Company Accounts Cost And Management Accounting Paper - 2 part - A Answer : 1 (a) (i) (a) 12 Months (ii) (b)

Capital reserve (iii) (a) Paid up capital (iv) (c) Reserve fund (v) (c) Any number of underwriters Answer : 1 (b) (i) Capital Profits (ii) Tax on distributed Profits (iii) Derecognized or eliminated from balance sheet (iv) Market value; Average price (v) Net assets; Yield Ans : 1 (c) (i) False : According to Section 80 of the companies Act, the redemption of preference shares shall not be taken as reducing the amount of its authorised capital. The main object of Section 80, is to protect the interests of the creditors of the company. As such the capital structure of the company will remain unaffected even after the Redemption of Preference Shares. (ii) False : A profit & Loss account is a periodic statement and a balance sheet is a point statement. Balance sheet is prepared at the end of the financial year whereas profit and loss account is prepared for the financial year. (iii) True : An internally generated goodwill should not be recognized as an asset. However, intangible assets arising from development phase should be recognized only if certain conditions are fulfilled. (iv) False : A company cannot enforce its lien by forfeiting the shares because by virtue of lien, the company has prior right to the shares over any creditor to whom they are given as security for a loan unless the company was given prior notice of an existing mortgage or pledge of these shares. (v) False : A limited company can retain excess application as calls in advance when the following two conditions are satisfied : (a) The Articles of the company provide for the acceptance of calls in advance. (b) The consent of the applicant has been taken either by a separate letter or by inserting a clause in the company's prospectus or application form. Answer : 2 (a) (i) Bonus shares and rights shares A company may issue fully paid up bonus shares by capitalizing its profits provided Articles of association contains provision in this regard. When a company is prosperous

and accumulates large distributable profits, it converts these accumulated profits into capital and divides the capital among the existing members in proportion to their entitlements. The members do not have to pay any amount for such shares. The bonus shares allotted to the members do not represent taxable income in their hands. The vesting of the rights in the bonus shares takes place when the shares are actually allotted and not from any earlier date. According to Section 81(1) of the companies Act, provides that whenever a company proposes to increase the subscribed capital of the company through a further issue of share, it is to be first offered to the existing members of the company, if the issue is being made. (a) at any time after the expiry of two years from the formation of the company; or (b) at any time after the expiry of one year from the first allotment of shares; which ever is earlier. The shares which are offered to the existing members are called RIGHT SHARES. (ii) 'Interim dividend' & 'Final dividend' A dividend declared in between two Annual General Meeting of the Company by the Directors is known as Interim dividend. Certain Sub-Sections have been inserted in Section 205 by the companies (Amendment) Act, 2000. According to Sub-Section (1A) the Board of Directors may declare interim dividend and the amount of dividend including interim dividend shall be deposited in a Separate Bank account within five days from the date of declaration of such dividend. According to Sub-Section (1B) the amount of dividend including interim dividend so deposited under Sub-Section (1A) shall be used for payment of interim dividend. Final dividend - it is declared at the end of the financial year. Sanction of the Shareholders at the general meeting is required. Section 205 is applicable to final dividend as it is based on annual profit and loss account. Note : With the enactment of the companies (Amendment) Act, 2000 interim dividend stands on the same footing as that of the final dividend. Both interim and final dividend when declared become debt are payable within 30 days of declaration of such dividend. (iii) STATUTORY Books & STATISTICAL Books: Every company incorporated under the Act, is required to keep at its registered office. The following statutory books and registers are given below : (i) Register of investments in securities not held in company name (ii) Register of charges (iii) Register of fixed deposits (iv) Register of members (v) Books of accounts (vi) Register of director's shareholdings (vii) Dividend register

(viii) Register of buy back of shares Statistical Books A company usually maintains a no of other books in order to keep complete records of the numerous details connected with the business operations. For eg : 1. Share application and allotment book 2. Share calls books 3. Share certificate books 4. Debenture application & allotment book 5. Debenture calls books 6. Dividend book 7. Agenda book 8. Register of share transfer book 9. Register of proxy book 10. Register of Employee stock option.

