Corporate Accounting Solved Paper May 2015, Dibrgarh University B.Com 2nd/4th Sem

Corporate Accounting Solved Question Papers Dibrugarh University
Corporate Accounting Solved Paper May 2015 (New Course)
COMMERCE (General/Speciality)
Course: 203 (Corporate Accounting )
The figures in the margin indicate full marks for the questions
Full Marks: 80
Pass Marks: 24
Time: 3 hours

1. (a) State the following statements whether ‘True’ or ‘False’:         1x3=3
a)      A debenture holder is a creditor of the company.                  false
b)      Out of face value of the shares, at least 20% is payable with application.     false
c)       Internal Reconstruction and Reduction is Share Capital means the same.       True
(b) Fill in the blanks:                        1x3=3
a)      The Companies Act, 2013 defines a subsidiary company under Section 2(87).
b)      Preliminary Expenses are of fictitious assets nature.
c)       Consolidated Financial Statements are prepared as per Accounting Standard 21.
(c) Write the correct answer:      1x2=2
                     i.            Preference Shareholders are
1)      Creditors of the company.
2)      Owners of the company.
3)      Customers of the company.
                   ii.            A contributory is a
1)      Debenture holder.
2)      Share holder.
3)      Creditor.
2. Write brief notes on (any four):                           4x4=16
a) Redeemable Preference Share
b) Payment of dividend out of capital profit:
c) Determination of purchase consideration.
d) Minority Interest.
e) Forfeiture of share.
Ans: a) Redeemable Preference Share: When, the preference shares have a fixed maturity period it becomes redeemable preference shares. It can be redeemable during the lifetime of the company. The Company Act has provided certain restrictions on the return of the redeemable preference shares.
Conditions for redemption of Preference Shares:
Under section 55 of the Companies Act, 2013, a company should have to follow the conditions:
1.       No authorization is required in the articles to redeem the preference shares of a company.
2.       The redeemable preference shares must be fully paid up. If there is any partly paid share, it should be converted in to fully paid shares before redemption.
3.       The redeemable preference shareholders should be paid out of undistributed profit/ distributable profit or out of fresh issue of shares for the purpose of redemption.
4.       If the shares are redeemed at a premium, it should be should be provided out of securities premium or out of profits of the company.
5.       The proceeds from fresh issue of debentures cannot be utilized for redemption.
b) Payment of dividend out of capital profit:
Ans: Section 123 puts a restriction on the declaration of dividend that it can only be paid after providing for the depreciation and from the profits of the company. If there is loss, then it should be set off first then a declaration of the dividends can be made. Thus, from the perusal of above section we can say that the capital  and the capital profits of the company can’t be used for the distribution of dividend. The rationale behind this rule is that the assets of the company are for the benefits of the creditors and not for declaration of dividend for the shareholders. A limited company held by its MOA declares that its capital will be applied for the purposes of the business. So, the capital should remain intact and used for the purpose of business.
But capital and capital profits can be used for distribution of dividend if:
a)      the Article of Association permits,
b)      the assets are sold and realized in the cash and
c)       after fair valuation of all assets and liabilities, the surplus remains.
c) Determination of purchase consideration.
Ans: Purchase Consideration refers to the consideration payable by the purchasing company to the vendor company for taking over the assets and liabilities of Vendor Company.
Accounting Standard – 14 defines the term purchase consideration as the “aggregate of the shares and other securities issued and the payment made in the form of ach or other assets by the transferee company to the shareholders of the transferor company”. Although, purchase consideration refers to total payment made by purchasing company to the shareholders of Vendor Company, its calculation could be in different methods, as explained below:
a. Lump sum method
b. Net Assets method
c. Net Payment Method
a. Lump sum Method: Under this method purchase consideration will be paid in lump sum as per the valuation of purchasing companies valuation. E.g., if it is stated that A Ltd. takes over the business of B Ltd. for Rs.15, 00,000 here the sum of the Rs.15, 00,000 is the Purchase Consideration.
b. Net Assets Method: Under this method P.C. shall be computed as follows:
Particulars
Rs.
Agreed value of assets taken over
Less: Agreed value of Liabilities taken over
XXX
XXX
Purchase Consideration
XXX
Note: i. The term “agreed value” means the amount at which the transferor company has agreed to sell and the transferee company has agreed to take over a particular assets or a liability Otherwise book value will be the agreed value.
ii. Fictitious assets (i.e., preliminary expenses, underwriting commission, discount on issue of shares, discount on issue of debentures and debit balance in P & L A/c) are not taken over.
c. Net Payment Method: Under this method P.C. should be calculated by aggregating total payments made by the purchasing company. E.g.: A Ltd. had taken over B Ltd. and for that it agreed to pay Rs.5, 00,000 in cash 4, 00,000 Equity Shares of Rs.10 each fully paid at an agreed value of Rs.15 per share then the P.C. will be ascertained as follows:
Particulars
Rs.
Cash
4,00,000 E. Shares of Rs.10 each fully paid, at Rs.15 per share
5,00,000
60,00,000
Purchase Consideration
65,00,000

