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Gauhati University Corporate Accounting Solved Question Paper 2023:
Gauhati University BCOM 2nd SEM
2023
COMMERCE (Honours Core)
(Corporate Accounting)
Paper: COM-HC-2016
Full Marks: 80
Time: 3 hours
The figures in the margin indicate full marks for the questions.
1. (i) Fill in the blanks with appropriate words: 1x5=5
(a) Right shares are generally issued at a price lower than the market price.
(b) The Companies Act, 2013 follows Schedule III format for preparation of Final Account.
(c) The issue of bonus shares must be recommended by the Board of Directors and approved by the shareholders.
Note: Authorization by the Articles of Association. Approval of its Shareholders/Members by passing a special resolution in a duly convened general meeting, basis recommendations of the Board.
(d) Pre-acquisition profits are retained profits.
(e) The company into which another company is amalgamated is called the transferee company.
(ii) State whether the following statements are true or false: 1x5=5
(a) Reduction in share capital must be sanctioned by National Company Law Board.
(b) At the time of valuation of goodwill, only gross profit is considered.
(c) Computer software is a ‘non-current’ asset.
(d) AS-24 deals with ‘accounting for amalgamation’ of companies.
(e) Buy back of shares does not affect the authorised share capital of company.
Answer:-
(a) True - Reduction in share capital must be sanctioned by the National Company Law Board.
(b) False - At the time of valuation of goodwill, net profit is considered, not just gross profit.
(c) True - Computer software is a ‘non-current’ asset.
(d) False - AS-24 deals with ‘discontinuing operations’ and not ‘accounting for amalgamation’. The relevant standard for amalgamation is AS-14.
(e) False - Buyback of shares does affect the authorised share capital of the company, as it reduces the outstanding shares.
2. Answer the following questions: 2x5=10
(a) Write the meaning of issue of bonus shares.
Answer:
The issue of bonus shares refers to the process where a company issues additional shares to its existing shareholders free of charge, in proportion to the shares they already hold. These shares are issued from the company’s accumulated profits or reserves and are typically provided as a reward to shareholders.
(b) State two objectives of amalgamation of companies.
Answer:
Expansion of Business: Amalgamation allows companies to combine their resources, assets, and capabilities, enabling them to grow and expand their business operations.
Synergy: By merging, companies can achieve greater operational efficiency, reduce costs, and increase profitability through economies of scale.
(c) What is internal reconstruction?
Answer:
Internal reconstruction refers to a process where a company reorganizes its financial structure, such as reducing or canceling its share capital, altering the value of assets or liabilities, or revaluing its reserves, to improve its financial position. This is done without liquidating the company.
(d) What do you mean by ‘holding company’?
Answer:
A holding company is a company that owns the majority of shares (more than 50%) in another company, known as a subsidiary company. The holding company controls the subsidiary's operations and decisions but typically does not involve itself in the day-to-day business activities of the subsidiary.
(e) Mention the names of various methods of valuation of equity shares.
Answer:
The various methods of valuation of equity shares include:
Earnings Capitalization Method
Net Asset Value Method
Market Price Method
Dividend Discount Model (DDM)
Price Earnings Ratio Method (P/E Ratio)
3. Answer any four of the following: 5x4=20
(a) Mention five conditions to be followed for buy back of shares.
Answer:
The following are the conditions to be followed for buyback of shares under the Companies Act, 2013:
Approval by Board and Shareholders: The buyback must be approved by the Board of Directors and authorized by shareholders through a special resolution passed in a general meeting, unless the buyback is less than 10% of the paid-up capital and free reserves, in which case a board resolution will suffice.
Maximum Limit of Buyback: The buyback cannot exceed 25% of the company's total paid-up capital and free reserves in a financial year.
Source of Funds: The buyback should be funded from the company’s free reserves, securities premium account, or the proceeds from an earlier issue of shares or other securities.
No Buyback through Public Offer: The company must not buy back its shares through a public offer; it should be done through open market purchases or through a tender offer.
Compliance with Debt Equity Ratio: The debt equity ratio after buyback should not exceed 2:1, i.e., for every Rs. 1 of debt, there should be Rs. 2 of equity capital in the company. This is to ensure that the company does not become overly leveraged.
Or
Sunrise Ltd. has issued and paid up capital of Rs. 8,00,000 divided into equity shares of Rs. 10 each. The balance in the securities premium account was Rs. 1,40,000 and general reserve Rs. 80,000. The company decided to buy back 20% of its share capital from its shareholders at Rs. 8 per share.
Pass Journal entries in the books of Sunrise Ltd. to record the above transactions.
