Financial Accounting - II - himpub.com

1 FinancialAccounting-II(AspertheRevisedSy llabus2016-17ofMumbaiUniversityforFirstY ear,BBI,SemesterII) ,MBA, ,UGCNET& ,Science&CommerceforBBI& ,Bhandup(W),Mumbai ,ChandrabhanSharma, , , ,SikkimManipalUniversity& ,MBA,BBI,BMS,BFM& , , ,MBA,NETHOD,AccountsatGurukulCollege,Gha tkopar& , ,MBA, , ,ShivajiShikshanSansthaCollege(Night), :2008 CERTIFIED AuthorsNopartofthispublicationmayberepro duced,storedinaretrievalsystem,ortransmi ttedinanyformorbyanymeans,electronic,mec hanical,photocopying, :2017 , Ramdoot PoojaApartments ,4-B,MurariLalStreet,AnsariRoad,DaryaGan j, :011-23270392,23278631;Fax:011-23256286 Nagpur:KundanlalChandakIndustrialEstate, GhatRoad, :0712-2738731,3296733;Telefax:0712-27212 16 ,2ndMainRoadSeshadripuram,BehindNataraja Theatre, :08041138821.

2 Mobile:09379847017,09379847005 ,Lingampally,BesidesRaghavendraSwamyMath am,Kachiguda, :040-27560041,27550139 , ,GroundFloor,SarangapaniStreet, , :09380460419 Pune:FirstFloor, Laksha Apartment, ,Mehunpura,Shaniwarpeth(NearPrabhatTheat re), :020-24496323,24496333;Mobile:0937057933 3 ,ShekhupuraColony, ,Aliganj, :0522-4012353;Mobile:09307501549 Ahmedabad:114, SHAIL ,1stFloor, , ,NavrangPura, :079-26560126;Mobile:09377088847 Ernakulam:39/176( ),1stFloor,KarikkamuriRoad,Ernakulam, :0484-2378012,2378016;Mobile:09387122121 Bhubaneswar:5 StationSquare,Bhubaneswar-751001(Odisha) .

3 Phone:0674-2532129;Mobile:09338746007 Kolkata:108/4,BeliaghataMainRoad,NearIDH ospital, , :033-32449649;Mobile:07439040301 DTPby:HansaBhoirPrintedat: , FinancialAccounting-II , ,theauthors, ,SuperProfitMethodCapitalizationMethod,A nnuityMethodValuationofSharesIntrinsicVa lueMethod, ,CompanyLaw/LegalProvisions(includingRel atedRestrictions,Power,TransfertoCapital RedemptionReserveAccountandProhibitions) ComplianceofConditionsincludingSources, CreationandUse, , :2 HoursMaximumMarks:75 (a)Sub-questionstobeasked(10)andtobeansw ered(any08)(b)Sub-questionstobeasked(10) andtobeanswered(any07)(*MultipleChoice/T rueorFalse/ (a)TheoryQuestion08(b) (05)Tobeanswered(03)Note.)

4 Theoryquestionof15 Marksmaybedividedintotwosub-questionsof7 /8and10 136 Chapter pointofviewgoodwill,inthesenseofattracti ngcustom, ,therefore,goodwillmaybesaidtobethatelem entarisingfromthereputation,connection, ,regardmustbehadtothenatureofthebusiness ,therisksinvolved, ,interalia, ,thenatureofthefirm ,completeorpartialmonopoly, , ; ,stockexchangequotationsnotbeingavailabl e,shareshavetobevaluedfortaxationpurpose s,gifttax,etc.; ,soastoenabletheholdertoexercisecontrolo verthecompanyconcerned,hastobeboughtorso ld; ,considerationofthefollowingfactorswillh aveabearing:(a)Natureoftheindustry,itshi storyandtheriskstowhichitissubjectto.

5 (b)Prospectsoftheindustryinthefuture.(c) Thecompany shistory itspastperformanceanditsrecordofpastprof itsanddividends.(d)Thebasisofvaluationof assetofthecompanyandtheirvalue.(e)Therat ioofliabilitiestocapital.(f)Thenatureofm anagementandthechanceforitscontinuation. (g)Capitalstructureorgearing.(h)Size,loc ationandreputationofthecompany sproducts.(i)Theincidenceoftaxation.(j)T henumberofshareholders.(k)Yieldonshareso fcompaniesengagedinthesameindustry,which arelistedintheStockExchanges.(l)Composit ionofpurchasersoftheproductsofthecompany .

