ICFAI Accounts

Financial Accounting (MB131) : January 2004
Question Paper
Financial Accounting (MB131) : January 2004
Section A : Basic Concepts (30 Marks)

• This section consists of questions with serial number 1 - 30.
• Answer all questions.
• Each question carries one mark.
1. Which of the following represent(s) personal accounts in accounting parlance?
a. Sundry creditors
b. Bank account
c. Outstanding wages
d. Prepaid insurance
e. All of the above.
< Answer >
2. Which of the following methods of valuation of inventory is based on the assumption that
costs are
charged against revenue in the order in which they occur?
a. FIFO method
b. LIFO method
c. Weighted average method
d. Moving average method
e. Base stock method.
< Answer >
3. Which of the following is not an item of revenue expenditure?
a. Interest on deposits accepted
b. Annual insurance premium on inventory
c. Customs duty paid in connection with the import of equipment
d. Repairs and maintenance on machinery
e. Expenditure on assets like paper weight and pin cushion.
< Answer >
4. Which of the following errors will cause a mismatch in the trial balance?
a. Errors of complete omission
b. Compensating errors
c. Errors of principle
d. Recording dual aspects of a transaction more than once
e. Errors of partial omission.
< Answer >
5. AB & Co. purchased a machine for Rs.10,00,000 on April 1, 2002. The salvage value of the
machine is
Rs.40,000. The useful life of the machine is 8 years. If the firm intends to depreciate the
machinery on
straight-line method, the rate of depreciation will be
a. 16%
b. 15%
c. 14%
d. 12.5%
e. 12%.
< Answer >
6. If the purchases day book of a firm is overcast, it will
a. Increase gross profit and reduce net profit
b. Reduce gross profit and increase net profit
c. Reduce gross profit as well as net profit
d. Increase gross profit as well as net profit
e. Reduce gross profit but will not have any impact on net profit.
< Answer >
7. Which of the following is true when a debtor pays his dues?
a. The asset side of the balance sheet will decrease
b. The asset side of the balance sheet will increase
c. The liability side of the balance sheet will increase
d. The liability side of the balance sheet will decrease
< Answer >
e. There is no change in total assets or total liabilities.
8. Withdrawal of goods from stock by the owner of the business for personal use should be
recorded by
debiting
a. Drawings account and crediting cash account
b. Drawings account and crediting purchases account
c. Capital account and crediting drawings account
d. Purchases account and crediting drawings account
e. Stock account and crediting capital account.
< Answer >
9. The cost price of a machine is Rs.1,20,000 and the depreciated value of the machine after 3
years will
be Rs.66,000. If the company charges depreciation under straight-line method, the rate of
depreciation
will be
a. 25%
b. 20%
c. 18%
d. 15%
e. 12%.
< Answer >
10. Consider the following data pertaining to a firm:
The balance as per pass book is
a. Rs.20,600 (Dr. balance)
b. Rs.18,500 (Dr. balance)
c. Rs.18,500 (Cr. balance)
d. Rs.15,600 (Dr. balance)
e. Rs.20,600 (Cr. balance).
Credit balance as per bank column of cash book Rs.13,500
Bank interest on overdraft appeared only in the pass book Rs.2,100
Cheques deposited but not collected by the bank Rs.5,000
< Answer >
11. Consider the following data pertaining to a company for the year 2002-2003:
The bad debts of the company during the year are
a. Rs.40,000
b. Rs.35,000
c. Rs.30,000
d. Rs.25,000
e. Rs.20,000.
Opening balance of sundry debtors Rs. 45,000
Credit sales Rs.4,25,000
Cash sales Rs. 20,000
Cash collected from debtors Rs.4,00,000
Closing balance of sundry debtors Rs. 50,000
< Answer >
12. The opening stock of a company is Rs.40,000 and the closing stock is Rs.50,000. If the
purchases
during the year are Rs.2,00,000 the cost of goods sold will be
a. Rs.2,10,000
b. Rs.2,00,000
c. Rs.1,90,000
d. Rs.1,80,000
e. Rs.1,50,000.
< Answer >
13. The balance as per bank statement of a company is Rs.12,500 (Dr.). The company deposited
two
cheques worth Rs.8,500, out of which one cheque for Rs.2,800 was dishonoured which was not
entered
in the cash book. The credit balance as per cash book is
a. Rs.21,000
b. Rs.15,300
c. Rs.23,800
d. Rs. 9,700
< Answer >
e. Rs. 4,000.
14. During the year 2002-03, the profit of a business before charging manager’s commission was
Rs.1,89,000. If the manager’s commission is 5% on profit after charging his commission, then
the total
amount of commission payable to manager is
a. Rs.10,000
b. Rs. 9,450
c. Rs. 9,000
d. Rs. 8,500
e. Rs. 9,947.
< Answer >
15. Which of the following statements is true?
a. The losses from the sale of capital assets need not be deducted from the revenue to ascertain
net
income
b. Going concern concept requires that always non-monetary assets should be valued and
recorded at
market value
c. According to consistency concept, the results of one accounting period of a business cannot be
compared with that of in the past
d. In terms of conservatism concept all probable losses must be considered in computation
of income
e. The system of recording transactions based on dual concept is double accounting system.
< Answer >
16. Which of the following ratios indicates the short-term liquidity of a business?
a. Inventory turnover ratio
b. Debt-equity ratio
c. Acid test ratio
d. Proprietary ratio
e. Net profit ratio.
< Answer >
17. Which of the following should be deducted in the Balance Sheet of a company from the share
capital to
find out paid-up capital?
a. Calls-in-advance
b. Calls-in-arrears
c. Share forfeiture
d. Discount on issue of shares
e. Share premium.
< Answer >
18. Which of the following statements is false?
a. The forfeited shares should not be issued at a premium
b. At the time of forfeiture of shares, share premium should not be debited with the amount of
premium already received
c. Shares can be issued at a discount only after one year from the commencement of business
d. Share premium cannot be utilized to redeem preference shares
e. The loss on re-issue of shares cannot be more than the gain on forfeiture of those shares.
< Answer >
19. Which of the following accounting treatments is/are true in respect of accrued commission
appearing
on the debit side of a trial balance?
a. It is shown on the debit side of the profit and loss account
b. It is shown on the credit side of the profit and loss account
c. It is shown on the liabilities side of the balance sheet
d. It is shown on the assets side of the balance sheet
e. Both (b) and (d) above.
< Answer >
20. The maximum amount beyond which a company is not allowed to raise funds by issue of
shares is
a. Issued capital
b. Reserve capital
c. Nominal capital
d. Subscribed capital
e. Paid-up capital.
< Answer >
21. The discount allowed on re-issue of forfeited shares is debited to
< Answer >
a. Discount on re-issue of shares account
b. Profit and loss account
c. Share premium account
d. Discount on issue of shares account
e. Forfeited shares account.
22. The interest on calls in advance is paid for the period from the
a. Date of receipt of application money to the date of appropriation
b. Date of receipt of allotment money to the date of appropriation
c. Date of receipt of advance to the date of appropriation
d. Date of appropriation to the date of dividend payment
e. Date of appropriation to the date of receipt of final call.
< Answer >
23. Which of the following items should not appear under the head ‘unsecured loans’ in the
Balance Sheet
of a company?
a. Sinking funds
b. Loans and advances from subsidiaries
c. Short term loans and advances from banks
d. Loans and advances from others
e. Fixed deposits.
< Answer >
24. Share premium cannot be used to
a. Issue bonus shares
b. Redeem preference shares
c. Write-off preliminary expenses
d. Write-off discount on issue of shares
e. Provide for premium payable on redemption of debentures.
< Answer >
25. Rishi Ltd. issued 1,50,000 shares of Rs.100 each at a discount of 10%. Rama, to whom 300
shares were
allotted failed to pay the final call of Rs.30 per share and hence, all his shares were forfeited. At
the time
of forfeiture, the amount transferred to share forfeiture account was
a. Rs. 9,000
b. Rs.18,000
c. Rs.21,000
d. Rs.27,000
e. Rs.30,000.
< Answer >
26. Suma Ltd. announced a rights issue of four shares of Rs.100 each at a premium of 160% for
every five
shares held by the existing shareholders. The market value of the share at the time of rights issue
is
Rs.440. The value of right is
a. Rs.124
b. Rs.352
c. Rs. 80
d. Rs.110
e. Rs.180.
< Answer >
a. A company will be deemed to be a holding company of another if, it holds more than 50
percent of both equity and preference share capital
b. The financial year of the holding company and its subsidiary company must end on the same
date
c. The share capital of the subsidiary company does not appear in the Consolidated
Balance Sheet
d. The inter company owing will be shown in the Consolidated Balance Sheet
e. Minority shareholders of the subsidiary are entitled to proportionate share in capital profits
only.
< Answer >
28. On December 01, 2002 H Ltd. acquired 60% shares in S Ltd. The balance of profit and loss
account of
S Ltd. on April 01, 2002 and March 31, 2003 was Rs.90, 000 and Rs.1, 50,000, respectively. The
profit is
earned evenly throughout the year. The share of capital profit of
H Ltd. in the profits of the subsidiary as on March 31, 2003 is
a. Rs. 36,000
b. Rs. 60,000
c. Rs. 72,000
< Answer >
d. Rs. 78,000
e. Rs.1,30,000.
29. On April 01, 2002, Sura Chemicals Ltd. issued 10,000, 18% Debentures of Rs.100 each. The
company
reserves the right to redeem its debentures in any year by purchase in open market. Interest on
debentures is payable on September 30, and March 31, every year.
• On July 1, 2002, the company purchased 2,000 of its own 18% debentures at Rs.98
cuminterest.
• The company cancelled its own 2,000 debentures on March 31, 2003.
The profit on cancellation of debentures transferred to Capital reserve is
a. Rs. 4,000
b. Rs. 9,000
c. Rs.36,000
d. Rs.13,000
e. Rs.27,000.
< Answer >
30. Consider the following profits pertaining to a company for the last 3 years:
The weighted average profit of the company for the purpose of valuation of goodwill is
a. Rs.4,50,000
b. Rs.4,35,000
c. Rs.4,10,000
d. Rs.3,85,000
e. Rs.3,50,000.
Year Profit (Rs.)
2000-01 Rs.3,30,000
2001-02 Rs.4,20,000
2002-03 Rs.4,80,000
< Answer >
ANS—
1. Answer : (e)
Reason : Personal accounts deal with accounts of individuals like creditors, debtors,
banks etc. It shows the
balance due to these individuals or due from them on a particular date and representative
personal
accounts represent the amounts due on account of accrual concept like accrued expenses
and prepaid
expenses or accrued incomes and pre-received incomes. By virtue of this, the accounts
stated in
alternatives (a) sundry creditors, (b) Bank account, (c) outstanding wages and (d) prepaid
insurance
represent personal accounts.
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2. Answer : (a)
Reason : The basis for pricing inventory is either cost of production or cost of acquisition.
FIFO method of
identifying inventory is based on the assumption that costs are charged against revenue in
the order in
which they occur. In case of other methods i.e. LIFO (b) method matches the most recent
costs incurred
with current revenue, leaving the first cost incurred to be included as inventory.
Weighted-Average
method (c) assumes that costs are charged against revenue based on an average of the
number of units
acquired at each price level. Moving average method (d) can be used only with a
perpetual inventory.
The cost per unit is recomputed after every addition to the inventory. The ending
inventory is valued at
the last moving average unit cost for the period. Base stock method (e) wherein a
minimal level of it is
a permanent investment, which is necessary for the normal business activities. Base stock
would be
carried at historical cost. Thus, FIFO method is the correct answer.
< TOP >
3. Answer : (c)
Reason : Revenue expenditure is incurred for day to day running of the business. Any
item of expenditure which
improves the earning capacity of a business entity or the expenditure incurred till the
asset is ready for
use is capital expenditure. From the viewpoint of this, the customs duty paid in
connection with the
import of equipment (c) is not revenue expenditure. The expenses mentioned in other
alternatives
Interest on deposits accepted (a) Annual insurance premium (b) repairs and maintenance
(d)
Expenditure on assets like paperweight etc. are items of revenue expenditure.
< TOP >
4. Answer : (e)
Reason : A trial balance in which the total of the debits does not equal to the total of
credits due to errors
committed in the process of accounting. One among the errors is Partial omission of an
entry If the
debit or credit aspect of a transaction has been omitted to be recorded, the trial balance
will disagree.
For example, if a cash sales of Rs.800 is omitted to be recorded in the Sales account then
the total
debits will exceed the total credits by Rs.800. Thus, results in a mismatch in the trial
balance. But, in
case of errors mentioned in alternatives (a), (b), (c) and (d) the agreeing of trial balance is
not affected
as explained hereunder:
Omission of the recording of a transaction from the books of accounts: If the withdrawal
of goods
worth Rs.1,200 by the proprietor is omitted to be recorded in the books, the trial balance
will still agree
as both the debit and the credit aspects have been omitted to be recorded.
Compensating errors: These are quite difficult to detect. If a cash discount of Rs.215
allowed to a
customer has been posted to the credit of his account as Rs.251 and a cash sale of
Rs.2,851 has been
posted to sales account as Rs.2,815, then the excess credit caused by the first error would
be exactly
compensated by the lower credit recorded by the second error and the trial balance will
be in
agreement.
Errors of principle: If the machinery account is debited for an amount of repair charges
incurred for
the machinery, the error will not be disclosed by the trial balance. This is because that
both machinery
account and repairs account are debit accounts and it is a question of principle that repair
charges
should not be debited to the machinery account. Hence, the total effect will be the same
and hence the
trial balance will tally.
Recording both aspects of a transaction more than once in the books of accounts: If a sale
of
Rs.3,500 made to PQR Ltd. is entered in the sales book twice, the error will not cause a
mismatch in the
totals of the trial balance.
< TOP >
5. Answer : (e)
Reason : Value of machine Rs.10,00,000
Less: Salvage value Rs. 40,000
Depreciable value Rs. 9,60,000
Life of the machine 8 years
Depreciation = = Rs.1,20,000
9,60,000
8
< TOP >
Rate of depreciation = = 12%
1, 20,000 100
10, 00,000
×
6. Answer : (c)
Reason : If purchase day book is overcast, it shows higher cost of production or goods
sold. It reduces gross
profit which in turn reduces net profit. It cannot increase gross profit and net profit.
Therefore, (c) is the
correct answer.
< TOP >
7. Answer : (e)
Reason : If a debtor pays his dues, debtors balance will decrease and cash balance will
increase. Thus, the
composition of assets will change. But there is no change in the total assets or liabilities
and hence (e) is
true.
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8. Answer : (b)
Reason : If the owner withdraws goods from the business, journal entry will be
Drawings account ……… Dr
To Purcahses account
Other options, given in a, c, d and e, relating to drawings are not correct.
< TOP >
9. Answer : (d)
Reason : Let the rate of depreciation = x
The depreciated value of machine = Rs.1,20,000 (1 – 3x) = Rs.66,000
1 – 3x = = 0.55
3x = 1 – 0.55 = 0.45
x = 0.45 ÷ 3 = 0.15 or 15%.
Thus, the rate of depreciation = 15%.
Alternatively
Cost Price Rs.1,20,000
WDV Rs.66,000
Total depreciation for 3 years 54,000; Depreciation per year Rs. = Rs.18,000
Rate of Depreciation = Rs. = 15%
Rs.1,20,000
Rs.66,000
54,000
3
18, 000 x 100
1, 20, 000
< TOP >
10. Answer : (a)
Reason :
and the amounts mentioned in other alternatives are not correct.
Credit balance as per bank column of cash book Rs.13,500
Add: Bank interest on overdraft debited in pass book Rs. 2,100
Cheques deposited but not collected by bank Rs. 5,000
Debit balance as per pass book Rs.20,600
< TOP >
11. Answer : (e)
Reason :
Opening balance of Sundry debtors Rs. 45,000
Add: Credit sales Rs.4,25,000
Rs.4,70,000
Less: Cash collected Rs.4,00,000
Rs. 70,000
Less: Closing balance of sundry
debtors Rs. 50,000
Bad debts Rs. 20,000
< TOP >
12. Answer : (c) < TOP >
Reason :
Opening stock Rs. 40,000
Add: Purchases Rs.2,00,000
Rs.2,40,000
Less: Closing stock Rs. 50,000
Cost of goods sold Rs.1,90,000
13. Answer : (d)
Reason :
Particulars Rs.
Balance as per banks statement (overdraft) 12,500
Less: Cheque returned but not entered in the cash book 2,800
Balance as per cash book (overdraft) 9,700
< TOP >
14. Answer : (c)
Reason : Let the profit = 100%
Commission = 5%
105%
Amount of commission payable to manager = Rs.1,89,000 × 105% = Rs.9,000
5%
< TOP >
15. Answer : (d)
Reason : The conservatism concept states that the revenues are to be recognized when
they are certain and losses
are to be considered when they are probable. Thus, the statement in alternative (d) is true.
The
statements in other alternatives are false since, The losses from the sale of capital assets
are to be
deducted from revenue to ascertain the net income (a) Going concern pre-supposes that
the assets are
categorized into fixed and current and the non-monetary assets are to be recorded at the
historical cost
and not at market value (b) The consistency concept facilitates the comparison of the
results of one
accounting period with that of the past (c) and the system of recording transactions based
on dual aspect
concept is double entry system and not the double account system (e). Hence, the correct
answer is (d).
< TOP >
16. Answer : (c)
Reason : Acid test ratio or quick ratio is a liquidity ratio which is an indicator of short
term solvency of a
business. Hence © is the correct answer. The ratios mentioned in other alternatives do not
indicate the
short term solvency of a business and are not the correct answers.
< TOP >
17. Answer : (b)
Reason : Called up capital is the amount on the shares which is actually demanded by the
company to be paid.
However, there may be some shareholders who may make default in the payment. The
money due from
them is called calls-in-arrears. This amount should be deducted from the called up capital
to arrive at
the paid-up capital. Thus, (b) is the correct answer.
< TOP >
18. Answer : (a)
Reason : Forfeited shares can be re-issued at a premium. Thus, the statement in
alternative (a) is false. The
statements in other alternatives are true-, if share premium is already received, share
premium account
cannot be debited with the amount of premium on forfeiture of shares; Shares can be
issued a discount,
only after one year from the commencement of business; Share premium can be utilized
only specific
purposes as per the provisions of section 78 of the Companies Act and it cannot be
utilized to redeem
preference shares; The forfeited shares cannot be reissued for a loss more than the gain
on those shares.
< TOP >
19. Answer : (d)
Reason : If accrued commission is shown on the debit side list of balances in the trial
balance, it indicates that it
is already adjusted in the commission received /receivable and it does not require any
adjustment in the
profit and loss account. It directly appears as a current asset in the balance sheet. Hence
(d) is true
< TOP >
20. Answer : (c)
Reason : The maximum amount beyond which a company is not allowed to raise funds
by issue of shares is
called nominal capital or authorized capital. The issued capital is that part of the nominal
capital issued
to the public and subscribed capital is that part of the issued capital which is subscribed
by the public.
Paid up capital is the amount which is paid-up by the shareholders. Reserve capital is that
capital which
< TOP >
will be called-up only in case of liquidation. Thus, alternative (c) is the correct answer.
21. Answer : (e)
Reason : Discount allowed on re-issue of forfeited shares is debited to forfeited shares
account. It cannot be
debited to discount on re-issue of shares, since there is no such account maintained, it is
not a usual
discount to be debited to (b) Profit and loss account. The share premium account (c) can
be debited
only for the purposes as per the provisons of the Compnaies Act. The discount on issue of
shares (d)
can be debited only in the event of issue of shares at a discount originally. Thus, (e) is the
correct
answer.
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22. Answer : (c)
Reason : The company may receive from the shareholders the amount uncalled on the
shares held by them even
though the amount is not called for. In such a case the company is compelled to pay
interest on the calls
in advance at prescribed rate from the date of receipt of advance to the date of
appropriation i.e. the date
when the call is made and the advance received is appropriated from calls in advance
account to the
relevant call account.
< TOP >
23. Answer : (a)
Reason : Sinking fund is created out of profit. It is the part of profit and should be listed
under the heading
“Reserves and Surplus” and not under “unsecured loans”. Loans and advances from
subsidiaries, short
term loans and advances from banks, loans and advances from others and fixed deposits
are unsecured
loans.
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24. Answer : (b)
Reason : Share premium should not be used for redemption of preference shares whereas
they can be used to
provide for premium on redemption of preference shares or debentures, to issue bonus
shares, to writeoff
preliminary expenses and discount on issue of shares.
< TOP >
25. Answer : (b)
Reason : The shares were issued at a discount of 10% i.e. they were issued for Rs.90 per
share.
Rama failed to pay the final call of Rs.30. Hence he has paid Rs.60 (Rs.90 – Rs.30).
The amount to be credited to shares forfeited account is Rs.60 x 300 shares = Rs.18,000
< TOP >
26. Answer : (c)
Reason : Value of right =
Where r = No of rights issued
N = No. of existing shares
M = Market price
S = Issue price of rights= Rs.100 + 160% premium = Rs.100 + Rs.160 = Rs.260
∴Value of rights = = Rs.80
r (M S)
Nr
−+
4 (440-260)
4+5



< TOP >
27. Answer : (c)
Reason : The share capital of the subsidiary company does not appear in the Consolidated
Balance Sheet (c) is
the correct statement and the share capital of the subsidiary company is not shown in the
consolidated
balance sheet. and other statements are not true. A company will be deemed to be a
holding company of
another if it holds more than 50 percent of both equity and preference share capital is not
true because
it should hold share only in equity capital and preference share capital will not be
considereed for
deciding the cost of control. and (a) is not the correct answer.
b. The financial year of the holding company and its subsidiary company must end on the
same date
is not the correct answer because it need not be on the same date.
d. The inter company owing will be shown in the Consolidated Balance Sheet is incorrect
because
intercompany owing are eliminated in the consolidated balance sheet and hence it is not
the
correct answer.
e. Minority of the subsidiary is entitled to proportionate share in capital profits only is
incorrect
because they are entitled for both capital profits and revenue profit and there is no
difference
between the two profits in computation of minority interest. Thus, alternative © is the
correct
answer.
< TOP >
28. Answer : (d)
Reason : Profit for the year 2002-2003 = Rs.1,50,000 – Rs.90,000 = Rs.60,000
Profit for 8 months (from April 01, 2002 to December 01, 2002)=
Share of capital profit of H Ltd. = (90,000 + 40,000) x 60% = Rs.78,000.
60,000 8 Rs.40,000
12
×=
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29. Answer : (d)
Reason : The profit on cancellation of debentures transferred to capital reserve is
Rs.13,000
On purchase of debentures, the journal entry to be made is
On cancellation of the debentures, the journal entry to be made is
Rs. Rs.
Own debentures a/c Dr 1,87,000
Interest on debentures a/c Dr 9,000
To Cash a/c 1,96,000
Rs. Rs.
18% Debentures a/c Dr 2,00,000
To Own debentures 1,87,000
To Capital Reserve 13,000
< TOP >
30. Answer: (b)
Reason: Weighted average profit
∴Weighted average profit = Rs.26,10,000 ÷ 6 = Rs.4,35,000
Year 1 Rs.3,30,000 × 1 Rs. 3,30,000
Year 2 Rs.4,20,000 × 2 Rs. 8,40,000
Year 3 Rs.4,80,000 × 3 Rs.14,40,000
6 Rs.26,10,000
< TOP >
Financial Accounting (MB131): April 2005

