1

ANSWERS TO

COMMERCE PAPER – II

MARCH – 2006

PART – A

I. Answer any two of the following questions not exceeding

40 lines.
1. What are the major functions of marketing? Explain
Ans:
Major Functions of Marketing
Marketing functions have been classified by different marketing experts in different
ways. But the most acceptable and meaningful classification is given by Clark and Clark.

1. Functions of Exchange
2. Functions of physical supply
1. Facilitating functions

1. Functions of Exchange :
1. Buying : It is the first step in the process of marketing. It requires planing of
purchases, search for sellers, selection of goods to be brought, assembling of
goods in right quantity, quality at right price time and the right place. Goods may
be purchased in any ways as : (a) By Inspection (b) By grading (c) By Sample or
(d) By description.
2. Selling : The main objective of any concern is to earn profits by selling. Selling
is the process of disposing off or transferring goods by sale. Selling creates
demand for product. Selling function involves product planning and
development, finding out or locating to buyers, negotiation of terms of sale such
as price, quantity, quality, date of delivery etc.
 2

3. Pricing : Pricing is closely related to selling. Pricing policy directly affects the
sales and profitability of the concern. The pricing policy may be cost based,
demand based or competition based and it varies from one company to the
other.
4. Advertising : Advertising is nothing but a paid form of non-personal
presentation of ideas, goods or services by an identified sponsor. Advertising
aims at introducing a new product, creating demand, facing competition and
creating goodwill. The different media used for advertising are television, radio,
cinema, press, posters etc.
5. Sales Promotion : It refers to those marketing activities other than advertising,
personal selling and publicity that stimulate consumer purchasing and dealer
effectiveness. Sales promotion techniques are indirect and non-personal.
Samples, demonstrations, coupons, contests, discounts, prizes, gifts etc., are
examples for sales promotion.

II. Functions of Physical Supply :

1. Transportation : Transportation is the carrying of goods from point of
production to the place of consumption. It creates place utility. Different modes
of transportation like bullock cart, truck, train, aeroplane and ship can be used
for the movement of goods.
2. Storage : Storage involves the holding of goods from the time they are
produced until they are needed for consumption without deterioration in quality.
Storage creates time and place utilities. It enables goods to be made available
to consumers wherever and whenever they are needed. It matches supply with
demand and stabilises prices.

III. Facilitating functions :

1. Financing : For exchange of goods and services and for any other marketing
activities finance is an important aspect. The finance of marketing can be
obtained from various sources such as banks, Financial institutions, individuals
etc.
2. Risk taking : Risk is the chance of loss. In any marketing activity uncertainty is
bound to exist. The unpredictable nature of consumers changing fashions,
 3

increasing competition etc., have to led to the concept of Risk- bearing. Some of
the risks may be avoided by taking insurance coverage.
3. Marketing Research : This is scientific device of knowing the potential market
for a particular product. This tells the producers as to (1) who are potential
buyers (2) What are their requirements (3) What are the defects of the product
(4) How should it be placed and all other relevant information.
4. Standardisation and Grading : Standardisation refers to establish standards
for different grades of products. Standard is a list of specification based on size,
colour, appearance, shape, taste etc. Grading refers to sorting of products into
different lots, each of which has substantially some characteristics with respect
of quality.
5. Packing : Packing is also an important function of marketing. It protect the
goods from damages. It also serves as a means of identifying a manufacturer’s
products. Packing means placing products in appropriate packages.
6. Branding : A brand is defined as a name, term, symbol or a design or
combination of them which is intended to identify the goods. The object of
branding is to introduce product differentiation in the market. Brand differentiates
the goods of one seller from those of his competitors in the market.

1. What are the powers of District Forum?

Ans:
District Forum:
A consumer Disputes Redressal Forum to be known as the District Forum, is the
forum established by the State Government in each District by notification. The State
Government may establish, if it deems fit, more than one District Forum in a district.
The District Forum is vested with necessary powers to redress consumers’
grievances with respect to unfair trade practices, defective goods and services, where
the value of which and the compensation, if any, claimed does not exceed Rs.20 lakhs.
Powers of District Forum :
1. Powers of Civil Court : For the purpose of settlement of the consumer
disputes under the Act, the District Forum has been vested with the same powers
as are vested in a Civil Court under the code of Civil Procedure, 1908 (5 of 1908)
while trying a suit in respect of the following matters, namely :
 4

i. the summoning and enforcing attendance of any defendant or witness and

examining the witness on oath.
ii. The discovery and production of any document or other material object
productable as evidence.
iii. The reception of evidence on affidavits.
iv. The requisitioning of the report of the concerned analysis or test from the
appropriate laboratory or from any other relevant sources.
v. Issuing of any commission for the examination of any witness and
vi. Any other matter which may be prescribed.