d) Minority Interest.
Ans: Minority Interest: When some of the shares in the subsidiary are held by outside shareholders they will be entitled to a proportionate share in the assets and liabilities of that company. The share of the outsider in the subsidiary is called minority interest.
Amount of minority interest is calculated by adding subsidiary company’s share in pre-acquisition profit, post-acquisition profit and in share capital of the company. Preference share capital to the extent of not purchased by holding company is also added with minority interest. In the consolidated balance sheet all the assets and liabilities of the subsidiary   are consolidated with assets and liabilities of the holding company and the minority interest representing the interest of the outsider in the subsidiary is shown as a liability.
 e) Forfeiture of share.
Ans: Forfeiture of shares: A company has no inherent power to forfeit shares. The power to forfeit shares must be contained in the articles. Where a share holder fail to pay the amount due on any call, the directors may, if so authorized by the articles, forfeit his shares. Shares can only be forfeited for non-payment of calls. An attempt to forfeit shares for other reasons is illegal. Thus where the shares are declared forfeited for the purpose of reliving a friend from liability, the forfeiture may be set aside.
Before the shares are forfeited the shareholder:
i) Must be served with a notice requiring him to pay the money due on the call together with interest;
ii) The notice shall specify a date, not being earlier than the expiry of 14 days from the date of service of notice, on or before which the payment is to be made and must also state that in the event of non-payment within that date will make the shares liable for forfeiture;
iii) There must be a proper resolution of the board;
iv) The power of forfeiture must be exercised bonafide and for the benefit of the company.
A person, whose shares have been forfeited, ceases to be a member of the company. But he shall remain liable to pay to the company all moneys which at the date of forfeiture were payable by him to the company in respect of the shares. The liability of such a person shall cease as and when the company receives payment in full in respect of the shares.

3. (a) Dhanshiri Co. Ltd. Issued 30000 shares of Rs. 100 each at a premium of 10% payable as under:-
On Application – Rs. 30
On Allotment – Rs. 60 (including premium)
On Call – Rs. 20
Bitul, holding 1000 shares failed to pay the allotment and call money. Ratul, holding 1800 shares failed to pay the call money. All these shares were forfeited and subsequently 1900 shares (including 900 shares of Ratul) reissued as fully paid-up for 80 per share. Give Journal Entries to record the above transactions and show the Balance Sheet of the company.                 10+4=14
Journal Entries
In the books of Dhanshri Co. Ltd
Date
Particulars
L/F
Amount
Amount
(i)
Bank A/c (30,000 x 30)               Dr.
To Share Application A/c
(Being the application money received on 30,000 shares @ Rs. 30 each)

6,00,000

6,00,000

Share Application A/c            Dr.
To Share Capital A/c
(Being the application money transferred to share capital account)

6,00,000

6,00,000
(ii)
Share Allotment A/c             Dr.
To Share Capital A/c (30,000 x 50)
To Securities Premium Reserve A/c 
(Being the allotment money due on 30,000 shares @ Rs. 60 each including premium @ Rs. 10 per share)

18,00,000

15,00,000
3,00,000
(iii)
Bank A/c                        Dr.
Calls in arrear A/c (1,000 x 60)   Dr.
To Share allotment A/c
(Being the allotment money received on 29,000 shares)

17,40,000
60,000


18,00,000
(iv)
Share Final Call A/c         Dr.
To Share Capital A/c (30,000 x 20)
(Being the final call money due on 30,000 shares @ Rs. 20 each)

