Intermediate Course

Study Material
(Modules 1 to 3)

Paper 1

Advanced
Accounting
(Relevant for May, 2025 and
onward Examinations)

Module – 3

BOARD OF STUDIES
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA

© The Institute of Chartered Accountants of India

 ii

This Study Material has been prepared by the faculty of the Board of Studies. The
objective of the Study Material is to provide teaching material to the students to
enable them to obtain knowledge in the subject. In case students need any
clarification or have any suggestion for further improvement of the material
contained herein, they may write to the Joint Director, Board of Studies.
All care has been taken to provide interpretations and discussions in a manner
useful for the students. However, the Study Material has not been specifically
discussed by the Council of the Institute or any of its committees and the views
expressed herein may not be taken to necessarily represent the views of the
Council or any of its Committees.
Permission of the Institute is essential for reproduction of any portion of this
material.

© THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA

All rights reserved. No part of this book may be reproduced, stored in a retrieval
system, or transmitted, in any form, or by any means, electronic, mechanical,
photocopying, recording, or otherwise, without prior permission, in writing, from the
publisher.

Basic draft of this publication was prepared by CA. (Dr.) Rashmi Goel

Edition : July, 2024

Committee/Department : Board of Studies

E-mail : [email protected]

Website : www.icai.org

Price : ` /- (For All Modules)

ISBN No. : 978-81-19472-30-7

Published by : The Publication & CDS Directorate on behalf of

The Institute of Chartered Accountants of India,
ICAI Bhawan, Post Box No. 7100,
Indraprastha Marg, New Delhi 110 002 (India)
Printed by :

© The Institute of Chartered Accountants of India

 CONTENTS

MODULE I

CHAPTER 1: Introduction to Accounting Standards

CHAPTER 2: Framework for Preparation and Presentation of Financial

Statements

CHAPTER 3: Applicability of Accounting Standards

CHAPTER 4: Presentation & Disclosures Based Accounting Standards

MODULE II

CHAPTER 5: Assets Based Accounting Standards

CHAPTER 6: Liabilities based Accounting Standards

CHAPTER 7: Accounting Standards based on items impacting Financial

Statements

CHAPTER 8: Revenue based Accounting Standards

CHAPTER 9: Other Accounting Standards

CHAPTER 10: Accounting Standards for Consolidated Financial
Statements

MODULE III

CHAPTER 11: Financial Statements of Companies

CHAPTER 12: Buy back of Securities

CHAPTER 13: Amalgamation of companies

CHAPTER 14: Accounting for Reconstruction of companies

CHAPTER 15: Accounting for Branches including foreign branches.

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 ii

DETAILED CONTENTS: MODULE – 2

CHAPTER 5: ASSETS BASED ACCOUNTING STANDARDS .................. 5.1 – 5.252

UNIT 1: ACCOUNTING STANDARD 2 VALUATION OF INVENTORY ...... 5.1-5.20

Learning Outcomes ................................................................................................................ 5.1
1.1 Introduction ................................................................................................................. 5.2
1.2 Inventories.................................................................................................................... 5.2
1.3 Measurement of Inventories ................................................................................... 5.4
1.4 Costs of inventory ...................................................................................................... 5.6
1.5 Costs of purchase ....................................................................................................... 5.6
1.6 Costs of Conversion................................................................................................... 5.6
1.7 Joint or By-Products .................................................................................................. 5.7
1.8 Other Costs .................................................................................................................. 5.8
1.9 Exclusions from the cost of inventories ............................................................... 5.9
1.10 Cost Formula ............................................................................................................... 5.9
1.11 Other techniques of cost measurement .............................................................. 5.9
1.12 Estimates of Net Realisable Value ....................................................................... 5.10
1.13 Comparison of Cost and Net Realisable Value ................................................ 5.11
1.14 NRV of materials held for use or disposal ........................................................ 5.11
1.15 Disclosures ................................................................................................................. 5.12
Test Your Knowledge .......................................................................................................... 5.15

UNIT 2: ACCOUNTING STANDARD 10 Property, Plant and

Equipment ............................................................................... 5.21-5.77
Learning Outcomes .............................................................................................................. 5.21
2.1 Introduction ............................................................................................................... 5.22
2.2 Scope of the Standard ............................................................................................ 5.22
2.3 Definition of Property, Plant and Equipment (PPE) ........................................ 5.23

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2.4 Other Definitions ..................................................................................................... 5.24

2.5 Recognition Criteria for PPE .................................................................................. 5.26
2.6 Measurement of PPE .............................................................................................. 5.27

2.7 Initial Recognition .................................................................................................. 5.28

2.8 Cost of a self-constructed Asset .......................................................................... 5.33
2.9 PPE acquired in Exchange for a Non-monetary Asset or
Assets or A combination of Monetary and Non-monetary Assets ............. 5.34
2.10 Treatment of Subsequent Costs ......................................................................... 5.38
Test Your Knowledge ........................................................................................................... 5.61

UNIT 3: ACCOUNTING STANDARD 13 ACCOUNTING FOR

INVESTMENTS ....................................................................... 5.78-5.112
Learning Outcomes .............................................................................................................. 5.78
3.1 Introduction ............................................................................................................... 5.78

3.2 Definition of the terms used in the Standard................................................... 5.79

3.3 Forms of Investments .............................................................................................. 5.79
3.4 Classification of Investments ................................................................................ 5.80
3.5 Cost of Investments ................................................................................................. 5.80
3.6 Carrying Amount of Investments ......................................................................... 5.82
3.7 Investment Properties ............................................................................................. 5.86
3.8 Disposal of Investments ......................................................................................... 5.86
3.9 Reclassification of Investments ............................................................................ 5.86
3.10 Disclosure ................................................................................................................... 5.88

Test Your Knowledge .......................................................................................................... 5.98

UNIT 4: ACCOUNTING STANDARD 16 BORROWING COSTS .......... 5.113-5.136

Learning Outcomes ........................................................................................................... 5.113
4.1 Introduction ............................................................................................................ 5.113

4.2 Definitions ............................................................................................................... 5.114

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4.3 Exchange Differences on Foreign Currency Borrowings ............................ 5.115

4.4 Borrowing Costs Eligible for Capitalisation.................................................... 5.117
4.5 Recognition criteria .............................................................................................. 5.118

4.6 Specific borrowings .............................................................................................. 5.119

4.7 General borrowings .............................................................................................. 5.120
4.8 Excess of the Carrying Amount of the Qualifying Asset over
Recoverable Amount ............................................................................................ 5.120
4.9 Commencement of Capitalisation .................................................................... 5.122
4.10 Suspension of Capitalisation .............................................................................. 5.123
4.11 Cessation of Capitalisation ................................................................................. 5.124
4.12 Disclosure ................................................................................................................ 5.125
Test Your Knowledge ....................................................................................................... 5.128

UNIT 5: ACCOUNTING STANDARD 19 LEASES ................................. 5.137-5.182

Learning Outcomes ........................................................................................................... 5.137
5.1 Introduction ............................................................................................................ 5.138
5.2 Applicability of AS 19 [Scope] ........................................................................... 5.138
5.3 Definitions ............................................................................................................... 5.139
5.4 Types of leases ....................................................................................................... 5.144
5.5 Indicators of Finance Lease ................................................................................ 5.145
5.6 Deterministic Conditions ..................................................................................... 5.146
5.7 Suggestive Conditions ......................................................................................... 5.147
5.8 Accounting for Finance Leases (Books of lessee) ......................................... 5.147

5.9 Accounting for Operating Leases ..................................................................... 5.163

5.10 Sale and Leaseback ............................................................................................... 5.168
Test Your Knowledge ....................................................................................................... 5.172

© The Institute of Chartered Accountants of India

CHAPTER 11
FINANCIAL STATEMENTS
OF COMPANIES

UNIT 1: PREPARATION OF FINANCIAL

STATEMENTS

LEARNING OUTCOMES
After studying this unit, you will be able to–
♦ Know how to maintain books of account of a company.
♦ Learn about statutory books of a company.
♦ Prepare and present the financial statements of a company as per
Schedule III to the Companies Act, 2013
♦ Appreciate the term divisible profits and dividends.

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 11.2 ADVANCED ACCOUNTING

UNIT OVERVIEW
Meaning of
Company, different Preparation of
types of companies financial
and maintenance of statements
books of accounts

Requisites of
Distributable profits financial
statements

Declaration and
payment of Transfer to Reserve
dividend

1.1 MEANING OF COMPANY

As per Section 2(20) of the Companies Act, 2013, “Company” means a company
incorporated under the Companies Act, 2013 or under any previous company law
(e.g., the Companies Act, 1956). Different types of companies have been defined
(under various sub-sections of the Companies Act, 2013) as follows:

2(21) “company limited by guarantee” means a company having the liability of

its members limited by the memorandum to such amount as the members
may respectively undertake to contribute to the assets of the company in
the event of its being wound up;

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 FINANCIAL STATEMENTS OF COMPANIES 11.3

2(22) “Company limited by shares” means a company having the liability of its
members limited by the memorandum to the amount, if any, unpaid on the
shares respectively held by them;
2(42) “Foreign company” means any company or body corporate incorporated
outside India which –
(a) has a place of business in India whether by itself or through an agent
physically or through electronic mode; and
(b) conducts any business activity in India in any other manner.
2(45) “Government company” means any company in which not less than 51% of
the paid-up share capital is held by the Central Government, or by any State
Government or Governments, or partly by the Central Government and
partly by one or more State Governments, and includes a company which is
a subsidiary company of such a Government company;
2(62) “One Person Company” means a company which has only one person as a
member;
2(68) “Private company” means a company having a minimum paid-up share
capital as may be prescribed, and which by its articles,—
(i) restricts the right to transfer its shares;
(ii) except in case of One Person Company, limits the number of its
members to two hundred:
Provided that where two or more persons hold one or more shares in
a company jointly, they shall, for the purposes of this sub-clause, be
treated as a single member:
Provided further that—
(A) persons who are in the employment of the company; and
(B) persons who, having been formerly in the employment of the
company, were members of the company while in that
employment and have continued to be members after the
employment ceased,
shall not be included in the number of members; and
(iii) prohibits any invitation to the public to subscribe for any securities of
the company;

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 11.4 ADVANCED ACCOUNTING

2(71) “Public Company” means a company which—

(a) is not a private company; and
(b) has a minimum paid-up share capital as may be prescribed:
Provided that a company which is a subsidiary of a company, not
being a private company, shall be deemed to be public company for
the purposes of this Act even where such subsidiary company
continues to be a private company in its articles;
2(85) “Small company” means a company, other than a public company, -

(i) paid-up share capital of which does not exceed ` 50 lakhs or such
higher amount as may be prescribed which shall not be more than `
10 crores; and
(ii) turnover of which as per profit and loss account for the immediately
preceding financial year does not exceed ` 2 crores or such higher
amount as may be prescribed which shall not be more than ` 100
crores:
Provided that nothing in this clause should apply to:
(A) a holding company or a subsidiary company
(B) a company registered under section 8
(C) a company or body corporate governed by any special Act
As per the Companies (Specification of Definitions Details) Rules, 2014 1, for
the purposes of sub-clause (i) and sub-clause (ii) of clause (85) of section 2
of the Act, paid up capital and turnover of the small company shall not
exceed ` 4 crores and ` 40 crores respectively.
2(92) “Unlimited company” means a company not having any limit on the
liability of its members;
2(46) “Holding company”, in relation to one or more other companies, means a
company of which such companies are subsidiary companies;

1
As amended by the Companies (Specification of Definitions Details) Amendment Rules,
2022 dated 15 September 2022.

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 FINANCIAL STATEMENTS OF COMPANIES 11.5

Explanation.–For the purposes of this clause, the expression “company”

includes any body corporate.

2(87) “Subsidiary company”, or “subsidiary”, in relation to any other company

(that is to say the holding company), means a company in which the holding
company-

(i) controls the composition of the Board of Directors; or

(ii) exercises or controls more than one-half of the total share capital
either at its own or together with one or more of its subsidiary
companies:
Provided that such class or classes of holding companies as may be
prescribed should not have layers of subsidiaries beyond such
numbers as may be prescribed.
Explanation – For the purposes of this clause, -
(a) a company should be deemed to be a subsidiary company of the
holding company even if the control referred to in sub-clause (i) or
sub-clause (ii) is of another subsidiary company of the holding
company;
(b) the composition of a company’s Board of Directors should be deemed
to be controlled by another company if that other company by
exercise of some power exercisable by it at its discretion can appoint
or remove all or a majority of the directors;
(c) the expression “company” includes any body corporate;
(d) “layer” in relation to a holding company means its subsidiary or
subsidiaries;
Companies (Accounting Standards) Rules, 2021 define Small and Medium
Sized Company as follows:

2(e) “Small and Medium Sized Company” (SMC) means, a company-

(i) whose equity or debt securities are not listed or are not in the
process of listing on any stock exchange, whether in India or outside
India;
(ii) which is not a bank, financial institution or an insurance company;

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 11.6 ADVANCED ACCOUNTING

(iii) whose turnover (excluding other income) does not exceed two
hundred and fifty crore rupees in the immediately preceding
accounting year;
(iv) which does not have borrowings (including public deposits) in excess
of fifty crore rupees at any time during the immediately preceding
accounting year; and
(v) which is not a holding or subsidiary company of a company which is
not a small and medium-sized company.
Explanation: For the purposes of this clause, a company shall qualify as a
Small and Medium Sized Company, if the conditions mentioned therein are
satisfied as at the end of the relevant accounting period.

1.2 MAINTENANCE OF BOOKS OF ACCOUNT

As per Section 128 of the Companies Act, 2013

Every company should prepare and keep

at its registered office

books of account and other relevant books and

financial statements
accrual basis and according to double entry system
of accounting.

for every financial year

giving a true and fair view of the state of the affairs

As per Section 128 of the Companies Act, 2013, every company shall prepare and
keep at its registered office books of account and other relevant books and
papers and financial statement for every financial year which give a true and fair
view of the state of the affairs of the company, including that of its branch office
or offices, if any, and explain the transactions effected both at the registered
office and its branches and such books should be kept on accrual basis and
according to the double entry system of accounting:

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 FINANCIAL STATEMENTS OF COMPANIES 11.7

Provided further that the company may keep such books of account or other
relevant papers in electronic mode in such manner as may be prescribed.

Maintenance at Place other than Registered Office

It is a duty of the company to inform the Registrar of Companies within seven
days of the decision in case the Board of Directors decides to maintain books at
the place other than the registered office.
In Case of Branch Office
Where a company has a branch office in India or outside India, it should be
deemed to have complied with the provisions of the Act, if proper books of
account relating to the transactions effected at the branch office are kept at that
office and proper summarised returns periodically are sent by the branch office to
the company at its registered office or such other place as the Board of Directors
has decided.
Section 128 (3) further lays down that the books of account and other books and
papers maintained by the company within India should be open for inspection at
the registered office of the company or at such other place in India by any
director during business hours, and in the case of financial information, if any,
maintained outside the country, copies of such financial information should be
maintained and produced for inspection by any director subject to such
conditions as may be prescribed. Section 128(5) further states that the books of
account of every company relating to a period of not less than 8 financial years
immediately preceding a financial year, or where the company had been in
existence for a period less than 8 years, in respect of all the preceding years
together with the vouchers relevant to any entry in such books of account should
be kept in good order.
Books of Accounts maintained in electronic mode
A company may keep such books of account or other relevant papers in
electronic mode in such manner as may be prescribed.
The books of account and other relevant books and papers maintained in
electronic mode shall remain accessible in India, at all times, so as to be usable
for subsequent reference.
Provided that for the financial year commencing on or after the 1st day of April,
2022, every company which uses accounting software for maintaining its books of

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 11.8 ADVANCED ACCOUNTING

account, shall use only such accounting software which has a feature of recording
audit trail of each and every transaction, creating an edit log of each change
made in books of account along with the date when such changes were made
and ensuring that the audit trail cannot be disabled.
The books of account and other relevant books and papers shall be retained
completely in the format in which they were originally generated, sent or
received, or in a format which shall present accurately the information generated,
sent or received and the information contained in the electronic records shall
remain complete and unaltered.
The information received from branch offices shall not be altered and shall be
kept in a manner where it shall depict what was originally received from the
branches.
The information in the electronic record of the document shall be capable of
being displayed in a legible form.

There shall be a proper system for storage, retrieval, display or printout of the
electronic records as the Audit Committee, if any, or the Board may deem
appropriate and such records shall not be disposed of or rendered unusable,
unless permitted by law;
Provided that the back-up of the books of account and other books and papers
of the company maintained in electronic mode, including at a place outside India,
if any, shall be kept in servers physically located in India on a daily basis.
The company shall intimate to the Registrar on an annual basis at the time of
filing of financial statement-
(a) the name of the service provider;
(b) the internet protocol address of service provider;
(c) the location of the service provider (wherever applicable);
(d) where the books of account and other books and papers are maintained on
cloud, such address as provided by the service provider.
Explanation.- For the purposes of this rule, the expression “electronic mode”
includes “electronic form” as defined in clause (r) of sub-section (1) of section 2
of Information Technology Act, 2000 and also includes an electronic record as

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 FINANCIAL STATEMENTS OF COMPANIES 11.9

defined in clause (t) of sub-section (1) of section 2 of the Information Technology

Act, 2000 and "books of account " shall have the meaning assigned to it under
the Act.
Where the service provider is located outside India, the name and address of the
person in control of the books of account and other books and papers in India.

1.3 STATUTORY BOOKS

The following statutory books are required to be maintained by a company under
different sections of the Companies Act, 2013:
♦ Register of Investments of the company held in its own name (Section 187)
♦ Register of Charges (Section 85)
♦ Register of Members (Sections 88)
♦ Register of Debenture-holders and other Security holders (Section 88)
♦ Minute Books (Section 118)
♦ Register of Contracts, or arrangements in which directors are interested
(Section 189)
♦ Register of directors and key managerial personnel and their shareholding
(Section 170)
♦ Register of Loans and Investments by Company (Section 186)
In addition, a company usually maintains a number of statistical books to
keep a record of its transactions which have resulted either in the payment
of money to it or constitute the basis on which certain payments have been
made by it.
♦ Registers and documents relating to the issue of shares are:
(i) Share Application and Allotment Book;
(ii) Share Call Book
(iii) Certificate Book

(iv) Register of Members

(v) Share Transfer Book
(vi) Dividend Register.

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 11.10 ADVANCED ACCOUNTING

1.4 ANNUAL RETURN

In accordance with Section 92 of the Companies Act, 2013, every company should
prepare an annual return in the form prescribed by the Companies Act, 2013
signed by a director and the company secretary, or where there is no company
secretary, by a company secretary in practice:
Provided that in relation to One Person Company and small company, the annual
return should be signed by the company secretary, or where there is no company
secretary, by the director of the company.

The annual return should be filed with the Registrar within 60 days from the day
on which each of the annual general meeting (AGM) is held or where no AGM is
held in any year, within 60 days from the date on which AGM should have been
held along with a statement showing the reasons why AGM was not held.

1.5 FINAL ACCOUNTS

Under Section 129 of the Companies Act, 2013, at the annual general meeting of
a company, the Board of Directors of the company should lay financial statements
before the company:
Financial Statements as per Section 2(40) of the Companies Act, 2013, inter-alia
include -
(i) a balance sheet as at the end of the financial year;
(ii) a profit and loss account, or in the case of a company carrying on any
activity not for profit, an income and expenditure account for the financial
year;
(iii) cash flow statement for the financial year;
(iv) a statement of changes in equity, if applicable; and
(v) any explanatory note annexed to, or forming part of, any document referred
to in (i) to (iv) above:

Provided that the financial statement, with respect to One Person Company, small
company and dormant company, may not include the cash flow statement.

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 FINANCIAL STATEMENTS OF COMPANIES 11.11

Statement of
Profit and
loss
Statement of Cash Flow
changes in Statement
Equity (if
applicable) Financial
statements

Notes and
Balance
other
sheet
statements

The financial statements of a one person company, small company, dormant

company or a private company (if such a private company is a start-up), may not
include the cash flow statement.

Periodic Financial Statements

The Central Government may, require such class or classes of unlisted companies,
as may be prescribed,—
(a) to prepare the financial results of the company on such periodical basis and
in such form as may be prescribed;
(b) to obtain approval of the Board of Directors and complete audit or limited
review of such periodical financial results in such manner as may be
prescribed; and

(c) file a copy with the Registrar within a period of thirty days of completion of
the relevant period with such fees as may be prescribed.

Requisites of Financial Statements

It should give a true and fair view of the state of affairs of the company as at the
end of the financial year.

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 11.12 ADVANCED ACCOUNTING

Provisions Applicable
(1) Specific Act is Applicable

For instance, any

(a) insurance company
(b) banking company or
(c) any company engaged in generation or supply of electricity ∗ or
(d) any other class of company for which a Form of balance sheet or Profit
and loss account has been prescribed under the Act governing such
class of company
(2) In case of all other companies
Balance Sheet as per Form set out in Part I of Schedule III and Statement of
Profit and Loss as per Part II of Schedule III.

Division Applicable to:

Division I Companies that are required to apply Accounting

Standards notified under Section 133 of the Companies
Act, 2013.

Division II Companies that are required to apply Indian Accounting

Standards notified under Section 133 of the Companies
Act, 2013.

Division III Non-Banking Finance Companies (NBFCs) that are

required to apply Indian Accounting Standards notified
under Section 133 of the Companies Act, 2013.

∗
Section 1(4)(d) of the Companies Act, 2013 states that the provisions of the Companies Act shall
apply to companies engaged in the generation or supply of electricity, except in so far as the said
provisions are inconsistent with the provisions of the Electricity Act, 2003. Keeping this in view,
Schedule III may be followed by such companies till the time any other format is prescribed by the
relevant statute.

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 FINANCIAL STATEMENTS OF COMPANIES 11.13

Points to be kept in mind while preparing final accounts:

♦ Requirements of Schedule III to the Companies Act;
♦ Other statutory requirements;
♦ Accounting Standards notified by Ministry of Corporate Affairs (MCA) (AS 1
to AS 29 2);
♦ Statements and Guidance Notes issued by the Institute of Chartered
Accountants of India (ICAI); which are necessary for understanding the
accounting treatment/ valuation/ disclosure suggested by the ICAI.

Compliance with Accounting Standards

As per section 133 of the Companies Act, it is mandatory to comply with
accounting standards notified by the Central Government from time to time.
Schedule III of the Companies Act, 2013
As per section 129 of the Companies Act, 2013, Financial statements should give a
true and fair view of the state of affairs of the company or companies and comply
with the accounting standards notified under section133 and should be in the
form or forms as may be provided for different class or classes of companies in
Schedule III under the Act. Schedule III to the Companies Act, 2013 has been
given as Annexure at the end of this chapter.

Requirements of
Schedule III to
the Companies
Act, 2013

Financial
statements

Accounting
Other
Standards
statutory
notified by
requirements
MCA

2
AS 6 and AS 8 have been withdrawn

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 11.14 ADVANCED ACCOUNTING

Example 1
In the financial statements of the financial year 20X1-20X2, Alpha Ltd. has
mentioned in the notes to accounts that during financial year, 24,000 equity shares
of ` 10 each were issued as fully paid bonus shares. However, the source from which
these bonus shares were issued has not been disclosed. Is such non-disclosure a
violation of the Schedule III to the Companies Act? Comment.
Solution
Schedule III has come into force for the Balance Sheet and Profit and Loss
Account prepared for the financial year commencing on or after 1st April, 20X1. As
per Part I of the Schedule III, a company should, inter alia, disclose in notes to
accounts for the period of 5 years immediately preceding the balance sheet date
(31st March, 20X2 in the instant case) the aggregate number and class of shares
allotted as fully paid-up bonus shares. Schedule III does not require a company to
disclose the source from which bonus shares have been issued. Therefore, non-
disclosure of source from which bonus shares have been issued does not violate
the Schedule III to the Companies Act.
Example 2
The management of Loyal Ltd. contends that the work in process is not valued since
it is difficult to ascertain the same in view of the multiple processes involved. They
opine that the value of opening and closing work in process would be more or less
the same. Accordingly, the management had not separately disclosed work in
process in its financial statements. Comment in line with Schedule III.
Solution
Schedule III to the companies Act does not require that the amounts of WIP at
the beginning and at the end of the accounting period to be disclosed in the
statement of profit and loss. Only changes in inventories of WIP need to be
disclosed in the statement of profit and loss. Non-disclosure of such change in
the statement of profit and loss by the company may not amount to violation of
Schedule III if the differences between opening and closing WIP are not material.

Example 3
Futura Ltd. had the following items under the head “Reserves and Surplus” in the
Balance Sheet as on 31st March, 20X1:

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 FINANCIAL STATEMENTS OF COMPANIES 11.15

Amount ` in lakhs
Securities Premium Account 80
Capital Reserve 60
General Reserve 90
The company had an accumulated loss of ` 250 lakhs on the same date, which it
has disclosed under the head “Statement of Profit and Loss” as asset in its Balance
Sheet. Comment on accuracy of this treatment in line with Schedule III to the
Companies Act, 2013.
Solution
Part I of Schedule III to the Companies Act, 2013 provides that debit balance of
Statement of Profit and Loss (after all allocations and appropriations) should be
shown as a negative figure under the head ‘Surplus’. Similarly, the balance of
‘Reserves and Surplus’, after adjusting negative balance of surplus, should be
shown under the head ‘Reserves and Surplus’ even if the resulting figure is in the
negative. In this case, the debit balance of profit and loss i.e. ` 250 lakhs exceeds
the total of all the reserves i.e. ` 230 lakhs. Therefore, balance of ‘Reserves and
Surplus’ after adjusting debit balance of profit and loss is negative by ` 20 lakhs,
which should be disclosed on the face of the balance sheet. Thus, the
presentation by the company is incorrect.
Example 4
Sumedha Ltd. took a loan from bank for ` 10,00,000 to be settled within 5 years in
10 equal half yearly instalments with interest. First instalment is due on 30.09.20X1
of ` 1,00,000. Determine how the loan will be classified in preparation of Financial
Statements of Sumedha Ltd. for the year ended 31st March, 20X1 according to
Schedule III.
Solution
In the given case, instalments due on 30.09.20X1 and 31.03.20X2 will be shown
under the head ‘short term borrowings’ as current maturities of loan from bank as
per the amendment to Schedule III vide MCA notification dated 24th March, 2021.
Therefore, in the balance sheet as on 31.3.20X1, ` 8,00,000 (` 1,00,000 x 8
instalments) will be shown under the heading ‘Long term Borrowings’ and
` 2,00,000 (` 1,00,000 x 2 instalments) will be shown under the heading ‘short
term borrowings’.

© The Institute of Chartered Accountants of India

 11.16 ADVANCED ACCOUNTING

Example 5
Prince Ltd. presents its provisions for contingencies under "Reserves and Surplus” in
Notes to Accounts in its financial statements. Whether this presentation is correct?
Solution
The ICAI’s Glossary of Terms Used in Financial Statements defines the term
‘Reserve’ as “the portion of earnings, receipts or other surplus of an enterprise
(whether capital or revenue) appropriated by the management for a general or a
specific purpose other than a provision for depreciation or diminution in the value
of assets or for a known liability.” ‘Reserves’ should be distinguished from
‘provisions’. For this purpose, reference may be made to the definition of the
expression `provision’ in AS-29 Provisions, Contingent Liabilities and Contingent
Assets.
As per AS-29, a `provision’ is “a liability which can be measured only by using a
substantial degree of estimation”. A ‘liability’ is “a present obligation of the
enterprise arising from past events, the settlement of which is expected to result
in an outflow from the enterprise of resources embodying economic benefits.”
Present obligation’ – “an obligation is a present obligation if, based on the
evidence available, its existence at the Balance Sheet date is considered probable,
i.e., more likely than not.”
Example 6
Anek Ltd. is a company that is required to present its financial statements as per the
Division I of Schedule III. The company has trade receivables at the balance sheet
date. What are the disclosures that are applicable with respect to trade receivables
in the financial statements?
Solution
Under Schedule III, trade receivables are required to be classified into long-term
(non-current) trade receivables and short-term (current) trade receivables. Trade
Receivables, shall be sub-classified as:
(i) (a) Secured, considered good;
(b) Unsecured considered good;
(c) Doubtful

© The Institute of Chartered Accountants of India

 FINANCIAL STATEMENTS OF COMPANIES 11.17

(ii) Allowance for bad and doubtful debts shall be disclosed under the relevant
heads separately.
(iii) Debts due by directors or other officers of the company or any of them
either severally or jointly with any other person or debts due by firms or
private companies respectively in which any director is a partner or a
director or a member should be separately stated.
For trade receivables outstanding, following ageing schedule shall be given:

Particulars Outstanding for following periods from Total

due date of payment#

Less 6 1-2 2-3 More

than 6 months- years years than 3
months 1 year years

(i) Undisputed Trade

Receivables –
considered good

(ii) Undisputed Trade

Receivables –
considered doubtful

(iii) Disputed Trade

Receivables –
considered good

(iv) Disputed Trade

Receivables –
considered doubtful

#similar information shall be given where no due date of payment is specified in

that case disclosure shall be from the date of the transaction.

Note: Students may note that the questions based on preparation of Statement
of Profit and Loss and Balance Sheet and explanatory notes as per Schedule III
have been given in this Unit. However, questions requiring preparation of cash
flow statements have been separately given in the next unit of this chapter.

© The Institute of Chartered Accountants of India

 11.18 ADVANCED ACCOUNTING

1.6 DISTRIBUTABLE PROFIT

One of the important functions of company accounting is to determine the
amount of profits which is available for distribution to the shareholders as
dividend. This is necessary since the amount of profits disclosed by the Profit &
Loss Account, in every case, is not available for distribution. The availability of
profits for distribution depends on a number of factors, e.g., their composition,
the amount of provisions and appropriations that must be made out of them in
priority, etc.
Meaning of Dividend
(a) A dividend is a distribution of divisible profit of a company among the
members according to the number of shares held by each of them in the
capital of the company and the rights attaching thereto.
(b) Such a distribution may or may not entail a release of assets; it would be
where a distribution involves payment of cash.

(c) But when profits are capitalised and the amount distributed is applied
towards payment of bonus shares, issued free to the shareholders, no part
of the assets of the company can be said to have been released since, in
such a case, profits are only capitalised, thereby increasing the paid up
capital of the company. The company does not give up any asset.
As per Section 2 (35) of the Companies Act, 2013, term “Dividend” includes
interim dividend also.
Under Section 123 (1) of the Companies Act, 2013, no dividend should be
declared or paid by a company for any financial year except-
(a) Out of the profits of the company for that financial year arrived at after
providing for depreciation in accordance with the provisions of section
123(2), or
(b) Out of the profits for any previous financial years arrived at after providing
for depreciation in accordance with the provisions of that sub section and
remaining undistributed; or
(c) Out of both the above;

© The Institute of Chartered Accountants of India

 FINANCIAL STATEMENTS OF COMPANIES 11.19

(d) Out of the moneys provided by the Central Government or any State
Government for the payment of dividend by the Company in pursuance of
any guarantee given by that government
Provided that no dividend should be declared or paid by a company from its
reserves other than free reserves.
Declaration of a dividend presupposes that there is a trading profit or a surplus
available for distribution, arrived at after providing for depreciation on assets, not
only for the year in which the profits were earned but also for any arrears of
depreciation of the past years, calculated in the manner prescribed by sub-section
(2) of Section 123.
Sub-section (3) of Section 124 further states that the Board of Directors of a
company may declare interim dividend during any financial year out of the
surplus in the profit and loss account and out of profits of the financial year in
which such interim dividend is sought to be declared:
Provided that in case the company has incurred loss during the current financial
year up to the end of the quarter immediately preceding the date of declaration
of interim dividend, such interim dividend should not be declared at a rate higher
than the average dividends declared by the company during the immediately
preceding three financial years.
Dividends cannot be declared except out of profits.
Capital cannot be returned to the shareholders by way of dividend.
Dividend can be declared and paid by a company only out of the profits or free
reserves (other than moneys provided by Central or State Govt.) as the payment of
dividend from any other source will amount to payment of dividend from capital
units.
Section 123(2) states that depreciation must be provided to the extent specified in
Schedule II to the Companies Act, 2013.Further, when the assets are sold, discarded,
demolished or destroyed in any financial year, the excess of the written down value
over its sale proceeds as scrap, if any should be written off in the same financial year.
Declaration and Payment of Dividend
For the purpose of second proviso to sub-section (1) of section 123, a company
may declare dividend out of the accumulated profits earned by it in previous
years and transferred by it to the reserves, in the event of inadequacy or absence

© The Institute of Chartered Accountants of India

 11.20 ADVANCED ACCOUNTING

of profits in any year, subject to the fulfilment of the following conditions as per
Companies (Declaration and Payment of Dividend) Rules, 2014:
(1) The rate of dividend declared should not exceed the average of the rates at
which dividend was declared by it in the three years immediately preceding
that year: provided that this sub-rule should not apply to a company, which
has not declared any dividend in each of the three preceding financial years.
(2) The total amount to be drawn from such accumulated profits should not
exceed one-tenth of the sum of its paid-up share capital and free reserves
as appearing in the latest audited financial statement.
(3) The amount so drawn should first be utilised to set off the losses incurred in
the financial year in which dividend is declared before any dividend in
respect of equity shares is declared.
(4) The balance of reserves after such withdrawal should not fall below 15% of
its paid up share capital as appearing in the latest audited financial
statement.
(5) No company should declare dividend unless carried over previous losses
and depreciation not provided in previous year are set off against profit of
the company of the current year the loss or depreciation, whichever is less,
in previous years is set off against the profit of the company for the year for
which dividend is declared or paid.
Transfer to Reserves
I The Board of Directors are free and can appropriate a part of the profits to
the credit of a reserve or reserves as per section 123 (1) of the Companies
Act, 2013.
II Appropriation of a part of profit is sometimes made under law.
(a) For example, under the Banking Regulation Act, a fixed percentage of
the profit of a banking company must first be transferred to the
General Reserve before any dividend can be distributed.
(b) Transfer of a part of profit to a reserve is also necessary where the
company has undertaken, at the time of raising of loan, that before
any part of its profit is distributed, a specified percentage of the profit
every year should be credited to a reserve for the repayment of the

© The Institute of Chartered Accountants of India

 FINANCIAL STATEMENTS OF COMPANIES 11.21

loan and until the time for repayment arrives, the amount should
remain invested in a specified manner.

III Apart from appropriations aforementioned, it may also be necessary to

provide for losses and arrears of depreciation and to exclude capital profit,
as mentioned earlier, to arrive at the amount of divisible profit.

Declaration of Dividend
As per Section 123 of the Companies Act, 2013, Board of Directors of a company
may declare dividend including interim dividend during any financial year out of
the surplus in the profit and loss account and out of profits of the financial year in
which such interim dividend is sought to be declared:
Provided that in case the company has incurred loss during the current financial
year up to the end of the quarter immediately preceding the date of declaration
of interim dividend, such interim dividend should not be declared at a rate higher
than the average dividends declared by the company during the immediately
preceding three financial years.
The amount of the dividend, including interim dividend, should be deposited in a
scheduled bank in a separate account within five days from the date of
declaration of such dividend.
No dividend should be paid by a company in respect of any share therein except
to the registered shareholder of such share or to his order or to his banker and
should not be payable except in cash: Provided that nothing in Section 123
should be deemed to prohibit the capitalisation of profits or reserves of a
company for the purpose of issuing fully paid-up bonus shares or paying up any
amount for the time being unpaid on any shares held by the members of the
company:
Provided further that any dividend payable in cash may be paid by cheque or
warrant or in any electronic mode to the shareholder entitled to the payment of
the dividend.

Dividend on preference shares

(a) Holders of preference shares are entitled to receive a dividend at a fixed
rate before any dividend is declared on equity shares.
(b) But such a right can be exercised subject to there being profits and the
Directors recommending payment of the dividend.

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 11.22 ADVANCED ACCOUNTING

Dividend on partly paid shares:

 A company may if so authorised by its Article, pay a dividend in proportion
to the amount paid on each share (Section 51 of the Companies Act, 2013).
Calls in Advance
Calls paid in advance do not rank for payment of dividend.
Payment of Dividend
As per Section 124 of the Companies Act, 2013:
(1) Where a dividend has been declared by a company but has not been paid
or claimed within thirty days from the date of the declaration to any
shareholder entitled to the payment of the dividend, the company should,
within seven days from the date of expiry of the said period of thirty days,
transfer the total amount of dividend which remains unpaid or unclaimed to
a special account to be opened by the company in that behalf in any
scheduled bank to be called the Unpaid Dividend Account.

(2) The company should, within a period of ninety days of making any transfer
of an amount under this section to the Unpaid Dividend Account, prepare a
statement containing the names, their last known addresses and the unpaid
dividend to be paid to each person and place it on the website of the
company, if any, and also on any other website approved by the Central
Government for this purpose, in such form, manner and other particulars as
may be prescribed.
(3) If any default is made in transferring the total amount or any part thereof to
the Unpaid Dividend Account of the company, it should pay, from the date of
such default, interest on so much of the amount as has not been transferred to
the said account, at the rate of 12% per annum and the interest accruing on
such amount should ensure to the benefit of the members of the company in
proportion to the amount remaining unpaid to them.
(4) Any person claiming to be entitled to any money transferred to the Unpaid
Dividend Account of the company may apply to the company for payment
of the money claimed.
(5) Any money transferred to the Unpaid Dividend Account of a company in
pursuance of this section which remains unpaid or unclaimed for a period of
seven years from the date of such transfer should be transferred by the

© The Institute of Chartered Accountants of India

 FINANCIAL STATEMENTS OF COMPANIES 11.23

company along with interest accrued, if any, thereon to the Fund “Investor
Education and Protection Fund” established section 125 and the company
should send a statement in the prescribed form of the details of such
transfer to the authority which administers the said Fund and that authority
should issue a receipt to the company as evidence of such transfer.
(6) All shares in respect of which unpaid or unclaimed dividend has been
transferred to “Investor Education and Protection Fund” should also be
transferred by the company in the name of Investor Education and
Protection Fund along with a statement containing such details as may be
prescribed:
Provided that any claimant of shares transferred above should be entitled to
claim the transfer of shares from Investor Education and Protection Fund in
accordance with such procedure and on submission of such documents as
may be prescribed.
(7) If a company fails to comply with any of the requirements of this section,
the company will be punishable with fine which will not be less than five
lakh rupees but which may extend to twenty-five lakh rupees and every
officer of the company who is in default will be punishable with fine which
will not be less than one lakh rupees but which may extend to five lakh
rupees.
Illustration 1
Due to inadequacy of profits during the year ended 31 st March, 20X2, XYZ Ltd.
proposes to declare 10% dividend out of general reserves. From the following
particulars, ascertain the amount that can be utilised from general reserves,
according to the Companies (Declaration of dividend out of Reserves) Rules, 2014:

`
17,500 9% Preference shares of ` 100 each, fully paid up 17,50,000
8,00,000 Equity shares of ` 10 each, fully paid up 80,00,000
General Reserves as on 1.4.20X1 25,00,000
Capital Reserves as on 1.4.20X1 3,00,000
Revaluation Reserves as on 1.4.20X1 3,50,000
Net profit for the year ended 31 March, 20X2st
3,00,000
Average rate of dividend during the last three years has been 12%.

© The Institute of Chartered Accountants of India

 11.24 ADVANCED ACCOUNTING

Solution

Amount that can be drawn from reserves for 10%

dividend

10% dividend on ` 80,00,000 ` 8,00,000

Profits available

Current year profit 3,00,000

Less: Preference dividend (1,57,500) (1,42,500)

Amount which can be utilised from reserves 6,57,500

Conditions as per Companies (Declaration of dividend out of Reserves) Rules,

20X1:
Condition I
Since 10% is lower than the average rate of dividend (12%), 10% dividend can be
declared.

Condition II
Maximum amount that can be drawn from the accumulated profits and reserves
should not exceed 10% of paid up capital plus free reserves ie. ` 12,25,000 [10%
of (80,00,000+17,50,000+25,00,000)]
Condition III
The balance of reserves after drawl ` 18,42,500 (` 25,00,000 - ` 6,57,500) should
not fall below 15 % of its paid up capital ie. ` 14,62,500 (15% of ` 97,50,000]
Since all the three conditions are satisfied, the company can withdraw ` 6,57,500
from accumulated reserves (as per Declaration and Payment of Dividend Rules,
2014.)

© The Institute of Chartered Accountants of India

 FINANCIAL STATEMENTS OF COMPANIES 11.25

Illustration 2
The following is the Trial Balance of Omega Limited as on 31.3.20X2:
(Figures in ` ‘000)

Debit Credit
Land at cost 220 Equity Capital (Shares of ` 10 300
each)
Plant & Machinery at 770 10% Debentures 200
cost
Trade Receivables 96 General Reserve 130
Inventories (31.3.X2) 86 Profit & Loss A/c 72
Bank 20 Securities Premium 40
Adjusted Purchases 320 Sales 700
Factory Expenses 60 Trade Payables 52
Administration Expenses 30 Provision for Depreciation 172
Selling Expenses 30 Suspense Account 4
Debenture Interest 20
Interim Dividend Paid 18
1670 1670

Additional Information:
(i) The authorised share capital of the company is 40,000 shares of ` 10 each.

(ii) The company on the advice of independent valuer wish to revalue the land at
` 3,60,000.
(iii) Declared final dividend @ 10% on 2nd April, 20X2.

(iv) Suspense account of ` 4,000 represents cash received for the sale of some of
the machinery on 1.4.20X1. The cost of the machinery was ` 10,000 and the
accumulated depreciation thereon being ` 8,000.
(v) Depreciation is to be provided on plant and machinery at 10% on cost.
You are required to prepare Omega Limited’s Balance Sheet as on 31.3.20X2 and
Statement of Profit and Loss with notes to accounts for the year ended 31.3.20X2 as
per Schedule III. Ignore previous years’ figures & taxation.

© The Institute of Chartered Accountants of India

 11.26 ADVANCED ACCOUNTING

Solution

Omega Limited
Balance Sheet as at 31st March, 20X2

Particulars Note No. (` in 000)

Equity and Liabilities

1. Shareholders' funds

A Share capital 1 300

B Reserves and Surplus 2 530

2. Non-Current liabilities

A Long term borrowings 3 200

3. Current liabilities

A Trade Payables 52

Total 1082

Assets

1. Non-current assets

A PPE (Property, Plant & Equipment) 4 880

2. Current assets

A Inventories 86

B Trade receivables 96

C Cash and bank balances 20

Total 1082

© The Institute of Chartered Accountants of India

 FINANCIAL STATEMENTS OF COMPANIES 11.27

Omega Limited
Statement of Profit and Loss for the year ended 31st March, 20X2

Particulars Notes (` in 000)

I. Revenue from operations 700

II. Other Income 5 2
III Total Income 702
IV Expenses:

Purchases 320
Finance costs 6 20
Depreciation (10% of 760 ∗) 76

Other expenses 7 120

Total Expenses 536
V. Profit (Loss) for the period (III – IV) 166

Notes to accounts

(` in 000)

1. Share Capital
Equity share capital
Authorised
40,000 shares of ` 10 each 400

Issued & subscribed & called up

30,000 shares of ` 10 each 300

2. Reserves and Surplus

Securities Premium Account 40
Revaluation reserve (360 – 220) 140
General reserve 130

∗
770 (Plant and machinery at cost) – 10 (Cost of plant and machinery sold)

© The Institute of Chartered Accountants of India

 11.28 ADVANCED ACCOUNTING

Profit & loss Balance

Opening balance 72
Profit for the period 166 238
Less: Appropriations
Interim Dividend (18) 220
530
3. Long term borrowing
10% Debentures 200
4. PPE
Land
Opening balance 220
Add: Revaluation adjustment 140
Closing balance 360
Plant and Machinery
Opening balance 770
Less: Disposed off (10)
760
Less: Depreciation (172-8+76) (240)
Closing balance 520
Total 880
5. Other Income
Profit on sale of machinery:
Sale value of machinery 4
Less: Book value of machinery (10-8) (2) 2
6. Finance costs

Debenture interest 20
7. Other expenses:
Factory expenses 60

Selling expenses 30
Administrative expenses 30 120

© The Institute of Chartered Accountants of India

 FINANCIAL STATEMENTS OF COMPANIES 11.29

Note: The final dividend will not be recognized as a liability at the balance sheet
date (even if it is declared after reporting date but before approval of the
financial statements) as per Accounting Standards. Hence, it has not been
recognized in the financial statements for the year ended 31 March, 20X2. Such
dividends will be disclosed in notes only.

Illustration 3
You are required to prepare Balance sheet and statement of Profit and Loss from the
following trial balance of Haria Chemicals Ltd. for the year ended 31st March, 20X1.
Haria Chemicals Ltd.
Trial Balance as at 31st March, 20X1

Particulars ` Particulars `
Inventory 6,80,000 Equity Shares
Furniture 2,00,000 Capital (Shares of ` 10 each) 25,00,000
Discount 40,000 11% Debentures 5,00,000
Loan to Directors 80,000 Bank loans 6,45,000
Advertisement 20,000 Trade payables 2,81,000
Bad debts 35,000 Sales 42,68,000
Commission 1,20,000 Rent received 46,000
Materials consumed 23,19,000 Transfer fees 10,000
Plant and Machinery 8,60,000 Profit & Loss account 1,39,000
Rentals 25,000 Depreciation provision:
Current account 45,000 Machinery 1,46,000
Cash 8,000
Interest on bank loans 1,16,000
Preliminary expenses 10,000
Fixtures 3,00,000
Wages 9,00,000
Consumables 84,000
Freehold land 15,46,000

© The Institute of Chartered Accountants of India

 11.30 ADVANCED ACCOUNTING

Tools & Equipment 2,45,000

Goodwill 2,65,000
Trade receivables 4,40,000
Dealer aids 21,000
Transit insurance 30,000
Trade expenses 37,000
Distribution freight 54,000
Debenture interest 55,000
85,35,000 85,35,000

Additional information: Closing Inventory on 31-3-20X1: ` 8,23,000.

Solution
Haria Chemicals Ltd.
Balance Sheet as at 31st March, 20X1

Schedule Rupees as at the

No. end of 31st March 20X1
(1) (2)
Equity and Liabilities
(1) Shareholders’ funds :
(a) Share Capital 1 25,00,000
(b) Reserves and Surplus 2 7,40,000
(2) Non Current Liabilities
(a) Long term borrowings 3 11,45,000

(3) Current Liabilities

(a) Trade payables 2,81,000

Total 46,66,000

© The Institute of Chartered Accountants of India

 FINANCIAL STATEMENTS OF COMPANIES 11.31

Assets
(1) Non current assets
(a) PPE 4 30,05,000
(b) Intangible assets (goodwill) 2,65,000
(2) Current assets
(a) Inventories 8,23,000
(b) Trade receivables 4,40,000
(c) Cash and bank balances 5 53,000
(d) Short term loans and advances 6 80,000

Total 46,66,000

Haria Chemicals Ltd.

Statement of Profit and Loss for the year ended 31st March, 20X1

Schedule Figures

Revenue from operations 42,68,000

Other income 7 56,000
(A) 43,24,000
Expenses
Cost of materials consumed 23,19,000
Change in inventory of finished goods 8 (1,43,000)
Employee benefit expenses 9 9,00,000
Finance cost 10 1,71,000
Other expenses 11 4,76,000
(B) 37,23,000
Profit before tax (A – B) 6,01,000
Provision for tax —

Profit for the period 6,01,000

© The Institute of Chartered Accountants of India

 11.32 ADVANCED ACCOUNTING

Notes to Accounts
1. Share capital `
Authorised:
Equity share capital of ` 10 each 25,00,000
Issued and Subscribed:
Equity share capital of ` 10 each 25,00,000
2. Reserves and Surplus
Balance as per last balance sheet 1,39,000
Balance in profit and loss account 6,01,000
7,40,000
3. Long term Borrowings
11% Debentures 5,00,000
Bank loans (assumed long-term) 6,45,000
11,45,000
4. PPE

Gross block Depreciation Net Block

Freehold land 15,46,000 15,46,000

Furniture 2,00,000 2,00,000
Fixtures 3,00,000 3,00,000
Plant & Machinery 8,60,000 1,46,000 7,14,000
Tools & Equipment 2,45,000 ________ 2,45,000
Total 31,51,000 1,46,000 30,05,000
5. Cash and bank balances
Cash and cash equivalents
Current account balance 45,000
Cash 8,000
Other bank balances Nil
53,000

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 FINANCIAL STATEMENTS OF COMPANIES 11.33

6. Short-term loans and Advances

Loan to directors 80,000
7. Other Income
Rent received 46,000
Transfer fees 10,000

56,000
8. Changes in inventory of finished goods, WIP & Stock in trade
Opening inventory 6,80,000

Closing inventory (8,23,000) (1,43,000)

9. Employee benefit expense
Wages 9,00,000

10. Finance cost

Interest on bank loans 1,16,000
Debenture interest 55,000

1,71,000
11. Other Expenses
Consumables 84,000
Preliminary expenses 10,000
Bad debts 35,000
Discount 40,000
Rentals 25,000
Commission 1,20,000
Advertisement 20,000
Dealers’ aids 21,000
Transit insurance 30,000
Trade expenses 37,000
Distribution freight 54,000
4,76,000

© The Institute of Chartered Accountants of India

 11.34 ADVANCED ACCOUNTING

Illustration 4
You are required to prepare a Statement of Profit and Loss and Balance Sheet from
the following Trial Balance extracted from the books of the International Hotels
Ltd., on 31st March, 20X2:
Dr. Cr.
` `
Authorised Capital-divided into 5,000 6% Preference Shares
of ` 100 each and 10,000 equity Shares of ` 100 each 15,00,000
Subscribed Capital -
5,000 6% Preference Shares of ` 100 each 5,00,000
Equity Capital 8,05,000
Purchases - Wines, Cigarettes, Cigars, etc. 45,800
- Foodstuffs 36,200
Wages and Salaries 28,300
Rent, Rates and Taxes 8,900
Laundry 750
Sales - Wines, Cigarettes, Cigars, etc. 68,400
- Food 57,600
Coal and Firewood 3,290
Carriage and Cooliage 810
Sundry Expenses 5,840
Advertising 8,360
Repairs 4,250
Rent of Rooms 48,000
Billiard 5,700
Miscellaneous Receipts 2,800
Discount received 3,300
Transfer fees 700

© The Institute of Chartered Accountants of India

 FINANCIAL STATEMENTS OF COMPANIES 11.35

Freehold Land and Building 8,50,000

Furniture and Fittings 86,300

Inventory on hand, 1st April, 20X1

Wines, Cigarettes. Cigars, etc. 12,800

Foodstuffs 5,260

Cash in hand 2,200

Cash with Bankers 76,380

Preliminary and formation expenses 8,000

2,000 Debentures of ` 100 each (6%) 2,00,000

Profit and Loss Account 41,500

Trade payables 42,000

Trade receivables 19,260

Investments 2,72,300

Goodwill at cost 5,00,000

General Reserve 2,00,000

19,75,000 19,75,000

Wages and Salaries Outstanding 1,280

Inventory on 31st March, 20X2

Wines, Cigarettes and Cigars, etc. 22,500

Foodstuffs 16,400

Depreciation : Furniture and Fittings @ 5% p.a. : Land and Building @ 2% p.a.

The Equity capital on 1st April, 20X1 stood at ` 7,20,000, that is 6,000 shares fully
paid and 2,000 shares ` 60 paid. The directors made a call of ` 40 per share on 1st
October 20X1. A shareholder could not pay the call on 100 shares and his shares
were then forfeited and reissued @ ` 90 per share as fully paid. The Directors
declared a dividend of 8% on equity shares on 2nd April, 20X2, transferring any
amount that may be required from General Reserve. Ignore Taxation.

© The Institute of Chartered Accountants of India

 11.36 ADVANCED ACCOUNTING

Solution
Balance Sheet of International Hotels Ltd. as at 31st March, 20X2

Particulars Note `
No

Equity and Liabilities

1 Shareholders' funds

a Share capital 1 13,00,000

b Reserves and Surplus 2 2,68,745

2 Non-current liabilities

a Long-term borrowings 3 2,00,000

3 Current liabilities

a Trade Payables 4 42,000

b Other current liabilities 5 13,280

Total 18,24,025

ASSETS

1 Non-current assets

i PPE 6 9,14,985

ii Intangible assets (Goodwill) 5,00,000

iii Non-current investments 2,72,300

2 Current assets

i Inventories 7 38,900

ii Trade receivables 19,260

iii Cash and bank balances 8 78,580

Total 18,24,025

© The Institute of Chartered Accountants of India

 FINANCIAL STATEMENTS OF COMPANIES 11.37

Statement of Profit and Loss of International Hotels Ltd.

for the year ended 31st March, 20X2

Particulars Notes Amount

I. Revenue from operations 9 1,79,700

II. Other income 10 6,800
III. Total Income (I + II) 1,86,500
IV. Expenses:
Cost of materials consumed 11 25,060
Purchases of Inventory-in-Trade 12 45,800
Changes in inventories of finished goods work- 13 (9,700)
in-progress and Inventory-in-Trade
Employee benefits expense 14 29,580
Finance costs 15 12,000
Other expenses 16 40,200
Depreciation and amortisation expense 17 21,315
Total expenses 1,64,255
V. Profit (Loss) for the period (III - IV) 22,245

Notes to accounts

`
1 Share Capital
Equity share capital
Authorised
10,000 Equity shares of ` 100 each 10,00,000
Issued & subscribed
8,000 Equity Shares of ` 100 each (A) 8,00,000
Preference share capital
Authorised
5,000 6% Preference shares of ` 100 each 5,00,000

© The Institute of Chartered Accountants of India

 11.38 ADVANCED ACCOUNTING

Issued & subscribed

5,000 6% Preference shares of ` 100 each (B) 5,00,000
Total (A + B) 13,00,000
2 Reserves and Surplus
Capital reserve [100 x (90 – 40)] 5,000
General reserve 2,00,000
Surplus (Profit & Loss A/c) 22,245
Add: Balance from previous year 41,500 63,745
Total 2,68,745
3 Long-term borrowings
Secured
6% Debentures 2,00,000
Total 2,00,000
4 Trade Payables 42,000
5 Other current liabilities
Wages and Salaries Outstanding 1,280
Interest on debentures 12,000 13,280
Total 13,280
6 PPE
Freehold land & Buildings 8,50,000
Less: Depreciation (17,000) 8,33,000
Furniture and Fittings 86,300
Less: Depreciation (4,315) 81,985
Total 9,14,985

© The Institute of Chartered Accountants of India

 FINANCIAL STATEMENTS OF COMPANIES 11.39

7 Inventories
Wines, Cigarettes & Cigars, etc. 22,500
Foodstuffs 16,400
Total 38,900
8 Cash and bank balances
Cash and cash equivalents
Cash at bank 76,380
Cash in hand 2,200
Other bank balances Nil
Total 78,580
9 Revenue from operations
Sale of products
Wines, Cigarettes, Cigars etc. 68,400
Food 57,600 1,26,000
Sale of services
Room Rent 48,000
Billiards 5,700 53,700
Total 1,79,700
10 Other Income
Transfer fees 700
Miscellaneous Receipts 2,800
Discount received 3,300
Total 6,800
11 Cost of materials consumed
Opening Inventory 5,260
Add: Purchases during the year 36,200
Less: Closing Inventory (16,400) 25,060
Total 25,060

© The Institute of Chartered Accountants of India

 11.40 ADVANCED ACCOUNTING

12 Purchases of Inventory-in-Trade
Wines, Cigarettes etc. 45,800
Total 45,800
13 Changes in inventories of finished goods
work-in-progress and Inventory-in-Trade
Wines, Cigarettes etc.
Opening Inventory 12,800
Less: Closing Inventory (22,500) (9,700)
Total (9,700)
14 Employee benefits expense
Wages and Salaries 28,300
Add: Wages and Salaries Outstanding 1,280 29,580
Total 29,580
15 Finance costs
Interest on Debentures (2,00,000 x 6%) 12,000
16 Other expenses
operating expenses
Rent, Rates and Taxes 8,900
Coal and Firewood 3,290
Laundry 750
Carriage and Cooliage 810
Repairs 4,250 18,000
Selling and administrative expenses
Advertising 8,360
Sundry Expenses 5,840 14,200
Preliminary expenses written off 8,000
Total 40,200
17 Depreciation and amortisation expense
Land and Buildings (8,50,000 x 2%) 17,000
Furniture & Fittings (86,300 x 5%) 4,315 21,315
Total 21,315

© The Institute of Chartered Accountants of India

 FINANCIAL STATEMENTS OF COMPANIES 11.41

Note: The final dividend will not be recognized as a liability at the balance sheet
date (even if it is declared after reporting date but before approval of the
financial statements) as per Accounting Standards. Hence, it has not been
recognized in the financial statements for the year ended 31 March, 20X2. Such
dividends will be disclosed in notes only.

Illustration 5
From the following particulars furnished by Pioneer Ltd., prepare the Balance Sheet
as at 31st March, 20X1 as required by Schedule III of the Companies Act. Give notes
at the foot of the Balance Sheet as may be found necessary -
Debit Credit
` `
Equity Capital (Face value of ` 100) 10,00,000
Calls in Arrears 1,000
Land 2,00,000
Building 3,50,000
Plant and Machinery 5,25,000
Furniture 50,000
General Reserve 2,10,000
Loan from State Financial Corporation 1,50,000
Inventory:
Finished Goods 2,00,000
Raw Materials 50,000 2,50,000
Provision for Taxation 68,000
Trade receivables 2,00,000

Advances 42,700
Dividend Payable 60,000
Profit and Loss Account 86,700

© The Institute of Chartered Accountants of India

 11.42 ADVANCED ACCOUNTING

Cash Balance 30,000

Cash at Bank 2,47,000
Loans (Unsecured) 1,21,000
Trade payables (For Goods and Expenses) 2,00,000

18,95,700 18,95,700

The following additional information is also provided:

(1) 2,000 equity shares were issued for consideration other than cash.
(2) Trade receivables of ` 52,000 are due for more than six months.

(3) The cost of assets:

Building ` 4,00,000
Plant and Machinery ` 7,00,000
Furniture ` 62,500
(4) The balance of ` 1,50,000 in the loan account with State Finance Corporation
is inclusive of ` 7,500 for interest accrued but not due. The loan is secured by
hypothecation of the Plant and Machinery.
(5) Balance at Bank includes ` 2,000 with Perfect Bank Ltd., which is not a
Scheduled Bank.
(6) The company had contract for the erection of machinery at ` 1,50,000 which
is still incomplete.
Solution
Pioneer Ltd.
Balance Sheet as at 31st March, 20X1

Particulars Notes `
Equity and Liabilities
1 Shareholders' funds
a Share capital 1 9,99,000
b Reserves and Surplus 2 2,96,700

© The Institute of Chartered Accountants of India

 FINANCIAL STATEMENTS OF COMPANIES 11.43

2 Non-current liabilities
a Long-term borrowings 3 2,63,500
3 Current liabilities
a Trade Payables 2,00,000
b Other current liabilities 4 67,500
c Short-term provisions 5 68,000
Total 18,94,700
Assets
1 Non-current assets
a PPE 6 11,25,000
2 Current assets
a Inventories 7 2,50,000
b Trade receivables 8 2,00,000
c Cash and bank balances 9 2,77,000
d Short-term loans and advances 42,700
Total 18,94,700

Notes to accounts

`
1 Share Capital
Equity share capital
Issued & subscribed & called up
10,000 Equity Shares of ` 100 each 10,00,000
(Of the above 2,000 shares have been
issued for consideration other than cash)
Less: Calls in arrears (1,000) 9,99,000
Total 9,99,000
2 Reserves and Surplus
General Reserve 2,10,000
Surplus (Profit & Loss A/c) 86,700
Total 2,96,700

© The Institute of Chartered Accountants of India

 11.44 ADVANCED ACCOUNTING

3 Long-term borrowings
Secured- Term Loans
Loan from State Financial Corporation 1,42,500
(1,50,000 – 7,500)
(Secured by hypothecation of Plant and
Machinery)
Unsecured loan 1,21,000
Total 2,63,500
4 Other current liabilities
Interest accrued but not due on loans (SFC) 7,500
Dividend Payable 60,000
Total 67,500
5 Short-term provisions
Provision for taxation 68,000
Total 68,000
6 PPE
Land 2,00,000
Buildings 4,00,000
Less: Depreciation (50,000) (b.f.) 3,50,000
Plant & Machinery 7,00,000
Less: Depreciation (1,75,000) (b.f.) 5,25,000
Furniture & Fittings 62,500
Less: Depreciation (12,500) (b.f.) 50,000
Total 11,25,000
7 Inventories
Raw Material 50,000
Finished goods 2,00,000
Total 2,50,000

© The Institute of Chartered Accountants of India

 FINANCIAL STATEMENTS OF COMPANIES 11.45

8 Trade receivables
Debts outstanding for a period exceeding six 52,000
months
Other Debts 1,48,000
Total 2,00,000
9 Cash and bank balances
Cash and cash equivalents
Cash at bank
with Scheduled Banks 2,45,000
with others (Perfect Bank Ltd.) 2,000 2,47,000
Cash in hand 30,000
Other bank balances Nil
Total 2,77,000

Note: Estimated amount of contract remaining to be executed on capital account

and not provided for ` 1,50,000. It has been assumed that the company had given
this contract for purchase of machinery.

Illustration 6
Following is the trial balance of Delta limited as on 31.3.20X2.
(Figures in ` ‘000)

Particulars Debit Particulars Credit

Land at cost 800 Equity share capital 500
(shares of
` 10 each)
Calls in arrears 5 10% Debentures 300
Cash in hand 2 General reserve 150
Plant & Machinery at cost 824 Profit & Loss A/c (balance 75
on 1.4.X1)
Trade receivables 120 Securities premium 40
Inventories (31-3-X2) 96 Sales 1200

© The Institute of Chartered Accountants of India

 11.46 ADVANCED ACCOUNTING

Cash at Bank 28 Trade payables 30

Adjusted Purchases 400 Provision for depreciation 150

Factory expenses 80 Suspense Account 10

Administrative expenses 45

Selling expenses 25

Debenture Interest 30

2455 2455

Additional Information:
(i) The authorized share capital of the company is 80,000 shares of ` 10 each.

(ii) The company revalued the land at ` 9,60,000.

(iii) Equity share capital includes shares of ` 50,000 issued for consideration other
than cash.
(iv) Suspense account of ` 10,000 represents cash received from the sale of some
of the machinery on 1.4.20X1. The cost of the machinery was ` 24,000 and
the accumulated depreciation thereon being ` 20,000. The balance of Plant &
Machinery given in trial balance is before adjustment of sale of machinery.
(v) Depreciation is to be provided on plant and machinery at 10% on cost.
(vi) Balance at bank includes ` 5,000 with ABC Bank Ltd., which is not a Scheduled
Bank.
(vii) Make provision for income tax @30%.
(viii) Trade receivables of ` 50,000 are due for more than six months.
You are required to prepare Delta Limited's Balance Sheet as at 31.3.20X2 and
Statement of Profit and Loss with notes to accounts for the year ended 31.3.20X2 as
per Schedule Ill. Ignore previous year's figures & taxation.

© The Institute of Chartered Accountants of India

 FINANCIAL STATEMENTS OF COMPANIES 11.47

Solution
Delta Limited

Balance Sheet as at 31st March 20X2

Particulars Note No. (` in ‘000)

A. Equity and Liabilities
1. Shareholders’ funds
(a) Share Capital 1 495.00
(b) Reserves and Surplus 2 807.20
2. Non-Current Liabilities
(a) Long Term Borrowings 3 300.00
3. Current Liabilities
(a) Trade Payables 30.00
(b) Short- term provision 4 163.80
Total 1,796.00
B. Assets
1. Non-Current Assets
(a) Property, Plant and Equipment 5 1,550.00
2. Current Assets
(a) Inventories 96.00
(b) Trade Receivables 6 120.00
(c) Cash and Cash equivalents 7 30.00
Total 1,796.00

Statement of Profit and Loss for the year ended 31 st March 20X2

Note
Particulars (` in ‘000)
No.
I. Revenue from Operations 1200.00
II. Other Income 8 6.00
III. Total Income (I +II) 1,206.00
IV. Expenses:
Purchases (adjusted) 400.00

© The Institute of Chartered Accountants of India

 11.48 ADVANCED ACCOUNTING

Finance Costs 9 30.00

Depreciation (10% of 800) 80.00
Other expenses 10 150.00
Total Expenses 660.00
V. Profit / (Loss) for the period before tax (III – IV) 546.00
VI. Tax expenses @30% 163.80
VII Profit for the period 382.20

Notes to Accounts

Particulars (` in ‘000)
1 Share Capital
Equity Share Capital
Authorised
80,000 Shares of ` 10/- each 800
Issued, Subscribed and Called-up
50,000 Shares of ` 10/- each 500
(Out of the above 5,000 shares have been
issued for consideration other than cash)
Less: Calls in arrears (5) 495
2 Reserves and Surplus
Securities Premium 40.00
Revaluation Reserve ` (960 – 800) 160.00
General Reserve 150.00
Surplus i.e. Profit & Loss Account Balance
Opening Balance 75.00
Add: Profit for the period 382.20 457.20
807.20

© The Institute of Chartered Accountants of India

 FINANCIAL STATEMENTS OF COMPANIES 11.49

3 Long-Term Borrowings
10% Debentures 300
4. Short – term provision
Provision for tax 163.80
5 Property, plant & equipment
Land
Opening Balance 800
Add: Revaluation adjustment 160
Closing Balance 960
Plant and Machinery
Opening Balance 824
Less: Disposed off (24)
800
Less: Depreciation ` (150 – 20 + 80) (210)
Closing Balance 590
Total 1,550
6 Trade receivables
Debits outstanding for a period exceeding six
50
months
Other debts 70 120
7 Cash and Cash Equivalents
Cash at Bank With scheduled banks 23
With others (ABC Bank Limited) 5
Cash in hand 2 30
8 Other Income
Profit on sale of machinery
Sale value of machinery 10
Less: Book value of machinery (24 – 20) (4) 6
9 Finance Costs
Debenture Interest 30
10 Other Expenses:
Factory expenses 80
Selling expenses 25
Administrative expenses 45 150

© The Institute of Chartered Accountants of India

 11.50 ADVANCED ACCOUNTING

SUMMARY
 Definitions of various types of companies as per the Companies Act, 2013.

 Books of accounts should be maintained at Registered office of company.

 Proper books are not deemed to be kept if they do not provide a true and
fair view of state of affairs of company.

 A number of Statutory Books have been prescribed under Companies Act

which is to be maintained along with statistical books to keep a record of all
transactions.

 Annual Return is to be filed by every company within 60 days of holding

Annual general meeting.

 Financial statements of a company should be as per Schedule III to the

Companies Act, 2013 and they should give true and fair view.

 Determining amount of profits available for distribution is an important

function and depends on a number of factors, like their composition, the
amount of provisions and appropriations that must be made out of them in
priority, etc.

 Capital cannot be returned to shareholders by way of dividend.

 Appropriating a part of profits may be done as a result of decision of Board

of directors or as per law.

 Dividend may be declared out of reserves subject to certain conditions.

Dividends cannot be declared except out of profits.

© The Institute of Chartered Accountants of India

 FINANCIAL STATEMENTS OF COMPANIES 11.51

TEST YOUR KNOWLEDGE

Multiple Choice Questions

1. Trade payables as per Schedule III will include:

(a) Dues payable in respect to statutory obligation

(b) Interest accrued on trade payables

(c) Bills payables.

(d) Bills receivables

2. Securities Premium Account is shown on the liabilities side in the Balance

Sheet under the heading:

(a) Reserves and Surplus.

(b) Current Liabilities.

(c) Share Capital.

(d) Share application money pending allotment

3. “Fixed assets held for sale” will be classified in the company’s balance sheet as

(a) Current asset

(b) Non-current asset

(c) Capital work- in- progress

(d) Deferred tax assets

4. Current maturities of long- term debt will come under

(a) Current Liabilities.

(b) Short term borrowings.

(c) Long term borrowings.

(d) Short term provisions

© The Institute of Chartered Accountants of India

 11.52 ADVANCED ACCOUNTING

5. Declaration of dividends for current year is made after providing for

(a) Depreciation of past years only.

(b) Depreciation on assets for the current year and arrears of depreciation
of past years (if any).

(c) Depreciation on current year only and by forgoing arrears of

depreciation of past years.

(d) Excluding current year depreciation

Theoretical Questions
6. State under which head these accounts should be classified in Balance Sheet,
as per Schedule III of the Companies Act, 2013:
(i) Share application money received in excess of issued share capital.
(ii) Share option outstanding account.
(iii) Unpaid matured debenture and interest accrued thereon.
(iv) Uncalled liability on shares and other partly paid investments.
(v) Calls unpaid.
(vi) Money received against share warrant.

Scenario based Questions

7. On 31st March, 20X1 Bose and Sen Ltd. provides to you the following ledger
balances after preparing its Profit and Loss Account for the year ended 31st
March, 20X1:

Credit Balances:
`
Equity shares capital, fully paid shares of ` 10 each 70,00,000
General Reserve 15,49,100
Loan from State Finance Corporation 10,50,000
(Secured by hypothecation of Plant & Machinery Repayable

© The Institute of Chartered Accountants of India

 FINANCIAL STATEMENTS OF COMPANIES 11.53

within one year` 2,00,000)

Loans: Unsecured (Long term) 8,47,000
Sundry Creditors for goods &expenses 14,00,000
(Payable within 6 months)
Profit & Loss Account 7,00,000
Provision for Taxation 8,16,900
1,33,63,000

Debit Balances:
`
Calls in arrear 7,000
Land 14,00,000
Buildings 20,50,000
Plant and Machinery 36,75,000
Furniture& Fixture 3,50,000
Inventories: Finished goods 14,00,000
Raw Materials 3,50,000
Trade Receivables 14,00,000
Advances: Short-term 2,98,900
Cash in hand 2,10,000
Balances with banks 17,29,000
Preliminary Expenses 93,100
Patents & Trademarks 4,00,000
1,33,63,000

The following additional information is also provided in respect of the above

balances:
(i) 4,20,000 fully paid equity shares were allotted as consideration for land
& buildings.
(ii) Cost of Building ` 28,00,000

© The Institute of Chartered Accountants of India

 11.54 ADVANCED ACCOUNTING

(iii) Cost of Plant & Machinery ` 49,00,000

Cost of Furniture & Fixture ` 4,37,500
(iv) Trade receivables for ` 3,80,000 are due for more than 6 months.
(v) The amount of Balances with Bank includes ` 18,000 with a bank which
is not a scheduled Bank and the deposits of ` 5 lakhs are for a period of
9 months.
(vi) Unsecured loan includes ` 2,00,000 from a Bank and ` 1,00,000 from
related parties.
(vii) Entire amount of Preliminary expenses to be written off, by adjusting
from opening balance of General Reserve.
You are not required to give previous year’s figures. You are required to
prepare the Balance Sheet of the Company as on 31 stMarch, 20X1 as required
under Schedule III to the Companies Act, 2013.
8. From the following particulars furnished by Alpha Ltd., prepare the Balance
Sheet as on 31st March 20X1 as required by Part I, Schedule III to the
Companies Act, 2013.

Particulars Debit ` Credit `

Equity Share Capital (Face value of ` 50,00,000
100 each)
Call in Arrears 5,000
Land & Building 27,50,000
Plant & Machinery 26,25,000
Furniture 2,50,000
General Reserve 10,50,000
Loan from State Financial Corporation 7,50,000
Inventory:
Raw Materials 2,50,000
Finished Goods 10,00,000 12,50,000
Provision for Taxation 6,40,000
Trade receivables 10,00,000
Short term Advances 2,13,500

© The Institute of Chartered Accountants of India

 FINANCIAL STATEMENTS OF COMPANIES 11.55

Profit & Loss Account 4,33,500

Cash in Hand 1,50,000
Cash at Bank 12,35,000
Unsecured Loan 6,05,000
Trade payables (for Goods and 8,00,000
Expenses)
Loans & advances from related parties 2,00,000
94,78,500 94,78,500

The following additional information is also provided:

(i) 10,000 Equity shares were issued for consideration other than cash.
(ii) Trade receivables of ` 2,60,000 are due for more than 6 months.
(iii) The cost of the Assets were:
Building ` 30,00,000, Plant & Machinery ` 35,00,000 and Furniture
` 3,12,500
(iv) The balance of ` 7,50,000 in the Loan Account with State Finance
Corporation is inclusive of ` 37,500 for Interest Accrued but not Due.
The loan is secured by hypothecation of Plant & Machinery.
(v) Balance at Bank includes ` 10,000 with Omega Bank Ltd., which is not a
Scheduled Bank.
(vi) Transfer ` 20,000 to general reserve is proposed by Board of directors.
(vii) Board of directors declared dividend of 5% on the paid up capital on 2nd April,
20X1.
9. Ring Ltd. was registered with a nominal capital of ` 10,00,000 divided into
shares of ` 100 each. The following Trial Balance is extracted from the books
on 31st March, 20X2:

Particulars ` Particulars `
Buildings 5,80,000 Sales 10,40,000
Machinery 2,00,000 Outstanding Expenses 4,000
Closing Stock 1,80,000 Provision for Doubtful 6,000
Loose Tools 46,000 Debts (1-4-20X1)

© The Institute of Chartered Accountants of India

 11.56 ADVANCED ACCOUNTING

Purchases (finished 4,20,000 Equity Share Capital 4,00,000

goods)
Salaries 1,20,000 General Reserve 80,000
Directors’ Fees 20,000 Profit and Loss A/c 50,000
Rent 52,000 (1-4-20X1)
Depreciation 40,000 Creditors 1,84,000
Bad Debts 12,000 Provision for depreciation:
Investment 2,40,000 On Building 1,00,000
Interest accrued on 4,000 On Machinery 1,10,000 2,10,000
investment
Debenture Interest 56,000 14% Debentures 4,00,000
Advance Tax 1,20,000 Interest on Debentures 28,000
Sundry expenses 36,000 accrued but not due
Debtors 2,50,000 Interest on Investments 24,000
Bank 60,000 Unclaimed dividend 10,000
24,36,000 24,36,000

You are required to prepare statement of Profit and Loss for the year ending
31st March, 20X2 and Balance sheet as at that date after taking into
consideration the following information:
(a) Closing stock is more than opening stock by ` 1,60,000.
(b) Provide to doubtful debts @ 4% on Debtors.
(c) Make a provision for income tax @30%.
(d) Depreciation expense included depreciation of ` 16,000 on Building and
that of ` 24,000 on Machinery.
(e) The directors declared a dividend @ 25% on 2nd April, 20X2 and transfer
to General Reserve @ 10%.
(f) Bills Discounted but not yet matured ` 20,000.

© The Institute of Chartered Accountants of India

 FINANCIAL STATEMENTS OF COMPANIES 11.57

10. On 31st March, 20X1, SR Ltd. provides the following ledger balances after
preparing its Profit & Loss Account for the year ended 31st March, 20X1.

Particulars Amount (`)

Debit Credit
Equity Share Capital, fully paid shares of ` 50 80,00,000
each
Calls in arrear 15,000
Land 25,00,000
Buildings 30,00,000
Plant & Machinery 24,00,000
Furniture & Fixture 13,00,000
Securities Premium 15,00,000
General Reserve 9,41,000
Profit & Loss Account 5,80,000
Loan from Public Finance Corporation (Secured 26,30,000
by Hypothecation of Land)
Other Long Term Loans 22,50,000
Short Term Borrowings 4,60,000
Inventories: Finished goods 45,00,000
Raw materials 13,00,000
Trade Receivables 17,50,000
Advances: Short Term 3,75,000
Trade Payables 8,13,000
Provision for Taxation 3,80,000
Unpaid Dividend 70,000
Cash in Hand 70,000
Balances with Banks 4,14,000
Total 1,76,24,000 1,76,24,000

The following additional information was also provided in respect of the

above balances:
(1) 50,000 fully paid equity shares were allotted as consideration for land.

© The Institute of Chartered Accountants of India

 11.58 ADVANCED ACCOUNTING

(2) The cost of assets were:

Building ` 32,00,000
Plant and Machinery ` 30,00,000
Furniture and Fixture ` 16,50,000

(3) Trade Receivables for ` 4,86,000 due for more than 6 months.
(4) Balances with banks include ` 56,000, the Naya bank, which is not a
scheduled bank.
(5) Loan from Public Finance Corporation repayable after 3 years.
(6) The balance of ` 26,30,000 in the loan account with Public Finance
Corporation is inclusive of `1,34,000 for interest accrued but not due.
The loan is secured by hypothecation of land.
(7) Other long term loans (unsecured) includes:

Loan taken from Nixes Bank ` 13,80,000

(Amount repayable within one year ` 4,80,000)
Loan taken from Directors ` 8,50,000

(8) Bills Receivable for ` 1,60,000 maturing on 15th June, 20X1 has been
discounted.
(9) Short term borrowings includes:

Loan from Naya bank ` 1,16,000 (Secured)

Loan from directors ` 48,000

(10) Transfer of ` 35,000 to general reserve has been proposed by the Board
of directors out of the profits for the year.
(11) Inventory of finished goods includes loose tools costing ` 5 lakhs (which
do not meet definition of property, plant & equipment as per AS 10)
You are required to prepare the Balance Sheet of the Company as on March 31st
20X1 as required under Part - I of Schedule III of the Companies Act, 2013.

You are not required to give previous year figures.

© The Institute of Chartered Accountants of India

 FINANCIAL STATEMENTS OF COMPANIES 11.59

ANSWERS/HINTS
Answer to the Multiple Choice Questions
1. (c) 2. (a) 3. (a) 4. (b) 5. (b)

Answer to the Theoretical Questions

6. (i) Current Liabilities/ Other Current Liabilities

(ii) Shareholders' Fund / Reserve & Surplus

(iii) Current liabilities/Other Current Liabilities

(iv) Contingent Liabilities and Commitments

(v) Shareholders' Fund / Share Capital

(vi) Shareholders' Fund / Money received against share warrants

Answer to the Scenario based Questions

7. Bose and Sen Ltd.
Balance Sheet as at 31st March, 20X1

Particulars Notes Figures at the

end of current
reporting period
(` )

Equity and Liabilities

1 Shareholders' funds

a Share capital 1 69,93,000

b Reserves and Surplus 2 21,56,000

2 Non-current liabilities

a Long-term borrowings 3 16,97,000

3 Current liabilities

a Trade Payables 14,00,000

© The Institute of Chartered Accountants of India

 11.60 ADVANCED ACCOUNTING

b Short term borrowings 4 2,00,000

c Short-term provisions 5 8,16,900

Total 1,32,62,900

Assets

1 Non-current assets

a PPE 6 74,75,000

b Intangible assets (Patents & Trade 4,00,000

Marks)

2 Current assets

a Inventories 7 17,50,000

b Trade receivables 8 14,00,000

c Cash and bank balances 9 19,39,000

d Short-term loans and advances 2,98,900

Total 1,32,62,900

Notes to accounts

`
1 Share Capital
Equity share capital
Issued, subscribed and called up
7,00,000 Equity Shares of ` 10 each 70,00,000
(Out of the above 4,20,000 shares
have been issued for consideration
other than cash)
Less: Calls in arrears (7,000) 69,93,000
Total 69,93,000
2 Reserves and Surplus
General Reserve 15,49,100

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 FINANCIAL STATEMENTS OF COMPANIES 11.61

Less: Preliminary expenses (93,100) 14,56,000

Surplus (Profit & Loss A/c) 7,00,000
Total 21,56,000
3 Long-term borrowings
Secured
Term Loans
Loan from State Finance Corporation 8,50,000
(` 10,50,000 - ` 2,00,000) (Secured
by hypothecation of Plant and
Machinery)
Unsecured
Bank Loan 2,00,000
Loan from related parties 1,00,000
Others 5,47,000 8,47,000
Total 16,97,000
4 Short term borrowings
Current maturities of long-term 2,00,000
debt- loan Instalment repayable
within one year
5 Short-term provisions
Provision for taxation 8,16,900
6 Property, plant and equipment

Land 14,00,000

Buildings 28,00,000

Less: Depreciation (7,50,000) (b.f.) 20,50,000

Plant & Machinery 49,00,000

Less: Depreciation (12,25,000) 36,75,000

(b.f.)

