INTERMEDIATE

GROUP-1

PAPER-1 ACCOUNTING
 Index

S.NO Chapter Name Page

No

1 Accounting Standards 1-159

2 Framework for preparation and presentation of Financial 160-177

Statements

3 Financial Statements of Companies

Unit: I 178-344

Unit: II

4 Profit or Loss Preand Post Incorporation 344-389

5 Accounting for Bonus Issue and Right Issue 390-432

6 Redemption of Preference Shares 433-474

7 Redemption of Debentures 474-507

8 InvestmentAccounts 508-564

9 Insurance Claims 564-613

10 Hire Purchase 614-640

11 DepartmentalAccounts 641-676

12 Accounting for Branchesincluding ForeignBranches 677-732

13 AccountsfromIncompleteRecords 733-827
 CHAPTER-1

ACCOUNTING STANDARDS

Q-1 (a) ABC Ltd. was making provision for non-moving inventories based on no issues for the
last 12 months up to 31.3.2019.
Total value of inventory ` 100 lakhs

Provision required based on 12 months issue ` 3.5lakhs

Provision required based on technical evaluation
` 2.5lakhs

The company wants to provide during the year ending 31.3.2020 based on technical
evaluation:
Does this amount to change in Accounting Policy? Can the company change the method of
provision?

(b) State whether the following statements are ‘True’ or ‘False’. Also give reason for your
answer.

1. Certain fundamental accounting assumptions underline the preparation and

presentation of financial statements. They are usually specifically stated because
their acceptance and use are not assumed.

2 If fundamental accounting assumptions are not followed in presentation and

preparation of financial statements, a specific disclosure is not required.

3. All significant accounting policies adopted in the preparation and

presentation of financial statements should form part of the financial

1
 statements
4. Any change in an accounting policy, which has a material effect should be
disclosed. Where the amount by which any item in the financial statements
is affected by such change is not ascertainable, wholly or in part, the fact need
not to be indicated. [RTP May’2020]

Ans.(a) The decision of making provision for non-moving inventories on the basis of technical
evaluation does not amount to change in accounting policy. Accounting policy of a
company may require that provision for non-moving inventories should be made. The
method of estimating the amount of provision may be changed in case a more prudent
estimate can be made. In the given case, considering the total value of inventory, the
change in the amount of required provision of non-moving inventory from ` 3.5 lakhs
to ` 2.5 lakhs are also not material. The disclosure can be made for such change in the
following lines by way of notes to the accounts in the annual accounts of ABC Ltd.
for the year 2019-20:

“The company has provided for non-moving inventories on the basis of technical
evaluation unlike preceding years. Had the same method been followed as in the
previous year, the profit for the year and the corresponding effect on the year end net
assets would have been lower by ` 1 lakh.”

(b) 1. False; As per AS 1 “Disclosure of Accounting Policies”, certain fundamental

accounting assumptions underlie the preparation and presentation of financial
statements. They are usually not specifically stated because their acceptance and
use are assumed. Disclosure is necessary if they are not followed.
2. False; As per AS 1, if the fundamental accounting assumptions, viz. Going Concern,
Consistency and Accrual are followed in financial statements, specific
disclosure is not required. If a fundamental accounting assumption is not
followed, the fact should be disclosed.

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 3. True; To ensure proper understanding of financial statements, it is necessary that
all significant accounting policies adopted in the preparation and presentation of
financial statements should be disclosed. The disclosure of the significant
accounting policies as such should form part of the financial statements and they
should be disclosed in one place.

4. False; Any change in the accounting policies which has a material effect in the
current period or which is reasonably expected to have a material effect in later
periods should be disclose.

Q-2 Particulars Kg. `

Opening Finished Goods 1,000 25,000
Inventory:
Raw Materials 1,100 11,000
Purchases 10,000 1,00,000
Labor 76,500
Overheads 75,000
(Fixed)
Sales 10,000 2,80,000
Closing Raw Materials 900
Inventory:
Finished Goods 1200

The expected production for the year was 15,000 kg of the finished product. Due to
fall in market demand the sales price for the finished goods was ` 20 per kg and the
replacement cost for the raw material was ` 9.50 per kg on the closing day. You are
required to calculate the closing inventory as on that date. [RTP-May’2020]
Ans. Calculation of cost for closing inventory

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 Particulars `
Cost of Purchase (10,200 x 10) 1,02,000
Direct Labor 76,500

51,000
Fixed Overhead ( 75,000 ×10,200 / 15000 )

Cost of Production 2,29,500

Cost of closing inventory per unit (2,29,500/10,200) ` 22.50
Net Realizable Value per unit ` 20.00
Since net realizable value is less than cost, closing inventory will be
valued at ` 20.
As NRV of the finished goods is less than its cost, relevant raw
materials will be
valued at replacement cost i.e., ` 9.50.
Therefore, value of closing inventory: Finished Goods (1,200 x 20) `
24,000
Raw Materials (900 x 9.50) ` 8,550
` 32,550
Q3.Classify the following activities as (1) Operating Activities, (2) Investing Activities, (3)
Financing Activities(4) Cash Equivalents. [RTP-May’2020]

a. Proceeds from long-term borrowings.

b. Proceeds from Trade receivables.

c. Trading Commission received.

d. Redemption of Preference
Shares.

e. Proceeds from sale of

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 investment
f. Interim Dividend paid on equity shares.

g. Interest received on debentures held as investment.

h. Dividend received on shares held as investments.

i. Rent received on property held as investment.

j. Dividend paid on Preference shares.

k. Marketable Securities
Ans. Operating Activities: b, c.
Investing Activities: e,g,
h, i.
Financing Activities: a,
d, f, j.
Cash Equivalent: k.
Q4 (a) Entity A has a policy of not providing for depreciation on PPE capitalized in the year
until the following year, but provides for a full year’s depreciation in the year of disposal of an
asset. Is this acceptable?
(b) Entity A purchased an asset on 1st January 2016 for ` 1,00,000 and the asset had an
estimated useful life of 10 years and a residual value of nil. On 1st January 2020, the
directors review the estimated life and decide that the asset will probably be useful for a
further 4 years. Calculate the amount of depreciation for each year, if company charges
depreciation on Straight Line basis
(c) The following items are given to you:
ITEMS
(1) Costs of testing whether the asset is functioning properly, after deducting the net
proceeds from selling any items produced while bringing the asset to that location

5
 and condition (such as samples produced when testing equipment);
(2) Costs of conducting business in a new location or with a new class of customer
(includingcostsof staff training);
(3) Any costs 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
(4) Costs of opening a new facility or business, such as, inauguration costs;
(5) Purchase price, including import duties and non–refundable purchase taxes, after
deducting trade discounts and rebates.
With reference to AS 10 “Property, Plant and Equipment”, classify the above items under the
followingheads
HEADS
(i) Purchase Price of PPE
(ii) Directly attributable cost of PPE or
(iii) Cost not included in determining the carrying amount of an item of PPE.
[RTP-May’20]
Ans. (a) The depreciable amount of a tangible fixed asset should be allocated on a
systematic basis over its useful life. The depreciation method should reflect the
pattern in which the asset’s future economic benefits are expected to be consumed by
the entity. Useful life means the period over which the asset is expected to be available
for use by the entity. Depreciation should commence as soon as the asset is acquired and
is available for use. Thus, the policy of Entity A is not acceptable.
(b) The entity has charged depreciation using the straight-line method at ` 10,000 per annum
i.e. (1,00,000/ 10 years). On 1st January 2020, the asset’s net book value is [1,00,000 –
(10,000 x 4)] = ` 60,000.
The remaining useful life is 4 years. The company should amend the annual provision

6
 for depreciation to charge the unamortized cost over the revised remaining life of four
years. Consequently, it should charge depreciation for the next 4 years at ` 15,000 per
annum i.e. (60,000 / 4 years). Depreciation is recognized even if the Fair value of the
Asset exceeds its Carrying Amount. Repair and maintenance of an asset do not negate
the need to depreciate it.
(c) (1) Costs of testing whether the asset is functioning properly, after deducting the net
proceeds from selling any items produced while bringing the asset to that location
and condition (such as samples produced when testing equipment) will be
classified as “Directly attributable cost of PPE”.
(2) Costs of conducting business in a new location or with a new class of customer
(including costs of staff training) will be classified under head (iii)as it will not
be included in determining the carrying amount of an item of PPE.
(3) Any costs 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 will be included in determination of Purchase Price of PPE
(4) Costs of opening a new facility or business, such as, inauguration costs will be
classified under head (iii) as it will not be included in determining the carrying
amount of an item of PPE.
(5) Purchase price, including import duties and non–refundable purchase taxes, after
deducting trade discounts and rebates will be included in determination of
Purchase Price of PPE.
Q5. (i) AXE Limited purchased fixed assets costing $ 5,00,000 on 1st Jan. 2018 from an
American company M/ s M&M Limited. The amount was payable after 6 months. The
company entered into a forward contract on 1st January 2018 for five months @ `
62.50 per dollar. The exchange rate per dollar was as follows:
On 1st January, 2018 ` 60.75 per dollar

7
 On 31st March, 2018 ` 63.00 per dollar
You are required to state how the profit or loss on forward contract would be
recognized in the books of AXE Limited for the year ending 2017-18, as per the
provisions of AS 11.
(ii) Assets and liabilities and income and expenditure items in respect of integral foreign
operations are translated into Indian rupees at the prevailing rate of exchange at the
end of the year. The resultant exchange differences in the case of profit, is carried to
other Liabilities Account and the Loss, if any, is charged to revenue. You are required
to comment in line with AS 11 [RTP-May’20]
Ans. (i) As per AS 11 “The Effects of Changes in Foreign Exchange Rates”, an enterprise
may enter into a forward exchange contract to establish the amount of the reporting
currency required, the premium or discount arising at the inception of such a forward
exchange contract should be amortized as expenses or income over the life of the
contract.

3 months falling in the year 2017-18; therefore, loss to be recognized in 2017-18 (8,75,000/5) x
3 = 5,25,000. Rest ` 3,50,000 will be recognized in the following year 2018-19.

(ii)Financial statements of an integral foreign operation (for example, dependent foreign branches)
should be translated using the principles and procedures described in paragraphs 8 to 16 of AS
11 (Revised 2003). The individual items in the financial statements of a foreign operation are
translated as if all its transactions had been entered into by the reporting enterprise itself.

8
Individual items in the financial statements of the foreign operation are translated at the actual
rate on the date of transaction. The foreign currency monetary items (for example cash,
receivables, payables) should be reported using the closing rate at each balance sheet date. Non-
monetary items (for example, fixed assets, inventories, investments in equity shares) which are
carried in terms of historical cost denominated in a foreign currency should be reported using
the exchange date at the date of transaction. Thus, the cost and depreciation of the tangible
fixed assets is translated using the exchange rate at the date of purchase ofthe assetifassetis
carriedat cost. If the fixedassetiscarriedat fair value, translationshouldbe done usingthe rate
existedonthe dateofthevaluation.The costof inventoriesistranslatedat theexchange rates
that existed when the cost of inventory was incurred and realizable value is translated applying
exchange rate when realizable value is determined which is generally closing rate. Exchange
difference arisingonthe translation of the financial statements of integral foreignoperation
shouldbe chargedto profit and loss account.

Thus, the treatment by the management of translating all assets and liabilities; income and
expenditure items in respect of foreign branches at the prevailing rate at the year end and also
the treatment of resultant exchange difference is not in consonance with AS 11 (Revised
2003).

Q6. Omega Equity Investments Ltd., wants to re-classify its investments in accordance with AS
13. State the values, at which the investments have to be reclassified in the following
cases:

(i) Long term investments in Company A, costing ` 8.5 lakhs are to be re-classified
as current. The company had reduced the value of these investments to ` 6.5
lakhs to recognize a permanent decline in value. The fair value on date of
transfer is ` 6.8 lakhs.

(ii) Current investment in Company C, costing ` 10 lakhs are to be re-classified as

long term as the company wants to retain them. The market value on date of

9
 transfer is ` 12 lakhs.

(iii) Certain long-terminvestments no longer considered for holding purposes, to be

reclassified as current investments. The original cost of these investments was `
18 lakhs but had been written down to ` 12 lakhs to recognize permanent decline
as per AS 13
[RTP-May’2020]

Ans. As per AS 13 ‘Accounting for Investments’, where long-term investments are

reclassified as current investments, transfers are made at the lower of cost and
carrying amount at the date of transfer. And where investments are reclassified from
current to long term, transfers are made at lower of cost and fair value on the date of
transfer. Accordingly, the re-classification will be done on the following basis:

(i) Inthis case,carryingamountof investmentonthedateoftransferislessthanthe

cost;hence this re-classified current investment should be carried at ` 6.5 lakhs
in the books.

(ii) In this case, reclassification of current investment into long-term investments will
be made at `
10 lakhs as cost are less than its market value of ` 12 lakhs.

(iii) In this case, the book value of the investment is ` 12 lakhs, which is lower than
its cost i.e., ` 18 lakhs. Here, the transfer should be at carrying amount and
hence this re-classified current investment should be carried at ` 12lakhs.
Q7. Govind Ltd. issued 12% secured debentures of ` 100 Lakhs on 01.04.2018, to be utilized as
under:
Particulars Amount (` in
lakhs)
Construction of factory building 40

10
 Purchase of Machinery 35
Working Capital 25
In March 2019, construction of the factory building was completed and machinery
was installed and ready for its intended use. Total interest on debentures for the
financial year ended 31.03.2019 was ` 12,00,000. During the year 2018-19, the
company had invested idle fund out of money raised from debentures in banks’
fixed deposit and had earned an interest of ` 3,00,000.

You are required to show the treatment of interest under Accounting Standard 16
and also explain nature of assets. [RTP-May’2020]

Ans. According to AS 16 “Borrowing Costs”, borrowing costs that are directly attributable
to the acquisition, construction or production of a qualifying asset should be
capitalized as part of the cost of that asset. The amount of borrowing costs eligible for
capitalization should be determined in accordance with this Standard. Other borrowing
costs should be recognized as an expense in the period in which they are incurred.

It also states that to the extent that funds are borrowed specifically for the purpose
of obtaining a qualifying asset, the amount of borrowing costs eligible for
capitalization on that asset should be determined as the actual borrowing costs
incurred on that borrowing during the period less any income on the temporary
investment of those borrowings.

Thus, eligible borrowing cost

= ` 12,00,000 – ` 3,00,000

= ` 9,00,000

Sr. Particulars Nature of Interest to Interest to be

No. assets be charged to Profit

11
 capitalized & Loss Account
(`) (`)
i Construction Qualifying 9,00,000x40/100
of
factory Asset = ` 3,60,000 NIL
building
ii Purchase of Not a Qualifying NIL 9,00,000x35/100
Machinery Asset = ` 3,15,000
iii Working Not a Qualifying NIL 9,00,000x25/100
Capital Asset
= ` 2,25,000
= ` 2,25,000

Total ` 3,60,000 ` 5,40,000

Q8. On 31st March 2017, a business firm finds that cost of a partly finished unit on that date is
Rs.530. The unit can be finished in 2017-18 by an additional expenditure of Rs.310. The
finished unit can be sold for Rs.750 subject to payment of 4% brokerage on selling price. The
firm seeks your advice regarding the amount at which the unfinished unit should be valued as
at 31st March, 2017 for preparation of final accounts. Assume that the partly finished unit
cannot be sold in semi-finished form and its NRV is zero without processingit further.
[RTP May ‘19]
Ans. Valuation of unfinished unit
Rs.
Net selling price 750
Less: estimated cost of completion (310)

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 440
Less: Brokerage (4% of 750) (30)
Net Realizable Value 410
Cos of inventory 530
Value of inventory (lower of cost and a realizable 410
value)
Q9. The Board of Directors of New Graphics Ltd. in its Board Meeting held on 18th April,
2017, considered and approved the Audited Financial results along with Auditors Report for the
Financial Year ended 31st March, 2017 and recommended a dividend of Rs.2 per equity
share (on 2 crore fully paid up equity shares of Rs.10 each) for the year ended31st March,
2017 and if approved by the members at the forthcoming Annual General Meeting of the
company on 18th June, 2017, the same will be paid to all the eligible shareholders.Discuss on
the accounting treatment and presentation of the said proposed dividend in the annual
accounts of the company for the year ended 31st March, 2017 as per the applicable Accounting
Standard and other Statutory Requirements. [RTP May ‘19]
Ans. As per the amendment in AS 4 "Contingencies and Events Occurring After the Balance
Sheet Date" vide Companies (Accounting Standards) Amendments Rules, 2016 dated
30th March, 2016, the events which take place after the balance sheet date, are sometimes
reflected in the financial statements because of statutory requirements or because of
their special nature.

However, dividends declared after the balance sheet date but before approval of
financial statements are not recognized as a liability at the balance sheet date because no
statutory obligation exists at that time. Hence such dividends are disclosed in the
notes to financial statements.

No, provision for proposed dividends is not required to be made. Such proposed
dividends are to be disclosed in the notes to financial statements. Accordingly, the

13
 dividend of? 4 crores recommended by New Graphics Ltd. in its Board meeting on 18th
April, 2017 shall not be accounted for in the books for the year 2016-17 irrespective of
the fact that it pertains to the year 2016-17 and will be paid after approval in the
Annual General Meeting of the members/shareholders.

Q10. Goods of Rs.5,00,000 were destroyed due to flood in September, 2015. A claim was lodged
with insurance company, but no entry was passed in the books for insurance claim.In March,
2018, the claim was passed and the company received a payment of Rs.3,50,000 against the
claim. Explain the treatment of such receipt in final accounts for the year ended 31st March,
2018. [RTP May ‘19]

Ans. As per the provisions of AS 5 "Net Profit or Loss for the Period, Prior Period Items
and Changes in Accounting Policies", prior period items are income or expenses, which
arise, in the current period as a result of error or omissions in the preparation of
financial statements of one or more prior periods. Further, the nature and amount of
prior period items should be separately disclosed in the statement of profit and loss in a
manner that their impact on current profit or loss can be perceived.

In the given instance, it is clearly a case of error in preparation of financial statements for
the year 2015-16. Hence, claim received in the financial year 2017-18 is a prior period
item and should be separately disclosed in the statement of Profit and Loss.
Q11. Preet Ltd. is installing a new plant at its production facility. It has incurred these costs:

1. Cost of the plant (cost per supplier's invoice plus taxes) Rs.50,00,000
2. Initial delivery and handling costs Rs.4,00,000
3. Cost of site preparation Rs.12,00,000
4. Consultants used for advice on the acquisition of the plant Rs.14,00,000
5. Interest charges paid to supplier of plant for deferred credit Rs.4,00,000
6. Estimated dismantling costs to be incurred after 7 years Rs.6,00,000

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 7. Operating losses before commercial production Rs.8,00,000
Please advise Preet Ltd. on the costs that can be capitalized in accordance with AS 10
(Revised). [RTP May ‘19]
Ans. According to AS 10 (Revised), these costs can be capitalized:
1. Cost of the plant Rs.50,00,000
2. Initial delivery and handling costs Rs.4,00,000
3. Cost of site preparation Rs.12,00,000
4. Consultants’ fees Rs.14,00,000
5. Estimated dismantling costs to be incurred after 7 years. Rs.6,00,000
Rs.86,00,000
Note: Interest charges paid on "Deferred credit terms" to the supplier of the plant
(not a qualifying asset) of Rs.4,00,000 and operating losses before commercial
production amounting to Rs.8,00,000 are not regarded as directly attributable costs and
thus cannot be capitalized. They should be written off to the Statement of Profit and
Loss in the period they are incurred.

Q12.Rau Ltd. purchased a plant for US$ 1,00,000 on 01st February 2016, payable after three
months. Company entered into a forward contract for three months @ Rs.49.15 per dollar.
Exchange rate per dollar on 01st Feb. was Rs.48.85. How will you recognize the profit or loss on
forward contract in the books of Rau Ltd.? [RTP May ‘19]

Ans. Forward Rate Rs.49.15

Less: Spot Rate (Rs.48.85)
Premium on Contract Rs.0.30
Contract Amount US$ 1,00,000
Total Loss (1,00,000 x 0.30) Rs.30,000

Contract period 3 months

Two falling the year 2016-17; therefore, loss to be recognized (30,000/3) x 2 = Rs.20,000. Rest
Rs.10,000 will be recognized in the following year.

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Q13. Viva Ltd. received a specific grant of Rs.30 lakhs for acquiring the plant of Rs.150 lakhs
during 2014- 15 havinguseful life of 10 years. The grant receivedwas creditedtodeferred
income inthe balance sheet andwasnot deducted fromthe costofplant. During2017-18, due
tonon-compliance ofconditions laid down for the grant, the company had to refund the
whole grant to the Government. Balance in the deferred income on that date was Rs.21 lakhs
and written down value of plant was Rs.105 lakhs. What should be the treatment of the
refund of the grant and the effect on cost of the fixed asset and the amount of depreciation to
be charged during the year 2017-18 in profit and loss account? AS 13 Accounting for Investments.
[RTP May ‘19]
Ans. As per AS-12, 'Accounting for Government Grants', "the amount refundable in respect
of a grant related to specific fixed asset should be recorded by reducing the deferred
income balance. To the extent the amount refundable exceeds any such deferred credit,
the amount should be charged to profit and loss statement.
In this case the grant refunded is 30 lakhs and balance in deferred income is Rs.21 lakhs,
Rs.9 lakhs shall be charged to the profit and loss account for the year 2017-18. There
will be no effect on the cost of the fixed asset and depreciation charged will be on the
same basis as charged in the earlier years.
Q14. Paridhi Electronics Ltd. has current investment (X Ltd.'s shares) purchased for Rs.5
lakhs, which the company want to reclassify as long-term investment on 31.3.2018. The market
value of these investments as on date of Balance Sheet was ?2.5 lakhs. How will you deal with
this as on 31.3.18 with reference to AS-13? [RTP May ‘19]
Ans. As per AS 13'Accounting for Investments', where investments are reclassified from
current to long- term, transfers are made at the lower of cost or fair value at the date
of transfer.
In the given case, the market value of the investment (X Ltd. shares) is Rs.2.50 lakhs,
which is lower than its cost i.e., Rs.5 lakhs. Therefore, the transfer to long term
investments should be made at cost of Rs.2.50 lakhs. The loss of Rs.2.50 lakhs

16
 should be charged to profit and loss account.
Q15. Zen Bridge Construction Limited obtained a loan of Rs.64 crores to be utilized asunder:
(i) Construction of Hill link road in Kedarnath Rs.50 crores
(ii) Purchase of Equipment and Machineries Rs.6 crores
(ii) Working Capital Rs.4 crores
(iv) Purchase of Vehicles Rs.1 crore
(v) Advances for tools/cranes etc. Rs.1 crore
(vi) Purchase of Technical Know how Rs.2 crores
(vii)Total Interest charged by the Bank for the year ending 31st Rs.1.6 crores
March, 2018
Show the treatment of Interest according to Accounting Standard by Zen Bridge
Construction Limited. [RTP May ‘19]
Ans. According to AS 16 'Borrowing costs', qualifying asset is an asset that necessarily
takes substantial period of time to get ready for its intended use. As per the standard,
borrowing costs that are directly attributable to the acquisition, construction or
production of a qualifying asset should be capitalized as part of the cost of that asset.
Other borrowing costs should be recognized as an expense in the period in which they
are incurred. Capitalization of borrowing costs is also not suspended when a
temporary delay is a necessary part of the process of getting an asset ready for its
intended use or sale.
The treatment of interest by Zen Bridge Construction Ltd. can be shown as:
Qualifying Interest tobe Interest to be
Assets capitalized Rs.in crores charges to Profit & Loss
A/c Rs. In crores
Construction of hill Yes 1.25 1 .6/64x
road* 50

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Purchase of equipment
and machineries No 0.15 1.6/64x6
Working capital No 0.10 1.6/64x4
Purchase of vehicles No 0.025 1 .6/64 x
1
Advance for tools, No 0.025 1 .6/64 x
cranes etc. 1
Purchase of technical No 0.05 1 .6/64 x
know-how 2
Total 1.25 0.35
*Note: It is assumed that construction of hill road will normally take more than a year
(substantial period of time), hence considered as qualifying asset.
Q16. PK Ltd. has identified business segment as its primary reporting format. It has identified
India, USA and UK as three geographical segments. It sells its products in the Indian market,
which constitutes 70 percent of the Company's sales. 25 per cent is sold in USA and the balance is
sold in UK. Is PK Ltd. as part of its geographical secondary segment information, required to
disclose segment revenue from export sales, where such sales are not significant?
[RTP May ‘19]
Ans. As per AS 17 if primary format of an enterprise for reporting segment information is
business segments, it should also report segment revenue from external customers
by geographical area based on the geographical location of its customers, for each
geographical segment whose revenue from sales to external customers is 10 per cent
or more of enterprise revenue. Accordingly, for the purposes of disclosing
secondary segment information, PK Ltd. is not required to disclose segment revenue
from export sales to UK, since that segment does not meet the 10 per center more of
enterprise revenue threshold. However, other secondary segment information as per AS

18
 17 should be disclosed in respect of this segment if the thresholds prescribed in the
AS 17 are met.
Q17. Is it permissible not to recognize deferred tax liability on the ground that the
Company expects that there will be losses both for accounting and tax purposes in near future?
You are required to give advice to the company. [RTP May ‘19]
Ans. The Company should provide for deferred tax liability on the timing differences
irrespective for the fact that these timing differences will reverse in the period in which
the Company expects to be in loss both from the accounting as well as tax point of
view. It may, however, be added that the deferred tax liability recognized at the
balance sheet date will give rise to future taxable income at the time of reversal
thereof.
Q18. A Limited is engaged in manufacturing of Chemical Y for which Raw Material X is
Rs. Per unit
Raw Material X
Cost Price 380
Unloading Charges 20
Freight Inward 40
Replacement Cost 300
Chemical Y
Material consumed 440
Direct Labor 120
Variable Overheads 80
required. The company provides you following information for the year ended 31st March,
2017.
Additional Information:
(i) Total fixed overhead for the year was Rs.4,00,000 on normal capacity of 20,000 units.
(ii) Closing balance of Raw Material X was 1,000 units and Chemical Y was Rs.2,400 units.
You are required to calculate the total value of closing stock of Raw Material X and
Chemical Y according to AS 2, when

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 (i) Net realizable value of Chemical Y is Rs.800 per unit
(ii) Net realizable value of Chemical Y is Rs.600 per unit [RTP Nov ‘18]
Ans.(i) When Net Realizable Value of the Chemical Y is Rs.800 per unit
NRV is greater than the cost of Finished Goods Y i.e., Rs.660 (Refer W.N.) Hence, Raw Material and
Finished Goods are to be valued at cost.

Value of Closing Stock:

Qty. Rate Amount (Rs.)
(Rs.)
Raw Material X 1,000 440 4,40,000
Finished Goods Y 2,400 660 15,84,000
Total Value of Closing Stock 20,24,000
(ii) When Net Realizable Value of the Chemical Y is Rs. 600 per unit

NRV is less than the cost of Finished Goods Y i.e., Rs. 660. Hence, Raw Material is to be valued
at replacement cost and Finished Goods are to be valued at NRV since NRV is less than the cost.
Value of Closing Stock:
Qty. Rate (Rs.) Amount (Rs.)
Raw Material X 1,000 300 3,00,000
Finished Goods Y 2,400 600 14,40,000
Total Value of Closing Stock 17,40,000
Working Note:

Statement showing cost calculation of Raw material X and Chemical Y

Raw Material X Rs.

Cost Price 380
Add: Freight Inward 40
Unloading charges 20

20
 Cost 440
Chemical Y Rs.
Materials consumed 440
Direct Labor 120
Variable overheads 80
Fixed overheads (Rs.4,00,000/20,000 units) 20
Cost 660
Q19. While preparing its final accounts for the year ended 31st March, 2017, a company
made provision for bad debts @ 5% of its total debtors. In the last week of February, 2017, a
debtor for Rs.20 lakhs had suffered heavy loss due to an earthquake; the loss was not
covered by any insurance policy. In April, 2017 the debtor became a bankrupt. Can the
company provide for the full loss arising out of insolvency of the debtor in the final accounts
for the year ended 31st March, 2017? You are required to advise the company in line with AS
4. [RTP Nov ‘18]
Ans. As per AS 4 'Contingencies and Events Occurring After the Balance Sheet Date',
adjustment to assets and liabilities are required for events occurring after the
balance sheet date that provide additional information materially affecting the
determination of the amounts relating to conditions existing at the Balance Sheet
date.

A debtor for Rs 20,00,000 suffered heavy loss due to earthquake in the last week of
February, 2017 which was not covered by insurance. This information with its
implications was already known to the company.The fact that he became bankrupt in
April, 2017 (after the balance sheet date) is only an additional information related to
the condition existing on the balance sheet date.

Accordingly, full provision for bad debts amounting Rs. 20,00,000 should be made,
to cover the loss arising due to the insolvency of a debtor, in the final accounts for the

21
 year ended 31st March 2017. Since the company has already made 5% provision of its
total debtors, additional provision amounting Rs. 19,00,000 shall be made (20,00,000
x 95%) for the year ended 31st March, 2017.
Q20. The Accountant of Mobile Limited has sought your opinion with relevant reasons,
whether the following transactions will be treated as change in Accounting Policy or not for the
year ended 31st March, 2017.
You are required to advise him in the following situations in accordance with the
provisions of AS 5

(i) Provision for doubtful debts was created @ 2% till 31st March, 2016. From the
Financial year 2016- 2017, the rate of provision has been changed to 3%.

(ii) During the year ended 31st March, 2017, the management has introduced a formal
gratuity scheme in place of ad-hoc ex-gratia payments to employees on
retirement.
(iii) Till the previous year the furniture was depreciated on straight line basis over a
period of 5 years. From current year, the useful life of furniture has been
changed to 3 years.

(iv) Management decided to pay pension to those employees who have retired after
completing 5 years of service in the organization. Such employees will get
pension of Rs.20,000 per month. Earlier there was no such scheme of pension
in the organization.

(v) During the year ended 31st March, 2017, there was change in cost formula in
measuring the cost of inventories. [RTP Nov ‘18]
Ans. (i) In the given case, Mobile limited created 2% provision for doubtful debts till
31st March, 2016. Subsequently in 2016-17, the company revised the estimates
based on the changed circumstances and wants to create 3% provision. Thus,
change in rate of provision of doubtful debt is change in estimate and is not

22
 change in accounting policy. This change will affect only current year.

(ii) As per AS 5, the adoption of an accounting policy for events or transactions that
differ in substance from previously occurring events or transactions, will not be
considered as a change in accounting policy. Introduction of a formal retirement
gratuity scheme by an employer in place of ad hoc ex- gratia payments to
employees on retirement is a transaction which is substantially different from the
previous policy, will not be treated as change in an accounting policy.

(iii) Change in useful life of furniture from 5 years to 3 years is a change in estimate and
is not a change in accounting policy.
(iv) Adoption of a new accounting policy for events or transactions which did not
occur previously should not be treated as a change in an accounting policy. Hence
the introduction of new pension scheme is not a change in accounting policy.

(v) Change in cost formula used in measurement of cost of inventories is a change in

accounting policy.

Q21. ABC Ltd. is installing a new plant at its production facility. It provides you the following
information:
Rs.
Cost of the plant (cost as per supplier's invoice) 31,25,000
Estimated dismantling costs to be incurred after 5 years 2,50,000
Initial Operating losses before commercial production 3,75,000
Initial delivery and handling costs 1,85,000
Cost of site preparation 4,50,000
Consultants used for advice on the acquisition of the plant 6,50,000
You are required to compute the costs that can be capitalized for plant by ABC Ltd., in accordance
with AS 10: Property, Plant and Equipment. [RTP Nov ‘18]

23
 Ans. According to AS 10 on Property, Plant and Equipment, the costs which will be capitalized

by ABC Ltd.:
Rs.
Cost of the plant 31,25,000
Initial delivery and handling costs 1,85,000
Cost of site preparation 4,50,000
Consultants' fees 6,50,000
Estimated dismantling costs to be incurred after 2,50,000
5 years
Total cost of Plant 46,60,000
Note: Operating losses before commercial production amounting to Rs.3,75,000 will not be
capitalized as per AS 10. They should be written off to the Statement of Profit and Loss in the
period they are incurred.
Q22. (i) Classify the following items as monetary or non-
monetary item: Share Capital
Trade Receivables
Investment in Equity
shares Fixed Assets.
(ii) ExchangeRateper$
Goodspurchasedon1.1.2017forUS $15,000
Rs.75
Exchange rate on 31.3.2017
Rs.74
Date of actual payment 7.7.2017
Rs.73

You are required to ascertain the loss/gain for financial years 2016-17 and 2017-18,
also give their treatment as per AS 11. [RTP Nov ‘18]
Ans. (i)

24
 Share capital Non-
monetary
Trade receivables Monetary
Investment in equity shares Non-
monetary
Fixed assets Non-
monetary
(ii) As per AS 11 on The Effects of Changes in Foreign Exchange Rates', all foreign
currency transactions should be recorded by applying the exchange rate on the date of
transactions. Thus, goods purchased on 1.1.2017 and corresponding creditor would be
recorded at Rs 11,25,000 (i.e., $15,000 x Rs. 75)
According to the standard, at the balance sheet date all monetary transactions should
be reported using the closing rate. Thus, creditors of US $15,000 on 31.3.2017 will be
reported at Rs. 11,10,000 (i.e., $15,000 x Rs. 74) and exchange profit of Rs. 15,000 (i.e.,
11,25,000 - 11,10,000) should be credited to Profit and Loss account in the year
2016-17.
On 7.7.2017, creditors of $15,000 is paid at the rate of Rs.73. As per AS 11, exchange
difference on settlement of the account should also be transferred to Profit and Loss
account. Therefore, Rs.15,000 (i.e., 11,10,000 - 10,95,000) will be credited to Profit
and Loss account in the year 2017-18.
Q23. A specific government grant of Rs.15 lakhs was received by USB Ltd. for acquiring the Hi-
Tech Diary plant of Rs.95 lakhs during the year 2014-15. Plant has useful life of 10 years. The
grant received was credited to deferred income in the balance sheet. During 2017-18, due to
non-compliance of conditions laid down for the grant, the company had to refund the
whole grant to the Government. Balance in the deferred income on that date was 10.50
lakhs and written down value of plant was Rs.66.50 lakhs.

25
 (i) What should be the treatment of the refund of the grant and the effect on cost of
plant and the amount of depreciation to be charged during the year 2017-18 in
profit and loss account?
(ii) What should be the treatment of the refund, if grant was deducted from the cost of
the plant during 2014-15 assuming plant account showed the balance of Rs.56
lakhs as on 1.4.2017?

You are required to explain in the line with provisions of AS 12. [RTP Nov ‘18]

Ans. As per para 21 of AS 12, 'Accounting for Government Grants', "the amount
refundable in respect of a grant related to specific fixed asset should be recorded by
reducing the deferred income balance. To the extent the amount refundable exceeds
any such deferred credit, the amount should be charged to profit and loss statement.

(i) In this case the grant refunded is Rs.15 lakhs and balance in deferred income is Rs. 10.50
lakhs, Rs. 4.50 lakhs shall be charged to the profit and loss account for the year 2017-18.
There will be no effect on the cost of the fixed asset and depreciation charged will be
on the same basis ascharged in the earlier years.

(ii) If the grant was deducted from the cost of the plant in the year 2014-15 then, para 21
of AS 12 states that the amount refundable in respect of grant which relates to
specific fixed assets should be recorded by increasing the book value of the assets,
by the amount refundable. Where the book value of the asset is increased,
depreciation on the revised book value should be provided prospectively over
the residual useful life of the asset. Therefore, in this case, the book value of the
plant shall be increased by Rs. 15 lakhs. The increased cost of Rs. 15 lakhs of the
plant should be amortized over 7 years (residual life). Depreciation charged during the
year 2017-18 shall be (56+15)17 years = Rs.10.14 lakhs presuming the
depreciation is charged on SLM.
Q24. M/s Active Builders Ltd. invested in the shares of another company (with an intention to

26
hold the shares for short term period) on 31st October, 2016 at a cost of Rs.4,50,000. It also
earlier purchased Gold of Rs.5,00,000 and Silver of Rs.2,25,000 on 31st March, 2014.
Market values as on 31st March, 2017 of the above investments are as follows: Shares
Rs.3,75,000; Gold Rs.7,50,000 and Silver Rs.4,35,000
You are required explain how will the above investments be shown in the books of account of
M/s Active Builders Ltd. for the year ending 31st March, 2017 as per the provisions of AS 13?
[RTP Nov ‘18]
Ans. As per AS 13 'Accounting for Investments', if the shares are purchased with an
intention to hold for short-term period, then investment will be shown at the
realizable value. In the given case, shares purchased on 31st October, 2016, will be
valued at Rs. 3,75,000 as on 31st March, 2017.

Gold and silver are generally purchased with an intention to hold it for long term period
until and unless given otherwise. Hence, the investment in gold and silver (purchased on
31st March, 2014) shall continue to be shown at cost as on 31st March, 2017 i.e., Rs.
5,00,000 and Rs. 2,25,000 respectively, though their realizable values have been
increased.

Thus, the shares, gold and silver will be shown at Rs.3,75,000, Rs. 5,00,000 and Rs.
2,25,000 respectively and hence, total investment will be valued at Rs.11,00,000 in the
books of account of M/s Active Builders for the year ending 31st March, 2017 as per
provisions of AS 13.
Q25. A company incorporated in June 2017, has setup a factory within a period of 8 months
with borrowed funds. The construction period of the assets had reduced drastically due to usage
of technical innovations by the company. Whether interest on borrowings for the period
prior to the date of setting up the factory should be capitalized although it has taken less
than 12 months for the assets to get ready for use. You are required to comment on the
necessary treatment withreference toAS 16. [RTPNov ‘18]

27
Ans. As per para 3.2 to AS 16 'Borrowing Costs', a qualifying asset is an asset that necessarily
takes a substantial period of time to get ready for its intended use or sale.

Further, Explanation to the above para states that what constitutes a substantial period of
time primarily depends on the facts and circumstances of each case. However, ordinarily,
a period of twelve months is considered as substantial period of time unless a shorter or
longer period can be justified on the basis of facts and circumstances of the case. In
estimating the period, time which an asset takes, technologically and commercially, to
get it ready for its intended use or sale is considered.

It may be implied that there is a rebuttable presumption that a 12 months period constitutes
substantial period of time.
Under present circumstances where construction period has reduced drastically due
to technical innovation, the 12 months period should at best be looked at as a
benchmark and not as a conclusive yardstick. It may so happen that an asset under
normal circumstances may take more than 12 months to complete. However, an
enterprise that completes the asset in 8 months should not be penalized for its
efficiency by denying it interest capitalization and vice versa.
The substantial period criteria ensures that enterprises do not spend a lot of time and
effort capturing immaterial interest cost for purposes of capitalization.
Therefore, if the factory is constructed in 8 months, then it shall be considered as a
qualifying asset. The interest on borrowings for the same shall be capitalized although
it has taken less than 12 months for the asset to get ready to use.
Q26. Calculate the segment results of a manufacturing organization from the following
information:
Segments A B C Total
Directly attributed revenue 5,00,000 3,00,000 1,00,000 9,00,000
Enterprise revenue (allocated in 5: 4: 2 basis) 1,10,000

28
 Revenue from transactions with other
segments
Transaction from B 1,00,000 50,000 1,50,000
Transaction from C 10,000 50,000 60,000
Transaction from A 25,000 1,00,000 1,25,000
Operating expenses 3,00,000 1,50,000 75,000 5,25,000
Enterprise expenses (allocated in 5: 4: 2 77,000
basis)
Expenses on transactions with other segments
Transaction from B 75,000 30,000
Transaction from C 6,000 40,000
Transaction from A 18,000 82,000
[RTP Nov ‘18]
Ans. Calculation of segment result
Segments A B C Total
Directly attributed revenue 5,00,000 3,00,000 1,00,000 9,00,000
Enterprise revenue (allocated in 5: 4: 2 50,000 40,000 20,000 1,10,000
basis)
Revenue from transactions with other
segments
Transaction from B 1,00,000 50,000 1,50,000
50,000
Transaction from C 10,000 60,000
25,000 1,00,000
Transaction from A 1,25,000
Total segment revenue as per AS 17 (A) 6,60,000 4,15,000 2,70,000 13,45,000
Operating expenses 3,00,000 1,50,000 75,000 5,25,000

29
 Enterprise expenses (allocated in 5:4:2 35,000 28,000 14,000 77,000
basis)
Expenses on transactions with other
segments
Transaction from B 75,000 30,000 1,05,000
Transaction from C 6,000 40,000 46,000
Transaction from A 18,000 82,000 1,00,000
Total segment expenses as per AS 17 4,16,000 2,36,000 2,01,000 8,53,00
(B)
Segment result (A-B) 2,44,000 1,79,000 69,000 4,92,000
Q27. Beta Ltd. is a full tax-free enterprise for the first ten years of its existence and is in the
second year of its operation. Depreciation timing difference resulting in a tax liability in year 1
and 2 is Rs.1,000 lakhs and Rs.2,000 lakhs respectively. From the third year it is expected that
the timing difference would reverse each year by Rs.50 lakhs. Assuming tax rate of 40%, you
are required to compute to the deferred tax liability at the end of the second year and any
charge to the Profit and Loss account. [RTPNov ‘18]

Ans. As per para 13 of Accounting Standard (AS) 22, Accounting for Taxes on Income",
deferred tax in respect of timing differences which originate during the tax holiday
period and reverse during the tax holiday period, should not be recognized to the
extent deduction from the total income of an enterprise is allowed during the tax
holiday period as per the provisions of sections 10A and 10B of the Income-tax Act.
Deferred tax in respect of timing differences which originate during the tax holiday
period but reverse after the tax holiday period should be recognized in the year in
which the timing differences originate. However, recognition of deferred tax assets
should be subject to the consideration of prudence. For this purpose, the timing
differences which originate first should be considered to reverse first.

30
 Out of Rs. 1,000 lakhs depreciation, timing difference amounting Rs. 400 lakhs (Rs. 50
lakhs x 8 years) will reverse in the tax holiday period and therefore, should not be
recognized. However, for Rs. 600 lakhs (Rs. 1,000 lakhs - Rs. 400 lakhs), deferred tax
liability will be recognized for Rs. 240 lakhs (40% of Rs. 600 lakhs) in first year. In the
second year, the entire amount of timing difference of Rs. 2,000 lakhs will reverse
only after-tax holiday period and hence, will be recognized in full. Deferred tax liability
amounting Rs. 800 lakhs (40% of Rs.2,000 lakhs) will be created by charging it to profit
and loss account and the total balance of deferred tax liability account at the end of second
year will be Rs. 1,040 lakhs (240 lakhs + 800 lakhs).

Q28. "Accounting Standards standardize diverse accounting policies with a view to

eliminate the non- comparability of financial statements and improve the reliability of
financial statements. "Discuss and explain the benefits of Accounting Standards.

[Sugg.Nov.’18,5Marks]

Ans. Accounting Standards standardize diverse accounting policies with a view to

eliminate the non- comparability of financial statements and improve the reliability
of financial statements. Accounting Standards provide a set of standard accounting
policies, valuation norms and disclosure requirements. Accounting standards aim at
improving the quality of financial reporting by promoting comparability, consistency
and transparency, in the interests of users of financialstatements.

The following are the benefits of Accounting Standards:

(i) Standardization of alternative accounting treatments: Accounting Standards reduce

to a reasonable extent confusing variation in the accounting treatment followed for
the purpose of preparation of financial statements.
(ii) Requirements for additional disclosures: There are certain areas where important is
not statutorily required to be disclosed. Standards may call for disclosure beyond
that required by law.

31
 (iii) Comparability of financial statements: The application of accounting standards
would facilitate comparison of financial statements of different companies situated in
India and facilitate comparison, to a limited extent, of financial statements of
companies situated in different parts of the world. However, it should be noted in
this respect that differences in the institutions, traditions and legal systems from one
country to another give rise to differences in Accounting Standards adopted in different
countries.

Q29. Hello Ltd. purchased goods at the cost of ` 20 lakhs in October. Till the end of the
financial year, 75% of the stocks were sold. The Company wants to disclose closing stock at ` 5
lakhs. The expected sale value is ` 5.5 lakhs and a commission at 10% on sale is payable to the
agent. Youare requiredtoascertainthe value of closing stock? [RTP Nov.‘19]

Ans. As per para 5 of AS 2 “Valuation of Inventories”, the inventories are to be valued at

lower of cost or net realizable value.

In thiscase, thecostof inventoryis ` 5lakhs. Thenet realizablevalue is ` 4.95lakhs(` 5.5

lakhs less cost to make the sale @ 10% of ` 5.5 lakhs). So, the closing stock should be
valued at ` 4.95 lakhs.
Q30. An earthquake destroyed a major warehouse of PQR Ltd. on 30.4.2019. The
accounting year of the company ended on 31.3.2019. The accounts were approved on
30.6.2019. The loss from earthquake is estimated at ` 25 lakhs. State with reasons, whether the
loss due to earthquake is an adjusting or non- adjusting event and how the fact of loss is to be
disclosedby the company. [RTP Nov. ‘19]

Ans. Para 8.3 of AS 4 “Contingencies and Events Occurring after the Balance Sheet
Date”, states that adjustments to assets and liabilities are not appropriate for events
occurring after the balance sheet date, if such events do not relate to conditions
existing at the balance sheet date. The destruction of warehouse due to earthquake
did not exist on the balance sheet date i.e., 31.3.2019. Therefore, loss occurred due to

32
 earthquake is not to be recognized in the financial year 2018-2019.

However, according to para 8.6 of the standard, unusual changes affecting the existence
or substratum of the enterprise after the balance sheet date may indicate a need to
consider the use of fundamental accounting assumption of going concern in the
preparation of the financial statements. As per the information given in the question,
the earthquake has caused major destruction; therefore, fundamental accounting
assumption of going concern is called upon.

Hence, the fact of earthquake together with an estimated loss of ` 25 lakhs should be
disclosed in the Report of the Directors for the financial year 2018-2019.

Q31. The Accountant of Mobile Limited has sought your opinion with relevant reasons,
whether the following transactions will be treated as change in Accounting Policy or not for the
year ended 31st March, 2019. Please advise him in the following situations in accordance with
the provisions of relevant Accounting Standard;

(i) Provision for doubtful debts was created @ 2% till 31st March, 2018. From the
Financial year 2018- 2019, the rate of provision has been changed to 3%.
(ii) During the year ended 31st March, 2019, the management has introduced a formal
gratuity scheme in place of ad-hoc ex-gratia payments to employees on
retirement.

(iii) Till the previous year the furniture was depreciated onstraight line basis over a
period of 5 years. From current year, the useful life of furniture has been
changed to 3 years.

(iv) Management decided to pay pension to those employees who have retired after
completing 5 years of service in the organization. Such employees will get
pension of ` 20,000 per month.Earlier there was no such scheme of pension in
the organization.

(v) During the year ended 31st March, 2019, there was change in cost formula in

33
 measuring the cost of inventories. [RTP Nov.‘19]
Ans.(i) In the given case, Mobile limited created 2% provision for doubtful debts till
31st March, 2018. Subsequently in 2018-19, the company revised the estimates based
on the changed circumstances and wants to create 3% provision. Thus, change in rate of
provision of doubtful debt is change in estimate and is not change in accounting
policy. This change will affect only current year.
(ii) As per AS 5, the adoption of an accounting policy for events or transactions that
differ in substance from previously occurring events or transactions, will not be
considered as a change in accounting policy. Introduction of a formal retirement
gratuity scheme by an employer in place of ad hoc ex-gratia payments to employees on
retirement is a transaction which is substantially different from the previous policy, will
not be treated as change in an accounting policy.
(iii) Change in useful life of furniture from 5 years to 3 years is a change in estimate and is
not a change in accounting policy.
(iv) Adoption of a new accounting policy for events or transactions which did not occur
previously should not be treated as a change in an accounting policy. Hence the
introduction of new pension scheme is not a change in accounting policy.
(v) Change in cost formula used in measurement of cost of inventories is a change in
accounting policy.
Q32. Shrishti Ltd. contracted with a supplier to purchase machinery which is to be installed in
its Department A in three months' time. Special foundations were required for the
machinery which were to be prepared within this supply lead time. The cost of the site
preparation and laying foundations were ` 1,41,870. These activities were supervised by a
technician during the entire period, who is employed for this purpose of ` 45,000 per month.
The technician's services were given by Department B to Department A, which billed the
services at ` 49,500 per month after adding 10% profit margin.

34
The machine was purchased at ` 1,58,34,000 inclusive of IGST @ 12% for which input credit is
available to Shrishti Ltd. ` 55,770 transportation charges were incurred to bring the machine to
the factory site. An Architect was appointed at a fee of ` 30,000 to supervise machinery
installation at the factory site.
Ascertain the amount at which the Machinery should be capitalized under AS 10 considering that
IGST credit is availed by the Shristhi Limited. Internally booked profits should be eliminated
in arriving at the cost of machine. [RTP Nov.‘19]
Ans. Calculation of Cost of Fixed Asset (i.e., Machinery)
Particulars `
Purchase Price Given (` 158,34,000 x 100/112) 1,41,37,500
Add: Site Preparation Cost Given 1,41,870
Technician’s Salary Specific/Attributable overheads
for
3 months (See Note) (45,000 x3) 1,35,000
Initial Delivery Cost Transportation 55,770
Professional Fees for Architect’s Fees 30,000
Installation
Total Cost of Asset 1,45,00,140
Q-33(i) Trade receivables as on 31.3.2019 in the books of XYZ Ltd. include an amount
receivable from Umesh ` 5,00,000 recorded at the prevailing exchange rate on the date
ofsales, i.e.,at US $ 1= ` 58.50. US$ 1= ` 61.20 on 31.3.2019.
Explain briefly the accounting treatment needed in this case as per AS 11 as on
31.3.2019.
(ii) Power Track Ltd. purchased a plant for US$ 50,000 on 31st October, 2018 payable
after 6 months. The company entered into a forward contract for 6 months @ ` 64.25 per
Dollar.On 31st October, 2018, the exchange rate was ` 61.50 per Dollar.

35
You are required to recognize the profit or loss on forward contract in the books of the company
for the year ended 31st March, 2019. [RTP Nov. ‘19]

Ans. (i) As per AS 11 “The Effects of Changes in Foreign Exchange Rates”, exchange
differences arising on the settlement of monetary items or on reporting an enterprise’s
monetary items at rates different from those at which they were initially recorded
during the period, or reported in previous financial statements, should be
recognized as income or as expenses in the period in which they arise.

Accordingly, exchange difference on trade receivables amounting ` 23,076 {`

5,23,076(US $ 8547* x `61.20) less ` 5,00,000} should be charged to profit & Loss
account.

(iii) Calculation of profit or loss to be recognized in the books of Power Track

Limited

Thus, the loss amounting to ` 1,14,583 for the period is tobe recognized in the year ended 31st
March, 2019.
Q-34 Samrat Limited has set up its business in a designated backward area which entitles the
company for subsidy of 25% of the total investment from Government of India. The
company has invested ` 80 crores in the eligible investments. The company is eligible
for the subsidy and has received ` 20 crores from the government in February 2019. The
company wants to recognize the said subsidy as its income to improve the bottom line
36
of the company.Do you approve the action of the company inaccordance with the Accounting
Standard? [RTP Nov. ‘19]

Ans. As per AS 12 “Accounting for Government Grants”, where the government grants are
in the nature of promoters’ contribution, i.e., they are given with reference to the
total investment in an undertaking or by way of contribution towards its total capital
outlay (for example, Central Investment Subsidy Scheme) and no repayment is
ordinarily expected in respect thereof, the grants are treated as capital reserve which
can be neither distributed as dividend nor considered as deferred income.

The subsidy received by Samrat Ltd. for setting up its business in a designated
backward area will be treated as grant by the government in the nature of promoter’s
contribution as the grant is given with reference to the total investment in an
undertaking i.e., subsidy is 25% of the eligible investment and also no repayment is
apparently expected in respect thereof.

* US $ 8,547 = 5,00,000/58.50
Since the subsidy received is neither in relation to specific fixed assets nor in relation
to revenue.Thus, the company cannot recognize the said subsidy as income in its financial
statements in the given case. It should be recognized as capital reserve which can be
neither distributed as dividend nor considered as deferred income.
Q-35 Z Bank has classified its total investment on 31-3-2018 into three categories (a) held
to maturity (b) available for sale (c) held for trading as per the RBI Guidelines.
‘Held to maturity’ investments are carried at acquisition cost less amortized amount.
‘Available for sale’ investments are carried at marked to market. ‘Held for trading’
investments are valued at weekly intervals at market rates. Net depreciation, if any, is
charged torevenue and net appreciation, if any,is ignored.
You are required to comment whether the policy of the bank is in accordance with AS 13?
[RTP Nov. ‘19]

37
Ans. As per AS 13 ‘Accounting for Investments’, the accounting standard is not applicable to
Bank, Insurance Company, Mutual Funds. In this case Z Bank is a bank, therefore, AS 13 does not
apply to it. For banks, the RBI has issued separate guidelines for classification and valuation of
its investment and Z Bank should comply with those RBI Guidelines/Norms. Therefore,
though Z Bank has not followed the provisions of AS 13, yet it would not be said as non-
compliance since, it is complying with the norms stipulated by the RBI.
Q-36 InMay,2018, CapacityLtd. tooka bankloantobe usedspecificallyfor the construction
of a new factory building. The construction was completed in January, 2019 and
the building was put to its use immediately thereafter. Interest on the actual
amount used for construction of the building till its completion was ` 18 lakhs,
whereas the total interest payable to the bank on the loan for the period till 31st March,
2019 amounted to ` 25 lakhs.
Can ` 25 lakhs be treated as part of the cost of factory building and thus be capitalized
on the plea that the loan was specifically taken for the construction of factory
building? Explain the treatment in line with the provisions of AS 16. AS 17 Segment
Reporting. [RTP Nov.‘19]
Ans. AS 16 clearly states that capitalization of borrowing costs should cease when
substantially all the activities necessary to prepare the qualifying asset for its
intended use are completed. Therefore, interest on the amount that has been used
for the construction of the building up to the date of completion (January, 2019) i.e.,
` 18 lakhsalone can becapitalized. It cannotbeextended to ` 25 lakhs.
Q-37 A Company has an inter-segment transfer pricing policy of charging at cost less 5%. The
market prices are generally 20% above cost.
You are required to examine whether the policy adopted by the company is correct or
not? [RTP Nov. ‘19]
Ans. AS 17 ‘Segment Reporting’ requires that inter-segment transfers should be measured on
the basis that the enterprise actually used to price these transfers. The basis of pricing
38
 inter-segment transfers and any change therein should be disclosed in the financial
statements. Hence, the enterprise can have its own policy for pricing inter-segment
transfers and hence, inter-segment transfers may be based on cost, below cost or
market price. However, whichever policy is followed, the same should be disclosed and
applied consistently. Therefore, in the given case inter-segment transfer pricing policy
adopted by the company is correct if followed consistently.
Q-38 The Accountant of Sohna Ltd. provides the following information for the year ended
31-03-2019:
Particulars `
Accounting Profit 7,50,000
Book Profit as per MAT 4,37,500
Profit as per Income Tax Act 90,000
Tax rate 20%
MAT rate 7.50%
You are required to calculate the deferred tax asset/ liability as per AS 22 and
amount of tax to be debited to the Profit and Loss Account for the year.
[RTP Nov. ‘19]

Ans. Tax as per accounting profit 7,50,000 x 20% = `

1,50,000 Taxas per Income-tax Profit 90,000
x 20% = ` 18,000 Taxas per MAT4,37,500 x
7.50% = ` 32,812.50
Tax expense= Current Tax + Deferred Tax

` 1,50,000 = ` 18,000 + Deferred tax

Therefore, Deferred Tax liability as on 31-03-2019

= ` 1,50,000 - ` 18,000 = ` 1,32,000

Amount of tax to be debited in Profit and Loss account for the year 31-03-2019
39
 Current Tax + Deferred Tax liability + Excess of MAT over current tax

= ` 18,000 + ` 1,32,000 + ` 14,812.50 (32,812.50 - 18,000)

= ` 1,64,812.50

Q-39 A private limited company manufacturing fancy terry towels had valued its
closing inventory of inventories of finished goods at the realizable value, inclusive of
profit and the export cash incentives. Firm contracts had been received and goods were
packed for export, but the ownership in these goods had not been transferred to the
foreign buyers.

You are required to advise the company on the valuation of the inventories in line with
the provisions of AS 2. [RTP May ‘18]
Ans. Accounting Standard 2 "Valuation of Inventories" states that inventories should be
valued at lower of historical cost and net realizable value. The standard states, "at
certain stages in specific industries, such as when agricultural crops have been
harvested or mineral ores have been extracted, performance may be substantially
complete prior to the execution of the transaction generating revenue. In such cases,
when sale is assured under forward contract or a government guarantee or when market
exists and there is a negligible risk of failure to sell, the goods are often valued at net
realizable value at certain stages of production."

Terry Towels do not fall in the category of agricultural crops or mineral ores.
Accordingly, taking into account the facts stated, the closing inventory of finished
goods (Fancy terry towel) should have been valued at lower of cost and net realizable
value and not at net realizable value. Further, export incentives are recorded only in the
year the export sale takes place. Therefore, the policy adopted by the company for
valuing its closing inventory of inventories of finished goods is not correct.

Q-40 With reference to AS 4 "Contingencies and events occurring after the balance sheet
date", identify whether the following events will be treated as contingencies,

40
 adjusting events or non-adjusting events occurring after balance sheet date in case
of a company which follows April to March as its financial year.
(i) A major fire has damaged the assets in a factory on 5th April, 5 days after the year end.
However, the assets are fully insured and the books have not been approved by
the Directors.

(ii) A suit against the company's advertisement was filed by a party on 10th April, 10
days after the year end claiming damages of Rs.20 lakhs. [RTP May ‘18]

Ans. According to AS 4 on 'Contingencies and Events Occurring after the Balance Sheet Date',
adjustments to assets and liabilities are required for events occurring after the balance
sheet date that provide additional information materially affecting the determination
of the amounts relating to conditions existing at the balance sheet date. However,
adjustments to assets and liabilities are not appropriate for events occurring after the
balance sheet date, if such events do not relate to conditions existing at the balance sheet
date. "Contingencies" used in the Standard is restricted to conditions or situations at the
balance sheet date, the financial effect of which is to be determined by future events
which may or may not occur.
(i) Fire has occurred after the balance sheet date and also the loss is totally insured.
Therefore, the event becomes immaterial and the event is non-adjusting in
nature.
(ii) The contingency is restricted to conditions existing at the balance sheet date.
However, in the given case, suit was filed against the company's advertisement by a
party on10thApril for amount of Rs. 20lakhs. Therefore,itdoesnot fitintothe
definitionofa contingencyandhenceisa non-adjusting event.
Q-41 Bela Ltd. has a vacant land measuring 20,000 sq. mts, which it had no intention to use in
the future. The Company decided to sell the land to tide over its liquidity problems and
made aprofit of Rs.10Lakhs by selling the said land. Moreover, there was a fire in the

41
 factory and a part of the unused factory shed valued at Rs.8 Lakhs was destroyed.
The loss from fire was set off against the profit from sale of land and profit of Rs.2
lakhs was disclosed as net profit from sale of assets.
You are required to examine the treatment and disclosure done by the company and advise
the company in line with AS 5. [RTPMay‘18]
Ans. As per AS 5 "Net Profit or Loss for the Period, Prior Period Items and Changes in
Accounting Policies" Extraordinary items should be disclosed in the statement of
profit and loss as a part of net profit or loss for the period. The nature and the amount of
each extraordinary item should be separately disclosed in the statement of profit and
loss in a manner that its impact on current profit or loss can be perceived. In the given
case the selling of land to tide over liquidation problems as well as fire in the Factory
does not constitute ordinary activities of the Company. These items are distinct from
the ordinary activities of the business. Both the events are material in nature and
expected not to recur frequently or regularly. Thus, these are Extraordinary Items.
Therefore, in the given case, disclosing net profits by setting off fire losses against
profit from sale of land is not correct. The profit on sale of land, and loss due to fire
should be disclosed separately in the statement of profit and loss.
Q-42 In the year 2016-17, an entity has acquired a new freehold building with a useful life
of 50 years for Rs.90,00,000. The entity desires to calculate the depreciation charge
per annum using a straight-line method. It has identified the following components
(with no residual value of lifts & fixtures at the end of their useful life) as follows:
Component Useful life Cost
(years)
Land Infinite Rs.20,00,000
Roof 25 Rs.10,00,000
Lifts 20 Rs.5,00,000

42
 Fixtures 10 Rs.5,00,000
Remainder of building 50 Rs.50,00,000
Rs.90,00,000
You are required to calculate depreciation for the year 2016-17 as per componentization
method. [RTP May ‘18]
Ans. Statement showing amount of depreciation as per Componentization Method
Component Depreciation (Per
annum)
Rs.
Land Nil
Roof 40,000
Lifts 25,000
Fixtures 50,000
Remainder of Building 1,00,000
2,15,000
Note: When the roof requires replacement at the end of its useful life the carrying
amount will be nil. The cost of replacing the roof should be recognized as a new
component.

Q-43 Power Track Ltd. purchased a plant for US$ 50,000 on 31st October, 2016 payable after
6 months. The company entered into a forward contract for 6 months @ Rs.64.25 per
Dollar. On 31st October, 2016, the exchange rate was Rs.61.50 per Dollar.

You are required to calculate the amount of the profit or loss on forward contract to be
recognized in the books of the company for the year ended 31st March, 2017.

[RTPMay‘18]

Ans.

43
 Calculation of profit or loss to be recognized in the books of Power Track Limited
Rs.
Forward contract rate Less; Spot 64.25
rate 61.50
Loss on forward contract Forward 2.75
Contract Amount $50,000
Total loss on entering into forward contract = ($ 50,000 x Rs.2.75) Contract Rs.1,37,500
period 6 months
Loss for the period 1st November, 2016 to 31st March, 2017 i.e., 5 months 5 months
falling in the year 2016-2017
5
Hence, Loss for 5 months will be Rs.1,37,500 x =
6 Rs.1,14,583

Thus, the loss amounting to Rs. 1,14,583 for the period is to be recognized in the year ended 31st
March, 2017.

Q-44 D Ltd. acquired a machine on 01-04-2012 for Rs.20,00,000. The useful life is 5 years.
The company had applied on 01-04-2012, for a subsidy to the tune of 80% of the cost.
The sanction letter for subsidy was received in November 2015. The Company's Fixed
Assets Account for the financial year 2015-16 shows a credit balance as under:
Particular Rs.

Machine (Original Cost) 20,00,000

Less;AccumulatedDepreciation (from 2012-13-to2014-15onStraight 12,00,000
Line Method)
8,00,000
Less; Grant received 16,00,000
Balance 8,00,000

You are required to explain how should the company deal with this asset in its accounts
for 2015-16? [RTP May ‘18]

Ans. From the above account, it is inferred that the Company follows Reduction Method
for accounting of Government Grants. Accordingly, out of the Rs. 16,00,000 that has been
received, Rs. 8,00,000 (being the balance in Machinery A/c) should be credited to the

44
 machinery A/c. The balance Rs. 8,00,000 may be credited to P & L A/c, since already
the cost of the asset to the tune of Rs. 12,00,000 had been debited to P&L A/c in the
earlier years by way of depreciation charge, and Rs.8,00,000 transferred to P&L A/c
now would be partial recovery of that cost. There is no need to provide depreciation
for 2015-16 or 2016-17 as the depreciable amount is now Nil.

Q-45 Paridhi Electronics Ltd. invested in the shares of another unlisted company on 1st May
2012 at a cost of Rs. 3,00,000 with the intention of holding more than a year. The
published accounts of unlisted company received in January, 2017 reveals that the
company has incurred cash losses with decline in market share and investment of
Paridhi Electronics Ltd. may not fetch more than Rs.45,000.You are required to
explain how you will deal with the above in the financial statements of the Paridhi
Electronics Ltd. as on 31.3.17 with reference to AS 13? [RTP May ‘18]

Ans. As per AS 13, "Accounting for Investments" Investments classified as long-term

investments should be carried in the financial statements at cost. However, provision for
diminution shall be made to recognize a decline, other than temporary, in the value of
the investments, such reduction being determined and made for each investment
individually. The standard also states that indicators of the value of an investment
are obtained by reference to its market value, the investee's assets and results and the
expected cash flows from the investment.

On this basis, the facts of the case given in the question clearly suggest that the provision
for diminution should be made to reduce the carrying number of shares to Rs. 45,000 in
the financial statements for the year ended 31st March, 2017 and charge the difference of
loss of Rs. 2,55,000 to profit and loss account.

Q-46 InMay,2016,CapacityLtd. tooka bankloan tobe usedspecificallyfor the construction

of a new factory building. The construction was completed in January, 2017 and
the building was put to its use immediately thereafter. Interest on the actual

45
 amount used for construction of the building till its completion was Rs.18 lakhs,
whereas the total interest payable to the bank on the loan for the period till 31st March,
2017 amounted to Rs. 25 lakhs.

Can Rs. 25 lakhs be treated as part of the cost of factory building and thus be capitalized
onthepleathat the loan was specifically taken for the construction of factory building?
Explain the treatment in line with the provisions of AS 16. [RTPMay‘18]

Ans. AS 16 clearly states that capitalization of borrowing costs should cease when substantially
all the activities necessary to prepare the qualifying asset for its intended use are
completed. Therefore, interest on the amount that has been used for the construction of
the building up to the date of completion (January, 2017) i.e., Rs.18 lakhs alone can
be capitalized. It cannot be extended to Rs.25 lakhs.

Q-47 A Company has an inter-segment transfer pricing policy of charging at cost less 5%. The
market prices are generally 20% above cost.

You are required to examine whether the policy adopted by the company is correct or not?
[RTPMay‘18]

Ans. AS 17 'Segment Reporting' requires that inter-segment transfers should be measured on

the basis that the enterprise actually used to price these transfers. The basis of pricing
inter-segment transfers and any change therein should be disclosed in the financial
statements. Hence, the enterprise can have its own policy for pricing intersegment
transfers and hence, inter-segment transfers may be based on cost, below cost or market
price. However, whichever policy is followed, the same should be disclosed and
applied consistently. Therefore, in the given case inter-segment transfer pricing policy
adopted by the company is correct if followed consistently.

46
Q-48 Rama Ltd., has provided the following information:
Rs.
Depreciation as per accounting records = 2,00,000
Depreciation as per income tax records = 5,00,000
Unamortized preliminary expenses as per tax = 30,000
record

There is adequate evidence of future profit sufficiency.

Youare required to calculate the amount of deferred tax asset/liability to be

recognized as transition adjustment assuming Tax rate as 50%. [RTP May ‘18]

Ans. Table showing calculation of deferred tax asset / liability

Particulars Amount Timing Deferred tax Amount

Rs. differences @50%

Excess depreciation as per tax 3,00,000 Timing Deferred tax 1,50,000
records (Rs.5,00,000 - liability
Rs.2,00,000)
15,000
Unamortized preliminary Timing
30,000 Deferred tax
expenses as per tax records
assets 1,35,000
Net deferred tax liability

Q49 Prepare cash flow from investing activities as per AS 3 of M/s Subham Creative Limited
for year ended 31.3.2019.
Particulars Amount
(`)
Machinery acquired by issue of shares at face value 2,00,000

47
 Claim received for loss of machinery in earthquake 55,000
Unsecured loans given to associates 5,00,000
Interest on loan received form associate company 70,000
Pre-acquisition dividend received on investment made 52,600
Debenture interest paid 1,45,200
Term loan repaid 4,50,000
Interest received on investment (TDS of ` 8,200 was deducted on the 73,800
above interest)

Purchased debentures of X Ltd., on 1st December, 2018 which are

redeemable
within 3 months 3,00,000
Book value of plant & machinery sold (loss incurred ` 9,600) 90,000
[Sugg.Nov.’19,5 Marks]

Ans. Cash Flow Statement from Investing Activities of Subham

Creative Limited for the year ended 31-03-2019
Cash generated from investing activities ` `
Interest on loan received 70,000
Pre-acquisition dividend received on investment 52,600
made
Unsecured loans given to subsidiaries (5,00,000)
Interest received on investments (gross value) 82,000
TDS deducted on interest (8,200)
Sale of Plant & Machinery ` (90,000 – 9,600) 80,400
Cash used in investing activities (before extra- (2,23,200)
ordinary item)

48
 Extraordinary claim received for loss of machinery 55,000
Net cash used in investing activities (after extra- (1,68,200)
ordinary item)
Note:

1. Debenture interest paid and Term Loan repaid are financing activities and therefore
not considered for preparing cash flow from investing activities.
2. Machinery acquired by issue of shares does not amount to cash outflow, hence also
not considered in the above cash flow statement.

3. The investments made in debentures are for short-term, it will be treated as

‘cash equivalent’ and will not be considered as outflow in cash flow
statement.

Q50 Karan Enterprises having is Head office in Mangalore, Karnataka has a branch in
Greenville, USA. Following is the trial balance of Branch as at 31-3-2019:
Particulars Amount ($) Dr. Amount ($)
Cr.
Fixed assets 8,000
Opening inventory 800
Cash 700
Goods received form Head Office 2,800
Sales 24,050
Purchases 11,800
Expenses 1,800
Remittance to head office 2,450
Head office account 4,300
28,350 28,350

(i) Fixed assets were purchased on 1st April, 201

49
(ii) Depreciation at 10% p.a. is to be charged on fixed assets on straight line method,

(iii) Closing inventory at branch is $ 700 as on 31-3-2019.

(iv) Goods received form Head Office (HO) were recorded at ` 1,85,500 in HO books.

(v) Remittances to HO were recorded at ` 1,62,000 in HO books.

(vi) HO account is recorded in HO books at ` 2,84,500.

(vii) Exchange rates of US Dollar at different dates can be

taken as: 1-4-2015 ` 63;
1-4-2018` 65 and

31-3-2019 ` 67.

Prepare the trial balance after been converted into Indian rupees in accordance with AS-11.

[Sugg.Nov.’19,5 Marks]

Ans. Trial Balance of Foreign Branch (converted into Indian Rupees)as on

March31, 2019

50
Q51. Mr.Rakshit gives the following information relating to items forming part of inventory as
on 31 st March, 2019. His factory produces product X using raw material A.
(i) 800 units of raw material A (purchased @ ` 140 per unit).

Replacement cost of raw material A as on 31 st March, 2019 is ` 190 per unit.

(ii) 650 units of partly finished goods in the process of producing X and cost
incurred till date ` 310 per unit. These units can be finished next year by
incurring additional cost of ` 50 per unit.

(iii) 1,800 units of finished product X and total cost incurred `

360 per unit. Expected selling price of product X is ` 350 per
unit.

In the context of AS-2, determine how each item of inventory will be

valued as on 31 st March, 2019. Also, calculate the value of total
inventory as on 31 st March, 2019. [Sugg.Nov.’19,5 Marks]

Ans. As per AS 2 (Revised) “Valuation of Inventories”, materials and other supplies

held for use in the production of inventories are not written down below cost if the
finished products in which they will be incorporated are expected to be sold at cost or
above cost. However, when there has been a decline in the price of materials and it is
estimated that the cost of the finished products will exceed net realizable value,
the materials are written down to net realizable value. In such circumstances, the
replacement cost of the materials may be the best available measure of their net
realizable value. In the given case, selling price of product X is ` 350 and total cost
per unit for production is ` 360.
Hence the valuation will be done as under:
(i) 800 units of raw material will be valued at cost 140.
(ii) 650 units of partly finished goods will be valued at 300 per unit* i.e., lower of

51
 cost (` 310) or Net realizable value ` 300 (Estimated selling price ` 350 per unit
less additional cost of ` 50).
(iii) 1,800 units of finished product X will be valued at NRV of ` 350 per unit since it is
lower than cost
` 360 of product X.
Valuation of Total Inventory as on 31.03.2019:
Units Cost(`) NRV / Value = units `
Replacement x cost or
cost ` NRV
whichever
is
less (`)
Raw material A 800 140 190 1,12,000 (800 x 140)
Partly finished 650 310 300 1,95,000 (650 x 300)
goods
Finished goods X 1,800 60 350 6,30,000 (1,800 x
350)
Value of 9,37,000
Inventory
*It has been assumed that the partly finished unit cannot be sold in semi-finished form and its
NRV is zero without processing it further.

Q52. Sheetal Ltd. has provided the following information for the year ended 31 st March,
2019:
Particulars Amount(`)
Accounting profit 9,00,000

52
 Book profit as per MAT 5,25,000
Profit as per Income Tax Act 95,000
Tax rate 30%
MAT rate 7.5%
You are required to calculate the deferred tax asset/liability as per AS-22 and amount of tax
to be debited to the profit and loss account for the year. [Sugg.Nov.’19,5 Marks]

Ans.
Tax as per accounting profit 9,00,000 x 30%= ` 2,70,000

Tax as per Income-tax Profit 95,000 x 30% = ` 28,500

Taxas per MAT
5,25,000x 7.50% = ` 39,375
Tax expense= Current Tax +Deferred Tax

` 2,70,000 = ` 28,500+ Deferred tax

Deferred Tax liability as on 31-03-2019

= ` 2,70,000 – ` 28,500 = ` 2,41,500

Amount of tax to be debited in Profit and Loss account for the year 31-03-2019

Current Tax + Deferred Tax liability + Excess of MAT over current tax

= ` 28,500 + ` 2,41,500+ ` 10,875 (39,375 – 28,500)

= ` 2,80,875

Q53. M/s X & Co. (a partnership firm), had a turnover of Rs. 1.25 crores (excluding
other income) and borrowings of Rs. 0.95 crores in the previous year. It wants to avail the
exemptions available in application of Accounting Standards to non-corporate entities for the
year ended 31.3.2018. Advise the management of M/s X & Co in respect of the exemptions of
provisions of ASs, as per the directive issued bythe ICAI.

53
[MTP Oct. ‘18, 5 Marks]

Ans. The question deals with the issue of Applicability of Accounting Standards to a non-
corporate entity. For availment of the exemptions, first of all, it has to be seen that M/s
X& Co. falls in which level of the non-corporate entities. Its classification will be done
on the basis of the classification of non-corporate entities as prescribed by the ICAI.
According to the ICAI, non-corporate entities can be classified under 3 levels viz Level
I, Level II (SMEs) and Level III(SMEs).

An entity whose turnover (excluding other income) does exceed rupees fifty crore in
the immediately preceding accounting year, will fall under the category of Level I
entities. Non-corporate entities which are not Level I entities but fall in any one or
more of the following categories are classified as Level II entities:

(i) All commercial, industrial and business reporting entities, whose turnover
(excluding other income) exceeds rupees one crore but does not exceed rupees
fifty crore in the immediately preceding accounting year.
(i) All commercial, industrial and business reporting entities having borrowings
(including public deposits) in excess of rupees one crore but not in excess of
rupees ten crore at any time during the immediately preceding accounting year.

(ii) Holding and subsidiary entities of any one of the above.

As the turnover of M/s X& Co. is more than Rs. 1 crore, it falls under 1st criteria
of Level II non- corporate entities as defined above. Even if its borrowings of Rs.
0.95 crores are less than Rs. 1 crore, it will be classified as Level II Entity. In this
case, AS 3, AS 17, AS 21, AS 23, AS 27 will not be applicable to M/s X & Co.
Relaxations from certain requirements in respect of AS 15, AS 19, AS 20, AS 25,
AS 28 and AS 29 are also available to M/s X& Co.

Q54. Mac Ltd. gives the following data regarding to its six segments:

(` in lakhs)
54
 Particulars A B C D E F Total
Segment assets 80 160 60 40 40 20 400
Segment results 100 (380) 20. 20 (20 60 (200)
)
Segment revenue 600 1,240 160 12 160 12 2,400
0 0
The accountant contends that segments ‘A’ and ‘B’ alone are reportable segments. Is he justified
in his view? Discuss in the context of AS-17 ‘Segment Reporting’. [Sugg.Nov.’19, 5 Marks]
Ans. As per AS 17 ‘Segment Reporting’, a business segment or geographical segment should
be identified as a reportable segment if:
- Its revenue from sales to external customers and from other transactions with
other segments is 10% or more of the total revenue- external and internal of all
segments; or

- Its segment result whether profit or loss is 10% or more of combined result of
all segments in profit; or combined result of all segments in loss, whichever is
greater in absolute amount; or

- Its segment assets are 10% or more of the total assets of all segments.

If the total external revenue attributable to reportable segments constitutes less than 75% of
total enterprise revenue, additional segments should be identified as reportable segments even
if they do not meet the 10% thresholds until at least 75% of total enterprise revenue is
included in reportable segments.

On the basis of turnover criteria segments, A and B are reportable segments.

On the basis of the result criteria, segments A, B and F are reportable segments (since their
results in absolute amount is 10% or more of ` 400lakhs).
On the basis of asset criteria, all segments except F are reportable segments.

55
Since all the segments are covered in at least one of the above criteria all segments have to be
reported upon in accordance with Accounting Standard (AS) 17. Hence, the opinion of
accountant is wrong.

Q55. First Ltd. began construction of a new factory building on 1st April, 2017. It obtained
` 2,00,000 as a special loan to finance the construction of the factory building on 1st April,
2017 at an interest rate of 8% per annum. Further, expenditure on construction of the
factory building was financed through other non-specific loans. Details of other
outstanding non-specific loans were:
Amount (`) Rate of Interest per
annum
4,00,000 9%
5,00,000 12%
3,00,000 14%
The expenditures that were made on the factory building construction were as follows:
Date Amount (`)
1st April, 2017 3,00,000
31st May, 2017 2,40,000
1st August, 2017 4,00,000
31st December, 2017 3,60,000
The construction of factory building was completed by 31st March, 2018. As per the provisions of
AS 16, you are required to:
(1) Calculate the amount of interest to be capitalized.
(2) Pass Journal entry for capitalizing the cost and borrowing cost in respect of the factory
building. [Sugg. May ‘19, 5 Marks]
Ans. Computation of average accumulated expenses
`

56
 ` 3,00,000 x 12 / 12 = 3,00,000
` 2,40,000 x 10 / 12 = 2,00,000
` 4,00,000 x 8 / 12 = 2,66,667
` 3,60,000 x 3 / 12 = 90,000
8,56,667
Calculation of average interest rate other than for specific borrowings
Amount of loan (`) Rate of interest Amount of
interest (`)
4,00,000 9% = 36,000
5,00,000 12% = 60,000
3,00,000 14% = 42,000
1,38,000
Weighted average rate of interest

= 11.5%

(138000/12,00,000*100)

(i) Amount of interest to be capitalized

`
Interest on average accumulated expenses:
Specific borrowings (` 2,00,000 x 8%) = 16,000
Non-specific borrowings (` 6,56,667* x 11.5%) = 75,517
Amount of interest to be capitalized = 91,517

57
 (i) Total expenses to be capitalized for building
`
Cost of building ` (3,00,000 + 2,40,000 + 4,00,000 + 13,00,000
3,60,000)
Add: Amount of interest to be capitalized 91,517
13,91,517
(ii) Journal Entry
Date Particulars Dr. (`) Cr.
(`)
31.3.2018 Building A/c Dr. 13,91,51
To Building WIP* 7 13,00,000
A/c To Borrowing 91,517
costs A/c
(Being amount of cost of building and
borrowing
cost thereon capitalized)
Q56. On 15th June, 2018, Y limited wants to re-classify its investments in accordance with AS
13 (revised).
Decide and state the amount of transfer, based on the following information:
(1) A portion of long-term investments purchased on 1st March, 2017 are to be re-
classified as current investments. The original cost of these investments was ` 14
lakhs but had been written down by
` 2 lakhs (to recognize 'other than temporary' decline in value). The market
value of these investments on 15th June, 2018 was ` 11 lakhs.
(2) Another portion of long-term investments purchased on 15th January, 2017 are to be
re-classified as current investments. The original cost of these investments was ` 7

58
 lakhs but had been written down to ` 5 lakhs (to recognize 'other than temporary'
decline in value). The fair value of these investments on 15th June, 2018 was `
4.5 lakhs.
(3) A portion of current investments purchased on 15th March, 2018 for ` 7 lakhs are to
be re-classified as long-terminvestments, as the company has decided to retain them.
The market value of these investments on 31st March, 2018 was ` 6 lakhs and fair
value on 15th June 2018 was ` 8.5 lakhs,
(4) Another portion of current investments purchased on 7th December, 2017 for ` 4
lakhs are to be re-classified as long-term investments. The market value of these
investments was:
on31st March,2018 ` 3.5 lakhs
on15thJune,2018 ` 3.8 lakhs
[Sugg.May‘19,5Marks]
Ans. As per AS 13 (Revised) ‘Accounting for Investments’, where long-term investments are
reclassified as current investments, transfers are made at the lower of cost and carrying
amount at the date of transfer; and where investments are reclassified from current to
long term, transfers are made at lower of cost and fair value on the date of transfer.
Accordingly, the re-classification will be done on the following basis:
(i) In this case, carrying amount of investment on the date of transfer is less than the
cost; hence this re-classified current investment should be carried at ` 12 lakhs
in the books.
(ii) In this case also, carrying amount of investment on the date of transfer is less than
the cost; hence this re-classified current investment should be carried at ` 5
lakhs in the books.
(iii) In this case, reclassification of current investment into long-term investments will
be made at ` 7 lakhs as cost are less than its fair value of ` 8.5 lakhs on the date

59
 of transfer.
* (` 8,56,667 - ` 2,00,000)
** Considering that ` 13,00,000 was debited to Building WIP A/c earlier.
(iv) In this case, market value (considered as fair value) is ` 3.8 lakhs on the date of
transfer which is lower than the cost of ` 4 lakhs. The reclassification of
current investment into long-term investments will be made at ` 3.8 lakhs.

Q57. State whether the following statements are 'True' or 'False'. Also give reason for your
answer.
(1) As per the provisions of AS-5, extraordinary items should not be disclosed in
the statement of profit and loss as a part of net profit or loss for the period.
(2) As per the provisions of AS-12, government grants in the nature of promoters'
contribution which become refundable should be reduced from the capital
reserve.
(3) As per the provisions of AS-2, inventories should be valued at the lower of cost and
selling price.
(4) As per the provisions of AS-13, a current investment is an investment, that by its
nature, is readily realizable and is intended to be held for not more than six
months from the date on which such investment is made.
(5) As per the provisions of AS-4, a contingency is a condition or situation, the
ultimate outcome of which (gain or loss) will be known or determined only on the
occurrence of one or more uncertain future events. [Sugg. May ‘19, 5 Marks]
Ans.
(1) False: The nature and the amount of each extraordinary item should be separately
disclosed in the statement of profit and loss in a manner that its impact on current
profit or loss can be perceived.

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 (2) True: When grants in the nature of promoters’ contribution becomes refundable, in
part or in full to the government on non-fulfillment of some specified conditions, the
relevant amount refundable to the government is reduced from the capital reserve.
(3) False: Inventories should be valued at the lower of cost and net realizable value (not
selling price) as per AS 2.
(4) False: A current investment is an investment that is by its nature readily realizable
and is intended to be held for not more than one year from the date on which such
investment is made.
(5) False: A contingency is a condition or situation, the ultimate outcome of which, gain
or loss, will be known or determined only on the occurrence, or non-occurrence, of
one or more uncertain future events.
Q58. The financial statements of PQ Ltd. for the year 2017-18 approved by the Board of
Directors on 15th July, 2018. The following information was provided:
(i) A suit against the company's advertisement was filed by a party on 20th April,
2018, claiming damages of ` 25 lakhs.
(ii) The terms and conditions for acquisition of business of another company have
been decided by March, 2018. But the financial resources were arranged in April,
2018 and amount invested was ` 50 lakhs.
(iii) Theft of cash of ` 5 lakhs by the cashier on 31st March, 2018 but was detected on 16th
July, 2018.
(iv) Company sent a proposal to sell an immovable property for ` 40 lakhs in March,
2018. The book value of the property was ` 30 lakhs on 31st March, 2018.
However, the deed was registered on 15th April, 2018.
(v) A, major fire has damaged the assets in a factory on 5th April, 2018. However, the
assets are fully insured.
With reference to AS-4 "Contingencies and events occurring after the balance sheet date",

61
 state whether the above-mentioned events will be treated as contingencies, adjusting
events or non-adjusting events occurring after the balance sheet date.
[Sugg.May ‘19,5Marks]
Ans. (i) Suit filed against the company is a contingent liability but it was not existing as on
balance sheet date as the suit was filed on 20th April after the balance Sheet date. As
per AS 4, 'Contingencies' used in the Standard is restricted to conditions or situations
at the balance sheet date, the financial effect of which is to be determined by future
events which may or may not occur. Hence, it will have no effect on financial
statements and will be a non-adjusting event.
(ii) In the given case, terms and conditions for acquisition of business were finalized
and carried out before the closure of the books of accounts but transaction for
payment of financial resources was affected in April, 2018. This is clearly an event
occurring after the balance sheet date. Hence, necessary adjustment to assets and
liabilities for acquisition of business is necessary in the financial statements for the
year ended 31st March 2018.
(iii) Only those significant events which occur between the balance sheet date and the date
on which the financial statements are approved, may indicate the need for
adjustment to assets and liabilities existing on the balance sheet date or may
require disclosure. In the given case, theft of cash was detected on 16th July, 18
after approval of financial statements by the Board of Directors, hence no treatment
is required.
(iv) Adjustments to assets and liabilities are not appropriate for events occurring after the
balance sheet date, if such events do not relate to conditions existing at the balance
sheet date. In the given case, sale of immovable property was under proposal stage
(negotiations also not started) on the balance sheet date. Therefore, no adjustment
to assets for sale of immovable property is required in the financial statements for
the year ended 31st March, 2018.
62
 (v) The condition of fire occurrence was not existing on the balance sheet date. Only
the disclosure regarding event of fire and loss being completely insured may be
given in the report of approving authority.
Q59. Write short note on Timing difference and Permanent Difference as per AS 22.
[Sugg. May ‘19, 5 Marks]
Ans. Matching of taxes against revenue for a period poses special problems arising from
the fact that in number of cases, taxable income may be different from the accounting
income. The divergence between taxable income may be different from the accounting
income arises due to two main reasons: Firstly, there are differences between items of
revenue and expenses as appearing in the statement of profit and loss and the items
which are considered as revenue, expenses or deductions for tax purposes, known as
Permanent Difference. Secondly, there are differences between the amount in respect
of a particular item of revenue or expense as recognized in the statement of profit
and loss and the corresponding amount which is recognized for the computation of
taxable income, known as Timing Difference.
Permanent differences are the differences between taxable income and accounting
income which arise in one accounting period and do not reverse subsequently. For
example, an income exempts from tax or an expense that is not allowable as a
deduction for tax purposes.
Timing differences are those differences between taxable income and accounting
income which arise in one accounting period and are capable of reversal in one or
more subsequent periods. For e.g., Depreciation, Bonus, etc.
Q60. Wooden Plywood Limited has a normal wastage of 5% in the production process. During
the year 2017- 18, the Company used 16,000 MT of Raw material costing ` 190 per MT. At the
end of the year, 950 MT of wastage was in stock. The accountant wants to know how this
wastage is to be treated in the books.

63
 You are required to:

(1) Calculate the amount of abnormal loss.

(2) Explain the treatment of normal loss and abnormal loss. [In the context of AS-2
(Revised)] [Sugg. May ‘19, 5 Marks]

Ans.(i) As per AS 2 (Revised) ‘Valuation of Inventories’, abnormal amounts of wasted materials,

labor and other production costs are excluded from cost of inventories and such costs are recognized as
expenses in the period in which they are incurred.
The normal loss will be included in determining the cost of inventories (finished goods) at the
year end.

Amount of Abnormal Loss:

Q61. Neon Enterprise operates a major chain of restaurants located in different cities. The
company has acquired a new restaurant located at Chandigarh. The new-restaurant requires
significant renovation expenditure. Management expects that the renovations will last for 3
months during which the restaurant will be closed.

Management has prepared the following budget for this period -

Salaries of the staff engaged in preparation of restaurant before its opening

7,50,000

Construction and remodeling cost of restaurant `

30,00,000
Explain the treatment of these expenditures as per the provisions of AS 10 "Property, Plant

64
and Equipment". [Sugg. Nov.’18, 5 Marks]

Ans. As per provisions of AS 10, any cost directly attributable to bring the assets to the
location and conditions necessary for it to be capable of operating in the manner
indicated by the management are called directly attributable costs and would be
included in the costs of an item of PPE.

Management of Neon Enterprise should capitalize the costs of construction and

remodeling the restaurant, because they are necessary to bring the restaurant to the
condition necessary for it to be capable of operating in the manner intended by
management. The restaurant cannot be opened without incurring the construction and
remodeling expenditure amounting Rs.30,00,000 and thus the expenditure should be
considered part of the asset.

However, the cost of salaries of staff engaged in preparation of restaurant Rs.7,50,000

before its opening are in the nature of operating expenditure that would be incurred if
the restaurant was open and these costs are not necessary to bring the restaurant to
the conditions necessary for it to be capable of operating in the manner intended by
management. Hence, Rs. 7,50,000 should be expensed.

Q62. (i) ABC Ltd. an Indian Company obtained long term loan from WWW private Ltd., a U.S.
company amounting to Rs.30,00,000. It was recorded at US $1 = Rs.60.00, taking exchange
rate prevailing at the date of transaction. The exchange rate on balance sheet data
(31.03.2018) was US $1 = ` 62.00.

(ii) Trade receivable includes amount receivable from Preksha Ltd., ` 10,00,000 recorded at
the prevailing exchange rate on the date of sales, transaction recorded at US $1 = ` 59.00. The
exchange rate on balance sheet date (31.03.2018) was US $1 = ` 62.00.

You are required to calculate the amount of exchange difference and also explain the accounting
treatment needed in the above two cases as per AS 11 in the books of ABC Ltd.

[Sugg. Nov.’18,5 Marks]

65
 Ans. Amount of Exchange difference and its Accounting Treatment

Thus, Exchange Difference on Long term loan amounting ` 1,00,000 may either be charged to Profit
and Loss A/c or to Foreign Currency Monetary Item Translation Difference Account but exchange
difference on trade receivables amounting ` 50,847.456 is required to be transferred to Profit
and Loss A/c.
Q63. HIL Ltd. was making provision for non-moving stocks based on no issues having occurred
for the last 12 months up to 31.03.2017. The company now wants to make provision based on
technical evaluation during the year ending 31.03.2018.
Total value of stock ` 120 lakhs
Provision required based on technical evaluation ` 3.00 lakhs.
Provision required based on 12 months no issues ` 4.00 lakhs.
You are requested to discuss the following points in the light of Accounting Standard (AS)-1
(i)Does this amount to change in accounting policy?
(ii)Can the company change the method of accounting? [Sugg. Nov.’18, 5 Marks]

Ans. The decision of making provision for non-moving inventories on the basis of technical
evaluation does not amount to change in accounting policy. Accounting policy of a company

66
may require that provision for non-moving inventories should be made but the basis for
making provision will not constitute accounting policy. The method of estimating the amount
of provision may be changed in case a more prudent estimate can be made.

In the given case, considering the total value of inventory, the change in the amount of required
provision of non-moving inventory from ` 4 lakhs to 3 lakhs are also not material. The disclosure
can be made for such change in the following lines by way of notes to the accounts in the annual
accounts of MILLtd. for the year 2017-18 in the following manner:

"The company has provided for non-moving inventories on the basis of technical evaluation
unlike preceding years. Had the same method been followed as in the previous year, the profit
for the year and the value of net assets at the end of the year would have been lower by ` 1
lakh."
Q64. The accounting year of Dee Limited ended on 31st March, 2018 but the accounts were
approved on 30th April, 2018. On 15th April, 2018 a fire occurred in the factory and office
premises. The loss by fire is of such a magnitude that it was not possible to expect the enterprise
Dee Limited to start operation again.State with reasons, whether the loss due to fire is an
adjusting or non- adjusting event and how the fact of loss is to be disclosed by the company in
the context of the provisions of AS-4 (Revised). [Sugg. Nov.’18, 5 Marks]

Ans. As per AS 4 (Revised) "Contingencies and Events occurring after the Balance Sheet
Date", an event occurring after the balance sheet date should be an adjusting event
even if it does not reflect any condition existing on the balance sheet date, if the
event is such as to indicate that the fundamental accounting assumption of going
concern is no longer appropriate.

The fire occurred in the factory and office premises of an enterprise after 31 March,
2018 but before approval of financial statement of 30.4.18. The loss by fire is of such a
magnitude that it is not reasonable to expect the Dee Ltd. to start operations again, i.e., the
going concern assumption is not valid. Since the fire occurred after 31/03/18, the loss on

67
 fire is not a result of any condition existing on 31/03/18. But the loss due to fire is an
adjusting event the entire accounts need to be prepared on a liquidation basis with
adequate disclosures by the company by way of note in its financial statements in the
following manner:

"Major fire occurred in the factory and office premises on 15th April, 2018 which has
made impossible for the enterprise to start operations again. Therefore, the financial
statements have been prepared on liquidation basis."
Q65. AXE Limited purchased fixed assets costing $ 5,00,000 on 1st Jan. 2018 from an American
company M/s M&M Limited. The amount was payable after 6 months. The company entered
into a forward contract on 1st January 2018 for five months @ f 62.50 per dollar. The
exchange rate per dollar was as follows:

On 1st January, 2018 Rs. 60.75 per dollar

On 31st March, 2018 Rs. 63.00 per dollar

Youare required to state how the profit or loss onforward contract would be recognized
in the books of AXELimitedforthe year ending2017-18, asper the provisionsof AS
11. [Sugg. Nov.’18,5 Marks]
Ans. As per AS 11 "The Effects of Changes in Foreign Exchange Rates", an enterprise may enter
into a forward exchange contract to establish the amount of the reporting currency
required, the premium or discount arising at the inception of such a forward exchange
contract should be amortized as expenses or income over the life of the contract.
Forward Rate Rs.62.50
Less: Spot Rate (Rs. 60.75)
Premium on Contract Rs. 1.75
Contract Amount US$5,00,00
0

68
 Total Loss (5,00,000 x 1.75) ` 8,75,000
Contract period 5 months
3 months falling in the year 2017-18; therefore, loss to be recognized in 2017-18 (8,75,000/5) x 3 =
Rs. 5,25,000. Rest ` 3,50,000 will be recognized in the following year 2018-19.

Q66. On 01.04.2014, XYZ Ltd. received Government grant off 100 Lakhs for an acquisition of
new machinery costing ` 500 lakhs. The grant was received and credited to the cost of the assets.
The life span of the machinery is 5 years. The machinery is depreciated at 20% on WDV
method. The company had to refund the entire grant in 2nd April, 2017 due to non-fulfilment of
certain conditions which was imposed by the government at the time of approval of grant.
How do you deal with the refund of grant to the Government in the books of XYZ Ltd., as per
AS 12? [Sugg. May ‘18, 5 Marks]
Ans. According to AS 12 on Accounting for Government Grants, the amount refundable in
respect of a grant related to a specific fixed asset (if the grant had been credited to the cost of
fixed asset at the time of receipt of grant) should be recorded by increasing the book value of the
asset, by the amount refundable. Where the book value is increased, depreciation on the
revised book value should be provided prospectively over the residual useful life of the
asset.

(Rs. in lakhs)

1st April, Acquisition cost of machinery (` 500 - ` 400.00

2014 100)
31st March, Less: Depreciation @ 20% (80)
2015
1st April, Book value 320.00
2015
31st March, Less: Depreciation @ 20% (64)

69
 2016
1st April, Book value 256.00
2016
31st March, Less: Depreciation @ 20% (51.20)
2017
1st April, Book value 204.80
2017
2nd April, Add: Refund of grant 100.00
2017
Revised book value 304.80
Depreciation @20% on the revised book value amounting Rs.304.80 lakhs is to be provided
prospectively over the residual useful life of the assets.
Q67. ABC Ltd. borrowed US $ 5,00,000 on 01/07/2017, which was repaid as on 31/07/2017. ABC

01/01/2017 1US$= Rs.68.50

31/03/2017 1US$= Rs.69.50
31/07/2017 1US$= Rs70.00
Ltd. prepares financial statement ending on 31/03/2017. Rate of Exchange between reporting
currency (INR) and foreign currency (USD) on different dates are as under:
You are required to pass necessary journal entries in the books of ABC Ltd. as per AS 11.
[Sugg. May ‘18, 5 Marks]
Ans. Journal Entries in the Books of ABC Ltd.

Date Particular Rs. (Dr.) Rs. (Cr)

Jan. Bank Account Dr. 342,50,000
01,2017 (5,00,000x68.50)
To Foreign Loan Account 342,50,000

70
 Mar.31, Foreign Exchange Difference Account Dr. 5,00,000
2017 To Foreign Loan Account
[5,00,000 x (69.50-68.50)] 5,00,000

Jul.31,2017
Foreign Exchange Difference Account Dr.
Dr. 2,50,000
[5,00,000 x (70-69.5)]
Foreign Loan Account 347,50,000
To Bank Account 350,00,000

Q68. Rohit Ltd. has provided the following information

Particulars Rs.
Depreciation as per accounting records 2,50,000
Depreciation as per taxrecords 5,50,000
Unamortized preliminary expenses as per tax record 40,000

There is adequate evidence of future profit sufficiency. How much deferred tax assets/liability
should be recognized as transition adjustment when the tax rate is 50%?
[Sugg.May ‘18,5 Marks]
Ans. Table showing calculation deferred tax asset/liability
Particulars Amount Timing Deferred tax Amount
difference @ 50%
Rs. Rs.
Excess depreciation as per tax 3,00,000 Timing Deferred 1,50,000
records (Rs.5,50,000 - tax
Rs.2,50,000) liability
Unamortized
Timing 20,000
preliminary expenses 40,000 Deferred

71
 as per tax records tax asset
Net deferred tax liability
1,30,000

Net deferred tax liability amounting Rs.1,30,000 should be recognized as transition

adjustment.
Q69. PQR Ltd. is in the process of finalizing its accounts for the year ended 31st March, 2018.
The company seeks your advice on the following:
(I) Goods worth of 5,00,000 were destroyed due to flood in September, 2015. A claim
was lodged with insurance company. But no entry was passed in the books for
insurance claim in the financial year 2015-16. In March, 2018, the claim was passed
and the company received a payment of f 3,50,000 against the claim. Explain the
treatment of such receipt in final account for the year ended 31st March, 2018.
(II) Company created a provision for bad and doubtful debts at 2.5% on debtors in
preparing the financial statements for the year 2017-18.
Subsequently, on a review of the credit period allowed and financial capacity of
the customers, the company decides to increase the provision to 8% on debtors as
on 31.03.2018. The accounts were not approved by the Board of Directors till the
date of decision. While applying the relevant accounting standard, can this
revision be considered as an extra-ordinary item or prior period item?
[Sugg. May‘18, 5 Marks]
Ans.
(i) As per the provisions of AS 5 "Net Profit or Loss for the Period, Prior Period Items
and Changes in Accounting Policies", prior period items are income or expenses, which
arise, in the current period as a result of error or omissions in the preparation of
financial statements of one or more prior periods. Further, the nature and amount of
prior period items should be separately disclosed in the statement of profit and loss in a

72
 manner that their impact on current profit or loss can be perceived.
In the given instance, it is clearly a case of error/omission in preparation of financial
statements for the year 2015-16. Hence, claim received in the financial year 2017-18 is
a prior period item and should be separately disclosed in the statement of Profit and
Loss.
(ii) In the given case, a limited company created 2.5% provision for doubtful debts for the
year 2017-2018. Subsequently, the company revised the estimates based on the changed
circumstances and wants to create 8% provision. As per AS 5, the revision in rate of
provision for doubtful debts will be considered as change in estimate and is neither a
prior period item nor an extraordinary item.

The effect of such change should be shown in the profit and loss account for the year
ending 31st March, 2018.
Q70. M/s Nathan Limited has three segments namely P, Q and R. The assets of the company are
` 15 crores. Segment P has 4 crores, Segment Q has 6 crores and Segment R has 5 crores.
Deferred tax assets included in the assets of each segment are P - ` 1 crore, Q - Rs.0.90 crores
and R - Rs.0.80 crores. The accountant contends all these three segments are reportable
segments. Comment.
Ans. According to AS 17 "Segment Reporting", segment Assets do not include income tax
assets.Therefore, the revised total assets are 12.3 crores [Rs.15 - (Rs. 1 + 0.9 + 0.8).
Details of Segment wise assets
Segment P holds total assets of Rs 3 crores (Rs 4 crores - Rs 1
crores); Segment Q holds Rs. 5.1 crores (Rs 6 crores - 0.9
crores);
Segment R holds Rs 4.2 crores (Rs 5 crores - Rs 0.8 crores).

Thus, all the three segments hold more than 10% of the total assets, all segments
are reportable segments.

73
 Hence, the contention of the accountant that all three segments are reportable
segments is correct.
Q71. Classify the following activities as

(i) Operating Activities, (ii) Investing activities, (iii) Financial activities and (iv) Cash
Equivalents.

(1) Cash receipts from Trade Receivables (2) Marketable Securities

(3) Purchaseof investment (4) Proceeds from long term borrowings

(5) Wagesand Salaries paid (6) Bank overdraft

(7) Purchase of Goodwill (8) Interim dividend paid on equity shares

(9) Short term Deposits (10) Underwriting commission paid

[MTPOct.‘18, Sugg , May‘18,5Marks]

Ans.

(a) Operating Activities: Items 1 and 5. (b) Investing Activities: Items 3,7 and 9

(c) Financing Activities: Items 4,6,8 and 10 (d) Cash Equivalent: 2

Q72. (i) In the year 2018-19, an entity has acquired a new freehold building with a useful life
of 50 years for Rs. 75,00,000. The entity desires to calculate the depreciation charge per
annum using a straight-line method. It has identified the following components (with no
residual value of lifts & fixtures at the end of their useful life) as follows:
Component Useful life Cost
(Years)
Land Infinite Rs. 10,00,000
Roof 25 Rs. 15,00,000
Lifts 20 Rs. 7,50,000
Fixtures 10 Rs. 2,50,000

74
 Remainder of building 50 Rs. 40,00,000
Rs. 75,00,000
Calculate depreciation for the year 2018-19 as per componentization method. Also state the
treatment, in case Roof requires replacement at the end of its useful life.

(ii) Entity A, a supermarket chain, is renovating one of its major stores. The store
will have more available space for store promotion outlets after the renovation
and will include a restaurant. Management is preparing the budgets for the year
after the store reopens, which include the cost of remodeling and the expectation of
a 15% increase in sales resulting from the store renovations, which will attract new
customers.

Decide whether the remodeling cost will be capitalized or not as per provision of
AS 10“Property plant & Equipment”. [MTP Oct. ‘19, 5 Marks]

Ans. (i) Statement showing amount of depreciation as per Componentization Method

Component Depreciation (Per

annum)

(Rs.)
Land Nil
Roof 60,000
Lifts 37,500
Fixtures 25,000
Remainder of Building 80,000
2,02,500
Note: When the roof requires replacement at the end of its useful life the carrying
amount will be nil. The cost of replacing the roof should be recognized as a new
component.
75
 (ii) The expenditure in remodeling the store will create future economic benefits
(in the form of 15% of increase in sales). Moreover, the cost of remodeling can be
measured reliably, therefore, it should be capitalized in line with AS 10 PPE.
Q73. The Accountant of Mobile Limited has sought your opinion with relevant reasons,
whether the following transactions will be treated as change in Accounting Policy or not for the
year ended 31st March, 2019. Please advise him in the following situations in accordance with
the provisions of relevant Accounting Standard;

(i) Provision for doubtful debts was created @ 2% till 31st March, 2018. From the
Financial year 2018- 2019, the rate of provision has been changed to 3%.

(ii) During the year ended 31st March, 2019, the management has introduced a formal
gratuity scheme in place of ad-hoc ex-gratia payments to employees on
retirement.
(iii) Till the previous year the furniture was depreciated on straight line basis over a
period of 5 years. From current year, the useful life of furniture has been
changed to 3 years.

(iv) Management decided to pay pension to those employees who have retired after
completing 5 years of service in the organization. Such employees will get
pension of Rs. 20,000 per month. Earlier there was no such scheme of pension
in the organization.

(v) During the year ended 31st March, 2019, there was change in cost formula in
measuring the cost of inventories. [MTP Oct. ‘18, MTP Oct. ‘19, 5 Marks]
Ans. (i) In the given case, Mobile limited created 2% provision for doubtful debts till
31st March, 2018. Subsequently in 2018-19, the company revised the estimates based
on the changed circumstances and wants to create 3% provision. Thus, change in rate of
provision of doubtful debt is change in estimate and is not change in accounting
policy. This change will affect only current year.

76
 (ii) As per AS 5, the adoption of an accounting policy for events or transactions that
differ in substance from previously occurring events or transactions, will not be
considered as a change in accounting policy. Introduction of a formal retirement
gratuity scheme by an employer in place of ad hoc ex- gratia payments to
employees on retirement is a transaction which is substantially different from the
previous policy, will not be treated as change in an accounting policy.
(iii) Change in useful life of furniture from 5 years to 3 years is a change in estimate and
isnotachange in accounting policy.
(iv) Adoption of a new accounting policy for events or transactions which did not
occur previously should not be treated as a change in an accounting policy. Hence
the introduction of new pension scheme is not a change in accounting policy.
(v) Change in cost formula used in measurement of cost of inventories is a change
in accounting policy.
Q74. Mr. Mehul gives the following information relating to items forming part of inventory as
on 31-3-2019.
His factory produces Product X using Raw material A.
(i) 600 units of Raw material A (purchased @ Rs. 120). Replacement cost of raw
material A as on 31-3- 2019 is Rs. 90 per unit.
(ii) 500 units of partly finished goods in the process of producing X and cost incurred
till date Rs. 260 per unit. These units can be finished next year by incurring
additional cost of Rs. 60 per unit.
(iii) 1500 units of finished Product X and total cost incurred Rs.
320 per unit. Expected selling price of Product X is Rs. 300 per
unit.
Determine how each item of inventory will be valued as on 31-3-2019. Also calculate
the value of total inventory ason31-3-2019. [MTP Oct. ‘19, 5 Marks]

77
Ans. As per AS 2 “Valuation of Inventories”, materials and other supplies held for use in
the production of inventories are not written down below cost if the finished products
in which they will be incorporated are expected to be sold at cost or above cost.
However, when there has been a decline in the price of materials and it is estimated
that the cost of the finished products will exceed net realizable value, the materials are
written down to net realizable value. In such circumstances, the replacement cost of
the materials may be the best available measure of their net realizable value. In the
given case, selling price of product X is Rs. 300 and total cost per unit for
production is Rs. 320.
Hence the valuation will be done as under:
(i) 600 units of raw material will be written down to replacement cost as market
value of finished product is less than its cost, hence valued at Rs. 90 per unit.
(ii) 500 units of partly finished goods will be valued at 240 per unit i.e., lower of cost
Rs. 320 (Rs. 260 + additional cost Rs. 60) or Net estimated selling price or NRV i.e.,
Rs. 240 (Estimated selling price Rs. 300 per unit less additional cost of Rs. 60).
(iii) 1,500 units of finished product X will be valued at NRV of Rs. 300 per unit since it
islower thancost Rs. 320 of product X.
Valuation of Total Inventory as on 31.03.2019:
Units Cost (Rs.) NRV/ Value = units x
Replacement cost or NRV
cost whichever is less
(Rs.)
Raw material A 600 120 90 54,000
Partly finished 500 260 240 1,20,000
goods
Finished goods X 1,500 320 300 4,50,000

78
 Value of Inventory 6,24,000
Q75. State whether the following statements are 'True' or 'False'. Also give reason for your
answer.
(i) Certain fundamental accounting assumptions underline the preparation and
presentation of financial statements. They are usually specifically stated because
their acceptance and use are not assumed.
(ii) If fundamental accounting assumptions are not followed in presentation and
preparation of financial statements, a specific disclosure is not required.
(iii) All significant accounting policies adopted in the preparation and
presentation of financial statements should form part of the financial
statements.
(iv) Any change in an accounting policy, which has a material effect should be
disclosed. Where the amount by which any item in the financial statements
is affected by such change is not ascertainable, wholly or in part, the fact
need not to be indicated.
(v) There is no single list of accounting policies which are applicable to all
circumstances. [MTP Oct. ‘19, 5 Marks]
Ans. (i) False; As per AS 1 “Disclosure of Accounting Policies”, certain fundamental
accounting assumptions underlie the preparation and presentation of financial
statements. They are usually not specifically stated because their acceptance and use
are assumed. Disclosure is necessary if they are not followed.
(ii) False; As per AS 1, if the fundamental accounting assumptions, viz. Going Concern,
Consistency and Accrual are followed in financial statements, specific
disclosure is not required. If a fundamental accounting assumption is not
followed, the fact should be disclosed.
(iii) True; To ensure proper understanding of financial statements, it is necessary that

79
 all significant accounting policies adopted in the preparation and presentation of
financial statements should be disclosed. The disclosure of the significant
accounting policies as such should form part of the financial statements and they
should be disclosed at one place.
(iv) False; Any change in the accounting policies which has a material effect in the
current period or which is reasonably expected to have a material effect in later
periods should be disclosed. Where such amount is not ascertainable, wholly
or in part, the fact should be indicated.
(v) True; As per AS 1, there is no single list of accounting policies which are
applicable to all circumstances. The differing circumstances in which enterprises
operate in a situation of diverse and complex economic activity make alternative
accounting principles and methods of applying those principles acceptable.
Q76. Suhana Ltd. issued 12% secured debentures of Rs. 100 Lakhs on 01.05.2018, to be utilized
as under:
Particulars Amount (Rs. in
lakhs)
Construction of factory building 40
Purchase of Machinery 35
Working Capital 25
In March 2019, construction of the factory building was completed and machinery
was installed and ready for its intended use. Total interest on debentures for the financial
year ended 31.03.2019 was Rs. 11,00,000. During the year 2018-19, the company had
invested idle fund out of money raised from debentures in banks' fixed deposit and
had earned an interest of Rs. 2,00,000.
Show the treatment of interest under Accounting Standard 16 and also explain nature
of assets.
OR

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 Beta Ltd. is a full tax-freeenterprise for the first ten years of its existence and is in the
second year of its operation. Depreciation timing difference resulting in a tax liability
in year 1 and 2 is Rs. 1,000 lakhs and Rs. 2,000 lakhs respectively. From the third year
it is expected that the timing difference would reverse each year by Rs. 50 lakhs.
Assuming tax rate of 40%, find out the deferred tax liability at the end of the second
year and any charge to the Profit and Loss account.
[MTPOct.‘18,MTPAug.‘18,MTPOct.‘19,5Marks]
Ans. According to AS 16 “Borrowing Costs”, borrowing costs that are directly attributable to
the acquisition, construction or production of a qualifying asset should be capitalized as part of
the cost of that asset. The amount of borrowing costs eligible for capitalization should be
determined in accordance with this Standard. Other borrowing costs should be recognized as an
expense in the period in which they are incurred.

It also states that to the extent that funds are borrowed specifically for the purpose of
obtaining a qualifying asset, the amount of borrowing costs eligible for capitalization on
that asset should be determined as the actual borrowing costs incurred on that borrowing during
the period less any income on the temporary investment of those borrowings.

Thus, eligible borrowing cost

= Rs. 11,00,000 - Rs. 2,00,000

= Rs. 9,00,000
Sr. Particulars Nature of Interest to be Interest to be charged
No. assets Capitalized (Rs.) to Profit & Loss Account
(Rs.)
i Construction Qualifying 9,00,000x40/100 NIL
of Asset*
factory = Rs. 3,60,000
building

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ii Purchase of Not a NIL 9,00,000x35/100
Qualifying
Machinery Asset = Rs. 3,15,000
iii Working Not a NIL 9,00,000x25/100
Capital Qualifying
Asset = Rs. 2,25,000
Total Rs. 3,60,000 Rs. 5,40,000
* A qualifying asset is an asset that necessarily takes a substantial period of time to
get ready for its intended use or sale.

OR

As per para 13 of Accounting Standard (AS) 22, Accounting for Taxes on Income”,
deferred tax in respect of timing differences which originate during the tax holiday
period and reverse during the tax holiday period, should not be recognized to the
extent deduction from the total income of an enterprise is allowed during the tax
holiday period as per the provisions of sections 10A and 10B of the Income-tax Act.
Deferred tax in respect of timing differences which originate during the tax holiday
period but reverse after the tax holiday period should be recognized in the year in
which the timing differences originate. However, recognition of deferred tax assets
should be subject to the consideration of prudence. For this purpose, the timing
differences which originate first should be considered to reverse first.