2. Power of Search and Seizure : In addition to the above, the Forum has the
power to require any person to furnish such books, accounts, documents or
commodities, as may be required for the purpose of examining them. The Forum
can also exercise the power of entry, seize and search of any premises.
3. Power to give Direction : Where the District Forum is satisfied that the goods
complained against suffer from any of the defects specified in the complaint or the
allegations contained in the complaint against the services are proved. It shall
issue an order to the opposite party (or seller) directing him to do one or more of
the following things, namely.
i. to remove the defects pointed out from the goods;
ii. to replace the goods with similar new goods;
iii. to return the price and charges paid by the complainant;
iv. to pay compensation to the consumer for any loss or injury suffered;
v. to remove the defects in goods or the deficiencies in the services;
vi. to discontinue the unfair trade practice or the restrictive trade practice or not to
repeat it;
vii. not to offer hazardous goods for sale; and
viii. to withdraw the hazardous goods from being offered for sale;
ix. to cease manufacture of hazardous goods and to desist from offering services
which are hazardous in nature.
x. to pay such sum as may be determined if it is of the opinion that loss or injury
has been suffered by a large number of consumers who are not identifiable
 5

conveniently (the amount so payable shall not be less than 5% of the value
of defective goods sold or services provided)
xi. to issue corrective advertisement to neutralise the effect of misleading
advertisement at the cost of the opposite party responsible for issuing such
misleading advertisement, and
xii. to provide for adequate costs to parties.

2. Describe the functions of Stock Exchange.

Ans:
Functions of Stock Exchange
The following are the definitions given by various experts and institution an stock
exchange.
Garg K. L.: An association of persons engaged in the buying and selling of
stocks, bonds and shares for the public on commission and guided by certain rules and
usages.
Securities contracts (Regulation) Act 1956: Any body of individuals whether
incorporated or not, constituted for the purpose of assisting, regulating, or controlling the
business of buying, selling or dealing in securities.

Functions of Stock Exchange:

Stock exchange, being a part of capital market, performs two functions
viz., primary functions and subsidiary functions.

I. Primary Functions:
The following are the basis functions of a stock exchange.
1. Provision of ready market for securities: The stock exchange provides a
ready market for securities. The investors can easily buy and sell securities on
the floor of the stock exchange. The prices at which the securities have been
traded are regularly given in the electronic and print media for the benefit of
investors.
2. Determination of security prices: The stock exchange helps in determining
the prices of various listed securities. The buying of securities regularly leads to
the determination of prices of securities. The exchange helps in the provision of
prices of securities through print and electronic media.
 6

3. Mobilisation Surplus Savings: Stock exchange is a channel for mobilising

capital. It helps in the mobilisation of small savings from various parts of the
country. By directing the flow of capital into worthwhile projects, it helps faster
economic development of the country. It provides mobility capital and facilitate
sound investment.
4. Provision of Liquidity for securities: In a stock exchange buying and selling
securities takes place regularly and systematically. Hence, an investor can
encash his securities at any time.
5. Protection of investors: A stock exchange functions strictly according to rules
and regulations. These rules and regulations provide a check on over trading in
securities. They prevent the manipulation of prices. Thus, a stock exchange
serves as a caretaker of investor ‘s money.
6. Encourages speculative dealings: Most of dealings are in the form of forward
contracts. In stock exchanges all facilities for a future contract are provided. The
terms of contract, payment and other conditions will be certified by the
exchange. This encourages speculation.
7. Barometer of economy: A stock exchange serves as a reliable barometer of a
country’s economic situation. It reflects the changes taking place in the
economy. It is a symbol of the development of an economy.

II. Subsidiary Functions:

In addition to the above primary function, stock exchange performs the
following subsidiary functions.

