Following information is extracted from the accounting records of ECT Electricity company for the year ended 31st March 2020 (in crores):
Share Capital 60.00
Fixed assets (tangible) at cost 116.00
Accumulated depreciation 40.00
Intangible assets 6.00
Investments:
- Depreciation Reserve Fund 40.00
- Contingencies Reserve 4.00
Loan from State Electricity Board 10.00
12% Debentures 20.00
Tariff and Dividend Control Reserve 6.00
Net profit after tax 12.20
Customers' Security Deposits 6.00
Monthly Average of current assets 7.00 (includes Rs. 10,000,000 due from customers)
Investments yield 10% return p.a.
The applicable bank rate is 9% p.a.
You are required to determine:
a) Capital base
b) Reasonable return
c) Disposal of surplus
Answer (1)
To solve this problem, we need to determine the following based on the financial details provided:
a) Capital Base
The capital base typically includes share capital and reserves. In this case, we'll include:
Share Capital: Rs. 60.00 crores
Depreciation Reserve Fund: Rs. 40.00 crores
Contingencies Reserve: Rs. 4.00 crores
Tariff and Dividend Control Reserve: Rs. 6.00 crores
So, the total capital base is calculated as follows:
Capital Base = 60.00 + 40.00 + 4.00 + 6.00 = Rs. 110.00 crores
b) Reasonable Return
Reasonable return might refer to a return on the capital base often calculated at a given rate of return. Here, the investments yield a 10% return.
Therefore, the reasonable return is:
Reasonable Return = 110.00 × 100 10 = Rs. 11.00 crores
c) Disposal of Surplus
Next, we need to determine the disposal of surplus by comparing the reasonable return against the net profit after tax.
Net Profit After Tax: Rs. 12.20 crores
Reasonable Return: Rs. 11.00 crores
The surplus is the amount by which the net profit exceeds the reasonable return:
Surplus = 12.20 − 11.00 = Rs. 1.20 crores
For the disposal of this surplus, companies often allocate surplus for various reserves or dividend payments. However, specific decisions on surplus allocation depend on company policy and regulatory requirements.
This response defines a typical approach based on basic accounting principles in the context of utility companies like ECT Electricity.