Out of Rs. 1,000 lakhs depreciation, timing difference amounting Rs. 400 lakhs (Rs. 50
lakhs x 8 years) will reverse in the tax holiday period and therefore, should not be
recognized. However, for Rs. 600 lakhs (Rs. 1,000 lakhs. Rs. 400 lakhs), deferred tax
liability will be recognized for Rs. 240 lakhs (40% of Rs. 600 lakhs) in first year. In the
second year, the entire amount of timing difference of Rs. 2,000 lakhs will reverse
only after-tax holiday period and hence, will be recognized in full. Deferred tax

82
 liability amounting Rs. 800 lakhs (40% of Rs. 2,000 lakhs) will be created by charging it
to profit and loss account and the total balance of deferred tax liability account at the
end of second year will be Rs. 1,040 lakhs (240 lakhs + 800lakhs).
Q77. Gamma Limited is working on different projects which are likely to be completed within 3
years period. It recognizes revenue from these contracts on percentage of completion method for
financial statements during 2014-2015, 2015-2016 and 2016-2017 for Rs. 11,00,000, Rs. 16,00,000 and
Rs. 21,00,000 respectively. However, for Income-tax purpose, it has adopted the completed
contract method under which it has recognized revenue of Rs. 7,00,000, Rs. 18,00,000 and Rs.
23,00,000 for the years 2014-2015, 2015-2016 and 2016-2017 respectively. Income-tax rate is
35%.You are required to compute the amount of deferred tax asset/liability for the years 2014-
2015, 2015- 2016 and 2016-2017. Also describe how this amount of deferred tax asset/liability
will be disclosed in the balance sheet of Omega Limited as per provisions of AS 22.
[MTPMarch‘18,MTPMarch‘19, 5Marks]

Ans. Gamma Limited

Calculation of Deferred Tax Asset/Liability

Year Accounting Taxable Timing Deferred Tax

Income Income Difference Liability

(Balance) (Balance)
2014-2015 11,00,000 7,00,000 4,00,000 1,40,000
2015-2016 16,00,000 18,00,000 2,00,000 70,000
2016-2017 21,00,000 23,00,000 NIL NIL
48,00,000 48,00,000
As per AS 22, deferred tax assets and liabilities should be distinguished from assets and
liabilities representing current tax for the period. Deferred tax assets and liabilities should be
disclosed under a separate heading in the balance sheet of the enterprise, separately from
current assets and current liabilities. The break-up of deferred tax assets and deferred tax

83
liabilities into major components of the respective balances should be disclosed in the notes
to accounts.

Q78. While preparing its final accounts for the year ended 31st March, 2016, a company
made provision for bad debts @ 5% of its total debtors. In the last week of February, 2016, a
debtor for Rs. 20 lakhs had suffered heavy loss due to an earthquake; the loss was not
covered by any insurance policy. In April, 2016 the debtor became a bankrupt. Can the
company provide for the full loss arising out of insolvency of the debtor in the final accounts
for the year ended 31st March, 2016? Comment with reference to relevant Accounting
Standard. [MTP March ‘19, 5 Marks]

Ans. As per AS 4 'Contingencies and Events Occurring After the Balance Sheet Date',
adjustment to assets and liabilities are required for events occurring after the
balance sheet date that provide additional information materially affecting the
determination of the amounts relating to conditions existing at the Balance Sheet
date.

A debtor for Rs. 20,00,000 suffered heavy loss due to earthquake in the last week of
February, 2016 which was not covered by insurance. This information with its
implications was already known to the company. The fact that he became bankrupt
in April, 2016 (after the balance sheet date) is only an additional information related
to the condition existing on the balance sheet date.

Accordingly, full provision for bad debts amounting Rs. 20,00,000 should be made,
to cover the loss arising due to the insolvency of a debtor, in the final accounts for the
year ended 31st March 2016. Since the company has already made 5% provision of its
total debtors, additional provision amounting Rs. 19,00,000 shall be made
(20,00,000 x95%).

84
Q79. Examine whether the following will constitute a change in accounting policy or not as
per AS 5.

(i) Introduction of a formal retirement gratuity scheme by an employer in place of

ad hoc ex-gratia payments to employees on retirement.
(ii) Management decided to pay pension to those employees who have retired after
completing 5 years of service in the organization. Such employees will get
pension of Rs. 20,000 per month. Earlier there was no such scheme of pension in
the organization. [MTP March ‘19, 5 Marks]

Ans. As per AS 5 'Net Profit or Loss for the Period, Prior Period Items and Changes in
Accounting Policies', the adoption of an accounting policy for events or transactions
that differ in substance from previously occurring events or transactions, will not be
considered as a change in accounting policy.

(i) Accordingly, introduction of a formal retirement gratuity scheme by an employer in

place of ad hoc ex-gratia payments to employees on retirement is not a change in
an accounting policy.
(ii) Similarly, the adoption of a new accounting policy for events or transactions
which did not occur previously or that were immaterial will not be treated as a
change in an accounting policy.

Q80. On the basis of information given below, find the value of inventory (by periodic inventory
method) as per AS 2, to be considered while preparing the Balance Sheet as on 31st March, 2017
on weighted Average Basis.

Details of Purchases:
Date of Unit (Nos.) Purchase cost per unit
purchase (Rs.)
01-03-2017 20 108

85
 08-03-2017 15 107
17-03-2017 30 109
25-03-2017 15 107
Details of issue of Inventory:
Date of Issue Unit
(Nos.)
03-03-2017 10
12-03-2017 20
18-03-2017 10
24-03-2017 20
Net realizable value of inventory as on 31st March, 2017 is Rs. 107.75 per unit.

Youare required to compute the value of Inventory as per AS 2.

[MTP March‘19, 5Marks]

Ans. Net Realizable Value of Inventory as on 31st March, 2017

= Rs. 107.75 x 20 units = Rs. 2,155

Value of inventory as per Weighted Average basis

Total units purchased and total cost:

01.03.2017 Rs.108 x20 units = Rs. 2160

08.3.2017 Rs.107 x15 units = Rs. 1605

17.03.2017 Rs.109 x30 units = Rs. 3270

25.03.2017 Rs. 107 x 15 units = Rs. 1605

Total 80 units = Rs. 8640

86
Weighted Average Cost = Rs. 8640/80 units = Rs.108
Total cost =Rs. 108 x 20 units = Rs. 2,160
Value of inventory to be considered while preparing Balance Sheet as on 31st March, 2017 is, Cost or
Net Realizable value whichever is lower i.e., Rs. 2,155.
Q81. Omega Limited has borrowed a sum of US $ 10,00,000 at the beginning of Financial Year
2016-17 for its residential project at 4 %. The interest is payable at the end of the Financial Year.
At the time of availment exchange rate was Rs. 56 per US $ and the rate as on31s'March,2017 was
Rs. 62 per US $. If Omega Limited borrowed the loan in India in Indian Rupee equivalent, the
pricing of loan would have been 10.50%.
You are required to compute Borrowing Cost and exchange difference for the year ending 31st
March, 2017 as per applicable Accounting Standards. [MTP March ‘19, 5 Marks]
Ans. (i) Interest for the period 2016-17
= US $ 10 lakhs x4% x Rs. 62 per US$ = Rs. 24.80 lakhs
(ii) Increase in the liability towards the principal amount
= US $ 10 lakhs x Rs. (62 - 56) = Rs. 60 lakhs
(iii) Interest that would have resulted if the loan was taken in Indian currency
= US $ 10 lakhs x Rs. 56 x 10.5% = Rs. 58.80 lakhs
(iv) Difference between interest on local currency borrowing and foreign currency
borrowing = Rs.
58.80 lakhs - Rs. 24.80 lakhs = Rs. 34 lakhs.
Therefore, out of Rs. 60 lakhs increase in the liability towards principal amount, only Rs.
34 lakhs will be considered as the borrowing cost. Thus, total borrowing cost would be Rs.
58.80 lakhs being the aggregate of interest of Rs. 24.80 lakhs on foreign currency
borrowings plus the exchange difference to the extent of difference between interest on
local currency borrowing and interest on foreign currency borrowing of Rs. 34 lakhs.

87
 Hence, Rs. 58.80 lakhs would be considered as the borrowing cost to be accounted for as
per AS 16 and the remaining Rs. 26 lakhs (60 - 34) would be considered as the exchange
difference to be accounted for as per AS 11.
Q82. Omega Ltd., has a normal wastage of 4% in the production process. During the year 2016-17,
the Company used 12,000 MT of raw material costing Rs. 150 per MT. At the end of the year
630 MT of wastage was ascertained in stock. The accountant wants to know how this
wastage is to be treated in the books.
You are required to compute the amount of normal and abnormal loss and treatment thereof in
line with AS 2 "Valuation of inventories".
[MTP Oct. ‘18, MTP April ‘19, MTP April ‘18, 5 Marks]
Ans. As per para AS 2 'Valuation of Inventories', abnormal amounts of wasted materials,
labor and other production costs are excluded from cost of inventories and such costs are
recognized as expenses in the period in which they are incurred. The normal loss will be
included in determining the cost of inventories (finished goods) at the year end.
Amount of Normal Loss and Abnormal Loss:
Material used 12,[email protected]=Rs.
18,00,000
Normal Loss (4% of 12,000 480 MT
MT)
Net quantity of material 11,520 MT
Abnormal Loss in quantity 150 MT (630 MT less480 MT)
Abnormal Loss Rs. 23,437.50 [150 units @ Rs.
156.25
(Rs.18,00,000/11,520)]
Amount Rs. 23,437.50 will be charged to the Profit and Loss statement.

88
Q83. Ram Ltd. purchased machinery for Rs. 80 lakhs, (useful life 4 years and residual
value Rs. 8 lakhs). Government grant received is Rs. 32 lakhs. Show the Journal Entry to be
passed at the time of refund of grant and the value of the fixed assets in the third year and the
amount of depreciation for remaining two years, if the grant is credited to Deferred Grant
A/c. [MTP April ‘18, MTP April ‘19, 5 Marks]

Ans. In the books of Ram Ltd.

If the grant is credited to Deferred Grant Account:

As per AS 12 'Accounting for Government Grants,' income from Deferred Grant

Account is allocated to Profit and Loss account usually over the periods and in the
proportions in which depreciation on related assets is charged.

Accordingly, in the first two years (Rs. 32 lakhs /4 years) = Rs. 8 lakhs x 2 years = Rs.
16 lakhs will be credited to Profit and Loss Account and Rs. 16 lakhs will be the balance
of Deferred Grant Account after two years.
Therefore, on refund of grant, following entry will be passed:

Rs. Rs.

I Deferred Grant A/c Dr. 16

lakhs

Profit&LossA/c Dr. 16
To Bank A/c 32 lakhs

(Being Government grant refunded)

1. Value of Fixed Assets after two years but before refund of grant

Fixed assets initially recorded in the books = Rs. 80 lakhs

Depreciation for each year= (Rs. 80 lakhs- Rs.8 lakhs)/4 years = Rs. 18 lakhs per year
Book value of fixed assets after two years = Rs. 80 lakhs - (Rs. 18 lakhs x 2 years) =
Rs. 44 lakhs

89
 2. Value of Fixed Assets afterrefund of grant

On refund of grant the balance of deferred grant account will become nil. The
fixed assets will continue to be shown in the books at Rs. 44 lakhs.

3. Amount of depreciation for remaining two years

Value of Fixed Assets before refund of grant Rs. 28 lakhs

Add Refundof grant Rs. 32lakhs

Rs. 60lakhs

4. Amount of depreciation for remaining two years

Value of the fixed assets after refund of grant -residual value of the assets / No. of
years

= Rs. 60 lakhs - Rs. 8 lakhs/ 2

= Rs. 26 lakhs per annum will be charged for next two years.
Q84. While preparing its final accounts for the year ended 31st March, 2019, a company made
provision for bad debts @ 5% of its total debtors. In the last week of February, 2019, a debtor
for Rs. 20 lakhs had suffered heavy loss due to an earthquake; the loss was not covered by any
insurance policy. In April, 2019 the debtor became a bankrupt. Can the company provide for the
full loss arising out of insolvency of the debtor in the final accounts for the year ended 31st
March, 2019? Comment with reference to relevant Accounting Standard.
[MTP April ‘19, 5 Marks]

Ans. As per AS 4 'Contingencies and Events Occurring After the Balance Sheet Date',
adjustment to assets and liabilities are required for events occurring after the
balance sheet date that provide additional information materially affecting the
determination of the amounts relating to conditions existing at the Balance Sheet
date.

A debtor for Rs. 20,00,000 suffered heavy loss due to earthquake in the last week of

90
 February, 2019 which was not covered by insurance. This information with its
implications was already known to the company. The fact that he became bankrupt
in April, 2019 (after the balance sheet date) is only an additional information related
to the condition existing on the balance sheet date.

Accordingly, full provision for bad debts amounting Rs. 20,00,000 should be made,
to cover the loss arising due to the insolvency of a debtor, in the final accounts for the
year ended 31st March 2019. Since the company has already made5% provision of its
total debtors, additional provision amounting Rs. 19,00,000 shall be made
(20,00,000 x95%).
Q85. Kumar Ltd. had made a rights issue of shares in 2017. In the offer document to its
members, it had projected a surplus of Rs. 40 crores during the accounting year to end on
31st March, 2017. The draft results for the year, prepared on the hitherto followed accounting
policies and presented for perusal of the board of directors showed a deficit of Rs. 10 crores.
The board in consultation with the managing director, decided not to provide for "after sales
expenses" during the warranty period. Till the last year, provision at 2% of sales used to be
made under the concept of "matching of costs against revenue" and actual expenses used to be
charged against the provision. The board now decided to account for expenses as and when
actually incurred. Sales during the year total to Rs. 600 crores.

As chief accountant of the company, you are asked by the managing director to draft the
notes on accounts for inclusionin the annual report for 2016-2017.

[MTPApril ‘18, MTPApril ‘19, 5 Marks]

Ans. As per AS 1, any change in the accounting policies which has a material effect in the
current period or which is reasonably expected to have a material effect in later periods
should be disclosed. In the case of a change in accounting policies which has a
material effect in the current period, the amount by which any item in the financial
statements is affected by such change should also be disclosed to the extent

91
 ascertainable. Where such amount is not ascertainable, wholly or in part, the fact
should be indicated. Accordingly, the notes on accounts should properly disclose the
change and its effect.

Notes on Accounts:

So far, the company has been providing 2% of sales for meeting "after sales expenses
during the warranty period. With the improved method of production, the probability
of defects occurring in the products has reduced considerably. Hence, the company has
decided not to make provision for such expenses but to account for the same as and
when expenses are incurred. Due to this change, the profit for the year is increased by
Rs. 12 crores than would have been the case if the old policy were to continue.
Q86. Mohan Ltd. purchased an asset on 1st January 2013 for Rs. 5,00,000 and the asset had an
estimated useful life of 5 years and a residual value of nil. On 1st January 2017, the directors
review the estimated life and decide that the asset will probably be useful for a further 4
years.You are required to compute the amount of depreciation for each year, if company charges
depreciation on Straight Line basis. [MTP April ‘19, 5 Marks]
Ans. The entity has charged depreciation using the straight-line method at Rs. 1,00,000
per annum i.e. (5,00,000/5 years). On 1st January 2017, the asset's net book value is
[5,00,000 - (1,00,000 x4)] Rs. 1,00,000. The remaining useful life is 4years. The company
should amend the annual provision for depreciation to charge the unamortized cost
over the revised remaining life of four years. Consequently, it should charge
depreciation for the next 4 years at Rs. 25,000 per annum i.e. (1,00,000/4 years).
Q87. Zen Bridge Construction Limited obtained a loan of Rs. 64 crores to be utilized as under:

(i) Construction of Hill link road in Kedarnath:Rs.50 crores (work was held up
totally for a month during the year due to heavy rain which are common in the
geographic region involved)

(ii) Purchase of Equipment and Machineries Rs.6 crores

92
 (iii) Working Capital Rs.4 crores

(iv) Purchase of Vehicles Rs.1 crores

(v) Advances for tools/cranes etc. Rs. 1 crore

(vi) Purchase of Technical Know-how Rs.2 crores

(vii) TotalInterestcharged bythe Bankfor the yearending 31stMarch, 2016 Rs.1.6

crores

You are required to show the treatment of Interest according to Accounting Standard
by Zen Bridge Construction Limited.

[MTP April ‘18, 5 Marks]

Ans. According to AS 16'Borrowing costs', qualifying asset is an asset that necessarily takes
substantial period of time to get ready for its intended use. As per the standard, borrowing
costs that are directly attributable to the acquisition, construction or production of a
qualifying asset should be capitalized as part of the cost of that asset. Other borrowing
costs should be recognized as an expense in the period in which they are incurred.
Capitalization of borrowing costs is also not suspended when a temporary delay is a
necessary part of the process of getting an asset ready for its intended use or sale.

The treatment of interest by Zen Bridge Construction Ltd. can be shown as:

Qualifying Interest to Interest to be

Assets be charged to
capitalized profit & Loss
Rs. in crores A/c Rs. in
crores
Construction of hill road* Yes 1.25 1.6/64x50
Purchase of equipment and
machineries No 0.15 1.6/64x6

93
Working capital No 0.10 1.6/64x4
Purchase of vehicles No 0.025 1.6/64x1
Advance for tools, cranes No 0.025 1.6/64x1
etc.

Purchase of technical know- No 1.25 0.05 1.6/64x2

how

Total 0.35
*Note: It is assumed that construction of hill road will normally take more than a year
(substantial period of time), hence considered as qualifying asset.

Q88. Prepare Cash Flow from Investing Activities of Creative Furnishings Limited for the
year ended 31-3- 2017.
Particulars Rs.
Plant acquired by the issue of 8% Debentures 1,56,000
Claim received for loss of plant in fire 49,600
Unsecured loans given to subsidiaries 4,85,000
Interest on loan received from subsidiary companies 82,500
Pre-acquisition dividend received on investment made 62,400
Debenture interest paid 1,16,000
Term loan repaid 4,25,000
Interest received on investment 68,000
(IDS of Rs. 8,200 was deducted on the above interest)
Book value of plant sold (loss incurred Rs. 9,600) 84,000
[MTPApril‘18, 5Marks]

94
 Ans Cash Flow Statement from Investing Activities of Creative Furnishings Limited
for the year ended 31-03-2017
Cash generated from investing activities Rs. Rs.
Interest on loan received 82,500
Pre-acquisition dividend received on investment made 62,400
Unsecured loans given to subsidiaries 4,85,000
Interest received on investments (gross value) 76,200
IDS deducted on interest 8,200
Sale of plant 74,400
Cash used in investing activities (before extra-ordinary 1,97,700
item)
Extraordinary claim received for loss of plant 49,600
Net cash used in investing activities (after extra-ordinary 1,48,100
item)
Note:
1. Debenture interest paid and Term Loan repaid are financing activities and therefore
not considered for preparing cash flow from investing activities.
2. Plant acquired by issue of 8% debentures does not amount to cash outflow, hence also
not considered in the above cash flow statement.
Q89. While preparing its final accounts for the year ended 31st March, 2016, a company
made provision for bad debts @ 5% of its total debtors. In the last week of February, 2016, a
debtor for Rs. 20 lakhs had suffered heavy loss due to an earthquake; the loss was not
covered by any insurance policy. In April, 2016 the debtor became a bankrupt. Can the
company provide for the full loss arising out of insolvency of the debtor in the final accounts
for the year ended 31st March, 2016?
You are required to examine and comment with reference to relevant Accounting

95
 Standard. [MTP April ‘18, 5 Marks]
Ans. As per AS 4 'Contingencies and Events Occurring After the Balance Sheet Date',
adjustment to assets and liabilities are required for events occurring after the
balance sheet date that provide additional information materially affecting the
determination of the amounts relating to conditions existing at the Balance Sheet
date.
A debtor for Rs. 20,00,000 suffered heavy loss due to earthquake in the last week of
February, 2016 which was not covered by insurance. This information with its
implications was already known to the company. The fact that he became bankrupt in
April, 2016 (after the balance sheet date) is only an additional information related to
the condition existing on the balance sheet date.
Accordingly, full provision for bad debts amounting Rs. 20,00,000 should be made,
to cover the loss arising due to the insolvency of a debtor, in the final accounts for the
year ended 31st March 2016. Since the company has already made 5% provision of its
total debtors, additional provision amounting Rs. 19,00,000 shall be made
(20,00,000 x 95%).
Q90. The Board of Directors of New Graphics Ltd. in its Board Meeting held on 18th April,
2017, considered and approved the Audited Financial results along with Auditors Report for the
Financial Year ended 31st March, 2017 and recommended a dividend of Rs. 2 per equity share
(on 2 crores fully paid-up equity shares of Rs. 10 each) for the year ended 31st March, 2017
and if approved by the members at the forthcoming Annual General Meeting of the company on
18th June, 2017, the same will be paid to all the eligible shareholders.Discuss on the accounting
treatment and presentation of the said proposed dividend in the annual accounts of the
company for the year ended 31st March, 2017 as per the applicable Accounting Standard and other
Statutory Requirements. [MTP March ‘18, 5 Marks]
Ans. As per the amendment in AS 4 "Contingencies and Events Occurring After the Balance Sheet

96
Date" vide Companies (Accounting Standards) Amendments Rules, 2016 dated 30th March, 2016,
the events which take place after the balance sheet date, are sometimes reflected in the financial
statements because of statutory requirements or because of their special nature.

However, dividends declared after the balance sheet date but before approval of financial
statements are not recognized as a liability at the balance sheet date because no statutory
obligation exists at that time. Hence such dividends are disclosed in the notes to financial
statements.

Provision for proposed dividends is not required to be made as per the amendment in AS 4.
Such proposed dividends are to be disclosed in the notes to financial statements. Accordingly,
the dividend of Rs.4 crores recommended by New Graphics Ltd. in its Board meeting on 18th
April, 2017 shall not be accounted for in the books for the year 2016-17 irrespective of the fact
that it pertains to the year 2016- 17 and will be paid after approval in the Annual General
Meeting of the members/shareholders.

Q91. On the basis of information given below, find the value of inventory (by periodic
inventory method) as per AS 2, to be considered while preparing the Balance Sheet as on 31st
March, 2017 on weighted Average Basis.

Details of Purchases:

Date of purchase Unit (Nos.) Purchase cost per unit

(Rs.)
01-03-2017 20 10
8
08-03-2017' 15 10
7
17-03-2017 30 10
9
25-03-2017 15 10

97
 7
Details of issue of Inventory:
Date of Issue Unit
(Nos.)
03-03-2017 10
12-03-2017 20
18-03-2017 10
24-03-2017 20

Net realizable value of inventory as on 31st March, 2017 is Rs. 107.75 per unit. You
are required to compute the value of Inventory as per AS 2?
[MTP March ‘18, 5 Marks]

Ans. Net Realizable Value of Inventory as on 31st March, 2017 = Rs.107.75 x 20 units =
Rs.2,155

Value of inventory as per Weighted Average basis

Total units purchased and total cost:

01.03.2017 Rs.108x20 units = Rs.2160
08.3.2017 Rs.107x15 units = Rs.1605
17.03.2017 Rs.109x30 units = Rs.3270
25.03.2017 Rs.107x15units= Rs.1605
Total 80 units = Rs.8640

Weighted Average Cost = Rs.8640/80 units = Rs.108

Total cost = Rs.108 x 20 units = Rs.2,160

Value of inventory to be considered while preparing Balance Sheet as on 31st March, 2017 is,
Cost or Net Realizable value whichever is lower i.e., Rs.2,155.
Q92. Mohan Ltd. has an existing freehold factory property, which it intends to knock down
and redevelop. During the redevelopment period the company will move its production

98
facilities to another (temporary) site.

The following incremental costs will be incurred:

Setup costs of Rs.5,00,000 to install machinery in the new

location. Rent of Rs.15,00,000
Removalcostsof Rs.3,00,000totransportthe machineryfromthe oldlocationtothe
temporarylocation.

You are required to examine in line with AS 10 "Property, Plant and Equipment" whether
these costs can be capitalized into the cost of the new building.

[MTP Oct. ‘18, MTP March ‘18, 5 Marks]

Ans. 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. These costs are not 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.

The costs to be incurred by the company are in the nature of costs of reducing or
reorganizing the operations of the accompany. These costs do not meet that
requirement of AS 10 "Property, Plant and Equipment" and cannot, therefore, be
capitalized.

Q93. Omega Limited has borrowed a sum of US $ 10,00,000 at the beginning of Financial Year
2016-17 for its residential project at 4 %. The interest is payable at the end of the Financial Year.
At the time of availment exchange rate was Rs.56 per US $ and the rate as on31st March, 2017 was
Rs.62 per US $. If Omega Limited borrowed the loan in India in Indian Rupee equivalent, the
pricing of loan would have been 10.50%. You are required to compute Borrowing Cost and
exchange difference for the year ending 31st March, 2017 as per applicable Accounting
Standards. [MTP March ‘18, 5 Marks]

Ans. (i) Interest for the period 2016-17

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 = US $ 10 lakhs x 4% x Rs.62 per US$ = Rs.24.80 lakhs

(ii) Increase in the liability towards the principal amount

= US $ 10 lakhs x Rs. (62 - 56) = Rs.60 lakhs

(iii) Interest that would have resulted if the loan was taken in Indian currency

= US $ 10 lakhs x Rs.56 x 10.5% = Rs.58.80 lakhs

(iv) Difference between interest on local currency borrowing and foreign currency
borrowing

= Rs.58.80 lakhs - Rs.24.80 lakhs = Rs. 34 lakhs.

Therefore, out of Rs. 60 lakhs increase in the liability towards principal amount, only
Rs.34 lakhs will be considered as the borrowing cost. Thus, total borrowing cost would be
Rs. 58.80 lakhs being the aggregate interest of Rs.24.80 lakhs on foreign currency
borrowings plus the exchange difference to the extent of difference between interest on
local currency borrowing and interest on foreign currency borrowing of Rs.34 lakhs.
Hence, Rs.58.80 lakhs would be considered as the borrowing cost to be accounted for as per AS 16
and the remaining Rs.26 lakhs (60 - 34) would be considered as the exchange difference to be
accounted for as per AS 11.
Q94. The Board of Directors of New Graphics Ltd. in its Board Meeting held on 18th April,
2017, considered and approved the Audited Financial results along with Auditors Report
for the Financial Year ended 31st March, 2017 and recommended a dividend of Rs. 2 per
equity share (on 2 crores fully paid-upequity shares of Rs. 10 each) for the year ended 31st
March, 2017 and if approved by the members at the forthcoming Annual General Meeting
of the company on 18th June, 2017, the same will be paid to all the eligible shareholders.
Discuss on the accounting treatment and presentation of the said proposed dividend in the
annual accounts of the company for the year ended 31st March, 2017 as per the applicable
Accounting Standard and other Statutory Requirements.

100
[MTP Aug. ‘18, 5 Marks]
Ans. As per the amendment in AS 4 “Contingencies and Events Occurring After the Balance
Sheet Date” vide Companies (Accounting Standards) Amendments Rules, 2016 dated
30th March, 2016, the events which take place after the balance sheet date, are
sometimes reflected in the financial statements because of statutory requirements or
because of their special nature.
However, dividends declared after the balance sheet date but before approval of
financial statements are not recognized as a liability at the balance sheet date because no
statutory obligation exists at that time. Hence such dividends are disclosed in the
notes to financial statements.
No, provision for proposed dividends is not required to be made. Such proposed
dividends are to be disclosed in the notes to financial statements. Accordingly, the
dividend of Rs.4 crores recommended by New Graphics Ltd. in its Board meeting on
18th April, 2017 shall not be accounted for in the books for the year 2016 -17
irrespective of the fact that it pertains to the year 2016-17 and will be paid after
approval in the Annual General Meeting of the members / shareholders.
Q95. How you will deal with following in the financial statements of the Paridhi Electronics
Ltd.ason31.3.18 with reference to AS-13?
(i) Paridhi Electronics Ltd. invested in the shares of another unlisted company on 1st
May 2014 at a cost of Rs. 3,00,000 with the intention of holding more than a year.
The published accounts of unlisted company received in January, 2018 reveals
that the company has incurred cash losses with decline in market share and
investment of Paridhi Electronics L td. may not fetch more than Rs. 45,000.
(ii) Also, Paridhi Electronics Ltd. has current investment (X Ltd.’s shares) purchased
for Rs. 5 lakhs, which the company want to reclassify as long-term investment.
The market value of these investments as on date of Balance Sheet was Rs. 2.5
lakhs. [MTP Aug. ‘18, 5 Marks]
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 Ans. (i) As per AS 13, “Accounting for Investments” Investments classified as long-term
investments should be carried in the financial statements at cost. However,
provision for diminution shall be made to recognize a decline, other than
temporary, in the value of the investments, such reduction being determined and
made for each investment individually. The standard also states that indicators of the
value of an investment are obtained by reference to its market value, the investee's
assets and results and the expected cash flows from the investment.
On this basis, the facts of the case given in the question clearly suggest that the provision
for diminution should be made to reduce the carrying amount of shares to Rs. 45,000
in the financial statements for the year ended 31st March, 2018 and charge the
difference of loss of Rs. 2,55,000 to profit and loss account.
(ii) As per AS 13 ‘Accounting for Investments’, where investments are reclassified from
current to long -term, transfers are made at the lower of cost or fair value at the date of
transfer.

In the given case, the market value of the investment (X Ltd. shares) is Rs.2.50 lakhs, which is
lower than its cost i.e., Rs. 5 lakhs. Therefore, the transfer to long term investments should be
made at cost of Rs. 2.50 lakhs. The loss of Rs. 2.50 lakhs should be charged to profit and loss
account.
Q96. Kumar Ltd. had made a rights issue of shares in 2017. In the offer document to its
members, it had projected a surplus of Rs. 40 crores during the accounting year to end on
31st March, 2017.

The draft results for the year, prepared on the hitherto followed accounting policies and
presented for perusal of the board of directors showed a deficit of Rs. 10 crores. The board in
consultation with the managing director, decided not to provide for “after sales expenses”
during the warranty period. Till the last year, provision at 2% of sales used to be made under the
concept of “matching of costs against revenue” and actual expenses used to be charged against

102
the provision. The board now decided to account for expenses as and when actually incurred.

Sales during the year total to Rs. 600 crores.

As chief accountant of the company, you are asked by the managing director to draft the
notes on accounts for inclusion in the annual report for 2016 -2017.

[MTP Aug. ‘18, 5 Marks]

Ans. As per AS 1, any change in the accounting policies which has a material effect in the
current period or which is reasonably expected to have a material effect in later periods
should be disclosed. In the case of a change in accounting policies which has a
material effect in the current period, the amount by which any item in the financial
statements is affected by such change should also be disclose d to the extent
ascertainable. Where such amount is not ascertainable, wholly or in part, the fact
should be indicated. Accordingly, the notes on accounts should properly disclose the
change and its effect.

Notes on Accounts:

So far, the company has been providing 2% of sales for meeting “after sales
expenses during the warranty period. With the improved method of production, the
probability of defects occurring in the products has reduced considerably. Hence, the
company has decided not to make provision for such expenses but to account for the
same as and when expenses are incurred. Due to this change, the profit for the year is
increased by Rs. 12 crores than would have been the case if the old policy were to
continue.

Q97. A Limited is engaged in manufacturing of Chemical Y for which Raw Material X is

required. The company provides you following information for the year ended 31st March,
2017.
Rs. Per unit

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 Raw Material X
Cost price 380
Unloading Charges 20
Freight Inward 40
Replacement cost 300
Chemical Y
Material consumed 440
Direct Labor 120
Variable Overheads 80
Additional Information:
(i) Total fixed overhead for the year was Rs. 4,00,000 on normal capacity of 20,000 units.
(ii) Closing balance of Raw Material X was 1,000 units and Chemical Y was Rs. 2,400 units.
You are required to calculate the total value of closing stock of Raw Material X and Chemical
Y according to AS 2, when Net realizable value of Chemical Y is Rs. 800 per unit.
[MTP Aug. ‘18, 5 Marks]
Ans. When Net Realizable Value of the Chemical Y is Rs. 800 per unit NRV is greater than the
cost of Finished Goods Y i.e., Rs. 660 (Refer W.N.)
Hence, Raw Material and Finished Goods are to be valued at cost.
Value of Closing Stock:
Qty. Rate (Rs.) Amount (Rs.)
Raw Material X 1,000 440 4,40,000
Finished Goods Y 2,400 660 15,84,000
Total Value of Closing Stock 20,24,000
Working Note:
Statement showing cost calculation of Raw material X and Chemical Y

104
 Raw Material X Rs.
Cost Price 380
Add: Freight Inward 40
Unloading charges 20
Cost 440
Chemical Y Rs.
Materials consumed 440
Direct Labor 120
Variable overheads 80
Fixed overheads (Rs.4,00,000/20,000 units) 20
Cost 660
Q98. ABC Ltd. is installing a new plant at its production facility. It has incurred these costs:
Cost of the plant (cost per supplier’s invoice plus taxes) Rs. 25,00,000
Initial delivery and handling costs Rs. 2,00,000
Cost of site preparation Rs. 6,00,000
Consultants used for advice on the acquisition of the plant Rs. 7,00,000
Interest charges paid to supplier of plant for deferred credit Rs. 2,00,000
Estimated dismantling costs to be incurred after 7 years Rs. 3,00,000
Operating losses before commercial production Rs. 4,00,000
Please advise ABC Ltd. on the costs that can be capitalized in accordance with AS 10
(Revised). [MTP Aug. ‘18, 5 Marks]

105
Ans. According to AS 10 (Revised), the following costs can be capitalized:

Cost of the plant Rs. 25,00,000

Initial delivery and handling costs Rs. 2,00,000
Cost of site preparation Rs. 6,00,000
Consultants’ fees Rs. 7,00,000
Estimated dismantling costs to be incurred after 7 years Rs. 3,00,000
Rs. 43,00,000
Note: Interest charges paid on “Deferred credit terms” to the supplier of the plant
(not a qualifying asset) of Rs. 2,00,000 and operating losses before commercial
production amounting to Rs.4,00,000 are not regarded as directly attributable costs and
thus cannot be capitalized. They should be written off to the Statement of Profit and
Loss in the period they are incurred.

Q99. In the books of M/s Prashant Ltd., closing inventory as on 31.03.2015 amounts to Rs.
1,63,000 (on the basis of FIFO method).The company decides to change from FIFO method
to weighted average method for ascertaining the cost of inventory from the year 2014-15. On
the basis of weighted average method, closing inventory as on 31.03.2015 amounts to Rs.
1,47,000. Realizable value of the inventory as on 31.03.2015 amounts to Rs. 1,95,000.Discuss
disclosure requirement of change in accounting policy as per AS-1. [MTP Oct. ‘18, 5
Marks]

Ans. As per AS 1 “Disclosure of Accounting Policies”, any change in an accounting policy

which has a material effect should be disclosed in the financial statements. The
amount by which any item in the financial statements is affected by such change
should also be disclosed to the extent ascertainable. Where such amount is not
ascertainable, wholly or in part, the fact should be indicated. Thus Prashant Ltd.
should disclose the change in valuation method of inventory and its effect on
106
 financial statements. The company may disclose the change in accounting policy
in the following manner:

‘The company values its inventory at lower of cost and net realizable value. Since net
realizable value of all items of inventory in the current year was greater than
respective costs, the company valued its inventory at cost. In the present year i.e.,
2014-15, the company has changed to weighted average method, which better
reflects the consumption pattern of inventory, for ascertaining inventory costs from
the earlier practice of using FIFO for the purpose. The change in policy has reduced
currentprofit and value of inventory by Rs. 16,000.

Q100. A Ltd. had following assets. Calculate depreciation for the year ended 31st
March, 2020 for each asset as per AS 10 (Revised):
(i) Machinery purchased for ` 10 lakhs on 1st April, 2015 and residual value after useful life of
5 years, based on 2015 prices is ` 10 lakhs.
(ii) Land for ` 50 lakhs.
(iii) A Machinery is constructed for ` 5,00,000 for its own use (useful life is 10 years).
Construction is completed on 1st April, 2019, but the company does not begin using the
machine until 31st March, 2020.
(iv) Machinery purchased on 1st April.2017 for ` 50,000 with useful life of 5 years and
residual value is NIL. On 1st April, 2019, management decided to use this asset for further 2
years only.
[Sugg Nov 2020]

Ans. Computation of amount of depreciation as per AS 10

(i) Machinery purchased on 1/4/15 for ` 10 lakhs Nil
(having residual value of ` 10 lakhs)
Reason: The company considers that the

107
 residual value, based on prices prevailing at
the balance sheet date, will equal the cost.
Therefore, there is no depreciable amount and
depreciation is correctly zero.

(ii) Land (50 lakhs) (considered freehold) Nil

Reason: Land has an unlimited useful life and
therefore, it is not depreciated
(iii) Machinery constructed for own use (` 50,000
5,00,000/10)
Reason: The entity should begin charging
depreciation from the date the
machine is ready for use i.e. 1st April,2019.
The fact that the machine was not used for a
period after it was ready to be used is not
relevant in considering when to begin
charging depreciation.

(iv) Machinery having revised useful life 15,000

Reason: The entity has charged depreciation
using the straight-line method at ` 10,000 per
annum i.e (50,000/5 years). On 1st April,2019
the asset's net book value is [50,000 – (10,000
x 2)] i.e. ` 30,000. The remaining useful life is
2 years as per revised estimate. The company
should amend the annual provision for
depreciation to charge the unamortized cost

108
 over the revised remaining life of 2 years.
Consequently, it should charge depreciation
for the next 2 years at 15,000 per annum i.e.
(30,000 / 2 years).

`
Q101. On 1st April, 2016, Mac Ltd. received a Government Grant of ` 60 lakhs for
acquisition of machinery costing ` 300 lakhs. The grant was credited to the cost of the asset.
The estimated useful life of the machinery is 10 years. The machinery is depreciated @ 10%
on WDV basis. The company had to refund the grant in June 2019 due to non-compliance of
certain conditions.
How the refund of the grant is dealt with in the books of Mac Ltd. assuming that the
company did not charge any depreciation for the year 2019-20.
Pass necessary Journal Entries for the year 2019-20. [Sugg Nov 2020]

Ans.
(` in lakhs)
1st April, Acquisition cost of 300.00
2016 machinery
Less: Government 60.00
Grant 240.00
31st March, Less: Depreciation @ 10% (24.00)
2017
1st April, Book value 216.00
2017
31st March, Less: Depreciation @ 10% (21.60)
2018

109
 1st April, Book value 194.40
2018
31st March, Less: Depreciation @ 10% (19.44)
2019
1st April, Book value 174.96
2019 Less: Depreciation @10% for 2 (2.916)
months 172.044
1st June, Book value
2019
June 2019 Add: Refund of grant* 60.00
Revised book value 232.044

Depreciation @10% on the revised book value amounting to ` 232.044 lakhs is to be

provided prospectively over the residual useful life of the machinery.
*considered refund of grant at beginning of June month and depreciation for two months
already charged. Alternative answer considering otherwise also possible.

Journal Entries
Machinery Account Dr. 60
To Bank Account 60
(Being government grant on asset
partly refunded which increased the
cost of fixed asset)
Depreciation Account Dr. 19.337
To Machinery Account 19.337
(Being depreciation charged on
revised value of fixed asset

110
 prospectively for 10 months)

Profit & Loss Account Dr. 22.253

To Depreciation Account 22.253
(Being depreciation transferred to
Profit and Loss Account amounting
to ` (2.916 + 19.337= 22.253)

Q102. A Limited invested in the shares of XYZ Ltd. on 1st December, 2019 at a cost of`
50,000. Out of these shares, ` 25,000 shares were purchased with an intention to hold for 6
months and ` 25,000 shares were purchased with an intention to hold as long-term
Investment.
A Limited also earlier purchased Gold of ` 1,00,000 and Silver of ` 30,00,000 on 1st April,
2019. Market value as on 31st March, 2020 of above investments are as follows:
Shares ` 47,500 (Decline in the value of shares is temporary.)
Gold ` 1,80,000
Silver ` 30,55,000
How above investments will be shown in the books of accounts of M/s A Limited for the
year ended 31st March, 2020 as per the provisions of AS 13 (Revised)? [ Sugg Nov 2020]

Ans.As per AS 13 (Revised) ‘Accounting for Investments, for investment in shares - if the
investment is purchased with an intention to hold for short-term period (less than one
year), then it will be classified as current investment and to be carried at lower of cost
and fair value.

In the given case ` 25,000 shares held as current investment will be carried in the books at
` 23,750 (` 47,500/2).

If equity shares are acquired with an intention to hold for long term period (more than one
year), then should be considered as long-term investment to be shown at cost in the Balance

111
Sheet of the company. However, provision for diminution should be made to recognize a
decline, if other than temporary, in the value of the investments. Hence,` 25,000 shares
held as long-term investment will be carried in the books at ` 25,000.

Gold and silver are generally purchased with an intention to hold them for long term
period (more than one year) until and unless given otherwise.
Hence, the investment in Gold and Silver (purchased on 1st March, 2019) should continue
to be shown at cost (since there is no ‘other than temporary’ diminution) as on 31st March, 2020. Thus
Gold at ` 1,00,000 and Silver at ` 30,00,000 respectively will be shown in the books

Q103. On 15th April, 2019 RBM Ltd. obtained a Term Loan from the Bank for ` 320 lakhs
to be utilized as under:`
(in lakhs)

Construction for factory shed 240

Purchase of Machinery 30
Working capital 24
Purchase of Vehicles 12
Advance for tools/cranes etc 8
Purchase of technical know how 6
In March, 2020 construction of shed was completed and machinery was installed. Total
interest charged by the bank for the year ending 31st March, 2020 was ` 40 lakhs.
In the context of provisions of AS 16 'Borrowing Costs', show the treatment of interest and
also explain the nature of Assets. [Sugg Nov 2020]
Ans.As per AS 16 A qualifying asset is an asset that necessarily takes a substantial period
of time to get ready for its intended use or sale. Other investments and those inventories
that are routinely manufactured or otherwise produced in large quantities on a repetitive
basis over a short period of time, are not qualifying assets. Assets that are ready for their
112
intended use or sale when acquired also are not qualifying assets. Borrowing costs that are
directly attributable to the acquisition, construction or production of a qualifying asset should
be capitalized as part of the cost of that asset. Other borrowing costs should be recognized as
an expense in the period in which they are incurred.

Construction of factory shed amounting ` 240 lakhs is qualifying asset in the given
case. The interest for this amount during the year will be added to the cost of factory
shed. All others (purchase of machinery, vehicles and technical know how,
working capital, advance for tools/cranes) are non-qualifying assets and related
borrowing cost will be charged to Profit and Loss statement.

Qualifying Asset as per AS 16 (construction of a shed) = ` 240

lakhs Borrowing cost to be capitalized = ` 40 lakhs x 240/320 = ` 30
lakhs Interest to be debited to Profit or Loss account: ` (40 – 30) = ` 10
lakhs.
Note: Assumed that construction of factory shed completed on 31st March, 2020.

Q104. Darshan Ltd. purchased a Machinery on 1st April, 2016 for ` 130 lakhs (Useful life
is 4Years). Government grant received is ` 40 lakhs for the purchase of above Machinery.

Salvage value at the end of useful life is estimated at ` 60 lakhs. Darshan Ltd. decides to
treat the grant as deferred income.
Your are required to calculate the amount of depreciation and grant to be recognized in
profit & loss account for the year ending 31st March, 2017,31st March, 2018, 31st March,
2019& 31st March, 2020.

Darshan Ltd. follows straight line method for charging depreciation. [Sugg Jan 2021]

Ans. As per 12 “Accounting for government grants”, grants related to depreciable assets, if treated as
deferred income are recognized in the profit and loss statement on a systematic and
rational basis over the useful life of the asset.

113
Amount of depreciation and grant to be recognized in the profit and loss account
each year

Depreciation per year:

`in lakhs
Cost of the Asset 130
Less: Salvage value (60)
70
Depreciation per year(70lakhs/4) 17.50

` 17.50 Lakhs depreciation will be recognized for the year ending 31st March, 2017, 31
st

March, 2018, 31st March, 2019 and 31st March, 2020.

Amount of grant recognized in Profit and Loss account each year :

40 lakhs /4 years = ` 10 Lakhs for the year ending 31st March, 2017, 31st March, 2018,
31st March, 2019 and 31st March, 2020.

Q105. Kunal Securities Ltd. wants to reclassify its investments in accordance with AS-13
(Revised). State the values, at which the investments have to be reclassified in the
following cases:

(i) Long term investment in Company A, costing ` 10.5 lakhs is to be re-classified

as current investment. The company had reduced the value of these investments
to` 9 lakhs to recognize a permanent decline in value. The fair value on the date
of reclassification is ` 9.3 lakhs.

(ii) Long term investment in Company B, costing ` 14 lakhs is to be re-classified as

current investment The fair value on the date of reclassification is ` 16 lakhs
and book value is ` 14 lakhs.

(iii) Current investment in Company C, costing `12 lakhs is to be re-classified as

114
 long term investment as the company wants to retain them. The market value
on the date of reclassification is ` 13.5 lakhs.

(iv) Current investment in Company D, costing ` 18 lakhs is to be re-classified as

long term investment. The market value on the date of reclassification is ` 16.5
lakhs. [Sugg Jan 2021]

Ans. As per AS 13 (Revised) ‘Accounting for Investments’, where long-term investments are
reclassified as current investments, transfers are made at the lower of cost and carrying
amount at the date of transfer. And where investments are reclassified from current to
long term, transfers are made at lower of cost and fair value on the date of transfer.

Accordingly, the re-classification will be done on the following basis:

(i) In this case, carrying amount of investment on the date of transfer is less than
the cost; hence this re-classified current investment should be carried at ` 9
lakhs in the books.

(ii) The carrying / book value of the long-term investment is same as cost i.e.,
` 14 lakhs. Hence this long-term investment will be reclassified as current
investment at book value of ` 14 lakhs only.

(iii) In this case, reclassification of current investment into long-term investments

will be made at ` 12 lakhs as cost are less than its market value of ` 13.5 lakhs.

(iv) Market value of the investment is ` 16.5 lakhs, which is lower than its cost i.e.,
` 18 lakhs. Therefore, the transfer to long term investments should be done in
the books at the market value i.e., ` 16.5 lakhs.

Q106. Mr. Jatin gives the following information relating to the items forming part of the
inventory as on 31.03.2019. His enterprise produces product P using Raw Material X.

900 units of Raw Material X (purchases @ ` 100 per unit). Replacement cost of Raw
Material X as on 3103.2019 is ` 80 per unit

115
400 units of partly finished goods in the process of producing P. Cost incurred till date is
` 245 per unit. These units can be finished next year by incurring additional cost of ` 50 per
unit.
800 units of Finished goods P and total cost incurred is ` 295 per unit.

Expected selling price of product P is `280 per unit, subject to a payment of 5%

brokerage on selling price.

Determine how each item of inventory will be valued as on 31.03.2019. Also

calculate the value of total Inventory as on 31.03.2019. [Sugg Jan 2021]

Ans. As per AS 2 (Revised) “Valuation of Inventories”, materials and other supplies held for use
in the production of inventories are not written down below cost if the finished products
in which they will be incorporated are expected to be sold at cost or above cost. However,
when there has been a decline in the price of materials and it is estimated that the cost of
the finished products will exceed net realizable value, the materials are written down to net
realizable value. In such circumstances, the replacement cost of the materials may be the
best available measure of their net realizable value. In the given case, selling price of
product P is ` 266 and total cost per unit for production is` 295.

Hence the valuation will be done as under:

(i) 900 units of raw material X will be written down to replacement cost as market
value of finished product is less than its cost, hence valued at ` 80 per unit.

(ii) 400 units of partly finished goods will be valued at 216 per unit i.e., lower
of cost (` 245) or Net realizable value ` 216 (Estimated selling price ` 266 per
unit less additional cost of ` 50).

(iii) 800 units of finished product P will be valued at NRV of ` 266 per unit since it
is lower than cost ` 295.
Valuation of Total Inventory as on 31.03.2019:

116
 Units Cost NRV/Repl Value = units x cost or NRV
(`) acement cost whichever is
less (`)
Raw material X 900 100 80 72,000
Partly finished 400 245 216 86,400
goods
Finished goods 800 295 266 2,12,800
P
Value of 3,71,200
Inventory

Q107. Explain briefly the accounting treatment needed in the following cases as per
AS 11 as on 31.03.2020

(i) Debtors include amount due from Mr. S ` 9,00,000 recorded at the prevailing
exchange rate on the date of sales, transaction recorded at US $1 = ` 72.00

US $ 1=`73.50 on 31st March,2020 US $ 1=

` 72.50 on 1st April,2019.
(ii) Long term loan taken on 1st April, 2019 from a U.S. company amounting to
` 75,00,000. `5,00,000 was repaid on 31st December, 2019, recorded at US $ 1 =
` 70.50. interest has been paid as and when debited by the US company.
US $1= ` 73.50 on 31st March,2020
US $1=1` 72.50 on 1st April, 2019. [Sugg Jan 2021]

Ans. As per AS 11 “The Effects of Changes in Foreign Exchange Rates”, exchange

differences arising on the settlement of monetary items or on reporting an enterprise’s monetary
items at rates different from those at which they were initially recorded during the

117
 period, or reported in previous financial statements, should be recognized as income
or as expenses in the period in which they arise.

However, at the option of an entity, exchange differences arising on reporting of

long - term foreign currency monetary items at rates different from those at which
they were initially recorded during the period, or reported in previous financial
statements, in so far as they relate to the acquisition of a non-depreciable capital
asset can be accumulated in a “Foreign Currency Monetary Item Translation
Difference Account” in the enterprise’s financial statements and amortized over the
balance period of such long-term asset/ liability, by recognition as income or
expense in each of such periods.
Foreign `
Currency Rate
Debtors
Initial recognition US $12,500 (9,00,000/72) 1 US $ = `72 9,00,000
Rate on Balance sheet date 1 US $ = ` 73.50
Exchange Difference Gain US $ 12,500 X (73.50- 18,750
72)
Treatment: Credit Profit and Loss A/c by ` 18,750
Long term Loan
Initial recognition US $ 1,03,448.28 1 US $ = ` 73.50 75,00,000
(75,00,000/72.50)
Rate on Balance sheet date 1 US $ = ` 73.50
Exchange Difference Loss after adjustment of
exchange gain on repayment of ` 5,00,000
` 67,987.48 [82,171.88 (US $ 96,356.08 X ` 73.5

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 less ` 70,00,000) less profit 14,184.40

[US $ 7,092.2 (5,00,000/70.5) X ` 2)] NET LOSS 67,987.48*

Treatment: Credit Loan A/c and

Debit FCMITD A/C or Profit and Loss A/c by
` 67,987.48

Thus, Exchange Difference on Long term loan amounting ` 67,987.48 may either be
charged to Profit and Loss A/c or to Foreign Currency Monetary Item Translation
Difference Account but exchange difference on debtors amounting ` 18,750 is required
to be transferred to Profit and Loss A/c.

NOTE 1: *Exchange Difference Loss (net of adjustment of exchange gain on repayment

of ` 5,00,000) has been calculated in the above solution. Alternative considering
otherwise also possible.

NOTE 2: Date of sales transaction of ` 9 lakhs has not been given in the question and hence
it has been assumed that the transaction took place during the year ended 31 March 2020.

Q108. List the Criteria for classification of non-corporate entities as level I Entities for the
purpose of application of Accounting Standards as per the Institute of Chartered
Accountants of India. [Sugg Jan 2021] [ 5marks]

Ans.Criteria for classification of non-corporate entities as level 1 entities for purpose of

application of Accounting Standards decided by the Institute of Chartered Accountants of
India is given below:

Non-corporate entities which fall in any one or more of the following categories, at the
end of the relevant accounting period, are classified as Level I entities:

(i) Entities whose equity or debt securities are listed or are in the process of listing
on any stock exchange, whether in India or outside India.

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 (ii) Banks (including co-operative banks), financial institutions or entities carrying
on insurance business.
(iii) All commercial, industrial and business reporting entities, whose turnover
(excluding other income) exceeds rupees fifty crore in the immediately
preceding accounting year.

(iv) All commercial, industrial and business reporting entities having borrowings
(including public deposits) in excess of rupees ten crore at any time during the
immediately preceding accounting year.

(v) Holding and subsidiary entities of any one of the above.

Q109. The draft results of Surya Ltd. for the year ended 31st March, 2020, prepared on the
hitherto followed accounting policies and presented for perusal of the board of directors
showed a deficit of ` 10 crores. The board in consultation with the managing director,
decided to value year-end inventory at works cost (` 50 crores) instead of the hitherto
method of valuation of inventory at prime cost (` 30 crores). As chief accountant of the
company, you are asked by the managing director to draft the notes on accounts for
inclusion in the annual report for 2019-2020. [RTP May 2021]

Ans As per AS 1, any change in the accounting policies which has a material effect in the
current period or which is reasonably expected to have a material effect in later periods
should be disclosed. In the case of a change in accounting policies which has a material
effect in the current period, the amount by which any item in the financial statements is
affected by such change should also be disclosed to the extent ascertainable. Where such
amount is not ascertainable, wholly or in part, the fact should be indicated. Accordingly,
the notes on accounts should properly disclose the change and its effect.

Notes on Accounts:

“During the year inventory has been valued at factory cost, against the practice of valuing it
at prime cost as was the practice till last year. This has been done to take cognizance of the

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more capital intensive method of production on account of heavy capital expenditure during
the year. As a result of this change, the year-end inventory has been valued at ` 50 crores and
the profit for the year is increased by ` 20 crores.”

Q110. The inventory of Rich Ltd. as on 31st March, 2020 comprises of Product – A: 200
units and Product – B: 800 units.

Details of cost for these products are:

Product – A: Material cost, wages cost and overhead cost of each unit are ` 40,` 30 and ` 20
respectively, Each unit is sold at ` 110, selling expenses amounts to 10% of selling costs.

Product – B: Material cost and wages cost of each unit are ` 45 and ` 35 respectively and
normal selling rate is ` 150 each, however due to defect in the manufacturing process 800
units of Product-B were expected to be sold at ` 70.

You are requested to value closing inventory according to AS 2 after considering the above.
[RTP May 2021]

Ans. According to AS 2 ‘Valuation of Inventories’, inventories should be valued at the lower of cost
and net realizable value.

Product – A
Material cost ` 40 x 200 =
8,000
Wages cost ` 30 x 200 =
6,000

Overhead ` 20 x 200 =
Total cost 4,000 ` 18,000
Realizable value [200 x ` 19,800
(110-11)]

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 Hence inventory value of ` 18,000
Product -A

Product – B
Material cost ` 45 x 800 =
36,000
Wages cost ` 35 x 800 =
Total cost 28,000 `
64,000
Realizable value (800 x 70) `
56,000
Hence inventory value of `
Product-B 56,000
Total Value of closing inventory i.e. Product A + `
Product B (18,000+ 56,000) 74,000

Q111.You are required to give the correct accounting treatment for the following in line
with provisions of AS 10:

(a) Trozen Ltd. operates a major chain of supermarkets all over India. It acquires a
new store in Pune which requires significant renovation expenditure. It is
expected that the renovations will be done in 2 months during which the store
will be closed. The budget for this period, including expenditure related to
construction and remodelling costs (` 18 lakhs), salaries of staff (` 2 lakhs) who
will be preparing the store before its opening and related utilities costs (` 1.5
lakhs), is prepared. The cost of salaries of the staff and utilities are operating
expenditures that would be incurred even after the opening of the supermarket.
What will the treatment of all these expenditures in the books of accounts?
[RTP May 2021]

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Ans.Trozen Ltd. should capitalize the costs of construction and remodelling the supermarket,
because they are necessary to bring the store to the condition necessary for it to be capable of
operating in the manner intended. The supermarket cannot be opened without incurring the
remodelling expenditure. Therefore, this construction and remodelling expenditure of ` 18
lakh should be considered as part of the cost of the asset. However, the cost of salaries of the
staff ` 2 lakh and utilities cost ` 1.5 lakh are operating expenditures that would be incurred
even after the opening of the supermarket. Therefore, these costs are not necessary to bring
the store to the condition necessary for it to be capable of operating in the manner intended
by the management and should be expensed.

Q112. ABC Ltd is setting up a new refinery outside the city limits. In order to facilitate
the construction of the refinery and its operations, ABC Ltd. is required to incur
expenditure on the construction/development of railway siding, road and bridge. Though
ABC Ltd. incurs the expenditure on the construction/ development, it will not have
ownership rights on these items and they are also available for use to other entities and
public at large. Can ABC Ltd. capitalize expenditure incurred on these items as property,
plant and equipment (PPE)? . [RTP May 2021]

Ans.AS 10 states that the cost of an item of property, plant and equipment shall be
recognized as an asset if, and only if:

(a) it is probable that future economic benefits associated with the item will
flow to the entity; and

(b) the cost of the item can be measured reliably.

Further, the standard provides that the standard does not prescribe the unit of measure for
recognition, i.e., what constitutes an item of property, plant and equipment. Thus,
judgement is required in applying the recognition criteria to an entity’s specific
circumstances. The cost of an item of property, plant and equipment comprise any costs
directly attributable to bringing the asset to the location and condition necessary for it to be

123
capable of operating in the manner intended by management.

In the given case, railway siding, road and bridge are required to facilitate the construction
of the refinery and for its operations. Expenditure on these items is required to be incurred
in order to get future economic benefits from the project as a whole which can be
considered as the unit of measure for the purpose of capitalization of the said expenditure
even though the company cannot restrict the access of others for using the assets
individually. It is apparent that the aforesaid expenditure is 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.

In view of this, even though ABC Ltd. may not be able to recognize expenditure incurred
on these assets as an individual item of property, plant and equipment in many cases
(where it cannot restrict others from using the asset), expenditure incurred may be
capitalized as a part of overall cost of the project. From this, it can be concluded that, in
the given case the expenditure incurred on these assets, i.e., railway siding, road and bridge,
should be considered as the cost of constructing the refinery and accordingly, expenditure
incurred on these items should be allocated and capitalized as part of the items of property,
plant and equipment of the refinery.

Q113. Classify the following items into Monetary and Non-monetary:

(i) Share capital; (ii) Trade Payables; (iii) Cash balance; (iv) Property, plant
and equipment [RTP May 2021]

Ans. Share capital - Non-monetary; Trade Payables - Monetary

Cash balance – Monetary; Property, plant and equipment - Non-monetary

Q114. Trade payables of CAT Ltd. include amount payable to JBB Ltd., ` 10,00,000
recorded at the prevailing exchange rate on the date of transaction, transaction recorded at
US $1 = ` 80.00. The exchange rate on balance sheet date (31.03.2020) was US $1 = `
85.00. You are required to calculate the amount of exchange difference and also explain
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the accounting treatment needed for this as per AS 11 in the books of CAT Ltd.

[RTP May 2021]

Ans Amount of Exchange difference and its Accounting Treatment

Foreign `
Currency Rate
Trade payables
Initial recognition US $ 12,500 1 US $ = ` 80 10,00,000
(`10,00,000/80)
Rate on Balance sheet date 1 US $ = ` 85
Exchange Difference loss US 62,500
$ 12,500 x ` (85-80)
Treatment:
Debit Profit and Loss A/c by ` 62,500
and Credit Trade Payables

Thus, Exchange Difference on trade payables amounting ` 62,500 is required to be

transferred to Profit and Loss

Q115. Hygiene Ltd. had received a grant of ` 50 lakh in 2012 from a State Government
towards installation of pollution control machinery on fulfilment of certain conditions. The
company, however, failed to comply with the said conditions and consequently was
required to refund the said amount in 2020.

The company debited the said amount to its machinery account in 2020 on payment of the
same. It also reworked the depreciation for the said machinery from the date of its purchase
and passed necessary adjusting entries in the year 2020 to incorporate the retrospective
impact of the same. State whether the treatment done by the company is correct or not.

[RTP May 2021]

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Ans. As per the facts of the case, Hygiene Ltd. had received a grant of ` 50 lakh in 2012 from
a State Government towards installation of pollution control machinery on fulfilment of
certain conditions. However, the amount of grant has to be refunded since it failed to comply
with the prescribed conditions. In such circumstances, AS 12, “Accounting for Government
Grants”, requires that the amount refundable in respect of a government grant related to a specific
fixed asset is recorded by increasing the book value of the asset or by reducing the capital
reserve or the deferred income balance, as appropriate, by the amount refundable. The
Standard further makes it clear that in the first alternative, i.e., where the book value of the
asset is increased, depreciation on the revised book value should be provided prospectively
over the residual useful life of the asset. Accordingly, the accounting treatment given by
Hygiene Ltd. of increasing the value of the plant and machinery is quite proper. However,
the accounting treatment in respect of depreciation given by the company of adjustment of
depreciation with retrospective effect is improper and constitutes violation of AS 12.

Q116. ABC Ltd. received two acres of land received for set up of plant. It also received `2
lakhs received for purchase of machinery of ` 10 lakhs. Useful life of machinery is 5
years. Depreciation on this machinery is to be charged on straight-line basis. How
should ABC Ltd. recognize these government grants in its books of accounts? [RTP May
2021]

Ans. ABC Ltd. should recognize the grants in the following manner:

● As per AS 12, government grants may take the form of non-monetary

assets, such as land or other resources, given at concessional rates. In
these circumstances, it is usual to account for such assets at their
acquisition cost. Non-monetary assets given free of cost are recorded at
a nominal value. Accordingly, land should be recognised at nominal
value in the balance sheet.

● The standard provides option to treat the grant either as a deduction

126
 from the gross value of the asset or to treat it as deferred income as per
provisions of the standard. Under first method, the grant is shown as a
deduction from the gross value of the asset concerned in arriving at its
book value. The grant is thus recognised in the profit and loss statement
over the useful life of a depreciable asset by way of a reduced
depreciation charge. Accordingly, the grant of ` 2 lakhs is deducted
from the cost of the machinery. Machinery will be recognised in the
books at ` 10 lakhs – ` 2 lakhs = ` 8 lakhs and depreciation will be
charged on it as follows:

` 8 lakhs/ 5 years = ` 1.60 lakhs per year.

Under the second method, grants related to depreciable assets are treated as deferred
income which is recognised in the profit and loss statement on a systematic and rational
basis over the useful life of the asset. Such allocation to income is usually made over the
periods and in the proportions in which depreciation on related assets is charged. ` 2 lakhs
should be recognised as deferred income and will be transferred to profit and loss over the
useful life of the asset. In this case, ` 40,000 [` 2 lakhs / 5 years] should be
credited to profit and loss each year over the period of 5 years

Q117. Paridhi Electronics Ltd. invested in the shares of Dhansukh Ltd. on 1st May 2020 at
a cost of ` 10,00,000. Three fourth of these investments were current investments and the
remaining investments were intended to be held for more than a year. The published
accounts of Dhansukh Ltd. received in January, 2021 reveals that the company has incurred
cash losses with decline in market share and investment of Paridhi Electronics Ltd. may not
fetch more than 7,50,000. The reduction in value is apparent to be non-temporary.

You are required to explain how you will deal with the above in the financial statements of
the Paridhi Electronics Ltd. as on 31.3.21 with reference to AS 13? [RTP May 2021]

Ans. As per AS 13, “Accounting for Investments”, carrying amount for current investments is the

127
lower of cost and fair value. But long term investments should be carried in the financial
statements at cost. However, provision for diminution shall be made to recognize a decline,
other than temporary, in the value of the investments, such reduction being determined and
made for each investment individually. The standard also states that indicators of the value
of an investment are obtained by reference to its market value, the investee's assets and
results and the expected cash flows from the investment.
Paridhi Ltd. made three fourth of ` 10,00,000 ie. `7,50,000 as current investment and
remaining ` 2,50,000 as long term. The facts of the case given in the question clearly
suggest that the provision for diminution should be made to reduce the carrying amount of
shares for both categories of shares to bring them to market value. Hence the carrying
value of investments will be shown at amount of ` 7,50,000 in the financial statements for
the year ended 31st March, 2021 and charge the difference of loss of ` 2,50,000 to profit
and loss account.

Q118. When capitalisation of borrowing cost should cease as per Accounting Standard 16?
Explain in brief.[RTP May 2021]

Ans. Capitalization of borrowing costs should cease when substantially all the activities
necessary to prepare the qualifying asset for its intended use or sale are complete. An asset
is normally ready for its intended use or sale when its physical construction or production
is complete even though routine administrative work might still continue. If minor
modifications such as the decoration of a property to the user’s specification, are all that are outstanding,
this indicates that substantially all the activi ties are complete. When the construction of a
qualifying asset is completed in parts and a completed part is capable of being used while
construction continues for the other parts, capitalization of borrowing costs in relation to a
part should cease when substantially all the activities necessary to prepare that part for its
intended use or sale are complete.

Q119. Shan Builders Limited has borrowed a sum of US $ 10,00,000 at the beginning of
Financial Year 2019-20 for its residential project at 4 %. The interest is payable at the end of
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the Financial Year. At the time of availment, exchange rate was ` 56 per US $ and the rate as
on 31st March, 2020 ` 62 per US $. If Shan Builders Limited had borrowed the loan in India
in Indian Rupee equivalent, the pricing of loan would have been 10.50%. You are required
to compute Borrowing Cost and exchange difference for the year ending 31st March, 2020
as per applicable Accounting Standards. [RTP May 2021]

Ans.(i) Interest for the period 2019-20

= US $ 10 lakhs x 4% × ` 62 per US $ = ` 24.80 lakhs

(ii) Increase in the liability towards the principal amount

= US $ 10 lakhs × ` (62 - 56) = ` 60 lakhs

(iii) Interest that would have resulted if the loan was taken in Indian currency

= US $ 10 lakhs × ` 56 x 10.5% = ` 58.80 lakhs

(iv) Difference between interest on local currency borrowing and foreign
currency borrowing = ` 58.80 lakhs - ` 24.80 lakhs = ` 34 lakhs.

Therefore, out of ` 60 lakhs increase in the liability towards principal amount, only` 34 lakhs
will be considered as the borrowing cost. Thus, total borrowing cost would be ` 58.80 lakhs
being the aggregate of interest of ` 24.80 lakhs on foreign currency borrowings plus the
exchange difference to the extent of difference between interest on local currency borrowing
and interest on foreign currency borrowing of ` 34 lakhs. Hence, ` 58.80 lakhs would be
considered as the borrowing cost to be accounted for as per AS 16 “Borrowing Costs” and the
remaining ` 26 lakhs (60 - 34) would be considered as the exchange difference to be accounted for as per
AS 11 “The Effects of Changes in Foreign Exchange Rates”.

Q120. What are the three fundamental accounting assumptions recognized by Accounting
Standard (AS) 1? Briefly describe each one of them. [RTP Nov 2020]

Ans .Accounting Standard (AS) 1 recognizes three fundamental accounting assumptions.

These are as follows:

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 (i) Going Concern: The financial statements are normally prepared on the
assumption that an enterprise will continue its operations in the foreseeable
future and neither there is intention, nor there is need to materially curtail
the scale of operations.

(ii) Consistency: The principle of consistency refers to the practice of using

same accounting policies for similar transactions in all accounting periods
unless the change is required (i) by a statute, (ii) by an accounting standard
or (iii) for more appropriate presentation of financial statements.

(iii) Accrual basis of accounting: Under this basis of accounting, transactions are
recognised as soon as they occur, whether or not cash or cash equivalent is
actually received or paid.

Q121. A Limited is engaged in manufacturing of Chemical Y for which Raw Material X is

required. The company provides you following information for the year ended 31st
March, 2020.
` Per
unit
Raw Material X
Cost price 400
Freight Inward 40
Replacement cost 320
Chemical Y
Material consumed 440
Direct Labour 120
Variable Overheads 80

Additional Information:

130
 (i) Total fixed overhead for the year was ` 4,00,000 on normal capacity of
25,000 units.

(ii) Closing balance of Raw Material X was 1,000 units and Chemical Y was
2,400 units.

You are required to calculate the total value of closing stock of Raw Material X
and Chemical Y according to AS 2, when Net realizable value of Chemical Y is `
600 per unit. [RTP Nov 2020]

Ans. Net Realizable Value of the Chemical Y (Finished Goods) is ` 600 per unit which is
less than its cost ` 656 per unit. Hence, Raw Material is to be valued at replacement cost
and Finished Goods are to be valued at NRV since NRV is less than the cost.

Value of Closing Stock:

Qty. Rate (`) Amount
(`)
Raw Material X 1,000 320 3,20,000
Finished Goods Y 2,400 600 14,40,000
Total Value of Closing 17,60,000
Stock

Working Note:

Statement showing cost calculation of Raw material X and Chemical Y

Raw Material X `
Cost Price 400
Add: Freight Inward 40
Cost 440
Chemical Y `
Materials consumed 440

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 Direct Labour 120
Variable overheads 80
Fixed overheads (`4,00,000/25,000 units) 16
Cost 656

Q122. Omega Ltd. contracted with a supplier to purchase machinery which is to be installed
in its one department in three months' time. Special foundations were required for the
machinery which were to be prepared within this supply lead time. The cost of the site
preparation and laying foundations were ` 1,40,000. These activities were supervised by a
technician during the entire period, who is employed for this purpose of ` 45,000 per month.

The machine was purchased at ` 1,58,00,000 and ` 50,000 transportation charges were incurred
to bring the machine to the factory site. An Architect was appointed at a fee of` 30,000 to
supervise machinery installation at the factory site.

You are required to ascertain the amount at which the Machinery should be capitalized under
AS 10. [RTP Nov 2020]

Ans Calculation of Cost of Fixed Asset (i.e. Machinery)

Particulars `
Purchase Price Given 1,58,00,000
Ad: Site Preparation Given 1,40,000
Cost
Technician’s Salary Specific/Attributable 1,35,000
overheads for 3 months
(45,000 x3)
Initial Delivery Transportation 50,000
Cost

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 Professional Fees Architect’s Fees 30,000
for Installation
Total Cost of Asset 1,61,55,000

Q123. Classify the following items as monetary or non-monetary item:

Share Capital
Trade Receivables
Investment in Equity shares
Fixed Assets. [RTP Nov 2020]
Ans.
Share capital Non-
monetary
Trade receivables Monetary
Investment in equity Non-
shares monetary
Fixed assets Non-
monetary
Q124.
Exchange Rate
per $
Goods purchased on 1.1.2019 for US ` 75
$ 15,000
Exchange rate on 31.3.2019 ` 74
Date of actual payment 7.7.2019 ` 73

You are required to ascertain the loss/gain to be recognized for financial years 2018- 19 and
2019-20 as per AS 11. [RTP Nov 2020]

133
Ans. As per AS 11 on ‘The Effects of Changes in Foreign Exchange Rates’, all foreign currency
transactions should be recorded by applying the exchange rate on the date of transactions.
Thus, goods purchased on 1.1.2019 and corresponding creditors would be recorded at `
11,25,000 (i.e. $15,000 × ` 75)

According to the standard, at the balance sheet date all monetary transactions should be
reported using the closing rate. Thus, creditors of US $15,000 on 31.3.2019 will be
reported at ` 11,10,000 (i.e. $15,000 × ` 74) and exchange profit of ` 15,000 (i.e. 11,25,000
– 11,10,000) should be credited to Profit and Loss account in the year 2018-19.

On 7.7.2019, creditors of $15,000 is paid at the rate of ` 73. As per AS 11, exchange
difference on settlement of the account should also be transferred to Profit and Loss account.
Therefore, ` 15,000 (i.e. 11,10,000 – 10,95,000) will be credited to Profit and Loss account
in the year 2019-20.

Q125. How would you treat the following in the accounts in accordance with AS 12
'Government Grants'?

(i) ` 35 Lakhs received from the Local Authority for providing Medical
facilities to the employees.

Ans. 35 lakhs received from the local authority for providing medical facilities to the
employees is a grant received in the nature of revenue grant. Such grants are generally
presented as a credit in the profit and loss statement, either separately or under a general
heading such as ‘Other Income’. Alternatively, ` 35 lakhs may be deducted in reporting the
related expense i.e. employee benefit expenses.

(ii) ` 100 Lakhs received as Subsidy from the Central Government for setting up
a unit in notified backward area. [RTP Nov 2020]
Ans. Asper AS 12‘Accounting for Government Grants’, where the government grants are in the nature of
promoters’ contribution, i.e. they are given with reference to the total investment in an undertaking or
by way of contribution towards its total capital outlay and no repayment is ordinarily

134
expected in respect thereof, the grants are treated as capital reserve which can be neither
distributed as dividend nor considered as deferred income. In the given case, the
subsidy received from the Central Government for setting up a unit in notified backward area
is neither in relation to specific fixed asset nor in relation to revenue. Thus, amount of ` 100
lakhs should be credited to capital reserve.
Q126. A Ltd. on 1-1-2020 had made an investment of ` 600 lakhs in the equity shares of B
Ltd. of which 50% is made in the long term category and the rest as temporary investment.
The realizable value of all such investment on 31-3-2020 became ` 200 lakhs as B Ltd. lost a
case of copyright. How will you recognize the reduction in the value of the investment in the
financial statements for the year ended on 31 -3-2020 as per AS 13 considering this
downfall in the value of shares as non-temporary? . [RTP Nov 2020]

Ans. A limited invested ` 600 lakhs in the equity shares of B Ltd. Out of the same, the
company intends to hold 50% shares for long term period i.e. ` 300 lakhs and remaining as
temporary (current) investment i.e. ` 300 lakhs. Irrespective of the fact that investment has
been held by A Limited only for 3 months (from 1.1.2020 to 31.3.2020), AS 13 lays
emphasis on intention of the investor to classify the investment as current or long term even
though the long-term investment may be readily marketable.

In the given situation, the realizable value of all such investments on 31.3.2020 became 200
lakhs i.e. ` 100 lakhs in respect of current investment and ` 100 lakhs in respect of long-term
investment.

As per AS 13, ‘Accounting for Investment’, the carrying amount for current investments is the lower of
cost and fair value. In respect of current investments for which an active market exists, market
value generally provides the best evidence of fair value.

Accordingly, the carrying value of investment held as temporary investment should be shown
at realizable value i.e. at ` 100 lakhs. The reduction of ` 200 lakhs in the carrying value of
current investment will be charged in the profit and loss account.

135
Standard further states that long-term investments are usually carried at cost. However, when
there is a decline, other than temporary, in the value of long-term investment, the carrying
amount is reduced to recognize the decline.

Here, B Limited has lost a case of copyright which drastically reduced the realizable value of
its shares to one third which is quiet a substantial figure. Losing the case of copyright may
affect the business and the performance of the company in long run. Accordingly, it will be
appropriate to reduce the carrying amount of long-term investment by ` 200 lakhs and show
the investments at ` 100 lakhs as the downfall in the value of shares is not temporary. The
reduction of ` 200 lakhs in the carrying value of long-term investment will be charged to the
profit and loss account.

Q127. Vital Limited borrowed an amount of `150 crores on 1.4.2019 for construction of
boiler plant @ 10% p.a. The plant is expected to be completed in 4 years. Since the
weighted average cost of capital is 13% p.a., the accountant of Vital Ltd. capitalized`
19.50 crores for the accounting period ending on 31.3.2020. Due to surplus fund out of
`150 crores, an income of ` 1.50 crores was earned and credited to profit and loss account.
Comment on the above treatment of accountant with reference to relevant accounting
standard. [RTP Nov 2020]
Ans. Para 10 of AS 16 ‘Borrowing Costs’ states that to the extent the funds are borrowed specifically for
the purpose of obtaining a qualifying asset, the amount of borrowing costs eligible for
capitalisation on that asset should be determined as the actual borrowing costs incurred on
that borrowing during the period less any income on the temporary investment of those
borrowings. The capitalisation rate should be the weighted average of the borrowing costs
applicable to the borrowings of the enterprise that are outstanding during the period, other
than borrowings made specifically for the purpose of obtaining a qualifying asset. Hence, in
the above case, treatment of accountant of Vital Ltd. is incorrect. The amount of borrowing
costs capitalized for the financial year 2019-20 should be calculated as follows:

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 Actual interest for 2019-20 (10% of ` 150 ` 15.00
crores) crores
Less: Income on temporary investment from
specific borrowings (` 1.50
crores)
Borrowing costs to be capitalized during year ` 13.50
2019-2020 crores

Q128. When capitalization of borrowing cost should cease as per Accounting Standard 16?
Explain in brief. [RTP Nov 2020]

Ans Capitalisation of borrowing costs should cease when substantially all the activities
necessary to prepare the qualifying asset for its intended use or sale are complete. An asset
is normally ready for its intended use or sale when its physical construction or production is
complete even though routine administrative work might still continue. If minor modifications
such as the decoration of a property to the user’s specification, are all that are outstanding, this
indicates that substantially all the activi ties are complete. When the construction of a
qualifying asset is completed in parts and a completed part is capable of being used while
construction continues for the other parts, capitalisation of borrowing costs in relation to a
part should cease when substantially all the activities necessary to prepare that part for its
intended use or sale are complete.
Q129. What are the issues, with which Accounting Standards deal? [RTP Nov2020]

Ans. Accounting Standards deal with the issues of (i) Recognition of events and
transactions in the financial statements, (ii) Measurement of these transactions and events,
(iii) Presentation of these transactions and events in the financial statements in a manner
that is meaningful and understandable to the reader, and (iv) Disclosure requirements.

Q130. On 31st March 2020, a business firm finds that cost of a partly finished unit on that
date is` 430. The unit can be finished in 2020-21 by an additional expenditure of ` 310. The

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finished unit can be sold for ` 750 subject to payment of 2% brokerage on selling price. The
firm seeks your advice regarding the amount at which the unfinished unit should be valued as
at 31st March, 2020 for preparation of final accounts. Assume that the partly finished unit
cannot be sold in semi-finished form and its NRV is zero without processing it further.
[RTP Nov 2021]

Ans. Valuation of unfinished unit

`
Net selling price 750
Less: Estimated cost of completion (310)
440
Less: Brokerage (2 % of 750) (15)
Net Realisable Value 425
Cost of inventory 430
Value of inventory (Lower of cost and net realisable 425
value)

Q131. A property costing ` 10,00,000 is bought on 1.4.2020. Its estimated total physical
life is 50 years. However, the company considers it likely that it will sell the property after
25 years.The estimated residual value in 25 years' time, based on current year prices, is:
Case (a) ` 10,00,000
Case (b) ` 9,00,000
You are required to compute the amount of depreciation charged for the year ended 31.3.2021.
[RTP Nov 2021]
Ans. Case (a)
The company considers that the residual value, based on prices prevailing at the balance sheet
date, will equal the cost.
There is, therefore, no depreciable amount and depreciation is zero.

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Case (b)

The company considers that the residual value, based on prices prevailing at the balance sheet
date, will be ` 9,00,000 and the depreciable amount is, therefore, ` 1,00,000.

Annual depreciation (on a straight line basis) will be ` 4,000 [{10,00,000 – 9,00,000} ÷ 25].

Q132. Mona Ltd. purchased a plant for US$ 1,00,000 on 01st December 2020, payable
after three months. Company entered into a forward contract for three months @ ` 49.15
per dollar. Exchange rate per dollar on 01st December was ` 48.85. How will you
recognize the profit or loss on forward contract in the books of Mona Ltd for the year
ended 31st March, 2021? [RTP Nov 2021]

Ans. Forward Rate ` 49.15

Less: Spot Rate (` 48.85)

Premium on Contract ` 0.30
Contract Amount US$ 1,00,000
Total Loss (1,00,000 x 0.30) ` 30,000 to be recognized in year ended 31.3.2021.

Q133. D Ltd. acquired a machine on 01-04-2017 for ` 20,00,000. The useful life is 5 years.
The company had applied on 01-04-2017, for a subsidy to the tune of 80% of the cost. The
sanction letter for subsidy was received in November 2020. The Company’s Fixed Assets Account for
the financial year 2020-21 shows a credit balance as under:
Particulars `
Machine (Original Cost) 20,00,000
Less: Accumulated Depreciation (from 2017-18- to 2019-20 on
Straight Line Method) 12,00,000
8,00,000
Less: Grant received (16,00,000)
Balance (8,00,000)

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You are required to explain how should the company deal with this asset in its accounts for
2020-21? [RTP Nov 2021]

Ans. From the above account, it is inferred that the Company has deducted grant from the
book value of asset for accounting of Government Grants. Accordingly, out of the `
16,00,000 that has been received, ` 8,00,000 (being the balance in Machinery A/c) should
be credited to the machinery A/c.
The balance ` 8,00,000 may be credited to P&L A/c, since already the cost of the asset to the
tune of ` 12,00,000 had been debited to P&L A/c in the earlier years by way of depreciation
charge, and ` 8,00,000 transferred to P&L A/c now would be partial recovery of that
cost.There is no need to provide depreciation for 2020-21 or 2021-22 as the depreciable
amount is now Nil.
Q134. Z Bank has classified its total investment on 31-3-2021 into three categories (a) held
to maturity (b) available for sale (c) held for trading as per the RBI Guidelines.

‘Held to maturity’ investments are carried at acquisition cost less amortised amount. ‘Available for sale’
investments are carried at marked to market. ‘Held for trading’ investments are valued at weekly
intervals at market rates. Net depreciation, if any, is charged to revenue and net
appreciation, if any, is ignored. Comment whether the policy of the bank is in accordance
with AS 13? [RTP Nov 2021]

Ans. As per AS 13 ‘Accounting for Investments’, the accounting standard is not applicable to Bank,
Insurance Company, Mutual Funds. In this case Z Bank is a bank, therefore, AS 13 does
not apply to it. For banks, the RBI has issued guidelines for classification and valuation of
its investment and Z Bank should comply with those RBI Guidelines/Norms. Therefore,
though Z Bank has not followed the provisions of AS 13, yet it would not be said as
non-compliance since, it is complying with the norms stipulated by the RBI.

Q135. In May, 2020, Omega Ltd. took a bank loan from a Bank. This loan was to be used
specifically for the construction of a new factory building. The construction was completed

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in January, 2021 and the building was put to its use immediately thereafter. Interest on the
actual amount used for construction of the building till its completion was ` 18 lakhs,
whereas the total interest payable to the bank on the loan for the period till 31 st March,
2021 amounted to ` 25 lakhs.The company wants to treat ` 25 lakhs as part of the cost of
factory building and thus capitalize it on the plea that the loan was specifically taken for the
construction of factory building? Explain the treatment in line with the provisions of AS 16.
[RTP Nov 2021]
Ans AS 16 clearly states that capitalization of borrowing costs should cease when
substantially all the activities necessary to prepare the qualifying asset for its intended use
are completed. Therefore, interest on the amount that has been used for the construction of
the building up to the date of completion (January, 2021) i.e. ` 18 lakhs alone can be
capitalized. It cannot be extended to ` 25 lakhs.

Q136. HIL Ltd. was making provision for non-moving stocks based on no issues having occurred for the
last 12 months upto 31.03.2019. The company now wants to change it and make provision based on
technical evaluation during the year ending 31.03.2020. Total value of stock on 31.3.20 is Rs. 120 lakhs.
Provision required based on technical evaluation amounts Rs. 3.00 lakhs. However, provision required
based on 12 months (no issues) is Rs. 4.00 lakhs. You are required to discuss the following points in the
light of Accounting Standard (AS)-1:

(i) Does this amount to change in accounting policy?

(ii) Can the company change the method of accounting?

(iii) Explain how it will be disclosed in the annual accounts of HIL Ltd. for the year 2019-20.
[MTP May 2021]
Ans. The decision of making provision for non-moving inventories on the basis of technical evaluation
does not amount to change in accounting policy. Accounting policy of a company may require that
provision for non-moving inventories should be made but the basis for making provision wil l not
constitute accounting policy. The method of estimating the amount of provision may be changed in

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 case a more prudent estimate can be made.

In the given case, considering the total value of inventory, the change in the amount of required provision
of non-moving inventory from Rs. 4 lakhs to Rs. 3 lakhs is also not material. The disclosure can be
made for such change in the following lines by way of notes to the accounts in the annual accounts of HIL
Ltd. for the year 2019-20 in the following manner:

“The company has provided for non-moving inventories on the basis of technical evaluation unlike
preceding years. Had the same method been followed as in the previous year, the profit for the year and the
value of net assets at the end of the year would have been lower by Rs. 1 lakh.”

Q137. Viva Ltd. received a specific grant of Rs. 30 lakhs for acquiring the plant of Rs. 150 lakhs during
2016-17 having useful life of 10 years. The grant received was credited to deferred income in the balance
sheet and was not deducted from the cost of plant. During 2019-20, due to non- compliance of
conditions laid down for the grant, the company had to refund the whole grant to the Government. Balance
in the deferred income on that date was Rs. 21 lakhs and written down value of plant was Rs. 105 lakhs.
What should be the treatment of the refund of the grant and the effect on cost of the fixed asset and the
amount of depreciation to be charged during the year 2019-20 in profit and loss account?

[MTP May 2021]

Ans. As per AS-12, ‘Accounting for Government Grants’, “the amount refundable in respect of a grant
related to specific fixed asset should be recorded by reducing the deferred income balance. To the extent
the amount refundable exceeds any such deferred credit, the amount should be charged to profit and
loss statement.

In this case the grant refunded is Rs. 30 lakhs and balance in deferred income is Rs. 21 lakhs, Rs. 9 lakhs
shall be charged to the profit and loss account for the year 2019-20. There will be no effect on the cost of
the fixed asset and depreciation charged will be on the same basis as charged in the earlier years.

Q138. Neon Enterprise operates a major chain of restaurants located in different cities. The company has
acquired a new restaurant located at Chandigarh. The new-restaurant requires significant renovation
expenditure. Management expects that the renovations will last for 3 months during which the restaurant

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will be closed.

Management has prepared the following budget for this period –

Salaries of the staff engaged in preparation of restaurant before its opening Rs. 7,50,000 Construction
and remodelling cost of restaurant Rs. 30,00,000
Explain the treatment of these expenditures as per the provisions of AS 10 "Property, Plant and
Equipment". [MTP May 2021]

Ans. As per provisions of AS 10, any cost directly attributable to bring the assets to the location and
conditions necessary for it to be capable of operating in the manner indicated by the management are
called directly attributable costs and would be included in the costs of an item of PPE.

Management of Neon Enterprise should capitalize the costs of construction and remodelling the restaurant,
because they are necessary to bring the restaurant to the condition necessary for it to be capable of
operating in the manner intended by management. The restaurant cannot be opened without incurring
the construction and remodelling expenditure amounting Rs. 30,00,000 and thus the expenditure should
be considered part of the asset.

However, the cost of salaries of staff engaged in preparation of restaurant Rs. 7,50,000 before its opening
are in the nature of operating expenditure that would be incurred if the restaurant was open and these
costs are not necessary to bring the restaurant to the conditions necessary for it to be capable of operating
in the manner intended by management. Hence, Rs. 7,50,000 should be expensed.
Q139. In a production process, normal waste is 5% of input. 5,000 MT of input were put in process
resulting in wastage of 300 MT. Cost per MT of input is Rs. 1,000. The entire quantity of waste and
finished output is in stock at the year end. State with reference to Accounting Standard, how will you value
the inventories in this case? What will be treatment for normal and abnormal waste?
[MTP May 2021]
Ans. As per para 13 of AS 2 (Revised), abnormal amounts of wasted materials, labour and other
production costs are excluded from cost of inventories and such costs are recognized as expenses in the
period in which they are incurred.

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In this case, normal waste is 250 MT and abnormal waste is 50 MT. The cost of 250 MT will be included
in determining the cost of inventories (finished goods) at the year end. The cost of abnormal waste
(50 MT x 1,052.6315 = Rs. 52,632) will be charged to the profit and loss statement.
Cost per MT ( Normal Quantity of 4,750 MT) = 50,00,000 / 4,750 = Rs.1,052.6315
Total value of inventory = 4,700 MT x Rs. 1,052.6315 = Rs. 49,47,368.

Q140. Omega Limited has borrowed a sum of US $ 10,00,000 at the beginning of Financial Year
2019-20 for its residential project at 4 %. The interest is payable at the end of the Financial Year. At the
time of availment of loan exchange rate was Rs. 56 per US $ and the rate as on 31st March, 2020 was
Rs. 62 per US $. If Omega Limited had borrowed the loan in India in Indian Rupee equivalent, the
pricing of loan would have been 10.50%.

You are required to compute Borrowing Cost and exchange difference for the year ending 31st March,
2020 as per applicable Accounting Standards.
[ MTP May 2021 ] ( 4 marks )
Ans. Interest for the period 2019-20

= US $ 10 lakhs x 4% × Rs. 62 per US$ = Rs. 24.80 lakhs

(ii) Increase in the liability towards the principal amount

= US $ 10 lakhs × Rs. (62 - 56) = Rs. 60 lakhs

(iii) Interest that would have resulted if the loan was taken in Indian currency

= US $ 10 lakhs × Rs. 56 x 10.5% = Rs. 58.80 lakhs

(iv) Difference between interest on local currency borrowing and foreign currency
borrowing = Rs. 58.80 lakhs - Rs. 24.80 lakhs = Rs. 34 lakhs.
Therefore, out of Rs. 60 lakhs increase in the liability towards principal amount, only Rs. 34 lakhs will be
considered as the borrowing cost. Thus, total borrowing cost would be Rs. 58.80 lakhs being the
aggregate of interest of Rs. 24.80 lakhs on foreign currency borrowings plus the exchange difference to
the extent of difference between interest on local currency borrowi ng and interest on foreign currency
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borrowing of Rs. 34 lakhs.

Hence, Rs. 58.80 lakhs would be considered as the borrowing cost to be accounted for as per AS 16 and the
remaining Rs. 26 lakhs (60 - 34) would be considered as the exchange difference to be accounted for as
per AS 11.

Q141. (i) “In determining the cost of inventories, it is appropriate to exclude certain costs and
recognize them as expenses in the period in which they are incurred”. Provide examples of such costs as
per AS 2 ‘Valuation of Inventories’.

(ii) X Limited purchased goods at the cost of Rs. 40 lakhs in October, 2020. Till March, 2021, 75% of
the stocks were sold. The company wants to disclose closing stock at Rs. 10 lakhs. The expected sale
value is Rs. 11 lakhs and a commission at 10% on sale is payable to the agent. Advise, what is the correct
value of closing stock to be disclosed as at 31.3.2021. [ MTP May 2021 ] ( 5 marks )
Ans (I).As per AS 2 ‘Valuation of Inventories’, certain costs are excluded from the cost of the
inventories and are recognized as expenses in the period in which incurred. Examples of such costs are:

(a) abnormal amount of wasted materials, labour, or other production costs;

(b) storage costs, unless those costs are necessary in the production process prior to a
further production stage;

(c) administrative overheads that do not contribute to bringing the inventories to their
present location and condition; and

(d) selling and distribution costs.

(iii) As per AS 2 “Valuation of Inventories”, the inventories are to be valued at lower of

cost or net realizable value. In this case, the cost of inventory is Rs. 10 lakhs. The net
realizable value is 11,00,000 ´ 90% = Rs. 9,90,000. So, the stock should be
valued at Rs. 9,90,000.

Q142. Ram Ltd. purchased machinery for Rs. 80 lakhs (useful life 4 years and residual value Rs. 8
lakhs). Government grant received was Rs. 32 lakhs. The grant had to be refunded at the beginning of

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third year. Show the Journal Entry to be passed at the time of refund of grant and the value of the fixed
assets in the third year and the amount of depreciation for remaining two years, if the grant had been
credited to Deferred Grant A/c. [ MTP May 2021 ] ( 5 marks )

Ans. As per AS 12 ‘Accounting for Government Grants,’ income from Deferred Grant Account is
allocated to Profit and Loss account usually over the periods and in the proportions in which
depreciation on related assets is charged.Accordingly, in the first two years (Rs. 32 lakhs/4 years) = Rs. 8
lakhs x 2 years= Rs. 16 lakhs will be credited to Profit and Loss Account and Rs. 16 lakhs will be the
balance of Deferred Grant Account after two years. Therefore, on refund of grant, following entry will
be passed:
Rs. Rs.
Deferred Grant A/c Dr. 16 lakhs
Profit & Loss A/c Dr. 16 lakhs
To Bank A/c 32 lakhs
(Being Government grant
refunded)

1. Value of Fixed Assets after two years but before refund of grant

Fixed assets initially recorded in the books = Rs. 80 lakhs

Depreciation for each year = (Rs. 80 lakhs – Rs.8 lakhs)/4 years = Rs. 18 lakhs per year

Book value of fixed assets after two years = Rs. 80 lakhs – (Rs. 18 lakhs x 2 years) = Rs. 44
lakhs

2. Value of Fixed Assets after refund of grant

On refund of grant the balance of deferred grant account will become nil. The fixed assets
will continue to be shown in the books at Rs. 44 lakhs.

3. Amount of depreciation for remaining two years

Depreciation will continue to be charged at Rs. 18 lakhs per annum for the remaining two
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 years.

Q143. Mohan Ltd. has an existing freehold factory property, which it intends to knock down and
redevelop. During the redevelopment period the company will move its production facilities to another
(temporary) site.

The details of the incremental costs which will be incurred are: Setup costs of Rs. 5,00,000 to install
machinery in the new location; Rent of Rs. 15,00,000; Removal costs of Rs. 3,00,000 to transport the
machinery from the old location to the temporary location.

Mohan Ltd. wants to seek your guidance as whether these costs can be capitalized into the cost of the new
building. You are required to advise in line with AS 10 “Property, Plant and Equipment”. [MTP May 2021 ]
( 5 marks )

Ans. 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. These costs are not 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. The costs to be incurred by the
company are in the nature of costs of reducing or reorganizing the operations of the accompany. These
costs do not meet that requirement of AS 10 “Property, Plant and Equipment” and cannot, therefore, be
capitalized.

Q144. State whether the following statements are 'True' or 'False' in line with the provisions of AS 1.
Also give reason for your answer.

(i) Certain fundamental accounting assumptions underline the preparation and presentation of
financial statements. They are usually specifically stated because their acceptance and use are
not assumed.

(ii) If fundamental accounting assumptions are not followed in presentation and preparation of
financial statements, a specific disclosure is not required.

(iii) All significant accounting policies adopted in the preparation and presentation of financial

147
 statements should form part of the financial statements.

(iv) Any change in an accounting policy, which has a material effect should be disclosed. Where
the amount by which any item in the financial statements is affected by such change is not
ascertainable, wholly or in part, the fact need not to be indicated.

(v) There is no single list of accounting policies which are applicable to all circumstances.
[MTP May 2021 ] ( 5 marks )

Ans.(i) False; As per AS 1 “Disclosure of Accounting Policies”, certain fundamental accounting

assumptions underlie the preparation and presentation of financial statements. They are usually not
specifically stated because their acceptance and use are assumed. Disclosur e is necessary if they are not
followed.

(ii) False; As per AS 1, if the fundamental accounting assumptions, viz. Going Concern,
Consistency and Accrual are followed in financial statements, specific disclosure is not
required. If a fundamental accounting assumption is not followed, the fact should be
disclosed.

(iii) True; To ensure proper understanding of financial statements, it is necessary that all
significant accounting policies adopted in the preparation and presentation of financial
statements should be disclosed. The disclosure of the significant accounting policies as
such should form part of the financial statements and they should be disclosed at one place.

(iv) False; Any change in the accounting policies which has a material effect in the c urrent
period or which is reasonably expected to have a material effect in later periods should be
disclosed. Where such amount is not ascertainable, wholly or in part, the fact should be
indicated.

(v) True; As per AS 1, there is no single list of accounting policies which are applicable to all
circumstances. The differing circumstances in which enterprises operate in a situation of
diverse and complex economic activity make alternative accounting principles and methods
of applying those principles acceptable.
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Q145. A company incorporated in June 2020, has setup a factory within a period of 8 months with
borrowed funds. The construction period of the assets had reduced drastically due to usage of technical
innovations by the company and the company is able to justify the reasons for the same. Whether
interest on borrowings for the period prior to the date of setting up the factory should be capitalized
although it has taken less than 12 months for the assets to get ready for use. You are required to comment
on the necessary treatment with reference to AS 16.[MTP May 2021 ] ( 5 marks )

Ans. As per AS 16 ‘Borrowing Costs’, a qualifying asset is an asset that necessarily takes a
substantial period of time to get ready for its intended use or sale. Further, the standard states that what
constitutes a substantial period of time primarily depends on the facts and circumstances of each case.
However, ordinarily, a period of twelve months is considered as substantial period of time unless a
shorter or longer period can be jus tified on the basis of facts and circumstances of the case. In
estimating the period, time which an asset takes, technologically and commercially, to get it ready for
its intended use or sale is considered.

It may be implied that there is a rebuttable presumption that a 12 months period constitutes substantial
period of time.

Under present circumstances where construction period has reduced drastically due to technical innovation,
the 12 months period should at best be looked at as a benchmark and not as a conclusive yardstick. It
may so happen that an asset under normal circumstances may take more than 12 months to complete.
However, an enterprise that completes the asset in 8 months should not be penalized for its efficiency by
denying it interest capitalization and vice versa.

The substantial period criteria ensures that enterprises do not spend a lot of time and effort capturing
immaterial interest cost for purposes of capitalization.

Therefore, if the factory is constructed in 8 months then it shall be considered as a qualifying asset. The
interest on borrowings for the same shall be capitalised although it has taken less than 12 months for the
asset to get ready to use.

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Q146. Om Ltd. purchased an item of property, plant and equipment for US $ 50 lakh on 01.04.2019 and
the same was fully financed by the foreign currency loan [US $] repayable in five equal instalments annually.
(Exchange rate at the time of purchase was 1 US $ = ` 60]. As on 31.03.2020 the first instalment was paid
when 1 US $ fetched ` 62.00. The entire loss on exchange was included in cost of goods sold. Om Ltd.
normally provides depreciation on an item of property, plant and equipment at 20% on WDV basis and
exercised the option to adjust the cost of asset for exchange difference arising out of loan restatement and
payment. Calculate the amount of exchange loss, its treatment and depreciation on this item of property,
plant and equipment. [MTP NOV 2020] ( 5 marks)
Ans. Exchange differences arising on restatement or repayment of liabilities incurred for the purpose of
acquiring an item of property, plant and equipment should be adjusted in the carrying amount of the
respective item of property, plant and equipment as Om Ltd. has exercised the option and it is long term
foreign currency monetary item. Thus, the entire exchange loss due to variation of ` 20 lakh on
31.03.2020 on payment of US $ 10 lakh, should be added to the carrying amount of an item of property,
plant and equipment and not to the cost of goods sold. Further, depreciation on the unamortized
depreciable amount should also be provided.

Calculation of Exchange loss:

Foreign currency loan (in `) = (50 lakh $ x ` 60) = ` 3,000 lakh

Exchange loss on outstanding loan on 31.03.2020 = ` 40 lakh US $ x (62.00-60.00) = ` 80 lakh.

So, ` 80 lakh should also be added to cost of an item of property, plant and equipment with
corresponding credit to outstanding loan in addition to ` 20 lakh on account of exchange loss on payment
of instalment. The total cost of an item of property, plant and equipment to be increased by ` 100 lakh.
Total depreciation to be provided for the year 2019 - 2020 = 20% of (` 3,000 Iakh+ 100 lakh) = ` 620
lakh.

Q147. On 01.04.2017, XYZ Ltd. received Government grant of ` 100 Lakhs for an acquisition of new
machinery costing ` 500 lakhs. The grant was received and credited to the cost of the assets. The life span of
the machinery is 5 years. The machinery is depreciated at 20% on WDV method. The company had to

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refund the entire grant in 2 nd April, 2020 due to non-fulfilment of certain conditions which was imposed by
the government at the time of approval of grant. How do you deal with the refund of grant to the
Government in the books of XYZ Ltd. as per AS 12? [MTP NOV 2020] ( 5 marks)

Ans. According to AS 12 on Accounting for Government Grants, the amount refundable in respect of a
grant related to a specific fixed asset (if the grant had been credited to the cost of fixed asset at the time of
receipt of grant) should be recorded by increasing the book value of the asset, by the amount refundable.
Where the book value is increased, depreciation on the revised book value should be provided
prospectively over the residual useful life of the asset.
(` in lakhs)

1st April, 2017 Acquisition cost of machinery (` 500 – ` 400.00

100)

31st March, Less: Depreciation @ 20% (80)

2018

1st April, 2018 Book value 320.00

31st March, Less: Depreciation @ 20% (64)

2019

1st April, 2019 Book value 256.00

31st March, Less: Depreciation @ 20% (51.20)

2020

1st April, 2020 Book value 204.80

2nd April, Add: Refund of grant 100.00

2020
Revised book value 304.80

Depreciation @ 20% on the revised book value amounting ` 304.80 lakhs is to be provided
prospectively over the residual useful life of the asset.

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Q148. (i) Entity A carried plant and machinery in its books at ` 2,00,000 which were destroyed in a fire.
These machines were insured 'New for old' and were replaced by the insurance company with new machines
of fair value ` 20,00,000. The old destroyed machines were acquired by the insurance company and the
company did not receive any cash compensation. State, how Entity A should account for the same?

(ii) Omega Ltd, a supermarket chain, is renovating one of its major stores. The store will have more
available space for store promotion outlets after the renovation and will include a restaurant.
Management is preparing the budgets for the year after the store reopens, which include the cost of
remodelling and the expectation of a 15% increase in sales resulting from the store renovations, which
will attract new customers.

Decide whether Omega Ltd. can capitalize the remodelling cost or not as per provisions of AS 10
“Property plant & Equipment”. [MTP NOV 2020] ( 5 marks)

Ans. (i) Entity A should account for a loss in the Statement of Profit and Loss on de-recognition of the
carrying value of plant and machinery in accordance with AS 10 on Property, Plant and Equipment.
Entity A should separately recognize a receivable and a gain in the income statement resulting from
the insurance proceeds once receipt is virtually certain. The receivable should be measured at the fair
value of assets provided by the insurer.

(ii) The expenditure in remodelling the store will create future economic benefits (in the form of 15% of
increase in sales). Moreover, the cost of remodelling can be measured reliably, therefore, it should be
capitalized in line with AS 10.

Q149. What do you mean by the term “cash and cash equivalent” as per AS 3? From the following
information of XYZ Limited, calculate cash and cash equivalent as on 31-03-2019.
Particulars Amount (`)
Cash balance with Bank 10,000
Fixed Deposit created on 01-11-2018 and maturing on15-07- 75,000

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 2019
Short Term Investment in highly liquid Sovereign Debt Mutual 1,00,000
fund made on 01-03-2019 (having maturity period of less than
3 months)
Bank Balance in a Foreign Currency Account in India $ 1,000

(Conversion Rate:
on the day of deposit ` 69/USD; ` 70/USD as on 31-03-2019)
Debentures purchased of ` 10 lacs of A Ltd., which are 90,000
redeemable on 31 st October, 2019

Shares of Alpha Ltd. purchased on 1st January, 2019 60,000

[MTP NOV 2020] ( 5 marks)

Ans. As per AS 3, Cash and cash equivalents consists of: (i) Cash in hand and deposits repayable on
demand with any bank or other financial institutions and (ii) Cash equivalents, which are short term,
highly liquid investments that are readily convertible into known amounts of cash and are subject to
insignificant risk or change in value. A short-term investment is one, which is due for maturity within three
months from the date of acquisition. Investments in shares are not normally taken as cash equivalent,
because of uncertainties associated with them as to realizable value.

Computation of Cash and Cash Equivalents as on 31st March, 2019

`
Cash balance with bank 10,000
Short term investment in highly liquid sovereign debt mutual 1,00,000
fund on 1.3.19
Bank balance in foreign currency account ($1,000 x ` 70,000
70)

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 1,80,000

Note: Fixed deposit, Shares and Debentures willnot be considered as cash and cash equivalents.

Q150. State whether the following statements are 'True' or 'False'. Also give reason for your answer.

(i) Certain fundamental accounting assumptions underline the preparation and presentation of
financial statements. They are usually not specifically stated because their acceptance and
use are assumed.

(ii) If fundamental accounting assumptions are not followed in presentation and preparation of
financial statements, a specific disclosure is not required.

(iii) All significant accounting policies adopted in the preparation and presentation of financial
statements should not form part of the financial statements.

(iv) Any change in an accounting policy, which has a material effect should be disclosed. Where
the amount by which any item in the financial statements is affected by such change is not
ascertainable, wholly or in part, the fact need to be indicated.

(v) There is a single list of accounting policies which are applicable to all circumstances.

[MTP May 2020] ( 5 marks)

Ans (i) .True; As per AS 1 “Disclosure of Accounting Policies”, certain fundamental accounting
assumptions underlie the preparation and presentation of financial statements. They are
usually not specifically stated because their acceptance and use are assumed. Disclosure is
necessary if they are not followed.

(ii) False; As per AS 1, if the fundamental accounting assumptions, viz. Going Concern,
Consistency and Accrual are followed in financial statements, specific disclosure is not
required. If a fundamental accounting assumption is not followed, the fact should be
disclosed.

(iii) False; To ensure proper understanding of financial statements, it is necessary that all
significant accounting policies adopted in the preparation and presentation of financial

154
 statements should be disclosed. The disclosure of the significant accounting policies as
such should form part of the financial statements and they should be disclosed in one place.

(iv) True; Any change in the accounting policies which has a material effect in the current
period, or which is reasonably expected to have a material effect in later periods should be
disclosed. Where such amount is not ascertainable, wholly or in part, the fact should be
indicated.

(v) False; As per AS 1, there is no single list of accounting policies which are applicable to all
circumstances. The differing circumstances in which enterprises operate in a situation of
diverse and complex economic activity make alternative accounting principles and methods
of applying those principles acceptable.

Q151. The Investment portfolio of XYZ Ltd. as on 31.03.2020 consisted of the following:
(Rs. in lacs)
Current Investments Cost Fair Value as on 31.03.2020
(1) 1000 Equity Shares of A Ltd. 5 7
(2) 500 Equity Shares of B Ltd. 10 15
(3) 1000 Equity Shares of C Ltd. 15 12
Total 30 34

Give your comments on the following:

(i) The company wants to value the above portfolio at Rs. 30 lakhs being lower of cost or fair
market value.

(ii) Company wants to transfer 1000 Equity Shares of C Ltd. from current investments to long
term investments on 31.03.2020 at cost of Rs. 15 lakhs. [MTP May 2020] ( 5 marks)

Ans. As per AS 13 “Accounting for Investments”, Valuation of current investments on overall

(or global) basis is not considered appropriate. Sometimes, the concern of an enterprise may be with
the value of a category of related current investments and not with each individual investment, and
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 accordingly the investments may be carried at the lower of cost and fair value computed category-
wise (i.e. equity shares, preference shares, convertible debentures, etc.). However, the more prudent
and appropriate method is to carry investments individually at the lower of cost and fair value.

(i) Hence the company has to value the current investment at Rs. 27 Lacs (A Ltd. shares at Rs.
5 lacs; B Ltd. shares at Rs. 10 lacs and C Ltd. shares at Rs. 12 lacs). The company’s
decision to value the portfolio at Rs. 30 lacs is not appropriate.

(ii) Moreover, where investments are reclassified from current to long-term, transfers are made at
the lower of cost and fair value at the date of transfer.

Hence, the company has to make transfer of 1,000 equity shares of C Ltd. at Rs. 12 lacs
(fair value) and not Rs. 15 lacs (cost) as the fair value is less than cost.

Q152. Viva Ltd. received a specific grant of Rs. 30 lakhs for acquiring the plant of Rs. 150 lakhs during
2016- 17 having useful life of 10 years. The grant received was credited to deferred income in the balance
sheet and was not deducted from the cost of plant. During 2019-20, due to non- compliance of
conditions laid down for the grant, the company had to refund the whole grant to the Government.
Balance in the deferred income on that date was Rs. 21 lakhs and written down value of plant was Rs. 105
lakhs. What should be the treatment of the refund of the grant and the effect on cost of the fixed asset and
the amount of depreciation to be charged during the year 2019-20 in profit and loss account?

[MTP May 2020] ( 5 marks)

Ans.As per AS-12, ‘Accounting for Government Grants’, “the amount refundable in respect of a grant
related to specific fixed asset should be recorded by reducing the deferred income balance. To the extent
the amount refundable exceeds any such deferred credit, the amount should be charged to profit and
loss statement.

In this case the grant refunded is Rs. 30 lakhs and balance in deferred income is Rs. 21 lakhs, Rs. 9 lakhs
shall be charged to the profit and loss account for the year 2019-20. There will be no effect on the cost of
the fixed asset and depreciation charged will be on the same basis as charged in the earlier years.

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Q153. Mohan Ltd. has an existing freehold factory property, which it intends to knock down and
redevelop. During the redevelopment period, the company will move its production facilities to another
(temporary) site.

The following incremental costs will be incurred:

Setup costs of Rs. 5,00,000 to install machinery in the new location.

Rent of Rs. 15,00,000

Removal costs of Rs. 3,00,000 to transport the machinery from the old location to the temporary location.

Mohan Ltd. wants to seek your guidance as whether these costs can be capitalized into the cost of the new
building. You are required to advise in line with AS 10 “Property, Plant and Equipment”.
[MTP May 2020] ( 5 marks)
Ans.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. These costs are not 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.

The costs to be incurred by the company are in the nature of costs of reducing or reorganizing the
operations of the accompany. These costs do not meet that requirement of AS 10 “Property, Plant and
Equipment” and cannot, therefore, be capitalized.

Q154. ABC Ltd. has entered into a binding agreement with XYZ Ltd. to buy a custom-made machine
amounting to Rs. 4,00,000. As on 31st March, 2020 before delivery of the machine, ABC Ltd. had to change
its method of production. The new method will not require the machine ordered and so it shall be scrapped
after delivery. The expected scrap value is ‘NIL’. Show the treatment of machine in the books of ABC
Ltd. [ MTP Nov 2020 ] ( 5 marks )
Ans. A liability is recognized when outflow of economic resources in settlement of a present obligation can
be anticipated and the value of outflow can be reliably measured. In the given case, ABC Ltd. should
recognize a liability of ` 4,00,000 payable to XYZ Ltd. When flow of economic benefit to the enterprise
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beyond the current accounting period is considered improbable, the expenditure incurred is recognized as
an expense rather than as an asset. In the present case, flow of future economic benefit from the machine to
the enterprise is improbable. The entire amount of purchase price of the machine should be recognized as an
expense. Hence ABC Ltd. should charge the amount of ` 4,00,000 (being loss due tochange in production
method) toProfit and loss statement and record the corresponding liability (amount payable to XYZ Ltd.)
for the same amount in the books for the year ended 31 st March, 2020.

Q155. Rau Ltd. purchased a plant for US$ 1,00,000 on 01st February 2020, payable after three months.
Company entered into a forward contract for three months @ Rs. 49.15 per dollar. Exchange rate per dollar
on 01st Feb. was Rs. 48.85. How will you recognize the profit or loss on forward contract in the books
of Rau Ltd.? [MTP May 2020] ( 5 marks )
Ans. Forward Rate Rs49.15
Less: Spot Rate (Rs. 48.85)
Premium on Contract Rs.0.30
Contract Amount US$ 1,00,000
Total Loss (1,00,000 x 0.30) Rs. 30,000
Contract period 3 months
st
Two months falling in the year ended 31 March, 2020;
therefore loss to be recognized (30,000/3) x 2 = Rs. 20,000.
Balance amount of Rs. 10,000 will be recognized in the
following financial year.

Q156. Omega Ltd., has a normal wastage of 4% in the production process. During the year 2019-20, the
Company used 12,000 MT of raw material costing Rs. 150 per MT. At the end of the year 630 MT of
wastage was ascertained in stock. The accountant wants to know how this wastage is to be treated in the
books.

You are required to compute the amount of normal and abnormal loss and treatment thereof in line with
AS 2 “Valuation of inventories”. [ MTP May 2020] ( 5 marks )

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Ans. As per para AS 2 ‘Valuation of Inventories’, abnormal amounts of wasted materials, labour and
other production costs are excluded from cost of inventories and such costs are recognized as expenses in
the period in which they are incurred. The normal loss will be included in determining the cost of
inventories (finished goods) at the year end.

Amount of Normal Loss and Abnormal Loss:

Material used 12,000 MT @ Rs. 150 = Rs. 18,00,000 Normal

Loss (4% of 12,000 MT) 480 MT
Net quantity of material 11,520MT

Abnormal Loss in quantity 150 MT (630 MT less 480 MT)

Abnormal Loss Rs. 23,437.50 [150 units @ Rs. 156.25 (Rs.18,00,000/11,520)]

Amount of Rs. 23,437.50 will be charged to the Profit and Loss statement.

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CHAPTER-2

Framework for preparation and presentation ofFinancial Statements

Q-1 A Ltd. has entered into a binding agreement with Gamma Ltd. to buy a custom-made
machine ` 1,00,000. At the end of 20X1-X2, before delivery of the machine, A Ltd. had
to change its method of production. The new method will not require the machine
ordered and it will be scrapped after delivery. The expected scrap value is nil.

You are required to advise the accounting treatment and give necessary journal entry in
the year 20X1- X2.

[RTP-May’2020]
Ans. A liability is recognized when outflow of economic resources in settlement of a
present obligation can be anticipated and the value of outflow can be reliably
measured. In the given case, A Ltd. should recognize a liability of ` 1,00,000 to
Gamma Ltd.

When flow of economic benefit to the enterprise beyond the current accounting
period is considered improbable, the expenditure incurred is recognized as an
expense rather than as an asset. In the present case, flow of future economic benefit
from the machine to the enterprise is improbable. The entire amount of purchase
price of the machine should be recognized as an expense.

Journal entry

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Q2.

[RTP May 2019]

Ans. (1) Users of Financial statement

Investors, employees, Lenders, Supplies/Creditors, Customers, Govt. & Public
(2) Qualitative Characteristics of Financial Statements:
Understandability, Relevance, Comparability, Reliability & Faithful
Representation
(3) Elements of Financial Statement:
Asset, Liability, Equity, Income/gain and Expense/Loss
(b) Fundamental Accounting Assumptions:
Accrual, Going Concern and Consistency
Q-3
(a) Explain in brief, the alternative measurement bases, for determining the value at which
an element can be recognized in the Balance Sheet or Statement of Profit and Loss.

(b) Mohan started a business on 1st April 2017 with Rs.12,00,000 represented by 60,000 units
of Rs.20 each. During the financial year ending on 31st March, 2018, he sold the entire
stock for Rs.30 each. In order to maintain the capital intact, calculate the maximum
amount, which can be withdrawn by Mohan in the year 2017-18 if Financial Capital is
maintained at historical cost. [RTP Nov ‘18]

Ans. (a) The Framework for Recognition and Presentation of Financial statements recognizes
four alternative measurement bases for the purpose of determining the value at which an
element can be recognized in the balance sheet or statement of profit and loss. These
bases are: (i)Historical Cost; (ii)Current cost (iii) Realizable (Settlement) Value and
(iv) Present Value.

