This page contains the following topics

1. Accounting for Shareholders' Equity

2. Accounting for Debentures

3. Accounting for Holding Company

4. Accounting for Price Level Change

5. Accounting for Business Combination/Acquisition of Business

6. Accounting for Non-Trading Organizations/Professionals

7. Theoretical Questions-Answers

Accounting for shareholders' equity

Shareholders' Equity is a part of Balance sheet which shows the wealth of Shareholders in the organization in terms of money or money's worth. . .

Shareholders' fund consists of two basic components, which is as given below

1. Contributed Capital

2. Retained Earnings

Shareholders' fund consists of various other sub-components under Contributed Capital and Retained earnings. These sub-components are listed as below.

1. Equity Share Capital or Ordinary Share Capital or Common Share Capital

2. Preference Share Capital

3. Additional-Paid-In-Capital - Common Share (Share Premium)

4. Additional Paid-In-Capital - Preference Share

5. Retained Earnings

6. Treasury Stock

What is a Treasury Stock ?

Let us tell a corporate story. Suppose Gandaki Noodles company decide to award its 5 high-performing employees on the occasion of its anniversary. The company further decide to award them with its own Equity Shares of Rs. 100 per share face value, 10 shares to each employee. Suppose the shares are currently selling in the market @ Rs 150 for each share. Then company shall have to purchase a total of 50 shares of a total value of Rs 7,500 (50 shares x Rs 150 each) from secondary market, because company can not issue share at any time. Also it is not practical to issue a small number of share (50 shares).

Such share that are purchased by the company is known as Treasury Stock. Treasury Stock is treated as Assets for the company and journal entry for Treasury Stock appears as below.

Treasury Stock Account Dr Rs 7,500

Bank Account Cr Rs 7,500

(50shares purchased from secondary market @ Rs 150per share for employee award plan on the occasion of anniversary)

RESALE OF TREASURY STOCK

Suppose, company decides to award only 4 employees, and 1employee later could not become qualified for the award. In such a condition, the unawarded share (i.e. 10 shares purchased @ Rs 150 each, total value Rs 1,500) shall be sold by the company in secondary market. Such act of company is known as "Resale of Treasury Stock" Suppose at the time of resale, share of the company is selling at Rs 175 per share in the secondary market. Then there shall be benefit to the company at resale by Rs 25 per share (Rs 175 - Rs 150). Such additional amount is called Additional-Paid-In-Capital - Treasury Stock. The amount of Additional-Paid-In-capital becomes Rs 250 (10 shares x Rs 25 per share). the journal entry of this transaction shall appear as below.

Bank Account Dr Rs 1750

Treasury Stock Account Cr 1,500

Additional-Paid-In-Capital - Treasury Stock Cr 250

(resale of 10 treasury stock of Rs 150 each at Rs 175 each)

Statement of Shareholders' Equity

Particulars Amount

Common Share Capital (xxx shares of Rs xx each) xxxxxxxx

Preference Share Capital (xxx shares of Rs xx each) xxxxxxxx

Additional-Paid-In-capital - Common Share xxxxxxxx

Additional-Paid-In-Capital - Preference Share xxxxxxxx

Retained Earning xxxxxxxx

Total Contributed Capital and Retained earning xxxxxxxx

Less: Treasury Stock, xxx Shares Common (xxxxxxxx)

Total Shareholders' Equity XXXXXXXX

Journal Entries for Shareholders' Equity

Following are the major Journal Entries in SH Equity.

1. When Common Shares are issued at PAR

Bank Account Dr

Common Share Capital Account Cr

2. When Preference Shares are issued at PAR

Bank Account Dr

Preference Share Capital Account Cr

3. When Common Share is issued at Premium

Bank Account Dr

Common Share Capital Account Cr

Additional-Paid-In-Capital Account- Common Share Cr

4. When Preference Share is issued at Premium

Bank Account Dr

Preference Share Capital Account Cr

Additional-Paid-In Capital Account- Pref. Share Cr

5. When Shares are issued for Non-Cash purpose at PAR

Fixed Assets (exp Machinery) Account Dr

Common Share Capital Account Cr

6. When share is issued for Non-Cash Purpose at Premium

Fixed Assets (example Machinery) Account Dr

Common Share Capital Account Cr

Additional-Paid-In-Capital Account- Common Share Account Cr

7. When CASH dividend is declared on Shares

Retained Earning Account Dr

Cash Dividend Payable Account Cr

8. When CASH dividend is paid

Cash Dividend Payable Account Dr

Cash Account Cr

9. When STOCK Dividend is declared on Shares

Retained Earning Account Dr

Stock Dividend Payable Account Cr

10.1: When STOCK Dividend is paid at PAR

Stock Dividend Payable Account Dr

Common Share Capital Account Cr

10.2: When STOCK Dividend is paid at Premium

Stock Dividend Payable Account Dr

Common Share Capital Account Cr

Additional-Paid-In Capital - Common Share Account Cr

Accounting for debenture

Debenture is a certificate issued by company to obtain a long term debt. It is a source to raise debt capital for long term financing of company. It is a form of debt and attracts interest at a certain percent per annum. The fund of debenture is generally raised from non financial institutions and general public.

Since it is a kind of loan, therefore the principal sum of debenture is refundable in some future point of date.

Therefore there Journal entries for debenture is recorded in two different point of date, which is as follows.

1. Journal Entry for issue of Debenture

2. Journal Entry for refund or redemption of Debenture

Journal Entry for issue of debenture

We consider the following three steps to record journal entry for issue of debenture

1. Basic Entry

Bank Account Dr

Debenture Account Cr

2. Condition of Issue

* Issued at Par (Issue at equal to Face value): - Do not consider. No adjustment

* Issued at Discount (Issue at less than face value):- It is loss for company, so discount comes in DEBIT side as follows

Bank Account Dr

Discount on issue of debenture A/C Dr

Debenture A/C Cr

* Issued at Premium (Issue at more than face value):- It is gain for company, so premium comes in CREDIT side as follows

Bank Account Dr

Debenture A/C Cr

Debenture Premium A/C Cr

3. Condition of Redemption

* Redemption at Par (refund at equal to face value):- Do not consider. No adjustment

* Redemption at discount (refund at less than face value):- It is a gain for company. Do not consider. No adjustment

* Redemption at premium (refund at more than face value):- It is loss for company. This condition has DOUBLE effect in

account. It appears and adjusted in journal entry as follows.

Loss on issue of Debenture A/C Dr

Premium on Redemption of Debenture A/C Cr

The above steps are all about Journal Entry for Issue of Debenture- M L Hada

Journal Entry for issue of Debenture with different combination of Issue and Redemption condition

1. Issue at Discount & Redemption at Discount

Bank A/C Dr

Discount on issue of Debenture A/C Dr

Debenture A/c Cr

2. Issue at Premium & Redemption at Discount

Bank A/C Dr

Debenture A/C Cr

Debenture Premium A/C Cr

3. Issue at Discount & Redemption at Premium

Bank A/C Dr

Discount on Issue of Debenture A/C Dr

Loss on Issue of Debenture A/C Dr

Debenture A/C Cr

Premium of Redemption of Debenture A/C Cr

4. Issue at Premium & Redemption at Premium

Bank A/C Dr

Loss on Issue of Debenture A/C Dr

Debenture A/C Cr

Debenture Premium A/C Cr

Premium on Redemption of Debenture A/C Cr

Journal Entry for Redemption of Debenture

Debenture is a kind of long term debt. Debenture once issued is refunded in some future date. It is called Redemption of Debenture. Debenture is refunded in two ways

(1) Redemption by paying cash

(2) Redemption by issuing Common Share

1. Redemption of Debenture by paying cash

For journal entry for redemption of debenture, only the condition of redemption is considered, which is as follows.