Solution:-
Journal
Working Notes:
Paid-up capital: ₹8,00,000 (80,000 shares of ₹10 each)
Securities Premium: ₹1,40,000
General Reserve: ₹80,000
Buyback of 20% of share capital = 16,000 shares at ₹8 per share
Total buyback amount: 16,000×₹8=₹1,28,00016,000 \times ₹8 = ₹1,28,00016,000×₹8=₹1,28,000
Face value of shares bought back: 16,000×₹10=₹1,60,00016,000 \times ₹10 = ₹1,60,00016,000×₹10=₹1,60,000
Premium paid on buyback: ₹1,60,000−₹1,28,000=₹32,000₹1,60,000 - ₹1,28,000 = ₹32,000₹1,60,000−₹1,28,000=₹32,000
(b) Explain the following:
(i) Deferred tax liability.
Answer:
A deferred tax liability happens when a company will need to pay taxes in the future due to differences in how income and expenses are reported in its accounts and for tax purposes. This usually happens because of things like:
A company records income in its accounts before it is taxed.
A company claims expenses earlier for tax purposes than for accounting purposes.
For example, if a company claims more depreciation (lower value of assets) on its tax return than on its financial statements, it will pay less tax now, but it will owe more tax later. This future tax debt is called deferred tax liability.
Answer:
Corporate dividend tax is the tax a company has to pay on the money it gives to its shareholders as dividends (profits paid to shareholders).
Before 2020 in India, companies had to pay a tax called Dividend Distribution Tax (DDT) on dividends. Shareholders did not have to pay tax on dividends separately.
After 2020, the tax was removed from the company, and now shareholders have to pay tax on the dividends they receive, based on their own income tax rates.
In simple terms, it is a tax on the money companies pay to shareholders from their profits. Before 2020, the company paid the tax; now, shareholders pay it.
(c) Show journal entries in the books of transferee company when amalgamation is in the nature of purchase.
Journal Entries for Amalgamation in the Nature of Purchase
(d) Explain briefly the need for preparation of consolidated Balance Sheet.
Answer:
A consolidated balance sheet is necessary for companies that have subsidiaries (other companies they control). It combines the financial statements of the parent company and all of its subsidiaries into one document. The need for preparing a consolidated balance sheet arises for the following reasons:
True Financial Picture: It gives a true and fair view of the financial position of the entire group of companies (parent + subsidiaries) as one single entity. It eliminates the effect of intercompany transactions, such as sales between the parent and subsidiary, providing a clearer picture of the group’s financial health.
Legal Requirement: In many countries, companies that have control over other companies are legally required to prepare a consolidated balance sheet. This is mandated by accounting standards, such as IFRS or GAAP, to ensure transparency in financial reporting.
Investor and Stakeholder Information: It provides useful information to investors, creditors, and other stakeholders about the overall financial position of the group, rather than just the parent company. This helps them assess the group’s profitability, financial stability, and investment potential.
Elimination of Double Counting: The consolidated balance sheet eliminates double counting of assets, liabilities, and equity that may arise due to transactions between the parent and its subsidiaries. For example, if the parent company owns goods from a subsidiary, these should not be counted twice in the group's balance sheet.
Reflects Group’s Strength: A consolidated balance sheet reflects the overall strength and value of the corporate group, helping in decision-making for future investments, mergers, acquisitions, or financing activities.
In essence, it provides a clear and unified financial view of the whole corporate group rather than just individual companies within it.
(e) The following information is taken from Visual Co. Ltd.:
(i) Capital:
900 6% preference shares of Rs. 100 each fully paid.
9000 equity shares of Rs. 10 each fully paid.
(ii) External liabilities Rs. 15,000.
(iii) Other equity Rs. 3,000.
(iv) The average profit (after taxation) earned every year is Rs. 10,500.
Calculate the value of each equity share.
(f) Arohan Ltd. decided on 30-03-2023 to convert its 80,000 fully paid equity shares of Rs. 10 each into Rs. 7 per share fully paid up and to return Rs. 3 per share to equity shareholders.
Pass necessary Journal entries in the books of Arohan Ltd.
Explanation:
Total Shares = 80,000 equity shares of Rs. 10 each.
Amount to be Returned = 80,000 shares × Rs. 3 = Rs. 2,40,000.
4. Answer the following questions: (any four) 10x4=40
(a) What is goodwill? Explain the various methods of valuation of goodwill. 2+8=10
Goodwill refers to the intangible value of a business that arises from factors such as its brand reputation, customer relationships, employee skills, and the ability to generate future profits. It represents the excess value paid for a business over and above its tangible assets and liabilities. Goodwill is an asset that reflects the earning power of a business, often linked to factors like market position, goodwill of employees, and client loyalty.
Goodwill is generally considered when a business is being bought or sold. It is often calculated as the difference between the purchase price of a company and the fair market value of its net identifiable assets (assets minus liabilities).
