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Test Series: October, 2023

MOCK TEST PAPER 2
INTERMEDIATE : GROUP – I
PAPER – 1: ACCOUNTING
ANSWERS
1. (a) (i) As per AS 2 ‘Valuation of Inventories’, certain costs are excluded from the cost of the
inventories and are recognized as expenses in the period in which incurred. Examples of
such costs are:
(a) abnormal amount of wasted materials, labour, or other production costs;
(b) storage costs, unless those costs are necessary in the production process prior to a
further production stage;
(c) administrative overheads that do not contribute to bringing the inventories to their
present location and condition; and
(d) selling and distribution costs.
(ii) As per AS 2 “Valuation of Inventories”, the inventories are to be valued at lower of cost or
net realizable value. In this case, the cost of inventory is ` 10 lakhs. The net realizable
value is 11,00,000  90% = ` 9,90,000. So, the stock should be valued at ` 9,90,000.
(b) As per AS 12 ‘Accounting for Government Grants,’ income from Deferred Grant Account is
allocated to Profit and Loss account usually over the periods and in the proportions in which
depreciation on related assets is charged. Accordingly, in the first two years (` 32 lakhs /4 years)
= ` 8 lakhs x 2 years = ` 16 lakhs will be credited to Profit and Loss Account and ` 16 lakhs will
be the balance of Deferred Grant Account after two years. Therefore, on refund of grant,
following entry will be passed:
` `
Deferred Grant A/c Dr. 16 lakhs
Profit & Loss A/c Dr. 16 lakhs
To Bank A/c 32 lakhs
(Being Government grant refunded)
1. Value of Fixed Assets after two years but before refund of grant
Fixed assets initially recorded in the books = ` 80 lakhs
Depreciation for each year = (` 80 lakhs – `8 lakhs)/4 years = ` 18 lakhs per year
Book value of fixed assets after two years = ` 80 lakhs – (` 18 lakhs x 2 years) = ` 44 lakhs
2. Value of Fixed Assets after refund of grant
On refund of grant the balance of deferred grant account will become nil. The fixed assets
will continue to be shown in the books at ` 44 lakhs.
3. Amount of depreciation for remaining two years
Depreciation will continue to be charged at ` 18 lakhs per annum for the remaining two
years.
(c) Constructing or acquiring a new asset may result in incremental costs that would have been
avoided if the asset had not been constructed or acquired. These costs are not be included in the
cost of the asset if they are not directly attributable to bringing the asset to the location and
condition necessary for it to be capable of operating in the manner intended by management.
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The costs to be incurred by the company are in the nature of costs of reducing or reorganizing
the operations of the accompany. These costs do not meet that requirement of AS 10 “Property,
Plant and Equipment” and cannot, therefore, be capitalized.
(d) (i) False; As per AS 1 “Disclosure of Accounting Policies”, certain fundamental accounting
assumptions underlie the preparation and presentation of financial statements. T hey are
usually not specifically stated because their acceptance and use are assumed. Disclosure
is necessary if they are not followed.
(ii) False; As per AS 1, if the fundamental accounting assumptions, viz. Going Concern,
Consistency and Accrual are followed in financial statements, specific disclosure is not
required. If a fundamental accounting assumption is not followed, the fact should be
disclosed.
(iii) True; To ensure proper understanding of financial statements, it is necessary that all
significant accounting policies adopted in the preparation and presentation of financial
statements should be disclosed. The disclosure of the significant accounting policies as
such should form part of the financial statements and they should be disclosed at on e place.
(iv) False; Any change in the accounting policies which has a material effect in the current
period or which is reasonably expected to have a material effect in later periods should be
disclosed. Where such amount is not ascertainable, wholly or in part, the fact should be
indicated.
(v) True; As per AS 1, there is no single list of accounting policies which are applicable to all
circumstances. The differing circumstances in which enterprises operate in a situation of
diverse and complex economic activity make alternative accounting principles and methods
of applying those principles acceptable.
2. (a) Investment Account for the year ending on 31 st December, 2022
Scrip : 8% Convertible Debentures in C Ltd.
[Interest Payable on 31 st March and 30th September]
Date Particulars Nominal Interest Cost ` Date Particulars Nominal Interest (` Cost (`)
value ` ` Value (`)
1.4.22 To Bank A/c 2,00,000 - 2,16,000 30.09.22 By Bank A/c - 12,000 -
1.7.22 To Bank A/c 1,00,000 2,000 1,10,000 [`3,00,000 x 8% x
(W.N.1) (6/12]
31.12.22 To P & L A/c - 14,033 - 1.10.22 By Bank A/c 80,000 84,000
[Interest] 1.10.22 By P & L A/c (loss) 2,933
(W.N.3)
1.12.22 By Bank A/c 733
(Accrued
interest)
(` 55,000 x .08 x
2/12)
1.12.22 By Equity shares 55,000 59,767
in C Ltd.
(W.N. 3 and 4)
31.12.22 By Balance c/d
(W.N.5) 1,65,000 3,300 1,79,300
3,00,000 16,033 3,26,000 3,00,000 16,033 3,26,000

