Accounts - Past Years Que Compilation

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INTERMEDIATE (IIPC) CO
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PAPER – 1: ACC
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BOAARD OF ST TUDIES
THE INSTITUT
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OF INDIA
(Set up by
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New Dellhi
© The Institute of Chartered Accountants of India

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ii

Paper 1 Accounting
Statement showing topic-wise distribution of Examination Questions along with Marks
Topics Term of Examination
Nov. 2009 May 2010 Nov. 2010 May 2011 Nov. 2011 May 2012 Nov.2012 May 2013 Nov.2013 May 2014 Nov. 2014
Q M Q M Q M Q M Q M Q M Q M Q M Q M Q M Q M
1 Accounting 1(vii ) 2 1(v) 2 1(b) 5 1 (a) 5 1(c) 5 1 20 7(c) 4 7 (b) 4 1 20 1(a) 5 1(a) 5
Standards 1(viii) 2 1(vi) 2 1(d) 5 7 (b) 4 7 (a) 4 7(c) 4 7(d) 4 7(c) 4 (b) 5 (b) 5
6(ii) 4 1(viii) 2 7(a) 4 9 7 (b) 4 24 8 7 (d) 4 (c) 5 (c) 5
6(iv) 4 6(b) 4 7(c ) 4 7(c) 4 7(e) 4 (d) 5 (d) 5
12 6(d) 4 18 7 (d) 4 16 7(d) 4 7(a) 4
14 7(e) 4 24 24

25
2 Financial
Statements of
Companies
Unit 1 Preparation of 1(ii) 2 1(a) 5 7(d) 4 5 16 2(a) 8 3(b) 10
Financial 1(v) 2
statements 1(vi) 2
1(x) 2
6 (v) 4
12
Unit 2 Cash Flow 5 (b) 8 3 16 4 16 4(a) 10 6(b) 8 3(b) 8 3 16 3(a) 6
Statements 7(b) 4
20
iii
3 Profits or Losses 5(b) 6 6(a) 10 4(b) 6 6(a) 8 2(b) 8
Prior to
Incorporation
4 Accounting for 5(a) 12 6 (a) 8 3(b) 8 7(e) 4
Bonus Issue
5 Internal 2 16 2 16 3 16 7(b) 4 4(a) 12
Reconstruction
6 Amalgamation 2 16 3 16 1 (c) 5 3 16 2 16 4 16
7 Unit Average Due 4 (b) 8 1(iv) 2 7(e) 4 7(a) 4 6 (b) 8 7(a) 4 7(a) 4 7(d) 4 7(c) 4 7(e) 4
1 Date
Unit 2 Account Current 7(c) 4 7(d) 4
8 Self Balancing 5 (b) 4 7(e) 4 1(a) 5 1(b) 5 4(b) 4

Ledgers

9 Financial 1(i) 2 5 (a) 8 2 16 5 16 3 16 4 16 1(d) 5 5(a) 10 4 16 7(a) 4 2 16
Statements of Not 1(ix) 2
for Profit 5 (a) 10
Organisations
14
10 Accounts from 2 16 6 16 3(a) 8 4 16 4 16 3(a) 8
Incomplete
Records
11 Hire Purchase 1(ii) 2 6 (b) 6* 5(a)* 8 1(c) 5 1(a) 5* 5(a) 8 7(c) 4
and Instalment 1(x) 2 3(a) 8* 5(b) 6*
Sale Transactions 4(a) 10 13 11
14
12 Investment 1 (iii) 2 1(iii) 2 1 (d) 5 5(b) 8 5(a) 8 1(d) 5 7(a) 4 5(b) 8 5(b) 8
Accounts 4(b) 6
8
iv
13 Insurance Claims 4 (a) 8 1 (ix) 2 7 (d) 4 1(b) 5 5(a) 10 6 16 5(b) 8 1(c) 5 6 16 5(a) 8
for Loss of Stock 7(b) 4
and Loss of Profit 12
14 Issues in 1(iv) 2 1 (i) 2 1 (a) 5 1(c) 5 1 (d) 5 3(b) 8 1(b) 5 2 16 2 16 6 16 6 16
Partnership 3 16 1 (vii) 2 4 16 2 16 7(b) 4 6 16
Accounts 6 (vi) 4 4 21 7 (c) 4 12 21
22 25
15 Accounting in 6(i) 4 6(c) 4 7(b) 4 7(d) 4 5(b) 6 7(e) 4 7(e) 4 7(a) 4 7(e) 4 7(b) 4
Computerized 6 (iii) 4
Environment 8
Note: ‘Q’ represents question numbers as they appeared in the question paper of respective examination. ‘M’ represents the
marks which each question carries in that respective examination.

The question papers of all the past attempts of IPCC can be accessed from the BOS Knowledge Portal at the Students’ Page on
the Institute’s website www.icai.org.
*The questions are based on Stock & Debtors method and H.P. Trading A/c method which have been removed from the existing
syllabus.
The given Matrix contains analysis of questions pertaining to Intermediate (IPC) Examinations.
v
vi

CONTENTS
Chapter Chapter Heading Page No.

1 Accounting Standards 1.1 – 1.45
2 Financial Statements of Companies 2.1 – 2.47
Unit-1: Preparation of Financial Statements of Companies 2.1 – 2.16

Unit-2: Cash Flow Statements 2.17 – 2.47
3 Profit or Loss Prior to Incorporation 3.1 – 3.11
4 Accounting for Bonus Issue 4.1 – 4.11

5 Internal Reconstruction 5.1 – 5.18
6 Amalgamation 6.1 – 6.27
7 Average Due Date and Account Current 7.1 – 7.15

Unit-1: Average Due Date 7.1 – 7.12
Unit-2: Account Current 7.13 – 7.15
8 Self Balancing Ledgers 8.1 – 8.11

9 Financial Statements of Not-for-Profit Organisations 9.1 – 9.45
10 Accounts from Incomplete Records 10.1 – 10.45
11 Hire Purchase & Instalment Sale Transactions 11.1 – 11.12
12 Investment Accounts 12.1 – 12.16
13 Insurance Claims for Loss of Stock & Loss of Profit 13.1 – 13.22
14 Issues in Partnership Accounts 14.1 – 14.53
15 Accounting in Computerised Environment 15.1 – 15.8
Question Papers 1 – 125
vii

viii

1
Accounting Standards
Question 1
Attempt any four of the following:
(a) X Ltd. received a grant of ` 2 crores from the Central Government for the purpose of a
special Machinery during 1998-99. The cost of Machinery was ` 20 crores and had a
useful life of 9 years. During 2002-03, the grant has become refundable due to non-
fulfillment of certain conditions attached to it. Assuming the entire grant was deducted
from the cost of Machinery in the year of acquisition. State with reasons, the accounting
treatment to be followed in the year 2002-03.
(b) The company deals in three products, A, B and C, which are neither similar nor
interchangeable. At the time of closing of its account for the year 2002-03. The Historical
Cost and Net Realizable Value of the items of closing stock are determined as follows:
Items Historical Cost Net Realisable Value
(` in lakhs) (` in lakhs)
A 40 28
B 32 32
C 16 24
What will be the value of Closing Stock?
(c) During the current year 2002−2003, X Limited made the following expenditure relating to
its plant building:
` in lakhs
Routine Repairs 4
Repairing 1
Partial replacement of roof tiles 0.5
Substantial improvements to the electrical wiring
system which will increase efficiency 10
What amount should be capitalized?
(d) A plant was depreciated under two different methods as under:

1.2 Accounting
Year SLM W.D.V.

1 7.80 21.38
2 7.80 15.80
3 7.80 11.68
4 7.80 8.64
31.20 57.50
5 7.80 6.38
What should be the amount of resultant surplus/deficiency, if the company decides to
switch over from W.D.V. method to SLM method for first four years? Also state, how will
you treat the same in Accounts.
(e) Write a short note on Firm underwriting and Partial underwriting along with firm
underwriting.
(f) Briefly explain the methods of accounting for amalgamation as per Accounting Standard-14.
(4 × 4 = 16 Marks, May 2004) (PE II)
Answer
(a) As per para 11.3 of AS 12 on Accounting for Government Grants, 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. Depreciation on the revised book value is
provided prospectively over the residual useful life of the asset. In the given case, book
value of machinery will be increased by ` 2 crores in the year 2002-2003. The
computations for the depreciation on machinery can be given as:
Cost of machinery ` 20 crores
Less: Grant received ` 2 crores
Cost of machinery ` 18 crores
Useful life of machinery 9 years
Depreciation per year as per straight line method ` 18 crores/9
(assuming residual value to be zero) = ` 2 crores
Total depreciation for 4 years (1998-99 to 2001-2002) ` 8 crores
Book value (in year 2002-2003) ` 10 crores
Add: Grant refunded ` 2 crores
Revised book value ` 12 crores
Remaining useful life 5 years
Revised annual depreciation ` 12 crores/5
= 2.4 crores

Accounting Standards 1.3
Thus, book value of machinery will be ` 12 crores in the year 2002-2003 and the
depreciation amounting ` 2.4 crores will be charged on machinery. Annual depreciation
of ` 2.4 crores will be charged in the next four years.
(b) As per para 5 of AS 2 on Valuation of Inventories, inventories should be valued at the
lower of cost and net realizable value. Inventories should be written down to net
realizable value on an item-by-item basis in the given case.
Items Historical Cost Net Realisable Value Valuation of closing
(` in lakhs) (` in lakhs) stock (` in lakhs)
A 40 28 28
B 32 32 32
C 16 24 16
88 84 76
Hence, closing stock will be valued at ` 76 lakhs.
(c) As per para 12.1 of AS 10 on Accounting for Fixed Assets, expenditure that increases the
future benefits from the existing asset beyond its previously assessed standard of
performance is included in the gross book value, e.g., an increase in capacity. Hence, in
the given case, Repairs amounting ` 5 lakhs and Partial replacement of roof tiles should
be charged to profit and loss statement. ` 10 lakhs incurred for substantial improvement
to the electrical writing system which will increase efficiency should be capitalized.
(d) As per para 21 of AS 6 on Depreciation Accounting, when a change in the method of
depreciation is made, depreciation should be recalculated in accordance with the new
method from the date of the asset coming into use. The deficiency or surplus arising from
retrospective recomputation of depreciation in accordance with the new method should
be adjusted in the accounts in the year in which the method of depreciation is changed.
In the given case, there is a surplus of ` 26.30 lakhs on account of change in method of
depreciation, which will be credited to Profit and Loss Account. Such a change should be
treated as a change in accounting policy and its effect should be quantified and
disclosed.
(e) In firm underwriting the underwriter agrees to subscribe upto a certain number of
shares/debentures irrespective of the nature of public response to issue of securities. He
gets these securities even if the issue is fully subscribed or over-subscribed. These
securities are taken by the underwriter in addition to his liability for securities not
subscribed by the public. Under partial underwriting along with firm underwriting, unless
otherwise agreed, individual underwriter does not get the benefit of firm underwriting in
determination of number of shares/debentures to be taken up by him.
(f) As per AS 14 on ‘Accounting for Amalgamations’, there are two main methods of
accounting for amalgamations:
(i) The Pooling of Interest Method: Under this method, the assets, liabilities and

1.4 Accounting
reserves of the transferor company are recorded by the transferee company at their
existing carrying amounts (after making the necessary adjustments).
If at the time of amalgamation, the transferor and the transferee companies have
conflicting accounting policies, a uniform set of accounting policies is adopted
following the amalgamation. The effects on the financial statements of any changes
in accounting policies are reported in accordance with AS 5 on ‘Net Profit or Loss
for the Period, Prior Period Items and Changes in Accounting Policies’.
(ii) The Purchase Method: Under the purchase method, the transferee company
accounts for the amalgamation either by incorporating the assets and liabilities at
their existing carrying amounts or by allocating the consideration to individual
identifiable assets and liabilities of the transferor company on the basis of their fair
values at the date of amalgamation. The identifiable assets and liabilities may
include assets and liabilities not recorded in the financial statements of the
transferor company.
Where assets and liabilities are restated on the basis of their fair values, the
determination of fair values may be influenced by the intentions of the transferee
company.
Question 2
(a) Under what circumstances can an enterprise change its accounting policy?
(b) Ram Co. (P) Ltd. furnishes you the following information for the year ended 31.3.2005:
Depreciation for the year ended 31.3.2005 ` 100 lakhs
(under straight line method)
Depreciation for the year ended 31.3.2005 ` 200 lakhs
(under written down value method)
Excess of depreciation for the earlier years calculated under written down ` 500 lakhs
value method over straight line method
The Company wants to change its method of claiming depreciation from straight line
method to written down value method.
Decide, how the depreciation should be disclosed in the Financial Statement for the year
ended 31.3.2005. (4 × 4 = 16 Marks, November 2005) (PE II)
Answer
(a) A change in accounting policy is made only if the adoption of a different accounting policy
is required by statute or for compliance with an accounting standard or if it is considered
that the change would result in a more appropriate preparation or presentation of the
financial statements of the enterprise. A more appropriate presentation of events or
transactions in the financial statements occurs when the new accounting policy results in

more relevant or reliable information about the financial position, performance or cash
flows of the enterprise.
(b) As per para 21 of AS 26 ‘Intangible Assets’, when a change in the method of depreciation
is made, depreciation should be calculated in accordance with the new method from the
date of the asset coming into use. The deficiency or surplus arising from retrospective
recomputation should be adjusted in the accounts in the year in which the method of
depreciation is changed. The deficiency should be charged to profit and loss account.
Similarly, any surplus should be credited in the statement of profit and loss. Such
change is a change in the accounting policy, and its effect should be quantified and
disclosed.
In the given case, the deficiency of ` 500 lakhs would be charged to the profit and loss
account of 31.3.2005. In the notes to account, the fact of change in method of
depreciation should be elaborated along with the effect of ` 500 lakhs. The current
depreciation charge of 200 lakhs determined in accordance with the written down value
method should be debited to the profit and loss account.
Question 3
Answer any four of the following:
(a) X Co. Limited purchased goods at the cost of `40 lakhs in October, 2005. Till March,
2006, 75% of the stocks were sold. The company wants to disclose closing stock at `10
lakhs. The expected sale value is `11 lakhs and a commission at 10% on sale is
payable to the agent. Advise, what is the correct closing stock to be disclosed as at
31.3.2006.
(b) Explain the ‘Accounting of Revaluation of Assets’ with reference to AS 10.
(c) Arjun Ltd. sold farm equipments through its dealers. One of the conditions at the time of
sale is, payment of consideration in 14 days and in the event of delay interest is
chargeable @ 15% per annum. The Company has not realized interest from the dealers
in the past. However, for the year ended 31.3.2006, it wants to recognise interest due on
the balances due from dealers. The amount is ascertained at ` 9 lakhs. Decide whether
the income by way of interest from dealers is eligible for recognition as per AS 9.
(4 Marks each, May 2006)(PE II)
Answer
(a) As per Para 5 of AS 2 “Valuation of Inventories”, the inventories are to be valued at lower
of cost and net realizable value.
In this case, the cost of inventory is ` 10 lakhs. The net realizable value is 11,00,000 ×
90% = ` 9,90,000. So, the stock should be valued at ` 9,90,000.
(b) As per Para 30 of AS 10 “Accounting for Fixed Assets”, an increase in net book value
arising on revaluation of fixed assets should be credited to owner’s interests under the

1.6 Accounting
head of ‘revaluation reserve, except that, to the extent that such increase is related to
and not greater than a decrease arising on revaluation previously recorded as a charge
to the profit and loss statement, it may be credited to the profit and loss statement. A
decrease in net book value arising on revaluation of fixed assets is charged directly to
profit and loss statement except that to the extent such a decrease is related to an
increase which was previously recorded as a credit to revaluation reserve and which has
not been subsequently reversed or utilized , it may be charged directly to that account.
(c) As per AS 9 “Revenue Recognition”, where the ability to assess the ultimate collection
with reasonable certainty is lacking at the time of raising any claim, the revenue
recognition is postponed to the extent of uncertainty inverted. In such cases, the
revenue is recognized only when it is reasonably certain that the ultimate collection will
be made.
In this case, the company never realized interest for the delayed payments make by the
dealers. Hence, it has to recognize the interest only if the ultimate collection is certain.
The interest income hence is not to be recognized.
Question 4
(i) A machinery costing ` 10 lakhs has useful life of 5 years. After the end of 5 years, its
scrap value would be ` 1 lakh. How much depreciation is to be charged in the books of
the company as per Accounting Standard-6?
(ii) Garden Ltd. acquired fixed assets viz. plant and machinery for `20 lakhs. During the
same year it sold its furniture and fixtures for `5 lakhs. Can the company disclose, net
cash outflow towards purchase of fixed assets in the cash flow statement as per AS-3?
(iii) ABC Ltd. gave 50,000 equity shares of ` 10 each (fully paid up) in consideration for
supply of certain machinery by X & Co. The shares exchanged for machinery are quoted
on Bombay Stock Exchange (BSE) at ` 15 per share, at the time of transaction. In the
absence of fair market value of the machinery acquired, how the value of machinery
would be recorded in the books of the company?
(iv) A company took a construction contract for ` 100 lakhs in January, 2006. It was found
that 80% of the contract was completed at a cost of ` 92 lakhs on the closing date i.e. on
31.3.2007. The company estimates further expenditure of ` 23 lakhs for completing the
contract. The expected loss would be ` 15 lakhs. Can the company recognise the loss in
the financial statements prepared for the year ended 31.3.2007?
(2 Marks each, May, 2007) (PCC)
Answer
(i) As per paragraph 20 of AS 6 ‘Depreciation Accounting’, the depreciable amount of a
depreciable asset should be allocated on a systematic basis to each accounting period
during the useful life of the asset. In the given case, the depreciation amount can be
calculated as follows:

`
Cost of machinery 10,00,000
Less: Scrap value at the end of useful life 1,00,000
Amount to be written off during useful life of machinery 9,00,000
Useful life of the asset 5 years
Depreciation to be provided each year (`9,00,000 / 5 years) `1,80,000
(ii) According to Para 21 of AS 3 (Revised) ‘Cash Flow Statements’, an enterprise should
report separately major classes of gross cash receipts and gross cash payments arising
from investing and financing activities, except to the extent that cash flows described in
paragraphs 22 and 24 are reported on a net basis. Acquisition and disposal of fixed
assets is not prescribed in para 22 and 24 of the standard.
Hence, the company cannot disclose net cash flow in respect of acquisition of plant and
machinery and disposal of furnitures and fixtures.
(iii) As per paragraph 22 of AS 10 ‘Accounting for Fixed Assets’ , fixed asset acquired in
exchange for shares or other securities in the enterprise should be recorded at its fair
market value, or the fair market value of the securities issued, whichever is more clearly
evident. Since, the market value of the shares exchanged for the asset is more clearly
evident, the company should record the value of machinery at ` 7,50,000. (i.e., 50,000
shares × `15 per share being the market price)
(iv) As per paragraphs 31 and 35 of AS 7 on Construction Contracts, an expected loss on the
construction contract should be recognized as an expense immediately irrespective of (i)
whether or not the work has commenced on the contract; or (ii) the stage of completion of
the contract; or (iii) the amount of profits expected to arise in other contracts.
Hence, the company must recognize the loss immediately.
Question 5
When can a company change its accounting policy?
(4 Marks, May, 2007, PCC) (November 2012, IPCC)
Answer
A change in accounting policy should be made in the following conditions:
(i) If the change is required by some statute or for compliance with an Accounting Standard.
(ii) Change would result in more appropriate presentation of the financial statement.
Change in accounting policy may have a material effect on the items of financial
statements. For example, if depreciation method is changed from straight-line method to
written-down value method, or if cost formula used for inventory valuation is changed
from weighted average to FIFO, or if interest is capitalized which was earlier not in

1.8 Accounting
practice, or if proportionate amount of interest is changed to inventory which was earlier

not the practice, all these may increase or decrease the net profit. Unless the effect of
such change in accounting policy is quantified, the financial statements may not help the
users of accounts. Therefore, it is necessary to quantify the effect of change on financial
statement items like assets, liabilities, profit / loss.
Question 6
Mention six areas in which different accounting policies are followed by companies.
(4 Marks, November, 2007) (PCC)
Answer
Following are the examples of the areas in which different accounting policies may be adopted
by different enterprises:
(i) Methods of depreciation, depletion and amortisation.
(ii) Valuation of inventories.
(iii) Methods of valuing goodwill.
(iv) Valuation of investments.
Question 7
List the criteria to be applied for rating an enterprise as Level-I enterprise for the purpose of
compliance of Accounting Standards in India. (4 Marks, November, 2007) (PCC)
Answer
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.
(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.
Question 8
What is the accounting entry to be passed as per AS 10 for the following situations:
(a) Increase in value of fixed asset by ` 50,00,000 on account of revaluation.

(b) Decrease in the value of fixed asset by ` 30,00,000 on account of revaluation.

(2 Marks each, May, 2008) (PCC)
Answer
Journal entries∗
` `
(a) Fixed asset A/c Dr. 50,00,000
To Revaluation reserve A/c 50,00,000
(Being the increase in value of fixed asset due to
upward revaluation)
(b) Profit and loss A/c Dr. 30,00,000
To Fixed asset A/c 30,00,000
(Being the decrease in net book value of fixed asset
due to downward revaluation)
Question 9
What are the items that are to be excluded in determination of the cost of inventories as per
AS 2 ? (4 Marks each, May, 2008) (PCC)
Answer
Items that are to be excluded in determination of the cost of inventories as per para 13 of AS 2
on ‘Valuation of Inventories’ are:
(i) Abnormal amounts of wasted materials, labour or other production costs.
(ii) Storage costs unless those costs are necessary in the production process prior to a
further production stage.
(iii) Administrative overheads that do not contribute to bringing the inventories to their
present location and condition; and
(iv) Selling and distribution costs.
Question 10
(i) Mention four assets, in respect of which AS 6 (revised) is not applicable.
(ii) Y Ltd. used certain resources of X Ltd. In return X Ltd. receives ` 10 lakhs and ` 15
lakhs as interest and royalties respectively, from Y Ltd. during the year 2007 –2008.
State on what basis X Ltd. should recognize their revenue, as per AS 9.
∗
The journal entries given are on the assumption that the revaluation is done for the first time, for that particular
fixed asset.

1.10 Accounting
(iii) Mention two categories of investments defined by AS 13 and also state their valuation
principles. (2 Marks each, November, 2008) (PCC)
Answer
(i) AS 6 on ‘Depreciation Accounting’, is not applicable in respect of following assets:
(1) Forest, plantations and similar regenerative natural resources.
(2) Goodwill.
(3) Livestock.
(4) Wasting assets or land (if it has unlimited useful life for the enterprise).
(ii) As per AS 9 on ‘Revenue Recognition’, interest of `10 lakhs received in the year
2007-2008 should be recognized on the time basis, whereas royalty of ` 15 lakhs
received in the same year should be recognized on accrual basis as per the terms of
relevant agreement.
(iii) As per para 7 and 8 of AS 13 on ‘Accounting for Investments’, there are two categories of
investments, viz., Current Investments and Long Term Investments. According to para
14 of the standard, the carrying amount for current investments is the lower of cost and
fair value whereas para 17 states that Long Term Investments are valued at cost less
permanent diminutions in value of investment. For current investments, para 16 of the
standard states that, any reduction to fair value and any reversals of such reductions are
included in the profit and loss statement.
Question 11
Name two methods of accounting for amalgamations as contemplated by AS 14.
(2 Marks each, June, 2009) (PCC)
Answer
Two methods of accounting for amalgamation as contemplated by AS 14 are:
(a) The pooling of interests method and
(b) The purchase method
Question 12
Sony Pharma ordered 12,000 kg. of certain material at `80 per unit. The purchase price
includes excise duty ` 4 per kg in respect of which full CENVAT credit is admissible. Freight
incurred amounted to ` 77,400. Normal transit loss is 3%. The company actually received
11,600 kg. and consumed 10,100 kg. of material. Compute cost of inventory under AS 2 and
abnormal loss. (4 Marks, June, 2009) (PCC)
Answer
`
Purchase price (12,000 kg × `80) 9,60,000

Less: CENVAT credit (12,000 kg. × `4) 48,000

9,12,000
Add: Freight 77,400
Total material cost 9,89,400
Number of units after normal loss = 97% of 12,000 kgs. 11,640 kgs.
⎛ 9,89,400 ⎞
Normal cost per kg. ⎜ ⎟ `85
⎝ 11,640 ⎠
Value of closing stock under AS 2 = (11,600 kgs. – 10,100 kgs.) × ` 85 = ` 1,27,500
Abnormal loss = (11,640 kgs. – 11,600 kgs.) × ` 85 = ` 3,400
Question 13
X Co. Ltd. having share capital of ` 50 lakhs divided into equity shares of ` 10 each was taken
over by Y Co. Ltd. X Co. Ltd. has General Reserve of ` 10,00,000 and Profit and Loss account Cr.
` 5,00,000. Y Co. Ltd. issued 11 equity shares of ` 10 each for every 10 shares of X Co. Ltd. How
the Journal entry would be passed in the books of Y Co. Ltd. for the shares issued under the
‘Pooling of interest method’ of amalgamation. (2 Marks each, November, 2009) (IPCC)
Answer
In the books of Y Co. Ltd.
Journal Entries
` `
Business Purchase A/c Dr. 55,00,000
To Liquidator of X Co. Ltd. 55,00,000
(Being business of X Co. Ltd. purchased)
Assets A/c (Bal. Fig.) Dr. 65,00,000
To Business Purchase A/c 55,00,000
To General Reserve A/c∗(10,00,000 – 5,00,000) 5,00,000
To Profit and Loss A/c 5,00,000
(Being assets and reserves and surplus taken over)
Liquidator of X Co. Ltd. Dr. 55,00,000
To Equity share capital A/c 55,00,000
(Being purchase consideration discharged through equity
shares of Y Co. Ltd.)
∗
Purchase consideration ` 55,00,000
Less : Share capital of X Co. Ltd. ` 50,00,000
To be adjusted from general reserve ` 5,00,000

1.12 Accounting
Question 14
(i) From the following data, find out value of inventory as on 30.04.2012 using (a) LIFO
method, and (b) FIFO method:
(1) 01.04.2009 Purchased 10 units @ ` 70 per unit
(2) 06.04.2009 Sold 6 units @ ` 90 per unit
(3) 09.04.2009 Purchased 20 units @ ` 75 per unit
(4) 18.04.2009 Sold 14 units @ ` 100 per unit
(ii) Explain contract costs as per Accounting Standard-7 related to ‘Construction Contracts’.
(iii) Year to year results of a company were not found comparable on the basis of gross profit
margin. List out the probable reasons.
(iv) MY Ltd. had acquired 200 equity shares of YZ Ltd. at ` 105 per share on 01.01.2009 and
paid ` 200 towards brokerage, stamp duty and STT. On 31st March, 2009, shares of YZ
Ltd. were traded at ` 110 per share. At what value investment is to be shown in the
Balance Sheet of MY Ltd. as at 31st March, 2009.(2 Marks each, November, 2009) (IPCC)
Answer
(i) (a) Statement showing valuation of closing inventory by LIFO method
Date Receipts Issue Balance
Unit Cost/unit Amount Unit Cost/unit Amount Unit Cost/unit Amount
1.4.09 10 70 700 10 70 700
6.4.09 6 70 420 4 70 280
9.4.09 20 75 1500 4 70 280
20 75 1500
18.4.09 14 75 1,050 4 70 280
6 75 450
Value of closing inventory as per LIFO method:
4 units x `70 = `280
6 units x `75 = `450 `730
(b) Statement showing valuation of closing inventory by FIFO method
Date Receipts Issue Balance
Unit Cost/unit Amount Unit Cost/unit Amount Unit Cost/unit Amount
1.4.09 10 70 700 10 70 700

6.4.09 6 70 420 4 70 280

9.4.09 20 75 1500 4 70 280
20 75 1500
18.4.09 4 70 280 10 75 750
10 75 750
Value of closing inventory as per FIFO method:
10 Units x `75 = `750
(ii) As per para 15 of AS 7 “Construction Contracts (revised 2002)”, contract cost should
comprise:
(a) costs that relate directly to the specific contract;
(b) costs that are attributable to contract activity in general and can be allocated to the
contract; and
(c) such other costs as are specifically chargeable to the customer under the terms of
the contract.
(iii) The probable reasons could be the change in the accounting policy viz.
(a) Change in method of recognition of sales revenue from cash basis to accrual basis
or vice versa; or
(b) Change in valuation of closing inventory by adopting different methods year to year
such as LIFO to FIFO to weighted average or vice versa.
(iv)
`
Purchase price of Equity shares of YZ Ltd.(200 shares x ` 105 per share) 21,000
Add: Brokerage, stamp duty and STT 200
Cost of investment 21,200
If the investment is a long term investment than it will be shown at cost. Therefore value
of investment will be ` 21,200. However, if the investment is a current investment, then it
will be shown at lower of cost (i.e. ` 21,200) or net realizable value (i.e. ` 200 x 110 =
` 22,000). Therefore value of investment will be ` 21,200.
Question 15
(a) As per Accounting Standard-14, what are the conditions which must be satisfied for an
amalgamation in the nature of merger?
(b) Rose Ltd. had made an investment of ` 500 lakhs in the equity shares of Nose Ltd. on
10.01.2009. The realisable value of such investment on 31.03.2009 became ` 200 lakhs

1.14 Accounting
as Nose Ltd. lost a case of patent rights. Rose Ltd. follows financial year as accounting
year. How will you recognize this reduction in financial statements for the year 2008-09.
(4 Marks each, November, 2009) (IPCC)
Answer
(a) According to AS 14 “Accounting for Amalgamations”, Amalgamation in the nature of
merger is an amalgamation which satisfies all the following conditions:
(i) All the assets and liabilities of the transferor company become, after amalgamation,
the assets and liabilities of the transferee company.
(ii) Shareholders holding not less than 90% of the face value of the equity shares of the
transferor company (other than the equity shares already held therein, immediately
before the amalgamation, by the transferee company or its subsidiaries or their
nominees) become equity shareholders of the transferee company by virtue of the
amalgamation.
(iii) The consideration for the amalgamation receivable by those equity shareholders of
the transferor company who agree to become equity shareholders of the transferee
company is discharged by the transferee company wholly by the issue of equity
shares in the transferee company, except that cash may be paid in respect of any
fractional shares.
(iv) The business of the transferor company is intended to be carried on, after the
amalgamation, by the transferee company.
(v) No adjustment is intended to be made to the book values of the assets and liabilities
of the transferor company when they are incorporated in the financial statements of
the transferee company except to ensure uniformity of accounting policies.
(b) Recognition of reduction in value of investment would depend upon the nature of
investment and nature of decline as per Accounting Standard 13 “Accounting for
Investments”. As per provisions of the standard, if the investments were acquired for long
term and decline is temporary in nature, reduction in value will not be recognized and
investments would be carried at cost. If the decline is of permanent nature, it will be
charged to profit and loss account. If the investments are current investments, then the
reduction should be recognized and charged to Profit and Loss Account as the current
investments are carried at cost or fair value, whichever is less.
Question 16
(a) A company acquired a machine on 1.4.2006 for ` 5,00,000. The company charged
depreciation upto 2008-09 on straight line basis with estimated working life of 10 years
and scrap value of ` 50,000. From 2009-10, the company decided to change
depreciation method at 20% on reducing balance method. Compute the amount
depreciation to be debited to Profit and Loss Account for the year 2009-10.

(b) An unquoted long-term investment is carried in the books at cost of ` 2 lacs. The
published accounts of unlisted company received in May, 2009 showed that the company
has incurred cash losses with decline market share and the long-term investment may
not fetch more than ` 20,000. How you will deal with it in the financial statement of
investing company for the year ended 31.3.2009?
(c) According to Accounting Standard 9, when revenue from sales should be recognised?
(2 Marks each, May, 2010) (IPCC)
Answer
(a) Annual depreciation charged by the company up to 2008-09
Cost price of the machine - Scrap value
=
Useful life of the machine
5,00,000 − 50,000
= = Rs.45,000
10
WDV of machine at the end of 2008-09 by Straight Line Method (SLM)
= `5,00,000 – (`45,000 × 3) = `3,65,000
Depreciation by Reducing Balance Method (RBM)
Cost / WDV at the Depreciation WDV at the end
beginning of the year of the year
` ` `
2006-07 5,00,000 5,00,000 × 20% 1,00,000 4,00,000
2007-08 4,00,000 4,00,000 × 20% 80,000 3,20,000
2008-09 3,20,000 3,20,000 20% 64,000 2,56,000
2,44,000
2009-10 2,56,000 2,56,000 × 20% 51,200 2,04,800
Depreciation to be charged in 2009 – 2010
`
Book value of the machine as per SLM as on 2008-09 3,65,000
Less: Book value of the machine as per RBM as on 2008-09 (2,56,000)
1,09,000
Add: Depreciation for the year 2009-10 as per RBM 51,200
Total depreciation debited to Profit and Loss account in the year 2009-10 1,60,200
(b) As per para 32 of AS 13 ‘Accounting for Investments’, investment classified as long term
investments should be carried in the financial statements at cost. However, provision for

1.16 Accounting
diminution shall be made to recognise a decline, other than temporary, in the value of the
investments, such reduction being determined and made for each investment
individually. As per para 17 of the standard, 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.
The facts of given case clearly suggest that there is decline in the market share of the
company and the investment will not fetch more than `20,000. Therefore, the provision of
`1,80,000 should be made to reduce the carrying amount of long term investment to
`20,000 in the financial statements for the year ended 31st March, 2009.
(c) As per para 11 of AS 9 ‘Revenue Recognition’, revenue from sales should be recognised
only when requirements as to performance are satisfied provided that at the time of
performance it is not unreasonable to expect ultimate collection. These requirements
can be given as follows:
(i) the seller of goods has transferred to the buyer the property in the goods for a price
or all significant risks and rewards of ownership have been transferred to the buyer
and the seller retains no effective control of the goods transferred to a degree
usually associated with ownership; and
(ii) no significant uncertainty exists regarding the amount of the consideration that will
be derived from the sale of the goods.
Question 17
(a) During the current year 2011-12, M/s L & C Ltd. made the following expenditure relating
to its plant and machinery:
`
General repairs 4,00,000
Repairing of electric motors 1,00,000
Partial replacement of parts of machinery 50,000
Substantial improvements to the electrical wiring system which will 10,00,000
increase efficiency of the plant and machinery
What amount should be capitalised according to AS 10?
(b) Raw materials inventory of a company includes certain material purchased at ` 100 per
kg. The price of the material is on decline and replacement cost of the inventory at the
year end is ` 75 per kg. It is possible to convert the material into finished product at
conversion cost of ` 125.

Decide whether to make the product or not to make the product, if selling price is
(i) ` 175 and (ii) ` 225. ∗ Also find out the value of inventory in each case.
Answer
(a) As per para 12.1 of AS 10 ‘Accounting for Fixed Assets’, expenditure that increases the
future benefits from the existing asset beyond its previously assessed standard of
performance is included in the gross book value, e.g., an increase in capacity. Hence, in
the given case, repairs amounting ` 5 lakhs and partial replacement of parts of
machinery worth `50,000 should be charged to profit & loss account. `10 lakhs incurred
for substantial improvement to the electrical wiring system which will increase efficiency
should be capitalized.
(b) As per para 24 of 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 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 realisable value. In such circumstances, the replacement cost of the
materials may be the best available measure of their net realisable value.
(i) When selling price is ` 175
Incremental Profit = ` 175 – ` 125 = ` 50
Current price of the material = ` 75
Therefore, it is better not to make the product. Raw material inventory would be valued
at net realisable value i.e. ` 75 because the selling price of the finished product is less
than `225 (100+125) per kg.
(ii) When selling price is `225
Incremental Profit = ` 225 – ` 125 = ` 100
Current price of the raw material = ` 75.
Therefore, it is better to make the product.
Raw material inventory would be valued at `100 per kg because the selling price of the
finished product is not less than ` 225.
Question 18
HP is a leading distributor of petrol. A detail inventory of petrol in hand is taken when the
books are closed at the end of each month. At the end of month following information is
available:
∗
This part of the question involves decision making which is not covered in Accounting Paper.

1.18 Accounting
Sales ` 47,25,000
General overheads cost ` 1,25,000
Inventory at beginning 1,00,000 litres @ 15 per litre
Purchases
June 1 two lakh litres @ 14.25
June 30 one lakh litres @ 15.15
Closing inventory 1.30 lakh litres
Compute the following by the FIFO as per AS 2:
(i) Value of Inventory on June, 30.
(ii) Amount of cost of goods sold for June.
(iii) Profit/Loss for the month of June. (5 Marks, November, 2010) (IPCC)
Answer
`
(i) Cost of closing inventory for 1,30,000 litres as on 30th June
1,00,000 litres @ `15.15 15,15,000
30,000 litres @ ` 14.25 4,27,500
Total 19,42,500
(ii) Calculation of cost of goods sold
Opening inventories (1,00,000 litres @ ` 15) 15,00,000
Purchases June-1 (2,00,000 litres @ `14.25) 28,50,000
June-30 (1,00,000 litres @ `15.15) 15,15,000
58,65,000
Less: Closing inventories (19,42,500)
Cost of goods sold 39,22,500
(iii) Calculation of profit
Sales (Given) (A) 47,25,000
Add: General overheads 1,25,000
Total cost (B) 40,47,500
Profit (A-B) 6,77,500
Question 19
(a) A company installed a plant at a cost of ` 20 lacs with estimated useful life of 10 years
and decided to depreciate on straight line method. In the fifth year, company decided to

switch over from straight line method to written down value method. Compute the
resultant surplus/deficiency if any, and state how will you treat the same in the accounts.
(b) An amount of ` 9,90,000 was incurred on a contract work upto 31-03-2010. Certificates
have been received to date to the value of ` 12,00,000 against which ` 10,80,000 has
been received in cash. The cost of work done but not certified amounted to ` 22,500. It
is estimated that by spending an additional amount of ` 60,000 (including provision for
contingencies) the work can be completed in all respects in another two months. The
agreed contract price of work is ` 12,50,000. Compute a conservative estimate of the
profit to be taken to the Profit and Loss Account as per AS 7.
Answer
(a) Table showing depreciation under Straight Line Method (SLM) and depreciation under
Written Down Value Method (WDV)
` in lacs
Depreciation
Year SLM WDV
I 2.001 2.002
II 2.00 1.80
III 2.00 1.62
IV 2.00 1.46∗
Total 8.00 6.88
Resultant surplus on change in method of depreciation from SLM to WDV = (8.00 – 6.88)
` 1.12 lakhs.
As per para 21 of AS 6 ‘Depreciation Accounting’, when a change in the method of
depreciation is made, depreciation should be re-calculated in accordance with the new
method from the date of the asset put to use. The deficiency or surplus arising from
retrospective re-computation of depreciation in accordance with the new method should
be adjusted in the accounts in the year in which the method of depreciation is changed.
In the given case, surplus amounting ` 1.12 lakhs (8.00 – 6.88) should be credited to
profit and loss statement in the fifth year. Such a change should be treated as a change
in accounting policy and its effect should be quantified and disclosed as per AS 5 “Net
Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies”.
1 Depreciation as per SLM ` 20 lakhs/10years = ` 2 lakhs.

2 Depreciation rate under SLM is 10% [(2,00,000/20,00,000) × 100]. It is assumed that depreciation
rate will remain same under WDV method also.
∗
Rounded off up to two decimals.

1.20 Accounting
(b) Computation of estimate of profit as per AS 7

`
Expenditure incurred upto 31.3.2010 9,90,000
Estimated additional expenses (including provision for contingency) 60,000
Estimated cost (A) 10,50,000
Contract price (B) 12,50,000
Total estimated profit [(B-A)] 2,00,000
Percentage of completion (9,90,000 / 10,50,000) x 100 94.29%
Computation of estimate of the profit to be taken to Profit and Loss Account:
Expenses incurred till 31.3.2010
Total estimated profit ×
Total estimated cost
9,90,000
2,00,000 × = ` 1,88,571
10,50,000
According to para 21 of AS 7 ‘Construction Contracts’, when the outcome of a
construction contract can be estimated reliably, contract revenue and contract costs
associated with the construction contract should be recognised as revenue and expenses
respectively by reference to stage of completion of the contract activity at the reporting
date. Thus estimated profit amounting ` 1,88,571 should be recognised as revenue in
the statement of profit and loss.
Question 20
“Recognizing the need to harmonize the diverse accounting policies and practices, accounting
standards are framed.” Give examples of areas in which different accounting policies may be
adopted by the enterprise. (5 Marks, November, 2010) (IPCC)
Answer
The following are examples∗ of the areas in which different accounting policies may be
adopted by different enterprise:
- Methods of depreciation, depletion and amortization;
- Valuation of inventories;
- Recognition of profit on long-term contracts;
- Valuation of fixed assets.
∗
The list of examples given here is not exhaustive.

Question 21
The abstract of the Balance Sheet of the AXE Ltd. as at 31st March 2010, are as follows:
Liabilities `
Equity share capital (` 100 each) 15,00,000
12% Preference share capital (` 100 each) 8,00,000
13% Debentures 3,00,000
On 31st March, 2010, BXE Ltd. agreed to take over AXE Ltd. on the following terms:
(1) For each preference share in AXE Ltd., ` 10 in cash and one 9% preference share of
` 100 in BXE Ltd.
(2) For each equity share AXE Ltd. ` 20 in cash and one equity share in BXE Ltd. of
` 100 each. It was decided that the share in BXE Ltd. will be issued at market price
` 140 per share.
(3) Liquidation expenses of AXE Ltd. are to be reimbursed by BXE Ltd. to the extent of
` 10,000. Actual expenses amounted to ` 12,500.
You are required to compute the amount of purchase consideration. (5 Marks, May, 2011)
Answer
Calculation of purchase consideration
` `
∗
I Payment made to shareholders of 8,000 preference
shares of AXE Ltd. :
Cash @ ` 10 per share (8,000 preference shares x ` 10) 80,000
9% Preference shares in BXE Ltd. @ ` 100 each 8,00,000 8,80,000
II Payment made to Equity shareholders of 15,000∗ equity
shares of AXE Ltd. :
Cash @ ` 20 per share (15,000 shares x ` 20) 3,00,000
Equity shares in BXE Ltd. issued at market price
` 140 each (15,000 shares x ` 140) 21,00,000 24,00,000
Total purchase consideration 32,80,000
Note: Re-imbursement of liquidation expenses of AXE Ltd. to the extent of ` 10,000, will not
be included in the calculation of purchase consideration.
∗ ⎛ 8,00,000 ⎞
⎜ ⎟ = 8,000 preference shares
⎝ 100 ⎠
∗ ⎛ 15,00,000 ⎞
⎜ ⎟ = 15,000 equity shares
⎝ 100 ⎠

1.22 Accounting
Question 22
Best Ltd. deals in five products, P, Q, R, S, and T which are neither similar nor
interchangeable. At the time of closing of its accounts for the year ending 31st March 2010, the
historical cost and net realizable value of the items of the closing stock are determined as
follows:
Items Historical cost Net realizable value
` `
P 5,70,000 4,75,000
Q 9,80,000 10,32,000
R 3,16,000 2,89,000
S 4,25,000 4,25,000
T 1,60,000 2,15,000
What will be the value of closing stock for the year ending 31st March, 2012 as per AS 2
“Valuation of Inventories”? (4 Marks, May, 2011) (IPCC)
Answer
As per para 5 of AS 2 “Valuation of Inventories, inventories should be valued at the lower of
cost and net relizable value. Inventories should be written down to net realizable value on an
item-by-item basis.
Valuation of inventory (item wise) for the year ending 31st March 2012
Item Historical Cost Net realizable value Valuation of closing stock
` ` `
P 5,70,000 4,75,000 4,75,000
Q 9,80,000 10,32,000 9,80,000
R 3,16,000 2,89,000 2,89,000
S 4,25,000 4,25,000 4,25,000
T 1,60,000 2,15,000 1,60,000
23,29,000
The value of inventory for the year ending 31st March 2012 = ` 23,29,000.
Question 23
In the Trial Balance of M/s. Sun Ltd. as on 31-3-2011, balance of machinery appears
` 5,60,000. The company follows rate of depreciation on machinery @ 10% p.a. on Written
Down Value Method. On scrutiny it was found that a machine appearing in the books on
1-4-2010 at ` 1,60,000 was disposed of on 30-9-2010 at ` 1,35,000 in part exchange of a new
machine costing ` 1,50,000.

You are required to calculate:

(i) Total depreciation to be charged in the Profit and Loss Account.
(ii) Loss on exchange of machine.
(iii) Book value of machinery in the Balance Sheet as on 31.3.2011.
(5 Marks, November, 2011) (IPCC)
Answer
(i) Total Depreciation to be charged in the Profit and Loss Account
`
Depreciation on old machinery in use [10% of (5,60,000-1,60,000)] 40,000
Add: Depreciation on new machine @ 10% for six months
⎛ 6⎞ 7,500
⎜ 1,50,000 × 10% × ⎟
⎝ 12 ⎠
Total depreciation on machinery in use 47,500
Add: Depreciation on machine disposed of (10% for 6 months)
⎛ 6⎞ 8,000
⎜ 1,60,000 × 10% × ⎟
⎝ 12 ⎠
So, total depreciation to be charged in Profit and Loss A/c 55,500
(ii) Loss on Exchange of Machine
`
Book value of machine as on 1.4.2011 1,60,000
Less: Depreciation for 6 months @ 10% (8,000)
Written Down Value as on 30.9.2011 1,52,000
Less: Exchange value (1,35,000)
Loss on exchange of machine 17,000
(iii) Book Value of Machinery in the Balance Sheet as on 31.03.2011
`
Balance as per trial balance 5,60,000
Less: Book value of machine sold (1,60,000)
4,00,000
Add: Purchase of new machine 1,50,000
5,50,000
Less: Depreciation on machinery in use (47,500)
5,02,500

1.24 Accounting
Question 24
(a) M/s. Tiger Ltd. allotted 7,500 equity shares of ` 100 each fully paid up to Lion Ltd. in
consideration for supply of a special machinery. The shares exchanged for machinery are
quoted at National Stock Exchange (NSE) at ` 95 per share, at the time of transaction. In
the absence of fair market value of the machinery acquired, show how the value of the
machinery would be recorded in the books of Tiger Ltd.?
(b) M/s. Sea Ltd. recognized ` 5.00 lakhs, on accrual basis, income from dividend during the
year 2010-11, on shares of the face value of ` 25.00 lakhs held by it in Rock Ltd. as at
31st March, 2011. Rock Ltd. proposed dividend @ 20% on 10th April, 2011. However,
dividend was declared on 30th June, 2011. Please state with reference to relevant
Accounting Standard, whether the treatment accorded by Sea Ltd. is in order.
(c) What disclosures should be made in the first financial statements following the
amalgamation?
(d) From the following data, show Profit and Loss A/c (Extract) as would appear in the books
of a contractor following Accounting Standard-7:
(` in lakhs)
Contract price (fixed) 480.00
Cost incurred to date 300.00
Estimated cost to complete 200.00
(e) M/s. Son Ltd. charged depreciation on its assets on SLM basis. In the year ended
31st March, 2012, it changed to WDV basis. The impact of the change when computed
from the date of the assets putting into use amounts to ` 18 lakhs being additional
depreciation. Discuss, when should an enterprise change method of charging
depreciation and how it should be dealt with in the Profit and Loss Alc.
Answer
(a) As per para 11 of AS 10 “Accounting for Fixed Assets”, fixed asset acquired in exchange
for shares or other securities in the enterprise should be recorded at its fair market value,
or the fair market value of the securities issued, whichever is more clearly evident.
Since, in the given situation, the market value of the shares exchanged for the asset is
more clearly evident, the company should record the value of machinery at ` 7,12,500
(i.e., 7,500 shares x ` 95 per share) being the market price of the shares issued in
exchange.
(b) Para 8.4 of AS 9 “Revenue Recognition” states that dividend from investments in shares
are not recognized in the statement of Profit and Loss until the right to receive dividend is
established.
In the given case, the dividend is proposed on 10th April, 2011, while it was declared on

30th June, 2011. Hence, the right to receive dividend is established on 30th June, 2011
only. Therefore, on applying the provisions stated in the standard, income from dividend
on shares should be recognized by Sea Ltd. in the financial year 2011-2012 only.
Therefore, the recognition of income from dividend of ` 5 lakhs, on accrual basis, in the
financial year 2010-11 is not in accordance with AS 9.
(c) Para 24 of AS 14 ‘Accounting for Amalgamations’ states that for all amalgamations
(whether for amalgamations accounted for under the pooling of interests method or
amalgamations accounted for under the purchase method), the following disclosures are
considered appropriate in the first financial statements following the amalgamation:
(a) Names and general nature of business of the amalgamating companies;
(b) Effective date of amalgamation for accounting purposes;
(c) The method of accounting used to reflect the amalgamation; and
(d) Particulars of the scheme sanctioned under a statute.
(d) Calculation of Estimated Total Cost
(` in lakhs)
Cost incurred to date 300
Estimate of cost to completion 200
Estimated total cost in completing the contract 500
Percentage of completion (300/500) x 100 = 60%
Revenue recognised as a percentage to contract price
= 60% of ` 480 lakhs = ` 288 lakhs
As per para 35 of AS 7 ‘Construction Contracts’, when it is probable that total contract
costs will exceed total contract revenue, the expected loss should be recognised as an
expense immediately. Accordingly, expenses to be recognized in the Profit and Loss
Account will be
(` in lakhs)
Total foreseeable loss (500-480) 20
Less: Loss for the current year (300-288) (12)
Expected loss to be recognized immediately as per para 35 of AS 7 8
Profit and Loss A/c (An Extract)
To Construction cost 300 By Contract price 288
To Estimated loss on completion of
contract 8

1.26 Accounting
(e) As per para 21 of AS 6 ‘Depreciation Accounting’, an enterprise can change one method
of charging depreciation to another method only if the adoption of the new method is
required by statute or for compliance with an accounting standard or if it is considered
that the change would result in a more appropriate preparation or presentation of the
financial statements of the enterprise.
When such a change in the method of depreciation is made, depreciation should be
recalculated in accordance with the new method from the date of the asset coming into
use. The deficiency or surplus arising from retrospective recomputation of depreciation
in accordance with the new method should be adjusted in the accounts through
statement of profit and loss in the year in which the method of depreciation is changed. In
case the change in the method results in deficiency in depreciation in respect of past
years, the deficiency should be charged in the statement of profit and loss.
Question 25
(a) M/s Excellent Construction Company Limited under took a contract to construct a
building for ` 3 crore on 1st September, 2011. On 31st March, 2012 the company found
that it had already spent ` 1 crore 80 lakhs on the construction. Prudent estimate of
additional cost for completion was ` 1 crore 40 lakhs. What amount should be charged,
to revenue in the final accounts for the year ended on 31st March, 2012, as per the
provisions of Accounting Standard 7 "Construction Contracts (Revised)" ?
(b) M/s Innovative Garments Manufacturing Company Limited invested in the shares of
another company on 1st October, 2011 at a cost of ` 2,50,000. It also earlier purchased
Gold of ` 4,00,000 and Silver of ` 2,00,000 on 1st March, 2009. Market value as on
31st March, 2012 of above investments are as follows:
`
Shares 2,25,000
Gold 6,00,000
Silver 3,50,000
How above investments will be shown in the books of accounts of M/s Innovative
Garments Manufacturing Company Limited for the year ending 31st March, 2012 as per
the provisions of Accounting Standard 13 "Accounting for Investments"?
(c) MIs Progressive Company Limited has not charged depreciation for the year ended on
31st March, 2012, in respect of a spare bus purchased during the financial year 2011-12
and kept ready by the company for use as a stand-by, on the ground that, it was not
actually used during the year. State your views with reference to Accounting Standard 6
"Depreciation Accounting".
Further during the year company made additions to its factory by using its own workforce,
at a cost of ` 4,50,000 as wages and materials. The lowest estimate from an outside
contractor to carry out the same work was ` 6,00,000. The directors contend that, since

they are fully entitled to employ an outside contractor, it is reasonable to debit the
Factory Building Account with ` 6,00,000. Comment whether the directors' contention is
right in view of the provisions of Accounting Standard 10 "Accounting for Fixed Assets"?
(d) Briefly explain the types of Amalgamations? (5 Marks each, May 2012) (IPCC)
Answer
(a) Calculation of Estimated Cost of Construction
` in crores
Cost of construction incurred till date 1.80
Add: Estimated future cost 1.40
Total estimated cost of construction 3.20
Percentage of completion of contract till date to total estimated cost of construction
= ` (1.80/3.20)×100 = 56.25%
Proportion of total contract value recognised as revenue as per AS 7 (Revised)
= Contract price x percentage of completion
= ` 3 crores x 56.25% = ` 1.6875 crores
(b) As per AS 13 Accounting for Investments’, for investment in shares - if shares are
purchased with an intention to hold for short-term period then it will be shown at the
realizable value of ` 2,25,000 as on 31st March, 2012.
However, if equity shares are acquired with an intention to hold for long term period then
it will be shown at cost of ` 2,50,000 in the Balance Sheet of the company. However,
provision for diminution shall be made to recognize a decline, if other than temporary, in
the value of shares.
As per the standard, investment acquired for long term period shall be shown at cost.
Gold and silver are generally purchased with an intention to hold it for long term period
untill and unless given otherwise. Hence, the investment in Gold and Silver (purchased
on 1st March, 2009) shall continue to be shown at cost as on 31st March, 2012 i.e.,
` 4,00,000 and ` 2,00,000 respectively, though their realizable values have been
increased.
(c) According to para no. 3.1 of AS 6, ‘Depreciation Accounting’, depreciation is a measure
of wearing out, consumption or other loss of value of a depreciable asset arising from
use, effluxion of time or obsolescence through technology and market changes.
Accordingly, depreciation may arise even when asset has not been used in the current
year but was ready for use in that year.
The need for using the stand by bus may not have arisen during the year but that does
not imply that the useful life of the bus has not been affected. Therefore, non-provision

1.28 Accounting
of depreciation on the ground that the bus was not used during the year is not tenable.
As per para no. 10.1 of AS 10, ‘Accounting for Fixed Assets’, clearly states that the gross
book value of the self constructed fixed asset includes the costs of construction that
relate directly to the specific asset and the costs that are attributable to the construction
activity in general can be allocated to the specific asset. If any internal profit is there it
should be eliminated. Saving of ` 1,50,000 on account of using its on work force is an
unrealized/ internal profit, which should not be capitalized/recorded as per the standard.
Thus, only ` 4,50,000 should be debited to the factory building account and not
` 6,00,000. Hence, the contention of the directors of the company to capitalize
` 6,00,000 as cost of factory building, on the ground that the company is fully entitled to
employ an outside contractor is not justifiable.
(d) As per AS 14, ‘Accounting for Amalgamations’ there are two types of amalgamation. In
first type of amalgamation there is a genuine pooling not merely of assets and liabilities
of the amalgamating companies but also of the shareholders’ interests and of the
businesses of the companies. Such amalgamations are amalgamations which are in the
nature of ‘merger’ and the accounting treatment of such amalgamations should ensure
that the resultant figures of assets, liabilities, capital and reserves more or less represent
the sum of the relevant figures of the amalgamating companies.
In the second category are those amalgamations which are in effect a mode by which
one company acquires another company and, as a consequence, the share holders of
the company which is acquired normally do not continue to have a proportionate share in
the equity of the combined company, or the business of the company which is acquired is
not intended to be continued. Such amalgamations are amalgamations in the nature of
‘purchase’.
Note: It is possible to answer this question by specifying all the conditions to be satisfied for
an amalgamation to be an amalgamation in the nature of merger. The amalgamation would to
be an amalgamation in the nature of purchase if any one or more of the said conditions are
not satisfied.
Question 26
A computer costing ` 60,000 is depreciated on straight line basis, assuming 10 years working
life and Nil residual value, for three years. The estimate of remaining useful life after third year
was reassessed at 5 years. Calculate depreciation as per the provisions of Accounting
Standard 6 "Depreciation Accounting". (4 Marks, May 2012) (IPCC)
Answer
Depreciation per year = ` 60,000 / 10 = ` 6,000
Depreciation on SLM charged for three years = ` 6,000 x 3 years = ` 18,000
Book value of the computer at the end of third year = ` 60,000 – ` 18,000 = ` 42,000.
Remaining useful life as per previous estimate = 7 years

Remaining useful life as per revised estimate = 5 years

Depreciation from the fourth year onwards = ` 42,000 / 5 = ` 8,400 per annum
Question 27
(a) From the following information, ascertain the value of stock as on 31st March, 2012:
`
Stock as on 01-04-2011 28,500
Purchases 1,52,500
Manufacturing Expenses 30,000
Selling Expenses 12,100
Administration Expenses 6,000
Financial Expenses 4,300
Sales 2,49,000
At the time of valuing stock as on 31st March, 2011 a sum of ` 3,500 was written off on a
particular item, which was originally purchased for ` 10,000 and was sold during the year
for ` 9,000. Barring the transaction relating to this item, the gross profit earned during
the year was 20% on sales.
(b) PQR Ltd. constructed a fixed asset and incurred the following expenses on its
construction:
`
Materials 16,00,000
Direct Expenses 3,00,000
Total Direct Labour 6,00,000
(1/15th of the total labour time was chargeable to the construction)
Total Office & Administrative Expenses 9,00,000
(4% is chargeable to the construction)
Depreciation on assets used for the construction of this asset 15,000
Calculate the cost of the fixed asset.

(c) "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. (4 Marks each, November 2012) (IPCC)

1.30 Accounting
Answer
(a) Statement showing valuation of stock as on 31.3.2012
` `
Stock as on 01.04.2011 28,500
Less: Book value of abnormal stock
(` 10,000 – ` 3,500) 6,500 22,000
Add: Purchases 1,52,500
Manufacturing Expenses 30,000
2,04,500
Less: Cost of Sales:
Sales as per Books 2,49,000
Less: Sales of Abnormal item (9,000)
2,40,000
Less: G.P. @ 20% (48,000) (1,92,000)
Value of Stock as on 31st March, 2012 12,500
(b) Calculation of cost of fixed assets
`
Materials 16,00,000
Direct expenses 3,00,000
Direct labour (1/15th of ` 6,00,000) 40,000
∗
Office and administrative expenses (4% ` 9,00,000) 36,000
Depreciation on assets 15,000
Cost of fixed asset 19,91,000
(c) As per AS-2 ‘Valuation of Inventories’, certain costs are excluded from the cost of the
inventories and are recognised as expenses in the period in which incurred. Examples of
such costs are:
(a) abnormal amounts 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
∗
It is assumed that 4% of office and administrative expenses are specifically attributable to construction
of a fixed asset.

present location and condition; and

(d) selling and distribution costs.
Question 28
What are the three fundamental accounting assumptions recognised by Accounting Standard
(AS) 1? Briefly describe each one of them. (4 Marks, May 2013) (IPCC)
Answer
Accounting Standard (AS) 1 recognizes three fundamental accounting assumptions. These are
as follows:
(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.
Question 29
(a) On 31st March 2013 a business firm finds that cost of a partly finished unit on that date is
` 530. The unit can be finished in 2013-14 by an additional expenditure of ` 310. The
finished unit can be sold for ` 750 subject to payment of 4% brokerage on selling price.
The firm seeks your advice regarding:-
(i) the amount at which the unfinished unit should be valued as at 31st March, 2013 for
preparation of final accounts and
(ii) the desirability or otherwise of producing the finished unit.
(b) M/s. Moon Ltd. sold goods worth ` 6,50,000 to Mr. Star. Mr. Star asked for a trade
discount amounting to ` 53,000 and same was agreed to by M/s. Moon Ltd. The sale was
effected and goods were dispatched. On receipt of goods, Mr. Star has found that goods
worth ` 67,000 are defective. Mr. Star returned defective goods to M/s. Moon Ltd. and
made payment due amounting to ` 5,30,000. The accountant of M/s. Moon Ltd. booked
the sale for ` 5,30,000. Discuss the contention of the accountant with reference to
Accounting Standard (AS) 9.
(c) What are the issues, with which Accounting Standards deal?
(4 Marks each, May 2013) (IPCC)

1.32 Accounting
Answer
(a) Valuation of unfinished unit
`
Net selling price 750
Less: Estimated cost of completion (310)
440
Less: Brokerage (4% of 750) 30
Net Realisable Value 410
Cost of inventory 530
Value of inventory (Lower of cost and net realisable value) 410
Incremental cost ` 310 (cost to complete) is less than incremental revenue ` 720 (` 750-
` 30). The enterprise will therefore decide to finish the unit for sale at ` 750.
Note: The above answer is given on the assumption that partly finished unit cannot be
sold in semi finished form and its NRV is zero without processing it further.
(b) As per AS 9 ‘Revenue Recognition’, revenue is the gross inflow of cash, receivable or
other consideration arising in the course of the ordinary activities of an enterprise from
the sale of goods. However, trade discounts and volume rebates given in the ordinary
course of business should be deducted in determining revenue. Revenue from sales
should be recognized at the time of transfer of significant risks and rewards. If the
delivery of the sales is not subject to approval from customers, then the transfer of
significant risks and rewards would take place when the sale is affected and goods are
dispatched.
In the given case, if trade discounts allowed by M/s. Moon Ltd. are given in the ordinary
course of business, M/s. Moon Ltd. should record the sales at ` 5,97,000 (i.e.
` 6,50,000 – ` 53,000) and goods returned worth ` 67,000 are to be recorded in the
form of sales return. However, when trade discount allowed by M/s. Moon Ltd. is not in
the ordinary course of business, M/s. Moon Ltd. should record the sales at gross value of
` 6,50,000. Discount of ` 53,000 in price and return of goods worth ` 67,000 are to be
adjusted by suitable provisions. M/s Moon Ltd. might have sent the credit note of
` 1,20,000 to Mr. Star to account for these adjustments. In both the cases, the contention
of the accountant to book the sales for ` 5,30,000 is not correct.
(c) 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 which should be there to enable the public at large and
the stakeholders and the potential investors in particular, to get an insight into what
these financial statements are trying to reflect and thereby facilitating them to take
prudent and informed business decisions.
Question 30
(a) Amna Ltd. contracted with a supplier to purchase a specific machinery to be installed
in Department A in two months time. Special foundations were required for the plant,
which were to be prepared within this supply lead time. The cost of site preparation
and laying foundations were ` 47,290. These activities were supervised by a
technician during the entire period, who is employed for this purpose of ` 15,000 per
month. The Technician's services were given to Department A by Department B,
which billed the services at ` 16,500 per month after adding 10% profit margin.
The machine was purchased at ` 52,78,000. Sales Tax was charged at 4% on the
invoice ` 18,590 transportation charges were incurred to bring the machine to the
factory. An Architect was engaged at a fee of ` 10,000 to supervise machinery
installation at the factory premises. Also, payment under the invoice was due in 3
months. However, the Company made the payment in 2nd month. The company operates
on Bank Overdraft@ 11%.
Ascertain the amount at which the asset should be capitalized under AS 10.
(b) Narmada Ltd. purchased an existing bottling unit from Kaveri Ltd. Kaveri Ltd. followed
straight line method of charging depreciation on machinery of the sold unit whereas
Narmada Ltd. followed written down value method in its other units. The directors of
Narmada Ltd. want to continue to charge depreciation for the acquired unit in Straight
Line Method which is not consistent with the WDV method followed in other units.
Discuss the contention of the directors with reference to the Accounting Standard 6.
Further during the year, Narmada Ltd. set up a new plant on coastal land. In view of the
corrosive climate, the Company felt that its machine life is reducing faster. Can the
Company charge a higher rate of depreciation?
(c) A Ltd. entered into a contract with B Ltd. to despatch goods valuing ` 25,000 every
month for 4 months upon receipt of entire payment. B Ltd. accordingly made the payment
of ` 1,00,000 and A Ltd. started despatching the goods. In third month, due to a natural
calamity, B Ltd. requested A Ltd. not to despatch goods until further notice though A Ltd.
is holding the remaining goods worth ` 50,000 ready for despatch. A Ltd. accounted
` 50,000 as sales and transferred the balance to Advance Received against Sales.
Comment upon the treatment of balance amount with reference to the provisions of
Accounting Standard 9.
(d) A Ltd. is amalgamating with B Ltd. They are undecided on the method of accounting to
be followed. You are required to advice the management of B Ltd. on the method of
accounting that can be adopted under AS-14. (5 Marks each, November 2013) (IPCC)

1.34 Accounting
Answer
(a) Calculation of Cost of Fixed Asset (i.e. Machine)
Particulars `
Purchase Price Given 52,78,000
Add: Sales Tax at 4% ` 52,78,000 x 4% 2,11,120
Site Preparation Cost Given 47,290
Technician’s Salary Specific/Attributable 30,000
overheads for 2 months (See
Note)
Initial Delivery Cost Transportation 18,590
Professional Fees for Architect’s Fees 10,000
Installation
Total Cost of Asset 55,95,000
Note:
(i) Interest on Bank Overdraft for earlier payment of invoice is not relevant under AS 10.
(ii) Internally booked profits should be eliminated in arriving at the cost of Fixed Assets.
(iii) It has been assumed that the purchase price of ` 52,78,000 excludes amount of
sales tax.
(b) According to para 12 of AS 6 ‘Deprecation Accounting’, there are several methods of
allocating depreciation over the useful life of the assets. The management of a business
selects the most appropriate method(s) based on various important factors e.g., (i) type
of asset, (ii) the nature of the use of such asset and (iii) circumstances prevailing in the
business. A combination of more than one method is sometimes used. A company may
adopt different methods of depreciation for different types of assets, provided the same
methods are followed consistently. Thus Narmada Ltd. can continue to charge
depreciation for the acquired unit as per straight line method.
The statute governing an enterprise may provide the basis for computation of the
depreciation. For example, the Companies Act lays down the rates of depreciation in
respect of various assets. Where the management’s estimate of the useful life of an
asset of the enterprise is shorter than that envisaged under the provisions of the relevant
statute, the depreciation provision is appropriately computed by applying a higher rate.
Therefore, in the given case, the Company can charge higher rates of depreciation based
on its estimate of the useful life of machinery, provided that such estimate is not less
than the rate prescribed by the Companies Act, for that class of assets. However, such
higher depreciation rates and/or the reduced useful lives of the assets should be
disclosed by way of notes to the accounts in the Financial Statements.

