Question Paper

Financial Statement Analysis (CFA560): January 2008

• Answer all 70 questions.

• Marks are indicated against each question.

Total Marks : 100

<Answer>
1. Which of the following statements is false with respect to concept of capital and capital maintenance?
(a) Capital is the contribution made by the owner(s) in the business
(b) Capital is regarded as a liability to the business in the nature of owner’s equity
(c) The main feature of the concept is the distinction between the owner(s) and that of the business
owned by them
(d) Income is the increase in capital which cannot be withdrawn bereft of any distortion of the
capital
(e) The method of ascertaining and reporting results of business helps in comprehending the
concept of capital maintenance.
(1 mark)
<Answer>
2. The current ratio of a company is 2:1. Which of the following transactions would improve the ratio?
(a) Purchase of a fixed asset on credit
(b) Redemption of preference shares
(c) Sale of office furniture for cash at a loss
(d) Purchase of stock-in-trade for cash
(e) Acceptance of bills of exchange drawn by creditors.
(1 mark)
<Answer>
3. Revenue manipulation can be done by
(a) Cookie-jar accounting
(b) Capitalizing revenue costs
(c) Understating liabilities
(d) Not recognizing rebates or discounts
(e) Non-current assets depreciation. (1 mark)
<Answer>
4. According to which of the qualitative characteristics of financial statements, the use of same accounting
principles from one period to another is required?
(a) Relevance
(b) Reliability
(c) Comparability
(d) Consistency
(e) Matching.
(1 mark)
<Answer>
5. Significant diversities are observed in the following areas except
(a) Accounting for Brands
(b) Accounting for Joint Ventures
(c) Treatment of ordinary items
(d) Treatment of Goodwill
(e) Treatment of Taxation in Accounts.
(1 mark)

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 <Answer>
6. The depreciation provided by Exotica Ltd., as per the tax records exceeds the depreciation provided by its
accounting records by Rs.3,00,000. Unamortised preliminary expenses, as per tax records is Rs.5,600.
There is adequate evidence of future profit sufficiency. Assuming the company adheres to Indian
Accounting Standards, the amount of deferred tax asset/liability to be recognized as transaction
adjustment, if the tax rate is 40%, is
(a) Rs.1,20,000 (deferred tax liability)
(b) Rs.1,17,760 (deferred tax liability)
(c) Rs.1,20,000 (deferred tax asset)
(d) Rs.1,17,760 (deferred tax asset)
(e) Rs.1,22,240 (deferred tax asset).
(2 marks)
<Answer>
7. Short-term receivables are reported on the basis of their
(a) Historical cost
(b) Current cost
(c) Net realizable value
(d) Present value of future cash flows
(e) Written down value.
(1 mark)
<Answer>
8. The currency of the environment in which an entity primarily generates and expends cash is known as
(a) Blended rate
(b) Foreign currency
(c) Functional currency
(d) Local currency
(e) Reporting currency.
(1 mark)
<Answer>
9. An increase in variable costs where selling price and fixed cost remain constant will result in
(a) An increase in margin of safety
(b) A fall in the sales level at which break even point will occur
(c) A rise in the sales level at which break even point will occur
(d) No change in the sales level at which break even point will occur
(e) No change in margin of safety.
(1 mark)
<Answer>
10. Which of the following is not a factor that causes diversity in accounting practices of different countries?
(a) Political and economic factors
(b) Cultural differences
(c) Difference in taxation
(d) Difference in use of finance
(e) Difference in legal systems.
(1 mark)
<Answer>
11. According to AS-23, which of the following accounting methods is adopted in accounting of an
Associate in the Consolidated Financial Statements?
(a) Cost method
(b) Equity method
(c) Amortized cost method
(d) Super profit method
(e) Market method.
(1 mark)
<Answer>
12. Which of the following is an example of a non-cash investing activity?
(a) Payment of dividend
(b) Purchase of land for cash
(c) Issuing stock in exchange for a building
(d) Receipt of interest on short term investments
(e) Purchase of investment property by cheque.
(1 mark)

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 <Answer>
13. The debt instruments held for maturity will be carried at the
(a) Amortized cost
(b) Fair market value
(c) Original cost
(d) Par value
(e) Net realizable value.
(1 mark)
<Answer>
14. If any gain or loss is realized in connection with holding of trading securities, the deferred tax effect will
be shown in
(a) Balance sheet
(b) Income statement
(c) Both balance sheet and income statement
(d) Cash flow statement
(e) None of the financial statements.
(1 mark)
<Answer>
15. The post retirement benefit costs include the following components except
(a) Service costs
(b) Interest costs
(c) Effect of any curtailments or settlements
(d) Amortization of transition obligation
(e) Amortization of net gains and losses.
(1 mark)
<Answer>
16. Sana Ltd. earned a profit of Rs.20,000 during the year 2006-07. The following balances were extracted
from the books of the company as on March 31, 2007:
Particulars Rs.
Land and building 1,00,000
Machinery 2,00,000
Furniture and fittings 60,000
Sundry debtors 30,000
Cash in hand and Bank 10,000
Sundry creditors 10,000
Short term loan 15,000
Stock in hand 10,000
Preliminary expenses 20,000
The average capital employed by the company was
(a) Rs.3,65,000
(b) Rs.3,95,000
(c) Rs.3,75,000
(d) Rs.4,00,000
(e) Rs.4,10,000. (2 marks)
<Answer>
17. Brij Ltd., had the following activities relating to its stock investments during 2006-07:
• Acquired 2,000 shares in Bhuvan Ltd., for Rs.26,000.
• Sold an investment in Royal Motors for Rs.35,000 when the carrying value was Rs.33,000.
• Acquired Rs.50,000 four-year certificate of deposit from a bank. (During the year, interest of
Rs.3,750 was paid to Brij Ltd.)
• Collected dividends of Rs.1,200 on stock investments.
As per the statement of cash flows, the net cash used in investing activities of Brij Ltd., for the year 2006-
07 was
(a) Rs.37,250
(b) Rs.38,050
(c) Rs.39,800
(d) Rs.41,000
(e) Rs.40,000.
(2 marks)

