@ProCA - Inter Accounts Top 101 Important Questions May2023

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CA INTERMEDIATE
ACCOUNTING (PAPER 1)
MOST IMPORTANT QUESTIONS FOR PRACTICE BEFORE EXAMsS
Compiled by CA. Jai Chawla Sir
S.NO TOPIC NAME NO. OF QNS PAGE. NO.

1 FINANCIAL STATEMENT 6 2-19
2 REDEMPTION OF DEBENTURES 5 20-27
3 CASH FLOW STATEMENT 7 28-45
4 INVESTMENT 8 46-57
5 BRANCH ACCOUNTING 9 58-75
6 DEPARTMENTAL ACCOUNTING 4 76-82
7 BONUS & RIGHT ISSUE 3 83-87
8 PROFIT OR LOSS PRE & POST INCORPORATION 3 88-95
9 REDEMTION OF PREFERENCE SHARES 8 96-115
10 INSURANCE CLAIMS 7 116-126
11 HIRE PURCHASE 4 127-131
12 INCOMPLETE RECORDS 6 132-145
13 AS 1 – DISCLOSURE OF ACCOUNTING POLICIES 2 146-147
14 AS 2 – VALUATION OF INVENTORIES 7 148-152
15 AS 10 – PPE 6 153-159
16 AS 11 – EFFECT OF CHANGES IN FOREIGN EXCHANGE 5 160-166
RATE
17 AS 12 – GOVERNMENT GRANTS 2 167-168
18 AS 16 – BORROWING COSTS 9 169-174
19 FRAMEWORK 1 175
TOTAL 101
JAI CHAWLA SIR (V’SMART ACADEMY) 1

FINANCIAL STATEMENTS OF COMPANIES
QUESTION 01:
The following extract of Balance Sheet of Star Ltd. (non- investment) company was obtained:
Balance Sheet (Extract) as on 31st March, 20X1
Liabilities Rs
Authorised capital:
60,000, 14% preference shares of Rs 100 60,00,000
6,00,000 Equity shares of Rs 100 each 6,00,00,000
6,60,00,000
Issued and subscribed capital:
45,000, 14% preference shares of Rs 100 each fully paid 45,00,000
3,60,000 Equity shares of Rs 100 each, Rs 80 paid-up 2,88,00,000
Share suspense account 60,00,000
Reserves and surplus:
Capital reserves (Rs 4,50,000 is revaluation reserve) 5,85,000
Securities premium 1,50,000
Secured loans:
15% Debentures 1,95,00,000
Unsecured loans:
Public deposits 11,10,000
Cash credit loan from SBI (short term) 3,95,000
Current Liabilities:
Trade Payables 10,35,000
Assets:
Investment in shares, debentures, etc. 2,25,00,000
Profit and Loss account (Dr. balance) 45,75,000
Share suspense account represents application money received on shares, the allotment of which is not yet made.
You are required to compute effective capital as per the provisions of Schedule V. Would your answer differ if Star Ltd.
is an investment company?
SOLUTION
Computation of effective capital:
Where Star Ltd. Is Where Star Ltd. is
a non-investment an investment
company Rs company Rs
Paid-up share capital —
45,000, 14% Preference shares 45,00,000 45,00,000
3,60,000 Equity shares 2,88,00,000 2,88,00,000
Capital reserves 1,35,000 1,35,000
(5,85,000 – 4,50,000)

Securities premium 1,50,000 1,50,000
15% Debentures 1,95,00,000 1,95,00,000
Public Deposits 11,10,000 11,10,000
(A) 5,41,95,000 5,41,95,000
Investments 2,25,00,000 —
Profit and Loss account (Dr. balance) 45,75,000 45,75,000
(B) 2,70,75,000 45,75,000
Effective capital (A–B) 2,71,20,000 4,96,20,000
QUESTION 02:
On 31st March, 20X1, SR Ltd. provides the following ledger balances after preparing its Profit & Loss Account for the
year ended 31st March, 20X1.
Particulars Amount (Rs.)
Debit Credit
Equity Share Capital, fully paid shares of Rs. 50 each 80,00,000
Calls in arrear 15,000
Land 25,00,000
Buildings 30,00,000
Plant & Machinery 24,00,000
Furniture & Fixture 13,00,000
Securities Premium 15,00,000
General Reserve 9,41,000
Profit & Loss Account 5,80,000
Loan from Public Finance Corporation (Secured by Hypothecation of 26,30,000
Land)
Other Long-Term Loans 22,50,000
Short Term Borrowings 4,60,000
Inventories: Finished goods 45,00,000
Raw materials 13,00,000
Trade Receivables 17,50,000
Advances: Short Term 3,75,000
Provision for Taxation 3,80,000
Unpaid Dividend 70,000
Cash in Hand 70,000
Balances with Banks 4,14,000
Total 1,76,24,000 1,76,24,000
The following additional information was also provided in respect of the above balances:
1) 50,000 fully paid equity shares were allotted as consideration for land.
2) The cost of assets were:
Building Rs. 32,00,000

Plant and Machinery Rs. 30,00,000
Furniture and Fixture Rs. 16,50,000
3) Trade Receivables for Rs. 4,86,000 due for more than 6 months.
4) Balances with banks include Rs. 56,000, the Naya bank, which is not a scheduled bank.
5) Loan from Public Finance Corporation repayable after 3 years.
6) The balance of Rs. 26,30,000 in the loan account with Public Finance Corporation is inclusive of Rs.1,34,000 for
interest accrued but not due. The loan is secured by hypothecation of land.
7) Other long-term loans (unsecured) includes:
Loan taken from Nixes Bank Rs. 13,80,000
(Amount repayable within one year) (Rs. 4,80,000)
Loan taken from Directors Rs. 8,50,000
8) Bills Receivable for Rs. 1,60,000 maturing on 15th June, 20X1 has been discounted.
9) Short term borrowings includes:
Loan from Naya bank Rs. 1,16,000 (Secured)
Loan from directors Rs. 48,000
10) Transfer of Rs. 35,000 to general reserve has been proposed by the Board of directors out of the profits for the
year.
11) Inventory of finished goods includes loose tools costing Rs. 5 lakhs (which do not meet definition of property, plant
& equipment as per AS 10)
You are required to prepare the Balance Sheet of the Company as on March 31st 20X1 as required under Part - I of
Schedule III of the Companies Act, 2013.
You are not required to give previous year figures
SOLUTION
SR Ltd.
Balance Sheet as at 31st March, 20X1
Particulars Notes Figures at the end of
current reporting period
(Rs.)
Equity and Liabilities
Shareholders' funds
Share capital 1 79,85,000
Reserves and Surplus 2 30,21,000
Non-current liabilities
Long-term borrowings 3 42,66,000
Current liabilities
Short-term borrowings 4 9,40,000
Trade Receivables 8,13,000
Other current liabilities 5 2,04,000
Short-term provisions 6 3,80,000

Total 1,76,09,000
Assets
Non-current assets
PPE 7 92,00,000
Current assets
Inventories 8 58,00,000
Trade receivables 9 17,50,000
Cash and cash equivalents 10 4,84,000
Short-term loans and advances 3,75,000
Total 1,76,09,000
Notes to accounts
1. Share Capital
Equity share capital
Issued, subscribed and called up
1,60,000 Equity Shares of Rs. 50 each (Out of the above 80,00,000
50,000 shares have been issued for consideration other
than cash)
Less: Calls in arrears (15,000) 79,85,000
2. Reserves and Surplus
Add: Transferred from Profit and loss account 35,000 9,76,000
Surplus (Profit & Loss A/c) 5,80,000
Less: Appropriation to General Reserve (proposed) (35,000) 5,45,000
30,21,000
3. Long-term borrowings
Secured: Term Loans
Loan from Public Finance Corporation [Receivable after 24,96,000
3 years (Rs. 26,30,000 - Rs. 1,34,000 for interest
accrued but not due)] (secured by hypothecation of
land)
Unsecured
Bank Loan (Nixes bank) 9,00,000
(Rs. 13,80,000 - Rs. 4,80,000 Receivable within 1 year)
Loan from Directors 8,50,000
Others 20,000 17,70,000
Total 42,66,000
4. Short-term borrowings
Loan from Naya bank (Secured) 1,16,000
Loan from Directors 48,000

Loan from Nixes bank Receivable within one year 4,80,000
Others 2,96,000
9,40,000
5. Other current liabilities
Unpaid dividend 70,000
Interest accrued but not due on borrowings 1,34,000
6,84,000
6. Short-term provisions
Provision for taxation 3,80,000
7. PPE
Land 25,00,000
Buildings 32,00,000
Less: Depreciation (2,00,000) 30,00,000
Furniture & Fittings 16,50,000
Total 92,00,000
8. Inventories
Raw Material 13,00,000
Finished goods 40,00,000
Loose tools 5,00,000 58,00,000
9. Trade receivables
Outstanding for a period exceeding six months 4,86,000
Others 12,64,000
Total 17,50,000
10. Cash and cash equivalents
Balances with banks
with Scheduled Banks 3,58,000
with others banks 56,000 4,14,000
Cash in hand 70,000
Total 4,84,000
Note: There is a contingent liability amounting to Rs. 1,60,000
QUESTION 03: (RTP May22)

“Current maturities of long-term borrowing are disclosed separately under the head Other current liabilities in the
balance sheet of a company.” You are required to comment in line with schedule III to the Companies Act 2013.
SOLUTION
Current maturities of loan term borrowing are shown under ‘short term borrowings’ and not under ‘Other current
liabilities’ as per the amendment to Schedule III vide MCA notification dated 24th March, 2021. Hence the statement
given in the question is not valid.

Question 04: (EXAM Nov22)
The following is the Trial Balance of Anmol Limited as on 31st March, 2022:
Debit Balance Amount (₹) Credit Balances Amount (₹)
Purchases 82,95,000 Sales 1,25,87,000
Wages and Salaries 12,72,000 Commission 72,500
Rent Rates and Taxes 2,20,000 Equity Share Capital 10,00,000
Selling & Distribution Expenses 50,000 General Reserve 10,00,000
Directors Fees 4,36,000 Surplus (P&L A/c) 01.04.2021 8,75,500
Bad Debts 32,000
Interest on Term Loan 38,500 Securities Premium 2,50,000
Land 8,05,000 Term Loan from Public Sector 1,02,00,000
Factory 24,00,000 Bank
Building 36,80,000 Trade Payables 55,08,875
Plant and Machinery 62,50,000 Provision for Depreciation:
Furniture and Fittings 8,25,000 On Plant & Machinery 9,37,500
Trade Receivables 64,75,000 On Furniture and Fittings 82,500
On Factory Building 1,84,000
Advance Income Tax Paid 37,500 Provision for Doubtful 25,000
Stock (1st April,2021) 9,25,000 Debts Bills Payable 1,25,000
Bank Balances 9,75,000
Cash on Hand 1,31,875
Total 3,28,47,875 Total 3,28,47,875
Following information is provided:
(1) The Authorized Share Capital of the Company is 2,00,000 Equity Shares of ₹ 10 each. The Company has issued
1,00,000 Equity Shares of ₹ 10 each.
(2) Rent of ₹ 20,000 and Wages of ₹ 1,56,500 are outstanding as on 31st March, 2022.
(3) Provide Depreciation @ 10% per annum on Plant and Machinery, 10% on Furniture and Fittings and 5% on
Factory Building on written down value basis.
(4) Closing Stock as on 31st March, 2022 is ₹ 11,37,500.
(5) Make a provision for Doubtful Debt @ 5% on Debtors.
(6) Make a provision of 25% for Corporate Income Tax.
(7) Transfer ₹ 1,00,000 to General Reserve.
(8) Term Loan from Public Sector Bank is secured against Hypothecation of Plant and Machinery. Installment of
Term Loan falling due within one year is ₹ 17,00,000.
(9) Trade Receivables of ₹ 85,600 are outstanding for more than six months.
(10) The Board declared a dividend @10% on Paid up Share Capital on 5 th April, 2022.
You are required to prepare Balance Sheet as on 31st March 2022 and Statement of Profit and Loss with Note to
Accounts for the year ending 31st March, 2022 as per Schedule III of the Companies Act, 2013. Ignore previous years'
figures.

Solution
Balance Sheet of Anmol Ltd. as at 31st March, 2022
Particulars Note ₹
No
1 Shareholders' funds
a Share capital 1 10,00,000
b Reserves and Surplus 2 24,76,462
2 Non-current liabilities
a Long-term borrowings 3 85,00,000
3 Current liabilities
a Short term borrowings (Installment of term loan 17,00,000
falling due in one year)
b Trade Payables 4 56,33,875
c Other current liabilities 5 1,76,500
d Short term provisions (provision for tax) 1,16,988
Total 1,96,03,825
ASSETS
1 Non-current assets
a PPE 6 1,11,70,700
2 Current assets
a Inventories 11,37,500
b Trade receivables 7 61,51,250
c Cash and bank balances 8 11,06,875
d Short term loans & advances (Advance tax paid) 37,500
1,96,03,825
Statement of Profit and Loss of Anmol Ltd. for the year ended 31st March, 2022
Particulars Notes Amount
I. Revenue from operations 1,25,87,000
II. Other income (Commission income) 72,500
III. Total Income (I + II) 1,26,59,500
IV. Expenses:
Purchases of Inventory-in-Trade 82,95,000
Changes in inventories of finished goods work-in- 9 (2,12,500)
progress and Inventory-in-Trade
Employee benefits expense 10 14,28,500
Finance costs (interest on term loan) 8,05,000
Depreciation 7,80,300
Other operating expenses 11 10,95,250

Total expenses 1,21,91,550
V. Profit (Loss) for the period (III - IV) 4,67,950
VI. (-) Tax (25%) (1,16,988)
VII. PAT 3,50,962
Notes to accounts
₹
1 Share Capital
Authorized
2,00,000 equity shares of ₹ 10 each 20,00,000
Issued & subscribed
1,00,000 equity shares of ₹ 10 each 10,00,000
2 Reserves and Surplus
Add: current year transfer 1,00,000 11,00,000
Profit & Loss balance
Opening balance: Surplus P & L A/c 8,75,500
Profit for the year 3,50,962
Less: Appropriations:
Transfer to General reserve (1,00,000) 11,26,462
24,76,462
3 Long-term borrowings
Term loan from public sector bank (Secured by 1,02,00,000
hypothecation)
Less: Installment of Term loan falling due within one (17,00,000)
year
Total 85,00,000
4 Trade payables
Trade payables 55,08,875
Bills payable 1,25,000 56,33,875
5 Other current liabilities
Rent outstanding 20,000
Wages and Salaries Outstanding 1,56,500 1,76,500
6 PPE (Note 2)
Land 24,00,000
Factory Buildings 33,21,200
Furniture & Fittings 6,68,250

Total 1,11,70,700
7 Trade receivables
Debtors Outstanding for period exceeding 6 months 85,600
Other debts 63,89,400
Less: Provision for doubtful debt (3,23,750) 61,51,250
8 Cash and bank balances
Cash and cash equivalents
Bank balance 9,75,000
Cash on hand 1,31,875 11,06,875
9 Changes in Inventories
Opening Inventory 9,25,000
Less: Closing Inventory (11,37,500)
Change (2,12,500)
10 Employee benefit expense
Wages and Salaries 12,72,000
Add: Wages and Salaries Outstanding 1,56,500 14,28,500
11 Other operating expenses
Rent 2,20,000
Add: outstanding 20,000 2,40,000
Rates and Taxes 50,000
Selling & Distribution expenses 4,36,000
Bad debts 38,500
Provision for Doubtful Debts (3,23,750-25,000) 2,98,750
Director’s fee 32,000
Total 10,95,250
Note:
1. The final dividend will not be recognized as a liability at the balance sheet date (even if it is declared after
reporting date but before approval of the financial statements) as per Accounting Standards. Hence, it has not
been recognized in the financial statements for the year ended 31 March, 2022. Such dividends will be disclosed
in notes only.
2. Calculation of depreciation:
Book Accumulated WDV Current year Current year

value depreciation Depreciation WDV
Land 24,00,000 - 24,00,000 - 24,00,000
Factory building 36,80,000 1,84,000 34,96,000 1,74,800 33,21,200
Plant & Machinery 62,50,000 9,37,500 53,12,500 5,31,250 47,81,250
Furniture & Fittings 8,25,000 82,500 7,42,500 74,250 6,68,250
Total 7,80,300 1,11,70,700

QUESTION 05: (Master Question)
The following is the Trial Balance of Holding Ltd., as on 31st March, 20X2:
PARTICULARS DR. CR.

Equity Share Capital - 16,25,000
3000, 9% Cumulative Pref. Share Capital - 3,00,000
10% Debentures - 4,80,000
Security Premium - 1,55,000
General Reserves - 15,00,000
Profit and Loss A/c (PY) - 1,50,000
Sales - 90,00,000
Trade Payables - 11,50,000
Provision for Depreciation on P&M - 3,50,000
Suspense A/c - 1,40,000
Land at Cost 40,00,000 -
Plant and Machine at Cost 12,50,000 -
Sundry Debtors 15,00,000 -
Bills Receivables 4,00,000 -
Inventories Closing (Stock in Trade) 7,50,000 -
Bank Balance 4,30,000 -
Adjusted Purchase of Stock in Trade 21,30,000 -
Factory Expenses 12,00,000 -
Administration Exp 4,00,000 -
Selling Exp 9,00,000 -
Debenture Interest Paid till 30th Sep 35,000 -
Goodwill 10,00,000 -
Interim Dividend Paid 90,000 -
Bad Debts 45,000 -
Provision for Doubtful Debts - 67,000
Directors Fees 51,000
Loose Tools 25,000
Consumables 18,000
Unclaimed Dividend of Last Year - 12,000
Long Term Investments (7.5%) 16,00,000 -
Interest received on above Investments - 90,000
Preliminary Expenses 40,000 -
Opening Raw Material 2,10,000 -
Purchase of Raw Material 8,10,000 -

Long Term Loan from Bank - 13,20,000
Long Term Laon from Other Parties - 3,00,000
Short Term Loan from Bank - 5,00,000
Govt. Grant Received (Revenue Nature) - 1,75,000
Managerial Remuneration Paid 1,00,000 -
Income Tax Paid 9,50,000 -
Provision for Income Tax (as on 1/04/20X1) - 5,20,000
Deferred Tax Liability - 1,00,000
1,79,34,000 1,79,34,000
Additional Information:
1. The authorised share capital of the company is:
3,000, 9% preference shares of Rs. 100 each 3,00,000
20,000, Equity shares of Rs. 100 each 20,00,000
2. Issued equity capital as on 1st April 20X1 stood at Rs. 14,40,000, that is 12,000 shares fully paid and 4,000 shares
of Rs. 60 paid. The directors made a call of Rs. 40 per share on 1st October. A shareholder could not pay the
call on 500 shares and his shares were then forfeited and reissued @ Rs. 90 per share as fully paid.
3. On 31st March 20X2, the Directors declared a dividend of 12% on equity shares, transferring any amount that
may be required from General Reserve.
4. The company on the advice of independent valuer wishes to revalue the land by 10%
5. Suspense account of Rs. 1,40,000 represents amount received for the sale of some of the machinery on 1-4-20X1.
The cost of the machinery was Rs. 3,00,000 and the accumulated depreciation thereon being Rs. 1,80,000.
6. Depreciation is to be provided on plant and machinery at 10% on diminishing balance.
7. Amortize 1/5th of Goodwill.
8. Rs. 2,00,000 of Debentures were redeemed on 1st Oct at 10% Premium but premium amount not yet credited to
Security Premium A/c. Full Amount wrongly debited to Debentures A/c.
9. Maintain a Provision of 7% on Debtors as on 31st March 20X2.
10. Provision for Income Tax as on 31st March should be Rs. 8,00,000
11. Closing Raw Material is Rs. 2,45,000
12. Adjusted Purchase of Stock in Trade includes 16,000 distributed among valued customers
13. Long Term loan from Bank includes Interest Accrued but not due Rs. 50,000 and Rs. 1,20,000 To be payable
within 1 Year.
14. Bills receivables discounted not yet matured Rs. 15,000
15. Outstanding expenses Rs. 21,000
16. Directors are eligible for Managerial remuneration of 11% of NP before Tax
17. Transfer 20% of NPAT to General Reserve.
You are required to prepare Holding Limited's Balance Sheet as on 31-3-20X2 and Statement of Profit and Loss with
notes to accounts for the year ended 31-3-20X2 as per Schedule III of the Companies Act, 2013.

