The Hindu Business Line : Bills in bank and bonus to broker

Pass the necessary journal entries with narration adjusting the above and show: a) rebate on bill discounted account; and b) interest and discount account in the ledger of the bank.

b) On April 1, 2002, Mr Krishna Murthy purchased 1,000 equity shares of Rs 100 each in Telco Ltd at Rs 120 each from a broker, who charged 2 per cent brokerage. He incurred 50 paise per Rs 100 as cost of shares transfer stamps. On January 31, 2003, bonus was declared in the ratio of 1:2.

Before and after the record date of bonus shares, the shares were quoted at Rs 175 per share and Rs 90 per share respectively. On March 31, 2003, Mr Krishna Murthy sold bonus shares to a broker who charged 2 per cent brokerage.

Show the investment account in the books of Mr Krishna Murthy, who held the shares as current assets and closing value of investments shall be made at cost or market value, whichever is lower.

Parts (a) and (b) of this question are fairly easy. Part (a) is on rebate on bills discounted in banks. Rebate on bills discounted is the unexpired portion of the discount earnings of a bank in a financial year. It arises in respect of bills discounted by a bank in a financial year but maturing for payment in the succeeding financial year. Refer Tables 1 and 2 for rebate on bills discounted and interest and discounts accounts. The amount of bills discounted and purchased is not relevant information, as no calculation of discount is involved.

The journal entries required in the books of Commercial Bank Ltd would be as follows:

March 31, 2003: Rebate on bills discounted account Dr. — Rs 65,040

To Interest and Discounts account — Rs 65,040

(Being the opening balance in rebate account, portion of discount pertaining to current financial year 2002-03, carried forward in the earlier year 2001-02)

March 31, 2003: Interest and Discounts account Dr. — Rs 92,760

To Rebate on bills discounted account — Rs 92,760

(Being the un-expired discount of the current financial year 2002-03 not to be recognised as income. Carried forward to the next financial year 2003-04)

March 31, 2003: Interest and discounts account Dr. — Rs 19,634,680

To P & L account — Rs 19,634,680

(Balance in interest and discounts account being income for 2002-03

transferred To P&L account)

This is a question on investment accounting. The investment account has been prepared as shown in Table 3.

The following points are to be noted:

1) Cost of shares acquired on April 1, 2002, should include the incidental expenses of brokerage and stamp duty for transfer, that is, Rs 1,20,000 + 2 per cent of Rs 1,20,000 + (0.5/100) x 120,000 = Rs 1,20,000 + 2,400 + 600 = Rs 1,23,000

2) Bonus shares are allotted free of cost and, hence, there is no cost for bonus shares.

3) The bonus shares are sold on March 31, 2003. Unfortunately, the problem does not contain the details of sale proceeds. It is hence reasonable to presume the sale proceeds are Rs 90 per share, being the market value after the issue of shares. The sale proceeds are to be netted off for brokerage (45,000 - 900)

4) Valuation of investments is to be based on cost or market value, whichever is lower. The cost and market value are ascertained as follows:

No. of shares on hand with the investor as at March 31, 2003 — 1,000

Cost - weighted average (permissible under AS 2 — 1,23,000 x (1,000/1,500) — Rs 82,000

Market value (presumed to be Rs 90 per share), 1,000 x 90 = Rs 90,000

Lower of cost and market value - cost - Rs 81,667 is the amount to be carried forward as investments.

Cash flow statement

THE balance-sheet of New Light Ltd for the years ended March 31, 2001 and 2002 are as shown in Table 4.

Additional information: i) the company sold one fixed asset for Rs 1,00,000, the cost of which was Rs 2,00,000 and the depreciation provided on it was Rs 80,000; ii) the company also decided to write off another fixed asset costing Rs 56,000 on which depreciation amounting to Rs 40,000 has been provided; iii) depreciation on fixed assets provided Rs 3,60,000; iv) the

company sold some investment at a profit of Rs 40,000, which was credited to capital reserve; v) debentures and preference share capital redeemed at 5 per cent premium; and vi) the company decided to value stock at cost, whereas previously the practice was to value stock at cost less 10 per cent. The stock according to books on March 31, 2001, was Rs 2,16,000. The stock on March 31, 2002 was correctly valued at Rs 3,00,000.

Prepare cash-flow statement as per the revised Accounting Standard 3 by indirect method.

This is a problem on preparation of cash flow statement. Details given to prepare the statement are easy to understand except for adjustment to stock. The stock as at March 31, 2001, is at 90 per cent of cost and, hence, to be written up to cost.

The opening stock would then be taken at Rs 2,40,000 [(216000/90) x 100] an increase of Rs 24,000. This would obviously change the value of other current assets as at March 31, 2001, to Rs 11,24,000 and also the P&L account as at the same date to Rs 2,64,000.

It is to be assumed that the P&L account prepared for the year ended March 31, 2002, has taken the figure of Rs 2,40,000 only as opening stock (valuation change from 90 per cent of cost to full cost from April 1, 2001) so that the P&L account as at March 31, 2002, would stand at Rs 3,00,000 as given. The solution is as follows:

Cash flow statement of New Light Ltd for the year 2001-02:

Cash flow from operating activities:

Retained profit for the year (difference between opening and closing balances in P&L account — Note 1) — Rs 36,000