(c) As per para 11 of AS 9 “Revenue Recognition”, in a transaction involving the sale of

goods, performance should be regarded as being achieved when the following conditions
are fulfilled:
(i) the seller of goods has transferred to the buyer the property in the goods for a price
or all significant risks and rewards of ownership have been transferred to the buyer
and the seller retains no effective control of the goods transferred to a degree
usually associated with ownership; and
(ii) no significant uncertainty exists regarding the amount of the consideration that will
be derived from the sale of the goods.
In the given case, transfer of property in goods results in or coincides with the transfer of
significant risks and rewards of ownership to the buyer. Also, the sale price has been
recovered by the seller. Hence, the sale is complete but delivery has been postponed at
buyer’s request. A Ltd. should recognize the entire sale of ` 1,00,000 (` 25,000 x 4) and
no part of the same is to be treated as Advance Receipt against Sales.
(d) An amalgamation may be either – an amalgamation in the nature of merger, or an
amalgamation in the nature of purchase. The selection of method of accounting for
amalgamation (pooling of interests or purchase method) is to be judged after considering
the intentions of the both the companies.
If genuine pooling of all assets, liabilities, shareholders’ interest is intended; separate
businesses of both the companies are continued and their amalgamation scheme
satisfies all the conditions necessary for merger as specified in AS 14 “Accounting for
Amalgamations”, pooling of interests method is adopted.
However, if B Ltd. or A Ltd. wants to acquire the other company, then purchase method
needs to be adopted. In that case, the shareholders of the acquired company don’t
continue to have proportional share in equity of the combined company and the business
of the acquired company is not intended to be continued. The object of the purchase
method is to account for the amalgamation by applying the same principles as are
applied in the normal purchase of assets.
Thus choice of accounting method depends on the fact whether B Ltd. wants to continue
its business or not.
Question 31
(a) Calculate the value of raw materials and closing stock based on the following
information:
Raw material X
Closing balance 500 units
` per unit
Cost price including excise duty 200

1.36 Accounting
Excise duty (Cenvat credit is receivable on the excise duty paid) 10

Freight inward 20
Unloading charges 10
Replacement cost 150
Finished goods Y
Closing Balance 1200 units
` per unit
Material consumed 220
Direct labour 60
Direct overhead 40
Total Fixed overhead for the year was ` 2,00,000 on normal capacity of 20,000 units.
Calculate the value of the closing stock, when
(i) Net Realizable Value of the Finished Goods Y is ` 400.
(ii) Net Realizable Value of the Finished Goods Y is ` 300.
(b) On 01.04.2010 a machine was acquired at ` 4,00,000. The machine was expected to
have a useful life of 10 years. The residual value was estimated at 10% of the original
cost. At the end of the 3rd year, an attachment was made to the machine at a cost of
` 1,80,000 to enhance its capacity. The attachment was expected to have a useful life of
10 years and zero terminal value. During the same time the original machine was
revalued upwards by ` 90,000 and remaining useful life was reassessed at 9 years and
residual value was reassessed at NIL.
Find depreciation for the year, if
(i) attachment retains its separate identity.
(ii) attachment becomes integral part of the machine
(c) Ascertain the value at which various items of Fixed Assets are to be shown in the
Financial Statements of Velvet Ltd. and amount to be debited to the Profit and Loss
Account in the context of the relevant Accounting Standard.
Narrations for the adjustments made should form part of the answer:
(i) Goodwill was valued at ` 1,20,000 by independent valuers and no consideration
was paid. The Company has not yet recorded the same.
(ii) Balance of Office Equipment as on 01.04.2013 is ` 1,20,000. On.1.04.2013, out of
the above office equipment having book value ` 20,000 has been retired from use
and held for disposal. The net realizable value of the same is ` 2,000. Rate of
depreciation is 15% p.a. on WDV basis.

(iii) Book Value of Plant and Machinery as on 01.04.2013 was ` 7,20,000. On

01.08.2013 an item of machinery was purchased in exchange for 500 equity shares
of face value ` 10. The Fair Market value of the equity shares on 01.08.2013 was
` 120. Rate of depreciation is 10% p.a. on WDV basis.
(d) M/s Highway .Constructions undertook the construction of a highway on 01.04.2013. The
contract was to be completed in 2 years. The contract price was estimated at ` 150
crores. Up to 31.03.2014 the company incurred ` 120 crores on the construction. The
engineers involved in the project estimated that a further ` 45 crores would be incurred
for completing the work.
What amount should be charged to revenue for the year 2013-14 as per the provisions of
Accounting Standard 7 "Construction Contracts"? Show the extract of the Profit & Loss
A/c in the books of M/s. Highway Constructions. (5 Marks each, May, 2014)
Answer
(a) Working Notes:
Raw Material X `
Cost Price 200
Less: Cenvat Credit (10)
190
Add: Freight Inward 20
Unloading charges 10
Cost 220
Finished goods Y `
Materials consumed 220
Direct Labour 60
Direct overhead 40
Fixed overheads (` 2,00,000/20,000 units) 10
Cost 330
Situation (i)
When Net Realisable Value of the Finished Goods Y is ` 400
NRV is greater than the cost of Finished Goods Y i.e. ` 330
Hence, Raw Material and Finished Goods are to be valued at cost

1.38 Accounting
Value of Closing Stock:

Qty Rate Amount (`)
Raw Material X 500 220 1,10,000
Finished Goods Y 1,200 330 3,96,000
Total Cost of Closing Stock 5,06,000
Situation (ii)
When Net Realisable Value of the Finished Goods Y is ` 300
NRV is less than the cost of Finished Goods Y i.e. ` 330
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 500 150 75,000
Finished Goods Y 1,200 300 3,60,000
Total Cost of Closing Stock 4,35,000
Note: It has been considered that Raw Material X is used for the production of Finished
Goods Y.
(b) Depreciation of Original Machine
`
Original cost of Machine as on 01.04.2010 4,00,000
Less: Residual Value 10% (40,000)
Depreciable Value 3,60,000
Useful life 10 Years
Depreciation per year 36,000
Depreciation for 3 Years 1,08,000
Written down value at the end of 3rd year (as on 31.03.2013) 2,92,000
(4,00,000 – 1,08,000)
Add: Revaluation 90,000
Total Book Value after revaluation 3,82,000
Reassessed remaining useful life 9 Years
Depreciation per year from 2013-14 42,444

Depreciation of Attachment
`
Original cost of Attachment as on 01.04.2013 1,80,000
Useful life 10 Years
Depreciation per year from 2013-14 18,000
Depreciation for the year 2013-14
(i) If Attachment retains its separate identity:
Depreciation of Original Machine ` 42,444
Depreciation of Attachment ` 18,000
Total Depreciation for 2013-14 ` 60,444
(ii) If Attachment becomes integral part of the Machine:
Total value of Machine as on 01.04.2013
Original Machine at revalued cost (W.N.1) ` 3,82,000
Cost of attachment ` 1,80,000
` 5,62,000
Useful life 9 Years
Depreciation for 2013-14 ` 62,444
Note:
1. Since, upward revaluation of the machine and reassessment of remaining useful life
had been made at the end of the 3rd year, it is implied that depreciation for the 3rd
year has been charged on the basis of old calculation & remaining useful life of 9
years is to be calculated from the beginning of the 4th year onwards.
2. Depreciation for the 4th year i.e. 2013-14 has been given in the solution.
(c) Statement showing treatment and value of various items of Fixed Assets
Item of Fixed Assets Amount Amount Narration Book Value
(`) Debited to as on
P& L in 31.3.2014
2013-14 to be
shown in
the
Financial
Statements
(i) Goodwill
Book value as on 1.4.2013 0

1.40 Accounting
Balance as on 31.3.2014 0
(See Note 1)
(ii) Office Equipment
Balance as on 1.4.2013 1,20,000
Less: Retired from use (Book 20,000
value on 1.4.2013)
1,00,000
Less: Depreciation for 2013-14
@ 15% WDV 15,000 15,000 Depreciation
Balance as on 31.3.2014 85,000 85,000
Office Equipment (Retired from
use)
Book Value as on 1.4.2013 20,000
Less: Book Value as on 2,000 2,000
31.3.2014 (at
NRV)(See Note 2)
Loss on retirement charged to 18,000 Loss on
P&L 18,000 retirement of
asset
(iii) Plant and Machinery
Book Value as on 1.4.2013 7,20,000
Add: Machine purchased on 60,000
01.08.2013 (See Note 3)
7,80,000
Less: Depreciation
Original machine for
whole year 72,000
New machine for 8 months 4,000 76,000 76,000 Depreciation
Balance as on 31.3.2014 7,04,000 7,04,000
1,09,000 7,91,000
Note:
1. As per para 16 of AS 10 ‘Accounting for Fixed Assets’ goodwill is to be recorded
only when some consideration in money or money’s worth has been paid for it.
Since the goodwill is self generated and no money or money’s worth has been paid
for the same, therefore, it is not to be recorded in the books.
2. Office equipment having book value of ` 20,000 as on 1.4.2013 has been retired
from use. It has been recorded at Net Realisable Value (NRV) as the NRV is lower
than the book value and shown separately in the financial statements. This is in
consonance with the provisions stated in para 14 of AS 10.

3. As per para 11 of the standard, the new machine has been recorded at the Fair
Market Value of the securities issued as it is more clearly evident.
(d) Statement showing the amount to be charged to Revenue as per AS 7
` in crores
Cost of construction incurred upto 31.03.2014 120
Add: Estimated future cost 45
Total estimated cost of construction 165
Degree of completion (120/165 x 100) 72.73%
Revenue recognized (72.73% of 150) 109 (approx)
Total foreseeable loss (165 – 150) 15
Less: Loss for the current year (120 – 109) 11
Loss to be provided for 4
Profit and Loss Account (Extract)
` in crores ` in crores
To Construction Costs 120 By Contract Price 109
To Provision for loss 4 By Net loss 15
124 124
Question 32
What are depreciable assets as per Accounting Standard-6? Explain why AS 6 does not apply
to Land. (4 Marks, IPCC May, 2014)
Answer
As per AS 6 ‘Depreciation Accounting’, depreciable assets are the assets which
(i) are expected to be used during more than one accounting period; and
(ii) have a limited useful life; and
(iii) are held by an enterprise for use in the production or supply of goods and services, for
rental to others, or for administrative purposes and not for the purpose of sale in the
ordinary course of business.
AS 6 does not apply to ‘land’ as land is considered to have unlimited useful life. Therefore, it is
not appropriate to charge depreciation on land.
Question 33
(a) In the books of Optic Fiber Ltd., plant and machinery stood at ` 6,32,000 on 1.4.2013.
However on scrutiny it was found that machinery worth ` 1,20,000 was included in the
purchases on 1.6.2013. On 30.6.2013 the company disposed a machine having book

1.42 Accounting
value of ` 1,89,000 on 1.4.2013 at ` 1,75,000 in part exchange of a new machine costing

` 2,56,000. The company charges depreciation @ 20% per annum WDV on plant and
machinery.
You are required to calculate:
(i) Depreciation to be charged to P/L
(ii) Book value of Plant and Machinery A/c as on 31.3.2014
(iii) Loss on exchange of machinery.
(b) Sarita Publications publishes a monthly magazine on the 15th of every month. It sells
advertising space in the magazine to advertisers on the terms of 80% sale value payable
in advance and the balance within 30 days of the release of the publication. The sale of
space for the March 2014 issue was made in February 2014. The magazine was
published on its scheduled date. It received ` 2,40,000 on 10.3.2014 and ` 60,000 on
10.4.2014 for the March 2014 issue.
Discuss in the context of AS 9 the amount of revenue to be recognized and the treatment
of the amount received from advertisers for the year ending 31.3.2014. What will be the
treatment if the publication is delayed till 2.4.2014 ?
(c) Capital Cables Ltd., has a normal wastage of 4% in the production process. During the
year 2013-14 the Company used 12,000 MT of raw material costing ` 150 per MT.
At the end of the year 630 MT of wastage was in stock. The accountant wants to know
how this wastage is to be treated in the books.
Explain in the context of AS 2 the treatment of normal loss and abnormal loss and also
find out the amount of abnormal loss if any.
(d) Blue-chip Equity Investments Ltd., wants to re-classify its investments in accordance with
AS 13.
(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) Long term investments in Company B, costing ` 7 lakhs are to be re-classified as
current. The fair value on date of transfer is ` 8 lakhs and book value is ` 7 lakhs.
(iii) 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 transfer is
` 12 lakhs.
(iv) Current investment in Company D, costing ` 15 lakhs are to be re-classified as long
term. The market value on date of transfer is ` 14 Lakhs.
(5 Marks each , IPCC November, 2014)

Answer
(a) (i) Depreciation to be charged to the Profit and Loss Account
(`)
Depreciation on old Machinery 31,600
[20% on `6,32,000 for 3 months(01.4.13 to 30.6.13)]
Add: Depreciation machinery acquired on 01.06.2013
(` 1,20,000 x 20% x 10/12) 20,000
Depreciation on Machinery after adjustment of exchange
[20% of `(6,32,000 -1,89,000+2,56,000) for 9 months] 1,04,850
Total Depreciation to be charged to Profit and Loss A/c 1,56,450
(ii) Book Value of Plant and Machinery as on 31.03.2014
` `
Balance as per books on 01.04.2013 6,32,000
Add: Included in purchases on 01.06.2013 1,20,000
Add: Purchase on 30.06.2013 2,56,000 3,76,000
10,08,000
Less: Book value of Machine sold on 30.06.2013 (1,89,000)
8,19,000
Less: Depreciation on machinery in use (1,56,450 - (1,47,000)
9,450)
Book Value as on 31.03.2014 6,72,000
(iii) Loss on exchange of Machinery
Book value of machinery as on 01.04.2013 1,89,000
Less: Depreciation for 3 months 9,450
WDV as on 30.06.2013 1,79,550
Less: Exchange value 1,75,000
Loss on exchange of machinery 4,550
(b) As per para 12 of AS 9 ‘Revenue Recognition’, ‘In a transaction involving the rendering of
services, performance should be measured either under the completed service contract
method or under the proportionate completion method, whichever relates the revenue to
the work accomplished’.

1.44 Accounting
In the given case, income accrues when the related advertisement appears before public.
The advertisement service would be considered as performed on the day the
advertisement is seen by public and hence revenue is recognized on that date. In this
case, it is 15.03.2014, the date of publication of the magazine.
Hence, ` 3,00,000 (` 2,40,000 + ` 60,000) is recognized as income in March, 2014. The
terms of payment are not relevant for considering the date on which revenue is to be
recognized. ` 60,000 is treated as amount due from advertisers as on 31.03.2014 and
` 2,40,000 will be treated as payment received against the sale.
However, if the publication is delayed till 02.04.2014 revenue recognition will also be
delayed till the advertisements get published in the magazine. In that case revenue of
` 3,00,000 will be recognized for the year ended 31.03.2015 after the magazine is
published on 02.04.2014. The amount received from sale of advertising space on
10.03.2014 of ` 2,40,000 will be considered as an advance from advertisers for the year
ended 31st March, 2014.
(c) As per para 13 of AS 2 (Revised) ‘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 Abnormal Loss:
Material used 12,000 MT @ `150 = `18,00,000
Normal Loss (4% of 12,000 MT) 480 MT
Net quantity of material 11,520 MT
Abnormal Loss in quantity 150 MT
Abnormal Loss ` 23,437.50
[150 units @ ` 156.25 (` 18,00,000/11,520)]
Amount ` 23,437.50 will be charged to the Profit and Loss statement.
(d) 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) 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 ` 6.5 lakhs in
the books.
(ii) The carrying / book value of the long term investment is same as cost i.e. ` 7 lakhs.

Hence this long term investment will be reclassified as current investment at book
value of ` 7 lakhs only.
(iii) In this case, reclassification of current investment into long-term investments will be
made at ` 10 lakhs as cost is less than its market value of ` 12 lakhs.
(iv) In this case, market value is ` 14 lakhs which is lower than the cost of ` 15 lakhs.
The reclassification of current investment as long-term investments will be made at
` 14 lakhs.
Note: The question simply states that Blue chip Equity Investment Ltd. wants to
reclassify its investments in accordance with AS 13. The values, at which the
investments have to be reclassified, have been given in the above answer.
Question 34
From the following information state the amount to be capitalized as per AS 10. Give the
explanations for your answer.
` 5 lakhs as routine repairs and ` 1 lakh on partial replacement of a part of a machine.
` 10 lakhs on replacement of part of a machinery which will improve the efficiency of a
machine. (4 Marks, IPCC November, 2014)
Answer
As per para 12 of AS 10 “Accounting for Fixed Assets”, only those expenditures that increase
the future benefits from the existing assets, beyond its previously assessed standard of
performance, is to be included in the gross book value.
Hence, in the given case, amount of ` 5 lakhs spent on routine repairs and ` 1 lakh on partial
replacement of a part of the machinery should be charged to Profit and Loss Account as these
amounts will help in maintaining the capacity but will not improve the efficiency of the
machine.
However, ` 10 lakhs incurred on replacement of a part of the machinery, which will increase
the efficiency of a machine, should be capitalized by inclusion in the gross book value of
machinery.

2
Financial Statements of Companies
Unit 1: Preparation of Financial Statements of Companies
Question 1
A company lodged a claim to insurance company for ` 5,00,000 in September, 2006. The
claim was settled in February, 2007 for ` 3,50,000. How will you record the short fall in claim
settlement in the books of the company. (2 Marks, November, 2007) (PCC)
Answer
Journal Entry
` `
Profit and Loss A/c Dr. 1,50,000
To Insurance Claim A/c 1,50,000
[Being the shortfall in settlement of insurance claim charged to
Profit and Loss A/c]
Question 2
The Articles of Association of S Ltd. provide the following:
(i) That 20% of the net profit of each year shall be transferred to reserve fund.
(ii) That an amount equal to 10% of equity dividend shall be set aside for staff bonus.
That the balance available for distribution shall be applied:
(a) in paying 14% on cumulative preference shares.
(b) in paying 20% dividend on equity shares.
one-third of the balance available as additional dividend on preference shares and 2/3 as
additional equity dividend.
A further condition was imposed by the articles viz. that the balance carried forward shall be
equal to 12% on preference shares after making provisions (i), (ii) and (iii) mentioned above.
The company has issued 13,000, 14% cumulative participating preference shares of ` 100
each fully paid and 70,000 equity shares of ` 10 each fully paid up.

Financial Statements of Companies 2.2
The profit for the year 2008 was ` 10,00,000 and balance brought from previous year
` 80,000. Provide ` 31,200 for depreciation and ` 80,000 for taxation before making other
appropriations. Prepare Profit and Loss Account –below the line.
Answer
Statement of Profit and Loss∗ for the year ended 2008
Particulars `
a Profit 10,00,000
b Expenses:
Depreciation and amortization expense (31,200)
Total expenses (31,200)
c Profit before tax (a-b) 9,68,800
d Provision for tax (80,000)
e Profit (Loss) for the period 8,88,800
Balance of Profit and Loss account brought forward 80,000
f Total 9,68,800
g Appropriations (made in Notes to Accounts)
Transfers to Reserves (1,77,760)
Proposed preference dividend (1,82,000 + 93,450) (2,75,450)
Proposed equity dividend (1,40,000 + 1,86,900) (3,26,900)
Bonus to employees (14,000 + 18,690) (32,690)
Total (8,12,800)
h Balance carried to Balance sheet (f-g) 1,56,000
Working Note:
Balance of amount available for Preference and Equity shareholders and Bonus `
for Employees
Credit Side 9,68,800
Less: Dr. side [1,77,760 + 1,82,000+1,40,000+14,000 + 1,56,000] (6,69,760)
2,99,040
Suppose remaining balance will be = x
1 1
Suppose preference shareholders will get share from remaining balance = x × = x
3 3
∗
As per revised Schedule VI (now Schedule III to the Companies Act, 2013), Statement of Profit and Loss is
to be prepared upto profit for the current year only. Any appropriation to current year’s profit alongwith the
brought forward profit is to be shown in the ‘Notes to Financial Statements for Reserves and Surplus’.

2.3 Accounting
2 2
Equity shareholders will get share from remaining balance = x × = x
3 3
2 10 2
Bonus to Employees = x × = x
3 100 30
2 1 2
Now, x+ x+ x = 2,99,040
3 3 30
32 x = 89,71,200
x = 89,71,200/32 = ` 2,80,350
1
Share of preference shareholders - ` 2,80,350 × = ` 93,450
3
2
Share of equity shareholders - ` 2,80,350 × = ` 1,86,900
3
2
Bonus to employees - ` 2,80,350 × = ` 18,690
30
Question 3
The Managing Director of A Ltd. is entitled to 5% of the annual net profits, as his remuneration,
subject to a minimum of `25,000 per month. The net profits, for this purpose, are to be taken
without charging income-tax and his remuneration itself. During the year, A Ltd. made net profit
of ` 43,00,000 before charging MD’s remuneration, but after charging provision for taxation of
` 17,20,000. Compute remuneration payable to the Managing Director.
(2Marks, June, 2009) (PCC)
Answer
Calculation of remuneration of the Managing Director ` in Lacs
Net profit as per books 43.00
Add: Provision for taxation 17.20
Annual profit for the purpose of managerial remuneration 60.20
Managing Director’s Remuneration @ 5% of above 3.01

Minimum remuneration to be paid to the Managing Director
= ` 25,000 per month × 12 3.00
Hence, in this case, remuneration to be paid to the Managing Director of A Ltd.
= ` 3,01,000.in the year.

Question 4
(i) What are the basic characteristics of a Private Ltd. Company?
(ii) Sumo Ltd. has a profit of ` 25 lakhs before charging depreciation for financial year
2008-09. Depreciation in the books was ` 11 lakhs and depreciation chargeable under
Section 205* comes to ` 17 lakhs. Compute divisible profit for the year.
(iii) The Companies Act, 1956∗ limits the payment of managerial remuneration. What is the
maximum managerial remuneration, which can be paid in case of a company consistently
earning profits and has more than one managerial person?
Answer
(i) According to Section 2 (68) of the Companies Act 2013, a private company means a
company which has a minimum paid-up capital of one lakh rupees or such higher paid-
up capital as may be prescribed, and which by its articles:
(a) Restricts the rights of members to transfer its shares.
(b) Except in the case of a one man company, limits the number of its member to 200
excluding: (i) persons who are in employment of the company; and (ii) persons who,
having been formerly in the employment of the company, were members of the
company while in that employment and have continued to be members after the
employment ceased. For the purpose of determining the number of members joint
holders of shares will be counted as single members.
(c) Prohibits any invitation to the public to subscribe to any securities of, the company.
(ii)
Computation of divisible profit (` in lakhs)
Profit for the year 2008-09. 25.00
Less: Depreciation chargeable under Section 205 of the (17.00)
Companies Act, 1956 (Refer note)
Divisible profit for the year 8.00
Note: Under section 123 (2) of the Companies Act 2013, depreciation has to be provided
in accordance with schedule II.
(iii) Under section 197(1) of the Companies Act 2013, the managerial remuneration payable
by a public company, to its directors, including managing director or whole time director
and its manager in respect of any financial year shall not exceed eleven percent of the
net profits of that company for that financial year computed in accordance with the
∗
The question requires the applicability of provisions of Companies Act, 1956 which is no more relevant.
Therefore, the answer has been given in line with Companies Act, 2013.

2.5 Accounting
provisions of section 198 of the Companies Act 2013 provided that the remuneration of
the directors shall not be deducted from the gross profits.
Provided that the company may in a general meeting may, with the approval of the
Central Govt., authorize the payment of managerial remuneration exceeding eleven
percent of the net profits subject to the provisions of schedule V of the Act.
Provided further that, except with the approval of the company in a general meeting:
(a) the remuneration payable to one managing director or a whole time director or a
manager shall not exceed 5% of its net profits, and if there is more than one such
director the maximum remuneration payable to all such directors and manager
taken together cannot exceed 10% of its net profits
(b) the remuneration payable to directors who are neither the managing director or
whole time director shall not exceed 1% of the net profits if there is a managing
director or a whole time director and 3% of the net profits in any other case.
Note: Since the question does not specify the nature of the managerial person an
elaborate answer as above is required.
Question 5
A company provided ` 10,00,000 for dividend payment. Is the Corporate Dividend Tax
payable in this case? If yes, please compute Corporate Dividend Tax assuming rate of 15%
plus surcharge of 10% and disclose as it would appear in profit and loss account of the
company. (4 Marks, November, 2009) (IPCC)
Answer
Note: Though current surcharge rate on DDT is 12% the question is solved on the basis of the
information given in the question. However, education cess of 3% is applied though not given
in the question. Therefore, total DDT arrives of 16.995%.
Yes, Corporate Dividend Tax (CDT)∗ is payable by the company which has provided for the
payment of dividend. CDT is payable even if no income tax is payable. This is payable by a
domestic company on distribution of profits to its shareholders.
In the given case Corporate Dividend Tax would be worked out as under:
(i) Grossing up of dividend:
10,00,000 x 100/85 = 11,76,470
(ii) CDT = 11,76,470 x 16.995 = 1,99,941
The liability in respect of CDT arises only if the profits are distributed as dividends
whereas the normal income-tax liability arises on the earning of the taxable profits.
∗
Corporate Dividend Tax is also known as ‘Dividend Distribution Tax’.

Since the CDT liability relates to distribution of profits as dividends which are adjusted as
appropriation /allocation of profit in the ‘Notes to Accounts’ of ‘Reserves and Surplus’, it
is appropriate that the liability in respect of DDT should also be adjusted therein.
CDT liability should be presented separately in the ‘Notes to Accounts’ of ‘Reserves and
Surplus’, as follows:
Dividend xxxxx
Dividend Corporate tax thereon xxxxx xxxxx
Question 6
Calculate the maximum remuneration payable to the Managing Director based on effective
capital of a non-investment company for the year, from the information given below:
(` in ‘000)
(i) Profit for the year (calculated as per Section 349, 350 & 351 of 3,000
the Companies Act, 1956)
(ii) Paid up capital 18,000
(iii) Reserves & surplus 7,200
(iv) Securities premium 1,200
(v) Long term loans 6,000
(vi) Investment 3,600
(vii) Preliminary expenses not written off 3,000
(viii) Remuneration paid to the Managing Director during the year 600
Answer
Note: Under the Companies Act, 2013, the Profits for the purposes of determining managerial
remuneration are computed in accordance with Section 198. Further, there is no provision for
computation of managerial remuneration on the basis of effective capital except in the case of loss
or inadequacy of profits in a financial year, hence this question is irrelevant in the new context as
there is no inadequacy of profits. Please refer to Sec 197, 198 and Schedule V of the Companies
Act 2013.
Question 7
What are the maximum limits of managerial remuneration for companies having adequate
profits? (4 Marks, May 2012) (IPCC)
Answer
For companies having adequate profits, maximum limits of managerial remuneration in
different circumstances are as under:
(i) Overall (excluding fee for attending meetings) 11% of net profit

2.7 Accounting
(ii) If there is one managing director or whole time director or manager 5% of net profit
(iii) If there is more than one managing director, whole time director or manager 10% of net
profit
(iv) Remuneration of directors who are neither managing directors nor whole time directors:
(a) If there is no managing or whole-time director 3% of net profit
(b) If there is a managing or whole-time director 1% of net profit
However, the above limits can be exceeded by the company approval at general
meetings with the Central Govt. approval.
Question 8
On 31st March, 2013 Bose and Sen Ltd. provides to you the following ledger balances after
preparing its Profit and Loss Account for the year ended 31st March, 2013:
Credit Balances :
`
Equity shares capital, fully paid shares of ` 10 each 70,00,000
General Reserve 15,49,100
Loan from State Finance Corporation 10,50,000
(Secured by hypothecation of Plant & Machinery Repayable
within one year ` 2,00,000)
Loans: Unsecured (Long term) 8,47,000
Sundry Creditors for goods & expenses 14,00,000
(Payable within 6 months)
Profit & Loss Account 7,00,000
Provision for Taxation 3,25,500
Proposed Dividend 4,20,000
Provision for Dividend Distribution Tax 71,400
1,33,63,000
Debit Balances :
`
Calls in arrear 7,000
Land 14,00,000
Buildings 20,50,000
Plant and Machinery 36,75,000
Furniture & Fixture 3,50,000
Stocks : Finished goods 14,00,000
Raw Materials 3,50,000

Sundry Debtors 14,00,000

Advances: Short-term 2,98,900
Cash in hand 2,10,000
Balances with banks 17,29,000
Preliminary Expenses 93,100
Patents & Trade marks 4,00,000
1,33,63,000
The following additional information is also provided:
(i) 4,20,000 fully paid equity shares were allotted as consideration for land & buildings.
(ii) Cost of Building ` 28,00,000
Cost of Plant & Machinery ` 49,00,000
Cost of Furniture & Fixture ` 4,37,500
(iii) Sundry Debtors for ` 3,80,000 are due for more than 6 months.
(iv) The amount of Balances with Bank includes ` 18,000 with a bank which is not a
scheduled Bank and the deposits of ` 5 lakhs are for a period of 9 months.
(v) Unsecured loan includes ` 2,00,000 from a Bank and ` 1,00,000 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, 2013 as required under Revised Schedule VI ∗ of
the Companies Act, 1956. (16 Marks, November 2013) (IPCC)
Answer
Bose and Sen Ltd.
Balance Sheet as on 31st March, 2013
Particulars Figures at the end of
current reporting
Notes period
`
Equity and Liabilities
1 Shareholders' funds
a Share capital 1 69,93,000
b Reserves and Surplus 2 21,56,000
2 Non-current liabilities
a Long-term borrowings 3 16,97,000
∗
Now Schedule III to the Companies Act, 2013.

2.9 Accounting
3 Current liabilities
a Trade Payables 14,00,000
b Other current liabilities 4 2,00,000
c Short-term provisions 5 8,16,900
Total 1,32,62,900
Assets
1 Non-current assets
a Fixed assets
Tangible assets 6 74,75,000
Intangible assets ( Patents & Trade Marks) 4,00,000
2 Current assets
a Inventories 7 17,50,000
b Trade receivables 8 14,00,000
c Cash and cash equivalents 9 19,39,000
d Short-term loans and advances 2,98,900
Total 1,32,62,900
Notes to accounts
`
1 Share Capital
Equity share capital
Issued, subscribed and called up
7,00,000 Equity Shares of ` 10 each 70,00,000
(Out of the above 4,20,000 shares have been issued for
consideration other than cash)
Less: Calls in arrears (7,000) 69,93,000
Total 69,93,000
2 Reserves and Surplus
Surplus (Profit & Loss A/c) 7,00,000
Less: Preliminary expenses (93,100)∗ 6,06,900
Total 21,56,000
∗
Preliminary expenses have been written off in line with Accounting Standards.

3 Long-term borrowings
Secured
Term Loans
Loan from State Finance Corporation 8,50,000
(` 10,50,000 - ` 2,00,000)
(Secured by hypothecation of Plant and Machinery)
Unsecured
Bank Loan 2,00,000
Loan from related parties 1,00,000
Others 5,47,000 8,47,000
Total 16,97,000
4 Other current liabilities
Loan Instalment repayable within one year 2,00,000
5 Short-term provisions
Provision for taxation 3,25,500
Provision for Dividend Distribution Tax 71,400
Total 8,16,900
6 Tangible assets
Land 14,00,000
Buildings 28,00,000
Less: Depreciation (7,50,000) 20,50,000
Plant & Machinery 49,00,000
Furniture & Fittings 4,37,500
Less: Depreciation (87,500) 3,50,000
Total 74,75,000
7 Inventories
Raw Material 3,50,000
Finished goods 14,00,000
17,50,000
8 Trade receivables
Debts outstanding for a period exceeding six months 3,80,000

2.11 Accounting
Other Debts 10,20,000

Total 14,00,000
9 Cash and cash equivalents
Cash at bank with Scheduled Banks including Bank 17,11,000
deposits for period of 9 months amounting ` 5,00,000
with others 18,000 17,29,000
Total 19,39,000
Question 9
The Articles of Association of Samson Ltd. provide the following:
(i) That 25 % of the net profit of each year shall be transferred to reserve fund.
(ii) That an amount equal to 10% of equity dividend shall be set aside for staff bonus.
(iii) That the balance available for distribution shall be applied:
(1) in paying 15% on cumulative preference shares.
(2) in paying 20% dividend on equity shares.
(3) one-third of the balance available as additional dividend on preference shares and
two-third as additional equity dividend.
A further condition was imposed by the articles viz. that the balance carried forward shall be
equal to 14% on preference shares after making provision (i), (ii) and (iii) mentioned above.
The company has issued 12,000, 15% cumulative participating preference shares of ` 100
each fully paid and 75,000 equity shares of ` 10 each fully paid up.
The profit for the year 2013-2014, was ` 10,00,000 and balance brought from previous year
` 1,50,000. Provide ` 37,500 for depreciation and ` 1,20,000 for taxation before making other
appropriations.
Show net balance of Profit and Loss Account after making above adjustments.
(8 Marks, IPCC May, 2014)
Answer
Statement of Profit and Loss for the year ended 31st March, 2014
Particulars Amount `
a Profit 10,00,000
b Expenses: Depreciation and amortization (37,500)
Total expenses (37,500)

c Profit before tax (a-b) 9,62,500

d Provision for tax (1,20,000)
e Profit (Loss) for the period 8,42,500
Notes to Accounts
Profit (Loss) for the period 8,42,500
Balance of Profit and Loss account brought forward 1,50,000
Total 9,92,500
Appropriations (made in Notes to Accounts)

Transfers to Reserves (2,10,625)
Proposed preference dividend (1,80,000 + 84,023) (2,64,023)
Proposed equity dividend (1,50,000 + 1,68,047) (3,18,047)
Bonus to employees (15,000 + 16,805) (31,805)
Total 8,24,500
Balance carried to Balance sheet (9,92,500 – 8,24,500) 1,68,000
Working Note:
Balance of amount available for Preference and Equity shareholders and Bonus for
Employees
Credit Side 9,92,500
Less: Dr. side (2,10,625 + 1,80,000 + 1,50,000 + 15,000 + 1,68,000
(i.e.12,000x100x14/100= 1,68,000) (7,23,625)
2,68,875
Suppose remaining balance will be = x
1 1
Preference shareholders will get share from remaining balance = x × = x
3 3
2 2
Equity shareholders will get share from remaining balance = x × = x
3 3
2 10 2
Bonus to Employees = x× = x
3 100 30
2 1 2
Now, x+ x+ x = 2,68,875
3 3 30

2.13 Accounting
32 x = 80,66,250 , than x = 2,52,070

Share of Preference Shareholders ` 2,52,070 x 1/3 = `84,023
Share of Equity Shareholders ` 2,52,070 x 2/3= `1,68,047
Bonus to employees ` 2,52,070 x 2/30 = `16,805
Note: Corporate dividend tax on dividend distributed has been ignored.
Question 10
From the following particulars furnished by Elegant Ltd., prepare the Balance Sheet as on 31st
March 2014 as required by Part I, revised Schedule VI of the Companies Act.
Particulars Debit ` Credit `
Equity Share Capital (Face value of ` 100 each) 50,00,000
Call in Arrears 5,000
Land & Building 27,50,000
Furniture 2,50,000
Loan from State Financial Corporation 7,50,000
Stock:
Finished Goods 10,00,000 12,50,000
Provision for Taxation 3,40,000
Advances 2,13,500
Profit & Loss Account 5,00,000
Cash in Hand 1,50,000
Cash at Bank 12,35,000
Preliminary expenses 66,500
Unsecured Loan 6,05,000
Sundry Creditors (for Goods and Expenses) 10,00,000
The following additional information is also provided:
(i) Preliminary expenses included ` 25,000 Audit Fees and ` 3,500 for out of pocket
expenses paid to the Auditors.

(ii) 10000 Equity shares were issued for consideration other than cash.
(iii) Debtors of ` 2,60,000 are due for more than 6 months.
(iv) The cost of the Assets were:
Building ` 30,00,000, Plant & Machinery ` 35,00,000 and Furniture ` 3,12,500
(v) The balance of ` 7,50,000 in the Loan Account with State Finance Corporation is
inclusive of ` 37,500 for Interest Accrued but not Due. The loan is secured by
hypothecation of Plant & Machinery.
(vi) Balance at Bank includes ` 10,000 with Global Bank Ltd., which is not a Scheduled
Bank. (10 Marks, IPCC November, 2014)
Answer
Elegant Ltd.
Particulars Notes `
Long-term borrowings 3 13,17,500
b Other current liabilities 4 37,500
c Short-term provisions 5 6,40,000
Total 94,73,500
Assets
Fixed assets
2 Current assets
d Short-term loans and advances 2,13,500
Total 94,73,500

2.15 Accounting
Notes to accounts
`
1 Share Capital
Issued & subscribed & called up
50,000 Equity Shares of ` 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
Surplus (Profit & Loss A/c) 5,00,000
Less: Preliminary expenses (66,500) 4,33,500
Total 14,83,500
Secured Term Loan
State Financial Corporation Loan (7,50,000- 37,500)
(Secured by hypothecation of Plant and Machinery) 7,12,500
Unsecured Loan 6,05,000
Total 13,17,500
4 Other current liabilities
Interest accrued but not due on loans (SFC) 37,500
Total 37,500

Total 6,40,000
6 Tangible assets
Land and Building 30,00,000


Furniture & Fittings 3,12,500
Total 56,25,000
7 Inventories
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
Cash at bank
with Scheduled Banks 12,25,000
with others (Global Bank Ltd.) 10,000 12,35,000
Total 13,85,000
∗ As per AS 26, preliminary expenses are not shown in the balance sheet, thus they are written off. The
amount of ` 25,000 as audit fee and out of pocket expenses paid to auditors amounting ` 3,500 have
been included in the amount of ` 66,500. The combined figure of ` 66,500 has been reduced from
Profit and Loss Account balance in the given solution.

2.17 Accounting
Unit 2: Cash Flow Statements
Question 1
ABC Ltd. gives you the following informations. You are required to prepare Cash Flow
Statement by using indirect methods as per AS 3 for the year ended 31.03.2004:
Balance Sheet as on
Liabilities 31st March 31st March Assets 31st March 31st March
2003 2004 2003 2004
` ` ` `
Capital 50,00,000 50,00,000 Plant & Machinery 27,30,000 40,70,000
Retained Earnings 26,50,000 36,90,000 Less: Depreciation 6,10,000 7,90,000
Debentures ― 9,00,000 21,20,000 32,80,000
Current Liabilities Current Assets
Creditors 8,80,000 8,20,000 Debtors 23,90,000 28,30,000
Bank Loan 1,50,000 3,00,000 Less: Provision 1,50,000 1,90,000
Liability for expenses 3,30,000 2,70,000 22,40,000 26,40,000
Dividend payable 1,50,000 3,00,000 Cash 15,20,000 18,20,000
Marketable 11,80,000 15,00,000
securities
Inventories 20,10,000 19,20,000
Prepaid Expenses 90,000 1,20,000
91,60,000 1,12,80,000 91,60,000 1,12,80,000
Additional Information:
(i) Net profit for the year ended 31st March, 2004, after charging depreciation ` 1,80,000 is
` 22,40,000.
(ii) Debtors of ` 2,30,000 were determined to be worthless and were written off against the
provisions for doubtful debts account during the year.
(iii) ABC Ltd. declared dividend of ` 12,00,000 for the year 2003-2004.
(16 Marks, May 2004) (PE-II)
Answer
Cash flow Statement of ABC Ltd. for the year ended 31.3.2004
Cash flows from Operating activities ` `
Net Profit 22,40,000
Add :Adjustment for Depreciation (`7,90,000 – `6,10,000) 1,80,000

Operating profit before working capital changes 24,20,000

Add: Decrease in Inventories (`20,10,000 – `19,20,000) 90,000
Increase in provision for doubtful debts
(` 4,20,000 – `1,50,000) 2,70,000
27,80,000
Less: Increase in Current Assets:
Debtors (` 30,60,000 – `23,90,000) 6,70,000
Prepaid expenses (` 1,20,000 – `90,000) 30,000
Decrease in current liabilities:

Creditors (` 8,80,000 – ` 8,20,000) 60,000
Expenses outstanding
(` 3,30,000 – `2,70,000) 60,000 8,20,000
Net cash from operating activities 19,60,000
Cash flows from Investing activities
Purchase of Plant & Equipment
(` 40,70,000 – ` 27,30,000) 13,40,000
Net cash used in investing activities (13,40,000)
Cash flows from Financing Activities
Bank loan raised (` 3,00,000 – ` 1,50,000) 1,50,000
Issue of debentures 9,00,000
Payment of Dividend (` 12,00,000 – ` 1,50,000) (10,50,000)
Net cash used in financing activities NIL
Net increase in cash during the year 6,20,000
Add: Cash and cash equivalents as on 1.4.2003
(` 15,20,000 + `11,80,000) 27,00,000
Cash and cash equivalents as on 31.3.2004
(` 18,20,000 + `15,00,000) 33,20,000
Note: Bad debts amounting ` 2,30,000 were written off against provision for doubtful debts
account during the year. In the above solution, Bad debts have been added back in the
balances of provision for doubtful debts and debtors as on 31.3.2004. Alternatively, the
adjustment of writing off bad debts may be ignored and the solution can be given on the basis
of figures of debtors and provision for doubtful debts as appearing in the balance sheet on
31.3.2004.

2.19 Accounting
Question 2
The following figures have been extracted from the Books of X Limited for the year ended on
31.3.2004. You are required to prepare a cash flow statement.
(i) Net profit before taking into account income tax and income from law suits but after
taking into account the following items was ` 20 lakhs:
(a) Depreciation on Fixed Assets ` 5 lakhs.
(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 31.3.2004 at a
premium of 5%. Further the company issued 50,000 equity shares of ` 10 each at a
premium of 20% on 2.4.2003. Dividend on preference shares were paid at the time of
redemption.
(iv) Dividends paid for the year 2002-2003 ` 5 lakhs and interim dividend paid ` 3 lakhs for
the year 2003-2004.
(v) Land was purchased on 2.4.2003 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 and current liabilities in the beginning and at the end of the years were as
detailed below:
As on 31.3.2003 As on 31.3.2004
` `
Stock 12,00,000 13,18,000
Sundry Debtors 2,08,000 2,13,100
Cash in hand 1,96,300 35,300
Bills receivable 50,000 40,000
Bills payable 45,000 40,000
Sundry Creditors 1,66,000 1,71,300
Outstanding expenses 75,000 81,800
(20 Marks, May 2005) (PE-II)

Answer
X Ltd.
Cash Flow Statement
for the year ended 31st March, 2004
` `
Cash flow from Operating Activities
Net profit before income tax and extraordinary items: 20,00,000
Adjustments for:
Depreciation on fixed assets 5,00,000
Discount on issue of debentures (Non cash charge to P/L) 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
Adjustments for:
Increase in stock (1,18,000)
Increase in sundry debtors (5,100)
Decrease in bills receivable 10,000
Decrease in bills payable (5,000)
Increase in sundry creditors 5,300
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
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 10% preference shares at 5% premium (15,75,000)

2.21 Accounting
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 year (1,61,000)
Add: Cash and cash equivalents as on 31.3.2003 1,96,300
Cash and cash equivalents as on 31.3.2004 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.
Question 3
(a) Raj Ltd. gives you the following information for the year ended 31st March, 2006:
(i) Sales for the year ` 48,00,000. The Company sold goods for cash only.
(ii) Cost of goods sold was 75% of sales.
(iii) Closing inventory was higher than opening inventory by ` 50,000.
(i) Trade creditors on 31.3.2006 exceed the outstanding on 31.3.2005 by ` 1,00,000.
(ii) Tax paid during the year amounts to ` 1,50,000.
(iii) Amounts paid to Trade creditors during the year ` 35,50,000.
(iv) Administrative and Selling expenses paid ` 3,60,000.
(v) One new machinery was acquired in December, 2005 for ` 6,00,000.
(vi) Dividend paid during the year ` 1,20,000.
(vii) Cash in hand and at Bank on 31.3.2006 ` 70,000.
(viii) Cash in hand and at Bank on 1.4.2005 ` 50,000.
Prepare Cash Flow Statement for the year ended 31.3.2006 as per the prescribed
Accounting standard.
(b) What all are the differences between Cash Flow statement and Fund Flow statement?
(12+4= 16 Marks, May 2006) (PE-II)
Answer
(a) Cash flow statement of Raj Limited
for the year ended 31.3.2006
Direct Method
` `
Cash flow from operating activities:
Cash receipt from customers (sales) 48,00,000

Cash paid to suppliers and expenses 39,10,000

(`35,50,000 + `3,60,000)
Cash flow from operation 8,90,000
Less: Tax paid 1,50,000
Cash flow from investing activities:
Purchase of fixed assets (6,00,000)
Cash flow from financing activities:
Dividend Paid (1,20,000)
Net cash from financing activities (1,20,000)
20,000
Add: Opening balance of Cash in Hand and at Bank 50,000
Cash in Hand and at Bank on 31.3.2006 70,000
(b) The fund flow statement is no more included in the syllabus therefore the question is not
relevant.
Question 4
The following are the summarized Balance Sheets of ‘X’ Ltd. as on March 31, 2005 and 2006:
Liabilities As on 31.3.2005 As on 31.3.2006
(`) (`)
Equity share capital 10,00,000 12,50,000
Capital Reserve --- 10,000
General Reserve 2,50,000 3,00,000
Profit and Loss A/c 1,50,000 1,80,000
Long-term loan from the Bank 5,00,000 4,00,000
Sundry Creditors 5,00,000 4,00,000
Provision for Taxation 50,000 60,000
Proposed Dividends 1,00,000 1,25,000
25,50,000 27,25,000
Assets Year 2005 Year 2006

(`) (`)
Land and Building 5,00,000 4,80,000
Machinery 7,50,000 9,20,000

2.23 Accounting
Investment 1,00,000 50,000

Stock 3,00,000 2,80,000
Sundry Debtors 4,00,000 4,20,000
Cash in Hand 2,00,000 1,65,000
Cash at Bank 3,00,000 4,10,000
25,50,000 27,25,000
(i) Dividend of ` 1,00,000 was paid during the year ended March 31, 2006.
(ii) Machinery during the year purchased for ` 1,25,000.
(iii) Machinery of another company was purchased for a consideration of ` 1,00,000 payable
in equity shares.
(iv) Income-tax provided during the year ` 55,000.
(v) Company sold some investment at a profit of ` 10,000, which was credited to Capital
reserve.
(vi) There was no sale of machinery during the year.
(vii) Depreciation written off on Land and Building ` 20,000.
From the above particulars, prepare a cash flow statement for the year ended March, 2006 as
per AS 3 (Indirect method). (16 Marks, November 2006)(PE-II)
Answer
Cash Flow Statement for the year ending on March 31, 2006
` `
I. Cash flows from Operating Activities
Net profit made during the year (W.N.1) 2,60,000
Adjustment for depreciation on Machinery (W.N.2) 55,000
Adjustment for depreciation on Land & Building 20,000
Operating profit before change in Working Capital 3,35,000
Decrease in Stock 20,000
Increase in Sundry Debtors (20,000)
Decrease in Sundry Creditors (1,00,000)
Income-tax paid (45,000)
II. Cash flows from Investing Activities
Purchase on Machinery (1,25,000)

Sale of Investments 60,000 (65,000)

III. Cash flows from Financing Activities
Issue of equity shares (2,50,000-1,00,000) 1,50,000
Repayment of Long term loan (1,00,000)
Dividend paid (1,00,000) (50,000)
Net increase in cash and cash equivalent 75,000
Cash and cash equivalents at the beginning of the 5,00,000
period
Cash and cash equivalents at the end of the period 5,75,000
Working Notes:
Note: Amount received on issue of equity shares is net of the shares issued in consideration
of purchase of machinery for ` 1,00,000
(i) Net Profit made during the year ended 31.3.2006
Increase in P & L (Cr.) Balance 30,000
Add: Transfer to general reserve 50,000
Add: Provision for taxation made during the year 55,000
Add: Provided for proposed dividend during the year 1,25,000
2,60,000
Note: The increase in General Reserve balance is attributed to transfer from P/L A/c.
However, the increase in Capital Reserve is independent of the P/L A/c and hence is not
shown in the profit for the year.
(ii) Machinery Account
` `
To Balance b/d 7,50,000 By Depreciation (Bal. Fig.) 55,000
To Bank 1,25,000 By Balance c/d 9,20,000
To Equity share capital 1,00,000
9,75,000 9,75,000
(iii) Provision for Taxation Account
` `
To Cash (Bal. Fig.) 45,000 By Balance b/d 50,000
To Balance c/d 60,000 By P & L A/c 55,000
1,05,000 1,05,000

2.25 Accounting
(iv) Proposed Dividend Account

` `
To Bank 1,00,000 By Balance b/d 1,00,000
To Balance c/d 1,25,000 By P & L A/c (Bal. Fig.) 1,25,000
2,25,000 2,25,000
(v) Investment Account
` `
To Balance b/d 1,00,000 By Bank A/c 60,000
To Capital Reserve A/c (Profit (Balancing figure for
on sale of investment) 10,000 investment sold)
By Balance c/d 50,000
1,10,000 1,10,000
Question 5
What is meant by ‘Cash’ and ‘Cash equivalents’ as per AS 3? (4 Marks, May, 2007)(PCC)
Answer
As per AS 3 ‘Cash Flow Statements’, the term ‘Cash’ and ‘Cash equivalents’ mean the
following:
Cash: It includes cash on hand and demand deposits with banks.
Cash Equivalents: It means short-term, highly liquid investments that are readily convertible
into known amounts of cash and which are subject to insignificant risk of changes in value.
Cash equivalents are held for the purpose of meeting short-term cash commitments rather
than for investment or other similar purposes. For an investment to qualify as a cash
equivalent, it must be readily convertible into a determinatble amount of cash and is subject to
an insignificant risk of changes in value. Therefore, an investment normally qualifies as a cash
equivalent only when it has a short maturity of, say, three months or less from the date of
acquisition and is virtually risk free. A short term investment in a highly risky asset will not
qualify as Cash Equivalent.
Question 6
J Ltd. presents you the following information for the year ended 31st March, 2007:
(` 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 in P & L account 24,000
(vi) Capital grant received - amortized in 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 in P & L A/c 3,000
(ix) Interest expenditure debited in 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
(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 in P & L A/c 6,000
Cash and bank balance on 1.4.2006 6,000
Cash and bank balance on 31.3.2007 8,000
You are required to prepare a cash flow statement as per AS-3 (Revised).
Answer
Cash Flow Statement as per AS 3
Cash flows from operating activities: ` in lacs
Net profit before tax provision 36,000
Add: Non cash expenditures:
Depreciation 24,000
Loss on sale of assets 48
Interest expenditure (non operating activity) 12,000 36,048
72,048
Less: Non cash income
Amortisation of capital grant received (10)

2.27 Accounting
Profit on sale of investments (non operating income) (120)

Interest income from investments (non op income) (3,000) 3,130
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 1.4.2006 6,000
Cash and bank balance as on 31.3.2007 8,000
Question 7
From the following summarised Cash account of S Ltd., prepare cash flow statement for the
year ended 31st March, 2009 in accordance with AS 3 (revised) using direct method.
Summarised Cash Account
(` 000) (` 000)
Opening balance 50 Payment to suppliers 2,000
Issue of share capital 300 Purchase of fixed assets 200
Received from customers 2,800 Overhead expenses 200

Sale of fixed assets 100 Wages and salaries 100

Tax paid 250
Dividend paid 50
Bank loan 300
Closing balance 150
3,250 3,250
(8 Marks, June, 2009) (PCC)
Answer
Cash Flow Statement for the year ended 31.3.2009
` in ‘000
Cash flow from Operating Activities
Cash received from customers 2,800
Less: Cash paid to suppliers 2,000
Cash paid for overhead expenses 200
Cash paid for wages and salaries 100 2,300
500
Less: Income tax paid 250
Net cash generated from Operating Activities 250
Cash flow from Investing Activities
Sale of fixed assets 100
Less: Purchase of fixed assets 200
Net cash used in Investing Activities (100)
Cash flow from Financing Activities
Received from issue of share capital 300
Less: Repayment of bank loan 300
Payment of dividend 50 350
Net cash used in Financing Activities (50)
Net increase in cash and equivalents 100
Add: Cash and equivalents at the beginning of the year 50
Cash and equivalents at the end of the year 150
Question 8
Balance Sheet of Raman Ltd. is given below:
(` in ‘000)
Liabilities 31.3.08 31.3.09 Assets 31.3.08 31.3.09
Share capital 500 500 Land & building 300 300

2.29 Accounting
9% Debentures 200 160Machinery 164 180

Sundry creditors 230 216Stock-in-trade 200 228
Profit and Loss A/c 40 54Sundry debtors 170 162
Depreciation fund 80 88Cash and bank 120 110
balances
Contingency reserve 140 110 Current Investment 262 190
Outstanding expenses 30 48 Pre-paid expenses 4 6
1,220 1,176 1,220 1,176
The following information is furnished:
(i) One old machinery which has original cost of ` 30,000 was sold for ` 10,000. The
accumulated depreciation in respect of the said machinery amounts to ` 16,000.
(ii) One new machinery was acquired for ` 46,000.
(iii) 9% Debentures were redeemed at a discount of 4% of their face value.
(iv) Dividend at 12% was declared and paid in cash.
(v) Income-tax liability of ` 30,000 paid was debited to contingency reserve.
You are required to prepare Cash Flow Statement in accordance with the Accounting
Standard 3. (16 Marks, November, 2009) (PCC)
Answer
Cash Flow Statement of Raman Ltd.
` `
A. Cash flow from Operating Activities
Net profit before tax (` 54,000 – ` 40,000 + ` 60,000) 74,000
Add: Adjustment for depreciation (W.N.1) 24,000
Interest on debentures∗ (`1,60,000 x 9%) 14,400
Loss on sale of machinery (W.N.2) 4,000
1,16,400
Less: Profit on redemption of debentures (Non
Operating Income) (1,600)
1,14,800
Less :Income tax paid (30,000)
Operating profit before changes in Working Capital 84,800
Add: Increase in outstanding expenses 18,000
∗
It is assumed that debentures were redeemed at the beginning of the year. Hence, interest has been considered on the
bal debs only.

Decrease in sundry debtors 8,000

Decrease in current investment∗∗ 72,000 98,000
1,82,800
Less: Decrease in sundry creditors 14,000
Increase in stock in trade 28,000
Increase in prepaid expenses 2,000 (44,000)
B. Cash flow from Investing Activities
Sale of old machinery 10,000
Purchase of machinery (46,000)
C. Cash flow from Financing Activities
Redemption of debentures (` 40,000 – `1,600) (38,400)
Payment of dividend (60,000)
Payment of interest on debentures (14,400)
Net cash used financing activities (1,12,800)
Net decrease in cash and cash equivalents during the year (10,000)
Cash and cash equivalents at the beginning of the year 1,20,000
Cash and cash equivalents at the end of the year 1,10,000
Working Notes:
1. Depreciation Fund
` `
To Machinery A/c 16,000 By Balance b/d 80,000
To Balance c/d 88,000 By Profit and Loss A/c 24,000
(Current year depreciation)
1,04,000 1,04,000
2. Machinery A/c
` `
To Balance b/d 1,64,000 By Depreciation Fund 16,000
To Bank (Purchased) 46,000 By Bank (realized on sale of old
machinery 10,000
By Profit and loss A/c (loss on 4,000
∗∗
It is assumed that current investments cannot be liquidated within short duration of 3 months, therefore it has not been
considered as part of cash and cash equivalents.

2.31 Accounting
sale) – Balancing Fig

By Balance c/d 1,80,000
2,10,000 2,10,000
Question 9
The following particulars relate to Bee Ltd., for the year ended 31st March, 2010 :
(i) Furniture of book value of ` 15,500 was disposed off for ` 12,000.
(ii) Machinery costing ` 3,10,000 was purchased and ` 20,000 were spent on its erection.
(iii) Fully paid 8% preference shares of the face value of ` 10,00,000 were redeemed at a
premium of 3%. In this connection 60,000 equity shares of ` 10 each were issued at a
premium of ` 2 per share. The entire money being received with applications.
(iv) Dividend was paid as follows:
On 8% preference shares ` 40,000
On equity shares for the year 2009-10 ` 1,10,000
(v) Total sales were ` 32,00,000 out of which cash sales were ` 11,50,000.
(vi) Total purchases were ` 8,00,000 including cash purchase of ` 60,000.
(vii) Total expenses were ` 12,40,000 charged to Profit and Loss A/c.
(viii) Taxes paid including dividend distribution tax of ` 22,500 were ` 3,30,000.
(ix) Cash and cash equivalents as on 31st March, 2010 were ` 1,25,000.
You are requested to prepare Cash Flow Statement as per AS 3 for the year ended
31st March, 2010 after taking into consideration the following also:
On 31st March, 2009 (`) On 31st March, 2010 (`)
Sundry debtors 1,50,000 1,47,000
Sundry creditors 78,000 83,000
Unpaid expenses 63,000 55,000
(8 Marks, May, 2010) (IPCC)
Answer
Cash Flow Statement for the year ended 31st March, 2010
` `
I. Cash flow from operating activities
Cash receipts from customers (W.N.1) 32,03,000
Cash paid to suppliers and payment for expenses (W.N.3) (20,43,000)


Income tax paid (`3,30,000 – `22,500) (3,07,500)
II. Cash flows from investing activities
Sale of furniture 12,000
Purchase of machinery (3,30,000)
III. Cash flow from financing activities
Proceeds from issue of equity shares 7,20,000
Redemption of 8% preference shares (10,30,000)
Dividend paid (`40,000 + `1,10,000) (1,50,000)
Dividend distribution tax paid (22,500)
Net cash used in financing activities (4,82,500)
Net increase in cash and cash equivalents 52,000
Add: Cash and cash equivalents as on 31st March, 2009 (Bal. fig.) 73,000
Cash and cash equivalents as on 31st March, 2010 1,25,000
Working Notes:
1. Credit sales = `32,00,000 – `11,50,000 = `20,50,000
Total Debtors Account
` `
To Balance b/d 1,50,000 By Cash/Bank (Bal. fig.) 20,53,000
To Credit sales 20,50,000 By Balance c/d 1,47,000
22,00,000 22,00,000
Total sale receipts = ` 20,53,000 + `11,50,000 = ` 32,03,000
2. Credit Purchases = ` 8,00,000 – `60,000 = ` 7,40,000
Total Creditors Account
` `
To Cash/Bank (Bal. fig.) 7,35,000 By Balance b/d 78,000
To Balance c/d 83,000 By Credit purchases 7,40,000
8,18,000 8,18,000
Total payments to suppliers = ` 7,35,000 + ` 60,000 = ` 7,95,000

2.33 Accounting
3. Total payment
`
Outstanding expenses as on 31.3.2009 63,000
Add: Expenses charged to Profit and loss account 12,40,000
13,03,000
Less:Outstanding expenses as on 31.3.2010 55,000
Payment on account of expenses 12,48,000
Total of payment to suppliers and payment for expenses = ` 7,95,000 + ` 12,48,000 = ` 20,43,000
Question 10
From the following information, prepare a Cash Flow Statement as per AS 3 for Banjara Ltd.,
using direct method:
Balance Sheet as on March 31, 2010 (`’ 000)
2010 2009
Assets:
Cash on hand and balances with bank 200 25
Marketable securities (having one month maturity) 670 135
Sundry debtors 1,700 1,200
Interest receivable 100 -
Inventories 900 1,950
Investments 2,500 2,500
Fixed assets at cost 2,180 1,910
Accumulated depreciation (1,450) (1,060)
Fixed assets (net) 730 850
Total assets 6,800 6,660
Liabilities:
Sundry creditors 150 1,890
Interest payable 230 100
Income tax payable 400 1,000
Long term debt 1,110 1,040
Total liabilities 1,890 4,030
Shareholder’s fund:
Share capital 1,500 1,250

Reserves 3,410 1,380

4,910 2,630
Total liabilities and shareholders’ fund 6,800 6,660
Statement of Profit or Loss for the year ended 31-3-10
(` ‘000)
Sales 30,650
Cost of sales (26,000)
Gross profit 4,650
Depreciation (450)
Administrative and selling expenses (910)
Interest expenses (400)
Interest income 300
Dividend income 200
Net profit before taxation and extraordinary items 3,390
Extraordinary items:
Insurance proceeds from earthquake disaster settlement 140
Net profit after extraordinary items 3,530
Income tax (300)
3,230
Additional information:
(i) An amount of ` 250 was raised from the issue of share capital and a further ` 250 was
raised from long-term borrowings.
(ii) Interest expense was ` 400 of which ` 170 was paid during the period. ` 100 relating to
interest expense of the prior period was also paid during the period.
(iii) Dividends paid were ` 1,200.
(iv) Tax deducted at source on dividends received (including in the tax expense of ` 300 for
the year) amounted to ` 40.
(v) During the period the enterprise acquired fixed assets for ` 350. The payment was made
in cash.
(vi) Plant with original cost of ` 80 and accumulated depreciation of ` 60 was sold for ` 20.
(vii) Sundry debtors and Sundry creditors include amounts relating to credit sales and credit
purchase only. (16 Marks, November, 2010) (IPCC)

2.35 Accounting
Answer
Cash Flow Statement (direct method)
` in ‘000
Cash flows from Operating Activities
Cash receipts from customers (W.N.2) 30,150
Cash paid to suppliers, employees and for expenses (W.N.3) (27,600)
Cash generated from operations 2,550
Income tax paid (W.N.4) (860)
1,690
Cash flow before extraordinary item:
Proceeds from earthquake disaster settlement 140
Net cash generated from operating activities 1,830
Cash flows from Investing Activities
Purchase of fixed assets (350)
Proceeds from sale of equipment 20
Interest received (300 – 100) 200
Dividends received (200 – 40) 160
Net cash from investing activities 30
Cash flows from Financing Activities
Proceeds from issuance of share capital 250
Proceeds from long term borrowings 250
Repayment of long term borrowings (W.N.5) (180)
Interest paid (W.N.6) (270)
Dividend paid (1,200)
Net cash used in financing activities (1,150)
Net increase in cash and cash equivalents 710
Cash and cash equivalents at beginning of the period (W.N.1) 160
Cash and cash equivalents at end of the period (W.N.1) 870
Working Notes:
(1) Cash and cash equivalents
Cash and cash equivalents consist of cash in hand and balances with banks and
investments in money market instruments for short period.

`’000
2010 2009
Cash in hand and balance with bank 200 25
Short-term investments 670 135
Cash and cash equivalents 870 160
(2) Cash receipts from customers
`’000
Total sales 30,650
Add: Sundry debtors at the beginning of the year 1,200
31,850
Less: Sundry debtors at the end of the year (1,700)
Cash sales 30,150
(3) Cash paid to suppliers, employees and for expenses
`’000
Cost of sales 26,000
Administrative and selling expenses 910
26,910
Add: Sundry creditors at the beginning of the year 1,890
Inventories at the end of the year 900 2,790
29,700
Less: Sundry creditors at the end of the year (150)
Inventories at the beginning of the year (1,950) (2,100)
27,600
(4) Income tax paid (including TDS from dividends received)
`’000
Income tax expense for the year 300
(including tax deducted at source from dividends received)
Add: Income tax liability at the beginning of the year 1,000
1,300
Less: Income tax liability at the end of the year (400)
900
Out of ` 900 thousands, tax deducted at source on dividends received (amounting to `40
thousands) is included in cash flows from investing activities and the balance of `860
thousands is included in cash flows from operating activities.