6,00,000

6,00,000
(v)
Bank A/c         Dr.
Calls in arrear A/c (2,800 x 20)    Dr.
To Share Final Call A/c
(Being the final call money received on 27,200 shares @ Rs. 20 each)

5,44,000
56,000


6,00,000
(vi)
Share Capital A/c (2,800*100)     Dr.
Securities Premium Reserve A/c     Dr.
To Forfeited Share A/c (1000 x 30+1800x80)
To Calls in arrear A/c
(Being the 2,800 shares forfeited due to non-payment of allotment and call money)

2,80,000
10,000


1,74,000
1,16,000

Bank A/c                             Dr.
Forfeited Shares A/c     Dr.
To Share Capital A/c
(Being the 1,900 forfeited shares reissued @ Rs. 80 each)

1,52,000
38,000



1,90,000
(viii)
Forfeited Shares A/C       Dr.
To Capital Reserve A/c
(Being the profit on re-issue of forfeited shares transferred to capital reserve)

64,000


64,000

Or
(b) (i) Under what circumstances can a company issue shares at a discount?                       5
Ans: As per sec. 53 of the Companies Act, 2013, issue of shares at a discount is prohibited. This prohibition applies to all companies, public or private. Any issue of share at a discount shall be void. But a company can issue sweat equity shares to its directors or employees as a reward to them for their contributions. Sweat equity shares are those which are issued by a company at a discount or for consideration other than cash.
According to Section 54 of company act 2013, a company is permitted to issue sweat equity shares provided the following conditions are satisfied:
a)      The issue of shares at a discount is authorised by a resolution passed by the company in its general meeting and sanctioned by the Central Government.
b)      The resolution must specify the maximum rate of discount at which the shares are to be issued but the rate of discount must not exceed 10 per cent of the nominal value of shares. The rate of discount can be more than 10 per cent if the Government is convinced that a higher rate is called for under special circumstances of a case.
c)       At least one year must have elapsed since the company was entitled to commence the business.
d)      The shares are of a class, which has already been issued.
e)      The shares are issued within two months from the date of sanction received from the Government.

(ii) Jokai Tea Ltd. issues 1000, 10% convertible debentures of Rs. 100 each. Give Journal Entries in each of the following cases:    3x3=9
1)      The debentures are issued at par and redeemable at par.
2)      The debentures are issued at 5% premium and redeemable at 10% premium.
The debentures are issued at 5% discount and redeemable at 5% premium.
Journal Entries
In the books of Jokai Tea Co. Ltd.
Date
Particulars
L/F
Amount (Dr.)
Amount (Cr.)
(1)
At the Time of Issue:
Bank A/c                Dr.
To 10% Convertible Debentures A/c
(Being the 1,000 10% Debentures issued at par)


1,00,000


1,00,000

At the Time of Redemption:
10% Convertible Debentures A/c   Dr.
To Bank A/c
(Being the 1,000 10% Debentures redeemed at par)


1,00,000


1,00,000
(2)
At the time of Issue:
Bank A/c            Dr.
Loss on issue of Debentures A/c    Dr.
To 10% Convertible Debentures A/c
To Premium on redemption of Debentures A/c
To Securities Premium Reserve A/c
(Being the 1,000 10% Debentures issued at a premium of 5% but redeemed at a premium of 10%)


1,05,000
10,000



1,00,000
10,000
5,000


At the time of redemption:
10% Convertible Debentures A/c         Dr.
Premium on redemption of Debentures A/c   Dr.
To Bank A/c
(Being the 1,000 10% Debentures redeemed at a premium of 10%)


1,00,000
10,000



1,10,000
(3)
At the time of Issue:
Bank A/c                Dr.
Loss on issue of Debentures A/c       Dr.
To 10% Debentures A/c
To Premium on redemption of debentures A/c
(Being the 1,000 10% Debentures issued at a discount of 5% but redeemed at a premium of 5%)


95,000
10,000



1,00,000
5,000

At the time of redemption:
10% Debentures A/c         Dr.
Premium on redemption of Debentures A/c  Dr.
To Bank A/c
(Being the 1,000 10% Debentures redeemed at a premium of 5%)