Furniture & Fittings 4,37,500

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 11.62 ADVANCED ACCOUNTING

Less: Depreciation (87,500) (b.f.) 3,50,000

Total 74,75,000

7 Inventories

Raw Material 3,50,000

Finished goods 14,00,000

17,50,000

8 Trade receivables

Debts outstanding for a period 3,80,000

exceeding six months

Other Debts 10,20,000

Total 14,00,000

9 Cash and bank balances

Cash and cash equivalents

Cash at bank with Scheduled Banks 12,11,000

with others 18,000 12,29,000

Cash in hand 2,10,000

Other bank balances
Bank deposits for period of 9 5,00,000
months

Total 19,39,000

8. Alpha Ltd.
Balance Sheet as at 31st March, 20X1

Particulars Notes `
Equity and Liabilities
1 Shareholders' funds

a Share capital 1 49,95,000

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 FINANCIAL STATEMENTS OF COMPANIES 11.63

b Reserves and Surplus 2 14,83,500

2 Non-current liabilities

Long-term borrowings 3 13,17,500

3 Current liabilities
a Trade Payables 8,00,000

b Short-term provisions 5 6,40,000

c Short-term borrowings 4 2,00,000
d Other Current Liabilities: Interest accrued
but not due on loans (SFC) 37,500
Total 94,73,500
Assets
1 Non-current assets
PPE 6 56,25,000
2 Current assets
a Inventories 7 12,50,000
b Trade receivables 8 10,00,000
c Cash and bank balances 9 13,85,000
d Short-term loans and advances 2,13,500
Total 94,73,500

Notes to accounts

`
1 Share Capital
Equity share capital
Issued & subscribed & called up
50,000 Equity Shares of ` 100 each
(of the above 10,000 shares have been
issued for consideration other than cash) 50,00,000

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 11.64 ADVANCED ACCOUNTING

Less: Calls in arrears (5,000) 49,95,000

Total 49,95,000
2 Reserves and Surplus
General Reserve 10,50,000
Add: current year transfer 20,000 10,70,000
Profit & Loss balance
Profit for the year 4,33,500
Less: Appropriations:
Transfer to General reserve (20,000) 4,13,500
Total 14,83,500
3 Long-term borrowings
Secured Term Loan
State Financial Corporation Loan
(7,50,000-37,500) 7,12,500
(Secured by hypothecation of Plant and
Machinery)
Unsecured Loan 6,05,000
Total 13,17,500
4 Short term Borrowings
Loans and advances 2,00,000
5 Short-term provisions
Provision for taxation 6,40,000

6 Property, plant and equipment

Land and Building 30,00,000
Less: Depreciation (2,50,000) (b.f.) 27,50,000

Plant & Machinery 35,00,000

Less: Depreciation (8,75,000) (b.f.) 26,25,000

Furniture & Fittings 3,12,500

Less: Depreciation (62,500) (b.f.) 2,50,000
Total 56,25,000

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 FINANCIAL STATEMENTS OF COMPANIES 11.65

7 Inventories
Raw Materials 2,50,000
Finished goods 10,00,000

Total 12,50,000
8 Trade receivables
Outstanding for a period exceeding six 2,60,000
months
Other Amounts 7,40,000

Total 10,00,000
9 Cash and bank balances
Cash and cash equivalents
Cash at bank
with Scheduled Banks 12,25,000
with others (Omega Bank Ltd.) 10,000 12,35,000
Cash in hand 1,50,000
Other bank balances Nil
Total 13,85,000

Note: The final dividend will not be recognized as a liability at the balance
sheet date (even if it is declared after reporting date but before approval of
the financial statements) as per Accounting Standards. Hence, it has not
been recognized in the financial statements for the year ended 31 March,
20X1. Such dividends will be disclosed in notes only.

9. Ring Ltd.
Profit and Loss Statement for the year ended 31st March, 20X2

Particulars Note No. (` In lacs)

I Revenue from operations 10,40,000
II Other income (interest on investment) 24,000
III Total income [I + II] 10,64,000

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 11.66 ADVANCED ACCOUNTING

IV Expenses:
Cost of purchase [4,20,000+ 1,60,000] 5,80,000
Changes in inventories [20,000-1,80,000] (1,60,000)
Employee Benefits Expense 1,20,000
Finance Costs (debenture interest) 56,000
Depreciation and Amortisation Expenses 40,000
Other Expenses 8 1,24,000
Total Expenses 7,60,000
V Profit before Tax (III-IV) 3,04,000
VI Tax Expenses @ 30% (91,200)
VII Profit for the period 2,12,800

Balance Sheet of Ring Ltd. as at 31ST March, 20X2

Particulars Note `
No.
I EQUITY AND LIABILITIES
(1) Shareholders’ Funds
(a) Share Capital 1 4,00,000
(b) Reserves and Surplus 2 3,42,800
(2) Non-Current Liabilities
(a) Long-term Borrowings (14% 4,00,000
debentures)
(3) Current Liabilities
(a) Trade Payable (Sundry Creditors) 1,84,000
(b) Other Current Liabilities 3 42,000
(c) Short-Term Provisions 4 91,200
Total 14,60,000
II ASSETS
(1) Non-Current Assets
(a) PPE 5 5,70,000
(b) Non-current Investments 2,40,000

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 FINANCIAL STATEMENTS OF COMPANIES 11.67

(2) Current Assets

(a) Inventories 6 2,26,000
(b) Trade Receivables 7 2,40,000
(c) Cash and bank balances 60,000
(d) Short Term Loans and Advances 1,20,000
(Advance Payment of Tax)
(e) Other Current Assets 4,000
(Interest accrued on investments)
Total 14,60,000

Note: There is a Contingent Liability for bills discounted but not yet matured
amounting to ` 20,000.

Notes to Accounts:

1. Share Capital
Authorised Capital
10,000 Equity Shares of ` 100 each 10,00,000

Issued Capital
4,000 Equity Shares of ` 100 each 4,00,000
Subscribed Capital and fully paid
4,000 Equity Shares of ` 100 each 4,00,000
2. Reserve and Surplus
General Reserve [` 80,000 + ` 21,280] 1,01,280
Balance of Statement of Profit & Loss Account
Opening Balance 50,000
Add: Profit for the period 2,12,800
2,62,800
Appropriations
Transfer to General Reserve @ 10% (21,280) 2,41,520
3,42,800

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 11.68 ADVANCED ACCOUNTING

3. Other Current Liabilities

Unclaimed Dividend 10,000
Outstanding Expenses 4,000
Interest accrued on Debentures 28,000
42,000
4. Short-Term Provision
Provision for Tax 91,200
5 Property, plant and equipment
Buildings 5,80,000
Less: Provision for Depreciation 1,00,000 4,80,000
Plant and Equipment 2,00,000
Less: Provision for Depreciation 1,10,000 90,000
5,70,000
6 Inventories
Closing Stock of Finished Goods 1,80,000
Loose Tools 46,000 2,26,000
7 Trade Receivables
Sundry Debtors 2,50,000
Less: Provision for Doubtful Debts (10,000) 2,40,000
8. Other Expenses
Rent 52,000
Directors’ Fees 20,000
Bad Debts 12,000
Provision for Doubtful Debts (4% of ` 2,50,000 4,000
less ` 6,000)
Sundry Expenses 36,000
1,24,000

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 FINANCIAL STATEMENTS OF COMPANIES 11.69

Note: The final dividend will not be recognized as a liability at the balance
sheet date (even if it is declared after reporting date but before approval of
the financial statements) as per Accounting Standards. Hence, it has not
been recognized in the financial statements for the year ended 31 March,
20X2. Such dividends will be disclosed in notes only.

10. SR Ltd.
Balance Sheet as at 31st March, 20X1

Particulars Notes Figures at the end of

current reporting
period (`)
Equity and Liabilities
1 Shareholders' funds
a Share capital 1 79,85,000
b Reserves and Surplus 2 30,21,000
2 Non-current liabilities
a Long-term borrowings 3 42,66,000
3 Current liabilities
a Short-term borrowings 4 9,40,000
b Trade Payables 8,13,000
c Other current liabilities 5 2,04,000
d Short-term provisions 6 3,80,000
Total 1,76,09,000
Assets
1 Non-current assets
a PPE 7 92,00,000
2 Current assets
a Inventories 8 58,00,000
b Trade receivables 9 17,50,000
c Cash and cash equivalents 10 4,84,000
d Short-term loans and advances 3,75,000
Total 1,76,09,000

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 11.70 ADVANCED ACCOUNTING

Notes to accounts

`
1. Share Capital
Equity share capital
Issued, subscribed and called up
1,60,000 Equity Shares of ` 50 each 80,00,000
(Out of the above 50,000 shares have
been issued for consideration other than
cash)
Less: Calls in arrears (15,000) 79,85,000
2. Reserves and Surplus
General Reserve 9,41,000
Add: Transferred from Profit and loss
account 35,000 9,76,000
Securities premium 15,00,000
Surplus (Profit & Loss A/c) 5,80,000
Less: Appropriation to General Reserve
(proposed) (35,000) 5,45,000
30,21,000
3. Long-term borrowings
Secured: Term Loans
Loan from Public Finance 24,96,000
Corporation [repayable after 3years
(` 26,30,000 - ` 1,34,000 for interest
accrued but not due)]
(secured by hypothecation of land)
Unsecured
Bank Loan (Nixes bank) 9,00,000
(` 13,80,000 - ` 4,80,000
repayable within 1 year)

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 FINANCIAL STATEMENTS OF COMPANIES 11.71

Loan from Directors 8,50,000

Others 20,000 17,70,000
Total 42,66,000
4. Short-term borrowings
Loan from Naya bank (Secured) 1,16,000
Loan from Nixes bank repayable 4,80,000
within one year (Current maturity of
Long term borrowing)

Loan from Directors 48,000

Others 2,96,000 9,40,000
5. Other current liabilities

Unpaid dividend 70,000

Interest accrued but not due on 1,34,000 2,04,000
borrowings
6. Short-term provisions
Provision for taxation 3,80,000
7. PPE
Land 25,00,000
Buildings 32,00,000
Less: Depreciation (2,00,000) 30,00,000
Plant & Machinery 30,00,000
Less: Depreciation (6,00,000) 24,00,000
Furniture & Fittings 16,50,000
Less: Depreciation (3,50,000) 13,00,000
Total 92,00,000
8. Inventories
Raw Material 13,00,000
Finished goods 40,00,000

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 11.72 ADVANCED ACCOUNTING

Loose tools 5,00,000 58,00,000

9. Trade receivables
Outstanding for a period exceeding six 4,86,000
months
Others 12,64,000
Total 17,50,000
10. Cash and cash equivalents
Balances with banks
with Scheduled Banks 3,58,000
with others banks 56,000 4,14,000
Cash in hand 70,000
Total 4,84,000

Note: There is a contingent liability amounting to ` 1,60,000

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 FINANCIAL STATEMENTS OF COMPANIES 11.73

UNIT 2: CASH FLOW STATEMENTS

LEARNING OUTCOMES
After studying this unit, you will be able to–
♦ Define cash flow statement as per AS 3 “Cash Flow Statements”.
♦ Differentiate operating, investing and financing activities.
♦ Learn the various elements of cash and cash equivalents.
♦ Prepare cash flow statement both by direct method and indirect
method.

UNIT OVERVIEW

Difference
Definition & Meaning of Cash between Preparation of
Significance of & cash operating, Cash Flow
cash flow equivalents and investing and Statement
statement Cash flow financing as per AS 3.
activities.

2.1 INTRODUCTION
Information about the cash flows of an enterprise is useful in providing users of
financial statements with a basis to assess the ability of the enterprise to generate
cash and cash equivalents and the needs of the enterprise to utilise those cash
flows. The economic decisions that are taken by users require an evaluation of the
ability of an enterprise to generate cash and cash equivalents and the timing and
certainty of their generation.

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 11.74 ADVANCED ACCOUNTING

The Standard deals with the provision of information about the historical changes
in cash and cash equivalents of an enterprise by means of a cash flow statement
which classifies cash flows during the period from operating, investing and
financing activities.

This statement provides relevant information in assessing a company’s liquidity,

quality of earnings and solvency.

Cash receipts

Cash Flow
Statement is Cash
f payments

Benefits:
(a) Cash flow statement provides information about the changes in cash and
cash equivalents of an enterprise.
(b) Identifies cash generated from trading operations.
(c) The operating cash surplus which can be applied for investment in fixed
assets.
(d) Portion of cash from operations is used to pay dividend and tax and the
other portion is ploughed back.
(e) Very useful tool of planning.
Purpose:
Cash flow statements are prepared to explain the cash movements between two
points of time.
Sources of Cash:
1. Issue of shares and debentures and raising long-term loan.
2. Sale of investments and other fixed assets.
3. Cash from operations (Net Operating Profit).
Applications of Cash
1. Redemption of preference shares and debentures and repayment of long-
term loan.

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 FINANCIAL STATEMENTS OF COMPANIES 11.75

2. Purchase of investments and other fixed assets.

3. Payment of tax.
4. Payment of dividend.
5. Loss on Operation (Net Operating Loss)

Note: Cash includes Bank Account also. Increase in cash or decrease in cash is put
in the applications and the sources respectively just to balance the cash flow
statement. At this juncture, you may note that changes in all balance sheet items
are to be taken into consideration separately in cash flow statement for
explaining movement of cash.

2.2 ELEMENTS OF CASH

As per AS 3, issued by the Council of the ICAI,
‘Cash’ include:
(a) Cash in hand,
(b) Demand deposits with banks, and
Cash equivalents include:
(a) Components
 Short term highly liquid investments that are readily convertible into
known amounts of cash and which are subject to an insignificant risk
of changes in value
 Securities with short maturity period of, say, three months or less from
the date of acquisition
(b) Objective
 Deploy, for a short period, idle cash required to meet short-term cash-
commitments.
(c) Examples
 Acquisition of preference shares, shortly before their specified
redemption date, bank deposits with short maturity period, etc.

Conclusion: Thus, cash flow statement deals with flow of cash funds but does not
consider the movements among cash, bank balance payable on demand and

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 11.76 ADVANCED ACCOUNTING

investment of excess cash in cash equivalents. Examples are cash withdrawn from
current account, cash deposited in bank for 60 days, etc.

2.3 CLASSIFICATION OF CASH FLOW

ACTIVITIES
AS 3 provides explanation for changes in cash position of the business entity. As
per Accounting Standard 3, cash flows during the period are classified as
Operating; Investing and Financing activities.

Cash Flow Activities

Inflow of Activities Outflow of Activities

Cash increase Cash decrease

Classification of Cash Flow Activities

Financing activities
Operating activities Investing activities
(changes in the size and
(principle revenue (acquisition and disposal
composition of the
generating) of long-term assets and owner’s capital and
other investments) borrowings)

2.3.1 Operating Activities

1. Definition: These are the principal revenue generating activities of the
enterprise.
2. Net Impact: Net impact of operating activities on flow of cash is reported as
‘Cash flows from operating activities’ or ‘cash from operations’.
3. Key Indicator: The amount of cash flows from operating activities is a key
indicator of the extent to which the operations of the enterprises have
generated sufficient cash flows to:
(a) Maintain the operating capability of the enterprise;
(b) Pay dividends, repay loans; and

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 FINANCIAL STATEMENTS OF COMPANIES 11.77

(c) Make new investments without recourse to external sources of

financing.
4. Information Provided: It provides useful information about financing
through working capital.
5. Benefits: Information about the specific components of historical operating
cash flows is useful, in conjunction with other information, in forecasting
future operating cash flows.

Cash flows arising from operating activities

Key indicator of the extent to Example

which the operations of the entity
have generated sufficient cash (a) Cash receipts from the sale of goods and the
flows to rendering of services
(b) Cash receipts from royalties, fees,
• repay loans commissions, and other revenue
• maintain the operating
(c) Cash payments to suppliers for goods and
capability of the entity services
• pay dividends (d) Cash payments to and on behalf of employees
• make new investments without
(e) Cash receipts and cash payments of an
recourse to external sources of insurance entity for premiums and claims,
financing annuities, and other policy benefits
(f) Cash payments or refunds of income taxes
Primarily derived from the unless they can be specifically identified with
financing and investing activities
principal revenue-producing
(g) cash receipts and payments relating to futures
activities of the entity
contracts, forward contracts, option contracts
and swap contracts when the contracts are
held for dealing or trading purposes.
Generally, result from the
(h) Cash flows arising from the purchase and sale
transactions and other events that
of dealing or trading securities
have role in the determination of
(i) Cash advances and loans made by financial
net profit or loss institutions since they relate to their main
revenue-producing activity.

2.3.2 Investing activities

1. Definition: These are the acquisition and disposal of long-term assets and other
investments not included in cash equivalents.

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 11.78 ADVANCED ACCOUNTING

2. Separate Disclosure: Separate disclosure of cash flows arising from investing

activities is important because the cash flows represent the extent to which the
expenditures have been made for resources intended to generate future
incomes and cash flows.

Cash flows arising from investing activities

Represent the extent to

Examples
which expenditures have
been made for resources
intended to generate
future income and cash (a) cash payments to acquire fixed assets (including
intangibles). These payments include those relating to
flows
capitalised research and development costs and self-
constructed fixed assets;
(b) cash receipts from sales of property, plant and
equipment, intangibles and other long-term assets;
(c) cash payments to acquire equity or debt instruments
of other entities and interests in joint ventures (other
than payments for those instruments considered to be
cash equivalents or those held for dealing or trading
purposes);
(d) cash receipts from sales of equity or debt instruments
of other entities and interests in joint ventures (other
than receipts for those instruments considered to be
cash equivalents and those held for dealing or trading
purposes);
(e) cash advances and loans made to other parties (other
than advances and loans made by a financial
institution);
(f) cash receipts from the repayment of advances and
loans made to other parties (other than advances and
loans of a financial institution);
(g) cash payments for futures contracts, forward
contracts, option contracts and swap contracts except
when the contracts are held for dealing or trading
purposes, or the payments are classified as financing
activities; and
(h) cash receipts from futures contracts, forward
contracts, option contracts and swap contracts except
when the contracts are held for dealing or trading
purposes, or the receipts are classified as financing
activities.

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 FINANCIAL STATEMENTS OF COMPANIES 11.79

2.3.3 Financing activities

1. Definition: These are the activities that result in changes in the size and
composition of the owner’s capital (including preference share capital) and
borrowings of the enterprise.
2. Separate Disclosure: The separate disclosure of cash flows arising from
financing activities is important because it is useful in predicting claims on
future cash flows by providers of funds (both capital and borrowings) to the
enterprise.

Cash flows arising from financing activities

useful in predicting claims Examples

on future cash flows by
providers of capital to the
entity
(a) cash proceeds from issuing shares or
other equity instruments;

(b) cash payments to owners to acquire or

redeem the entity’s shares;

(c) cash proceeds from issuing debentures,

loans, notes, bonds, mortgages and other
short-term or long-term borrowings;

(d) cash repayments of amounts borrowed;

and
(e) cash payments by a lessee for the
reduction of the outstanding liability
relating to a finance lease.

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 11.80 ADVANCED ACCOUNTING

2.4 CALCULATION OF CASH FLOWS FROM

OPERATING ACTIVITIES
1. Components: Cash flows from operating activities result from the
transactions and other events that enter into the determination of net profit
or loss.
2. Methods: An enterprise can determine cash flows from operating activities
using either:

Methods

Direct Method Indirect Method

(a) Direct Method: The direct method, whereby major classes of gross
cash receipts and gross cash payments are considered; or
(b) Indirect Method: The indirect method, whereby net profit or loss is
adjusted for the effects of transactions of a non-cash nature, deferrals
or accruals of past or future operating cash receipts or payments, and
items of income or expense associated with investing or financing
activities.

2.4.1 Direct Method

1. Information Required
(a) Gross receipts and gross cash payments may be obtained from the
accounting records to ascertain cash flows from operating activities.
(b) For example,
(i) information about cash received from trade receivables,
(ii) payment to trade payables, cash expenses etc., which may be
obtained by an analysis of cash book.
(c) In actual practice, the relevant information is obtained by adjusting
sales, cost of sales and other items in the profit and loss accounts for:
 Changes during the period in inventories and operating
receivables and payables;
 Other non-cash items such as depreciation on fixed assets,

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 FINANCIAL STATEMENTS OF COMPANIES 11.81

goodwill written off, preliminary expenses written off, loss or

gain on sale of fixed assets etc.; and
 Other items for which the cash effects are investing or financing
cash flows. Examples are interest received and paid, dividend
received and paid etc., which are related to financing or
investing activities and are shown separately in the cash flow
statement.
2. The direct method provides information which may be useful in estimating
future cash flows and which is not available under the indirect method and
is, therefore, considered more appropriate than the indirect method.
3. However, indirect method of determining the cash from operating activities
is more popular in actual practice.

2.4.2 Indirect Method

Under the indirect method, the net cash from operating activities is determined
by adjusting net profit or loss instead of individual items appearing in the profit
and loss account. Net profit or loss is also adjusted for the effect of:
(a) changes during the period in inventories and operating receivables and
payables;
(b) non-cash items such as depreciation; and
(c) all other items for which the cash effects are financing or investing cash
flows.

2.4.3 Conclusion
1. It is worth noting that both direct and indirect methods adjust current
assets and current liabilities related to operating activities to determine cash
from operating activities.
2. But direct method adjust individual items of profit and loss account and
indirect method adjusts overall net profit (or loss) to determine cash from
operation.
3. Therefore, indirect method fails to provide break-up of cash from
operations.

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 11.82 ADVANCED ACCOUNTING

Proforma of ‘Cash Flow from Operating Activities’ by indirect method

`
Net Profit for the year -
Add: Non-Cash and Non-Operating Expenses: -
Depreciation -
Loss on Sale of Assets -
Provision for taxation, etc. -
Less: Non-Cash and Non-Operating Incomes:
Profit on Sale of Assets -
Net Profit after Adjustment for Non-Cash Items (-)
Cash from = Net Profit (after adjustment for Non-cash Items)
operation
- Increase in Current Assets
+ Decrease in Current Assets
+ Increase in Current Liabilities
- Decrease in Current Liabilities

2.5 CALCULATION OF CASH FLOWS FROM

INVESTING ACTIVITIES
1. These activities are related to the acquisition and disposal of long-term assets,
non-operating current assets and investments which results in outflow of cash.
2. Disposal of the aforesaid assets results in inflow of cash.
3. Thus, inflows and outflows related to acquisition and disposal of assets,
other than those related to operating activities, are shown under this
category.

2.6 CALCULATION OF CASH FLOWS FROM

FINANCING ACTIVITIES
1. These activities are basically related to the changes in capital and borrowing
of the enterprise which affect flow of cash.

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 FINANCIAL STATEMENTS OF COMPANIES 11.83

2. Redemption of shares and repayment of borrowings results in outflow of cash.

3. Thus inflows and outflows related to the amount of capital and borrowings
of the enterprise are shown under this head.

Note: Students are advised to refer full text of Accounting Standard on Cash
Flow Statements (AS 3) for the better understanding of the chapter.

2.7 ILLUSTRATIONS
Illustration 1
Intelligent Ltd., a non-financial company has the following entries in its Bank
Account. It has sought your advice on the treatment of the same for preparing Cash
Flow Statement.
(i) Loans and Advances given to the following and interest earned on them:
(1) to suppliers
(2) to employees
(3) to its subsidiaries companies

(ii) Investment made in subsidiary Smart Ltd. and dividend received

(iii) Dividend paid for the year
(iv) TDS on interest income earned on investments made

(v) TDS on interest earned on advance given to suppliers

(vi) Insurance claim received against loss of fixed asset by fire
Discuss in the context of AS 3 Cash Flow Statement.
Solution
(i) Loans and advances given and interest earned
(1) to suppliers Operating Cash flow
(2) to employees Operating Cash flow
(3) to its subsidiary companies Investing Cash flow

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 11.84 ADVANCED ACCOUNTING

(ii) Investment made in subsidiary company and dividend received

Investing Cash flow
(iii) Dividend paid for the year

Financing Cash Outflow

(iv) TDS on interest income earned on investments made
Investing Cash Outflow

(v) TDS on interest earned on advance given to suppliers

Operating Cash Outflow
(vi) Insurance claim received of amount loss of fixed asset by fire
Extraordinary item to be shown under a separate heading as ‘Cash inflow
from investing activities’.
Illustration 2
Following are extracts of the Balance Sheets of Ajay Ltd.:

Particulars Notes 31.3.20X1 31.3.20X2

` `
Equity and Liabilities
Shareholder’s funds
(a) Share capital 1 5,00,000 5,00,000
(b) Reserve & surplus 2 50,000 90,000
Non-current liabilities
(a) Long-term borrowings 3 5,00,000 7,50,000
Current liabilities
(a) Other current liabilities 4 --- 5,000

Assets
Non-current assets
(a) Intangible assets 5 2,05,000 1,80,000

© The Institute of Chartered Accountants of India

 FINANCIAL STATEMENTS OF COMPANIES 11.85

Notes to accounts

31.3.20X1 31.3.20X2

` `
1 Share Capital
50,000 Equity Shares of `10 each 5,00,000 5,00,000
2 Reserve & surplus
Profit & Loss A/c 50,000 90,000

3 Long-term borrowings
10% Debentures 5,00,000 7,50,000
4 Other current liabilities

Unpaid interest --- 5,000

5 Intangible assets
Goodwill 2,05,000 1,80,000
You are required to show the related items in Cash Flow Statement.
Solution
An Extract of Cash Flow Statement for the year ending 31.3.20X2

`
Cash flows from operating activities:

Closing balance as per Profit & Loss A/c 90,000

Less: Opening balance as per Profit & Loss Alc (50,000)
Add: Goodwill amortisation 25,000

Add: Interest on Debentures (Refer Note 1) 75,000

Net Cash from Operating Activities 1,40,000

Note 1 : Interest has been computed on the closing balance of debentures as on

31.3.20X2 assuming that all the additions/ deletions were made, if any, at the
beginning of the year.

© The Institute of Chartered Accountants of India

 11.86 ADVANCED ACCOUNTING

Cash flows from financing activities:

Proceeds from debentures (Refer Working Note) 2,50,000

Interest paid on Debentures [less unpaid] (70,000)

Net Cash from Financing Activities 1,80,000

Working Note:

10% Debentures Account

Particulars ` Particular `
To Balance c/d 7,50,000 By Balance b/d 5,00,000
By Bank A/c (Bal. fig.) 2,50,000

7,50,000 7,50,000

Illustration 3
From the following information, calculate cash flow from operating activities:
Summary of Cash Account
for the year ended March 31, 20X1

Particulars ` Particulars `
To Balance b/d 1,00,000 By Cash Purchases 1,20,000
To Cash sales 1,40,000 By Trade payables 1,57,000
To Trade receivables 1,75,000 By Office & Selling 75,000
Expenses

To Trade Commission 50,000 By Income Tax 30,000

To Sale of Investment 30,000 By Investment 25,000
To Loan from Bank 1,00,000 By Repayment of Loan 75,000

To Interest & Dividend 1,000 By Interest on loan 10,000

By Balance c/d 1,04,000

5,96,000 5,96,000

© The Institute of Chartered Accountants of India

 FINANCIAL STATEMENTS OF COMPANIES 11.87

Solution
Cash Flow Statement of ……
for the year ended March 31, 20X1(Direct Method)

Particulars ` `
Operating Activities:
Cash received from sale of goods 1,40,000
Cash received from Trade receivables 1,75,000

Trade Commission received 50,000 3,65,000

Less: Payment for Cash Purchases 1,20,000

Payment to Trade payables 1,57,000
Office and Selling Expenses 75,000
Payment for Income Tax 30,000 (3,82,000)

Net Cash Flow used in Operating Activities (17,000)

Illustration 4
The following summary cash account has been extracted from the company’s
accounting records:
Summary Cash Account

(` ’000)

Balance at 1.3.20X1 35
Receipts from customers 2,783

Issue of shares 300

Sale of fixed assets 128

3,246
Payments to suppliers 2,047
Payments for property, plant & equipment 230
Payments for overheads 115

© The Institute of Chartered Accountants of India

 11.88 ADVANCED ACCOUNTING

Wages and salaries 69

Taxation 243
Dividends 80

Repayments of bank loan 250 (3,034)

Balance at 31.3.20X2 212

Prepare Cash Flow Statement of this company Hills Ltd. for the year ended 31st
March, 20X2 in accordance with AS-3 (Revised).
The company does not have any cash equivalents.
Solution
Hills Ltd.
Cash Flow Statement for the year ended 31st March, 20X2
(Using direct method)

(` ’000)

Cash flows from operating activities

Cash receipts from customers 2,783
Cash payments to suppliers (2,047)
Cash paid to employees (69)
Other cash payments (for overheads) (115)

Cash generated from operations 552

Income taxes paid (243)

Net cash from operating activities 309

Cash flows from investing activities

Payments for purchase of fixed assets (230)
Proceeds from sale of fixed assets 128

Net cash used in investing activities (102)

© The Institute of Chartered Accountants of India

 FINANCIAL STATEMENTS OF COMPANIES 11.89

Cash flows from financing activities

Proceeds from issuance of share capital 300

Bank loan repaid (250)
Dividend paid (80)
Net cash used in financing activities (30)
Net increase in cash and cash equivalents 177
Cash and cash equivalents at beginning of period 35
Cash and cash equivalents at end of period 212

Illustration 5
Prepare cash flow statement of M/s MNT Ltd. for the year ended 31 st March, 20X1
with the help of the following information:
(1) Company sold goods for cash only.
(2) Gross Profit Ratio was 30% for the year, gross profit amounts to ` 3,82,500.
(3) Opening inventory was lesser than closing inventory by ` 35,000.
(4) Wages paid during the year ` 4,92,500.
(5) Office and selling expenses paid during the year ` 75,000.
(6) Dividend paid during the year ` 30,000.
(7) Bank loan repaid during the year ` 2,15,000 (included interest ` 15,000).
(8) Trade payables on 31st March, 20X0 exceed the balance on 31st March, 20X1
by ` 25,000.
(9) Amount paid to trade payables during the year ` 4,60,000.
(10) Tax paid during the year amounts to ` 65,000 (Provision for taxation as on
31.03.20X1` 45,000).
(11) Investments of ` 7,00,000 sold during the year at a profit of ` 20,000.
(12) Depreciation on fixed assets amounts to ` 85,000.
(13) Plant and machinery purchased on 15th November, 20X0 for ` 2,50,000.
(14) Cash and Cash Equivalents on 31st March, 20X0` 2,00,000.
(15) Cash and Cash Equivalents on 31st March, 20X1` 6,07,500.

© The Institute of Chartered Accountants of India

 11.90 ADVANCED ACCOUNTING

Solution
M/s MNT Ltd.
Cash Flow Statement for the year ended 31st March, 20X1
(Using direct method)

Particulars ` `

Cash flows from Operating Activities

Cash sales (` 3,82,500/.30) 12,75,000

Less: Cash payments for trade payables (4,60,000)

Wages Paid (4,92,500)

Office and selling expenses (75,000) (10,27,500)

Cash generated from operations before taxes 2,47,500

Income tax paid (65,000)

Net cash generated from operating activities (A) 1,82,500

Cash flows from investing activities

Sale of investments (7,00,000 + 20,000) 7,20,000

Payments for purchase of Plant & machinery (2,50,000)

Net cash used in investing activities (B) 4,70,000

Cash flows from financing activities

Bank loan repayment (including interest) (2,15,000)

Dividend paid (30,000)

Net cash used in financing activities (C) (2,45,000)

Net increase in cash (A+B+C) 4,07,500

Cash and cash equivalents at beginning of the

period 2,00,000

Cash and cash equivalents at end of the period 6,07,500

© The Institute of Chartered Accountants of India

 FINANCIAL STATEMENTS OF COMPANIES 11.91

Illustration 6
Ryan Ltd provides you the following information at the year-end, March 31, 20X1:

` `
Sales 6,98,000
Cost of Goods Sold (5,20,000)

1,78,000
Operating Expenses
(including Depreciation Expense of ` 37,000) (1,47,000)

31,000

Other Income / (Expenses):

Interest Expense paid (23,000)
Interest Income received 6,000

Gain on Sale of Investments 12,000

Loss on Sale of Plant (3,000)

(8,000)

23,000
Income tax (7,000)

16,000

Information available:

31st March 31st March

20X1 20X0

` `
Plant 7,15,000 5,05,000
Less: Accumulated Depreciation (1,03,000) (68,000)

6,12,000 4,37,000

© The Institute of Chartered Accountants of India

 11.92 ADVANCED ACCOUNTING

Investments (Long term) 1,15,000 1,27,000

Inventory 1,44,000 1,10,000
Trade receivables 47,000 55,000

Cash 46,000 15,000

Prepaid expenses 1,000 5,000
Share Capital 4,65,000 3,15,000
Reserves and surplus 1,40,000 1,32,000
Bonds 2,95,000 2,45,000
Trade payables 50,000 43,000
Outstanding liabilities 12,000 9,000
Income taxes payable 3,000 5,000

Analysis of selected accounts and transactions during 20X0-X1

1. Purchased investments for ` 78,000.
2. Sold investments for ` 1,02,000. These investments cost ` 90,000.

3. Purchased plant assets for ` 1,20,000.

4. Sold plant assets that cost `10,000 with accumulated depreciation of ` 2,000
for ` 5,000.
5. Issued ` 1,00,000 of bonds at face value in an exchange for plant assets on
31st March, 20X1.
6. Repaid ` 50,000 of bonds at face value at maturity.
7. Issued 15,000 shares of ` 10 each.
8. Paid cash dividends ` 8,000.
Prepare Cash Flow Statement as per AS-3 (Revised), using indirect method.

© The Institute of Chartered Accountants of India

 FINANCIAL STATEMENTS OF COMPANIES 11.93

Solution
Ryan Ltd.
Cash Flow Statement
for the year ending 31st March, 20X1

` `
Cash flows from operating activities
Net profit before taxation 23,000

Adjustments for:
Depreciation 37,000
Gain on sale of investments (12,000)

Loss on sale of plant assets 3,000

Interest expense 23,000
Interest income (6,000)

Operating profit before working capital changes 68,000

Decrease in trade receivables 8,000
Increase in inventory (34,000)
Decrease in prepaid expenses 4,000
Increase in trade payables 7,000
Increase in outstanding liabilities 3,000

Cash generated from operations 56,000

Income taxes paid* (9,000)

Net cash generated from operating activities 47,000

Cash flows from investing activities
Purchase of plant (1,20,000)

Sale of plant 5,000

Purchase of investments (78,000)

© The Institute of Chartered Accountants of India

 11.94 ADVANCED ACCOUNTING

Sale of investments 1,02,000

Interest received 6,000

Net cash used in investing activities (85,000)

Cash flows from financing activities

Proceeds from issuance of share capital 1,50,000

Repayment of bonds (50,000)

Interest paid (23,000)

Dividends paid (8,000)

Net cash from financing activities 69,000

Net increase in cash and cash equivalents 31,000

Cash and cash equivalents at the beginning of the 15,000

period

Cash and cash equivalents at the end of the 46,000

period

Note: Significant non-cash adjustments: Issued ₹ 1,00,000 of bonds at face value

for acquisition of plant on 31st March, 20X1.

*Working Note:

`
Income taxes paid:
Income tax expense for the year 7,000
Add: Income tax liability at the beginning of the year 5,000
12,000

Less: Income tax liability at the end of the year (3,000)

9,000

© The Institute of Chartered Accountants of India

 FINANCIAL STATEMENTS OF COMPANIES 11.95

Illustration 7
The balance sheets of Sun Ltd. as at 31st March 20X1 and 20X0 were as:

Particulars Notes 20X1 20X0

` `

Equity and Liabilities

1 Shareholder’s funds

(a) Share capital 1 60,000 50,000

(b) Reserve & surplus 2 5,000 4,000

2 Current liabilities

(a) Trade Payables 4,000 2,500

(b) Other current liabilities 3 - 1,000

(c) Short term provision (provision for tax) 1,500 1,000

Total 70,500 58,500

Assets

1 Non-current assets

(a) Property, Plant & Equipment 4 39,500 29,000

2 Current assets

(a) Current investments 2,000 1,000

(b) Inventories 17,000 14,000

(c) Trade receivables 8,000 6,000

(d) Cash & cash equivalents 5 4,000 8,500

70,500 58,500

© The Institute of Chartered Accountants of India

 11.96 ADVANCED ACCOUNTING

Notes to accounts

20X1 20X0

` `
1 Share Capital
Equity Shares of `10 each 60,000 50,000

2 Reserve & surplus

Profit and Loss Account 5,000 4,000
3 Other current liabilities
Dividend Payable - 1,000
4 Property, plant and equipment (at WDV)
Building 10,000 10,000
Fixtures 17,000 11,000
Vehicles 12,500 8,000
Total 39,500 29,000
5 Cash and cash equivalents
Cash and Bank 4,000 8,500

The profit and loss statement for the year ended 31st March, 20X1 disclosed:

Particulars `
Profit before tax 4,500
Tax expense: Current tax (1,500)
Profit for the year 3,000

Declared dividend (2,000)

Retained Profit 1,000

© The Institute of Chartered Accountants of India

 FINANCIAL STATEMENTS OF COMPANIES 11.97

Further information is available:

Fixtures Vehicles

` `
Depreciation for the year 1,000 2,500
Disposals:
Proceeds on disposal of vehicles — 1,700
Written down value — (1,000)

Profit on disposal 700

Prepare a Cash Flow Statement for the year ended 31st March, 20X1.
Solution
Sun Ltd.
Cash Flow Statement
for the year ended 31st March, 20X1

` `
Cash flows from operating activities
Net Profit before taxation 4,500
Adjustments for:
Depreciation 3,500

Profit on sale of vehicles (1,700 – 1,000) (700)

Operating profit before working capital changes 7,300

Increase in Trade receivables (2,000)
Increase in inventories (3,000)
Increase in Trade payables 1,500

Cash generated from operations 3,800

Income taxes paid (W.N.1) (1,000)

Net cash generated from operating activities 2,800

© The Institute of Chartered Accountants of India

 11.98 ADVANCED ACCOUNTING

Cash flows from investing activities

Sale of vehicles 1,700

Purchase of current investments (1,000)

Purchase of vehicles (W.N.3) (8,000)

Purchase of fixtures (W.N.3) (7,000)

Net cash used in investing activities (14,300)

Cash flows from financing activities

Issue of shares for cash 10,000

Dividends paid (W.N.2) (3,000)

Net cash generated from financing activities 7,000

Net decrease in cash and cash equivalents (4,500)

Cash and cash equivalents at beginning of period

(See Note) 8,500

Cash and cash equivalents at end of period

(See Note) 4,000

Note to the Cash Flow Statement

Cash and Cash Equivalents

31.3.20X1 31.3.20X0

Bank and Cash 4,000 8,500

Cash and cash equivalents 4,000 8,500

© The Institute of Chartered Accountants of India

 FINANCIAL STATEMENTS OF COMPANIES 11.99

Working Notes:

`
1. Income taxes paid
Income tax expense for the year 1,500
Add: Income tax liability at the beginning of the year 1,000
2,500
Less: Income tax liability at the end of the year (1,500)
1,000
2. Dividend paid
Declared dividend for the year 2,000
Add: Amount payable at the beginning of the year 1,000
3,000
Less: Amount payable at the end of the year -
3,000
3. Property, plant and equipment acquisitions
Fixtures Vehicles
` `
W.D.V. at 31.3.20X1 17,000 12,500
Add back:
Depreciation for the year 1,000 2,500
Disposals — 1,000
18,000 16,000
Less: W.D.V. at 31.12.20X0 (11,000 (8,000)
)
Acquisitions during 20X0-20X1 7,000 8,000

Note: Current investments may not be readily convertible to a known amount of

cash and may not be subject to an insignificant risk of changes in value as per the
requirements of AS 3 and hence those have been considered as investing
activities.

© The Institute of Chartered Accountants of India

 11.100 ADVANCED ACCOUNTING

Illustration 8
Ms. Jyoti of Star Oils Limited has collected the following information for the
preparation of cash flow statement for the year ended 31 st March, 20X1:

(` in lakhs)

Net Profit 25,000

Dividend paid 8,535
Provision for Income tax 5,000
Income tax paid during the year 4,248
Loss on sale of assets (net) 40
Book value of the assets sold 185
Depreciation charged to the Statement of Profit and Loss 20,000
Profit on sale of Investments 100
Carrying amount of Investment sold 27,765
Interest income received on investments 2,506
Interest expenses of the year 10,000
Interest paid during the year 10,520
Increase in Working Capital (excluding Cash & Bank Balance) 56,081
Purchase of Fixed assets 14,560
Investment in joint venture 3,850
Expenditure on construction work in progress 34,740
Proceeds from calls in arrear 2
Receipt of grant for capital projects 12
Proceeds from long-term borrowings 25,980
Proceeds from short-term borrowings 20,575
Opening cash and bank balance 5,003
Closing cash and bank balance 6,988

Prepare the Cash Flow Statement for the year ended 31 March 20X1 in accordance
with AS 3. (Make necessary assumptions)

© The Institute of Chartered Accountants of India

 FINANCIAL STATEMENTS OF COMPANIES 11.101

Solution
Star Oils Limited
Cash Flow Statement
for the year ended 31st March, 20X1

(` in lakhs)

Cash flows from operating activities

Net profit before taxation (25,000 + 5,000) 30,000
Adjustments for :
Depreciation 20,000
Loss on sale of assets (Net) 40
Profit on sale of investments (100)
Interest income on investments (2,506)
Interest expenses 10,000
Operating profit before working capital changes 57,434
Changes in working capital (Excluding cash and bank (56,081)
balance)
Cash generated from operations 1,353
Income taxes paid (4,248)
Net cash used in operating activities (2,895)
Cash flows from investing activities
Sale of assets (W.N.1) 145
Sale of investments (27,765 + 100) 27,865
Receipt of grant for capital projects 12
Interest income on investments 2,506
Purchase of fixed assets (14,560)
Investment in joint venture (3,850)
Expenditure on construction work-in progress (34,740)
Net cash used in investing activities (22,622)

© The Institute of Chartered Accountants of India

 11.102 ADVANCED ACCOUNTING

Cash flows from financing activities

Proceeds from calls in arrear 2
Proceeds from long-term borrowings 25,980

Proceed from short-term borrowings 20,575

Interest paid (10,520)
Dividend (including dividend tax) paid (8,535) 27,502
Net increase in cash and cash equivalents 1,985
Cash and cash equivalents at the beginning of the 5,003
period

Cash and cash equivalents at the end of the period 6,988

Working note:
1. Book value of the assets sold 185

Less : Loss on sale of assets (40)

Proceeds on sale 145
Illustration 9
From the following Summary Cash Account of X Ltd. prepare Cash Flow Statement
for the year ended 31st March, 20X1 in accordance with AS 3 (Revised) using the
direct method. The company does not have any cash equivalents.
Summary Cash Account for the year ended 31.3.20X1

`’000 `’000
Balance on 1.4.20X0 50 Payment to Suppliers 2,000
Issue of Equity Shares 300 Purchase of Fixed Asset 200
Receipts from Customers 2,800 Overhead expense 200

Sale of Fixed Assets 100 Wages and Salaries 100

© The Institute of Chartered Accountants of India

 FINANCIAL STATEMENTS OF COMPANIES 11.103

Taxation 250
Dividend 50

Repayment of Bank Loan 300

Balance on 31.3.20X1 150

3,250 3,250

Solution
X Ltd.
Cash Flow Statement for the year ended 31st March, 20X1
(Using direct method)

` ’000 ` ’000
Cash flows from operating activities
Cash receipts from customers 2,800
Cash payments to suppliers (2,000)
Cash paid to employees (100)
Cash payments for overheads (200)
Cash generated from operations 500
Income tax paid (250)
Net cash generated from operating activities 250
Cash flows from investing activities
Payments for purchase of fixed assets (200)
Proceeds from sale of fixed assets 100
Net cash used in investing activities (100)
Cash flows from financing activities
Proceeds from issuance of equity shares 300
Bank loan repaid (300)
Dividend paid (50)
Net cash used in financing activities (50)
Net increase in cash 100
Cash at the beginning of the year 50
Cash at the end of the year 150

© The Institute of Chartered Accountants of India

 11.104 ADVANCED ACCOUNTING

Illustration 10
Given below are the relevant extracts of the Balance Sheet and the Statement of
Profit and Loss of ABC Ltd. along with additional information:

Extract of Balance sheet

Particulars Notes 31.3.20X1 31.3.20X0

(` in lakhs) (` in lakhs)

Equity and Liabilities

1 Current liabilities
(a) Trade Payables 250 230
(b) Short term Provisions 1 200 180
(c) Other current liabilities 2 70 50
Assets
1 Current assets
(a) Inventories 200 180
(b) Trade Receivables 400 250
(c) Other current assets 3 195 180

Statement of Profit and Loss of ABC Ltd.

for the year ended 31st March, 20X1

Particulars Notes ` in lakhs

I Revenue from operations 4,150
II Other income 4 100
III Total income (I + II) 4,250
Expenses:
Purchases of Stock-in-Trade 2,400
Change in inventories of finished goods (20)
Employee benefits expense 800
Depreciation expense 100
Finance cost 5 60
Other expenses 200
IV Total expenses 3,540

© The Institute of Chartered Accountants of India

 FINANCIAL STATEMENTS OF COMPANIES 11.105

V Profit before tax (III – IV) 710

VI Tax expense:
Current tax 200
VII Profit for the year from 510
continuing operations

Appropriations

Balance of Profit and Loss account brought forward 50

Transfer to general reserve 200
Dividend paid 330

Notes to accounts:

20X1 20X0
(` in lakhs) (` in lakhs)
1 Short term Provisions:
Provision for Tax 200 180
2 Other current liabilities:
Outstanding wages 50 40
Outstanding expenses 20 10
Total 70 50
3 Other current assets:
Advance tax 195 180
4 Other income:
Interest and dividend 100
5 Finance cost:
Interest 60

Compute cash flow from operating activities using both direct and indirect method.

© The Institute of Chartered Accountants of India

 11.106 ADVANCED ACCOUNTING

Solution
Cash Flows from Operating Activities

` in lakhs ` in lakhs
Using Direct Method
Cash Receipts:

Cash sales and collection from Trade

receivables
Sales + Opening Trade receivables – Closing 4,150 + 250 − 400 4,000
Trade receivables (A)
Cash payments:
Cash purchases & payment to Trade payables
Purchases + Opening Trade payables – 2,400 + 230 − 250 2,380
Closing Trade payables
Wages and salaries paid 800 + 40 − 50 790
Cash expenses 200 + 10 – 20 190
Taxes paid – Advance tax 195

(B) 3,555

Cash flow from operating activities (A – B) 445

Using Indirect Method

Profit before tax 710

Add: Non-cash items : Depreciation 100
Add: Interest : Financing cash inflow 60

Less: Interest and Dividend : Investment cash (100)

outflow
Less: Tax paid (195)

Working capital adjustments

© The Institute of Chartered Accountants of India

 FINANCIAL STATEMENTS OF COMPANIES 11.107

Trade receivables 250−400 (150)

Inventories 180−200 (20)

Trade payables 250−230 20

Outstanding wages 50−40 10
Outstanding expenses 20−10 10 (130)

Cash flow from operating activities 445

Illustration 11
Prepare Cash flow for Gamma Ltd., for the year ending 31.3.20X1 from the
following information:
(1) Sales for the year amounted to ` 135 crores out of which 60% was cash sales.
(2) Purchases for the year amounted to ` 55 crores out of which credit purchase
was 80%.
(3) Administrative and selling expenses amounted to ` 18 crores and salary paid
amounted to ` 22 crores.
(4) The Company redeemed debentures of ` 20 crores at a premium of 10%.
Debenture holders were issued equity shares of ` 15 crores towards
redemption and the balance was paid in cash. Debenture interest paid during
the year was ` 1.5 crores.
(5) Dividend paid during the year amounted to ` 11.7 crores.

(6) Investment costing ` 12 crores were sold at a profit of ` 2.4 crores.

(7) ` 8 crores was paid towards income tax during the year.
(8) A new plant costing ` 21 crores was purchased in part exchange of an old
plant. The book value of the old plant was ` 12 crores but the vendor took
over the old plant at a value of ` 10 crores only. The balance was paid in
cash to the vendor.

© The Institute of Chartered Accountants of India

 11.108 ADVANCED ACCOUNTING

(9) The following balances are also provided:

` in crores ` in crores
1.4.20X0 31.3.20X1

Debtors 45 50
Creditors 21 23

Bank 6 18.2

Solution
Gamma Ltd.
Cash Flow Statement for the year ended 31st March, 20X1
(Using direct method)

Particulars ` in crores ` in crores

Cash flows from operating activities

Cash sales (60% of 135) 81
Cash receipts from Debtors 49
[45+ (135x40%) - 50]
Cash purchases (20% of 55) (11)
Cash payments to suppliers (42)
[21+ (55x80%) – 23]
Cash paid to employees (22)
Cash payments for overheads (Adm. and selling) (18)
Cash generated from operations 37
Income tax paid (8)
Net cash generated from operating activities 29
Cash flows from investing activities
Sale of investments (12+ 2.40) 14.4
Payments for purchase of fixed assets (21 – 10) (11)
Net cash generated from investing activities 3.4

© The Institute of Chartered Accountants of India

 FINANCIAL STATEMENTS OF COMPANIES 11.109

Cash flows from financing activities

Redemption of debentures (22-15) (7)
Interest paid (1.5)
Dividend paid (11.7)
Net cash used in financing activities (20.2)
Net increase in cash 12.2
Cash at beginning of the period 6.0
Cash at end of the period 18.2

Significant non-cash items:

(a) Debenture-holders received equity shares of ₹ 15 crores on redemption of
the debentures.
(b) Plant having book value of ₹ 12 crores was given in exchange of an asset
costing ₹ 21 crores. The said plant was transferred at a value of ₹ 10 crores
only, and ₹ 11 crores was paid for the balance dues towards the plant.
Illustration 12
From the following information of Mr. Zen, prepare a Cash flow statement as per
AS-3 for the year ended 31.3.20X1:
Ledger balances of Mr. Zen as of 20X0 and 20X1

As on 1.4.20X0 As on 1.4.20X1
` `
Zen’s Capital A/c 10,00,000 12,24,000
Trade payables 3,20,000 3,52,000
Mrs. Zen’s loan 2,00,000 --
Loan from Bank 3,20,000 4,00,000
Land 6,00,000 8,80,000
Plant and Machinery (net block) 6,40,000 4,40,000
Inventories 2,80,000 2,00,000
Trade receivables 2,40,000 4,00,000
Cash 80,000 56,000

© The Institute of Chartered Accountants of India

 11.110 ADVANCED ACCOUNTING

Additional information:
A machine costing ` 80,000 (accumulated depreciation there on `24,000) was sold
for ` 40,000. The provision for depreciation on 1.4.20X0 was ` 2,00,000 and
31.3.20X1 was ` 3,20,000. The net profit for the year ended on 31.3.20X1 was
` 3,60,000.
Solution
Cash Flow Statement of Mr. Zen as per AS 3
for the year ended 31.3.20X1

(i) Cash flow from operating activities

Net Profit (given) 3,60,000

Adjustments for

Depreciation on Plant & Machinery (W.N.2) 1,44,000

Loss on Sale of Machinery (W.N.1) 16,000 1,60,000

Operating Profit before working capital 5,20,000

changes

Decrease in inventories 80,000

Increase in trade receivables (1,60,000)

Increase in trade payables 32,000 (48,000)

Net cash generated from operating activities 4,72,000

(ii) Cash flow from investing activities

Sale of Machinery (W.N.1) 40,000

Purchase of Land (8,80,000 – 6,00,000) (2,80,000)

Net cash used in investing activities (2,40,000)

© The Institute of Chartered Accountants of India

 FINANCIAL STATEMENTS OF COMPANIES 11.111

(iii) Cash flow from financing activities

Repayment of Mrs. Zen’s Loan (2,00,000)

Drawings (W.N.3) (1,36,000)

Loan from Bank 80,000
Net cash used in financing activities (2,56,000)

Net decrease in cash (24,000)

Opening balance as on 1.4.20X0 80,000

Cash balance as on 31.3.20X1 56,000

Working Notes:
1. Plant & Machinery A/c

` `
To Balance b/d 8,40,000 By Cash – Sales 40,000

(6,40,000 + 2,00,000) By Provision for 24,000

Depreciation A/c
By Profit & Loss A/c – 16,000
Loss on Sale (80,000 –
64,000)
By Balance c/d
(4,40,000+3,20,000) 7,60,000

8,40,000 8,40,000

2. Provision for depreciation on Plant and Machinery A/c

` `
To Plant and 24,000 By Balance b/d 2,00,000
Machinery A/c
To Balance c/d 3,20,000 By Profit & Loss A/c 1,44,000
(Bal. fig.)
3,44,000 3,44,000

© The Institute of Chartered Accountants of India

 11.112 ADVANCED ACCOUNTING

3. To find out Mr. Zen’s drawings:

`
Opening Capital 10,00,000
Add: Net Profit 3,60,000
13,60,000
Less: Closing Capital (12,24,000)
Drawings 1,36,000

Note: Students may note that in case there is an increase in the amount of
debentures/ loans during the year and the interest is required to be
computed, then in such a case, students may choose either to compute
interest on the closing balance of the debentures or may compute interest
on opening balance for full year (in case of no repayment) and
proportionate interest on additions. Suitable note for assumption may be
given in the solution for this.

SUMMARY
• Cash flow statement dealt under AS 3.
• Benefits include providing information relating to changes in cash and cash
equivalents of an enterprise.
• Cash include:
(a) Cash in hand and (b) Demand deposits with banks
• Cash equivalents are short term, highly liquid investments that are readily
convertible into known amounts of cash and which are subject to an
insignificant risk of changes in value.

• Cash flow activities may be classified as inflow and outflow but as per AS-3
they are classified as Operating Activities, Investing activities, Financing
activities.

• Operating activities are principal revenue generating activities.

• Investing Activities relate to acquisition and disposal of long-term assets
and other investments.

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 FINANCIAL STATEMENTS OF COMPANIES 11.113

• Financing Activities include the ones which result in changes in the size and
composition of the owner’s capital (including preference share capital) and
borrowings of the enterprise.
• Methods to calculate cash flow from operating activities include:
(a) Direct Method

(b) Indirect Method

• In order to calculate cash flow from investing activities inflows and outflows
related to acquisition and disposal of assets, other than those related to
operating activities, are shown under this category.
• In order to calculate cash flow from financing activities inflows and outflows
related to the amount of capital and borrowings of the enterprise are shown
under this head.

TEST YOUR KNOWLEDGE

Multiple Choice Questions

1. While preparing cash flow statement, conversion of debt to equity

(a) Should be shown as a financing activity.

(b) Should be shown as an investing activity.

(c) Should not be shown as it is a non-cash transaction

(d) Should not be shown as operating activity.

2. Which of the following would be considered a ‘cash-flow item from an

“investing" activity’?

(a) Cash outflow to the government for payment of taxes.

(b) Cash outflow to purchase bonds issued by another company.

(c) Cash outflow to shareholders as dividends

(d) Cash outflow to make payment to trade payables.

© The Institute of Chartered Accountants of India

 11.114 ADVANCED ACCOUNTING

3. All of the following would be included in a company’s operating activities

except:

(a) Income tax payments

(b) Collections from customers or Cash payments to suppliers

(c) Dividend payments

(d) Office and selling expenses.

4. Hari Uttam, a stock broking firm, received ` 1,50,000 as premium for forward
contracts entered for purchase of equity shares. How will you classify this
amount in the cash flow statement of the firm?

(a) Operating Activities.

(b) Investing Activities.

(c) Financing Activities.

(d) Non-cash transaction

5. As per AS 3 on Cash Flow Statements, cash received by a manufacturing

company from sale of shares of ABC Company Ltd. should be classified as
(a) Operating activity.
(b) Financing activity.
(c) Investing activity.
(d) Non-cash transaction

Theoretical Questions
6. What is the significance of cash flow statement? Explain in brief.
7. Explain the difference between direct and indirect methods of reporting cash
flows from operating activities with reference to AS 3.

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 FINANCIAL STATEMENTS OF COMPANIES 11.115

Scenario based Questions

8. Classify the following activities as (a) Operating activities, (b) Investing
activities (c) Financing activities (d) Cash equivalents with reference to AS 3
(Revised).
(a) Brokerage paid on purchase of investments
(b) Underwriting commission paid
(c) Trading commission received
(d) Proceeds from sale of investment
(e) Purchase of goodwill
(f) Redemption of preference shares
(g) Rent received from property held as investment
(h) Interest paid on long-term borrowings
(i) Marketable securities (having risk of change in value)
(j) Refund of income tax received
9. How will you disclose following items while preparing Cash Flow Statement of
Gagan Ltd. as per AS-3 for the year ended 31st March, 20X2?
(i) 10% Debentures issued: As on 01-04-20X1 ` 1,10,000
As on 31-03-20X2 ` 77,000

(ii) Debentures were redeemed at 5% premium at the end of the year.

Premium was charged to the Profit & Loss Account for the year.
(iii) Unpaid Interest on Debentures: As on 01-04-20X1 ` 275
As on 31-03-20X2 ` 1,175
(iv) Debtors of ` 36,000 were written off against the Provision for Doubtful
Debts A/c during the year.
(v) 10% Bonds (Investments): As on 01-04-20X1 ` 3,50,000
As on 31-03-20X2 ` 3,50,000
(vi) Accrued Interest on Investments: As on 31-03-20X2 ` 10,500

© The Institute of Chartered Accountants of India

 11.116 ADVANCED ACCOUNTING

10. From the following Balance sheet of Grow More Ltd., prepare Cash Flow
Statement for the year ended 31st March, 20X1 :

Particulars Notes 31st March, 31st March,

20X1 20X0
Equity and Liabilities
1 Shareholders’ funds
A Share capital 10,00,000 8,00,000
B Reserves and Surplus 1 3,00,000 2,10,000
2 Non-current liabilities
Long term borrowings 2 2,00,000 -
3 Current liabilities
A Trade Payables 7,00,000 8,20,000
B Other current liabilities 3 - 1,00,000
C Short term provision 1,00,000 70,000
(provision for tax)
Total 23,00,000 20,00,000
Assets
1 Non-current assets
A Property, plant and 13,00,000 9,00,000
Equipment 4
B Non-Current Investments 1,00,000 -
2 Current assets
A Inventories 4,00,000 2,00,000
B Trade receivables 5,00,000 7,00,000
C Cash and Cash equivalents - 2,00,000
Total 23,00,000 20,00,000
Notes to accounts

No. Particulars 31st March, 20X1 31st March, 20X0

1 Reserves and Surplus

General reserve 2,00,000 1,50,000

© The Institute of Chartered Accountants of India

 FINANCIAL STATEMENTS OF COMPANIES 11.117

Profit and Loss account 1,00,000 60,000

Total 3,00,000 2,10,000

2 Long term borrowings

Debentures (issued at end of 2,00,000 --
year)

3. Other current liabilities

Dividend payable - 1,00,000

4 Property, plant and
equipment
Plant and machinery 7,00,000 5,00,000
Land and building 6,00,000 4,00,000
Net carrying value 13,00,000 9,00,000
(i) Depreciation @ 25% was charged on the opening value of Plant and
Machinery.
(ii) At the year end, one old machine costing ` 50,000 (WDV ` 20,000) was
sold for ` 35,000. Purchase was also made at the year end.
(iii) ` 50,000 was paid towards Income tax during the year.
(iv) Construction of the building got completed on 31.03.20X1 and hence no
depreciation may be charged on the same.
Prepare Cash flow Statement.
11. From the following Balance Sheets and information, prepare Cash Flow
Statement of Ryan Ltd. by Indirect method for the year ended 31st March,
20X1:

Particulars Notes 31st March 31st March

20X1` 20X0 `
Equity and Liabilities
1 Shareholders’ funds

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 11.118 ADVANCED ACCOUNTING

A Share capital 1 6,00,000 7,00,000

B Reserves and Surplus 2 4,20,000 3,00,000
2 Non-current liabilities
Long term borrowings 3 2,00,000 -
3 Current liabilities
A Trade Payables 1,15,000 1,10,000
B Other current liabilities 4 30,000 80,000
C Short term provision (provision for
tax) 95,000 60,000
Total 14,60,000 12,50,000
Assets
1 Non-current assets
A Property, plant and Equipment 5 9,15,000 7,00,000
B Non-Current Investments 50,000 80,000
2 Current assets
A Inventories 95,000 90,000
B Trade receivables 2,50,000 2,25,000
C Cash and Cash equivalents 50,000 90,000
D Other Current assets 1,00,000 65,000
Total 14,60,000 12,50,000
Notes to accounts

No. 31st March, 31st March,

20X1 20X0

1. Share capital
Equity share capital 6,00,000 5,00,000

10% Redeemable Preference share

capital -- 2,00,000
Total 6,00,000 7,00,000

© The Institute of Chartered Accountants of India

 FINANCIAL STATEMENTS OF COMPANIES 11.119

2 Reserves and Surplus

Capital redemption reserve 1,00,000 -
Capital reserve 70,000 -
General reserve 1,50,000 2,50,000
Profit and Loss account 1,00,000 50,000
Total 4,20,000 3,00,000

3 Long term borrowings

9% Debentures 2,00,000 --

4. Other current liabilities

Dividend payable - 60,000

Liabilities for expenses 30,000 20,000

Total 30,000 80,000

5 Property, plant and equipment

Plant and machinery 7,65,000 5,00,000

Land and building 1,50,000 2,00,000

Net carrying value 9,15,000 7,00,000

Additional Information:

(i) A piece of land has been sold out for `1,50,000 (Cost – `1,20,000) and
the balance land was revalued. Capital Reserve consisted of profit on
revaluation of land.
(ii) On 1st April, 20X0 a plant was sold for `90,000 (Original Cost – `70,000
and W.D.V. – ` 50,000) and Debentures worth `1 lakh were issued at
par as part consideration for plant of `4.5 lakhs acquired.
(iii) Part of the investments (Cost – `50,000) was sold for `70,000.

© The Institute of Chartered Accountants of India

 11.120 ADVANCED ACCOUNTING

(iv) Pre-acquisition dividend received `5,000 was adjusted against cost of

investment.
(v) Interim dividend was declared and paid @ 15% during the current year.
(vi) Income-tax liability for the current year was estimated at `1,35,000.
(vii) Depreciation @ 15% has been charged on Plant and Machinery but no
depreciation has been charged on Building.
12. The Balance Sheet of New Light Ltd. as at 31st March, 20X1 and 20X0 (for the
years ended) are as follows:

` `
Notes 31 March
st
31 March
st

20X0 20X1
Equity and Liabilities
1 Shareholders’ funds
A Share capital 1 16,00,000 18,80,000
B Reserves and Surplus 2 8,40,000 11,00,000
2 Non-current liabilities
Long term borrowings 3 4,00,000 2,80,000
3 Current liabilities
A Other current liabilities 4 6,00,000 5,20,000
B Short term provision
(provision for tax) 3,60,000 3,40,000
Total 38,00,000 41,20,000

Assets

1 Non-current assets

A Property, plant and 22,80,000 26,40,000

Equipment 5

B Non-Current Investments 4,00,000 3,20,000

2 Current assets

A Cash and Cash equivalents 10,000 10,000

© The Institute of Chartered Accountants of India

 FINANCIAL STATEMENTS OF COMPANIES 11.121

B Other Current assets 11,10,000 11,50,000

Total 38,00,000 41,20,000

Notes to accounts

No. Particulars 31st March, 31st March,

20X0
20X1

1. Share capital
Equity share capital 12,00,000 16,00,000
10% Preference share capital 4,00,000 2,80,000
Total 16,00,000 18,80,000
2 Reserves and Surplus
General reserve 6,00,000 7,60,000
Profit and Loss account 2,40,000 3,40,000
Total 8,40,000 11,00,000
3 Long term borrowings
9% Debentures 4,00,000 2,80,000
Total 4,00,000 2,80,000
4. Other current liabilities
Dividend payable 1,20,000 -
Current Liabilities 4,80,000 5,20,000
Total 6,00,000 5,20,000
5 Property, plant and
equipment

Property, plant and equipment 32,00,000 38,00,000

Less: Depreciation (9,20,000) (11,60,000)
Net carrying value 22,80,000 26,40,000

Additional information:

(i) The company sold one property, plant and equipment for ` 1,00,000, the

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 11.122 ADVANCED ACCOUNTING

cost of which was ` 2,00,000 and the depreciation provided on it was

`80,000.

(ii) The company also decided to write off another item of property, plant
and equipment costing ` 56,000 on which depreciation amounting to
` 40,000 has been provided.

(iii) Depreciation on property, plant and equipment provided ` 3,60,000.

(iv) Company sold some investment at a profit of ` 40,000.

(v) Debentures and preference share capital redeemed at 5% premium.

Debentures were redeemed at the year end.

(vi) Company decided to value inventory at cost, whereas previously the

practice was to value inventory at cost less 10%. The inventory
according to books on 31.3.20X0 was ` 2,16,000. The inventory on
31.3.20X1 was correctly valued at ` 3,00,000.

Prepare Cash Flow Statement as per revised Accounting Standard 3 by indirect

method.

13. ABC Ltd. gives you the Balance sheets as at 31st March 20X0 and 31st March
20X1. You are required to prepare Cash Flow Statement by using indirect
method as per AS 3 for the year ended 31st March 20X1:

Particulars Notes ` `
31st March 31st March
20X0 20X1

Equity and Liabilities

1 Shareholders’ funds

A Share capital 50,00,000 50,00,000

B Reserves and Surplus 26,50,000 36,90,000

2 Non-current liabilities

Long term borrowings 1 - 9,00,000

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 FINANCIAL STATEMENTS OF COMPANIES 11.123

3 Current liabilities
A Short-term borrowings 1,50,000 3,00,000
(Bank loan)
B Trade payables 8,80,000 8,20,000
C Other current liabilities 2 4,80,000 2,70,000
Total 91,60,000 1,09,80,000
Assets
1 Non-current assets
A Property, plant and 21,20,000 32,80,000
Equipment 3
2 Current assets
A Current Investments 11,80,000 15,00,000
B Inventory 20,10,000 19,20,000
C Trade receivables 4 22,40,000 26,40,000
D Cash and Cash equivalents 15,20,000 15,20,000
E Other Current assets (Prepaid 90,000 1,20,000
expenses)
Total 91,60,000 1,09,80,000

Notes to accounts

No. Particulars `20X0 20X1

1 Long term borrowings

9% Debentures (issued at the end of year) - 9,00,000

Total - 9,00,000

2. Other current liabilities

Dividend payable 1,50,000 -

Liabilities for expenses 3,30,000 2,70,000

Total 4,80,000 2,70,000

© The Institute of Chartered Accountants of India

 11.124 ADVANCED ACCOUNTING

3 Property, plant and equipment

Plant and machinery 27,30,000 40,70,000

Less: Depreciation (6,10,000) (7,90,000)

Net carrying value 21,20,000 32,80,000

4 Trade receivables

Gross amount 23,90,000 28,30,000

Less: Provision for doubtful debts (1,50,000) (1,90,000)

Total 22,40,000 26,40,000

Additional Information:
(i) Net profit for the year ended 31st March, 20X1, after charging
depreciation ` 1,80,000 is ` 10,40,000.
(ii) Trade receivables of ` 2,30,000 were determined to be worthless and
were written off against the provisions for doubtful debts account
during the year.
14. Following is the Balance Sheet of Fox Ltd. You are required to prepare cash
flow statement using Indirect Method.

Particulars Note 31st 31st

No. March,20X2 March,20X1
(`) (`)
(I) Equity and Liabilities
1. Shareholders’ Funds
(a) Share capital 1 5,60,000 3,00,000
(b) Reserve and Surplus 2 35,000 25,000
2. Current Liabilities
(a) Trade payables 1,50,000 60,000
(b) Short-term 8,000 5,000
provisions
(Provision for taxation)
Total 7,53,000 3,90,000

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 FINANCIAL STATEMENTS OF COMPANIES 11.125

(II) Assets
1. Non-current assets
(a) Property, Plant and 3,50,000 1,80,000
Equipment
2. Current assets
(a) Inventories 1,20,000 50,000
(b) Trade receivables 1,00,000 25,000
(c) Cash and cash 1,05,000 90,000
equivalents
(d) Other current assets 78,000 45,000
Total 7,53,000 3,90,000
Notes to Accounts
Particulars 31st 31st
March,20X2 (`) March,20X1
(`)
1. Share capital
(a) Equity share capital 4,10,000 2,00,000
(b) Preference share capital 1,50,000 1,00,000
5,60,000 3,00,000
2. Reserve and surplus
Surplus in statement of profit and 25,000
loss at the beginning of the year
Add: Profit of the year 20,000
Less: Dividend (10,000)
Surplus in statement of profit and 35,000 25,000
loss at the end of the year
Additional Information:
1. Dividend paid during the year ` 10,000
2. Depreciation charges during the year ` 40,000.

© The Institute of Chartered Accountants of India

 11.126 ADVANCED ACCOUNTING

ANSWERS/ HINTS

Answer to the Multiple Choice Questions

1. (c) 2. (b) 3. (c) 4. (a) 5. (c)

Answer to the Theoretical Questions

6. Cash flow statement provides information about the changes in cash and
cash equivalents of an enterprise. It identifies cash generated from trading
operations and is very useful tool of planning.
7. As per Para 18 of AS 3 (Revised) on Cash Flow Statements, an enterprise
should report cash flows from operating activities using either:
(a) The direct method, whereby major classes of gross cash receipts and
gross cash payments are disclosed; or
(b) the indirect method, whereby net profit or loss is adjusted for the
effects of transactions of a non-cash nature, any deferrals or accruals
of past or future operating cash receipts or payments, and items of
income or expense associated with investing or financing cash flows.

Answer to the Scenario based Questions

8. Classification of activities with reference to AS 3

a. Brokerage paid on purchased of Investing Activities

investments
b. Underwriting Commission paid Financing Activities
c. Trading Commission received Operating Activities
d. Proceeds from sale of investment Investing Activities
e. Purchase of goodwill Investing Activities
f. Redemption of Preference shares Financing Activities
g. Rent received from property held as Investing Activities
investment

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 FINANCIAL STATEMENTS OF COMPANIES 11.127

h. Interest paid on long term borrowings Financing Activities

i. Marketable securities Not a Cash equivalent
j. Refund of Income tax received Operating activities

9. Cash Flow Statement of M/s Gagan Ltd.

for the year ended March 31, 20X2

A Cash Flow from Operating Activities

Net Profit as per Profit & Loss A/c xxxxx
Add: Premium on Redemption of Debentures 1,650
Add: Interest on 10% Debentures 11,000
Less: Interest on 10% Investments (35,000)
B Cash Flow from Investing Activities
Interest on Investments [35,000-10,500] 24,500
C Cash Flow from Financing Activities
Interest on Debentures paid [11,000 - (1,175 - 275)] -
(10,100)
outflow
Redemption of Debentures [(1,10,000 - 77,000) at 5%
(34,650)
premium] - outflow

Note: Debtors written off against provision for doubtful debts does not
require any further adjustment in Cash Flow Statement.

10. Cash Flow Statement of Grow More Ltd.

for the year ended 31st March, 20X1
Cash Flow from Operating Activities

Increase in balance of Profit and Loss Account 40,000

(1,00,000 – 60,000)
Provision for taxation (W.N.1) 80,000
Transfer to General Reserve (2,00,000 – 1,50,000) 50,000
Depreciation (W.N.2) 1,25,000

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 11.128 ADVANCED ACCOUNTING

Profit on sale of Plant and Machinery (15,000)

Operating Profit before Working Capital changes 2,80,000
Increase in Inventories (2,00,000)
Decrease in Trade receivables 2,00,000
Decrease in Trade payables (1,20,000)
Cash generated from operations 1,60,000
Income tax paid (50,000)
Net Cash generated from operating activities 1,10,000

Cash Flow from Investing Activities

Purchase of fixed assets (3,45,000)

Expenses on building (6,00,000 – 4,00,000) (2,00,000)

Increase in investments (1,00,000)

Sale of old machine 35,000

Net Cash used in investing activities (6,10,000)

Cash Flow from Financing activities

Proceeds from issue of shares 2,00,000

(10,00,000 – 8,00,000)

Proceeds from issue of debentures 2,00,000

Dividend paid (1,00,000)

Net cash generated from financing activities 3,00,000

Net decrease in cash and cash equivalents (2,00,000)

Cash and Cash equivalents at the beginning of 2,00,000

the year

Cash and Cash equivalents at the end of the year Nil

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 FINANCIAL STATEMENTS OF COMPANIES 11.129

Working Notes:
1. Provision for taxation account

` `
To Cash (Paid) 50,000 By Balance b/d 70,000
To Balance c/d 1,00,000 By Profit and Loss 80,000
A/c
(Balancing
figure)
1,50,000 1,50,000

2. Plant and Machinery account

` `
To Balance b/d 5,00,000 By Depreciation 1,25,000
To Profit and Loss A/c 15000
(profit on sale of
machine)
To Cash (Balancing 3,45,000 By Cash (sale of 35,000
figure) machine)
_______ By Balance c/d 7,00,000
8,60,000 8,60,000

11. Cash Flow Statement of Ryan Limited

For the year ended 31st March, 20X1

` `
Cash flow from operating activities
2,75,000
Net Profit before taxation (W.N.1)

Adjustment for

Depreciation (W.N.3) 1,35,000

Profit on sale of land (30,000)

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 11.130 ADVANCED ACCOUNTING

Profit on sale of plant (W.N.3) (40,000)

Profit on sale of investments (W.N.4) (20,000)
Interest on debentures (2,00,000 X 9%) 18,000
Operating profit before working capital 3,38,000
changes
Increase in inventory (5,000)
Increase in trade receivables (25,000)
Increase in Other current assets (W.N.9) (35,000)
Increase in Trade payables 5,000
Increase in liabilities for expenses 10,000
Cash generated from operations 2,88,000
Income taxes paid (W.N.8) (1,00,000)
Net cash generated from operating activities 1,88,000
Cash flow from investing activities
Proceeds from sale of land (W.N.2) 1,50,000
Proceeds from sale of plant (W.N.3) 90,000
Proceeds from sale of investments (W.N.4) 70,000
Purchase of plant (W.N.3) (3,50,000)
Purchase of investments (W.N.4) (25,000)
Pre-acquisition dividend received (W.N.4) 5,000
Net cash used in investing activities (60,000)
Cash flow from financing activities
Proceeds from issue of equity shares 1,00,000
(6,00,000 – 5,00,000)
Proceeds from issue of debentures 1,00,000
(2,00,000 – 1,00,000)
Redemption of preference shares (2,00,000)
Dividends paid (1,50,000)

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 FINANCIAL STATEMENTS OF COMPANIES 11.131

Interest paid on debentures (18,000)

Net cash used in financing activities (1,68,000)

Net decrease in cash and cash equivalents (40,000)

Cash and cash equivalents at the beginning of 90,000
the year

Cash and Cash equivalents at the end of the 50,000

year
Significant Non-cash Items:
Debentures amounting to ` 1,00,000 have been issued as part consideration
for acquisition of plant of ` 4,50,000.
Working Notes:

1. `
Net profit before taxation
Retained profit 1,00,000
Less: Balance as on 31.3.20X0 (50,000)

50,000
Provision for taxation 1,35,000
Dividend 90,000

2,75,000

2. Land and Building Account

` `
To Balance b/d 2,00,000 By Cash (Sale) 1,50,000
To Profit and Loss A/c 30,000 By Balance c/d 1,50,000
(Profit on sale)
To Capital reserve
(Revaluation profit) 70,000
3,00,000 3,00,000

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 11.132 ADVANCED ACCOUNTING

3. Plant and Machinery Account

` `
To Balance b/d 5,00,000 By Cash (Sale) 90,000
To Profit and loss By Depreciation 1,35,000
account 40,000
To Debentures 1,00,000 By Balance c/d 7,65,000
To Bank 3,50,000
9,90,000 9,90,000

4. Investments Account
` `
To Balance b/d 80,000 By Cash (Sale) 70,000
To Profit and loss By Dividend
To account 20,000 (Pre-
Bank (Balancing acquisition) 5,000
figure) 25,000
By Balance c/d 50,000
1,25,000 1,25,000

5. Capital Reserve Account

` `
To Balance c/d 70,000 By Profit on
revaluation
of land 70,000
70,000 70,000

6. General Reserve Account

` `
To Capital redemption By Balance b/d 2,50,000
reserve 1,00,000
T0 Balance c/d 1,50,000
2,50,000 2,50,000

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 FINANCIAL STATEMENTS OF COMPANIES 11.133

7. Dividend payable Account

` `
To Bank (Balancing By Balance b/d 60,000
figure) 1,50,000
To Balance c/d - By Profit and
loss
account 90,000
1,50,000 1,50,000
8. Provision for Taxation Account

` `
To Bank (Balancing 1,00,000 B Balance b/d 60,000
figure) y
To Balance c/d 95,000 B Profit and loss 1,35,000
y account

1,95,000 1,95,000

9. Other Current Assets Account

` `
To Balance b/d 65,000 By Balance c/d 1,00,000
To Bank (Balancing
figure) 35,000

1,00,000 1,00,000

12. New Light Ltd.

Cash Flow Statement for the year ended 31st March, 20X1

A. Cash Flow from operating activities ` `

Profit after appropriation
Increase in profit and loss A/c after inventory
adjustment [`3,40,000 – (`2,40,000 + 76,000
`24,000)]

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 11.134 ADVANCED ACCOUNTING

Transfer to general reserve 1,60,000

Provision for tax 3,40,000

Net profit before taxation and extraordinary 5,76,000

item
Adjustments for:

Depreciation 3,60,000
Loss on sale of property, plant and equipment 20,000
Decrease in value of property, plant and 16,000
equipment
Profit on sale of investment (40,000)
Premium on redemption of preference share 6,000
capital
Interest on debentures 36,000
Premium on redemption of debentures 6,000

Operating profit before working capital 9,80,000

changes
Increase in current liabilities
(`5,20,000 –`4,80,000) 40,000
Increase in other current assets
[`11,50,000 – (` 11,10,000 + `24,000)] (16,000)
Cash generated from operations 10,04,000
Income taxes paid (3,60,000)

Net Cash generated from operating activities 6,44,000

B. Cash Flow from investing activities

Purchase of property, plant and equipment (8,56,000)

(W.N.3)
Proceeds from sale of property, plant and 1,00,000
equipment (W.N.3)

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 FINANCIAL STATEMENTS OF COMPANIES 11.135

Proceeds from sale of investments (W.N.2) 1,20,000

Net Cash used in investing activities (6,36,000)

C. Cash Flow from financing activities

Proceeds from issuance of share capital 4,00,000

Redemption of preference share capital (1,26,000)

(`1,20,000 + `6,000)

Redemption of debentures (1,26,000)

(` 1,20,000 +` 6,000)

Dividend paid (1,20,000)

Interest on debentures (36,000)

Net Cash generated from financing activities (8,000)

Net increase/decrease in cash and cash Nil

equivalent during the year

Cash and cash equivalent at the beginning of 10,000

the year

Cash and cash equivalent at the end of the 10,000

year

Working Notes:

1. Revaluation of inventory will increase opening inventory by ` 24,000.

2,16,000/90 x 10 = ` 24,000
Therefore, opening balance of other current assets would be as
follows:
` 11,10,000 + ` 24,000 = ` 11,34,000
Due to under valuation of inventory, the opening balance of profit and
loss account be increased by ` 24,000.
The opening balance of profit and loss account after revaluation of
inventory will be ` 2,40,000 + ` 24,000 = ` 2,64,000

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 11.136 ADVANCED ACCOUNTING

2. Investment Account
` `
To Balance b/d 4,00,000 By Bank A/c 1,20,000

To Profit and Loss (balancing figure

A/c being investment
sold)
(Profit on sale 40,000 By
3,20,000
of investment) Balance c/d

4,40,000 4,40,000

3. Property, Plant and Equipment Account

` ` `
To Balance b/d 32,00,000 By Bank A/c (sale 1,00,000
of assets)
To Bank A/c 8,56,000 By Accumulated
depreciation
(balancing
A/c
figure being 80,000
By
assets Profit and loss
purchased) A/c (loss
on sale of
assets) 20,000 2,00,000

By Accumulated
depreciation
A/c
40,000
By Profit and loss
A/c
(assets written
off)
16,000 56,000
By Balance c/d 38,00,000
40,56,000 40,56,000

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 FINANCIAL STATEMENTS OF COMPANIES 11.137

4. Accumulated Depreciation Account

` `
To Property, 80,000 By Balance b/d 9,20,000
plant and
equipment
A/c
To Property, 40,000 By Profit and loss 3,60,000
plant and A/c (depreciation
equipment for the year)
A/c

To Balance c/d 11,60,000

12,80,000 12,80,000

13. Cash Flow Statement of ABC Ltd. for the year ended 31.3.20X1

Cash flows from Operating Activities ` `

Net Profit 10,40,000

Add: Adjustment For Depreciation (`7,90,000 – 1,80,000

`6,10,000)
Add: Adjustment for Provision for Doubtful Debts 2,70,000
(` 4,20,000 – `1,50,000)

Operating Profit Before Working Capital Changes 14,90,000

Add: Decrease in Inventories 90,000

(` 20,10,000 – ` 19,20,000)

15,80,000

Less: Increase in Current Assets

Trade Receivables
(` 30,60,000 – `23,90,000) 6,70,000

Prepaid Expenses (` 1,20,000 – `90,000) 30,000

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 11.138 ADVANCED ACCOUNTING

Decrease in Current Liabilities:

Trade Payables (` 8,80,000 – ` 8,20,000) 60,000

Expenses Outstanding
(` 3,30,000 – ` 2,70,000) 60,000 (8,20,000)

Net Cash generated from Operating Activities 7,60,000

Cash Flows from Investing Activities

Investment in Current Investments (3,20,000)

Purchase of Plant & Machinery
(` 40,70,000 – ` 27,30,000)
(13,40,000)

Net Cash Used in Investing Activities (16,60,000)

Cash Flows from Financing Activities

Bank Loan Raised (` 3,00,000 – ` 1,50,000) 1,50,000

Issue of Debentures 9,00,000

Payment of Dividend (1,50,000)

Net Cash Used in Financing Activities 9,00,000

Net Increase in Cash During the Year -

Add: Cash and Cash Equivalents as on 1.4.20X0 15,20,000

Cash and Cash Equivalents as on 31.3.20X1 15,20,000

Note:

1. Bad debts amounting ` 2,30,000 were written off against provision for
doubtful debts account during the year. In the above solution, Bad
debts have been added back in the balances of provision for doubtful
debts and trade receivables as on 31.3.20X1. Alternatively, the
adjustment of writing off bad debts may be ignored and the solution
can be given on the basis of figures of trade receivables and provision
for doubtful debts as appearing in the balance sheet on 31.3.20X1.