The annuity factor is determined based on the number of years over which the super profits will be earned and the discount rate.
6. Market Value Method: In this method, goodwill is calculated based on the sale price of similar businesses in the market. This involves analyzing the prices at which similar businesses have been bought and sold, and using these transactions as a benchmark to determine the value of goodwill.
Each method of valuation is used depending on the availability of data, the type of business, and the purpose of the valuation. The choice of method may vary depending on whether the business is in its early stages or is well-established.
(b) Write four conditions for effecting capital reduction. Explain the complete procedure to be followed for capital reduction. 4+6=10
Answer:
Four Conditions for Effecting Capital Reduction:
Approval by Shareholders: The capital reduction must be approved by a special resolution passed in a general meeting. The shareholders of the company must agree to the proposal to reduce the company's capital.
Approval by the National Company Law Tribunal (NCLT): After obtaining the approval of shareholders, the company must also seek approval from the NCLT (formerly known as the Company Law Board). This is required for the reduction to be legally valid and binding.
Creditor’s Consent (if applicable): If the reduction of capital involves paying off or modifying the company's obligations to creditors, their consent is necessary. The creditors need to approve the reduction, as their interests should not be adversely affected.
No Adverse Effect on the Company’s Solvency: The reduction of capital should not affect the solvency of the company. The company must ensure that after the reduction, it remains able to meet its liabilities and continue operations.
Procedure to be Followed for Capital Reduction:
Board of Directors' Resolution: The board of directors of the company must first approve the proposal for capital reduction and prepare a report explaining the reasons for the reduction, the method, and its impact on the company.
Special Resolution of Shareholders: The company must convene a general meeting to pass a special resolution. The shareholders must approve the reduction of capital by a three-fourths majority (75%) of the voting shareholders.
Application to the NCLT: Once the special resolution is passed by the shareholders, the company must file an application with the National Company Law Tribunal (NCLT) for approval. The NCLT examines the application, considering whether the reduction would unfairly affect creditors or shareholders.
Advertisement and Notice to Creditors: The company is required to publish an advertisement in a widely circulated newspaper and notify creditors about the capital reduction. If the reduction involves the reduction of liabilities, creditors must be given an opportunity to object to the proposal.
NCLT’s Order: After hearing from the company and its creditors (if applicable), the NCLT issues an order either approving or rejecting the capital reduction. If approved, the company is authorized to proceed with the reduction.
Filing with Registrar of Companies (RoC): After the NCLT order is obtained, the company must file the NCLT’s order with the Registrar of Companies (RoC). The capital reduction becomes effective upon such filing.
Implementing the Reduction: The company implements the reduction as per the approved plan. This could involve reducing the nominal value of shares, canceling unpaid shares, or reducing the number of outstanding shares.
Post-Reduction Financial Adjustments: The company must adjust its balance sheet to reflect the reduction in capital. This includes modifying share capital and related reserves as per the reduction plan approved by shareholders and the NCLT.
By following these steps, a company can reduce its capital in a lawful and systematic manner while adhering to regulatory requirements.
(c) The following ledger balances are extracted from the books of Divine Ltd. on 31-03-2023:
You are required to prepare a Balance Sheet of the company as per schedule III of the Companies Act, 2013.
Given Ledger Balances:
Equity Share Capital: ₹20,00,000
Sundry Creditors: ₹7,20,000
Bank Loan: ₹4,00,000
Proposed Dividend: ₹1,00,000
10% Debentures: ₹8,00,000
Reserves (General + Securities Premium): ₹3,80,000
Profit & Loss: ₹4,00,000
Balance Sheet (as per Schedule III of the Companies Act, 2013):
(d) Sailash Ltd. and Kailash Ltd. decided to amalgamate and a new company SK Ltd. is formed to take over both the companies as on 31st March, 2023. The following are the Balance Sheets as on that date:
Balance Sheet
Calculate the purchase consideration of both the companies and prepare the amalgamated Balance Sheet of SK Ltd. assuming the amalgamation is in the nature of purchase.
Solution:-
Balance Sheet of SK Ltd. as on 31st March, 2023:
(e) The following are the Balance Sheets of “Himesh Ltd.” and its subsidiary Co. “Shekhar Ltd.” as on 31st March, 2023:
Balance Sheet
The shares were acquired by Himesh Ltd. on 1st October, 2022. Prepare the consolidated Balance Sheet of Himesh Ltd. and Shekhar Ltd. as on 31-03-2023 and show necessary workings.
