SSF UNIVERSITY QUESTION PAPER WITH SOLUTION by mnmgroup

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                  SSF Nov. 2011 University Paper Solution
Q. 1 b)(ii)
Sparrow Ltd. has a project (having life of five years) in wings which would cost Rs.50lakhs.
Compute the profitability index of the project when the cost of capital is 12%. The cash flows
expected to generate from the project for the five years are Rs.20,00,000, Rs..16,00,000,
Rs.18,00,000, Rs.12,00,000 and Rs.14,00,000. The project cost would be depreciated on straight
line basis having no scrap value.

Q.1 b) ii) Solution
                      Sparrow Ltd.
Year              CIF       PV@12%              PVCIF
 1             20,00,000      0.893           17,86,000
 2             16,00,000      0.797           12,75,200
 3             18,00,000      0.712           12,81,600
 4             12,00,000      0.636           7,63,200
 5             14,00,000      0.567           7,93,800 .
                            PVCIF →           58,99,800

                                PVCIF
Profitability Index     =
                                PVCOF
                               58,99,800
                        =
                               50,00,000
                        =      1.18

Q. 1 b) iii)
Calculate EVA from the following data for the year ended 31st March 2003

          Average Debt ( Crs)                                        50
          Average equity ( Crs)                                     2766
          Cost of debt (Post Tax)                                  7.72%
          Cost of equity                                          16.54%
          Profit after tax, before exceptional item                15.41
          Interest                                                    5

Q.1 b) iii) Solution
NOPAT           =       PAT + Interest (Post Tax)
                =       15.41 + 3.86
                =       19.27

                       %        K      W ACC
Debt      50          1.78   7.72%     0.13%

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Equity    2766      98.22    16.54%     16.25%
          2816      100          Ko     16.38%

 EVA          =       NOPAT – Ko x Capital
               =       19.27 – 16.38% x 2816
               =       19.27 – 461.26
               =       (441.99)
Note:
   1. Interest given 5 crore is ignored  It is before tax & tax rate is not given.
   2. Interest        = 50 x 7.72%
      (post tax)      = 3.86

Q.2) Eagle Ltd. is setting up a new project for manufacturing two products :
   Product A – 30 lacs Kgs and Product B – 50 lacs Kgs
   The cost of the project after capitalising interest and preoperative expenses are as under:
                                                                                ( In lacs)
   Land and Site Development                                                          52
   Building                                                                           68
   Plant and Machinery                                                              580
   Other Fixed Assets                                                                 24
   Preliminary Expenses                                                                6__
   Total                                                                            730

   Means of Finance                                                             ( In lacs)
   Equity Share Capital                                                             250
   Term Loan @ (17.5%)                                                              480
   Total                                                                            730

Assumptions:
   a) Capacity utilization of both the products is 50%, 60%, for first and second year and is
      70% for third year onward.
   b) Raw Material requirement for product A is 60 per Kg and for product B 160 per Kg.
   c) Total Cost of power is 60 lacs in first year with an increase of 10% thereafter every
      year.
   d) Repairs and maintenance 100 lacs per year.
   e) Administration Expenses of      80 lacs in first year with an increase of 10% thereafter
      every year.
   f) Salaries and Wages are estimated at      200 lacs in first year with an increase of 20%
      thereafter every year.
   g) Selling Expenses are estimated at 10% of sales.
   h) Selling price for each product is estimated at      80 and     240 for Product A and B
      respectively
   i) Depreciation is to be charged @ 5% on Building, @ 10% on Plant and Machinery and @
      15% on other assets.

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   j) Term Loan are repayable over 5 years in equal installments commencing from second
      year.
   k) All expenses are to remain constant for this purpose of appraisal except interest on Term
      Loan from third year onward.
      From the above prepare a cost and profitability statement for 5 years and repayment of
      Term Loan schedule for all the years.

Q.2) Solution
                                           Eagle Ltd.
                                     Repayment of Term Loan
                                    Loan Amortisation Schedule
                                 480
Equal Principal Instalment =
                                  5
(Starting 2nd year)           = 96 Lacs

   Year      P (o/s) at beg     Int. @ 17.5%      (P) Inst.        Loan Inst.   P (o/s) at end
    1             480                 84            NIL                48            480
    2             480                 84             96               180            384
    3             384                67.2            96              163.2           288
    4             288                50.4            96              146.4           192
    5             192                33.6            96              129.6            96
    6              96                16.8            96              112.8           NIL

Note: It is assumed moratorium in 1st year is only on principal.

W.N.1) Sales
      Year 1 = Product A + Product B
             = [30 x 50% x 80] + [50 x 50% x 240]
             = 1200 + 6000
             = 7200 Lacs

        Year 2 = Product A + Product B
               = [30 x 60% x 80] + [50 x 60% x 240]
               = 1440 + 7200
               = 8640 Lacs

        Year 3         = Product A + Product B
        Year 4         = [30 x 70% x 80] + [50 x 70% x 240]
        Year 5         = 1680 + 8400
                       =10080 Lacs

W.N.2) R.M.