Discount on Redemption = "Gain" It is credited in the journal entry

Premium on Redemption = "Loss" It is debited n the journal entry

There are two journal entries for Redemption of debenture, which are as follows.

(a) For crediting the amount of debenture to the account of debenture holders

Debenture A/C Dr

Premium on Redemption of Debenture A/C Dr (if premium)

Discount on Redemption of debenture A/C Cr (if discount)

Debenture Holders A/C

(b) For making payment to debenture holders

Debenture Holders A/C Dr

Bank A/C or Cash A/C Cr

2. Redemption of Debenture by issuing Common Shares

(a) For crediting the amount of debenture to the account of debenture holders

Debenture A/C Dr

Premium on Redemption of Debenture A/C Dr (if premium)

Discount on Redemption of debenture A/C Cr (if discount)

Debenture Holders A/C

(b) For making payment to debenture holders

Debenture Holders A/C Dr

Discount on issue of Share A/C Dr (if dscount)

Common Share Capital A/C Cr

Share Premium A/C Cr (if premium)

(Note: The first journal entry for redemption of debenture is same in both; redemption by paying cash or by issuing shares

Accounting for holding company

Generally small business firms find themselves in difficult position to fight competition with large company in an industry. Therefore two or more small business firms associate themselves financially to make them able to sustain or survive in the business. For the purpose, one firm acquire (buy) 50% plus Equity share of the next firm. For example, suppose there are two small firms named H Ltd and S Ltd in an industry. Suppose H Ltd acquire 60% share of S Ltd. Then H Ltd shall have control over the decision making process in S Ltd also, because H Ltd has majority in the board of directors of S Ltd through voting rights. In the example, H Ltd is recognized as Holding Company and S Ltd shall be recognized as Subsidiary company. After the tie-up, Holding company prepares a combined Balance Sheet, which is called " Consolidated Balance Sheet "

Some Important Terminologies

(a) Pre acquisition period & Post acquisition period:

The date on which holding company acquire (buy) the Equity shares of subsidiary company is known as date of acquisition. Suppose holding company acquire shares on 1 Apr of the year, then 1 Apr is called date of acquisition. The period before the date of acquisition is called Pre acquisition period. And the period after the date of acquisition is called Post acquisition period. In this example, 3 months (Jan to March) is pre acquisition period and 9 months (Apr to Dec) is post acquisition period. In other way, 3/12 is pre acquisition period and 9/12 is post acquisition period. Note that 12 is the total number of months in a year

(b) Capital Profit and Revenue Profit:

The proportion of profit in the pre acquisition period is called pre acquisition profit or “Capital Profit” and the proportion of profit in the post acquisition period is called post acquisition profit or “Revenue profit” For example suppose there is a total amount of profit of the subsidiary company of Rs100,000 and date of acquisition as said earlier is 1 Apr, then Rs 25,000 (Rs100,000 x 3/12 = Rs 25,000) is capital profit and Rs75,000 (Rs 100,000 x 9/12) is revenue profit

(c) Ratio of Contribution:

Both capital profit and revenue profits are shared in between holding company and subsidiary company on the basis of their ratio of contribution. As in our example, suppose holding company has acquired 60% shares out of the total shares of subsidiary company which is suppose 10,000 shares. Then the proportion of shares in between holding company and subsidiary company shall be 60% and 40% (total 100%). It could be expressed as below

H Ltd S Ltd

Ratio of contribution 6000 sh: 4000 sh

3 : 2

3/5 : 2/5

(d) Equity shares, PL Account (Retained Earning) and General Reserve:

When holding company acquires equity shares of subsidiary company, then holding company generally shall have legal rights (authority) over the following three items of the subsidiary company shown in the balance sheet

Equity Share Capital or Common Share Capital

Retained Earning or PL Appropriation Account

(General) Reserve

The above three items of balance sheet of subsidiary company shall be divided in between holding company and subsidiary company. For which working note is required

Steps of Working Note

The working note has 5 steps as mentioned below

1. Date of acquisition

2. Ratio of contribution

3. Calculation of Capital Profit (CP) and Revenue Profit (RP)

4. Minority Interest

5. Cost of Control

1. Date of acquisition: This is the month when holding company acquire shares of subsidiary company

2. Ratio of contribution: This is the ratio of share of subsidiary company which is acquired by holding company and the remaining shares with subsidiary company. Capital profit and Revenue profits are shared by holding company and subsidiary company on the basis of ratio of contribution

3. Capital Profit and Revenue Profit: Profit before the date of acquisition is called Capital Profit and profit after the date of acquisition is called Revenue Profit

4. Minority Interest: When holding company acquires shares in subsidiary company, then the holding company becomes majority and the subsidiary company becomes minority (bearing fewer numbers of shares). Therefore the worth of shares/funds that remains with the subsidiary company is called Minority Interest

5. Cost of Control: When holding company acquires Equity shares of subsidiary company, then holding company pay amount to subsidiary company. Sometimes holding company pays more than what is acquired and sometimes pays less than what is acquired. If holding company pays more amount, the excess amount given is called Goodwill and if holding company pays less amount, the less short amount paid is called Capital Reserve. Goodwill is assets and Capital Reserve is liability.

Important Notes

1. Three items from above Working Note go to CBS (Revenue Profit of Holding Co, Minority Interest, Goodwill or Capital Reserve)

2. Three items from question Balance Sheet do not go to CBS (Equity Share Capital of Subsidiary Company, PL Account/Retained Earning and Gen Reserve, Investment of Holding Company)

ADJUSTMENTS in CONSOLIDATED Balance Sheet

Following are some of the general adjustments for Consolidated Balance Sheet

1. Mutual Owing: Mutual Owing is a transaction of credit purchase/credit sale among Holding Company and Subsidiary Company. Such transactions are removed or minus from both sides of CBS as follows.

(a) Minus from AP or S Creditors or CL in Liability side

(b) Minus from AR or S Debtors or CA in Assets side

2. Mutual Bills: Mutual Bills is a transaction of BR and BP among Holding company and Subsidiary company. Such transactions are also removed or minus from both sides of CBS as follows.

(a) Minus from BP or CL in Liability side

(b) Minus from BR or CA in Assets side

3. Unrealized Profit: There may be a transaction of Purchase of Goods or Sales of Goods (inventory or Stocks) among Holding company and Subsidiary company. Out of the total Purchase or Sale of such stocks or inventory, there may be some part of stock unsold and included in the stock of the Holding or Subsidiary company.