2.37 Accounting
(5) Repayment of long term borrowings during the year

`’000
Long term debts at the beginning of the year 1,040
Add: Long term borrowings made during the year 250
1,290
Less: Long term borrowings at the end of the year (1,110)
180
(6) Interest paid during the year
`’000
Interest expense for the year 400
Add: Interest payable at the beginning of the year 100
500
Less: Interest payable at the end of the year (230)
270
Question 11
The following are the summarized Balance Sheets of Lotus Ltd. as on 31st March 2010 and 2011:
Liabilities 31-3-2010 31-3-2011
` `
Equity share capital (` 10 each) 10,00,000 12,50,000
Capital reserve 10,000
Profit and loss A/c 4,00,000 4,80,000
Long term loan from the bank 5,00,000 4,00,000
Sundry creditors 5,00,000 4,00,000
Provision for taxation 50,000 60,000
24,50,000 26,00,000
Assets ` `
Land and building 4,00,000 3,80,000
Machinery 7,50,000 9,20,000
Investment 1,00,000 50,000
Stock 3,00,000 2,80,000
Sundry debtors 4,00,000 4,20,000
Cash in hand 2,00,000 1,40,000
Cash at bank 3,00,000 4,10,000
24,50,000 26,00,000

(1) Depreciation written off on land and building ` 20,000.
(2) The company sold some investment at a profit of ` 10,000, which was credited to Capital
Reserve.
(3) Income-tax provided during the year ` 55,000.
(4) During the year, the company purchased a machinery for ` 2,25,000. They paid
` 1,25,000 in cash and issued 10,000 equity shares of ` 10 each at par.
You are required to prepare a cash flow statement for the year ended 31st March, 2011 as per
AS 3 by using indirect method. (16 Marks, May, 2011) (IPCC)
Answer
In the books of Lotus Ltd.
Cash Flow Statement for the year ending 31st March, 2011
` `
I Cash flow from Operating Activities
Net Profit before tax for the year (W.N.1) 1,35,000
Add: Depreciation on machinery (W.N.2) 55,000
Depreciation on land & building 20,000
Operating profit before change in working capital 2,10,000
Add: Decrease in stock 20,000
Less: Increase in sundry debtors (20,000)
Less: Decrease in sundry creditors (1,00,000)
Cash generated from Operations 1,10,000
Less: Income tax paid (W.N.3) (45,000)
Net cash generated from operating activities 65,000
II Cash flow from Investing activities
Purchase of machinery (2,25,000 – 1,00,000) (1,25,000)
Sale of investment (W.N. 4) 60,000
III Cash flow from financing activities
Issue of equity shares (2,50,000-1,00,000) 1,50,000
Repayment of long term loan (1,00,000)
Net cash generated from financing activities 50,000
Net increase in cash and cash equivalents 50,000

2.39 Accounting
Cash and cash equivalents at the beginning of the year

(2,00,000 + 3,00,000) 5,00,000
Cash and cash equivalents at the end of the year 5,50,000
(1,40,000+4,10,000)
Working Notes:
1. Calculation of Net Profit before tax
`
Increase in Profit & Loss (Cr.) balance 80,000
1,35,000
2. Calculation of Depreciation charged during the year on Machinery account
Particulars Amount (`) Particulars Amount (`)
To Balance b/d 7,50,000 By Depreciation (Bal.fig.) 55,000
To Bank 1,25,000 By Balance c/d 9,20,000
To Equity share capital 1,00,000
9,75,000 9,75,000
3. Calculation of tax paid during the year
Provision for Taxation A/c
To Cash (Bal.fig.) 45,000 By Balance b/d 50,000
1,05,000 1,05,000
4. Calculation of sales value of investment sold
Investment A/c
To Balance b/d 1,00,000 By Bank A/c (Bal.fig.) 60,000
To Capital reserve (Profit By Balance c/d 50,000
on sale of investments) 10,000
1,10,000 1,10,000

Question 12
Balance Sheet of M/s Hero Ltd. as on 31st March, 2010 and 2011 are as follows:
(` in ’000)
Liabilities 31-3-10 31-03-11 Assets 31-3-10 31-03-11
Equity share capital 1,000 1,150 Land & buildings 500 480
Capital reserve - 10 Machinery 750 820
General reserve 250 300 Investments 100 50
Profit and loss A/c 150 180 Stock 300 280
Long term loan from bank 500 400 Sundry debtors 400 420
Sundry creditors 500 400 Cash in hand 200 165
Provision for taxation 50 60 Cash at bank 300 410
Proposed dividends 100 125
2,550 2,625 2,550 2,625
(i) Dividend of ` 1,00,000 was paid during the year ended 31st March, 2011.
(ii) Machinery purchased during the year for ` 1,25,000.
(iii) Company sold some investment at a profit of ` 10,000 which was credited to capital
reserve.
(iv) Depreciation written off on land and building ` 20,000.
(v) Income tax provided during the year ` 55,000.
From the above particulars, prepare a cash flow statement for the year ended 31st March,
2011 as per AS 3 using indirect method. (10 Marks) (November, 2011) (IPCC)
Answer
Cash Flow Statement for the year ended on 31st March, 2011
` `
I Cash flow from Operating Activities
Net profit made during the year (W.N.1) 2,60,000
Add: Depreciation on machinery (W.N.2) 55,000
Add: Depreciation on land and building 20,000
Operating profit before change in working capital 3,35,000
Add: Decrease in stock (3,00,000 – 2,80,000) 20,000
Less: Increase in sundry debtors(4,20,000 – 4,00,000) (20,000)

2.41 Accounting
Less: Decrease in sundry creditors (5,00,000 – 4,00,000) (1,00,000)

Less: Income tax paid (W.N.3) (45,000)
Net cash generated from operating activities 1,90,000
II Cash flow from Investing Activities
Purchase of machinery (1,25,000)
Sale of investment (50,000 + 10,000) 60,000
III Cash flow from Financing Activities
Issue of equity shares (11,50,000 – 10,00,000) 1,50,000
Repayment of long term loan from bank
(5,00,000 – 4,00,000) (1,00,000)
Dividend paid (1,00,000)
Net cash used in financing activities (50,000)
Net increase in cash and cash equivalent 75,000
Add: Cash and Cash Equivalents at the beginning of the
period (2,00,000 + 3,00,000) 5,00,000
Cash and cash equivalents at the end of the period (1,65,000 +
4,10,000) 5,75,000
Working Notes:
1. Net profit (before tax) made during the year `
Increase in Profit and Loss A/c balance (1,80,000 – 1,50,000) 30,000
Add: Transfer to General Reserve (3,00,000 – 2,50,000) 50,000
Add: Provided for proposed dividend during the year (W.N.4) 1,25,000
2,60,000
2. Machinery Account
` `
To Balance b/d 7,50,000 By Bank (machinery sold) 55,000
(Bal. Fig.)
To Bank (machinery 1,25,000 By Balance c/d 8,20,000
purchased)
8,75,000 8,75,000

3. Provision for Taxation

` `
To Cash (Bal. fig.) 45,000 By Balance b/d 50,000
To Balance c/d 60,000 By Profit & Loss A/c 55,000
1,05,000 1,05,000
4. Proposed Dividend A/c

` `
To Balance c/d 1,25,000 By Profit & Loss A/c (Bal. fig.) 1,25,000
2,25,000 2,25,000
Question 13
On the basis of the following information prepare a Cash Flow Statement for the year ended
31st March, 2013:
(i) Total sales for the year were ` 199 crore out of which cash sales amounted to
` 131 crore.
(ii) Cash collections from credit customers during the year, totalled ` 67 crore.
(iii) Cash paid to suppliers of goods and services and to the employees of the enterprise
amounted to ` 159 crore.
(iv) Fully paid preference shares of the face value of ` 16 crore were redeemed and equity
shares of the face value of ` 16 crore were allotted as fully paid up at a premium of 25%.
(v) ` 13 crore were paid by way of income tax.
(vi) Machine of the book value of ` 21 crore was sold at a loss of ` 30 lakhs and a new
machine was installed at a total cost of ` 40 crore.
(vii) Debenture interest amounting ` 1 crore was paid.
(viii) Dividends totalling ` 10 crore was paid on equity and preference shares. Corporate
dividend tax @ 17% was also paid.
(ix) On 31st March, 2012 balance with bank and cash on hand totalled ` 9 crore.
(8 Marks, May 2013) (IPCC)

2.43 Accounting
Answer
Cash flow statement
(` in crores) (` in crores)
Cash flow from operating activities
Cash sales 131
Cash collected from credit customers 67
Less: Cash paid to suppliers for goods & services and to employees (159)
Cash from operations 39
Less: Income tax paid (13)
Net cash generated from operating activities 26.00
Cash flow from investing activities
Payment for purchase of Machine (40.00)
Proceeds from sale of Machine 20.70
Net cash used in investing activities (19.30)
Cash flow from financing activities
Redemption of Preference shares (16.00)
Proceeds from issue of Equity shares 20.00
Debenture interest paid (1.00)
Dividend Paid (11.70)
Net cash used in financing activities (8.70)
Net decrease in cash and cash equivalent (2.00)
Add: Cash and cash equivalents as on 1.04.2012 9.00
Cash and cash equivalents as on 31.3.2013 7.00
Question 14
Surya Ltd. has provided you the following particulars. Prepare Cash Flow from Operating
Activities by Indirect Method in accordance with AS 3 :
Profit & Loss Account of Surya Ltd.
Particulars ` Particulars `
To Depreciation 86,700 By Operating Profit before depreciation 11,01,600
To Patents written off 35,000 By Profit on Sale on Investments 10,000
To Provision for Tax 1,25,000 By Refund of Tax 3,000
To Proposed dividend 72,000 By Insurance Claim-Major Fire Settlement 1,00,000
To Transfer to Reserve 87,000

To Net Profit 8,08,900

12,14,600 12,14,600
Additional information :
in `
31.3.2012 31.3.2013
Stock 1,20,000 1,60,000
Trade Debtors 7,500 75,000
Trade Creditors 23,735 87,525
Provision for Tax 1,18,775 1,25,000
Prepaid Expenses 15,325 12,475
Marketable Securities 11,775 29,325
Cash Balance 25,325 35,340
(8 Marks) (IPCC, November 2013)

Answer
Indirect Method
Cash flow from Operating activities for the year ended 31st March, 2013
`
Net Profit as per Profit & Loss A/c 8,08,900
Add: Proposed dividend 72,000
Add: Transfer to reserve 87,000
Add: Provision for Tax made during the Current Year 1,25,000
Less: Refund of tax (3,000)
Less: Extraordinary items (i.e. Insurance Claim – Major Fire
Settlement) (1,00,000)
Net Profit before taxation, and extraordinary items 9,89,900
Add: Depreciation 86,700
Add: Patents written off 35,000
Less: Profit on sale of investments (10,000)
Increase in stock (40,000)
Increase in trade debtors (67,500)
Increase in trade creditors 63,790
Decrease in prepaid expenses 2,850 (40,860)

2.45 Accounting
Income taxes paid (net of refund) 1,15,775

Cash flow before extraordinary item 9,44,965
Insurance claim recovery (major fire settlement) 1,00,000
Working Note:
Payment of Income Tax
Opening Balance 1,18,775
Add: Provision made in the year 1,25,000
Less: Refund received in the year (3,000)
Less: Closing Balance (1,25,000)
Amount paid in the year 1,15,775
Question 15
Intelligent Ltd., a non financial company has the following entries in its Bank Account. It has
sought your advice on the treatment of the same for preparing Cash Flow Statement.
(i) Loans and Advances given to the following and interest earned on them:
(1) to suppliers
(2) to employees
(3) to its subsidiaries companies
(ii) Investment made in subsidiary Smart Ltd. and dividend received
(iii) Dividend paid for the year
(iv) TDS on interest income earned on investments made
(v) TDS on interest earned on advance given to suppliers
(vi) Insurance claim received against loss of fixed asset by fire
Discuss in the context of AS 3 Cash Flow Statement (4 Marks, IPCC May, 2014)
Answer
(i) Loans and advances given and interest earned
(1) to suppliers Operating Cash flow
(2) to employees Operating Cash flow
(3) to its subsidiary companies Investing Cash flow
(ii) Investment made in subsidiary company and dividend received
Investing Cash flow

(iii) Dividend paid for the year

Financing Cash Outflow
(iv) TDS on interest income earned on investments made
Investing Cash Outflow
(v) TDS on interest earned on advance given to suppliers
Operating Cash Outflow
(vi) Insurance claim received of amount loss of fixed asset by fire
Extraordinary item to be shown under a separate heading as ‘Cash inflow from Operating
activities’.
Question 16
Prepare Cash flow for Gamma Ltd., for the year ending 31.3.2014 from the following
information:
(1) Sales for the year amounted to ` 135 crores out of which 60% was cash sales.
(2) Purchases for the year amounted to ` 55 crores out of which credit purchase was 80%.
(3) Administrative and selling expenses amounted to ` 18 crores and salary paid amounted
to ` 22 crores.
(4) The Company redeemed debentures of ` 20 crores at a premium of 10%. Debenture
holders were issued equity shares of ` 15 crores towards redemption and the balance
was paid in cash. Debenture interest paid during the year was
` 1.5 crores.
(5) Dividend paid during the year amounted to ` 10 crores. Dividend distribution tax @ 17%
was also paid.
(6) Investment costing ` 12 crores were sold at a profit of ` 2.4 crores.
(7) ` 8 crores was paid towards income tax during the year.
(8) A new plant costing ` 21 crores was purchased in part exchange of an old plant. The
book value of the old plant was ` 12 crores but the vendor took over the old plant at a
value of ` 10 crores only. The balance was paid in cash to the vendor.
(9) The following balances are also provided:
` in crores ` in crores
1.4.2013 31.3.2014
Debtors 45 50
Creditors 21 23
Bank 6
(6 Marks, IPCC November, 2014)

2.47 Accounting
Answer
Gamma Ltd.
Cash Flow Statement for the year ended 31st March, 2014
(Using direct method)
Particulars ` in crores ` in crores
Cash flows from operating activities
Cash sales (60% of 135) 81
Cash receipts from Debtors 49
[45+ (135x40%) - 50]
Cash purchases (20% of 55) (11)
Cash payments to suppliers (42)
[21+ (55x80%) – 23]
Cash paid to employees (22)
Cash payments for overheads (Adm. and selling) (18)
Cash generated from operations 37
Income tax paid (8)
Net cash generated from operating activities 29
Cash flows from investing activities
Sale of investments (12+ 2.40) 14.4
Payments for purchase of fixed assets (11)
Net cash used in investing activities 3.4
Cash flows from financing activities
Redemption of debentures (22-15) (7)
Interest paid (1.5)
Dividend paid (10.0)
Dividend Distribution Tax paid (1.7)
Net cash used in financing activities (20.2)
Net increase in cash 12.2
Cash at beginning of the period 6.0
Cash at end of the period 18.2

3
Profit & Loss Prior to Incorporation
Question 1
The partnership of Sakshi Agencies decided to convert the partnership into Private Limited
Company named Rameshwar Company Pvt. Ltd. with effect from 1st January, 2008. The
consideration was agreed at ` 2,34,00,000 based on firm’s Balance Sheet as on 31st
December, 2007. However, due to some procedural difficulties, the company could be
incorporated only on 1st April, 2008. Meanwhile, the business was continued on behalf of the
company and the consideration was settled on that day with interest at 12% p.a. The same
books of accounts were continued by the company, which closed its accounts for the first time
on 31st March, 2009 and prepared the following summarized Profit and Loss account:
` `
To Cost of goods sold 3,27,60,000 By Sales 4,68,00,000
To Salaries 23,40,000
To Depreciation 3,60,000
To Advertisement 14,04,000
To Discount 23,40,000
To Managing Director’s 1,80,000
remuneration
To Miscellaneous office 2,40,000
expenses
To Office cum showroom rent 14,40,000
To Interest 19,02,000
To Profit 38,34,000
4,68,00,000 4,68,00,000
The company’s only borrowing was a loan of ` 1,00,00,000 at 12% p.a. to pay the purchase
consideration due to the firm and for working capital requirements. The company was able to
double the monthly average sales of the firm from 1st April, 2008, but the salaries trebled from
the date. It had to occupy additional space from 1st July, 2008 for which rent was ` 60,000 per
month.

3.2 Accounting
Prepare a statement showing apportionment of costs and revenue between pre-incorporation

and post-incorporation periods. (8 Marks, June, 2009)(PCC)
Answer
Statement showing calculation of profits for pre and post incorporation periods
for the year ended 31.3.09 (15 Months)
Total Ratio Pre Post
(` ) (` ) (` )
Gross profit 1,40,40,000 1:8 15,60,000 1,24,80,00
0
Less: Salaries 23,40,000 1:12 1,80,000 21,60,000
Depreciation 3,60,000 1:4 72,000 2,88,000
Advertisement 14,04,000 1:8 1,56,000 12,48,000
Discount 23,40,000 1:8 2,60,000 20,80,000
Managing director’s remuneration 1,80,000 Post - 1,80,000
Office cum showroom rent 14,40,000 Actual 1,80,000 12,60,000
Miscellaneous office expenses 2,40,000 1:4 48,000 1,92,000
Interest 19,02,000 Actual 7,02,000 12,00,000
Goodwill (bal. fig.) 38,000 ---
Net profit (B.f.) ---- 38,72,000
Note: Since the profits prior to incorporation are in the negative, they would:
(a) either be considered as a reduction from any capital reserve accruing in relation to
the transaction, or
(b) be treated as goodwill.
Working Notes:
(1) Calculation of Time Ratio
Pre-Incorporation Period Post-Incorporation Period
1st January, 2008 to 31st March, 2008 1st April, 2008 to 31st March, 2009
(3 Months) (12 Months)
3: 12
1: 4
(2) Calculation of Sales Ratio
3 Months 12 Months
3x1 12 x 2
3: 24

Profit & Loss Prior to Incorporation 3.3
1: 8
(3) Calculation of Staff Salary Ratio
3 Months 12 Months
3x1 12 x 3
3: 36
1: 12
(4) Calculation of Interest
2,34,00,000 x 3/12 x 12/100 1,00,00,000 x 12/100
= ` 7,02,000 = ` 12,00,000
(5) Calculation of Rent
Rent on additional space
1 July 2008 to 31st March, 2009 = 9 Months
Total additional rent = 60,000 x 9 = ` 5,40,000
Remaining rent on earlier space = 14,40,000 – 5,40,000 = ` 9,00,000
Rent per month = 9,00,000 = ` 60,000
15 per
month
Pre-Incorporation Period rent = 60,000 x 3 = 1,80,000
Post-Incorporation Period rent = 60,000 x 12 = 7,20,000
Additional rent = 5,40,000
12,60,000
(6) Calculation of Gross Profit
Trading Account
` `
To Cost of goods sold 3,27,60,000 By Sales 4,68,00,000
To Gross profit (Bal. fig.) 1,40,40,000
4,68,00,000 4,68,00,000
Note:
1. The Profit & Loss Account presented in for a period of 15 months from 1st Jan 2008 to
31st March 2009 out of which the pre incorporation period is 3 months upto 31st March
2008 and post incorporation period of 12 months

3.4 Accounting
2. As advertisement cost and discounts are directly related to sales, it is proper to assume
that they would be incurred in the same ratio of time as Sales. Hence, 1 : 8
3 Since Managing Director is a position which is appointed in a company, it is proper to
assume that his pay is incurred during the post incorporation period.
4. Interest on money borrowed to pay the purchase consideration is a post incorporation
cost whereas the interest on purchase consideration for 3 months till payment will be pre
incorporation cost.
Question 2
Rama Udyog Limited was incorporated on August 1, 2008. It had acquired a running business
of Rama & Co. with effect from April 1, 2008. During the year 2008-09, the total sales were `
36,00,000. The sales per month in the first half year were half of what they were in the later
half year. The net profit of the company, ` 2,00,000 was worked out after charging the
following expenses:
(i) Depreciation ` 1,08,000, (ii) Audit fees ` 15,000, (iii) Directors’ fees ` 50,000, (iv)
Preliminary expenses ` 12,000, (v) Office expenses ` 78,000, (vi) Selling expenses ` 72,000
and (vii) Interest to vendors upto August 31, 2008 ` 5,000.
Please ascertain pre-incorporation and post-incorporation profit for the year ended 31st March,
2009. (6 Marks, November, 2009) (IPCC)
Answer
Statement showing pre and post incorporation profit for the year ended 31st March, 2009
Particulars Total Basis of Pre- Post-
Amount Allocation incorporation Incorporation
` ` `
Gross Profit 5,40,000 2:7 1,20,000 4,20,000
Less: Depreciation 1,08,000 1:2 36,000 72,000
Audit Fee 15,000 1:2 5,000 10,000
Director’s Fee 50,000 Post - 50,000
Preliminary Expenses 12,000 Post - 12,000
Office Expenses 78,000 1:2 26,000 52,000
Selling Expenses 72,000 2:7 16,000 56,000
Interest to vendors 5,000 Actual 4,000 1,000
Net Profit (` 33,000 being pre-
incorporation profit is transferred
to capital reserve Account) 2,00,000 33,000 1,67,000

Working Notes:
1. Sales ratio
The sales per month in the first half year were half of what they were in the later half
year. If in the later half year, sales per month is Re.1 then it should be 50 paise per
month in the first half year. So sales for the first four months (i.e. from 1st April, 2008 to
31st July, 2008) will be 4 × .50 = ` 2 and for the last eight months (i.e. from 1st August,
2008 to 31st March, 2009) will be (2 × .50 + 6 × 1) = ` 7. Thus sales ratio is 2:7.
2. Time ratio
1st April, 2008 to 31st July, 2008 : 1st August, 2008 to 31st March, 2009
= 4 months : 8 months = 1:2
Thus, time ratio is 1:2.
3. Gross profit
Gross profit = Net profit + All expenses
= ` 2,00,000 + ` ( 1,08,000+15,000+50,000+12,000+78,000+72,000+5,000)
= ` 2,00,000 +` 3,40,000 = ` 5,40,000.
Question 3
The partners of Shri Enterprises decided to convert the partnership firm into a Private Limited
Company Shreya (P) Ltd. with effect from 1st January, 2008. However, company could be
incorporated only on 1st June, 2008. 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, 2008 to pay
purchase consideration and for working capital. The company closed its accounts for the first
time on 31st March, 2009 and presents you the following summarized profit and loss account:
` `
Sales 19,80,000
Discount to dealers 46,200
Directors’ remuneration 60,000
Salaries 90,000
Rent 1,35,000
Interest 1,05,000
Depreciation 30,000
Office expenses 1,05,000
Sales promotion expenses 33,000

3.6 Accounting
Preliminary expenses (to be written off in first year itself) 15,000 18,07,200
Profit 1,72,800
Sales from June, 2008 to December, 2008 were 2½ times of the average sales, which further
increased to 3½ times in January to March quarter, 2009. The company recruited additional
work force to expand the business. The salaries from July, 2008 doubled. The company also
acquired additional showroom at monthly rent of ` 10,000 from July, 2008.
You are required to prepare a statement showing apportionment of cost and revenue between
pre-incorporation and post-incorporation periods. Also suggest how the pre-incorporation
profits/losses are to be dealt with. (10 Marks, November, 2010) (IPCC)
Answer
Shreya (P) Limited
Profit and Loss Account
for 15 months ended 31st March, 2009
Pre. inc. (5 months) Post inc. (10 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
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
Sales promotion expenses 5,000 28,000
Net profit/(loss) (750) 1,73,550
Treatment of pre-incorporation loss:
Pre-incorporation loss may, either be considered as a reduction from any capital reserve
accruing in relation to the transaction or be treated as goodwill.
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, 2008 = 2½x X 7 = 17.5x
From January to March, 2009 = 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, 2008 = x
July to March, 2009 =xX9X2 = 18x
19x
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, 2008 to May, 2008
⎛ 6,00,000 × 12 × 5 ⎞
⎜ 100 × 12 ⎟= ` 30,000
⎝ ⎠
Post incorporation period from June, 2008 to March, 2009
⎛ 9,00,000 × 10 × 10 ⎞
⎜ 100 × 12 ⎟= ` 75,000
⎝ ⎠
` 1,05,000
Question 4
A firm M/s. Alag, which was carrying on business from 1st July, 2010 gets Itself incorporated
as a company on 1st November, 2010. The first accounts are drawn upto 31st March 2011. The

3.8 Accounting
gross profit for the period is ` 56,000. The general expenses are ` 14,220; Director's fee
` 12,000 p.a.; Incorporation expenses ` 1,500. Rent upto 31st December was ` 1,200 p.a
after which it is increased to ` 3,000 p.a. Salary of the manager, who upon incorporation of
the company was made a director, is ` 6,000 p.a. His remuneration thereafter is included in
the above figure of fee to the directors.
Give statement showing pre and post incorporation profit. The net sales are ` 8,20,000, the
monthly average of which for the first four months is one-half of that of the remaining period.
The company earned a uniform profit. Interest and tax may be ignored.
Answer
Statement showing pre and post-incorporation profits
Particulars Basis Pre – Post- Total
incorporation incorporation
period period
` ` `
Gross Profit Sales ratio 16,000 40,000 56,000
Less: General expenses Time ratio 6,320 7,900 14,220
Directors’ fee Actual - 5,000 5,000
Formation expenses Actual - 1,500 1,500
Rent (600 + 750) W.N. 2 400 950 1,350
Manager’s salary Actual 2,000 - 2,000
Net Profit transferred to:
Capital Reserve 7,280 - -
P & L A/c - - 24,650 31,930
Working Notes:
1. Calculation of sales ratio
Let the average monthly sales of first four months = 100
and next five months = 200
Total sales of first four months = 100 x 4 = 400 and
Total sales of next five months = 200 x 5 = 1,000
The ratio of sales = 400 : 1,000 =2 : 5
2. Rent
Till 31st December, 2011, rent was ` 1,200 p.a. i.e. ` 100 p.m.
So, Pre-incorporation rent = ` 100 x 4 months = ` 400
Post-incorporation rent = (` 100 x 2 months) + (` 250 x 3 months) = ` 950

Question 5
The promoters of Glorious Ltd. took over on behalf of the company a running business with
effect from 1st April, 2012. The company got incorporated on 1st August, 2012. The annual
accounts were made up to 31st March, 2013 which revealed that the sales for the whole year
totalled ` 1,600 lakhs out of which sales till 31st July, 20I2 were for ` 400 lakhs. Gross profit
ratio was 25%.
The expenses from 1st April 2012, till 31st March, 2013 were as follows:
(` in lakhs)
Salaries 69
Rent, Rates and Insurance 24
Sundry Office Expenses 66
Travellers' Commission 16
Discount Allowed 12
Bad Debts 4
Directors' Fee 25
Audit Fee 9
Depreciation on Tangible Assets 12
Debenture Interest 11
Prepare a statement showing the calculation of Profits for the pre-incorporation and post-
incorporation periods. (8 Marks, May 2013) (IPCC)
Answer
(a) Statement showing the calculation of Profits for the pre-incorporation and post-
incorporation periods
Amount Allocation incorporation incorporation
(` in (` in lakhs) (` in lakhs)
lakhs)
Gross Profit (25% of ` 1,600) 400 Sales 100 300
Less: Salaries 69 Time 23 46
Rent, rates and Insurance 24 Time 8 16
Sundry office expenses 66 Time 22 44
Travellers’ commission 16 Sales 4 12
Discount allowed 12 Sales 3 9

3.10 Accounting
Bad debts 4 Sales 1 3

Directors’ fee 25 Post - 25
∗
Audit Fees 9 Sales 2.25 6.75
Depreciation on tangible assets 12 Time 4 8
Debenture interest 11 Post - 11
Net profit 152 32.75 119.25
Working Notes:
1. Sales ratio
(` in
lakh)
Sales for the whole year 1,600
Sales upto 31st July, 2012 400
Therefore, sales for the period from 1st August, 2012 to 31st March, 2013 1,200
Thus, sale ratio = 400:1200

= 1:3
2. Time ratio
1st April, 2012 to 31st July, 2012 : 1st August, 2012 to 31st March, 2013
= 4 months: 8 months = 1:2
Thus, time ratio is 1:2.
Question 6
Sneha Ltd. was incorporated on 1st July, 2013 to acquire a running business of Atul Sons with
effect from 1st April, 2013. During the year 2013-14, the total sales were ` 24,00,000 of which
` 4,80,000 were for the first six months. The Gross profit of the company
` 3,90,800. The expenses debited to the Profit & Loss Account included:
(i) Director's fees ` 30,000
(ii) Bad debts ` 7,200
(iii) Advertising ` 24,000 (under a contract amounting to ` 2,000 per month)
(iv) Salaries and General Expenses ` 1,28,000
∗
Audit fee has been assumed to be related with tax audit and therefore apportioned into pre and post-
incorporation periods on the basis of turnover.

(v) Preliminary Expenses written off ` 10,000

(vi) Donation to a political party given by the company ` 10,000.
Prepare a statement showing pre-incorporation and post-incorporation profit for the year
ended 31st March, 2014. (8 Marks, IPCC May, 2014)
Answer
Statement showing the calculation of Profits for the pre-incorporation and post-
incorporation periods
For the year ended 31st March, 2014
Amount Allocation incorporation incorporation
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 expenses 1,28,000 Time 32,000 96,000
Preliminary expenses 10,000 Post 10,000
Donation to Political Party 10,000 Post 10,000
Net Profit 1,81,600 1,81,240
Pre-incorporation profit transfer to 360
Capital Reserve
Working Notes:
1. Sales ratio
Particulars `
Sales for period up to 30.06.2013 (4,80,000 * 3/6) 2,40,000
Sales for period from 01.07.2013 to 31.03.2014 (24,00,000 – 2,40,000) 21,60,000
Thus, Sales Ratio = 1 : 9
2. Time ratio
1st April, 2013 to 30 June, 2013: 1st July, 2013 to 31st March, 2014
= 3 months: 9 months = 1: 3
Thus, Time Ratio is 1: 3

4
Accounting for Bonus Issue
Question 1
The following is the Balance Sheet of Bumbum Limited as at 31st March, 2009:
`
Sources of funds
Authorized capital
50,000 Equity shares of ` 10 each 5,00,000
10,000 Preference shares of ` 100 each 10,00,000
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
Securities Premium 6,00,000
Profit & Loss A/c 1,80,000
2,500, 9% Debentures of ` 100 each 2,50,000
Sundry Creditors 1,70,000
26,50,000
Application of funds
Fixed Assets (net) 7,80,000
Investments (market value ` 5,80,000) 4,90,000
Deferred Tax Assets 3,40,000
Cash & Bank balance 2,80,000
Preliminary expenses 1,40,000
26,50,000
In Annual General Meeting held on 20th June, 2009 the company passed the following
resolutions:
(i) To split equity share of ` 10 each into 5 equity shares of ` 2 each from 1st July, 09.

Accounting for Bonus Issue 4.2
(ii) To redeem 8% preference shares at a premium of 5%.

(iii) To redeem 9% Debentures by making offer to debenture holders to convert their holdings
into equity shares at ` 10 per share or accept cash on redemption.
(iv) To issue fully paid bonus shares in the ratio of one equity share for every 3 shares held
on record date.
On 10th July, 2009 investments were sold for ` 5,55,000 and preference shares were
redeemed.
40% of Debentureholders exercised their option to accept cash and their claims were settled
on 1st August, 2009.
The company fixed 5th September, 2009 as record date and bonus issue was concluded by
12th September, 2009.
You are requested to journalize the above transactions including cash transactions and
prepare Balance Sheet as at 30th September, 2009. All working notes should form part of
your answer. (12 Marks, November, 2010) (IPCC)
Answer
Bumbum Limited
Journal Entries
2009 Dr. (`) Cr. (`)
July 1 Equity Share Capital A/c (` 10 each) Dr. 3,00,000
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 A/c Dr. 25,000
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

4.3 Accounting
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)
Aug 1 9% Debentures A/c Dr. 2,50,000
Interest on debentures A/c Dr. 7,500
To Debentureholders A/c 2,57,500
(Being amount payable to debenture holders along with
interest payable)
Aug. 1 Debentureholders A/c Dr. 2,57,500
To Cash & bank A/c (1,00,000 + 7,500) 1,07,500
To Equity share capital A/c{15,000 X 2} 30,000
To Securities premium A/c 1,20,000
(Being claims of debenture holders satisfied)
Sept. 5 Capital Redemption Reserve A/c Dr. 1,10,000
To Bonus to shareholders A/c 1,10,000
(Being balance in capital redemption reserve capitalized to
issue bonus shares)
Sept. 12 Bonus to shareholders A/c Dr. 1,10,000
(Being 55,000 fully paid equity shares of ` 2 each issued
as bonus in ratio of 1 share for every 3 shares held)
Sept. 30 Securities Premium A/c Dr. 25,000
To Premium on redemption of preference shares A/c 25,000
(Being premium on preference shares adjusted from
securities premium account)
Sept. 30 Profit & Loss A/c Dr. 7,500
To Interest on debentures A/c 7,500
(Being interest on debentures transferred to Profit and
Loss Account)
Balance Sheet as at 30th September, 2009
Particulars Notes `

Total 19,42,500
Assets
a Fixed assets
Tangible assets 7,80,000
b Deferred tax asset 3,40,000
2 Current assets
Trade receivables 6,20,000
Cash and cash equivalents 2,02,500
Total 19,42,500
Notes to accounts
1 Share Capital ` `
Authorized share capital
2,50,000 Equity shares of ` 2 each 5,00,000
10,000 Preference shares of `100 each 10,00,000 15,00,000
Securities Premium A/c
Balance as per balance sheet 6,00,000
Add: Premium on equity shares issued on
conversion of debentures (15,000 x 8) 1,20,000
7,20,000
Less: Adjustment for premium on preference
Shares (25,000)
Balance 6,95,000
Capital Redemption Reserve(5,00,000-1,10,000) 3,90,000
General Reserve (6,50,000 – 5,00,000) 1,50,000
Profit & Loss A/c 1,80,000
Less: Preliminary expenses written off (1,40,000)

4.5 Accounting
Add: Profit on sale of investment 65,000

Less: Interest on debentures (7,500) 97,500
Total 13,32,500
Working Notes:
`
1. Redemption of preference share:
5,000 Preference shares of ` 100 each 5,00,000
Premium on redemption @ 5% 25,000
Amount Payable 5,25,000
2. Redemption of Debentures
2,500 Debentures of ` 100 each 2,50,000
Less: Cash option exercised by 40% holders (1,00,000)
Conversion option exercised by remaining 60% 1,50,000
1,50,000
Equity shares issued on conversion = = 15,000 shares
10
3. Issue of Bonus Shares
Existing equity shares after split (30,000 x 5) 1,50,000 shares
Equity shares issued on conversion 15,000 shares
Equity shares entitled for bonus 1,65,000 shares
Bonus shares (1 share for every 3 shares held) to be issued 55,000 shares
4. 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)
Paid to Debentureholders (7,500 + 1,00,000) (1,07,500)
Balance 2,02,500
5. Interest of ` 7,500 paid to debenture holders have been debited to
Profit & Loss Account.

Question 2
Following is the extract from the Balance Sheet of M/s. Yahoo Ltd. as at 31st March, 2011:
(`)
Authorised capital:
50,000, 10% Preference shares of ` 10 each 5,00,000
Issued and subscribed capital:
40,000, 10% Preference shares of ` 10 each fully paid 4,00,000
1,80,000, Equity shares of ` 10 each, of which ` 7.50 paid up 13,50,000
Reserves and Surplus:
General reserve 2,40,000
Capital reserve 1,50,000
Securities premium 50,000
Profit and loss account 3,00,000
On 1st April, 2011, the company has made a final call @ ` 2.50 each on 1,80,000 equity
shares. The call money was received by 30th April, 2011. There after the company decided to
capitalize its reserves by issuing bonus shares at the rate of one share for every three shares
held. Securities premium of ` 50,000 includes a premium of ` 20,000 for shares issued to
vendor for purchase of a special machinery. Capital reserve includes ` 60,000 being profit on
exchange of plant and machinery.
Show necessary Journal Entries in the books of the company and prepare the extract of the
Balance Sheet after bonus issue. Necessary assumption, if any, should form part of your
answer. (8 Marks, November, 2011) (IPCC)
Answer
In the books of M/s. Yahoo Ltd.
Journal Entries
Date Particulars ` `
1.4.2011 Equity share final call A/c Dr. 4,50,000
(Being the final call of ` 2.50 per share on
1,80,000 equity shares made)
30.4.2011 Bank A/c Dr. 4,50,000
To Equity share final call A/c 4,50,000
(Being final call money on 1,80,000 shares
received)
30.4.2011 Securities premium A/c (50,000 – 20,000) Dr. 30,000

4.7 Accounting
Capital reserve A/c (1,50,000 – 60,000) Dr. 90,000

General reserve A/c Dr. 2,40,000
Profit and loss A/c Dr. 2,40,000
To Bonus to shareholders A/c 6,00,000
(Being utilisation of reserves for bonus issue of
one share for every three shares held)
30.4.2011 Bonus to equity shareholders A/c Dr. 6,00,000
(Being capitalization of the bonus shares issued)
Extract of Balance Sheet (After bonus issue)
Particulars Notes No. `
Equity & liabilities
1. Shareholders’ Funds
(a) Share Capital 1 28,00,000
(b) Reserves & Surplus 2 1,40,000
Notes to Accounts
`
1. Share Capital
Authorised share capital:
50,000, 10% Preference shares of ` 10 each 5,00,000
2,40,000, Equity shares of ` 10 each (refer W.N.) 24,00,000
Issued and subscribed capital:
40,000, 10% Preference shares of ` 10 each fully paid 4,00,000
2,40,000, Equity shares of ` 10 each fully paid 24,00,000
(Out of the above, 60,000 equity shares of ` 10
each have been issued by way of bonus)
28,00,000
2. Reserves and Surplus:
General reserve 2,40,000
Less: Utilisation for issue of bonus shares (2,40,000) -
Capital reserve 1,50,000
Less: Utilisation for issue of bonus shares (90,000) 60,000
Securities premium 50,000
Less: Utilisation for issue of bonus shares (30,000) 20,000
Profit and loss A/c 3,00,000
Less: Utilisation for issue of bonus shares (2,40,000) 60,000
1,40,000

Assumption:
1. Capital Reserve and Securities Premium collected in cash only can be utilized for the
purpose of issue of bonus shares. Hence, the securities premium Account to the extent
of issue to vendor for machinery and capital reserve representing profit on exchange of
machinery have been excluded from consideration for issue of bonus shares. It is
assumed that balance of capital reserve and securities premium is collected in cash only.
2. It is also assumed that necessary resolutions have been passed and requisite legal
requirements related to the issue of bonus shares have been complied with before issue
of bonus shares.
Working Note:
On the basis of the above assumptions, the Authorised Capital should be increased as under:
Required for bonus issue ` 6,00,000
Less: Balance of authorised equity share capital (available) (` 2,00,000)
Authorised capital to be increased ` 4,00,000
Total authorised capital after bonus issue (` 20,00,000 + ` 4,00,000) = ` 24,00,000.
Question 3
The following notes pertain to Brite Ltd.'s Balance Sheet as on 31st March, 2012:
Notes ` in Lakhs
(1) Share Capital
Authorised :
20 crore shares of ` 10 each 20,000
Issued and Subscribed :
10 crore Equity Shares of ` 10 each 10,000
2 crore 11% Cumulative Preference Shares
of ` 10 each 2,000
Total 12,000
Called and paid up:
10 crore Equity Shares of ` 10 each, ` 8 per share called
and paid up 8,000
2 crore 11% Cumulative Preference Shares of ` 10 each,
Fully called and paid up 2,000
Total 10,000

4.9 Accounting
(2) Reserves and Surplus :

Capital Reserve 485
Capital Redemption Reserve 1,000
Securities Premium 2,000
General Reserve 1,040
Surplus i.e. credit balance of Profit & Loss (Appropriation) Account 273
Total 4,798
On 2nd April, 2012 the company made the final call on equity shares @ ` 2 per share. The
entire money was received in the month of April, 2012.
On I" June, 2012 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 decided to utilize the capital
reserves to the maximum possible extent.
Pass journal entries for all the above mentioned transactions. 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. (8 Marks, November 2012) (IPCC)
Answer
In the books of Brite Ltd.
Journal Entries
Dr. Cr.
2012 ` in ` in
lakhs lakhs
April 2 Equity Share Final Call A/c Dr. 2,000
To Equity Share Capital A/c 2,000
(Final call of ` 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 Dr. 1,000
Securities Premium A/c Dr. 2,000
Capital Reserve A/c Dr. 485
General Reserve A/c (bal fig) Dr. 515
To Bonus to Shareholders A/c 4,000
(Bonus issue of two shares for every five shares held, by
utilising various reserves as per Board’s resolution
dated…….)

Bonus to Shareholders A/c Dr. 4,000

To Equity Share Capital A/c 4,000
(Capitalisation of profit)
Notes to Accounts
` in
lakhs
1. Share Capital
Authorised share capital
20 crore shares of ` 10 each 20,000
Issued, subscribed and fully paid up share capital
14 crore Equity shares of ` 10 each, fully paid up 14,000
(Out of the above, 4 crore equity shares @ ` 10 each were
issued by way of bonus)
2 crore, 11% Cumulative Preference share capital of
` 10 each, fully paid up 2,000
16,000
2. Reserves and Surplus
Capital Reserves 485
Less: Utilized for bonus issue (485) -
Capital Redemption reserve 1,000
Less: Utilized for bonus issue (1,000) -
Less: Utilized for bonus issue (2,000) -
Less: Utilized for bonus issue (515) 525
Surplus (Profit and Loss Account) 273
Total 798
Question 4
Following items appear in the Trial Balance of Saral Ltd. as on 31st March, 2014:
Particulars Amount
4,500 Equity Shares of `100 each 4,50,000
Capital Reserve (including `40,000 being profit on sale of Plant) 90,000
Capital Redemption Reserve 30,000
Profit and Loss Account (Cr. Balance) 65,000

4.11 Accounting
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 Saral Ltd. (4 Marks, IPCC May, 2014)
Answer
Capital Redemption Reserve A/c Dr. 30,000
Securities Premium A/c Dr. 40,000
Capital Reserve (Realized in cash) Dr 40,000
General Reserve A/c Dr. 40,000
To Bonus to Shareholders 1,50,000
(Being issue of bonus shares by utilization of various
Reserves, as per resolution dated …….)
Bonus to Shareholders A/c Dr. 1,50,000
To Equity Share Capital 1,50,000
(Being capitalization of Profit)

5
Internal Reconstruction
Question 1
The Balance Sheet of M/s. Ice Ltd. as on 31-03-2011 is given below:
Liabilities ` Assets `
1,00,000 Equity shares of 10,00,000 Freehold property 5,50,000
` 10 each fully paid up Plant and machinery 2,00,000
4,000, 8% Preference shares of 4,00,000 Trade investment (at cost) 2,00,000
` 100 each fully paid Sundry debtors 4,50,000
6% Debentures 4,00,000 Stock-in trade 3,00,000
(secured by freehold Deferred advertisement
property) expenses∗ 50,000
Arrear interest 24,000 4,24,000
Sundry creditors 1,01,000 Profit and loss account 4,75,000
Director’s loan 3,00,000
22,25,000 22,25,000
The Board of Directors of the company decided upon the following scheme of reconstruction
with the consent of respective stakeholders:
(i) Preference shares are to be written down to ` 80 each and equity shares to ` 2 each.
(ii) Preference dividend in arrear for 3 years to be waived by 2/3rd and for balance 1/3rd,
equity shares of ` 2 each to be allotted.
(iii) Debentureholders agreed to take one freehold property at its book value of
` 3,00,000 in part payment of their holding. Balance debentures to remain as liability of
the company.
(iv) Arrear debenture interest to be paid in cash.
(v) Remaining freehold property to be valued at ` 4,00,000.
(vi) Investment sold out for ` 2,50,000.
(vii) 75% of Director’s loan to be waived and for the balance, equity shares of ` 2 each to be
allotted.
∗
As per para 56 of AS 26, deferred advertisement expenses should not appear in the Balance Sheet.

5.2 Accounting
(viii) 40% of sundry debtors, 80% of stock and 100% of deferred advertisement expenses to
be written off.
(ix) Company’s contractual commitments amounting to ` 6,00,000 have been settled by
paying 5% penalty of contract value.
Show the Journal Entries for giving effect to the internal re-construction and draw the Balance
Sheet of the company after effecting the scheme. (16 Marks, November, 2011) (IPCC)
Answer
In the books of Ice Ltd.
Journal Entries
Particulars Debit Credit
` `
i 8% Preference share capital A/c (` 100 each) Dr. 4,00,000
To 8% Preference share capital A/c (` 80 each) 3,20,000
To Capital reduction A/c 80,000
(Being the preference shares of ` 100 each fully paid
reduced to ` 80 each fully paid as per the approved
scheme of reconstruction)
ii Equity share capital A/c (` 10 each) Dr. 10,00,000
To Equity share capital A/c (` 2 each) 2,00,000
To Capital reduction A/c 8,00,000
(Being the equity shares of ` 10 each fully paid
reduced to ` 2 each fully paid under the scheme of
reconstruction as approved)
iii Capital reduction A/c Dr. 32,000
To Equity share capital A/c (` 2 each) 32,000
(Being arrears of preference share dividend of one
year to be settled by issue of 16,000 equity shares of
` 2 each fully paid as per the approved scheme of
reonstruction)
iv 6% Debentures A/c Dr. 3,00,000
To Freehold property A/c 3,00,000
(Being claim settled in part by transfer of freehold
property under the approved scheme of
reconstruciton)
v Accrued debenture interest A/c Dr. 24,000
To Bank A/c 24,000
(Being accrued debenture interest paid)

Internal Reconstruction 5.3
vi Freehold property A/c Dr. 1,50,000

(Being appreciation on revaluation of freehold
property under scheme of reconstruction)
vii Bank A/c Dr. 2,50,000
To Trade investment A/c 2,00,000
To Capital reduction A/c 50,000
(Being trade investment sold on profit)
viii Director’s loan A/c Dr. 3,00,000
To Equity share capital A/c (` 2 each) 75,000
(Being director’s loan waived by 75% and balance
being discharged by issue of 37,500 equity shares of
` 2 each under scheme of reconstruction)
ix Capital Reduction A/c Dr. 12,73,000
To Profit and loss A/c 4,75,000
To Sundry debtors A/c 1,80,000
To Stock-in-trade A/c 2,40,000
To Deferred advertisement expenses A/c 50,000
To Bank A/c 30,000
To Capital reserve A/c 2,98,000
(Being various assets, penalty on cancellation of
contract, profit and loss account debit balance written
off, and balance transferred to capital reserve account
as per the scheme of reconstruction)
Balance Sheet of Ice Ltd. (As reduced)
Particulars Notes `
Total 11,26,000

5.4 Accounting
Assets
a Fixed assets
2 Current assets
a Inventories 60,000
b Trade receivables 2,70,000
Total 11,26,000
Note to Accounts
1 Share Capital
(out of which 53,500 shares have been issued for consideration other
than cash)
4,000, 8% Preference shares of `80 each fully paid up 3,20,000
Total 6,27,000
Capital Reserves 2,98,000
3. Long-term borrowings
4 Tangible assets
Freehold property 4,00,000
Plant and machinery 2,00,000
Total 6,00,000
5. Cash and cash equivalents
Cash at bank(2,50,000 – 24,000 –30,000) 1,96,000
Question 2
M/s Platinum Limited has decided to reconstruct the Balance Sheet since it has accumulated
huge losses. The following is the Balance Sheet of the company as on
31st March, 2012 before reconstruction:
Liabilities Amount (`) Assets Amount (`)
(`)
Share Capital
50,000 shares of ` 50 Goodwill 22,00,000
each fully paid up 25,00,000 Land & Building 42,70,000

1,00,000 shares of ` 50 Machinery 8,50,000

each ` 40 paid up 40,00,000 Computers 5,20,000
Capital Reserve 5,00,000 Inventories 3,20,000
8% Debentures of ` 100 each 4,00,000 Trade receivables 10,90,000
12% Debentures of ` 100 each 6,00,000 Cash at Bank 2,68,000
Trade Creditors 12,40,000 Profit & Loss 7,82,000

Account
Outstanding Expenses 10,60,000
Total 1,03,00,000 Total 1,03,00,000
Following is the interest of Mr. Shiv and Mr. Ganesh in M/s Platinum Limited:
Mr. Shiv Mr. Ganesh
8% Debentures 3,00,000 1,00,000
12% Debentures 4,00,000 2,00,000
Total 7,00,000 3,00,000
The following scheme of internal reconstruction was framed and implemented, as approved by
the court and concerned parties:
(1) Uncalled capital is to be called up in full and then all the shares to be converted into
Equity Shares of ` 40 each.
(2) The existing shareholders agree to subscribe in cash, fully paid up equity shares of 40
each for ` 12,50,000.
(3) Trade Creditors are given option of either to accept fully paid equity shares of ` 40 each
for the amount due to them or to accept 70% of the amount due to them in cash in full
settlement of their claim. Trade Creditors for ` 7,50,000 accept equity shares and rest of
them opted for cash towards full and final settlement of their claim.
(4) Mr. Shiv agrees to cancel debentures amounting to ` 2,00,000 out of total debentures
due to him and agree to accept 15% Debentures for the balance amount due. He also
agree to subscribe further 15% Debentures in cash amounting to
` 1,00,000.
(5) Mr. Ganesh agrees to cancel debentures amounting to ` 50,000 out of total debentures
due to him and agree to accept 15% Debentures for the balance amount due.
(6) Land & Building to be revalued at ` 51,84,000, Machinery at ` 7,20,000, Computers at
` 4,00,000, Inventories at ` 3,50,000 and Trade receivables at 10% less to as they are
appearing in Balance Sheet as above.
(7) Outstanding Expenses are fully paid in cash.
(8) Goodwill and Profit & Loss A/c will be written off and balance, if any, of Capital Reduction
A/c will be adjusted against Capital Reserve.

5.6 Accounting
You are required to pass necessary Journal Entries for all the above transactions and draft the
company's Balance Sheet immediately after the reconstruction. (16 Marks, May, 2012) (IPCC)
Answer
Journal Entries
` `
Bank A/c Dr. 10,00,000
(Being money on final call received)
Equity share capital (` 50) A/c Dr. 75,00,000
To Equity share capital (` 40) A/c 60,00,000
To Capital Reduction A/c 15,00,000
(Being conversion of equity share capital of ` 50 each
into ` 40 each as per reconstruction scheme)
Bank A/c Dr. 12,50,000
To Equity Share Capital A/c 12,50,000
(Being new shares allotted at ` 40 each)
Trade Creditors A/c Dr. 12,40,000
To Bank A/c (4,90,000 x 70%) 3,43,000
(Being payment made to creditors in shares or cash to
the extent of 70% as per reconstruction scheme)
8% Debentures A/c Dr. 3,00,000
To Shiv A/c 7,00,000
(Being cancellation of 8% and 12% debentures of Shiv)
Shiv A/c Dr. 8,00,000
To 15% Debentures A/c 6,00,000
(Being issuance of new 15% debentures and balance
transferred to capital reduction account as per
reconstruction scheme)
Bank A/c Dr. 1,00,000
(Being new debentures subscribed by Shiv)

To Ganesh A/c 3,00,000

(Being cancellation of 8% and 12% debentures of
Ganesh)
Ganesh A/c Dr. 3,00,000
To 15% Debentures A/c 2,50,000
To Capital Reduction A/c 50,000
(Being issuance of new 15% debentures and balance
transferred to capital reduction account as per
Land and Building (51,84,000 – 42,70,000) Dr. 9,14,000
Inventories Dr. 30,000
(Being value of assets appreciated)
Outstanding expenses A/c Dr. 10,60,000
To Bank A/c 10,60,000
(Being outstanding expenses paid in cash)
Capital Reduction A/c Dr. 33,41,000
To Machinery A/c 1,30,000
To Computers A/c 1,20,000
To Trade receivables A/c 1,09,000
To Goodwill A/c 22,00,000
To Profit and Loss A/c 7,82,000
(Being amount of Capital Reduction utilized in writing off
P & L A/c (Dr.) balance, goodwill and downfall in value
of other assets)
Capital Reserve A/c Dr. 5,00,000
(Being debit balance of capital reduction account
adjusted against capital reserve)
Balance Sheet (as reduced) as on 31.3.2012
Particulars Notes `
a Long-term borrowings 2 8,50,000
Total 88,50,000

5.8 Accounting
Assets
a Fixed assets
2 Current assets
a Inventories 3,50,000
b Trade receivables 9,81,000
c Cash and cash equivalents 12,15,000
Total 88,50,000
Notes to accounts
`.
1. Share Capital
2,00,000 Equity shares of ` 40 80,00,000
Secured
15% Debentures (assumed to be secured) 8,50,000
3. Tangible assets
Land & Building 51,84,000
Machinery 7,20,000
Computers 4,00,000 63,04,000
Working Notes:
1. Cash at Bank Account
To Balance b/d 2,68,000 By Trade Creditors A/c 3,43,000
To Equity Share capital A/c 10,00,000 By Outstanding expenses A/c 10,60,000
To Equity Share Capital A/c 12,50,000 By Balance c/d (bal. fig.) 12,15,000
26,18,000 26,18,000
2. Capital Reduction Account
To Machinery A/c 1,30,000 By Equity Share Capital A/c 15,00,000
To Computers A/c 1,20,000 By Trade Creditors A/c 1,47,000
To Trade receivables A/c 1,09,000 By Shiv A/c 2,00,000

To Goodwill A/c 22,00,000 By Ganesh A/c 50,000

To Profit and Loss A/c 7,82,000 By Land & Building 9,14,000
By Inventories 30,000
By Capital Reserve A/c 5,00,000
33,41,000 33,41,000
Question 3
The Balance Sheet of M/s. Cube Limited as on 31-03-2013 is given below:
Particulars Note No. Amount
(` in lakh)
Equity & Liabilities
Shareholders' Funds
Shares’ Capital 1 700
Reserves & Surplus 2 (261)
Non-Current Liabilities
Long term Borrowings 3 350
Current Liabilities
Trade Payables 4 51
Other Liabilities 5 12
Total 852
Assets
Non-Current Assets
Fixed Assets
Tangible Assets 6 375
Current Assets
Current Investments 7 100
Inventories 8 150
Trade Receivables 9 225
Cash & Cash Equivalents 10 2
Total 852
Notes to Accounts:
` in Lakhs
(1) Share Capital
Authorised :
100 lakh shares of ` 10 each 1,000
4 lakh, 8% Preference Shares of ` 100 each 400
1,400

5.10 Accounting
Issued, Subscribed and paid up:

50 lakh Equity Shares of ` 10 each, full paid up 500
2 lakh 8% Preference Shares of ` 100 each, fully paid up 200
Total 700
(2) Reserves and Surplus
Debit balance of Profit & Loss A/c (261)
(3) Long Term Borrowings
6% Debentures (Secured by Freehold Property) 200
Directors’ Loan 150
350
(4) Trade Payables
Sundry Creditors for Goods 51
(5) Other Current Liabilities
Interest Accrued and Due on 6% Debentures 12
(6) Tangible Assets
Freehold Property 275
Plant & Machinery 100
375
(7) Current Investment
Investment in Equity Instruments 100
(8) Inventories
Finished Goods 150
(9) Trade Receivables
Sundry Debtors for Goods 225
(10) Cash and Cash Equivalents
Balance with Bank 2
The Board of Directors of the company decided upon the following scheme of reconstruction
with the consent of respective shareholders:
(1) Preference Shares are to be written down to ` 80 each and Equity Shares to ` 2 each.
(2) Preference Shares Dividend in arrears for 3 years to be waived by 2/3rd and for balance
1/3 rd, Equity Shares of ` 2 each to be allotted.
(3) Debenture holders agreed to take one Freehold Property at its book value of ` 150 lakh
in part payment of their holding. Balance Debentures to remain as liability of the
company.
(4) Interest accrued and due on Debentures to be paid in cash.
(5) Remaining Freehold Property to be valued at ` 200 lakh.

(6) All investments sold out for ` 125 lakh.

(7) 70% of Directors' loan to be waived and for the balance, Equity Shares of ` 2 each to be
allowed.
(8) 40% of Sundry Debtors and 80% of Inventories to be written off.
(9) Company's contractual commitments amounting to ` 300 lakh have been settled by
paying 5% penalty of contract value.
You are required to :
(a) Pass Journal Entries for all the transactions related to internal reconstruction;
(b) Prepare Reconstruction Account; and
(c) Prepare notes on Share Capital and Tangible Assets to Balance Sheet, immediately after
the implementation of scheme of internal reconstruction. (16 Marks, May 2013)
Answer
(a) Journal Entries in the books of M/s. Cube Ltd.
Particulars Debit Credit
(` in (` in
lakhs) lakhs)
(i) 8% Preference share capital A/c (` 100 each) Dr. 200
To 8% Preference share capital A/c (` 80 each) 160
To Reconstruction A/c 40
(Being the preference shares of ` 100 each fully paid
reduced to ` 80 each fully paid as per the approved
scheme)
(ii) Equity share capital A/c (` 10 each) Dr. 500
To Equity share capital A/c (` 2 each) 100
(Being the equity shares of ` 10 each fully paid
reduced to ` 2 each fully paid under the
(iii) Reconstruction A/c Dr. 16
(Being 1/3rdarrears of preference share dividend of 3
years settled by issue of 8 lakhs equity shares of ` 2
each fully paid)
(iv) 6% Debentures A/c Dr. 150

5.12 Accounting
To Freehold property A/c 150

(Being claim of Debenture holders settled in part by
transfer of freehold property)
(v) Accrued debenture interest A/c Dr. 12
To Bank A/c 12
(Being accrued debenture interest paid)
(vi) Freehold property A/c Dr. 75
(Being appreciation on revaluation of freehold
property under scheme of reconstruction)
(vii) Bank A/c Dr. 125
To Investments A/c 100
(Being investment sold at profit)
(viii) Director’s loan A/c Dr. 150
(Being director’s loan waived by 70% and balance
discharged by issue of 22.5 lakhs equity shares of
` 2 each fully paid)
(ix) Reconstruction A/c Dr. 629
To Profit and loss A/c 261
To Sundry debtors A/c (225 x 40%) 90
To Stock-in-trade A/c (150 x 80%) 120
To Bank A/c (300 x 5%) 15
To Capital reserve A/c 143
(Being certain value of various assets, penalty on
cancellation of contract, profit and loss account debit
balance written off, and balance transferred to capital
reserve account as per the scheme of reconstruction)

(b) Reconstruction Account

Dr. Cr.
(` in (` in
lakhs) lakhs)
To Equity Share Capital 16 By Preference Share Capital 40
To Sundry Debtors 90 By Equity Share Capital 400
To Finished Goods 120 By Freehold Property 75
To Profit & Loss A/c 261 By Bank 25
To Bank A/c 15 By Director’s Loan 105
To Capital Reserve 143
645 645
(c) Notes to Balance Sheet
(` in (` in
lakhs) lakhs)
1. Share Capital
Authorised:
100 lakhs Equity shares of ` 2 each 200
4 lakhs 8% Preference shares of ` 80 each 320
520
Issued:
80.5 lakhs equity shares of ` 2 each 161
2 lakhs Preference Shares of ` 80 each 160
321
2. Tangible Assets
Freehold Property 275
Less: Utilized to pay Debenture holders (150)
125
Add: Appreciation 75 200
Plant and Machinery 100
300
Question 4
Pass journal entries for the following transactions :
(i) Conversion of 2 lakh fully paid equity shares of ` 10 each into stock of ` 1,00,000 and
balance as 12% fully convertible Debenture.
(ii) Consolidation of 40 lakh fully paid equity shares of ` 2.50 each into 10 lakh fully paid
equity share of ` 10 each.

5.14 Accounting
(iii) Sub-division of 10 lakh fully paid 11% preference shares of ` 50 each into 50 lakh fully
paid 11% preference shares of ` 10 each.
(iv) Conversion of 12% preference shares of ` 5,00,000 into 14% preference shares
` 3,00,000 and remaining balance as 12% Non-cumulative preference shares.
(4 Marks, November 2013) (IPCC)
Answer
Journal Entries
` `
(i) Equity share Capital A/c. Dr. 20,00,000
To Equity Stock 1,00,000
To 12% Fully Convertible Debentures 19,00,000
(Being conversion of 2 lakh equity shares of ` 10 each
into stock of ` 1,00,000 and balance as 12% fully
convertible debentures as per resolution dated…)
(ii) Equity Share Capital A/c (` 2.50) Dr. 100,00,000
To Equity Share Capital A/c (` 10) 100,00,000
(Being consolidation of 40 lakh shares of ` 2.50 each into
10 lakh shares of ` 10 each as per resolution dated…)
(iii) 11% Preference Shares Capital A/c (` 50) Dr. 500,00,000
To 11% Preference Share Capital A/c (` 10) 500,00,000
(Being subdivision of 10 lakh preference shares of ` 50
each into 50 lakh shares of ` 10 each as per resolution
dated…)
(iv) 12% Preference Share Capital A/c Dr. 5,00,000
To 14% Preference Share Capital 3,00,000
To 12% Non-cumulative Preference Share Capital 2,00,000
(Being conversion of 12% preference shares of ` 500,000
into 14% preference shares of ` 300,000 and 12% non
cumulative preference shares of ` 200,000 as per
resolution dated…)
Question 5
The Balance Sheet of Vaibhav Ltd. as on 31st March 2014 is as follows:
Equity Shares of ` 100 each 2,00,00,000 Fixed Assets 2,50,00,000
6%, Cumulative Preference Investments (Market
1,00,00,000 20,00,000
Shares of ` 100 each Value ` 19,00,000)

5% Debentures of ` 100 each 80,00,000 Current Assets 2,00,00,000

Sundry Creditors 1,00,00,000 P & L A/c 12,00,000
TOTAL 4,82,00,000 TOTAL 4,82,00,000
The following scheme of Internal Reconstruction is sanctioned:
(i) All the existing equity shares are reduced to ` 40 each.
(ii) All preference shares are reduced to ` 60 each.
(iii) The rate of Interest on Debentures increased to 6%. The Debenture holders surrender
their existing debentures of ` 100 each and exchange the same for fresh debentures of `
70 each for every debenture held by them.
(iv) Fixed assets are to be written down by 20%.
(v) Current assets are to be revalued at ` 90,00,000.
(vi) Investments are to be brought to their market value.
(vii) One of the creditors of the company to whom the company owes ` 40,00,000 decides to
forgo 40% of his claim. The creditor is allotted with 60000 equity shares of ` 40 each in
full and final settlement of his claim.
(viii) The taxation liability is to be settled at ` 3,00,000.
(ix) It is decided to write off the debit balance of Profit & Loss A/c.
Pass journal entries and show the Balance Sheet of the company after giving effect to the
above. (12 Marks, IPCC November, 2014)
Answer
Journal Entries in the books of Vaibhav Ltd.
` `
(i) Equity share capital (` 100) A/c Dr. 2,00,00,000
To Equity Share Capital (` 40) A/c 80,00,000
To Capital Reduction A/c 1,20,00,000
(Being conversion of equity share capital of ` 100 each into
`40 each as per reconstruction scheme)
(ii) 6% Cumulative Preference Share capital (` 100) A/c Dr. 1,00,00,000
To 6% Cumulative Preference Share Capital (` 60)A/c 60,00,000
(Being conversion of 6% cumulative preference shares
capital of ` 100 each into ` 60 each as per reconstruction
scheme)

5.16 Accounting
(iii) 5% Debentures (` 100) A/c Dr. 80,00,000

To 6% Debentures (` 70) A/c 56,00,000
(Being 6% debentures of ` 70 each issued to existing 5%
debenture holders. The balance transferred to capital
reduction account as per reconstruction scheme)
(iv) Sundry Creditors A/c Dr. 40,00,000
To Equity Share Capital (` 40) A/c 24,00,000
(Being a creditor of ` 40,00,000 agreed to surrender his
claim by 40% and was allotted 60,000 equity shares of ` 40
each in full settlement of his dues as per reconstruction
scheme)
(v) Provision for Taxation A/c Dr. 2,00,000
Capital Reduction A/c Dr. 1,00,000
To Liability for Taxation A/c 3,00,000
(Being conversion of the provision for taxation into liability
for taxation for settlement of the amount due)
(vi) Capital Reduction A/c Dr. 199,00,000
To P & L A/c 12,00,000
To Fixed Assets A/c 50,00,000
To Current Assets A/c 110,00,000
To Investments A/c 1,00,000
To Capital Reserve A/c (Bal. fig.) 26,00,000
(Being amount of Capital Reduction utilized in writing off
P & L A/c (Dr.) Balance, Fixed Assets, Current Assets,
Investments and the Balance transferred to Capital Reserve)
(vii) Liability for Taxation A/c Dr. 3,00,000
To Current Assets (Bank A/c) 3,00,000
(Being the payment of tax liability)
Balance Sheet of Vaibhav Ltd. (After Reconstruction) as on 31st March, 2014
Particulars Notes `


Trade Payables(1,00,00,000 less 40,00,000) 60,00,000
Total 3,06,00,000
Assets
a Fixed assets
b Investments 5 19,00,000
2 Current assets 6 87,00,000
Total 3,06,00,000
Notes to accounts
`
1. Share Capital
2,60,000 equity shares of ` 40 each
(of the above 60,000 shares have been issued for 1,04,00,000
Preference share capital
1,00,000 6% Cumulative Preference shares of ` 60
60,00,000
each
Total 1,64,00,000
2. Reserves and Surplus
Capital Reserve 26,00,000
Secured
4. Tangible assets
Fixed Assets 2,50,00,000

5.18 Accounting
Adjustment under scheme of reconstruction (50,00,000) 2,00,00,000

5. Investments 20,00,000
Adjustment under scheme of reconstruction (1,00,000) 19,00,000
6. Current assets
2,00,00,000
Adjustment under scheme of reconstruction
110,00,000
90,00,000
Taxation liability paid
(3,00,000) 87,00,000
Working Note:
Capital Reduction Account
To Liability for taxation A/c 1,00,000 By Equity share capital 1,20,00,000
To P & L A/c 12,00,000 By 6% Cumulative 40,00,000
To Fixed Assets 50,00,000 preferences Share capital
To Current assets 110,00,000 By 5% Debentures 24,00,000
To Investment 1,00,000 By Sundry creditors 16,00,000
To Capital Reserve
(Bal. fig.) 26,00,000 _________
2,00,00,000 2,00,00,000

6
Amalgamation
Question 1
Following are the Balance Sheet of companies as at 31.12.2003:
Liabilities D Ltd. V Ltd. Assets D Ltd. V Ltd.
` ` ` `
Equity share capital Goodwill 6,00,000 ―
(` 100) 8,00,000 6,00,000 Fixed Assets 5,00,000 8,00,000
General Reserve 4,00,000 3,00,000 Investments 2,00,000 4,00,000
Investment Current Assets 4,00,000 3,00,000
Allowance
Reserve ― 4,00,000
Sundry Creditors 5,00,000 2,00,000 ________ ________
17,00,000 15,00,000 17,00,000 15,00,000
D Ltd. took over V Ltd. on the basis of the respective shares value, adjusting wherever
necessary, the book values of assets and liabilities on the basis of the following information:
(i) Investment Allowance Reserve was in respect of addition made to fixed assets by V Ltd.
in the year 1997-2002 on which income tax relief has been obtained. In terms of the
Income Tax Act, 1961, the company has to carry forward till 2006 reserve of ` 2,00,000
for utilization.
(ii) Investments of V Ltd. included 1,000 shares in D Ltd. acquired at cost of ` 150 per
share. The other investments of V Ltd. have a market value of ` 1,92,500.
(iii) The market value of investments of D Ltd. are to be taken at ` 1,00,000.
(iv) Goodwill of D Ltd. and V Ltd. are to be taken at ` 5,00,000 and ` 1,00,000 respectively.
(v) Fixed assets of D Ltd. and V Ltd. are valued at ` 6,00,000 and ` 8,50,000 respectively.
(vi) Current assets of D Ltd. included ` 80,000 of stock in trade received from V Ltd. at cost
plus 25%.
The above scheme has been duly adopted. Pass necessary Journal Entries in the books of D
Ltd. and prepare Balance Sheet of D Ltd. after taking over the business of V Ltd. Fractional

6.2 Accounting
share to be settled in cash, rest in shares of D Ltd. Calculation shall be made to the nearest
multiple of a rupee. (16 Marks, May 2004) (PE-II)
Answer
Journal Entries in the Books of D Ltd.