1. Safety of Investment: Securities in the stock exchanges are listed after

complete security. It prevents the trading of false and duplicate securities. It
also facilitates in the immediate and easy transfer of securities.
2. Provision of information about listed companies: The organised stock
exchange collects information about the companies listed with it and publish
the information in the form of “Official Year Book”. This proves very useful to
the investors in making investment decisions.
 7

3. Publication of statistics: Stock exchanges publish regularly correct reports

regarding securities trade. They provide free information from such reports to
investors.

III. Answer any four of the following questions not exceeding

20 lines.
1. Explain the differences between life insurance and marine insurance
Ans:
Life Insurance:
Life Insurance is a contract by which the insurer, in consideration of a premium
either in gross sum or by periodical payment undertakes to the person for whose benefit
the insurance is effected, a sum of money of annuity or the death of the person whose
life is insured or at his attaining a certain age.

Fire Insurance:
An insurance against fire is one by which the insurer, in consideration of a
payment in gross or at stated intervals, agrees to indemnify the insured for a certain time
against damage to his property by fire.
Differences between Life Insurance and Fire Insurance

Basis of difference Life Insurance Fire insurance

1. Nature of Risk The risk is certain in life This risk is not certain
insurance
2. Object The object is to secure The object is to provide
future and also to make security in the event of a
investment loss.
3. Time coverage The policy is generally of Fire / Marine insurance
a longer period policy is for a short
period
4. Premium amount It is decided according to Premium is decided
the age of insured and according to the risk
the time of the policy involved.
5. Insurable interest In life insurance, The insurable interest
insurable interest must must exist at the time of
exit at the time of contract and also at the
acquiring the policy. time of loss
6. Compensation In this case loss is not In fire / Marine
compensated a fixed insurance, actual loss is
amount of money (sum compensated.
assured) is only paid
 8

7. Surrender of policy The policy, can be The policy can not be

surrendered before its surrendered.
maturity.
8. Moral obligation The moral obligation of The insured is under
the insured is less moral obligation to
because nobody may die protect the goods
to get insurance money. insured.
9. Payment of premium The premium may be The payments of
paid in installments. premium is in lump sum
amount payable at one
time.

1. What are the objectives in levying customs and excise

duty? Explain
Ans:
Customs Duties:
Almost every government in the world levies duties on goods imported and
exported by the country. These levies are called custom duties. The import duty will
be levied when goods are brought into the country.
Custom duties may be charged for any of the following objects:
1. to raise revenue for the government
2. to give protection to the home products as against the foreign imports and
dumping
3. to give preferential treatment to the production of one country over the other.
Custom duties may be levied either on the quantity of goods or according to their
value. When duties are imposed according to weight, volume or measurement of the
imported or exported goods, they are known as specific duties. When the duty is
charged according to the value of the goods imported or exported, it is called ad valorem
duty. Most of the duties are ad valorem. Some countries levy both ad valorem and
specific duties on the same article. The duties are charged at different rates for different
goods for which the government prepares schedules known as tariffs.

Excise Duties:
These duties are imposed on the manufacture and consumption of goods
produced in the home country. These are primarily charged for raising revenue for the
Government. In India, the Central and State Governments are having right to impose
excise duty.
 9

Sometimes, these may also be imposed to discourage consumption. Luxury

goods are charged with excise duty at a higher rate than the essential goods. In our
country almost all products have to bear some excise duty. Sugar, cloth, liquors,
safety matches etc., are subject to excise duties. However, small scale industries are
exempted from the payment of excise duties.

2. What are the advantages and disadvantages of outdoor media?

Ans:
Outdoor Media :
Outdoor or mural advertising is the oldest form of advertising and remains the most
common media even today. It is also called `wall advertising’. Outdoor advertising
consists of a display of advertisements out of door which may be in the form of posters,
painted signs, field signs, neon light signs, hoardigns and posters carried by sand
witchmen. This is also referred to as mural advertising as posters consisting of a
picture, are often placed on walls particularly a large one, printed directly on a wall or
large photograph attached directly to a wall. Small playcards or posters placed outside
or inside carriages such as trams, delivery –vans, buses, railway carriages etc., are
come under this category. The new form of advertising by using balloons, kites and
smoke-writing in the sky is also a part of outdoor advertising.