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 <Answer>
18. The process of assigning pension benefits or costs during the period of employee service is known as
(a) Assumption
(b) Attribution
(c) Curtailment
(d) Settlement
(e) Amortization.
(1 mark)
<Answer>
19. Dividend Pay-out Ratio is
(a) A ratio between dividend paid and the number of equity shares
(b) Dividend per share divided by Earnings per share
(c) A ratio between Profit after tax and the dividend paid
(d) The percentage of equity earnings over Earnings before interest and tax
(e) Earnings per share divided by Dividend per share.
(1 mark)
<Answer>
20. The statement showing the change in equity of a business enterprise during a period from transactions
and other events and circumstances from the non owner sources is known as
(a) Balance Sheet
(b) Income Statement
(c) Statement of Comprehensive Income
(d) Statement of Cash flows
(e) Statement of Stakeholders Equity.
(1 mark)
<Answer>
21. Joydeep Ltd. has incurred a loss of Rs. 5,00,000 during the year ended March 31, 2007. The product of
the company has become outdated and the company does not expect with reasonable certainty that in
future it will earn any taxable profits, rather it expects that there will be loss in future. What should the
company do to fully comply with the requirement of AS-22 in respect of creation of deferred tax
asset/liability, assuming tax rate as 30%?
(a) Create a deferred tax asset for Rs.1,50,000
(b) Create a deferred tax liability for Rs.1,50,000
(c) Not required to create a deferred tax asset or liability
(d) Create a deferred tax asset for Rs.5,00,000
(e) Create a deferred tax liability for Rs.5,00,000.
(2 marks)
<Answer>
22. While preparing a cash-flow statement, the conversion of long term loan to equity is to be
(a) Classified as operating cash flow
(b) Classified as investing cash flow
(c) Classified as financing cash flow
(d) Excluded as it is a non-cash transaction
(e) Shown by way of note to the cash flow statement.
(1 mark)
<Answer>
23. Financial Lease is a lease that transfers
(a) Reasonable risks and rewards incident to ownership of an asset
(b) Minimum risks and rewards incident to ownership of an asset
(c) Substantially all the risks and rewards incident to ownership of an asset
(d) Only the risks incident to ownership of an asset
(e) No risks and rewards incident to ownership of an asset.
(1 mark)
<Answer>
24. Which of the following methods is used for accounting of non-influential (no influence) investments?
(a) Cost adjusted fair value method
(b) Equity method
(c) Market method
(d) Proportionate consolidation method
(e) Consolidation method.
(1 mark)

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 <Answer>
25. Which of the following statements is false?
(a) Going concern concept assumes that business will be carried on for a definite period
(b) The actual receipts or payments are not taken as the base under the accrual system
(c) The revenues/expenses are recognized if they belong to the relevant accounting period
irrespective of whether cash or cash equivalent is received/paid
(d) Securities are valued at lower of cost or market value in recognition of conservatism concept
(e) The financial statements provide information not only the amount cash payments or receipts
during the reporting period, but also the cash payable or receivable in the reporting period.
(1 mark)
<Answer>
26. Which of the following does not help in expense manipulation?
(a) Employee Pension and Other Retirement Benefit Schemes
(b) Big-Bath accounting
(c) Accounting for inventories
(d) Understating liabilities
(e) Overstatement of value of accounts receivables.
(1 mark)
<Answer>
27. Which of the following statements is false with respect to free cash flows?
(a) They are the discretionary cash flows that remain once the firm has replaced its
productive capacity
(b) Its computation is helpful to the investors in ascertaining the cash flow that can be
distributed to them as dividends
(c) To compute free cash flows for creditors, cash flows after interest are calculated
(d) Creditors are also interested in cash flows as it represents the amount available with the firm for
repayment of their loans
(e) The larger the firm’s free cash flows, the healthier it is because it has more cash
available for growth, debt payment and dividends.
(1 mark)
<Answer>
28. On January 1, 2007, Candy Ltd. purchased 80% of Sandy Ltd.’s Rs.10 par common stock for Rs.9,75,000
in a business combination that is accounted for as a purchase. On this date, the carrying amount of Sandy
Ltd.’s net assets was Rs. 1 million. The fair value of the assets acquired and liabilities assumed were the
same as their carrying amounts on Sandy Ltd.’s balance sheet except for plant assets, the fair value of
which was Rs. 1,00,000 in excess of the carrying amount. For the year ended December 31, 2007, Sandy
Ltd. had net income of Rs. 1,90,000 and paid cash dividends totaling Rs.1,25,000. The goodwill
recognized at the date of the business combination is
(a) Nil
(b) Rs. 75,000
(c) Rs. 95,000
(d) Rs.1,75,000
(e) Rs.2,12,000.
(2 marks)
<Answer>
29. Equity multiplier as defined in Du Pont Analysis is
(a) Earning per share/Market price of shares
(b) Earning per share/Book value of shares
(c) Profit after tax/Net worth
(d) Average assets/Average equity
(e) Earnings before interest and tax/Net worth.
(1 mark)
<Answer>
30. Which of the following can improve break-even point?
(a) Increase in variable cost
(b) Increase in fixed cost
(c) Increase in sale price
(d) Increase in sales volume
(e) Increase in production volume.
(1 mark)

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 <Answer>
31. Which of the following disclosures to be made in case of defined benefit plans is false?
(a) A description of each plan
(b) A description of groups of employees covered
(c) A reconciliation of movements or changes during the previous period being reported
(d) The amount of actual return on plan assets
(e) A description of the principal actuarial assumptions.
(1 mark)
<Answer>
32. Following information pertaining to Tarun Ltd. was extracted from the accounting records for the year
ended March 31, 2007:

Particulars (Rs.)
Cash received from customers 8,70,000
Rent received 10,000
Cash paid to suppliers and employees 5,10,000
Taxes paid 1,10,000
Cash dividend paid 30,000

The Net cash flow provided by operations for 2006-07 was

(a) Rs. 2,20,000
(b) Rs. 2,30,000
(c) Rs. 2,50,000
(d) Rs. 2,60,000
(e) Rs. 2,00,000.
(2 marks)
<Answer>
33. Which of the following is not a method of revenue recognition?
(a) Profit recovery method
(b) Sales basis method
(c) Installment sales method
(d) Percentage of completion method
(e) Completed contract method.
(1 mark)
<Answer>
34. Which of the following statements is useful for identifying reasons for changes in shareholder’s claims on
assets of the company?
(a) Balance sheet
(b) Income statement
(c) Statement of cash flows
(d) Statement of stakeholders’ equity
(e) Statement of comprehensive income.
(1 mark)
<Answer>
35. Which of the following is false with respect to factors to be considered in selection of a foreign currency?
(a) The expenses incurred by the foreign entity
(b) The source of financing of the foreign entity
(c) The currency in which the foreign entities sales market is denominated
(d) The volume of inter-company transactions between the parent and the foreign entity
(e) The responsiveness of the parent entity sales prices to exchange rate changes and to
international competitions.
(1 mark)

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 <Answer>
36. Vaibhav Ltd. showed on accounting income of Rs.8,00,000 for the year ended on March 31, 2007. In
computation of accounting income, the following data were considered:

Gain on Revaluation of Asset

(Cr. to Profit & Loss account) Rs.3,50,000
Depreciation deducted for accounting purpose in
excess of depreciation deducted for income tax purpose Rs. 50,000
Income Tax Rate 35%