SOLUTION
Working Notes:
1) Allotment of Equity Share Capital
₹
Uncalled Money 40 Loss
Reissued Price 90 Gain
Total Gain 50
Capital Reserve 50 x 500 = 25,000
Already Fully Paid Shares 12,000 no.

Partly Paid Shares 4,000 no.
Total No of Shares 16,000 no.
Equity Share Capital 16,000 x 100 =
16,00,000
2) Dividend
₹
(a) Preference Dividend 3,00,000 x 9% 27,000
(b) Equity Dividend 16,00,000 x 12% 1,92,000
3) Land Revaluation by 4,00,000
4) Wrong Entry
Bank A/c Dr. 1,40,000
To Suspense A/c 1,40,000
Correct Entry
Bank A/c Dr. 1,40,000
Accumulated Depreciation A/c Dr. 1,80,000
To Gain A/c (Other Income) 20,000
To Machine A/c 3,00,000
5) Depreciation of Plant & Machinery

Machine Provision
Value As per Trail Balance 12,50,000 3,50,000
Sold/Depreciation (3,00,000) (1,80,000)
Balance 9,50,000 1,70,000
Depreciation = (9,50,000 – 1,70,000) x 10% = 78,000

6) Amortisation of Goodwill:
10,00,000 / 5 = 2,00,000
7) Wrong Entry
Debenture A/c Dr. 2,20,000
To Bank A/c 2,20,000
Correct Entry
Debenture A/c Dr. 2,00,000
Securities Premium A/c Dr. 20,000
Rectification Entry
Securities Premium A/c Dr. 20,000
To Debentures A/c 20,000
Revised Debenture Value after Rectification entry = 4,80,000 + 20,000 = 5,00,000
Interest on Debenture (2nd Half) = 5,00,000 x 10% x 6/12 = 25,000
8) Provision for Bad Debts A/c

Particular Amount Particular Amount
To Bad Debts 45,000 By Balance B/d 67,000
To Closing Balance 1,05,000 By P&L A/c 83,000
1,50,000 1,50,000
9) Provision for Tax

Particular Amount Particular Amount
To Bank 9,50,000 By Balance B/d 5,20,000
To Balance c/d 8,00,000 By P&L A/c (b/f) 12,30,000
17,50,000 17,50,000
10) Cost of Material Consumed:

Opening Raw Material 2,10,000
Purchase of Raw Material 8,10,000
Closing Raw Material (2,45,000)
Cost of Material Consumed 7,75,000
11) Advertisement = 16,000

12) Long Term Loan From Bank is 13,20,000
Interest = 50,000 (OCL)
Current Maturity = 1,20,000 (Short term Borrowing)
Balance Figure = 11,50,000 (Long term Borrowing)
13) Outstanding Expenses = 21,000
14) Interest on Investment

Investment 16,00,000
Interest Rate 7.5%
1,20,000
(-) Balance in Trail Balance (90,000)
Accrued Interest on Investment 30,000
15) Managerial Remuneration

Net Profit before Remuneration & Tax = 33,59,000
Managerial Remuneration @ 11% = 3,69,490
(-) Paid = 1,00,000
Managerial Remuneration Payable = 2,69,490
Balance Sheet
PARTICULARS
EQUITY & LIABILITIES
1 Shareholder’s Fund
A Share Capital 1 19,00,000
B Reserves & Surplus 2 36,60,510
2 Non Current Liabilities

Long Term Borrowings 3 19,50,000
Deferred Tax Liabilities 1,00,000
3 Current Liabilities
A Short Term Borrowings 4 6,20,000
B Trade Payable 11,50,000
C Short Term Provisions 5 8,00,000
D Other Current Liabilities 6 5,96,490
1,07,77,000

ASSETS
1 Non-Current Assets
A Property, Plant & Equipment: 7 51,02,000
B Goodwill 7 8,00,000 59,02,000
C Long term Investment 16,00,000
2 Current Asset
A Debtors – Provisions 13,95,000
B Bills Receivable 4,00,000 17,95,000
C Inventory 8 10,20,000
D Cash & Cash Equivalent 4,30,000
E Other Current Assets
Accrued Interest 30,000
1,07,77,000
Statement of profit & Loss A/c of Holding Ltd. for year ended 31st March 20X2
1 Revenue from Operation 90,00,000

2 Other Income
Gain 20,000
Grant 1,75,000
Interest on Investment 1,20,000 3,15,000
93,15,000
Expenditures
(i) Cost of Material Consumed 7,75,000
(ii) Adjusted Purchase 21,30,000 – 21,14,000
16,000
(iii) Change in Inventory of Stock In Trade -
(iv) Employee Benefit:
Managerial Remuneration 3,69,490
(v) Finance Cost:
Interest on Debentures 35,000 + 60,000
25,000
(vi) Depreciation/Amortisation:
Depreciation on Machinery 78,000
Amortisation of Goodwill 2,00,000 2,78,000
(vii) Other Expenses:
Factory 12,00,000
Advertisement 16,000

Administration Expense 4,00,000
Selling Expense 9,00,000
Provision for Doubtful Debts 83,000
Directors Fee 51,000
Consumables 18,000
Preliminary Expenses 40,000
Outstanding Expenses 21,000 27,29,000
Net Profit Before Tax 29,89,510
(-) Tax Expense
Current Tax (12,30,000)
Net Profit After Tax 17,59,510*
*Transfer to General Reserve @20% = 3,51,902
Notes to Accounts:
Rs
1 Share Capital
Authorised
20,000 Equity shares of Rs 100 each 20,00,000
Issued & subscribed
16,000 Equity Shares of Rs 100 each 16,00,000
Preference share capital
Authorised
3,000 9% Preference shares of Rs 100 each 3,00,000
Issued & subscribed
5,000 6% Preference shares of Rs 100 each 3,00,000
Total 19,00,000
2 Reserves & Surplus
Capital reserve 25,000
General reserve 15,00,000 18,51,902
+ Transfer from P&L A/c 3,51,902
Profit & Loss A/c
Opening balance 1,50,000
+ Net Profit After Tax 17,59,510
- Transfer (3,51,902)
- Interim Dividend (90,000)
- Preference Dividend (27,000)
- Equity Dividend (1,92,000) 12,48,608
Revaluation Reserve 4,00,000 36,60,510
3 Long term Borrowings
From Bank 11,50,000
From Others 3,00,000
Debentures 5,00,000 19,50,000
4 Short term Borrowings
From Bank 5,00,000
Current Maturity of Long Term Borr. 1,20,000 6,20,000
5 Short term Provision:
Tax Provision 8,00,000
6 Other Current Liabilities:
Outstanding Expenses 21,000
Managerial Remuneration 2,69,490
Unclaimed Dividend 12,000
Interest accrued not due 50,000
Preference Dividend 27,000
Equity Dividend 1,92,000
Interest on Debentures 25,000 5,96,490
7 Property, Plant & Equipment:
a) Tangible Assets
Land 44,00,000
(-) Provision for Depreciation (2,48,000) 7,02,000
b) Intangible Asseets
Goodwill 8,00,000 59,02,000
8 Inventory:
Raw Material 2,45,000
Stock In Trade 7,50,000
Loose Tools 25,000 10,20,000
9 Depreciation/Amortisation:
Depreciation on Machinery 78,000
Amortisation of Goodwill 2,00,000 2,78,000
10 Other Expenses:
Factory 12,00,000
Administration Expense 4,00,000
Selling Expense 9,00,000
Provision for Doubtful Debts 83,000
Directors Fee 51,000
Consumables 18,000
Preliminary Expenses 40,000
Outstanding Expenses 21,000 27,29,000
Question 6
XYZ Ltd. is having inadequacy of profits in the year ending 31-03-2021 and it proposes to declare 10% dividend out
of General Reserves.
From the following particulars ascertain the amount that can be utilized from general reserves, according to the
Companies (Declaration of Dividend out of Reserves) Rules, 2014:
5,00,000 Equity Shares of Rs. 10 each fully paid up 50,00,000
General Reserves 25,00,000
Revaluation Reserves 6,50,000
Net profit for the year 1,42,500
Average rate of dividend during the last five years has been 12%.

SOLUTION
Amount that can be drawn from reserves for (10% dividend on Rs. 50,00,000 i.e., Rs. 5,00,000)
Profits available
Current year profit Rs. 1,42,500
Amount which can be utilized from reserves (Rs. 5,00,000 – 1,42,500) Rs. 3,57,500
Conditions as per Companies (Declaration of dividend out of Reserves) Rules, 20X1:

Condition I
Since 10% is lower than the average rate of dividend (12%), 10% dividend can be declared.
Condition II
Maximum amount that can be drawn from the accumulated profits and reserves should not exceed 10% of paid-up
capital plus free reserves i.e., Rs. 7,50,000 [10% of (50,00,000 + 25,00,000)]
Condition III
The balance of reserves after drawl Rs. 21,42,500 (Rs. 25,00,000 - Rs. 3,57,500) should not fall below 15 % of its
paid-up capital i.e., Rs. 7,50,000 (15% of Rs. 50,00,000]
CONCLUSION
Since all the three conditions are satisfied, the company can withdraw Rs. 3,57,500 from accumulated reserve (as per
Declaration and Payment of Dividend Rules, 2014).

REDEMPTION OF DEBENTURES
QUESTION 07:
Sencom Limited issued Rs. 1,50,000 5% Debentures on 30th September 20X0 on which interest is payable half yearly
on 31st March and 30th September. The company has power to purchase debentures in the open market for cancellation
thereof. The following purchases were made during the year ended 31st December, 20X2 and the cancellation were
made on the same date. On 31st December 20X0, investments made for the purpose of redemption were Rs 22,500.
1st March 20X2 – Rs 25,000 nominal value purchased for Rs 24,725 ex-interest.
1st September 20X2 – Rs 20,000 nominal value purchased for Rs 20,125 cum-interest.
You are required to draw up the following accounts up to the date of cancellation:
(i) Debentures Account; and
(ii) Own Debenture (Investment) Account.
Ignore taxation.
SOLUTION
Sencom Limited Debenture Account
20X2 Particulars Rs 20X2 Particulars Rs
Mar 1 To Own Debentures 24,725 Jan 1 By Balance b/d 1,50,000
Mar 1 To Profit on cancellation 275
(25,000-24,725)
Sep 1 To Own Debentures (Note 3) 19,708
Sep 1 To Profit on cancellation 292
(20,000-19,708)
Dec 31 Balance c/d 1,05,000
1,50,000 1,50,000
Own Debenture (Investment) Account

Date Particulars Nominal Interest Cost Rs Date Particulars Nominal Interest Cost Rs
Cost Rs Cost Rs
Rs Rs
20X2 20X2
Mar 1 To Bank (W.N. 1) 25,000 521 24,725 Mar 1 By Debentures A/c 25,000 - 24,725
Sep 1 To Bank (W.N. 2 & 3) 20,000 417 19,708 Sep 1 By Debentures A/c 20,000 - 19,708
Dec. 31 By P&L A/c 938
45,000 938 44,433 45,000 938 44,433
Working notes:
1. 25,000 x 5% x 5/12 = 521
2. 20,000 x 5% x 5/12 = 417
3. 20,125 – 417 = 19,708

QUESTION 08:
The following balances appeared in the books of Paradise Ltd as on 1-4-20X1:
• 12 % Debentures Rs. 7,50,000
• Balance of DRR Rs. 25,000
• DRR Investment 1,12,500 represented by 10%, 1,125 Secured Bonds of the Government of India of Rs. 100 each.
Annual contribution to the DRR was made on 31st March every year. On 31-3-20X2, balance at bank was Rs 7,50,000
before receipt of interest. The investment were realised at par for redemption of debentures at a premium of 10% on
the above date.
You are required to prepare the following accounts for the year ended 31st March, 20X2:
(1) Debentures Account
(2) DRR Account
(3) DRR Investment Account
(4) Bank Account
(5) Debenture Holders Account.
SOLUTION
1. 12% Debentures Account
Date Particulars Rs Date Particulars Rs
31 st
March, To Debenture holder’s A/c 7,50,000 1 st
April, By Balance b/d 7,50,000
20X2 20X1
7,50,000 7,50,000
2. DRR Account
1st April, By Balance b/d 25,000
20X1
31st March, To General reserve A/c 75,000 1st April, By Profit and loss A/c 50,000
20X2 note 1 20X1 (Refer Note 1)
1,87,500 1,87,500
3. 10% Secured Bonds of Govt. (DRR Investment) A/c

1 st
April, To Balance b/d 1,12,500 31 st
March, By Bank A/c 1,12,500
20X1 20X2
1,12,500 1,12,500
4. Bank A/c
31st To Balance b/d 7,50,000 31st B 12% Debenture 8,25,000
March, March

20X2 To Interest on DRR 11,250
Investment
20X2 To DRR Investment A/c 1,12,500 By Balance c/d 48,750
8,73,750 8,73,750
5. Debenture holder’s A/c

31st To Bank A/c 8,25,000 31st By 12% Debentures 7,50,000
March, March, By Premium on redemption of 75,000
20X2 20X2 debentures @ 10%
8,25,000 8,25,000
Note 1 –
Calculation of DRR before redemption = 10% of Rs 7,50,000 = 75,000 Available balance = Rs
25,000;
DRR required = 75,000 – 25,000 = Rs 50,000.
QUESTION 09: (RTP Nov18)

st
The summarized Balance Sheet of Spices Ltd. As on 31 March, 2018 read as under:
Rs
Liabilities:
Share Capital: 9,000 equity shares of Rs 10 each, fully paid up 90,000
General Reserve 38,000
Debenture Redemption Reserve 35,000
12% Convertible Debentures: 1,200 Debentures of Rs 50 each 60,000
Unsecured Loans 28,000
Short term borrowings 19,000
2,70,000
Assets:
Fixed Assets (at cost less depreciation) 72,000
Debenture Redemption Reserve Investments 34,000
Cash and Bank Balances 86,000
Other Current Assets 78,000
2,70,000
st
The debentures are due for redemption on 1 April, 2018. The terms of issue of debentures provided that they were
redeemable at a premium 10% and also conferred option to the debenture holders to convert 40% of their holding into
equity shares at a predetermined price of Rs 11 per share and the balance payment in cash.
Assuming that:
(i) Except for debenture holders holding 200 debentures in aggregate, rest of them exercised the option for maximum
conversion,

(ii) The investments realized Rs. 56,000 on sale,
(iii) All the transactions were taken place on 1st April,2018
(iv) Premium on redemption of debentures is to be adjusted against General Reserve.
You are required to
(a) Redraft the Balance Sheet of Spices Ltd. as on 01.04.2018 after giving effect to the redemption.
(b) Show your calculations in respect of the number of equity shares to be allotted and the cash payment necessary.
SOLUTION
Spices Ltd.
Balance Sheet as on 01.04.2018
Particulars Note Figures as at the end of
No. current reporting period
I. Equity and Liabilities
(1) Shareholder's Funds
(a) Share Capital 1 1,10,000
(b) Reserves and Surplus 2 91,000
(2) Non-Current Liabilities
(a) Long-term borrowings – 28,000
Unsecured Loans
(3) Current Liabilities
(a) Short-term borrowings 19,000
Total 2,48,000
II. Assets
(1) Non-current assets
(a) Fixed assets
(i) Tangible assets 72,000
(2) Current assets
(a) Cash and cash equivalents 98,000
(b) Other current assets 78,000
Total 2,48,000
Notes to Accounts
Rs
1 Share Capital
11,000 Equity Shares of Rs 10 each 1,10,000
(Out of above, 2000 shares issued to debentures holders who opted for
conversion into shares)
2 Reserve and Surplus
General Reserve 38,000
Add: Debenture Redemption Reserve transfer 35,000
73,000
Add: Profit on sale of investments 22,000

95,000
Less: Premium on redemption of debentures (1,200 x Rs. 5) (6,000) 89,000
Securities Premium Account (2,000 x Rs 1) 2,000
91,000
Working Notes:
(i) Calculation of number of shares to be allotted Rs

Total number of debentures 1,200
Less: Number of debentures not opting for conversion (200)
1,000
40% of 1,000 400
Redemption value of 400 debentures (400 x Rs 55) Rs 22,000
Number of Equity Shares to be allotted 22,000/11 = 2,000 shares of Rs. 10 each
(ii) Calculation of cash to be paid Rs
Number of debentures 1,200
Less: Number of debentures to be converted into equity shares (400)
800
Redemption value of 800 debentures (800 × Rs 55) Rs 44,000
(iii)
Cash and Bank Balance Rs.
Balance before redemption 86,000
Add: Proceeds of investments sold 56,000
1,42,000
Less: Cash paid to debenture holders (44,000)
98,000
QUESTION 10: (EXAM Nov 18)

A Company had issued 1,000 12% debentures of Rs. 100 each redeemable at the company's option at the end of 10
years at par or prior to that by purchase in open market or at Rs. 102 after giving 6 months’ notice. On 31st December,
2016, the accounts of the company showed the following balances:
Debenture redemption fund Rs. 53,500 represented by 10% Govt. Loan of a nominal value of Rs. 42,800 purchased at
an average price of Rs. 101 and Rs. 10,272 un-invested cash in hand.
On 1st January 2017, the company purchased Rs. 11,000 of its own debentures at a cost of Rs. 10,272.
On 30th June, 2017, the company gave a six months’ notice to the holders of Rs. 40,000 debentures and on 31st
December, 2017 carried out the redemption by sale of Rs. 40,800 worth of Govt. Loan at par and also cancelled the
own debentures held by it.
Prepare ledger account of Debenture Redemption Fund Account and Debenture Redemption Fund Investment Account
for the year ended 31.12.2017, assuming that, interest on company debentures & Govt. loan was payable on 31st
December every year.