Advantages of Outdoor Media :

1. It has wide coverage
2. It is capable gaining more attention of the public
3. Outdoor advertising is more useful for local dealers. Its results can be more
readily secured by using this form of advertising.
4. In big cities and high traffic areas, outdoor advertising is the most effective form
of advertising.
5. Outdoor advertising is more flexible
6. It offers greater selectively because it can be used locally, regionally or even
nationally.
7. It can be easily remembered
8. It is quite economical
9. It has comparatively long life
10. It is a very good media to stress brand names and package identity.
 10

Disadvantages of Outdoor Media

The outdoor advertising media possess the following disadvantages and thus is
subject to criticism.
1. It is subject to adverse reaction of the public on the ground that the walls of the
houses are used for writing outdoor advertisement even without the permission
of the owner of the house.
2. The message written under this type of advertising is to brief.
3. The exact effect created on prospects is difficult to measure.
4. The language used in writing on the wall advertising is usually defective and
sometimes immoral too. It has an adverse effect on the public.

3. Give an outline of the advantages of computers.

Ans:
Compter Definition:
A computer can be defined as an electronic data processing machine which not
only process numeric and non –numeric data. It also stores and retrieves a lot of
information whenever needed.
Computer can do mathematical calculations like additions, subtractions,
multiplication’s, divisions etc., millions of times faster than a human brain.
Advantages of Computers:
Computers are widely used in almost every aspect of present day society. They
have become an indispensable tool of the modern competitive world. In business
field computers are widely used for inventory control, preparation of salary sheets,
maintenance of records. Preparation of financial statements etc. The following are
advantages of computers.
1. A computer provides more information than is otherwise possible.
2. It provides information at a great speed.
3. It reduces the monotony of the office staff.
4. It makes complicated calculations at a great speed.
5. It saves office labour costs.
6. It ensures greater accuracy in data processing
7. It provides indirect financial saving through various types of application e.
g., inventory control.
 11

8. It ensures better centralised control.

9. It provides flexibility of operations as any number of programmes can be
prepared for different business operations.
10. It improves customer service and company prestige.

1. Write the differences between speculator and investor.

Ans:
Speculator :
The person who buys the securities with a hope to sell them in future at a profit or sell in
expectation of being able to buy at a profit in future is called as a speculator. He seeks
his gain wholly through price differences. .Speculator are of four types. They are :
(1) Bulls (2) Bears (3) Laneduch (4) Stag

Investor :
Investor is a person who invests in various types of securities. His main aim is
optimising the return on his investments. Always takes care of security of this principal
amount. He also shows more interest in security of his income also. Generally investor
will not be prepared to bear any risk of laws. He prefers maximum marketability as well
as liquidity of his investment. He is not at all interested in the forward markets like that
of a speculator.

Differences between Speculator and Investor

Basis of difference Speculator
1. Basic Objective Speculator’s main interest is
in making quick profits on the
basis of price changes.
2. Delivery Speculation does not take
Securities delivery of the securities
purchased, or gives delivery
of securities sold by him. He
receives or pays the amount
of difference in the sale and
purchase price
investor
Investor is interested mainly
in the safety of investment
regularity of income and
appreciation in the value of
securities.
Investor takes delivery of
the securities and pays for
them after purchase and
delivers the securities which
he has sold on payment.
 12

6. Write five functions of managers.

Ans:
The following are the five functions of managers.
1. Planning,
2. Organising,
3. Staffing,
4. Directing, and
5. Controlling

III. Answer any five of the following questions not exceeding 5

lines each.
1. Average policy
Ans:
A fire policy containing an ‘Average Clause’ is called an Average policy. Under a
specific policy (i.e., a policy without the Average Clause), in the event of loss, the
insured can claim up the full amount of his policy, even if he has under – insured his
property. Suppose, the property insured for Rs.10,000 is valued at Rs.20,000 at the
time of loss. This is a case of under – insurance. In case of policy without an
Average Clause, if the loss is, say for Rs.8,000 the insured can claim this full amount
from the insurer. But, if the policy is ‘subject to average, i.e., if it is an average policy,
the insured will be paid Rs.8,000 x 10,000 / 20,000 = Rs.4,000 only. Thus under an
average policy, the insured is penalised for under – insurance of the property.

