CA Intermediate (New Course)

Ranker’s Mock Test Paper 1

Paper 5- Advance Accounting
Suggested Answers

Q.1.

(a) Amount of foreseeable loss(Rs in lakhs)

Total cost of construction (500 + 105 + 495) 1,100

Less: Total contract price (1,000)

Total foreseeable loss to be recognised as expense 100

According AS 7, when it is probable that total contract costs will exceed total contract revenue, the expected loss
should be recognised as an expense immediately.

(b) Contract work-in-progress i.e. cost incurred to date are Rs 605 lakhs(Rs in lakhs)

Work certified 500

Work not certified 105605

This is 55% (605/1,100 100) of total costs of construction.

(c) Proportion of total contract value recognised as revenue:

55% of Rs 1,000 lakhs = Rs 550 lakhs

(d) Amount due from/to customers

= (Contract costs + Recognised profits –Recognised Losses)–(Progress payments received + Progress payments to be
received)

= (605 + Nil –100)–(400 + 140) `in lakhs

= [505–540] Rs in lakhs Amount due to customers

= Rs 35 lakhs

The amount of Rs 35 lakhs will be shown in the balance sheet as liability.

(e) The relevant disclosures under AS 7 are given below

Contract revenue 550

Contract expenses 605

Recognised profits less recognised losses (100)

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Progress billings Rs (400 + 140)

540

Retentions (billed but not received from contractee) 140

Gross amount due to customers 35

(b)

Journal entries in the books of lessee

Asset A/c Dr. 1,49,888

To Lessor 1,49,888
(Being recognition of finance lease
as an asset and a liability)

Working Note:

Year Lease Payments Discounting Factor (12.6%) Present Value Rs

1 40,000 0.89 35,600

2 40,000 0.79 31,600

3 40,000 0.70 28,000

4 40,000 0.622 24,880

5 40,000 0.552 22,080

5 14,000 (GRV) 0.552 7,728

1,49,888

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Q.2.

(a)

In the books of Company Journal Entries

Date Particulars Dr. Rs Cr.Rs

1/3/13 to Bank A/C 240000
31/3/13 Employees compensation expenses A/C 432000
To equity share capital A/C 48000
To securities premium A/C 624000
(Being allotment to employees 4,800 shares of
Rs 10 each at a premium of Rs 130 at an
exercise price of Rs 50 each)
31-3-13 Profit and Loss account 432000
To Employees compensation expenses A/c
(Being transfer of employees compensation 432000
expenses)
Working Note:

1.Employee Compensation Expenses = Discount between Market Price and option price

= Rs 140 – Rs 50 = Rs 90 per share

= Rs 90 x 4,800 = Rs 4,32,000/- in total.

2.The Employees Compensation Expense is transferred to Securities Premium Account.

3.Securities Premium Account = Rs 50 – Rs10 = Rs 40 per share + Rs 90 per share on account of discount of option
price over market price = Rs 130 per share = Rs 130 x 4,800 = Rs 6, 24,000/- in total.

(b)

Form B-RA (Prescribed by IRDA)Metro General Insurance CompanyRegistration no. and date of registration with
IRDARevenue Account for the year ended 31st March, 20X2

Particulars Schedule Amount(` )

Premium earned (Net) 1 75,56,000

Total (A) 75,56,000

Claims incurred (Net) 2 51,63,000

Commission 3 1,57,000

Operating expenses related to insurance business 4 1,90,000

Total (B) 55,10,000

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Operating profit from insurance business (A-B) 20,46,000

Schedules forming part of Revenue Account

Schedule 1: Premium Earned (Net)

ParticularsAmount (` )

Premium from direct businesswritten 75,25,000

Add: Premium on reinsurance accepted 8,25,000

Less:Premium on reinsurance ceded (4,90,000)

Net Premium 78,60,000

Adjustment for change in Reserve for unexpired risk (W.N.2) (3,04,000)

Total Premium earned (net) 75,56,000

Schedule 2: Claims Incurred (Net)

Particulars Amount (` )

Claims paid -Direct (W.N.1) 51,23,000

Add: Re-insurance accepted (W.N.1) 4,85,000

Less:Re-insurance ceded (W.N.1) (4,45,000)