• Marks are indicated against each question.
1. Which of the following is a leverage ratio?
(a) Debt-Equity ratio (b) Current ratio ( c) Quick ratio
(d) Earning power (e) Inventory turnover ratio.
(1 mark)
< Answer >
2. Amortization of unidentified intangible assets is in terms of
(a) Conservatism concept (b) Going concern concept
(c) Matching concept (d) Time period concept
(e) Business entity concept.
(1 mark)
< Answer >
3. The following Trial Balance pertaining to John Vicky as at March 31, 2005 was prepared by
an
inexperienced accountant:
Trial Balance of John Vicky as at March 31, 2005
Particulars Debit (Rs.) Credit (Rs.)
Capital (1st April, 2004) 89,000
Drawings 10,000
Stock (1st April, 2004) 37,000
Purchases 2,31,250
Sales 3,94,000
Motor vehicles 14,500
Cash in hand 1,350
Sundry creditors 49,760
Sundry debtors 1,39,700
Bank overdraft 9,000
Administrative expenses 76,360
Office equipment 35,000
Carriage outward 2,310
Returns inward 2,050
Provision for bad debts 4,250
Returns outward 3,160
Discount allowed 2,800
Discount received 3,150
Total 5,52,320 5,52,320
Though the Trial Balance has tallied, it has certain errors which were subsequently rectified. The
total
of the corrected Trial Balance as on March 31, 2005 is
(a) Rs.5,52,320 (b) Rs.4,64,200 (c) Rs.5,55,510 (d) Rs.5,43,200 (e)
Rs.5,03,440.
(2 marks)
< Answer >
4. In contract accounting, the percentage of completion method is an exception to the
(a) Matching principle (b) Going concern principle
(c) Historical cost principle (d) Business entity principle
(e) Revenue recognition principle.
(1 mark)
< Answer >
5. In which of the following areas, will the accounting policies tend to be uniform among the
enterprises?
(a) Method of providing Depreciation
(b) Valuation of Inventories (c) Treatment of Goodwill
(d) Treatment of Contingent Liabilities (e) Accounting for Cash.
(1 mark)
< Answer >
2
6. Consider the following data pertaining to Sun Ltd. for the month of March 2005:
Particulars Rs.
Purchase of goods for resale 2,10,000
Freight in 30,000
Freight out 25,000
Cost of goods available for sale is
(a) Rs.1,88,000 (b) Rs.2,10,000 (c) Rs.2,18,000
(d) Rs.2,35,000 (e) Rs.2,40,000.
(1 mark)
< Answer >
7. Consider the following information pertaining to Blue Sky Ltd. for the year 2004-2005:
Particulars 1st April 2004 31st March 2005
Inventory Rs.52,200 Rs.65,800
Sundry debtors Rs.37,000 Rs.60,000
Total credit sales made during the year were of Rs.6,75,000. The amount of discount allowed to
the
sundry debtors during the period was Rs.2,800.
Cash collected from the sundry debtors during the year was
(a) Rs.7,22,000 (b) Rs.6,95,200 (c) Rs.6,75,000
(d) Rs.6,49,200 (e) Rs.5,14,200.
(2 marks)
< Answer >
8. On March 31, 2005, the overdraft balance as per the bank pass book of Mr. Suresh was
Rs.13,880. The
balance did not agree with the balance as per cash book. On scrutiny, the following discrepancies
are
noticed:
• Interest on overdraft for the quarter ended March ’05 is Rs.480 (not recorded in the cash book).
• Cheques deposited in the bank, but not cleared aggregate to Rs.1,800.
• Cheques issued but not presented are for Rs.2,350.
• A cheque for Rs.1,000 which was discounted with the bank earlier was dishonoured. Mr.
Suresh
was not aware of the dishonour.
The balance as per cash book as on March 31, 2005 is
(a) Rs.12,950 (Credit) (b) Rs.14,810 (Credit)
(c) Rs.13,810 (Debit) (d) Rs.13,950 (Debit) (e) Rs.12,950 (Debit).
(2 marks)
< Answer >
9. Carriage inward refers to the cost of transportation for
(a) Purchase of materials (b) Sale of products (c) Returns outward
(d) Return of unsold goods (e) Newly acquired machinery.
(1 mark)
< Answer >
10. Advance received from customers is an
(a) Item of current liability (b) Item of non-current asset
(c) Item of contingent liability (d) Item of non-cash transaction
(e) Item of inventory.
(1 mark)
< Answer >
11. T.M. & Co. a dealer in shares, purchased shares. This was debited to Investment account.
This is a/an
(a) Error of commission (b) Error of omission
(c) Error of principle (d) Error of compensation
(e) Correct recording of transaction (No error).
(1 mark)
< Answer >
12. Consider the following data pertaining to M/s. Ramu Enterprises as on March 31, 2005:
Particulars Rs.
Credit sales 1,40,000
< Answer >
3
Credit purchases 20,000
Cash sales 20,000
Cash purchases 70,000
Wages paid 5,000
Carriage inward 1,000
Gas, water and fuel 2,000
Raw materials destroyed by fire 2,000
Additional Information:
Particulars As on April 01, 2004 As on March 31, 2005
Rs. Rs.
Inventory 27,000 40,000
Outstanding wages 500 700
Gross profit of M/s.Ramu Enterprises for the year ended March 31, 2005 is
(a) Rs.73,800 (b) Rs.75,800 (c) Rs.74,800
(d) Rs.76,200 (e) Rs.75,200.
(2 marks)
13. As per the Accounting Standard, which of the following is/are not extra-ordinary item/s to an
enterprise?
I. Attachment of its property. II. Destruction by fire of factory building.
III. Insolvency of a debtor. IV. Factory building collapsed in earthquake.
(a) Only (III) above (b) Both (II) and (III) above
(c) Both (I) and (IV) above (d) Both (I) and (III) above
(e) All (I), (II), (III) and (IV) above.
(1 mark)
< Answer >
14. Which of the following is/are non-current liability(ies)?
I. Long term loans. II. Declared dividend.
III.Bank overdraft. IV.Sundry creditors. V. Debentures.
(a) Only (V) above (b) Only (I) above
(c) Both (I) and (V) above (d) (I), (II) and (IV) above
(e) (I), (III) and (V) above.
(1 mark)
< Answer >
15. Which of the following transactions does not change the total amount of liabilities in the
balance sheet?
(a) Purchase of office furniture on credit
(b) Payment of bank loan (c) Issue of debentures
(d) Acceptance of bills from creditors (e) Issue of preference shares.
(1 mark)
< Answer >
(a) Prepaid expenses are shown on the asset side
(b) Income received in advance is shown on the asset side
(c) Income earned but not received is shown on the asset side
(d) Income accrued but not due is shown on the asset side
(e) Outstanding expenses are shown on the liability side.
(1 mark)
< Answer >
17. Which of the following is not true about Fixed Assets?
(a) They are acquired for using them in the conduct of business operations
(b) They are not meant for resale to earn profit
(c) They can easily be converted into cash
(d) Depreciation at specified rates is to be charged on most of the Fixed Assets
(e) Their utility is not confined to one accounting period.
(1 mark)
< Answer >
4
18. Which of the following is not an objective of maintaining books of accounts?
(a) Maintaining a permanent, accurate and complete record of business transactions
(b) Maintaining records of incomes, expenses and losses in such a way that the net profit or loss
for
any specified period may be ascertained
(c) Increasing the profit or reducing the loss made by the enterprise
(d) Maintaining records of assets and liabilities in such a way that the financial position of the
business at any point can easily be ascertained
(e) Providing required information for legal and tax purposes.
(1 mark)
< Answer >
19. In a manufacturing company, which of the following systems is called a product costing
system?
(a) Perpetual inventory system (b) Periodic inventory system
(c) Accrual system (d) Weighted average system
(e) Specific identification system.
(1 mark)
< Answer >
20. Which of the following costs is not directly related to a specific contract?
(a) Site labor cost
(b) Cost of moving plant and equipment to and from a site
(c) Research and Development cost
(d) Supervision cost
(e) Cost of materials used.
(1 mark)
< Answer >
21. Which of the following methods of valuation of inventory is based on the assumption that
costs are
charged against revenue in the order in which they occur?
(a) FIFO method (b) LIFO method
(c) Weighted average method (d) Moving average method (e) Base stock method.
(1 mark)
< Answer >
22. Which of the following methods of depreciation takes into consideration the output from the
asset?
(a) Straight line method (b) Written down value method
(c) Sum-of-the-years’ digits method (d) Units-of-production method
(e) Double declining method.
(1 mark)
< Answer >
23. Consider the following data pertaining to Lairs Ltd. for the month of March 2005:
Date Purchases Issues Balance
Quantity (Kg.) Rate (Rs.) Quantity (Kg.) Quantity (Kg.) Rate (Rs.)
01-03-2005 500 22.80
02-03-2005 400 24
10-03-2005 600 25
25-03-2005 1,000
If the company uses weighted average method for inventory valuation, the value of inventory as
on
March 31, 2005 is
(a) Rs.11,967 (b) Rs.12,000 (c) Rs.12,500
(d) Rs.11,400 (e) Rs.36,000.
(2 marks)
< Answer >
24. The cost of goods sold does not include
(a) Indirect labour (b) Power and light
(c) Storage expenses (d) Advertising expenses (e) Excise duty.
(1 mark)
< Answer >
25. Renewal fee for patents is a
(a) Capital expenditure (b) Revenue expenditure
(c) Deferred revenue expenditure (d) Development expenditure
(e) Contingent expenditure.
< Answer >
5
(1 mark)
26. Cost of raw-material is equal to its
(a) Purchase price
(b) Purchase price plus duties and taxes
(c) Purchase price plus duties, taxes and freight inward
(d) Purchase price plus duties, taxes and freight inward minus discount
(e) Purchase price plus duties, taxes and freight inward minus discount and duty draw back.
(1 mark)
< Answer >
27. Which of the following does not come under fixed assets?
(a) Buildings (b) Furniture (c) Long term investment
(d) Equipment (e) Machinery.
(1 mark)
< Answer >
28. When goods are sold subject to the approval by the buyer, revenue should be recognized
when the
(a) Goods have been formally accepted by the buyer
(b) Payment has been received from the buyer
(c) Buyer has seen the sample and approved the same
(d) Goods have been sent to the buyer
(e) Goods have been received by the buyer, irrespective of his approval.
(1 mark)
< Answer >
29. For a car manufacturing company, which of the following is not a fixed asset?
(a) Land and Building (b) Machinery (c) Office furniture
(d) Stock of cars (e) Patents.
(1 mark)
< Answer >
30. Payment of Municipal taxes is a
(c) Capital receipt (d) Revenue receipt
(e) Development expenditure.
(1 mark)
< Answer >
31. Which of the following expenses is capital in nature?
(a) Purchase of a truck (b) Replacement of old tyres and tubes
(c) Repairs to furniture (d) Payment of Road tax
(e) Payment of insurance premium.
(1 mark)
< Answer >
32. In a funds flow statement prepared on working capital basis, a short term loan repaid by the
organization
(a) Is shown as a source of working capital
(b) Is shown as an increase in cash
(c) Is shown as a decrease in cash
(d) Does not affect the working capital
(e) Is not shown either as a source or a use of funds.
(1 mark)
< Answer >
33. In accounting, window-dressing implies
(a) Showing the real position of the business
(b) Showing a worse position of the business
(c) Showing a better position than the true and fair view of the business
(d) Making excess provisions for the expenses of the business
(e) Showing a true and fair view.
(1 mark)
< Answer >
34. Dinakar operates a garment store in a hired premises at a rent of Rs.1,20,000 per annum. The
owner of
the premises, who has recently completed her fashion-designing course, wishes to purchase the
garment
< Answer >
6
the premises, who has recently completed her fashion-designing course, wishes to purchase the
garment
store. The details of the business of Dinakar are as under:
• The profit for the year 2004-2005 is Rs.2,30,000.
• The capital employed by Dinakar is Rs.20,00,000.
• The value of the premises is Rs.4,00,000.
If the normal return on capital employed is 12%, the super profit is
(a) Rs.58,000 (b) Rs.62,000 (c) Rs.1,10,000
(d) Rs.1,20,000 (e) Rs.1,78,000.
(3 marks)
35. Which of the following are not current assets?
(a) Inventories (b) Bills receivable
(c) Accounts receivable (d) Prepaid expenses (e) Incomes received in advance.
(1 mark)
< Answer >
36. Accounting Standard Board was set up by the
(a) Government of India
(b) Institute of Chartered Accountants of India
(c) Institute of Costs and Works Accountants of India
(d) Reserve Bank of India
(e) Securities and Exchange Board of India.
(1 mark)
< Answer >
37. RSV Ltd. acquires the following assets of BC Ltd. paying a sum of Rs.22,50,000:
Particulars Rs.
Cash at bank 23,750
Cash on hand 12,250
Accounts receivable 86,200
Other identifiable assets 16,00,000
If Accounts Receivable are believed to have a realizable value of Rs.80,000 and other
identifiable assets
are estimated to have market value of Rs.18,50,000, the amount of goodwill to be recorded in the
books
of RSV Ltd. is
(a) Rs.5,34,000 (b) Rs.2,90,200 (c) Rs.2,84,000
(d) Rs.5,40,200 (e) Rs.3,20,000.
(2 marks)
< Answer >
38. An inexperienced book-keeper of M/s.Volga & Co. has drawn up the following trial balance
of the firm
for the year ended March 31, 2005:
Trial Balance as on March 31, 2005
Particulars Debit
Rs.
Particulars Credit
Rs.
Provision for doubtful debts 2,000 Capital 45,910
Bank overdraft 16,540 Sundry creditors 16,370
Sundry debtors 29,830 Discount allowed 7,330
Discount received 2,520 General expenses 8,290
Drawings 12,000 Returns inward 3,300
Office furniture 21,550 Cash sales 60,800
Purchases 1,09,230 Credit sales 1,08,020
Rent and rates 3,140
Salaries 25,200
Opening stock 24,180
Provision for depreciation on
office furniture 3,640
Total 2,49,830 Total 2,50,020
Subsequently another trial balance was drawn and the residual difference was placed to a
suspense
account. The amount debited/credited to suspense account was
< Answer >
7
(a) Rs.190 (debit) (b) Rs.530 (credit)
(c) Rs.11,750 (debit) (d) Rs.4,170 (debit) (e) Rs.11,750(credit).
(2 marks)
39. Silver Coats Ltd. invited applications for 1,00,000 equity shares of Rs.10 each at a premium
of Rs.2 per share.
The entire issue was underwritten by three underwriters in the following percentages:
Anil 30%
Vimal 40%
Sunil 30%
The details of marked and unmarked applications received are:
Marked applications of Anil 22,000 shares
Vimal 24,000 shares
Sunil 28,000 shares
Unmarked applications 16,000 shares
The final liability of Vimal in terms of number of shares is
(a) Nil (b) 9,600 (c) 3,200 (d) 16,000 (e) 8,000.
(2 marks)
< Answer >
40. Which of the following error will not be disclosed by a Trial Balance?
(a) Posting of one aspect of a transaction twice
(b) Omission of recording a transaction
(c) Error in balancing of ledger accounts
(d) Omission of listing an account balance
(e) Overcasting / undercasting of a subsidiary book.
(1 mark)
< Answer >
41. If the forfeited shares are issued at a discount, the amount of discount shall be debited to
(a) Profit and loss account (b) Capital reserve account
(c) Share forfeiture account (d) Share premium account
(e) Share capital account.
(1 mark)
< Answer >
42. The primary means of communicating comprehensive accounting information to the users is
(a) Prospectus (b) Trial balance (c) Bank Reconciliation Statement
(d) Financial statements (e) Statement of cash flow.
(1 mark)
< Answer >
43. After preparation of the Profit and Loss Account, the following are extracted from the books
of
Universe Ltd. as on March 31, 2005:
Particulars Rs. Particulars Rs.
Called-up share capital 5,00,000 Plant and machinery 2,20,000
Land and building 4,90,000 Investments 60,000
Secured loans 3,00,000 Calls-in-arrear 30,000
Term loan from Syndicate Bank 1,00,000 Capital reserve 90,000
Sundry debtors 1,20,000
Profit and loss account
(credit balance) 50,000
Stock 96,000 Outstanding expenses 500
Loans to employees 50,000
Provision for doubtful debts 10,000
Insurance premium paid in
advance 1,200
Interest received in advance 700 Cash 4,000
Bank balance (Debit) 40,000 Preliminary expenses 30,000
The total of the liabilities side of the balance sheet is
(a) Rs.11,01,200 (b) Rs.11,00,200 (c) Rs.11,31,200
(d) Rs.11,41,200 (e) Rs.11,01,900.
< Answer >
8
(2 marks)
44. The authorized capital of Chand Ltd. is 1,00,000 shares of Rs.10 each. On April 10, 2004,
50,000
shares are issued for subscription at a premium of Rs.2 per share. The share money is payable as
follows:
Rs.5 (including the premium of Rs.2) with application
Rs.3 on allotment
Rs.2 on first call
Rs.2 on final call.
The subscription list closed on May 11, 2004 and the directors proceeded with allotment on May
18,
2004. The shares are fully subscribed and the application money (including the premium) is
received in
full. The allotment money is received by June 30, 2004, except as regards 500 shares.
The first call and the final call money is received by September 30, 2004, and December 31,
2004,
respectively, except the final call money on 200 shares which is not received.
Assuming that there are no other transactions, the cash balance as on December 31, 2004 is
(a) Rs.8,46,100 (b) Rs.6,00,000 (c) Rs.5,96,100
(d) Rs.4,96,000 (e) Rs.5,96,000.
(2 marks)
< Answer >
45. Which of the following statement(s) is/are false?
I. An equity share always carries the voting right.
II. In case of equity shares, the dividend is paid at a fixed rate during the lifetime of the
company.
III. The share premium received on issue of shares cannot be utilized in writing off the
preliminary
expenses of the company.
(a) Only (I) above (b) Only (II) above
(c) Both (I) and (II) above (d) Both (I) and (III) above
(e) Both (II) and (III) above.
(1 mark)
< Answer >
46. Rights shares are the shares
(a) Issued by a newly formed company
(b) Legally issued to the public at large
(c) Offered to the existing equity shareholders
(d) That have a right of redemption
(e) That have a right to cumulative dividends.
(1 mark)
< Answer >
47. A company issued 14% debentures of Rs.10,00,000 at a discount of 10%. The discount on
issue of
debentures will be treated in the account books as
(c) Deferred revenue expenditure (d) Capital loss
(e) Outstanding expenditure.
(1 mark)
< Answer >
48. The Issued Share Capital of Marval Ltd. is Rs.12,00,000 divided into 1,20,000 shares which
were
issued at a premium of 100%. The company offers two shares for every three shares held to its
existing
shareholders. If the rights issue price is Rs.410 per share and the market value at the time of
rights issue
is Rs.560 per share, the value of right is
(a) Rs.60 (b) Rs.20 (c) Rs.150 (d) Rs.410 (e) Rs.560.
(1 mark)
< Answer >
49. The difference between par value and issue price below the par value of share, is called
(a) Share premium (b) Trade discount
(c) Commission on issue of shares (d) Discount on issue of shares (e) Cash discount.
(1 mark)
< Answer >
50. Debentures can be redeemed
I. At par.
II. At a premium.
< Answer >
9
III. At a discount.
IV. By conversion into stock.
(a) Only (I) above (b) Both (I) and (II) above
(c) Both (I) and (III) above (d) (I), (II) and (III) above
(e) (I), (II), (III) and (IV) above.
(1 mark)
51. The balance of cash book signifies
(a) Net income (b) Cash in hand (c) Net sales
(d) Net purchases (e) Net expenditure.
(1 mark)
< Answer >
52. The profits earned by a subsidiary company before acquisition by a holding company are
known as
(a) Revenue profits (b) Capital profits (c) Super profits
(d) Average profits (e) Future maintainable profits.
(1 mark)
< Answer >
53. On April 01, 2004, the Profit and Loss Appropriation account of Wye Ltd. had a balance of
Rs.2,30,000. During the year 2004-05, the company earned a net profit of Rs.6,62,800 and
• The adjustment of income tax provision for the year 2003-04 amounted to Rs.58,800. The
company has a policy to transfer every year a sum of Rs.2,50,000 to general reserve.
• The sinking fund for redemption of debentures is created on April 01,2002 and the annual
installment is Rs.1,50,000.
• The company declared a dividend of 20% on Equity Share Capital of 5,000 fully paid shares of
Rs.100 each issued at Rs.90 each.
After effecting the above, the balance in the Profit and Loss Appropriation account of the
company as
on March 31, 2005 is
(a) Rs.3,24,000 (b) Rs.3,92,800 (c) Rs.3,34,000
(d) Rs.3,82,800 (e) Rs.4,84,000.
(2 marks)
< Answer >
54. Desktop Publishing Ltd. began its operations on July 01,2004. The following accounts and
balances
were contained in the adjusted trial balance of the company as on March 31, 2005:
Equity Share Capital Rs.95,500
Declared Dividends Rs.9,550
Fees earned Rs.48,200
Rent paid Rs.13,200
Salaries paid Rs.5,750
Income Tax paid Rs.1,100
Electricity Rs.3,700
Pre paid rent Rs.1,800
Cash on hand Rs.10,600
Sundry assets Rs.1,17,650.
The amount of profit earned by the company for the year ended March 31, 2005 was
(a) Rs.13,100 (b) Rs.24,450 (c) Rs.22,650 (d) Rs.26,250 (e) Rs.16,700.
(2 marks)
< Answer >
55. The Adams Ltd. paid a dividend of Rs.1,20,000 at the end of March 31, 2005. On April 01,
2004, there
was Rs.40,000 of dividends in arrears. The company’s capital structure consists of 5,000 9%,
cumulative preference shares of Rs.100 each and 10,000 equity shares of Rs.30 each, both fully
paid.
How much did Adams Ltd. pay as dividends to its equity shareholders for the year 2004 - 05?
(a) Percentage not given-Insufficient data (b) Rs.75,000
(c) Rs.45,000 (d) Rs.35,000 (e) Rs.80,000.
(2 marks)
< Answer >
56. The following information is extracted from the books of Sun Pharmacy Ltd.:
Purchases made during the year Rs.7,80,000
Sales made during the year Rs.13,22,000
Opening stock Rs.1,90,000
< Answer >
10
Closing stock Rs.2,17,000
• Goods worth Rs.18,000 were distributed as free sample and no entry is made to this effect.
• A sale of Rs.28,000 has been credited to purchases account.
• Carriage outward amounted to Rs.2,000.
Considering the above, gross profit of the company for the year was
(a) Rs.5,85,000 (b) Rs.5,87,000 (c) Rs.5,89,000
(d) Rs.6,15,000 (e) Rs.6,17,000.
(2 marks)
57. The system of accounting to be followed by a company
(a) Must be the same as of all other companies
(b) Can be different from the system followed by other companies
(c) Must be disclosed if it is different from the recognized policy
(d) Must be on accrual basis and according to the double entry system of accounting
(e) Can be on cash basis of accounting on the approval of the Registrar of Companies.
(1 mark)
< Answer >
58. Pawan Ltd. has been incorporated with an Authorised Capital of Rs.10,00,000 divided into
1,00,000
equity shares of Rs.10 each. The company issued 65,000 shares of Rs.10 each to the public for
subscription payable as under:
On application Re.1
On allotment Rs.2
On first call Rs.2
On second call Rs.2
On final call Rs.3
The public has subscribed for 60,000 shares. The directors of the company made first call of Rs.2
per
share to carry on the business of the company. Out of these, one shareholder holding 5,000
shares
failed to pay the call money of Rs.2 per share.
The company made profit of Rs.58,500 during the financial year and the directors declared a
dividend
of 6% to the shareholders.
The amount of capital that is to be considered for paying dividends is
(a) Rs.5,00,000 (b) Rs.6,50,000 (c) Rs.3,00,000
(d) Rs.6,00,000 (e) Rs.2,90,000.
(2 marks)
< Answer >
59. The following information is taken from the books of Splendid Ltd.:
On April 4, 2005 the company issued 7% Debentures having a face value of Rs.12,00,000 at a
discount
of 2.5%. On April 12, the company further issued 25,000 8% Preference shares of Rs.100 each.
On
April 29, the company redeemed the existing 30,000 6% Preference shares of Rs.100 each at a
premium
of 5% together with one month dividend thereon. Bank balance as on March 31, 2005 was
Rs.29,25,000.
The Bank balance as on April 30, 2005 will be
(a) Rs.32,30,000 (b) Rs.33,15,000 (c) Rs.33,30,000
(d) Rs.33,45,000 (e) Rs.34,30,000.
(2 marks)
< Answer >
60. Once the unclaimed dividend is transferred to General Revenue Account of the Central
Government,
any shareholder entitled to such dividend may claim it from
(a) The Reserve Bank of India (b) The Central Government
(c) The Company (d) The Registrar of companies
(e) Any Scheduled Bank.
(1 mark)
< Answer >
61. The balance in the creditors account of a company as at the beginning of the month of March
2005 was
Rs.3,40,000. During the month,
• A sum of Rs.1,85,000 was paid to the creditors .
• Goods purchased from the suppliers amounted to Rs.2,47,000.
< Answer >
11
• Goods returned to them as defective were of Rs.8,000.
• They allowed a sum of Rs.4,800 as cash discount.
• A bill for Rs.8,000 accepted by the company in favour of a creditor could not be honoured on
the
due date and hence was dishonoured on March 20, 2005.
The balance in the creditors account as on March 31, 2005 was
(a) Rs.4,02,000 (b) Rs.3,94,200 (c) Rs.3,97,200
(d) Rs.4,05,200 (e) Rs.4,50,020.
(2 marks)
62. The books of Sahara Ltd. revealed the following information:
Particulars Rs.
Opening inventory 6,00,000
Purchases during the year 2004-2005 34,00,000
Sales during the year 2004-2005 48,00,000
On March 31, 2005, the value of inventory as per physical stock-taking was Rs.3,25,000. The
company’s gross profit on sales has remained constant at 25%. The management of the company
suspects that some inventory might have been pilfered by a new employee. What is the estimated
cost
of missing inventory?
(a) Rs.75,000 (b) Rs.25,000 (c) Rs.1,00,000
(d) Rs.1,50,000 (e) Rs.2,25,000.
(2 marks)
< Answer >
63. ABC Ltd. maintains the inventory records under perpetual system of inventory. Consider the
following
data pertaining to inventory of ABC Ltd. held for the month of March 2005:
Date Particulars Quantity Cost Per unit (Rs.)
March 1 Opening inventory 15 400
4 Purchases 20 450
6 Purchases 10 460
If the company sold 32 units on March 24, 2005, closing inventory under FIFO method is
(2 marks)
< Answer >
64. Consider the following data pertaining to Taurus Ltd.
Average Trading Profit Rs.2,58,900
Normal Profits Rs.2,23,800
Where in the goodwill was valued on the basis of 3 years’ purchase of super profits. Further, it
has been
resolved by the company to amortise the goodwill over a period of five years.
The journal entry to be passed for amortisation of goodwill every year is
(a) Profit and Loss a/c. Dr. Rs.21,060
To Goodwill a/c. Rs.21,060
(b) Depreciation a/c. Dr. Rs. 7,020
(c) Goodwill a/c. Dr. Rs.21,060
To Profit and Loss a/c. Rs.21,060
(d) Profit and Loss a/c. Dr. Rs. 7,020
(e) General Reserve a/c. Dr. Rs.21,060
To Goodwill a/c. Rs.21,060.
(2 marks)
< Answer >
65. Which of the following is false with respect to goodwill?
(a) Goodwill though caused by factors which cannot be easily and accurately quantified, must be
assigned a value
(b) It is the present value of a firm’s anticipated excess earnings
(c) It is the extra saleable value attached to a prosperous business beyond the intrinsic value of
net
assets
< Answer >
12
(d) It is an identifiable intangible asset
(e) It is like any other asset, a store of prospective revenue.
(1 mark)
66. M/s.Sunder Ltd. issued 80,000 equity shares of Rs.10 each, payable as under:
On application Rs.3
On allotment Rs.4
On first call Rs.2
On final call Rs.1
The applications received for 1,20,000 shares were dealt with as under:
• Applicants of 20,000 shares were allotted in full.
• Applicants of 80,000 shares were allotted 60,000 shares pro-rata.
• Applications for 20,000 shares were rejected.
The amount available for adjustment towards allotment money is
(a) Rs.1,20,000 (b) Rs.2,40,000 (c) Rs.60,000
(d) Rs.1,80,000 (e) Rs.3,20,000.
(2 marks)
< Answer >
67. Needs Ltd. issued 20,000 equity shares of Rs.100 each at a premium of 20% payable as
under:
On application Rs.50 (inclusive of premium)
On allotment Rs.30
On first call Rs.20
On second and final call Rs.20
Applications were received for 24,000 shares and the company has resolved to reject 4,000
applications
in full and allot to 20,000 applicants in full. The journal entry passed at the time of receipt of
application money is
(a) Bank account Dr. Rs.12,00,000
To Share application account Rs.12,00,000
(b) Share application account Dr. Rs.12,00,000
To Share Capital account Rs.12,00,000
(c) Bank account Dr. Rs.12,00,000
To Share Capital account Rs.12,00,000
(d) Bank account Dr. Rs. 6,00,000
To Share Capital account Rs. 6,00,000
(e) Bank account Dr. Rs.10,00,000
To Share Capital account Rs. 6,00,000
To Share premium account Rs. 4,00,000.
(2 marks)
< Answer >
68. When redeemable preference shares are due for redemption, the entry passed is
(a) Debit Redeemable preference share capital account and Credit Cash account
(b) Debit Redeemable preference share capital account and Credit Redeemable Preference
shareholders account
(c) Debit Redeemable Preference shareholders account and Credit Cash account
(d) Debit Redeemable Preference shareholders account and Credit Redeemable preference share
capital account
(e) Debit Redeemable preference share capital account and Credit Capital redemption reserve
account.
(1 mark)
< Answer >
69. Which of the following statements is/are true?
I. Discount on issue of debentures can be shown in the books of the accounts even after the life
of
the debentures.
II. Capital profits can be used for converting partly paid shares to fully paid-up.
III. Bonus issue of shares is not permitted unless the partly paid up shares, if any existing, are
made
fully paid.
< Answer >
13
fully paid.
(c) Both (I) and (II) above (d) Both (I) and (III) above (e) Both (II) and (III) above.
(1 mark)
70. Traditionally, human resource is not taken as asset in the Balance Sheet of a business in
recognition of,
(a) Cost concept (b) Money measurement concept
(c) Consistency concept (d) Business entity concept
(e) Going concern concept.
(1 mark)
< Answer >
71. A transaction of purchase of stationery of Rs.400 for cash has not been entered in the
cashbook. This is
an example of
(a) Error of partial omission (b) Error of commission
(c) Error of principle (d) Compensating error
(e) Error of complete omission.
(1 mark)
< Answer >
72. A firm sells goods at a gross margin of 25% on sales. Opening Stock was Rs.40,000 and
closing stock
was Rs.30,000. Purchases during the period were Rs.1,10,000. What is the amount of Sales?
(a) Rs.1,60,000 (b) Rs.1,20,000 (c) Rs.2,00,000 (d) Rs.1,50,000 (e) Rs.96,000.
(2 marks)
< Answer >
73. Net worth consists of
I. Equity.
II. General reserve.
III. Capital reserve.
IV. Profit and Loss account balance.
(a) Only (I) above (b) Both (I) and (IV) above
(c) Both (I) and (III) above (d) Both (I) and (II) above
(1 mark)
< Answer >
74. Damaged inventory should be valued at
(a) Nominal value (b) Market value
(c) Net realizable value (d) Cost price or market price, whichever is lower
(e) Acquisition cost.
(1 mark)
< Answer >
75. Which of the following expenses is not included in the acquisition cost of a plant and
equipment?
(a) Cost of site preparation
(b) Delivery and handling charges
(c) Installation costs
(d) Professional fees in connection with the equipment
(e) Financing costs incurred subsequent to the period after plant and equipment is put to use.
(1 mark)
< Answer >
14
Suggested Answers
1. Answer : (a)
Reason : Debt-Equity ratio is also called as leverage ratio. Thus, alternative (a) is the correct
answer.
Current ratio (b) and Quick ratio (c) are liquidity ratios and not leverage ratios. Earning power
(d)
and Inventory turnover ratio (e) are not leverage ratios. Therefore, alternative (a) is the correct
answer.
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2. Answer : (c)
Reason : Intangible assets are amortized like tangible fixed assets. If costs benefit more than one
accounting
period, they should be systematically and rationally allocated to all accounting periods. Matching
concept involves recognizing costs as expenses on the basis of direct association with assets.
Thus
amortization of intangible assets is the systematic allocation of costs over several periods in
recognition of matching concept. The other concepts do not recognize allocation of costs of fixed
assets. Conservatism concept is not meant to introduce a bias into financial reporting. It is a
prudent reaction to uncertainty to try to ensure that inherent risks in business are adequately
considered. Going concern concept (b) assumes that the business entity is assumed to be a going
concern in the absence of evidence to the contrary. Time Period concept (d) requires accounting
information to be reported at regular intervals to foster comparability. Business entity concept
explains that in accounting business is to be considered as a separate entity from the owner. It
does
not speak about amortization.
Thus, alternative (c) is the correct answer.
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3. Answer : (a)
Reason :
Trial Balance of John Vicky as at March 31, 2005
Sl.No Heads of Account
Debt Balance
(Rs.)
Credit Balance
(Rs.)
1. Capital (1st April, 2004) 89,000
2. Drawings 10,000
3. Stock (1st April, 2004) 37,000
4. Purchases 2,31,250
5. Sales 3,94,000
6. Motor Vehicles 14,500
7. Cash in Hand 1,350
8. Sundry Creditors 49,760
9. Sundry Debtors 139,700
10. Bank Overdraft 9,000
11. Administrative over head 76,360
12. Office Equipment 35,000
13. Carriage Outward 2,310
14. Returns Inward 2,050
15. Provision for Bad Debts 4,250
16. Returns Outward 3,160
17. Discount Allowed 2,800
18. Discount Received 3,150
TOTAL 5,52,320 5,52,320
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4. Answer : (e)
Reason : In contract accounting, there is a reasonable certainty that the project would be
completed and the
return consideration is realized. In fact, return consideration may begin as soon as the work
begins.
So, revenue may be recognized at work-in-progress. This is the exception to the revenue
recognition principle. Other principles stated in (a), (b), (c) and (d) are not correct. Hence, (e) is
true.
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5. Answer : (e)
Reason : Method of providing depreciation ,valuation of inventories, treatment of Goodwill and
treatment of
contingent liabilities differ from enterprise to enterprise
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15
contingent liabilities differ from enterprise to enterprise >
6. Answer : (c)
Reason : Cost of goods = Purchases – Returns outward + Freight in
= Rs.2,10,000 – Rs.22,000 + Rs.30,000 = Rs.2,18,000
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7. Answer : (d)
Reason :
Particulars Rs.
Opening balance of sundry debtors 37,000
Add : Credit sales 6,75,000
7,12,000
Less : Closing balance of Sundry debtors 60,000
6,52,000
Less : Discount allowed 2,800
Cash collected from sundry debtors 6,49,200
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8. Answer : (a)
Reason : Bank reconciliation statement as on March 31, 2005:
Particulars Rs. Rs.
Overdraft as per bank pass book 13,880
Less : Interest on overdraft not entered in cash book 480
Cheques deposited not cleared 1,800
Cheque discounted which was dishonoured 1,000
3,280
10,600
Add : Cheques issued but not presented for payment 2,350
Overdraft as per cash book 12,950
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9. Answer : (a)
Reason : Carriage inward expense is related to the carrying cost of material purchased. If it is
incurred for
carrying new assets, it should be capitalized to the assets value. Carrying cost relating to sale of
products, returns outward and return of unsold goods will not be treated as carriage inward
expenses. Hence, (a) is correct.
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10. Answer : (a)
Reason : Advance received from customers is a current liability till the goods are supplied or
services are
rendered.
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11. Answer : (c)
Reason : Error of principle is the error of treating revenue items as capital and capital items as
revenue. The
purchase of shares by the share broker is to be debited to purchases account and not to
investment.
It is error of principle. (c) is the correct answer.
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12. Answer : (b)
Reason : Books of Ramu Enterprises
Dr. Trading Account for the period ending March 31, 2005 Cr.
Particulars Rs. Rs. Particulars Rs. Rs.
To Opening stock 27,000 By Sales :
To Purchases Cash 20,000
Cash 70,000 Credit 1,40,000
Credit 20,000 1,60,000
90,000 (–) Returns inward 3,000 1,57,000
(–) Goods lost due to fire 2,000 By Closing stock 40,000
(–) Returns outward (–) 2,000 86,000
To Wages 5,000
(+) Outstanding as on
March 31, 2005 700
5,700
(–) Outstanding as on
April 01, 2004 500 5,200
To Carriage inward 1,000
To Gas, water, fuel 2,000
To Gross Profit 75,800
1,97,000 1,97,000
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16
13. Answer : (a)
Reason : Insolvency of a debtor is not an extra-ordinary event. Attachment of property,
destruction by fire of
factory building, factory building collapsed in earthquake etc. are extra-ordinary items.
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14. Answer : (c)
Reason : The non-current liability is a liability which is not repayable in a period of 12 months or
a business
cycle which ever is earlier. Thus, Long-term loans and Debentures are non current liabilities.(c)
is
the correct answer.
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15. Answer : (d)
Reason : Acceptance of bills drawn by creditors will not result in any change in the amount of
liabilities of
balance sheet, because it will decrease the balance of creditors and increase the balance of bills
payable by the same amount. So (d) is correct, other transactions change the total amount of
liabilities of the balance sheet.
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16. Answer : (b)
Reason : Income received in advance is a liability and should shown on the liability side and not
on asset
side. All other statements viz, prepaid expenses shown on asset side, income earned but not
received shown on asset side, income accrued but not due shown on asset side and outstanding
liabilities for expenses shown on liability side are true.
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17. Answer : (c)
Reason : Fixed assets cannot easily be converted into cash. They are acquired for using them in
the conduct
of business operations They are not meant for resale to earn profit. Depreciation at specified rates
is
to be charged on most of the Fixed Assets. Their utility is not confined to one accounting period.
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18. Answer : (c )
Reason : To increase the profit or reduce the loss made by the enterprise is not an object of
keeping
accounts. All others are objects of maintaining accounts.
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19. Answer : (a)
Reason : In a manufacturing company, the perpetual inventory system is called product costing
system. In
such system, the cost of each product is accumulated as it flows through the production process.
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20. Answer : (c)
Reason : Research and Development cost cannot directly be attributed to a specific work. Site
labor cost,
cost of moving plant and equipment to and from a site , supervision cost and materials used can
be
related to specific contract.
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21. Answer : (a)
Reason : The basis for pricing inventory is either cost of production or cost of acquisition. FIFO
method of
identifying inventory is based on the assumption that costs are charged against revenue in the
order
in which they occur. In case of other methods i.e. LIFO (b) method matches the most recent costs
incurred with current revenue, leaving the first cost incurred to be included as inventory.
Weighted-
Average method (c) assumes that costs are charged against revenue based on an average of the
number of units acquired at each price level. Moving average method (d) can be used only with a
perpetual inventory. The cost per unit is recomputed after every addition to the inventory. The
ending inventory is valued at the last moving average unit cost for the period. Base stock method
(e) wherein a minimal level of it is a permanent investment, which is necessary for the normal
business activities. Base stock would be carried at historical cost. Thus, FIFO method is the
correct
answer.
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22. Answer : (d)
Reason : The depreciation rate according to units-of-production method is applied to the number
of units
produced during an accounting period. Hence, it is related to the usage of the asset. Straight line
method, written down value method, sum-of-the-years’ digits method and double declining
method
takes into consideration the cost of the asset, salvage value and useful life but not the output from
the asset. Hence the answer is (d).
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17
23. Answer : (b)
Reason :
Purchases Issues Balance
Date Quantity
(Kg)
Rate
per kg.
(Rs.)
Amount
(Rs.)
Quantity
(Kg)
Rate per
kg. (Rs.)
Amount
(Rs.)
Quantity
(Kg)
Rate
per kg.
(Rs.)
Amount
(Rs.)
1-3-05 500 22.80 11,400
2-3-05 400 24 9,600 900 23.33 21,000
10-03-05 600 25 15,000 1,500 24.00 36000
25-03-05 1,000 24 24,000 500 24.00 12,000
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24. Answer: (d)
Reason: Both direct and indirect labour as well as power and light form part of the
manufacturing cost.
Advertising expenses come under selling and distribution cost and hence not a manufacturing
cost
to be included in the cost of goods sold.
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25. Answer : (b)
Reason : Although patent is a capital expenditure, renewal fee paid for patent is treated as
revenue
expenditure.
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26. Answer : (e)
Reason : Cost of purchase of raw-material is purchase price plus duties and taxes plus freight
inward minus
discount and duty draw back.
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27. Answer : (c)
Reason : Long term investment is not a fixed asset. Buildings, Furniture, Equipment and
Machinery are
fixed assets which also referred to as property.
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28. Answer : (a)
Reason : When goods are sold subject to approval by buyer, revenue should be recognized when
goods have
been formally accepted by the buyer.
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29. Answer : (d)
Reason : Stock of cars is a current asset for a car manufacturing company. Land and Building,
machinery,
office furniture and Patents are fixed assets.
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30. Answer : (b)
Reason : Payment of Municipal taxes is a revenue expenditure.
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31. Answer : (a)
Reason : Purchase of a truck is a capital expenditure. Replacement of old tyres and tubes, cost of
repair, and
road tax paid are revenue in nature.
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32. Answer : (c)
Reason : Repayment of short term loan is shown as a decrease in cash (c). Therefore, alternative
(c) is the
correct answer. It is not a source of working capital. Therefore, alternative (a) is not the correct
answer. It is shown as increase in cash (b), is also not a correct answer. Does not affect the
working
capital (d) is also not a correct answer, since it is affecting the working capital. Is not shown
either
as a source or a use of funds (e) is also not the correct answer. Therefore, alternative (c) is the
correct answer.
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33. Answer : (c)
Reason : Window-dressing implies showing a better position than the true and fair view of
accounts.
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34. Answer : (b)
Reason :
Rs.
Profit for the year 2004-2005 2,30,000
Add: Rent (not relevant if the owner of the premises operates the business) 1,20,000
Adjusted maintainable profits 3,50,000
Capital employed by Dinakar 20,00,000
Add: Value of premises 4,00,000
Total capital employed 24,00,000
Normal profit (12% of Rs.24,00,000) 2,88,000
Super profits (Rs.3,50,000 – Rs.2,88,000) 62,000
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35. Answer : (e)
Reason : Current assets include cash and cash equivalents, inventories, accounts receivable, bills
receivable,
and prepaid expenses. Income received in advance is a liability.
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18
and prepaid expenses. Income received in advance is a liability.
36. Answer : (b)
Reason : Accounting Standard Board was set up by the Institute of Chartered Accountants of
India
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37. Answer : (c)
Reason :
Particulars Rs. Rs.
Total Purchase price 22,50,000
Less: Cash at bank
Cash on hand
Accounts receivable
Other identifiable assets
23,750
12,250
80,000
18,50,000
19,66,000
Goodwill 2,84,000
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38. Answer : (c)
Reason : Corrected Trial Balance
Particulars Debit (Rs.) Credit
(Rs.)
Provision for doubtful debts 2,000
Sundry debtors 29,830
Drawings 12,000
Office furniture 21,550
Purchases 1,09,230
Rent and rates 3,140
Salaries 25,200
Provision for depreciation on furniture 3,640
Capital 45,910
General expenses 8,290
Cash sales 60,800
Total 2,44,050 2,55,800
Suspense (Debit) Rs.2,55,800 – Rs.2,44,050 = Rs.11,750.
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39. Answer : (e)
Reason : (No. of shares)
Particulars Anil Vimal Sunil Total
Liability 30,000 40,000 30,000 1,00,000
Less: Unmarked applications in the
ratio of 3:4:3
4,800 6,400 4,800 16,000
25,200 33,600 25,200 84,000
Less: Marked (Stamped) applications 22,000 24,000 28,000 74,000
3,200 9,600 (2,800) 10,000
Less: Division of Sunil’s surplus
(in the ratio of 3:4) 1,200 1,600 2,800 –
Final liability of each underwriter 2,000 8,000 Nil 10,000
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40. Answer : (b )
Reason : Since a transaction altogether has been omitted both debit and credit aspects have not
been
recorded. Hence the trial balance cannot disclose the existence of the above error.
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41. Answer : (c)
Reason : If a company reissues the forfeited shares at a discount, that discount amount will be
debited to
forfeited share account.
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19
According to the Companies Act, the company cannot debit share capital account, profit and loss
account, capital redemption reserve account and capital reserve account for the amount of
discount
allowed on reissue of forfeited shares.
42. Answer : (d)
Reason : The users of accounting information of a company are investors, bankers, creditors,
shareholders,
management, employees, customers, government and regulatory agencies who are interested in
the
affairs of a company. The means of communicating information are financial statements; (d) i.e.
profit and loss account and balance sheet. These are the means through which inferences like
ratio
analysis are drawn. Prospectus (a) is the document inviting the public to subscribe to its
securities
and there may be certain accounting statistics, which are useful to the users. But it is not
comprehensive. Hence it is false. Trial balance (b) is a summary of all ledger accounts prepared
in
a tabular form from which no useful inference can be drawn. Hence, it is not the correct answer.
Bank reconciliation statement (c) is a statement prepared by a business only in the event of
difference between balance as per bank statement and bank column of cashbook, which has no
relevance to the users. Hence, it is false. Statement of cash flow (e) is the statement depicting
inflow and outflow of cash irrespective of nature of source and relevance of period. It is more or
less of receipts and payments account of non-profit organization which has no significance to the
users and it is false.
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43. Answer : (a)
Reason : Balance Sheet of Universe Ltd. as on March 31, 2005
Liabilities Rs. Assets Rs.
Share capital 5,00,000 Land & building 4,90,000
Less calls in arrears 30,000 4,70,000 Plant and machinery 2,20,000
Capital reserve 90,000 Investments 60,000
P & L A/c 50,000 Sundry debtors 1,20,000
Secured loans 3,00,000
Less provision for
doubtful debts 10,000
1,10,000
Term Loan from Bank 1,00,000 Stock 96,000
Sundry creditors 90,000 Loans to employees 50,000
Outstanding expenses 500 Cash 4,000
Interest received in advance 700 Bank 40,000
Insurance premium paid in
advance
1,200
Preliminary expenses 30,000
11,01,200 11,01,200
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44. Answer : (c)
Reason : In the books of the Company
Cash Book (Bank Column only)
Date Particulars Rs. Date Particulars Rs.
2004
May 11
To Share Application A/c (Being
application money received on 50,000
shares @ Rs.5 each including
premium of Rs.2 per share)
2,50,000 2004
Dec 31
By
Balance
c/d
5,96,100
June 30 To Share Allotment A/c
(Being allotment money received on
49,500 shares @ Rs.3 each)
1,48,500
Sept. 30 To Share First Call A/c
(Being First call money received on
99,000
Dec. 31 To Share Final Call A/c
(Being Final Call money received on
98,600
5,96,100
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45. Answer : (e)
Reason : The equity shareholders get the dividend, depending on the income the company made
and there is
no fixed amount and the share premium received on issue of shares can be utilized in writing off
the preliminary expenses of the company. Hence, alternative II and III are not correct and the
answer is (e).
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20
46. Answer : (c)
Reason : Rights shares are the shares that are offered to the existing equity shareholders (c).
These are not
issued by a newly formed company (a) They are not the shares issued to the public at large. They
are issued only to the existing shareholders. (b). It does not indicate the right of redemption of
shares issue (d). These are not the shares with cumulative dividend right.
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47. Answer : (d)
Reason : The discount on issue of debentures is a capital loss which will be written off over a
period of time.
(d) is the correct answer.
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48. Answer : (a)
Reason : Value of right =
r
(M S)
Nr
−+
Where r = No of rights issued
N = No of old shares
M = Market price
S = Issue price of rights
∴ Value of rights =
2
(Rs.560 Rs.410)
32
  −  +  = Rs.60
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49. Answer : (d)
Reason : When share is issued at less than par value, the difference is debited to an appropriately
titled
discount account, which is a contra equity share account. The discount account is not an expense
account nor does it appear on the income statement.
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50. Answer : (e)
Reason : Debentures can be redeemed
I. At par
II. At a premium
III. At a discount
IV. By conversion into stock.
Thus, (e) the combination of (I), (II), (III) and (IV) is the correct answer.
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51. Answer : (b )
Reason : The cash book is to record all cash receipts and payments and the balance in cash book
shows the
cash on hand.
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52. Answer : (b)
Reason : The profits earned by a subsidiary company before the holding company acquiring
control over it is
known as capital profit. Any profit before acquisition date is the capital profit. Other profits
mentioned in (a), (c), (d) and (e) are not true.
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53. Answer : (c)
Reason : Profit and Loss Appropriation Account of Wye Ltd. for the year ended March 31, 2005
To Income Tax Provision for the previous year 58,800 By Balance B/d 2,30,000
To General Reserve 2,50,000 By Net Profit 6,62,800
To Sinking Fund 1,50,000
To Proposed dividend 1,00,000
To Balance c/d 3,34,000
8,92,800 8,92,800
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54. Answer : (b)
Reason: Net income is equal to revenues minus expenses. In this case, revenues equal Rs.48,200
and
expenses equal Rs.23,750 (Rs.13,200 + Rs.5,750 + Rs.1,100 + Rs.3,700). Net income is
Rs.24,450
(Rs.48,200 – Rs.23,750).
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55. Answer : (d)
Reason: Of the Rs.1,20,000 paid, Rs.40,000 was paid toward dividends in arrears and Rs.80,000
was paid
toward dividends for 2004-05. Of the Rs.80,000, Rs.45,000 was paid to preference stockholders
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21
toward dividends for 2004-05. Of the Rs.80,000, Rs.45,000 was paid to preference stockholders
(5,000 shares x Rs.100 per share x .09), leaving Rs.35,000 to be paid to common stockholders
(Rs.80,000 – Rs.45,000).
56. Answer : (b)
Reason :
Trading Account for the year ended
Dr Cr
Particulars Amount
(Rs)
Amount
(Rs)
Particulars Amount
(Rs)
Amount
(Rs)
1,90,000
7,90,000
5,87,000
13,50,000
2,17,000
To Opening Stock
To Purchases
Less: Distribution of
free samples
Add: Sale wrongly
credited to purchases
To Gross Profit
7,80,000
18,000
7,62,000
28,000
15,67,000
By Sales
Add: Amount
wrongly credited
to purchases
By Closing Stock
13,22,000
28,000
15,67,000
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57. Answer : (d)
Reason : A company’s system of accounting for maintaining books of accounts must be on the
accrual basis
and according to the double entry system of accounting. The systems in other alternatives are no
systems at all or not recognized under the Act. Thus, alternative (d) is the correct answer.
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58. Answer : (e)
Reason : Called up capital The directors of the company called Rs.5 per share on 60,000 shares =
Rs.3,00,000
Less calls in arrear on 5,000 shares at the rate of Rs.2 = 10,000
Paid-up capital to be considered for dividends = Rs.2,90,000
Thus, (e) is the correct answer.
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59. Answer : (e)
Reason : Balance as on 31st March 2005 Rs.29,25,000
Issue of debentures 12,000 Rs.12,00,000
Less: discount 2.5% Rs. 30,000 Rs.11,70,000
Issued preference shares 25,000 R s.25,00,000
Rs.65,95,000
Less: Redemption of 30,000 6% preference shares Rs.30,00,000
Premium on redemption Rs. 1,50,000
Dividend for one month R s. 15,000 Rs.31,65,000
Balance as on 30 th April 2005 Rs.34,30,000
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60. Answer : (b)
Reason : Once the unclaimed dividend is transferred to General Revenue a/c of the Central
Government, any
shareholder entitled can claim such dividend from the Central Government.
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61. Answer: (c)
Reason: Dr. Creditors A/c Cr.
To Cash 1,85,000 By Balance b/d 3,40,000
To Purchases Returns 8,000 By Purchases 2,47,000
To Cash Discount 4,800 By Bills Payable 8,000
To Balance C/d 3,97,200
5,95,000 5,95,000
By Balance b/d 3,97,200
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62. Answer : (a)
Reason : Dr. Stock account Cr.
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22
To Opening balance 6,00,000
To Purchases 34,00,000
By Cost of goods sold
(Rs.48,00,000 × 75%)
36,00,000
By Missing inventory (balancing figure) 75,000
By Closing balance (physical count) 3,25,000
40,00,000 40,00,000
The estimated cost of missing inventory is Rs.75,000.
63. Answer : (e)
Reason : Under First in First out method of inventory valuation, the sale of 32 units will be
accounted as,
15 Units @ Rs.400 = Rs. 6,000
17 Units @ Rs.450 = Rs. 7,650
32 = Rs.13,650
The balance of inventory is,
3 Units @ Rs.450 = Rs. 1,350
10 Units @ Rs.460 = Rs. 4,600
Value of closing inventory Rs. 5,950
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64. Answer : (a)
Reason : Average Trading Profit Rs.2,58,900
Normal Profits (-) Rs.2,23,800
Super profits Rs. 35,100
Value of goodwill = 3 x Rs.35,100 = Rs.1,05,300
Amortisation – in five years = Yearly amortisation = Rs.1,05,300/5 = Rs.21,060.
The journal entry will be
Profit and Loss a/c. Dr. Rs.21,060
To Goodwill a/c. Rs.21,060.
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65. Answer : (d)
Reason : Intangible assets are classified as either identifiable or unidentifiable. Goodwill (d),
arising out of
payment for reputation, brand name, location, loyality, etc. is an unidentifiable intangible asset.
Hence, alternative (d) is false. It is described as a momentum or push (a) like the momentum of a
body that continues its motion against a retarding force. It, though caused by factors which
cannot
be easily and accurately quantified, must be assigned a value (a). It is a payment for something
which places the payer in the position being able to earn more than he would be able to do by his
own unaided efforts (b). It is the difference between the value of a business as a whole and the
aggregate of the fair value of its net assets (c). The basic characteristic of an asset is said to have
productivity. Since the goodwill helps in extra earnings, it is said to be a store of prospective
revenue (e). Thus, alternatives (a), (b), and (e) are true.
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66. Answer : (c)
Reason :
No of shares
Applied
No of
Shares
allotted
Amount
paid
Amount adjusted
towards
application
Amount
available
Amount
refunded
Rs. Rs. Rs. Rs.
20,000 20,000 60,000 60,000 - -
80,000 60,000 2,40,000 1,80,000 60,000 -
20,000 - 60,000 - - 60,000
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67. Answer : (a)
Reason : The journal entry passed at the time of receipt of application money is
Bank account Dr. Rs.12,00,000
To Share application account Rs.12,00,000
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68. Answer : (b)
Reason : When redeemable preference shares are due for redemption, the entry passed is debit
Redeemable
preference share capital account; Credit Redeemable Preference shareholders account.
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23
69. Answer : (e)
Reason : After the life of the debenture no entry on account of discount on its issue should be
shown in the
books of accounts. Capital profit can be used to convert partly paid shares to fully paid shares
and
bonus shares cannot be made on partly paid-up shares. Hence, the answer is (e).
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70. Answer: (b)
Reason : In financial accountancy, a record is made only when the information can be expressed
in monetary
terms. Recording, classification and summarization of business transactions requires a common
unit of measurement, which is taken as money. If events cannot be quantified in monetary terms,
then they do not facilitate accounting. Hence, human resource cannot be taken as asset in
accounting books.
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71. Answer : (e)
Reason : If a transaction of cash purchase of stationery has not been entered in the cashbook it is
an example
of complete omission. (e) is the correct answer.
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72. Answer : (d)
Reason : Opening stock + Purchases = Cost of goods sold + closing stock
= Rs.40,000 + Rs.1,10,000 = Rs.1,50,000
Cost of goods sold = Rs.1,50,000 less closing stock = Rs.1,50,000 – Rs.30,000 = Rs.1,20,000
Sales are at a margin of 25% = 125 x Rs .1,20,000/100 = Rs.1,50,000.
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73. Answer : (e)
Reason : Net worth includes equity, general reserve, capital reserve and balance in Profit & Loss
A/c.
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74. Answer : (c)
Reason : The damaged inventory should be valued at its net realizable value. Hence the answer is
(c). The
cost price or market price whichever is lower is used in case of normal inventory but not in case
of
damaged inventory. The market value is not used in any case. The acquisition cost is used for
valuing fixed assets. The nominal value is not at all considered.
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75. Answer : (e)
Reason : AS-10 deals with the recognition of assets, determination of carrying amounts,
depreciation
impairments to the carrying amounts. The cost should include expenses directly attributable to
the
asset and which result in an increase in the economic life of the asset. The financing costs
relating
to deferred credits or to borrow funds are not capitalized to the extent that such costs relate to
periods after such assets are ready to put to use. All other expenses stated in other alternatives are
capitalized.
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Financial Accounting (MB131): January 2005