The amount of profit included in such unsold stock or closing stock is called "Unrealized Profit". Such amount of unrealized profit is removed or minus from both sides of CBS as follows.

(a) Minus from PL Account or Revenue Account in Liability side

(b) Minus from Stock or Inventory or CA in Assets side

Following are the steps to calculate the amount of "Unrealized Profit"

Step 1: Determine Unsold stock or stock included in closing stock

Step 2: Determine Unrealized profit as below

for profit on basis of Sales

Unsold stock x Profit %

----------------------------------

100

for profit on basis of Cost

Unsold stock x Profit %

-----------------------------------

100 + Profit %

4. Dividend from Subsidiary Company: Like all other companies, Subsidiary Company also distributes Dividend to its Share Holders. When Subsidiary Company distributes dividend, then Holding Company also receives dividend from Subsidiary Company on the shares it has acquired in the Subsidiary Company

The Most Important thing to note here is that such a dividend may be paid out of Pre acquisition Profit or Post acquisition profit. If the dividend s paid out of Pre acquisition profit that is referred to as Pre acquisition dividend and the dividend which is paid out of Post acquisition profit is referred to as Post acquisition dividend

Pre-acquisition Dividend

When the Holding Company receives dividend out of Pre acquisition profit, then the dividend so received by Holding Company is a kind of Capital gain for it. It is like return of Capital or return of Investment for the Holding Company

Here as a rule, such Pre-acquisition dividend should be credited to the Investment A/c by the Holding Company, it should not be credited to the Profit and Loss A/c by the Holding Company in its book

But in the Practical Problem in the books, it has been assumed that Pre acquisition dividend is generally credited by Holding Company to Profit & Loss A/C. In this context, while preparing Consolidated Balance Sheet, first of all amount of Pre-acquisition dividend of subsidiary company is determined and then the following adjustment are made

Step 1: Deduct the whole amount of Pre-acquisition Dividend from beginning PL A/C of subsidiary company in step no 3 of working note (Calculation of Capital Profit & Revenue Profit)

Step 2: Deduct the share of Pre-acquisition Dividend of Holding Company while calculating Cost of Control in Working Note

Step 3: Deduct the share of Pre-acquisition Dividend of Holding Company in Consolidated Balance Sheet

Post acquisition Dividend

Post acquisition dividend is that dividend which is distributed by the Subsidiary Company out of the Post acquisition profit. The Post acquisition dividend should be treated as an Income for Holding Company and should be credited to the Profit and Loss A/C.in its book Since the Holding Company has already included this kind of dividend in the Profit and Loss A/C, so it is not necessary to do any kind of adjustments in Consolidated Balance Sheet

Interim Dividend

The dividend which is declared and distributed by company before actual income is called "Interim Dividend" Interim Dividend in terms of Pre acquisition and Post acquisition Profit is also treated in the same way as discussed above

5. Revaluation of Fixed Assets: Revaluation refers to the increase or decrease in the value of Fixed Assets. Increase or decrease in the value of Fixed Assets is a Capital gain or Capital Loss for the company. Therefore, revaluation of Fixed assets Increase or Decrease the value of Capital Gain (or Loss). And on the other hand, the revaluation also increase or decrease in the value of Fixed assets in Consolidated Balance Sheet. Following is the adjustments

(a) Minus or Plus in Capital Gain (Loss) in Working Note

(b) Minus or Plus to the respective Fixed assets in Consolidated Balance Sheet

Solution download here ....1st

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Sol_HC_Q No 14 (16)

Sol_HC_Q_No 15(17)

Sol_HC_Q_No_16(18)

Accounting for price level change

The Income Statement and Balance Sheet that an organization prepares at the end of every year is called Conventional Financial Accounting. In the Income Statement, Costs are recorded on Historical Basis and Revenues are recorded on a Current value basis. In the same way, in Balance Sheet, the assets and liabilities are recorded on the Historical basis. In other words, in conventional Balance Sheet, assets are recorded on the basis of cost that has been paid in the past when they were purchased, and liabilities are recorded on the basis of the amount received in the past. It is a sad reality that the value of assets and liabilities given in the Balance Sheet are not equal to the current market value, because it is quite natural that the value of assets and liabilities fluctuate according to the current market value. The fluctuation depends upon the Purchasing Power of Money.

For the correct and actual valuation of assets and liabilities of the business, the accounts should be designed/developed in such a way so that it would give the actual valuation of the assets and liabilities in accordance with the current market value. And it is possible to do so, if we convert the Income Statement and Balance Sheet according to the current price level or current purchasing power of money. The way of conversion is called Accounting for Price Level Change. The Accounting for Price Level change is also called Inflation Accounting, because the value of expense, income, assets and liabilities are converted on the basis of rate of inflation so that it would represents the actual value prevailing in the market.

The rate of inflation is called Price Index on the basis of which a multiplier is developed which is called Conversion Factor (CF). On the basis of the conversion factor, the historical value of items are converted into the current market value.

Methods of Accounting for Price Level Change

Fundamentally there are two methods of accounting for Price Level Change, they are as follows

1. Current Purchasing Power Method or CPP Method

2. Current Cost Accounting Method or CCA Method

1. Current Purchasing Power (CPP) or General Purchasing Power (GPP) Method

Under this method, all the items of Conventional financial statements are converted according to the general price level by using an appropriate conversion factor (CF). One demerit of this method is that it uses the index of General Price Level or a Common Price Level for all the items, it ignores the Price Index of an individual item. It is possible that there may be an increase in the General Price index, whereas in the same time, there may be a decrease in the value of a particular assets.

Procedures or Steps of CPP Method

There are 4 steps for CPP Method, which are as given below.

Step 1: Calculation of Conversion Factor (CF)

Step 2: Find out Holding Gain or Loss from Monetary Items

Step 3: Restatement or Conversion of Income Statement

Step 4: Restatement or Conversion of Balance Sheet

Step 1: Calculation of CF: CF are as follows:

Opening Conversion Factor = C P I

O P I

Closing Conversion Factor = C P I

C P I

Average Conversion Factor = C P I

A P I

Share/Assets Acquisition Conversion Factor = C P I

Acquisition Index

Abbreviations: CPI = Closing Price Index. OPI = Opening Price Index. API = Opening Price Index: :We should note that there is CPI is in the upper part in all the Conversion Factor formulas.

CPI is used for such items, which takes place generally at the end. Like: Tax paid, Dividend paid, Interest paid, etc

OPI is used for specifically Opening Stock. Also if acquisition price index for Fixed assets and its depreciation are not available then also OPI can be used.