Answer : 2 (b)

Consolidated Balance Sheet of H Ltd. and its Subsidiary S Ltd. as on 31st December 2010 Liabilities Share capital 5,000 equity shares @ ` 100 each Minority Interest Reserve & Surplus General Reserve Profit & Loss A/c Add : Profit from S Ltd. Amount Assets (`) Goodwill 5,00,000 Fixed Assets: 26,250 H Ltd S Ltd 1,00,000 Current Assets: Stock 80,000 H Ltd 27,000 S Ltd 1,07,000 1000 1,06,000 Less : Unrealised Profit Debtors H Ltd. 40,000 S Ltd. Less: Inter company owing Bank H Ltd. S Ltd. Amount (`) 68,250

3,50,000 1,55,000 5,05,000

90,000 40,000 1,30,000 1,000 1,29,000

Less : Unrealised profit

Secured Loans 14% Debentures 1,00,000 Less: Inter co. Invest. 60,000 Current Liabilities: Creditors: H Ltd. S Ltd. Less: Mutual Owings

60,000 30,000 90,000 20,000 70,000

75,000 45,000 1,20,000 20,000 1,00,000 8,72,250

75,000 25,000 1,00,000

8,72,250

Q. 3 (a) (i) Purchase of Own Debentures in the Market by a company. A company can buy its own debentures in the open market if it is authorized by its article of association. The debentures so purchased can be used either for immediate cancellation or redemption of debentures or for investment. The debentures so purchased for investment can subsequently either be reissued to fulfill additional requirement of cash or can be cancelled if the company so desires. Debentures when purchased for investment are popularly known as 'OWN DEBENTURES.' (ii) Tax on distributed Profits - is chargeable on any amount declared, distributed or

paid by a domestic company by way of dividend whether interim or otherwise. It is paid in addition to the income tax chargeable on total income. Tax on distributed profit is payable to the credit of Central Government within 14 days from the date of declaration, distribution or payment whichever is earlier. The present rate of tax is 15% plus education cess and secondary and higher education cess plus surcharge. (iii) Lien on Shares : A lien is a right to retain the possession of the property belonging to the debtor until be clears his dues. In the context of a company it means that a member will not be permitted to transfer his shares unless he pays his debts to the company. This right of lien is not inherent and should be expressly provided for, in the articles. It is safer to adopt clauses 9 to 12 of Table A which provide for this right. Regulation 9 to Table A states that the company shall not only have a first and paramount lien on every partly paid-up shares for all moneys called in respect of that share, but the right of lien shall extend to all dividends payable thereon as well. Answer : 3 (b) (i) Asset backing Method: ` Equity share capital 1,00,000 12% Preference Share Capital 1,00,000 Reserve & Surplus 15,000 External Liabilities (12,000 + 6,000) 18,000 Gross Assets 2,33,000 Less: Fictitious Assets 800 Less: External Liabilities 18,000 18,800 Net Assets available for all shareholders 2,14,200 Less: Preference Share Capital 1,00,000 Net Assets available for equity shareholders 1,14,200 Number of Equity Shares 10,000 Intrinsic value per share = = = ` 11.42 (ii) Yield Method: ` Average Profit after tax 28,500 Less: Preference dividend @ 12% on ` 1,00,000 12,000 Profit available for equity shareholders 16,500 Expected Rate of return on equity capital = 100 = 100 = ` 16.50% Normal rate of return (given) 10% Value per share =

(iii) Fair Value Method: Fair value of share = = = ` 13.96 Answer : 3 (c) Dr. Profit and Loss Appropriation Account for the year ended 31st March, 2010 Particulars Amount Particulars ` To General Reserve A/c 58,000 By Balance b/fd (Refer Note) To Preference Dividend 55,000 By Net profits for the year b/d To Proposed Dividend on Equity Share Capital @ 24% 3,60,000 To balance c/d 1,45,000 6,18,000 By balance b/d Cr. Amount ` 38,000 5,80,000

6,18,000 1,45,000

Note : Proposed Dividend exceeds 20% of the paid up capital. Therefore transfer to General reserve should be minimum 10% of the current year profits.