1. Under Hybrid system of accounting for revenues and expenses, the
(a) Accrual basis for revenues and cash basis for expenses is used
(b) Accrual basis for expenses and cash basis for revenues is used
(c) Accrual basis is used both for revenues and expenses
(d) Cash basis is used for both revenues and expenses
(e ) Mercantile basis is used for both expenses and revenues.
(1 mark)
< Answer >
2. If a concern proposes to discontinue its business from March 2004 and decides to dispose off
all its
assets within a period of 4 months, the Balance Sheet as on March 31, 2004 should indicate the
assets at
their
(a) Historical cost (b) Net realizable value
(c) Cost less depreciation (d) Cost price or market value, whichever is lower
(e) Replacement cost.
(1 mark)
< Answer >
3. Which of the following is not a use of fund?
(a) Acquiring assets (b) Incurring expenses
(c) Incurring losses (d) Incurring liabilities (e) Paying dividends.
(1 mark)
< Answer >
(a) Capital of a firm is reduced by the outside borrowings
(b) When there is no change in proprietor’s capital account, it is an indication of loss in the
business
(c) Nominal account refers to the tangible transactions
(d) Real accounts relate to the assets of a business
(e) Bills Payable is a nominal account.
(1 mark)
< Answer >
(a) The convention of disclosure implies that all material information should be disclosed in the
accounts
(b) The losses from the sale of capital assets need not be deducted from the revenue to ascertain
the
net income
(c) In recognition of the principle of materiality, unimportant items are either omitted or merged
with
other items
(d) The convention of consistency facilitates, the comparison of the results of one accounting
period
with that of the other
(e) The specific intervals of time for which the income or loss of the business is measured
periodically, is called the accounting period.
(1 mark)
< Answer >
6. The impact of prior period items is required to be shown as
(a) Retained profits (b) Gross profits
(c) Previous year profits (d) Current year profits (e) Notes to accounts.
(1 mark)
< Answer >
7. Consider the following data pertaining to ABC Ltd. for the year 2003-2004:
Opening balance of creditors Rs. 80,000
Closing balance of creditors Rs. 90,000
< Answer >
2
Total purchases during the year Rs.2,50,000
If the creditors were paid to the tune of Rs.1,80,000 and discount received was Rs.8,000, the
credit
purchases during the year 2003-2004 are
(a) Rs.2,50,000 (b) Rs.1,98,000 (c) Rs.1,88,000 (d) Rs.1,70,000 (e) Rs.1,62,000.
(1 mark)
8. Consider the following information of Hyder Ltd. of Hyderabad for the year 2003-2004:
Credit purchases during the year Rs. 9,25,000
Payment made to creditors during the year Rs.10,00,000
Closing balance of sundry creditors account Rs. 40,000
Discount received Rs. 10,000
The opening balance of sundry creditors account was
(a) Rs.25,000 (b) Rs.45,000 (c) Rs.75,000 (d) Rs.2,05,000 (e) Rs.1,25,000.
(1 mark)
< Answer >
9. Consider the following data pertaining to Sun Ltd. for the month of December 2004:
Particulars Rs.
Purchase of goods for resale 2,10,000
Freight in 30,000
Freight out 25,000
Cost of goods available for sale is
(a) Rs.1,88,000 (b) Rs.2,10,000 (c) Rs.2,18,000 (d) Rs.2,35,000 (e) Rs.2,40,000.
(1 mark)
< Answer >
10. How does a mistake of overcasting of purchases day book affect the cost of sales and the
profit?
(a) Cost of sales is decreased and net profit is increased
(b) Cost of sales is increased and net profit is not affected
(c) Both cost of sales and gross profit are increased
(d) Cost of sales is increased and gross profit is decreased
(e) Both cost of sales and gross profit are decreased.
(1 mark)
< Answer >
11. Which one of the following is a wrong entry in listing out the under mentioned accounts in
the Trial
Balance of a business?
(a) Plant & machinery - debit column
(b) Discount received - credit column
(c) Sales - credit column
(d) Carriage outward - credit column
(e) Interest paid - debit column.
(1 mark)
< Answer >
12. As on March 31, 2004, the overdraft balance of Mr.X as per bank pass book is Rs.20,000.
The pass
book balance did not agree with the balance as per cash book. On scrutiny, the following
omissions and
commissions were noticed:
• A cheque for Rs.4,000 issued to Mr.Y has not been presented for payment till date
• Mr.Z, a tenant, directly deposited into the bank account an amount of Rs.10,000 towards rent
and
the same is not accounted in the cash book.
• A cheque for Rs.15,000 deposited in the bank is not yet realised
• The interest on debentures for this year, directly collected by the bank, amounted to Rs.10,000.
The bank balance as per cash book is
(a) Debit balance of Rs.23,500 (b) Credit balance of Rs.29,000
(c) Credit balance of Rs.16,500 (d) Debit balance of Rs.5,500
(e) Debit balance of Rs.16,500.
< Answer >
3
(2 marks)
13. The withdrawal of cash from the bank will figure in both the bank and the cash columns of a
three
column cash book. Such entries are called
(a) Contra entries (b) Continuous entries
(c) Credit entries (d) Contingent entries (e) Adjusting entries.
(1 mark)
< Answer >
14. The following errors were made by the accountant of a company while preparing the profit
and loss
account for the year 2003–2004:
Salaries were overstated by Rs.15,000
Repairs were understated by Rs. 7,000
Income from investments was understated by Rs. 7,000
The impact of the errors on the net profit for the year was
(a) Rs.22,000 (overstated) (b) Rs.22,000 (understated)
(c) Rs.15,000 (understated) (d) Rs.7,000 (understated)
(e) Rs.7,000 (overstated).
(1 mark)
< Answer >
15. What is the net effect of the under mentioned errors on the trial balance of a firm?
I. Total of sales was taken as Rs.58,726 instead of Rs.58,762.
II. A discount of Rs.52 allowed to Mr.X was not posted in the discount account.
III. Sale of old furniture of Rs.130 was credited to Machinery account.
IV. A credit sale of Rs.250 to Mr.S was posted twice in his account.
(a) Credit total of trial balance will be more than that of debit total by Rs.234
(b) Debit total of trial balance will be more than that of credit total by Rs.234
(c) Credit total of trial balance will be more than that of debit total by Rs.104
(d) Debit total of trial balance will be more than that of credit total by Rs264
(e) Debit total of trial balance will be more than that of credit total by Rs.286.
(2 marks)
< Answer >
16. A credit sale of Rs.2,000 was wrongly entered in the purchases book. The impact of the
mistake on
profit is, it
(a) Decreases the gross profit by Rs.2,000 (b) Increases the gross profit by Rs.2,000
(c) Decreases the gross profit by Rs.4,000 (d) Increases the gross profit by Rs.4,000
(e) Has no impact.
(1 mark)
< Answer >
17. Goods worth Rs.750 have been purchased from S & Co. But while posting the entry, the
credit was
given to R & Co. The total of credit side of the trial balance is Rs.43,570. Assuming that, this is
the only
error, indicate the total of the debit side of the trial balance before rectification.
(a) Rs.43,570 (b) Rs.44,420 (c) Rs.42,820 (d) Rs.44,320 (e)
Rs.42,070.
(1 mark)
< Answer >
18. Consider the following data pertaining to Joy Ltd. for the year ended March 31, 2004:
Cash sales Rs 4,00,000
Decrease in inventory Rs. 40,000
Plant & Machinery Rs.1,70,000
Rent received Rs. 55,000
Purchases Rs 2,85,000
Sales commission paid Rs. 12,000
The company noticed the following:
• An amount Rs.2,500 is the amount of rent received in advance.
• A credit purchase of Rs.15,000 was wrongly recorded in sales day book as Rs.51,000.
• The company has the practice of depreciating the Plant and Machinery at the rate of 15% per
annum on straight line method. The original cost of the Plant and Machinery was Rs.2,00,000.
< Answer >
4
• Sales commission was paid only to the extent of two thirds of the amount payable.
Considering the above data and the additional information, the net profit of the company for the
period
ended March 31, 2004 was
(a) Rs.18,000 (b) Rs.19,500 (c) Rs.13,500 (d) Rs.28,000 (e)
Rs.18,500.
(2 marks)
19. There was a fire in the factory of Mr. Anand and goods worth Rs.10,000 were lost. However,
Mr.
Anand who was far-sighted, already insured the goods and the insurance company accepted the
claim to
the extent of Rs.8,000. The treatment of this is
I. Debit Profit and Loss Account by Rs.2,000
II. Debit insurance company account by Rs.8,000
III. Credit Trading Account by Rs.10,000
IV. Deduct Rs.2,000 from closing stock
(c) Only (III) above (d) (I), (II), (III) and (IV) above
(e) (I), (II) and (III) above.
(1 mark)
< Answer >
20. X Ltd. was showing a balance of Rs.30,000 to the debit of building account. It was sold for
Rs.45,000.
The gain on the sale of building was transferred to the profit and loss account, thus making the
net profit
equal to Rs.1,70,000. The profit from operations will be
(a) Rs.2,15,000 (b) Rs.1,70,000 (c) Rs.1,55,000 (d) Rs.2,00,000 (e)
Rs.1,40,000.
(1 mark)
< Answer >
21. Consider the following extracts of the trial balance of Nilgiri Ltd. as on March 31, 2004:
Particulars Rs.
Share Capital 5,76,900
12%Bank loan 1,50,000
Bills payable 10,000
Land & building 4,36,000
Cash at bank 23,500
Office equipment 1,99,700
Furniture 2,00,000
Closing stock 38,000
Bills receivable 9,000
Petty cash 210
Cash on hand 9,400
For the year ending March 31, 2004, the following adjustments were effected
• Depreciation on – Office equipment: Rs.19,970, Furniture:Rs.30,000
• Reserve for discount on Sundry creditors is Rs.720. Provision for discount on Sundry debtors is
Rs.779
• Sundry creditors include a debt of Rs.8,000 due to Mr.Madhukar who is also in the list of
Sundry
debtors for the same amount
• Accrued commission receivable amounted to Rs.13,000 and prepaid printing charges
aggregated
to Rs.1,850, Accrued interest on bank loan is of Rs.15,000.
After effecting the above adjustments, the net profit was Rs.1,33,731.
The total of the Balance Sheet of the company as at March 31, 2004 was
(a) Rs.9,36,911 (b) Rs.9,27,631 (c) Rs.9,26,911 (d) Rs.9,13,911 (e)
Rs.9,26,970.
(3 marks)
< Answer >
22. Consider the following data pertaining to Jagriti Ltd. as on March 31, 2004:
Particulars Amount (Rs.) Amount (Rs.)
< Answer >
5
Sales 6,35,000
Purchases 4,56,000
Salaries 86,000
Other expenses 73,000
Fixed assets 5,00,000
Cash and bank 53,000
Share capital 6,00,000
Short term loan 36,000
13,03,000 13,03,000
The value of stock as on March 31, 2004 is Rs.75,000. The company has the practice of charging
depreciation on the fixed assets at the rate of 15% on written down value method. The total of
liabilities
side of balance sheet as on March 31, 2004 is
(a) Rs.7,38,000 (b) Rs.6,68,000 (c) Rs.6,73,000 (d) Rs.5,93,000 (e)
Rs.7,43,000.
(2 marks)
23. The amount earmarked for distribution to the shareholders is known as
(a) Profit after tax (b) Retained earnings
(c) Dividends (d) Operating profit (e) Profit before tax.
(1 mark)
< Answer >
24. AB Ltd. follows perpetual inventory system. On March 31 every year, the company
undertakes physical
stock verification. On March 31, 2004, the value of stock as per the records differed from the
value as
per the physical stock. On scrutiny, the following differences were noticed:
• Stock register was overcast by Rs.6,000.
• Goods purchased for Rs.10,000 were received and included in the physical stock but no
entry was made in the books.
• Goods costing Rs.30,000 were sold and entered in the books but the stock is yet to be
delivered.
• Goods worth Rs.5,000 are returned to the suppliers but the same is omitted to be recorded.
If the inventory is valued in the books at Rs.1,50,000, the value of physical inventory is
(a) Rs.1,11,000 (b) Rs.1,89,000 (c) Rs.1,79,000 (d) Rs.1,59,000 (e)
Rs.1,19,000.
(2 marks)
< Answer >
25. The following information pertains to Whitestar Ltd. for the year 2003–2004:
Particulars April 1, 2003 March 31, 2004
Inventory Rs. 72,000 Rs. 67,000
Sundry debtors Rs. 47,000 Rs. 70,000
Sundry creditors Rs. 40,000 Rs. 38,000
Total of credit sales made during the year was Rs.6,75,000. The cost of goods sold of the
company was
80% of the sales.
Cash collected from the customers during the year was
(a) Rs.7,22,000 (b) Rs.6,98,000 (c) Rs.6,75,000 (d) Rs.6,52,000 (e)
Rs.5,37,000.
(1 mark)
< Answer >
26. Consider the following data pertaining to Wren Ltd. for the year 2003-2004:
Particulars Rs.
Provision for doubtful debts as on April 1, 2003 4,000
Sundry debtors as on March 31, 2004 1,50,000
Bad debts to be written off 10,000
If a provision equal to 5% is to be created on the debtors’ balances, the charge against profit and
loss
< Answer >
6
account for the year ended March 31, 2004 is
(a) Rs.3,500 (b) Rs.7,000 (c) Rs.11,000 (d) Rs.13,000 (e)
Rs.17,500.
(1 mark)
27. Consider the following information pertaining to XYZ Ltd.:
On April 01, 2003, the provision for bad debts account showed a balance of Rs.30,000. As on
March 31,
2004, the status of the following debtors is
• Mr. A had become insolvent and only 40 paise in a rupee is expected to be realized out of his
estate in full settlement. He owed a total amount of Rs.20,000
• Mr. B who owes an amount of Rs.10,000 became bankrupt and it was understood that no
amount
will be recovered from him.
• Mr. C has agreed to pay Rs.3,000 as final settlement against his dues of Rs.10,000 and the
balance is irrecoverable.
If the company decided to maintain the provision at Rs.35,000 as on March 31, 2004, the amount
to be
debited to Profit and loss account, after considering the above, is
(a) Rs.34,000 (b) Rs.29,000 (c) Rs.26,000 (d) Rs.35,000 (e)
Rs.64,000.
(1 mark)
< Answer >
28. Among the various methods for valuation of inventory, Specific Identification method is the
most
suitable method for valuation of
(a) Coal (b) Textiles (c) Chemicals
(d) Diamond Jewellery (e) Food products.
(1 mark)
< Answer >
29. Which of the following is not classified as inventory in the financial statements?
(a) Finished goods
(b) Work-in-process
(c) Stores and spares
(d) Raw-materials and components
(e) Advance payment made to suppliers for raw materials.
(1 mark)
< Answer >
30. Consider the following data pertaining to a company for the year 2003-2004:
Opening balance of sundry debtors Rs. 45,000
Credit sales Rs.4,25,000
Cash sales Rs. 20,000
Cash collected from debtors Rs.4,00,000
Closing balance of sundry debtors Rs. 50,000
The bad debts of the company during the year are
(a) Rs.40,000 (b) Rs.35,000 (c) Rs.30,000 (d) Rs.25,000 (e)
Rs.20,000.
(2 marks)
< Answer >
31. The cost price of a machine is Rs.1,20,000 and the depreciated value of the machine after 3
years will be
Rs.66,000. If the company charges depreciation under straight line method, the rate of
depreciation will
be
(a) 25% (b) 20% (c) 18% (d) 15% (e) 12%.
(1 mark)
< Answer >
ANS—