1. E – Commerce
Ans:
It is the process of conducting business by electronic means. It means the use of
computer and other relating electronic equipment to do business through internet. E-
Commerce is a process of buying and selling of goods or services online through
internet any time and any where and payment by electronic credit cards.
 13

2. What are the two advantages and two disadvantages of T.V.

advertising?
Ans:
Television Advertising :
It is said that today television advertising is the best selling media ever invented.
It has a potential advertising impact unmatched by an other media. It is a means of
bringing actual demonstration in the homes of the prospects and is therefore more
effective media when compared with radio. That is why the position of radio advertising
has now being gradually taken by television advertising.
The coverage of television is increasing at a rapid pace in India. This media is
particularly advantageous for those advertisers whose products require demonstration.
Sponsored programmes have also been started on television in India.

Advantages :
1. On television the products can be demonstrated and their use can be explained.
No other medium can compete with T.V. as far as effective presentation is
concerned.
2. This medium reaches the people almost like personal or face to face contract.
3. Advertisements can be clubbed with entertainment programmes to avoid
monotony arising on account of continuous viewing of advertisements.
4. This medium facilitates the advertisers to use computer graphics, music, spoken
words, written words and illustrations while transmitting the message.
5. The message can be sent conveniently depending on the geographical region to
cover and accordingly the channel can be chosen.
6. This medium allows the advertiser to repeat the message as frequently as
possible to draw the attention of the target audience.
Disadvantages :
1. It is a costly medium when compared to print medium and only the big firms can
afford to use it because its production costs are very high.
2. The message given in TV must be seen and understood immediately.
Otherwise, its utility is lost. Therefore, complicated messages cannot be sent
through T.V.
 14

3. Often too much content is compressed in T.V. advertisements which is to last for
a few seconds, Because of this, people fail to understand the main theme of the
advertisement.
4. With the help of remote control, viewers may skip the commercials.

1. State any three consumer rights.

Ans:
Consumer Rights :
The following are the rights of consumers.
1. the right to be protected against marketing of goods which are hazardous to
life and property.
2. The right to be informed about the quality, quantity, potency, purity,
standard and price of goods to protect the consumers against unfair trade
practices.
3. The right to be assured, wherever possible, access to variety of goods at
competitive prices;
4. The right to be heard and to be assured that consumers interest will receive
due consideration at appropriate forums.
5. The right to seek redressal against unfair trade practices or unscrupulous
exploitation of consumers; and
6. The right to consumer education

5. Certificate of origin
Ans:
Certificate of Origin
The certificate of origin is a document issued as a proof of the fact that the goods
have been produced in the country mentioned in it. It will be signed by the exporter and
counter – signed by the customs officer. In countries like Indian Chambers of Commerce
are also authorised to issue such certificates. The purpose of this certificate enables the
exporter in getting concessions in customs duty, when there is a trade agreement
between importing and exporting countries.
 15

This certificate of origin is normally issued by the Chamber of Commerce. Indian

Merchant’s Chambers, Indo – Arab Chamber of Commerce, Memon Chamber of
Commerce, Bombay chamber of Commerce and Maharashtra Chamber of
Commerce are some of the chambers regularly approached by the exporters for
certificate of origin.

6. Bull:
Ans:
Bull
A speculator, who anticipates rise in the price of securities. He buys securities
with a view to sell them in future at a higher prices and thereby make a profit. In India, a
bull is also known as a tejiwala.

1. Attitude:
Ans:
Attitude
People do their work better if they like that work. Similarly people become more
effective members of work group if they like the other members of the work group. In the
presence of such things to react favourably is called an attitude. All of us have
favourable and unfavourable attitudes. Favourable attitudes definitely contribute to better
performance.
For example, if a person looks at his work as something unavoidable, feels very
unhappy while doing the work and prefers to do the minimum work and get away from
this, it is an unfavourable attitude. Such people do not work, feel unhappy and avoid
work as much as possible.
There are people who look at their work as a challenge and opportunity to rpove
their merit, enjoy their work and would like to do their best and also create a good and
pleasant atmosphere.
 16

2. C.P.U. (Central Processing Unit):

Ans:
Central Processing Unit
The most important part of the computer is C.P.U. It means central processing unit.
It is the brain of the computer, because it has many similarities of a brain. It has to
process the input data and has to produce the output results as per the program given
by user. The C.P.U. divided into three parts. (a) Control unit (b) Arithmetic/Logic unit
(A.L.U.), (c) Memory Unit.
1. Control Unit ; It control the flow of input and output and direct operations of the
entire system.
2. ALU : It means arithmetic and logical calculations that are needed while
processing the data.
3. Memory : This is the place where the data is stored permanently. It has
circuitory to control the interpretation and execution of instructions. It has
arithmetic, logic and control sections. This processor control the sequence of
instructions give commands to all devices and carries out processing work.