SOLUTION
(1) Since this chapter has been amended twice in the past, the below solution is not as per amendment, so
where ever required we have to change the solution:
(2) Debenture Redemption Fund Account

31.12.17 To Debenture Redemption 408 1.1.17 By Balance b/d 53,500
Fund Investment A/c
To Premium on redemption of 800 31.12.17 By interest on DRFI 4,280
debentures (10% of Rs. 42,800)
To Balance c/d 57,892 By interest on own 1,320
debentures (i.e., 12% on
Rs. 11,000)
59,100 59,100
1.1.18 To Balance b/d 57,892
(3) Debenture Redemption Fund Investment Account

Rs Rs
1.1.17 To Balance b/d (428 x 43,228 31.12.17 By Bank A/c 40,800
Rs 101)
1.1.17 To Bank 10,272 By Debenture redemption 408
Fund (1% of Rs. 40,800)
By 12% Debentures 11,000
31.12.17 To capital Reserve 728 By Balance c/d 2,020
(Profit on cancellation
of Debentures)
54,228 54,228
1.1.18 To Balance b/d 2,020
QUESTION 11: (EXAM Nov22)

On 1st April, 2021, the following balances appeared in the books of Globe Limited (an unlisted company other than
AIFI, Banking Company, NBFC and HFC):
(i) 50,000 9% Debentures of ₹ 100 each issued at par
(ii) Balance of Debenture Redemption Reserve (DRR) ₹ 5,00,000.
(iii) Debenture Redemption Reserve (DRR) Investment ₹ 5,00,000 represented by 8.75% Secured Bonds of the
Government of India of ₹ 100 each.
Interest on Debentures was paid half- yearly on 30th of September and 31st March every year. On 31st May, 2021,
the company purchased 8,000 Debentures of its own @ 98 (ex-interest) per debenture and cancelled them on the
same date.
On 1st January,2022, it further acquired another 10,000 own Debentures @ ₹ 101 (cum - interest) per debenture

and cancelled them on the same date.
The funds required for purchasing the aforesaid debentures were partly raised by selling off the DRR Investment.
On 30th March, 2022, the remaining investments were realized at par and the Debentures were redeemed on 31st
March, 2022.
You are required to prepare the following accounts for the year ended 31 st March, 2022:
(1) 9% Debentures Account.
(2) Debenture Redemption Reserve Account.
(3) Debenture Redemption Reserve Investment Account.
(4) Interest on Debentures Account.
Solution
In the book of Globe Ltd.
9% Debentures Account
Date Particulars ₹ Date Particulars ₹
31.5.21 To Bank A/c* (Own Debentures 1.4.21 By Bal b/d 50,00,000
Purchased) 784,000
To Profit on cancellation of debentures 16,000
1.1.22 To Bank A/c* (Own Debentures
Purchased) (10,000x101) - 22,500 9,87,500
To Profit on cancellation of debentures 12,500

31.3.22 To Bank 32,00,000
50,00,000 50,00,000
Note - Alternatively, this entry can also be routed through Own Debentures Account.
Debenture Redemption Reserve Account

31.5.21 To General reserve 80,000 1.4.21 By Bal b/d 5,00,000
1.1.22 To General reserve 1,00,000
31.3.22 To General reserve 3,20,000
5,00,000 5,00,000
Debenture Redemption Reserve Investment Account

1.4.21 To Bal b/d 5,00,000 31.5.21 By Bank A/c 1,20,000
(8,000x100x15%)
1.4.21 To Bank A/c 2,50,000 1.1.22 By Bank A/c 1,50,000
(10,000x100x15%)
31.3.22 By Bank A/c 4,80,000
(32,000x100x15%)
7,50,000 7,50,000

Interest on Debentures Account
31.5.21 To Bank A/c 31.3.22 By P&L A/c 3,67,500
(8,000x100x9%x2/12) 12,000
30.9.21 To Bank A/c
(42,000 x 100 x 9% x 1,89,000
6/12)
1.1.22 To Bank A/c
(10,000x100x9%x3/12) 22,500
31.3.22 To Bank A/c
(32,000x100x9%x 6/12) 1,44,000
3,67,500 3,67,500
Working Note:
Additional Investment in Debenture Redemption Reserve Investment
Debenture redemption Reserve Investment required = 15% of ₹ 50,00,000 = ₹ 7,50,000 Debenture redemption
Reserve Investment existing on 1/04/21 = 5,00,000
Additional Debenture redemption Reserve Investment required = ₹ 7,50,000 - ₹ 5,00,000 = ₹ 2,50,000

CASH-FLOW STATEMENTS
QUESTION 12A: (RTP May20)

Classify the following activities as
(a) Operating Activities,
(b) Investing Activities,
(c) Financing Activities
(d) Cash Equivalents.
(a) Purchase of Machinery.
(b) Proceeds from issuance of equity share capital
(c) Cash Sales.
(d) Proceeds from long-term borrowings.
(e) Proceeds from Trade receivables.
(f) Cash receipts from Trade receivables.
(g) Trading Commission received.
(h) Purchase of investment.
(i) Redemption of Preference Shares.
(j) Cash Purchases.
(k) Proceeds from sale of investment
(l) Purchase of goodwill.
(m) Cash paid to suppliers.
(n) Interim Dividend paid on equity shares.
(o) Wages and salaries paid.
(p) Proceed from sale of patents.
(q) Interest received on debentures held as investment.
(r) Interest paid on Long-term borrowings.
(s) Office and Administration Expenses paid
(t) Manufacturing Overheads paid.
(u) Dividend received on shares held as investments.
(v) Rent Received on property held as investment.
(w) Selling and distribution expense paid.
(x) Income tax paid
(y) Dividend paid on Preference shares.
(z) Underwritings Commission paid.
(aa) Rent paid.
(bb) Brokerage paid on purchase of investments.
(cc) Bank Overdraft
(dd) Cash Credit

(ee) Short-term Deposits
(ff) Marketable Securities
(gg) Refund of Income Tax received.
SOLUTION
(a) Operating Activities: c, e, f, g, j, m, o, s, t, w, x, aa & gg.
(b) Investing Activities: a, h, k, l, p, q, u, v, bb & ee.
(c) Financing Activities: b, d, i, n, r, y, z, cc & dd.
(d) Cash Equivalent: ff.
QUESTION 12B:
Classify the following activities as per AS 3 Cash Flow Statement:
(i) Interest paid by financial enterprise
(ii) Tax deducted at source on interest received from subsidiary company
(iii) Deposit with Bank for a term of two years
(iv) Insurance claim received towards loss of machinery by fire
(v) Bad debts written off
SOLUTION
(i) Interest paid by financial enterprise
Cash flows from operating activities
(ii) TDS on interest received from subsidiary company
Cash flows from investing activities
(iii) Deposit with bank for a term of two years
(iv) Insurance claim received against loss of fixed asset by fire
Extraordinary item to be shown as a separate heading under ‘Cash flow from investing activities’
(v) Bad debts written off
It is a non-cash item which is adjusted from net profit/loss under indirect method, to arrive at net cash flow
from operating activity.
QUESTION 13:
The balance sheets of Sun Ltd. for the years ended 31st March 20X1 and 20X0 were summarised as:
20X1 20X0
Rs Rs
Equity Share Capital 60,000 50,000
Reserves:
Profit and Loss Account 5,000 4,000
Current Liabilities:
Trade payables 4,000 2,500
Other Current Liabilities - 1,000

Taxation 1,500 1,000
Total 70,500 58,500
Fixed Assets (at W.D.V.)
Premises 10,000 10,000
Fixtures 17,000 11,000
Vehicles 12,500 8,000
Short-term investments 2,000 1,000
Current Assets
Inventory 17,000 14,000
Trade receivables 8,000 6,000
Bank and Cash 4,000 8,500
Total 70,500 58,500
Notes to accounts
20X1 (Rs.) 20X0 (Rs.)
1 Share Capital
Equity Shares of Rs.10 each 60,000 50,000
2 Reserve & surplus
Dividend Payable - 1,000
4 Property, plant and equipment (at WDV)
Building 10,000 10,000
Fixtures 17,000 11,000
Vehicles 12,500 8,000
Total 39,500 29,000
5 Cash and cash equivalents
Cash and Bank 4,000 8,500
The profit and loss account for the year ended 31st March, 20X1disclosed
Profit before tax 4,500
Taxation (1,500)
Profit after tax 3,000
Declared dividends (2,000)
Retained profit 1,000
Further information is available

Fixtures Vehicles
Rs Rs
Depreciation for year 1,000 2,500
Disposals:
Proceeds on disposal — 1,700

Written down value — (1,000)
Profit on disposal 700
Prepare a Cash Flow Statement for the year ended 31st March, 20X1.
Solution
Sun Ltd.
Cash Flow Statement
for the year ended 31st March, 20X1
Particulars Rs Rs
CASH FLOWS FROM OPERATING ACTIVITIES
Net Profit before taxation 4,500
Adjustments for:
Depreciation 3,500
Profit on sale of vehicles (1,700 – 1,000) (700)
Operating profit before working capital changes 7,300
Increase in Trade receivables (2,000)
Increase in inventories (3,000)
Increase in Trade payables 1,500
Cash generated from operations 3,800
Income taxes paid (W.N.1) (1,000)
Net cash generated from operating activities 2,800
CASH FLOWS FROM INVESTING ACTIVITIES
Sale of vehicles 1,700
Purchase of vehicles (W.N.3) (8,000)
Purchase of fixtures (W.N.3) (7,000)
Net cash used in investing activities (14,300)
CASH FLOWS FROM FINANCING ACTIVITIES
Issue of shares for cash 10,000
Dividends paid (W.N.2) (3,000)
Net cash from financing activities 7,000
Net decrease in cash and cash equivalents (4,500)
Cash and cash equivalents at beginning of period (See Note) 8,500
Cash and cash equivalents at end of period (See Note) 4,000
Note to the Cash Flow Statement
Cash and Cash Equivalents 31.3.20X1 31.3.20X0
Bank and Cash 4,000 8,500
Cash and cash equivalents 4,000 8,500
Working Notes:
Particulars Rs Rs
1. Income taxes paid
Income tax expense for the year 1,500

Add: Income tax liability at the beginning of the year 1,000
2,500
Less: Income tax liability at the end of the year (1,500)
1,000
2. Dividend paid
Declared dividend for the year 2,000
Add: Amount payable at the beginning of the year 1,000
3,000
Less: Amount payable at the end of the year -
3,000
3. Fixed assets acquisitions
Fixtures Vehicles
Rs Rs
W.D.V. at 31.3.20X1 17,000 12,500
Add back:
Depreciation for the year 1,000 2,500
Disposals — 1,000
18,000 16,000
Less: W.D.V. at 31.12.20X0 (11,000) (8,000)
Acquisitions during20X0-20X1 7,000 8,000
Note: Current investments may not be readily convertible to a known amount of cash and may not be
subject to an insignificant risk of changes in value as per the requirements of AS 3 and hence those
have been considered as investing activities.
QUESTION 14:
Given below is the Statement of Profit and Loss of ABC Ltd. and relevant Balance Sheet information:
Extract of Balance sheet
Particular Notes 31.3.20X1 31.3.20X0
(Rs. In lakhs) (Rs. In lakhs)
a Trade Payables 250 230
b Short term Provisions 1 200 180
c Other current liabilities 2 70 50
Assets
1 Current assets
a Inventories 200 180
b Trade Receivable 400 250
c Other current assets 3 195 180

Statement of Profit and Loss of ABC Ltd.
Particulars Notes Rs. In lakhs
I Revenue from operations 4,150
II Other income 4 100
III Total income (I + II) 4250
Expenses:
Purchase on Stock-in-Trade 2,400
Change in inventories of finished goods (20)
Employee benefits expense 800
Depreciation expense 100
Finance cost 5 60
Other expenses 200
IV Total expenses 3,540
V Profit before tax (III -IV) 710
VI Tax expense:
Current tax 200
VII Profit for the year from continuing operations 510
Appropriations
Balance of profit and loss account brought forward 50
Transfer to general reserve 200
Dividend paid 330
Notes to accounts:
20X1 (Rs. In lakhs) 20X0 (Rs. In lakhs)
1 Short term provision
Provision for tax 200 180
Outstanding wages 50 40
Outstanding expenses 20 10
Total 70 50
3 Other current assets:
Advance tax 195 180
4 Other income:
Interest and dividend 100
5 Finance cost:
Interest 60

Compute cash flow from operating activities using both direct and indirect method.
Solution
By direct method
Computation of Cash Flow from Operating Activities
Particulars Rs in lakhs Rs in lakhs
Cash Receipts:
Cash sales and collection from Trade receivables
Sales + Opening Trade receivables – Closing Trade receivables (A) 4,150+250-400 4,000
Cash payments:
Cash purchases & payment to Trade payables Purchases + Opening 2,400+230-250 2,380
Trade payables – Closing Trade payables
Wages and salaries paid 800+40-50 790
Cash expenses 200+10–20 190
Taxes paid – Advance tax 195
(B) 3,555
Cash flow from operating activities (A – B) 445
By Indirect Method
Computation of Cash Flow from Operating Activities
Rs in lakhs Rs in lakhs
By Indirect method
Profit before tax 710
Add: Non-cash items: Depreciation 100
Add: Interest: Financing cash outflow 60
Less: Interest and Dividend: Investment cash inflow (100)
Less: Tax paid (195)
Working capital adjustments
Trade receivables 250-400 = (150)
Inventories 180-200 = (20)
Trade payables 250-230 =20
Outstanding wages 50-40=10
Outstanding expenses 20-10 =10 (130)
Cash flow from operating activities 445

QUESTION 15:
From the following Balance Sheet & information, prepare Cash Flow Statement of Ryan Ltd. by Indirect method for
the year ended 31st March, 20X1:
Balance Sheet
31stMarch, 20X1 31stMarch, 20X0
Liabilities
Equity Share Capital 6,00,000 5,00,000
10% Redeemable Preference Share Capital – 2,00,000
Capital Redemption Reserve 1,00,000 –
Capital Reserve 1,00,000 –
General Reserve 1,00,000 2,50,000
9% Debentures 2,00,000 –
Trade payables 1,15,000 1,10,000
Liabilities for Expenses 30,000 20,000
Provision for Taxation 95,000 60,000
Dividend payable 90,000 60,000
15,00,000 12,50,000
31st March,20X1 31st March,20X0
Assets
Land and Building 1,50,000 2,00,000
Plant and Machinery 7,65,000 5,00,000
Investments 50,000 80,000
Inventory 95,000 90,000
Trade receivables 2,50,000 2,25,000
Cash and Bank 65,000 90,000
Voluntary Separation Payments 1,25,000 65,000
15,00,000 12,50,000
(i) A piece of land has been sold out for Rs 1,50,000 (Cost – Rs 1,20,000) and the balance land was revalued. Capital
Reserve consisted of profit on sale and profit on revaluation.
(ii) On 1st April, 20X0 a plant was sold for Rs 90,000 (Original Cost – Rs 70,000 and W.D.V. – Rs 50,000) and
Debentures worth Rs1 lakh was issued at par as part consideration for plant of Rs4.5 lakhs acquired.
(iii) Part of the investments (Cost – Rs 50,000) was sold for Rs 70,000.
(iv) Pre-acquisition dividend received Rs 5,000 was adjusted against cost of investment.
(v) Directors have declared 15% dividend for the current year.
(vi) Voluntary separation cost of Rs 50,000 was adjusted against General Reserve.
(vii) Income-tax liability for the current year was estimated at Rs 1,35,000.

Depreciation @ 15% has been written off from Plant account but no depreciation has been charged on Land and
Building.
Solution
Cash Flow Statement of Ryan Limited
For the year ended 31st March, 20X1
Particulars Rs
CASH FLOW FROM OPERATING ACTIVITIES
Net Profit before taxation (W.N.1) 2,75,000
Adjustment for
Depreciation (W.N.3) 1,35,000
Profit on sale of land (30,000)
Profit on sale of plant (W.N.3) (40,000)
Profit on sale of investments (W.N.3) (20,000)
Interest on debentures (W.N.4) 18,000
Operating profit before working capital changes 3,38,000
Increase in inventory (5,000)
Increase in trade receivables (25,000)
Increase in other current assets (W.N.9) (35,000)
Increase in Trade payables 5,000
Increase in accrued liabilities 10,000
Cash generated from operations 2,88,000
Income taxes paid (W.N.8) (1,00,000)
Net cash generated from operating activities 1,88,000
CASH FLOW FROM INVESTING ACTIVITIES
Proceeds from sale of land (W.N.2) 1,50,000
Proceeds from sale of plant (W.N.3) 90,000
Proceeds from sale of investments (W.N.4) 70,000
Purchase of plant (W.N.3) (3,50,000)
Purchase of investments (W.N.4) (25,000)
Pre-acquisition dividend received (W.N.4) 5,000
Net cash used in investing activities (60,000)
CASH FLOW FROM FINANCING ACTIVITIES
Proceeds from issue of equity shares 1,00,000
(6,00,000 – 5,00,000)
Proceeds from issue of debentures 1,00,000
(2,00,000 – 1,00,000)
Redemption of preference shares (2,00,000)
Dividends paid (1,50,000)
Interest paid on debentures (18,000)
Net cash used in financing activities (1,68,000)
Net decrease in cash and cash equivalents (40,000)

Cash and cash equivalents at the beginning of the year 90,000
Cash and Cash equivalents at the end of the year 65,000
Working Notes:
1. Net Profit before taxation
Particulars Rs
Net profit before taxation
Retained profit 1,00,000
Less: Balance as on 31.3.20X0 (50,000)
20,000
Provision for taxation 1,35,000
Dividend payable 90,000
Net Profit before taxation 2,75,000
2. Land and Building Account

Particulars Rs Particulars Rs
To Balance b/d 2,00,000 By Cash (Sale) 1,50,000
To Capital reserve (Profit on sale) 30,000 By Balance c/d 1,50,000
To Capital reserve (Revaluation 70,000
profit)
3,00,000 3,00,000
3. Plant and Machinery Account

To Balance b/d 5,00,000 By Cash (Sale) 90,000
To Profit and loss account 40,000 By Depreciation 1,35,000
To Debentures 1,00,000 By Balance c/d 7,65,000
To Bank 3,50,000
9,90,000 9,90,000
4. Investments Account
To Balance b/d 80,000 By Cash (Sale) 70,000
To Profit and loss account 20,000 By Dividend (Pre acquisition) 5,000
To Bank (Balancing figure) 25,000 To Balance C/d 50000
125000 125000
5. Capital Reserve Account

To Balance c/d 70,000 By Profit on revaluation of land 70,000
70,000 700,000

6. General Reserve Account
To Capital redemption reserve 1,00,000 By Balance b/d 2,50,000
To Balance c/d 1,50,000
2,50,000 2,50,000
7. Dividend payable Account
To Bank (Balancing figure) 1,50,000 By Balance b/d 60,000
To Balance c/d - By Profit & loss account 90,000
1,50,000 1,50,000
8. Provision for Taxation Account

To Bank 1,00,000 By balance b/d 60,000
(Balancing figure)
To Balance c/d 95,000 By Profit & loss account 1,35,000
1,95,000 1,95,000
9. Other Current Assets Account

To Balance b/d 65,000 By Balance c/d 1,00,000
To Bank (Balancing figure) 35,000
1,00,000 1,00,000

A company provides you the following information:
(i) Total sales for the year were Rs. 398 crores out of which cash sales amounted to Rs. 262 crores.
(ii) Receipts from credit customers during the year, aggregated Rs. 134 crores.
(iii) Purchases for the year amounted to Rs. 220 crores out of which credit purchase was 80%.
Balance in creditors as on
1.4.2016 Rs. 84 crores
31.3.2017 Rs. 92 crores
(iv) Suppliers of other consumables and services were paid Rs. 19 crores in cash.
(v) Employees of the enterprises were paid 20 crores in cash.
(vi) Fully paid preference shares of the face value of Rs. 32 crores were redeemed. Equity shares of the face value
of Rs. 20 crores were allotted as fully paid up at premium of 20%.
(vii) Debentures of Rs. 20 crores at a premium of 10% were redeemed. Debenture holders were issued equity shares
in lieu of their debentures.

