CA INTERMEDIATE TEST

AS – 12; AS – 7; AS – 20 & INTERNAL RECONSTRUCTION :

PART A – MCQs (2 Marks Each)
CASE STUDY: 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 (1 to 4) based on the above information:
Q1. The land received from Government, free of cost should be presented at:
(a) ₹75 Lakhs
(b) ₹30 Lakhs
(c) ₹10 Lakhs
(d) ₹45 Lakhs (Answer: c)
Q2. 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. (Answer: c)
Q3. 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. (Answer: c)
Q4. 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) None of the above (Answer: c)
Q5. 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. (Answer: c)
Q6. AB Company Ltd. had 1,00,000 shares of common stock outstanding on January 1. Additional 50,000 shares were
issued on July 1, and 25,000 shares were re - acquired on September 1. The weighted average number of shares
outstanding during the year on Dec. 31 is
(a) 1,40,000 shares
(b) 1,25,000 shares
(c) 1,16,667 shares
(d) 1,20,000 shares (Answer: c)
Q7. LP Contractors undertakes a fixed price contract of ₹200 lakh. Transactions related to the contract include:
Material purchased: ₹80 lakh
Unused material: ₹30 lakh
Labour charges: ₹60 lakh
Machine used for 3 years for the contract. Original cost of the machine is ₹100 lakh. Expected useful life is 15
years. Estimated future costs to be incurred to complete the contract: ₹80 lakh. Loss on contract to be recognised
is:
(a) ₹40 lakh
(b) ₹10 lakh
(c) ₹90 lakh
(d) ₹50 lakh (Answer: b)
Case Study: Accounting Year is Calendar year. (Q8 to Q10)
Net profit Year 2020: ₹11,00,000
Year 2021: ₹15,00,000
No of shares outstanding prior to right issue 5,00,000 shares
Right issue One new share for each five
outstanding (i.e., 1,00,000 shares)
st
Fair value of one share immediately prior to right on 1 March, 2021 ₹21
Right issue price ₹15
Last date to exercise rights 01st March, 2021
Q8. Basic EPS for the year 2020 is
(a) 2.00
(b) 2.10
(c) 2.20
(d) 2.30 (Answer: c)
Q9. Basic EPS for the year 2021 is
(a) 2.50
(b) 2.55
 (c) 2.60
(d) 2.65 (Answer: b)
Q10. Restated Basic EPS for the year 2020 is
(a) 2.00
(b) 2.10
(c) 2.20
(d) 2.30 (Answer: b)
PART B – DESCRIPTIVE QUESTIONS
QUESTION 1 & 2 (14 MARKS) ARE COMPULSORY, ATTEMPT ANY 1 FROM REMAINING 2 (12 MARKS EACH)
Q1. (a) Calculate the basic and diluted earnings per share for the year 2020-21 from the following information:
1. Net profit after tax for the year ₹64,12,500
2. No. of equity shares outstanding 15,00,000
3. No. of 9% convertible debentures of ₹100 issued on 1st July, 2020 75,000
4. Each debenture is convertible into 8 Equity Shares
Tax relating to interest expenses – 35% (4 Marks)

Solution: Basic EPS for the year 2020-21= 64,12,500⁄15,00,000 = ₹4.28

Computation of diluted earnings per share for year 2020-21

Adjusted net profit for the current year
Weighted average number of equity shares
Adjusted net profit for the current year will be (64,12,500 + 5,06,250 – 1,77,188) = ₹67,41,562
No. of equity shares resulting from conversion of debentures: 6,00,000 Shares (75,000 × 8)
12 9
Weighted average no. of equity shares used to compute diluted EPS: 15,00,000 × 12 + 6,00,000 × 12 = 19,50,000

Shares
Diluted earnings per share: (67,41,562/19,50,000) = ₹3.46
Working Note:
Interest expense for 9 months = 75,00,000×9%×9/12 =₹5,06,250
Tax expense 35% on interest is ₹1,77,188 (5,06,250 x 35%)