API is used for those items which takes place continuously throughout the year. Like: Sales, Purchase, Operating Expenses etc

For the Opening stock, OPI is used, but for the closing stock, there could be used OPI or API, it depends upon the situation. If Closing stock is part of Opening stock, then OPI is used and if Closing stock is the part of Purchase then API is used. *

Step 2: Find Out Holding Gain or Loss from monetary items:

Under CPP method, a distinction between monetary items and non-monetary items becomes necessary. Monetary items are those items, the value of which are fixed in terms of monetary unit by some kind of contract. The Price Level or Inflation or deflation does not make any effect in their value. Like: Cash in Hand, Cash at Bank, Bills Receivable, Bills Payable, Sundry Debtors (Book Debt), Account Receivable, Sundry Creditors, Account Payable, Outstanding Expenses, Prepaid Expenses, Redeemable Preference Share Capital, Debenture etc. Such monetary items do not require conversion while Preparing CPP BS

Non-monetary items are those items, the value of which are not fixed by any contract are called non-monetary tems. The values of them are not fixed. Like: Machinery, Building, Inventory, etc

During the period of inflation, there is a loss on holding such monetary assets, which is called Holding-monetary loss. But there is a gain on holding monetary liabilities during the period of inflation, which is called Holding-monetary gain

- ML Hada

Step 3: Restatement or Conversion of Income Statement:

The Historical value Income Statement is converted into CPP Income statement by applying appropriate conversion factor

Step 4: Restatement or Conversion of Balance Sheet:

The Historical value Balance Sheet is converted into CPP Income statement by applying appropriate conversion factor

* As stated earlier in step no 1, Opening stock is converted using Opening Price Index (OPI). But Closing stock is not converted using Closing Price Index (CPI). Closing stock is converted using OPI or API or sometimes both OPI and API. It is situational. Let us discuss the matter taking one example as follows.

Sales 10,00,000

Less: Cost of Goods Sold

Opening Stock 100,000 (OPI is used)

+ Purchases 400,000 (API is used)

Total Goods available 500,000

- Closing Stock (100,000)

(400,000)

Gross Profit Margin 600,000

As stated in the above Income Statement Company has Opening Stock Rs 100,000. Then after Company has purchased stock for Rs 400,000 during the year. Company has total stock available Rs 500,000. Out of Rs 500,000 available stock, company has sold stock of Rs 400,000 and then Closing stock remaining with company at the year end is Rs 100,000. Here we also need to consider the Method of Issue of Inventory, i.e. First In First Out (FIFO) and Last In First Out (LIFO). If the method of Inventory Issue is FIFO, then company first issue (sale) the Opening stock and then after issue (sale) the Purchased Stock . If the method of inventory issue is LIFO, then company first issue (sale) the Purchased stock, then after issue (sale) the Opening stock.

Case 1: Suppose method of Inventory issue is FIFO

If the method is FIFO, then it is observed that company shall issue (sold) first of all the Opening stock, i.e. Rs 100,000 and the remaining Rs 300,000 has been sold out of the Purchased stock (total sales is Rs400,000). Therefore closing stock remains out of Purchased stock, i.e. Rs 100,000 (Rs 400,000 - sold Rs 300,000). Since the closing stock remains out of the Purchased stock, therefore the Closing Stock Rs 100,000 shall be converted using API (because Index of Purchase is API).

Case 2: Suppose method of Inventory issue is LIFO

If the method is LIFO, then it is observed that company shall issue (sold) fist, out of Purchased stock. It means company shall issue (sell) all the Purchased stock, i.e. Rs 400,000. Then the Opening stock inventory shall all (Rs 100,000) remains in Closing Stock. Therefore in this case, the Closing stock shall be converted using OPI (because Index for Opening stock is OPI).

Case 3: Sometimes Closing Stock is converted partially using API and partially using OPI both

Let us take another example to understand that in some cases Closing stock is converted using both API and OPI. Cosider the following example.

Sales Rs 10,00,000

Less: Cost of Goods Sold:

Opening Stock 100,000

+ Purchase 400,000

500,000

- Closing stock (150,000)

(350,000)

Gross Profit 650,000

Suppose the method of inventory issue here is LIFO. Here total sale is Rs 350,000. Since the method is LIFO, so company shall issue (sale) firts of all out of Purchased stock. We observe that all Rs 350,000 shall be sold out of Purchased stock only. There shall also be remaining balance of stock Rs 50,000 out of the purchased stock (Rs 400,000 - Rs 350,000) .And Opening inventory Rs100,000 shall all remains in the Closing stock. Here Closing stock Rs 50,000 is out of the Purchased stock and Rs100,000 is also all remains in Closing stock. Here the Closing stock 150,000 shall be converted using both API and OPI (Rs 50,000 shall use API and Rs 100,000 shall use OPI).

Steps for Preparation of CPP Balance Sheet

Following are General rules (steps) for preparation/conversion of/into CPP Balance Sheet

1. Monetary items are not converted (because they are already converted while preparing "Holding Monetary Gain or Loss"

2. Inventory is generally converted using "API"

3. Share Capital is converted using "Index at the time of Issue of share"

4. Fixed Assets is converted using "Index at the time of Purchase of FA"

5. The "Balancing Figure" is taken as CPP Retained earning or Loss. It may comes as balancing figure in Liability side (as gain) or in Assets side (as Loss)

2. Current Cost Accounting (CCA) Method

It is observed that there are some demerits in the CPP method, like CPP method does not recognize the Price Index of individual item, because of which items of the financial statements may not represents the true market value even after conversion under CPP method. To overcome this basic demerit, another method was developed in UK, which is known as CCA Method. It recognizes the changes in individual item separately irrespective of the General Price Index.

Procedures or Steps of CCA Method

Step 1: Fixed Assets Adjustment

Step 2: Depreciation Adjustment

Step 3: Inventory Adjustment

Step 4: Cost of Sales Adjustment (COSA)

Step 5: Monetary Working Capital Adjustment (MWCA)

Step 6: Gearing Adjustment (GA)

Step 7: Current Cost Accounting Reserve (CCAR)

Then after the following two Statements are prepared:

Preparation of Current Cost Income Statement

Preparation of Current Cost Balance Sheet

The all above steps (from 1 to 7) are described as below

Step 1: Fixed Assets Adjustment

Under this step, the amount of Fixed Assets of Historical Value Balance Sheet is converted into CCA value generally either by (a) Net Realizable value or Current Market value or by (b) Converting on the basis of Fixed Assets relevant Index. Net Realizable value is available in the question, if it is not given then we take second option and following is the format.

Fixed Assets Adjustment

Particulars Period 1 Period 2

Current Cost value

Period 1 value x CF Rs ..........

Period 2 value x CF Rs .........

Less: CC Depreciation

Period 1 value x CF (Rs .........)

Period 2 value x CF (Rs .........)

-----------------------------------------------------------------------

Net CCA Value of F. A. Rs ............ .................

Less:Historical Net Cost (Rs .....) (Rs ..........)

F A Adjustment Rs ............ Rs ............

Step 2: Depreciation Adjustment

Under this step, the amount of Depreciation of Historical Value Balance Sheet is converted into CCA value by multiplying with CF

Depreciation Adjustment

Particulars Period 1 Period 2

Depreciation

Period 1 value x CF Rs .........

Period 2 value x CF Rs..........

Less: Historical cost (Rs .........) (Rs .........)

......................................................................................

Rs ............ ...............

Depreciation Adj = Period 2 value - Period 1 value

= Rs ...................