Net Claims paid 51,63,000

Schedule 3: Commission

Particulars Amount (` )

Commission paid 1,60,000

Add:Reinsurance accepted 15,000

Less: Commission on reinsurance ceded (18,000)

Net Commission 1,57,000

Schedule 4: Operating Expenses related to Insurance Business

Particulars Amount (` )

Expenses of management (2,90,000 – 45,000 – 55,000) 1,90,000

1,90,000

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Working Notes:

1. Claims incurred
Particulars Direct Business (` ) Re-insurance accepted (` ) Re-insurance Ceded (`)
Paid / received 49,70,000 5,10,000 3,95,000
Add: Outstanding
at the end of
the year 7,38,000 70,000 1,25,000
Add:
Expenses in
Connection
with settlement
of claims
(45,000 + 55,000) 1,00,000
Less:
Outstanding at
the beginning
of the year (6,85,000) (95,000) (75,000)
51,23,000 4,85,000 4,45,000

2. Change in Reserve for unexpired risk

Particulars Amount (` )
Opening Reserve as on 31stMarch, 20X128, 40,000
Less:Closing Reserve as on 31stMarch, 20X2(` 78,60,000 x 40%) (31,44,000)
3,04,000

Q.3.

(a) If Insurance Company does not wish to bear the whole of risk of a policy, then it will reinsure a part of risk with
some other insurer. In such a case the insurer is said to have ceded (given) a part of its business to other insurer .i.e.
the risk of the insurance is being underwritten by another Insurance Company. In other words, in Re-Insurance
business transaction is defined as an agreement between the Ceding Company and the Reinsurer, where the former
agrees to cede (give) and the later agrees to accept certain specified share of risk in return for a share of the
premium. In such a case, on a claim arising, the claim will be shared between the two companies in the proportion
they had agreed to underwrite the risk.

(b)

Books of S Ltd. Journal Entries

Date Particulars Dr Rs Cr Rs
31/3/11 Employees Compensation Expense Account Dr. 12000
To Employees Stock Option Outstanding Account 12000
(Being compensation expense recognized in respect
of 1,000 options granted to employees at discount
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 of Rs 30 each, amortized on straight line basis over
2½ years)
Profit and Loss Account Dr. 12000
To Employees Compensation Expense Account 12000
(Being employees compensation expense of the year
transferred to P&L A/c)
31/3/12 Employees Compensation Expense Account Dr. 12000
To Employees Stock Option Outstanding Account 12000
(Being compensation expense recognized in respect
of 1,000 options granted to employees at discount
of `30 each, amortized on straight line basis over 2½
years)
Profit and Loss Account Dr. 12000
To Employees Compensation Expense Account 12000
(Being employees compensation expense of the year
transferred to P&L A/c)
31/3/13 Employees Compensation Expense Account Dr. 12000
To Employees Stock Option Outstanding Account 12000
(Being balance of compensation expense amortized
Rs30,000 lessRs.24,000)
Profit and Loss Account Dr. 12000
To Employees Compensation Expense Account 12000
(Being employees compensation expense of the year
transferred to P&L A/c)
31/7/13 Bank Account (`60 × 1,000) Dr. 60000
To Equity Share Capital Account 50000
To Securities Premium Account 10000
(Being exercise of 1,000 options at an exercise price
of Rs 60)
31/7/13 Stock Option Outstanding A/c (’30 x 1,000) Dr 30000
To Securities Premium Account 30000
(Being the balance in the Employees Stock Option
Outstanding Account transferred to Securities
Premium A/c)
Working Notes:

1. Total employees compensation expense = 1,000 x (`90 – `60) = `30,000

2. Employees compensation expense has been written off during 2½ years on straight line basis as under: I year = Rs
12,000 (for full year) II year = Rs 12,000 (for full year) III year = `6,000 (for half year)

Q.4.