The provision for income tax was

(a) Rs.2,80,000
(b) Rs.2,62,500
(c) Rs.2,97,500
(d) Rs.1,75,000
(e) Rs.1,57,500.
(2 marks)
<Answer>
37. Which of the following valuations of different assets and liabilities for the proper application of the
purchase method is false?
(a) Finished goods would be valued at their estimated selling prices less sum of the costs of
disposal and a normal profit
(b) Receivables are valued at the present value amounts that are to be received and determined by
using the current interest rates, less allowances for the uncollectible accounts
(c) Assets such as land, natural resources and non-marketable securities would be included and are
required to be considered at their appraisal value
(d) Accounts payable, long-term debts, pensions, warranties etc. are to be considered at the present
value of the amounts that are to be paid based on the appropriate current interest rate
(e) The plant and machinery to be used in the operations would be valued at the fair value less the
cost to sell.
(1 mark)
<Answer>
38. The acquisition which takes place when one entity, nominally the acquirer, issues as many shares to the
former owners of the target that they become the majority owners of the successor entity is known as
(a) Absorption
(b) Consolidation
(c) Amalgamation
(d) Reverse acquisition
(e) Internal reconstruction.
(1 mark)
<Answer>
39. RK Ltd., has furnished the following data:

Particulars Rs.
Sales 15,00,000
Purchases 9,66,750
Opening inventory 2,28,750
Closing inventory 2,95,500

The inventory turnover ratio of the company is

(a) 0.17 times
(b) 0.29 times
(c) 2.28 times
(d) 3.43 times
(e) 6.72 times.
(2 marks)

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 <Answer>
40. Sriram Ltd. manufactures a single product. The estimated cost data and other information relating to the
product are as follows:
Sale price per unit – Rs.92
Total variable production cost per unit – Rs.51
Sales commission (on sales) – 5%
Fixed costs:
Production overheads – Rs.4,85,500
Administrative and selling overheads – Rs.3,08,300
Effective income tax rate – 40%
The number of units to be sold by the company in order to reach its break-even point is
(a) 24,500
(b) 23,842
(c) 23,402
(d) 22,948
(e) 21,808.
(2 marks)
<Answer>
41. Which of the following is not a component of net periodic pension cost?
(a) Service cost
(b) Actuarial gain or loss
(c) Notional return on plan assets
(d) Interest cost on projected benefit obligation
(e) Amortization of unrecognized prior service cost.
(1 mark)
<Answer>
42. Which of the following is not a qualitative characteristic of financial statements?
(a) Relevance
(b) Consistency
(c) Reliability
(d) Going concern
(e) Comparability.
(1 mark)
<Answer>
43. Which of the following disclosures is false relating to financial liabilities done in the financial
statements?
(a) The presentation on the balance sheet of the present value of future liability payments,
discounted at the rate in effect at issuance
(b) Interest expense for the period is disclosed either in the balance sheet or as a foot note
(c) The cash interest expense is shown in the cash flow statement
(d) Details of financial liabilities in case of off balance sheet items such as leases, take-or-pay
contracts, and other material financial obligations are shown as notes to financial statements
(e) For a publicly traded firm, filings with the Securities and Exchange Commission (SEC) will
detail all outstanding securities and their relevant terms.
(1 mark)

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 <Answer>
44. The following is the summarized balance sheet of Vainavi Ltd. as on March 31, 2007:

Liabilities Rs. Assets Rs.

10,000 equity shares of Rs.10 each 1,00,000 Fixed assets 95,000
Profit and Loss a/c 60,000 Current assets 1,20,000
Creditors 55,000
Total 2,15,000 Total 2,15,000

On April 1, 2007, Bharath Ltd. took over the business of Vainavi Ltd. for a consideration of Rs.1,37,500.
The amount of profit/loss in the realization account of Vainavi Ltd. was
(a) Rs. 50,000 (Loss)
(b) Rs. 45,000 (Profit)
(c) Rs. 45,000 (Loss)
(d) Rs. 22,500 (Loss)
(e) Rs. 22,500 (Profit).
(2 marks)
<Answer>
45. A specialized kind of debt instrument where the interest payments are not made on a regular basis but
instead are accumulated and paid on the maturity of the bond along with the principal is known as
(a) Callable bond
(b) Serial bond
(c) Debenture
(d) Convertible bond
(e) Zero-coupon bond.
(1 mark)
<Answer>
46. A bond of Rs.4,000 with an unamortized discount of Rs.200 and a market value of Rs.3,880 is converted
into 10 shares of Rs.40 each at par as common stock whose market value is Rs.380 per share. Under
conversion using book value method, which of the following accounts is debited for the entry made in the
books of account?
(a) Bonds payable
(b) Common stock
(c) Discount on bonds payable
(d) Additional paid-in capital
(e) Loss on redemption.
(2 marks)
<Answer>
47. In common size analysis the items in the income statement are expressed as a percentage of
(a) Total assets
(b) Net sales
(c) Total expenses
(d) Gross sales
(e) Gross profit.
(1 mark)

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 <Answer>
48. Swastik Ltd. and Prem Ltd. combine and form a new company Mayuri Ltd. with a share capital of
Rs.20,00,000 divided into 2,00,000 equity shares of Rs.10 each .

Particulars Swastik Ltd. Prem Ltd.

Net assets (Rs.) 5,50,000 6,00,000
Net liabilities (Rs.) 3,00,000 2,00,000

The new company is to take-up the whole of the assets of Swastik Ltd. and Prem Ltd. on a consideration
to Swastik Ltd. of Rs.10,00,000 and to Prem Ltd. of Rs.8,00,000 in fully paid Rs.10 shares. The amount
of purchase consideration to Swastik Ltd., calculated under lump sum basis is
(a) Rs. 2,50,000
(b) Rs.10,00,000
(c) Rs. 4,00,000
(d) Rs. 8,00,000
(e) Rs. 6,50,000.
(2 marks)
<Answer>
49. The following figures are collected from the annual report of Kashyap Ltd.:
Return on investment = 12 percent
Number of outstanding equity shares = 1,00,000
Net worth = Rs.25 lakh
Total debt = Rs.40 lakh
Average cost of debt = 9 percent
Applicable tax rate = 40 percent
The earning per share for Kashyap Ltd. is
(a) Rs.2.00
(b) Rs.2.26
(c) Rs.2.52
(d) Rs.2.73
(e) Rs.2.99.
(2 marks)
<Answer>
50. The profits and sales of Varun Ltd. for 2 consecutive years were as follows:
Year Profits (Rs.) Sales (Rs.)
1 25,500 2,10,000
2 43,500 2,70,000
The required sales value to earn a profit of Rs.22,500 is
(a) Rs.1,25,000
(b) Rs.1,10,000
(c) Rs.1,50,000
(d) Rs.2,00,000
(e) Rs.1,75,000.
(2 marks)
<Answer>
51. A capital lease where the manufacturer or the dealer (lessor) recognizes profit or loss in addition to
interest income is known as
(a) Operating lease
(b) Finance lease
(c) Leveraged lease
(d) Sales-type lease
(e) Direct financing lease.
(1 mark)

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 <Answer>
52. On April 1, 2007 Jock Company leased three cars from Rein Motors for five years for an equal annual
rent of Rs.1,00,000 to be made on April 1, each year. The estimated residual value of the three cars at the
end of the lease period is Rs.40,000. The lease fulfills all criteria as capital lease and the interest rate
implicit in the lease is considered as 9%. Present values of 9% for different periods are:

For an annuity due with 5 payments 4.240

For an ordinary annuity with five payments 3.890
th
Present value of Re.1 for 5 period 0.650