1. Answer : (b )
Reason : Accrual basis is used under hybrid system of accounting for expenses and cash basis is
used for revenue
used.
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2. Answer : (b)
Reason : Financial accounting principles assume the going concern concept and hence the fixed
assets will be
valued at cost less depreciation. However, in the given case, the concern decided to close its
operations.
Hence, the fixed assets should be indicated in the balance sheet at net realizable value. Hence the
answer
is (b). The assets are not recorded at historical cost. Cost or market value, whichever is lower is
used to
record stock-in-trade but not fixed assets. The replacement cost is irrelevant when the firm is
going to
discontinue its operations.
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3. Answer : (d)
Reason : Incurring liability is a source of fund but not a use of fund. Acquiring assets, incurring
expenses,
incurring losses and paying dividends are all uses of funds.
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4. Answer : (d)
Reason : Real accounts represent the assets and properties of a business is the correct statement
and (d) is the
correct answer.
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5. Answer : (b )
Reason : The losses from sale of capital assets should be deducted fom the revenue to ascertain
the net income
The convention of disclosure implies that all material information should be disclosed in the
accounts
In keeping with the principle of materiality unimportant items are either left out or merged with
other
items. The comparison of the results of one accounting period with that in the past is possible
when the
convention of consistency is adhered to by the business. The income or loss of business is always
computed with relevance to a specific period called the accounting period.
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6. Answer : (e )
Reason : Prior period items are to be debited to Profit &Loss A/c and its impact on the current
year profit should
be shown in the notes to the accounts.
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7. Answer : (b)
Reason : Dr. Sundry Creditors Cr.
2003-2004 To Cash 1,80,000 April 01, 2003 By Balance b/d 80,000
To discount 8,000
March 31, 2004 To Balance c/d 90,000
2003-2004 By Purchases
(balancing figure)
1,98,000
2,78,000 2,78,000
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8. Answer : (e)
Reason : Rs.
Payment made to creditors 10,00,000
Closing balance 40,000
10,50,000
Less : Credit purchases 9,25,000
Opening balance 1,25,000
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9. Answer : (c)
Reason : Cost of goods = Purchases – Returns outward + Freight in
= Rs.2,10,000 – Rs.22,000 + Rs.30,000 = Rs.2,18,000
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10. Answer : (d)
Reason : A mistake of overcasting of purchases day book increases cost of sales and decreases
gross profit. (d) is
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18
the correct answer. >
11. Answer : (d)
Reason : The thumb rule is that all expenses and assets are showing debit balances and incomes
and liabilities
credit balances. Carriage outward being an expense should be listed in debt column of the Trial
Balance.
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12. Answer : (b)
Reason : Bank Reconciliation Statement
Particulars Rs. Rs.
Overdraft balance as per Pass book 20,000
Add : Cheques issued to Mr. Y but not
presented for payment 4,000
Rent deposited by Mr. Z directly into the bank 10,000
Interest on debentures directly collected by bank 10,000 24,000
44,000
Less :
Cheque deposited, yet to be realised 15,000 15,000
Overdraft balance as per cash book 29,000
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13. Answer : (a)
Reason : The withdrawal of cash from the bank will figure in both and cash columns of a cash
book and such
entries are called contra entries. (a) is the correct answer.
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14. Answer: (c)
Reason :
Particulars Profit increased
(Rs.)
Profit decreased
(Rs.)
Salaries overstated (Profit understated) 15,000
Repairs understated (Profit overstated) 7,000
Income of investment understated (Profit
understated)
7,000
7,000 22,0000
Net profit understated/decreased 15,000 --
22,000 22,000
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15. Answer : (b)
Reason : i. Difference in sales a/c because of taking Rs.58,726 instead of Rs.58,762=Rs.36
whereby credit is
less by the amount
ii. Discount not debited Rs.52 on account of which debit balance is less by the amount
iii. Sale of old furniture credited to machinery a/c instead of furniture is not affecting the
agreement of
trial balance
iv. Sale twice debited to S a/c has increased the debit balance by Rs.250
So excess debit Rs.250 plus short credit of Rs.36 minus short debit Rs.52 makes debit total more
by
Rs.234 of the Trial balance
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16. Answer : (c)
Reason : A credit sale of Rs.2,000 was wrongly entered in the purchases book. This mistake will
result in a
decrease in the gross profit of Rs.4,000.
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17. Answer : (a)
Reason :The mistake of posting of an item to the correct side of a wrong account will not affect
the agreement of a
trial balance . Thus, the total of credit side will be the total of debit side too. Thus, before and
after
rectification the total of the debit side will be Rs.43,570. (a) is the correct answer.
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18. Answer : (c)
Reason : Net Profit of Joy Ltd. for the year ending March 31, 2004 :
Dr. Cr.
To Purchases 2,85,000 By Cash sales 4,00,000
Add : Omitted to be recorded
15,000 3,00,000
Less : Wrong Credit 51,000
3,49,000
To Decrease in inventory 40,000
3,49,000 3,49,000
To Sales Commission 12,000 By Gross Profit 9,000
+ Accrued 6,000 18,000 By Rent received 55,000
To Depreciation 30,000 Less : received in advance 2,500 52,500
To Net Profit 13,500
61,500 61,500
The net profit is Rs.13,500
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19. Answer : (e)
Reason : When goods are lost and insurance company accepts the claim only to a certain extent,
profit and loss
account should be debited with net loss, Trading account will be credited with cost of goods lost
and
insurance company account will be debited with the amount of claim accepted. Thus the entry is
Profit and Loss account Dr. Rs.2,000
Insurance company account Dr. Rs.8,000
To Trading account Rs. 10,000
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20. Answer : (c)
Reason : The net profit Rs.1,70,000 – Rs.15,000(Profit on sale of building which is carried to P&
L account
(Rs.45,000 –Rs.30,000) = Rs.1,55,000. The profit from operations will be Rs.1,55,000.
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21. Answer : (c)
Reason : Balance Sheet of Nilgir Ltd as on March 31, 2003.
Share Capital 5,76,900 Land & building 4,36,000
Profit and loss account 1,33,731 Office equipment 1,99,700
12% Bank Loan 1,50,000 Less : depreciation 19,970 1,79,730
Add : Outstanding interest
15,000
1,65,000
Furniture 2,00,000
Sundry creditors 50,000 Less : depreciation 30,000 1,70,000
Less : Closing stock 38,000
Debtors set off 8,000 Sundry debtors 55,000
Provision for discount
on creditors 720 41,280
Less : Provision for discount
on debtors
779
Creditors set off 8,000 46,221
Bills payable 10,000 Bills receivable 9,000
Cash at bank 23,500
Petty cash 210
Accrued commission 13,000
Prepaid printing charges 1,850
Cash on hand 9,400
9,26,911 9,26,911
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22. Answer : (b)
Reason : Dr. Trading and profit and loss account for the year ended March 31, 2004 Cr.
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To Opening stock 90,000 By Sales 6,35,000
To Purchases 4,56,000 By Closing stock 75,000
To Gross profit 1,64,000
7,10,000 7,10,000
To Salaries 86,000 By Gross profit 1,64,000
To other expenses 73,000 By Net loss 70,000
To Depreciation 75,000
2,34,000 2,34,000
Balance sheet as on March 31, 2003
Share capital 6,00,000 Fixed assets
5,00,000
Less : depreciation
75,000
4,25,000
Sundry creditors 32,000 Sundry debtors 45,000
Short tem loan 36,000 Closing stock 75,000
Net loss 70,000
6,68,000 6,68,000
23. Answer : (c)
Reason : Dividends represent the amount earmarked to distribute to the shareholders. Hence (c)
is the answer.
The amount of taxes is to be deducted from profit before tax and the amount to be transferred to
reserves
and other appropriations, if any, need to be made from profits after tax. Operating profit is the
amount of
profit other than non-operating surplus. Interest, taxes, other appropriations should be made to
operating
profit. Hence this is not the amount earmarked for distribution to shareholders.
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24. Answer : (c)
Reason : Computation of inventory :
Particulars Rs. Rs.
Inventory value as per books 1,50,000
Add Purchases received but not accounted 10,000
Sales yet to be delivered 30,000 40,000
1,90,000
Less Returns outward 5,000
Amount overcast in stock sheet 6,000 11,000
Inventory as per physical stock 1,79,000
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25. Answer : (d)
Reason :
Particulars Rs.
7,22,000
Less : Closing balance of Sundry debtors 70,000
Cash collected from customers 6,52,000
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26. Answer : (d)
Reason :
Particulars Rs.
Opening Provision 4,000
Shortfall of provision 6,000
Provision required 5% of Rs.1,40,000 (Rs.1,50,000 – Rs.10,000) 7,000
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Provision required 5% of Rs.1,40,000 (Rs.1,50,000 – Rs.10,000) 7,000
Charge against profit and loss account 13,000
27. Answer : (a)
Reason : Dr. Provision for Bad debts Account Cr.
March 31,
2004 To A 12,000 April 01, 2003 By Opening balance 30,000
To B 10,000 March 31, 2004 By P & L a/c 34,000
To C 7,000
To Closing balance 35,000
64,000 64,000
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28. Answer : (d)
Reason : For valuation of relatively expensive items whose physical identification at various
stages is possible,
Specific Identification method is most suited. Where the inventories are vast and physical
identification
is difficult, the method is not advisable.
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29. Answer : (e)
Reason : Advance payment made to suppliers for materials is not classified as inventory. Other
items mentioned
in (a), (b), (c) and (d) are classified as inventory in the financial statements as they are the
components
of inventory.
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30. Answer : (e)
Reason :
Opening balance of Sundry debtors Rs. 45,000
Add : Credit sales Rs.4,25,000
Rs.4,70,000
Less : Cash collected Rs.4,00,000
Rs. 70,000
Less : Closing balance of sundry debtors Rs. 50,000
Bad debts Rs. 20,000
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31. Answer : (d)