SCRIP: Equity Shares in C LTD.

Date Particulars Cost (`) Date Particulars Cost (`)
1.12.22 To 8 % debentures 59,767 31.12.22 By balance c/d 59,767

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Working Notes:
(i) Cost of Debenture purchased on 1 st July = `1,12,000 – `2,000 (Interest) = `1,10,000
(ii) Cost of Debentures sold on 1st Oct.
= (`2,16,000 + `1,10,000) x 80,000/3,00,000 = ` 86,933
(iii) Loss on sale of Debentures = ` 86,933– `84,000 = `2,933
Nominal value of debentures converted into equity shares =` 55,000
[(` 3,00,000 – 80,000) x.25]
Interest received before the conversion of debentures
Interest on 25% of total debentures = 55,000 x 8% x 2/12 = 733
(iv) Cost of Debentures converted = (` 2,16,000 + `1,10,000) x 55,000/3,00,000
= ` 59,767
(v) Cost of closing balance of Debentures = (` 2,16,000 + `1,10,000) x 1,65,000 / 3,00,000
= ` 1,79,300
(vii) Closing balance of Debentures has been valued at cost.
(viii) 5,000 equity Shares in C Ltd. will be valued at cost of ` 59,767 being lower than the market
value ` 75,000 (` 15 x5,000)
Note: It is assumed that interest on debentures, which are converted into cash, has been
received at the time of conversion.
(b) Memorandum Trading Account for the Period from 1.1.2023 to 30.6.2023
` `
To Opening Stock (1.1.2023) 1,50,000 By Sales 11,50,000
To Purchases 9,50,000 Less: Sales Returns (40,000) 11,10,000
Less: Returns (12,500) 9,37,500
To Cartage Inwards 17,500 By Closing Stock 2,80,000
To Wages 7,500 (Bal. Fig.)
To Gross Profit 2,77,500
(25% of ` 11,10,000)
13,90,000 13,90,000

Stock Destroyed Account

` `
To Trading Account 2,80,000 By Stock Salvaged Account 20,000
By Balance c/d (For Claim) 2,60,000
2,80,000 2,80,000
Statement of Claim
Items Cost Depreciation Salvage Claim
(`) (`) (`) (`)
A B C D (E=B-C-D)
Stock 2,80,000 20,000 2,60,000
Buildings 3,75,000 1,25,000 + 9,375 4,000 2,36,625
Equipment 75,000 22,500 + 5,625 2,500 44,375
5,41,000
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(c) Statement showing cash value of the machine acquired on hire-purchase basis
Instalment Amount Interest @ 5% half Principal Amount
yearly (10% p.a.) = (in each instalment)
5/105 = 1/21)
(in each instalment)
` ` `
5th Instalment 6,000 286 5,714
Less: Interest (286)
5,714
Add: 4th Instalment 6,000
11,714 558 5,442
Less: Interest (558) (11,156–5,714)
11,156
Add: 3rd instalment 6,000
17,156 817 5,183
Less: Interest (817) (16,339–11,156)
16,339
Add: 2nd instalment 6,000
22,339 1,063 4,937
Less: Interest (1,063) (21,276–16,339)
21,276
Add: 1st instalment 6,000
27,276 1,299 4,701
Less: Interest (1,299) (25,977–21,276)
25,977 4,023 25,977
The cash purchase price of machinery is ` 25,977
3. (a) In the books of Moon Star
Trial Balance (in Rupees) of Virginia (USA) Branch
as on 31 st March, 2023
Dr. Cr. Conversion Dr. Cr.
US $ US $ rate ` `
Office Equipment 43,200 50 21,60,000
Depreciation on Office Equipment 4,800 50 2,40,000
Furniture and fixtures 2,880 50 1,44,000
Depreciation on furniture and 320 50 16,000
fixtures
Stock (1st April, 2022) 22,400 47 10,52,800
Purchases 96,000 45 43,20,000
Sales 1,66,400 45 74,88,000
Goods sent from H.O. 32,000 15,80,000
Carriage inward 400 45 18,000
Salaries (3,200+400) 3,600 45 1,62,000
Outstanding salaries 400 50 20,000