If the first annual payment is made on April 1, 2007, Jock Company’s recorded capital lease liability
immediately after the first required payment is
(a) Rs.4,50,000
(b) Rs.4,15,000
(c) Rs.4,05,000
(d) Rs.3,75,000
(e) Rs.3,50,000.
(2 marks)
<Answer>
53. Lalitha Textiles Limited sold goods to Lavanya Garments for £ 60,000 on October 31, 2006. The dues
were realized from Lavanya Garments on July 31, 2007. Lalitha Textiles Ltd. closes its books of accounts
on March 31 every year. The exchange rates have been provided below:
October 31, 2006 - Rs.55.50 per £
March 31, 2007 - Rs.56.00 per £
July 31, 2007 - Rs.55.75 per £
Gain/loss on settlement was
(a) Rs.15,000 (Loss)
(b) Rs. 7,500 (Gain)
(c) Rs.30,000 (Loss)
(d) Rs.15,000 (Gain)
(e) Rs. 7,500 (Loss).
(2 marks)
<Answer>
54. On October 01, 2006, Surya Ltd. acquired 60% shares in Chandra Ltd. at a cost of Rs.18,75,000.
Balance Sheet of Chandra Ltd. as on March 31, 2007

Liabilities Rs. Assets Rs.

Share capital 20,00,000 Fixed assets 28,50,000
(2,00,000 shares of Rs.10 each) Current assets 3,80,000
Capital reserve 6,00,000
Profit and loss account 4,00,000
Current liabilities 2,30,000
Total 32,30,000 Total 32,30,000

Surya Ltd.’s share in capital profits of Chandra Ltd. was Rs.4,20,000. The amount of goodwill that is to
be shown in the Consolidated Balance Sheet as on March 31, 2007 was
(a) Rs.2,55,000
(b) Rs.2,85,000
(c) Rs.6,75,000
(d) Rs.3,75,000
(e) Rs.1,35,000.
(2 marks)

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 <Answer>
55. Soumya Limited has furnished the following details in its financial statement:
Selling of receivables = Rs. 3,00,000
Debt = Rs.22,50,000
Equity = Rs. 9,60,000
EBIT = Rs. 4,50,000
Interest Expense = Rs. 2,10,000
Interest on receivables = 9%
It is disclosed in footnotes of the financial statements that the receivables were sold with recourse.
The leverage ratio after the balance sheet adjustment is
(a) 2.34
(b) 2.14
(c) 2.66
(d) 2.01
(e) 2.37.
(2 marks)
<Answer>
56. Manasa Ltd. began operations on January 1, 2007 and reported a pre-tax income of Rs.4,00,000 and
taxable income of Rs.5,20,000 for its first year. Manasa Ltd. had a temporary difference relating to
accrued product warranty costs that it expected to pay in the following manner:

Year Rs.
2008 40,000
2009 60,000
2010 20,000

The enacted tax rates are 30% for years 2007 and 2008 and 35% for 2009 and 2010. The deferred tax
account at the end of year 2007 was
(a) Rs.36,000 as deferred tax asset
(b) Rs.36,000 as deferred tax liability
(c) Rs.40,000 as deferred tax asset
(d) Rs.40,000 as deferred tax liability
(e) Rs.42,000 as deferred tax asset.
(2 marks)
<Answer>
57. Tarun Ltd., leased equipment from Neelam Ltd. with 9 months of free rent under 6 year operating lease
for a monthly rental of Rs.10,000. The lease term started from April 01, 2007 and the payment will start
from January 01, 2008. In Tarun Ltd.’s income statement for the year ended March 31, 2008, the
reporting amount of rent expense should be
(a) Rs. 80,000
(b) Rs.1,05,000
(c) Rs.1,20,000
(d) Rs. 90,000
(e) Rs. 60,000.
(2 marks)
<Answer>
58. Panorama Ltd. acquired 4,800 equity shares of Madhulika Ltd. on January 01, 2007 at a cost of
Rs.7,20,000. The balances of general reserve and profit and loss account of Madhulika Ltd. as on the date
of acquisition were Rs.2,50,000 and Rs.1,00,000 respectively. The paid-up capital of Madhulika Ltd.
consists of 8,000 equity shares of Rs.100 each. The cost of control to be shown in the Consolidated
Balance Sheet as on March 31, 2007 was
(a) Rs.10,000 (Goodwill)
(b) Rs.16,000 (Capital reserve)
(c) Rs.40,000 (Capital reserve)
(d) Rs.30,000 (Goodwill)
(e) Rs.25,000 (Goodwill).
(2 marks)

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 <Answer>
59. The following data is extracted from the books of Saini Chemicals Ltd., as on March 31, 2007:

Share capital (share of Rs.100 each) Rs. 80,00,000

Net assets Rs. 1,20,00,000
Dividend declared 15%

If the rate of return in other companies in the similar industry is 12%, the fair value of equity share of the
company was
(a) Rs.150.00
(b) Rs.125.00
(c) Rs.137.50
(d) Rs.106.25
(e) Rs.105.00.
(2 marks)
<Answer>
60. Taneja Corp., had 12,00,000 shares (Rs.10 per share) of common stock outstanding on January 1 and
December 31, 2006. In connection with the acquisition of a subsidiary company in June 2005, Taneja
Corp. is required to issue 50,000 additional shares of its common stock on July 1, 2007, to the former
owners of the subsidiary. Taneja Corp. paid Rs.2,00,000 in preferred stock dividends in the year 2006 and
reported net income of Rs.34,00,000 for the year. Taneja Corp.’s diluted EPS for the year 2007 should be
(a) Rs.2.83
(b) Rs.2.72
(c) Rs.2.67
(d) Rs.2.56
(e) Rs.2.00.
(2 marks)
<Answer>
61. Arun Ltd. acquired 80% shares of Komal Ltd. on April 1, 2007. The authorized and subscribed share
capital of Komal Ltd. comprised of 30,000 shares of Rs.10 each. The accountant of Arun Ltd. computes
the capital profits (pre acquisition) and revenue profits (post acquisition) of Komal Ltd. as Rs.1,30,000
and Rs.1,50,000 respectively. The value of minority interest in the Consolidated Balance Sheet prepared
by Arun Ltd., was
(a) Rs. 60,000
(b) Rs. 86,000
(c) Rs. 90,000
(d) Rs.1,16,000
(e) Rs.1,19,000.
(2 marks)
<Answer>
62. Mr. Jain joined the services of a company on January 1, 2006 and is included in the company’s defined
pension benefit plan. He is due for retirement on December 31, 2025. He is expected to live for 10 years
after retirement. He is presently drawing a salary of Rs.30,000 per year. Actuarial estimates indicate that
the salary is likely to increase at the rate of 5% per annum every year for the next 19 years. The discount
rate is 8% per annum. The vesting schedule stipulates that he will be entitled to 25% of the Accumulated
Benefit Obligation (ABO) for each completed year of service until he becomes fully vested in four years.
The annual pension is equal to one week’s salary at the time of retirement multiplied by the number of
years worked under the plan. The present value of pension benefit as on December 31, 2025 will be
(a) Rs.75,810
(b) Rs.19,565
(c) Rs. 4,891
(d) Rs.63,210
(e) Rs. 8,157.
(2 marks)