1. Different valuation bases are used in accounting and in this context, present value means
(a) The amount that needs to be paid if the asset is to be acquired currently
(b) The amount collectible in the event of the asset’s disposal in the normal course of business
(c) The amount realizable under distress sale
(d) The present discounted value of the future inflows that an item is expected to generate
in the
normal course of business
(e) The written down value of an asset.
(1 mark)
< Answer >
2. As per Accounting Standard a qualifying asset is
(a) An asset which satisfies a particular condition
(b) An asset that takes a long time to get ready for intended use or sale
(c) An asset which qualifies for a particular rate of depreciation
(d) An asset which qualifies to be a part of reconstruction
(e) An asset that takes less than predicted time for intended use.
(1 mark)
< Answer >
3. The total of all the current assets of Intelligent Limited is Rs.3,00,000. The following
information is also
available from the trial balance of the company.
The only other current asset not included in the information above is closing stock. Its value
must be
(a) Rs.2,14,500 (b) Rs.2,04,500 (c) Rs.2,02,000
(d) Rs.1,98,000 (e) Rs.2,41,050.
(1 mark)
Rs.
Current liabilities 16,400
Provision for taxation 12,000
Cash & bank balance 30,000
Bills receivable 25,000
Office typewriter 39,000
< Answer >
4. Which of the following branches of accounting primarily deals with processing and presenting
data for
internal users?
(a) Financial Accounting (b) Tax Accounting
(c) Management Accounting (d) Inflation Accounting (e) Cost Accounting.
(1 mark)
< Answer >
5. In which of the following areas the accounting policies tend to be uniform among enterprises?
(a) Methods of Depreciation (b) Valuation of Inventories
(c) Treatment of Goodwill (d) Treatment of Contingent Liabilities
(e) Accounting for Cash.
(1 mark)
< Answer >
Suggested Answers with Examiner's Feedback Page 2 of 27
file://\\webserver\e\0106\Professional\MB131-0106.htm 9/18/2006
6. Which of the following cost is not directly related to a specific contract?
(a) Site labor cost
(b) Cost of moving plant and equipment to and from a site
(c) Research and Development cost
(d) Supervision cost
(e) Materials used.
(1 mark)
< Answer >
7.
The bank balance as per the bank statement on December 31, 2005 was
(a) Rs.2,14,940 (credit) (b) Rs.1,34,940 (debit)
(c) Rs.2,05,900 (debit) (d) Rs.2,05,240 (debit)
(e) Rs.1,34,940 (credit).
(2 marks)
On December 31, 2005, the bank column of the cash book of Mercury Ltd. showed a credit
balance of Rs.1,62,000 which did not agree with the balance as per the bank statement. On
scrutiny the following omissions and commissions were noticed:
• As per bank statement, a cheque of Rs.7,000 was deposited on December 24, 2005. But
no entry was made in the cash book
• Receipt side of the cash column of the cash book was undercast by Rs.1,000
• An amount of Rs.49,960 was credited by the bank on account of the proceeds of a cheque
for Rs.50,000 deposited for collection. No entry was passed in the cash book for bank
charges
• A cheque issued by a customer for Rs.5,300 was deposited in the bank on December
24, 2005. But the same was dishonoured on December 29, 2005. No entry was passed in
the cash book for dishonour
• The amount of bills receivable collected directly by the bank aggregated to Rs.35,000
• The amount of bank charges of Rs.250 was recorded twice in the cash book
• A bill of Rs.80,000 discounted for Rs.70,960 was dishonoured by the bank, and noting
charges of Rs.150 was paid by the bank. No entry was made in the cash book.
< Answer >
8. ‘Outstanding salaries’ represents
(a) A personal account (b) A real account
(c) A nominal account (d) A deferred expense account (e) An
asset.
(1 mark)
< Answer >
9. During the year 2004-2005 the opening stock and the closing stock of a company were
Rs.1,20,000 and
Rs.1,00,000 respectively. If the cost of goods sold during the year was Rs.3,40,000, then the
goods
purchased by the company were
(a) Rs.4,60,000 (b) Rs.4,40,000 (c) Rs.3,60,000 (d) Rs.3,40,000 (e)
Rs.3,20,000.
(1 mark)
< Answer >
10. The following balances were extracted from the books of Silvergreen Ltd. during the year
2004 – 2005.
The cost of goods sold during the year was Rs.9,00,000. The gross profit margin was 25%.
Cash paid to creditors during the year was
(a) Rs.9,20,000 (b) Rs.9,10,000 (c) Rs.8,90,000 (d) Rs.8,80,000 (e)
Rs.8,70,000.
(1 mark)
Particulars April 1, 2004 March 31, 2005
Sundry creditors Rs.80,000 Rs.100,000
Inventory Rs.60,000 Rs. 50,000
< Answer >
11. Consider the following information pertaining to Blue Sky Ltd. for the year 2004-2005:
Total credit sales made during the year was Rs.6,75,000. The amount of discount allowed to the
sundry
debtors during the period was Rs.2,800. The cost of goods sold of the company was 80% of the
sales.
Cash collected from the sundry debtors during the year was
(a) Rs.7,22,000 (b) Rs.6,95,200 (c) Rs.6,75,000 (d) Rs.6,49,200 (e)
Rs.5,14,200.
(2 marks)
Particulars 1st April 2004 31st March 2005
Inventory Rs.52,200 Rs.65,800
Sundry debtors Rs.37,000 Rs.60,000
Sundry creditors Rs.50,000 Rs.48,000
< Answer >
12. Carriage inward refers to the cost of transportation for
(a) Purchase of materials (b) Sales of products (c) Return outwards
(d) Return of unsold goods (e) Newly acquired machinery.
(1 mark)
< Answer >
13. The process of transferring entries from journal to ledger is known as
(a) Journalizing (b) Ledgerizing (c)
Posting
(d) Transferring (e) Appropriation.
(1 mark)
< Answer >
14. The credit balance in the Bank account is
(a) Current asset (b) A current liability (c)
Capital
(d) Profit (e) An expenditure.
(1 mark)
< Answer >
15. From the point of view of a business concern which of the following A/c does not show
credit balance?
(a) Sales (b) Capital (c)
Reserve
(d) Commission paid (e) Rent Received.
(1 mark)
< Answer >
16. The term “Imprest System” is used in relation to
(a) Purchases book (b) Sales book (c) Petty cash book
(d) Cash book (e) Returns inward book.
(1 mark)
< Answer >
17. Which of the following journal entry passed in respect of the under mentioned transactions is
false?
I. Pankaj commenced business with a capital of Rs.50000.
II. Purchased goods from Krishna on credit Rs.40000.
III. Purchased machinery from Rama on credit Rs.20000.
IV. Paid to Krishna by cheque for purchases Rs.10000.
V. Cash withdrawn from bank for office use Rs.5000.
Rs. Rs.
(a) Cash a/c Dr. 50,000
To Pankaj’s capital a/c
50,000
(b) Purchase a/c Dr. 40,000
To Krishna’s a/c
< Answer >
40,000
(c) Machinery a/c Dr. 20,000
To Rama’s a/c
20,000
(d) Krishna’s a/c Dr. 10,000
To Cash a/c
10,000
(e) Cash a/c Dr. 5,000
To Bank a/c
5,000.
(1 mark)
18. The total of debit side of trial balance of a company is Rs.2,45,000 and that of the credit side
is
Rs.2,72,900. Subsequently the following mistakes are discovered.
The total of the corrected trial balance is
(a) Rs.2,74,900 (b) Rs.2,59,900 (c) Rs.2,75,100 (d) Rs.2,84,900 (e)
Rs.2,82,800.
(2 marks)
Particulars
Correct Amount
(Rs.)
Amount which appears in trial
balance (Rs.)
Opening stock 40,500 40,600
Advertisement expenses 15,000 15,000 (credit side)
Interest from investments 36,000 30,000
Sundry creditors 76,000 80,000
< Answer >
19. Which of the following will not appear in Profit and Loss Account of a business?
(a) Drawings (b) Bad debts
(c) Provision for doubtful debts (d) Accrued expenses
(e) Reserve for discount on sundry creditors.
(1 mark)
< Answer >
20. Consider the following data pertaining to M/s. Ramu Enterprises as on March 31, 2005:
Additional Information:
Net profit of M/s. Ramu Enterprises for the year ended March 31, 2005 is
(a) Rs.73,800 (b) Rs.72,300 (c) Rs.74,800 (d) Rs.76,200 (e)
Rs.75,200.
Particulars Rs.
Credit purchases 20,000
Cash sales 20,000
Wages paid 5,000
Salaries paid 2,000
Carriage inward 1,000
Printing and stationery 600
Gas, water and fuel 2,000
Raw materials destroyed by fire 2,000
Particulars
As on April 01, 2004 As on March 31, 2005
Rs. Rs.
Inventory 27,000 40,000
Outstanding wages 500 700
Outstanding salaries 400 300
< Answer >
(2 marks)
21. The opening balance in the Provision for Bad & Doubtful A/c of a company is Rs.8,500 and
bad debts
written off in the year is Rs.1000. If the company wants to maintain the Provision for Bad &
Doubtful
Debt @5% on its S. Debtors balance of Rs.1,10,000, the Profit & Loss A/c will be
(a) Debited by Rs.6500 (b) Debited by Rs.2000
(c) Credited by Rs.2000 (d) Credited by Rs.3000
(e) Debited by Rs.3000.
(2 marks)
< Answer >
22. When sale is Rs.4,80,000 gross loss is 25% on cost. Purchase of goods is Rs.3,50,000 and
closing stock
is Rs.60,000. The stock at the beginning would be
(a) Rs.70,000 (b) Rs.94,000 (c) Rs.1,34,000 (d) Rs.3,50,000 (e)
Rs.30,000.
(1 mark)
< Answer >
23. If the profit is 25% of the cost price then it is
(a) 25% of the sales price (b) 33% of the sales price
(c) 20% of the sales price (d) 15% of the sales price
(e) 17 % of the sales price.
(1 mark)
< Answer >
24. A building standing in the books at Rs.30,000, was sold for Rs.45,000. The gain on the sale
of building
was transferred to the profit and loss account, thus making the net profit to Rs.1,70,000. The
profit from
operations will be
(a) Rs.2,15,000 (b) Rs.1,70,000 (c) Rs.1,55,000 (d) Rs.2,00,000 (e)
Rs.1,40,000.
(1 mark)
< Answer >
25. The book value of stock as on March 31, 2005 was Rs.130000.Goods worth Rs.6000 was
destroyed in
fire on 15.3.’05 against which claim for Rs.4000 admitted by the Insurance Company. Which of
the
following is the appropriate accounting treatment for the above transaction?
(a) Debit Rs.4000 to Profit & Loss A/c and show Rs.4000 as claim receivable on the asset side of
B/S
(b) Debit Rs.6000 to Profit &loss A/c and show Rs.4000 as claim receivable on the asset side of
B/S
(c) Deduct Rs.6000 from the value of closing stock; Debit Rs.2000 to P&L A/c and show
Rs.4000 as
claim receivables on the asset side of B/S
(d) Deduct Rs.6000 from the value of closing stock ; debit Rs.6000 to P&L A/c and show
Rs.4000 as
claim receivables on the asset side of B/S
(e) Debit Rs.2000 to P&L A/c and show Rs.4000 as claim receivables on the asset side of B/S.
(2 marks)
< Answer >
26. Consider the following data pertaining to Jagriti Ltd. as on March 31, 2005:
The value of stock as on March 31, 2005 is Rs.75,000. The company has the practice of charging
Particulars Amount (Rs.) Amount (Rs.)
Sales 6,35,000
Purchases 4,56,000
Salaries 86,000
Other expenses 73,000
Fixed assets 5,00,000
Share capital 6,00,000
Short term loan 36,000
13,03,000 13,03,000
< Answer >
depreciation on the fixed assets at the rate of 15% on written down value method. The Net
Profit/Loss
and total of balance sheet as on March 31, 2005 is
(a) Rs 70,000(Dr)- Rs.7,38,000 (b) Rs.70,000(Dr)- Rs.6,68,000
(c) Rs 75,000(Cr) -Rs.6,73,000 (d) Rs75,000(Dr) - Rs.5,93,000
(e) Rs.Nil -Rs.7,43,000.
(2 marks)
27. Regarding adjustment for expenses and incomes in Balance-Sheet, which of the following
statements is
false?
(a) Prepaid expenses are shown on the asset side
(b) Income received in advance is shown on the asset side
(c) Income earned but not received is shown on the asset side
(d) Income accrued but not due is shown on the asset side
(e) Outstanding liabilities for expenses are shown on the liability side.
(1 mark)
< Answer >
28. Which of the followings is false?
(a) Plant and machinery is a fixed asset
(b) Bank balance is a current asset
(c) Debentures is a current liability
(d) Short term investment is a current asset
(e) Fixtures is a fixed asset.
(1 mark)
< Answer >
29. In retail inventory method, original selling price may be modified. If the selling price is
lowered below
the original selling price, it is known as
(a) Markup (b) Markup cancellation (c) Net markup
(d) Markdown (e) Net markdown.
(1 mark)
< Answer >
30. If depreciation is calculated on the basis of formula, n(n+1)/2, then which one of the
following methods
is adopted?
(a) Diminishing value method (b) Annuity method
(c) Sum of years digits method (d) Sinking fund method
(e) Straight line method.
(1 mark)
ANS—
1. Answer : (d)
Reason : Present value is the discounted value of all future inflows an asset is expected to
generate.
2. Answer : (b)
Reason : Accounting Standard 16 defines a qualifying asset as an asset that takes a long
time to get ready for intended
use or sale
3. Answer: (a)
Reason: Total of all current assets = Rs. 3,00,000/-
Total of current assets excluding stock
= Sundry Debtors + Bills Receivable + Cash & Bank Balance
= 30,500 + 25,000 + 30,000 = Rs. 85,500
Value of closing stock = Rs. 3,00,000 – Rs. 85,500 = Rs. 2,14,500
4. Answer : (c)
Reason : Management accounting is the branch of accounting which primarily deals with
processing and presenting
data for internal users. (c) is the correct answer.
5. Answer : (e)
Reason : Methods of depreciation ,valuation of inventories, treatment of Goodwill and
treatment of contingent
liabilities differ from enterprise to enterprise
6. Answer : (c)
Reason : Research and Development cost cannot directly be attributed to a specific work.
Site labor cost, cost of
moving plant and equipment to and from a site , supervision cost and materials used can
be related to specific
contract.
7. Answer : (d)
Reason : Bank Reconciliation Statement as on December 31, 2005
Rs. Rs.
Bank overdraft per the cash book 1,62,000
Add : Cheque for Rs.50,000 deposited but
collection as per bank statement Rs.49,960 i.e.
bank charges 40
Cheque dishonoured as per the bank statement 5,300
Bill for Rs.80,000 discounted for Rs.70,960
dishonoured by the bank, noting charges being
Rs.150 80,150 85,490
2,47,490
Less : Cheque deposited but not recorded in
the cash book 7,000
Bills collected directly by the bank 35,000
Bank charges recorded twice in the cash book 250 42,250
Bank overdraft as per the pass book (Dr.) 2,05,240
8. Answer : (a)
Reason : Outstanding salaries is the amount payable during a particular period which is
not yet paid. It is Personal
Account representing salaries due to employees. It is a representative personal account.
9. Answer : (e)
Reason :
Particulars Rs.
Closing stock 1,00,000
Add : Cost of goods sold 3,40,000
4,40,000
Less : Opening stock 1,20,000
Goods purchased 3,20,000
10. Answer : (e)
Reason :
Note:
Particulars Rs.
Opening sundry creditors 80,000
Add : Purchase during the year (Note) 8,90,000
9,70,000
Less : Closing sundry creditors 1,00,000
Cash paid 8,70,000
Rs.
Cost of Goods sold 9,00,000
Add: Closing stock 50,000
9,50,000
Less: Opening stock 60,000
Purchases 8,90,000
11. Answer : (d)
Reason :
Particulars Rs.
7,12,000
Less : Closing balance of Sundry
debtors
60,000
6,52,000
Less : Discount allowed 2,800
Cash collected from sundry debtors 6,49,200
12. Answer : (a)
Reason : Carriage inward expense is related to the carrying cost of material purchased. If
it is incurred for carrying
new assets, it should be capitalized to the assets value. Carrying cost relating to sales of
products, return
outwards and return of unsold goods will not be treated as carriage inward expenses.
Hence, (a) is correct
13. Answer : (c)
Reason : The process of transferring entries from journal to ledger is known as posting.
Hence the answer is (c). The
process of recording the transaction in the book of original entry is journalizing. Taking
over the balance in
nominal accounts to profit and loss account is transferring. The allocation of profit to
reserves is known as
appropriation. There is no term called ledgerizing.
14. Answer : (b)
Reason : A credit balance in a bank account denotes a current liability. (b) is the correct
answer.
15. Answer : (d)
Reason : Commission paid is an expense and should show a debit balance
16. Answer : (c)
Reason : The term “imprest system” is used in relation to petty cash book. (c) is the
correct answer.
17. Answer : (d)
Reason : Paid to Krishna by cheque for purchases Rs.10000- the correct journal entry is
to debit Krishna’s a/c and
credit bank a/c. All the other journal entries are correctly passed.
18. Answer : (b)
Reason :
Particulars Rs.
Total of debit side of trial balance 2,45,000
Add : Advertisement expenses 15,000
Less : Opening stock (excess taken) 100
Total of trial balance (Debit side) 2,59,900
Particulars Rs.
Total of credit side of trial balance 2,72,900
Add : Interest on investments (less taken) 6,000
Less : Sundry creditors (excess taken) 4,000
Less : Advertisement expenses (wrongly taken) 15,000
Total of trial balance (credit side) 2,59,900
19. Answer : (a)
Reason : Profit and loss account is an income statement which depicts all incomes/gains
and expenses/losses during an
accounting period. Drawings are neither an income nor an expense to be recorded in
profit and loss account.
Thus, (a) is the correct answer. The items in other alternatives are either expenses or
accrued expenses or
probable expenses for which provision is to be created and probable income of discount
on sundry creditors.
The depreciation, bad debts and provision for doubtful debts and accrued expenses
appear in the profit and
loss account and provision for income i.e. provision for discount on sundry creditors.
Hence, (a) is the correct
answer.
20. Answer : (b)
Reason : Books of Ramu Enterprises
Dr. Trading Account for the period ending March 31, 2005 Cr.
To Opening stock 27,000 By Sales :
To Purchases Cash 20,000
Cash 70,000 Credit 1,40,000
Credit 20,000 1,60,000
90,000 (–) Returns
inward
3,000 1,57,000
(–) Goods lost 2,000 By Closing
stock
40,000
(–) Returns outward 2,000 86,000
To Wages 5,000
(+) Outstanding as on March
31, 2005 700
5,700
(–) Outstanding as on April 01,
2004
500 5,200
To Carriage inward 1,000
To Gas, water, fuel 2,000
1,97,000 1,97,000
By Gross
profit
75,800
Printing and stationery 600
Salaries paid 2,000
Less outstanding on 1.4.2004 400
1,600
Add outstanding on 31.3.2005 300
1,900
Net Profit 72,300
75,800 75,800
21. Answer : (c)
Reason : The formula for passing adjusting entry in respect of bad & doubtful debt is bad
debt written off plus
required provision minus old provision. Required provision @5% on 110000=5500 plus
bad debt
Rs.1000=6500. The old provision is Rs.8500.The excess of provision already made can
be reversed by
crediting Rs.2000 to the Profit & Loss A/c.
22. Answer : (d)
Reason : The cost of goods sold at a gross sale of 25% = Rs.4,80,000 x 100 / 75 =
Rs.6,40,000
Opening stock + Purchases = Cost of goods sold + Closing stock
= Rs.3,50,000 = Rs.6,40,000 + Rs.60,000 = Rs.3,50,000
Opening stock Rs.3,50,000. (d) is the correct answer.
23. Answer : ( c)
Reason : If the profit is 25% of the cost price then it is 20% of the sales price. Suppose
the cost price is Rs.100, profit
is Rs.25 and sales price is Rs.125. Profit in percentage is 25/125=20% of sales price
24. Answer : (c)
Reason : The net profit Rs.1,70,000 – Rs.15,000(Profit on sale of building which is
carried to P& L account
(Rs.45,000 –Rs.30,000) = Rs.1,55,000. The profit from operations will be Rs.1,55,000.
25. Answer : (c)
Reason : Deduct Rs.6000 from the value of closing stock; Debit Rs.2000 to P&L A/c and
show Rs.4000 as claim
receivables on the asset side of B/S –To estimate the actual stock held, value of stock
destroyed in fire to be
deducted. As against the loss of Rs.6000 claim admitted is only Rs.4000.The difference
of Rs.2000 to be
treated as a loss and taken to P&L A/c. As the claim amount is receivable it is to be taken
on the asset side of
B/s
26. Answer : (b)
Reason : Dr. Trading and profit and loss account for the year ended March 31, 2005 Cr.
Balance sheet as on March 31, 2005
To Purchases 4,56,000 By closing stock 75,000
To Gross profit 1,64,000
7,10,000 7,10,000
To Salaries 86,000 By Gross profit 1,64,000
To other expenses 73,000 By Net loss 70,000
To Depreciation 75,000
2,34,000 2,34,000
Share capital 6,00,000 Fixed assets 4,25,000
Sundry creditors 32,000 Sundry debtors 45,000
Short tem loan 36,000 Closing stock 75,000
Net loss 70,000
6,68,000 6,68,000
27. Answer : (b)
Reason : Income received in advance is a liability and shown on the liability side. All
other statements viz, prepaid
expenses shown on asset side, income earned but not received shown on asset side,
income accrued but not
due shown on asset side and outstanding liabilities for expenses shown on liability side
are true.
28. Answer : (c )
Reason : Debenture issued is a long term liability.
29. Answer : (d)
Reason : Markdown means selling price being lowered below the original selling price.
Selling price below the
original selling price cannot be mark-up, markup cancellation, net mark-up or net
markdown. Hence (d) is
correct.
30. Answer : (c)
Reason : Under, Sum of Digits method of depreciation, depreciation is calculated on the
basis of formula n(n+1)/2. (c)
is the correct answer.
Financial Accounting (MB131): July 2005
Financial Accounting (MB131): July 2005
· Answer all questions.

· Marks are indicated against each question.
1. The retirement of the chairman of a company, even though has far reaching consequences on
the health
of the company, is not accounted for in the books of account in recognition of
(a) Conservatism concept (b) Business entity concept
(c) Money measurement concept (d) Going concern concept (e) Materiality concept.
(1 mark)
< Answer >
2. Which of the following statements is prepared as of a particular date?
(a) Profit and loss account (b) Balance sheet
(c) Cash flow statement (d) Income and expenditure statement
(e) Profit and loss appropriation account.
(1 mark)
< Answer >
3. The fixed assets are recorded at their cost, in recognition of
(a) Matching concept (b) Money measurement concept
(c) Cost concept (d) Accrual concept (e) Materiality concept.
(1 mark)
< Answer >
4. If the sales day book of a business is undercast, it will
(a) Decrease gross profit but will not have any impact on net profit
(b) Decrease gross profit as well as net profit
(c) Decrease gross profit and increase net profit
(d) Increase gross profit as well as net profit
(e) Increase gross profit but will not have any impact on net profit.
(1 mark)
< Answer >
5. Which of the following accounts is closed at the end of the financial year?
(a) Salaries account (b) Plant and machinery account
(c) Debentures account (d) Sundry debtors account (e) Investments account.
(1 mark)
< Answer >
6. Which of the following is a liability of a firm?
(a) Debit balance of discount column of cashbook
(b) Credit balance of bank passbook
(c) Debit balance of bank column of cashbook
(d) Debit balance of cash column of cashbook
(e) Credit balance of bank column of cashbook.
(1 mark)
< Answer >
7. Consider the following information of Hyder Ltd. of Hyderabad for the year 2004-2005:
Credit purchases during the year Rs. 9,25,000
Payment made to creditors during the year Rs.10,00,000
Closing balance of sundry creditors account Rs. 40,000
< Answer >
Discount received Rs. 10,000
The opening balance of sundry creditors account was
(a) Rs.25,000 (b) Rs.45,000 (c) Rs.75,000
(d) Rs.2,05,000 (e) Rs.1,25,000.
(1 mark)
8. Consider the following data pertaining to RSV & Co. for the year 2004-2005:
Opening stock Rs.1,00,000
Closing stock Rs. 90,000
Opening stock and closing stock includes stock of stationery, amounting to Rs.4,000 and
Rs.3,000
respectively. General expenses include payment for stationery of Rs.36,000. Credit purchases of
stationery for Rs.9,000 recorded as ordinary purchases. Stationery of Rs.5,000 is consumed by
the
proprietor.
The amount of stationery consumed to be charged to Profit and Loss account of RSV & Co. for
the year
ending March 31, 2005 is
(2 marks)
< Answer >
9. A credit sale of goods to Shivendra should be debited to
(a) Sales account (b) Goods account
(c) Shivendra’s account (d) Purchases account (e) Cash account.
(1 mark)
< Answer >
10. Consider the Balance Sheet of Net Services Ltd. as on March 31, 2005:
Share capital 1,00,000 Cash at bank 42,000
Profit and Loss account 19,000 Sundry debtors 90,000
Sundry creditors 25,000 Closing stock 10,000
Prepaid Rent 2,000
Total 1,44,000 Total 1,44,000
Following is the summary of transactions that occurred during the month of April 2005:
Rs.
· Collections from debtors 88,000
· Payments to creditors 24,000
· Purchase of inventory on credit 80,000
· Sale of inventory on credit (cost Rs.70,000) 85,000
· Recognition of rent expenses in the month of April 2005 1,000
· Salaries paid by cheque in the month of April 2005 8,000
The company has the practice of routing transactions through bank account.
Considering the above Balance Sheet and the additional information, the cash at bank as on April
30,
2005 was
(a) Rs.97,000 (b) Rs.1,02,000 (c) Rs.98,000 (d) Rs.90,000 (e) Rs.1,06,000.
(2 marks)
< Answer >
11. Which of the following errors causes a mismatch in trial balance?
(a) Omission of an entry in the journal
(b) Recording of wrong amount in the journal
(c) Recording of wrong account in the journal
< Answer >
(d) Posting of wrong amount in the ledger in one account concerned
(e) Posting of correct amount to the correct side of wrong account.
(1 mark)
12. Consider the following data pertaining to Lairs Ltd. for the month of June 2005:
Date Quantity
(Kg.)
Rate
(Rs.)
Quantity
(Kg.)
Quantity
(Kg.)
Rate
(Rs.)
01-06-2005 500 22.80
02-06-2005 400 24
10-06-2005 600 25
25-06-2005 1,000
If the company uses weighted average method for inventory valuation, the value of inventory as
on June
30, 2005 is
(2 marks)
< Answer >
13. The following is the trial balance of Mythili Ltd. as on March 31, 2005:
Particulars Debit (Rs.) Particulars Credit (Rs.)
Land & building 3,65,000 Equity share capital
(Face value Rs.10 each)
5,00,000
Plant & machinery 6,72,000 Sundry creditors 1,50,000
Furniture & fixtures 2,85,000 Sales 16,15,000
Sundry debtors 1,80,000 Purchases returns 49,000
Purchases 6,72,000
Bank overdraft
(Rate of Interest-13% per annum) 3,00,000
Sales returns 22,000 Discount received 21,000
Opening stock
(as on April 01, 2004) 48,000 Reserves & Surplus 3,12,000
Bad debts 19,000 12% Debentures 2,80,000
Salaries and wages 5,10,000
Interest on bank overdraft 30,000
Advertisement 1,20,000
Annual fire insurance
premium (with effect from
May 01, 2004)
18,000
Investments (8% p.a.) 2,00,000
General expenses 54,000
Cash at bank 20,000
Total 32,27,000 Total 32,27,000
The company has furnished the following additional information:
< Answer >
§ Closing stock as on March 31, 2005 was Rs.50,000.
§ Depreciation is to be provided on plant & machinery at the rate of 20% per annum and on
furniture
and fixtures at the rate of 12% per annum.
§ A provision for discount on debtors is to be made at the rate of 5% on sundry debtors.
§ Goods worth Rs.5,000 are distributed as samples.
Considering the above trial balance and the additional information, the net profit of the company
for the
year ended March 31, 2005 was
(3 marks)
14. On April 01, 2004, Sneha Limited showed a balance of Rs.5,600 to the credit of Provision for
bad and
doubtful debts. On March 31, 2005, the Sundry Debtors showed a balance of Rs.2,50,400. Out of
the
total debtors, the status of the following debtors is as follows:
Sinha Rs.3,800 - identified as bad debt and is to be written off
Gupta Rs.9,000 - expected to realize only 80%
Patel Rs.8,000 - expected to realize only 60%
Iyer Rs.5,500 - filed insolvency petition and the recovery chances are remote.
All other debts as on the date of finalisation of accounts are estimated to be good. The company
maintains a suitable provision for doubtful debts. The amount debited to the profit and loss
account in
respect of provision for bad and doubtful debts for the year ended March 31, 2005 was
(2 marks)
< Answer >
15. The capital account of Mr. Ganesh showed a balance of Rs.2,50,000 on April 01, 2004.
During the year
2004-05, Mr. Ganesh brought in fresh capital of Rs.50,000 and withdrew Rs.10,000 by way of
cash. He
also took goods worth Rs.5,000 for personal use. If capital account of Mr. Ganesh showed a
balance of
Rs.3,10,000 on March 31, 2005, the profit for the year was
(a)Rs.30,000 (b) Rs.35,000 (c) Rs.40,000 (d) Rs.25,000 (e) Rs.27,000.
(1 mark)
< Answer >
16. Current liabilities are such obligations which are to be satisfied within a period of
(a) Three months (b) Six months (c) One year
(d) Two years (e) Three years.
(1 mark)
< Answer >
17. Consider the following data pertaining to AB Ltd.:
Particulars Rs.
Cost of the machinery purchased on April 01, 2004 6,60,000
Installation charges 40,000
Market value as on March 31, 2005 8,00,000
While finalizing the annual accounts, if the company values the machinery at Rs.8,00,000, which
of the
following concepts is violated by the company?
(a) Cost (b) Matching (c) Realisation
(d) Periodicity (e) Business Entity.
(1 mark)
< Answer >
18. Which of the following statement is false?
(a) Capital Reserve arises out of capital profits
(b) Revenue Reserves are available for distribution as profit
(c) Specific Reserve is created out of capital profit
(d) General Reserves are not created for any specific purpose
(e) Credit balance in Profit & Loss Account is a Revenue Reserve.
< Answer >
(1 mark)
19. Which of the following is not a contingent liability?
(a) Claims against the company not acknowledged as debts
(b) Arrears of fixed cumulative dividends
(c) Prolonged illness of Chairman
(d) Liability on account of bills discounted
(e) Uncalled liability on shares partly paid.
(1 mark)
< Answer >
20. Consider the following data pertaining to Wren Ltd. for the year 2004-2005:
Particulars Rs.
Provision for doubtful debts as on April 01, 2004 4,000
Sundry debtors as on March 31, 2005 1,50,000
If a provision equal to 5% is to be created on the sundry debtors, the charge against profit and
loss
account for the year ended March 31, 2005 is
(1 mark)
< Answer >
21. The opening inventory is
(a) Net purchases minus closing inventory
(b) Net purchases minus the cost of goods sold
(c) Total goods available for sale minus net purchases
(d) Total goods available for sale minus the cost of goods sold
(e) Total goods available for sale minus closing inventory.
(1 mark)
< Answer >
22. Consider the following data with regard to plant and equipment pertaining to Mittal Ltd.:
Cost of the plant (Rs.) 5,00,000
Installation charges (Rs.) 30,000
Estimated useful life (years) 8
Scrap value (Rs.) 50,000
If the firm follows the straight line method of depreciation, the rate of depreciation is
(a) 5.25% (b) 6.00% (c) 9.50% (d) 10.10% (e)
11.32%.
(2 marks)
< Answer >
23. Which of the following is a capital expenditure?
(a) Salaries (b) Purchase of computer for office use
(c) Salaries to computer staff (d) Depreciation on computer
(e) Royalty paid.
(1 mark)
< Answer >
24. The profits of Karunya Ltd. for the past 5 years are as under:
Year Rs.
2000-2001 75,000
2001-2002 3,00,000
2002-2003 3,46,500
2003-2004 4,53,000
< Answer >
2004-2005 7,42,500
The company noticed the following errors, while computing the weighted average profits for the
purpose of valuation of goodwill:
· The profit for the year 2004-2005 includes profit of Rs.22,500 on sale of plant.
· The depreciation charged for the year 2004-05 was excess by Rs.3,000.
The weighted average profit of the company to be considered for valuation of goodwill is
(a) Rs.4,76,100 (b) Rs.4,82,600 (c) Rs.3,83,400
(d) Rs.5,00,100 (e) Rs.4,74,100.
(2 marks)
25. When purchase consideration is greater than Net Asset Value, it is to be adjusted against
(a) Capital Reserve (b) Goodwill (c) Profit & Loss Account
(d) Preliminary Expenses (e) Promoters’ funds.
(1 mark)
< Answer >
26. The Balance Sheet of Snigdha Ltd. as on March 31, 2005 is as under:
Share capital: Land and building 4,00,000
Equity shares of Rs.100 each 5,00,000 Plant and machinery 3,00,000
12% Preference shares of Rs.10 each
(issued at a discount of 10%)
3,00,000 Furniture and fixtures 2,50,000
Reserves and surplus: Investments 2,25,000
General reserve 1,50,000 Sundry debtors 1,00,000
Profit and loss account 2,50,000 Inventories 1,50,000
18% Debentures 2,00,000 Cash 50,000
14,75,000 14,75,000
The 12% preference shares are redeemable at a premium of 10% during the month of April 2005.
The
company wishes to maintain the cash balance at Rs.25,000. For the purpose of redemption of
preference
shares, it proposed to sell the investments for Rs.2,00,000. The company proposes to issue
sufficient
number of equity shares of Rs.100 each at a premium of 5% to raise required cash resources. The
number of equity shares to be issued is
(a) 1,500 (b) 1,000 (c) 685 (d) 2,000 (e) 750.
(2 marks)
< Answer >
27. Great Tyres Ltd. issued 80,000 shares of Rs.10 each at a premium of 25% payable Rs.2 on
application,
Rs.4.50 (including premium) on allotment and the balance on call. Applications were received
for
1,92,800 shares and allotment was made as under:
· Applicants for 50,800 shares were allotted 30,480 shares pro-rata.
The surplus money, if any, would be refunded only after utilizing the excess received on
application
towards the payment of allotment dues. The amount refunded to the applicants is
(a) Rs.Nil (b) Rs.7,400 (c) Rs.1,92,800
(d) Rs.1,34,400 (e) Rs.2,25,600.
(2 marks)
< Answer >
28. Consider the following information pertaining to M/s.Rainbow Ltd. as on March 31,2005: <
Answer >
Share capital 5,00,000 Land and building 3,60,000
(5,000 shares Rs .100 each) Plant and machinery 2,70,000
Reserves and surplus 4,60,600 Furniture 1,75,000
Sundry creditors 50,000 Inventories 90,000
Short term loan 80,000 Sundry debtors 60,000
Loans and advances 75,000
Cash on hand 10,000
Cash at bank 35,000
Preliminary expenses 15,600
10,90,600 10,90,600
The assets are to be revalued as under for the purpose of valuation of shares:
· Plant and machinery is to be revalued downwards by 10%.
· Furniture is to be valued at Rs.1,80,000.
· Provision of 5% is to be provided for doubtful debts.
The value of share of M/s.Rainbow Ltd. is
(a) Rs.220 (b) Rs.197 (c) Rs.184 (d) Rs.223 (e)
Rs.192.
(2 marks)
29. The authorized share capital of Growth Ltd. is 10,00,000 shares of Rs.10 each. The company
is
planning to raise funds by making rights issue of equity shares to finance its expansion. The
Issued/Called-up/Paid-up share capital of the company is 5,00,000 shares of Rs.10 each. The
value of
its share is Rs.42. The company offers to its shareholders the right to buy 2 shares at Rs.11 each
for
every 5 shares held by them.
The share capital outstanding after the rights issue is
(a) Rs.70,00,000 (b) Rs.1,34,00,000 (c) Rs.50,00,000
(d) Rs.72,00,000 (e) Rs.1,00,00,000.
(2 marks)
< Answer >
30. The share capital of Jade Ltd. consists of 2,000 equity shares of Rs.10 each, Rs.5 paid -up
and 500 6%
cumulative preference shares of Rs.10 each fully paid. It is proposed that the Wye Ltd. shall
purchase
the whole of the capital of Jade Ltd.
The Balance Sheet of Jade Ltd. shows assets (exclusive of goodwill) Rs.30,000, outside
liabilities
Rs.8,000, profit and loss account credit Rs.7,000 and paid-up capital Rs.15,000.
The assets and liabilities are accepted at Balance Sheet figures and there are no arrears of
preference
dividend.
The value of equity share in Jade Ltd. is
(a) Rs.11.00 (b) Rs .8.50 (c) Rs.5.00
(d) Rs.10.00 (e) Rs.12.50.
(2 marks)
< Answer >
31. Tantrum Ltd. invited applications for 5,000 shares of Rs.10 each at a premium of Rs.2 per
share payable
as follows:
On application – Rs.5 (including premium)
On allotment – Rs.4
On final call – Rs.3
Allotment was made on pro rata basis to the applicants of 6,000 shares. Mr. Beejay to whom 60
shares
were allotted, failed to pay allotment money and call money. Mr. Raj, the holder of 100 shares,
failed to
pay call money. All these shares were forfeited after proper notice.
On forfeiture, the amount debited to share capital account and share premium account
respectively is
(a) Rs.1,600; Rs.320 (b) Rs.1,400; Rs.nil
(c) Rs.1,600; Rs.nil (d) Rs.1,120; Rs.320
< Answer >
(e) Rs.1,400; Rs.320.
(2 marks)
32. Lotus Ltd. has issued 10% Debentures at a discount of 10% redeemable at a premium of 10%
after five
years. Which of the following statements is true with regard to the debentures?
(a) 10% of the outstanding amount is redeemed every year
(b) The debentures are issued at a premium of 10%
(c) The debentures are issued at a discount of 30%
(d) 10% of the outstanding amount shall not be redeemed
(e) The debentures carry interest rate of 10%.
(1 mark)
< Answer >
33. Which of the following is false?
(a) A company can issue convertible debentures
(b) A company can issue debentures with voting rights
(c) A company can buy its own shares
(d) A company can buy its own debentures
(e) There are legal restrictions on use of premium collected on issue of shares.
(1 mark)
< Answer >
ANS---
1. Answer : (c)
Reason : The retirement of the chairman of a company, even though it has far reaching
consequences on the
health of the company, is not accounted in recognition of money measurement concept. This
concept
envisages that a record is made only of information that can be expressed in monetary terms. As
retirement of the chairman cannot be expressed in monetary terms, the same is not accounted.
Conservatism concept envisages that recognition of revenue requires better evidence than
recognition
of expenses. According to business entity concept, business is treated separately from its owners.
A
business entity is assumed to carry on its operations forever under going concern concept. All
material
items should be separately disclosed under materiality concept. Alternative (a) is the correct
answer.
< TOP >
2. Answer : (b)
Reason : Balance sheet is prepared as on a particular date whereas profit and loss account, cash
flow statement,
income and expenditure account are prepared for a particular period.
< TOP >
3. Answer : (c)
Reason : The fixed assets are recorded at their cost and not at their market value in recognition of
cost concept.
(c) is the correct answer.
< TOP >
4. Answer : (b)
Reason : If sales day book is undercast, gross profit will be decreased, simultaneously net profit
will be
decreased with the same amount. Therefore (b) is true.
< TOP >
5. Answer : (a)
Reason : Salaries account is a nominal account which is closed at the end of the year by transfer
to profit and loss
account. Hence the answer is (a). The other alternatives i.e. plant and machinery account,
debentures
account, sundry debtors account, investments account are real or personal accounts which will
not be
closed at the end of the financial year.
< TOP >
6. Answer : (e)
Reason : Credit balance of bank column of cashbook represents bank overdraft and is a liability.
Hence the
answer is (e). Credit balance of bank passbook, Debit balance of bank column of cashbook and
Debit
balance of cash column of cashbook represents favorable balance. The debit balance of discount
column of cash book represents an expense.
< TOP >
7. Answer : (e)
Reason :
Rs.
Payment made to creditors 10,00,000
Closing balance 40,000
10,50,000
Less : Credit purchase 9,25,000
Opening balance 1,25,000
< TOP >
8. Answer : (b)
Reason : Amount of stationery to be charged to profit and loss account for the year ended March
31, 2005:
Particulars Rs.
Opening balance of stationery 4,000
Add: Cash purchases of stationery included
in general expenses 36,000
Credit purchases of stationery included in purchases 9,000
49,000
< TOP >
Less: Closing balance of stationery 3,000
46,000
Less: Stationery consumed by the proprietor 5,000
Stationery debited to profit and loss account 41,000
9. Answer : (c)
Reason : A credit sale to Shivenra should be recorded as
Shivndra’s account Dr. To Sales account. Thus, shivendra’s account is debited.
< TOP >
10. Answer : (c)
Reason :
Cash at Bank Rs.
Opening Cash 42,000
Add : Collections from debtors 88,000
1,30,000
Less : Paid to creditors 24,000
Salaries paid 8,000
Closing cash balance at Bank 98,000
< TOP >
11. Answer : (d)
Reason : Posting of wrong amount in the ledger in one account concerned leads to mismatch in
trial balance as
the wrong amount is recorded only in one account. Omission of an entry in the journal, recording
of
wrong amount in the journal, recording of wrong account in the journal, posting of wrong
amount in all
the accounts affected will not cause a mismatch in trial balance because the mistake is effected
on both
sides.
< TOP >
12. Answer : (b)
Reason :
Date
Quantity
(Kg)
Rate
per
kg.
(Rs.)
Amount
(Rs.)
Quantity
(Kg)
Rate per kg.
(Rs.)
Amount
(Rs.)
Quantity
(Kg)
Rate
per
kg.
(Rs.)
Amount
(Rs.)
01-06-05 500 22.80 11,400
02-06-05 400 24 9,600 900 23.33 21,000
10-06-05 600 25 15,000 1,500 24.00 36,000
25-06-05 1,000 24 24000 500 24.00 12,000
< TOP >
13. Answer : (b)
Reason : Trading and profit & loss account of Mythili Ltd. for the year ended March 31, 2005
Dr. Cr.
To Purchases 6,72,000 Less: Returns 22,000 15,93,000
Less : Returns 49,000 6,23,000
By Advertisement (free
samples)
5,000
To Gross profit c/f 9,77,000 By Closing stock 50,000
16,48,000 16,48,000
To Bad debts 19,000 By Gross Profit 9,77,000
To Salaries and wages 5,10,000
By Interest on
investments
16,000
To Intereston bank overdraft 30,000 (Accrued Income @ 8%
< TOP >
on Rs.2,00,000)
Add:Outstanding 9,000 39,000 By Discount received 21,000
To Advertisement 1,20,000
Add : Free samples 5,000 1,25,000
To Fire insurance premium 18,000
Less : Prepaid 1,500 16,500
To Discount allowed 12,000
To General expenses 54,000
To Outstanding interest on debentures 33,600
To Depreciation
Plant & machinery (20%) 1,34,400
Furniture & fixtures (12%) 34,200
To Provision for discount on debtors 9,000
To Net profit 27,300
10,14,000 10,14,000
14. Answer : (b)
Reason : The amount debited to profit and less account in respect of provision for doubtful debts
is Rs.8,700.
Dr. Provision for bad and doubtful debts Cr.
To Bad debts (Sinha) 3,800 By balance b/f 5,600
To Provision c/f 10,500 By Profit and loss account 8,700
14,300 14,300
Computation of suitable provision for the year ending March 31,2003
Particulars Rs.
Gupta Rs.9,000 Expected to realize only 80% hence doubt full part 1,800
PatelRs.8,000 Expected to realize only 60%. 3,200
Iyer Rs.5,500 Filed Insolvency petition and the recovery chances are remote 5,500
< TOP >
15. Answer: (d)
Reason: Amount (Rs.)
Balance in capital account on 31.3.95 3,10,000
Less : Fresh capital brought in 50,000
2,60,000
Add : Drawings 10,000
Add : Goods taken for personal use 5,000
2,75,000
Less : Capital at the beginning 2,50,000
Profit for the year 25,000
< TOP >
16. Answer : (c )
Reason : Current liabilities are such obligations which are to be satisfied within one year.
< TOP >
17. Answer : (a)
Reason : In terms of cost concept the value of an asset is to be determined on the basis of
acquisition cost.
Valuation of machinery at market value is in violation of cost concept unless the machine is
actually
sold, realizable value will give only a hypothetical figure. Market value is highly subjective
because to
know the value of the asset one has to chase the uncertain future. The other concepts matching
concept
(b) deals with matching costs with revenue, Realization concept (c) deals with recognition of
income at
various levels of production, Periodicity concept (d) explains how the accounting information is
to be
< TOP >
reported at regular intervals to foster comparability, Business entity concept (e) explains the
owner is
different from the business entity. Thus, the concepts (b), (c), (d), and (e) do not explain how the
fixed
assets are to be recorded.
18. Answer : (c)
Reason : Specific Reserve comes under Revenue Reserve and is created out of revenue profits.
Capital Reserve
arises out of capital profits. Revenue Reserves are available for distribution as profit General
Reserves
are not created for any specific purpose. Credit balance in Profit & Loss A/c is a Revenue
Reserve
< TOP >
19. Answer : (c)
Reason : Prolonged illness of Chairman is not a contingent liability. All other options viz, claim
against the firm
not acknowledged as debt, arrears of fixed cumulative dividend, liability on account of bills
discounted
and uncalled liability on shares partly paid are contingent liabilities.
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20. Answer : (d)
Reason :
Particulars Rs.
Opening Provision 4,000
Shortfall of provision 6,000
Provision required 5% of Rs.1,40,000
(Rs.1,50,000 – Rs.10,000) 7,000
Charge against profit and loss account 13,000
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21. Answer : (c)
Reason : Total goods available for sale includes opening inventory and net purchases. Hence the
opening
inventory is total goods available for sale minus net purchases. Hence (c) is the answer. Net
purchases
minus closing inventory indicates the cost of goods sold. Net purchases minus the cost of goods
sold
gives the difference of closing stock and opening stock. Total goods available for sale minus the
cost of
goods sold is the closing inventory. Total goods available for sale minus closing inventory is the
cost of
goods sold.
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22. Answer : (e)
Reason : Depreciation =
Plant value-Scrapvalue
Life of theplant
=
(Rs.5,00,000+Rs.30,000) Rs.50,000
8years
-
=
Rs.5,30,000 Rs.50,000
8years
-
=
Rs.4,80,000
Rs.60,000
8years
=
=
Rs.60,000
100
5,30,000
´
= 11.32%
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23. Answer : (b)
Reason : Purchase of computer for office use is a capital expenditure. Salaries to computer staff,
Depreciation on
computer, Royalty paid etc. are items of revenue expenditure.
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24. Answer : (a)
Reason :
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2000-
2001
Rs.
2001-
2002
Rs.
2002-
2003
Rs.
2003-
2004
Rs.
2004-
2005
Rs.
Total
Rs.
Profit 7,42,500
Add: Depreciation
excess provided
3000
Less: profit on sale
of plant 22,500
Adjusted profits 75000 300000 346500 453000 723000
Weights 1 2 3 4 5
Profits × weights 75000 600000 1039500 1812000 3615000 7141500
Weighted average profits = Rs.71,41,500 / 15 = Rs.4,76,100
25. Answer : (a)
Reason : If the purchase consideration in more than net asset value, it is as be adjusted to capital
reserve account,
therefore (a) is correct.
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26. Answer : (b)
Reason : Dr. Cash account Cr.
To Balance b/d. 50,000 By Preference shareholders
(Rs.3,00,000 x 110%)
3,30,000
To Investments 2,00,000 By Balance c/d. 25,000
To Equity shares
(including premium) 1,05,000
3,55,000 3,55,000
No. of equity shares = Rs.1,05,000 / Rs.105 = 1,000 shares.
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27. Answer : (b)
Reason :
Shares
applied
Shares
allotted
Application
money
received
Rs.
Application
money due
Rs.
Excess money
Rs.
Allotment
money due
(including
premium)
Rs.
Surplus /
(deficit)
Rs.
(1) (2) (3)=(1)×Rs.2 (4)=(2) ×
Rs.2
(5)=(3) –(4) (6)=(2)×Rs.4.5 (7) = (5)–
(6)
50,800 30,480 1,01,600 60,960 40,640 1,37,160 (96,520)
96,000 28,400 1,92,000 56,800 1,35,200 1,27,800 7,400
46,000 21,120 92,000 42,240 49,760 95,040 (45,280)
1,92,800 80,000 3,85,600 1,60,000 2,25,600 3,60,000
Hence the amount of refund is Rs.7,400
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28. Answer : (c)
Reason :
Particulars Rs. Rs.
Land and building 3,60,000
Plant and machinery (Rs.2,70,000 ´ Rs.90%) 2,43,000
Furniture 1,80,000
Inventories 90,000
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Sundry debtors (Rs.60,000 ´ 95%) 57,000
Loans and advances 75,000
Cash 10,000
Bank 35,000
Less: 10,50,000
Short term loan 80,000 1,30,000
Net assets 9,20,000
Value of share =
Rs.9,20,000 Rs.184
5,000
=
29. Answer : (a)
Reason : Present capital Rs.50,00,000
Rights issue 5,00,000 x
2
5 x Rs.10 = Rs.20,00,000
Total share Capital Rs.70,00,000
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30. Answer : (b)
Reason:
Particulars Rs.
Assets 30,000
Less: Liabilities 8,000
Net Assets 22,000
Less: Preference shares capital 5,000
Amount available for equity shares 17,000
Value of each equity share Rs.17,000 ¸ 2000 = Rs.8.50.
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31. Answer: (c)
Reason: The journal entry is
Share capital account (160 x 10) Dr. Rs.1,600
To Share allotment account (60 x 3) Rs. 180
To Share final call account (160 x 3) Rs. 480
To Share forfeiture account (240 + 100 x 7) Rs. 940
(Forfeiture of 160 shares on which 60 shares paid only Rs.4 per share and 100 shares paid only
Rs.7 per
share.)
Shares allotted = 60
Shares applied =
6,000
60 72
5,000
´=
= 72 x 5 = Rs.360 – 120 = 240.
Amount debited to share capital is Rs.1,600 and share premium account is Rs.Nil.
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32. Answer : (e)
Reason : The debentures carry rate of interest of 10%.
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33. Answer : (b)
Reason : No company shall, after the commencement of the Companies Act, 1956, issue any
debentures carrying
voting rights at any meeting of the company, whether generally or in respect of particular classes
of
business.
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Financial Accounting - I (MB131): April 2006