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 FINANCIAL STATEMENTS OF COMPANIES 11.139

2. Current investments (i.e. Marketable securities) may not be readily

convertible to a known amount of cash and be subject to an
insignificant risk of changes in value as per the requirements of AS 3
and hence those have been considered as investing activities.

14. Fox Ltd.

Cash Flow Statement for the year ended 31st March, 20X2

` `
Cash flows from operating activities

Net Profit (35,000 less 25,000) 10,000

Add: Dividend 10,000

Provision for tax 8,000

Net profit before taxation and extraordinary 28,000

items

Adjustments for:

Depreciation 40,000

Operating profit before working capital changes 68,000

Increase in trade receivables (75,000)

Increase in inventories (70,000)

Increase in other current assets (33,000)

Increase in trade payables 90,000 (88,000)

Cash used in operating activities (20,000)

Less: Tax paid* (5,000)

Net cash used in operating activities (25,000)

Cash flows from investing activities

Purchase of PPE (2,10,000)

Net cash used in investing activities (2,10,000)

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 11.140 ADVANCED ACCOUNTING

Cash flows from financing activities

Issue of equity shares for cash 2,10,000

Issue of preference shares 50,000

Dividends paid (10,000)

Net cash generated from financing activities 2,50,000

Net increase in cash and cash equivalents 15,000

Cash and cash equivalents at beginning of period 90,000

Cash and cash equivalents at end of period 1,05,000

*Provision for tax of last year considered to be paid in the current year.
Working Note:

Property, plant and equipment acquisitions

W.D.V. at 31.3.20X2 3,50,000

Add back:

Depreciation for the year 40,000

3,90,000

Less: W.D.V. at 31.12.20X1 1,80,000

Acquisitions during 20X1-20X2 2,10,000

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 11.141 ADVANCED ACCOUNTING

ANNEXURE
CHAPTER

Schedule III to the Companies Act, 2013

(See section 129)
Division I ∗

Financial Statements for a company whose Financial Statements are required to

comply with the Companies (Accounting Standards) Rules, 2021.

GENERAL INSTRUCTIONS FOR PREPARATION OF BALANCE SHEET AND

STATEMENT OF PROFIT AND LOSS OF A COMPANY

1. Where compliance with the requirements of the Act including Accounting

Standards as applicable to the companies require any change in treatment
or disclosure including addition, amendment, substitution or deletion in the
head/sub-head or any changes inter se, in the financial statements or
statements forming part thereof, the same shall be made and the
requirements of this Schedule shall stand modified accordingly.
2. The disclosure requirements specified in this Schedule are in addition to and
not in substitution of the disclosure requirements specified in the
Accounting Standards prescribed under the Companies Act, 2013.
Additional disclosures specified in the Accounting Standards shall be made
in the notes to accounts or by way of additional statement unless required
to be disclosed on the face of the Financial Statements. Similarly, all other
disclosures as required by the Companies Act shall be made in the notes to
accounts in addition to the requirements set out in this Schedule.
3. (i) Notes to accounts shall contain information in addition to that
presented in the Financial Statements and shall provide where
required (a) narrative descriptions or dis-aggregations of items

∗
As per syllabus, only Division I of Schedule III (excluding general instructions for the
preparation of consolidated financial statements) has been reproduced here. In exercise of
the powers conferred by sub-section (1) of section 467 of the Companies Act, 2013, the
Central Government made certain amendments in Schedule III to the said Act with effect
from 1st day of April, 2021 vide MCA notification dated 24th March, 2021. This Annexure
incorporates these amendments.

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 11.142 ADVANCED ACCOUNTING
ADVANCED ACCOUNTING

recognized in those statements and (b) information about items that

do not qualify for recognition in those statements.
(ii) Each item on the face of the Balance Sheet and Statement of Profit
and Loss shall be cross-referenced to any related information in the
notes to accounts. In preparing the Financial Statements including the
notes to accounts, a balance shall be maintained between providing
excessive detail that may not assist users of financial statements and
not providing important information as a result of too much
aggregation.
4. (i) Depending upon the total income of the company, the figures
appearing in the Financial Statements shall be rounded off as given
below:
Total income Rounding off
(a) less than one hundred to the nearest hundreds, thousands,
crore rupees lakhs or millions, or decimals thereof
(b) one hundred crore to the nearest, lakhs, millions or
rupees or more crores, or decimals thereof.
(ii) Once a unit of measurement is used, it should be used uniformly in
the Financial Statements.
5. Except in the case of the first Financial Statements laid before the Company
(after its incorporation) the corresponding amounts (comparatives) for the
immediately preceding reporting period for all items shown in the Financial
Statements including notes shall also be given.
6. For the purpose of this Schedule, the terms used herein shall be as per the
applicable Accounting Standards.

Note: This part of Schedule sets out the minimum requirements for disclosure on
the face of the Balance Sheet, and the Statement of Profit and Loss (hereinafter
referred to as “Financial Statements” for the purpose of this Schedule) and Notes.
Line items, sub-line items and sub-totals shall be presented as an addition or
substitution on the face of the Financial Statements when such presentation is
relevant to an understanding of the company’s financial position or performance
or to cater to industry/sector-specific disclosure requirements or when required
for compliance with the amendments to the Companies Act or under the
Accounting Standards.

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 FINANCIAL STATEMENTS OF COMPANIES 11.143

PART I –BALANCE SHEET

Name of the Company…………………….

Balance Sheet as at………………………

(Rupees in…………)

Particulars Note Figures Figures as

No. as at the at the end
end of of
current previous
reporting reporting
period period

1 2 3 4

EQUITY AND LIABILITIES

1. Shareholders' funds

a Share capital

b Reserves and Surplus

c Money received against share warrants

2. Share application money pending

allotment

3. Non-current liabilities

a Long-term borrowings

b Deferred tax liabilities (Net)

c Other long term liabilities

d Long-term provisions

4. Current liabilities

a Short-term borrowings

b Trade Payables

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 11.144 ADVANCED ACCOUNTING
ADVANCED ACCOUNTING

(A) total outstanding dues of micro

enterprises and small enterprises; and

(B) total outstanding dues of creditors

other than micro enterprises and small
enterprises.

c Other current liabilities

d Short-term provisions

Total

ASSETS

1 Non-current assets

a i Property, plant and Equipment

ii Intangible assets

iii Capital Work-in-progress

iv Intangible assets under development

b Non-current investments

c Deferred tax assets (Net)

d Long-term loans and advances

e Other non-current assets

2 Current assets

a Current investments

b Inventories

c Trade receivables

d Cash and cash equivalents

e Short-term loans and advances

f Other current assets

Total

See accompanying notes to Financial Statements.

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 FINANCIAL STATEMENTS OF COMPANIES 11.145

Notes
GENERAL INSTRUCTIONS FOR PREPARATION OF BALANCE SHEET
1. An asset shall be classified as current when it satisfies any of the following
criteria:
(a) it is expected to be realized in, or is intended for sale or consumption
in, the company’s normal operating cycle;
(b) it is held primarily for the purpose of being traded;
(c) it is expected to be realized within twelve months after the reporting
date; or
(d) it is cash or cash equivalent unless it is restricted from being
exchanged or used to settle a liability for at least twelve months after
the reporting date.
All other assets shall be classified as non-current.
2. An operating cycle is the time between the acquisition of assets for
processing and their realization in cash or cash equivalents. Where the
normal operating cycle cannot be identified, it is assumed to have a
duration of 12 months.

3. A liability shall be classified as current when it satisfies any of the following

criteria:
(a) it is expected to be settled in the company’s normal operating cycle;

(b) it is held primarily for the purpose of being traded;

(c) it is due to be settled within twelve months after the reporting date; or
(d) the company does not have an unconditional right to defer settlement
of the liability for at least twelve months after the reporting date.
Terms of a liability that could, at the option of the counterparty, result
in its settlement by the issue of equity instruments do not affect its
classification.
All other liabilities shall be classified as non-current.

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 11.146 ADVANCED ACCOUNTING
ADVANCED ACCOUNTING

4. A receivable shall be classified as a ‘trade receivable’ if it is in respect of the

amount due on account of goods sold or services rendered in the normal
course of business.
5. A payable shall be classified as a ‘trade payable’ if it is in respect of the
amount due on account of goods purchased or services received in the
normal course of business.
6. A company shall disclose the following in the notes to accounts:
A. SHARE CAPITAL
For each class of share capital (different classes of preference shares to be
treated separately):
(a) the number and amount of shares authorized;

(b) the number of shares issued, subscribed and fully paid, and subscribed
but not fully paid;
(c) par value per share;
(d) a reconciliation of the number of shares outstanding at the beginning
and at the end of the reporting period;
(e) the rights, preferences and restrictions attaching to each class of
shares including restrictions on the distribution of dividends and the
repayment of capital;
(f) shares in respect of each class in the company held by its holding
company or its ultimate holding company including shares held by or
by subsidiaries or associates of the holding company or the ultimate
holding company in aggregate;

(g) shares in the company held by each shareholder holding more than 5
percent shares specifying the number of shares held;
(h) shares reserved for issue under options and contracts/commitments
for the sale of shares/disinvestment, including the terms and amounts;
(i) for the period of five years immediately preceding the date as at
which the Balance Sheet is prepared:

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 FINANCIAL STATEMENTS OF COMPANIES 11.147

(A) Aggregate number and class of shares allotted as fully paid up

pursuant to contract(s) without payment being received in cash.

(B) Aggregate number and class of shares allotted as fully paid up

by way of bonus shares.
(C) Aggregate number and class of shares bought back.

(j) terms of any securities convertible into equity/preference shares

issued along with the earliest date of conversion in descending order
starting from the farthest such date.
(k) calls unpaid (showing aggregate value of calls unpaid by directors and
officers)
(l) forfeited shares (amount originally paid up)
(m) A company shall disclose Shareholding of Promoters* as below:

Shares heldby promoters at the end of the % Change during

year the year***
S. Promoter No. of % of total
No name Shares** shares**
Total
*Promoter here means promoter as defined in the Companies Act,
2013.
** Details shall be given separately for each class of shares
*** percentage change shall be computed with respect to the number at
the beginning of the year or if issued during the year for the first time
then with respect to the date of issue.
B. RESERVES AND SURPLUS
(i) Reserves and Surplus shall be classified as:
(a) Capital Reserves;
(b) Capital Redemption Reserve;
(c) Securities Premium;
(d) Debenture Redemption Reserve;

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 11.148 ADVANCED ACCOUNTING
ADVANCED ACCOUNTING

(e) Revaluation Reserve;

(f) Share Options Outstanding Account;
(g) Other Reserves – (specify the nature and purpose of each
reserve and the amount in respect thereof);
(h) Surplus i.e. balance in Statement of Profit & Loss disclosing
allocations and appropriations such as dividend, bonus shares
and transfer to/from reserves etc.
(Additions and deductions since last balance sheet to be shown under
each of the specified heads)
(ii) A reserve specifically represented by earmarked investments shall be
termed as a ‘fund’.

(iii) Debit balance of statement of profit and loss shall be shown as a

negative figure under the head ‘Surplus’. Similarly, the balance of
‘Reserves and Surplus’, after adjusting negative balance of surplus, if
any, shall be shown under the head ‘Reserves and Surplus’ even if the
resulting figure is in the negative.
C. LONG-TERM BORROWINGS
(i) Long-term borrowings shall be classified as:
(a) Bonds/debentures.
(b) Term loans

(A) From banks.

(B) From other parties
(c) Deferred payment liabilities.

(d) Deposits.
(e) Loans and advances from related parties.
(f) Long term maturities of finance lease obligations

(g) Other loans and advances (specify nature).

(ii) Borrowings shall further be sub-classified as secured and unsecured.
Nature of security shall be specified separately in each case.

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 FINANCIAL STATEMENTS OF COMPANIES 11.149

(iii) Where loans have been guaranteed by directors or others, the aggregate
amount of such loans under each head shall be disclosed.

(iv) Bonds/debentures (along with the rate of interest and particulars of

redemption or conversion, as the case may be) shall be stated in
descending order of maturity or conversion, starting from farthest
redemption or conversion date, as the case may be. Where
bonds/debentures are redeemable by instalments, the date of maturity
for this purpose must be reckoned as the date on which the first
instalment becomes due.
(v) Particulars of any redeemed bonds/ debentures which the company has
power to reissue shall be disclosed.
(vi) Terms of repayment of term loans and other loans shall be stated.
(vii) Period and amount of continuing default as on the balance sheet date
in repayment of loans and interest, shall be specified separately in
each case.
D. OTHER LONG TERM LIABILITIES
Other Long-term Liabilities shall be classified as:
(a) Trade payables
(b) Others
E. LONG-TERM PROVISIONS
The amounts shall be classified as:
(a) Provision for employee benefits.
(b) Others (specify nature).
F. SHORT-TERM BORROWINGS
(i) Short-term borrowings shall be classified as:
(a) Loans repayable on demand
(A) From banks
(B) From other parties
(b) Loans and advances from related parties.

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 11.150 ADVANCED ACCOUNTING
ADVANCED ACCOUNTING

(c) Deposits.
(d) Other loans and advances (specify nature).
(ii) Borrowings shall further be sub-classified as secured and unsecured.
Nature of security shall be specified separately in each case.
(iii) Where loans have been guaranteed by directors or others, the aggregate
amount of such loans under each head shall be disclosed.
(iv) Period and amount of default as on the balance sheet date in repayment
of loans and interest shall be specified separately in each case.
“(v) current maturities of Long term borrowings shall be disclosed
separately.

FA. Trade Payables

The following details relating to Micro, Small and Medium Enterprises shall
be disclosed in the notes:
(a) the principal amount and the interest due thereon (to be shown
separately) remaining unpaid to any supplier at the end of each
accounting year;
(b) the amount of interest paid by the buyer in terms of section 16 of the
Micro, Small and Medium Enterprises Development Act, 2006, along with
the amount of the payment made to the supplier beyond the appointed
day during each accounting year;
(c) the amount of interest due and payable for the period of delay in making
payment (which have been paid but beyond the appointed day during
the year) but without adding the interest specified under the Micro,
Small and Medium Enterprises Development Act, 2006;
(d) the amount of interest accrued and remaining unpaid at the end of each
accounting year; and

(e) the amount of further interest remaining due and payable even in the
succeeding years, until such date when the interest dues above are
actually paid to the small enterprise, for the purpose of disallowance of a
deductible expenditure under section 23 of the Micro, Small and
Medium Enterprises Development Act, 2006.

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 FINANCIAL STATEMENTS OF COMPANIES 11.151

FB. Trade payables due for payment

The following ageing schedule shall be given for Trade payables due for
payment:-
Trade Payables ageing schedule
(Amount in `)

Particulars Outstanding for following periods

from due date of payment#

Less 1-2 years 2-3years More Total

than 1 than 3
year years

(i) MSME
(ii) Others
(iii) Disputed dues –
MSME
(iv) Disputed dues –
(v) Others

# similar information shall be given where no due date of payment is

specified in that case disclosure shall be from the date of the transaction.
Unbilled dues shall be disclosed separately;
Explanation: The terms 'appointed day', 'buyer', 'enterprise', 'micro
enterprise', 'small enterprise' and 'supplier', shall have the same meaning
assigned to those under clauses (b), (d), (e), (h), (m) and (n) respectively of
section 2 of the Micro, Small and Medium Enterprises Development Act,
2006.
G. OTHER CURRENT LIABILITIES
The amounts shall be classified as:
(a) Current maturities of finance lease obligations;
(b) Interest accrued but not due on borrowings;
(c) Interest accrued and due on borrowings;

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 11.152 ADVANCED ACCOUNTING
ADVANCED ACCOUNTING

(d) Income received in advance;

(e) Unpaid dividends
(f) Application money received for allotment of securities and due for
refund and interest accrued thereon. Share application money
includes advances towards allotment of share capital. The terms and
conditions including the number of shares proposed to be issued, the
amount of premium, if any, and the period before which shares shall
be allotted shall be disclosed. It shall also be disclosed whether the
company has sufficient authorized capital to cover the share capital
amount resulting from allotment of shares out of such share
application money. Further, the period for which the share application
money has been pending beyond the period for allotment as
mentioned in the document inviting application for shares along with
the reason for such share application money being pending shall be
disclosed. Share application money not exceeding the issued capital
and to the extent not refundable shall be shown under the head
Equity and share application money to the extent refundable i.e., the
amount in excess of subscription or in case the requirements of
minimum subscription are not met, shall be separately shown under
‘Other current liabilities’
(g) Unpaid matured deposits and interest accrued thereon
(h) Unpaid matured debentures and interest accrued thereon
(i) Other payables (specify nature);
H. SHORT-TERM PROVISIONS
The amounts shall be classified as:
(a) Provision for employee benefits.
(b) Others (specify nature).
I. Property, Plant and Equipment
(i) Classification shall be given as:
(a) Land.
(b) Buildings.

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 FINANCIAL STATEMENTS OF COMPANIES 11.153

(c) Plant and Equipment.

(d) Furniture and Fixtures.
(e) Vehicles.
(f) Office equipment.
(g) Others (specify nature).
(ii) Assets under lease shall be separately specified under each class of
asset.
(iii) A reconciliation of the gross and net carrying amounts of each class
of assets at the beginning and end of the reporting period showing
additions, disposals, acquisitions through business combinations,
amount of change due to revaluation (if change is 10% or more in the
aggregate of the net carrying value of each class of Property, Plant
and Equipment) and other adjustments and the related depreciation
and impairment losses/reversals shall be disclosed separately.
(iv) Where sums have been written off on a reduction of capital or
revaluation of assets or where sums have been added on revaluation
of assets, every balance sheet subsequent to date of such write-off, or
addition shall show the reduced or increased figures as applicable and
shall by way of a note also show the amount of the reduction or
increase as applicable together with the date thereof for the first five
years subsequent to the date of such reduction or increase.
J. INTANGIBLE ASSETS
(i) Classification shall be given as:
(a) Goodwill.
(b) Brands /trademarks.
(c) Computer software.
(d) Mastheads and publishing titles.
(e) Mining rights.
(f) Copyrights, and patents and other intellectual property rights,
services and operating rights.

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 11.154 ADVANCED ACCOUNTING
ADVANCED ACCOUNTING

(g) Recipes, formulae, models, designs and prototypes.

(h) Licenses and franchise.
(i) Others (specify nature).
(ii) A reconciliation of the gross and net carrying amounts of each class of
assets at the beginning and end of the reporting period showing
additions, disposals, acquisitions through business combinations,
amount of change due to revaluation (if change is 10% or more in the
aggregate of the net carrying value of each class of intangible assets)
and other adjustments and the related depreciation and impairment
losses or reversals shall be disclosed separately.
(iii) Where sums have been written off on a reduction of capital or
revaluation of assets or where sums have been added on revaluation
of assets, every balance sheet subsequent to date of such write-off, or
addition shall show the reduced or increased figures as applicable and
shall by way of a note also show the amount of the reduction or
increase as applicable together with the date thereof for the first five
years subsequent to the date of such reduction or increase.
K. NON-CURRENT INVESTMENTS
(i) Non-current investments shall be classified as trade investments and
other investments and further classified as:

(a) Investment property;

(b) Investments in Equity Instruments;
(c) Investments in preference shares
(d) Investments in Government or trust securities;
(e) Investments in debentures or bonds;
(f) Investments in Mutual Funds;
(g) Investments in partnership firms
(h) Other non-current investments (specify nature)
Under each classification, details shall be given of names of the bodies
corporate [indicating separately whether such bodies are (i)
subsidiaries, (ii) associates, (iii) joint ventures, or (iv) controlled special

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 FINANCIAL STATEMENTS OF COMPANIES 11.155

purpose entities] in whom investments have been made and the

nature and extent of the investment so made in each such body
corporate (showing separately investments which are partly-paid).
In regard to investments in the capital of partnership firms, the names
of the firms (with the names of all their partners, total capital and the
shares of each partner) shall be given.
(ii) Investments carried at other than at cost should be separately stated
specifying the basis for valuation thereof.
(iii) The following shall also be disclosed:
(a) Aggregate amount of quoted investments and market value
thereof;

(b) Aggregate amount of unquoted investments;

(c) Aggregate provision for diminution in value of investments.
L. LONG-TERM LOANS AND ADVANCES
(i) Long-term loans and advances shall be classified as:
(a) Capital Advances;
(b) Loans and advances to related parties (giving details thereof);
(c) Other loans and advances (specify nature).
(ii) The above shall also be separately sub-classified as:
(a) Secured, considered good;
(b) Unsecured, considered good;
(c) Doubtful.
(iii) Allowance for bad and doubtful loans and advances shall be disclosed
under the relevant heads separately.
(iv) Loans and advances due by directors or other officers of the company
or any of them either severally or jointly with any other persons or
amounts due by firms or private companies respectively in which any
director is a partner or a director or a member should be separately
stated.

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ADVANCED ACCOUNTING

M. OTHER NON-CURRENT ASSETS

Other non-current assets shall be classified as:

(i) Long Term Trade Receivables (including trade receivables on deferred

credit terms);
(ia) Security Deposits;

(ii) Others (specify nature);

(iii) Long term Trade Receivables, shall be sub-classified as:
(a) (A) Secured, considered good;

(B) Unsecured considered good;

(C) Doubtful
(b) Allowance for bad and doubtful debts shall be disclosed under
the relevant heads separately.
(c) Debts due by directors or other officers of the company or any
of them either severally or jointly with any other person or debts
due by firms or private companies respectively in which any
director is a partner or a director or a member should be
separately stated.
(iv) For trade receivables outstanding, following ageing schedule shall be
given:
Trade Receivables ageing schedule
(Amount in `)

Particulars Outstanding for following periods

from due date of payment#

Less 6 1-2 2-3 More Total

than 6 months than 3
years years
months - 1 year years

(i) Undisputed Trade

receivables –
considered good

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 FINANCIAL STATEMENTS OF COMPANIES 11.157

(ii) Undisputed Trade

Receivables –
considered
doubtful

(iii) Disputed Trade

Receivables
considered good

(iv) Disputed Trade

Receivables
considered
doubtful

# similar information shall be given where no due date of payment is

specified, in that case disclosure shall be from the date of the transaction.
Unbilled dues shall be disclosed separately.
N. CURRENT INVESTMENTS
(i) Current investments shall be classified as:

(a) Investments in Equity Instruments;

(b) Investment in Preference Shares

(c) Investments in government or trust securities;

(d) Investments in debentures or bonds;

(e) Investments in Mutual Funds;

(f) Investments in partnership firms

(g) Other investments (specify nature).

Under each classification, details shall be given of names of the bodies

corporate [indicating separately whether such bodies are (i)
subsidiaries, (ii) associates, (iii) joint ventures, or (iv) controlled special
purpose entities] in whom investments have been made and the
nature and extent of the investment so made in each such body
corporate (showing separately investments which are partly-paid). In

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 11.158 ADVANCED ACCOUNTING
ADVANCED ACCOUNTING

regard to investments in the capital of partnership firms, the names of

the firms (with the names of all their partners, total capital and the
shares of each partner) shall be given.

(ii) The following shall also be disclosed:

(a) The basis of valuation of individual investments

(b) Aggregate amount of quoted investments and market value

thereof;

(c) Aggregate amount of unquoted investments;

(d) Aggregate provision made for diminution in value of

investments.
O. INVENTORIES
(i) Inventories shall be classified as:

(a) Raw materials;

(b) Work-in-progress;

(c) Finished goods;

(d) Stock-in-trade (in respect of goods acquired for trading);

(e) Stores and spares;

(f) Loose tools;

(g) Others (specify nature).

(ii) Goods-in-transit shall be disclosed under the relevant sub-head of

inventories.

(iii) Mode of valuation shall be stated.

P. TRADE RECEIVABLES
(i) For trade receivables outstanding, the following ageing schedules
shall be given:

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 FINANCIAL STATEMENTS OF COMPANIES 11.159

Trade Receivables ageing schedule (Amount in `)

Particulars Outstanding for following periods

from due date of payment#

Less 6 1-2 2-3 More Total

than 6 months years than 3
years
months years
-1 year

(i) Undisputed Trade

receivables –
considered good

(ii) Undisputed Trade

Receivables –
considered doubtful

(iii) Disputed Trade

Receivables considered
good

(iv) Disputed Trade

Receivables considered
doubtful

# similar information shall be given where no due date of payment is

specified in that case disclosure shall be from the date of the
transaction.
Unbilled dues shall be disclosed separately.
(ii) Trade receivables shall be sub-classified as:
(a) Secured, considered good;
(b) Unsecured considered good;
(c) Doubtful.
(iii) Allowance for bad and doubtful debts shall be disclosed under the
relevant heads separately.

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 11.160 ADVANCED ACCOUNTING
ADVANCED ACCOUNTING

(iv) Debts due by directors or other officers of the company or any of

them either severally or jointly with any other person or debts due by
firms or private companies respectively in which any director is a
partner or a director or a member should be separately stated.
Q. CASH AND CASH EQUIVALENTS
(i) Cash and cash equivalents shall be classified as:
(a) Balances with banks;
(b) Cheques, drafts on hand;
(c) Cash on hand;
(d) Others (specify nature).
(ii) Earmarked balances with banks (for example, for unpaid dividend)
shall be separately stated.
(iii) Balances with banks to the extent held as margin money or security
against the borrowings, guarantees, other commitments shall be
disclosed separately.
(iv) Repatriation restrictions, if any, in respect of cash and bank balances
shall be separately stated.
(v) Bank deposits with more than 12 months maturity shall be disclosed
separately.
R. SHORT-TERM LOANS AND ADVANCES
(i) Short-term loans and advances shall be classified as:
(a) Loans and advances to related parties (giving details thereof);
(b) Others (specify nature).
(ii) The above shall also be sub-classified as:
(a) Secured, considered good;
(b) Unsecured, considered good;

(c) Doubtful.

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 FINANCIAL STATEMENTS OF COMPANIES 11.161

(iii) Allowance for bad and doubtful loans and advances shall be disclosed
under the relevant heads separately.

(iv) Loans and advances due by directors or other officers of the company
or any of them either severally or jointly with any other person or
amounts due by firms or private companies respectively in which any
director is a partner or a director or a member shall be separately
stated.
S. OTHER CURRENT ASSETS (SPECIFY NATURE).
This is an all-inclusive heading, which incorporates current assets that do
not fit into any other asset categories.
T. CONTINGENT LIABILITIES AND COMMITMENTS (TO THE EXTENT
NOT PROVIDED FOR)
(i) Contingent liabilities shall be classified as:
(a) Claims against the company not acknowledged as debt;

(b) Guarantees;
(c) Other money for which the company is contingently liable
(ii) Commitments shall be classified as:
(a) Estimated amount of contracts remaining to be executed on
capital account and not provided for;
(b) Uncalled liability on shares and other investments partly paid
(c) Other commitments (specify nature).
U. The amount of dividends proposed to be distributed to equity and
preference shareholders for the period and the related amount per share
shall be disclosed separately. Arrears of fixed cumulative dividends on
preference shares shall also be disclosed separately.
V. Where in respect of an issue of securities made for a specific purpose, the
whole or part of the amount has not been used for the specific purpose at
the balance sheet date, there shall be indicated by way of note how such
unutilized amounts have been used or invested.

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ADVANCED ACCOUNTING

VA. Where the company has not used the borrowings from banks and financial
institutions for the specific purpose for which it was taken at the balance sheet
date, the company shall disclose the details of where they have been used.
W. If, in the opinion of the Board, any of the assets other than Property, Plant
Equipment, “Intangible assets and non-current investments do not have a
value on realization in the ordinary course of business at least equal to the
amount at which they are stated, the fact that the Board is of that opinion,
shall be stated.
Y. Additional Regulatory Information

(i) Title deeds of Immovable Property not held in name of the

Company
The company shall provide the details of all the immovable property
(other than properties where the Company is the lessee and the lease
agreements are duly executed in favour of the lessee) whose title
deeds are not held in the name of the company in format given below
and where such immovable property is jointly held with others, details
are required to be given to the extent of the company’s share.

Relevant Descrip- Gross Title Whether Pro- Reason for

line item tion of carrying deeds title deed perty not being
in the item of value held holder is a held held in the
Balance pro-perty in the promoter, since name of
sheet name director or which the
of relative# date company*
of *
promoter*
/ director
or
employee
of
promoter/
director
PPE Land - - - - **also
Building indicate if
-
in dispute

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 FINANCIAL STATEMENTS OF COMPANIES 11.163

Investment
property

-
Land
PPE retired Building
from
active use
and held
for Land
disposal Building
-

others

#Relative here means relative as defined in the Companies Act, 2013.

*Promoter here means promoter as defined in the Companies Act, 2013.

(ii) Where the Company has revalued its Property, Plant and Equipment,
the company shall disclose as to whether the revaluation is based on
the valuation by a registered valuer as defined under rule 2 of the
Companies (Registered Valuers and Valuation) Rules, 2017.
(iii) Following disclosures shall be made where Loans or Advances in the
nature of loans are granted to promoters, directors, KMPs and the
related parties (as defined under Companies Act, 2013,) either
severally or jointly with any other person, that are:
(a) repayable on demand or
(b) without specifying any terms or period of repayment

Type of Amount of loan or Percentage to the total

Borrower advance in the Loans and Advances in
nature of loan the nature of loans
outstanding
Promoters
Directors
KMPs
Related Parties

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 11.164 ADVANCED ACCOUNTING
ADVANCED ACCOUNTING

(iv) Capital-Work-in Progress (CWIP)

(a) For Capital-work-in progress, following ageing schedule shall be
given:
CWIP aging schedule
(Amount in `)

CWIP Amount in CWIP for a period Total*

of

Less 1-2 2-3 More

than 1 years years than3
year years

Projects in progress
Projects temporarily
suspended

*Total shall tally with CWIP amount in the balance sheet.

(b) For capital-work-in progress, whose completion is overdue or
has exceeded its cost compared to its original plan, following
CWIP completion schedule shall be given**:
(Amount in `)

CWIP To be completed in

Lessthan 1-2 2-3 More than

1 year years years 3 years

Project 1 Project 2”

**Details of projects where activity has been suspended shall be

given separately.

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 FINANCIAL STATEMENTS OF COMPANIES 11.165

(v) Intangible assets under development:

(a) For Intangible assets under development, following ageing
schedule shall be given:
Intangible assets under development aging schedule
(Amount in `)

Intangible assets Amount in CWIP for a period of Total*

under development
Less than 1-2 2-3 More than
1 year years years 3 years

Projects in progress
Projects temporarily
suspended

* Total shall tally with the amount of Intangible assets under

development in the balance sheet.
For Intangible assets under development, whose completion is
overdue or has exceeded its cost compared to its original plan,
following Intangible assets under development completion
schedule shall be given**:
(Amount in `)

Intangible assets under To be completed in

development
Less 1-2 2-3 More
than 1 years years than 3
year years

Project 1

Project 2

**Details of projects where activity has been suspended shall be given

separately.

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 11.166 ADVANCED ACCOUNTING
ADVANCED ACCOUNTING

(vi) Details of Benami Property held

Where any proceedings have been initiated or pending against the
company for holding any benami property under the Benami
Transactions (Prohibition) Act, 1988 (45 of 1988) and the rules made
thereunder, the company shall disclose the following:-

(a) Details of such property, including year of acquisition,

(b) Amount thereof,
(c) Details of Beneficiaries,

(d) If property is in the books, then reference to the item in the

Balance Sheet,
(e) If property is not in the books, then the fact shall be stated with
reasons,
(f) Where there are proceedings against the company under this
law as an abetter of the transaction or as the transferor then the
details shall be provided,
(g) Nature of proceedings, status of same and company’s view on
same.
(vii) Where the Company has borrowings from banks or financial
institutions on the basis of security of current assets, it shall disclose
the following:-
(a) whether quarterly returns or statements of current assets filed by
the Company with banks or financial institutions are in
agreement with the books of accounts.

(b) if not, summary of reconciliation and reasons of material

discrepancies, if any to be adequately disclosed.
(viii) Wilful Defaulter*
Where a company is a declared wilful defaulter by any bank or
financial Institution or other lender, following details shall be given:
a. Date of declaration as wilful defaulter,
b. Details of defaults (amount and nature of defaults),

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* “wilful defaulter” here means a person or an issuer who or which is

categorized as a wilful defaulter by any bank or financial institution (as
defined under the Act) or consortium thereof, in accordance with the
guidelines on wilful defaulters issued by the Reserve Bank of India.
(ix) Relationship with Struck off Companies

Where the company has any transactions with companies struck off
under section 248 of the Companies Act, 2013 or section 560 of
Companies Act, 1956, the Company shall disclose the following
details:-

Name of Nature of Balance Relationship with

struck off transactions with outstanding
the Struck off
Company struck-off
company, if any,
Company
to be disclosed

Investments in
securities

Receivables

Payables

Shares held by stuck

off company

Other outstanding
balances (to be
specified)

(x) Registration of charges or satisfaction with Registrar of

Companies
Where any charges or satisfaction yet to be registered with Registrar
of Companies beyond the statutory period, details and reasons
thereof shall be disclosed.
(xi) Compliance with number of layers of companies
Where the company has not complied with the number of layers
prescribed under clause (87) of section 2 of the Act read with

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ADVANCED ACCOUNTING

Companies (Restriction on number of Layers) Rules, 2017, the name

and CIN of the companies beyond the specified layers and the
relationship/extent of holding of the company in such downstream
companies shall be disclosed.
(xii) Following Ratios to be disclosed:-

Current Ratio,
a. Debt-Equity Ratio,
b. Debt Service Coverage Ratio,

c. Return on Equity Ratio,

d. Inventory turnover ratio,
e. Trade Receivables turnover ratio,
f. Trade payables turnover ratio,
g. Net capital turnover ratio,
h. Net profit ratio,

i. Return on Capital employed,

j. Return on investment.
The company shall explain the items included in numerator and
denominator for computing the above ratios. Further explanation shall
be provided for any change in the ratio by more than 25% as
compared to the preceding year.
(xiii) Compliance with approved Scheme(s) of Arrangements
Where any Scheme of Arrangements has been approved by the
Competent Authority in terms of sections 230 to 237 of the
Companies Act, 2013, the Company shall disclose that the effect of
such Scheme of Arrangements have been accounted for in the books
of account of the Company ‘in accordance with the Scheme’ and ‘in
accordance with accounting standards’ and deviation in this regard
shall be explained.

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(xiv) Utilisation of Borrowed funds and share premium:

(A) Where company has advanced or loaned or invested funds
(either borrowed funds or share premium or any other sources
or kind of funds) to any other person(s) or entity(ies), including
foreign entities (Intermediaries) with the understanding (whether
recorded in writing or otherwise) that the Intermediary shall
(i) directly or indirectly lend or invest in other persons or entities
identified in any manner whatsoever by or on behalf of the
company (Ultimate Beneficiaries) or
(ii) provide any guarantee, security or the like to or on behalf of the
Ultimate Beneficiaries; the company shall disclose the following:-
(I) date and amount of fund advanced or loaned or invested in
Intermediaries with complete details of each Intermediary.
(II) date and amount of fund further advanced or loaned or invested
by such Intermediaries to other intermediaries or Ultimate
Beneficiaries alongwith complete details of the ultimate
beneficiaries.

(III) date and amount of guarantee, security or the like provided to

or on behalf of the Ultimate Beneficiaries.
(IV) declaration that relevant provisions of the Foreign Exchange
Management Act, 1999 (42 of 1999) and Companies Act has
been complied with for such transactions and the transactions
are not violative of the Prevention of Money-Laundering act,
2002 (15 of 2003).;
(B) Where a company has received any fund from any person(s) or
entity(ies), including foreign entities (Funding Party) with the
understanding (whether recorded in writing or otherwise) that
the company shall
(i) directly or indirectly lend or invest in other persons or
entities identified in any manner whatsoever by or on
behalf of the Funding Party (Ultimate Beneficiaries) or

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 11.170 ADVANCED ACCOUNTING
ADVANCED ACCOUNTING

(ii) provide any guarantee, security or the like on behalf of the

Ultimate Beneficiaries, the company shall disclose the
following:-
(I) date and amount of fund received from Funding
parties with complete details of each Funding party.

(II) date and amount of fund further advanced or loaned

or invested other intermediaries or Ultimate
Beneficiaries alongwith complete details of the other
intermediaries’ or ultimate beneficiaries.
(III) date and amount of guarantee, security or the like
provided to or on behalf of the Ultimate Beneficiaries
declaration that relevant provisions of the Foreign
Exchange Management Act, 1999 (42 of 1999) and
Companies Act has been complied with for such
transactions and the transactions are not violative of
the Prevention of Money-Laundering act, 2002 (15 of
2003).;

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PART II –STATEMENT OF PROFIT AND LOSS

Name of the Company…………………….

Profit and loss statement for the year ended ………………………

(Rupees in…………)

Particulars Note Figures for Figures for

No. the current the
reporting previous
period reporting
period

1 2 3 4

I. Revenue from operations xxx xxx

II. Other income xxx xxx

III. Total Income (I + II) xxx xxx

IV. Expenses: xxx xxx
Cost of materials consumed xxx xxx

Purchases of Stock-in-Trade xxx xxx

Changes in inventories of finished xxx xxx
goods
xxx xxx
work-in-progress
xxx xxx
and Stock-in-Trade
xxx xxx
Employee benefits expense
xxx xxx
Finance costs
xxx xxx
Depreciation and amortization
xxx xxx
expense
Other expenses
Total expenses xxx xxx

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ADVANCED ACCOUNTING

V. Profit before exceptional and xxx xxx

extraordinary items and tax (III-IV)

VI. Exceptional items xxx xxx

VII. Profit before extraordinary items and xxx xxx

tax (V - VI)

VIII. Extraordinary Items xxx xxx

IX. Profit before tax (VII- VIII) xxx xxx

X Tax expense:
(1) Current tax xxx xxx
(2) Deferred tax xxx xxx xxx xxx

XI Profit (Loss) for the period from xxx Xxx

continuing operations (VII-VIII)

XII Profit/(loss) from discontinuing xxx Xxx

operations

XIII Tax expense of discontinuing xxx Xxx

operations

XIV Profit/(loss) from Discontinuing xxx Xxx

operations (after tax) (XII-XIII)

XV Profit (Loss) for the period (XI + XIV) xxx xxx

XVI Earnings per equity share:

(1) Basic xxx xxx
(2) Diluted xxx xxx
See accompanying notes to the financial statements.

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GENERAL INSTRUCTIONS FOR PREPARATION OF STATEMENT OF

PROFIT AND LOSS
1. The provisions of this Part shall apply to the income and expenditure
account referred to in sub-clause (ii) of Clause (40) of Section 2 in like
manner as they apply to a statement of profit and loss.

2. (A) In respect of a company other than a finance company revenue from

operations shall disclose separately in the notes revenue from

(a) Sale of products;

(b) Sale of services;

“(ba) Grants or donations received (relevant in case of section 8

companies only)”;

(c) Other operating revenues;

Less:

(d) Excise duty.

(B) In respect of a finance company, revenue from operations shall

include revenue from

(a) Interest; and

(b) Other financial services

Revenue under each of the above heads shall be disclosed separately by

way of notes to accounts to the extent applicable.

3. Finance Costs

Finance costs shall be classified as:

(a) Interest expense;

(b) Other borrowing costs;

(c) Applicable net gain/loss on foreign currency transactions and

translation.

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 11.174 ADVANCED ACCOUNTING
ADVANCED ACCOUNTING

4. Other income
Other income shall be classified as:
(a) Interest Income (in case of a company other than a finance company);
(b) Dividend Income;
(c) Net gain/loss on sale of investments
(d) Other non-operating income (net of expenses directly attributable to
such income).
5. Additional Information
A Company shall disclose by way of notes additional information regarding
aggregate expenditure and income on the following items:
(i) (a) Employee Benefits Expense [showing separately (i) salaries and
wages, (ii) contribution to provident and other funds, (iii)
expense on Employee Stock Option Scheme (ESOP) and
Employee Stock Purchase Plan (ESPP), (iv) staff welfare
expenses].
(b) Depreciation and amortization expense;
(c) Any item of income or expenditure which exceeds one per cent
of the revenue from operations or ` 1,00,000, whichever is
higher;
(d) Interest Income;
(e) Interest Expense;
(f) Dividend Income;
(g) Net gain/ loss on sale of investments;
(h) Adjustments to the carrying amount of investments;
(i) Net gain or loss on foreign currency transaction and translation
(other than considered as finance cost);

(j) Payments to the auditor as

(a) auditor,

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 FINANCIAL STATEMENTS OF COMPANIES 11.175

(b) for taxation matters,

(c) for company law matters,
(d) for management services,
(e) for other services,
(f) for reimbursement of expenses;
(k) In case of companies covered u/s 135, amount of expenditure
incurred on corporate social responsibility activities.
(l) Details of items of exceptional and extraordinary nature;
(m) Prior period items;
(ii) (a) In the case of manufacturing companies,
(1) Raw materials under broad heads.
(2) goods purchased under broad heads.
(b) In the case of trading companies, purchases in respect of goods
traded in by the company under broad heads.
(c) In the case of companies rendering or supplying services, gross
income derived from services rendered or supplied under broad
heads.

(d) In the case of a company, which falls under more than one of the
categories mentioned in (a), (b) and (c) above, it shall be
sufficient compliance with the requirements herein if purchases,
sales and consumption of raw material and the gross income
from services rendered is shown under broad heads.
(e) In the case of other companies, gross income derived under
broad heads.
(iii) In the case of all concerns having works in progress, works-in-
progress under broad heads.
(iv) (a) The aggregate, if material, of any amounts set aside or proposed
to be set aside, to reserve, but not including provisions made to
meet any specific liability, contingency or commitment known to
exist at the date as to which the balance-sheet is made up.

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 11.176 ADVANCED ACCOUNTING
ADVANCED ACCOUNTING

(b) The aggregate, if material, of any amounts withdrawn from such

reserves.

(v) (a) The aggregate, if material, of the amounts set aside to

provisions made for meeting specific liabilities, contingencies or
commitments.

(b) The aggregate, if material, of the amounts withdrawn from such

provisions, as no longer required.
(vi) Expenditure incurred on each of the following items, separately for
each item:-
(a) Consumption of stores and spare parts.
(b) Power and fuel.

(c) Rent.
(d) Repairs to buildings.
(e) Repairs to machinery.

(f) Insurance.
(g) Rates and taxes, excluding, taxes on income.
(h) Miscellaneous expenses,
(vii) (a) Dividends from subsidiary companies.
(b) Provisions for losses of subsidiary companies.
(viii) The profit and loss account shall also contain by way of a note the
following information, namely:
(a) Value of imports calculated on C.I.F basis by the company during
the financial year in respect of –

I. Raw materials;
II. Components and spare parts;
III. Capital goods;

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 FINANCIAL STATEMENTS OF COMPANIES 11.177

(b) Expenditure in foreign currency during the financial year on

account of royalty, know-how, professional and consultation
fees, interest, and other matters;
(c) Total value if all imported raw materials, spare parts and
components consumed during the financial year and the total
value of all indigenous raw materials, spare parts and
components similarly consumed and the percentage of each to
the total consumption;

(d) The amount remitted during the year in foreign currencies on

account of dividends with a specific mention of the total number
of non-resident shareholders, the total number of shares held by
them on which the dividends were due and the year to which the
dividends related;
(e) Earnings in foreign exchange classified under the following
heads, namely:
I. Export of goods calculated on F.O.B. basis;
II. Royalty, know-how, professional and consultation fees;
III. Interest and dividend;
IV. Other income, indicating the nature thereof
(ix) Undisclosed income: The Company shall give details of any transaction
not recorded in the books of accounts that has been surrendered or
disclosed as income during the year in the tax assessments under the
Income Tax Act, 1961 (such as, search or survey or any other relevant
provisions of the Income Tax Act, 1961), unless there is immunity for
disclosure under any scheme and also shall state whether the
previously unrecorded income and related assets have been properly
recorded in the books of account during the year.
(x) Corporate Social Responsibility (CSR)
Where the company covered under section 135 of the companies act,
the following shall be disclosed with regard to CSR activities:-
(a) amount required to be spent by the company during the year,

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 11.178 ADVANCED ACCOUNTING
ADVANCED ACCOUNTING

(b) amount of expenditure incurred,

(c) shortfall at the end of the year,
(d) total of previous years shortfall,
(e) reason for shortfall,
(f) nature of CSR activities,
(g) details of related party transactions, e.g., contribution to a trust
controlled by the company in relation to CSR expenditure as per
relevant Accounting Standard,
(h) where a provision is made with respect to a liability incurred by
entering into a contractual obligation, the movements in the
provision during the year should be shown separately.
(xi) Details of Crypto Currency or Virtual Currency
Where the Company has traded or invested in Crypto currency or
Virtual Currency during the financial year, the following shall be
disclosed:-
(a) profit or loss on transactions involving Crypto currency or Virtual
Currency
(b) amount of currency held as at the reporting date,
deposits or advances from any person for the purpose of trading
or investing in Crypto Currency/ virtual currency.

Note: Broad heads shall be decided taking into account the concept of
materiality and presentation of true and fair view of financial statements.

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ANNEXURE
CHAPTER

Schedule III to the Companies Act, 2013

(See section 129)
Division I

Financial Statements for a company whose Financial Statements are required to

comply with the Companies (Accounting Standards) Rules, 2021.

GENERAL INSTRUCTIONS FOR PREPARATION OF BALANCE SHEET AND

STATEMENT OF PROFIT AND LOSS OF A COMPANY

1. Where compliance with the requirements of the Act including Accounting

Standards as applicable to the companies require any change in treatment
or disclosure including addition, amendment, substitution or deletion in the
head/sub-head or any changes inter se, in the financial statements or
statements forming part thereof, the same shall be made and the
requirements of this Schedule shall stand modified accordingly.
2. The disclosure requirements specified in this Schedule are in addition to and
not in substitution of the disclosure requirements specified in the
Accounting Standards prescribed under the Companies Act, 2013.
Additional disclosures specified in the Accounting Standards shall be made
in the notes to accounts or by way of additional statement unless required
to be disclosed on the face of the Financial Statements. Similarly, all other
disclosures as required by the Companies Act shall be made in the notes to
accounts in addition to the requirements set out in this Schedule.
3. (i) Notes to accounts shall contain information in addition to that
presented in the Financial Statements and shall provide where
required (a) narrative descriptions or dis-aggregations of items


As per syllabus, only Division I of Schedule III (excluding general instructions for the
preparation of consolidated financial statements) has been reproduced here. In exercise of
the powers conferred by sub-section (1) of section 467 of the Companies Act, 2013, the
Central Government made certain amendments in Schedule III to the said Act with effect
from 1st day of April, 2021 vide MCA notification dated 24th March, 2021 . This Annexure
incorporates these amendments.

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 FINANCIAL STATEMENTS OF COMPANIES 11.139

recognized in those statements and (b) information about items that

do not qualify for recognition in those statements.
(ii) Each item on the face of the Balance Sheet and Statement of Profit
and Loss shall be cross-referenced to any related information in the
notes to accounts. In preparing the Financial Statements including the
notes to accounts, a balance shall be maintained between providing
excessive detail that may not assist users of financial statements and
not providing important information as a result of too much
aggregation.
4. (i) Depending upon the total income of the company, the figures
appearing in the Financial Statements shall be rounded off as given
below:
Total income Rounding off
(a) less than one hundred to the nearest hundreds, thousands,
crore rupees lakhs or millions, or decimals thereof
(b) one hundred crore to the nearest, lakhs, millions or
rupees or more crores, or decimals thereof.
(ii) Once a unit of measurement is used, it should be used uniformly in
the Financial Statements.
5. Except in the case of the first Financial Statements laid before the Company
(after its incorporation) the corresponding amounts (comparatives) for the
immediately preceding reporting period for all items shown in the Financial
Statements including notes shall also be given.
6. For the purpose of this Schedule, the terms used herein shall be as per the
applicable Accounting Standards.

Note: This part of Schedule sets out the minimum requirements for disclosure on
the face of the Balance Sheet, and the Statement of Profit and Loss (hereinafter
referred to as “Financial Statements” for the purpose of this Schedule) and Notes.
Line items, sub-line items and sub-totals shall be presented as an addition or
substitution on the face of the Financial Statements when such presentation is
relevant to an understanding of the company’s financial position or performance
or to cater to industry/sector-specific disclosure requirements or when required
for compliance with the amendments to the Companies Act or under the
Accounting Standards.

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PART I –BALANCE SHEET

Name of the Company…………………….

Balance Sheet as at………………………

(Rupees in…………)

Particulars Note Figures Figures as

No. as at the at the end
end of of
current previous
reporting reporting
period period

1 2 3 4

EQUITY AND LIABILITIES

1. Shareholders' funds

a Share capital

b Reserves and Surplus

c Money received against share warrants

2. Share application money pending

allotment

3. Non-current liabilities

a Long-term borrowings

b Deferred tax liabilities (Net)

c Other long term liabilities

d Long-term provisions

4. Current liabilities

a Short-term borrowings

b Trade Payables

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 FINANCIAL STATEMENTS OF COMPANIES 11.141

(A) total outstanding dues of micro

enterprises and small enterprises; and

(B) total outstanding dues of creditors

other than micro enterprises and small
enterprises.

c Other current liabilities

d Short-term provisions

Total

ASSETS

1 Non-current assets

a i Property, plant and Equipment

ii Intangible assets

iii Capital Work-in-progress

iv Intangible assets under development

b Non-current investments

c Deferred tax assets (Net)

d Long-term loans and advances

e Other non-current assets

2 Current assets

a Current investments

b Inventories

c Trade receivables

d Cash and cash equivalents

e Short-term loans and advances

f Other current assets

Total

See accompanying notes to Financial Statements.

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ADVANCED ACCOUNTING

Notes
GENERAL INSTRUCTIONS FOR PREPARATION OF BALANCE SHEET
1. An asset shall be classified as current when it satisfies any of the following
criteria:
(a) it is expected to be realized in, or is intended for sale or consumption
in, the company’s normal operating cycle;
(b) it is held primarily for the purpose of being traded;
(c) it is expected to be realized within twelve months after the reporting
date; or
(d) it is cash or cash equivalent unless it is restricted from being
exchanged or used to settle a liability for at least twelve months after
the reporting date.
All other assets shall be classified as non-current.
2. An operating cycle is the time between the acquisition of assets for
processing and their realization in cash or cash equivalents. Where the
normal operating cycle cannot be identified, it is assumed to have a
duration of 12 months.
3. A liability shall be classified as current when it satisfies any of the following
criteria:
(a) it is expected to be settled in the company’s normal operating cycle;
(b) it is held primarily for the purpose of being traded;
(c) it is due to be settled within twelve months after the reporting date; or
(d) the company does not have an unconditional right to defer settlement
of the liability for at least twelve months after the reporting date.
Terms of a liability that could, at the option of the counterparty, result
in its settlement by the issue of equity instruments do not affect its
classification.
All other liabilities shall be classified as non-current.

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4. A receivable shall be classified as a ‘trade receivable’ if it is in respect of the

amount due on account of goods sold or services rendered in the normal
course of business.
5. A payable shall be classified as a ‘trade payable’ if it is in respect of the
amount due on account of goods purchased or services received in the
normal course of business.
6. A company shall disclose the following in the notes to accounts:
A. SHARE CAPITAL
For each class of share capital (different classes of preference shares to be
treated separately):
(a) the number and amount of shares authorized;
(b) the number of shares issued, subscribed and fully paid, and subscribed
but not fully paid;
(c) par value per share;

(d) a reconciliation of the number of shares outstanding at the beginning

and at the end of the reporting period;
(e) the rights, preferences and restrictions attaching to each class of
shares including restrictions on the distribution of dividends and the
repayment of capital;
(f) shares in respect of each class in the company held by its holding
company or its ultimate holding company including shares held by or
by subsidiaries or associates of the holding company or the ultimate
holding company in aggregate;
(g) shares in the company held by each shareholder holding more than 5
percent shares specifying the number of shares held;
(h) shares reserved for issue under options and contracts/commitments
for the sale of shares/disinvestment, including the terms and amounts;
(i) for the period of five years immediately preceding the date as at
which the Balance Sheet is prepared:

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(A) Aggregate number and class of shares allotted as fully paid up

pursuant to contract(s) without payment being received in cash.

(B) Aggregate number and class of shares allotted as fully paid up

by way of bonus shares.
(C) Aggregate number and class of shares bought back.

(j) terms of any securities convertible into equity/preference shares

issued along with the earliest date of conversion in descending order
starting from the farthest such date.

(k) calls unpaid (showing aggregate value of calls unpaid by directors and
officers)
(l) forfeited shares (amount originally paid up)
(m) A company shall disclose Shareholding of Promoters* as below:

Shares heldby promoters at the end of the % Change during

year the year***
S. Promoter No. of % of total
No name Shares** shares**
Total
*Promoter here means promoter as defined in the Companies Act,
2013.
** Details shall be given separately for each class of shares
*** percentage change shall be computed with respect to the number at
the beginning of the year or if issued during the year for the first time
then with respect to the date of issue.
B. RESERVES AND SURPLUS
(i) Reserves and Surplus shall be classified as:
(a) Capital Reserves;
(b) Capital Redemption Reserve;

(c) Securities Premium;

(d) Debenture Redemption Reserve;

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 FINANCIAL STATEMENTS OF COMPANIES 11.145

(e) Revaluation Reserve;

(f) Share Options Outstanding Account;
(g) Other Reserves – (specify the nature and purpose of each
reserve and the amount in respect thereof);
(h) Surplus i.e. balance in Statement of Profit & Loss disclosing
allocations and appropriations such as dividend, bonus shares
and transfer to/from reserves etc.
(Additions and deductions since last balance sheet to be shown under
each of the specified heads)
(ii) A reserve specifically represented by earmarked investments shall be
termed as a ‘fund’.
(iii) Debit balance of statement of profit and loss shall be shown as a
negative figure under the head ‘Surplus’. Similarly, the balance of
‘Reserves and Surplus’, after adjusting negative balance of surplus, if
any, shall be shown under the head ‘Reserves and Surplus’ even if the
resulting figure is in the negative.
C. LONG-TERM BORROWINGS
(i) Long-term borrowings shall be classified as:
(a) Bonds/debentures.
(b) Term loans

(A) From banks.

(B) From other parties
(c) Deferred payment liabilities.
(d) Deposits.
(e) Loans and advances from related parties.
(f) Long term maturities of finance lease obligations
(g) Other loans and advances (specify nature).
(ii) Borrowings shall further be sub-classified as secured and unsecured.
Nature of security shall be specified separately in each case.

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(iii) Where loans have been guaranteed by directors or others, the aggregate
amount of such loans under each head shall be disclosed.

(iv) Bonds/debentures (along with the rate of interest and particulars of

redemption or conversion, as the case may be) shall be stated in
descending order of maturity or conversion, starting from farthest
redemption or conversion date, as the case may be. Where
bonds/debentures are redeemable by instalments, the date of maturity
for this purpose must be reckoned as the date on which the first
instalment becomes due.
(v) Particulars of any redeemed bonds/ debentures which the company has
power to reissue shall be disclosed.

(vi) Terms of repayment of term loans and other loans shall be stated.
(vii) Period and amount of continuing default as on the balance sheet date
in repayment of loans and interest, shall be specified separately in
each case.
D. OTHER LONG TERM LIABILITIES
Other Long-term Liabilities shall be classified as:
(a) Trade payables
(b) Others
E. LONG-TERM PROVISIONS
The amounts shall be classified as:
(a) Provision for employee benefits.
(b) Others (specify nature).
F. SHORT-TERM BORROWINGS
(i) Short-term borrowings shall be classified as:
(a) Loans repayable on demand

(A) From banks

(B) From other parties
(b) Loans and advances from related parties.

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 FINANCIAL STATEMENTS OF COMPANIES 11.147

(c) Deposits.
(d) Other loans and advances (specify nature).
(ii) Borrowings shall further be sub-classified as secured and unsecured.
Nature of security shall be specified separately in each case.
(iii) Where loans have been guaranteed by directors or others, the aggregate
amount of such loans under each head shall be disclosed.
(iv) Period and amount of default as on the balance sheet date in repayment
of loans and interest shall be specified separately in each case.

“(v) current maturities of Long term borrowings shall be disclosed

separately.

FA. Trade Payables

The following details relating to Micro, Small and Medium Enterprises shall
be disclosed in the notes:
(a) the principal amount and the interest due thereon (to be shown
separately) remaining unpaid to any supplier at the end of each
accounting year;
(b) the amount of interest paid by the buyer in terms of section 16 of the
Micro, Small and Medium Enterprises Development Act, 2006, along with
the amount of the payment made to the supplier beyond the appointed
day during each accounting year;
(c) the amount of interest due and payable for the period of delay in making
payment (which have been paid but beyond the appointed day during
the year) but without adding the interest specified under the Micro,
Small and Medium Enterprises Development Act, 2006;
(d) the amount of interest accrued and remaining unpaid at the end of each
accounting year; and

(e) the amount of further interest remaining due and payable even in the
succeeding years, until such date when the interest dues above are
actually paid to the small enterprise, for the purpose of disallowance of a
deductible expenditure under section 23 of the Micro, Small and
Medium Enterprises Development Act, 2006.

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FB. Trade payables due for payment

The following ageing schedule shall be given for Trade payables due for
payment:-
Trade Payables ageing schedule
(Amount in `)

Particulars Outstanding for following periods

from due date of payment#

Less 1-2 years 2-3years More Total

than 1 than 3
year years

(i) MSME
(ii) Others
(iii) Disputed dues –
MSME
(iv) Disputed dues –
(v) Others

# similar information shall be given where no due date of payment is

specified in that case disclosure shall be from the date of the transaction.
Unbilled dues shall be disclosed separately;
Explanation: The terms 'appointed day', 'buyer', 'enterprise', 'micro
enterprise', 'small enterprise' and 'supplier', shall have the same meaning
assigned to those under clauses (b), (d), (e), (h), (m) and (n) respectively of
section 2 of the Micro, Small and Medium Enterprises Development Act,
2006.
G. OTHER CURRENT LIABILITIES
The amounts shall be classified as:
(a) Current maturities of finance lease obligations;

(b) Interest accrued but not due on borrowings;

(c) Interest accrued and due on borrowings;

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 FINANCIAL STATEMENTS OF COMPANIES 11.149

(d) Income received in advance;

(e) Unpaid dividends
(f) Application money received for allotment of securities and due for
refund and interest accrued thereon. Share application money
includes advances towards allotment of share capital. The terms and
conditions including the number of shares proposed to be issued, the
amount of premium, if any, and the period before which shares shall
be allotted shall be disclosed. It shall also be disclosed whether the
company has sufficient authorized capital to cover the share capital
amount resulting from allotment of shares out of such share
application money. Further, the period for which the share application
money has been pending beyond the period for allotment as
mentioned in the document inviting application for shares along with
the reason for such share application money being pending shall be
disclosed. Share application money not exceeding the issued capital
and to the extent not refundable shall be shown under the head
Equity and share application money to the extent refundable i.e., the
amount in excess of subscription or in case the requirements of
minimum subscription are not met, shall be separately shown under
‘Other current liabilities’
(g) Unpaid matured deposits and interest accrued thereon
(h) Unpaid matured debentures and interest accrued thereon
(i) Other payables (specify nature);
H. SHORT-TERM PROVISIONS
The amounts shall be classified as:
(a) Provision for employee benefits.

(b) Others (specify nature).

I. Property, Plant and Equipment
(i) Classification shall be given as:

(a) Land.
(b) Buildings.

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ADVANCED ACCOUNTING

(c) Plant and Equipment.

(d) Furniture and Fixtures.
(e) Vehicles.
(f) Office equipment.
(g) Others (specify nature).

(ii) Assets under lease shall be separately specified under each class of
asset.
(iii) A reconciliation of the gross and net carrying amounts of each class
of assets at the beginning and end of the reporting period showing
additions, disposals, acquisitions through business combinations,
amount of change due to revaluation (if change is 10% or more in the
aggregate of the net carrying value of each class of Property, Plant
and Equipment) and other adjustments and the related depreciation
and impairment losses/reversals shall be disclosed separately.

(iv) Where sums have been written off on a reduction of capital or

revaluation of assets or where sums have been added on revaluation
of assets, every balance sheet subsequent to date of such write-off, or
addition shall show the reduced or increased figures as applicable and
shall by way of a note also show the amount of the reduction or
increase as applicable together with the date thereof for the first five
years subsequent to the date of such reduction or increase.
J. INTANGIBLE ASSETS
(i) Classification shall be given as:

(a) Goodwill.
(b) Brands /trademarks.
(c) Computer software.

(d) Mastheads and publishing titles.

(e) Mining rights.
(f) Copyrights, and patents and other intellectual property rights,
services and operating rights.

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 FINANCIAL STATEMENTS OF COMPANIES 11.151

(g) Recipes, formulae, models, designs and prototypes.

(h) Licenses and franchise.
(i) Others (specify nature).
(ii)  A reconciliation of the gross and net carrying amounts of each class of
assets at the beginning and end of the reporting period showing
additions, disposals, acquisitions through business combinations,
amount of change due to revaluation (if change is 10% or more in the
aggregate of the net carrying value of each class of intangible assets)
and other adjustments and the related depreciation and impairment
losses or reversals shall be disclosed separately.
(iii) Where sums have been written off on a reduction of capital or
revaluation of assets or where sums have been added on revaluation
of assets, every balance sheet subsequent to date of such write-off, or
addition shall show the reduced or increased figures as applicable and
shall by way of a note also show the amount of the reduction or
increase as applicable together with the date thereof for the first five
years subsequent to the date of such reduction or increase.
K. NON-CURRENT INVESTMENTS
(i) Non-current investments shall be classified as trade investments and
other investments and further classified as:

(a) Investment property;

(b) Investments in Equity Instruments;
(c) Investments in preference shares
(d) Investments in Government or trust securities;
(e) Investments in debentures or bonds;
(f) Investments in Mutual Funds;
(g) Investments in partnership firms
(h) Other non-current investments (specify nature)
Under each classification, details shall be given of names of the bodies
corporate [indicating separately whether such bodies are (i)
subsidiaries, (ii) associates, (iii) joint ventures, or (iv) controlled special

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ADVANCED ACCOUNTING

purpose entities] in whom investments have been made and the

nature and extent of the investment so made in each such body
corporate (showing separately investments which are partly-paid).
In regard to investments in the capital of partnership firms, the names
of the firms (with the names of all their partners, total capital and the
shares of each partner) shall be given.
(ii) Investments carried at other than at cost should be separately stated
specifying the basis for valuation thereof.
(iii) The following shall also be disclosed:
(a) Aggregate amount of quoted investments and market value
thereof;
(b) Aggregate amount of unquoted investments;
(c) Aggregate provision for diminution in value of investments.
L. LONG-TERM LOANS AND ADVANCES
(i) Long-term loans and advances shall be classified as:
(a) Capital Advances;
(b) Loans and advances to related parties (giving details thereof);
(c) Other loans and advances (specify nature).
(ii) The above shall also be separately sub-classified as:
(a) Secured, considered good;

(b) Unsecured, considered good;

(c) Doubtful.
(iii) Allowance for bad and doubtful loans and advances shall be disclosed
under the relevant heads separately.
(iv) Loans and advances due by directors or other officers of the company
or any of them either severally or jointly with any other persons or
amounts due by firms or private companies respectively in which any
director is a partner or a director or a member should be separately
stated.

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M. OTHER NON-CURRENT ASSETS

Other non-current assets shall be classified as:

(i) Long Term Trade Receivables (including trade receivables on deferred

credit terms);
(ia) Security Deposits;

(ii) Others (specify nature);

(iii) Long term Trade Receivables, shall be sub-classified as:
(a) (A) Secured, considered good;
(B) Unsecured considered good;
(C) Doubtful
(b) Allowance for bad and doubtful debts shall be disclosed under
the relevant heads separately.
(c) Debts due by directors or other officers of the company or any
of them either severally or jointly with any other person or debts
due by firms or private companies respectively in which any
director is a partner or a director or a member should be
separately stated.

(iv) For trade receivables outstanding, following ageing schedule shall be

given:
Trade Receivables ageing schedule

(Amount in `)

Particulars Outstanding for following periods

from due date of payment#

Less 6 1-2 2-3 More Total

than 6 months than 3
years years
months - 1 year years

(i) Undisputed Trade

receivables –
considered good

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(ii) Undisputed Trade

Receivables –
considered
doubtful

(iii) Disputed Trade

Receivables
considered good

(iv) Disputed Trade

Receivables
considered
doubtful

# similar information shall be given where no due date of payment is

specified, in that case disclosure shall be from the date of the transaction.
Unbilled dues shall be disclosed separately.
N. CURRENT INVESTMENTS
(i) Current investments shall be classified as:

(a) Investments in Equity Instruments;

(b) Investment in Preference Shares

(c) Investments in government or trust securities;

(d) Investments in debentures or bonds;

(e) Investments in Mutual Funds;

(f) Investments in partnership firms

(g) Other investments (specify nature).

Under each classification, details shall be given of names of the bodies

corporate [indicating separately whether such bodies are (i)
subsidiaries, (ii) associates, (iii) joint ventures, or (iv) controlled special
purpose entities] in whom investments have been made and the
nature and extent of the investment so made in each such body
corporate (showing separately investments which are partly-paid). In

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 FINANCIAL STATEMENTS OF COMPANIES 11.155

regard to investments in the capital of partnership firms, the names of

the firms (with the names of all their partners, total capital and the
shares of each partner) shall be given.

(ii) The following shall also be disclosed:

(a) The basis of valuation of individual investments

(b) Aggregate amount of quoted investments and market value

thereof;

(c) Aggregate amount of unquoted investments;

(d) Aggregate provision made for diminution in value of

investments.
O. INVENTORIES
(i) Inventories shall be classified as:

(a) Raw materials;

(b) Work-in-progress;

(c) Finished goods;

(d) Stock-in-trade (in respect of goods acquired for trading);

(e) Stores and spares;

(f) Loose tools;

(g) Others (specify nature).

(ii) Goods-in-transit shall be disclosed under the relevant sub-head of

inventories.

(iii) Mode of valuation shall be stated.

P. TRADE RECEIVABLES
(i) For trade receivables outstanding, the following ageing schedules
shall be given:

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ADVANCED ACCOUNTING

Trade Receivables ageing schedule (Amount in `)

Particulars Outstanding for following periods

from due date of payment#

Less 6 1-2 2-3 More Total

than 6 months years than 3
years
months years
-1 year

(i) Undisputed Trade

receivables –
considered good

(ii) Undisputed Trade

Receivables –
considered doubtful

(iii) Disputed Trade

Receivables considered
good

(iv) Disputed Trade

Receivables considered
doubtful

# similar information shall be given where no due date of payment is

specified in that case disclosure shall be from the date of the
transaction.

Unbilled dues shall be disclosed separately.

(ii) Trade receivables shall be sub-classified as:
(a) Secured, considered good;

(b) Unsecured considered good;

(c) Doubtful.
(iii) Allowance for bad and doubtful debts shall be disclosed under the
relevant heads separately.

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 FINANCIAL STATEMENTS OF COMPANIES 11.157

(iv) Debts due by directors or other officers of the company or any of

them either severally or jointly with any other person or debts due by
firms or private companies respectively in which any director is a
partner or a director or a member should be separately stated.
Q. CASH AND CASH EQUIVALENTS
(i) Cash and cash equivalents shall be classified as:
(a) Balances with banks;
(b) Cheques, drafts on hand;
(c) Cash on hand;
(d) Others (specify nature).
(ii) Earmarked balances with banks (for example, for unpaid dividend)
shall be separately stated.
(iii) Balances with banks to the extent held as margin money or security
against the borrowings, guarantees, other commitments shall be
disclosed separately.
(iv) Repatriation restrictions, if any, in respect of cash and bank balances
shall be separately stated.
(v) Bank deposits with more than 12 months maturity shall be disclosed
separately.
R. SHORT-TERM LOANS AND ADVANCES
(i) Short-term loans and advances shall be classified as:
(a) Loans and advances to related parties (giving details thereof);
(b) Others (specify nature).

(ii) The above shall also be sub-classified as:

(a) Secured, considered good;
(b) Unsecured, considered good;

(c) Doubtful.

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(iii) Allowance for bad and doubtful loans and advances shall be disclosed
under the relevant heads separately.

(iv) Loans and advances due by directors or other officers of the company
or any of them either severally or jointly with any other person or
amounts due by firms or private companies respectively in which any
director is a partner or a director or a member shall be separately
stated.
S. OTHER CURRENT ASSETS (SPECIFY NATURE).
This is an all-inclusive heading, which incorporates current assets that do
not fit into any other asset categories.
T. CONTINGENT LIABILITIES AND COMMITMENTS (TO THE EXTENT
NOT PROVIDED FOR)
(i) Contingent liabilities shall be classified as:
(a) Claims against the company not acknowledged as debt;

(b) Guarantees;
(c) Other money for which the company is contingently liable
(ii) Commitments shall be classified as:
(a) Estimated amount of contracts remaining to be executed on
capital account and not provided for;
(b) Uncalled liability on shares and other investments partly paid

(c) Other commitments (specify nature).

U. The amount of dividends proposed to be distributed to equity and
preference shareholders for the period and the related amount per share
shall be disclosed separately. Arrears of fixed cumulative dividends on
preference shares shall also be disclosed separately.
V. Where in respect of an issue of securities made for a specific purpose, the
whole or part of the amount has not been used for the specific purpose at
the balance sheet date, there shall be indicated by way of note how such
unutilized amounts have been used or invested.

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 FINANCIAL STATEMENTS OF COMPANIES 11.159

VA. Where the company has not used the borrowings from banks and financial
institutions for the specific purpose for which it was taken at the balance sheet
date, the company shall disclose the details of where they have been used.
W. If, in the opinion of the Board, any of the assets other than Property, Plant
Equipment, “Intangible assets and non-current investments do not have a
value on realization in the ordinary course of business at least equal to the
amount at which they are stated, the fact that the Board is of that opinion,
shall be stated.
Y. Additional Regulatory Information

(i) Title deeds of Immovable Property not held in name of the

Company
The company shall provide the details of all the immovable property
(other than properties where the Company is the lessee and the lease
agreements are duly executed in favour of the lessee) whose title
deeds are not held in the name of the company in format given below
and where such immovable property is jointly held with others, details
are required to be given to the extent of the company’s share.

Relevant Descrip- Gross Title Whether Pro- Reason for

line item tion of carrying deeds title deed perty not being
in the item of value held holder is a held held in the
Balance pro-perty in the promoter, since name of
sheet name director or which the
of relative# date company*
of *
promoter*
/ director
or
employee
of
promoter/
director
PPE Land - - - - **also
Building indicate if
-
in dispute

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ADVANCED ACCOUNTING

Investment
property

-
Land
PPE retired Building
from
active use
and held
for Land
disposal Building
-

others

#Relative here means relative as defined in the Companies Act, 2013.

*Promoter here means promoter as defined in the Companies Act, 2013.

(ii) Where the Company has revalued its Property, Plant and Equipment,
the company shall disclose as to whether the revaluation is based on
the valuation by a registered valuer as defined under rule 2 of the
Companies (Registered Valuers and Valuation) Rules, 2017.
(iii) Following disclosures shall be made where Loans or Advances in the
nature of loans are granted to promoters, directors, KMPs and the
related parties (as defined under Companies Act, 2013,) either
severally or jointly with any other person, that are:
(a) repayable on demand or
(b) without specifying any terms or period of repayment

Type of Amount of loan or Percentage to the total

Borrower advance in the Loans and Advances in
nature of loan the nature of loans
outstanding
Promoters
Directors
KMPs
Related Parties

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(iv) Capital-Work-in Progress (CWIP)

(a) For Capital-work-in progress, following ageing schedule shall be
given:
CWIP aging schedule
(Amount in `)

CWIP Amount in CWIP for a period Total*

of

Less 1-2 2-3 More

than 1 years years than3
year years

Projects in progress
Projects temporarily
suspended

*Total shall tally with CWIP amount in the balance sheet.

(b) For capital-work-in progress, whose completion is overdue or
has exceeded its cost compared to its original plan, following
CWIP completion schedule shall be given**:
(Amount in `)

CWIP To be completed in

Lessthan 1-2 2-3 More than

1 year years years 3 years

Project 1 Project 2”

**Details of projects where activity has been suspended shall be

given separately.

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ADVANCED ACCOUNTING

(v) Intangible assets under development:

(a) For Intangible assets under development, following ageing
schedule shall be given:
Intangible assets under development aging schedule
(Amount in `)

Intangible assets Amount in CWIP for a period of Total*

under development
Less than 1-2 2-3 More than
1 year years years 3 years

Projects in progress
Projects temporarily
suspended

* Total shall tally with the amount of Intangible assets under

development in the balance sheet.
For Intangible assets under development, whose completion is
overdue or has exceeded its cost compared to its original plan,
following Intangible assets under development completion
schedule shall be given**:
(Amount in `)

Intangible assets under To be completed in

development
Less 1-2 2-3 More
than 1 years years than 3
year years

Project 1

Project 2

**Details of projects where activity has been suspended shall be given

separately.

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 FINANCIAL STATEMENTS OF COMPANIES 11.163

(vi) Details of Benami Property held

Where any proceedings have been initiated or pending against the
company for holding any benami property under the Benami
Transactions (Prohibition) Act, 1988 (45 of 1988) and the rules made
thereunder, the company shall disclose the following:-

(a) Details of such property, including year of acquisition,

(b) Amount thereof,
(c) Details of Beneficiaries,
(d) If property is in the books, then reference to the item in the
Balance Sheet,
(e) If property is not in the books, then the fact shall be stated with
reasons,
(f) Where there are proceedings against the company under this
law as an abetter of the transaction or as the transferor then the
details shall be provided,
(g) Nature of proceedings, status of same and company’s view on
same.
(vii) Where the Company has borrowings from banks or financial
institutions on the basis of security of current assets, it shall disclose
the following:-
(a) whether quarterly returns or statements of current assets filed by
the Company with banks or financial institutions are in
agreement with the books of accounts.

(b) if not, summary of reconciliation and reasons of material

discrepancies, if any to be adequately disclosed.
(viii) Wilful Defaulter*

Where a company is a declared wilful defaulter by any bank or

financial Institution or other lender, following details shall be given:
a. Date of declaration as wilful defaulter,

b. Details of defaults (amount and nature of defaults),

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ADVANCED ACCOUNTING

* “wilful defaulter” here means a person or an issuer who or which is

categorized as a wilful defaulter by any bank or financial institution (as
defined under the Act) or consortium thereof, in accordance with the
guidelines on wilful defaulters issued by the Reserve Bank of India.
(ix) Relationship with Struck off Companies

Where the company has any transactions with companies struck off
under section 248 of the Companies Act, 2013 or section 560 of
Companies Act, 1956, the Company shall disclose the following
details:-

Name of Nature of Balance Relationship with

struck off transactions with outstanding
the Struck off
Company struck-off
company, if any,
Company
to be disclosed

Investments in
securities

Receivables

Payables

Shares held by stuck

off company

Other outstanding
balances (to be
specified)

(x) Registration of charges or satisfaction with Registrar of

Companies
Where any charges or satisfaction yet to be registered with Registrar
of Companies beyond the statutory period, details and reasons
thereof shall be disclosed.
(xi) Compliance with number of layers of companies
Where the company has not complied with the number of layers
prescribed under clause (87) of section 2 of the Act read with

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 FINANCIAL STATEMENTS OF COMPANIES 11.165

Companies (Restriction on number of Layers) Rules, 2017, the name

and CIN of the companies beyond the specified layers and the
relationship/extent of holding of the company in such downstream
companies shall be disclosed.
(xii) Following Ratios to be disclosed:-

Current Ratio,
a. Debt-Equity Ratio,
b. Debt Service Coverage Ratio,
c. Return on Equity Ratio,
d. Inventory turnover ratio,
e. Trade Receivables turnover ratio,

f. Trade payables turnover ratio,

g. Net capital turnover ratio,
h. Net profit ratio,
i. Return on Capital employed,
j. Return on investment.
The company shall explain the items included in numerator and
denominator for computing the above ratios. Further explanation shall
be provided for any change in the ratio by more than 25% as
compared to the preceding year.

(xiii) Compliance with approved Scheme(s) of Arrangements

Where any Scheme of Arrangements has been approved by the
Competent Authority in terms of sections 230 to 237 of the
Companies Act, 2013, the Company shall disclose that the effect of
such Scheme of Arrangements have been accounted for in the books
of account of the Company ‘in accordance with the Scheme’ and ‘in
accordance with accounting standards’ and deviation in this regard
shall be explained.

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(xiv) Utilisation of Borrowed funds and share premium:

(A) Where company has advanced or loaned or invested funds
(either borrowed funds or share premium or any other sources
or kind of funds) to any other person(s) or entity(ies), including
foreign entities (Intermediaries) with the understanding (whether
recorded in writing or otherwise) that the Intermediary shall
(i) directly or indirectly lend or invest in other persons or entities
identified in any manner whatsoever by or on behalf of the
company (Ultimate Beneficiaries) or
(ii) provide any guarantee, security or the like to or on behalf of the
Ultimate Beneficiaries; the company shall disclose the following:-

(I) date and amount of fund advanced or loaned or invested in

Intermediaries with complete details of each Intermediary.
(II) date and amount of fund further advanced or loaned or invested
by such Intermediaries to other intermediaries or Ultimate
Beneficiaries alongwith complete details of the ultimate
beneficiaries.
(III) date and amount of guarantee, security or the like provided to
or on behalf of the Ultimate Beneficiaries.
(IV) declaration that relevant provisions of the Foreign Exchange
Management Act, 1999 (42 of 1999) and Companies Act has
been complied with for such transactions and the transactions
are not violative of the Prevention of Money-Laundering act,
2002 (15 of 2003).;
(B) Where a company has received any fund from any person(s) or
entity(ies), including foreign entities (Funding Party) with the
understanding (whether recorded in writing or otherwise) that
the company shall
(i) directly or indirectly lend or invest in other persons or
entities identified in any manner whatsoever by or on
behalf of the Funding Party (Ultimate Beneficiaries) or

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 FINANCIAL STATEMENTS OF COMPANIES 11.167

(ii) provide any guarantee, security or the like on behalf of the

Ultimate Beneficiaries, the company shall disclose the
following:-
(I) date and amount of fund received from Funding
parties with complete details of each Funding party.

(II) date and amount of fund further advanced or loaned

or invested other intermediaries or Ultimate
Beneficiaries alongwith complete details of the other
intermediaries’ or ultimate beneficiaries.
(III) date and amount of guarantee, security or the like
provided to or on behalf of the Ultimate Beneficiaries
declaration that relevant provisions of the Foreign
Exchange Management Act, 1999 (42 of 1999) and
Companies Act has been complied with for such
transactions and the transactions are not violative of
the Prevention of Money-Laundering act, 2002 (15 of
2003).;

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PART II –STATEMENT OF PROFIT AND LOSS

Name of the Company…………………….