13
 <Answer>
63. Kushboo Ltd., has a defined benefit plan. The projected benefit obligation for its plan is Rs.150 lakh. The
Accumulated Benefit Obligation of the plan is Rs.125 lakh and the Vested Benefit Obligation is Rs.100
lakh. The fair value of the plan assets is Rs.80 lakh. If the company is currently reporting a pension
liability of Rs.9 lakh, the minimum liability allowance to be created is
(a) Rs.25 lakh
(b) Rs.14 lakh
(c) Rs.40 lakh
(d) Rs.34 lakh
(e) Rs.46 lakh.
(2 marks)
<Answer>
64. SFAS 52, Foreign Currency Translation, requires the current rate of exchange to be used for remeasuring
certain balance sheet items and the historical rate of exchange for other balance sheet items. An item that
should be remeasured using the historical exchange rate is
(a) Long term debt
(b) Accounts and notes payable
(c) Cash
(d) Prepaid expenses
(e) Accounts receivable.
(1 mark)
<Answer>
65. A company is considered to have controlling interest securities when equity securities held by such
company are having voting rights more than
(a) 75% of voting stock of investee’s company
(b) 50% of voting stock of investee’s company
(c) 30% of voting stock of investee’s company
(d) 20% of voting stock of investee’s company
(e) 10% of voting stock of investee’s company.
(1 mark)
<Answer>
66. The calculation of Minimum Lease Payments in the case of lessee includes
(a) Contingent rentals
(b) Lessee’s obligation to pay executory costs on leased property
(c) Minimum lease rentals
(d) Amount payable for failure to renew the lease period
(e) A guarantee by the lessee to pay the lessor’s debt.
(1 mark)
<Answer>
67. At the end of the first year of operation, Trendz Company reported Rs.90,000 as its taxable income and
Rs.76,000 as its pre-tax financial income. The difference between these two is for a single temporary
difference. The company believes that only 75% of the deductible temporary difference is more likely
than not to be realized because of uncertainty of the economic environment. If the current tax rate is 30%
and no charge has been enacted for future years then at the year end balance sheet, how much will be
reported as deferred tax asset?
(a) Rs.14,000
(b) Rs.12,000
(c) Rs.10,500
(d) Rs. 4,200
(e) Rs. 3,150.
(2 marks)
<Answer>
68. Jaya Ltd., provides an incentive compensation plan under which its president receives a bonus equal to
10% of the company’s income before income tax but after deduction of the bonus. If the tax rate is 40
percent and net income after bonus and income tax was Rs.2,40,000, what was the amount of the bonus?
(a) Rs.24,000
(b) Rs.36,000
(c) Rs.40,000
(d) Rs.48,000
(e) Rs.96,000.
(2 marks)

14
 <Answer>
69. On April 01, 2003, Mirra Ltd. issued a 10%, 10 year bond of Rs.8,00,000 at Rs.98. The interest is
payable on semi-annual basis. The company incurred Rs.56,000 as issue expense. On April 01, 2007, the
entire lot of the bond is repurchased at Rs.102 for each bond of Rs.100 and retired. Mirra Ltd. is using
straight line method to compute the transaction effect. The gain/loss on repurchase of the bond for Mirra
Ltd. was
(a) (Rs.59,200)
(b) Rs.29,600
(c) (Rs.25,600)
(d) (Rs.49,600)
(e) Rs.16,000.
(2 marks)
<Answer>
70. Malathi Ltd., has equity capital of Rs.8,40,000, divided into shares of Rs.10 each. Current market price of
each equity share is Rs.20. It also has preference share capital of Rs.6,00,000 at 15%. If it had a profit
after tax of Rs.9,00,000 during the current year and paid Rs.3,36,000 by way of equity dividends, the
price earnings ratio (PE) is
(a) 2.28
(b) 2.70
(c) 2.27
(d) 2.07
(e) 2.77.
(2 marks)

END OF QUESTION PAPER

15
 Suggested Answers
Financial Statement Analysis (CFA560): January 2008
Answer Reason
1. D Capital is the contribution made by the owner(s) in the business and is regarded as a liability to the < TOP >
business in the nature of owner’s equity. The underlying feature for this treatment is the distinction
between the owner(s) and that of the business owned by them, as a result of which the business is vested
with an implied obligation to repay such sum to the owner(s). The accountant’s methodology of
ascertaining and reporting results of business helps in comprehending the concept of capital
maintenance. The surplus in the form of income alone is available for consumption while the capital is to
be maintained intact. Hence, the answer is (d)
2. C Selling office furniture which is a fixed asset for cash whether at a profit or loss will increase the current < TOP >
assets of a business and improves the position of current ratio. Thus, alternative (c) is the correct
answer. The transactions in other alternatives either decrease current ratio or do not affect the ratio and
are incorrect answers. Purchase of a fixed asset on credit (a) and Redemption of preference shares (b)
decreases the current ratio and Acceptance of bills of exchange drawn by creditors (e) and Purchase of
stock-in-trade for cash (d) do not change the current ratio.
3. D Revenue manipulation can be done by not recognizing rebates or discounts. All the other help in expense < TOP >
manipulation: (a) Cookie-jar accounting, (b) Capitalizing revenue costs, (c) Understating liabilities and
(e) Non-current assets depreciation.
4. D According to consistency quality of the qualitative characteristics of financial statements, the use of < TOP >
same accounting principles from one period to another is required
5. C Significant diversities are observed in the area of Treatment of extra-ordinary items and not of ordinary < TOP >
items. Significant diversities are also observed in the following areas – (a) Accounting for Brands, (b)
Accounting for Joint Ventures, (d) Treatment of Goodwill and (e) Treatment of Taxation in Accounts.
Hence, the correct answer is (c).
6. B Deferred tax should be recognised for all the timing differences. In the instant case the timing difference < TOP >
between taxable income and accounting income is
Excess depreciation as per tax 3,00,000
Less Expenses provided in taxable income 5,600
Timing Difference Rs. 2,94,400
As tax expense is more than the current tax due to timing difference of Rs. 2,94,400,
Therefore deferred tax liability = 40% of Rs.2,94,400 = Rs.1,17,760 shall be credited in accounts.
7. C Short-term receivables and some inventories are reported on the basis of their net realizable (settlement) < TOP >
value. Hence, the answer is (c).
8. C The currency of the primary economic environment in which the entity operates normally that is the < TOP >
currency of the environment in which an entity primarily generates and expends cash is called functional
currency.
9. C If variable cost increases, contribution per unit decreases, break-even point will be increased, provided < TOP >
sales price per unit and fixed cost remain same. Other options given in (a), (b), (d) and (e) are not
correct.
10. D The factors which cause the diversity in accounting practices of different countries are the following – < TOP >
(a) Political and economic factors, (b) Cultural differences, (c) Difference in taxation and (e) Difference
in legal systems. Difference in use of finance is incorrect factor. Difference in source of finance if the
correct factor which causes the diversity in accounting practices of different countries. Hence, the
answer is (d).