1. In the event of conflict between the International Accounting Standards and the local
standards, which
among the following will prevail?
(a) The rule of the Company Law will prevail
(b) The rule of the Securities Exchange Board of India prevails
(c) The rule of the International Accounting Standards prevails
(d) The rule of local standards, laws and regulations shall prevail
(e) The rule of the Central Government will prevail.
(1 mark)
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Answer
>
2. Under which of the following conditions is a balance sheet said to be window dressed?
(a) When income is accounted for on accrual basis
(b) When prepaid expenses are considered and accounted for in the preparation of final accounts
(c) When an adequate provision for expenses and potential losses is not made
(d) When a provision for the probable loss is made in advance of its occurrence
(e) When the assets and liabilities in the Balance Sheet are reflected at Historical cost.
(1 mark)
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Answer
>
3. The transactions pertaining to purchase of fixed assets and investments on credit, are recorded
in
(a) Simple cash book (b) Double cash book (c) Purchase
book
(d) Journal proper (e) Bills payable book.
(1 mark)
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Answer
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4. An asset, the value of which depends on the earning capacity of the business concern is
(a) Investments (b) Debtors (c) Fixed
asset
(d) Goodwill (e) Cash at Bank.
(1 mark)
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Answer
>
5. Rights shares are the shares
(a) Issued by a newly formed company
(b) Legally issued to the public at large
(c) Offered to the existing equity shareholders
(d) That have a right of redemption
(e) That have a right to cumulative dividends.
(1 mark)
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Answer
>
6. The maximum amount beyond which a company is not allowed to raise funds by issue of
shares is
(a) Issued capital (b) Reserve capital (c) Authorised
capital
(d) Subscribed capital (e) Paid-up capital.
(1 mark)
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Answer
>
2
7. Which of the following methods of valuation of goodwill uses the present value factor?
(a) Capitalization of average profits methods
(b) Capitalization of super profits method
(c) Annuity method of super profits
(d) Number of years’ purchase of average profits method
(e) Super profits method.
(1 mark)
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Answer
>
8. The process of converting cost of intangible assets to expense is called
(a) Depreciation (b) Amortization (c)
Depletion
(d) Deterioration (e) None of the above.
(1 mark)
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Answer
>
9. Which of the following methods is/are followed for amortization of intangible assets?
(a) Straight-line method (b) Written down method
(c) Sum of the years’ digits method (d) Annuity method
(e) Both (a) and (b) above.
(1 mark)
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Answer
>
10.When depreciation appears in the Trial balance, in which of the following statements will it
be shown?
(a) Trading Account (b) Profit and loss account
(c) Profit and loss appropriation account (d) Balance Sheet
(e) Notes to accounts.
(1 mark)
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Answer
>
11.The method of inventory valuation which enables the firm to even out the erratic movements
in the
purchase prices to the best extent possible, is
(a) Last in first out method (b) First-in-first out method
(c) High-in-low out method (d) Simple average method
(e) Weighted Average Method.
(1 mark)
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Answer
>
12.Certain fundamental accounting assumptions underlie the preparation and presentation of
financial
statements and hence are not specifically stated because their acceptance and use are assumed.
Which
among the following is not a fundamental accounting assumption?
(a) Going concern concept (b) Consistency (c) Accrual
(d) Conservatism (e) Both (a) and (b) above.
(1 mark)
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Answer
>
13.The discount allowed on re-issue of forfeited shares is debited to
(a) General reserve account (b) Capital reserve account
(c) Revaluation reserve account (d) Capital redemption reserve account
(e) Forfeited shares account.
(1 mark)
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Answer
>
14.Which of the following cannot be utilized for the redemption of Preference Shares of a
company?
(a) Proceeds of fresh issue of shares
(b) Securities premium on fresh issue of shares
(c) General reserve
(d) Profit and loss account
(e) Dividend equalization reserve.
(1 mark)
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Answer
>
3
15.Which of the following data is essential for calculation of value of an equity share under the
intrinsic
value method?
(a) Normal rate of return (b) Expected rate of return
(c) Market value per share (d) Dividend per share
(e) Net equity.
(1 mark)
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Answer
>
16.The cum-interest/cum-dividend quotation implies
(a) The purchaser pays a higher price than the normal price
(b) The right of receiving accrued interest/dividend is retained by the seller
(c) The seller charges a higher price
(d) The right of receiving accrued interest/dividend is passed on to the purchaser
(e) (a), (c) and (d) above.
(1 mark)
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Answer
>
17.The cumulative preference shareholders enjoy preferential treatment over equity shareholders
with
regard to
(a) Priority in payment of dividend (b) Return of capital
(c) Voting rights (d) Cumulation of dividends
(e) (a), (b) and (d) above.
(1 mark)
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Answer
>
18.The accounting based on Real capital maintenance concept (which considers the general price
rise) is
called the
(a) Current purchasing power Accounting
(b) Current Cost Accounting
(c) Cost accounting
(d) Financial Accounting
(e) Managerial Accounting.
(1 mark)
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Answer
>
19.Share allotment denotes a stage subsequent to
(a) Share Application (b) Share forfeiture (c)
Share redemption
(d) Share First call (e) Share second call.
(1 mark)
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Answer
>
20.The accounting entry involved, for issue of shares to promoters for the services rendered by
them is
(a) Debit goodwill account and credit share capital account
(b) Debit cash account and credit share capital account
(c) Debit promoters’ account and credit share capital account
(d) Debit share capital account and credit cash account
(e) Debit goodwill account and credit calls in arrear account.
(1 mark)
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Answer
>
21.Premium on redemption of debentures account is
(a) A real account (b) A nominal account (c) A personal
account
(d) An asset (e) A capital reserve.
(1 mark)
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Answer
>
4
22.Which of the following statements is true?
(a) Going concern concept assumes that business will be carried on for a definite period
(b) Time period concept facilitates the comparison of the results of one accounting period of a
business with that in the past
(c) The capital losses need not be deducted to ascertain net income
(d) Provision for bad and doubtful debts is created in recognition of conservatism concept
(e) Materiality concept states that all business transactions are to be recorded how so ever
insignificant they may be.
(1 mark)
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Answer
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23.Which of the following accounts appear(s) in the Balance Sheet of a business?
I. Stock at the end of the financial year.
II. Stock at the beginning of the financial year.
III. Drawings.
IV. Prepaid Rent.
V. Interest received but not yet earned.
(a) Only (I) above (b) Only (III) above
(c) Both (I) and (III) above (d) (I), (III), (IV) and (V) above
(e) All (I), (II), (III), (IV) and (V) above.
(1 mark)
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Answer
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24.Underwriting commission will not be paid on the amount of shares taken by
(a) Promoters (b) Directors (c)
Employees
(d) Directors’ friends (e) All of the above.
(1 mark)
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Answer
>
25.The portion of the acquisition cost of the asset yet to be allocated is known as
(a) Written down value (b) Accumulated value
(c) Realisable value (d) Salvage value (e) Residual
value.
(1 mark)
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Answer
>
26.Which of the following items is/are covered under Accounting Standard-2 with regard to
accounting
for inventory?
I. Financial instruments held as stock-in-trade.
II. Work in progress arising under construction contracts.
III. Work in progress of service providers.
IV. Work in progress of a manufacturing industry.
(a) Only (I) above (b) Only (IV) above
(c) Both (I) and (II) above (d) Both (III) and (IV) above
(e) (II), (III) and (IV) above.
(1 mark)
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Answer
>
27.Which of the following statements is false?
(a) Bonus issue can be made out of share premium account
(b) Bonus issue shall not be made within 12 months of any public issue
(c) Bonus issue shall not be made in lieu of dividend
(d) Reserves created out of revaluation of fixed assets can be used for bonus issue
(e) Bonus shares should not be issued unless partly paid shares are made fully paid.
(1 mark)
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Answer
>
5
28.The money received on reissue of forfeited shares is inadvertently credited to ‘Capital
Suspense’
account. The adjustment entry involved in reversing the capital suspense account is
(a) Debit to Capital Suspense account (b) Credit to Share Capital account
(c) Debit to Share forfeiture account (d) Both (a) and (b) above
(e) (a), (b) and (c) above.
(1 mark)
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Answer
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29.Which of the following assets is/are to be valued at the lower of cost and net realizable value?
(a) Goodwill (b) Inventories (c) Investments
(d) Sundry debtors (e) Fixed Assets.
(1 mark)
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Answer
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30.Which of the following statements is true?
(a) Bank charges increase debit balance shown as per bank column of the cash book
(b) Bank charges increase debit balance as per bank pass book
(c) A cash sale of a non-trading asset is recorded in the journal proper
(d) Cash discount allowed by the business will appear on the debit side of the debtor’s account
(e) Bank reconciliation statement is prepared by a bank.
(1 mark)
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Answer
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31.The balances of which of the following accounts do not disappear, once they are
debited/credited to
Trading Account.
(a) Sales (b) Purchases (c) Inward returns
(d) Closing stock (e) Outward returns.
(1 mark)
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Answer
>
32.On issue of shares, the application money should not be less than
(a) 2.5% of the nominal value of shares (b) 2.5% of the issue price of
shares
(c) 5.0% of the nominal value of shares (d) 5.0% of the issue price of
shares
(e) 10.0% of the nominal value of shares.
(1 mark)
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Answer
>
33.Which of the following methods is not a practical way of realizing revenue?
(a) Delivery method (b) Percentage-of-completion method
(c) Production method (d) Installment method
(e) Moving average method.
(1 mark)
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Answer
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34.According to the SEBI guidelines, before the redemption of debentures having a maturity of
more than
18 months, the debenture redemption reserve created, should be at least equivalent to
(a) 10% of the debenture issue (b) 25% of the debenture issue
(c) 30% of the debenture issue (d) 50% of the debenture issue
(e) 75% of the debenture issue.
(1 mark)
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Answer
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35.The periodical total of a purchase returns book is recorded to the
(a) Debit side of the purchases account
(b) Debit side of the purchases returns account
(c) Credit side of the purchases account
(d) Credit side of the purchases returns account
(e) Credit side of creditors account.
(1 mark)
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Answer
>
6
36.In Retail Inventory Method, if the markup selling price is decreased but not below the original
selling
price, it is known as
(a) Markup cancellation (b) Markdown (c) Markdown cancellation
(d) Net markup (e) Net markdown.
(1 mark)
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Answer
>
37.According to which of the following accounting concepts, are the shareholders treated as
creditors for
the amount they pay on shares?
(a) Cost concept (b) Duality concept (c) Going concern concept
(d) Money measurement concept (e) Business entity concept.
(1 mark)
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Answer
>
38.The profit or loss on own debentures is to be accounted for at the time of
(a) Purchase of own debentures (b) Subsequent interest payment
(c) Cancellation of own debentures (d) Original issue of debentures
(e) Liquidation of the company.
(1 mark)
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Answer
>
39.The statement which helps an accountant to assess the arithmetical accuracy of the accounting
process
is the
(a) Balance sheet (b) Profit and loss account
(c) Cash book (d) Trial balance (e) Bank reconciliation statement.
(1 mark)
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Answer
>
40.Which of the following is a liability of a firm?
(a) Debit balance of discount column of cash book
(b) Credit balance of bank pass book
(c) Debit balance of bank column of cash book
(d) Debit balance of cash column of cash book
(e) Credit balance of bank column of cash book.
(1 mark)
<
ANSWER-