Profit and loss statement for the year ended ………………………

(Rupees in…………)

Particulars Note Figures for Figures for

No. the current the
reporting previous
period reporting
period

1 2 3 4

I. Revenue from operations xxx xxx

II. Other income xxx xxx

III. Total /ŶĐŽŵĞ (I + II) xxx xxx

IV. Expenses: xxx xxx
Cost of materials consumed xxx xxx
Purchases of Stock-in-Trade xxx xxx
Changes in inventories of finished xxx xxx
goods
xxx xxx
work-in-progress
xxx xxx
and Stock-in-Trade
xxx xxx
Employee benefits expense
xxx xxx
Finance costs
xxx xxx
Depreciation and amortization
xxx xxx
expense
Other expenses
Total expenses xxx xxx

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 FINANCIAL STATEMENTS OF COMPANIES 11.169

V. Profit before exceptional and xxx xxx

extraordinary items and tax (III-IV)

VI. Exceptional items xxx xxx

VII. Profit before extraordinary items and xxx xxx

tax (V - VI)

VIII. Extraordinary Items xxx xxx

IX. Profit before tax (VII- VIII) xxx xxx

X Tax expense:
(1) Current tax xxx xxx
(2) Deferred tax xxx xxx xxx xxx

XI Profit (Loss) for the period from xxx Xxx

continuing operations (VII-VIII)

XII Profit/(loss) from discontinuing xxx Xxx

operations

XIII Tax expense of discontinuing xxx Xxx

operations

XIV Profit/(loss) from Discontinuing xxx Xxx

operations (after tax) (XII-XIII)

XV Profit (Loss) for the period (XI + XIV) xxx xxx

XVI Earnings per equity share:

(1) Basic xxx xxx
(2) Diluted xxx xxx
See accompanying notes to the financial statements.

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ADVANCED ACCOUNTING

GENERAL INSTRUCTIONS FOR PREPARATION OF STATEMENT OF

PROFIT AND LOSS
1. The provisions of this Part shall apply to the income and expenditure
account referred to in sub-clause (ii) of Clause (40) of Section 2 in like
manner as they apply to a statement of profit and loss.

2. (A) In respect of a company other than a finance company revenue from

operations shall disclose separately in the notes revenue from

(a) Sale of products;

(b) Sale of services;

“(ba) Grants or donations received (relevant in case of section 8

companies only)”;

(c) Other operating revenues;

Less:

(d) Excise duty.

(B) In respect of a finance company, revenue from operations shall

include revenue from

(a) Interest; and

(b) Other financial services

Revenue under each of the above heads shall be disclosed separately by

way of notes to accounts to the extent applicable.

3. Finance Costs

Finance costs shall be classified as:

(a) Interest expense;

(b) Other borrowing costs;

(c) Applicable net gain/loss on foreign currency transactions and

translation.

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 FINANCIAL STATEMENTS OF COMPANIES 11.171

4. Other income
Other income shall be classified as:
(a) Interest Income (in case of a company other than a finance company);
(b) Dividend Income;
(c) Net gain/loss on sale of investments

(d) Other non-operating income (net of expenses directly attributable to

such income).
5. Additional Information

A Company shall disclose by way of notes additional information regarding

aggregate expenditure and income on the following items:
(i) (a) Employee Benefits Expense [showing separately (i) salaries and
wages, (ii) contribution to provident and other funds, (iii)
expense on Employee Stock Option Scheme (ESOP) and
Employee Stock Purchase Plan (ESPP), (iv) staff welfare
expenses].
(b) Depreciation and amortization expense;
(c) Any item of income or expenditure which exceeds one per cent
of the revenue from operations or ` 1,00,000, whichever is
higher;
(d) Interest Income;

(e) Interest Expense;

(f) Dividend Income;
(g) Net gain/ loss on sale of investments;
(h) Adjustments to the carrying amount of investments;
(i) Net gain or loss on foreign currency transaction and translation
(other than considered as finance cost);

(j) Payments to the auditor as

(a) auditor,

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ADVANCED ACCOUNTING

(b) for taxation matters,

(c) for company law matters,
(d) for management services,
(e) for other services,
(f) for reimbursement of expenses;

(k) In case of companies covered u/s 135, amount of expenditure

incurred on corporate social responsibility activities.
(l) Details of items of exceptional and extraordinary nature;

(m) Prior period items;

(ii) (a) In the case of manufacturing companies,
(1) Raw materials under broad heads.
(2) goods purchased under broad heads.
(b) In the case of trading companies, purchases in respect of goods
traded in by the company under broad heads.
(c) In the case of companies rendering or supplying services, gross
income derived from services rendered or supplied under broad
heads.
(d) In the case of a company, which falls under more than one of the
categories mentioned in (a), (b) and (c) above, it shall be
sufficient compliance with the requirements herein if purchases,
sales and consumption of raw material and the gross income
from services rendered is shown under broad heads.
(e) In the case of other companies, gross income derived under
broad heads.
(iii) In the case of all concerns having works in progress, works-in-
progress under broad heads.

(iv) (a) The aggregate, if material, of any amounts set aside or proposed
to be set aside, to reserve, but not including provisions made to
meet any specific liability, contingency or commitment known to
exist at the date as to which the balance-sheet is made up.

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 FINANCIAL STATEMENTS OF COMPANIES 11.173

(b) The aggregate, if material, of any amounts withdrawn from such

reserves.

(v) (a) The aggregate, if material, of the amounts set aside to

provisions made for meeting specific liabilities, contingencies or
commitments.

(b) The aggregate, if material, of the amounts withdrawn from such

provisions, as no longer required.
(vi) Expenditure incurred on each of the following items, separately for
each item:-
(a) Consumption of stores and spare parts.
(b) Power and fuel.
(c) Rent.
(d) Repairs to buildings.
(e) Repairs to machinery.
(f) Insurance.
(g) Rates and taxes, excluding, taxes on income.
(h) Miscellaneous expenses,
(vii) (a) Dividends from subsidiary companies.
(b) Provisions for losses of subsidiary companies.
(viii) The profit and loss account shall also contain by way of a note the
following information, namely:
(a) Value of imports calculated on C.I.F basis by the company during
the financial year in respect of –

I. Raw materials;
II. Components and spare parts;
III. Capital goods;

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ADVANCED ACCOUNTING

(b) Expenditure in foreign currency during the financial year on

account of royalty, know-how, professional and consultation
fees, interest, and other matters;
(c) Total value if all imported raw materials, spare parts and
components consumed during the financial year and the total
value of all indigenous raw materials, spare parts and
components similarly consumed and the percentage of each to
the total consumption;
(d) The amount remitted during the year in foreign currencies on
account of dividends with a specific mention of the total number
of non-resident shareholders, the total number of shares held by
them on which the dividends were due and the year to which the
dividends related;
(e) Earnings in foreign exchange classified under the following
heads, namely:
I. Export of goods calculated on F.O.B. basis;
II. Royalty, know-how, professional and consultation fees;
III. Interest and dividend;
IV. Other income, indicating the nature thereof
(ix) Undisclosed income: The Company shall give details of any transaction
not recorded in the books of accounts that has been surrendered or
disclosed as income during the year in the tax assessments under the
Income Tax Act, 1961 (such as, search or survey or any other relevant
provisions of the Income Tax Act, 1961), unless there is immunity for
disclosure under any scheme and also shall state whether the
previously unrecorded income and related assets have been properly
recorded in the books of account during the year.
(x) Corporate Social Responsibility (CSR)
Where the company covered under section 135 of the companies act,
the following shall be disclosed with regard to CSR activities:-
(a) amount required to be spent by the company during the year,

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 FINANCIAL STATEMENTS OF COMPANIES 11.175

(b) amount of expenditure incurred,

(c) shortfall at the end of the year,

(d) total of previous years shortfall,

(e) reason for shortfall,
(f) nature of CSR activities,

(g) details of related party transactions, e.g., contribution to a trust

controlled by the company in relation to CSR expenditure as per
relevant Accounting Standard,
(h) where a provision is made with respect to a liability incurred by
entering into a contractual obligation, the movements in the
provision during the year should be shown separately.
(xi) Details of Crypto Currency or Virtual Currency
Where the Company has traded or invested in Crypto currency or
Virtual Currency during the financial year, the following shall be
disclosed:-
(a) profit or loss on transactions involving Crypto currency or Virtual
Currency
(b) amount of currency held as at the reporting date,
deposits or advances from any person for the purpose of trading
or investing in Crypto Currency/ virtual currency.

Note: Broad heads shall be decided taking into account the concept of
materiality and presentation of true and fair view of financial statements.

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India
CHAPTER 12
BUY-BACK OF
SECURITIES

LEARNING OUTCOMES
After studying this chapter, you will be able to:
♦ Elucidate the meaning of buy-back of securities;
♦ Comprehend the Accounting Treatment buy-back of securities;

♦ Learn the provisions of the Companies Act regarding buy-back of

securities.

CHAPTER OVERVIEW
Buy-Back of Shares

• As per Section 68 (1) of the Companies Act 2013, buy-back of shares can be
made out of: its free reserves; or the securities premium account; or the
proceeds of any shares or other specified securities.

• The buy-back of equity shares in any financial year shall not exceed twenty-five
per cent of its total paid-up equity capital in that financial year.

• There shall be a minimum gap of one year in a buy-back offer from the date of
closure of the previous buy-back.

• The ratio of the debt owed by the company is not more than twice the capital
and its free reserves after such buy-back.

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 12.2 ADVANCED ACCOUNTING

1. INTRODUCTION
Buy-back of shares means purchase of its own shares by a company. When shares
are bought back by a company, they have to be cancelled by the company. Thus,
shares buy-back results in decrease in share capital of the company. A company
cannot buy its own shares for the purpose of investment. A company having
sufficient cash may decide to buy-back its own shares. The following may be the
objectives/advantages of Buy-back of shares:
(a) to increase earnings per share if there is no dilution in company’s earnings
as the buy-back of shares reduces the outstanding number of shares.
(b) to increase promoters holding as the shares which are bought back are
cancelled.
(c) to discourage others to make hostile bid to take over the company as the
buy-back will increase the promoters holding.
(d) to support the share price on the stock exchanges when the share price, in
the opinion of company management, is less than its worth, especially in the
depressed market.
(e) to pay surplus cash to shareholders when the company does not need it for
business.
The Companies Act, 2013 under Section 68 (1) permits companies to buy-back
their own shares and other specified securities out of:
(i) its free reserves; or
(ii) the securities premium account; or

(iii) the proceeds of the issue of any shares or other specified securities.
Note: No buy-back of any kind of shares or other specified securities shall be
made out of the proceeds of an earlier issue of the same kind of shares or same
kind of other specified securities. For example, if equity shares are to be bought-
back, then, preference shares may be used for the purpose.
The other important provisions relating to the buy-back are:
(1) Section 68 (2) further states that no company shall purchase its own shares
or other specified securities unless—

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 BUY-BACK OF SECURITIES 12.3

(a) the buy-back is authorised by its articles;

(b) a special resolution has been passed in general meeting of the
company authorising the buy-back;
However, the above provisions do not apply where the buy-back is ten
percent or less of the paid-up equity capital + free reserves and is
authorized by a board resolution passed at a duly convened meeting
of the directors. Hence, in case the buy-back is up to 10% of paid up
equity + free reserves, the same may be done with the authorization
of the Board Resolution without the necessity of its being authorized
by the articles of association of the company and by a special
resolution of its members passed at a general meeting of the
company.
(c) the buy-back must be equal or less than twenty-five per cent of the
total paid-up capital and free reserves of the company: (Resource Test)

(d) Further, the buy-back of shares in any financial year must not exceed
25% of its total paid-up capital and free reserves: (Share Outstanding
Test)
(e) the ratio of the debt owed by the company (both secured and
unsecured) after such buy-back is not more than twice the total of its
paid-up capital and its free reserves: (Debt-Equity Ratio Test)

Note: Central Government may prescribe a higher ratio of the debt

than that specified under this clause for a class or classes of
companies. Debt here should include both long-term debt as well as
short term debt.
(f) all the shares or other specified securities for buy-back are fully paid-
up;

(g) the buy-back of the shares or other specified securities listed on any
recognised stock exchange is in accordance with the regulations made
by the Securities and Exchange Board of India in this behalf;

(h) the buy-back in respect of shares or other specified securities other

than those specified in clause (f) is in accordance with the guidelines
as may be prescribed.

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 12.4 ADVANCED ACCOUNTING

Provided that no offer of the buy-back under this sub section shall be made
within a period of one year reckoned from the date of closure of a previous
offer of buy-back if any. This means that there cannot be more than one
buy-back in one year.
(2) The notice of meeting at which special resolution is supposed to be passed
must be accompanied by an explanatory statement stating-
(a) a full and complete disclosure of all material facts;
(b) the necessity of the buy-back;
(c) the class of security intended to be purchased under the buy-back;
(d) the amount to be invested under the buy-back;
(e) the time limit for completion of the buy-back.
(3) Every buy-back shall be completed within twelve months from the date of
passing the special resolution, or the resolution passed by the board of
directors.
(4) The buy-back may be—
(a) from the existing security holders on a proportionate basis; or
(b) from the open market; or
(c) by purchasing the securities issued to employees of the company
pursuant to a scheme of stock option or sweat equity.
(5) Where a company has passed a special resolution under clause (b) of Sub-
section (2) to buy-back its own shares or other securities under this section, it
shall, before making such buy-back, file with the Registrar and the Securities
and Exchange Board of India a declaration of solvency in the form as may be
prescribed and verified by an affidavit to the effect that the Board of Directors
has made a full inquiry into the affairs of the company as a result of which
they have formed an opinion that it is capable of meeting its liabilities and
will not be rendered insolvent within a period of one year of the date of
declaration adopted by the Board of Directors. It must be signed by at least
two directors of the company, one of whom shall be the managing director, if
any:

© The Institute of Chartered Accountants of India

 BUY-BACK OF SECURITIES 12.5

Note: No declaration of solvency shall be filed with the Securities and

Exchange Board of India by a company whose shares are not listed on any
recognised stock exchange.
(6) Where a company buys-back its own securities, it shall extinguish and
physically destroy the securities so bought-back within seven days of the
last date of completion of buy-back.
(7) Where a company completes a buy-back of its shares or other specified
securities under this section, it shall not make further issue of same kind of
shares (including allotment of further shares under clause (a) of Sub-section
(1) of Section (62) or other specified securities within a period of six months
except by way of bonus issue or in the discharge of subsisting obligations
such as conversion of warrants, stock option scheme, sweat equity or
conversion of preference shares or debentures into equity shares.
(8) Where a company buy-back its securities under this section, it shall maintain
a register of the securities so bought, the consideration paid for the
securities bought-back, the date of cancellation of securities, the date of
extinguishing and physically destroying of securities and such other
particulars as may be prescribed.
(9) A company shall, after the completion of the buy-back under this section,
file with the Registrar and the Securities and Exchange Board of India, a
return containing such particulars relating to the buy-back within thirty days
of such completion, as may be prescribed, provided that no return shall be
filed with the Securities and Exchange Board of India by a company whose
shares are not listed on any recognised stock exchange.
(10) If a company makes default in complying with the provisions of this section
or any regulations made by SEBI in this regard, the company may be
punishable with a fine which shall not be less than Rs One Lakh but which
may extend to three lakh rupees and every officer of the company who is in
default shall be punishable with imprisonment for upto 3 years or with a
fine of not less than one lakh rupees but which may extend to three lakh
rupees or with both.
(11) Section 69 (1) states that where a company purchases its own shares out of
the free reserves or securities premium account, a sum equal to the nominal
value of shares so purchased shall be transferred to the Capital Redemption

© The Institute of Chartered Accountants of India

 12.6 ADVANCED ACCOUNTING

Reserve Account and details of such account shall be disclosed in the

Balance Sheet.

(12) The shares or other specified securities which are proposed to be bought-
back must be fully paid-up.

(13) The Capital Redemption Reserve Account may be applied by the company
in paying up unissued shares of the company to be issued to members of
the company as fully paid bonus shares.

(14) Premium (excess of buy-back price over the par value) paid on buy-back
should be adjusted against free reserves and/or securities premium account.
Revaluation reserve represents unrealized profit and hence it cannot be
used for buy-back of securities.

Some Important Terms

(a) “specified securities” includes employees’ stock option or other securities as

may be notified by the Central Government from time to time;

(b) “free reserves” means such reserves which, as per the latest audited balance
sheet of a company, are available for distribution as dividend:

Provided that-

(i) any amount representing unrealised gains, notional gains or revaluation of

assets, whether shown as a reserve or otherwise, or

(ii) any change in carrying amount of an asset or a liability recognised in equity,

including surplus in profit and loss account on measurement of the asset or
the liability at fair value, shall not be treated as free reserves.

2. PROVISIONS OF SECTION 70 OF THE

COMPANIES ACT 2013
(1) No company shall directly or indirectly purchase its own shares or other
specified securities—

(a) through any subsidiary company including its own subsidiary

companies; or

© The Institute of Chartered Accountants of India

 BUY-BACK OF SECURITIES 12.7

(b) through any investment company or group of investment companies;

or
(c) if a default is subsisting, in repayment of deposit or interest payable
thereon, redemption of debentures or preference shares or payment
of dividend to any shareholder or repayment of any term loan or
interest payable thereon to any financial institutions or bank. Provided
that the buy–back is not prohibited if the default is remedied and a
period of three years has elapsed since the cessation of the default.
(2) In accordance with schedule III, no company shall directly or indirectly
purchase its own shares or other specified securities in case such company
has not complied with provisions of Sections 92 (filling of annual return),
123 (payment of dividend within 30 days of declaration), 127 (failure to
distribute dividend) and 129 (preparation of financial statement of the
company).

Explanation I.— For the purposes of Section 68 and Section 70 of the companies Act,
2013 "specified securities" includes employees' stock option or other securities as
may be notified by the Central Government from time to time.

Explanation II. — For the purposes of Section 68, "free reserves" includes securities
premium account.

Note: In exercise of the powers conferred under section 30 of the Securities and
Exchange Board of India Act, 1992, SEBI made Securities and Exchange Board of
India (Buy-back of Securities) (Amendment) Regulations, 2013 to amend the
Securities and Exchange Board of India (Buy-back of Securities) Regulations, 1998.
The important provisions of the new regulations are: (i) No offer of buy-back for
fifteen per cent or more of the paid up capital and free reserves of the company
shall be made from the open market. (ii)A company shall not make any offer of
buy-back within a period of one year reckoned from the date of closure of the
preceding offer of buy-back, if any. (iii)The company shall ensure that at least fifty
per cent of the amount earmarked for buy-back is utilized for buying-back shares
or other specified securities.

© The Institute of Chartered Accountants of India

 12.8 ADVANCED ACCOUNTING

Illustration 1
M Ltd. furnishes the following Balance Sheet as at 31st March, 20X1:

Particulars Notes ` (in 000)

Equity and Liabilities
1 Shareholders’ funds
A Share capital 1 5,000
B Reserves and Surplus 2 6,310
2 Non-current liabilities
Long term borrowings 3 400
3 Current liabilities
A Trade Payables 40
Total 11,750
Assets
1 Non-current assets
A Property, plant and Equipment 4 2,750
B Non-Current Investments (at cost) 5,000
2 Current assets
A Inventories 1,000
B Trade receivables 2,000
C Cash and Cash equivalents 1,000
Total 11,750
Notes to accounts

No. Particulars ` in (‘000)

1 Share Capital
Authorized, Issued and Subscribed Capital:
3,00,000 Equity shares of ` 10 each fully paid up 3,000
20,000 9% Preference Shares of 100 each 2,000
Total 5,000
2 Reserves and Surplus
Capital reserve 10

© The Institute of Chartered Accountants of India

 BUY-BACK OF SECURITIES 12.9

Revenue reserve 4,000

Securities premium 500
Profit and Loss account 1,800
Total 6,310
3 Long term borrowings
10% Debentures 400
4 Property, Plant and Equipment (PPE)
PPE: Cost 3,000
Less: Provision for depreciation (250)
Net carrying value 2,750

The company passed a resolution to buy-back 20% of its equity capital @ ` 15 per
share. For this purpose, it sold its investments of ` 30 lakhs for ` 25 lakhs.
You are required to pass necessary Journal entries.
Solution
Journal Entries in the books of M Ltd.
` in ‘000

Particulars Dr. Cr.

1. Bank A/c Dr. 2,500
Profit and Loss A/c Dr. 500
To Investment A/c 3,000
(Being investment sold for the purpose of buy-
back of Equity Shares)
2. Equity share capital A/c Dr. 600
Premium payable on buy-back Dr. 300
To Equity shares buy-back A/c 900
(Being the amount due on buy-back of equity
shares)
3. Equity shares buy-back A/c Dr. 900
To Bank A/c 900
(Being payment made for buy-back of equity
shares)

© The Institute of Chartered Accountants of India

 12.10 ADVANCED ACCOUNTING

4. Securities Premium A/c Dr. 300

To Premium payable on buy-back 300
(Being premium payable on buy-back charged
from Securities premium)
5. Revenue reserve A/c Dr. 600
To Capital Redemption Reserve A/c 600
(Being creation of capital redemption reserve to
the extent of the equity shares bought back)

Illustration 2
Anu Ltd. (a non-listed company) furnishes you with the following balance sheet as
at 31st March, 20X1: (in crores `)

Particulars Notes `
Equity and Liabilities
1 Shareholders’ funds
A Share capital 1 100
B Reserves and Surplus 2 300
2 Current liabilities
A Trade Payables 40

Total 440

Assets

1 Non-current assets
A Property, plant and equipment 3 -
B Non-Current Investments 4 100

2 Current assets
A Trade receivables 140
B Cash and Cash equivalents 200

Total 440

© The Institute of Chartered Accountants of India

 BUY-BACK OF SECURITIES 12.11

Notes to accounts

No. Particulars `
1 Share Capital
Authorized, issued and subscribed share capital:
12% Redeemable preference shares of ` 100 each, 75
fully paid up
Equity shares of ` 10 each, fully paid up 25
Total 100
2 Reserves and Surplus
Capital reserve 15
Securities premium 25
Revenue reserves 260
Total 300
3 Property, Plant and Equipment
PPE Cost 100
Less: Provision for depreciation (100)
Net carrying value NIL
4 Non-Current Investments
Non-current investments at cost (Market value ` 400 100
Cr.)

The company redeemed preference shares on 1st April, 20X1. It also bought back 50
lakhs equity shares of ` 10 each at ` 50 per share. The payments for the above
were made out of the huge bank balances, which appeared as a part of current
assets.

You are asked to:

(i) Pass journal entries to record the above.

(ii) Prepare balance sheet as at 1.4.20X1.

© The Institute of Chartered Accountants of India

 12.12 ADVANCED ACCOUNTING

Solution
(i) Journal entries in the books of Anu Ltd.
` in crores

Particulars Dr. Cr.

1st 12% Preference share capital A/c Dr. 75

April, To Preference shareholders A/c 75

20X1 (Being preference share capital account
transferred to shareholders account)

Preference shareholders A/c Dr. 75

To Bank A/c 75
(Being payment made to shareholders)

Shares buy-back A/c Dr. 25

To Bank A/c 25

(Being 50 lakhs equity shares bought back @ ` 50

per share)

Equity share capital A/c (50 lakhs х ` 10) Dr. 5

Securities premium A/c (50 lakhs х ` 40) Dr. 20

To Shares buy-back A/c 25

(Being cancellation of shares bought back)

Revenue Reserve A/c Dr. 80

To Capital Redemption Reserve A/c (75+5) 80

(Being creation of capital redemption reserve

to the extent of the face value of preference
shares redeemed and equity shares bought
back)

© The Institute of Chartered Accountants of India

 BUY-BACK OF SECURITIES 12.13

(ii) Balance Sheet of Anu Ltd as at 1.4.20X1

(in crores `)

Particulars Notes `
Equity and Liabilities
1 Shareholders’ funds
A Share capital 1 20
B Reserves and Surplus 2 280
2 Current liabilities
A Trade Payables 40
Total 340
Assets
1 Non-current assets
A Property, plant and equipment 3 -
B Non-Current Investments 4 100
2 Current assets
A Trade receivables 140
B Cash and Cash equivalents 5 100
Total 340

Notes to accounts

No. Particulars `
1 Share Capital
Authorized, issued and subscribed share capital
200 lakhs Equity shares of ` 10 each fully paid 20
Total 20
2 Reserves and Surplus
Capital reserve 15
Capital redemption reserve 80

© The Institute of Chartered Accountants of India

 12.14 ADVANCED ACCOUNTING

Securities premium 25
Less: Utilization for buy-back of shares (20) 5
Revenue Reserve 260
Less: transfer to Capital redemption reserve (80) 180
Total 280
3 Property, plant and Equipment
PPE: cost 100
Less: Provision for depreciation (100)
Net carrying value -
4 Non-Current Investments
Non-current investments at cost 100
(Market value ` 400 Crores)
5 Cash and Cash Equivalents
Cash and Cash Equivalents as on 31.3.20X1 200
Less: Bank payment for redemption and buy-back (100)
Total 100

Illustration 3
Dee Limited (a non-listed company) furnishes the following Balance Sheet as at
31st March, 20X1:
(in thousand ` )

Particulars Notes `
Equity and Liabilities
1 Shareholders’ funds
A Share capital 1 2,700
B Reserves and Surplus 2 9,700
2 Current liabilities
A Trade Payables 1,400
Total 13,800

© The Institute of Chartered Accountants of India

 BUY-BACK OF SECURITIES 12.15

Assets
1 Non-current assets
A Property, plant and Equipment 9,300
B Non-Current Investments 3,000
2 Current assets
A Inventories 500
B Trade receivables 200
C Cash and Cash equivalents 800
Total 13,800

Notes to accounts

No. Particulars `
1 Share Capital
Authorized, issued and subscribed capital:
2,50,000 Equity shares of ` 10 each fully paid up 2,500
2,000, 10% Preference shares of ` 100 each 200
(Issued two months back for the purpose of buy-back) _____
Total 2,700
2 Reserves and Surplus
Capital reserve 1,000
Revenue reserve 3,000
Securities premium 2,200
Profit and loss account 3,500
Total 9,700

The company passed a resolution to buy-back 20% of its equity capital @ ` 50 per
share. For this purpose, it sold all of its investment for ` 22,00,000.
You are required to pass necessary journal entries and prepare the Balance Sheet.

© The Institute of Chartered Accountants of India

 12.16 ADVANCED ACCOUNTING

Solution
Journal Entries in the books of Dee Limited
(in thousand `)

Particulars Dr. Cr.

(i) Bank Account Dr. 2,200

Profit and Loss Account Dr. 800
To Investment Account 3,000
(Being the investments sold at loss for the purpose of
buy-back)

(ii) Equity Share buy-back Account Dr. 2,500

To Bank Account 2,500

(Being the payment made on buy-back)

(iii) Equity Share Capital Account Dr. 500

Premium Payable on Buy-Back Account Dr. 2,000
To Equity Shares Buy-Back Account 2,500
(Being the buy-back amount allocated to equity share
capital)

(iv) Securities premium Account Dr. 2,000

To Premium payable on buy-back Account 2,000
(Being the premium payable on buy-back adjusted
against securities premium account)

(v) Revenue reserve Account Dr. 300

To Capital Redemption Reserve Account 300
(Being the amount equal to nominal value of equity shares
bought back out of free reserves transferred to capital
redemption reserve account)

© The Institute of Chartered Accountants of India

 BUY-BACK OF SECURITIES 12.17

Balance Sheet of Dee Limited as at 1st April, 20X1

(After buy-back of shares)
(in thousand `)

Particulars Notes `
Equity and Liabilities
1 Shareholders’ funds
A Share capital 1 2,200
B Reserves and Surplus 2 6,900
2 Current liabilities
A Trade Payables 1,400
Total 10,500
Assets
1 Non-current assets
A Property, plant and Equipment 9,300
2 Current assets
A Inventories 500
B Trade receivables 200
C Cash and Cash equivalents 500
Total 10,500

Notes to accounts

No. Particulars `
1 Share Capital
Authorized, issued and subscribed capital:
2,50,000 Equity shares of ` 10 each fully paid up 2,000
2,000, 10% Preference shares of ` 100 each 200
(Issued two months back for the purpose of buy-
back) _____
Total 2,200

© The Institute of Chartered Accountants of India

 12.18 ADVANCED ACCOUNTING

2 Reserves and Surplus

Capital reserve 1,000
Capital redemption reserve 300
Securities Premium 2,200
Less: Premium payable on buy-back of shares (2,000) 200
Revenue reserve 3,000
Less: Transfer to Capital redemption reserve (300) 2,700
Profit and loss A/c 3,500
Less: Loss on investment (800) 2,700
Total 6,900

Illustration 4
Extra Ltd. (a non-listed company) furnishes you with the following Balance Sheet as
at 31st March, 20X1:
(in lakhs `)

Particulars Notes `
Equity and Liabilities
1 Shareholders’ funds
A Share capital 1 120
B Reserves and Surplus 2 118
2 Non-current liabilities
Long term borrowings 3 4
3 Current liabilities
A Trade Payables 70
Total 312
Assets
1 Non-current assets
A Property, plant and Equipment 50
B Non-current Investments 120
2 Current assets
A Cash and Cash equivalents 142
Total 312

© The Institute of Chartered Accountants of India

 BUY-BACK OF SECURITIES 12.19

Notes to accounts

No. Particulars `
1 Share Capital
Authorized, issued and subscribed capital:
Equity shares of ` 10 each fully paid 100
9% Redeemable preference shares of ` 100 each fully 20
paid
Total 120
2 Reserves and Surplus
Capital reserves 8
Revenue reserves 50
Securities premium 60
Total 118
3 Long term borrowings
10% Debentures 4

(i) The company redeemed the preference shares at a premium of 10% on 1 st

April, 20X1.
(ii) It also bought back 3 lakhs equity shares of ` 10 each at ` 30 per share. The
payment for the above was made out of huge bank balances.
(iii) Included in its investment were “investments in own debentures” costing ` 2
lakhs (face value ` 2.20 lakhs). These debentures were cancelled on 1st April,
20X1.
(iv) The company had 1,00,000 equity stock options outstanding on the above-
mentioned date, to the employees at ` 20 when the market price was `30
(This was included under current liabilities) On 1.04.20X1 employees exercised
their options for 50,000 shares.
(v) Pass the journal entries to record the above.
(vi) Prepare Balance Sheet as at 01.04.20X1.

© The Institute of Chartered Accountants of India

 12.20 ADVANCED ACCOUNTING

Solution
(` in lakhs)

Date Particulars Debit Credit

20X1
1st April 9% Redeemable preference share capital A/c Dr. 20.00
Premium on redemption of preference shares A/c Dr. 2.00
To Preference shareholders A/c 22.00
(Being preference share capital transferred to
shareholders account)
Preference shareholders A/c Dr. 22.00
To Bank A/c 22.00
(Being payment made to shareholders)
Equity shares buy-back A/c Dr. 90.00
To Bank A/c 90.00
(Being 3 lakhs equity shares of ` 10 each
bought back @ ` 30 per share)
Equity share capital A/c Dr. 30.00
Securities premium A/c Dr. 60.00
To Equity Shares buy-back A/c 90.00
(Being cancellation of shares bought back)
Revenue reserve A/c Dr. 50.00
To Capital redemption reserve A/c 50.00
(Being creation of capital redemption reserve
account to the extent of the face value of
preference shares redeemed and equity
shares bought back as per the law)

© The Institute of Chartered Accountants of India

 BUY-BACK OF SECURITIES 12.21

10% Debentures A/c Dr. 2.20

To Investment (own debentures) A/c 2.00
To Profit on cancellation of own debentures 0.20
A/c
(Being cancellation of own debentures costing
` 2 lakhs, face value being ` 2.20 lakhs and the
balance being profit on cancellation of
debentures)
Bank A/c Dr. 10.00
Employees stock option outstanding (Current
liabilities) A/c Dr. 5.00
To Equity share capital A/c 5.00
To Securities premium A/c 10.00
(Being the allotment to employees, of 50,000
shares of ` 10 each at a premium of 20 per
share in exercise of stock options by
employees)
Securities premium A/c Dr. 2.00
To Premium on redemption of preference 2.00
shares A/c
(Being premium on redemption of preference
shares adjusted through securities premium)

Balance Sheet of Extra Ltd. as at 01.04.20X1

(in lakhs `)

Particulars Notes `
Equity and Liabilities
1 Shareholders’ funds
A Share capital 1 75.00
B Reserves and Surplus 2 66.20

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 12.22 ADVANCED ACCOUNTING

2 Non-current liabilities
Long term borrowings 3 1.80
3 Current liabilities
A Other Current Liabilities 4 65.00
Total 208
Assets
1 Non-current assets
A Property, plant and Equipment 50.00
B Non-current Investments 5 118.00
2 Current assets
A Cash and Cash equivalents 6 40.00
Total 208

Notes to accounts

No. Particulars `
1 Share Capital

Equity shares of ` 10 each fully paid 100

Less: Cancellation of bought back shares (30)
Add: Shares issued against ESOP 5

Total 75
2 Reserves and Surplus
Capital Reserve

Opening balance 8.00

Add: Profit on cancellation of debentures 0.20 8.20
Revenue reserves

Opening balance 50.00

Less: Creation of Capital Redemption Reserve (50.00) -

© The Institute of Chartered Accountants of India

 BUY-BACK OF SECURITIES 12.23

Securities Premium
Opening balance 60.00
Less: Adjustment for cancellation of equity (60.00)
shares
Less: Adjustment for premium on redemption (2.00)
of preference shares
Add: Shares issued against ESOP at premium 10.00 8.00
Capital Redemption Reserve 50.00
Total 66.20
3 Long term borrowings
10% Debentures 4.00
Less: Cancellation of own debentures (2.20)
Total 1.80
4. Other Current liabilities
Opening balance 70.00
Less: Adjustment for ESOP outstanding (5.00)
Total 65.00
5. Non-current investments
Opening balance 120.00
Less: Investment in own debentures (2.00)
Total 118.00
6. Cash and Cash Equivalents
Opening balance 142.00
Less: Payment to preference shareholders (22.00)
Less: Payment to equity shareholders (90.00)
Add: Share price received against ESOP 10.00
Total 40.00

© The Institute of Chartered Accountants of India

 12.24 ADVANCED ACCOUNTING

Illustration 5
Pratham Ltd. (a non-listed company) has the following Capital structure as on
31st March, 20X1:

Particulars ` `
Equity Share Capital (shares of ` 10 each fully paid 30,00,000
Reserves & Surplus
General Reserve 32,50,000
Security Premium Account 6,00,000
Profit & Loss Account 4,30,000
Revaluation Reserve 6,20,000 49,00,000
Loan Funds 42,00,000

You are required to compute by Debt Equity Ratio Test, the maximum number of
shares that can be bought back in the light of above information, when the offer
price for buy-back is ` 30 per share.
Solution
Debt Equity Ratio Test

Particulars `
(a) Loan funds 42,00,000
(b) Minimum equity to be maintained after
buy-back in the ratio of 2:1 (` in crores) 21,00,000
(c) Present equity shareholders fund 72,80,000
(` in crores)
(d) Future equity shareholder fund (` in 59,85,000
crores) (See Note 2) (72,80,000-12,95,000)
(e) Maximum permitted buy-back of Equity 38,85,000 (by simultaneous
(` in crores) [(d) – (b)] (See Note 2) equation)
(f) Maximum number of shares that can be 1,29,500 (by simultaneous
bought back @ ` 30 per share (shares in equation)
crores) (See Note 2)

© The Institute of Chartered Accountants of India

 BUY-BACK OF SECURITIES 12.25

Working Note:
1. Shareholders’ funds

Particulars `

Paid up capital 30,00,000

Free reserves (32,50,000 +6,00,000+4,30,000) 42,80,000

72,80,000

2. As per section 68 of the Companies Act, 2013, amount transferred to CRR

and maximum equity to be bought back will be calculated by simultaneous
equation method.
Suppose amount equivalent to nominal value of bought back shares
transferred to CRR account is ‘x’ and maximum permitted buy-back of
equity is ‘y’.
Equation 1 : (Present equity – Nominal value of buy-back transfer to CRR) –
Minimum equity to be maintained = Maximum permissible buy-back of
equity.

(72,80,000 –x)-21,00,000 = y (1)

Since 51,80,000 – x = y
 Maximum buy -back 
Equation 2:  ×Nominal Value 
 Offer price for buy -back 

= Nominal value of the shares bought –back to be transferred to CRR

y
=  × 10  = x
 30 

3x = y (2)
x = ` 12,95,000 crores and y

= ` 38,85,000 crores

© The Institute of Chartered Accountants of India

 12.26 ADVANCED ACCOUNTING

Illustration 6
Perrotte Ltd. (a non-listed company) has the following Capital Structure as on
31.03.20X1:

Particulars (` in crores)
(1) Equity Share Capital (Shares of ` 10 each fully - 330
paid)
(2) Reserves and Surplus
General Reserve 240 -
Securities Premium Account 90 -
Profit & Loss Account 90 -
Infrastructure Development Reserve 180 600
(3) Loan Funds 1,800

The Shareholders of Perrotte Ltd., on the recommendation of their Board of Directors,

have approved on 12.09.20X1 a proposal to buy-back the maximum permissible number
of Equity shares considering the large surplus funds available at the disposal of the
company.

The prevailing market value of the company’s shares is ` 25 per share and in order
to induce the existing shareholders to offer their shares for buy-back, it was decided
to offer a price of 20% over market.
You are also informed that the Infrastructure Development Reserve is created to
satisfy Income-tax Act requirements.
You are required to compute the maximum number of shares that can be bought
back in the light of the above information and also under a situation where the
loan funds of the company were either ` 1,200 crores or ` 1,500 crores.
Assuming that the entire buy-back is completed by 09.12.20X1, show the
accounting entries in the company’s books in each situation.

© The Institute of Chartered Accountants of India

 BUY-BACK OF SECURITIES 12.27

Solution
Statement determining the maximum number of shares to be bought back
Number of shares

Particulars When loan fund is

` 1,800 crores ` 1,200 crores ` 1,500 crores

Shares Outstanding Test 8.25 8.25 8.25

(W.N.1)

Resources Test (W.N.2) 6.25 6.25 6.25

Debt Equity Ratio Test Nil 3.75 Nil

(W.N.3)

Maximum number of shares

that can be bought back Nil 3.75 Nil
[least of the above]

Journal Entries for the Buy-Back

(applicable only when loan fund is ` 1,200 crores)
` in crores

Particulars Debit Credit

(a) Equity share buy-back account Dr. 112.5

To Bank account 112.5

(Being buy-back of 3.75 crores equity shares of `

10 each @ ` 30 per share)

(b) Equity share capital account Dr. 37.5

Securities premium account Dr. 75

To Equity share buy-back account 112.5

(Being cancellation of shares bought back)

© The Institute of Chartered Accountants of India

 12.28 ADVANCED ACCOUNTING

(c) General reserve account Dr. 37.5

To Capital redemption reserve account 37.5
(Being transfer of free reserves to capital
redemption reserve to the extent of nominal value
of share capital bought back out of redeemed
through free reserves)

Working Notes:
1. Shares Outstanding Test

Particulars (Shares in crores)

Number of shares outstanding 33

25% of the shares outstanding 8.25

2. Resources Test

Particulars
Paid up capital (` in crores) 330
Free reserves (` in crores) 420
Shareholders’ funds (` in crores) 750
25% of Shareholders fund (` in crores) ` 187.5 crores
Buy-back price per share ` 30
Number of shares that can be bought back 6.25 crores shares
(shares in crores)

3. Debt Equity Ratio Test

Particulars When loan fund is

` ` 1,200 ` 1,500
1,800 crores crores
crores
(a) Loan funds (` in crores) 1,800 1,200 1,500
(b) Minimum equity to be
maintained after buy-back in 900 600 750
the ratio of 2:1 (` in crores)

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 BUY-BACK OF SECURITIES 12.29

(c) Present equity shareholders 750 750 750

fund (` in crores)
(d) Future equity shareholder fund N.A. 712.5 N.A.
(` in crores) (See Note 2) (750-37.5)
(e) Maximum permitted buy-back Nil 112.5 (by Nil
of Equity (` in crores) [(d) – simultaneous
(b)] (See Note 2) equation)
(f) Maximum number of shares 3.75 (by
that can be bought back @ simultaneous
` 30 per share (shares in crores) Nil equation) Nil
(See Note 2)
Note:
1. Under Situations 1 & 3 the company does not qualify for buy-back of
shares as per the provisions of the Companies Act, 2013.
2. As per section 68 of the Companies Act, 2013, the ratio of debt owed
by the company should not be more than twice the capital and its free
reserve after such buy-back. In the question, it is stated that the
company has surplus funds to dispose of therefore, it is presumed that
buy- back is out of free reserves or securities premium and hence a
sum equal to the nominal value of the share bought back shall be
transferred to Capital Redemption Reserve (CRR). Utilization of CRR is
restricted to issuance of fully paid-up bonus shares only. It means
CRR is not available for distribution as dividend. Hence, CRR is not a
free reserve. Therefore, for calculation of future equity i.e. share
capital and free reserves, amount transferred to CRR on buy-back has
to be excluded from present equity.
Amount transferred to CRR and maximum equity to be bought back
will be calculated by simultaneous equation method.
Suppose amount equivalent to nominal value of bought back shares
transferred to CRR account is ‘x’ and maximum permitted buy-back of
equity is ‘y’.

© The Institute of Chartered Accountants of India

 12.30 ADVANCED ACCOUNTING

Then
Equation 1 : (Present equity – Nominal value of buy-back transfer to
CRR) – Minimum equity to be maintained= Maximum permissible buy-
back of equity
(750 –x)-600 = y (1)
Since 150 – x = y
 Maximum buy - back 
Equation 2:  x Nominal Value 
 Offer price for buy - back 
= Nominal value of the shares bought –back to be transferred to CRR
y
=  × 10  = x
 30 

[here (30 = 25% x 120]

Or 3x = y (2)
by solving the above two equations we get
x = ` 37.5 crores
y = ` 112.5 crores

SUMMARY
• Buy-back of shares can be made out of:
(i) its free reserves; or
(ii) the securities premium account; or
(iii) the proceeds of any shares or other specified securities.
• No company shall purchase its own shares or other specified securities
unless—
 The buy-back is authorized by the Articles of Association and by a
special resolution passed at a general meeting. However, in case the
buy-back is for a sum less than or equal to ten percent of the paid-up
equity shares + free reserves the same may be authorized by the
resolution of the directors passed at a duly convened Board Meeting.

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 BUY-BACK OF SECURITIES 12.31

 the buy-back is or less than or equal to twenty-five per cent of the

total paid-up capital and free reserves of the company:
 Partly paid shares cannot be bought back by a company;
 the buy-back of equity shares in any financial year shall not exceed
twenty-five per cent of its total paid-up equity capital in that financial
year.
 No offer of buy-back will be made within a period of one year from
the date of closing of the previous buy-back if any. Hence, there can
be a maximum of one buy-back in one year.
 the ratio of the debt owed by the company (both secured and
unsecured) is not more than twice the paid-up capital and its free
reserves after such buy-back:

TEST YOUR KNOWLEDGE

Multiple Choice Questions

1. As per section 68(1) of the Companies Act, buy-back of own shares by the
company, shall not exceed
(a) 25% of the total paid-up capital and free reserves of the company.
(b) 20% of the total paid-up capital and free reserves of the company.
(c) 15% of the total paid-up capital and free reserves of the company.
(d) 10% of the total paid-up capital and free reserves of the company.
2. The companies are permitted to buy-back their own shares out of
(a) Free reserves and Securities premium

(b) Proceeds of the issue of any shares.

(c) Both (a) and (b)
(d) Neither (a) nor (b).

© The Institute of Chartered Accountants of India

 12.32 ADVANCED ACCOUNTING

3. When a company purchases its own shares out of free reserves; a sum equal
to nominal value of shares so purchased shall be transferred to

(a) Revenue redemption reserve.

(b) Capital redemption reserve.
(c) Buy-back reserve
(d) Special reserve
4. State which of the following statements is true?
(a) Buy-back is for more than twenty-five per cent of the total paid-up
capital and free reserves of the company.
(b) Partly paid shares cannot be bought back by a company.
(c) Buy-back of equity shares in any financial year shall exceed twenty-five
per cent of its total paid-up equity capital in that financial year.
(d) Partly paid shares can be bought back by a company.
5. Premium (excess of buy-back price over the par value) paid on buy-back
should be adjusted against
(a) Free reserves.
(b) Securities premium.
(c) Both (a) and (b).
(d) Neither (a) nor (b).

6. Advantages of Buy-back of shares include to

(a) Encourage others to make hostile bid to take over the company.

(b) Decrease promoters holding as the shares which are bought back are
cancelled.

(c) Discourage others to make hostile bid to take over the company as the
buy-back will increase the promoters holding.

(d) All of the above.

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 BUY-BACK OF SECURITIES 12.33

7. What are the conditions to be fulfilled by a Joint Stock Company to buy-back

its equity shares as per Companies Act, 2013? Explain in brief.

Scenario based Questions

8. SMM Ltd. has the following capital structure as on 31st March, 20X1:
` in crore

Particulars Situation I Situation II

(i) Equity share capital (shares of ` 10 1,200 1,200
each)
(ii) Reserves:
General Reserves 1,080 1,080
Securities Premium 400 400
Profit & Loss 200 200
Infrastructure Development Reserve 320 320
(Statutory Reserve)
(iii) Loan Funds 3,200 6,000

The company has offered buy-back price of ` 30 per equity share. You are
required to calculate maximum permissible number of equity shares that can
be bought back in both situations and also required to pass necessary Journal
Entries.
9. KG Limited furnishes the following Balance Sheet as at 31st March, 20X1:

Particulars Notes `
Equity and Liabilities
1 Shareholders’ funds
A Share capital 1 1,200
B Reserves and Surplus 2 810
2 Non-current liabilities
Long term borrowings 750
3

© The Institute of Chartered Accountants of India

 12.34 ADVANCED ACCOUNTING

3 Current liabilities
A Trade Payables 745
B Other Current Liabilities 195

Total 3,700

Assets
1 Non-current assets
A Property, plant and equipment 4 2,026

B Non-current Investments 74
2 Current assets
A Inventories 600

B Trade receivables 260

C Cash and Cash equivalents 740

Total 3,700

Notes to accounts

No. Particulars `
1 Share Capital
Authorized, issued and subscribed capital
Equity share capital (fully paid up shares of ` 10 1,200
each)
2 Reserves and Surplus
Securities premium 175
General reserve 265
Capital redemption reserve 200
Profit & loss A/c 170
Total 810

© The Institute of Chartered Accountants of India

 BUY-BACK OF SECURITIES 12.35

3 Long term borrowings

12% Debentures 750
4 Property, plant and equipment
Land and Building 1,800
Plant and machinery 226
Net carrying value 2,026

On 1st April, 20X1, the company announced the buy-back of 25% of its equity
shares @ ` 15 per share. For this purpose, it sold all of its investments for ` 75
lakhs.
On 5th April, 20X1, the company achieved the target of buy-back. On 30th
April, 20X1 the company issued one fully paid up equity share of ` 10 by way
of bonus for every four equity shares held by the equity shareholders.
You are required to:

(1) Pass necessary journal entries for the above transactions.

(2) Prepare Balance Sheet of KG Limited after bonus issue of the shares.
10. Following is the Balance Sheet of Competent Limited as at 31st March, 20X1:

Particulars Notes `
Equity and Liabilities
1 Shareholders’ funds
A Share capital 1 12,50,000
B Reserves and Surplus 2 18,75,000
2 Non-current liabilities
Long term borrowings 3 28,75,000
3 Current liabilities
A Other Current Liabilities 16,50,000
Total 76,50,000
Assets
1 Non-current assets
A Property, plant and Equipment 4 46,50,000

© The Institute of Chartered Accountants of India

 12.36 ADVANCED ACCOUNTING

2 Current assets
A Other Current Assets 30,00,000
Total 76,50,000
Notes to accounts

No. Particulars `
1 Share Capital
Authorized, issued and subscribed capital:
Equity share capital (fully paid up shares of ` 10 12,50,000
each)
2 Reserves and Surplus
Securities premium 2,50,000
Profit and loss account 1,25.000
Revenue reserve 15,00,000
Total 18,75,000
3 Long term borrowings
14% Debentures 18,75,000
Unsecured Loans 10,00,000
Total 28,75,000
4 Property, plant and equipment
Land and Building 19,30,000
Plant and machinery 18,00,000
Furniture and fitting 9,20,000
Net carrying value 46,50,000

The company wants to buy-back 25,000 equity shares of ` 10 each, on 1st

April, 20X1 at ` 20 per share. Buy-back of shares is duly authorized by its
articles and necessary resolution has been passed by the company towards
this. The payment for buy-back of shares will be made by the company out of
sufficient bank balance available shown as part of Current Assets.

© The Institute of Chartered Accountants of India

 BUY-BACK OF SECURITIES 12.37

Comment with your calculations, whether buy-back of shares by company is

within the provisions of the Companies Act, 2013. If yes, pass necessary
journal entries towards buy-back of shares and prepare the Balance Sheet
after buy-back of shares.
11. The following information from Balance Sheet of Z Ltd. as on 31st March
,20X1:

` Lakhs
Share Capital:
Equity shares of ` 10 each Fully Paid Up 16,000
10% Redeemable Pref. Shares of ` 10 each Fully Paid Up 5,000
Reserves & Surplus
Capital Redemption Reserve 2,000
Securities Premium 1,600
General Reserve 12,000
Profit & Loss Account 600
Secured Loans:
9% Debentures 10,000
Current Liabilities:
Trade payables 4,600
Sundry Provisions 2,000
Fixed Assets 28,000
Investments 4,700
Cash at Bank 4,600
Other Current Assets 16,500

On 1st April, 20X1 the Company redeemed all its Preference Shares at a
Premium of 10% and bought back 10% of its Equity Shares at ` 20 per Share.
In order to make cash available, the Company sold all the Investments for `
5,000 lakhs.
You are required to pass journal entries for the above and prepare the
Company’s Balance sheet immediately after buyback of equity shares and
redemption of preference shares.

© The Institute of Chartered Accountants of India

 12.38 ADVANCED ACCOUNTING

ANSWERS/HINTS
Answer to the Multiple Choice Questions
1. (a) 2. (c) 3. (b) 4. (b) 5. (c) 6. (c)

Answer to the Theoretical Questions

7. Section 68 to 70 of the Companies Act, 2013 lays down the provisions for a
company to buy-back its own equity shares. For details, refer Para 1.1 and
1.2 of the chapter.

Answer to the Scenario based Questions

8. Statement determining the maximum number of shares to be bought back
Number of shares (in crores)

Particulars When loan fund is

` 3,200 crores ` 6,000 crores

Shares Outstanding Test (W.N.1) 30 30

Resources Test (W.N.2) 24 24

Debt Equity Ratio Test (W.N.3) 32 Nil
Maximum number of shares that can be 24 Nil
bought back [least of the above]

Journal Entries for the Buy-Back

(applicable only when loan fund is `3,200 crores)

` in crores
Particulars Debit Credit
(a) Equity shares buy-back account Dr. 720
To Bank account 720
(Being payment for buy-back of 24 crores
equity shares of ` 10 each @ ` 30 per share)

© The Institute of Chartered Accountants of India

 BUY-BACK OF SECURITIES 12.39

(b) Equity share capital account Dr. 240

Premium Payable on buy-back account Dr. 480
To Equity share buy-back account 720
(Being cancellation of shares bought back)
Securities Premium account Dr. 400
General Reserve / Profit & Loss A/c Dr. 80
To Premium Payable on buy-back 480
account
(Being Premium Payable on buy-back
account charged to securities premium and
general reserve/Profit & Loss A/c)
(c) General Reserve / Profit & Loss A/c Dr. 240
To Capital redemption reserve 240
account
(Being transfer of free reserves to capital
redemption reserve to the extent of nominal
value of share capital bought back out of
redeemed through free reserves)

Working Notes:
1. Shares Outstanding Test

Particulars (Shares in crores)

Number of shares outstanding 120

25% of the shares outstanding 30

2. Resources Test

Particulars

Paid up capital (` in crores) 1,200

Free reserves (` in crores) (1,080 + 400 +200) 1,680
Shareholders’ funds (` in crores) 2,880

© The Institute of Chartered Accountants of India

 12.40 ADVANCED ACCOUNTING

25% of Shareholders fund (` in crores) ` 720 crores

Buy-back price per share ` 30

Number of shares that can be bought back 24 crores shares

3. Debt Equity Ratio Test: Loans cannot be in excess of twice the Equity
Funds post Buy-Back

Particulars When loan fund is

` 3,200 crores ` 6,000 crores
(a) Loan funds (`) 3,200 6,000
(b) Minimum equity to be 1,600 3,000
maintained after buy-back in
the ratio of 2:1 (`) (a/2)
(c) Present equity shareholders 2,880 2,880
fund (`)
(d) Future equity shareholders 2,560 (2,880- N.A.
fund (`) (see W.N.4) 320)
(e) Maximum permitted buy- 960 Nil
back of Equity (`) [(d) – (b)]
(f) Maximum number of shares 32 crore
that can be bought back @ shares Nil
` 30 per share
As per the provisions of the
Companies Act, 2013, Qualifies Does not
company Qualify

4. Amount transferred to CRR and maximum equity to be bought back

will be calculated by simultaneous equation method

Suppose amount transferred to CRR account is ‘x’ and maximum

permitted buy-back of equity is ‘y’ Then

Equation 1: (Present Equity - Transfer to CRR)- Minimum Equity to

be maintained = Maximum Permitted Buy-Back

© The Institute of Chartered Accountants of India

 BUY-BACK OF SECURITIES 12.41

= (2,880 – x) – 1,600 = y
= 1280 – x =y (1)
Equation 2: Maximum Permitted Buy-Back X Nominal Value Per
Share/Offer Price Per Share
y/30 x 10 = x

or
3x = y (2)
by solving the above two equations we get
x= ` 320
y = ` 960
9. In the books of KG Limited
Journal Entries

Date Particulars Dr. Cr.

20X1 (` in lakhs)
April 1 Bank A/c Dr. 75
To Investment A/c 74
To Profit on sale of investment 1
(Being investment sold on profit)
April 5 Equity share capital A/c Dr. 300
Securities premium A/c Dr. 150
To Equity shares buy-back A/c 450
(Being the amount due to equity shareholders
on buy-back)
Equity shares buy-back A/c Dr. 450
To Bank A/c 450
(Being the payment made on account of buy-
back of 30 Lakh Equity Shares)
April 5 General reserve A/c Dr. 265
Profit and Loss A/c Dr. 35
To Capital redemption reserve A/c 300

© The Institute of Chartered Accountants of India

 12.42 ADVANCED ACCOUNTING

(Being amount equal to nominal value of buy-

back shares from free reserves transferred to
capital redemption reserve account as per the
law)
April 30 Capital redemption reserve A/c Dr. 225
To Bonus shares A/c (W.N.1) 225
(Being the utilization of capital redemption
reserve to issue bonus shares)
Bonus shares A/c Dr. 225
To Equity share capital A/c 225
(Being issue of one bonus equity share for
every four equity shares held)

Balance Sheet (After buy-back and issue of bonus shares)

Particulars Notes `
Equity and Liabilities
1 Shareholders’ funds
A Share capital 1 1,125
B Reserves and Surplus 2 436
2 Non-current liabilities
Long term borrowings 3 750
3 Current liabilities
A Trade Payables 745
B Other Current Liabilities 195
Total 3,251
Assets
1 Non-current assets
A Property, plant and equipment 4 2,026
2 Current assets
A Inventories 600

© The Institute of Chartered Accountants of India

 BUY-BACK OF SECURITIES 12.43

B Trade receivables 260

C Cash and Cash equivalents 365
Total 3,251

Notes to accounts

No. Particulars `
1 Share Capital
Authorized, issued and subscribed capital:
Equity share capital (fully paid up shares of `
10 each) 1,125
2 Reserves and Surplus
General Reserve 265
Less: Transfer to CR (265) -
Capital Redemption Reserve 200
Add: Transfer due to buy-back of shares
from P/L 35
Add; Transfer due to buy-back of shares
from General Reserve 265
Less: Utilisation for issue of bonus shares (225) 275
Securities premium 175
Less: Adjustment for premium paid on buy-
back (150) 25
Profit & Loss A/c 170
Add: Profit on sale of investment 1
Less: Transfer to CRR (35) 136
Total 436
3 Long term borrowings
12% Debentures 750
4 Property, Plant and Equipment
Land and Building 1,800
Plant and machinery 226
Net carrying value 2,026

© The Institute of Chartered Accountants of India

 12.44 ADVANCED ACCOUNTING

Working Notes:
1. Amount of bonus shares = 25% of (1,200 – 300) lakhs = ` 225 lakhs
2. Cash at bank after issue of bonus shares

Particulars ` in lakhs
Cash balance as on 1st April, 20X1 740
Add: Sale of investments 75
815
Less: Payment for buy-back of shares (450)
365

Note: In the given solution, it is possible to adjust transfer to capital

redemption reserve account or capitalization of bonus shares from any
other free reserves or securities premium (to the extent available) also.

10. Determination of Buy-back of maximum no. of shares as per the Companies

Act, 2013
1. Shares Outstanding Test

Particulars (Shares)
Number of shares outstanding 1,25,000
25% of the shares outstanding 31,250

2. Resources Test: Maximum permitted limit 25% of Equity paid up

capital + Free Reserves

Particulars
Paid up capital (`) 12,50,000
Free reserves (`) (15,00,000 + 2,50,000 + 1,25,000) 18,75,000
Shareholders’ funds (`) 31,25,000
25% of Shareholders fund (`) 7,81,250
Buy-back price per share ` 20
Number of shares that can be bought back (shares) 39,062
Actual Number of shares for buy-back 25,000

© The Institute of Chartered Accountants of India

 BUY-BACK OF SECURITIES 12.45

3. Debt Equity Ratio Test: Loans cannot be in excess of twice the Equity
Funds post Buy-Back

Particulars `

(a) Loan funds (`) (18,75,000 + 10,00,000 + 45,25,000

16,50,000)

(b) Minimum equity to be maintained after buy-

back in the ratio of 2:1 (`) (a/2) 22,62,500

(c) Present equity/shareholders fund (`) 31,25,000

(d) Future equity/shareholders fund (`) (see 28,37,500 ∗2F

W.N.) (31,25,000 – 2,87,500)

(e) Maximum permitted buy-back of Equity (`) 5,75,000

[(d) – (b)]

(f) Maximum number of shares that can be 28,750 shares

bought back @ ` 20 per share

(g) Actual Buy-Back Proposed 25,000 Shares

Summary statement determining the maximum number of shares to

be bought back
Particulars Number of
shares
Shares Outstanding Test 31,250
Resources Test 39,062

∗
As per Section 68 (2) (d) of the Companies Act 2013, the ratio of debt owed by the
company should not be more than twice the capital and its free reserves after such buy-
back. Further under Section 69 (1), on buy-back of shares out of free reserves a sum equal
to the nominal value of the share bought back shall be transferred to Capital Redemption
Reserve (CRR). As per section 69 (2) utilization of CRR is restricted to fully paying up
unissued shares of the Company which are to be issued as fully paid-up bonus shares only.
It means CRR is not available for distribution as dividend. Hence, CRR is not a free reserve.
Therefore, for calculation of future equity i.e. share capital and free reserves, amount
transferred to CRR on buy-back has to be excluded from the present equity.

© The Institute of Chartered Accountants of India

 12.46 ADVANCED ACCOUNTING

Debt Equity Ratio Test 28,750

Maximum number of shares that can be bought 28,750
back [least of the above]

Company qualifies all tests for buy-back of shares and came to the
conclusion that it can buy maximum 28,750 shares on 1st April, 20X1.
However, company wants to buy-back only 25,000 equity shares
@ ` 20. Therefore, buy-back of 25,000 shares, as desired by the
company is within the provisions of the Companies Act, 2013.
Journal Entries for buy-back of shares

Particulars Debit (`) Credit (`)

(a) Equity shares buy-back account Dr. 5,00,000

To Bank account 5,00,000

(Being buy-back of 25,000 equity shares of

` 10 each @ ` 20 per share)

(b) Equity share capital account Dr. 2,50,000

Securities premium account Dr. 2,50,000

To Equity shares buy-back account 5,00,000

(Being cancellation of shares bought back)

(c) Revenue reserve account Dr. 2,50,000

To Capital redemption reserve account 2,50,000

(Being transfer of free reserves to capital

redemption reserve to the extent of
nominal value of capital bought back
through free reserves)

© The Institute of Chartered Accountants of India

 BUY-BACK OF SECURITIES 12.47

Balance Sheet of M/s. Competent Ltd.

as at 31st March, 20X1

Particulars Notes `
Equity and Liabilities

1 Shareholders’ funds

A Share capital 1 10,00,000

B Reserves and Surplus 2 16,25,000

2 Non-current liabilities

Long term borrowings 3 28,75,000

3 Current liabilities

A Other Current Liabilities 16,50,000

Total 71,50,000

Assets

1 Non-current assets

A Property, plant and equipment 4 46,50,000

2 Current assets

Other Current Assets (30,00,000 – 25,00,000

A 5,00,000)

Total 71,50,000

Notes to accounts

No. Particulars `
1 Share Capital
Authorized, issued and subscribed
capital:
Equity share capital (fully paid up shares
of ` 10 each) 10,00,000

© The Institute of Chartered Accountants of India

 12.48 ADVANCED ACCOUNTING

2 Reserves and Surplus

Profit and Loss A/c 1,25,000
Revenue reserves 15,00,000
Less: Transfer to CRR (2,50,000) 12,50,000
Securities premium 2,50,000
Less: Utilization for share buy-back (2,50,000) -

Capital Redemption Reserves 2,50,000

Total 16,25,000

3 Long term borrowings

14% Debentures 18,75,000

Unsecured Loans 10,00,000

Total 28,75,000

4 Property, plant and equipment

Land and Building 19,30,000

Plant and machinery 18,00,000

Furniture and fitting 9,20,000

Net carrying value 46,50,000

Working Note:
Amount transferred to CRR and maximum equity to be bought back will be
calculated by simultaneous equation method.
Suppose amount transferred to CRR account is ‘x’ and maximum permitted
buy-back of equity is ‘y’.
Then
(31,25,000 – x) – 22,62,500 = y (1)
 y 
 × 10  = x or 2x = y (2)
 20 

© The Institute of Chartered Accountants of India

 BUY-BACK OF SECURITIES 12.49

by solving the above equation, we get

x = `2,87,500
y = ` 5,75,000
11. (i) Journal Entries in the books of Z Ltd. (` in lakhs)

Particulars
1 Bank A/c Dr. 5,000
To Investments A/c 4,700
To Profit and Loss A/c 300
(Being investment sold on profit for the
purpose of buy-back)
2 10% Redeemable Preference Share Capital Dr. 5,000
A/c Dr. 500
Premium on Redemption of Preference Shares 5,500
A/c
To Preference Shareholders A/c
(Being redemption of preference share capital
at premium of 10%)
3 Profit and Loss A/c Dr. 500
To Premium on Redemption of Preference 500
Shares A/c
(Being premium on redemption of preference
shares adjusted through securities premium)
4 Equity Share Capital A/c Dr. 1,600
Premium on buyback Dr. 1,600
To Equity buy-back A/c 3,200
(Being Equity Share bought back, Share
Capital cancelled, and Premium on Buyback
accounted for)
5 Securities Premium A/c (1,600) Dr. 1,600
To Premium on Buyback A/c
(Being premium on buyback provided out of 1,600
securities premium)

© The Institute of Chartered Accountants of India

 12.50 ADVANCED ACCOUNTING

6. Preference Shareholders A/c 5,500

Equity buy-back A/c 3,200
To Bank A/c 8,700
(Being payment made to preference
shareholders and equity shareholders)
7 General Reserve Account 6,600
To Capital Redemption Reserve Account 6,600
(Being amount transferred to capital
redemption
reserve account towards face value of
preference shares redeemed and equity
shares bought back)

(ii) Balance Sheet of C Ltd. (after Redemption and Buyback)

(` Lakhs)
Particulars Note No Amount
EQUITY AND LIABILITIES `
(I) Shareholders’ Funds:
(a) Share Capital 1 14,400
(b) Reserves and Surplus 2 14,400
Non-Current Liabilities:
(2)
(a) Long Term Borrowings 3 10,000
Current Liabilities:
(3)
(a) Trade payables 4,600
(b) Short Term Provisions 2,000
Total 45,400
(II) ASSETS
Non-Current Assets
(1)
PPE 28,000

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 BUY-BACK OF SECURITIES 12.51

Current Assets:
(a) Cash and Cash equivalents (W N) 900
(b) Other Current Assets 16,500
45,400

Notes to Accounts

` in Lakhs

1. Share Capital

1,440 lakh Equity Shares of ` 10 each

Fully Paid up (160 lakh Equity Shares
bought back) 14,400

2. Reserves and Surplus

General Reserve 12,000

Less: Transfer to CRR (6,600) 5,400

Capital Redemption Reserve 2,000

Add: Transfer due to buy-back of 6,600

shares from Gen. res. 8,600

Securities premium 1,600

Less: Adjustment for premium paid on (1,600)

buy back

Profit & Loss A/c 600

Add: Profit on sale of investment 300

Less: Adjustment for premium paid (500)

on redemption of preference
shares 400 14,400

3. Long-term borrowings

Secured

9 % Debentures 10,000

© The Institute of Chartered Accountants of India

 12.52 ADVANCED ACCOUNTING

Working Note:
Bank Account

Amount Amount
(` Lakhs) (` Lakhs)
To balance b/d 4,600 By Preference 5,500
Shareholders A/c
To Investment A/c 5,000 By Equity buy back A/c 3,200
(sale
Proceeds)
By Balance c/d (Balancing
figure) 900
9,600 9,600

© The Institute of Chartered Accountants of India

 CHAPTER 13
AMALGAMATION OF
COMPANIES

LEARNING OUTCOMES
After studying this chapter, you will be able to:
♦ Understand the term “Amalgamation” and the methods of accounting
for amalgamations.
♦ Appreciate the concept of transferee Company and the transferor
company.
♦ Meaning of purchase consideration and Calculation of Purchase
consideration under various Methods.
♦ Pass the entries to close the books of the vendor company.
♦ Pass the journal entries in the books of purchasing company to
incorporate the assets and liabilities of the vendor company and also
giving effect to other adjustments.
♦ Preparation of Balance sheet of transferee company after
Amalgamation.

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 13.2 ADVANCED ACCOUNTING

CHAPTER OVERVIEW

This chapter deals with accounting for amalgamations and the treatment of any
resultant goodwill or reserves. Amalgamation means an amalgamation pursuant
to the provisions of the Companies Act 2013 or any other statute which may be
applicable to companies.

Types of Amalgamation

Amalgamation in the nature of Amalgamation in the nature of

merger purchase

1. INTRODUCTION
In today’s modern world, we are witnessing, the rise of different business ideas
every other day. This has attributed to the immense increase in the competition.
Some of the shrewd businesses survive through this cut throat competition,
whereas some of them are wiped out due to the dynamics of this very
competition.

Like the strategies to set up businesses, there has been wide increase in realizing
the need to stay in the business through the different difficult market situations.
Hence, the business world has also seen the growing importance of business-
saving strategies.

There can be different strategies to ensure the business continues to exist, or

existing companies find ways to increase market share by eliminating the
competitors or to come out of financial crisis by restructuring the present capital
structure and the like.

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AMALGAMATION OF COMPANIES

Such strategies are termed using different words like “corporate marriages”,
“strategic alliances”, “business partnering”, etc. The same has been defined in the
Accounting Standard 14 (AS 14).
In this chapter we shall understand the terms, meanings, methods, accounting
treatments related to amalgamation in detail.

2. MEANING OF AMALGAMATION
Amalgamation refers to the process of merger of two or more companies into a
single entity or where one company takes over the other by outright purchase.
Therefore, the term ‘amalgamation’ contemplates two kinds of activities:
(i) two or more companies join to form a new company (Popularly known as
Amalgamation) or
(ii) absorption and blending of one by the other (Popularly known as
Absorption).
As discussed, this arrangement is sought by companies to receive various
advantages such as economies of large-scale production, avoiding competition,
increasing efficiency, expansion, increase in market share, etc.
In amalgamation we have generally two companies called as – 1) vendor or
Transferor Company and 2) Vendee or Transferee Company. Let us understand
the concepts through the following examples-
Example 1- Company A and Company B amalgamate to form Company C.
Company A and Co B are called transferor companies and Company C is called as
the transferee company- this strategy is called as AMALGAMATION.
Example 2- Company A is taken over by Company B (purchased). Here, Company
A is called as Transferor Company and Company B is Transferee Company. This
strategy is called as ABSORPTION.
Example 3- Company A has been suffering from losses for past 5 years, a new
Company B is floated to take over the existing Company A. Here, Company A is
the transferor company and Company B is Transferee Company. This strategy is
termed as EXTERNAL RECONSTRUCTION.

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The concept of the examples given above can be understood from the following
table of differences-

Basis Amalgamation Absorption External

Reconstruction
Meaning Two or more In this case an In this case, a newly
companies are existing company formed company
wound up and a takes over the takes over the
new company is business of one or business of an
formed to take over more existing existing company.
their business. companies.
Minimum At least three At least two Only two companies
number of companies are companies are are involved.
Companies involved. involved.
involved
Number of Only one resultant No new resultant Only one resultant
new resultant company is formed. company is formed. company is formed.
companies Two companies are Under this case a
wound up to form a newly formed
single resultant company takes over
company. the business of an
existing company.
Objective Amalgamation is Absorption is done External
done to cut to cut competition & reconstruction is
competition & reap reap the economies done to reorganize
the economies in in large scale. the financial
large scale. structure of the
company.
In every type of amalgamation, the assets and liabilities of the transferor company
are amalgamated or transferred to the transferee company. The accounting
treatment in the books of both the transferor and transferee is given in further
sections.

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AMALGAMATION OF COMPANIES

3. TYPES OF AMALGAMATION
The Institute of Chartered Accountants of India has introduced Accounting
Standard -14 (AS 14) on ‘Accounting for Amalgamations’. The standard
recognizes two types of amalgamation –

Amalgamation in the nature of merger is an amalgamation where there is a

genuine pooling not only of assets and liabilities of the transferor and transferee
companies but also of the shareholders’ interests and of the businesses of the
companies. The accounting treatment of such amalgamations should ensure that
the resultant figures of assets, liabilities, capital and reserves more or less
represent the sum of the respective figures of the transferor and transferee
companies.

Amalgamation in the nature of merger is an amalgamation, as per para 3(e) of

AS-14, which satisfies all the following conditions:

(i) All the assets and liabilities of the transferor company become, after
amalgamation, the assets and liabilities of the transferee company.

(ii) Shareholders holding not less than 90% of the face value of the equity
shares of the transferor company (other than the equity shares already held
therein, immediately before the amalgamation, by the transferee company
or its subsidiaries or their nominees) become equity shareholders of the
transferee company by virtue of the amalgamation.

(iii) The consideration for the amalgamation receivable by those equity

shareholders of the transferor company who agree to become equity
shareholders of the transferee company is discharged by the transferee
company wholly by the issue of equity shares in the transferee company,
except that cash may be paid in respect of any fractional shares.

(iv) The business of the transferor company is intended to be carried on, after
the amalgamation, by the transferee company.

(v) No adjustment is intended to be made to the book values of the assets and
liabilities of the transferor company when they are incorporated in the
financial statements of the transferee company except to ensure uniformity

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of accounting policies. For example, if transferor company is following

weighted average method for inventory valuation, the book value of the
inventory of the transferor company will be revised by applying the FIFO
method (if the transferee company follows FIFO method for inventory
valuation).
If any one or more of the above conditions are not satisfied in an amalgamation,
such amalgamation is called amalgamation in the nature of purchase.
Difference between amalgamation in the nature of merger and
amalgamation in the nature of purchase

Best of Distinction Amalgamation in the Amalgamation in the

Nature of Merger Nature of Purchase
(a) Transfer of There is transfer of all There need not be transfer
Assets and assets & liabilities. for all assets & liabilities.
Liabilities
(b) Shareholders of Equity shareholders Equity shareholders need
transferor holding 90% equity not become shareholders
company shares in transferor of transferee company.
company become
shareholders of
transferee company.
(c) Purchase Purchase consideration is Purchase consideration
Consideration discharged wholly by need not be discharged
issue of equity shares of wholly by issue of equity
transferee company shares.
(except cash only for
fractional shares)
(d) Same Business The same business of the The business of the
transferor company is transferor company need
intended to be carried on not be intended to be
by the transferee carried on by the
company. transferee company.

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AMALGAMATION OF COMPANIES

(e) Recording of The assets & liabilities The assets & liabilities
Assets & taken over are recorded taken over are recorded at
Liabilities at their existing carrying their existing carrying
amounts except where amounts or the basis of
adjustment is required to their fair values.
ensure uniformity of
accounting policies.
(f) Method of Journal entries for Journal entries for
Accounting recording the merger are recording the purchase of
passed by pooling of business are passed by
interest method. purchase method.

4. PURCHASE CONSIDERATION
For purpose of accounting for amalgamations, we are essentially guided by AS 14
‘Accounting for Amalgamations’. Para 3(g) of AS 14 defines the term purchase
consideration as the “aggregate of the shares and other securities issued and the
payment made in the form of cash or other assets by the transferee company to the
shareholders of the transferor company”.
In simple words, it is the price payable by the transferee company to the
transferor company for taking over the business of the transferor company.
The important point to be noted here is the amount paid towards the equity
shareholders and preference shareholders is only considered as part of the
purchase consideration as per the definition under AS-14. Hence, it should be
noted that purchase consideration does not include the sum which the transferee
company will directly pay to the debenture-holders or creditors of the transferor
company. If a certain liability of the transferor company has not been taken over
by the transferee company it will be discharged by the transferor company.
The purchase consideration can be computed in the following methods-

1. Lumpsum method- Under this method, the transferee company agrees to

pay a lumpsum/fixed amount to shareholders of the transferor company.

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 13.8 ADVANCED ACCOUNTING

2. Net payment method- Under this method the transferee company makes
individual payments to the equity shareholders and preference shareholders
either by way of cash, issue of shares and debentures.

3. Net assets method- Under this method, the purchase consideration is

arrived based on the value of the Assets less the outside liabilities
(excluding share capital and reserves) taken over by the transferee
company. As per AS 14, the value of the assets and liabilities shall be at the
value as agreed between the two parties. If there is no value agreed, then
assets and liabilities taken at the book value.

The purchase consideration essentially depends upon the fair value of its
elements. For example, when the consideration includes securities, the value
fixed by the statutory authority may be taken as the fair value. In case of
other assets, the fair value may be determined by reference to the market
value of the assets given up or in the absence of market value, net book
value of the assets (i.e. cost less accumulated depreciation) are considered.

4. Intrinsic value or share exchange method – Under this method, the

purchase consideration is calculated at the intrinsic value of shares of the
transferor or transferee company. The ratio of shares to be issued is
computed and multiplied with intrinsic value. Total share capital of the
transferor company shall be divided by the total number of shares

Sometimes adjustments may have to be made in the purchase consideration in

the light of one or more future events. When the additional payment is probable
and can be reasonably estimated it is to be included in the calculation of
purchase consideration.

Any of the methods or a combination of the above methods can be used by the
companies to calculate the purchase consideration.

Purchase consideration either recorded at Issue price or at Par value.

The above methods have been explained in the following illustrations.

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AMALGAMATION OF COMPANIES

Illustration 1
S. Ltd. is absorbed by P. Ltd. S ltd. gives the following information on the date of
absorption:

`
Sundry Assets 13,00,000
Share capital:
2,000 7% Preference shares of ` 100 each (fully paid-up) 2,00,000
5,000 Equity shares of ` 100 each (fully paid-up) 5,00,000
Reserves 3,00,000
6% Debentures 2,00,000
Trade payables 1,00,000
Additional information:
P. Ltd. has agreed:
(i) to issue 9% Preference shares of ` 100 each, in the ratio of 3 shares of P. Ltd.
for 4 preference shares in S. Ltd.
(ii) to issue to the debenture-holders in S Ltd. 8% Mortgage Debentures at ` 96 in
lieu of 6% Debentures in S. Ltd. which are to be redeemed at a premium of
20%;
(iii) to pay ` 20 per share in cash and to issue six equity shares of ` 100 each
issued at the market value ` 125 in lieu of every five shares held in S. Ltd.;
and
(iv) to assume the liability to trade payables.
You are required to calculate the purchase consideration.
Solution
The purchase consideration will be

` Form
Preference shareholders: 2,000 × 3/4 × 100 1,50,000 9% Pref. shares
Equity shareholders: 5,000 × 20 1,00,000 Cash
5,000 × 6/5 × 125 7,50,000 Equity shares
10,00,000

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 13.10 ADVANCED ACCOUNTING

Note:
1. According to AS 14, ‘consideration’ excludes the any amount payable to
debenture-holders. The liability in respect of debentures of S Ltd. will be
taken by P Ltd., which will then be settled by issuing new 8% debentures.

2. The issue of the equity shares is done at ` 125 (market value) as it has been
mentioned in the question. The face value shall not be considered for this
purpose.

Illustration 2
Following is the balance sheet of A Ltd. as on 31st March, 20X1

Particulars Notes ` (000)

Equity and Liabilities
1 Shareholders’ funds
A Share capital 1 22,50
B Reserves and Surplus 2 9,00
2 Non-current liabilities
A Long-term borrowings 3 7,00
3 Current liabilities
A Trade Payables 5,00
Total 43,50
Assets
1 Non-current assets
A Property, Plant and Equipment 4 32,50
B Non-current investments 5 6,00

2 Current assets
a Inventories 2,00
b Trade receivables 2,00
c Cash and Cash equivalents 1,00
Total 43,50

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Notes to accounts

1 Share Capital ` in (‘000)

Equity share capital
1,50,000 Equity Shares of ` 10 each 15,00
7,500 14% Preference Shares of ` 100 each 7,50
22,50
2 Reserves and Surplus
General reserve 9,00
3 Long-term borrowings
Secured
15% Debentures 7,00
4 Property, plant and Equipment
Land and Building 32,50
5 Non-current investments
Investments at cost 6,00

B Ltd agreed to take over the assets and liabilities on the following terms and
conditions:

(a) Discharge 15% debentures at a premium of 10% by issuing 15% debentures

of X Ltd.

(b) PPE at 10% above the book value and investments at par value.

(c) Current assets at a discount of 10% and Current liabilities at book value.

(d) Preference shareholders are discharged at a premium of 10% by issuing 15%

preference shares of Rs.100 each.

(e) Issue 3 equity shares of ` 10 each for every 2 equity shares in B Ltd. and pay
the balance in cash.

Calculate Purchase consideration.

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 13.12 ADVANCED ACCOUNTING

Solution
Calculation of Purchase Consideration (Net Asset value Method)

PARTICULARS (` in ‘000’s)
Value of assets taken over:
Property, Plant and Equipment 35,75
Non-Current Investments 6,00
Current Assets 4,50
Total Assets (A) 46,25
Less: Liabilities taken over:
15% Debentures 7,70
Current Liabilities 5,00
Total Liabilities (B) 12,70
Purchase consideration (A -B) 33,55
Mode of Purchase Consideration
In the form of 15% Preference shares 8,25
In the form of Equity shares 22,50
In the form of Cash (Balance) 2,80
Total 33,55

Illustration 3
Let us consider the Balance Sheet of X Ltd. as at 31st March, 20X1:

Particulars Notes ` (000)

Equity and Liabilities
1 Shareholders’ funds
A Share capital 1 100,00
B Reserves and Surplus 2 12,50
2 Non-current liabilities
A Long-term borrowings 3 40,00
3 Current liabilities
A Trade Payables 20,00
Total 172,50

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AMALGAMATION OF COMPANIES

Assets
1 Non-current assets
A Property, Plant and Equipment 4 105,50
B Non-current investments 5 5,00

2 Current assets
a Inventories 23,00
b Trade receivables 24,00
c Cash and Cash equivalents 15,00
Total 172,50
Notes to accounts

` in (‘000)
1 Share Capital
Equity share capital
7,50,000 Equity Shares of ` 10 each 75,00
25,000 14% Preference Shares of ` 100 each 25,00
100,00
2 Reserves and Surplus
General reserve 12,50
12,50
3 Long-term borrowings
Secured
14% Debentures 40,00
40,00
4 Property, plant and Equipment
Land and Building 50,00
Plant and machinery 45,00
Furniture 10,50
105,50
5 Non-current investments
Investments at cost 5,00
5,00

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 13.14 ADVANCED ACCOUNTING

Other Information:

(i) Y Ltd. takes over X Ltd. on 10th April, 20X1.