1,00,000
5,000



1,05,000

4. (a) Explain the treatment of the under-mentioned items in the preparation of final accounts of a company: 3 ½ x4=14
1) Preliminary expenses
2) Provisions and reserves:
3) Advance payment of tax.
4) Managerial remuneration.
Ans: 1) Preliminary expenses: Preliminary Expenses: Expenses incurred to the formation of a company are called ‘Preliminary Expenses’. Preliminary expenses include the following: -
a)      Expenses incurred in order to get the company registered.
b)      Expenses incurred for the preparation, printing and issue of prospectus.
c)       Cost of preliminary books and Common Seal.
d)      Duty payable on Authorized Capital.
e)      Underwriting Commission etc.
Preliminary Expenses are to be written off out Securities Premium Account or it may be written off out of the Profit & Loss A/c gradually over some period. The balance left of preliminary expenses is to be shown in the asset side of the balance sheet of the company under the heading of ‘Miscellaneous Expenditure’.
2) Provisions and reserves: Provisions is divided into two categories – long term provisions and short term provisions. Long term provisions includes warranties and employees benefit liabilities. Short term provisions include provisions for tax, dividend payables and corporate dividend tax. Long term provisions are shown under the head non-current liabilities and short term provisions are shown under the current liabilities. Reserves are shown under the head shareholder’s fund.
3) Advance payment of tax.
Ans: Under Income Tax Act 1961, companies are required to pay advance tax on their expected profits. When advance payment of tax is made, the entry is:

Advance Income Tax Account ………………………………………………………………….. Dr.
    To Bank Account
(Being payment of tax in advance)
L/f
Amount
Amount
Since the actual amount payable as income tax will be known long after the preparation of the Profit and Loss Account (i.e. when the assessment is made by the Income Tax Department), the liability for taxes has to be estimated while preparing the Profit and Loss Account so that dividend to shareholders may be made from revenue profits and not from capital profits. So, liability for taxes is estimated and provided for in the books. The entry is:

Profit and Loss Account……………………………………………………………..…………... Dr.
    To Provision for Income Tax Account
(Being provision for income tax for the year)
L/f
Amount
Amount
When the actual assessment of tax is made, balances appearing in Provision for Income Tax Account, Advance Income Tax Account and tax deducted at source on income earned by the company are transferred to Income Tax Account. If the actual assessment of tax comes to be more than the provision made, the balance is deducted from the Surplus in the Balance Sheet. The amount is not debited to the Profit and Loss Account because tax assessed related to the profits of the last year. Similarly, if the actual assessment of tax is less than the amount provided for, the difference is added to the Surplus Account shown in the Balance Sheet.
4) Managerial remuneration.
Ans: Section 197 of CA 2013 deals with the overall maximum managerial remuneration and managerial Remuneration in case of absence or inadequacy of profits. According to this section, the total managerial remuneration payable by a public company, to its directors, including managing director and whole-time director, and its manager in respect of any financial year shall not exceed eleven per cent. of the net profits of that company for that financial year computed in the manner laid down in section 198 except that the remuneration of the directors shall not be deducted from the gross profits. However, a company in general meeting may, with the approval of the Central Government, authorise the payment of remuneration exceeding eleven per cent. of the net profits of the company, subject to the provisions of Schedule V.
However, the remuneration payable to any one managing director; or whole-time director or manager shall not exceed five percent of the net profits of the company and if there is more than one such director remuneration shall not exceed ten per cent. of the net profits to all such directors and manager taken together
Or
(b) Examine the relevance of Accounting Standards and IFRS in the preparation of financial statement of companies. 7+7=14
Ans: Accounting Standards: Accounting Standards are the policy documents or written statements issued, from time to time, by an apex expert accounting body in relation to various aspects of measurement, treatment and disclosure of accounting transactions for ensuring uniformity in accounting practices and reporting. These standards are prepared by Accounting Standard Board (ASB).
Every statement of profit and loss and balance sheet of a company shall comply with the accounting standards. Accounting Standards recommended by the Institute of Chartered Accountants of India and prescribed by the Central Government in consultation with National Advisory Committee on accounting Standards are mandatory and applicable to all companies while preparing statement of profit and loss and balance sheet. Where the statement of profit and loss and the balance sheet of a company do not comply with the accounting standards, such a company shall disclose in its statement of profit and loss and balance sheet (a) the deviation from the accounting standards; (b) the reasons for such deviation and (c) the financial effect, if any, arising due to such deviation.
Objectives or Purposes of Accounting Standards:
a.      To provide information to the users as to the basis on which the accounts have been prepared and the financial statements have been presented.
b.      To harmonize the diverse accounting policies & practices which are in use the preparation & presentation of financial statements.
c.       To make the financial statements more meaningful and comparable and to make people place more reliance on financial statements prepared in conformity with the accounting standards.
d.      To guide the judgment of professional accountants in dealing with those items, which are to be followed consistently from year to year.
e.       To provide   a  set  of  standard  accounting  policies, valuation  norms  and  disclosure  requirements.
Relevance/Applicability of Ind AS (Converged IFRS)
The Ministry of Corporate Affairs (MCA) notified the Companies (Indian Accounting Standards) Rules, 2015 (the ‘Rules’) on 16th February, 2015. The Rules specify the Indian Accounting Standards (Ind AS) applicable to certain class of companies and set out the dates of applicability as follows:
1) Voluntary adoption: Companies may voluntarily adopt Ind AS for financial statements for accounting periods beginning on or after 1 April, 2015, with the comparatives for the periods ending 31 March, 2015 or thereafter. Once a company opts to follow the Ind AS, it will be required to follow the same for all the subsequent financial statements.
2) Mandatory adoption: The following companies will have to adopt Ind AS for financial statements from the accounting periods beginning on or after 1 April, 2016:
a) Companies whose equity and/or debt securities are listed or are in the process of listing on any stock exchange in India or outside India (listed companies) and having net worth of Rs. 500 crores or more.
b) Unlisted companies having a net worth of Rs. 500 crores or more.
c) Holding, subsidiary, joint venture or associate companies of the listed and unlisted companies covered above.
Comparatives for these financial statements will be periods ending 31 March, 2016 or thereafter.
3) The following companies will have to adopt Ind AS for financial statements from the accounting periods beginning on or after 1 April, 2017:
a) Listed companies having net worth of less than Rs. 500 crore.
b) Unlisted companies having net worth of Rs. 250 crore or more but less than Rs. 500 crore.
c) Holding, subsidiary, joint venture or associate companies of the listed and unlisted companies covered above.
Comparatives for these financial statements will be periods ending 31 March, 2017 or thereafter.
4) The above mentioned roadmap for adoption will not be applicable to:
a) Companies whose securities are listed or in the process of listing on SME exchanges (Exchanges meant for small and medium-sized enterprises).
b) Companies not covered by the roadmap in the ‘Mandatory adoption’ categories mentioned above.
c) Insurance companies, banking companies and non-banking finance companies.
Challenges envisaged in convergence:
a)      Change to regulatory environment: For the success of convergence in India, certain regulatory amendment is required.
b)      Lack of Preparedness: Corporate India and accounting professionals need to be trained for effective migration to IFRS. Additionally auditors would need to train their staff to audit under IFRS environment
c)       Significant cost: Significant one-time costs of converting to IFRS (including costs of adapting IT systems, training personnel and educating investors)
d)      Impact on financial performance: Due to the significant differences between Indian GAAP and IFRS, adoption of IFRS is likely to have a significant impact on the financial position and financial performance of most Indian companies
Communication of Impact of IFRS to investors: Companies also need to communicate the impact of IFRS convergence to their investors to ensure they understand the shift from Indian GAAP to IFRS.
5. (a) Distinguish between the following:                            7+7=14
1) Amalgamation in the nature of Merger and Amalgamation in the nature of purchase.
Ans: Difference between Amalgamation in the nature of purchase and Amalgamation in the nature of merger
Basis of Distinction
Amalgamation in the Nature of Merger
Amalgamation in the Nature of Purchase
Transfer of Assets and Liabilities
There is transfer of all assets & liabilities.
There need not be transfer for all assets & liabilities.
Equity Shareholder’s holding 90%
Equity shareholders holding 90% equity shares in transferor company become shareholders of transferee company.
Equity shareholders need not become shareholders of transferee company.