(viii) Rs26 crores were paid by way of income tax.
(ix) A new machinery costing Rs. 25 crores was purchased in part exchange of old machinery. The book value of
the old machinery was Rs. 13 crores. Through the negotiations, the vendor agreed to take over the old machinery
at a higher value of Rs. 15 crores. The balance was paid in cash to the vendor.
(x) Investment costing Rs. 18 cores were sold at a loss of Rs. 2 crores.
(xi) Dividends amounting Rs. 15 crores (including dividend distribution tax of Rs. 2.7 crores) was also paid.
(xii) Debenture interest amounting Rs. 2 crore was paid.
(xiii) On 31st March 2016, Balance with Bank and Cash on hand was Rs. 2 crores.
On the basis of the above information, you are required to prepare a Cash Flow Statement for the year ended 31st
March, 2017 (Using direct method).
SOLUTION
Cash flow statement (using direct method) for the year ended 31st March, 2017
(Rs. in (Rs. in
crores) crores)
Cash flow from operating activities
Cash sales 262
Cash collected from credit customers 134
Less: Cash paid to suppliers for goods & services and to employees (Refer
Working Note) (251)
Cash from operations 145
Less: Income tax paid (26)
Net cash generated from operating activities 119
Cash flow from investing activities
Net Payment for purchase of Machine (25 – 15) (10)
Proceeds from sale of investments 16
Net cash used in investing activities 6
Cash flow from financing activities
Redemption of Preference shares (32)
Proceeds from issue of Equity shares 24
Debenture interest paid (2)
Dividend Paid (15)
Net cash used in financing activities (25)
Net increase in cash and cash equivalents 100
Add: Cash and cash equivalents as on 1.04.2016 2
Cash and cash equivalents as on 31.3.2017 102
Working Note:
Calculation of cash paid to suppliers of goods and services and to employees
(Rs. in crores)
Opening Balance in creditors Account 84
Add: Purchases (220x .8) 176

Total 260
Less: Closing balance in Creditors Account 92
Cash paid to suppliers of goods 168
Add: Cash purchases (220x .2) 44
Total cash paid for purchases to suppliers (a) 212
Add: Cash paid to suppliers of other consumables and services (b) 19
Add: Payment to employees (c) 20
Total cash paid to suppliers of goods & services and to employees 251
[(a)+ (b) + (c)]
QUESTION 17: (EXAM Jan21)

The following information was extracted from the books of S Ltd. for the year ended 31.03.2020.
(1) Net profit before taking into account income tax and after taking into account the following items was Rs. 30
Lakhs
(a) Depreciation on Property, Plant and Equipment Rs. 7,00,000
(b) Discount on issue of debentures written off Rs. 45,000
(c) Interest on debentures paid Rs. 4,35,000
(d) Investment of Book value Rs. 3,50,000 sold for 3,75,000
(e) Interest received on investments Rs.70,000
(2) Income tax paid during the year Rs.12,80,000
(3) The company issued 60,000 equity shares of Rs. 10 each at a premium of 20% on 10.04.2019
(4) 20,000 9% Preference Shares of Rs. 100 were redeemed on 31st March 2020 at a premium of 5%
(5) Dividend paid during the year amounted to Rs. 11,00,000 (Including dividend distribution tax)
(6) A new plant costing 7 Lakhs was purchased in part exchange of an old plant on 1st January 2020. The book
value of the old plant was Rs. 8 Lakhs but the vendor took over the old plant at a value of Rs. 6 Lakhs only.
The balance amount was paid to vendor through cheque on 30th March 2020.
(7) Company decided to value inventory at cost, whereas previously the practice was to value inventory at cost less
10%. The inventory according to books on 31.03.2020 was 14,76,000.
The Inventory on 31.03.2019 was correctly valued at Rs. 13,50,000
(8)Current assets and current liabilities in the beginning and at the end of the years 2019-2020 were as:
As on 01.04.2019 As on 31.03.2020
Rs. Rs.
Inventory 13,50,000 14,76,000
Trade Receivables 3,27,000 3,13,200
Cash in Hand 2,40,700 3,70,500
Trade payables 2,84,700 2,87,300
Outstanding expenses 97,000 1,01,400
You are required to prepare a Cash Flow Statement for the year ended 31st March 2020 as per AS 3 (revised) using
the indirect method.

SOLUTION
S Ltd.
Cash Flow Statement for the year ended 31st March, 2020
Cash flows from operating activities

Net profit before taxation* 30,00,000
Adjustments for:
Depreciation on PPE 7,00,000
Discount on debentures 45,000
Profit on sale of investments (25,000)
Interest income on investments (70,000)
Interest on debentures 4,35,000
Stock adjustment 1,64,000
{14,76,000 less 16,40,000(14,76,000/90X100)}
Operating profit before working capital change 12,49,000
Changes in working capital 42,49,000
(Excluding cash and bank balance):
Less: Increase in inventory (2,90,000)
{16,40,000(14,76,000/90X100) less 13,50,000}
Add: Decrease in Trade receivables 13,800
Increase in trade payables 2,600
Increase in o/s expenses 4,400 (2,69,200)
Less: Income taxes paid (12,80,000)
Net cash generated from operating activities 26,99,800
Sale of investments 3,75,000
Interest received 70,000
Payments for purchase of fixed assets (1,00,000)
(7,00,000 – 6,00,000)
Net cash used in investing activities 3,45,000
Cash flows from financing activities
Redemption of Preference shares (21,00,000
Issue of shares 7,20,000
Interest paid (4,35,000)
Dividend paid (11,00,000)
Net cash used in financing activities (29,15,000)
Net increase in cash 1,29,800
Cash at beginning of the period 2,40,700
Cash at end of the period 3,70,500

*Net profit given in the question is after considering only the items listed as information point (1) of the question;
hence amount of loss on plant not added back
QUESTION 18:
The Balance Sheet of New Light Ltd. for the years ended 31st March, 20X0 and 20X1 are as follows:
Notes 31st March, 31st March,
20X0 (Rs.) 20X1 (Rs.)
Equity and liabilities
1 Shareholders’ funds
A Share capital 1 16,00,000 18,80,000
B Reserves and Surplus 2 8,40,000 11,00,000
2 Non-current liabilities
A Long term borrowings 3 4,00,000 2,80,000
A Other current liabilities 4 6,00,000 5,20,000
B Short term provision (Provision for tax) 3,60,000 3,40,000
Total 38,00,000 41,20,000
Assets
1 non-current assets
A Property, plant and Equipment 5 22,80,000 26,40,000
B Non-Current investment 3,20,000
2 Current assets
A Cash and Cash equivalents 10,000 10,000
B Inventory 2,16,000 3,00,000
C Other current assets 8,94,000 8,50,000
Total 38,00,000 41,20,000
Notes to accounts
No. Particular 31st March, 20X0 31st March, 20X1
1 Share capital
Equity share capital 12,00,000 16,00,000
10% Preference share capital 4,00,000 2,80,000
Total 16,00,000 18,80,000
General reserve 6,00,000 7,60,000
Profit and Loss account 2,40,000 3,40,000
Total 8,40,000 11,00,000
3 Long term borrowings
9% Debentures 4,00,000 2,80,000
Total 4,00,000 2,80,000

Dividend payable 1,20,000 -
Current Liabilities 4,80,000 5,20,000
Total 6,00,000 5,20,000
5 Property, plant and equipment
Property, plant and equipment 32,00,000 38,00,000
Less: Depreciation (9,20,000) (11,60,000)
Net carrying value 22,80,000 26,40,000
Additional information:
(i) The company sold one fixed asset for Rs 1,00,000, the cost of which was Rs 2,00,000 and the depreciation
provided on it was Rs 80,000.
(ii) The company also decided to write off another fixed asset costing Rs 56,000 on which depreciation amounting
to Rs 40,000 has been provided.
(iii) Depreciation on fixed assets provided Rs 3,60,000.
(iv) Company sold some investment at a profit of Rs 40,000.
(v) Debentures and preference share capital redeemed at 5% premium. Debentures were redeemed at the year end.
(vi) Company decided to value inventory at cost, whereas previously the practice was to value inventory at cost less
10%. The inventory according to books on 31.3.20X0 was Rs 2,16,000. The inventory on 31.3.20X1 was correctly
valued at Rs 3,00,000.
Prepare Cash Flow Statement as per revised Accounting Standard 3 by indirect method.
SOLUTION
New Light Ltd.
Cash Flow Statement for the year ended 31st March, 20X1
A. Cash Flow from operating activities Rs.
Profit after appropriation
Increase in profit and loss A/c after inventory adjustment
[Rs. 3,40,000 – (Rs. 2,40,000 + Rs. 24,000)] 76,000
Transfer to general reserve 1,60,000
Dividend payable 1,60,000
Provision for tax 3,40,000
Net profit before taxation and extraordinary Item 5,76,000
Adjustments for:
Depreciation 3,60,000
Loss on sale of fixed assets 20,000
Decrease in value of fixed assets 16,000
Profit on sale of investment (40,000)
Premium on redemption of preference share capital 6,000
Interest on debentures 36,000
Premium on redemption of debentures 6,000
Operating profit before working capital changes 9,80,000
Increase in current liabilities (Rs. 5,20,000 – Rs. 4,80,000) 40,000

Increase in other current assets (16,000)
[Rs. 11,50,000 – (Rs. 11,10,000 + Rs. 24,000)]
Income taxes paid (3,60,000)
Net Cash generated from operating activities 6,44,000
B. CASH FLOW FROM INVESTING ACTIVITIES
Purchase of fixed assets (W.N.3) (8,56,000)
Proceeds from sale of fixed assets (W.N.3) 1,00,000
Proceeds from sale of investments (W.N.2) 1,20,000
Net Cash from investing activities (6,36,000)
C. CASH FLOW FROM FINANCING ACTIVITIES
Proceeds from issuance of share capital 4,00,000
Redemption of preference share capital (1,26,000)
(Rs. 1,20,000 + Rs. 6,000)
Redemption of debentures (Rs. 1,20,000 + Rs. 6,000) (1,26,000)
Dividend paid (1,20,000)
Interest on debentures (36,000)
Net Cash from financing activities (8,000)
Net increase/decrease in cash and cash equivalent during the year Nil
Cash and cash equivalent at the beginning of the year 10,000
Cash and cash equivalent at the end of the year 10,000
Working Notes:
1. Revaluation of inventory will increase opening inventory by Rs. 24,000. 2,16,000/90 x 100 = Rs. 24,000
Therefore, opening balance of other current assets would be as follows:
Rs. 11,10,000 + Rs. 24,000 = Rs. 11,34,000
Due to under valuation of inventory, the opening balance of profit and loss account be increased by Rs. 24,000.
The opening balance of profit and loss account after revaluation of inventory will be Rs. 2,40,000 + Rs. 24,000 = Rs.
2,64,000
2. Investment Account
To Balance b/d 4,00,000 By Bank A/c 1,20,000
To Capital reserve A/c (Profit (balancing figure being
on sale of investment) 40,000 investment sold)
By Balance c/d 3,20,000
4,40,000 4,40,000
3. Fixed Assets Account

To Balance b/d 32,00,000 By Bank A/c (sale of assets) 1,00,000

To Bank A/c 8,56,000 By Accumulated depreciation 80,000
(Balancing figure being A/c
assets purchased)
By Profit and loss A/c (loss on
sale of assets) 20,000
By Accumulated depreciation A/c 40000
By Profit and loss A/c 16000
(assets written off)
By Balance c/d 38,00,000
40,56,000 40,56,000
4. Accumulated Depreciation Account

To Fixed assets A/c 80,000 By Balance b/d 9,20,000
To Fixed assets A/c 40,000 By Profit and loss A/c 3,60,000
To Balance c/d 11,60,000 (depreciation for the period)
12,80,000 12,80,000

INVESTMENT ACCOUNTS
QUESTION 19:
On 1.1.20X1, Sundar had 25,000 equity shares of ‘X’ Ltd. at a book value of Rs. 15 per share (Nominal value Rs. 10).
On 20.6.20X1, he purchased another 5,000 shares of the company at Rs.16 per share. The directors of ‘X’ Ltd.
announced a bonus and rights issue. No dividend was payable on these issues. The terms of the issue are as follows:
Bonus basis 1:6 (Date 16.8.20X1)
Rights basis 3:7 (Date 31.8.20X1) Price Rs. 15 per share
Due date for payment 30.9.20X1
Shareholders were entitled to transfer their rights in full or in part. Accordingly, Sundar sold 33.33% of his entitlement
to Sekhar for a consideration of Rs. 2 per share.
Dividends: Dividends for the year ended 31.3.20X1 at the rate of 20% were declared by X Ltd. and received by Sundar
on 31.10.20X1. Dividends for shares acquired by him on 20.6.20X1 are to be adjusted against the cost of purchase.
On 15.11.20X1, Sundar sold 25,000 equity shares at a premium of Rs. 5 per share. You are required to prepare in the
books of Sundar.
(1) Investment Account
(2) Profit & Loss Account.
For your exercise, assume that the books are closed on 31.12.20X1and shares are valued at average cost.
SOLUTION
Books of Sundar
Investment Account
(Scrip: Equity Shares in X Ltd.)
Date Particulars No. Amount Date Particulars No. Amount
1.4.20X1 To Bal b/d 25,000 3,75,000 31.10.20X1 By Bank — 10,000
(Dividend on shares
acquired
on 20/6/20X1)
(W.N.4)
20.6.20X1 To Bank 5,000 80,000 15.11.20X1 By Bank A/c 25,000 3,75,000
(Sale of shares)
16.8.20X1 To Bonus 5,000 — By Bal. c/d 20,000 2,64,444
(W.N.1) (W.N.6)
30.9.20X1 To Bank 10,000 1,50,000
(Rights Shares)
(W.N.3)
45,000 6,49,444 45,000 6,49,444

Profit and Loss Account (An extract)
Particulars Amount Particulars Amount
To Balance c/d 1,04,444 By Profit transferred 44,444
By Sale of rights (W.N.3) 10,000
By Dividend (W.N.4) 50,000
1,04,444 1,04,444
Working Notes:
(1) Bonus Shares = 25,000 + 5,000 / 6= 5,000 shares
(2) Right Shares = 25,000 + 5,000 + 5,000 X 3 / 7 = 15,000 shares.
(3) Right shares renounced = 15,000×1/3 = 5,000
shares Sale of right shares = 5,000 x 2 = Rs. 10,000
Right shares subscribed = 15,000 – 5,000 = 10,000 shares
Amount paid for subscription of right shares = 10,000 x 15 = Rs. 1,50,000
(4) Dividend received = 25,000 (shares as on 1st April 20X1) × 10 × 20% = Rs. 50,000
Dividend on shares purchased on 20.6.20X1 = 5,000×10×20% = Rs. 10,000 is adjusted to Investment A/c
(5) Profit on sale of 25,000 shares = Sales proceeds – Average cost
Sales proceeds = Rs. 3,75,000
Average cost = (3,75,000 + 80,000 + 1,50,000 -10,000) X 25,000 /45,000
=3,30,556
Profit = Rs. 3,75,000– Rs. 3,30,556= Rs. 44,444.
(6) Cost of shares on 31.12.20X1 = (3,75,000 + 80,000 + 1,50,000 -10,000) X 25,000 / 45,000
= 2,64,444
QUESTION 20:
Mr. Brown has made following transactions during the financial year 20X1-X2:
Date Particulars
01.05.20X1 Purchased 24,000 12% Bonds of Rs. 100 each at Rs. 84 cum-interest.
Interest is payable on 30th September and 31st March every year.
15.06.20X1 Purchased 1,50,000 equity shares of Rs. 10 each in Alpha Limited for Rs. 25 each through a
broker, who charged brokerage @ 2%.
10.07.20X1 Purchased 60,000 equity shares of Rs. 10 each in Beeta Limited for Rs. 44 each through a
broker, who charged brokerage @2%.
14.10.20X1 Alpha Limited made a bonus issue of two shares for every three shares held
31.10.20X1 Sold 80,000 shares in Alpha Limited for Rs. 22 each.
01.01.20X2 Received 15% interim dividend on equity shares of Alpha Limited.

15.01.20X2 Beeta Limited made a right issue of one equity share for every four shares held at Rs.
5 per share. Mr. Brown exercised his option for 40% of his entitlements and sold the
balance rights in the market at Rs. 2.25 per share.
01.03.20X2 Sold 15,000 12% Bonds at Rs. 90 ex-interest
15.03.20X2 Received 18% interim dividend on equity shares of Beeta Limited. Interest on 12% Bonds
was duly received on due dates.
Prepare separate investment account for 12% Bonds, Equity Shares of Alpha Limited and Equity Shares of Beeta
Limited in the books of Mr. Brown for the year ended on 31st March, 20X2.
SOLUTION
In the books of Mr. Brown
12% Bonds for the year ended 31st March 20X2
Date Particulars No. Income Amount Date Particulars No. Income Amount
Rs. Rs. Rs. Rs.
20X1 To Bank A/c 24,000 24,000 19,92,000 20X1 By Bank- Interest - 1,44,000
May, 1 (W.N.7) Sept. 30 (24,000 x 100 x
12% x 6/12)
20X2 To P & L A/c - - 1,05,000 20X2 By Bank A/c 15,000 75,000 13,50,000
March 1 (W.N.1) Mar. 1 (W.N.8)
20X2 To P & L A/c 2,49,000 20X2 By Bank - Interest 54,000
March 31 (b.f.) Mar. 31 (9,000 x 100 x 12%
x 6/12)
By Balance c/d 9,000 - 7,47,000
(W.N.2)
24,000 2,73,000 20,97,000 24,000 2,73,000 20,97,000
Investment in Equity shares of Alpha Ltd. for the year ended 31st March, 20X2
Rs. Rs. Rs. Rs.
20X1 To Bank A/c 1,50,000 -- 38,25,000 20X1 By Bank A/c 80,000 - 17,60,000
June ([1,50,000 x 25] + [2% Oct. 31
15 x (1,50,000 x 25)])
Oct. 14 To Bonus Issue 1,00,000 - - 20X2 By Bank A/c –dividend 2,55,000
(1,50,000/3x2) Jan. 1 (1,70,000 x10 x 15%)
20X1Oct. To P & L A/c (W.N.3) 5,36,000 March By Balance c/d (W.N.4)
31 31 1,70,000 - 26,01,000
20X2 To P & L A/c 2,55,000
Mar. 31
2,50,000 2,55,000 43,61,000 2,50,000 2,55,000 43,61,000
Investment in Equity shares of Beeta Ltd. for the year ended 31st March, 20X2

Rs. Rs. Rs. Rs.
20X1 To Bank A/c ([60,000 x 60,000 -- 26,92,800 20X2 By Bank – dividend - 1,18,800
July 10 44] + [2% x (60,000 x Mar. 15 [(60,000 + 6,000) x
44)]) 10 x 18%]
20X2 To Bank A/c (W.N. 5) 6,000 - 30,000 March 31 By Balance c/d 66,000 -
Jan. 15 (bal. fig.)
March 31 To P & L A/c - 1,18,800 - 27,22,800
66,000 1,18,800 27,22,800 66,000 1,18,800 27,22,800
Working Notes:
1. Profit on sale of 12%Bond
Sales price Rs.13,50,000
Less: Cost of bond sold =19,92,000X 15,000/ 24,000 (Rs.12,45,000)
Profit on sale Rs. 1,05,000
2. Closing balance as on 31.3.20X2 of 12 %Bond

19,92,000X 9,000/ 24,000=Rs. 7,47,000
3. Profit on sale of equity shares of Alpha Ltd.

Sales price Rs. 17,60,000
Less: Cost of bond sold = 38,25,000 X 80,000 / 2,50,000 (Rs. 12,24,000)
Profit on sale Rs. 5,36,000
4. Closing balance as on 31.3.20X2 of equity shares of Alpha Ltd.