161
 A brief explanation of each measurement basis is as follows:

1. Historical Cost: Historical cost means acquisition price. According to this, assets are
recorded at an amount of cash or cash equivalent paid or the fair value of the asset
at the time of acquisition. Liabilities are generally recorded at the amount of
proceeds received in exchange for the obligation.

2. Current Cost: Current cost gives an alternative measurement basis. Assets are
carried out at the amount of cash or cash equivalent that would have to be paid if the
same or an equivalent asset was acquired currently. Liabilities are carried at the
undiscounted amount of cash or cash equivalents that would be required to settle
the obligation currently.

3. Realizable (Settlement) Value: As per realizable value, assets are carried at the
amount of cash or cash equivalents that could currently be obtained by selling the
assets in an orderly disposal. Liabilities are carried at their settlement values;
i.e., the undiscounted amount of cash or cash equivalents paid to satisfy the
liabilities in the normal course of business.

4. Present Value: Under present value convention, assets are carried at present value
of future net cash flows generated by the concerned assets in the normal course of
business. Liabilities under this convention are carried at present value of future net
cash flows that are expected to be required to settle the liability in the normal
course of business.

(b)
Particular Financial Capital
Maintenance at

Historical Cost (Rs.)

Closing equity (Rs.30 x 60,000 18,00,000 represented by
units) Opening equity cash 60,000 units x Rs. =

162
 Permissible drawings to keep Capital 12,00,000
intact 6,00,000 (1,80,000 -
12,00,000)
Thus, in order to maintain the capital intact Mohan can withdraw Rs. 6,00,000 as the maximum
amount

Q-4 Explain main elements of Financial Statements. [RTP May ‘18]

Ans. Elements of Financial Statements

The Framework for preparation and Presentation of financial statements classifies

items of financial statements can be classified in five broad groups depending on their
economic characteristics: Asset, Liability, Equity, Income/Gain and Expense/Loss.
Assets Resource controlled by the enterprise as a result of past events from
which future economic benefits are expected to flow to the enterprise

Liability Present obligation of the enterprise arising from past events, the settlement
of which is expected to result in an outflow of a resource embodying
economic benefits.

Equity Residual interest in the assets of an enterprise after deducting all its
liabilities.

Income/gain Increase in economic benefits during the accounting period in the

form of inflows or enhancement of assets or decreases in liabilities that
result in increase in equity other than those relating to contributions
from equity participants
Expense/ loss Decrease in economic benefits during the accounting period in the form
of outflows or depletions of assets or incurrence of liabilities that result
in decrease in equity other than those relating to distributions to equity
participants.

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Q-5 Summarized Balance Sheet of Cloth Trader as on 31.03.2017 is given below:
Liabilities Amount (`) Assets Amount (`)
Proprietor's Capital 3,00,000 Fixed Assets 3,60,000
Profit & Loss Account 1,25,000 Closing Stock 1,50,000
10% Loan Account 2,10,000 Sundry Debtors 1,00,000
Sundry Creditors 50,000 Deferred Expenses 50,000
Cash & Bank 25,000
6,85,000 6,85,000
Additional Information is as follows:

(1) The remaining life of fixed assets is 8 years. The pattern of use of the asset is even. The
net realizable value of fixed assets on 31.03.2018was ` 3,25,000.
(2) Purchases and Sales in 2017-18 amounted to ` 22,50,000 and ` 27,50,000 respectively.

(3) The cost andnet realizable value of stockon 31.03.2018were ` 2,00,000 and ` 2,50,000
respectively.

(4) Expenses for the year amounted to ` 78,000.

(5) Deferred Expenses are amortized equally over 5 years.

(6) Sundry Debtors on 31.03.2018 are ` 1,50,000 of which ` 5,000 is doubtful. Collection
of another `
25,000 depends on successful re-installation of certain product supplied to the
customer;

(7) Closing Sundry Creditors are ` 75,000, likely to be settled at

10% discount. (8) Cash balance as on 31.03.2018 is ` 4,22,000.
(9) There is an early repayment penalty for the loan of
` 25,000. You are required to prepare: (Not assuming
going concern)

164
 (1) Profit & Loss Account for the year 2017-18.

(2) Balance Sheet as on 31st March, 2018. [Sugg. May ‘19, 5 Marks]

Ans. Profit and Loss Account for the year ended 2017-18 (not assuming going
concern)

Particulars Amount Particulars Amount

` `
To Opening Stock 1,50,000 By Sales 27,50,000
To Purchases 22,50,000 By Closing Stock 2,50,000
To Expenses* 78,000 By Trade payables 7,500
To Depreciation 35,000
To Provision for doubtful debts 30,000
To Deferred cost 50,000
To Loan penalty 25,000
To Net Profit (b.f.) 3,89,500
30,07,500 30,07,500

Balance Sheet as at 31st March, 2018 (not assuming going concern)

Liabilities Amount Assets Amount
` `
Capital 3,00,000 Fixed Assets 3,25,000
Profit & Loss A/c 5,14,500 Stock 2,50,000
10% Loan 2,35,000 Trade receivables (less 1,20,000
provision)
Trade payables 67,500 Deferred costs Nil
Bank 4,22,000
11,17,000 11,17,000
*Assumed that ` 78,000 includes interest on 10% loan amount for the year.

Q-6 "One of the characteristics of the financial statement is neutrality. “Do you agree with
this statement? Explain in brief. [Sugg. Nov.’18,5 Marks]

Ans. Yes, one of the characteristics of financial statements is neutrality. To be reliable,

the information contained in financial statement must be neutral, that is free from
165
 bias.
Financial Statements are not neutral if by the selection or presentation of
information, the focus of analysis could shift from one area of business to another
thereby arriving at a totally different conclusion based on the business results.
Information contained in the financial statements must be free from bias. It should
reflect a balanced view of the financial position of the company without attempting
to present them in biased manner. Financial statements cannot be prepared with the
purpose to influence certain division, i.e., they must be neutral.

Q-7 Briefly explain the elements of financial statements.

[Sugg.May ‘18, 5Marks]

Ans. Elements of Financial Statements

Assets Resource controlled by the enterprise as a result of past events from which
future economic benefits are expected to flow to the enterprise
Liability Present obligation of the enterprise arising from past events, the
settlement of which is expected to result in an outflow of a resource
embodying economic benefits.

Equity Residual interest in the assets of an enterprise after deducting all its liabilities

Income/gain Increase in economic benefits during the accounting period in the form
of inflows or enhancement of assets or decreases in liabilities that result
in increase in equity other than those relating to contributions from
equity participants

Expense/loss Decrease in economic benefits during the accounting period in the form
of outflows or depletions of assets or incurrence of liabilities that result in
decrease in equity other than those relating to distributions to equity
participants.

Q-8 ABC Ltd. has entered into a binding agreement with XYZ Ltd. to buy a custom-made
166
 machine amounting to Rs. 4,00,000. As on 31st March, 2018 before delivery of the
machine, ABC Ltd. had to change its method of production. The new method will not
require the machine ordered and so it shall be scrapped after delivery. The expected
scrap value is ‘NIL’.

Show the treatment of machine in the books of ABC Ltd. [MTP Oct. ‘19, 5 Marks]

Ans. A liability is recognized when outflow of economic resources in settlement of a

present obligation can be anticipated and the value of outflow can be reliably
measured. In the given case, ABC Ltd. should recognize a liability of Rs. 4,00,000
payables to XYZ Ltd. When flow of economic benefit to the enterprise beyond the
current accounting period is considered improbable, the expenditure incurred is
recognized as an expense rather than as an asset. In the present case, flow of future
economic benefit from the machine to the enterprise is improbable. The entire
amount of purchase price of the machine should be recognized as an expense. Hence
ABC Ltd. should charge the amount of Rs. 4,00,000 (being loss due to change in
production method) to Profit and loss statement and record the corresponding
liability (amount payable to XYZ Ltd.) for the same amount in the books for the year
ended 31st March, 2018.

Q-9 Explain in brief, the alternative measurement bases, for determining the value at which
an element can be recognized in the Balance Sheet or Statement of Profit and Loss.

[MTPMarch‘19,April‘19,18,5Marks]
Ans. The Framework for Recognition and Presentation of Financial statements recognizes
four alternative measurement bases for the purpose of determining the value at which an
element can be recognized in the balance sheet or statement of profit and loss. These
bases are: (i)Historical Cost; (ii)Current cost (iii) Realizable (Settlement) Value and
(iv) Present Value.
A brief explanation of each measurement basis is as follows:

167
 1. Historical Cost: Historical cost means acquisition price. According to this, assets are
recorded at an amount of cash or cash equivalent paid or the fair value of the
asset at the time of acquisition. Liabilities are generally recorded at the
amount of proceeds received in exchange for the obligation.
2. Current Cost: Current cost gives an alternative measurement basis. Assets are
carried out at the amount of cash or cash equivalent that would have to be paid if
the same or an equivalent asset was acquired currently. Liabilities are carried
at the undiscounted amount of cash or cash equivalents that would be required
to settle the obligation currently.
3. Realizable (Settlement) Value: As per realizable value, assets are carried at the
amount of cash or cash equivalents that could currently be obtained by selling the
assets in an orderly disposal. Liabilities are carried at their settlement values;
i.e., the undiscounted amount of cash or cash equivalents paid to satisfy the
liabilities in the normal course of business.
4. Present Value: Under present value convention, assets are carried at present value
of future net cash flows generated by the concerned assets in the normal course of
business. Liabilities under this convention are carried at present value of future
net cash flows that are expected to be required to settle the liability in the
normal course of business.
Q-10 "One of the characteristics of financial statements is neutrality"- Do you agree with this
statement? Comment. [MTP March ‘18, 5 Marks]
Ans. Yes, one of the characteristics of financial statements is neutrality. To be reliable,
the information contained in financial statement must be neutral, that is free from
bias.
Financial Statements are not neutral if by the selection or presentation of
information, the focus of analysis could shift from one area of business to another

168
 thereby arriving at a totally different conclusion on the business results.
For example, if the assets of a company primarily consist of trade receivables and
insurance claims and the financial statements do not specify that the insurance
claims have been lying unrealized for a number of years or that a few key trade
receivables have not given balance confirmation certificates, an erroneous conclusion
may be drawn on the liquidity of the company. Financial statements are said to depict
the true and fair view of the business of the organization by virtue of neutrality.
Q-11 ABC Ltd. has entered into a binding agreement with XYZ Ltd. to buy a custom -made
machine amounting to Rs. 4,00,000. As on 31st March, 2018 before delivery of the
machine, ABC Ltd. had to change its method of production. The new method will not
require the machine ordered and so it shall be scrapped after delivery. The expected
scrap value is ‘NIL’.

Explain the treatment of machine in the books of ABC Ltd.

[MTP Aug. ‘18, 5 Marks]

Ans. A liability is recognized when outflow of economic resources in settlement of a present
obligation can be anticipated and the value of outflow can be reliably measured. In the given
case, ABC Ltd. should recognize a liability of Rs.4,00,000 payable to XYZ Ltd.

When flow of economic benefit to the enterprise beyond the current accounting period is
considered improbable, the expenditure incurred is recognized as an expense rather than as
an asset. In the present case, flow of future economic benefit from the machine to the
enterprise is improbable. The entire amount of purchase price of the machine should be
recognized as an expense.

Hence ABC Ltd. should charge the amount of Rs.4,00,000 (being loss due to change in
production method) to Profit and loss statement and r record the corresponding liability
(amount payable to XYZ Ltd.) for the same amount in the books for r the year ended 31st
March, 2018.

169
 Q-12 ABC Ltd. has entered into a binding agreement with XYZ Ltd. to buy a custom-made
machine amounting to Rs. 4,00,000. As on 31st March, 2018 before delivery of the
machine, ABC Ltd. had to change its method of production. The new method will not
require the machine ordered and so it shall be scrapped after delivery. The expected
scrap value is ‘NIL’.

Show the treatment of machine in the books of ABC Ltd. [MTP Oct. ‘18, 5 Marks]

Ans. A liability is recognized when outflow of economic resources in settlement of a

present obligation can be anticipated and the value of outflow can be reliably
measured. In the given case, ABC Ltd. should recognize a liability of Rs.4, 00,000
payable to XYZ Ltd. When flow of economic benefit to the enterprise beyond the current
accounting period is considered improbable, the expenditure incurred is recognized as an
expense rather than as an asset. In the present case, flow of future economic benefit
from the machine to the enterprise is improbable. The entire amount of purchase price
of the machine should be recognized as an expense. Hence ABC Ltd. should charge the
amount of Rs. 4,00,000 (being loss due to change in production method) to Profit and
loss statement and record the corresponding liability (amount payable to XYZ Ltd.)
for the same amount in the books for the year ended 31st March, 2018.

Q-13 Aman startedabusinesson1stApril20X1 with ` 24,00,000representedby1,20,000

unitsof ` 20each. During the financial year ending on 31st March, 20X2, he sold the
entire stock for ` 30 each. In order to maintain the capital intact, calculate the
maximum amount, which can be withdrawn by Aman in the year 20X1-X2 if
Financial Capital is maintained at historical cost [RTP Nov.‘19]

Ans.

Particulars Financial Capital Maintenance at

Historical Cost (`)

Closing equity

170
 (` 30 x 1,20,000 units) 36,00,000 represented by cash
Opening equity 1,20,000units x ` 20 = 24,00,000
Permissible drawings to keep Capital intact 12,00,000 (36,00,000 – 24,00,000)

Q14. What are the qualitative characteristics of the Financial Statements which improve the
usefulness of the information furnished therein?
[Sugg Nov 2020] [ 4 marks]
Ans.The qualitative characteristics are attributes that improve the usefulness of information
provided in financial statements. Financial statements are required to show a true and
fair view of the performance, financial position and cash flows of an enterprise. The
framework for Preparation and Presentation of Financial Statements suggests that the
financial statements should maintain the following four qualitative characteristics to
improve the usefulness of the information furnished therein.
1. Understandability: The financial statements should present information in a
manner as to be readily understandable by the users with reasonable knowledge
of business and economic activities and accounting.

2. Relevance: The financial statements should contain relevant information only.

Information, which is likely to influence the economic decisions by the users,
is said to be relevant. Such information may help the users to evaluate past,
present or future events or may help in confirming or correcting past
evaluations. The relevance of a piece of information should be judged by its
materiality. A piece of information is said to be material if its misstatement (i.e.,
omission or erroneous statement) can influence economic decisions of a user.

3. Reliability: To be useful, the information must be reliable; that is to say, they

must be free from material error and bias. The information provided are not
likely to be reliable unless transactions and events reported are faithfully
represented. The reporting of transactions and events should be neutral, i.e. free

171
 from bias and be reported on the principle of 'substance over form'. The
information in financial statements must be complete. Prudence should be
exercised in reporting uncertain outcome of transactions or events.

4. Comparability: Comparison of financial statements is one of the most

frequently used and most effective tools of financial analysis. The financial
statements should permit both inter-firm and intra-firm comparison. One
essential requirement of comparability is disclosure of financial effect of change
in accounting policies.

Q15. Explain how financial capital is maintained at historical cost?

Kishore started a business on 1st April, 2019 with ` 15,00,000 represented by 75,000 units
of `20 each. During the financial year ending on 31st March, 2020, he sold the entire
stock for ` 30 each. In order to maintain the capital intact, calculate the maximum amount,
which can be withdrawn by Kishore in the year 2019-20 if Financial Capital is maintained
at historical cost.
[Sugg Jan 2021] [ 5marks]

Ans. Financial capital maintenance at historical cost: Under this convention, opening and
closing assets are stated at respective historical costs to ascertain opening and closing
equity. If retained profit is greater than or equals to zero, the capital is said to be
maintained at historical costs. This means the business will have enough funds to replace
its assets at historical costs. This is quite right as long as prices do not rise.

Maximum amount withdrawn by Kishore in year 2019-20 if Financial capital is maintained

at historical cost
Particulars Financial Capital Maintenance
at Historical Cost (`)
Closing equity (` 30 x 75,000 22,50,000 represented by cash

172
 units)
Opening equity 75,000 units x ` 20 = 15,00,000
Permissible drawings to keep 7,50,000 (22,50,000 –
Capital intact 15,00,000)

Thus ` 7,50,000 is the maximum amount that can be withdrawn by Kishore in year 2019-
20 if Financial capital is maintained at historical cost.
Q16. With regard to financial statements, name any five qualitative characteristics and
elements. [RTP May 2021]
Ans. Qualitative Characteristics of Financial Statements:

Understandability, Relevance, Comparability, Reliability & Faithful Representation

(ii) Elements of Financial Statements:

Asset, Liability, Equity, Income/Gain and Expense/Loss

Q17. Aman started a business on 1st April 2020 with ` 24,00,000 represented by 1,20,000
units of ` 20 each. During the financial year ending on 31st March, 2021, he sold the entire
stock for ` 30 each. In order to maintain the capital intact, calculate the maximum amount,
which can be withdrawn by Aman in the year 2020-21 if Financial Capital is maintained at
historical cost. [RTP May 2021]
Ans.
Particulars Financial Capital
Maintenance at
Historical Cost (`)
Closing equity 36,00,000 represented by
(` 30 x 1,20,000 units) cash
Opening equity 1,20,000 units x ` 20 =
24,00,000

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 Permissible drawings to keep 12,00,000 (36,00,000 –
Capital intact 24,00,000)

Q18.With regard to financial statements name any four.

(i) Users

(ii) Qualitative characteristics

(iii) Elements [RTP Nov 2020]

Ans i) Users of financial statements:

Investors, Employees, Lenders, Supplies/Creditors, Customers, Government

& Public

(ii) Qualitative Characteristics of Financial Statements:

Understandability, Relevance, Comparability, Reliability & Faithful

Representation

(iii) Elements of Financial Statements:

Asset, Liability, Equity, Income/Gain and Expense/Loss

Q19. What is meant by ‘Measurement’? What are the bases of measurement of Elements of
Financial Statements? Explain in brief.
[RTP Nov 2021]

Ans. Measurement is the process of determining money value at which an element can be
recognized in the balance sheet or statement of profit and loss. The framework recognizes
four alternative measurement bases for the purpose. These bases can be explained as:
Historical cost This is the Acquisition price. According to
this, assets are recorded at an amount of
cash and cash equivalent paid or the fair
value of the assets at time of acquisition.

174
 Current Cost Assets are carried out at the amount of cash
or cash equivalent that would have to be
paid if the same or an equivalent asset was
acquired currently. Liabilities are carried at
the undiscounted amount of cash or cash
equivalents that would be required to settle
the obligation currently.
Realisable For assets, amount currently realizable on
(Settlement) Value sale of the asset in an orderly disposal. For
liabilities, this is the undiscounted amount
expected to be paid on settlement of
liability in the normal course of business.

Present Value Assets are carried at present value of future

net cash flows generated by the concerned
assets in the normal course of business.
Liabilities are carried at present value of
future net cash flows that are expected to be
required to settle the liability in the normal
course of business.

In preparation of financial statements, all or any of the measurement basis can be used in
varying combinations to assign money values to financial items.

Q20. Explain in brief, the alternative measurement bases, for determining the value at which an
element can be recognized in the Balance Sheet or Statement of Profit and Loss.
[MTP May 2021] ( 4 marks )

Ans. The Framework for Recognition and Presentation of Financial statements recognizes four

175
alternative measurement bases for the purpose of determining the value at which an element can be
recognized in the balance sheet or statement of profit and loss. These bases are: (i)Historical Cost;
(ii)Current cost (iii) Realizable (Settlement) Value and (iv) Present Value.

A brief explanation of each measurement basis is as follows:

1. Historical Cost: Historical cost means acquisition price. According to this, assets are
recorded at an amount of cash or cash equivalent paid or the fair value of the asset at the
time of acquisition. Liabilities are generally recorded at the amount of proceeds received in
exchange for the obligation.

2. Current Cost: Current cost gives an alternative measurement basis. Assets are carried out at
the amount of cash or cash equivalent that would have to be paid if the same or an
equivalent asset was acquired currently. Liabilities are carried at the undiscounted amount
of cash or cash equivalents that would be required to settle the obligation currently .

3. Realisable (Settlement) Value: As per realizable value, assets are carried at the amount of
cash or cash equivalents that could currently be obtained by selling the assets in an orderly
disposal. Liabilities are carried at their settlement values; i.e. the undiscounted amount of
cash or cash equivalents paid to satisfy the liabilities in the normal course of business.

4. Present Value: Under present value convention, assets are carried at present value of
future net cash flows generated by the concerned assets in the normal course of business.
Liabilities under this convention are carried at present value of future net cash flows that are
expected to be required to settle the liability in the normal course of business.

Q21. Opening Balance Sheet of Mr. A is showing the aggregate value of assets, liabilities and equity Rs.
8 lakh, Rs. 3 lakh and Rs. 5 lakh respectively. During accounting period, Mr. A has the following
transactions:

(1) Earned 10% dividend on 2,000 equity shares held of Rs. 100 each

(2) Paid Rs. 50,000 to creditors for settlement of Rs. 70,000

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 (3) Rent of the premises is outstanding Rs. 10,000

(4) Mr. A withdrew Rs. 9,000 for his personal use.

You are required to show the effect of above transactions on Balance Sheet in the form of Assets- Liabilities
= Equity after each transaction. [MTP May 2021 ] ( 5 marks )

Ans. Effects of each transaction on Balance sheet of the trader is shown below:
Assets Liabilities Equity
Transactions – =
Rs. lakh Rs. lakh Rs. lakh
Opening 8.00 – 3.00 = 5.00
(1) Dividend earned 8.20 – 3.00 = 5.20
(2) Settlement of Creditors 7.70 - 2.30 = 5.40
(3) Rent Outstanding 7.70 – 2.40 = 5.30
(4) Drawings 7.61 – 2.40 = 5.21

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CHAPTER-3

Financial Statements of Companies

UNIT I

PREPARATION OF FINANCIAL STATEMENTS

Q-1 You are required to prepare a Balance Sheet as at 31st March 2018, as per Schedule III of
the Companies Act, 2013, from the following information of Mehar Ltd.:
Particulars Amount (Rs.) Particulars Amount (Rs)
Term Loans (Secured) 40,00,000 Investments (Non-current) 9,00,000
Trade payables 45,80,000 Profit for the year 32,00,000
Other advances 14,88,000 Trade receivables 49,00,000
Cash and Bank Balances 38,40,000 Miscellaneous Expenses 2,32,000
Staff Advances 2,20,000 Loan from other parties 8,00,000
Provision for Taxation 10,20,000 Provision for Doubtful Debts 80,000
Securities Premium 19,00,000
Loose Tools 2,00,000 Stores 16,00,000
General Reserve 62,00,000 Fixed Assets (WDV) 2,26,00,000
Capital Work-in- 8,00,000 Finished Goods 30,00,000
progress
Additional Information: -

1. Share Capital consist of-

(a) 1,20,000 Equity Shares of Rs.100 each fully paid up.

(b) 40,000, 10% Redeemable Preference Shares of Rs.100 each fully paid up.

2. The company declared dividend @ 5%of equityshare capital. The dividend

distribution tax rate is 17.304%. (15% CDT, surcharge 12%, Education Cess 2%

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 and SHEC@1%)

3. Depreciate Assets by Rs.20,00,000. [RTP Nov ‘18]

Ans. Balance Sheet of Mehar Ltd. as at 31st March, 2018

Notes to account
Rs.
1. Share Capital
Authorized, issued, subscribed & called up
1,20,000, Equity Shares of Rs. 100 each 1,20,00,000
40,000 10% Redeemable Preference Shares of 100 each 40,00,000 1,60,00,000

2. Reserves and Surplus 19,00,000

Securities Premium
62,00,000
Account General reserve
Profit & Loss

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 Balance Opening
balance
Profit for the period 32,00,000
Less; Miscellaneous Expenditure written off
(2,32,000)
29,68,000
Less: Appropriations
Dividend (10,00,000)
Dividend distribution tax (2,03,576)
17,64,424 98,64,424
3. Other current liabilities
Loanfrom other parties Dividend 8,00,000
Dividend 10,00,00
Distribution tax [W.N] 2,03,576 20,03,576
4. Tangible assets
Fixed Assets
Opening Balance 2,26,00,000
Less; Depreciation 20,00,000
Closing balance 2,06,00,000
5. Inventories
Finished Goods 30,00,000
Stores 16,00,000
Loose Tools 2,00,000 48,00,000
6. Trade Receivables
Trade receivables 49,00,000
Less: Provision for Doubtful Debts 80,000 48,20,000
7. Short term loans & Advances
Staff Advances 2,20,000
Other Advances 14,88,000 17,08,000

Working Note:

Calculation of Dividend distribution tax

(i) Grossing-up of dividend:

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 Dividend distributed by Mehar Ltd.

Equity shares dividend 6,00,000

Preference share dividend 4,00,000 10,00,000

Add: Increase for the purpose of grossing up of dividend

10,00,000 x [15/ (100-15)] 1,76,470

Gross dividend 11,76,470

(ii) Dividend distribution tax @ 17.304% 2,03,576

Q-2 PQ Ltd., a non-investment company has been incurring losses for the past few years.
The company provides the following information for the current year:
(Rs. In lakhs)
Paid up equity share capital 180
Paid up preference share capital 30
Reserves (including Revaluation reserve Rs.15 lakhs) 225
Securities premium 60
Long term loans 60
Deposits repayable after one year 30
Application money pending allotment 1080
Accumulated losses not written off 30
Investments 270
PQ Ltd. has only one whole-time director, Mr. Hello. You are required to calculate the amount of
maximum remuneration that can be paid to him as per provisions of Companies Act, 2013, if no
special resolution is passed at the general meeting of the company in respect of payment of
remunerationforaperiodnot exceeding three years. [RTP Nov ‘18]

Ans. Calculation of effective capital and maximum amount of monthly remuneration

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 (Rs. In lakhs)
Paid up equity share capital 180
Paid up Preference share capital 30
Reserve excluding Revaluation reserve (225-15) 210
Securities premium 60
Long term loans 60
Deposits repayable after one year 30
570
Less; Accumulated losses not written off 30
Investments 270
Effective capital for the purpose of managerial 270
remuneration
Since PQ Ltd. is incurring losses and no special resolution has been passed by the company for
payment of remuneration, managerial remuneration will be calculated on the basis of
effective capital of the company, therefore maximum remuneration payable to the Managing
Director should be @ Rs.60,00,000 per annum*.

*lf the effective capital is less than 5 Crore, limit of yearly remuneration payable should not
exceed Rs.60 lakhs as per Companies Act, 2013.

Q-3 Kapil Ltd. has authorized capital of Rs. 50 lakhs divided into 5,00,000 equity shares of Rs.
10 each. Their books show the following balances as on 31st March, 2017:
Rs. Rs.
Inventory 1.4.2016 6,65,000 Bank Current Account 20,000
Discounts & Rebates allowed 30,000 Cash in hand 8,000
Carriage Inwards 57,500 Interest (bank overdraft) 1,11,000
Patterns 3,75,000 Calls in Arrear @ Rs.2 per 10,000

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 share
Rate, Taxes and Insurance 55,000 Equity share capital 20,00,000
Furniture & Fixtures 1,50,000 (2,00,000 shares of Rs.10
each)
Purchases 12,32,500 Bank Overdraft 12,67,000
Wages 13,68,000
Freehold Land 16,25,000 Trade Payables (for goods) 2,40,000
Plant & Machinery 7,50,000 Sales 36,17,000
Engineering Tools 1,50,000 Rent (Cr.) 30,000
Trade Receivables 4,00,500 Transfer fees received 6,500
Advertisement 15,000 Profit & Loss A/c (Cr.) 67,000
Commission & Brokerage 67,500 Repairs to Building 56,500
Business Expenses 56,000 Bed debts 25,500
The inventory (valued at cost or market value, which is lower) as on 31st March, 2017 was Rs.
7,08,000. Outstanding liabilities for wages Rs.25,000 and business expenses Rs.36,000. Dividend
declared @ 12% on paid-up capital and it was decided to transfer to reserve @ 2.5% of profits.
Charge depreciation on closing written down amount of Plant & Machinery @ 5%, Engineering
Tools @ 20%; Patterns @ 10%; and Furniture & Fixtures @10%. Provide 25,000 as doubtful debts
after writing off Rs.16,000 as bad debts. Provide for income tax @ 30%. Corporate Dividend Tax
Rate @ 17.304 (wherein Base Rate is 15%).

You are required to prepare Statement of Profit & Loss for the year ended 31st March, 2017
and Balance Sheet as on that date. [RTPMay‘18]

Ans. Kapil Ltd.

Balance Sheet as at 31st March, 2017

Particulars Note No. Rs.

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I Equity and Liabilities

(1) Shareholders’ Funds

(a) Share Capital 1 19,90,000

(b) Reserves and Surplus 2 59,586

(2) Current Liabilities 2,40,500

(a) Trade Payables 3 13,28,000

(b) Other Current Liabilities 4 4,07,414

(c) Short-Term Provisions 40,25,500

Total

II ASSETS

(1) Non-Current Assets 5 29,30,000

(a) Fixed Assets 7,08,000

(i) Tangible Assets 6 3,59,500
(2) Current 7 28,000
Assets 40,25,500
(a) Inventories

(b) Trade Receivables

(c) Cash and Cash Equivalents

Total
Kapil Ltd.

Statement of Profit and Loss for the year ended 31st March, 2017

Particular Note No. (Rs.)

I Revenue from Operations 36,17,000

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 II Other Income 8 36,500
II Total Revenue [I + II] 36,53,500
IV Expenses:

Cost of purchases 12,32,500

Changes in Inventories [6,65,000-7,08,000] (43,000)

Employee Benefits Expenses 9 13,93,000

Finance Costs 10 1,11,000

Depreciation and Amortization Expenses 1,20,000

Other Expenses 11 4,40,000

Total Expenses 32,53,500

V Profit before Tax (III-IV) 4,00,000

VI Tax Expenses @ 30% (1,20,000)

VII Profit for the period 2,80,000

Notes Accounts:
1. Share Capital
Authorized Capital
5,00,000 Equity Shares of Rs 10 each 50,00,000
Issued Capital
2,00,000 Equity Shares of Rs. 10 each 20,00,000
Subscribed Capital and fully paid
1,95,000 Equity Shares of Rs.10 each 19,50,000
Subscribed Capital but not fully paid
5,000 Equity Shares of Rs.10 each Rs. 8 paid 40,000

185
 (Call unpaid Rs.10,000) 19,90,000
2. Reserves and Surplus
General Reserve 7,000
Surplus i.e., Balance in Statement of Profit & Loss:
Opening Balance 67,000
Add: Profit for the period 2,80,000
Less; Transfer to Reserve @ 2.5% (7,000)
Less; Equity Dividend [12% of (20,00,000-10,000)] (2,38,800)
Less; Corporate Dividend Tax (Working note) (48,614) 52,586
59,586
3. Other Current Liabilities
Bank Overdraft 12,67,000
Outstanding expenses (25,000 + 36,000) 61,000
13,28,000
4. Short term Provisions
Provision for Tax 1,20,000
Equity dividend payable 2,38,800
Corporate Dividend Tax 48,614
4,07,414
5. Tangible Assets
Particulars Value given Depreciation Depreciation Written down
(Rs.) rate Charged value at the end

(Rs.)
Land 16,25,000 - 16,25,000
Plant & Machinery 7,50,000 5% 37,500 7,12,500

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Furniture & Fixtures 1,50,000 10% 15,000 1,35,000
Patterns 3,75,000 10% 37,500 3,37,500
Engineering Tools 1,50,000 20% 30,000 1,20,000
30,50,000 1,20,000 29,30,000
6. Trade Receivables
Trade receivables (4,00,500 - 16,000) 3,84,500
Less: Provision for doubtful debts 25,000
3,59,500
7. Cash & Cash equivalent
Cash Balance 8,000
Bank Balance in current A/c 20,000
28,000
8. Other Income
Miscellaneous Income (Transfer fees) 6,500
Rental Income 30,000
36,500
9. Employee benefits expenses
Wages 13,68,000
Add: Outstanding wages 25,000
13,93,000
10. Finance Cost
Interest onBank overdraft 1,11,000
11. Other Expenses
Carriage Inward 57,500
Discount & Rebates 30,000

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 Advertisement 15,000
Rate, Taxes and Insurance 55,000
Repairs to Buildings 56,500
Commission & Brokerage 67,500
Miscellaneous Expenses [56,000+36,000] (Business Expenses) 92,000
Bad Debts [25,500+16,000] 41,500
Provision for Doubtful Debts 25,000
4,40,000
Working Note

Calculation of grossing up of dividend:

Particulars Rs.
Dividend distributed by Company 2,38,800
Add: Increase for the purpose of grossing up of 42,141
dividend
2,38,800 x [15/ (1 00-1 5)]
Gross dividend 2,80,941
Dividend distribution tax @ 17.304% 48,614
Q-4 Shweta Ltd. has the Authorized Capital of Rs. 15,00,000 consisting of 6,000 6%
Preference shares of Rs.100 each and 90,000 equity Shares of Rs.10 each. The following
was the Trial Balance of the Company as on 31st March, 2018:
Particulars Dr. Cr.
Investment in Shares at cost 1,50,000
Purchases 14,71,500
Selling Expenses 2,37,300
Inventory as at the beginning of the year 4,35,600

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 Salaries and Wages 1,56,000
Cash on Hand 36,000
Interim Preference dividend for the half year to 30th 18,000
September
Bills Receivable 1,24,500
Interest on Bank overdraft 29,400
Interest on Debentures up to 30th Sep (1st half year) 11,250
Debtors 1,50,300
Trade payables 2,63,550
Freehold property at cost 10,50,000
Furniture at cost less depreciation of Rs. 45,000 1,05,000
6% Preference share capital 6,00,000
Equity share capital fully paid up 6,00,000
5% mortgage debentures secured on Freehold properties 4,50,000
Income tax paid in advance for the current year 30,000
Dividends 12,750
Profit and Loss A/c (opening balance) 85,500
Sales (Net) 20,11,05
0
Bank overdraft secured by hypothecation of stocks and 4,50,000
receivables
Technical know-how fees at cost paid during the year 4,50,000
Audit fees 18,000
Total 44,72,850 44,72,85
0
You are required to prepare the Profit and Loss Statement for the year ended 31st March, 2018 and
189
the Balance Sheet as on 31st March, 2018 as per Schedule III of the Companies Act, 2013 after
taking into account the following -

190
 1. Closing Stock was valued at Rs.4,27,500.

2. Purchases include Rs.15,000 worth of goods and articles distributed among valued
customers.

3. Salaries and Wages include Rs.6,000 being Wages incurred for installation of Electrical
Fittings which were recorded under "Furniture".

4. Bills Receivable include Rs. 4,500 being dishonored bills. 50% of which had
been considered irrecoverable.

5. Bills Receivable of Rs.6,000 maturing after 31st March were discounted.

6. Depreciation on Furniture to be charged at 10% on Written Down Value. Investment in

shares is to be treated as non-current investments.

7. Interest on Debentures for the half year ending on 31st March was due on that date.

8. Provide Provision for taxation Rs.12,000.

9. Technical Know-how Fees is to be written off over a period of 10 years.

10. Salaries and Wages include Rs.30,000 being Director's Remuneration.

11. Trade receivables include Rs.18,000 due for more than six months.

[RTP May ‘19]

Ans. Statement of Profit and Loss of Shweta Ltd. for the year ended 31st March, 2018
Particular Note Rs.
I Revenue from Operations 20,11,050

II Other income (Divided income) 12,750

III Total Revenue (I &+ II) 20,23,800
IV Expenses:

(a) Purchases (14,71,500 - Advertisement Expenses 15,000)

14,56,500

191
 (b) Changes in Inventories of finished Goods /
Work in progress (4,35,600 -4,27,500) 8,100

(c) Employee Benefits expense 9 1,20,000

(d) Finance costs 10 51,900
(e) Depreciation & Amortization Expenses [10% of 11,100
(1,05,000+6,000)]

(f) Other Expenses 11 3,47,550

Total Expenses 19,95,150

V Profit before exceptional, extraordinary items and tax 28,650

(III-IV) VI Exceptional items -

VII Profit before extra-ordinary items and tax 28,650
(V-IV) VIII Extraordinary items -
IX Profit before tax (VII-VI 28,650
II) X Tax expense:
12,000
Current Tax
16,650
XI Profit/Loss for the period (after tax)

192
 Balance sheet of Shweta Ltd. as on 31st March, 2018
Particular as on 31st March Note
I
(1) Shareholders' funds:
(a) Share capital 1 12,00,000

(b) Reserves and surplus 2 66,150

(2) Non-current liabilities:

Long term borrowings 3 4,50,000
(3) Current liabilities:
(a) Short term borrowings
4 4,50,000
(b) Trade payables
2,63,550
(c) Other current liabilities
5 29,250
Total
24,58,950
II ASSETS
(1) Non-current Assets
(a) Property, Plant & Equipment
(i) Tangible assets
6 11,49,900
(ii) Intangible assets
7 4,05,000
(b) Non-current investments (Shares at cost)
1,50,000
Current Assets:
(a) Inventories
(b) Trade receivables 4,27,500

(c) Cash and Cash equivalents - Cash on hand 8 2,72,550

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 (d) Short term loans and advances -Income tax 36,000
(paid 30,000-Provision 12,000)
Total
18,000

24,58,950
Note: There is a Contingent liability for Bills receivable discounted with Bank Rs.6,000
Notes to accounts
Rs.
1. Share Capital
Authorized
90,000 Equity Shares of Rs.10 each 9,00,000
6,000 6% Preference shares of Rs.100 each 6,00,000 15,00,000
Issued, subscribed & called up
60,000, Equity Shares of Rs.10 each 6,00,000
6,000 6% Redeemable Preference Shares of 100 each 6,00,000 12,00,000
2. Reserves and Surplus
Balance as on 1st April, 2017 85,500
Add: Surplus for current year 16,650 1,02,150
Less; Preference Dividend 36,000
Balance as on 31st March, 2018 66,150

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3. Long Term Borrowings
5% Mortgage Debentures (Secured against Freehold Properties) 4,50,000
4. Short Term Borrowings
Secured Borrowings: Loans Repayable on Demand
Overdraft from Banks (Secured by Hypothecation of Stocks & 4,50,000
Receivables)
5. Other Current liabilities
Interest Accrued and due on Borrowings (5% Debentures) 11,250
Unpaid Preference Dividends 18,000 29,250
6. Tangible Fixed assets
Furniture
Furniture at Cost Less depreciation Rs.45,000 (as given in Trial 1,05,000
Balance
Add: Depreciation 45,000
Cost of Furniture 1,50,000
Add: Installation charge of Electrical Fittings wrongly
included under the heading Salaries and Wages 6,000
Total Gross block of Furniture A/c 1,56,000
Accumulated Depreciation Account: Opening
Balance-given in Trial Balance 45,000
Depreciation for the year:
On Opening WDV at 10% i.e. (10%x 1,05,000) 10,500
On additional purchase during the year at 10% i.e. (10%x 6,000)
600
Less; Accumulated Depreciation 56,100 99,900

195
 Freehold property (at cost) 10,50,000
11,49,900
7. Intangible Fixed Assets
Technical knowhow 4,50,000
Less; Written off 45,000 4,05,000
8. Trade Receivables
Sundry Debtors (a) Debt outstanding for more than six months 18,000
(b) Other Debts (refer Working Note) 1,34,550
Bills Receivable (1,24,500 -4,500) 1,20,000 2,72,550
9. Employee benefit expenses
Amount as per Trial Balance 1,56,000
Less; Wages incurred for installation of electrical fittings to be 6,000
capitalized
Less; Directors' Remuneration shown separately 30,000
Balance amount 1,20,000
10. Finance Costs
Interest on bank overdraft 29,400
Interest on debentures 22,500 51,900

196
 11. Other Expenses
Payment to the auditors 18,000
Director's remuneration 30,000
Selling expenses 2,37,300
Technical knowhow written of (4,50,000/10) 45,000
Advertisement (Goods and Articles Distributed) 15,000
Bad Debts (4,500 x50%) 2,250 3,47,55
0
Working Note
Calculation of Sundry Debtors-Other debts
Sundry Debtors as given in Trial Balance 1,50,300
Add Back: Bill receivable Dishonored 4,500
1,54,800
Less: Bad Debts written off - 50% Rs.4,500 (2,250)
Adjusted Sundry Debtor 1,52,550
Less: Debts due for more than 6 months (as per information given) (18,000)
Total of other Debtors i.e., Debtors outstanding for less than 6 months 1,34,550
Q-5 From the following particulars furnished by the Prashant Ltd., prepare the Balance
Sheet as at 31 stMarch, 2019 as required by Schedule III of the Companies Act, 2013:
Particulars Debit (`) Credit (`)
Equity shares capital (face value of ` 10 each) 15,00,000
Calls-in-arrears 5,000
Land 5,50,000
Building 4,85,000
Plant & machinery 5,60,000

197
 General reserve 2,70,000
Loan from State Financial Corporation 2,10,000
Inventories 3,15,000
Provision for taxation 72,000
Trade receivables 2,95,000
Short-term loans & advances 58,500
Profit & loss account 1,06,800
Cash in hand 37,300
Cash at bank 2,85,000
Unsecured loans 1,65,000
Trade payables 2,67,000
Total 25,90,800 25,90,800
The following additional information is also provided:

(1) 10,000 equity shares were issued for consideration other than cash.

(2) Trade receivables of ` 55,000 are due for more than six months.
(3) The cost of building and plant & machinery is ` 5,50,000 and ` 6,25,000
respectively.

(4) The loan from State Financial Corporation is secured by hypothecation of plant &
machinery. The balance of ` 2,10,000 in this account is inclusive of ` 10,000 for
interest accrued but not due.
(5) Balance at Bank included ` 15,000 with Aakash Bank Ltd., which is not a scheduled
bank. [Sugg.Nov.’19,10 Marks]

Ans.(a) PrashantLtd.

Balance Sheet as on 31st March, 2019

Particulars Notes `

198
 Equity and Liabilities
1 Shareholders’ funds

a Share capital 1 14,95,000

b Reserves and Surplus 2 3,76,800

Non-current liabilities 3 3,65,000

2
Long-term borrowings
Current liabilities
3 a Trade Payables 2,67,000
b Other current liabilities 4 10,000
c Short-term provisions 5 72,000
25,85,800
Total

Assets
1 Non-current assets

Property, Plant and Equipment 6 15,95,000

2 Current assets
3,15,000
a Inventories
7 2,95,000
b Trade receivables
8 3,22,300
c Cash and bank balances 58,500
d Short-term loans and advances 25,85,800
Total
Notes to accounts
`

199
1 Share Capital Equity share
capital
Issued & subscribed & fully paid up
1,50,000 Equity Shares of ` 10 each
(Of the above 10,000 shares have been issued for
consideration other than cash)
Less: Calls in arrears 15,00,000
(5,000) 14,95,000

2 Reserves and Surplus

General Reserve 2,70,000
Profit & Loss balance 1,06,800
Total 3,76,800
Long-term borrowings Secured
3
Loan from State Financial Corporation (2,10,000-10,000)
2,00,000
(Secured by hypothecation of Plant and Machinery)
1,65,000
Unsecured Loan
3,65,000
Total
Other current liabilities 10,000

Interest accrued but not due on loans (SFC) 72,000

4 Short-term provisions
5,50,000
Provision for taxation Property,
5,50,000
5 Plant & Equipment Land
(65,000) 4,85,000
Building
6,25,000
6 Less: Depreciation(b.f.) Plant &
(65,000) 5,60,000
Machinery
15,95,000

200
 Less: Depreciation (b.f.)
55,000
Total 2,40,000
Trade receivables 2,95,000
Outstanding for a period exceeding six months
2,85,000
Other Amounts
37,300
Total
7 Nil
Cash and bank balances
Cash and cash equivalents Cash at bank Cash
in hand

8
Other bank balances
3,22,300
Total
Q-6 The following extract of Balance Sheet of Prabhat Ltd. (Non-investment Company)
was obtained: Balance Sheet (Extract) as on 31st March, 2019
Liabilities
Issued and subscribed capital:
30,000,12% preference shares of ` 100 each (fully paid) 30,00,000
24,00,000 equity shares of ` 10 each, ` 8 paid up 1,92,00,000
Share suspense account 40,00,000

Reserves and Surplus:

Securities premium 1,00,000
Capital reserves (` 3,00,000 is revaluation reserve) 3,90,000
Secured loans:
12% debentures 1,30,00,000

201
 Unsecured loans:
Public deposits 7,40,000
Current liabilities:
Trade payables 6,90,000
Cash credit from SBI (short term) 9,30,000
Assets
Investments in shares, debentures etc. 1,50,00,000
Profit & loss account (Dr. balance) 30,50,000
Share suspense account represents application money received on shares, the allotment
of which is not yet made.

Youare required to compute effective capital as per the provisions of Schedule V.

Would your answer differ if Prabhat Ltd. is an investment company?
[Sugg.Nov.’19, 5 Marks]

Ans. Computation of effective capital

Where Prabhat Ltd. Is a Where Prabhat Ltd. is

non-investment an investment
company ` company `
Paid-up share capital —
30,000, 12% Preference shares 30,00,000 30,00,000
24,00,000 Equity shares of ` 8 1,92,00,000 1,92,00,000
paid up
Capital reserves (3,90,000 – 90,000 90,000
3,00,000)
Securities premium 1,00,000 1,00,000

202
 12% Debentures 1,30,00,000 1,30,00,000
Public Deposits 7,40,000 7,40,000
(A) 36,130,000 36,130,000
Investments 1,50,00,000 —
Profit and Loss account (Dr. 30,50,000 30,50,000
balance)
(B) 1,80,50,000 30,50,000
Effective capital (A–B) 1,80,80,000 3,30,80,000
Q-7 Futura Ltd. had the following items under the head “Reserves and Surplus” in the
Balance Sheet as on 31st March,2019:
Amount Rs. in
lakhs
Securities Premium Account 80
Capital Reserve 60
General Reserve 90
The company had an accumulated loss of Rs. 250 lakhs on the same date, which it has
disclosed under the head “Statement of Profit and Loss” as asset in its Balance Sheet.
Comment on accuracy of this treatment in line with Schedule III to the Companies
Act, 2013. [MTP Oct. ‘19, 4 Marks]
Ans. Note 6 (B) given under Part I of Schedule III to the Companies Act, 2013 provides that
debit balance of Statement of Profit and Loss (after all allocations and appropriations) shall
be shown as a negative figure under the head ‘Surplus’. Similarly, the balance of ‘Reserves and
Surplus’, after adjusting negative balance of surplus, shall be shown under the head ‘Reserves and
Surplus’ even if the resulting figure is in the negative. In this case, the debit balance of profit and
loss i.e., Rs. 250 lakhs exceed the total of all the reserves i.e., Rs. 230 lakhs. Therefore, balance of
‘Reserves and Surplus’ after adjusting debit balance of profit and loss is negative by Rs. 20 lakhs,
203
which should be disclosed on the face of the balance sheet. Thus, the treatment done by the
company is incorrect.
Q-8 PQ Ltd., a non-investment company has been incurring losses for the past few years.
The company provides the following information for the current year:
(Rs. in lakhs)
Paid up equity share capital 180
Paid up Preference share capital 30
Reserves (including Revaluation reserve Rs. 15 lakhs) 225
Securities premium 60
Long term loans 60
Deposits repayable after one year 30
Application money pending allotment 1080
Accumulated losses not written off 30
Investments 270

PQ Ltd. has only one whole-time director, Mr. Hello. You are required to calculate
the amount of maximum remuneration that can be paid to him as per provisions of Part
II of Schedule XIII, if no special resolution is passed at the general meeting of the
company in respect of payment of remuneration for a period not exceeding three years.
[MTP Oct. ‘19, 4Marks]
Ans. Calculation of effective capital and maximum amount of monthly remuneration
Since PQ Ltd. is incurring losses and no special resolution has been passed by the company for
payment of remuneration, managerial remuneration will be calculated on the basis of
effective capital of the company, therefore maximum remuneration payable to the Managing
Director should be @ Rs. 60,00,000 per annum.
Note: Revaluation reserve and application money pending allotment are not included while

204
computing effective capital of PQ Ltd.
(Rs. in lakhs)
Paid up equity share capital 180
Paid up Preference share capital 30
Reserve excluding Revaluation reserve (225- 15) 210
Securities premium 60
Long term loans 60
Deposits repayable after one year 30
570
(30)
Less: Accumulated losses not written off (270)
Investments 270
Effective capital for the purpose of managerial remuneration

Q-9 From the following particulars furnished by Alpha Ltd., prepare the Balance Sheetas
on31stMarch 20X1 as required by Part I, Schedule III of the Companies Act, 2013.

Particulars Debit Rs. Credit Rs.

Equity Share Capital (Face value of Rs. 100 each) 50,00,000
Call in Arrears 5,000
Land & Building 27,50,000
Plant & Machinery 26,25,000
Furniture 2,50,000
General Reserve 10,50,000
Loan from State Financial Corporation 7,50,000
Inventory:
Raw Materials 2,50,000
Finished Goods 10,00,000 12,50,000
Provision for Taxation 6,40,000
Trade receivables 10,00,000

205
 Short term Advances 2,13,500
Profit & Loss Account 4,33,500
Cash in Hand 1,50,000
Cash at Bank 12,35,000
Unsecured Loan 6,05,000
Trade payables (for Goods and Expenses) 8,00,000
Loans & advances from related parties 2,00,000
The following additional information is also provided:

(i) 10,000 Equity shares were issued for consideration other than cash,

(ii) Trade receivables of Rs. 2,60,000 are due for more than 6 months,

(iii) The cost of the Assets was:

Building Rs. 30,00,000, Plant & Machinery Rs. 35,00,000 and Furniture Rs.
3,12,500

(iv) The balance of Rs. 7,50,000 in the Loan Account with State Finance Corporation is
inclusive of Rs. 37,500 for Interest Accrued but not Due. The loan is secured by
hypothecation of Plants Machinery.

(v) Balance at Bank includes Rs. 10,000 with Omega Bank Ltd., which is not a Scheduled
Bank,

(vi) Transfer Rs. 20,000 to general reserve is proposed by Board of directors

(vii) Board of directors has declared dividend of 5% on the paid-upcapital. The dividend
distribution tax liability is Corporate Dividend Tax Rate @ 17.304 (wherein Base
Rate is 15%).

[MTPMarch‘19,MTPMarch‘18,20Marks]

206
Ans. Alpha Ltd.

Balance Sheet as on 31st March, 20X1

Particular Notes Rs.
Equity and Liabilities

1 Shareholders’ funds
1 49,95,000
a Share capital
2 11,82,907
b Reserves and Surplus

2 Non-current liabilities 3 13,17,500

Long-term borrowings 8,00,000

3 Current liabilities 4 3,38,093

a Trade Payables 5 6,40,000

b Other current liabilities 2,00,000

c short term provisions 94,73,500

d short term borrowings

Total
Assets

1 Non-current assets

Property, Plant & equipment Tangible assets

2 Current assets 6 56,25,000
a Inventories
7 12,50,000
b Trade receivables 8 10,00,000
c Cash and bank balances 9 13,85,000
d Short-term loans and advances 2,13,500

207
 Total 94,73,500
Notes to accounts
Rs.
1. Share Capital
Equity share capital
Issued & subscribed & called up
50,000 Equity Shares of Rs. 100 each
(Of the above 10,000 shares have been issued 50,00,000
for consideration other than cash) (5,000) 49,95,000
Less; Calls in arrears 49,95,000

Total 10,50,000
2 Reserves and Surplus
20,000 10,70,000
General Reserve

Add: current year transfer

Profit & Loss balance

Profit for the year 4,33,500

Less; Appropriations:

Transfer to General reserve (20,000)

Dividend Payable (Refer W N) (2,49,750)

DOT on dividend (Refer W N) (50,843) 1,12,907

Total 11,82,907

3 Long-term borrowings

Secured Term Loan

208
 State Financial Corporation Loan (7,50,000-
37,500)

(Secured by hypothecation of Plant and 7,12,500

Machinery)

Unsecured Loan 6,05,000

Total 13,17,500

4 Other current liabilities

Interest accrued but not due on loans (SFC) 37,500

Dividend (Refer W N) 2,49,750

DOT on dividend (Refer W N) 50,843 3,00,593

3,38,093

5 Short-term provisions

Provision for taxation 6,40,000

6 Tangible assets

Land and Building 30,00,000

Less; Depreciation (2,50,000) 27,50,000

(b.f.)

Plants Machinery 35,00,000

Less; Depreciation (8,75,000) 26,25,000

(b.f.)

Furniture & Fittings 3,12,500

209
 Less; Depreciation (62,500) (b.f.) 2,50,000

Total 56,25,000

7 Inventories

Raw Materials 2,50,000

Finished goods 10,00,000

Total 12,50,000

8 Trade receivables

Outstanding for a period exceeding six 2,60,000

months

Other Amounts 7,40,000

Total 10,00,000

9 Cashand bank
balances Cash and
cash equivalents Cash
at bank
with Scheduled Banks 12,25,000

with others (Omega Bank 10,000 12,35,000

Ltd.) Cash in hand 1,50,000

Other bank balances Nil
13,85,000
Total
Working Note:

Calculation of grossing-up of Rs.

dividend Particular 2,49,750

210
 Dividend distributed Alpha Ltd. (5% of
49,95,000) 44,074

Add:Increases for the purpose of grossing up of 2,93,824

dividend

15
x 2, 49, 750

100 -15

Gross dividend
Q-10 The following extract of Balance Sheet of X Ltd. (a non-investment company)
was obtained:

Balance Sheet (Extract) as on 31st March, 2017

Liabilities Rs.
Issued and subscribed capital:
20,000,14% preference shares of Rs. 100 each fully paid 20,00,000
1,20,000 Equity shares of Rs. 100 each, Rs. 80 paid-up 96,00,000
Capital reserves (Rs. 1,50,000 is revaluation reserve) 1,95,000
Securities premium 50,000
15% Debentures 65,00,000
Unsecured loans: Public deposits repayable after one year 3,70,000
Investment in shares, debentures, etc. 75,00,000
Profit and Loss account (debit balance) 15,00,000

You are required to compute Effective Capital as per the provisions of Schedule V to
Companies Act, 2013. [MTP March ‘18, MTP March ‘19, 5 Marks]

Ans. Computation of effective capital:

Rs.

211
Paid-up share capital
20,000, 14% Preference shares 20,00,000
1,20,000 Equity shares 96,00,000
Capital reserves (excluding revaluation reserve) 45,000
Securities premium 50,000

212
 15% Debentures 65,00,000
Public Deposits 3,70,000
(A) 1,85,65,000
Investments 75,00,000
Profit and Loss account (Dr. 15,00,000
balance)
(B) 90,00,000
Effective capital (A-B) 95,65,000
Q-11 State under which head the following accounts should be classified in Balance Sheet, as
per Schedule III of the Companies Act, 2013:
(i) Share application money received in excess of issued share capital.

(ii) Share option outstanding account.

(iii) Unpaid matured debenture and interest accrued thereon.

(iv) Uncalled liability on shares and other partly paid investments.

(v) Calls unpaid.

(vi) Intangible Assets under development.

(vii) Money received against share warrant.

(viii) Cash equivalents. [MTP April ‘19, 5 Marks]

Ans.

(i) Current Liabilities/Other Current Liabilities

(ii) Shareholders' Fund / Reserve & Surplus

(iii) Current liabilities/Other Current Liabilities

(iv) Contingent Liabilities and Commitments

(v) Shareholders' Fund / Share Capital

213
 (vi) Fixed Assets

(vii) Shareholders' Fund/Money received against share warrants

(viii) Current Assets

Q-12 From the following particulars furnished by Megha Ltd., prepare the Balance Sheet as
on 31st March 20X1 as required by Part I, Schedule III of the Companies Act, 2013.
Particulars Debit Rs. Credit Rs.
Equity Share Capital (Face value of Rs. 100 each) 50,00,000
Call in Arrears 5,000
Land & Building 27,50,000
Plant & Machinery 26,25,000
Furniture 2,50,000
General Reserve 10,50,000
Loan from State Financial Corporation 7,50,000
Inventory:

214
 Raw Materials 2,50,000
Finished Goods 10,00,000 12,50,000
Provision for Taxation 6,40,000
Trade receivables 10,00,000
Short term Advances 2,13,500
Profit & Loss Account 4,33,500
Cash in Hand 1,50,000
Cash at Bank 12,35,000
Unsecured Loan 6,05,000
Trade payables (for Goods and 8,00,000
Expenses)
Loans & advances from related 2,00,000
parties
The following additional information is also provided:

(i) 10,000 Equity shares were issued for consideration other than cash.

(ii) Trade receivables of Rs. 2,60,000 are due for more than 6 months.

(iii) The cost of the Assets was: Building Rs. 30,00,000, Plant & Machinery Rs. 35,00,000 and
Furniture Rs. 3,12,500

(iv) The balance of Rs. 7,50,000 in the Loan Account with State Finance Corporation is include
Rs. 37,500 for Interest Accrued but not Due. The loan is secured by hypothecation of
Plant & Machinery.

(v) Balance at Bank includes Rs. 10,000 with Omega Bank Ltd., which is not a Scheduled
Bank.

(vi) Transfer of Rs. 20,000 to general reserve is proposed by the Board of directors.

[MTP Aug. ‘18, 16 Marks]

215
Ans. Megha Ltd.

Balance Sheet as on 31st March, 20X1

Particulars Notes Rs.

Equity and Liabilities

1 Shareholders' funds

a Share capital 1 49,95,000

2 14,83,500
b Reserves and Surplus

Non-current liabilities 3 13,17,500

2
Long-term borrowings
8,00,000
Current liabilities
3 4 37,500
a Trade Payables
5 6,40,000
b Other current liabilities
2,00,000
c Short-term provisions

d Short-term borrowings 94,73,500

Total

216
 Assets
1 Non-current assets
Fixed assets
Tangible assets
6 56,25,000
Current assets
2 a Inventories 12,50,000
b Trade receivables 7 10,00,000

c Cash and bank balances 8 13,85,000

d Short-term loans and advances 9 2,13,500

94,73,500

Total
Notes to accounts

Rs.
1 Share Capital

Equity share capital

Issued & subscribed & called up 50,000

Equity Shares of Rs. 100 each
(Of the above 10,000 shares have been issued for
consideration other than cash)
50,00,000
Less: Calls in arrears
(5,000) 49,95,000
49,95,000
Reserves and Surplus Total
10,50,000
2 General Reserve
20,000 10,70,000

217
 Add: current year transfer Profit & 4,33,500
Loss balance
(20,000) 4,13,500
Profit for the year Less:
Appropriations: 14,83,500

Transfer to General reserve

Long-term borrowings 7,12,500

Secured Term Loan Total 6,05,000

3 State Financial Corporation Loan (7,50,000-37,500) (Secured 13,17,500

by hypothecation of Plant and Machinery) Unsecured Loan
37,500

Other current liabilities

Interest accrued but not due on loans (SFC)

Total
4

218
 5 Short-term provisions
Provision for taxation 6,40,000

6 Tangible assets
Land and Building 30,00,000
Less: Depreciation (2,50,000) (b.f.) 27,50,000
Plant & Machinery 35,00,000
Less: Depreciation (8,75,000) (b.f.) 26,25,000
Furniture & Fittings 3,12,500
Less: Depreciation (62,500) (b.f.) 2,50,000
Total 56,25,000
7 Inventories
Raw Materials 2,50,000
Finished goods 10,00,000
Total 12,50,000
8 Trade receivables
Outstanding for a period exceeding six months 2,60,000
Other Amounts 7,40,000
Total 10,00,000
9 Cash and bankbalances
Cash at bank
with Scheduled Banks 12,25,000
with others (Omega Bank Ltd.) 10,000 12,35,000
Cash in hand 1,50,000
Other bank balances Nil
Total 13,85,000
Q-13 The following is the Draft Profit & Loss A/c of Mudra Ltd., the year ended 31st March,

219
 20X1:
Rs. Rs.
To Administrative, Selling and By Balance b/d 5,72,350
distribution expenses 8,22,542 By Balance from Trading 40,25,365
A/c 2,73,925
To Directors fees 1,34,780 By Subsidies received from
To Interest on debentures 31,240 Govt.
To Managerial remuneration 2,85,350
To Depreciation on fixedassets 5,22,543
To Provision for Taxation 12,42,500
To General Reserve 4,00,000
To Investment Revaluation 12,500
Reserve
To Balance c/d 14,20,185

48,71,640 48,71,640
Depreciation on fixed assets as per Schedule II of the Companies Act, 2013 was Rs.5,75,345. You
are required to calculate the maximum limits of the managerial remuneration as per Companies
Act, 2013. [MTP Aug. ‘18, 5 Marks]
Ans. Calculation of net profit u/s 198 of the Companies Act, 2013
Rs. Rs.
Balance from Trading A/c 40,25,365

Add: Subsidies received from Government

2,73,925
42,99,290

220
 Less: Administrative, selling and distribution 8,22,542
expenses Director’s fees 1,34,780
Interest on debentures
31,240
Depreciation on fixed assets as per Schedule
5,75,345
II Profit u/s 198 (15,63,907)

27,35,383
Maximum Managerial remuneration under Companies Act, 2013= 11% of Rs.27,35,383=
Rs.3,00,892.
Q-14 From the following particulars furnished by Happy Ltd., prepare the Balance Sheet as
on 31st March 2018 as required by Part I, Schedule III of the Companies Act.
Particulars Debit Rs. Credit Rs.
EquityShare Capital (Facevalue of Rs. 100 50,00,000
each)
Call in Arrears 5,000
Land & Building 27,50,000
Plant & Machinery 26,25,000
Furniture 2,50,000
General Reserve 10,50,000
Loan from State Financial Corporation 7,50,000
Stock:
Raw Materials 2,50,000
Finished Goods 10,00,000 12,50,000
Provision for Taxation 6,40,000
Sundry Debtors 10,00,000
Advances 2,13,500

221
 Profit & Loss Account 4,33,500
Cash in Hand 1,50,000
Cash at Bank 12,35,000
Unsecured Loan 6,05,000
Sundry Creditors (for Goods and 10,00,000
Expenses)
The following additional information is also provided:

(i) 10,000 Equity shares were issued for consideration other than cash.

(ii) Debtors of Rs. 2,60,000 are due for more than 6 months.

(iii) The cost of the Assets was: Building Rs. 30,00,000, Plant & Machinery Rs. 35,00,000
and Furniture Rs. 3,12,500
(iv) The balance of Rs. 7,50,000 in the Loan Account with State Finance Corporation is
inclusive of Rs. 37,500 for Interest Accrued but not Due. The loan is secured by
hypothecation of Plant & Machinery.

(v) Balance at Bank includes Rs. 10,000 with Global Bank Ltd., which is not a
Scheduled Bank.

[MTP Oct. ‘18, 15 Marks]

Ans. Happy Ltd.

Balance Sheet as on 31st March, 2018

Particulars Notes Rs.
Equity and Liabilities
1 Shareholders' funds
a Share capital 1 49,95,000
b Reserves and Surplus
2 14,83,500

222
 Non-current liabilities 3 13,17,500
2 Long-term borrowings
10,00,000
Current liabilities
a Trade Payables 4 37,500
3
5 6,40,000
b Other current liabilities
94,73,500
c Short-term provisions

Assets
Total
Non-current assets Fixed 6 56,25,000

assets Tangible assets 7 12,50,000

1
Current assets
8 10,00,000
a Inventories
9 13,85,000
b Trade receivables
2,13,500
2 c Cash and cash equivalents 94,73,500
d Short-term loans and advances

Total
Notes to accounts
Rs.
1 Share Capital
Equity share capital
Issued & subscribed & called up

223
 50,000 Equity Shares of Rs. 100 each
(Of the above 10,000 shares have been
issued for
consideration other than cash) 50,00,000
Less: Calls in arrears (5,000) 49,95,000
Total 49,95,000
2 Reserves and Surplus

General Reserve 10,50,000

4,33,500
Surplus (Profit & Loss A/c)
14,83,500
Total

3 Long-term borrowings

Secured Term Loan

7,12,500
State Financial Corporation Loan (7,50,000 -
37,500) (Secured by hypothecation of Plant 6,05,000

and Machinery) Unsecured Loan 13,17,500

Total 37,500
Other current liabilities
6,40,000
4 Interest accrued but not due on loans (SFC)

Short-term
27,50,000
5 provisions
Provision for 26,25,000
taxation
6 2,50,000
Tangible assets
56,25,000
Land and 30,00,000
2,50,000

224
 Building Less: (2,50,000) 10,00,000
Depreciation 12,50,000
35,00,000
Plant &
(8,75,000) 2,60,000
Machinery
3,12,500 7,40,000
Less:
Depreciation (62,500) 10,00,000

Furniture &
7 Fittings Less: 12,35,000
Depreciation 1,50,000
Total
13,85,000
Inventories
Raw
8 Materials
Finished
goods
Total

Trade receivables
9
Outstanding for a period exceeding six
months Other Amounts
12,25,000
Total
10,000
Cash and cash equivalents

Cash at bank with Scheduled

Banks with others (Global
BankLtd.)
Cash in hand

Total

225
Q-15 (a) The following balance appeared in the books of Oliva Company Ltd. as on 31-03-
2019.
Particulars ` Particulars `
Inventory 01-04-2018 Sales 17,10,000
-Raw Material 30,000 Interest 3,900
-Finished goods 46,500 76,500 Profit and Loss A/c 48,000
Purchases 12,15,00 Share Capital 3,15,000
0
Manufacturing Expenses 2,70,000 Secured Loans:
Short–term 4,500
Long-term 25,500
21,000
Salaries and wages 40,200 Fixed Deposits (unsecured):
Short -term 1,500
General Charges 16,500 Long - term 3,300 4,800
Interim Dividend 27,000 Trade payables 3,27,000
paid (inclusive of
Dividend Distribution Tax)
Building 1,01,000
Plant and Machinery 70,400
Furniture 10,200
Motor Vehicles 40,800
Stores and Spare Parts 45,000
Consumed

226
 Investments:
Current 4,500
Non-Current 7,500 12,000
Trade receivables 2,38,500
Cash in Bank 2,71,100

24,34,20 24,34,200
0
From the above balance and the following information, prepare the company’s Profit
and Loss Account for the year ended 31st March, 2019 and Company’s Balance Sheet
as on that date:

1. Inventory on 31st March,2019 Raw material ` 25,800 & finished goods ` 60,000.

2. Outstanding Expenses: Manufacturing Expenses ` 67,500 & Salaries & Wages `

4,500.

3. Interest accrued on Securities ` 300.

4. General Charges prepaid ` 2,490.

5. Provide depreciation: Building @ 2% p.a., Machinery @ 10% p.a., Furniture @

10% p.a. & Motor Vehicles @ 20% p.a.
6. Current maturity of long-term loan is ` 1,000.

7. The Taxation provision of 40% on net profit is considered.

227
(b)The following extract of Balance Sheet of X Ltd. (a non-investment company) was
obtained:

Balance Sheet (Extract) as on 31st March, 2019

Liabilities `
Authorized capital:
15,000, 14% preference shares of ` 100 15,00,000
1,50,000 Equity shares of ` 100 each 1,50,00,000
1,65,00,000
Issued and subscribed capital:
15,000, 14% preference shares of ` 100 each fully paid 15,00,000
1,20,000 Equity shares of ` 100 each, ` 80 paid-up 96,00,000
Capital reserves (` 1,50,000 is revaluation reserve) 1,95,000
Securities premium 50,000
15% Debentures 65,00,000
Investment in shares, debentures, etc. 75,00,000
Profit and Loss account (debit balance) 15,25,000
Youare required to compute Effective Capital as per the provisions of Schedule V to
the Companies Act,2013. [RTP Nov‘19]

Ans. (a) Oliva Company Ltd.

Statement of Profit and loss for the year ended 31.03.2019

(` )
Particulars Not Amou
e nt
I Revenue from operations 17,10,000
II Other income (3,900 +300) 4,200

228
III Total Revenue (I +II) 17,14,200
IV Expenses:
Cost of materials consumed 10 12,64,200
Purchases of inventory-in-trade --
Changes in inventories of finished goods, work-in-progress
and inventory-in-Trade 11 (13,500)
Employee benefit expenses 12 44,700
Finance costs --
Depreciation and amortization expenses 18,240
Other expenses 13 3,51,510
Total Expenses 16,65,150
V Profit before exceptional and extraordinary items and tax 49,050
VI Exceptional items --
VII Profit before extraordinary items and tax 49,050
VIII Extraordinary items --
I Profit before 49,050
X tax

X Tax expense of 19,620

(40% 49,050)

X Profit/Loss for period continui operations 29,430

I the from ng
Oliva Company Ltd.

Balance Sheet for the year ended 31.03.2019

Particulars Not Amount

229
 e
1 Equity and Liabilities
(i) Shareholders’ funds
(a) Share Capital 3,15,000
(b) Reserves and surplus 1 50,430
2) Non-current liabilities
(a) Long-term borrowings 2 23,300
(3) Current Liabilities
(a) Short -term borrowings 3 6,000
(b) Trade payables 3,27,000
(c) Other current liability 4 73,000
(d) Short term provision 5 19,620
8,14,350
II ASSETS
(1) Non-current assets
(a) Property, Plant & equipment
(i) Tangible assets 6 2,04,160
(b) Non-current investments 7,500
(2) Current assets
(a) Current investments 4,500
(b) Inventories 7 85,800
(c) Trade receivables 2,38,500
(d) Cash and cash equivalents 2,71,100
(e) Short-term loans and advances 8 2,490
(f) Other current assets 9 300

230
 8,14,350
Notes to accounts

No Particulars Amount Amount

1. Reserve & Surplus
Profit & Loss Account: Balance b/f 48,000
Net Profit for the year 29,430
Less: Interim Dividend including DDT (27,000) 50,430
2. Long term borrowings

Securedloans (21,000 less current maturities 20,000

1,000)

Fixed Deposits: Unsecured 3,300 23,300

3. Short term borrowings

Secured loans 4,500

Fixed Deposits -Unsecured 1,500 6,000

4. Other current liabilities

Expenses Payable (67,500 + 4,500) 72,000

Current maturities of long-term borrowings 1,000 73,000

5. Short term provisions

Provision for Income tax 19,620

6. Tangible Assets

Building 1,01,000

Less: Depreciation @ 2% (2,020) 98,980

231
 Plant & Machinery 70,400

Less: Depreciation @10% (7,040) 63,360

Furniture 10,200

Less: Depreciation @10% (1,020) 9,180

Motor vehicles 40,800

Less: Depreciation @20% (8,160) 32,640 2,04,160

7 Inventory:

Raw Material 25,800

Finished goods 60,000 85,800

8. Short term Loans & Advances

General Charges prepaid 2,490

9. Other Current Assets:

Interest accrued 300

10. Cost of material consumed

Opening inventory of raw Material & Stores 30,000

Add: Purchases 12,15,000

Stores & Spare parts consumed (45,000) 12,90,000

Less: Closing inventory (25,800) 12,64,200

11. Changes in inventory of Finished Goods &

WIP

Closing Inventory of Finished Goods 60,000

232
 Less: Opening Inventory of Finished Goods 46,500 13,500

12. Employee Benefit expenses

Salary & Wages (40,200 + 4,500) 44,700

13. Other Expenses:

Manufacturing Expenses 3,37,500

(2,70,000 +67,500)

General Charges (16,500 - 2,490) 14,010 3,51,510

(b) Computation of Effective Capital

Paid-up share capital-

15,000, 14% Preference shares 15,00,000
1,20,000 Equity shares 96,00,000
Capital reserves (excluding revaluation reserve) 45,000
Securities premium 50,000
15% Debentures 65,00,000
(A) 1,76,95,000
Investments 75,00,000
Profit and Loss account (Dr. balance) 15,25,000
(B) 90,25,000
Effective capital (A-B) 86,70,000
Q-16 Shweta Ltd. has the Authorized Capital of Rs. 15,00,000 consisting of 6,000 6%
Preference shares of Rs.100 each and 90,000 equity Shares of Rs.10 each. The following
was the Trial Balance of the Company as on 31st March, 2018:
Particulars Dr. Cr.

233
Investment in Shares at cost 1,50,000
Purchases 14,71,500
Selling Expenses 2,37,300
Inventory as at the beginning of the year 4,35,600
Salaries and Wages 1,56,000
Cash on Hand 36,000
Interim Preference dividend for the half year to 30th 18,000
September
Bills Receivable 1,24,500
Interest on Bank overdraft 29,400
Interest on Debentures up to 30th Sep (1st half year) 11,250
Debtors 1,50,300
Trade payables 2,63,550
Freehold property at cost 10,50,000
Furniture at cost less depreciation of Rs. 45,000 1,05,000
6% Preference share capital 6,00,000
Equity share capital fully paid up 6,00,000
5% mortgage debentures secured on Freehold properties 4,50,000
Income tax paid in advance for the current year 30,000
Dividends 12,750
Profit and Loss A/c (opening balance) 85,500
Sales (Net) 20,11,050
Bank overdraft secured by hypothecation of stocks and 4,50,000
receivables
Technical know-how fees at cost paid during the year 4,50,000

234
 Audit fees 18,000
Total 44,72,850 44,72,850
You are required to prepare the Profit and Loss Statement for the year ended 31st March,
2018 and the Balance Sheet as on 31st March, 2018 as per Schedule III of the
Companies Act, 2013 after taking into account the following -

1. Closing Stock was valued at Rs.4,27,500.

2. Purchases include Rs.15,000 worth of goods and articles distributed among valued
customers.

3. Salaries and Wages include Rs.6,000 being Wages incurred for installation of
Electrical Fittings which were recorded under "Furniture".

4. Bills Receivable include Rs. 4,500 being dishonored bills. 50% of which had been
considered irrecoverable.

5. Bills Receivable of Rs.6,000 maturing after 31st March were discounted.

6. Depreciation on Furniture to be charged at 10% on Written Down Value. Investment

in shares is to be treated as non-current investments.

7. Interest on Debentures for the half year ending on 31st March was due on that date.

9. Provide Provision for taxation Rs.12,000.

10. Technical Know-how Fees is to be written off over a period of 10 years.

11. Salaries and Wages include Rs.30,000 being Director's Remuneration.

12. Trade receivables include Rs.18,000 due for more than six months.

[RTP May‘19]

Ans. Statement of Profit and Loss of Shweta Ltd. for the year ended 31st March, 2018
Particular Not Rs.
e

235
 I Revenue from Operations 20,11,050
II Other income (Divided
income) 12,750

III Total Revenue (I &+ II)

IV Expenses: 20,23,800

(a) Purchases (14,71,500 - Advertisement Expenses 14,56,500

15,000)
(b) Changes in Inventories of finished
Goods / Work in progress (4,35,600 8,100
-4,27,500)
9
(c) Employee Benefits expense
1,20,000
(d) Finance costs
10
(e) Depreciation & Amortization Expenses [10% of
(1,05,000+6,000)] 51,900

(f) OtherExpense
11,100
11
Total Expenses
3,47,550

19,95,150

V Profit before exceptional, extraordinary items and tax (III- 28,650

IV) VI Exceptional items -
VII Profit before extra-ordinary items and tax (V-IV) 28,650
VIII Extraordinary items -
IX Profit before tax (VII-VI II) 28,650
X Tax expense:
Current Tax 12,000
XI Profit/Loss for the period (after tax) 16,650
236
 Balance sheet of Shweta Ltd. as on 31st March, 2018
Particular as on 31st March Note
I
(1) Shareholders' funds:
1 12,00,000
(a) Share capital
2 66,150
(b) Reserves and surplus
(2) Non-current liabilities: 3 4,50,000

Long term borrowings 4 4,50,000

(3) Current liabilities: 2,63,550
(a) Short term borrowings 5 29,250
(b) Trade payables 24,58,950

(c) Other current liabilities

Total
II ASSETS
6 11,49,900
(1) Non-current Assets
7 4,05,000
(a) Property, Plant & Equipment 1,50,000
(i) Tangible assets
4,27,500
(ii) Intangible assets
8 2,72,550
(b) Non-current investments (Shares at cost) 36,000
Current Assets:
18,000
(a) Inventories
24,58,950
(b) Trade receivables
(c) Cash and Cash equivalents - Cash on hand

237
 (d) Short term loans and advances -Income
tax (paid 30,000-Provision 12,000)
Total

Note: There is a Contingent liability for Bills receivable discounted with Bank Rs.6,000

238
 Notes to accounts

Rs.
1. Share Capital

Authorized
9,00,000
90,000 Equity Shares of Rs.10 each
6,00,000 15,00,000
6,000 6% Preference shares of Rs.100 each
Issued, subscribed & called up 6,00,000
60,000, Equity Shares of Rs.10 each 6,00,000 12,00,000
6,000 6% Redeemable Preference Shares of 100 each
85,500
2. Reserves and Surplus
16,650 1,02,150
Balance as on 1st April, 2017
36,000
Add: Surplus for current year
66,150
Less; Preference Dividend
Balance as on 31st March, 2018 4,50,000

3. Long Term Borrowings

5% Mortgage Debentures (Secured against Freehold Properties) 4,50,000

4. Short Term Borrowings 11,250

Secured Borrowings: Loans Repayable on Demand 18,000 29,250
Overdraft from Banks (Secured by Hypothecation of Stocks &
Receivables)
1,05,000
5. Other Current liabilities
45,000
Interest Accrued and due on Borrowings (5% 1,50,000
Debentures) Unpaid Preference Dividends
6,000

239
6. Tangible Fixed assets 1,56,000
Furniture
Furniture at Cost Less depreciation Rs.45,000 (as given in Trial
Balance Add: Depreciation
Cost of Furniture

Add: Installation charge of Electrical Fittings

56,100 99,900
wrongly included under the heading Salaries and
10,50,000
Wages Total Gross block of Furniture A/c
11,49,900
Accumulated Depreciation Account: Opening

Balance-given in Trial Balance 45,000

Depreciation for the year:

On Opening WDV at 10% i.e. (10%x 1,05,000) 10,500

On additional purchase during the year at 10% i.e. (10%x 6,000)

600

Less; Accumulated Depreciation

Freehold property (at cost)
7. Intangible Fixed Assets

Technical knowhow 4,50,000

Less; Written off 45,000 4,05,000

8. Trade Receivables
Sundry Debtors (a) Debt outstanding for more than six 18,000
months
(b) Other Debts (refer Working Note) 1,34,550
Bills Receivable (1,24,500 -4,500) 1,20,000 2,72,550

240
 9. Employee benefit
expenses 1,56,000

Amount as per Trial

Balance
Less; Wages incurred for installation of electrical fittings to be 6,000
capitalized
Less; Directors' Remuneration shown separately 30,000

Balance amount 1,20,000

10. Finance Costs

Interest on bank overdraft 29,400
Interest on debentures 22,500 51,900
11. Other Expenses
Payment to the auditors 18,000
Director's remuneration 30,000
Selling expenses 2,37,300
Technical knowhow written of (4,50,000/10) 45,000
Advertisement (Goods and Articles Distributed) 15,000
Bad Debts (4,500 x50%) 2,250 3,47,550
Working Note
Calculation of Sundry Debtors-Other debts
Sundry Debtors as given in Trial Balance 1,50,300
Add Back: Bill receivable Dishonored 4,500
1,54,800
Less: Bad Debts written off - 50% Rs.4,500 (2,250)
Adjusted Sundry Debtor 1,52,550

241
 Less: Debts due for more than 6 months (as per information given) (18,000)
Total of other Debtors i.e., Debtors outstanding for less than 6 months 1,34,550
Q-17 The following extract of Balance Sheet of Gaurav Ltd. was
obtained:

Balance Sheet (Extract) as on 31st March, 2018

Liabilities Rs.
Authorized capital:
90,000, 14% preference shares of Rs.100 90,00,000
9,00,000 Equity shares of Rs.100 each 9,00,00,000
9,90,00,000
Issued and subscribed capital:
67,500, 14% preference shares of Rs.100 each fully paid 67,50,000
5,40,000 Equity shares of Rs.100 each, Rs.80 paid-up 4,32,00,000
Share suspense account 90,00,000
Reserves and surplus
Capital reserves (Rs.6,75,000 is revaluation reserve) 8,87,500
Securities premium 2,25,000
Secured loans:
15% Debentures 2,92,50,000
Unsecured loans:
Public deposits 16,65,000
Cash credit loan from SBI (short term) 5,92,500
Current Liabilities:
Trade Payables 15,50,500
Assets:

242
 Investment in shares, debentures, etc. 3,37,50,000
Profit and Loss account (Dr. balance) 68,62,500

Share suspense account represents application money received on shares, the allotment
of which is not yet made. You are required to compute effective capital as per the
provisions of Schedule V. Would your answer differ if Gaurav Ltd.is an investment
company? [RTP May ‘19]

Ans. Computation of effective capital:

Where Gaurav Ltd. is a Where Gaurav Ltd. is an

non- investment company investment company

Paid-up share capital - 67,500, 67,50,000 67,50,000

14% Preference shares
5,40,000 Equity shares 4,32,00,000 4,32,00,000
Capital reserves 2,02,500 2,02,500
Securities premium 2,25,000 2,25,000
15% Debentures 2,92,50,000 2,92,50,000
Public Deposits 16,65,000 16,65,000
(A) 8,12,92,500 8,12,92,500
Investments 3,37,50,000 -
Profit and Loss account (Dr. 68,62,500 68,62,500
balance)
(B) 4,06,12,500 68,62,500
Effective capital (A-B) 4,06,80,000 7,44,30,000

243
Q-18 The following is the Draft Profit & Loss A/c of Harsha Ltd., the year ended 31st March,
20X1:
` `
To” Administrative, Selling and By Balance b/d 28,61,750
distribution expenses 41,12,710 Balance from 201,26,825
”” Directors fees 6,73,900 Trading A/c
Interest on debentures 1,56,200 “
” Managerial remuneration 14,26,750 13,69,625
Depreciation on fixed assets
” 26,12,715 “ Subsidies received
Provision for Taxation
” 62,12,500 from Govt.
General Reserve
” 20,00,000
Investment Revaluation
Reserve 62,500
” Balance c/d 71,00,925

243,58,200 243,58,200
Depreciation on fixed assets as per Schedule II of the Companies Act, 2013 was `
28,76,725. You are required to calculate the maximum limits of the managerial
remuneration as per Companies Act, 2013.

[RTP-May’2020]

Ans. Calculation of net profit u/s 198 of the Companies Act, 2013

` `
Balance from Trading A/c 201,26,825
Add: Subsidies received from Government 13,69,625

244
 214,96,450
Less: Administrative, selling and distribution expenses 41,12,710
Director’s fees 6,73,900
Interest on debentures 1,56,200
Depreciation on fixed assets as per Schedule II 28,76,725 (78,19,535)
Profit u/s 198 136,76,915

Maximum Managerial remuneration under Companies Act, 2013 = 11% of `

136,76,915= ` 15,04,461

Q-19 The following extract of Balance Sheet of Gaurav Ltd. was

obtained:

Balance Sheet (Extract) as on 31st March, 2018

Liabilities Rs.
Authorized capital:
90,000, 14% preference shares of Rs.100 90,00,000
9,00,000 Equity shares of Rs.100 each 9,00,00,000
9,90,00,000
Issued and subscribed capital:
67,500, 14% preference shares of Rs.100 each fully paid 67,50,000
5,40,000 Equity shares of Rs.100 each, Rs.80 paid-up 4,32,00,000
Share suspense account 90,00,000
Reserves and surplus
Capital reserves (Rs.6,75,000 is revaluation reserve) 8,87,500
Securities premium 2,25,000

245
 Secured loans:
15% Debentures 2,92,50,000
Unsecured loans:
Public deposits 16,65,000
Cash credit loan from SBI (short term) 5,92,500
Current Liabilities:
Trade Payables 15,50,500
Assets:
Investment in shares, debentures, etc. 3,37,50,000
Profit and Loss account (Dr. balance) 68,62,500
Share suspense account represents application money received on shares, the allotment
of which is not yet made. You are required to compute effective capital as per the
provisions of Schedule V. Would your answer differ if Gaurav Ltd.is an investment
company? [RTP May ‘19]

Ans. Computation of effective capital:

Where Gaurav Where Gaurav
Ltd.is a non- Lts. is an
investment company investment company
Paid-up share capital - 67,500, 67,50,000 67,50,000
14% Preference shares
5,40,000 Equity shares 4,32,00,000 4,32,00,000
Capital reserves 2,02,500 2,02,500
Securities premium 2,25,000 2,25,000
15% Debentures 2,92,50,000 2,92,50,000
Public Deposits 16,65,000 16,65,000

246
 (A) 8,12,92,500 8,12,92,500
Investments 3,37,50,000 -
Profit and Loss account (Dr. 68,62,500 68,62,500
balance)
(B) 4,06,12,500 68,62,500
Effective capital (A-B) 4,06,80,000 7,44,30,000

Q20.Following is the draft Profit & Loss Account of X Ltd. for the year ended 31st March,
2020:
Amount Amount
(`) (`)
To Administrative 5,96,400 By Balance b/d 7,25,300
Expenses
To Advertisement 1,10,500 By Balance 42,53,650
Expenses from Trading
A/c
To Sales 1,05,550 By Subsidies 3,50,000
Commission received from
Government
To Director's fees 1,48,900
To Interest on -56,000
Debentures
To Managerial 3,05,580
Remuneration
To Depreciation on 5,78,530
Fixed Assets
To Provision for 12,50,600

247
 taxation
To General Reserve 5,50,000
To Investment 25,800
Revaluation Reserve
To Balance c/d 16,01,090
53,28,950 53,28,950

Depreciation on Fixed Assets as per Schedule II of the Companies Act, 2013 was` 6,51,750.
You are required to calculate the maximum limits of the managerial remuneration as per
Companies Act, 2013.
[Sugg Nov2020] [ 4marks]

Ans. Calculation of net profit of X Ltd. as per the Companies Act, 2013

` `

Balance from Trading A/c 42,53,650

Add: Subsidies received from Government 3,50,000
46,03,6

Less: Administrative expenses 5,96,40 50

Advertisement 0
expenses Sales 1,10,50
commission 0
1,05,5
50

Director’s fees 1,48,900

Interest on debentures 56,000
Depreciation on fixed assets as per 6,51,750 (16,69,1

248
 Schedule II 00)

Profit u/s 198 29,34,5

50

Maximum Managerial remuneration under Companies Act, 2013 = 11% of ` 29,34,550

= ` 3,22,800 (rounded off).

Q21.The following is the Draft Profit & Loss A/c of Brown Ltd. the year
ended 31st March,2020:

Amount Amount
(`) (`)

To Administrative 4,99,200 By Balance 6,27,550

expenses b/d
To Advertisement 1,18,200 By Balance
from
To Commission on sales 95,225 Trading A/c 38,15,890
To Director’s Fees 1,35,940 By
Subs
idies

To Interest on debentures 28,460 received 2,50,000

from Govt.

To Managerial 2,75,550 By Profit on 20,000

remuneration sale of
4,82,565
forfeited
To Depreciation on fixed
shares
assets
To Provision for Taxation 11,50,200

249
 To General Reserve 4,50,000
To Investment Revaluation 52,800
Reserve
To Balance c/d 14,25,300

47,13,440 47,13,440
Depreciation on fixed assets as per Schedule II of the Companies Act, 2013 was` 5,15,675.
You are required to calculate the maximum limit of managerial remuneration as per
Companies Act, 2013.
[Sugg Jan 2021] [ 4marks]

Ans. Calculation of net profit u/s 198 of the Companies Act, 2013
` `
Balance from Trading A/c 38,15,890

Add: Subsidies received from Government 2,50,000

40,65,890
Less: Administrative, selling and 7,12,625
distribution
expens 1,35,940
es (4,99,200 + 1,18,200 + 95,225) 28,460
Director’s fees 5,15,675
Interest on (13,92,700)

debentures 26,73,190
Depreciation on fixed assets as per
Schedule II

Profit u/s 198

250
 Maximum Managerial remuneration under Companies Act, 2013= 11% of ` 26,73,190
= ` 2,94,051 (rounded off).
Note:

1. Investment Revaluation reserve not to be deducted for calculation of profit

under section 198;

2. Profit on sale of forfeited shares not to added for calculation of profit under
section 198.

*Alternative presentation of the above answer also possible by starting from

Net profit as per Profit and Loss Account.

Q22. Om Ltd. has authorized capital of ` 50 lakhs divided into 5,00,000 equity shares
of ` 10 each. Their books show the following ledger balances as on 31st March, 2021:
` `
Inventory 1.4.2020 6,65,000 Bank Current Account (Dr. 20,000
balance)
Discounts & Rebates allowed 30,000 Cash in hand 11,000
Carriage Inwards 57,500
Purchases 12,32,500 Calls in Arrear @ ` 2 per
share 10,000

Rate, Taxes and Insurance 55,000 Equity share capital 20,00,000

Furniture & Fixtures 1,50,000 (2,00,000 shares of ` 10
each)
Business Expenses 56,000 Trade Payables 2,40,500
Wages 14,79,000 Sales 36,17,000
Freehold Land 7,30,000 Rent (Cr.) 30,000
Plant & Machinery 7,50,000 Transfer fees received 6,500

251
 Engineering Tools 1,50,000 Profit & Loss A/c (Cr.) 67,000
Trade Receivables 4,00,500 Repairs to Building 56,500
Advertisement Expenses 15,000 Bad debts 25,500
Commission & Brokerage 67,500
Expenses

The inventory (valued at cost or market value, which is lower) as on 31 st March, 2021 was
` 7,05,000. Outstanding liabilities for wages ` 25,000 and business expenses ` 36,500. It was
decided to transfer ` 10,000 to reserves.Charge depreciation on written down values of Plant
& Machinery @ 5%, Engineering Tools @ 20% and Furniture & Fixtures @10%. Provide
` 25,000 as doubtful debts for trade receivables. Provide for income tax @ 30%. It was
decided to transfer ` 10,000 to reserves.You are required to prepare Statement of Profit &
Loss for the year ended 31st March, 2021 and Balance Sheet as at that date.
[RTP May 2021]
Ans. Balance Sheet of Om Ltd. as at 31st March, 2021

Particulars Note No. (`)

I Equity and Liabilities
(1) Shareholders' Funds
(a) Share Capital 1 19,90,000
(b) Reserves and Surplus 2 3,82,000
(2) Current Liabilities
(a) Trade Payables 2,40,500
(b) Other Current Liabilities 3 61,500
(c) Short-Term Provisions 4 1,35,000
Total 28,09,000
II ASSETS

252
(1) Non-Current Assets
(a) Property, Plant and Equipment 5 16,97,500

(2) Current Assets

(a) Inventories 7,05,000
(b) Trade Receivables 6 3,75,500
(c) Cash and Cash Equivalents 7 31,000
Total 28,09,000

Statement of Profit and Loss of Om Ltd. for

the year ended 31st March, 2021
Particulars Note (`)
No.
I Revenue from Operations 36,17,000
II Other Income 8 36,500
III Total Revenue [I + II] 36,53,500
IV Expenses:
Cost of purchases 12,32,500
Changes in Inventories [6,65,000- (40,000)
7,05,000]
Employee Benefits Expenses 9 15,04,000
Depreciation and Amortization 82,500
Expenses
Other Expenses 10 4,24,500
Total Expenses 32,03,500
V Profit before Tax (III-IV) 4,50,000

253
 VI Tax Expenses @ 30% (1,35,000)
VI Profit for the period 3,15,000
I

Notes to Accounts:

1. Share Capital
Authorized Capital
5,00,000 Equity Shares of ` 10 each 50,00,000

Issued Capital
2,00,000 Equity Shares of ` 10 each 20,00,000
Subscribed Capital and fully paid
1,95,000 Equity Shares of `10 each 19,50,000
Subscribed Capital but not fully paid
5,000 Equity Shares of `10 each ` 8 paid 40,000
(Call unpaid `10,000) 19,90,000

2. Reserves and Surplus

General Reserve 10,000
Surplus i.e. Balance in Statement of Profit & Loss:
Opening Balance 67,000
Add: Profit for the period 3,15,000
Less: Transfer to Reserve (10,000)3,72,000
3,82,000

3.Other Current Liabilities

Outstanding Expenses [25,000+36,500] 61,500

4.Short-term Provisions

254
 Provision for Tax 1,35,000

12. Property, Plant and Equipment

Particulars Value Depreciation Depreciation Written down value
given rate Charged at the end
(`) (`) (`)
Land 7,30,000 - 7,30,000
Plant & 7,50,000 5% 37,500 7,12,500
Machinery
Furniture & 1,50,000 10% 15,000 1,35,000
Fixtures
Engineering 1,50,000 20% 30,000 1,20,000
Tools
17,80,000 82,500 16,97,500

13. Trade Receivables

Trade receivables 4,00,500
Less: Provision for doubtful debts (25,000)
3,75,500

14. Cash & Cash Equivalent

Cash Balance 11,000
Bank Balance in current A/c 20,000
31,000

15. Other Income

Miscellaneous Income (Transfer fees) 6,500
Rental Income 30,000
36,500

255
 16. Employee benefits expenses
Wages 14,79,000
Add: Outstanding wages 25,000
15,04,000

17. Other Expenses

Carriage Inwards 57,500
Discount & Rebates 30,000
Advertisement 15,000
Rate, Taxes and Insurance 55,000
Repairs to Buildings 56,500
Commission & Brokerage 67,500
Miscellaneous Expenses [56,000+36,500] 92,500
(Business Expenses)
Bad Debts 25,500
Provision for Doubtful Debts 25,000
4,24,500

Q23. XYZ Ltd. is having inadequacy of profits in the year ending 31-03-2021 and it
proposes to declare 10% dividend out of General Reserves.

From the following particulars ascertain the amount that can be utilized from general
reserves, according to the Companies (Declaration of Dividend out of Reserves) Rules, 2014:

5,00,000 Equity Shares of ` 10 each fully paid up 50,00,000

General Reserves 25,00,000
Revaluation Reserves 6,50,000
Net profit for the year 1,42,500

256
Average rate of dividend during the last five years has been 12%.
[RTP May 2021]

Ans. Amount that can be drawn from reserves for (10% dividend on ` 50,00,000 i.e.`
5,00,000)

Profits available

Current year profit ` 1,42,500

Amount which can be utilized from reserves (` 5,00,000 – 1,42,500) ` 3,57,500 Conditions
as per Companies (Declaration of dividend out of Reserves) Rules, 20X1:

Condition I
Since 10% is lower than the average rate of dividend (12%), 10% dividend can be declared.

Condition II

Maximum amount that can be drawn from the accumulated profits and reserves should not
exceed 10% of paid up capital plus free reserves ie. ` 7,50,000 [10% of (50,00,000 +
25,00,000)]
Condition III

The balance of reserves after drawl ` 21,42,500 (` 25,00,000 - ` 3,57,500) should not fall
below 15 % of its paid up capital ie. ` 7,50,000 (15% of ` 50,00,000]

Since all the three conditions are satisfied, the company can withdraw ` 3,57,500 from
accumulated reserve (as per Declaration and Payment of Dividend Rules, 2014).

Q24. Mohit Ltd. provides the following information as on 31st March, 2021:
Liabilities `
Authorized capital:
1,00,000, 14% preference shares of `100 1,00,00,000

257
 10,00,000 Equity shares of `100 each 10,00,00,000
11,00,00,000

Issued and subscribed capital:

77,500, 14% preference shares of ` 100 each fully paid 77,50,000
5,40,000 Equity shares of ` 100 each, ` 80 paid-up 4,32,00,000
Share suspense account 90,00,000
Reserves and surplus
Capital reserves (` 5,00,000 is revaluation reserve) 8,77,500
Securities premium 2,25,000
Secured loans:
15% Debentures 2,92,50,000
Unsecured loans:
Public deposits 16,65,000
Cash credit loan from SBI (short term) 5,92,500
Current Liabilities:
Trade Payables 15,52,500
Assets:
Investment in shares, debentures, etc. 3,50,50,000
Profit and Loss account (Dr. balance) 68,50,000

Share suspense account represents application money received on shares, the allotment of
which is not yet made. You are required to compute effective capital as per the provisions
of Schedule V if Mohit Ltd is non-investment company. Would your answer differ if Mohit
Ltd. is an investment company?
[RTP May2021]

258
Ans Computation of effective capital:
Where Mohit Ltd.is a Where Mohit Ltd.is an
non- investment investment company
company
Paid-up share capital
—
77,500, 14% 77,50,000 77,50,000
Preference shares
5,40,000 Equity 4,32,00,000 4,32,00,000
shares
Capital reserves 3,77,500 3,77,500
Securities premium 2,25,000 2,25,000
15% Debentures 2,92,50,000 2,92,50,000
Public Deposits 16,65,000 16,65,000
(A) 8,24,67,500 8,24,67,500
Investments 3,50,50,000 -
Profit and Loss 68,50,000 68,50,000
account (Dr.
balance)
(B) 4,19,00,000 68,50,000
Effective capital (A– 4,05,67,500 7,56,17,500
B)

Q25. On 31st March, 2020, Om Ltd. provides to you the following ledger balances
after preparing its Profit and Loss Account for the year ended 31st March, 2020:

Credit Balances

259
 `
Equity shares capital (fully paid shares of ` 10 1,05,00,000
each)
General Reserve 21,84,000
Loan from State Finance Corporation 15,75,000
(Secured by hypothecation of Plant &
Machinery - Repayable
within one year ` 3,00,000)
Loans: Unsecured (Long term) 12,70,500
Sundry Creditors for goods &
expenses (Payable within 6 21,00,000
months)
Profit & Loss Account 10,50,000
Provision for Taxation 12,25,350
199,04,850

NOVEMBER, 2020 Debit Balances :

`
Calls in arrear 10,500
Land 21,00,000
Buildings 30,75,000
Plant and Machinery 55,12,500
Furniture & Fixture 5,25,000
Inventories : Finished goods 21,00,000
Raw Materials 5,25,000
Trade Receivables 21,00,000
Advances: Short-term 4,48,350

260
 Cash in hand 3,15,000
Balances with banks 25,93,500
Patents & Trade marks 6,00,000
199,04,850

The following additional information is also provided in respect of the above balances:

(i) 6,30,000 fully paid equity shares were allotted as consideration for land &
buildings.

(ii) Cost of Building ` 42,00,000 Cost of Plant

& Machinery ` 73,50,000 Cost of
Furniture & Fixture ` 6,56,250
(iii) Trade receivables for ` 5,70,000 are due for more than 6 months.

(iv) The amount of Balances with Bank includes ` 27,000 with a bank which is not a
scheduled Bank and the deposits of ` 7,50,000 are for a period of 9 months.

(v) Unsecured loan includes ` 3,00,000 from a Bank and ` 1,50,000 from related
parties.

You are not required to give previous year figures. You are required to prepare the Balance
Sheet of the Company as on 31st March, 2020 as required under Schedule III of the
Companies Act, 2013.
[RTP Nov 2020]
Ans. Om Ltd.
Balance Sheet as on 31st March, 2020
Particulars Not Figures at the
es end of current
reporting period
(`)

261
Equity and Liabilities
1 Shareholders' funds
a Share capital 1 1,04,89,500
b Reserves and Surplus 2 32,34,000
2 Non-current liabilities
a Long-term borrowings 3 25,45,500
3 Current liabilities
a Trade Payables 21,00,000
b Other current liabilities 4 3,00,000
c Short-term provisions 5 12,25,350
Total 1,98,94,350
Assets
1 Non-current assets
a Property, Plant and 6 1,12,12,500
Equipment
b Intangible assets (Patents
& Trade Marks) 6,00,000
2 Current assets
a Inventories 7 26,25,000
b Trade receivables 8 21,00,000
c Cash and cash equivalents 9 29,08,500
d Short-term loans and 4,48,350
advances
Total 1,98,94,350

Notes to accounts

262
 `
1 Share Capital
Equity share capital
Issued, subscribed and called up
10,50,000 Equity Shares of 1,05,00,0

` 10 each (Out of the above 00

6,30,000 shares

have been issued for

consideration other than
cash) (10,50 1,04,89,5
Less: Calls in arrears 0) 00
Total 1,04,89,5
00
2 Reserves and Surplus
General Reserve 21,84,000
Surplus (Profit & Loss A/c) 10,50,000
Total 32,34,000
3 Long-term borrowings
Secured
Term Loans
Loan from State Finance
Corporation (` 15,75,000
less ` 3,00,000)
(Secured by hypothecation of 12,75,000
Plant

263
 and Machinery)

Unsecured
Bank Loan 3,00,000
Loan from related parties 1,50,000
Others 8,20,500 12,70,500
Total 25,45,500
4 Other current liabilities
Loan Instalment repayable
within one year 3,00,000
5 Short-term provisions
Provision for taxation 12,25,350
6 Property, Plant and Equipment
Land 21,00,000
Buildings 42,00,000
Less: Depreciation (11,25,000 30,75,000
)
Plant & Machinery 73,50,000
Less: Depreciation (18,37,500 55,12,500
)
Furniture & Fittings 6,56,250
Less: Depreciation (1,31,250) 5,25,000
Total 1,12,12,5
00
7 Inventories
Raw Material 5,25,000

264
 Finished goods 21,00,000
26,25,000
8 Trade receivables
Debts outstanding for a
period exceeding six 5,70,000
months
Other Debts 15,30,000
Total 21,00,000
9 Cash and cash equivalents
Cash at bank with 25,66,5
Scheduled Banks including 00
Bank deposits for period of
9 months amounting `
7,50,000
with others 27,00 25,93,500
Cash in hand 0 3,15,000
Total 29,08,500

Q26. Kartik Ltd. is a non-investment company and has been incurring losses for the
past few years. The company provides the following information for the current year:
(` in lakhs)
Paid up equity share capital 270
Paid up Preference share capital 45

Reserves (including Revaluation reserve ` 22.5 337.5

lakhs)

265
 Securities premium 90
Long term loans 90
Deposits repayable after one year 45
Application money pending allotment 1620
Accumulated losses not written off 45
Investments 405

Kartik Ltd. has only one whole-time director, Mr. Kumar. You are required to
calculate the amount of maximum remuneration that can be paid to him as per
provisions of the Companies Act, 2013, if no special resolution is passed at the
general meeting of the company in respect of payment of remuneration.
[RTP Nov2020]
Ans. Calculation of effective capital and maximum amount of monthly remuneration
(` in lakhs)
Paid up equity share capital 270
Paid up Preference share capital 45
Reserve excluding Revaluation reserve (337.5- 315
22.5)
Securities premium 90
Long term loans 90
Deposits repayable after one year 45
855
Less: Accumulated losses not written off (45)
Investments (405)
Effective capital for the purpose of managerial 405
remuneration

266
 Since Kartik Ltd. is incurring losses and no special resolution has been passed by
the company for payment of remuneration. Effective capital of the company is less
than 5 crores, maximum remuneration payable to the Managing Director should
be @` 60,00,000 per annum.
Note: Revaluation reserve and application money pending allotment are not
included while computing effective capital of Kartik Ltd.

Q27. Star Ltd. gives the following information the year ended 31st March, 2021:
`
Gross profit 60,38,048
Subsidies received from Govt. 4,10,888
Administrative, Selling and distribution 12,33,813
expenses
Directors’ fees 2,02,170
Interest on debentures 46,860
Managerial remuneration 4,28,025
Depreciation on Property, plant and equipment 7,83,815
(PPE)
Provision for Taxation 18,63,750
Transfer to General Reserve 6,00,000
Transfer to Investment Revaluation Reserve 18,750

Depreciation on PPE as per Schedule II of the Companies Act, 2013 was ` 8,63,018

You are required to calculate the maximum amount of the managerial remuneration as
allowed as per Companies Act, 2013.
[RTP Nov 2021]

Ans. Calculation of net profit u/s 198 of the Companies Act, 2013

267
 ` `
Gross profit 60,38,048
Add: Subsidies received from 4,10,888
Government
64,48,936
Less: Administrative, selling and
12,33,8
distribution expenses
13
Director’s fees 2,02,17
0
Interest on debentures 46,860
Depreciation on PPE as per 8,63,0 (23,45,861)
Schedule II 18
Profit u/s 198 41,03,075

Maximum Managerial remuneration under Companies Act, 2013= 11% of ` 41,03,075

= ` 4,51,338
Q28. State under which head these accounts should be classified in Balance Sheet, as per
Schedule III of the Companies Act, 2013:

(i) Share application money received in excess of issued share capital.

(ii) Share option outstanding account.

(iii) Unpaid matured debenture and interest accrued thereon.

(iv) Uncalled liability on shares and other partly paid investments.

(v) Calls unpaid. [RTP Nov 2021]

Ans. (i) Current Liabilities/ Other Current Liabilities

(ii) Shareholders' Fund / Reserve & Surplus

268
 (iii) Current liabilities/Other Current Liabilities

(iv) Contingent Liabilities and Commitments

(v) Shareholders' Fund / Share Capital

Q29.Om Ltd. has the Authorised Capital of ` 15,00,000 consisting of 6,000 6%

Redeemable Preference shares of ` 100 each and 90,000 equity Shares of `10 each. The
following was the Trial Balance of the Company as on 31st March, 2021:
Particulars Dr. Cr.
Investment in shares at cost (non-current 1,50,000
investment)
Purchases 14,71,500
Selling expenses 2,37,300
Inventory as at the beginning of the year 4,35,600
Salaries and wages (included ` 30,000
1,56,000
being Director's Remuneration)
Cash on hand 84,000
Bills receivable 1,24,500
Interest on Bank overdraft 29,400

Interest on debentures upto 30th Sep (1st 11,250

half year)
Trade receivables and trade payables 1,50,300 2,63,550
Freehold property at cost 10,50,000
Furniture at cost less depreciation of ` 1,05,000
45,000
6% Redeemable Preference share capital 6,00,000
Equity share capital fully paid up 6,00,000

269
 5% mortgage debentures secured on 4,50,000
freehold properties
Dividends 12,750
Profit and Loss A/c (opening balance) 85,500
Sales (Net) 20,11,050
Bank overdraft (secured by hypothecation
of stocks and receivables) 4,50,000
Technical knowhow fees (cost paid 4,50,000
during the year)
Audit fees 18,000

Total 44,72,850 44,72,850

Other Information:

1. Closing Stock was valued at ` 4,27,500.

2. Purchases include ` 15,000 worth of goods and articles distributed among

valued customers.

3. Salaries and Wages include ` 6,000 being Wages incurred for installation of
Electrical Fittings which were recorded under "Furniture".

4. Bills Receivable include ` 4,500 being dishonoured bills. 50% of which had
been considered irrecoverable.

5. Bills Receivable of ` 6,000 maturing after 31st March were discounted.

6. Depreciation on Furniture to be charged at 10% on Written Down Value.

7. Interest on Debentures for the half year ending on 31st March was due on that
date.

8. Technical Knowhow Fees is to be written off over a period of 10 years.

270
 9. Trade receivables include ` 18,000 due for more than six months.

You are required to prepare the Balance Sheet as at 31st March, 2021 and Statement
of Profit and Loss for the year ended 31st March, 2021 as per Schedule III to the
Companies Act, 2013 after taking into account the above information. Ignore
taxation.
[RTP Nov 2021 ]
Ans. Balance sheet of Om Ltd. as at 31st March, 2021
Not (`)
e
I Equity and Liabilities
(1) Shareholders’ funds:
(a) Share capital 1 12,00,00
0
(b) Reserves and surplus 2 1,14,150

(2) Non-current liabilities:

Long term borrowings 3 4,50,000
(3) Current liabilities:
(a) Short term borrowings 4 4,50,000
(b) Trade payables 2,63,550
(c) Other current liabilities 5 11,250
Total 24,88,95
0
II ASSETS

271
 (1) Non- Current Assets:
(a) Property, plant and equipment 6 11,49,90
0
(b) Intangible assets 7 4,05,000
(c) Non-current investments (Shares at 1,50,000
cost)
(2) Current Assets:
(a) Inventories 4,27,500
(b) Trade receivables 8 2,72,550
(c) Cash and Cash equivalents – Cash on 84,000
hand
Total 24,88,95
0

Note: There is a Contingent liability for Bills receivable discounted with Bank ` 6000.

Statement of Profit and Loss of Om Ltd. for the year ended 31st March, 2021
Particulars Not `
e
I Revenue from Operations 20,11,05
0
II Other income (Dividend income) 12,750
III Total Revenue (I &+ II) 20,23,80
0
IV Expenses:
(a) Purchases of Inventory (14,71,500 – 14,56,50
Advertisement Expenses 15,000) 0

272
 (b) Changes in Inventories of finished 8,100
Goods / Work in progress & inventory
(4,35,600 – 4,27,500)
(c) Employee Benefits expense 9 1,20,000
(d) Finance costs 10 51,900
(e) Depreciation &
11,100
Amortization Expenses
[10% of (1,05,000 + 6,000)]
(f) Other Expenses 11 3,47,550

Total Expenses 19,95,15

0
V Profit before exceptional, extraordinary 28,650
items and tax
VI Exceptional items -
VII Profit before extra-ordinary items and tax 28,650
VII Extraordinary items -
I
IX Profit before tax 28,650

Notes to accounts
(`)
1. Share Capital
Authorized capital:
90,000 Equity Shares of ` 10 each. 9,00,00
0

273
 6,000 6% Preference shares of ` 100 6,00,00
each 0
Issued, subscribed & called up:
60,000, Equity Shares of ` 10 each 6,00,00
0 12,00,0
6,000 6% Redeemable Preference Shares 6,00,00 00
of 100 each 0
2. Reserves and Surplus
Balance as on 1st April, 2020 85,500
Add: Surplus for current year 28,650
Balance as on 31st March, 2021 1,14,150
3. Long Term Borrowings
5% Mortgage Debentures (Secured 4,50,000
against Freehold Properties)
4. Short Term Borrowings
Secured Borrowings: Loans Repayable 4,50,000
on Demand Overdraft from Banks
(Secured by Hypothecation of Stocks &
Receivables)
5. Other Current liabilities
Interest due on Borrowings (5% 11,250
Debentures)
6. Property, plant and equipment
Furniture
Furniture at Cost Less depreciation

274
` 45,000 (as given in Trial Balance 1,05,00
0
Add: Depreciation 45,000
Cost of Furniture 1,50,00
0
Add: Installation charge of Electrical
Fittings wrongly included under the
heading Salaries and Wages

6,00
0
Total Gross block of Furniture A/c 1,56,00
0
Accumulated Depreciation
Account: Opening Balance-given
in Trial Balance
45,0
00
Depreciation for the year:
On Opening WDV at 10% i.e.
(10% x 1,05,000) 10,500
On additional purchase during the year
at 10% i.e. (10% x 6,000) 600
Less: Accumulated Depreciation 56,100 99,900
Freehold property (at cost) 10,50,00
0

275
 11,49,90
0
7. Intangible Assets
Technical knowhow 4,50,00
0
Less: Written off 45,000 4,05,000
8. Trade Receivables
Sundry Debtors (a) Debt outstanding 18,000
due more than six months
(b) Other Debts (refer Working 1,34,55
Note) 0
Bills Receivable (1,24,500 -4,500) 1,20,00 2,72,550
0
9. Employee benefit expenses
Salaries & Wages 1,56,00
0
Less: Wages incurred for 6,000
installation of electrical fittings to
be capitalised
Less: Directors’ Remuneration shown 30,000
separately
Balance amount 1,20,000
10. Finance Costs
Interest on bank overdraft 29,400
Interest on debentures 22,500

276
 51,900
11. Other Expenses
Payment to the auditors 18,000
Director’s remuneration 30,000
Selling expenses 2,37,30
0
Technical knowhow written of 45,000
(4,50,000/10)
3,47,5
Advertisement (Goods and Articles 15,000
50
Distributed)
Bad Debts (4,500 x 50%) 2,250

Working Note:
Calculation of Sundry Debtors-Other Debts
Sundry Debtors as given in Trial Balance 1,50,300
Add Back: Bills Receivables Dishonoured 4,500
1,54,800
Less: Bad Debts written off – 50% ` 4,500 (2,250)
Adjusted Sundry Debtors 1,52,550
Less: Debts due for more than 6 months (as per information given) (18,000)
Total of other Debtors i.e. Debtors outstanding for less than 6 months1,34,550

Q30.From the following particulars furnished by Alpha Ltd., prepare the Balance Sheet as on 31st
March 2020 as required by Part I, Schedule III of the Companies Act, 2013.
Particulars Debit Rs. Credit Rs.
Equity Share Capital (Face value of Rs. 50,00,000
100 each)

277
 Call in Arrears 5,000
Building 27,50,000
Plant & Machinery 26,25,000
Furniture 2,50,000
General Reserve 10,50,000
Loan from State Financial Corporation 7,50,000
Inventory:
Raw Materials 2,50,000
Finished Goods 10,00,000 12,50,000
Provision for Taxation 6,40,000
Trade receivables 10,00,000
Short term Advances 2,13,500
Profit & Loss Account 4,33,500
Cash in Hand 1,50,000
Cash at Bank 12,35,000
Unsecured Loan 6,05,000
Trade payables (for Goods and Expenses) 8,00,000
Loans & advances from related parties 2,00,000

The following additional information is also provided:

(i) 10,000 Equity shares were issued for consideration other than cash.

(ii) Trade receivables of Rs. 2,60,000 are due for more than 6 months.

(iii) The cost of the Assets were:

Building Rs. 30,00,000, Plant & Machinery Rs. 35,00,000 and Furniture Rs. 3,12,500

(iv) The balance of Rs. 7,50,000 in the Loan Account with State Finance Corporation is inclusive

278
 of Rs. 37,500 for Interest Accrued but not Due. The loan is secured by hypothecation of
Plant & Machinery.

(v) Balance at Bank includes Rs. 10,000 with Omega Bank Ltd., which is not a Scheduled
Bank.

(vi) Transfer Rs. 20,000 to general reserve as proposed by Board of directors.

[MTP May 2021 ] ( 15 marks)
Ans. Alpha Ltd.