Purchase Consideration

Purchase consideration is discharged wholly by issue of equity shares (except cash for fractional shares)
Purchase consideration need not be discharged wholly by issue of equity shares.
Same Business

The same business of the transferor company is intended to be carried on by the transferee company.
The business of the transferor company need not be intended to be carried on by the transferee company.
Recording of Assets & Liabilities

The assets & liabilities taken over are recorded at their existing carrying amounts except where adjustment is required to ensure uniformity of accounting policies.
The assets & liabilities taken over are recorded at their existing carrying amounts or the basis of their fair values.

Recording of Reserves of Transferor Co.

All reserves are recorded at their existing carrying amounts and in the same form.
Only statutory reserves are recorded at their existing carrying amounts.
Recording of Balance of Profit & Loss A/c of Transferor

The balance of P&L A/c should be aggregated with the corresponding balance of the transferee co. or transferred to the General.
The balance of P&L A/c losses its identity and is not recorded at all.


2) Pooling of interest method and Purchase method of amalgamation.
Ans: Difference between Pooling of interest and purchase method of recording transactions relating to amalgamation.
Basis
Pooling of Interest Method
Purchase Method
a)   Applicability
The pooling of interest method is applied in case of an amalgamation in the nature of merger.
Purchase method is applied in the case of an amalgamation in the nature of purchase.

b)   Recording
In the pooling of interest method all the reserves of the transferor Co. are also recorded by the transferee Co. in its books of account.
In the purchase method the transferee Co. records in its books of accounts only the assets and liabilities taken over the reserves, except the statutory reserves of the transferor company are not aggregated with those of the transferee Co.
c)    Adjustment of the differences

Under the pooling of interest method, the difference between the consideration paid and the share capital of the transferor company is adjusted in the general reserve or other reserves of the transferee company.
Under the purchase method, the difference between the consideration and net assets taken over is treated by the transferee company as goodwill or capital reserve.

d)   Statutory reserves

In this method, the statutory reserves are recorded by the transferee co. like all other
reserves without opening Amalgamation and Adjustment A/c.
In the purchase method, while incorporating the statutory reserves, the transferee Co. has to open amalgamation adjustment account debiting it with the amt. of the statutory reserves being incorporated.
Or
(b) Ganapati Co. Ltd. had the following Ledger balances as on 31st March, 2015:
Cr. Balances
Rs.
Dr. Balances
Rs.
Issued and subscribed capital:
8000 shares of Rs. 100 each fully paid
800, 6% Debentures of Rs. 1,000 each
Bank Overdraft
Sundry Creditors
Bills Payable

8,00,000
8,00,000
2,40,000
3,00,000
1,00,000
Goodwill
Land and Buildings
Plant and Machinery
Stock
Sundry Debtors
Cash at Bank
Preliminary Expenses
Profit & Loss A/c (Dr.)
2,40,000
3,60,000
8,00,000
1,88,000
1,84,000
50,000
24,000
3,94,000

22,40,000

22,40,000
The following scheme of reconstruction was adopted:
a)      Without altering the number of shares in issued and subscribed capital, the face value and paid-up value of each share was to be reduced to Rs. 50.
b)      The existing debentures be converted into 400, 7 ½ % debentures of Rs. 1,000 each, fully paid.
c)       The assets be revalued as under:
Land and Building – Rs. 3,28,000
Plant and Machinery – Rs. 7,20,000
Stock – Rs. 1,78,000
Sundry Debtors subject to a Bad Debts provision of Rs. 20,000
d)      Goodwill, Preliminary Expenses and the debit balance of Profit & Loss A/c will be completely written off.
Give Journal Entries to implement the above scheme and prepare the Balance Sheet after the reconstruction scheme is carried through.                          8+6=14
Journal Entries
In the books of Ganpati Ltd.
Particulars
L/F
Amount
Amount
Share Capital A/c                                                       Dr.
To Share Capital A/c
To Capital Reduction A/c
(Being the Share Capital of Rs. 100 each reduced to Rs. 50 per share)

8,00,000

4,00,000
4,00,000
6% Debentures A/c                                                      Dr.
To 7.5% Debenture A/c
To Capital Reduction A/c
(Being the 6% Debentures converted into 400 7.5% Debentures of Rs. 1,000 each)