Step 3: Inventory Adjustment

Under this step, the amount of Inventory of Historical Value Balance Sheet is converted into CCA value either by (a) Current Market Replacement value or by (b) Converting the Historical value Inventory by multiplying with suitable index available. Current Market Replacement value is available in the question, if it is not available then we take second option and following is the format

Inventory Adjustment

Particulars Period 1 Period 2

Replacement Value Rs .......... Rs ..........

(Converted value

multiplied by CF)

Less: Historical value (Rs ........) (Rs ..........)

-------------------------------------------------------------------

Amt to be credited to

CCAR Rs ........... Rs .............

Step 4: Cost of Sales Adjustment (COSA)

Under this step, the difference between the Current Cost of Goods Sold and the Historical Cost of Goods Sold is determined. Following is the formula

COSA = (C - O) - Ia ( C/Ic - O/Io )

Where, C = Historical Cost Closing Stock, O = Historical Cost Opening Stock, Ia = average Index, Ic = closing Index, Io = opening Index

Step 5: Monetary Working Capital Adjustment (MWCA)

Under this step, monetary current assets and monetary current liabilities are considered for adjustment. MWCA can be determined as follows.

MWC = Monetary Current Assets – Monetary Current Liabilities

It should also be noted that;

(i) Monetary current assets generally do not include Cash balance and monetary current liabilities generally do not include Bank overdraft.

(ii) Trade creditors or debtors relating to Fixed Assets purchased are not included

(iii) Inventory subject to COSA is also not included

Step 6: Gearing Adjustment (GA)

Under this step, it is determined the proportion of Capital Employed by the Borrowed Capital or Debt Capital or Long Term Debt. If the whole capital is financed by the Shareholders, then no Gearing Adjustment becomes necessary

There are two stages for calculation of gearing adjustment

Stage 1: Calculation of Gearing ratio.

Stage 2: Calculation of Gearing Adjustment

Gearing Ratio (GR) = --------------

B + S

Where, B = Average Net Borrowing

S = Average Shareholders' Fund

Borrowings include all liabilities fixed in monetary term apart from those taken in Monetary Current Liabilities. For example: Debenture, Secured Loan, Preference Share Capital, Short Term Loan, Bank Overdraft – Cash – Marketable Securities

Similarly, Shareholders’ Fund include Equity Share Capital, PL Account, Proposed Dividend + Increased Value in Fixed Assets (FA Adjustment Step No 1) + Increased Value in Inventory (Inventory Adjustment Step No 3)

Gearing Adjustment (GA) = --------------------- x A

B + S

Where A = Total amount of Current Cost Adjustment (CCA)

Also, CCA or A = Depreciation Adjustment + COSA + MWCA

Step 7: Current Cost Accounting Reserve (CCAR)

After completion of Steps from 1 to 6, then CCAR could be determined. It appears as below.

Current Cost Accounting Reserve

Particulars amount Amount

CCA

Depreciation Adjustment Rs .......

COSA Rs ........

MWCA Rs ........

Rs ..........

Less: Gearing Adjustment (Rs .........)

Rs ..........

Add: Increase in the value of FA Rs ..........

Add: Increase in the value of Inventory Rs ..........

Total amount credited to CCAR Rs ..........

Note that 6 items are there is CCAR

Step 8: Preparation of Current Cost Income Statement

Following is the format of CC Income Statement

Particulars Amount

NPBIT (Historical value) Rs .............

Less: CCA

Depreciation Adj Rs .......

COSA Rs ........

MWCA Rs ........

(Rs ..........)

Current Cost Operating Profit Rs ............

Less: Interest Expenses ( Rs ...........)

Add: Gearing Adjustment Rs ............

Current Cost NPBT Rs .............

Less: Tax Provision ( Rs ...........)

Profit available to Shareholders Rs ............

Add: Retained Earning B/d Rs ............

Retained Earning C/d Rs ............

Step 9: Preparation of Current Cost Balance Sheet

Following are very common STEPS to prepare CCA BS

(a) Fixed Assets and Accumulated Depreciation are converted as per the given CF

(b) Inventory or Stock is converted on the basis of given CF using generally Average Index

(d) CCAR is put in Liability side

(e) Balancing figure is taken as CCA Retained Earning

PLC_2021_2016

PLC_2015

Accounting for business combination/acquisition of business

We observe that one business firm is purchased by another business firm. It is called acquisition of a business. The company who acquire another company is called Purchasing Company and the company which is acquired by another company is called Vendor Company. For example, company A acquires company B, then company A is "Purchasing company" and company B is called "Vendor company". Such activity is known as "Business combination or acquisition of business"

There are different methods of business combination. Among which following two methods are the most common method of business combination.

1. Amalgamation

2. Absorption

Amalgamation

We observe a situation when two or more than two existing company close down their business. A new company is formed and registered with government. The newly registered company take over the Assets and Liabilities of the old companies. This process of combining business is called Amalgamation. In another wold, amalgamation is a process of closing down two or more than two companies and forming a new company who take over the assets and liabilities of old companies. The existence of two existing companies come to an end, and a new company comes into existence to take over the assets and liabilities to the old ones.

Absorption

Sometimes an existing company acquires the business of another existing company. This situation is called "Absorption of business" Under the absorption, no new company is formed. Suppose there are two companies, X Company and Y Company. They are running their business. Suppose X Company is closed and discontinued the business. The another company, Y Company acquired the assets and liabilities of X Company. It is absorption of business. Here Y company has absorbed the business of X company.

Accounting Treatment of Business Combination

Under both amalgamation and absorption, the following two things happen.

1. An existing company is liquidated

2. Assets and liabilities of the liquidated company is taken over by another company

Therefore accounting treatment for both amalgamation and absorption are similar in many ways. Under both forms of business combination, there are two parties involved as follows.

1. Vendor Company

2. Purchasing Company

Under both amalgamation and absorption, Vendor Company transfers the assets and liabilities to the Purchasing Company and Purchasing Company pay the value to the Vendor Company, The value which is determined to pay to the Vendor company by the purchasing company is called “Purchase Consideration.”

Steps of Accounting Process

Step 1: Determination of Purchase Consideration

Step 2: Closing Entries in the books of account of Vendor Company

Step 3: Opening Entries in the books of account of Purchasing Company

Determination of Purchase Consideration

There are 2 major methods for how to determine Purchase Consideration, which are as follows

(a) Lump Sum Method: The Purchase Consideration amount is Fixed for a sum of money. No calculation is required.

(b) Net Assets or Net Worth Method: Net assets or Net Worth is the difference between Assets Taken Over and the Liabilities assumed. The assets not taken over or the liabilities not assumed or not considered are not taken into the calculation of the Net Worth amount. Sometimes the Purchasing Company may pay or add some extra amount over and above the Net Worth amount while paying to the Vendor Company. The extra amount being paid is called ‘Goodwill amount” and is added to the value of Purchase Consideration

While calculating the value of Net Assets, the following points are considered, which are very IMPORTANT

Assets Side:

1. Fictitious Assets are not included. Examples of fictitious assets are: PL Account Dr balance, Preliminary Expenses, Dis on issue of share and debenture, Underwriting Commission, advertising Suspense account etc.