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        Year 1 = Product A + Product B
               = [30 x 50% x 60] + [50 x 50% x 160]
               = 900 + 4000
               = 4900 Lacs

        Year 2 =[30 x 60% x 60] + [50 x 60% x 160]
               = 1080 + 4800
               = 5880 Lacs

        Year 3        = [30 x 70% x 60] + [50 x 70% x 160]
        Year 4        = 1260 + 5600
        Year 5        = 6860 Lacs

W.N.3) Depreciation
   Building = 68 x 5%                = 3.4
   P&M        = 580 x 10%            = 58
   Other Asset
      Other Fixed Assets = 24 x 15% = 3.6
                                         65
      Note 1: The method is assumed to be SLM
      Note 2: No depr is charged on land & preliminary expenses.
( Preliminary Exp. are w/off and period is not given. Land does not depreciate).

                          Cost & profitability statement for 5 years.
                                                                            ( Lacs)
                 Particulars         Year 1    Year 2    Year 3      Year 4  Year 5
         Sales                         7200      8640     10080       10080   10080
         (-) Cost
               RM                     4900      5880        6860          6860     6860
               Power                    60        66         72.6        79.86    87.85
               Repair & Main           100       100          100          100      100
               Administration           80        88         96.8       106.48   117.13
               Salaries & Wages        200       240          288        345.6   414.72
               Selling Expenses        720       864        1008          1008     1008
                  (10% of Sales)
         PBDIT                         1140      1402     1654.6     1580.06      1492.3
         (-) Depreciation                65        65         65          65          65
         PBIT                          1075      1337     1589.6     1515.06      1427.3
         (-) Interest                    84        84       67.2        50.4        33.6
         NPBT                           991      1253     1522.4     1464.66      1393.7

Note: Since tax rate is not given, calculation is done only upto NPBT.
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 Q.3)
 (A) Cock Ltd. furnishes the following data regarding its six segments for the year ended 31st
      March, 2010:
                                                                        ( In Lakhs)
      Segments =>            P        Q       R      S       T     U         Total
      Segment Assets         300      620     80     60      80    60        1200
      Segment Results        50      (190) 10        10     (10)   30        (100)
      Segment Revenue        40       80      30     20      20    10         200
   Identify the reportable segments and advise the management of Cock Ltd. keeping in view
   the provisions of Accounting Standard 17 on Segment Reporting as issued by the ICAI.

Q.3) (A) Solution
Accounting standard 17
→ As per Para 27c 10% Asset Test

Particulars               P         Q          R         S          T         U        Total
Segment Asset            300       620        80        60         80        60         1200
Segment Asset %         25 %     51.67 %    6.67 %      5%       6.67 %      5%        100 %
Reportable Segment        √         √          ×         ×          ×         ×           –

→ As per Para 27b 10% Result Test
      Particulars       P          Q           R          S         T         U        Total
Profit Segment          50         –          10         10         –         30       100
Loss Segment             –        190          –          –        10          –       200
Segment Result %       25%        95%         5%         5%        5%        15%        –
(Base Total Loss)
Reportable Segment      √          √           ×          ×         ×         √          –

→ As per Para 27a 10% Revenue Test
Particulars             P         Q            R         S         T           U       Total
Segment Revenue         40       80            30        20        20         10        200
Segment Revenue %      20%      40%           15%       10%       10%         5%       100 %
Reportable Segment      √         √            √         √         √           ×         –

→ As per Para 29, 75% Revenue Test

Also, 75% Revenue Test is satisfied, since all Segment become Reportable Segment as per Para
27a, 27b & 27c. (Since they satisfy atleast one criteria).




Q.3 (B)

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 Peacock Ltd. furnishes the following data for the year ended 31st March, 2010:
  - depreciation provided as per accounting records amounted to          10,00,000/- whereas the
 depreciation provided as per tax records, under the block of assets concept amounted to Rs.
 17,50,000/-
 - unamortized preliminary expenditure as per tax records amounted to 1,40,000/-
 The income tax rate applicable is 40% and there is adequate evidence of future profit sufficiency.
 How much deferred tax asset / liability should be recognized as transition adjustment, as per
 Accounting Standard – 22 as issued by the Institute of Chartered Accountants of India.

 Q.3 B) Solution
                                           Peacock Ltd.