8,00,000

4,00,000
4,00,000
Capital Reduction A/c                                                 Dr.
To Goodwill A/c
To Preliminary Expenses A/c
To Profit & Loss A/c
To Land & Building A/c
To Plant & Machinery A/c
To stock A/c
To Bad debt Provision A/c
(Being the Sundry assets written off)

8,00,000

2,40,000
24,000
3,94,000
32,000
80,000
10,000
20,000
Balance Sheet of Ganpati Co. Ltd (And Reduced)
As on 31st March, 2015
Particulars
Note No.
Amount
        I.            Equity & Liabilities:
1)      Shareholders fund:
a)      Share Capital
b)      Reserve & Surplus:




4,00,000
-
2)      Non Current Liabilities:
a)      Long term borrowing
7.5% Debenture
3)      Current Liabilities
a)      Short term borrowing
b)      Trade Payable (S/C + B/P)


4,00,000


2,40,000
4,00,000
Total (1 + 2 + 3)

14,40,000
      II.            Assets:
1)      Non Current Assets:
a)      Fixed Assets
Tangible Fixed Assets:
Land & Building                      
 Plant & Machinery                  
2)      Current Assets
a)      Inventories
b)      Trade receivable
c)       Cash & cash equivalent





3,28,000
7,20,000

1,78,000
1,64,000
50,000
Total (1 + 2)

14,40,000

6. (a) (i) Give the legal definition of holding company and a subsidiary company.      6
Ans: Meaning of Holding and Subsidiary Company
An important development of recent times in the business world is the combining of independent business units into a group or an economic unit. A company may acquire either the whole or majority of shares of another company so as to have a controlling interest in such a company or companies. The controlling company is known as Holding or Parent Company and the company controlled is known as Subsidiary Company.
Holding Company: As per Section 2(46) “holding company”, in relation to one or more other companies, means a company of which such companies are subsidiary companies. According to this section, one company can become the holding company of another in any of the following three ways:
1. By holding more than 50% of nominal value of the equity shares of the other company i.e. the holding company holds the majority of voting power in the subsidiary company.
2. By controlling the composition of the Board of Directors of the other company so that the holding company is able to appoint or remove the directors of the subsidiary company.
3. By controlling a holding company which controls another subsidiary or subsidiaries. For example, if B Ltd is a Subsidiary of C Ltd & C Ltd is a subsidiary of A Ltd then B Ltd is also deemed to be a subsidiary of A Ltd.
Meaning of “subsidiary Company” 
As per Section 2(87) of the Companies Act, 2013, a company is a “subsidiary company” of another company, i .e.“holding company”, if that other company:
1.       holds a majority of the voting rights in it, or
2.       is a member of it and has the right to appoint or remove a majority of its board of directors, or
3.       is a member of it and controls alone, pursuant to an agreement with other members, a majority of the voting rights in it, or if it is a subsidiary of a company that is itself a subsidiary of that other company.
(ii) Mention four advantages and four disadvantages of a holding company.                      4+4=8
Ans: Advantages of Holding Company:  Following are the important advantages of holding company:
a)      Easy Formation: The holding company can be formed very easily. There is no legal formality. Any company may purchase the majority shares from stock exchange and can become holding company.
b)      Large Business:  A holding company can collect the capital and expand the business on large scale.
c)       Foreign Capital: The holding company may also attract the foreign capital for the expansion of a business.
d)      A Stable Combination: The holding company is a very stable form of business organization. Its life is not affected by the disagreement of subsidiary company.
e)      Goodwill: When the goodwill of the holding company is established in the market, it also improves the goodwill of its subsidiary company before the public.
f)       Separate Position: The subsidiary companies can maintain their separate position under this system. They do not lose their identity.
g)      Control on Production: A holding company can check the production and adjusts the supply according the demand. So over production cannot take place.
Disadvantages or Defects of Holding Company: Following are the main defects of the holding company:
a)      Problem of Monopoly: A holding company tries to create monopoly over the market. Monopoly is always against the public interest. It fixes higher prices and consumer suffers a loss.
b)      Unequal Distribution of Wealth: Due to holding companies wealth goes in few hands and society is divided into two classes, rich and poor. Rich class enjoys all the amenities of life while poor class faces poverty and hunger.
c)       Costly Management: A holding company spends a lot of money on the officers and offices. All the units are managed by the central authority. So it is costly to maintain the proper control on large number subsidiary companies.
d)      Minority Interest Ignored: The interest of the minority shareholders is ignored and the members of the holding company dispose of every resolution for their own interest.
e)      Misuse of Funds: The director of the company enjoys unlimited powers and they take undue advantages. They misuse the funds also.
f)       Over Capitalization: There is always a danger of over capitalization in the holding companies. It is very harmful for both the companies.
g)      False Reports: Generally the directors of the company present false reports about the company's financial position. The true condition of the company nobody knows, and due to this sometimes creditors suffer a loss.
Or
(b) On 31st March, 2015 the ledger balances of H Ltd. and its subsidiary S. Ltd. stood as follows:
Cr. Balances
H Ltd.
Rs.
S Ltd.
Rs.
Dr. Balances
H Ltd.
Rs.
S Ltd.
Rs.
Equity Shares Capital
General Reserves
Profit & Loss A/c
Creditors
8,00,000
1,50,000
90,000
1,20,000
2,00,000
70,000
55,000
80,000
Fixed Assets
75% Equity Shares in S Ltd. (at cost)
Stock
Other Current Assets
5,50,000
2,80,000
1,05,000
2,25,000
1,00,000
---------
1,77,000
1,28,000