2. The assets which are not taken over by Purchasing Company are not included.

3. Goodwill (after revaluation), Patent, Copyright, Trade Marks are not included.

4. If it is mentioned in the question that “all assets are taken over” then “Cash in Hand and Cash at Bank” are also included, otherwise not.

Liability Side:

1. The "Accumulated Profit Accounts" are not included. Examples of accumulated profit are: PL Account Cr Balance, General Reserve, Debenture Sinking Fund, Capital Reserve, Capital Redemption Reserve, Capital Reserve, Share Premium account, Workmen Compensation Fund, Dividend Equalization Fund etc

2. The liabilities which are not assumed by Purchasing Company are not included.

3. If it is mentioned in the question that “Only trade liabilities” are taken over, then only trade liabilities like Sundry creditors/Account Payable and Bills Payables are taken

4. Any Fund which are Payable to the outsiders or the third party or the liabilities which do not belong to Shareholders are included into the calculation. Examples are: Employee Provident Fund, Pension Fund, Workmen saving Fund etc

Closing Entries in Book of Vendor Company

Vendor company is that company who sale its business and transfer its assets and liability to another company (Purchasing company). While selling the business, the vendor company may have gain or loss. For determining the gain or loss, vendor company prepare a separate Ledger Account named "Realization Account" Following are most common situation and journal entry

1. For transferring Sundry Assets to Realization Account

Realization A/C Dr

Sundry Assets A/C Cr

Note:

(a) All assets except Fictitious Assets are transferred even if they are not taken over by Purchasing Company

(b) If Cash and Bank balance are not taken over by Purchasing Company, they should not be transferred
(c) Intangible assets are also transferred if they are taken over by Purchasing Company

2. For transferring Sundry Liabilities to Realization Account

Sundry Liabilities A/C Dr

Realization A/C Cr

Note:
(a) Accumulated Profit or Reserve are not transferred. They are transferred to Shareholders Account. Example: Reserve account, Fund account etc.
(b) Liability not taken over by Purchasing Company should not be transferred to Realization account. But gain or loss on discharge of such liabilities must be taken
(c) Provision account must be transferred e.g. Employee Provident Fund, Pension Fund, Provision for Taxation, Provision for bad and doubtful debt etc

3. For Gain and Loss on discharge of Liabilities not taken over by Purchasing Company

(i) If Loss

Liability A/C Dr

Realization A/C (loss) Dr

Bank A/C Cr

(ii) If Gain

Liability A/C Dr

Realization A/C (gain) Cr

Bank A/C Cr

4. For sale of Assets not taken over by Purchasing Company

Bank A/C Dr

Realization A/C Cr

5. For Purchase Consideration Due

Purchasing Company A/C Dr

Realization A/C Cr

6. For Realization Expenses

i.If borne by Vendor Company

Realization A/C Dr

Bank A/C Cr

ii. If borne by Purchasing Company

No Journal Entry

iii.If Realization Expense is paid by Purchasing Company as a part Purchase Consideration

Realization A/C Dr

Bank A/C Cr

7. For Redemption at Premium or at discount to Debenture Holders

(a) For redemption at Premium

(i) Debenture A/C Dr

Realization (premium) A/C Dr

Debenture Holders' A/C Cr

(ii) Debenture Holders' A/C Dr

Bank A/C or Deb in new Comp A/C Cr

(b) For redemption at discount

(i) Debenture A/C Dr

Realization (dis) A/C Cr

Debenture Holders' A/C Cr

(ii) Debenture Holders' A/C Dr

Bank A/C or Deb in new Comp A/C Cr

8. For redemption of Pref Share at Premium or discount to Pref Share holders

Debenture and Preference shares are treated similar at the time of closing entries in the book of vendor company. Therefore journal entries for Preference share is also similar to the journal entry as in the case of Debenture redemption

9. For Closing Realization Account and Gain or Loss transferred to Equity Share holders account

(a) For gain

Realization A/C Dr

Equity Shareholders' A/C Cr

(b) For loss

Equity Shareholders' A/C Dr

Realization A/C Cr

10. For receiving Purchase Consideration from Purchasing Company

Bank Account Dr

Pref Share in Purchasing Company Account Dr

Equity Share in Purchasing Company Account Dr

Debenture in Purchasing Company Account Dr

Purchasing Company A/C Cr

11. For transfer SH Equity/Fund to Shareholders account

Equity Share Capital Account Dr

General Reserve Account Dr

PL A/c Dr

Other Reserves Account Dr

Equity Shareholders A/C Cr

12. For transfer Fictitious assets to Equity Shareholders account

Equity Shareholders A/C Dr

Fictitious Assets A/C Cr

13. For payment to Equity shareholders after Closing SH account

Equity Shareholders' A/C Dr

Share in Purchasing Comp A/C Cr

Bank A/C Cr

Note: Entry no 10 and 13 are inter related

Accounting for non-trading organization and/or accounting for professionals

From the view point of objectives, there are two kinds of organizations

1. Profit Making Organizations

2. Non Profit Making Organizations

The fundamental objective of a profit making organization is to do business and earn profit.

But the fundamental objective of a non profit making organization is to provide service to society in different walk of like, like Sports, Rural Development, Social development, Eradication of proverty etc. Some of the example of non profit making organizations are follows.

माइती नेपाल

सानो पाइला

समता स्कुल, आदि

Though Non Trading Organizations do not earn profit, but they also have some kind of transactions like Donation received, Charity rendered, expenses for organizing sports tournament etc. To record these transactions related to welfare of society, they also maintain some kind of accounting system, which is called "Accounting for Non Trading Organizations.

The NTO basically maintained the following accounts/statements.

1. Receipt and Payment Account (for recording daily receipt and payments similar to Cash book)

2. Income and Expenditure Account (for viewing the status of transactions of Revenue nature)

3. Balance Sheet (for viewing the Assets and Liabilities position, just like BS of Trading Concerns)

Accounting Terminologies for Non-Trading Organizations

Since the nature of transactions of non trading organizations are different than that of the trading concerns, therefore the accounting terminologies/headings of transactions are also different here. Among all, the transactions of Revenue nature goes to Income & Expenditure Account and the transactions of Capital Nature goes to Balance Sheet.

How to know that a transaction is of Revenue nature and goes to Income & Expenditure (I/E) Account and in the same way how to understand that a transaction is of Capital nature and goes to Balance Sheet?

NTO first of all prepare Receipt & Payment Account. Each side consists of the following typical entries.

Receipt & Payment Account

Receipts Payments

To opening balance xxxx By Salary Paid xxxx

To Subscription xxxx By Stationary xxxx

To Life Membership fee xxxx By Machinery xxxx

To Donation xxxx By Tournament Exps xxxx

To Donation for Building xxxx By Equipment xxxx

To Sundry Income xxxx By Honorarium xxxx

To Entrance Fee xxxx By Seminar Exps xxxx

To, Endowment Fund xxxx By Closing balance xxxx

XXXX XXXX

From the above Receipt & Payment Account, we need to prepare (a) Income & Expenditure Account & (b) Balance Sheet.

