Unit 2 Accounting and Auditing PYQ’s 25th Dec 2021 Shift 1

The correct answer is A, B only

Key Points 

Logistics Management :

Logistics management is an element of the supply chain process that plans, implements, and controls the efficient, effective flow and storage of goods, services, and related information from point of origin to point of consumption in order to meet consumer needs.

Important Points

•  Logistics refers to the process of management.
• How resources are acquired, stored and transported to their final destination.
• This one business discipline in which potential distributors and Identification of suppliers as well as their effectiveness and determining accessibility.
• The people who manage, coordinate, analyse and optimize this process are called logisticians.
• The traditional system approach to management involves an independent management wing and minimum costs of the establishment.

The correct answer is (A) – (III), (B) – (IV), (C) – (I), (D) – (II)

The correct match is given below:

Important Points Methods of Purchase Consideration:

Lump Sum Method: 

• The purchasing company may agree to pay the seller company a lump-sum payment in exchange for the purchase of its business.
• This strategy, in fact, is not based on any scientific ideas or methodologies. This approach of determining purchase consideration is unscientific and non-mathematical.

Net Worth or Net Assets Method:

• In this method, the purchase consideration is computed using this method by adding up the values of various assets acquired by the purchasing firm and subtracting them from the values of various liabilities acquired by the purchasing company.
• For the purposes of calculating purchase consideration, the values of assets and liabilities are those that are agreed upon between the acquiring firm and the vendor company, rather than the values that appear on the vendor company’s Balance Sheet.
• (Agreed value of Assets taken over) – (Agreed value of liabilities taken over) = Net Assets

Net Payment Method:

• The amount payable to the shareholders of the selling firm in cash, shares, or debentures in the acquiring company may be specified in the agreement between the selling company and the purchasing company.
• According to AS – 14, “consideration for amalgamation” refers to the total number of shares and other securities issued, as well as the payment made by the transferee company to the transferor firm’s shareholders in the form of cash or other assets.
• The total of shares, debentures, and cash to be paid for claims of Equity and Preference shareholders of the transferor company is the purchase consideration under the net payment method.

Swap Ratio Method:

• The total number of shares to be received by the share-holders of the transfer or firm from the transferee company is determined by dividing the net worth of assets by the value of one share of the transferee company using this technique.
• When the number of shares to be received by the transferor firm is determined, it is divided by the transferor company’s existing shares to get the share ratio.

The correct answer is Vendor’s suspense account

Key Points 

Sometimes the purchasing firm does not takeover the vendor’s debtors and creditors, but instead agrees to collect book debts and pay creditors out of debtor collections.

• The company charges a commission based on a percentage of both the amount collected from debtors and the amount given to creditors for this purpose.
• Since the purchasing business performs this function on behalf of the vendors, any profit or loss (in the form of discounts and bad debts) should be paid by them.

Important Points 

For closing of Debtors Account, the following entries are passed:

Entries in the Books of Purchasing Company:

Entries in the Books of Vendor Company:

The correct answer is Goodwill on consolidation

Important PointsA. When the value of “Investment in subsidiary” in the holding company’s balance sheet is more than the book value of the net assets acquired:

• When the value of “Investment in Subsidiary” in the holding company’s Balance Sheet is more than the book value of the net assets acquired, the difference represents “Goodwill on Consolidation”. 
• In this case, Investment in the Subsidiary will not cancel out against the share capital of the subsidiary unless goodwill equal to the difference of the two items is shown on the assets side of the Consolidated Balance Sheet.

B. When the value of “Investment in subsidiary” in the holding company’s balance sheet is less than the book value of the net assets acquired:

• Conversely, if the value of Investment in the Subsidiary is less than the book value of the net assets acquired, the difference represents Capital Reserve on Consolidation.
• In this case also, Investment in a Subsidiary will not cancel out against the share capital of the subsidiary unless capital reserve equal to the difference of the two items is shown on the liabilities side of the Consolidated Balance Sheet.

The correct answer is 4 : 17

Key Points Sacrificing Ratio: Sacrificing ratio is the percentage of existing partners that surrender their profit share in favour of newly admitted partners.

Formula for Sacrificing Ratio:

Sacrificing ratio = Old profit sharing ratio – New profit sharing ratio

Important Points Old Ratio = X : Y = 4 : 3 

 Z’s Share = 1/5

Calculation of New Ratio

Remaining share for X and Y after admitting Z = 1−15=451−15=45​

X’s share = 45×23=81545×23=815

Y’s share = 45×13=41545×13=415

Sacrifice by X = 47−815=410547−815=4105

Sacrifice by Y = 37−415=1710537−415=17105

Sacrificing Ratio = 4 : 17 

The incorrect statement is “In the public issue, there is no question of any over-subscription and in the rights issue, the shares may be undersubscribed or oversubscribed leading to pro rata allotment.”

