Assignment Code: BCOC-137/TMA/2021-22

Course Code: BCOC-137

Assignment Name: Corporate Accounting

Year: 2021-2022

Verification Status: Verified by Professor

*Disclaimer: Q4 of this assignment remains unsolved.**

Maximum Marks: 100

Note: Attempt all the questions.

Section – A

Q.1 Pawan Ltd. had authorized capital of Rs. 5 lakh divided into shares of Rs. 10 each. It purchased a Building from Y for Rs. 2 lakh and issued fully paid shares to Y for purchase consideration. It invited applications for the balance 30,000 shares of Rs. 10 each payable as follow: Rs 3 per share on application, Rs 3 per share on allotment, Rs 2 per share on 1st call and Rs 2 per share on final call. Ashok who had been allotted 500 shares failed to pay both the calls. His shares were forfeited and re-issued at Rs 9 per share to Hari as fully paid up. Make necessary entries in Journal and prepare the opening Balance Sheet of Company. (10)

Ans)

JOURNAL

Q.2 X Ltd decides to buy back 10% of Rs. 100 crore paid up equity capital. The face value of per equity share is Rs. 10, but the market price is Rs 15 per share. X Ltd took the following steps for the buyback of its shares:

i) To issue 14 % debentures of Rs. 100 each at par for the face value of Rs. 10 crores.

ii) To utilise the General Reserve.

iii) To sell investment of Rs. 7 crores for Rs 8 crores.

iv) To buy back the shares at the market price.

v) To immediately cancel the shares bought back.

Pass necessary journal entries. (10)

Ans)

JOURNAL ENTRIES

Q.3 X Ltd wants to purchase the business of Y Ltd. Profit of Y Ltd for the past four years were Rs. 35,000 Rs. 60,000, Rs. 50,000 and Rs. 55,000, respectively. You are informed that Rent at Rs. 4000 p.a. and manager salary @ Rs. 2,000 per month which have been charged against profit of Y Ltd. will not be paid by X Ltd. Average capital employed by Y Ltd. was Rs. 6,00,000 and normal rate of return of the same type of business was 10%. Calculate the value of Goodwill by capitalization method. (10)

Ans)

Goodwill = Super Profit x Number of years purchase

Normal Profit = Capital Employed x Normal Rate Return/100

                      = 6,00,000 x 10/100

                      = 60,000

Actual Profit = 35,000 + 60,000 + 50,000 + 55,000 - (4000 + 2000) / 4

                    = 1,34,000 / 4

                    = 48,500

Super Profit = Actual Profit - Normal Profit

                   = 60,000 - 48,500

                   = 11,500

Goodwill = 11,500 x 4

               = Rs. 46,000

Q.4 Capital of Great India Ltd. comprise 1,000 6% participating preference shares of Rs. 100 each and 4000 equity shares of Rs. 100 each fully paid. Preference shares are entitled to participate in profits to the extent of 4% after payment of an equity dividend of 10%. Balance of profit is available for equity shareholders. The Company’s normal profit (Less tax) is Rs 75000. Normal Rate of dividend to this type of Company is 8% on participating preference shares and 10% on equity shares. Determine the value of each type of shares on the basis of Dividend Yield Method. (10)

Ans)

Q.5 How will you prepare a Consolidated Balance Sheet in case of partly owned subsidiary company with the help of a suitable example? (10)

Ans) Steps for preparing consolidated balance Sheet of the holding company and its subsidiary company.

1st Step:

Add all the assets of subsidiary company with the assets of holding company. But Investment of holding company in Subsidiary company will not show in consolidated balance sheet because, investment in subsidiary company will automatically adjust with the amount of share capital of subsidiary company in holding company.

2nd Step:

Add all the liabilities of subsidiary company with the liabilities of holding company. But Share capital of subsidiary company in holding company will not show in the consolidated balance sheet in the books of holding company. Because this share capital automatically adjust with the amount of the investment of holding company in to subsidiary company .

3rd Step:

Calculate of Minority Interest: First of all we should know what minority interest is. Minority interest is the shareholder but there is not holding company’s shareholder. So, when holding company shows consolidated balance sheet, it is the duty of accountant to show minority interest in the liability side of consolidated balance sheet.

