Question 1 (a) Hardy Ltd. intends to extend the factory set up on the adjacent plot with disintegrated old premises. It acquired the land having an...

Question

Question 1 (a) Hardy Ltd. intends to extend the factory set up on the adjacent plot with disintegrated old premises. It acquired the land having an area of 250 hectares at a cost of 25,000 per hectare. Hardy Ltd. incurred Stamp duty and registration charges of 5% of land value. Legal fees were paid 4,75,000 for land acquisition. Hardy Ltd. incurred 37,85,000 for demolishing old premises thereon. A sum of 12,60,000 (including 5% GST thereon) was realized from the sale of material salvaged from the site. Till the new site with extended factory premises is ready, the company needs to move the present production facilities to another (temporary) site. The following incremental costs will be incurred. (1) Set up costs of 7,50,000 to install machinery in the new location. (2) Rent of 12,00,000. (3) Removal costs of 2,50,000 to transport the machinery from the old location to the temporary location. (i) Management is of the opinion that the cost of moving the production facilities to another temporary location can be capitalised. You are required to advise. (ii) You are also required to compute the cost of land acquired. (7 Marks) (b) Ms. Neha had 20,000 Equity shares in Nexus Ltd. at a book value of 2,40,000 on 01.04.2024. Face value of shares is 10 per share. ADVANCED ACCOUNTING The Directors of Nexus Ltd. announced a bonus of equity shares in the ratio of one share for every 5 shares held on 30/04/2024. On 31/07/2024 the company made a right issue in the ratio of three shares for every 4 shares held, on payment of 14 per share. The due date for payment was 31/08/2024. Ms. Neha opted to subscribe 50% of the right shares and sold the remaining of her entitlement to Ms. Rewa for a consideration of 3 per share. On 08/10/2024, Ms. Neha received dividend from Nexus Ltd. @ 15% for the year ended 31/03/2024. On 01/11/2024, Neha sold 11500 shares at a premium of 16 per share. You are required to prepare Investment A/c as per AS -13 in the books of Ms. Neha for the year ended 31/03/2025 assuming that the shares are being valued at average cost. (7 Marks)

Accepted Answer

Option descriptive: Correct Option. Solution: (a) (i) (i) Constructing or acquiring a new asset may result in incremental costs that would have been avoided if the asset had not been constructed or acquired. (ii) These costs are not to be included in the cost of the asset if they are not directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management. (iii) The costs to be incurred by the company are in the nature of costs of relocating or reorganising operations of the company and do not meet the requirement of AS 10 (Revised) (iv) Therefore, these costs cannot be capitalized. (ii) Computation of cost of land Particulars Purchase Price 250 hectares x 25,000 per hectares 62,50,000 Stamp Duty and Registration Charges 5% of 62,50,000 3,12,500 Legal and Consultancy Fees 4,75,000 Demolition Expenses (Net of Salvage Income) 12,60,000 x (100/105) 37,85,000 (12,00,000) 25,85,000 Cost of Land 96,22,500 (b) Alternative -1 Considering the Examinee has calculated Average Cost directly for shares sold and for Closing Balance of Shares: Investment Account in Books of Ms. Neha (Scrip: Equity Shares in Nexus Ltd.) No. Amount No. Amount 1.4.2024 To Bal b/d 20,000 2,40,000 1.11.2024 By Bank 11,500 2,99,000 30.4.2024 To Bonus 4,000 (Sale of shares) 31.8.2024 To Bank (Rights Shares) 9,000 1,26,000 31.3.2025 By Bal. c/d 21,500 2,38,455 1.11.2024 To P&L A/c (Profit 1,71,455 on sale of shares) 33,000 5,37,455 33,000 5,37,455 Working Notes: (1) Bonus Shares = (20,000) /5 = 4,000 shares (2) Right Shares = (20,000+4,000) 4 × 3 = 18,000 shares (3) Rights shares sold = 18,000×50% = 9,000 shares (4) Dividend received = 20,000×10×15% = 30,000 will be taken to P&L statement ADVANCED ACCOUNTING (5) Average Cost of shares sold: Average Cost = (2,40,000+1,26,000) 33,000 x 11,500 = 1,27,545 (6) Profit on sale of 11,500 shares = Sales proceeds – Average cost Sales proceeds = 2,99,000 Profit = 2,99,000– 1,27,545= 1,71,455. (7) Cost of shares on 31.3.2025 (2,40,000+1,26,000) 33,000 x 21,500 = 2,38,455 (8) Sale of rights amounting 27,000 ( 3 x 9,000 shares) will not be shown in investment A/c but will directly be taken to P & L statement. Alternative - 2 Calculate Average Cost per Unit first and then worked out the cost of shares sold and closing balance of shares using average unit cost: Investment Account in Books of Ms. Neha (Scrip: Equity Shares in Nexus Ltd.) No. Amount No. Amount 1.4.2024 To Bal b/d 20,000 2,40,000 1.11.2024 By Bank 11,500 2,99,000 30.4.2024 To Bonus 4,000 (Sale of shares) 31.8.2024 To Bank (Rights Shares) 9,000 1,26,000 31.3.2025 By Bal. c/d 21,500 2,38,435 1.11.2024 To P&L A/c (Profit 1,71,435() on sale of shares) 33,000 5,37,435 33,000 5,37,435 () rounding off difference of 30 adjusted i.e. 1,71,465 – 30 = 1,71,435 Working Notes: (1) Bonus Shares = (20,000) /5 = 4,000 shares (2) Right Shares = (20,000+4,000) 4 x 3 = 18,000 shares (3) Rights shares sold = 18,000×50% = 9,000 shares (4) Dividend received = 20,000×10×15% = 30,000 will be taken to P&L statement (5) Average Cost per Share: = (2,40,000 + 1,26,000) / (20,000 + 4,000 + 9,000) = (3,66,000 / 33,000) = 11.09 per share (rounded off to 2-decimal places) Average Cost = (11,500 × 11.09) = 1,27,535 (6) Profit on sale of 11,500 shares = Sales proceeds – Average cost Sales proceeds = 2,99,000 Profit = 2,99,000 – 1,27,535 = 1,71,465. (7) Cost of shares on 31.3.2025 21,500 x 11.09 = 2,38,435 (8) Sale of rights amounting 27,000 ( 3 x 9,000 shares) will not be shown in investment A/c but will directly be taken to P & L statement.

Options

Correct Answer

All Options:

Detailed Solution & Explanation

Key Concepts to Understand

Consideration

More Questions from Advanced Accounting

Ready to Master Advanced Accounting?