Dr. Cr.
Amount Amount
` `
Business Purchase Account Dr. 12,42,500
To Liquidator of V Ltd. 12,42,500
(For purchase consideration due)
Investments Account Dr. 1,92,500
Goodwill Account (Balancing figure) Dr. 1,00,000
Fixed Assets Account Dr. 8,50,000
Current Assets Account Dr. 3,00,000
To Sundry Creditors Account 2,00,000
To Business Purchase Account 12,42,500
(For assets and liabilities taken over at agreed value)
Liquidator of V Ltd. Dr. 12,42,500
To Equity Share Capital Account (`100) 9,03,600
To Securities Premium Account (`37.50) 3,38,850
To Cash Account 50
(For purchase consideration discharged)
Goodwill Account Dr. 16,000
To Current Assets (Stock) Account 16,000
(For elimination of unrealized profit on unsold stock)
Amalgamation Adjustment Account Dr. 2,00,000
To Investment Allowance Reserve Account 2,00,000
(For incorporation of statutory reserve)
Balance Sheet of D Ltd.
as on 31st December, 2003
Particulars Notes `

Amalgamation 6.3
a Trade Payables 3 7,00,000
Total 33,42,450
Assets
a Fixed assets
Tangible assets (5,00,000 + 8,50,000) 13,50,000
Intangible assets 4 7,16,000
b Investments(2,00,000 + 1,92,500) 3,92,500
c Amalgamation Adjustment Account 2,00,000
2 Current assets(7,00,000 – 50 – 16,000) 6,83,950
Total 33,42,450
Notes to accounts
`
1 Share Capital
17,036 shares of ` 100 each (out of which 9036
shares are issued in favour of vendor for 17,03,600
Total 17,03,600
Investment allowance reserve 2,00,000 9,38,850
3 Trade payables
Creditors 7,00,000
4 Intangible assets
Goodwill (6,00,000 + 1,00,000 + 16,000) 7,16,000
Working Notes:
1. Calculation of net asset value of shares
D Ltd. V Ltd.
` `
Goodwill 5,00,000 1,00,000

6.4 Accounting
Fixed Assets 6,00,000 8,50,000

Investments 1,00,000 3,30,000*
Current Assets 4,00,000 3,00,000
16,00,000 15,80,000
Less: Sundry Creditors 5,00,000 2,00,000
Net assets 11,00,000 13,80,000
Number of shares 8,000 6,000
Value per equity share 137.50 230
*Investments of V Ltd. are calculated as follows: `

Shares in D Ltd. (1,000 × 137.50) 1,37,500
Market value of remaining investments (given) 1,92,500
3,30,000
2. Calculation of Purchase Consideration

`
Value of Assets of V Ltd 15,00,000
Less: Value erosion on investments (` 2,50,000 – 1,92,500) 57,500
Less: Sundry Creditors 2,00,000
12,42,500
Settlement of Purchase Consideration
`
Net assets of V Ltd. 13,80,000
Value of Shares of D Ltd. 137.50
Number of shares to be issued in D Ltd. to V Ltd. (13,80,000 ÷ 137.50) 10,036.36
Less: Shares already held by V Ltd. 1,000
Additional shares to be issued 9,036.36
Total value of shares to be issued (9036 × 137.50) 12,42,450

Cash payment for fractional share (.36 × 137.50) 50
12,42,500

Amalgamation 6.5
Question 2
The following is the summarized Balance Sheet of A Ltd. as at 31st March, 2006:
8,000 equity shares of ` 100 each 8,00,000 Building 3,40,000
10% debentures 4,00,000 Machinery 6,40,000
Loan from A 1,60,000 Stock 2,20,000
Creditors 3,20,000 Debtors 2,60,000
General Reserve 80,000 Bank 1,36,000
Goodwill 1,30,000
Misc. Expenses 34,000
(Share issue Expenses)
17,60,000 17,60,000
B Ltd. agreed to absorb A Ltd. on the following terms and conditions:
(1) B Ltd. would take over all assets, except bank balance at their book values less 10%.
Goodwill is to be valued at 4 year’s purchase of super profits, assuming that the normal
rate of return be 8% on the combined amount of share capital and general reserve.
(2) B Ltd. is to take over creditors at book value.
(3) The purchase consideration is to be paid in cash to the extent of ` 6,00,000 and the
balance in fully paid equity shares of ` 100 each at ` 125 per share.
The average profit is ` 1,24,400. The liquidation expenses amounted to ` 16,000. B
Ltd. sold prior to 31st March, 2006 goods costing ` 1,20,000 to A Ltd. for ` 1,60,000.
` 1,00,000 worth of goods are still in stock of A Ltd. on 31st March, 2006. Creditors of A
Ltd. include ` 40,000 still due to B Ltd.
Show the necessary Ledger Accounts to close the books of A Ltd. and prepare the
Balance Sheet of B Ltd. as at 1st April, 2006 after the takeover.
(20 Marks, November 2006) (PE-II)
Answer
Books of A Limited
Realisation Account
` `
To Building 3,40,000 By Creditors 3,20,000
To Machinery 6,40,000 By B Ltd. 12,10,000
To Stock 2,20,000 By Equity Shareholders (Loss) 76,000

6.6 Accounting
To Debtors 2,60,000
To Goodwill 1,30,000
To Bank (Exp.) 16,000
16,06,000 16,06,000
Bank Account
To Balance b/d 1,36,000 By Realisation (Exp.) 16,000
To B Ltd. 6,00,000 By 10% debentures 4,00,000
By Loan from A 1,60,000
By Equity shareholders 1,60,000
7,36,000 7,36,000
10% Debentures Account
4,00,000 4,00,000
Loan from A Account
1,60,000 1,60,000
Misc. Expenses Account
To Balance b/d 34,000 By Equity shareholders 34,000
34,000 34,000
General Reserve Account
To Equity shareholders 80,000 By Balance b/d 80,000
80,000 80,000
B Ltd. Account
To Realisation A/c 12,10,000 By Bank 6,00,000
By Equity share in B Ltd.(4,880
shares at ` 125 each) 6,10,000
12,10,000 12,10,000
Equity Shares in B Ltd. Account
To B Ltd. 6,10,000 By Equity shareholders 6,10,000
6,10,000 6,10,000
Equity Share Holders Account
To Realisation 76,000 By Equity share capital 8,00,000
To Misc. Expenses 34,000 By General reserve 80,000
To Equity shares in B Ltd. 6,10,000
To Bank 1,60,000
8,80,000 8,80,000

Amalgamation 6.7
B Ltd
Balance Sheet as on 1st April, 2006 (An extract)∗
Particulars Notes `
a Trade Payables 3 2,80,000
b Bank overdraft 6,00,000
Total 14,75,000
Assets
a Fixed assets
Intangible assets 5 2,16,000
2 Current assets
14,75,000
Notes to accounts
`
1 Share Capital
4,880 Equity shares of ` 100 each
(Shares have been issued for consideration
other than cash) 4,88,000
Total 4,88,000
2 Reserves and Surplus (an extract)
Profit and loss account
∗
In the absence of the particulars of assets and liabilities (other than those of A Ltd.), the complete Balance Sheet of B
Ltd. after takeover cannot be prepared.

6.8 Accounting
Less: Unrealised profit (15,000) (15,000)

Total 1,07,000
3 Trade payables
Opening balance 3,20,000
Less: Inter-company transaction cancelled upon
amalgamation (40,000) 2,80,000
4 Tangible assets
Buildings 3,06,000
Machinery 5,76,000
Total 8,82,000
5 Intangible assets
Goodwill 2,16,000
6 Inventories
Less: Cancellation of profit upon amalgamation (15,000) 1,83,000
7 Trade receivables
Less: Intercompany transaction cancelled upon amalgamation (40,000)
Less: Provision for doubtful debts (26,000) 1,94,000
Working Notes:
1. Valuation of Goodwill `
Average profit 1,24,400
Less: 8% of ` 8,80,000 (70,400)
Super profit 54,000
Value of Goodwill = 54,000 x 4 2,16,000
2. Net Assets for purchase consideration
Goodwill as valued in W.N.1 2,16,000
Building 3,06,000
Machinery 5,76,000
Stock 1,98,000
Debtors 2,60,000
Total Assets 15,56,000

Amalgamation 6.9
Less: Creditors 3,20,000

Provision for bad debts 26,000 (3,46,000)
Net Assets 12,10,000
Out of this ` 6,00,000 is to be paid in cash and remaining i.e., (12,10,000 – 6,00,000)
` 6,10,000 in shares of ` 125. Thus, the number of shares to be allotted 6,10,000/125 =
4,880 shares.
3. Unrealised Profit on Stock `
The stock of A Ltd. includes goods worth ` 1,00,000 which was sold by B
40,000
Ltd. on profit. Unrealized profit on this stock will be ×1,00,000 25,000
1,60,000
As B Ltd purchased assets of A Ltd. at a price 10% less than the book
value, 10% need to be adjusted from the stock i.e., 10% of ` 1,00,000. (10,000)
Amount of unrealized profit 15,000
Question 3
The following are the Balance Sheets of M Ltd. and N Ltd. as at 31st March, 2009:
(` in lakhs)
Liabilities M Ltd. N Ltd.
Fully paid equity shares of ` 10 each 3,600 900
10% Preference shares of ` 10 each, fully paid up 1,200 -
Capital Reserve 600 -
General Reserve 2,100 -
Profit and Loss Account 780 -
8% Redeemable debentures of ` 1,000 each - 300
Trade Creditors 2,421 369
Provisions 870 93
11,571 1,662
Assets
Plant and Machinery 4,215 468
Furniture and Fixtures 2,400 183
Motor Vehicles - 51
Stock 2,370 444
Sundry Debtors 1,044 237

6.10 Accounting
Cash at Bank 1,542 240

Preliminary Expenses - 33∗
Discount on Issue of Debentures - 6
11,571 1,662
A new Company MN Ltd. was incorporated with an authorised capital of ` 15,000 lakhs
divided into shares of ` 10 each. For the purpose of amalgamation in the nature of merger, M
Ltd. and N Ltd. were merged into MN Ltd. on the following terms:
(i) Purchase consideration for M Ltd.’s business is to be discharged by issue of 120 lakhs
fully paid 11% preference shares and 720 lakhs fully paid equity shares of MN Ltd. to the
preference and equity shareholders of M Ltd. in full satisfaction of their claims.
(ii) To discharge purchase consideration for N Ltd.’s business, MN Ltd. to allot 90 lakhs fully
paid up equity shares to shareholders of N Ltd. in full satisfaction of their claims.
(iii) Expenses on the liquidation of M Ltd. and N Ltd. amounting to ` 6 lakhs are to be borne
by MN Ltd.
(iv) 8% redeemable debentures of N Ltd. to be converted into 8.5% redeemable debentures
of MN Ltd.
(v) Expenses on incorporation of MN Ltd. were ` 15 lakhs.
You are requested to:
(a) Pass necessary Journal Entries in the books of MN Ltd. to record above transactions,
and
(b) Prepare Balance Sheet of MN Ltd. after merger. (16 Marks, November, 2009) (IPCC)
Answer
In the books of MN Ltd.
Journal Entries
(` in lakhs)
Dr. Cr.
Business Purchase Account Dr. 9,300
To Liquidator of M Ltd. 8,400
To Liquidator of N Ltd. 900
(Being consideration payable to liquidators of the two companies taken
over)
Plant and Machinery Account (4,215+468) Dr. 4,683
∗
As per para 56 of AS 26, Preliminary expenses should Not appear in the Balance Sheet.

Amalgamation 6.11
Furniture and Fixtures Account (2,400+183) Dr. 2,583

Motor Vehicles Account Dr. 51
Stock Account (2,370+444) Dr. 2,814
Sundry Debtors Account (1,044+237) Dr. 1,281
Cash at Bank Account (1,542+240) Dr. 1,782
Preliminary Expenses Account Dr. 33
Discount on issue of Debentures Account Dr. 6
Profit and Loss Account (Refer W.N.) Dr. 120
To 8% Redeemable Debentures of N Ltd. Account 300
To Trade Creditors Account (2,421+369) 2,790
To Provisions Account (870+93) 963
To Business Purchase Account 9,300
(Being incorporation of all the assets and liabilities and the excess of
consideration over the share capital being adjusted against reserves
and surplus)
Liquidator of M Ltd. Account Dr. 8,400
Liquidator of N Ltd. Account Dr. 900
To Equity Share Capital Account (7,200+900) 8,100
To 11% Preference Share Capital Account 1,200
(Being allotment of fully paid shares in discharge of purchase
consideration)
Profit and Loss Account Dr. 6
To Bank Account 6
(Being payment of liquidation expenses of M Ltd. and N Ltd.)
Preliminary Expenses Account Dr. 15
To Bank Account 15
(Being expenses on incorporation of MN Ltd.)
8% Redeemable Debentures of N Ltd. Account Dr. 300
To 8.5% Redeemable Debentures Account 300
(Being conversion of 8% Debentures of N Ltd. into 8.5% Debentures)
Profit and Loss Account Dr. 48
To Preliminary Expenses Account (33+15) 48
(Being Preliminary Expenses are charged to Profit & Loss A/c in the
year it is incurred and not shown in the Balance Sheet as per para 56 of
AS 26)

6.12 Accounting
Balance Sheet of MN Ltd.

Particulars Notes ` in lakhs
EQUITY & LIABILITY

1. Shareholders’ Funds
a Share capital 1 9,300
b Reserve & Surplus 2 (174)
2 . Non-Current-Liabilities
a Long- term borrowings 3 300
3. Current-Liabilities
a Trade Payables 2,790
b Short term provisions 4 963.
Total 13,179
ASSETS
1 . Non-current assets
a Fixed assets
Tangible assets 5 7,317
b Other Non-current asset 6 6
2. Current assets
a Inventories 2,814
b Trade receivables 1,281
c Cash and cash equivalents 7 1,761
Total 13,179
Note to Accounts
` in lakhs
1 Share Capital
Authorised share capital
15 crore shares of `10 each 15,000
810 lakhs Equity shares of `10 each, fully paid Reserves and Surplus 8,100
120 lakhs 11% Preference shares of `10 each, fully paid 1,200
(All the above mentioned shares have been issued for consideration other
than cash)
Total 9,300

Amalgamation 6.13

Profit and Loss Account (120+6+48) (174)
Secured
8.5% Redeemable Debentures 300
Others 963
5 Tangible assets
Plant and Machinery 4,683
Furniture and Fixtures 2,583
Plant and machinery 51
Total 7,317
6 Other non-current assets
Discount on Issue of Debentures 6
Cash at Bank (1,782–6–15) 1,761
Working Note:
Profit and Loss Account (` in lakhs)
Total consideration = ` (8,400 + 900) lakhs 9,300
Less: Share Capital of Companies taken over [` (3,600+1,200+900) lakhs] 5,700
3,600
Amount to be adjusted:
Capital Reserve 600
Profit & Loss A/c 780 3,480
Debit balance of Profit & Loss Account 120
Question 4
The Balance Sheet of Reckless Ltd. as on 31st March, 2008 is as follows:
`
Assets:
Freehold premises 2,20,000
Machinery 1,77,000

6.14 Accounting
Furniture & fittings 90,800

Stock 3,87,400
Sundry debtors 80,000
Less : Provision for doubtful debts 4,000 76,000
Cash in hand 2,300
Cash at bank 1,56,500
Bills receivable 15,000
11,25,000
Liabilities:
60,000 Equity shares of `10 each 6,00,000
Pre-incorporation profit 21,000
Contingency reserve 1,35,000
Profit and loss appropriation account 1,26,000
Acceptances 20,000
Creditors 1,13,000
Provision for income-tax 1,10,000
11,25,000
Careful Ltd. decided to take over Reckless Ltd. from 31st March, 2008 with the following
assets at value noted against them :
`
Furniture and fittings 80,000
Machinery 1,60,000
Stock 3,45,000
¼ of the consideration was satisfied by the allotment of fully paid preference shares of ` 100
each at par which carried 13% dividend on cumulative basis. The balance was paid in the
form of Careful Ltd’s equity shares of ` 10 each, ` 8 paid up.
Sundry Debtors realised ` 79,500. Acceptances were settled for ` 19,000. Income-tax
authorities fixed the taxation liability at ` 1,11,600. Creditors were finally settled with the cash
remaining after meeting liquidation expenses amounting to `4,000.

Amalgamation 6.15
(i) Calculate the number of equity shares and preference shares to be allotted by Careful
Ltd. in discharge of consideration.
(ii) Prepare the important ledger accounts in the books of Reckless Ltd.; and
(iii) Pass journal entries in the books of Careful Ltd. with narration.
Answer
(i) Calculation of the number of equity shares and preference shares to be allotted by
Careful Ltd. in discharge of purchase consideration
Calculation of purchase consideration: `
Agreed value of assets taken over:
Furniture & fittings 80,000
Machinery 1,60,000
Stock 3,45,000
10,00,000
Discharge of purchase consideration:
1. Amount paid by allotment of 13% preference shares
1
= ` 10,00,000 ×
4
= ` 2,50,000
Number of 13% preference shares of ` 100 each

2,50,000
= = 2,500 preference shares
100
2. Amount paid by allotment of equity shares

= ` 10,00,000 – ` 2,50,000 = ` 7,50,000
Paid up value of one equity share = ` 8 each

Hence, the number of equity shares allotted
` 7,50,000
= = 93,750equity shares
`8

6.16 Accounting
(ii) Ledger accounts in the books of Reckless Ltd.

Realisation Account
` `
To Freehold Premises 2,20,000 By Creditors 1,13,000
To Machinery 1,77,000 By Acceptances 20,000
To Furniture & Fittings 90,800 By Provision for tax 1,10,000
To Stock 3,87,400 By Provision for doubtful debts 4,000
To Sundry Debtors 80,000 By Careful Ltd. 10,00,000
To Bills Receivable 15,000 By Cash/Bank:
To Cash/ Bank: Sundry Debtors 79,500
Acceptances 19,000
Provision for tax 1,11,600
Creditors 1,03,700
To Cash/Bank
Liquidation expenses 4,000
To Profit 1,18,000
13,22,500 13,22,500
Cash and Bank Account
` `
To Balance b/d By Realisation A/c
(cash at bank) 1,56,500 Acceptances 19,000
To Cash in hand 2,300 Provision for tax 1,11,600
To Realisation A/c (Debtors) 79,500 By Realisation (Expenses) 4,000
By Realisation A/c
[Creditors (bal fig.)] 1,03,700
2,38,300 2,38,300
Equity Shareholders Account
` `
To 13% Cumulative 2,50,000 By Equity Share Capital 6,00,000
preference shares in
Careful Ltd.

Amalgamation 6.17
To Equity Shares in By Pre-incorporation profit 21,000

Careful Ltd. 7,50,000
By Contingency reserve 1,35,000
By Profit & Loss
Appropriation Account 1,26,000
By Realisation Account 1,18,000
10,00,000 10,00,000
Careful Ltd. Account
` `
To Realisation Account 10,00,000 By 13% Cumulative preference 2,50,000
shares in Careful Ltd.
By Equity shares in Careful Ltd. 7,50,000
10,00,000 10,00,000
(iii) Journal Entries in the books of Careful Ltd.
` `
Business purchase Account Dr. 10,00,000
To Liquidator of Reckless Ltd. Account 10,00,000
(Being amount payable to liquidator of Reckless Ltd. for assets
taken over)
Bills receivable Account Dr. 15,000
Freehold premises Account Dr. 4,00,000
Furniture & fittings Account Dr. 80,000
Machinery Account Dr. 1,60,000
Stock Account Dr. 3,45,000
To Business purchase Account 10,00,000
(Being assets taken over from Reckless Ltd.)
Liquidator of Reckless Ltd. Dr. 10,00,000
To 13% Cumulative preference share capital Account 2,50,000
To Equity share capital Account 7,50,000
(Being allotment of 13% cumulative preference shares of `100
each fully paid up and equity shares of `10 each `8 paid up)

6.18 Accounting
Question 5
The Balance Sheet of Mars Limited as on 31st March, 2011 was as follow:
Share Capital: Fixed Assets:
1,00,000 Equity shares of ` 10 Land and building 7,64,000
each fully paid up 10,00,000 Current Assets 7,75,000
Reserve and surplus Stock
Capital reserve 42,000 Sundry debtors 1,60,000
Contingency reserve 2,70,000 Less : Provision for 1,52,000
Profit and loss A/c 2,52,000 doubtful debts 8,000
Current Liabilities & Provisions Bill receivable 30,000
Bills payable 40,000 Cash at bank 3,29,000
Sundry creditors 2,26,000
Provisions for income tax 2,20,000
20,50,000 20,50,000
On 1st April, 2011, Jupiter Limited agreed to absorb Mars Limited on the following terms and
conditions:
(1) Jupiter Limited will take over the assets at the following values:
`
Land and building 10,80,000
Stock 7,70,000
(2) Purchase consideration will be settled by Jupiter Ltd. as under:
4,100 fully paid 10% preference shares of ` 100 will be issued and the balance will be
settled by issuing equity shares of `10 each at ` 8 paid up.
(3) Liquidation expenses are to be reimbursed by Jupiter Ltd. to the extent of ` 5,000.
(4) Sundry debtors realized ` 1,50,000. Bills payable were settled for ` 38,000. Income tax
authorities fixed the taxation liability at ` 2,22,000 and the same was paid.
(5) Creditors were finally settled with cash remaining after meeting liquidation expenses
amounting to ` 8,000
You are required to:
(i) Calculate the number of equity shares and preference shares to be allotted by Jupiter
Limited in discharge of purchase consideration

Amalgamation 6.19
(ii) Prepare the Realisation account, Bank account, Equity shareholders account and Jupiter
Limited’s account in the books of Mars Ltd. (16 Marks, May, 2011) (IPCC)
Answer
(i) Calculation of number of shares to be allotted
Particulars Amount (`)
Land and building 10,80,000
Stock 7,70,000
Total 18,80,000
Amount discharged by issue of preference shares 4,10,000
Number of preference shares to be issued (4,10,000/100) 4,100 shares
Amount discharged by issue of equity shares (` 18,80,000 – 4,10,000) 14,70,000
Number of equity shares to be issued (` 14,70,000 / 8) 1,83,750 Shares
(ii) Ledger Accounts in the books of Mars Limited
Realization Account
To Land and building 7,64,000 By Provision for doubtful debts 8,000
To Stock 7,75,000 By Bills payable 40,000
To Sundry debtors 1,60,000 By Sundry creditors 2,26,000
To Bills receivable 30,000 By Provision for taxation 2,20,000
To Bank A/c –liquidation 3,000 By Jupiter Ltd. (purchase
expenses consideration) 18,80,000
To Bank A/c- bills payable 38,000 By Bank A/c- sundry debtors 1,50,000
To Bank A/c –income tax 2,22,000
To Bank A/c –sundry creditors 2,16,000
To Profit transferred to equity
shareholders A/c 3,16,000
25,24,000 25,24,000
Note: Liquidation expenses paid = ` 8,000 – ` 5,000(reimbursed by Jupiter Ltd) = 3,000
Bank Account
To Balance b/d 3,29,000 By Realisation A/c 3,000
To Realisation A/c (payment received (liquidation expenses)
from debtors) 1,50,000 By Jupiter Ltd. 5,000
To Jupiter Ltd. (liquidation expenses) 5,000 By Bills payable 38,000

6.20 Accounting
By Income tax 2,22,000

By Sundry creditors
(Bal.fig.) 2,16,000
4,84,000 4,84,000
Equity Shareholders Account
To 10% Preference shares 4,10,000 By Equity share capital A/c 10,00,000
in Jupiter Limited By Capital reserve 42,000
To Equity shares in Jupiter 14,70,000 By Contingency reserve 2,70,000
Limited By Profit and loss A/c 2,52,000
By Realisation A/c (profit) 3,16,000
18,80,000 18,80,000
Jupiter Limited Account
To Realisation A/c 18,80,000 To 10% Preference shares in 4,10,000
Jupiter Limited
To Equity shares in Jupiter
Limited 14,70,000
18,80,000 18,80,000
Question 6
The following was the Balance Sheet of V Ltd. as on 31st March, 2012:
Particulars Note No. Amount
(` in lakhs)
(1) Shareholders' Funds
(a) Share Capital 1 1,150
(b) Reserves and Surplus 2 (87)
(2) Non-current Liabilities
(a) Long-term Borrowings 3 630
(3) Current Liabilities
Trade Parables 170
Total 1,863
Assets
(1) Non-current Assets
Tangible Assets 4 1,152

Amalgamation 6.21
(2) Current Assets

Inventories 380
Trade Receivables 256
Cash and Cash equivalents 5 75
Total 1,863
Notes:
(1) Share Capital
Authorised : ?
Issued, Subscribed and Paid up :
80 lakh Equity Shares of ` 10 each, fully paid up 800
35 lakh 12% Cumulative Preference Shares
of ` 10 each, fully paid up 350
Total 1,150
(2) Reserves and Surplus
Debit Balance of Profit & Loss Account (87)
Total (87)
(3) Long-Term Borrowings
10% Secured Cumulative Debentures of
` 100 each, fully paid up 600
Outstanding Debenture Interest 30
Total 630
(4) Tangible Assets
Land and Buildings 445
Plant and Machinery 593
Furniture, Fixtures and Fittings 114
Total 1,152
Balance at Bank 69
Cash in hand 6
Total 75
On 1st April, 2012 P Ltd. took over the entire business of V Ltd. on the following terms:
V Ltd.'s equity shareholders would receive 4 fully paid equity shares of P Ltd. of ` 10 each
issued at a premium of ` 2.50 each for every five shares held by them in V Ltd.
Preference shareholders of V Ltd. would get 35 lakh 13% Cumulative Preference Shares of
` 10 each fully paid up in P Ltd., in lieu of their present holding.

6.22 Accounting
All the debentures of V Ltd. would be converted into equal number of 10.5% Secured
Cumulative Debentures of ` 100 each, fully paid up after the take over by P Ltd., which would
also pay outstanding debenture interest in cash.
Expenses of amalgamation would be borne by P Ltd. Expenses came to be ` 2 lakh. P Ltd.
discovered that its creditors included ` 7 lakh due to V Ltd. for goods purchased.
Also P Ltd.'s stock included goods of the invoice price of ` 5 lakh earlier purchased from V
Ltd., which had charged profit @ 20% of the invoice price.
(i) Prepare Realisation A/c in the books of V Ltd.
(ii) Pass journal entries in the books of P Ltd. assuming it to be an amalgamation in the
nature of merger. (16 Marks, November 2012) (IPCC)
Answer
Realisation Account in the books of V Ltd.
` in lakhs ` in lakhs
To Land and Buildings A/c 445 By 10% Secured Cumulative 600
Debentures A/c
To Plant and Machinery A/c 593 By Outstanding Debenture 30
interest A/c
To Furniture, Fixtures & Fittings 114 By Trade payables A/c 170
A/c
To Inventories A/c 380 By P Ltd. A/c 1,150
To Trade Receivables A/c 256 (purchase consideration -
Refer working note)
To Bank A/c 69
To Cash in Hand A/c 6
To Equity Shareholders A/c 87
(Profit on Realisation)
1,950 1,950
Journal Entries in the books of P Ltd.
Dr. Cr.
` in lakhs ` in lakhs
1 Business Purchase A/c Dr. 1,150
To Liquidator of V Ltd. A/c 1,150
(Being purchase consideration due)
2 Land and Buildings A/c Dr. 445

Amalgamation 6.23
Plant and Machinery A/c Dr. 593

Furniture, Fixtures & Fittings A/c Dr. 114
Inventories A/c Dr. 380
Trade Receivables A/c Dr. 256
Bank A/c Dr. 69
Cash in Hand A/c Dr. 6
Profit and Loss A/c Dr. 87
To 10% Debentures A/c 600
To Outstanding Debenture interest A/c 30
To Trade payables A/c 170
To Business Purchase A/c 1,150
(Being assets and liabilities taken over from V Ltd.
under the scheme of amalgamation in the nature of
merger)
3 Liquidators of V Ltd. A/c Dr. 1,150
To Equity Share Capital A/c 640
To 13% Cumulative Preference Shares A/c 350
To Securities Premium A/c 160
(Being discharge of consideration, by allotment of 64
lakh equity shares of ` 10 each at a premium of ` 2.50
per share & 35 lakh 13% cumulative preference shares
of ` 10 each at par)
4 10% Secured Cumulative Debentures A/c Dr. 600
To 10.5% Secured Cumulative Debentures A/c 600
(Being 10% Secured Cumulative Debentures of V Ltd.
converted into 10.5% Secured Cumulative Debentures
of P Ltd.)
5 Outstanding Debenture interest A/c Dr. 30
To Bank A/c 30
(Being outstanding debenture interest paid in cash by
P Ltd.)
6 Goodwill A/c Dr. 2
To Bank A/c 2
(Being amalgamation expenses met by P Ltd.)
7 Trade Payables A/c Dr. 7

6.24 Accounting
To Trade Receivables A/c 7

(Being settlement of mutual liability )
8 Profit and Loss A/c Dr. 1
To Inventories A/c (5 x 20%) 1
(Being unrealized profit on stock purchased from V Ltd
written off from the inventories of P Ltd.)
Working Note:
Calculation of Purchase Consideration payable by P Ltd.
` in lakhs
Payment to preference shareholders:
13% Cumulative Preference Shares of ` 10 each (35 lakh shares × ` 10) 350
Payment to equity shareholders:
(80 lakh shares x 4/5)= 64 lakhs equity shares @ `10 640
Securities Premium (64 lakhs equity shares @ ` 2.5) 160
Total purchase consideration 1,150
Question 7
The summarized Balance Sheet of Srishti Ltd. as on 31st March, 2014 was as follows:
Amount (`) Amount
Liabilities Assets
(`)
Equity Shares of ` 10 fully paid 30,00,000 Goodwill 5,00,000
Export Profit Reserves 8,50,000 Tangible Fixed Assets 30,00,000
General Reserves 50,000 Stock 10,40,000
Profit and loss Account 5,50,000 Debtors 1,80,000
9% Debentures 5,00,000 Cash & Bank 2,80,000
Trade Creditors 1,00,000 Preliminary Expenses 50,000
50,50,000 50,50,000
Anu Ltd. agreed to absorb the business of Srishti Ltd. with effect from 1st April, 2014.
(a) The purchase consideration settled by Anu Ltd. as agreed:
(i) 4,50,000 equity Shares of ` 10 each issued by Anu Ltd. by valuing its share @
` 15 per share.
(ii) Cash payment equivalent to ` 2.50 for every share in Srishti Ltd.
(b) The issue of such an amount of fully paid 8% Debentures in Anu Ltd. at 96% as is
sufficient to discharge 9% Debentures in Srishti Ltd. at a premium of 20%.

Amalgamation 6.25
(c) Anu Ltd. will take over the Tangible Fixed Assets at 100% more than the book value,
Stock at ` 7,10,000 and Debtors at their face value subject to a provision of 5% for
doubtful Debts.
(d) The actual cost of liquidation of Srishti Ltd. was ` 75,000. Liquidation cost of Srishti Ltd.
is to be reimbursed by Anu Ltd. to the extent of ` 50,000.
(e) Statutory Reserves are to be maintained for 1 more year.
(i) Close the books of Srishti Ltd. by preparing Realisation Account, Anu Ltd. Account,
Shareholders Account and Debenture Account, and
(ii) Pass Journal Entries in the books of Anu Ltd. regarding acquisition of business.
Answer
(i) Purchase consideration computation `
Cash payment for (3,00,000 x ` 2.5) 7,50,000
Equity Shares (4,50,000 x ` 15) 67,50,000
75,00,000
In the books of Srishti Ltd.
Realisation Account
` `
To Goodwill 5,00,000 By 9% Debentures 5,00,000
To Tangible Fixed Assets 30,00,000 By Creditors 1,00,000
To Stock 10,40,000 By By Anu Ltd. 75,00,000
To Debtors 1,80,000 (Purchase consideration)
To Cash & Bank A/c 2,55,000
(2,80,000- 25,000)
To Cash & Bank A/c 25,000
(Realization expenses)
To Profit on realization
transfer to shareholders 31,00,000
81,00,000 81,00,000
Equity Shareholders A/c
` `
To Preliminary expenses 50,000 By Equity Share Capital 30,00,000

6.26 Accounting
To Equity Shares in Anu Ltd. 67,50,000 By Export Profit Reserves 8,50,000

To Cash & Bank A/c 7,50,000 By General Reserves 50,000
By P & L A/c 5,50,000
By Realization A/c 31,00,000
75,50,000 75,50,000
9% Debentures Account
` `
To Realization A/c 5,00,000 By Balance b/d 5,00,000
Anu Ltd.
` `
To Realization A/c 75,00,000 By Share Capital 67,50,000
By Bank A/c 7,50,000
75,00,000 75,00,000
(ii) Journal Entries in the books of Anu Ltd.
` `
1 Business Purchase A/c Dr. 75,00,000
To Liquidator of Srishti Ltd 75,00,000
(Being business of Srishti Ltd. taken over)
2 Tangible Fixed Assets Dr 60,00,000
Stock Dr 7,10,000
Debtors Dr 1,80,000
Cash & Bank A/c Dr 2,55,000
Goodwill A/c (Bal. fig.) Dr 10,64,000
To Provision for doubtful debts 9,000
To Liability for 9 % Debentures 6,00,000
To Creditors 1,00,000
To Business Purchase account 75,00,000
(Being assets and liabilities taken over)
3 Amalgamation Adjustment A/c Dr. 8,50,000
To Export Profit Reserves 8,50,000
(Being statutory Reserves taken over)
4 Goodwill Dr. 50,000

Amalgamation 6.27
To Bank A/c 50,000

(Liquidation expenses reimbursed))
5 Liquidator of Shristi Ltd. Dr. 75,00,000
To Equity Share Capital 45,00,000
To Securities Premium 22,50,000
To Bank A/c 7,50,000
(Being purchase consideration discharged)
6 Liability for 9% Debentures ( 5,00,000 x 120/100) Dr. 6,00,000
Discount on issue of debentures 25,000
To 8% Debentures (6,00,000 x 100/96) 6,25,000
(Being liability of debenture holders’ discharged)

7
Average Due Date
Unit 1: Average Due Date
Question 1
A promissory note executed by Mr. X is due on 12.8.2007. What is the maturity date of the
promissory note including grace days? (2 Marks, May, 2007) (PCC)
Answer
Where the promissory note is due (including grace days) on public holiday, the preceding day
shall be the due date. Hence, the due date is 14.8.2007.
Question 2
Mr. A advanced ` 30,000 to Mr. B on 1.4.2008. The amount is repayable in 6 equal monthly
instalments commencing from 1.5.2008. Compute the average due date for the loan.
(2 Marks, May, 2008) (PCC)
Answer
Date of loan + Sum of months from the date of lending to repayment
Average due date =
No. of instalments
(1 + 2 + 3 + 4 + 5 + 6)
= 1.4.2008 +
6
= 1.4.2008 + 3.5 months = 16th July 2008
Question 3
R had the following bills receivable and bills payable against S. Calculate average due date
when the payment can be made or received without any loss or gain of interest to either party.
Bills Receivable Bills Payable
Date of the Bill Amount (`) Tenure in Date of bill Amount (`) Tenure in
months months
1.6.08 9,000 3 29.5.08 6,000 2

Average Due Date 7.2
5.6.08 7,500 3 3.6.08 9,000 3

9.6.08 10,000 1 10.6.08 10,000 2
12.6.08 8,000 2 13.6.08 7,000 2
20.6.08 12,000 3 27.6.08 11,000 1
Holiday intervening in the period 15th August, 2008, 16th August, 2008, and 6th September, 2008.
Answer
Calculation of Average Due Date (taking base date as 12th July, 2008)
Date Due date Amount (`) No. of Days Products (`) Remarks
including days from July 12
of grace
1.6.08 4.9.08 9,000 54 4,86,000 Bills Receivable
5.6.08 8.9.08 7,500 58 4,35,000
9.6.08 12.7.08 10,000 0 0
12.6.08 14.8.08 8,000 33 2,64,000
20.6.08 23.9.08 12,000 73 8,76,000
46,500 20,61,000
29.5.08 1.8.08 6,000 20 1,20,000 Bills Payable
3.6.08 5.9.08 9,000 55 4,95,000
10.6.08 13.8.08 10,000 32 3,20,000
13.6.08 14.8.08 7,000 33 2,31,000
27.6.08 30.7.08 11,000 18 1,98,000
43,000 13,64,000
Difference of Products = ` 20,61,000 – ` 13,64,000 = ` 6,97,000
Difference of Amount = ` 46,500 – ` 43,000 = ` 3,500
Average Due Date = Differenceof Pr oducts
Base Date +
Differenceof Amount
= 6,97,000
July 12 +
3,500
= July 12 + 199.14 or 199 days
= 27th January, 2009
Note:
(i) B/R of 12.6.08 Due date changed due to holidays
(ii) B/P of 3.6.08 Due date changed due to holidays
(iii) B/P of 13.6.08 Due date changed due to holidays

7.3 Accounting
Question 4
Harish has the following bills due on different dates. It was agreed to settle the total amount
due by a single cheque payment. Find the date of the cheque.
(i) ` 5,000 due on 5.3.2009
(ii) ` 7,000 due on 7.4.2009
(iii) ` 6,000 due on 17.7.2009
(iv) ` 8,000 due on 14.9.2009 (4 Marks, November, 2009) (PCC)
Answer
Calculation of number of days from the base date
Due date Amount (` ) No. of days from 5.3.09 Product
5.3.2009 5,000 0 0
7.4.2009 7,000 33 2,31,000
17.7.2009 6,000 134 8,04,000
14.9.2009 8,000 193 15,44,000
26,000 25,79,000
Sum of Product
Average due date = Base date +
Sum of Amount
25,79,000
= 5.3.2009 + = 99 days
26,000
The date of the cheque will be 99 days from the base date i.e.12.6.2009. So on
12th June, 2009, all bills will be settled by a single cheque payment.
Question 5
A trader allows his customers, credit for one week only beyond which he charges interest @
12% per annum. Anil, a customer buys goods as follows:
Date of Sale/Purchase Amount (` )
January 2, 2009 6,000
January 28, 2009 5,500
February 17, 2009 7,000
March 3, 2009 4,700
Anil settles his account on 31st March, 2009. Calculate the amount of interest payable by Anil
using average due date method. (8 Marks, November, 2009) (IPCC)

Answer
Let us assume 9th January, 2009 to be the base date:
Date of Sale Due date of Amount (` No. of days from 9th Product
payment ) January, 2009
Jan. 2 Jan. 9 6,000 0 0
Jan. 28 Feb. 4 5,500 26 1,43,000
Feb. 17 Feb. 24 7,000 46 3,22,000
March 3 March 10 4,700 60 2,82,000
23,200 7,47,000
Sum of Pr oduct
Average Due date = Base date +
Sum of amount
7,47,000
= 9th January, 2009 +
23,200
= 9th January 2009 + 32 days
i.e. 32 days from 9th January, 2009 = 10th February, 2009
Thus, average due date = 10th February, 2009
No. of days from 10th February, 2009 to 31st March, 2009 = 49 days.
Interest payable by Anil on ` 23,200 for 49 days @ 12% per annum
49 12
= ` 23,200 × × = ` 373.74
365 100
Question 6
Swaminathan owed to Subramanium the following sums :
` 5,000 on 20th January, 2009
` 8,000 on 3rd March, 2009
` 6,000 on 5th April, 2009
` 11,000 on 30th April, 2009
Ascertain the average due date. (2 Marks, May, 2010) (IPCC)
Answer
Calculation of average due date taking 20th January as the base date
Due Date Amount No. of days from 20th Product
` January
20th January 5,000 0 0

7.5 Accounting
3rd March 8,000 42 3,36,000

5th April 6,000 75 4,50,000
30th April 11,000 100 11,00,000
30,000 18,86,000
Total Product
Average due date = 20th January +
Total Amount
18,86,000
= 20th January +
30,000
= 20th January, 2009 + 63 days (approx)
= 24th March, 2009
Question 7
From the following details find out the average due date:
Date of Bill Amount (`) Usance of Bill
29th January, 2009 5,000 1 month
20th March, 2009 4,000 2 months
12th July, 2009 7,000 1 month
10th August, 2009 6,000 2 months
Answer
Calculation of Average Due Date
(Taking 3rd March, 2009 as base date)
Date of bill 2009 Term Due date Amount No. of days Product
2009 from the base
date i.e. 3rd
March,2009
(`) (`) (`)
29th January 1 month 3rd March 5,000 0 0
20th March 2 months 23rd May 4,000 81 3,24,000
12th July 1month 14th Aug. 7,000 164 11,48,000
10th August 2 months 13th Oct. 6,000 224 13,44,000
22,000 28,16,000

Sum of Products
Average due date = Base date + Days equal to
Sum of Amounts
28,16,000
= 3rd March, 2009 +
22,000
= 3rd March, 2009 + 128 days
= 9th July, 2009
Working Note:
1. Bill dated 29th January, 2009 has the maturity period of one month, but there is no
corresponding date in February, 2009. Therefore, the last day of the month i.e. 28th
February, 2009 shall be deemed maturity date and due date would be 3rd March, 2009
(after adding 3 days of grace).
2. Bill dated 12th July, 2009 has the maturity period of one month, due date (after adding 3
days of grace) falls on 15th August, 2009. 15th August being public holiday, due date
would be preceding date i.e. 14th August, 2009.
Question 8
A and B are partners in a firm and share profits and losses equally. A has withdrawn the
following sum during the half year ending 30th June 2010:
Date Amount
`
January 15 5,000
February 10 4,000
April 5 8,000
May 20 10,000
June 18 9,000
Interest on drawings is charged @ 10% per annum. Find out the average due date and
calculate the interest on drawings to be charged on 30th June 2010.
Answer
Calculation of Average due date
(Base Date 15th Jan, 2010)
Date Amount No. of days Product
` `
January 15 5,000 0 0

7.7 Accounting
February 10 4,000 26 1,04,000

April 5 8,000 80 6,40,000
May 20 10,000 125 12,50,000
June 18 9,000 154 13,86,000
36,000 33,80,000
Total product
Average due date = Base date + × days
Total amount
33,80,000
= 15th Jan + days
36,000
= 15th Jan + 94 days (approx.)
= 19th April, 2010
Number of days from 19th April, 2010 to 30th June, 2010 = 72 days
Interest on drawings from 19th April to 30th June @10%:
72 10
= ` 36,000 × ×
365 100
= ` 710
Hence, interest on drawings ` 710 will be charged from A on 30th June, 2010.
Question 9
Mr. Black accepted the following bills drawn by Mr. White:
Date of Bill Period Amount (`)
09-03-2010 4 months 4,000
16-03-2010 3 months 5,000
07-04-2010 5 months 6,000
18-05-2010 3 months 5,000
He wants to pay all the bills on a single date. Interest chargeable is @ 18% p.a. and
Mr. Black wants to save ` 150 on account of interest payment. Find out the date on which he
has to effect the payment to save∗ interest of ` 150. Base date to be taken shall be the
earliest due date. (8 Marks, November, 2011) (IPCC)
∗
The word ‘save’ should be read as ‘earn’ for better understanding of the requirement of the question.

Answer
Calculation of Average Due Date taking base date as 19.06.2010
Date of Bill Period Maturity No. of days from the Amount Products
date base date (`)
09.03.2010 4 months 12.07.2010 23 4,000 92,000
16.03.2010 3 months 19.06.2010 0 5,000 0
07.04.2010 5 months 10.09.2010 83 6,000 4,98,000
18.05.2010 3 months 21.08.2010 63 5,000 3,15,000
20,000 9,05,000
Total of pr oduct
Average due date = Base date +
Total of amount
9,05,000
= 19.06.2010 + = 45 days (approx.)
20,000
= 3rd August, 2010.
Computation of date of payment to earn interest of ` 150
Interest per day = [` 20,000 x (18/100)]/365 days
= ` 3,600/365 = ` 10 per day (approx.)
To earn interest of ` 150, the payment should be made 15 days (` 150 / ` 10 per day) earlier
to the due date. Accordingly, the date of payment would be:
Date of payment to earn interest of ` 150 = 3rd August, 2010 –15 days
= 19th July, 2010.
Question 10
M/s Stairs & Co. draw upon M/s Marble & Co. several bills of exchange due for payment on
different dates as under :
Date of Bill Amount(`) Tenure of Bill
12th May 44,000 3 months
10th June 45,000 4 months
1st July 14,000 1 month
19th July 17,000 2 months
Find out the average due date on which payment may be made in one single amount by M/s
Marble & Co. to M/s Stairs & Co. 15th August, Independence Day, is national holiday and
22nd September declared emergency holiday, due to death of a national leader.

7.9 Accounting
Answer
(Taking 4th August as the base date)
Date of bill Term Due date Amount No. of days from Product
` the base date i.e.
4th August
12th May 3 months 14th August 44,000 10 4,40,000
10th June 4 months 13th October 45,000 70 31,50,000
1st July 1 month 4th August 14,000 0 0
19th July 2 months 23th September 17,000 50 8,50,000
1,20,000 44,40,000
Total of products
Average due date=Base date+ Days equal to
Total amount
44,40,000
= 4th August +
1,20,000
= 4th August +37 days = 10th September
Question 11
T owes to K the following amounts:
` 7,000 due on 15th March, 2012
` 12,000 due on 5th April, 2012
` 30,000 due on 25th April, 2012
` 20,000 due on 11 June, 2012
He desires to make the full payment on 30th June, 2012 along with interest @ 10% per annum
from the average due date. Find out the average due date and the amount of interest. Amount
of interest may be rounded off to the nearest rupee. (4 Marks, November 2012) (IPCC)
Answer
Calculation of Average Due Date taking 15th March, 2012 as the base date
Due date Amount No. of days from the base Product
date i.e. 15th March, 2012
`
15th March, 2012 7,000 0 0
5thApril, 2012 12,000 21 2,52,000
25th April, 2012 30,000 41 12,30,000

11th June 2012 20,000 88 17,60,000

69,000 32,42,000
Total of products
Average due date = Base date + Days equal to
Total amount
32,42,000
= 15th March, 2012 +
69,000
= 15th March, 2012 + 47 days (approx.) =1st May, 2012
Interest amount: Interest can be calculated on ` 69,000 from 1st May, 2012 to 30th June,
2012 at 10% p.a. i.e. interest on ` 69,000 for 60 days at 10%p.a. =` 69,000 x 10/100 x 60/366
= ` 1,131 (approx.)
Question 12
The following transactions took place between Thick and Thin. They desire to settle their
account on average due date.
Purchases by Thick from Thin (` )
9th July, 2013 7,200
14th August, 2013 12,200
Sales by Thick to Thin (` )

15th July, 2013 18,000
31st August, 2013 16,500
Calculate Average Due Date and the amount to be paid or received by Thick.
Answer
Computation of products for Thick’s payments
(Taking 9.7.13 as base date)
Due Date Amount No. of days from base date to due date Product
` `
9.7.13 7,200 0 0
14.8.13 12,200 36 4,39,200
19,400 4,39,200

7.11 Accounting
Computation of products for Thin’s payments (Base date = 9.7.13)

Due Date Amount No. of days from base date to due Product
date
` `
15.7.13 18,000 6 1,08,000
31.8.13 16,500 53 8,74,500
34,500 9,82,500
Excess of Thin’s products over Thick [9,82,500-4,39,200] 5,43,300
Excess of Thin’s amounts over Thick [34,500-19,400] 15,100
5,43,300
Number of days from base date to date of settlement is = = 36 days (approx.)
15,100
Hence, the date of settlement of the balance amount is 36 days after 9th July, i.e. 14th August.
Thus, on 14th August, 2013, Thin has to pay ` 15,100 to Thick.
Question 13
Define Average Due Date. List out the various instances when Average Due Date can be
used. (4 Mark, IPCC May, 2014)
Answer
In business enterprises, a large number of receipts and payments by and from a single party may
occur at different points of time. To simplify the calculation of interest involved for such
transactions, the idea of average due date has been developed. Average Due Date is a break-even
date on which the net amount payable can be settled without causing loss of interest either to the
borrower or the lender.
Few instances where average due date can be used:
(i) Calculation of interest on drawings made by the proprietors or partners of a business firm
at several points of time.
(ii) Settlement of accounts between a principal and an agent.
(iii) Settlement of contra accounts, that is, A and B sell goods to each other on different
dates.
Question 14
Kishanlal has made the following sales to Babulal. He allows a credit period of 10 days
beyond which he charges interest @ 12% per annum.
Date of Sales Amount (`)
26.05.14 12,000

18.07.14 18,000
02.08.14 16,500
28.08.14 9,500
09.09.14 15,500
17.09.14 13,500
Babulal wants to settle his accounts on 30-9-2014. Calculate the interest payable by him using
Average Due Date (ADD). If Babulal wants to save interest of ` 588, how many days before
30.9.2014 does he have to make payment? Also find the payment date in this case.
Answer
Calculation of Average Due date (Taking 05th June as the base date)
Date Due Date Amount No. of days from Product
` Base date `
26.05.2014 05.06.2014 12,000 0 0
18.07.2014 28.07.2014 18,000 53 9,54,000
02.08.2014 12.08.2014 16,500 68 11,22,000
280.8.2014 07.09.2014 9,500 94 8,93,000
09.09.2014 19.09.2014 15,500 106 16,43,000
17.09.2014 27.09.2014 13,500 114 15,39,000
85,000 61,51,000
61,51,000
Average due date = 5.6.14 + = 5.6.14 + 72 days (app.) = 16.08.2014
85,000
Interest if settlement is done on 30.9.14
45
85,000 x 12% x = ` 1,258 (approx.)
365
If Babulal wants to save interest of ` 588, then he has to make the payment following days
before 30.09.2014:
= 588/1258 X 45 days (16.08.2014 to 30.09.2014) = 21 days earlier
Payment date, in the above case, will be 09.09.2014.

7.13 Accounting
Unit 2: Account Current
Question 1
What is meant by ‘Red-Ink interest’ in an Account Current? (2 Marks) (November, 2007) (PCC)
Answer
In an Account Current, interest is calculated on the amount of a bill from the date of
transaction to the closing date of the period concerned. In case the due date of the bill falls
after the closing date of the account, then no interest is allowed for that period. However, it is
customarily followed that interest from the date of closing to the due date is written in red ink
in the appropriate side of the Account Current. This interest is called Red-Ink Interest. This
Red-Ink interest is treated as negative interest.
Question 2
What is Account current? (2 Marks, May, 2008) (PCC)
Answer
Account current is a running statement of transactions between parties, maintained in the form
of a ledger account, for a given period of time and includes interest allowed or charged on
various items. It is prepared when transactions regularly take place between two parties. An
account current has two parties – one who renders the account and the other to whom the
account is rendered.
Question 3
Roshan has a current account with partnership firm. It has debit balance of ` 75,000 as on
01-07-2012. He has further deposited the following amounts:
Date Amount (`)
14-07-2012 1,38,000
18-08-2012 22,000
He withdrew the following amounts :
Date Amount (`)
29-07-2012 97,000
09-09-2012 11,000
Show Roshan's A/c in the ledger of the firm. Interest is to be calculated at 10% on debit
balance and 8% on credit balance. You are required to prepare current account as on 30th
September, 2012. (4 Marks, November 2013) (IPCC)

Answer
Roshan’s Current Account with Partnership firm (as on 30.9.2012)
Date Particulars Dr Cr Balance Dr. Days Dr Product Cr
or (`) Product
(`) (`) (`) Cr. (`)
01.07.12 To Bal b/d 75,000 75,000 Dr. 13 9,75,000
14.07.12 By Cash A/c 1,38,000 63,000 Cr. 15 9,45,000
29.07.12 To Self 97,000 34,000 Dr. 20 6,80,000
18.08.12 By Cash A/c 22,000 12,000 Dr. 22 2,64,000
09.09.12 To Self 11,000 23,000 Dr. 22 5,06,000
30.09.12 To Interest A/c 457 23,457 Dr.
30.09.12 By Bal. c/d 23,457
1,83,457 1,83,457 24,25,000 9,45,000
Interest Calculation:
On ` 24,25,000x 10% x 1/365 = ` 664
On ` 9,45,000 x 8% x 1/365 = (` 207)
Net interest to be debited = (` 457)
Note: The above current account has been prepared by means of product of balances method.
Question 4
From the following particulars prepare a current account∗, as sent by Mr. Ram to Mr. Siva as
on 31st October 2014 by means of product method charging interest @ 5% p.a.
2014 Particulars `
1st July Balance due from Siva 750
15th August Sold goods to Siva 1250
20th August Goods returned by Siva 200
22nd Sep Siva paid by cheque 800
15th Oct Received cash from Siva 500
∗
‘Current Account’ to be read as ‘Account Current’

7.15 Accounting
Answer
Siva in Account Current with Ram as on 31st Oct, 2014
Dr. Cr.
` Days Product ` Days Product
(`) (`)
01.07.14 To Bal. b/d 750 123 92,250 20.08.14 By Sales 200 72 14,400
Returns
15.8.14 To Sales 1,250 77 96,250 22.09.14 By Bank 800 39 31,200
31.10.14 To Interest 18.48 15.10.14 By Cash 500 16 8,000
By Balance 1,34,900
of Products
_____ ______ 31.10.14 By Bal. c/d 518.48 ______
2018.48 1,88,500 2018.48 1,88,500
5 1
Interest = ` 1,34,900 x × = ` 18.48
100 365

8
Self Balancing Ledgers
Question 1
What are the advantages of self-balancing ledger system? (4 Marks November, 2007)(PCC)
Answer
Following are the advantages of self-balancing ledger system:
(i) It fixes the responsibility on the ledger keeper who had to balance the ledger. The error
is localized.
(ii) Interim accounts can be prepared without personal ledger to be balanced.
(iii) The total amount due from debtors and total amount payable to suppliers and creditors is
readily available.
(iv) The maintenance of general ledger would be easy as the voluminous debtors and
creditors details are maintained in control accounts.
Question 2
From the following prepare General Ledger Adjustment account in Debtors Ledger and
Debtors Ledger Adjustment account in General Ledger:
`
Balance as on 1.4.2008
Debit balances in Debtors ledger 2,46,200
Credit balances in Debtors ledger 3,400
Transactions during the month of April, 2008
Credit sales 9,74,900
Sales return 21,700
Cash received from debtors 8,62,100
Discount allowed to debtors 39,200
Bills receivable received from debtors 51,200
Bills receivable dishonoured 3,500

8.2 Accounting
Bills payable given to suppliers 27,000

Credit balance in Debtors ledger on 30.4.2008 5,200
(8 Marks May, 2008) (PCC)
Answer
In Debtors Ledger
General Ledger Adjustment Account
Date Particulars ` Date Particulars `
1.4.2008 To Balance b/d 3,400 1.4.2008 By Balance b/d 2,46,200
1.4.2008 to To Debtors 1.4.2008 to By Debtors ledger
30.4.2008 ledger 30.4.2008 adjustment
adjustment A/c:
A/c:
Sales return 21,700 Sales 9,74,900
Cash B/R
received 8,62,100 dishonoured 3,500
Discount 30.4.2008 By Balance c/d 5,200
allowed 39,200
B/R received 51,200
30.4.2008 To Balance c/d 2,52,200
(Bal. fig.)
12,29,800 12,29,800
In General Ledger
Debtors Ledger Adjustment A/c
1.4.08 To Balance b/d 2,46,200 1.4.08 By Balance b/d 3,400
1.4.2008 To General ledger 1.4.2008 By General ledger
to 30.4.08 adjustment A/c: to 30.4.08 adjustment A/c:
Sales 9,74,900 Sales return 21,700
B/R Cash received 8,62,100
dishonoured 3,500
30.4.08 To Balance c/d 5,200 30.4.08 Discount
allowed 39,200
B/R received 51,200

Self Balancing Ledgers 8.3

(Bal.fig.)
12,29,800 12,29,800
Question 3
What is the difference between the Sectional and Self-balancing system?
(4 Marks June, 2009) (PCC)
Answer
(i) Under sectional balancing system only one trial balance is prepared in General Ledger
while under self balancing system, separate trial balance is prepared in each ledger.
(ii) Under sectional balancing system, Total Debtors account and Total Creditors account
are memorandum accounts and not the part of double entry system but under self
balancing system adjustment accounts are the parts of double entry system.
(iii) Under sectional balancing system, arithmetical accuracy of Sales Ledger and Bought
Ledger can be checked by preparing Total Debtors account and Total Creditors account
while under self balancing arithmetical accuracy of each ledger can be checked by
preparing trial balance of each ledger.
(iv) Under sectional balancing system, Total Debtors account and Total Creditors account
are opened in General Ledger while under Self Balancing System, adjustment accounts
are opened in General Ledger, Sales Ledger and bought ledger.
Question 4
From the following information furnished by X & Co., prepare Total Debtors Account.
Transactions for the month of March, 2009 `
(i) Sales (includes cash sales of ` 7,000) 68,000
(ii) Collections from debtors (cash) 57,000
(iii) Discount allowed 2,000
(iv) Bad debts written off 1,500
(v) Cheques received 10,000
(vi) Cheques dishonoured 2,000
(vii) Return inward 700
(viii) Bad debts written off – now recovered 500
(ix) Provision for doubtful debts 1,200
(x) Balance outstanding on 1.3.2009 (Receivables) 20,000
(4 Marks November, 2009) (PCC)

8.4 Accounting
Answer
Total Debtors Account
` `
To Balance b/d 20,000 By Discount allowed 2,000
To Sales 61,000 By Bank A/c 10,000
To Bank A/c (Cheques dishonoured) 2,000 By Cash A/c 57,000
By Bad debts A/c 1,500
By Sales return A/c 700
83,000 83,000
Question 5
Ujju Enterprise furnishes you the following information for the period October to December,
2009. You are requested to draw up Debtors Ledger Adjustment account in the General
Ledger:
(i) Total sales amounted to ` 2,20,000 including sale of old motor car for ` 10,000 (book
value ` 5,000). Total credit sales were 80% higher than the cash sales.
(ii) Cash collection from debtors amounted to 60% of the aggregate of the opening debtors
amounting to ` 40,000 and credit sales for the period. Debtors were allowed discount of
` 10,000.
(iii) Bills receivables drawn during the period totalled ` 20,000 of which one bill of
` 5,000 was dishonoured for non-payment as the party became insolvent and his estate
realized 50 paise in a rupee.
(iv) A sum of ` 3,000 was written off as bad debts, ` 7,000 was realized against bad debts
written off in earlier years and provision of ` 6,000 was made for doubtful debts.
(4 Marks November,2010) (IPCC)
Answer
In the books of Ujju Enterprise
Debtors Ledger Adjustment Account in the General Ledger
2009 ` 2009 `
Oct. 1 To Balance b/d 40,000 Oct. 1 to By General Ledger
Dec. 31 Adj. A/c:
Oct. 1 to To General Ledger Adj. A/c: Collection from 1,05,000
Dec.31 Sales (Refer W.N.) 1,35,000 debtors-bank
[60% of `

Bills Receivables 5,000 (40,000 +

dishonoured 1,35,000)]
Discount allowed 10,000
Bills receivables 20,000
Bad debts (`2,500 5,500
+ `3,000)
1,80,000 1,80,000
Note: No entries are to be made:
(a) For ` 7,000 realised against bad debts written off in earlier years, and
(b) For provision of ` 6,000 made for doubtful debts.
Working Note:
Calculation of credit sales :
`
Total trade sales (2,20,000 – 10,000) 2,10,000
⎛ 100 ⎞
Less: Cash sales ⎜ 2,10,000 × ⎟ (75,000)
⎜
⎝ (180 + 100 ) ⎟⎠
Question 6
On 1st October, 2010, the debit balances of debtors account is ` 77,500 in the books of
M/s Zee Ltd. Transactions during the 6 months ended on 31st March 2011 were as follows:
`
Total sales (including cash sales ` 14,000) 84,000
Payment received from debtors in cash 38,000
Bills receivable received 26,000
Discount allowed to customers for prompt payment 1,000
Bill receivable endorsed to suppliers 5,000
Bill receivables dishonoured 8,500
Noting charges on bill dishonoured 250
Goods rejected and returned back by the customer 2,550
Bad debts recovered (written off in 2009) 900
Interest debited for delay in payment 1,250

8.6 Accounting
You are required to prepare a Debtors Account for the period ending 31st March in the General
of M/s Zee Ltd. (4 Marks) (IPCC May, 2011)
Answer
Total Debtors account in the General Ledger of M/s Zee Ltd.
Date Particulars Amount Date Particulars Amount
` `
1.10.10 To Balance c/d 77,500 1.10.10 to By General Ledger
31.3.11 Adjustment A/c:
1.10.10 To General Ledger Cash collected 38,000
to Adjustment A/c:
31.3.11
Sales (84,000- 70,000 Bills Receivable A/c 26,000
14,000)
Bills receivable Discount allowed 1,000
(Bill dishonored) 8,500 Sales return 2,550
Bank (Noting 250 31.3.11 By Balance c/d 89,950
charges)
Interest 1,250
1,57,500 1,57,500
Working Note:
1. Bad debts of the year 2008-09 recovered in 2010-11 will not appear in the ‘Total Debtors
account. It will be credited to profit & loss account.
2. Bills receivables of ` 5,000 endorsed to the supplier will not be shown in the ‘Total
Debtors account because at the time of endorsement Supplier’s account will be debited
and Bills receivable account will be credited.
Question 7
M/s Ice Limited gives you the following information to find out Total Sales and Total
Purchases:
Debtors as on 01.04.2011 70,000
Creditors as on 01.04.2011 81,000
Bills Receivables received during the year 47,000
Bills Payable issued during the year 53,000
Cash received from customers 1,56,000

Cash paid to suppliers 1,72,000

Bad Debts recovered 16,000
Bills Receivables endorsed to creditors 27,000
Bills Receivables dishonoured by customers 5,000
Discount allowed by suppliers 7,000
Discount allowed to customers 9,000
Endorsed Bills Receivables dishonoured 3,000
Sales Return 11,000
Bills Receivable discounted 8,000
Discounted Bills Receivable dishonoured 2,000
Cash Sales 1,68,500
Cash Purchases 1,97,800
Debtors as on 31.03.2012 82,000
Creditors as on 31.03.2012 95,000

Answer
1. Total Sales = Cash sales + Credit sales
= ` 1,68,500 + ` 2,25,000 (W.N.1)= ` 3,93,500
2. Purchases = Cash Purchases + Credit Purchases
= ` 1,97,800 + ` 2,70,000 (W.N.2)
= ` 4,67,800
Working Notes:
1. Debtors Account
To Balance b/d 70,000 By Bills receivable 47,000
To Bills receivable dishonoured 5,000 By Cash 1,56,000
To Bills receivable dishonoured 3,000 By Discount allowed 9,000
(endorsed)
To Bills receivable dishonoured 2,000 By Sales return 11,000
(discounted)
To Credit sales (bal.fig.) 2,25,000 By Balance c/d 82,000
3,05,000 3,05,000

8.8 Accounting
2. Creditors Account
To Bills payable 53,000 By Balance b/d 81,000
To Cash 1,72,000 By Bills receivable 3,000
To Discount received 7,000 dishonoured (endorsed)
To Bills receivable 27,000 By Credit purchases (bal.fig.) 2,70,000
endorsed
To Balance c/d 95,000
3,54,000 3,54,000
Note: It is assumed that sales return is out of credit sales only.
Question 8
A business concern maintains self-balancing ledgers. On the basis of following information,
prepare General Ledger Adjustment Account in Debtors Ledger for the month of April, 2012.
(` )
Debit balances in Debtors Ledger on 01-04-2012 3,58,200
Credit balances in Debtors Ledger on 01-04-2012 9,400
Transactions during the month of April, 2012 are:
Total Sales (including Cash Sales, ` 1,00,000) 20,95,400
Sales Returns 33,100
Cash received from credit customers 17,25,700
Bills Receivable received from customers 95,000
Bills Receivable dishonoured 7,500
Cash paid to customers for returns 6,000
Transfers to Creditors Ledger 16,000
Credit balances in Debtors Ledger on 30-04-2012 9,800
Answer
IN DEBTORS LEDGER
GENERAL LEDGER ADJUSTMENT ACCOUNT
01.04.2012 To Balance b/d 9,400 1.4.2012 By Balance b/d 3,58,200

01.04.2012 To Debtors ledger 01.04.2012 By Debtors ledger

to adjustment A/c : to adjustment A/c :
30.4.2012 Cash received 17,25,700 30.4.2012 Credit sales 19,95,400
Sales Returns 33,100 Cash paid for returns 6,000
Bills receivable Bills receivable
received 95,000 dishonoured 7,500
Transfer to 16,000 30.04.2012 To Balance c/d 9,800
creditors ledger
30.04.2012 By Balance c/d
(bal.fig) 4,97,700
23,76,900 23,76,900
Question 9
M/s. Big Systematic Ltd. maintains self-balancing ledgers preparing control accounts at the
end of each calendar month.
On 3rd January, 2013 the accountant of the company located the following errors in the books
of account:
(i) An amount of ` 8,700 received from customer Mehra was credited to Mehta, another
customer.
(ii) The sales book for December, 2012 was undercast by ` 1,000.
(iii) Goods invoiced at ` 15,600 were returned to supplier, M/s Mega Ltd., but no entry was
made in the books for this return made on 28th December, 2012.
Pass the necessary Journal Entries to rectify the above mentioned errors.
Answer
Journal Entries
In the books of M/s Big. Systematic Ltd.
` `
(i) Mehta (In Sales/ Debtors Ledger) Dr. 8,700
To Mehra (In Sales/ Debtors Ledger) 8,700
(Being amount received from Mehra was wrongly credited
to Mehta, now rectified)
(ii) (a) Suspense Account (In Sales / Debtors Ledger) Dr. 1,000
To Sales Account (In General Ledger) 1,000

8.10 Accounting
(b) Sales/Debtors Ledger Adjustment Account Dr. 1,000

(In General Ledger)
To General Ledger Adjustment Account 1,000
(In Sales/ Debtors Ledger)
(Being rectification of the error resulting from under
casting of the Sales Book)
(iii) (a) M/s. Mega Ltd. A/c (In Creditors/Bought Ledger) Dr. 15,600
To Purchase Returns A/c (In General Ledger) 15,600
(b) Creditors/Bought Ledger Adjustment A/c Dr. 15,600
(In General Ledger)
To General Ledger Adjustment A/c 15,600
(In Creditors/Bought Ledger)
(Being goods returned to supplier not recorded earlier,
now recorded)
Question 10
From the following particulars, prepare the Creditors' Ledger Adjustment Account as would,
appear in the General Ledger of Mr. Sathish for the month of March 2014.
Date Particulars
1 Purchase from Mr. Akash ` 7,500
3 Paid ` 3000 after adjusting the initial advance in full to Mr. Akash
10 Paid ` 2,500 to Mr. Dev towards the purchases made in February in full.
12 Paid advance to Mr. Giridhar ` 6,000
14 Purchase goods from Mr. Akash ` 6,200
20 Returned goods worth ` 1,000 to Mr. Akash
24 Settled the balance due to Mr. Akash at a discount of 5%.
26 Goods purchased from Mr. Giridhar against the advance paid already
29 Purchased from Mr. Nathan ` 3,500
30 Goods returned to Mr. Prem 1,200. The goods were originally purchased form
cash in the month of February 2014.