38,25,000 x 1,70,000 = Rs. 26,01,000
2,50,000
5. Calculation of right shares subscribed by Beeta Ltd.
𝟔𝟎, 𝟎𝟎𝟎 𝐬𝐡𝐚𝐫𝐞𝐬

𝐑𝐢𝐠𝐡𝐭 𝐒𝐡𝐚𝐫𝐞𝐬 = 𝐱 𝟏 = 𝟏𝟓, 𝟎𝟎𝟎 𝐬𝐡𝐚𝐫𝐞𝐬
𝟒
Shares subscribed by Mr. Brown = 15,000 x 40%= 6,000 shares

Value of right shares subscribed = 6,000 shares @ Rs. 5 per share = Rs. 30,000
6. Calculation of sale of right entitlement by Beeta Ltd.
No. of right shares sold = 15,000 - 6,000 = 9,000 shares
Sale value of right = 9,000 shares x Rs. 2.25 per share = Rs. 20,250
Note: As per para 13 of AS 13, sale proceeds of rights are to be credited to P & L A/c.

7. Purchase of bonds on01.05.20X1
Interest element in purchase of bonds = 24,000 x 100 x 12% x 1/12 = Rs. 24,000 Investment elements in purchase
of bonds = (24,000 x 84) – 24,000 = Rs. 19,92,000
8. Sale of bonds on01.03.20X2
Interest element in purchase of bonds = 15,000 x 100 x 12% x 5/12 = Rs. 75,000 Investment elements in purchase
of bonds = 15,000 x 90 = Rs. 13,50,000
QUESTION 21: (RTP May19) (MTP May22)

A Ltd. purchased on 1st April, 2018 8% convertible debenture in C Ltd. of face value of Rs. 2,00,000 @ Rs. 108. On
1st July, 2018 A Ltd. purchased another Rs. 1,00,000 debentures @ Rs. 112 cum interest.
On 1st October, 2018 Rs. 80,000 debenture was sold @ Rs. 108. On 1st December, 2018, C Ltd. give option for
conversion of 8% convertible debentures into equity share of Rs. 10 each. A Ltd. receive 5,000 equity share in C Ltd.
in conversion of 25% debenture held on that date. The market price of debenture and equity share in C Ltd. at the
end of year 2018 is Rs. 110 and Rs. 15 respectively. Interest on debenture is payable each year on 31st March, and
30th September. The accounting year of A Ltd. is calendar year.
Prepare investment account in the books of A Ltd. on average cost basis.
SOLUTION
Investment Account for the year ending on 31st December, 2018
Scrip: 8% Convertible Debentures in C Ltd.
[Interest Payable on 31st March and 30th September]
Date Particulars Nominal Interest Cost (Rs) Date Particulars Nominal interest Cost (Rs)
value (Rs) (Rs) Value (Rs) (Rs)
1.4.18 To bank A/c 2,00,000 2,000 2,16,000 30.09.18 By Bank A/c 12,000
[Rs. 3,00,000 x
8% x (6/12])
1.7.18 To bank A/c 1,00,000 14,033 1,10,000 1.10.18 By Bank A/c 80,000 84,000
(W.N.1)
31.12.18 To P & L A/c 3,00,000 16,033 3,26,000 1.10.18 By P&L A/c 2,933
[Interest] (loss) (W.N.1)
1.12.18 By Bank A/c 733
(Accrued
interest)
(Rs. 55,000 x
0.08 x 2/12)
1.12.18 By Equity shares 55,000 59,767
in C Ltd.
(W.N. 3 and 4)
1.12.18 By Balance c/d 1,65,000 3,300 1,79,300
(W.N.5)
3,00,000 16,033 3,26,000 3,00,000 16,033 3,26,000

SCRIP: Equity Shares in C LTD.
Date Particulars Cost (Rs) Date Particulars Cost (Rs)
1.12.18 To 8 % debentures 59,767 31.12.18 By balance c/d 59,767
Working Notes:
(i) Cost of Debenture purchased on 1st July = Rs. 1,12,000 – Rs. 2,000 (Interest)
= Rs. 1,10,000
(ii) Cost of Debentures sold on 1st Oct.
= (Rs. 2,16,000 + Rs. 1,10,000) x 80,000/3,00,000 = Rs. 86,933
(iii) Loss on sale of Debentures = Rs. 86,933– Rs. 84,000 = Rs. 2,933
Nominal value of debentures converted into equity shares = Rs. 55,000
[(Rs. 3,00,000 – 80,000) x.25]
Interest received before the conversion of debentures
Interest on 25% of total debentures = 55,000 x 8% x 2/12 = 733
(iv) Cost of Debentures converted = (Rs. 2,16,000 + Rs. 1,10,000) x 55,000/3,00,000

= Rs. 59,767
(v) Cost of closing balance of Debentures = (Rs. 2,16,000 + Rs. 1,10,000) x 1,65,000 / 3,00,000
= Rs. 1,79,300
(vii) Closing balance of Debentures has been valued at cost being lower than the market value i.e., Rs. 1,81,500 (Rs.
1,65,000 @ Rs. 110)
(viii) 5,000 equity Shares in C Ltd. will be valued at cost of Rs. 59,767 being lower than the market value Rs. 75,000
(Rs. 15 x5,000)
Note: It is assumed that interest on debentures, which are converted into cash, has been received at the time of
conversion.
QUESTION 22: (MTP May20)

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

(3) Equity Shares of C Ltd. 15 12
Total 30 34
Give your comments on the following:
(i) The company wants to value the above portfolio at Rs. 30 lakhs being lower of cost or fair market value.
(ii) Company wants to transfer 1000 Equity Shares of C Ltd. From current investments to long term investments on 31.03.2020
at cost of Rs. 15lakhs.
SOLUTION
As per AS 13 “Accounting for Investments”, Valuation of current investments on overall (or global) basis is not
considered appropriate. Sometimes, the concern of an enterprise may be with the value of a category of related current
investments and not with each individual investment, and accordingly the investments may be carried at the lower of
cost and fair value computed category-wise (i.e., equity shares, preference shares, convertible debentures, etc.). However,
the more prudent and appropriate method is to carry individually at the lower of cost and fair value.
(i) Hence the company has to value the current investment at Rs. 27 Lacs (A Ltd. shares at Rs. 5 lacs; B Ltd.
shares at Rs. 10 lacs and C Ltd. shares at Rs. 12 lacs). The company’s decision to value the portfolio at Rs. 30
lacs is not appropriate.
(ii) Moreover, where investments are reclassified from current to long-term, transfers are made at the lower of cost
and fair value at the date of transfer.
Hence, the company has to make transfer of 1,000 equity shares of C Ltd. at Rs. 12 lacs (fair value) and not Rs. 15
lacs (cost) as the fair value is less than cost.
QUESTION 23: (EXAM May18) (MTP Nov20)

Mr. Vijay entered into the following transactions of purchase and sale of equity shares of JP Power Ltd. The shares
have paid up value of Rs. 10 per share.
Date No. of Shares Terms
01.01.2019 600 Buy @ Rs. 20 per share
15.03.2019 900 Buy @ Rs. 25 per share
20.05.2019 1000 Buy @ Rs. 23 per share
25.07.2019 2500 Bonus Shares received
20.12.2019 1500 Sale @ Rs. 22 per share
01.02.2020 1000 Sale @ Rs. 24 per share
Addition information:
(1) On 15.09.2016 dividend @ Rs. 3 per share was received for the year ended 31.03.2016.
(2) On 12.11.2016 company made a right issue of equity shares in the ratio of one share for five shares held on
payment of Rs. 20 per share. He subscribed to 60% of the shares and renounced the remaining shares on receipt
of the premium of Rs. 3 per share.
(3) Shares are to be valued on weighted average cost basis.
You are required to prepare Investment Account for the year ended 31.03.2016 and 31.03.2017.

SOLUTION
Investment in Equity shares of JP Power Ltd.
Date Particulars No. Dividend Amount Date Particulars No. Dividend Amount
Rs. Rs. Rs. Rs.
1.1.19 To Bank A/c 600 12,000 31.3.19 By Balance c/d 1,500 34,500
15.3.19 To Bank A/c 900 22,500 ____ ______
1,500 34,500 1,500 34,500
1.4.19 To Balance b/d 1,500 34,500 15.9.19 By Bank - 3,000
dividend 4,500
20.5.19 To Bank A/c 1,000 23,000 20.12.19 By Bank 1,500 33,000
25.7.19 To Bonus shares 2,500 _ 1.2.20 By Bank 1,000 24,000
12.11.19 To Bank A/c 600 12,000 31.3.20 By Balance c/d 3,100 36,812.50
20.12.19 To P& L A/c
(profit on sale) 15,187.50
1.2.20 To P& L A/c 12,125
(profit on sale)
31.3.20 To P & L A/c
(dividend) 4,500
5,600 4,500 96,812.50 5,600 4,500 96,812.50
Working Notes:
1. Calculation of Weighted average cost of equity shares
600 shares purchased at Rs. 12,000
900 shares purchased at Rs. 22,500
1,000 shares purchased at Rs. 23,000 2,500 shares at nil cost
600 right shares purchased at Rs. 12,000
Total cost of 5,600 shares is Rs. 66,500 [Rs. 69,500 less Rs. 3,000 (pre-acquisition dividend received on 1,000 shares
purchased on20.5.19].
Hence, weighted average cost per share will be considered as Rs. 11.875 per share (66,500/5,600).
2. It has been considered that no dividend was received on bonus shares as the dividend pertains to the year
st
ended 31 March, 2019.
3. Calculation of right shares subscribed by Vijay
Right Shares (considering that right shares have been granted on Bonus shares also) = 5,000/5 x 1= 1,000 shares
Shares subscribed = 1,000 x 60%= 600 shares
Value of right shares subscribed = 600 shares @ Rs. 20 per share = Rs. 12,000 Calculation of sale of right renouncement
No. of right shares sold = 1,000 x 40% = 400 shares
Sale value of right = 400 shares x Rs. 3 per share = Rs. 1,200
Note: As per para 13 of AS 13, sale proceeds of rights is to be credited to P & L A/c.
4. Profit on sale of equity shares
As on 20.12.19

Sales price 33,000.00
Less: Cost of shares sold (1,500 x Rs. 11.875) (17,812.50)
Profit on sale 15,187.50
As on 1.2.20
Sales price (1,000 shares at Rs. 24) 24,000
Less: Cost of shares sold (1,000 x Rs. 11.875) (11,875)
Profit on sale 12,125
Balance of 3,100 shares as on 31.3.20 will be valued at Rs. 36,812.50 (at rate of Rs. 11.875 per share)
QUESTION 24: (EXAM May19)

On 15th June, 2018, Y limited wants to re-classify its investments in accordance with AS 13 (revised). Decide and
state the amount of transfer, based on the following information:
1. A portion of long-term investments purchased on 1st March, 2017 are to be re-classified as current investments.
The original cost of these investments was Rs. 14 lakhs but had been written down by Rs. 2 lakhs (to recognise
'other than temporary decline in value). The market value of these investments on 15th June, 2018 was Rs. 11
lakhs.
2. Another portion of long-term investments purchased on 15th January, 2017 are to be re-classified as current
investments. The original cost of these investments was Rs. 7 lakhs but had been written down to Rs. 5 lakhs (to
recognize 'other than temporary' decline in value). The fair value of these investments on 15th June, 2018 was Rs.
4.5 lakhs.
3. A portion of current investments purchased on 15th March, 2018 for Rs. 7 lakhs are to be re-classified as long-
term investments, as the company has decided to retain them. The market value of these investments on 31st
March, 2018 was Rs. 6 lakhs and fair value on 15th June 2018 was Rs. 8.5 lakhs,
4. Another portion of current investments purchased on 7th December, 2017 for Rs. 4 lakhs are to be re-classified as
long-term investments. The market value of these investments was:
on 31st March, 2018 Rs. 3.5 lakhs
on 15th June, 2018 Rs. 3.8 lakhs
SOLUTION
As per AS 13 (Revised) ‘Accounting for Investments’, where long-term investments are reclassified as current
investments, transfers are made at the lower of cost and carrying amount at the date of transfer; and where
investments are reclassified from current to long term, transfers are made at lower of cost and fair value on the
date of transfer.
Accordingly, the re-classification will be done on the following basis:
1. In this case, carrying amount of investment on the date of transfer is less than the cost; hence this re-classified
current investment should be carried at Rs. 12 lakhs in the books.
2. In this case also, carrying amount of investment on the date of transfer is less than the cost; hence this re-
classified current investment should be carried at Rs. 5 lakhs in the books.
3. In this case, reclassification of current investment into long-term investments will be made at Rs. 7 lakhs as cost
is less than its fair value of Rs. 8.5 lakhs on the date of transfer.

(Rs. 8,56,667 – Rs. 2,00,000)
Considering that Rs. 13,00,000 was debited to Building WIP A/c earlier.
In this case, market value (considered as fair value) is Rs. 3.8 lakhs on the date of transfer which is lower than the
cost of Rs. 4 lakhs. The reclassification of current investment into long-term investments will be made at Rs. 3.8
lakhs.
QUESTION 25: (MASTER PROBLEM)

Mr. Jai invested in Equity Shares of V’Smart Ltd having face value Rs. 10
Date Particulars
01-04-2020 Opening balance 5,000 equity shares at a book value of Rs. 175 per share
01-05-2020 Purchased 6,000 equity shares@ Rs. 215 on cum right basis; Brokerage of 1% was paid
in addition.
15-06-2020 The company announced a bonus issue of 3 shares for every 11 shares held
01-08-2020 The company made a rights issue of 1 share for every 7 shares held at Rs. 230 per
share. The entire money was payable by 31.08.2020
25-08-2020 Rights to the extent of 30% of his entitlements was sold @ Rs. 75 per share. The
remaining rights were subscribed. Ex-right price after Right issue becomes Rs. 170
16-09-2020 Dividend of 9% for the year ended 31.03.2020 was received on 16.09.2020.
01-12-2020 Sold 6,000 shares @ 180 per share. Brokerage of 1% was incurred extra.
25-01-2021 Received interim dividend @ Rs. 3 per share for the year 2020-21.
31-03-2021 The shares were quoted in the stock exchange @ Rs. 160.
These Investments have been classified as Current investment in the books of Mr. Jai.
On 15th May 2021, Mr. Jai decides to reclassify investment in equity shares of V’Smart Ltd. as Long term Investment.
On 15th May 2021, the shares were quoted in the stock exchange @ Rs. 150.
You are required to Prepare Investment Accounts in the books of Mr. Jai for the year 2020-21, assuming that the
average cost method is followed.
SOLUTION
Investment A/c
Date Particular Nominal Value Interest Cost Date Particular Nominal Interest Cost
Value
1/4 To Balance 5,000 - 8,75,000 25/8 By Bank - - 27,000
1/5 To Bank 6,000 - 13,02,900 16/9 By Bank - 4,500 5,400
15/6 To Bonus 3,000 - - 1/12 By Bank 6,000 - 10,69,200
25/8 To Bank 1,400 - 3,22,000 25/1 By Bank - 28,200 -
1/12 To Gain - - 1,07,836 31/3 By Loss - - 2,136
31/3 By Balance 9,400 - 15,04,000
15,400 - 26,07,736 15,400 - 26,07,736
Working Note:
1) Right issue = 14,000/7 = 2,000 no.
Subscribed =1,400 x 230 = 3,22,000

Transferred = 600
Proceed (600 x 75) = 45,000
Notional Loss (215 – 170) x 600 = 27,000
Transfer to P&L = 18,000
2) Sale Value = (6,000 x 180) – 1% = 10,69,200

Weighted Average Cost = 24,67,500/15,400 x 6,000 = 9,67,364
Gain = 1,07,836
3) Interim Dividend: 9,400 x 3/- = 28,200

Ms. Suzi provides the following details relating to his holding in 10% Covertible Debentures (face value of Rs. 100
each) of Maggi Ltd. held as current assets:
1.4.2018 Opening balance - 20,000 debentures, cost Rs. 19,50,000
1.6.2018 Purchased 12,000 debentures @ Rs. 98.5 each Ex-Interest
1.11.2018 Purchased 6,000 debentures @ Rs. 110 each Cum Interest
31.1.2019 Sold 18,000 debentures @ Rs. 115 each Cum-Interest
28.2.2019 Conversion of 5000 debentures into Equity Shares in the ratio of 3:1. Interest on
convertible debentures was also received on the same date
31.3.2019 Market value of debentures Rs. 105 each and Equity Shares Rs. 9
th st
Due dates of interest are 30 June and 31 December.
Brokerage at 1% is to be paid for each transaction. Ms. Suzi closes his books on 31.3.2019. Show investment account
as it would appear in his books assuming FIFO method is followed.
SOLUTION
Investment A/c
Date Particular Nominal Value Interest Cost Date Particular Nominal Interest Cost
Value
1/4 To Balance 20,00,000 50,000 19,50,000 30/6 By Bank - 1,60,000 -
1/6 To Bank 12,00,000 50,0002 11,93,8201 31/12 By Bank - 1,90,000 -
1/11 To bank 6,00,000 20,000 6,46,6003 31/1 By Bank 18,00,000 15,000 20,34,300
31/1 To Gain - - 2,79,300 28/2 By investment 5,00,000 - 4,93,455
in Equity
To P&L - 2,90,833 - 28/2 By Bank - 8,333 -
31/3 By Loss - - 11,965
31/3 By Balance 15,00,000 3,75,000 15,30,000
38,00,000 4,10,833 40,69,720 38,00,000 4,10,833 40,69,720
Working Note:
1) Purchase: - (12,000 x 98.5) + 1% = 11,93,820
2) Interest: - 12,000 x 100 x 5/12 = 50,000

3) Purchase on Cum Rate:
60,000 x 110 = 6,60,000
+ 1% = 6,600
(-) Interest (4m) = (20,000)
= 6,46,600
4) Profit/Loss: -
Sale Value = 18,000 x 115 (Cum Rate) = 20,70,000
(-) 1% = (20,700)
(-) Interest (18,000 x100 x 1% x 1/12) = (15,000)
Sale Value = 20,34,300
Cost of 18,000 (fifo) (19,50,000/20,000 x 18,000) = 17,55,000

Gain = 2,79,300
5) Conversion of 5,000 No:

2,000 out of Opening = 19,50,0000/20,000 x 2000 = 1,95,000
+ 3,000 out of 1/6 Purchase = 11,93,820/12,000 x 3,000 = 2,98,455
= 4,93,455
Investment In Equity A/c Dr. 4,93,455

To Interest on Debenture A/c 4,93,455
6) Loss
Book Value = 15,41,965
Market Value = 15,30,000
(102 x 15,000)
Loss = 11,965

ACCOUNTING FOR BRANCHES INCLUDING FOREIGN BRANCH
QUESTION 27:
Sell Well who carried on a retail business opened a branch X on January 1st, 20X1 where all sales were on credit basis.
All goods required by the branch were supplied from the Head Office and were invoiced to the branch at 10% above
cost.
The following were the transactions:

Jan. 20X1 Feb. 20X1 March 20X1
Rs. Rs. Rs.
Goods sent to Branch (Purchase Price) 40,000 50,000 60,000
Sales as shown by the branch monthly report 38,000 42,000 55,000
Cash received from Debtors and remitted to H.O. 20,000 51,000 35,000
Returns to H.O. (Invoice price to Branch) 1,200 600 2,400
The stock of goods held by the branch on March 31, 20X1 amounted to Rs. 53,400 at invoice to branch.
Record these transactions in the Head Office books, showing balances as on 31st March, 20X1 and the branch gross
profit for the three months ended on that date.
All workings should form part of your solution.
Solution
Books of Sell Well
Branch Account
Rs. Rs.
To Goods sent to Branch A/c 1,65,000 By Cash-collected from 1,06,000
(1,50,000 + 10%) debtors
To goods sent to Branch A/c 382 By Goods sent to Branch- 4,200
(4,200 X 10/100 returns
To Stock Reserve (W.N.2) 4,855 By Goods sent to Branch 15,000
(W.N.1)
To Profit (bal.) transferred to 37,363 By Balance c/d 82,400
General Profit & Loss A/c Stock 53,400
Debtors 29,000
2,07,600 2,07,600
Memorandum Branch Debtors Account