(ii) Debenture holders of X Ltd. are discharged by Y Ltd. at 10% premium by
issuing 15% own debentures of Y Ltd.
(iii) 14% Preference Shareholders of X Ltd. are discharged at a premium of 20% by
issuing necessary number of 15% Preference Shares of Y Ltd. (Face value ` 100
each).
(iv) Intrinsic value per share of X Ltd. is ` 20 and that of Y Ltd. ` 30. Y Ltd. will
issue equity shares to satisfy the equity shareholders of X Ltd. on the basis of
intrinsic value. However, the entry should be made at par value only. The
nominal value of each equity share of Y Ltd. is ` 10.
Compute the purchase consideration.
Solution

Computation of Purchase consideration (` in ’000) Form

For Preference Shareholders of X Ltd. 3,000 30,000
15% Preference
shares in Y Ltd.
For equity shareholders of X Ltd. 5,000 5,00,000 Equity
(20/30 × 7,50,000) × ` 10 shares of Y Ltd.
of ` 10 each
Total Purchase consideration 8,000

Note: According to AS 14, amount paid to the debenture holders should not be
included in the purchase consideration calculation. Such debentures will be taken
over by Y Ltd. and then discharged by them later.

Illustration 4
Neel Ltd. and Gagan Ltd. amalgamated to form a new company on 1.04.20X1.
Following is the Balance Sheet of Neel Ltd. and Gagan Ltd. as at 31.3.20X1:

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AMALGAMATION OF COMPANIES

Particulars Notes Neel Gagan

Equity and Liabilities

1 Shareholders’ funds
A Share capital 7,75,000 8,55,000
2 Current liabilities 6,23,500 5,57,600
Total 13,98,500 14,12,600
Assets

1 Non-current assets
A Property, Plant and Equipment 1 12,35,000 12,54,000
2 Current assets 1,63,500 1,58,600

Total 13,98,500 14,12,600

Notes to accounts:

1 Property, plant and Equipment

Land and Building 7,50,000 6,40,000

Plant and machinery 4,85,000 6,14,000

12,35,000 12,54,000

Following is the additional information:

(i) The assets of Neel Ltd. and Gagan Ltd. are to be revalued as under:

Neel Gagan
` `
Plant and machinery 5,25,000 6,75,000
Building 7,75,000 6,48,000

(ii) The purchase consideration is to be discharged as under:

(a) Issue 24,000 equity shares of ` 25 each fully paid up in the proportion
of their profitability in the preceding 2 years.

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 13.16 ADVANCED ACCOUNTING

(b) Profits for the preceding 2 years are given below:

Neel Gagan
` `
1st year 2,62,800 2,75,125
IInd year 2,12,200 2,49,875
Total 4,75,000 5,25,000

(c) Issue 12% preference shares of ` 10 each fully paid up at par to provide
income equivalent to 8% return on net assets in the business as on
31.3.20X1 after revaluation of assets of Neel Ltd. and Gagan Ltd.
respectively.

You are required to compute the

(i) Equity and preference shares issued to Neel Ltd. and Gagan Ltd.,
(ii) Purchase consideration.
Solution
(i) Calculation of equity shares to be issued to Neel Ltd. and Gagan Ltd.

Profits of Neel Gagan

` `
I year 2,62,800 2,75,125
II year 2,12,200 2,49,875

Total 4,75,000 5,25,000

The total profits- ` 4,75,000+ ` 5,25,000= ` 10,00,000

No. of shares to be issued = 24,000 equity shares in the proportion of the
preceding 2 years’ profits.

Neel Gagan
24,000 x 475/1000 11,400 equity shares
24,000 x 525/1000 12,600 equity shares

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Calculation of 12% Preference shares to be issued to Neel Ltd. and

Gagan Ltd.
Neel Gagan
` `
Net assets (Refer working note) 8,40,000 9,24,000
8% return on Net assets 67,200 73,920
12% Preference shares to be issued 56,000 shares
 100 
67,200 × 12  = 5,60,000 @ ` 10 each
 

 100  61,600 shares

73,920 × 12  = 6,16,000 @ ` 10 each
 

(ii) Total Purchase Consideration

Neel Gagan
` `
Equity shares @ of ` 25 each 2,85,000 3,15,000
12% Preference shares @ of ` 10 each 5,60,000 6,16,000
Total 8,45,000 9,31,000

Working Note:
Calculation of Net assets as on 31.3.20X1

Neel Gagan
` `
Plant and machinery 5,25,000 6,75,000
Building 7,75,000 6,48,000
Current assets 1,63,500 1,58,600
Less: Current liabilities (6,23,500) (5,57,600)
8,40,000 9,24,000

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 13.18 ADVANCED ACCOUNTING

Note: Since the income from the preference shares shall be equal to the 8%
return on assets, the shares are computed in such way that 12% dividend on them
shall be equal to 8% of the return on Net assets.

5. METHODS OF ACCOUNTING FOR

AMALGAMATIONS
There are two main methods of accounting for amalgamation viz,

Methods of accounting for Amalgamation

Pooling of interests method Purchase method

The first method is used in case of amalgamation in the nature of merger where the
conditions as per para 3(e) of AS-14, required are fulfilled and the second method is
used in case of amalgamation in the nature of purchase.
Pooling of Interest Method
Under pooling of interests method, the assets, liabilities and reserves of the
Transferor Company will be taken over by Transferee Company at existing
carrying amounts unless any adjustment is required due to different accounting
policies followed by these companies.
As a result the difference between the amount recorded as share capital issued
(plus any additional consideration in the form of cash or other assets) and the
amount of share capital of Transferor Company should be adjusted in the reserves
of the financial statements of Transferee company (recorded as deduction from
the reserves where the capital issued is more than the capital of the transferor
company).
In simple terms, where in case of pooling method- the amount to be adjusted
against the reserves- can be computed in the following 3 steps-

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AMALGAMATION OF COMPANIES

Step I- Equity Share capital + Preference share capital issued+ any other
additional consideration in form of cash and other assets by the Transferee
Company.
Step II- Existing Equity share capital + Existing Preference share capital in the
books of Transferor Company.

Step III- Step I- Step II= amount to be adjusted from the reserves of Transferee
company.

Purchase Method

Assets and Liabilities: the assets and liabilities of the transferor company should
be incorporated at their existing carrying amounts or the purchase consideration
should be allocated to individual identifiable assets and liabilities on the basis of
their fair values at the date of amalgamation.

Difference between the Purchase Consideration and Net Assets transferred:

Any excess of the amount of purchase consideration over the value of the net
assets of the transferor company acquired by the transferee company should be
recognized as goodwill in the financial statement of the transferee company. Any
short fall should be shown as capital reserve. Goodwill should be amortized over
period of five years unless a somewhat longer period can be justified.

In simple terms, where in case of purchase method- the amount to be transferred

to capital reserve or to be recorded as Goodwill- can be computed in the
following 3 steps-

Step I- Find out the Net assets amount using the following formula- Total assets-
Outside liabilities (Non-current liabilities + Current Liabilities)

Step II- Compute the purchase consideration using any of the methods as given
under Purchase consideration computation.

Step III- (a) If Step I- Step II= Positive amount- then it is capital reserve- since the
assets received more than the amount paid as purchase consideration to acquire
them.

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(b) If Step I- Step II= Negative amount- then it is to be recorded as Goodwill

(intangible asset) - since the amount paid for acquiring business is more than the
Net assets, which is technically due to its goodwill.

Treatment of reserves under purchase method

No reserves, other than statutory reserves, of the transferor company should

be incorporated in the financial statements of transferee-company.

The balance of Profit and Loss account, general reserves of the transferor
company are not recorded at all.

Though, normally, in an amalgamation in the nature of purchase, the identity of

reserves is not preserved, an exception is made only in respect of statutory
reserves and such reserves shall retain their identity in the financial statements of
the transferee company in the same form in which they appeared in the financial
statements of the transferor company, till the time their identity is required to be
maintained to comply with the relevant statute.

This exception is made only in those amalgamations where the requirements of

the relevant statute for recording the statutory reserves in the books of the
transferee company are complied with. Statutory reserves of the transferor
company should be incorporated in the balance sheet of transferee company by
way of the following journal entry.

Amalgamation Adjustment Reserve A/c Dr.

To Statutory Reserves

‘Amalgamation Adjustment Reserve’ is debited to bring in the statutory

reserves of the transferor company. This is represented as deduction from the
reserves of the transferee company after amalgamation.

Once after the time period to show such statutory reserves is over, both the
reserves and the aforesaid account are reversed. Amalgamation Adjustment
Reserve’ has to be shown as a separate line item - which implies, that this debit
"cannot be set off against Statutory reserve taken over" and therefore, the
presentation will be as follows:

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Reserves

Description Amount Amount

(Current year) (Previous Year)

Statutory Reserve (taken over from

transferor company)

General Reserve

Retained Earnings

Amalgamation Adjustment Reserve (--) (--)

(negative balance)

6. JOURNAL ENTRIES TO CLOSE THE BOOKS OF

VENDOR COMPANY
In case of amalgamation under any of the above methods, there shall be an
accounting treatment both in the books of vendor (transferor) and vendee
(transferee) companies.

We will now, understand the treatment in the books of vendor under this section-
Since the books of the vendor will be closed upon amalgamation- the assets and
the liabilities at the book values are transferred to a separate account called as
the “Realization account”.

The purchase consideration receivable is credited to the Realization account. On

the receipt of the purchase consideration, it is debited to equity shareholders and
preference shareholders’ account. The balance of realization account (either
profit/loss) is transferred to the equity shareholders’ account.

Those assets and liabilities which are not taken over by vendee company but
settled by the vendor company are also shown in the books of the vendor only.

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The journal entries have been explained with the following illustration:
Illustration 5
Wye Ltd. acquires the business of Zed Ltd. whose balance sheet as at 31st March,
20X1 is as under:

Particulars Notes `
Equity and Liabilities

1 Shareholders’ funds
A Share capital 1 12,00,000
B Reserves and Surplus 2 1,58,000

2 Non-current liabilities
A Long-term borrowings 3 2,00,000
3 Current liabilities

A Trade Payables 1,20,000

B Other current liabilities 12,000
(Interest payable on debentures)

Total 16,90,000
Assets
1 Non-current assets

A Property, Plant and Equipment 4 10,00,000

B Intangible assets 5 2,90,000

2 Current assets
A Inventories 1,50,000
B Trade receivables 1,80,000

C Cash and Cash equivalents 70,000

Total 16,90,000

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Notes to accounts:

`
1 Share Capital
Equity Share capital (` 100 each) 8,00,000
6% Preference Share capital (` 100 each) 4,00,000
12,00,000
2 Reserves and Surplus
Capital reserve 1,00,000
Profit and loss A/c 50,000
Workmen compensation reserve
(Expected liability ` 5,000) 8,000
1,58,000
3 Long-term borrowings
6% Debentures 2,00,000
2,00,000
4 Property, Plant and Equipment
Land and Building 4,00,000
Plant and machinery 6,00,000
10,00,000
5 Intangible assets
Goodwill 2,40,000
Patents 50,000
2,90,000
Wye Ltd. was to take over all assets (except cash) and liabilities (except for interest
due on debentures) and to pay following amounts:
(i) ` 2,00,000 7% Debentures (` 100 each) in Wye Ltd. for the existing debentures
in Zed Ltd.; for the purpose, each debenture of Wye Ltd. is to be treated as
worth ` 105.

© The Institute of Chartered Accountants of India

 13.24 ADVANCED ACCOUNTING

(ii) For each preference share in Zed Ltd. ` 10 in cash and one 9% preference
share of ` 100 each in Wye Ltd.
(iii) For each equity share in Zed Ltd. ` 20 in cash and one equity share in Wye
Ltd. of ` 100 each having the market value of ` 140.
(iv) Expense of liquidation of Zed Ltd. are to be reimbursed by Wye Ltd. to the
extent of ` 10,000. Actual expenses amounted to ` 12,500.
Wye Ltd. valued Land and building at ` 5,50,000 Plant and Machinery at ` 6,50,000
and patents at ` 20,000 of Zed Ltd for the purpose of amalgamation.
Solution
Purchase Consideration

` Form
(i) Preference Shares: ` 10 per share 40,000 Cash
Preference shares 4,00,000 4,40,000 Preference shares
(ii) Equity shares: ` 20 per share 1,60,000 Cash
8,000 equity shares in
Wye Ltd. @ ` 140 11,20,000 12,80,000 Equity shares
17,20,000
Steps to close the Books of the Vendor Company
1. Open Realization Account and transfer all assets at book value.
Exception: If cash is not taken over by the purchasing company, it should
not be transferred.
Note: Profit and Loss Account (Dr.) and expenses not written off are not
assets and should not be transferred to the Realization Account.
The journal entry in the above case is:

` `
Realization A/c Dr. 16,20,000
To Sundries —

Goodwill 2,40,000
Land & Building 4,00,000

© The Institute of Chartered Accountants of India

 13.25
AMALGAMATION OF COMPANIES

Plant & Machinery 6,00,000

Patents 50,000
Inventory 1,50,000
Trade receivables 1,80,000
(Transfer of assets to Realization Account on sale of business to Wye Ltd.)

2. Transfer to the Realization Account the liabilities which the purchasing

company is to take over. In case of the provisions, the portion which represents
liability expected to arise in future should be so transferred and the portion
which is not required (i.e., the reserve portion) should be treated as profit.
Accordingly, the following entry will be recorded:
` `
6% Debentures in Wye Ltd. Dr. 2,00,000
Workmen’s Compensation Reserve Dr. 5,000
Trade payables Dr. 1,20,000
To Realization A/c 3,25,000
(Transfer of liabilities taken over by Wye Ltd.
to Realization A/c)
For liabilities not take over by the purchasing company, the profit or loss on
discharge of such liabilities shall be transferred to Realization Account.
3. Debit purchasing company and credit Realization Account with the purchase
consideration.
Wye Ltd.- Dr. 17,20,000
To Realization A/c 17,20,000
(Amount receivable from Wye Ltd. for sale of business)
4. On receipt of the purchase consideration debit what is received (cash,
debentures, shares etc.) and credit the purchasing company. Thus —
Cash Dr. 2,00,000
9% Preference shares in Wye Ltd. Dr. 4,00,000

© The Institute of Chartered Accountants of India

 13.26 ADVANCED ACCOUNTING

Equity shares in Wye Ltd. Dr. 11,20,000

To Wye Ltd. 17,20,000
(Receipt of purchase consideration from
the purchase company)
5. Expenses of liquidation have to be dealt with according to the circumstances of
each case.
(a) If the vendor company has to bear and pay them:
Realization Account should be debited and Cash Account credited.

(b) If the expenses are to be borne by the purchasing company, the

question may be dealt within one of the two ways mentioned below:

(i) It may be ignored in the books of the vendor company.

(ii) If the expenses are to be paid first by the vendor company and
afterwards reimbursed by the purchasing company, the following
two entries will be passed:

(a) Debit Purchasing company and credit Cash Account when

expenses are paid by the vendor company; and

(b) Debit Cash Account and credit purchasing company (on

the expenses being reimbursed).

In the above mentioned case Wye Ltd. has to pay maximum of

` 10,000 only whereas, the amount spent is ` 12,500. Hence ` 2,500 is
to be borne by Zed Ltd.; the entries required will be :

` `

Wye Ltd. Dr. 10,000

Realization A/c Dr. 2,500

To Cash A/c 12,500

(Liquidation expenses out of which

` 10,000 is payable by Wye Ltd.)

© The Institute of Chartered Accountants of India

 13.27
AMALGAMATION OF COMPANIES

Cash A/c Dr. 10,000

To Wye Ltd. 10,000

(Account reimbursed by Wye Ltd. for expense)

6. Liabilities not assumed by the purchasing company, have to be paid off. On
payment, debit the liability concerned and credit cash. Any difference between
the amount actually paid and the book figure must be transferred to the
Realization Account. Zed Ltd. shall pass the following entries in this respect:

` `
Interest Outstanding Dr. 12,000
To Debentureholders A/c 12,000
(Amount due to debenture holders
for debentures interest)
Debentureholders Dr. 12,000
To Cash A/c 12,000

(Debentureholders paid cash ` 12,000

for outstanding interest)
7. Credit the preference shareholders with the amount payable to them,
debiting Preference Share Capital with the amount shown in the books,
transferring the difference between the two, if any, to the Realization
Account. Thus —

6% Pref. Share Capital A/c Dr. 4,00,000

Realization A/c Dr. 40,000
To Preference Shareholders A/c 4,40,000

(The amount due to preference

shareholders for capital and the extra
amount payable under the scheme of
absorption)

© The Institute of Chartered Accountants of India

 13.28 ADVANCED ACCOUNTING

Note: In the absence of any indication to the contrary, preference

shareholders will be entitled only to the capital contributed by them. But if
funds available after paying off creditors are not sufficient to satisfy the
claim of preference shareholders fully, they will have to suffer a loss to the
extent of the deficit.

8. Pay off preference shareholders by debiting them and crediting whatever is

given to them. The entry in the above case is :

` `
Preference shareholders A/c Dr. 4,40,000

To Cash A/c 40,000

To 9% Preference shares in Wye Ltd. 4,00,000

(Cash and preference shares in Wye

Ltd. given to preference shareholders)

9. Transfer equity share capital and account representing profit or loss (including
the balance in Realization Account) to Equity Shareholders Account. This will
determine the amount receivable by the equity shareholders. Zed Ltd. shall
pass the following entries in this regard :

` `
Equity Share Capital A/c Dr. 8,00,000

Capital Reserve A/c Dr. 1,00,000

Profit and Loss A/c Dr. 50,000

Workmen’s Compensation Reserve A/c Dr. 3,000

Realization A/c Dr. 3,82,500

To Equity Shareholders A/c 13,35,500

(Various accounts representing capital and

profit transferred to Equity Shareholders Account)

© The Institute of Chartered Accountants of India

 13.29
AMALGAMATION OF COMPANIES

10. On satisfaction of the claims of the equity shareholders, debit their account
and credit whatever is given to them. Hence:

Equity Shareholders A/c Dr. 13,35,500

To Equity Shares in Wye Ltd. 11,20,000

To Cash A/c (W.N.2) 2,15,500

Working Notes
1. Realization Account
` `
To Sundry Assets 16,20,000 By Sundry Liabilities 3,25,000
To Cash (excess expenses of liquidation) 2,500 By Wye Ltd. 17,20,000
To Preference Shareholders 40,000
To Equity Shareholders A/c -
profit transferred 3,82,500
20,45,000 20,45,000
2. Cash Account
` `
To Balance b/d 70,000 By Realization 2,500
To Wye Ltd. 2,00,000 By Wye Ltd. 10,000
(consideration for amalgamation)
To Wye Ltd. 10,000 By Debenture-holders 12000
(liquidation expenses reimbursed) By Preference shareholder 40000
By Equity Shareholder (B/F) 215500
280000 280000

7. ENTRIES IN THE BOOKS OF PURCHASING

COMPANY
In the books of the purchasing/ vendee/ transferee company, the assets and
liabilities which are taken overs are recorded at the agreed values and where
there is no agreed value then at the book values.

© The Institute of Chartered Accountants of India

 13.30 ADVANCED ACCOUNTING

Continuing with the information given in Illustration 5:

1. Debit Business Purchase Account and Credit Liquidator of the vendor
company with the account of the purchase consideration. Thus -
` `
Business Purchase A/c Dr. 17,20,000
To Liquidator of Zed Ltd. 17,20,000
(Amount payable to Zed Ltd. as per agreement dated....)
2. (i) Debit assets acquired (except goodwill) at the value placed on them
by the purchasing company;

(ii) Credit liabilities taken over at agreed values and credit Business
Purchase Account with the amount of purchase consideration; and

(iii) If the credits as per (ii) above exceed debits as per (i) above, the
difference should be debited to Goodwill Account, in the reverse
case, the difference should be credited to Capital Reserve.

Note: The amount of Goodwill or Capital Reserve that shall be included will
be the amount as has been arrived at only in foregoing manner.

In the above case the entry to be passed shall be:

` `
Land and Building A/c Dr. 5,50,000

Plant and Machinery A/c Dr. 6,50,000

Patents A/c Dr. 20,000

Inventory A/c Dr. 1,50,000

Trade receivables Dr. 1,80,000

Goodwill Dr. 5,05,000

© The Institute of Chartered Accountants of India

 13.31
AMALGAMATION OF COMPANIES

To

Provision for Workmen’s Compensation A/c 5,000

Trade payables 1,20,000
Debentures in Z Ltd. 2,10,000
Business Purchases Account 17,20,000

(Various assets and liabilities taken over from Zed Ltd.Goodwill ascertained as
a balancing figure)

3. On the payment to the vendor company the balance at its credit, the entry
to be made by Wye Ltd. shall be:

` `

Liquidator of Zed Ltd. Dr. 17,20,000

To Cash 2,00,000
To 9% Preference Share Capital A/c 4,00,000
To Equity Share Capital A/c 8,00,000
To Securities Premium A/c 3,20,000

(Payment of cash and issue of shares in

satisfaction of purchase consideration)

4. Debentures in Z Ltd. A/c Dr. 2,10,000

To 7% Debentures A/c 2,00,000

To Premium on Debentures A/c 10,000
(Debentures issued)

5. If the purchasing company is required to pay the expenses of liquidation of the

vendor company, the amount should be debited to the Goodwill or Capital
Reserve Account, as the case may be. In the instant case, the entry shall be:

Goodwill Account Dr. 10,000

To Cash Account 10,000

(Amount paid towards liquidation expenses on Zed Ltd.)

© The Institute of Chartered Accountants of India

 13.32 ADVANCED ACCOUNTING

Typical adjustments which shall be noted while working out the problems

Entries at par value - The students will note that purchasing company is left with
a large debit in the Goodwill Account (Step No. 2) accompanied by quite a large
amount in the Securities Premium Account (Step No. 3). The two cannot be
adjusted. However, it would be permissible to negotiate on the basis to the
market value of the shares but to make entries only on the basis of par of shares
of purchasing company. This will mean that Goodwill Account (or Capital Reserve)
will be automatically adjusted for the securities premium.

Inter Company-owing - Should the purchasing company owe an amount to the

vendor company or vice versa, the amount will be included in the book debts of
one company and trade payables of the other. This should be adjusted by the
entry:

Trade payables Dr.

To Trade receivables

The entry should be made after the usual acquisition entries have been passed. At
the time of preparing the Realization Account and passing the business purchase
entries, no attention need be paid to the fact that the two companies involved
owed money mutually.

Adjustment of the value of stock - Inter-company owings arise usually from

purchase and sale of goods; it is likely, therefore, that at the time, of the sale of
business, the debtor company also has goods in stock which it purchased from
the creditor company - the cost of the debtor company will include the profit
made by the creditor company. After the takeover of the business it is essential
that such a profit is eliminated. The entry for this will be made by the purchasing
company. If it is the vendor company which has such goods in stock, at the time
of passing the acquisition entries, the value of the stock should be reduced to its
cost to the company which is acquiring the business; automatically goodwill or
capital reserve, as the case may be, will be adjusted. But if the original sale was
made by the vendor company and the stock is with the company acquiring the

© The Institute of Chartered Accountants of India

 13.33
AMALGAMATION OF COMPANIES

business, the latter company will have to debit Goodwill (or Capital Reserve) and
credit stock with the amount of the profit included in the stock.

Inter-company Loans- Where there is any loan taken by the transferor company
from the transferee company then the amount of the loan shall be taken over by
the transferee company and adjustment entry to be passed as follows-

Loan (liability of Transferor co) A/c Dr XXX

To Loans and advances (assets) XXX

(Elimination of the inter-company loans taken by

the transferor from transferee company).

Illustration 6
The following Balance Sheets are given as at 31st March, 20X1:

Particulars ` Best Ltd. ` Better Ltd.

(in lakhs) (in lakhs)

Equity and Liabilities

1 Shareholders’ funds
A Share capital 20 10
(shares of ` 100 each, fully pad)
B Reserves and Surplus 10 8
2 Current liabilities 20 2
Total 50 20
Assets
1 Non-current assets
A Property, Plant and Equipment 25 15
B Non-current investments 5 -
2 Current assets 20 5
Total 50 20

© The Institute of Chartered Accountants of India

 13.34 ADVANCED ACCOUNTING

The following further information is given:

(a) Better Limited issued bonus shares on 1st April, 20X1, in the ratio of one share
for every two held, out of Reserves and Surplus.
(b) It was agreed that Best Ltd. will take over the business of Better Ltd., on the
basis of the latter’s Balance Sheet, the consideration taking the form of
allotment of shares in Best Ltd.
(c) The value of shares in Best Ltd. was considered to be ` 150 and the shares in
Better Ltd. were valued at ` 100 after the issue of the bonus shares. The
allotment of shares is to be made on the basis of these values.
(d) Liabilities of Better Ltd., included ` 1 lakh due to Best Ltd., for purchases from
it, on which Best Ltd., made profit of 25% of the cost. The goods of ` 50,000
out of the said purchases, remained in stock on the date of the above Balance
Sheet.
Make the closing ledger in the Books of Better Ltd. and the opening journal entries
in the Books of Best Ltd., and prepare the Balance Sheet as at 1st April, 20X1 after
the takeover.
Solution
LEDGER OF BETTER LIMITED
Property, Plant and Equipment (PPE) Account

` `
To Balance b/d 15,00,000 By Realization A/c (transfer)15,00,000

Current Assets Account

` `
To Balance b/d 5,00,000 By Realization A/c (transfer)5,00,000

Liabilities Account

` `
To Realization A/c 2,00,000 By Balance b/d 2,00,000

© The Institute of Chartered Accountants of India

 13.35
AMALGAMATION OF COMPANIES

Realization Account

` `
To PPE A/c 15,00,000 By Liabilities A/c 2,00,000

” Current Assets A/c 5,00,000 ” Best Limited 15,00,000

(Purchase Consideration)

” Shareholders’ A/c 3,00,000

(Loss on Realization)
20,00,000 20,00,000
Share Capital Account

` `
To Sundry shareholders By Balance b/d 10,00,000
A/c - (transfer) 15,00,000 ” Reserves & Surplus A/c
(Bonus issue) 5,00,000
15,00,000 15,00,000
Reserves & Surplus Account

` `
To Share Capital (Bonus issue) 5,00,000 By Balance b/d 8,00,000
” Sundry Shareholders 3,00,000
8,00,000 8,00,000
Best Ltd.

` `
To Realization A/c - Purchase By Shares in Best Ltd 15,00,000
Consideration 15,00,000
15,00,000 15,00,000

© The Institute of Chartered Accountants of India

 13.36 ADVANCED ACCOUNTING

Shares in Best Ltd.

` `
To Best Ltd. 15,00,000 By Sundry Shareholders A/c15,00,000
Sundry Shareholders Account

` `
To Realization A/c 3,00,000 By Share Capital A/c 15,00,000
(Loss) ” Reserves & Surplus A/c3,00,000
” Share in Best Ltd. 15,00,000

18,00,000 18,00,000
Journal of Best Ltd.

Dr. Cr.
20X1 ` `

Apr. 1 Property, Plant and Equipment A/c Dr. 15,00,000

Current Assets A/c Dr. 5,00,000

To Liabilities A/c 2,00,000

To Liquidator of Better Ltd. 15,00,000
To Capital Reserve A/c 3,00,000
(Assets & Liabilities of Better Ltd. taken over
for an agreed purchase consideration of `
15,00,000 as per agreement dated....)

Liquidator of Better Ltd. Dr. 15,00,000

To Share Capital A/c 10,00,000
To Securities Premium A/c 5,00,000
(Discharge of Purchase consideration by the
issue of equity shares of ` 10,00,000 at a
premium of ` 50 per share as per agreement)

© The Institute of Chartered Accountants of India

 13.37
AMALGAMATION OF COMPANIES

Trade payables A/c Dr. 1,00,000

To Trade receivables A/c 1,00,000
(Amount due from Better Ltd., and included in
its creditors taken over, cancelled against own
Trade receivables)
Capital Reserve A/c Dr. 10,000
To Current Asset (Stock) A/c 10,000
(Unrealized profit on stock included in current
assets of Better Ltd. written off to Reserve
Account. 20% on sale value of `50,000 shall be
eliminated as unrealized profit)
Working Note :
Calculation of Purchase consideration:

Issued Capital of Better Ltd. (after bonus issue) at ` 100 per share ` 15,00,000
Purchase consideration has been discharged by Best Ltd. by the issue of shares
for ` 10,00,000 at a premium of ` 5,00,000. This gives the value of ` 150 per share.
Balance Sheet of Best Ltd. (After absorption)

Particulars Notes `
Equity and Liabilities
1 Shareholders' funds
a Share capital 1 30,00,000
b Reserves and Surplus 2 17,90,000
2 Current liabilities 21,00,000
Total 68,90,000
Assets
1 Non-current assets
a Property, Plant and Equipment 3 40,00,000
b Non-current investments 5,00,000
2 Current assets 23,90,000
Total 68,90,000

© The Institute of Chartered Accountants of India

 13.38 ADVANCED ACCOUNTING

Notes to accounts

`
1 Share Capital
Equity share capital
Issued & Subscribed
30,000 shares of ` 100 (of the above 10,000
shares have been issued for consideration 30,00,000
other than cash)
Total 30,00,000
2 Reserves and Surplus
Capital Reserve (3,00,000 – 10,000) 2,90,000
Securities Premium 5,00,000
Other reserves and surplus 10,00,000
Total 17,90,000
3 Property, Plant and Equipment
PPE 25,00,000
Acquired during the year 15,00,000 40,00,000
Total 40,00,000

Illustration 7
K Ltd. and L Ltd. amalgamate to form a new company LK Ltd. The financial position
of these two companies as at the date of amalgamation was as under:

Particulars Notes ` K Ltd. ` L Ltd.

Equity and Liabilities
1 Shareholders’ funds

A Share capital 1 12,00,000 6,00,000

B Reserves and Surplus 2 3,71,375 1,97,175

© The Institute of Chartered Accountants of India

 13.39
AMALGAMATION OF COMPANIES

2 Non-current liabilities
A Long-term borrowings 3 2,00,000 2,00,000

3 Current liabilities
A Trade Payables 1,00,000 2,10,000
Total 18,71,375 12,07,175

Assets
1 Non-current assets
A Property, Plant and Equipment 4 11,30,000 8,20,000
B Intangible assets 5 80,000 -
2 Current assets
A Inventories 2,25,000 1,40,000
B Trade receivables 2,75,000 1,75,000
C Cash and Cash equivalents 6 1,61,375 72,175
Total 18,71,375 12,07,175

Notes to accounts

1 Share Capital K Ltd. L Ltd.

Equity shares of ` 100 each 8,00,000 3,00,000
7% Preference Shares of ` 100 each 4,00,000 3,00,000
12,00,000 6,00,000
2 Reserves and Surplus
General reserve - 1,00,000
Profit and loss account 3,71,375 97,175
3,71,375 1,97,175
3 Long-term borrowings
5% Debentures 2,00,000 -
Secured loan - 2,00,000
2,00,000 2,00,000

© The Institute of Chartered Accountants of India

 13.40 ADVANCED ACCOUNTING

4 Property, plant and Equipment

Land and Building 4,50,000 3,00,000
Plant and machinery 6,20,000 5,00,000
Furniture and fittings 60,000 20,000
11,30,000 8,20,000
5 Intangible assets
Goodwill 80,000 -
80,000 -
6 Cash and Cash Equivalents
Cash at Bank 1,20,000 55,000
Cash in hand 41,375 17,175
1,61,375 72,175

The terms of amalgamation are as under:

(A) (1) The assumption of liabilities of both the Companies.
(2) Issue of 5 Preference shares of ` 20 each in LK Ltd. @ ` 18 paid up at
premium of ` 4 per share for each preference share held in both the
Companies.
(3) Issue of 6 Equity shares of ` 20 each in LK Ltd. @ ` 18 paid up at a
premium of ` 4 per share for each equity share held in both the
Companies. In addition, necessary cash should be paid to the Equity
Shareholders of both the Companies as is required to adjust the rights
of shareholders of both the Companies in accordance with the intrinsic
value of the shares of both the Companies.
(4) Issue of such amount of fully paid 6% debentures in LK Ltd. as is sufficient
to discharge the 5% debentures in K Ltd. at a discount of 5% after takeover.

(B) (1) The assets and liabilities are to be taken at book values inventory and
trade receivables for which provisions at 2% and 2 ½ % respectively to
be raised.
(2) The trade receivables of K Ltd. include ` 20,000 due from L Ltd.

© The Institute of Chartered Accountants of India

 13.41
AMALGAMATION OF COMPANIES

(C) The LK Ltd. is to issue 15,000 new equity shares of ` 20 each, ` 18 paid up at
premium of ` 4 per share so as to have sufficient working capital. Prepare
ledger accounts in the books of K Ltd. and L Ltd. to close their books.
Solution
Books of K Ltd.
Realization Account

` `
To Goodwill 80,000 By 5% Debentures 2,00,000
To Land & Building 4,50,000 By Trade payables 1,00,000
To Plant & Machinery 6,20,000 By LK Ltd. 15,60,000
To Furniture & Fitting 60,000 (Purchase consideration)
To Trade receivables 2,75,000 By Equity shareholders A/c 51,375
To Stores & inventory 2,25,000 (loss)
To Cash at Bank 1,20,000
To Cash in hand 41,375
To Preference shareholders
(excess payment) 40,000
19,11,375 19,11,375

Equity Shareholders Account

` `
To Realization A/c (loss) 51,375 By Share capital 8,00,000
To Equity Shares in LK Ltd. 10,56,000 By Profit & Loss A/c 3,71,375
To Cash 64,000
11,71,375 11,71,375
7% Preference Shareholders Account

` `
To Preference Shares in LK Ltd. 4,40,000 By Share capital 4,00,000

By Realization A/c 40,000

4,40,000 4,40,000

© The Institute of Chartered Accountants of India

 13.42 ADVANCED ACCOUNTING

LK Ltd. Account

` `
To Realization A/c 15,60,000 By Equity Shares in LK Ltd.
For Equity 10,56,000
Pref. 4,40,000 14,96,000
By Cash 64,000
15,60,000 15,60,000
Books of L Ltd.
Realization Account
` `
To Land & Building 3,00,000 By Trade payables 2,10,000
To Plant & Machinery 5,00,000 By Secured loan 2,00,000
To Furniture & Fittings 20,000 By LK Ltd. (Purchase
To Trade receivables 1,75,000 consideration) 7,90,000
To Inventory of stores 1,40,000 By Equity shareholders A/c—
To Cash at bank 55,000 Loss 37,175
To Cash in hand 17,175
To Pref. shareholders 30,000
12,37,175 12,37,175
Equity Shareholders Account

` `
To Equity shares in LK Ltd. 3,96,000 By Share Capital 3,00,000
To Realization 37,175 By Profit & Loss A/c 97,175
To Cash 64,000 By Reserve 1,00,000
4,97,175 4,97,175
7% Preference Shareholders Account

` `
To Preference Shares in LK Ltd. 3,30,000 By Share capital 3,00,000
By Realization A/c 30,000
3,30,000 3,30,000

© The Institute of Chartered Accountants of India

 13.43
AMALGAMATION OF COMPANIES

LK Ltd. Account
` `
To Realization A/c 7,90,000 By Equity shares in LK Ltd.
For Equity 3,96,000
Preference 3,30,000 7,26,000
By Cash 64,000
7,90,000 7,90,000
Working Notes:
(i) Purchase consideration

K Ltd. L Ltd.
` `
Payable to preference shareholders:
Preference shares at ` 22 per share 4,40,000 3,30,000
Equity Shares at ` 22 per share 10,56,000 3,96,000
Cash [See W.N. (ii)] 64,000 64,000
15,60,000 7,90,000
(ii) Value of Net Assets

K Ltd. L Ltd.
` `
Goodwill 80,000
Land & Building 4,50,000 3,00,000
Plant & Machinery 6,20,000 5,00,000
Furniture & Fittings 60,000 20,000
Trade receivables less 2.5% 2,68,125 1,70,625
Inventory less 2% 2,20,500 1,37,200
Cash at Bank 1,20,000 55,000
Cash in hand 41,375 17,175
18,60,000 12,00,000

© The Institute of Chartered Accountants of India

 13.44 ADVANCED ACCOUNTING

Less : Debentures 2,00,000 –

Trade payables 1,00,000 2,10,000
Secured Loans – (3,00,000) 2,00,000 (4,10,000)
15,60,000 7,90,000
Payable in shares 14,96,000 7,26,000
Payable in cash 64,000 64,000

Illustration 8
Consider the following balance sheets of X Ltd. and Y Ltd. as at 31st March, 20X1:

Particulars Notes ` X Ltd ` Y Ltd.

(‘000) (‘000)

Equity and Liabilities

1 Shareholders’ funds

A Share capital 1 72,00 47,00

B Reserves and Surplus 2 15,50 10,50

2 Non-current liabilities

A Long-term borrowings 3 5,00 3,50

3 Current liabilities

A Trade Payables 4,50 3,50

B Other current liabilities 2,00 1,50

Total 99,00 66,00

Assets

1 Non-current assets

A Property, Plant and 4 63,25 36,00

Equipment

B Non-current investments 5 7,00 5,00

© The Institute of Chartered Accountants of India

 13.45
AMALGAMATION OF COMPANIES

2 Current assets

A Inventories 12,50 9,50

B Trade receivables 9,00 10,30

C Cash and Cash equivalents 7,25 5,20

Total 99,00 66,00

Notes to accounts

X Ltd (‘000) Y Ltd (‘000)

1 Share Capital
Equity share capital (` 10 each) 50,00 30,00
14% Preference Shares capital ` 100 each 22,00 17,00
72,00 47,00
2 Reserves and Surplus
General reserve 5,00 2,50
Export profit reserve 3,00 2,00
Investment allowance reserve - 1,00
Profit and loss account 7,50 5,00
15,50 10,50
3 Long-term borrowings
13% Debentures of ` 100 each 5,00 3,50
5,00 3,50
4 Property, Plant and Equipment
Land and Building 25,00 15,50
Plant and machinery 32,50 17,00
Furniture 5,75 3,50
63,25 36,00
5 Non-current investments
Investments at cost 7,00 5,00
7,00 5,00

© The Institute of Chartered Accountants of India

 13.46 ADVANCED ACCOUNTING

X Ltd. takes over Y Ltd. on 1st April, 20X1. X Ltd. discharges the purchase
consideration as below:

(i) Issued 3,50,000 equity shares of ` 10 each at par to the equity shareholders of
Y Ltd.
(ii) Issued 15% preference shares of ` 100 each to discharge the preference
shareholders of Y Ltd. at 10% premium.
The debentures of Y Ltd. will be converted into equivalent number of debentures of
X Ltd. The statutory reserves of Y Ltd. are to be maintained for 2 more years.
Show the (i) Journal entries and (ii) Balance sheet of X Ltd. after amalgamation on
the assumption that:
(a) the amalgamation is in the nature of merger.
(b) the amalgamation is in the nature of purchase.
Solution
(a) Amalgamation in the nature of merger:
(i) Journal Entries in the Books of X Ltd.

` ‘000 ` ‘ 000
Business Purchase Dr. 53,70
To Liquidator of Y Ltd. 53,70
(Consideration payable for business taken over from Y
Ltd)
Sundry Assets of Y Ltd Dr. 66,00
General Reserve (Related to X Ltd) 4,20
To Sundry Liabilities of Y Ltd 8,50
To Export profit Reserve 2,00
To Investment allowance Reserve 1,00
To Profit & Loss 5,00
To Business Purchase 53,70
(Incorporation of various assets and liabilities taken
over from Y Ltd. at book values and difference of share
capital and purchase consideration being adjusted with
free Reserves)
Liquidator of Y Ltd. Dr. 53,70

© The Institute of Chartered Accountants of India

 13.47
AMALGAMATION OF COMPANIES

To Equity Share Capital 35,00

To 15% Preference Share Capital 18,70
(Discharge of consideration for Y Ltd.’ s business)
Sundry Liabilities in Y Ltd (13% Debentures in Y Ltd.) Dr. 3,50
To 13% Debentures 3,50
(Allotment of 13% Debentures to debenture holders of
Y Ltd. at Par)
(ii) Balance Sheet of X Ltd.

Particulars Notes ` in '000

Equity and Liabilities
1 Shareholders' funds
a Share capital 1 12,570
b Reserves and Surplus 2 1,930
2 Non-current liabilities
a Long-term borrowings 3 850
3 Current liabilities
a Trade Payables 800
b Other current liabilities 350
Total 16,500
Assets
1 Non-current assets
a Property, Plant and Equipment 4 9,925
b Non-current investments 1,200
2 Current assets
a Inventories 2,200
b Trade receivables 1,930
c Cash and cash equivalents 1,245
Total 16,500

© The Institute of Chartered Accountants of India

 13.48 ADVANCED ACCOUNTING

Notes to accounts

` in ‘ 000
1 Share Capital
Equity share capital
8,50,000 Equity Shares of ` 10 each 8,500
Preference share capital
18,700, 15% Preference Shares of ` 100 each 1,870
22,000, 14% Preference Shares of ` 100 each 2,200
Total 12,570
2 Reserves and Surplus
General Reserve of X Ltd. 500
Add: General reserve of Y Ltd. 250 750
Less: Adjustment for amalgamation* (670) 80
Export Profit Reserve of X Ltd. 300
Add: Export Profit Reserve of Y Ltd. 200 500
Investment Allowance Reserve 100
Profit & Loss A/c of X Ltd. 750
Add: Profit & Loss A/c of Y Ltd. 500 1,250
Total 1,930
3 Long-term borrowings
Secured
8,500 13% Debentures of ` 100 each 850
Total 850
4 Property, Plant and Equipment
Land & Buildings 4,050
Plant & Machinery 4,950
Furniture & Fittings 925
Total 9,925

© The Institute of Chartered Accountants of India

 13.49
AMALGAMATION OF COMPANIES

*The difference between the amount recorded as share capital issued and the
amount of share capital of transferor-company should be adjusted in reserves.
Thus, Adjustment for amalgamation = ` ’000 (53,70 – 47,00) = ` (’000) 670
(b) Amalgamation in the nature of purchase:
(i) Journal Entries in the Books of X Ltd.

Dr. Cr.
` `
Business Purchase Dr. 53,70,000

To Liquidator of Y Ltd. 53,70,000

(Consideration payable for business taken over
from Y Ltd)

Sundry Assets of Y Ltd Dr. 66,00,000

To Sundry Liabilities of Y Ltd 8,50,000

To Capital Reserve 3,80,000
To Business Purchase 53,70,000
(Incorporation of various assets and liabilities taken
over from Y Ltd. at book values and difference of
Net assets and purchase consideration being
credited to Capital reserve)

Liquidator of Y Ltd. Dr. 53,70,000

To Equity Share Capital 35,00,000
To 15% Preference Share Capital 18,70,000
(Discharge of consideration for Y Ltd.’ s business)

13% Debentures in Y Ltd. Dr. 3,50,000

To 13% Debentures 3,50,000
(Allotment of 13% Debentures to debenture holders
of Y Ltd. at Par)

© The Institute of Chartered Accountants of India

 13.50 ADVANCED ACCOUNTING

Balance Sheet of X Ltd.

Particulars Notes ` in'000

Equity and Liabilities
1 Shareholders' funds
a Share capital 1 12,570
b Reserves and Surplus 2 1,930
2 Non-current liabilities
a Long-term borrowings 3 850
3 Current liabilities
a Trade Payables 800
b Other current liabilities 350
Total 16,500
Assets
1 Non-current assets
a Property, Plant and Equipment 4 9,925
b Non-current investments 1,200

2 Current assets
a Inventories 2,200
b Trade receivables 1,930
c Cash and cash equivalents 1,245
Total 16,500
Notes to accounts

` in'000
1 Share Capital
Equity share capital
8,50,000 Equity Shares of ` 10 each 8,500
Preference share capital
18,700, 15% Preference Shares of ` 100 each 1,870
22,000, 14% Preference Shares of ` 100 each 2,200
Total 12,570

© The Institute of Chartered Accountants of India

 13.51
AMALGAMATION OF COMPANIES

2 Reserves and Surplus

Capital Reserve 380
General Reserve 500
Amalgamation adjustment reserve (300)
Export Profit Reserve 500
Investment Allowance Reserve 100
Surplus (Profit & Loss A/c) 750
Total 1,930
3 Long-term borrowings
Secured
8,500 13% Debentures of ` 100 each 850
Total 850
4 Property, Plant and Equipment
Land & Buildings 4,050
Plant & Machinery 4,950
Furniture & Fittings 925
Total 9,925

Workings Notes:

Capital Reserve arising on Amalgamation:

(A) Net Assets taken over: ` (’000) ` (’000)

Sundry Assets 66,00
Less: 13% Debentures 3,50
Trade payables 3,50
Other current liabilities 1,50 (8,50)
57,50
(B) Purchase consideration:
To Equity Shareholders of Y Ltd. 35,00
To Preference Shareholders of Y Ltd. 18,70
53,70
(C) Capital Reserve (A – B) 3,80

© The Institute of Chartered Accountants of India

 13.52 ADVANCED ACCOUNTING

Illustration 9
The following are the Balance Sheets of P Ltd. and Q Ltd. as at 31st March, 20X1:

Particulars Notes ` P Ltd ` Q Ltd

Equity and Liabilities
1 Shareholders’ funds
A Share capital 1 8,00,000 4,00,000
B Reserves and Surplus 3,00,000 2,00,000
2 Non-current liabilities
A Long-term borrowings 2 2,00,000 1,50,000
3 Current liabilities
A Trade Payables 2,50,000 1,50,000
Total 15,50,000 9,00,000
Assets
1 Non-current assets
A Property, Plant and Equipment 7,00,000 2,50,000
B Non-current investments 80,000 80,000
2 Current assets
A Inventories 2,40,000 3,20,000
B Trade receivables 4,20,000 2,10,000
C Cash and Cash equivalents 1,10,000 40,000
Total 15,50,000 9,00,000

Notes to accounts

P Ltd. Q Ltd.
1 Share Capital
Equity shares of ` 10 each 6,00,000 3,00,000
10% Preference Shares of ` 100 each 2,00,000 1,00,000
8,00,000 4,00,000
2 Long term borrowings
12% Debentures 2,00,000 1,50,000
2,00,000 1,50,000

© The Institute of Chartered Accountants of India

 13.53
AMALGAMATION OF COMPANIES

Details of Trade receivables and trade payables are as under:

P Ltd. (`) Q Ltd. (`)

Trade receivables
Debtors 3,60,000 1,90,000
Bills Receivable 60,000 20,000
4,20,000 2,10,000
Trade payables
Sundry Creditors 2,20,000 1,25,000
Bills Payable 30,000 25,000
2,50,000 1,50,000

Property, plant and equipment of both the companies are to be revalued at 15%
above book value. Both the companies are to pay 10% Equity dividend, but
Preference dividend having been already paid.

After the above transactions are given effect to, P Ltd. will absorb Q Ltd. on the
following terms:

(i) 8 Equity Shares of ` 10 each will be issued by P Ltd. at par against 6 shares of
Q Ltd.

(ii) 10% Preference Shareholders of Q Ltd. will be paid at 10% discount by issue
of 10% Preference Shares of ` 100 each at par in P Ltd.

(iii) 12% Debenture holders of Q Ltd. are to be paid at 8% premium by 12%

Debentures in P Ltd. issued at a discount of 10%.

(iv) ` 30,000 is to be paid by P Ltd. to Q Ltd. for Liquidation expenses. Sundry

Creditors of Q Ltd. include ` 10,000 due to P Ltd.

(v) Inventory in Trade and Debtors are taken over at 5% lesser than their book
value by P Ltd.

Prepare:

(a) Journal entries in the books of P Ltd.

(b) Statement of consideration payable by P Ltd.

© The Institute of Chartered Accountants of India

 13.54 ADVANCED ACCOUNTING

Solution
(a) Journal Entries in the Books of P Ltd.

Dr. Cr.
` `
Property, Plant and Equipment Dr. 1,05,000
To Revaluation Reserve 1,05,000
(Revaluation of PPE at 15% above book value)
Reserve and Surplus Dr. 60,000
To Equity Dividend 60,000
(Declaration of equity dividend @ 10%)
Equity Dividend Dr. 60,000
To Bank Account 60,000
(Payment of equity dividend)
Business Purchase Account Dr. 4,90,000
To Liquidator of Q Ltd. 4,90,000
(Consideration payable for the business taken over from
Q Ltd.)
Property, Plant and Equipment (115% of ` 2,50,000) Dr. 2,87,500
Inventory (95% of ` 3,20,000) Dr. 3,04,000
Debtors Dr. 1,90,000
Bills Receivable Dr. 20,000
Investment Dr. 80,000
Cash at Bank Dr. 10,000
(` 40,000 –` 30,000 dividend paid)
To Provision for Bad Debts (5% of ` 1,90,000) 9,500
To Sundry Creditors 1,25,000
To 12% Debentures in Q Ltd. 1,62,000
To Bills Payable 25,000

© The Institute of Chartered Accountants of India

 13.55
AMALGAMATION OF COMPANIES

To Business Purchase Account 4,90,000

To Capital Reserve (Balancing figure) 80,000

(Incorporation of various assets and liabilities taken over

from Q Ltd. at agreed values and difference of net assets
and purchase consideration being credited to capital
reserve)

Liquidator of Q Ltd. Dr. 4,90,000

To Equity Share Capital 4,00,000

To 10% Preference Share Capital 90,000
(Discharge of consideration for Q Ltd.’ s business)

12% Debentures in Q Ltd. (` 1,50,000 × 108%) Dr. 1,62,000

Discount on Issue of Debentures Dr. 18,000
To 12% Debentures 1,80,000
(Allotment of 12% Debentures to debenture holders of Q
Ltd. at a discount of 10%)

Sundry Creditors of Q Ltd. Dr. 10,000

To Sundry Debtors of P Ltd. 10,000
(Cancellation of mutual owing)

Goodwill Dr. 30,000

To Bank 30,000
(Being liquidation expenses reimbursed to Q Ltd.)

Capital Reserve Dr. 30,000

To Goodwill 30,000
(Being goodwill set off)

© The Institute of Chartered Accountants of India

 13.56 ADVANCED ACCOUNTING

(b) Statement of Consideration payable by P Ltd. for 30,000 shares

(payment method)
30,000
Shares to be allotted × 8 = 40,000 shares of P Ltd.
6

Issued 40,000 shares of ` 10 each i.e. ` 4,00,000 (i)

For 10% preference shares, to be paid at 10% discount
1,00,000×90
` ` 90,000 (ii)
100

Consideration amount [(i) + (ii)] ` 4,90,000

Illustration 10
The financial position of two companies Hari Ltd. and Vayu Ltd. as at 31st March,
20X1 was as under:

Particulars Notes Hari Ltd. Vayu Ltd.

Equity and Liabilities
1 Shareholders’ funds
A Share capital 1 11,00,000 4,00,000
B Reserves and Surplus 2 70,000 70,000
2 Non-current liabilities
A Long term provisions 3 50,000 20,000
3 Current liabilities
A Trade Payables 1,30,000 80,000
Total 13,50,000 5,70,000
Assets
1 Non-current assets
A Property, Plant and Equipment 4 8,00,000 2,50,000
B Intangible assets 5 50,000 25,000

© The Institute of Chartered Accountants of India

 13.57
AMALGAMATION OF COMPANIES

2 Current assets
A Inventories 2,50,000 1,75,000
B Trade receivables 2,00,000 1,00,000
C Cash and Cash equivalents 50,000 20,000
Total 13,50,000 5,70,000

Notes to accounts

Hari Ltd. Vayu Ltd.

1 Share Capital
Equity shares of ` 10 each 10,00,000 3,00,000
9% Preference Shares of ` 100 each 1,00,000 --
10% Preference Shares of ` 100 each -- 1,00,000
11,00,000 4,00,000
2 Reserves and Surplus
General reserve 70,000 70,000
70,000 70,000
3 Long term Provisions
Retirement gratuity fund 50,000 20,000
50,000 20,000
4 Property, plant and Equipment
Land and Building 3,00,000 1,00,000
Plant and machinery 5,00,000 1,50,000
8,00,000 2,50,000
5 Intangible assets
Goodwill 50,000 25,000
50,000 25,000

© The Institute of Chartered Accountants of India

 13.58 ADVANCED ACCOUNTING

Hari Ltd. absorbs Vayu Ltd. on the following terms:

(a) 10% Preference Shareholders are to be paid at 10% premium by issue of 9%
Preference Shares of Hari Ltd.
(b) Goodwill of Vayu Ltd. is valued at ` 50,000, Buildings are valued at ` 1,50,000
and the Machinery at ` 1,60,000.
(c) Inventory to be taken over at 10% less value and Provision for Doubtful Debts
to be created @ 7.5%.
(d) Equity Shareholders of Vayu Ltd. will be issued necessary Equity Shares @ 5%
premium.
Prepare necessary Ledger Accounts to close the books of Vayu Ltd. and show the
acquisition entries in the books of Hari Ltd. Also draft the Balance Sheet after
absorption as at 31st March, 20X1.
Solution
In the Books of Vayu Ltd.
Realization Account

` `

To Sundry Assets 5,70,000 By Retirement 20,000

Gratuity Fund

To Preference Shareholders By Trade payables 80,000

(Premium on
Redemption) 10,000

To Equity Shareholders By Hari Ltd. (Purchase 5,30,000

(Profit on Realization) 50,000 Consideration) _______

6,30,000 6,30,000

© The Institute of Chartered Accountants of India

 13.59
AMALGAMATION OF COMPANIES

Equity Shareholders Account

` `

To Equity Shares of Hari 4,20,000 By Share Capital 3,00,000

Ltd.

By General Reserve 70,000

By Realization
Account
(Profit on
_______ realization) 50,000

4,20,000 4,20,000

Preference Shareholders Account

` `
To 9% Preference Shares of 1,10,000 By Preference Share 1,00,000
Hari Ltd. Capital
By Realization
Account
(Premium on
Redemption of
Preference
____ Shares) 10,000
1,10,000 1,10,000

Hari Ltd. Account

` `
To Realization Account 5,30,000 By 9% Preference Shares 1,10,000
_______ By Equity Shares 4,20,000
5,30,000 5,30,000

© The Institute of Chartered Accountants of India

 13.60 ADVANCED ACCOUNTING

In the Books of Hari Ltd.

Journal Entries

Dr. Cr.
` `
Business Purchase A/c Dr. 5,30,000
To Liquidators of Vayu Ltd. Account 5,30,000
(Being business of Vayu Ltd. taken over)

Goodwill Account Dr. 50,000

Building Account Dr. 1,50,000
Machinery Account Dr. 1,60,000
Inventory Account Dr. 1,57,500
Trade receivables Account Dr. 1,00,000
Bank Account Dr. 20,000
To Retirement Gratuity Fund Account 20,000
To Trade payables Account 80,000
To Provision for Doubtful Debts Account 7,500
To Business Purchase A/c 5,30,000
(Being Assets and Liabilities taken over as per
agreed valuation).

Liquidators of Vayu Ltd. A/c Dr. 5,30,000

To 9% Preference Share Capital A/c 1,10,000
To Equity Share Capital A/c 4,00,000
To Securities Premium A/c 20,000
(Being Purchase Consideration satisfied as
above).

© The Institute of Chartered Accountants of India

 13.61
AMALGAMATION OF COMPANIES

Balance Sheet of Hari Ltd. (after absorption)

as at 31st March, 20X1

Particulars Notes `
Equity and Liabilities
1 Shareholders' funds
A Share capital 1 16,10,000
B Reserves and Surplus 2 90,000
2 Non-current liabilities
A Long-term provisions 3 70,000
3 Current liabilities
A Trade Payables 2,10,000
Total 19,80,000
Assets
1 Non-current assets
A Property, Plant and Equipment 4 11,10,000
B Intangible assets 5 1,00,000
2 Current assets
A Inventories 4,07,500
B Trade receivables 6 2,92,500
C Cash and cash equivalents 70,000
Total 19,80,000

Notes to accounts

`
1 Share Capital
Equity share capital
1,40,000 Equity Shares of ` 10 each fully 14,00,000
paid (Out of above 40,000 Equity Shares
were issued in consideration other than for
cash)

© The Institute of Chartered Accountants of India

 13.62 ADVANCED ACCOUNTING

Preference share capital

2,100 9% Preference Shares of ` 100 each 2,10,000
(Out of above 1,100 Preference Shares were
issued in consideration other than for cash)
Total 16,10,000
2 Reserves and Surplus
Securities Premium 20,000
General Reserve 70,000
Total 90,000
3 Long-term provisions
Retirement Gratuity fund 70,000
Total 70,000
4 Property, Plant and Equipment
Buildings 4,50,000
Machinery 6,60,000
Total 11,10,000
5 Intangible assets
Goodwill 1,00,000
6 Trade receivables 3,00,000
Less: Provision for Doubtful Debts 7,500
2,92,500

Working Notes:

Purchase Consideration: `
Goodwill 50,000

Building 1,50,000
Machinery 1,60,000
Inventory 1,57,500

© The Institute of Chartered Accountants of India

 13.63
AMALGAMATION OF COMPANIES

Trade receivables 92,500

Cash at Bank 20,000
6,30,000
Less: Liabilities:
Retirement Gratuity Fund (20,000)
Trade payables (80,000)
Net Assets/ Purchase Consideration 5,30,000
To be satisfied as under:
10% Preference Shareholders of Vayu Ltd. 1,00,000
Add: 10% Premium 10,000
1,100 9% Preference Shares of Hari Ltd. 1,10,000
Equity Shareholders of Vayu Ltd. to be satisfied by issue of
40,000 Equity Shares of Hari Ltd. at 5% Premium 4,20,000
Total 5,30,000

Illustration 11
The following are the Balance Sheets of A Ltd. and B Ltd. as at 31.3.20X1:

Particulars Notes ` A Ltd ` B Ltd

(in‘000) (in’000)
Equity and Liabilities
1 Shareholders’ funds
A Share capital 1 2,000 1,000
B Reserves and Surplus 2 1,000 (800)
2 Non-current liabilities
A Long-term borrowings 3 750 450
3 Current liabilities
A Trade Payables 300 300
B Short term Borrowings –
Bank overdraft -- 50
Total 4,050 1,000

© The Institute of Chartered Accountants of India

 13.64 ADVANCED ACCOUNTING

Assets
1 Non-current assets
A Property, Plant and Equipment 2,700 850
B Non-current investments 700 --
2 Current assets
A Trade receivables 400 150
B Cash and Cash equivalents 250 --
(cash at bank)
Total 4050 1000

Notes to accounts

1 Share capital A Ltd. (‘000) B Ltd. (‘000)

Equity shares of ` 100 each 2000 1000

2000 1000
2 Reserves and Surplus
General reserve 1000 --

Profit and loss A/c (debit balance) -- (800)

1000 (800)
3 Long term borrowings

10% debentures 500 --

Loan from banks 250 450
750 450

B Ltd. has acquired the business of A Ltd. The following scheme of merger was
approved:
(i) Banks agreed to waive off the loan of ` 60 thousands of B Ltd.
(ii) B Ltd. will reduce its shares to ` 10 per share and then consolidate 10 such
shares into one share of ` 100 each (new share).

© The Institute of Chartered Accountants of India

 13.65
AMALGAMATION OF COMPANIES

(iii) Shareholders of A Ltd. will be given one share (new) of B Ltd. in exchange of
every share held in A Ltd.

(iv) Trade payables of B Ltd. includes ` 100 thousands payable to A Ltd.

Pass necessary entries in the books of B Ltd. and prepare Balance Sheet after
merger.
Solution
Calculation of purchase consideration

One share of B Ltd. will be issued in exchange of every

share of A Ltd. (i.e. 20,000 equity shares of B Ltd. will be
issued against 20,000 equity shares of A Ltd.) 20,000 shares

Journal Entries in the books of B Ltd.

Date (` in
thousands)
20X1 Dr. Cr.
March,31 Loan from bank A/c Dr. 60
To Capital reduction A/c 60
(Being loan from bank waived off to the
extent of ` 60 thousand)
Equity share capital A/c (` 100) Dr. 1,000
To Equity share capital A/c (` 10) 100
To Capital reduction A/c 900
(Being equity shares of ` 100 each
reduced to ` 10 each)

Equity share capital A/c (` 10) Dr. 100

To Equity share capital A/c (` 100 100
each)
(Being 10 equity shares of ` 10 each
consolidated to one share of ` 100 each)

© The Institute of Chartered Accountants of India

 13.66 ADVANCED ACCOUNTING

Capital reduction A/c Dr. 960

To Profit and loss A/c 800

To Capital reserve A/c 160

(Being accumulated losses set off against
reconstruction A/c and balance
transferred to capital reserve account)

Property, plant and equipment A/c Dr. 2,700

Investment A/c Dr. 700
Trade receivables A/c Dr. 400
Cash at bank A/c Dr. 250
To Trade payables A/c 300
To Loans from bank A/c 250
To 10% Debentures A/c 500
To Liquidator of A Ltd. A/c 2,000
To Reserves A/c 1,000
(Being assets, liabilities and reserves
taken over under pooling of interest
method and amount due to Liquidator)

Liquidator of A Ltd. A/c Dr. 2,000

To Equity share capital A/c 2,000
(Being payment made to liquidators of A
Ltd. by allotment of 20,000 new equity
shares)

Trade payables A/c Dr. 100

To Trade receivables A/c 100

(Being mutual owing cancelled)

© The Institute of Chartered Accountants of India

 13.67
AMALGAMATION OF COMPANIES

Balance Sheet of B Ltd. after merger as at 31.3.20X1

Particulars Notes ` in ‘000

Equity and Liabilities
1 Shareholders' funds
a Share capital 1 2,100
b Reserves and Surplus 2 1,160
2 Non-current liabilities
a Long term borrowings 3 1,140
3 Current liabilities
a Trade payables 500
b Short term borrowings 4 50
Total 4,950
Assets
1 Non-current assets
a Property, Plant and Equipment 3,550
b Non-current investments 700
2 Current assets
a Trade receivables 450
b Cash and cash equivalents 250
Total 4,950

Notes to accounts

` in ‘000
1 Share Capital
21,000, Equity shares of ` 100 each fully paid 2,100
(Out of the above, 20,000 shares have been
issued for consideration other than cash)

© The Institute of Chartered Accountants of India

 13.68 ADVANCED ACCOUNTING

2 Reserves and Surplus

Capital reserve 160
General reserve 1,000
Total 1,160
3 Long Term Borrowings
10% Debentures 500
Loan from Bank (250+450-60) 640 1,140
4 Short term borrowings
Bank overdraft 50

SUMMARY
 Amalgamation means joining of two or more existing companies into one
company, the joined companies lose their identity and form themselves
into a new company.
 Amalgamation includes- absorption and external reconstruction within its
scope as per AS 14.
 In absorption, an existing company takes over the business of another
existing company. Thus there is only one liquidation and that is of the
merged company.
 A company which is merged into another company is called a transferor
company or a vendor company.
 A company into which the vendor company is merged is called transferee
company or vendee company or purchasing company.

 Amalgamation is of two types- in the nature of merger and in the nature

of purchase.
 In amalgamation in the nature of merger there is genuine pooling of:

(a) Assets and liabilities of the amalgamating companies,

(b) Shareholders’ interest.

© The Institute of Chartered Accountants of India

 13.69
AMALGAMATION OF COMPANIES

Also the business of the transferor company is intended to be carried on by

the transferee company. The conditions as laid down in para 3(e) of AS-14
should be satisfied in full. Even if one condition is not satisfied, then it will
be called as amalgamation in nature of purchase.
 In amalgamation in the nature of purchase, one company acquires the
business of another company.
 Purchase Consideration can be defined as the aggregate of the shares and
securities issued and the payment made in form of cash or other assets by
the transferee company to the shareholders of the transferor company.
 There can be different methods to compute the purchase consideration-
Lumpsum payment method, Net Payment method, Net assets method,
Intrinsic value or share exchange method.
 There are two main methods of accounting for amalgamation:
(a) The pooling of interests method, and
(b) The purchase method.
 Under pooling of interests method, the assets, liabilities and reserves of
the transferor company will be taken over by transferee company at
existing carrying amounts and the difference between the share capital
issued by the transferee company to the transferor and the actual existing
share capital is adjusted with the reserves.
 Under purchase method, the assets and liabilities of the transferor
company should be incorporated at their existing carrying amounts or the
purchase consideration should be allocated to individual identifiable
assets and liabilities on the basis of their fair values at the date of
amalgamation.
 The difference between the purchase consideration and the net assets (at
agreed values) of the transferor company shall be recorded as goodwill or
capital reserve in the books of the transferee company.
 All inter-company adjustments shall be eliminated from the books of the
transferee company after the amalgamation.

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 13.70 ADVANCED ACCOUNTING

TEST YOUR KNOWLEDGE

Multiple Choice Questions
1. In case of amalgamation, the entry for elimination of unrealized profit or loss
on stock is made
(a) By the vendor company
(b) By the purchasing company

(c) By the third party

(d) By the court
2. If expenses of liquidation of the vendor company are paid by the purchasing
company then, in purchasing company’s book, the account debited is
(a) Goodwill account.
(b) Liquidation expense account.
(c) Vendor company account.
(d) General reserve.
3. Amalgamation adjustment reserve is opened in the books of the
amalgamated company to incorporate
(a) Assets of the amalgamating company.
(b) Non- Statutory reserves of the amalgamating company.
(c) Statutory reserves of the amalgamating company.
(d) General reserve of the amalgamating company.
4. Amalgamation Adjustment Reserve is presented in the financial statements of
the transferee company as
(a) Other current asset.
(b) Separate line item with a negative sign under the head ‘Reserves and
Surplus’.

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AMALGAMATION OF COMPANIES

(c) Other non-current assets.

(d) Investment of the company
5. A company into which the vendor company is merged is called
(a) Transferee company.
(b) Transferor company.
(c) Selling company.
(d) Acquiree company.
6. If the purchase consideration is more than net assets (at agreed values) of the
transferor company, difference shall be recorded as __________ in the books of
the transferee company.
(a) Goodwill.
(b) Capital Reserve.
(c) Profit.
(d) Loss.

Theoretical Questions
7. What are the conditions, which, according to AS 14 on Accounting for
Amalgamations, must be satisfied for an amalgamation in the nature of
merger?
8. Distinguish between (i) the pooling of interests method and (ii) the purchase
method of recording transactions relating to amalgamation.

Scenario based Questions

9. The following are the Balance Sheets of Yes Ltd. and No Ltd. as at 31st March,
20X1:

Particulars Notes ` Yes Ltd ` No Ltd

(in crores) (in crores)

Equity and Liabilities

1 Shareholders’ funds

© The Institute of Chartered Accountants of India

 13.72 ADVANCED ACCOUNTING

A Share capital 1 12 5
B Reserves and Surplus 88 10
2 Non-current liabilities
A Long term borrowings 2 -- 10
3 Current liabilities 33 15
Total 133 40
Assets
1 Non-current assets

A Property, Plant and Equipment 3 20 6

B Non-current investments 4 13 --

2 Current assets 100 34

Total 133 40
Notes of accounts

Yes Ltd. No Ltd.

1 Share Capital
Equity share capital
Authorized share capital 25 5
Issued and subscribed:
Equity shares of ` 10 each fully 12 5
paid
12 5
2 Long term borrowings
Unsecured loan from Yes -- 10
Ltd.
-- 10

© The Institute of Chartered Accountants of India

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3 Property, Plant and

Equipment
Gross value 70 30
Depreciation (50) (24)
20 6
4 Non-current investments
30 lakhs equity shares of ` 10 3 --
each
Long term loan to No Ltd. 10 --
13 --

On that day Yes Ltd. absorbed No Ltd. The members of No Ltd. are to get one
equity share of Yes Ltd. issued at a premium of ` 2 per share for every five
equity shares held by them in No Ltd. The necessary approvals are obtained.

You are asked to pass journal entries in the books of the two companies to
give effect to the above if the amalgamation is in the nature of merger.

10. The following are the Balance Sheets of X Ltd. and Y Ltd :

Particulars Notes ` X Ltd. ` Y Ltd.

Equity and Liabilities
1 Shareholders’ funds
A Share capital 1 1,00,000 50,000
B Reserves and Surplus 2 10,000 (10,000)
2 Non-current liabilities
A Long term borrowings 3 -- 15,000
3 Current liabilities
A Trade Payables 25,000 5,000
Total 135,000 60,000
Assets
1 Non-current assets
A Property, Plant and Equipment 1,20,000 60,000

© The Institute of Chartered Accountants of India

 13.74 ADVANCED ACCOUNTING

B Non-current investments 4 15,000 --

Total 135,000 60,000
Notes to accounts

1 Share Capital X Ltd. Y Ltd.

Equity share capital 1,00,000 50,000
1,00,000 50,000
2 Reserves and Surplus
Profit and loss A/c 10,000 --
Profit and loss A/c (debit balance) -- (10,000)
10,000 (10,000)
3 Long term borrowings
Loan from X Ltd. -- 15,000
4 Non-current investments
Loan to Y Ltd. 15,000 --
15,000 --
A new company XY Ltd. is formed to acquire the sundry assets and trade
payables of X Ltd. and Y Ltd. and for this purpose, the sundry assets of X Ltd.
are revalued at ` 1,00,000. The debt due to X Ltd. is also to be discharged in
shares of XY Ltd.
Show the Ledger Accounts to close the books of X Ltd.
11. Super Express Ltd. and Fast Express Ltd. were in competing business. They
decided to form a new company named Super Fast Express Ltd. The balance
sheets of both the companies were as under:

Particulars Notes Super Fast

Express Express
Ltd. Ltd.
` `
Equity and Liabilities
1 Shareholders’ funds
A Share capital 1 20,00,000 10,00,000
B Reserves and Surplus 2 1,00,000 2,60,000

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 13.75
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2 Non-current liabilities
A Long term provisions 3 1,00,000 --
2 Current liabilities
A Trade Payables 60,000 40,000
Total 22,60,000 13,00,000
Assets
1 Non-current assets
A Property, Plant and 4 14,00,000 11,00,000
Equipment
B Intangible assets 5 -- 1,00,000
2 Current assets
A Inventories 3,00,000 40,000
B Trade receivables 2,40,000 40,000
C Cash and Cash equivalents 6 3,20,000 20,000
Total 22,60,000 13,00,000
Notes to accounts

Super Express Fast Express

Ltd. ` Ltd.`
1 Share Capital
Equity shares of ` 100 each 20,00,000 10,00,000
2 Reserves and Surplus
Insurance reserve 1,00,000 --
Employee profit sharing reserve -- 60,000
Reserve account -- 1,00,000
Surplus -- 1,00,000
1,00,000 2,60,000
3 Long term provisions
Provident fund 1,00,000 --
Total 1,00,000 --

© The Institute of Chartered Accountants of India

 13.76 ADVANCED ACCOUNTING

4 Property, Plant and Equipment

Land and Building 10,00,000 6,00,000
Plant and machinery 4,00,000 5,00,000
14,00,000 11,00,000
5 Intangible assets
Goodwill -- 1,00,000
-- 1,00,000
6. Cash and Cash Equivalents
Cash at Bank 2,20,000 10,000
Cash in hand 1,00,000 10,000
3,20,000 20,000

The assets and liabilities of both the companies were taken over by the new
company at their book values. The companies were allotted equity shares of `
100 each in lieu of purchase consideration amounting to ` 30,000 (20,000 for
Super-Fast Express Ltd and 10,000 for Fast Express Ltd.).
Prepare opening balance sheet of Super Fast Express Ltd. considering pooling
method.
12. The following were the Balance Sheets of P Ltd. and V Ltd. as at 31st March,
20X1:

Particulars Notes ` P Ltd ` V Ltd

(` in Lakhs) (` in Lakhs)
Equity and Liabilities
1 Shareholders’ funds
A Share capital 1 15,000 6,000
B Reserves and Surplus 2 15,370 4,335
2 Non-current liabilities
Long term borrowings 3 -- 1,000
3 Current liabilities
A Trade Payables 1,200 463

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 13.77
AMALGAMATION OF COMPANIES

B Short term provisions 1,830 702

Total 33,400 12,500
Assets
1 Non-current assets
A Property, Plant and 4 22,304 6,750
Equipment
2 Current assets
A Inventories 7,862 4,041
B Trade receivables 2,120 1,100
C Cash and Cash equivalents 1,114 609
Total 33,400 12,500

Notes to accounts

` P Ltd ` V Ltd
(` in (` in
Lakhs) Lakhs)
1 Share Capital 15,000 6,000
2 Reserves and Surplus
Securities premium 3,000 --
Foreign project reserve -- 310
General reserve 9,500 3,200
Profit and loss account 2,870 825
15,370 4,335
3 Long term borrowings
12% debentures -- 1,000
-- 1,000
4 Property, Plant and
Equipment
Land and Building 6,000 --
Plant and machinery 14,000 5,000

© The Institute of Chartered Accountants of India

 13.78 ADVANCED ACCOUNTING

Furniture and fixtures 2,304 1,750

22,304 6,750

All the bills receivable held by V Ltd. were P Ltd.’s acceptances.

On 1st April 20X1, P Ltd. took over V Ltd in an amalgamation in the nature of
merger. It was agreed that in discharge of consideration for the business P Ltd.
would allot three fully paid equity shares of ` 10 each at par for every two
shares held in V Ltd. It was also agreed that 12% debentures in V Ltd. would be
converted into 13% debentures in P Ltd. of the same amount and
denomination.

Details of trade receivables and trade payables as under:

P Ltd. V Ltd.
(` in lakhs) (` in lakhs)
Trade payables
Bills Payable 120 -
Trade Creditors 1,080 463
1,200 463
Trade receivables
Trade debtors 2,120 1,020
Bills Receivable — 80
2,120 1,100
Expenses of amalgamation amounting to ` 1 lakh were borne by P Ltd.
You are required to: (i) pass journal entries in the books of P Ltd. and (ii)
prepare P Ltd.’s Balance Sheet immediately after the merger.
13. Sun and Neptune had been carrying on business independently. They agreed
to amalgamate and form a new company Jupiter Ltd. with an authorised
share capital of ` 4,00,000 divided into 80,000 equity shares of ` 5 each. On
31st March, 20X3 the respective information of Sun and Neptune were as
follows:

Sun (` ) Neptune (`)

Share capital 3,65,000 3,52,500

© The Institute of Chartered Accountants of India

 13.79
AMALGAMATION OF COMPANIES

Current liabilities 5,97,000 1,80,250

Property, Plant and Equipment 6,35,000 3,65,000
Current assets 3,27,000 1,67,750
Additional Information:
(a) Revalued figures of non-current and Current assets were as follows:

Sun (` ) Neptune (`)

Property, Plant and Equipment 7,10,000 3,90,000

Current Assets 2,99,500 1,57,750

(b) The debtors and creditors include ` 43,350 owed by Sun to Neptune.
The purchase consideration is satisfied by issue of the following shares
and debentures.
(i) 60,000 equity shares of Jupiter Ltd. to Sun and Neptune in the
proportion to the profitability of their respective business based on
the average net profit during the last three years which were as
follows:

Sun (` ) Neptune (`)

20X1 Profit 4,49,576 2,73,900
20X2 (Loss)/Profit (2,500) 3,42,100
20X3 Profit 3,77,924 3,59,000

(ii) 15% debenture in Jupiter Ltd. at par to provide an income

equivalent to 8% return business as on capital employed in their
respective business as on 31st March, 20X3 after revaluation of
assets.
You are required to:
(1) Compute the amount of debentures and shares to be issued to Sun and
Neptune.
(2) A Balance sheet of Jupiter Ltd. showing the position immediately after
amalgamation.

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 13.80 ADVANCED ACCOUNTING

14. The following information from Balance Sheet of X Ltd. as at 31st March,
20X1:
`
4,000 Equity shares of ` 100 each 4,00,000
10% Debentures 2,00,000
Loans 80,000
Trade payables 1,60,000
General Reserve 40,000
Building 1,70,000
Machinery 3,20,000
Inventory 1,10,000
Trade receivables 1,30,000
Bank 68,000
Patent 65,000
Share issue Expenses 17,000

Y Ltd. agreed to absorb X Ltd. on the following terms and conditions:

(1) Y Ltd. would take over all assets, except bank balance and Patent at
their book values less 10%. Goodwill is to be valued at 4 year’s
purchase of super profits, assuming that the normal rate of return be
8% on the combined amount of share capital and general reserve.
(2) Y Ltd. is to take over trade payables at book value.
(3) The purchase consideration is to be paid in cash to the extent of
` 3,00,000 and the balance in fully paid equity shares of ` 100 each at
` 125 per share.
The average profit is ` 62,200. The liquidation expenses amounted to ` 8,000.
Y Ltd. sold prior to 31st March, 20X1 goods costing ` 60,000 to X Ltd. for
` 80,000. ` 50,000 worth of goods are still in Inventory of X Ltd. on 31st
March, 20X1. Trade payables of X Ltd. include ` 20,000 still due to Y Ltd.
Show the necessary Ledger Accounts to close the books of X Ltd. and prepare
the Balance Sheet of Y Ltd. as at 1st April, 20X1 after the takeover.

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AMALGAMATION OF COMPANIES

ANSWERS/HINTS
Answer to the Multiple Choice Questions
1. (b) 2. (a) 3. (c) 4. (b) 5. (a) 6. (a)

Answer to the Theoretical Questions

7. Refer Para 3 of chapter.
8. Refer Para 5 of chapter.

Answer to the Scenario based Questions

9. Journal Entries in the books of No Ltd.

(Rupees in crores)
Dr. Cr.
Realization Account Dr. 64.00
To Property, plant and equipment Account 30.00
To Current Assets Account 34.00
(Being the assets taken over by Yes Ltd. transferred to
Realization Account)
Provision for depreciation Account Dr. 24.00
Current Liabilities Account Dr. 15.00
Unsecured Loan from Yes Ltd. Account Dr. 10.00
To Realization Account 49.00
(Being the transfer of liabilities and provision to
Realization Account)
Yes Ltd. Dr. 1.2
To Realization Account 1.2
(Being the amount of consideration due from Yes Ltd. credited
to Realization Account)

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 13.82 ADVANCED ACCOUNTING

Equity Shareholders Account Dr. 13.80

To Realization Account 13.80

(Being the loss on Realization transferred to equity share-

holders account)

Equity Share Capital Account Dr. 5.00

Reserves and Surplus Account Dr. 10.00

To Equity Shareholders Account 15.00

(Being the amount of share capital, reserves and surplus

credited to equity shareholders account)

Equity shares of Yes Ltd. Dr. 1.20

To Yes Ltd. 1.20

(Being the receipt of 10 lakhs equity shares of

` 10 each at ` 12 per share for allotment to shareholders)

Equity shareholders Account Dr. 1.20

To Equity shares of Yes Ltd. 1.20

(Being the distribution of equity shares received from Yes

Ltd. to shareholders)

Journal Entries in the books of Yes Ltd.

(Rupees in crores)
Dr. Cr.
Business Purchase Account Dr. 1.2
To Liquidator of No Ltd. Account 1.2
(Being the amount of purchase consideration agreed under
approved scheme of amalgamation- W.N. 1)

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 13.83
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Property, plant and equipment Dr. 6.00

Current Assets Dr. 34.00
To Current Liabilities 15.00
To Unsecured Loan (from Yes Ltd.) 10.00
To Business Purchase Account 1.20
To Reserve & Surplus A/c 10.00
To Profit & loss A/c ∗ 3.80
(Being the assets and liabilities taken over and the surplus

transferred to Profit and loss account)

Liquidator of No Ltd. Dr. 1.20
To Equity Share Capital Account 1.00
To Securities Premium Account 0.20
( Being the allotment to shareholders of No Ltd.
10 lakhs equity shares of ` 10 each at a premium of

` 2 per share)
Unsecured Loan (from Yes Ltd.) Dr. 10.00
To Loan to No. Ltd. 10.00
(Being the cancellation of unsecured loan given to No Ltd.)
Working Note:
Purchase Consideration ` in crores
50lakhs
× ` 12 i.e., 10 lakhs equity shares at ` 12 per share 1.20
5

Number of equity shares of ` 10 each to be issued 1.20 crores  = 10 lakhs.

 12 

∗
As amalgamation in the nature of merger so balancing figure will be transferred to Profit
& Loss account.

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 13.84 ADVANCED ACCOUNTING

10. Books of X Ltd.

Realization Account

` `
To Sundry Assets 1,20,000 By Trade payables 25,000
By XY Ltd. (Purchase consideration) 75,000
By Shareholders (Loss on realization) 20,000
1,20,000 1,20,000

Shareholders Account

` `
To Realization Account (Loss) 20,000 By Equity Share Capital 1,00,000
To Shares in XY Ltd. 90,000 By Profit and Loss Account 10,000
1,10,000 1,10,000

Loan Y Ltd.

` `
To Balance b/d 15,000 By Shares in XY Ltd. 15,000

Shares in XY Ltd.

` `
To XY Ltd. 75,000 By Shareholders 90,000
To Loan Y Ltd. 15,000
90,000 90,000

XY Ltd.