6 (m) ,however,maybecomeimportant,whenlargeblo cksofsharesareinvolved.(n) :(i)Personalskillinmanagement(ii)Natureo fbusiness(iii)Favourablelocation(iv)Acce sstosupplies(v)Patentsandtrademarksprote ction(vi)Exceptionallyfavourablecontract s.(vii)Capitalrequirementsandarrangement ofcapital.(o)Estimationoftheprofitsexpec tedtobeearnedbythefirmandtheamountofcapi talemployedtoearnsuchprofits,aretobecomp utedcarefully.(p)Marketreputationwhichth ecompanyanditsmanagementenjoys.(q) ,thepurchasingcompanymaypaymorefortheacq uiredcompanythanthefairmarketvalueofitsn etidentifiableassets(tangibleassetsplusi dentifiableintangibles,netofanyliabiliti esassumedbythepurchaser).

7 Excessofacquisitioncostovernetassetsacqu ired , , ,afavourablereputationinthemarketplace,s uperiorproductionmethods, ,thesevaluesaredeterminedbyappraisal,but insomecases, ,eitherhigherorlower, ,givingCompanyY` `50,000accountsreceivablethatarebelieved tohavearealisablevalueof`60,000,andother identifiableassetsthatareestimatedtohave acurrentmarketvalueof` ``Totalpurchaseprice15,00,000 Less:Cashacquired50,000 Accountsreceivable60,000 Otheridentifiableassets(estimated)11,00, 000 Goodwill12,10,0002,90,000 Thisextraamountof`2,90,000paidoveranabov e,Networth`12,10,000isgoodwill, , , :(a)Simpleprofitmethodand(b)Superprofitm ethod.

8 (a)SimpleProfitMethod:Goodwillisgenerall yvaluedonthebasisofacertainnumberofyears , :TradingProfit/BusinessProfit/RecurringP rofit/NormalProfit(ofPastYear)Particular s1stYear2ndYear3rdYearNetProfitbeforeAdj ustmentandTaxxxxxxxLess:NonTradingIncome ( ,IncomefrominvestmentAsset)xxxxxxLess:No n-recurringIncome( ,profitonsaleofinvestment/Asset)xxxxxxAd d:Non-recurringLoss( ,Lossonsaleofinvestment/Asset)(xx)(xx)(x x)TradingProfitafterAdjustmentandbeforeT axxxxxxx4 ValuationofGoodwillandSharesCalculationo fAverageprofit:(a)SimpleAverageProfit=ye arspastofnumberTotal)yearspast(ofprofitT otal(b)WeightedAverageprofit:YearsTradin gProfit(a)Weight(b)Product(a b)2007xx1xx2008xx2xx2009xx3xx6xxxWeighte dAverageProfit=weightofTotalproductTotal Notes:Ifpastprofitsareinincreasingtrend, (FutureMaintainableProfit).

9 (i)Allactualexpensesandlossesnotlikelyto occurinthefutureareaddedbacktoprofits.(i i)Allactualexpensesandlossesnotlikelytoo ccurinthefutureareaddedbacktoprofits.(ii i) `Simple/WeightedAverageProfitbeforeTaxxx Add:Expensesincurredinpastnottobeincurre dinfuture( ,Rentpaidinpastnotpayableinfuture)xxLess :Expensesnotincurredinpasttobeincurredin future( ,Rentnotpaidinpastpayableinfuture)(xx)Le ss:NotionalManagementRemunerationFutureM aintainableProfitbeforeTaxxxxxxLess:Tax( ifRateisnotgivenme50%)(xx)FutureMaintain ableProfitafterTaxxxxAfteradjustingprofi tinthelightoffuturepossibilities, purchaseoftheaverageprofitswhichcometo`5 0,000,thegoodwillwillbe`1,50,000, ,3 `50, , (AtAgreed/AdjustmentValue)(Except:Intang ible,Non-trading/FictitiousAssets)Planta ndMachineryxxLandandBuildingxxFurniturea ndFixturesxxStockxxCash/BankxxxxLess:Ext ernalLiability(AtAgreed/AdjustValue)(Exc ept.)

10 CapitalandReserveandsurplus)LoansxxDeben turesxxCreditorsxxxxxOutstandingExpenses , AverageCapitalEmployed=2 EmployedCapital ClosingEmployed Capital Opening =ClosingCapitalEmployed ofCurrentYears Profit+CurrentYears Dividend(b) ,thismethodofvaluinggoodwillwouldrequire thefollowinginformation:(i)Anormalrateof returnforrepresentativefirmsintheindustr y.(ii) ,bankrate,market,need, (NRR) +RateofReturnsorShareperPriceMarketShare perDividend ,2009:Liabilities`Assets``PreferenceShar eCapital5,00,000 FixedAssets:Cost50,00,000 EquityShareCapital20,00,000 Depreciation30,00,00020,00,000 ReservesandSurplus25,00,000 CapitalWork-inProgress40,00,000 Long-termLoans27,00,000 Investment10%5,00,000 CurrentLiabilitiesandProvisions15,00,000 CurrentAssets25,00,000 UnderwritingCommission2,00,00092,00,0009 2,00,000 Thecompanyearnedaprofitof`18,00.