Rs. Rs.
To Balance b/d — By Cash/Bank 1,06,000
To Sales 1,35,000 By Balance c/d 29,000
1,35,000 1,35,000

Goods Sent to Branch Account
Rs. Rs.
To Branch A/c (Returns) 4,200 By Branch A/c 1,65,000
To Branch A/c (Loading) (W.N.1) 15,000 By Branch A/c – 382
To Purchases A/c 1,46,182 Loading on returns
1,65,382 1,65,382
QUESTION 28:
KP manufactures a range of goods which it sells to wholesale customers only from its head office. In addition,
the H.O. transfers goods to a newly opened branch at factory cost plus 15%. The branch then sells these goods
to the general public on only cash basis.
The selling price to wholesale customers is designed to give a factory profit which amounts to 30% of the sales
value. The selling price to the general public is designed to give a gross margin (i.e., selling price less cost of goods
from H.O.) of 30% of the sales value.
KP operates from rented premises and leases all other types of fixed assets. The rent and hire charges for these are
included in the overhead costs shown in the trial balances.
From the information given below, you are required to prepare for the year ended 31st Dec., 20X1 in columnar form.
(a) A Profit & Loss account for (i) H.O. (ii) the branch (iii) the entire business.
(b) Balance Sheet as on 31st Dec., 20X1 for the entire business.
H.O. Branch
Rs. Rs. Rs. Rs.
Raw materials purchased 35,000
Direct wages 1,08,500
Factory overheads 39,000
Stock on 1-1-20X1
Raw materials 1,800
Finished goods 13,000 9,200
Debtors 37,000
Cash 22,000 1,000
Administrative Salaries 13,900 4,000
Salesmen Salaries 22,500 6,200
Other administrative &
selling overheads 12,500 2,300
Inter-unit accounts 5,000 2,000
Capital 50,000
Sundry Creditors 13,000
Provision for unrealized profit in stock 1,200
Sales 2,00,000 65,200

Goods sent to Branch 46,000
Goods received from H.O. 44,500
3,10,200 3,10,200 67,200 67,200
Notes:
(1) On 28th Dec., 20X1 the branch remitted Rs. 1,500 to the H.O. and this has not yet been recorded in the H.O.
books. Also, on the same date, the H.O. dispatched goods to the branch invoiced at Rs. 1,500 and these too
have not yet been entered into the branch books. It is the company’s policy to adjust items in transit in the
books of the recipient.
(2) The stock of raw materials held at the H.O. on 31st Dec.,20X1 was valued at Rs. 2,300.
(3) You are advised that:
• There were no stock losses incurred at the H.O. or at the branch.
• It is KP’s practice to value finished goods stock at the H.O. at factory cost.
• There were no opening or closing stock of work-in-progress.
(4) Branch employees are entitled to a bonus of Rs. 156 under a bilateral agreement.
Solution
In the books of KP
Trading and Profit & Loss Account for the year ended 31st Dec., 20X1
H.O. Branch Total H.O. Branch Total
Rs. Rs. Rs. Rs. Rs. Rs.
To Material consumed 34,500 - 34,500 By Sales 2,00,000 65,200 2,65,200
(W.N.1)
To Wages 1,08,500 - 1,08,500 By Goods Sent to Branch 46,000 - -
To Factory Overheads 39,000 - 39,000
To Opening stock of By Closing stock 15,000 9,560 24,560
finished goods 13,000 9,200 22,200 including transit (W.N.2)
To Goods from H.O. 46,000
To Gross Profit c/d 66,000 19,560 85,560
(W.N.3)
2,61,000 74,760 2,89,760 2,61,000 74,760 2,89,760
To Admn. Salaries 13,900 4,000 17,900 By Gross Profit b/d 66,000 19,560 85,560
To Salesmen Salaries 22,500 6,200 28,700
To Other Admn. & Selling 12,500 2,300 14,800
Overheads
To Stock Reserve (W.N.4) 47 - 47
To Bonus to Staff - 156 156
To Net Profit 17,053 6,904 23,957
66,000 19,560 85,560 66,000 19,560 85,560
Balance Sheet as on 31st Dec., 20X1


Capital 50,000 - 50,000 Fixed Assets - - -
Profit: H.O. 17,053 23,957 23,957 Current Assets:
Branch 6,904
Raw material 2,300 2,300
Trade Creditors 13,000 13,000 Finished Goods (Less 15,000 9,560 23,313*
Stock Res.)
Bonus Payable 156 156 Debtors 37,000 - 37,000
H.O. Account* 10,404 Cash (including 23,500 1,000 24,500
transit item)
Stock Reserve (W.N.4) 1,247 Branch A/c 10,404*
88,204 10,560 87,113 88,204 10,560 87,113
*9,560 × 100/115 i.e., (8,313 + 15,000) = Rs.23,313

** (5,000 + 6,904) – 1500 = Rs. 10,404.
Working Notes:
(1) Material Consumed
Opening raw material + Raw Material Purchased – Closing raw material
= 1,800 + 35,000 - 2,300 = 34,500
(2) Closing stock at head office
(a) Calculation of total factor cost = Material consumed + Wages + Factory overhead
= 34,500 + 1,08,500 + 39,000 = 1,95,000
(b) Cost (factory cost) of goods sold = Sales – Gross profit
= 2,00,000 – 2,00,000 x 70% = 1,40,000
(c) Stock transferred to branch = 46,000 x 100/115 = 40,000
(d) Closing stock=1,95,000–1,40,000–40,000=15,000
(3) Gross profit of Branch = Sales x Gross profit ratio
= 65,200 x 30% =19,560
(4) Closing stock reserve = 9,560 x 15/115 = 1,246
Charge to profit and loss=1,247–1,200=47
QUESTION 29:
M/s Carlin has head office at New York (U.S.A.) and branch at Mumbai (India). Mumbai branch is an integral foreign
operation of Carlin & Co.
Mumbai branch furnishes you with its trial balance as on 31st March, 20X2 and the additional information given
thereafter:
Dr. Cr.
Rupees in thousands

Stock on 1st April, 20X1 300 –
Purchases and sales 800 1,200
Sundry Debtors and creditors 400 300
Bills of exchange 120 240
Wages and salaries 560 –
Rent, rates and taxes 360 –
Sundry charges 160 –
Computers 240
Bank balance 420 –
New York office a/c – 1,620
3,360 3,360
(a) Computers were acquired from a remittance of US $ 6,000 received from New York head office and paid to the
suppliers. Depreciate computers at 60% for the year.
(b) Unsold stock of Mumbai branch was worth Rs. 4,20,000 on 31st March, 20X2.
(c) The rates of exchange may be taken as follows:
• on 1.4.20X1 @ Rs. 40 per US$
• on 31.3.20X2 @ Rs. 42 per US$
• average exchange rate for the year @ Rs. 41 per US$
• conversion in $ shall be made up to two decimal accuracy.
You are asked to prepare in US dollars the revenue statement for the year ended 31st March, 20X2 and the balance
sheet as on that date of Mumbai branch as would appear in the books of New York head office of Carlin & Co.
You are informed that Mumbai branch account showed a debit balance of US $ 39609.18 on 31.3.20X2 in New
York books and there were no item spend in reconciliation.
Solution
M/s Carlin
Mumbai Branch Trial Balance in (US $) as on 31st March, 20X2
Conversion Dr. Cr.
rate per US $ US $ US $
(Rs.)
Stock on 1.4.X1 40 7,500.00 –
Purchases and sales 41 19,512.20 29,268.29
Sundry debtors and creditors 42 9,523.81 7,142.86
Bills of exchange 42 2,857.14 5,714.29
Wages and salaries 41 13,658.54 –
Rent, rates and taxes 41 8,780.49 –
Sundry charges 41 3,902.44 –
Computers – 6,000.00 –
Bank balance 42 10,000.00 –
New York office A/c – – 39,609.18

81,734.62 81,734.62
Trading and Profit & Loss Account for

the year ended 31st March, 20X2
US $ US $
To Opening Stock 7,500.00 By Sales 29,268.29
To Purchases 19,512.20 By Closing stock (4,20,000/42) 10,000.00
To Wages and salaries 13,658.54 By Gross Loss c/d 1,402.45
40,670.74 40,670.74
To Gross Loss b/d 1,402.45 By Net Loss 17,685.38
To Rent, rates and taxes 8,780.49
To Sundry charges 3,902.44
To Depreciation on computers 3,600.00
(US $ 6,000 × 0.6)
17,685.38 17,685.38
Balance Sheet of Mumbai Branch

as on 31st March, 20X2
Liabilities US $ Assets US $ US $
New York Office A/c 39,609.18 Computers 6,000.00
Less: Net Loss (17,685.38) 21,923.80 Less: Depreciation (3,600.00) 2,400.00
Sundry creditors 7,142.86 Closing stock 10,000.00
Bills payable 5,714.29 Sundry debtors 9,523.81
Bank balance 10,000.00
Bills receivable 2,857.14
34,780.95 34,780.95
QUESTION 30: (RTP Nov 19)

From the following particulars relating to Pune branch for the year ending December 31, 2018, prepare Branch Account
in the books of Head office.
Rs.
Stock at Branch on January 1, 2018 10,000
Branch Debtors on January 1, 2018 4,000
Branch Debtors on Dec. 31, 2018 4,900
Petty cash at branch on January 1, 2018 500
Furniture at branch on January 1, 2018 2,000
Prepaid fire insurance premium on January 1, 2018 150
Salaries outstanding at branch on January 1, 2018 100
Good sent to Branch during the year 80,000
Cash Sales during the year 1,30,000

Credit Sales during the year 40,000
Cash received from debtors 35,000
Cash paid by the branch debtors directly to the Head Office 2,000
Discount allowed to debtors 100
Cash sent to branch for Expenses:
Rent 2,000
Salaries 2,400
Petty Cash 1,000
Annual Insurance up to March 31, 2019 600 6,000
Goods returned by the Branch 1,000
Goods returned by the debtors 2,000
Stock on December 31,2018 5000
Petty Cash spent by branch 850
Provide depreciation on furniture 10% p.a.
Goods costing Rs. 1,200 were destroyed due to fire and a sum of Rs. 1,000 was received from the Insurance Company.
SOLUTION
Pune Branch Account
Particulars Rs. Particulars Rs. Rs.
To Opening Balance By Opening Balance:
Stock 10,000 Salaries outstanding 100
Debtors 4,000 By Remittances:
Petty Cash 500 Cash sales 1,30,000
Furniture 2,000 Cash received from debtors 35,000
Prepaid Insurance 150 Cash paid by Debtors directly 2,000
to H.O
To Goods sent to Branch 80,000 Received from Insurance 1,000 1,68,000
Account Company
To Bank (expenses) By Goods sent to branch 1,000
Rent 2,000 (Return of goods by the
Salaries 2,400 branch to H.O.)
Petty Cash 1,000 By Closing Balances:
Insurance 600 6,000 Stock 5,000
To Net Profit 78,950 Petty Cash 650
Debtors 4,900
Furniture 1,800
(2,000 – 10% depreciation)
Prepaid insurance 150
(1/4 x Rs. 600)
1,81,600 1,81,600

Working Note:
Calculation of petty cash balance at the end: Rs.
Opening balance 500
Add: Cash received from the Head Office 1,000
Total Cash with branch 1,500
Less: Spent by the branch 850
Closing balance 650
QUESTION 31: (MTP Nov19) (RTP Nov20, Nov22)

M & S Co. of Lucknow has a Branch in Canberra, Australia (as an integral foreign operation of M & S Co.). At the
end of 31st March 2019, the following ledger balances have been extracted from the books of the Lucknow office
and the Canberra.
Lucknow office (Rs. In Canberra Branch (Aust. Dollars
thousands) in thousands)
Dr. Cr. Dr. Cr.
Capital 2,000
Reserves & Surplus 1,000
Land 500
Buildings (Cost) 1,000
Buildings Dep. Reserves 200
Plant and Machinery (Cost) 2,500 200
Plant and Machinery Dep. 600 130
Reserves
Debtors/Creditors 280 200 60 30
Stock as on 1- 4-2018 100 20
Branch Stock Reserve 4
Cash & Bank Balances 10 10
Purchases/Sales 240 520 20 123
Goods sent to Branch 100 5
Managing Partner's Salary 30
Wages and Salary 75 45
Rent 12
Office Expenses 25 18
Commission Receipts 256 100
Branch/HO Current Account 120 7
4,880 4,880 390 390
The following information is also available:
st
(i) Stock as at 31 March, 2019
Lucknow Rs. 1,50,000
Canberra A$ 3125 (all stock are out of purchases made at Abroad)

(ii) Head Office always sent goods to the Branch at cost plus 25%
(iii) Provision is to be made for doubtful debts at5%
(iv) Depreciation is to be provided on Buildings at 10% and on Plant and Machinery at 20% on written down value.
You are required to:
(1) Convert the Branch Trial Balance into rupees by using the following exchange rates:
Opening rate 1 A $ = Rs. 50
Closing rate 1 A $ = Rs. 53
Average rate 1 A $ = Rs. 51.00
For Fixed Assets 1 A $ = Rs. 46.00
Prepare Trading and Profit and Loss Account for the year ended 31st March 2019 showing to the extent possible
H.O. results and Branch results separately.
SOLUTION
M & S Co. Ltd.
Canberra, Australia Branch Trial Balance As on 31st March 2019
($ ‘thousands) (Rs.’ thousands)
Dr. Cr. Conversion Dr. Cr.
rate per $
Plant & Machinery (cost) 200 Rs. 46 9,200
Plant & Machinery Dep. Reserve 130 Rs. 46 5,980
Trade receivable/payable 60 30 Rs. 53 3,180 1,590
Stock (1.4.2018) 20 Rs. 50 1,000
Cash & Bank Balances 10 Rs. 53 530
Purchase / Sales 20 123 Rs. 51 1,020 6,273
Goods received from H.O. 5 Actual 100
Wages & Salaries 45 Rs. 51 2,295
Rent 12 Rs. 51 612
Office expenses 18 Rs. 51 918
Commission Receipts 100 Rs. 51 5,100
H.O. Current A/c 7 Actual 120
18,855 19,063
Foreign Exchange Loss (bal. fig.) 208
390 390 19,063 19,063
Closing stock 3.125 53 165.625
Trading and Profit & Loss Account for the year ended 31st March, 2019
(Rs.’000)
To Opening Stock 100 1,000.000 1,100.000 By Sales 520 6,273.000 6,793.000
To Purchases 240 1,020.000 1,260.000 By Goods sent to 100 – 100.000
Branch

To Goods received from – 100.000 100.000 By Closing Stock 150 165.625 315.625
Head Office
To Wages & Salaries 75 2,295.000 2,370.000
To Gross profit c/d 355 2,023.625 2,378.625
770 6,438.625 7,208.625 770 6,438.625 7,208.625
To Rent – 612.000 612.000 By Gross profit 355 2,023.625 2,378.625
b/d
To Office expenses 25 918.000 943.000 By Commission 256 5,100.000 5,356.000
receipts
To Provision for doubtful 14 159.000 173.000
debts @ 5%
To Depreciation (W. N.) 460 644.000 1,104.000
To Balance c/d 112 4,790.625 4,902.625

611 7,123.625 7,734.625 611 7,123.625 7,734.625
To Managing Partner’s 30.000 By Balance b/d 4,902.625
Salary
To Exchange Loss 208.000 By Branch stock 4.000
To Balance c/d 4,668.625 reserve
4,906.625 4,906.625
Working Note:
Calculation of Depreciation
H.O Rs. ‘000 Branch Rs.
‘000
Building – Cost 1,000
Less: Dep. Reserve (200)
800
Depreciation @ 10% (A) 80
Plant & Machinery Cost 2,500 9,200
Less: Dep. Reserve (600) (5,980)
1,900 3,220
Depreciation @ 20% (B) 380 644
Total Depreciation (A+B) 460 644
Note: As the closing stock of Branch does not consist any stock transferred from M&S Co., there is no need to
create closing stock reserve. But the opening branch stock reserve has to be reversed in the P&L A/C.

Mr. Chena Swami of Chennai trades in Refined Oil and Ghee. It has a branch at Salem. He despatches 30 tins of
Refined Oil @ Rs. 1,500 per tin and 20 tins of Ghee @ Rs. 5,000 per tin on 1st of every month. The Branch has

incurred expenditure of Rs. 45,890 which is met out of its collections; this is in addition to expenditure directly paid
by Head Office.
Following are the other details:
Chennai H.O. Salem B.O.
Amount (Rs.) Amount (Rs.)
Purchases:
Refined Oil 27,50,000
Ghee 48,28,000
Direct Expenses 6,35,800
Expenses paid by H.O. 76,800
Sales:
Refined Oil 24,10,000 5,95,000
Ghee 38,40,500 14,50,000
Collection during the year 20,15,000
Remittance by Branch to Head Office 19,50,000
Chennai H.O.
Balance as on 01-04-2020 31-03-2021
Stock:
Refined Oil 44,000 8,90,000
Ghee 10,65,000 15,70,000
Building 5,10,800 7,14,780
Furniture & Fixtures 88,600 79,740
Salem Brach Office

Balance as on 01-04-2020 31-03-2021
Stock:
Refined Oil 22,500 19,500
Ghee 40,000 90,000
Sundry Debtors 1,80,000 ?
Cash in hand 25,690 ?
Furniture & Fixtures 23,800 21,420
(i) Addition to Building on 01-04-2020 Rs. 2,41,600 by H.O.
(ii) Rate of depreciation: Furniture & Fixtures @ 10% and building @ 5% (already adjusted in the above figure)
(iii) The Branch Manager is entitled to 10% commission on Branch profits (after charging his commission).
(iv) The General Manager is entitled to a salary of Rs. 20,000 per month.
(v) General expenses incurred by Head Office is Rs. 1,86,000.