Important PointsA: In the public issue, applications for shares are invited from the general public, and in the rights issue, the shares are offered to existing shareholders.

This statement is true as 

• Public Issue: When an issue/offer of shares or convertible securities is made to new investors for becoming part of the shareholders’ family of the issuer (The entity making an issue is referred to as “Issuer”) it is called a public issue.
• Right Issue: When an issue of shares or convertible securities is made by an issuer to its existing shareholders on a particular date fixed by the issuer (i.e. record date), it is called a right’s issue. The rights are offered in a particular ratio to the number of shares or convertible securities held as on the record date

B: In the public issue, there is no question of any over-subscription and in rights issues, the shares may be undersubscribed or over-subscribed leading to pro rata allotment.

This statement is false as 

• Public issue is made to the general public and there are high chances of over-subscription or under-subscription, but right shares are allotted in proportion to existing shareholdings. So, there is no scope for oversubscription.

C: The price of the public issue is generally less than the market price and in the rights issue, the price is deliberately made less than the market price.

This statement is true as 

• The price of the public issue is generally less than the market price.
• In the rights issue, the price is deliberately made less than the market price by the directors.

D: In a public issue, the communication of the issue is through a prospectus or advertisements, and in a rights issue the communication is between the company and the existing members of the company.

This statement is true:

• Public issue is made through a prospectus that contains each and every detail of the issue whereas the right issue is made through communication between the company and the existing members of the company.

The correct answer is A and C only

Key Points Accounting standard – 2: Valuation of Inventories

The objective of this standard is to formulate the method of computation of cost of inventories/stock, to determine the value of closing stock/ inventory at which, the inventory is to be shown in balance sheet till its’ sale and recognition as revenue.

Important Points

In Inventory Cost should include all: 

• costs of purchase (including taxes, transport, and handling) net of trade discounts received
• costs of conversion (including fixed and variable manufacturing overheads) including depreciation of factory plant
• other costs incurred in bringing the inventories to their present location and condition including freight and insurance

The correct answer is (A), (B), (C), (D), (E)

Key Points 

Liquidation of Company

• Liquidation is the process through which a debt-ridden firm shuts down operations and sells its assets to pay off its debts and other commitments.
• A corporation is liquidated when it is determined that it is unable to continue operating.
• This could be owing to a variety of factors, including insolvency (which is usually the primary reason), unwillingness to continue operations, and so on.
• When a business goes bankrupt, the liquidator sells the company’s assets to pay off all debts.
• After repaying the creditors, the remaining positive balance is transferred to the company’s shareholders.
• When there is liquidation of a company, one or more persons are required to be appointed specially for conducting the liquidation or winding up proceedings of the company. Such a person’s are called Liquidator’s. He is required to realise the assets, discharge the liabilities and distribute the surplus, if any among shareholders. 

Important Points The liquidator after realizing the assets of the company should distribute the proceeds among below-mentioned claimants in the following order:

•  Legal charges – The insolvency resolution process costs and the liquidation costs paid in full
•  Liquidators remuneration and cost of expenses of winding up
•  Workman’s dues and claims of the secured creditors – Wages and any unpaid dues owed to employees other than workmen for the period of twelve months preceding the liquidation commencement date.
•  Preferential creditors and creditors secured by floating charge –  debts owed to a secured creditor in the event such secured creditor has relinquished security in the manner set out in section 52 of Insolvency Code, 2016.
•  Unsecured creditors – Then the Financial debts owed to unsecured creditors are settled
• Any remaining debts and dues.
• Preference shareholders, if any, and
• Equity shareholders or partners, as the case may be.

The correct answer is A and C only

Key Points Working Capital:

The difference between a company’s current assets, such as cash, accounts receivable (unpaid invoices from customers), and inventories of raw materials and completed goods, and its current liabilities, such as accounts payable, is known as working capital.

Formula: Working Capital = Current assets – Current Liabilities

Important Points (A) An increase in current assets increases working capital

Let us consider an example:

Let Current assets = 1,00,000 and Current Liabilities = 40,000

Working Capital = 1,00,000 – 40,000 = 60,000

Current Assets increases to 1,20,000

Working Capital = 1,20,000 – 40,000 = 80,000

Hence, increase in current assets increases working capital

 (C) An increase in current liabilities decreases working capital

Let us consider an example:

Let Current assets = 1,00,000 and Current Liabilities = 40,000

Working Capital = 1,00,000 – 40,000 = 60,000

Current Liabilities increases to 60,000

Working Capital = 1,20,000 – 60,000 = 40,000

Hence, an increase in current liabilities decreases working capital