Balance Sheet as at 31st March, 2020

Particulars Note Rs.
s
Equity and
1 Liabilities
Shareholders'
a 1 49,95,000
funds Share
b 2 14,83,500
capital Reserves
2 and Surplus Non-
3 13,17,500
current liabilities
Long-term
3 8,00,000
borrowings
a
4 37,500
Current
b
liabilities Trade 5 6,40,000

Payables 2,00,000
c
Other current 94,73,500
liabilities Short-
d
term provisions Tota
Short-term l
6 56,25,000

279
 borrowings
1 7 12,50,000
Assets 8 10,00,000

2 Non-current assets 9 13,85,000

Property, Plant & 2,13,500
a equipment Current 94,73,500
b assets
Inventories
c Trade receivables

Cash and bank balances

d
Short-term loans and advances Tota
l

Notes to accounts

Rs.
1 Share Capital
Equity share capital
Issued & subscribed & called up
50,000 Equity Shares of Rs. 100 each
(of the above 10,000 shares have been issued
50,00,000
for consideration other than cash)
Less: Calls in arrears (5,000) 49,95,000
Total 49,95,000
2 Reserves and Surplus
General Reserve 10,50,000

280
Add: current year transfer 20,000 10,70,000

281
with others (Omega Bank Ltd.) 12,35,000
10,00
0
Cash in hand 1,50,000
Other bank balances Nil
Total 13,85,000

282
Q31.The following extract of Balance Sheet of X Ltd. (a non-investment company) was obtained:

Balance Sheet (Extract) as on 31st March, 2020

Liabilities Rs.
Issued and subscribed capital:
20,000, 14% preference shares of Rs. 100 each fully paid 20,00,000
1,20,000 Equity shares of Rs. 100 each, Rs. 80 paid-up 96,00,000
Capital reserves (Rs. 1,50,000 is revaluation reserve) 1,95,000
Securities premium 50,000
15% Debentures 65,00,000
Unsecured loans: Public deposits repayable after one year 3,70,000
Investment in shares, debentures, etc. 75,00,000
Profit and Loss account (debit balance) 15,00,000

You are required to compute Effective Capital as per the provisions of Schedule V to Companies Act,
2013. [MTP May 2021 ] ( 4 marks )

Ans. Computation of effective capital:

Rs.
Paid-up share capital-
20,000, 14% Preference shares 20,00,000
1,20,000 Equity shares 96,00,000
Capital reserves (excluding revaluation 45,000
reserve)
Securities premium 50,000
15% Debentures 65,00,000
Public Deposits 3,70,000

283
 (A) 1,85,65,000
Investments 75,00,000
Profit and Loss account (Dr. balance) 15,00,000
(B) 90,00,000
Effective capital (A–B) 95,65,000

Q32.You are required to prepare a Balance Sheet as at 31 st March 2020, as per Schedule III of the
Companies Act, 2013, from the following information of Mehar Ltd.:
Particulars Amount Particulars Amount
(Rs.) (Rs.)
Term Loans (Secured) 40,00,000 Investments (Non- 9,00,000
current)
Trade payables 45,80,000 Profit for the year 32,00,000
Cash and Bank Balances 38,40,000 Trade receivables 49,00,000
Staff Advances 2,20,000 Miscellaneous Expenses 2,32,000
Other advances (given by 14,88,000 Loan from other parties 8,00,000
Co.)
Provision for Taxation 10,20,000 Provision for Doubtful 80,000
Debts
Securities Premium 19,00,000 Stores 16,00,000
Loose Tools 2,00,000 Finished Goods 30,00,000
General Reserve 62,00,000 Plant and Machinery 2,14,00,000
(WDV)

Additional Information: -

1. Share Capital consists of-

(a) 1,20,000 Equity Shares of Rs. 100 each fully paid up.

284
 (b) 40,000, 10% Redeemable Preference Shares of Rs. 100 each fully paid up.

2. Write off the amount of Miscellaneous Expenses in full, amounting Rs. 2,32,000.
[ MTP May 2021 ] ( 14 marks )

Ans. Balance Sheet of Mehar Ltd. as at 31 st March, 2020

Not Rs.
e
I EQUITY AND LIABILITIES:
(1) (a) Share Capital 1 1,60,00,000

(b) Reserves and Surplus 2 110,68,000

(2) Non-current

Liabilities Long 40,00,000

(3) term Borrowings-

Terms Loans
45,80,000
(Secured)
3 8,00,000
Current Liabilities
10,20,000
(a) Trade Payables
3,74,68,000
(b) Other current liabilities
II
(1) (c) Short-term Provisions (Provision for taxation)
Tot 4 214,00,000
al
9,00,000
ASSET
(2)
S
5 48,00,000
Non-current Assets
6 48,20,000
(a) Property, Plant andEquipment
38,40,000

285
 (b) Non- current Investments 7 17,08,000

Current Assets: 3,74,68,000

(a) Inventories
(b) Trade Receivables
(c) Cash and Cash Equivalents
(d) Short-term Loans andAdvances

Total

Notes to accounts
(Rs.)
1. Share Capital

Authorized, issued, subscribed & 1,20,00,000

called up 1,20,000,EquityShares
40,00,000 1,60,00,000
ofRs.100 each
2.
40,000 10% Redeemable PreferenceShares of 100
19,00,000
each
62,00,000
Reserves and Surplus
Securities Premium Account
General reserve
Profit & Loss Balance
Opening balance -
Profit for the period 32,00,000
Less: Miscellaneous (2,32,000) 29,68,000 110,68,000
Expenditure written off
3.
Other current liabilities
8,00,000

286
 4. Loan from other parties
Property,plant and 214,00,000
5. equipment Plant and
Machinery (WDV) 30,00,000
Inventories 16,00,000
Finished Goods
2,00,000 48,00,000
Stores
6.
Loose Tools
49,00,000
Trade Receivables
(80,000) 48,20,000
Trade receivables
7.
Less: Provision for Doubtful 2,20,000
Debts Short term loans &
14,88,000 17,08,000
Advances Staff
Advances*
Other Advances*

Q33. XYZ Ltd. proposes to declare 10% dividend out of General Reserves due to inadequacy of profits in
the year ending 31-03-2020.

From the following particulars ascertain the amount that can be utilized from general reserves,
according to the Companies Rules, 2014: (Rs.)
8,00,000 Equity Shares of Rs. 10 each fully paid up 80,00,000
General Reserves 25,00,000
Revaluation Reserves 6,50,000
Net profit for the year 1,42,500
Average rate of dividend during the last five years has been 12%.
[MTP May 2021 ] ( 5 marks )

287
Ans. Amount that can be drawn from reserves for (10% dividend on Rs. 80,00,000 i.e. Rs. 8,00,000)

Profits available

Current year profit Rs. 1,42,500

Amount which can be utilized from reserves (Rs. 8,00,000 – 1,42,500) Rs. 6,57,500

Conditions as per Companies (Declaration of dividend out of Reserves) Rules, 2014:

Condition I
Since 10% is lower than the average rate of dividend (12%), 10% dividend can be declared.

Condition II

Maximum amount that can be drawn from the accumulated profits and reserves should not
exceed 10% of paid up capital plus free reserves ie. Rs. 10,50,000 [10% of (80,00,000 +
25,00,000)]

Condition III

The balance of reserves after drawl Rs. 18,42,500 (Rs. 25,00,000 - Rs. 6,57,500) should not fall
below 15 % of its paid up capital ie. Rs. 12,00,000 (15% of Rs. 80,00,000]

Since all the three conditions are satisfied, the company can withdraw Rs. 6,57,500 from
accumulated reserve (as per Declaration and Payment of Dividend Rules, 2014).

Q34. X Ltd. (a non-investment company) provides the following information as on 31st March, 2020
was obtained:
Rs.
Issued and subscribed capital:
15,000, 14% preference shares of Rs. 100 each fully paid 15,00,000
1,20,000 Equity shares of Rs. 100 each, Rs. 80 paid-up 96,00,000
Capital reserves (Rs. 1,50,000 is revaluation reserve) 1,95,000
Securities premium 50,000

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 15% Debentures 65,00,000
Investment in shares, debentures, etc. 75,00,000
Profit and Loss account (debit balance) 15,25,000
You are required to compute Effective Capital as per the provisions of Schedule V to the Companies Act,
2013. [MTP May 2021 ] ( 5 marks )

Ans. Computation of Effective Capital

Rs.
Paid-up share capital-
15,000, 14% Preference shares 15,00,000
1,20,000 Equity shares 96,00,000
Capital reserves (excluding revaluation 45,000
reserve)
Securities premium 50,000
15% Debentures 65,00,000
(A) 1,76,95,000
Investments 75,00,000
Profit and Loss account (Dr. balance) 15,25,000
(B) 90,25,000
Effective capital (A–B) 86,70,000

Q35.Shree Ltd. has authorized capital of ` 50 lakhs divided into 5,00,000 equity shares of ` 10 each.
Their books show the following balances as on 31 st March, 2020:

` `
Inventory 1.4.2019 6,65,000 Bank balance in Current 20,000

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 Account
Discounts & Rebates 30,000 Cash in hand 8,000
allowed
Carriage Inwards 57,500 Interest (bank overdraft) 1,11,000
Patterns 3,75,000 Calls in Arrear @ `2 per 10,000
share
Rate, Taxes and Insurance 55,000 Equity share capital 20,00,000
Furniture & Fixtures 1,50,000 (2,00,000 shares of ` 10
each)
Purchases 12,32,500 Bank Overdraft 12,67,000
Wages 13,68,000
Freehold Land 16,25,000 Trade Payables (for goods) 2,40,500
Plant & Machinery 7,50,000 Sales 36,17,000
Engineering Tools 1,50,000 Rent (Cr.) 30,000
Trade Receivables 4,00,500 Transfer fees received 6,500
Advertisement 15,000 Profit & Loss A/c (Cr.) 67,000
Commission & Brokerage 67,500 Repairs to Building 56,500
(Dr.)
Business Expenses 56,000 Bad debts 25,500

You are required to prepare Statement of Profit & Loss for the year ended 31 st March, 2020 and Balance
Sheet as on that date in line with Schedule III to the Companies Act, 2013 after considering the following:

The inventory (valued at cost or market value, which is lower) as on 31st March, 2020 was` 7,08,000.
Outstanding liabilities for wages ` 25,000 and business expenses ` 36,000.

Charge depreciation on closing written down value of Plant & Machinery @ 5%, Engineering Tools @ 20%;
Patterns @ 10%; and Furniture & Fixtures @10%. Provide 25,000 as doubtful debts after writing off ` 16,000

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as additional bad debts. Provide for income tax @ 30%.
[MTP May 2020] ( 16marks)
Ans. Balance Sheet of Shree Ltd. as at 31st March, 2020

Particul Note (`)

ars No.
I Equity and Liabilities
(1) Shareholders' Funds 1 19,90,000
(a) Share Capital 2 3,47,000
(b) Reserves and Surplus
2,40,500
(2) Current Liabilities
3 13,28,000
(a) Trade Payables 4 1,20,000
(b) Other Current Liabilities 40,25,500
II (c) Short-Term Provisions
Tot
al
ASSET
S
(1) Non-Current Assets

(i) Property,plantand Equipment 5 29,30,000

(2) (PPE)
Current Assets 7,08,000

(a) Inventories 6 3,59,500

7 28,000
(b) Trade Receivables
40,25,500
(c) Cash and Cash

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 Equivalents Total

Shree Ltd.

Statement of Profit and Loss for the year ended 31st March, 2020
Particulars Note (`)
No.
I Revenue from Operations 36,17,000
II Other Income 8 36,500
III Total Revenue [I + II] 36,53,500
IV Expenses:
Cost of purchases 12,32,500
Changes in Inventories [6,65,000-7,08,000] (43,000)
Employee Benefits Expenses 9 13,93,000
Finance Costs 10 1,11,000
Depreciation and Amortization Expenses 1,20,000
Other Expenses 11 4,40,000
Total Expenses 32,53,500
V Profit before Tax (III-IV) 4,00,000
V Tax Expenses @ 30% (1,20,000)
I
V Profit for the period 2,80,000
II

Notes to Accounts:

1. Share Capital

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 Authorised Capital
5,00,000 Equity Shares of ` 10 each 50,00,000
Issued Capital
2,00,000 Equity Shares of ` 10 each 20,00,000
Subscribed Capital and fully paid
1,95,000 Equity Shares of `10 each 19,50,000
Subscribed Capital but not fully paid
5,000 Equity Shares of `10 each ` 8 paid 40,000
(Call unpaid `10,000) 19,90,000

2. Reserves and Surplus

Surplus i.e. Balance in Statement of
Profit & Loss:
Opening Balance 67,000
Add: Profit for the period 2,80,000 3,47,00
0

3. Other Current Liabilities

Bank Overdraft 12,67,000
Outstanding Expenses [25,000+36,000] 61,000

Provision for Tax 1,20,000

13,28,000

4. Short-term Provisions

5. PPE

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 Particulars Value given Depreciation Depreciation Written
(`) rate Charged down value at
(`) the end
(`)
Land 16,25,000 - 16,25,000
Plant & Machinery 7,50,000 5% 37,500 7,12,500
Furniture & Fixtures 1,50,000 10% 15,000 1,35,000
Patterns 3,75,000 10% 37,500 3,37,500
Engineering Tools 1,50,000 20% 30,000 1,20,000
30,50,000 1,20,000 29,30,000

6.Trade Receivables
Trade receivables (4,00,500-16,000) 3,84,500
Less: Provision for doubtful debts (25,000)
3,59,500

7.Cash & Cash Equivalent

Cash Balance 8,000
Bank Balance in current A/c 20,000
28,000

8.Other Income
Miscellaneous Income (Transfer fees) 6,500
Rental Income 30,000
36,500

9.Employee benefits expenses

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 Wages 13,68,000
Add: Outstanding wages 25,000
13,93,000

10. Finance Cost

Interest on Bank overdraft 1,11,000

11.Other Expenses
Carriage Inward 57,500
Discount & Rebates 30,000
Advertisement 15,000
Rate, Taxes and Insurance 55,000
Repairs to Buildings 56,500
Commission & Brokerage 67,500
Miscellaneous Expenses [56,000+36,000] (Business 92,000
Expenses)
Bad Debts [25,500+16,000] 41,500
Provision for Doubtful Debts 25,000
4,40,000

Q36. Medha Ltd. took a loan from bank for ` 10,00,000 to be settled within 5 years in 10 equal half yearly
instalments with interest. First instalment is due on 30.09.2020 of ` 1,00,000. Determine how the loan will be
classified in preparation of Financial Statements of Medha Ltd. for the year ended 31st March, 2020
according to Schedule III. [MTP May 2020] ( 4 marks)
Ans. As per Schedule III, a liability should be classified as current when it satisfies any of the following

295
criteria:

(i) it is expected to be settled in the company’s normal operating cycle;

(ii) it is held primarily for the purpose of being traded;

(iii) it is due to be settled within twelve months after the reporting date; or

(iv) the company does not have an unconditional right to defer settlement of the liability for at
least twelve months after the reporting date.

In the given case, instalments due on 30.09.2020 and 31.03.2021 will be shown under the head
‘other current liabilities’. Therefore, in the balance sheet as on 31.3.2020, ` 8,00,000 (`
1,00,000 x 8 instalments) will be shown under the heading ‘Long term Borrowings’ and `
2,00,000 (` 1,00,000 x 2 instalments) will be shown under the heading ‘Other Current
Liabilities’ as current maturities of loan from bank.

Q37. On 31st March, 2020, SR Ltd. provides the following ledger balances after preparing its Profit
&Loss Account for the year ended 31st March, 2020.
Particulars Amount (Rs.)
Debit Credit
Equity Share Capital, fully paid shares of Rs. 50 each 80,00,000
Calls in arrear 15,000
Land 25,00,000
Buildings 30,00,000
Plant & Machinery 24,00,000
Furniture &Fixture 13,00,000
Securities Premium 15,00,000
General Reserve 9,41,000
Profit & Loss Account 5,80,000

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 Loan from Public Finance Corporation (Secured by 26,30,000
Hypothecation of Land)
Other Long Term Loans 22,50,000
Short Term Borrowings 4,60,000
Inventories: Finished goods 45,00,000
Raw materials 13,00,000
Trade Receivables 17,50,000
Advances: Short Term 3,75,000
Trade Payables 8,13,000
Provision for Taxation 3,80,000
Dividend payable 70,000
Cash in Hand 70,000
Balances with Banks 4,14,000
Total 1,76,24,000 1,76,24,000

The following additional information was also provided in respect of the above balances:

(1) 50,000 fully paid equity shares were allotted as consideration for land.

(2) The cost of assets were:

Building Rs. 32,00,000

Plant and Machinery Rs. 30,00,000
Furniture and Fixture Rs. 16,50,000

(3) Trade Receivables for Rs. 4,86,000 due for more than 6 months.

(4) Balances with banks include Rs. 56,000, the Naya bank, which is not a scheduled bank.

(5) Loan from Public Finance Corporation repayable after 3 years.

(6) The balance of Rs. 26,30,000 in the loan account with Public Finance Corporation is inclusive of
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 Rs. 1,34,000 for interest accrued but not due. The loan is secured by hypothecation of land.
Loan taken from Nixes Bank Rs. 13,80,000
(Amount repayable within one year Rs. 4,80,000)
Loan taken from Directors Rs. 8,50,000

(7) Other long-term loans (unsecured) include:

(8) Bills Receivable for Rs. 1,60,000 maturing on 15th June, 2020 has been discounted.

Loan from Naya bank Rs. 1,16,000 (Secured)

Loan from directors Rs. 48,000

(9) Short term borrowings include:

(10) Transfer of Rs. 35,000 to general reserve has been proposed by the Board of directors out of the
profits for the year.

(11) Inventory of finished goods includes loose tools costing Rs. 5 lakhs (which do not meet
definition of property, plant & equipment as per AS 10)

You are required to prepare the Balance Sheet of the Company as on March 31st 2020 as required
under Part – I of Schedule III of the Companies Act, 2013. Ignore previous year figures.

[ MTP May 2020 ](20 Marks)

Ans. SR Ltd.

Balance Sheet as on 31st March, 2020

298
Notes to accounts

299
Note: There is a Contingent Liability amounting Rs. 1,60,000

300
 Q38. The following extract of Balance Sheet of X Ltd. as on 31.3.2020 (a non-investment company)
was obtained:
Liabilities `
Issued and subscribed capital:
20,000, 14% preference shares of ` 100 each fully paid 20,00,000
1,20,000 Equity shares of ` 100 each, ` 80 paid-up 96,00,000
Capital reserves (` 1,50,000 is revaluation reserve) 1,95,000
Securities premium 50,000
15% Debentures 65,00,000
Unsecured loans: Public deposits repayable after one year 3,70,000
Investment in shares, debentures, etc. 75,00,000
Profit and Loss account (debit balance) 15,00,000

You are required to compute Effective Capital as per the provisions of Schedule V to Companies Act,
2013. [ MTP Nov 2020] ( 5 marks )
Ans. Computation of effective capital:
`
Paid-up share capital-
20,000, 14% Preference shares 20,00,000
1,20,000 Equity shares 96,00,000
Capital reserves (excluding revaluation 45,000
reserve)
Securities premium 50,000
15% Debentures 65,00,000
Public Deposits 3,70,000

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 (A) 1,85,65,000
Investments 75,00,000
Profit and Loss account (Dr. balance) 15,00,000
(B) 90,00,000
Effective capital (A–B) 95,65,000

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 UNIT II

CASH FLOW STATEMENT

Q-1 The following information was provided by PQR Ltd. for the year ended 31st March,
2019:

(1) Gross Profit Ratio was 25% for the year, which amounts to ` 3,75,000.

(2) Company sold goods for cash only.

(3) Opening inventory was lesser than closing inventory by ` 25,000.

(4) Wages paid during the year ` 5,55,000.

(5) Office expenses paid during the year ` 35,000.

(6) Selling expenses paid during the year ` 15,000.

(7) Dividend paid during the year ` 40,000 (including dividend distribution tax).

(8) Bank Loan repaid during the year ` 2,05,000 (included interest ` 5,000)

(9) Trade Payables on 31st March, 2018 were ` 50,000 and on 31st March, 2019 were `
35,000.

(10) Amount paid to Trade payables during the year ` 6,10,000

(11) Income Tax paid during the year amounts to `

55,000 (Provision for taxation as on 31st March,
2019 ` 30,000).
(12) Investments of ` 8,20,000 sold during the year at a profit of ` 20,000.

(13) Depreciation on furniture amounts to ` 40,000.

303
 (14) Depreciation on other tangible assets amounts to ` 20,000.

(15) Plant and Machinery purchased on 15th November, 2018 for ` 3,50,000.

(16) On 31st March, 2019 ` 2,00,000, 7% Debentures were issued at face value in an
exchange for a plant.

(17) Cash and Cash equivalents on 31st March, 2018 ` 2,25,000.

(A) Prepare cash flow statement for the year ended 31st March, 2019, using direct
method.

(B) Calculate cash flow from operating activities, using indirect method.

[Sugg.May‘19, 10Marks]

Ans. PQR Ltd.

Cash Flow Statement for the year ended 31st March, 2019

(Using direct method)

Particulars ` `
Cash flows from Operating
Activities Cash sales (` 15,00,000
3,75,000/25%) (6,10,000)
Less: Cash payments for trade
(5,55,000)
payables Wages Paid
(50,000) (12,15,000)
Office and selling expenses ` (35,000 + 15,000)

Cash generated from operations before taxes 2,85,000

Income tax paid (55,000)
Net cash generated from operating activities (A) 2,30,000
Cash flows from Investing activities
Sale of investments ` (8,20,000 + 20,000) 8,40,000

304
 Payments for purchase of Plant & machinery (3,50,000)
Net cash used in investing activities (B) 4,90,000
Cash flows from financing activities
Bank loan repayment (including interest) (2,05,000)
Dividend paid (including dividend distribution tax) (40,000)
Net cash used in financing activities (C) (2,45,000)
Net increase in cash (A+B+C) 4,75,000
Cash and cash equivalents at beginning of the period 2,25,000
Cash and cash equivalents at end of the period 7,00,000
(ii) ‘Cash Flow from Operating Activities’ by indirect
method
`
Net Profit for the year before tax and extraordinary items 2,80,000
Add: Non-Cash and Non-Operating Expenses:
Depreciation 60,000
Interest Paid 5,000
Less: Non-Cash and Non-Operating Incomes:
Profit on Sale of Investments (20,000)
Net Profit after Adjustment for Non-Cash Items 3,25,000
Less: Decrease in trade payables 15,000
Increase in inventory 25,000 (40,000)
Cash generated from operations before taxes 2,85,000
Working Note:

Calculation of net profit earned during the year

` `

305
 Gross profit 3,75,000
Less: Office expenses, selling expenses 50,000
Depreciation 60,000
Interest paid 5,000 (1,15,000)
2,60,000
Add: Profit on sale of investments 20,000
Net profit before tax 2,80,000
Q-2 J Ltd. presents you the following information for the year ended 31st March, 2019:
(Rs. in lacs)
(i) Net profit before tax provision 36,000
(ii) Dividend paid 10,202
(iii) Income-tax paid 5,100
(iv) Book value of assets sold 222
Loss on sale of asset 48
(v) Depreciation debited to P & L account 24,000
(vi) Capital grant received - amortized to P & L A/c 10
(vii) Book value of investment sold 33,318
Profit on sale of investment 120
(viii) Interest income from investment credited to P & L A/c 3,000
(ix) Interest expenditure debited to P & L A/c 12,000
(x) Interest actually paid (Financing activity) 13,042
(xi) Increase in working capital 67,290
[Excluding cash and bank balance]
(xii) Purchase of fixed assets 22,092

306
 (xiii) Expenditure on construction work 41,688
(xiv) Grant received for capital projects 18
(xv) Long term borrowings from banks 55,866
(xvi) Provision for Income-tax debited to P & L A/c 6,000
Cash and bank balance on 1.4.2018 6,000
Cash and bank balance on 31.3.2019 8,000
Youare required to prepare a cash flow statement as per AS-3 (Revised).
[MTP Oct. ‘19, 12 Marks]
Ans. Cash Flow Statement as per AS 3
Rs. in lacs
Cash flows from operating activities: 36,000
Net profit before tax provision
Add: Non cash expenditures:
Depreciation 24,000
Loss on sale of assets 48
Interest expenditure (non-operating 12,000 36,048
activity)
72,048
Less: Non cash income
Amortization of capital grant received (10)
Profit on sale of investments (non-operating (120)
income)
Interest income from investments (non-operating (3,000) 3,130
income)

307
 Operating profit 68,918
Less: Increase in working capital (67,290)
Cash from operations 1,628
Less: Income tax paid (5,100)
Net cash generated from operating activities (3,472)
Cash flows from investing activities:
Sale of assets (222. 48) 174
Sale of investments (33,318+120) 33,438
Interest income from investments 3,000
Purchase of fixed assets (22,092)
Expenditure on construction work (41,688)
Net cash used in investing activities (27,168)
Cash flows from financing activities:
Grants for capital projects 18
Long term borrowings 55,866
Interest paid (13,042)
Dividend paid (10,202)
Net cash from financing activities 32,640
Net increase in cash 2,000
Add: Cash and bank balance as on 1.4.2018 6,000
Cash and bank balance as on 31.3.2019 8,000
Q-3 The following figures have been extracted from the books of X Limited for the year ended
on 31.3.2019.
You are required to prepare a cash flow statement as per AS 3 using indirect method.

(i) Net profit before taking into account income tax and income from law suits but

308
 after taking into account the following items was ` 20 lakhs:
(a) Depreciation on Property, Plant & Equipment ` 5lakhs.

(b) Discount on issue of Debentures written off ` 30,000.

(c) Interest on Debentures paid ` 3,50,000.

(d) Book value of investments ` 3 lakhs (Sale of Investments for `

3,20,000). (e) Interest received on investments ` 60,000.
(f) Compensation received ` 90,000 by the company in a suit filed.

(ii) Income tax paid during the year ` 10,50,000.

(iii) 15,000, 10% preference shares of ` 100 each were redeemed on 31.3.2019 at a
premium of 5%. Further the company issued 50,000 equity shares of ` 10 each at a
premium of 20% on 2.4.2018. Dividend on preference shares were paid at the
time of redemption.

(iv) Dividend paid for the year 2017-2018 ` 5 lakhs and interim dividend paid ` 3
lakhs for the year 2018-2019.
(v) Land was purchased on 2.4.2018 for ` 2,40,000 for which the company issued 20,000
equity shares of ` 10 each at a premium of 20% to the land owner as
consideration.
(vi) Current assets andcurrent liabilitiesinthe beginningandat the endof the years
were asdetailed below:

As on 31.3.2018 As on 31.3.2019

` `
Inventory 12,00,000 13,18,000
Trade receivables 2,58,000 2,53100
Cash in hand 1,96,300 35,300
Trade payables 2,11,000 2,11,300

309
 Outstanding expenses 75,000 81,800
[RTP-May’20]

Ans. X Ltd.

Cash Flow Statement

for the year ended 31st March, 2019

` `
Cash flow from Operating Activities
Net profit before income tax and extraordinary items: 20,00,000
Adjustments for:
Depreciation on PPE 5,00,000
Discount on issue of debentures 30,000
Interest on debentures paid 3,50,000
Interest on investments received (60,000)
Profit on sale of investments (20,000) 8,00,000
Operating profit before working capital changes 28,00,000
Adjustments for:
Increase in inventory (1,18,000
)
Decrease in trade receivable 4,900
Increase in trade payables 300
Increase in outstanding expenses 6,800 (1,06,000)
Cash generated from operations 26,94,000
Income tax paid (10,50,000
)
16,44,000

310
 Cash flow from extraordinary items:
Compensation received in a suit filed 90,000
Net cash flow from operating activities 17,34,000
Cash flow from Investing Activities
Sale proceeds of investments 3,20,000
Interest received on investments 60,000
Net cash flow from investing activities 3,80,000
Cash flow from Financing Activities
Proceeds by issue of equity shares at 20% premium 6,00,000
Redemption of preference shares at 5% premium (15,75,000)
Preference dividend paid (1,50,000)
Interest on debentures paid (3,50,000)
Dividend paid (5,00,000 + 3,00,000) (8,00,000)
Net cash used in financing activities (22,75,000)
Net decrease in cash and cash equivalents during the (1,61,000)
year
Add: Cash and cash equivalents as on 31.3.2018 1,96,300
Cash and cash equivalents as on 31.3.2019 35,300
Note: Purchase of land in exchange of equity shares (issued at 20% premium) has not
been considered in the cash flow statement as it does not involve any cash
transaction.
Q-4 From the following information, prepare a Cash Flow Statement for the year ended 31st
March, 2019.

Balance Sheets

311
 Particulars Not 31.03.2019 31.03.2018
e (` ) (` )
I EQUITY AND LIABILITES

(1) Shareholder’s Funds

(a) Share Capital 1 3,50,000 3,00,000

(b) Reserves and Surplus 2 82,000 38,000

(2) Non-Current Liabilities

(3) Current Liabilities 65,000 44,000

3 37,000 27,000
(a) Trade Payables
32,000 28,000
(b) Other Current Liabilities
5,66,000 4,37,000
(c) Short term Provisions (provision for
tax)
4 2,66,000 1,90,000
Total
47,000 60,000
II ASSETS
35,000 10,000
(1) Non-current Assets

(a) Tangible Assets 78,000 85,000

1,08,000 75,000
(b) Intangible Assets (Goodwill)
32,000 17,000
Non-Current Investments
5,66,000 4,37,000
(2) Current Assets

(a) Inventories

(b) Trade Receivables

(c) Cash & Cash Equivalents

Total

312
 Note 1: Share Capital

Particulars 31.03.2019 (`) 31.03.2018 (`)

Equity Share Capital 2,50,000 1,50,000
8% Preference Share Capital 1,00,000 1,50,000
Total 3,50,000 3,00,000
Note 2: Reserves and Surplus
Particulars 31.03.2019 (`) 31.03.2018 (`)
General Reserve 30,000 20,000
Profit and Loss A/c 27,000 18,000
Capital Reserve 25,000

Total 82,000 38,000

Note 3: Current Liabilities
Particulars 31.03.2019(`) 31.03.2018 (`)
Dividend declared 37,000 27,000
Note 4: Tangible Assets
Particulars 31.03.2019 (`) 31.03.2018 (`)
Land & Building 75,000 1,00,000
Machinery 1,91,000 90,000
Total 2,66,000 1,90,000
Additional Information:
(i) ` 18,000 depreciation for the year has been written off on plant and machinery and
no depreciation has been charged on Land and Building.
(ii) A piece of land has been sold out for ` 50,000 and the balance has been revalued,
profit on such sale and revaluation being transferred to capital reserve. There is no
313
 other entry in Capital Reserve Account.
(iii) A plant was sold for ` 12,000 WDV being ` 15,000 on the date of sale (after charging
depreciation).
(iv) Dividend received amounted to ` 2,100 which included pre-acquisition dividend of
` 600.
(v) An interim dividend of ` 10,000 including Dividend Distribution Tax has been paid.
(vi) Non-current investments given in the balance sheet represents investment in
shares of other companies.
(vii) Amount of provision for tax existing on 31.3.2018 was paid during the year 2018-19.
[RTP Nov ‘19]
Ans. Cash flow Statement for the year ending 31st March, 2019
Particulars ` `
1 Cash Flow from Operating Activities
A. Closing balance as per Profit and Loss Account 27,000
Less: Opening balance as per Profit and Loss Account (18,000)
Add: Dividend declared during the year 37,000
Add: Interim dividend paid during the year 10,000
Add: Transfer to reserve 10,000
Add: Provision for Tax 32,000
B. Net profit before taxation, and extra-ordinary item 98,000

C. Add: Items to be added

Depreciation 18,000

Loss on sale of Plant 3,000 34,000

Goodwill written off 13,000 (1,500)

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 D. Less: Dividend Income 1,30,500

E. Operating profit before working capital changes [B + C - D]

F. Add: Decrease in Current Assets and Increase in Current 28,000

Liabilities Decrease in Inventories (33,000)
7,000 1,25,500
Increase in Trade Payables 21,000 (28,000)

G. Less: Increase in Trade Receivables 97,500

H Cash generated from operations (1,34,000)
(E+F-G) I Less: Income taxes paid
50,000
J Net Cash from (used in) operating
12,000
activities Cash Flows from
(25,600)
investing activities: Purchase of
II. 2,100
Plant
(95,500)
Sale of Land
Sale of plant 1,00,000
Purchase of (50,000)
investments
(10,000)
Dividend
(27,000)
Received
13,000
Net cash used in investing activities
15,000
III. Cash Flows from Financing Activities:
17,000
Proceeds from issue of equity share
32,000
capital Redemption of preference shares
Interim Dividend (inclusive of
DDT) paid Final dividend
(inclusive of DDT) paid Net

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 cash from financing activities
Net increase in cash and cash equivalents (I+II+III)
Cash and cash equivalents at beginning of
IV.
period Cash and cash equivalents at end
V.
of period (IV+V)
VI.
1. Land and BuildingAccount
Particulars ` Particulars `
To Balance b/d 1,00,000 By Bank A/c 50,00
To Capital Reserve A/c 25,000 (Sale) By 0
(Profit on Balance c/d 75,00
sale/revaluation) 0
1,25,000 1,25,000
2. Plant and Machinery Account

Particulars ` Particulars `
To Balance b/d 90,000 By Depreciation A/c 18,000
To Bank A/c (Purchase) 1,34,000 By Bank A/c (sale) 12,000
By Profit and Loss, A/c 3,000
(Loss on sale)
By Balance c/d 1,91,000
2,24,000 2,24,000
3. Investments Account
Particulars ` Particulars `
To Balance b/d 10,000 By Bank A/c (Div. 600
received)
To bank A/c (Purchase 25,600 By Balance c/d 35,000

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 35,600 35,600
Q-5 Preet Ltd. presents you the following information for the year ended 31st March, 2019:
(Rs. in lacs)
(i) Net profit before tax provision 72,000
(ii) Dividend paid 20,404
(iii) Income-tax paid 10,200
(iv) Book value of assets sold 444
Loss on sale of asset 96
(v) Depreciation debited to P & L account 48,000
(vi) Capital grant received - amortized to P & L A/c 20
(vii) Book value of investment sold 66,636
Profit on sale of investment 240
(viii) Interest income from investment credited to P & LA/c 6,000
(ix) Interest expenditure debited to P & L A/c 24,000
(x) Interest actually paid (Financing activity) 26,084
(xi) Increase in working capital 1,34,580
[Excluding cash and bank balance]
(xii) Purchase of fixed assets 44,184
(xiii) Expenditure on construction work 83,376
(xiv) Grant received for capital projects 36
(xv) Long term borrowings from banks 1,11,732
(xvi) Provision for Income-tax debited to P & L A/c 12,000
Cash and bank balance on 1.4.2018 12,000
Cash and bank balance on 31.3.2019 16,000
You are required to prepare a cash flow statement as per AS-3 (Revised). [RTP May ‘19]

317
Ans. Cash Flow Statement as per AS 3
Rs. in lacs
Cash flows from operating activities:
Net profit before tax provision 72,000
Add: Non cash expenditures:
Depreciation 48,000
Loss on sale of assets 96
Interest expenditure (non-operating activity) 24,000 72,096
1,44,096
Less: Non cash income
Amortization of capital grant received (20)
Profit on sale of investments (non-operating income) (240)
Interest income from investments (non-operating income) (6,000) 6,260
Operating profit 1,37,836
Less; Increase in working capital 1,34,580
Cash from operations 3,256
Less; Income tax paid 10,200
Net cash generated from operating activities 6944
Cash flows from investing activities:
Sale of assets (444 - 96) 348
Sale of investments (66,636+240) 66,876
Interest income from investments 6,000
Purchase of fixed assets 44,184
Expenditure on construction work 83,376
Net cash used in investing activities 54,336

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 Cash flows from financing activities:
Grants for capital projects 36
Long term borrowings 1,11,732
Interest paid 26,084
Dividend paid 20,404
Net cash from financing activities 65,280
Net increase in cash 4,000
Add: Cash and bank balance as on 1.4.2018 12,000
Cash and bank balance as on 31.3.2019 16,000
Q-6 The Balance Sheet of Harry Ltd. for the year ending 31st March, 2018 and 31st
March, 2017 were summarized as follows:
2018 (Rs.) 2017 (Rs.)
Equity share capital 1,20,000 1,00,000
Reserves:
Profit and Loss Account 9,000 8,000
Current Liabilities:
Trade Payables 8,000 5,000
Income tax pay able 3,000 2,000
Declared Dividends 4,000 2,000
1,44,000 1,17,000
Fixed Assets (at W.D.V):
Building 19,000 20,000
Furniture & Fixture 34,000 22,000
Cars 25,000 16,000
Long Term Investments 32,000 28,000

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 Current Assets:
Inventory 14,000 8,000
Trade Receivables 8,000 6,000
Cash & Bank 12,000 17,000
1,44,000 1,17,000

The Profit and Loss account for the year ended 31st March, 2018
disclosed:
Rs.
Profit before tax 8,000
Income Tax (3,000)
Profit after tax 5,000
Declared Dividends (4,000)
Retained Profit 1,000
Further Information is available:

1. Depreciation on Building Rs.1,000.

2. Depreciation on Furniture & Fixtures for the year Rs.2,000.

3. Depreciation on Cars for the year Rs.5,000. One car was disposed during the year for
Rs.3,400 whose written down value was Rs.2,000.

4. Purchase investments for Rs.6,000.

5. Sold investments for Rs.10,000, these investments cost Rs.2,000.

You are required to prepare Cash Flow Statement as per AS-3 (revised) using indirect
method.

[RTP Nov ‘18]

320
Ans. Harry Ltd.

Cash Flow Statement for the year ended 31st March, 2018
Rs. Rs.
Cash flows from operating activities
Net Profit before taxation 8,000
Adjustments for:
Depreciation (1,000+2,000 +5,000) 8,000
Profit on sale of Investment (8,000)
Profit on sale of car (1,400)
Operating profit before working capital changes 6,600
Increase in Trade receivables (2,000)
Increase in inventories (6,000)
Increase in Trade payables 3,000
Cash generated from operations 1,600
Income taxes paid (2,000)
Net cash generated from operating activities (A) (400)
Cash flows from investing activities
Sale of car 3,400
Purchase of car (16,000)
Sale of Investment 10,000
Purchase of Investment (6,000)
Purchase of Furniture & fixtures (14,000)
Net cash used in investing activities (B) (22,600)
Cash flows from financing activities
Issue of shares for cash 20,000

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 Dividends paid* (2,000)
Net cash from financing activities(C) 18,000
Net decrease in cash and cash equivalents (A + B +C) (5,000)
Cash and cash equivalents at beginning of period 17,000
Cash and cash equivalents at end of period 12,000
* Dividend declared for the year ended 31st March, 2017 amounting Rs. 2,000 must have
been paid in the year 2017-18. Hence, it has been considered as cash outflow for preparation
of cash flow statement of 2017- 18.
Working Notes:
1 Calculation of Income taxes paid
Rs.
Income tax expense for the year 3,000
Add: Income tax liability at the beginning of the year 2,000
5,000
Less: Income tax liability at the end of the year (3,000)
2,000

2. Calculation of Fixed assets acquisitions

Furniture & Fixtures (Rs.) Car (Rs.)
W.D.V. at 31.3.2018 34,000 25,000
Add back: Depreciation for the year 2,000 5,000
Disposals -- 2,000
36,000 32,000
Less; W.D.V. at 31. 3. 2017 (22,000) (16,000)
Acquisitions during 2016-2018 14,000 16,000
Q-7 A company provides you the following information:

(i) Total sales for the year were Rs. 398 crores out of which cash sales amounted to
Rs.262 crores.

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 (ii) Receipts from credit customers during the year, aggregated Rs.134 crores.

(iii) Purchases for the year amounted to Rs.220 crores out of which credit
purchase was 80%. Balance in creditors as on
1.4.2016 Rs.84 crores

31.3.2017 Rs.92 crores

(iv) Suppliers of other consumables and services were paid Rs. 19 crores in cash, (v)
Employees of the enterprises were paid 20 crores in cash.

(vi) Fully paid preference shares of the face value of Rs.32 crores were redeemed. Equity
shares of the face value of Rs. 20 crores were allotted as fully paid up at
premium of 20%.

(vii) Debentures of Rs.20 crores at a premium of 10% were redeemed. Debenture holders
were issued equity shares in lieu of their debentures.

(viii) Rs. 26crores were paidbyway of income tax.

(ix) A new machinery costing Rs.25 crores was purchased in part exchange of an old
machinery. The book value of the old machinery was Rs.13 crores. Through the
negotiations, the vendor agreed to take over the old machinery at a higher value of
Rs.15crores. The balance was paid incash tothe vendor.

(x) Investment costing Rs 18 cores were sold at a loss of Rs.2 crores.

(xi) Dividends amounting Rs.15 crores (including dividend distribution tax of Rs.2.7
crores) was also paid.

(xii) Debenture interest amounting Rs.2 crore was paid.

(xiii) On 31st March 2016, Balance with Bank and Cash on hand was Rs. 2 crores.

On the basis of the above information, you are required to prepare a Cash Flow
Statement for the year ended 31st March, 2017 (Using direct method).

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 [RTP May ‘18]
Ans. Cash flow statement (using direct method) for the year ended 31st March, 2017
(Rs. in crores) (Rs. In
crores)
Cash flow from operating activities
Cash sales 262
Cash collected from credit customers 134
Less; Cash paid to suppliers for goods & services
and to employees (Refer Working Note) (251)
Cash from operations 145
Less; Income tax paid (26)
Net cash generated from operating activities 119
Cash flow from investing activities
Net Payment for purchase of Machine (25 - 15) (10)
Proceeds from sale of investments 16
Net cash used in investing activities 6
Cash flow from financing activities
Redemption of Preference shares (32)
Proceeds from issue of Equity shares 24
Debenture interest paid (2)
Dividend Paid (15)
Net cash used in financing activities (25)
Net increase in cash and cash equivalents 100
Add: Cash and cash equivalents as on 1-4-2016 2
Cash and cash equivalents as on 31-3-2017 102

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 Working Note:

Calculation of cash paid to suppliers of goods and services and to employees

(Rs. in
crores)
Opening Balance in creditors Account 84
Add: Purchases (220x .8) 17
6
Total 22
0
Less; Closing balance in Creditors Account 92
Cash paid to suppliers of goods 16
8
Add: Cash purchases (220x .2) 44
Total cash paid for purchases to suppliers (a) 21
2
Add: Cash paid to suppliers of other consumables and services (b) 19
Add: Payment to employees (c) 20
Total cash paid to suppliers of goods & services and to employees [(a) 25
+ (b) + (c)] 1

Q8. The following figures have been extracted from the books of Manan Jo Limited for
the year ended on 31.3.2020. You are required to prepare the Cash Flow statement as per
AS 3 using indirect method.

(i) Net profit before taking into account income tax and income from law suits but
after taking into account the following items was ` 30 lakhs :

(a) Depreciation on Property, Plant & Equipment ` 7.50 lakhs.

325
 (b) Discount on issue of Debentures written off ` 45,000.

(c) Interest on Debentures paid ` 5,25,000.

(d) Book value of investments ` 4.50 lakhs (Sale of Investments for ` 4,80,000).

(e) Interest received on investments ` 90,000.

(ii) Compensation received `1,35,000 by the company in a suit filed.

(iii) lncome tax paid during the year ` 15,75,000.

(iv) 22,500, 10% preference shares of ` 100 each were redeemed on 02-04-2019 at a
premium of 5%.

(v) Further the company issued 75,000 equity shares of `10 each at a premium of
20% on 30.3.2020 (Out of 75,000 equity shares, 25,000 equity shares were
issued to a supplier of machinery)

(vi) Dividend for FY 2018-19 on preference shares were paid at the time of redemption.

(vii) Dividend on Equity shares paid on 31.01.2020 for the year 2018-2019 ` 7.50
lakhs (including dividend distribution tax) and interim dividend paid ` 2.50
lakhs for the year 2019-2020.

(viii) Land was purchased on 02.4.2019 for `3,00,000 for which the company issued
22,000 equity shares of ` 10 each at a premium of 20% to the land owner and
balance in cash as consideration.

(ix) Current assets and current liabilities in the beginning and at the end of the
years were as detailed below :
As on As on
01.04.2019 31.3.2020
` `
Inventory 18,00,000 19,77,000

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 Trade receivables 3,87,000 3,79,650
Cash in hand 3,94,450 16,950
Trade payables 3,16,500 3,16,950
Outstanding expenses 1,12,500 1,22,700

Ans. Manan Ltd. Cash Flow Statement

for the year ended 31st March, 2020

` `
Cash flow from Operating Activities
Net profit before income tax and extraordinary items: 30,00,000

Adjustments for:
Depreciation on Property, plant and equipment 7,50,000

Discount on issue of debentures 45,000

Interest on debentures paid 5,25,000
Interest on investments received (90,000)
Profit on sale of investments (30,000) 12,00,000
Operating profit before working capital changes 42,00,000
Adjustments for:
Increase in inventory (1,77,000)
Decrease in trade receivable 7,350
Increase in trade payables 450
Increase in outstanding expenses 10,200 (1,59,000)
Cash generated from operations 40,41,000
Income tax paid (15,75,000)

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 Cash flow from ordinary items 24,66,000
Cash flow from extraordinary items:
Compensation received in a suit filed 1,35,000
Net cash flow from operating activities 26,01,000
Cash flow from Investing Activities;
Sale proceeds of investments 4,80,000
Interest received on investments 90,000
Purchase of land (3,00,000 less 2,64,000) (36,000)
Net cash flow from investing activities 5,34,000
Cash flow from Financing Activities
Proceeds of issue of equity shares at 20% premium 6,00,000
Redemption of preference shares at 5% premium (23,62,500)
Preference dividend paid (2,25,000)
Interest on debentures paid (5,25,000)
Dividend paid (7,50,000 + 2,50,000) (10,00,000)
Net cash used in financing activities (35,12,500)
Net decrease in cash and cash equivalents during the year (3,77,500)

Add: Cash and cash equivalents as on 31.3.2019 3,94,450

Cash and cash equivalents as on 31.3.2020 16,950

Q9. Following information was extracted from the books of S Ltd. for the year
ended 31st March,2020 :

(1) Net profit before talking into account income tax and after talking into account
the following items was `30 lakhs;

(i) Depreciation on Property, Plant & Equipment `7,00,000

328
 (ii) Discount on issue of debentures written off `45,000.

(iii) Interest on debentures paid `4,35,000

(iv) Investment of Book value `3,50,000 sold for `3,75,000.

(v) Interest received on Investments `70,000

(2) Income tax paid during the year ` 12,80,000

(3) Company issued 60,000 Equity Shares of `10 each at a premium of 20%
on 10th April,2019.

(4) 20,000,9% Preference Shares of `100 each were redeemed on 31st March,
2020 at a premium of 5%

(5) Dividend paid during the year amounted to `11 Lakhs (including dividend
distribution tax)

(6) A new Plant costing `7 Lakhs was purchased in part exchange of an old plant
on 1st January,2020. The book value of the old plant was `8 Lakhs but the
vendor took over the old plant at a value of `6 Lakhs only. The balance amount
was paid to vendor through cheque on 30th March,2020.

(7) Company decided to value inventory at cost, whereas previously the practice
was to value inventory at cost less 10%. The inventory according to books on
31.03.2020 was ` 14,76,000.The inventory on 31.03.2019 was correctly valued
at ` 13,50,000.

(8) Current Assets and Current Liabilities in the beginning and at the end of year
2019-2020 were as:
As on 1st As on 31st
April,2019 March,2020
(`) (`)

329
 Inventory 13,50,000 14,76,000
Trade Receivables 3,27,000 3,13,200
Cash &Bank 2,40,700 3,70,500
Balances
Trade Payables 2,84,700 2,87,300
Outstanding 97,000 1,01,400
Expenses

You are required to prepare a Cash Flow Statement for the year ended 31st March, 2020
as per AS 3 (revised) using the indirect method. (12 Marks)
[Sugg Jan 2021]
Ans. S Ltd.

Cash Flow Statement for the year ended 31st March, 2020
` `
Cash flows from operating activities
Net profit before taxation* 30,00,000
Adjustments for:
Depreciation on PPE 7,00,000
Discount on debentures 45,000
Profit on sale of investments (25,000)
Interest income on investments (70,000)
Interest on debentures 4,35,000
Stock adjustment 1,64,000
{14,76,000 less
16,40,000(14,76,000/90X100)}
Operating profit before working capital 12,49,000

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changes
Changes in working capital 42,49,000
(Excluding cash and bank balance):
Less: Increase in inventory (2,90,000)
{16,40,000(14,76,000/90X100) less
13,50,000}
Add: Decrease in Trade receivables 13,800
Increase in trade payables 2,600
Increase in o/s expenses 4,400 (2,69,200)
Cash generated from operations 39,79,800
Less: Income taxes paid (12,80,000)
Net cash generated from operating 26,99,800
activities
Cash flows from investing activities
Sale of investments 3,75,000
Interest received 70,000
Payments for purchase of fixed assets (1,00,000)
(7,00,000 – 6,00,000)
Net cash used in investing activities 3,45,000
Cash flows from financing activities
Redemption of Preference shares (21,00,000)

331
 Issue of shares 7,20,000
Interest paid (4,35,00
Dividend paid 0)
Net cash used in financing
(11,00,0
activities Net increase in (29,15,000)
00)
cash 1,29,800
Cash at beginning of the period 2,40,700
Cash at end of the period 3,70,500
*Net profit given in the question is after considering only the items listed as
information point (1) of the question ; hence amount of loss on plant not added
back.

Q10. The following are the extracts of Balance Sheet and Statement of Profit and Loss
of Supriya Ltd.:

Extract of Balance Sheet

Particulars Notes 2021 (`’000)2020 (`’000)

Equity and Liabilities

1 Shareholder’s funds
(a) Share capital 1 500 200
2 Non- current liabilities
(a) Long term loan from bank --- 250
3 Current liabilities
(a) Trade Payables 1,000 3,047
Assets
1 Non-current assets
(a) Property, Plant and Equipment 230 128

332
 2 Current assets

(a) Trade receivables 2,000 4,783

(b) Cash & cash equivalents (Cash balance) 212 35

Extract of Statement of Profit and Loss

Particulars Notes 2021 (`’000) 2020 (`’000)

I Expenses:
Employee benefits expense 69 25
Other expenses 2 115 110
II Tax expense:
Current tax (paid during year) 243 140

Notes to accounts
2021 (`’000) 2020
(`’000)
1 Share Capital
Equity Shares of `10 each, fully 500 200
paid up
2 Other expenses
Overheads 115 110

Prepare Cash Flow Statement of Supriya Ltd. for the year ended 31st March, 2021 in
accordance with AS-3 (Revised) using direct method. All transactions were done in cash
only. There were no outstanding/prepaid expenses as on 31st March, 2020 and on 31st
March, 2021. Ignore deprecation. Dividend amounting ` 80,000 was paid during the year
ended 31st March, 2021.

[RTP May 2021]

333
Ans Supriya Ltd.

Cash Flow Statement for the year ended 31st March, 2021
(Using direct method)
(` ’000)
Cash flows from operating activities
Cash receipts from customers 2,783
Cash payments to suppliers (2,047)
Cash paid to employees (69)
Other cash payments (for overheads) (115)
Cash generated from operations 552
Income taxes paid (243)
Net cash from operating activities 309
Cash flows from investing activities
Payments for purchase of Property, Plant and Equipment (102)
Net cash used in investing activities (102)
Cash flows from financing activities
Proceeds from issuance of share capital 300
Bank loan repaid (250)
Dividend paid (80)
Net cash used in financing activities (30)
Net increase in cash and cash equivalents 177
Cash and cash equivalents at beginning of period 35
Cash and cash equivalents at end of period 212

334
 Q11. Prepare Cash Flow Statement of Light Ltd. for the year ended 31 st March, 2020,
in accordance with AS 3 (Revised) from the following Summary Cash Account:

Summary Cash Account

` in '000 ` in '000
Balance as on 01.04.2019 315
Receipts from Customers 24,894
Sale of Investments (Cost ` 153
1,35,000)
Issue of Shares 2,700
Sale of Fixed Assets 1,152
29,214
Payment to Suppliers 18,306
Purchase of Investments 117
Purchase of Fixed Assets 2,070 ,
Wages & Salaries 621
Selling & Administration 1,035
Expenses
Payment of Income Tax 2,187
Payment of Dividends 720
Repayment of Bank Loan 2,250
Interest paid on Bank Loan (27,756)
Balance as on 31.03.2020 450 1,458

[RTP Nov2020]

335
Ans. Light Ltd.

Cash Flow Statement for the year ended 31st March, 2020
Cash flows from operating activities (` ’000) (` ’000)
Cash receipts from customers 24,894
Cash payments to suppliers (18,306)
Cash paid to employees (621)
Other cash payments (for Selling & Administrative expenses) (1,035)
Cash generated from operations 4,932
Income taxes paid (2,187)
Net cash from operating activities 2,745
Cash flows from investing activities
Payments for purchase of fixed asset (2,070)
Proceeds from sale of fixed assets 1,152
Purchase of investments (117)
Sale of investments 153
Net cash used in investing activities (882)
Cash flows from financing activities
Proceeds from issuance of share capital 2,700
Bank loan repaid (2,250)
Interest paid on bank loan (450)
Dividend paid (720)
Net cash used in financing activities (720)
Net increase in cash and cash equivalents 1,143
Cash and cash equivalents at beginning of period 315

336
 Cash and cash equivalents at end of period 1,458

Q12. On the basis of the following information prepare a Cash Flow Statement for the
year ended 31st March, 2021 (Using direct method):
(i) Total sales for the year were ` 597 crores out of which cash sales amounted
to` 393 crores.

(ii) Receipts from credit customers during the year, totalled ` 201 crores.

(iii) Purchases for the year amounted to ` 330 crores out of which credit purchases
were 80%.

Balance in creditors as on

1.4.2020 ` 126 crores

31.3.2021 ` 138 crores

(iv) Suppliers of other consumables and services were paid ` 28.5 crores in cash.

(v) Employees of the enterprises were paid 30 crores in cash.

(vi) Fully paid preference shares of the face value of ` 48 crores were redeemed.
Equity shares of the face value of ` 30 crores were allotted as fully paid up at
premium of 20%.

(vii) Debentures of ` 30 crores at a premium of 10% were redeemed. Debenture

holders were issued equity shares in lieu of their debentures.

(viii) ` 39 crores were paid by way of income tax.

(ix) A new machinery costing ` 15 was purchased.

(x) Investment costing ` 27 cores were sold at a loss of ` 3 crores.

(xi) Dividends totalling ` 22.5 crores was also paid.

(xii) Debenture interest amounting ` 3 crore was paid.

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 (xiii) On 31st March 2020, Balance with Bank and Cash on hand totalled ` 3 crores.
[RTP Nov 2021]
Ans. Cash flow statement (using direct method) for the year ended 31st March, 2021
(` in crores) (` in
crores)
Cash flow from operating activities
Cash sales 393
Cash collected from credit customers 201
Less: Cash paid to suppliers for goods & services and to (376.5)
employees (Refer Working Note)
Cash from operations 217.5
Less: Income tax paid (39)
Net cash generated from operating activities 178.5
Cash flow from investing activities
Payment for purchase of Machine (15)
Proceeds from sale of investments 24
Net cash used in investing activities 9
Cash flow from financing activities
Redemption of Preference shares (48)
Proceeds from issue of Equity shares 36
Debenture interest paid (3)
Dividend Paid (22.5)
Net cash used in financing activities (37.5)
Net increase in cash and cash equivalents 150
Add: Cash and cash equivalents as on 1.04.2020 3

338
 Cash and cash equivalents as on 31.3.2021 153

Working Note:

Calculation of cash paid to suppliers of goods and services and to employees

(` in
crores)
Opening Balance in creditors Account 126
Add: Purchases (330x .8) 264
Total 390
Less: Closing balance in Creditors Account 138
Cash paid to suppliers of goods 252
Add: Cash purchases (330x .2) 66
Total cash paid for purchases to suppliers (a) 318
Add: Cash paid to suppliers of other consumables 28.5
and services (b)
Add: Payment to employees (c) 30
Total cash paid to suppliers of goods & services 376.5
and to employees [(a)+ (b) + (c)]

Q13. Prepare cash flow from investing activities as per AS 3 of M/s Subham Creative Limited for
year ended 31.3.2019.

Particulars Amount (Rs.)

Machinery acquired by issue of shares at face value 2,00,000
Claim received for loss of machinery in earthquake 55,000
Unsecured loans given to associates 5,00,000

339
 Interest on loan received from associate company 70,000
Pre-acquisition dividend received on investment made 52,600
Debenture interest paid 1,45,200
Term loan repaid 4,50,000
Interest received on investment (TDS of Rs. 8,200 was 73,800
deducted on the above interest)
Book value of plant & machinery sold (loss incurred Rs. 90,000
9,600)

[MTP May 2021 ] ( 4 marks )

Ans.

Cash Flow Statement from Investing Activities of Subham Creative Limited for
year ended 31-03-2019

Cash generated from investing activities Rs. Rs.

Interest on loan received 70,000
Pre-acquisition dividend received on investment 52,600
made
Unsecured loans given to subsidiaries (5,00,000)
Interest received on investments (gross value) 82,000
TDS deducted on interest (8,200)
Sale of Plant & Machinery Rs. (90,000 – 9,600) 80,400
(2,23,200)

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 Cash used in investing activities (before extra- 55,000
ordinary item)
Extraordinary claim received for loss of machinery
Net cash used in investing activities (after extra- (1,68,200)
ordinary item)
Note:

1. Debenture interest paid and Term Loan repaid are financing activities and therefore not
considered for preparing cash flow from investing activities.

2. Machinery acquired by issue of shares does not amount to cash outflow, hence also not
considered in the above cash flow statement.

Q14. Following is the cash flow abstract of Alpha Ltd. for the year ended 31st March, 2021:

Cash Flow (Abstract)

Inflows Rs. Outflows Rs.
Opening cash and bank 80,000 PaymentforAccount 90,000
balance Payables
Share capital – shares 5,00,000 Salaries and wages 25,000
issued
Collection from Trade Payment of overheads 15,000
Receivables 3,50,000 Machinery acquired 4,00,000
Debentures redeemed 50,000

Sale of Machinery 70,000 Bank loan repaid 2,50,000

Tax paid 1,55,000
Closing cashand bank 15,000
balance
10,00,000 10,00,000

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 Prepare Cash Flow Statement for the year ended 31st March, 2021 in accordance with AS 3.
[ MTP May 2021 ] ( 5 marks )
Ans. Cash Flow Statement for the year ended 31.3.2021
Rs. Rs.
Cash flow from operating activities
Cash received on account of trade receivables 3,50,000
Cash paid on account of trade payables (90,000)
Cash paid to employees (salaries and wages) (25,000)
Other cash payments (overheads) (15,000)
Cash generated from operations 2,20,000
Income tax paid (1,55,000)
Net cash generated from operating activities 65,000
Cash flow from investing activities
Payment for purchase of machinery (4,00,000)
Proceeds from sale of machinery 70,000
Net cash used in investment activities (3,30,000)
Cash flow from financing activities
Proceeds from issue of share capital 5,00,000
Bank loan repaid (2,50,000)
Debentures redeemed (50,000)
Net cash used in financing activities 2,00,000
Net decrease in cash and cash equivalents (65,000)
Cash and cash equivalents at the beginning of the 80,000
year
Cash and cash equivalents at the end of the year 15,000

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Q15.Prepare Cash Flow Statement of Tom & Jerry Ltd. for the year ended 31stMarch, 2020, in
accordance with AS-3 (Revised) from the following Summary Cash Account:

Summary Cash Account

Rs. in '000 Rs. in'000
Balance as on 01.04.2019 210
Receipts from Customers 16,596
Sale of Investments (Cost Rs. 90,000) 102
Issue of Shares 1,800
Sale of Fixed Assets 768
19,476
Payment to Suppliers 12,204
Purchase of Investments 78
Purchase of Fixed Assets 1,380 ,
Wages & Salaries 414
Selling & Administration Expenses 690
Payment of Income Tax 1,458
Payment of Dividends 480
Repayment of Bank Loan 1,500
Interest paid on Bank Loan 300 (18,504)
Balance as on 31.03.2020 972
[MTP May 2020] ( 8 marks )
Ans. Cash Flow Statement of Tom & Jerry Ltd. for the year ended
31st March, 2020
(Rs. ’000)

Cash flows from operating activities

343
Cash receipts from customers 16,596
Cash payments to suppliers (12,204)
Cash paid to employees (414)

Other cash payments (for Selling & Administrative (690)

expenses)
Cash generated from operations 3,288
Income taxes paid (1,458)
Net cash from operating activities 1,830
Cash flows from investing activities
Payments for purchase of fixed asset (1,380)
Proceeds from sale of fixed assets 768
Purchase of investments (78)
Sale of investments 102
Net cash used in investing activities (588)
Cash flows from financing activities
Proceeds from issue of share capital 1,800
Bank loan repaid (1,500)
Interest paid on bank loan (300)
Dividend paid (480)
Net cash used in financing activities (480)
Net increase in cash and cash equivalents 762
Cash and cash equivalents at beginning of period 210

344
CHAPTER-4

Profit or Loss Pre and Post Incorporation

Q-1 The partners of C&G decided to convert their existing partnership business into a
private limited called CG trading Pvt. Ltd. with effect from 1.7.2018.

The same books of accounts were continued by the company which closed its
accounts for the first term on 31.3.2019. The summarized profit & loss account for
the year ended 31.3.2019 is below:
Particulars ` in lakhs ` in lakhs
Turnover 245.00
Interest on investments 6.00 251.00
Less: Cost of goods sold 124.32
Advertisement 3.50
Sales Commission 7.00
Salaries 18.00
Managing Director’s Remuneration 6.00
Interest on Debenture 2.(XV
Rent 5.50
Bad debt 1.15
Underwriting Commission 1.00
Audit fees 3.00

345
 Loss on sale of Investments 1.00
Depreciation 4.00 176.47
74.53
The following additional information was provided:

(i) The average monthly sales doubled from 1.7.2018, GP ratio was constant.

(ii) All investments were sold on 31.5.2018.

(iii) Average monthly salaries doubled from 1.10.2018.

(iv) The company occupied additional space from 1.7.2018 for which rent of ` 20,000
per month was incurred.
(v) Bad debts recovered amounting to ` 60,000 for a sale made on 2016-17 has been
deducted from bad debts mentioned above.

(vi) Audit fees pertains to the company.

Prepare a statement apportioning the expenses between pre and post incorporation
periods and calculate the profit / loss for such periods.

[Sugg.Nov.’19,10 Marks]

Ans. C G Trading Private Limited

Statement showing calculation of Profit/Loss for Pre and Post Incorporation Periods

` In
lakhs

Ratio Total Pre Post

Incorporation Incorporation
Sales 1:6 245.00 35.00 210.00

346
Interest on Investments Pre 6.00 6.00 -
Bad debts recovered Pre 0.60 0.60 -
(i) 251.6 41.60 210.00
Cost of goods sold 1:6 124.32 17.76 106.56
Advertisement 1:6 3.50 0.50 3.00
Sales commission 1:6 7.00 1.00 6.00
Salary (W.N.3) 1:5 18.00 3.00 15.00
Managing director’s remuneration Post 6.00 - 6.00
Interest on Debentures Post 2.00 - 2.00
Rent (W.N.4) 5.50 0.93 4.57
Bad debts (1.15 + 0.6) 1:6 1.75 0.25 1.50
Underwriting commission Post 1.00 - 1.00
Audit fees Post 3.00 - 3.00
Loss on sale of Investment Pre 1.00 1.00 -
Depreciation 1:3 4.00 1.00 3.00
(ii) 177.07 25.44 151.63
Net Profit [(i)-(ii) 74.53 16.16 58.37
Working Notes:

1. Calculation of Sales Ratio

Let the average sales per month be x

Total sales from 01.04.2018 to 30.06.2018 will be 3x

Average sales per month from 01.07.2018 to 31.03.2019

will be 2x Total sales from 01.07.2018 to 31.03.2019 will
be 2x X 9 =18x
Ratio of Sales will be 3x: 18x i.e., 3:18 or 1:6

347
 2. Calculation of time Ratio

3 Months: 9 Months i.e., 1:3

3. Apportionment of Salary

Let the salary per month from 01.04.2018 to

30.09.2018 is x Salary per month from 01.10.2018
to 31.03.2019 will be 2x Hence, pre incorporation
salary (01.04.2018 to 30.06.2018) = 3x
Post incorporation salary from 01.07.2018 to 31.03.2019 = (3x +
12x) i.e.,15x Ratio for division 3x: 15x or 1: 5

4. Apportionment of Rent ` In Lakhs

Total Rent 5.50
Less:additionalrent from1.7.2018to31.3.2019 1.80
Rent of old premises for 12 months 3.70
Pre Post
Apportionment in time ratio 0.93 2.77
Add: Rent for new space - 1.80
Total 0.93 4.57

Q-2 Tarun Ltd. was incorporated on 1st July, 2018 to acquire a running business of Vinay
Sons with effect from1stApril,2018. Duringtheyear 2018-19,thetotal saleswere `
12,00,000of which` 2,40,000 were for the first six months. The Gross Profit for the
year is ` 4,15,000. The expenses debited to the Profit and Loss account included:

(i) Director's fees ` 25,000

(ii) Bad Debts ` 6,500

(iii) Advertising ` 18,000 (under a contract amounting to ` 1,500 per month)

(iv) Company Audit Fees ` 15,000

(v) Tax Audit Fees ` 10,000

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(1) Prepare a statement showing pre-incorporation and post incorporation profit for
the year ended 31st March,2019.

(2) Explain how profits are to be treated.

[Sugg. May ‘19, 5 Marks]

Ans. Statement showing the calculation of Profits for the pre-incorporation and post-
incorporation periods
For the year ended 31st March, 2019
Particulars Total Basis of Pre- Post

Amount Allocation incorporation incorporation

Gross Profit 4,15,000 Sales (1:9) 41,500 3,73,500
Less: Directors’ fee 25,000 Post 25,000
Bad debts 6,500 Sales (1:9) 650 5,850
Advertising 18,000 Time (1:3) 4,500 13,500
Company Audit Fees 15,000 Post 15,000
Tax Audit Fee 10,000 Sales (1:9) 1,000 9,000
Net Profit 3,40,500 35,350 3,05,150
Pre-incorporation profits to be transferred to capital reserve and post -incorporation
profit to be transferred to profit & Loss A/c.

Working Notes:
(i) Sales ratio
Particulars `
Sales for period up to 30.06.2018 (2,40,000 x 3/6) 1,20,000
Sales for period from 01.07.2018 to 31.03.2019 (12,00,000 – 10,80,000
1,20,000)
Thus, Sales Ratio = 1: 9 (1,20,000: 10,80,000)

349
 (ii) Time ratio

1st April, 2018 to 30 June, 2018: 1st July, 2018 to 31st March, 2019

= 3 months: 9months =
1: 3 Thus, time Ratio
is 1: 3
Q-3 Sun Limited took over the running business of a partnership firm M/s A & N Brothers
with effect from 1st April, 2017. The company was incorporated on 1st September,
2017. The following profit and loss account has been prepared for the year ended
31st March, 2018.
Particular ` Particular `
To salaries 1,33,000 By Gross Profit b/d 7,50,000
To rent 96,000
To carriage outward 75,000
To audit fees 12,000
To travelling expenses 66,000
To commission on sales 48,000
To printing and stationery 24,000
To electricity charges 30,000
To depreciation 80,000
To advertising expenses 24,000
To preliminary expenses 9,000
To Managing Director's 8,000
remuneration
To Net Profit c/d 1,45,000

350
 7,50,000 7,50,000
Additional Information:

1. Trend of sales during April, 2017 to March, 2018 was as under:

April, May ` 85,000 per month
June, July ` 1,05,000 per month
August, September ` 1,20,000 per month
October, November ` 1,40,000 per month
December onward ` 1,50,000 per month
2. Sun Limited took over a machine worth ` 7,20,000 from A&N Brothers and purchased a
new machine on 1st February, 2018 for ` 4,80,000. The company decides to provide
depreciation @ 10% p.a.

3. The company occupied additional space from 1st October, 2017 @ rent of ` 6,000 per
month.

4. Out of travelling expenses, ` 30,000 were incurred by office staff while remaining
expenses were incurred by salesmen.

5. Audit fees pertains to the company.

6. Salaries were doubled from the date of incorporation.

Youare required to prepare a statement apportioning the expenses between pre and post
in corporation periods and calculate the profit/(loss) for such periods.

[Sugg. Nov.’18, 12 Marks]

Ans. Statement showing calculation of profit for per and post incorporation periods for the
year ended 31- 3-2018

351
 Particulars Pre- Post-
incorporation incorporation

period period

` `
Gross profit (1:2) 2,50,000 5,00,000
Less; Salaries (5:14) 35,000 98,000
Carriage outward (1:2) 25,000 50,000
Audit fee - 12,000
Travelling expenses (W.N.3) 24,500 41,500
Commission on sales (1:2) 16,000 32,000
Printing & stationary (5:7) 10,000 14,000
Rent (office building) (W.N.4) 25,000 71,000
Electricity charges (5:7) 12,500 17,500
Depreciation 30,000 50,000
Advertisement (1:2) 8,000 16,000
Preliminary expenses - 9,000
MD remuneration - 8,000
Pre-incorporation profit - t/f to Capital reserve 64,000 -
(Bal. Fig.)
Net profit (Bal. Fig.) - 81,000
Working Notes:

1. Time Ratio

Pre incorporation period = 1st April, 2017 to 31st August, 2017

i.e., 5 months Post incorporation period is 7months
Time ratio is 5: 7.

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2. Sales ratio
April 85,000
May 85,000
June 1,05,000
July 1,05,000
August 1,20,000
5,00,000
September 1,20,000
Oct & Nov. 2,80,000
Dec. to March (1,50,000 x4) 6,00,000
10,00,000
5,00,000: 10,00,000 = 1.2
3. Travelling expenses
` `
Pre-incorporation Post-incorporation
30,000 office staff (5:7) 12,500 17,500
36,000 sales (1:2) 12,000 24,000
24,500 41,500
4. Rent
`
Rent for additional space Rs. (6,000 x 6) 36,000
Remaining rent Rs. (96,000-36,000) 60,000
Pre-incorporation period (5/12 of 60,000) 25,000
Post- incorporation period Rs.35,000 + Rs.36,000 71,000
5. Salaries

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 Suppose x for a month in pre-incorporation period then salaries for preincorporation
period = 5x salaries for post incorporation period = 2x X 7 = 14x Ratio = 5:14
6. Depreciation
Rs. Rs Pre- Rs.
incorporation Post
incorporation
Total depreciation 80,000
Less: Depreciation exclusively for post
incorporation period
(Rs.4,80,000 x 10 x 2/12) 8,000
72,000
Depreciation for pre-incorporation period 30,000 42,000
Rs.72,000 x 5/12) 50,000
Depreciation for post incorporation period (Rs.
72,000 x 7/12) 30,000
Q-4 The promotors of Shiva Ltd. took over on behalf of the company a running business
with effect from 1st April 2017. The company got incorporated on 1st August 2017.
The annual accounts were made up to 31st March, 2018 which revealed that the sales
for the whole year totaled ` 2400 lakhs out of which sales till 31st July, 2017 were
for ` 600 lakhs. Gross profit ratio was 20%.
The expenses from 1st April 2017, till 31st March, 2018 were as follows:
Particular Rs. in lakhs
Salaries 75
Rent, rates and Insurance 30
Sundry Office expenses 72
Traveler’s Commission 20

354
 Discount allowed 16
Bad Debts 6
Directors Fee 30
Tax Audit Fee 16
Depreciation on Tangible Assets 15
Debenture Interest 14
Prepare a statement showing the calculation of profits for the pre-incorporation and Post
incorporation periods. [Sugg. May ‘18, 10 Marks]
Ans. Statement Showing the calculation of Profits for the pre-incorporation and post
incorporation periods
Particulars Total Basis of Pre- Post-
Amount (Rs. Allocation incorporation (Rs. incorporation (Rs.
in lakhs) in lakhs) in lakhs)
Gross Profit (20% of 480 Sales 120 360
Rs. 2,400)
Less: Salaries 75 Time 25 50
Rent, rates and 30 Time 10 20
Insurance
Sundry office 72 Time 24 48
expenses
Travelers’ 20 Sales 5 15
commission
Discount allowed 16 Sales 4 12
Bad debts 8 Sales 2 6
Directors' fee 30 Post - 30

355
 Tax Audit Fees* 16 Sales 4 12
Depreciation on 15 Time 5 10
tangible assets
Debenture’s interest 14 Post - 14
Net Profit 184 41 143
* Tax Audit Fees allocated in the ratio of sales.

Thus, pre-incorporation profits are ` 41 lakhs and post- incorporation profit is ` 143 akhs.

Working Notes:
1. Sales ratio
(Rs. in lakh)
Sales for the whole year 2400
Sales up to 31st July, 2017 600
Therefore, sales for the period from 1st August, 2017 to 31st 1,800
March 2018
Thus, sale ration = 600:1800 = 1:3

2. Time ratio

1st April, 2017 to 31st July, 2017: 1st August, 2017 to 31st March, 2018

= 4 monhts:8 month = 1:2, Thus, time ratio is 1:2.

Q-5 The Business carried on by Kamal under the name "K" was taken over as a running
business with effect from 1stApril, 2016 by Sanjana Ltd., which was incorporated on 1st
July, 2016. The same set of books was continued since there was no change in the type of
business and the following particulars of profits for the year ended 31st March, 2017
were available.

Rs. Rs.
Sales: Company period 40,000

356
 Prior period 10,000 50,000
Selling Expenses 3,500
Preliminary Expenses written off 1,200
Salaries 3,600
Directors' Fees 1,200
Interest on Capital (Up to 30.6.2016) 700
Depreciation 2,800
Rent 4,800
Purchases 25,000
Carriage Inwards 1,019 43,819
Net Profit 6,181
The purchase price (including carriage inwards) for the post-incorporation period had increased
by 10 percent as compared to pre-incorporation period. No stocks were carried either at the
beginning or at the end.
You are required to prepare a statement showing the amount of pre- and post-incorporation
period profits stating the basis of allocation of expenses.
OR

Following items appear in the Trial Balance of Beta Ltd. as on 31st March, 2017:

Particulars Amount
3,000 Equity Shares of Rs. 100 each 3,00,000
Securities Premium 40,000
Capital Redemption Reserve 30,000
General Reserve 1,00,000
Profit and Loss Account (Cr. Balance) 50,000
The company decided to issue to equity shareholders bonus shares at the rate of 1 share for
every 3 shares held. Company decided that there should be the minimum reduction in free

357
reserves. Pass necessary Journal Entries in the books of Beta Ltd. [MTP April ‘19, 5 Marks]
Ans. Statement showing the calculation of profits/losses for pre incorporation and Post
incorporation period profits of Sanjana Ltd. for the year ended 31st March, 2017
Particular Basis Pre Post

Rs. Rs.
Sales (given) 10,000 40,000
Less; Purchases 1:3.3 5,814 19,186
Carriage Inwards 1:3.3 237 782
Gross Profit (i) 3,949 20,032
Less; Selling Expenses 1:4 700 2,800
Preliminary Expenses 1,200
Salaries 1:3 900 2,700
Director Fees 1,200
Interest on capital 700
Depreciation 1:3 700 2,100
Rent 1:3 1,200 3,600
Total of Expenses (ii) 4,200 13,600
Capital Loss/Net Profit (i-ii) 251 6,432
Working Notes:

1 Sales Ratio =10,000:40,000 =1 :4

2 Time Ratio = 3:9 =1:3

3 Purchase Price Ratio

Ratio is 3: 9
But purchase price was 10% higher in the company period

358
 Ratio is3 :9 + 10% i.e., 3:9.9=1:3.3.
Or

Capital Redemption Reserve A/c Dr. 30,000

Securities Premium A/c Dr. 40,000

General Reserve A/c Dr. 30,000

To Bonus to Shareholders 1,00,000

(Being issue of bonus shares by utilization of various

Reserves, as per resolution dated.)

Bonus to Shareholders A/c Dr. 1,00,000

To Equity Share Capital 1,00,000

(Being capitalization of Profit)

Q-6 ABC Ltd. took over a running business with effect from 1st April, 2016. The company
was incorporated on 1st August, 2016. The following summarized Profit and Loss
Account has been prepared for the year ended 31.3.2017:
Rs. Rs.
To Salaries 48,000 By Gross profit 3,20,000
To Stationery 4,800
To Travelling expenses 16,800
To Advertisement 16,000
To Miscellaneous trade expenses 37,800
To Rent (office buildings) 26,400
To Electricity charges 4,200
To Director's fee 11,200
To Bad debts 3,200

359
 To Commission to selling agents 16,000
To Tax Audit fee 6,000
To Debenture interest 3,000
To Interest paid to vendor 4,200
To Selling expenses 25,200
To Depreciation on fixedassets 9,600
To Net profit 87,600

3,20,000 3,20,000
Additional information:

(a) Total sales for the year, which amounted to Rs. 19,20,000 arose evenly up to the date
of 30.9.2016. Thereafter they spurted to record an increase of two-third during
the rest of the year.

(b) Rent of office building was paid @ Rs. 2,000 per month up to September, 2016 and
thereafter it was increased by Rs.400 per month.

(c) Travelling expenses include Rs. 4,800 towards sales promotion.

(d) Depreciation include Rs.600 for assets acquired in the post incorporation period.
(e) Purchase consideration was discharged by the company on 30th September, 2016 by
issuing equity shares of Rs.10 each.
Prepare Statement showing calculation of profits and allocation of expenses
between pre and post incorporation periods. [MTP April ‘18, 10
Marks]
Ans. Statement showing calculation of profits for pre and post incorporation periods for
the year ended 31.3.2017

360
 Particulars Pre incorporation Post incorporation
period period
Rs. Rs.
Gross profit (1:3) 80,000 2,40,000
Less; Salaries (1:2) 16,000 32,000
Stationery (1:2) 1,600 3,200
Advertisement (1:3) 4,000 12,000
Travelling expenses (W.N.3) 4,000 8,000
Sales promotion expenses (W.N.3) 1,200 3,600
Misc. trade expenses (1:2) 12,600 25,200
Rent (office building) (W.N.2) 8,000 18,400
Electricity charges (1:2) 1,400 2,800
Director's fee - 11,200
Bad debts (1:3) 800 2,400
Selling agents commission (1:3) 4,000 12,000
Audit fee (1:3) 1,500 4,500
Debenture interest - 3,000
Interest paid to vendor (2:1) (W.N.4) 2,800 1,400
Selling expenses (1:3) 6,300 18,900
Depreciation on fixed assets (W.N.5) 3,000 6,600
Capital reserve (Bal. Fig.) 12,800 -
Net profit (Bal. Fig.) - 74,800
Working Notes:
1. Time Ratio
Pre incorporation period = 1st April, 2016 to 31st July, 2016 i.e., 4 months

361
 Post incorporation period is 8 months’
Time ratio is 1: 2.
2. Sales ratio
Let the monthly sales for first 6 months (i.e., from 1.4.2016 to
30.09.16) be = x Then, sales for 6 months =6x
Monthly sales for next 6 months (i.e., from 1.10.16 to31.3.2017) = x + 2/3x = 5/3x
Then, sales for next 6 months = 5x/3 X 6 = 10x
Total sales for the year = 6x + 10x = 16x
Monthly sales in the pre incorporation period = Rs. 19,20,000/16 = Rs.
1,20,000 Total sales for pre-incorporation period = Rs. 1,20,000 x 4
= Rs.4,80,000
Totalsales for post incorporation period = Rs. 19,20,000 -
Rs.4,80,000=Rs. 14,40,000 Sales Ratio = 4,80,000:14,40,000= 1:3
3. Rent
Rs.
Rent for pre-incorporation period 8,000 (pre)
(Rs.2,000 x 4)
Rent for post incorporation period 4,000
August,2016& September,2016 14,400 18,400
(Rs.2,000 x 2) (post)
October,2016 to March,2017
(Rs.2,400 x 6)
4. Travelling expenses and sales promotion expenses
Pre Post
Rs. Rs.
Traveling expenses Rs.12,000 (i.e., Rs.16,800-Rs.4,800) distributed

362
 in 1:2 ratio
distributed in 1:2 ratio 40,00 8,000
Sales promotion expenses Rs. 4,800 distributed in 1:3 ratio 1,200 3,600
5. Interest paid to vendor till 30th September, 2016
Pre Post
Rs. Rs.
Interest for pre-incorporation
period ( 4200 / 6 * 4 ) 2,800

Interest for post incorporation period i.e.,

for August, 2016 & September, 2016 1,400
( 4200 * 2/6)
6. Depreciation

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Q-7 MeghaLtd. was incorporated on 1.8.2016 to take over the running business of M/s
Happy withassets from 1.4.2016. The accounts of the company were closed on
31.3.2017.

The average monthly sales during the first four months of the year (2016-17) were twice
the average monthly sales during each of the remaining eight months.
You are required to compute time ratio and sales ratio for pre and post incorporation
periods.

[MTP March ‘18, 5 Marks]

Ans. Time ratio:

Pre-incorporation period (1.4.2016 to 1.8.2016) = 4months

Post incorporation period (1.8.2016 to 31.3.2017) = 8months

Time ratio = 4:8 or 1:2

Sales ratio:

Average monthly sale before incorporation was twice the average sale per month of
the post incorporation period. If weightage for each post-incorporation month is x,
then

Weighted sales ratio = 4 x 2x:8 x 1x = 8x: 8x or 1: 1

Q-8 Roshani & Reshma working in partnership, registered a joint stock company under the
name of Happy Ltd. on May 31st 2018 to take over their existing business. The
summarized Profit & Loss A/c as given by Happy Ltd. for the year ending 31st March,
2019 is as under:

Happy Ltd.

Profit & Loss A/c for the year ending March 31, 2019

364
 Particulars Amount (`) Particulars Amount (`)
To Salary 1,44,000 By Gross Profit 4,50,000
To Interest on Debenture 36,000
To Sales Commission 18,000
To Bad Debts 49,000
To Depreciation 19,250
To Rent 38,400
To Company Audit fees 12,000
To Net Profit 1,33,350

Total 4,50,000 Total 4,50,000

Prepare a Statement showing allocation of expenses & calculation of pre-incorporation & post-
incorporation profits after considering the following information:

(i) GP ratio was constant throughout the year.

(ii) Depreciation includes ` 1,250 for assets acquired in post incorporation period.

(iii) Baddebts recoveredamounting to ` 14,000fora sale madein2015-16hasbeen

deductedfrombad debts mentioned above.

(iv) Total sales were ` 18,00,000 of which ` 6,00,000 were for April to September.

(v) Happy Ltd. had to occupy additional space from 1st Oct. 2018 for which rent was `
2,400 per month. [RTP Nov ‘19]
Ans. Pre-incorporation period is for two months, from 1st April, 2018 to 31st May, 2018.
10 months’ period (from 1st June, 2018 to 31st March, 2019) is post-incorporation period.

Statement showing calculation of

profit/losses for pre and post
incorporation periods

365
 Pre-Inc Post Inc

` `
Gross Profit 50,000 4,00,000
Bad debts Recovery 14,000

64,000 4,00,000
Less: Salaries 24,000 1,20,000
Audit fees - 12,000
Depreciation 3,000 16,250
Sales commission 2,000 16,000
Bad Debts (49,000 + 14,000) 7,000 56,000
Interest on Debentures - 36,000
Rent 4,000 34,400
Net Profit 24,000 1,09,350
* Pre-incorporation profit is a capital profit and will be transferred to Capital Reserve.
Working Notes:
(i) Calculation of ratio of Sales
Sales from April to September =6,00,000(1,00,000p.m. onaverage
basis) October to March = ` 12,00,000 (2,00,000 p.m. on average
basis)
Thus, sales for pre-incorporation period = `
2,00,000 post-incorporation period = `
16,00,000
Sales are in the ratio of 1:8
(ii) Gross profit, sales commission and bad debts written off have been allocated in
pre and post incorporation periods in the ratio of Sales.

366
 (iii) Rent, salary is allocated on time basis.
(iv) Interest on debentures is allocated in post incorporation period.
(v) Audit fees charged to post incorporation period as relating to company audit.
(vi) Depreciation of ` 18,000 divided in the ratio of 1:5 (time basis) and ` 1,250
charged to post incorporation period.
(vii) Bad debt recovery of ` 14,000/- is allocated in pre-incorporation period, being sale
made in 2015-16.
(viii) Rent
(` 38,400 - Additional rent for 6 months) `
[38,400- 14,400 (2,400 x 6) = ` 24,000 i.e., 2,000 per month]
1/4/18-31/5//18(2,000x2) = 4,000

1/6/18-31/3/19 - [(2,000 x 10) +14,400] = 34,400

38,400
Q-9 Lotus Ltd. was incorporated on 1st July, 2017 to acquire a running business of Feel
goods with effect from 1st April, 2017. During the year 2017-18, the total sales were Rs.
48,00,000 of which Rs. 9,60,000 were for the first six months. The Gross profit of the
company Rs. 7,81,600. The expenses debited to the Profit & Loss Account included:
(i) Director's fees Rs.60,000

(ii) Bad debts Rs.14,400

(iii) Advertising Rs. 48,000 (under a contract amounting to Rs.4,000 per month)

(iv) Salaries and General Expenses Rs.2,56,000

(v) Preliminary Expenses written off Rs.20,000

(vi) Donation to a political party given by the companyRs.20,000.

Prepare a statement showing pre-incorporation and post-incorporation profit for the

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 year ended 31st March,2018. [RTP May ‘19]

Ans. Statement showing the calculation of Profits for the pre-incorporation and post-
incorporation periods

For the year ended 31st March, 2018

Particulars Total Basis of Pre- Post-

Amount Allocatio incorporatio incorporatio

n n n
Gross Profit 7,81,600 Sales 78,160 7,03,440
Less: Directors' fee 60,000 Post 60,000
Bad debts 14,400 Sales 1,440 12,960
Advertising 48,000 Time 12,000 36,000
Salaries & general expenses 2,56,000 Time 64,000 1,92,000
Preliminary expenses 20,000 Post 20,000
Donation to Political Party 20,000 Post 20,000
Not Profit 3,63,200 720 3,62,480
Working Notes:

1. Sales ratio

Particular Rs.
Sales for period up to 30.06.2017 (9,60,000 x 3/6) 4,80,000
Salesforperiodfrom01.07.2017to31.03.2018(48,00,000- 43,20,000
4,80,000)
Thus, Sales Ratio = 1: 9

2. Time ratio

1st April, 2017 to 30 June, 2017:1st July, 2017 to 31st March, 2018

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 = 3 months: 9 months = 1:3

Thus, Time Ratio is 1: 3

Q-10 Roshani & Reshma working in partnership, registered a joint stock company under the
name of Happy Ltd. on May 31st 2017 to take over their existing business. The
summarized Profit & Loss A/c as given by Happy Ltd. for the year ending 31st March,
2018 is as under:
Happy Ltd.

Profit & Loss Account for the year ending March 31, 2018
Particular Amount (Rs.) Particulars Amount (Rs.)
To Salary 1,44,000 By Gross Profit 4,50,000
To Interest on Debenture 36,000
To Sales Commission 18,000
To Bad Debts 49,000
To Depreciation 19,250
To Rent 38,400
To Audit fees (Company 12,000
Audit)
To Net Profit Total 1,33,350
Total 4,50,000 Total 4,50,000
You are required to prepare a Statement showing allocation of expenses and calculation of
pre-incorporation and post- incorporation profits after considering the following
information:

(i) GP ratio was constant throughout the year.

(ii) Depreciation includes Rs.1,250 for assets acquired in post incorporation period.

(iii) Bad debts recovered amounting to Rs. 14,000 for a sale made in 2014-15 has been

369
 deducted from bad debts mentioned above.

(iv) Total sales were Rs.18,00,000 of which Rs.6,00,000 were for April to September.

(v) Happy Ltd. had to occupy additional space from 1st Oct. 2017 for which rent was
Rs.2,400 per month.

[RTP Nov ‘18]

Ans. Pre-incorporation period is for two months, from 1st April, 2017 to 31st May, 2017.
10 months' period (from 1st June, 2017 to 31st March, 2018) is post-incorporation
period.

Statement showing calculation of profit/losses for pre and post incorporation

periods
Pre-lnc Post-lnc
Rs. Rs.
Gross Profit 50,000 4,00,000
Bad debts Recovery 14,000
64,000 4,00,000
Less: Salaries 24,000 1,20,000
Audit fees - 12,000
Depreciation 3,000 16,250
Sales commission 2,000 16,000
Bad Debts (49,000 + 14, 000) 7,000 56,000
Interest on Debentures - 36,000
Rent 4,000 34,400
Net Profit 24,000 1,09,350

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Working Notes:

(i) Calculation of ratio of Sales

Sales from April toSeptember = 6,00,000 (1,00,000 p.m. on average basis)

Oct. to March = Rs. 12,00,000 (2,00,000 p.m. on average basis)

Thus, sales for pre-incorporation period = Rs.2,00,000

post-incorporation period = Rs.16,00,000

Sales are in the ratio of 1:8

(ii) Gross profit, sales commission and bad debts written off have been allocated in
pre and post incorporation periods in the ratio of Sales.
(iii) Rent, salary is allocated on time basis.

(iv) Interest on debentures is allocated in post incorporation period.

(v) Audit fees charged to post incorporation period as relating to company audit.

(vi) Depreciationof Rs.18,000 divided in the ratioof 1:5(time basis) andRs.1,250 charged to
post incorporation period.

(vii) Bad debt recovery of Rs.14.000/- is allocated in pre-incorporation period, being sale

made in 2014-15.

(viii) Rent

(Rs.38,400 - Additional rent for 6 months) Rs.

[38,400-14,400 (2,400 x 6)] = 24,000
1/4/17-31/5//17 (2,000x2) = 4,000
1/6/17-31/3/18-[(2,000x10) +14,400] = 34,400
38,400
Q-11 The Business carried on by Kamal under the name "K" was taken over as a running

371
 business with effect from 1st April, 2016 by Sanjana Ltd., which was incorporated on
1st July, 2016. The same set of books was continued since there was no change in the
type of business and the following particulars of profits for the year ended 31st
March, 2017 were available.
Rs. Rs.
Sales: Company period 40,000
Prior period 10,000 50,000
Selling Expenses 3,500
Preliminary Expenses written off 1,200
Salaries 3,600
Directors' Fees 1,200
Interest on Capital (Up to 30.6.2016) 700
Depreciation 2,800
Rent 4,800
Purchases 25,000
Carriage Inwards 1,019 43,819
Net Profit 6,181
The purchase price (including carriage inwards) for the post-incorporation period had
increased by 10 percent as compared to pre-incorporation period. No stocks were carried
either at the beginning or at the end.You are required to prepare a statement showing the
amount of pre and post incorporation period profits stating the basis of allocation of
expenses. [RTP May‘18]
Ans. Statement showing the calculation of profits/losses for pre incorporation and Post
incorporation period profits of Sanjana Ltd. for the year ended 31st March, 2017

Particulars Basis Pre Post

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 Rs. Rs.

Sales (given) 10,000 40,000

Less; Purchases 1:3.3 5,814 19,186
Carriage Inwards 1:3.3 237 782
Gross Profit (i) 3,949 20,032
Less; Selling Expenses 1:4 700 2,800
Preliminary Expenses 1,200
Salaries 1:3 900 2,700
Director Fees 1,200
Interest on capital 700
Depreciation 1:3 700 2,100
Rent 1:3 1,200 3,600
Total of Expenses(ii) 4,200 13,600
Capital Loss/Net Profit (i-ii) (251) 6,432
Working Notes:

1. SalesRatio=10,000:40,000 = 1:4

2. Time Ratio = 3:9 = 1:3

3. Purchases Price Ratio

Ratio is 3: 9
But purchases price was 10% higher in the company period

Ratio is 3: 9 + 10%
3:9.9 = 1:3.3.

Q12. Moon Ltd. was incorporated on 1st August, 2019 to take over the running business of a
partnership firm w.e.f. 1st April, 2019. The summarized Profit & Loss Account for the

373
year ended 31st March, 2020 is as under:
Amount
(`)
Gross Profit 6,30,000
Less: Salaries 1,56,000
Rent, Rates & Taxes 72,000
Commission on sales 40,600
Depreciation 60,000
Interest on Debentures 36,000
Director's fees 24,000
Advertisement 48,000 4,36,600
Net Profit for the year 1,93,400

Moon Ltd. initiated an advertising campaign which resulted in increase of monthly sales
by 25% post incorporation.
You are required to prepare a statement showing the profit for the year between pre-
incorporation and post-incorporation. Also, explain how these profits are to be treated in the
accounts?
[Sugg Nov 2020] [ 4 marks]
Ans. Statement showing the calculation of Profits for the pre-incorporation and post-
incorporation periods

374
Pre-incorporation profit will be transferred to Capital Reserve.

Post-incorporation profit will be transferred to Profit & Loss Account.

Working Notes:

1. Sales ratio

Let the monthly sales for first 4 months (i.e. from 1.4.2019 to 31.7.2019) be = x

Then, sales for 4 months = 4x

Monthly sales for next 8 months (1st August, 2019 to 31st March, 2020)

= x + 25% of x= 1.25x Then, sales for next 8 months = 1.25x X 8 = 10x

Total sales for the year = 4x + 10x = 14x. Hence Sales Ratio = 4 x :10x i.e. 2:5

2. Time ratio

1st April, 2019 to 31st July, 2019 : 1st August, 2019 to 31st March, 2020
= 4 months: 8 months = 1:2. Thus, time ratio is 1:2.

Q13. Megha Ltd. was incorporated on 1.7.2020 to take over the running business of M/s
Happy from 1.4.2020. The accounts of the company were closed on 31.3.2021.

The average monthly sales during the first three months of the year (2020-21) was twice the

375
average monthly sales during each of the remaining nine months.

You are required to compute time ratio and sales ratio for pre and post incorporation periods.

[RTP May2021]

Ans. Time ratio:

Pre-incorporation period (1.4.2020 to 1.7.2020) = 3 months

Post incorporation period (1.7.2020 to 31.3.2021) = 9 months

Time ratio = 3 : 9 or 1 : 3

Sales ratio:

Average monthly sale before incorporation was twice the average sale per
month of the post incorporation period. If weightage for each post-
incorporation month is x, then
Weighted sales ratio = 3 ´ 2x : 9 ´ 1x = 6x : 9x or 2 : 3

Q14.The Business carried on by Kamal under the name "K" was taken over as a running
business with effect from 1st April, 2020 by Sanjana Ltd., which was incorporated on 1st
July, 2020. The same set of books was continued since there was no change in the type
of business and the following particulars for the year ended 31st March, 2021
were available:
` `
Sales: Company period (1.7.20 to 40,000
31.3.21)
Prior period (1.4.20 to 30.6.20) 10,000 50,000
Selling Expenses 3,500
Preliminary Expenses written off 1,200
Salaries paid 3,600

376
 Directors' Fees 1,200
Interest on Capital (Upto 30.6.2020) 700
Depreciation 2,800
Rent expense 4,800
Purchases: Company period (1.7.20 to 3,125
31.3.21
Prior period (1.4.20 to 21,875
30.6.20)
Carriage Inwards 1,000 43,800
Net Profit 6,200

You are required to prepare a statement showing the amount of pre and post incorporation
period profits stating the basis of allocation of expenses.
[RTP May 2021]

Ans. Statement showing the calculation of profits/losses for pre incorporation

and Post incorporation period profits of Sanjana Ltd.

for the year ended 31st March, 2021

Particulars Basis Pre Post
` `
Sales (given) 10,000 40,000
Less: Purchases (given) 3,125 21,875
Carriage Inwards 1:7 125 875
Gross Profit (i) 6,750 17,250
Less: Selling Expenses 1:4 700 2,800
Preliminary Expenses 1,200
Salaries 1:3 900 2,700

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 Director Fees 1,200
Interest on capital 700
Depreciation 1:3 700 2,100
Rent 1:3 1,200 3,600
Total of Expenses(ii) 4,200 13,600
Pre-incorporation/Net Profit (i-ii) 2,550 3,650

Working Notes:

1: Sales Ratio = 10,000 : 40,000 = 1 :4

2: Time Ratio = 3:9 = 1:3

Q15. Green Ltd. took over a running business with effect from 1st April, 2019. The
company was incorporated on 1st August, 2019. The following summarized Profit and Loss
Account has been prepared for the year ended 31.3.2020:
` `
To Salaries 72,000 By Gross profit4,80,000
To Stationery 7,200
To Travelling expenses 25,200
To Advertisement 24,000
To Miscellaneous trade expenses 56,700
To Rent (office buildings) 39,600
To Electricity charges 6,300
To Director’s fee 16,800
To Bad debts 4,800
To Commission to selling agents 33,000
To Debenture interest 4,500

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 To Interest paid to vendor 6,300
To Selling expenses 37,800
To Depreciation on fixed assets 14,400
To Net profit 1,31,400

4,80,000 4,80,000

Additional information:

(a) Sales ratio between pre and post incorporation periods was 1:3.

(b) Rent of office building was paid @ ` 3,000 per month up to September, 2019
and thereafter it was increased by ` 600 per month.

(c) Travelling expenses include ` 7,200 towards sales promotion. Travelling

expenses are to be allocated between pre and post incorporation periods on
time basis.

(d) Depreciation include ` 900 for assets acquired in the post incorporation period.

(e) Purchase consideration was discharged by the company on 30th September,

2019 by issuing equity shares of ` 10 each.

You are required to prepare Statement showing calculation of profits and allocation
of expenses between pre and post incorporation periods.
[RTP Nov2020]
Ans. Statement showing calculation of profits for pre and post incorporation periods

for the year ended 31.3.2020

Particulars Pre- Post-
incorporation incorporation
period period
` `

379
A. Gross profit (1:3) 1,20,000 3,60,000
Less: Salaries (1:2) 24,000 48,000
Stationery (1:2) 2,400 4,800
Advertisement (1:3) 6,000 18,000
Travelling expenses (W.N.3) 6,000 12,000
Sales promotion expenses 1,800 5,400
(W.N.3)
Misc. trade expenses (1:2) 18,900 37,800
Rent (office building) 12,000 27,600
(W.N.2)
Electricity charges (1:2) 2,100 4,200
Director’s fee 16,800
Bad debts (1:3) 1,200 3,600
Selling agents commission 8,250 24,750
(1:3)
Debenture interest 4,500
Interest paid to vendor (2:1) 4,200 2,100
(W.N.4)
Selling expenses (1:3) 9,450 28,350
Depreciation on fixed assets 4,500 9,900
(W.N.5)
B. 1,00,800 2,47,800
Pre-incorporation profit (A less 19,200
B)
Post-incorporation profit (A less 1,12,200

380
B)

Working Notes:

1. Time Ratio

Pre incorporation period = 1st April, 2019 to 31st July, 2019

i.e. 4 months

Post incorporation period is 8 months Time ratio

is 1: 2.
2. Rent
`
Rent for pre-incorporation period (` 3,000 x 4) 12,000 (pre)
Rent for post incorporation period
August,2019 & September, 2019 (` 3,000 x 2) 6,000
October,2019 to March,2020 (` 3,600 x 6) 21,600 27,600 (post)

3. Travelling expenses and sales promotion expenses

Pre Post
` `
Traveling expenses ` 18,000 (i.e. ` 25200 -
` 7200) distributed in 1:2 ratio 6,000 12,000
Sales promotion expenses ` 7,200 distributed in 1:3 ratio
1,800 5,400

4. Interest paid to vendor till 30th September, 2019

Pre Post
` `

381
 Interest for pre-incorporation period ` 6,300x 4/6 4,200

Interest for post incorporation period i.e. for

August, 2019 & September, 2019 = ` 6,300x 2/6 2,100

5. Depreciation
Pre Post
` `
Total depreciation 14,400
Less: Depreciation exclusively for post incorporation period 900 900
13,500
Depreciation for pre-incorporation period (13,500x4/12) 4,500
Depreciation for post incorporation period (13,500x8/12) ____ 9,000
4,500 9,900

Q16. New Limited was incorporated on 01.08.2020 to take-over the business of a

partnership firm w.e.f. 01.04.2020. It provides you the following information for the year
ended 31.03.2021:
`
Gross profit 9,00,000
Expenses:
Salaries 1,80,000
Rent, Rates & Taxes 1,20,000
Depreciation 37,500
Commission on Sales 31,500
Interest on Debentures 48,000

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 Director’s Fees 18,000
Advertisement 54,000
Net Profit for the Year 4,11,000

(i) New Limited initiated an advertising campaign which resulted increase in

monthly average sales by 25% post incorporation.

(ii) The Gross profit ratio post incorporation increased to 30% from 25%.

You are required to apportion the profit for the year between pre-incorporation and
post- incorporation periods.
[RTP Nov 20201]

Ans. Statement showing the calculation of Profits for the pre-incorporation and post-
incorporation periods

Particulars Total Basis of Pre- Post-

Amount Allocation incorporation incorporation
` ` `
Gross Profit 9,00,000 1:3 2,25,000 6,75,000
Less: Salaries 1,80,000 Time 60,000 1,20,000
Rent, rates and 1,20,000 Time 40,000 80,000
taxes
Commission on 31,500 Sales(2:5) 9,000 22,500
sales
Depreciation 37,500 Time 12,500 25,000
Interest on 48,000 Post 48,000
debentures
Directors’ fee 18,000 Post 18,000

383
 Advertisement 54,000 post 54,000

Net profit 4,11,000 1,03,500 3,07,500

Working Notes:

1. Sales ratio

Let the monthly sales for first 4 months (i.e. from 1.4.2020 to 31.7.2020) be
= x Then, sales for 4 months = 4x
Monthly sales for next 8 months (i.e. from 1.8.20 to 31.3.2021) = x + 25% of
x= 1.25x Then, sales for next 8 months = 1.25x X 8 = 10x
Total sales for the year = 4x + 10x = 14x Sales
Ratio = 4 x :10x i.e. 2:5
2. Gross profit ratio

From 1.4.2020 to 31.7.2020 gross profit is 25% of sales

Then, 25% of 4x= 1x
gross profit for next 8 months (i.e. from 1.8.20 to 31.3.2021) is 30%
Then, 30% of 10x = 3x
Therefore gross profit ratio will be 1:3

3.Time ratio

1st April, 2020 to 31st July, 2020 : 1st August, 2020 to 31st March, 2021

= 4 months: 8 months = 1:2 Thus, time

ratio is 1:2.

Q17. Sneha Ltd. was incorporated on 1st July, 2019 to acquire a running business of Atul Sons with
effect from 1st April, 2019.During the year 2019-20, the total sales were Rs. 24,00,000 of which Rs.
4,80,000 were for the first six months. The Gross profit of the company for the year was Rs. 3,90,800.
The expenses charged to the Statement of Profit & Loss Account included the following:

384
 (i) Director's fees Rs. 30,000

(ii) Bad debts Rs. 7,200

(iii) Advertising Rs. 24,000 (under a contract amounting to Rs. 2,000 per month)

(iv) Salaries and General Expenses Rs. 1,28,000

(v) Preliminary Expenses written off Rs. 10,000

(vi) Donation to a political party given by the company Rs. 10,000.

Prepare a statement showing pre-incorporation and post-incorporation profit for the year ended 31st March,
2020
[MTP May 2021 ] ( 6 marks)

Ans. Statement showing the calculation of Profits for the pre-incorporation and post- incorporation
periods for the year ended 31 st March, 2020
Particulars Total Allocation Pre- Post-
basis incorporation incorporation
Rs. Rs.
Gross Profit 3,90,800 Sales 39,080 3,51,720
Less: Directors’ fee 30,000 Post 30,000
Bad debts 7,200 Sales 720 6,480
Advertising 24,000 Time 6,000 18,000
Salaries & general 1,28,000 Time 32,000 96,000
expenses
Preliminary expenses 10,000 Post 10,000
Donation to Political 10,000 Post 10,000
Party
Net Profit 1,81,600 1,81,240
Pre-incorporation profit 360

385
 transferred
to Capital Reserve

Working Notes:

1. Sales ratio
Particulars Rs.
Sales for period up to 30.06.2019 (4,80,000 X 3/6) 2,40,000
Salesfor period from 01.07.2019 to 31.03.2020 (24,00,000 – 21,60,000
2,40,000)

Thus, Sales Ratio = 1 : 9

2. Time ratio

1st April, 2019 to 30 June, 2019: 1st July, 2019 to 31st March, 2020

= 3 months: 9 months = 1: 3

Thus, Time Ratio is 1: 3

Q18. The partners of Ojasvi Enterprises decided to convert the partnership firm into a Private Limited
Company Tejasvi (P) Ltd. with effect from 1st January, 2019. However, company could be
incorporated only on 1st June, 2019. The business was continued on behalf of the company and the
consideration of ` 6,00,000 was settled on that day along with interest @ 12% per annum. The company
availed loan of ` 9,00,000 @ 10% per annum on 1st June, 2019 to pay purchase consideration and for
working capital. The company closed its accounts for the first time on 31st March, 2020 and presents
you the following summarized profit and loss account:
` `
Sales 19,80,000
Cost of goods sold 11,88,000
Discount to dealers 46,200

386
 Directors’ remuneration 60,000
Salaries 90,000
Rent 1,35,000
Interest 1,05,000
Depreciation 30,000
Office expenses 1,05,000
Preliminary expenses (to be written off in first 15,000
year itself) 17,74,200
Profit 2,05,800

Sales from June, 2019 to December, 2019 were 2½ times of the average sales, which further increased to
3½ times in January to March quarter, 2019. The company recruited additional work force to expand the
business. The salaries from July, 2019 doubled. The company also acquired additional showroom at
monthly rent of ` 10,000 from July, 2019.

You are required to prepare a statement showing apportionment of cost and revenue between pre -
incorporation and post-incorporation periods.
[MTP Nov 2020] ( 10 marks )
Ans. Tejasvi (P) Limited

Statement showing apportionment of cost and revenue between pre-incorporation

and post-incorporation periods
Pre. inc. (5 Post inc. (10
months) months)
(`) (`)
Sales (W.N.1) 3,00,000 16,80,000
Less: Cost of sales 1,80,000 10,08,000
Discount to dealers 7,000 39,200

387
 Directors’ remuneration - 60,000
Salaries (W.N.2) 18,750 71,250
Rent (W.N.3) 15,000 1,20,000
Interest (W.N.4) 30,000 75,000
Depreciation 10,000 20,000
Office expenses 35,000 70,000
Preliminary expenses 15,000
Net profit 4,250 2,01,550
Working Notes:

1. Calculation of sales ratio

Let the average sales per month in pre-incorporation period be x

Average Sales (Pre-incorporation) =xX5 = 5x

Sales (Post incorporation) from June to December, 2019 = 2½x X 7 = 17.5x

From January to March, 2020 = 3½x X 3 = 10.5x

Total Sales 28.0x

Sales ratio of pre-incorporation & post incorporation is 5x : 28x

2. Calculation of ratio for salaries

Let the average salary be x

Pre-incorporation salary = xX5 5x

Post incorporation salary

June, 2019 = x
July,2019 to March, 2020 = x X 9 X 2 = 18x
19x

388
 Ratio is 5 : 19

3. Calculation of Rent `

Total rent 1,35,000

Less: Additional rent for 9 months @ ` 10,000 p.m. 90,000

Rent of old premises apportioned in time ratio 45,000

Apportionment Pre Inc. Post Inc.

Old premises rent 15,000 30,000
Additional Rent 90,000
15,000 1,20,000

4. Calculation of interest

Pre-incorporation period from January, 2019 to May, 2019

6,00,000 * 12 * 5 / 100 * 12 = ` 30,000
Post incorporation period from June, 2019 to March, 2020
9,00,000 * 10 * 10 / 100 * 12 = ` 75,000
` 1,05,000

389
CHAPTER-5

Accounting for Bonus Issue and Right Issue

Q-1 Following is the extract of the Balance Sheet of Xeta Ltd. March,
as at 31st 2017
Rs.
Authorized capital:
50,000 12% Preference shares of Rs.10 each 5,00,000
4,00,000 Equity shares of Rs.10 each 40,00,000
45,00,000
Issued and Subscribed capital:
24,000 12% Preference shares of Rs.10 each fully 2,40,000
paid
2,70,000 Equity shares of Rs.10 each, Rs.8 paid up 21,60,000
Reserves and surplus:
General Reserve 3,60,000
Securities premium 1,00,000
Profit and Loss Account 6,00,000
On 1st April, 2017, the Company has made final call@ ` 2 each on 2,70,000 equity shares. The
call money was received by 20th April, 2017. Thereafter, the company decided to capitalize
its reserves by way of bonus at the rate of one share for every four shares held.
Show necessary journal entries in the books of the company and prepare the extract of the
balance sheet as on 30th April, 2017 after bonus issue.[RTP May ‘19]

390
Ans. Journal Entries in the books of Xueta Ltd. Rs. Rs.
1-4-2017 Equity shares final call A/c Dr. 5,40,000
To Equity share capital A/c 5,40,000
(For final calls of Rs.2 per share on 2,70,000 equity shares
due as per Board's Resolution dated )
20-4-2017 Bank A/c Dr. 5,40,000
Dr. To Equity share final call A/c 5,40,000
(For final call money on 2,70,000 equity shares received)
Securities Premium A/c Dr. 1,00,000
General Reserve A/c Dr. 3,60,000
Profit and Loss A/c Dr. 2,15,000
To Bonus to shareholders A/c 6,75,000
(For making provision for bonus issue
of one
share for every four shares held)
Bonus to shareholders A/c Dr. 6,75,000
To Equity share capital A/c 6,75,000
(For issue of bonus shares)
Extract of Balance Sheet as at 30th April, 2017 (after bonus issue)
Rs.
Authorized Capital
50,000 12% Preference shares of Rs.10 each 5,00,000
4,00,000 Equity shares of Rs.10 each 40,00,000
Issued and subscribed capital
24,000 12% Preference shares of Rs.10 each, fully paid 2,40,000
3,37,500 Equity shares of Rs.10 each, fully paid 33,75,000

391
 (Out of above, 67,500 equity shares @ ` 10 each were issued by
way of bonus)
Reserves and surplus
Profit and Loss Account 3,85,000

Q2 Following is the extract of the Balance Sheet of Xeta Ltd. as at 31st

March, 2017:
Rs.
Authorized capital:
50,000 12% Preference shares of Rs.10 each 5,00,000
4,00,000 Equity shares of Rs.10 each 40,00,000
45,00,000
Issued and Subscribed capital:
24,000 12% Preference shares of Rs.10 each fully paid 2,40,000
2,70,000 Equity shares of Rs.10 each, Rs.8 paid up 21,60,000
Reserves and surplus:
General Reserve 3,60,000
Securities premium 1,00,000
Profit and Loss Account 6,00,000
On 1st April, 2017, the Company has made final call @ Rs.2 each on 2,70,000 equity shares.
The call money was received by 20th April, 2017. Thereafter, the company decided to
capitalize its reserves by way of bonus at the rate of one share for every four shares held.
You are required to give necessary journal entries in the books of the company and
prepare the extract of the balance sheet as on 30th April, 2017 after bonus issue. [RTP
Nov ‘18]
Ans. Journal Entries in the books of Xeta Ltd.

392
 Rs. Rs.
1-4-2017 Equity shares final call A/c Dr. 5,40,000
To Equity share capital A/c 5,40,000
(For final calls of Rs.2 per share on 2,70,000
equity shares due as per Board's Resolution dated
...........................................................................)
20-4-2017 Bank A/c Dr. 5,40,000
To Equity share final call A/c 5,40,000
(For final call money on 2,70,000 equity shares
received)
Securities Premium A/c Dr. 1,00,000
General Reserve A/c Dr. 3,60,000
Profit and Loss A/c Dr. 2,15,000
To Bonus to shareholders A/c 6,75,000
(For making provision for bonus issue
of one
share for every four shares held)
Bonus to shareholders A/c Dr. 6,75,000
ToEquitysharecapitalA/c (Forissueofbonusshares) 6,75,000
Extract of Balance Sheet as at 30th April, 2017 (after bonus issue)

Rs.
Authorized Capital
50,000 12% Preference shares of Rs.10 each 5,00,000
4,00,000 Equity shares of Rs.10 each 40,00,000
Issued and subscribed capital

393
 24,000 12% Preference shares of Rs.10 each, fully paid 2,40,000
3,37,500 Equity shares of Rs.10 each, fully paid 33,75,000
(Out of above, 67,500 equity shares @ Rs.10 each were issued by way of
bonus)
Reserves and surplus
Profit and Loss Account 3,85,000
Q-3 Following is the extract of the Balance Sheet of Manoj Ltd. as at 31st March, 20X1

Rs.
Authorized capital:
30,000 12% Preference shares of Rs.10 each 3,00,000
4,00,000 Equity shares of Rs.10 each 40,00,000
43,00,000
Issued and Subscribed capital:
24,000 12% Preference shares of Rs.10 each fully paid 2,40,000
2,70,000 Equity shares of Rs.10 each, Rs.8 paid up 21,60,000
Reserves and surplus:
General Reserve 3,60,000
Capital Redemption Reserve 1,20,000
Securities premium (collected in cash) 75,000
Profit and Loss Account 6,00,000
On 1st April, 20X1, the Company has made final call @ Rs. 2 each on 2,70,000 equity shares.
The call money was received by 20th April, 20X1. Thereafter, the company decided to
capitalize its reserves by way of bonus at the rate of one share for every four shares held.

Youare required to prepare necessary journal entries in the books of the company and prepare

394
 the relevant extract of the balance sheet as on 30th April, 20X1 after bonus issue.