Payment Side

In the Payment side, few items are expenses and go to Income & Expenditure Account and few items are Assets or Property and go to Balance Sheet. It is easy to recognize about, which are Expenses and which are Assets. For example Salary, Stationary, T Expenses. Honorarium, Seminary Expenses are EXPENSES and the rest Machinery, Equipment are ASSETS.

Honorarium is a kind of remuneration that is paid to experts or scholars for his/her contribution to the organization. For example, suppose a Football clubs invites Ronaldo on the occasion of anniversary of the club. Ronaldo also interacts with the players and provided training and tips for the development of the players. In the occasion, the club arrange to/fro tickets, accommodation, also offered a gift. Suppose the club incurred A TOTAL expense of Rs. 50,000. Such expense is called "Honorarium" It is treated as Expense and goes to "Income & Expenditure Account"

Receipt Side

In the Receipt side, some items are Income and some items are Liability. Naturally, Income goes to Income & Expenditure Account and Liabilities go to Balance Sheet. It is not simple to recognize which one are Income and which one are Liability here. To recognize Income and Liability, we follow the following criteria.

Out of the Receipts, some receipts are Regular whereas some Receipts are not Regular or Irregular. Regular means which takes place frequently, happens many times in a year. Irregular means those which are not so frequent, takes place rarely, not every year. The Receipts which are Regular are taken as Income and go to Income & Expenditure Account. The Receipts which are Irregular are taken as Liability and goes to Balance Sheet.

Now let us examine, which Receipts are regular and which receipts are irregular one by one as follows.

(a) Subscriptions: Subscription is a membership free, which is deposited by all the members of the NTO. Such fee is mandatory to deposit by all the member every year to renew the membership. Such receipts are regular, so it is Income for the organization, hence gores to Income & Expenditure Account.

(b) Life Membership Fee: Life Membership fee is also membership fee. But what is difference that Subscription is a membership fee which is deposited by the members on yearly basis and renew their membership. But few members deposit a lump sum of membership fee. The amount is bigger than subscription. One who deposit a lump sum bigger amount for membership, then such member becomes life member of the organization and no need to deposit membership fee every year. Such membership fee is called Life Membership fee. Such kind of membership fee are deposited by only a few members. Such receipts are irregular. So it is considered Liability and goes to Balance Sheet.

(c) Entrance Fee: Entrance fee is the sum which is deposited by new members at the time of taking new membership. Every year new members join NTO and deposit Entrance fee. Entrance fee is a regular source of receipt. Therefore Entrance fee is Income and goes to Income & Expenditure Account.

(d) Donation: Donation is a charity money that is given by individual or any institution to NTO to for help. Such money deposited into the NTO is called "Donation" There are two kinds of donation which are as below.

(i) General Donation: It is a small sum of money that is deposited by General public or the members. For example, you might have seen that in Temple or Mosque, there is "Donation Box" Any person visiting temple or mosque drop 5 rupees, 10 rupees,100 rupees and such small amount in the "Donation Box". The temple or mosque use such money for their day to day work/need. Such kind of donation is regular. So it is revenue receipt and goes to "Income & Expenditure Account".

(ii) Specific Donation: Sometimes NTO ask people to donate for a specific purpose, like Donation for Construction of Building, Donation for organizing Tournament, Donation for construction of Library Building etc. The deposits in such donation is purposefully and also comparatively a big sum. Such kind of donation is not regular, it is occasional. Therefore "Donation for Library:, "Donation for construction of Building" are specific donation is capital receipt and goes to Balance Sheet.

(e) Sundry Income: It is small amounts of miscellaneous receipts. Such kinds of receipts are a regular receipts and go to Income & Expenditure Account.

(f) Endowment Fund: It is called बन्दोबस्त कोष वा अक्षय कोष in Nepali language. You might have heard or read that a person has deposited a large sum of money (like 1 Crore) in the name of a trust or any social organization. The person also mentions in the document that the sum Rs 1 Crore (example) can not be withdrawn by that social organization, but the interest earned there from can be withdrawn and the interest money could be used for day to day or any other expenses/payments. But the main fund (Rs 1 Crore) can not be withdrawn.

Such kind of fund is generally a big fund and is irregular. Therefore, Endowment fund is Liability. But the interest earned from the Endowment is a regular receipt and goes to Income & Expenditure Account.

(g) Legacy: Legacy is an amount of money or property left to someone in a will. Generally a person write a legal document promising to transfer money or property to someone after his/her death. Such sum of money or property is called Legacy. NTO also receive such kind of fund/property. Such kind of receipts are rare or irregular. Therefore Legacy is generally a liability for the organization.

THEORETICAL QUESTIONS-ANSWERS

Q No 1: What do you mean by business combination? What are the advantages and disadvantages?

Ans: Business combination is a process under which two or more than two business firms combine their businesses and becomes a new business firm. Business combination is generally happens in between the firms under the same line of business or the same industry. The common purpose of business combination is to take advantage of becoming a large scale and to cut down the throat-cut competition. There are generally 2 types of business combination.

(a) Amalgamation (b) Absorption

Advantages of business combination:

a. Cut-throat competition ends

b. Establishment and management costs could be reduced

c. Research and Development could develop

d. A kind of monopoly situation could be achieved

e. Cost of production could be reduced

Disadvantages of business combination:

a. It could bring monopolistic condition in the market which becomes harmful to the society

b. Business combination may results in over capitalization (excess capital situation)

Q No 2: Describe the features of ordinary share capital.

Ans: Ordinary share capital is a basic share capital of a firm. It is also called common share capital or a equity share capital. Following is the features of ordinary share capital.

a. Payment of dividend: Rate of dividend payment to ordinary share capital is not fixed. Holders of the ordinary share capital receive residual amount of dividend after dividend to preference shareholders is distributed

b. Redemption or refund of capital: Ordinary share capital is non refundable as per the company act.

c. Voting right: Ordinary shareholders enjoy voting rights in the election of board of directors.

Q No 3: How do you classify current liability? Also state the features of each?

Ans: Current liability is defined as all those obligations of the business organizations, which are payable within one accounting period. Generally current liabilities are paid by using current assets or by creating new current liabilities. Current liabilities are classified into 3 groups.

(i) Definitely determinable current Liability: The liabilities which can be measured exactly in terms off money are called Definitely determinable current liability. For example: Accounts Payable, Bills Payable, Notes Payable, Outstanding expenses, etc

(ii) Estimated Current Liability: The liabilities which can not be measured exactly are called Estimated liability. Such liabilities are estimated on the basis of statistics and past experience. For example: Tax Payable, Warranty etc

(iii) Contingent Current Liability: Contingent liabilities are those liabilities which depends upon happening or not happening of some future events. In other words, contingent liabilities will be confirmed by the outcome of an uncertain future event. For example: Product guarantee card, etc

Q No 4: Answer in one sentence.

Ans:

(a) Stock Dividend: Dividend distribution in form of share

(b) Full form of CPPM and CCAM: Current Purchasing Power Method. Current Cost Accounting Method

(d) Preference Share Capital: Share capital of a company which carry a certain or fixed rate of dividend and do not carry voting right

(e) Debenture: It is a long term debt generally taken from non banking institutions. Debenture has a definite maturity dateand carry a fixed rate of annual interest.