1. Answer : (d)
Reason : If there is a conflict between the International Accounting Standards and the local
standards or the
local laws and regulations, the local standards, laws and regulations will prevail.
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TOP
>
2. Answer : (c)
Reason : Options (a), (b), (d) and (e) are a part of the accounting principles and concepts which
need to be
adhered to in the preparation of Financial statements. Hence the adherence to these concepts
does not
result in window dressing the financial statements. However, provision for expenses and
potential
losses is to be made as per accounting concept of ‘conservatism’. Not providing such provision
leads
to window dressing since the profits get inflated.
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>
3. Answer : (d)
Reason : Journal proper is used to record all transactions which cannot be included in the Cash
book or any
other subsidiary books. Eg. Purchase or sale of fixed assets and investments on credit, adjusting
entries and rectification entries.
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TOP
>
4. Answer : (d)
Reason : The value of investments, debtors, Fixed assets and cash at bank are not dependent on
the earning
capacity of the firm. Goodwill an intangible asset, depends on the earning capacity of the firm.
The
higher the profits or earnings expected the higher the value of goodwill.
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>
5. Answer : (c)
Reason : Rights shares are the shares that are offered to the existing equity shareholders (c).
These are not
issued by a newly formed company (a) They are not the shares issued to the public at large. They
are
issued only to the existing shareholders. (b). It does not indicate the right of redemption of shares
issue
(d). These are not the shares with cumulative dividend right.
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>
6. Answer : (c)
Reason : The maximum amount beyond which a company is not allowed to raise funds by issue
of shares is
called nominal capital or authorized capital. The issued capital is that part of the nominal capital
issued to the public and subscribed capital is that part of the issued capital which is subscribed by
the
public. Paid up capital is the amount which is paid-up by the shareholders. Reserve capital is that
capital which will be called-up only in case of liquidation.
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>
7. Answer : (c)
Reason : Annuity Method of super profits © of valuation of goodwill uses the present value
factor since there is
heavy loss of interest. Capitalisation of average profits method (a) is not the correct answer since
there
is not such method through which goodwill can be assigned a value. Capitalisation of super
profits
method (b) tries to find out the amount of capital needed for earning the super profit and it does
not
consider the present value factor and hence is not the correct answer. No. of years’ purchase of
average profits method (d) is also known as simple profit method where in the goodwill is
calculated
with the help of the average annual profit expected to accrue in future based on past profits and
the
number of years of purchase as agreed by the parties and is not the correct answer. Number of
years of
purchase of super profits method (e) where in super profits are computed taking into account the
average profits and the normal rate of return in the similar type of industry based on the capital
employed in the business the difference between the average profit and the normal return is the
super
profit an is multiplied with the number of years’ purchase as agreed by the parties. And it is not
the
correct answer. Thus, alternative (c) is the correct answer.
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17
8. Answer : (b)
Reason : Amortization is the method of converting cost of intangible assets to expense.
Intangible assets like
patents, trademarks, franchises are amortized over a period of time.
The other alternatives
(a) Depreciation is the process of allocating to expense the cost of fixed assets over its useful life
in
a rational and systematic manner.
(c) Depletion is the process of allocating the cost of natural resources like coal petroleum etc. to
expense in a rational and systematic manner.
(d) Deterioration is the physical process of wearing out.
Thus, the alternatives (a), (c), (d) and (e) are not relevant to intangible assets.
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9. Answer : (a)
Reason : Amortization of intangible assets signifies, the systematic writing down of the value of
the intangible
assets over its life. The method adopted is straight line method. The other alternatives written
down
value method, sum of the years’ digits method and Annuity method are used for depreciating the
value
of tangible fixed assets.
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>
10. Answer : (b)
Reason : When depreciation appears in the Trial balance, it is taken in the Profit and loss account
only. If
depreciation does not appear in the Trial balance but appears as an adjustment it appears in the
Profit
and loss account and is also reduced from Fixed assets to give double effect to the transaction.
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>
11. Answer : (e)
Reason : The advocates of this method feel that the ‘smoothing’ of purchase costs achieved by
the weighted
average method enable them to even out the erratic movements in the purchase prices to the best
possible extent.
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>
12. Answer : (d)
Reason : AS -1 discusses this issue where it lists out going concern concept, consistency concept,
and accrual
concept as fundamental accounting assumptions. Conservatism is a concept under GAAP but its
use
cannot be assumed.
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>
13. Answer : (e)
Reason : Discount allowed on re-issue of forfeited shares is debited to forfeited shares account. It
cannot be
debited to general reserve account, capital reserve account, revaluation reserve account and
capital
redemption reserve account.
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>
14. Answer : (b)
Reason : Securities Premium on fresh issue of shares (b) cannot be utilized for the redemption of
Preference
Shares of a company. As per the Companies Act, the redemption may be done from the proceeds
of
fresh issue of shares or undistributed profits which would otherwise be available for dividend.
Thus,
proceeds of fresh issue of shares (a), General reserve (c), Profit and loss account credit balance
and
Dividend equalization reserve are not the correct answers since they can be utilized for
redemption of
preference shares.
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>
15. Answer : (e)
Reason : Under intrinsic value method the value per share is arrived by valuing the assets of a
company and
deducting there from all the liabilities and claims of preference shareholders and dividing the net
assets by the number of shares. The value of net assets is nothing but the net equity.
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>
16. Answer : (e)
Reason : The cum-interest/cum-dividend quoting price of securities implies that interest accrued
or dividend
accrued is added to the value of the securities. Thus, it is more than the ex-interest price. The
purchaser pays a higher price than the normal price, the seller charges a higher price and the right
of
receiving dividend/interest is passed on to the buyer. Thus, alternatives (a), (c) and (d) are
correct. The
alternative (b) the right to receive the interest/dividend is retained by the seller is false.
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>
17. Answer : (e)
Reason : Cumulative Preference shareholders enjoy preferential treatment with regard to priority
in payment of
dividend, (a) repayment of capital (b) and also in case of insufficient profits their dividends
(undeclared) are cumulated (d) unlike equity shareholders. Equity shareholders enjoy voting
rights (c)
but not the preference shareholders. Thus, the alternatives (a), (b), and (d) are true in case of
cumulative preference shareholders.
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>
18
18. Answer : (a)
Reason : The accounting based on Real capital maintenance concept (which considers the
general price rise) is
called the Current Purchasing Power Accounting.
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>
19. Answer : (a)
Reason : Only when the share applications are received and the allotment is finalized is the share
allotment
money called for from the shareholders to whom share allotment is made.
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>
20. Answer : (a)
Reason : The accounting entry involved for issue of shares to promoters for the services rendered
by them is
debit goodwill account and credit share capital account (a). Since in recognition of the vale of
services
rendered by the promoters certain number of shares are allotted to them for which no
consideration is
coming forth and is debited to goodwill and credited to share capital account. Since no cash is
coming
forth and no obligation form the promoters to pay in future the entries in alternatives (b) and (c)
are
incorrect. It is issue of shares in lieu of the services rendered and hence share capital account is
not
debited and no payment of cash is involved and cash account cannot be credited and alternative
(d) is
incorrect. Since no payment from the directors is expected the question of calls in arrears does
not
arise and the alternative (e) is incorrect.
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>
21. Answer : (c)
Reason : Premium on redemption of debentures account represents the additional amount
payable to debenture
holders at the time of redemption of debentures and is a personal account.
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>
22. Answer : (d)
Reason : According to the conservatism concept, ‘anticipate no profit and provide for all possible
losses’.
Thus, in recognition of conservatism concept, provision for bad and doubtful debts is created in
anticipation of actual bad debts. The statements in other alternatives are incorrect because Going
concern concept assumes that business will be carried on for a indefinite period and not for
definite
period (a). The capital losses are to be deducted to ascertain net income (c). Materiality concept
states
that insignificant events need not be recorded and the statement in alternative (e) is incorrect.
Thus,
the correct answer is (d).
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23. Answer : (d)
Reason : Stock at the end of the financial year is the closing stock, drawings are the amounts
withdrawn by the
owner of the business for personal use; and prepaid rent is the amount of rent which is paid in
advance
of the current financial year and interest received but not yet earned is the amount of interest
received
which does not pertain to the current year are the items that appear in the balance sheet of a
business.
Stock at the beginning of the financial year is the opening stock that appears in Trading Account
of a
business and not in the balance sheet. Thus,(d), the combination of all the accounts in
alternatives (I),
(III), (IV) and (V) is the correct answer.
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24. Answer : (e)
Reason : According to Section.76 of the Companies Act, a company is authorized to pay
underwriting
commission only if the shares or debentures are offered to the general public. No underwriting
commission can be paid, if the issue is privately placed. The shares taken by Promoters,
Directors,
employees and directors’ friends cannot be considered as shares offered to the general public. As
such
no underwriting commission is payable on these shares.
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25. Answer : (a)
Reason : The portion of the acquisition cost of the asset yet to be allocated is known as written
down value (a)
Accumulated value (b) is the value of a thing accumulated over a period of time and not the
correct
answer. Realizable value (c) is the value which can be realized in the event of sale and is not
correct
answer. Salvage value (d) is the value of an asset that remains as scrap value after its usage over
a
period of time and is not the correct answer. Residual value (e) is the value remaining residue
and is
not the correct answer. Alternative (a) is the correct answer.
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26. Answer : (b)
Reason : The Accounting Standard-2 deals with regard to accounting for inventory. According to
the
statement, Work in progress of a manufacturing industry is covered. Thus, the alternative (b) is
the
correct answer. The items of inventory stated in other alternatives are not covered under AS-2
Financial instruments held as stock-in-trade: Work in progress arising under construction
contracts
and Work in progress of service providers. Hence, alternatives (a) reflecting statement (I); (c)
combination of statements (I) and (II); alternative (d) combination of statements (III) and (IV)
and
alternative (e) combination Of statements II, III and IV are incorrect.
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27. Answer : (d)
Reason : Reserves created out of revaluation of fixed assets should not be capitalized and hence
should not be
used for bonus issue. Bonus issue can be made out of share premium account. Bonus issue shall
not be
made within 12 months of any public issue and it shall not be made in lieu of dividend. Bonus
shares
should not be issued unless partly paid shares are made fully paid.
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28. Answer : (e)
Reason : The adjustment entry involved in reversing ‘Capital Suspense’ account which is
created, while placing
the amounts received on reissue of forfeited shares at a discount is (a) Debit to Capital Suspense
account (b) Credit to Share Capital account (c)Debit to Share forfeiture account and thus, the
combination of alternatives (a), (b) and (c) the alternative (e) is the correct answer.
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29. Answer : (b)
Reason : Inventories (b) are to be valued at the lower of cost and net realizable value. All the
other assets stated
in other alternatives are valued as per the cost concept. Goodwill (a) is a fixed intangible asset
and is
shown at the cost of its acquisition. Investments (c) are valued at cost or market value which is
ever
less. Sundry debtors (d) are shown at deducting any amount of bad debts and the provision
created for
bad and doubtful debts. Fixed Assets are valued at Cost only. Thus, the correct answer is (b).
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30. Answer : (b)
Reason : Bank charges increase debit balance as per bank pass book (b) is the correct answer.
The debit
balance as per bank pass book indicates the overdraft balance and the bank charges being the
expenditure increase the debit balance. The alternative (a) is incorrect because, the Bank charges
decrease the debit balance shown as per bank column of the cash book and do not increase the
debit
balance as debit balance as per cash book signifies the favourable balance. A cash sale of a
nontrading
asset is recorded in the journal proper is incorrect (c) because all in transactions involving cash
receipts and payments are recorded in the cash book Cash discount allowed by the business will
appear on the debit side of the debtor’s account (d) is incorrect because, the cash discount
allowed is a
reduction in the balance of a debtor’s account which appears on the credit side. Bank
reconciliation
statement is prepared by a bank (e) is incorrect because bank reconciliation statement is prepared
by
the business and not by the bank. Thus, (b) is the correct answer.
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31. Answer : (d)
Reason : The closing stock(d) is the value of goods which remain unsold at the end of the period
whose balance
appears once in trading account and once in balance sheet of the business. All other accounts
sales (a),
purchases (b), inward returns (c) and outward returns (e) are closed once they are absorbed by
the
trading account. Thus, (d) is the correct answer.
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32. Answer : (c)
Reason : According to the provisions of the Companies Act, the application money should not be
less than 5%
of nominal value of the shares. The other options given in a, b, d and e are not correct.
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33. Answer : (e)
Reason : The following methods are the practical ways of realizing revenue applying the
conservatism concept
and realization concept and the (a)Delivery method in case of sale of goods, (b)Percentage-
ofcompletion
method in case of rendering of services,(c) Production method in case of agriculture
produce and (d) Installment method in case of sale of goods on installments. Thus, these are the
various ways of recognizing revenue and the methods adopted to recognize revenue. Moving
average
method (e) is the method of valuing inventory and it is not the method adopted to recognize
revenue.
Thus, (e) is the correct answer.
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34. Answer : (d)
Reason : According to SEBI guidelines, a debenture issue having a maturity of more than 18
months
necessitates the creation of a special reserve known as debenture redemption reserve. Such
debenture
redemption reserve should be equivalent to at least 50% of the amount of debenture issue prior to
the
commencement of the redemption. Thus, (d) is the correct answer.
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35. Answer : (d)
Reason : Purchases account is a debit balance and purchase returns is a credit balance and the
total of purchase
returns will be recorded to the credit side of the purchase returns account.
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36. Answer : (a)
Reason : In retail inventory method, if the markup selling price is decreased but not below the
original selling
price, it is known as markup cancellation.
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37. Answer : (e)
Reason : Shareholders are treated as creditors for the amount they have paid on shares subscribed
by them
according to the business entity concept. According to cost concept, all transactions are recorded
at
cost. The duality concept emphasizes that assets = owner’s equity + outside liability. A business
entity
is assumed to carry on its operations forever under going concern concept. According to money
measurement concept, only those transactions that can be expressed in monetary terms are
recorded.
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38. Answer : (c)
Reason : The profit or loss on own debentures is to be calculated at the time of cancellation of
own debentures
and not at the time of purchase or next interest payment or original issue of debentures or
liquidation
of the company.
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39. Answer : (d)
Reason : The trial balance is prepared to assess the arithmetical accuracy. Hence the answer is
(d). The profit
and loss account is prepared to know the profit or loss of the concern. The balance sheet is
prepared to
know the financial position as on a particular date. The cashbook indicates the cash receipts and
payments. The bank reconciliation statement is prepared to reconcile the bank balance as per
cash
book and pass book.
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40. Answer : (e)
Financial Accounting – II (MB132) : April 2006
Financial Accounting – II (MB132) : April 2006

1. Which of the following will not form a part of ‘Miscellaneous Expenditure’ of the Balance
Sheet of a company?
(a) Preliminary expenses (b) Underwriting expenses
(c) Loss on sale of fixed assets (d) Discount on issue of shares
(e) Interest paid out of capital during construction.
(1 mark)
< Answer >
2. Which of the following is/are subjective method(s) of sales forecasting?
(a) Jury of executive opinion (b) Sales force estimate
(c) Regression Method (d) Time Series Projection Method
(e) Both (a) and (b) above.
(1 mark)
< Answer >
3. In accordance with AS -14, purchase consideration is the aggregate of shares and other
securities issued and the
payment made in the form of cash or other assets by the transferee company to the __________
of the transferor
company.
(a) Equity holder (b) Preference holders
(c) Debenture holders (d) Shareholders
(e) All (a), (b), (c) and (d) above.
(1 mark)
< Answer >
4. In the Consolidated Balance Sheet of a Holding Company, the value of minority interest
consists of the
proportionate share of minority shareholders in the
I. Nominal value of share capital of subsidiary company.
II. Reserves of the holding company.
III. Reserves and profits of the subsidiary company at the time of acquisition by the holding
company.
IV. Income of the holding company after its acquisition.
V. Income of the subsidiary company after its acquisition by the holding company.
(a) Only (I) above (b) Both (I) and (II) above
(c) Both (I) and (IV) above (d) (I), (III) and (IV) above
(e) (I), (III) and (V) above.
(1 mark)
< Answer >
5. Which of the following ratios measures the liquidity of a company?
(a) Debt-equity ratio (b) Interest coverage ratio
(c) Net profit margin (d) Acid-test ratio
(e) Return on equity.
(1 mark)
< Answer >
6. Under the Net Assets Method of calculating purchase consideration, assets and liabilities of
the transferor
company are taken over by the transferee company at
(a) Book value (b) Fair value
(c) Market value (d) Replacement value
(e) Agreed value.
(1 mark)
< Answer >
7. Which of the following is not shown by a funds flow statement on cash basis?
(a) The sources of cash (b) The uses of cash
(c) Decrease in cash (d) The net change in working capital
(e) Increase in cash.
(1 mark)
< Answer >
2
8. Which of the following is false with regard to Economic Value Added (EVA)?
(a) The computation of EVA involves a complex procedure
(b) EVA can be improved by downsizing profitable operations
(c) EVA is a residual income measure that subtracts the cost of capital from the operating profit
generated by a
business
(d) EVA can be used for making day-to-day decisions as well as for strategic planning
(e) EVA is one variation of residual income with adjustments in the method of calculation.
(1 mark)
< Answer >
9. Which of the following points can be considered as the starting point of financial forecasting?
(a) Forecasting material requirements
(b) Forecasting man power requirements
(c) Forecasting financial requirements
(d) Forecasting sales volume
(e) Forecasting assets requirements.
(1 mark)
< Answer >
10. Dividend paid by a subsidiary company out of pre-acquisition profits is
(a) Adjusted against investment in subsidiary account at the time of consolidation of accounts
(b) Adjusted against general reserve at the time of consolidation of accounts
(c) Credited to profit and loss account as revenue receipts at the time of consolidation of
accounts
(d) Ignored for consolidation purposes
(e) The claim of the shareholders of the holding company.
(1 mark)
< Answer >
11. When the identity of the specific statutory reserve created under the Purchase Method of
accounting for
amalgamation is no longer required to be maintained, the following entry is to be made
(a) Statutory Reserves A/c Dr.
To Amalgamation A/c
(b) Statutory Reserves A/c Dr.
To Amalgamation Adjustment A/c
(c) Amalgamation Adjustment Dr.
To Statutory Reserves A/c
(d) Share Capital A/c Dr.
(e) Statutory Reserves A/c Dr.
To Profit and Loss A/c
(1 mark)
< Answer >
12. Which of the following should be deducted from the share capital to find out paid-up capital?
(a) Calls-in-advance (b) Calls-in-arrears
(c) Share forfeiture (d) Discount on issue of shares
(e) Share premium.
(1 mark)
< Answer >
13. A funds flow statement is also known as
(a) Balance sheet (b) Profit and loss statement
(c) Income statement (d) Proforma statement
(e) Statement for the changes in financial position.
(1 mark)
< Answer >
14. Which of the following is not shown under the head ‘Share Capital’ in the Balance Sheet of a
company?
(a) Preference share capital (b) Equity share capital
(c) Calls-in arrear (d) Share forfeiture
(e) Preference dividend.
(1 mark)
< Answer >
15. Which of the following ratios indicates the ability of a firm to service the financial charges?
< Answer >
3
(a) Dividend pay-out ratio (b) Fixed charges coverage ratio
(c) Net profit margin ratio (d) Inventory turnover ratio
(e) Acid test ratio.
(1 mark)
16. As per schedule VI of the Companies Act, 1956, which of the following is not shown in the
Balance Sheet of a
company under the head ‘Fixed Assets’?
(a) Lease hold property (b) Development of property
(c) Railway sidings (d) Designs
(e) Unadjusted development expenditure.
(1 mark)
< Answer >
17. According to schedule VI of the Companies Act, 1956, which of the following assets is/are
shown under the head
‘investments’ in the balance sheet of a company?
I. Investments in the capital of partnership firms.
II. Investment in trust securities.
III. Investment in shares.
IV. Investment in debentures.
(c) Both (III) and (IV) above (d) (II), (III) and (IV) above
(1 mark)
< Answer >
18. In addition to the Managing Director or Manager of the company, who among the following
is/are responsible
for keeping proper books of accounts of a company?
I. Every legal advisor of the company.
II. Every banker of the company.
III. Every officer and other employee and agent in default.
IV. Every auditor of the company.
V. Every member of the company.
(a) Only (III) above (b) Both (I) and (IV) above
(c) Both (III) and (IV) above (d) Both (IV) and (V) above
(e) All (I), (II), (III), (IV) and (V) above.
(1 mark)
< Answer >
19. In which of the following situations, price earnings ratio is applied?
(a) To determine the financial risk of a business entity
(b) To determine the expected market value of the shares of a company
(c) To assess the earning potential of a company in the near future
(d) To examine the operational efficiency of a company
(e) To check how efficiently the assets are utilized by a firm.
(1 mark)
< Answer >
20. Dividends are usually paid as a percentage of
(a) Authorized share capital (b) Net profit
(c) Paid-up capital (d) Called-up capital
(e) Called-up share capital plus calls-in-advance less un-paid calls.
(1 mark)
< Answer >
21. As per schedule VI of the Companies Act, 1956, under which of the following heads is
‘Premium on issue of
debentures’ shown in the balance sheet of a company?
(a) Miscellaneous expenditure (b) Debentures
(c) Reserves and surplus (d) Current liabilities and provisions
(e) Current assets.
(1 mark)
< Answer >
22. While preparing proforma financial statement by using budgeted expense method
(a) The method of extrapolation is applied to assess the total expenses of the company in
proportion to increase
in sales
(b) The items related to various expenses are projected on the basis of the anticipated changes
< Answer >
4
(c) The future cost-sales ratio is assumed to be prevailed as per historical relationship
(d) A regression equation may be framed to project the costs during the future years
(e) All the expenses are increased by a fixed percentage.
(1 mark)
23. Declared dividend should be classified in the balance sheet as a
(a) Provision (b) Current liability (c) Reserve
(d) Current asset (e) Miscellaneous expenditure.
(1 mark)
< Answer >
24. According to which of the following accounting concepts consolidated financial statements
are prepared when a
parent-subsidiary relationship exists?
(a) Going concern (b) Business entity
(c) Materiality (d) Cost (e) Periodicity.
(1 mark)
< Answer >
25. The profit and loss appropriation section of the profit and loss account shows the
appropriation of profit and is
popularly known as
(a) Below the line (b) Above the line
(c) Profit and loss adjustment account (d) Specific reserve
(e) General reserve.
(1 mark)
< Answer >
26. According to the Companies Act, 1956, the companies have to compulsorily maintain their
books of account
only on
(a) Accrual basis (b) Cash basis
(c) Accrual basis or cash basis whichever is followed consistently
(d) Hybrid basis (e) Tax basis.
(1 mark)
< Answer >
27. No disclosure is required in consolidated financial statements in respect of
(a) Remittances-in-transit (b) Capital reserve
(c) Intra-group transactions (d) Goodwill
(e) Minority interest.
(1 mark)
< Answer >
28. Which of the following is/are true regarding the effect on return on equity, other things
remaining constant?
(a) Greater the amount of sales, lower the return on equity
(b) Lower the equity multiplier, lower the return on equity
(c) Higher the assets turnover, lower the return on equity
(d) Lower the debt-assets ratio, higher the return on equity
(e) Higher the return on assets, lower the return on equity.
(1 mark)
< Answer >
29. Which of the following increases the external funds required?
(a) An increase in the spontaneous liabilities to sales ratio
(b) A decrease in the retention ratio
(c) An increase in the assets turnover ratio
(d) A decrease in the short-term bank borrowings
(e) Both (b) and (d) above.
(1 mark)
< Answer >
30. In which of the following circumstances, subscribed capital is equal to issued capital?
(a) When the board of directors have called up the total amount payable by the shareholders
(b) When the maximum share capital which the company is authorized to issue is offered to
public
(c) When there are no calls-in-arears
(d) When all the shares offered to the public are taken up by the public
(e) Subscribed capital and issued capital are one and the same.
(1 mark)
< Answer >
31. Which of the following results in an increase in working capital of a company?
(a) An increase in outstanding rent (b) An increase in investments
< Answer >
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(c) A decrease in depreciation (d) A decrease in the amount of provision for tax
(e) An increase in gross fixed assets.
(1 mark)
32. Which of the following statements is/are true regarding inventory turnover ratio?
I. If the inventory turnover ratio has decreased from past, it means that either inventory is
decreasing or cost
of goods sold is increasing.
II. If a firm has an inventory turnover that is slower than for its industry, then the inventory
stocks may be low.
III. Low inventory turnover has impact on the liquidity of the business.
(c) Only (III) above (d) Both (I) and (III) above
(e) All (I), (II) and (III) above.
(1 mark)
< Answer >
33. Which of the following cannot be inferred from a funds flow analysis?
(a) Liquidity (b) Acquisition of non current assets
(c) External funds utilized (d) Pattern of financing
(e) None of the above.
(1 mark)
< Answer >
34. If the proposed dividend appears in the balance sheet of subsidiary company, while preparing
the Consolidated
Balance Sheet, the share of minority shareholders should be
(a) Shown under proposed dividend in the Consolidated Balance Sheet
(b) Credited to Investment account
(c) Credited to Consolidated Profit and Loss account
(d) Added to minority interest in Consolidated Balance Sheet
(e) Credited to Goodwill account.
(1 mark)
< Answer >
35. Which of the following equations is equal to Net Value Added?
(a) Gross Value Added + Depreciation (b) Gross Value Added + Interest
(c) Gross Value Added – Depreciation (d) Gross Value Added – Inventory
(e) Gross Value Added – Net Inventory.
(1 mark)
< Answer >
36. The item ‘Interest Accrued on Investments’ appears in the balance sheet of a company under
the category of
(a) Loans and advances (b) Current assets
(c) Investments (d) Current liabilities
(e) Reserves and surplus.
(1 mark)
< Answer >
37. As per Accounting Standard 18, if two or more companies are subsidiaries of the same
holding company, each
subsidiary is known as ___________ of the other subsidiary.
(a) Fellow subsidiary (b) Co-subsidiary (c) Subsidiary
(d) Associate (e) Sub-subsidiary.
(1 mark)
< Answer >
38. Which of the following denotes the dividend declared by the directors between two annual
general meetings?
(a) Proposed dividend (b) Final dividend
(c) Interim dividend (d) Declared dividend
(e) Unpaid dividend.
(1 mark)
< Answer >
39. Which of the following ratios indicates the capital structure?
(a) Debt-assets ratio (b) Inventory turnover ratio
(c) Total asset turnover ratio (d) Return on equity (e) Return on assets.
(1 mark)
< Answer >
40. Economic value addition can be computed as
(a) Gross profit – Cost of capital
(b) Gross profit – Average cost of capital
< Answer >
6
(c) Net operating profit before tax – Cost of capital
(d) Net operating profit after tax – Weighted average cost of capital
(e) Net operating profit before tax – Depreciation.
(1 mark)
ANS—
Suggested Answers
Financial Accounting – II (MB132): April 2006
1. Answer : (c)
Reason: The loss on sale of fixed assets (c) is debited to profit and loss account and is not carried
over under
Miscellaneous expenditure in the balance sheet of a company and alternative (c) is the correct
answer. the following will form part of ‘Miscellaneous Expenditure’ of the Balance Sheet of a
company till they are adjusted/written off completely Preliminary expenses (a), Underwriting
expenses (b), Discount on issue of shares (d) and Interest paid out of capital.(e) are not the
correct
answers.
<
2. Answer : (e)
Reason: In Jury of Executive opinion method, the personal judgements of many senior
executives from
different fields are taken into account while in sales force estimates method, the personal
judgement
of the sales personnel operating at the ground level are considered. But mathematical tools and
techniques are applied in the methods mentioned in the options (c) and (d). Hence, the option (e)
is
answer.
<
3. Answer : (d)
Reason: Para 3(g) of AS-14 clearly states that purchase consideration is the aggregate of shares
and other
securities issued and the payment made in the form of cash or other assets by the transferee
company to the shareholders of the transferor company.
<
4. Answer : (e)
Reason: In the Consolidated Balance Sheet of a Holding Company, the value of minority interest
consists of
the proportionate share of minority shareholders in the (I) Nominal value of share capital of
subsidiary company (III) Reserves and profits of the subsidiary company at the time of
acquisition
by the holding company and (V). Income of the subsidiary company after the acquisition by the
holding company Hence, the alternative (e) the combination of the these statements is the correct
answer. (II) Reserves of the holding company and (IV) Income of the holding company after its
acquisition are entirely the share of the share holders of the holding company and do not belong
to
the minority share holders of the subsidiary company and the alternatives (b), (c) and (d) with
these
statements are incorrect. The alternative (a) is incorrect because it does not represent the entire
share of the minority share holders. Thus, alternative (e) is the correct answer.
<
5. Answer : (d)
Reason: The liquidity of a company is measured by the acid-test ratio as it is a liquidity ratio.
The other
ratios, as mentioned in the other options, do not convey anything in relation to the liquidity of a
company.
<
6. Answer : (e)
Reason: Under the Net Assets method of calculating purchase consideration, assets and liabilities
of the
transferor company are taken over by the transferee company at agreed values. In the absence of
agreed values, book values of the assets and liabilities is considered.
<
7. Answer : (d)
Reason: A funds flow statement on cash basis does not show the net change in working capital.
<
8. Answer : (b)
Reason: EVA can be improved by downsizing non-profitable operations, units or by selling off
sub-standard
assets. Hence (b) is false. The computation of EVA involves a complex procedure. Stern and
Stewart suggested 175 different assumptions and adjsutments on the basic measure. EVA is a
residual income measure that subtracts the cost of capital from the operating profit generated by
a
business. In other words, EVA measures whether the operating profit is enough compated to the
total cost of capital. EVA is simply after-tax operating profit minus the total annual cost of
capital.
EVA is one variation if residual income with adjustments in the method of calculation. Unlike
the
<
14
traditional measure of accounting profit where only part of the cost of capital (cost of debt) is
deducted, EVA requires deduction of full cost of capital (Cost of debt as well as cost of equity).
EVA can be used for making day-to-day decisions as well as for strategic planning. For this
purpose, EVA points have to be identified. An EVA point is one which has revenue, expenditure
and capitl issue attached to it. EVA destroyers for each EVA point are identified and steps are
taken
to improve them.EVA analysis is made for each and every EVA point for decision-making. Thus
(a), (c), (d) and (e) are true.
9. Answer : (d)
Reason: Forecasting sales volume is the first step in the exercise of financial forecasting. Based
on the
amount of sales target to be achieved by the company, forecasting for the other requirements are
made.
<
10. Answer : (a)
Reason: Dividends paid by a subsidiary company out of pre-acquisition profits are adjusted
against
Investment A/c for the purpose of arriving at cost of control at the time of consolidation of
accounts
(a) since they form part of capital profits they are adjusted against the cost of control and
alternative
(a) is the correct answer. Since, they are capital profits, they cannot be adjusted against general
reserve at the time of consolidation (b) is the incorrect answer. They are not revenue receipts to
be
transferred to Profit and Loss account at the time of consolidation of accounts and alternative (c)
is
the incorrect answer. Since they are part of capital profits, they cannot be ignore for
consolidation
purposes. And alternative (d) is incorrect. The dividends declared out of post-acquisition profits
are
the claims of the shareholders of the holding company. and do not form part of cost of control.
The
alternative (e) is not the correct answer. Thus, alternative (a) is the correct answer.
<
11. Answer : (b)
Reason: When Statutory Reserves are incorporated in the financial statements of the transferee
company by
way of the following entry.
Amalgamation Adjustment A/c Dr.
This ENTRY is reversed when the statutory reserve is no longer required. Hence the journal
entry is
Statutory Reserves A/c Dr.
To Amalgamation Adjustment A/c
<
12. Answer : (b)
Reason: Called up capital is the amount on the shares which is actually demanded by the
company to be
paid. However, there may be some shareholders who may make default in the payment. The
money
due from them is called calls-in-arrears. This amount should be deducted from the called up
capital
to arrive at the paid-up capital. Thus, (b) is the correct answer.
<
13. Answer : (e)
Reason: A funds flow statement is known through different terms one of them is mentioned in
the given
option (e). A balance sheet states the financial position of a company as on a particular date
while
profit and loss statement or income statement shows the financial performance of a company
during
a year or a particular time period. Proforma statements are prepared to project the financial
position
(proforma balance sheet) of a company and the financial performance (proforma income
statement)
of a company in future.
<
14. Answer : (e)
Reason: Preference share capital, equity share capital, calls-in arrear and share forfeiture should
be shown
under the head ‘Share capital’ in the balance sheet. However the preference dividend will be
shown
under provisions if it is proposed and under current liabilities if declared. The unclaimed
dividend
also will be shown under the head current liabilities, Thus the answer is (e).
<
15. Answer : (b)
Reason: Dividend pay out ratio indicates the amount of dividend paid out of net profit earned by
the
company. Net profit margin represents the amount of profit as a percentage of total sales.
Inventory
turnover ratio implies how efficiently the inventories are used by a company while acid test ratio
shows the liquidity status for a company. But fixed chares coverage ratio represents the ability of
a
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firm to meet its financial obligations to make service the debts as well as to pay the lease rentals.
16. Answer : (e)
Reason: As per schedule VI of the Companies Act, 1956, Unadjusted development expenditure
(e) is shown
under Miscellaneous expenditure and is the correct answer. It is not shown under the head fixed
assets. The other assets stated in alternatives Lease hold property (a), Development of property
(b), Railway sidings (c) and Designs (d) are the fixed assets and not the correct answers. Thus,
alternative (e) is the correct answer.
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17. Answer : (e)
Reason: According to the Schedule VI of the Companies Act, 1956, the following assets is/are
shown under
the head ‘investments’ in the balance sheet of a company
I Investments in the capital of partnership firms
II Investment in Trust securities
III Investment in shares
IV Investment in debentures.
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18. Answer : (a)
Reason: (III) Every officer and other employee and agent in default is/are held responsible for
keeping
proper books of accounts of a company in addition to the Managing Director or Manager of the
company Thus, alternative (a) is the correct answer. The other persons mentioned in other
statements and alternatives (b), (c), (d) and (e) are incorrect because they are not the persons held
liable for proper keeping books of accounts
I Every legal advisor of the company
II Every banker of the company
IV Every auditor of the company
V Every member of the company. Thus, the correct answer is (a).
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19. Answer : (b)
Reason: The financial risk of a firm may be estimated by using the leverage and coverage ratios
while the
earning potential of a company may be evaluated through the profitability ratios. The operational
and the level of efficiency in utilizing the assets may measured by using the turnover ratios. But
price-earnings ratio is used to determine the expected market price per share of the company.
One
may project the EPS of a company for the next few years and thereafter by assuming the
continuity
of the same P/E multiple, the future market price per share may be calculated.
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20. Answer : (c)
Reason: Dividends are usually paid as a percentage of called-up capital less calls-in-arrear (c).It
is not paid
on authorized capital (a) unless it is fully called-up and paid-up. Net profit (b) is the basis for
declaring dividends but the computation is as a percentage of paid-up capital. And is not the
correct
answer. No dividend is payable on calls-in-advance hence the alternative (d) which states paid-
up
share capital plus calls-in-advance is incorrect. The alternative (e) is also incorrect because, it
also
includes calls-in-advance. Thus, alternative (c) is the correct answer.
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21. Answer : (c)
Reason: As per the Schedule VI of the Companies Act, 1956, ‘Premium on issue of debentures’
is shown
under head Reserves and Surplus in the balance sheet of a company. It is unlike share premium
which is to be utilized as per section 79 of the Companies Act. The premium on issue of
debentures
is treated as profit and placed under Reserves and Surplus in the balance sheet of a company.
Thus, (c) is the correct answer.
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22. Answer : (b)
Reason: The trend analysis, through the method of extrapolation and regression analysis are used
for the
projection of sales volume of the company. The future relationship between various costs to sales
is
assumed to follow historical relationship in case of percent of sales method. But in budgeted
expense method, the estimation of the various items is considered on the basis of the expected
changes to be happened in the market for the preparation of the proforma income statement.
Hence,
the option (b) is the answer.
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23. Answer : (b)
Reason: The proposed dividend is classified as a provision and shown on the liability side of the
balance
sheet. The dividend finally decided by the shareholders in the annual general meeting as payable
is
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termed as Declared Dividend. Any dividend declared must be paid with thirty days from the date
of
declaration. Hence, a declared dividend must be classified as a current liability in the balance
sheet
of the company. Thus the answer is (b).
24. Answer : (b)
Reason: Consolidated financial statements should reflect the economic activities of a business
enterprise
measured without regard to the boundaries of the legal entity. A parent and subsidiary are legally
separate but are treated as a single business enterprise in consolidated statements, in recognition
of
Business entity concept (b). The other concepts do not explain about consolidation of financial
statements. The Going concern concept (a) assumes that the business entity will continue to
operate
in the absence of evidence to the contrary. Materiality (c) requires reporting the information that
has
a value significant enough to affect decisions of those using the financial statements. Cost
concept
(d) explains how the assets are to be recorded in the books of accounts. According to this, fixed
assets are to be recorded at cost less accumulated depreciation. Periodicity (e) explains that the
financial accounting process is meant to provide the information about the economic activities of
the
business enterprise at regular intervals. It does not speak about consolidation of financial
statements.
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25. Answer : (a)
Reason: In case of a company, it is not necessary to split the profit and loss account into three
sections i.e.
Trading Account, Profit and Loss Account and Profit and Loss Appropriation Account. Only
Profit
and Loss Account may be prepared covering items appearing in Trading Account and Profit and
Loss Appropriation Account. The Profit and Loss Appropriation section of the profit and Loss
account shows the appropriation of profit and is popularly known as ‘below the line’ (a) is the
correct answer. There is no term ‘above the line’ (b) in accounting in this context. Profit and loss
adjustment account (c) is the final account depicting rectification of errors that are found after
preparation of final accounts. Specific reserve (d) is appropriation of profit for specific purpose
either for acquisition of an asset or amortization of expenditure or redemption of a liability and
has
no relevance. General reserve (e) is the reserve created out of net profits, which is not the correct
answer.
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26. Answer : (a)
Reason: According to the Companies Act, 1956, the companies have to compulsorily maintain
their books of
account only on accrual basis. Cash basis should not be followed.
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27. Answer : (c)
Reason: No disclosure is required in consolidated financial statements in respect of Intra-group
transactions.
The other items, Remittances-in-transit, capital reserve/Goodwill and minority interest are
disclosed
in consolidated financial statements.
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28. Answer : (b)
Reason: Du Pont equation for return on equity is:
Return on Equity (ROE)
Net profit Sales Average assets
Sales Average assets Average equity
××
The third component of the equation is called equity multiplier.
Thus, higher the assets turnover ratio, higher the equity multiplier, higher the debt-assets ratio,
higher the return on assets, higher will be the return on equity. Hence, (c), (d) and (e) are not
correct
and (b) is correct. Return on equity does not depend on sales. Hence, (a) is also not true.
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29. Answer : (b)
Reason: A decrease in the retention ratio implies an increase in the dividend payment and less
amount of
funds available for investment and hence increases the external funds required. Hence, (b) is
true.
An increase in the spontaneous liabilities to sales ratio, an increase in assets turnover ratio (i.e. a
decrease in total assets to sales ratio) decreases the external funds required. Hence, (a) and (c) are
incorrect. Short-term bank borrowings are one of the sources of the external funds and does not
indicate the amount of funds required.
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30. Answer : (d)
Reason: The nominal value of shares taken up by the public is subscribed capital. The issued
capital is the
nominal value of shares offered to the public. Hence subscribed capital is equal to issued capital
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when all the shares offered to the public are taken up by the public. When the board of directors
have called up the total amount payable by the shareholders, the called-up capital will be equal to
the subscribed capital. When the maximum share capital which the company is authorized to
issue is
offered to public, the authorized capital will be equal to the issued capital.When all the
shareholders
have duly paid the total amount payable by them, the called-up capital will be equal to the paid-
up
capital. Subscribed capital and issued capital are not one and the same. Thus the answer is (d).
31. Answer : (d)
Reason : An increase in current assets or a decrease in current liabilities will increase the
working capital.
Hence, a decrease in the amount of provision for tax i.e. a current liability results in an increase
in
working capital. Option (a) results in an increase in current liability and hence results in decrease
in
working capital. Other alternatives indicates changes in non-current assets and hence are not
correct.
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32. Answer : (c)
Reason : Inventory turnover ratio=Cost of goods sold/Average inventory
If the inventory turnover ratio has decreased from past, it means that either inventory is growing
or
cost of goods sold sales are dropping. So statement (I) is incorrect.
If a firm has an inventory turnover that is slower than for its industry, then there may be obsolete
goods on hand, or inventory stocks may be high. So statement (II) is incorrect.
Low inventory turnover has impact on the liquidity of the business because most of the current
assets are tied up in inventory. So statement (III) is correct.
Hence option (c) is the answer.
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33. Answer : (e)
Reason : Using a funds flow statement we can know about all the given factors. i.e. liquidity,
acquisition of
non current assets, about utilization of external funds and pattern of financing. Hence (e) is the
answer.
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34. Answer : (a)
Reason : If the proposed dividend appears in the balance sheet of subsidiary company, while
preparing the
Consolidated Balance Sheet, the amount belonging to minority shareholders should be shown
under
proposed dividend in the Consolidated Balance Sheet. Hence the answer is (a).
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35. Answer : (c)
Reason : Net value-added is derived by deducting depreciation from the gross value added.
Gross value
added is arrived at by deducting cost of all materials and services and other extraordinary
expenses
from sales revenue and any other income. Therefore, Net value added = Gross value added –
Depreciation.
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36. Answer : (b)
Reason : The item interest accrued on investments appears in the Balance Sheet of a company
under the
category of current assets.
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37. Answer : (a)
Reason : As per accounting standard 18, if two or more companies are subsidiaries of the same
holding
company, each subsidiary is known as Fellow subsidiary.
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38. Answer : (c)
Reason : Though dividends can be declared only by a resolution of the shareholders, if the
articles permit, the
directors can declare an interim dividend (c) between two annual general meetings. The dividend
recommended by the directors is termed as proposed dividend (a) till such time it is approved by
the
shareholders in the AGM. The dividend finally decided by the shareholders in the AGM as
payable
is termed as Declared dividend (d). The unclaimed portion of it is un-paid/ un-claimed dividend
(e).
Final dividend (b) gives rise to an enforceable obligation.
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39. Answer : (a)
Reason : Debt asset ratio indicates the capital structure of a company. Inventory turnover ratio
and total asset
turnover ratio are the turnover ratios that indicate how efficiently the assets are utilized by a
company. While return on equity and return on assets are the profitability ratios of a business
entity.
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40. Answer : (d)
Reason : Economic value addition=Net operating profit after tax – Weighted average cost of
capital.
Financial Accounting-I (MB131): July 2006
Financial Accounting-I (MB131): July 2006