(b) RT Enterprises has entered into a fixed price contract for construction of a tower with its customer. Initial
tender price agreed is ₹220 crore. At the start of the contract, it is estimated that total costs to be incurred will be
₹200 crore. At the end of year 1, this estimate stands revised to ₹202 crore. Assume that the construction is
expected to be completed in 3 years. During year 2, the customer has requested for a variation in the contract. As a
result of that, the total contract value will increase by ₹5 crore and the costs will increase by ₹3 crore. RT has
decided to measure the stage of completion on the basis of the proportion of contract costs incurred to the total
estimated contract costs. Contract costs incurred at the end of each year is:
Year 1: ₹52.52 crore
Year 2: ₹154.20 crore (including unused material of 2.5 crore)
Year 3: ₹205 crore.
You are required to calculate:
(a) Stage of completion for each year.
(b) Profit to be recognised for each year. (6 Marks)
Solution: Stage of completion = Costs incurred to date / Total estimated costs
Year 1: 52.52 crore / 202 crore = 26%
Year 2: (154.20 crore – 2.50 crore) / 205 crore = 74%
Year 3: 205 crore / 205 crore = 100%
Year 1 Year 2 Year 3
Contract Revenue (1) 57.20 Crore 109.30 Crore 58.50 Crore
(220 𝐶𝑟𝑜𝑟𝑒 × 26%) (225 𝐶𝑟𝑜𝑟𝑒 × 74%) (225 𝐶𝑟𝑜𝑟𝑒 × 100%)
− 57.20 𝐶𝑟𝑜𝑟𝑒 − 154.20 𝐶𝑟𝑜𝑟𝑒
Contract Cost (2) 52.52 Crore 99.18 Crore 53.30 Crore
(202 𝐶𝑟𝑜𝑟𝑒 × 26%) (205 𝐶𝑟𝑜𝑟𝑒 × 74%) (205 𝐶𝑟𝑜𝑟𝑒 × 100%)
− 52.52 𝐶𝑟𝑜𝑟𝑒 − 151.70
Contact Profit [(1) – (2)] 4.68 Crore 10.12 Crore 5.20 Crore

(c) Suraj Limited provides you the following information:

1. It received a Government Grant @40% towards the acquisition of Machinery worth ₹25 Crores.
2. It received a Capital Subsidy of ₹150 Lakhs from Government for setting up a Plant costing ₹300 Lakhs in a
notified backward region.
3. It received ₹50 Lakhs from Government for setting up a project for supply of arsenic free water in a notified
area.
4. It received ₹5 Lakhs from the Local Authority for providing Corona Vaccine free of charge to its employees
and their families.
State, how you will treat the above in the books of Suraj Limited. (4 Marks)
Solution:
1. As per AS 12 “Accounting for Govt. Grants”, two methods of presentation in financial statements of grants
related to specific fixed assets are regarded as acceptable alternatives. Under the first alternative, the grant of
₹10 crores (40% of 25 crores) is shown as a deduction from the gross value of the asset concerned in arriving at
its book value. The grant is thus recognized the profit and loss statement over the useful life of a depreciable
asset by way of a reduced depreciation charge. Under second alternative method, grant amounting ₹10 crores is
treated as deferred income which is recognized in the profit and loss statement on a systematic and rational
basis over the useful life of the asset.
 2. In the given case, the grant amounting ₹150 lakhs received from the Central Government for setting up a plant
in notified backward area may be considered as in the nature of promoters’ contribution. Thus, amount of ₹150
lakhs should be credited to capital reserve and the plant will be shown at ₹300 lakhs.
3. ₹50 lakhs received from Govt. for setting up a project for supply of arsenic free water in notified area should be
credited to capital reserve. Alternatively, if it is assumed that the project consists of capital asset only, then the
amount of ₹50 lakhs received from Govt. for setting up a project for supply of arsenic free water should either
be deducted from cost of asset of the project concerned in the balance sheet or treated as deferred income
which is recognized in the profit and loss statement on a systematic and rational basis over the useful life of the
asset.
4. ₹5 lakhs received from the local authority for providing corona vaccine to the employees is a grant received in
nature of revenue grant. Such grants are generally presented as a credit in the profit and loss account, either
separately or under a general heading ‘Other Income’. Alternatively, ₹5 lakhs may be deducted in reporting the
related expense i.e. employee benefit expenses.