Consolidated Equity and Liabilities:
(f) Coal India Ltd. resolved to utilize Rs. 2,50,000 of its General Reserve Balance to declare a bonus to shareholders by paying the final call of Rs. 2.50 per share on 1,00,000 equity shares of Rs. 10 each. The company further decided to utilize the balance of Securities Premium Reserve A/c of Rs. 2,00,000 by issuing fully paid up bonus shares.
Pass Journal entries in the books of company and also show the ratio of bonus issue.
In the Books of Coal India Ltd.
Journal Entries:
Bonus Issue Ratio:
Bonus Shares = Rs. 2,50,000 / Rs. 2.50 per share = 1,00,000 bonus shares
Bonus Issue Ratio = 1:1 (One bonus share for every existing share)
(g) What is right share? Explain the advantages of right issue. 4+6=10
Answer:
A right share is a type of share issued by a company to its existing shareholders, giving them the right, but not the obligation, to purchase additional shares in proportion to their existing holdings at a specified price, usually lower than the market price. This right is typically offered to raise capital for the company. The shareholders can either exercise their rights and buy the new shares or sell them to others in the market.
Advantages of Right Issue:
Raising Capital at Lower Costs: A right issue allows the company to raise capital at a lower cost compared to other methods like public offerings or debt financing. Since the shares are offered at a discount, it attracts existing shareholders, ensuring funds are raised quickly.
Retention of Control: Since the issue is offered to existing shareholders, they are given the opportunity to maintain their proportional ownership in the company. This avoids dilution of their control over the company.
Enhancing Liquidity for Shareholders: The right shares are typically offered at a price lower than the market price. Shareholders who do not wish to buy additional shares can sell the rights in the market, providing them with an opportunity to gain liquidity.
Strengthening Shareholder Relationship: By offering rights issues to existing shareholders, companies maintain a strong relationship with their investors. Shareholders feel valued, as they are given the first opportunity to participate in the company’s growth.
Flexibility for Shareholders: Shareholders have the flexibility to either subscribe to the new shares, sell the rights, or let them lapse. This provides an option to make decisions based on their individual financial positions and preferences.
Cost-effective for the Company: Since a rights issue is made directly to the existing shareholders, it eliminates the need for intermediaries, such as underwriters, which would be required in a public offering. This reduces the overall cost for the company in raising capital
(h) Write notes on: 5+5=10.
(i) Amalgamation in the nature of merger
Answer:
Amalgamation in the nature of merger refers to a type of business combination where two or more companies come together to form a new entity, and the merging companies lose their identity. In this case, the companies involved in the amalgamation are generally of similar size, and the merging parties share common objectives, management, and control. The merged company assumes the identity of the surviving company, and the shareholders of the merging companies typically receive shares in the surviving company in proportion to their holdings in the original companies.
Key Features of Amalgamation in the Nature of Merger:
The merging companies dissolve, and the business is taken over by the surviving company.
The shareholders of the merging companies receive shares in the new company in proportion to their existing shareholding.
The assets and liabilities of the merged companies are transferred to the surviving company.
The companies involved are of similar size and strength, and the purpose is often to achieve synergistic benefits such as cost reduction, economies of scale, and an expanded market share.
The transaction is usually accounted for using the pooling of interest method, where the assets and liabilities are combined at their book value.
(ii) Different forms of internal reconstruction
Answer:
Internal reconstruction refers to the process of reorganizing a company’s financial structure and operations without liquidating it. It is done to improve the financial health of a company that may be facing financial distress, such as excessive debt or a poor balance sheet. There are various forms of internal reconstruction, including:
Reduction of Share Capital: The company reduces its share capital, either by canceling unissued shares, reducing the nominal value of shares, or writing off accumulated losses. This helps in improving the company’s financial position by reducing its liabilities.
Revaluation of Assets: The company may revalue its assets to reflect their true market value. This process helps in adjusting the asset values and improving the balance sheet by increasing asset values and reducing liabilities.
Debt Restructuring: The company may restructure its debt by negotiating with creditors to reduce the total debt, extend repayment terms, or convert debt into equity. This makes the company’s financial structure more manageable and reduces the burden of excessive debt.
Issue of New Shares: The company may issue new shares to raise additional capital, which can be used to pay off debts, finance expansion, or improve liquidity. This is often done as part of a broader plan for financial recovery.
Transfer of Assets: The company may transfer certain non-essential or underperforming assets to a subsidiary or another company. This helps in focusing on core operations while shedding underperforming or non-core assets.
Internal reconstruction aims to create a more efficient, financially stable, and profitable organization without resorting to liquidation or external financial support.
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Conclusion
In conclusion, the Gauhati University Corporate Accounting Solved Question Paper 2023 is a helpful resource for students to understand and practice corporate accounting. By going through the solutions carefully, students can improve their knowledge and feel more confident for their exams. Keep studying, and good luck with your preparation. You can do it!
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