1. The funds available with a company after paying all claims including tax and dividend is
called
(a) Net profit (b) Net operating profit
(c) Capital profit (d) Retained earnings
(e) Profit before tax.
(1 mark)
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2. Which of the following events/transactions is not recorded in the books of account of a
business?
(a) Withdrawal of goods by the proprietor for personal consumption
(b) Sale of an asset on credit
(c) Purchase of a new asset in exchange of an old asset
(d) Receipt of interest by proprietor on bank fixed deposit held jointly with spouse
(e) Loss of stock by fire.
(1 mark)
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3. Which of the following accounting concepts enables comparison of financial statements over a
period of time?
(a) Cost concept (b) Consistency concept
(c) Materiality concept (d) Money measurement concept
(e) Accounting period concept.
(1 mark)
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4. Under the Companies Act, a company is normally not permitted to have an accounting period
extending beyond
(a) 6 months (b) 12 months (c) 15 months
(d) 18 months (e) 22 months.
(1 mark)
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5. Who of the following is not an internal user of Financial Statements?
(a) Board of Directors (b) Partners (c) Investors
(d) Managers (e) Officers.
(1 mark)
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6. For a trading company which of the following is not a non-trading income or expense?
(a) Rent received (b) Profit from sale of old furniture
(c) Dividend received (d) Interest on borrowings
(e) Interest on Investments.
(1 mark)
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(a) Accounting principle is general law or rule followed in the preparation of financial
statements
(b) Usefulness, objectivity and feasibility are the three basic norms generally found in
accounting principles
(c) The entity concept does not consider the business and the proprietor as distinct from
each other
(d) In accountancy all business transactions are recorded as having dual aspect
(e) The convention of disclosure implies that all material information should be disclosed in
the accounts.
(1 mark)
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8. When applied to Balance-Sheet the convention of conservatism results in
(a) Understatement of assets
(b) Understatement of liabilities and provisions
(c) Over statement of capital
(d) Understatement of assets and liabilities and provisions
(e) Understatement of assets, liabilities and provisions and capital.
(1 mark)
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9. The total of all the current assets of Intelligent Limited is Rs. 3,00,000. The following
information is also available from the trial balance of the company.
The only other current asset not included in the information above is closing stock. Its value
must be
(a) Rs.2,14,500 (b) Rs.2,04,500 (c) Rs.2,02,000
(d) Rs.1,98,000 (e) Rs.2,41,500.
(2 marks)
Sundry debtors Rs. 30,500
Current liabilities Rs. 16,400
Provision for taxation Rs. 12,000
Cash & bank balance Rs. 30,000
Bills receivable Rs. 25,000
Office typewriter Rs. 39,000
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10.Valuation of inventory on the same basis every year, is based on the principle of
(a) Cost concept (b) Consistency concept
(c) Conservatism concept (d) Matching concept
(e) Accounting period concept.
(1 mark)
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11.Consider the following data pertaining to Volga Ltd.:
While finalizing the annual accounts, if the company values the machinery at Rs.12,00,000,
which of the following concepts is violated by the company?
(a) Cost (b) Matching
(c) Realisation
(d) Periodicity (e) Business Entity.
(1 mark)
Particulars Rs.
Cost of the machinery purchased on April 1, 2005 10,00,000
Installation charges 1,00,000
Market value as on March 31, 2006 12,00,000
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12.As per Accounting Standard-1, which of these accounting assumptions are taken into
consideration while preparing financial statements?
I. Prudence.
II. Going concern.
III. Accrual.
IV. Consistency.
(a) Both (I) and (IV) above (b) Both (II) and (III) above
(c) Both (I) and (III) above (d) (II), (III) and (IV) above
(1 mark)
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13.The ending balance of owner’s equity is Rs.21,000. During the year, the owner contributed
Rs.
6,000 and withdrew Rs.4,000. If the firm had Rs.8,000 net income for the year, what was the
owner’s equity at the beginning of the year?
(a) Rs.23,000 (b) Rs.21,000 (c) Rs.19,000 (d)
Rs.11,000 (e) Rs.25,000.
(2 marks)
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14.According to money measurement concept, which of the following will be recorded in the
books of accounts?
(a) Health of the Chairman of the company
(b) Quality control in the business
(c) Value of building
(d) ISI certification obtained
(e) Election of board of directors.
(1 mark)
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15.Accounting Standards 12 (AS 12) pertains to
(a) Accounts for Amalgamation
(b) Accounting for Government Grants
(c) Accounting for the Effects of Changes in Foreign Exchange Rates
(d) Accounting for Construction Contracts
(e) Contingencies and Events Occurring after the Balance-Sheet Date.
(1 mark)
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16.The income or expenses which arise in the current year as a result of errors or omissions in
the
preparation of financial statements of one or more previous years is known as
(a) Prior period items (b) Extraordinary items
(c) Contingent items (d) Preliminary items
(e) Equity items.
(1 mark)
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17.Which of the following represent(s) Personal accounts in accounting parlance?
I. Sundry creditors.
II. Bank account.
III. Outstanding wages.
IV. Prepaid insurance.
(c) Only (III) above (d) Only (IV) above
(1 mark)
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18.M/s. Swapna Enterprises introduced the imprest system of petty cash book, the amount of
imprest being Rs.1,000. The petty cash transactions during the month of June 2006 are as
under:
The amount of cash received on July 01, 2006 to make up the imprest balance is
(a) Rs.678 (b) Rs.294 (c) Rs.906 (d)
Rs.522 (e) Rs.1,100.
(2 marks)
Particulars
Amount
(Rs.)
Stamps 145
Conveyance 186
Repairs 228
Stationery 154
Other office expenses 193
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19.Which of the following is not a nominal A/c?
(a) Purchases (b)
Sales (c) Rent
(d) Trade mark (e) Advertisement.
(1 mark)
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20.Which of the following type of error will not be reflected by a Trial Balance?
(a) Posting of a transaction twice
(b) Omission of a transaction
(c) Wrong calculation of balance in ledger accounts
(d) Omission of an account balance
(e) Wrong totaling in a subsidiary book.
(1 mark)
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21.Consider the following data pertaining to purchases made by Zodiac Ltd., a dealer in
electronic
goods, for the month of June 2006:
On June 22, 2006, the company purchased from Indian Stationers on credit for office use 10
dozens of carbon papers at the rate of Rs.35 per dozen and 10 dozens of ball pens at the rate of
Rs.25 per dozen.
The total of purchases for the month of June 2006, was
(a) Rs.2,14,350 (b) Rs.2,38,000 (c) Rs.2,14,950
(d) Rs.2,38,600 (e) Rs.2,14,200.
(2 marks)
Date Particulars No. of units
Rate per unit
Rs.
Trade
Discount
June 01 Black & White TVs 50 3,000 10%
Colour TVs 10 6,000 10%
June 09 Tape Recorders 10 1,000 10%
Two-in-one 10 1,500 10%
June 19 Audio Cassettes 100 30 5%
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22.Consider the following data pertaining to a company for the month of June 2006:
The sales of the company during the month are
(a) Rs.1,41,250 (b) Rs.1,35,600 (c) Rs.1,33,750
(d) Rs.1,28,400 (e) Rs.1,13,000.
Opening stock Rs.22,000
Closing stock Rs.25,000
Purchases less returns Rs.1,10,000
Gross profit margin (on sale) 20%
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(1 mark)
23.Which of the following statements is false?
(a) Credit side total of discount column of cash book is an income
(b) Credit balance of bank pass book is an overdraft
(c) Debit balance of bank column of cash book is an asset
(d) Debit balance of cash column of cash book is an asset
(e) Credit balance of bank column of cash book is a liability.
(1 mark)
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24.Consider the following data pertaining to M/s. Libra Company:
During the year 2005-06, the sales were Rs.3,60,000 and all were on credit. The cash
purchases were Rs.80,000 and credit purchases were Rs.2,00,000. Expenses paid during the
year were Rs.70,000.
The cash and bank balance of M/s. Libra Company as on March 31, 2006 was
(a) Rs.50,000 (b) Rs.90,000 (c) Rs.70,000
(d) Rs.80,000 (e) Rs.60,000.
(2 marks)
Particulars
As on April 01, 2005
Rs.
As on March 31, 2006
Rs.
Cash & bank 60,000 ?
Sundry debtors 50,000 40,000
Sundry creditors 70,000 80,000
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25.Purchases of office furniture on acceptance of a bill of exchange is recorded in
I. Journal proper.
II. Bills payable book.
III. Purchases book.
(c) Only (III) above (d) Both (I) and (II) above
(e) Both (II) and (III) above.
(1 mark)
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26.In retail inventory method, original selling price may be modified. If the selling price is
lowered below the original selling price, it is known as
(a) Markup (b) Markup cancellation
(c) Net markup (d) Markdown (e)
Net markdown.
(1 mark)
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27.Consider the following information of Make-up Company for the year 2005-2006:
The amount to be debited to profit and loss account to make the estimated provision is
(a) Rs.8,600 (b) Rs.10,400 (c) Rs.10,520 (d) Rs.10,600
(e) Rs.10,680.
(2 marks)
Opening balance of provision for debtors account Rs. 20,000
Bad debts during the year Rs. 18,000
Closing balance of Sundry debtors Rs.2,65,000
Estimated provision for doubtful debts 4%
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28.A company purchased second hand machinery in exchange of its 2,000 shares. The book
value
of the machinery is Rs.2,25,000 and similar machinery is available in the market for
Rs.2,50,000. The book value of the company’s share is Rs.90 and its shares are quoted at
Rs.110 in the market. The value of machinery to be taken in the book is
(a) Rs.2,25,000 (b) Rs.2,50,000 (c) Rs.1,80,000
(d) Rs.2,20,000 (e) Rs.2,00,000.
(2 marks)
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29.Which of the following is not included in the cost of land?
(a) Broker’s commission (b) Legal fee (c) Stamp duty
(d) Registration charge (e) Property tax.
(1 mark)
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30.Renewal fee for patent is
(c) Deferred revenue expenditure (d) Development expenditure
(e) Contingent expenditure.
(1 mark)
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31.The main objective of providing depreciation is to
(a) Calculate the true net profit
(b) Compute the actual cash profit
(c) Create funds for replacement of fixed assets
(d) Reduce tax burden
(e) Value the equity shares of a company.
(1 mark)
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1. Answer : (d)
Reason : The fund available with a company after paying all claims including tax and dividend is
Retained earnings. (d) is the correct answer.
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2. Answer : (d)
Reason : The receipt of interest by proprietor on bank fixed deposit held jointly with spouse
cannot be
entered in the books of account of the business. The other items i.e. withdrawal of goods by
the proprietor for personal consumption, sale of an asset on credit, purchase of new asset in
exchange of old asset and loss of stock by fire are all recorded in the books of account.
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3. Answer : (b)
Reason : According to the consistency concept, the financial statements should be prepared on
the
basis of accounting principles which are followed consistently. Hence, this concept enables
comparison of financial statements over a period of time. According to cost concept, all
transactions are recorded at cost. All material items should be separately disclosed under
materiality concept. Money measurement concept envisages that a record is made only of
information that can be expressed in monetary terms. According to accounting period concept,
the income or loss of a business is measured periodically for a specific interval of time, called
accounting period.
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4. Answer : (c)
Reason : As per the companies Act, the accounting period of a company in the normal
circumstance
shall not exceed 15months. Answer(c)is correct.
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5. Answer : (c)
Reason : Board of Directors, Partners, Managers and Officers are internal users. An investor is
an
external user.
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6. Answer : (d)
Reason : Rent received, Profit from sale of old furniture, Dividend received, and Interest on
Investments are non-trading income. Interest paid on borrowings is a trading expense.
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7. Answer : (c)
Reason : The entity concept considers the business and the proprietor as distinct from each other
Accounting principle is general law or rule followed in the preparation of financial statements
Usefulness, objectivity and feasibility are the three basic norms generally found in accounting
principles. In Accountancy all business transactions are recorded as having dual aspect .The
convention of disclosure implies that all material information should be disclosed in the
accounts.
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8. Answer : (a)
Reason : The concept of conservatism involves understating gains and values and overstating
losses
and liabilities. Hence when applied to Balance-Sheet the convention of conservatism results in
understatement of assets. Option (a) is correct.
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9. Answer : (a)
Reason : Total of all current assets = Rs.3,00,000
Total of current assets excluding stock
= Sundry Debtors + Bills Receivable + Cash & Bank Balance
= 30,500 + 25,000 + 30,000 = Rs. 85,500
Value of closing stock = Rs.3,00,000 – Rs.85,500 = Rs.2,14,500
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10. Answer : (b)
Reason : The consistency concept requires that once an entity has decided to follow one method
of
valuation of inventory, it will follow the same unless there is strong reason to change the
method of valuation, which is in consonance with consistency principle.
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11. Answer : (a)
Reason : In terms of cost concept the value of an asset is to be determined on the basis of
acquisition
cost. Valuation of machinery at market value is in violation of cost concept unless the machine
is actually sold, realizable value will give only a hypothetical figure. Market value is highly
subjective because to know the value of the asset one has to chase the uncertain future. The
other concepts matching concept (b) deals with matching costs with revenue, Realization
concept (c) deals with recognition of income at various levels of production, Periodicity
concept (d) explains how the accounting information is to be reported at regular intervals to
foster comparability, Business entity concept (e) explains the owner is different from the
business entity. Thus, the concepts (b), (c), (d), and (e) do not explain how the fixed assets are
to be recorded.
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12. Answer : (d)
Reason : As per AS 1, the accounting assumptions of Going concern, Accrual and Consistency
are
taken into consideration while preparing financial statements. (d), the combination of these is
the correct answer.
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13. Answer : (d)
Reason : The owners’ equity at the beginning of the year = Rs.11,000
Closing Capital plus drawings less (contribution plus net income) = Rs.21,000 + Rs.4,000 –
(Rs.6,000 + Rs.8,000) = Rs.25,000- Rs.14,000 = Rs.11,000.
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14. Answer : (c)
Reason : According to money measurement concept the Value of building will be recorded in the
books of accounts. All other events cannot be measured in terms of money and hence not
recorded in books of accounts.
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15. Answer : (b)
Reason : Accounting Standards 12 (AS 12) pertains to Accounting for Government Grants.
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16. Answer : (a)
Reason : According to Accounting Standard-5, the incomes or expenses which arise in the
current
period as a result of errors or omissions in the preparation of financial statements of one or
more prior periods is known as prior period items. Extraordinary items are income or
expenses that arise from events or transactions that are clearly distinct from the ordinary
activities of the enterprise and, therefore, are not expected to recur frequently or regularly.
Contingent items are gains or losses, which arise only on the occurrence or non-occurrence of
a one or more uncertain future events. Preliminary items are those expenses incurred for the
incorporation of the company. Equity items are the items like equity share capital, calls-inarrears,
which are related to equity shareholders.
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17. Answer : (e)
Reason : Personal accounts deal with accounts of individuals like creditors, debtors, banks etc. It
shows the balance due to these individuals or due from them on a particular date and
representative personal accounts represent the amounts due on account of accrual concept like
accrued expenses and prepaid expenses or accrued incomes and pre-received incomes. By
virtue of this, the accounts stated in alternatives (a) sundry creditors, (b) Bank account, (c)
outstanding wages and (d) prepaid insurance represents personal accounts.
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18. Answer : (c)
Reason :
Particulars
Amount
(Rs.)
Amount
(Rs.)
Petty cash 1,000
Less : Stamps 145
Conveyance 186
Repairs 228
Stationery 154
Other office expenses 193 906
94
Amount reimbursed 906
1,000
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19. Answer : (d)
Reason : Trade mark is treated as a fixed asset and hence a real account. All others are nominal
A/c’s.
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20. Answer : (b)
Reason : Since a transaction altogether has been omitted both debit and credit aspects have not
been
recorded. Hence the trial balance cannot disclose the existence of the above error.
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21. Answer : (a)
Reason : Purchases Day Book
The purchase of stationery is not a part of purchase of goods and it is to be debited to
stationery account.
Date Particulars Details
(Rs.)
Total
(Rs.)
June. 01 50 Black & White T.V. @
Rs.3,000 each
10 Colour T.V. @ Rs.6,000
each
1,50,000
60,000
2,10,000
Less : Trade discount @
10%
21,000 1,89,000
June. 09 10 pieces of Taperecorder @
Rs.1,000 each
10,000
10 pieces of Two-in-one @
Rs.1,500 each
15,000
25,000
10%
2,500 22,500
June. 19 100 pieces of Audio Casettes
@ Rs.30 each
3,000
5%
150 2,850
2,14,350
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22. Answer : (c)
Reason :
Gross profit margin = 20% on sales
20% on sales = 25% on cost.
Sales = Rs.1,07,000 × 1.25 = Rs.1,33,750.
Thus, the sales of the company is Rs.1,33,750.
Particulars Rs.
Add : Purchases less returns 1,10,000
1,32,000
Less : Closing stock 25,000
Cost of goods sold 1,07,000
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23. Answer : (b)
Reason : Credit balance of bank pass book is an overdraft (b) is a false statement because credit
balance as per pass book indicates the favourable balance and it is an asset. Credit balance of
discount column of cash book is an income (a) is true. Debit balance of bank column of cash
book is an asset (c). Debit balance of cash column of cash book is an asset and Credit balance
of bank column of cash book is a liability (e) are the true statements and the alternatives are
not the correct answers. Thus, (b) is the correct answer.
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24. Answer : (b)
Reason : Dr. Sundry debtors account Cr.
Dr. Sundry Creditors Cr.
Cash and Bank balance :
April 01,
2005
To Balance
b/d
50,000
2005-
2006
By Cash
(Balancing
figure)
3,70,000
2005-2006
To Sales 3,60,000
March 31,
2006
By Balance
c/d
40,000
4,10,000 4,10,000
2005-2006 To Cash
(balancing
figure)
1,90,000
April 01,
2005
By Balance
b/d
70,000
March 31,
2006
To Balance
c/d
80,000
2005-
2006
By
Purchases
2,00,000
2,70,000 2,70,000
Particulars Rs.
Opening cash and bank balance 60,000
Add Cash received from sundry
debtors
3,70,000
4,30,000
Less Cash paid to sundry creditors 1,90,000
Expenses paid 70,000
Closing cash and bank balance 90,000
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25. Answer : (d)
Reason : Purchase of office furniture against acceptance of a bill of exchange is recorded in
Journal
Proper to record the purchase and in Bills payable subsidiary to record the acceptance of bill
of exchange. Thus, it is recorded in both the books (d) is the correct answer.
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26. Answer : (d)
Reason : Markdown means selling price being lowered below the original selling price. Selling
price
below the original selling price cannot be mark-up, markup cancellation, net mark-up or net
markdown. Hence (d) is correct.
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27. Answer : (a)
Reason : Make-up Co.
Bad debts Rs.18,000
Add : Closing provision (4% on
Rs.2,65,000)
Rs.10,600
Rs.28,600
Less : Opening provision Rs.20,000
Amount to be debited to profit & loss
account
Rs. 8,600
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28. Answer : (d)
Reason : When machinery is acquired in exchange of shares, the market value of the company’s
share
is considered to calculate the value of machinery. Hence (110x2000) = Rs.2,20,000 is the
value of machinery.
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29. Answer : (e)
Reason : Property tax is a revenue expenditure. All other expenses like legal fee, registration
charge
stamp duty, broker’s fee etc. can be included in the cost of the building.
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30. Answer : (b)
Reason : Although patent is a capital expenditure, renewal fee paid for patent is treated as
revenue
expenditure.
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31. Answer : (c)

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Financial Accounting (MB131) : January 2004

Financial Accounting (MB131) : January 2004

Section A : Basic Concepts (30 Marks)

Financial Accounting (MB131): April 2005

Financial Accounting (MB131): April 2005

• Answer all questions.

Financial Accounting (MB131): January 2005

Financial Accounting (MB131): January 2005

• Answer all questions.

Financial Accounting (MB131): January 2005

Financial Accounting (MB131): January 2006

Financial Accounting (MB131): January 2006

• Answer all questions.

Financial Accounting (MB131): July 2005

Financial Accounting (MB131): July 2005

· Answer all questions.

Financial Accounting - I (MB131): April 2006

Financial Accounting - I (MB131): April 2006

• Answer all questions.

Financial Accounting - I (MB131): April 2006

Financial Accounting – II (MB132) : April 2006

Financial Accounting – II (MB132) : April 2006

• Answer all questions.

Financial Accounting-I (MB131): July 2006

Financial Accounting-I (MB131): July 2006

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