` `
To Realization Account 75,000 By Shares in XY Ltd. 75,000

11. Balance Sheet of Super Fast Express Ltd.

Particulars Notes `
Equity and Liabilities
1 Shareholders' funds
a Share capital 1 30,00,000
b Reserves and Surplus 2 3,60,000

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 13.85
AMALGAMATION OF COMPANIES

2 Non-current liabilities
a Long-term provisions 3 1,00,000
3 Current liabilities
a Trade Payables 1,00,000
Total 35,60,000
Assets
1 Non-current assets
a Property, Plant and Equipment 4 25,00,000
b Intangible assets 5 1,00,000
2 Current assets
Inventories 3,40,000
Trade receivables 2,80,000
Cash and cash equivalents 6 3,40,000
Total 35,60,000
Notes to Accounts

`
1 Share Capital
Equity share capital
Issued, subscribed and paid up
30,000 Equity shares of ` 100 each 30,00,000
Total 30,00,000
2 Reserves and Surplus
Reserve account 1,00,000
Surplus 1,00,000
Insurance reserve 1,00,000
Employees profit sharing account 60,000
Total 3,60,000
3 Long-term provisions
Provident fund 1,00,000
Total 1,00,000

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 13.86 ADVANCED ACCOUNTING

4 Property, Plant and Equipment

Buildings 16,00,000
Machinery 9,00,000
Total 25,00,000
5 Intangible assets
Goodwill 1,00,000
Total 1,00,000
6 Cash and cash equivalents
Balances with banks 2,30,000
Cash on hand 1,10,000
Total 3,40,000

12. Books of P Ltd.

Journal Entries
Dr. Cr.
(` in Lacs) (` in Lacs)
Business Purchase A/c Dr. 9,000
To Liquidator of V Ltd. 9,000
(Being business of V Ltd. taken over for

Consideration settled as per agreement)

Plant and Machinery Dr. 5,000

Furniture & Fittings Dr. 1750

Inventory Dr. 4,041

Debtors Dr. 1,020

Cash at Bank Dr. 609

Bills Receivable Dr. 80

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 13.87
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To Foreign Project Reserve 310

To General Reserve (3,200 - 3,000) 200
To Profit and Loss A/c (825 ) 825
To Liability for 12% Debentures 1,000
To Creditors 463
To Provisions 702
To Business Purchase 9,000
(Being assets & liabilities taken over from V Ltd.)
Liquidator of V Ltd. A/c Dr. 9,000
To Equity Share Capital A/c 9,000
(Purchase consideration discharged in the
form of equity shares)
Goodwill A/c Dr. 1
To Bank A/c 1
(Liquidation expenses paid by P Ltd debited to Goodwill A/c)
Profit and loss A/c Dr. 1
To Goodwill A/c 1
(being the Goodwill charged to Profit and loss account)
Liability for 12% Debentures A/c Dr. 1,000
To 13% Debentures A/c 1,000
(12% debentures discharged by issue of
13% debentures)
Bills Payable A/c Dr. 80

To Bills Receivable A/c 80

(Cancellation of mutual owing on account of bills)

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 13.88 ADVANCED ACCOUNTING

Balance Sheet of P Ltd. as at 1st April, 20X1 (after merger)

Particulars Notes ` (in lakhs)
Equity and Liabilities
1 Shareholders' funds
A Share capital 1 24,000
B Reserves and Surplus 2 16,704
2 Non-current liabilities
A Long-term borrowings 3 1,000
3 Current liabilities
A Trade Payables (1,543 + 40) 1,583
B Short-term provisions 2,532
Total 45,819
Assets
1 Non-current assets
A Property, Plant and Equipment 4 29,054
2 Current assets
A Inventories 11,903
B Trade receivables 3,140
C Cash and cash equivalents 1,722
Total 45,819

Notes to accounts

`
1. Share Capital
Equity share capital
Authorized, issued, subscribed and paid up
24 crores equity shares of ` 10 each 24,000
(Of the above shares, 9 crores shares have been issued
for consideration other than cash)
Total 24,000

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2. Reserves and Surplus

General Reserve 9,700
Securities Premium 3,000
Foreign Project Reserve 310
Profit and Loss Account 3,694
Total 16,704
3. Long-term borrowings
Secured
13% Debentures 1,000
4. Property, Plant and Equipment
Land & Buildings 6,000
Plant & Machinery 19,000
Furniture & Fittings 4,054
Total 29,054

Working Note:
Computation of purchase consideration
The purchase consideration was discharged in the form of three equity
shares of P Ltd. for every two equity shares held in V Ltd.
3
Purchase consideration = ` 6,000 lacs × = ` 9,000 lacs.
2
13. (1) Computation of Amount of Debentures and Shares to be issued:
Sun Neptune
(i) Average Net Profit
` (4,49,576-2,500+3,77,924)/3 = 2,75,000
` (2,73,900+,3,42,100+3,59,000)/3 = 3,25,000

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 13.90 ADVANCED ACCOUNTING

(ii) Equity Shares Issued

(a) Ratio of distribution
Sun: Neptune
275 325
(b) Number
Sun : 27,500
Neptune: 32,500
60,000
(c) Amount
27,500 shares of ` 5 each = 1,37,500
32,500 shares of ` 5 each = 1,62,500
(iii) Capital Employed (after revaluation of assets) ` `
Property, plant and equipment 7,10,000 3,90,000
Current Assets 2,99,500 1,57,750
10,09,500 5,47,750
Less: Current Liabilities (5,97,000) (1,80,250)
4,12,500 3,67,500
(iv) Debentures Issued
8% Return on capital employed 33,000 29,400
15% Debentures to be issued to provide
equivalent income:
100
Sun: 33,000 × = 2,20,000
15
100
Neptune: 29,400 × = 1,96,000
15

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(2) Balance Sheet of Jupiter Ltd.

As at 31st March 20X3 (after amalgamation)

Particulars Note No `
I. Equity and Liabilities

(1) Shareholders’ Funds

(a) Share Capital 1 3,00,000
(b) Reserves and Surplus 2 64,000

(2) Non-Current Liabilities

(a) Long-term borrowings 3 4,16,000
(3) Current Liabilities
(a) Other current liabilities 7,33,900

Total 15,13,900

II. Assets
(1) Non-current assets
(a) PPE 11,00,000
(2) Current assets
(a) Other current assets 4,13,900

Total 15,13,900

Notes to Accounts

`
1 Share Capital
Authorized
80,000 Equity Shares of ` 5 each 4,00,000
Issued and Subscribed
60,000 Equity Shares of ` 5 each 3,00,000
(all the above shares are allotted as fully paid-up
pursuant to a contract without payment being
received in cash)

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 13.92 ADVANCED ACCOUNTING

2 Reserve and Surplus

Capital Reserve 64,000
3 Long-term borrowings
Secured Loans
15% Debentures 4,16,000
Working Notes:

Sun Neptune Total

` ` `
(1) Purchase Consideration
Equity Shares Issued 1,37,500 1,62,500 3,00,000
15% Debentures Issued 2,20,000 1,96,000 4,16,000
3,57,500 3,58,500 7,16,000
(2) Capital Reserve
(a) Net Assets taken over
Property, plant & equipment 7,10,000 3,90,000 11,00,000
Current Assets 2,99,500 1,14,400* 4,13,900
10,09,500 5,04,400 15,13,900
Less: Current Liabilities (5,53,650**) (1,80,250) (7,33,900)
4,55,850 3,24,150 7,80,000
(b) Purchase Consideration 3,57,500 3,58,500 7,16,000
(c) Capital Reserve [(a) - (b)] 98,350
(d) Goodwill [(b) - (a)] 34,350
(e) Capital Reserve 64,000
[Final Figure(c) -(d)]

* 1,57,750–43,350= 1,14,400
** 5,97,000–43,350= 5,53,650

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 13.93
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14. Books of X Limited

Realisation Account
` `
To Building 1,70,000 By Trade payables 1,60,000
To Machinery 3,20,000 By Y Ltd. 6,05,000
To Inventory 1,10,000 By Equity Shareholders 38,000
(Loss)
To Trade 1,30,000
receivables
To Patent 65,000
To Bank (Exp.) 8,000
8,03,000 8,03,000

Bank Account
To Balance b/d 68,000 By Realisation (Exp.) 8,000
To Y Ltd. 3,00,000 By 10% Debentures 2,00,000
By Loan 80,000
By Equity shareholders 80,000
3,68,000 3,68,000
10% Debentures Account
To Bank 2,00,000 By Balance b/d 2,00,000
2,00,000 2,00,000
Loan Account
To Bank 80,000 By Balance b/d 80,000
80,000 80,000
Share Issue Expenses Account
To Balance b/d 17,000 By Equity shareholders 17,000
17,000 17,000
General Reserve Account
To Equity 40,000 By Balance b/d 40,000

© The Institute of Chartered Accountants of India

 13.94 ADVANCED ACCOUNTING

shareholders
40,000 40,000
Y Ltd. Account
To Realisation A/c 6,05,000 By Bank 3,00,000
By Equity share in Y Ltd.
(2,440 shares at ` 125 3,05,000
each)
6,05,000 6,05,000
Equity Shares in Y Ltd. Account
To Y Ltd. 3,05,000 By Equity shareholders 3,05,000
3,05,000 3,05,000
Equity Share Holders Account
To Realisation 38,000 By Equity share capital 4,00,000
To Share issue 17,000 By General reserve 40,000
Expenses
To Equity shares 3,05,000
in B Ltd.
To Bank 80,000
4,40,000 4,40,000

Y Ltd
Balance Sheet as on 1st April, 20X1 (An extract) ∗

Particulars Notes `
Equity and Liabilities
1 Shareholders' funds
a Share capital 1 2,44,000
b Reserves and Surplus 2 53,500
2 Current liabilities
a Trade Payables 3 1,40,000

∗
In the absence of the particulars of assets and liabilities (other than those of X Ltd.), the
complete Balance Sheet of Y Ltd. after takeover cannot be prepared.

© The Institute of Chartered Accountants of India

 13.95
AMALGAMATION OF COMPANIES

b Bank overdraft 3,00,000

Total 7,37,500
Assets
1 Non-current assets
a Property, Plant and Equipment 4 4,41,000
Intangible assets 5 1,08,000
2 Current assets
a Inventories 6 91,500
b Trade receivables 7 97,000
7,37,500

Notes to Accounts
`
1 Share Capital
Equity share capital
2,440 Equity shares of ` 100 each (Shares
have been issued for consideration other 2,44,000
than cash)
Total 2,44,000
2 Reserves and Surplus (an extract)
Securities Premium 61,000
Profit and loss account …..
Less: Unrealised profit (7,500) (7,500)
Total 53,500
3 Trade payables
Opening balance 1,60,000
Less: Inter-company transaction cancelled
upon amalgamation (20,000) 1,40,000

© The Institute of Chartered Accountants of India

 13.96 ADVANCED ACCOUNTING

4 Property, Plant and Equipments

Buildings 1,53,000
Machinery 2,88,000
Total 4,41,000
5 Intangible assets
Goodwill 1,08,000
6 Inventories
Opening balance 99,000
Less: Cancellation of profit upon (7,500) 91,500
amalgamation
7 Trade receivables
Opening balance 1,17,000
Less: Intercompany transaction cancelled (20,000) 97,000
upon amalgamation

Working Notes:

1. Valuation of Goodwill `
Average profit 62,200
Less: 8% of ` 4,40,000 (35,200)
Super profit 27,000
Value of Goodwill = 27,000 x 4 1,08,000
2. Net Assets for purchase consideration
Goodwill as valued in W.N.1 1,08,000
Building 1,53,000
Machinery 2,88,000
Inventory 99,000
Trade receivables (1,30,000-13,000) 1,17,000
Total Assets 7,65,000

© The Institute of Chartered Accountants of India

 13.97
AMALGAMATION OF COMPANIES

Less: Trade payables (1,60,000)

Net Assets 6,05,000
Out of this ` 3,00,000 is to be paid in cash and remaining i.e.,
(6,05,000 – 3,00,000) ` 3,05,000 in shares of ` 125. Thus, the
number of shares to be allotted 3,05,000/125 = 2,440 shares.
3. Unrealised Profit on Inventory `
The Inventory of X Ltd. includes goods worth ` 50,000
which was sold by Y Ltd. on profit. Unrealized profit
on this Inventory will be [20,000/80,000 x 50,000] 12,500
As Y Ltd purchased assets of X Ltd. at a price 10% less
than the book value, 10% need to be adjusted from (5,000)
the Inventory i.e., 10% of
` 50,000.
Amount of unrealized profit 7,500

© The Institute of Chartered Accountants of India

CHAPTER
14
INTERNAL
RECONSTRUCTION

LEARNING OUTCOMES
After studying this chapter, you will be able to:
♦ Understand the meaning of term “reconstruction” and the types of
reconstruction.
♦ Understand the concept of Sub-division and consolidation of shares,
conversion of shares into stock and vice versa
♦ Understand the meaning of Capital reduction account and rules
regarding the presentation of accounts post reconstruction in
accordance with the provisions of the Companies Act 2013.

© The Institute of Chartered Accountants of India

 14.2 ADVANCED ACCOUNTING

CHAPTER OVERVIEW

Types of Reconstruction

Internal Reconstruction External reconstruction

(Sections of the Companies (AS14 Accounting for
Act 2013) Amalgamations)

Methods of Internal Reconstruction

Alteration Variation of Reduction

Compromise/ Surrender
of Share Shareholders’ of Share
Arrangement of Shares
Capital rights Capital

Sub-division and
Conversion of share into
Consolidation of
stock or vice-versa
Shares

1. MEANING OF RECONSTRUCTION
When a company has been making losses for several years, the financial position
does not present a true and fair view of the state of the affairs of the company. In
such a company the assets are generally overvalued, as the balance sheet consists
of fictitious assets, unrepresented intangible assets and debit balance in the profit
and loss account (showing the carry forward of losses). Such a situation always
leads the company to show a higher net worth and not depicting a true picture of
financial statements. In short, the company is over capitalized. Such a situation
brings the need for reconstruction/reorganization of the affairs.

© The Institute of Chartered Accountants of India

 14.3
INTERNAL RECONSTRUCTION

Reconstruction is a process by which affairs of a company are reorganized by

revaluation of assets, reassessment of liabilities and by writing off the losses already
suffered, by reducing the paid up value of shares and/or varying the rights attached
to different classes of shares. The object of reconstruction is usually to reorganize
capital or to compound with creditors so that company can be bailed out from
present situation without winding up the existing company.
However, there may be external reconstruction. Wherever an undertaking is being
carried on by a company and is in substance transferred, not to an outsider, but
to another company consisting substantially of the same shareholders with a view
to its being continued by the transferee company, there is external reconstruction.
Such external reconstruction is essentially covered under the category of
‘amalgamation in the nature of merger’ in AS 14.
Difference Between Internal and External Reconstruction

Basis Internal Reconstruction External Reconstruction

Liquidation and The existing company is The existing company is
formation of not liquidated rather the liquidated to form a new
new company capital and debt structure company in which the existing
is changed to bring the shareholders become
company back to normalcy shareholders of new company
as well
Reduction of There is certain reduction There is no reduction of capital.
capital and of capital and sometimes In fact, there is a fresh share
varying rights the outside liabilities like capital of the company. The
debenture holders may shareholders need not vary
have to reduce their claim their rights in company
in this scheme.
Legal position Internal reconstruction is External reconstruction is
done as per provisions of regulated by section 232 of the
section 61 and 66 of the Companies Act, 2013.
Companies Act, 2013.
Legal formalities It requires court’s It can be affected without the
confirmation and other court’s interference and less
legal procedures before it time-consuming process.
can be implemented

© The Institute of Chartered Accountants of India

 14.4 ADVANCED ACCOUNTING

2. METHODS OF INTERNAL RECONSTRUCTION

For properly deploying the process of internal reconstruction following methods
are generally employed or used simultaneously:

2.1 Alteration of Share Capital

According to Section 61 of the Companies Act 2013, a limited company can alter
its share capital, if so authorized by its Articles, by passing an ordinary resolution
in the general meeting. The provisions of the relevant sections of Companies Act
will be applicable, but in this chapter, we are going to focus on the accounting
treatment of the various conditions pertaining to internal reconstruction.

The following types of Alteration can be done under Section 61-

(a) Increase of authorized share capital;

(b) Consolidation and sub-division into shares of larger or smaller denominations;

(c) Conversion of all or any of the shares into stock or vice versa;

(d) Cancellation of shares which have not been taken or agreed to be taken by any
person.

Sub-division and Consolidation of Shares

The existing share capital can be sub-divided or consolidated into the shares into those
of a smaller or higher denomination than that fixed by the Memorandum of
Association, so long as the proportion between the paid up and unpaid amount, if any,
on the shares continues to be the same as it was in the case of the original shares.

For example, a company with a capital of ` 10,00,000 divided into 10,000 equity
shares of ` 100 each on which ` 75 is paid up decides to reorganize its capital by
splitting one equity share of ` 100 each into 10 such shares of ` 10 each. The
consequential entry to be passed in such a case would be—

Dr. Cr.
` `
Equity Share Capital (` 100) A/c Dr. 7,50,000

© The Institute of Chartered Accountants of India

 14.5
INTERNAL RECONSTRUCTION

To Equity Share Capital (` 10) A/c 7,50,000

(Being the sub-division of 10,000 shares of ` 100 each
with ` 75 paid up thereon into 1,00,000 shares of ` 10
each with ` 7.50 paid up thereon as per the resolution of
shareholders passed in the General Meeting held on...)
Similar entries will be passed on consolidation of shares of a smaller amount into
those of a larger amount.
Illustration 1
On 31-12-20X1, B Ltd. had 20,000, ` 10 Equity Shares as authorized capital and the
shares were all issued on which ` 8 was paid up. In June, 20X2 the company in
general meeting decided to sub-divide each share into two shares of ` 5 with ` 4
paid up. In June, 20X3 the company in general meeting resolved to consolidate 20
shares of ` 5, ` 4 per share paid up into one share of ` 100 each, ` 80 paid up.
Pass entries and show how share capital will appear in notes to Balance Sheet as on
31-12-20X1, 31-12-20X2 and 31-12-20X3.

Solution
Journal Entries
20X2 ` `
June Equity Share Capital (` 10) A/c Dr. 1,60,000
To Equity Share Capital (` 5) A/c 1,60,000
(Being the sub-division of 20,000 shares
of ` 10 each with ` 8 paid up into 40,000
shares ` 5 each with ` 4 paid up by
resolution in general meeting dated....)
20X3 Equity Share Capital (` 5) A/c Dr. 1,60,000
June To Equity Share Capital (` 100) A/c 1,60,000
(Being consolidation of 40,000 shares of
` 5 with ` 4 paid up into 2,000 ` 100
shares with ` 80 paid up)

© The Institute of Chartered Accountants of India

 14.6 ADVANCED ACCOUNTING

Notes to Balance Sheet

Liabilities: `
As on 31-12-20X1
1. Share Capital
Authorized:
20,000 Equity Shares of ` 10 each 2,00,000
Issued, Subscribed and Paid up:
20,000 Equity Shares of ` 10 each ` 8 per share paid up 1,60,000
As on 31-12-20X2
1. Share Capital
Authorized:
40,000 Equity Shares of ` 5 each 2,00,000
Issued, Subscribed and Paid up:
40,000 Equity Shares of ` 5 each ` 4 per share paid up 1,60,000
As on 31-12-20X3 `
1. Share Capital
Authorized:
2,000 Equity Shares of ` 100 each 2,00,000
Issued, Subscribed and Paid up:
2,000 Equity Shares of ` 100 each ` 80 per share paid up 1,60,000

Note: Some accountants prefer not to make any entry as the amount remains
same. Even when an entry is passed it applies only to the called-up portion, and
not to uncalled or unissued portion of share capital.

Conversion of Fully Paid Shares into Stock and Stock into Shares

According to section 61 of Companies Act, 2013, a company can convert its fully
paid shares into stock and reconversion of stock into shares. If authorized by its
Articles, a company may, in a general meeting by passing an ordinary resolution,

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 14.7
INTERNAL RECONSTRUCTION

can convert its fully paid shares into stock and reconversion of stock into shares.
Stock is the consolidation of the share capital into one unit divisible into aliquot
parts. Stock is a bundle of fully paid shares put together for convenience so that it
may be divided into any amount and transferred into any fractions and sub-
divisions without regard to the original face value of the shares. While it is
impossible for share capital to be one share, any amount of stock may be
transferred. In practice, however, companies restrict the transfer of stock to
multiples say, ` 100.
A company can convert its fully paid shares into stock. Upon the company
converting its shares into stock, the book-keeping entries merely record the
transfer from share capital account to stock account. A separate Stock Register is
started in which details of members’ holdings are entered and the annual return is
modified accordingly.
Illustration 2
C Ltd. had ` 5,00,000 authorized capital on 31-12-20X1 divided into shares of ` 100
each out of which 4,000 shares were issued and fully paid up. In June 20X2 the
Company decided to convert the issued shares into stock. But in June, 20X3 the
Company re-converted the stock into shares of ` 10 each, fully paid up.
Pass entries and show how Share Capital will appear in Notes to Balance Sheet as
on 31-12-20X1, 31-12-20X2 and 31-12-20X3.
Solution
Journal Entries

` `
20X2
June Equity Share Capital A/c Dr. 4,00,000
To Equity Stock A/c 4,00,000
(Being conversion of 4,000 fully paid Equity
Shares of ` 100 into ` 4,00,000 Equity Stock
as per resolution in general meeting
dated…)

© The Institute of Chartered Accountants of India

 14.8 ADVANCED ACCOUNTING

20X3
June Equity Stock A/c Dr. 4,00,000
To Equity Share Capital A/c 4,00,000
(Being re-conversion of ` 4,00,000 Equity
Stock into 40,000 shares of ` 10 fully paid
Equity Shares as per resolution in General
Meeting dated...)

Notes to Balance Sheet

`
As on 31-12-20X1
Share Capital
Authorized
5,000 Equity Shares of ` 100 each 5,00,000
Issued and Subscribed
4,000 Equity Shares of ` 100 each fully called up 4,00,000
As on 31-12-20X2 `
Share Capital
Authorized
5,000 Equity Shares of ` 100 each 5,00,000
Issued and Subscribed
Equity Stock- 4,000 Equity Shares of ` 100 converted into Stock 4,00,000
As on 31-12-20X3 `
Share Capital
Authorized
50,000 Equity Shares of ` 10 each 5,00,000
Issued and Subscribed
40,000 Equity Shares of ` 10 each fully called up 4,00,000

© The Institute of Chartered Accountants of India

 14.9
INTERNAL RECONSTRUCTION

2.2 Variation of Shareholders Rights

Section 48 of the Companies Act, 2013 provides that when a company has issued
different classes of shares with different rights or privileges attached to such
shares e.g. rights as to dividend, voting rights etc., any of such right may be
changed in any manner. The provisions will be applicable as per the Companies
Act 2013 , the accounting treatment is discussed in detail here.
For example, the company may change rate of (a) dividend on preference shares
or (b) convert cumulative preference shares into non-cumulative preference
shares without changing the amount of share capital by passing the following
journal entries:
(a) Debit (Old)% Cum. Pref. Share Capital Account
Credit (New)% Cum. Pref. Share Capital Account
(b) Debit …% Cum. Pref. Share Capital Account
Credit …% Non-cum. Pref. Share Capital Account

2.3 Reduction of Share Capital

Section 66 of the Companies Act, 2013 lays down the procedure in respect of
reduction of share capital. Subject to confirmation by the Tribunal on an
application by the company, a company may, by a special resolution, reduce the
share capital in the following manner-
(a) Extinguishing or reducing the liability of the shareholders in respect of
unpaid amount on the shares held by them; or
(b) Paying off any paid-up share capital which is in excess of its requirements;

(c) Cancelling any paid-up share capital which is lost or is unrepresented by

available assets.
Generally, reduction in share capital is followed when a company has been
suffering losses continuously for a long time, is not truly represented by its assets.
In such a case, any scheme for capital reduction should write-off that portion of
capital which is already lost

© The Institute of Chartered Accountants of India

 14.10 ADVANCED ACCOUNTING

This reduction is a sacrifice by the shareholders and the amount of reduction or

sacrifice is credited to a new account called Capital Reduction Account (or
Reconstruction Account). The accounting treatment is as follows:
(a) When liability of the shareholders is extinguished or reduced in respect
of unpaid amount on the shares held by them: Here the shareholders are
not called upon to pay the unpaid amount on shares held by them in future.
For example, a company decides to reduce ` 10 per share, into ` 7.5 per
share fully paid up, by cancelling the unpaid amount of ` 2.5 per share. The
entry in this case would be
Share Capital (Partly Paid-Up) Account Dr. (` 7.5 (Fv `10) X No. of Shares)
To Share Capital (Fully Paid-up) Account (` 7.5 (Fv- `7.5) X No. of Shares)
(b) When excess paid up capital is paid off: When its not possible for the
company to employ profitably its paid up capital, then in such case it may
decide to refund the excess capital to its shareholders. For example, a
company having fully paid-up share of ` 10 each, decides to pay-off ` 2 per
share to make it of ` 8 fully paid-up, entries in that case would be
Share Capital Account (` 10) Dr. (` 10 X No. of Shares)
To Share Capital Account (` 8) (` 8 X No. of Shares)
To Sundry Shareholders Account (` 2 X No. of Shares)
Sundry Shareholders Account Dr. (` 2 X No. of Shares)
To Bank Account (` 2 X No. of Shares)
(c) When the paid up capital which is lost or not represented is cancelled:
Reduction in paid up value only- Here the nominal value of the share remains
the same and only the paid value is reduced. For example, the shareholders
may agree to reduce the paid capital of ` 100 per share to paid value of ` 10
per share. The sacrifice is ` 90 and the entry will be
Share Capital Account Dr. (` 90 X No. of Shares)
To Capital Reduction Account (` 90 X No. of Shares)

© The Institute of Chartered Accountants of India

 14.11
INTERNAL RECONSTRUCTION

Reduction in both nominal and paid up values- In this case, both the paid
up capital and nominal value of the shares are reduced. Continuing the
above example, the entry will be:

Share Capital Account (` 100 Share) Dr. (` 100 X No. of Shares)

To Share Capital (` 10 Share) (` 10 X No. of Shares)

To Capital Reduction Account (` 90 X No. of Shares)

Thus in such treatment we debit the original Share Capital Account so as to close
it, credit new Share Capital Account with the amount treated as paid up; and
credit Capital Reduction Account with the difference.

2.4 Compromise/Arrangements
A scheme of compromise and arrangement is an agreement between a company
and its members and outside liabilities when the company faces financial
problems. Such an arrangement therefore also involves sacrifices by shareholders,
or creditors or debenture holders or by all of them.

Accounting treatment for some of the cases is as follows:

a) When equity shareholders give up their right over the reserves and
accumulated profits of the company:

Reserves Account Dr. (With the amount of reserves)

To Reconstruction Account

b) Settlement of outside liabilities at lesser amount: Liabilities such as sundry

creditors may agree to accept less amount in lieu of final settlement.
Treatment will be as follows:

Outside Liabilities Account Dr. (With the amount of sacrifice)

Provision Account (if any) Dr. (made by creditors, debenture holders etc.)

To Reconstruction Account

© The Institute of Chartered Accountants of India

 14.12 ADVANCED ACCOUNTING

2.5 Surrender of Shares

In this method, shares are divided into shares of smaller denominations and then
the shareholders are made to surrender their shares to the company. These shares
are then allotted to debenture holders and creditors so that their liabilities are
reduced. The unutilized surrendered shares are then cancelled by transferring
them to Reconstruction Account.

3. ENTRIES IN CASE OF INTERNAL

RECONSTRUCTION
On a scheme of internal reconstruction being adopted (through special resolution
confirmed by the Court), the accounting treatment of the different situations and
the entries to be passed are as follows:
1. Under the above-mentioned methods- the alteration of share capital and
the varying of the shareholders rights do not involve opening the capital
reduction/reconstruction account.
2. It is only under the reduction of share capital, unrepresented reserves,
compromise/ arrangements with the outsiders liabilities and surrender of
shares, there shall be capital reduction/reconstruction account used to which
the unrepresented assets/liabilities will be transferred as per the arrangement.
3. An appreciation in the value of an asset or reduction in the amount of a
liability should be debited to the account concerned and credited to Capital
Reduction Account (or Reconstruction Account).
4. Eliminate debit balance of profit and loss account and all over-valuation of
assets by crediting the accounts concerned and debiting the Capital
Reduction (or Reconstruction) Account. For this purpose, any reserve
appearing in the books of the company may be used. If any balance is left in
the Capital Reduction (or Reconstruction) Account, it should be transferred
to the Capital Reserve Account.

© The Institute of Chartered Accountants of India

 14.13
INTERNAL RECONSTRUCTION

5. If there is any balance in the reconstruction account it is finally transferred

to the Capital reserve under Reserves and Surplus. But if the amount for
writing off the assets and accumulated losses is more than the
reconstruction amount, then reserves will be adjusted against the same.
While preparing the balance sheet of a reconstructed company, the following
points are to be kept in mind:
(a) After the name of the company, the words “and Reduced” should be added
only if the Court so orders.
(b) In case of fixed assets, the amount written off under the scheme of
reconstruction must be shown for five years.

Illustration 3
The Balance Sheet of A & Co. Ltd. as at 31-3-20X2 is as follows:

Particulars Notes `
Equity and Liabilities
1 Shareholders’ funds
A Share capital 1 11,50,000
B Reserves and Surplus 2 (5,35,000)
2 Non-current liabilities
A Long-term borrowings 3 3,75,000
3 Current liabilities
A Trade Payables 3,00,000
B Short term borrowings - Bank Overdraft 1,95,000
C Other current liabilities 4 1,22,500
Total 16,07,500
Assets
1 Non-current assets
A Property, plant and equipment 5 4,75,000
B Intangible assets 6 1,67,500
C Non-current investments 7 55,000

© The Institute of Chartered Accountants of India

 14.14 ADVANCED ACCOUNTING

2 Current assets
A Inventories 4,25,000
B Trade receivables 4,85,000
Total 16,07,500

Notes to accounts

`
1 Share Capital
Equity share capital:
75,000 Equity Shares of ` 10 each 7,50,000
Preference share capital:
4,000 6% Cumulative Preference Shares of ` 100 each 4,00,000
11,50,000
2 Reserves and Surplus
Debit balance of Profit and loss Account (5,35,000)
(5,35,000)
3 Long-term borrowings
Secured
6% Debentures (secured on the freehold property) 3,75,000
3,75,000
4 Other current liabilities
Loan from directors 1,00,000
Interest payable on 6% debentures 22,500
1,22,500
5 Property plant and Equipment
Freehold property 4,25,000
Plant 50,000
4,75,000

© The Institute of Chartered Accountants of India

 14.15
INTERNAL RECONSTRUCTION

6 Intangible assets
Goodwill 1,30,000
Patents 37,500
1,67,500
7 Non-current investments
Investments at cost 55,000
55,000
The Court approved a Scheme of re-organization to take effect on 1-4-20X2,
whereby:

(i) The Preference shares to be written down to ` 75 each and Equity Shares to
` 2 each.
(ii) Of the Preference Share dividends which are in arrears for four years, three
fourths to be waived and Equity Shares of ` 2 each to be allotted for the
remaining quarter.

(iii) Interest payable on debentures to be paid in cash.

(iv) Debenture-holders agreed to take over freehold property, book value

` 1,00,000 at a valuation of ` 1,20,000 in part repayment of their holdings
and to provide additional cash of ` 1,30,000 secured by a floating charge on
company’s assets at an interest rate of 8% p.a.

(v) Patents and Goodwill to be written off.

(vi) Inventory to be written off by ` 65,000.

(vii) Amount of ` 68,500 to be provided for bad debts.

(viii) Remaining freehold property after giving to debenture holders, to be re-

valued at ` 3,87,500.

(ix) Investments be sold for ` 1,40,000.

(x) Directors to accept settlement of their loans as to 90% thereof by allotment of

equity shares of ` 2 each and as to 5% in cash, and balance 5% being waived.

© The Institute of Chartered Accountants of India

 14.16 ADVANCED ACCOUNTING

(xi) There were capital commitments totalling ` 2,50,000. These contracts are to
be cancelled on payment of 5% of the contract price as a penalty.

(xii) Ignore taxation and cost of the scheme.

You are requested to show Journal entries reflecting the above transactions
(including cash transactions) and prepare the Balance Sheet of the company after
completion of the Scheme.

Solution
Journal of A & Co. Ltd.

Dr. Cr.
` `
20X2 Equity Share Capital A/c (` 10) Dr. 7,50,000
April 1 To Capital Reduction A/c 6,00,000
To Equity Share Capital A/c (` 2) 1,50,000
(Reduction of equity shares of ` 10 each to
shares of ` 2 each as per Reconstruction
Scheme dated...)
” 6% Cum. Preference Share Capital A/c Dr. 4,00,000
(` 100)
To Capital Reduction A/c 1,00,000
To Pref. Share Capital A/c (` 75) 3,00,000
(Reduction of preference shares of ` 100
each to shares of ` 75 each as per
reconstruction scheme)
” Capital Reduction Account Dr. 24,000
To Equity Share Capital Account 24,000
(Arrears of preference dividends satisfied by
the issue of equity shares, 25% of the amount
due, ` 96,000)

© The Institute of Chartered Accountants of India

 14.17
INTERNAL RECONSTRUCTION

” Freehold Property A/c Dr. 82,500

To Capital Reduction A/c 82,500
(Appreciation in the value of property:
Book value Revalued Figure
` 1,00,000 ` 1,20,000
` 3,25,000 ` 3,87,500
Total ` 4,25,000 ` 5,07,500
Profit on revaluation: ` 82,500)
” 6% Debentures A/c Dr. 1,20,000
To Freehold Property A/c 1,20,000
(Claims of debenture-holders, in part, in
respect of principal discharged by transfer
of freehold property vide Scheme of
Reconstruction)
” Interest payable A/c Dr. 22,500
To Bank A/c 22,500
(Debenture interest paid)
” Bank A/c Dr. 1,30,000
To 8% Debentures A/c 1,30,000
(8% Debentures issued for cash)
” Bank A/c Dr. 1,40,000
To Investment A/c 55,000
To Capital Reduction A/c 85,000
(Sale of Investment for ` 1,40,000 cost being
` 55,000; profit credited to Capital Reduction
Account)
” Directors’ Loan A/c Dr. 1,00,000
To Equity Share Capital A/c 90,000

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 14.18 ADVANCED ACCOUNTING

To Bank A/c 5,000

To Capital Reduction A/c 5,000
(Directors’ loan discharged by issue of
equity shares of ` 90,000, cash payments of
` 5,000 and surrender of ` 5,000, vide
Scheme of Reconstruction)
” Capital Reduction A/c Dr. 8,48,500
To Patents 37,500
To Goodwill 1,30,000
To Inventory 65,000
To Provision for Doubtful Debts 68,500
To Bank 12,500
To Profit & Loss Account 5,35,000
(Writing off patents, goodwill, profit and
loss account and reducing the value of
stock, making the required provision for
doubtful debts and payment for
cancellation of capital commitments)

Note: Penalty charges for cancellation of the contract amounts to ` 12,500

(2,50,000X5%) being paid in cash.

Balance Sheet of A & Co. Ltd. (And Reduced) as at 1st April, 20X2

Particulars Notes `
Equity and Liabilities
1 Shareholders’ funds
A Share capital 1 5,64,000
2 Non-current liabilities
A Long-term borrowings 2 3,85,000

© The Institute of Chartered Accountants of India

 14.19
INTERNAL RECONSTRUCTION

3 Current liabilities
A Trade Payables 3,00,000
Total 12,49,000
Assets
1 Non-current assets
A Property, plant and equipment 3 4,37,500
B Intangible assets 4 -
2 Current assets
A Inventories 3,60,000
B Trade receivables 5 4,16,500
C Cash and cash equivalents 35,000
Total 12,49,000

Notes to accounts

1 Share Capital
Equity share capital
1,32,000 Equity shares of ` 2 each (of the above 2,64,000
57,000 shares have been issued for consideration
other than cash)
Preference share capital
4,000 6% Preference shares of ` 75 each 3,00,000
Total 5,64,000
2 Long-term borrowings
Secured
6% Debentures 2,55,000
8% Debentures 1,30,000
Total 3,85,000

© The Institute of Chartered Accountants of India

 14.20 ADVANCED ACCOUNTING

3 Property, plant and equipment

Freehold property 4,25,000
Add: Appreciation under scheme of Reconstruction 82,500
Less: Disposed of (1,20,000) 3,87,500
Plant 50,000
Net carrying value 4,37,500
4 Intangible assets
Goodwill 1,30,000
Less: Written off under scheme of Reconstruction (1,30,000)
Net carrying value NIL
Patents 37,500
Less:Written off under scheme of Reconstruction (37,500) -
Net carrying value - NIL
5 Trade Receivables 4,85,000
Less: Provision for doubtful debts 68,500
4,16,500

Illustration 4
Given below is the Balance sheet of Rebuilt Ltd. as at 31.3.20X1:

Particulars Notes `
Equity and Liabilities
1 Shareholders’ funds
A Share capital 1 13,50,000
B Reserves and Surplus 2 (4,51,000)
2 Non-current liabilities
A Long-term borrowings (Loan) 3 5,73,000

© The Institute of Chartered Accountants of India

 14.21
INTERNAL RECONSTRUCTION

3 Current liabilities
A Trade Payables 2,07,000
B Other current liabilities 35,000
Total 17,14,000
Assets
1 Non-current assets
A Property, plant and equipment 4 6,68,000
B Intangible assets 5 3,18,000

2 Current assets
A Inventories 4,00,000
B Trade receivables 3,28,000
Total 17,14,000

Notes to accounts

`
1 Share Capital
Equity share capital 7,50,000
15,000 Equity Shares of ` 50 each
Preference share capital
12,000, 7% Cumulative Preference Shares of ` 50 each
(Preference dividend is in arrears for five years) 6,00,000
Total 13,50,000
2 Reserves and Surplus
Debit balance of Profit and loss Account (4,51,000)
(4,51,000)
3 Long-term borrowings
Loan 5,73,000
5,73,000

© The Institute of Chartered Accountants of India

 14.22 ADVANCED ACCOUNTING

4 Property, plant and Equipment

Building at cost less depreciation 4,00,000
Plant at cost less depreciation 2,68,000
6,68,000
5 Intangible assets
Trademarks and Goodwill at cost 3,18,000
3,18,000

The Company is not earning profits, short of working capital and a scheme of
reconstruction has been approved by both the classes of shareholders. A summary
of the scheme is as follows:
(a) The equity shareholders have agreed that their ` 50 shares should be reduced
to ` 2.50 by cancellation of ` 47.50 per share. They have also agreed to
subscribe for three new equity shares of ` 2.50 each for each equity share
held.
(b) The preference shareholders have agreed to cancel the arrears of dividends
and to accept for each ` 50 share, 4 new 5% preference shares of ` 10 each,
plus 6 new equity shares of ` 2.50 each, all credited as fully paid.
(c) Lenders to the company for ` 1,50,000 have agreed to convert their loan into
share and for this purpose they will be allotted 12,000 new preference shares
of ` 10 each and 12,000 new equity shares of ` 2.50 each.
(d) The directors have agreed to subscribe in cash for 40,000, new equity shares
of ` 2.50 each in addition to any shares to be subscribed by them under (a)
above.
(e) Of the cash received by the issue of new shares, ` 2,00,000 is to be used to
reduce the loan due by the company.
(f) The equity share capital cancelled is to be applied:
i. to write off the debit balance in the profit and loss A/c; and

ii. to write off ` 35,000 from the value of plant.

Any balance remaining is to be used to write down the value of trademarks and
goodwill.

© The Institute of Chartered Accountants of India

 14.23
INTERNAL RECONSTRUCTION

Show by journal entries how the financial books are affected by the scheme and
prepare the balance sheet of the company after reconstruction. The nominal capital
as reduced is to be increased to ` 6,50,000 for preference share capital and
` 7,50,000 for equity share capital.

Solution
In the books of Rebuilt Ltd.
Journal Entries

Particulars Debit Credit

(`) (`)
1. Equity share capital A/c (` 50) Dr. 7,50,000
To Equity share capital A/c (` 2.50) 37,500
To Capital reduction A/c 7,12,500
(Being equity capital reduced to nominal
value of ` 2.50 each)
2. Bank A/c Dr. 1,12,500
To Equity share capital 1,12,500
(Being 3 right shares against each share was
issued and subscribed)
3. 7% Preference share capital A/c (` 50) Dr. 6,00,000
Capital reduction A/c Dr. 60,000
To 5% Preference share capital (` 10) 4,80,000
To equity share capital (` 50) 1,80,000
(Being 7% preference shares of ` 50 each
converted to 5% preference shares of ` 10
each and also given to them 6 equity shares
for every share held)
4. Loan A/c Dr. 1,50,000
To 5% Preference share capital A/c 1,20,000
To Equity share capital A/c 30,000
(Being loan to the extent of ` 1,50,000
converted into share capital)

© The Institute of Chartered Accountants of India

 14.24 ADVANCED ACCOUNTING

5. Bank A/c Dr. 1,00,000

To Equity share application money A/c 1,00,000
(Being shares subscribed by the directors)
6. Equity share application money A/c Dr. 1,00,000
To Equity share capital A/c 1,00,000
(Being application money transferred to
capital A/c)
7. Loan A/c Dr. 2,00,000
To Bank A/c 2,00,000
(Being loan repaid)
8. Capital reduction A/c Dr. 6,52,500
To Profit and loss A/c 4,51,000
To Plant A/c 35,000
To Trademarks and Goodwill A/c (Bal.fig.) 1,66,500
(Being losses and assets written off to the
extent required)

Balance sheet of Rebuilt Ltd. (and reduced)

as at 31.3.20X1
Particulars Notes `
Equity and Liabilities
1 Shareholders' funds
a Share capital 1 10,60,000
2 Non-current liabilities
a Long-term borrowings 2,23,000
3 Current liabilities
a Trade Payables 2,07,000
b Other current liabilities 35,000
Total 15,25,000

© The Institute of Chartered Accountants of India

 14.25
INTERNAL RECONSTRUCTION

Assets
1 Non-current assets
a Property, plant and equipment 2 6,33,000
b Intangible assets 3 1,51,500
2 Current assets
a Inventories 4,00,000
b Trade receivables 3,28,000
c Cash and cash equivalents 4 12,500
Total 15,25,000

Notes to accounts

`
1. Share Capital
Authorized capital:
65,000 Preference shares of ` 10 each 6,50,000
3,00,000 Equity shares of ` 2.50 each 7,50,000 14,00,000
Issued, subscribed and paid up:
1,80,000 equity shares of ` 2.5 each 4,60,000
60,000, 5% Preference shares of ` 10 each 6,00,000 10,60,000
2. Property plant and equipment
Building at cost less depreciation 4,00,000
Plant at cost less depreciation 2,33,000 6,33,000
3. Intangible assets
Trademarks and goodwill 1,51,500
4. Cash and cash equivalents
Bank (1,12,500+1,00,000-2,00,000) 12,500

© The Institute of Chartered Accountants of India

 14.26 ADVANCED ACCOUNTING

Illustration 5
Vaibhav Ltd. gives the following ledger balances as at 31st March 20X1:

`
Property, Plant and Equipment 2,50,00,000
Investments (Market-value ` 19,00,000) 20,00,000
Current Assets 2,00,00,000
P & L A/c (Dr. balance) 12,00,000
Share Capital: Equity Shares of ` 100 each 2,00,00,000
6%, Cumulative Preference Shares of ` 100 each 1,00,00,000
5% Debentures of ` 100 each 80,00,000
Creditors 1,00,00,000
Provision for taxation 2,00,000
The following scheme of Internal Reconstruction is sanctioned:
(i) All the existing equity shares are reduced to ` 40 each.

(ii) All preference shares are reduced to ` 60 each.

(iii) The rate of Interest on Debentures increased to 6%. The Debenture holders
surrender their existing debentures of ` 100 each and exchange the same for
fresh debentures of ` 70 each for every debenture held by them.
(iv) Property, Plant and Equipment is to be written down by 20%.
(v) Current assets are to be revalued at ` 90,00,000.

(vi) Investments are to be brought to their market value.

(vii) One of the creditors of the company to whom the company owes
` 40,00,000 decides to forgo 40% of his claim. The creditor is allotted with
60000 equity shares of ` 40 each in full and final settlement of his claim.
(viii) The taxation liability is to be settled at ` 3,00,000.
(ix) It is decided to write off the debit balance of Profit & Loss A/c.

Pass journal entries and show the Balance Sheet of the company after giving effect
to the above.

© The Institute of Chartered Accountants of India

 14.27
INTERNAL RECONSTRUCTION

Solution
Journal Entries in the books of Vaibhav Ltd.

` `
(i) Equity share capital (` 100) A/c Dr. 2,00,00,000
To Equity Share Capital (` 40) A/c 80,00,000
To Capital Reduction A/c 1,20,00,000
(Being conversion of equity share capital of
` 100 each into `40 each as per reconstruction
scheme)
(ii) 6% Cumulative Preference Share capital 1,00,00,000
(` 100) A/c Dr.
To 6% Cumulative Preference Share Capital 60,00,000
(` 60)A/c
To Capital Reduction A/c 40,00,000
(Being conversion of 6% cumulative preference
shares capital of ` 100 each into
` 60 each as per reconstruction scheme)
(iii) 5% Debentures (` 100) A/c Dr. 80,00,000
To 6% Debentures (` 70) A/c 56,00,000
To Capital Reduction A/c 24,00,000
(Being 6% debentures of ` 70 each issued to
existing 5% debenture holders. The balance
transferred to capital reduction account as per
reconstruction scheme)
(iv) Sundry Creditors A/c Dr. 40,00,000
To Equity Share Capital (` 40) A/c 24,00,000
To Capital Reduction A/c 16,00,000
(Being a creditor of ` 40,00,000 agreed to
surrender his claim by 40% and was allotted
60,000 equity shares of ` 40 each in full
settlement of his dues as per reconstruction
scheme)

© The Institute of Chartered Accountants of India

 14.28 ADVANCED ACCOUNTING

(v) Provision for Taxation A/c Dr. 2,00,000

Capital Reduction A/c Dr. 1,00,000
To Liability for Taxation A/c 3,00,000
(Being conversion of the provision for taxation
into liability for taxation for settlement of the
amount due)
(vi) Capital Reduction A/c Dr. 199,00,000
To P & L A/c 12,00,000
To Property, Plant and Equipment A/c 50,00,000
To Current Assets A/c 110,00,000
To Investments A/c 1,00,000
To Capital Reserve A/c (Bal. fig.) 26,00,000
(Being amount of Capital Reduction utilized in
writing off P & L A/c (Dr.) Balance, PPE, Current
Assets, Investments and the Balance transferred
to Capital Reserve)
(vii) Liability for Taxation A/c Dr. 3,00,000
To Current Assets (Bank A/c) 3,00,000
(Being the payment of tax liability)
Balance Sheet of Vaibhav Ltd. (and reduced) as at 31st March, 20X1

Particulars Notes `
Equity and Liabilities
1 Shareholders' funds
a Share capital 1 164,00,000
b Reserves and Surplus 2 26,00,000
2 Non-current liabilities
Long-term borrowings 3 56,00,000
3 Current liabilities
Trade Payables (1,00,00,000 less 40,00,000) 60,00,000
Total 3,06,00,000

© The Institute of Chartered Accountants of India

 14.29
INTERNAL RECONSTRUCTION

Assets
1 Non-current assets
a Property, plant and equipment 4 2,00,00,000
b Investments 5 19,00,000
2 Current assets 6 87,00,000
Total 3,06,00,000

Notes to accounts

`
1. Share Capital
Equity share capital
Issued, subscribed and paid up
2,60,000 equity shares of ` 40 each
(of the above 60,000 shares have been 1,04,00,000
issued for consideration other than cash)
Preference share capital
Issued, subscribed and paid up
1,00,000 6% Cumulative Preference shares of
60,00,000
` 60 each
Total 1,64,00,000
2. Reserves and Surplus
Capital Reserve 26,00,000
3. Long-term borrowings
Secured
6% Debentures 56,00,000
4. Property, Plant and Equipment
Carrying value 2,50,00,000
Adjustment under scheme of reconstruction (50,00,000) 2,00,00,000
5. Investments
20,00,000
Adjustment under scheme of reconstruction (1,00,000) 19,00,000

© The Institute of Chartered Accountants of India

 14.30 ADVANCED ACCOUNTING

6. Current assets
2,00,00,000
Adjustment under scheme of reconstruction (1,10,00,000)
90,00,000
Taxation liability paid (3,00,000) 87,00,000

Working Note:
Capital Reduction Account

To Liability for taxation 1,00,000 By Equity share capital 1,20,00,000

A/c
To P & L A/c 12,00,000 By 6% Cumulative
To Property, plant and preferences
equipment 50,00,000
To Current assets 1,10,00,000 Share capital 40,00,000
To Investment 1,00,000 By 5% Debentures 24,00,000
To Capital Reserve
(Bal. fig.) 26,00,000 By Sundry creditors 16,00,000
2,00,00,000 2,00,00,000

Illustration 6
Following is the Balance Sheet of ABC Ltd. as at 31st March, 20X1:

Particulars Notes `
Equity and Liabilities
1 Shareholders’ funds
A Share capital 1 26,00,000
B Reserves and Surplus 2 (4,05,000)
2 Non-current liabilities
A Long-term borrowings 3 12,00,000
3 Current liabilities
A Trade Payables 5,92,000
B Short term borrowings - Bank overdraft 1,50,000
Total 41,37,000

© The Institute of Chartered Accountants of India

 14.31
INTERNAL RECONSTRUCTION

Assets
1 Non-current assets
A Property, plant and equipment 4 12,20,000
B Non-current investment 6 68,000
C
2 Current assets
A Inventory 14,00,000
B Trade receivables 14,39,000
C Cash and cash equivalents 10,000
Total 41,37,000

Notes to accounts:

`
1 Share Capital
Equity share capital:
2,00,000 Equity Shares of ` 10 each 20,00,000
6,000, 8% Preference shares of ` 100 each 6,00,000
26,00,000
2 Reserves and Surplus
Debit balance of Profit and loss A/c (4,05,000)
(4,05,000)
3 Long-term borrowings
9% debentures 12,00,000
12,00,000
4 Property, Plant and Equipment
Plant and machinery 9,00,000
Furniture and fixtures 3,20,000
12,20,000

© The Institute of Chartered Accountants of India

 14.32 ADVANCED ACCOUNTING

5 Non-current investments
Investments (market value of ` 55,000) 68,000
68,000
The following scheme of reconstruction was finalized:
(i) Preference shareholders would give up 30% of their capital in exchange for
allotment of 11% Debentures to them.
(ii) Debenture holders having charge on plant and machinery would accept plant
and machinery in full settlement of their dues.

(iii) Inventory equal to ` 5,00,000 in book value will be taken over by trade
payables in full settlement of their dues.
(iv) Investment value to be reduced to market price.
(v) The company would issue 11% Debentures for ` 3,00,000 and augment its
working capital requirement after settlement of bank overdraft.
Pass necessary Journal Entries in the books of the company. Prepare Capital
Reduction account and Balance Sheet of the company after internal reconstruction.

Solution
In the Books of ABC Ltd.
Journal Entries

Particulars ` `
8% Preference share capital A/c Dr. 6,00,000
To 11% Debentures A/c 4,20,000
To Capital reduction A/c 1,80,000
[Being 30% reduction in liability of preference share
capital and issue of 11% debentures]

© The Institute of Chartered Accountants of India

 14.33
INTERNAL RECONSTRUCTION

9% Debentures A/c Dr. 12,00,000

To Plant & machinery A/c 9,00,000
To Capital reduction A/c 3,00,000
[Settlement of debenture holders by allotment of
plant & machinery]
Trade payables A/c Dr. 5,92,000
To Inventory A/c 5,00,000
To Capital reduction A/c 92,000
[Being settlement of creditors by giving Inventories]
Bank A/c Dr. 3,00,000
To 11% Debentures A/c 3,00,000
[Being fresh issue of debentures]
Bank overdraft A/c Dr. 1,50,000
To Bank A/c 1,50,000
[Being settlement of bank overdraft]
Capital reduction A/c Dr. 5,72,000
To Investment A/c 13,000
To Profit and loss A/c 4,05,000
To Capital reserve A/c 1,54,000
[Being decrease in investment and profit and loss
account (Dr. bal.); and balance of capital reduction
account transferred to capital reserve]

Capital Reduction Account

` `
To Investments A/c 13,000 By Preference share capital A/c 1,80,000
To Profit and loss A/c 4,05,000 By 9% Debenture holders A/c 3,00,000
To Capital reserve A/c 1,54,000 By Trade payables A/c 92,000
5,72,000 5,72,000

© The Institute of Chartered Accountants of India

 14.34 ADVANCED ACCOUNTING

Balance Sheet of ABC Ltd. (And Reduced)

As at 31st March 20X1

Particulars Note No `
I. Equity and Liabilities
(1) Shareholder's Funds
(a) Share Capital 1 20,00,000
(b) Reserves and Surplus 2 1,54,000
(2) Non-Current Liabilities
(a) Long-term borrowings 3 7,20,000
Total 28,74,000
II. Assets
(1) Non-current assets
(a) Property, plant and equipment 4 3,20,000
(b) Non-current investments 5 55,000
(2) Current assets
(a) Inventories (` 14,00,000 – ` 5,00,000) 9,00,000
(b) Trade receivables 14,39,000
(c) Cash and cash equivalents
Cash at Bank (W. N.) 1,60,000
Total 28,74,000

Notes to Accounts

`
1. Share Capital
2,00,000 Equity shares of ` 10 each fully paid-up 20,00,000
2. Reserve and Surplus
Capital Reserve 1,54,000

© The Institute of Chartered Accountants of India

 14.35
INTERNAL RECONSTRUCTION

3. Long Term Borrowings

11% Debentures (` 4,20,000 + ` 3,00,000) 7,20,000
4. Property, Plant and Equipment
Plant & machinery 9,00,000
Less: Adjustment on scheme of reconstruction 9,00,000 -
Furniture & fixtures 3,20,000
5. Non-Current Investments
Investments (` 68,000 – ` 13,000) 55,000

Working Note:
Cash at bank = Opening balance + 11% Debentures issued – Bank overdraft paid
= ` 10,000 + ` 3,00,000 – ` 1,50,000 = ` 1,60,000

Illustration 7
The Balance Sheet of Revise Limited as at 31st March, 20X1 was as follows :

Particulars Notes `
Equity and Liabilities
1 Shareholders’ funds
A Share capital 1 10,00,000
B Reserves and surplus 2 (6,00,000)
2 Non-current liabilities
A Long-term borrowings 3 2,00,000
3 Current liabilities
A Trade Payables 72,000
B Other current liabilities 4 24,000
C Short term provisions 5 24,000
Total 7,20,000

© The Institute of Chartered Accountants of India

 14.36 ADVANCED ACCOUNTING

Assets
1 Non-current assets
A Property, Plant and Equipment 6 1,00,000
2 Current assets
A Inventory 3,20,000
B Trade receivables 2,70,000
C Cash and cash equivalents 30,000
Total 7,20,000

Notes to accounts

`
1 Share Capital
Equity share capital
10,000 Equity Shares of ` 100 each 10,00,000
10,00,000
2 Reserves and Surplus
Debit balance of Profit and loss Account (6,00,000)
(6,00,000)
3 Long-term borrowings
12% debentures 2,00,000
2,00,000
4 Other current liabilities
Interest payable on debentures 24,000
24,000
5 Short term provisions
Provision for taxation 24,000
24,000
6 Property, Plant and Equipment
Machinery 1,00,000
1,00,000

© The Institute of Chartered Accountants of India

 14.37
INTERNAL RECONSTRUCTION

It was decided to reconstruct the company for which necessary resolution was
passed and sanctions were obtained from appropriate authorities. Accordingly, it
was decided that:
(a) Each share is sub-divided into ten fully paid up equity shares of ` 10 each.
(b) After sub-division, each shareholder shall surrender to the company 50% of
his holding, for the purpose of re-issue to debenture holders and trade
payables as necessary.
(c) Out of shares surrendered, 10,000 shares of ` 10 each shall be converted into
12% preference shares of ` 10 each, fully paid up.
(d) The claims of the debenture-holders shall be reduced by 75 per cent. In
consideration of the reduction, the debenture holders shall receive preference
shares of ` 1,00,000 which are converted out of shares surrendered.
(e) Trade payables claim shall be reduced to 50 per cent, it is to be settled by the
issue of equity shares of ` 10 each out of shares surrendered.
(f) Balance of profit and loss account to be written off.
(g) The shares surrendered and not re-issued shall be cancelled.
You are required to show the journal entries giving effect to the above and the
resultant Balance Sheet
Solution

Dr. Cr.
` `
Equity Share Capital (` 100) A/c Dr. 10,00,000
To Share Surrender A/c 5,00,000
To Equity Share Capital (` 10) A/c 5,00,000
(Subdivision of 10,000 equity shares of ` 100 each
into 1,00,000 equity shares of ` 10 each and
surrender of 50,000 of such subdivided shares as
per capital reduction scheme)

© The Institute of Chartered Accountants of India

 14.38 ADVANCED ACCOUNTING

12% Debentures A/c Dr. 1,50,000

Interest payable A/c Dr. 18,000

To Reconstruction A/c 1,68,000

(Transferred 75% of the claims of the debenture
holders to reconstruction account in consideration
of which 12% preference shares are being issued
out of share surrender account as per capital
reduction scheme)

Trade payables A/c Dr. 72,000

To Reconstruction A/c 72,000

(Transferred claims of the trade payables to

reconstruction account, 50% of which is being clear
reduction and equity shares are being issued in
consideration of the balance)

Share Surrender A/c Dr. 5,00,000

To 12% Preference Share Capital A/c 1,00,000
To Equity Share Capital A/c 36,000
To Reconstruction A/c 3,64,000
(Issued preference and equity shares to discharge
the claims of the debenture holders and the trade
payables respectively as a per scheme and the
balance in share surrender account is being
transferred to reconstruction account)

Reconstruction A/c Dr. 6,04,000

To Profit and Loss A/c 6,00,000
To Capital Reserve A/c 4,000
(Adjusted debit balance of profit and loss account
against the reconstruction account and the balance
in the latter is being transferred to capital reserve)

© The Institute of Chartered Accountants of India

 14.39
INTERNAL RECONSTRUCTION

Balance Sheet of Revise Limited (and reduced) as at...

Particulars Note No. `

I. Equity and Liabilities
(1) Shareholder's Funds
(a) Share Capital 1 6,36,000
(b) Reserves and Surplus 2 4,000
(2) Non-Current Liabilities
(a) Long-term borrowings 3 50,000
(3) Current Liabilities
(a) Other current liabilities 4 6,000
(b) Short-term provisions 5 24,000
Total 7,20,000
II. Assets
(1) Non-current assets
(a) Property, plant and equipment 6 1,00,000
(2) Current assets
(a) Inventories 3,20,000
(b) Trade receivables 2,70,000
(c) Cash and cash equivalents 30,000
Total 7,20,000

Notes to Accounts
`
1. Share Capital
Equity Share Capital
Issued Capital: 53,600 Equity Shares of ` 10 each 5,36,000
Preference Share Capital
Preference Shares 1,00,000
(Of the above shares all are allotted as fully paid up
pursuant to capital reduction scheme by conversion of
equity shares without payment being received in cash)
6,36,000

© The Institute of Chartered Accountants of India

 14.40 ADVANCED ACCOUNTING

2. Reserve and Surplus

Capital Reserve 4,000
3. Long-term borrowings
Unsecured Loans
12% Debentures 50,000
4. Other current liabilities
Interest payable on debentures 6,000
5. Short-term provisions
Provision for Income-tax 24,000
6. Property, plant and Equipment
Machinery 1,00,000

Illustration 8
Recover Ltd. decided to reorganize its capital structure owing to accumulated losses
and adverse market condition. The Balance Sheet of the company as on 31 st March
20X1 is as follows-

Particulars Notes `
Equity and Liabilities
1 Shareholders’ funds
A Share capital 1 3,50,000
B Reserves and surplus 2 (70,000)
2 Non-current liabilities
A Long-term borrowings 3 50,000
3 Current liabilities
A Trade Payables 80,000
Short term Borrowings – Bank
B overdraft 90,000
Other Current Liabilities (Interest
C payable on Debentures) 5,000
5,05,000

© The Institute of Chartered Accountants of India

 14.41
INTERNAL RECONSTRUCTION

Assets
1 Non-current assets
A Property, Plant Equipment 4 3,35,000
B Intangible assets 5 50,000
C Non-current investments 6 40,000
2 Current assets
A Inventories 30,000
B Trade receivables 50,000
5,05,000
Notes to accounts:

1 Share Capital `
Equity share capital:
20,000 Equity Shares of ` 10 each 2,00,000
Preference share capital:
15,000 8% Cumulative Preference Shares of ` 10
each (preference dividend has been in arrears for 1,50,000
4 years)
3,50,000
2 Reserves and surplus
Profit and loss account (debit balance) (70,000)
(70,000)
3 Long-term borrowings
Secured
10% Debentures (secured on the freehold 50,000
property)
50,000
4 Property, Plant and Equipment
Freehold property 1,20,000
Leasehold property 85,000
Plant and machinery 1,30,000
3,35,000

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 14.42 ADVANCED ACCOUNTING

5 Intangible assets

Goodwill 50,000

50,000

6 Non-current investments

Non-Trade investments at cost 40,000

40,000

Subsequent to approval by court of a scheme for the reduction of capital, the

following steps were taken:
i. The preference shares were reduced to ` 2.5 per share, and the equity shares
to ` 1 per share.
ii. One new equity share of ` 1 was issued for the arrears of preferred dividend
for past 4 years.
iii. The debenture holders took over the freehold property at an agreed figure of
` 75,000 and paid the balance to the company after deducting the amount
due to them.
iv. Plant and Machinery was written down to ` 1,00,000.
v. Non-trade Investments were sold for ` 32,000.
vi. Goodwill and obsolete stock (included in the value of inventories) of ` 10,000
were written off.
vii. A contingent liability of which no provision had been made was settled at
` 7,000 and of this amount, ` 6,300 was recovered from the insurance.
You are required (a) to show the Journal Entries, necessary to record the above
transactions in the company’s books and (b) to prepare the Balance Sheet, after
completion of the scheme.

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Solution
Journal entries in the books of Recover Ltd

Particulars Dr. Cr.

` `
8% Cumulative Preference share capital (` 10) A/c Dr. 1,50,000
To 8% Cumulative Preference share capital 37,500
(`2.5) A/c
To Reconstruction (` 7.5) A/c 1,12,500
(Preference shares being reduced to shares of `
2.5 per share and remaining transferred to
reconstruction account as per internal
reconstruction scheme)
Equity share capital A/c (`10) Dr. 2,00,000
To Equity Share capital A/c (` 1) 20,000
To Reconstruction A/c (` 9) 1,80,000
(Equity shares reduced to ` 1 per share with the
remaining amount transferred to reconstruction
account as a part of the internal reconstruction
scheme)
Reconstruction A/c Dr. 48,000
To Equity share capital A/c 48,000
(Equity shares of ` 1 issued in lieu of the arrears
of preference dividend for 4 years as a part of the
internal reconstruction scheme)
10% Debentures A/c Dr. 50,000
Interest payable on debentures A/c Dr 5,000
Bank A/c Dr. 20,000
Reconstruction A/c Dr. 45,000
To Freehold property A/c 1,20,000
(Debenture holders being paid by the sale of
property, which is sold at a loss debited to the
reconstruction account. Amount received in
excess being refunded to company by debenture
holders as a part of the internal reconstruction
scheme)

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 14.44 ADVANCED ACCOUNTING

Reconstruction A/c Dr. 90,000

To Plant and Machinery Ac 30,000
To Goodwill A/c 50,000
To Inventory A/c 10,000
(The assets written off as a part of the internal
reconstruction scheme)
Bank A/c Dr. 32,000
Reconstruction A/c Dr. 8,000
To Investments A/c 40,000
(Investments sold at a loss debited to
reconstruction account as a part of the internal
reconstruction scheme)
Contingent Liability A/c Dr. 7,000
To Bank A/c 7,000
(Contingent liability paid as a part of the internal
reconstruction scheme)
Bank A/c Dr. 6,300
Reconstruction A/c Dr. 700
To Contingent Liability A/c 7,000
(The insurance company remitting part of the
contingency payment amount)
Reconstruction A/c Dr. 70,000
To Profit and loss A/c 70,000
(Accumulated losses written off to reconstruction
account as a part of the internal reconstruction
scheme)
Reconstruction A/c Dr. 30,800
To Capital reserve A/c 30,800
(The balance in reconstruction account
transferred to capital reserve as a part of the
internal reconstruction scheme)

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Balance sheet of Recover Ltd. as at 31st March 20X1 (and reduced)

Particulars Notes `

Equity and Liabilities

1 Shareholders’ funds

A Share capital 1 1,05,500

B Reserves and surplus 2 30,800

2 Non-current liabilities

A Long-term borrowings -

3 Current liabilities

A Trade Payables 80,000

B Short term borrowings - Bank Overdraft 90,000

Total 3,06,300

Assets

1 Non-current assets

A Property, Plant and Equipment 3 1,85,000

2 Current assets

A Inventories 20,000

B Trade receivables 50,000

C Cash and cash equivalents 4 51,300

Total 3,06,300

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 14.46 ADVANCED ACCOUNTING

Notes to accounts:

1 Share Capital `

Equity share capital

68,000 Equity Shares of ` 1 each 68,000

Preference share capital

15,000 8% Cumulative Preference Shares of ` 2.5 each 37,500

1,05,500

2 Reserves and surplus

Capital reserve 30,800

3 Property, Plant and Equipment

Leasehold property 85,000

Plant and machinery 1,00,000

1,85,000

4 Cash and cash equivalents

Bank A/c (20,000+32,000-7000+6,300) 51,300

SUMMARY
1. Reconstruction is a process by which affairs of a company are reorganized
by revaluation of assets, reassessment of liabilities and by writing off the
losses already suffered and by reducing the paid up value of shares and/or
varying the rights attached to different classes of shares.
2. Reconstruction account is a new account opened to transfer the sacrifice
made by the shareholders for that part of capital which is represented by
lost assets.
3. Reconstruction account is utilized for writing-off fictitious assets, writing
down over-valued fixed assets, recording new liability etc.

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INTERNAL RECONSTRUCTION

4. If some credit balance remains in the reconstruction account, the same

should be transferred to the capital reserve account.
5. Methods of Internal reconstruction:
• Alteration of share capital:
 Sub-divide or consolidate shares into smaller or higher
Denomination
 Conversion of share into stock or vice-versa
• Variation of shareholders’ rights:
 Only the specific rights are changed. There is no change in the
amount of capital.
• Reduction of share capital
• Compromise, arrangements etc.
• Surrender of Shares.
6. Under the Alteration and the variation of the shareholders rights, there is no
capital reduction account opened, only under the reduction of share capital,
compromises and surrender of shares- capital reduction account comes in
the journal entries.
The balance of the reconstruction account to be transferred to the Capital
reserve.

TEST YOUR KNOWLEDGE

Multiple Choice Questions
1. When the object of reconstruction is usually to re-organise capital or to
compound with creditors or to effect economies then such type of
reconstruction is called
(a) Internal reconstruction with liquidation
(b) Internal reconstruction without liquidation of the company
(c) External reconstruction
(d) None of the above.

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 14.48 ADVANCED ACCOUNTING

2. The accumulated losses under scheme of internal reconstruction are written

off against
(a) Capital Reduction account
(b) Share Capital account
(c) Shareholders’ account
(d) Reserve and surplus.
3. A process of reconstruction, which is carried out without liquidating the
company and forming a new one is called
(a) Internal reconstruction.
(b) External reconstruction.
(c) Amalgamation in the nature of merger.
(d) Amalgamation in the nature of purchase.
4. Reconstruction is a process by which affairs of a company are reorganized by
(a) Revaluation of assets and Reassessment of liabilities.
(b) Writing off the losses already suffered by reducing the paid up value of
shares and/or varying the rights attached to different classes of shares.
(c) Both (a) and (b).
(d) None of the above.
5. For reduction of the share capital, the permission has to be sought from
(a) Court.
(b) Controller.
(c) State government.
(d) Shareholders.
6. In case of internal reconstruction
(a) Only one company is liquidated.
(b) Two or more companies are liquidated.
(c) No company is liquidated.
(d) Two companies amalgamated.

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Theoretical Questions
7. What are the methods of internal reconstruction generally followed by
companies?

Scenario based Questions

8. Parth Ltd, had laid down the following terms upon the sanction of the
reconstruction plan by the court-

1. Furniture and Fixtures which stood at the books at ` 1,50,000 to be

written down to ` 95,000. The freehold premises which was valued at `
7,00,000 showed an appreciation of ` 55,000.

2. Plant and machinery showed fall in value of ` 89,000, to be recorded in

the books. Investment at ` 2,00,000 was brought down to the existing
market value at ` 1,05,000.

3. Debenture holders accepted to receive the following in lieu of their

present 9% debentures of ` 2,50,000-

a. 1/5th of the total to be paid in cash to them.

b. To take over the land and buildings of value ` 72,000.

c. To forgo the remaining unpaid portion as a policy of

reconstruction.

Write off the profit and loss A/c debit balance at ` 70,000 which had been
accumulated over the years. In case of any shortfall, the balance of the
General reserve of ` 1,50,000 can be utilized to write off the losses under
reconstruction scheme.

Show the necessary journal entries as part of the reconstruction process

considering that balance in general reserve utilized to write off the losses as
per reconstruction scheme.
9. The following scheme of reconstruction has been approved for Win Limited:
(i) The shareholders to receive in lieu of their present holding at 1,00,000
shares of ` 10 each, the following:

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 14.50 ADVANCED ACCOUNTING

(a) New fully paid ` 10 Equity shares equal to 3/5th of their holding.
(b) 10% Preference shares fully paid to the extent of 1/5 th of the
above new equity shares.
(c) ` 40,000, 8% Debentures.
(ii) An issue of ` 1 lakh 10% first debentures was made and allotted,
payment for the same being received in cash forthwith.
(iii) Goodwill which stood at ` 1,40,000 was completely written off.
(iv) Plant and machinery which stood at ` 2,00,000 was written down to
` 1,50,000.
(v) Freehold property which stood at ` 1,50,000 was written down by `
50,000.
You are required to draw up the necessary Journal entries in the Books of Win
Limited for the above reconstruction. Suitable narrations to Journal entries
should form part of your answer.
10. Green Limited had decided to reconstruct the Balance Sheet since it has
accumulated huge losses. The following is the Balance Sheet of the Company as
at 31.3.20X1 before reconstruction:

Particulars Notes `
Equity and Liabilities
1 Shareholders’ funds
A Share capital 1 65,00,000
B Reserves and Surplus 2 (20,00,000)
2 Non-current liabilities
A Long-term borrowings 3 15,00,000
3 Current liabilities
A Trade Payables 5,00,000
Total 65,00,000
Assets
1 Non-current assets
A Property, plant and equipment 4 45,00,000

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 14.51
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B Intangible assets 5 20,00,000

2 Current assets Nil
Total 65,00,000
Notes to accounts

`
1 Share Capital
Equity share capital
Authorized share capital
1,50,000 Equity shares of ` 50 each 75,00,000
Issued, subscribed and paid up capital
50,000 Equity Shares of ` 50 each 25,00,000
1,00,000 Equity shares of ` 50 each, ` 40 paid up 40,00,000
65,00,000
2 Reserves and Surplus
Debit balance of Profit and loss Account (20,00,000)
(20,00,000)
3 Long-term borrowings
Secured: 12% First debentures 5,00,000
12% Second debentures 10,00,000
15,00,000
4 Property, Plant and Equipment
Building 10,00,000
Plant 10,00,000
Computers 25,00,000
45,00,000
5 Intangible assets
Goodwill 20,00,000
20,00,000

The following is the interest of Mr. X and Mr. Y in Green Limited:

© The Institute of Chartered Accountants of India

 14.52 ADVANCED ACCOUNTING

Mr. X Mr. Y
` `
12% First Debentures 3,00,000 2,00,000
12% Second Debentures 7,00,000 3,00,000
Trade payables 2,00,000 1,00,000
12,00,000 6,00,000
Fully paid up ` 50 shares 3,00,000 2,00,000
Partly paid up shares (` 40 paid up) 5,00,000 5,00,000

The following Scheme of Reconstruction is approved by all parties interested

and also by the Court:
(a) Uncalled capital is to be called up in full and such shares and the other
fully paid up shares be converted into equity shares of ` 20 each.
(b) Mr. X is to cancel ` 7,00,000 of his total debt (other than share amount)
and to pay ` 2 lakhs to the company and to receive new 14% First
Debentures for the balance amount.
(c) Mr. Y is to cancel ` 3,00,000 of his total debt (other than equity shares)
and to accept new 14% First Debentures for the balance.
(d) The amount thus rendered available by the scheme shall be utilised in
writing off of Goodwill, Profit and Loss A/c Loss and the balance to write
off the value of computers.
You are required to draw the Journal Entries to record the same and also
show the Balance Sheet of the reconstructed company.
11. The following is the Balance Sheet of Weak Ltd. as at 31.3.20X1:

Particulars Notes `
Equity and Liabilities
1 Shareholders’ funds
A Share capital 1 1,50,00,000
B Reserves and Surplus 2 (6,00,000)

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2 Non-current liabilities
A Long-term borrowings 3 40,00,000
3 Current liabilities
A Trade Payables 50,00,000
B Short term provisions 4 1,00,000
Total 2,35,00,000
Assets
1 Non-current assets
A Property, plant and equipment 1,25,00,000
B Non-current investment 5 10,00,000
2 Current assets 1,00,00,000
Total 2,35,00,000

Notes to accounts
`
1 Share Capital
Equity share capital
1,00,000 Equity Shares of ` 100 each 1,00,00,000
50,000, 12% Cumulative Preference shares of ` 100 50,00,000
each
1,50,00,000
2 Reserves and Surplus
Debit balance of Profit and loss Account (6,00,000)
(6,00,000)
3 Long-term borrowings
40,000, 10% debentures of `100 each 40,00,000
40,00,000
4 Short term provisions
Provision for taxation 1,00,000
1,00,000

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 14.54 ADVANCED ACCOUNTING

5 Non-current investments
Investments (market value of ` 9,50,000) 10,00,000
10,00,000

The following scheme of reorganization is sanctioned:

(i) All the existing equity shares are reduced to ` 40 each.
(ii) All preference shares are reduced to ` 60 each.

(iii) The rate of interest on debentures is increased to 12%. The debenture

holders surrender their existing debentures of ` 100 each and exchange
the same for fresh debentures of ` 70 each for every debenture held by
them.
(iv) One of the creditors of the company to whom the company owes
` 20,00,000 decides to forgo 40% of his claim. He is allotted 30,000
equity shares of ` 40 each in full satisfaction of his claim.
(v) Property, plant and equipment are to be written down by 30%.
(vi) Current assets are to be revalued at ` 45,00,000.

(vii) The taxation liability of the company is settled at ` 1,50,000.

(viii) Investments to be brought to their market value.
(ix) It is decided to write off the debit balance of Profit and Loss account.
Pass Journal entries and show the Balance sheet of the company after giving
effect to the above.
12. The following is the Balance Sheet of X Ltd. as at 31st March, 20X1:

Particulars Notes `
Equity and Liabilities
1 Shareholders’ funds
A Share capital 1 36,00,000
B Reserves and Surplus 2 (14,40,000)
2 Non-current liabilities
A Long-term borrowings 3 6,00,000

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3 Current liabilities
A Trade Payables 3,00,000
Short term borrowings - Bank 6,00,000
B overdraft
Total 36,60,000
Assets
1 Non-current assets
A Property, plant and equipment 4 30,00,000
B Intangible assets 5 90,000
2 Current assets
a Inventories 2,60,000
b Trade receivables 2,80,000
C Cash and cash equivalents 30,000
Total 36,60,000

Notes to accounts
`
1 Share capital
24,000 Equity Shares of ` 100 each 24,00,000
12,000, 10% Preference Shares of ` 100 12,00,000
each
Total 36,00,000
2 Reserves and Surplus
Debit balance of Profit and loss Account (14,40,000)
(14,40,000)
3 Long-term borrowings
10% debentures 6,00,000
6,00,000
4. Property, plant and Equipment

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 14.56 ADVANCED ACCOUNTING

Land and Building 12,00,000

Plant and Machinery 18,00,000
30,00,000
5 Intangible assets
Goodwill 90,000
90,000

On the above date, the company adopted the following scheme of

reconstruction:
(i) The equity shares are to be reduced to shares of ` 40 each fully paid
and the preference shares to be reduced to fully paid shares of ` 75
each.
(ii) The debenture holders took over Inventories and Trade receivables in
full satisfaction of their claims.
(iii) The Land and Building to be appreciated by 30% and Plant and
machinery to be depreciated by 30%.
(iv) The debit balance of profit and loss account and intangible assets are to
be eliminated.
(v) Expenses of reconstruction amounted to ` 5,000.
Give journal entries incorporating the above scheme of reconstruction and
prepare the reconstructed Balance Sheet.

ANSWERS/HINTS
Answer to Multiple Choice Questions
1. (b) 2. (a) 3. (a) 4. (c) 5. (a) 6. (c)

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Answer to Theoretical Questions

7. Methods of Internal reconstruction:
• Sub-division or consolidation of shares into smaller or higher
Denomination and Conversion of share into stock or vice-versa
• Variation of shareholders’ rights
• Reduction of share capital
• Compromise, arrangements etc.
• Surrender of Shares.