Answer
In the General Ledger of Mr. Sathish for month of March, 2014
Creditors Ledger Adjustment Account
2014 ` 2014 `
March 1 To Balance b/d 4,500 March 1 By Balance b/d 2,500
(Advance to Akash) (Due to Mr. Dev)
March 31 To General Ledger March 31 By General Ledger
Adjustment A/c (In Adjustment A/c (in
Bought Ledger) Bought Ledger)
Bank (WN 2) 16,440 Purchases (WN 1) 23,200
Returns (Akash) 1,000
Discount 260
(5% of 5,200)
March 31 To Balance c/d
(Due to Nathan) 3,500
25,700 25,700
Working Notes:
(1) Purchases:
1.3.2013 Akash 7,500
14.3.2013 Akash 6,200
26.3.2013 Giridhar 6,000
29.3.2013 Nathan 3,500
23,200
(2) Payments:
3.3.2013 Akash 3,000
10.3.2013 Dev 2,500
12.3.2013 Giridhar 6,000
24.3.2013 Akash (95% of 5,200) 4,940
16,440
Note: The above answer is given on the basis that Mr. Prem will pay in cash for the goods
returned as the sale was on cash basis and was not recorded in Creditors Ledger Adjustment
account earlier.

9
Financial Statements of Not-For-Profit
Organisations
Note: All the answers in the Chapter have been given on the basis that the clubs metioned in
the questions are not registered under the Companies Act, 2013.
Question 1
Explain the accounting treatment of donation received for specific purpose in the case of
charitable society. (4 Marks, May 2007)(PCC)
Answer
Donations may have been raised either for meeting some revenue or capital expenditure;
those intended for the first mentioned purpose are credited directly to the Income and
Expenditure Account but others, if the donors have declared their specific intention, are
credited to special fund account and in the absence thereof, to the Capital Fund Account. If
any investments are purchased out of a special fund or an asset is acquired therefrom, these
are disclosed separately. Any income received from such investments or any donations
collected for a special purpose are credited to an account indicating the purpose and
correspondingly the expenditure incurred in carrying out the purpose of the fund is debited to
this account. On no account any such expense is charged to the Income and Expenditure
Account. The term "Fund" is strictly applicable to the amounts collected for a special purpose
when these are invested, e.g. Scholarship Fund, Prize Fund etc. In other cases, when the
amounts collected are not invested in securities or assets distinguishable from those
belonging to the institution, the word "Account" is more appropriate e.g. Building Account,
Tournament Account etc.
Question 2
Following is the Receipts and Payments Account of Mayur Club for the year ended 31st March,
2008:
Receipts ` Payments `
Opening balance (1.4.2007) Payments:
Cash on hand 39,100 Sports materials 3,04,500
Cash at bank 50,000 Salaries 3,15,000

Financial Statements of Not-For-Profit Organisations 9.2
Receipts: Equipment purchased on 1.10.2007 60,000

Subscriptions Bank fixed deposits on 31.3.2008 1,50,000
For the year 2006-07 18,000 Rent 1,48,500
For the year 2007-08 9,63,000 Ground maintenance 22,120
For the year 2008-09 4,500 Insurance 38,400
Interest on bank Stationery 3,450
Fixed deposits @10% 45,000 Sundry expenses 5,880
Closing balance as on 31.3.2008
Cash on hand 31,750
Cash at bank 40,000
11,19,600 11,19,600
Following additional information is provided to you:
(i) The club has 220 members. The annual subscription is ` 4,500 per member.
(ii) Depreciation to be provided on furniture at 10% p.a. and on sports equipment at 15% p.a.
(iii) On 31st March, 2008, stock of sports material in hand (after members use during the
year) is valued at ` 78,000 and stock of stationery at ` 3,150. Rent for 1 month is
outstanding. Unexpired insurance amounts to ` 9,600.
(iv) On 31st March, 2007 the club had the following assets:
Furniture ` 2,70,000
Sports equipment ` 1,80,000
Bank fixed deposit ` 4,50,000
Stock of stationery ` 1,500
Stock of sports material ` 73,500
Unexpired insurance ` 8,400
Subscription in arrear ` 22,500
Note: There was no liability on 31.3.2007.
You are required to prepare:
(i) Income and Expenditure Account; and
(ii) Balance Sheet as at 31st March, 2008.
(16 Marks, May 2008) (PCC)

9.3 Accounting
Answer
Mayur Club
(i) Income and Expenditure Account for the year ended 31.3.2008
Expenditure ` Income `
To Sports Material used By Subscription (W.N.2) 9,90,000
Opening stock 73,500 By Interest on fixed
deposit 45,000
3,78,000
Less: Closing stock 78,000 3,00,000
To Salaries 3,15,000
To Rent 1,48,500
Add:Outstanding
(W.N.6) 13,500 1,62,000
To Ground maintenance 22,120
To Insurance 38,400
Less: Unexpired on
31.3.08 9,600
28,800
Add: Unexpired on
1.4.07 8,400 37,200
To Stationery used
Opening stock 1,500
Add: Purchases 3,450
4,950
Less: Closing Stock 3,150 1,800
To Sundry expenses 5,880
To Depreciation on
Furniture 27,000
Sports equipment 31,500 58,500
To Excess of income
over expenditure 1,32,500
10,35,000 10,35,000

Balance Sheet as at 31st March, 2008

Capital fund: Equipments: Opening 1,80,000
balance
Opening balance 10,95,000 Add: Addition 60,000
(W.N.1)
Add: Excess of 2,40,000
income over Less: Depreciation
expenditure 1,32,500 12,27,500 (W.N.5) 31,500 2,08,500
Rent outstanding 13,500 Furniture: 2,70,000
(W.N.6)
Subscription received in Less: Depreciation 27,000 2,43,000
advance for 2008-09 4,500
Sports material 78,000
Stock of stationery 3,150
Fixed deposit in bank
(4,50,000 + 1,50,000) 6,00,000
Subscription in arrears:
For 2006-07 (W.N.3) 4,500
For 2007-08 (W.N.4) 27,000 31,500
Prepaid insurance 9,600
(unexpired)
Cash on hand 31,750
Cash at bank 40,000
12,45,500 12,45,500
Working Notes:
1. Balance Sheet as at 31.3.2007
Capital fund (Bal. fig.) 10,95,000 Sports equipment 1,80,000
Furniture 2,70,000
Sports materials 73,500
Fixed deposits in bank 4,50,000

9.5 Accounting
Subscription in arrears 22,500

(unexpired)
Cash on hand 39,100
Cash at bank 50,000
10,95,000 10,95,000
`
2. Income on account of subscription
220 members @ ` 4,500 each 9,90,000
3. Subscription still in arrears of 2006-2007
Opening balance of subscription in arrears (as on 1.4.2007) 22,500
Less: Arrears subscription of 2006-07 received during the year 2007-08 18,000
Subscription of 2006-07 still in arrears as on 31.3.2008 4,500
4. Subscription in arrear on 31.3.2008
Subscription for the year 2007-08 9,90,000
Less: Subscription received for the year 9,63,000
Subscription in arrears for 2007-08 27,000
5. Depreciation on sports equipment
On ` 1,80,000 @ 15% for full year 27,000
On ` 60,000 @ 15% for 6 months 4,500
Total 31,500
6. Outstanding rent of 2007-2008
` 1,48,500
Outstanding rent = × 1 month 13,500
11 months
Question 3
What is “Fund Based Accounting” under not-for-profit organisations?
(2 Marks, November 2008) (PCC)
Answer
Fund based accounting essentially involves preparation of financial statements fund-wise.
Not-for-profit organizations, particularly educational institutions, sometimes maintain separate
account or fund for any specific activities of the organization such as sports prizes,

refreshments, and in that cases presentation of information in Financial Statements is made

fund wise. In such cases, contribution and donations for income from and expenses on those
activities are not recorded in Income and Expenditure account but are directly adjusted in
Specific Fund account.
Question 4
Following is the Receipts and Payments Account of Nanoo Club for the year ended 31st
March, 2009:
Receipts Amount (` ) Payments Amount (` )
Opening balance: Salaries 1,20,000
Cash 10,000 Creditors 15,20,000
Bank 3,850 Printing and stationery 70,000
Subscription received 2,02,750 Postage 40,000
Entrance donation 1,00,000 Telephone and fax 52,000
Interest received 58,000 Repairs and maintenance 48,000
Sale of fixed assets 8,000 Glass and table linen 12,000
Miscellaneous income 9,000 Crockery and cutlery 14,000
Receipts at coffee room 10,70,000 Garden upkeep 8,000
Wines and spirits 5,10,000 Membership fees 4,000
Swimming pool 80,000 Insurance 5,000
Tennis court 1,02,000 Electricity 28,000
Closing balance:
Cash 8,000
Bank 2,24,600
21,53,600 21,53,600
Following additional information is provided to you:
(i) Assets and liabilities as on 31.3.2008 were as follows:
`
Fixed assets 5,00,000
Stock 3,80,000
Investment in 12% Government securities 5,00,000
Outstanding subscription 12,000
Gratuity fund 1,50,000

9.7 Accounting

Subscription received in advance 15,000
Entrance donation received pending membership 1,00,000
(ii) Subscription received in advance as on 31.3.09 was ` 18,000.
(iii) Outstanding subscription as on 31.3.09 was ` 7,000.
(iv) Outstanding expenses as on 31.3.09 are:
Salaries : ` 8,000
Electricity : ` 15,000
(v) 50% of the entrance donation was to be capitalized. There was no pending membership
as on 31.3.09.
(vi) The cost of assets sold as on 1.4.08 was ` 10,000.
(vii) Depreciation was provided @ 10% p.a. on fixed assets on written down value basis.
(viii) A sum of ` 20,000 received in October, 2008 as entrance donation from an applicant was
to be refunded, as he has not fulfilled the requisite membership qualification. The refund
was made on 3.6.09.
(ix) Purchases made during the year 2008-09 amounted to ` 15,00,000.
(x) The value of closing stock as on 31.3.09 was ` 2,10,000.
(xi) The Club as a matter of policy charges off to Income and Expenditure account, all
purchases made on account of crockery, cutlery, glass and linen in the year of purchase.
(i) Income and Expenditure account for the year ended 31st March, 2009.
(ii) Balance Sheet as on 31st March, 2009. (20 Marks, June 2009) (PCC)
Answer
Income and Expenditure Account of Nanoo club
Expenditure Amount Income Amount

(` ) (` )
To Salaries (W.N.8) 1,28,000 By Subscriptions (W.N.2) 1,94,750
To Printing and stationery 70,000 By Entrance donation (W.N.3) 90,000
To Postage 40,000 By Interest (W.N.4) 60,000
To Telephone & fax 52,000 By Miscellaneous income 9,000

To Repairs and maintenance 48,000 By Profit from operations (W.N.6) 92,000

To Glass and table linen 12,000 By Excess of expenditure over
Crockery and cutlery 14,000 income transferred to capital
fund (deficit) 30,250
To Garden upkeep 8,000
To Membership fees 4,000
To Insurance (W.N.5) 6,000
To Electricity charges (W.N.8) 43,000
To Loss on sale of assets 2,000
(10,000 – 8,000)
To Depreciation (W.N.9) 49,000
4,76,000 4,76,000
Balance Sheet of Nanoo Club
as on 31st March, 2009
Liabilities Amount Assets Amount

(` ) (` )
Capital fund(W.N.10) 10,89,600 Fixed assets (W.N.9) 4,41,000
Gratuity fund 1,50,000 Stock 2,10,000
Sundry creditors (W.N.7) 92,000 Investments in 12%
Subscription received in advance 18,000 Government securities 5,00,000
Entrance donation refundable 20,000 Subscription outstanding 7,000
Outstanding salary 8,000 Interest accrued (W.N.4) 2,000
Outstanding electricity charges 15,000 Bank 2,24,600
Cash 8,000
13,92,600 13,92,600
Working Notes:
(1) Opening Balance Sheet
as on 1st April, 2008
(` ) (` )
Capital fund (Bal.Fig.) 10,29,850 Fixed assets 5,00,000

9.9 Accounting
Sundry creditors 1,12,000 Stock 3,80,000

Subscription received in advance 15,000 Investment in 12%
Government securities 5,00,000
Entrance donation received in Subscription outstanding 12,000
advance (pending membership) 1,00,000 Prepaid insurance 1,000
Gratuity fund 1,50,000 Cash 10,000
Bank 3,850
14,06,850 14,06,850
(2) Subscription
`
Subscription received during the year 2,02,750
Add: Outstanding subscription on 31.3.2009 7,000
Add: Received in advance as on 1.4.2008 15,000
2,24,750
Less: Outstanding subscription as on 1.4.2008 (12,000)
Less: Received in advance as on 31.3.2009 (18,000)
1,94,750
(3) Entrance Donation
`
Entrance Donation received during the year 1,00,000
Add: Received in Advance as on 1.4.2008 1,00,000
2,00,000
Less: Refundable to Ineligible Member 20,000
1,80,000
Less:50% Capitalized 90,000
90,000
(4) Interest received
`
Interest on ` 5,00,000 @ 12% p.a. 60,000
Less: Interest received during the year 58,000
Interest accrued as on 31.3.2009 2,000
Interest credited to Income and Expenditure A/c 60,000

(5) Insurance
`
Insurance paid during the year 5,000
Add: Prepaid Insurance as on 1.4.2008 1,000
6,000
(6) Profit from Operations

`
Cost of Goods sold
Opening Stock as on 1.4.2008 3,80,000
18,80,000
Less: Closing Stock 2,10,000
Cost of Goods Sold (A) 16,70,000
Receipts from operations
Receipts from Coffee Room 10,70,000
Receipts from Wines & Sprits 5,10,000
Receipts from Swimming Pool 80,000
Receipts from Tennis Court 1,02,000
Total of Receipts (B) 17,62,000
Profit from Operations (B-A) 92,000
(7) Sundry Creditors

`
Opening Balance as on 1.4.2008 1,12,000
Add: Purchases made during the year 15,00,000
16,12,000
Less:Payment made during the year 15,20,000
Closing Balance as on 31.3.2009 92,000

9.11 Accounting
(8) (a) Salary
`
Salary paid as on 31.3.2009 1,20,000
Add: Outstanding Salary as on 31.3.2009 1,28,000
8,000
(b) Electricity charges

Electricity paid during the year 2008-09 28,000
Add: Outstanding Electricity charges as on 31.3.2009 43,000
15,000
(9) Fixed Assets
`
Fixed Assets as per Trial Balance 5,00,000
Less: W.D.V. of Assets sold 10,000
4,90,000
Less: Depreciation @ 10% on ` 4,90,000 49,000
Fixed Assets as on 31.3.2009 4,41,000
(10) Capital fund

`
Capital fund as on 31.3.2008 10,29,850
Add: Entrance donation capitalized 90,000
11,19,850
Less: Deficit 30,250
10,89,600
Question 5
Omshanti Club has 500 members with annual fee of ` 1,000 per member. At the end of the
accounting year, accountant noticed that 40 members have not paid annual fee and 70
members had paid fee in advance. Help the accountant to compute cash receipts of annual
fee for the year. (2 Marks each, November 2009) (IPCC)

Answer
Computation of cash receipts of annual fee for the year `
Total fee receivable during the year (500 members × ` 1,000) 5,00,000
Less: Fee not received (40 members × ` 1,000) (40,000)
4,60,000
Add: Fee received in advance (70 members × ` 1,000) 70,000
Cash received during the year towards annual fee 5,30,000
Question 6
The Income and Expenditure Account of City Sports Club for the year ended 31st March, 2009
was as follows:
Expenditure Amount Income Amount (` )
(` )
To Salaries 1,20,000 By Subscriptions 1,60,000
To Printing and Stationery 6,000 By Entrance Fees 10,000
To Rent 12,000 By Contribution for Annual dinner 20,000
To Repairs 10,000 By Profit on Annual Sports meet 20,000
To Sundry Expenses 8,000
To Annual Dinner Expenses 30,000
To Interest to Bank 6,000
To Depreciation on Sports 6,000
equipment
To Excess of Income over
Expenditure 12,000
2,10,000 2,10,000
The above account had been prepared after the following adjustments:
`
Subscriptions outstanding on 31.03.2008 12,000
Subscriptions received in advance on 31.03.2008 9,000
Subscriptions received in advance on 31.03.2009 5,400
Subscriptions outstanding on 31.03.2009 15,000
Salaries outstanding at the beginning and at the end of the financial year were ` 8,000 and
` 10,000 respectively. Sundry expenses included prepaid insurance expenses of ` 1,200.

9.13 Accounting
The Club owned a freehold ground valued ` 2,00,000. The Club has sports equipment on
01.04.2008 valued at ` 52,000. At the end of the year, after depreciation, the sports
equipment amounted to ` 54,000. The Club raised a loan of ` 40,000 from a bank on
01.01.2008, which was unpaid till 31.03.2009. On 31.03.2009, cash in hand was ` 32,000.
Prepare Receipts and Payments account of the Club for the year ended 31st March, 2009 and
Balance Sheet as on that date. (10 Marks, November 2009) (IPCC)
Answer
City Sports Club
Receipt and Payments Account for the year ended 31st March, 2009
Receipts Amount Payments Amount
(`) (`)
To Balance b/d (Bal. Fig.) 27,800 By Salaries:
To Subscription: for 2007-2008 8,000
for 2007-2008 12,000 for 2008-2009 1,10,000
for 2008-2009 (W.N.3) 1,36,000 By Printing and Stationery 6,000
for 2009-2010 5,400 By Rent 12,000
To Entrance Fees 10,000 By Repairs 10,000
To Contribution for Annual 20,000 By Sundry Expenses 9,200
Dinner (8,000 + 1,200)
To Profit on Annual Sports 20,000∗ By Annual Dinner 30,000
Meet Expenses
By Interest to Bank 6,000
By Sports Equipment 8,000
(W.N.2)
2,31,200 2,31,200
Liabilities Amount Amount Assets Amount Amount
(` ) (` ) (` ) (` )
Capital Fund (W.N.1) 2,34,800 Freehold Ground 2,00,000
Add: Excess of Sports Equipment 52,000
income over Add: Additions
expenditure during the year (Bal. 8,000
12,000 2,46,800 Fig.) 60,000
∗
It is assumed that the profit on annual sports meet has been realized in cash.

Bank Loan 40,000 Less: Depreciation (6,000) 54,000

Outstanding Salaries 10,000 Subscription in 15,000
Arrear
Subscription in 5,400 Prepaid Insurance 1,200
Advance
Cash in hand 32,000
3,02,200 3,02,200
Working Notes:
(1) Opening Balance of Capital Fund:
` `
Capital Fund (Bal. Fig.) 2,34,800 Freehold Ground 2,00,000
Bank Loan 40,000 Sports Equipment 52,000
Outstanding Salaries 8,000 Subscription in Arrear 12,000
Subscription in Advance 9,000 Cash in hand 27,800
2,91,800 2,91,800
(2) Sports Equipment Account
` `
To Balance b/d 52,000 By Depreciation Account 6,000
To Bank Account 8,000 By Balance c/d 54,000
60,000 60,000
(3) Subscription received during 2008-09
` `
Subscription for 2008-09 1,60,000
Less: Subscription outstanding as on 31.3.09 15,000
Less: Subscription received in advance as on 31.3.08 9,000 24,000
1,36,000
Question 7
On the basis of the following informations, prepare Income and Expenditure Account for the
year ended 31st March, 2010 :
Receipts and Payments Account for the year ended 31st March, 2010

9.15 Accounting
To Cash in hand (opening) 1,300 By Salaries 2,58,000
To Cash at bank (opening) 3,850 By Rent 71,500
To Subscriptions 4,94,700 By Printing & stationery 3,870
To Interest on 8% Government bonds 4,000 By Conveyance 10,600
To Bank interest 160 By Scooter purchased 50,000
By 8% Government bonds 1,00,000
By Cash in hand (closing) 840
By Cash at bank (closing) 9,200
5,04,010 5,04,010
(i) Salaries paid includes ` 6,000 paid in advance for April, 2010. Monthly salaries paid
were ` 21,000.
(ii) Outstanding rent on 31st March, 2009 and 31st March, 2010 amounted to ` 5,500 and
` 6,000 respectively.
(iii) Stock of printing and stationery material on 31st March, 2009 was ` 340; it was ` 365 on
31st March, 2010.
(iv) Scooter was purchased on 1st October, 2009. Depreciation @ 20% per annum is to be
provided on it.
(v) Investments were made on 1st April, 2009.
(vi) Subscriptions due but not received on 31st March, 2009 and 31st March, 2010 totalled
` 14,000 and ` 12,800 respectively. On 31st March, 2010, subscriptions amounting to
` 700 had been received in advance for April, 2010. (8 Marks, May 2010) (IPCC)
Answer
Income and Expenditure Account for the year ended 31st March, 2010
To Salaries (W.N.1) 2,52,000 By Subscription (W.N.6) 4,92,800
To Rent (W.N.2) 72,000 By Interest on 8% Government 8,000
To Printing and stationery (W.N.3) 3,845 bonds (W.N.5)
To Conveyance 10,600 By Bank interest 160
To Depreciation on Scooter (W.N.4) 5,000
To Surplus i.e. excess of income
over expenditure 1,57,515
5,00,960 5,00,960

Working Notes:
`
1. Salaries paid 2,58,000
Less: Salary paid in advance for April, 2010 6,000
Salaries for the year 2,52,000
2. Rent paid 71,500
Add: Outstanding rent as on 31.3.2010 6,000
77,500
Less: Outstanding rent as on 31.3.2009 5,500
Rent for the year 2009-2010 72,000
3. Printing and stationery 3,870
Add: Stock as on 31.3.2009 340
4,210
Less: Stock as on 31.3.2010 365
Printing and stationery consumed during the year 2009-2010 3,845
4. 20 6
Depreciation on scooter = ` 50,000 × × = ` 5,000
100 12
5. Interest on Government bonds received 4,000
Add: Interest due but not received 4,000
Interest income for the year 2009-2010 8,000
6. Subscription received 4,94,700
Add: Accrued subscription as on 31.3.2010 12,800
5,07,500
Less: Accrued subscription as on 31.3.2009 14,000
Unearned subscription for April, 2010 700 (14,700)
Income for the year 4,92,800
Question 8
The Young Trust runs a Charitable Hospital and a Dispensary. The following information is
available for the year ended 31st March, 2009 from the books of accounts:
Dr. Cr.
` `
Capital fund 9,00,000
Donations received during the year 6,00,000

9.17 Accounting
Recovery of the rent 2,75,000

Fee received from patients 3,00,000
Recovery of food supplies 1,40,000
Surgical equipments 4,55,000
Building & operation theatres 3,20,000
Consumption in the hospital of:
Medicines 1,20,000
Food stuff 90,000
Chemicals 30,000
Closing stock of hospital
Medicines 20,000
Food stuff 4,000
Chemicals 1,000
Sales of medicines (dispensary) 3,10,000
Opening stock of medicines (dispensary) 55,000
Purchase of medicines (dispensary) 3,00,000
Salaries:
Administrative staff 30,000
Doctors/Nurses 1,50,000
Assistant at the dispensary 15,000
Electricity & power charges:
Hospital 1,05,000
Dispensary 2,000
Furniture & equipments 80,000
Ambulance 30,000
Postage & telephone expenses less recovery 26,000
Subscription to medical journals 21,000
Ambulance maintenance charges less recovery 800
Consumption of bed sheets 90,000
Fixed deposits made on 01-04-2008 for three years at interest
@ 11% p.a. 5,00,000
Cash & bank balances 41,300
Sundry debtors (dispensary) 60,500
Sundry creditors (dispensary) 41,000
Remuneration to trustees, trust office expenses etc. 21,000

(a) The dispensary supplied medicines to the hospital worth ` 60,000, for which no
adjustment was made in the books.
(b) The closing stock of the medicines was ` 40,000 at the dispensary.
(c) The stock of medicines on 31st March, 2009 at the hospital included ` 4,000 worth of
medicines belonging to the patients, which has not been considered while arriving at the
figure of consumption of medicines.
(d) The donations were received towards Corpus of the Trust.
(e) On 15th August, 2008, surgical equipments were donated having market value of
` 40,000.
(f) The hospital is to receive the grant of 25% of the amount spent on treatment of the poor
patients from the Red Cross Society. Such expenditure was ` 50,000.
(g) Out of the fee recovered from the patients, 10% is to be given to the Specialist retained
by the Hospital.
(h) Depreciation on the assets on the closing balances:
Surgical Equipments @ 20%
Building @ 5%
Furniture & Equipments @ 10%
Ambulance @ 30%
(i) Income and Expenditure Account of the Hospital, Dispensary and Trust.
(ii) Statement of Affairs of the Trust for the year ended 31st March, 2009.
Answer
Income & Expenditure Account of Dispensary
Particulars Amount Particulars Amount
` `
To Opening stock of medicines 55,000 By Sales of medicine 3,10,000
To Purchase of medicines 3,00,000 By Supply of medicines 60,000
To Salaries to assistants 15,000 to hospital
To Electricity & power charges 2,000 By Closing stock of 40,000
To Surplus transferred to trust income medicines
& expenditure account (Bal. Fig.) 38,000
4,10,000 4,10,000

9.19 Accounting
Income & Expenditure Account of Hospital

` `
To Consumption of: By Fees received from 3,00,000
Medicines (W.N.1) 1,84,000 patients
Food stuff 90,000 By Recovery for rent 2,75,000
Chemicals 30,000 3,04,000 By Recovery of food 1,40,000
supplies
To Salaries: By Ambulance maintenance
Admn. staff 30,000 charges less recovery
Doctors & nurses 1,50,000 1,80,000 By Grant receivable 800
To Electricity & power charges 1,05,000 from Red Cross Society
To Subscription to medical (25% of ` 50,000) 12,500
journals 21,000
To Consumption of bed sheets 90,000 By Deficit transferred
To Retainership of specialists to trust income & 1,33,700
outstanding (W.N.2) 30,000 expenditure account
To Depreciation on:
Surgical equipments 99,000
Building 16,000
Furniture & fixtures 8,000
Ambulance 9,000 1,32,000
8,62,000 8,62,000
Income & Expenditure Account of the Young Trust
` `
To Deficit from hospital 1,33,700 By Surplus from dispensary 38,000
To Postage & telephone expenses By Interest accrued on
less recovery 26,000 fixed deposits 55,000
To Remuneration to trustees, trust 21,000 By Deficit
office expenses etc. (Excess of expenditure
over income) 87,700
1,80,700 1,80,700

Statement of Affairs of Young Trust as on 31st March, 2009

Amount Amount
Capital fund: Building 3,20,000
Opening balance 9,00,000 Less: Depreciation 16,000 3,04,000
Add: Donations: Surgical equipment 4,55,000
Cash 6,00,000 Add: Donation 40,000
Surgical 4,95,000
equipment 40,000 Less: Depreciation (99,000) 3,96,000
15,40,000 Furniture 80,000
Less: Deficit 87,700 14,52,300 Less: Depreciation (8,000) 72,000
Sundry creditors 41,000 Ambulance 30,000
(dispensary) Less: Depreciation (9,000) 21,000
Outstanding Stock:
retainership to Medicines:
specialist (W.N.2) 30,000 Dispensary 40,000
Hospital 16,000
(20,000 – 4,000)
Food stuff
Hospital 4,000
Chemicals 1,000 61,000
Sundry debtors
(Dispensary) 60,500
Grant receivable
from Red Cross
Society 12,500
Fixed deposits 5,00,000
Interest accrued 55,000
Cash & bank
balance 41,300
15,23,300 15,23,300
Working Notes:
1. Consumption of medicines in hospital:
`
Medicines 1,20,000
Supplies received from dispensary 60,000

9.21 Accounting
Medicines in stock belonging to patients 4,000

Total 1,84,000
2. Calculation of fee given to specialist:
10% of ` 3,00,000 = ` 30,000
Note: It is presumed that surgical equipment donated on 15th August 2008 was not
included in the closing balance of surgical equipments as on 31st March, 2009.
Question 9
The following is the Receipt and Payment Account of Park View Club in respect of the year
Receipt Amount (`) Payments Amount (`)
To Balance b/d 1,02,500 By Salaries 2,08,000
To Subscriptions∗ By Stationery 40,000
2009-10 4,500 By Rent 60,000
2010-11 2,11,000 By Telephone expenses 10,000
2011-12 7,500 2,23,000 By Investment 1,25,000
To Profit on sports meet 1,55,000 By Sundry expenses 92,500
To Income from investments 1,00,000 By Balance c/d 45,000
5,80,500 5,80,500
(1) There are 450 members each paying an annual subscription of ` 500. On 1st April, 2010
outstanding subscription was ` 5,000.
(2) There was an outstanding telephone bill for ` 3,500 on 31st March, 2011.
(3) Outstanding sundry expenses as on 31st March, 2010 totalled ` 7,000.
(4) Stock of stationery:
On 31st March, 2010 ` 5,000
On 31st March, 2011 ` 9,000
(5) On March, 2010 building stood in the books at ` 10,00,000 and it was subject to
31st
depreciation @ 5% per annum.
(6) Investment on 31st March, 2010 stood at ` 20,00,000.
∗
In the questions paper, the years have been wrongly printed as 2008-09 (instead of 2009-10), 2009-
10 (instead of 2010-11) and 2010-11 (instead of 2011-12). However, in the question given above,
these corrections have been incorporated.

(7) On 31st march, 2011, income accrued on the investments purchased during the year
amounted to ` 3,750.
Prepare an Income and Expenditure Account for the year ended 31st March, 2011 and the
Balance Sheet as at that date (16 Marks, May 2011) (IPCC)
Answer
Park View Club
Income and Expenditure Account
for the year ending on 31st March 2011
(`) (`)
To Salaries 2,08,000 By Subscriptions (W.N. 2) 2,25,000
To Stationery consumed (W.N.3) 36,000 By Profit on sports meet 1,55,000
To Rent 60,000 By Income on investments 1,00,000
To Telephone expenses 10,000 Add: Income accrued 3,750 1,03,750
Add: Outstanding on 31.3.11 3,500 13,500
To Sundry expenses 92,500
Less: Outstanding on 31.3.10 (7,000) 85,500
To Depreciation of building 50,000
To Surplus (excess of income over
expenditure)
30,750
4,83,750 4,83,750
Balance Sheet as at 31st March 2011

(`) (`)
Capital fund (W.N.1) 31,05,500 Outstanding subscriptions 14,500
Add: Surplus 30,750 31,36,250 Investment
Subscriptions received in advance 7,500 (20,00,000+1,25,000) 21,25,000
Outstanding telephone bills 3,500 Add: Interest accrued on
investments 3,750 21,28,750
Building 10,00,000
Cash balance 45,000
31,47,250 31,47,250

9.23 Accounting
Working Notes:
(1) Balance Sheet as at 31st March 2010
(`) (`)
Outstanding sundry expenses 7,000 Building 10,00,000
Capital fund (Bal.fig.) 31,05,500 Investments 20,00,000
Cash balance 1,02,500
Outstanding subscriptions 5,000
31,12,500 31,12,500
(2) Calculation of subscriptions accrued during the year
Subscription A/c
(`) (`)
To Outstanding Subscriptions 5,000 By Cash A/c 2,23,000
(as on 1.4.10) By Outstanding subscriptions
To Income & Expenditure A/c 2,25,000 (as on 31.3.11) (Bal.fig.)
14,500
To Subscriptions received in
advance for 2011-12 7,500
2,37,500 2,37,500
(3) Calculation of stationery consumed during the year
`
Stock of stationery as on 31 March, 2010 5,000
Add: Purchased during the year 2010-11 40,000
45,000
Less: Stock of stationery as on 31st March, 2011 (9,000)
Stationery consumed 36,000
Question 10
Bear Bar club was registered in a city and the accountant prepared the following Receipts and
Payments Account for the year ended 31st March, 2011 and showed a deficit of ` 14,520.


` `
Subscriptions 62,130 Premises 30,000
Fair receipts 7,200 Honorarium to Secretary 12,000
Variety show receipt (net) 12,810 Rent 2,400
Interest 690 Rates & taxes 3,780
Bar collection 22,350 Printing & stationary 1,410
Excess cash spent 1,000 Sundry expenses 5,350
Deficit 14,520 Wages 2,520
Fair expenses 7,170
Bar purchases payments 17,310
Repair 960
New car (less proceeds of old car ` 9,000) 37,800
1,20,700 1,20,700
The following additional information are:
01-04-2010 31-03-2011
Cash in hand 450 -
Bank balances as per pass book 24,690 10,440
Cheque issued but not presented - for sundry expenses 270 90
Subscriptions due 3,600 2,940
Premises at cost 87,000 1,17,000
Accumulated depreciation on premises 56,400 -
Car at cost 36,570 46,800
Accumulated depreciation on car 30,870 -
Bar stock 2,130 2,610
Creditors for the bar purchases 1,770 1,290
Cash excess spent represent honorarium to secretary not withdrawn due to cash deficit. His
annual honorarium is ` 12,000.
Depreciation on premises and car is to be provided at 5% and 20% on written down value
method.
You are required to prepare the correct Receipts and Payments Account, Income and
Expenditure Account and Balance Sheet as on 31st March, 2011.

9.25 Accounting
Answer
In the books of Bear Bar Club
Receipts & Payments Account for the year ended 31.03.2011
` `
To Balance b/d By Honorarium to Secretary 11,000
Cash in hand 450 (12,000 – 1,000)
Bank (W.N.6) 24,420 24,870 By Rent 2,400
To Subscriptions 62,130 By Rates & taxes 3,780
To Fair receipts 7,200 By Printing & stationery 1,410
To Variety show receipts 12,810 By Sundry expenses 5,350
To Interest 690 By Wages 2,520
To Bar collection 22,350 By Fair expenses 7,170
To Car sold (old) 9,000 By Bar purchases 17,310
By Repairs 960
By Premises 30,000
By Car (37,800 + 9,000) 46,800
By Balance c/d
Bank (W.N.6) 10,350
1,39,050 1,39,050
Income & Expenditure Account
` `
To Honorarium to secretary 12,000 By Subscription 62,130
To Rent 2,400 Less: Outstanding as on 1.4.10 (3,600)
To Rates & taxes 3,780 Add: Outstanding as on 1.3.11 2,940 61,470
To Printing & stationery 1,410 By Fair receipts 7,200
To Sundry expenses 5,350 Less: Fair expenses (7,170) 30
To Wages 2,520 By Variety show 12,810
To Repairs 960 By Interest 690
To Depreciation on: By Profit from bar (W.N.3) 6,000
Premises (1,530+1,500) 3,030 By Profit on sale of car (W.N.5) 3,300

Car 9,360
To Surplus (excess of
income over expenditure) 43,490
84,300 84,300
Balance Sheet as on 31.03.2011
` `
Capital fund Premises 87,000
Opening balance (W.N.1) 65,130 Add: Addition in the year 30,000
Add: Surplus 43,490 1,08,620 1,17,000
Sundry creditors 1,290 Less: Accumulated
Outstanding Honorarium 1,000 depreciation (W.N.4) (59,430) 57,570
Car 36,570
Add: Addition in the year 46,800
83,370
Less: Book value of the
car sold (36,570)
Less: Depreciation of
new car (9,360) 37,440
Bar stock 2,610
Subscription due 2,940
Cash at bank (W.N.6) 10,350
1,10,910 1,10,910
Working Notes:
1. Balance Sheet as on 31.03.2010
` `
Capital fund (bal. fig.) 65,130 Premises 87,000
Sundry creditors for bar 1,770 Car 36,570
Accumulated depreciation on Bar stock 2,130
Premises 56,400 Subscription due 3,600
Car 30,870 87,270 Cash at bank (W.N.6) 24,420
Cash in hand 450
1,54,170 1,54,170

9.27 Accounting
2. Creditors for Bar Purchases

` `
To Bank 17,310 By Balance b/d 1,770
To Balance c/d 1,290 By Purchases (Bal. fig.) 16,830
18,600 18,600
3. Trading Account (of Bar)
` `
To Opening stock 2,130 By Bar collections 22,350
To Purchases (W.N.2) 16,830 (Cash)
To Profit (Bal. fig.) 6,000 By Closing stock 2,610
24,960 24,960
4. Accumulated Depreciation on Premises

`
Opening Balance 56,400
Add: Depreciation on old premises [(87,000 – 56,400) × 5%] 1,530
Depreciation on new premises (30,000 × 5%) 1,500
59,430
5. Profit on sale of car

` `
Sales price of a car 9,000
Less: Book value of old car sold 36,570
Less: Accumulated depreciation (30,870) (5,700)
Profit on sale 3,300
6. Bank balance as per cash book
1.4.2010 31.3.2011
` `
Bank balance as per Pass book 24,690 10,440
Less: Cheque issued but not presented for payment (270) (90)
Bank balance as per cash book 24,420 10,350

Question 11
From the following Income & Expenditure A/c of Premium Sports Club for the year ended
31st March, 2012, you are required to prepare Receipts & Payment A/c for the year ended 31 st
March, 2012 and Balance Sheet as on that date:
(`) (`)
To Rent 2,16,000 By Entrance Fee 1,20,000
To Printing & Stationery 28,000 By Profit on sale of Sports
To Postage & Telephone 41,600 Material 5,500
To Membership Fee 3,200 By Interest on 8%
To Electricity Charges 38,500 Government Bonds 12,000
To Garden Upkeep 19,300 By Sale of Old Newspaper 11,600
To Sports Material Utilized 62,800
To Repairs & Maintenance 18,700
To Depreciation 13,000
To Miscellaneous Expenses 5,700
To Surplus carried to Capital
Fund 3,500
Total 5,69,100 Total 5,69,100
The following additional information is provided to you:
(a)
Balances as Balances as
on 01.04.2011 on 31.03.2012
Fixed Assets 2,40,000 ?
Bank Balance 8,300 ?
Stock of Sports Material 43,450 35,670
Outstanding Subscription 10,200 5,700
Subscription received in advance 2,400 4,900
8% Government Bonds 1,50,000 1,50,000
Outstanding Salaries 16,000 14,300

9.29 Accounting
Outstanding Rent 21,000 15,000

Advance for Stationery 1,350 1,550
Outstanding Repairs & Maintenance 1,200 Nil
Creditors for purchase of Sports Material 3,400 4,200
(b) Some of Fixed Assets were purchased on 01.10.2011 and depreciation is to be charged
@ 5% p.a.
(c) Sports Material worth ` 72,000 was purchased on credit during the year.
(d) The Club became member of State Table Tennis Association on 01.01.2012 when it paid
fee up to 31.12.2012.
(e) 50% of Entrance Fee is to be capitalized.
(f) Interest on 8% Government Bonds was received for two quarters only.
(g) A Fixed Deposit of ` 80,000 was made on 31st March, 2012. (16 Marks, May 2012) (IPCC)
Answer
Receipts and Payments Account of Premium Sports Club
To Cash at bank (opening) 8,300 By Salaries (W.N.6) 1,20,500
To Subscription (W.N.1) 4,27,000 By Rent (W.N.7) 2,22,000
To Entrance fee (W.N.2) 2,40,000 By Printing and stationary 28,200
To Interest on 8% Government (W.N.8)
Bond (W.N.3) 6,000 By Postage and telephone 41,600
To Sale of old Newspaper 11,600 By Membership fee (W.N.9) 12,800
To Sale of Sports Material 22,480 By Electricity charges 38,500
(W.N.4) By Garden upkeep 19,300
By Payment to creditors for 71,200
sports material (W.N.5)
By Purchase of Fixed assets 40,000
(W.N.10)
By Repairs and Maintenance 19,900
(W.N.11)
By Misc. expenses 5,700
By Fixed Deposit made 80,000
By Cash at bank (closing)
(bal.fig.) 15,680
7,15,380 7,15,380

Balance Sheet of Premium Sports Club

Liabilities ` ` Assets ` `
Capital fund: Fixed Assets 2,40,000
Opening balance 4,09,300 Add: Additions 40,000
(W.N.12) (W.N.10)
Add: Surplus 3,500 4,12,800 2,80,000
Entrance fee 1,20,000 Less: Depreciation 13,000 2,67,000
Subscription 4,900 Fixed Deposit 80,000
received in advance Investments in 8%
Outstanding expenses Government Bonds 1,50,000
Salary 14,300 Stock of sports 35,670
Rent 15,000 29,300 material
Creditors for 4,200 Subscription
purchase of sports receivable 5,700
material Membership fee
paid in advance 9,600
Prepaid printing and
stationary charges 1,550
Outstanding interest
on 8% Govt. Bond 6,000
Cash at bank 15,680
5,71,200 5,71,200
Working Notes:
1. Subscription received during the year
`
Subscription for the year ended 31st March, 2012 4,20,000
Less: Subscription receivable on 31.3.2012 5,700
Less: Subscription received in advance on 1.4.2011 2,400 (8,100)
4,11,900
Add: Subscription receivable on 1.4.2011 10,200
Add: Subscription received in advance on 31.3.2012 4,900 15,100
4,27,000
2. Entrance Fee received during the year
Entrance fee as per Income and Expenditure Account ` 1,20,000
Add: Capitalised entrance fee (50%) ` 1,20,000
` 2,40,000

9.31 Accounting
3. Interest on 8% Government Bond

`
Interest as per Income and Expenditure Account 12,000
Less: Outstanding interest for 2 quarters [12,000x (6/12)] (6,000)
6,000
4. Sales price of Sports Material sold
`
Stock of Sports Material on 1.4.2011 43,450
Add: Purchase of Sports Material during the year 72,000
1,15,450
Less: Stock of Sports Material on 31.3.2012 (35,670)
Cost of Sports Material consumed in the club and for sale 79,780
Less: Sports material consumed in the club (62,800)
Cost of Sports material sold 16,980
Sales Price of sports material sold = ` 16,980 + ` 5,500 = ` 22,480
5. Payment to creditors for Sports Material
`
Purchase of Sports Material 72,000
Less: Closing creditors for purchase of Sports Material on 31.3.2012 (4,200)
67,800
Add: Opening creditors for purchase of Sports Material on 1.4.2011 3,400
71,200
6. Salaries paid during the year
`
Salary as per Income and Expenditure Account 1,18,800
Less: Outstanding balance as on 31.3.2012 (14,300)
1,04,500
Add: Outstanding balance as on 1.4.2011 16,000
1,20,500
7. Rent paid during the year
`
Rent as per Income and Expenditure Account 2,16,000
Less: Outstanding balance as on 31.3.2012 (15,000)

2,01,000
2,22,000
8. Printing and Stationary paid during the year
`
Printing and stationary as per Income and Expenditure Account 28,000
Less: Prepaid balance as on 1.4.2011 (1,350)
26,650
Add: Prepaid balance as on 31.3.2012 1,550
28,200
9. Membership fee paid during the year
`
Membership fee as per Income and Expenditure Account 3,200
Add: Prepaid balance as on 31.3.2012 [(3,200/3) x 9] 9,600
12,800
10. Fixed Asset purchased during the year
`
Depreciation during the year 13,000
Less: Depreciation on Opening balance of fixed asset (12,000)
Depreciation on new purchase of fixed asset during the year 1,000
⎛ 12 100 ⎞
Cost of asset purchased during the year ⎜ 1,000 x x ⎟ 40,000
⎝ 6 5 ⎠
11. Repairs and Maintenance paid during the year

`
Repairs and Maintenance as per Income and Expenditure Account 18,700
19,900
12. Balance Sheet of Premium Sports Club
as on 1st April, 2011
Capital fund (Bal.fig.) 4,09,300 Fixed Assets 2,40,000

9.33 Accounting
Subscription received in 2,400 Investments in 8% 1,50,000

advance Government Bonds
Outstanding expenses: Stock of sports material 43,450
Salary 16,000 Subscription receivable 10,200
Rent 21,000 Prepaid printing and 1,350
stationary charges
Repairs and maintenance 1,200 Bank 8,300
Creditors for purchase of
sports material 3,400
4,53,300 4,53,300
Note: It is assumed that Premium Sports Club has purchased all the sports equipment on
credit basis only.
Question 12
During the year ended 31st March, 2012, Sachin Cricket Club received subscriptions as
follows:
`
For year ending 31st March, 2011 12,000
For year ending 31st March, 2012 6,15,000
For year ending 31st March, 2013 18,000
Total 6,45,000
There are 500 members and annual subscription is ` 1,500 per member.
On 31st March, 2012, a sum of ` 15,000 was still in arrears for subscriptions for the year
Ascertain the amount of subscriptions that will appear on the credit side of Income and
Expenditure Account for the year ended 31st March, 2012. Also show how the items would
appear in the Balance Sheet as on 31st March, 2011 and the Balance Sheet as on 31st March,
2012. (5 Marks, November 2012) (IPCC)
Answer
Amount of subscription for the year 2011-12
Income & Expenditure A/c (An extract) of Sachin Cricket Club
` `
By Subscription (500 members × ` 1,500 7,50,000
per member)

Balance Sheet of Sachin Cricket Club as on 31st March 2011 (An extract)
Liabilities Rs` Assets Rs`
Subscription Receivable (15,000 + 12,000) 27,000
Balance Sheet of Sachin Cricket Club as on 31st March 2012 (An extract)
Liabilities Rs` Assets ` Rs`
Unearned Subscription 18,000 Outstanding Subscription
of 2010-11 15,000
of 2011-12
` (7,50,000 – 6,15,000) 1,35,000 1,50,000
Question 13
The Receipts and Payments Account, the Income and Expenditure Account and additional
information of a sports club for the year ended 31st March, 2013 were as follows:
Receipts & Payments Account
For the year ending on 31st March, 2013
To Balance b/d 42,000 By Secretary’s Salary 10,000
To Entrance Fees 2011-12 10,000 By Printing & Stationary 26,000
To Entrance Fees 2012-13 1,00,000 By Advertising 16,000
To Subscription 2011-12 6,000 By Fire Insurance 12,000
To Subscription 2012-13 1,50,000 By 12% Investments
To Subscription 2013-14 4,000 (Purchased on 01-10-2012) 2,00,000
To Rent Received 24,000 By Furniture 20,000
To Interest Received 6,000 By Balance c/d 58,000
3,42,000 3,42,000
Income & Expenditure Account

For the year ending on 31st March, 2013
To Secretary Salary 15,000 By Entrance Fees 1,05,000
To Printing & Stationery 22,000 By Subscription 1,56,000
To Advertising 16,000 By Rent 28,000

9.35 Accounting
To Audit Fees 5,000 By Interest on Investments 12,000

To Fire Insurance 10,000
To Depreciation:
Sports Equipments 90,000
Furniture 5,000
To Surplus 1,38,000
3,01,000 3,01,000
The assets and liabilities as on 31st March, 2012 include Club Grounds & Pavilion
` 4,40,000, Sports Equipments ` 2,50,000, Furniture & Fixtures ` 40,000, Subscription in
Arrear ` 8,000, Subscription received in advance ` 2,000 and Creditors for Printing &
Stationery ` 5,000.
You are required to prepare the Balance Sheet of the Club as on 31st March, 2013.
Answer
Balance Sheet of Sports Club
As at 31st March 2013
Fixed Assets:
Capital Fund: Club, Grounds & Pavilion 4,40,000
Opening Balance (W.N.) 7,83,000 Furniture & Fixtures 40,000
Add: Surplus 1,38,000 9,21,000 Add: Additions 20,000
Current Liabilities: 60,000
Outstanding Salary 5,000 Less : Depreciation (5,000) 55,000
(15,000-10,000)
Outstanding Audit Fees 5,000 Sports Equipments 2,50,000
Creditors for Printing & Less: Depreciation (90,000) 1,60,000
Stationery
{22,000-(26,000– 5,000)} 1,000
Subscription received in 4,000 Investments :
advance Investment (at cost) 2,00,000
Accrued Interest 6,000
[` 12,000 - ` 6,000]
Current Assets:

Accrued rent 4,000

(28,000 - 24,000)
Subscription receivable
For 2011-12
(8,000-6,000) 2,000
For 2012-13 {(1,56,000-
(1,50,000 + 2,000)} 4,000
Entrance Fees
receivables (1,05,000- 5,000
1,00,000)
Prepaid Insurance
(12,000-10,000) 2,000
Cash and bank 58,000
9,36,000 9,36,000
Working Note:
Calculation of Capital Fund as on 1st April, 2012
Balance Sheet of Sports Club
As at 31st March 2012
Capital Fund (bal.fig.) 7,83,000 Fixed Assets :
Current Liabilities: Club, Grounds & Pavilion 4,40,000
Subscription received in advance 2,000 Furniture & Fixtures 40,000
Creditors for Printing and Sports Equipments 2,50,000
Stationary 5,000 Current Assets:
Entrance Fees receivables 10,000
Subscription receivables 8,000
Cash and Bank 42,000
7,90,000 7,90,000
Question 14
Highend Club appointed a new accountant for maintaining books of account. He prepared
following Receipts and Payments A/c for the year ended as on 31st March, 2013.
Receipts and Payments Account
(`) (`)
To Balance b/d 9,000 By Printing & Stationery 21,000

9.37 Accounting
To Annual subscription for 9,18,000 By Telephone Expenses 45,000

current year By Repair & Maintenance
Add : Outstanding of last year Expenses (including 1,26,000
received this year 36,000 payment for sports material
9,54,000 ` 54,000)
Less: Subscription recd. in By Garden Upkeep 55,000
Advance as on 31-03-2012 (18,000) 9,36,000 By Electricity Charged 36,000
To Sale of Old Newspaper 36,000 By Loss on sale of furniture 36,000
To 5% Interest on 27,000 (Cost as per books `
Investments 90,000) By Balance c/d 25,57,000
To Entrance Fees 68,000
To Donation for building 18,00,000
28,76,000 28,76,000
Highend Club had following balances:
01-04-2012 01-04-2013
` `
Furniture 3,60,000
Stock of Sports material 1,33,200 36,000
Subscription receivable 54,000
Outstanding Printing & Stationery Expenses 1,500 2,500
Outstanding Electricity Charges 3,200
50% Entrance Fees is to be capitalized.
Do you agree with above Receipts and Payments Account? If not, prepare correct Receipts
and Payments Account and Income and Expenditure Account for the year ended 31st March,
2013 and Balance Sheet as on that date. (16 Marks, November 2013) (IPCC)
Answer
Corrected Receipts and Payments Account of Highend Club
` `
To bal. b/d 9,000 By Printing & Stationery 21,000
To annual subscription 9,18,000 By Telephone expenses 45,000

Less: Receivable on 31.3.2013 (54,000) By Garden upkeep 55,000

Add: Advance received for year 2013-14 18,000 By Electricity charges 36,000
Add: Receivable as on 31.3.2012 36,000 By Repairs and 72,000
maintenance
Less: Advance received on 31.3.2012 (18,000) 9,00,000 (1,26,000 - 54,000)
To sale of furniture (90,000 - 36,000) 54,000 By Sports material 54,000
To Sale of old newspaper 36,000 By bal. c/d 26,11,000
To Entrance fee 68,000
To Donation for building 18,00,000
To Interest on investments 27,000
28,94,000 28,94,000
Income & Expenditure Account of Highend Club for the year ended 31st March, 2013
` `
To Printing and Stationery expenses 22,000 By Subscription 9,18,000
(W.N.1)
To Repairs and Maintenance By Entrance fee
(1,26,000 -54,000) 72,000 (50% of 68,000) 34,000
To Telephone expenses 45,000 By Sale of old newspapers 36,000
To Sports material (W.N. 2) 1,51,200 By Interest on investments 27,000
To Garden upkeep 55,000
To Electricity charges (W.N. 3) 39,200
To Loss on sale of furniture 36,000
To Excess of surplus over expenditure 5,94,600
10,15,000 10,15,000
Balance sheet of Highed Club as on 31st March, 2013
` `
Capital Fund (W.N. 4) 10,58,700 Furniture 3,60,000
∗
Add: Entrance fee capitalized 34,000 Less: sale (90,000) 2,70,000
Add: Surplus 5,94,600 16,87,300 Sports material 36,000
∗
Alternatively, Entrance fees may be shown separately as liability without being added to Capital Fund.

9.39 Accounting
Building fund 18,00,000 5% investments 5,40,000

Outstanding Electricity charges 3,200 Cash in hand 26,11,000
Outstanding printing and stationary exp. 2,500 Subscription receivable 54,000
35,11,000 35,11,000
Working Notes:
1. Printing and Stationary expenses for the year
`
Amount paid 21,000
Add: Outstanding as on 31.3.2013 2,500
23,500
Less: Outstanding as on 31.3.2012 (1,500)
22,000
2. Depreciation on Sports material
Stock as on 1.4.2012 1,33,200
Add: Purchases 54,000
1,87,200
Less: Stock as on 31.3.2013 36,000
1,51,200
3. Electricity charges for the year
Amount paid 36,000
39,200
4. Calculation of value of investments
Interest on 5% investments = ` 27,000
Value of Investment = ` 27,000 x 100 /5 = ` 5,40,000
5. Balance Sheet as on 1st April, 2012
Furniture 3,60,000
Capital fund (balancing fig.) 10,58,700 Sports material 1,33,200
Subscription received in advance 18,000 Subscription receivables 36,000
Outstanding printing and stationary 1,500 Investments 5,40,000
charges Cash in hand 9,000
10,78,200 10,78,200

Question 15
From the following extract of Receipts and Payments Account and the additional information,
you are required to calculate the Income from Subscription for the year ending March 31, 2014
and show them in the Income & Expenditure Account, and the Balance Sheet of a Club.
An extract of Receipts and Payments Account
To Subscription
2012-13 4,000
2013-14 20,000
2014-15 5,000 29,000
Information:
(i) Subscription outstanding on 31.03.2013 ` 5,000
(ii) Subscription outstanding on 31.03.2014 ` 4,000
(iii) Subscription received in advance on 31.03.2013 for 2013-14 ` 5,000
Answer
Income and Expenditure A/c for the year ending 31st March, 2014
` `
By subscription: Received 20,000
Add: Outstanding 31.3.2014 (4,000 – 1,000) (See Note) 3,000
Add: Received in advance last year for 2013-14 5,000 28,000
Balance Sheet as on 31st March, 2014 (Extract)
Subscription received in advance for year 5,000 Subscription o/s:
2014-15
2012-13 ` 1,000
2013-14 3,000 4,000
Note: Subscription outstanding on 31.03.2014 as given in the question is ` 4,000. It has been
considered that last year outstanding ` 1,000 has also been included in this amount.
Question 16
The following information relates to Country Sports Club for the year ended 31.3.2014. You

9.41 Accounting
are required to prepare the Receipts and Payments Account for the year ended 31.3.2014 and
Balance Sheet as on that date.
To Repairs and By Receipts for annual
Maintenance 88,000 Sports 3,25,000
To Ground upkeep 1,66,500 Less: Expenses for Sports 2,75,000 50,000
To Electricity charges 82,600 By Entrance fees 1,80,000
To Sports material used 1,48,000 By Interest on 10%
To Printing and Stationary 42,200 government bond 12,000
To Groundsman wages 80,000 By Rent on hire of club
To Depreciation 1,36,000 ground 84,000
To Prizes distributed By Profit on sale of
(Net of fund income) 4,000 sports material 10,500
To Surplus carried to By Sale of old
capital fund 96,700 newspaper 3,500
11,80,000 11,80,000
(a)
Balance as on Balance as on
1.4.2013 (`) 31.3.2014 (`)
Fixed assets (net block) 6,36,000 7,20,000
Stock of sports material 1,24,000 1,38,000
Investment in 10% government bond 1,20,000 1,20,000
Subscription received in advance 64,000 72,000
Outstanding subscriptions 1,24,000 88,000
Outstanding repair expenses 13,500 24,500
Creditors for sports material 78,600 62,500
Salary paid in advance 32,000 28,000
Prize fund 2,40,000 2,40,000
Prize fund investments 2,36,000 2,36,000
Bank balance 54,500 ?
(b) During the year the club purchased sports material of ` 1,80,000, out of which 75% was
credit purchase.

(c) 25% of the entrance fees is to be capitalized.

(d) As per the Club's policy any excess of expense for prizes distributed over prize fund
income is to be charged to Income and Expenditure A/c and vice versa:-
prize fund income earned during the year ` 36,000
prizes distributed during the year ` 40,000
(e) Interest on Government bond is received half yearly on 30th June and 31st December
each year. (16 Marks, IPCC November, 2014)
Answer
Country Sports Club
Receipts and Payments Account for the year ended 31st March, 2014
To Balance b/d 54,500 By Salaries (W.N.4) 3,32,000
To Subscription (W.N.3) 8,84,000 By Repairs & maintenance (W.N.5) 77,000
To Receipts for Annual 3,25,000 By Expenses for Annual Sports 2,75,000
Sports By Ground upkeep 1,66,500
To Entrance fee 2,40,000 By Electricity charges 82,600
(` 1,80,000 x 4/3) By Sports materials (Cash) 45,000
To Interest 12,000 By Sports material (creditors paid) 1,51,100
To Rent received 84,000 (W.N.2)
To Sale of old newspapers 3,500 By Printing and Stationery 42,200
To Prize fund income 36,000 By Ground man wages 80,000
To Sale of Sports Material 28,500 By Fixed Assets (W.N.6) 2,20,000
(W.N.2) By Prizes distributed 40,000
____ By Balance c/d (Bal. fig) 1,56,100
16,67,500 16,67,500
Balance Sheet of Club as on 31.3.2014
(`) (`)
Capital fund (opening 9,33,400 Fixed Assets (net) 7,20,000
balance) (W.N.1) Sports Material 1,38,000
Add: Surplus 96,700 Investment
Entrance fee 60,000 10,90,100 (10% Govt. Bonds) 1,20,000
Prize fund 2,40,000 Accrued Interest 3,000

9.43 Accounting
Subscription received in Outstanding

advance 72,000 Subscriptions 88,000
Outstanding repair Salary paid in advance 28,000
expenses 24,500 Prize fund investments 2,36,000
Creditors Bank Balance 1,56,100
(Sports Material) 62,500
14,89,100 14,89,100
Working Notes:
1. Balance Sheet of Club as on 1.4.2013
(`) (`)
Capital fund opening (bal. fig.) 9,33,400 Fixed Assets (net) 6,36,000
Prize fund 2,40,000 Sports Material 1,24,000
Subscription received in 64,000 Investment 1,20,000
advance (10% Govt. Bonds)
Outstanding repair expenses 13,500 Accrued interest 3,000
(` 1,20,000x 10% x 3/12)
Creditors (Sports Material) 78,600 Outstanding Subscriptions 1,24,000
Salary paid in advance 32,000
Prize fund investments 2,36,000
Bank Balance 54,500
13,29,500 13,29,500
2. Stock of Sports Materials
Amount Amount
(`) (`)
To Balance b/d 1,24,000 By Sale of Materials (Bal. fig.) 28,500
To Cash (1,80,000x 0.25) 45,000 By Sports Materials used 1,48,000
To Creditors (given)
(Purchases on credit) 1,35,000 By Balance c/d 1,38,000
To Profit on Sale 10,500 __
3,14,500 3,14,500

Creditors for Sports Materials

Amount Amount
(`) (`)
To Cash (bal. fig.) 1,51,100 By Balance b/d 78,600
To Balance c/d 62,500 By Sports Materials 1,35,000
2,13,600 2,13,600
[Payments for Sports materials is `1,96,100 (`1,51,100 + ` 45,000)]
3. Subscriptions received during the year
`
Subscription credited to Income and Expenditure A/c 8,40,000
Add: Outstanding subscription at the beginning of the year 1,24,000
Advance subscription received at the end of the year 72,000
10,36,000
Less: Outstanding subscription at the end of the year 88,000
Advance subscription received at the beginning of the year 64,000 (1,52,000)
Subscription received during the year 8,84,000
4. Salaries paid during the year `
Amount debited to Income and Expenditure A/c 3,36,000
Add: Salary paid in advance as on 31.3.2014 28,000
3,64,000
Less: Salary paid in advance as on 31.3.2013 (32,000)
3,32,000
5. Repairs and maintenance paid during the year
Amount debited to Income and Expenditure A/c 88,000
1,01,500
Less: Outstanding as on 31.3.2014 (24,500)
77,000

9.45 Accounting
6 Purchase of Fixed Assets

Amount Amount
(`) (`)
To Balance b/d 6,36,000 By Depreciation 1,36,000
To Purchase of fixed 2,20,000 By Balance c/d 7,20,000
assets (Bal. fig.)
_____ ____
8,56,000 8,56,000

10
Accounts from Incomplete Records
Question 1
Lucky does not maintain proper books of accounts. However, he maintains a record of his
bank transactions and also is able to give the following information from which you are
requested to prepare his final accounts for the year 2003:
1.1.2003 31.12.2003
` `
Debtors 1,02,500 −
Creditors − 46,000
Stock 50,000 62,500
Bank Balance − 50,000
Fixed Assets 7,500 9,000
Details of his bank transactions were as follows:
`
Received from debtors 3,40,000
Additional capital brought in 5,000
Sale of fixed assets (book value ` 2,500) 1,750
Paid to creditors 2,80,000
Expenses paid 49,250
Personal drawings 25,000
Purchase of fixed assets 5,000
No cash transactions took place during the year. Goods are sold at cost plus 25%. Cost of
goods sold was ` 2,60,000. (16 marks, November 2004) (PE II)
10.2 Accounting
Answer
Trading and Profit and Loss Account
for the year ended 31st December, 2003
Amount Amount
` `
To Opening stock 50,000 By Sales (` 2,60,000 × 125/100) 3,25,000
To Purchases (balancing 2,72,500 By Closing stock 62,500
figure)
To Gross profit c/d
(` 2,60,000 × 25/100) 65,000
_______ _______
3,87,500 3,87,500
To Expenses 49,250 By Gross profit b/d 65,000
To Loss on sale of fixed
assets 750
To Depreciation on fixed
assets (W.N.1) 1,000
To Net profit 14,000 ______
65,000 65,000
Balance Sheet as on 31st December, 2003
Amount Amount
Liabilities Assets
` `
Capital (W.N. 5) 1,69,000 Fixed assets 9,000
Add: Additional capital 5,000 Debtors (W.N. 3) 87,500
Net profit 14,000 Stock 62,500
1,88,000 Bank balance 50,000
Less: Drawings 25,000 1,63,000
Creditors 46,000 _______
2,09,000 2,09,000
Accounts from Incomplete Records 10.3
Working Notes:
1. Fixed assets account
` `
To Balance b/d 7,500 By Bank (sale) 1,750
To Bank 5,000 By Loss on sale of fixed asset 750
By Depreciation (balancing 1,000
figure)
_____ By Balance c/d 9,000
12,500 12,500
2. Bank account
` `
To Balance b/d (balancing figure) 62,500 By Creditors 2,80,000
To Debtors 3,40,000 By Expenses 49,250
To Capital 5,000 By Drawings 25,000
To Sale of fixed assets 1,750 By Fixed assets 5,000
_______ By Balance c/d 50,000
4,09,250 4,09,250
3. Debtors account
` `
To Balance b/d 1,02,500 By Bank 3,40,000
To ⎛ 125 ⎞ 3,25,000 By Balance c/d 87,500
Sales ⎜ ` 2,60,000 × ⎟
⎝ 100 ⎠ _______ (balancing figure) _______
4,27,500 4,27,500
4. Creditors account
` `
To Bank 2,80,000 By Balance b/d (balancing 53,500
figure)
To Balance c/d 46,000 By Purchases (from trading 2,72,500
account)
3,26,000 3,26,000
5. Balance Sheet as on 1st January, 2003

Creditors (W.N. 4) 53,500 Fixed assets 7,500
10.4 Accounting
Capital (balancing figure) 1,69,000 Debtors 1,02,500

Stock 50,000
_______ Bank balance (W.N. 2) 62,500
2,22,500 2,22,500
Question 2
From the following furnished by Shri Ramji, prepare Trading and Profit and Loss account for the
year ended 31.3.2005. Also draft his Balance Sheet as at 31.3.2005:
1.4.2004 31.3.2005
` `
Creditors 3,15,400 2,48,000
Expenses outstanding 12,000 6,600
Fixed assets (includes 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:
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 bank after receiving cash) 12,50,000
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: Ramji has not sold any Fixed Asset during the year. (16 Marks, November 2005) (PE II)
Answer
In the books of Shri Ramji
Dr. Cr.
` ` ` `
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 11,72,600
8,000
To Gross Profit c/d By Closing stock
2,96,200 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 (W.N. 5) 1,86,000
To Depreciation (W.N. 4) 55,000
To Net profit 30,800 _______
3,10,200 3,10,200
Capital (W.N. 1) 5,35,400 Sundry Assets 2,32,200
Add: Additional capital 1,70,000 Add: New
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 outstanding 6,600 Cash in hand 24,000
_______ Cash in Bank 1,37,600
9,82,200 9,82,200
10.6 Accounting
Working Notes:
(1) Statement of Affairs as at 31st March, 2004
Sundry creditors 3,15,400 Sundry Assets 2,32,200
Outstanding expenses 12,000 Stock 1,60,800
Ramji’s Capital Debtors 3,30,600
(Balancing figure) 5,35,400 Cash in hand 59,200
_______ 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 (14,36,200 – 13,44,200 By Discount 30,000
92,000)
By Returns (sales) 29,000
By Bad debts 8,400
By Balance c/d (Balancing
________ figure) 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
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 Fixed Assets: `

Add: Additions 63,600
2,95,800
Less: Closing balance 2,40,800
Depreciation 55,000
(5) Expenses to be shown in profit and loss account

Expenses (in cash) 1,91,400
Add: Outstanding of 2005 6,600
1,97,800
Less: Outstanding of 2004 12,000
1,86,000
(6) Cash and Bank Account
Cash Bank Cash Bank
` ` ` `
To Balance b/d 59,200 80,000 By Purchases 20,600 −
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 c/d 24,000 1,37,600
3,36,000 16,00,000 3,36,000 16,00,000
Question 3
Mr. Ashok keeps his books in Single Entry system. From the following information, prepare
Trading and Profit & Loss Account for the year ended 31st March, 2006 and the Balance Sheet
as on that date:
Assets and Liabilities 31.3.2005 31.3.2006
(` ) (` )
Sundry Creditors 30,000 25,000
Outstanding expenses 1,000 500
Fixed Assets 23,000 22,000
Stock 16,000 22,500
Cash in Hand and at Bank 14,000 16,000
Sundry Debtors ? 36,000
10.8 Accounting
Following further details are available for the Current year:

` `
∗
Total receipts from debtors 1,30,000 Cash purchases 2,000
Returns inward 3,000 Fixed Assets purchased and
paid by cheque 1,000
Bad Debts 1,000 Drawings by cheques 6,500
Total Sales 1,50,000 Deposited into the bank 10,000
Discount received 1,500 Withdrawn from bank 18,500
Return outwards 1,000 Cash in hand at the end 2,500
Capital introduced Paid to creditors by cheques 1,20,000
(paid into Bank) 15,000 Expenses paid 20,000
Cheques received from Debtors 1,25,000
(16 Marks, November 2006) (PE II)
Answer
for the year ended on 31st March, 2006
` `
To Opening Stock 16,000 By Sales:
To Purchases: Cash 6,500
(W.N.1)
Cash 2,000 Credit 1,43,500
Credit (W.N.3) 1,17,500 1,50,000
1,19,500 Less:Returns 3,000 1,47,000
Less: Returns 1,000 1,18,500 By Stock 22,500
To Gross Profit c/d 35,000
1,69,500 1,69,500
To Expenses 20,000
Add: O/s at the end 500 By Gross profit b/d 35,000
20,500 By Discount received 1,500
Less: O/s at the 1,000 19,500
beginning
∗
The words given as “Cash receivable from debtors” in the question paper have been replaced by “Total
receipts from debtors” to draw the final accounts.
To Bad debts 1,000

To Net Profit 14,000
36,500 36,500
Balance Sheet
` `
Capital (W.N.5) 48,500 Fixed Assets 23,000
Add:Additional Add: Purchased during the 1,000
Capital 15,000 year
Add: Net Profit 14,000 Less: Depreciation 2,000 22,000
Less: Drawings 6,500 71,000 Stock 22,500
Creditors 25,000 Cash 2,500
Outstanding Exp. 500 Bank 13,500
_____ Debtors 36,000
96,500 96,500
Working Notes:
1. Cash Account
` `
To Balance b/d 4,500 By Purchases 2,000
To Sales (Bal. Fig.) 6,500 By Bank (contra) 10,000
To Debtors 5,000 By Expenses 20,000
To Bank (contra) 18,500 By Balance c/d 2,500
34,500 34,500
2. Bank Account
` `
To Balance b/d (Bal. Fig.) 9,500 By Fixed Assets 1,000
To Cash (contra) 10,000 By Cash (contra) 18,500
To Debtors 1,25,000 By Creditors 1,20,000
1,59,500 1,59,500
10.10 Accounting
` `
To Bank 1,20,000 By Balance b/d 30,000
To Returns 1,000 By Purchase (Bal. Fig.) 1,17,500
To Discount received 1,500
1,47,500 1,47,500
4. Debtors Account
` `
To Balance b/d (Bal. Fig.) 26,500 By Cash 5,000
To Sales 1,43,500 By Bank 1,25,000
By Bad Debts 1,000
By Returns 3,000
1,70,000 1,70,000
5. Opening Balance Sheet as on 31.3.2005
` `
Creditors 30,000 Fixed Assets 23,000
O/s Expenses 1,000 Stock 16,000
Capital (Bal. Fig.) 48,500 Cash 4,500
Bank (W.N.2) 9,500
Debtors (W.N.4) 26,500
79,500 79,500
Question 4
Mr. Y keeps his books under single entry system. On 31st March, 2006 his Balance Sheet was
as follows:
Capital of Mr. Y 4,50,000 Fixed assets 2,25,000
Creditors 8,70,000 Stock 9,15,000
Bills payable 1,87,500 Debtors 2,22,000

Expenses outstanding 67,500 Bills receivable 90,000
Cash / Bank balance 1,20,000
15,75,000 15,75,000
(i) Following are the summary of cash and bank transactions for the year ended 31st March,
2007:
`
Cash sales 1,10,70,000
Collection from debtors 22,65,000
Payments to creditors 1,12,60,500
Paid for bills payable 12,22,500
Sundry expenses paid 9,31,050
Drawings for domestic expenses by Mr. Y 3,60,000
Cash and bank balance as on 31.3.2007 1,90,950
(ii) Following further details are furnished:
`
Gross profit on sales @ 10%
Bills receivable from debtors during the year 6,52,500
Discount received from creditors 42,000
Bills receivable endorsed to creditors 22,500
Annual fire insurance premium paid
(This is paid on 1st August every year) 9,000
Depreciate fixed assets @ 10%
(iii) Balances as on 31.3.2007 are given below:
`
Stock in hand 9,75,000
Debtors 2,28,000
Bills receivable 2,10,000
Bills payable 2,10,000
Outstanding expenses 7,500
10.12 Accounting
Prepare Trading, Profit and Loss Account for the year ended 31st March, 2007 and Balance
Sheet on that date. (16 Marks) (May, 2007)(PCC)
Answer
Trading and Profit and Loss Account of Mr. Y for the year 31.3.2007
` `
To Opening stock 9,15,000 By Sales: Cash 1,10,70,000
To Purchases 1,27,02,750 Credit (W.N.2) 29,77,500 1,40,47,500
(W.N.5)
To Gross profit 14,04,750 By Closing stock 9,75,000
1,50,22,500 1,50,22,500
To Expenses 8,71,050 By Gross profit 14,04,750
(W.N.6)
To Discount 54,000 By Discount received 42,000
allowed
To Net profit 4,99,200
14,46,750 14,46,750
Balance Sheet of Mr. Y
Capital Fixed assets 2,25,000
4,50,000
Add: Net profit 4,99,200 Less: Depreciation 22,500 2,02,500
9,49,200 Stock 9,75,000
Less: Drawings 3,60,000 5,89,200 Debtors 2,28,000
Bills payable 2,10,000 Bills receivable 2,10,000
Creditors 10,02,750 Prepaid insurance 3,000
Outstanding expenses 7,500 Cash on hand/bank 1,90,950
18,09,450 18,09,450
Working Notes:
1. Bills Receivable Account
` `
To Balance b/d 90,000 By Cash (Balancing figure) 5,10,000
To Debtors 6,52,500 By Creditors (Bills endorsed) 22,500
7,42,500 7,42,500
2. Debtors Account
` `
To Balance b/d 2,22,000 By Cash/Bank 22,65,000
To Credit Sales 29,77,500 By Discount allowed 54,000
(Balancing figure)
By Bills receivable 6,52,500
31,99,500 31,99,500
3. Bills Payable Account

` `
To Balance c/d 2,10,000 By Creditor (Balancing figure) 12,45,000
14,32,500 14,32,500
` `
To Cash/Bank 1,12,60,500 By Balance b/d 8,70,000
To Discount 42,000 By Purchases 1,27,02,750
To B/R endorsed 22,500
To B/P 12,45,000
To Balance c/d (Balancing figure) 10,02,750
1,35,72,750 1,35,72,750
10.14 Accounting
5. Stock Account
` `
To Balance b/d 9,15,000 By Cost of goods sold 1,26,42,750
To Purchases 1,27,02,750 (` 1,40,47,500 x 90%)
(Balancing figure) By Balance c/d 9,75,000
1,36,17,750 1,36,17,750
6. Expenses for the year ended 31st March, 2007
`
Expenses paid during the year 9,31,050
Add: Outstanding expenses as on 31.3.2007 7,500
9,38,550
Less: Outstanding expenses as on 1.4.2006 67,500
8,71,050
Add: Prepaid Insurance as on 1.4.2006 3,000
8,74,050
Less: Prepaid Insurance as on 31.3.2007 (9,000 x 4/12) 3,000
Expenses shown in the profit and loss account for the year ended 8,71,050
31.3.2007
Question 5
The closing capital of Mr. A on 31.3.2007 was ` 1,50,000. On 1.4.2006 his capital was
` 60,000. During the year he had drawn ` 40,000 for domestic expenses. He introduced
` 25,000 as additional capital in February, 2007. Find out his net profit for the year.
(2 Marks) (November, 2007) (PCC)
Answer
Statement showing calculation of profit for the year 31.3.2007
`
Capital as on 31.3.2007 1,50,000
Add: Drawings during the year 40,000
1,90,000
Less: Additional capital introduced in February 2002 (25,000)
1,65,000
Less: Capital as on 1.4.2006 (60,000)

Net profit for the year 1,05,000
Question 6
In a concern, the opening provision for doubtful debts is ` 51,000. During the year a sum of
` 10,000 was written off as bad debt. The closing balance of sundry debtors amounts to
` 6,30,000. It was decided that 10% of the debtors is to be maintained as provision.
Calculate the closing balance towards provision for doubtful debts and pass journal entry for
giving effect to the provision maintained. (2 Marks) (May, 2008) (PCC)
Answer
Closing balance of Sundry Debtors = ` 6,30,000
Closing provision for doubtful debts to be maintained @ 10% = ` 63,000
Less: Opening Provision for doubtful debts = ` 51,000
Additional provision to be maintained = ` 12,000
Journal Entry
` `
Profit and Loss A/c Dr. 12,000
(Being additional provision on doubtful debts maintained @ 10%)
Question 7
A company sold 25% of the goods on cash basis and the balance on credit basis. Debtors are
allowed 2 months credit and their balance as on 31.3.2008 is ` 1,40,000. Assume that the
sale is uniform through out the year. Calculate the total sales of the company for the year
ended 31.3.2008. (2 Marks) (May, 2008) (PCC)
Answer
Debtors as on 31.3.2008 = ` 1,40,000
Credit period allowed = 2 months
i.e. Debtors as on 31.3.2008 is standing for credit sales of February and March 2008
Credit sales per month = ` 1,40,000/2
= ` 70,000
Credit sales for the year 2007-2008 = ` 70,000 × 12
= ` 8,40,000
25 = ` 2,80,000
Add: Cash sales 8,40,000×
75
10.16 Accounting
Total sales of the company for the year ended 31.3.2008 ` 11,20,000
Closing balance of Sundry Debtors = ` 6,30,000
Closing provision for doubtful debts to be maintained @ 10% = ` 63,000
Less: Opening Provision for doubtful debts = ` 51,000
Additional provision to be maintained = ` 12,000
Journal Entry
` `
Profit and Loss A/c Dr. 12,000
(Being additional provision on doubtful debts maintained @ 10%)
Question 8
The books of Mr. Z showed the following information:
1.1.2007 (` ) 31.12.2007 (` )
Bank balance --- 50,000
Debtors --- 87,500
Creditors --- 46,000
Stock 50,000 62,500
Fixed assets 7,500 9,000
The following are the details of the bank transactions:
`
Receipt from customers 3,40,000
Payments to creditors 2,80,000
Capital brought in 5,000
Sale of fixed assets 1,750
Expenses paid 49,250
Drawings 25,000
Purchase of fixed assets 5,000
Other information:
(i) Cost of goods sold ` 2,60,000
(ii) Gross profit 25% on cost of goods sold
(iii) Book value of assets sold ` 2,500
Prepare Trading, Profit and Loss account for the year ended 31.12.2007 and Balance Sheet
as at 31.12.2007. (8 Marks) (November, 2008) (PCC)
Answer
Trading and Profit & Loss Account
Dr. Cr.
` `
To Opening stock 50,000 By Sales (W.N.8) 3,25,000
To Purchases (W.N.7) 2,72,500 By Closing stock 62,500
To Gross profit (W.N.6) 65,000
3,87,500 3,87,500
To Expenses 49,250 By Gross profit 65,000
To Loss on sale of fixed asset 750
To Depreciation on fixed assets 1,000
65,000 65,000
Balance Sheet as at 31.12.2007
Liabilities ` ` Assets `
Capital as on 1.1.2007 1,69,000 Fixed Assets 9,000
Add: Net profit 14,000 Debtors 87,500
Additional capital 5,000 Stock 62,500
1,88,000 Bank 50,000
Less: Drawings 25,000 1,63,000
Creditors 46,000
2,09,000 2,09,000
Working Notes:
1. Balance Sheet as at 1.1.2007
Capital (Bal. Fig.) 1,69,000 Fixed Assets 7,500
Creditors 53,500 Debtors 1,02,500
Stock 50,000
10.18 Accounting
Bank Balance 62,500

2,22,500 2,22,500
2. Bank account
` `
To Balance b/d (Bal. Fig.) 62,500 By Creditors 2,80,000
To Debtors 3,40,000 By Expenses 49,250
To Fixed Assets 1,750 By Fixed Assets (purchased) 5,000
4,09,250 4,09,250
3. Debtors account
` `
To Balance b/d (Bal. Fig.) 1,02,500 By Bank 3,40,000
To Sales (W.N.8) 3,25,000 By Balance c/d 87,500
4,27,500 4,27,500
4. Creditors account
` `
To Bank 2,80,000 By Balance b/d (Bal. Fig.) 53,500
To Balance c/d 46,000 By Purchases (W.N.7) 2,72,500
3,26,000 3,26,000
5. Fixed Assets account
` `
To Balance b/d 7,500 By Bank (Sale) 1,750
To Bank 5,000 By Profit and Loss A/c (loss on sale) 750
By Depreciation (Bal. Fig.) 1,000
12,500 12,500
6. Gross Profit = ` 2,60,000 x 25% = ` 65,000.
7. Cost of goods sold = Opening stock + Purchases – Closing stock

` 2,60,000 = ` 50,000 + Purchases - ` 62,500
Purchases = ` 2,72,500.
8. Sales = Cost of goods sold + gross profit
= ` 2,60,000 + ` 65,000
= ` 3,25,000.
Question 9
Following is the Balance Sheet of Mr. Ram, a small trader, as on 31st March, 2008:
Creditors 1,00,000 Cash 10,000
Capital 4,00,000 Bank 20,000
Stock 80,000
Debtors 1,00,000
Fixed Assets 2,90,000
5,00,000 5,00,000
A fire occurred on the night of 31st March, 2009, destroying the accounting records as well as
the closing cash of the trader. However, the following information was available:
(i) Debtors and creditors as on 31st March, 2009 showed an increase of 20% as compared
to 31st March, 2008.
(ii) Credit period:
Debtors : 1 month
Creditors : 2 months
(iii) Stock was maintained at the same level throughout the year.
(iv) Cash sales constituted at 20% of the total sales.
(v) All purchases were on credit basis only.
(vi) Current ratio on 31st March, 2009 was exactly 2.
(vii) Total expenses excluding depreciation for the year amounted to ` 5,00,000.
(viii) Depreciation was provided @ 10% on the closing book value of fixed assets.
(ix) Bank and cash transactions for the financial year 2008-09 were as under:
(a) Payment to creditors included ` 1,00,000 by cash.
(b) Received from debtors included ` 11,80,000 by way of cheques.
10.20 Accounting
(c) Cash deposited into the Bank ` 2,40,000.

(d) Personal drawings from Bank ` 1,00,000.
(e) Fixed assets purchased and paid by cheques ` 4,50,000.
(f) Assume that cash destroyed by fire is written off in the Profit and Loss account.
(i) Trading and Profit and Loss account of Shri Ram for the year ended 31st March, 2009.
(ii) A Balance Sheet as at that date. (8 Marks June,2009) (PCC)
Answer
To Opening stock 80,000 By Sales (W.N.2)
To Purchases (W.N.1) 7,20,000 Cash 3,60,000
To Gross profit 10,80,000 Credit 14,40,000 18,00,000
By Closing stock 80,000
18,80,000 18,80,000
To Expenses 5,00,000 By Gross profit 10,80,000
To Loss of cash by fire 20,000
To Net profit transfered to
Capital A/c 4,86,000
10,80,000 10,80,000
Balance Sheet as on 31.3.2009
Creditors 1,20,000 Cash at bank (W.N.3) 40,000
Capital 4,00,000 Debtors 1,20,000
Add: Net profit Stock 80,000
during the year 4,86,000
8,86,000 Fixed assets 2,90,000
Less: Drawings 1,00,000 7,86,000 During the year 4,50,000
7,40,000
Less: Depreciation 74,000 6,66,000
9,06,000 9,06,000
Working Notes:
(1) Calculation of creditors as on 31.3.2009 and credit purchase for 2008-2009
Creditors = Previous year creditors + 20% increase
= 1,00,000 + 20,000
= ` 1,20,000
12
Credit purchases = Creditors at the end ×
2
12
= 1,20,000 × = ` 7,20,000
2
(2) Calculation of Debtors as 31.3.2009 and Cash and Credit Sales for 2008-2009
Debtors on 31.3.2009 = Debtors on 31.3.2008 + 20% Increase
= 1,00,000 + 20,000
= ` 1,20,000
Credit sales for 2008-2009= Debtors at the end (i.e. one month credit) x 12
= ` 1,20,000 x 12 = ` 14,40,000
100
Total sales = ` 14,40,000 × = ` 18,00,000
80
Cash sales = Total sales – Credit sales
= ` 18,00,000 – ` 14,40,000
= ` 3,60,000
(3) Cash and Bank Balance as on 31.3.2009

Current ratio = 2
Current assets 2
Current ratio = =
Current liabilities 1
Current assets = Current liabilities x 2
Current assets = 1,20,000 x 2 = 2,40,000
Cash and bank balance = Current assets – (Debtors + Stock)
Cash and bank balance = 2,40,000 – (1,20,000 + 80,000)
Cash and bank balance = 2,40,000 – 2,00,000 = ` 40,000
10.22 Accounting
(4) Cash Account

` `
To Balance b/d 10,000 By Creditors A/c 1,00,000
To Sales A/c 3,60,000 By Bank A/c 2,40,000
To Debtors A/c (W.N.6) 2,40,000 By Expenses A/c 2,50,000
(5,00,000 – 2,50,000)
By Loss by fire (Bal.fig.) 20,000
6,10,000 6,10,000
(5) Bank Account
` `
To Balance b/d 20,000 By Creditors A/c (W.N.7) 6,00,000
To Debtors A/c 11,80,000 By Fixed assets A/c 4,50,000
To Cash A/c 2,40,000 By Drawings 1,00,000
By Expenses (Bal. fig.) 2,50,000
14,40,000 14,40,000
(6) Debtors Account
` `
To Balance b/d 1,00,000 By Bank 11,80,000
To Sales 14,40,000 By Cash (Bal. Fig.) 2,40,000
15,40,000 15,40,000
(7) Creditors Account
` `
To Cash A/c 1,00,000 By Balance b/d 1,00,000
To Bank (Bal. fig.) 6,00,000 By Purchases A/c 7,20,000
To Balance c/d 1,20,0002
8,20,000 8,20,000
1
Debtors on 31.3.2009 = Debtors on 31.3.2008 x 120% i.e. 1,00,000 x 120% = ` 1,20,000
2
Creditors on 31.3.2009 = Creditors on 31.3.2008 x 120% i.e. 1,00,000 x 120% = ` 1,20,000
Question 10
Find out the profit of Mr. A from the following information:
Capital at the beginning of the year ` 20,00,000
Drawings made by Mr. A ` 2,00,000
Capital at the end of the year ` 25,00,000
Additional capital introduced during the year ` 1,00,000
Answer
Statement showing profit earned by Mr. A during the year
`
Capital at the end of the year 25,00,000
Add: Drawings 2,00,000
27,00,000
Less: Additional capital introduced during the year (1,00,000)
26,00,000
Less: Capital at the beginning of the year (20,00,000)
Profit earned during the year 6,00,000
Question 11
A trader purchased goods for ` 1,70,000. The opening stock of inventory prior to the said
purchase was ` 30,000. His sales was ` 2,10,000. Find out the closing stock of inventory if
the Gross profit margin is 25% on cost. (2 Marks) (November, 2009) (IPCC)
Answer
Calculation of closing stock:
Cost of goods sold = Sales – Gross Profit
25
= ` 2,10,000 – (` 2,10,000 × )
125
= ` 1,68,000
Closing stock = Opening Stock + Purchases – Cost of goods sold
= ` 30,000 + ` 1,70,000 – ` 1,68,000
= ` 32,000
10.24 Accounting
Question 12
The books of account of Ruk Ruk Maan of Mumbai showed the following figures:
31.3.2008 31.3.2009
` `
Furniture & fixtures 2,60,000 2,34,000
Stock 2,45,000 3,20,000
Debtors 1,25,000 ?
Cash in hand & bank 1,10,000 ?
Creditors 1,35,000 1,90,000
Bills payable 70,000 80,000
Outstanding salaries 19,000 20,000
An analysis of the cash book revealed the following:
`
Cash sales 16,20,000
Cash purchases 6,15,000
Payment to creditors 9,73,000
Discount received from creditors 32,000
Payment for bills payable 4,30,000
Drawings for domestic expenses 1,20,000
Salaries paid 2,36,000
Rent paid 1,32,000
Sundry trade expenses 81,000
Depreciation is provided on furniture & fixtures @10% p.a. on diminishing balance method.
Ruk Ruk 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, 2009 and Balance Sheet as on that date. (16 Marks) (May, 2010) (IPCC)
Answer
In the books of Ruk Ruk Maan
Trading & Profit & Loss Account
Amount Amount
Particulars Particulars
` `
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
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 received 32,000
To Sundry trade expenses 81,000
To Discount allowed 20,000
To Depreciation on furniture
& fixtures 26,000
To Net profit 2,16,000
7,12,000 7,12,000
Balance Sheet
as at 31st March, 2009
Amount Amount
Liabilities ` `
Capital Fixed assets
Opening balance 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
Current liabilities & provisions: Cash & Bank (W.N.6) 2,01,000
Creditors 1,90,000
Bills payable 80,000
Outstanding salaries 20,000
9,02,000 9,02,000
10.26 Accounting
Working Notes:
` `
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
` `
To Cash/Bank 9,73,000 By Balance b/d 1,35,000
To Bills payable A/c (W.N.1) 4,40,000 By Credit purchases (Bal. fig.) 15,00,000
To Discount received 32,000
To Balance c/d 1,90,000
16,35,000 16,35,000
3. Calculation of credit sales
`
Opening stock 2,45,000
Add: Purchases
Cash purchases 6,15,000
Credit purchases 15,00,000 21,15,000
23,60,000
Less: Closing Stock 3,20,000
Gross profit ratio on sales 25%
100 27,20,000
Total sales = ` 20,40,000 × =
75
Less: Cash sales 16,20,000
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 31.3.2009 20,000
2,56,000
Less: Outstanding salaries as on 31.03.2008 19,000
2,37,000
6. Cash / Bank Account
` `
To Balance c/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 b/d 2,01,000
27,88,000 27,88,000
7. Balance Sheet
As at 31st March, 2008
` `
Creditors 1,35,000 Furniture & fixtures 2,60,000
Bills payable 70,000 Stock 2,45,000
Outstanding slaries 19,000 Debtors 1,25,000
Capital (Bal. Fig.) 5,16,000 Cash & bank 1,10,000
7,40,000 7,40,000
Question 13
Mr A runs a business of readymade garments. He closes the books of accounts on 31st March,
2010. The Balance Sheet as on 31st March, 2010 was as follows:
A’s capital a/c 4,04,000 Furniture 40,000
10.28 Accounting
Creditors 82,000 Stock 2,80,000

Debtors 1,00,000
Cash in hand 28,000
Cash at bank 38,000
4,86,000 4,86,000
You are furnished with the following information:
(1) His sales, for the year ended 31st March, 2011 were 20% higher than the sales of
previous year, out of which 20% sales was cash sales.
Total sales during the year 2009-10 were ` 5,00,000.
(2) Payments for all the purchases were made by cheques only.
(3) Goods were sold for cash and credit both. Credit customers pay be cheques only.
(4) Deprecition on furniture is to be charged 10% p.a.
(5) Mr A sent to the bank the collection of the month at the last date of the each month after
paying salary of ` 2,000 to the clerk, office expenses `1,200 and personal expenses
` 500.
Analysis of bank pass book for the year ending 31st March 2011 disclosed the following:
`
Payment to creditors 3,00,000
Payment of rent up to 31st March, 2011 16,000
Cash deposited into the bank during the year 80,000
The following are the balances on 31st March, 2011:
`
Stock 1,60,000
Debtors 1,20,000
Creditors for goods 1,46,000
On the evening of 31st March 2011, the cashier absconded with the available cash in the cash book.
You are required to prepare Trading and Profit and Loss A/c for the year ended 31st March,
2011 and Balance Sheet as on that date. All the workings should form part of the answer.
(16 Marks May, 2011) (IPCC)
Answer
Trading and Profit and Loss Account for the year ending 31st March 2011
To Opening stock 2,80,000 By Sales (W.N. 3)
To Purchases (W.N. 1) 3,64,000 Credit 4,80,000
To Gross profit 1,16,000 Cash 1,20,000 6,00,000
By Closing stock 1,60,000
7,60,000 7,60,000
To Salary 24,000 By Gross profit 1,16,000
To Rent 16,000
To Office expenses 14,400
To Loss of cash (W.N. 6) 23,600
To Depreciation on furniture 4,000
1,16,000 1,16,000
A’s Capital 4,04,000 Furniture 40,000
Add: Net Profit 34,000 Less: Depreciation (4,000) 36,000
Less: Drawings (6,000) 4,32,000 Stock 1,60,000
Debtors 1,20,000
Creditors 1,46,000 Cash at bank 2,62,000
5,78,000 5,78,000
Working Notes:
(1) Calculation of purchases
Creditors Account
To Bank A/c 3,00,000 By Balance b/d 82,000
To Balance c/d 1,46,000 By Purchases (Bal.fig.) 3,64,000
4,46,000 4,46,000
10.30 Accounting
(2) Calculation of total sales

`
Sales for the year 2009-10 5,00,000
Add: 20% increase 1,00,000
Total sales for the year 2010-11 6,00,000
(3) Calculation of credit sales
`
Total sales 6,00,000
Less: Cash sales (20% of total sales) (1,20,000)
4,80,000
(4) Calculation of cash collected from debtors
Debtors Account
To Balance b/d 1,00,000 By Bank A/c (Bal. fig.) 4,60,000
To Sales A/c 4,80,000 By Balance c/d 1,20,000
5,80,000 5,80,000
(5) Calculation of closing balance of cash at bank
Bank Account
To Balance b/d 38,000 By Creditors A/c 3,00,000
To Debtors A/c 4,60,000 By Rent A/c 16,000
To Cash A/c 80,000 By Balance c/d 2,62,000
5,78,000 5,78,000
(6) Calculation of the amount of cash defalcated by the cashier
`
Cash balance as on 1st April 2010 28,000
Add: Cash sales during the year 1,20,000
1,48,000
Less: Salary (` 2,000x12) 24,000
Office expenses (` 1,200 x 12) 14,400
Drawings of A (` 500x12) 6,000

Cash deposited into bank during the year 80,000 1,24,400
Cash balance as on 31st March 2011 (defalcated by the 23,600
cashier)
Question 14
Following information of the Final Accounts of Kumaran Ltd. are missing as shown below:
Trading and Profit & Loss A/c for the year ended 31-03-2012
(`’000) (`’000)
To Opening Stock 7,000 By Sales ?
To Purchases ? By Closing Stock ?
To Manufacturing Expenses 1,750
To Gross Profit c/d ?
Total ? Total ?
To Office and Administration By Gross Profit b/d ?
Expenses 7,400 By Commission Received 1,000
To Interest on Debentures 600
To Provision for Taxation ?
To Net Profit for the year c/d ?
Total ? Total ?
To Proposed Dividends ? By Balance b/d 1,400
To Transfer to General Reserves ? By Net Profit for the year b/d ?
To Balance Transfer to Balance Sheet ?
Total ? Total ?
Balance Sheet as on 31-03-2012
Liabilities (` 000) Assets (` 000)
Paid up Capital 10,000 Fixed Assets:
General Reserves: Plant and Machinery 14,000
Balance at the beginning of Other Fixed Assets ?
the year ? Current Assets:
Proposed addition ? Stock in Trade ?
Profit and Loss Appropriation A/c ? Sundry Debtors ?
10% Debentures ? Bank Balance 1,250
Current Liabilities ?
Total ? Total ?
10.32 Accounting
You are required to provide the missing figures with the help of following information:
(i) Current Ratio 2 :1.
(ii) Closing stock is 25% of sales.
(iii) Proposed dividends are 40% of the paid up capital.
(iv) Gross profit ratio is 60%.
(v) Ratio of Current Liabilities to Debentures is 2 : 1.
(vi) Transfer to General Reserves is equal to proposed dividends.
(vii) Profit carried forward are 10% of the proposed dividends.
(viii) Provision for taxation is 50% of profits.
(ix) Balance to the credit of General Reserves at the beginning of the year is twice the
amount transferred to that account from the current profits.(16 Marks, November 2012) (IPCC)
Answer
` ‘000
1. Amount of debentures
⎛ Interest on debentures ⎞ ⎛ 600 ⎞
= ⎜ × 100 ⎟ = ⎜ × 100 ⎟ = 6,000
⎝ Rate of interest ⎠ ⎝ 10 ⎠
2. Amount of proposed dividend
= Paid up share capital x 40%= 10,000 x 40% = 4,000
3. Transfer to general reserves
= Amount of proposed dividend i.e. 4,000
4. Profit carried forward
= 10% of proposed dividend = 10% of 4,000 = 400
5. Net profit for the year
= Proposed dividend + Transfer to general reserve + Profit carried forward – Net profit
carried forward
= (4,000 + 4,000 + 400) – 1,400 = 7,000
6. Provision for taxation
Provision for taxation = 50% of profit (i.e. before net profit)
It means that net profit is 50% and provision for tax is 50%.
Therefore, if net profit is 7,000 then, Provision for taxation is also 7,000
7. Gross profit
= Net profit + all expenses – Commission received
= (7,000 + 7,000 + 600 + 7,400) – 1,000 = 21,000
8. Sales
⎛ Gross profit ⎞
= ⎜ × 100 ⎟
⎝ Rate of profit ⎠
⎛ 21,000 ⎞
= ⎜ × 100 ⎟ = 35,000
⎝ 60 ⎠
9. Closing stock
= 25% of sales
= 25% x 35,000 = 8,750
10. Purchases
= (Sales + Closing stock) – (Opening stock + Manufacturing expenses + Gross profit)
= (35,000 + 8,750) – (7,000 + 1,750 + 21,000)
= 43,750 - 29,750 = 14,000
11. Balance of General Reserve as on 1.4.2011
= Twice the amount transferred to general reserve during the year
= 2 x 4,000 = 8,000
12. Current Liabilities
=Current liabilities is twice of amount of debentures
= 2 x 6,000 = 12,000
13. Current Assets
Current Assets = current ratio x current liabilities
= 2 x 12,000 = 24,000
14. Sundry Debtors
Sundry Debtors = Current assets – Stock in trade – Bank balance
= 24,000 – 8,750 – 1,250 = 14,000
15. Total of Equity and Liabilities part of the balance sheet
= Shareholders capital + Non-current liabilities + Current liabilities
= (10,000 + 12,000 + 400) + 6,000+ 12,000 = 40,400
10.34 Accounting
16. Other Fixed Assets

= Total of Equity and Liabilities part of the balance sheet – (Current assets + Plant and
Machinery)
= 40,400 – (24,000 + 14,000) = 2,400
Question 15
A sole trader requests you to prepare his Trading and Profit & Loss Account for the year
ended 31st March, 2013 and Balance Sheet as at that date. He provides you the following
information:
Statement of Affairs as at 31st March, 2012
Bank Overdraft 4,270 Furniture 96,000
Outstanding Expenses Computer 24,300
Salaries 8,000 Mobile Phone 8,000
Rent 6,000 14,000 Stock 89,500
Bills Payable 22,500 Trade Debtors 55,000
Trade Creditors 52,500 Bills Receivable 15,000
Capital Unexpired Insurance 2,400
(balancing figure) 1,97,430 Stock of Stationery 200
Cash in Hand 300
Total 2,90,700 Total 2,90,700
He informs you that there has been no addition to or sale of Furniture, Computer and Mobile
Phone during the accounting year 2012-13. The other assets and liabilities on 31st March,
2013 are as follows:
`
Stock 95,400
Trade Debtors 65,000
Bills Receivable 20,000
Unexpired Insurance 2,500
Stock of Stationery 250
Cash at Bank 18,000
Cash at Hand 7,230
Salaries Outstanding 8,300
Rent Outstanding 6,000
Bills Payable 26,500

Trade Creditors 76,000
He also provides you the following summary of his cash transactions:
Cash Sales 5,09,800 Trade Creditors 3,06,000
Trade Debtors 1,51,900 Bills Payable 80,000
Bills Receivable 65,000 Salaries 99,000
Rent 72,000
Insurance Premium 10,000
Stationery 1,500
Mobile Phone Expenses 9,000
Drawings 1,20,000
It is found prudent to depreciate Furniture @ 5%, Computer @ 10% and Mobile Phone @ 25%. A
provision for bad debts @ 5% on Trade Debtors is also considered desirable.
Answer
Particulars ` Particulars ` `
To Opening Stock 89,500 By Sales:
To Purchases (W. N. 3) 4,13,500 Credit (W.N. 1) 2,31,900
To Gross profit c/d (Bal. Fig.) 3,34,100 Cash 5,09,800 7,41,700
By Closing stock 95,400
8,37,100 8,37,100
To Insurance (W.N. 5) 9,900 By Gross profit b/d 3,34,100
To Salaries (W. N. 6) 99,300
To Rent (W.N. 7) 72,000
To Stationery (W.N. 8) 1,450
To Mobile Phone expenses 9,000
To Provision for doubtful 3,250
debts (5% of 65,000)
10.36 Accounting
To Depreciation:
Furniture 4,800
Computer 2,430
Mobile Phone 2,000 9,230
To Net Profit 1,29,970
3,34,100 3,34,100
Liabilities ` ` Asset ` `
Capital A/c: Furniture 96,000
Opening Balance 1,97,430 Less: Depreciation (4,800) 91,200
Less :Drawings (1,20,000) Computer 24,300
77,430 Less: Depreciation (2,430) 21,870
Add: Net Profit 1,29,970 2,07,400 Mobile Phone 8,000
Bills Payable 26,500 Less: Depreciation (2,000) 6,000
Trade Creditors 76,000 Trade Debtors 65,000
Outstanding Less: Provision for (3,250) 61,750
expenses: doubtful debts
Salaries 8,300 Bills Receivable 20,000
Rent 6,000 Closing Stock 95,400
Unexpired Insurance 2,500
Stock of Stationery 250
Cash at bank 18,000
Cash in hand 7,230
3,24,200 3,24,200
Working Notes:
1. Trade Debtors Account
` `
To Balance b/d 55,000 By Cash /Bank 1,51,900
To Credit Sales (bal. fig.) 2,31,900 By Bills Receivable A/c (W.N.2) 70,000
By Balance c/d (given) 65,000
2,86,900 2,86,900
2. Bills Receivable Account

` `
To Balance b/d 15,000 By Cash/Bank 65,000
To Sundry Debtors (bal. fig.) 70,000 By Bal. c/d (given) 20,000
85,000 85,000
3. Trade Creditors Account
` `
To Bank/Cash 3,06,000 By Bal. b/d 52,500
To Bills payable A/c 84,000 By Credit Purchases (bal. 4,13,500
(W.N.4) fig)
To Bal. c/d(given) 76,000
4,66,000 4,66,000
` `
To Cash/Bank A/c 80,000 By Bal. b/d 22,500
To Bal. c/d (given) 26,500 By Sundry Creditors (bal. fig.) 84,000
1,06,500 1,06,500
5. Insurance expenses for the year 2012-2013
`
Insurance paid during the year 10,000
Add: Unexpired Insurance as on 1.4.2012 2,400
Less: Unexpired insurance as on 31.3.2013 (2,500)
9,900
6. Salaries for the year 2012-2013
`
Salaries paid during the year 99,000
Add: Salaries outstanding as on 31.03.2013 8,300
1,07,300
Less: Salaries outstanding as on 1.4.2012 (8,000)
99,300
10.38 Accounting
7. Rent expenses for the year 2012-2013

`
Rent paid during the year 72,000
Add: Rent outstanding as on 31.03.2013 6,000
78,000
Less: Rent outstanding as on 1.04.2012 (6,000)
72,000
8. Stationery expenses for the year 2012-2013
`
Stock of stationery as on 1.4.2012 200
Add: Stationery purchased during the year 1,500
1,700
Less: Stock of stationery as on 31.3.2013 (250)
1,450
Question 16
The details of Assets and Liabilities of Mr. 'A' as on 31-3-2012 and31-3-2013 are as follows:
31.3.2012 31.3.2013
` `
Assets:
Furniture 50,000
Building 1,00,000
Stock 1,00,000 2,50,000
Sundry Debtors 60,000 1,10,000
Cash in hand 11,200 13,200
Cash at Bank 60,000 75,000
Liabilities :
Loans 90,000 70,000
Sundry Creditors 50,000 80,000
Mr. 'A' decided to provide depreciation on building by 2.5% and furniture by 10% for the
period ended on 31-3-2013. Mr. ‘A’ purchased jewellery for ` 24,000 for his daughter in
December 2012. He sold his car on 30-3-2013 and the amount of
` 40,000 is retained in the business.
(i) Prepare statement of affairs as on 31-3-2012 and 31-3-2013.
(ii) Calculate the profit received by 'A' during the year ended 31-3-2013.
(|8 Marks) (IPCC, November 2013)
Answer
(i) Statement of Affairs
Liablilities 31.3.12 31.3.13 Assets 31.3.12 31.3.13
` ` ` `
Loans 90,000 70,000 Furniture 50,000 45,000
Creditors 50,000 80,000 Building 1,00,000 97,500
Capital A/c 2,41,200 4,40,700 Stock 1,00,000 2,50,000
Debtors 60,000 1,10,000
Cash in hand 11,200 13,200
Cash at Bank 60,000 75,000
3,81,200 5,90,700 3,81,200 5,90,700
Working Note:
Dep. on Building ` 2,500 (2.5% of ` 1,00,000)
Dep. on Furniture ` 5,000 (10% of ` 50,000)
(ii) Calculation of Profit earned by A during the year ended 31st March, 2013
Capital Account
` `
By bal. b/d 2,41,200
To Drawings 24,000 By Additional Capital (Car sale proceeds) 40,000
To bal. c/d 4,40,700 By P&L A/c. (Bal. figure) 1,83,500
4,64,700 4,64,700
Note: Interest on drawings and capital has been ignored in the absence of information.
Question 17
Following are the incomplete information of Moonlight Traders:
The following balances are available as on 31.03.2013 and 31.03.2014.
Balances 31.03.2013 31.03.2014
` `
Land and Building 5,00,000 5,00,000
10.40 Accounting
Plant and Machinery 2,20,000 3,30,000

Office equipment 1,05,000 85,000
Debtors ? 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%. 1,25,000 1,00,000
Bank 25,000 ?
Provision for tax (rate 30%) 35,000 30,000
Other Information `
Payment to creditors for purchases 5,25,000
Payment of office expenses 42,000
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%
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) On 01.10.13 they sold machine having Book Value ` 40,000 (as on 31.03.2013) at a loss
of ` 15,000. New machine was purchased on 01.01.2014.
(ii) Office equipment was sold at its book value on 01.04.2013.
(iii) Loan was partly repaid on 31.03.14 together with interest for the year.
Prepare Trading P & L A/c and Balance Sheet as on 31.03.2014. (16 Marks, IPCC May, 2014)
Answer
In the Books of Moonlight Traders
Trading Account for the year ended 31.03.2014
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 (12,50,000 x 25/125) 2,50,000
13,15,000 13,15,000
Profit and Loss Account for the year ended 31.03.2014
To Discount 5,500 By Gross profit 2,50,000
To Salaries Expenses 32,000 By Discount 4,500
To Office expenses (W.N.3) 37,000
To Selling expenses 15,000
To Interest on loan (12% on ` 1,25,000) 15,000
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 Tax Provision (69,000 x 30%) 20,700
To Net profit after tax 48,300
2,54,500 2,54,500
Balance sheet as on 31.3.2014
Capital (W.N. 6) 8,95,500 Land and Building (5,00,000 - 4,75,000
Add: Net Profit 48,300 9,43,800 25,000)
∗
Alternatively, the entire provision for tax as on 31.3.2013 of ` 35,000 has been assumed to be paid during
the year. In that case Working Note 10 will not be required and profit and loss account will show ` 30,000 as
provision for 31.3.2014 instead of ` 20,700.
10.42 Accounting
Creditors for 1,05,500 Plant and Machinery (W.N.4a) 3,08,250

Purchases (W.N. 8) (3,30,000-21,750)
Outstanding expenses 15,000 Office Equipment (85,000-12,750) 72,250
Loan from SBI 1,00,000 Debtors less Bad debts (W.N. 7) 2,20,500
Tax Provision 30,000 Stock 65,000
Bank Balance (W.N. 9) 53,300
11,94,300 11,94,300
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 (2,50,000*100/20) 12,50,000
Credit Sales (12,50,000*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
` `
To Opening balance 2,20,000 By Bank (Sale) 40,000
To Bank (Purchases) 1,50,000 By Closing Balance 3,30,000
3,70,000 3,70,000
(b) Calculation of Depreciation 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
* [3,30,000 Less (2,20,000 – 40,000)]
(c) Sale of Machinery Account
Amount (`) Amount (`)
To Plant & 40,000 By Depreciation 2,000
Machinery
By Profit and Loss A/c 15,000
By Bank (bal.fig.) 23,000
(Sale)
40,000 40,000
5. Calculation of Depreciation on Office Equipments

`
Opening Balance 1,05,000
Less: Closing Balance 85,000
Sale of Office Equipments 20,000
Balance of Office Equipments after sale on 01.04.2013 85,000
Depreciation @15% 12,750
6. Opening Balance Sheet as on 31.03.2013
` `
Creditors 95,000 Land & Building 5,00,000
Creditor for Exp. 20,000 Plant & Machinery 2,20,000
Loan 1,25,000 Office Equipment 1,05,000
Provision for Tax 35,000 Debtors (W.N. 7) 1,55,500
Capital (Bal. fig.) 8,95,500 Stock (from Trading A/c) 1,65,000
Bank 25,000
11,70,500 11,70,500
10.44 Accounting
7. Sundry Debtors A/c

` `
To Balance b/d (bal. fig.) 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/d (bal. fig.) 1,05,500
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
To Sale of equipment 20,000 By Purchases (cash) 3,60,000
By Purchase of Machinery 1,50,000
By Bank Loan & Interest 40,000
(W.N. 11)
By Tax (W.N. 10) 25,700
By Balance c/d (bal. fig.) 53,300
12,43,000 12,43,000
10. Provision for Tax Account
` `
To Bank (bal. fig.) 25,700 By Balance b/d 35,000
55,700 55,700
11. Repayment of Bank Loan and interest
`
Interest 1,25,000 x 12% 15,000
Loan (1,25,000 – 1,00,000) 25,000
40,000
Note:
The above solution has been worked out on the basis of the following assumptions:-
(i) Tax profits are the same as accounting profits.
(ii) The figure of ` 2,25,000, being the closing balance of Sundry Debtors as given in the
question is before providing for bad debts. Accordingly, the closing balance has been
reduced by the amount of bad debts.
11
Hire Purchase & Instalment Sale
Transactions
Question 1
Sameera Corporation sells Computers on Hire-purchase basis at cost plus 25%. Terms of
sales are 5,000/- as Down payment and 10 monthly instalments of ` 2,500/- for each
Computer. From the following particulars, prepare Hire-purchase Trading A/c for the year
2002-2003:
As on 1st April, 2002, last instalment on 20 Computers were outstanding as these were not
due upto the end of the previous year. During 2002―03, the firm sold 120 Computers. As on
31st March, 2003 the position of instalments outstanding were as under:
Instalments due but not collected 4 Instalments on 4 Computers and Last instalment on
9 Computers
Instalments not yet due 6 Instalments on 50 Computers, 4 Instalments on 20
and Last Instalment on 40 Computers
Two Computers on which 8 Instalments were due and one Instalment not yet due on
31.03.2003, had to be repossessed. Repossessed stock is valued at 50% of cost. All other
Instalments have been received. (14 Marks, May 2004) (PE II)
Note: Hire Purchase Trading Account (Debtors) Method and Stock and Debtors Method are
not covered in the syllabus of Paper 1: Accounting at Intermediate (IPC) level. Thus the
question is not relevant now.
Question 2
ABC Ltd. sells goods on Hire-purchase by adding 50% above cost. From the following
particulars, prepare Hire-purchase Trading account to reveal the profit for the year ended
31.3.2005:
`
1.4.2004 Instalments due but not collected 10,000
1.4.2004 Stock at shop (at cost) 36,000
1.4.2004 Instalment not yet due 18,000

Hire Purchase & Instalment Sale Transactions 11.2
31.3.2005 Stock at shop 40,000

31.3.2005 Instalments due but not collected 18,000
Other details:
Total instalments became due 1,32,000
Goods purchased 1,20,000
Goods on which due instalments could not be collected were repossessed and valued at 30%
below original cost. The vendor spent ` 500 on getting goods overhauled and then sold for
` 2,800. (16 Marks, May 2005) (PE II)
Question 3
S Ltd. has a Hire-purchase department. Goods are sold on hire-purchase at cost plus 60%.
From the following particulars draft Hire-purchase trading account and compute profit or loss
for the year ended 31st March, 2007:
`
Goods with customers on 1.4.2006 (instalments are not due) 3,20,000
Instalments due on 1.4.2006 (customers are paying) 20,000
Goods sold on hire-purchase during the year (i.e., from 1.4.2006 to 31.3.2007) 16,00,000
Goods re-possessed from customers valued at 40% 16,000
Unpaid instalments in respect of re-possessed goods 40,000
Goods with customers as on 31.3.2007 (at hire-purchase price) 7,20,000
(8 Marks, May, 2007) (PCC)
Question 4
Ram & Co. acquired a motor lorry on hire-purchase basis. It has to make cash down payment
of ` 1,00,000 at the beginning. The payments to be made subsequently are ` 2,63,000;
` 1,85,000 and ` 1,14,000 at the end of first year, second year and third year respectively.

11.3 Accounting
Interest charged is @ 14% per annum. Calculate the cost price of motor lorry and interest
paid in each instalment. (4 Marks, May, 2008) (PCC)
Answer
Calculation of cost price and total interest to be paid on motor lorry
No. of Amount due at the time of Interest on cumulative Cash Price in
instalment instalment instalment each instalment
III 1,14,000 14 1,00,000
1,14,000 × = 14,000
114
II 1,85,000 14 1,50,000
2,85,000* × = 35,000
114
I 2,63,000 14 2,00,000
5,13,000** × = 63,000
114
Cash down payment 1,00,000
Total 1,12,000 5,50,000
* 1,00,000 + 1,85,000 = 2,85,000.
**2,63,000 + 1,50,000 + 1,00,000 = 5,13,000.
Question 5
Wye sells goods on Hire-purchase at cost plus 50%. Prepare Hire Purchase Trading Account
from the information given below:
`
Stock with customers on hire-purchase price (opening) 1,62,000
Stock in hand at shop (opening) 3,24,000
Instalments overdue (opening) 1,35,000
Purchases during the year 10,80,000
Goods repossessed (instalments not due ` 36,000) 9,000
Stock at shop excluding repossessed goods (closing) 3,60,000
Cash received during the year 10,35,000
Installments overdue (closing) 1,62,000
The vendor spent `2,000 on goods repossessed and then sold it for ` 15,000.

Question 6
From the following, calculate the cash price of the asset:
`
Hire purchase price of the asset 50,000
Down payment 10,000
Four annual instalments at the end of each year 10,000
Rate of interest 5% p.a
Answer
Calculation of cash price of the asset
Number of Closing Amount of Total Interest Opening
instalments balance instalment 5/105 balance
4 0 10,000 10,000 476 9,524
3 9,524 10,000 19,524 930 18,594
2 18,594 10,000 28,594 1,362 27,232
1 27,232 10,000 37,232 1,773 35,459
Cash price of the asset = Down payment + ` 35,459
= ` 10,000 + ` 35,459
= ` 45,459
Question 7
Easilife Ltd. has a hire-purchase department which fixes hire-purchase price by adding 40% to
the cost of the goods. The following additional information is provided to you :
`
On 1st April, 2009 :
Goods out on hire-purchase (at hire-purchase price) 2,10,000
Instalments due 14,000
Transactions during the year :
Hire-purchase price of goods sold 9,80,000
Instalments received 8,12,000
Value of goods repossessed due to defaults (hire-purchase instalments
unpaid ` 5,600) 7,800
On 31st March, 2010:

11.5 Accounting
Goods out on hire-purchase (at hire-purchase price) 3,78,000

You are required to prepare Hire-purchase Trading Account, ascertaining the profit made by
the department during the year ended 31st March, 2010. (10 Marks, May, 2010) (IPCC)
Question 8
Sonam Corporation sells goods on hire purchase basis. The hire purchase price is cost plus 50%.
From the following particulars prepare Hire Purchase Trading Account for the year ended 31st
March, 2010:
`
Instalments not yet due on 01-04-09 3,00,000
Instalments due on 01-04-09 1,50,000
Goods sold on hire purchase during the year 9,00,000
Instalments collected from HP debtors 6,80,000
Stock with customers at hire purchase price 4,50,000
Goods re-possessed during the year 60,000
On 31-03-2010 Goods repossessed were valued at Cost less 40%
Question 9
M/s Multistore Limited sells goods both on cash and hire purchase basis and record hire-
purchase transactions on "Stock and Debtors System". It closes its books of accounts on 31st
March every year. On 1st May, 2011, it sold to Manas a Scooter and a LCD TV.
The other information are as follows:
Particulars Scooter LCD TV
Cost Price 30,000 40,000
Down Payment 5,000 6,000
Number of Installments Payable 12 6
Amount of each Installment 2,800 7,600
Mode of Payment Monthly Quarterly
1st Installment due on 1st June, 2011 1st July, 2011

Manas paid all the installments due except for those due on 1st January, 2012. It was decided
that M/s Multistore Limited will take back Scooter at an agreed price of ` 22,000 and excess
amount, if any, will be adjusted against the installments due of LCD TV.
Scooter repossessed was sold for ` 24,500 after incurring repair charges of ` 1,000.
Prepare necessary ledger accounts to record the above transactions and find out the profit.
Question 10
On 1st April, 2012 Fastrack Motors Co. sells a truck on hire purchase basis to Teja Transport
Co. for a total hire purchase price of ` 9,00,000 payable as to ` 2,40,000 as down payment
and the balance in three equal annual instalments of ` 2,20,000 each payable on 31st March,
2013, 2014 and 2015.
The hire vendor charges interest @ 10% per annum.
You are required to ascertain the cash price of the truck for Teja Transport Co. Calculations
may be made to the nearest rupee. (5 Marks, November 2012) (IPCC)
Answer
Rate of int erest 10 1
Ratio of interest and amount due = = =
100 + Rate of int erest 110 11
There is no interest element is there 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 Interest Cumulative
instalments time of instalment Cash price
[1] [2] [3] (2-3) = [4]
3rd 2,20,000 1/11 of ` 2,20,000 =` 20,000 2,00,000
2nd 4,20,000 [W.N.1] 1/11 of ` 4,20,000= ` 38,182 3,81,818
1st 6,01,818 [W.N.2] 1/11of ` 6,01,818= ` 54,711 5,47,107
Total cash price = ` 5,47,107+ 2,40,000 (down payment) =` 7,87,107
Working Notes:
1. ` 2,00,000+ 2nd instalment of ` 2,20,000= ` 4,20,000.

11.7 Accounting
2. ` 3,81,818+ 1st instalment of ` 2,20,000= ` 6,01,818.

Question 11
A Trader sold out goods on hire purchase at a profit of 25% on cost price.
Prepare (i) Hire Purchase Stock Alc (ii) Shop Stock A/c (iii) Hire Purchase Debtors' Alc and
(iv) Hire Purchase Adjustment A/c in the books of the trader from the following details :
(` )
Stock in Godown on 01-04-2011 6,00,000
on 31-03-2012 5,00,000
Overdue Instalments :
on 01-04-2011 40,000
on 31-03-2012 60,000
Goods with Customer on
Hire Purchase on 01-04-2011 7,20,000
Purchases 12,92,000
Instalments received 12,00,000

Question 12
M/s. Zed Laptop Co. has a hire-purchase department and goods are sold on hire-purchase
adding 25% to cost. From the following information (all figures are at hire-purchase price),
prepare Hire-Purchase Trading Account for the year ending March 31, 2013 :
`
April 01, 2012 goods with customers (Instalments not yet due) 80,000
Goods sold on Hire-purchase during the year 4,00,000
Cash received during the year from customers 3,00,000
Instalments due but not yet received at the end of the year,
customers paying 10,000

Question 13
On 1st April, 2012, M/s. Power Motors sold on hire purchase basis a truck whose cash price
was ` 9,00,000 to M/s. Singh & Singh, a transport firm. The terms of the contract were that the
transporters were to pay ` 3,00,000 down and six four-monthly instalments of ` 1,00,000 plus
interest on outstanding amount of cash price for the intervening four months. The instalments
were payable on 31st July, 30th November and 31st March in each one of the two accounting
years. Interest was calculated @ 12% per annum.
M/s. Singh & Singh duly paid the instalment on 31st July, 2012 but failed to pay the instalment
on 30th November, 2012. M/s. Power Motors, after legal formalities, repossessed the truck
valuing it at ` 7,00,000.
M/s. Power Motors spent ` 80,000 on repairs and repainting of the truck and on
7th January, 2013 sold it for ` 7,50,000 cash.
You are required to prepare M/s. Singh & Singh’s A/c and Goods Repossessed Account in the
books of M/s. Power Motors. (6 Marks, May 2013) (IPCC)
Answer
In the books of M/s. Power Motors
M/s. Singh & Singh’s Account
1.04.2012 To Hire Purchase Sales 9,00,000 1.04.2012 By Bank (Down 3,00,000
A/c (Cash Price) payment)
31.07.2012 To Interest A/c 24,000 31.07.2012 By Bank 1,24,000
(1,00,000+24,000)
4
(6,00,000 ×.12 × )
12
30.11.2012 To Interest A/c 30.11.2012 By Goods
4 Repossessed A/c 7,00,000
(5,00,000 ×.12 × ) 20,000
12
30.11.2012 To Profit & Loss Account 1,80,000
(Bal. fig.)
11,24,000 11,24,000
Goods Repossessed Account

30.11.2012 To Singh & Singh’s A/c 7,00,000 7.1.2013 By Bank A/c 7,50,000
7.1.2013 To Bank A/c 80,000 7.1.2013 By By Profit & Loss
(Repairs) A/c -loss 30,000
7,80,000 7,80,000

11.9 Accounting
Question 14
Happy Valley Florists Ltd. acquired a delivery van on hire purchase on 01.04.2010 from
Ganesh Enterprises. The terms were as follows:
Hire Purchase Price 1,80,000
Down Payment 30,000
1st installment payable after 1 year 50,000
2nd installment after 2 years 50,000
3rd installment after 3 years 30,000
4th installment after 4 years 20,000
Cash price of van ` 1,50,000 and depreciation is charged at 10% WDV.
(i) Calculate Total Interest and Interest included in each installment
(ii) Prepare Van A/c., Ganesh Enterprises A/c. in the books of Happy Valley Florists Ltd. up
to 31.03.2014. (8 Marks, IPCCMay, 2014)
Answer
Calculation of total Interest and Interest included in each installment
Hire Purchase Price (HPP) = Down Payment + instalments
= 30,000 + 50,000 + 50,000 + 30,000 + 20,000 = 1,80,000
Total Interest = 1,80,000 – 1,50,000 = 30,000
Computation of IRR (considering two guessed rates of 6% and 12%)
Year Cash Flow DF @6% PV DF @12% PV
0 30,000 1.00 30,000 1.00 30,000
1 50,000 0.94 47,000 0.89 44,500
2 50,000 0.89 44,500 0.80 40,000
3 30,000 0.84 25,200 0.71 21,300

4 20,000 0.79 15,800 0.64 12,800
NPV 1,62,500 NPV 1,48,600

Interest rate implicit on lease is computed below by interpolation:

1,62,500 − 1,50,000
Interest rate implicit on lease = 6% + × (12 − 6 ) = 11.39%
1,62,500 − 1,48,600
12,500
= 6% + × 6 = 11.39%
13,900
Thus repayment schedule and interest would be as under:
Installment Principal at Interest Gross Installment Principle at
no. beginning included in amount end
each
installment
Cash down 1,50,000 1,50,000 30,000 1,20,000
1 1,20,000 13,668 1,33,668 50,000 83,668
2 83,668 9,530 93,198 50,000 43,198
3 43,198 4,920 48,118 30,000 18,118
4 18,118 2,064 20,182 20,000 182*
30,182*
Ledger Accounts in the books of Happy Valley Florist Ltd.

Van Account
1.4.2010 To Ganesh 1,50,000 31.03.2011 By Depreciation A/c 15,000
Enterprises
1,50,000 1,50,000
1.4.2011 To Balance b/d 1,35,000 31.03..2012 By Depreciation A/c 13,500
1,35,000 1,35,000
1.4.2012 To Balance b/d 1,21,500 31.03.2013 By Depreciation A/c 12,150
1,21,500 1,21,500
1.4.2013 To Balance b/d 1,09,350 31.03.2014 By Depreciation A/c 10,935
1,09,350 1,09,350

11.11 Accounting
Ganesh Enterprises Account

1.4.2010 To Bank A/c 30,000 1.4.10 By Van A/c 1,50,000
31.03.2011 To Bank A/c 50,000 31.03.11 By Interest c/d 13,668
1,63,668 1,63,668
31.03.2012 To Bank A/c 50,000 1.4.11 By Balance b/d 83,668
To Balance c/d 43,198 31.03.12 By Interest A/c 9,530
93,198 93,198
To Balance c/d 18,118 31.3.13 By Interest A/c 4,920
48,118 48,118
31.3.14 By Interest A/c 1,882*
20,000 20,000
*Balanced due to approximation in interest calculations.
Question 15
What are the differences between Hire Purchase and Installment System?
Answer
Statement showing differences between Hire Purchase and Installment System
Basis of Distinction Hire Purchase Installment System
1. Governing Act It is governed by Hire It is governed by the Sale of
Purchase 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 The title to goods passes
(ownership) last payment. immediately as in the case
of usual sale.
4. Right to Return goods The hirer may return goods Unless seller defaults,
without further payment goods are not returnable.
except for accrued
installments.
5. Seller’s right to The seller may take The seller can sue for price

repossess possession of the goods if if the buyer is in default. He

hirer is in default. cannot take possession of
the goods.
6. Right of Disposal Hirer cannot hire out sell, The buyer may dispose off
pledge or assign entitling the goods and give good
transferee to retain title to the bona fide
possession as against the purchaser.
hire vendor.
7. Responsibility for Risk The hirer is not responsible The buyer is responsible for
of Loss. for risk of loss of goods if he risk of loss of goods
has taken reasonable because of the ownership
precaution because the has transferred.
ownership has not yet
transferred.
8. Name of Parties The parties involved are The parties involved are
involved called Hirer and Hire vendor. called buyer and seller.
9. Component other than Component other than Cash Component other than Cash
cash price. Price included in installment Price included in Installment
is called Hire charges. is called Interest.

12
Investment Accounts
Question 1
On 1st April, 2008, Mr. Neel purchased 5,000 equity shares of ` 100 each in X Ltd. @ ` 120
each from a Broker, who charged 2% brokerage. He incurred ½% as cost of shares transfer
stamps. On 31st January, 2009, Bonus was declared in the ratio of 1:2. Before and after the
record date of bonus shares, the shares were quoted at ` 175 per share and ` 90 per share
respectively. On 31st March, 2009, Mr. Neel sold bonus shares to a broker, who charged 2%
brokerage.
Show the Investment Account in the books of Mr. Neel, who held the shares as current assets
and closing value of investments shall be made at cost or Market value, whichever is lower.
(8 Marks June,2009)(PCC)
Answer
Investment Account in the books of Mr. Neel
(Scrip: Equity Shares of X Ltd.)
Dr. Cr.
Date Particulars Nominal Cost (` ) Date Particulars Nominal Cost (` )
Value (` ) Value (` )
1.4.08 To Bank A/c 5,00,000 6,15,000 31.3.09 By Bank A/c
(W.N.1) (W.N.2) 2,50,000 2,20,500
31.01.09 To Bonus 31.3.09 By Balance c/d
Shares 2,50,000 - (W.N.4) 5,00,000 4,10,000
31.03.09 To Profit and - 15,500
Loss A/c
(W.N.3)
7,50,000 6,30,500 7,50,000 6,30,500

Investment Accounts 12.2
Working Notes:
1. Calculation of cost of equity shares purchased on 1.4.08
1
= 5,000 × ` 120 + 2% of ` 6,00,000 + % of ` 6,00,000 = ` 6,15,000
2
2. Calculation of profit proceeds of equity shares sold on 31.3.09
= 2,500 × ` 90 – 2% of ` 2,25,000 = ` 2,20,500
3. Calculation of profit on sale of bonus shares on 31.3.09
= Sale proceeds – Average cost
⎛ 2,50,000 ⎞
= 2,20,500 – 2,05,000 i.e. ⎜ 6,15,000 × ⎟ = ` 15,500
⎝ 7,50,000 ⎠
4. Valuation of equity shares on 31.3.09
5,00,000
Cost = 6,15,000 × = ` 4,10,000
7,50,000
Market value = 5,000 shares × ` 90 = ` 4,50,000
Closing Balance has been valued at ` 4,10,000 i.e. at cost which is lower than the
market value.
Question 2
Mr. T purchased 1,000 nos. 10% debentures of ` 100 each on 1st April, 2009 at ` 96 cum-
interest, the previous interest date being 31st December, 2008. Compute cost of investment.
(2 Marks, June, 2009) (PCC)
Answer
`
Total amount payable 1,000 × 96 = 96,000
Less: Interest included in the price for January, February and
10 3
March i.e. 1,00,000 × × = 2,500
100 12
Cost of the Investment 93,500
Question 3
Mr. X purchased 1,000, 6% Government Bonds of ` 100 each on 31st January, 2009 at ` 95
each. Interest is payable on 30th June and 31st December. The price quoted is cum interest.
Journalise the transaction. (2 Marks) (May, 2010) (IPCC)

12.3 Accounting
Answer
Journal Entry
Date Particulars Amount Amount
(Dr.) (Cr.)
` `
31st Jan., 2009 Investment A/c Dr. 94,500
6 1 Dr. 500
Interest A/c (` 1,00,000 × × )
100 12
To Bank A/c 95,000
(Being purchase of 1,000, 6% Government
bonds of ` 100 each at ` 95 each cum
interest)
Question 4
Gaama Investment Company holds 1,000, 15% debentures of ` 100 each in Beta Industries
Ltd. as on April 1, 2009 at a cost of ` 1,05,000. Interest is payable on
June, 30 and December, 31 each year.
On May 1, 2009, 500 debentures are purchased cum-interest at ` 53,500. On November 1,
2009, 600 debentures are sold ex-interest at ` 57,300. On November 30, 2009, 400
debentures are purchased ex-interest at ` 38,400. On December 31, 2009, 400 debentures
are sold cum-interest for ` 55,000.
Prepare the investment account showing value of holdings on March 31, 2010 at cost, using
FIFO method. (6 Marks, May, 2010) (IPCC)
Answer
In the books of Gaama Investments Ltd.
Investment Account (15% Debentures in Beta Industries Ltd.)
Date Particulars Nominal Interest Cost Date Particulars Nominal Interest Cost
Value Value
` ` ` ` ` `
1.04.09 To Balance b/d 30.06.09 By Bank A/c
(W.N.1) 1,00,000 3,750 1,05,000 (W.N.3) - 11,250 -
1.05.09 To Bank A/c 1.11.09 By Bank A/c
(W.N.2) 50,000 2,500 51,000 (W.N.4) 60,000 3,000 57,300
30.11.09 To Bank A/c 1.11.09 By Profit & Loss A/c
(W.N.5) 40,000 2,500 38,400 (W.N.10) 5,700
31.12.09 To Profit & Loss A/c 10,000 31.12.09 By Bank A/c (W.N. 6 40,000 3,000 52,000
(W.N.12) & 7)

31.03.10 To Profit & Loss A/c - 18,625 31.12.09 By Bank A/c - 6,750 -
(W.N.8)
31.03.10 By Bank A/c (W.N.9
& 10) 90,000 3,375 89,400
1,90,000 27,375 2,04,400 1,90,000 27,375 2,04,400
Working Notes:
15 3
1. Accrued interest as on 1.4.09 = ` 1,00,000 × × = Rs.3,750
100 12
15 4
2. Accrued interest = ` 50,000 × × = Rs.2,500
100 12
Cost of investment for purchase on 1.5.09 = ` 53,500 – ` 2,500 = ` 51,000
15 6
3. Interest received = ` 1,50,000 × × = Rs.11,250
100 12
15 4
100 12
15 5
100 12
15 6
100 12
7. Sale price of investment on 31.12.09 = ` 55,000 – ` 3,000 = ` 52,000
15 6
100 12
15 3
100 12
10. Cost of investment as on 31.3.10= ` 51,000 + ` 38,400 = ` 89,400
11. Loss on debentures sold on 1.11.2009:
Sales price of debentures ` 57,300
` 1,05,000
Less: Cost of investment sold = × 600 = (` 63,000)
1,000
Loss on sale ` 5,700)

12.5 Accounting
12. Profit on debentures sold on 31.12.2009:

Sales price of debentures ` 52,000
Rs.1,05,000
Less: Cost of investment sold = × 400 = (` 42,000)
1,000
Profit on sale ` 10,000
Question 5
H purchased 500 equity shares of ` 100 each in the ABC Company Limited for ` 62,500
inclusive of brokerage and stamp duty. Some years later the company decided to capitalise its
profit and to issue to the holders of equity shares one equity share as Bonus for every equity
share held by them. Prior to capitalization, the shares of ABC Company Limited were quoted
at ` 175 per share. After the capitalization, the shares were quoted at ` 92.50 per share. H
sold the Bonus shares and received ` 90 per share. Show Investment A/c in H’s books on
average cost basis as per AS 13. (5 Mark November, 2010) (IPCC)
Answer
In the books of H
Investment Account (Equity Shares of ABC Co. Ltd.)
Particulars Face Cost Particulars Face Cost
Value Value
` ` ` `
∗
To Balance b/d 50,000 62,500 By Bank A/c 50,000 45,000
To Bonus Shares A/c 50,000 - By Balance c/d 50,000 31,250
To Profit & Loss A/c 13,750 (Refer W.N.2)
(Refer W.N. 1)
(Profit on sale)
1,00,000 76,250 1,00,000 76,250
Working Note:
1. Calculation of profit on sale of bonus shares:
`
Sales price of bonus shares 45,000
∗
Bonus issue was made some years later to the purchase of initial 500 equity shares.