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Rent, rates and taxes 800 45 36,000

Insurance 400 45 18,000
Trade expenses 400 45 18,000
Head Office A/c 45,600 20,50,000
Trade debtors 9,600 50 4,80,000
Trade creditors 6,800 50 3,40,000
Cash at bank 2,000 50 1,00,000
Cash in hand 400 50 20,000
Exchange gain (bal. fig.) 4,66,800
2,19,200 2,19,200 1,03,64,800 1,03,64,800
(b) Trading and Profit and Loss Account of Virginia Branch
for the year ended 31st March, 2023
` `
To Opening stock 10,52,800 By Sales 74,88,000
To Purchases 43,20,000 By Closing stock 10,75,000
To Goods from Head Office 15,80,000 (21,500 US $ × 50)
To Carriage inward 18,000
To Gross profit c/d 15,92,200
85,63,000 85,63,000
To Salaries 1,62,000 By Gross profit b/d 15,92,200
To Rent, rates and taxes 36,000
To Insurance 18,000
To Trade expenses 18,000
To Depreciation on office 2,40,000
equipment
To Depreciation on furniture 16,000
and fixtures
To Net Profit c/d 11,02,200
15,92,200 15,92,200
(b) Trading and Profit and Loss Account of Archana Enterprises
for the year ended 31st March, 2023
` `
To Opening Stock 9,15,000 By Sales
To Purchases (W.N. 2) 125,97,000 Cash 110,70,000
To Gross profit c/d 13,93,000 Credit (W.N. 1) 28,60,000 139,30,000
(10% of 139,30,000) By Closing stock 9,75,000
149,05,000 149,05,000
To Sundry expenses (W.N. 4) 9,18,750 By Gross profit b/d 13,93,000
To Discount allowed 54,000 By Discount received 42,500
To Depreciation 22,500
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(15% ` 1,50,000)
To Net Profit (b.f.) 4,40,250
14,35,500 14,35,500
Balance Sheet of Archana Enterprises as at 31st March, 2023
Liabilities Amount Assets Amount
` `
Capital Furniture & Fittings 1,50,000
Opening balance 6,75,000 Less: Depreciation (22,500) 1,27,500
Less: Drawing (3,60,000) Stock 9,75,000
3,15,000 Trade Debtors 3,43,000
Add: Net profit for Unexpired insurance 3,000
the years 4,40,250 7,55,250
Trade creditors 8,29,000 Cash in hand & at bank 1,90,950
(W.N. 3)
Outstanding 55,200
expenses
16,39,450 16,39,450
Working Notes:
1. Trade Debtors Account
` `
To Balance b/d 3,12,000 By Cash/Bank 27,75,000
To Credit sales 28,60,000 By Discount allowed 54,000
(Bal. fig.) By Balance c/d 3,43,000
31,72,000 31,72,000
2. Memorandum Trading Account
` `
To Opening stock 9,15,000 By Sales 139,30,000
To Purchases (Balancing 125,97,000 By Closing stock 9,75,000
figure)
To Gross Profit (10% on sales) 13,93,000
149,05,000 149,05,000
3. Trade Creditors Account
` `
To Cash/Bank 124,83,000 By Balance b/d 7,57,500
To Discount received 42,500 By Purchases (as calculated 125,97,000
To Balance c/d in W.N. 2)
(balancing figure) 8,29,000
133,54,500 133,54,500

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4. Computation of sundry expenses to be charged to Profit & Loss A/c