Q2. M/s Xylem Limited has decided to reconstruct the Balance Sheet since it has accumulated huge losses. The
following is the summarized Balance Sheet of the company as on 31st March, 2019 before reconstruction:
Liabilities Amount (₹) Assets Amount (₹)
Share capital Land & Building 42,70,000
50,000 shares of ₹50 Machinery 8,50,000
each fully paid up 25,00,000 Computers 5,20,000
1,00,000 shares of ₹50 Inventories 3,20,000
each ₹40 paid up 40,00,000 Trade receivables 10,90,000
Capital reserves 5,00,000 Cash at bank 2,68,000
8% debentures of ₹100 each 4,00,000 Profit & Loss Account 29,82,000
12% debentures of ₹100 each 6,00,000
Trade payables 12,40,000
Outstanding expenses 10,60,000
1,03,00,000 1,03,00,000
Following is the interest of Mr. A and Mr. B in M/s Xylem Limited:
Mr. A Mr. B
8% Debentures 3,00,000 1,00,000
12% Debentures 4,00,000 2,00,000
Total 7,00,000 3,00,000
The following scheme of internal reconstruction was framed and implemented, as approved by the court and
concerned parties:
(a) Uncalled capital is to be called up in full and then all the shares to be converted into Equity Shares of ₹ 40
each.
(b) The existing shareholders agree to subscribe in cash, fully paid up equity shares of 40 each for ₹
12,50,000.
(c) Trade payables are given option of either to accept fully paid equity shares of ₹ 40 each for the amount due
to them or to accept 70% of the amount due to them in cash in full settlement of their claim. Trade
payables for ₹ 7,50,000 accept equity shares and rest of them opted for cash towards full and final
settlement of their claim.
(d) Mr. A agrees to cancel debentures amounting to ₹ 2,00,000 out of total debentures due to him and agree to
accept 15% Debentures for the balance amount due. He also agree to subscribe further 15% Debentures in
cash amounting to ₹ 1,00,000.
(e) Mr. B agrees to cancel debentures amounting to ₹ 50,000 out of total debentures due to him and agree to
accept 15% Debentures for the balance amount due.
(f) Land & Building to be revalued at ₹ 51,84,000, Machinery at ₹ 7,20,000, Computers at ₹ 4,00,000,
Inventories at ₹ 3,50,000 and Trade receivables at 10% less to as they are appearing in Balance Sheet as
above.
(g) Outstanding Expenses are fully paid in cash.
(h) Profit & Loss A/c will be written off and balance, if any, of Capital Reduction A/c will be adjusted against
Capital Reserve.
You are required to pass necessary Journal Entries for all the above transactions and draft the company's
Balance Sheet immediately after the reconstruction. (14 Marks)
Solution:
₹ ₹
Bank A/c Dr. 10,00,000
To Equity share capital A/c 10,00,000
(Being money on final call received)
Equity share capital (₹50) A/c Dr. 75,00,000
To Equity share capital (₹40) A/c 60,00,000
To capital reduction A/c 15,00,000
(Being conversion of equity share capital of ₹50 each into ₹40 each as per
reconstruction scheme)
Bank A/c Dr. 12,50,000
To Equity share capital A/c 12,50,000
(Being new shares allotted at ₹40 each)
Trade payables A/c Dr. 12,40,000
To Equity share capital A/c 7,50,000
 To Bank A/c (4,90,000 × 70%) 3,43,000
To Capital Reduction A/c 1,47,000
(Being payment made to trade payables in shares or cash to the extent of
70% as per reconstruction scheme)
8% Debenture A/c Dr, 3,00,000
12% Debentures A/c Dr. 4,00,000
To A A/c 7,00,000
(Being cancellation of 8% and 12% debenture of A)
A A/c Dr. 8,00,000
To 15% Debentures A/c 6,00,000
To Capital Reduction A/c 2,00,000
(Being issuance of new 15% debentures and balance transferred to capital
reduction account as per reconstruction scheme)
Bank A/c Dr. 1,00,000
To A A/c 1,00,000
(Being new debentures subscribed by A)
8% Debentures A/c Dr. 1,00,000
12% Debentures A/c Dr. 2,00,000
To A A/c 3,00,000
(Being cancellation of 8% and 12% debenture of B)
B A/c Dr. 3,00,000
To 15% Debentures A/c 2,50,000
To Capital Reduction A/c 50,000
(Being issuance of new 15% debentures and balance transferred to capital
reduction account as per reconstruction scheme)
Land and building (51,84,000 – 42,70,000) Dr. 9,14,000
Inventories Dr. 30,000
To capital reduction A/c 9,44,000
(Being value of assets appreciated)
Outstanding expenses A/c Dr. 10,60,000
To Bank A/c 10,60,000
(Being outstanding expenses paid in cash)
Capital reduction A/c Dr. 33,41,000
To Machinery A/c 1,30,000
To computer A/c 1,20,000
 To Trade receivables A/c 1,09,000
To Profit and Loss A/c 29,82,000
(Being amount of capital reduction utilized in writing off P & L A.c (Dr.)
balance and downfall in value of other assets)
Capital Reserve A/c Dr. 5,00,000
To Capital Reduction A/c 5,00,000
(Being debit balance of capital reduction account adjusted against capital
reserve)
Balance sheet of Xylem Ltd. (as reduced) as on 31.3.20219
Particulars Notes ₹
Equity and Labilities
1 Shareholder’s funds
a Share capital 1 80,00,000
2 Non-current liabilities
a Long-term borrowings 2 8,50,000
Total 88,50,000
Assets
1 Non-current assets
a Property, Plant and equipment
Tangible assets 3 63,04,000
2 Current assets
a Inventories 3,50,000
b Trade receivables 9,81,000
c Cash and cash equivalents 12,15,000
Total 88,50,000
Notes to accounts
₹
1 Share capital
2,00,000 Equity shares of ₹40 80,00,000
2 Lon-term borrowings
Secured
15% debentures (Assumed to be secured) 8,50,000
3. Tangible assets
Land & Building 51,84,000
Machinery 7,20,000
 Computers 4,00,000 63,04,000