Explanation:

Section – B

Q.6 Explain with imaginary figures, how the following items will appear in a company’s balance Sheet? (2.5, 2.5)

i) Share Capital

Ans) Share capital is reported by a company on its balance sheet in the shareholder's equity section. The information may be listed in separate line items depending on the source of the funds. These usually include a line for common stock, another for preferred stock, and a third for additional paid-in capital.

Common stock and preferred stock shares are reported at their par value at the time of sale. In modern business, the "par" or face value is a nominal figure. The actual amount received by a company in excess of par value is reported as "additional paid-in capital."

The amount of share capital reported by a company includes only payments for purchases made directly from the company. The later sales and purchases of those shares and the rise or fall of their prices on the open market have no effect on the company's share capital.

Here's an example, and how it appears on a balance sheet: Assume company ABC issues 1,000 shares. Each share has a par value of $1 and sells for $25. The company's accountant will record $1,000 as share capital and the remaining $24,000 as additional paid-in capital.

ii) Fixed Assets

Ans) A fixed asset is capitalized. When a company purchases a fixed asset, they record the cost as an asset on the balance sheet instead of expensing it onto the income statement. Due to the nature of fixed assets being used in the company’s operations to generate revenue, the fixed asset is initially capitalized on the balance sheet and then gradually depreciated over its useful life. A fixed asset shows up as property, plant, and equipment (a non-current asset) on a company’s balance sheet.

For example, a company that purchases a printer for $1,000 would record an asset on its balance sheet for $1,000. Over its useful life, the printer would gradually decapitalize itself from the balance sheet.

Q.7 How are various activities classified while preparing the Cash Flow Statement? (5)

Ans) As per Accounting Standard-3 various activities of cash flow statement are classified into three categories as follows:

Cash Flow from Operating Activities: These are the principal revenue producing activities of the enterprise and other activities. The cash flow statement begins with the operating activities section. Operating activities generally reflect cash generated and/or paid as a result of the firm’s core business functions. Under US GAAP, this category incorporates the cash received from customers, paid to suppliers, paid for operating costs, paid for income taxes, received from interest or dividends, and paid for periodic interest costs. 

Investing Activities: These are the acquisition and disposal of long-term assets, other investments not included in cash equivalents. Cash flows from investing activities are those involving non-current capital assets used in the firm’s operations, such as Property, Plant, Equipment (PP&E) and intangible assets. When a company invests in new long-term capacity by acquiring either PP&E or another company, the investment is a cash outflow from investing activities. Disposals of these types of assets for cash generate inflows. 

Financing Activities: These are the activities that result in changes in the size and composition of the owner’s capital and borrowings of the enterprise. Cash flows from financing activities are those that take place between a firm and its investors. These include both the equity investments of stockholders (owners) and the loans from bondholders and other creditors. When the company issues new shares, it records a cash inflow from financing, and when it repurchases shares, pays dividends or pays off debt, it records a cash outflow.

Q.8 Briefly explain the methods of internal reconstruction. (5)

Ans) Internal reconstruction means the reorganization of the capital structure of a company without forming a new company and without liquidating the existing company. Internal reconstruction of a company is done to alter the share capital or to reduce the share capital without going into liquidation. For properly deploying the process of internal reconstruction following methods are generally employed or used simultaneously:

Alteration of Share Capital: The alteration of share capital involves those cases which do not require any approval from the court.

Following are the alterations which a company can carry out if the Articles of the company empower:

1. Increase in Share Capital

2. Consolidation of Shares

3. Sub Division of Shares

4. Cancellation of Unissued Shares

5. Conversion of Shares into Stock

Reduction of Share Capital: Reduction of capital can be carried out by a company according to the provisions laid down in Section 100 to 105 of the Companies Act. The reduction of capital can only be made if it is mentioned in the Articles of the company and a special resolution is passed to that effect. Further, the scheme of reconstruction should be approved by the court and the sanction of the court should be maintained. The scheme is passed by the court only if it thinks fit and the consent of the creditors is obtained, or their claims are settled.

Q.9 Explain the difference between accounting treatment in the nature of merger and in the nature of purchase. (2.5, 2.5)

Ans) The differences between accounting treatment in the nature of merger and in the nature of purchase are:

Transfer of Assets and Liabilities

a) Nature of Merger: There is transfer of all assets & liabilities.

b) Nature of Purchase: There need not be transfer for all assets & liabilities.