                   Excess depr as per Tax (17,50,000 – 10,00,000)        7,50,000
                   (-) Unamortised Preliminary Expenses                (1,40,000)
                                               Timing difference         6,10,000

  Deferred Tax liability as per AS 22
 = 6,10,000 x 40%
 = 2,44,000

  J/E:
 P & Loss A/c                Dr.      2,44,000
        To Deferred Tax Liability                    2,44,000


Q.4) Ostrich Ltd. a company incorporated under the Indian Companies Act, 1956 exported goods
     worth US$ 80,000 to Crow Inc of New York on 15th December, 2009. On that date the
     exchange rate for US$ 1 was 46.50.
     The payment for the above export (after adjusting 25% down-payment) was made as under:
                 Date                Amount (US $)            Exchange Rate for US $ 1
             25-02-2010                    25,000                    Rs.47.50
             21-03-2010                    20,000                    Rs.42.00
             15-04-2010                    15,000                    Rs.48.50

 The accounting year of the company ends on 31st March each year. The exchange rate as on 31st
 March, 2010 for US $ 1 was 45
 You are required to compute the foreign exchange loss or gain, as per Accounting Standard 11,
 for each of the above transactions and in total for the year ended 31st March 2010 & 31st March
 2011 by preparing Foreign Exchange Account.




 Q.4) Solution
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Ostrich Ltd
                                   $
Sales                            80,000
(-) Down Payment @ 25%           20,000
Balance                          60,000

                             Foreign Exchange (Fluctuation) A/c
   Dr.                                                                                   Cr.
     Date           Particular                        Date         Particular
    21-3-10     To Crow Inc.               92,000    25.2.10   By Crow Inc.          25,000
                ($ 20,000 x 4.6)                               ($ 25,000 x 1)
     31-3-10    To Crow Inc.               22,500    31-3-10   By P & Loss A/c       89,500
                ($ 15,000 x 1.5)                               (Net Loss)
                                          1,14,500                                 1,14,500
     31-3-11    To P & Loss A/c             52,500   15-4-10   By Crow Inc.          52,500
                (Net gain)                                     ($ 15,000 x 3.5)
                                           52,500                                    52,500

Q.5) On 1st January 2007 Parrot Ltd. purchased from Penguin Ltd. machinery under hire
purchase system, 5,00,000 being paid on delivery and the balance in five installments of
7,50,000 each payable half-yearly on 30th June and 31st December. The vendor charges interest
@ 10% per annum. The cash price of the machinery was 37,50,000.
You are required to show how this transaction should be recorded in the books of Parrot Ltd., by
preparing Machinery Account and Penguin Ltd. Account, if depreciation rate is 10% per annum
on the written down value of the machinery. The accounts are to be prepared for the first two
years only.

Q.5) Solution
                                 Parrot Ltd
                                 .
        Cash Price               37,50,000
        (-) Down Payment           5,00,000 .
        Balance C.P.             32,50,000

H.P. Installment = 7,50,000 x 5 = 37,50,000
                   (Given)
 H.P. Instal > Balance cash price, H.P. Installment Includes Interest

                                     H.P. Amortisation Schedule
Year            P (o/s) at beg      Int. @ 10% p.a. (P) Inst        H.P. Inst.    P (o/s) at end
1→I             32,50,000           1,62,500         *5,87,500      7,50,000      26,62,500
 → II           26,62,500           1,33,125         *6,16,875      7,50,000      20,45,625
2→I             20,45,625           1,02,281         *6,47,719      7,50,000      13,97,906

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 → II            13,97,906        69,895              *6,80,105      7,50,000        7,17,801
3→I              7,17,801         *32,199             7,17,801       7,50,000        NIL

Interest Year I → 1st Inst.
                         10     6
          32,50,000 x       x     1,62,500
                        100 12
Note:
Year 3 calculation is not required, since accounts are to be prepared for first two years only.

                                          Machinery A/c
    Dr.                                                                                     Cr.
      Date         Particular                        Date         Particular
     Year 1                                         Year 1
     1.1.07     To Penguin Ltd.       37,50,000    31.12.07    By Depr               3,75,000
                                                   31.12.07    By bal. c/d          33,75,000
                                      37,50,000                                     37,50,000
      Year 2                                        Year 2
      1.1.08    To bal. b/d           33,75,000    31.12.08    By Depr               3,37,500
                                                   31.12.08    By bal. c/d          30,37,500
                                      33,75,000                                     33,75,000
      Year 3
      1.1.09    To bal. b/d           30,37,500

                                            Penguin Ltd.
    Dr.                                                                                     Cr.
       Date     Particular                            Date         Particular
     Year 1                                         Year 1
      1.1.07 To Cash/Bank              5,00,000      1.1.07    By Machinery         37, 50,000
     30.6.07 To Cash/Bank              7,50,000     30.6.07    By Interest            1,62,500
    31.12.07 To Cash/Bank              7,50,000    31.12.07    By Interest            1,33,125

     31.12.07 To bal. c/d             20,45,625
                                      40,45,625                                     40,45,625
     30.06.08 To Cash/Bank             7,50,000     Year 2
     31.12.08 To Cash/Bank             7,50,000      1.1.08    By bal.bld           20,45,625
                                                    30.6.08    By Interest           1,02,281
     31.12.08 To bal. c/d              7,17,801    31.12.08    By Interest             69,895
                                      22,17,801                                     22,17,801

                                                    Year 3
                                                    1.1.09     To bal. b/d            7,17,801




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