`
Sundry expenses paid (as per cash and Bank book) 9,31,050
Add: Prepaid expenses as on 31–3–2022 3,000
9,34,050
Less: Outstanding expenses as on 31–3–2022 (67,500)
8,66,550
Add: Outstanding expenses as on 31–3–2023 55,200
9,21,750
Less: Prepaid expenses as on 31–3–2023 (Insurance paid till July, 2023) (9,000
x 4/12) (3,000)
9,18,750
4. (a) Calculation of Departmental Results (Actual Gross Profit)
A (`) B (`) C (`)
Actual Sales 1,72,500 1,59,400 74,600
Add back: Discount (Refer W.N.) 2,500 600 400
Normal sales 1,75,000 1,60,000 75,000
Gross profit % on normal sales 20% 25% 33.33%
Normal gross profit 35,000 40,000 25,000
Less: Discount (2,500) (600) (400)
Actual gross profit 32,500 39,400 24,600
Computation of value of stock as on 31st Dec. 2022
Departments A B C
` ` `
Stock (on 1.1. 2022) 24,000 36,000 12,000
Add: Purchases 1,46,000 1,24,000 48,000
1,70,000 1,60,000 60,000
Add: Actual gross profit 32,500 39,400 24,600
2,02,500 1,99,400 84,600
Less: Actual Sales (1,72,500) (1,59,400) (74,600)
Closing stock as on 31.12.2022 (bal.fig.) 30,000 40,000 10,000
Working Note:
Calculation of discount on sales:
Departments A B C
` ` `
Sales at normal price 10,000 3,000 1,000
Less: Sales at actual price (7,500) (2,400) (600)
2,500 600 400

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(b) Journal Entries

Date Particulars Amount Dr. Amount Cr.
` `
1.5.2022 Bank A/c Dr. 1,50,00,000
To Debenture Application A/c 1,50,00,000
(Application money received on 1,50,000
debentures @ ` 100 each)
1.6.2022 Debenture Application A/c Dr. 1,50,00,000
Underwriters A/c Dr. 50,00,000
To 15% Debentures A/c 2,00,00,000
(Allotment of 1,50,000 debentures to
applicants and 50,000 debentures to
underwriters)
Underwriting Commission Dr. 4,00,000
To Underwriters A/c 4,00,000
(Commission payable to underwriters @ 2%
on ` 2,00,00,000)
Bank A/c Dr. 46,00,000
To Underwriters A/c 46,00,000
(Amount received from underwriters in
settlement of account)
01.06.2022 Debenture Redemption Investment A/c Dr. 12,00,000
To Bank A/c
(200,000 X 100 x 15% X 40%) 12,00,000
(Being Investments made for redemption
purpose)
30.9.2022 Debenture Interest A/c Dr. 10,00,000
To Bank A/c 10,00,000
(Interest paid on debentures for 4 months @
15% on ` 2,00,00,000)
31.10.2022 15% Debentures A/c Dr. 1,20,00,000
To Equity Share Capital A/c 20,00,000
To Securities Premium A/c 1,00,00,0000
(Conversion of 60% of debentures into
shares of ` 60 each with a face value of `
10)
31.3.2023 Debenture Interest A/c Dr. 7,50,000
To Bank A/c 7,50,000
(Interest paid on debentures for the half
year)
(Refer working note)

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Working Note:
Calculation of Debenture Interest for the half year ended 31st March, 2023:
On ` 80,00,000 for 6 months @ 15% = `6,00,000
On ` 1,20,00,000 for 1 months @ 15% = ` 1,50,000
`7,50,000
(c) Journal Entries
` `
1-4-2023 Equity share final call A/c Dr. 5,40,000
To Equity share capital A/c 5,40,000
(For final calls of ` 2 per share on 2,70,000 equity
shares due as per Board’s Resolution dated….)
20-4-2023 Bank A/c Dr. 5,40,000
To Equity share final call A/c 5,40,000
(For final call money on 2,70,000 equity shares
received)
Securities Premium A/c Dr. 75,000
Capital redemption reserve A/c Dr. 1,20,000
General Reserve A/c Dr. 3,60,000
Profit and Loss A/c (b.f.) Dr. 1,20,000
To Bonus to shareholders A/c 6,75,000
(For making provision for bonus issue of one share for
every four shares held)
Bonus to shareholders A/c Dr. 6,75,000
To Equity share capital A/c 6,75,000
(For issue of bonus shares)
5. (a) Balance Sheet of Mehar Ltd. as at 31 st March, 2023
Note `
I EQUITY AND LIABILITIES:
(1) (a) Share Capital 1 1,60,00,000
(b) Reserves and Surplus 2 110,68,000
(2) Non-current Liabilities
Long term Borrowings- 40,00,000
Terms Loans (Secured)
(3) Current Liabilities
(a) Trade Payables 45,80,000
(b) Other current liabilities 3 8,00,000
(c) Short-term Provisions (Provision for taxation) 10,20,000
Total 3,74,68,000
II ASSETS
(1) Non-current Assets
(a) Property, Plant and Equipment 4 214,00,000
(b) Non- current Investments 9,00,000
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(2) Current Assets:

(a) Inventories 5 48,00,000
(b) Trade Receivables 6 48,20,000
(c) Cash and Cash Equivalents 38,40,000
(d) Short-term Loans and Advances 7 17,08,000
Total 3,74,68,000
Notes to accounts
(`)
1. Share Capital
Authorized, issued, subscribed & called up
1,20,000, Equity Shares of ` 100 each 1,20,00,000
40,000 10% Redeemable Preference Shares of 100 each 40,00,000 1,60,00,000
2. Reserves and Surplus
Securities Premium Account 19,00,000
General reserve 62,00,000
Profit & Loss Balance
Opening balance -
Profit for the period 32,00,000
Less: Miscellaneous Expenditure
written off (2,32,000) 29,68,000 110,68,000
3. Other current liabilities
Loan from other parties 8,00,000
4. Property, plant and equipment
Plant and Machinery (WDV) 214,00,000
5. Inventories
Finished Goods 30,00,000
Stores 16,00,000
Loose Tools 2,00,000 48,00,000
6. Trade Receivables
Trade receivables 49,00,000
Less: Provision for Doubtful Debts (80,000) 48,20,000
7. Short term loans & Advances
Staff Advances* 2,20,000
Other Advances* 14,88,000 17,08,000
*Considered to be short term.
(b) Statement showing the calculation of Profits for the pre-incorporation and post-
incorporation periods for the year ended 31 st March, 2023
Particulars Total Allocation Pre- Post-
basis incorporation incorporation
` `
Gross Profit 3,90,800 Sales 39,080 3,51,720
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Less: Directors’ fee 30,000 Post 30,000

Bad debts 7,200 Sales 720 6,480
Advertising 24,000 Time 6,000 18,000
Salaries & general 1,28,000 Time 32,000 96,000
expenses
Preliminary expenses 10,000 Post 10,000
Donation to Political 10,000 Post 10,000
Party
Net Profit 1,81,600 1,81,240
Pre-incorporation profit transferred 360
to Capital Reserve
Working Notes:
1. Sales ratio
Particulars `
Sales for period up to 30.06.2022 (4,80,000 X 3/6) 2,40,000
Sales for period from 01.07.2022 to 31.03.2023 (24,00,000 – 2,40,000) 21,60,000
Thus, Sales Ratio = 1 : 9
2. Time ratio
1st April, 2022 to 30 June, 2022: 1st July, 2022 to 31st March, 2023
= 3 months: 9 months = 1: 3
Thus, Time Ratio is 1: 3
6. (a) (i) Interest for the period 2022-23
= US $ 10 lakhs x 4% × ` 62 per US$ = ` 24.80 lakhs
(ii) Increase in the liability towards the principal amount
= US $ 10 lakhs × ` (62 - 56) = ` 60 lakhs
(iii) Interest that would have resulted if the loan was taken in Indian currency
= US $ 10 lakhs × ` 56 x 10.5% = ` 58.80 lakhs
(iv) Difference between interest on local currency borrowing and foreign currency
borrowing = ` 58.80 lakhs - ` 24.80 lakhs = ` 34 lakhs.
Therefore, out of ` 60 lakhs increase in the liability towards principal amount, only ` 34 lakhs will
be considered as the borrowing cost. Thus, total borrowing cost would be ` 58.80 lakhs being the
aggregate of interest of ` 24.80 lakhs on foreign currency borrowings plus the exchange
difference to the extent of difference between interest on local currency borrowing and interest on
foreign currency borrowing of ` 34 lakhs.
Hence, ` 58.80 lakhs would be considered as the borrowing cost to be accounted for as per AS
16 and the remaining ` 26 lakhs (60 - 34) would be considered as the exchange difference to be
accounted for as per AS 11.
(b) Computation of effective capital:
`
Paid-up share capital-
20,000, 14% Preference shares 20,00,000
1,20,000 Equity shares 96,00,000