Equity Shareholder’s holding 90%

a) Nature of Merger: Equity shareholders holding 90% equity shares in transferor company become shareholders of transferee company.

b) Nature of Purchase: Equity shareholders need not become shareholders of transferee company.

Purchase Consideration

a) Nature of Merger: Purchase consideration is discharged wholly by issue of equity shares (except cash for fractional shares)

b) Nature of Purchase: Purchase consideration need not be discharged wholly by issue of equity shares.

Same Business

a) Nature of Merger: The same business of the transferor company is intended to be carried on by the transferee company.

b) Nature of Purchase: The business of the transferor company need not be intended to be carried on by the transferee company.

Recording of Assets & Liabilities

a) Nature of Merger: The assets & liabilities taken over are recorded at their existing carrying amounts except where adjustment is required to ensure uniformity of accounting policies.

b) Nature of Purchase: The assets & liabilities taken over are recorded at their existing carrying amounts or the basis of their fair values.

Recording of Reserves of Transferor Co.

a) Nature of Merger: All reserves are recorded at their existing carrying amounts and in the same form.

b) Nature of Purchase: Only statutory reserves are recorded at their existing carrying amounts.

Recording of Balance of Profit & Loss A/c of Transferor

a) Nature of Merger: The balance of P&L A/c should be aggregated with the corresponding balance of the transferee co. or transferred to the General.

b) Nature of Purchase: The balance of P&L A/c losses its identity and is not recorded at all.

Q.10 Give journal entries in the books of Transferor Company and the Transferee Company in case of amalgamation. (2.5, 2.5)

Ans) Journal Entries in Books of Transferor Company and Transferee Company:

IN THE BOOKS OF TRANSFEROR COMPANY(SELLING COMPANY)

Accounting standard 14 is not applicable for selling company.

Accounting is done with the objective of closing books of accounts and simultaneous determination of profit or loss on closing books of accounts.

TRANSFER TO REALIZATION ACCOUNT

Q.11 Give the Proforma of Profit and Loss Account of Banking Company without schedules. (5)

Ans) Banking companies are required to prepare their Profit and Loss Account according to Form B in the Third Schedule. Form B is in a summary form and the details of various items are given in the Schedules.

Section – C

Q.12 Explain the slip system of bank Book-keeping. Explain its advantages and disadvantages? (3, 7)

Ans) In this system, posting is made from slips prepared inside the organisation itself or from slips filled in by its customers. So entries are not made in the books of original entry or subsidiary books but posting of entries is done from slips. In a banking company, the main slips are pay-in-slips, withdrawal slips and cheques and all these slips are filled in by clients of the bank.

The main advantages of the slip system are:

1. The bank saves a lot of clerical labour as most of the slips are filled in by its customers.

2. Subsidiary books are avoided as posting is done from slips.

3. Entries can be recorded with minimum delay as slips can easily pass from hand to hand among clerks concerned.

The disadvantages of the slip system are :

1. Slips may be lost, destroyed, or misappropriated as these are loose.

2. Books cannot be verified if subsidiary books are not kept.

Q.13 Write short notes on the following: (5, 5)

a) Non-Performing Assets

Ans) A nonperforming asset (NPA) is a debt instrument where the borrower has not made any previously agreed upon interest and principal repayments to the designated lender for an extended period of time. The nonperforming asset is, therefore, not yielding any income to the lender in the form of interest payments. For example, a mortgage in default would be considered nonperforming. After a prolonged period of non-payment, the lender will force the borrower to liquidate any assets that were pledged as part of the debt agreement. If no assets were pledged, the lender might write-off the asset as a bad debt and then sell it at a discount to a collections agency.

b) Commercial Banks

Ans) The term commercial bank refers to a financial institution that accepts deposits, offers checking account services, makes various loans, and offers basic financial products like certificates of deposit (CDs) and savings accounts to individuals and small businesses. A commercial bank is where most people do their banking. Commercial banks make money by providing and earning interest from loans such as mortgages, auto loans, business loans, and personal loans. Customer deposits provide banks with the capital to make these loans. Some of the world's largest financial institutions are commercial banks or having commercial banking operations—many of which can be found in the United States. For instance, Chase Bank is the commercial banking unit of JPMorgan Chase. Headquartered in New York City, Chase Bank reported about $3.2 trillion in assets as of June 2021.4 Bank of America is the second-largest bank in the United States, with more than $2.35 trillion in assets and 66 million customers including both retail clients and small and mid-sized businesses