Add: Tax provision 2001-02 — Rs 3,40,000

Proposed dividend 2001-02 — Rs 1,44,000

Loss on sale of asset (Note 2) — Rs 20,000

Loss on write-off of asset (Note 2) — Rs 16,000

Depreciation for 2001-02 — Rs 3,60,000

Premium on redemption: a) Pref. shares — Rs 6,000 (Note 3)

b) Debentures- 6000 (Note 3) — Rs 12,000

Transfer to general reserve (Note 4) — Rs 1,20,000

Pre. expenses written off (Note 5) — Rs 40,000

Interest paid (Note 6) — Rs 30,600

Preference dividend paid (Note 6) — Rs 34,000

Sub-total — Rs 11,16,600

Operating profit before working capital changes — Rs 11,52,600

Adjustment: Working capital changes

Increase in other current assets (Note 7) — Rs (176000)

Increase in current liabilities (Note 7) — Rs 40,000

Sub-total — Rs (1,36,000)

Cash flow before extraordinary items — Rs 10,16,600

Cash flow from extraordinary item — Nil

Less: Taxes paid (Note 8) — Rs 3,60,000

Net cash from operating activities — Rs 6,56,600

Cash flow from investing activities:

Purchase of assets (Note 3) — Rs (8,56,000)

Sale of assets (Note 3) — Rs 1,00,000

Sale of investments (Note 9) — Rs 1,20,000

Net cash from investing activities — Rs (6,36,000)

Cash flow from financing activities:

Equity share capital issued (Note 10) — Rs 4,00,000

Preference shares redeemed at 5 per cent premium (Note 3) — Rs (1,26,000)

Debentures redeemed at 5 per cent premium (Note 3) — Rs (1,26,000)

Interest paid (Note 6) — Rs (30,600)

Dividend paid on equity (Note 12) — Rs (1,04,000)

Dividend paid, preference (Note 6) — Rs (34,000)

Net cash from financing activities — Rs (20,600)

Net increase in cash and cash equivalents — Nil

Cash and cash equivalents, April 1, 2001 — Rs 10,000

Cash and cash equivalents, March 31, 2002 — Rs 10,000

Notes:

1) The opening stock at cost would be Rs 2,40,000 (2,16,000 + (10/90) x (2,16,000). Balance in P&L account as at March 31, 2003, would be Rs 2,64,000 after revising stock to cost.

The difference between the opening balance and closing balance of P&L account will hence be Rs 3,00,000 - Rs 2,64,000, that is, Rs 36,000.

2) The details of assets purchased, loss on sale of asset, and so on, could be ascertained by preparing the asset account and the provision for depreciation account (see Tables 5 and 6).

3) Premium on redemption of preference shares would be 5 per cent of Rs 1,20,000, that is, Rs 6,000, and that of debentures 5 per cent on Rs 1,20,000, that is, Rs 6,000.

The par value of preference shares redeemed during the year is Rs 4,00,000 - Rs 28,000 = Rs 1,20,000 and the par value debentures redeemed are Rs 4,00,000 - Rs 2,80,000 = Rs 1,20,000.

Outflow on redemption of preference shares = par value + premium = Rs 1,20,000 + Rs 6,000 = Rs 1,26,000

Outflow on redemption of debenture = par value + premium = Rs 1,20,000 + Rs 6,000 = Rs 1,26,000

4) Transfer to reserve out of profits earned during the year is = Rs 8,00,000 - Rs 6,80,000 = Rs 1,20,000

5) Preliminary expenses written off is = Rs 80,000 - Rs 40,000 = Rs 40,000.

6) Interest paid for the year: It is assumed that debentures redeemed during the year have been redeemed exactly in the middle of the year. The interest charged to P&L account would then be: 9 per cent on Rs 2,80,000 (outstanding throughout the year) — Rs 25,200; 9 per cent on Rs 1,20,000 (for half year) — Rs 5,400

Total interest to be added back with operating profits, but to be shown as an outflow under financing activities — Rs 30,600

Assuming that the preference shares are redeemed in the middle of the year, such as debentures, the dividend paid on preference shares during the year would be: 10 per cent for Rs 2,80,000 for full year — Rs 28,000; 10 per cent for Rs 1,20,000 (half year) — Rs 6,000

Total preference dividend to be added back with operating profits, but to be shown as an outflow under financing activities — Rs 34,000

7) Increase in other current assets: Other current assets - opening as at March 31, 2001 — Rs 11,10,000

Add: Stock as at March 31, 2001 at cost — Rs 24,000

Correct value of other current assets (March 31, 2001) — Rs 11,34,000

Other current assets as at March 31, 2002 — Rs 13,10,000

Increase in other current assets (cash outflow) — Rs 1,76,000

Current liabilities as at March 31, 2001 — Rs 4,80,000

Current liabilities as at March 31, 2002 — Rs 5,20,000

Increase in current liabilities (cash inflow) — Rs 40,000

8) Taxes paid for the year being last year's provision (provision as at March 31, 2001) — Rs 3,60,000

9) Details of investment: Opening balance in investment account (April 1, 2001) — Rs 4,00,000

Closing balance as at March 31, 2002 — Rs 3,20,000

Cost of investment sold therefore is — Rs 80,000

Profit on sale credited to capital reserve — Rs 40,000

Sale proceeds (cost + profit) — Rs 1,20,000

Profit on sale need not be added back to calculate operating profits, as it has not been credited to P&L account but to capital reserve. Sale proceed has been shown as an inflow under investing activity.

10) Share capital issued during the year (Rs 16,00,000 - Rs 12,00,000) = Rs 4,00,000

12) Dividend proposed on March 31, 2002, of Rs 1,44,000 is adjusted in calculation of operating profits. Equity dividend paid during the year is last year's proposed dividend less the unpaid dividend as at March 31, 2002,

is Rs 1,20,000 - Rs 16,000 = Rs 1,04,000. Outflow due to dividend of Rs 1,04,000 is shown under cash flow from financial activities.

(Suggested answers to the November 2003 CA (PE II) paper on accountancy.)

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