16
11. B Equity method is adopted in accounting for investments of the investor, when the investor has significant < TOP >
influence over the investee. Cost method (a) is the method where in the acquisition of any asset is
reported in the books at its historical cost. And it is not the appropriate method to account for the
investments where the investor has significant influence. Amortized cost method (c) is a method where
in the cost of the asset is amortized over its useful life and is not the appropriate method. Super profit
method (d) is one of the methods of valuation of goodwill. Market method (e) is a method of accounting
for non-influential investments and is not the method of accounting for investments of the investor when
the investor has significant influence over the investee. Thus, (b) is the correct answer.
12. C Payment of dividend, purchase of land for cash, receipt of interest on short term investments and < TOP >
purchase of investment property by cheque imply cash flow, where as when stock is issued in exchange
for a building, no cash flow takes place hence is a non cash investing activity. Hence (c) is the correct
answer.
13. A The investments that are considered as held-to-maturity are to be accounted for by adopting the cost < TOP >
method which would be requiring that they be carried at the amortized cost using the effective interest
method.
14. B Any income or loss with holding of trading securities, the deferred tax effect must be shown in the < TOP >
income statement. Since the gain is a non cash transaction it will not effect the Cash flow statement.
15. C The post retirement benefit costs include the following components except effect of any curtailments or < TOP >
settlements. The post retirement benefit costs include (a) Service costs, (b) Interest costs, (d)
Amortization of transition obligation and (e) Amortization of net gains and losses. Effect of any
curtailments or settlements is the component of the net retirement benefits. Hence, the answer is (c).
16. C < TOP >

Particulars (Rs.) (Rs.)

Land and building 1,00,000
Machinery 2,00,000
Furniture and fittings 60,000
Sundry debtors 30,000
Cash in hand and Bank 10,000
Stock in hand 10,000 4,10,000

Less: Sundry creditors 10,000

Short-term loan 15,000 25,000
Closing capital employed 3,85,000
Less: 50% of profit for 2006-07 10,000
Average capital employed 3,75,000
17. D Investing activities include all cash flows involving assets, other than operating assets. The investing < TOP >
activities are:
Rs.
Purchase of inventory in stock (26,000)
Sale of inventory in stock 35,000
Acquisition of CD (50,000)
Net cash used (41,000)
The gain on sale of investments in Royal Motors (Rs.35,000 – Rs.33,000 = Rs.2,000), the interest earned
(Rs.3,750), and dividends earned (Rs.1,200) are all operating items. Note that the sale of investments is
reported in the investing section at the cash inflow amount (Rs.35,000), not at the carrying value of the
investment (Rs.33,000). If the CD had been for three months instead of four years, it would be part of
“Cash and Cash equivalents” and would not be shown under investing activities.
18. B The process of assigning pension benefits or costs to periods of employee service is known as < TOP >
attribution.
19. B Dividend pay out ratio is the ratio of DPS to EPS. It indicates what percentage of total earnings is paid to < TOP >
the shareholders.
20. C The statement showing the change in equity of a business enterprise during a period from transactions < TOP >
and other events and circumstances from the non owner sources is known as Statement of
Comprehensive Income. Hence, the answer is (c).

17
21. C As the company has incurred a loss of Rs. 5 lakhs which is also the loss as per Income Tax Act, the < TOP >
company should have created the deferred tax assets for Rs. 1,50,000 (30% of 5 lakhs). Deferred tax
should be recognised and carried forward only to the extent that there is a reasonable certainty that
sufficient future taxable income will be available against which such deferred tax assets can be realised.
In this case the company does not expect sufficient future taxable income, therefore the company is not
required to create deferred tax assets or liability to fully comply with the requirement of AS-22.
22. D AS-3 states that the financing and investment activities that do not require the use of cash or cash < TOP >
equivalents should be excluded from the cash flow statements. Since the conversion of long term loan to
equity is a non-cash transaction it can be excluded from cash flow statements.
23. C Finance lease is a lease that transfers substantially all the risks and rewards incident to ownership of an < TOP >
asset.
24. C Market method is used for accounting for non-influential investments. All the other (a) Cost adjusted fair < TOP >
value method; (b) Equity method, (d) Proportionate consolidation method and (e) Consolidation method
are used for accounting for influential investments. Hence, the answer is (c).
25. A The going concern concept assumes that the enterprise has neither the intention nor the necessity to < TOP >
liquidate or curtail materially the scale of operation of its business venture in the foreseeable future. The
statements in other alternatives (b) The actual receipts or payments are not taken as the base under the
accrual system, (c) The revenues/expenses are recognized if they belong to the relevant accounting
period irrespective of cash or cash equivalent received/paid or not, (d) Securities are valued at lower of
cost or market value in recognition of conservatism concept (e) The financial statements provide
information not only the amount cash payments or receipts during the reporting period, but also the cash
payable or receivable in the reporting period are true statements. Thus, the correct answer is (a).
26. E (a) Employee Pension and Other Retirement Benefit Schemes, (b) Big-Bath accounting, (c) Accounting < TOP >
for inventories and (d) Understating liabilities help in expense manipulation. Overstatement of value of
accounts receivables helps in revenue manipulation. Hence, the answer is (e).
27. C To compute free cash flows for creditors, cash flows before interest are calculated and not after interest. < TOP >
All the other statements (a) They are the discretionary cash flows that remain once the firm has replaced
its productive capacity, (b) Its computation is helpful to the investors in ascertaining the cash flow that
can be distributed to them as dividends, (d) Creditors are also interested in cash flows as it represents the
amount available with the firm for repayments to creditors and (e) The larger the firm’s free cash flows,
the healthier it is because it has more cash available for growth, debt payment and dividends are all true
statements regarding free cash flows. Hence, the answer is (c).
28. C The excess of the cost of the acquired entity over the fair value of the acquired net assets is goodwill. As < TOP >
indicated below, the fair value of 80% of the net assets of the acquired entity is Rs.8,80,000. Goodwill is
there fore Rs.95,000.
Rs.
Cost 9,75,000
Fair value of acquired net assets:
Carrying amount: Rs.10,00,000 × 80% (8,00,000)
Undervalued plant: Rs.1,00,000 × 80% (80,000)
Goodwill 95,000
29. D According to the Du Pont Analysis < TOP >

Equity multiplier = (Average assets/Average equity) = 1 / (1 – debt to assets ratio).

30. C < TOP >
Fixed cost
Break even point = Sale price per unit − Variable cost per unit
From the above relation, increase in sale price can improve break-even point. Break-even point will not
improve with the increase in variable cost, fixed cost, sales volume and production volume. Other
statements mentioned in (a), (b), (d) and (e) are not correct.
31. C A disclosure in respect of a reconciliation of movements or changes during the reporting period and not < TOP >
previous period being reported is required in case of defined benefit plan.
32. D Payment of dividends is a financing activity. All other transactions listed are cash flows from operating < TOP >
activities. Accordingly, the net cash flows from operating is Rs.2,60,000 (Rs.8,70,000 + Rs.10,000 –
Rs.5,10,000 – Rs.1,10,000).