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Capital reserves (excluding revaluation reserve) 45,000

Securities premium 50,000
15% Debentures 65,00,000
Public Deposits 3,70,000
(A) 1,85,65,000
Investments 75,00,000
Profit and Loss account (Dr. balance) 15,00,000
(B) 90,00,000
Effective capital (A–B) 95,65,000
OR
Capital Redemption Reserve A/c Dr. 1,40,000
Securities Premium A/c (considered to be realized in cash) Dr. 80,000
General Reserve A/c (balancing figure) Dr. 80,000
To Bonus to Shareholders 3,00,000
(Being issue of bonus shares by utilization of various
Reserves, as per resolution dated …….)
Bonus to Shareholders A/c Dr. 3,00,000
To Equity Share Capital 3,00,000
(Being capitalization of Profit)
(c) Cash Flow Statement from Investing Activities of Subham Creative Limited for year ended
31-03-2023
Cash generated from investing activities ` `
Interest on loan received 70,000
Pre-acquisition dividend received on investment made 52,600
Unsecured loans given to subsidiaries (5,00,000)
Interest received on investments (gross value) 82,000
TDS deducted on interest (8,200)
Sale of Plant & Machinery ` (90,000 – 9,600) 80,400
Cash used in investing activities (before extra-ordinary item) (2,23,200)
Extraordinary claim received for loss of machinery 55,000
Net cash used in investing activities (after extra-ordinary item) (1,68,200)
Note:
1. Debenture interest paid and Term Loan repaid are financing activities and therefore not
considered for preparing cash flow from investing activities.
2. Machinery acquired by issue of shares does not amount to cash outflow, hence also not
considered in the above cash flow statement.
(d) The Framework for Recognition and Presentation of Financial statements recognizes four
alternative measurement bases for the purpose of determining the value at which an element can
be recognized in the balance sheet or statement of profit and loss. These bases are: (i)Historical
Cost; (ii)Current cost (iii) Realizable (Settlement) Value and (iv) Present Value.

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A brief explanation of each measurement basis is as follows:

1. Historical Cost: Historical cost means acquisition price. According to this, assets are
recorded at an amount of cash or cash equivalent paid or the fair value of the asset at the
time of acquisition. Liabilities are generally recorded at the amount of proceeds received in
exchange for the obligation.
2. Current Cost: Current cost gives an alternative measurement basis. Assets are carried out
at the amount of cash or cash equivalent that would have to be paid if the same or an
equivalent asset was acquired currently. Liabilities are carried at the undiscounted amount
of cash or cash equivalents that would be required to settle the obligation currently .
3. Realisable (Settlement) Value: As per realizable value, assets are carried at the amount of
cash or cash equivalents that could currently be obtained by selling the assets in an orderly
disposal. Liabilities are carried at their settlement values; i.e. the undiscounted amount of
cash or cash equivalents paid to satisfy the liabilities in the normal course of business.
4. Present Value: Under present value convention, assets are carried at present value of
future net cash flows generated by the concerned assets in the normal course of business.
Liabilities under this convention are carried at present value of future net cash flows that are
expected to be required to settle the liability in the normal course of business.
(e) Calculation of Interest and Cash Price
Ratio of interest and amount due = 8 / (100 + rate of interest) i.e. 8/108
To ascertain cash price, interest will be calculated from last instalment to first instalment as
follows:
No. of Amount due at the time Interest Cumulative
instalments of instalment Cash price
[1] [2] [3] (2-3) = [4]
3rd 12,000 8/108 of `12,000 =` 889 11,111
2nd 23,111 [W.N.1] 8/108 of ` 23,111 = `1,712 21,399
1st 33,399 [W.N.2] 8/108 of `33,399 = `2,474 30,925
5,075
Total cash price = ` 30,925 + ` 12,000 (down payment) =`42,925
Working Notes:
1. ` 11,111+ 2nd instalment of ` 12,000= ` 23,111
2. ` 21,399+ 1st instalment of ` 12,000= ` 33,399

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