PART – B

Solution IV:
Revaluation Account
Dr. Cr.
Particulars Amount Particulars Amount
Rs. Rs.
To Patents 4,000 By Bad debts reserve 8,000
To Outstanding liability 1,600
To X ‘s Capital a/c 800
To Y’s Capital a/c 800
To Z’s Capital a/c 800
8,000 8,000

X’s Capital Account

Dr. Cr.
Particulars Amount Particulars Amount
Rs. Rs.
To 5% X loan a/c 74,134 By Balance b/d 60,000
By Reserve Fund 13,334
By Revaluation a/c 800
 17

74,134 74,134

Y’s Capital Account

Dr. Cr.
Particulars Amount Particulars Amount
Rs. Rs.
To Balance c/d 74,133 By Balance b/d 60,000
By Reserve Fund 13,333
By Revaluation a/c 800
74,133 74,133
By Balance b/d 74,133

Z’s Capital Account

Dr. Cr.
Particulars Amount Particulars Amount
Rs. Rs.
To Balance c/d 74,133 By Balance b/d 60,000
By Reserve fund 13,333
By Revaluation a/c 800
74,133 74,133
By Balance b/d 74,133

Balance Sheet of Y & Z as on 1-4-2006

Liabilities Amount Assets Amount
Rs. Rs.
Creditors 32,000 Plant & Machinery 80,000
Outstanding liability 1,600 Furniture 32,000
Y Capital account 74,133 Debtors 1,00,000
Z Capital account 74,133 Goodwill 24,000
X’s Loan Account 74,134 Bank balance 20,000
2,56,000 2,56,000

Solution V (a):
Ledger Accounts in the Books of Rama
Consignment Account
Particulars Amount Particulars Amount
Rs. Rs.
To Goods sent consignment a/c 40,000 By Krishna a/c 80,000
To Bank a/c 8,000
To Krishna a/c 3,600
To Krishna a/c 4,000
To Profit 24,400
80,000 80,000

Krishna ‘s Account
Particulars Amount Particulars Amount
Rs. Rs.
To Consignment a/c 80,000 By Consignment a/c 3,600
 18

By Consignment a/c 4,000

By Bank (Balance) 72,400
80,000 80,000

Goods sent on Consignment Account

Particulars Amount Particulars Amount
Rs. Rs.
To Trading a/c 40,000 By Consignment a/c 40,000
40,000 40,000

Solution V (b):
Income and Expenditure Account for the year ended 31-3-2006
Amount Amount Amount Amount
Expenditure Particulars
Rs. Rs. Rs. Rs.
To Salaries 7,500 By Subscriptions 23,000
Add: O/s salaries 1,000 8,500 Add: Outstanding 1,000 24,000
To Help to poor By Interest received 800
students 7,400
Add: Outstanding 3,200 10,600 By Donations 7,000
To expenses on
free dispensary 6,900
Add: Outstanding 600 7,500
To Postage and
Stationery 700
Add: Outstanding 800 1,500
To Excess of Income
over expenditure 3,700
31,800 31,800

NOTE: Donations are treated as revenue income

Solution VI (a):
Draft :

It is an order issued by a Bank on its Branch or in some other Bank at another

place authorizing them to pay the sum stated in the draft to the person whose name is
also given in the draft. Just like a cheque, a bank draft can be crossed, but in this case
the payee of the draft can collect the money through a bank only. The bank issuing the
Draft charges commission of nominal rates.

Solution VI (b):
 19

Depreciation under Fixed Installment Method :

Cost of the asset - Scrap Value

Annual Depreciation 
Estimated life of asset (in years)

Explanation of Formula :

1. Cost of Asset : Cost of the asset means the original cost of the asset. The cost
includes the purchase price and expenses like freight and installation charges.
2. Scrap or residual Value : The asset being used will definitely become obsolete
sooner or latter. The asset can be disposed off even if it is obsolete (useless) as
a scrap. The amount fetched by scrapped asset is known as its residual value.
3. Estimated life of the asset : Whenever asset is acquired, the manufacturer
generally mentions the estimated working life of the asset. It may be in years,
months, days or hours.