[RTPMay ‘18]
Ans. Journal Entries in the books of Manoj Ltd.
Rs. Rs.
1-4-20x1 Equity share final call A/c Dr. 5,40,000

To Equity share capital A/c 5,40,000

(For final calls of Rs. 2 per share on 2,70,000

equity shares due as per Board's Resolution dated )

20-4-20x1 Bank A/c Dr. 5,40,000

To Equity share final call A/c 5,40,000

(For final call money on 2,70,000 equity shares 75,000

received) Securities Premium A/c 1,20,000
Dr.
Capital redemption reserve A/c
3,60,000
General Reserve A/c Dr.
1,20,000
Profit and Loss A/c (b.f.) Dr.
6,75,000
To Bonus to shareholders A/c Dr.

(For making provision for bonus issue

6,75,000
of one share for every four shares
6,75,000
held)
Bonus to shareholders Dr.
A/c To Equity share
capital A/c
(For issue of bonus shares)
Extract of Balance Sheet as at 30th April, 20X1 (after bonus issue)

395
 Rs.
Authorized Capital
30,000 12% Preference shares of Rs. 10 each 3,00,000
4,00,000 Equity shares of Rs. 10 each 40,00,000
Issued and subscribed capital
24,000 12% Preference shares of Rs.10 each, fully paid 2,40,000
3,37,500 Equity shares of Rs. 10 each, fully paid 33,75,000
(Out of the above, 67,500 equity shares @ Rs.10 each were issued by way of
bonus shares)
Reserves and surplus Profit and Loss Account 4,80,000
Q-4 The following is the summarized Balance Sheet of Bumbum Limited as at 31st March,
2019:
`
Sources of funds
Authorized capital
50,000 Equity shares of ` 10 each 5,00,000
10,000 Preference shares of ‘100 each (8% 10,00,000
redeemable)
15,00,000
Issued, subscribed and paid up
30,000 Equity shares of ` 10 each 3,00,000
5,000, 8%Redeemable Preference shares of ` 100 each 5,00,000
Reserves & Surplus x
Securities Premium 6,00,000
General Reserve 6,50,000

396
 Profit & Loss A/c 40,000
Trade payables 4,20,000
25,10,000
Application of funds
PPE (net) 7,80,000
Investments (market value ` 5,80,000) 4,90,000
Deferred Tax Assets 3,40,000
Trade receivables 6,20,000
Cash & Bank balance 2,80,000
25,10,000
In Annual General Meeting held on 20thJune, 2019 the company passed the
followingresolutions: (i) To split equity share of ` 10 each into 5 equity
shares of ` 2 each from 1st July, 2019.
(ii) To redeem 8% preference shares at a premium of 5%.
(iii) Toissue fully paid bonus shares in the ratio of one equity share for every 3 shares
held on record date.
On 10th July, 2019 investments were sold for ` 5,55,000 and preference shares
were redeemed. The bonus issue was concluded by 12th September, 2019
You are required to journalize the above transactions including cash transactions and
prepare Balance Sheet as at 30thSeptember, 2019. All working notes should form part
of your answer. [RTP-May’20]
Ans. Bumbum Limited
Journal Entries
2019 Dr. (`) Cr. (`)
July 1 Equity Share Capital A/c (` 10 each) Dr. 3,00,000

397
 To Equity share capital A/c (` 2 each) 3,00,000
(Being equity share of ` 10 each splitted into 5 equity
shares of ` 2 each) {1,50,000 x 2}
July 10 Cash & Bank balance A/c Dr. 5,55,000
To Investment A/c 4,90,000
To Profit & Loss A/c 65,000
(Being investment sold out and profit on sale credited
to Profit & Loss A/c)
July 10 8% Redeemable preference share capital A/c Dr. 5,00,000
Premium on redemption of preference share 25,000
A/c Dr.
To Preference shareholders A/c 5,25,000
(Being amount payable to preference share
holders
on redemption)
July 10 Preference shareholders A/c Dr. 5,25,000
To Cash & bank A/c 5,25,000
(Being amount paid to preference
shareholders)
July 10 General reserve A/c Dr. 5,00,000
To Capital redemption reserve A/c 5,00,000
(Being amount equal to nominal value of preference
shares transferred to Capital Redemption Reserve A/c
on its redemption as per the law)

398
Sept. 12 Capital Redemption Reserve A/c Dr. 1,00,000

To Bonus to shareholders A/c 1,00,000

(Being balance in capital redemption reserve

capitalized to issue bonus shares)
Sept. 12 Bonus to shareholders A/c Dr. 1,00,000

To Equity share capital A/c 1,00,000

(Being 50,000 fully paid equity shares of ` 2

each
issued as bonus in ratio of 1 share for every 3
Sept. 30 shares held) Dr. 25,000

Securities Premium A/c

ToPremium on redemption of preference 25,000
shares A/c
(Being premium on preference shares adjusted from

securities premium account)

Balance Sheet as at 30th September, 2019

Particulars Notes `
Equity and Liabilities

1 Shareholders’
funds a 1 4,00,000
Share capital 2 12,30,000
b Reserves and Surplus
4,20,000
2 Current liabilities
20,50,000

399
 a Trade Payables Total
7,80,000
3,40,000
Assets

1 Non-current 6,20,000
assets a 3,10,000
PPE 20,50,000
b Deferred tax asset

2 Current assets
Trade
receivables
Total
Cash and cash equivalents

Notes to accounts

1 Share Capital ` `
Authorized share capital

2,50,000 Equity shares of ` 2 each 5,00,000

10,000 8% Preference shares of ` 100 each 10,00,000 15,00,000

Issued, subscribed and paid up

2,00,000 Equity shares of ` 2 each 4,00,000

2 Reserves and Surplus

Securities Premium A/c

Balance as per balance sheet 6,00,000

Less: Adjustment for premium on preference (25,000)

Shares Balance 5,75,000

4,00,000

400
 Capital Redemption Reserve (5,00,000-1,00,000) 1,50,000
General Reserve (6,50,000 – 5,00,000) 40,000
Profit & Loss A/c 65,000 1,05,000
Add: Profit on sale of investment 12,30,000
Total
Working Notes:
`
1. Redemption of preference shares
5,000 Preference shares of ` 100 each 5,00,000
Premium on redemption @ 5% 25,000
Amount Payable 5,25,000
2. Issue of Bonus Shares
Existing equity shares after split (30,000 x 5) 1,50,000
shares
Bonus shares (1 share for every 3 shares held) to be issued 50,000 shares
3. Cash and Bank Balance
Balance as per balance sheet 2,80,000
Add: Realization on sale of investment 5,55,000
8,35,000
Less: Paid to preference share holders (5,25,000)
Balance 3,10,000

Q-5 Following is the extract of Balance Sheet of Prem Ltd. as at 31 st March, 2018:
Authorized capital `
3,00,000 equity shares of ` 10 each 30,00,000
25,000, 10% preference shares of ` 10 each 2,50,000

401
 32,50,000

Issued and subscribed capital:

2,70,000 equity shares of ` 10 each fully paid up 27,00,000
24,000,10% preference shares of ` 10 each fully paid up 2,40,000
29,40,000
Reserves and surplus:
General reserve 3,60,000
Capital redemption reserve 1,20,000
Securities premium (in cash) 75,000
Profit and loss account 6,00,000
11,55,000

On 1st April, 2018, the company decided to capitalize its reserves by way of bonus at
the rate of two shares for every five shares held. Show necessary journal entries in
the books of the company and prepare the extract of the balance sheet after bonus
issue. [Sugg.Nov.’19, 5 Marks]
Ans. Prem Ltd.
Journal Entries
April Capital Redemption Reserve A/c Dr 1,20,000
1 .
Securities Premium Dr 75,000
A/c General Reserve . 3,60,000
A/c Profit and Loss A/c Dr 5,25,000
(b.f.) .
To Bonus to Equity Dr
Shareholders A/c (Bonus issue @ two .

402
 shares for every five shares held by 10,80,000
utilizing various reserves as per Board’s
Resolution dated...)
Bonus to Shareholders A/c Dr 10,80,00

ToEquity Share . 0

Capital A/c (Issue of bonus 10,80,000

shares)
Balance Sheet (Extract) as on 1st April, 2018 (after bonus issue)
Particulars Notes Amount (`)
Equity and Liabilities
1 Shareholders’ funds
a Share capital 1 40,20,000
b Reserves and Surplus 2 75,000
Notes to Accounts
1 Share Capital (` )
Authorized share capital:
3,78,000* Equity shares of ` 10 each 37,80,000
*
25,000 10% Preference shares of ` 10 2,50,000
each
Total 40,30,000
Issued, subscribed and fully paid share capital:
3,78,000 Equity shares of ` 10 each, fully paid
(Out of above, 1,08,000 equity shares @ ` 10 each
were issued by way of bonus) 37,80,000
24,000 10% Preference shares of ` 10 each 2,40,000

403
 Total 40,20,000
2 Reserves and Surplus
Capital Redemption Reserve 1,20,000 Nil
Less: Utilized 1,20,000
Securities Premium 75,000
Less: Utilized for bonus issue (75,000) Nil
General reserve 3,60,000
Less: Utilized for bonus issue (3,60,000) Nil
Profit & Loss Account 6,00,000
Less: Utilized for bonus issue (5,25,000) 75,000
Total 75,000
Note: * Authorized capital has been increased by the minimum required amount i.e., ` 7,80,000
(37,80,000– 30,00,000) in the above solution.
Q-6 Following are the balances appear in the trial balance of Arya Ltd. as at 31st March.
2018.
Issued and Subscribed Capital:
Rs.
10,000; 10% Preference Shares of Rs.10 each 1,00,000
fully paid
1,00,00, Equity Shares of Rs.10 each Rs 8 paid 8,00,000
up
Reserves and Surplus:
General Reserve 2,40,000
Security Premium (collected in cash) 25,000
Profit and Loss Account 1,20,000
On 1st April, 2018 the company has made final call @ ` 2 each on 1,00,000 Equity Shares.

404
 The call money was received by 15th April, 2018. Thereafter the company decided to
issue bonus shares to equity shareholders at the rate of 1 share for every 5 shares held
and for this purpose, it decided that there should be minimum reduction in free
reserves. Pass Journal entries. [Sugg. May ‘18, 5 Marks]

Ans. Arya Ltd.

Journal Entries
2018 Dr. Cr.
Rs. Rs.
April 1 Equity Share Final Call A/c Dr. 2,00,000
To Equity Share Capital A/c 2,00,00
0
(Final call of Rs.2 per share on 1,00,000 equity
shares due as per Board’s Resolution dated )
April Bank A/c Dr. 2,00,000
15
To Equity Share Final Call A/c 2,00,00
0
(Final Call money on 1,00,000 equity shares
received)
Securities Premium A/c Dr. 25,000
General Reserve A/c* Dr. 1,75,000
To Bonus to Shareholder A/c 2,00,00
0
(Bonus issue @ one share for every 5 shares held by
utilizing

405
 various reserves as per Board’s resolution dated...)
April Bonus to Shareholders A/c Dr. 2,00,000
15
To Equity Share Capital A/c (Capitalization of 2,00,00
profit) 0
Note: Profit and Loss Account balance may also be utilized along with General Reserve for the
purpose of issue of Bonus shares.
Q-7 Following items appear in the Trial Balance of Beta Ltd. as on 31st March, 2017:
Particulars Amount
3,000 Equity Shares of Rs. 100 each 3,00,000
Securities Premium (collected in cash) 40,000
Capital Redemption Reserve 30,000
General Reserve 1,00,000
The company decided to issue to equity shareholders bonus shares at the rate of 1
share for every 3 shares held. Company decided that there should be the minimum
reduction in free reserves. Pass necessary Journal Entries in the books of Beta Ltd.
[MTP Oct. ‘19, 5 Marks]
Ans. Capital Redemption Reserve A/c Dr.
30,000 Securities Premium A/c Dr.
40,000
General Reserve A/c Dr. 30,000
To Bonus to Shareholders 1,00,000
(Being issue of bonus shares by utilization of
various Reserves, as per resolution dated)
Bonus to Shareholders A/c Dr. 1,00,000
To Equity Share Capital 1,00,000

406
 (Being capitalization of Profit)
Q-8 Omega company offers new shares of Rs. 100 each at 25% premium to existing
shareholders on the basis one for five shares. The cum-right market price of a share is
Rs. 200.
You are required to calculate the (i) Ex-right value of a share; (ii) Value of a right
share?
[MTP April ‘19, 4 Marks]
Ans. Ex-right value of the shares
= (Gum-right value of the existing shares + Rights shares x Issue Price) / (Existing No.
of shares + No. of right shares) = (Rs. 200 X 5 Shares + Rs. 125 X 1 Share) / (5 + 1)
Shares
= Rs. 1,125 / 6 shares = Rs. 187.50 per share.
Value of right = Gum-right value of the share - Ex-right value of the share
= Rs. 200-Rs. 187.50 = Rs. 12.50 per share.
Q-9 The following notes pertain to Brite Ltd.'s Balance Sheet as on 31st March, 20X1:
Notes Rs. in Lakhs
(1) Share Capital
Authorized:
20 crore shares of Rs. 10 each 20,000
Issued and Subscribed:
10 crore Equity Shares of Rs. 10 each 10,000
2 crore 11% Cumulative Preference Shares of Rs. 10 each 2,000
Total 12,000
Called and paid up:
10 crore Equity Shares of Rs. 10 each, Rs. 8 per share called and paid 8,000

407
 up 2 crores
11% Cumulative Preference Shares of Rs. 10 each, fully called 2,000
and paid up
Total 10,000
(2) Reserves and Surplus:
Capital Redemption Reserve 1,485
Securities Premium (collected in cash) 2,000
General Reserve 1,040
Surplus i.e., credit balance of Profit & Loss Account 273
Total 4,798
On 2nd April 20X1, the company made the final call on equity shares @ Rs. 2 per share.
The entire money was received in the month of April, 20X1.On 1st June 20X1, the
company decided to issue to equity shareholders bonus shares at the rate of 2 shares
for every 5 shares held.
Youa re required to prepare journal entries for all the above-mentionedtransactions. Also
prepare the notes on Share Capital and Reserves and Surplus relevant to the
Balance Sheet of the company immediately after the issue of bonus shares. [MTP
April ‘18, 10 Marks]
Ans. Journal Entries in the books of Brite Ltd.
20x1 Dr. Cr.
Rs.in lakhs Rs. in lakhs

408
 April 2 Equity Share Final Call A/c Dr. 2,000
To Equity Share Capital A/c 2,000

(Final call of Rs. 2 per share on 10 crore equity shares made due)
Bank A/c Dr. 2,000
To Equity Share Final Call A/c 2,000

(Final call money on 10 crore equity shares received)

June 1 Capital Redemption Reserve A/c 1,485
Securities Premium A/c 2,000
General Reserve A/c (b.f.) . 515
To Bonus to Shareholders A/c
4,000
(Bonus issue of two shares for every five shares held,
by utilizing various reserves as per Board's resolution
dated..................................................................)
4,000
Bonus to Shareholders A/c.
4,000
To Equity Share Capital
(Capitalization of profit)
Notes to Accounts
1 Share Capital
Authorized share
capital 20,000
20 crores share of Rs.10 each
Issued, subscribed and fully paid-up share capital 14,000
14 crore Equity shares of Rs. 10 each, fully paid up

409
 (Out of the above, 4 crore equity shares @
Rs.10 each were issued by way of bonus)
2 crore, 11% Cumulative Preference share capital of Rs. 10 each, 2,000
fully paid up
16,000
2. Reserves and Surplus
Capital Redemption reserve 1,485
Less: Utilized for bonus issue 1,485
Securities Premium 2,000
Less: Utilized for bonus issue (2,000
)
General Reserve 1,040
Less: Utilized for bonus issue 515 515
Surplus (Profit and Loss 273
Account)
Total 798
Q-10 Following items appear in the Trial Balance of Hello Ltd. as on 31st March, 2017:
Particulars Amount
9,000 Equity Shares of Rs.100 each 9,00,000
Securities Premium 80,000
Capital Redemption Reserve 1,40,000
General Reserve 2,10,000
Profit and Loss Account (Cr. Balance) 90,000
The company decided to issue to equity shareholders bonus shares at the rate of 1 share for
every 3 shares held. Company decided that there should be the minimum reduction in free
reserves.

410
You are required to give the necessary Journal Entries in the books Hello Ltd.

[MTP March ‘18, 5 Marks]

Ans. Journal Entries in the books of Hello Ltd.

Capital Redemption Reserve A/c Dr.

Securities Premium A/c 1,40,000

General Reserve A/c (balancing figure) To Bonus to Dr. 80,000

Shareholders Dr. 80,000 3,00,000
(Beingissueof bonussharesbyutilization ofvarious
Reserves, as perresolution dated.......)
BonustoShareholdersA/c Dr.3,00,000
To Equity Share Capital 3,00,000
(Being capitalization of profit)

Q-11 Omega company offers new shares of Rs. 100 each at 25% premium to existing
shareholders on the basis one for five shares. The cum -right market price of a share
is Rs. 200.
You are required to calculate the (i) Ex -right value of a share; (ii) Value of a right
share?
[MTP Aug. ‘18, 4 Marks]
Ans. Ex-right value of the shares
= (Cum-rightvalue ofthe existingshares+Rightsshares x Issue Price) / (Existing No.
ofshares+ No. of right shares)
= (Rs. 200 x 5 Shares + Rs. 125 x 1 Share) / (5 + 1) Shares
= Rs. 1,125 / 6 shares = Rs. 187.50 per share.
Value of right = Cum-right value of the share – Ex-right value of the share
= Rs. 200 – Rs. 187.50 = Rs. 12.50 per share.
Q-12 Following is the extract of the Balance Sheet of Manoj Ltd. as at 31st March, 20X1

411
 Authorized capital: Rs.
30,000 12% Preference shares of Rs. 10 each 3,00,000
3,00,000 Equity shares of Rs. 10 each 30,00,000
33,00,000
Issued and Subscribed capital:
24,000 12% Preference shares of Rs. 10 each fully paid 2,40,000
2,70,000 Equity shares of Rs. 10 each, Rs. 8 paid up 21,60,000
Reserves and surplus:
General Reserve 3,60,000
Capital Redemption Reserve 1,20,000
Securities premium (collected in cash) 75,000
Profit and Loss Account 6,00,000
On 1st April, 20X1, the Company has made final call @ Rs. 2 each on 2,70,000 equity shares.

The call money was received by 20th April, 20X1. Thereafter, the company decided to
capitalize its reserves by way of bonus at the rate of one share for every four shares held.
Prepare necessary journal entries in the books of the company.
[MTP Aug.‘18, 5Marks]
Ans. Journal Entries in the books of Manoj Ltd.
Rs. Rs.
1-4-20X1 Equity share final call A/c Dr. 5,40,000
To Equity share capital A/c 5,40,000
(Forfinal callsof Rs. 2pershareon2,70,000equity
shares due as per Board’s Resolution dated….)

412
 20-4- Bank A/c Dr. 5,40,000
20X1 To Equity share final call A/c 5,40,000

(For final call money on 2,70,000 equity shares 75,000

received) Securities Premium A/c Dr. 1,20,000
Capital redemption Reserve A/c Dr.
3,60,000
General Reserve A/c Dr. 1,20,000
Profit and Loss A/c (b.f.) Dr. 6,75,000
To Bonus to shareholders A/c

(For making provision for bonus issue of one 6,75,000

share for every four shares held) 6,75,000
Bonus to shareholders A/c Dr.
To Equity share capital
A/c (For issue of bonus
shares)
Q-13 Following items appear in the Trial Balance of Beta Ltd. as on 31st March, 2017:

Particulars Amount
3,000 Equity Shares of Rs. 100 each 3,00,000
Securities Premium (collected in cash) 40,000
Capital Redemption Reserve 30,000
General Reserve 1,00,000
The company decided to issue to equity shareholders bonus shares at the rate of 1 share for
every 3 shares held. Company decided that there should be the minimum reduction in free
reserves. Pass necessary Journal Entries in the books of Beta Ltd. [MTP Oct. ‘18, 5 Marks]
Ans.

413
 Capital Redemption Reserve A/c Dr. 30,000
Securities Premium A/c Dr. 40,000
General Reserve A/c Dr. 30,000
To Bonus to Shareholders 1,00,000
(Being issue of bonus shares by utilization of various
Reserves, as per resolution dated …….)

Bonus to Shareholders A/c Dr. 1,00,000

To Equity Share 1,00,000
Capital (Being
capitalization of Profit)
Q14. Following is the extract of the Balance of Manoj Ltd. as at 31st March, 20X1
Sheet
`
Authorized capital:
30,000 12% Preference shares of ` 10 each 3,00,000
4,00,000 Equity shares of ` 10 each 40,00,000
43,00,000

Issued and Subscribed capital:

24,000 12% Preference shares of ` 10 each fully paid 2,40,000
2,70,000 Equity shares of ` 10 each, ` 8 paid up 21,60,000
Reserves and surplus:
General Reserve 3,60,000
Capital Redemption Reserve 1,20,000

414
 Securities premium (collected in cash) 75,000
Profit and Loss Account 6,00,000
On 1st April, 20X1, the Company has made final call @ ` 2 each on 2,70,000 equity
shares. The call
money was received by 20th April, 20X1. Thereafter, the company decided to capitalize
its reserves by way of bonus at the rate of one share for every four shares held.
Show necessary journal entries in the books of the company and prepare the relevant
extract of the balance sheet as on 30th April, 20X1 after bonus issue. [RTP Nov‘19]
Ans. Journal Entries in the books of Manoj Ltd.
` `
1-4-20X1 Equity share final call A/c Dr. 5,40,000
To Equity share capital A/c 5,40,000
(For final calls of ` 2 per share on 2,70,000
equity shares due as per Board’s Resolution dated )
20-4-20X1 Bank A/c Dr. 5,40,000
To Equity share final call 5,40,000
A/c
(For final call money on 2,70,000 equity shares
received)
Securities Premium A/c Dr. 75,000
Capital Redemption Reserve A/c Dr. 1,20,000
General Reserve A/c Dr. 3,60,000
Profit and Loss A/c (b.f.) Dr. 1,20,000
To Bonus to shareholders 6,75,000
A/c
(For making provision for bonus issue of one share

415
 for
every four shares held)
Bonus to shareholders A/c Dr. 6,75,000
To Equity share capital A/c 6,75,000
(For issue of bonus shares)
Extract of Balance Sheet as at 30th April, 20X1 (after bonus issue)
`
Authorized Capital
30,000 12% Preference shares of ` 10 each 3,00,000
4,00,000 Equity shares of ` 10 each 40,00,00
0
Issued and subscribed capital
24,000 12% Preference shares of ` 10 each, fully paid 2,40,000
3,37,500 Equity shares of ` 10 each, fully paid 33,75,00
0
(Out of the above, 67,500 equity shares @ ` 10 each were issued by way of
bonus shares)
Reserves and surplus
Profit and Loss Account 4,80,000

Q15. Following is the information of Umesh Ltd. as at 31st March, 2021:

`
Authorized capital:
30,000 12% Preference shares of ` 10 each 3,00,000

4,00,000 Equity shares of ` 10 each 40,00,000

43,00,000

416
 Issued and Subscribed capital:

24,000 12% Preference shares of ` 10 each fully 2,40,000

paid
3,00,000 Equity shares of ` 10 each, ` 8 paid up 24,00,000
Reserves and surplus:
General Reserve 3,60,000
Capital Redemption Reserve 1,20,000
Securities premium (collected in cash) 75,000
Profit and Loss Account 6,00,000

On 1st April, 2021, the Company has made final call @ ` 2 each on 3,00,000 equity
shares. The call money was received by 20th April, 2021. Thereafter, the company
decided to capitalize its reserves by way of bonus at the rate of one share for every
four shares held.

You are required to prepare necessary journal entries in the books of the company.
[RTP May 2021]

Ans. Journal Entries in the books of Umesh Ltd.

` `
1-4- Equity share final call A/c Dr. 6,00,000
2021
To Equity share capital A/c 6,00,000
(For final calls of ` 2 per share on 3,00,000 equity
shares due as per Board’s Resolution dated….)
20-4- Bank A/c Dr. 6,00,000

417
 2021
To Equity share final call A/c 6,00,000
(For final call money on 3,00,000 equity shares
received)
Securities Premium A/c Dr. 75,000
Capital redemption reserve A/c Dr. 1,20,000
General Reserve A/c Dr. 3,60,000
Profit and Loss A/c (b.f.) Dr. 1,95,000
To Bonus to shareholders A/c 7,50,000
(For making provision for bonus issue of one share
for every four shares held)
Bonus to shareholders A/c Dr. 7,50,000
To Equity share capital A/c 7,50,000
(For issue of bonus shares)

Q16. Following is the extract of the Balance Sheet of Madhu Ltd.as at 31st March, 2020
`
Authorized capital:
45,000 12% Preference shares of ` 10 each 4,50,000
6,00,000 Equity shares of ` 10 each
60,00,000
64,50,000
Issued and Subscribed capital:
36,000 12% Preference shares of ` 10 each fully 3,60,000
paid
4,05,000 Equity shares of ` 10 each, ` 8 paid up 32,40,000

418
 Reserves and surplus:
General Reserve 5,40,000
Capital Redemption Reserve 1,80,000
Securities premium (collected in cash) 1,12,500
Profit and Loss Account 9,00,000

On 1st April, 2020, the Company has made final call @ ` 2 each on 4,05,000 equity
shares. The call money was received by 20th April, 2020. Thereafter, the company
decided to capitalize its reserves by way of bonus at the rate of one share for every
four shares held by utilizing the balance of profit and loss account to the minimum
extent.

You are required to prepare necessary journal entries in the books of the company
and prepare the relevant extract of the balance sheet as on 30 th April, 2020 after
bonus issue.
[RTP Nov2020]

Ans. Journal Entries in the books of Madhu Ltd.

` `
1-4- Equity share final call A/c Dr. 8,10,000
2020
To Equity share capital A/c 8,10,000
(For final calls of ` 2 per share on 4,05,000 equity
shares due as per Board’s Resolution dated….)
20-4- Bank A/c Dr. 8,10,000
2020
To Equity share final call A/c 8,10,000

419
 (For final call money on 4,05,000 equity shares
received)
Securities Premium A/c Dr. 1,12,500
Capital redemption reserve A/c Dr. 1,80,000
General Reserve A/c Dr. 5,40,000
Profit and Loss A/c (b.f.) Dr. 1,80,000
To Bonus to shareholders A/c 10,12,500

(For making provision for bonus issue of one share for

every four shares held)
Bonus to shareholders A/c
To Equity share capital A/c Dr. 10,12,500
10,12,500
(For issue of bonus shares)

Extract of Balance Sheet as at 30th April, 2020 (after bonus issue)

`
Authorized Capital
45,000 12% Preference shares of ` 10 each 4,50,000
6,00,000 Equity shares of ` 10 each 60,00,000
Issued and subscribed capital
36,000 12% Preference shares of ``10 each, fully paid 3,60,000
5,06,250 Equity shares of ` 10 each, fully paid 50,62,500
(Out of the above, 1,01,250 equity shares @ ` 10 each were issued by way
of bonus shares)
Reserves and surplus
Profit and Loss Account 7,20,000

420
 Q17. .Raman Ltd. gives the following information as at 31st March, 2021:
`
Authorised capital:
45,000 12% Preference shares of ` 10 each 4,50,000
6,00,000 Equity shares of ` 10 each 60,00,000
64,50,000
Issued and Subscribed capital:
36,000 12% Preference shares of ` 10 each fully 3,60,000
paid
4,05,000 Equity shares of ` 10 each, ` 8 paid up 32,40,000
Reserves and surplus:
General Reserve 5,40,000

Capital Redemption Reserve 1,80,000

Securities premium (collected in cash) 1,12,500
Profit and Loss Account 9,00,000

On 1st April, 2021, the Company has made final call @ ` 2 each on 4,05,000 equity
shares. The call money was received by 20th April, 2021. Thereafter, the company
decided to capitalize its reserves by way of bonus at the rate of one share for every
four shares held.

Show necessary journal entries in the books of the company.

[RTP Nov2021]
Ans. Journal Entries in the books of Raman Ltd.
` `
1-4- Equity share final call A/c Dr. 8,10,000

421
 2021
To Equity share capital A/c 8,10,000
(For final calls of ` 2 per share on 4,05,000
equity shares due as per Board’s Resolution dated….)
20-4- Bank A/c Dr. 8,10,000
2021
To Equity share final call A/c 8,10,000
(For final call money on 4,05,000 equity shares
received)
Securities Premium A/c Dr. 1,12,500
Capital Redemption Reserve A/c Dr. 1,80,000
General Reserve A/c Dr. 5,40,000
Profit and Loss A/c (b.f.) Dr. 1,80,000
To Bonus to shareholders A/c 10,12,500
(For making provision for bonus issue of one
share for every four shares held)
Bonus to shareholders A/c Dr. 10,12,500
To Equity share capital A/c 10,12,500
(For issue of bonus shares)

Q18.Following items appear in the Trial Balance of Hello Ltd. as on 31st March, 2020:
Particulars Amount
9,000 Equity Shares of Rs.100 each 9,00,000
Securities Premium 80,000
Capital Redemption Reserve 1,40,000
General Reserve 2,10,000

422
 Profit and Loss Account (Cr. Balance) 90,000

The company decided to issue to equity shareholders bonus shares at the rate of 1 share for every 3
shares held. Company decided that there should be the minimum reduction in free reserves. You are
required to give the necessary Journal Entries in the books Hello Ltd.
[MTP May 2021 ] ( 4 marks )

Ans. Capital Redemption Reserve A/c Dr.1,40,000

Securities Premium A/c Dr 80000

(considered to be realized in cash )

General Reserve A/c (balancing figure) Dr. 80,000

To Bonus to Shareholders 3,00,000

(Being issue of bonus shares by utilization of

various Reserves, as per resolution
dated …….)
Bonus to Shareholders A/c Dr 3,00,000
.
To Equity Share Capital 3,00,000
(Being capitalization of Profit)

Q19.Manu Ltd. gives the following information as at 31st March, 2021:

Rs.
Issued and Subscribed capital:
24,000 12% Preference shares of Rs. 10 each fully 2,40,000
paid
2,70,000 Equity shares of Rs. 10 each, Rs. 8 paid 21,60,000

423
 up
Reserves and surplus:
General Reserve 3,60,000
Capital Redemption Reserve 1,20,000
Securities premium (collected in cash) 75,000
Profit and Loss Account 6,00,000
On 1st April, 2021, the Company has made final call @ Rs. 2 each on 2,70,000 equity shares. The call
money was received by 20th April, 2021. Thereafter, the company decided to capitalize its reserves by
way of bonus at the rate of one share for every four shares held. You are required to prepare necessary
journal entries in the books of the company on 30th April, 2021 for these transactions.
[MTP May 2021] ( 4 marks )
Ans. Journal Entries
Rs. Rs.
1-4- Equity share final call A/c Dr. 5,40,000
2021 To Equity share capital A/c
(For final calls of Rs. 2 per share on 2,70,000 equity shares due 5,40,000
as per Board’s Resolution dated….)
20-4- Bank A/c Dr. 5,40,000
2021 To Equity share final call A/c
(For final call money on 2,70,000 equity shares received) 5,40,000

Securities Premium A/c Capital redemption Dr. 75,000

reserve A/c Dr. 1,20,000
General Reserve A/c Dr. 3,60,000
Profit and Loss A/c (b.f.) Dr. 1,20,000

424
 To Bonus to shareholders A/c 6,75,000
(For making provision for bonus issue of one share for every
four shares held)
Bonus to shareholders A/c Dr. 6,75,000
To Equity share capital A/c (For issue of 6,75,000
bonus shares)

Q20.A Limited company with subscribed capital of Rs. 5,00,000 consisting of 50,000 Equity shares of Rs.
10 each; called up capital Rs. 7.50 per share. A bonus of Rs. 1,25,000 declared out of General Reserve
to be applied in making the existing shares fully paid up. You are required to pass necessary Journal
Entries (with narration) for this issue of bonus shares. [ MTP May 2020 ] ( 5 marks )

Ans Journal Entries

Rs. Rs.
General Reserve A/c Dr. 1,25,000
To Bonus to shareholders A/c 1,25,000
(For making provision of bonus issue)
Share Final Call A/c 1,25,000
To Equity share capital A/c 1,25,000
(For final calls of Rs. 2.5 per share on 50,000
equity shares due as per Board’s Resolution
dated….)
Bonus to shareholders A/c Dr. 1,25,000
To Share Final Call A/c 1,25,000
(For adjusting Final Call A/c against bonus issue)

425
RIGHT ISSUE

Q-1 Omega company offers new shares of ` 100 each at 20% premium to existing
shareholders on the basis of one for four shares. The cum-right market price of a
shareis ` 190.You are required to calculate the Value of a right share.
[RTP Nov. ‘19]
Ans. Value of right share = Cum-right value of the share - Ex-right value of the share (as
computed in Working Note) = ` 190 - ` 176 = ` 14 per share.

Working Note:

Ex-right value of the shares

= (Cum-right value of the existing shares + Rights shares x Issue Price) / (Existing No. of
shares + No. of right shares) = (` 190 x 4 Shares + ` 120 x 1 Share) / (4 + 1) Shares
= ` 880 / 5 shares = ` 176 per share.

Q-2 State under which head these accounts should be classified in Balance Sheet, as per
Schedule III of the Companies Act, 2013:

(i) Share application money received in excess of issued share capital.

(ii) Share option outstanding account.

(iii) Unpaid matured debenture and interest accrued thereon.

(iv) Uncalled liability on shares and other partly paid investments.

(v) Calls unpaid. [RTP May ‘19]

Ans. (i) Current Liabilities/ Other Current Liabilities

(ii) Shareholders' Fund/Reserve & Surplus

(iii) Current liabilities/Other Current Liabilities

(iv) Contingent Liabilities and Commitments

426
 (v) Shareholders' Fund / Share Capital

Q-3 Acompanyoffers newshares of Rs.100each at25% premiumto existing shareholders

on onefor four basis. The cum-right market price of a share is ` 150. Calculate the
value of a right. [RTPMay‘19]

Ans. Ex-right value of the shares = (Gum-right value of the existing shares + Rights
shares Issue Price) / (Existing Number of shares + Rights Number of shares)

= (Rs. 150 X 4 Shares + Rs.125 X 1 Share) / (4 + 1) Shares

= Rs. 725 / 5 shares = Rs.145 per share.

Value of right = Gum-right value of the share - Ex-right value of the share

= Rs.150-Rs.145 = Rs.5 per share.

Q-4 Zeta Ltd. has decided to increase its existing share capital by making rights issue
to its existing shareholders. Zeta Ltd. is offering one new share for every two shares
held by the shareholder. The market value (cum-right) of the share is Rs.360 and the
company is offering one right share of Rs.180 each to its existing shareholders. You
are required to calculate the value of a right. What should be the ex-right value of a
share? [RTP Nov ‘18]
Ans. Ex-right value of the = (Cum-right value of the existing shares + Rights
shares shares x
Issue Price) / (Existing Number of shares + Number of
Right shares)
= (Rs. 360 x 2 Shares+ Rs.180 x 1 Share)/ (2 + 1)
Shares

= Rs.900/3 shares = Rs.300 per share.

Value of right = Cum-right value of the share - Ex-right value of the share

= Rs.360- Rs.300 = Rs.60 per share.

427
 Hence, any one desirous of having a confirmed allotment of one share from the company at
Rs. 180 will have to pay Rs. 120 (2 shares x Rs. 60) to an existing shareholder holding 2 shares
and willing to renounce his right of buying one share in favor of that person.

Q-5 Omega company offers new shares of Rs. 100 each at 25% premium to existing
shareholders on the basis one for five shares. The cum-right market price of a share
is Rs.200.

Youare required to calculate the (I) Ex-right value of a share; (II) Valueof a right share?
[RTPMay‘18]

Ans. Ex-right value of the shares

= (Gum-right value of the existing shares + Rights shares x Issue Price) /
(Existing No. of shares +No.of right shares)

= (Rs.200 X 5 Shares + Rs.125 X 1 Share) / (5 + 1) Shares

= Rs.1,125 / 6 shares = Rs.187.50 per share.

Value of right = Gum-right value of the share-Ex-right value of the share

= Rs.200-Rs.187.50 =Rs.12.50 per share.

Q6.Following items appear in the Trail Balance of Star Ltd. as on 31st March, 2019:
Particulars `
80,000 Equity shares of `10 each, ` 8 paid-up 6,40,000
Capital Reserve (including `45,000 being profit on sale of Machinery)1,10,000
Revaluation Reserve 80,000
Capital Redemption Reserve 75,000
Securities Premium 60,000
General Reserve 2,10,000
Profit & Loss Account (Cr. Balance) 1,00,000
On 1st April,2019, the Company has made final call on Equity shares @` 2 per share.
428
The entire money was received in the month of April, 2019
.On 1st June, 2019, the Company decided to issue to Equity shareholders bonus shares at
the rate of 2 shares for every 5 shares held and for this purpose, it was decided that there
should be minimum reduction in free reserves.
Pass necessary journal entries in the Books of Star Ltd. [Sugg Jan2021] [ 5marks]
Ans. Journal Entries in the books of Star Ltd.
2019 Dr. Cr.
` `
April Equity Share Final Call A/c Dr. 1,60,000
1 To Equity Share Capital A/c

(Final call of ` 2 per share on 80,000 equity 1,60,000

shares made due)

Bank A/c Dr. 1,60,000

To Equity Share Final Call A/c 1,60,000

(Final call money on 80,000 equity shares

received)
June Capital Redemption Reserve A/c Capital Dr. 75,000
1 Reserve Dr. 45,000*
Securities Premium A/c General Reserve
Dr. 60,000
A/c (b.f.)
Dr. 1,40,000**
To Bonus to Shareholders A/c
3,20,000
(Bonus issue of two shares for every five shares
held, by utilizing various reserves as per Board’s
resolution dated…….)
Bonus to Shareholders A/c Dr. 3,20,000

429
 To Equity Share Capital A/c (Capitalization 3,20,000
of profit)
* considering it as free reserve as it has been realized.

** Alternatively, different combination of profit and loss balance and general

reserve may also be used.

Q7.Beta Ltd. having share capital of 20,000 equity shares of `10 each decides to issue
rights share at the ratio of 1 for every 8 shares held at par value. Assuming all the share
holders accepted the rights issue and all money was duly received, pass journal entry in the
books of the company.[RTP May2021]

Ans.
` `
Bank A/c Dr. 25,000
To Equity share capital A/c 25,000

(For rights share issued at par value in the ratio of 1:8

equity shares due as per Board’s Resolution dated….)

Working Note:

Number of Rights shares to be issued- 20,000/8x1= 2,500 shares

Q8. Omega Ltd. offers new shares of ` 100 each at 25% premium to existing shareholders on
the basis one for five shares. The cum-right market price of a share is ` 200. You are
required to calculate the (i) Ex-right value of a share; (ii) Value of a right share?
[RTP May 2021]

Ans Ex-right value of the shares

= (Cum-right value of the existing shares + Rights shares x Issue Price) /

(Existing No. of shares + No. of right shares) = (` 200 X 5 Shares + ` 125 X 1
Share)/(5+1) Shares

430
 = ` 1,125 / 6 shares = ` 187.50 per share.

Value of right = Cum-right value of the share – Ex-right value of the share

= ` 200 – ` 187.50 = ` 12.50 per share.

Q9.Omega company offers new shares of ` 100 each at 25% premium to existing
shareholders on the basis one for five shares. The cum-right market price of a share is `
200.You are required to calculate the (i) Ex-right value of a share; (ii) Value of a right share?
[RTP Nov2020]
Ans. Ex-right value of the shares

= (Cum-right value of the existing shares + Rights shares x Issue Price) /

(Existing No. of shares + No. of right shares) = (` 200 X 5 Shares + ` 125
X 1 Share) / (5 + 1) Shares

= ` 1,125 / 6 shares = ` 187.50 per share.

Value of right = Cum-right value of the share – Ex-right value of the share

= ` 200 – ` 187.50 = ` 12.50 per share.

Q10. Super company offers new shares of ` 100 each at 20% premium to existing
shareholders on the basis one for four shares. The cum-right market price of a share is `
190.You are required to calculate the value of a right share.
[RTP Nov2021]

Ans. Value of right = Cum-right value of the share – Ex-right value of the share (as
computed in Working Note)
= ` 190 – ` 176 = ` 14 per share.

Working Note:

Ex-right value of the shares

= (Cum-right value of the existing shares + Rights shares x Issue Price) /

431
 (Existing No. of shares + No. of right shares) = (` 190 X 4 Shares + ` 120
X 1 Share) / (4 + 1) Shares

= ` 880 / 5 shares = ` 176 per share.

432
CHAPTER-6

Redemption of Preference Shares

Q-1 The Summarized Balance Sheet of Clean Ltd. as on 31st March, 2019 is as follows:
Particulars (` )
EQUITY AND LIABILITIES
1. Shareholder's funds:
(a) Share Capital 5,80,000
(b) Reserves and Surplus 96,000
2. Current Liabilities:
Trade Payables 1,13,000
Total 7,89,000
ASSETS:
1. Non-Current Assets

(a) Property, Plant and Equipment

Tangible Assets 6,90,000

(b) Non-current investments 37,000

Current Assets
62,000
2. Cash and cash equivalents (Bank)

7,89,000
Total

433
 The Share Capital of the company consists of ` 50 each Equity shares of ` 4,50,000 and `
100 each 8% Redeemable Preference Shares of ` 1,30,000 (issued on 1.4.2017).

Reserves and Surplus comprises statement of profit and loss only.

In order to facilitate the redemption of preference shares at a premium of 10%, the

Company decided:
(a) to sell all the investments for ` 30,000.
(b) to finance part of redemption from company funds, subject to, leaving a Bank balance
of ` 24,000.
(c) to issue minimum equity share of ` 50 each at a premium of ` 10 per share to raise
the balance of funds required.
You are required to:
(1) Pass Journal Entries to record the above transactions.
(2) Prepare Balance Sheet after completion of the above transactions
[Sugg.May‘19, 10Marks]
Ans.
(a) Journal Entries
Particulars Dr. (`) Cr. (`)
1 Bank A/c Dr. 75,000
To Share Application A/c 75,000
(For application money received on 1,250 shares
@ ` 60 per share)
2 Share Application A/c Dr. 75,000
To Equity Share Capital A/c 62,500
To Securities Premium A/c 12,500
(For disposition of application money received)

434
 3 Preference Share Capital A/c Dr. 1,30,000
Premium on Redemption of Preference Shares A/c Dr. 13,000
To Preference Shareholders A/c 1,43,000
(For amount payable on redemption of preference shares)
4 Profit and Loss A/c Dr. 13,000
To Premium on Redemption of Preference Shares A/c 13,000
(For writing off premium on redemption out of profits)
5 Bank A/c Dr. 30,000
Profit and Loss A/c (loss on sale) A/c Dr. 7,000
To Investment A/c 37,000
(For sale of investments at a loss of ` 3,500)
6 Preference Shareholders A/c Dr. 1,43,000
To Bank 1,43,000
(Being amount paid to Preference shareholders)
7 Profit and Loss A/c Dr. 67,500
To Capital Redemption Reserve A/c 67,500
(For transfer to CRR out of divisible profits an amount
equivalent to excess of nominal value of preference shares
over proceeds (face value of equity shares) i.e., ` 1,30,000 - `
62,500)
Balance Sheet of Clean Ltd. (after redemption)
Particulars Notes `
No.
EQUITY AND LIABILITIES
1.

435
 Shareholders’ funds 1 5,12,500
a) Share capital
2 88,500
b) Reserves and Surplus
2.
Current liabilities 1,13,000
Trade Payables 7,14,000
Total
ASSETS
1. Non-Current Assets

Property Plant and Equipment’s

6,90,000
Tangible asset
2. Current Assets 24,000
Cash and cash equivalents (bank) 7,14,000
3
Total
Notes to accounts `
1. Share Capital
Equity share capital ` (4,50,000 + 62,500) 5,12,500
2. Reserves and Surplus
Capital Redemption Reserve 67,500
Profit and Loss Account ` (96,000 - 13,000 - 7,000 - 8,500
67,500)
Security Premium 12,500
88,500
3. Cash and cash equivalents
Balances with banks ` (62,000 + 75,000 +30,000 - 24,000
1,43,000)

436
 Working Note:
Calculation of Number of Shares: `
Amount payable on redemption (1,30,000 + 10% Premium) 1,43,000
Less: Sale price of investment (30,000)
1,13,000
Less: Available bank balance (62,000 - 24,000) (38,000)
Funds required from fresh issue 75,000
No. of shares = 75,000/60 = 1,250 shares

Q-2 Explain the conditions when a company should issue new equity shares for redemption of
the preference shares. Also discuss the advantages and disadvantages of redemption of
preference shares by issue of equity shares. [Sugg. Nov.’18, 5 Marks]

Ans. A company may prefer issue of new equity shares in the following situations:

(a) When the company realizes that the capital is needed permanently and it makes more
sense to issue Equity Shares in place of Redeemable Preference Shares which carry a
fixed rate of dividend.

(b) When the balance of profit, which would otherwise be available for dividend, is
insufficient.

(c) When the liquidity position of the company is not good enough.

Advantages of redemption of preference shares by issue of fresh equity shares

(1) No cash outflow of money is required -now or later.

(2) New equity shares may be valued at a premium.

(3) Shareholders retain their equity interest.

Disadvantages of redemption of preference shares by issue of fresh equity shares

(1) There will be dilution of future earnings;

437
 (2) Share-holding in the companies changed.

Q3. Dheeraj Limited had 5,000, 10% Redeemable Preference Shares of Rs. 100 each, fully paid up.
The company had to redeem these shares at a premium of 10%.
It was decided by the company to issue the following:

(i) 40,000 Equity Shares of Rs. 10 each at par

(ii) 2,000 12% Debentures of Rs.100 each.

The issue was fully subscribed and all accounts were received in full. The payment was duly
made. The company had sufficient profits. Show journal entries in the books of the
company
[Sugg.May‘18, 10Marks]
Ans. In the books of Dheeraj Limited
Journal Entries

Date Particular Dr. Dr. (Rs.) Cr. (Rs.)

Bank A/c Dr. 4,00,000
To Equity Share Capital A/c 4,00,000
(Being the issue of 40,000 equity shares of Rs.10 each at par
as per Board's resolution No... ...dated....)
Bank A/c Dr. 2,00,000
To 12% Debenture A/c 2,00,000
(Being the issue of 2,000 Debentures of Rs.100 each as per
Board's Resolution No.....dated......)
10% Redeemable Preference Share Capital A/c Dr. 5,00,000
Premium on Redemption of Preference Shares A/c Dr. 50,000
To Preference Shareholders A/c 5,50,000
(Being the amount payable on redemption
transferred to Preference Shareholders Account)
Preference Shareholders A/c Dr. 5,50,000
To Bank A/c 5,50,000
(Being the amount paid on redemption of preference shares)
Profit & Loss A/c Dr. 50,000
To Premium on Redemption of Preference Shares A/c 50,000

438
 (Being the adjustment of premium on
redemption against Profits & Loss Account)
Profit & Loss A/c Dr. 1,00,000
To Capital Redemption Reserve A/c 1,00,000
(Working Note)
(Being the amount transferred to Capital Redemption Reserve
Account as per the requirement of the Act)

Working Note:
Face value of shares to be redeemed Rs.5,00,000
Less: Proceeds from new issue Rs.4,00,000
Balance Rs.1,00,000
Amount to be transferred to Capital Redemption Reserve Account
Q-4 The Board of Directors of a Company decide to issue minimum number of equity
shares of Rs. 9 to redeem Rs. 5,00,000 preference shares. The maximum amount of
divisible profits available for redemption is Rs. 3,00,000.
Calculate the number of shares to be issued by the company to ensure that provisions of
Section 55 are not violated. Also determine the number of shares if the company
decides to issue shares in multiples of Rs. 50 only.
[MTP Oct.‘19, 5Marks]
Ans. Nominal value of preference shares Rs.5,00,000
Maximum possible redemption out of profits Rs.3,00,000
Minimum proceeds of fresh issue Rs.5,00,000 -3,00,000 = Rs.2,00,000
Proceeds of one share = Rs.9
Minimum number of shares =2,00,000/9=22,222.22shares

As fractional shares are not permitted, the minimum number of shares to be issued is 22,223
shares.If shares are to be issued in multiples of 50, then the next higher figure which is a
multiple of 50 is 22,250. Hence, minimum number of shares to be issued in such a case is 22,250
shares.

Q-5 The Board of Directors of a Company decide to issue minimum number of equity
shares of Rs. 9 to redeem Rs. 5,00,000 preference shares. The maximum amount of

439
 divisible profits available for redemption is Rs. 3,00,000.

You are required to compute the number of shares to be issued by the company to ensure
that provisions of Section 55 are not violated. Also determine the number of shares if
the company decides to issue shares in multiples of Rs. 50 only.

OR

Following items appear in the Trial Balance of Hello Ltd. as on 31st March, 2017:
Particulars Amount
9,000 Equity Shares of Rs.100 each 9,00,000
Securities Premium 80,000
Capital Redemption Reserve 1,40,000
General Reserve 2,10,000
Profit and Loss Account (Cr. Balance) 90,000
The company decided to issue to equity shareholders bonus shares at the rate of 1 share for
every 3 shares held. Company decided that there should be the minimum reduction in free
reserves.You are required to give the necessary Journal Entries in the books Hello Ltd.

[MTP March ‘19, 5 Marks]

Ans.
Nominal value of preference shares Rs.5,00,000
Maximum possible redemption out of profit Rs.3,00,000

Minimum proceeds of fresh issue Rs.5,00,000 - 3,00,000 = Rs.2,00,000

Proceed of one share = Rs.9

Minimum number of shares

2, 00, 000 / 9

440
 = 22,222.22 shares

As fractional shares are not permitted, the minimum number of shares to be issued is 22,223
shares.If shares are to be issued in multiples of 50, then the next higher figure which is a multiple
of 50 is 22,250. Hence minimum number of shares to be issued in such a case is 22,250 shares.

OR

441
 Journal Entries in the books of Hello Ltd.
Capital Redemption Reserve A/c Dr. 1,40,000
Securities Premium A/c Dr. 80,000

General Reserve A/c (balancing figure) Dr. 80,000

To Bonus to Shareholders (Being issue of bonus 3,00,000
shares
by utilization of various Reserves, as per resolution
dated.......................................................................... ) Dr. 3,00,000

Bonus to Shareholders A/c

To Equity Share Capital (Being capitalization of 3,00,000
Profit)
Q6. G India Ltd. had 9,000 10% redeemable Preference Shares of Rs.10 each, fully paid up.
The company decided to redeem these preference shares at par by the issue of sufficient
number of equity shares of Rs.9 each fully paid up.You are required to prepare necessary
Journal Entries including cash transactions in the books of the company.
[MTP April ‘18, 5 Marks]
Ans. In the books of G India
Limited
Journal
Date Particular Dr. (Rs.) Cr.
(Rs.)
Bank A/c Dr. 90,000

To Equity Share Capital A/c 90,000

(Being the issue of 10,000 Equity Shares of Rs.9

each at par, as per Board'sResolution No.....Dated

442
 ........................................................... )
10% Redeemable Preference Shares Capital Dr. 90,000
A/c To Preference Shareholders A/c 90,000
(Being the amount payable on redemption of
preference shares transferred to Preference
Shareholders A/c)
Preference Shareholders A/c Dr.
90,000
To Bank A/c
90,000
(Being the amount paid on redemption of preference
shares)
Q7. The Board of Directors of a Company decide to issue minimum number of equity
shares of Rs.9 to redeem Rs.5,00,000 preference shares. The maximum amount of
divisible profits available for redemption is Rs.3,00,000.You are required to compute the
number of shares to be issued by the company to ensure that provisions of Section 55 are not
violated. Also determine the number of shares if the company decides to issue shares in
multiples of Rs. 50 only. [MTP March ‘18, 5 Marks]
Ans. Nominal value of preference shares Rs.5,00,000
Maximum possible redemption out of profits Rs.3,00,000
Minimum proceeds of fresh issue Rs.5,00,000 - 3,00,000= Rs.2,00,000
Proceed of one share = Rs.9

Minimum number of shares 2, 00,000/9

=22,222,22share

As fractional shares are not permitted, the minimum number of shares to be issued is 22,223
shares. If shares are to be issued in multiples of 50, then the next higher figure which is a
multiple of 50 is 22,250. Hence, minimum number of shares to be issued in such a case is
22,250 shares.
Q8. The following are the extracts from the Balance Sheet of ABC Ltd. as on 31st December,
20X1.
443
Share capital: 40,000 Equity shares of Rs.10 each fully paid – Rs.4,00,000; 1,000 10% Redeemable
preference shares of Rs.100 each fully paid – Rs.1,00,000.
Reserve & Surplus: Capital reserve – Rs.50,000; Securities premium – Rs.50,000; General
reserve – Rs.75,000; Profit and Loss Account – Rs.35,000
On 1st January 20X2, the Board of Directors decided to redeem the preference shares at par by
utilization of reserve.
You are required to pass necessary Journal Entries including cash transactions in the books of
the company. [MTP Aug. ‘18, 5 Marks]
Ans. In the books of ABC Limited
Journal Entries
Date Particulars Dr. Cr. (Rs.)
20X2 (Rs.)

Jan 1 10% Redeemable Preference Share Capital A/c Dr. 1,00,000

To Preference Shareholders A/c 1,00,000
(Being the amount payable on redemption
transferred to Preference Shareholders
Account)
Preference Shareholders A/c Dr. 1,00,000
To Bank A/c
1,00,000
(Being the amount paid on redemption of
preference shares)
General Reserve A/c
Dr.
75,000
Profit & Loss A/c
Dr.
25,000
To Capital Redemption Reserve A/c
(Being the amount transferred to Capital 1,00,000

Redemption Reserve Account as per the

444
 requirement of the Act)

Note: Securities premium and capital reserve cannot be utilized for transfer to Capital Redemption
Reserve.

Q9. The Board of Directors of a Company decide to issue minimum number of equity
shares of Rs. 9 to redeem Rs. 5,00,000 preference shares. The maximum amount of
divisible profits available for redemption is Rs. 3,00,000.Calculate the number of shares to
be issued by the company to ensure that provisions of Section 55 are not violated. Also
determine the number of shares if the company decides to issue shares in multiples of Rs. 50
only. [MTP Oct. ‘18, 5 Marks]

Ans. Nominal value of preference shares Rs.5,00,000

Maximum possible redemption out of profits Rs.3,00,000
Minimum proceeds of fresh issue Rs.5,00,000 -3,00,000 = Rs.2,00,000
Proceed of one share = Rs.9

2, 00, 000/9
Minimum number of shares = 22,222.22 shares

As fractional shares are not permitted, the minimum number of shares to be issued is 22,223
shares. If shares are to be issued in multiples of 50, then the next higher figure which is a
multiple of 50 is 22,250. Hence, minimum number of shares to be issued in such a case is
22,250 shares.
Q-10 The following are the extracts from the Balance Sheet of ABC Ltd. as on 31st December,
20X1:

Share capital: 50,000 Equity shares of ` 10 each fully paid – ` 5,00,000; 2,000 10% Redeemable
preference shares of ` 100 each fully paid – ` 2,00,000.

Reserve& Surplus:Capital reserve – `2,00,000;General reserve–` 2,00,000; Profit and

445
 Loss Account –
` 75,000.

On 1st January 20X2, the Board of Directors decided to redeem the preference shares at
premium of 5% by utilization of reserves.

You are required to prepare necessary Journal Entries including cash transactions in the
books of the company. [RTP Nov.‘19]

Ans. In the books of ABC Limited Journal Entries

Date Particulars Dr. (`) Cr. (`)

20X2
Jan 1 10% Redeemable Preference Share Capital A/c Dr. 2,00,000
Premium on Redemption of PreferenceShares 10,000
To Preference Shareholders A/c 2,10,000
(Being the amount payable on redemption transferred
to Preference Shareholders Account)
Preference Shareholders A/c Dr. 2,10,000
To Bank A/c 2,10,000
(Being the amount paid on redemption of preference shares)
General Reserve A/c Dr. 2,00,000

446
 To Capital Redemption Reserve A/c 2,00,000

(Being the amount transferred to Capital Redemption

Reserve Account as per the requirement of the Act)
Profit & Loss A/c Dr.
10,000
ToPremium on Redemption of Preference Shares
A/c (Being premium on redemption charged to Profit 10,000

and Loss A/c)

Note: Capital reserve cannot be utilized for transfer to Capital Redemption Reserve.

Q-11 The capital structure of an AP Ltd. consists of 20,000 Equity Shares of Rs.10 each fully
paid up and 1,000 8% Redeemable Preference Shares of Rs.100 each fully paid up
(issued on 1.4.20X1).
Undistributed reserve and surplus stood as: General Reserve Rs.80,000; Profit and Loss
Account Rs.20,000; Investment Allowance Reserve out of which Rs.5,000, (not free for
distribution as dividend) Rs.10,000; Cash at bank amounted to Rs.98,000. Preference
shares are to be redeemed at a Premium of 10% and for the purpose of redemption, the
directors are empowered to make fresh issue of Equity Shares at par after utilizing the
undistributed reserve and surplus, subject to the conditions that a sum of Rs.20,000
shall be retained in general reserve and which should not be utilized.

Pass Journal Entries to give effect to the above arrangements and also show how
the relevant items will appear in the Balance Sheet of the company after the
redemption carried out. [RTP May ‘19]

Ans. In the books of AP Ltd.

Journal Entries

Date Particulars Dr. (Rs.) Cr. (Rs.)

Bank A/c Dr. 25,000

447
 To Equity Share Capital A/c 25,000

(Being the issue of 2,500 Equity Shares of Rs.10

each at par,as per Board'sResolution No... . dated )

1,00,000
8% Redeemable Preference Share Capital A/c Dr.
Premium on Redemption of Preference Shares 10,000
Dr.
A/c
To Preference Shareholders A/c 1,10,000

(Being the amount paid on redemption

transferred to Preference Shareholders
Account)
Dr.
Preference Shareholders A/c To 1,10,000

Bank A/c 1,10,000

(Being the amount paid on redemption of preference
shares)
Dr.
Profit & Loss A/c 10,000

To Premium on Redemption of 10,000

Preference Shares A/c
(Being the premium payable on redemption
is adjusted against Profit & Loss Account)
General Reserve A/c
Dr. 60,000
Profit & Loss A/c
Dr. 10,000

448
 Investment Allowance Reserve A/c Dr. 5,000

To Capital Redemption Reserve A/c 75,00

0
(Being the amount transferred to Capital Redemption
Reserve Account as per the requirement of the Act)
Balance Sheetsas on...... (Extracts)
Particulars Notes Rs.
EQUITY AND LIABILITIES

1. Shareholders’ funds
1 2,25,000
a Share capital
2 1,00,000
b Reserves and Surplus
?
Total

ASSETS
13,000
2. Current Assets
?
Cash and cash equivalents
(98,000 + 25,000 - 1,10,000)
Total 2,25,000
Notes to accounts
20,000
1. Share capital 75,000
22,500 Equity shares (20,000 + 2,500) of Rs.10 each fully paid up 5,000
2. Reserves and Surplus 1,00,000
General Reserve

Capital Redemption Reserve Investment

Allowance Reserve
Working Note:

449
 No of Shares to be issued for redemption of Preference Shares:
Face value of shares redeemed Rs.1,00,000

Less: Profit available for distribution as

dividend: General Reserve: Rs. Rs.60,000

(80,000-20,000)
Profit and Loss (20,000 - 10,000 set aside for Rs.10,000
adjusting premium payable on redemption of preference Rs.5,000
(Rs.75,000)
shares) Investment Allowance Reserve: (Rs 10,000-
5,000) 25,000

Therefore, No. of shares to be issued = 25,000/ ` 10 = 2,500 shares.

Q-12 The following are the extracts from the Balance Sheet of Meera Ltd. as on 31st
December, 2017.

Share capital: 60,000 Equity shares of Rs.10 each fully paid - Rs.6,00,000; 1,500 10% Redeemable
preference shares of Rs.100 each fully paid - Rs.1,50,000.
Reserve & Surplus: Capital reserve - Rs.75,000; Securities premium - Rs.75,000; General
reserve - Rs.1,12,500; Profit and Loss Account - Rs.62,500.

On 1st January 2018, the Board of Directors decided to redeem the preference shares at
premium of 10% by utilization of reserve.
You are required to prepare necessary Journal Entries including cash transactions in the
books of the company.
[RTP Nov ‘18]

Ans. In thebooksof Meera Limited Journal Entries

450
 Date Particulars Dr. Rs. Cr.Rs.
2018
Jan 1 10% Redeemable Preference Share Capital A/c Dr. 1,50,000
Premium on Redemption ofPref. shares Dr. 15,000
To Preference Shareholders A/c 1,65,000
(Being the amount payable on redemptiontransferred
to Preference Shareholders Account)
Preference Shareholders A/c Dr. 1,65,000
To Bank A/c 1,65,000
(Being the amount paid on redemption of preference shares)
Profit & Loss A/c Dr. 15,000
To Premium on Redemption of Pref. Shares 15,000
(Being adjustment of premium on redemption)
General Reserve A/c Dr. 1,12,500
Profit & Loss A/c Dr. 37,500
To Capital Redemption Reserve A/c 1,50,000
(Being the amount transferred to Capital Redemption
Reserve Account as per the requirement of the Act)

Note:SecuritiespremiumandcapitalreservecannotbeutilizedfortransfertoCapitalRedemption
Reserve.

Q-13 The following are the extracts from the Balance Sheet of ABC Ltd. as on 31st December,
20X1:

Share capital: 50,000 Equity shares of Rs.10 each fully paid - Rs.5,00,000; 1,500 10%
Redeemable preference shares of Rs.100 each fully paid - Rs. 1,50,000.
Reserve & Surplus: Capital reserve - Rs.1,00,000; General reserve -Rs.1,00,000; Profit and
Loss Account - Rs.75,000.

On 1st January 20X2, the Board of Directors decided to redeem the preference shares
at premium of 10% by utilization of reserves.

You are required to prepare necessary Journal Entries including cash transactions in the
books of the company.
[RTP May ‘18]

451
Ans.
Date Particulars Dr. Rs. Cr.Rs.

20x2
Jan 1 10% Redeemable Preference Share Capital A/c Dr. 1,50,000

Premium on Redemption of Preference 15,000

Shares to Preference Shareholders A/c 1,65,000
(Being the amount payable on
redemption transferred to Preference
Shareholders Account)
Preference Shareholders A/c Dr.
1,65,000
To Bank A/c
1,65,000
(Being the amount paid on redemption of preference
shares)
Dr. 1,00,000
General Reserve A/c
Dr. 50,000
Profit & Loss A/c
1,50,000
To Capital Redemption Reserve A/c

(Being the amount transferred to Capital

Redemption Reserve Account as per the
requirement of the Act)
Dr.
Profit & Loss A/c
15,000
To Premium on Redemption of Preference
15,000
Shares A/c

(Being premium on redemption charged to Profit and

Loss A/c)
Note: Capital reserve cannot be utilized for transfer to Capital Redemption Reserve.

452
Q14.The Books of Arpit Ltd. shows the following Balances as on 31st December, 2019:
Amount
(`)
6,00,000 Equity shares of ` 10 each fully paid up 60,00,000
30,000, 10% Preference shares of ` 100 each, ` 80 24,00,000
paid up
Securities Premium 6,00,000
Capital Redemption Reserve 18,00,000
General Reserve 35,00,000

Under the terms of issue, the Preference Shares are redeemable on 31st March,
2020 at a premium of 10%. In order to finance the redemption, the Board of
Directors decided to make a fresh issue of 1,50,000 Equity shares of `10 each at a
premium of 20%, ` 2 being payable on application, ` 7 (including premium) on
allotment and the balance on 1st January, 2021. The issue was fully subscribed
and allotment made on 1st March, 2020. The money due on allotment was
received by 20th March, 2020.

The preference shares were redeemed after fulfilling the necessary conditions of
Section 55 of the Companies Act, 2013.
You are required to pass the necessary Journal Entries and also show how the
relevant items will appear in the Balance Sheet of the company after the
redemption carried out on 31st March, 2020. [Sugg Nov2020](12Marks)

Ans. Journal Entries

` `

1 10% Preference Share Final Call A/c Dr. 6,00,000

453
 To 10% Preference Share Capital 6,00,000
A/c
(For final call made on preference
shares @ ` 20 each to make them
fully paid up)
2 Bank A/c Dr. 6,00,000
To 10% Preference Share Final 6,00,000
Call A/c
(For receipt of final call money on
preference shares)

3 Bank A/c Dr. 3,00,000

To Equity Share Application A/c 3,00,000
(For receipt of application money on
1,50,000 equity shares @ ` 2 per
share)

4 Equity Share Application A/c Dr. 3,00,000

To Equity Share Capital A/c 3,00,000
(For capitalization of application
money received)
5 Equity Share Allotment A/c Dr. 10,50,000
To Equity Share Capital A/c 7,50,000
To Securities Premium A/c 3,00,000
(For allotment money due on
1,50,000 equity shares @ ` 7 per
share including a premium of ` 2

454
 per share)

6 Bank A/c Dr. 10,50,000

To Equity Share Allotment A/c 10,50,000
(For receipt of allotment money on
equity shares)

7 10% Preference Share Capital A/c Dr. 30,00,000

Premium on Redemption of Dr. 3,00,000
Preference Shares A/c
To Preference Shareholders A/c 33,00,000
(For amount payable to preference
shareholders on redemption at 10 %
premium)
8 General Reserve A/c Dr. 3,00,000
To Premium on Redemption A/c 3,00,000
(Writing off premium on redemption
of preference shares)

9 General Reserve A/c Dr. 19,50,000

To Capital Redemption Reserve 19,50,000
A/c
(For transfer of CRR the amount not
covered by the proceeds of fresh
issue of equity shares i.e., 30,00,000
- 3,00,000 - 7,50,000)
10 Preference Shareholders A/c Dr. 33,00,000

455
 To Bank A/c 33,00,0
(For amount paid to preference 00
shareholders)

Balance Sheet (extracts)

Particulars Notes As at As at
No. 31.3.2020 31.12.2019
` `
EQUITY AND LIABILITIES
1. Shareholders’ funds

a) Share capital 1 70,50,000 84,00,000

b) Reserves and Surplus 2 59,00,000 59,00,000

Notes to Accounts:

As at As at
31.3.2020 31.12.2019
1. Share Capital
Issued, Subscribed and Paid up:
6,00,000 Equity shares of ` 10 each 60,00,000 60,00,000
fully paid up
1,50,000 Equity shares of `10 each ` 7 paid 10,50,000 -
up
30,000, 10% Preference shares of ` 100 - 24,00,000
each,

456
 `80 paid up

70,50,000 84,00,000
2. Reserves and Surplus
Capital Redemption Reserve 37,50,000 18,00,000
Securities Premium 9,00,000 6,00,000
General Reserve 12,50,000 35,00,000
59,00,000 59,00,000

Note:

1. Securities premium has not been utilized for the purpose of premium payable on
redemption of preference shares assuming that the company referred in the
question is governed by Section 133 of the Companies Act, 2013 and comply
with the Accounting Standards prescribed for them.

2. Amount received (excluding premium) on fresh issue of shares till the date of
redemption should be considered for calculation of proceeds of fresh issue of
shares. Thus, proceeds of fresh issue of shares are `10,50,000 (`3,00,000
application money plus ` 7,50,000 received on allotment towards share capital)
and balance ` 19,50,000 to taken from general reserve account.
Q15. The Capital structure of a company BK Ltd., consists of 30,000 Equity Shares of ` 10
each fully paid up and 2,000 9% Redeemable Preference Shares of ` 100 each fully paid up
as on 31.03.2020. the other particulars as at 31.03.2020 are as follows:
Amount (`)
General Reserve 1,20,000
Profit &Loss Account 60,000
Investment Allowance Reserve (not free for distribution as 15,000
dividend)

457
 Cash at bank 1,95,000

Preference Shares are to be redeemed at a premium of 10%. For the purpose of

redemption, the directors are empowered to make fresh issue of Equity Shares at
per after utilizing the undistributed reserve &surplus, subject to the conditions that
a sum of` 40,000 shall be retained in General Reserve and which should not be
utilized.Company also sold investment of 4500 Equity Shares in G Ltd., costing
`45,000 at 9 per share.Pass Journal entries to give effect to the above arrangements
and also show how the relevant items will appear in the Balance Sheet as at
31.03.2020 of BK Ltd., afte r the redemption is carried out.

[Jan 2021 Sugg ] (12 Marks)

Ans. Journal Entries

Date Particulars Dr. (`) Cr. (`)
Bank A/c Dr. 84,500
To Equity Share Capital A/c 84,500

(Being the issue of 8,450 Equity Shares of

` 10 each as per Board’s Resolution
No…..dated…….)
9% Redeemable Preference Share Capital A/c Premium Dr. 2,00,000
on Redemption of Preference Shares A/c Dr. 20,000
To Preference Shareholders A/c 2,20,000
(Being the amount paid on redemption transferred to
Preference Shareholders Account)
Bank A/c Dr. 40,500
Profit and Loss A/c (loss on sale) A/c To Dr. 4,500
Investment A/c 45,000

458
 (Being investment sold at loss of ` 4,500)

Preference Shareholders A/c To Bank Dr. 2,20,000

A/c 2,20,000
(Being the amount paid on redemption
of preference shares)
Profit & Loss A/c Dr. 20,000
To Premium on Redemption of Preference 20,000
Shares A/c
(Being the premium payable on redemption is adjusted
against Profit & Loss Account)
General Reserve A/c Profit & Loss Dr. 80,000
A/c Dr. 35,500
To Capital Redemption Reserve A/c 1,15,500
(Beingthe amounttransferred to Capital
Redemption Reserve Account)

Balance Sheet as on ………[Extracts]

Particulars Notes No. `

EQUITY AND LIABILITIES

1. Shareholders’ funds
a Share capital 1 3,84,500

b Reserves and Surplus ASSETS 2 1,70,500

Current Assets
2.
Cash and cash equivalents 1,00,000
(1,95,000 + 84,500+ 40,500 – 2,20,000)

459
 Notes to accounts

1. Share Capital
38,450 Equity shares (30,000 + 8,450) of `10 each fully paid up3,84,500
2. Reserves and Surplus
General Reserve 40,000
Profit and loss account NIL
Capital Redemption Reserve 1,15,500
Investment Allowance Reserve 15,000
1,70,500
Working Note:

Number of Shares to be issued for redemption of Preference Shares:

Face value of shares redeemed `2,00,000

Less: Profit available for distribution as dividend:

General Reserve: ` (1,20,000-40,000) `80,000
Profit and Loss (60,000 less 20,000 set aside for
adjusting premium payable on redemption of Pref.

shares less 4,500 loss on sale of investments) `35,500

` (1,15,500)

` 84,500
Therefore, No. of shares to be issued = 84,500/`10 = 8,450 shares.
Q16. ABC Ltd. provides you the following information as on 31st March, 2021:
Share capital:
50,000 Equity shares of ` 10 each fully paid – ` 5,00,000;

1,500 10% Redeemable preference shares of `100 each fully paid – ` 1,50,000.

460
 Reserve & Surplus:
Capital reserve – ` 1,00,000; General reserve
–` 80,000;
Profit and Loss Account`95,000.

On 1st April 2021, the Board of Directors decided to redeem the preference shares at
premium of 10% by utilization of reserves.
You are required to prepare necessary Journal Entries including cash transactions in the books
of the company
[RTP May 2021]

Ans. In the books of ABC Limited

Journal Entries
Date Particulars Dr. (`) Cr. (`)
2021
April 10% Redeemable Preference Share Capital A/c Dr. 1,50,000
1 Premium on Redemption of Preference Shares 15,000
To Preference Shareholders A/c 1,65,000
(Being the amount payable on redemption
transferred to Preference
Shareholders
Account)
Preference Shareholders A/c Dr. 1,65,000
To Bank A/c 1,65,000
(Being the amount paid on redemption of
preference shares)
General Reserve A/c Dr. 80,000

461
 Profit & Loss A/c Dr. 70,000
To Capital Redemption Reserve A/c 1,50,000
(Being the amount transferred to Capital
Redemption Reserve Account as per the
requirement of the Act)
Profit & Loss A/c Dr. 15,000
To Premium on Redemption of 15,000
Preference Shares A/c
(Being premium on redemption charged to Profit
and Loss A/c)

Note: Capital reserve cannot be utilized for transfer to Capital Redemption Reserve.

Q17.The following are the extracts from the Balance Sheet of Hari Ltd. as on 31st March,
2020:

Share capital: 75,000 Equity shares of `10 each fully paid – `7,50,000; 2,250 10%
Redeemable preference shares of `100 each fully paid – ` 2,25,000.

Reserve & Surplus: Capital reserve – ` 1,50,000; General reserve –` 1,50,000; Profit and Loss
Account – `1,12,500.

On 1st April 2020, the Board of Directors decided to redeem the preference shares at
premium of 10% by utilization of reserves.
You are required to prepare necessary Journal Entries including cash transactions in the books
of the company. [RTP Nov 2020]
Ans. In the books of Hari Limited Journal Entries

462
Note: Capital reserve cannot be utilized for transfer to Capital Redemption Reserve.

Q18. .Neeraj Ltd.’s capital structure consists of 45,000 Equity Shares of ` 10 each fully
paid up and 3,000 9% Redeemable Preference Shares of ` 100 each fully paid up as on
31.03.2021. The other particulars as at 31.03.2021 are as follows:
Amount
(`)
General Reserve 1,80,000
Profit & Loss Account 90,000
Investment Allowance Reserve (not free for 22,500
distribution as dividend)
Cash at bank 2,92,500

Preference Shares are to be redeemed at a premium of 10%. For the purpose of redemption,
the directors are empowered to make fresh issue of Equity Shares at par after utilizing the

463
undistributed reserve & surplus, subject to the conditions that a sum of ` 60,000 shall be
retained in General Reserve and which should not be utilized. Company also sold
investment of 6,750 Equity Shares in Kumar Ltd., costing `67,500 at ` 9 per share.

Pass Journal entries to give effect to the above arrangements and also show how the relevant
items will appear in the Balance Sheet as at 31.03.2021 of Neeraj Ltd. after the redemption
is carried out. [RTP Nov2021]
Ans. Journal Entries
Date Particulars Dr. (`) Cr. (`)
Bank A/c Dr. 1,26,750
To Equity Share Capital A/c 1,26,750
(Being the issue of 12,675 Equity Shares of
` 10 each as per Board’s Resolution No dated….)
9% Redeemable Preference Share Capital A/c Dr. 3,00,000
Premium on Redemption of Preference Shares A/c Dr. 30,000
To Preference Shareholders A/c 3,30,000
(Being the amount paid on redemption transferred to
Preference Shareholders Account)
Bank A/c Dr. 60,750
Profit and Loss A/c (loss on sale) A/c Dr. 6,750
To Investment A/c 67,500
(Being investment sold at loss of ` 6,750)
Preference Shareholders A/c Dr. 3,30,000
To Bank A/c 3,30,000
(Being the amount paid on redemption of preference
shares)

464
 Profit & Loss A/c Dr. 30,000
To Premium on Redemption of Preference
Shares A/c 30,000
(Being the premium payable on redemption is adjusted
against Profit & Loss Account)
General Reserve A/c Dr. 1,20,000
Profit & Loss A/c Dr. 53,250
To Capital Redemption Reserve A/c 1,73,250
(Being the amount transferred to Capital Redemption
Reserve Account)

Balance Sheet as at 31.3.2021[Extracts]

Particulars Notes No. `

EQUITY AND LIABILITIES

1.
1 5,76,750

b Reserves and Surplus 2 2,55,750

ASSETS
2. Current Assets

Cash and cash equivalents

(2,92,500 + 1,26,750+ 60,750 – 3,30,000) 1,50,000

Notes to accounts

1. Share Capital

465
 57,675 Equity shares (45,000 + 12,675) of `10 5,76,750
each fully paid up
2. Reserves and Surplus
General Reserve 60,000
Profit and loss account NIL
Capital Redemption Reserve 1,73,250
Investment Allowance Reserve 22,500
2,55,750

Working Note:

Number of Shares to be issued for redemption of Preference Shares:

Face value of shares redeemed ` 3,00,000

Less: Profit available for distribution as dividend:

General Reserve: ` (1,80,000-60,000) ` 1,20,000
Profit and Loss (90,000 less 30,000 set aside for
adjusting premium payable on redemption of Pref.

shares less 6,750 loss on sale of investments` 53,250

` (1,73,250)

` 1,26,750

Therefore, No. of shares to be issued = ` 1,26,750/`10 = 12,675 shares.

Q19. The capital structure of AP Ltd. consists of 20,000 Equity Shares of Rs.10 each fully paid up and
1,000 8% Redeemable Preference Shares of Rs.100 each fully paid up.Undistributed reserve and
surplus stood as: General Reserve Rs. 80,000; Profit and Loss Account Rs. 20,000; Investment
Allowance Reserve is Rs. 10,000 out of which Rs. 5,000 is not ascertained as free reserve; Cash at bank
amounted to Rs. 98,000.

466
Preference shares are to be redeemed at a Premium of 10% and for the purpose of redemption, the
directors are empowered to make fresh issue of Equity Shares at par after utilizing the undistributed
reserves and surplus, subject to the condition that a sum of Rs. 20,000 shall be retained in general
reserve which should not be utilized.
You are required to pass Journal Entries to give effect to the above arrangements and also show how the
relevant items will appear in the Balance Sheet of the company after the redemption is carried out.
[MTP May 2021 ] ( 12 marks )

Ans. Journal Entries in the books of AP Ltd.

Date Particulars Dr. (Rs.) Cr. (Rs.)
Bank A/c Dr. 25,000

To Equity Share Capital A/c 25,000

(Being the issue of 2,500 Equity Shares of Rs. 10

each atpar, as per Board’s Resolution
No…..dated…….)

8% Redeemable Preference Share Dr. 1,00,000

Capital A/c

Premium on Redemption of Preference Dr. 10,000

Shares A/c
To Preference Shareholders A/c 1,10,000

(Being the amount paid on redemption transferred

to Preference Shareholders Account)
Dr. 1,10,000
Preference Shareholders
1,10,000
To Bank A/c
(Being the amount paid on redemption of preference

467
 shares)
Profit & Loss A/c Dr. 10,000
To Premium on Redemption of Preference 10,000
Shares A/c

(Being the premium payable on redemption is adjusted against Profit

& Loss Account)

General Reserve A/c Profit & Loss Dr. 60,000

A/c Dr. 10,000

Investment Allowance Reserve A/c Dr. 5,000
To Capital Redemption Reserve A/c
75,000
(Being the amount transferred to Capital Redemption Reserve Account as
per the requirement of the Act)

Balance Sheet as at ………[Extracts]

Particulars Notes No. Rs.

EQUITY AND LIABILITIES
1. Shareholders’ funds
a Share capital 1 2,25,000
b Reserves and Surplus 2 1,00,000
Total
?
ASSETS
2.
Current Assets
Cash and cash 13,000

468
 equivalents (98,000 +
?
25,000 – 1,10,000) Total

Notes to accounts
1. Share Capital
22,500 Equity shares (20,000 + 2,500) of Rs.10 each 2,25,000
fully paid up
2. Reserves and
Surplus 20,000

General Reserve
Capital Redemption Reserve 75,000
Investment Allowance Reserve 5,000
1,00,000

Working Note:
No of Shares to be issued for redemption of Preference
Shares:
Face value of shares redeemed Rs.1,00,000
Less: Profit available:

General Reserve : Rs.(80,000-20,000) Rs.60,000

Profit and Loss (20,000 – 10,000 set aside for

adjusting premium payable on redemption of

preference shares) Rs.10,000

Investment Allowance Reserve: (Rs. 10,000-5,000)Rs. 5,000 (Rs. 75,000)

Rs. 25,000

Therefore, No. of shares to be issued = 25,000/Rs.10 = 2,500 shares.

469
Q20. The following are the extracts from the Balance Sheet of ABC Ltd. as on 31st March, 2020.

Share capital: 40,000 Equity shares of ` 10 each fully paid – ` 4,00,000; 1,000 10% Redeemable
preference shares of ` 100 each fully paid – ` 1,00,000.

Reserve & Surplus: Capital reserve – ` 50,000; Securities premium – ` 50,000; General reserve –
` 75,000; Profit and Loss Account – ` 35,000

On 1st April 2020, the Board of Directors decided to redeem the preference shares at par by
utilisation of reserve.

You are required to pass necessary Journal Entries including cash transactions in the books of the
company.
[MTP Nov 2020] ( 5 marks )

Ans. In the books of ABC Limited Journal Entries

Date Particulars Dr. (`) Cr. (`)
2020

April 1 10% Redeemable Preference Share Capital A/c To Preference Dr. 1,00,000
Shareholders A/c
1,00,000
(Being the amount payable on redemption transferred to
Preference Shareholders Account)
Preference Shareholders A/c To Bank A/c Dr. 1,00,000
(Being the amount paid on redemption of preference 1,00,000
shares)
General Reserve A/c Profit & Loss A/c Dr. 75,000
To Capital Redemption Reserve A/c Dr. 25,000

470
 (Being the amount transferred to Capital Redemption 1,00,000
Reserve Account as per the requirement of the Act)

Note: Securities premium and capital reserve cannot be utilised for transfer to Capital Redemption
Reserve.

Q21.The capital structure of a AP Ltd. consists of 20,000 Equity Shares of Rs.10 each fully paid up and
1,000 8% Redeemable Preference Shares of Rs.100 each fully paid up (issued on 1.4.20X1).

Undistributed reserve and surplus stood as: General Reserve Rs. 80,000; Profit and Loss Account Rs.
20,000; Investment Allowance Reserve is Rs. 10,000 out of which Rs. 5,000 is not ascertained as free
reserve; Cash at bank amounted to Rs. 98,000. Preference shares are to be redeemed at a Premium of 10%
and for the purpose of redemption, the directors are empowered to make fresh issue of Equity Shares at par
after utilising the undistributed reserve and surplus, subject to the conditions that a sum of Rs. 20,000
shall be retained in general reserve and which should not be utilised.

Pass Journal Entries to give effect to the above arrangements and also show how the relevant items will
appear in the Balance Sheet of the company after the redemption carried out. [ MTP May 2020 ] ( 12
marks )

Ans. In the books of AP Ltd.

Journal Entries

Date Particulars Dr. (Rs.) Cr. (Rs.)

Bank A/c Dr. 25,000
To Equity Share Capital A/c 25,000

(Being the issue of 2,500 Equity Shares of Rs. 10

each at par, as per Board’s Resolution Dr. 1,00,000
No…..dated…….) Dr. 10,000
8% Redeemable Preference Share Capital A/c 1,10,000

471
Premium on Redemption of Preference Shares
A/c Dr. 1,10,000
To Preference Shareholders A/c 1,10,000
(Being the amount paid on redemption
transferred to Preference Shareholders Account) Dr. 10,000
Preference Shareholders 10,000
A/c To Bank A/c
(Being the amount paid on redemption of
preference shares) Dr. 60,000

Profit & Loss A/c Dr. 10,000

To Premium on Redemption of Dr. 5,000

Preference Shares A/c 75,000

(Being the premium payable on redemption is

adjusted against Profit & Loss Account)

General Reserve
A/c Profit &
Loss A/c
Investment Allowance Reserve A/c
To Capital Redemption Reserve A/c
(Being the amount transferred to Capital
Redemption Reserve Account as per the
requirement of the Act)

Balance Sheet as on..... [Extracts]

Particulars Notes No. Rs.

472
 EQUITY AND LIABILITIES
1. Shareholders’
funds a 1 2,25,000
Share capital 2 1,00,000
b Reserves and Surplus Tota ?
l
2.
ASSETS
Current Assets
Cash and cash equivalents 13,000
(98,000 + 25,000 – 1,10,000)
?
Tota
l

Notes to accounts

1. Share Capital

22,500 Equity shares (20,000 + 2,500) of Rs.10 each fully paid up 2,25,000

2. Reserves and Surplus

General Reserve 20,000
Capital Redemption Reserve 75,000
Investment Allowance Reserve 5,000 1,00,000

Working Note:

No of Shares to be issued for redemption of Preference Shares:

Face value of shares redeemed Rs.1,00,000

Less: Profit available for distribution as dividend:

473
 General Reserve : Rs.(80,000-20,000) Rs.60,000
Profit and Loss (20,000 – 10,000 set aside for
adjusting premium payable on redemption of

preference shares) Rs.10,000

Investment Allowance Reserve: (Rs. 10,000-5,000)Rs. 5,000 (Rs. 75,000)

Rs. 25,000

Therefore, No. of shares to be issued = 25,000/Rs.10 = 2,500 shares.

474
CHAPTER-7

Redemption of Debentures

Q-1 A company had issued 40,000, 12% debentures of ` 100 each on 1st April, 2015. The
debentures are due for redemption on 1 st March, 2019. The terms of issue of.
debentures provided that they were redeemable at a premium of 5% and also
conferred option to the debenture holders to convert 20% of their holding into equity
shares (nominal value ` 10) at a predetermined price of ` 15 per share and the payment
in cash. 50 debentures holders holding totally 5,000 debentures did not exercise the
option. Calculate the number of equities shares to be allotted to the debenture holders
and the amount to be paid in cash on redemption. [Sugg.Nov.’19, 5Marks]

Ans. Calculation of number of equities shares to be allotted

Number of
debentures
Total number of debentures 40,000
Less: Debenture holders not opted for conversion (5,000)
Debenture holders opted for conversion 35,000
Option for conversion 20%
Number of debentures to be converted (20% of 35,000) 7,000

Redemption value of7,000debentures at a premiumof5%[7,000 ` 7,35,000

x (100+5)]
Equity shares of ` 10 each issued to debenture holders on
redemption

475
 [` 7,35,000/ ` 15] 49,000 shares
Amount of cash to be paid
Amount to be paid into cash [42,00,000 (40,000 x ` 105)– 7,35,000] on ` 34,65,000
redemption
Q-2 A Company had issued 1,000 12% debentures of 100 each redeemable at the company's
option at the end of 10 years at par or prior to that by purchase in open market or at f 102
after giving6 months’ notice. On 31st December, 2016, the accounts of the company
showed the following balances:

Debenture redemption fund ` 53,500 represented by 10% Govt. Loan of a nominal

value of ` 42,800 purchased at an average price of ` 101 and ` 10,272 uninvested
cash in hand.

On 1st January 2017, the company purchased ` 11,000 of its own debentures at a cost of
Rs.10,272.

On 30th June, 2017, the company gave a six months’ notice to the holders of ` 40,000
debentures and on 31st December, 2017 carried out the redemption by sale of ` 40,800
worthof Govt. Loanat par andalso cancelled the own debentures held by it.
Prepare ledger account of Debenture Redemption Fund Account and Debenture
Redemption Fund Investment Account for the year ended 31.12.2017, assuming that,
interest on company debentures & Govt. loan was payable on 31st December every year.
[Sugg. Nov.’18, 8 Marks]

476
Ans. Debenture Redemption Fund Account
Date Particulars Rs. Date Particulars Rs.
31-12- To Debenture 1-1- By Balance b/d 53,500
17 Redemption 17
Fund Investment A/c 408
To Premium on redemption 800
of debentures By interest on DRFI 4,280

To Balance c/d 31-12- (10% of Rs.42,800)

57,892 17 By interest on Own
1,320
debentures

(i.e., 12% on Rs.11,000)

59,100 59,100
1-1- To Balance b/d 57,892
18
Debenture Redemption Fund Investment Account
Rs. Rs.
1.1.17 To Balance b/d 43,228 31.12.17 By Bank A/c 40,800
(428 x Rs.101) By Debenture redemption
Fund (1% of Rs.40,800)
By 12% Debentures 11,000
1.1.17 To Bank 10,272 By Balance c/d 2,020
31.12.17 To Capital Reserve 728
(Profit on cancellation of
Debentures)
54,228 54,228

477
 1.1.18 To Balance b/d 2,020
Q-3 GurudevLimitedpurchases forimmediate cancellation6,000ofits own 12%
debentures of ` 100 each on 1st November, 2017. The dates of interest being 31st March,
and 30th September. Pass necessary journal entries relating to the cancellation if:

(i) Debentures are purchased at ` 98 ex-interest,

(ii) Debentures are purchased at ` 98 cum-interest.

[Sugg.May ‘18, 5Marks]

Ans. In the books of Gurudev Ltd.

Journal Entries

(i) In case of ex-interest

Date Particulars Rs. Rs.
1.11.2017Own Debentures A/c Dr 5,88,000

Debentures Interest A/c [6,000 x 100 x 12% x . 6,000

(1/12)] D
r
To Bank A/c (Purchase of 6,000 5,94,000
Debentures @ 98 ex interests for
immediate cancellation
Dr 6,00,000
1.11.17 12% Debentures A/c

To Own Debentures A/c 5,88,000

ToCapital reserve A/c (Profit on 12,000

cancellation of debentures)
(Being profit on cancellation of 6,000
Debentures transferred to capital reserved account)

(ii) In case of cum interest

1.11.17
Own Debenture A/c Dr. 5,82,000

478
 Debenture Interest Account A/c Dr. 6,000
[6,000 x 100 x 12% x (1/12)]
To Bank A/c 5,88,000

(Being 6,000 debentures purchased @ Rs.

1.11.17 98 cum interest for immediate

cancellation)
12% Debenture A/c Dr. 6,00,000
5,82,000
To Own Debentures A/c
18,000
To Capital reserve A/c (Profit on cancellation of
debentures) (Being Profit on cancelation of 6,000
Debentures
transferred to capital reserve account).
Q-4 A Company had issued 20,000, 13% Convertible debentures of Rs. 100 each on 1st
April, 20X1. The debentures are due for redemption on 1st July, 20X2. The terms of
issue of debentures provided that they were redeemable at a premium of 5% and
also conferred option to the debenture holders to convert 20% of their holding into
equity shares (Nominal value Rs. 10) at a price of Rs. 15 per share. Debenture holders
holding 2,500 debentures did not exercise the option.

Calculate the number of equities shares to be allotted to the Debenture holders

exercising the option to the maximum.

[MTP April ‘18, 5 Marks]

Ans. Calculation of number of equities shares to be allotted

Number of
debentures

479
 Total number of debentures 20,000
Less; Debenture holders not opted for conversion 2,500
Debenture holders opted for conversion 17,500
Option for conversion 20%
Number of debentures to be converted (20% of 17,500) 3,500
Redemption value of 3,500 debentures at a premium of 5% [3,500 Rs. 3,67,500
x (100+5)]
Equity shares of Rs. 10 each issued on conversion [Rs. 24,500 shares
3,67,500/ Rs. 15]
Q-5 Omega Limited (a manufacturing company) recently made a public issue in
respect of which the following information is available:
(a) No. of partly convertible debentures issued- 2,00,000; face value and issue
price- ` 100 per debenture.

(b) Convertible portionper debenture- 60%, dateof conversion- on expiry of 6

months from the date of closing of issue i.e., 31.10.20X1.
(c) Date of closure of subscription lists- 1.5.20X1, date of allotment- 1.6.20X1, rate
of interest on debenture- 15% payable from the date of allotment, value of
equity shares for the purpose of conversion- ` 60 (Face Value ` 10).

(d) Underwriting Commission- 2%.

(e) Number of debentures applied for - 1,50,000.
(f) Interest payable on debentures half-yearly on 30th September and 31st March.
Write relevant journal entries for all transactions arising out of the above during the
year ended 31st March, 20X2 (including cash and bank entries).
[RTP Nov.‘19]
Ans. Journal Entries in the books of Omega Ltd.

480
Date Particulars Amount Amount
Dr. Cr.
` `
1.5.20X1 Bank A/c Dr. 1,50,00,000
To Debenture Application A/c 1,50,00,000
(Application money received on 1,50,000
debentures @ ` 100 each)
1.6.20X1 Debenture Application A/c Dr. 1,50,00,000
Underwriters A/c Dr. 50,00,000
To 15% Debentures A/c 2,00,00,000
(Allotment of 1,50,000 debentures to applicants
and 50,000 debentures to underwriters)
Underwriting Commission Dr. 4,00,000
To Underwriters A/c 4,00,000
(Commission payable to underwriters @ 2% on `
2,00,00,000)
Bank A/c Dr. 46,00,000
To Underwriters A/c 46,00,000
(Amount received from underwriters in settlement
of account)
01.06.20X1 Profit & Loss A/c
To Debenture Redemption Reserve A/c Dr. 20,00,000
(200,000 x 100 x 25% x 40%) 20,00,000
(Being Debenture Redemption Reserve created
on non-convertible debentures)

481
 Debenture Redemption Reserve Investment A/c
ToBank A/c (200,000 x 100 x 15% x 40%) Dr. 12,00,000
(Being Investments made for redemption purpose)
12,00,000
30.9.20X1 Debenture Interest A/c Dr. 10,00,000
To Bank A/c 10,00,000
(Interest paid on debentures for 4 months @
15% on ` 2,00,00,000)
31.10.20X1 15% Debentures A/c Dr. 1,20,00,000

ToEquity Share 20,00,000

Capital A/c To 1,00,00,0000
Securities Premium
31.3.20X2 A/c 7,50,000
(Conversion of 60% of debentures 7,50,000
into shares of ` 60 each with a face Dr.

value of ` 10) Debenture Interest

A/c
To Bank A/c
(Interest paid on debentures for the
half year) (refer working note
below)
Working Note:

Calculation of Debenture Interest for the half year ended 31st March, 20X2

On ` 80,00,000 for6 months @ 15% = ` 6,00,000

On` 1,20,00,000for1 months@ 15% = ` 1,50,000

482
 ` 7,50,000

Q-6 On 1st January, 2008 Raman Ltd. allotted 20,000 9% Debentures of ?100 each at par, the
total amount having been received along with applications.

(i) On 1st January, 2010 the Company purchased in the open market 2,000 of its own
debentures @ Rs.101 each and cancelled them immediately.

(ii) On 1st January, 2013 the company redeemed at par debentures for Rs.6,00,000 by
draw of a lot.

(iii) On 1st January, 2014 the company purchased debentures of the face value of Rs.4,00,000
for 3,95,600 in the open market, held them as investments for one year and then
cancelled them.

(iv) Finally, as per resolution of the board of directors, the remaining debentures were
redeemed at a premium of 2% on 1st January, 2018 when Securities Premium
Account in the company's ledger showed a balance of Rs.60,000.

Pass journal entries for the above-mentioned transactions ignoring debenture

redemption reserve, debenture - interest and interest on own' debentures.

[RTP May ‘19]

Ans. Journal

483
484
485
Q-7 The summarized Balance Sheet of Spices Ltd. as on 31st March, 2018 read as under:
Rs.
Liabilities:

Share Capital: 9,000 equity shares of Rs.10 each, 90,000

fully paid-up General Reserve
38,000
Debenture Redemption Reserve
35,000
12% Convertible Debentures: 1,200 Debentures of Rs.50 each
60,000
Unsecured Loans 28,000
Short term borrowings 19,000
2,70,000
Assets:

Fixed Assets (at cost less depreciation) 72,000

Debenture Redemption Reserve Investments 34,000

Cash and Bank Balances 86,000
Other Current Assets 78,000
2,70,000
The debentures are due for redemption on 1st April, 2018. The terms of issue of
debentures provided that they were redeemable at a premium 10% and also conferred
option to the debenture holders to convert 40% of their holding into equity shares at a
predeterminedpriceof11pershareandthe balancepayment in cash.

Assuming that:

(i) Except for debenture holders holding 200 debentures in aggregate, rest of them
exercised the option for maximum conversion,

(ii) The investments realized Rs.56,000 on sale,

486
 (iii) All the transactions were taken place on 1st April, 2018

(iv) Premium on redemption of debentures is to be adjusted against General Reserve.

You are required to

(a) Redraft the Balance Sheet of Spices Ltd. as on 01.04.2018 after giving effect to the
redemption.

(b) Show your calculations in respect of the number of equity shares to be allotted and the
cash payment necessary. [RTP Nov ‘18]
Ans. Spices Ltd.
Balance Sheet as on 01.04.2018
Particulars Note No. Figures as at
the end of
current
reporting
period
I. Equity and Liabilities
(1) Shareholder's Funds
(a) Share Capital 1 1,10,000
(b) Reserves and Surplus 2 91,000
(2) Non-Current Liabilities
(a) Long-term borrowings - Unsecured Loans 28,000
(3) Current Liabilities
(a) Short-term borrowings 19,000
Total 2,48,000
II. Assets
(1) Non-current assets

487
 (a) Fixed assets
(i) Tangible assets 72,000
(2) Current assets
(a) Cash and cash equivalents 98,000
(b) Other current assets 78,000
Total 2,48,000

Rs.
1. Share Capital
11,000 Equity Shares of Rs.10 each 1,10,000
(Out of above, 2000 shares issued to debentures
holders who opted for conversion into shares)
2. Reserve and Surplus
General Reserve 38,000
Add: Debenture Redemption Reserve transfer 35,000
73,000
22,000
Add: Profit on sale of investments 95,000
Less: Premium on redemption of debentures (1,200 xRs.5) 6,000 89,000
Securities Premium Account (2,000 x Rs.1) 2,000
91,000
Notes to Accounts
Working Notes:
(i) Calculation of number of shares to be allotted Rs.
Total number of debentures 1,200
Less; Number of debentures not opting for conversion (200)
1,000

40% of 1,000 400

Redemption value of 400 debentures (400 x Rs.55) Rs.22,000
Number ofEquity Sharestobeallotted 22,000/11= 2,000sharesof
Rs.10each.

488
 (ii) Calculation of cash to be paid Rs.

Number of debentures 1,200

Less; Number of debentures to be converted into (400)
equity shares
800
Redemption value of 800 debentures (800 x Rs.55)
Rs.44,000
(ii Cash and Bank Balance Rs.
i)
Balance before redemption 86,000
Add: Proceeds of investments sold 56,000
1,42,000
Less: Cash paid to debenture holders 44,000
98,000
Q-8 On 1st January, 2006 Raman Ltd. allotted 20,000 9% Debentures of Rs.100 each at par,
the total amount having been received along with applications.
(i) On 1st January, 2008 the Company purchased in the open market 2,000 of its own
debentures @
101 each and cancelled them immediately.
(ii) On 1st January, 2011 the company redeemed at par debentures for Rs.6,00,000 by
draw of a lot.
(iii) On 1st January, 2012 the company purchased debentures of the face value of Rs.4,00,000
for 3,95,600 in the open market, held them as investments for one year and then
cancelled them.
(iv) Finally, as per resolution of the board of directors, the remaining debentures were
489
 redeemed at a premium of 2% on 1st January, 2016.
You are required to prepare required journal entries for the above-mentioned
transactions ignoring debenture redemption reserve, debenture interest and interest on
own debentures. [RTP May‘18]
Ans. Journal Entries

490
Q9.Sumit Ltd. (an unlisted company other than AIFI, Banking company, NBFC and HFC)
had 8,000, 9% debentures of ` 100 each outstanding as on 1st April, 2019, redeemable on
31st March, 2020.

On 1st April, 2019, the following balances appeared in the books of accounts:

 Investment in 1,000, 7% secured Govt. bonds of ` 100 each, ` 1,00,000.

 Debenture Redemption Reserve is ` 50,000.

Interest on investments is received yearly at the end of financial year.

1,000 own debentures were purchased on 30th March, 2020 at an average price of`
96.50 and cancelled on the same date.

On 31st March, 2020, the investments were realized at par and the debentures were
redeemed. You are required to write up the following accounts for the year ended
31st March, 2020.

(1) 9% Debentures Account.

(2) Debenture Redemption Reserve Account.

(3) DRR Investment Account.

491
 (4) Own Debentures Account. (10 Marks)

[Sugg Nov 2020]

Ans. 9% Debentures Account

Date Particulars ` Date Particulars `
30th March, To Own 96,500 1st April, By Balance 8,00,000
2020 Debentures A/c 2019 b/d
March, 2020 To Profit on
cancellation 3,500
31st March, To Bank A/c 7,00,000
2020
8,00,000 8,00,000

Debenture Redemption Reserve (DRR) Account

Date Particulars ` Date Particulars `
1st April, By Balance b/d 50,000
2019
31st To General 80,000 st
1 April, By Profit and loss A/c
March, Reserve A/c [Refer Working Note 30,000
2019
2020 3]
80,000 80,000

Debenture Redemption Reserve Investments (DRRI) Account

Date Particulars Amount Date Particulars Amount
1st April To Balance b/d 1,00,000 31st March, By Bank A/c 15,000
2019 2020 (1,000 x 100 x
15%)

492
 (Refer Working
Note 2)

1st April To Bank A/c (Refer 20,000 31st March, By Bank A/c 1,05,000
2019 Working Note 1) 1,20,000 2020 (Refer Working 1,20,000
Note 2)

Own Debentures A/c

Date Particulars Amount Date Particulars Amount

30th March, To Bank 96,500 30th March, By 9% 96,500
2020 A/c* 96,500 2020 Debentures 96,500
* interest not considered.
Working Notes:

1. Debenture Redemption Reserve Investment A/c

The company would be required to invest an amount equivalent to 15% of the

value of the debentures in specified investments which would be equivalent to:

= Total No of debentures X Face value per debenture X 15%

= 8,000 X 100 X 15% = `1,20,000/-

The company has already invested in specified investments i.e. 7% Govt bonds
for an amount of `1,00,000 as per the information given in the question. The
balance amount of `20,000 (i.e. ` 1,20,000 less ` 1,00,000) would be invested by
the company on 1 April 2019.

2. Redemption of Debenture Redemption Reserve Investments on 31.3.2020

Since the company purchased 1,000 own debentures on 31 March 2020, the
company would also realize the investments of 15% corresponding to these
debentures for which computation is as follows:

493
 = No of own debentures to be bought X Face value per debenture X 15%

= 1,000 X 100 X 15% = ` 15,000/-

The remaining debentures i.e. total debentures less own debentures would be
redeemed on 31 March 2020 and hence the company would also realize the
balance investments of 15% corresponding to these debentures for which
computation is as follows:

= (Total no of debentures - No of own debentures) X Face value per debenture

X 15% = (8,000 - 1,000) X 100 X 15% = `1,05,000/-

3. Debenture Redemption Reserve

The company would be required to transfer an amount equivalent to 10% of

the value of the debentures in Debentures Redemption Reserve Account. The
value of debentures is 8,00,000 thus 10% of it i.e. 80,000 should be there in DRR
a/c. The available balance in DRR a/c is only 50,000 therefore 30,000 (80,000 –
50,000) additional amount will be transferred from General Reserve or Profit
and loss A/c to DRR A/c.

Q10.During the year 2019-2020, A Limited (a listed company) made a public issue in
respect of which the following information is available:

(i) No. of partly convertible debentures issued-1,00,000; face value and issue price
`100 per debenture. (Whole issue was underwritten by X Ltd.)

(ii) Convertible portion per debenture -60%, date of conversion -on expiry of 6
months from the date of closing of issue.

(iii) Date of closure of subscription lists -1st May,2019, date of allotment – 1st
June, 2019, rate of interest on debenture -15% p.a. payable from the date of
allotment, value of equity share for the purpose of conversion – `60 (face value
`10)

494
 (iv) Underwriting Commission –2%

(v) No. of debentures applied for by public –80,000

(vi) Interest is payable on debentures half yearly on 30th September and 31st
March each year.

Pass relevant journal entries for all transactions arising out of the above during the year
ended 31st March,2020. (including cash and bank entries) (8 Marks)

[Sugg Jan 2021]

Ans. Journal Entries in the books of A Ltd.

Date Particulars Amount Dr. Amount Cr.
` `
1.5.2019 Bank A/c Dr. 80,00,000
To Debenture Application A/c 80,00,000

(Application money received on 80,000

debentures @ `100 each)
1.6.2019 Debenture Application A/c Dr. 80,00,000
Underwriters A/c Dr. 20,00,000
To 15% Debentures A/c 1,00,00,000
(Allotment of 80,000 debentures to
applicants and 20,000 debentures to
underwriters)
Underwriting Commission To Dr. 2,00,000
Underwriters A/c 2,00,000
(Commission payable to underwriters @
2% on ` 1,00,00,000)

495
 Bank A/c Dr. 18,00,000
To Underwriters A/c 18,00,000

(Amount received from underwriters in

settlement of account)
01.06.2019 Debenture Redemption Investment A/c To Dr. 6,00,000
Bank A/c
6,00,000
(100,000 X 100 x 15% X 40%)
(Being Investments madefor
redemption purpose)
30.9.2019 Debenture Interest A/c To Bank Dr. 5,00,000
A/c 5,00,000
(Interest paid on debentures for 4 months
@ 15% on ` 1,00,00,000)
31.10.2019 15% Debentures A/c Dr. 60,00,000
To Equity Share Capital A/c To 10,00,000
Securities Premium A/c 50,00,000
(Conversion of 60% of debentures into
shares of ` 60 each with a face value of `
10)
31.3.2020 Debenture Interest A/c To Bank Dr. 3,75,000
A/c 3,75,000
(Interest paid on debentures for the half
year)
(Refer working note below)

Working Note:

496
 Calculation of Debenture Interest for the half year ended 31st March,
2020 On ` 40,00,000 for 6 months @ 15% = `3,00,000
On ` 60,00,000 for 1 months @ 15% = 75,000
`3,75,000
Q11.The following balances appeared in the books of Omega Ltd. as on 1-4-2020:

(i) 10 % Debentures ` 75,00,000

(ii) Balance of DRR ` 2,50,000

(iii) DRR Investment ` 11,25,000 represented by 10% ` 11,250 Secured Bonds of

the Government of India of ` 100 each.

Annual contribution to the DRR was made as per the requirement. On 31-3-2021,
balance at bank was ` 80,00,000 before receipt of interest. Interest on Debentures
had already been paid. The investments were realized at par for redemption of
debentures at a premium of 10% on the above date.

Omega Ltd. is an unlisted company (other than AIFI, Banking company, NBFC
and HFC). You are required to prepare Debenture Redemption Reserve Account,
Debenture Redemption Reserve Investment Account and Bank Account in the
books of Omega Ltd. for the year ended 31st March, 2021.

[RTP May 2021]

Ans. Debenture Redemption Reserve Account

Date Particulars ` Date Particulars `

31st To General reserve 1st By Balance b/d 2,50,000

March, A/c (Refer Note) 7,50,000 April,

2021 2020

1st By Profit and loss 5,00,000

497
 April, A/c (Refer Note 1)
7,50,000 7,50,000
2020

10% Secured Bonds of Govt. (DRR Investment) A/c

` `

1st April, 2020 To Balance b/d11,25,000 31st March, 2021 By Bank A/c11,25,000
11,25,000 11,25,000

Bank Account

` `

31st To Balance b/d 80,00,000 31st By Debenture 82,50,000

March, March, holders
2021 To Interest on 1,12,500 2021 A/c
DRR Investment (110% of 75,00,000)
(11,25,000X
10%)
To DRR By Balance c/d 9,87,500
Investment A/c 11,25,000
92,37,500 92,37,500

Working note –

Calculation of DRR before redemption = 10% of ` 75,00,000 = 7,50,000

Available balance = ` 2,50,000
DRR required =7,50,000 – 2,50,000= ` 5,00,000.

Q12.XYZ Ltd. has issued 1,000, 12% convertible debentures of ` 100 each redeemable after
a period of five years. According to the terms & conditions of the issue, these debentures
were redeemable at a premium of 5%. The debenture holders also had the option at the time

498
of redemption to convert 20% of their holdings into equity shares of ` 10 each at a price of `
20 per share and balance in cash. Debenture holders amounting ` 20,000 opted to get their
debentures converted into equity shares as per terms of the issue. You are required to
calculate the number of shares issued and cash paid for redemption of ` 20,000 debenture
holders. [RTP Nov2020]

Ans.
Number of
debentures
Debenture holders opted for conversion 200
(20,000 /100)
Option for conversion 20%
Number of debentures to be converted 40
(20% of 200)

Redemption value of 40 debentures at a

premium of 5% [40 x (100+5)] ` 4,200

Equity shares of ` 10 each issued on

conversion
[` 4,200/ ` 20 ] 210 shares

Calculation of cash to be paid : `

Number of debentures 200

Less: number of debentures to be converted into equity (40)
shares
160

Redemption value of 160 debentures (160 × ` 105) i.e. ` 16,800

499
Q13. Jeet Limited (listed company) recently made a public issue in respect of which the
following information is available:

(a) No. of partly convertible debentures issued - 1,00,000; face value and issue
price-` 100 per debenture.
(b) Convertible portion per debenture- 60%, date of conversion- on expiry of 6
months from the date of closing of issue i.e 31.10.2020.

(c) Date of closure of subscription lists - 1.5.2020, date of allotment- 1.6.2020, rate
of interest on debenture- 15% payable from the date of allotment, value of
equity share for the purpose of conversion- ` 60 (Face Value ` 10).

(d) Underwriting Commission- 2%.

(e) Number of debentures applied for - 75,000.

(f) Interest payable on debentures half-yearly on 30th September and 31st March.

Write relevant journal entries for all transactions arising out of the above during the
year ended 31st March, 2021 (including cash and bank entries).

[RTP Nov 2021]

Ans. Journal Entries in the books of Jeet Ltd. Journal Entries

Date Particulars Amount Amount
Dr. Cr.
` `
1.5.2020 Bank A/c Dr. 75,00,000
To Debenture Application A/c 75,00,000
(Application money received on 75,000
debentures @ ` 100 each)
1.6.2020 Debenture Application A/c Dr. 75,00,000
Underwriters A/c Dr. 25,00,000

500
 To 15% Debentures A/c 1,00,00,000
(Allotment of 75,000 debentures to
applicants and 25,000 debentures to
underwriters)
Underwriting Commission Dr. 2,00,000
To Underwriters A/c 2,00,000
(Commission payable to underwriters @ 2%
on ` 1,00,00,000)
Bank A/c Dr. 23,00,000
To Underwriters A/c 23,00,000
(Amount received from underwriters in
settlement of account)
1.6.2020 Debenture Redemption Reserve Investment 6,00,000
A/c
To Bank A/c (1,00,000x100x15%x 40%) Dr. 6,00,000
(Being Investments made for redemption
purpose)
30.9.2020 Debenture Interest A/c To Dr. 5,00,000
Bank A/c 5,00,000
(Interest paid on debentures for 4 months @
15% on ` 1,00,00,000)
31.10.2020 15% Debentures A/c Dr. 60,00,000
To Equity Share Capital A/c 10,00,000
To Securities Premium A/c 50,00,000
(Conversion of 60% of debentures into shares
of ` 60 each with a face value of

501
 ` 10)

31.3.2021 Debenture Interest A/c Dr. 3,75,000

To Bank A/c 3,75,000
(Interest paid on debentures for the half year)
(refer working note below)
Working Note :

Calculation of Debenture Interest for the half year ended 31st March,
2021 On ` 40,00,000 for 6 months @ 15%= ` 3,00,000
On ` 60,00,000 for 1 months @ 15% = ` 75,000
` 3,75,000

Q14. XYZ Ltd. has issued 1,000, 12% convertible debentures of Rs. 100 each redeemable after a
period of five years. According to the terms & conditions of the issue, these debentures
were redeemable at a premium of 5%. The debenture holders also had the option at the
time of redemption to convert 20% of their holdings into equity shares of Rs. 10 each at a price
of Rs. 20 per share and balance in cash. Debenture holders amounting Rs. 20,000 opted to
get their debentures converted into equity shares as per terms of the issue.
You are required to calculate the number of shares issued and cash paid for redemption of Rs. 20,000
debenture holders and also pass journal entry for conversion and redemption of debentures. [MTP May
2021] (5 marks)

Ans.
Number of
debentures
Debenture holders opted for conversion (20,000 /100) 200
Option for conversion 20%

502
 Number of debentures to be converted (20% of 200) 40
Redemption value of 40 debentures at a premium of 5% [40 x (100+5)] Rs. 4,200
Equity shares of Rs. 10 each issued on conversion
[Rs. 4,200/ Rs. 20 ] 210 shares

Calculation of cash to be paid : Rs.

Number of debentures 200

Less: number of debentures to be converted into equity shares (40)

160

Redemption value of 160 debentures (160 × Rs. 105) Rs. 16,800

Journal Entry

Debentures A/c Dr. 20,000

Premium on redemption A/c Dr. 1,000

To Debenture holders A/c 21,000

(Being amount due to debenture holders at redemption)

Debenture holders A/c Dr. 21,000

To Equity Share capital A/c To Securities 2,100

premium A/c To Cash A/c Dr. 2,100

(Discharge of amount due to Debenture holders) 16,800

Q15.Surya Limited (a listed company) recently made a public issue in respect of which the
following information is available:

503
 (a) No. of partly convertible debentures issued- 2,00,000; face value and issue price- Rs. 100
per debenture.

(b) Convertible portion per debenture- 60%, date of conversion- on expiry of 6 months from the
date of closing of issue.

(c) Date of closure of subscription lists- 1.5.2020, date of allotment- 1.6.2020, rate of interest
on debenture- 15% payable from the date of allotment, value of equity share for the purpose
of conversion- Rs. 60 (Face Value Rs. 10).

(d) Underwriting Commission- 2%.

(e) No. of debentures applied for- 1,50,000.

(f) Interest payable on debentures half-yearly on 30th September and 31st March.

Write relevant journal entries for all transactions arising out of the above during the year ended
31st March, 2021 (including cash and bank entries).