Answer : 4 (a) In the books of Alex Ltd. Journal Entries Particulars Dr. ` Cr. `

Equity Share Capital A/c To Share Forfeited A/c (Refer W. Note) To Share Allotment A/c To Share First Call A/c (Forfeiture of 100 shares for non-payment of allotment money and first call) Bank A/c Share Forfeited A/c To Equity Share Capital A/c (Re-issued of 100 forfeited shares issued @ ` 7 per share ` 8 being paid-up) Share Forfeited A/c To Capital Reserve A/c (Profit on re-issue of 100 forfeited shares transferred to Capital Reserve A/c)

Dr.

800 175 325 300

Dr. Dr.

700 100 800

Dr.

75 75

Working Note : No. of Shares Allotted = 100 No. of Shares applied for = 100 5/4 = 125 Application money received including premium of ` 2 125 ` 3 = Less : Transferred to Securities Premium A/c (100 ` 2) = Balance amount received transferred to share Forfeited A/c

` 375 ` 200 ` 175

Ans : 4 (b) As per Section 80, the conditions which must be fulfilled for redemption of preference shares are as follows : 1. Such shares must be fully paid up 2. Such shares shall be redeemed only out of distributed profits or out of the proceeds of a fresh issue of shares made for the purpose of redemption. 3. Premium payable on preference shares, if any, can be paid only out of profits of the company or out of Companies Securities Premium Account and it undertakes to pay the debenture-holders their principal and interest and normally charges its property as security and declares a trust in favour of the debenture holders. It also contains other provisions concerning meetings of the debenture-holders, supervion of the assets charged and keeping of a register of debenture holders. 4. No company limited by shares shall after the commencement of the companies (Amendment) Act, 1996 issue any preference shares which is irredeemable or is redeemable after the expiry of a period of twenty years from the date of issue [80 (5A)].

5. 6. 7.

The redumption of preference shares by a company shall not be taken as reducing the amount of its authorised share capital. If new shares are issued for the purpose of redemption of preference shares, it will not be treated as increase of capital. If a company fails to comply with the legal provisions of this section, the company and every officer of the company who is in default shall be punishable with fine which may extend to ten thousand rupees.

Answer : 4 (c) Dr. Date

12% Debentures Account Particulars Amount Date Particulars ` 30 Dec. 09 To Bank A/c 34,800 1 April 09 By Balance b/fd 30 Dec. 09 To Sinking Fund A/c (Profit on cancellation of debentures) (W. Note 1) 5,200 31.Mar. 10 To Balance c/d 3,60,000 4,00,000 01 Apr. By Balance b/d 10

Cr. Amount ` 4,00,000

4,00,000 3,60,000

Dr.
Date Particulars

Sinking Fund Account

Cr.
Amount ` 2,40,000

Amount Date Particulars ` 40,000 01 April 09 By Balance b/fd 30 Dec. 09 To General Reserve A/c 30 Dec. 09 To Capital Reserve A/c 30 Dec. 09 By sinking Fund (t/f on profit on investment A/c cancellation) 5,200 (Profit on sale of Investment) 2,26,400 30 Dec. 09 By 12% 31 Mar. 10 To Balance c/d Debentures A/c (Profit on Cancellation) 31 Mar. 10 By Interest on Sinking Fund Account 2,71,600

3,200

5,200

23,200 2,71,600

Dr. Date

Sinking Fund Investment Account Particulars Amount Date Particulars ` 01 April 09 To Balance b/fd 2,40,000 30 Dec. 09 By Bank A/c 30 Dec. 09 To Sinking Fund A/c 3,200 31 Mar. 10 By Balance c/d 2,43,200 2,08,000 01 Apr. 10 To Balance b/d

Cr. Amount ` 35,200 2,08,000 2,43,200

Working Note : (1) Profit on Sale of Investments : ` Nominal value of investments: Sale proceeds of investments (cum interest) Less: Interest on investments for 3 months @ 8% (01/10/09 to 30/12/09) 800 Sale Price of investments Less: Purchase price of investments (2,40,000/3,00,000 40,000) Profit on sale of investments (2) Profit on Cancellation of Debentures Nominal value of debentures Sale proceeds of investments @ ` 90 36,000 ` 40,000

35,200 32,000 3,200 ` 40,000 ` 36,000

Less: Interest on debentures for 3 months @ 12% (01/10/09 to 30/12/09) ` 1,200 Net Sales Proceeds ` 34,800 Profit on cancellation of debentures = ` 40,000 - ` 34,800 = ` 5,200 (3) Interest on Sinking Fund Investment Account during the year Half yearly interest received on 30th September 2009 on ` 3,00,000 @ 8% Add : Interest on investments for 3 months @ 8% on ` 40,000 Half yearly interest received on 31st March 2010 on 2,60,000 @ 8% Total Part - B Answer: 5 (a) (i) (c) 25% (ii) (c) ` 25 lakhs (iii) (a) Standard costing (iv) (b) Perpetual inventory (v) (a) Charging of over heads to cost centres or (c) Charging of overheads to cost centres or cost units.