18
33. A Profit recovery method is not a method of revenue recognition. All the others (b) Sales basis method, (c) < TOP >
Installment sales method, (d) Percentage of completion method and (e) Completed contract method are
the methods of revenue recognition. Hence, the answer is (a).
34. D Statement of stakeholders’ equity is the statement useful for identifying reasons for changes in < TOP >
shareholder’s claims on assets of the company. Hence, the answer is (d).
35. E The responsiveness of the foreign entities sales prices to exchange rate changes and to international < TOP >
competitions is the true statement. All the other are factors to be considered in selection of a foreign
currency. Hence, the answer is (e).
36. D < TOP >

Rs.
Accounting income 8,00,000
Add: Depreciation deducted for accounting purpose in
excess of depreciation deducted for income tax purpose 50,000
Less: Gain on Revaluation of Asset 3,50,000
Taxable income 5,00,000
Provision of income tax = 35% of Rs.5,00,000 = Rs.1,75,000
37. E The plant and machinery to be used in the operations, it would be valued at the fair value less the cost to < TOP >
sell is false. In case the plant and machinery is to be used in the operations, it would be valued at the
current replacement costs for similar capacity unless the expected future use of the assets indicates a
lower value to the acquires and in case the plant or equipment is expected to be sold, it would be valued
at the fair value less the cost to sell.
38. D The acquisition which takes place when one entity, nominally the acquirer, issues so many shares to the < TOP >
former owners of the target that they become the majority owners of the successor entity is known as
reverse acquisition. Hence, the answer is (d).
39. D Inventory turnover = cost of goods sold/ average inventory < TOP >

= Rs.900,000/Rs.262,125 = 3.43 times.

Cost of goods sold = opening inventory + purchases – closing inventory
= Rs.228,750 + Rs.966,750 - Rs.295,500 = Rs.900,000
Average inventory = (opening inventory + closing inventory)/2 = Rs.262,125.
40. E < TOP >
Fixed cost
Break-even point = Sales price per unit − (Variable cost +Sales Commission) per unit

Rs.4,85,500 + Rs.3,08,300 Rs.7,93,800

=
Rs.92 − (Rs.51+ 5% on Rs.92) = Rs.36.40 = 21,807.7 units or 21,808 units.

41. C Net periodic pension cost consists of the following components: < TOP >

i. Service cost.
ii. Interest cost on projected benefit obligation.
iii. Actual return on plan assets.
iv. Actuarial Gain or loss.
v. Amortization of unrecognized prior service cost.
Notional return on plan assets is not a component of net periodic pension cost. All the other are the
components of net periodic pension cost. Hence, the answer is (c).
42. D Going concern is not a qualitative characteristic of financial statement. Going concern is an assumption < TOP >
of Financial Statements. All the others mentioned in (a) Relevance, (b) Consistency, (c) Reliability and
(e) Comparability are the qualitative characteristics of financial statements. Hence, the answer is (d).
43. B Interest expense for the period is disclosed in the income statement and not in the balance sheet. All the < TOP >
other disclosures are true. Hence, the answer is (b).

19
44. D The loss in realization account is Rs.22,500 < TOP >

Dr. Realization Account Cr.

To Fixed assets 95,000 By Creditors 55,000
To Current assets 1,20,000 By Bharath Ltd. a/c 1,37,500
By Equity shareholders a/c (Loss) 22,500
2,15,000 2,15,000
45. E A specialized kind of debt instrument where the interest payments are not made on a regular basis but < TOP >
instead are accumulated and paid on the maturity of the bond along with the principal is known as Zero-
coupon bond.
46. A < TOP >

Rs. Rs.
Dr.Bonds payable 4,000
Cr.Discount on bonds payable (unamortized discount) 200
Cr.Common stock (10 shares × par value) 400
Cr.Additional paid-in capital (10 shares × Rs.340 3,400
premium)
47. B In common size analysis the items in the income statement are expressed as a percentage of net sales. < TOP >

48. B Purchase consideration under the Lumpsum basis is the amount of purchase consideration paid in the < TOP >
form of shares, cash etc. to the amalgamating company. Hence in the above problem, the amount of net
assets and liabilities is not relevant. The lumpsum purchase consideration paid by Mayuri Ltd. to
Swastik Ltd. is Rs.10,00,000 (in form of shares) and to Prem Ltd. Rs.8,00,000 in the form of shares.
49. C Total assets of the company = Rs.25 lakh + Rs.40 lakh = Rs.65 lakh and so the amount of EBIT < TOP >
registered by the company = Rs.65 lakh × 12 percent = Rs.7.80 lakh.
Now, interest paid by the company against the debt capital = Rs.40 lakh × 9 percent = Rs.3.60 lakh.
Hence, the earnings before taxes is = Rs.7.80 lakh – Rs.3.60 lakh = Rs.4.20 lakh and the net profit for
the company = Rs.4.20 lakh × 0.60 = Rs.2.52 lakh.
Therefore, the earnings after tax per share will be = Rs.2.52.
50. D < TOP >

Profit (Rs.) Sales (Rs.) Costs (Rs.)

Year I 25,500 2,10,000 1,84,500
Year II 43,500 2,70,000 2,26,500
Change of Profit
Contribution to sales ratio = Change of Sales

Rs.43, 500 − Rs.25, 500 Rs.18, 000

= Rs.2, 70, 000 − Rs.2,10, 000 = Rs.60, 000 = 30%
Fixed cost (Year I) = 30% on Rs.2,10,000 – Profit
= Rs.63,000 – Rs.25,500 = Rs.37,500.
Required sales value = (Fixed cost + target profit) ÷ 30%
= (Rs.37,500 + Rs.22,500) ÷ 30% = Rs.60,000 ÷ 30%
= Rs.2,00,000
51. D A capital lease where the manufacturer or the dealer (lessor) recognizes profit or loss in addition to < TOP >
interest income is known as sales-type lease.
52. E Before the payment was made on 1st April 2007, the initial lease liability will be the present value of the < TOP >
five years lease rental together with the present value of the residual value i.e. Rs.(1,00,000 × 4.240 +
40,000 × 0.6500) = Rs.4,50,000. The payment made on 1st April 2007, should be excluded from this
value and the capitalized liability will be Rs.(4,50,000 – 1,00,000) = Rs.3,50,000
53. A < TOP >

Date Amount in £ Exchange rate Amount in Rs.

31.03.2007 60,000 Rs.56.00 33,60,000 (A)
31.07.2007 60,000 Rs.55.75 33,45,000 (B)
Loss on settlement 60,000 Re.00.25 15,000 (A) – (B)

20
54. A < TOP >

Particulars (Rs.) (Rs.)