Q3. Following is the summarised Balance Sheet of Ravi Limited as on 31 March, 2017.
Balance Sheet as on 31 March 2017
Liabilities Amount ₹ Assets Amount ₹
Authorised and Issued equity share Patent 4,00,000
capital: Plant & machinery 30,00,000
30,000 shares of 100 each fully paid 30,00,000 Building 5,50,000
20,000 7% cumulative preference shares Trade receivables 23,50,000
of 100 each fully paid 20,00,000 Inventory 16,30,000
General Reserve 6,00,000 Cash 1,20,000
Loan form Director 4,40,000 Bank Balance 2,30,000
Trade payables 24,60,000 Profit and Loss account 8,40,000
Outstanding expenses 3,20,000
Declared dividend 3,00,000
91,20,000 91,20,000
Note: The arrears of preference dividend amount to ₹2,80,000. The company had suffered losses since last 3 years
due to bad market condition and hope for a better position in the future. The following scheme of reconstruction
has been agreed upon and duly approved by all concerned:
1. Equity shares to be converted into 3,00,000 shares of ₹10 each.
2. Equity shareholders to surrender top the company 80 percent of their holdings.
3. Preference shareholders agree to forgo their right on arrears of dividends in consideration of which 7%
preference shares are to be converted into 8% preference shares.
4. Trade payables agree to reduce their claim by one fourth in consideration of their getting shares of 5,00,000
out of the surrendered equity shares.
5. Directors agree to forego the amounts due on account of loan.
6. Surrendered shares no otherwise utilised to be cancelled.
7. Assets to be reduced as under:
Amount ₹
Patent by 4,00,000
Plant & Machinery by 4,00,000
Inventory by 3,40,000
8. Trade receivables to the extent of ₹17,00,000 are considered
9. Revalued figure for building is accepted at ₹7,00,000.
10. Declared dividend is paid to the equity shareholders
11. Any surplus after meeting the losses should be utilised in writhing down the value the plant further.
12. Expenses of reconstruction amounted to ₹60,000.
13. Further 40,000 equity shares were issued to the existing member for increasing the working capital. The issue
was fully subscribed and paid - up.
You are required to pass the Journal Entries for giving effect to the above arrangement (12 Marks)
Solution: Books of Ravi Ltd. Journal Entries
Date Particulars Debit ₹ Credit ₹
(i) Equity Share Capital (100 each) a/c Dr. 30,00,000
To Equity share capital (10 each) A/c 30,00,000
(Sub division of equity share into 10 each)
(ii) Equity Share Capital (10) A/c Dr. 24,00,000
To Share surrendered A/c 24,00,000
(Surrender of 80% of shareholding by equity shareholders)
(iii) 7% Cumulative Preference share capital A/c Dr. 20,00,000
To 8% cumulative preference share capital A/c 20,00,000
(Conversion of 7% Cumulative Preference share capital into 8%
Cumulative preference share capital. They also forgo their to arrears of
dividends)
(iv) Shares Surrendered A/c Dr. 5,00,000
To Equity share capital A/c 5,00,000
(Surrendered share issued against trade payables under reconstruction
scheme)
(v) Declared Dividend A/c Dr. 3,00,000
Expenses of reconstruction A/c Dr. 60,000
To Bank A/c 3,60,000
(Dividend to Equity Shareholder's and reconstruction expenses)
(vi) Share surrendered A/c Dr. 19,00,000
To capital Reduction A/c Dr. 19,00,000
(Cancellation of unissued surrendered shares) (24,00,000-5,00,000)
(vii) Loan from Director A/c Dr. 4,40,000
Trade payables A/c Dr. 6,15,000
Building A/c Dr. 1,50,000
To Capital reduction A/c 12,05,000
(Amount sacrificed by directors and trade payables and appreciation in
value of building)
(viii) Loan from Director A/c Dr. 31,05,000
 To Patent A/c 4,00,000
To Trade receivables A/c 6,50,000
To Inventory A/c 3,40,000
To Profit and Loss A/c 8,40,000
To Expenses on Reconstruction A/c 60,000
To Plant A/c (bal. fig) 8,15,000
(Various assets and expenses written off)
(ix) Bank A/c Dr. 4,00,000
To Share application money A/c 4,00,000
(Application money receive on full and final payment)
(x) Share application money A/c Dr. 4,00,000
To Share capital A/c 4,00,000
(Being 40,000 equity shares of 10 each issued and fully paid - up)