[MTP May 2021 ] ( 6 marks)

Ans.
Date Particulars Amount Dr. Amount Cr.
Rs. Rs.
1.5.2020 Bank A/c Dr. 1,50,00,000

To Debenture Application A/c 1,50,00,000

(Application money received on 1,50,000

debentures @ Rs. 100 each)
1.6.2020 Debenture Application A/c Underwriters Dr. 1,50,00,000
A/c Dr. 50,00,000
To 15% Debentures A/c 2,00,00,000
(Allotment of 1,50,000 debentures to applicants

504
 and 50,000 debentures to underwriters)

Underwriting Commission Dr. 4,00,000

To Underwriters A/c 4,00,000
(Commission payable to underwriters @ 2% on
Rs. 2,00,00,000)
Bank A/c Dr. 46,00,000
To Underwriters A/c 46,00,000

(Amountreceived from underwriters in

settlement ofaccount)
01.06.2020 Debenture Redemption Investment A/c To Dr. 12,00,000
Bank A/c
12,00,000
(200,000 X 100 x 15% X 40%)
(Being Investments made for redemption
purpose)
30.9.2020 Debenture Interest A/c To Dr. 10,00,000
Bank A/c 10,00,000
(Interest paid on debentures for 4 months @
15% on Rs. 2,00,00,000)
31.10.2020 15% Debentures A/c Dr. 1,20,00,000

To Equity Share Capital A/c To 20,00,000

Securities Premium A/c 1,00,00,0000
(Conversion of 60% of debentures into shares of
Rs. 60 each with a face value of Rs. 10)
31.3.2021 Debenture Interest A/c To Dr. 7,50,000

505
 Bank A/c 7,50,000
(Interest paid on debentures for the half year)
(Refer working note below)

Working Note:

Calculation of Debenture Interest for the half year ended 31st March, 2021: On Rs.
80,00,000 for 6 months @ 15% = Rs.6,00,000
On Rs. 1,20,00,000 for 1 months @ 15% = Rs. 1,50,000
Rs.7,50,000

Q16. XYZ Ltd. has issued 1,000, 12% convertible debentures of Rs. 100 each redeemable after a
period of five years. According to the terms & conditions of the issue, these debentures were
redeemable at a premium of 5%. The debenture holders also had the option at the time of redemption
to convert 20% of their holdings into equity shares of Rs. 10 each at a price of Rs. 20 per share and balance
in cash. Debenture holders amounting Rs. 20,000 opted to get their debentures converted into equity
shares as per terms of the issue.
You are required to calculate the number of shares issued and cash paid for redemption of Rs. 20,000
debenture holders and also pass journal entry for conversion and redemption of debentures.

[MTP May 2020 ] ( 5 marks )

Ans.
Number of debentures

Debenture holders opted for conversion (20,000 /100) 200

Option for conversion 20%
Number of debentures to be converted (20% of 200) 40
Redemption value of 40 debentures at a premium of 5% [40 x (100+5)]Rs. 4,200
Equity shares of Rs. 10 each issued on conversion
[Rs. 4,200/ Rs. 20 ] 210 shares

506
Calculation of cash to be paid : Rs.

Number of debentures 200

Less: number of debentures to be converted into equity shares (40)

160

Redemption value of 160 debentures (160 × Rs. 105) Rs. 16,800

Journal Entry
Debentures A/c Dr. 20,000
Premium on redemption A/c To Debenture Dr. 1,000
holders A/c 21,000
(Being amount due to debenture holders at redemption)
Debenture holders A/c Dr. 21,000

ToEquity Share capital A/c To Securities 2,100

premium A/c To Cash A/c Dr. 2,100

(Discharge of amount due to Debenture holders) 16,800

507
CHAPTER-8

Investment Accounts

Q-1 Mr. Harsh provides the following details relating to his holding m 10% debentures
(face value of ` 100 each) of Exe Ltd., held as current assets:

1.4.2018 opening balance - 12,500 debentures, cost `

12,25,000
1.6.2018 purchased 9,000 debentures @ ` 98 each ex-
interest
1.11.2018 purchased 12,000 debentures @ ` 115 each cum-
interest
31.1.2019 sold 13,500 debentures @ ` 110 each cum-
interest
31.3.2019 Market value of debentures @ ` 115 each

Due dates of interest are 30 th June and 31st December. Brokerage at 1% is to be paid for
each transaction. Mr., Harsh closes his books on 31.3.2019. Show investment account
as it would appear in his books assuming FIFO method is followed.
[Sugg.Nov.’19,10 Marks]
Ans. Investment Account of Mr. Harsh for the year ending on 31-3-2019 (Scrip: 10%
Debentures of Exe Limited)
(Interest Payable on 30th June and 31st December)

508
Date Particular Nomin Intere Cost Date Particulars Nomina Intere Cost
s al st l st
Valu ` Valu `
e ` e `
` `
1.4.1 To
8 Balance
b/ d 12,50,000 31,250 12,25,00 30.6.1 By Bank - 1,07,500 -
0 8 21,500 x
100

x 10% x
1/2
1.6.1 To Bank
8 (ex-
Interest) 9,00,000 37,500 8,90,820 31.12.1 By
(W.N.1) 9 Bank
33,50
0x 1,67,500

100
x10% x
1/2
1.11.1 To Bank
8 (Cum-
Interest) 12,00,000 40,000 13,53,80 31.1.1 By Bank 13,50,00 11,25 14,58,90
(W.N.2) 0 9 (W.N.3) 0 0 0
To

509
 Profit
31.1.1
& Loss By
9 1,34,92 31.3.1 20,00,00 50,00 21,45,64
A/c Balanc
0 9 0 0 0
(W.N. e c/d
-
3) (W.N.
4)
31.3.1 To
9 Profit
& Loss 2,27,500
A/c
(Bal. fig.)
33,50,000 3,36,250 36,04,54 33,50,000 3,36,250 36,04,54
0 0

510
Working Notes:

1. Purchase of debentures on 1.6.18

Interest element = 9,000 x 100 x 10% x 5/12 = ` 37,500

Investment element = (9,000 x 98) + [1% (9,000 x 98)] = ` 8,90,820

2. Purchase of debentures on 1.11.2018

Interest element = 12,000 x 100 x 10% x 4/12 = ` 40,000

Investment element = 12,000 X 115 X 101% less 40,000 = ` 13,53,800

3. Profit on sale of debentures as on 31.1.19

`
Sales price of debentures (13,500 x ` 110) 14,85,000
Less: Brokerage @ 1% (14,850)
14,70,150
Less: Interest (1,35,000/ 12) (11,250)
14,58,900
Less: Cost of Debentures [(12,25,000 + (890820 X (13,23,980)
1,00,000/9,00,000)]
Profit on sale 1,34,920
4. Valuation of closing balance as on 31.3.2019:

Marketvalue of 20,000Debenturesat ` 115= `

23,00,000 Cost of
8,000 Debentures = 8,90,820/ 9,000 X 8,000 = 7,91,840

12,000 Debentures = 13,53,800

Total 21,45,640

Value at the end is ` 21,45,640, i.e., which is less than market value of ` 23,00,000.

511
 Q-2 Following transaction of Nisha took Place during the financial year 2017-18:

1st April, 2017 Purchased ` 9,000 8% bonds of ` 100 each at ` 80.50 cum-interest.
Interest is payable on 1st November and 1st May.
1stMay,2017 Received half year’s interest on 8% bonds.

10July,2017 Purchased 12,000 equity shares of Rs.10 each in Moon Limited for ` 44
each through a broker, who charged brokerage @2%
1st October 2017 Sold 2,250 8% bonds at ` 81 Ex-
interest. 1st November, 2017 Received half year’s
interest on 8% bonds.
15th January, 2018 Moon Limited made a right issue of one equity share for every four
Equity shares held at ` 5 per share. Nisha exercised the option for
4% of her entitlements and sold the balance right int he markets at
` 2.25 per share.
15th March, 2018 Received 18% interim dividend on equity shares of Moon Limited.

Prepare separate investment account for 8% bonds and equity shares of Moon Limited in the
books of Nisha for the year ended on 31st March, 2018. Assume that the average cost
method is followed.

[Sugg.Nov.’18,10Marks]

Ans. In the books of Nisha

8% Bonds for the year ended 31st March, 2018

Date Particular No. Income Amount Date Particular No. Income Amount
` ` ` `
2017 1 May By Bank - 36,000 -

512
1 To Bank 9,000 30,000 6,94,500 2017 Interest
April, A/c
Oct.
1 ToP & L - - 8,625 1 Oct. By Bank 2,250 7,500 1,82,250
2018 A/c A/c

March (W.N.1) 2017

31
ToP & L 40,500 1 Nov. By bank 27,000
A/c 2018 Interest
2018 By
Mar.31 Balance
c/d
(W.N.2)
6,750 - 5,20,875
9,000 70,500 7,03,125 9,000 70,500 7,03,125

Investment In Equity shares of Moon Ltd. for the year ended 31st March, 2018

Date Particula No. Incom Amoun Date Particular No. Incom Amoun
r e t e t
` ` ` `
2017 To Bank 12,00 -- 5,38,56 2018 By Bank- - 23,760
A/c 0 0 Marc dividend
h
15 *
2018 To Bank 1,200 - 6,000 March By
Jan. A/c 31 Balance

513
 15 (W.N.3) c/d 13,20 - 5,44,560
(bal.fig 0
)
Marc ToP &
h 31 L A/c - 23,760

13,20 23,760 5,44,56 13,20 23,760 5,44,560

0 0 0
* Considering that dividend was received on right share also.

Working Notes:

1. Profit on sale of 8% Bonds

Sales price ` 1,82,250
Less: Cost of bond sold = 6,94,500/9,000x (` 1,73,625)
2,250
Profit on sale ` 8,625
2. Closing balance as on 31.3.2018 of 8% Bonds
6,94,500/ 9,000 x 6,750= ` 5,20,875
3. Calculation of right shares subscribed by Moon Ltd.
Right Shares = 12,000/4 x 1= 3,000 shares
Shares subscribed by Nisha = 3,000 x 40%= 1,200 shares
Value of right shares subscribed = 1,200 shares @ ` 5 per share = ` 6,000
4. Calculation of sale of right entitlement by Moon Ltd.
No. of right shares sold = 3,000 -1,200 = 1,800 rights for ` 4,050
Note: As per para 13 of AS 13, sale proceeds of rights are to be credited to P & L A/c.
Q-3 Mr. Vijay entered into the following transactions of purchase and sale of equity shares of
JP Power Ltd.

514
The shares have paid up value of ` 10 per share.
Date No. of Terms
Shares
01.01.2016 600 Buy @ Rs.20 per
share
15.03.2016 900 Buy @ Rs.25 per
share
20.05.2016 1000 Buy@ Rs.23 per
share
25.07.2016 2500 Bonus Shares
received
20.12.2016 1500 Sale @ Rs.22 per
share
01.02.2017 1000 Sale @ Rs.24 per
share
Addition information:

(1) On 15.09.2016 dividend @ ` 3 per share was received for the year ended 31.03.2016.

(2) On 12.11.2016 company made a right issue of equity shares in the ratio of one share for
five shares held on payment of ` 20 per share. He subscribed to 60% of the shares and
renounced the remaining shares on receipt of the premium of ` 3 per share.

(3) Shares are to be valued on weighted average cost basis.

You are required to prepare Investment Account for the year ended 31.03.2016 and
31.03.2017. [Sugg.May‘18, 10Marks]

Ans. Investment in Equity Shares of JP Power Ltd.

Date Particular No. Divide Amoun Date Particular No. Divide Amoun

515
 nd t nd t
01.01. To Bank 600 12,000 31.3.1 By Balance c/ 1,500 34,500
16 A/c 6 d
15.3.1 To Bank 900 22,500
6 A/c
1,50 34,500 1,500 34,500
0
1.4.16 To Balance 1,50 34,500 15.9.1 By Bank 4,500 3,000
b/ d 0 6 dividend
20.5.1 To Bank 1,00 23,000 20.12. By Bank 1,500 33,000
6 A/c 0 16
25.7.1 To Bonus 2,50 - 1.2.17 By Bank 1,000 24,000
6 shares 0
12.11. To Bank 600 12,000 31.3.1 By Balance c/ 3,100 36,812.
16 A/c 7 d 50*
20.12. To P&L A/c
16
(Profit on 15,187,
sale) 50*
1.2.17 To P&L A/c 12,125
(Profit on
sale)
31.3.1 To P&L A/c 4,500
7
(dividend)
5,60 4,500 96,812, 5,600 4,500 96,812.

516
 0 50 50
Working Notes:
1. Calculation of Weighted average cost of equityshares
600 shares purchased at Rs.12,000
900 shares purchased at Rs.22,500
1,000 shares purchased at Rs.23,000
2,500 shares at nil cost
600 right shares purchased at Rs.12,000
Total cost of 5,600 shares is Rs.66,500 [Rs. 69,500 less Rs.3,000 (pre-acquisition dividend received
on 1,000 shares purchased on 20.5.17].
Hence, weighted average cost per share will be considered as Rs.11.875 per share
(66,500/5,600).
2. It has been considered that no dividend was received on bonus shares as the dividend
pertains to the year ended 31st March, 2016.

3. Calculation of right sharessubscribed by Vijay

Right Shares (considering that right shares have been granted on Bonus shares also) = 5,000/5
x 1= 1,000 shares

Shares subscribed = 1,000 x 60%= 600 shares

Value of right shares subscribed = 600 shares @ Rs. 20 per share =

Rs.12,000 Calculation of sale of right renouncement
No. of right shares sold = 1,000 x 40% = 400 shares

Sale value of right = 400 shares x Rs.3 per share = Rs.1,200

Note: As per para 13 of AS 13, sale proceeds of rights are to be credited to P & L A/c.

4. Profit on sale of equity shares

As on 20.12.16

517
 Sales price (1,500 shares atRs.22) 33,000.00
Less: Cost of shares sold (1,500 x Rs 11.875) (17,812.50)
Profit on sale 15,187.50
As on 1.2.17
Sales price (1,000 shares atRs.24) 24,000
Less: Cost of shares sold (1,000 x Rs. 11.875) 11,875
Profit on sale 12,125
Balance of 3,100 shares as on 31.3.17 will be valued at ` 36,812.50 (at rate of Rs.11.875 per share).

Q-4 Akash Ltd. had 4,000equity share of XLimited, at a book value of Rs. 15 per share (face
value of Rs. 10 each) on 1st April 2018. On 1st September 2018, Akash Ltd. acquired
1,000 equity shares of X Limited at a premium of Rs. 4 per share. X Limited announced
a bonus and right issue for existing shareholders.

The terms of bonus and right issue were -

(1) Bonus was declared, at the rate of two equity shares for every five equity shares
held on 30th September, 2018.

(2) Right shares are to be issued to the existing shareholders on 1st December, 2018.
The company issued two right shares for every seven shares held at 25% premium.
No dividend, was payable on these shares. The whole sum being payable by 31st
December, 2018.
(3) Existing shareholders were entitled to transfer their rights to outsiders, either
wholly or in part.

(4) Akash Ltd. exercised its option under the issue for 50% of its entitlements and sold
the remaining rights for Rs. 8 per share.

(5) Dividend for the year ended 31st March 2018, at the rate of 20% was declared by the
company and received by Akash Ltd., on 20th January 2019.

518
 (6) On 1st February 2019, Akash Ltd., sold half of its shareholdings at a premium of Rs.
4 per share.

(7) The market price of share on 31.03.2019 was Rs. 13 per share.

You are required to prepare the Investment Account of Akash Ltd. for the year ended 31st March,
2019 and determine the value of shares held on that date assuming the investment as current
investment. [MTP Oct. ‘19, 10 Marks]
Ans. Investment Account-Equity Shares in XLtd.

Date No. Dividen Amoun Dat No. Dividen Amoun

of d t e of d t

share share
s Rs. Rs. s Rs. Rs.
2018 201

April To 4,000 - 60,000 9 By Bank 8,000 2,000

1 Balanc Jan. (dividend

e b/d 20 ) By
1,000 - 14,000 4,00 56,000
To Bank Bank
Sept 1 2,000 - 0 42,250
To Bonus By Balance
Sept.3 1,000 - 12,50 Feb. 4,00
Issue To c/d
0 0 1 0
Bank
Dec.1 Mar.
(Right)
2019 13,750 31
Feb. 1
To
8,000
Profit
Feb. 1
&
Loss 8,000

519
 4,000 8,000 1,00,250 8,00 8,000 1,00,250
April. To Balance 42,250 0
1 b/d
Working Notes:

Rs.
(Rs. 60,000 + Rs. 14,000 + Rs. 12,500) 86,500
Less: Dividend on shares purchased on 1st Sept, 2018 (2,000)
Cost of 8,000 shares 84,500
Cost of 4,000 shares (Average cost basis*) 42,250
Sale proceeds (4,000 shares @ 14/-) 56,000
Profit on sale 13,750

1. Cost of shares sold.Amount paid for 8,000 shares

* For ascertainment of cost for equity shares sold, average cost basis has been applied.
2. Value of investment at the end of the year
Closing balance will be valued based on lower of cost (Rs. 42,250) or net realizable value
(Rs.13 x 4,000). Thus, investment will be valued at Rs. 42,250.
3. Calculation of sale of right entitlement
1,000 shares x Rs. 8 per share = Rs. 8,000
Amount received from sale of rights will be credited to P & L A/c as per AS 13
4. Dividend received on investment held as on 1st April, 2018
= 4,000 shares x Rs. 10 x 20%
= Rs. 8,000 will be transferred to Profit and Loss A/c
Dividend received on shares purchased on 1st Sep. 2018
= 1,000 shares x Rs. 10 x 20% = Rs. 2,000 will be adjusted to Investment A/c
Note: It is presumed that no dividend is received on bonus shares as bonus shares are declared
on 30th Sept., 2018 and dividend pertains to the year ended 31.3.2018.

520
Q-5 In 2015, Royal Ltd. issued 12% fully paid debentures of Rs. 100 each, interest being
payable half yearly on 30th September and 31st March of every accounting year.
On 1st December, 2016, M/s. Kumar purchased 10,000 of these debentures at Rs.101 cum-
interest price, also paying brokerage @ 1% of cum-interest amount of the purchase. On
1st March, 2017 the firm sold all of these debentures at Rs.106 cum-interest price,
again paying brokerage @ 1 % of cum-interest amount. Prepare Investment Account
in the books of M/s. Kumar for the period 1st December, 2016 to 1st March, 2017.
[MTP March ‘19, 6 Marks]
Ans. In the books of M/s Kumar
Investment Account for the period from 1st December 2016 to 1st
March, 2017 (Scrip: 12% Debentures of Royal
Ltd.)
Date Particul Nomina Intere Cost date Particul Nomina Intere Cost
ars l st ars l st
1.12.20 To Bank 10,00,0 20,00 10,00,1 1.3.20 By Bank 10,00,0 50,00 9,99,40
16 A/c 00 0 00 17 A/c 00 0 0
(W.N.1) (W.N.2)
1.3.201 To Profit - 1.3.20 By Profit
7 & 17 &
loss A/ c 30,00 loss A/ c 700
10,00,0 0 10,00,1 10,00,0 50,00 10,00,1
00 50,00 00 00 0 00
0
Working Notes:
(i) Cost of 12% debentures purchased on 1.12.2016 Rs.
Cost Value (10,000 xRs.101) = 10,10,000

521
 Add: Brokerage (1% of Rs.10,10,000) = 10,100
Less; Cum Interest (10,000 x 100 x12% x 2/12) = (20,000)
Total = 10,00,100
(ii) Sale proceeds of 12% debentures sold on 1st Rs.
March, 2017
Sales Price (10,000 xRs.106) = 10,60,000
Less; Brokerage (1% of Rs.10,60,000) = (10,600)
Less; Cum Interest (10,000 x 100 x12% x 5/12) = (50,000)
Total = 9,99,400
Q-6 Gopal holds 2,000, 15% Debentures of Rs. 100 each in Ritu Industries Ltd. as on April 1,
2015 at a cost of Rs. 2,10,000. Interest is payable on June, 30 and December, 31 each year. On
May 1, 2015,1,000 debentures are purchased cum-interest at Rs. 1,07,000. On November
1,2015,1,200 debentures are sold ex-interest at Rs. 1,14,600. On November 30, 2015,
800 debentures are purchased ex-interest at Rs. 76,800. On December31,2015,800
debentures are sold cum-interest for Rs. 1,10,000. You are required to prepare the
Investment Account showing value of holdings on March31, 2016 at cost, using FIFO
Method. [MTP April ‘19, 10 Marks]
Ans. Investment Account of Gopal
For the year ended 31.3.2016
(Script: 15% Debentures in Ritu Industries
Ltd.) (Interest payable on 30th June and
31st December)
Date Particula Nomin Intere Cost Date Particula Nomin Intere Cost
rs al st Rs. rs al st Rs.
1.04.1 To 2,00,0 7,500 2,10,0 30.06. By Bank - 22,500
5 Balance 00 00 15 A/c

522
 A/c
1.05.1 To Bank 1,00,0 5,000 1,02,0 1.11.1 By Bank 1,20,0 6,000 1,14,6
5 A/c 00 00 5 A/c 00 00
30.11. To Bank 80,000 5,000 76,80 1.11.1 By Profit - - 11,400
15 A/c 0 5
& Loss
A/c
31.12. To Profit 20,00 31.12. By Bank 80,000 6,000 1,04,0
15 & Loss 0 15 A/c 00
A/c
31.03. To Profit 37,250 31.12. By Bank - 13,500 -
16 & 15 A/c
Loss A/c 31.12. By Bank 6,750
(Bal. fig.) 15 A/c
31.3.1 By Bal. 1,80,0 1,78,8
6 c/d 00 00
3,80,0 54,750 4,08,8 3,80,0 54,750 4,08,8
00 00 00 00

523
Working Notes:

Q-7 Meera carried out the following transactions in the shares of Kumar Ltd.:
(1) On 1st April, 2017 She purchased 40,000 equity shares of Rs.1 each fully paid up for
Rs.60,000
(2) On 15th May, 2017 Meera sold 8,000 shares for Rs.15,200
(3) At a meeting on 15th June, 2017, the company decided:

524
 (i) Tomake abonus issue of one fully paid-upshare for every four shares held on1st
June 2017, and
(ii) Togive its members the right to apply for one share for every five shares held on
1st June 2017 at a price of ` 1.50 per share of which 75 paise is payable on or
before 15th July 2017 and the balance, 75 paise per share, on or before 15th
September, 2017.
The shares issued under (i) and (ii) were not to rank for dividend for the year ending 31st
December 2017.
(a) Meera received her bonus shares and took up 4000 shares under the right issue,
paying the sum thereon when due and selling the rights of the remaining
shares at 40 paise per share; the proceeds were received on 30th September
2017.
(b) On 15th March 2018, she received a dividend from Kumar Ltd. of 15 per cent in
respect of the year ended 31st Dec2017.
(c) On 30th March she received Rs.28,000 from the sale of 20,000 shares.
You are required to prepare the Investment Account in Meera's books for the year ended 31st
March 2018 recording the above-mentionedtransactions by transferring any profits or losses
on these transactions to Profit and Loss account. Apply average cost basis. Expenses and tax to
be ignored.
[MTP March ‘18, 10 Marks]
Ans. Investment Account (Shares in Kumar Limited) in the books of Meera

Dat Particular No. Incom Amoun Dat Particular No. of Incom Amoun
e s of e t e Shares e t
201 Share
7 s
April To Bank 40,000 - 60,000 May By Bank 8,000 - 15,200

525
1 (Purchases) (Sale)
May To Profit & - - 3,200
Loss
A/c
(W.N.1) By Bank
June To Bonus 8,000 - N i l 201 (Dividend
Issue 8 @ 15% on
July To Bank @ 4,000 - 3,000 Mar. Rs.32,000 4,800 -
75 p. 15 )
paid on ) By Bank
4,000 (Sale)
shares
Sept. To Bank @ - - 3,000 Mar. By 20,00 - 28,000
75 p. 30 Balance c/ 0
paid on ) d

4,000 24, 000

shares x 54, 000
2018 To Profit & 3,455 Mar. 24,00 - 29,455
Loss 31 0

44, 000
Mar. A/c
(W.N.2)

To Profit & - 4,800

Loss A/c
52,000 4,800 72,655 52,00 4,800 72,655
0
Working Notes:
526
(1) Profit on Sale on 15-5-2017
Cos of 8,000 shares @ Rs.1.50 Rs.12,000
Less: Sales price Rs.15,200
Profit Rs.3,200
(2) Cost of 20,000 shares sold:
Cost of 44,000 shares (48,000 + 6,000) Rs.54,000

Rs.54, 000
Cost of 20,000 x20, 000shares Rs.24,545
44,000shares 

527
 Profit on sale of 20,000 shares (Rs.28,000 - Rs.24,545) Rs.3,455

Q-8 Smart Investments made the following investments in the

year 2017-18: 12% State Government Bonds having face
value Rs. 100
Date Particulars
01.04.2017 Opening Balance (1200 bonds) book value of Rs. 1,26,000
02.05.2017 Purchased 2,000 bonds @ Rs. 100 cum interest
30.09.2017 Sold 1,500 bonds at Rs. 105 ex
interest Interest on the bonds is received on 30th June and
31st Dec. each year. Equity Shares of X Ltd.
15.04.2017 Purchased 5,000 equity shares @ Rs. 200 on cum right basis
Brokerage of 1% was paid in addition (Face Value of shares
Rs. 10)
03.06.2017 The companyannounceda bonusissue of 2 shares
for every 5
shares held.
16.08.2017 The company made a rights issue of 1 share for every 7
shares held
at Rs. 250 per share.
The entire money was payable by 31.08.2017.
22.8.2017 Rights to the extent of 20% was sold @ Rs. 60. The
remaining rights
were subscribed.
02.09.2017 Dividend @ 15% for the year ended 31.03.2017 was received on
16.09.2017

528
 15.12.2017 Sold 3,000 shares @ Rs. 300. Brokerage of 1% was incurred
extra.
15.01.2018 Received interim dividend @ 10% for the year 2017-18
31.03.2018 The shares were quoted in the stock exchange @ Rs. 220
Prepare Investment Accounts in the books of Smart Investments. Assume that the
average cost method is followed.
[MTP Aug. ‘18, 12 Marks]
Ans. In the books of Smart Investments
12% Govt. Bonds for the year ended 31st March, 2018

Investments in Equity shares of X Ltd. for year ended 31.3.2018

Working Notes:
1. Profit on sale of bonds on 30.9.17

529
 = Sales proceeds – Average cost
Sales proceeds = Rs. 1,57,500
Average cost = Rs. [(1,26,000+1,92,000) x 1,500/3,200] =
1,49,062.50 Profit = 1,57,500– Rs.
1,49,062.50=Rs.8,437.50
2. Valuation of bonds on 31st March, 2018

Cost = Rs. 3,18,000/3,200 x1,700 = 1,68,937.50

3. Cost of equity shares purchased on 15/4/2017

= Cost + Brokerage

= (5,000 x Rs. 200) + 1% of (5,000 x Rs. 200) = Rs. 10,10,000

4. Sale proceeds of equity shares on 1 5/12/2017

= Sale price – Brokerage

= (3,000 x Rs. 300) – 1% of (3,000 x Rs. 300) = Rs. 8,91,000.

5. Profit on sale of shares on 15/12/2017

= Sales proceeds – Average

cost Sales proceeds

=Rs. 8,91,000
Average cost = Rs. [(10,10,000+2,00,000 -7,500) x 3,000/7,800]

= Rs. [12,02,500 x 3,000/7,800] = 4,62,500

Profit = Rs. 8,91,000 – Rs. 4,62,500=Rs. 4,28,500.

6. Valuation of equity shares on 31st March,

2018 Cost =Rs. [12,02,500 x 4,800/7,800] =
Rs. 7,40,000

7. Market Value = 4,800 shares ×Rs. 220 =Rs.

530
 10,56,000
Closing stock of equity shares has been valued at Rs.7,40,000 i.e., cost being lower
than the market value.

Note: If rights are not subscribed for but are sold in the market, the sale proceeds are
taken to the profit and loss statement as per para 13 of AS 13 “Accounting for
Investments”.
Q-9 A Pvt. Ltd. follows the calendar year for accounting purposes. The company
purchased 5,000 (nos.) 13.5% Convertible Debentures of Face Value of ` 100 each of
P Ltd. on 1st May 2018 @ ` 105 on cum interest basis. The interest on these
instruments is payable on 31st March & 30th September respectively. On August
1st 2018 the company again purchased 2,500 of such debentures @ ` 102.50 each on
cum interest basis. On 1st October, 2018 the company sold 2,000 Debentures @ ` 103
each. On 31st December, 2018 the company received 10,000 equity shares of ` 10 each in
P Ltd. on conversion of 20% of its holdings. Interest for 3 months on converted
debentures was also received on 31.12.2018. The market value of the debentures and
equity shares as at the close of the year were ` 106 and ` 9 respectively. Prepare the
Debenture Investment Account & Equity Shares Investment Account in the books of A
Pvt. Ltd. for the year 2018on Average Cost Basis. [RTP Nov.’19]

531
Ans. Books of A Pvt. Ltd.

Investment in 13.5% Convertible Debentures in P Ltd. Account (Interest

payable 31st March & 30th September)
Date Particular Nomina Interes Amount Date Particular Nominal Interest Amoun
s l t ` s ` ` t

` ` `
2018 2018

May To Bank 5,00,00 5,625 5,19,375 Sept.3 By Bank 50,62

1 0 0 (6 5

To Bank 11,25 2,45,000 Oct.1 months 2,00,00 2,06,00

Dec. 31 Int) By
Aug. ToP&L 2,50,00 0 2,167 0 0
1 A/c To 0 Dec. 31 Bank
Oct.1 P&L A/c 52,31 1,10,00 1,12,10
By Equity
Dec. 3 Dec. 31 0 8
share By 3,71
31
Bank 3

(See
note1) 14,85
4,40,00 4,48,43
By 0
0 4
Balance
c/d
7,50,00 69,18 7,66,54 7,50,00 69,18 7,66,54
0 8 2 0 8 2
Note 1: ` 3,713 received on 31.12.2018 represents interest on the debentures converted till
date of conversion.

Note 2: Cost being lower than Market Value the debentures are carried forward at Cost.

532
 Investment in Equity shares in P Ltd. Account
Date Particulars Nominal Amount Date Particulars Nominal Amount

` ` ` `
2018 2018
Dec 31 To 13.5% Deb. 1,00,000 1,12,108 Dec.31 By P&L A/c 22,108
Dec.31 By Bal. c/d 1,00,000 90,000
1,00,000 1,12,108 1,00,000 1,12,108
Note 1: Cost being higher than Market Value the shares are carried forward at Market
Value.
Working Notes:
1. Interestpaidon ` 5,00,000purchasedonMay1st,2018for themonth ofApril 2018,as
part of purchase price: 5,00,000 x 13.5% x 1/12 = ` 5,625
2. Interest received on 30th Sept. 2018
On ` 5,00,000 = 5,00,000 x 13.5% x ½ = 33,750
On ` 2,50,000 = 2,50,000 x 13.5% x ½ = 16,875
Total ` 50,625
3. Interest paid on ` 2,50,000 purchased on Aug. 1st 2018 for April 2018 to July 2018 as
part of purchase price:
2,50,000 x 13.5% x 4/12 = ` 11,250
4. Loss on Sale of
Debentures Cost of
acquisition
(` 5,19,375 +` 2,45,000)x` 2,00,000/` 7,50,000 = 2,03,833
Less: Sale Price (2,000 x 103) = 2,06,000

Profit on sale =` 2,167

533
 5. Interest on 1,100 Debentures (being those converted) for 3 months i.e.,
Oct-Dec. 2018 1,10,000 x 13.5% x 3/12 = ` 3,713
6. Cost of Debentures converted to Equity Shares

(` 5,19,375 + ` 2,45,000) x 1,10,000/7,50,000= ` 1,12,108

7. Cost of Balance Debentures

(` 5,19,375 + ` 2,45,000) x ` 4,40,000/` 7,50,000 = ` 4,48,434

8. Interest on Closing Debentures for period Oct.- Dec. 2018 carried forward (accrued
interest)

` 4,40,000 x 13.5% x 3/12 = ` 14,850

Q-10 A Ltd. purchased on 1st April, 2018 8% convertible debenture in C Ltd. of face value of
Rs.2,00,000 @ Rs.108. On 1st July, 2018 A Ltd. purchased another Rs.1,00,000
debenture @ Rs.112 cum interest.

On 1st October, 2018 Rs.80,000 debenture was sold @ Rs.108. On 1st December, 2018, C
Ltd. give option for conversion of 8% convertible debentures into equity share of Rs.10
each. A Ltd. receive 5,000 equity share in C Ltd. in conversion of 25% debenture held
on that date. The market price of debenture and equity share in C Ltd. at the end of
year 2018 is Rs.110 and Rs.15 respectively.

Interest on debenture is payable each year on 31st March, and 30th September. The
accounting year of A Ltd. is calendar year. Prepare investment account in the books of
A Ltd. on average cost basis. [RTP May ‘19]

Ans. Investment Account for the year ending on 31st December, 2018
Scrip:8% Convertible Debentures in C
Ltd.
[Interest Payable on 31st March and 30th September]

Date Particular Nomina Interes Cost Date Particulars Nomina Interes Cost

534
 s l t (Rs.) l t (Rs.)
value (Rs.) Value (Rs.)
(Rs.) (Rs.)
1.4.18 To Bank 2,00,00 - 2,16,00 30.09.1 By Bank A/c - 12,000 -

1.7.18 A/c To 0 2,00 0 8 [Rs.

Bank A/c 1,00,00 0 1,10,00 3,00,00
(W.N.1) 0 0 0 x 8%
31.12.1
To P & L 14,03 x 80,000 84,000
8
A/c 3 1.10.18 (6/12] 2,933
- -
[Interest] 1.10.18 By Bank A/c t) 733
1.12.18 By P&L A/c
(loss) 55,000
(W.N.1) 59,767
1.12.18
By Bank A/ c
1,65,00 3,300
(Accrued 1,79,30
31.12.1 0
interest (Rs. 16,033 0
8 3,00,00
55,000 x .08x 3,26,00
16,03 0
3,00,00 3,26,00 2/12) 0
3
0 0 By Equity
shares in C
Ltd. (W.N. 3
and 4)
By Balance c/
d (W.N.5)
SCRIP: Equity Shares in C LTD.

Date Particulars Cost (Rs.) Date Particulars Cost

535
 (Rs.)
1.12.1 To 8 % 59,767 31.12.1 By balance 59,767
8 debentures 8 c/d
Working Notes:

(i) Cost of Debenture purchased on 1st July = Rs.1,12,000-Rs.2,000 (Interest) =

Rs.1,10,000

(ii) Cost of Debentures sold on 1st Oct.

=(Rs.2,16,000 +Rs.1,10,000)x 80,000/3,00,000 = Rs.86,933
Loss on sale of Debentures = Rs.86,933-Rs.84,000 = Rs.2,933
Nominal value of debentures converted into equity shares =
Rs.55,000 [(Rs.3,00,000-80,000) x.25]
Interest received before the conversion of debentures
Interest on 25% of total debentures = 55,000 x 8% x 2/12 = 733
(iv) Cost of Debentures converted = (Rs.2,16,000 + Rs.1,10,000) x 55,000/3,00,000 =
Rs.59,767
(v) Cost of closing balance of Debentures =
(Rs.2,16,000 + Rs.1,10,000) x 1,65,000/3,00,000 = Rs.1,79,300
(vii) Closing balance of Debentures has been valued at cost being lower than the market value
i.e., Rs.1,81,500 (Rs.1,65,000 @Rs.110)
(viii) 5,000 equity Shares in C Ltd. will be valued at cost of Rs.59,767 being lower than
the market value Rs.75,000 (Rs.15x5,000)
Note:It is assumed that interest on debentures, which are converted into cash, has been
received at the time of conversion.
Q-11 Akash Ltd. had 4,000equity share of X Limited, at a book value of Rs.15 per share (face
value of Rs.10 each) on 1st April 2017. On 1st September 2017, Akash Ltd. acquired
1,000 equity shares of X Limited at a premium of Rs.4 per share. X Limited announced

536
 a bonus and right issue for existing shareholders.
The terms of bonus and right issue were -
(1) Bonus was declared, at the rate of two equity shares for every five equity shares held on
30th September, 2017.
(2) Right shares are to be issued to the existing shareholders on 1st December, 2017. The
company issued two right shares for every seven shares held at 25% premium. No
dividend was payable on these shares. The whole sum being payable by 31st
December, 2017.
(3) Existing shareholders were entitled to transfer their rights to outsiders, either wholly or
in part.
(4) Akash Ltd. exercised its option under the issue for 50% of its entitlements and sold the
remaining rights for Rs.8 per share.
(5) Dividend for the year ended 31st March 2017, at the rate of 20% was declared by
the company and received by Akash Ltd., on 20th January 2018.
(6) On 1st February 2018, Akash Ltd., sold half of its shareholdings at a premium of Rs.4
per share.
(7) The market price of share on 31.03.2018 was Rs.13 per share.
You are required to prepare the Investment Account of Akash Ltd. for the year ended 31st
March, 2018 and determine the value of share held on that date assuming the investment
as current investment. Consider average cost basis for ascertainment of cost for equity
share sold. [RTP Nov ‘18]
Ans. Investment Account-Equity Shares in X Ltd.
Date No. of Dividend Amount Date No. Dividend Amount
Share Rs. Rs. of Rs. Rs.
Share
2017 2018

537
 April 1 To Balance 4,000 - 60,000 Jan. 20 By 8,000 2,000
b/ d Bank
(dividend)
Sept 1 To Bank 1,000 - 14,000 Feb. 1 By 4,000 56,000
Bank
Sept.30 To Bonus 2,000 - Mar. 31 By 4,000 42,250
Issue Balance c/ d
Dec.1 To Bank 1,000 - 12,500
(Right)
2018
Feb.1 To Profit 13,750
& Loss A/c
Mar.31 To Profit
& Loss A/c
(Dividend 8,000
income)
8,000 8,000 1,00,250 8,000 8,000 1,00,250
April.1 To Balance 4,000 42,250
b/ d
Working Notes:

1. Cost Shares Sold-Amount paid of Rs.8,000 shares

Rs.
(Rs.60,000 + Rs.14,000+Rs.12,500) 86,500
Less; Dividend on shares purchased on 1st Sept, 2017 (2,000)
Cost of 8,000 shares 84,500

538
 Cost of 4,000 shares (Average cost basis*) 42,250
Sale proceeds (4,000 shares @ 14/-) 56,000
Profit on sale 13,750
* For ascertainment of cost for equity shares sold, average cost basis has been applied.

2. Value of investment at the end of the year

Closing balance will be valued based on lower of cost (Rs.42,250) or net realizable value
(Rs.13 x 4,000). Thus, investment will be valued at Rs.42,250.

3. Calculation of sale of right entitlement

1,000 shares x Rs.8 per share = Rs.8,000

AmountreceivedfromsaleofrightswillbecreditedtoP&LA/c asperAS13'Accounting
forInvestments'.

4. Dividend received on investment held as on 1st April, 2017

= 4,000 shares x Rs10x20%

= Rs.8,000 will be transferred to Profit and Loss A/c

Dividend received on shares purchased on 1st Sep. 2017

= 1,000 shares x Rs.10 x 20% = Rs.2,000 will be adjusted to Investment A/c

Note: It is presumed that no dividend is received on bonus shares as bonus shares are
declared on 30th Sept., 2017 and dividend pertains to the year ended 31.3.2017.

Q-12 Alpha Ltd. purchased 5,000,13.5% Debentures of Face Value of Rs.100 each of Pergot
Ltd. on 1st May 2017 @ Rs.105 on cum interest basis. The interest on these
instruments is payable on 31st & 30th of March & September respectively. On
August 1st 2017 the company again purchased 2,500 of such debentures @
Rs.102.50 each on cum interest basis. On October 1st, 2017 the company sold 2,000

539
 Debentures @ Rs.103 each on ex-interest basis. The market value of the debentures as at
the close of the year was Rs.106. You are required to prepare the Investment in
Debentures Account in the books of Alpha Ltd. for the year ended 31st Dec. 2017 on
Average Cost Basis. [RTPMay‘18]
Ans. Books of AlphaLtd.

Investment in 13.5% Debentures in Pergot Ltd.

Account (Interest Payable on 31st March &
30th September)
Date Particular Nominal Interest Amount Date Particular Nominal Interest Amount

2017 Rs. Rs. Rs. 2017 Rs. Rs. Rs.

May To Bank 5,00,000 5,625 5,19,375 Sept.30 By Bank 50,625
1 Oct.1 (6 months
Dec.31 Int) By 2,00,000 2,06,000
To 2,50,000 11,250 2,45,000
Aug.1 Bank Bank
2,167
Oct.1 To P&L 5,50,000 5,60,542
52,313
By 18,563
Dec.31 A/c To
69,188 7,66,542 7,50,000 7,66,542
P&L 7,50,000 Balance 69,188
A/c c/d
Note: Cost being lower than Market Value the debentures are carried forward at Cost.

Working Notes:

1. Interest paid on Rs. 5,00,000 purchased on May 1st, 2017 for the month of April 2017, as
part of purchase price: 5,00,000 x 13.5% x 1/12 = Rs.5,625

2. Interest received on 30th Sept. 2017

On Rs. 5,00,000 = 5,00,000 x 13.5% x 1/2 = 33,750
On Rs. 2,50,000 = 2,50,000 x 13.5% x 1/2 = 16,875

540
 Total Rs. 50,625
3. Interest paid on Rs.2,50,000 purchased on Aug. 1st 2017 for April 2017 to July 2017 as
part of purchase price:
2,50,000 x13.5% x 4712 = Rs.11,250

4. Loss on Sale of Debentures Cost of acquisition

(Rs.5,19,375 + Rs.2,45,000) x Rs.2,00,000/Rs.7,50,000 = 2,03,833
Less: Sale Price (2,000 x 103) = 2,06,000
Profit on sale = Rs. 2,167
5. Cost of Balance Debentures

(Rs.5,19,375 + Rs.2,45,000) x Rs.5,50,000/Rs.7,50,000 = Rs.5,60,542

6. Interest on Closing Debentures for period Oct.-Dec. 2017 carried forward

(accrued interest) Rs.5,50,000 x 13.5% x 3/12 = Rs.18,563.

Q13. On 1st April, 2019 Mr. H had 30,000 equity shares of ABC Ltd. at book value of ` 18
per share (Nominal value 10 per share). On 10th June, 2019, H purchased another 10,000
equity shares of the ABC ltd. at ` 16 per share through a broker who charged 1.5% brokerage.

The directors of ABC Ltd. announced a bonus and a right issue. The terms of the
issues were as follows:
(i) Bonus shares were declared at the rate of one equity share for every four
shares held on 15th July, 2019.

(ii) Right shares were to be issued to the existing equity shareholders on 31st
August, 2019. The company decides to issue one right share for every five
equity shares held at 20% premium and the due date for payment will be 30th
September, 2019. Shareholders were entitled to transfer their rights in full or in
part.

(iii) No dividend was payable on these issues.

541
 Mr. H subscribed 60% of the rights entitlements and sold the remaining rights for
consideration of ` 5 per share.

Dividends for the year ending 31st March, 2019 was declared by ABC Ltd. at the
rate of 20% and received by Mr. H on 31st October, 2019.
On 15th January, 2020 Mr. H sold half of his shareholdings at ` 17.50 per share and
brokerage was charged @1 %.

You are required to prepare Investment account in the books of Mr. H for the year
ending 31st March, 2020, assuming the shares are valued at average cost.

[Sgg Nov2020] [ 10 marks]

Ans In the books of Mr. H

Investment in equity shares of ABC Ltd. for the year ended 31st March, 2020
Date Particulars No. Income Amount Date Particulars No. Income Amount
` ` ` `
2019 To Balance 30,000 - 5,40,000 2019 By Bank - 60,000 20,000
April b/d Oct. A/c
1 (W.N. 5)
June To Bank A/c 10,000 -- 1,62,400 20X2 By Bank 28,000 - 4,85,100
Jan. A/c
(W.N.4)
July To Bonus 10,000 - - March By 28,000 - 3,77,200
Issue 31 Balance
(W.N. 1) c/d

Sept. To Bank 6,000 - 72,000 (W.N. 6)

A/c
(W.N.

542
 2)

2020 To P & L - - 1,07,900

Jan. A/c
(W.N.
4)
March To P & L - 60,000 -
31 A/c
56,000 60,000 8,82,300 56,000 60,000 8,82,300

Working Notes:

1. Calculation of no. of bonus shares issued

Bonus Shares = (30,000 + 10,000) divided by 4= 10,000 shares

2. Calculation of right shares subscribed

Right Shares = 30,000 shares+10,000 shares+10,000 shares

5
= 10,000 shares

Shares subscribed 10,000 x 60% = 6,000 shares

Value of right shares subscribed = 6,000 shares @ ` 12 per share = ` 72,000

3. Calculation of sale of right entitlement

Amount received from sale of rights will be 4,000 shares x ` 5 per share

= ` 20,000 and it will be credited to statement of profit and loss.

4. Calculation of profit/loss on sale of shares- Total

holding = 30,000 shares original
10,000 shares purchased
10,000 shares bonus

543
 6,000 shares right shares
56,000
50% of the holdings were sold i.e. 28,000 shares (56,000 x1/2) were sold. Cost of
total holdings of 56,000 shares
= ` 5,40,000 + ` 1,62,400 + ` 72,000– ` 20,000 = ` 7,54,400

Average cost of shares sold would be:

544
 = 7,54,400 × 28,000
56,000 = ` 3,77,200
Sale proceeds of 28,000 shares (28,000 x `17.50) 4,90,000

Less: 1% Brokerage (4,900)

4,85,100

Less: Cost of 28,000 shares sold (3,77,200)

Profit on sale 1,07,900

5. Dividend received on investment held as on 1st April, 2019

= 30,000 shares x ` 10 x 20%

= ` 60,000 will be transferred to Profit and Loss A/c and

Dividend received on shares purchased on 10th June, 2019
= 10,000 shares x ` 10 x 20% = `20,000 will be adjusted to Investment A/c

6. Calculation of closing value of shares (on average basis) as on 31st March, 2020

7,54,400 × 28,000 = ` 3,77,200

56,000

Q14. P Ltd. had 8,000 equity shares of K Ltd., at a book value of ` 15 per share (face value
of` 10 each) on 1st April,2019. On 1st September, 2019, P Ltd. acquired another 2,000
equity shares of K Ltd. at a premium of ` 4 per share. K Ltd. announced a bonus and right
issue for existing shareholders.

The term of bonus and right issue were:

(i) Bonus was declared at the rate for two equity shares for every five shares held
on 30th September, 2019.

545
 (ii) Right shares are to be issued to the existing shareholders on 1st December,
219. The Company had issued two right shares for every seven shares held at
25% premium on face value. No dividend was payable on these shares. The
whole sum being payable by 31st December, 2019.

(iii) Existing shareholders were entitled to transfer their r ight to outsiders either
wholly or in part.

(iv) P Ltd. exercised its option under the issue for 50% of its entitlements and sold
the remaining rights for `8 per share

(v) Dividend for the year ended 31st March,2019 at the rate of 20% was declared
by K Ltd. and received by P Ltd. on 20th January, 2020.

(vi) On 1st February, 2020, P Ltd. sold half of its shareholdings at a premium of ` 4
per share.

(vii) The market price of share on 31st March,2020 was `13 per share.

You are required to prepare the Investment account of P Ltd. for the year
ended 31st March,2020 and determine the value of shares held on that date,
assuming the investment as current investment. Consider average cost basis for
ascertainment for cost for equity shares sold.

[Sugg Jan 2021](10 Marks)

Ans. Investment Account-Equity Shares in K Ltd.

Date No. of Dividend Amount Date No. Dividend Amount
shares of
shares
` ` ` `

546
1.4.19 To 8,000 - 1,20,000 20.1.20 By Bank 16,000 4,000
Bal.b/d (dividend)
[8,000 x
10
x 20%]
and
[2,000 x
10
1.9.19 To Bank 2,000 - 28,000 1.2.20 x 20%] 8,000 1,12,000
30.9.19 To Bonus 4,000 — By
Issue 25,000 Bank
31.12.19 To Bank 2,000 - 31.3.20 8,000 84,500
(Right)
(W.N.1) By
20.1.20 To Profit 16,000 Balance

& Loss c/d

27,500
A/c (W.N.

(Dividend 3)
1.2.20 income)
To P& L
A/c
(profit on
sale)
16,000 16,000 2,00,500 16,000 16,000 2,00,500

Working Notes:

1. Right shares

547
 No. of right shares issued = (8,000 + 2,000 + 4,000)/ 7 X 2=
4,000

No. of right shares subscribed = 4,000 x 50% = 2,000 shares

Value of right shares issued = 2,000 x `12.50 = ` 25,000
No. of right shares sold = 2,000 shares

Sale of right shares = 2,000 x ` 8 = ` 16,000 to be credited to statement of

profit and loss

2. Cost of shares sold — Amount paid for 16,000 shares

`
(`1,20,000 + ` 28,000 + ` 25,000) 1,73,000
Less: Dividend on shares purchased on Sept.1 (since the dividend (4,000)
pertains to the year ended 31st March, 2019, i.e., the pre-acquisition
period)
Cost of 16,000 shares 1,69,000
Cost of 8,000 shares (Average cost basis) 84,500
Sale proceeds (8,000 X `14) 1,12,000
Profit on sale 27,500

3. Value of investment at the end of the year

Assuming investment as current investment, closing balance will be valued based on lower
of cost or net realizable value.Here, Net realizable value is `13 per share i.e., 8,000 shares x `
13 = 1,04,000 and cost = 84,500. Therefore, value of investment at the end of the year will be `
84,500.
Q15.On 1st April, 2019 Mr. Shyam had an opening balance of 1000 equity shares of X
Ltd 1,20,000 (face value `100 each).On 5.04.2019 he further purchased 200 cum-right shares
for ` 135 each. On 8.04.2019 the director of X Ltd announced right issue in the ratio of

548
1:6.Mr. Shyam waived off 100% of his entitlement of right issue in the favour of Mr. Rahul
at the rate of ` 20 each.All the shares held by Shyam had been acquired on cum right basis and
the total market price (ex-right) of all these shares after the declaration of rights got reduced by
` 3,400.On 10.10.2019 Shyam sold 350 shares for ` 140 each. 31.03.2020 The market price of
each share is ` 125 each.You are required to prepare the Investment account in the books of Mr.
Shyam for the year ended 31.03.2020 assuming that the shares are being valued at average
cost.
[RTP May2021]

Ans In the books of Mr. Shyam for the year ending on 31-3-2020 (Scrip: Equity
Shares of X Limited)
Date Particulars Qty Amount Date Particulars Qty Amount
1.4.2019 To Balance b/d 1000 1,20,000 8.04.2019 By Bank A/c 3,400
(W.N.1)
5.04.2019 To Bank (200x 200 27,000 10.10.2019 By Bank A/c 350 49,000
`135) (350x `140)
10.10.2019 To Profit & 7,117 31.3.2020 By Balance c/d 850 1,01,717
Loss A/c (W.N.3)
(W.N.2)
1200 1,54,117 1200 1,54,117

Working Notes:

1. Sale of Rights ` 4,000

The market price of all shares of X Ltd after shares becoming ex-rights has been
reduced by ` 3,400

In this case out of sale proceeds of `4,000; ` 3,400 may be applied to reduce the
carrying amount to the market value and ` 600 would be credited to the profit

549
 and loss account.

2. Profit on sale of 350 shares

Amount
Sale price of 350 shares (350 shares X 140 each) ` 49,000
Less: Cost of 350 shares [(1,20,000+27,000-3,400) X350]/1200 ` 41,883
Profit ` 7,117

3. Valuation of 850 shares as on 31.03.2020

Particulars Amount
Cost price of 850 shares ` 1,01,717
[(1,20,000 +27,000 -3,400) x 850 /1,200]
Fair Value as on 31.03.2020 [850 X ` 125 ` 1,06,250
each]
Cost price or fair value whichever is less ` 1,01,717

Q16. In 2018, Royal Ltd. issued 12% fully paid debentures of ` 100 each, interest being
payable half yearly on 30th September and 31st March of every accounting year. On 1st
December, 2019, M/s. Kumar purchased 10,000 of these debentures at ` 101 (cum-
interest) price. On 1st March, 2020 the firm sold all of these debentures at` 106
(cum-interest) price.You are required to prepare Investment (Debentures) Account in the
books of M/s. Kumar for the period 1st December, 2019 to 1st March, 2020.

[RTP Nov2020]
Ans. Investment Account in the books of M/s Kumar for the
period from 1st December 2019 to 1st March, 2020
(Scrip: 12% Debentures of Royal Ltd.)

550
 Date ParticularsNominal Interest Cost Date Particulars NominalInterest C
Value (`) Value
(`) (`)
1.12.2019 To Bank A/c 10,00,000 20,000 9,90,000 1.03.2020 By Bank A/c 10,00,000 50,000 10,10,
(W.N.1) (W.N.2)

1.3.2020 To Profit &

loss A/c 30,000 20,000
10,00,000 50,000 10,10,000 10,00,000 50,000 10,10,

Working Notes:

(i) Cost of 12% debentures purchased on `

1.12.2019

Cost Value (10,000 ´`101) = 10,10,000

Less: Interest (10,000 x 100 x12% x 2/12) = (20,000)

Total = 9,90,000

(ii) Sale proceeds of 12% debentures sold on 1st `

March, 2020 = 10,60,000
Sales Price (10,000 ´`106)

Less: Interest (10,000 x 100 x12% x 5/12) = (50,000)

Total = 10,10,000

Q17.Mr. X acquires 200 shares of a company on cum-right basis for ` 60,000. He

subsequently receives an offer of right to acquire fresh shares in the company in the
proportion of 1:1 at ` 105 each. He does not subscribe but sells all the rights for` 15,000. The
market value of the shares after their becoming ex-rights has also gone down to ` 50,000.

551
What should be the accounting treatment in this case?
[RTP Nov 2020]

Ans. As per AS 13, where the investments are acquired on cum-right basis and the market
value of investments immediately after their becoming ex-right is lower than the cost for
which they were acquired, it may be appropriate to apply the sale proceeds of rights to
reduce the carrying amount of such investments to the market value. In this case, the
amount of the ex-right market value of 200 shares bought by X immediately after the
declaration of rights falls to `50,000. In this case, out of sale proceeds of` 15,000, ` 10,000
may be applied to reduce the carrying amount to bring it to the market value `40,000 and `
5,000 would be credited to the profit and loss account.

Q18. Following transactions of Meeta took place during the financial year 2020 -21:

1st April, 2020 Purchased ` 4,500 8% bonds of ` 100

each at ` 80.50 cum-interest. Interest is
payable on 1st November and 1st May.

1st May, 2020 Received half year’s interest on 8% bonds.

10 July, 2020 Purchased 6,000 equity shares of ` 10 each

in Kamal Limited for ` 44 each through a
broker, who charged brokerage @ 2%.

1st October Sold 1,125 8% bonds at ` 81 Ex-interest.

2020

1st November, Received half year’s interest on 8% bonds.

2020

15th January, Received 18% interim dividend on equity

2021 shares of Kamal Limited.

552
 15th March, Kamal Limited made a rights issue of one
2021 equity share for every four Equity shares
held at ` 5 per share. Meeta exercised the
option for 40% of her entitlements and
sold the balance rights in the market at `
2.25 per share.

Prepare separate investment account for 8% bonds and equity shares of Kamal Limited in
the books of Meeta for the year ended on 31st March, 2021. Assume that the average cost
method is followed. [RTP Nov 2021]
Ans. In the books of Meeta

8% Bonds for the year ended 31st March, 2021

Date Particulars No. Income Amount Date Particulars No. Income Amount
` ` ` `
2020 1 By - 18,000
1 April, To Bank A/c 4,500 15,000 3,47,250 May Bank

Oct. 1 2020 - Interest

2021 To P & L A/c - - 4,312.50 1 Oct. By Bank 1,125 3,750 91,125

March 31 (W.N.1) 2020 A/c
To P & L A/c 20,250 1 By 13,500
Nov. Bank
2021 - Interest
2021 By 3,375 -2,60,437.50
Mar. Balance
31 c/d
(W.N.2)

553
 4,500 35,250 3,51,562.50 4,500 35,2503,51,562.50

Investment in Equity shares of Kamal Ltd. for the year ended 31 st March, 2021
Date Particulars No. Income Amount Date Particulars No. Income Amount
` ` ` `
2020 To Bank 6,000 -- 2,69,280 2021 By Bank - 10,800
July 10 A/c Jan –
15 dividend
2021 To Bank 600 - 3,000 March By 6,600 2,72,280

March A/c 31 Balance

15 (W.N. 3) c/d
(bal. fig.)
March To P & L
31 A/c - 10,800

6,600 10,800 2,72,280 6,600 10,800 2,72,280

Working Notes:

1. Profit on sale of 8% Bonds

Sales price ` 91,125

Less: Cost of bonds sold = 3,47,250/4,500x 1,125 (` 86,812.50)

Profit on sale ` 4,312.50

2. Closing balance as on 31.3.2021 of 8 % Bonds

3,47,250/4,500x 3,375= ` 2,60,437.50

3. Calculation of right shares subscribed by Kamal Ltd.

Right Shares = 6,000/4 x 1= 1,500 shares

554
 Shares subscribed by Meeta = 1,500 x 40%= 600 shares

Value of right shares subscribed = 600 shares @ ` 5 per share = ` 3,000

4. Calculation of sale of right entitlement by Kamal Ltd.

No. of right shares sold = 1,500 – 600 = 900 rights for 2,025

Note: As per para 13 of AS 13, sale proceeds of rights are to be credited to P

& L A/c.

Q19. On 1st April, 2019, Rajat has 50,000 equity shares of P Ltd. at a book value of Rs. 15 per share
(face value Rs. 10 each). He provides you the further information:

(1) On 20th June, 2019 he purchased another 10,000 shares of P Ltd. at Rs. 16 per share.

(2) On 1st August, 2019, P Ltd. issued one equity bonus share for every six shares held by the
shareholders.

(3) On 31st October, 2019, the directors of P Ltd. announced a right issue which entitles the
holders to subscribe three shares for every seven shares at Rs. 15 per share. Shareholders can
transfer their rights in full or in part.

Rajat sold 1/3rd of entitlement to Umang for a consideration of Rs. 2 per share and subscribed the rest on
5th November, 2019.

You are required to prepare Investment A/c in the books of Rajat for the year ending 31st March,
2020. [MTP May 2021] ( 8 marks)
Ans. In the books of Rajat

Investment Account (Equity shares in P Ltd. )

Date Particulars No. of Amount Date Particulars No. of Amount
shares (Rs.) shares (Rs.)
1.4.19 To Balance b/d 50,000 7,50,000 31.3.20 By Balancec/d 90,000 12,10,000

555
20.6.19 To Bank A/c 10,000 1,60,000 (Bal. fig.)

1.8.19 10,000 -
To Bonus issue
(W.N.1)
5.11.19
To Bank A/c
20,000 3,00,000
(right shares)

(W.N.4)

90,000 12,10,000 90,000 12,10,000

Working Notes:
50,000 + 10,000
(1) Bonus shares = = 10,000 shares
6

(2) Right shares = 50,000 + 10,000+ 10,000 * 3 = 30000 shares

7
(3). Sale of rights = 30000 * 1/3* Rs 2 = Rs20000 to be credited to P & L A/c as per AS13
(4). Rights subscribed=30000shares * 2/3 * 15 = Rs3,00,000

Q20. A Ltd. purchased on 1st April, 2020 8% convertible debenture in C Ltd. of face value of Rs.
2,00,000 @ Rs. 108. On 1st July, 2020 A Ltd. purchased another Rs. 1,00,000 debentures @ Rs. 112 cum
interest. On 1st October, 2020 Rs. 80,000 debentures were sold @ Rs. 105. On 1st December, 2020, C
Ltd. give option for conversion of 8% convertible debentures into equity share of Rs. 10 each. A Ltd.
received 5,000 equity shares in C Ltd. in conversion of 25% debentures held on that date. The market
price of debenture and equity share in C Ltd. on 31st December, 2020 is Rs. 110 and Rs. 15 respectively.
Interest on debenture is payable each year on 31st March, and 30th September. Prepare investment
account in the books of A Ltd. on average cost basis for the accounting year ended 31st December,
2020. [MTP May 2021 ] ( 8 marks )

556
 Ans. Investment Account for the year ending on 31st December, 2020

Scrip : 8% Convertible Debentures in C Ltd.

[Interest Payable on 31st March and 30th September]
Date Particulars Nominal Interest Cost Rs. Date Particulars Nominal Interest Cost
value Rs. Rs. Value (Rs.) (Rs. (Rs.)
1.4.20 To Bank 2,00,000 - 2,16,000 30.09.20 By Bank A/c - 12,000 -
A/c
1.7.20 To Bank 1,00,000 2,000 1,10,000 [Rs.3,00,000
A/c x 8% x (6/12]
(W.N.1)
31.12.20 To P & L - 14,033 - 1.10.20 By Bank A/c 80,000 84,000
A/c
[Interest] 1.10.20 By P & L A/c 2,933
(loss)
(W.N.3)
1.12.20 By BankA/c 733
(Accrued
interest)
(Rs. 55,000
x .08 x 2/12)
1.12.20 By Equity 55,000 59,767
shares in
C Ltd.
(W.N. 3 and
4)
31.12.20 By Balance

557
 c/d (W.N.5) 1,65,000 3,300 1,79,300

3,00,000 16,033 3,26,000 3,00,000 16,033 3,26,000

SCRIP: Equity Shares in C LTD.

Date Particulars Cost (Rs.) Date Particulars Cost (Rs.)

1.12.20 To 8 % debentures 59,767 31.12.20 By balance c/d 59,767

Working Notes:

(i) Cost of Debenture purchased on 1st July = Rs.1,12,000 – Rs.2,000 (Interest) = Rs.1,10,000

(ii) Cost of Debentures sold on 1st Oct.

= (Rs.2,16,000 + Rs.1,10,000) x 80,000/3,00,000 = Rs. 86,933

(iii) Loss on sale of Debentures = Rs. 86,933– Rs.84,000 = Rs.2,933 Nominal

value of debentures converted into equity shares =Rs. 55,000
[(Rs. 3,00,000 – 80,000) x.25]

Interest received before the conversion of debentures

Interest on 25% of total debentures = 55,000 x 8% x 2/12 = 733

(iv) Cost of Debentures converted = (Rs. 2,16,000 + Rs.1,10,000) x 55,000/3,00,000

= Rs. 59,767

(v) Cost of closing balance of Debentures = (Rs. 2,16,000 + Rs.1,10,000) x 1,65,000 / 3,00,000
= Rs. 1,79,300

(vii) Closing balance of Debentures has been valued at cost.

(viii) 5,000 equity Shares in C Ltd. will be valued at cost of Rs. 59,767 being lower than the
market value Rs. 75,000 (Rs. 15 x5,000)

558
 Note: It is assumed that interest on debentures, which are converted into cash, has been received at
the time of conversion.

Q21. Mr. Vijay entered into the following transactions of purchase and sale of equity shares of JP Power
Ltd. The shares have paid up value of ` 10 per share.
Date No. of Shares Terms
01.01.2019 600 Buy @ ` 20 per share
15.03.2019 900 Buy @ ` 25 per share
20.05.2019 1000 Buy @ ` 23 per share
25.07.2019 2500 Bonus Shares received
20.12.2019 1500 Sale @ ` 22 per share
01.02.2020 1000 Sale @ ` 24 per share

Addition information:

(1) On 15.09.2019 dividend @ ` 3 per share was received for the year ended 31.03.2019.

(2) On 12.11.2019 company made a right issue of equity shares in the ratio of one share for
five shares held on payment of ` 20 per share. He subscribed to 60% of the shares and
renounced the remaining shares on receipt of ` 3 per share.

(3) Shares are to be valued on weighted average cost basis.

You are required to prepare Investment Account for the year ended 31.03.2019 and 31.03.2020.

(ii). Whether the accounting treatment 'at cost' under the head ‘Long Term Investments’ without
providing for any diminution in value is correct and in accordance with the provisions of AS 13. If not,
what should have been the accounting treatment in such a situation? What methodology should be
adopted for ascertaining the provision for diminution in the value of investment, if any. Explain in brief.
[MTP Nov 2020 ] (8+4=12 marks)

Ans. (i) Investment in Equity shares of JP Power Ltd.

559
Date Particulars No. Dividend Amount Date Particulars No. Dividend Amount
` ` ` `
1.1.19 To Bank A/c 600 12,000 31.3.19 By Balance 1,500 34,500
c/d
15.3.19 To Bank A/c 900 22,500 ____ ______
1,500 34,500 1,500 34,500
1.4.19 To Balance 1,500 34,500 15.9.19 By Bank- 4,500 3,000
b/d dividend
20.5.19 To Bank A/c 1,000 23,000 20.12.19 By Bank 1,500 33,000
25.7.19 To Bonus 2,500 _ 1.2.20 By Bank 1,000 24,000
shares
12.11.19 To Bank A/c 600 12,000 31.3.20 By Balance 3,100 36,812.50
c/d
20.12.19 To P& L A/c
(profit on 15,187.50
sale)
1.2.20 To P& L A/c 12,125
(profit on
sale)
31.3.20 To P & L A/c 4,500
(dividend)
5,600 4,500 96,812.50 5,600 4,500 96,812.50

Working Notes:

1. Calculation of Weighted average cost of equity shares

600 shares purchased at ` 12,000

560
 900 shares purchased at ` 22,500

1,000 shares purchased at ` 23,000 2,500

shares at nil cost
600 right shares purchased at ` 12,000

Total cost of 5,600 shares is ` 66,500 [` 69,500 less ` 3,000 (pre-acquisition dividend
received on 1,000 shares purchased on 20.5.19].

Hence, weighted average cost per share will be considered as ` 11.875 per share
(66,500/5,600).

2. It has been considered that no dividend was received on bonus shares as the dividend
pertains to the year ended 31st March, 2019.

3. Calculation of right shares subscribed by Vijay

Right Shares (considering that right shares have been granted on Bonus shares also) =
5,000/5 x 1= 1,000 shares

Shares subscribed = 1,000 x 60%= 600 shares

Value of right shares subscribed = 600 shares @ ` 20 per share = ` 12,000 Calculation
of sale of right renouncement
No. of right shares sold = 1,000 x 40% = 400 shares

Sale value of right = 400 shares x ` 3 per share = ` 1,200

Note: As per para 13 of AS 13, sale proceeds of rights is to be credited to P & L A/c.

4. Profit on sale of equity shares

As on 20.12.19

Sales price (1,500 shares at ` 22) 33,000.00

Less: Cost of shares sold (1,500 x ` 11.875) (17,812.50)

561
 Profit on sale 15,187.50

As on 1. 2.20

Sales price (1,000 shares at ` 24) 24,000

Less: Cost of shares sold (1,000 x ` 11.875) (11,875)

Profit on sale 12,125

Balance of 3,100 shares as on 31.3.20 will be valued at ` 36,812.50 (at rate of

` 11.875 per share)

(iii) The accounting treatment 'at cost' under the head 'Long Term Investment’ in the financial
statements of the company without providing for any diminution in value is correct and is in
accordance with the provisions of AS 13 provided that there is no decline, other than temporary,
in the value of investment. If the decline in the value of investment is, other than temporary,
compared to the time when the shares were purchased, provision is required to be made. The
reduction in market value should not be considered, in isolation to determine the decline, other than
temporary. The amount of the provision for diminution in the value of investment may be
ascertained considering the factors indicated in AS 13.

Q22.On 1st April, 2019, Mr. Vijay had 30,000 Equity shares in X Ltd. (the company) at a book value
of Rs. 4,50,000 (Face Value Rs. 10 per share). On 22nd June, 2019, he purchased another 5000
shares of the same company for Rs. 80,000.The Directors of X Ltd. announced a bonus of equity
shares in the ratio of one share for seven shares held on 10th August, 2019.On 31st August, 2019
the Company made a right issue in the ratio of three shares for every eight shares held, on payment of
Rs. 15 per share. Due date for the payment was 30th September, 2019, Mr. Vijay subscribed to
2/3rd of the right shares and sold the remaining of his entitlement to Viru for a consideration of Rs. 2
per share.On 31stOctober,2019, Vijay received dividends from X Ltd. @ 20% for the year ended 31st
March, 2019. Dividend for the shares acquired by him on 22ndJune,2019 to be adjusted against the

562
 cost of purchase.On 15th November, 2019 Vijay sold 20,000 Equity shares at a premium of Rs. 5
per share.You are required to prepare Investment Account in the books of Mr. Vijay for the year ended
31st March, 2020 assuming the shares are being valued at average cost.

[MTP May 2020] ( 10 marks )

Ans. Books of Vijay

Investment Account (Scrip: Equity

Shares in X Ltd.)
No. Amount No. Amount
Rs. Rs.
1.4.2019 To Bal b/d 30,000 4,50,000 31.10.2019 By Bank — 10,000
22.6.2019 To Bank 5,000 80,000 (dividend
10.8.2019 To Bonus 5,000 - on shares
30.9.2019 To Bank 10,000 1,50,000 acquired on
(Rights Shares) 22/6/2019)
15.11.2019 To Profit 32,000 15.11.2019 By Bank (Sale 20,000 3,00,000
(on sale of of shares)
shares) By Bal. c/d
31.3.2020 30,000 4,02,000
50,000 7,12,000 50,000 7,12,000

Working Notes:

(1) Bonus Shares = (30,000 + 5,000) / 7 = 5,000 shares

(30, 000 + 5, 000 + 5, 000)
(2) Right Shares =
( 30,000+5,000+5,000) * 3/ 8 = 15000 shares

563
(3) Rights shares sold = 15,000×1/3 = 5,000 shares

(4) Dividend received = 30,000×10×20% = Rs.60,000 will be taken to P&L statement

(5) Dividend on shares purchased on 22.6.2019= 5,000×10×20% = Rs. 10,000 is adjusted to

Investment A/c

(6) Profit on sale of 20,000 shares

= Sales proceeds – Average cost Sales

proceeds = Rs. 3,00,000
(4, 50, 000 + 80, 000 + 1, 50, 000 - 10, 000)
Average cost = × 20, 000 = Rs. 2,68,000
50, 000

Profit = Rs. 3,00,000– Rs.2,68,000= Rs.32,000.

(7) Cost of shares on 31.3.2018

(4, 50, 000 + 80, 000 + 1, 50, 000 - 10, 000) × 30, 000 = Rs.4,02,000

50, 000

(8) Sale of rights amounting Rs. 10,000 (Rs. 2 x 5,000 shares) will not be shown in investment
A/c but will directly be taken to P & L statement.

564
 CHAPTER-9

Insurance Claims

Q-1 A trader intends to take a loss of profit policy with indemnity period of 6 months;
however, he could not decide the policy amount. From the following details,
suggest the policy amount:

Turnover in last financial year 36,00,000

Standingcharges in last financial year 7,20,000

Net profit earned in last year was 10% of turnover and the same trend expected in
subsequent year. Increase in turnover expected 25%.
Toachieveadditional sales, trader has toincur additional expenditure of ` 50,000.
[RTP-May’2020]
Ans.(a) Calculation of Gross Profit

Net Profit + Standing Charges × 100

Gross Profit =
Turn over

= (3,60,000 + 7,20,000)/36,00,000= 30%

(b) Calculation of policy amount to cover loss of profit
`
Turnover in the last financial year 36,00,000
Add: 25% increase in turnover 9,00,000
45,00,000
Gross profit on increased turnover 13,50,000

565
 Add: Additional standing charges 50,000
Policy Amount 14,00,000
Therefore, the trader should go in for a loss of profit policy of ` 14,00,000.

Q-2 A fire occurred in the premises of M/s Kirti & Co. on 15 th December, 2018. The
working remained disturbed up to 15th March, 2019 as a result of which sales
adversely affected. The firm had taken out an insurance policy with an average clause
against consequential losses for ` 2,50,000.
Following details are available from the quarterly sales tax return filed / GST return
filed:

Sales 2015-16 2016-17(`) 2017-18 (`) 2018-19(`)

From 1st April to 30th June 3,80,000 3,15,000 4,11,900 3,24,000

From 1st July to 30th 1,86,000 3,92,000 3,86,000 4,42,000

September

IFrom 1st October to 31st 3,86,000 4,00,000 4,62,000 3,50,000

December

From 1st January to 31st 2,88,000 3,19,000 3,80,000 2,96,000

March ,

Total 12,40,00 14,26,000 16,39,900 14,12,000

0

A period of 3 months (i.e., from 16-12-2018 to 15-3-2019) has been agreed upon as
indemnity period.

Sales from 16-12-2017 to 31-12-2017 68,000

Sales from 16-12-2018 to 31-12-2018 Nil

566
 Sales from 16-03-2018 to 31-03-2018 1,20,000
Sales from 16-03-2019 to 31-03-2019 40,000

Net profit was 2,50,000 and standing charges (all insured) amounted to ` 77,980 for the
year ending 31st March, 2018.

You are required to calculate the loss of profit claim amount.

[Sugg.Nov.’19,10 Marks]

Ans. Gross profit ratio

`

Net profit for the year 2017-18 2,50,000

Add: Insured standing charges 77,980

567
Calculation of Short sales
Indemnity period: 16.12.2018 to 15.3.19

Standard sales to be calculated on basis of corresponding period of

year 2017-18
`
Sales for period 16.12.2017 to 31.12.17 68,000
Sales for period 1.1.2018 to 15.3.2018 (Note 1) 2,60,000
Sales for period 16.12.2017 to 15.3.2018 3,28,000
Add: upward trend in sales (15%) (Note 2) 49,200
Standard Sales (adjusted) 3,77,200

Actual sales of disorganized period

Calculation of sales from 16.12.18 to 15.3.19
Sales for period 16.12.18 to 31.12.18 Nil
Sales for 1.1.19 to 15.3.19 (` 2,96,000 – ` 40,000) 2,56,000
Actual Sales 2,56,000
Short Sales (` 3,77,200 - ` 2,56,000) 1,21,200

Loss of gross profit

Short sales x gross profit ratio = 1,21,200 x 20% 24,240
Application of average clause

568
 Working Notes:
1. Sales for period 1.1.18 to 15.3.18 `

Sales for 1 Jan. to 31 March (2017-18) (given) 3,80,000

Less: Sales for 16.3.18 to 31.3.18 (given) (1,20,000)
Sales for period 1.1.18 to 15.3.18 2,60,000

2. Calculation of upward trend in sales

Total sales in year 2015-16 = ` 12,40,000
Increase in sales in year 2016-17 as compared to = ` 1,86,000
2015-16

1,86,000 (14,26,000 - 12,40,000) = 15%

% increase = 12,40,000

Increase in sales in year 2017-18 as compared to year 2016-17

2,13,900 (16,39,900 - 14,26,000) = 15%

% increase = 14,26,000

Thus, annual percentage increase trend is of 15%

3. Grossprofit on annualturnover `

Sales from 16.12.17 to 30.12.17 (adjusted) (68,000 x 1.15) 78,200

1.1.18 to 31.3.18 (adjusted) (3,80,000 x1.15) 4,37,000

1.4.18 to 30.6.18 3,24,000

1.7.18 to 30.9.18 4,42,000

1.10.18 to 15.12.18 (3,50,000 – Nil) 3,50,000

Sales for 12 months just before date of fire* 16,31,200

Gross profit on adjusted annual sales @ 20% 3,26,240

NOTE*: Alternatively, the annual adjusted turnover may be computed as ` 17,98,000

569
 (` 15,64,000 X 1.15) considering the annual % increase trend for the entire period of
last 12 months preceding to the date of fire. In that case, the gross profit on adjusted
annual sales @ 20% will be computed as ` 3,59,720 and net claim will be computed
accordingly.

Q-3 A fire occurred in the premises of M/s Bright on 25th May, 2017. As a result of fire,
sales were adversely affected up to 30th September, 2017. The firm had taken Loss of
profit policy (with an average clause) for ` 3,50,000 having indemnity period of 5
months. There is an upward trend of 10% in sales.

The firm incurred an additional expenditure of ` 30,000 to

maintain the sales. There was a saving of ` 5,000 in the insured
standing charges.
Actual turnover from 25th May, 2017 to 30th ` 1,75,000
September, 2017
Turnover from 25th May, 2016 to 30th September, ` 6,00,000
2016
Net profit for last financial year ` 2,00,000
Insured standing charges for the last financial year ` 1,75,000
Total standing charges for the last financial year ` 3,00,000
Turnover for the last financial year ` 15,00,000
Turnover for one year from 25th May, 2016 to 24th ` 14,00,000
May, 2017
You are required to calculate the loss of profit claim amount, assuming that entire sales during
the
interrupted period was due to additional expenses.
Ans. Computation of the amount of claim for the loss of [Sugg.May‘19,10
profit Marks]

570
1. Reduction in turnover
`
Turnover from 25th May, 2016 to 30th September, 6,00,000
2016
Add: 10% expected increase 60,000
6,60,000
Less: Actual Turnover from 25th May, 2017 to 30th (1,75,000)
September, 2017
Short Sales 4,85,000
2. Calculation of loss of Profit
Gross Profit on reduction in turnover @ 25% on ` 1,21,250

4,85,000
(See working note 1)
Add: Additional Expenses
Lower of
(i) Actual = ` 30,000
(ii) Additional Exp. x G.P. on Adjusted Annual Turnover
G.P. as above + Uninsured Standing Charges
30,000x [3,85,000/ (3,85,000+1,25,000)] = ` 22,647
(iii) G.P. on sales generated by additional expenses
175000x 25% =` 43,750
It is given that entire sales during the interrupted period was due to additional
expenses. Therefore, lower of above is (i, ii & iii) `
22,647
1,43,897

571
 Less: Saving in Insured Standing Charges (5,000)
Amount of claim before application of Average Clause 1,38,897
3. Application of Average Clause:
Amount of Policy x Amount of Claim
G.P. on Annual Turnover
(3,50,000/3,85,000) x 1,38,897= `
1,26,270
Amount of claim under the policy = ` 1,26,270
Working Notes:

1. Rate of Gross Profit for last Financial `

Year:
Net Profit for last financial year 2,00,000
Add: Insured Standing Charges 1,75,000
Gross Profit 3,75,000
Turnover for the last financial year 15,00,000

Rate of Gross Profit = 375000/1500000*100 = 25 %

2. Annual Turnover (adjusted):
Turnover from 25 May, 2016 to 24 May, 14,00,000
2017
Add: 10% expected increase 1,40,000
15,40,000
Gross Profit on ` 15,40,000 @ 25% 3,85,000
Standing charges not Insured (3,00,000 - 1,25,000
1,75,000)

572
 Gross profit + Uninsured standing charges 5,10,000

Q-4 A fire engulfed the premises of a business of M/S Kite Ltd. in the morning, of 1st
October, 2017. The entire stock was destroyed except, stock salvaged of ` 50,000.
Insurance Policy was for ` 5,00,000 with average clause.

The following information was obtained from the records saved for the period from 1st
April to 30th September, 2017:
Sales 27,75,000
Purchases 18,75,000
Carriage inward 35,000
Carriage outward 20,000
Wages 40,000
Salaries 50,000
Stock in hand on 31st March, 3,50,000
2017

Additional Information:

(1) Sales up to 30th September, 2017, includes ` 75,000 for which goods had not been
dispatched.

(2) On 1st June, 2017, goods worth ` 1,98,000 sold to Hari on approval basis which was
included in sales but no approval has been received in respect of 2/3rd of the goods sold
to him till 30th September, 2017.

(3) Purchases up to 30th September, 2017 did not include ` 1,00,000 for which purchase
invoices had not been received from suppliers, though goods have been received in
godown.

(4) Past records show the gross profit rate of 25% on sales.

You are required to prepare the statement of claim for loss of stock for submission to the
573
Insurance Company.

[Sugg. Nov.’18, 10 Marks]

Ans. Computation of claim for loss of stock

`
Stock on the date of fire (i.e., on 1.10.2017) 3,75,000
Less: Stock salvage 50,000
Stock destroyed by fire (Loss of stock) 3,25,000
Insurance Claim = ` 3,25,000

(Average clause is not applicable as insurance policy amount (` 5,00,000) is more than that value
of closing stock i.e., ` 3,75,000)
Memorandum Trading
A/c (1.4.17 to 30.9.17)
Particular ` Particular `
To Opening stock 3,50,000 By Sales 25,68,000
To Purchases 19,75,000 By Goods with customers* 99,000

(` 18,75,000 + ` 1,00,000) (For approval) (W.N.1)

To Carriage inward 35,000 By Closing stock (bal.fig) 3,75,000
To Wages 40,000

To Gross profit
(` 25,68,000 x25%) 6,42,000
30,42,000 30,42,000

* For financial statement purposes, this would form part of closing stock (since there is no
sale). However, this has been shown separately for computation of claim for loss of stock
since the goods were physically not with the entity and, hence, there was no loss of

574
 such stock.

Working Notes:

1. Calculation of goods with customers

Since no approval for sale has been received for the goods of ` 1,32,000 (i.e., 2/3 of `
1,98,000) hence, these should be valued at cost i.e., ` 1,32,000 - 25% of ` 1,32,000 = `
99,000.

2. Calculation of actual sales

Total sales - Goods not dispatched - Sale of goods on

approval (2/3rd) = Sales (` 27,75,000 - 75,000 - ` 1,32,000)
= ` 25,68,000
Q-5 On 30th March, 2018 fire occurred in the premises of M/s Alok & Co. The concern had
taken an insurance policy of ` 1,20,000 which was subject to the average clause. From
the books of accounts, the following particulars are available relating to the period
1st January to 30th March, 2018:

(i) Stock as per Balance Sheet at 31st December, 2017 Rs.1,91,200

(ii) Purchases (including purchase of machinery costing f 60,000) Rs.3,40,000

(iii) Wages(including wages ` 6,000 for installation of machinery) Rs.1,00,000

(iv) Sales (including goods sold on approval basis amounting to Rs.99,000)

Rs.5,50,000 No approval has been received in respect of 2/3rd of the goods sold on
approval.
(v) The average rate of gross profit is 20% of sales.

(vi) The value of the salvaged goods was Rs.24,600

You are required to compute the amount of the claim to be lodged to the Insurance
Company.

[Sugg.May‘18,10Marks]

575
Ans. Computation of claim for loss of stock

Rs.
Stock on the date of fire i.e., on 30th March, 2018 (W.N.1) 1,25,000
Less: Value of salvaged stock 24,600
Loss of stock 1,00,600

A claim of Rs.96,422 (approx.) should be lodged by M/s Alok & Co. to the
insurance company.

Working Notes:

1. Calculation of closing stock as on 30th March, 2018

Memorandum Trading Account for (From 1st January, 2018 to 30th

March, 2018)

Particulars Amount Particular Amount

Rs. Rs.
To Opening stock 1,91,200 By Sales (W.N.3) 4,84,000
To Purchases (3,40,000- By Goods with customers
60,000) 2,80,000 (For approval) (W.N.2) 52,800

To Wages (1,00,000-6,000) 94,000 By Closing stock (Bal. 1,25,200

Fig.)

576
 To Gross profit (20% on sales) 96,800
6,62,000 6,62,000

* For financial statement purposes, this would form part of closing stock (since there is no
sale). However, this has been shown separately for computation of claim for loss of stock
since the goods were physically not with the concern and, hence, there was no loss of
such stock.

2. Calculation of goods with customers

Since no approval for sale has been received for the goods of Rs. 66,000 (i.e., 2/3 of Rs.
99,000) hence, these should be valued at cost i.e., Rs.66,000 - 20% of Rs.66,000 =
Rs.52,800.
3 Calculation of actual sales

Total sales - Sale of goods on approval (2/3rd) = Rs.5,50,000 - 66,000 = Rs.4,84,000.

Q-6 The premises of Anmol Ltd. caught fire on 22nd January 2017, and the stock was
damaged. The firm makes account up to 31st March each year. On 31st March, 2016 the
stock at cost was Rs. 6,63,600 as against Rs. 4,81,100 on 31st March, 2015.
Purchases from 1st April, 2016 to the date of fire were Rs. 17,41,350 as against Rs.
22,62,500 for the full year 2015-16 and the corresponding sales figures were Rs. 24,58,500
and Rs. 26,00,000 respectively. You are given the following further information:

(i) In July, 2016, goods costing Rs. 50,000 were given away for advertising purposes, no
entries being made in the books.

(ii) During 2016-17, a clerk had misappropriated unrecorded cash sales. It is

estimated that the defalcation averaged Rs. 1,000 per week from 1st April, 2016
until the clerk was dismissed on 18th August, 2016.

(iii) The rate of gross profit is constant.

You are required to calculate the value of stock in hand on the date of fire with the

577
 help of above information. [MTP Oct. ‘19, 6 Marks]
Ans. Ascertainment of rate of gross profit for the year
2015-16 TradingA/c for the year
ended 31-3-2016
` `

To Opening stock 4,81,100 By Sales 26,00,000

To Purchases 22,62,500 By Closing stock 6,63,600
To Gross profit 5,20,000

32,63,600 32,63,600

Memorandum Trading A/c for the period from 1-4-2016 to 22-01-2017

` ` ` `
To Opening stock 6,63,600 By Sales 24,58,500
To Purchases 17,41,350 Add: Unrecorded 20,000 24,78,500
Less: Goods used cash
for sales (W.N.)
advertisement (50,000) 16,91,350 By Closing stock 3,72,150
To Gross profit (20% 4,95,700
of ` 24,78,500)
28,50,650 28,50,650
Estimated stock in hand on the date of fire was 3,72,150.
Working Note:

578
 Cash sales defalcated by the accountant:
Defalcation period = 1.4.2016 to 18.8.2016= 140 days
Since, 140 days / 7 weeks = 20 weeks
Therefore, amount of defalcation = 20 weeks x ` 1,000 = ` 20,000.
Q-7 A trader's godown caught fire on 29th August, 2017, and a large part of the stock of goods
was destroyed. However, goods costing Rs. 54,000 could be salvaged incurring
firefighting expenses amounting to Rs. 2,350.
The trader provides you the following additional information:
Rs.

Cost of stock on 1st April, 2016 3,55,250

Cost of stock on 31st March,2017 3,95,050
Purchases during the year ended 31st March, 2017 28,39,800
Purchases from 1st April, 2017 to the date of fire 16,55,350
Cost of goods distributed as samples for advertising from 1st April, 2017 to the 20,500
date of fire
Cost of goods withdrawn by trader for personal use from 1st April, 2017 to the 1,000
date of fire
Sales for the year ended 31st March, 2017 40,00,000
Sales from 1st April, 2017 to the date of fire 22,68,000

The insurance company also admitted firefighting expenses. The trader had taken the
fire insurance policy for Rs. 4,50,000 with an average clause. [MTP March ‘19, 8
Marks]

579
Ans. Memorandum TradingAccount for the period 1st April, 2017 to 29th August
2017

Rs. Rs.

To opening Stock 3,95,050 By sales 22,68,000

To Purchases 16,55,350 By Closing stock (Bal. fig.) 4,41,300
Less: Advertisement (20,500)
Drawing (1,000) 16,33,850
To Gross Profit [30% of

Sales] [W.N] 6,80,400

27,09,300 27,09,300

Statement of Insurance Claim

Rs.

Value of stock destroyed by fire 4,41,300

Less; Salvaged Stock (54,000)

Add: Fire Fighting Expenses 2,350

Insurance Claim 3,89,650

Note: Since policy amount is more than claim amount, average clause will not apply.
Therefore, claim amount of Rs. 3,89,650 will be admitted by the Insurance Company.
Working Note:
Trading Account for the year ended 31st March, 2017
Rs. Rs.
To Opening Stock 3,55,250 By Sales 40,00,000
To Purchases 28,39,800 By Closing stock 3,95,050
To Gross Profit 12,00,000

580
 43,95,050 43,95,050

Q-8 A trader's godown caught fire on 29th August, 2017, and a large part of the stock of goods
was destroyed. However, goods costing Rs.54,000 could be salvaged incurring
firefighting expenses amounting to Rs.2,350.
The trader provides you the following additional information:
Rs.
Cost of stock on 1st April, 2016 3,55,250
Cost of stock on 31st March, 2017 3,95,050
Purchases during the year ended 31st March, 2017 28,39,800
Purchases from 1st April, 2017 to the date of fire 16,55,350
Cost of goods distributed as samples for advertising from 1st April, 2017 to the 20,500
date of fire
Cost of goods withdrawn by trader for personal use from 1st April, 2017 to the 1,000
date of fire
Sales for the year ended 31st March, 2017 40,00,000
Sales from 1st April, 2017 to the date of fire 22,68,000
The insurance company also admitted firefighting expenses. The trader had taken the fire insurance
policy for Rs. 4,50,000 with an average clause.
You are required to calculate the amount of the claim that will be admitted by the insurance
Company. [MTP March ‘18, 10 Marks]
Ans. Memorandum Trading Account for the period 1st April, 2017 to 29th August 2017
Rs. Rs.
581
 To Opening Stock 3,95,050 By Sales 22,68,000
To Purchases 16,55,350 By Closing stock 4,41,300
(Bal.fig.)
Less: Advertisement (20,500)
Drawings (1,000) 16,33,850
To Gross Profit [30% of Sales] [W N] 6,80,400
27,09,300 27,09,300
Statement of Insurance Claim
Rs.
Value of stock destroyed by fire 4,41,300
Less; Salvaged Stock (54,000)
Add: Fire Fighting Expenses 2,350
Insurance Claim 3,89,600
Note: Since policy amount is more than claim amount, average clause will not apply.
Therefore, claim amount of Rs.3,89,650 will be admitted by the Insurance Company.
Working Note:
Trading Account for the year ended 31st March, 2017

Rs. Rs.
To Opening Stock 3,55,250 By Sales 40,00,000
To Purchases 28,39,800 By Closing stock 3,95,050
To Gross Profit 12,00,000
43,95,050 43,95,050
Rate of Gross Profit in 2016-2017

Gross Profit
582
 Sales x 100 = 12,00,000/40,00,000 x 100 = 30%

Q-9 On 2.6.2018 the stock of Mr. Black was destroyed by fire. However, following
particulars were furnished from the records saved:
Rs.

Stock at cost on 1.4.2017 1,35,000

Stock at 90% of cost on 31.3.2018 1,62,000
Purchases for the year ended 31.3.2018 6,45,000
Sales for the year ended 31.3.2018 9,00,000
Purchases from 1.4.2018 to 2.6.2018 2,25,000
Sales from 1.4.2018 to 2.6.2018 4,80,000
Sales up to 2.6.2018 includes Rs. 75,000 being the goods not dispatched to the customers. The
sales invoice price is Rs. 75,000.

Purchases up to 2.6.2018 includes a machinery acquired for Rs. 15,000.

Purchases up to 2.6.2018 does not include goods worth Rs. 30,000 received from suppliers, as
invoice not received up to the date of fire. These goods have remained in the godown at the
time of fire. The insurance policy is for Rs. 1,20,000 and it is subject to average clause. Ascertain
the amount of claim for loss of stock. [MTP Aug. ‘18, 8 Marks]

Ans. In the books of Mr. Black

Trading Account for the year ended 31.3.2018

Rs. Rs.
To Opening Stock 1,35,000 By Sales 9,00,000
To Purchases 6,45,000 By Closing Stock at cost 1,80,000

100
To Gross Profit 3,00,000 1,62,000*
90
10,80,000 10,80,000

Memorandum 583Trading A/c

for the period from 1.4.2018 to 02.06.2018
Rs. Rs.
Q-10 On 15th December, 2017, a fire occurred in the premises of M/s. OM Exports. Most of
the stocks were destroyed. Cost of stock salvaged being Rs. 1,40,000. Stock on 15th
December, 2017 was valued at Rs. 6,40,000. Compute the amount of the claim, if the
stock were insured for Rs. 4,00,000. [MTP Oct. ‘18, 4 Marks]

Ans.

Rs.

Estimated value of Stock as at date of fire 6,40,000

Less: Value of Salvaged Stock 1,40,000

Estimated Value of Stock lost by fire 5,00,000

584
 As the value of stock is more than insured value, amount of claim would be subject to
average clause.

Q-11 On 2.6.2019 the stock of Mr. Black was destroyed by fire. However, following
particulars were furnished from the records saved:
Stock at cost on 1.4.2018 1,35,000
Stock at 90% of cost on 31.3.2019 1,62,000
Purchases for the year ended 31.3.2019 6,45,000
Sales for the year ended 31.3.2019 9,00,000
Purchases from 1.4.2019 to 2.6.2019 2,25,000
Sales from 1.4.2019 to 2.6.2019 4,80,000

Sales up to 2.6.2019 includes ` 75,000 being the goods not dispatched to the
customers. The sales (invoice) price is ` 75,000.

Purchases up to 2.6.2019 includes a machinery acquired for ` 15,000.

Purchases up to 2.6.2019 does not include goods worth ` 30,000 received from suppliers,
as invoice not received up to the date of fire. These goods have remained in the
godown at the time of fire. The insurance policy is for ` 1,20,000 and it is subject to
average clause. Ascertain the amount of claim for loss of stock. [RTP Nov ‘19]

Ans.

585
.

Q-12 A fire engulfed the premises of a business of M/s Preet on the morning of 1st July 2018.

586
 The building, equipment and stock were destroyed and the salvage recorded the
following:
Building-Rs.4,000; Equipment-Rs.2,500; Stock-Rs.20,000. The following other information
was obtained from the records saved for the period from 1st January to 30th June
2018:

Rs.
Sales 11,50,000
Sales Returns 40,000
Purchases 9,50,000
Purchases Returns 12,500
Cartage inward 17,500
Wages 1,50,000
Stock in hand on 31st December, 2017 3,75,000
Building (value on 31st December, 2017) 75,000
Equipment (value on 31st December, 2017)
Depreciation provision till 31st December,2017 on:

Building 1,25,000
Equipment 22,500
No depreciation has been provided since December 31st 2017. The latest rate of depreciation is 5%
p.a. on building and 15% p.a. on equipment by straight line method.Normally business makes a
profit of 25% on net sales. You are required to prepare the statement of claim for submission to the
Insurance Company. [RTP May ‘19]
Ans. Memorandum Trading Account for the Period from 1.1.2018 to 30.6.2018
Rs. Rs.

587
To Opening Stock 1,50,000 By Sales 11,50,000
(1.1.2018) 9,50,000 Less: Sales
To Purchases
Less: Returns (12,500) 93,37,500 Returns (40,000)
To cartage Inward 17,500 By Closing Stock 2,80,000
To wages 7,500 (Bal.fig)
To Gross Profit 2,77,500
(25%of Rs.11,10,000)
13,90,000 13,90,000

Stock Destroyed Account

To Trading Account 2,80,000 By Stock Salvaged Account 20,000
ByBalance c/d (For Claim) 2,60,000
2,80,000 2,80,000
Statement of Claim
Items Cost Depreciation Salvage Claim
Rs. Rs. Rs. Rs.
A B C D E=B-C-D
Stock 2,80,000 20,000 2,60,000
Buildings 3,75,000 1,25,000+9,375 4,000 2,36,625
Equipment 75,000 22,500+5,625 2,500 44,375
5,41,000
Q-13 On 27th July, 2017, a fire occurred in the godown of M/s. Vijay Exports and most of
the stocks were destroyed. However, goods costing Rs.5,000 could be salvaged.
Their firefighting expenses were amounting to Rs.1,300.

588
 From the salvaged accounting records, the following information is available
relating to the period from 1.4.2017 to 27.7.2017:
1. Stock as per balance sheet as on 31.3.2017 Rs.63,000
2. Purchases (including purchase of machinery costing Rs.10,000 Rs.2,92,000
3. Wages (including wages paid for installation of machinery Rs.3,000) Rs.53,000
4. Sales (including goods sold on approval basis amounting to Rs.40,000.
Rs.4,12,000 No approval has been received in respect of 1/4th of the goods sold on
approval)
5. Cost of goods distributed as free sample Rs.2,000
Other Information:

(i) While valuing the stock on 31.3.2017, Rs.1,000 had been written off in respect of
certain slow-moving items costing Rs.4,000. A portion of these goods were sold in June,
2017 at a loss of Rs.700 on original cost of Rs.3,000. The remainder of these stocks is
now estimated to be worth its original cost.
(ii) Past record shows the normal gross profit rate is20%.

(iii) The insurance company also admitted firefighting expenses. The Company had taken the
fire insurance policy of Rs.55,000 with the average clause.

You are required to compute the amount of claim of stock destroyed by fire, to be lodged
to the Insurance Company. Also prepare Memorandum Trading Account for the period
1.4.2017 to 27.7.2017 for normal and abnormal items.

[RTP Nov ‘18]

Ans. Memorandum Trading Account for the period 1st April, 2017 to 27th July,
2017
Normal Abnormal Total Normal Abnormal Total
To Opening 60,000 4,000 64,000 By Sales 4,00,000 2,300 4,02,300

589
stock
(W.N.5) (W.N.3)
To Purchases 2,80,000 - 2,80,000 By Loss - 700 700
(W.N.1)
To Wages 50,000 - 50,000 By Goods on 8,000 - 8,000
(W.N.4) Approval
(W.N.2)
To Gross profit 80,000 - 80,000 By Closing 62,000 1,000 63,000
stock
@ 20% (Bal. fig.)
4,70,00 4,000 4,74,000 4,70,000 4,000 4,74,000

590
591
 Q-14 The premises of Anmol Ltd. caught fire on 22nd January 2017, and the stock was
damaged. The firm makes account up to 31st March each year. On 31st March, 2016 the
stock at cost was Rs. 6,63,600 as against Rs. 4,81,100 on 31st March, 2015.
Purchases from 1st April, 2016 to the date of fire were Rs.17,41,350 as against
Rs.22,62,500 for the full year 2015-16 and the corresponding sales figures were
Rs.24,58,500 and Rs.26,00,000 respectively. You are given the following further
information:

(i) In July, 2016, goods costing Rs.50,000 were given away for advertising purposes, no
entries being made in the books.

(ii) During 2016-17, a clerk had misappropriated unrecorded cash sales. It is

estimated that the defalcation averaged Rs.1,000 per week from 1st April, 2016
until the clerk was dismissed on 18th August, 2016.
(iii) The rate of gross profit is constant.

You are required to calculate the value of stock in hand on the date of fire with the
help of above information. [RTP May‘18]

Ans. Ascertainment of rate of gross profit for the year 2015-16

Trading A/c for the year ended 31-3-2016
Rs. Rs.
To Opening stock 4,81,100 By Sales 26,00,000
To Purchases 22,62,500 By Closing stock 6,63,000
To Gross profit 5,20,000
32,63,600 32,63,600

Rate of gross profit =

G.P/ Sales * 100

592
 5, 20, 000 × 100 = 20%
=
26, 00, 000

Memorandum Trading A/c for the period from 1-4-2016 to 22-01-2017

Rs. Rs. Rs. Rs.
To Opening 6,63,600 By Sales 24,58,500
stock To 17,41,350 Add: Unrecorded 20,000 24,78,500
Purchases cash sales (W.N.)
Less: Goods used for By Closing stock
advertisement (50,000) 16,91,350 3,72,150
To Gross profit (20% 4,95,700
of Rs. 24,78,500)
28,50,650 28,50,650
Estimated stock in hand on the date of fire was Rs.3,72,150.
Working Note:
Cash sales defalcated by the accountant:

Defalcation period = 1.4.2016 to 18.8.2016= 140 days

Since, 140 days / 7 weeks = 20 weeks

Therefore, amount of defalcation = 20 weeks x Rs. 1,000 = Rs. 20,000.

Q15. A Fire occurred in the premises of M/s B & Co. on 30th September, 2019. The firm
had taken an insurance policy for ` 1,20,000 which was subject to an average clause.
Following particulars were ascertained from the available records for the period from 1st
April, 2018 to 30th September, 2019:
Amount
(`)

593
 Stock at cost on 1-04-2018 2,11,000
Stock at cost on 31-03-2019 2,52,000
Purchases during 2018-19 6,55,000
Wages during 2018-19 82,000
Sales during 2018-19 8,60,000
Purchases from 01-04-2019 to 30-09-2019 (including purchase of 4,48,000
machinery costing ` 58,000)
Wages from 01-04-2019 to 30-09-2019 (including wages for 85,000
installation of machinery costing ` 7,000)
Sales from 01-04-2019 to 30-09-2019 6,02,000
Sale value of goods drawn by partners (1-4-19 to 30-9-19) 52,000

Cost of Goods sent to consignee on 18th September, 2019 lying unsold 44,800
with them
Cost of Goods distributed as free samples(1-4-19 to 30-9-19) 8,500

While valuing the Stock at 31st March, 2019, ` 8,000 were written off in respect of a
slow moving item, cost of which was ` 12,000. A portion of these goods was sold at a
loss of` 4,000 on the original cost of ` 9,000. The remainder of the stock is estimated
to be worth the original cost. The value of Goods salvaged was estimated at ` 35,000.

You are required to ascertain the amount of claim to be lodged with the Insurance
Company for the loss of stock. (10Marks) [ Sugg Nov2020]
Ans. Memorandum Trading Account

for the period 1st April, 2019 to 30th September, 2019

Norma Abnorma Total Norma Abnorma Total
l l l l

594
 Items Items Items Items

` ` ` ` ` `
To 2,48,000 12,000 2,60,00 By Sales 5,97,000 5,000 6,02,00
Openin 0 0
g stock
To 3,39,900 - 3,39,90 By
Purchases 0 Goods 44,800 - 44,800
(W.N. 2) sent to
consigne
e

To Wages 78,000 - 78,000 By Loss - 4,000 4,000

(85,000 –
7,000)
To Gross 1,19,400 - 1,19,400 By Closing 1,43,500 3,000 1,46,500
profit stock
@20% (Bal. fig.)
7,85,300 12,000 7,97,300 7,85,300 12,000 7,97,300

Statement of Claim for Loss of Stock

`
Book value of stock as on 30.9.2019 1,46,500
Less: Stock salvaged (35,000)
Loss of stock 1,11,500

Amount of claim to be lodged with insurance company

= Loss of stock x Policy value

595
 Value of stock on the date of fire

= ` 1,11,500 x 1,20,000/1,46,500 = `91,331 (approx.)

Working Notes:

1. Rate of gross profit for the year ended 31st March, 2019
Trading Account for the year ended 31st March, 2019
` `
To Opening Stock 2,11,000 By Sales 8,60,00
0
To Purchases 6,55,000 By Closing stock
2,52,000 Add:
To Wages 82,000 2,60,00
written off
0
8,0
To Gross Profit 1,72,000
00
(b.f.)
11,20,00 11,20,0
0 00
Rate of Gross Profit in 2018-19

Gross Profit / Sales * 100

= 1,72,000 X 100 / 8,60,000 = 20%

2. Calculation of Adjusted Purchases

`
Purchases (4,48,000 – 58,000) 3,90,00
0

Less: Drawings [52,000 – (20 % of 52,000)] (41,600)

596
 Free samples
(8,500)
Adjusted purchases 3,39,90
0

Note: The answer has been given considering that the value of stock (at cost) on
31.3.19 amounting ` 2,52,000 is after adjustment of written off amount in respect of
slow-moving item.

Q16. Fire occurred in the premises of M/S MJ & Co., on 31st December, 2019. From the
following particulars related to the period from 1st April 2019 to 31st December 2019, you
are required to ascertain the amount of claim to be filed with the insurance policy for
` 1,00,000 which is subject to average clause. The value of goods salvaged was estimated
at ` 31,000. The average rate of gross profit was 20% throughout the period:
Particulars Amount
(`)
(i) Opening stock as on 1st April,2019 1,50,000

(ii) Purchases during the year 4,20,000

(iii) Goods withdrawn by the proprietor for his 10,000
self-use at Sales
Value
(iv) Goods distributed as charity at cost 4,000
(v) Purchases include ` 5,000 of Tools purchased,
these tools
should have been capitalized.
(vi) Wages (include wages paid for the installation 90,000
of machinery

597
 `6,000)
(vii Sales during the year 6,10,000
)
(vii Cost of goods sent to consignee on 1st 25,000
i) November,2019, lying
unsold with the consignee.
(ix) Sales Return 10,000

[Sugg Jan 2021] (10 Marks)

Ans. Memorandum Trading Account for the period 1st April, 2019 to 31st Dec 2019
` `
To Opening Stock 1,50,000 By Sales 6,00,000
(6,10,000 - 10,000)
To Purchases 4,20,000 By Consignment 25,000
Less: Tools purchased (5,000) stock
Goods distributed as (4,000) By Closing Stock 1,32,000
Cost of goods taken by proprietor (Bal.
(8,000) fig.)
To Wages (90,000 – 6,000)
To Gross Profit
4,03,000
[20% of Sales)
84,000

1,20,000

7,57,000 7,57,000

* For financial statement purposes, this would form part of closing stock (since
there is no sale). However, this has been shown separately for computation of

598
 claim for loss of stock since the goods were physically not with the concern and,
hence, there was no loss of such stock.

Statement of Insurance Claim

`
Value of stock destroyed by fire 1,32,000
Less: Salvaged Stock (31,000)
Loss of stock 1,01,000

Note:

Since policy amount is less than value of stock on date of fire, average clause will
apply. Therefore, claim amount will be computed by applying the formula:

Claim = Insured value × Loss suffered

Total cost

Claim amount = ` 1,01,000/1,32,000X1,00,000 = ` 76,515 (Rounded off)

NOTE: The average rate of 20% has been given in the question. In the above solution, Gross
Profit is calculated @ 20% on sales. Alternative answer considering Gross Profit of 20% is
also possible.

Q17. .Ram’s godown caught fire on 29th August, 2020. Large part of the stock of goods
was destroyed and goods costing ` 56,350 could be salvaged. Ram provides you the
following additional information:
`
Cost of stock on 1st April, 2019 3,55,250
Cost of stock on 31st March, 2020 3,95,050
Purchases during the year ended 31st March, 2020 28,39,800
Purchases from 1st April, 2020 to the date of fire 16,55,350

599
 Cost of goods distributed as samples for advertising from 1st April, 20,500
2020 to the date of fire
Cost of goods withdrawn by trader for personal use from 1st April, 2020
to the date of fire 1,000
Sales for the year ended 31st March, 2020 40,00,000
Sales from 1st April, 2020 to the date of fire 22,68,000

Ram had taken the fire insurance policy for ` 4,00,000 with an average clause. You
are required to compute the amount of the claim that will be admitted by the
insurance company. [RTP May2021]

Ans. Memorandum Trading Account for the period 1st April, 2020 to 29th
August 2020
` `
To Opening Stock 3,95,050 By Sales 22,68,000
To Purchases 16,55,350 By Closing stock 4,41,300
(Bal. fig.)
Less: Advertisement (20,500)
Drawings (1,000) 16,33,850
To Gross Profit [30% of
Sales] [W N] 6,80,400

27,09,300 27,09,300

Statement of Insurance Claim

`
Value of stock destroyed by fire 4,41,300
Less: Salvaged Stock (56,350)

600
 3,84,950

Note: Since policy amount is less than the value of stock on date of fire, average
clause will apply.

` 4,00,000/4,41,300 X 3,84,950= ` 3,48,924 (rounded off)

Therefore, claim amount of ` 3,48,924 will be admitted by the Insurance Company.

Working Note:

Trading Account for the year ended 31st March, 2020

` `
To Opening Stock 3,55,250 By Sales 40,00,000
To Purchases 28,39,800 By Closing stock 3,95,050
To Gross Profit 12,00,000

43,95,050 43,95,050

Rate of Gross Profit in 2019-20

= 12,00,000/40,00,000 x 100 = 30%

Q18. Shyam’s godown caught fire on 29th August, 2020, and a large part of the stock of goods was
destroyed. However, goods costing ` 54,000 could be salvaged. The trader provides you the
following additional information:
`
Cost of stock on 1st April, 2019 3,55,250
Cost of stock on 31st March, 2020 3,95,050
Purchases during the year ended 31st March, 2020 28,39,800
Purchases from 1st April, 2020 to the date of fire 16,55,350
Cost of goods distributed as samples for advertising from 1st April, 2020 20,500
to the date of fire

601
 Cost of goods withdrawn by trader for personal use from 1st April, 2020
to the date of fire 1,000

Sales for the year ended 31st March, 2020 40,00,000

Sales from 1st April, 2020 to the date of fire 22,68,000

Shyam had taken the fire insurance policy for ` 2,50,000 with an average clause.

Calculate the amount of the claim that will be admitted by the insurance company. Consider
that the rate of gross profit up to date of fire is same as that of previous accounting year.
[RTP Nov2020]
Ans. Memorandum Trading Account for the period 1st April, 2020 to 29th August 2020

` `
To Opening Stock 3,95,050 By Sales 22,68,000
To Purchases 16,55,350 By Closing stock (Bal. fig.) 4,41,300
Less: Advertisement (20,500)

Drawings (1,000) 16,33,850

To Gross Profit [30% of Sales] [W N]
6,80,400

27,09,300
27,09,300

Statement of Insurance Claim

`
Value of stock on date of fire4,41,300

602
 Less: Salvaged Stock (54,000)
stock destroyed 3,87,300

Application of Average Clause

Amount of Insurance claim= ` 3,87,300/ 4,41,300 X 2,50,000 = ` 2,19,409 (rounded

off)

Working Note:

Trading Account for the year ended 31st March, 2020

` `
To Opening Stock 3,55,250 By Sales 40,00,000
To Purchases 28,39,800 By Closing stock 3,95,050
To Gross Profit 12,00,000
43,95,050 43,95,050

Rate of Gross Profit in 2019-2020

= 12,00,000/40,00,000 x 100 = 30%

Q19.On 2.6.2021 the stock of Mr. Heera was destroyed by fire. However, following
particulars were furnished from the records saved:

`
Stock at cost on 1.4.2020 2,02,500

603
 Stock at 90% of cost on 31.3.2021 2,43,000
Purchases for the year ended 31.3.2021 9,67,500
Sales for the year ended 31.3.2021 13,50,000
Purchases from 1.4.2021 to 2.6.2021 3,37,500
Sales from 1.4.2021 to 2.6.2021 7,20,000

Sales up to 2.6.2021 includes ` 1,12,500 being the goods not dispatched to the
customers. The sales (invoice) price is ` 1,12,500.

Purchases up to 2.6.2021 includes a machinery acquired for ` 22,500.

Purchases up to 2.6.2021 does not include goods worth ` 45,000 received from
suppliers, as invoice not received up to the date of fire. These goods have
remained in the godown at the time of fire. The insurance policy is for ` 1,80,000
and it is subject to average clause. Ascertain the amount of claim for loss of stock.
[RTP Nov2021]

Ans .In the books of Mr. Heera

Trading Account for the year ended 31.3.2021

` `
To Opening Stock 2,02,500 By Sales 13,50,000
To Purchases 9,67,500 By Closing Stock at cost 2,70,000
To Gross Profit 4,50,000 100
(2,43,000× 90 )

16,20,000 16,20,000

Memorandum Trading A/c

for the period from 1.4.2021 to 02.06.2021
604
 ` `
To Opening Stock (at cost) 2,70,000 By Sales 7,20,000
To Purchases 3,37,500 Less: Goods not
Add: Goods received but dispatched 1,12,500 6,07,500
invoice not received 45,000 By Closing stock (Balancing 2,25,000
3,82,500 figure)
Less: Machinery 22,500 3,60,000
To Gross Profit (Refer W.N.) 2,02,500

8,32,500 8,32,500
Calculation of Insurance Claim
Claim subject to average clause =
Actual loss of stock × Amount of policy

Value of stock on the date of fire

= 1,80,000 x (2,25,000 / 2,25,000)= ` 1,80,000

Working Note:
G.P. ratio = 4,50,000 / 13,50,000 × 100 = 33.3%
Amount of Gross Profit = ` 6,07,500 x 33.3% = ` 2,02,500
Q20. A fire engulfed the premises of a business of M/s Kite in the morning, of 1st October, 2019. The
entire stock was destroyed except, stock salvaged of Rs. 50,000. Insurance Policy was for Rs. 5,00,000
with average clause.

Stock in hand on 31st March, 2019 Rs. 3,50,000

605
 The following information was obtained from the records saved for the period from
1st April to 30th September, 2019:

Rs.
Sales 27,75,000
Purchases 18,75,000
Carriage inward 35,000
Carriage outward 20,000
Wages 40,000
Salaries 50,000

Additional Information:

(1) Sales upto 30th September, 2019, includes Rs. 75,000 for which goods had not been
dispatched.

(2) On 1stJune, 2019, goods worth Rs. 1,98,000 sold to Hari on approval basis which was
included in sales but no approval has been received in respect of 2/3rd of the goods sold to
him till 30th September, 2019.

(3) Purchases upto 30th September, 2019 did not include Rs. 1,00,000 for which purchase
invoices had not been received from suppliers, though goods have been received in
godown.

(4) Past records show the gross profit rate of 25% on sales.

You are required to prepare the statement of claim for loss of stock for submission to the
Insurance Company. .
(8marks) [ MTP May 2021]

Ans. Computation of claim for loss of stock

606
 Rs.
Stock on the date of fire (i.e. on 1.10.2019) 3,75,000
Less: Stock salvaged (50,000)
Stock destroyed by fire (Loss of stock) 3,25,000

Insurance claim amount= Rs. 3,25,000

(Average clause is not applicable as insurance policy amount ( Rs. 5,00,000) is more than the
value of closing stock ie. Rs. 3,75,000)

Memorandum Trading A/c (1.4.19 to 30.9.19)

Particulars (Rs.) Particulars (Rs.)
To Opening stock 3,50,000 By Sales 25,68,000
To Purchases 19,75,000 By Goods with 99,000
(Rs. 18,75,000+Rs. customers* (for
1,00,000) approval) (W.N.1)
To Carriage inward 35,000 By Closing stock (bal. 3,75,000
fig.)
To Wages 40,000
To Gross profit
(Rs. 25,68,000 x 25%) 6,42,000 _______
30,42,000 30,42,000

* For financial statement purposes, this would form part of closing stock (since there is no sale).
However, this has been shown separately for computation of claim for loss of stock since the
goods were physically not with the entity and, hence, there was no loss of such stock.