Cost of investments 18,75,000
Face value of investments Rs. (20,00,000 × 60%) 12,00,000
Share in capital profits 4,20,000 16,20,000
Goodwill 2,55,000
55. D Selling of receivables is treated as borrowing and current liability is increased accordingly. Income < TOP >
statement should be adjusted to show the changes in interest and adjust the cash from operations by
reducing the amount of receivable sold from the cash flow from operations and increasing the cash flow
from financing.
Particulars As reported After adjustment
Debt 22,50,000 25,50,000
Equity 9,60,000 9,60,000
Debt to equity ratio 2.34 2.66
EBIT 4,50,000 4,77,000
Interest expense 2,10,000 2,37,000
Interest Coverage ratio 2.14 2.01
56. C The computation is as follows: (Rs.40,000 × 30%) + (Rs.20,000 × 35%) + (Rs.60,000 × 35%) = < TOP >
Rs.12,000 + Rs.7,000 + Rs.21,000 = Rs.40,000. Since Manasa Ltd. has not yet realized the tax benefits
from the warranty deductions, they have a deferred tax asset.
57. B The rent on operating lease is to be amortized on the basis of straight line method unless any other < TOP >
suitable method is found. In the given case, Tarun Ltd. is required to pay Rs.10,000 per month for 6 years
except the first 9 months i.e. (72 – 9) months. Thus the total lease rental expense for Tarun Ltd. is Rs.(63 x
10,000) = Rs.6,30,000. Applying the straight line method the rent expense for the year ending 31st
March, 2008 will be Rs.(6,30,000/6) = Rs.1,05,000.
58. D Degree of control = 4,800 / 8,000 = 3/5 = 60% < TOP >

Particulars Rs. Rs.

Cost of investment 7,20,000
Less: Face value of shares held:
Equity (4,800 x Rs.100) 4,80,000
Capital profit (Rs.3,50,000 x 3/5) 2,10,000 6,90,000
Goodwill 30,000
59. C Value of share as per intrinsic value method = Net assets/No.of shares < TOP >

= Rs.1,20,00,000/80,000 = Rs.150
Value as per yield method = Rate of dividend/Normal dividend x value of share
= 15%/12% x Rs.100 = Rs.125
Value of share as per fair value method = (Rs.150 + Rs.125)/2 = Rs.137.50
60. D The requirement is to compute the diluted EPS for 2007. Therefore, all potential common shares that < TOP >
reduce current EPS must be included in the computation. The formula for diluted EPS is
Net income available to common shareholders
Weighted − average common shares outstanding
The net income available to common shareholders is Rs.32,00,000. This is the net income after preferred
dividends of Rs.2,00,000. The weighted-average common shares outstanding is 12,50,000. This is
computed as the actual common shares outstanding for the full year of 12,00,000 plus the contingent
common shares of 50,000 that were outstanding for the full year because the contingency was incurred
in 2005.
Thus, Diluted EPS = Rs.32,00,000/12,50,000 = Rs.2.56.

21
61. D Shares of Arun Ltd. = 80% < TOP >

Minority = 20%
Share Capital of Minority Interest
= 20% of Rs.3,00,000 = Rs. 60,000
Minority share in capital profits
= 20% of Rs.1,30,000 = Rs. 26,000
Minority share in revenue profits
= 20% of Rs.1,50,000 = Rs. 30,000
Total minority interest = Rs.1,16,000
62. C Projected Benefit Obligation for the year 2006 with 5% in salary < TOP >

Salary on the date of retirement = Rs.30,000 × 2.527 (PV of lump sum table @ 5%) = Rs.75,810.
Annual pension based on salary at the time of retirement = Rs.75,810 × (1 ÷ 52) × 2 = Rs.2,915.8
Present value of pension benefit as on December 31, 2025 = Rs.2,915.8 × 6,710 = Rs.19,565
Present value of pension as on December 31, 2006 = Rs.19,565 × 0.250 = Rs.4,891
63. A The minimum liability is equal to the excess of ABO over the fair value of plan assets: < TOP >

Minimum liability = ABO – fair value of plan assets

= Rs.125 lakh – Rs.100 lakh = Rs.25 lakh.
Minimum liability allowance or additional minimum liability to be created will be:
Minimum liability required minus the net pension liability reported:
Rs.25 lakh – Rs.9 lakh = Rs.16 lakh.
The net pension liability to be reported in the balance sheet will be Rs.25 lakh.
64. D Financial statements are remeasured using the temporal rate method. In general, this method adjusts < TOP >
monetary items at the current rate and non monetary items at the historical rate. Prepaid expenses is a
non monetary item that should be remeasured using the historical rate.
65. B A company is considered to have controlling interest securities when equity securities are having voting < TOP >
rights or the company has more than 50% of voting stock of investee’s company.
66. D For the lessee as per SFAS-13 include the minimum rent, any guarantee the lessee is required/must make < TOP >
including the purchase price of the leased property, amount to make up the deficiency from the specified
minimum, amount payable for failure to renew/extend the lease period. If the lease contains the bargain
purchase option, minimum lease payment would include only the minimum rent over the lease term and
the payment required to exercise the option. It specifically excludes from minimum lease rentals, a
guarantee by the lessee to pay the lessor’s debt, lessee’s obligation to pay executory costs on leased
property, contingent rentals.
67. E The amount of temporary difference is the difference of the taxable income and the financial income and < TOP >
it is (Rs.90,000 – 76,000) = Rs.14,000. As there is a possibility of only 75% to be realized, the amount to
be realized is 75% of Rs.14,000 = Rs.10,500. Thus the deferred tax asset is 30% of Rs.10,500 i.e.
Rs.3,150.
68. C If net income after bonus and income tax is Rs.2,40,000, income before taxes can be computed by < TOP >
dividing Rs.2,40,000 by 1 minus the tax rate.
Income before taxes = Rs.2,40,000/(1−0.40) = Rs.4,00,000
The bonus is equal to 10 percent of income before income tax but after the bonus.
The Rs.4,00,000 computed above is income before tax but after all other expenses including the bonus.
Therefore, the bonus must be Rs.40,000 (10% × Rs.4,00,000).

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69. A The gain or loss on the repurchase is computed as follows: < TOP >

Reacquisition price Rs. Rs.

[(102/100) x Rs.8,00,000] 8,16,000
Net carrying amount:
Face value 8,00,000
Unamortized discount (9,600)
[2% x 8,00,000 x (6/10)]
Unamortized issue costs [56,000 x (6/10)] (33,600)
7,56,800
Loss on bond repurchase 59,200.
The loss on bond repurchase (debt extinguishment) is treated as an extraordinary item.
70. D Number of equity shares of the company is = Rs.8,40,000/Rs.10 = 84,000 shares < TOP >

Profit after tax = Rs.9,00,000

Less preference dividend (Rs.6,00,000 × 15%) = Rs. 90,000
Profits available to equity Rs.8,10,000
Earnings per share = Rs.8,10,000/84000 = Rs.9.64
Price earnings ratio = MPS/EPS = Rs.20/Rs.9.64 = 2.07

< TOP OF THE DOCUMENT >

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