Q4. (a) JS Ltd. purchased a Machinery for ₹40 Lakhs (Useful Life 4 years and Residual value ₹8 Lakhs). Government
Grant received is ₹16 Lakhs. Due to non- compliance of certain condition, the Grant become refundable in 3rd
year to the extent of ₹12 Lakhs. Show the Journal Entry to be passed at the time of refund of Grant and the value
of the Fixed Assets, if (a) the Grant is credited to Fixed Assets (b) the Grant is credited to Deferred Grant A/c
(6 Marks)
Solution:
A. If Grant is credited to Fixed Assets (i.e., Assets Cost Reduction Method)
Particulars Dr. (₹) Cr. (₹)
Fixed Assets A/C Dr. 12,00,000
To Bank A/C 12,00,000
(Being Grant refunded to the Government on non- compliance of related
conditions, and Cost of the Asset thereby increased) (See Note below)
*Depreciation p.a. = Cost 40 Lakhs - Grant 16 Lakhs - Residual Value 8 Lakhs / 4 Years Useful Life = ₹ 4,00,000
p.a.
• WDV of Asset before the above Journal Entry = Cost ₹40,00,000 less Grant Credited at inception ₹ 16,00,000
less Depreciation of ₹ 4,00,000 for 2 years = ₹16,00,000
• Carrying Book Value of Asset after above Journal Entry = ₹16,00,000 + ₹12,00,000 = ₹ 28,00 000
B. If Grant is credited to Deferred Grant A/c (i.e., Deferred Income Method)
Particulars Dr. (₹) Cr. (₹)
Deferred Government Grant A/c Dr. 8,00,000
Profit and Loss A/C Dr. 4,00,000
 To Bank A/C 12,00,000
(Being Grant refunded to Government, and excess provided from P&L A/c)
• Depreciation p.a. under Deferred Income Method = Cost 40 Lakhs - Residual Value 8 Lakhs / 4 Years Useful
Life = ₹ 8,00,000 p.a.
• WDV of Asset at beginning of year 3 = Cost ₹40,00,000 less Depreciation of ₹ 8,00,000 for 2 years =
₹24,00,000
• Balance of Deferred Grant at the end of 2 years ₹16,00,000 - (₹4,00,000 x 2 years) = ₹ 8,00,000
• There will not be any change in the Carrying Amount of the Asset.

(b) Compute the percentage of Completion and the Contract Revenues and costs to be recognized
Contract Price – ₹75 Lakhs
Materials issued ₹18 Lakhs of which Materials costing ₹3 Lakhs is still lying unused at the end of the period.
• Labour paid for workers engaged at site ₹12 Lakhs (₹2 Lakhs is still payable)
Specific Contract Costs – ₹6 Lakhs, Sub-Contract Costs for work executed – ₹5 Lakhs, Advances paid to Sub-
Contractors – ₹3 Lakhs.
• Cost estimated to be incurred to complete the Contract – ₹30 Lakhs (6 Marks)
Solution: Here, the Proportionate Cost Method will provide a realistic estimate of stage of completion. This is
calculated as under:
Particulars Computation Amount
Materials Cost incurred on the Contract (net of Closing Stock) ₹ 18(-) ₹3 15 Lakhs
Add: Labour Costs incurred on the Contract (Paid + Payable) ₹ 12+ ₹2 14 Lakhs
Specific Contract Costs Given 6 Lakhs
Sub-Contract Costs (advances should not be considered) Given 5 Lakhs
Costs Incurred till Date Given 40 Lakhs
Add: Further Costs to be incurred 30 Lakhs
Total Contract Costs 70 Lakhs
Hence, Percentage of Completion based on Cost
Cost incurred till date 40 57.14%
Estimated Total Costs 70
Contract Revenue to be recognized (as per Para 21) 57.14% x ₹75 42.86 Lakhs
Less. Contract Costs to be recognized (as per Para 21) as per computer 40.00 Lakhs
Therefore, Contract Profit 2.86 Lakhs