⎛ 62,500 ⎞
Less: Average cost of shares sold ⎜ x 50,000 ⎟ = (31,250)
⎝ 1,00,000 ⎠
Profit 13,750
2. Value of closing investment:
⎛ 50,000 ⎞
Market value of shares ⎜ × 92.50 ⎟ = 46,250
⎝ 100 ⎠
Cost price of shares (W.N. 1) = 31,250
Value of investment will be least of market value or average cost price, i.e. ` 31,250
Question 6
On 1st April, 2010, Rajat has 50,000 equity shares of P Ltd. at a book value of ` 15 per share
(face value ` 10 each). He provides you the further information:
(1) On 20th June, 2010, he purchased another 10,000 shares of P Ltd. at ` 16 per share.
(2) On 1st August, 2010, P Ltd. issued one equity bonus share for every six shares held by
the shareholders.
(3) On 31st October, 2010, the directors of P Ltd. announced a right issue which entitle the
holders to subscribe three shares for every seven shares at ` 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 ` 2 per share and subscribe the
rest on 5th November, 2010.
You are required to prepare Investment A/c in the books of Rajat for the year ending
31st March, 2011. (5 Marks May, 2011) (IPCC)
Answer
In the books of Rajat
Investment Account
(Equity shares in P Ltd. )
Date Particulars No. of Amount Date Particulars No. of Amount
shares (`) shares (`)
1.4.10 To Balance b/d 50,000 7,50,000 31.3.11 By Balance c/d 90,000 12,10,000
20.6.10 To Bank A/c 10,000 1,60,000 (Bal. fig.)
1.8.10 To Bonus 10,000 -
issue (W.N.1)
5.11.10 To Bank A/c
(right shares)

12.7 Accounting
(W.N.4) 20,000 3,00,000

90,000 12,10,000 90,000 12,10,000
Working Notes:
50,000 + 10,000
(1) Bonus shares = = 10,000 shares
6
50,000 + 10,000 + 10,000
(2) Right shares = × 3 = 30,000 shares
7
1
(3) Sale of rights = 30,000 shares× × ` 2= ` 20,000 to be credited to Profit & Loss A/c as
3
per AS 13
2
(4) Rights subscribed = 30,000 shares × × ` 15 = ` 3,00,000
3
Question 7
Mr. Brown has made following transactions during the financial year 2011-12:
Date Particulars
01.05.2011 Purchased 24,000 12% Bonds of ` 100 each at ` 84 cum-interest.
Interest is payable on 30th September and 31st March every year.
15.06.2011 Purchased ` 1,50,000 equity shares of ` 10 each in Alpha Limited for
` 25 each through a broker, who charged brokerage @ 2%.
10.07.2011 Purchased 60,000 equity shares of ` 10 each in Beeta Limited for
` 44 each through a broker, who charged brokerage @2%.
14.10.2011 Alpha Limited made a bonus issue of two shares for every three shares held.
31.10.2011 Sold 80,000 shares in Alpha Limited for ` 22 each.
01.01.2012 Received 15% interim dividend on equity shares of Alpha Limited.
15. 01.2012 Beeta Limited made a right issue of one equity share for every four
shares held at ` 5 per share. Mr. Brown exercised his option for 40% of
his entitlements and sold the balance rights in the market at
` 2.25 per share.
01.03.2012 Sold 15,000 12% Bonds at ` 90 ex-interest.
15.03.2012 Received 18% interim dividend on equity shares of Beeta Limited.

Interest on 12% Bonds was duly received on due dates. Prepare separate investment account
for 12% Bonds, Equity Shares of Alpha Limited and Equity Shares of Beeta Limited in the
books of Mr. Brown for the year ended on 31st March, 2012. (8 Marks, May 2012) (IPCC)
Answer
In the books of Mr. Brown
12% Bonds for the year ended 31st March, 2012
Date Particulars No. Income Amount Date Particulars No. Income Amount
` ` ` `
2011 May, To Bank A/c 24,000 24,000 19,92,000 2011 Sept. By Bank- - 1,44,000
1 30 Interest
2012 To P & L A/c - - 1,05,000 2012 Mar. By Bank 15,000 75,000 13,50,000
March 31 (W.N.1) 1 A/c
To P & L A/c 2,49,000 2012 Mar. By Bank- 54,000
31 Interest
By Balance
c/d
(W.N.2) 9,000 - 7,47,000
24,000 2,73,000 20,97,000 24,000 2,73,000 20,97,000
Investment in Equity shares of Alpha Ltd. for the year ended 31st March, 2012
` ` ` `
2011 To Bank A/c 1,50,000 -- 38,25,000 2011 By Bank A/c 80,000 - 17,60,000
June 15 Oct. 31
Oct. 14 To Bonus 1,00,000 - - 2012 By Bank A/c - 2,55,000
Issue Jan. 1 dividend
(1,50,000/3 x2)
2012 To P & L A/c 5,36,000 March 31 By Balance 1,70,000 - 26,01,000
Mar. 31 (W.N.3) c/d
(W.N.4)
To P & L A/c
2,55,000
2,50,000 2,55,000 43,61,000 2,50,000 2,55,000 43,61,000
Investment in Equity shares of Beeta Ltd. for the year ended 31st March, 2012
` ` ` `
2011 To Bank A/c 60,000 -- 26,92,800 2012 By Bank – - 1,18,800
July 10 Mar. 15 dividend
2012 To Bank A/c 6,000 - 30,000 March By Balance
Jan. 15 (W.N. 5) 31 c/d
(bal.fig.) 66,000 - 27,22,800
March To P & L A/c
31 - 1,18,800 -
66,000 1,18,800 27,22,800 66,000 1,18,800 27,22,800
Working Notes:
1. Profit on sale of 12% Bond
Sales price ` 13,50,000

12.9 Accounting
19,92,000
Less: Cost of bond sold = x 15,000 (` 12,45,000)
24,000
Profit on sale ` 1,05,000
2. Closing balance as on 31.3.2012 of 12 % Bond
19,92,000
x 9,000 = ` 7,47,000
24,000
3. Profit on sale of equity shares of Alpha Ltd.
Sales price ` 17,60,000
38,25,000
Less: Cost of bond sold = x 80,000 (` 12,24,000)
2,50,000
Profit on sale ` 5,36,000
4. Closing balance as on 31.3.2012 of equity shares of Alpha Ltd.
38,25,000
x 1,70,000 = ` 26,01,000
2,50,000
5. Calculation of right shares subscribed by Beeta Ltd.
60,000 shares
Right Shares = x 1= 15,000 shares
4
Shares subscribed by Mr. Brown = 15,000 x 40%= 6,000 shares
Value of right shares subscribed = 6,000 shares @ ` 5 per share = ` 30,000
6. Calculation of sale of right entitlement by Beeta Ltd.
No. of right shares sold = 15,000 - 6,000 = 9,000 shares
Sale value of right = 9,000 shares x ` 2.25 per share = ` 20,250
Note: As per para 13 of AS 13, sale proceeds of rights is to be credited to P & L A/c.
Question 8
On 01-04-2011, Mr. T. Shekharan purchased 5,000 equity shares of ` 100 each in V. Ltd. @
` 120 each from a broker, who charged 2% brokerage. He incurred 50 paisa per ` 100 as
cost of shares transfer stamps. On 31-01-2012 bonus was declared in the ratio of 1 : 2. Before
and after the record date of bonus shares, the shares were quoted at ` 175 per share and
` 90 per share respectively. On 31-03-2012 Mr. T. Shekharan sold bonus shares to a broker,
who charged 2% brokerage.

Show the Investment Account in the books of T. Shekharan, who held the shares as Current
Assets and closing value of investments shall be made at cost or market value whichever is
lower. (8 Marks, November 2012) (IPCC)
Answer
In the books of T. Shekharan
Investment Account
(Script: Equity Shares of V Ltd.)
Date Particulars Nominal Cost Date Particulars Nominal Cost
Value Value
(` ) (` ) (` ) (` )
1.4.2011 To Bank A/c 5,00,000 6,15,000 31.3.2012 By Bank A/c 2,50,000 2,20,500
(W.N.1) (W.N.2)
31.1.2012 To Bonus 2,50,000 − 31.3.2012 By Balance 5,00,000 4,10,000
31.3.2012 To shares Profit c/d
and (W.N.4)
Loss A/c
(W.N.3) 15,500
7,50,000 6,30,500 7,50,000 6,30,500
Working Notes:
1. Cost of equity shares purchased on 1.4.2011
= Cost + Brokerage + Shares of transfer stamps
= 5,000 × ` 120 + 2% of ` 6,00,000 + ½% of ` 6,00,000 = ` 6,15,000
2. Sale proceeds of equity shares sold on 31st March, 2012
= Sales price – Brokerage = 2,500 × ` 90 – 2% of ` 2,25,000 = ` 2,20,500.
3. Profit on sale of bonus shares on 31st March, 2012
= Sales proceeds – Average cost
Sales proceeds = ` 2,20,500
Average cost = ` [6,15,000 × 2,50,000/7,50,000] = ` 2,05,000
Profit = ` 2,20,500 – ` 2,05,000= ` 15,500.
4. Valuation of equity shares on 31st March, 2012
Cost = ` [6,15,000 × 5,00,000/7,50,000]= ` 4,10,000 i.e ` 82 per share
Market Value = 5,000 shares × ` 90 = ` 4,50,000
Closing stock of equity shares has been valued at ` 4,10,000 i. e cost being lower than
the market value.

12.11 Accounting
Question 9
In 2011, M/s. Wye 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, 2012, M/s. Bull & Bear purchased 10,000 of these debentures at ` 101
cum-interest price, also paying brokerage @ 1% of cum-interest amount of the purchase. On
1st March, 2013 the firm sold all of these debentures at ` 106 cum-interest price, again paying
brokerage @ 1 % of cum-interest amount.
Prepare Investment Account in the books of M/s. Bull & Bear for the period 1st December,
2012 to 1st March, 2013. (5 Marks, May 2013) (IPCC)
Answer
In the books of M/s Bull & Bear
Investment Account
for the period from 1st December 2012 to 1st March, 2013
(Scrip: 12% Debentures of M/s. Wye Ltd.)
Date Particulars Nominal Interest Cost Date Particulars Nominal Interest Cost
Value (` ) Value (` )
(` ) (` )
1.12.2012 To Bank A/c 10,00,000 20,000 10,00,100 1.03.2013 By Bank A/c 10,00,000 50,000 9,99,400
(W.N.1) (W.N.2)
1.3.2013 To Profit & loss - 1.3.2013 By Profit &
A/c 30,000 loss A/c 700
10,00,000 50,000 10,00,100 10,00,000 50,000 10,00,100
Working Notes:
(i) Cost of 12% debentures purchased on 1.12.2012 `
Cost Value (10,000 × ` 101) = 10,10,000
Add: Brokerage (1% of ` 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 31st March, 2013 `
Sales Price (10,000 × ` 106) = 10,60,000
Question 10
On 01-05-2012, Mr. Mishra purchased 800 equity shares of 10 each in Fillco Ltd. @ ` 50 each
from a broker who charged 5%. He incurred 20 paisa per 100 as cost of shares transfer
stamps. On 31-10-2012, bonus was declared in the ratio 1 : 4. The shares were quoted at
` 110 and ` 60 per share before and after the record date of bonus shares respectively. On

30-11-2012, Mr. Mishra sold the bonus shares to a broker who charged 5%. You are required
to prepare Investment Account in the books of Mr. Mishra for the year ending 31-12-2012 and
closing value of lnvestment shall be made at cost or market value whichever is lower.
Answer
In the books of Mr. Mishra
Investment Account for the year ended 31st Dec. 2012
(Scrip: Equity Shares of Fillco Ltd.)
Date Particulars Nominal Cost Date Particulars Nominal Cost
Value Value
(` ) (`) (` ) (` )
1.5.2012 To Bank A/c 8,000 42,080 30.11.12 By Bank A/c 2,000 11,400
31.10.2012 To Bonus 2,000 − 31.12.12 By Balance 8,000 33,664
shares c/d
31.12.2012 To Profit & − 2,984
loss A/c
10,000 45,064 10,000 45,064
Working Notes:
(i) Cost of equity shares purchased on 1.5.2012 = 800 × ` 50 + 5% of ` 40,000 + .002 of
` 40,000 = ` 42,080.
(ii) Sale proceeds of equity shares sold on 30.11.2012 = 200 × ` 60 – 5% of ` 12,000 = ` 11,400
(iii) Profit on sale of bonus shares on 30.11.12
Sales proceeds = ` 11,400
42,080
Average cost =` x 2,000 = ` 8,416
10,000
Profit = ` 11,400 – ` 8,416 = ` 2,984
(iv) Valuation of equity shares on 31st Dec., 2012
Cost = (` 42,080/10,000 x 8,000) = ` 33,664
Market Value = 800 × ` 60 = ` 48,000
Closing balance has been valued at ` 33,664 being lower than the market value
Less: Brokerage (1% of ` 10,60,000) = (10,600)
Less: Cum Interest (10,000 x 100 x12% x 5/12) = (50,000)
Total = 9,99,400

12.13 Accounting
Question 11
Smart Investments made the following investments in the year 2013-14:
12% State Government Bonds having face value ` 100
Date Particulars
01.04.2013 Opening Balance (1200 bonds) book value of ` 126,000
02.05.2013 Purchased 2,000 bonds @ ` 100 cum interest
30.09.2013 Sold 1,500 bonds at ` 105 ex interest
Interest on the bonds is received on 30th June and 31st Dec. each year.
Equity Shares of X Ltd.
15.04.2013 Purchased 5,000 equity shares @ ` 200 on cum right basis
Brokerage of 1% was paid in addition (Face Value of shares ` 10)
03.06.2013 The company announced a bonus issue of 2 shares for every 5
shares held.
16.08.2013 The company made a rights issue of 1 share for every 7 shares
held at ` 250 per share.
The entire money was payable by 31.08.2013.
22.8.2013 Rights to the extent of 20% was sold @ ` 60. The remaining
rights were subscribed.
02.09.2013 Dividend @ 15% for the year ended 31.03.2013 was received on
16.09.2013
15.12.2013 Sold 3,000 shares @ ` 300. Brokerage of 1% was incurred extra.
15.01.2014 Received interim dividend @ 10% for the year 2013-14
31.03.2014 The shares were quoted in the stock exchange @ ` 220
Prepare Investment Account in the books of Smart Investments. Assume that the average cost
method is followed. (8 Marks, IPCC May, 2014)

Answer
In the books of Smart Investments
12% Govt. Bonds for the year ended 31st March, 2014
Date Particulars Nos. Incom Amount Date Particulars Nos. Income Amount
e
1.4.13 To Opening 1,200 3,600 1,26,000 30.6.13 By Bank A/c (Interest) - 19,200 -
balance b/d (3,200 x 100 x 12%
x 6/12)
2.5.13 To Bank A/c 2,000 8,000 1,92,000 30.9.13 By Bank A/c 1,500 4,500 1,57,500
31.3.14 To P & L A/c 27,400 31.12.13 By Bank A/c (Interest) - 10,200 -
(Interest) (1,700 x 100 x 12%

x 6/12)
To P & L A/c 8,437.50 31.3.14 By Bal. c/d 1,700 5,100 1,68,937.50
(Profit on Sale)
3,200 39,000 3,26,437.50 3,200 39,000 3,26,437.50
Investments in Equity shares of X Ltd. for year ended 31.3.2014
Date Particulars Nos. Income Amount Date Particulars Nos. Income Amount
15.4.13 To Bank A/c 5,000 10,10,000 By Bank (Dividend) - - 7,500
3.6.13 To Bonus Issue 2,000 - - 16.9.13 By Bank (Sale) 3,000 - 8,91,000
31.8.13 To Bank A/c 800 2,00,000 15.12.13 By Bank (interim dividend) 4,800
31.3.14 To P & L A/c 4,800 4,28,500 15.1.14 By Bal. c/d 4,800 7,40,000
Investment Accounts
31.3.14
7800 4,800 16,38,500 7800 4,800 16,38,500
12.14
12.15 Accounting
Working Notes:
1. Profit on sale of bonds on 30.9.13
Average cost = ` [(1,26,000+1,92,000) × 1,500/3,200] = 1,49,062.50
Profit = 1,57,500– ` 1,49,062.50=` 8,437.50
2. Valuation of bonds on 31st March, 2014
Cost = ` 3,18,000/3,200 x1,700 = 1,68,937.50
3. Cost of equity shares purchased on 15/4/2013
= Cost + Brokerage
= (5,000 ×` 200) + 1% of (5,000 × ` 200) = ` 10,10,000
4. Sale proceeds of equity shares on 15/12/2013
= Sale price – Brokerage
= (3,000 ×` 300) – 1% of (3,000 × ` 300) = ` 8,91,000.
5. Profit on sale of shares on 15/12/2013
Average cost = ` [(10,10,000+2,00,000-7,500) × 3,000/7,800]
= ` [12,02,500 × 3,000/7,800] = 4,62,500
Profit = ` 8,91,000 – ` 4,62,500=` 4,28,500.
6. Valuation of equity shares on 31st March, 2014
Cost =` [12,02,500 × 4,800/7,800] = ` 7,40,000
Market Value = 4,800 shares ×` 220 =` 10,56,000
Closing stock of equity shares has been valued at ` 7,40,000 i.e. cost being lower
than the market value.
Note:
1. It is presumed that no dividend is received on bonus shares as bonus shares are
declared on 3.6.2013 and dividend pertains to the year ended 31.03.2013.
2. The amount of dividend for the period, for which shares were not held by the investor,
has been treated as capital receipt.

13
Insurance Claims for Loss of Stock &
Loss of Profit
Question 1
On 2.6.2007 the stock of Mr. Black was destroyed by fire. However, following particulars were
furnished from the records saved:
`
Stock at cost on 1.4.2006 1,35,000
Stock at 90% of cost on 31.3.2007 1,62,000
Purchases for the year ended 31.3.2007 6,45,000
Sales for the year ended 31.3.2007 9,00,000
Purchases from 1.4.2007 to 2.6.2007 2,25,000
Sales from 1.4.2007 to 2.6.2007 4,80,000
Sales upto 2.6.2007 includes ` 75,000 being the goods not dispatched to the customers. The
sales invoice price is ` 75,000.
Purchases upto 2.6.2007 includes a machinery acquired for ` 15,000.
Purchases upto 2.6.2007 does not include goods worth ` 30,000 received from suppliers, as
invoice not received upto the date of fire. These goods have remained in the godown at the
time of fire.
Value of stock salvaged from fire ` 22,500 and this has been handed over to the insurance
company.
The insurance policy is for ` 1,20,000 and it is subject to average clause. Ascertain the
amount of claim for loss of stock. (8 Marks) (May, 2007)(PCC)

Insurance Claims for Loss of Stock & Loss of Profit 13.2
Answer
In the books of Mr. Black
` `
To Opening Stock 1,35,000 By Sales 9,00,000
To Purchases 6,45,000 By Closing Stock at cost 1,80,000
To Gross Profit 3,00,000 ⎛ 100 ⎞
⎜ 1,62,000 × ⎟
⎝ 90 ⎠
10,80,000 10,80,000
Memorandum Trading A/c
for the period from 1.4.2007 to 02.06.2007
` `
To Opening Stock at cost 1,80,000 By Sales 4,80,000
To Purchases 2,25,000 Less: Goods not
Add: Goods received but dispatched 75,000 4,05,000
invoice not received 30,000 By Closing stock (Balancing 1,50,000
2,55,000 figure)
Less: Machinery 15,000 2,40,000
To Gross Profit (Refer working note) 1,35,000
5,55,000 5,55,000
Calculation of Insurance Claim
Claim subject to average clause = Actual loss of stock x Amount of Policy / Value of stock on
the date of fire
⎛ 1,20,000 ⎞
= 1,50,000∗ x ⎜ ⎟ = ` 1,20,000
⎝ 1,50,000 ⎠
Working Note:
3,00,000 1
G.P. ratio = × 100 = 33 %
9,00,000 3
1
Amount of Gross Profit = ` 4,05,000 x 33 % = ` 1,35,000
3
∗
Salvaged stock amounting ` 22,500 handed over to the insurance company is also a loss to Mr. Black.

13.3 Accounting
Question 2
On 11.11.2007 the premises of Rocky Ltd. was destroyed by fire. The following information is
made available:
`
Stock as on 1.4.2006 3,75,000
Sales from 1.4.2006 to 31.3.2007 8,55,000
Stock as on 31.3.2007 2,00,000
Sales from 1.4.2007 to 11.11.2007 4,35,500
In valuing the stock on 31.3.2007, due to damage 50% of the value of the stock which
originally cost ` 22,000 was written off.
In June, 2007 about 50% of this stock was sold for ` 5,500 and the balance of obsolete stock
is expected to realize the same price (i.e., 50% of the original cost).
The gross profit ratio is to be assumed as uniform in respect of other sales. Stock salvaged
from fire amounts to ` 11,500.
Compute the value of stock lost in fire. (8 Marks) (May, 2008) (PCC)
Answer
In the books of Rocky Ltd.
` `
To Opening stock 3,75,000 By Sales 8,55,000
To Purchases 5,20,000 By Closing stock (W.N.) 2,11,000
To Gross profit (Bal. fig.) 1,71,000
10,66,000 10,66,000
Gross profit ratio of 2006-2007 = Gross profit

× 100
Sales
= ` 1,71,000
× 100
` 8,55,000
= 20%

Memorandum Trading Account

for the period 1.4.2007 to 11.11.2007
Normal Abnormal Normal Abnormal
` ` ` `
To Opening stock 1,89,000 11,000 By Sales 4,30,000 5,500
To Purchases 3,41,000 By Closing stock 1,86,000 5,500
To Gross profit @
20% 86,000
6,16,000 11,000 6,16,000 11,000
Computation of stock lost in fire:
Closing stock = Normal stock + Abnormal stock
= ` 1,86,000 + ` 5500
= ` 1,91,500
Less: Stock salvaged ` 11,500
Stock lost in fire ` 1,80,000
Working Note:
Closing stock = Closing stock as given + Amount written off
= ` 2,00,000 +` 11,000
= ` 2,11,000
Question 3
From the following details, calculate consequential loss claim:
1. Date of fire: 1st September following;
2. Indemnity period: 6 months;
3. Period of disruption : 1st September to 1st February;
4. Sum insured: ` 1,08,900;
5. Sales were ` 6,00,000 for preceding financial year ended on 31st March;
6. Net profit for preceding financial year ` 36,000 plus insured standing charges
` 72,000;
7. Rate of Gross profit 18%;
8. Uninsured standing charges ` 6,000;

13.5 Accounting
9. Turnover during the disruption period ` 67,500;

10. Annual turnover for 12 months immediately preceding the date of fire ` 6,60,000;
11. Standard turnover i.e. for corresponding months (1st September to 1st February) in the
year preceding the date of fire ` 2,25,000;
12. Increase in the cost of working capital ` 12,000 with a saving of insured standing
charges ` 4,500 during the disruption period;
13. Reduced turnover avoided through increase in working capital ` 30,000;
14. Special clause stipulated:
a. Increase in rate of G.P. 2%.
b. Increase in turnover (standard and annual) 10%. (8 Marks) (November, 2008) (PCC)
Answer
Computation of the amount of claim for consequential loss:
(i) Calculation of short sales: `

Standard turnover of 1st September to 1st October (preceding) 2,25,000
Add: Increase of 10% due to upward trend 22,500
Adjusted turnover 2,47,500
Less: Actual turnover during disruption period i.e. 1st September to 1st
October (following) 67,500
1,80,000
(ii) Increased rate of G.P. = 18% + 2% = 20% on sales.
(iii) Loss of profit on short sales = 20% of ` 1,80,000 = ` 36,000.
(iv) Calculation of claim for increased cost of working capital:
Increased cost of working will be lower of `

(i) Actual expense 12,000
(ii) G.P. on Annual turnover
Additionalexpenses×
G.P. on Annual turnover + Uninsuredcharges
1,45,200 11,523
12,000 ×
1,45,200 + 6,000
(iii) G.P. on additional sales = 30,000 x 20% 6,000

` 6,000 is lower of above three, so additional expenses would be ` 6,000

Net claim for increased cost of working capital = ` 6,000 minus savings in insured
standing charges = ` 6,000 – ` 4,500 = ` 1,500
(v) Calculation of adjusted annual sales `

Sales for 12 months preceding the date of fire 6,60,000
Add: 10% of increase in trend 66,000
Adjusted Annual Sales 7,26,000
(vi) Insurable Amount i.e gross profit on adjusted annual sales `
Adjusted annual sales 7,26,000
Rate of Gross Profit 20%
Insurable amount (` 7,26,000 x 20%) 1,45,200
(vii) Amount of Insurance Claim:
Insured Amount
= × Total Loss ( Loss of profit + Claim for increased cost)
Insurable Amount
1,08,900
= × (36,000 + 1,500) = ` 28,125.
1,45,200
Question 4
What is “average clause” under insurance claim? (2 Marks)(June, 2009) (PCC)
Answer
When a businessman wants to reduce the burden of Insurance Premium and wants to take
an insurance policy which is less than the value of average stock, it is known as under
insurance. For discouraging the under-insurance, fire insurance policies contain an
average clause. In such a case, the net claim is calculated by using following formula:
Amount of Policy
Amount of claim = × ActualLoss
Insurable Amount

13.7 Accounting
Question 5
Calculate the amount of Insurance claim to be lodged, based on the following information:
Value of stock destroyed by fire ` 90,000

Insurance policy amount (subject to average clause) ` 65,000
Value of stock salvaged from fire ` 40,000
Answer
Total stock before fire = ` 90,000 + ` 40,000 = ` 1,30,000.
Stock destoyed by fire
Amount of insurance claim = × Amount insured
Total stock before fire
` 90,000
= ×` 65,000 = ` 45,000
` 1,30,000
Question 6
A fire broke out in the godown of a business house on 8th July, 2009. Goods costing `
2,03,000 in a small sub-godown remain unaffected by fire. The goods retrieved in a damaged
condition from the main godown were valued at ` 1,97,000.
The following particulars were available from the books of accounts:
Stock on the last Balance Sheet date at 31st March, 2009 was ` 15,72,000. Purchases for the
period from 1st April, 2009 to 8th July, 2009 were ` 37,10,000 and sales during the same
period amounted to ` 52,60,000. The average gross profit margin was 30% on sales.
The business house has a fire insurance policy for ` 10,00,000 in respect of its entire stock.
Assist the Accountant of the business house in computing the amount of claim of loss by fire.
(8 Marks) (November, 2009) (IPCC)
Answer
Calculation of amount of claim ` `

Value of stock as on 8th July, 2009 (Refer W.N.) 16,00,000
Less: Value of stock remaining unaffected by fire 2,03,000
Agreed value of damaged goods 1,97,000 4,00,000
Loss of stock 12,00,000

Applying average clause:

Amount of policy
Amount of claim = × Loss of stock
Stock on the date of fire
` 10,00,000
= ×12,00,000
` 16,00,000
= ` 7,50,000
Working Note:
Memorandum Trading Account for the period from 1st April, 2009 to 8th July, 2009
` `
To Purchases 37,10,000 By Closing Stock (Bal.Fig.) 16,00,000
To Gross Profit (30% of
sales) 15,78,000
68,60,000 68,60,000
Question 7
In January, 2010 a firm took an insurance policy for ` 60 lakhs to insure goods in its godown
against fire subject to average clause. On 7th March, 2010 a fire broke out destroying goods
costing ` 44 lakhs. Stock in the godwon was estimated at ` 80 lakhs. Compute the amount
of insurance claim. (2 Marks) (May, 2010) (IPCC)
Answer
Amount of insurance policy
Amount of insurance claim = Amount of loss due to fire ×
Totalstock in the godown
Rs.60lakhs
= ` 44 lakhs ×
Rs.80lakhs
= ` 33 lakhs
Question 8
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 4,50,000

13.9 Accounting
Standing charges in last financial year 90,000

Net profit earned in last year was 10% of turnover and the same trend expected in
subsequent year.
Increase in turnover expected 25%.
To achieve additional sales, trader has to incur additional expenditure of ` 31,250.
(4 Marks) (November, 2010) (IPCC)
Answer
(a) Calculation of Gross Profit
Net Profit + Standing Charges
Gross Profit = × 100
Turnover
45,000 + 90,000
= × 100 = 30%
4,50,000
(b) Calculation of policy amount to cover loss of profit
`
Turnover in the last financial year 4,50,000
Add: 25% increase in turnover 1,12,500
5,62,500
Gross profit on increased turnover (5,62,500 x 30%) 1,68,750
Add: Additional standing charges 31,250
Policy Amount 2,00,000
Therefore, the trader should go in for a loss of profit policy of ` 2,00,000.

Question 9
On 30th March, 2011 fire occurred in the premises of M/s Suraj Brothers. The concern had
taken an insurance policy of ` 60,000 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 2011.
(1) Stock as per Balance Sheet at 31st December, 2010, ` 95,600.
(2) Purchases (including purchase of machinery costing ` 30,000) ` 1,70,000
(3) Wages (including wages ` 3,000 for installation of machinery) ` 50,000.

(4) Sales (including goods sold on approval basis amounting to ` 49,500) ` 2,75,000. No
approval has been received in respect of 2/3rd of the goods sold on approval.
(5) The average rate of gross profit is 20% of sales.
(6) The value of the salvaged goods was ` 12,300.
You are required to compute the amount of the claim to be lodged to the insurance company.
(5 Marks) (May, 2011) (IPCC)
Answer
Computation of claim for loss of stock
`
Stock on the date of fire i.e. on 30th March, 2011 (W.N.1) 62,600
Less: Value of salvaged stock (12,300)
Loss of stock 50,300
Insured value 48,211 (approx.)
Amount of claim = x Loss of stock
Total cost of stock on the date of fire
⎛ 60,000 ⎞
= ⎜ × 50,300 ⎟
⎝ 62,600 ⎠
A claim of ` 48,211 (approx.) should be lodged by M/s Suraj Brothers to the insurance
company.
Working Notes:
1. Calculation of closing stock as on 30th March, 2011
Memorandum Trading Account for
(from 1st January, 2011 to 30th March, 2011)
(`) (`)
To Opening stock 95,600 By Sales (W.N.3) 2,42,000
To Purchases By Goods with customers
(1,70,000 – 30,000) 1,40,000 (for approval) (W.N.2) 26,400
To Wages By Closing stock (Bal. fig.) 62,600
(50,000 – 3,000) 47,000
To Gross profit
(20% on sales) 48,400
3,31,000 3,31,000

13.11 Accounting
2. Calculation of goods with customers

Since no approval for sale has been received for the goods of ` 33,000 (i.e. 2/3 of
` 49,500) hence, these should be valued at cost i.e. ` 33,000 – 20% of ` 33,000 =
` 26,400.
3. Calculation of actual sales
Total sales – Sale of goods on approval = ` 2,75,000 – ` 33,000 = ` 2,42,000.
Question 10
A fire occurred in the premises of M/s. Fireproof Co. on 31st August, 2010. From the following
particulars relating to the period from 1st April, 2010 to 31st August, 2010, 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 31-03-2010 99,000
(ii) Purchases 1,70,000
(iii) Wages (including wages for the installation of a machine ` 3,000) 50,000
(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, 2010, lying unsold
with them 16,500
(vii) Cost of goods distributed as free samples 1,500
While valuing the stock at 31st March, 2010, ` 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% throughout. (10 Marks) (November, 2011) (IPCC)
Answer
Memorandum Trading Account for the period 1st April, 2010 to 31st August, 2010
Normal Abnormal Total Normal Abnormal Total
Items Items Items Items
` ` ` ` ` `
To Opening stock 95,000 5,000 1,00,000 By Sales 2,40,000 2,000 2,42,000
To Purchases 1,56,500 - 1,56,500 By Goods sent to
(Refer W.N.) consignee 16,500 - 16,500

To Wages 47,000 - 47,000 By Loss - 500 500

To Gross profit 48,000 - 48,000 By Closing stock 90,000 2,500 92,500
@ 20% (Bal.fig.)
3,46,500 5,000 3,51,500 3,46,500 5,000 3,51,500
Statement of Claim for Loss of Stock

`
Book value of stock as on 31.08.2010 92,500
Less: Stock salvaged (20,000)
Loss of stock 72,500
Amount of claim to be lodged with insurance company
Policy value
= Loss of stock x
Value of stock on the date of fire
60,000
= ` 72,500 x
92,500
= ` 47,027
Working Note:
Calculation of Adjusted Purchases
`
Purchases 1,70,000
Less: Drawings (12,000)
Free samples (1,500)
Adjusted purchases 1,56,500
Question 11
Ramda & Sons had taken out policies (without Average Clause) both against loss of stock and loss
of profit, for ` 2,10,000 and ` 3,20,000 respectively. A fire occurred on 1st July, 2011 and as a
result of which sales were seriously affected for a period of 3 months.
Trading and Profit & Loss A/c of Ramda & Sons for the year ended on 31st March, 2011 is given
below:
To Opening Stock 96,000 By Sales 12,00,000

13.13 Accounting
To Purchases 7,56,000 By Closing Stock 1,85,000

To Wages 1,58,000
To Manufacturing Expenses 75,000
To Gross Profit c/d 3,00,000
13,85,000 13,85,000
To Administrative Expenses 83,600 By Gross Profit b/d 3,00,000
To Selling Expenses (Fixed) 72,400
To Commission on Sales 34,200
To Carriage Outward 49,800
3,00,000 3,00,000
Further detail provided is as below:
(a) Sales, Purchases, Wages and Manufacturing Expenses for the period 1.04.2011 to
30.06.2011 were ` 3,36,000, ` 2,14,000, ` 51,000 and ` 12,000 respectively.
(b) Other Sales figure were as follows `
From 01.04.2010 to 30.06.2010 3,00,000
From 01.07.2010 to 30.09.2010 3,20,000
From 01.07.2011 to 30.09.2011 48,000
(c) Due to decrease in the material cost, Gross Profit during 2011-12 was expected to increase
by 5% on sales.
(d) ` 1,98,000 were additionally incurred during the period after fire. The amount of policy
included ` 1,56,000 for expenses leaving ` 42,000 uncovered.
Compute the claim for stock, loss of profit and additional expenses (16 Marks, May 2012) (IPCC)
Answer
Claim for loss of stock
Memorandum Trading Account for the period 1st April to 1st July, 2011
` `
To Purchases 2,14,000 By Closing stock
To Wages 51,000 (Bal.fig.) 2,26,800
To Manufacturing expenses 12,000

To Gross Profit @ 30% on sales

(W.N) 1,00,800
5,62,800 5,62,800
Claim for loss of stock will be limited to ` 2,10,000 only which is the amount of Insurance
policy and no average clause will be applied.
Loss of Profit
(a) Short Sales :
Sales from 1st July, 2010 to 30th Sept. 2010 3,20,000
Add: 12% rise observed in 2011-12 over 2010-11
(April- June ` 3,36,000 instead of ` 3,00,000) 38,400
3,58,400
Less: Sales from 1st July, 2011 to 30th Sept. 2011 (48,000)
Short-Sales 3,10,400
(b) Gross profit ratio
Net Profit + Insured standing charges (2010-11)
× 100
Sales (2010-11)
60,000 + 1,56,000
× 100 = 18%
12,00,000
Add: Expected rise due to decline in material cost 5%
23%
(c) Loss of Gross Profit
23% on short sales ` 3,10,400= ` 71,392
(d) Annual turnover (12 months to 1st July, 2011):
Amount (`)
Sales for April 2010 - March, 2011 12,00,000
Less: From 1-4-2010 to 30-6-2010 (3,00,000)
9,00,000
Add: From 1-4-2011 to 30-6-2011 3,36,000
12,36,000
Add: 12% increasing trend 1,48,320
13,84,320

13.15 Accounting
Gross Profit on annual turnover @ 23% 3,18,394

(e) Amount allowable in respect of additional expenses
Least of the following: Amount (`)
(i) Actual expenses 1,98,000
(ii) Gross Profit on sales during indemnity period
23% of ` 48,000 11,040
Gross profit on annual (adjusted) turnover
(iii) × Additional Expenses
Gross profit as above + Uninsured charges
(3,18,394/ 3,60,394) x 1,98,000 1,74,925
Least i.e. `11,040 is admissible.
Claim
Loss of Gross Profit ` 71,392
Add: Additional expenses ` 11,040
` 82,432
Insurance claim for loss of profit will be of ` 82,432 only.
Working Note:
Rate of Gross Profit in 2010-11
Gross Pr ofit
× 100
Sales
3,00,000
× 100 = 25%
12,00,000
In 2011-12, Gross Profit is expected to increase by 5% as a result of decline in material cost,
hence the rate of Gross Profit for loss of stock is taken at 30%.
Question 12
On 29th August, 2012 the godown of a trader caught fire and a large part of the stock of goods
was destroyed. However, goods costing ` 1,08,000 could be salvaged incurring fire fighting
expenses amounting to ` 4,700.
The trader provides you the following additional information:
`
Cost of stock on 1st, April, 2011 7,10,500

Cost of stock on 31st, March, 2012 7,90,100

Purchases during the year ended 31st March, 2012 56,79,600
Purchases from 1st April, 2012 to the date of fire 33,10,700
Cost of goods distributed as samples for advertising from
1st April, 2012 to the date of fire 41,000
Cost of goods withdrawn by trader for personal use from
1st April, 2012 to the date of fire 2,000
Sales for the year ended 31st March, 2012 80,000
Sales from 1st April, 2012 to the date of fire 45,36,000
The insurance company also admitted firefighting expenses. The trader had taken the fire
insurance policy for ` 9,00,000 with an average clause.
Calculate the amount of the claim that will be admitted by the insurance company.
Answer
Memorandum Trading Account for the period 1st April, 2012 to 29th Aug.2012
`
` `
To Purchases 33,10,700 By Closing stock (Bal. 8,82,600
fig.)
Less: Advertisement (41,000)
Drawings (2,000) 32,67,700
To Gross Profit [30% of Sales 13,60,800
- Refer Working Note]
54,18,600 54,18,600
Statement of Insurance Claim
`
Value of stock destroyed by fire 8,82,600
Less: Salvaged Stock (1,08,000)
Add: Fire Fighting Expenses 4,700
Insurance Claim 7,79,300

13.17 Accounting
Note: Since policy amount is more than claim amount, average clause will not apply.
Therefore, claim amount of ` 7,79,300 will be admitted by the Insurance Company.
Working Note:
Trading Account for the period ended 31st March, 2012
` `
To Purchases 56,79,600 By Closing stock 7,90,100
To Gross Profit 24,00,000
87,90,100 87,90,100
Rate of Gross Profit in 2011-12
Gross Pr ofit 24,00,000
× 100 = × 100 = 30%
Sales 80,00,000
Question 13
On 15th December, 2012, a fire occurred in the premises of M/s. OM Exports. Most of the
stocks were destroyed. Cost of stock salvaged being ` 1,40,000. From the books of account,
the following particulars were available:
(i) Stock at the close of account on 31st March, 2012 was valued at ` 9,40,000.
(ii) Purchases from 01-04-2012 to 15-12-2012 amounted to ` 13,20,000 and the sales
during that period amounted to ` 20,25,000.
On the basis of his accounts for the past three years, it appears that average gross profit ratio
is 20% on sales.
Compute the amount of the claim, if the stock were insured for ` 4,00,000.
Answer
Memorandum Trading Account
For the period 01.04.2012 to 15.12.2012
To Opening stock 9,40,000 By Sales 20,25,000
To Purchases 13,20,000 By Closing Stock 6,40,000
To Gross Profit @20% 4,05,000 (Bal. figure)
26,65,000 26,65,000

Statement of Claim
`
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
As the value of stock is more than insured value, amount of claim would be subject to average
clause.
Amount of Policy
Amount of Claim= × Actual Loss of Stock
Value of Stock
4,00,000
Amount of Claim = × 5,00,000
6,40,000
= ` 3,12,500
Question 14
Monalisa & Co. runs plastic goods shop. Following details are available from quarterly
sales tax return filed.
Sales 2009 2010 2011 2012
` ` ` `
From 1st January to 31st March 1,80,000 1,70,000 2,05,950 1,62,000
From 1st April to 30th June 1,28,000 1,86,000 1,93,000 2,21,000
From 1st July to 30th September 1,53,000 2,10,000 2,31,000 1,75,000
From 1st October to 31st December 1,59,000 1,47,000 1,90,000 1,48,000
Total 6,20,000 7,13,000 8,19,950 7,06,000
Period `
Sales from 16-09-2011 to 30-09-2011 34,000
Sales from 16-09-2012 to 30-09-2012 Nil
Sales from 16-12-2011 to 31-12-2011 60,000
Sales from 16-12-2012 to 31-12-2012 20,000
A loss of profit policy was taken for ` 1,00,000. Fire occurred on 15th September, 2012.
Indemnity period was for 3 months. Net Profit was ` 1,20,000 and standing charges
(all insured) amounted to ` 43,990 for year ending 31st December, 2011.

13.19 Accounting
Determine the Insurance Claim. (16 Marks, November 2013) (IPCC)

Answer
(1) Gross profit ratio `
Net profit in year 2011 1,20,000
Add: Insured standing charges 43,990
Gross profit 1,63,990
1,63,990
Ratio of gross profit = = 20%
8,19,950
(2) Calculation of Short sales
Indemnity period: 16.9.2012 to 15.12.12
Standard sales to be calculated on basis of corresponding period of year 2011
`
Sales for period 16.9.2011 to 30.9.11 34,000
Sales for period 1.10.2011 to 15.12.2011 (Note 1) 1,30,000
Sales for period 16.9.2011 to 15.12.2011 1,64,000
Add: upward trend in sales (15%) (Note 2) 24,600
Standard Sales (adjusted) 1,88,600
Actual sales of disorganized period
Calculation of sales from 16.9.12 to 15.12.12
Sales for period 16.9.12 to 30.9.12 Nil
Sales for 1.10.12 to 15.12.12 (` 1,48,000 – ` 20,000) 1,28,000
Actual Sales 1,28,000
Short Sales (` 1,88,600 - ` 1,28,000) 60,600
(3) Loss of gross profit
Short sales x gross profit ratio = 60,600 x 20% 12,120

(4) Application of average clause

policy value
Net claim = Gross claim x
gross profit on annual turnover
1,00,000
= 12,120 x
1,79,860 (Note 3)
Amount of claim = 6,738.57 (approx.) i.e. `. 6,739 (round off)
Working Notes:
1. Sales for period 1.10.11 to 15.12.11 `
Sales for 1.10.11 to 31.12.11 (given) 1,90,000
Sales for 16.12.11 to 31.12.11 (given) 60,000
Sales for period 1.10.11 to 15.12.11 1,30,000
2. Calculation of upward trend in sales
Total sales in year 2009 ` 6,20,000
Increase in sales in year 2010 as compared to 2009 = ` 93,000
93,000 (7,13,000 - 6,20,000)
% increase = = 15%
6,20,000
Increase in sales in year 2011 as compared to year 2010
1,06,950 (8,19,950 - 7,13,000)
% increase = = 15%
7,13,000
Thus annual percentage increase trend is of 15%.
3. Gross profit on annual turnov `
Sales from 16.9.11 to 30.9.11 34,000
1.10.11 to 31.12.11 1,90,000
1.1.12 to 31.3.12 1,62,000
1.4.12 to 30.6.12 2,21,000
1.7.2012 to 15.9.2012 (1,75,000 – Nil) 1,75,000

13.21 Accounting
Sales for 12 months just before date of fire 7,82,000

Add: 15% upward trend 1,17,300
Adjusted sales of 12 months just before the date of fire 8,99,300
Gross profit on adjusted annual sales @ 20% 1,79,860
Question 15
A fire occurred in the premises of M/s. Kailash & Co. on 30th September 2013. From the
following particulars relating to the period from 1st April 2013 to 30th September 2013, you are
required to ascertain the amount of claim to be filed with the Insurance Company for the loss
of Stock. The company has taken an Insurance policy for ` 75,000 which is subject to average
clause. The value of goods salvaged was estimated at ` 27,000. The average rate of Gross
Profit was 20% throughout the period.
Particulars Amount in `
(i) Opening Stock 1,20,000
(ii) Purchase made 2,40,000
(iii) Wages paid (including wages for the installation of a machine 75,000
` 5,000)
(iv) Sales 3,10,000
(v) Goods taken by the Proprietor (Sale Value) 25,000
(vi) Cost of goods sent to Consignee on 20th September 2013, lying 18,000
unsold with them
(vii) Free Samples distributed -Cost 2,500
Answer
Memorandum Trading Account for the period 1st April, 2013 to 30th Sept. 2013
` `
To Purchases 2,40,000 By Consignment stock 18,000
Less: Advertisement (2,500) By Closing Stock (Bal. fig.) 1,41,500
Cost of goods
taken by proprietor (20,000) 2,17,500
To Wages 70,000
To Gross Profit 62,000
[20% of Sales)
4,69,500 4,69,500

Statement of Insurance Claim

`
Value of stock destroyed by fire 1,41,500
Less: Salvaged Stock (27,000)
Insurance Claim 1,14,500
Note: Since policy amount is less than claim amount, average clause will apply. Therefore,
claim amount will be computed by applying the formula
Insured value
Claim= ×Loss suffered
Total cost
Claim amount = ` 60,689 (1,14,500 x 75,000/ 1,41,500)

14
Issues in Partnership Accounts
Question 1
Ram, Rahim and Robert are partners, sharing Profits and Losses in the ratio of 5 : 3 : 2.
It was decided that Robert would retire on 31.3.2005 and in his place Richard would be admitted
as a partner with new profit sharing ratio between Ram, Rahim and Richard at 3 : 2 : 1.
Balance Sheet of Ram, Rahim and Robert as at 31.3.2005:
Capital Accounts: Cash in hand 20,000
Ram 1,00,000 Cash in Bank 1,00,000
Rahim 1,50,000 Sundry Debtors 5,00,000
Robert 2,00,000 Stock in Trade 2,00,000
General Reserve 2,00,000 Plant & Machinery 3,00,000
Sundry Creditors 8,00,000 Land & Building 5,30,000
Loan from Richard 2,00,000 ________
16,50,000 16,50,000
Retirement of Robert and admission of Richard is on the following terms:
(a) Plant & Machinery to be depreciated by ` 30,000.
(b) Land and Building to be valued at ` 6,00,000.
(c) Stock to be valued at 95% of book value.
(d) Provision for doubtful debts @ 10% to be provided on debtors.
(e) General Reserve to be apportioned amongst Ram, Rahim and Robert.
(f) The firm’s goodwill to be valued at 2 years purchase of the average profits of the last 3
years. The relevant figures are:
Year ended 31.3.2002 − Profit ` 50,000

Issues in Partnership Accounts 14.2

(g) Out of the amount due to Robert ` 2,00,000 would be retained as loan by the firm and
the balance will be settled immediately.
(h) Richard’s capital should be equal to 50% of the combined capital of Ram and Rahim.
Prepare:
(i) Capital accounts of the partners; and
(ii) Balance Sheet of the reconstituted firm. (16 Marks, November 2005) (PE-II)
Answer
Partners’ Capital Accounts
Dr. Cr.
Ram Rahim Robert Richard Ram Rahim Robert Richard
` ` ` ` ` ` ` `
To Revaluation 10,000 6,000 4,000 − By Balance 1,00,000 1,50,000 2,00,000 −

A/c(W.N. 1) b/d
To Loan from 2,00,000 By General 1,00,000 60,000 40,000 −

Robert A/c reserve
To Bank 58,000 By Goodwill 55,000 33,000 22,000 −

(W.N. 2)
To Balance c/d 2,45,000 2,37,000 − − _______ _______ _______ _______
2,55,000 2,43,000 2,62,000 − 2,55,000 2,43,000 2,62,000 −
To Goodwill∗ 55,000 36,667 − 18,333 By Balance 2,45,000 2,37,000 − −

b/d
By Loan A/c − − − 2,00,000

−
transfer
To Balance c/d 1,90,000 2,00,333 − 1,95,167 By Bank − − − 13,500
2,45,000 2,37,000 − 2,13,500 2,45,000 2,37,000 − 2,13,500
∗
As per para 36 of AS 10, ‘Accounting for Fixed Assets’, goodwill should be recorded in the books only when
some consideration in money or money’s worth has been paid for it. Therefore, the goodwill raised at the
time of retirement of Robert is to be written off in new ratio among remaining partners including new partner –
Richard.

14.3 Accounting

after the admission of Richard
Capital Accounts: Land and Building 6,00,000
Ram 1,90,000 Plant and Machinery 2,70,000
Rahim 2,00,333 Stock 1,90,000
Richard 1,95,167 Debtors 4,50,000
Sundry Creditors 8,00,000 Cash at Bank (W.N. 3) 55,500
Loan from Robert 2,00,000 Cash in hand 20,000
15,85,500 15,85,500
Working Notes:
(1) Revaluation Account
` `
To Plant and Machinery 30,000 By Land and Building 70,000
To Stock 10,000 By Partners Capital A/cs:
To Debtors 50,000 Ram 10,000
Rahim 6,000
______ Robert 4,000 20,000
90,000 90,000
(2) Calculation of Goodwill:
Profit for the year ended 31.3.2002 50,000
1,65,000
1,65,000
Average profit = = ` 55,000
3
Goodwill = ` 55,000 × 2 years = ` 1,10,000.
(3) Bank Account
` `
To Balance b/d 1,00,000 By Robert’s Capital A/c 58,000
To Richard’s Capital A/c 13,500 By Balance c/d 55,500
1,13,500 1,13,500

Question 2
Laurel and Hardy are partners of the firm LH & Co., from 1.4.2003. Initially both of them
contributed `1,00,000 each as capital. They did not contribute any capital thereafter. They
maintain accounts of the firm on mercantile basis. They were sharing profits and losses in the
ratio of 5:4. After the accounts for the year ended 31.3.2007 were finalized, the partners
decided to share profits and losses equally with effect from 1.4.2003.
It was also discovered that in ascertaining the results in the earlier years certain adjustments,
details of which are given below, had not been noted.
Year ended 31st March 2004 2005 2006 2007
` ` ` `
Profit as per accounts prepared and finalized 1,40,000 2,60,000 3,20,000 3,60,000
Expenses not provided for (as at 31st March) 30,000 20,000 36,000 24,000
Incomes not taken into account (as at 31st18,000 15,000 12,000 21,000
March)
The partners decided to admit Chaplin as a partner with effect from 1.4.2007. It was decided
that Chaplin would be allotted 20% share in the firm and he must bring 20% of the combined
capital of Laurel and Hardy.
Following is the Balance sheet of the firm as on 31.3.2007 before admission of Chaplin and
before adjustment of revised profits between Laurel and Hardy.
Balance Sheet of LH & Co. as at 31.3.2007
Capital Accounts: Plant and machinery 60,000
Laurel 2,11,500 Cash on hand 10,000
Hardy 1,51,500 Cash at bank 5,000
Sundry creditors 2,27,000 Stock in trade 3,10,000
Sundry debtors 2,05,000
5,90,000 5,90,000
(i) Profit and Loss Adjustment account;
(ii) Capital accounts of the partners; and
(iii) Balance Sheet of the firm after the admission of Chaplin. (20 Marks, May, 2007)(PCC)

14.5 Accounting
Answer
(i) Profit and Loss Adjustment Account∗
` `
To Expenses not provided for By Income not considered
(years 2004-2007) 1,10,000 (for years 2004-2007) 66,000
By Partners’ capital accounts
(loss)
Laurel 22,000
Hardy 22,000
1,10,000 1,10,000
(ii) Partners’ Capital Accounts

Laurel Hardy Chaplin Laurel Hardy Chaplin
` ` ` ` ` `
To P & L 22,000 22,000 - By Balance b/d 2,11,500 1,51,500 -
Adjustment
A/c
To Hardy 60,000 By Laurel - 60,000 -
To Balance c/d 1,29,500 1,89,500 63,800 By Cash - - 63,800
2,11,500 2,11,500 63,800 2,11,500 2,11,500 63,800
By Balance b/d 1,29,500 1,89,500 63,800
(iii) Balance Sheet of LH & Co.

as on 1.4.2007
(After admission of Chaplin)
Capital accounts: Plant and machinery 60,000
Laurel 1,29,500 Sundry debtors 2,05,000
Hardy 1,89,500 Stock in trade 3,10,000
Chaplin 63,800 Accrued income 66,000
Sundry creditors 2,27,000 Cash on hand (10,000 + 63,800) 73,800
Outstanding expenses 1,10,000 Cash at bank 5,000
7,19,800 7,19,800
∗
It is assumed that expenses and incomes not taken into account in earlier years were fully ignored.

Working Notes:
1. Computation of Profit and Loss distributed among partners
`
Profit for the year ended 31.3.2004 1,40,000
31.3.2005 2,60,000
31.3.2006 3,20,000
31.3.2007 3,60,000
Total Profit 10,80,000
Laurel Hardy Total
` ` `
Profit shared in old ratio i.e 5:4 6,00,000 4,80,000 10,80,000
Profit to be shared as per new ratio i.e. 1:1 5,40,000 5,40,000 10,80,000
Excess share 60,000
Deficit share (60,000)
Laurel to be debited by `60,000 and Hardy to be credited by `60,000.
2. Capital brought in by Chaplin
Capital to be brought in by Chaplin must be equal to 20% of the combined
capital of Laurel and Hardy `
Capital of Laurel (2,11,500 – 22,000 – 60,000) 1,29,500
Capital of Hardy (1,51,500 – 22,000 + 60,000) 1,89,500
Combined Capital 3,19,000
20% of the combined capital brought in by Chaplin (20% of ` 3,19,000)
63,800
Question 3
A and B are equal partners. They admit C and D as partners with 1/5 and 1/6 share
respectively. What is the profit sharing ratio of all the partners? (2 Marks, May, 2007) (PCC)
Answer
Let total profits or losses of the firm be 1
1 1
Shares of C and D is and respectively.
5 6

14.7 Accounting
1 1 11 19
Balance remaining: 1 – ( + ) = 1− =
5 6 30 30
19 9.5 9.5
to be shared equally by A and B as :
30 30 30
New profit sharing ratio will be A: B: C: D
⎡ 9.5 2 ⎤ ⎡ 9.5 2 ⎤ ⎡ 1 12 ⎤ ⎡ 1 10 ⎤
⎢ 30 × 2 ⎥ : ⎢ 30 × 2 ⎥ : ⎢ 5 × 12 ⎥ : ⎢ 6 × 10 ⎥
⎣ ⎦ ⎣ ⎦ ⎣ ⎦ ⎣ ⎦
Thus new profit sharing ratio of all the partners will be 19:19:12:10.
Question 4
X and Y are partners sharing profits and losses in the ratio of 3:2. On 30th September, 2006
they admitted Z as a partner. The new profit sharing ratio agreed was 2:2:1.
At the time of admission Z brought in a fixture valued at ` 6,000 and a machinery worth
`24,000. No accounting entry was passed for the fixture brought in by partner Z in the books
of the firm.
Also at the time of admission the valuation of goodwill was made. The value of goodwill of X
and Y was decided at ` 40,000 and value of goodwill of partner Z was fixed at ` 20,000. No
effect was given to the goodwill value in the books of the firm.
On 31.3.2007, it was decided that partner X would retire and the other partners viz., Y and Z
would continue the business of the firm by converting it into a company called YZ Ltd., with
equal shareholding in the company.
The partners agreed as below:
(i) The goodwill of the firm shall be fixed at `80,000. Necessary effect for goodwill value
not recorded earlier shall be given. The present goodwill value being `80,000 shall be
reflected in the books of the company.
(ii) All the assets and liabilities of the firm shall be taken over by the company.
(iii) Partner X would take motor car of the firm at a value of `7,400.
(iv) A plant owned by the firm is sold for `6,000.
(v) The profit of the firm upto 30.9.2006 was `44,000.
(vi) Partner X agreed to leave `90,000 as loan with the firm in return for 12% interest per
annum.

Following is the Trial Balance of the firm as on 31.3.2007:

Particulars Dr. Cr.
` `
Capital Account:
X - 80,000
Y - 50,000
Z - 24,000
Drawings Account:
X 22,000 -
Y 20,000 -
Z 9,600 -
Sundry Debtors 70,000 -
Sundry Creditors - 32,000
Plant (Book value of plant sold `8,000) 46,000 -
Fixtures 14,000 -
Stock 24,000 -
Motor car 5,400 -
Cash at bank 34,600 -
Profit and Loss A/c (for the year) 59,600
2,45,600 2,45,600
(i) Goodwill Adjustment Account
(ii) Profit and Loss Appropriation Account
(iii) Partners’ Capital Accounts
(iv) Balance Sheet of YZ Ltd. after conversion. (20 Marks November, 2007) (PCC)
Answer
(i) Goodwill Adjustment Account
` `
30.9.07 To Partners’ Capital 30.9.06 By Partners’ Capital A/cs
A/cs
(in old ratio) (in new ratio)

14.9 Accounting
X 24,000 X 24,000
Y 16,000 Y 24,000
Z 20,000 Z 12,000
31.3.07 To Partners’ Capital 31.3.07 By Goodwill A/c
A/cs
X 32,000 (Goodwill raised in the 80,000
book)
Y 32,000
Z 16,000
1,40,000 1,40,000
(ii) Profit and Loss Appropriation Account
` `
To Plant - Loss on 2,000 By Motor Car 2,000
sale of plant
To Partners’ Capital By Profit and Loss A/c 59,600
A/cs
X 32,640
Y 23,840
Z 3,120
61,600 61,600
Calculation of profit Total X Y Z

apportionment:
` ` ` `
Upto 30.9.2006 44,000 26,400 17,600 NIL
From 01.10.2006 to 31.3.2007 15,600 6,240 6,240 3,120
59,600 32,640 23,840 3,120
(iii) Partners’ Capital Accounts
X Y Z X Y Z
` ` ` ` ` `
30.9.06 To Goodwill 24,000 24,000 12,000 30.9.06 By Balance 80,000 50,000 -
Adjustment
A/c
31.7.07 To Motor car 7,400 - - By Plant & - - 24,000

machinery
To Drawings 22,000 20,000 9,600 By Fixtures - - 6,000
To 12% Loan 90,000 - - By Goodwill 24,000 16,000 20,000
Adjustment
A/c
To Bank 25,240 - - By Profit upto 26,400 17,600 -
30.9.06
To Balance c/d - 77,840 47,520 31.7.07 By Profit for 6 6,240 6,240 3,120
months
ended
31.3.07
By Goodwill Adj.
A/c 32,000 32,000 16,000
1,68,640 1,21,840 69,120 1,68,640 1,21,840 69,120
31.7.07 To Bank 15,160 - 31.7.07 By Balance b/d 77,840 47,520
To Share By Bank 15,160
capital 62,680 62,680
77,840 62,680 77,840 62,680
(iv) Balance Sheet of YZ Ltd.

Share capital 1,25,360 Goodwill 80,000
12% Loan 90,000 Plant (46,000 – 8,000) 38,000
Sundry creditors 32,000 Fixtures (14,000 + 6,000) 20,000
Stock 24,000
Sundry debtors 70,000
Cash at bank 15,360
2,47,360 2,47,360
Bank A/c
` `
To Balance b/d 34,600 By X’s Capital A/c 25,240
To Plant (sold) A/c 6,000 By Y’s Capital A/c 15,160
To Z’s capital A/c 15,160 By Balance c/d 15,360
55,760 55,760

14.11 Accounting
Total capital of the firm before conversion:

Y 77,840
Z 47,520
1,25,360
As Y and Z would continue with equal shareholding, therefore, share capital of Y and Z would
be `1,25,360 / 2 = `62,680 each.
`
Z should bring cash `(62,680 – 47,520) = 15,160
Y should withdraw cash `(77,840 – 62,680) = 15,160
Question 5
A, B, and C are partners sharing profits and losses in the ratio of 3:2:1. B retired from the firm.
Partners A and C decided to take his share in 3:1 ratio. What is the new ratio of the partners
A and C? (2 Marks, November, 2007) (PCC)
Answer
Calculation of new profit and loss sharing ratio of partners A and C
1/3rd share of B taken by oartners A & C in 3:1 i.e.
1 3 1
=> A will receive from B = × =
3 4 4
1 1 1
=> C will receive from B = × =
3 4 12
Total share of A and C will be:
3 1 12 + 6 18 3
A= + = = or
6 4 24 24 4
1 1 2 +1 3 1
C= + = = or
6 12 12 12 4
Therefore, new profit and loss sharing ratio of A and C will be 3:1.
Question 6
A, B and C are partners of the firm ABC & Co., sharing profits and losses in the ratio of 5:3:2.
Following is the Balance Sheet of the firm as at 31.3.2008:


Partners’ capital accounts: Goodwill 1,00,000
A 4,50,000 Building 10,50,000
B 1,30,000 Machinery 6,50,000
C 1,70,000 Furniture 2,15,000
Investment fluctuation reserve 1,00,000 Investments (market value
`75,000) 60,000
Contingency reserve 75,000 Stock 6,50,000
Long-term loan 15,00,000 Sundry debtors 6,95,000
Bank overdraft 2,20,000 Advertisement suspense 25,000
34,45,000 34,45,000
It was decided that B would retire from the partnership on 1.4.2008 and D would be admitted
as a partner on the same date. Following adjustments are agreed amongst the partners for
the retirement/admission:
(i) Goodwill is to be valued at `5,00,000, but the same will not appear as an asset in the
books of the firm.
(ii) Building and machinery are to be revalued at `10,00,000 and `5,20,000 respectively.
(iii) Investments are to be taken over by B at the market value.
(iv) Provision for doubtful debts to be maintained at 20% on sundry debtors.
(v) The capital of the reconstituted firm will be `10,00,000 to be contributed by the partners
A, C and D in their new profit sharing ratio of 2 :2 : 1.
(vi) Surplus funds if any will be used to pay the bank overdraft.
(vii) Amount due to retiring partner B will be transferred to his loan account.
Prepare:
(i) Revaluation Account;
(ii) Capital Accounts of the partners; and
(iii) Balance Sheet of the firm after reconstitution. (20 Marks, May, 2008) (PCC)

14.13 Accounting
Answer
(i) Revaluation Account
` `
To Building 50,000 By Investments 15,000
To Machinery 1,30,000 By Partners’ capital
A/cs (Loss on
revaluation)
To Provision for doubtful A 1,52,000
debts 1,39,000
B 91,200
C 60,800 3,04,000
3,19,000 3,19,000
(ii) Partners’ Capital Accounts
A B C D A B C D
` ` ` ` ` ` ` `
To Revaluation 1,52,000 91,200 60,800 - By Balance b/d 4,50,000 1,30,000 1,70,000 -
A/c
To Goodwill 50,000 30,000 20,000 - By Contingency 37,500 22,500 15,000 -
(W.N.2) Reserve
To A and B - - 1,00,000 1,00,000 By Investment 50,000 30,000 20,000 -
(W.N.3) fluctuation
Reserve
To Investments - 75,000 - -
To Advertisement 12,500 7,500 5,000 - By C and D 50,000 1,50,000 - -
suspense (W.N.3)
To B’s Loan A/c - 1,28,800 - - By Bank 27,000 - 3,80,800 3,00,000
(Bal. fig.) (Bal.fig.)
To Balance c/d
(W.N.4) 4,00,000 - 4,00,000 2,00,000
6,14,500 3,32,500 5,85,800 3,00,000 6,14,500 3,32,500 5,85,800 3,00,000
(iii) Balance Sheet as at 01.04.2008

(After retirement of B and admission of D)
Partners’ capital Building 10,00,000
accounts (W.N.4)
A 4,00,000 Machinery 5,20,000
C 4,00,000 Furniture 2,15,000

D 2,00,000 Stock 6,50,000

Long term loan 15,00,000 Debtors 6,95,000
B’s loan 1,28,800 Less: Provision for
doubtful debts 1,39,000 5,56,000
Sundry creditors 8,00,000 Cash at bank (W.N.1) 4,87,800
34,28,800 34,28,800
Working Notes:
1. Bank Account
` `
To A’s capital A/c 27,000 By Balance b/d (Overdraft) 2,20,000
To C’s capital A/c 3,80,800 By Balance c/d (Bal. fig.) 4,87,800
To D’s capital A/c 3,00,000
7,07,800 7,07,800
2. Goodwill, already shown in the Balance Sheet of ` 1,00,000, is firstly written
off and then an adjusting entry is passed for revalued goodwill of ` 5,00,000 in
sacrificing and gaining ratio of partners. This treatment is given based on the
para 36 of AS 10, which states that goodwill should be recorded in the books
only when some consideration in money or money’s worth has been paid for it.
3. Calculation of sacrificing and gaining ratio
Partners New share Old share Share Sacrificed Share Gained
A 2 5 2 5 1
- =
5 10 5 10 10
B 3 3
10 10
C 2 2 2 2 1
-
5 10 5 10 5
D 1 1
5 5
Adjusting Entry
` `
C’s Capital A/c Dr. 1,00,000

14.15 Accounting
D’s Capital A/c Dr. 1,00,000

To A’s Capital A/c 50,000
To B’s Capital A/c 1,50,000
4. Capitals of A, C and D as per new ratio `
Total Capital of the firm after admission 10,00,000
2
A’s share = 10,00,000 × 4,00,000
5
2
C’s share = 10,00,000 × 4,00,000
5
1
D’s share = 10,00,000 × 2,00,000
5
Question 7
P, Q and R share profit and losses in the ratio of 4:3:2 respectively. Q retires and P and R
decide to share future profits and losses in the ratio of 5:3. Then immediately H is admitted
for 3/10 share of profits half of which was gifted by P and the remaining share was taken by H
equally from P and R. Calculate the new profit sharing ratio after H’s admission and gaining
ratio of P and R after Q’s retirement. (2 Marks, November, 2008) (PCC)
Answer
(a) Calculation of new profit sharing ratio after H’s admission:
5 ⎡ 3 1⎤ ⎡ 3 1⎤
P= −⎢ × ⎥− ⎢ × ⎥
8 ⎣ 10 2 ⎦ ⎣ 10 4 ⎦
5 3 3
= − −
8 20 40
25 − 6 − 3 16
= =
40 40
3 ⎡ 3 1⎤
R= − ×
8 ⎢⎣ 10 4 ⎥⎦
3 3 15 − 3 12
= − = =
8 40 40 40
3 3 4 12
H= or × =
10 10 4 40

Hence,
New Ratio of P : R : H
16:12:12
Or 4:3:3
(b) Calculation of gaining ratio of P and R after Q’s retirement:
5 4 45 − 32 13
P= − = =
8 9 72 72
3 2 27 − 16 11
R= − = =
8 9 72 72
Question 8
A and M are partners, sharing profits and losses in the ratio of 3:2. G is admitted for 1/4th
share. Thereafter, N enters the partnership for 20 Paise in a Rupee. Compute new profit
sharing ratio. (2 Marks, June, 2009) (PCC)
Answer
Let the total share be = 1
1
Share of new partner G =
4
1 3
Remaining share of profit = 1- =
4 4
3 3 9
New ratio of (A) = × =
4 5 20
3 2 6
New ratio of (M) = × =
4 5 20
New ratio of A:M:G = 9: 6: 5
Again, let the total share at the time of admission of N = 1
1
Share of new partner N is 20% i.e.
5
1 4
Remaining share = 1- =
5 5
4 9 9
New ratio of A = × =
5 20 25

14.17 Accounting
4 6 6
New ratio of M = × =
5 20 25
4 5 5
New ratio of G = × =
5 20 25
New ratio of A:M:G:N = 9:6:5:5
Question 9
P, N and T are equal partners. The decided to change their profit sharing ratio into 5:4:3.
They raised the goodwill in the books to the extent of `2,40,000 and it is to be written off
immediately. Show Journal entries with narration to be passed for raising the goodwill and for
its subsequent write off. (2 Marks, November, 2009) (PCC)
Answer
Journal Entries
Dr. (`) Cr. (`)
Goodwill A/c Dr. 2,40,000
To B’s Capital A/c 80,000
To C’s Capital A/c 80,000
(Being the value of goodwill raised in the books, in old
profit sharing ratio)
A’s Capital A/c Dr. 1,00,000
B’s Capital A/c Dr, 80,000
C’s Capital A/c Dr. 60,000
To Goodwill A/c 2,40,000
(Being the value of goodwill written off from the books of
the firm, in new profit sharing ratio)
Note: As per para 36 of AS 10, ‘Accounting for fixed Assets,’ goodwill should be recorded
in the books only when some consideration in money or money’s worth has been paid for it.
Therefore, the goodwill valued at the time of change in profit and loss sharing ratio is to be
adjusted through capital accounts of the partners directly. The journal entries for raising
goodwill and then writing it off is not in accordance with the said standard but have been given
due to the requirement of the question.
Alternatively, Capital accounts of partner A and partner C may be adjusted to give net effect to
the above entries.