You are requested to prepare Branch Account in the Head Office books and also prepare Chena Swami’s Trading and
Profit & loss Account (excluding branch transactions) for the year ended 31st March, 2021.
SOLUTION
In the books of Mr. Chena Swami Salem
Branch Account
Rs. Rs.
To Balance b/d By Bank (Remittance to H.O.) 19,50,000
Opening stock:
Ghee 40,000 By Balance c/d
Refined Oil 22,500 Closing stock:
Debtors 1,80,000 Refined oil 19,500
Cash on hand 25,690 Ghee 90,000
Furniture & fittings 23,800 Debtors (W.N. 1) 2,10,000
To Goods sent to Branch A/c Cash on hand (W.N. 2) 44,800
Refined Oil (30 x Rs. 1,500x12) 5,40,000 Furniture & fittings 21,420
Ghee (20 x Rs. 5,000 x12) 12,00,000
To Bank (Expenses paid by H.O.) 76,800
To Manager’s commission in profits 10% 20,630
(2,26,930x10/110)
To Net Profit transferred to General P & L A/c 2,06,300
23,35,720 23,35,720
Mr. Chena Swami

Trading and Profit and Loss account for the year ended 31st March, 2021 (Excluding branch transactions)
Rs. Rs.
To Opening Stock: By Sales:
Refined Oil 44,000 Refined Oil 24,10,000
Ghee 10,65,000 Ghee 38,40,500
To Purchases: By Closing Stock:
Refined Oil 27,50,000 Refined Oil 8,90,000
Less: Goods sent Ghee 15,70,000
to Branch (5,40,000) 22,10,000
Ghee 48,28,000
Less: Goods sent
to Branch (12,00,000) 36,28,000
To Direct Expenses 6,35,800
To Gross Profit 11,27,700
87,10,500 87,10,500
To Manager’s Salary 2,40,000 By Gross Profit 11,27,700
To General Expenses 1,86,000 By Branch Profit 2,06,300

To Depreciation transferred
Furniture (88,600 - 79,740) 8,860
Building (5,10,800 + 2,41,600 -
7,14,780) 37,620
To Net profit 8,61,520
13,34,000 13,34,000
Working Notes:
(1) Debtors Account
Rs. Rs.
To Balance b/d 1,80,000 By Cash Collections 20,15,000
To Sales made during By Balance c/d 2,10,000
the year: (Bal. Figure)
Refined oil 5,95,000
Ghee 14,50,000
22,25,000 22,25,000
(2) Branch Cash Account
Rs. Rs.
To Balance b/d 25,690 By Remittance 19,50,000
To Collections 20,15,000 By Exp. 45,890
By Balance c/d (Bal. Figure) 44,800
20,40,690 20,40,690
Question 33: (EXAM Nov22)

Modern Stores of Delhi operates a branch at Nagpur. The Head office affects all purchases and the branch is charged
at cost plus 60%. All the cash received by Nagpur Branch is remitted to Delhi. The Branch expenses are met by the
Branch out of an Imprest Account which is reimbursed by the Delhi Head Office every month. The Branch maintains
a Sales Ledger and certain essential subsidiary records, but otherwise all branch transactions are recorded at Delhi.
The following branch transactions took place during the year ended 31st March, 2022:
₹
Goods received from Delhi at Selling Price 1,50,000
Cash Sales 69,000
Goods returned to Delhi at Selling Price 3,000
Credit Sales (Net of returns) 63,000
Authorized Reduction in Selling Price of Goods Sold 1,500
Cash Received from Debtors 48,000
Debtors written off as irrecoverable 2,000
Cash Discount allowed to Debtors 1,500
− On 1st April, 2021 the Stock in trade at the Branch at Selling Price amounted to ₹ 60,000 and the Debtors were

₹ 40,000.
− A consignment of goods sent to the Branch on 27th March,2022 with a Selling Price of ₹ 1,800 was not
received until 5th April,2022 and had not been accounted for in stock.
− The Closing Stock at Selling Price was ₹ 72,900.
− The expenses relating to the Branch for the year ended 31 st March,2022 amounted to ₹ 18,000.
You are required to prepare the Branch Stock Account, Branch Debtors Account, Branch Adjustment Account and
Branch Profit and Loss Account maintained at Delhi under Stock and Debtors method. Any stock unaccounted for is
to be regarded as normal wastage.
Solution
Books of Modern Store Delhi Nagpur Branch Stock A/c
Particulars ₹ Particulars ₹
To Opening stock 60,000 By Bank A/c (Cash Sales) 69,000
To Goods sent to branch A/c 1,50,000 By Branch Debtors A/c 63,000
(Credit sales)
To Goods sent to branch A/c 1,800 By Goods sent to branch A/c 3,000
(Return)
By Branch adjustment A/c 1,500
(Reduction in selling price)
By Branch adjustment A/c 600
(Normal Loss)
By Closing stock (including 74,700
stock in transit of ₹ 1,800)
2,11,800 2,11,800
Branch Debtors A/c

To Bal. b/d 40,000 By Cash/Bank A/c 48,000
To Branch Stock (Sales) 63,000 By Branch P&L A/c (Bad 2,000
debts)
By Branch P&L A/c 1,500
(Discount)
By Bal. c/d 51,500
103,000 103,000
Branch Adjustment A/c
To Branch Stock Account By Stock reserve A/c (60,000 22,500
(Reduction in selling price) 1,500 X 60/160)
To Branch Stock Account By Goods sent to branch A/c 56,925
(Normal loss*) 600 (Loading)
To Goods sent to branch A/c (1,51,800 X 60/160)
(loading on returns) 1,125

(3,000 X 60/160)
To Branch P&L A/c 48,187
To Stock reserve A/c 28,013**
(74,700 X 60/160)
79,425 79,425
Note: * Alternatively, the loading of ₹ 225 on normal loss may be charged to Branch Adjustment A/c and cost
₹375 thereof may be charged to Branch P&L A/c.
** rounded off. Alternatively may be rounded off as ₹ 28,012.
Branch P&L A/c
To Branch expenses A/c 18,000 By Branch Adjustment A/c 48,187
To Bad debts A/c 2,000
To Discount A/c 1,500
To Net Profit 26,687
48,187 48,187
QUESTION 34: (Final A/c System Cost Methods)

Delhi HO sends goods to its Pune branch at 20% above cost. Branch has been instructed by HO to sell goods as under: -
Cash sales at IP
Credit sales at SP (Which is 50% above cost)
1) Opening stock = Rs. 75,000 (IP)
2) Goods sent to branch = Rs. 5,40,000 (IP)
3) Cash sales = Rs. 1,08,000 (IP)
4) Credit sales = Rs. 4,65,000 (SP)
5) Sales return by credit customer = Rs. 22,500 (SP)
6) Sales return by cash customer =Rs. 12,000 (IP)
7) Goods return by branch to HO = Rs. 48,000 (IP)
8) Goods received by branch till year end = Rs. 5,10,000 (IP)
9) Closing stock at the end = Rs. 72,000 (IP)
Solution of Final A/c System Cost Method
Opening Stock (Cost) – 62,500
+ Net Goods Sent to Branch – 4,10,000
((5,40,000 – 48,000) / 120 x 100)
Total (IP) – 4,72,500
COGS (IP) Closing Goods in Shortage Gross Profit
1) Cash Sales: Stock Transit (b/f) 1,63,500
Net Sales = 96,000 / 120 x 100 60,000 25,000 12,500
COGS (Cash) = 80,000
2) Net Credit Sales = 4,42,500 (SP)
COGS = 4,42,500 / 150 x 100 = 2,95,000
Total COGS = 3,75,000

Memorandum Branch Trading and P&L A/c
To Opening Stock 62,500 By Sales
Net Cash 96,000
Net Credit 4,42,500
To Net Goods sent to Branch 4,10,000 By Shortage 12,500
To Gross Profit 1,63,500 By Closing Stock
In Hand 60,000
In Transit 25,000
6,36,000 6,36,000
To Abnormal Loss 12,500 By Gross Profit 1,63,500
To Net Profit 1,51,000
1,63,500 1,63,500
QUESTION 35: (Debtors Method)

Widespread invoices goods to its branch at cost plus 20%. The branch sells goods for cash as well as on credit. The
branch meets its expenses out of cash collected from its debtors and cash sales and remits the balance of cash to
head office after with-holding Rs. 10,000 necessary for meeting immediate requirements of cash. On 31st March, 20X1
the assets at the branch were as follows:
Rs. (‘000)
Cash in Hand 10
Trade Debtors 384
Stock, at Invoice Price 1,080
Furniture and Fittings 500
During the accounting year ended 31 March, 20X2 the invoice price of goods dispatched by the head office to
st
the branch amounted to Rs. 1 crore 32 lakhs. Out of the goods received by it, the branch sent back to head office
goods invoiced at Rs. 72,000. Other transactions at the branch during the year were as follows:
(Rs. ‘000)
Cash Sales 9,700
Credit Sales 3,140
Cash collected by Branch from Credit Customers 2,842
Cash Discount allowed to Debtors 58
Returns by Customers 102
Bad Debts written off 37
Expenses paid by Branch 842
On 1st January, 20X2 the branch purchased new furniture for 1 lakh for which payment was made by head office
through a cheque.
On 31st March, 20X2 branch expenses amounting to Rs. 6,000 were outstanding and cash in hand was again Rs. 10,000.

Furniture is subject to depreciation @ 16% per annum on diminishing balance method.
Prepare Branch Account in the books of head office for the year ended 31st March, 20X2.
Solution
In the Head Office Books
Branch Account
Rs.’000 Rs.’000
To Balance b/d By Balance b/d
Cash in hand 10 Stock reserve Rs. 1,080 × 1/6 180
Trade debtors 384 By Goods sent to branch A/c (Returns 72
to H.O.)
Stock 1,080 By Goods sent to branch A/c (Loading 2,188
on net goods sent to branch –
13,128X1/6
Furniture and fittings 500
To Goods sent to branch A/c 13,200 Bank A/c (Remittance from branch to 11,700
H.O.) (W.N.5)
To Bank A/c (Payment for 100 By Balance c/d
furniture)
To balance c/d stock reserve 1,470 245 Cash in hand 10
x 1/6
To Outstanding expenses 6 Trade debtors (W.N.3) 485
To Net profit transferred to General 1,096 Stock (W.N.1) 1,470
P/L account
Furniture & fittings (W.N.4) 516
16,621 16,621
Working Notes:
1. Invoice price and cost
Let cost be 100
So, invoice price 120
Loading 20
Loading: Invoice price = 20 : 120 = 1 :6
2. Invoice price of closing stock in branch

Branch Stock Account
Rs. ‘000 Rs. ‘000
To Balance b/d 1,080 By Goods sent to branch 72
To Goods sent to branch 13,200 By Branch Cash 9,700
To Branch debtors 102 By Branch debtors 3,140

By Balance c/d 1,470
14,382 14,382
3. Closing balance of branch debtors

Branch Debtors Account
Rs. ‘000 Rs. ‘000
To Balance b/d 384 By Branch cash 2,842
To Branch stock 3,140 By Branch expenses discount 58
By branch stock (Returns) 102
By Branch expenses (Bad debts) 37
By Balance b/d 485
3,524 3,524
4. Closing balance of furniture and fittings

Branch Furniture and Fittings Account
Rs. ‘000 Rs. ‘000
To Balance b/d 500 By depreciation [(500x16%) + 84
(100x16%x3/12)]
To Bank 100 By Balance c/d 516
600 600
Note: Since the new furniture was purchased on 1st Jan 20X2 depreciation will be for 3 months.
5. Remittance by branch to head office

Branch Cash Account
Rs. ‘000 Rs. ‘000
To Balance b/d 10 By Branch expenses 842
To Branch stock 9,700 By Remittances to H.O. (b.f) 11,700
To Branch debtors 2,842 By Balance b/d 10
12,552 12,552

DEPARTMENTAL ACCOUNTS
IMPORTANT NOTES TO SOLVE THE QUESTIONS

1) Closing stock and Opening stock of transferee department may come from transferor department at COST or COST plus Profit
Margin.
2) If goods are transferred at Original Cost only then no need to calculate unrealised profit (Stock Reserve).
3) If goods are transferred at Cost plus Margin by transferor department, then SR (Unrealised profit) must be included in the
Closing stock of Transferee department if some of the transferred goods are unsold.
4) To find out the percentage of Margin earned by transferor on Stock Transfer: - Either question will provide percentage of
profit or if percentage of profit is not given then we will assume that stock transfer is made at Normal Selling Price i.e., Gross
Profit Percentage is to be calculated for transferor department.
On opening stock, if gross profit percentage of last year is not given then, current year gross profit percentage is applied on
opening stock also.
5) How much percentage of stock is included in opening and closing stock of transferee department which came from
transferor department?
a) Either Given in Question
OR
b) If not given, we will assume that stock of transferee contains Own Expense and Transferred goods in proportion of: -
i) Total Own Expense during the year
&
ii) Total Transferred Goods during the year
If separate transfer values are not given in the question then we will assume that “Transfer to” is included in sales and “Transfer
from” is included in purchase.
QUESTION 36:
Z Ltd. has three departments and submits the following information for the year ending on 31st March, 20X1:
A B C Total (Rs.)
Purchases (units) 6,000 12,000 14,400
Purchases (Amount) 6,00,000
Sales (Units) 6,120 11,520 14,976
Selling Price (per unit) Rs. 40 45 50
Closing Stock (Units) 600 960 36
You are required to prepare departmental trading account of Z Ltd., assuming that the rate of profit on sales is
uniform in each case.
Solution
Departmental Trading Account for the year ended on 31st March, 20X1
Particulars A B C Particulars A B C

To Opening Stock 11,520 8,640 12,240 By Sales 2,44,800 5,18,400 7,48,800
(W.N.4) A- 6120 x 40
B- 11,520 x 45
C- 4,97
To Purchases (W.N.2) 96,000 2,16,000 2,88,000 By Cosing Stock 9,60 17,280 720
(W.N.4)
To Gross Profit (b.f.) 1,46,880 3,11,040 4,49,280
2,54,400 5,35,680 7,49,520 2,54,400 5,35,680 7,49,520

Working Notes:
(1) Profit Margin Ratio
Selling price of unit purchased: Rs.
Department A 6,000 x 40 2,40,000
Department B 12,000 x 45 5,40,000
Department C 14,400 x 50 7,20,000
Total Selling Price 15,00,000
Less: Purchase (Cost) Value (6,00,000)
Gross Profit 9,00,000
Profit Margin Ratio = 9,00,000/15,00,000 x100 = 60%
(2) Statement showing department-wise per unit Cost and Purchase Cost
A B C
Rs. Rs. Rs.
Selling Price (Per unit) (Rs.) 40 45 50
Less: Profit Margin @ 60% (Rs.) (24) (27) (30)
Profit Margin is uniform for all depts at 60%
Purchase price per unit (Rs.) 16 18 20
Number of units purchased 6,000 12,000 14,400
(Purchase cost per unit x Units purchased) 96,000 2,16,000 2,88,000
(3) Statement showing calculation of department-wise Opening Stock (in Units)

A B C
Sales (Units) 6,120 11,520 14,976
Add: Closing Stock (Units) 600 960 36
6,720 12,480 15,012
Less: Purchases (units) (6,000) (12,000) (14,400)
Opening Stock (Units) 720 480 612

(4) Statement showing department-wise cost of Opening Stock and Closing Stock
A B C
Cost of Opening Stock (Rs.) 720 x 16 = 480 x 18 = 612 x 20 =
. 11,520 8,640 12,240
Cost of Closing Stock 600 x 16 = 960 x 18 = 36 x 20 =
. 9,600 17,280 720
QUESTION 37:
Department P sells goods to Department S at a profit of 25% on cost and to Department Q at a profit of 15% on
cost. Department S sells goods to P and Q at a profit of 20% and 30% on sales respectively. Department Q sells
goods to P and S at 20% and 10% profit on cost respectively.
Departmental Managers are entitled to 10% commission on net profit subject to unrealised profit on departmental sales
being eliminated. Departmental profits after charging Manager's commission, but before adjustment of unrealised profits
are as below:
Rs.
Department P 90,000
Department S 60,000
Department Q 45,000
Stock lying at different Departments at the end of the year are as below:
Figures in Rs.
DEPARTMENTS
P S Q
Transfer from P - 18,000 14,000
Transfer from S 48,000 - 38,000
Transfer from Q 12,000 8,000 -
Find out correct Departmental Profits after charging Managers' Commission.
Solution
Calculation of correct Departmental Profits
Department Department Department
P (Rs.) S (Rs.) Q (Rs.)
Profit after charging Manager’s Commission 90,000 60,000 45,000
Add: Manager’s Commission (1/9) 10,000 6,667 5,000
1,00,000 66,667 50,000
Less: Unrealised profit on Stock (WN) (5,426) (21,000) (2,727)
Profit Before Manager’s Commission 94,574 45,667 47,273
Less: Manager’s Commission 10% (9,457) (4,567) (4,727)
Correct Profit after Manager’s Commission 85,117 41,100 42,546

Working Notes:
Department P Department S Department Q Total
(Rs.) (Rs.) (Rs.) (Rs.)
Unrealised Profit of:
Department P - 25/125X18,000 15/115X14,000 5,426
=3,600 =1,826
Department S 20/100X48,000 - 30/100X38,000 21,000
=9,600 =11,400
Department Q 20/120X12,000 10/110X8,000 2,727
=2,000 =727

Gram Udyog, a retail store, has two departments, ‘Khadi and Silks’ for each of which stock account and memorandum
‘mark-up’ accounts are kept. All the goods supplied to each department are debited to the stock account at cost plus
a ‘mark-up’, which together make-up the selling-price of the goods and in the account of the sale proceeds of the
goods are credited. The amount of ‘mark-up’ is credited to the Departmental Mark-up Account. If the selling price of
any goods is reduced below its normal selling price, the reduction ‘marked down’ is adjusted both in the Stock Account
and the Departmental ‘Mark-up’ Account. The rate of ‘Mark-up’ for Khadi Department is 33- 1/3% of the cost and
for Silks Department it is 50% of the cost.
The following figures have been taken from the books for the year ended December 31,20X1:
Khadi Deptt. Silks Deptt.
Rs. Rs.
Stock as on January 1st at cost 10,500 18,600
Purchases 75,900 93,400
Sales 95,600 1,25,000
(1) The stock of Khadi on January 1, 20X1 included goods the selling price of which had been marked down by
Rs. 1,260. These goods were sold during the year at the reduced prices.
(2) Certain stock of the value of Rs. 6,900 purchased for the Khadi Department were later in the year transferred
to the Silks department and sold for Rs. 10,350. As a result, though cost of the goods is included in the Khadi
Department the sale proceeds have been credited to the Silks Department.
(3) During the year 20X1 to promote sales the goods were marked down as follows:
Cost (Rs.) Marked Down (Rs.)
Khadi 5,600 360
Silk 10,000 2,000
All the goods marked down, were sold except Silks of the value of Rs. 5,000 marked down by Rs. 1,000.
(4) At the time of stock-taking on December 31, 20X1 it was discovered that Khadi cloth of the cost of Rs. 390
was missing and it was decided that the amount be written off.
You are required to prepare for both the departments for the year 20X1.
(a) The Memorandum Stock Account;

(b) The Memorandum Mark-up Account:
(c) Extract of Profit and Loss Account.
Solution
Silk Stock Account
20X1 Rs. 20X1 Rs.
To Balance b/d By Sales A/c 1,25,000
To Cost 18,600 By Mark-up A/c 2,000
Mark-up @50% 9,300 27,900 By Balance c/d (b.f.) 51,350
To Purchases 93,400
Mark-up @50% 46,700 1,40,100
To Khadi A/c 6,900
Mark-up@50% 3,450 10,350
1,78,350 1,78,350
Silk Mark-up Account

20X1 Rs. 20X1 Rs.
To Stock A/c 2,000 By Balance b/d 9,300
To Profit & Loss A/c (b.f.) 41,000 By Stock A/c 46,700
To Balance c/d 16,450 By Stock A/c 3,450
[(1/3* of {51,350 + 1,000}) – 1,000]
59,450 59,450
* 1/2 on cost is equal to 1/3 on sales
Khadi Stock Account
20X1 20X1
To Balance b/d 12,740 By Sales 95,600
Cost Mark-up @ 33- 10,500 14,000 Mark-up A/c @33- 2,300 9,200
1/3% 3,500 1/3%
To Purchases 75,900 1,01,200 By Loss of Stock A/c 390
Mark-up @ 33- 1/3% 25,300
Mark-up A/c @ 33- 130 520
1/3%
By P&L A/c 1,620
By Balance c/d (b.f.) 8,260
1,13,940 1,13,940
# [(10,500 x 33-1/3%) – 1,260] = Rs. 2,240
Khadi Mark-up Account
20X1 Rs. 20X1 Rs.
To Stock A/c (transfer) 2,300 By Balance b/d
To Stock A/c (re-sale) 130 (3,500 – 1,260) 2,240
To Profit & Loss A/c 22,685 By Khadi Stock A/c 25,300

To Balance (1/4 of Rs. 8,260) 2,065
27,540 27,540
Profit and Loss Account (Extract)