= ` 12,000 = ` 800 = ` 10,400 ` 23,200

Answer : (b) (i) Master budget is a summary budget incorporating the component functional budgets and which is finally approved, adopted and employed. (ii) Costs which are pertinent for decision-making are termed as Relevant costs (iii) A responsibility centre in which a manager is accountable for cost only is called Cost centre. (iv) Contract in which reimbursement is based on actual allowable cost plus a fixed fee is called Cost plus contract (v) Excess of budgeted revenues over the break-even revenue is called Margin of Safety Answer : 5 (c) (i) True : Direct costs are not necessarily the same as variable cost. Direct costs comprises of direct material cost, direct labour cost and direct expenses. Variable cost is made up of direct material, direct wages, direct expenses and variable overheads.

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(ii) False : Idle facility is that part of total facility like that part of a plant, machine or equipment etc. Which cannot be effectively utilized in the business whereas idle time is that time which is paid for, but not utilized for production. Hence, we may say idle time is part of idle facility. (iii) True : Because they are usually directly engaged in production or carrying out some operation or process. Overtime premium paid to the factory workers is called direct labour cost and they can be easily identified with and charged to the product. (iv) False : In case of rising prices, i.e. inflation, the seal profits of the concern becomes low because they may be inadequate to meet the concern's demand to purchase raw materials at the ruling price. Therefore, net income cannot be maximized in inflation. (v) True : Collection of sundry debtors has no impact on current ratio. Reduction in sundry debtors would be equal to addition in cash/bank balance. Therefore total current assets will remain same and hence current ratio will have no impact. Answer : 6 (a) (i) 1. Cost Accounting It deals with ascertainment allocation, apportionment and accounting aspect of costs It provides a base for management accounting The status of cost accountant comes after the management accountant Management Accounting It deals with the effect and impact of costs on the business It is derived from both cost accounting and financial accounting Management accountant is senior in position to cost accountant

2. 3.

4.

It has a narrow approach. He has to It reports the effect of cost on the refer to economic and statistical business alongwith cost analysis date for analysing cost effects. It does not include financial accounting, tax planning and tax accounting It can be installed without management accounting It includes financial and cost accounting, tax planning and tax accounting It needs financial and cost accounting as its base for its installation. Store Ledger A record of both quantities and value Maintained by the costing department

5.

6.

(ii) Bin Card 1. 2. A record of quantities only Maintained by the store keeper

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3. 4. 5.

Normally posted just before the transaction takes place Each transaction is individually posted usually kept inside the stores

Always posted after the transaction takes place Transactions may be summarised and posted periodically Kept outside the stores

(iii) Time Keeping is concerned with the recording of time of each worker engaged in the factory. The time - keeping will serve the following purposes : 1. Preparation of pay rolls in case of time - paid workers 2. Meeting the statutory requirements. 3. Ensuring discipline in attendance. 4. Recording of each worker's time 'in' and 'out' of the factory making distinction between normal time, over time, late attendance & early leaving. 5. For overhead distribution when overheads are absorbed on the basis of labour hours. Time - Booking : is the recording of time spent by the worker on the different jobs or work orders carried out by him during his period of attendance in the factory. The objects of time - booking are :1. To ensure that time paid for according to time - keeping is properly utilised on different jobs or work orders. 2. To ascertain the labour cost of each individual job or work order. 3. To ascertain unproductive time or idle time so as to make efforts to keep it in limit. 4. Bonus payable under incentive schemes of wage payment is dependent upon the time taken for completing a job, so it is necessary to know the time taken to complete a particular job. 5. To know the efficiency of workers, it is necessary to make the comparison of actual time taken with time allowed for completing a particular task.