The Adjusting Journal entry would be

` `
A’s Capital A/c Dr. 20,000
To C’s Capital A/c 20,000
(Being adjusting entry passed for goodwill, due to change in
profit and loss sharing ratio)
Question 10
On 1st April, 2008, X, Y and Z enter into partnership introducing capital of `80,000, `50,000
and `50,000 respectively. They agree to share Profits and Losses equally. At the end of the
accounting year on 31st March, 2009, X claims that he be paid interest on his additional
Capital of `30,000 @ 10% per annum, while Z demands salary of `600 per month for the
extra hours devoted by him daily at the shop. The partnership deed is silent on these matters.
Decide the matters with reasons. (2 Marks, November, 2009) (IPCC)
Answer
When the partnership deed is silent on the matter of interest on capitals and salary to
partners, then no partner is entitled to claim interest on capital and salary. Therefore, claim of
X and Z is not tenable. However, inclusion of specific provision regarding the said issues in
partnership deed can make them entitled for interest on capital and salary.
Question 11
Were partners sharing Profits and Losses in the ratio of 5:3:2 respectively. On 31 st March,
2009 Balance Sheet of the firm stood as follows:
Capital A/cs Buildings 55,000
E 50,000 Furniture 25,000
F 40,000 Stock 42,000
G 28,000 1,18,000 Debtors 20,000
Creditors 33,500 Cash at Bank 11,200
Outstanding Expenses 1,700
1,53,200 1,53,200
On 31st March, 2009, E decided to retire and F and G decided to continue as equal partners.
Other terms of retirement were as follows:
(i) Building be appreciated by 20%.
(ii) Furniture be depreciated by 10%.

14.19 Accounting
(iii) A provision of 5% be created for bad debts on debtors.

(iv) Goodwill be valued at two years’ purchase of profit for the latest accounting year. The
firm’s Profit for the year ended 31st March, 2009 was `25,000. No goodwill account is to
be raised in the books of accounts.
(v) Fresh capital be introduced by F and G to the extent of `10,000 and `35,000
respectively.
(vi) Out of sum payable to retiring partner E, a sum of `45,000 be paid immediately and the
balance be transferred to his loan account bearing interest @ 12% per annum. The loan
is to be paid off by 31st March, 2011.
One month after E’s retirement, F and G agreed to admit E’s son H as a partner with one-forth
share in Profits/Losses. E agreed that the balance in his loan account be converted into H’s
Capital. E also agreed to forgo one month’s interest on his loan.
It was also agreed that H will bring in, his share of goodwill through book adjustment, valued
at the price on the date of E’s retirement. No goodwill account is to be raised in the books.
You are requested to pass necessary Journal Entries to give effect to the above transactions
and prepare Partners’ Capital Accounts. (16 Marks November, 2009) (IPCC)
Answer
Dr. Cr.
` `
1. Building Account Dr. 11,000
To Revaluation Account 11,000
(Being building appreciated)
2. Revaluation Account Dr. 3,500
To Furniture Account 2,500
To Provision for Doubtful Debts Account 1,000
(Being furniture depreciated by 10% and Provision for
doubtful debts created @ 5% on Debtors)
3. Revaluation Account Dr. 7,500
To E’s Capital Account 3,750
To F’s Capital Account 2,250
To G’s Capital Account 1,500
(Being profit on revaluation transferred to capital accounts
of partners)
4. F’s Capital Account Dr. 10,000

G’s Capital Account Dr. 15,000

To E’s Capital Account 25,000
(Being adjustment for E’s share of goodwill)
5. Bank Account Dr. 45,000
(Being fresh capital introduced by F and G)
6. E’s Capital Account Dr. 78,750
To Bank Account 45,000
To E’s Loan Account 33,750
(Being settlement of E’s capital on his retirement)
7. E’s Loan Account Dr. 33,750

To H’s Capital Account 33,750
(Transfer of E’s Loan Account to H’s Capital Account)
8. H’s Capital Account Dr. 12,500
(Being adjustment entry passed for H’s share of goodwill)
E F G H E F G H
` ` ` ` ` ` ` `
To E (Goodwill) 10,000 15,000 By Balance b/d 50,000 40,000 28,000
To Bank 45,000 By Revaluation A/c 3,750 2,250 1,500
To E’s Loan A/c 33,750 By F (Goodwill) 10,000
To Balance c/d 42,250 49,500 By G (Goodwill) 15,000
By Bank (fresh capital) 10,000 35,000
78,750 52,250 64,500 78,750 52,250 64,500
To F (Goodwill) 6,250 By Balance b/d 42,250 49,500
To G (Goodwill) 6,250 By E’s Loan A/c 33,750
To Balance c/d 48,500 55,750 21,250 By H (goodwill) 6,250 6,250
48,500 55,750 33,750 48,500 55,750 33,750

14.21 Accounting
Working Notes:
1. Calculation of gaining ratio
Partners New ratio Old ratio Gain Sacrifice
E 5 5
10 10
F 1 3 1 3 2
– =
2 10 2 10 10
G 1 2 1 2 3
– =
2 10 2 10 10
Hence, ratio of gain between F and G = 2:3
2. Value of total goodwill of the firm = `25,000 × 2 = `50,000
5
E’s share = `50,000 × = Rs. 25,000
10
2
F will bear = `25,000 × =Rs.10,000
5
3
G will bear = `25,000 × =Rs.15,000
5
1
3. H’s share of goodwill = `50,000 × = `12,500
4
F and G share equal profits. Therefore, their sacrificing ratio will also be equal
Hence, each of them will be credited with `6,250
Question 12
SAD Enterprises, a partnership firm, had purchased business of SWAD enterprises on
01.04.2008 and paid `50,000 towards goodwill. On 01.04.2009, SAD enterprises decided to
admit W as partner and the goodwill was valued at `1,00,000 for the purpose.
Please explain with reasons, at what price goodwill can be shown in the books of account.
Answer
Para 16 of AS 10,’ Accounting for Fixed Assets’ states that goodwill can be recorded in the
books only when some consideration in money or money’s worth has been paid for it.
Therefore, only purchased goodwill should be recorded in the books. In the said case,
payment of `50,000 was made towards purchase of goodwill, hence to this extent goodwill

can be recorded in the books. Para 35 of AS 26 ‘Intangible Assets’• also states that internally
generated goodwill∗ should not be recognized as an asset. Internally generated (self
generated) goodwill is not recognized as an asset because it is not an identifiable resource
controlled by the enterprise that can be measured reliably at cost.
Therefore, only purchased goodwill should be recorded in the books.
Additional goodwill of `50,000 is self generated goodwill, which should not be recorded. On
admission, death or retirement of a partner, goodwill adjustments can be carried out through
capital accounts.
Question 13
(i) A and B are partners in a firm sharing profits and losses in the ratio of 3 : 2. Their
capitals are ` 60,000 and ` 40,000 respectively. They admit C as a new partner who will
get 1/6th share in the profit of the firm. C brings in ` 25,000 as his capital. Find out the
amount of goodwill on the basis of the above information.
(ii) In the absence of a partnership deed, what will be your decision in disputes amongst
partners regarding the following matters:
(a) Profit sharing ratio;
(b) Interest rate, at which interest is to be allowed to a partner, on loan given to the firm
by a partner. (2 Marks May, 2010) (IPCC)
Answer
(i) Calculation of Goodwill
C brings capital for 1/6th share in profit = ` 25,000
Therefore, total capital of the firm = ` 25,000 × 6 = ` 1,50,000
Capital of old partners should be = ` 1,50,000 – ` 25,000 = ` 1,25,000
Actual combined capital of old partners = ` 60,000 + ` 40,000 = ` 1,00,000
So, the goodwill of the firm = ` 1,25,000- ` 1,00,000= ` 25,000
(ii) In the absence of a partnership deed:
(a) The partners will share profits/losses equally; and
(b) Interest @ 6% per annum is to be paid on the loan advanced to the firm by a
partner.
•
AS 26 does not form part of Paper 1 “Accounting” syllabus.
∗
The enterprise, while doing business, develops goodwill over a period of time. Goodwill generated in the process
of doing business is called internally generated goodwill.

14.23 Accounting
Question 14
Following two problems are regarding issues in Partnership Accounts, kindly solve both:
(i) Anil and Mukesh are partners sharing profit, and losses in the ratio 3 : 2. Govind is
admitted for ¼th share of firm. Thereafter, Madan enters for 20 paisa in a rupee.
Compute new profit sharing ratios under both the admission of partners.
(ii) The following Goodwill Account was opened by the partners R and S, on the admission
of H as a new partner into firm Om and Sons. Calculate the share of profit agreed to be
given to “H”.
Goodwill A/c
` `
1-4-2010 To R’s Capital A/c 24,800 1-4-2010 By R’s Capital A/c 12,400
1-4-2010 To S’s Capital A/c 18,600 1-4-2010 By S’s Capital A/c 12,400
1-4-2010 By H’s Capital A/c 18,600
43,400 43,400
Answer
(i) 1. At the time of admission of Govind
Let the total share of profit at the time of admission of Govind = 1
Share of New Partner - Govind = ¼
Remaining share of profit = 1 – ¼ = ¾
Now,
3 3 9
New share of Anil = x =
4 5 20
3 2 6
New share of Mukesh = x =
4 5 20
New ratio of Anil, Mukesh and Govind
9 6 1
: : i.e. = 9:6:5
20 20 4
2. At the time of admission of Madan
Let total share at the time of admission of Madan = 1
Share of new partner - Madan = 1/5

Remaining share = 1 – 1/5 = 4/5

Now,
4 9 9
New share of Anil = x =
5 20 25
New share of Mukesh = 4/5 x 6/20 = 6/25
New share of Govind = 4/5 x 5/20 =5/25
New ratio of Anil, Mukesh, Govind and Madan
9 6 5 1
: : : i.e. 9 : 6 :5 :5
25 25 25 5
(ii) Share of H in profit sharing ratio may be calculated as follows:
Share of H in Goodwill 18,600 3
H’s share = = =
Total Goodwill 43,400 7
Question 15
Ramu, Shamu and Raju were partners sharing profits and losses in the ratio of 3 : 2 : 2. Their
Balance Sheet as on 01-01-2009 was as follows:
Capital accounts Fixed assets 80,000
Ramu 30,000 Stock 15,000
Shamu 20,000 Debtors 12,000
Raju 20,000 70,000 Cash & bank 1,951
Reserves 14,000
Creditors 24,951
1,08,951 1,08,951
On 1st October, 2009, Ramu died. His heirs agreed that:
(i) Goodwill of the firm be valued at 2 years’ purchase of average profit of past three years.
Profits for the year 2006, 2007 and 2008 were ` 30,000, ` 40,000 and ` 47,600
respectively.
(ii) Fixed assets be revalued at ` 1,01,000.
(iii) Profit to be shared, earned in subsequent period after death of Ramu till settlement of his
executors’ claim.

14.25 Accounting
Ramu’s heirs account was settled on 31-12-2009 by bringing in required cash by remaining
partners in equal proportion leaving cash balance of ` 1,234. Each partner had drawn
@ ` 1,000 per month for personal use.
Profit for the current year after charging depreciation of ` 9,000 (` 6,000 for first three
quarters and ` 3,000 for last quarter ) was ` 46,600 earned evenly through-out the year.
You are requested to prepare Profit & Loss Appropriation A/c, Cash & Bank A/c, Ramu’s
Executor’s A/c and Partners’ Capital Accounts for the year ended on 31-12-2009 assuming
remaining partners’ decided not to retain goodwill in the books.
Answer
(i) Profit & Loss Account
` (for ` (for ` (for ` (for
nine three nine three
months) months months) months)
To Depreciation 6,000 3,000 By Profit (W.N.1) 41,700 13,900
To Net profit 35,700 10,900
41,700 13,900 41,700 13,900
Profit & Loss Appropriation Account
` (for ` (for ` (for ` (for
nine three nine three
months) months months) months
To Partners’ capital A/cs By Net Profit 35,700 10,900
Ramu 15,300 -
Shamu 10,200 3,043
Raju 10,200 3,044
To Ramu’s Executor A/c
(W.N.2) - 4,813
35,700 10,900 35,700 10,900
(ii) Partners’ Capital Accounts as on 1st October, 2009
Ramu Shamu Raju Ramu Shamu Raju
(`) (`) (`) (`) (`) (`)
To Drawings 9,000 9,000 9,000 By Balance b/d 30,000 20,000 20,000
To Ramu’s 87,414 - - By Reserves 6,000 4,000 4,000
Executors A/c

To Balance c/d - 55,276 55,276 By Goodwill∗

(W.N.3) 36,114 24,076 24,076
By Fixed 9,000 6,000 6,000
Assets∗∗
By Profit &
Loss
Appropriation 15,300 10,200 10,200
A/c
96,414 64,276 64,276 96,414 64,276 64,276
(iii) Partners’ Capital Accounts as on 31.12.2009

Shamu Raju Shamu Raju
(`) (`) (`) (`)
By Balance b/d 55,276 55,276
To Drawings 3,000 3,000 By Cash 62,255 62,255
To Goodwill 42,133 42,133 By Profit & Loss
To Balance c/d 75,441 75,442 Appropriation A/c 3,043 3,044
1,20,574 1,20,575 1,20,574 1,20,575
(iv) Ramu’s Executors’ A/c as on 31.12.2009

(`) (`)
To Bank 92,227 By Balance b/d 87,414
By P&L Appropriation
A/c 4,813
92,227 92,227
(v) Cash & Bank A/c
(`) (`)
To Balance b/d 1,951 By Ramu’s executors A/c 92,227
To Shamu’s capital A/c 62,255 By Partners’ Capital A/cs
(Drawings):
∗
As per para 36 of AS 10, ‘Accounting for fixed Assets, ‘goodwill should be recorded in the books only
when some consideration in money or money’s worth has been paid for it. However, in the above solution,
goodwill has been raised in the books at the time of death of a partner and written off by the remaining partners,
as per the information given in the question.
∗∗
Appreciation of fixed assets may also be recorded through “Revaluation Account”.

14.27 Accounting
To Raju’s capital A/c 62,255 Ramu 9,000

Shamu 12,000
Raju 12,000
1,26,461 1,26,461
Working Notes:
1. Profit for the year before depreciation:
`
Profit after depreciation 46,600
Add: Depreciation 9,000
Profit before depreciation 55,600
2. As per section 37 of the Partnership Act, in case of settlement of deceased

partner’s account on the date other then the date of death, the executor of
deceased partner has a choice to take
Either-
Unsettled capital as on 1.10.09
(A) Profit earned on un-settled capital = Profit x
Total capital as on 1.10.09
87,414
= 10,900 x
(87,414 + 55,276 + 55,276)
87,414
= 10,900 x = ` 4,813
1,97,966
Or-
(B) Interest on capital @ 6% i.e.
` 87,414 × 6% × 3/12 = ` 1,311
Option A is beneficial, therefore heirs of Ramu will opt for proportionate share
of profit i.e. ` 4,813.
3. Valuation of Goodwill:
` Weight Product
Profit for 2006 30,000 1 30,000
2007 40,000 2 80,000

2008 47,600 3 1,42,800

1,17,600 6 2,52,800
2,52,800
Weighted Average Profit = = ` 42,133
6
Goodwill = 2 years’ purchase of average profit = ` 42,133 × 2 = ` 84,266.
Question 16
Shiv and Mohan are partners in a firm sharing profits and losses equally. On 31st March, 2011,
the balances of their capital accounts were ` 3,00,000 and ` 2,00,000 respectively. The
average profits of the firm are ` 1,36,000 and the rate of normal profit is 20%.
On 1st April, 2011 they agreed to admit Hari as a partner for one fourth share. Hari will bring `
1,00,000 as capital.
You are required to compute the value of the goodwill of the firm on admission of Hari, if
goodwill is to be calculated on the basis of:
(1) 5 years purchase of super profit
(2) Capitalization method
(3) 3 years purchase of average profit. (5 Marks, May, 2011) (IPCC)
Answer
Valuation of goodwill
(1) 5 years purchase of super profit
`
Average profit 1,36,000
Less : Normal profit @ 20% of (` 3,00,000+ ` 2,00,000) (1,00,000)
Super profit 36,000
Value of goodwill = 5 × Super profit
= 5 × ` 36,000
= ` 1,80,000
Value of goodwill of the firm will be ` 1,80,000.
(2) Capitalisation method
Average profit
Normal value of business =
Normal rate of profit

14.29 Accounting
1,36,000
= = ` 6,80,000
20%
`
Normal value of business 6,80,000
Less: Actual capital employed – Shiv 3,00,000
– Mohan 2,00,000 (5,00,000)
Value of goodwill of the firm will be
1,80,000
(3) 3 years purchase of average profits
Goodwill = 3 × Average profit
= 3 × ` 1,36,000
= ` 4,08,000
Value of goodwill of the firm will be ` 4,08,000.
Question 17
Amit and Sumit are partners sharing profits and losses in the ratio of 3:2. Their Balance Sheet
as on 31st March 2011 is given below:
` `
Capital Accounts: Land & building 3,20,000
Amit 1,76,000 Investments (Market value ` 55,000) 50,000
Sumit 2,54,000 Debtors
3,00,000
Loan from Puneet 3,00,000 Less: Provision for doubtful debts 2,90,000
10,000
General Reserve 30,000 Stock 1,10,000
Employer’s provident fund 10,000 Cash at bank 50,000
Creditors 50,000
8,20,000 8,20,000
st
They decided to admit Puneet as a new partner from 1 April, 2011 on the following terms:
(1) Amit will give 1/3rd of his share and Sumit will give 1/4th of his share to Puneet.
(2) Puneet’s loan account will be converted into his capital.
(3) The Goodwill of the firm is valued at ` 3,00,000. Puneet will bring his share of goodwill in
cash and the same was immediately withdrawn by the partners.

(4) Land and building was found undervalued by ` 1,00,000.

(5) Stock was found overvalued by ` 60,000.
(6) Provision for doubtful debts will be made equal to 5% of debtors.
(7) Investments are to be valued at their market price.
It was decided that the total capital of the firm after admission of new partner would be
` 10,00,000. Capital accounts of partners will be readjusted on the basis of their profit sharing
ratio and excess or deficiency will be adjusted in cash.
(a) Revaluation A/c
(b) Partners’ capital A/cs
(c) Balance Sheet of the firm after admission of a new partner (16 Marks, May, 2011) (IPCC)
Answer
Revaluation A/c
To Stock 60,000 By Land & building 1,00,000
To Provision for doubtful 5,000 By Investments 5,000
debts
To Profit transferred to
Amit’s capital A/c 24,000
Sumit’s capital A/c 16,000
1,05,000 1,05,000

Particulars Amit Sumit Puneet Particulars Amit Sumit Puneet
` ` ` ` ` `
To Amit’s By Balance b/d 1,76,000 2,54,00 -
capital A/c - - 60,000 By Puneets' Loan - 0 3,00,000
A/c -
To Puneet’s - - 30,000 By Puneet’s
capital A/c capital A/c 60,000 30,000 -
To Bank A/c 60,000 30,000 - By Bank A/c (W.N.2) - - 90,000
To Balance By Revaluation 24,000 16,000 -
c/d 4,00,000 3,00,000 3,00,000 A/c

14.31 Accounting
By General
reserve 18,000 12,000 -
By Bank 1,82,000 18,000 -
4,60,000 3,30,000 3,90,000 4,60,000 3,30,00 3,90,000
0
Balance Sheet as on 1st April, 2011

(After admission of a new partner - Puneet)
` `
Capital accounts Land and building (3,20,000 + 1,00,000) 4,20,000
Amit 4,00,000 Investments 55,000
Sumit 3,00,000 Debtors 3,00,000
Puneet 3,00,000 Less: Provision for doubtful debts (15,000) 2,85,000
Creditors 50,000 Stock (1,10,000 – 60,000) 50,000
Employers’ Cash at bank (W.N. 3)
provident fund∗ 10,000 2,50,000
10,60,000 10,60,000
Working Notes:
(1) Calculation of incoming partner’s share, new profit sharing ratio and sacrificing
ratio
Amit Sumit
Old profit sharing ratio 3/5 2/5
Surrendered by old partners 3/5 x 1/3 = 1/5 2/5 x 1/4 = 1/10
Remaining share 3/5 – 1/5 = 2/5 2/5 – 1/10 = 3/10
Puneet’s total share in profits = 1/5 + 1/10 = 3/10

New profit sharing ratio of Amit : Sumit : Puneet =2/5 : 3/10 : 3/10 = 4:3:3
Sacrificing ratio of Amit : Sumit is 1/5 : 1/10 : or 2:1
∗
It is assumed that Employer’s Provident Fund represents employer’s contribution to provident fund
which is yet to be deposited. Hence, the same represents a current liability.

(2) Calculation of share of goodwill by old partners

Goodwill of the firm was ` 3,00,000
3
Share of Puneet in goodwill = ` 3,00,000 × = ` 90,000
10
Goodwill will be distributed among the old partners in their sacrificing ratio of 2:1 i.e.
` 60,000 by Amit and ` 30,000 by Sumit.
(3) Calculation of closing balance of bank account after admission
Bank A/c
(`) (`)
To Balance b/d 50,000 By Amit’s capital A/c 60,000
To Puneet’s capital A/c 90,000 By Sumit’s capital A/c 30,000
To Sumit’s capital A/c 18,000 By Balance c/d 2,50,000
To Amit’s capital A/c 1,82,000
3,40,000 3,40,000
Question 18
X,Y and Z are partners sharing profits an losses in the ratio of 4:3:2 respectively. On 31st
March, 2011 Y retires and X and Z decide to share profits and losses in the ratio of 5:3. Then
immediately, W is admitted for 3/10th shares in profits, 2/3rd of which was given by X and rest
was taken by W from Z . Goodwill of the firm is valued at ` 2,16,000 W brings required amount
of goodwill.
Give necessary Journal Entries to adjust goodwill on retirement of Y and admission of W if
they do not want to raise goodwill in the books of accounts. (4 Marks, May, 2011) (IPCC)
Answer
Journal Entries
Date Particulars L.F. Dr. (`) Cr.(`)
31.3.11 X’s capital A/c Dr. 39,000
Z’s capital A/c Dr. 33,000
To Y’s capital A/c (3/9 х ` 2,16,000) 72,000
(Being Y’s share of goodwill adjusted in the capital
accounts of gaining partners in their gaining ratio
13:11 – Refer Working Note.)
Cash A/c Dr. 64,800

14.33 Accounting
To W’s capital A/c (3/10 х ` 2,16,000) 64,800

(Being the amount of goodwill brought in by W)
W’s capital A/c Dr. 64,800
To X’s capital A/c 43,200
To Z’s capital A/c 21,600
(Being the goodwill credited to sacrificing partners
in their sacrificing ratio 2:1)
Working Note:
Calculation of gaining ratio of X and Z
Gaining ratio = New ratio – Old ratio
For X = 5/8-4/9 = 13/72
Z = 3/8-2/9 = 11/72
Gaining ratio = 13:11
Question 19
A and B are in partnership sharing profits and losses in the ratio of 3:2. The capitals of A and
B are ` 80,000 and ` 60,000 respectively. They admit C as a partner who contributes
` 35,000 as capital for 1/5th share of profits to be acquired equally from both A & B. The
capital accounts of old partners are to be adjusted on the basis of the proportion of C’s capital
to his share in the business. Calculate the amount of actual cash to be paid off or brought in
by the old partners for the purpose and pass the necessary journal entries.
Answer
Share of profit taken from A and B each= 1/5 x 1/2 = 1/10 each
Calculation of New Profit Sharing Ratio
A B
Existing ratio 3/5 2/5
Less: Share of profit transferred to C (1/10) (1/10)
New share 5/10 3/10
New profit sharing ratio of A:B:C = 5/10 : 3/10 : 2/10
Calculation of Total Capital of the Reconstituted Firm
Capital brought in by C for 1/5th share = ` 35,000
Total Capital = ` 35,000 x (5/1) = ` 1,75,000

Calculation of Actual Cash to be paid or brought in by old partners

A B C
(`) (`) (`)
New capital of ` 1,75,000 distributed in the ratio 5:3:2 87,500 52,500 35,000
Less: Adjusted old capital of A & B (80,000) (60,000) -
Cash brought in 7,500 35,000
Cash to be paid (7,500)
Journal Entries
Dr. Cr.
Particulars L.F. Amount Amount
` `
Cash A/c Dr. 7,500
(Being the shortage of capital brought in cash by A)
B’s Capital A/c Dr. 7,500
To Cash A/c 7,500
(Being the excess capital withdrawn by B)
Note: Entries for cash brought in and paid off only, have been passed.
Question 20
Good, Better and Best are in partnership sharing profits and losses in the ratio 3 : 2 : 4. Their
capital account balances as on 31st March, 2012 are as follows:
`
Good 1,70,000 (Cr)
Better 1,10,000 (Cr)
Best 1,22,000 (Cr)
Following further information provided:
(1) ` 22,240 is to be transferred to General Reserve.
(2) Good, Better and Best are paid monthly salary in cash amounting ` 2,400, ` 1,600 and `
1,800 respectively.
(3) Partners are allowed interest on their closing capital balance @ 6% p.a. and are charged
interest on drawings @ 8% p.a.
(4) Good and Best are entitled to commission @ 8% and 10% respectively of the net profit
before making any appropriation.

14.35 Accounting
(5) Better is entitled to commission @ 15% of the net profit before charging Interest on
Drawings but after making all other appropriations.
(6) During the year Good withdraw ` 2,000 at the beginning of every month, Better
` 1,750 at the end of every month and Best ` 1,250 at the middle of every month.
(7) Firm's Accountant is entitled to a salary of ` 2,000 per month and a commission of 12%
of net profit after charging such commission.
The Net Profit of the firm for the year ended on 31st March, 2012 before providing for any of
the above adjustments was ` 2,76,000.
You are required to prepare Profit and Loss Appropriation Account for the year ended on 31st
March, 2012 (8 Marks, May 2012) (IPCC)
Answer
Profit and Loss Appropriation Account
for the year ended on 31st March, 2012
To General reserve 22,240 By Net Profit (See W.N.1) 2,25,000
To Salaries to partners By Interest on drawings
(W.N.3)
Good 28,800 Good 1,040
Better 19,200 Better 770
Best 21,600 69,600 Best 600 2,410
To Interest on Capital
Good 10,200
Better 6,600
Best 7,320 24,120
To Commission to partners
Good 18,000
Better 10,281
(W.N.4)
Best 22,500 50,781
To Partners’ Capital A/cs
(profit)
Good 20,223
Better 13,482
Best 26,964 60,669
2,27,410 2,27,410

Working Notes:
1. Profit and Loss Account
To Salary (Firm’s Accountant) 24,000 By Profit 2,76,000
To Commission (Firm’s
Accountant) (W.N.2) 27,000
To Net Profit transferred to
P & L Appropriation A/c 2,25,000
2,76,000 2,76,000
2. Commission of Firm’s Accountant
Profit after salary of firm's accountant ( 2,76,000 - 24,000 )
= × 12% = × 12% = ` 27,000
(100+12 ) % (100+12 ) %
3. Interest on Drawings
`
Good (at the beginning of every month) (` 2,000 x 6.5 x 8%) 1,040
Better (at the end of every month) (` 1,750 x 5.5 x 8%) 770
Best (at the middle of every month) (` 1,250 x 6 x 8%) 600
2,410
4. Commission of Better
Commission of Better = [Net profit for appropriation (excluding interest on drawings) -
General reserve – Interest on capital - Salaries to partners – Commission to Good and
Best] x 15%
Commission to Better = ` [2,25,000 – 22,240 – 24,120 – 69,600– 18,000 – 22,500] x 15%
= ` 68,540 x 15% = `10,281.
Question 21
X, Y and Z are partners sharing profits and losses equally. On 1st December, 2011 Z retired
from the partnership firm. The capitals of the partners, after all necessary adjustments stood at
` 45,000, ` 75,000 and ` 50,000 respectively. X and Y continued to carry on the business
without settling the accounts of Z. Final payment to Z made on 1st March, 2012. The
partnership firm made profit amounting to ` 30,000 during the period from 1st December,
2011 to 29th February, 2012.
What are the rights of Z to share subsequent profit as per the provisions of Section 37 of the
Indian Partnership Act? (4 Marks, May 2012) (IPCC)

14.37 Accounting
Answer
Under Section 37 of the Partnership Act, Z can exercise any of the following two options in the
absence of a contract:
1. Z is entitled at his option to such share of the profits made since he ceased to be a
partner as may be attributable to the use of his share of the property of the firm or
2. Z is entitled to interest at the rate of six per cent per annum on the amount of his share in
the property of the firm.
It may be noted that Z is not bound to make election until the share of the profit that would be
payable to him has been ascertained.
Question 22
Arun and Varun were partners sharing profits in the ratio of 13 : 11 respectively. On 1st April,
2012 they admitted Tarun as a new partner on the following conditions:
(i) All partners would share profits equally in the new firm.
(ii) Tarun would bring in ` 52,000 as his capital and ` 36,000 as his share of goodwill. No
goodwill account appeared in the books of the firm at the time of Tarun's admission and it
was decided not to open any goodwill account. Adjustment for Tarun's goodwill being
made through capital accounts.
Pass journal entries to record all the transactions on Tarun's admission.
Clearly show the calculation of ratio of sacrifice. (5 Marks, November 2012) (IPCC)
Answer
Journal Entries on Tarun’s admission
Year Dr. Cr.
2012 ` `
1st April Bank A/c Dr. 88,000
To Tarun’s Capital A/c (52,000 + 36,000) 88,000
(Being amount brought by Tarun towards its Capital and
share of Goodwill)
Tarun’s Capital A/c Dr. 36,000
To Arun’s Capital A/c 22,500
To Varun’s Capital A/c 13,500
(Being Tarun’s share of goodwill in the firm ` 36,000, has
been credited to the old partners in the sacrificing ratio 5:3)

Working Note:
Calculation of Sacrificing Ratio
Old Ratio New Ratio Sacrificing Ratio (Old – new)
Arun 13/24 1/3 (13/24 – 1/3) = 5/24
Varun 11/24 1/3 (11/24 – 1/3) = 3/24
Tarun -- 1/3 --
Therefore sacrificing ratio is 5:3.

Question 23
Atul, Balbir and Chatur were carrying on a business in partnership sharing profits in the ratio
of 5 : 3 : 2 respectively. On 31st March, 2012 their Balance Sheet stood as follows:
Liabilities ` Assets ` `
Atul's Capital 6,25,000 Goodwill 80,000
Balbir's Capital 3,75,000 Land and Buildings 7,00,000
Chatur's Capital 2,50,000 Furniture 1,65,000
General Reserve 1,00,000 Stock 2,86,000
Trade Creditors 2,10,000 Trade Debtors 1,80,000
Less: Provision for Bad 3,600 1,76,400
Total 15,60,000 15,60,000
Atul retired on the above mentioned date and partners agreed that :
(i) The current value of goodwill be taken to be equal to the book value of the asset.
(ii) Land and Buildings be considered worth ` 9,00,000.
(iii) The provision for bad debts on trade debtors be raised to 5%.
(iv) Provision be made for compensation of ` 5,000 to an ex-employee.
(v) Half of the amount due to Atul be paid immediately in cash and the balance be treated as
10% loan, repayable within 3 years.
In order to facilitate cash payment to Atul, Balbir and Chatur brought in ` 3,00,000 in the ratio
of 3 : 2 respectively.
Prepare Revaluation Account, the Capital Accounts of all the partners and Bank Account.
Also draw the Initial Balance Sheet of Balbir and Chatur, immediately after Atul's retirement.

14.39 Accounting
Answer
1 Revaluation Account
` `
To Provision for doubtful debts 5,400 By Land and Buildings 2,00,000
[(5% of 1,80,000) – 3,600]
To Provision for compensation 5,000
To Partners’ Capital Accounts
(Profit)
Atul 94,800
Balbir 56,880
Chatur 37,920 1,89,600
2,00,000 2,00,000
2. Partners’ Capital Accounts
Particulars Atul Balbir Chatur Particulars Atul Balbir Chatur

` ` ` ` ` `
∗
To Goodwill By Balance b/d 6,25,000 3,75,000 2,50,000
(5:3:2) 40,000 24,000 16,000
To Cash A/c 3,84,900 By General
Reserve 50,000 30,000 20,000
To 10% Loan 3,84,900 By Revaluation 94,800 56,880 37,920
A/c
To Atul’s By Balbir’s &
Capital - 24,000 16,000 Chatur’s
A/c Capital
Accounts 40,000
To Balance By Cash A/c 1,80,000 1,20,000
c/d 5,93,880 3,95,920
8,09,800 6,41,880 4,27,920 8,09,800 6,41,880 4,27,920
3. Bank Account
` `
To Balance b/d 1,52,600 By Atul’s Capital A/c 3,84,900
∗
Goodwill appearing in the given balance sheet as on 31st March, 2012 has been written off in line with
the provisions of Accounting Standards.

To Balbir’s capital A/c 1,80,000 By Balance c/d 67,700

To Chatur’s capital A/c 1,20,000
4,52,600 4,52,600
4. Balance Sheet of Balbir and Chatur
as at 31.03.2012 (after Atul’s retirement)
Equity & Liabilities ` Assets `
Capital Accounts: Land and Buildings 9,00,000
Balbir 5,93,880 Furniture 1,65,000
Chatur 3,95,920 Stock 2,86,000
10% Loan from Atul 3,84,900 Trade Debtors 1,80,000
Trade Creditors 2,10,000 Less: Provision for 1,71,000
Provision for doubtful debts (9,000)
Compensation 5,000 Cash at Bank 67,700
15,89,700 15,89,700
Question 24
P, Q and R were carrying on a business in partnership, sharing profits and losses in the ratio
of 5 : 3 : 2 respectively. The firm earned a profit of ` 3,60,000 for the accounting year ended
31st March, 2012 on which date the firm's Balance Sheet stood as follows:
P's Capital 7,00,000 Freehold Land and Building 8,00,000
Q's Capital 5,70,000 Machinery 3,50,000
R's Capital 4,30,000 Furniture & Fixtures 1,02,000
Creditors 79,400 Stock 2,98,800
Outstanding Expenses 4,900 Debtors 1,60,000
Cash at Bank 73,500
Total 17,84,300 Total 17,84,300
P died on 31st August, 2012. According to firm's partnership deed, in case of death of a
partner:-
(i) Assets and Liabilities have to be revalued by an independent valuer.
(ii) Goodwill is to be calculated at two years' purchase of average profits for the last three
completed accounting years and the deceased partner's capital account is to be credited

14.41 Accounting
with his share of goodwill.

(iii) The share of the deceased partner in the profits for the period between end of the previous
accounting year and the date of death is to be calculated on the basis of the previous
accounting year's profits. Post death of P, Q & R will share profit in the ratio of 3 : 2.
Profits for the accounting years 2009-2010 and 2010-2011 were as follows :-
`
For the year ended 31st March, 2010 2,90,000 .
For the year ended 31st March, 2011 3,40,000
Drawings by P from 1st April, 2012 to the date of his death totalled ` 46,000.
On revaluation, Freehold Land and Building was appreciated by ` 1,00,000; Machinery was
depreciated by ` 10,000 and a Provision for Bad Debts was created @ 5% on Debtors as on
31st March, 2012. P's sole heir was given ` 5,00,000 immediately and the balance along with
interest @ 12% per annum was paid to him on 31st March, 2013.
Prepare Revaluation Account, P's Capital Account and P's Heir Account, giving important
working notes. (16 Marks, May 2013) (IPCC)
Answer
Revaluation Account
Particulars ` ` Particulars `
To Machinery 10,000 By Freehold Land &
To Provision for doubtful Building 1,00,000
debts( 5% of 1,60,000) 8,000
To Capital accounts:
P 41,000
Q 24,600
R (Profit transferred) 16,400 82,000
1,00,000 1,00,000
P’s Capital Account
To Drawings 46,000 By Balance b/d 7,00,000
To P’s heir 11,00,000 By Q’s capital A/c 1,98,000
(Balance transferred) By R’s capital A/c 1,32,000
By Profit and Loss Suspense A/c 75,000
By Revaluation A/c 41,000
11,46,000 11,46,000

P’s Heir Account

31.08.2012 To Bank A/c 5,00,000 31.08.2012 By P’s Capital A/c 11,00,000
31.03.2013 To Bank A/c 6,42,000 31.03.2013 By Interest A/c
⎛ 7⎞
⎜ 6,00,000 × 12% × ⎟ 42,000
⎝ 12 ⎠
11,42,000 11,42,000
Working Notes:
1. Calculation of gaining ratio of Partners Q and R
New share Old share Gaining share Sacrificing share
P 5/10 5/10
Q 3/5 3/10 3 3 6−3 3
− = =
5 10 10 10
R 2/5 2/10 2 2 4−2 2
− = =
5 10 10 10
2. Calculation of Goodwill
`
2009-10 2,90,000
2010-11 3,40,000
2011-12 3,60,000
9,90,000
Average Profit = 9,90,000/3 = ` 3,30,000
Goodwill = 3,30,000 x 2 = ` 6,60,000
5
Share of P in goodwill = 6,60,000 × = ` 3,30,000
10
Adjustment for P’s share of goodwill through Q’s and R’s capital accounts (in their
gaining ratio 3:2) :
Q’s capital A/c (3,30,000 x 3/5) ` 1,98,000
R’ s capital A/c (3,30,000 x 2/5) ` 1,32,000
3. Share of P in Profits for the period between 1.4.2012 to 31.8.2012 i.e. till the date of
death
1st April, 2012 to 31st August, 2012 = 5 months
Profit for year 2011-12 = ` 3,60,000

14.43 Accounting
5
Estimated profit for 5 months = 3,60,000 x =` 150,000
12
5
Share of P = 1,50,000 x =` 75,000
10
Question 25
Pathak, Quereshi and Ranjeet were partners sharing profits in the ratio of 7 : 5 : 3 respectively. On
31st March, 2013 Quereshi retired when the firm's Balance Sheet was as follows :
Capital Accounts : Land and Building 10,00,000
Pathak 8,50,000Plant and Machinery 4,65,000
Quereshi 6,20,000Furniture, Fixture and Fittings 2,30,100
Ranjeet 3,70,000Stock 1,82,200
General Reserve 2,25,000Trade Debtors 2,00,000
Trade Creditors 1,13,000Less : Provision for Bad Debts 6,000 1,94,000
Total 21,78,000 Total 21,78,000
It was agreed that :
(i) Land & Building be appreciated by 20%.
(ii) Plant & Machinery be depreciated by 10%.
(iii) Provision for Bad Debts be made equal to 4% of Trade Debtors.
(iv) Outstanding repairs bill amounting to ` 1,500 be recorded in the books of account.
(v) Goodwill of the firm be valued at ` 3,00,000 and Quereshi's capital account be
credited with his share of goodwill without raising goodwill account.
(vi) Half of the amount due to Quereshi be immediately paid to him by means of a cheque
and the balance be treated as a loan bearing interest @ 12% per annum.
After Quereshi's retirement, Pathak and Ranjeet admitted Swamy as a new partner with effect
from 1st April, 2013. Pathak, Ranjeet and Swamy agreed to share profits in the ratio of 2 : 1 : 1
respectively. Swamy brought patents valued at ` 20,000 and ` 3,80,000 in cash including
payment for his share of goodwill as valued by the old firm. The entire amount of
` 4,00,000 was credited to Swamy's Capital Account. Adjustments were made in the capital
accounts for Swamy's share of goodwill.
(a) Pass journal entries for all the above transactions without any narration, and

(b) Prepare the capital account of all the partners. (16 Marks, November 2013) (IPCC)
Answer
(a) Journal Entries on 31st March, 2013
` `
1 Land and Building Dr. 2,00,000
To Revaluation A/c 2,00,000
2. Revaluation A/c Dr. 46,500
To Plants and Machinery 46,500
3 Revaluation A/c Dr 3,500
To Provision for bad debts 2,000
[(` 2,00,000 x 4%) - ` 6000]
To Provision for Outstanding repair bills 1,500
4 Pathak’s Capital A/c Dr. 70,000
Ranjeet’s Capital A/c Dr. 30,000
To Quereshi’s Capital A/c 1,00,000
5 Revaluation A/c Dr. 1,50,000
To Pathak’s Capital A/c 70,000
To Quereshi’s Capital A/c 50,000
To Ranjeet’s Capital A/c 30,000
6 General reserve A/c Dr. 2,25,000
To Pathak’s Capital A/c 1,05,000
To Quereshi’s Capital A/c 75,000
7 Quereshi’s Capital A/c Dr. 8,45,000
To Bank A/c 4,22,500
To Quereshi’s Loan A/c 4,22,500
8 Patents Dr. 20,000
Cash A/c Dr. 3,80,000
To Swamy’s Capital A/c 4,00,000
9 Swamy’s Capital A/c (` 3,00,000/4) Dr. 75,000
To Pathak’s Capital A/c 60,000

(b) Capital Accounts of partners
14.45
Amount Amount
Pathak Quereshi Ranjeet Swamy Pathak Quereshi Ranjeet Swamy
31.3.13 31.3.13
To Quereshi 70,000 30,000 By Bal. b/d 8,50,000 6,20,000 3,70,000
By general reserve 1,05,000 75,000 45,000
Accounting
To Bank A/c 4,22,500 By Pathak & 1,00,000

Ranjeet
To Loan A/c 4,22,500 By Revaluation A/c 70,000 50,000 30,000
To Bal. c/d 9,55,000 4,15,000

10,25,000 8,45,000 4,45,000 10,25,000 8,45,000 4,45,000
1.4.13 1.4.13
To Pathak 60,000 By Bal. b/d 9,55,000 4,15,000
To Ranjeet 15,000 By Patents 20,000
To Bal. c/d 10,15,000 4,30,000 3,25,000 By Cash 3,80,000
By Swamy 60,000 15,000
10,15,000 4,30,000 4,00,000 10,15,000 4,30,000 4,00,000
Working Notes:
1. Calculation of Gaining ratio after retirement of Quereshi on 31st March, 2013
Pathak : Quereshi : Ranjeet Pathak : Ranjeet
Old Ratio 7/15 : 5/15 : 3/15 New Ratio 7/10 : 3/10
Gain of Pathak New Ratio - Old Ratio
7/10 - 7 / 15
(105 – 70) / 150
35 / 150
Gain of Ranjeet 3/10 – 3/15 = (45 – 30)/150 = 15/150
Gaining Ratio = 35 : 15 =7:3
2. Calculation of Sacrificing ratio of Pathak and Ranjeet at time of admission of
Swamy
1st April, 2013 7:3 (ratio between old partners)
2 7 1 3
New ratio 2:1:1 − −
4 10 4 10
10 - 14 5-6
20 20
4 1
=
20 20
Sacrificing ratio 4:1
Question 26
The Balance Sheet of Amit, Bhushan and Charan, who share profits and losses as 3 : 2 : 1
respectively, as on 01.04.2013 is as follows:

(`) (`)
Capital Accounts: Amit 1,80,000 Machinery 1,50,000
Bhushan 1,60,000 Furniture 1,50,000
Charan 1,40,000 Debtors 80,000
Current Accounts: Bhushan 16,000 Less: Provision for 4,000 76,000
doubtful Debts
Creditors 1,20,000 Stock 2,10,000
Cash 20,000

14.47 Accounting
- Current Account: Charan 10,000

6,16,000 6,16,000
1
Dev is admitted as a partner on the above date for th share in the profit and loss. Following
5
are agreed upon:
(1) The profit and loss sharing ratio among the old partners will be equal.
(2) Dev brings in ` 1,50,000 as capital but is unable to bring the required amount of premium
for goodwill.
(3) The goodwill of the firm is valued at ` 60,000.
(4) Assets and liabilities are to be valued as follows:
Machinery ` 2,06,000 : Furniture ` 1,28,000 : Provision for doubtful debts @ 10% on
debtors.
(5) Necessary adjustments regarding goodwill and Profit / loss on revaluation are to made
through the Partner's Current Accounts.
(6) It is decided that the revalued figures of assets and liabilities will not appear in the
Balance Sheet of the new firm.
(7) Capital Accounts of the old partners in the new firm should be proportionate to the new
profit and loss sharing ratio, taking Dev's Capital as base. The existing partners will not
bring cash for further capital. The necessary adjustments are to be made through the
partner’s Current Account.
Prepare Partner's Capital & Current Account, and the Balance Sheet of the new firm after
admission. (16 Marks, IPCC May, 2014)

Answer
In the books of Firm
Amit Bhushan Charan Dev Amit Bhushan Charan Dev
To Balance c/d 2,00,000 2,00,000 2,00,000 1,50,000 By Balance b/d 1,80,000 1,60,000 1,40,000
(Working Note 1) By Bank A/c - - - 1,50,000
By Partners’ 20,000 40,000 60,000
Current A/cs
(bal. fig)
2,00,000 2,00,000 2,00,000 1,50,000 2,00,000 2,00,000 2,00,000 1,50,000
Partners’ Current Accounts

Amit Bhushan Charan Dev Amit Bhushan Charan Dev
To Balance b/d - - 10,000 - By Balance b/d - 16,000 - -
To Memorandum 8,000 8,000 8,000 6,000 By Memorandum 15,000 10,000 5,000 -
Revaluation A/c Revaluation
To Amit and - - 6,000 12,000 By Dev and Charan 14,000 4,000 - -
Bhushan (Goodwill
(Goodwill adjustment) adjustment)
To Partners Capital 20,000 40,000 60,000 - By Balance c/d - 18,000 79,000 18,000
Issues in Partnership Accounts
A/cs
To Balance c/d 1,000 - -
29,000 48,000 84,000 18,000 29,000 48,000 84,000 18,000
14.48
14.49 Accounting
Balance Sheet of new firm

After Dev’s Admission
Capital Accounts: A/cs Machinery 1,50,000
Amit 2,00,000 Furniture 1,50,000
Bhushan 2,00,000 Stock 2,10,000
Charan 2,00,000 Debtors 80,000
Dev 1,50,000 7,50,000 Less: Provision for doubtful debts 4,000 76,000
Current Account: Amit 1,000 Cash 1,70,000
Creditors 1,20,000 Current Accounts:
Bhushan 18,000
Charan 79,000
Dev 18,000
1,15,000
8,71,000 8,71,000
Working Notes:
1. Dev. joins the business for 1/5th share and brings ` 1,50,000 as capital. Thus, total
capital of new firm will be ` 7,50,000 (1,50,000 × 5). Total capital of Amit, Bhushan &
Charan will be ` 6,00,000 (7,50,000 – 1,50,000) which will be shared by them equally i.e.
2,00,000 each.
2. Calculation of New profit sharing ratio
Amit Bhushan Charan Dev
4 1 4 1 4 1 1
× × ×
5 3 5 3 5 3 5
4 4 4 3
15 15 15 15
4:4:4:3
3. Adjustment of Goodwill
Sacrificing/gaining ratios of old partners
Amit Bhushan Charan Dev
4 3 4 2 4 1 1
- - -
15 6 15 6 15 6 5
24 − 45 24 − 30 24 − 15
90 90 90

21 6 9 18
Sacrifice Sacrifice Gain Gain
90 90 90 90
Entry for adjustment for goodwill of ` 60,000
Charan Dr. 6,000
Dev Dr. 12,000
To Amit 14,000
To Bhushan 4,000
(Being goodwill adjusted in partners sacrificing/gaining ratios)
4. Memorandum Revaluation A/c
Amount Amount`
`
To Furniture 22,000 By Machinery 56,000
To Partners’ Current A/cs:
Amit 15,000
Bhushan 10,000
Charan 5,000 30,000
56,000 56,000
To Machinery 56,000 By Furniture 22,000
By Provision for doubtful debts 4,000
By Partners’ Current A/cs:
Amit 8,000
Bhushan 8,000
Charan 8,000
Dev 6,000 30,000
56,000 56,000
Question 27
Anuj, Ayush and Piyush are in partnership sharing profits and losses in the ratio 2 : 2 : 1. Their
Balance Sheet as on 31.3 .2014 is as follows:
Capital accounts: Fixed assets:
Anuj 3,75,000 Plant 7,87,000

14.51 Accounting
Ayush 2,80,000 Current assets:

Piyush 2,25,000 8,80,000 Stock 1,03,000
General Reserve 1,88,000 Debtors 1,56,000
Creditors 2,16,000 Bank FD 2,25,000
Bank balance 13,000
12,84,000 12,84,000
Anuj decided to retire with effect from 1.4.2014.
The remaining partners agreed to share profits and losses equally in future.
The following adjustments were agreed to be made upon retirement of Anuj.
(i) Goodwill was to be valued at 1 year purchase of the average profits of the preceding 3
years on the date of retirement.
The average profits of the past 3 years were as follows:
Year ended `
31.3.2014 3,30,000 (as per draft accounts)
31.3.2013 2,32,000
31.3.2012 2,20,900
The partners decided not to raise goodwill account in the books.
(ii) The assets were revalued as follows:
Plant to be depreciated by 10%
Creditors amounting to ` 10,000 were omitted to be recorded;
` 6,000 is to be written off from stock;
Provision for doubtful debts to be created @ 5% of the debtors;
Interest accrued on FD amounting to ` 9,000 was omitted to be recorded.
The above adjustments were to be made from the profit for the year ended 31.3 .2014
before calculation of goodwill.
(iii) Anuj agreed to take over the bank FD including interest accrued thereon in part payment
of his dues and the balance would remain as a loan, carrying interest of 8% p.a.
(iv) Ayush and Piyush agreed to bring in sufficient cash to make their capital proportionate
and maintain a bank balance of ` 1,50,000.
You are required to prepare
(I) Capital accounts of partners as on 1.4.2014 giving effect to the above adjustments.

(2) Balance Sheet as on 1.4.2014 after Anuj’s retirement. (16 Marks, IPCC November, 2014)
Answer
Partners’ Capital Accounts as on 1.4.2014
Anuj Ayush Piyush Anuj Ayush Piyush
To Anuj 22,950 68,850 By Balance b/d 3,75,000 2,80,000 2,25,000
To Revaluation 37,400 37,400 18,700 By General 75,200 75,200 37,600
Loss Reserves
To Bank FD 2,34,000 By Ayush 91,800
To 8% Loan 2,70,600 and Piyush
To Balance c/d* 3,03,450 3,03,450 By Cash
(Bal. fig.) - 8,600 1,28,400
5,42,000 3,63,800 3,91,000 5,42,000 3,63,800 3,91,000
Balance Sheet as on 1.4.2014 after Anuj’s retirement

Liabilities Amount (`) Assets Amount (`)
Anuj’s Loan 2,70,600 Plant(90% of ` 7,87,000) 7,08,300
Creditors(2,16,000+10,000) 2,26,000 Stock (` 1,03,000 less ` 97,000
6,000)
Capital Accounts*: Debtors(95% of ` 1,56,000 1,48,200
Ayush 3,03,450 Bank Balance 1,50,000
Piyush 3,03,450
11,03,500 11,03,500
*Total of capital balances should be ` 6,06,900 which is proportioned to individual partners in
their profit sharing ratio.
Working Notes:
1. Profit / Loss on revaluation
Revaluation Account
Amount Amount
(`) (`)
To Plant 78,700 By Interest on FD 9,000
To Creditors 10,000 By Loss on revaluation 93,500
To Inventory 6,000
To Provision for doubtful debts 7,800 -
1,02,500 1,02,500

14.53 Accounting
2. Calculation of Goodwill
Goodwill Valuation
Profit of year ended `
31.3.2014 (` 3,30,000 less ` 93,500) 2,36,500
31.3.2013 2,32,000
31.3.2012 2,20,000
Total Profits 6,88,500
Average Profit = 6,88,500/3 = 2,29,500
Goodwill valued at 1 year purchase amounting ` 2,29,500.
3. Adjustment for goodwill among partners
Anuj’s share of goodwill (2,29,500 x 2/5) = 91,800
Gaining ratio of Ayush and Piyush
Ayush Piyush
1 2 1 1
− −
2 5 2 5
5−4 1 5−2 3
= =
10 10 10 10
Gaining Ratio = 1: 3
Entry for adjustment of goodwill
` `
Ayush’s capital A/c Dr. 22,950
Piyush’s capital A/c Dr. 68,850
To Anuj’s capital A/c 91,800
(Being Anuj’s share of goodwill debited to remaining
partners in their gaining ratio)

15
Accounting in Computerised
Environment
Question 1
What are the advantages and disadvantages of ERP package?
(4 Marks, May, 2007 and November, 2009,PCC)
Answer
Larger organisations often go for an ERP package where finance comes as a module. An ERP
is an integrated software package that manages the business process across the entire
enterprise.
Advantages of using an ERP
The advantages of using an ERP for maintaining accounts are as follows:
1. Standardised processes and procedures : An ERP is a generalised package which
covers most of the common functionalities of any specific module.
2. Standardised reporting : Majority of the desired reports are available in an ERP package.
These reports are standardised across industry and are generally acceptable to the
users.
3. Duplication of data entry is avoided as it is an integrated package.
4. Greater information is available through the package.
Disadvantages of an ERP
The disadvantages of an ERP are the following:
1. Lesser flexibility : The user may have to modify their business procedure at times to be
able to effectively use the ERP.
2. Implementation hurdles : Many of the consultants doing the implementation of the ERP
may not be able to fully appreciate the business procedure to be able to do a good
implementation of an ERP.

15.2 Accounting
3. Very expensive : ERP are normally priced at an amount which is often beyond the reach
of small and medium sized organisation. However, there are some ERP coming into the
market which are moderately priced and may be useful to the small businesses.
4. Complexity of the software : Generally an ERP package has large number of options to
choose from. Further the parameter settings and configuration makes it a little complex
for the common users.
Question 2
What are the advantages of outsourcing the accounting functions?
(4 Marks, November, 2007, PCC)
Answer
Following are the advantages of outsourcing the accounting functions:
(i) The organisation that outsources its accounting function is able to save time to
concentrate on the core area of business activity.
(ii) The organisation is able to utilise the expertise of the third party in undertaking the
accounting work.
(iii) Storage and maintenance of the data is in the hand of professional people.
(iv) The organisation is not bothered about people leaving the organisation in key accounting
positions.
(v) The proposition is proving to be economically more sensible.
Question 3
Explain the factors to be considered before selecting the pre-packaged accounting software.
(4 Marks, May, 2008, PCC)
Answer
There are many accounting softwares available in the market. To choose the accounting
software appropriate to the need of the organization is a difficult task, some of the criteria for
selection could be the following:
1. Fulfillment of business requirements: Some packages have few functionalities
more than the others. The purchaser may try to match his requirement with the available
solutions.
2. Completeness of reports: Some packages might provide extra reports or the reports
match the requirements more than the others.
3. Ease of Use: Some packages could be very detailed and cumbersome compare to the
others.

Accounting in Computerised Environment 15.3
4. Cost: The budgetary constraints could be an important deciding factor. A package

having more features cannot be opted because of the prohibitive costs.
5. Reputation of vendor: Vendor support is essential for any software. A stable vendor
with good reputation and track records will always be preferred.
6. Regular updates: Law is changing frequently. A vendor who is prepared to give updates
will be preferred to a vendor unwilling to give updates.
Question 4
What are the advantages of customised accounting packages?
(4 Marks, November, 2008, PCC and IPCC November, 2014)
Answer
Following are the advantages of the customised accounting packages:
1. The functional areas that would otherwise have not been covered gets computerised.
2. The input screens can be tailor made to match the input documents for ease of data
entry.
3. The reports can be as per the specification of the organisation. Many additional MIS
reports can be included in the list of reports.
4. Bar-code scanners can be used as input devices suitable for the specific needs of an
individual organisation.
5. The system can suitably match with the organisational structure of the company.
Question 5
Mention, four advantages and four disadvantages of pre-packaged accounting software.
(4 Marks, June, 2009, PCC)
Answer
Advantages of Pre-packaged Accounting Software
1. Easy to install
2. Relatively inexpensive
3. Easy to use
4. Back-up procedure is simple.
5. Certain flexibility of report formats provided by some of the software
6. Very effective for small and medium size businesses.

15.4 Accounting
Disadvantages of Pre-packaged Accounting Software

1. Does not cover peculiarities of specific business
2. Does not cover all functional area
3. Customization may not be possible in most such software
4. Reports generated are not sufficient or serve the purpose
5. Lack of security
6. Bugs in the software
Question 6
Market is full of ready-made accounting softwares. What factors will you consider to choose
one of them for your enterprise? (4 Marks, November, 2011, IPCC)
Answer
While choosing the accounting software, the following points should be considered:
1. Fulfilment of business requirements: Some packages have few functionalities more than
the others. The purchaser may try to match his requirement with the available solutions.
2. Completeness of reports: Some packages might provide extra reports or the reports
match the requirement more than the others.
3. Ease of use: Some packages could be very detailed and cumbersome compare to the
others.
4. Cost: The budgetary constraints could be an important deciding factor. A package having
more features cannot be opted because of the prohibitive costs.
5. Reputation of the vendor: Vendor support is essential for any software. A stable vendor
with reputation and good track records will always be preferred.
6. Regular updates: Law is changing frequently. A vendor who is prepared to give updates
will be preferred to a vendor unwilling to give updates.
Question 7
What do you mean by Customised Accounting Software?
(4 Marks, November, 2009)
Answer
A customised accounting software is one where the software is developed on the basis of
requirement specifications provided by the organisation. The choice of customised accounting
software could be because of the typical nature of the business or else the functionality
desired to be computerised is not available in any of the pre-packaged accounting software.

An organisation desiring to have an integrated software package covering most of the

functional area may have the financial module as part of the entire customised system.
Question 8
What are the advantages of pre-packaged accounting software? (4 Marks, May, 2010, IPCC)
Answer
Advantages of Pre-Packaged Accounting Software:
1. Easy to install: The CD or floppy disk is to be inserted and the setup file should be run
to complete the installation. Certain old DOS based accounting softwares require some
settings to be added in the system configuration file and the system batch file. These
instructions are generally provided in the user manuals.
2. Relatively inexpensive: These packages are sold at very cheap prices nowadays.
3. Easy to use: Mostly menu driven with help options. Further the user manual provides
most of the solutions to problems that the user may face while using the software.
4. Backup procedure is simple: Housekeeping section provides a menu for backup. The
backup can be taken on floppy disk or CD or hard disk.
4. Flexibility: There is certain flexibility in formatting of report as provided by some of the
softwares. This allows the user to make the invoice, challan, GRNs look the way they
want.
6. Very effective for small and medium size businesses: Most of their functional areas
are covered by these standardised packages.
Question 9
A large size multi department’s hospital decided to outsource the accounting functions.
Hospital invited proposals from vendors through open tender and received three proposals.
How will you select the vendor? (4 Marks, November, 2010, IPCC)
Answer
The proposals will be evaluated and vendor will be selected considering the following criteria:
1. Quantum of services provided and whether the same matches with the requirements of
the hospital.
2. Reputation and background of the vendor.
3. Comparative costs of the various propositions.
4. Organizational set up of the vendor particularly technical staffing to obtain services
without inordinate delay.
5. Assurance of quality, confidentiality and secrecy.
6. Data storage and processing facilities.

15.6 Accounting
Question 10
“In business today, the accounts which were earlier maintained in a manual form, are replaced
with computerized accounts”. Explain the significance of computerized accounting system in
modern time. (4 Marks, May, 2011, IPCC)
Answer
In modern time, computerized accounting systems are used in various areas. The significance
of the computerized accounting system is as follows:
(1) Increase speed, accuracy and security - In computerized accounting system, the
speed with which accounts can be maintained is several fold higher. Besides speed, level
of accuracy is also high in computerized accounting system.
(2) Reduce errors - In computerized accounting, the possibilities of errors are also very less
unless some mistake is made while recording the data.
(3) Immediate information - In this system, with an entry of a transaction, corresponding
ledger posting is done automatically. Hence, trial balance will also be automatically
tallied and the user will get the information immediately.
(4) Avoid duplication of work - Computerized accounting systems also remove the
duplication of the work.
Question 11
"ERP package is gaining popularity in big organizations." Briefly explain the advantages of
using an ERP package, in the light of above statement. (4 Marks, May 2012, IPCC)
Answer
The advantages of using an ERP for maintaining accounts are as follows:
1. Standardised processes and procedures : An ERP is a generalised package which
covers most of the common functionalities of any specific module.
2. Standardised reporting : Majority of the desired reports are available in an ERP
package. These reports are standardised across industry and are generally acceptable to
the users.
3. No Redundancy : Duplication of data entry is avoided as it is an integrated package.
4. Better Information : Greater information is available through this package.
Question 12
Write any four disadvantages of Pre-packaged Accounting Software.
(4 Marks, November 2012, IPCC)
Answer
Disadvantage of Pre-packaged Accounting Software:

1. Lesser Flexibility: Business today is becoming more and more complex. A standard
package may not be able to take care of these complexities i.e. it does not cover
peculiarities of specific business. Therefore, customization may not be possible in such
softwares.
2. Covers only few functional areas and only main reports are covered: Many pre-
packaged accounting softwares do not cover all functional areas. For example,
production process may not be covered by most pre-packaged accounting softwares. The
demands for modern day business may make the management desire for several other
reports for exercising management control. These reports may not be available in a
standard package.
3. Lack of security: Any person can view data of all companies with common access
password. Levels of access control as we find in many customised accounting software
packages are generally missing in a pre-packaged accounting package.
4. Bugs in the software: Certain bugs may remain in the software which takes long to be
rectified by the vendor and is common in the initial years of the software.
Question 13
What is an Enterprise Resource Planning (ERP) software? What are the factors which you will
take into consideration while choosing an ERP software? (4 Marks, May 2013, IPCC)
Answer
An Enterprise Resource Planning (ERP) is an integrated software package that manages the
business process across the entire enterprise by integrating informations created by different
functional groups of the organisation.
Choice of ERP software depends upon the following factors:
1. Functional requirement of the organisation: The ERP that matches most of the
requirements of an organisation is preferred over the others.
2. Reports available in the ERP: The organisation visualises the reporting requirements
and chooses a vendor which fulfils its reporting requirements.
3. Background of the vendors: The service and deliverable record of a vendor is
extremely important in choosing the vendor.
4. Cost comparisons: The budget constraints and fund position of an enterprise often
becomes the deciding factor for choosing a particular package.
Question 14
Explain the reasons due to which the manual accounting system was replaced by the
computerized accounting system in modem time. (4 Marks, November 2013, IPCC)

15.8 Accounting
Answer
In modern time, computerized accounting system has replaced the manual accounting system
due to the following reasons:
(1) Speed, accuracy and security - In computerized accounting system, the speed with which
accounts can be maintained is several folds higher. Besides speed, level of accuracy is
also high in computerized accounting system.
(2) Reduced errors - In computerized accounting, the possibilities of errors are also very less
unless some mistake is made while recording the data.
(3) Immediate information - In this system, with an entry of a transaction, corresponding
ledger posting is done automatically. Hence, trial balance will also be automatically
tallied and the user will get the information immediately.
(4) Avoidance of duplication of work - Computerized accounting systems also remove the
chances for duplication of the work.

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© The Institute of Chartered Accountants of India

©THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA

Revised Edition : July, 2015

Department/Committee : Board of Studies

ISBN No. : 978-81-8441-531-5

Published by : The Publication Department on behalf of The Institute of

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

8 Self Balancing 5 (b) 4 7(e) 4 1(a) 5 1(b) 5 4(b) 4

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

Chapter Chapter Heading Page No.

2 Financial Statements of Companies 2.1 – 2.47

Unit-1: Preparation of Financial Statements of Companies 2.1 – 2.16

3 Profit or Loss Prior to Incorporation 3.1 – 3.11

4 Accounting for Bonus Issue 4.1 – 4.11

6 Amalgamation 6.1 – 6.27

7 Average Due Date and Account Current 7.1 – 7.15

Unit-2: Account Current 7.13 – 7.15

8 Self Balancing Ledgers 8.1 – 8.11

10 Accounts from Incomplete Records 10.1 – 10.45

11 Hire Purchase & Instalment Sale Transactions 11.1 – 11.12

12 Investment Accounts 12.1 – 12.16

14 Issues in Partnership Accounts 14.1 – 14.53

15 Accounting in Computerised Environment 15.1 – 15.8

Question Papers 1 – 125

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

Year SLM W.D.V.

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

practice, or if proportionate amount of interest is changed to inventory which was earlier

© The Institute of Chartered Accountants of India

(b) Decrease in the value of fixed asset by ` 30,00,000 on account of revaluation.

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

Less: CENVAT credit (12,000 kg. × `4) 48,000

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

6.4.09 6 70 420 4 70 280

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

1 Depreciation as per SLM ` 20 lakhs/10years = ` 2 lakhs.

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(b) Computation of estimate of profit as per AS 7

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

You are required to calculate:

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India