Q No 5: Define and classify liability in detail with clear examples (10 marks)

Ans: Liabilities are generally classified into two parts as given below.

(a) Long Term Liability: Long term liabilities are those liabilities which are payable generally in the period more than one year. Examples are Debentures, Bank Loan, Bonds etc.

(i) Debentures: Debenture is the amount taken as loan from general public and institutional buyers. It has a definite maturity date, generally of one year. Debenture carries a certain annual rate of interest. Like share, debentures also can be issued at par, premium or discount.

(ii) Bonds: Bond is a written unconditional promise, wherein the borrower promises to pay a certain sum of money at a certain future date along with a stated rate of interest.

(b): Current Liability: (please refer answer of question no 3 above)

Q No 6: Explain the meaning and features of Non-profit-making organizations.

Ans: There are two types of organizations (i) Trading or Profit making organizations and (ii) Non Trading or Non-profit making organizations.

Non profit making organizations are a kind of service oriented social organizations. For example: Football clubs, Religious organizations, NGOs, INGOs etc. These organizations carry out their activities without profit making objectives.

Non profit making organizations are a voluntary association of peoples which are established with the objective of rendering service to the members and the society as a whole. Following are the basic features of Non profit making organizations.

(a) Objectives: Its basic objective is to provide service to its members and society.

(b) Source of fund: Its basic source of income is the membership fee and donation, grants received from public or government.

(c) Books of Accounts: Since its objective is not to make profit, so such organization does not prepare Profit & Loss Account, rather they prepare "Income and Expenditures Account"

Q No 7: Give the answers of the following questions in a single sentence.

(a) What does CCA stands for: Ans: Current Cost Accounting

(b) What does :Retirement of Debentures mean? Ans: Refund of amount of debentures to Debentureholders

(d) What is Ordinary Shares? Ans: It is common shares, which are not refundable.

Q No 8: Explain "Purchase Consideration" Write different methods of determining Purchase Consideration. (10 Marks)

Ans: Purchase Consideration is a Purchase price paid by purchasing company to vendor company for the takeover of the business. Purchase consideration is determined mutually by both purchasing company and vendor company.

Generally purchase price is discharged or paid by purchasing company to vendor company by issuing common shares, debentures and also some amount by cash.

There are different methods of determining purchase consideration. Following are some of the important method among them.

(a) Lump Sum method: According to Lump Sum Method, a fixed amount is paid by the purchasing company to vendor company. Calculation is not required to determine purchase consideration.

(b) Net Payment Method: According to the Net Payment Method, both the purchasing company and vendor company determined the mode of payment and the total sum of different mode of payment is the Purchase consideration. In other word, it is determined how much share capital, how much debentures and how much cash are to be paid and total sum of all these share, debentures and cash is Purchase consideration.

(c) Net Worth Method or Net Assets Method: Under this method, the total value of the Liabilities taken over is deducted from the total value of Assets Assets taken over. It is called Net Worth or Net Assets of the Vendor company. Suppose out of the total assets of 10 Lakh, purchasing company agreed to take over the assets of 8 lakh only, in the same way, out of the total liability of 10Lakh, purchasing company agreed to take over the liabilities of 3 lakh only. In this case Net Assets or Net worth of vendor company is Rs 5 lakh.

Assets taken over Rs 800,000

Less: Liability taken over (Rs 300,000)

Net Worth Rs 500,000

Q No 9: Write short answer in single sentence.

(a) Treasury Stock: When company buy back its own shares of stock from open market, it is called treasury stock.

(b) Purchase consideration: It is a purchase price determined for taking over the vendor company under business combination.

(c) Holding Company: The company who buy more than 50% of the shares of next company for gaining majority in another company is called Holding company.

(d) Contingent liability: The liability which depends on happening or not happening a certain future event is called contingent liability.

(e) Subsidiary Company: The company which sell out more than 50% shares to another company is called Subsidiary company.

(f) Accounting Standard: It is set of rules and guidelines for keeping up records in book of record.

Accounting Standards

Accounting is a part of business communication and is a language of business. It gives the information about financial performance as well as financial position of a business enterprise through different financial statements to its stakeholders

In the initial period, a wide verity of accounting methods were being used by different business enterprises as per their own choice. There was not any standardized common accounting system. Because of it, a comparative study was not possible and also it was difficult to understand the financial result of an enterprise

Hence a need of an accounting standard was felt by everyone and several accounting standard setting bodies were established and several conventions were organized for setting a Accounting Standard common for all

An accounting standard is a selected set of accounting policies or board guidelines regarding the principles and methods to be chosen out of several available alternatives acceptable to all

Objectives of Accounting Standard

(a) To harmonize accounting policies and practices. However some flexibility is acceptable to make necessary adjustments as per the nature and need of the business for their purpose

(b) To ensure uniformity, comparability and qualitative improvement in the preparation and presentation of financial statements

(c) To describe the accounting principles, valuation techniques, accounting methods so that there will be a fair view of financial results

Benefits/Advantages of Accounting Standard

a) Reduction in variation: Standard reduces confusing variations in accounting treatment and similarly in accounting results

a) b) A Full Disclosure of Information: Standard discloses all the information to its stakeholders like Creditors, Government, Shareholders, Researcher, General public etc

c) Facilitates Comparisons: It helps comparison between two business organizations or two financial years of the same organization

International Accounting Standard

Today is the age of Globalizations. Business has gone global. A Multi National Companies (MNCs) operate their business in different countries. Hence it is necessary to develop a globally accepted, high quality financial reporting framework so that it becomes possible to keep uniformity and becomes easy to understand by all. It increases reliability between all the stakeholders

International Accounting Standards aim at bringing uniformity in financial reporting at International level. International Accounting Standard Board (IASB), based in UK, London is responsible for setting international financial reporting standards. The board was formed in year 2001 AD

International Accounting Standards are designed as a common global language of business affairs so that company accounts are understandable and comparable across international boundaries. International Accounting Standards are progressively replacing the many different National Accounting Standards

Nepal Accounting Standard

Nepal has passed through a lot of difficult times and we are still struggling in infrastructure sector, Energy Sector and business and other sectors for development of the Nation. Amidst the difficult times, there is a lot of development in Trade and Industry sector in Nepal. To support the development from Accounting Front, there is Accounting Standard in Nepal. It is developing year by year through different boards, conventions, Seminars and a lot of development has been made in Reporting System in the part of Cash Flow Statement, Inventory Valuation, Income Tax, Leases and others which is helpful to keep record and interpret the financial results

Following are the objectives of Nepal Accounting Standard

• To enhance the reliability and relevance of financial statements
• To facilitate comparisons with the financial statements of other Enterprises or of two financial years of the same Enterprise
• To prescribe the Criteria for selecting and changing accounting policies, accounting treatment

B B A 2nd Sem

Accounting for shareholders' equity

What is a Treasury Stock ?

RESALE OF TREASURY STOCK

Journal Entries for Shareholders' Equity

Accounting for debenture

Accounting for holding company

Accounting for price level change

Steps for Preparation of CPP Balance Sheet

Accounting for business combination/acquisition of business

Accounting for non-trading organization and/or accounting for professionals