Working Notes:

1. Calculation of goods with customers

607
 Since no approval for sale has been received for the goods of Rs. 1,32,000 (i.e. 2/3 of Rs.
1,98,000) hence, these should be valued at cost i.e. Rs. 1,32,000 – 25% of Rs. 1,32,000
= Rs. 99,000.

2. Calculation of actual sales

Total sales – Goods not dispatched- Sale of goods on approval (2/3rd)=

Sales (Rs. 27,75,000 –75,000– Rs.1,32,000) = Rs. 25,68,000

Q21. A fire engulfed the premises of a business of M/s Preet on the morning of 1st July 2020. The
building, equipment and stock were destroyed and the salvage recorded the following:

Building – Rs. 4,000; Equipment – Rs. 2,500; Stock – Rs. 20,000. The following other information was
obtained from the records saved for the period from 1 st January to 30th June 2020:
Rs.
Sales 11,50,000
Sales Returns 40,000
Purchases 9,50,000
Purchases Returns 12,500
Cartage inward 17,500
Wages 7,500

Stock in hand on 31st December, 2019 1,50,000

Building (value on 31st December, 2019) 3,75,000

Equipment (value on 31st December, 2019) 75,000

Depreciation provided till 31st December, 2019 on:

Building 1,25,000
Equipment 22,500

No depreciation has been provided after December 31st 2019. The latest rate of depreciation is 5% p.a.
608
on building and 15% p.a. on equipment by straight line method.

Normally business makes a profit of 25% on net sales. You are required to prepare the statement of
claim for submission to the Insurance Company.
[MTP May 2021 ] ( 8 marks )

Ans. Memorandum Trading Account for the Period from 1.1.2020 to 30.6.2020
Rs. Rs.
To Opening Stock (1.1.2020) To 1,50,000 By Sales 11,50,000
Purchases 9,50,000 Less: Sales Returns (40,000) 11,10,000
Less: Returns (12,500) 9,37,500
To Cartage Inwards To 17,500 By Closing Stock 2,80,000
Wages 7,500 (Bal. Fig.)
To Gross Profit 2,77,500
(25% of Rs. 11,10,000)
13,90,000 13,90,000

Stock Destroyed Account

Rs. Rs.
To Trading Account 2,80,000 By Stock Salvaged 20,000
Account By Balance 2,60,000
2,80,000 c/d (For Claim) 2,80,000

Statement of Claim
Items Cost (Rs.) Depreciation Salvage Claim
(Rs.) (Rs.) (Rs.)
A B C D (E=B-C-D)
Stock 2,80,000 20,000 2,60,000
Buildings 3,75,000 1,25,000 + 9,375 4,000 2,36,625

609
 Equipment 75,000 22,500 + 5,625 2,500 44,375
5,41,000

Q22. A fire occurred in the premises of M/s. Fireproof on 31 st August, 2020. From the following
particulars relating to the period from 1st April, 2020 to 31st August, 2020, you are requested to
ascertain the amount of claim to be filed with the insurance company for the loss of stock. The
concern had taken an insurance policy for ` 60,000 which is subject to an average clause.
`
(i) Stock as per Balance Sheet at 31-03-2020 99,000
(ii) Purchases 1,70,000
(iii) Wages (including wages for the installation of a machine 50,000
` 3,000)
(iv) Sales 2,42,000
(v) Sale value of goods drawn by partners 15,000
(vi) Cost of goods sent to consignee on 16th August, 2020, lying 16,500
unsold with them
(vii Cost of goods distributed as free samples 1,500
)

While valuing the stock at 31 st March, 2020, ` 1,000 were written off in respect of a slow moving item.
The cost of which was ` 5,000. A portion of these goods were sold at a loss of` 500 on the
original cost of ` 2,500. The remainder of the stock is now estimated to be worth the original cost. The
value of goods salvaged was estimated at ` 20,000. The average rate of gross profit was 20% (on sales)
throughout. [MTP Nov2020] ( 8 marks )

Ans. Memorandum Trading Account for the period 1st April, 2020 to 31st August, 2020
Normal Abnormal Total Normal Abnormal Total
Items Items Items Items

610
 ` ` ` ` ` `

To Opening 95,000 5,000 1,00,000 By Sales 2,40,000 2,000 2,42,000

stock
To Purchases 1,56,500 - 1,56,500 By Goods sent
(Refer W.N.) to consignee 16,500 - 16,500
To Wages 47,000 - 47,000 By Loss - 500 500
To Gross profit 48,000 - 48,000 By Closing 90,000 2,500 92,500
@ 20% stock
3,46,500 5,000 3,51,500 (Bal.fig.) 3,46,500 5,000 3,51,500

Statement of Claim for Loss of Stock

`
Book value of stock as on 31.08.2020 92,500
Less: Stock salvaged (20,000)
Loss of stock 72,500

Amount of claim to be lodged with insurance company

= Loss of stock x Policy value

Value of stock on the date of fire

= 72,500 x 60,000 = ` 47,027

92,500

Working Note:

Calculation of Adjusted Purchases

`

611
 Purchases 1,70,000
Less: Drawings (12,000)
Free samples (1,500)
Adjusted purchases 1,56,500

Q23. On 2.6.2019, there occurred a fire in the warehouse of Mr. White and his total stock was
destroyed by fire. However, following information could be obtained from the records saved:
Rs.
Stock at cost on 1.4.2018 10,80,000
Stock at 90% of cost on 31.3.2019 12,96,000
Purchases for the year ended 31.3.2019 51,60,000
Sales for the year ended 31.3.2019 72,00,000
Purchases from 1.4.2019 to 2.6.2019 18,00,000
Sales from 1.4.2019 to 2.6.2019 38,40,000

Sales up to 2.6.2019 includes Rs.6,00,000 (invoice price) being the goods not dispatched to the customers.
Purchases up to 2.6.2019 includes a machinery acquired for Rs.1,20,000. However, it does not include goods
worth Rs. 2,40,000 received from suppliers, as invoice not received up to the date of fire. These goods
have remained in the godown at the time of fire. The insurance policy is for Rs. 9,60,000 and it is
subject to average clause.You are required to ascertain the amount of claim for loss of stock applying
average clause. [MTP May 2020 ] ( 10 marks )

Ans. In the books of Mr. White

Trading Account for the year ended 31.3.2019

Rs. Rs.
To Opening Stock 10,80,000 By Sales 72,00,000
To Purchases 51,60,000 By Closing Stock at cost (12,96,000 x 100/90) 14,40,000

612
 To Gross Profit 24,00,000

86,40,000
86,40,000
Memorandum Trading A/c
for the period from 1.4.2019 to 02.06.2019

Rs. Rs.
Opening Stock (at cost) 14,40,000 By Sales 38,40,000
Less: Goods not
Purchases 18,00,000 dispatched 6,00,000
Add: Goods received but By Closing stock (Balancing figure) 32,40,000

invoice not received 2,40,000 12,00,000

20,40,000
Less: Machinery 1,20,000 19,20,000
Gross Profit (Refer W.N.) 10,80,000

44,40,000 44,40,000

Calculation of Insurance Claim

Claim subject to average clause = Actual loss of stock / Value of stock on the date of fire
× Amount of policy
= 9,60,000 x 12,00,000/12,00,000= Rs.9,60,000
Working Note:
G.P. ratio =24,00,000/ 72,00,000= 33 3%
Amount of Gross Profit = Rs.32,40,000 x 33.3 % = Rs.10,80,000

613
CHAPTER-10

Hire Purchase

Q-1 On January 1, 20X1 Kasturi Ltd. acquired a Pick-up Van on hire purchase from Shorya
Ltd. The terms of the contract were as follows:
(a) The cash price of the van was ` 25,000.
(b) ` 10,000 were to be paid on signing of the contract.
(c) The balance was to be paid in annual instalments of ` 5,000 plus interest.
(d) Interest chargeable on the outstanding balance was 6% p.a.
(e) Depreciation at 10% p.a. is to be written-off using the straight-line method.
You are required to show the Van account & Shorya Ltd. account in the books of
Kasturi Ltd. from January 1, 20X1 to December 31, 20X3.
[RTP-May’ 20]
Ans. Ledger Accounts in the books of
Kasturi Van Account
Date Particulars ` Date Particulars `
1.1.20X To Shorya Ltd. 25,000 31.12.20 By Depreciatio A/c 2,500
1 X1 n
31.12.20 By Balance 22,500
X1 c/d
25,000 25,000
1.1.20X To Balance b/d 22,500 31.12.20 By Depreciatio A/c 2,500
2 X2 n

614
 31.12.20 By Balance 20,000
X2 c/d
22,500 22,500
1.1.20X To Balance b/d 20,000 31.12.20 By Depreciatio A/c 2,500
3 X3 n
31.12.20 By Balance 17,500
X3 c/d
20,000 20,000
Shorya Ltd. Account
Date Particulars ` Date Particulars `
1.1.20X1 To Bank A/c 10,000 1.1.20X1 By Van 25,000
A/c
31.12.20 To Bank A/c 5,900 31.12.20 By Interest A/c 900
X1 X1
31.12.20 To Balance c/d 10,000
X1
25,900 25,900
31.12.20 To Bank A/c 5,600 1.1.20X2 By Balance b/d 10,000
X2
31.12.20 To Balance c/d 5,000 31.12.20 By Interest A/c 600
X2 X2
10,600 10,600
31.12.20 To Bank A/c 5,300 1.1.20X3 By Balance b/d 5,000
X3
31.12.20 By Interest A/c 300
X3

615
 5,300 5,300

Q-2 M/s Amar bought six Scooters from M/s Bhanu on 1st April, 2015 on the following
terms:
Down payment ` 3,00,000
1st instalment payable at the end of 1st ` 1,59,000
year
2nd instalment payable at the end of 2nd ` 1,47,000
year
3rd instalment payable at the end of ` 1,65,000
3rd year
Interest is charged at the rate of 10% per annum.
M/s Amar provides depreciation @ 20% per annum on the diminishing balance method.
On 31st March, 2018 M/s Amar failed to pay the 3rd instalment upon which M/s Bhanu
repossessed two Scooters. M/s Bhanu agreed to leave the other four Scooters with M/s Amar
and adjusted the value of the repossessed Scooters against the amount due. The Scooters taken
over were valued on the basis of 30% depreciation per annum on written down value. The
balance amount remaining in the vendor's account after the above adjustment was paid by
M/s Amar after 5 months with interest@ 15% per annum.
M/s Bhanu incurred repairing expenses of ` 15,000 on repossessed scooters and sold scooters for
`1,05,000 on 25th April, 2018. You are required to:
(1) Calculate the cash price of the Scooters and the interest paid with each instalment.
(2) Prepare Scooters Account and M/s Bhanu Account in the books of M/s Amar.
(3) Prepare Goods Repossessed Account in the books of M/s Bhanu.
[Sugg. May ‘19, 10 Marks]
(i) Calculation of Interest and Cash Price
Ans.

616
 No. of Outstanding Amount due Outstanding Interest Outstanding
installments balance at at the time of balanceat balance at
the end installment the end the beginning
after the before the
payment of payment of
installment installment
[1] [2] [3] [4] = 2 +3 [5] = 4 x [6]=4-5
3rd - 1,65,000 1,65,000 10/110 1,50,000
2nd 1,50,000 1,47,000 2,97,000 15,000 2,70,000
1st 2,70,000 1,59,000 4,29,000 27,000 3,90,000
Down 39,000 3,00,000
payment
Total of interest and Total cash price 81,000 6,90,000
(ii)
In the books of M/s Amar
Scooters Account
Date Particulars ` Date Particulars `

1.4.2015 To Bhanu 6,90,000 31.3.2016 By Depreciation A/c 1,38,000

A/c
By Balance c/d 5,52,000
6,90,000
6,90,000
1.4.2016 To Balance 5,52,000 31.3.2017 By Depreciation A/c 1,10,400
b/d
Balance c/d 4,41,600
5,52,000 5,52,000
1.4.2017 To Balance 4,41,600 31.3.2018 By Depreciation A/c 88,320
b/d
By M/s Bhanu a/c 78,890
(Value of 2 Scooters takenover)
ByProfit and Loss, A/c (Bal. fig.) 38,870
By Balance c/d 2,35,520
4/6 (4,41,600 - 88,320)
4,41,600 4,41,600

617
(iii) M/s Bhanu Account
Date Particulars ` Date Particulars `
1.4.15 To Bank (down 3,00,000 1.4.15 By Scooters A/c 6,90,000
payment)
31.3.16 To Bank (1st 1,59,000 31.3.16 By Interest A/c 39,000
Installment)
To Balance c/d 2,70,000

7,29,000
7,29,000
31.3.17 To Bank (2nd 1,47,000 1.4.2016 By Balance b/d 2,70,000
Installment)
To Balance c/d 1,50,000 31.3.2017 By Interest A/c 27,000
2,97,000 2,97,000
31.3.18 To Scooter A/c 78,890 1.4.2017 By Balance b/d 1,50,000
To Balance c/d (b.f.) 86,110 31.3.2018 By Interest A/c 15,000
1,65,000
1,65,000
31.8.18 To Bank (Amount 1.4.2018 By Balance b/d 86,110
settled after 5 months) 91,492 31.8.2018 By Interest A/c (@ 5,382
15 %
on bal.)
(86,110 x 5/12 x
15/100)
91,492 91,492
(iv) In the Books of M/s Bhanu

618
 Goods Repossessed A/c
Date Particulars ` Date Particulars `
31.3.18 To Amar A/c 78,890 31.3.2018 By Balance c/d 78,890
78,890 By Bank (Sale) 78,890
1.04.2018 To Balance 78,890 25.4.2018 1,05,000
b/d
25.4.2018 To Repair A/c 15,000
25.4.2018 ToProfit & 11,110
Loss A/c
1,05,000 1,05,000
Working Note:
Value of Scooters taken over `
2 Scooters (6,90,000/6 x 2) 2,30,000
Depreciation @ 30% WDV for 3
years
(69,000 + 48,300 +33,810) (1,51,110)
78,890
Q-3 Krishan bought 2 cars from 'Fair Value Motors Pvt. Ltd. on 1.4.2015 on the
following terms (for both cars):
Rs.
Down payment 6,00,000
1st Installment at the end of first year 4,20,000
2nd Installment at the end of 2nd year 4,90,000
3rd Installment at the end of 3rd year 5,50,000
Interest is charged at 10% p.a.

619
Krishan provides depreciation @ 25% on the diminishing balances.
On 31.3.2018 Krishan failed to pay the 3rd installment upon which 'Fair Value Motors Pvt. Ltd.'
repossessed 1 car. Krishan agreed to leave one car with Fair Value Motors Pvt. Ltd. and
adjusted the value of the car against the amount due. The car taken over was valued on the
basis of 40% depreciation annually on written down basis. The balance amount remaining in
the vendor's account after the above adjustment was paid by Krishan after 3 months with
interest@ 20% p.a.
You are required to: Calculate the cash price of the cars and the interest paid with each
installment, and prepare Car Account in the books of Krishan for the year 2017-18 assuming
books are closed on March 31, every year. Figures may be rounded off to the nearest rupee.
[MTPMarch‘19,6Marks, RTPN‘19]
Ans
Calculation of Interest and Cash Price
No. of Outstanding Amount Outstanding Interest Outstanding
installment balance at due at the balance at balance at
the end time of the end the
after the installment before the beginning
(1) payment of payment of (5)
installment installment =4x10/110 (6) =4-5
(3) (4) = 2 + 3
(2)
3rd - 5,50,000 5,50,000 50,000 5,00,000
2nd 5,00,000 4,90,000 90,000 90,000 9,00,000
1st 9,00,000 4,20,000 13,20,000 1,20,000 12,00,000

Total cash price = Rs. 12,00,000+6,00,000 (down payment) = Rs.18,00,000

620
 Cars Account in the books of Krishna for the year ended 31st March, 18
1.4.2017 To 10,12,500 31.3.2018 By Depreciation A/c 2,53,125
Balance By Fairvalue Morots A/c (value of 1
b/ d [18,00,000 Car taken over after depreciation for
less 3 years@40%p.a.) [9,00,000-
depreciation (3,60,000 + 2,16,000 + 1,29,600)]
(4,50,000+ By Loss transferred to Profit and
3,37,500) Loss A/c on surrender (Bal.fig.)
By balance c/d
(10,12,500-2,53,125) 1,94,400

1,85,288

3,79,687

10,12,500 10,12,500

Q-4 The following particulars relate to hire purchase transactions:

(a) X purchased three cars from Y on hire purchase basis, the cash price of each car being Rs.
2,00,000.
(b) The hire purchaser charged depreciation @20% on diminishing balance method.
(c) Two cars were seized by on hire vendor when second installment was not paid at
the end of the second year. The hire vendor valued the two cars at cash price less 30%
depreciation charged under it diminishing balance method.
(d) The hire vendor spent Rs.10,000 on repairs of the cars and then sold them for a
total amount of Rs.1,70,000.

621
 You are required to compute:

(i) Agreed value of two cars taken back by the hire vendor

(ii) Book value of car left with the hire purchaser.

(iii) Profit or loss to hire purchaser on two cars taken back by their hire vendor,

(iv) Profit or loss of cars repossessed, when sold by the hire vendor.

[RTP May ‘19, RTP Nov ‘18]

Ans
Rs.
(i) Price of two cars = Rs.2,00,000 x 2 4,00,000
Less; Depreciation for the first year @ 30% 1,20,000

2,80,000

Less: Depreciation for the second year = Rs.2, 80,000 *30/100

84,000

Agreed value of two cars taken back by the hire vendor 1,96,000

(ii) Cash purchase price of one car 2,00,000

Less; Depreciation on Rs.2,00,000 @20% for the first year 40,000
Written drown value at the end of first year 1,60,000
Less; Depreciation on Rs.1,60,000 @ 20% for the second year 32,000
Book value of car left with the hire purchaser 1,28,000

(iii) Book value of one car as calculated in working note (ii) above 1,28,000

622
 Book value of Two cars = Rs.1,28,000 x 2 2,56,000
Value at which the two cars were taken back, calculated in 1,96,000
working note (i) above

Hence, loss on cars taken back = Rs.2,56,000 - Rs.1,96,000 60,000

(iv) Sale proceeds of cars repossessed

Less: Value at which cars were taken 1,70,000

back

Rs.1,96,000
Repair Rs.10,000 2,06,000
Loss on resale 36,000

Q5. On 1st April, 2017, Mr. Nilesh acquired a Tractor on Hire purchase from Raj Ltd.
The terms of contract were as follows:
(i) The Cash price of the Tractor was ` 11,50,000.

(ii) ` 2,50,000 were to be paid as down payment on the date of purchase.

(iii) The Balance was to be paid in annual instalments of ` 3,00,000 plus interest at the
end of the year.

(iv) Interest chargeable on the outstanding balance was 8% p.a.

(v) Depreciation @ 10% p.a. is to be charged using straight line method.

Mr. Nilesh adopted the Interest Suspense method for recording his Hire purchase
transactions.
You are required to :
Prepare the Tractor account, Interest Suspense account and Raj Ltd.’s account in the books
of Mr. Nilesh for the period of hire purchase. [Sugg Nov 2020] [8 marks ]
Ans. Tractor Account
623
Date Particulars ` Date Particulars `
1.4.2017 To Raj 11,50,000 31.3.2018 By Dep. 1,15,000
_______ By Balance c/d10,35,000
11,50,000 11,50,000
1.4.2018 To Balance b/d10,35,000 31.3.2019 By Dep. 1,15,000

________ By Balance c/d 9,20,000

10,35,000 10,35,000
1.4.2019 To balance b/d 9,20,000 31.3.2020 By Dep. 1,15,000
_______ By Balance c/d 8,05,000
9,20,000 9,20,000

H.P. Interest Suspense Account

Date Particulars ` Date Particulars `
1.4.2017 To Raj Ltd. A/c (W.N.) 1,44,00031.3.2018 By Interest A/c 72,000

31.3.2018 By Balance c/d 72,000

1,44,000 1,44,000
1.4.2018 To Balance b/d 72,000 31.3.2019 By Interest A/c 48,000
31.3.2019 By Balance c/d 24,000

72,000 72,000
1.4.2019 To Balance b/d 24,000 31.3.2020 By Interest A/c 24,000

Total Interest = ` 72,000 + ` 48,000 + ` 24,000 = ` 1,44,000

Raj Ltd. Account

Date Particulars ` Date Particulars `

624
 1.4.2017 To Bank A/c 2,50,000 1.4.2017 By Tractor A/c 11,50,000
31.3.2018 To Bank A/c 3,72,000 By H.P. Interest Suspense 1,44,000
A/c
To Balance 6,72,000
c/d
12,94,000 12,94,000
31.3.2019 To Bank A/c 3,48,000 1.4.2018 By Balance b/d 6,72,000
To Balance 3,24,000 _______
c/d
6,72,000 6,72,000
31.3.2020 To Bank A/c 3,24,000 1.4.2019 By Balance b/d 3,24,000

Q6. Jai Ltd purchased a machine on hire purchase basis from KM Ltd. on the following
terms:

(a) Cash price ` 1,20,000.

(b) Down payment at the time of signing the agreement on 1-1-2016, ` 32,433.

(c) 5 annual instalments of `23,100, the first to commence at the end of twelve
months from the date of down payment.

(d) Rate of interest is 10% p.a.

Your are required to calculate the total interest and interest included in each
instalment. Also prepare the Ledger Account of KM Ltd. in the books of Jai Ltd.
(8 Marks) [Sugg Jan 2021]
Ans. Calculation of interest
Total Interest in each Cash price in each
(`) instalment instalment
(1) (2)

625
Cash Price 1,20,000
Less: Down Payment (32,433) Nil ` 32,433
Balance due after down 87,567
payment

Interest/CashPrice of 1st - ` 87,567x10/100 23,100 –

instalment = 8,757 =
8,757 ` 14,343

Less: Cash price of 1st (14,343)

instalment

Balance due after 1st 73,224

instalment

Interest/cash price of 2nd - ` 73,224x 10/100 ` 23,100 -

instalment
= ` 7,322=
` 7322 ` 15,778

Less: Cash price of 2nd (15,778)

instalment

Balance due after 2nd 57,446

instalment

Interest/Cash price of 3rd - ` 57,446 x 10/100 ` 23,100 -

instalment
= ` 5745=
` 5745 ` 17,355

Less: Cash price of 3rd (17,355)

instalment

626
Balance due after 3rd 40,091
instalment

Interest/Cash price of 4th - ` 40,091x10/100= ` 23,100 -

instalment
` 4,009 ` 4,009=
` 19,091

Less: Cash price of 4th (19,091)

instalment

Balance due after 4th 21,000

instalment

Interest/Cash price of 5th - `21,000 x10/100 ` 23,100 –

instalment
= ` 2,100 ` 2,100= 21,000

Less: Cash price of 5th (21,000)

instalment
Total Nil ` 27,933 `1,20,000
Total interest can also be calculated as follow:

(Down payment + instalments) – Cash Price = ` [32,433 +(23,100 x 5)] – `1,20,000 =

` 27,933

KM Ltd. Account in the books of Jai Ltd

Date Particulars ` Date Particulars `
1.1. 2016 To Bank A/c 32,433 1.1.2016 By Machine A/c 1,20,000

627
31.12.2016 To Bank A/c 23,100 31.12.2016 By Interest A/c 8,757
31.12.2016 To Balance c/d 73,224
1,28,757 1,28,757
31.12.2017 To Bank A/c 23,100 1.1.2017 By Balance b/d 73,224
31.12.2017 To Balance c/d 57,446 31.12.2017 By Interest A/c 7,322
80,546 80,546
31.12.2018 To Bank A/c 23,100 1.1.2018 By Balance b/d 57,446
31.12.2018 To Balance c/d 40,091 31.12.2018 By Interest A/c 5,745
63,191 63,191
31.12.2019 To Bank A/c 23,100 1.1.2019 By Balance b/d 40,091
31.12.2019 To Balance c/d 21,000 31.12.2019 By Interest A/c 4,009
44,100 44,100
31.12.2020 To Bank A/c 23,100 1.1.2020 By Balance b/d 21,000
____ 31.12.2020 By Interest A/c 2,100
23,100 23,100

Q7. What is meant by repossession. What is the treatment for repossession in the books of
Hire Purchaser? [RTP May 2021]

Ans. Repossession is the Right of the Seller to take back the goods sold from the Hire
purchaser in case of any default by the Hire purchaser and can sell the goods after
reconditioning to any other person. The hire purchaser closes the Hire Vendor’s Account by
transferring the balance of Hire Vendor Account to Hire Purchase Asset and then finding
the profit and loss on repossession in Asset Account.

Q8.On 1st April 2018 M/s KMR acquired a machine on hire purchase from M/s PQR on

628
the following terms:

(1) Cash price of the machine was ` 2,40,000.

(2) The down payment at the time of signing the contract was ` 96,000.

(3) The balance amount is to be paid in 3 equal annual instalments plus interest.

(4) Interest is chargeable @ 8% p.a.

On this basis prepare the H.P. Interest Suspense Account and Account of M/s
PQR in the books of the purchaser for the period of hire purchase.
[RTP May 2021]
Ans. In the books of M/s KMR (purchaser)

H.P. Interest Suspense Account

Date Particulars ` Date Particulars `
1.4.18 To M/s PQR A/c (W.N.) 23,04031.3.19 By Interest A/c11,520

31.3.19 By Balance c/d11,520

23,040 23,040
1.4.19 To Balance b/d 11,520 31.3.20 By Interest A/c 7,680
31.3.20 By Balance c/d 3,840
11,520 11,520
1.4.20 To Balance b/d 3,840 31.3.21 By Interest A/c 3,840

M/s PQR Account

Date Particulars ` Date Particulars `
1.4.18 To Bank/Cash 96,000 1.4.18 By Machine A/c 2,40,000
A/c
31.3.19 To Bank/Cash 59,520 1.4.18 By H.P. Interest Suspense A/c 23,040
A/c

629
 31.3.18 To Balance c/d 1,07,520
2,63,040 2,63,040
31.3.20 To Bank/Cash 55,680 1.4.19 By Balance b/d 1,07,520
A/c
31.3.20 To Balance c/d 51,840
1,07,520 1,07,520
31.3.21 To Bank/Cash 51,840 1.4.20 By Balance b/d 51,840
A/c

Working Note:
Cash Price 2,40,000
Down Payment 96,000
1,44,000

` 1,44,000 to be paid in 3 instalments ie. ` 48,000 plus interest Total

interest = ` 11,520 + ` 7,680 + ` 3,840 = ` 23,040

Q9. X purchased three cars from Y on hire purchase basis, the cash price of each car being
` 2,00,000. The hire purchaser charged depreciation @ 20% on diminishing balance method.
Two cars were seized by on hire vendor when second installment was not paid at the end of
the second year. The hire vendor valued the two cars at cash price less 30% depreciation
charged under diminishing balance method. The hire vendor spent ` 10,000 on repairs of
the cars and then sold them for a total amount of ` 1,70,000.

You are required to compute: (i) Agreed value of two cars taken back by the hire vendor
and book value of car left with the hire purchaser and (ii) Profit or loss to hire purchaser
on two cars taken back by the hire vendor.
[ RTP Nov 2020]

630
Ans.
`
(i) Price of two cars = ` 2,00,000 x 2 4,00,000
Less: Depreciation for the first year @ 30% 1,20,000
2,80,000
Less: Depreciation for the second year = ` 2,
84,000
80,000* 30%

Agreed value of two cars taken back by the 1,96,000

hire vendor
Cash purchase price of one car 2,00,000
Less: Depreciation on ` 2,00,000 @20% for the 40,000
first year
Written drown value at the end of first year 1,60,000
Less: Depreciation on ` 1,60,000 @ 20% for the 32,000
second year
Book value of car left with the hire purchaser 1,28,000
(ii)
Book value of one car as calculated above 1,28,000
Book value of Two cars = ` 1,28,000 x 2 2,56,000
Value at which the two cars were taken back, 1,96,000
calculated in (i) above
Hence, loss to hire purchaser on cars taken back
by hire vendor ` 60,000
= ` 2,56,000 – ` 1,96,000 =

Q10. On January 1, 2018 M/s Hello acquired a Machine on hire purchase from M/s Pass.

631
The terms of the contract were as follows:
(a) The cash price of the Machine was ` 2,00,000.

(b) ` 80,000 were to be paid on signing of the contract.

(c) The balance was to be paid in annual instalments of ` 40,000 plus interest. The
first instalment was to be paid on 31st Dec. 2018.

(d) Interest chargeable on the outstanding balance was 6% p.a.

(e) Depreciation at 10% p.a. is to be written-off using the WDV method.

You are required to give Journal Entries in the books of M/s Hello from January 1,
2018 to December 31, 2020.
[RTP Nov2021]

Ans. In the books of M/s Hello Journal Entries

Date Particulars Dr. Cr.
` `
2018 Machine A/c Dr. 2,00,000
Jan. 1 To M/s Pass A/c 2,00,000
(Being the purchase of a Machine on hire purchase
from M/s Pass)
“ M/s Pass A/c Dr. 80,000
To Bank A/c 80,000
(Being the amount paid on signing the H.P. contract)

Dec. Interest A/c Dr. 7,200

31
To M/s Pass A/c 7,200
(Being the interest payable @ 6% on

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 ` 1,20,000

“ M/s Pass A/c (` 40,000+` 7,200) Dr. 47,200

To Bank A/c 47,200

(Being the payment of 1st instalment along with

interest)
“ Depreciation A/c Dr. 20,000
To Machine A/c 20,000
(Being the depreciation charged @ 10% p.a. on `
2,00,000)
“ Profit & Loss A/c Dr. 27,200
To Depreciation A/c 20,000
To Interest A/c 7,200
(Beingthe depreciation and interest
transferred to Profit and Loss Account)
2019 Interest A/c Dr. 4,800
Dec. To M/s Pass A/c 4,800
31
(Being the interest payable @ 6% on
` 80,000)
M/s Pass A/c (` 40,000 + ` 4,800) Dr. 44,800
To Bank A/c 44,800

(Being the payment of 2nd instalment along with

interest)
Depreciation A/c Dr. 18,000
To Machine A/c 18,000

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 (Being the depreciation charged @ 10% p.a.)
Profit & Loss A/c Dr. 22,800
To Depreciation A/c 18,000
To Interest A/c 4,800
(Being the depreciation and interest charged to Profit
and Loss Account)
2020 Interest A/c Dr. 2,400
Dec. To M/s Pass A/c 2,400
31
(Being the interest payable @ 6% on
` 40,000)
M/s Pass A/c (` 40000 + ` 2,400) Dr. 42,400
To Bank A/c 42,400
(Being the payment of final instalment along with
interest)
Depreciation A/c Dr. 16,200
To Machine A/c 16,200
(Being the depreciation charged @ 10% p.a.)
Profit & Loss A/c Dr. 18,600
To Depreciation A/c 16,200
To Interest A/c 2,400
(Being the interest and depreciation charged to
Profit and Loss Account)

Q11. Identify four differences between Hire Purchase and Installment Payment agreement.
[MTP May 2021] ( 4 marks )

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Ans. Statement showing differences between Hire Purchase and Installment System
Basis of Distinction Hire Purchase Installment System
1. Governing Act It is governed by Hire Purchase It is governed by the Sale of
Act,1972. Goods Act, 1930.
2. Nature of Contract It is an agreement of hiring. It is an agreement of sale.
3. Passing of Title The title to goods passes on last The title to goods passes
(ownership) payment. immediately as in the case of
usual sale.
4. Right to Return The hirer may return goods without Unless seller defaults, goods are
goods further payment except for accrued not returnable.
installments.
5. Seller’s right to The seller may take possession of the The seller can sue for price if the
repossess goods if hirer is in default. buyer is in default. He
cannot take possession of the
goods.
6. Right of Disposal Hirer cannot hire out, sell, pledge or The buyer may dispose off the
assign entitling transferee to retain goods and give good title to
possession as against the hire the bonafide purchaser.
vendor.
7. Responsibility for The hirer is not responsible for risk The buyer is responsible for risk
Risk of Loss of loss of goods if he has taken of loss of goods because
reasonable precaution because the of the ownership has
ownership has not yet transferred. transferred.
8. Name of Parties The parties involved are called Hirer The parties involved are called
involved and Hire vendor. buyer and seller.

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 9. Component other Component other than Cash Price Component other than Cash
than cash price. included in installment is called Price included in Installment is
Hire charges. called Interest.

Note: Any four differences may form part of the answer.

Q12. M/s. Kodam Enterprises purchased a generator on hire purchase from M/s. Sanctum Ltd. on
1stApril, 2019. The hire purchase price was Rs.48,000. Down payment was Rs.12,000 and the balance
is payable in 3 annual instalments of Rs.12,000 each payable at the end of each financial year. Interest
is payable @ 8% p.a. and is included in the annual payment of Rs.12,000.Depreciation at 10% p.a. is to be
written off using the straight line method.
You are required to calculate the cash price of the generator and the interest paid on each instalment.
[MTP May 2021] ( 4 marks )

Ans. Calculation of Interest and Cash Price

Ratio of interest and amount due = 8 / (100 + rate of interest) i.e. 8/108

To ascertain cash price, interest will be calculated from last instalment to first instalment as follows:
No. of Amount due at the time Interest Cumulative
instalments of instalment Cash price
[1] [2] [3] (2-3) = [4]

3rd 12,000 8/108 of Rs.12,000 =Rs. 889 11,111

2nd 23,111 [W.N.1] 8/108 of Rs. 23,111 = Rs.1,712 21,399

1st 33,399 [W.N.2] 8/108 of Rs.33,399 = Rs.2,474 30,925

5,075

Total cash price = Rs. 30,925 + Rs. 12,000 (down payment) =Rs.42,925

Working Notes:

1. Rs. 11,111+ 2nd instalment of Rs. 12,000= Rs. 23,111

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2. Rs. 21,399+ 1st instalment of Rs. 12,000= Rs. 33,399
Q13. A acquired on 1st January, 2020 a machine under a Hire-Purchase agreement which provides for 5 half-
yearly instalments of Rs. 6,000 each, the first instalment being due on 1st July, 2020. Assuming that the
applicable rate of interest is 10 per cent per annum, calculate the cash value of the machine. All working
should form part of the answer. [MTP May 2021 ] ( 4 marks )

Ans. Statement showing cash value of the machine acquired on hire-purchase basis
Instalment Interest @ 5% half yearly (10% Principal Amount (in each
Amount p.a.) = 5/105 = 1/21) instalment)
(in each instalment)
Rs. Rs. Rs.
5th Instalment 6,000 286 5,714
Less: Interest (286)
5,714
Add: 4th 6,000
Instalment
11,714 558 5,442
Less: Interest (558) (11,156–5,714)
11,156
Add: 3rd 6,000
instalment
17,156 817 5,183
Less: Interest (817) (16,339–11,156)
16,339
Add: 2nd 6,000
instalment
22,339 1,063 4,937

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 Less: Interest (1,063) (21,276–16,339)
21,276
Add: 1st 6,000
instalment
27,276 1,299 4,701
Less: Interest (1,299) (25,977–21,276)
25,977 4,023 25,977

Q14. On 1st April, 2017, X Ltd. sells a Trucks on hire purchase basis to Transporters & Co. for a total
purchase price of ` 18,00,000 payable as to ` 4,80,000 as down payment and the balance in three equal
annual instalments of ` 4,40,000 each payable on 31st March 2018, 2019 and 2020.

The hire vendor charges interest @ 10% per annum.

You are required to ascertain the cash price of the truck for Transporters & Co. Calculations may be made
to the nearest rupee. [MTP Nov 2020 ] ( 5 marks )
Ans. Ratio of interest and amount due = Rateof interest / 100+ Rate of interest = 10/ 110 = 1 / 11
There is no interest element in the down payment as it is paid on the date of the transaction. Instalments
paid after certain period includes interest portion also. Therefore, to ascertain cash price, interest will be
calculated from last instalment to first instalment as follows:

Calculation of Interest and Cash Price

No. of Amount due at the time of Interest Cumulative Cash
instalments instalment price
[1] [2] [3] (2-3) = [4]

3rd 4,40,000 1/11 of ` 4,40,000 =` 4,00,000

40,000
2nd 8,40,000 1/11 of ` 8,40,000= ` 7,63,636
76,364

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 1st 12,03,636 1/11of ` 12,03,636= ` 10,94,215
1,09,421

Total cash price = ` 10,94,215 + 4,80,000 (down payment) =` 15,74,215.

Q15. M/s. Kodam Enterprises purchased a generator on hire purchase from M/s. Sanctum Ltd. on
1stApril, 2019. The hire purchase price was Rs.48,000. Down payment was Rs.12,000 and the balance is
payable in 3 annual instalments of Rs.12,000 each payable at the end of each financial year. Interest is
payable @ 8% p.a. and is included in the annual payment of Rs.12,000.

Depreciation at 10% p.a. is to be written off using the straight line method.

You are required to calculate the cash price of the generator and the interest paid on each instalment.
[ MTP May 2020 ] ( 5 marks )

Ans. Calculation of Interest and Cash Price

Ratio of interest and amount due = 8 / (100 + rate of interest) i.e. 8/108

To ascertain cash price, interest will be calculated from last instalment to first instalment as follows:
No. of Amount due at the Interest Cumulative
instalments time of instalment Cash price
[1] [2] [3] (2-3) = [4]

3rd 12,000 8/108 of Rs.12,000 =Rs. 889 11,111

2nd 23,111 [W.N.1] 8/108 of Rs. 23,111 = 21,399

Rs.1,712

1st 33,399 [W.N.2] 8/108 of Rs.33,399 = Rs.2,474 30,925

5,075

Total cash price = Rs. 30,925 + Rs. 12,000 (down payment) =Rs.42,925
Working Notes:
1. Rs. 11,111+ 2nd instalment of Rs. 12,000= Rs. 23,111

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2. Rs. 21,399+ 1st instalment of Rs. 12,000= Rs. 33,399

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CHAPTER-11

Departmental Accounts

Q-1 ABC Ltd. has several departments. Goods supplied to each department are debited to a
Memorandum Departmental Stock Account at cost plus a fixed percentage (mark-up) to
give the normal selling price. The amount of mark-up is credited to a Memorandum
Departmental Markup account. If the selling price of goods is reduced below its
normal selling prices, the reduction (mark-down) will require adjustment both in
the stock account and the mark-up account. The mark-up for department X for the last
three years has been 20%. Figures relevant to department X for the year ended 31 st
March, 2019 were as follows;

Stockas on 1st April, 2018, at cost ` 1,50,000

Purchases at cost ` 4,30,000

Sales ` 6,50,000

It is further ascertained that:

(1) Shortage of stock found in the year ending 31.3.2019, costing ` 4,000 were written
off.

(2) Opening stock on 1.4.2018 including goods costing ` 12,000 had been sold during the
year and had been marked-down in the selling price by ` 1,600. The remaining
stock had been sold during the year.

(3) Goods purchased during the year were marked down by ` 3,600 from a cost of 30,000.
Marked- down stock costing 10,000 remained unsold on 31.3.2019.

(4) The departmental closing stock is to be valued at cost subject to adjustment for

641
 mark-up and mark-down.

You are required to prepare for the year ended 31 st March, 2019:

(i) DepartmentalTradingAccountfor departmentX for theyearended31 st March,

2019 inthebooks of head office.

(ii) Memorandum Stock Account for the year ended 31 st March, 2019.

(iii) Memorandum Mark-Up account for the year ended 31 st March, 2019.

[Sugg.Nov.’19,10 Marks]
Ans.(i) Department Trading Account for Department X For
the year ending on 31.03.2019
In the books of Head Office
Particulars ` Particulars `
To Opening Stock 1,50,000 By Sales 6,50,000
To Purchases 4,30,000 By Shortage 4,000
To Gross Profit c/d 1,05,000 By Closing Stock 31,000
6,85,000 6,85,000
(ii) Memorandum Stock Account (for Department X) (at selling price)
Particulars ` Particulars `
To Balance b/d
(`
1,50,000+20% By Profit & Loss A/c (Cost of Shortage)
of
1,50,000) 1,80,000 4,000
To Purchases By Memorandum Departmental Markup

(` 4,30,000 + A/c (Load on Shortage) (` 4,000 x

20% of 20%)

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 ` 4,30,000) 5,16,000 By Memorandum Departmental Mark-
up A/c (Mark-down on Current
800
Purchases)
By Debtors A/c (Sales) Memorandum
3,600
By Departmental Mark-up A/c (Mark
6,50,000
Down on Opening Stock)
Balance c/d
By 1,600
36,000
6,96,000 6,96,000

(iii) Memorandum Departmental Mark-up Account

Particulars ` Particulars `
To Memorandum 800 By Balance b/d 30,000
Departmental Stock A/c (` 1,80,000 x 20/120)
(` 4,000 × 20/100)
To Memorandum 3,600 By Memorandum 86,000
Departmental Stock A/c Departmental Stock
To Memorandum 1,600 A/c (` 5,16,000 x
Departmental Stock A/c 20/120)

To Gross Profit transferred

to Profit & Loss A/c 1,05,000
To Balance c/d [(`36,000
+ 1,200*) x 20/120 - ` 5,000
1,200]
1,16,000 1,16,000

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 *[` 3,600 ×10,000/30,000] = ` 1,200. Alternatively, this adjustment of ` 1,200 may be
routed through Memorandum Stock Account.

Working Notes:

(i) Calculation of Cost of Sales

`
A Sales as per Books 6,50,000
B Add: Mark-down in opening stock (given) 1,600
C Add: mark-down in sales out of current Purchases
(` 3,600 x 20,000 /30,000) 2,400
D Value of sales if there was no mark-down (A+B+C) 6,54,000
E Less: Gross Profit (20/120 of ` 6,54,000) subject to Mark Down (1,09,000)
F Cost of sales (D-E) 5,45,000
(ii) Calculation of Closing Stock
`
A Opening Stock 1,50,000
B Add: Purchases 4,30,000
C Less: Cost of Sales (5,45,000)
D Less: Shortage (4,000)
E Closing Stock (A+B-C-D) 31,000
Q-2 Axe Limited has four departments, A, B, C and D. Department A sells goods to other
departments at a profit of 25% on cost. Department B sells goods to other
department at a profit of 30% on sales. Department C sells goods to other
departments at a profit of 10% on cost, Department D sells goods to other departments
at a profit of 15% on sales.
Stock lying at different departments at the year-end was as follows:

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 Department Department Department Department
A B C D
Transfer from - 45,000 50,000 60,000
Department A 50,000 - - 75,000
Transfer from - -
Department B
22,000 -
Transfer from 33,000 65,000
10,000
Department C 40,000
Transfer from Department D
Departmental managers are entitled to 10% commission on net profit subject to
unrealized profit on departmental sales being eliminated.
Departmental profits after charging manager's commission, but before adjustment of
unrealized profit are as under:
`
Department A 2,25,000
Department B 3,37,500
Department C 1,80,000
Department D 4,50,000

Calculate the correct departmental profit after charging Manager’s commission.

[Sugg.Nov.’18,5Marks]

645
Answer
Calculation of correct departmental profits
Department Department Department Department
A B C D
` ` ` `
Profit after charging managers’ 2,25,000 3,75,500 1,80,000 4,50,000
commission
Add back: managers’ commission 25,000 37,500 20,000 50,000
(1/9)
2,50,000 3,75,000 2,00,000 5,00,000
Less: Unrealized profit on stock 31,000 37,500 5,000 17,250
(Working Note)
Profit before Manager’s commission 2,19,000 3,37,500 1,95,000 4,82,750
Less:Commission for Department 21,900 33,750 19,500 48,275
Manager @ 10%
Correct Department Profit after manager’s 1,97,100 3,03,750 1,75,500 4,34,475
commission
Working Note:

Q-3 M/s. Delta is a Department Store having three department X, Y andZ. The
information regarding three department for the year ended 31st March, 2019 are
given below:
Particular Dept. Dept. Dept.
Opening Stock 18,000 12,000 10,000
Purchases 66,000 44,000 22,000
Debtors at end 7,500 5,000 5,000

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 Sales 90,000 67,500 45,000
Closing Stock 22,500 8,750 10,500
Value of furniture in each Department 10,000 10,000 5,000
Floor space occupied by each Dept. (in sq. ft.) 1,500 1,250 1,000
Number of employees in each Department 25 20 15
Electricity consumed by each Department (in 300 200 100
units)
Additional information
Amount Rs.
Carriage inwards 1,500
Carriage outwards 2,700
Salaries 24,000
Advertisement 2,700
Discount allowed 2,250
Discount received 1,800
Rent, Rates and Taxes 7,500
Depreciation on furniture 1,000
Electricity Expenses 3,000
Labor welfare expenses 2,400
Prepare Departmental Trading and Profit & Loss Account for the year ended 31st March,
2018 after providing provision for Bad Debts at 5%. [Sugg. May ‘18, 10 Marks]

Ans. In the Books of M/s Delta Departmental Trading and Profit and Loss Account
for the year ended 31st March, 2018

Particulars Dept. Dept. Total Particulars Dept. Dept. Dept. Total

647
 Dept. ` ` ` ` ` ` `
`
To Stock (opening) 12,000
18,000 10,000 40,000 By Sales 90,000 67,500 45,000 2,02,500
To Purchases 44,000
66,000 22,000 1,32,000 By Stock 22,500 8,750 10,500 41,750
(closing)
ToCarriage 500 250 1,500
Inwards 750
To Gross Profit c/ d 19,750 23,250 70,750
(b.f.) 27,750
1,12,500 76,250 55,500 2,44,250 1,12,500 76,250 55,500 2,44,250
To Carriage 900 600 2,700 By Gross 27,750 19,750 23,250 70,750
Outwards 1,200 Profit b/ d
To Electricity 1,500
1,000 500 3,000 By Discount 900 600 300 1,800
received
To Salaries 10,000
8,000 6,000 24,000
To Advertisement 1,200
900 600 2,700
ToDiscount 750 500 2,250
allowed 1,000
To Rent, Rates and 2,500 2,000 7,500
Taxes 3,000
To Depreciation 400
400 200 1,000
To Provision for
Bad
Debts @ 5% of 250 250 875
debtors 375

648
To Labor welfare 800 600 2,400
expenses 1,000
To Net Profit (b.f.) 8,975
4,850 12,300 26,125
28,650 20,350 23,550 72,550 28,650 20,350 23,550 72,550
Working Note:

Basis of allocation of expenses

Carriage inwards Purchases (3:2:1)
Carriage outwards Turnover (4:3:2)
Salaries No. of Employees
(5:4:3)
Advertisement Turnover (4:3:2)
Discount allowed Turnover (4:3:2)
Discount received Purchases (3:2:1)
Rent, rates and Taxes Floor Space occupied
(6:5:4)
Depreciation on furniture Value of furniture
(2:2:1)
Labor welfare expenses No. of Employees
(5:4:3)
Electricity expense Units consumed
(3:2:1)
Provision for bad debts Debtors’ balances
(3:2:1)
Q-4 The following balances were extracted from the books of Beta. You are
required to prepare Departmental Trading Account and general Profit & Loss
Account for the year ended 31st December, 2018:
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 Particulars Dept. A Dept. B
Rs. Rs.
Opening Stock 3,00,000 2,40,000
Purchases 39,00,000 54,60,000
Sales 60,00,000 90,00,000
General expenses incurred for both the Departments were Rs. 7,50,000 and you are also
supplied with the following information:
(i) Closing stock of Department, A Rs. 6,00,000 including goods from Department B for
Rs. 1,20,000 at cost to Department A.
(ii) Closing stock of Department B Rs. 12,00,000 including goods from Department A for
Rs. 1,80,000 at cost to Department B.
(iii) Opening stock of Department, A and Department B include goods of the value of Rs.
60,000 and Rs. 90,000 taken from Department B and Department A respectively at
cost to transferee departments.
(iv) The gross profit is uniform from year to year.
[MTP Oct.‘19,10Marks] Ans.
Departmental Trading Account for the year ended on 31st December, 2018
Particulars A B Particulars A B
Rs. Rs. Rs. Rs.
To Opening 3,00,000 2,40,000 By Sales 60,00,000 90,00,000
Stock
To Purchases 39,00,000 54,60,000 By Closing Stock 6,00,000 12,00,000
To Gross Profit 24,00,000 45,00,000

66,00,000 1,02,00,000 66,00,000 1,02,00,000

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 General profit and loss account of Beta for the year ended on 31st December, 2018
Particulars Amount Particulars Amount
Rs. Rs.
To General expenses. 7,50,000 By Stock (Opening stock)
reserve
To Stock reserve (Closing Dept. A 30,000
Stock)
Dept. A 60,000 Dept. B 36,000
Dept. B 72,000 By Gross
Profit
To Net Profit 60,84,000 Dept. A 24,00,000
Dept. B 45,00,000
69,66,000 69,66,000
Working Notes:

Dept. A Dept. B
1. Percentage of Profit 24,00,000/60,00,000 x 100 45,00,000/90,00,000 x 100
40% 50%
2. Opening Stock reserve 60,000 x 50% = 30,000 90,000 x 40% = 36,000
3. Closing Stock reserve 1,20,000 x 50%=60,000 1,80,000 x 40% = 72,000

. General expenses have not been allocated to individual department and are charged to General
Profit and Loss Account.

Q-5 The following balances were extracted from the books of M/s Division. You are
required to prepare Departmental Trading Account and Profit and Loss account for the
year ended 31st December, 2017 after adjusting the unrealized department profits if

651
 any.
Dept. A Dept. B
Rs. Rs.
Opening Stock 50,000 40,000
Purchases 6,50,000 9,10,000
Sales 10,00,000 15,00,000
General expenses incurred for both the departments were Rs. 1,25,000 and you are also
supplied with the following information: (a) Closing stock of Department A
Rs.1,00,000 including goods from Department B for Rs. 20,000 at cost of
Department A. (b) Closing stock of Department B Rs. 2,00,000 including goods from
Department A for Rs. 30,000 at cost to Department B. (c) Opening stock of
Department A and Department B include goods of the value of Rs. 10,000 and Rs.
15,000 taken from Department B and Department A respectively at cost to transferee
department. (d) The rate of gross profit is uniform from year to year.
[MTP Aug. ‘18, 8 Marks]

Ans. Departmental Trading and Loss Account of M/s Division

For the year ended 31st December, 2017

Deptt. A Deptt. B Deptt. A Deptt. B

Rs. Rs. Rs. Rs.

To Opening stock 50,000 40,000 By Sales 10,00,000 15,00,000

To Purchases 6,50,000 9,10,000 By Closing
stock
To Gross profit 4,00,000 7,50,000 1,00,000 2,00,000
11,00,000 17,00,000 11,00,000 17,00,000
To General By Gross 4,00,000 7,50,000

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 profit
Expenses (in ratio of
sales) 50,000 75,000
To Profit t/f to general
profit and loss account 3,50,000 6,75,000

4,00,000 7,50,000 4,00,000 7,50,000

General Profit and Loss Account
Rs. Rs.
To Stock reserve required By Profit from:
(additional: Stock in Deptt. Deptt. A 3,50,000
A 5,000 Deptt. B 6,75,000
50%of(Rs.20,000-Rs.10,000)
(W.N.1)
6,000
Stock in Deptt. B
10,14,000
40%of(Rs.30,000-Rs.15,000)
10,25,000
(W.N.2)

To Net Profit
10,25,000
Working Notes:
1. Stock of department A will be adjusted according to the rate applicable to
department B = [(7,50,000 ÷ 15,00,000) x 100] = 50%
2. Stock of department B will be adjusted according to the rate applicable to
department A = [(4,00,000 ÷ 10,00,000) x 100] = 40%
Q-6 Following is the Trial Balance of Mr. Mohan as on 31.03.2017:
Particulars Debit (Rs.) Credit (Rs.)

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Capital Account 40,000
Drawing Account 1,500
Opening Stock Department A 8,500
Department B 5,700
Department C 1,200
Purchases Department A 22,000
Department B 17,000
Department C 8,000
Sales Department A 54,000
Department B 33,000
Department C 21,000
Sales Returns Department A 4,000
Department B 3,000
Department C 1,000
Freight and Carriage Department A 1,400
Department B 800
Department C 200
Furniture and fixtures 4,600
Plant and Machinery 20,000
Motor Vehicles 40,000
Sundry Debtors 12,200
Sundry Creditors 15,000
Salaries 4,500
Power and water 1,200
Telephone charges 2,100
Bad Debts 750

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 Rent and taxes 6,000
Insurance 1,500
Wages Department A 800
Department B 550
Department C 150
Printing and 2,000
Stationeries
Advertising 3,500
Bank Overdraft 12,000
Cash in hand 850

1,75,000 1,75,000
Youare requiredto prepare Department Trading, Profit and Loss Account and the Balance
Sheet taking
into account the following adjustments:

(a) Outstanding Wages: Department B- Rs. 150, Department C – Rs. 50.

(b) Depreciate Plant and Machinery and Motor Vehicles at the rate of 10%.

(c) Each Department shall share all expenses in proportion to their sales.

(d) Closing Stock: Department A - Rs. 3,500, Department B - Rs. 2,000, Department C -
Rs. 1,500.

[MTPOct.‘18,10Marks,RTPMay‘18]

Ans Trading and Profit and Loss Account for the year ended on
31st March, 2017
Particulars A B C Particulars A B C
(Rs.) (Rs.) (Rs.) (Rs.) (Rs.) (Rs.)

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 To Opening Stock 8,500 5,700 1,200 By Sales less
Sales returns 50,000 30,000 20,000
By Closing 3,500 2,000 1,500
To Purchases 22,000 17,000 8,000
Stock
To Freight carriage 1,400 800 200
32,000 21,500
To Wages 800 700 200
7,800 11,900
To Gross profit
20,800 7,800 11,900
465 -
53,500 32,000 21,500
To Salaries
2,250 1,350 900 53,500
To Power & Water By Gross
600 360 240 20,800
To Telephone Profit
1,050 630 420 -
Charges By Net
11,900
375 225 150 Loss
To Bad Debts
3,000 1,800 1,200
ToRent Taxes
To Insurance 750 450 300

To Printing & 1,000 600 400

Stationery 1,750 1,050 700
To Advertising
3,000 1,800 1,200
To Depreciation (2,000
7,025 6,390
+4,000) 8,265
To Net Profit 20,800 8,265
11,900

20,800

656
 Balance Sheet as at 31.03.2017
Liabilities Rs. Assets Rs.
Capital A/c 40,000 Furniture & 4,600
Fixtures
Add: Net Profit
(Rs. 7,025 + Rs. 6,390) 13,415 Plant & 20,000
Machinery
53,415
Less: Depreciation 2,000 18,000
Less: Net loss in Dept B 465 Motor Vehicles 40,000
52,950 Less: Depreciation 4,000 36,000
Less: Drawings 1,500 51,450 Sundry Debtors 12,200
Sundry Creditors 15,000 Cash in hand 850
Bank Overdraft 12,000 Closing Stock 7,000
Wages Outstanding 200

78,650 78,650
Note: All expenses have been allocated among departments in proportion of their sales
in the solution as per the specific requirement of the question.

Q-7 A firm has two departments--Sawmill and Furniture. Furniture is made with wood
supplied by the Sawmill department at its usual selling price. From the following
figures prepare Departmental Trading and Profit and Loss Account for the year2018:
Sawmill Furniture

` `

657
 Opening Stock on 1st January, 2018 1,50,000 25,000
Sales 12,00,000 2,00,000
Purchases
10,00,000 7,500
Supply to Furniture Department
1,50,000 --
Selling expenses
10,000 3,000
Wages
10,000
30,000
Closing Stock on 31st December, 2018
30,000
1,00,000
The value of stocks in the furniture department consists of 75% wood and 25% other expenses.
The Sawmill Department earned Gross Profit at 15 % on sales in 2017. General expenses of the
business as a whole came to ` 55,000. The firm adopts FIFO method for assigning costs to
inventories. [RTP Nov.’19]

Ans. Departmental Trading and Profit and Loss Account

Particulars Sawmill Furniture Particulars Sawmill Furniture

To Opening stock 1,50,000 25,000 By Sales 12,00,000 2,00,000
To Purchase 10,00,000 7,500 By Transfer to furniture
department 1,50,000
To Wages 30,000 10,000 By Closing stock 1,00,000 30,000

658
 To Transfer from
sawmill - 1,50,000
To Gross profit 2,70,000 37,500

14,50,000 2,30,000 14,50,00 2,30,00

0 0
To Selling 10,000 3,000 By Gross profit 2,70,00 37,500
expenses 0
To Net Profit 2,60,000 34,500

2,70,000 37,500 2,70,00 37,500

0

General Profit & Loss Account

Particulars Amount Particulars Amount

To General Expenses 55,000 By Net Profit from

To Stock reserve (WN-2) 4,500 Saw Mill 2,60,000
To Net Profit 2,37,813 Furniture 34,500
By stock reserve (opening 2,813
WN-1)
2,97,313 2,97,313
Working Notes

1. Calculation of Stock Reserve (opening)

25,000 x 75% wood x 15% = ` 2,813

2. Calculation of closing stock reserve

Gross profit Rate of Saw Mill of

2018 2,70,000 / (12,00,000 + 1,50,000)

659
 x 100 = 20%
30,000x 75% x 20% = ` 4,500.

Q-8 The following balances were extracted from the books of M/s Division. You are
required to prepare Departmental Trading Account and Profit and Loss account for the
year ended 31st December, 2018 after adjusting the unrealized department profits if
any.
Dept. A Dept.

Rs. Rs.
Opening stock 50,000 40,000
Purchases 6,50,000 9,10,000
Sales 10,00,000 15,00,000

General expenses incurred for both the departments were Rs.1,25,000 and you are also
supplied with the following information: (a) Closing stock of Department A
Rs.1,00,000 including goods from Department B for Rs.20,000 at cost of
Department A. (b) Closing stock of Department B Rs. 2,00,000 including goods from
Department A for Rs.30,000 at cost to Department B. (c) Opening stock of Department A
and Department B include goods of the value of Rs.10,000 and Rs.15,000 taken from
Department B and Department A respectively at cost to transferee departments, (d)
The rate of gross profit is uniform from year to year.

[RTPMay‘19,RTPNov.’18]
Ans. Departmental Tradingand Loss account of M/s Division
Fortheyearended31stDecember,2018
Deptt. A. Dept. Dept. A Dept.
Rs. Rs. Rs. Rs.
To Opening stock 50,000 40,000 By Sales 10,00,000 15,00,000

660
 To Purchases 6,50000 9,10,000 By Closing stock 1,00,000 2,00,000
To Gross profit 4,00,000 7,50,000 11,00,000 17,00,000
11,00,000 17,00,000
To General Expenses By Gross profit 4,00,000 7,50,000
(In ratio of sales) 50,000 75,000
To Profit it/f to general 3,50,000 6,75,000
profit and loss account

4,00,000 7,50,000 4,00,000 7,50,000

General Profit and Loss Account
Rs. Rs.
To Stock reserve required (additional: - By Profit from -
Stock in Deptt. A - Deptt. A 3,50,000
50% of (Rs.20,000 - Rs.10,000) (W.N.1) 50,000 Deptt. A 6,75,000
Stock in Deptt. B
40% of (Rs.30,000 - Rs.15,000 (W.N.2) 6,000
To Net Profit 10,14,000
10,25,000 10,25,000
Working Notes:

1. Stock of department A will be adjusted according to the rate applicable to department B

= [(7,50,000 15,00,000) x 100] = 50%
2. Stock of department B will be adjusted according to the rate applicable to department A
= [(4,00,000
10,00,000) x 100] = 40%.
Q9. Department A sells goods to Department B at a profit of 20% on cost and to

661
Department C at 50% on cost. Department B sells goods to Department A and
Department C at a profit of 15% and 10% on sales respectively. Department C sells goods
to Department A and Department B at a profit of 10% and 5% on cost respectively.

Stock lying at different departments at the end of the year are as follows:
Department A Department B Department C
(`) (`) (`)
Transfer from Department A 1,14,000 60,000
Transfer from Department B 55,000 15,200
Transfer from Department C 52,800 1,11,300
Calculate Department wise unrealized profit on Stock. [Sugg Nov 2020] [4marks]

Ans Calculation of unrealized profit of each department

Dept. A Dept. B Dept. C Total
` ` ` `
Unrealized Profit
of:
Department A 1,14,000 x 60,000 x 50/150 39,000
20/120 = 19,000 = 20,000
Department B 55,000 x .15 15,200 x.10 9,770
= 8,250 = 1,520
Department C 52,800 x 10/110 1,11,300 x 5/105
= 4,800 5,300 10,100

Q10. XYZ Garage consists of 3 departments: Spares, Service and Re pairs, each
department being managed by a departmental manager whose commission was
respectively 5%, 10% and 10% of the respective departmental profit subject to a
minimum of `5,000 in each case.

662
 Inter departmental transfers take place at a “loaded” price as follows:
From Spares to Service 5% above cost
From Spares to Repairs 10% above cost

From Spares to Service 10% above cost

In respect of the year ended March 31st 2019 the firm had already prepared and closed
the departmental trading and profit and loss account. Subsequently it was discovered that
the closing stocks of department had included inter-departmentally transferred goods at
“loaded” price instead of the correct cost price.

From the following information, you are required to prepare a statement re-computing the
departmental profit or loss:
Spares Service Repairs
` ` `
Final Net Profit/Loss(after charging 38,000 50,400 72,000
commission) (Loss) (Profit) (Profit)
Inter-departmental transfers 65,000 4,202
Included at “loaded” price in (21,000 from (from Spares)
the departmental stocks Spares and 44,000
from Repairs)
[Sugg Jan 2021] [10 marks]

Ans. Calculation of correct Departmental Profits or Losses

Department Department Department
Spares (`) Service (`) Repair (`)
Profit after charging (38,000) 50,400 72,000
Manager’s
Commission

663
 Add: Manager’s 5,000(Minimum) 5,600 8,000
Commission (1/9)
(33,000) 56,000 80,000
Less: Unrealized profit on (1,382) (4,000)
Stock (WN)
Profit Before Manager’s (34,382) 56,000 76,000
Commission
Less: Manager’s (5,000) (5,600) (7,600)
Commission 10%
Correct Profit after (39,382) 50,400 68,400
Manager’s
Commission

Working Note:
Department Department Department Repair Total
Spares (`) Service (`) (`) (`)
Unrealized Profit
of:
Department 21,000X5/105 4202X10/110 = 1,382
Spares 382
= 1,000
Department
Repair 44000X10/110 4,000
= 4000

Q11. Below balances are taken from the records of M/s Big Shopping Complex for the
year ended 31st March, 2020:

664
 Details Department P (`) Department Q (`)
Opening Stock 1,00,000 80,000
Purchases 13,00,000 18,20,000
Sales 20,00,000 30,00,000

 Closing stock of Department P was ` 2,00,000 including goods transferred from

Department Q for ` 40,000.

 Closing stock of Department Q was ` 4,00,000 including goods transferred

from Department P for ` 60,000.

 Opening stock of Department P included goods for ` 20,000 transferred from

Department Q and Opening stock of Department Q included goods for ` 30,000
transferred from Department P.

 Assume that above transfer amounts are cost to the transferee departments and
the rate of gross profit is uniform from year to year.

 Total selling expenses incurred were ` 2,50,000 for both the departments.
From the above information, prepare Departmental Trading Account and Profit & Loss
Account for the year ended 31st March 2020, after adjusting the unrealized departmental
profits, if any
[RTP May 2021]
Ans. Departmental Trading and Profit & Loss A/c for M/s Big Shopping Complex

For the year ended 31st March 2020

Details Deptt. P Deptt. Q Details Deptt. P Deptt. Q
(`) (`) (`) (`)
To Opening Stock 1,00,000 80,000 By Sales 20,00,000 30,00,000
To Purchases 13,00,000 18,20,000 By Closing 2,00,000 4,00,000
Stock

665
 To Gross Profit 8,00,000 15,00,000
22,00,000 34,00,000 22,00,000 34,00,000
To Selling Exp 1,00,000 1,50,000 By Gross 8,00,000 15,00,000
Profit
(in ratio of sales)
To Profit transferred to 7,00,000 13,50,000
General P&L A/c
8,00,000 15,00,000 8,00,000 15,00,000

General Profit and Loss A/c for M/s Big Shopping

Complex For the year ended 31st March 2020
Details Amount Details Amount (`)
(`)
To Stock Reserve Deptt. By Profit transferred from
P WN 1 & 2 Deptt. P 7,00,000
50% x (40,000 – 20,000) 10,000 Deptt. Q 13,50,000
Deptt. Q WN 1 & 3
40% x (60,000 – 30,000) 12,000
To Net Profit 20,28,000
20,50,000 20,50,000

Working Notes:

1. Gross Profit Ratios are: Deptt. P = 8,00,000 / 20,00,000 = 40% and

of Deptt. Q = 15,00,000 / 30,00,000 = 50%.

2. Stock Reserve for Deptt. P shall be adjusted as per the gross profit ratio of
Deptt. Q i.e. 50% (On Closing Stock – Opening Stock)

3. Stock Reserve for Deptt. Q shall be adjusted as per the gross profit ratio of

666
 Deptt. P i.e. 40% (On Closing Stock – Opening Stock)

Q12. Department X sells goods to Department Y at a profit of 50% on cost and to

Department Z at 20% on cost. Department Y sells goods to Department X and Z at a profit
of 25% and 15% respectively on sales. Department Z charges 30% profit on cost to
Department X and 40 profit on sale to Y.

Stocks lying at different departments at the end of the year are as under:
Dept. X Dept. Y Dept. Z
` ` `
Transfer from Department X 75,000 48,000
Transfer from Department Y 50,000 82,000
Transfer from Department Z 52,000 56,000

Calculate the unrealized profit of each department and also total unrealized profit.
[RTP Nov2020]

Ans. Calculation of unrealized profit of each department and total unrealized profit
Dept. X Dept. Y Dept. Z Total
` ` ` `
Unrealized Profit of:
Department X 75,000 x 50/150 48,000 x 20/120
= 25,000 = 8,000 33,000
Department Y 50,000 x .25 82,000 x .15
= 12,500 = 12,300 24,800
Department Z 52,000 x 30/130 56,000 x 40/100
= 12,000 = 22,400 34,400
92,200

Q13. M/s. Hero is a Departmental Store having three departments X, Y and Z. The

667
information regarding three departments for the year ended 31st March, 2021 are given
below:
Particulars Dept. X Dept. Dept. Z
Y
Opening Stock 18,000 12,000 10,000
Purchases 66,000 44,000 22,000
Debtors at end 7,500 5,000 5,000
Sales 90,000 67,500 45,000
Closing Stock 22,500 8,750 10,500
Value of furniture in each Department 10,000 10,000 5,000
Floor space occupied by each Dept. 1,500 1,250 1,000
(in Sq. ft.)
Number of employees in each 25 20 15
Department
Electricity consumed by each 300 200 100
Department (in units)

Additional Information:
Amount
(`)
Carriage inwards 1,500
Carriage outwards 2,700
Salaries 24,000
Advertisement 2,700
Discount allowed 2,250
Discount received 1,800

668
 Rent, Rates and Taxes 7,500
Depreciation on furniture 1,000
Electricity Expenses 3,000
Labour welfare expenses 2,400

Prepare Departmental Trading and Profit & Loss Account for the year ended
31st March, 2021 after providing provision for Bad Debts at 5%.
[RTP Nov2021]

Ans. In the Books of M/s Hero

Departmental Trading and Profit and Loss Account

for the year ended 31st March, 2021
Particulars Deptt.X Deptt. Deptt. Total Particular Deptt.X Deptt. Deptt. Total
Y Z s Y Z
` ` ` ` ` ` ` `
To Stock 18,000 12,000 10,000 40,000 By Sales 90,000 67,500 45,000 2,02,50
(opening) 0

To Purchases 66,000 44,000 22,000 1,32,00 By Stock 22,500 8,750 10,500 41,750
0 (closing)
To Carriage 750 500 250 1,500
Inwards
To Gross Profit 27,750 19,750 23,250 70,750
c/d (b.f.)
1,12,50 76,250 55,500 2,44,25 1,12,50 76,250 55,500 2,44,25
0 0 0 0
To Carriage 1,200 900 600 2,700 By Gross 27,750 19,750 23,250 70,750
Outwards Profit b/d

669
To Electricity 1,500 1,000 500 3,000 By 900 600 300 1,800

To Salaries 10,000 8,000 6,000 24,000 Discount

received
ToAdvertisemen 1,200 900 600 2,700
t
To Discount 1,000 750 500 2,250
allowed
To Rent, Rates 3,000 2,500 2,000 7,500
and Taxes
To Depreciation 400 400 200 1,000
To Provision for 375 250 250 875
Bad Debts @
5% of debtors
To Labour 1,000 800 600 2,400
welfare expenses
To Net Profit 8,975 4,850 12,300 26,125
(b.f.)
28,650 20,350 23,550 72,550 28,650 20,350 23,550 72,550

Working Note:
Basis of allocation of expenses
Carriage inwards Purchases (3:2:1)
Carriage outwards Turnover (4:3:2)
Salaries No. of Employees (5:4:3)
Advertisement Turnover (4:3:2)
Discount allowed Turnover (4:3:2)

670
 Discount received Purchases (3:2:1)
Rent, Rates and Taxes Floor Space occupied
(6:5:4)
Depreciation on furniture Value of furniture (2:2:1)
Labour welfare expenses No. of Employees (5:4:3)
Electricity expense Units consumed (3:2:1)
Provision for bad debts Debtors balances (3:2:2)

Q14. The following balances were extracted from the books of Beta. You are required to prepare
Departmental Trading Account and General Profit & Loss Account for the year ended 31st
December, 2020:
Particulars Deptt. A Deptt. B
Rs. Rs.
Opening Stock 3,00,000 2,40,000
Purchases 39,00,000 54,60,000
Sales 60,00,000 90,00,000

General expenses incurred for both the Departments were Rs. 7,50,000 and you are also supplied with
the following information:

(i) Closing stock of Department A Rs. 6,00,000 including goods from Department B for Rs.
1,20,000 at cost to Department A.

(ii) Closing stock of Department B Rs. 12,00,000 including goods from Department A for
Rs. 1,80,000 at cost to Department B.

(iii) Opening stock of Department A and Department B include goods of the value of Rs.
60,000 and Rs. 90,000 taken from Department B and Department A respectively at cost to
transferee departments.

(iv) The gross profit is uniform from year to year.

671
[MTP May 2021] ( 8 marks )
Ans. Departmental Trading Account for the year ended on 31st December, 2020
Particulars A B Particulars A B
Rs. Rs. Rs. Rs.
To Opening Stock 3,00,000 2,40,000 By Sales 60,00,000 90,00,000

To Purchases 39,00,000 54,60,000 By Closing Stock 6,00,000 12,00,000

To Gross Profit 24,00,000 45,00,000

66,00,000 1,02,00,000 66,00,000 1,02,00,000

General profit and loss account of Beta for the year ended on 31st December, 2020
Particulars Amount Particulars Amount
Rs. Rs.
To General expenses* 7,50,000 By Stock reserve (opening stock)

To Stock reserve (Closing Stock) Dept. A 30,000

Dept. A 60,000 Dept. B 36,000

Dept. B 72,000 By Gross Profit
To Net Profit 60,84,000 Dept. A 24,00,000
Dept. B 45,00,000

69,66,000 69,66,000

Working Notes:
Dept. A Dept. B
1. Percentage of Profit 24,00,000/60,00,000 x 10045,00,000/90,00,000 x 100
40% 50%

672
 2. Opening Stock reserve 60,000 x 50% = 30,000 90,000 X 40% = 36,000
3. Closing Stock reserve 1,20,000 x 50%=60,000 1,80,000 x 40% = 72,000

Q15. X Ltd has three departments A, B and C. From the particulars given below compute: (i) the
values of stock as on 31st Dec. 2020 and (ii) the departmental results showing actual amount of gross
profit.
A B C

Rs. Rs. Rs.

Stock (on 1.1. 2020) 24,000 36,000 12,000
Purchases 1,46,000 1,24,000 48,000
Actual sales 1,72,500 1,59,400 74,600
Gross Profit on normal selling 20% 25% 33 1/3%
price

During the year ended 31st Dec. 2020, certain items were sold at discount and these discounts were
reflected in the value of sales shown above. The items sold at discount were:
A B C

Rs. Rs. Rs.

Sales at normal price 10,000 3,000 1,000
Sales at actual price 7,500 2,400 600

[ MTP May 2021 ] ( 6 marks )

Ans. Calculation of Departmental Results (Actual Gross Profit)

A (Rs.) B (Rs.) C (Rs.)
Actual Sales 1,72,500 1,59,400 74,600
Add back: Discount (Refer 2,500 600 400
W.N.)

673
 Normal sales 1,75,000 1,60,000 75,000
Gross profit % on normal sales 20% 25% 33.33%
Normal gross profit 35,000 40,000 25,000
Less: Discount (2,500) (600) (400)
Actual gross profit 32,500 39,400 24,600

Computation of value of stock as on 31st Dec. 2020

Departments A B C

Rs. Rs. Rs.

Stock (on 1.1. 2020) 24,000 36,000 12,000
Add: Purchases 1,46,000 1,24,000 48,000
1,70,000 1,60,000 60,000
Add: Actual gross profit 32,500 39,400 24,600
2,02,500 1,99,400 84,600
Less: Actual Sales (1,72,500) (1,59,400) (74,600)
Closing stock as on 31.12.2020 30,000 40,000 10,000
(bal.fig.)
Working Note:

Calculation of discount on sales:

Departments A B C

Rs. Rs. Rs.

Sales at normal price 10,000 3,000 1,000
Less: Sales at actual price (7,500) (2,400) (600)
2,500 600 400

674
Q16. The following balances were extracted from the books of Beta. You are required to prepare
Departmental Trading Account and general Profit & Loss Account for the year ended 31st March,
2020:
Particulars Deptt. A Deptt. B
` `
Opening Stock 3,00,000 2,40,000
Purchases 39,00,000 54,60,000
Sales 60,00,000 90,00,000

General expenses incurred for both the Departments were ` 7,50,000 and you are also supplied with the
following information:

(i) Closing stock of Department A ` 6,00,000 including goods from Department B for ` 1,20,000
at cost to Department A.

(ii) Closing stock of Department B ` 12,00,000 including goods from Department A for ` 1,80,000
at cost to Department B.

(iii) Opening stock ofDepartment Aand Department Binclude goods ofthe value of ` 60,000 and
` 90,000 taken from Department B and Department A respectively at cost to transferee
departments.

(iv) The gross profit is uniform from year to year.

[MTP Nov 2020 ] ( 8 marks )
Ans. Departmental Trading Account for the year ended on 31st March, 2020
Particulars A B Particulars A B
` ` ` `
To Opening Stock 3,00,000 2,40,000 By Sales 60,00,000 90,00,000
To Purchases 39,00,000 54,60,000 By Closing Stock 6,00,000 12,00,000
To Gross Profit 24,00,000 45,00,000

675
 66,00,000 1,02,00,000 66,00,000 1,02,00,000

General profit and loss account of Beta for the year ended on 31 st March, 2020
Particulars Amount Particulars Amount
` `
To General expenses 7,50,000 By Stock reserve (opening
To Stock reserve stock)

(Closing Stock) Dept. A 30,000

Dept. A 60,000 Dept. B 36,000

Dept. B 72,000 By Gross Profit
To Net Profit 60,84,000 Dept. A 24,00,000
Dept. B 45,00,000
69,66,000 69,66,000

Working Notes:
Dept. A Dept. B
Percentage of Profit 24,00,000/60,00,000 x 100 = 45,00,000/90,00,000 x 100 =
40% 50%
Opening Stock reserve 60,000 x 50% = 30,000 90,000 X 40% = 36,000
Closing Stock reserve 1,20,000 x 50%=60,000 1,80,000 x 40% = 72,000

676
CHAPTER-12

Accounting for Branches including Foreign Branches

Q-1 On 31stMarch, 2019 Chennai Branch submitsthe following TrialBalance to its Head
Office at Lucknow:
Debit Balances ` in lacs

Furniture and Equipment 18

Depreciation on furniture 2
Salaries 25
Rent 10
Advertising 6
Telephone, Postage and Stationery 3
Sundry Office Expenses 1
Stock on 1st April, 2018 60
Goods Received from Head Office 288
Debtors 20
Cash at bank and in hand 8
Carriage Inwards 7
448
Credit Balances
Outstanding Expenses 3

677
 Goods Returned to Head Office 5
Sales 360
Head Office 80
448
Additional Information:

Stock on 31st March, 2019 was valued at ` 62 lacs. On 29th March, 2019 the Head
Office dispatched goods costing ` 10 lacs to its branch. Branch did not receive these
goods before 1st April, 2019. Hence, the figure of goods received from Head Office
does not include these goods. Also, the head office has charged the branch ` 1 lac for
centralized services for which the branch has not passed the entry.

You are required to :(i) pass Journal Entries in the books of the Branch to make the
necessary adjustments and (ii) prepare Final Accounts of the Branch including Balance
Sheet. [RTP-May’20]

Ans.(i) Books of Branch

Journal Entries

Dr. Cr.
Goods in Transit A/c Dr. 10
To Head Office A/c ` 10
(Goods dispatched by head office but not received by
branch before 1st April, 2019)
Expenses A/c
Dr. 1
To Head Office A/c
1
(Amount charged by head office for centralized services)

(` in lacs)
(ii) Trading and Profit & Loss Account of the
Branch for the year ended 31st

678
 March, 2019
` in lacs ` in lacs
To Opening Stock 60 By Sales 360
To Goods received from By Closing Stock 62
Head Office 288
Less: Returns (5) 283
To Carriage Inwards 7
To Gross Profit c/d 72

422 422
To Salaries 25 By Gross Profit b/d 72
To Depreciation on Furniture 2
To Rent 10
To Advertising 6
To Telephone, Postage & Stationery 3
To Sundry Office Expenses 1
To Head Office Expenses 1
To Net Profit Transferred to
Head Office A/c 24

72 72

Balance Sheet as on 31st March, 2019

Liabilities ` in lacs Assets ` in lacs
Head Office 80 Furniture & 20
Equipment

679
 Add: Goods in 10 Less: Depreciation (2) 18
transit
Head Office 1 Stock in hand 62
Expenses
Net Profit 24 115 Goods in Transit 10
Outstanding 3 Debtors 20
Expenses
Cash at bank and in 8
hand
118 118

Q-2 M/s Rani & Co. has head office at Singapore and branch at Delhi (India). Delhi
branch is an integral foreign operation of M/s Rani & Co. Delhi branch furnishes you
with its Trial Balance as on 31st March, 2019 and the additional information
thereafter: ( Rupees in thousands)
Dr. Cr.

Stock on 1st April, 2018 600 -

Purchases and Sales 1,600 2,400
Sundry Debtors and Creditors 800 600
Bills of Exchange 240 480
Wages 1,120 -
Rent, rates and taxes 720 -
Sundry Expenses 320 -
Computers 600 -
Bank Balance 520 -

680
 Singapore Office A/c - 3,040
Total 6,520 6,520
Additional information:

(a) Computers were acquired from a remittance of Singapore dollar 12,000 received from
Singapore Head Office and paid to the suppliers. Depreciate Computers at the rate of
40% for the year.

(b) Closing Stock of Delhi branch was ` 15,60,000 on 31st March, 2019.

(c) The Rates of Exchange may be taken as

follows: (i) on 1.4.2018 @ ` 50 per
Singapore Dollar
(ii) on 31.3.2019 @ ` 52 per Singapore Dollar

(iii) Average Exchange Rate for the year @ ` 51 per Singapore Dollar.

(iv) Conversion in Singapore Dollar shall be made up to two decimal accuracies.

(d) Delhi Branch Account showed a debit balance of Singapore Dollar 59,897.43 on
31.3.2019 in the Head office books and there were no items pending for
reconciliation.

In the books of Head office, you are required to prepare:

(1) Revenue statement for the year ended 31st March, 2019 (in Singapore Dollar)

(2) Balance Sheet as on that date. (In Singapore Dollar)

[Sugg. May ‘19, 8 Marks]

Ans. Revenue Statement

for the year ended 31st March, 2019

Singapore Singapore dollar
dollar

681
 To Opening Stock 12,000.00 By Sales 47,058.82
To Purchases 31,372.55 By Closing stock 30,000.00
To Wages 21,960.78 (15,60,000/52)
To Gross profit b/d 11,725.49

77,058.82 77,058.82
To Rent, rates and 14,117.65 By Gross 11,725.49
taxes To Sundry 6,274.51 profit c/d By 13,466.67
Expenses Net loss b/d
To Depreciation on
4,800.00
computers (Singapore
dollar 12,000 x 0.4) 25,192.16

25,192.16

Balance Sheet of Delhi

Branch as on 31st March,
2019
Liabilities Singapore Assets Singapore Singapore

dollar dollar dollar

Singapore Office A/c Computers 12,000.00
59,897.43
Less: Net Loss (13,466.67) 46,430.76 Less: Depreciation(4,800.00) 7,200.00
Sundry creditors 11,538.46 Closing stock 30,000.00
Bills payable 9,230.77 Sundry debtors 15,384.61
Bank balance 10,000.00

682
 Bills receivable 4,615.38
67,199.99 67,199.99
Working Note:
M/s Rani & Co.

Delhi Branch Trial Balance in (Singapore $) as on 31st March,

2019

683
 Conversion rate per Dr. Cr.
Singapore Singapore Singapore
Dollar (` )
dollar dollar
Stock on 1.4.18 6,00,000.00 50 12,000.00 -
Purchases and 16,00,000.00 24,00,000.00 51 31,372.55 47,058.82
sales
Sundry Debtors
and
Creditors 8,00,000.00 6,00,000.00 52 15,384.61 11,538.46
Bills of 2,40,000.00 4,80,000.00 52 4,615.38 9,230.77
exchange
Wages 11,20,000.00 51 21,960.78 -
Rent, rates and 7,20,000.00 51 14,117.65 -
taxes
Sundry 3,20,000.00 51 6,274.51 -
Expenses
Computers 6,00,000.00 - 12,000.00 -
Bank balance 5,20,000.00 52 10,000.00 -
Singapore - 59,897.43
office A/c
1,27,725.48 1,27,725.48
Q-3 Ayan Ltd. invoices goods to its branch at cost plus 33.3 %
From the following particulars prepare
Branch Stock Account, Branch Stock Adjustment Account and Branch Profit and Loss Account as
they would appear in the books of head office.

684
 Rs.
Stock at commencement at Branch at invoice Price 36,60,000
Stock at close at Branch at Invoice Price 2,88,000
Goods sent to Branch during the year at invoice price (including goods 24,00,000
invoiced at ` 48,000
to Branch on 31.03.2018 but not received by Branch before close of the
year).
Return of goods to head office (invoice Price) 1,20,000
Credit Sales at Branch 1,20,000
Invoice value of goods pilfered 24,000
Normal loss at Branch due to wastage and deterioration of stock (at invoice 36,000
price)
Cash Sales at Branch 21,60,000
Ayan closes its books on 31st March, 2018.
[Sugg. May ‘18, 10 Marks]
Ans. In the books of Head Office
Branch Stock Account
Particular Rs. Particular Rs.
To Balance b/d 3,60,000 By Bank A/c (cash Sales) 21,60,000
To Goods sent to 24,00,000 By Branch Debtors A/c (Credit Sales) By Goods 1,20,000
Branch A/c sent to Branch A/c (Returns to H.O.)
To Branch 36,000 By Branch Adjustment A/c* 1,20,000
Adjustment (Rs.24,000 x 25/100)
A/c balancing fig. By Branch P&L A/c* (Cost of
(Surplus)*** Abnormal Loss)

685
 By Branch Adjustment A/c** (invoice 6,000
price of normal loss
18,000
By Balance c/d:
In hand in transit 36,000

2,88,000
48,000
27,96,000 27,96,000
*Alternative, combined position for the amount of Rs.24,000 may be passed through Goods
pilfered account.

** Alternatively, it may first be transferred to normal Loss account which may ultimately
be closed by transfer to Branch Adjustment account. The final amount of net profit will
however remain same.

*** It has been considered that the surplus may be due to sale of goods by branch at price
higher than invoice price.

686
 Branch Stock Adjustment Account
Particulars Rs. Particulars Rs.
To Branch Stock A/c 6,000 By Stock Reserve A/c 90,000
(Loading on Abnormal Loss) (Rs. 3,60,000x25/100)
To Branch Stock A/c 36,000 By Goods Sent to Branch A/c 5,70,000
(Normal Loss) (Rs.24,00,000 - Rs.1,20,000) x 25/100
To Stock Reserve A/c 84,000 By Branch Stock A/c (Surplus) 36,000
(Rs.3,36,000x25/100)
To Gross Profit t/f to P & LA/c5,70,000
6,96,000 6,96,000
Branch Profit and Loss Account
Particulars Rs. Particulars Rs.
To Branch Stock A/c 18,000 By Branch 5,70,000
(Cost of Abnormal Adjustment A/c
Loss) 5,52,000 (Gross Profit)
To Net Profit t/f to General 5,70,000 5,70,000
P&LA/c
Q-4 M & S Co. of Lucknow has a branch in Canberra, Australia (as an integral foreign
operation of M & S Co.). At the end of 31st March 2019, the following ledger balances
have been extracted from the books of the Lucknow office and the Canberra.
Lucknow office (Rs. Canberra Branch
In thousand) (Aust. Dollars in
thousand)
Dr. Cr. Dr. Cr.
Capital 2,000
Reserves & Surplus 1,000

687
Land 500
Buildings (Cost) 1,000
Buildings Dep. 200
Reserves
Plant and Machinery 2,500 200
(Cost)
Plant and Machinery
Dep.
Reserves 600 130
Debtors/Creditors 280 200 60 30
Stock as on 1- 4-2018 100 20
Branch Stock Reserve 4
Cash & Bank 10 10
Balances
Purchases/Sales 240 520 20 123
Goods sent to Branch 100 5
Managing Partner's 30
Salary
Wages and Salary 75 45
Rent 12
Office Expenses 25 18
Commission Receipts 256 100
Branch/HO Current 120 7
Account
4,880 4,880 390 390

688
 The following information is also available:

(i) Stock as at 31st March,

2019 Lucknow Rs.
1,50,000
Canberra A$ 3125 (all stock is out of purchases made at Abroad)

(ii) Head Office always sent goods to the Branch at cost plus 25%

(iii) Provision is to be made for doubtful debts at 5%

(iv) Depreciation is to be provided on Buildings at 10% and on Plant and Machinery at 20%
on written down value.

You are required to:

(1) Convert the Branch Trial Balance into rupees by using the following exchange rates:
Opening rate 1 A $ = Rs. 50
Closing rate 1 A $ = Rs. 53
Average rate 1 A $ = Rs. 51.00
For Fixed Assets 1 A $ = Rs. 46.00
(2) Prepare Trading and Profit and Loss Account for the year ended 31st March 2019
showing to the extent possible H.O. results and Branch results separately. [MTP
Oct.‘19, 10 Marks]
Ans.

689
 M & S Co. Ltd.

Canberra, Australia Branch Trial

Balance As on 31st

($ ‘thousands) (Rs. ‘thousands)

Dr. Cr. Conversion Dr. Cr.
rate per $
Plant & Machinery (cost) 200 Rs. 46 9,200
Plant & Machinery Dep. Reserve 130 Rs. 46 5,980
Trade receivable/payable 60 30 Rs. 53 3,180 1,590
Stock (1.4.2018) 20 Rs. 50 1,000
Cash & Bank Balances 10 Rs. 53 530
Purchase / Sales 20 123 Rs. 51 1,020 6,273
Goods received from H.O. 5 Actual 100
Wages & Salaries 45 Rs. 51 2,295
Rent 12 Rs. 51 612
Office expenses 18 Rs. 51 918
Commission Receipts 100 Rs. 51 5,100
H.O. Current A/c 7 Actual 120
18,855 19,063
Foreign Exchange Loss (bal. fig.) 208
390 390 19,063 19,063
Closing stock 3.125 53 165.625

690
Trading and Profit & Loss Account for the year ended 31st March, 2019

(Rs.’000)

H.O. Branch Total H.O. Branch Total

To Opening Stock 100 1,000.000 1,100.000 By Sales 520 6,273.000 6,793.000
To Purchases 240 1,020.000 1,260.000 By Goods sent

To Goods to Branch 100 - 100.000

received
fromHead - 100.000 100.000 By Closing Stock 150 165.625 315.625
Office
To Wages & 75 2,295.000 2,370.000
Salaries
To Gross profit 355 2,023.625 2,378.625
c/d
770 6,438.625 7,208.625 770 6,438.625 7,208.625
To Rent - 612.000 612.000 By Gross profit 355 2,023.625 2,378.625
b/d
To Office expenses 25 918.000 943.000 By Commission
To Provision for receipts 256 5,100.000 5,356.000
doubtful debts 14 159.000 173.000

@ 5%
To Depreciation 460 644.000 1,104.000
(W. N.)
To Balance c/d 112 4,790.625 4,902.625

611 7,123.625 7,734.625 611 7,123.625 7,734.625

691
 Working Note:

Calculation of Depreciation
H. O Branch
Rs. ‘000 Rs. ‘000
Building. Cost 1,000
Less: Dep. Reserve (200)
800
Depreciation @ 10% (A) 80
Plant & Machinery Cost 2,500 9,200
Less: Dep. Reserve (600) (5,980)
1,900 3,220
Depreciation @ 20% (B) 380 644
Total Depreciation (A+B) 460 644
Note: As the closing stock of Branch does not consist any stock transferred from M& S Co.,
there is no need to create closing stock reserve. But the opening branch stock reserve has to
be reversed in the P&L A/c.

Q-5 XYZ is having its Branch at Kolkata. Goods are invoiced to the branch at 20% profit on
sale. Branch has been instructed to send all cash daily to head office. All expenses are
paid by head office except petty expenses which are met by the Branch Manager.

692
 From the following particulars, you are required to prepare branch account in the
books of Head Office.
Rs. Rs.
Stockon 1st April 2017 (invoice 30,000 Discount allowed to debtors 160
price)
Sundry Debtors on 1st April, 18,000 Expenses paid by head office:
201 7
Cash in hand as on 1st April, - Rent 1,800
2017
Office furniture on 1st April, 3,000 Salary 3,200
2017
Goods invoiced from the head Stationery & Printing 800
office (invoice price) 1,60,00
0
Goods returned to Head Office 2,000 Petty expenses paid by the branch 600
(Invoice price)
Goods returned by debtors 960 Depreciation to be provided on
branch
Cash received from debtors 60,000 furniture at 10% p. a.
Cash Sales 1,00,00 Stockon 31st March, 2018
0
Credit sales 60,000 (At invoice price) 28,00
0
[MTPMarch‘19,MTPMarch‘18,8Marks]

Ans In the books of Head Office - XYZ Kolkata

Branch Account (at invoice)
693
 Rs. Rs.
To Balance b/d By Stock reserve (opening) By 6,000
Stock 30,000 Remittances:
Debtors 18,000 Cash Sales 1,00,000
Cash from Debtors 60,000
Furniture 3,000
Less; Petty expenses (600)
To Goods sent to 1,60,000 1,59,400
By Goods sent to branch (loading)
branch
By Goods returned by branch
ToGoods returned by 400 32,000
(Return to H.O.)
branch (loading)
By Balance c/d Stock
To Bank (expenses paid
Debtors
by H.O.)
Furniture (3,000-300)
Rent 1 ,800 2,000
Salary3,200
Stationary & printing 800
5,800 28,000
To Stock reserve 5,600 16,880
(closing)
To Profit transferred to 2,700
General Profits Loss 24,180
A/c
2,46,980 2,46,980
Working Note:
Debtors Account
Rs. Rs.
To Balance c/d 18,000 By Cash account 60,000
To Sales account (credit) 60,000 By Sales return account 960

694
 By Discount allowed account 160
By Balance c/d 16,880
78,000 78,000

Note:In the absence of opening cash balance, remittance to Head Office has been made
after payment of petty expenses.
Q-6 On 31st December, 2016 the following balances appeared in the books of Kolkata
Branch of an English firm having its HO office in New York:
Amount in Rs. Amount in
Rs.
Stock on 1st Jan, 2016 2,34,000
Purchases and Sales 15,62,500 23,43,750
Debtors and Creditors 7,65,000 5,10,000
Bills Receivable and Payable 2,04,000 1,78,500
Salaries and Wages 1,00,000 -
Rent, Rates and Taxes 1,06,250 -
Furniture 91,000 -
Bank A/c 5,68,650
New York Account - 5,99,150
36,31,400 36,31,400
Stock on 31st December, 2016 was Rs. 6,37,500.
Branch account in New York books showed a debit balance of $ 13,400 on 31st
December, 2016 and Furniture appeared in the Head Office books at $ 1,750.
The rate of exchange on 31st December, 2015 was Rs. 52 and on 31st December, 2016 was
Rs. 51. The average rate for the year was Rs. 50.
Prepare in the Head Office books the Profit and Loss a/c and the Balance Sheet of the

695
 Branch.
[MTPApril‘19, MTPApril‘18,10Marks]
Ans. In the books of English Firm (Head Office in New York)
Kolkata Branch
Profit and Loss Account for the year ended 31st December, 2016
$ $
To Opening Stock 4,500 By Sales 46,875
To Purchases 31,250 By Closing stock (6,37,500 / 12,500
To Gross profit c/d 23,625 51)
59,375 59,375
To salaries 2,000 By Gross profit b/d 23,625
To Rent, rates and taxes 2,125
To exchange translation 2,000
loss
To Net Profit c/d 17,500

23,625 23,625

Balance Sheet of Kolkata Branch as on 31st December, 2016

Liabilities $ Assets $
Head office A/c 13,400 Furniture 1,750
Add: Net profit 17,500 30,900 Closing Stock 12,500
Trade creditors 10,000 Trade Debtors 15,000
Bills Payable 3,500 Bill Receivable 4,000
Cash at Bank 11,150
44,400 44,400

696
 Working Note:
Require for calculation of Exchange Translation Loss
Kolkata Branch Trail Balance (converted in $) as on 31st December, 2016
Dr. Cr. Conversion Dr. Cr.
Rs. Rs. rate $ $
Stock on 1st Jan., 2016 2,34,000 52 4,500
Purchases & Sales
15,62,500 23,43,750 50 31,250 46,875
Debtors & creditors 5,10,000
7,65,000 51 15,000 10,000
Bills Receivable and Bills
2,04,000 1,78,500 51 4,000 3,500
Payable Salaries and wages
1,00,000 50 2,000
Rent, Rates and Taxes
Furniture 1,06,250 50 2,125

Bank A/c 91,000 1,750

5,68,650 51 11,150
New York Account
5,99,150 13,400
Exchange translation loss (bal. fig.)
2,000
36,31,400 73,775
36,31,400 73,775

Q-7 M/s Heera & Co. has head office at U.S.A. and branch in Patna (India). Patna
branch is an integral foreign operation of Heera & Co. Patna branch furnishes you with
its trial balance as on 31stMarch, 2018 and the additional information given
thereafter: (Rupees in thousands)
Dr. Cr.

Stock on 1st April, 2017 300

Purchases and Sales 800 1,200
Sundry Debtors & Creditors 400 300

697
 Bills of Exchange 120 240
Wages & Salaries 560 -
Rent, Rates & Taxes 360 -
Sundry Charges 160 -
Plant 240 -
Bank Balance 420 -
New York Office A/c - 1,620
3,360 3,360
Information:

(a) Plant was acquired from a remittance of US $ 6,000 received from USA head office
and paid to the suppliers. Depreciate Plant at 60% for the year.
(b) Unsold stock of Patna branch was worth Rs. 4,20,000 on 31st March, 2018.

(c) The rates of exchange may be taken as follows:

- On 01.04.2017 @ Rs. 55 per US $

- On 31.03.2018 @ Rs. 60 per US $

- Average exchange rate for the year @ Rs.58 per

US $ Conversion in $ shall be made up to two
decimal accuracy.
You are asked to prepare in US dollars the revenue statement for the year ended 31st March,
2018 and the balance sheet as on that date of Patna branch as would appear in the books of USA
head office of Heera & Co. You are informed that Patna branch account showed a debit balance of
US $ 29845.35 on 31.3.2018 in USA books and there were no items pending reconciliation.
[MTP Aug. ‘18, 12 Marks]
Ans. M/s Heera & Co.
Patna Branch Trial Balance in (US $) as on 31st March, 2018

698
 Conversion Dr. Cr.
rate per US $ US $ US $
(Rs.)
Stock on 1.4.15 55 5,454.55 –
Purchases and sales 58 13,793.10 20,689.66
Sundry debtors and creditors 60 6,666.67 5,000.00
Bills of exchange 60 2,000.00 4,000.00
Wages and salaries 58 9,655.17 -
Rent, rates and taxes 58 6,206.90 -
Sundry charges 58 2,758.62 -
Plant – 6,000.00 -
Bank balance 60 7,000.00 -
USA office A/c – - 29,845.35
59,535.01 59,535.01

Trading and Profit & Loss

Account for the yearended
31st March, 2018

US $ US $
To Opening Stock 5,454.55 By Sales 20,689.66
To Purchases 13,793.10 By Closing stock 7,000.00
To Wages and salaries 9,655.17 (Rs. 4,20,000/60)
By Gross Loss c/d 1,213.16

28,902.82 28,902.82

699
 To Gross Loss b/d 1,213.16 By Net Loss 13,778.68
To Rent, rates and taxes 6,206.90
To Sundry charges 2,758.62
To Depreciation on Plant 3,600.00
(US $ 6,000 × 0.6)

13,778.68 13,778.68

BalanceSheet of Patna
Branch as on 31st March,
2018

Liabilities US $ Assets US $ US $
USA Office A/c 29,845.35 Plant 6,000.00
Less: Net Loss (13,778.68) 16,066.67 Less: Depreciation (3,600.00) 2,400.00
Sundry creditors 5,000.00 Closing stock 7,000.00
Bills payable 4,000.00 Sundry debtors 6,666.67
Bills receivable 2,000.00
Bank 8balance 7,000.00
25,066.67
25,066.67

Q-8 On 31st December, 2016 the following balances appeared in the books of Kolkata
Branch of an English firm having its Head office in New York:

Amount in Rs. Amount in

Rs.
Stock on 1st Jan., 2016 2,34,000
Purchases and Sales 15,62,500 23,43,750
Debtors and Creditors 7,65,000 5,10,000
Bills Receivable and Payable 2,04,000 1,78,500

700
 Salaries and Wages 1,00,000 -
Rent, Rates and Taxes 1,06,250 -
Furniture 91,000 -
Bank A/c 5,68,650
New York Account - 5,99,150
36,31,400 36,31,400

Stock on 31st December, 2016 was Rs.6,37,500.

Branch account in New York books showed a debit balance of $ 13,400 on 31st
December, 2016 and Furniture appeared in the Head Office books at $1,750.

The rate of exchange on 31st December, 2015 was Rs. 52 and on 31st December, 2016 was
Rs. 51. The average rate for the year was Rs. 50.

Prepare in the Head Office books the Profit and Loss A/c and the Balance Sheet of the
Branch assuming branch to be an integral foreign operation of H.O.

[MTP Oct. ‘18, 10 Marks]

Ans. In the books of English Firm (Head Office in New York)

KolkataBranch Profitand Loss Account for the

year ended 31st December,2016

$ $
To Opening stock 4,500 By Sales 46,875
To Purchases 31,250 By Closing stock 12,500
To Gross profit c/d 23,625 (6,37,500 / 51)
59,375 59,375
To Salaries 2,000 By Gross profit b/d 23,625
To Rent, rates and taxes 2,125
To Exchange translation loss 2,000
To Net Profit c/d 17,500
23,625 23,625

701
 Balance Sheet of Kolkata
Branch as on 31st December, 2016
Liabilities $ $ Assets $
Head Office 13,400 Furniture 1,750
A/c Add: Net 17,500 30,900 Closing Stock 12,500
profit Trade 10,000 Trade
15,000
creditors Debtors Bills
3,500 4,000
Bills Receivable
11,150
Payable Cash at bank
44,400 44,400
Working Note:
Calculation of Exchange Translation Loss
Kolkata Branch Trial Balance (converted in $) as on 31st December,
2016
Dr. Cr.Conversion Dr. Cr.
Rs. Rs. rate ($) ($)
Stock on 1st Jan., 2016 2,34,000 52 4,500
Purchases & Sales 15,62,500 23,43,750 50 31,250 46,875
Debtors & creditors 7,65,000 5,10,000 51 15,000 10,000
Bills Receivable and Bills Payable 2,04,000 1,78,500 51 4,000 3,500
Salaries and wages 1,00,000 50 2,000
Rent, Rates and Taxes 1,06,250 50 2,125
Furniture 91,000 1,750
Bank A/c 5,68,650 51 11,150
New York Account 5,99,150 13,400
Exchange translation loss (bal. fig.) 2,000

702
 36,31,400 36,31,400 73,775 73,775
Q-9 From the following particulars relating to Pune branch for the year ending December 31,
2018, prepare Branch Account in the books of Head office.
`
Stock at Branch on January 1, 2018 10,000
Branch Debtors on January 1, 2018 4,000
Branch Debtors on Dec. 31, 2018 4,900
Petty cash at branch on January 1, 2018 500
Furniture at branch on January 1, 2018 2,000
Prepaid fire insurance premium on January 1, 2018 150
Salaries outstanding at branch on January 1, 2018 100
Good sent to Branch during the year 80,000
Cash Sales during the year 1,30,000
Credit Sales during the year 40,000
Cash received from debtors 35,000
Cash paid by the branch debtors directly to the Head 2,000
Office
Discount allowed to debtors 100
Cash sent to branch for Expenses:
Rent 2,000
Salaries 2,400
Petty Cash 1,000
Annual Insurance up to March 31, 2019 600 6,000
Goods returned by the Branch 1,000

703
 Goods returned by the debtors 2,000
Stock on December 31,2018 5000
Petty Cash spent by branch 850
Provide depreciation on furniture 10% p.a.
Goodscosting ` 1,200were destroyeddue tofire anda sum of ` 1,000wasreceivedfromthe
Insurance Company. [RTP Nov ‘19]

Ans. Pune Branch Account

Particulars ` Particulars ` `
To Opening Balance By Opening
Stock 10,000 Balance: 100
Debtors 4,000 Salaries
outstanding
Petty Cash 500 1,30,000
By Remittances:
Furniture 2,000 35,000
Prepaid Insurance 150 Cash sales

Cash received from 2,000

debtors Cash paid by
debtors directly to H.O.

704
 To Goods sent to 80,000 Received from
Branch Account Insurance Company 1,000 By
Goods sent to branch 1,68,000
To Bank (expenses) (Return of goods by the 1,000
Rent 2,000 branch to H.O.)
Salaries 2,400 By Closing Balances: Stock
Petty Cash 1,000 Petty Cash Debtors
Furniture (2,000 – 10% depreciation
Insurance 6,000
600 5,000
Prepaid insurance
To Net Profit 78,950 650
(1/4 x ` 600)
4,900
) 1,800

150
1,81,600 1,81,600
Working Note:
Calculation of petty cash balance at the end: `
Opening balance 500
Add: Cash received form the Head Office 1,000
Total Cash with branch 1,500
Less: Spent by the branch 850
Closing balance 650
Q-10 M/s ABC & Co. has head office at New York (U.S.A.) and branch in Bangalore (India).
Bangalore branch is an integral foreign operation of ABC & Co.

Bangalore branch furnishes you with its trial balance as on 31st March, 2018and the additional
information given thereafter:

705
 Dr. Cr
.
(Rupees in
thousands)
Stock on 1st April, 2017 300
Purchases and Sales 800 1,200
Sundry Debtors & Creditors 400 300
Bills of Excha 120 240
nge
Wages & Salaries 560 -
Rent, Rates & Taxes 360 -
Sundry Charges 160 -
Computers 240 -
Bank Balance 420 -
New York Office A/c _ 1,620
3,360 3,360
Additional Information:

(a) Computers were acquired from a remittance of US $ 6,000 received from New York head
office and paid to the suppliers. Depreciate computers at 60% for the year.
(b) Unsold stock of Bangalore branch was worth 4,20,000 on 31st March, 2018.

(c) The rates of exchange may be taken as follows:

- On 01.04.2017 @Rs.55 per US $

- On 31.03.2018 @Rs.60 per US $

- Average exchange rate for the year @ Rs.58 per US $

706
 - Conversion in $ shall be made up to two decimal accuracy.

You are asked to prepare in US dollars the revenue statement for the year ended 31st March,
2018 and the balance sheet as on that date of Bangalore branch as would appear in the
books of New York head office of ABC & Co. You are informed that Bangalore branch
account showed a debit balance of US $29845.35 on 31.3.2018 in New York books and
there were no items pending reconciliation.

[RTPMay‘19]

Ans. M/s ABC & Co.

Bangalore Branch TrialBalance in

(US $) as on 31st March,
2018
Conversion Dr. Cr.
rate per US US $ US $
$
Rs.
Stock on 1.4.17 55 5,454.55 -
Purchases and sales 58 13,793.10 20,689.66
Sundry debtors and creditors 60 6,666.67 5,000.00
Bills of exchange 60 2,000.00 4,000.00
Wages and salaries 58 9,655.17 -
Rent, rates and taxes 58 6,206.90 -
Sundry charges 58 2,758.62 -
Computers - 6,000.00 -
Bank balance 60 7,000.00 -
New York office A/c - - 29,845.35

707
 59,535.01 59,535.01
Q-11 Pass necessary Journal entries in the books of an independent Branch of M/s TPL
Sons, wherever required, to rectify or adjust the following transactions:

(i) Branch paid Rs.5,000 as salary to a Head Office Manager, but the amount paid has
been debited by the Branch to Salaries Account.

(ii) A remittance of Rs.1,50,000 sent by the Branch has not received by Head Office
on the date of reconciliation of Accounts.
(iii) Branch assets accounts retained at head office; depreciation charged for the year
Rs.15,000 not recorded by Branch.

(iv) HeadOffice expensesRs.75,000 allocatedtothe Branch, but not yet beenrecordedby

the Branch.
(v) Head Office collected Rs.60,000 directly from a Branch Customer. The intimation of
the fact has not been received by the Branch.

(vi) Goods dispatched by the Head office amounting to Rs.50,000, but not received by
the Branch till date of reconciliation.
(vii) Branch incurred advertisement expenses of Rs.10,000 on behalf of other Branches, but
not recorded in the books of Branch.

(viii) Head office made payment of Rs.16,000 for purchase of goods by branch, but
not recorded in branch books.

[RTP Nov ‘18]

Ans. Books of Branch

Journal Entries

Amount Rs.
Dr. Cr.

708
(i) Head Office Dr. 5,000
Account
To Salaries Account 5,000
(Being rectification of salary paid on behalf of
Head Office)
(ii) No entry in Branch Books is required.

(iii) Depreciation A/c Dr. 15,000

To Head Office Account 15,000
(Being depreciation of assets accounted for)

(iv) Dr. 75,000

Expenses Account
75,000
To Head Office Account

(Being allocated expenses of Head Office

recorded) Dr.

(v) Head Office Account

60,000
To Debtors Account
60,000
(Being adjustment entry for collection from
Branch Debtors directly by Head Office)
Dr.

(vi) Goods in-transit

Account 50,000
To Head Office 50,000
Account Dr.

(Being goods sent by Head Office still in-

709
 transit)
10,000
(vii) Head Office Account
50,000
To expenses Account Dr.

(Being expenditure incurred, wrongly

recorded in books)

(vii) Purchases account 16,000

A/c
To Head Office 16,000
Account
(Being purchases booked)
Q-12 AlphaLtd. hasa retailshop under the supervision of a manager.The ratio of gross profit
at sellingprice is constant at 25 per cent throughout the year to 31 st March, 2017.
Branch manager is entitled to a commission of 10 per cent of the profit earned by his
branch, calculated before charging his commission but subject to a deduction from such
commission equal in 25 per cent of any ascertained deficiency of branch stock. All
goods were supplied to the branch in head office.
The following details for the year ended 31 st March, 2017 are given as follows:
Rs. Rs.
Opening Stock (at cost) 74,736 Chargeable expenses 49,120
Goods sent to branch (at cost) 2,89,680 Closing Stock (Selling 1,23,328
Price)
Sales 3,61,280
Manager's commission paid on 2,400
account
From the above details, you are required to calculate the commission due to manager for the

710
year ended 31stMarch, 2017. [RTPMay‘18]
Ans. Step: Calculation of Deficiency
Branch stock account (at invoice price)
Particulars Rs. Particulars Rs.
To Opening Stock By Sales 3,61,280
(Rs.74,736 + 1/3 of 99,648
Rs.74,736) By Closing Stock 1,23,328
To Goods sent to Branch A/c 3,86,240
(Rs.2,89,680 + 1/3 of
Rs.2,89,680)
By Deficiency at sale
price [Balancing figure] 1,280
4,85,888 4,85,000
Step 2: Calculation of Net Profit before
Commission
Branch account
Particular Rs. Particular Rs.
To Opening [Rs.74,736 + 1/3 of 99,648 By Sales 3,61,280
Rs.74,736]
To Gross sent to Branch A/c 3,86,240 By Closing Stock 1,23,328
(Rs.2,89,680 + 1/3 of Rs.2,89,680)
To Expenses 49,120 By Stock Reserve A/c 24,912
To Stock Reserve A/c 30,832 By goods sent to Branch 96,560
A/c
(Rs.1,23,328x25/1 00]

711
 To Net Profit - subject to
manager's commission 40,240

6,06,080 6,06,080

Step 3: Calculation of Commission still due to manager

Rs.
A Calculation at 10% profit before charging his commission 4,024
[Rs.40,240x1 0/1 00]
B Less; 25% of cost of deficiency in stock (25% of (75% of (240)
Rs.1,280)
C Commission for the year [A-B] 3,784
D Less; Paid on account (2,400)
E Balance due (C-D) 1,384

Q13.Vijay & Co. of Jaipur has a branch in Patna to which goods are sent @ 20% above
cost. The branch makes both cash & credit sales. Branch expenses are paid direct from
Head office and the branch has to remit all cash received into the bank account of Head
office. Branch doesn't maintain any books of accounts, but sends monthly returns to the
head office.
Following further details are given for the year ended 31st March, 2020:
Amount
(`)
Goods received from Head office at Invoice Price 8,40,000
Goods returned to Head office at Invoice Price 60,000
Cash sales for the year 2019-20 1,85,000

712
 Credit Sales for the year 2019-20 6,25,000
Stock at Branch as on 01-04-2019 at Invoice price 72,000
Sundry Debtors at Patna branch as on 01-04-2019 96,000
Cash received from Debtors 4,38,000
Discount allowed to Debtors 7,500
Goods returned by customer at Patna Branch 14,000
Bad debts written off 5,500
Amount recovered from Bad debts previously 1,000
written off as Bad
Rent, Rates & taxes at Branch 24,000
Salaries & wages at Branch 72,000
Office Expenses (at Branch) 9,200
Stock at Branch as on 31-03-2020 at cost price 1,25,000

Prepare necessary ledger accounts in the books of Head office by following Stock and
Debtors method and ascertain Branch profit. [Sugg Nov2020]

Ans .Branch Stock Account

713
Q14. Give Journal Entries in the books of Branch to rectify or adjust the following:

(1) Branch paid ` 5,000 as salary to H.O supervisor, but the amount paid by
branch has been debited to salary account in the books of branch.

(2) Asset Purchased by branch for ` 25,000, but the Asset account was retained in

714
 H.O Books.

(3) A remittance of `8,000 sent by the branch has not been received by H.O.

(4) H.O collected ` 25,000 directly from the customer of Branch but fails to give
the intimation to branch.

(5) Remittance of funds by H.O to branch `5,000 not entered in branch books.
[Sugg Jan 2021]

Ans. Journal Entries in Books of Branch A

Particulars Dr. Cr.
Amount Amount
` `
(i) Head office account Dr. 5,000
To Salaries account 5,000
(Being the rectification of salary paid on
behalf of H.O.)
(ii) Head office account Dr. 25,000
To Bank / Liability A/c 25,000
(Being Asset purchased by branch but Asset
account retained at head office books)
(iii) No Entry in Branch Books
(iv) Head office account Dr. 25,000

To Debtors account 25,000

(Being the amount of branch debtors
collected by H.O.)
(v) Bank A/c Dr. 5,000
To Head Office 5,000

715
 (Remittance of Funds by H.O. to Branch)

Q15. Alpha Ltd. has a retail shop under the supervision of a manager. The ratio of
gross profit at selling price is constant at 25 per cent throughout the year to 31 st
March, 2020.Branch manager is entitled to a commission of 10 per cent of the profit
earned by his branch, calculated before charging his commission but subject to a
deduction from such commission equal to 25 per cent of any ascertained deficiency of
branch stock. All goods were supplied to the branch from head office.The following
details for the year ended 31st March, 2020 are given as follows:
` `
Opening Stock (at cost) 74,736 Chargeable expenses 49,120
Goods sent to branch (at cost) 2,89,680 ClosingStock (Selling Price) 1,23,328

Sales 3,61,280
Manager’s commission paid
on account 2,400

From the above details, you are required to calculate the commission due to manager for
the year ended 31st March, 2020.
[RTP May 2021]
Ans. In the books of Alpha Ltd.