(a) For the purpose of accounting AS 19 ‘Leases’ classify the lease into two categories as follows:

(i) Finance Lease

(ii) Operating Lease

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Finance Lease: It is a lease, which transfers substantially all the risks and rewards incidental to ownership of an asset
to the lessee by the lessor but not the legal ownership. As per para 8 of the standard, in following situations, the
lease transactions are called Finance lease: The lessee will get the ownership of leased asset at the end of the lease
term. The lessee has an option to buy the leased asset at the end of the lease term at price, which is lower than its
expected fair value at the date on which option will be exercised.The lease term covers the major part of the life of
asset even if title is not transferred.At the beginning of lease term, present value of minimum lease rental covers
the initial fair value.

The asset given on lease to lessee is of specialized nature and can only be used by the lessee without major
modification. Operating Lease: It is lease, which does not transfer all the risks and rewards incidental to ownership.
Lease payments under an operating lease should be recognised as an expense in the statement of profit and loss on
a straight line basis over the lease term unless another systematic basis is more representative of the time pattern of
the user’s benefit.

(b) Calculation of cost of software (intangible asset) acquired for internal use

Purchase cost of the software $ 1,00,000

Less: Trade discount @ 5% ($ 5,000) $ 95,000 Cost in ` (US $ 95,000 x ` 52) 49,40,000
Add: Import duty on cost @ 20% (Rs) 9,88,000
59,28,000
Purchase tax @ 10% (Rs) 5,92,800
Installation expenses (Rs) 25,000
Profession fee for clearance from customs (Rs) 20,000
Cost of the software to be capitalized (Rs) 65,65,800
Note: Since entry tax has been mentioned as a recoverable / refundable tax, it is not included as part of the cost of
the asset.

Q.5.
In exercise of the powers conferred by Section 114A of the Insurance Act, 1938 (4 of 1938), the Insurance Regulatory
and Development Authority in consultation with the Insurance Advisory Committee prescribed the new formats for
the financial statements of Insurance Companies i.e. preparation of Financial Statements and Auditor’s Report of
Insurance Companies Regulations, 2000. Therefore, the above revenue account can be prepared as:

Schedule Current year Previous year

Rs Rs
Premiums earned (net) Profit / (Loss) 1 2521750
on sale / redemption of investments
Otherss (to be specified)
Interest, Dividends and Rent

140000

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Gross (Net + TDS) 2661750
Total (A) 1781000
Claims incurred (net) 2 147000
Commission 3
Operating expenses related to
Insurance business 341000
Total (B)
Operating Profit from Marine 2269000
Insurance business (A-B) 4
392750

Schedules forming part of Revenue Account

Current year Previous year

Schedule –1
Premium earned (net) 2827000
Total Premiums earned (262000)
Less: Premium on reinsurance ceded 2565000
Total Premium earned (net) Change in
provision for unexpired risk (Required
provision – existing reserve)
(2693250-265000) (43250)
Net Premium earned 2521750
Schedule – 2
Claims incurred (net) 1781000
Schedule – 3
Commission paid
Direct 150000
Add: Re-insurance accepted Less: 11000
reinsurance ceded (14000)
147000
Schedule – 4
Operating expenses related to
insurance business
Employees’ remuneration and welfare 260000
benefits
Rent, Rates and Taxes 18000
Printing and Stationery 23000
Legal and Professional charges 40000

341000

Working Notes:

Total Premium Income Direct Reinsurance

Received 2400000 360000
Add: Receivable on 31st March, 2013 180000 28000

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 2580000 388000
Less: Receivable on 1st April, 2012 (120000) (21000)
2460000 367000
Total premium income 24,60,000 + 3,67,000 = 28,27,000

Premium Expense on reinsurance

Premium Paid during the year
Add: Payable on 31st March, 2013
Less: Payable on 1st April, 2012
Claims Paid
Direct Business
Re-insurance
Legal Expenses
Less: Re-insurance claims received
Claims outstanding as on 31st March,
2013
Direct
Re-insurance
Less: Recoverable from Re-insurers on
31st March, 2013
Claims outstanding as on 1st April, 2012
Direct
Re-insurance
Less: Recoverable from Re-insurers on 1st
April, 201
Expenses of Management Salaries
Rent, Rates and taxes
Printing and Stationery
Legal Expenses

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