Answer to Scenario-based Questions

8. Journal entries in the books of Parth Ltd.

Dr. Cr.
` `
Reconstruction A/c Dr. 2,39,000
To Furniture and Fixtures A/c 55,000
To Plant and machinery A/c 89,000
To Investment A/c 95,000
(Writing off overvalued assets as per
Reconstruction Scheme dated.)
Freehold premises A/c Dr. 55,000
To Reconstruction A/c 55,000
(Being the increase in the premises credited
to reconstruction account as per
reconstruction scheme)
9% Debentures A/c Dr. 2,50,000
To Bank A/c 50,000
To Land and building A/c 72,000
To Reconstruction A/c 1,28,000
(Being the debenture holders claim settled
partly and foregone partly as per
reconstruction scheme)

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 14.58 ADVANCED ACCOUNTING

Reconstruction A/c Dr. 70,000

To Profit and loss A/c 70,000
(Being the loss written off as per
reconstruction scheme)
General reserve A/c Dr. 1,26,000
To Reconstruction A/c 1,26,000
(Being the balance in general reserve utilized
to write off the losses as per reconstruction
scheme)

9. Journal Entries
` `
Equity Share Capital (old) A/c Dr. 10,00,000
To Equity Share Capital (` 10) A/c 6,00,000
To 10% Preference Share Capital A/c 1,20,000
To 8% Debentures A/c 40,000
To Capital Reduction A/c 2,40,000
(Being new equity shares, 10% Preference
Shares, 8% Debentures issued and the
balance transferred to Reconstruction
account as per the Scheme)
Bank A/c Dr. 1,00,000
To 10% First Debentures A/c 1,00,000
(Being allotment of 10% first Debentures)
Capital Reduction A/c Dr. 2,40,000
To Goodwill Account 1,40,000
To Plant and Machinery Account 50,000
To Freehold Property Account 50,000
(Being Capital Reduction Account utilized
for writing off of Goodwill, Plant and
Machinery and Freehold property as per
the scheme)

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10. Journal Entries in books of Green Limited

Dr. Cr.
` `
Bank Account Dr. 10,00,000
To Equity Share Capital Account 10,00,000
(Balance of ` 10 per share on 1,00,000 equity shares
called up as per reconstruction scheme)
Equity Share Capital Account (` 50) Dr. 75,00,000
To Equity Share Capital Account (` 20) 30,00,000
To Capital Reduction Account 45,00,000
(Reduction of equity shares of ` 50 each to
shares of ` 20 each as per reconstruction scheme)

12% First Debentures Account Dr. 3,00,000

12% Second Debentures Account Dr. 7,00,000
Trade payables Account Dr. 2,00,000

To X 12,00,000
(The total amount due to X, transferred to
his account)

Bank Account Dr. 2,00,000

To X 2,00,000
(The amount paid by X under the reconstruction
scheme)
12% First Debentures Account Dr. 2,00,000
12% Second Debentures Account Dr. 3,00,000
Trade payables Account Dr. 1,00,000
To Y 6,00,000
(The total amount due to Y, transferred to
his account)

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 14.60 ADVANCED ACCOUNTING

Y Dr. 6,00,000
To 14% First Debentures Account 3,00,000
To Capital Reduction Account 3,00,000
(The amount due to Y discharged by issue of
14% first debentures)
X Dr. 14,00,000
To 14% First Debentures Account 7,00,000
To Capital Reduction Account 7,00,000
(The cancellation of ` 7,00,000 out of total debt of
Mr. X and issue of 14% first debentures for the balance
amount as per reconstruction scheme)
Capital Reduction Account Dr. 55,00,000
To Goodwill Account 20,00,000
To Profit and Loss Account 20,00,000
To Computers Account 15,00,000
(The balance amount of capital reduction account utilised in
writing off goodwill, profit and loss account, and computers—
Working Note)
Balance Sheet of Green Limited (and reduced)
as at 31st March, 20X1

Particulars Notes `
Equity and Liabilities
1 Shareholders' funds
a Share capital 1 30,00,000
2 Non-current liabilities
a Long-term borrowings 2 10,00,000
3 Current liabilities
a Trade Payables 2,00,000
Total 42,00,000

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Assets
1 Non-current assets
a Property, plant and equipment 3 30,00,000
2 Current assets
Cash and cash equivalents 12,00,000
Total 42,00,000

Notes to accounts

`
1. Share Capital

Equity share capital

Issued, subscribed and paid up
1,50,000 equity shares of ` 20 each 30,00,000

Total 30,00,000

2. Long-term borrowings

Secured
14% First Debentures 10,00,000

Total 10,00,000

3. Property, Plant and Equipment

Building 10,00,000
Plant 10,00,000
Computers 10,00,000

Total 30,00,000

Working Note:
Capital Reduction Account
` `
To Goodwill A/c 20,00,000 By Equity Share 45,00,000

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 14.62 ADVANCED ACCOUNTING

Capital A/c
To P & L A/c 20,00,000 By X 7,00,000
To Computers (Bal. Fig.) 15,00,000 By Y 3,00,000
55,00,000 55,00,000

11. Journal Entries in the books of Weak Ltd.

` `
(i) Equity share capital (` 100) A/c Dr. 1,00,00,000
To Equity Share Capital (` 40) A/c 40,00,000
To Capital Reduction A/c 60,00,000
(Being conversion of equity share
capital of ` 100 each into ` 40 each as
per reconstruction scheme)
(ii) 12% Cumulative Preference Share Dr. 50,00,000
capital (` 100) A/c Dr.
To 12% Cumulative Preference 30,00,000
Share Capital (` 60) A/c
To Capital Reduction A/c 20,00,000
(Being conversion of 12% cumulative
preference share capital of ` 100 each
into ` 60 each as per reconstruction
scheme)
(iii) 10% Debentures A/c Dr. 40,00,000
To 12% Debentures A/c 28,00,000
To Capital Reduction A/c 12,00,000
(Being 12% debentures issued to 10%
debenture-holders for 70% of their
claims. The balance transferred to
capital reduction account as per
reconstruction scheme)
(iv) Trade payables A/c Dr. 20,00,000
To Equity Share Capital A/c 12,00,000

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To Capital Reduction A/c 8,00,000

(Being a creditor of ` 20,00,000 agreed
to surrender his claim by 40% and was
allotted 30,000 equity shares of ` 40
each in full settlement of his dues as per
reconstruction scheme)
(v) Provision for Taxation A/c Dr. 1,00,000
Capital Reduction A/c Dr. 50,000
To current assets(bank A/c) A/c 1,50,000
(Being liability for taxation settled)
(vi) Capital Reduction A/c Dr. 99,00,000
To P & L A/c 6,00,000
To Property, plant and equipment 37,50,000
A/c
To Current Assets A/c 55,00,000
To Investments A/c 50,000
(Being amount of Capital Reduction
utilized in writing off P & L A/c (Dr.)
Balance, Property, plant and equipment,
Current Assets, Investments through
capital reduction account)
(vii) Capital Reduction A/c Dr. 50,000
To capital Reserve A/c 50,000
(Being balance in capital reduction
account transferred to capital reserve
account)

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 14.64 ADVANCED ACCOUNTING

Balance Sheet of Weak Ltd. (and reduced) as at 31.3.20X1

Particulars Notes `
Equity and Liabilities
1 Shareholders' funds
a Share capital 1 82,00,000
b Reserves and Surplus 2 50,000
2 Non-current liabilities
a Long-term borrowings 3 28,00,000
3 Current liabilities
a Trade Payables 30,00,000
Total 1,40,50,000
Assets
1 Non-current assets
a Property, plant and equipment 4 87,50,000
b Investments 5 9,50,000
2 Current assets 6 43,50,000
Total 1,40,50,000
Notes to accounts

` `
1. Share Capital
Equity share capital
Issued, subscribed and paid up
1,30,000 equity shares of ` 40 each 52,00,000
Preference share capital
Issued, subscribed and paid up
50,000 12% Cumulative Preference shares of ` 60
30,00,000
each
Total 82,00,000

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2. Reserves and Surplus

Capital Reserve 50,000
3. Long-term borrowings
Secured
12% Debentures 28,00,000
4. Property, plant and Equipment
Total PPE 1,25,00,000
Adjustment under scheme of reconstruction (37,50,000) 87,50,000
5. Investments 10,00,000
Adjustment under scheme of reconstruction (50,000) 9,50,000
6. Current assets 45,00,000
Adjustment under scheme of reconstruction (1,50,000) 43,50,000

Working Note:
Capital Reduction Account

` `
To Current Asset 50,000 By Equity share capital 60,00,000
To P & L A/c 6,00,000 By 12% Cumulative
To Property, plant preference share capital 20,00,000
and equipment 37,50,000 By 10% Debentures 12,00,000
To Current assets 55,00,000 By Trade payables 8,00,000
To Investment 50,000
To Capital Reserve
(bal. fig.) 50,000

1,00,00,000 1,00,00,000

© The Institute of Chartered Accountants of India

 14.66 ADVANCED ACCOUNTING

12. In the books of X Ltd.

Journal Entries

31st March, 20X1 ` `

(i) Equity Share Capital A/c (` 100) Dr. 24,00,000
To Equity Share Capital A/c (` 40) 9,60,000
To Capital Reduction A/c 14,40,000
(Being 24,000 equity shares of ` 100 each
reduced to ` 40 each fully paid up)
(ii) 10% Preference Share Capital A/c (` 100) Dr. 12,00,000
To 10% Preference Share Capital A/c 9,00,000
(` 75)
To Capital Reduction A/c 3,00,000
(Being 12,000 Preference shares of ` 100
each reduced to ` 75 each fully paid up)
(iii) 10% Debentures A/c Dr. 6,00,000
To Inventories A/c 2,60,000
To Trade receivables A/c 2,80,000
To Capital Reduction A/c 60,000
(Being debenture holders given Inventories and
Trade receivables in full settlement of their
claims)
(iv) Land & Building A/c Dr. 3,60,000
To Capital Reduction A/c 3,60,000
(Being Land & Building appreciated by
30%)
(v) Capital reduction A/c Dr. 5,000
To Cash A/c 5,000
(Being expenses of reconstruction paid)

© The Institute of Chartered Accountants of India

 14.67
INTERNAL RECONSTRUCTION

(vi) Capital Reduction A/c Dr. 20,70,000

To Goodwill A/c 90,000
To Profit and Loss A/c 14,40,000
To Plant & Machinery A/c 5,40,000
(Being various losses written off, assets
written down through Capital Reserve A/c)
(vii) Capital Reduction Dr. 85,000
To Capital Reserve A/c (Bal. Fig.) 85,000
(Being balance in Capital Reduction A/c
transferred to Capital Reserve A/c)

Balance Sheet (And Reduced) of X Ltd.

as at 31st March, 20X1

Particulars Notes No. `

Equity and Liabilities
1 Shareholders' funds
a Share capital 1 18,60,000
b Reserves and Surplus 2 85,000
2 Current liabilities
a Trade Payables 3,00,000
b Short term borrowings 6,00,000
Total 28,45,000
Assets
1 Non-current assets
a Property, plant and equipment 3 28,20,000
2 Current assets
Cash and cash equivalents (30,000 -
25,000
5,000)
Total 28,45,000

© The Institute of Chartered Accountants of India

 14.68 ADVANCED ACCOUNTING

Notes to accounts

1. Share Capital `
Equity share capital

24,000 equity shares of ` 40 each fully paid up 9,60,000

Preference share capital
12,000, 10% Preference shares of ` 75 each
9,00,000
fully paid up

Total 18,60,000

2. Reserves and Surplus

Capital Reserve 85,000
3. Property, plant and Equipment
Land and Building 15,60,000
Plant and Machinery 12,60,000

Total 28,20,000

© The Institute of Chartered Accountants of India

 CHAPTER 15
ACCOUNTING FOR
BRANCHES INCLUDING
FOREIGN BRANCHES

LEARNING OUTCOMES
After studying this chapter, you will be able to–

♦ Understand concept of branches and their classification from

accounting point of view.
♦ Distinguish between the accounting treatment of dependent branches
and independent branches.
♦ Learn various methods of charging goods to branches.
♦ Solve the problems, when goods are sent to branch at wholesale
price.
♦ Prepare the reconciliation statement of branch and head office
transactions after finding the reasons for their disagreement.
♦ Incorporate branch balances in the head office books.
♦ Differentiate between integral and non-integral foreign branches.
♦ Learn the techniques of foreign currency translation in case of foreign
branches.

© The Institute of Chartered Accountants of India

 15.2 ADVANCED ACCOUNTING

CHAPTER OVERVIEW

Classification of Branches

Inland Branches Foreign Branches

Dependent Branches for which Independent Branches which

whole accounting records are maintain independent
kept at Head Office accounting records

Methods of maintaining accounts of Dependent Branches

Goods invoiced at cost or Goods invoiced at

selling price wholesale price

Stock and Trading and profit Whole sale branches

Debtors and loss account method
Debtors
Method method (Final
Method
Accounts method)

1. INTRODUCTION
A branch can be described as any establishment carrying on either the same or
substantially the same activity as that carried on by head office of the company. It
must also be noted that the concept of a branch means existence of a head office;
for there can be no branch without a head office - the principal place of business.
Branch offices are of a great utility in the sense that they allow business to be

© The Institute of Chartered Accountants of India

 ACCOUNTING FOR BRANCHES INCLUDING 15.3
FOREIGN BRANCHES

expanded closer to the clients and hence they facilitate face to face interaction
with customers.

From the accounting point of view, branches may be classified as follows:

• Inland Branches which can be further classified as:
(a) Independent Branches which maintain independent accounting
records
(b) Dependent Branches for which whole accounting records are kept at
Head Office
• Foreign Branches
Difference between branch and department
Branch: Establishment at location different from Head Office to carry either same
or substantially same activity as carried on by Head Office
Department: Division of a large organization dealing with a various kind of
activity at the same location.
Let’s take an example of a CA Firm working in the field of Auditing, Taxation and
Finance having office at Mumbai, Chennai and Delhi practicing such fields. The CA
firm has various branches in different cities, i.e., Mumbai, Chennai and Delhi, also
it has various department of Auditing, Taxation and Finance at one particular
branch (location).

2. DISTINCTION BETWEEN BRANCH

ACCOUNTS AND DEPARTMENTAL
ACCOUNTS
Basis of distinction Branch Accounts Departmental
Accounts

1. Maintenance of Branch accounts may be Departmental accounts

accounts maintained either at are maintained at one
branch or at head office. place only.

© The Institute of Chartered Accountants of India

 15.4 ADVANCED ACCOUNTING

2. Apportionment of As expenses in respect of Common expenses are

common expenses each branch can be distributed among the
identified, so the departments concerned
apportionment problem on some equitable basis
never arises. considered suitable in
the case.
3. Reconciliation Reconciliation of head Such problem never
office and branch arises.
accounts is necessary in
case of Branches
maintaining independent
accounting records at the
end of the accounting
year.
4. Conversion of At the time of finalization Such problem never
foreign currency of accounts, conversion arises.
figures of figures of foreign
branch is necessary.

3. DEPENDENT BRANCHES
When the business policies and the administration of a branch are wholly
controlled by the head office and its accounts also are maintained by it, the
branch is described as Dependent branch. Branch accounts, in such a case, are
maintained at the head office out of reports and returns received from the
branch. Some of the significant types of branches that are operated in this
manner are described below:
(a) A branch set up merely for booking orders that are executed by the head
office. Such a branch only transmits orders to the head office;
(b) A branch established at a commercial center for the sale of goods supplied
by the head office, and under its direction all collections are made by the
H.O.; and

(c) A branch for the retail sale of goods, supplied by the head office.

© The Institute of Chartered Accountants of India

 ACCOUNTING FOR BRANCHES INCLUDING 15.5
FOREIGN BRANCHES

Accounting in the case of first two types is simple. Only a record of expenses
incurred at the branch has to be maintained.

But however, a retail branch is essentially a sale agency that principally sells
goods supplied by the head office for cash and, if so authorized, also on credit to
approved customers. Generally, cash collected is deposited into a local bank to
the credit of the head office and the head office issues cheques or transfers funds
thereon for meeting the expenses of the branch. In addition, the Branch Manager
is provided with a ‘float’ for petty expenses which is replenished from time to
time on an imprest basis. If, however, the branch also sells certain lines of goods,
directly purchased by it, the branch retains a part of the sale proceeds to pay for
the goods so purchased.

4. METHODS OF CHARGING GOODS TO

BRANCHES
Goods may be invoiced to branches (1) at cost; or (2) at selling price; or (3) in case
of retail branches, at wholesale price.

Selling price method is adopted where the goods would be sold at a fixed price
by the branch. It is suitable for dealers in tea, petrol, ghee, etc. In this way, greater
control can be exercised over the working of a branch in as much as that the
branch balance in the head office books would always be composed of the value
of unsold stock at the branch and remittances or goods in transit.

Goods may be invoiced to branches

In case of retail
At cost At selling price branches, at wholesale
price

© The Institute of Chartered Accountants of India

 15.6 ADVANCED ACCOUNTING

5. ACCOUNTING FOR DEPENDENT BRANCHES

Dependent branch does not maintain a complete record of its transactions. The
Head office may maintain accounts of dependent branches in any of the following
methods:

Methods

At cost or at selling price At wholesale price

Debtors method
Wholesale branch
Stock & Debtors method
method
Trading & P&L method

5.1 When goods are invoiced at cost

If goods are invoiced to the branch at cost, the trading results of branch can be
ascertained by following any of the three methods: (i) Debtors Method, (ii)Stock
and Debtors method, (iii) Trading and Profit and Loss Account (Final
Accounts) Method.
For finding out the trading results of branch, it is assumed that the branch is an
entity separate from the head office. On this basis, a Branch Account is stated in
the head office books to which the price of goods or services provided or
expenses paid out are debited and correspondingly, the value of benefits and
cash received from the branch are credited.
Debtors method This method of accounting is suitable for small sized branches.
Under this method, separate branch account is maintained for each branch to
compute profit or loss made by each branch. Various accounting adjustments to
respective branch account are as follows:
• The opening balance of stock, debtors (if any), petty cash (if any), are
debited to the Branch Account; the cost of goods sent to branch as well as
any direct purchases made by branch (for which Head Office makes the

© The Institute of Chartered Accountants of India

 ACCOUNTING FOR BRANCHES INCLUDING 15.7
FOREIGN BRANCHES

payment), expenses of the branch paid by the head office, e.g., salaries, rent,
insurance, etc., are also debited to it.

• Conversely, amounts remitted by the branch and the cost of goods returned
by the branch are credited.
• At the end of the year, the value of unsold stock, the total of customers’
balances outstanding and that of petty cash are brought into the branch
account on the credit side.
• Accordingly, the branch account will reveal profit or loss; Debit ‘balance’ will
be the loss suffered by the working of the branch and vice versa.
If the branch is allowed to make small purchases of goods locally as well as to
incur expenses out of its cash receipts, it will be necessary for the branch to
supply to the head office a copy of the Cash Account, showing details of cash
collections and disbursements. To illustrate the various entries which are made in
the Branch Account, the proforma of a Branch Account is shown below:
Proforma Branch Account

To Balance b/d By Bank A/c (Cash remitted)

Cash By Return to H.O.
Stock
Debtors By Balance c/d
Petty Cash Cash
Fixed Assets Stock
Prepaid Expenses Debtors
To Goods sent to Branch Petty Cash
To Bank A/c Fixed Assets
Salaries Prepaid Expenses
Rent
Sundry Expenses By Profit and Loss A/c—Loss
To Profit & Loss A/c—Profit (if debit side is larger)
(if credit side is larger)

© The Institute of Chartered Accountants of India

 15.8 ADVANCED ACCOUNTING

Note:
1. Having credited the Branch Account by the actual cash received from
debtors, it would be incorrect to debit the Branch Account, in respect of
discount or allowances to debtors.
2. The accuracy of the trading results as disclosed by the Branch Account, so
maintained, if considered necessary, can be proved by preparing a
Memorandum Branch Trading and Profit & Loss Account, in the usual way,
from the balances of various items of income and expenses contained in the
Branch Account.
Example 1
XP Ltd opened a branch at Delhi and sent goods costing `50,000 to Delhi branch.
Delhi Branch sold entire goods on credit at ` 62,000. No other transaction occurred
at the branch. Prepare branch account in Head Office Books and find out the profit.
Solution
We know that branch earned net profit of `12,000, now see how same can be find
out by branch account.
Branch Account

Particulars Amount Particulars Amount

` `

To Opening branch assets Nil By Closing branch

assets
To Goods sent to branch 50,000 Stock Nil

To Net Profit 12,000 Debtor 62,000 62,000

62,000 62,000

Example 2
XP Ltd opened a new branch at Delhi. XP Ltd sent goods costing ` 50,000 to Delhi
branch. Delhi branch sold entire goods in cash at ` 70,000. Branch paid expenses
of ` 8,000. No other transaction occurred at the branch. Prepare branch account in
HO Books and find out the profit.

© The Institute of Chartered Accountants of India

 ACCOUNTING FOR BRANCHES INCLUDING 15.9
FOREIGN BRANCHES

Solution
We know that branch earned net profit of `12,000 (i.e. Gross Profit ` 20,000 less
expenses of ` 8,000), Let’s see how same can be find out by branch account:
Branch Account

Particulars Amount Particulars Amount

To Opening branch assets Nil By Closing branch assets

Stock Nil
To Goods sent to branch 50,000 Debtor Nil
To Net Profit transferred to 12,000 Cash 62,000 62,000
General P&L A/c (70,000 - 8,000)
62,000 62,000

Example 3
Prepare branch account and find out profit earned by branch if transactions are as
under:
Goods sent to branch ` 50,000
Furniture sent to branch ` 10,000 (at the beginning of year)
Credit sales at branch ` 62,000
Bad Debts ` 1,000
Other information:
Closing stock at branch ` 10,000
Closing Debtor ` 61,000
Furniture (after depreciation@20%) ` 8,000
Solution
Branch Account

Particulars Amount Particulars Amount

To Opening branch assets-

(Furniture) 10,000 By Closing branch

assets-

© The Institute of Chartered Accountants of India

 15.10 ADVANCED ACCOUNTING

To Goods sent to branch 50,000 Stock 10,000

To Net Profit transferred to 19,000 Debtor 61,000

General P&L A/c
Furniture 8,000 79,000

79,000 79,000

Illustration 1 (a)
Buckingham Bros, Bombay have a branch at Nagpur. They send goods at cost to
their branch at Nagpur. However, direct purchases are also made by the branch for
which payments are made at head office. All the daily collections are transferred
from the branch to the head office.
From the following, prepare Nagpur branch account in the books of head office by
Debtors method:

` `
Opening balance (1-1- Bad Debts 1,000
20X1) Imprest Cash 2,000
Sundry Debtors 25,000 Discount to Customers 2,000
Stock: Transferred from H.O. 24,000 Remittances to H.O.
Direct Purchases 16,000 (received by H.O.) 1,65,000
Cash Sales 45,000 Remittances to H.O.
Credit Sales 1,30,000 (not received by H.O. so far) 5,000
Direct Purchases 45,000 Branch Exp. directly paid 30,000
by H.O.
Returns from Customers 3,000 Closing Balance (31-12-
20X1)
Goods sent to branch from 60,000 Stock: Direct Purchase 10,000
H.O.
Transfer from H.O. for Petty 4,000 Transfer from H.O. 15,000
Cash expenses Debtors ?
Imprest Cash ?
Petty Cash expenses 4,000

© The Institute of Chartered Accountants of India

 ACCOUNTING FOR BRANCHES INCLUDING 15.11
FOREIGN BRANCHES

Solution
In the Books of Buckingham Bros, Bombay
Nagpur Branch Account

Particulars ` Particulars `
To Opening Branch Assets- By Bank –
Remittances received
from branch
Stock (24,000+16,000) 40,000 Cash Sales 45,000
Debtors 25,000 Cash from Debtors * 1,20,000
Cash in transit * 5,000 1,70,000
Imprest Cash 2,000 By Closing Branch
Assets
To Goods sent to Branch A/c 60,000 Stock (15,000 25,000
+10,000)
To Creditors (Direct 45,000 Debtors (W.N. 1) 24,000
Purchases) Imprest Cash (W.N. 2) 2,000

To Bank (Sundry exp.) 30,000

To Bank (Petty cash exp.) 4,000
To Net Profit transferred to 15,000
General Profit & Loss A/c
2,21,000 2,21,000

Working Notes:
1. Memorandum Debtors A/c

Particulars ` Particulars `
To To Bal b/d 25,000 By By Sales Return 3,000
To To Sales 130,000 By By Bad Debts 1,000
By By Discount 2,000
By By Cash * 125,000
By By Bal c/d 24,000
155,000 155,000

© The Institute of Chartered Accountants of India

 15.12 ADVANCED ACCOUNTING

2. Memorandum Petty Cash

Particulars ` Particulars `
To Bal b/d 2,000 By Expenses 4,000
(met by Branch)
To Transfer from H.O. 4,000 By Bal c/d 2,000
6,000 6,000

* Collection from Debtors = Total Remittances (1,65,000+5,000) – Cash Sales

(45,000) = ` 1,25,000
Stock and Debtors method
If it is desired to exercise a more detailed control over the working of a branch,
the accounts of the branch are maintained under Stock and Debtors Method.
According to this method, the following accounts are maintained by the Head
Office:

Account Purpose
1. Branch Stock Account (or Ascertainment of shortage or surplus
Branch Trading Account)
2. Branch Debtors Account Ascertainment of closing balance of debtors
3. Branch Expenses Account Ascertainment of total expenses incurred
4. Goods sent to Branch Ascertainment of cost of goods sent to
Account branch
5. Branch Cash / Bank Know about cash flow at branch (eg: where
Account branch is allowed to incur expenses locally)
6. Branch Fixed Asset Control over branch Fixed Assets
Account
7. Branch Profit and Loss Calculation of net profit or loss
Account

The manner in which entries are recorded in the above method is shown below:

Transaction Account debited Account credited

(a) Cost of goods sent to Branch Stock A/c Goods sent to Branch
the Branch A/c

© The Institute of Chartered Accountants of India

 ACCOUNTING FOR BRANCHES INCLUDING 15.13
FOREIGN BRANCHES

(b) Remittances for Branch Cash A/c Cash A/c

expenses
(c) Any asset (e.g. Branch Asset (Furniture) Asset A/c
furniture) provided by A/c
H.O.
(d) Cost of goods returned Goods sent to Branch Branch Stock A/c
by the branch A/c
(e) Cash Sales at the Branch Cash A/c Branch Stock A/c
Branch
(f) Credit Sales at the Branch Debtors A/c Branch Stock A/c
Branch
(g) Return of goods by Branch Stock A/c Branch Debtors A/c
debtors
to the Branch
(h) Cash paid by debtors Branch Cash A/c Branch Debtors A/c
(i) Discount & allowance Branch Expenses A/c Branch Debtors A/c
to debtors, bad debts
(j) Remittances to H.O. Cash A/c Branch Cash A/c
(k) Branch Expenses Branch Expenses A/c Cash A/c
directly paid by H.O.
(l) Expenses met by Branch Expenses A/c Branch Cash A/c
Branch

(m) Closing Stock: Credit the Branch Stock Account with the value of closing
stock at cost. It will be carried down as opening balance (debit) for the next
accounting period. The Balance of the Branch Stock Account, (after
adjustment therein the value of closing stock), if in credit, will represent the
gross profit on sales and vice versa.

Other Steps:
(n) Transfer Balance of Branch Stock Account to the Branch Profit and Loss
Account.

© The Institute of Chartered Accountants of India

 15.14 ADVANCED ACCOUNTING

(o) Transfer Balance of Branch Expenses Account to the debit of Branch Profit &
Loss Account.

(p) The balance in the Branch P&L A/c will be transferred to the (H.O.) Profit &
Loss Account.
(q) The credit balance in the Goods sent to Branch Account is afterwards
transferred to the Head Office Purchase Account or Trading Account (in
case of manufacturing concerns), it being the value of goods transferred to
the Branch.
Branch Trading and Profit and Loss Account (Final Accounts Method)
In this method, Trading and Profit and Loss accounts are prepared considering
each branch as a separate entity. The main advantage of this method is that, it is
easy to prepare and understand. It also gives complete information of all
transactions which are ignored in the other methods. It should be noted that
Branch Trading and Profit and Loss account is merely a memorandum account
and therefore, the entries made there in do not have double entry effect.
Illustration 1 (b)
From the information given in the illustration 1(a), prepare Nagpur Branch Trading
and Profit and Loss Account in the books of head office.
Solution
Buckingham Bros. Bombay
Nagpur Branch-Trading and Profit and Loss Account
for the year ending 31st December, 20X1

Particulars ` Particulars ` `
To Opening Stock 40,000 By Sales
To Goods transferred 60,000 Cash 45,000
from Head Office Credit sales 1,30,000
To Purchases 45,000 1,75,000
To Gross Profit c/d 52,000 Less: Returns (3,000) 1,72,000
By Closing Stock 25,000
1,97,000 1,97,000
To Expenses 30,000 By Gross Profit b/d 52,000
To Discounts 2,000

© The Institute of Chartered Accountants of India

 ACCOUNTING FOR BRANCHES INCLUDING 15.15
FOREIGN BRANCHES

To Bad Debts 1,000

To Petty Cash Expenses 4,000
To Net Profit 15,000
transferred to General
P&L A/c
52,000 52,000

The students may note that Gross Profit and Net Profit earned by the branch are
ascertainable in this method and also evaluating the performance of the branch is
very much easier in this method than in the ‘Debtors method’.
Solving Illustration by all three methods
Given below is a simple problem, the solution whereto has been prepared in all
the three methods so as to show the distinguishing features of these methods.
Illustration 2
The Bombay Traders invoiced goods to its Delhi branch at cost. Head Office paid all
the branch expenses from its bank account, except petty cash expenses which were
met by the Branch. All the cash collected by the branch was banked on the same
day to the credit of the Head Office. The following is a summary of the transactions
entered into at the branch during the year ended December 31, 20X1.
` `
Balances as on 1.1.20X1:
Stock 7,000 Bad Debts 600
Debtors 12,600 Goods returned by 500
customers
Petty Cash, 200 Salaries & Wages 6,200
Goods sent from H.O. 26,000 Rent & Rates 1,200
Goods returned to H.O. 1,000 Sundry Expenses 800
Cash Sales 17,500 Cash received from Sundry
Credit Sales 28,400 Debtors 28,500
Allowances to customers 200 Balances as on 31.12.20X1:
Discount to customers 1,400 Stock 6,500
Debtors 9,800
Petty Cash 100

© The Institute of Chartered Accountants of India

 15.16 ADVANCED ACCOUNTING

Prepare: (a) Branch Account (Debtors Method), (b) Branch Stock Account, Branch
Profit & Loss Account, Branch Debtors and Branch Expenses Account by adopting
the Stock and Debtors Method and (c) Branch Trading and Profit & Loss Account to
prove the results as disclosed by the Branch Account.
Solution
(a) Debtors Method
Delhi Branch Account
20X1 ` ` 20X1 ` `
Jan. 1 To Opening Dec 24 Bank
branch 31
assets:
Stock 7,000 Cash Sales 17,500
Debtors 12,600 Cash from
Petty cash 200 19,800 sundry 28,500 46,000
Debtors
Dec. To Goods sent By Goods sent to
31 to Branch 26,000 Branch A/c –
A/c
To Bank: Returns to 1,000
H.O.
Salaries & 6,200 By Closing
Wages branch assets
Rent & Rates 1,200 Stock 6,500
Sundry Exp. 800 8,200 Debtors 9,800
Petty Cash 100 16,400
To Net profit 9,400
ts/f to
General P&L
A/c
63,400 63,400
Jan. 1, To Balance b/d 16,400
20X2

© The Institute of Chartered Accountants of India

 ACCOUNTING FOR BRANCHES INCLUDING 15.17
FOREIGN BRANCHES

(b) Stock and Debtors Method

Branch Stock Account
20X1 ` 20X1 `
Jan. 1 To Balance b/d - 7,000 Dec. 31 By Sales:
Opening
Stock
Dec. 31 To Goods Sent 26,000 Cash 17,500
to Branch A/c Credit 28,400
To Branch P&L 19,900 Less: Return (500) 45,400
A/c
By Goods sent to 1,000
Branch A/c -
Return
By Balance c/d - 6,500
Closing Stock
52,900 52,900
20X2 To Balance b/d - 6,500
Jan. 1 Opening
Stock

Delhi Branch Debtors Account

20X1 ` 20X1 `
Jan. 1 To Balance b/d 12,600 Dec. 31 By Cash 28,500
Dec. 31 To Sales 28,400 By Returns 500
By Allowances 200
By Discounts 1,400

By Bad debts 600

By Balance c/d 9,800

41,000 41,000

20X2 Jan. 1 To Balance b/d 9,800

© The Institute of Chartered Accountants of India

 15.18 ADVANCED ACCOUNTING

Delhi Branch Expenses Account

20X1 ` 20X1 `
Dec. To Salaries & Wages 6,200 Dec. By Branch P&L 10,500
31 31 A/c
To Rent & Rates 1,200
To Sundry Expenses 800
To Petty Cash 100
expenses
(200-100)

To Allowance to 200
customers
To Discount 1,400
To Bad Debts 600
10,500 10,500

Delhi Branch Profit & Loss Account

20X1 ` 20X1 `
Dec. To Branch Exp. A/c 10,500 Dec. By Gross Profit 19,900
31 31 b/d
To Net Profit ts/f to
General P & L 9,400
A/c
19,900 19,900
(c) Branch Trading and Profit and Loss Account

` ` ` `
To Stock 7,000 By Sales:
To Goods sent Cash 17,500
from H.O. 26,000 Credit 28,400
Less: Returns (1,000) 25,000 Less:
to H.O. returns (500) 27,900 45,400

© The Institute of Chartered Accountants of India

 ACCOUNTING FOR BRANCHES INCLUDING 15.19
FOREIGN BRANCHES

To Gross profit 19,900 By Closing Stock 6,500

c/d
51,900 51,900
To Salaries & 6,200 By Gross 19,900
Wages Profit b/d
To Rent & Rates 1,200
To Sundry Exp. 800
To Petty Cash 100
Exp.
To Allowances to 200
Customers
To Discounts 1,400
To Bad Debts 600
To Net Profit 9,400
19,900 19,900

5.2 When goods are invoiced at selling price

Whenever, goods sent to branch are invoiced at selling price, certain
considerations need to be kept in mind such as:
(a) It would be obvious that, if Branch Account is debited with the sales price of
goods and subsequent to the debit being raised there is a change in the
sale price, the amount of debit either has to be increased or reduced on a
consideration of the quantity of unsold stock that was there at the branch at
the time the change took place. Such an adjustment will be necessary as
often as the change in sale price occurs.
(b) Moreover, the amount of anticipatory or unrealized profit, included in the
value of unsold stock with the branch at the close of the year will have to be
eliminated before the accounts of the branch are incorporated with that of
the head office. This will be done by creating a reserve.
It may also be necessary to adjust the value of closing stock on account of the
physical losses of stock due to either pilferage or wastages which may have

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 15.20 ADVANCED ACCOUNTING

occurred during the year. This adjustment is made by debiting the cost of such
goods to Goods Lost Account and the amount of loading (included in the lost
goods), to the Branch Adjustment Account.
The three different methods that are usually adopted for maintaining accounts on
this basis are described below:

(i) Stock and Debtors Method

Under this method, when goods are invoiced at selling price, one additional
account i.e. ‘Branch Adjustment account’ is also prepared in addition to all the
accounts which are maintained on cost basis. (Refer para 5.1)
• When goods are invoiced at selling price, the following points should be kept
in mind under this method:
(i) Journal Entries:
Transaction Accounts debited Accounts credited
(a) Sale price of the Branch Stock A/c (at (i) Goods sent to
goods sent from selling price) Branches A/c with
H.O. to the cost of the goods
Branch sent.
(ii) Branch Adjustment
A/c (with the
loading i.e.,
Difference between
the selling and cost
price).
(b) Return of goods (i) Goods sent to Branch Branch Stock A/c
By the Branch to A/c (with the cost of
H.O. goods returned).
(ii) Branch Adjustment
A/c (with the loading)
(c) Cash sales at the Branch Cash/Bank A/c Branch Stock A/c
Branch
(d) Credit Sales at Branch Debtors A/c Branch Stock A/c
the Branch

© The Institute of Chartered Accountants of India

 ACCOUNTING FOR BRANCHES INCLUDING 15.21
FOREIGN BRANCHES

(e) Goods returned Branch Stock A/c Branch Debtors A/c

to
(at selling price)
Branch by
customers
(f) Goods lost in (i) Goods Lost in Transit Branch Stock A/c
A/c
Transit or stolen or Goods Stolen A/c
(with cost of the
goods)
(ii) Branch Adjustment
A/c
(with the loading)

(ii) Closing Stock

The balance in the Branch Stock Account at the close of the year normally should
be equal to the unsold stock at the Branch valued at sale price. But quite often
the value of stock actually held at the branch is either more or less than the
balance of the Branch Stock Account. In that event, as discussed earlier, it will be
necessary that the balance in the Branch Stock Account is increased or reduced by
debit or credit to Goods Lost Account (at cost price of goods) and Branch
Adjustment Account (with the loading). The Stock Account at selling price, thus
reveals loss of stock (or surplus) and serves as a check on the branch in this
respect.

The discrepancy in the amount of balance in the Branch Stock Account and the
value of stock actually in hand, valued at sale price, may be the result of one or
more of the under-mentioned factors:

• An error in applying the percentage of loading.

• Goods having been sold either below or above the established selling price.
• A Commission to adjust returns or allowances.

• Physical loss of stock due to natural causes or pilferage.

• Errors in Stock-taking.

© The Institute of Chartered Accountants of India

 15.22 ADVANCED ACCOUNTING

For example, the balance brought down in the Branch Stock Account is ` 100 in
excess of the value of stock actually held by the branch when the goods were
invoiced by the head office to the branch at 25% above cost and the discrepancy is
either due to pilferage or loss by fire, the actual loss to the firm would be ` 80, since
20% of the invoice (same as 25% above cost) price would represent the element of
profit. The adjusting entry in such a case would be:

Dr. ` Cr. `
Goods Lost A/c Dr. 80
Branch Adjustment A/c Dr. 20
To Branch Stock A/c 100

If on the other hand, a part of the sale proceeds has been misappropriated, then in
that case Loss by Theft A/c would be debited, rest of the entry being same.
Rebates and allowances allowed to customers debited to P&L A/c & credited to
debtors A/c.
In the Goods Sent to Branch Account, the cost of the goods sent out to a branch
for sale is credited by debiting Branch Stock Account. Conversely, the cost of
goods returned by the branch is debited to this account. As such the balance in
the account at the end of the year will be the cost of goods sent to the branch;
therefore, it will be transferred either to the Trading Account or to Purchases
Account of the head office.
The amount of profit anticipated on sale of goods sent to the branch is credited
to the Branch Adjustment Account and conversely, the amount of profit not
realized in respect of goods returned by the branch to head office or that in
respect to stock remaining unsold with the branch at the close of the year is
debited to Branch Adjustment Account. The balance in this account, at the end of
year thus will consist of the amount of Gross Profit earned on sale by the branch.
On that account, it will be transferred to the Branch Profit and Loss Account.
(iii) Elimination of unrealized profit in the closing stock

The balance in the Branch Stock account would be at the sale price; therefore, it
would be necessary to eliminate the element of profit included in such closing
stock. This is done by creating a reserve against unrealized profit, by debiting the
Branch Adjustment Account and crediting Stock Reserve Account with an amount

© The Institute of Chartered Accountants of India

 ACCOUNTING FOR BRANCHES INCLUDING 15.23
FOREIGN BRANCHES

equal to the difference in the cost and selling price of unsold stock. Sometimes
instead of opening a separate account in respect of the reserve, the amount of
the difference is credited to Branch Stock Account. In that case, the credited
balance of such a reserve is also carried forward separately, along with the debit
balance in the Branch Stock Account; the difference between the two would be
the value of stock at cost. In either case, the credit balance will be deducted out
of the value of closing stock for the purpose of disclosure in the balance sheet, so
that the stock is shown at cost.
An Alternative method: Where the gross profit of each branch is not required to
be ascertained separately, although the selling price is uniform, the amount of
goods sent to the branch is recorded only in two accounts namely - Branch Stock
Account and Goods Sent to Branch A/c.
In this method, at the end of the year the Branch Stock Account is closed by
transfer of the balance representing the value of closing stock, at sale price, to the
Goods Sent to Branch Account. This has the effect of altogether eliminating
from the books the value of stock at the branch. The balance of Goods sent to
Branch Account is afterwards transferred to the Trading Account representing
the net sale price of goods sold at the branch. In that case, the value of closing
stock at the branch at cost will be subsequently introduced in the Trading
Account together with that of closing stock at the head office.
Illustration 3 (a)
Harrison of Chennai has a branch at New Delhi to which goods are sent @ 20%
above cost. The branch makes both cash and credit sales. Branch expenses are met
partly from H.O. and partly by the branch. The statement of expenses incurred by
the branch every month is sent to head office for recording.
Following further details are given for the year ended 31st December, 20X1:

`
Cost of goods sent to Branch at cost 2,00,000
Goods received by Branch till 31-12-20X1 at invoice price 2,20,000
Credit Sales for the year @ invoice price 1,65,000
Cash Sales for the year @ invoice price 59,000
Cash Remitted to head office 2,22,500

© The Institute of Chartered Accountants of India

 15.24 ADVANCED ACCOUNTING

Expenses paid by H.O. 12,000

Bad Debts written off 750
Balances as on 1-1-20X1 31-12-20X1
` `
Stock 25,000 (Cost) 28,000 (invoice price)
Debtors 32,750 26,000
Cash in Hand 5,000 2,500
Show necessary ledger accounts in the books of the head office and determine the
Profit or Loss of the Branch for the year ended 31st December, 20X1.
Solution
Books of Harrison
Branch Stock Account

` `
To Balance b/d – Op Stock 30,000 By Branch Debtors (Sales) 1,65,000
To Goods Sent to Branch A/c 2,40,000 By Branch Cash 59,000
To Branch Adjustment A/c 2,000 By Balance c/d
(Balancing Figure – Goods in Transit
Excess of Sale over Invoice (` 2,40,000 – ` 2,20,000) 20,000
Price)
Closing Stock at 28,000
Branch

2,72,000 2,72,000

Branch Debtors Account

` `
To Balance b/d 32,750 By Bad debts written off 750
To Branch Stock A/c (Sales) 1,65,000 By Branch Cash (bal. 1,71,000
fig.)
By Balance c/d 26,000
1,97,750 1,97,750

© The Institute of Chartered Accountants of India

 ACCOUNTING FOR BRANCHES INCLUDING 15.25
FOREIGN BRANCHES

Branch Cash Account

` `
To Balance b/d 5,000 By Bank Remittance to 2,22,500
H.O.
To Branch Stock 59,000 By Branch Expenses 10,000
To Branch Debtors 1,71,000 [met by Branch (Bal.
fig.)]
By Balance c/d 2,500
2,35,000 2,35,000
Branch Adjustment Account
` `
By Stock Reserve opening 5,000
(25,000 × 20%)
To Branch P &L - Gross 39,000 By Goods sent to Branch 40,000
Profit (Bal. fig.) A/c
To Stock Reserve (on By Branch Stock A/c 2,000
closing stock (48,000 ×
1/6) 8,000
47,000 47,000

Branch Expenses
` `
To Cash (H.O) 12,000
To Branch Cash 10,000 By Branch P&L A/c 22,000
22,000 22,000

Branch Profit and Loss Account

` `
To Branch Expenses 22,000 By Gross Profit (from 39,000
Branch Adjustment A/c)
To Branch Debtors (bad debts) 750
To Net Profit 16,250
39,000 39,000

© The Institute of Chartered Accountants of India

 15.26 ADVANCED ACCOUNTING

Goods Sent to Branch Account

` `

To Branch Adjustment A/c 40,000 By Branch to Stock A/c 2,40,000

To Purchase A/c - Transfer 2,00,000

2,40,000 2,40,000

(ii) Debtors Method

Under this method, the principal accounts that will be maintained are:
• The Branch Account;

• The Goods Sent to Branch Account; and

• The Stock Reserve Account.
Entries in these accounts will be made in the following manner:

Transaction Account debited Account credited

(a) Goods sent to Branch at Branch A/c Goods Sent to Branch
selling price A/c
(b) ‘Loading being the Goods Sent to Branch A/c
difference between selling Branch A/c
price and cost of goods
(c) Returns to H.O. at selling Goods Sent to Branch A/c
price Branch A/c
(d) ‘Loading’ in respect of Branch A/c Goods Sent to Branch
goods returned to H.O. A/c
(e) ‘Loading’ included in the Stock Reserve A/c Branch A/c
opening stock to reduce it
(f) Closing stock at selling Branch Stock A/c Branch A/c
price
(g) ‘Loading’ included in Branch A/c Stock Reserve A/c
closing stock to reduce it
to cost

© The Institute of Chartered Accountants of India

 ACCOUNTING FOR BRANCHES INCLUDING 15.27
FOREIGN BRANCHES

It will be observed that entries in the Branch Account in respect of goods sent to
a branch or returned by it, as well as those for the opening and closing stock, will
be at selling price. In consequence, the Branch Account is maintained at selling price.
Hence, the Branch Account will not correctly show the trading profit of the Branch
unless these amounts are adjusted to cost. Such an adjustment is effected by
making contra entries in ‘Goods Sent to Branch A/c’ and ‘Stock Reserve Account’.
In respect of closing stock at branch for the purpose of disclosure in the Balance
Sheet, the credit balance in the ‘Stock Reserve Account’ at the end of the year will
be deducted from the value of the closing stock, so as to reduce it to its cost; it
will be carried forward as a separate balance to the following year, for being
transferred to the credit of the Branch Account.
Illustration 3 (b)
Take figures from Illustration 3 (a) and prepare branch account following debtors’
method.
Solution
Books of Harrison
New Delhi Branch Account

` `
To Balance B/d
Stock 30,000 By Stock Reserve 5,000
Debtors 32,750
Cash 5,000

To Goods Sent to Branch A/c 2,40,000 By Goods Sent to Branch 40,000

(2,00,000 + 20%) A/c

To Cash (Exp. paid by 12,000 By Cash – Remittance from 2,22,500

H.O.) branch

To Net Profit ts/f to H.O. 16,250 By Balance c/d 26,000

Profit & Loss A/c Debtors
(Balancing Figure)

© The Institute of Chartered Accountants of India

 15.28 ADVANCED ACCOUNTING

To Stock reserve 8,000 Stock (including Transit 48,000

(48,000X20/120) – W.N 2)

Cash 2,500

3,44,000 3,44,000

Working Note:

Closing Stock = Stock at branch + Stock in Transit (Goods sent by HO – Goods

Received by Branch) = ` 28,000 + (` 2,40,000 - ` 2,20,000) = ` 48,000.

Illustration 4

Sell Well who carried on a retail business opened a branch X on January 1st, 20X1
where all sales were on credit basis. All goods required by the branch were supplied
from the Head Office and were invoiced to the branch at 10% above cost.

The following were the transactions:

Jan. 20X1 Feb. 20X1 March 20X1

` ` `
Goods sent to Branch (Purchase Price) 40,000 50,000 60,000
Sales as shown by the branch monthly 38,000 42,000 55,000
report
Cash received from Debtors and 20,000 51,000 35,000
remitted to H.O.
Returns to H.O. (Invoice price to Branch) 1,200 600 2,400

The stock of goods held by the branch on March 31, 20X1 amounted to ` 53,400 at
invoice to branch.
Record these transactions in the Head Office books, showing balances as on
31st March, 20X1 and the branch gross profit for the three months ended on that
date.

All workings should form part of your solution.

© The Institute of Chartered Accountants of India

 ACCOUNTING FOR BRANCHES INCLUDING 15.29
FOREIGN BRANCHES

Solution
Books of Sell Well
Branch Account

` `

To Goods sent to Branch 1,65,000 By Goods sent to 15,000

A/c (1,50,000+10%) Branch-Loading

To Goods sent to Branch 382 By Goods sent to 4,200

A/c Branch-returns
(4,200 X 10/110)

By Bank 1,06,000

By Balance c/d -
Closing Branch
Assets

To Stock Reserve (53,400 X 4,855 Stock 53,400

10/110)

To Net Profit (Bal fig) ts/f to 37,363 Debtors (Sales- 29,000 82,400
General P&L A/c Collection)

2,07,600 2,07,600

Working Note:
Memorandum Branch Debtors Account

` `
To Balance b/d --- By Cash/Bank 1,06,000
To Sales 1,35,000 By Balance c/d 29,000

1,35,000 1,35,000

© The Institute of Chartered Accountants of India

 15.30 ADVANCED ACCOUNTING

Goods Sent to Branch Account

` `
To Branch A/c – Loading 15,000 By Branch A/c 1,65,000
To Branch A/c – Returns 4,200 By Branch A/c – Loading 382
To Purchases A/c 1,46,182 on returns
1,65,382 1,65,382

(iii) Trading and Profit and Loss Account (Final Accounts) Method

All items of memorandum Branch Trading and Profit and Loss Account are to be
converted into cost price if the goods are invoiced to branch at selling price.
Other points will remain same as already discussed in Para 5.1 for this method if
goods are invoiced at cost.

Illustration 5

Following is the information of the Jammu branch of Best New Delhi for the year
ending 31st March, 20X2 from the following:

(1) Goods are invoiced to the branch at cost plus 20%.

(2) The sale price is cost plus 50%.

(3) Other information:

Stock as on 01.04.20X1(invoice price) 2,20,000

Goods sent during the year (invoice price) 11,00,000

Sales during the year 12,00,000

Expenses incurred at the branch 45,000

Ascertain

(i) the profit earned by the branch during the year.

(ii) branch stock reserve in respect of unrealized profit.

© The Institute of Chartered Accountants of India

 ACCOUNTING FOR BRANCHES INCLUDING 15.31
FOREIGN BRANCHES

Solution
(i) Calculation of profit earned by the branch
In the books of Jammu Branch
Trading Account and Profit and Loss Account

Particulars Amount Particulars Amount

` `
To Opening stock 2,20,000 By Sales 12,00,000
To Goods 11,00,000 By Closing stock 3,60,000
received by Head (Refer W.N.)
office
To Expenses 45,000
To Net profit (Bal 1,95,000
fig)
15,60,000 15,60,000

(ii) Stock reserve in respect of unrealised profit

= ` 3,60,000 x (20/120) = ` 60,000
Working Note:

`
Cost Price 100
Invoice Price 120
Sale Price 150
Calculation of closing stock at invoice `
price
Opening stock at invoice price 2,20,000
Goods received during the year at 11,00,000
invoice price
13,20,000
Less: Cost of goods sold at invoice price (9,60,000) [12,00,000 x (120/150)]
Closing stock 3,60,000

© The Institute of Chartered Accountants of India

 15.32 ADVANCED ACCOUNTING

Illustration 6

Hindustan Industries Mumbai has a branch in Cochin to which office goods are
invoiced at cost plus 25%. The branch sells both for cash and on credit. Branch
Expenses are paid direct from head office, and the Branch has to remit all cash
received into the Head Office Bank Account.

From the following details, relating to calendar year 20X1, prepare the accounts in
the Head Office Ledger and ascertain the Branch Profit. Branch does not maintain
any books of account, but sends weekly returns to the Head Office:

`
Goods received from Head Office at invoice price 6,00,000
Returns to Head Office at invoice price 12,000
Stock at Cochin as on 1st Jan., 20X1 60,000
Sales in the year - Cash 2,00,000
Credit 3,60,000
Sundry Debtors at Cochin as on 1st Jan. 20X1 72,000
Cash received from Debtors 3,20,000
Discount allowed to Debtors 6,000
Bad debts in the year 4,000
Sales returns at Cochin Branch 8,000
Rent, Rates, Taxes at Branch 18,000

Salaries, Wages, Bonus at Branch 60,000

Office Expenses 6,000
Stock at Branch on 31st Dec. 20X1 at invoice price 1,20,000

Prepare Branch accounts in books of head office by Stock and debtors method.

© The Institute of Chartered Accountants of India

 ACCOUNTING FOR BRANCHES INCLUDING 15.33
FOREIGN BRANCHES

Solution
Books of Hindustan Industries, Mumbai
Cochin Branch Stock Account

` `
To Balance b/d – Op Stock 60,000 By Bank A/c – Cash Sales 2,00,000

To Branch Debtors A/c – 8,000 By Branch Debtors A/c - 3,60,000

Sales Return Credit Sales
To Goods sent to Branch 6,00,000 By Goods sent to Branch 12,000
A/c (Returns to H.O.)
To Branch Adjustment A/c 24,000 By Balance c/d - Closing 1,20,000
(Excess of Selling Price stock
over Invoice Price)

6,92,000 6,92,000

Cochin Branch Stock Adjustment Account

` `
To Goods sent to Branch 2,400 By Balance b/d 12,000
A/c (1/5 of ` 60,000)
(1/5 of ` 12,000) (on
returns)
To Branch P & L A/c (Profit 1,29,600 By Goods sent to Branch 1,20,000
on sale) – Bal fig A/c (1/5 of
` 6,00,000)
To Balance c/d (1/5 of 24,000 By Branch Stock 24,000
` 1,20,000)

1,56,000 1,56,000

© The Institute of Chartered Accountants of India

 15.34 ADVANCED ACCOUNTING

Goods Sent to Branch Account

` `
To Cochin Branch Stock 1,20,000 By Cochin Branch Stock 6,00,000
Adjustment A/c A/c
To Cochin Branch Stock 12,000 By Cochin Branch Stock 2,400
A/c (Returns) Adj. A/c
To Purchases A/c 4,70,400
6,02,400 6,02,400
Branch Debtors Account
` `
To Balance b/d 72,000 By Bank 3,20,000
To Branch Stock By Branch P&L A/c 6,000
Discount
A/c 3,60,000 By Branch P&L A/c - Bad 4,000
Debts
By Branch Stock - Sales 8,000
Returns
By Balance c/d 94,000
4,32,000 4,32,000
Branch Expenses Account

` `
To Bank A/c (Rent, Rates By Branch Profit & Loss
& Taxes) 18,000 A/c (Transfer) 84,000
To Bank A/c (Salaries &
Wages) 60,000
To Bank A/c (office exp.) 6,000
84,000 84,000

Branch Profit & Loss Account for the year ending 31st Dec. 20X1

` `
To Branch Expenses A/c 84,000 By Branch Stock Adj. A/c 1,29,600
To Branch Debtors A/c 6,000

© The Institute of Chartered Accountants of India

 ACCOUNTING FOR BRANCHES INCLUDING 15.35
FOREIGN BRANCHES

To Branch Debtors A/c 4,000

To Net Profit transferred to
Profit & Loss A/c 35,600
1,29,600 1,29,600

Illustration 7
Arnold of Delhi, trades in Ghee and Oil. It has a branch at Lucknow. He dispatches
25 tins of Oil @ ` 1,000 per tin and 15 tins of Ghee @ ` 1,500 per tin on 1st of every
month. The branch incurs some expenditure which is met out of its collections; this
is in addition to expenditure directly paid by Head Office.
Following are the other details:

Delhi Lucknow
` `
Purchases Ghee 14,75,000 -
Oil 29,32,000 -
Direct expenses 3,83,275 -
Expenses paid by H.O. - 14,250
Sales Ghee 18,46,350 3,42,750
Oil 27,41,250 3,15,730
Collection during the year (including Cash - 6,47,330
Sales)
Remittance by Branch to Head Office - 6,13,250

(Delhi)
Balance as on: 1-1-20X1 31-12-20X1
Stock: Ghee 1,50,000 3,12,500
Oil 3,50,000 4,17,250
Debtors 7,32,750 -
Cash on Hand 70,520 55,250
Furniture & Fittings 21,500 19,350
Plant/Machinery 3,07,250 7,73,500

© The Institute of Chartered Accountants of India

 15.36 ADVANCED ACCOUNTING

(Lucknow)
Balance as on: 1-1-20X1 31-12-20X1
Stock: Ghee 17,000 13,250
Oil 27,000 44,750
Debtors 75,750 ?
Cash on Hand 7,540 12,350
Furniture & Fittings 6,250 5,625
Plant/Machinery -

Addition to Plant/Machinery on 1-1-20X1 ` 6,02,750.

Rate of Depreciation: Furniture / Fittings @ 10% and Plant / Machinery @ 15%
(already adjusted in the above figures).
The Branch Manager is entitled to 10% commission after charging such commission
whereas, the General Manager is entitled to 10% commission on overall company
profits after charging such commission. General Manager is also entitled to a salary
of ` 2,000 p.m. General expenses incurred by H.O. ` 24,000.
Prepare Branch Account in the head office books and also prepare the Arnold’s
Trading and Profit and Loss A/c (excluding branch transactions).
Solution
In the books of Arnold
Lucknow Branch Account

` `
To Balance b/d By Bank (Remittance) 6,13,250
-Opening Branch Assets By Closing Branch Assets
Opening stock: Closing stock:
Ghee 17,000 Ghee 13,250
Oil 27,000 Oil 44,750
Debtors 75,750 Debtors (W.N. 1) 86,900
Cash on hand 7,540 Cash on hand (W.N. 2) 12,350

© The Institute of Chartered Accountants of India

 ACCOUNTING FOR BRANCHES INCLUDING 15.37
FOREIGN BRANCHES

Furniture & fittings 6,250 Furniture & fittings 5,625

To Goods sent to Branch
A/c
Ghee (15 x 1500 x 12) 2,70,000
Oil (25 x 1000 x 12) 3,00,000
To Bank (Expenses paid) 14,250
To Branch Manager
commission
(` 58,335 × 1/11) 5,303
To Net Profit transferred
to General P & L A/c 53,032
7,76,125 7,76,125

Arnold
Trading and Profit and Loss account for the year ended 31st December, 20X1
(Excluding branch transactions)

` `
To Opening Stock: By Sales:
Ghee 1,50,000 Ghee 18,46,350
Oil 3,50,000 Oil 27,41,250
To Purchases: By Closing Stock:
Ghee 14,75,000 Ghee 3,12,500
Less: Goods sent Oil 4,17,250
to Branch (2,70,000) 12,05,000
Oil 29,32,000
Less: Goods sent
to Branch (3,00,000) 26,32,000
To Direct Expenses 3,83,275
To Gross Profit c/d 5,97,075
53,17,350 53,17,350
To Manager’s Salary 24,000 By Gross Profit b/d 5,97,075

© The Institute of Chartered Accountants of India

 15.38 ADVANCED ACCOUNTING

To General Expenses 24,000 By Branch Profit

To Depreciation: transferred 53,032
Furniture @10% 2,150
Plant & Machinery
@ 15% (W.N.3) 1,36,500 1,38,650
To General Manager’s
Commission @ 10%
(i.e., 4,63,457 × 1/11) 42,132
To Net profit 4,21,325
6,50,107 6,50,107

Working Notes:
(1) Memorandum Branch Debtors Account

` `
To Balance b/d 75,750 By Cash Collections 6,47,330
(including Cash Sales)
To Sales (including By Balance c/d 86,900
Cash
Sales)
Ghee 3,42,750
Oil 3,15,730
7,34,230 7,34,230

(2) Memorandum Branch Cash Account

` `
To Balance b/d 7,540 By Remittance 6,13,250
To Collections 6,47,330 By Exp. (Balance fig.) 29,270
By Balance c/d 12,350
6,54,870 6,54,870

(3) Depreciation on Plant & Machinery

3,07,250 x 15% + 6,02,750 x 15% = `1,36,500

© The Institute of Chartered Accountants of India

 ACCOUNTING FOR BRANCHES INCLUDING 15.39
FOREIGN BRANCHES

5.3 Goods invoiced at wholesale price to retail branches

Under this method, the Head Office (particularly, the manufacturing concern)
supplies goods to its retail branches at wholesale price which is cost plus
wholesale profit.

Profit of branch = Sale proceeds at shop - wholesale price of the goods sold.

For this purpose, it is assumed that Manufacturer would always be able to sell the
goods on wholesale terms thereby Manufacturer profit = Wholesale price - Cost.

Many concerns, therefore, invoice goods to such shops at wholesale price and
determine profit or loss on sale of goods on this basis.

Branch Stock Account or the Trading Account is debited with:

(a) the value of opening stock at the Branch; and

(b) price of goods sent during the year at wholesale price.

It is credited by:

(a) sales effected at the shop; and

(b) closing stock of goods valued at wholesale price.

The value of goods lost due to accident, theft etc. also is credited to the Branch
Stock Account or Trading Account calculated at the wholesale price. At this
stage, the Branch Stock or Trading Account will reveal the amount of gross profit
(or loss). It is transferred to the Branch Profit and Loss Account. On further being
debited with the expenses incurred at the shop and the wholesale price of goods
lost, the Branch Profit and Loss Account will disclose the net profit (or loss) at the
shop.

Since the closing stock at the branch has to be valued at wholesale price, it would
be necessary to create a stock reserve equal to the difference between its
wholesale price and its cost (to the head office) by debiting the amount in the
Head Office Profit and Loss Account. This Stock Reserve is carried forward to the
next year and then transferred to the credit of the (Head Office) Profit and Loss
Account.

© The Institute of Chartered Accountants of India

 15.40 ADVANCED ACCOUNTING

Illustration 8
M/s Rahul operates a number of retail outlets to which goods are invoiced at
wholesale price which is cost plus 25%. These outlets sell the goods at the retail
price which is wholesale price plus 20%.
Following is the information regarding one of the outlets for the year ended 31.3.20X2:
`
Stock at the outlet 1.4.20X1 30,000
Goods invoiced to the outlet during the year 3,24,000
Gross profit made by the outlet 60,000
Goods lost by fire ?
Expenses of the outlet for the year 20,000
Stock at the outlet 31.3.20X2 36,000
You are required to prepare the following accounts in the books of Rahul Limited
for the year ended 31.3.20X2:
(a) Outlet Stock Account.
(b) Outlet Profit & Loss Account.
(c) Stock Reserve Account.
Solution
Outlet Stock Account
` `
To Balance b/d 30,000 By Sales (Working Note 1) 3,60,000
To Goods sent to 3,24,000 By Goods lost by fire (b.f.) 18,000
outlet
To Gross Profit c/d 60,000 By Balance c/d 36,000
4,14,000 4,14,000

Outlet Profit & Loss Account

` `
To Expenses 20,000 By Gross Profit b/d 60,000
To Goods lost by fire (W.N.2) 18,000
To Profit transferred 22,000
60,000 60,000

© The Institute of Chartered Accountants of India

 ACCOUNTING FOR BRANCHES INCLUDING 15.41
FOREIGN BRANCHES

Stock Reserve Account

` `
To HO P & L A/c – Transfer 6,000 By Balance b/d 6,000
To Balance c/d (Stock Res. 7,200 By HO P&L A/c 7,200
required) (W.N. 3)
13,200 13,200

Working Notes:
`
(1) Wholesale Price 100+25 = 125
Retail Price 125 + 20% = 150
Gross Profit at the outlet
Wholesale Price – Retail Price (150 – 125) 25
150
Retail sales value = 60,000 × = ` 3,60,000
25

(2) Goods lost by fire

Opening Stock + Goods Sent + Gross Profit – Sales – Closing Stock
30,000 + 3,24,000 + 60,000 – 3,60,000 – 36,000 = ` 18,000
(3) Stock Reserve
25
Opening Stock = 30,000 × = ` 6,000
125
25
Closing Stock = 36,000 × = ` 7,200
125

6. ACCOUNTING FOR INDEPENDENT BRANCHES

When the size of the business is big, it is desirable that the branch maintains
complete records of its transactions. These branches are called independent
branches and each independent branch maintains comprehensive account books
for recording their transactions; therefore, a separate trial balance of each branch
can be prepared. The head office maintains one ledger account for each such
branch, wherein all transactions between the head office and the branches are
recorded.

© The Institute of Chartered Accountants of India

 15.42 ADVANCED ACCOUNTING

Salient features of accounting system of an independent branch are as

follows:
1. Branch maintains its entire books of account under double entry system.
2. Branch opens in its books a Head Office account to record all transactions
that take place between Head Office and branch. The Head Office maintains
a Branch account to record these transactions.
3. Branch prepares its Trial Balance, Trading and profit and loss Account at the
end of the accounting period and sends copies of these statements to Head
Office for incorporation.
4. After receiving the final statements from branch, Head Office reconciles
between the two – Branch account in Head Office books and Head Office
account in Branch books.
5. Head office passes necessary journal entries to incorporate branch trial
balance in its books.
The Head Office Account in branch books and Branch Account in head office
books is maintained respectively.

Transactions Head office books Branch books

(i) Dispatch of goods Branch A/c Dr. Goods received from Dr.
to branch by H.O. To Good sent to H.O. A/c
Branch A/c To Head Office A/c
(ii) When goods are Goods sent to Branch Dr. Head Office A/c Dr.
returned by the A/c To Goods received
Branch to H.O. To Branch A/c from H.O. A/c
(iii) Branch Expenses are No Entry Expenses A/c Dr.
paid by the Branch To Bank or Cash
A/c
(iv) Branch Expenses Branch A/c Dr. Expenses A/c Dr.
paid by H.O. To Bank or cash To Head Office A/c
(v) Outside purchases No Entry Purchases A/c Dr.
made by the Branch To Bank (or)
Creditors A/c

© The Institute of Chartered Accountants of India

 ACCOUNTING FOR BRANCHES INCLUDING 15.43
FOREIGN BRANCHES

(vi) Sales effected by the No Entry Cash or Debtors A/c Dr.

Branch To Sales
(vii) Collection from Cash or Bank A/c Dr. Head office A/c Dr.
Debtors of the To Branch A/c To Sundry Debtors
Branch recd. by H.O. A/c
(viii) Payment by H.O. for Branch A/c Dr. Purchases (or) Sundry Dr.
purchase made by To Bank Creditors A/c
Branch To Head Office
(ix) Purchase of Asset No Entry Sundry Assets Dr.
by Branch To Bank (or)
Liability
(x) Asset purchased by Branch Asset A/c Dr. Head office Dr.
the Branch but Asset To Branch A/c To Bank (or)
A/c retained at H.O. Liability
books
(xi) Depreciation on (x) Branch A/c Dr. Depreciation A/c Dr.
above To Branch Asset To Head Office A/c
(xii) Remittance of funds Branch A/c Dr. Bank A/c Dr.
by H.O. to Branch To Bank To Head Office
(xiii) Remittance of funds Reverse entry of (xii) Reverse entry of (xii)
by Branch to H.O. above i.e. above
(xiv) Transfer of goods (Recipient) Branch A/c Supplying Branch Dr.
from one Branch to To Supplying Dr. H.O. A/c
another branch Branch A/c
To Goods sent to
H.O. A/c
Recipient Branch
Goods Received from Dr.
H.O. A/c

To Head Office
A/c

© The Institute of Chartered Accountants of India

 15.44 ADVANCED ACCOUNTING

Students may find a few further practical situations and it is hoped that they can
pass entries on the basis of accounting principles explained above.

The final result of these adjustments will be that so far as the Head Office is
concerned, the branch will be looked upon either as a debtor or creditor, as a
debtor if the amount of its assets is in excess of its liabilities and as a creditor if
the position is reverse.

A debit balance in the Branch Account should always be equal to the net assets at
the branch. The important thing to remember, when independent sets of accounts
are maintained, is that the branch and head office books are connected with each
other only through the medium of the Branch and the Head Office Account which
are converse of each other. Also, when the accounts of branch and head office are
consolidated, both the Branch and Head Office Accounts will be eliminated.

7. ADJUSTMENT AND RECONCILIATION OF

BRANCH AND HEAD OFFICE ACCOUNTS
If the branch and the head office accounts, converse of each other, do not tally,
these must be reconciled before the preparation of the final accounts of the
concern as a whole.

For example, if Head Office has sent goods worth ` 50,000 but the branch has
received till the closing date goods only ` 40,000, then the branch should treat
` 10,000 as goods in transit and should pass the following entry :
Dr. Cr.
Goods in transit A/c Dr. 10,000
To Head Office A/c 10,000
However, there will be no entry in Head office books being the point where the
event has been recorded in full, hence no further entries in Head office books.

7.1 Reasons for Disagreement

Following are the possible reasons for the disagreement between Branch A/c in
Head office books and Head office A/c in Branch books on the closing date:

© The Institute of Chartered Accountants of India

 ACCOUNTING FOR BRANCHES INCLUDING 15.45
FOREIGN BRANCHES

Receipt of income or
Goods returned payment or expenses
Goods dispatched by the branch to relating to the
by the Head office Amount remitted
Head Office may Branch transacted
not received by by Head office to
have been directly by the head
the branch. These branch or vice
received by the office or vice versa,
goods may be in versa remaining
H.O. Again, these hence not recorded
transit or loss in in transit on the
goods may be in at the respective
closing date.
transit. transit or lost in ends wherein they
transit. are normally to be
recorded.

The technique of reconciliation has been illustrated through the example given
below :

Head office Branch

Dr. Cr. Dr. Cr.
Goods sent to Branch 1,50,000 -
Goods recd. from H.O. A/c - 1,40,000
Branch A/c 1,12,000
Head office A/c - - - 78,500

On analysis of Branch A/c in Head office books and Head office A/c in branch
books, you find:
• Goods valued `10,000 sent by head office has not been received by branch,
hence not recorded in the branch books.
• ` 15,000 remitted by the branch has not been received, hence not recorded
in the head office books.
• Direct collection of ` 10,500 from a customer of the branch by Head office
not informed to the branch, hence not recorded by the branch.

© The Institute of Chartered Accountants of India

 15.46 ADVANCED ACCOUNTING

• A sum of ` 14,500 paid by branch to the suppliers of head office not

recorded at Head office.

• Head office expenditure allocation to the branch `12,000 not recorded in

the branch.
• ` 7,500 being FD interest of head office received by the branch on oral
instructions from H.O., not recorded in the head office books.

Head Office Branch Books

Books
Dr. Cr. Dr. Cr.
` ` ` `
(i) Goods in transit - - Goods in Transit 10,000
(` 10,000) A/c
To Head 10,000
office A/c
(ii) Cash in Transit: Cash in 15,000 (No Entry)
Transit A/c
To Branch 15,000
A/c
(iii) Direct Collection Head Office A/c 10,500
by H.O. on behalf To Debtors 10,500
of the Branch A/c
(iv) Direct payment of Sundry 14,500
` 14,500 by Creditors A/c
Branch on
behalf of H.O To Branch 14,500
A/c
(v) Expenditure Branch Exp. A/c 12,000
Allocated to
Branch
To H.O. A/c 12,000

© The Institute of Chartered Accountants of India

 ACCOUNTING FOR BRANCHES INCLUDING 15.47
FOREIGN BRANCHES

(vi) Fixed Deposit Branch A/c 7,500

interest of To Sundry 7,500
` 7,500 directly Income
received by the
Branch

In Branch Books
Head Office Account

` `
To Sundry Debtors A/c 10,500 By Balance b/d 78,500
To Balance c/d 90,000 By Goods in transit 10,000
By Branch expenses 12,000
1,00,500 1,00,500
By Balance b/d 90,000

In the Books of Head Office

Branch A/c

` `
To Balance b/d 1,12,000 By Cash in Transit 15,000
To Sundry Income 7,500 By Sundry Creditors 14,500
By Balance c/d 90,000
1,19,500 1,19,500
To Balance b/d 90,000

Important Points to be noted:

(i) the balance of Head Office A/c in Branch books and Branch A/c in Head
Office books have tallied.
(ii) Adjustment are made only at the point:
Where the recording has been omitted, and

Other than the point where action has already been effected.

© The Institute of Chartered Accountants of India

 15.48 ADVANCED ACCOUNTING

7.2 Other points

(1) Inter-Branch Transactions
Inter-branch transactions (i.e. transaction between two branches) are usually
adjusted as if they were entered into only with the head office. It is a very
convenient method of treating such transaction especially where the number of
branches are large. Suppose Kolkata Branch incurred an expenditure on
advertisement of ` 1,000 on account of Delhi Branch, the entries that would be
made in such a case would be as follows:

Dr. Cr.
`
In Kolkata Books:
Head Office A/c Dr. 1,000
To Cash 1,000
In Delhi Books:
Advertisement A/c Dr. 1,000
To H.O. A/c 1,000
In H.O. Books:
Delhi Branch A/c Dr. 1,000
To Kolkata Branch A/c 1,000

(2) Fixed Assets

Often the accounts of fixed assets of a branch are kept in the head office books;
in such a case, at the end of the year, the amount of depreciation on the assets is
debited to the branch concerned by recording the following entry by head office:

Branch Account Dr.

To Branch Asset Account

The branch will pass the following entry:

Depreciation Account Dr.

To Head Office Account

© The Institute of Chartered Accountants of India

 ACCOUNTING FOR BRANCHES INCLUDING 15.49
FOREIGN BRANCHES

(3) Head office Expenses charged to Branch

Usually the head office devotes considerable time in attending to the affairs of
the branch; on that account, it may decide to raise a charge against the branch in
respect of the cost of such time. In such a case the amount is debited to the
branch (being receivable from branch) and is credited to appropriate expense
head such as Salaries Accounts, General Charges Account, Entertainment Account
etc (i.e. reducing the expense in head office books). The branch credits the H.O.
Account and debits Expenses Account.
Illustration 9
Give Journal Entries in the books of an independent Branch to rectify or adjust the
following:
(i) Branch paid ` 5,000 as salary to H.O supervisor, but the amount paid by
branch has been debited to salary account in the books of branch.
(ii) Asset Purchased by branch for ` 25,000, but the Asset account was retained in
H.O Books.
(iii) A remittance of `8,000 sent by the branch has not been received by H.O.
(iv) H.O collected ` 25,000 directly from the customer of Branch but fails to give
the intimation to branch.
(v) Remittance of funds by H.O to branch ` 5,000 not entered in branch books.
Solution
Journal Entries in Books of Branch

Particulars Dr. Cr.

Amount Amount
` `
(i) Head office account Dr. 5,000
To Salaries account 5,000
(Being the rectification of salary paid on
behalf of H.O.)

© The Institute of Chartered Accountants of India

 15.50 ADVANCED ACCOUNTING

(ii) Head office account Dr. 25,000

To Bank / Liability A/c 25,000
(Being Asset purchased by branch but Asset
account retained at head office books)
(iii) No Entry in Branch Books
(iv) Head office account Dr. 25,000
To Debtors account 25,000
(Being the amount of branch debtors
collected by H.O.)
(v) Bank A/c Dr. 5,000
To Head Office 5,000
(Remittance of Funds by H.O. to Branch)

Illustration 10
The following Trial balances as at 31st December, 20X1 have been extracted from
the books of Major Ltd. and its branch at a stage where the only adjustments
requiring to be made prior to the preparation of a Balance Sheet for the
undertaking as a whole are to be done.

Head Office Branch

Dr. Cr. Dr. Cr.
` ` ` `
Share Capital 1,50,000
Fixed Assets 75,125 18,901
Current Assets 1,21,809 23,715 (Note 3)
Current Liabilities 34,567 9,721
Stock Reserve, 1st Jan., 20X1
(Note 2) 693
Revenue Account 43,210 10,250
Branch Account 31,536
Head Office Account 22,645
2,28,470 2,28,470 42,616 42,616

You are required to record the following in the appropriate ledger accounts in both
sets of books.

© The Institute of Chartered Accountants of India

 ACCOUNTING FOR BRANCHES INCLUDING 15.51
FOREIGN BRANCHES

Note:
1. Goods transferred from Head Office to the Branch are invoiced at cost plus
10% and both Revenue Accounts have been prepared on the basis of the
prices charged.
2. Relating to the Head Office goods held by the Branch on 1st January, 20X1.
3. Includes goods received from Head Office at invoice price ` 4,565.
4. Goods invoiced by Head Office to Branch at ` 3,641 were in transit at
31st December, 20X1, as was also a remittance of ` 3,500 from the Branch.
5. At 31st December, 20X1, the following transactions were reflected in the Head
Office books but unrecorded in the Branch books.
The purchase price of lorry, ` 2,500, which reached the Branch on December 25th; a
sum received on December 30, 20X1 from one of the Branch debtors, ` 750.
Solution
H.O. Books
Branch Account

20X1 ` 20X1 `
Dec. 31 To Balance b/d 31,536 Dec. 31 By Cash in transit 3,500
By Balance c/d 28,036
31,536 31,536

Cash in transit Account

20X1 ` 20X1 `
Dec. 31 To Branch A/c 3,500 Dec. 31 By Balance c/d 3,500

Stock Reserve Account

20X1 ` 20X1 `
Dec. 31 To Balance c/d 746 Jan. 1 By Balance b/d 693

(4,565+3,641) x By Revenue A/c (b.f.) 53

10/110

746 746

© The Institute of Chartered Accountants of India

 15.52 ADVANCED ACCOUNTING

Revenue Account

20X1 ` 20X1 `

Dec. 31 To Stock Reserve 53 Dec. 31 By Balance b/d 43,210

To Balance c/d 43,157

43,210 43,210

Branch Books
Head Office Account

20X1 ` 20X1 `
Dec. 31 To Current Assets 750 Dec. 31 By Balance b/d 22,645
By Goods in transit 3,641
To Balance c/d 28,036 By Motor Vehicle 2,500
28,786 28,786

Goods in Transit Account

20X1 ` 20X1 `
Dec. 31 To Head 3,641 Dec. 31 By Balance 3,641
Office c/d

Motor Vehicle Account

20X1 ` 20X1 `
Dec. 31 To Head 2,500 Dec. 31 By Balance 2,500
Office c/d

Sundry Current Assets A/c

20X1 ` 20X1 `
Dec. 31 To 23,715 Dec. 31 By H.O. 750
Balance (Remittance
b/d by Debtor)
By Balance c/d 22,965
23,715 23,715

© The Institute of Chartered Accountants of India

 ACCOUNTING FOR BRANCHES INCLUDING 15.53
FOREIGN BRANCHES

8. INCORPORATION OF BRANCH BALANCE IN

HEAD OFFICE BOOKS
The method that will be adopted for incorporating the trading result of the
branch with that of the head office would depend on whether it is desired to
prepare
(a) Standalone P&L & Balance Sheet for each Branch, or
(b) Consolidated statement of Branch & H.O.
Method I: Separate P&L & Balance Sheet for each Branch
Amount of P&L is shown by Branch & is transfer to H.O. in Branch books &
converse entry is passed in H.O. Books as:
Branch A/c Dr.
To Profit & Loss A/c
In such a case, not only P&L but also separate Balance Sheet for Branch & H.O. is to
be prepared. The Branch Balance Sheet would show the amount advanced by H.O.
to it as "Capital." In H.O. Books such amount would be shown as "Advance to
Branch"
Method II: Prepare a consolidated Profit & Loss Account and Balance Sheet
Individual balances of all the revenue accounts would be separately transferred to
the Head Office Account by debit or credit in the branch books and the converse
entries would be passed in the head office books. The effect thereof will be
similar to the amount of net profit or loss of the branch having been transferred
since it would be composed of the balances that have been transferred. In case it
is also desired that consolidated balance sheet of the branch and the head office
should be prepared, it will also be necessary to transfer the balance of assets and
liabilities of the branch to the head office. The adjusting entries that would be
passed in this respect in the books of branch are shown below:
(a) Head Office Account Dr.

To Asset (individual) Account

© The Institute of Chartered Accountants of India

 15.54 ADVANCED ACCOUNTING

(b) (Individual) Liability Account Dr.

To Head Office Account
Converse entries are passed in the head office books.
It is obvious that after afore-mentioned entries have been passed, the Branch
Account in the Head Office books and Head Office Account in the branch books
will be closed and it will be necessary to restart them at the beginning of the next
year.
In consequence, at the beginning of the following year, the under-mentioned
entry is recorded by the branch:
Asset Account (In Detail) Dr.
To Liability Accounts (In Detail)
To H.O. Account (The difference between assets and liabilities)
Illustration 11
KP manufactures a range of goods which it sells to wholesale customers only from
its head office. In addition, the H.O. transfers goods to a newly opened branch at
factory cost plus 15%. The branch then sells these goods to the general public on
only cash basis.

The selling price to wholesale customers is designed to give a factory profit which
amounts to 30% of the sales value. The selling price to the general public is
designed to give a gross margin (i.e., selling price less cost of goods from H.O.) of
30% of the sales value.
KP operates from rented premises and leases all other types of fixed assets. The rent
and hire charges for these are included in the overhead costs shown in the trial
balances.
From the information given below, you are required to prepare for the year ended
31st Dec., 20X1 in columnar form.

(a) A Profit & Loss account for (i) H.O. (ii) the branch (iii) the entire business.
(b) Balance Sheet as on 31st Dec., 20X1 for the entire business.

© The Institute of Chartered Accountants of India

 ACCOUNTING FOR BRANCHES INCLUDING 15.55
FOREIGN BRANCHES

H.O. Branch

` ` ` `
Raw materials purchased 35,000

Direct wages 1,08,500

Factory overheads 39,000
Stock on 1-1-20X1

Raw materials 1,800

Finished goods 13,000 9,200
Debtors 37,000

Cash 22,000 1,000

Administrative Salaries 13,900 4,000
Salesmen Salaries 22,500 6,200

Other administrative &

selling overheads 12,500 2,300
Inter-unit accounts 5,000 2,000

Capital 50,000
Sundry Creditors 13,000
Provision for unrealized 1,200
profit in stock
Sales 2,00,000 65,200
Goods sent to Branch 46,000

Goods received from 44,500

H.O.

3,10,200 3,10,200 67,200 67,200

© The Institute of Chartered Accountants of India

 15.56 ADVANCED ACCOUNTING

Note:
(1) On 28th Dec., 20X1 the branch remitted ` 1,500 to the H.O. and this has not
yet been recorded in the H.O. books. Also, on the same date, the H.O.
dispatched goods to the branch invoiced at ` 1,500 and these too have not
yet been entered into the branch books. It is the company’s policy to adjust
items in transit in the books of the recipient.
(2) The stock of raw materials held at the H.O. on 31st Dec., 20X1 was valued at
` 2,300.
(3) You are advised that:
 there were no stock losses incurred at the H.O. or at the branch.
 it is KP’s practice to value finished goods stock at the H.O. at factory
cost.
 there were no opening or closing stock of work-in-progress.
(4) Branch employees are entitled to a bonus of ` 156 under a bilateral
agreement.

Solution
In the books of KP
Trading and Profit & Loss Account for the year ended 31st Dec., 20X1
H.O. Branch Total H.O. Branch Total
` ` ` ` ` `
To Opening stock of 13,000 9,200 22,200 By Sales 2,00,000 65,200 2,65,200
finished goods

To Material consumed
(W.N.1) 34,500 - 34,500
To Wages 1,08,500 - 1,08,500 By Goods Sent 46,000 - -
To Factory Overheads 39,000 - 39,000 to Branch
To Goods from H.O. 46,000 By Closing 15,000 9,560 24,560
stock including (Bal Fig)
transit (W.N.2)
To Gross Profit c/d 66,000 19,560 85,560
(W.N.3)
(Bal Fig)
2,61,000 74,760 2,89,760 2,61,000 74,760 2,89,760

© The Institute of Chartered Accountants of India

 ACCOUNTING FOR BRANCHES INCLUDING 15.57
FOREIGN BRANCHES

To Admn. Salaries 13,900 4,000 17,900 By Gross Profit 66,000 19,560 85,560
b/d
To Salesmen Salaries 22,500 6,200 28,700
To Other Admn. & selling
Overheads 12,500 2,300 14,800
To Stock Reserve 47 - 47

(W.N.4)
To Bonus to Staff - 156 156
To Net Profit 17,053 6,904 23,957
66,000 19,560 85,560 66,000 19,560 85,560

Balance Sheet as on 31st Dec., 20X1

H.O. Branch Total H.O. Branch Total
` ` ` ` ` ` `
Capital 50,000 - 50,000 Fixed Assets - - -
Profit: H.O. 17,053 Current Assets:
Branch 6,904 23,957 23,957 Raw material 2,300 2,300
Trade 13,000 13,000 Finished Goods 15,000 9,560 23,313*
Creditors
Bonus Payable 156 156 (Less Stock Res.)
H.O. Account* 10,404 Debtors 37,000 - 37,000
Stock Reserve Cash (including 23,500 1,000 24,500
(W.N.4) 1,247 transit item)
Branch A/c 10,404**
88,204 10,560 87,113 88,204 10,560 87,113

*9,560 × 100/115 i.e., (8,313 + 15,000) = ` 23,313 or (15,000 + 9,560) – 1,247 (Stock reserve)
** (5,000 + 6,904) – 1500 = ` 10,404.