Step 1: Calculation of Deficiency

Branch stock account (at invoice price)

Particulars ` Particulars `
To Opening Stock (` 74,736 + 1/3 By Sales 3,61,280
of ` 74,736) 99,648

716
 To Goods sent to Branch A/c By Closing Stock 1,23,328
(` 2,89,680 + 1/3 of ` 2,89,680) 3,86,240
By Deficiency at sale price
1,280
[Balancing figure]

4,85,888 4,85,888

Step 2: Calculation of Net Profit before Commission

Branch account
Particulars ` Particulars `
To Opening Stock 99,648 By Sales 3,61,280
[`74,736 + 1/3 of ` 74,736]
To Gross sent to Branch A/c (` 3,86,240 By Closing Stock 1,23,328
2,89,680 + 1/3 of
` 2,89,680)
To Expenses 49,120 By Stock Reserve 24,912
A/c
To Stock Reserve [` 1,23,328 x A/c 30,832 By Goods sent to 96,560
25/100] Branch
A/c
To Net Profit – subject to
manager’s commission 40,240
6,06,080 6,06,080

Step 3: Calculation of Commission still due to manager

`
A Calculation at 10% profit before charging
his commission [` 40,240 x 10/100] 4,024

B Less: 25% of cost of deficiency in stock [25% of (240)

717
 (75% of ` 1,280)]
C Commission for the year [A-B] 3,784
D Less: Paid on account (2,400)
E Balance due (C-D) 1,384

Q16. M & S Co. of Lucknow has an integral foreign branch in Canberra, Australia. At
the end of 31st March 2020, the following ledger balances have been extracted from the
books of the Lucknow office and the Canberra.
Lucknow Canberra
office (` In Branch (Aust.
thousand) Dollars in thousand)
Dr Cr. Dr. Cr.
.
Capital 2,000
Reserves & Surplus 1,000
Land 500
Buildings (Cost) 1,000
Buildings Dep. 200
Reserves
Plant and Machinery 2,500 200
(Cost)
Plant and Machinery
Dep.
Reserves 600 130
Debtors/Creditors 280 200 60 30
Stock as on 1- 4-2019 100 20

718
 Branch Stock Reserve 4
Cash & Bank Balances 10 10
Purchases/Sales 240 520 20 123
Goods sent to Branch 100 5
Managing Partner's 30
Salary
Wages and Salaries 75 45
Rent 12
Office Expenses 25 18
Commission Receipts 256 100
Branch/HO Current 120 7
Account
4,880 4,880 390 390

You are required to convert the Branch Trial Balance given above into rupees by using the
following exchange rates:

Opening rate 1 A $ = ` 50
Closing rate 1 A $ = ` 53
Average rate 1 A $ = ` 51.00
for Fixed Assets 1 A $ = ` 46.00
[RTP Nov2020]

Ans .M & S Co. Ltd.

Canberra, Australia Branch Trial Balance As on

31st March 2020

719
 ($ ‘thousands) (`
‘thousands)
Dr. Cr. Conversion rate per Dr. Cr.
$
Plant & Machinery (cost) 200 ` 46 9,200
Plant & Machinery Dep. 130 ` 46 5,980
Reserve
Trade receivable/payable 60 30 ` 53 3,180 1,590
Stock (1.4.2019) 20 ` 50 1,000
Cash & Bank Balances 10 ` 53 530
Purchase / Sales 20 123 ` 51 1,020 6,273
Goods received from H.O. 5 Actual 100
Wages & Salaries 45 ` 51 2,295
Rent 12 ` 51 612
Office expenses 18 ` 51 918
Commission Receipts 100 ` 51 5,100
H.O. Current A/c 7 Actual 120

18,855 19,063

Foreign Exchange Loss (bal. fig.) 208

390 19,063 19,063

390

Q17. Lal & Co. of Jaipur has a branch in Patna to which goods are sent @ 20% above
cost. The branch makes both cash & credit sales. Branch expenses are paid direct from
Head office and the branch has to remit all cash received into the bank account of Head
720
 office. Branch doesn't maintain any books of accounts but sends monthly returns to
the head office.Following further details are given for the year ended 31st March, 2020:
Amount
(`)
Goods received from Head office at Invoice Price 4,20,000
Goods returned to Head office at Invoice Price 30,000
Cash sales for the year 2019-20 92,500
Credit Sales for the year 2019-20 3,12,500
Stock at Branch as on 01-04-2019 at Invoice price 36,000
Sundry Debtors at Patna branch as on 01-04-2019 48,000
Cash received from Debtors 2,19,000
Discount allowed to Debtors 3,750
Goods returned by customer at Patna Branch 7,000
Bad debts written off 2,750
Amount recovered from Bad debts previously 500
written off as Bad
Rent, Rates & taxes at Branch 12,000
Salaries & wages at Branch 36,000
Office Expenses (at Branch) 4,600
Stock at Branch as on 31-03-2020 at cost price 62,500

Prepare necessary ledger accounts in the books of Head office by following Stock and
Debtors method and ascertain Branch profit.
[RTP Nov 2021]

Ans.

721
722
Q18. Moon Star has a branch at Virginia (USA). The Branch is a non-integral foreign operation of the
Moon Star. The trial balance of the Branch as at 31st March, 2020 is as follows:
Particulars US $
Dr. Cr.
Office equipments 48,000
Furniture and Fixtures 3,200
Stock (April 1, 2019) 22,400
Purchases 96,000
Sales --- 1,66,400
Goods sent from H.O 32,000

723
 Salaries 3,200
Carriage inward 400
Rent, Rates & Taxes 800
Insurance 400
Trade Expenses 400
Head Office Account --- 45,600
Sundry Debtors 9,600
Sundry Creditors --- 6,800
Cash at Bank 2,000
Cash in Hand 400

2,18,800 2,18,800

The following further information is given:

(1) Salaries outstanding $ 400.

(2) Depreciate office equipment and furniture & fixtures @10% p.a. at written down value.

(3) The Head Office sent goods to Branch for Rs.15,80,000.

(4) The Head Office shows an amount of Rs. 20,50,000 due from Branch. (5)
Stock on 31st March, 2020 -$21,500.
(6) There were no transit items either at the start or at the end of the year.

(7) On April 1, 2018 when the fixed assets were purchased the rate of exchange was Rs.
43 to one $. On April 1, 2019, the rate was 47 per $. On March 31, 2020 the rate was Rs.
50 per $. Average rate during the year was Rs. 45 to one $.

Prepare Trial balance incorporating adjustments given converting dollars into rupees and Trading,
Profit and Loss Account for the year ended 31st March, 2020 of the Branch as would appear in the
books of Moon Star for the purpose of incorporating in the main Balance Sheet.
724
[MTP May 2021] ( 8 marks )
Ans. In the books of Moon Star

Trial Balance (in Rupees) of Virginia (USA) Branch as on 31st March, 2020
Dr. Cr. Conversion Dr. Cr.
US $ US rate Rs. Rs.
$
Office Equipment 43,200 50 21,60,000
Depreciation on 4,800 50 2,40,000
Office
Equipment
Furniture and fixtures 2,880 50 1,44,000
Depreciation on 320 50 16,000
furniture and fixtures

Stock (1st April, 2019) 22,400 47 10,52,800

Purchases 96,000 45 43,20,000

Sales 1,66,40 45 74,88,000
0
Goods sent from H.O. 32,000 15,80,000
Carriage inward 400 45 18,000
Salaries (3,200+400) 3,600 45 1,62,000
Outstanding salaries 400 50 20,000
Rent, rates and taxes 800 45 36,000
Insurance 400 45 18,000
Trade expenses 400 45 18,000
Head Office A/c 45,60 20,50,000

725
 0
Trade debtors 9,600 50 4,80,000
Trade creditors 6,80 50 3,40,000
0
Cash at bank 2,000 50 1,00,000
Cash in hand 400 50 20,000
Exchange gain (bal. 4,66,800
fig.)
2,19,20 2,19,20 1,03,64,800 1,03,64,80
00 0

Q19. DM Delhi has a branch in London which is an integral foreign operation of DM. At the end of the
year 31st March, 2021, the branch furnishes the following trial balance in U.K. Pound:
Particulars £ £
Dr. Cr.

Fixed assets (Acquired on 1st April, 2017) 24,000

Stock as on 1st April, 2020 11,200

Goods from head Office 64,000

Expenses 4,800
Debtors 4,800
Creditors 3,200
Cash at bank 1,200
Head Office Account 22,800
Purchases 12,000
Sales 96,000

726
 1,22,000 1,22,000

In head office books, the branch account stood as shown below:

London Branch A/c

Particulars Amount Particulars Amount
Rs. Rs.
To Balance b/d 20,10,000 By Bank A/c 52,16,000
To Goods sent to branch 49,26,000 By Balance c/d 17,20,000
69,36,000 69,36,000

The following further information is given:

(a) Fixed assets are to be depreciated @ 10% p.a. on WDV.

(b) On 31st March, 2021:

Expenses outstanding- £ 400
Prepaid expenses - £ 200
Closing stock - £ 8,000
(c) Rate of Exchange:

1st April, 2017 - Rs. 70 to £ 1

1st April, 2020 - Rs. 76 to £ 1

31st March, 2021 - Rs. 77 to £ 1

Average - Rs. 75 to £ 1
You are required to prepare: (1) Trial balance, incorporating adjustments of outstanding and prepaid
expenses, converting U.K. pound into Indian rupees; and (2) Trading and profit and loss account for the
year ended 31st March, 2021 of London branch as would appear in the books of Delhi head office of DM.
[ MTP May 2021 ] ( 8 marks )

Ans. Trial Balance of London Branch as on 31st March, 2021

727
 Particulars U.K. Rate Per Dr. (Rs.) Cr. (Rs.)
Pound U.K. Pound
Fixed Assets 24,000 70 16,80,000
Stock (as on 1st April, 2020) 11,200 76 8,51,200

Goods from Head Office 64,000 - 49,26,000

Sales 96,000 75 72,00,000
Purchases 12,000 75 9,00,000
Expenses (4,800 + 400 – 200) 5,000 75 3,75,000
Debtors 4,800 77 3,69,600
Creditors 3,200 77 2,46,400
Outstanding Expenses 400 77 30,800
Prepaid expenses 200 77 15,400
Cash at Bank 1,200 77 92,400
Head office Account - 17,20,000
Difference in Exchange 12,400
92,09,600 92,09,600

Closing stock will be (8,000 × 77) = Rs. 6,16,000

Trading and Profit & Loss A/c for the yearended 31st March, 2021
Particulars Amount Particulars Amount
(Rs.) (Rs.)
To Opening Stock 8,51,200 By Sales 72,00,000
To Purchases 9,00,000 Closing Stock 6,16,000
To Goods from H.O.49,26,000 By
To Gross Profit 11,38,800

728
 78,16,000 Gross Profit 78,16,000
To Expenses 3,75,000 By Profit due 11,38,800
To Depreciation 1,68,000 Exchange
By to
To Net Profit 6,08,200 difference 12,400
11,51,200 11,51,200

Working Note:

Since London Branch is an integral foreign operation. Hence, (1) Fixed assets (cost and depreciation)
are translated using the exchange rate at the date of purchase of the assets. (2) Exchange difference
arising on translation of the financial statement is charged to Profit and Loss Account.

Q20. L Ltd. has its head office at Mumbai and two branches at Pune and Goa. The branches purchase
goods independently. Pune branch makes a profit of one third on cost and Goa branch makes a profit of
20% on sales. Goods are also supplied by one branch to another at the respective sales price. From the
following particulars, prepare the Trading and Profit and Loss Account of Pune branch and find out the
profit or loss made by it considering the reserve for unrealised profits:
Particula Pune Branch ` Goa Branch `
rs
Opening Stock 40,000 30,000
Purchases (Including Inter Branch transfers) 2,00,000 2,50,000
Sales 2,80,000 2,95,625
Chargeable Expenses 15,000 27,500
Closing Stock 30,000 43,500
Office and Administration Expenses 13,250 7,000
Selling and Distribution Expenses 15,000 10,000

Information:

729
 (i) Opening stock at Pune Branch includes goods of ` 10,000 (invoice price) taken from Goa
Branch,

(ii) Opening stock at Goa Branch includes goods of invoice price ` 17,000 taken from Pune
Branch,

(iii) The Pune Branch sales includes transfer of goods to Goa Branch at selling price ` 20,000

(iv) The sales of Goa Branch include transfer of goods to Pune Branch at selling price ` 15,000.

(v) Closing stock at Pune Branch includes goods received from Goa Branch (invoice price
` 5,000.

(vi) Closing stock at Goa Branch includes goods of ` 4,000 (invoice price).
[MTP Nov 2020 ] ( 6 marks )

Ans. Pune Branch Trading and Profit and Loss Account

Particulars ` Particulars `
To Opening Stock(including 40,000 By Sales (including `20,000 to 2,80,000
`10,000 from Goa Branch) Goa Branch)
To Purchases 2,00,000 By Closing Stock (including 30,000
`5,000 from Goa Branch)
To Chargeable Expenses 15,000
To Gross Profit c/d (before making
adjustment for unrealised profit) 55,000
3,10,000 3,10,000
To Stock Reserve (for unrealised 1,000 By Gross Profit b/d 55,000
profit in Closing Stock lying at
Goa Branch) (`4,000 x 25/100)
To Office & Adm. Expenses 13,250 By Stock Reserve (for 4,250
unrealised profit in Opening

730
 Stock lying at Goa Branch)
(` 17,000 x 25/100)
To Selling & Distribution Expenses 15,000
To Net Profit 30,000

59,250 59,250

Q21 .Ganesh Ltd. has head office at Delhi (India) and branch at New York. New York branch is an
integral foreign operation of Ganesh Ltd. New York branch furnishes you with its trial balance as on 31st
March, 2020 and the additional information given thereafter:
Dr. ($) Cr. ($)
Stock on 1st April, 2019 300 –
Purchases and sales 800 1,500
Sundry Debtors and creditors 400 300
Bills of exchange 120 240
Sundry expenses 1,080 –
Bank balance 420 –
Delhi office A/c – 1,080
3,120 3,120

The rates of exchange may be taken as follows:

 on 1.4.2019 @ ` 40 per US $

 on 31.3.2020 @ ` 42 per US $

 average exchange rate for the year @ ` 41 per US $.

New York branch account showed a debit balance of ` 44,380 on 31.3.2020 in Delhi books and there were
no items pending reconciliation.

You are asked to prepare trial balance of New York in ` in the books of Ganesh Ltd.
731
[MTP Nov 2020 ] ( 4 marks )

Ans, In the books of Ganesh Ltd.

New York Branch Trial Balance in (`)

as on 31st March, 2020
Conversion rate per US Dr. Cr
$ ` .
(` ) `
Stock on 1.4.19 40 12,000
Purchases and sales 41 32,800 61,500
Sundry debtors and creditors 42 16,800 12,600
Bills of exchange 42 5,040 10,080
Sundry expenses 41 44,280
Bank balance 42 17,640
Delhi office A/c – 44,380
1,28,560 1,28,560

732
CHAPTER-13

Accounts from Incomplete Records

Q-1 The books of account of Mr. Maan of Mumbai showed the following figures:
31.3.2018 ` 31.3.2019
Furniture & `
fixtures Stock 2,60,000 2,34,000
Debtors 2,45,000 3,20,000
Cash in hand & 1,25,000 ?
bank Creditors
1,10,000 ?
Bills payable
1,35,000 1,90,00
Outstanding
0
salaries 70,000
80,000
An analysis of the cash book revealed the 19,000
20,000
following:

`
Cash sales
16,20,000
Collection from debtors
Discount allowed to debtors 10,58,000

Cash purchases 20,000

Payment to creditors 6,15,000
Discount received from 9,73,000
creditors Payment for bills
32,000
payable Drawings for

733
 domestic expenses Salaries 4,30,000
paid
1,20,000
Rent paid
2,36,000
Sundry trade expenses
1,32,000

81,000

Depreciation is provided on furniture & fixtures @10% p.a. on diminishing balance method.
Mr. Maan maintains a steady gross profit rate of 25% on sales.

You are required to prepare Trading and Profit and Loss account for the year ended 31st March, 2019
and Balance Sheet as on that date. [RTP-May’ 20]
Ans. Trading & Profit and Loss Account In the books of
Mr. Maan for the year ended 31st March,
2019
Particulars Amount Particulars Amount

` `
To Opening stock 2,45,000 By Sales:
To Purchases: Cash 16,20,000
Cash 6,15,000 Credit (W.N.3) 11,00,000

734
Credit (W.N. 2) 15,00,000 By Closing stock 3,20,000
To Gross profit c/d 6,80,000

30,40,000 30,40,000
To Salaries (W.N.5) 2,37,000 By Gross profit b/d 6,80,000
To Rent 1,32,000 By Discount 32,000
received
To Sundry trade expenses 81,000
To Discount allowed 20,000
To Depreciation on furniture & 26,000
fixtures
To Net profit 2,16,000

7,12,000 7,12,000

Balance Sheet

as at 31st March, 2019

Liabilities Amount Amount

` `
Capital Fixed assets
Opening balance (W.N.7) 5,16,000 Furniture & fixtures 2,34,000
Add: Net profit 2,16,000 Current assets:
7,32,000 Stock 3,20,000
Less: Drawings 1,20,000 6,12,000 Debtors (W.N.4) 1,47,000

735
 Current liabilities & Cash & bank 2,01,000
provisions: (W.N.6)
Creditors 1,90,000
Bills payable 80,000
Outstanding salaries 20,000

9,02,000 9,02,000
Working Notes:

1. Bills Payable Account

` `
To Cash/Bank 4,30,000 By Balance b/d 70,000
To Balance c/d 80,000 By Trade creditors (Bal. fig.)4,40,000
5,10,000 5,10,000
2. Creditors Account
` `
To Cash/Bank 9,73,000 By Balance b/d 1,35,000
To Bills payable A/c 4,40,000 By Credit purchases (Bal. 15,00,000
(W.N.1) fig.)
To Discount received 32,000
To Balance c/d 1,90,000

16,35,000 16,35,000
3. Calculation of credit sales
`

736
 Opening stock 2,45,000
Add: Purchases

Cash purchase 6,15,000

Credit purchases 15,00,000

21,15,000

23,60,000
Less: Closing Stock
3,20,000
Cost of goods sold
Gross profit ratio on sales 20,40,000

Gross profit ratio on sales 25%

Total sales ` 20,40,000 × 100/75 27,20,000

16,20,000
Less: Cash sales
Credit sales 11,00,000
4. Debtors Account

` `
To Balance b/d 1,25,000 By Cash/Bank 10,58,000
To Credit sales (W.N.3) 11,00,000 By Discount allowed 20,000
By Balance c/d (Bal. fig.) 1,47,000
12,25,000 12,25,000

5. Salaries

`
Salaries paid during the year 2,36,000
Add: Outstanding salaries as on 31.3.2019 20,000

737
 2,56,000
Less: Outstanding salaries as on 31.03.2018 19,000
2,37,000
6. Cash / Bank Account
` `
To Balance b/d 1,10,000 By Cash purchases 6,15,000
To Cash sales 16,20,000 By Creditors 9,73,000
To Debtors 10,58,000 By Bills payable 4,30,000
By Drawings 1,20,000
By Salaries 2,36,000
By Rent 1,32,000
By Sundry trade expenses 81,000
By Balance c/d 2,01,000
27,88,000 27,88,000
7. Balance Sheet as at 31st March, 2018
` `
Creditors 1,35,000 Furniture & fixtures 2,60,000
Bills payable 70,000 Stock 2,45,000
Outstanding salaries 19,000 Debtors 1,25,000
Capital (Bal. fig.) 5,16,000 Cash & bank 1,10,000
7,40,000 7,40,000
Q-2 Archana Enterprises maintain their books of accounts under single entry system. The
Balance Sheet as on 31st March, 2018 was as follows:

Liabilities Amount (`) Assets Amount (`)

738
Capital A/c 6,75,000 Furniture & 1,50,000
Trade creditors 7,57,500 fixtures Stock 9,15,000
Outstanding exp. 67,500 Trade debtors’ 3,12,000
Prepaid insurance
3,000
Cash in hand & at bank
1,20,000
15,00,000 15,00,000

The following was the summary of cash and bank book for the year ended 31 st
March, 2019:

Receipts Amount (`) Payments Amount

(`)
Cash in hand & at Payment to trade creditors 1,24,83,000

Bank on 1st April, 2018 1,20,000 Sundry expenses paid 9,31,050

Cash sales 1,10,70,000 Drawings 3,60,000

Receipts from trade debtors 27,75,000 Cash in hand & at Bank 1,90,950

on 31st March, 2019

1,39,65,000 1,39,65,000
Additional Information:
(i) Discount allowed to trade debtors and received from trade creditors amounted to `
54,000 and `

42,500 respectively, (for the year ended 31st March, 2019)

(ii) Annual fire insurance premium of ` 9,000 was paidevery year on 1st August for
the renewal of the policy.
(iii) Furniture & fixtures were subject to depreciation @ 15% p.a. on diminishing
balance method.

739
 (iv) The following are the balances as on 31 st March, 2019:
Stock ` 9,75,000
Trade debtors ` 3,43,000
Outstanding expenses ` 55,200
(v) Gross profit ratio of 10% on sales is maintained throughout the year.

You are required to prepare Trading and Profit & Loss account for the year ended 31 st
March, 2019, and Balance Sheet as on that date. [Sugg.Nov.’19,10 Marks]

Ans. Tradingand Profit and Loss Account of Archana

Enterprises for the year ended 31st
March, 2019
` `
To Opening Stock 9,15,000 By Sales
To Purchases (W.N. 2) 125,97,000 Cash 110,70,000
To Gross profit c/d 13,93,000 Credit (W.N. 1) 28,60,000 139,30,000
(10% of 139,30,000) By Closing stock 9,75,000
149,05,000 149,05,000
To Sundry expenses (W.N. 4) 9,18,750 By Gross profit b/d 13,93,000
To Discount allowed 54,000 By Discount received 42,500
To Depreciation 22,500
(15% `1,50,000)
To Net Profit (b.f.) 4,40,250

14,35,500 14,35,500
Balance Sheet of Archana Enterprises as at 31st March, 2019
Liabilities Amount Assets Amount

740
 ` `
Capital Furniture & Fittings 1,50,000
Opening balance Less: Depreciation (22,500) 1,27,500
6,75,000
Less: Stock 9,75,000
Drawing(3,60,000)
3,15,000 Trade Debtors 3,43,000
Add: Net profit
for the years 3,000
4,40,250 7,55,250 Unexpired Insurance

Trade creditors
Cash in hand & at bank
(W.N. 3) 8,29,000 1,90,950
Outstanding 55,200
expenses
16,39,450 16,39,450
Working Notes:
1. Trade Debtors Account
` `
To Balance b/d 3,12,000 By Cash/Bank 27,75,000
To Credit sales28,60,000 By Discount allowed 54,000
(Bal. fig.) By Balance c/d 3,43,000
31,72,000 31,72,000
2. Memorandum Trading Account
` `
To Opening stock 9,15,000 By Sales 139,30,000

741
 To Purchases (Balancing figure)125,97,000 By Closing stock 9,75,000
To Gross Profit (10% on sales) 13,93,000

149,05,000 149,05,000
3. Trade Creditors Account
` `
To Cash/Bank 124,83,000 By Balance b/d 7,57,500
To Discount received 42,500 By Purchases (as calculated125,97,000
To Balance c/d in W.N. 2)
(Balancing figure) 8,29,000

133,54,500 133,54,500
4. Computation of sundry expenses to be charged to Profit & Loss A/c
`
Sundry expenses paid (as per cash and Bank book) 9,31,050
Add: Prepaid expenses as on 31–3–2018 3,000
9,34,050
Less: Outstanding expenses as on 31–3–2018 (67,500)
8,66,550
Add: Outstanding expenses as on 31–3–2019 55,200
9,21,750
Less: Prepaid expenses as on 31–3–2019 (Insurance paid till July, 2019)
(9,000 x 4/12) (3,000)
9,18,750
Q-3 The following balances appeared in the books of M/s Sunshine Traders:
As on As on

742
 31-03-2018 31-03-2019
(` ) (` )
Land and Building 2,50,000 2,50,000
Plant and Machinery 1,10,000 1,65,000
Office Equipment 52,500 42,500
Sundry Debtors 77,750 1,10,250
Creditors for Purchases 47,500 ?
Provision for office expenses 10,000 7,500

Stock ? 32,500
Long Term loan from ABC Bank @ 10% per 62,500 50,000
annum
Bank 12,500 ?
Capital 4,65,250 ?

Other information was as follows: In (`)

- Collection from Sundry Debtors 4,62,500

- Payments to Creditors for Purchases 2,62,500
- Payment of office Expenses 21,000
- Salary paid 16,000
- Selling Expenses paid 7,500
- Total sales 6,25,000
Credit sales (80% of Total sales)
2,70,000
- Credit Purchases
Cash Purchases (40% of Total Purchases)

743
 - Gross Profit Margin was 25% on cost
- Discount Allowed 2,750
- Discount Received 2,250
- Bad debts 2,250
- Depreciation to be provided as follows:

Land and Building - 5% per annum

Plant and Machinery - 10% per annum
Office Equipment - 15% Per annum

On 01.10.2018 the firm sold machine having book value, ` 20,000 (as on 31.03.2018) at a loss of
7,500. New machine was purchased on 01.01.2019.

- Office equipment was sold at its book value on 01.04.2018.

- Loan was partly repaid on 31.03.2019 together with interest for the year.

You are required to prepare:

(i) Trading and Profit & Loss account for the year ended 31st March, 2019.

(ii) Balance Sheet as on 31st March 2019.

[Sugg. May ‘19, 12 Marks]

Ans. Trading and Profit and Loss A/c for the year ended 31.3.2019

` `
To Opening stock (Balancing figure) 82,500 By Sales- Cash (W.N.1) 1,25,000
To Purchases-Cash 1,80,000 Credit 5,00,000 6,25,000
Credit (W.N.1) 2,70,000 4,50,000 By Closing stock 32,500
To Gross profit c/d 1,25,000
6,57,500 6,57,500

744
To Loss on sale of 7,500 By Gross profit b/d 1,25,000
Machine By Discount received 2,250
To Depreciation
Land & Building 12,500
Plant & Machinery11,875
Office Equipment 6,375 30,750
To Expenses paid
Salary 16,000
Selling Expenses 7,500
Office Expenses 18,500 42,000
To Bed debt 2,250
To Discount allowed 2,750
To Interest on loan 6,250
To Net profit 35,750

1,27,250 1,27,250
Balance Sheet as on 31-3-2019
Liabilities ` Assets `
Capital (Balancing Figure) 4,65,250 Land & Building 2,50,000
Add: Net profit 35,750 5,01,000 Less: Depreciation (12,500) 2,37,500
Sundry creditors (W.N.3) 52,750 Plant & Machinery 1,65,000
Bank loan 50,000 Less: Depreciation (10,875) 1,54,125
Provision for expenses 7,500 Office Equipment 42,500
Less: Depreciation (6,375) 36,125
Debtors 1,10,250

745
 Stock 32,500
Bank balance (W.N.4) 40,750
6,11,250 6,11,250
Working Notes:

1. Calculation of Sales and Purchases

Total sales = ` 6,25,000
Cash sales = 20% of total sales (6,25,000) = ` 1,25,000
Credit sales = 80% of total sales (6,25,000)= 5,00,000
Gross Profit 25% on cost = 6,25,000 x 25 / 125= 1,25,000
Credit purchases = ` 2,70,000
Credit purchases = 60% of total
purchases
Cash purchases = 40% of total
purchases
Total purchases = 2,70,000 / 60 x 100 = ` 4,50,000
Cash purchases = 4,50,000 - 2,70,000 = ` 1,80,000
2. Plant & Machinery
` `
To Balance b/d 1,10,000 By Sale of Machinery A/c 20,000
To Cash-purchase (Bal. Fig.) 75,000 By Balance c/d 1,65,000
1,85,000 1,85,000
Depreciation on Plant & Machinery:
@ 10% p.a. on ` 20,000 for 6 months = 1,000
@ 10% p.a. on ` 90,000 (i.e., ` 1,10,000 - ` 20,000) = 9,000
@ 10% p.a. on ` 75,000 for 3 months (i.e., during the year) = 1,875

746
 11,875
Sale of Machinery Account
To Plant and Machinery 20,000 By Depreciation (20,000 x 10% x 1/2) 1000
By Profit and Loss, A/c 7,500
By Bank (Balancing figure) 11,500
20,000 20,000
3. Creditors Account
` `
To Cash 2,62,500 By Balance b/d 47,500
To Discount received 2,250 By Credit purchases (W.N.2)2,70,000
To Balance c/d (Bal. Fig.) 52,750

3,17,500 3,17,500
Debtors Account
` `
To Balance b/d (Given) 77,750 By Cash 4,62,500
To Sales (Credit) 5,00,000 By Discount allowed 2,750
By Bad debts 2,250
By Balance c/d 1,10,250
5,77,750 5,77,750
Provision for Office Expenses Account
` `
To Bank 21,000 By balance b/d 10,000
To balance c/d 7,500 By Expenses. (Bal. fig.)18,500
28,500 28,500
Bank Account

747
 ` `
To Balance b/d 12,500 By Creditors 2,62,500
To Debtors 4,62,500 By Purchases 1,80,000
To Office Equipment(sales) 10,000 By Expenses
` (16,000 + 7,500 + 21,000) 44,500
To Cash sales (W.N.1) 1,25,000 By Bank loan paid 18,750
To Machine sold 11,500 By Machine purchased (W.N.4) 75,000
By Balance c/d (Bal. Fig.) 40,750
6,21,500 6,21,500
Office Equipment Account

To balance b/d 52,500 By Sales 10,000

By balance c/d 42,500
52,500 52,500
Q-4 Aman, a readymade garment trader, keeps his books of account under single entry
system. On the closing date, i.e., on 31st March, 2017 his statement of affairs stood
as follows:
Liabilities Amount Assets Amount `
`
Aman’s Capital 4,80,000 Building 3,25,000
Loan 1,50,00 Furniture 50,000
Creditors 3,10,00 Motor car 90,000
Stock 2,00,000
Debtors 1,70,00
Cash in hand 20,000
Cash at bank 85,000
9,40,00 9,40,000

748
Riots occurred and a fire broke out on the evening of 31st March, 2018, destroying the books
of accounts. On that day, the cashier had absconded with the available cash. You are furnished
with the following information:
1. Sales for the year ended 31st March, 2018 were 20% higher than the previous year's sales,
out of which, 20% saleswere forcash. He always sellshis goodsat cost plus25%. There
were nocash purchases.
2. Collection from debtors amounted to ` 14,00,000, out of which ` 3,50,000 was received
in cash.
3. Businessexpensesamountedto ` 2,00,000,ofwhich` 50,000wereoutstandingon31st
March,2018and ` 60,000 paid by cheques.
4. Gross profit as per last year's audited accounts was ` 3,00,000.
5. Provide depreciation on building and furniture at 5% each and motor car at 20%.
6. His private records and the Bank Pass Book disclosed the following transactions for the
year 2017-18:
`
Payment to creditors (paid by cheques) 13,75,000
Personal drawings (paid by cheques) 75,000
Repairs (paid by cash) 10,000
Travelling expenses (paid by cash) 15,000
Cash deposited in bank 7,15,000
Cash withdrawn from bank 1,20,000
7. Stock level was maintained at ` 3,00,000 all throughout the year.
8. The amount defalcated by the cashier is to be written off to the Profit and Loss Account.

You are required to prepare Trading and Profit and Loss A/c for the year ended 31st March, 2018
and Balance Sheetas onthatdate of Aman. All the workingsshouldform part of theanswer.
[Sugg.Nov.’18,15 Marks]

749
Ans.Trading and Profit and Loss Account of Aman for the year ended 31st March, 2018
` `
To Opening Stock 2,00,000 By Sales 18,00,000
To Purchases (Bal. fig.) 15,40,000 By Closing Stock 3,00,000
To Gross Profit c/d 3,60,000
21,00,000 21,00,000

To Business Expenses 2,00,000 By Gross Profit b/d 3,60,00

To Repairs 10,000
To Depreciation:
Building 16,250
Machinery 2,500
Motor Car 18,000 36,750
To Travelling Expenses 15,000
To Loss by theft (cash defalcated 20,000
To Net profit 78,250
3,60,000 3,60,000
Balance Sheet of Aman as at 31st March, 2018
Liabilities ` ` Assets ` `
Capital 4,80,000 Building 3,25,000
Add: Less: Depreciation 16,250 3,08,750
Net Profit 78,250 Furniture 50,000
Drawings 75,000 4,83,250 Less: Depreciation 2,500 47,500
Loan 1,50,000 Motor Car 90,000
Less: Depreciation 18,000 72,000
Sundry Creditors 4,75,000 Stock in Trade 3,00,000

750
 Outstanding business Sundry Debtors 2,10,000
Expenses 50,000 Bank Balance 2,20,000
11,58,250 11,58,250
Working Notes:
1. Cash and BankAccount
Particular Cash Bank Particulars Cash Bank
To Balance b/d 20,000 85,000 By Payment to - 13,75,000
Creditors
To Collection from 3,50,000 10,50,000 By Business Expenses 90,000 60,000
Debtors
To Sales (18,00,000 x 3,60,000 - By Repair 10,000 -
20%)
To Cash (C) - 7,15,000 By Cash (C) 1,20,000
(withdrawal)
By Bank (c) 7,15,000
To Bank (C) 1,20,000 - By Travelling Expenses 15,000 -
By Private Drawings - 75,000
By Balance c/d 2,20,000
By Cash defalcated 20,000
(Balancing fig.)

8,50,000 18,50,000 8,50,000 18,50,000

2. Calculation of sales during 2017-18
Gross profit (last year i.e., for year ended 31- 3,00,000
3-2017)
Goods sold at cost plus 25% i.e., 20% of 15,00,000

751
 sales
Sales for 2016-17 3,00,000/0.2
Sales for 2017-18 (15,00,000 x 1.2) 18,00,000
Credit sales for 2017-18 17,40,000
(80% of
18,00,000)
3. Debtors Accounting

To Bal. b/d 1,70,000 By Cash 3,50,000

To Sales (18,00,000 x 80%)14,40, 000 By Bank 10,50,000
By Bal. c/d 2,10,000
16,10,000 16,10,000
4. Creditors Account
To Bank 13,75,000 By Bal. b/d 3,10,000
To Bal. c/d (bal. fig.) 4,75,000 By Purchases15,40,000
18,50,000 18,50,000

Q5. Mr. Aman is running a business of readymade garments. He does not maintain his books
of accounts under double entry system. While assessing the income of Mr. Aman for the
financial year 2018-19, Income Tax Officer feels that he has not disclosed the full income
earned by him from his business. He provides you the following information:
On 31st March, 2018
Sundry Assets Rs. 16,65,000
Liabilities Rs. 4,13,000
On 31st March, 2019
Sundry Assets Rs. 28,40,000

752
 Liabilities Rs. 5,80,000
Mr. Aman’s drawings for the year 2018-19 Rs. 32,000 per month
Income declared to the Income Tax Officer Rs. 9,12,000
During the year 2018-19, one life insurance policy of Mr.Aman was maturedand amount
received Rs. 50,000 was retained in the business.
State whether the Income Tax Officer's contention is correct. Explain by giving your working.
[MTP Oct.‘19, 4Marks]
Ans. Determination of Capital balances of Mr. Aman on 31.3.2018 and 31.3.2019
31.3.2018 31.3.2019
Rs. Rs.
Assets 16,65,000 28,40,000
Less: Liabilities (4,13,000) (5,80,000)
Capital 12,52,000 22,60,000

Determination of Profit by applying the method of the capital comparison

Rs.
Capital Balance as on 31-3-2019 22,60,000
Less: Fresh capital introduced (matured life insurance policy amount) (50,000)
22,10,000
Add: Drawings (Rs. 32,000 x 12) 3,84,000
25,94,000
Less: Capital Balance as on 1.4.2018 (12,52,000)
Profit 13,42,000
Income declared 9,12,000
Suppressed Income 4,30,000

753
The Income-tax officer’s contention that Mr. Aman has not declared his true income is correct.
Mr. Aman’s true income is in excess of the disclosed income by Rs. 4,30,000.

Note: Closing capital is increased due to fresh capital introduction, so it is deducted.

Closing capital was reduced due to withdrawal by proprietor; so, it is added back.

Q6. Ram carried on business as retail merchant. He has not maintained regular account books.
However, he always maintained Rs. 10,000 in cash and deposited the balance into the bank
account. He informs you that he has sold goods at profit of 25% onsales.
Following information is given to you:
Assets and Liabilities As on As on
1.4.2016 31.3.2017
Cash in Hand 10,000 10,000
Sundry Creditors 40,000 90,000
Cash at Bank 50,000 (Cr.) 80,000(Dr.)
Sundry Debtors 1,00,000 3,50,000
Stock in Trade 2,80,000 ?
Ram's capital 3,00,000
Analysis of his bank pass book reveals the following information:

(a) Payment to creditors Rs. 7,00,000

(b) Payment for business expenses Rs. 1,20,000

(c) Receipts from debtors Rs. 7,50,000

(d) Loan from Laxman Rs. 1,00,000 taken on 1.10.2016 at 10%
per annum

(e) Cash deposited in the bankRs. 1,00,000

He informs you that he paid creditors for goods Rs. 20,000 in cash and salaries Rs. 40,000
in cash. He has drawn Rs. 80,000 in cash for personal expenses. During the year Ram had

754
not introduced any additional capital. Surplus cash if any, to be taken as cash sales.
You are required to prepare:

(i) Trading and Profit and Loss Account for the year ended 31.3.2017.

(ii) Balance Sheet as at 31st March, 2017.

[MTPMarch‘19,12Marks]

Ans. Trading and Profit and Loss Account for the year ended 31st March, 2017
Rs. Rs.
To Opening stock 2,80,000 By Sales
To Purchases 7,70,000 Cash 2,40,000
To Gross Profit @ 25% 3,10,000 Creditor 10,00,000 12,40,000
By Closing Stock (bal.fig) 1,20,000
13,60,00 13,60,000
0
To Salaries 40,000 By Gross Profit 3,10,000
To Business expenses 1,20,000
To Interest on loan 5,000
(10% of 1,00,000*6/12)
To Net Profit 1,45,000

3,10,000 3,10,000

755
 Balance Sheet as at 31st March, 2017
Liabilities Rs. Rs. Assets Rs.
Ram’s capital: Cash in hand 10,000
Opening 3,00,000 Cash at Bank 80,000
Add: Net Profit 1,45,000 Sundry Debtors 3,50,000
4,45,000 Stock in trade 1,20,000
Less; Drawings (80,000) 3,65,000
Loan from Laxman 1,05,000
(Including interest
due)
Sundry Creditors 90,000

5,60,000 5,60,000

Working Notes:
1. Sundry Debtors Account
Rs. Rs.
To Balance b/d 1,00,000 By Bank A/c 7,50,000
To Credit sales (Bal.fig) 10,00,000 By Balance c/d 3,50,000
11,00,000 11,00,000
2. Sundry Creditor Account
Rs. Rs.
To Bank A/c 7,00,000 By Balance b/d 7,50,000
To Cash A/c 20,000 By Purchases (Bal. Fig) 7,70,000
To Balance c/d 90,000
8,10,000 8,10,000

756
 3. Cash and Bank Account
Cash Bank Cash Bank
Rs. Rs. Rs. Rs.
To Balance 10,000 By Balance 50,000
To b/d Sales 2,40,000 By b/d 1,00,000
To (bal. fig) 1,00,000 By Bank(C) 40,000
To Cash (C) 7,50,000 By Salaries 20,000 7,00,000
To Debtors 1,00,000 By Creditors 80,000
Laxman’s By Drawings 1,20,000
loan Business expenses
By Balance c/d 10,000 80,000
2,50,000 9,50,000 2,50,000 9,50,000

Q7. The following is the Balance Sheet of Chirag as on 31st March, 2015:

Liabilities Rs. Assets Rs.

Capital Account 48,000 Building 32,500
Loan 15,000 Furniture 5,000
Creditor 31,000 Motor car 9,000
Stock 20,000
Debtors 17,000
Cash in hand 2,000
Cash at bank 8,500
94,000 94,000
A riot occurredonthe nightof 31st March, 2016inwhich all books andrecordswere lost. The
cashier had

757
absconded with the available cash. He gives you the following information:
(a) His sales for the year ended 31st March, 2016 were 20% higher than the previous
year's. He always sells his goods at cost plus 25%; 20% of the total sales for the year
ended 31st March, 2016 were for cash. There were no cash purchases
(b) On 1st April, 2015 the stock level was raised to Rs. 30,000 and stock was maintained at
this new level all throughout the year.
(c) Collection from debtors amounted to Rs. 1,40,000 of which Rs. 35,000 was received in
cash, Business expenses amounted to Rs. 20,000 of which Rs. 5,000 was outstanding
on 31st March, 2016 and Rs. 6,000 was paid by cheques.
(d) Analysis of the Pass Book revealed the Payment to Creditors Rs. 1,37,500, Personal
Drawing Rs. 7,500, Cash deposited in Bank Rs. 71,500, and Cash withdrawn from
Bank Rs. 12,000.
(e) Gross profit as per last year's audited accounts was Rs. 30,000.
(f) Provide depreciation on Building and Furniture at 5% and Motor Car at 20%.
(g) The amount defalcated by the cashier may be treated as recoverable from him.
You are required to prepare the Trading and Profit and Loss Account for the year ended
31st March, 2016 andBalance Sheet as on that date.
[MTP April ‘19, 10 Marks]
Ans. Trading and Profit Loss Account for the year ending on 31st March, 2016
Particular Rs. Particular Rs.
To Opening Stock 20,000 By Sales 1,80,000
To Purchases (bal.fig.); 1,54,000 By Closing Stock 30,000
To Gross Profit c/d (@20% on sales) 36,000 2,10,000
To Sundry Business Expenses 20,0000 By Gross Profit b/d 36,000
To Depreciationon Building 1,625

758
 Furniture 250
Motor 1,800 3,675
To Net profit transferred to
Capital A/c 12,325

36,000 36,000

Balance Sheet as at 31st March, 2016

Liabilities Rs. Assets Rs.
Capital Account: Building 32,500
Opening Balance 48,000 Less; Depreciation (1,625) 30,875
Add: Net profit 12,325 Furniture 5,000
60,325 Less; Depreciation (250) 4,750
Less; Drawings (7,500) 52,825 Motor Car 9,000
Loan 15,000 Less; Depreciation (1,800) 7,200
Sundry Creditors 47,500 Stock in trade 30,000
Outstanding Expenses 5,000 Sundry Debtors 21,000
Cash at Bank 22,000
Sundry Advances (Amount
recoverable from Cashier) 4,500
1,20,325 1,20,325

759
Working Notes:

(i) Total Debtors Amount

Particular Rs. Particular Rs.

To Balance b/d 17,000 By Bank (Rs.1,40,000-Rs.35,000) 1,05,000
To Sales (80% of 1,44,000 By Cash A/c By 35,000
Rs.1,80,000) Balance c/d 21,000
1,61,000 1,61,000
(ii) Total Creditor Account
Particular Rs. Particular Rs.
To Bank 1,37,500 By Balance b/d 31,000
To Balance c/d 47,500 By Purchases 1,54,000
1,85,000 1,85,000
(iii) Cash Book
Particulars Cash Rs. Bank Rs. Particulars Cash Rs. Bank Rs.
To Balance b/d 2,000 8,500 By Business Expenses 9,000 6,000
To sales 36,000 - By drawings - 7,500
To Sundry Debtors 35,000 1,05,000 By Sundry Creditors - 1,37,500
To Cash (Contra) - 71,500 By Bank (Contra) 71,500 -
To Bank (Contra) 12,000 By Cash (Contra) - 12,000
By Defalcation (Bal.Fig) 4,500 -
By Balance c/d (Bal.Fig)
85,000 1,85,000 85,000 1,85,000

(iv)Last year’s Total Sales = Gross Profit x 100/20 = Rs.30,000 x 100/20 =

Rs.1,50,000

(v) Current year’s total Sales = Rs.1,50,000 + 20% of Rs.1,50,000 =

760
 Rs.1,80,000
(vi) Current year’s Credit Sales =Rs.1,80,000 x 80% = Rs.1,44,000

(vii) Cos of Goods Sold = Sales - G.P. = Rs.1,80,000 - Rs.36,000 =

Rs.1,44,000

(vii)Purchases = Cost of Goods Sold + Closing stock -

Opening Stock
= Rs.1,44,000 + Rs.30,000 - Rs.20,000 = Rs.1,54,000.
Q8. The following is the Balance Sheet of Chirag as on 31st March, 2015:
Liabilities Rs. Assets Rs.
Capital Account 48,000 Building 32,500
Loan 15,000 Furniture 5,000
Creditor 31,000 Motor car 9,000
Stock 20,000
Debtors 17,000
Cash in hand 2,000
Cash at bank 8,500
94,000 94,000
A riot occurred on the night of 31st March, 2016 in which all books and records were lost.
The cashier had absconded with the available cash. He gives you the following
information:
(a) Hissales for theyear ended31st March, 2016were 20%higher thanthe previousyear's. He
always sells his goods at cost plus 25%; 20% of the total sales for the year ended 31st
March, 2016 were for cash. There were no cash purchases
(b) On 1st April, 2015 the stock level was raised to Rs. 30,000 and stock was maintained at
this new level all throughout the year.
(c) Collection from debtors amounted to Rs. 1,40,000 of which Rs. 35,000 was received in
761
 cash, Business expenses amounted to Rs. 20,000 of which Rs. 5,000 was outstanding on
31st March, 2016 and Rs. 6,000 was paid by cheques.
(d) Analysis of the Pass Book revealed the Payment to Creditors Rs. 1,37,500, Personal
Drawing Rs. 7,500, Cash deposited in Bank Rs. 71,500, and Cash withdrawn from
Bank Rs. 12,000.
(e) Gross profit as per last year's audited accounts was Rs. 30,000.
(f) Provide depreciation on Building and Furniture at 5% and Motor Car at 20%.
(g) The amount defalcated by the cashier may be treated as recoverable from him.
You are required to prepare the Trading and Profit and Loss Account for the year ended 31st
March, 2016 and Balance Sheet as on that date.
[MTPApril‘18,10Marks]
Ans. Trading and Profit and Loss Account For the year ending on
31st March, 2016
Particulars Rs. Particulars Rs.
To Opening Stock 20,000 By Sales 1,80,000
To Purchases (bal.fig.); 1,54,000 By Closing Stock 30,000
To Gross Profit c/d (@20% on sales) 36,000 2,10,000
2,10,000
To Sundry Business Expenses 20,000 By Gross Profit b/d 36,000
To Depreciation on Building 1,625
Furniture 250
Motor 1,800 3,675
To Net profit transferred to Capital A/c 12,325

36,000 36,000

762
 Balance Sheet as at 31st March, 2016
Liabilities Rs. Assets Rs.
Capital Account: Building 32,500
Opening Balance 48,000 Less; Depreciation (1,625) 30,875
Add: Net profit 12,325 Furniture 5,000
60,325 Less; Depreciation (250) 4,750
Less; Drawings (7,500) 52,825 Motor Car 9,000
Loan 15,000 Less; Depreciation (1,800) 7,200
Sundry Creditors 47,500 Stock in trade 30,000
Outstanding Expenses 5,000 Sundry Debtors 21,000
Cash at Bank 22,000
Sundry Advances
(Amount
recoverable
from Cashier) 4,500
1,20,325 1,20,32
5
Working Notes:
(i) Total Debtors Account
Particulars Rs. Particulars Rs.
To Balance b/d 17,000 By Bank (Rs.1,40,000 - 1,05,000
To Sales (80% of Rs. 1,80,000) 1,44,0000 Rs.35,000) 35,000
By Cash 21,000
A/c By
Balance c/d

763
 1,61,000 1,61,000
(ii) Total Creditors Account
Particulars Rs. Particulars Rs.
To Bank 1,37,500 By balance b/d 31,000
To Balance c/d 47,500 By Purchases 1,54,000
1,85,000 1,85,000
(iii) Cash Book
Particulars Cash Bank Particulars Cash Bank
Rs. Rs. Rs. Rs.
To Balance b/d 2,000 8,500 By Business Expenses 9,000 6,000
To Sales 36,000 - By Drawings - 7,500
To Sundry Debtors35,000 1,05,000 By Sundry Creditors - 1,37,500
To Cash (Contra) - 71,500 By Bank (Contra) 71,500 -
To Bank (Contra) 12,000 By Cash (Contra) - 12,000
By Defalcation (Bal fig.) 4,500 -
By Balance c/d (Bal fig.)
22,000
85,000 1,85,000 85,000 1,85,000
(iv)Last year's Total Sales = Gross Profit x 100/20 = Rs. 30,000 x 100/20 =
Rs. 1,50,000
(v) Current year's Total Sales = Rs. 1,50,000+20% of Rs. 1,50,000= Rs.
1,80,000
(vi) Current year's Credit Sales = Rs. 1,80,000 x 80%= Rs. 1,44,000
(vii) Cost of Goods Sold = Sales - G.P. = Rs. 1,80,000 - Rs. 36,000 = Rs.

1,44,000
(viii)Purchases = Cost of Goods Sold + Closing Stock

764
 Opening Stock
= Rs. 1,44,000 + Rs. 30,000 - Rs. 20,000 = Rs. 1,54,000
Q9. Ram carried on business as retail merchant. He has not maintained regular account books.
However, he always maintained Rs.10,000 in cash and deposited the balance into the bank
account. He informs you that he has sold goods at profit of 25% onsales.

Following information is given to you:

Assets and Liability As on 1.4.2016 As on
31.3.2017
Cash in Hand 10,000 10,000
Sundry Creditors 40,000 90,000
Cash at Bank 50,000 (Cr.) 80,000(Dr.)
Sundry Debtors 1,00,000 3,50,000
Stock in Trade 2,80,000 ?
Ram's capital 3,00,000
Analysis of his bank pass book reveals the following information:
(a) Payment to creditors Rs.7,00,000
(b) Payment for business expenses Rs.1,20,000
(c) Receipts from debtors Rs.7,50,000
(d) Loan from Laxman Rs.1,00,000 taken on 1.10.2016 at 10%
per annum (e) Cash deposited in the bank Rs.1,00,000
He informs you that he paid creditors for goods Rs.20,000 in cash and salaries Rs.40,000
in cash. He has drawn Rs.80,000 in cash for personal expenses. During the year Ram had
not introduced any additional capital. Surplus cash if any, to be taken as cash sales.
You are required to prepare:
(i) Trading and Profit and Loss Account for the year ended 31.3.2017.
(ii) Balance Sheet as at 31st March, 2017.

765
[MTP March ‘18, 10 Marks]
Ans. Trading and profit and loss account for the year ended 31st March, 2017
Rs. Rs.
To Opening stock 2,80,000 By Sales
To Purchases 7,70,000 Cash 2,40,000
To Gross Profit @ 25% 3,10,000 Credit 10,00,000 12,40,000
By Closing Stock 1,20,000
(bal.fig.)
13,60,000 13,60,000
To Salaries 40,000 By Gross Profit 3,10,000
To Business expenses 1,20,000
To Interest on loan 5,000
(10% of 1,00,000*6/1 2)
To Net Profit 1,45,000
3,10,000 3,10,000
Balance Sheet as at 31st March, 2017
Liabilities Rs. Rs. Assets Rs.
Ram's capital: Cash in hand 10,000
Opening 3,00,000 Cash at Bank 80,000
Add: Net Profit 1,45,000 Sundry Debtors 3,50,000
4,45,000 Stock in trade 1,20,000
Less; Drawings (80,000) 3,65,000
Loan from Laxman
(Including interest 1,05,000
due)
Sundry Creditors 90,000

766
 5,60,000 5,60,000

Working Notes:
1. Sundry Debtors Account
Rs. Rs.
To Balance c/d 1,00,000 By Bank A/c By Balance 7,50,000
To Credit sales 10,00,000 c/d 3,50,000
(Bal.fig) 11,00,000 11,00,000
2. Sundry Creditor Account
Rs. Rs.
To Bank A/c 7,00,000 By Balance b/d 40,000
To Cash A/c 20,000 By Purchased (Bal.fig)7,70,000
To Balance c/d 90,000

8,10,000 8,10,000

3. Cash and Bank Account

Cash Bank Cash Bank
Rs. Rs. Rs. Rs.
To Balance b/d 10,000 By Balance b/d 50,000
To Sales (bal. fig) 2,40,000 By Bank A/c (C) 1,00,000
To Cash (C) 1,00,000 By Salaries 40,000
To Debtors 7,50,000 By Creditors 20,000 7,00,000
To Laxman's loan 1,00,000 By Drawings 80,000
By Business expenses 1,20,000
By Balance c/d 10,000 80,000
2,50,000 9,50,000 2,50,000 9,50,000

767
 Q10. Following is the incomplete information of Jyotishikha Traders:
The following balances are available as on 31.03.2018 and 31.03.2019.
Balances 31.03.2018 31.03.201
9
Land and Building 5,00,000 5,00,000
Plant and Machinery 2,20,000 3,30,000
Office equipment 1,05,000 85,000
Debtors (before charging for Bad debts) ? 2,25,000
Creditors for purchases 95,000 ?
Creditors for office expenses 20,000 15,000
Stock ? 65,000
Long term loan from SBI @ 12%. 1,60,000 100,000
Bank 25,000 ?
Other Information In `
Collection from debtors 9,25,000
Payment to creditors for purchases 5,25,000
Payment of office expenses (excluding interest on 42,000
loan)
Salary paid 32,000
Selling expenses 15,000
Cash sales 2,50,000
Credit sales (80% of total sales)
Credit purchases 5,40,000
Cash purchases (40% of total purchases)
GP Margin at cost plus 25%

768
 Discount Allowed 5,500
Discount Received 4,500
Bad debts (2% of closing debtors)
Depreciation to be provided as follows:
Land and Building 5%
Plant and Machinery 10%
Office Equipment 15%
Other adjustments:
(i) On01.10.18 theysoldmachinehavingBookValue ` 40,000(ason31.03.2018)at a
lossof ` 15,000. New machine was purchased on 01.01.2019.
(ii) Office equipment was sold at its book value on 01.04.2018.

(iii) Loan was partly repaid on 31.03.19 together with interest for the year.
You are required to prepare Trading, Profit & Loss Account and Balance Sheet as on
31.03.2019. [RTP Nov.’19]
Ans. In the Books of Jyotishikha Traders Trading Account for
the year ended 31.03.2019
Particulars ` Particulars `
To Opening Stock, A/c (Bal. fig.) 1,65,000 By Sales (W.N.1)12,50,000
To Purchases (W.N.2) 9,00,000 By Closing Stock 65,000
To Gross profit (12,50,000x25/125) 2,50,000

13,15,000 13,15,000

Profit and Loss Account for the year ended 31.03.2019

Particulars ` Particulars `

769
To Discount 5,500 By Gross profit2,50,000
To Salaries Expenses 32,000 By Discount 4,500
To Office expenses (W.N.3) 37,000
To Selling expenses 15,000 84,000
To Interest on loan (12% on ` 1,60,000) 19,200
To Bad debts (2% of ` 2,25,000) 4,500
To Loss on sale of Machinery 15,000
To Depreciation:
Land & Building 25,000
Plant &Machinery (W.N 4b) 23,750
Office Equipment (W.N. 5) 12,750 61,500
To Net profit after tax 64,800

2,54,500 2,54,500

Balance sheet as on 31.3.2019

Liabilities ` ` Assets `
Capital (W.N. 6) 8,95,500 Land and Building 4,75,000
(5,00,000-25,000)
Add: Net Profit 64,800 9,60,300 Plant and Machinery 3,08,250
(W.N.4a)
(3,30,000-21,750)
Creditors for Purchases1,05,500 Office Equipment 72,250
(W.N. 8) (85,000-12,750)
Outstanding expenses 15,000 Debtors less Bad debts 2,20,500

770
 Loan from SBI 1,00,000 (W.N. 7)
Stock 65,000
Bank Balance (W.N. 9) 39,800
11,80,800 11,80,800
Working Notes:
1. Calculation of Total Sales `
Cash Sales 2,50,000
Credit Sales (80% of total sales)
Cash Sales (20% of total sales)
Thus, total Sales (250000 x 100/20) 12,50,000
Credit Sales (1250000 x 80/100) 10,00,000
2. Calculation of Total Purchases `
Credit Purchases 5,40,000
Cash Purchases (40% of total purchases)
Credit Purchases (60% of total purchases)
Thus, total Purchases (5,40,000 x 100/60) 9,00,000
Cash Purchases 9,00,000 x 40/100) 3,60,000

3. Office Expenses Account

` `
To Bank A/c 42,000 By Balance b/d 20,000
To Balance c/d 15,000 By Profit & loss A/c 37,000
57,000 57,000
4. (a) Plant and Machinery Account
` `

771
 To Opening balance2,20,000 By Sale 40,000
To Purchases 1,50,000 By Closing Balance3,30,000
3,70,000 3,70,000

(b) Depreciation calculations on Plant &Machinery

`
Depreciation on 1,80,000 x 10% (for full year) 18,000
1,50,000 x 10% x 3/12 (for 3 months) 3,750
40,000 x 10% x 6/12 (for 6 months) 2,000
23,750
(c) Sale of Machinery Account
Amount (`) Amount (`)
To Plant & Machinery 40,000 By Depreciation 2,000
By Profit and Loss, A/c 15,000 By Bank 23,000
40,000 40,000
5. Depreciation calculations on Office Equipment’s
`
Opening Balance 1,05,000
Less: Closing Balance 85,000
Sale of Office Equipment 20,000
Balance of Office Equipment after sale 85,000
Depreciation @15% 12,750
6. Opening Balance Sheet as on 31.03.2018

` `
Creditors 95,000 Land & Building 5,00,000
Creditor for Exp. 20,000 Plant & Machinery 2,20,000

772
 Loan 1,60,000 Office Equipment 1,05,000
Capital (Bal. fig.) 8,95,500 Debtors 1,55,500
Stock 1,65,000
Bank 25,000
11,70,500 11,70,500
7. Sundry Debtors A/c
` `

To Balance b/d 1,55,500 By Bank 9,25,000

To Sales 10,00,000 By Discount 5,500
By Bad debts 4,500
By Bal. c/d 2,20,500
11,55,500 11,55,500
8. Sundry Creditors A/c

` `
To Bank 5,25,000 By Balance b/d 95,000
To Discount 4,500 By Purchases 5,40,000
To Balance c/d1,05,500

6,35,000 6,35,000
9. Bank Account
` `
To Balance b/d 25,000 By Creditors 5,25,000
To Debtors 9,25,000 By Office Expenses 42,000
To Cash Sales 2,50,000 By Salary Expense 32,000
To Sale of Machinery (W.N. 4c) 23,000 By Selling Expenses 15,000

773
 To Sale of equipment 20,000 By Purchases (cash) 3,60,000
By Purchase of Machinery 1,50,000
By Bank Loan & Interest 79,200
By Balance c/d 39,800
12,43,000 12,43,000

Q11. From the following information in respect of Mr. Preet, prepare Trading and Profit and
Loss Account for the year ended 31st March, 2018 and a Balance Sheet as at that date:
31-03-2017 31-03-2018
(1) Liabilities and Assets Rs. Rs.
Stock in trade 1,60,000 1,40,000
Debtors for sales 3,20,000 ?
Bills receivable - ?
Creditors for purchases 2,20,000 3,00,000
Furniture at written down value 1,20,000 1,27,000
Expenses outstanding 40,000 36,000
Prepaid expenses 12,000 14,000
Cash on hand 4,000 3,000
Bank Balance 20,000 1,500
(2) Receipts and Payments during 2017-2018:

Collections from Debtors (after allowing 2-1/2% discount) 11,70,000

Payments to Creditors (after receiving 2% discount) 7,84,000

Proceeds of Bills receivable discounted at 2%) 1,22,500

Proprietor's drawings 1,40,000

Purchase of furniture on 30.09.2017 20,000

774
 12% Government securities purchased on 1-10-2017 2,00,000

Expenses 3,50,000

Miscellaneous Income 10,000

(3) Sales are effected so as to realize a gross profit of 50% on the cost.

(4) Capital introduced during the year by the proprietor by cheques was omitted to be
recorded in the Cash Book, though the bank balance on 31st March, 2018 (as shown
above), is after taking the same into account.

(5) Purchases and Sales are made only on credit.

(6) During the year, Bills Receivable of Rs.2,00,000 were drawn on debtors, out of these,
Bills amount to Rs.40,000 were endorsed in favor of creditors. Out of this latter
amount, a Bill for Rs.8,000 was dishonored by the debtor.

[RTP May ‘19]

Ans. Trading and Profit & Loss Account for the year ended 31st March, 2018
US $ US $
To Opening Stock 5,454.55 By Sales 20,689.66
To Purchases 13,793.10 By Closing stock (Rs.4,20,000/60) 7,000.00
To Wages and salaries 9,655.17 By Gross Loss c/d 1,213.16
28,902.82 28,902.82
To Gross Loss b/d 1,213.16 By Net Loss 13,778.68
To Rent, rates and taxes 6,206.90
To Sundry charges 2,758.62
To Depreciation on computers 3,600.00
(US $ 6,000 x 0.6)
13,778.68 13,778.68

775
 Balance Sheet of Bangalore Branch as on 31st March, 2018
Liabilities US$ Assets US$ US$
New YorkOffice A/c 29,845.35 Computers 6,000.00
Less; Net Loss (13,778.68) 16,066.67 Less; (3,600.00) 2,400.00

Depreciation
Sundry creditors 5,000.00 Closing stock 7,000.00
Bills payable 4,000.00 Sundry debtors 6,666.67
Bills receivable 2,000.00
Bank balance 7,000.00
25,066.67 25,066.67

Trading and Profit and Loss Account of Mr. Preet For the year ended 31st March, 2018
Amount Amount
Rs. Rs.
To Opening stock 1,60,000 By Sales 13,98,000
To Purchases (W.N. 5) 9,12,000 By Closing stock 1,40,000
To Gross profit c/d (Bal.fig.) 4,66,000
15,38,000 15,38,000
To Expenses (W.N. 7) 3,44,000 By Gross profit b/d 4,66,000
To Discount allowed (W.N. 9) 32,500 By Discount received (W.N.10) 16,000
To Depreciation on furniture 13,000 By Interest on Govt. Securities (W.N. 12,000
(W.N.1) 8)
To Net profit 1,14,500 By Miscellaneous income 10,000
5,04,000 5,04,000

Balance Sheet of Mr. Preet as on 31st March, 2018

776
Liabilities Amount Assets Amount
Rs. Rs.
Capital (W.N.6) 3,76,000 Furniture 1,27,000
Add: Additional capital (W.N.2) 12% Government Securities 2,00,000
1,72,00
Accrued interest on Govt.
Add:Profit during the year 1,14,500 securities (W.N.8) 12,000
6,62,500 Debtors (W.N.3) 3,26,000
Less: Drawing 1,40,000 5,22,500 Bills Receivable (W.N.4) 35,000
Creditors 3,00,000 Stock 1,40,000
Outstanding expenses 36,000 Prepaid expenses 14,000
Cash on hand 3,000
Bank balance 1,500
8,58,500 8,58,500
Working Notes:
1. Furniture account
Rs. Rs.
To Balance b/d 1,20,000 By Depreciation (bal.Fig.) 13,000
To Bank 20,000 By Balance c/d 1,27,000
1,40,000 1,40,000
2. Cash and Bankaccount
Rs. Rs.
To Balance b/d By Creditors 7,84,000
Cash 4,000 By Drawing 1,40,000
Bank 20,000 By Furniture 20,000

777
To Debtors 11,70,000 By 12% Govt. securities 2,00,000
To Bill receivable 1,22,500 By expenses 3,50,000
To Miscellaneous income 10,000 By Balance c/d
To Additional Capital (bal.fig) 1,72,000 Cash 3,000
Bank 1,500
14,98,500 14,98,500
3. Debtor’s account
Rs. Rs.
To balance b/d 3,20,000 By Cash and Bank 11,70,000
ToCreditors (Bills receivable 8,000 By Discount 30,000
dishonored)
To Sales (W.N.1) 13,98,000 By Bills Receivable 2,00,000
By balance c/d (bal.fig) 3,26,000
17,26,000 17,26,000
4. Bills Receivable account
Rs. Rs.
To Debtors 2,00,000 By Bank 1,22,500
By Discount 2,500
By Creditors 40,000
By Balance c/d (bal. fig.) 35,000
2,00,000 2,00,000
5. Creditor’s account
Rs. Rs.
To Bank 7,84,000 By Balance b/d 2,20,000
To Discount 16,000 By Debtors (Bills receivable 8,000
dishonored)

778
To Bills receivable 40,000 By Purchases (bal. fig.) 9,12,000
To Balance c/d 3,00,000
11,40,000 11,40,000

6. Balance Sheet as on 1st April, 2017

Liabilities Rs. Assets Rs.
Creditors 2,20,000 Furniture 1,20,000
Outstanding expenses 40,000 Debtors 3,20,000
Capital (balancing figure) 3,76,000 Stock 1,60,000
Prepaid expenses 12,000
Cash 4,000
Bank balance 20,000
6,36,000 6,36,000
7. Expenses incurred during the year
Rs.
Expenses paid during the year 3,50,000
Add: Outstanding expenses as on 31 .3.2018 36,000
Prepaid expenses as on 31.3.2017 12,000 48,000
3,98,000
Less: Outstanding expenses as on 31.3.2017 40,000
Prepaid expenses as on 31.3.2018 14,000 54,000
Expenses incurred during the year 3,44,000
8. Interest on Government securities
2,00,000 x 12% x 6/12 = Rs.12,000
Interest on Government securities receivables for 6 months = Rs.12,000
9. Discount allowed
Rs.

779
Discount to Debtors 11,70,000 * 2 . .5 % / 97. .5 %
30,000

2,500
Discount on Bills Receivable
1,22,500 * 2 % / 98%
32,500

10. Discount received

Rs.

Discount to Creditors 7,84,000 * 2 % / 98% 16,000

11. Credit sales

Cash of Goods sold = Opening stock + net purchases - Closing stock
= Rs.1,60,000 + Rs.9,12,000 - Rs.1,40,000
= Rs.9,32,000
Sale price = Rs.9,32,000 + 50% of 9,32,000 = Rs.13,98,000.
Q12. The following information relates to the business of ABC Enterprises, who requests
you to prepare a Trading and Profit & Loss A/c for the year ended 31st March, 2017 and a
Balance Sheet as on that date.

(a) Assets and Liabilities as on:

in Rs.
1-4-2016 31-3-2017
Furniture 60,000 63,500
Inventory 80,000 70,000

780
 Sundry Debtors 1,60,000 ?
Sundry Creditors 1,10,000 1,50,000
Prepaid Expenses 6,000 7,000
Outstanding Expenses 20,000 18,000
Cash in Hand & Bank Balance 12,000 26,250
(b) Cash transaction during the year:

(i) Collection from Debtors, after allowing discount of Rs.15,000 amounted to

Rs.58,85,000

(ii) Collection on discounting of Bills of Exchange, after deduction of discount of

Rs.1,250 by bank, totaled to Rs.61,250.

(iii) Creditors of Rs.4,00,000 were paid Rs.3,92,000 in full settlement of their dues.

(iv) Payment of Freight inward of Rs.30,000.

(v) Amount withdrawn for personal use Rs.70,000.

(vi) Payment for office furniture Rs.10,000.

(vii) Investment carrying annual interest of 6% were purchased at Rs.95 (200 shares,
face value Rs.100 each) on 1st October 2016 and payment made thereof.

(viii) Expenses including salaries paid Rs.95,000. (ix) Miscellaneous receipt of Rs.5,000.

(c) Bills of exchange drawn on and accepted by customers during the year amounted to Rs.
1,00,000. Of these, bills of exchange of Rs.20,000 were endorsed in favor of creditors.
An endorsed bill of exchange of Rs.4,000 was dishonored.

(d) Goods costing Rs.9,000 were used as advertising material.

(e) Goods are invariably sold to show a gross profit of 20% on sales.

(f) Difference in cash book, if any, is to be treated as further drawing or introduction of

capitalbyproprietor of ABC enterprises.

781
 (g) Provide at 2% for doubtful debts on closing debtors. Partnership Accounts: Dissolution
of Partnership.

[RTP Nov ‘18]

Ans. TradingandProfitandLossAccountofABCenterprisefortheyearended31st
March,2017
Rs. Rs.
To Opening Inventor 80,000 By Sales 6,08,750
To Purchases By Closing inventory 70,000
4,56,00
0
Less: For advertising 4,47,000
(9,000
)
To Freight inwards 30,000
To Gross profit c/d 1,21,750
6,78,750 6,78,750
To Sundry expenses 92,000 By Gross profit b/d 1,21,750
To Advertisement 9,000 By Interest on investment 600
To Discount allowed - (20,000 x 6/1 00 x1/2)
Debtors 15,000 By Discount received 8,000
Bills Receivable 1,250 16,250 By Miscellaneous income 5,000
To Depreciation on furniture 6,500
To Provision for doubtful debts 1,455
To Net profit 10,145

782
 1,35,350 135,350
Balance Sheet as on 31st March, 2017
Liabilities Amount Assets Amount
Rs. Rs. Rs. Rs.
Capital as on 1.4.2016 1,88,000 Furniture (w.d.v.) 60,000
Less; Drawings (91,000) Additions during the 10,000
year
97,000 Less; Depreciation (6,500) 63,500
Add: Net Profit 10,145 1,07,145 Investment (200x95) 19,000
Sundry creditors 1,50,000 Interest accrued 600
Outstanding expenses 18,000 Closing inventory 70,000
Sundry debtors 72,750
Less; Provision for
doubtful debts 1,455 Bills 71,295

receivable 17,500
Cash in hand and at bank Prepaid 26,250
expenses 7,000
2,75,145 2,75,145
Working Notes
(1) Capital on 1st April, 2016
Balance sheet as on 1st April, 2016
Liabilities Rs. Assets Rs.
Capital (Bal.fig.) 1,88,000 Furniture (w.d.v.) 60,000
Creditors 1,10,000 Closing Inventory 80,000
Outstanding expenses 20,000 Sundry debtors 1,60,000
Cash in hand and at bank 12,000

783
 Prepaid expenses 6,000
3,18,000 3,18,000
(2) Purchases made during
the year Sundry
Creditors Account
Rs. Rs.
To Cash and Bank, A/c 3,92,000 Ba Balance b/d 1,10,000
To Discount received A/c 8,000 By Sundry debtor’s A/c 4,000
To Bills Receivable A/c 20,000 By Purchases A/c 4,56,000
To Balance c/d 1,50,000 (Balancing figure)

5,70,000 5,70,000

(3) Sales Made During the year

Rs.
Opening inventory 80,000
Purchases 4,56,000
Less: For advertising (9,000) 4,47,000
Freight inwards 30,000
5,57,000
Less: Closing inventory 70,000
Cost of goods sold 4,87,000
Add: Gross profit (25% on cost) 1,21,750
6,08,750

(3) Debtors on 31st March, 2017

784
 Sundry Debtors Account
Rs. Rs.
To Balance b/d 1,60,000 By Cash and bank, A/c 5,85,000
To Sales A/c 6,08,750 By Discount allowed A/c 15,000
To Sundry creditors A/c By Bills receivable A/c 1,00,000
(Bill dishonored) 4,000 By Balance c/d (Bal. fig.) 72,750
7,72,750 7,72,750
(5) Additionaldrawings by proprietors ofABC
enterprises Cash and Bank
Account
Rs. Rs.
To Balance b/d 12,000 By Freight inwards A/c 30,000
To Sundry debtor’s A/c 5,85,000 By Furniture A/c 10,000
To Bills Receivable A/c 61,250 By Investment A/c 19,000
To Miscellaneous income A/c 5,000 By Expenses A/c 95,000
By Creditors A/c 3,92,000
By Drawings A/c
91,000
[Rs.70,000 + Rs.21, 000)
26,250
(Additional drawings)]
6,63,250 6,63,250
By Balance c/d

(6) Amount of expenses debited to profit and

Loss A/c Sundry expenses
Account
Rs. Rs.

785
To Prepaid expenses A/c 6,000 By Outstanding expenses, A/c 20,000
(on 1.4.2016) (on 1.4.2016)
To Bank A/c 95,000 By Profit and Loss, A/c 92,000
(Balancing figure)
To Outstanding expenses By Prepaid expenses A/c
A/c (on 31. 3.201 7) 18,000 (on 31.3.17) 7,000
1,19,000 1,19,000

(7) Bills Receivable on 31st March,

2017 Bills Receivable
Account
Rs. Rs.
To Debtors A/c 1,00,000 By Creditors A/c 20,000
By Bank A/c 61,250
By Discount on bills receivable 1,250
A/c
By Balance c/d (Balancing 17,500
figure)
1,00,000 1,00,000
Note: All sales and purchases are assumed to be on credit basis.
Q13. The following is the Balance Sheet of Manish and Suresh as on 1st April, 2016:
Liabilities Rs Assets Rs.
.
Capital Accounts Building 1,00,000
Manish 1,50,000 Machinery 65,000
Suresh 75,000 Stock 40,000
Creditors for 30,000 Debtors 50,000

786
 goods Creditors for 25,000 Bank 25,000
expenses 2,80,000 2,80,000

They give you the following additional information:

(i) Creditors' Velocity* 1.5 month & Debtors' Velocity* 2 months.

(ii) Stock level is maintained uniformly in value throughout all over the year.
(iii) Depreciation on machinery is charged @ 10%, Depreciation on building @ 5%
in the current year.
(iv) Cost price will go up 15% as compared to last year and also sales in the current year
will increase by 25% in volume.
(v) Rate of gross profit remains the same.

(vi) Business Expenditures are Rs.50,000 for the year. All expenditures are paid off in
cash.

(vii) Closing stock is to be valued on LIFO Basis.

(viii) All sales and purchases are on credit basis and there are no cash purchases and
sales.

You are required to prepare Trading, Profit and Loss Account, TradeDebtors Account and Trade
Creditors Account for the year ending 31.03.2017. [RTP May ‘18]

Ans. Trading and Profit and Loss account for the year ending 31st March, 2017

Particulars Rs. Particulars Rs.

To Opening Stock 40,000 By Sales 4,31,250
To Purchases (Working Note) 3,45,000 By Closing Stock 40,000
To Gross Profit c/d (20% on 86,250

787
sales)
4,71,250 4,71,250
To Business Expenses 50,000 By Gross Profit b/d 86,250
To Depreciation on:
Machinery 6,500
Building 5,000 11,500
To Net profit 24,750

86,250 86,250
Trade Debtors Account
Particulars Rs. Particulars Rs.
To Balance b/d 50,000 By Bank (bal.fig). 4,09,375
To Sales 4,31,250 By Balance c/d (1/6 of 71,875
4,31,250)
4,81,250 4,81,250
Trade Creditors Account
Particulars Rs. Particulars Rs.
To Bank (Balancing figure) 3,31,875 By Balancing b/d 30,000
To Balance c/d (1/8 of 43,125 By Purchases 3,45,000
Rs.3,45,000)
3,75,000 3,75,000
Working Note:

Rs.
(i) Calculation of Rate of Gross Profit earned during previous year
A Sales during previous year (Rs.50,000 x 12/2) 3,00,000

788
 B Purchases (Rs.30,000x12/1 .5) 2,40,000
C Cost of Goods Sold (Rs.40,000 + Rs.2,40,000 - Rs.40,000) 2,40,000

Q14. M/s Rohan & Sons runs a business of Electrical goods on wholesale basis. The books
of accounts are closed on 31st March every year. The Balance Sheet as on 31st March,
2019 is as follows
Liabilities ` Assets `
Capital 12,50,000 Fixed Assets 6 50,000
Closing stock 3,75,000
Trade Debtors 3,65,000
Trade Creditors 1,90,000 Cash & Bank 1,95,000

Profit & Loss A/c 1,45,000

15,85,000 15,85,000

The management estimates the purchase & sales for the year ended 31st March,2020 as under:
Particulars Upto 31.01.2020 February 2020 March 2020
(`) (`) (`)
Purchases 16,20,000 1,40,000 1,25,000

789
 Sales 20,75,000 2,10,000 1, 75,000

All Sales and Purchases are on credit basis. It was decided to invest ` 1,50,000 in purchase
of Fixed assets, which are depreciated @ 10% on book value. A Fixed Asset of book
value as on 01.04.2019, ` 60,000 was sold for ` 56,000 on 31st March, 2020.

The time lag for payment to Trade Creditors for purchases is one month and receipt from
Trade debtors for sales, is two months. The business earns a gross profit of 25% on turnover.
The expenses against gross profit amounts to 15% of the turnover. The amount of
depreciation is not included in these expenses.

Prepare Trading & profit & Loss Account for the year ending 31st March, 2020 and draft
a Balance Sheet as at 31st March, 2020 assuming that creditors are all Trade creditors for
purchases and debtors are all Trade debtors for sales and there is no other current asset and
liability apart from stock and cash and bank balances.
Also, prepare Cash & Bank account and Fixed Assets account for the year ending 31st
March, 2020
[ Sugg Nov 2020 ] [ 10 marks]

Ans.. Trading and Profit and Loss Account of M/s Rohan & Sons
for the year ended 31st March, 2020
` `

To Opening stock 3,75,000 By Sales 24,60,000

To Purchases 18,85,000 By Closing stock 4,15,000
To Gross Profit c/d 6,15,000 (Balancing Figure)
(25%)
28,75,000 28,75,000
To Depreciation 80,000 By Gross profit b/d 6,15,000
To Expenses (15% of 3,69,000 By Profit on sale of Fixed 2,000
` 24,60,000) assets

To Net Profit (b.f.) 1,68,000

6,17,000 6,17,000

790
 Balance Sheet of M/s Rohan Sons as on 31st March, 2020

Liabilities Assets `
Capital 12,50,000 Fixed assets (less Dep.) 6,66,000
Profit & Loss A/c (1,45,000 + 1,68,000) 3,13,000 Stock 4,15,000

Trade Creditors 1,25,000 Debtors 3,85,000

_______ Cash and bank 2,22,000
16,88,000 16,88,000

Cash and Bank Account

To Bal. b/d 1,95,000 By Creditors (1,90,000 + 19,50,000
16,20,000 + 1,40,000)
To Debtors 24,40,000 By Expenses 3,69,000
(3,65,000 + 20,75,000)
To Fixed assets 56,000 By Fixed assets 1,50,000
By Bal. c/d 2,22,000
26,91,000 26,91,000

Fixed Assets Account

To Bal. b/d 6,50,000 By Cash 56,000
To Profit on sale of Fixed asset 2,000 By Depreciation on sold 6,000
fixed asset
By Depreciation 74,000
(59,000 + 15,000)
To Bank A/c 1,50,000 By Bal. c/d 6,66,000
8,02,000 8,02,000

791
Q15. Following is the Balance Sheet of M/s. S Traders as on 31st March, 2019:
Liabilities (`) Assets (`)
Capital 1,50,000 Fixed Assets 1,05,000
11% Bank Loan 80,000 Closing stock 76,000
Trade payables 52,000 Debtors 68,000
Profit & Loss A/c 56,000 Deferred 24,000
Expenditure
Cash & Bank 65,000
3,38,000 3,38,000

Additional Information:

(i) Remaining life of Fixed Assets is 6 years with even use. The net realizable value
of Fixed Assets as on 31st March, 2020 is ` 90,000.

(ii) Firm's Sales & Purchases for the year ending 31st March, 2020 amounted to
` 7,80,000 and ` 6,25,000 respectively.

(iii) The cost & net realizable value of the stock as on 31st March, 2020 was, `
60,000 and ` 66,000 respectively.

(iv) General expenses (including interest on Loan) for the year 2019-20 were ` 53,800.

(v) Deferred expenditure is normally amortised equally over 5 years starting from
the Financial year 2018-19 i.e. ` 6,000 per year.

(vi) Debtors on 31st March, 2020 is ` 65,000 of which ` 5,000 is doubtful. Collection
of another ` 10,000 debtors depends on successful re-installation of certain
products supplied to the customer.
(vii) Closing Trade payable ` 48,000, which is likely to·be settled at 5% discount.

(viii) There is a prepayment penalty of ` 4,000 for Bank loan outstanding.

792
 (ix) Cash & Bank balances as on 31st March, 2020 is ` 1,65,200.

Prepare Profit & Loss Account for the year ended 31st March, 2020 and Balance
Sheet as on 31st March, 2020 assuming the firm is not a going concern. [4marks]

Ans. Profit and Loss Account of M/s S Traders for the year ended 31st March, 2020
(business is not a going concern)
` `
To Opening Stock 76,000 By Sales 7,80,000
To Purchases 6,25,000 By Trade payables 2,400
To General expenses 53,800 By Closing Stock 66,000
To Depreciation (1,05,000 less 15,000
90,000)
To Provision for doubtful debts 15,000
To Deferred expenditure 24,000
To Loan penalty 4,000
To Net Profit (b.f.) 35,600

8,48,400 8,48,400

Balance Sheet M/s S Traders as on 31st March, 2020

Liabilities and Capital ` Assets `
Capital 1,50,000 Fixed assets 90,000
Profit & Loss A/c Debtors
opening balance 56,000 (65,000 less provision for 50,000
doubtful debts
` 15,000)
Profit earned during the year 35,600 91,600 Closing stock 66,000

793
11% Loan 84,000 Cash & Bank balance 1,65,200
Trade payables 45,600
3,71,200 3,71,200

Q16. Mr. Prakash furnishes following information for his readymade garments business:

(i) Receipts and Payments during 2019-20:

Receipts Amount ` Payments Amount `
Bank Balance as on Payment to Sundry
1-4-2019 16,250 Creditors 3,43,000
Received from Sundry Salaries 75,000
Debtors 4,81,000
General Expenses 22,500
Cash sales 1,70,800 Rent and Taxes 11,800
Capital brought in the Drawings 96,000
Business during the year 50,000
Cash Purchases 1,22,750
Interest on Investment Balance at Bank on
Received 9,750 31-03-2020 36,600
Cash in hand on
31-03-2020 20,150
7,27,800 7,27,800

(ii) Particulars of other Assets and Liabilities are as follows:

1st April, 31st March,

2019 2020
(`) (`)

794
 Machinery 85,000 85,000
Furniture 24,500 24,500
Trade Debtors 1,55,000 ?
Trade Creditors 60,200 ?
Stock 38,600 55,700
12% Investment 85,000 85,000
Outstanding Salaries 12,000 14,000

(iii) Additional information:

(1) 20% of Total sales and 20% of total purchases are in cash.

(2) Of the Debtors, a sum of ` 7,200 should be written off as Bad debt and
further a provision for doubtful debts is to be provided @2%.
Provide depreciation @10% p.a. on Machinery and Furniture.
You are required to prepare Trading and Profit & Loss account for the year ended 31st
March, 2020, and Balance Sheet as on that date.
[Sugg Jan 2021] [10 marks ]

Ans. Trading and Profit & Loss Account for the year ended 31-03-2020
` ` `
To Opening Inventory 38,600 By Sales 8,54,000
To Purchases 6,13,750 By Closing Inventory 55,700
To Gross profit c/d (b.f.) 2,57,350
9,09,700 9,09,700
To Salaries 77,000 By Gross Profit b/d 2,57,350
(75,000+14,000-12,000)
To Rent 11,800 By Interest on 10,200

795
 investment

To General expenses To 22,500 (9,750+450)

Depreciation:
8,500
Machinery @ 10%
2,450
Furniture @ 10% To 10,950
7,200
Bad Debts
To Provision for doubtful 7,000 14,200
debts
To Balance being profit 1,31,100
2,67,550 2,67,550
carried to Capital A/c
(b.f.)

Balance Sheet as on 31st March, 2020

Liabilities ` ` Assets ` `
Adamjee’s Capital Machinery 85,000
on 1st April, 2019 3,32,150 Less: Depreciation (8,500) 76,500
Add: Fresh Capital 50,000 Furniture 24,500
Add: Profit for the year 1,31,100 Less: Depreciation (2,450) 22,050
5,13,250
Less: Drawings (96,000) 4,17,250 Inventory-in-trade 55,700
Sundry debtors
3,57,200
Less: Provision for
Sundry creditors 2,08,200
Doubtful debts
Outstanding expenses 14,000 (14,200) 3,43,000
Investment
85,450
(including accrued
interest ` 450)
36,600

796
 Cash at bank Cash 20,150
6,39,450 in hand 6,39,450

Working Notes:

1. Balance sheet as on 1-4-2019

` `
Sundry creditors 60,200 Machinery 85,000
Capital 3,32,150 Furniture 24,500
(balancing figure) Inventory 38,600

Outstanding salaries 12,000 Sundry debtors 1,55,000

Investments 85,000

Bank balance (from Cash 16,250

statement)

4,04,350 4,04,350

2. Total Debtors Account

` `
1.4.19 To Balance b/d 1,55,000 31.3.20 By Cash 4,81,000
31.3.20 To Credit sales 6,83,200 31.3.20 By Bad debts 7,200
(1,70800/20x80) By Balance c/d 3,50,000
(Bal. Fig.)
8,38,200 8,38,200

3. Total Creditors Account

` `
31.3.20 To Cash 3,43,000 1.4.19 By Balance b/d 60,200

797
31.3.20 To Balance 2,08,200 31.3.20 By Credit Purchases 4,91,000
c/d (1,22,750/20x80)
(Bal. Fig.)
5,51,200 5,51,200

Q17. Ram carried on business as retail merchant. He has not maintained regular account
books. However, he always maintained ` 10,000 in cash and deposited the balance into the
bank account. He informs you that he has sold goods at profit of 25% on sales.

Following information is given to you:

Assets and Liabilities As on As on
1.4.2020 31.3.2021
Cash in Hand 10,000 10,000
Sundry Creditors 40,000 90,000
Cash at Bank 50,000 (Cr.) 80,000 (Dr.)
Sundry Debtors 1,00,000 3,50,000
Stock in Trade 2,80,000 ?
Ram’s capital 3,00,000 ?

Analysis of his bank pass book reveals the following information:

(a) Payment to creditors ` 7,00,000

(b) Payment for business expenses ` 1,20,000

(c) Receipts from debtors ` 7,50,000

(d) Loan ` 1,00,000 taken on 1.10.2020 at 10% per annum

(e) Cash deposited in the bank ` 1,00,000

He informs you that he paid creditors for goods ` 20,000 in cash and salaries ` 40,000 in
cash. He has drawn ` 80,000 in cash for personal expenses. During the year Ram had not
798
introduced any additional capital. Surplus cash if any, to be taken as cash sales. All
purchases are on credit basis.

You are required to prepare: Trading and Profit and Loss Account for the year ended
31.3.2021 and Balance Sheet as at 31st March, 2021. [RTP May 2021]

Ans. Trading and Profit and Loss Account of Ram for the year ended 31st
March, 2021
` `
To Opening stock 2,80,000 By Sales
To Purchases 7,70,000 Cash 2,40,000
To Gross Profit @ 25% 3,10,000 Credit 10,00,000 12,40,000

By Closing Stock (bal.fig.) 1,20,000

13,60,000 13,60,000

To Salaries 40,000 By Gross Profit 3,10,000

To Business expenses 1,20,000

To Interest on loan 5,000

(10% of 1,00,000 x 6/12)

To Net Profit
1,45,000
3,10,000
3,10,000

Balance Sheet of Ram as at 31st March, 2021

Liabilities ` ` Assets `
Ram’s capital: Cash in hand 10,000
Opening 3,00,000 Cash at Bank 80,000

799
Add: Net Profit 1,45,000 Sundry Debtors 3,50,000
4,45,000 Stock in trade 1,20,000
Less: Drawings (80,000) 3,65,000
Loan (including interest due) 1,05,000
Sundry Creditors 90,000 _______
5,60,000 5,60,000

Working Notes:

1. Sundry Debtors Account

` `
To Balance b/d 1,00,000 By Bank A/c 7,50,000
To Credit sales (Bal. fig) 10,00,000 By Balance c/d 3,50,000
11,00,000 11,00,000

2. Sundry Creditors Account

` `
To Bank A/c 7,00,000 By Balance b/d 40,000
To Cash A/c 20,000 By Purchases (Bal. fig.) 7,70,000
To Balance c/d 90,000
8,10,000 8,10,000

3. Cash and Bank Account

Cash Bank Cash Bank
` ` ` `
To Balance b/d 10,000 By Balance 50,000
b/d
To Sales (bal. 2,40,000 By Bank A/c 1,00,000
fig) (C)

800
 To Cash (C) 1,00,000 By Salaries 40,000

To Debtors 7,50,000 By Creditors 20,000 7,00,000

To Loan 1,00,000 By Drawings 80,000
By Business 1,20,000
expenses
2,50,000 By Balance 10,000 80,000
9,50,000 c/d
2,50,000 9,50,000

Q18. The following is the Balance Sheet of Manish and Suresh as on 1st April, 2019:
Liabilities ` Assets `
Capital Accounts: Building 1,00,000
Manish 1,50,000 Machinery 65,000
Suresh 75,000 Stock 40,000
Creditors for goods 30,000 Debtors 50,000
Creditors for expenses 25,000 Bank 25,000

2,80,000 2,80,000

They give you the following additional information:

(i) Sales and purchases for the year ended 31st March, 2019 were ` 3,00,000 and
` 2,40,000 respectively.

(ii) Stock level is maintained uniformly in value throughout all over the year.

(iii) Depreciation on machinery is charged @ 10%, Depreciation on building @ 5%

in the current year.

(iv) Sales in the current year will increase by 43.75% in volume.

801
 (v) Rate of gross profit remains the same.

(vi) Business Expenditures are ` 50,000 for the year. All expenditures are paid off in
cash.

(vii) All sales and purchases are on credit basis and there are no cash purchases and
sales.

You are required to prepare Trading and Profit and Loss Account for the year ended
31.03.2020. [RTP Nov 2020]

Ans. Trading and Profit and Loss account for the year ending 31st March, 2020
Particulars ` Particulars `
To Opening Stock 40,000 By Sales 4,31,250
To Purchases (Working Note) 3,45,000 By Closing Stock 40,000
To Gross Profit c/d (20% on sales)
86,250
4,71,250 4,71,250
To Business Expenses 50,000 By Gross Profit b/d 86,250
To Depreciation on:
Machinery 6,500
Building 5,000 11,500
To Net profit 24,750
86,250 86,250

Working Note:

`
(i) Calculation of Rate of Gross Profit earned during previous year
A Sales during previous year 3,00,000

802
 B Purchases 2,40,000
C Cost of Goods Sold (` 40,000 + ` 2,40,000 – ` 40,000) 2,40,000
D Gross Profit (A-C) 60,000
E Rate of Gross Profit 60000/300000*100 20%

(ii) Calculation of sales and Purchases during current year `

Cost of goods sold during previous year

A Add: Increases in volume @ 43.75 % 2,40,000
B Cost of goods sold during Current Year 1,05,000
C Add: Gross profit @ 25% on cost (20% on sales) 3,45,000
D Sales for current year [C+D] 86,250
E 4,31,250

Q19. From the following details furnished by Mittal ji, prepare Trading and Profit and Loss
account for the year ended 31.3.2021. Also draft his Balance Sheet as at 31.3.2021:
1.4.2020 31.3.2021
` `
Creditors 3,15,400 2,48,000
Expenses outstanding 12,000 6,600
Plant and Machinery 2,32,200 2,40,800
Stock in hand 1,60,800 2,22,400
Cash in hand 59,200 24,000
Cash at bank 80,000 1,37,600
Sundry debtors 3,30,600 ?
Details of the year’s transactions are as
follows:

803
 Cash and discount credited to debtors 12,80,000
Returns from debtors 29,000
Bad debts 8,400
Sales (Both cash and credit) 14,36,200
Discount allowed by creditors 14,000
Returns to creditors 8,000
Capital introduced by cheque 1,70,000
Collection from debtors (Deposited into 12,50,000
bank after receiving cash)
Cash purchases 20,600
Expenses paid by cash 1,91,400
Drawings by cheque 8,600
Machinery acquired by cheque 63,600
Cash deposited into bank 1,00,000
Cash withdrawn from bank 1,84,800
Cash sales 92,000
Payment to creditors by cheque 12,05,400

Note: Mittalji has not sold any machinery during the year.

[RTP Nov2021]

Ans. In the books of Mittal ji

Trading and Profit and Loss Account for

the year ended 31st March, 2021

804
 ` ` ` `
To Opening stock 1,60,800 By Sales:
To Purchases: Cash 92,000
Cash 20,600 Credit 13,44,200
Credit (W.N. 3) 11,60,000 14,36,200
11,80,600 Less: Returns (29,000) 14,07,200
Less: Returns (8,000) 11,72,600
To Gross Profit c/d 2,96,200 By Closing stock 2,22,400
16,29,600 16,29,600
To Discount allowed 30,000 By Gross profit b/d 2,96,200
To Bad debts 8,400 By Discount 14,000
To General expenses 1,86,000
(W.N. 5)
To Depreciation (W.N. 4) 55,000

To Net profit 30,800

3,10,200 3,10,200

Balance Sheet as at 31st March, 2021

Liabilities ` Assets `
Capital (W.N. 1) 5,35,400 Plant & Machinery 2,32,200
Add: Additional 1,70,000 Add: New
capital machinery 63,600
Net profit 30,800 2,95,800
7,36,200 Less: Depreciation (55,000) 2,40,800
Less: Drawings (8,600) 7,27,600 Stock in trade 2,22,400
Sundry creditors 2,48,000 Sundry debtors (W.N. 2) 3,57,400
Expenses 6,600 Cash in hand 24,000
outstanding
Cash in Bank 1,37,600

805
 9,82,200 9,82,200

Working Notes:

(1) Statement of Affairs as at 31st March, 2020

Liabilities ` Assets `
Sundry creditors 3,15,400 Plant & 2,32,200
Machinery
Outstanding 12,000 Stock 1,60,800
expenses
Mittal’s Capital Debtors 3,30,600
(Balancing 5,35,400 Cash in hand 59,200
figure)
_______ Cash at Bank 80,000
8,62,800 8,62,800

(2) Sundry Debtors Account

` `
To Balance b/d 3,30,600 By Cash 12,50,000
To Sales 13,44,200 By Discount 30,000
(14,36,200 – 92,000) By Returns (sales) 29,000
By Bad debts 8,400
________ By Balance c/d (Bal. fig.) 3,57,400
16,74,800 16,74,800

(3) Sundry Creditors Account

` `
To Bank – Payments 12,05,400 By Balance b/d 3,15,400

806
To Discount 14,000 By Purchases credit 11,60,000
To Returns 8,000 (Balancing figure)
To Balance c/d (closing
balance) 2,48,000
14,75,400 14,75,400

(4)

Depreciation on Plant & Machinery: `

Opening balance 2,32,200
Add: Additions
63,600
2,95,800
Less: Closing balance (2,40,80
0)
Depreciation
55,000
(5) Expenses to be shown in profit and loss account
Expenses (in cash) 1,91,400
Add: Outstanding of 2021 6,600
1,98,000
Less: Outstanding of 2020 12,000
1,86,000

(6) Cash and Bank Account

Cash Bank Cash Bank
To Balance 59,200 80,000 By Purchases 20,600 -

807
 b/d
To Capital 1,70,000 By Expenses 1,91,400
To Debtors 12,50,000 By Plant and 63,600
Machinery
To Bank 1,84,800 By Drawings 8,600
To Cash 1,00,000 By Creditors 12,05,400
To Sales 92,000 By Cash 1,84,800
By Bank 1,00,000
_______ ________ By Balance 24,000 1,37,600
c/d
3,36,000 16,00,000 3,36,000 16,00,000

Q20. Archana Enterprises maintain their books of accounts under single entry system. The Balance-
Sheet as on 31st March, 2018 was as follows :
Liabilities Amount Assets Amount (Rs.)
(Rs.)
Capital A/c 6,75,000 Furniture & fixtures 1,50,000
Trade creditors 7,57,500 Stock 9,15,000
Outstanding expenses 67,500 Trade debtors 3,12,000
Prepaid insurance 3,000
Cash in hand & at bank 1,20,000
15,00,000 15,00,000

The following was the summary of cash and bank book for the year ended 31st March, 2019:
Receipts Amount (Rs.) Payments Amount (Rs.)
Cash in hand & at Bank on 1,20,000 Payment to trade creditors 1,24,83,000

808
 1st April, 2018

Cash sales 1,10,70,000 Sundry expenses paid 9,31,050

Receipts from trade debtors 27,75,000 Drawings 3,60,000

Cash in hand & at Bank on

31st March, 2019 1,90,950

1,39,65,000 1,39,65,000
Additional Information:

(i) Discount allowed to trade debtors and received from trade creditors amounted to Rs.
54,000 and Rs. 42,500 respectively (for the year ended 31 st March, 2019).

(ii) Annual fire insurance premium of Rs. 9,000 was paid every year on 1st August for the
renewal of the policy.

(iii) Furniture & fixtures were subject to depreciation @ 15% p.a. on diminishing balance
method.

(iv) The following are the balances as on 31st March, 2019:

Stock Rs. 9,75,000
Trade debtors Rs. 3,43,000
Outstanding expenses Rs. 55,200
(v) Gross profit ratio of 10% on sales is maintained throughout the year.
You are required to prepare Trading and Profit & Loss account for the year ended 31st March,
2019, and Balance Sheet as on that date. [MTP May 2021] ( 12 marks )
Ans. Trading and Profit and Loss Account of Archana Enterprises

for the year ended 31st March, 2019

Rs. Rs.
To Opening Stock 9,15,000 By Sales

809
To Purchases (W.N. 2) 125,97,000 Cash 110,70,000
To Gross profit c/d 13,93,000 Credit (W.N. 1) By 28,60,000 139,30,000
(10% of 139,30,000) Closing stock 9,75,000
149,05,000 149,05,000
To Sundry expenses (W.N. 4) 9,18,750 By Gross profit b/d By 13,93,000
Discount received
To Discount allowed 54,000 42,500
To Depreciation 22,500
(15% Rs. 1,50,000)

To Net Profit (b.f.) 4,40,250

14,35,500 14,35,500

Balance Sheet of Archana Enterprises as at 31st March, 2019

Liabilities Amount Assets Amount
Rs. Rs.
Capital Furniture & Fittings 1,50,000
Opening balance 6,75,000 Less: Depreciation (22,500) 1,27,500

Less: Drawing (3,60,000) Stock 9,75,000

3,15,000 Trade Debtors 3,43,000
Add: Net profit for Unexpired insurance 3,000
the years 4,40,250 7,55,250
Trade creditors 8,29,000 Cash in hand & at bank 1,90,950
(W.N. 3)
Outstanding expenses 55,200

16,39,450 16,39,450

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Working Notes:

1. Trade Debtors Account

Rs. Rs.
To Balance b/d 3,12,000 By Cash/Bank 27,75,000
To Credit sales 28,60,000 By Discount allowed 54,000
(Bal. fig.) By Balance c/d 3,43,000
31,72,000 31,72,000

2. Memorandum Trading Account

Rs. Rs.
To Opening stock 9,15,000 By Sales 139,30,000
To Purchases (Balancing 125,97,000 By Closing 9,75,000
figure) stock
To Gross Profit (10% on 13,93,000
sales)
149,05,000 149,05,000

3. Trade Creditors Account

Rs. Rs.
To Cash/Bank 124,83,000 By Balance b/d 7,57,500

To Discount 42,500 By Purchases (as 125,97,000

received To calculated in W.N. 2)
Balance c/d
8,29,000
(balancing
133,54,500 133,54,500
figure)

4. Computation of sundry expenses to be charged to Profit & Loss A/c

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 Rs.
Sundry expenses paid (as per cash and Bank book) 9,31,050
Add: Prepaid expenses as on 31–3–2018 3,000
9,34,050
Less: Outstanding expenses as on 31–3–2018 (67,500)
8,66,550
Add: Outstanding expenses as on 31–3–2019 55,200
9,21,750
Less: Prepaid expenses as on 31–3–2019 (Insurance paid
till July,
2019) (9,000 x 4/12) (3,000)
9,18,750

Q21. The following is the Balance Sheet of Chirag as on 31 st March, 2020:

Liabiliti Rs. Asset Rs.
es s
Capital Account 48,000 Building 32,500
Loan 15,000 Furniture 5,000
Creditor 31,000 Motor car 9,000
Stock 20,000
Debtors 17,000
Cash in hand 2,000
Cash at bank 8,500
94,000 94,000

A riot occurred on the night of 31st March, 2021 in which all books and records were lost. The cashier
had absconded with the available cash. He gives you the following information:
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 (a) His sales for the year ended 31st March, 2021 were 20% higher than the previous year’s
sales. He always sells his goods at cost plus 25%; 20% of the total sales for the year ended
31st March, 2021 were for cash. There were no cash purchases.

(b) On 1st April, 2020 the stock level was raised to Rs. 30,000 and stock was maintained at this
new level all throughout the year.

(c) Collection from debtors amounted to Rs. 1,40,000 of which Rs. 35,000 was received in
cash, Business expenses amounted to Rs. 20,000 of which Rs. 5,000 was outstanding on
31st March, 2021 and Rs. 6,000 was paid by cheques.

(d) Analysis of the Pass Book revealed the Payment to Creditors Rs. 1,37,500, Personal
Drawing Rs. 7,500, Cash deposited in Bank Rs. 71,500, and Cash withdrawn from Bank
Rs. 12,000.

(e) Gross profit as per last year’s audited accounts was Rs. 30,000.

(f) Provide depreciation on Building and Furniture at 5% and Motor Car at 20%.

(g) The amount defalcated by the cashier may be treated as recoverable from him.

You are required to prepare the Trading and Profit and Loss Account for the year ended 31 st
March, 2021 and Balance Sheet as on that date. [ MTP May 2021] ( 12 marks )

Ans. Trading and Profit and Loss Account for the year ending on 31 st March, 2021
Particulars Rs. Particulars Rs.
To Opening Stock 20,000 By Sales 1,80,000
To Purchases (bal.fig.) 1,54,000 By Closing Stock 30,000
To Gross Profit c/d (@20% on sales) 36,000 2,10,000
2,10,000
To Sundry Business Expenses 20,000 By Gross Profit b/d 36,000
To Depreciation:

813
 Building 1,625
Furniture 250
Motor 1,800 3,675
To Net profit transferred to Capital A/c 12,325

36,000 36,000

Balance Sheet as at 31st March, 2021

Liabilities Rs. Assets Rs.
Capital Account: Building 32,500
Opening Balance 48,000 Less: Depreciation (1,625) 30,875
Add: Net profit 12,325 Furniture 5,000
60,325 Less: Depreciation (250) 4,750
Less: Drawings (7,500) 52,825 Motor Car 9,000
Loan 15,000 Less: Depreciation (1,800) 7,200
Sundry Creditors 47,500 Stock in trade 30,000
Outstanding Expenses 5,000 Sundry Debtors 21,000
Cash at Bank 22,000
Sundry Advances
(Amount recoverable from
Cashier) 4,500
1,20,325 1,20,325

Working Notes:

(i) Total Debtors Account

Particulars Rs. Particulars Rs.
To Balance b/d 17,000 By Bank (Rs. 1,40,000 – Rs. 1,05,000

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 35,000)
To Sales (80% of Rs. 1,44,000 By Cash A/c 35,000
1,80,000)
By Balance c/d 21,000
1,61,000 1,61,000

(ii) Total Creditors Account

Particulars Rs. Particulars Rs.
To Bank 1,37,500 By Balance b/d 31,000
To Balance c/d 47,500 By Purchases 1,54,000
1,85,000 1,85,000

(iii) Cash Book

Particulars Cash Bank Rs. Particulars Cash Bank Rs.
Rs. Rs.
To Balance b/d 2,000 8,500 By Business Expenses 9,000 6,000
To Sales 36,000 - By Drawings - 7,500
To Sundry Debtors 35,000 1,05,000 By Sundry Creditors - 1,37,500
To Cash (Contra) - 71,500 By Bank (Contra) 71,500 -
To Bank (Contra) 12,000 By Cash (Contra) - 12,000
By Defalcation (Bal fig.) 4,500 -
By Balance c/d (Bal fig.) 22,000
85,000 1,85,000 85,000 1,85,000

(iv) Last year’s Total Sales = Gross Profit x 100/20 = Rs. 30,000 x 100/20 = Rs. 1,50,000
(v) Current year’s Total Sales = Rs. 1,50,000+ 20% of Rs. 1,50,000= Rs. 1,80,000
(vi) Current year’s Credit Sales = Rs. 1,80,000 x 80%= Rs. 1,44,000

(vii) Cost of Goods Sold = Sales – G.P. = Rs.1,80,000 – Rs. 36,000 = Rs. 1,44,000

815
 (viii) Purchases = Cost of Goods Sold + Closing Stock – Opening Stock

= Rs. 1,44,000 + Rs. 30,000 – Rs. 20,000 = Rs. 1,54,000

Q22. Ram carried on business as retail merchant. He has not maintained regular account books.
However, he always maintained ` 10,000 in cash and deposited the balance into the bank account. He
informs you that he has sold goods at profit of 25% on sales.

Following information is given to you:

Assets and Liabilities As on 1.4.2019 As on 31.3.2020
Cash in Hand 10,000 10,000
Sundry Creditors 40,000 90,000
Cash at Bank 50,000 (Cr.) 80,000 (Dr.)
Sundry Debtors 1,00,000 3,50,000
Stock in Trade 2,80,000 ?
Ram’s capital 3,00,000

Analysis of his bank pass book reveals the following information:

(a) Payment to creditors ` 7,00,000

(b) Payment for business expenses ` 1,20,000

(c) Receipts from debtors ` 7,50,000

(d) Loan from Laxman ` 1,00,000 taken on 1.10.2019 at 10% per annum

(e) Cash deposited in the bank ` 1,00,000

He informs you that he paid creditors for goods ` 20,000 in cash and salaries ` 40,000 in cash.
He has drawn ` 80,000 in cash for personal expenses. During the year Ram had not introduced
any additional capital. Surplus cash if any, to be taken as cash sales.

You are required to prepare: (i) Trading and Profit and Loss Account for the year ended 31.3.2020.
(iii) Balance Sheet as at 31st March, 2020. [MTP Nov 2020 ] ( 12 marks)

816
 Ans. Trading and Profit and Loss Account
for the year ended 31st
March, 2020
` `
To Opening stock 2,80,000 By Sales
To Purchases 7,70,000 Cash 2,40,000
To Gross Profit @ 25% 3,10,000 Credit 10,00,000 12,40,000
By Closing Stock (bal.fig.) 1,20,000
13,60,000 13,60,000
To Salaries 40,000 By Gross Profit 3,10,000
To Business expenses 1,20,000
To Interest on loan 5,000
(10% of 1,00,000 x 6/12)
To Net Profit 1,45,000

3,10,000 3,10,000

Balance Sheet as at 31st March, 2020

Liabilities ` ` Assets `
Ram’s capital: Cash in hand Cash 10,000

Opening 3,00,000 at Bank Sundry 80,000

1,45,000 Debtors Stock in
Add: Net Profit 3,50,000
trade
4,45,000 1,20,000

Less: Drawings (80,000)

3,65,000
Loan from Laxman (including interest due) 1,05,000

817
Sundry Creditors 90,000
5,60,000

5,60,000

Working Notes:

1. Sundry Debtors Account

` `
To Balance b/d 1,00,000 By Bank A/c 7,50,000
To Credit sales (Bal. fig) 10,00,000 By Balance c/d 3,50,000
11,00,000 11,00,000

2. Sundry Creditors Account

` `
To Bank A/c To 7,00,000 By Balance b/d 40,000
Cash A/c To 20,000 By Purchases (Bal. fig.) 7,70,000
Balance c/d 90,000
8,10,000
8,10,000

3. Cash and Bank Account

Cash Bank Cash Bank
` ` ` `
To Balance b/d 10,000 By Balance b/d 50,000
To Sales (bal. fig) 2,40,000 By Bank A/c (C) 1,00,000
To Cash (C) 1,00,000 By Salaries 40,000

818
 To Debtors 7,50,000 By Creditors 20,000 7,00,000
To Laxman’s loan 1,00,000 By Drawings 80,000
By Business
expenses Balance 1,20,000
By c/d 10,000 80,000
2,50,000 9,50,000 2,50,000 9,50,000

Q23. From the following information, prepare Trading and Profit & Loss Account for the year ended
31.03.2020 and the Balance Sheet as at 31.03.2020 of M/s Prasad & Co., a proprietorship firm.
Assets & Liabilities As on 01.04.2019 As on 31.03.2020
Creditors 20,000 15,000
Outstanding Expenses 600 800
Fixed Assets 12,000 13,000
Stock 10,000 12,000
Cash in hand 7,500 2,000
Cash at Bank 2,500 10,000
Debtors ? 18,000

Details of the year’s transactions are as follows:

(1) Discounts allowed to Debtor 4,000
(2) Returns from debtors 1,450
(3) Bad debts 500
(4) Total sales (Cash and Credit) 72,000
(5) Discount allowed by creditors 700
(6) Returns to creditors 400
(7) Receipts from debtors paid into Bank 76,000

819
 (8) Cash purchases 1,000
(9) Expenses paid by cash 9,000
(10) Drawings by cheque 500
(11) Purchase of Fixed Assets by cheque 4,000
(12) Cash deposited into bank 5,000
(13) Cash withdrawn from bank 9,000
(14) Cash in hand at 31.03.2020 2,000
(15) Payments to creditors by cheque 60,000

No assets were sold during the year. Any difference in cash account to be considered as cash sales.
[MTP May 2020 ] ( 16 marks )

Ans. In the books of M/s Prasad & Co. Trading and

Profit and Loss Account for the year ended
31st March, 2020
Rs. Rs. Rs. Rs.
To Opening stock 10,000 By Sales:
To Purchases: Cash 500
Cash 1,000 Credit 71,500
Credit (W.N. 3) 56,100 Less: Returns (1,450) 70,550
57,100 By Closing stock 12,000
Less: Returns (400) 56,700
To Gross Profit c/d 15,850

82,550 82,550
To Discount 4,000 By Gross profit b/d 15,850
allowed
To Bad debts 500 By Discount received 700

820
To General expenses 9,200 By Net Loss (balancing fig.) 150
(W.N. 5)
To Depreciation (W.N. 4) 3,000 __
16,700 16,700

Balance Sheet as at 31st March, 2020

Liabilities Rs. Assets Rs.
Capital (W.N. 1) 39,850 Fixed Assets 12,000
Less: Net loss 150 Add: New asset 4,000
39,700 16,000
Less: Drawings (500) 39,200 Less: (3,000) 13,000
Depreciation
Sundry creditors 15,000 Stock in trade 12,000
Expenses outstanding 800 Sundry debtors (W.N. 2) 18,000
Cash in hand 2,000
_______ Cash in Bank 10,000
55,000 55,000

Working Notes:

(1) Ascertainment of Opening Capital - Statement of Affairs as at 1.4.19

Liabilities Rs. Assets Rs.
Sundry creditors 20,000 Fixed Assets 12,000
Outstanding expenses 600 Stock 10,000
Prasad’s Capital Debtors 28,450
(Balancing figure) 39,850 Cash in hand 7,500
_______ Cash at Bank 2,500

821
 60,450 60,450

(2) Sundry Debtors Account

Rs. Rs.
To Balance b/d (bal. fig) 28,450 By Cash 76,000
To Sales (72,000 – 500) 71,500 By Discount 4,000
By Returns (sales) 1,450
By Bad debts 500
________ By Balance c/d (given) 18,000
99,950 99,950

(3) Sundry Creditors Account

Rs. Rs.
To Bank – Payments 60,000 By Balance b/d Purchases - credit (Balancing 20,000
To Discount 700 By figure) 56,100
To Returns 400
To Balance c/d
(closing
balance) ________
15,000
76,100 76,100

(4) Depreciation on Fixed Assets

Rs.
Opening balance of fixed assets 12,000
Add: Additions 4,000
16,000

822
 Less: Closing balance of fixed assets (13,000)
Depreciation 3,000

(5) Expenses to be shown in profit and loss account

Expenses (in cash) 9,000

Add: Outstanding of 2020 800

9,800
Less: Outstanding of 2019 600
9,200

(6) Cash and Bank Account

Cash Bank Cash Bank
Rs. Rs. Rs. Rs.
To Balance b/d 7,500 2,500 By Purchases 1,000 -
To Debtors - 76,000 By Expenses 9,000
To Bank (C) 9,000 - By Fixed Asset 4,000
To Cash (C) - 5,000 By Drawings 500
To Sales (balancing figure 500 - By Creditors 60,000
considered as cash sales)
By Cash (C) 9,000
By Bank (C) 5,000
By Balance c/d 10,000
2,000
17,000 83,500 17,000 83,500

Q24. Mr. Aman is running a business of readymade garments. He does not maintain his books of
accounts under double entry system. While assessing the income of Mr. Aman for the financial year
2018-19, Income Tax Officer feels that he has not disclosed the full income earned by him from his

823
 business. He provides you the following information:

On 31st March, 2018

Sundry Assets `16,65,000
Liabilities `4,13,000

On 31st March, 2019

Sundry Assets `28,40,000
Liabilities `5,80,000
Mr. Aman’s drawings for the year 2018-19 `32,000 per month
Income declared to the Income Tax Officer `9,12,000

During the year 2018-19, one life insurance policy of Mr. Aman was matured and amount received
50,000 was retained in the business.State whether the Income Tax Officer's contention is correct.
Explain by giving your working. [MTP Nov 2020 ] ( 5 marks )
Ans. Determination of Capital balances of Mr. Aman on 31.3.2018 and 31.3.2019
31.3.2018 31.3.2019
Assets 16,65,000 28,40,000
Less: Liabilities (4,13,000) (5,80,000)
Capital 12,52,000 22,60,000

Determination of Profit by applying the method of the capital comparison

`
Capital Balance as on 31-3-2019 22,60,000
Less: Fresh capital introduced (matured life insurance policy (50,000)
amount)
22,10,000
Add: Drawings (`32,000 × 12) 3,84,000
25,94,000

824
 Less: Capital Balance as on 1.4.2018 (12,52,000)
Profit 13,42,000
Income declared 9,12,000
Suppressed Income 4,30,000

The Income-tax officer’s contention that Mr. Aman has not declared his true income is correct. Mr.
Aman’s true income is in excess of the disclosed income by `4,30,000.

825