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Answer : 6 (b) Cash Flow Statement of Bright Ltd for the year ended 31.3.2010 Particulars

13

I.

II.

III.

IV. V. VI.

Cash Flows from Operating Activities: Closing balance as per Reserves & Surplus Less : Opening balance as per Reserve & Surplus A/c Add : Preference Dividend Add : Interim Dividend Net profit before taxation and extra ordinary items Add : Adjustment for Depreciation Interest on 14% Debentures Discount on issue of debenture written off Loss on sale machine / land & building Premium payable on redemption of preference shares Less : Interest on investment Operating profit before Working Capital Changes add : Decrease in current assets & increase in current liabilities : Decrease in stock Increase in creditors Increase in provisions for doubtful debts Less : Increase in current Assets & decrease in current liabilities : Increase in debtors (gross) Net cash from operating activities Cash Flow from Investing Activities : Purchase of fixed assets Proceeds from sale of machine Interest on Investment Purchase of Investment Net cash used in investing activities Cash Flow from Financing Activities : Proceeds from issue of share capital Proceeds from 14% Debentures Redemption of preference shares Interest paid on long-term borrowings Interim Dividend paid Preference dividend paid during the year Net cash used in financing activities Net increase in cash and cash equivalents [I + II + III] Add : Cash and cash equivalents at the beginning of the period Cash and cash equivalents at the end of the period

2,70,000 1,10,000 36,000 45,000 2,41,000 70,000 14,000 5,000 15,000 5,000

1,09,000 (3,000) 3,47,000

10,000 75,000 5,000

90,000

1,10,000 3,27,000 (2,20,000) 25,000 3,000 (50,000) (2,42,000) 50,000 1,00,000 (1,05,000) (14,000) (45,000) (36,000) (50,000) 35,000 40,000

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(IV + V)

75,000

Working Notes : Dr. Particulars To Balance b/d To Bank A/c (Purchases) (Balancing figure)

Fixed Assets A/c (at WDV) ` Particulars ` 5,10,000 By Bank A/c 2,20,000 By Profit & Loss A/c (Loss on sale) By Depreciation A/c By Balance c/d 7,30,000

Cr. 25,000 15,000 70,000 6,20,000 7,30,000

It has been assumed that new investments have been purchased at the end of current accounting year. Answer : 7 A (i) Essentials of an Effective Budgetary Control System Some of the pre - requisites for the successful implementation of an effective budgetary control system are given below. 1. It is a plan expressed in monetary terms but it can also contain physical units 2. It is prepared prior to a defined period of time during which it will operate. 3. It is related to a definite future period 4. It is approved by the management for implementation 5. it usually shows the planned income to be generated and expenditure to be incurred. 6. It also shows capital to be employed during the period. 7. It is prepared for the purpose of implementing the policy formulated by the management and the objectives to be achieved during the period. 8. The budget should be comprehensive, complete, continuous and realistic to attain. 9. There should be an assurance from the top management executives for cooperation and acceptance of the budgetary control system. (ii) Make or Buy Decisions A concern can utilise its idle capacity by making component parts instead of buying them from market. In such a make or buy decision, the price asked by the outside suppliers should be compared with the marginal cost of producing the component parts. If the marginal cost is lower than the price demanded by the outside suppliers the component parts should be manufactured in the factory itself to utilised unused capacity. Fixed expenses are not taken in the cost of manufacturing component parts on the assumption that they have been already incurred, the additional cost involved is only