Solution VI (c)
Red Ink Interest

In case the due date of a bill falls after the date of closing the account, then no
interest is allowed for that. However, interest from the date of closing to such due date is
written in `Red Ink’ in the appropriate side of the `Current Account’’. This interest is
called Red-Ink Interest. This Red Ink Interest is treated as negative interest.

Solution VI (d)
Average Due Date

``Average due Date’’ is arithmetic average of several due dates of various

payments. J.R. Batiliboi defines the Average Due Date as ``Average Due date means an
equated date on which a payment may be made in one single amount in place of several
amounts due for payment on different dates.’’
 20

Solution VI (e)

Del Credere Commission

Commission paid by the consignor to the consignee for bearing the risk of bad
debts arising out of credit sales made by him on behalf of the consignor. Generally, the
del credere commission is to be calculated on the total sales. Unless, otherwise
mentioned that it is to be calculated on credit sales only

Solution VI (f)

Suspense Account
When the Trial Balance does not agree, an effort is made to locate errors and
rectify them. But if the errors cannot be located easily and quickly and, at the same time,
if the final accounts are to be prepared urgently, the difference in the Trial Balance is
rectified by writing it to the lesser side of the Trial Balance under the name of Suspense
Account. Such a temporarily opened suspense account is to be closed later on when
the errors are located and rectified.

Solution VI (g)
Revenue Expenditure

Revenue Expenditure is the expenditure incurred in one accounting

period and the full benefit is enjoyed in the same period. It is normally of recurring
nature. It includes expenses incurred for acquiring assets for resale at a profit or for
conversion into finished products, for maintaining fixed assets in good working
order, for keeping the organisation going e.g., rent, rates and taxes etc.
 21

Solution VI (h):

Total Profits = 1
E’s share = 1/5th

1 4
Share of C and D 1 - 
5 5
4 3 12
C' sshare   
5 5 25
4 2 8
D' sshare   
5 5 25
12 8 5
C, D and E' s New profit sharing ratio  : :
25 25 25

C, D, E Profit sharing ratio = 12 :8 : 5

Solution VII (a):

Various Kinds of Errors :

Kinds of Errors :
Errors may be broadly classified into two categories. They are :
1. Errors of Principle : Errors involving violation of accounting principle are
termed as errors of principle.
2. Clerical Errors : The errors made by the clerical staff while recording
transactions are known as Clerical Errors. These are of the following three
types.
(1) Errors of Omission
(2) Errors of Commission and
(3) Compensating Errors
 22

Solution VII (b):

Journal entries in the books of Vaheed
Debit Credit
Date Particulars L.F.
Rs. Rs.
1-4–2006 Sudheer A/c Dr. 20,000
To Sales A/c 20,000
(Being the goods sold on credit)
Bills Receivable a/c Dr. 20,000
To Sudheer a/c 20,000
(Being the acceptance received)
Bank a/c Dr. 19,600
Discount a/c Dr. 400
To B/R a/c 20,000
(Being the bill discounted with
bank)
4-8-06 Sudheer a/c Dr. 20,000
To Bank a/c 20,000
(Being the bill was dishonored on
due date)

Solution VII (c):

ASSET A/c
Amount Amount
Date Particulars Date Particulars
Rs. Rs.
1-5-02 To Bank 48,000 31-12-02 By Depreciation 3,200
By Balance c/d 44,800
48,000 48,000
1-1-03 To Balance b/d 44,800 31-12-03 By Depreciation 4,800
By Balance c/d 40,000
44,800 44,800
1-1-04 To Balance b/d 40,000 31-12-04 By Depreciation 4,800
By Balance c/d 35,200
40,000 40,000
1-1-05 To Balance b/d 35,200 1-7-05 By Depreciation 2,400
To Profit & Loss a/c 3,200 By Bank 36,000
38,400 38,400
 23

Solution VII (d):

Calculation of the average due Date

Starting Date : 14-3-2006

No. of days
Date of Bill Due Date Amount Rs. from base date Product
to due date
11-01-2006 14-3-2006 800 0 0
16-02-2006 19-03-2006 400 5 2,000
19-03-2006 22-05-2006 200 69 13,800
10-04-2006 13-05-2006 400 60 24,000
1,800 39,800

Total of Products
Average Due Date  Based Date 
Total of Amounts

39,800
 14 March 
1,800
= 14 March + 22 = 5th April , 2006