Working Notes:

(1) Material consumed

Opening raw material + Raw Material Purchased – Closing raw material

= 1,800 + 35,000 - 2,300 = 34,500

© The Institute of Chartered Accountants of India

 15.58 ADVANCED ACCOUNTING

(2) Closing stock at head office

(a) Calculation of total factor cost = Material consumed + Wages +
Factory overhead

= 34,500 + 1,08,500 + 39,000 = 1,82,000

(b) Cost (factory cost) of goods sold = Sales – Gross profit
= 2,00,000 – 2,00,000 x 30% = 1,40,000

(c) Stock transferred to branch = 46,000 x 100/115 = 40,000

(d) Closing stock = 13,000 (Opening Stock) + 1,82,000 – 1,40,000 – 40,000
= 15,000
(3) Gross profit of Branch = Sales x Gross profit ratio
= 65,200 x 30% = 19,560
(4) Closing stock reserve = 9,560 x 15/115 = 1,247
Charge to profit and loss = 1,247 – 1,200 (existing) = 47
Illustration 12
AFFIX of Kolkata has a branch at Delhi to which the goods are supplied from
Kolkata but the cost thereof is not recorded in the Head Office books.
On 31st March, 20X1 the Branch Balance Sheet was as follows:

Liabilities ` Assets `
Creditors Balance 40,000 Debtors Balance 2,00,000
Head Office 1,68,000 Building Extension A/c closed —
by transfer to H.O. A/c
Cash at Bank 8,000
2,08,000 2,08,000

During the six months ending on 30-9-20X1, the following transactions took place
at Delhi.
` `
Sales 2,40,000 Manager’s Salary 4,800
Purchases 48,000 Collections from Debtors 1,60,000
Wages paid 20,000 Discounts allowed 8,000

© The Institute of Chartered Accountants of India

 ACCOUNTING FOR BRANCHES INCLUDING 15.59
FOREIGN BRANCHES

Salaries (inclusive of advance Discount earned 1,200

of ` 2,000) 6,400 Cash paid to Creditors 60,000
General Expenses 1,600 Building Account 4,000
(further payment)
Fire Insurance (paid for one 3,200 Cash in Hand 1,600
year)
Remittance to H.O. 38,400 Cash at Bank 28,000

Set out the Head Office Account in Delhi books and the Branch Balance Sheet as on
30-9-20X1. Also give journal entries in the Delhi books.
Solution
Journal Entries

20X1 Dr. Cr.

30 Sept. ` `
Salary Advance A/c Dr. 2,000
To Salaries A/c 2,000
(The amount paid as advance adjusted by debit to
Salary Advance Account)
Prepared Insurance A/c (3,200 x 6/12) Dr. 1,600
To Fire Insurance A/c 1,600
(Six months premium transferred to the Prepaid
Insurance A/c)
Head Office Account Dr. 88,400
To Purchases A/c 48,000
To Wages A/c 20,000
To Salaries A/c (6,400 – 2,000) 4,400
To General Expenses A/c 1,600
To Fire Insurance A/c (3,200 x 6/12) 1,600
To Manager’s Salary A/c 4,800
To Discount Allowed A/c 8,000
(Transfer of various revenue accounts (Dr.) to the
H.O. Account for closing the accounts)

© The Institute of Chartered Accountants of India

 15.60 ADVANCED ACCOUNTING

Sales Accounts Dr. 2,40,000

Discount Earned A/c Dr. 1,200
To Head Office A/c 2,41,200
[Revenue accounts (Cr.) transferred to H.O.]
Head Office Account Dr. 4,000
To Building Account 4,000
(Transfer of amounts spent on building extension
to H.O. A/c)
Head Office Account

20X1 ` 20X1 `
Sep. 30 To Cash-remittance 38,400 April 1 By Balance b/d 1,68,000
To Sundries 88,400 Sep. 30 By Sundries 2,41,200
(Revenue A/cs) (Revenue A/cs)
To Building A/c 4,000
To Balanced c/d 2,78,400
4,09,200 4,09,200

Balance Sheet of Delhi Branch as on Sept. 30, 20X1

Liabilities ` Assets `
Creditors Balances 26,800 Debtors Balances 2,72,000
Head Office Account 2,78,400 Salary Advance 2,000
Prepaid Insurance 1,600
Building Extension A/c
transferred to H.O. —
Cash in Hand 1,600
Cash at Bank 28,000
3,05,200 3,05,200

© The Institute of Chartered Accountants of India

 ACCOUNTING FOR BRANCHES INCLUDING 15.61
FOREIGN BRANCHES

Cash and Bank Account

` `
To Balance b/d 8,000 By Wages 20,000
To Collection from 1,60,000 By Salaries 6,400
Debtors
By Insurance 3,200
By General Exp. 1,600
By H.O. A/c 38,400
By Manager’s Salary 4,800
By Creditors 60,000
By Building A/c 4,000
By Balance c/d
By Cash in Hand 1,600
By Cash at Bank 28,000 29,600
1,68,000 1,68,000

Debtors Account
` `
To Balance b/d 2,00,000 By Cash Collection 1,60,000
To Sales 2,40,000 By Discount (allowed) 8,000
By Balance c/d 2,72,000
4,40,000 4,40,000
To Balance b/d 2,72,000
Creditors Account
` `

To Cash 60,000 By Balance b/d 40,000

To Discount (earned) 1,200 By Purchases 48,000
To Balance c/d 26,800
88,000 88,000

By Balance b/d 26,800

© The Institute of Chartered Accountants of India

 15.62 ADVANCED ACCOUNTING

Illustration 13
Ring Bell Ltd. Delhi has a Branch at Bombay where a separate set of books is used.
The following is the trial balance extracted on 31st December, 20X1.
Head Office Trial Balance

` `
Share Capital (Authorised: 10,000 Equity Shares of ` 100
each):
Issued: 8,000 Equity Shares 8,00,000
Profit & Loss Account - 1-1-20X1 25,310
General Reserve 1,00,000
Fixed Assets 5,30,000
Stock 2,22,470
Debtors and Creditors 50,500 21,900
Profit for 20X1 52,200
Cash Balance 62,730
Branch Current Account 1,33,710
9,99,410 9,99,410

Branch Trial Balance

` `
Fixed Assets 95,000
Profit for 20X1 31,700
Stock 50,460
Debtors and Creditors 19,100 10,400
Cash Balance 6,550
Head Office Current Account 1,29,010
1,71,110 1,71,110
The difference between the balances of the Current Account in the two sets of books
is accounted for as follows:
(a) Cash remitted by the Branch on 31st December, 20X1, but received by the
Head Office on 1st January 20X2 - ` 3,000.

© The Institute of Chartered Accountants of India

 ACCOUNTING FOR BRANCHES INCLUDING 15.63
FOREIGN BRANCHES

(b) Stock stolen in transit from Head Office and charged to Branch by the Head
Office, but not credited to Head Office in the Branch books as the Branch
Manager declined to admit any liability (not covered by insurance) - ` 1,700.
Give the Branch Current Account in Head Office books after incorporating Branch Trial
Balance through journal.
Solution
The Branch Current Account in the Head Office Books and Head Office Current
Account in the Branch Books do not show the same balances. Therefore, in order
to reconcile them, the following journal entries will be passed in the Head Office
books:
Journal Entries

Dr. Cr.
20X1 ` `
Dec., 31 Cash in Transit A/c Dr. 3,000
To Branch Current A/c 3,000
(Cash sent by the Branch on 31st Dec., 20X1
but received at H.O. on 1st Jan., 20X2)
Loss by theft A/c Dr. 1,700
To Branch Current A/c 1,700
(Stock lost in transit from H.O. to Branch)
In order to incorporate, in the H.O. books, the given Branch trial balance which
has been drawn up after preparing the Branch Profit & Loss Account, the
following journal entries will be necessary:
Journal Entries

20X1 ` `
Dec. 31 Branch Current Account Dr. 31,700
To Profit & Loss Account 31,700
(Branch Profit for the year)
Branch Fixed Assets Dr. 95,000
Branch Stock Dr. 50,460
Branch Debtors Dr. 19,100

© The Institute of Chartered Accountants of India

 15.64 ADVANCED ACCOUNTING

Branch Cash Dr. 6,550

To Branch Current Account 1,71,110
(Branch assets brought into H.O. Books)
Branch Current A/c Dr. 10,400
To Branch Creditors 10,400
(Branch creditors brought into H.O.
Books)
Branch Current Account

` `
To Balance b/d 1,33,710 By Cash in transit 3,000
To Profit & Loss A/c 31,700 By Loss of theft 1,700
To Branch Creditors 10,400 By Sundry Branch Assets 1,71,110
1,75,810 1,75,810

Profit and Loss Account for 20X1

` `
To Loss by Theft 1,700 By Balance b/d 25,310
To Balance c/d 1,07,510 By Year’s Profit: H.O. 52,200
Branch 31,700
1,09,210 1,09,210

9. INCOMPLETE INFORMATION IN BRANCH

BOOKS
If it is desired that profitability of the branch should be kept secret from the branch
staff, the head office would hold back some key information from the branch, e.g.,
amount of opening stock, cost of goods sent to the branch, etc. The head office, in
such a case would maintain a record of goods sent to the branch by passing the
entry:

Goods Supplied to the Branch Account Dr.

To Purchases Account

© The Institute of Chartered Accountants of India

 ACCOUNTING FOR BRANCHES INCLUDING 15.65
FOREIGN BRANCHES

The value of the closing stock will also be adjusted only in head office books.

In such a case, for closing its books at the end of the year, the branch will simply
transfer various revenue accounts to the head office without drawing up a
Trading and Profit & Loss Account.

On that basis, supplemented by the record of transactions maintained at the head

office, it will be possible to construct the Trading and Profit & Loss Account of the
branch.
Illustration 14
Messrs Ramchand & Co., Hyderabad has a branch in Delhi. The Delhi Branch deals
not only in the goods from Head Office but also buys some auxiliary goods and
deals in them. They, however, do not prepare any Profit & Loss Account but close all
accounts to the Head Office at the end of the year and open them afresh on the
basis of advice from their Head Office. The fixed assets accounts are also
maintained at the Head Office.
The goods from the Head Office are invoiced at selling prices to give a profit of 20
per cent on the sale price. The goods sent from the branch to Head Office are at
cost. From the following prepare Branch Trading and Profit & Loss Account and
Branch fixed Assets Account in the Head Office Books.
Trial Balance of the Delhi Branch as on 31-12-20X1

Debit ` Credit `
Head office opening balance on 15,000 Sales 1,00,000
1-1-20X1
Goods from H.O. 50,000 Goods to H.O. 3,000

Purchases 20,000 Head Office Current A/c 15,000

Opening Stock Sundry Creditors 3,000
(H.O. supplies goods at invoice 4,000
prices)
Opening Stock of other goods 500
Salaries 7,000

© The Institute of Chartered Accountants of India

 15.66 ADVANCED ACCOUNTING

Rent 3,000
Office expenditure 2,000

Cash on Hand 500

Cash at Bank 4,000
Sundry Debtors 15,000

1,21,000 1,21,000

The Branch balances as on 1st January, 20X1, were as under: Furniture ` 5,000;
Sundry Debtors ` 9,500; Cash ` 1,000, Creditors ` 30,000. The closing stock at
branch of the head office goods at invoice price is ` 3,000 and that of purchased
goods at cost is ` 1,000. Depreciation is to be provided at 10 per cent on branch
assets.
Solution
Delhi Branch Trading and Profit & Loss Account
for the year ended 31st Dec., 20X1
` `
To Opening By Sales 1,00,000
Stock:
Head office 3,200 By Goods from 3,000
Goods Branch
(4,000 x 80%) By Closing Stock:
Others 500 3,700 Head Office 2,400
goods
(3,000 x 80%)
To Goods to 40,000 Others 1,000 3,400
Branch
(50,000 x 80%)
To Purchases 20,000
To Gross Profit 42,700
c/d
1,06,400 1,06,400

© The Institute of Chartered Accountants of India

 ACCOUNTING FOR BRANCHES INCLUDING 15.67
FOREIGN BRANCHES

To Salaries 7,000 By Gross profit 42,700

b/d
To Rent 3,000
To Office 2,000
Expenses
To Dep. on 500
furniture @
10%
To Net profit 30,200
42,700 42,700
Branch (Fixed) Assets Account (In Head Office Books)

20X1 ` 20X1 `
Jan. 1 To Balance b/d 5,000 Dec. 31 By Delhi Branch A/c 500
(Depreciation)
By Balance c/d 4,500
5,000 5,000
20X2
Jan. 1 To Balance b/d 4,500

Note: Furniture A/c is maintained in Head office books; it is not a part of either
opening or closing balance.

10. FOREIGN BRANCHES

Foreign branches generally maintain independent and complete record of
business transacted by them in currency of the country in which they operate.
Thus, problems of incorporating balances of foreign branches relate mainly to
translation of foreign currency into Indian rupees. This is because exchange rate
of Indian rupee is not stable in relation to foreign currencies due to international
demand and supply effects on various currencies. The accounting principles which
apply to inland branches also apply to a foreign branch after converting the trial
balance of the foreign branch in the Indian currency.

© The Institute of Chartered Accountants of India

 15.68 ADVANCED ACCOUNTING

11. ACCOUNTING FOR FOREIGN BRANCHES

For the purpose of accounting, AS 11 (revised 2003) classifies the foreign
branches may be classified into two types:
• Integral Foreign Operation;
• Non- Integral Foreign Operation.

Let us discuss these two types of foreign branches in detail.

11.1. Integral Foreign Operation (IFO)

It is a foreign operation, the activities of which are an integral part of those of the
reporting enterprise. The business of IFO is carried on as if it were an extension of
the reporting enterprise’s operations. For example, sale of goods imported from
the reporting enterprise and remittance of proceeds to the reporting enterprise.

11.2. Non-Integral Foreign Operation (NFO)

It is a foreign operation that is not an Integral Foreign Operation. The business of
a NFO is carried on in a substantially independent way by accumulating cash and
other monetary items, incurring expenses, generating income and arranging
borrowing in its local currency. An NFO may also enter into transactions in foreign
currencies, including transactions in the reporting currency. An example of NFO
may be production in a foreign currency out of the resources available in such
country independent of the reporting enterprise.

The following are the indicators of Non- Integral Foreign Operation-

• Control by reporting enterprises - While the reporting enterprise may control

the foreign operation, the activities of foreign operation are carried
independently without much dependence on reporting enterprise.

• Transactions with the reporting enterprises are not a high proportion of the
foreign operation’s activities.

• Activities of foreign operation are mainly financed by its operations or from

local borrowings. In other words, it raises finance independently and is in
no way dependent on reporting enterprises.

© The Institute of Chartered Accountants of India

 ACCOUNTING FOR BRANCHES INCLUDING 15.69
FOREIGN BRANCHES

• Foreign operation sales are mainly in currencies other than reporting

currency.

• All the expenses by foreign operations are primarily paid in local currency,
not in the reporting currency.

• Day-to-day cash flow of the reporting enterprises is independent of the

foreign enterprises cash flows.

• Sales prices of the foreign enterprises are not affected by the day-to-day
changes in exchange rate of the reporting currency of the foreign operation.

• There is an active sales market for the foreign operation product.

The above are only indicators and not decisive/conclusive factors to classify the
foreign operations as non-integral, much will depend on factual information,
situations of the particular case and, therefore, judgment is necessary to
determine the appropriate classification.
Controversies may arise in deciding the foreign branches of the enterprises into
integral or non-integral. However, there may not be any controversy that
subsidiary associates and joint ventures are non-integral foreign operation.
In case of branches classified as independent for the purpose of accounting are
generally classified as non-integral foreign operations.

12. TECHNIQUES FOR FOREIGN CURRENCY

TRANSLATION
12.1 Integral Foreign Operation (IFO)
Following are the standard recommendations for foreign currency translation:
(1) All transactions of IFO be translated at the rate prevailing on the date of
transaction. This will require date wise details of the transaction entered by
that operation together with the rates. Weekly or monthly average rate is
permitted if there are no significant variations in the rate.

© The Institute of Chartered Accountants of India

 15.70 ADVANCED ACCOUNTING

(2) Translation at the balance sheet date-

(i) Monetary items 1 at closing rate;

(ii) Non-monetary items 2: The cost and depreciation of the tangible fixed
assets is translated using the exchange rate at the date of purchase of
the asset if asset is carried at cost. If tangible fixed asset is carried at
fair value, translation should be done using the rate existed on the
date of the valuation.
(iii) The cost of inventories is translated at the exchange rates that existed
when the cost of inventory was incurred and realizable value is
translated applying exchange rate when realizable value is determined
which is generally closing rate.

(iv) Exchange difference arising on the translation of the financial

statement of integral foreign operation should be charged to profit
and loss account.

12.2 Non-Integral Foreign Operation

Accounts of non-integral foreign operation are translated using the following
principles:
• Balance sheet items i.e. Assets and Liabilities both monetary and non-
monetary – apply closing exchange rate.

• Items of income and expenses – At actual exchange rates on the date of

transactions. However, accounting standard allows average rate subject to
materiality.

• Resulting exchange rate difference should be accumulated in a “foreign

currency translation reserve” until the disposal of “net investment in non-
integral foreign operation”.

1
Monetary items are money held and assets and liabilities to be received or paid in fixed or
determinable amounts of money. Cash, receivables and payables are examples of monetary
items.
2
Non-monetary items are assets and liabilities other than monetary items. Fixed assets,
investments in equity shares, inventories are examples of non-monetary assets.

© The Institute of Chartered Accountants of India

 ACCOUNTING FOR BRANCHES INCLUDING 15.71
FOREIGN BRANCHES

Items Integral Foreign Non Integral Foreign

Operations Operations

Monetary Items (Cash, Closing rate Closing rate

Bank Balance, Debtor,
Creditor, Loans, Bills
receivable, Bills Payable)

Non-Monetary Items Rate on date of purchase Closing rate

(Fixed Assets)

Inventory Generally, closing rate Closing rate

(but if rate on the date
of purchase of inventory
is available, then that
rate)

Profit and Loss items Average rate Average rate

(revenue items)
(but if rate on the date (but if rate on the date
of transaction is of transaction is
available, then that rate) available, then that rate)

Exchange Difference Charge to P&L account. Accumulated in Foreign

Currency Translation
reserve.

13. CHANGE IN CLASSIFICATION

When there is a change in classification, accounting treatment is as under-

13.1 Integral to Non-Integral

(i) Translation procedure applicable to non-integral shall be followed from the
date of change.

© The Institute of Chartered Accountants of India

 15.72 ADVANCED ACCOUNTING

(ii) Exchange difference arising on the translation of non-monetary assets at

the date of re-classification is accumulated in foreign currency translation
reserve.

13.2 Non-Integral to Integral

(i) Translation procedure as applicable to integral should be applied from the
date of change.
(ii) Translated amount of non-monetary items at the date of change is treated as
historical cost.
(iii) Exchange difference lying in foreign currency translation reserve is not to be
recognized as income or expense till the disposal of the operation even if
the foreign operation becomes integral.
Illustration 15
On 31st December, 20X2 the following balances appeared in the books of Chennai
Branch of an English firm having its HO office in New York:

Amount in` Amount in`

Stock on 1st Jan., 20X2 2,34,000

Purchases and Sales 15,62,500 23,43,750
Debtors and Creditors 7,65,000 5,10,000
Bills Receivable and Payable 2,04,000 1,78,500
Salaries and Wages 1,00,000 -

Rent, Rates and Taxes 1,06,250 -

Furniture 91,000 -
Bank A/c 5,68,650

New York Account - 5,99,150

36,31,400 36,31,400

Stock on 31st December, 20X2 was ` 6,37,500.

Branch account in New York books showed a debit balance of $ 13,400 on
31st December, 20X2 and Furniture appeared in the Head Office books at $ 1,750.

© The Institute of Chartered Accountants of India

 ACCOUNTING FOR BRANCHES INCLUDING 15.73
FOREIGN BRANCHES

The rate of exchange for 1 $ on 31 st December, 20X1 was ` 52 and on 31st

December, 20X2 was ` 51. The average rate for the year was ` 50.
Prepare in the Head Office books the Profit and Loss a/c and the Balance Sheet of the
Branch assuming integral foreign operation.
Solution
In the books of English Firm (Head Office in New York)
Chennai Branch Profit and Loss Account
for the year ended 31st December, 20X2

$ $

To Opening stock 4,500 By Sales 46,875

To Purchases 31,250 By Closing stock 12,500
To Gross profit c/d 23,625 (6,37,500 / 51)

59,375 59,375

To Salaries 2,000 By Gross profit b/d 23,625

To Rent, rates and taxes 2,125

To Exchange translation loss 2,000
To Net Profit c/d 17,500

23,625 23,625
Balance Sheet of Chennai Branch
as on 31st December, 20X2

Liabilities $ $ Assets $

Head Office A/c 13,400 Furniture 1,750

Add: Net profit 17,500 30,900 Closing Stock 12,500

Trade creditors 10,000 Trade Debtors 15,000

Bills Payable 3,500 Bills Receivable 4,000
Cash at bank 11,150

44,400 44,400

© The Institute of Chartered Accountants of India

 15.74 ADVANCED ACCOUNTING

Working Note:
Calculation of Exchange Translation Loss
Chennai Branch Trial Balance (converted in $)
as on 31st December, 20X2

Dr. Cr. Conversion Dr. Cr.

` ` Rate ($) ($)

Stock on 1st Jan., 20X2 2,34,000 52 4,500

Purchases & Sales 15,62,500 23,43,750 50 31,250 46,875

Debtors & creditors 7,65,000 5,10,000 51 15,000 10,000

Bills Receivable and Bills 2,04,000 1,78,500 51 4,000 3,500

Payable

Salaries and wages 1,00,000 50 2,000

Rent, Rates and Taxes 1,06,250 50 2,125

Furniture 91,000 1,750

Bank A/c 5,68,650 51 11,150

New York Account 5,99,150 13,400

Exchange translation loss (bal.

fig.) 2,000

36,31,400 36,31,400 73,775 73,775

Illustration 16
S & M Ltd., Bombay, have a branch in Sydney, Australia. Sydney branch is an
integral foreign operation of S & M Ltd.
At the end of 31st March, 20X2, the following ledger balances have been extracted
from the books of the Bombay Office and the Sydney Office:

© The Institute of Chartered Accountants of India

 ACCOUNTING FOR BRANCHES INCLUDING 15.75
FOREIGN BRANCHES

Bombay Sydney
(` thousands) (Austr dollars
thousands)
Debit Credit Debit Credit
Share Capital – 2,000 – –
Reserves & Surplus – 1,000 – –
Land 500 – – –
Buildings (Cost) 1,000 – – –
Buildings Dep. Reserve – 200 – –
Plant & Machinery (Cost) 2,500 – 200 –
Plant & Machinery Dep. – 600 – 130
Reserve
Debtors / Creditors 280 200 60 30
Stock (1.4.20X1) 100 – 20 –
Branch Stock Reserve – 4 – –
Cash & Bank Balances 10 – 10 –
Purchases / Sales 240 520 20 123
Goods sent to Branch – 100 5 –
Managing Director’s salary 30 – – –
Wages & Salaries 75 – 45 –
Rent – – 12 –
Office Expenses 25 – 18 –
Commission Receipts – 256 – 100
Branch / H.O. Current A/c 120 – – 7
4,880 4,880 390 390

The following information is also available:

(1) Stock as at 31.3.20X2:
Bombay ` 1,50,000

Sydney A $ 3,125

© The Institute of Chartered Accountants of India

 15.76 ADVANCED ACCOUNTING

You are required to convert the Sydney Branch Trial Balance into rupees;
Use the following rates of exchange :
Opening rate A $ = ` 20
Closing rate A $ = ` 24
Average rate A $ = ` 22

For Fixed Assets A $ = ` 18

Solution
Sydney Branch Trial Balance (in Rupees)
As on 31st March, 20X2
(` ‘000)

Conversion Rate per A$ Dr. Cr.

Plant & Machinery (cost) ` 18 36,00
Plant & Machinery Dep. Reserve ` 18 23,40
Debtors / Creditors ` 24 14,40 7,20
Stock (1.4.20X1) ` 20 4,00
Cash & Bank Balances ` 24 2,40
Purchase / Sales ` 22 4,40 27,06
Goods received from H.O. – 1,00
Wages & Salaries ` 22 9,90
Rent ` 22 2,64
Office expenses ` 22 3,96
Commission Receipts ` 22 22,00
H.O. Current A/c 1,20
78,70 80,86
Exchange loss (balancing figure) 2,16
80,86 80,86

© The Institute of Chartered Accountants of India

 ACCOUNTING FOR BRANCHES INCLUDING 15.77
FOREIGN BRANCHES

Illustration 17
M/s Carlin has head office at New York (U.S.A.) and branch at Mumbai (India).
Mumbai branch is an integral foreign operation of Carlin & Co.

Mumbai branch furnishes you with its trial balance as on 31st March, 20X2 and the
additional information given thereafter:

Dr. Cr.
Rupees in thousands
Stock on 1st April, 20X1 300 –
Purchases and sales 800 1,200
Sundry Debtors and creditors 400 300
Bills of exchange 120 240
Wages and salaries 560 –
Rent, rates and taxes 360 –
Sundry charges 160 –
Computers 240
Bank balance 420 –
New York office a/c – 1,620
3,360 3,360

Additional information:
(a) Computers were acquired from a remittance of US $ 6,000 received from New
York head office and paid to the suppliers. Depreciate computers at 60% for
the year.
(b) Unsold stock of Mumbai branch was worth ` 4,20,000 on 31st March, 20X2.
(c) The rates of exchange may be taken as follows:
• on 1.4.20X1 @ ` 40 per US $

• on 31.3.20X2 @ ` 42 per US $
• average exchange rate for the year @ ` 41 per US $
• conversion in $ shall be made upto two decimal accuracy.

© The Institute of Chartered Accountants of India

 15.78 ADVANCED ACCOUNTING

You are asked to prepare in US dollars the revenue statement for the year ended
31st March, 20X2 and the balance sheet as on that date of Mumbai branch as
would appear in the books of New York head office of Carlin & Co. You are
informed that Mumbai branch account showed a debit balance of US $ 39609.18 on
31.3.20X2 in New York books and there were no items pending reconciliation.
Solution
M/s Carlin
Mumbai Branch Trial Balance in (US $)
as on 31st March, 20X2

Conversion Dr. Cr.

rate per US $ US $ US $

(`)

Stock on 1.4.X1 40 7,500.00 –

Purchases and sales 41 19,512.20 29,268.29

Sundry debtors and creditors 42 9,523.81 7,142.86

Bills of exchange 42 2,857.14 5,714.29

Wages and salaries 41 13,658.54 –

Rent, rates and taxes 41 8,780.49 –

Sundry charges 41 3,902.44 –

Computers – 6,000.00 –

Bank balance 42 10,000.00 –

New York office A/c – – 39,609.18

81,734.62 81,734.62

© The Institute of Chartered Accountants of India

 ACCOUNTING FOR BRANCHES INCLUDING 15.79
FOREIGN BRANCHES

Trading and Profit & Loss Account

for the year ended 31st March, 20X2

US $ US $
To Opening Stock 7,500.00 By Sales 29,268.29
To Purchases 19,512.20 By Closing stock 10,000.00
(4,20,000/42)
To Wages and salaries 13,658.54 By Gross Loss c/d 1,402.45
40,670.74 40,670.74
To Gross Loss b/d 1,402.45 By Net Loss 17,685.38
To Rent, rates and taxes 8,780.49
To Sundry charges 3,902.44
To Depreciation on 3,600.00
computers
(US $ 6,000 × 0.6)
17,685.38 17,685.38

Balance Sheet of Mumbai Branch

as on 31st March, 20X2

Liabilities US $ Assets US $ US $
New York Office 39,609.18 Computers 6,000.00
A/c
Less: Net Loss (17,685.38) 21,923.80 Less: Depreciation (3,600.00) 2,400.00
Sundry creditors 7,142.86 Closing stock 10,000.00
Bills payable 5,714.29 Sundry debtors 9,523.81
Bank balance 10,000.00
Bills receivable 2,857.14
34,780.95 34,780.95

© The Institute of Chartered Accountants of India

 15.80 ADVANCED ACCOUNTING

SUMMARY
• Types of branches
 Dependent branches
 Independent branches
• Classification of Branches from accounting point of view
 Branches in respect of which the whole of the accounting records are
kept at the head office (Dependent Branches)
 Branches which maintain independent accounting records
(Independent Branches), and

 Foreign Branches.
• Systems of accounting followed by Dependent Branches
 Debtors System: under this system head office makes a branch
account. Anything given to branch is debited and anything received
from branch would be credited.
 Branch trading and profit and loss account (Final accounts)
method/branch account method: Under this system head office
prepares (a) profit and loss account (b) branch account taking each
branch as a separate entity.

 Stock and debtors system: Under this system head office opens:
 Branch Stock Account
 Branch Profit and Loss Account
 Branch Debtors Account
 Branch Expenses Account
 Goods sent to Branch Account
 Branch Asset Account
• Maintenance of comprehensive account books by Independent
Branches Preparation of separate trial balance of each branch in H.O.
books.

© The Institute of Chartered Accountants of India

 ACCOUNTING FOR BRANCHES INCLUDING 15.81
FOREIGN BRANCHES

• Types of Foreign branches

 Integral Foreign Operation (IFO): It is a foreign operation, the activities
of which are an integral part of those of the reporting enterprise.
 Non-Integral Foreign Operation (NFO): It is a foreign operation that is
not an Integral Foreign Operation. The business of a NFO is carried on
in a substantially independent way by accumulating cash and other
monetary items, incurring expenses, generating income and arranging
borrowing in its local currency.
• Non-Integral Foreign Operation -translation
 Balance sheet items i.e. Assets and Liabilities both monetary and non-
monetary – apply closing exchange rate.
 Items of income and expenses – At actual exchange rates on the date
of transactions
 Resulting exchange rate difference should be accumulated in a
“foreign currency translation reserve” until the disposal of “net
investment in non-integral foreign operation”.
• Integral Foreign Operation (IFO) - translation
 All transactions at the rate prevailing on the date of transaction
Translation at the balance sheet date-
 Monetary items at closing rate;
 Non-monetary items: The cost and depreciation of the tangible fixed
assets is translated using the exchange rate at the date of purchase of
the asset if asset is carried at cost. If tangible fixed asset is carried at
fair value, translation should be done using the rate existed on the
date of the valuation.
 The cost of inventories is translated at the exchange rates that existed
when the cost of inventory was incurred and realizable value is
translated applying exchange rate when realizable value is determined
which is generally closing rate.
 Exchange difference arising on the translation of the financial
statement of integral foreign operation should be charged to profit
and loss account.

© The Institute of Chartered Accountants of India

 15.82 ADVANCED ACCOUNTING

TEST YOUR KNOWLEDGE

Multiple Choice Questions
1. If goods are invoiced to branches at cost, trading results of branch can be
ascertained by
(a) Debtors method.
(b) Stock and debtors method.
(c) Either (a) or (b).
(d) Both (a) and (b).
2. Under branch trading and profit loss account method
(a) H.O prepares profit and loss account.
(b) Each branch is treated separate entity.
(c) Both (a) and (b).
(d) Either (a) or (b).
3. Goods may be invoiced to branch at
(a) Cost or Selling price.
(b) Wholesale price.
(c) Both (a) and (b).
(d) Either (a) or (b).
4. Under debtors method, opening balance of debtors is
(a) Debited to branch account.
(b) Credited to branch account.
(c) Debited to H.O account.
(d) Credited to H.O account.
5. Cost of goods returned by branch will have the following effect
(a) Goods sent to branch account will be debited.
(b) Branch stock account will be credited.
(c) Both (a) and (b).
(d) Either (a) or (b).

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 ACCOUNTING FOR BRANCHES INCLUDING 15.83
FOREIGN BRANCHES

Theoretical Questions
6. Why goods are marked on invoice price by the head office while sending
goods to the branch?
7. Differentiate Branch Accounts with Departmental accounts.

Scenario based Questions

8. Goods worth ` 50,000 sent by head office but the branch has received till the
closing date goods for worth ` 40,000 only. Give journal entry in the books of
H.O. and branch for goods in transit.
9. Alphs having head office in Mumbai has a branch in Nagpur. The branch at
Nagpur is an independent branch maintaining separate books of account. On
31.3.20X1, it was found that the goods dispatched by head office for `
2,00,000 was received by the branch only to the extent of ` 1,50,000. The
balance goods are in transit. What is the accounting entry to be passed by
the branch for recording the goods in transit, in its books?
10. Show adjustment journal entry in the books of head office at the end of April,
20X1 for incorporation of inter-branch transactions assuming that only head
office maintains different branch accounts in its books.
A. Delhi branch:
(1) Received goods from Mumbai – ` 35,000 and ` 15,000 from
Kolkata.
(2) Sent goods to Chennai – ` 25,000, Kolkata – ` 20,000.
(3) Bill Receivable received – ` 20,000 from Chennai.

(4) Acceptances sent to Mumbai – ` 25,000, Kolkata – ` 10,000.

B. Mumbai Branch (apart from the above) :
(5) Received goods from Kolkata – ` 15,000, Delhi – ` 20,000.

(6) Cash sent to Delhi – ` 15,000, Kolkata – ` 7,000.

C. Chennai Branch (apart from the above) :
(7) Received goods from Kolkata – ` 30,000.

© The Institute of Chartered Accountants of India

 15.84 ADVANCED ACCOUNTING

(8) Acceptances and Cash sent to Kolkata – ` 20,000 and `10,000

respectively.
D. Kolkata Branch (apart from the above) :
(9) Sent goods to Chennai – ` 35,000.
(10) Paid cash to Chennai – `15,000.
(11) Acceptances sent to Chennai – `15,000.
11. Give Journal Entries in the books of Branch A to rectify or adjust the following:
(i) Head Office expenses ` 3,500 allocated to the Branch, but not recorded
in the Branch Books.
(ii) Depreciation of branch assets, whose accounts are kept by the Head
Office not provided earlier for ` 1,500.
(iii) Branch paid ` 2,000 as salary to a H.O. Inspector, but the amount paid
has been debited by the Branch to Salaries account.
(iv) H.O. collected ` 10,000 directly from a customer on behalf of the
Branch, but no intimation to this effect has been received by the Branch.
(v) A remittance of ` 15,000 sent by the Branch has not yet been received
by the Head Office.
(vi) Branch A incurred advertisement expenses of ` 3,000 on behalf of
Branch B.
12. Widespread invoices goods to its branch at cost plus 20%. The branch sells
goods for cash as well as on credit. The branch meets its expenses out of cash
collected from its debtors and cash sales and remits the balance of cash to
head office after withholding ` 10,000 necessary for meeting immediate
requirements of cash. On 31st March, 20X1 the assets at the branch were as
follows:

` (‘000)
Cash in Hand 10
Trade Debtors 384
Stock, at Invoice Price 1,080
Furniture and Fittings 500

© The Institute of Chartered Accountants of India

 ACCOUNTING FOR BRANCHES INCLUDING 15.85
FOREIGN BRANCHES

During the accounting year ended 31st March, 20X2 the invoice price of
goods dispatched by the head office to the branch amounted to ` 1 crore 32
lakhs. Out of the goods received by it, the branch sent back to head office
goods invoiced at ` 72,000. Other transactions at the branch during the year
were as follows:

(` ‘000)
Cash Sales 9,700
Credit Sales 3,140
Cash collected by Branch from Credit Customers 2,842
Cash Discount allowed to Debtors 58
Returns by Customers 102
Bad Debts written off 37
Expenses paid by Branch 842

On 1st January, 20X2 the branch purchased new furniture for ` 1 lakh for
which payment was made by head office through a cheque.
On 31st March, 20X2 branch expenses amounting to ` 6,000 were
outstanding and cash in hand was again ` 10,000. Furniture is subject to
depreciation @ 16% per annum on diminishing balance method.
Prepare Branch Account in the books of head office for the year ended 31st
March, 20X2.
13. On 31st March, 20X2 Kanpur Branch submits the following Trial Balance to its
Head Office at Lucknow :

Debit Balances ` in lacs

Furniture and Equipment 18
Depreciation on furniture 2
Salaries 25
Rent 10
Advertising 6
Telephone, Postage and Stationery 3

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 15.86 ADVANCED ACCOUNTING

Sundry Office Expenses 1

Stock on 1st April, 20X1 60
Goods Received from Head Office 288
Debtors 20
Cash at bank and in hand 8
Carriage Inwards 7
448
Credit Balances
Outstanding Expenses 3
Goods Returned to Head Office 5
Sales 360
Head Office 80
448

Additional Information:
Stock on 31st March, 20X2 was valued at ` 62 lacs. On 29th March, 20X2 the
Head Office dispatched goods costing ` 10 lacs to its branch. Branch did not
receive these goods before 1st April, 20X2. Hence, the figure of goods received
from Head Office does not include these goods. Also, the head office has
charged the branch ` 1 lac for centralized services for which the branch has not
passed the entry.
You are required to:
(i) Pass Journal Entries in the books of the Branch to make the necessary
adjustments
(ii) Prepare Final Accounts of the Branch including Balance Sheet, and
(iii) Pass Journal Entries in the books of the Head Office to incorporate the
whole of the Branch Trial Balance.

14. M/s Marena, Delhi has a branch at Bangalore to which office goods are
invoiced at cost plus 25%. The branch sells both for cash and on credit.

© The Institute of Chartered Accountants of India

 ACCOUNTING FOR BRANCHES INCLUDING 15.87
FOREIGN BRANCHES

Branch Expenses are paid direct from head office and the Branch has to remit
all cash received into the Head Office Bank Account.

From the following details, relating to calendar year 20X1, prepare the
accounts in the Head Office Ledger and ascertain the Branch Profit under
Stock and Debtors Method’.

Branch does not maintain any books of account, but sends weekly returns to
the Head Office.

`
Goods received from Head Office at invoice price 45,00,000
Returns to Heads Office at invoice price 90,000
Stock at Bangalore as on 1st January, 20X1 4,50,000
Sales during the year - Cash 15,00,000
- Credit 27,00,000
Sundry Debtors at Bangalore as on 1st January, 20X1 5,40,000
Cash received from Debtors 24,00,000
Discount allowed to Debtors 45,000
Bad Debts in the year 30,000
Sales returns at Bangalore Branch 60,000
Rent, Rates and Taxes at Branch 1,35,000
Salaries, Wages and Bonus at Branch 4,50,000
Office Expenses 45,000
Stock at Branch on 31st December, 20X1 at invoice price 9,00,000
15. Beta, having head office at Mumbai has a branch at Nagpur. The head office
does wholesale trade only at cost plus 80%. The goods are sent to branch at
the wholesale price viz., cost plus 80%. The branch at Nagpur is wholly
engaged in retail trade and the goods are sold at cost to H.O. plus 100%.
Following details are furnished for the year ended 31st March, 20X1:

Head Office Branch

(` ) (` )
Opening stock 2,25,000
Purchases 25,50,000

© The Institute of Chartered Accountants of India

 15.88 ADVANCED ACCOUNTING

Goods sent to branch (Cost to H.0. plus 80%) 9,54,000

Sales 27,81,000 9,50,000
Office expenses 90,000 8,500
Selling expenses 72,000 6,300
Staff salary 65,000 12,000

You are required to prepare Trading and Profit and Loss Account of the head
office and branch for the year ended 31st March, 20X1.
16. Pass necessary Journal entries in the books of an independent Branch of a
business entity to rectify or adjust the following:
(i) Income of ` 2,800 allocated to the Branch by Head Office but not
recorded in the Branch books.
(ii) Branch paid `3,000 as salary to a Head Office Manager, but the amount
paid has been debited by the Branch to Salaries Account.
(iii) Branch incurred travelling expenses of `5,000 on behalf of other
Branches, this was not recorded in the books of Branch.
(iv) A remittance of ` 1,50,000 sent by the Branch has not received by Head
Office on the date of reconciliation of Accounts.
(v) Head Office allocates `75,000 to the Branch as Head Office expenses,
which has not yet been recorded by the Branch.
(vi) Head Office collected `30,000 directly from a Branch Customer. The
intimation of the fact has been received by the Branch only now, not
recorded till now.
(vii) Goods dispatched by the Head office amounting to `10,000, but not
received by the Branch till date of reconciliation. The Goods have been
received subsequently.
17. The Washington branch of XYZ Mumbai sent the following trial balance as on
31st December, 20X1:

$ $
Head office A/c _ 22,800
Sales _ 84,000

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 ACCOUNTING FOR BRANCHES INCLUDING 15.89
FOREIGN BRANCHES

Debtors and creditors 4,800 3,400

Machinery 24,000 _
Cash at bank 1,200 _
Stock, 1 January, 20X1 11,200 _
Goods from H.O. 64,000 _
Expenses 5,000 _
1,10,200 1,10,200
In the books of head office, the Branch A/c stood as follows:
Washington Branch A/c

` `

To Balance b/d 8,10,000 By Cash 28,76,000

To Goods sent to By Balance c/d

branch 29,26,000 8,60,000

37,36,000 37,36,000

Goods are sent to the branch at cost plus 10% and the branch sells goods at
invoice price plus 25%. Machinery was acquired in past, when $ 1.00 = ` 40.
Rates of exchange were:

1st January, 20X1 $ 1.00 = ` 46

31st December, 20X1 $ 1.00 = `48

Average $ 1.00 = ` 47

Machinery is depreciated @ 10% and the branch manager is entitled to a

commission of 5% on the profits of the branch.
You are required to:
(i) Prepare the Branch Trading & Profit & Loss A/c in dollars.

(ii) Convert the Trial Balance of branch into Indian currency and prepare
Branch Trading & Profit and Loss A/c and the Branch A/c in the books
of head office.

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 15.90 ADVANCED ACCOUNTING

ANSWERS/HINTS
Answer to the Multiple Choice Questions
1. (c) 2. (c) 3. (c) 4. (a) 5. (c)

Answer to the Theoretical Questions

6. Goods are marked on invoice price to achieve the following objectives:
(i) To keep secret from the branch manager, the cost price of the goods
and profit made, so that the branch manager may not start a rival and
competitive business with the concern; and
(ii) To have effective control on stock i.e. stock at any time must be equal
to opening stock plus goods received from head office minus sales
made at branch.
(iii) To dictate pricing policy to its branches, as well as save work at branch
because prices have already been decided.
7. Branch accounts may be maintained either at branch or at head office and
no allocation problem arises since the expenses in respect of each branch
can be identified However, Departmental accounts are maintained at one
place only. Common expenses are distributed among the departments
concerned on some equitable basis considered suitable in the case. For
details, refer Para 2 of the Chapter to know the differences.

Answer to Scenario based Questions

8. Journal entry in the books of Head Office
No entry
Journal entry in the books of Branch
` `
Goods-in-transit account Dr. 10,000
To Head Office account 10,000
(Being goods sent by head office is still in transit)

© The Institute of Chartered Accountants of India

 ACCOUNTING FOR BRANCHES INCLUDING 15.91
FOREIGN BRANCHES

9.

Nagpur branch must include the inventory in its books as goods in

transit.
The following journal entry must be made by the branch:

Goods in transit A/c Dr. 50,000

To Head office A/c 50,000
[Being Goods sent by Head office is still in transit on the closing
date]

10. Journal entry in the books of Head Office

Date Particulars Dr. Cr.

` `
30th Mumbai Branch Account Dr.
April, 3,000
20X1
Chennai Branch Account Dr. 70,000
To Delhi Branch Account 15,000
To Kolkata Branch Account 58,000
(Being adjustment entry passed by head
office in respect of inter-branch
transactions for the month of April, 20X1)

Working Note:
Inter – Branch transactions

Delhi Mumbai Chennai Kolkata

` ` ` `

A. Delhi Branch

(1) Received goods 50,000 (Dr.) 35,000 (Cr.) 15,000 (Cr.)

(2) Sent goods 45,000 (Cr.) 25,000 (Dr.) 20,000 (Dr.)

© The Institute of Chartered Accountants of India

 15.92 ADVANCED ACCOUNTING

(3) Received Bills 20,000 (Dr.) 20,000 (Cr.)

receivable

(4) Sent acceptance 35,000 (Cr.) 25,000 (Dr.) 10,000 (Dr.)

B. Mumbai Branch

(5) Received goods 20,000 (Cr.) 35,000 (Dr.) 15,000 (Cr.)

(6) Sent cash 15,000 (Dr.) 22,000 (Cr.) 7,000 (Dr.)

C. Chennai Branch

(7) Received goods 30,000 (Dr.) 30,000 (Cr.)

(8) Sent cash and 30,000 (Cr.) 30,000 (Dr.)

acceptances

D. Kolkata Branch

(9) Sent goods 35,000 (Dr.) 35,000 (Cr.)

(10) Sent cash 15,000 (Dr.) 15,000 (Cr.)

(11) Sent acceptances 15,000 (Dr.) 15,000 (Cr.)

15,000 (Cr.) 3,000 (Dr.) 70,000 (Dr.) 58,000 (Cr.)

11. Books of Branch A

Journal Entries

Particulars Dr. Cr.

Amount Amount `
`
(i) Expenses account Dr. 3,500
To Head office account 3,500
(Being the allocated expenditure by the
head office recorded in branch books)

(ii) Depreciation account Dr. 1,500

To Head office account 1,500
(Being the depreciation provided)

(iii) Head office account Dr. 2,000

© The Institute of Chartered Accountants of India

 ACCOUNTING FOR BRANCHES INCLUDING 15.93
FOREIGN BRANCHES

To Salaries account 2,000

(Being the rectification of salary paid on
behalf of H.O.)

(iv) Head office account Dr. 10,000

To Debtors account 10,000

(Being the adjustment of collection

from branch debtors)

(v) No entry in branch books

(vi) Head Office account Dr. 3,000

To Cash account 3,000
(Being the expenditure on account of
Branch B, recorded in books)

Note: Entry (vi) Inter branch transactions are routed through Head Office.
12. In the Head Office Books
Branch Account
for the year ended 31st March, 20X2
` ‘000 `’000
To Balance b/d By Balance b/d
Cash in hand 10 Stock reserve ` 1,080 × 180
Trade debtors 384 1
6
Stock 1,080 By Goods sent to branch 72
Furniture and fittings 500 A/c (Returns to H.O.)
To Goods sent to branch 13,200 By Goods sent to branch 2,188
A/c 100 A/c (Loading on net
To Bank A/c (Payment for goods sent to branch –
furniture) 245  1
To Balance c/d Stock By
 13,128 × 6 
 
 1 Bank A/c (Remittance
reserve  1,470 × 
 6 from branch to H.O.) 11,700
(W.N.5)

© The Institute of Chartered Accountants of India

 15.94 ADVANCED ACCOUNTING

To Net profit transferred By Balance c/d

to General P/L
account 1,096 Cash in hand 10
To Balance c/d - Trade debtors (W.N.3) 485
Outstanding 6 Stock (W.N.1) 1,470
expenses
Furniture and fittings
(W.N.4) 516
16,621 16,621

Working Notes:

1. Invoice price and cost

Let cost be 100
So, invoice price 120
Loading 20
Loading: Invoice price= 20 : 120 =1:6
2. Memorandum Branch Stock Account
` ‘000 ` ‘000
To Balance b/d 1,080 By Goods sent to 72
branch
To Goods sent to 13,200 By Branch Cash 9,700
branch
To Branch debtors 102 By Branch debtors 3,140
By Balance c/d 1,470
14,382 14,382

3. Memorandum Branch Debtors Account

` ‘000 ` ‘000
To Balance b/d 384 By Branch cash 2,842
To Branch stock 3,140 By Branch expenses 58
discount
By Branch stock 102
(Returns)
By Branch expenses

© The Institute of Chartered Accountants of India

 ACCOUNTING FOR BRANCHES INCLUDING 15.95
FOREIGN BRANCHES

(Bad debts) 37
By Balance b/d 485
3,524 3,524

4. Memorandum Branch Furniture and Fittings Account

` ‘000 ` ‘000
To Balance b/d 500 By Depreciation 84
[(500x16%) + (100
x 16% x 3/12)]
To Bank 100 By Balance c/d 516
600 600
Note: Since the new furniture was purchased on 1st Jan 20X2
depreciation will be for 3 months.

5. Memorandum Branch Cash Account

` ‘000 ` ‘000
To Balance b/d 10 By Branch expenses 842
To Branch stock 9,700 By Remittances to 11,700
H.O. (b.f)
To Branch debtors 2,842 By Balance b/d 10
12,552 12,552

13. (i) Books of Branch

Journal Entries

(` in lacs)
Dr. Cr.
Goods in Transit A/c Dr. 10
To Head Office A/c 10
(Goods dispatched by head office but not
received by branch before 1st April, 20X2)
Expenses A/c Dr. 1

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 15.96 ADVANCED ACCOUNTING

To Head Office A/c 1

(Amount charged by head office for
centralised services)

(ii) Trading and Profit & Loss Account of the Branch

for the year ended 31st March, 20X2

` in lacs ` in lacs
To Opening Stock 60 By Sales 360
To Goods received from By Closing Stock 72
including
transit
Head Office 288+10
Less: Returns (5) 293
To Carriage Inwards 7
To Gross Profit c/d 72
432 432
To Salaries 25 By Gross Profit 72
b/d
To Depreciation on 2
Furniture
To Rent 10
To Advertising 6
To Telephone, Postage & 3
Stationery
To Sundry Office Expenses 1
To Head Office Expenses 1
(centralised services)
To Net Profit Transferred to
Head Office A/c 24
72 72

© The Institute of Chartered Accountants of India

 ACCOUNTING FOR BRANCHES INCLUDING 15.97
FOREIGN BRANCHES

Balance Sheet as on 31st March, 20X2

Liabilities ` in lacs Assets ` in lacs

Head Office 80 Furniture & Equipment 20

Add: Goods in 10 Less: Depreciation (2) 18

transit Stock in hand 62

Head Office Goods in Transit 10

Expenses 1 Debtors 20

Net Profit 24 115 Cash at bank and in

Outstanding hand 8

Expenses 3

118 118

(iii) Books of Head Office

Journal Entries

` `

Dr. Dr.

Branch Trading Account Dr. 365

To Branch Account 365

(The total of the following items in branch trial

balance debited to branch trading account:

` in lacs

Opening Stock 60

Goods received from Head Office 288

Goods purchased but not received 10

Carriage Inwards 7

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 15.98 ADVANCED ACCOUNTING

Branch Account Dr. 437

To Branch Trading Account 437
(Total sales, closing stock and goods returned to
Head Office credited to branch trading account,
individual amount being as follows:
` in lacs
Sales 360
Closing Stock 62
Goods in transit 10
Goods returned to Head Office 5)
Branch Trading Account Dr. 72
To Branch Profit and Loss Account 72
(Gross profit earned by branch credited to Branch
Profit and Loss Account)
Branch Profit and Loss Account Dr. 48
To Branch Account 48
(Total of the following branch expenses debited to
Branch Profit & Loss Account:
` in lacs
Salaries 25
Rent 10
Advertising 6
Telephone, Postage & Stationery 3
Sundry Office Expenses 1
Head Office Expenses 1
Depreciation on furniture 2)

Branch Profit & Loss Account Dr. 24

To Profit and Loss Account 24
(Net profit at branch credited to general Profit &
Loss A/c)

© The Institute of Chartered Accountants of India

 ACCOUNTING FOR BRANCHES INCLUDING 15.99
FOREIGN BRANCHES

Branch Furniture & Equipment Dr. 18

Branch Stock Dr. 62
Branch Debtors Dr. 20
Branch Cash at Bank and in Hand Dr. 8
Goods in Transit Dr. 10
To Branch 118
(Incorporation of different assets at the branch in
H.O. books)
Branch Dr. 3
To Branch Outstanding Expenses 3
(Incorporation of Branch Outstanding Expenses in
H.O. books)
14. Bangalore Branch Stock Account

Particulars Amount (`) Particulars Amount (`)

To Balance b/d 4,50,000 By Goods sent to 90,000

Goods sent to branch A/c
(Returns)

branch A/c 45,00,000 By Bank A/c (Cash 15,00,000

sales)

To Branch debtors 60,000 By Branch debtors A/c 27,00,000

A/c (Returns) (credit sales)

To Branch By Balance c/d 9,00,000

adjustment A/c
(Surplus over
invoice price)* 1,80,000

51,90,000 51,90,000

*Alternatively, this may directly be transferred to Branch P&L A/c without

routing it through Branch Adjustment Account.

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 15.100 ADVANCED ACCOUNTING

Bangalore Branch Adjustment Account

Particulars Amount Particulars Amount

(`) (`)

To Stock reserve - 20% 1,80,000 By Stock reserve - 20% 90,000

of ` 9,00,000 of ` 4,50,000
(closing stock) (Opening stock)

To Branch profit & loss 9,72,000 By Goods sent to 8,82,000

A/c (Gross profit) branch A/c – 20%
of ` 44,10,000
(45,00,000 – 90,000)

__ By Branch stock A/c 1,80,000

11,52,000 11,52,000

Branch Profit & Loss Account

Particulars Amount Particulars Amount

(`) (`)
To Branch expenses A/c 6,30,000 By Branch adjustment 9,72,000
A/c
To Branch debtors A/c 45,000 (Gross Profit)
(Discount)
To Branch Debtors A/c 30,000
(Bad debts)
To Net profit
(transferred to Profit
& Loss A/c) 2,67,000
9,72,000 9,72,000

© The Institute of Chartered Accountants of India

 ACCOUNTING FOR BRANCHES INCLUDING 15.101
FOREIGN BRANCHES

Branch Expenses Account

Particulars Amount Particulars Amount
(`) (`)
To Bank A/c (Rent, 1,35,000 By Branch profit and 6,30,000
rates & taxes) loss A/c (Transfer)
To Bank A/c (Salaries, 4,50,000
wages& bonus)
To Bank A/c (Office
expenses) 45,000
6,30,000 6,30,000

Branch Debtors Account

Particulars Amount Particulars Amount

(`) (`)
To Balance b/d 5,40,000 By Bank A/c 24,00,000
To Branch stock A/c 27,00,000 By Branch profit and 75,000
loss A/c (Bad debts
and discount)
By Branch stock A/c 60,000
(Sales returns)
By Balance c/d (bal.
fig.) 7,05,000
32,40,000 32,40,000

Goods sent to Branch Account

Particulars Amount Particulars Amount

(`) (`)
To Branch stock A/c 90,000 By Branch stock 45,00,000
A/c
To Branch adjustment 8,82,000
A/c
To Purchases A/c 35,28,000
45,00,000 45,00,000

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 15.102 ADVANCED ACCOUNTING

15. Trading and Profit and Loss A/c

For the year ended 31st March 20X1

Head Branch Head Branch

office office
` ` ` `
To Opening 2,25,000 - By Sales 27,81,000 9,50,000
stock
To Purchases 25,50,000 - By Goods 9,54,000 _
sent to
branch
To Goods - 9,54,000 By 7,00,000 99,000
received Closi
from head ng
office stock
(W.N.1
& 2)
To Gross 16,60,000 95,000
profit c/d
44,35,000 10,49,000 44,35,000 10,49,000
To Office 90,000 8,500 By Gross 16,60,000 95,000
expenses profit
b/d
To Selling 72,000 6,300
expenses
To Staff 65,000 12,000
salaries
To Branch 44,000 _
Stock
Reserve
(W.N.3)
To Net Profit 13,89,000 68,200
16,60,000 95,000 16,60,000 95,000

© The Institute of Chartered Accountants of India

 ACCOUNTING FOR BRANCHES INCLUDING 15.103
FOREIGN BRANCHES

Working Notes:

(1) Calculation of closing stock of head office: `

Opening Stock of head office 2,25,000
Goods purchased by head office 25,50,000
27,75,000
Less: Cost of goods sold [37,35,000 x 100/180] (20,75,000)
7,00,000
(2) Calculation of closing stock of branch: `
Goods received from head office [At invoice value] 9,54,000
Less: Invoice value of goods sold [9,50,000 x 180/200] (8,55,000)
99,000
(3) Calculation of unrealized profit in branch stock:
Branch stock ` 99,000
Profit included 80% of cost
Hence, unrealized profit would be = ` 99,000 x 80/180 ` 44,000

16. Books of Branch

Journal Entries
Sr. Amount in `
No Particulars Dr. Cr.
(i) Head Office Account Dr. 2,800
To Income Account 2,800
(Being the income allocated by the Head office
not recorded earlier, now recorded)
(ii) Head Office Account Dr. 3,000
To Salaries Account 3,000
(Being rectification of salary paid on behalf of
Head Office)
(iii) Head Office Account Dr. 5,000
To Cash Account 5,000
(Being expenditure incurred on account of
other branch, now recorded in books)

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 15.104 ADVANCED ACCOUNTING

(iv) No entry in Branch Books is required.

(v) Expenses Account Dr. 75,000
To Head Office Account 75,000
(Being allocated expenses of Head Office
recorded)
(vi) Head Office Account Dr. 30,000
To Debtors Account 30,000
(Being adjustment entry for collection from
Branch Debtors directly by Head Office)
(vii) Goods -in- transit Account Dr. 10,000
To Head Office Account 10,000
(Being goods sent by Head Office still in-
transit)

17. (i) In the Books of Head Office

Branch Trading and Profit & Loss A/c (in Dollars)
for the year ended 31st December, 20X1

Particulars $ Particulars $
To Opening stock 11,200 By Sales 84,000
To Goods from H.O. 64,000 By Closing stock 8,000
(W.N.2)
To Gross profit c/d 16,800
92,000 92,000
To Expenses 5,000 By Gross profit b/d 16,800
To Depreciation (24,000 x 2,400
10%)
To Manager’s commission 470
(W.N.1)
To Net profit c/d 8,930
16,800 16,800

© The Institute of Chartered Accountants of India

 ACCOUNTING FOR BRANCHES INCLUDING 15.105
FOREIGN BRANCHES

(ii) (a) Converted Branch Trial Balance (into Indian Currency)

Particulars Rate per $ Dr. (`) Cr. (`)

Machinery 40 9,60,000 _
Stock January 1, 20X1 46 5,15,200 _
Goods from head office Actual 29,26,000 _
Sales 47 _ 39,48,000
Expenses 47 2,35,000 _
Debtors & creditors 48 2,30,400 1,63,200
Cash at bank 48 57,600 _
Head office A/c Actual _ 8,60,000
Difference in exchange rate (b.f.) 47,000 _
49,71,200 49,71,200
Closing stock $ 8,000 (W.N. 2) 48 `
3,84,000
(b) Branch Trading and Profit & Loss A/c for the year ended
31st December, 20X1
` `
To Opening stock 5,15,200 By Sales 39,48,000
To Goods from 29,26,000 By Closing stock 3,84,000
head office (W.N.2)
To Gross profit c/d 8,90,800
43,32,000 43,32,000
To Expenses 2,35,000 By Gross profit b/d 8,90,800
To Depreciation @
10% on ` 96,000
9,60,000
To Exchange 47,000
difference
To Manager’s
commission 22,560
(W.N.1)
To Net Profit c/d 4,90,240
8,90,800 8,90,800

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 15.106 ADVANCED ACCOUNTING

(c) Branch Account

` `
To Balance b/d 8,60,000 By Machinery 9,60,000
To Net profit 4,90,240 Less: Depreciation (96,000)
To Creditors 1,63,200 8,64,000
To Outstanding By Closing stock 3,84,000
commission By Debtors 2,30,400
22,560
By Cash at bank 57,600
15,36,000 15,36,000

Working Notes:
1. Calculation of manager’s commission @ 5% on profit

i.e. 5% of $[16,800 – (5,000 + 2,400)]

Or 5% × $9,400 = $ 470
Manager’s commission in Rupees = $ 470 × ` 48 = ` 22,560
2. Calculation of closing stock

$
Opening stock 11,200
Add: Goods from head office 64,000
75,200
Less: Cost of goods sold (at invoice price)
100
i.e. × 84,000
125 (67,200)
Closing stock 8,000
Closing stock in Rupees = $8,000 x ` 48 = ` 3,84,000.

Note: Manager is entitled to commission on profits earned at the end

of the year.

© The Institute of Chartered Accountants of India

 CASE SCENARIOS

Case Scenario 1
RTS Ltd, (“RTS” or the “Company”), is engaged in the business of manufacturing of
equipments/components. The Company has a contract with the Indian Railways for
a brake component which is structured such that:
♦ The Company’s obligation is to deliver the component to the Railways’
stockyard, while the delivery terms are ex-works, the Company is responsible
for engaging a transporter for delivery.
♦ Railways sends an order for a defined quantity.
♦ The Company manufactures the required quantity and informs Railways for
carrying out the inspection.
♦ Railways representatives visit the Company’s factory and inspect the
components, and mark each component with a quality check sticker.
♦ Goods once inspected by Railways, are marked with a hologram sticker to
earmark for delivery identification by the customer when they are delivered
to the customer’s location.
♦ The Company raises an invoice once it dispatches the goods.
The management of RTS is under discussion with the auditors of the Company in
respect of accounting of a critical matter as regards its accounting with respect
subsequent events i.e. events after the reporting period. They have been checking
as to which one of the following events after the reporting period provide evidence
of conditions that existed at the end of the reporting period?

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 CS.2 ADVANCED ACCOUNTING

i. Nationalisation or privatization by government

ii. Out of court settlement of a legal claim
iii. Rights issue of equity shares

iv. Strike by workforce

v. Announcing a plan to discontinue an operation
The Company has received a grant of ` 8 crores from the Government for setting
up a factory in a backward area. Out of this grant, the Company distributed ` 2
crores as dividend. The Company also received land, free of cost, from the State
Government but it has not recorded this at all in the books as no money has been
spent.
RTS has a subsidiary, A Ltd, which is evaluating its production process wherein
normal waste is 5% of input. 5,000 MT of input were put in process resulting in
wastage of 300 MT. Cost per MT of input was ` 1,000. The entire quantity of waste
was on stock at the end of the financial year.
(i) When should RTS Ltd recognize revenue as per the Accounting Standards
notified under the Companies (Accounting Standards) Rules, 2006? Would
your answer be different if inspection is normally known to lead to no quality
rejections?
(a) Revenue should be recognized on dispatch of components. The
assessment would not change even in case where inspection is normally
known to lead to no quality rejections.
(b) Revenue should be recognized on completion of inspection of
components. The assessment would not change even in case where
inspection is normally known to lead to no quality rejections.
(c) Revenue should be recognized on dispatch of components. The
assessment would change where inspection is normally known to lead
to no quality rejections.
(d) Revenue should be recognized on delivery of the component to the
Railways’ stockyard. The assessment would change where inspection is
normally known to lead to no quality rejections.

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 CASE SCENARIOS CS.3

(ii) In respect of A Ltd, state with reference to Accounting Standards notified

under the Companies (Accounting Standards) Rules, 2006, what would be
value of the inventory to be recorded in the books of accounts?
(a) ` 4,700,000.
(b) ` 5,000,000.
(c) ` 4,950,000.
(d) ` 4,947,368.
(iii) Please guide regarding the accounting treatment of both the grants
mentioned above in line with the requirements of Accounting Standard 12.

(a) Distribution of dividend out of grant is correct. In the second case also
not recording land in the books of accounts is correct.
(b) Distribution of dividend out of grant is incorrect. In the second case,
not recording land in the books of accounts is correct.
(c) Distribution of dividend out of grant is correct. In the second case, land
should be recorded in the books of accounts at a nominal value.
(d) Distribution of dividend out of grant is incorrect. In the second case,
land should be recorded in the books of accounts at a nominal value.

Answers
(i) (b) (ii) (d) (iii) (d)

Case Scenario 2
Suman Ltd. is in the business of manufacturing electronics equipment and selling
these at its various outlets. It provides installation services for the equipment sold
and also provide free 1 year warranty on all the sold products.
Beach Resorts are leading resorts in the city. It purchased 5 air conditioners (AC)
from Suman Ltd. for its resort. Suman Ltd. sold 5 AC to Beach resort for ` 45,000
each which includes installation fees of ` 1,000 for each AC. The Company also
offers 1 year warranty for any repair etc. The Company also offered ` 500 per AC
as trade discount. Beach resort placed order on March 15, 2024 and made payment
on March 20, 2024. The ACs were delivered on March 27, 2024 and the installation
was completed on April 5, 2024.

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 CS.4 ADVANCED ACCOUNTING

(i) How much revenue should be recognised by the Company as on March 31,
2024:
(a) ` 2,25,000
(b) ` 2,17,500
(c) ` 2,00,000
(d) ` 2,30,000
(ii) How much revenue should be recognised by the Company in the financial
year 2024-25:
(a) ` 5000
(b) ` 2,20,000
(c) ` 10,000
(d) ` 2,40,000
(iii) What will be the accounting for trade discount:
(a) The same will be recognised separately in the profit and loss.
(b) The trade discounts are deducted in determining the revenue.
(c) Trade discount will be recognised after one year, when the warranty will
be over.
(d) Trade discount will be recognised after installation is complete.
(iv) Is the Company required to do any accounting for 1 year warranty provided
by it:
(a) No accounting treatment is required till some warranty claim is actually
received by the Company.
(b) As there exist a present obligation to provide warranty to customers for
1 year, the Company should estimate the amount that it may have to
incur considering various factors including past trends and create a
provision as per AS 29.
(c) Accounting for claims will be done on cash basis i.e. expense will be
recognised when expense is made.

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 CASE SCENARIOS CS.5

(d) As the Company is not charging separately for the warranty provided,
there is no need to create any provision.

Answers
(i) (b) (ii) (a) (iii) (b) (iv) (b)

Case Scenario 3
Mars Ltd. is a manufacturing enterprise which is starting a new manufacturing plant
at X Village. It has commenced construction of the plant on April 1, 2023 and has
incurred following expenses:
♦ It has acquired land for installing Plant for ` 50,00,000

♦ It incurred ` 35,00,000 for material and direct labour cost for developing the
Plant.
♦ The Company incurred ` 10,00,000 for head office expenses at New Delhi
which included rent, employee cost and maintenance expenditure.
♦ The Company borrowed ` 25,00,000 for construction work of Plant @12% per
annum on April 1, 2023. Director finance of the Company incurred travel and
meeting expenses amounting to ` 5,00,000 during the year for arranging this
loan.
♦ On November 1, 2023, the construction activities of the plant were
interrupted as the local people alongwith the activists have raised issues
relating to environmental impact of plant being constructed. Due to agitation
the construction activities came to standstill for 3 months.
♦ With the help of Government and NGOs, the agitation was over by February
28, 2024 and the work resumed. However, to balance the impact on
environment, government ordered the company to install certain devices for
which the Company had to incur ` 6,00,000 in March 2024.
♦ The rate of depreciation on Plant is 10%.
Based on the above information, answer the following questions.
(i) Which of the following expenses cannot be included in the cost of plant:

(a) Cost of Land

© The Institute of Chartered Accountants of India

 CS.6 ADVANCED ACCOUNTING

(b) Construction material and labour cost

(c) Head office expenses
(d) Borrowing cost

(ii) How much amount of borrowing cost can be capitalised with the plant:
(a) ` 300,000
(b) ` 2,00,000

(c) ` 7,00,000
(d) ` 6,00,000
(iii) The total cost of plant as on march 31, 2024 will be:
(a) ` 85,00,000
(b) ` 98,00,000
(c) ` 93,00,000
(d) ` 95,00,000
(iv) The amount of depreciation to be charged for the year end March 31, 2024
(a) ` 4,30,000
(b) ` 9,30,000
(c) ` 9,80,000
(d) Nil

Answers
(i) (c) (ii) (b) (iii) (c) (iv) (d)

Case Scenario 4
Beloved Finance Ltd. is a financial enterprise which is in the business of lending
loan to small businesses and earn interest on loans.
♦ During the year the Company has lend 50 crores and earned ` 1.5 crore as
interest on loans.

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 CASE SCENARIOS CS.7

♦ The Company had surplus funds during the year and invested then in Fixed
Deposits with bank and earned interest on fixed deposits of ` 20 lacs.
♦ The Company also acquired a gold loan unit for ` 10 crore during the year
and the Company provided interest free loan of ` 15 crore to its wholly-
owned subsidiary.
♦ The Company paid a total income tax of ` 75 lacs for the year.
Based on the above information, answer the following questions.
(i) In the Cash Flow Statement as per AS 3, the interest income of ` 1.5 crore
earned on earned on loans given by the Company will be disclosed as:
(a) Cash Flow from Operating Activities
(b) Cash Flow from Investing Activities
(c) Cash Flow from Financing Activities
(d) Non-cash Items
(ii) In the Cash Flow Statement as per AS 3, the interest income of ` 20 Lacs
earned fixed deposits with bank will be disclosed as:
(a) Cash Flow from Operating Activities

(b) Cash Flow from Investing Activities

(c) Cash Flow from Financing Activities
(d) Non-cash Items
(iii) In the Cash Flow Statement as per AS 3, amount paid for acquiring gold loan
unit will be disclosed as:
(a) Cash Flow from Operating Activities
(b) Cash Flow from Investing Activities
(c) Cash Flow from Financing Activities
(d) Non-cash Items
(iv) In the Cash Flow Statement as per AS 3, total income tax of ` 75 lacs paid for
the year will be disclosed as:
(a) Cash Flow from Operating Activities

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 CS.8 ADVANCED ACCOUNTING

(b) Cash Flow from Investing Activities

(c) Cash Flow from Financing Activities
(d) Non-cash Items

(v) Is any specific disclosures required to made in relation to the interest free
loan of ` 15 crore provided by the Company to its wholly-owned subsidiary,
if yes, as per which Accounting Standard:
(a) Yes, disclosure is required to be made as per AS 3, Cash Flow
Statements.
(b) Yes, disclosure is required to be made as per AS 18, Related Party
Disclosures
(c) Yes, disclosure is required to be made as per AS 13, Accounting for
Investments
(d) No specific disclosures are required.

Answers
(i) (a) (ii) (a) (iii) (b) (iv) (a) (v) (b)

Case Scenario 5
Venus Limited received a parcel of land at no cost from the government for the
purpose of developing a factory in an outlying area. The land is valued at ` 75 lakhs,
while the nominal value is ` 10 lakhs. Additionally, the company received a
government grant of ` 30 lakhs, which represents 25% of the total investment
needed for the factory development. Furthermore, the company received ` 15 lakhs
with the stipulation that it be used to purchase machinery. There is no expectation
from the government for the repayment of these grants.
Answer the following questions based on the above information:
(i) The land received from Government, free of cost should be presented at:
(a) ` 75 Lakhs
(b) ` 30 Lakhs

(c) ` 10 Lakhs
(d) ` 45 Lakhs

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 CASE SCENARIOS CS.9

(ii) As per AS 12, how the Government Grant of ` 30 Lakhs should be presented:
(a) It should be recognised in the profit and loss statement as per the
related cost.
(b) It will be treated as capital reserve.
(c) It will be treated as deferred income.
(d) It will not be recognised in the financial statements.
(iii) As per AS 12, how the Government Grant of ` 15 Lakhs with a condition to
purchase machinery may be presented as:
(a) Capital Reserve
(b) Shareholders Fund
(c) Deferred Income
(d) Income in statement of profit and loss as received.
(iv) Which of the above grants are required to be recognised in the statement of
profit and loss on a systematic and rational basis over the useful life of the
asset:

(a) Land received as Grant

(b) Government Grant of ` 30 Lakhs
(c) Government Grant of ` 15 Lakhs with a condition to purchase machinery
(d) Noe of the above

Answers
(i) (c) (ii) (b) (iii) (c) (iv) (c)

Case Scenario 6
Axis limited is a manufacturing company. It purchased a machinery costing
` 10 Lakhs in April 2023. It paid ` 4 lakhs upfront and paid the remaining
` 6,00,000 as deferred payment by paying instalment of ` 1,05,000 for the next 6
months. During the year, the Company sold a land which was classified as its
‘property, plant and equipment’ for ` 25,00,000 and paid ` 1,00,000 as income tax
as long term capital gain on such sale. During the year, the Company also received

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 CS.10 ADVANCED ACCOUNTING

income tax refund along with interest.

(i) As per the requirements of AS 3, ‘Cash Flow Statements’, how the amount for
purchase of machinery should be presented:
(a) ` 10 lakhs as ‘Cash flows from Investing Activities’ and ` 30,000 will
simply be booked in profit and loss with no presentation if Cash Flow
Statement.
(b) ` 10.30 lakhs as ‘Cash flows from Investing Activities’ as entire amount
is spend on purchase of machinery.
(c) ` 10 lakhs as ‘Cash flows from Investing Activities’ and ` 30,000 as ‘Cash
flows from Financing Activities’.
(d) ` 10.30 lakhs as ‘Cash flows from Financing Activities’ as the machinery
has been purchased on finance.
(ii) At what amount, the machinery should be recognised in the financial
statements:
(a) ` 400,000
(b) ` 10,30,000

(c) ` 600,000
(d) ` 10,00,000
(iii) How should the income tax paid on sale of land should be disclosed in the
Cash Flows Statement:
(a) Cash flows from Operating Activities
(b) Cash flows from Investing Activities

(c) Cash flows from Financing Activities

(d) No disclosure in Cash Flow Statement
(iv) How should the interest on income tax refunds should be disclosed in the
Cash Flows Statement:
(a) Cash flows from Operating Activities
(b) Cash flows from Investing Activities

(c) Cash flows from Financing Activities

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 CASE SCENARIOS CS.11

(d) No disclosure in Cash Flow Statement

Answers
(i) (c) (ii) (d) (iii) (b) (iv) (b)

Case Scenario 7
SEAS Ltd., the “Company”, is in the business of tours and travels. It sells holiday
packages to the customers. The Company negotiates upfront with the Airlines for
specified number of seats in flight. The Company agrees to buy a specific number
of tickets and pay for those tickets regardless of whether it is able to resell all of
those in package.
The rate paid by the Company for each ticket purchased is negotiated and agreed
in advance. The Company also assists the customers in resolving complaints with
the service provided by airlines. However, each airline is responsible for fulfilling
obligations associated with the ticket, including remedies to a customer for
dissatisfaction with the service.
The Company bought a forward contract for three months of US$ 1,00,000 on 1
March 2024 at 1 US$ = INR 83.10 when exchange rate was US$ 1 = INR 83.02. On
31 March 2024, when the Company closed its books, exchange rate was US$ 1 =
INR 83.15. On 1 April 2024, the Company decided for premature settlement of the
contract due to some exceptional circumstances.
The Company is evaluating below mentioned schemes:
i. Introduction of a formal retirement gratuity scheme by an employer in place
of ad hoc ex-gratia payments to employees on retirement.
ii. Management decided to pay pension to those employees who have retired
after completing 5 years of service in the organization. Such employees will
get pension of ` 20,000 per month. Earlier there was no such scheme of
pension in the organization.
SEAS Ltd. has a subsidiary, ADI Ltd., which is in the business of construction
having turnover of ` 200 crores. SEAS Ltd. and ADI Ltd. hold 9% and 23%
respectively in an associate company, ASOC Ltd. Both SEAS Ltd. and ADI Ltd.
prepare consolidated financial statements as per Accounting Standards
notified under the Companies (Accounting Standards) Rules, 2021.

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 CS.12 ADVANCED ACCOUNTING

(i) What would be the basis of revenue recognition for SEAS Ltd. as per the
requirements of Accounting Standards?
(a) Gross basis.
(b) Net basis.
(c) Depends on the accounting policy of the Company.
(d) Indian GAAP allows a choice to the Company to recognize revenue on
gross basis or net basis.
(ii) Please suggest accounting treatment of forward contract for the year ended
31 March 2024 as per Accounting Standard 11.

(a) MTM (marked to market value) of contract will be recorded on 31 March

2024.
(b) MTM (marked to market value) of contract will be computed as at 31
March 2024 and only if there is loss, it will be recorded during the year
ended 31 March 2024.
(c) No accounting will be done during the year ended 31 March 2024.
(d) Premium on contract will be amortized over the life of the contract.
(iii) You are requested to advise the Company in respect of the accounting
requirements of above schemes related to employee benefits as to which one
of those schemes should be considered as a change in accounting policy
during the year.
(a) 1 – Change in accounting policy. 2 – Change in accounting policy.
(b) 1– Not a change in accounting policy. 2 – Change in accounting policy.
(c) 1 – Not a change in accounting policy. 2 – Not a change in accounting
policy.

(d) 1– Change in accounting policy. 2 – Not a change in accounting policy.

(iv) Please comment regarding consolidation requirements for SEAS Ltd. and ADI
Ltd. using the below mentioned options as to which one should be correct.
(a) ADI Ltd. would using equity method of accounting for 23% in ASOC Ltd.
SEAS Ltd. would consolidate ADI Ltd. and consequently automatically

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 CASE SCENARIOS CS.13

equity account 23% and separately account for the balance 9% as per
AS 13.
(b) ADI Ltd. would account for 23% in ASOC Ltd. as per AS 13. SEAS
Ltd. would consolidate ADI Ltd. and consequently automatically
account 23% and separately account for the balance 9%.
(c) ADI Ltd. would account for 23% share in ASOC Ltd using equity method
of accounting. SEAS Ltd. would consolidate ADI Ltd. and consequently,
automatically account for ASOC Ltd 23% share and separately account
for 9% share in ASOC Ltd. using equity method of accounting in
consolidated financial statements.
(d) ADI Ltd. would account for 23% in ASOC Ltd. as per AS 13. SEAS Ltd.
would consolidate ADI Ltd. and using equity method of accounting 23%
in ASOC Ltd. and separately account for the balance 9% as per AS 13.

Answers
(i) (a) (ii) (d) (iii) (c) (iv) (c)

Case Scenario 8
On 1st April, 2022, Shubham Limited purchased some land for ` 30 lakhs for the
purpose of constructing a new factory. This cost of 30 lakhs included legal cost of
` 2 lakhs incurred for the purpose of acquisition of this land. Construction work
could start on 1st May, 2022 and Shubham Limited provides you the details of the
following costs incurred in relation to its construction:
`
Preparation and levelling of the land 80,000
Employment costs of the construction workers (per month) 29,000
Purchase of materials for the construction 21,24,000
Cost of relocating employees to new factory for work 60,000
Costs of inauguration ceremony on 1 January, 2023 st
80,000
Overhead costs incurred directly on the construction of the factory 25,000
(per month)

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 CS.14 ADVANCED ACCOUNTING

General overhead costs allocated to construction project by the Manager is `

30,000. However, as per company’s normal overhead allocation policy, it should
be ` 24,000. The auditor of the company has support documentation for the cost
of ` 15,000 only) and raised objection for the balance amount.
The construction of the factory was completed on 31st December, 2022 and
production could begin on 1st February, 2023. The overall useful life of the factory
building was estimated at 40 years from the date of completion. However, it was
estimated that the roof will need to be replaced 20 years after the date of
completion and that the cost of replacing the roof at current prices would be 25%
of the total cost of the building.
The construction of the factory was partly financed by a loan of ` 28 lakhs borrowed
on 1st April, 2022. The loan was taken at an annual rate of interest of 9%. During
the period when the loan proceeds had been fully utilized to finance the
construction, Shubham Limited received investment income of ` 25,000 on the
temporary investment of the proceeds.
You are required to assume that all of the net finance costs to be allocated to the
cost of factory (not land) and interest cost to be capitalized based on nine months’
period.
Based on the information given in the above scenario, answer the following
multiple choice questions:
(i) Which of the following cost (incurred directly on construction) will be
capitalized to the cost of factory building?
(a) ` 2,00,000 incurred as legal cost
(b) ` 60,000 – costs of relocating employees
(c) ` 80,000 costs of inauguration ceremony
(d) ` 24,000 – allocated general overhead cost
(ii) What amount of employment cost of construction workers will be capitalized
to the cost of factory building?

(a) ` 2,90,000
(b) ` 3,48,000
(c) ` 2,32,000

(d) ` 29,000

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 CASE SCENARIOS CS.15

(iii) What is the amount of net borrowing cost capitalized to the cost of the
factory?
(a) ` 1,89,000
(b) ` 1,68,000
(c) ` 1,44,000
(d) ` 1,64,000
(iv) What will be the carrying amount (i.e. value after charging depreciation) of
the factory in the Balance Sheet of Shubham Limited as at 31st March, 2023?
(a) ` 30,00,000

(b) ` 57,78,125
(c) ` 27,78,125
(d) ` 58,00,000

Answers
(i) (a) (ii) (c) (iii) (d) (iv) (b)

© The Institute of Chartered Accountants of India