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variable cost. (iii) Cost Plus Contracts : is a pricing method under which contractee agrees to reimburse the actual cost plus the agreed percentage of profit. This method is usually adopted when the works to be carried out are urgent and the value of the contract is heavy. For eg : in the works of construction during war time, urgent works, defence, public utility works, ship building etc. Government and semi Government organization usually adopt the cost plus contracts to assign works. In cost plus contacts, it is possible to know the cost of contract, cost per each element and the amount of profit to the contractor. Answer : 7 (b) (i) Sales Gross Profit Ratio = Sales = = ` 16,00,000 (ii) Sundry Debtors Debtors Velocity : 3 months Debtors Velocity = Therefore Debtor Turnover Ratio = 12/3 = 4 Times Total Debtors = = = ` 4,00,000 Less : Bills Receivables ` 25,000 Sundry Debtors ` 3,75,000 (iii) Closing stock Stock Velocity = 8 months Stock Velocity = Therefore, Stock Turnover ratio = 12/8 = 1.5 times Cost of goods sold = Sales - Gross profit = ` 16,00,000 - ` 4,00,000 = ` 12,00,000 Stock Turnover Ratio = Or, 1.5 = Or, Average Stock = = ` 8,00,000 Closing Stock = Opening Stock + 10,000 Average Stock = Or, 8,00,000 = Or, OS = Or, OS = ` 7,95,000 Closing stock = ` 7,95,000 + ` 10,000 = ` 8,05,000

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(iv) Sundry Creditors Creditors Velocity : 2 months Creditors Velocity = Creditors Turnover Ratio = 12/2 = 6 times Purchase = Cost of goods sold + Closing stock - Opening stock = 12,00,000 + 8,05,000 - 7,95,000 = ` 12,10,000 Total Creditors = Total Creditors = = ` 2,01,667 Less : Bills Payable = ` 10,000 Sundry Creditors = ` 1,91,667 Answer : 7 (c) There are certain costs which are specially used for decision making by the management such decision making costs may, be relevant costs or irrelevant costs. Various types of costs used by management in decision making are briefly described below :1. Opportunity Costs : Opportunity cost is the cost of selecting one course of action and the losing of other opportunities to carry out that course of action. It is the amount that can be received it the asset is utilized in its next best alternative. 2. Differential cost : Differential cost has been defined as "the difference in total cost between alternatives, calculated to against decision making." It helps management to know the additional profit that would be earned if idle capacity is used or when additional investments are made. 3. Imputed costs : Some costs are not incurred and are useful while taking decision pertaining to a particular situation. Examples : Interest on internally generated funds, salaries of owners of proprietorship or partnership, notional rent. etc. 4. Out-of-Pocket Costs : This costs signify such outlay required for an activity. The management would like to know that the income from a particular project will at least cover the expenditure for the project, Acceptance of a special order requires to be considered as additional costs need not be incurred if the special order is not accepted. 5. Marginal Costs : It is the aggregate of variable Costs, i.e. prime cost plus variable overheads. Thus, costs are classified as fixed and variable. 6. Replacement Costs : This is the cost of replacing an asset at current market values example when the cost of replacing an asset is considered it means the cost of purchasing the asset at the prevailing market price is important and not the cost at which it was purchased. Answer : 8 (a) (i) Replacement Method

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= = 1.82% (ii) Separation Method

No. of workers left Average no. of workers

100 =

= 4.55%

Average no. of workers is calculated as under : =

= No. of workers at the beginning + no. of workers at the end of the month 2 = 550

Answer : 8 (b) Computation of machine Hour Rate : Particulars

Per Year Per Hour ` `

Standing Charges Wages for operator (` 5,000X12)/3 Other Overheads Total Standing charges Per hour (30,431/2,015) Machine Expenses Depreciation [(1,00,000 - 5,000) / 10]/2,015 Repair and maintenance (5,00X12/2,015) Electricity (10 units @ 50 Paise) Machine Hour Rate
Working Note: Calculation of effective machine hours:

20,000 10,431 30,431 15.10

4.71 2.98 5.00 27.79

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Total working hours per year (48 52) Less: 15% maintenance time

Less: 5% for setting up time Effective time Answer : 8 (c) (i) Re-ordering level (ROL) = Maximum usage Maximum Reorder Period = 20 units per day 15 days = 300 units (ii) Reorder Quantity (ROQ) = = = 200 units A = Annual Demand O = Ordering Cost C = Carrying Cost (iii) Maximum Level = ROL + ROQ - (Minimum rate of Consumption X Minimum Reorder Period) = 300 units + 200 units - (10 units per day 6 days) = 440 units (iv) Minimum Level = ROL - (Average Rate of consumption Average Reorder Period) = 300 units - (15 units per day 10 days) = 300 - 150 units = 150 units (v) Danger Level = Average consumption Lead time fo emergency purchases = 15 units per day 4 days = 60 units

2,496 375 2,121 106 2,015

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