11,60,000
4,05,000

11,60,000
4,05,000
Draw the Consolidated Balance Sheet as on 31st March, 2015 after taking into consideration the following information also:                                 14
a)      H Ltd. acquired the shares on 31st July, 2014.
b)      S Ltd. earned a profit of Rs. 45,000 for the year ended 31st March, 2015.
c)       In January 2015, S Ltd. sold to H Ltd. goods costing Rs. 15,000 for Rs. 20,000. On 31st March, 2015, half of these goods were lying unsold in the godown of H Ltd.
Ans:
         i.            Degree of Control:
H. Ltd. = 75%
S. Ltd = 25%
       ii.            Control Chart A: (Shareholder’s Fund)
Particulars
Total
H. Ltd
S. Ltd
        I.            Pre-acquisition Profit:
General Reserve
Surplus (opening balance = 55,000 – 45,000) 10,000
Add: Surplus upto 31-7-14 (45,000*4/12)    15,000

70,000
25,000



95,000
71,250
23,750
      II.            Post-acquisition Profit:
Surplus (45,000 x 8/12)
    III.            Share Capital

30,000
2,00,000

22,500
1,50,000

7,500
50,000
Minority Interest


81,250
      iii.            Control Chart B:
Particulars
Amount (Rs.)
Cost of Investment
Less: (i) H. Ltd. shares in Pre-acquisition profit
(ii) H. Ltd. share in share capital
2,80,000
71,250
1,50,000
Goodwill
58,750
     iv.            Control Chart C:
Particulars
Fixed Assets
Stock
Other Current Assets
Trade Payable
H. Ltd
S. Ltd.
5,50,000
1,00,000
1,05,000
1,77,000
2,25,000
1,28,000
1,20,000
80,000

Less: Stock Reserve
6,50,000
2,82,000
7,500
3,53,000
2,00,000

6,50,000
2,74,500
3,53,000
2,00,000
Consolidated Balance Sheet of H Ltd. & S Ltd
Particulars
Amount (Rs.)
              I.            Equity & Liabilities:
a)      Shareholder’s Fund
1)      Share Capital
2)      Reserve & Surplus
GeneralReserve                                                                             1,50,000
Surplus                                                                                             90,000
Less:StockReserve                                                                             7,500
Add: Revenue Profit                                                                        22,500
b)      Minority Interest
c)       Non-Current Liabilities
d)      Current Liabilities:
Trade Payable


8,00,000




2,55,000
81,250
Nil

2,00,000
Total (a + b + c)
13,36,250
            II.            Assets:
a)   Non-Current Assets
1)   Fixed Assets
Tangible (Fixed Assets)
Intangible Goodwill
b)   Current Assets:
1)      Inventories
2)      Other Current Assets



6,50,000
58,750

2,74,500
3,53,000
Total (a + b)
13,36,250