20X1 Rs. 20X1 Rs.
To Khadi Stock A/c 1,620 By Khadi Mark-up A/c 24,305
To Silk Stock A/c 1,000 By Silk Mark-up A/c 42,000
QUESTION 39:
A firm has two departments--Sawmill and Furniture. Furniture is made with wood supplied by the Sawmill department
at its usual selling price. From the following figures prepare Departmental Trading and Profit and Loss Account for the
year 20X2:
Saw mill Furniture
Rs. Rs.
Opening Stock on1st January, 20X2 1,50,000 25,000
Sales 12,00,000 2,00,000
Purchases 10,00,000 7,500
Supply to Furniture Department 1,50,000 --
Selling expenses 10,000 3,000
Wages 30,000 10,000
Stock on 31st December, 20X2 1,00,000 30,000
The value of stocks in the furniture department consists of 75 per cent wood and 25 per cent other expenses. The
Sawmill Department earned Gross Profit at 15 percent in 20X1. General expenses of the business as a whole came to
Rs. 55,000.
Solution
Department Trading and Profit and Loss Account
Particulars Saw mill Furniture Particulars Saw mill Furniture
Rs. Rs. Rs. Rs.
To opening stock 1,50,000 25,000 By sales 12,00,000 2,00,000
To purchase 10,00,000 7,500 By transfer to 1,50,000
furniture dept.
To wages 30,000 10,000 By Closing stock 1,00,000 30,000
To transfer from saw mill - 1,50,000
To gross profit 2,70,000 37,500
14,50,000 2,30,000 14,50,000 2,30,000
To selling expenses 10,000 3,000 By Gross Profit 2,70,000 37,500
To Net Profit 2,60,000 34,500
2,70,000 37,500 2,70,000 37,500
General Profit & Loss Account

Particulars Amount Rs. Particulars Amount Rs.
To general Expenses 55,000 By Net Profit from Saw Mill 2,60,000
Furniture 34,500
To stock reserve (WN2) 4,500 By stock reserve (opening 2,813
WN-1)
To Net Profit 2,37,813
2,97,313 2,97,313
Working Notes:
Calculation of Stock Reserve (opening), assuming FIFO
Rs. 25,000 X 75% wood X 15% = Rs. 2,813
Calculation of closing stock reserve
Gross Profit Rate of Saw Mill of 20X2:
Rs. 2,70,000 / (12,00,000 + 1,50,000) X 100 = 20%
Rs. 30,000 X 75% X 20% = Rs. 4,500

BONUS & RIGHT ISSUE
QUESTION 40: (RTP Nov18, May20 & Nov22)

Zeta Ltd. has decided to increase its existing share capital by making rights issue to its existing shareholders. Zeta
Ltd. is offering one new share for every two shares held by the shareholder. The market value (cum-right) of the
share is Rs 360 and the company is offering one right share of Rs 180 each to its existing shareholders. You are
required to calculate the value of a right. What should be the ex-right value of a share?
SOLUTION
Ex-right value of the shares = (Cum-right value of the existing shares + Rights shares x Issue Price) / (Existing
Number of shares + Number of Right shares)
= (Rs. 360 x 2 Shares + Rs. 180 x 1 Share) / (2+1) Shares
= Rs. 900 / 3 shares =Rs. 300 per share.
Value of right = Cum-right value of the share – Ex-right value of the share
= Rs. 360 – Rs. 300 = Rs. 60 per share.
Hence, any one desirous of having a confirmed allotment of one share from the company at Rs 180 will have to pay
Rs 120 (2 shares x Rs 60) to an existing shareholder holding 2 shares and willing to renounce his right of buying
one share in favour of that person.

The following is the summarised Balance Sheet of Bumbum Limited as at 31st March, 2019:
Rs
Sources of funds
Authorized capital
10,000 Preference shares of Rs 100 each (8% redeemable) 10,00,000
15,00,000
Issued, subscribed and paid up
5,000, 8%Redeemable Preference shares of Rs 100 each 5,00,000
Reserves & Surplus
Profit & Loss A/c 40,000
Application of funds 25,10,000
PPE (net) 7,80,000
Investments (market value Rs 5,80,000) 4,90,000
Deferred Tax Assets 3,40,000
Trade receivables 6,20,000

Cash & Bank balance 2,80,000
25,10,000
In Annual General Meeting held on 20th June, 2019 the company passed the following resolutions:
(i) To split equity share of Rs 10 each into 5 equity shares of Rs 2 each from 1st July, 2019.
(ii) To redeem 8% preference shares at a premium of 5%.
(iii) To issue fully paid bonus shares in the ratio of one equity share for every 3 shares held on record date.
On 10th July, 2019 investments were sold for Rs 5,55,000 and preference shares were redeemed.
The bonus issue was concluded by 12th September, 2019
You are required to journalize the above transactions including cash transactions and prepare Balance Sheet as at 30th
September, 2019. All working notes should form part of your answer.
SOLUTION
Bumbum Limited
Journal Entries
2019 Dr. (Rs) Cr. (Rs)
July 1 Equity Share Capital A/c (Rs10each) Dr. 3,00,000
To Equity share capital A/c (Rs 2 each) 3,00,000
(Being equity share of Rs 10 each splitted into 5 equity
shares of Rs 2 each) {1,50,000 X 2}
July 10 Cash & Bank balance A/c Dr. 5,55,000
To Investment A/c 4,90,000
To Profit & Loss A/c 65,000
(Being investment sold out and profit on sale credited to
Profit & Loss A/c)
July 10 8% Red. pref. sh. capital A/c Dr. 5,00,000
Premium on red. of pref. sh. A/c Dr. 25,000
To Preference shareholders A/c 5,25,000
(Being amount payable to preference shareholders on
redemption)
July 10 Preference shareholders A/c Dr. 5,25,000
To Cash & bank A/c 5,25,000
(Being amount paid to preference shareholders)
July 10 General reserve A/c Dr. 5,00,000
To Capital redemption reserve A/c 5,00,000
(Being amount equal to nominal value of preference
shares transferred to Capital Redemption Reserve A/c on
its redemption as per the law)
Sept. 12 Capital Redemption Reserve A/c Dr. 1,00,000
To Bonus to shareholders A/c 1,00,000
(Being balance in capital redemption reserve capitalized
to issue bonus shares)

Sept. 12 Bonus to shareholders A/c Dr. 1,00,000
To Equity share capital A/c 1,00,000
(Being 50,000 fully paid equity shares of Rs 2 each issued
as bonus in ratio of 1 share for every 3 shares held)
Sept. 30 Securities Premium A/c Dr.
To Premium on redemption of preference shares A/c 25,000
(Being premium on preference shares adjusted from 25,000
securities premium account)
Balance Sheet as at 30th September, 2019

Particulars Notes Rs
A Share capital 1 4,00,000
B Reserves and Surplus 2 12,30,000
A Trade Payables 4,20,000
Total 20,50,000
Assets
A PPE 7,80,000
B Deferred tax asset 3,40,000
2 Current assets
Cash and cash equivalents 3,10,000
Total 20,50,000
Notes to accounts
1 Share Capital Rs Rs
Authorized share capital
2,50,000 Equity shares of Rs 2 each 5,00,000
10,000 8% Preference shares of Rs100 each 10,00,000 15,00,000
2,00,000 Equity shares of ₹ 2 each 4,00,000
Reserves and Surplus
2
Securities Premium A/c
Balance as per balance sheet 6,00,000
Less: Adjustment for premium on preference Shares (25,000)
Balance 5,75,000
Capital Redemption Reserve (5,00,000-1,00,000) 4,00,000

General Reserve (6,50,000 – 5,00,000) 1,50,000
Add: Profit on sale of investment 65,000 1,05,000
Total 12,30,000
Working Notes:
Rs
1. Redemption of preference shares
5,000 Preference shares of Rs 100 each 5,00,000
Premium on redemption @ 5% 25,000
Amount Payable 5,25,000
2. Issue of Bonus Shares
Existing equity shares after split (30,000 x 5) 1,50,000 shares
Bonus shares (1 share for every 3 shares held) to be issued 50,000 shares
3. Cash and Bank Balance
Add: Realization on sale of investment 5,55,000
8,35,000
Less: Paid to preference share holders (5,25,000)
Balance 3,10,000

Following is the balance sheet of V’Smart Limited as at 31st March, 2021:
Authorized capital
5,00,000 12% Preference shares of Rs. 10 each 50,00,000
15,00,000 Equity shares of Rs. 10 each 1,50,00,000
2,00,00,000
Issued and Subscribed capital
4,00,000 12% Preference shares of Rs. 10 each fully paid 40,00,000
13,00,000 Equity shares of Rs. 10 each, Rs. 8 paid up
1,04,00,000
Reserves and Surplus
Capital Redemption Reserve 7,50,000
Securities Premium (Unrealised Portion 50,000) 2,50,000
Profit and Loss Account 20,00,000
Revaluation Reserve 8,00,000

On 1st April 2021, the company has made final call @ Rs. 2 each on 13 LACS equity shares. The call money was
received by 15th April, 2021, Thereafter, the company decided to capitalize its reserves by way of bonus at the rate of
one share for every four shares held, it also decided that there should be minimum reduction in free reserves.
On 1st June 2021, the company issued Rights shares at the rate of two share for every five shares held on that date
at issue price of Rs. 12 per share. All the rights shares were accepted by the existing shareholders and the money was
duly received by 20th June, 2021.
You are required to pass necessary journal entries in the books of the Sujata Food Limited for bonus issue and right
issue.
SOLUTION
Journal Entries in the books of Sujata Foods Ltd.
2021 Dr. Cr.
Rs. Rs.
April 1 Equity Share Final Call A/c Dr. 26,00,000
To Equity Share Capital A/c 26,00,000
(Final call of Rs. 2 per share on 13,00,000
equity shares made due)
April 15 Bank A/c Dr. 26,00,000
To Equity Share Final Call A/c 26,00,000
(Final call money on equity shares received)
Capital Redemption Reserve A/c Dr. 7,50,000
Securities Premium A/c Dr. 2,00,000
General Reserve A/c Dr. 23,00,000
To Bonus to Shareholders A/c 32,50,000
(Bonus issue of one share for every four shares
held, by utilising various reserves as per Board’s
resolution dated…….)
Bonus to Shareholders A/c Dr. 32,50,000
(Capitalization of profit)
Bank A/c Dr. 78,00,000
To Securities Premium A/c 13,00,000
June 20
(Being Right issue of 2 shares for every 5
shares held as per board resolution dated
………..)
Note: Authorised Equity Capital shall be increased by 1,25,000 Shares

PRE & POST INCORPORATION
QUESTION 43: (RTP May18) (MTP May19, May21, Nov21)

The Business carried on by Kamal under the name "K" was taken over as a running business with effect from 1st April,
2016 by Sanjana Ltd., which was incorporated on 1st July, 2016. The same set of books was continued since there was
no change in the type of business and the following particulars of profits for the year ended 31st March, 2017 were
available.
Rs Rs
Sales: Company period 40,000
Prior period 10,000 50,000
Selling Expenses 3,500
Preliminary Expenses written off 1,200
Salaries 3,600
Directors' Fees 1,200
Interest on Capital (Up to 30.6.2016) 700
Depreciation 2,800
Rent 4,800
Purchases Company Period 25,000
Carriage Inwards 1,019 43,819
Net Profit 6,181
The purchase price (including carriage inwards) for the post -incorporation period had increased by 10 percent as
compared to pre-incorporation period. No stocks were carried either at the beginning or at the end.
You are required to prepare a statement showing the amount of pre and post incorporation period profits stating the
basis of allocation of expenses.
SOLUTION
Statement showing the calculation of profits/losses for pre incorporation and Post incorporation period profits of Sanjana
Ltd. for the year ended 31st March, 2017
Particulars Basis Pre Rs Post Rs
Sales (given) 10,000 40,000
Less Purchases 1:3.3 5,814 19,186
Carriage Inwards 1:3.3 237 782
Gross Profit (i) 3,949 20,032
Less Selling Expenses 1:4 700 2,800

Preliminary Exp - 1,200
Salaries 1:3 900 2,700
Directors Fees - 1,200
Interest on Capital 700 -
Depreciation 1:3 700 2,100

Rent 1:3 1,200 3,600

Total Expenses (ii) 4,200 13,600
Capital Loss/Net Profit (i-ii) (251) 6,432
Working Notes:
1: Sales Ratio = 10,000:40,000 = 1:4
2: Time Ratio = 3:9 = 1:3
3: Purchase Price Ratio
Therefore, Ratio is 3:9
But purchase price was 10% higher in the company period
Ratio is 3:9 + 10%
3:9.9 = 1:3.3.

The partners of Shri Enterprises decided to convert the partnership firm into a Private Limited Company Shreya (P)
Ltd. with effect from 1st January, 2018. However, company could be incorporated only on 1st June, 2018. The business
was continued on behalf of the company and the consideration of Rs. 6,00,000 was settled on that day along with
interest @ 12% per annum. The company availed loan of Rs. 9,00,000 @ 10% per annum on 1st June, 2018 to pay
purchase consideration and for working capital. The company closed its accounts for the first time on 31st March, 2019
and presents you the following summarized profit and loss account:
Rs Rs
Sales 19,80,000
Cost of goods sold 11,88,000
Discount to dealers 46,200
Directors’ remuneration 60,000
Salaries 90,000
Rent 1,35,000
Interest 1,05,000
Depreciation 30,000
Office expenses 1,05,000
Sales promotion expenses 33,000
Preliminary expenses (to be written off in first year itself) 15,000 18,07,200
Profit 1,72,800
Sales from June, 2018 to December, 2018 were 2½ times of the average sales, which further increased to 3½ times
in January to March quarter, 2019. The company recruited additional work force to expand the business. The salaries
from July, 2018 doubled. The company also acquired additional showroom at monthly rent of Rs. 10,000 from July,
2018.
You are required to prepare a Profit and Loss Account showing apportionment of cost and revenue between pre-
incorporation and post-incorporation periods.

SOLUTION
Shreya (P) Limited
Profit and Loss Account for 15 months ended 31st March, 2019
Pre. inc. Post inc. Pre. inc. Post inc. (10
(5 months) (10 months) (5 months) months)
(Rs) (Rs) (Rs) (Rs)
To Cost of sales 1,80,000 10,08,000 By Sales 3,00,000 16,80,000
To Gross profit 1,20,000 6,72,000 (W.N.1)
3,00,000 16,80,000 3,00,000 16,80,000
To Discount to dealers 7,000 39,200 By Gross profit 1,20,000 6,72,000
To Directors’ Remuneration - 60,000 By Loss 750
To Salaries (W.N.2) 18,750 71,250
To Rent (W.N.3) 15,000 1,20,000
To Interest (W.N.4) 30,000 75,000
To Depreciation 10,000 20,000
To Office expenses 35,000 70,000
To Preliminary expenses - 15,000
To Sales promotion expenses 5,000 28,000
To Net profit - 1,73,550
1,20,750 6,72,000 1,20,750 6,72,000
Working Notes:
1. Calculation of sales ratio:
Let the average sales per month in pre-incorporation period be x
Average Sales (Pre-incorporation) = x X 5 5x
Sales (Post incorporation) from June to December, 2018 = 2½ x X 7 17.5x
From January to March, 2019 = 3½ x X 3 10.5x
Total Sales 28.0x
Sales ratio of pre-incorporation & post incorporation is 5x : 28x
2. Calculation of ratio for salaries

Let the average salary be x
Pre-incorporation salary = x X 5= 5x
Post incorporation salary
June, 2018 = x
July 18 to March, 2019 = x X 9 X 2 = 18x
19x
Ratio is 5:19
3. Calculation of Rent
₹

Total Rent 1,35,000
Less: Additional rent for 9 months @ Rs. 10,000 p.m. 90,000
Rent of old premises apportioned in time ratio 45,000
Apportionment Pre Post

Old premises rent 15,000 30,000
Additional Rent 90,000
Total 28,000 1,20,000
4. Calculation of interest
Pre-incorporation period from January, 2018 to May, 2018
6,00,000×12×5
Rs. 30,000
100×12
Post incorporation period from June, 2018 to March, 2019

9,00,000×10×10
Rs. 75,000
100×12
Rs. 1,05,000

Hot Limited was formed to take over a running business of Awesome Enterprises with effect from 1st April, 2021. The
company was incorporated in 1st July, 2021 and the certificate of commencement of business was received on 1st
August 2021. No entries relating to the transfer of the business were entered in the books which were continued until
31st march, 2022. The following trail balance was extracted from the books as on 31st march, 2022.
Particulars Dr (Rs.) Cr (Rs.)
Sales - 30,00,000
Cost of Goods sold 21,00,000
Rent 3,00,000
Salaries 1,50,000
Travelling expenses 20,000
Depreciation 9,000
Carriage outward 8,000
Printing & Stationary 50,000
Miscellaneous expenses 25,000
Directors’ fees 1,000
Managing Director’s Remuneration 8,000
Bad debts (net of recovery) 30,000
Commission & Brokerage to Selling Agents 70,000
Audit fee 60,000
Interest on debentures 12,000
Interest on vendors 14,000
Selling and distribution expenses 24,000
Preliminary expenses 13,000
Underwriting commission 18,000

Fixed assets 12,50,000
Current assets 5,50,000
Cool Limited’s capital as on 1 April, 2021
st
9,00,000
Current liabilities 2,00,000
Debentures 6,00,000
Interest on Investment 27,000
Total 47,00,000 47,00,000
Addition information:
(a) Total sales for the year arose evenly up to the date of the certificate of commencement, after that date there is
an increase of 25% during the rest of the year.
(b) The company delas with one type of product. The unit cost of goods sold was reduced by 10% since 1st august,
2021 as compared to the pre-incorporation period.
(c) Rent of old office building was increased by 20% since 1st November, 2021. It had to also occupy additional space
from 1st July, 2021 for which rent was Rs. 15,000 p.m.
(d) The salaries were tripled from 1st August, 2021.
(e) Travelling expenses include Rs. 7,500 towards sales promotion.
(f) Depreciation includes Rs. 3,000 for new assets acquired in august 2021.
(g) Purchase consideration was discharged by the company on 30th Nov.2021 by issuing 60,000 equity shares of Rs.
10 each.
(h) Bad debts recovered Rs. 10,000 relating to Last Year.
(i) Hot Ltd. initiated advertisement campaign which resulted in increase in Post Period Sales.
(j) Investments were sold on 30th September.
you are required to prepare Profit & Loss Statement in a columnar form for the year ended 31st March, 2022 showing
the allocation of profits pre-incorporation and post-incorporation periods including the basis of apportionment.
SOLUTION:
In the Books of Hot Ltd.
Statement showing Calculation for Profit or Loss Pre & Post Incorporation
Particular Total (₹) Basis Pre – Post –

Incorporation (₹) Incorporation (₹)
Sales 30,00,000 Sales 6,42,857 24,57,143
Bad debts recovered 10,000 Pre 10,000 -
Interest on Investment 27,000 1:1 13,500 13,500
Total 30,37,000 6,66,357 24,70,643
(-) Expenses
Cost of Goods Sold 21,00,000 10:33 4,88,372 16,11,628
Rent 3,00,000 W.N.4 38,076.92 2,61,923.08

Salaries 1,50,000 W.N.5 16,071.43 1,33,928.57
Travelling Expenses 20,000 W.N.6 4,732.14 15,267.86
Depreciation 9,000 W.N.7 1,500 7,500
Carriage Outward 8,000 Sales 1,714.29 6,285.71
Printing & Stationery 50,000 Time 12,500 37,500
Advertisement 15,000 Post - 15,000
Miscellaneous Expenses 25,000 Time 6,250 18,750
Directors Fee 1,000 Post - 1,000
Managing Director Remuneration 8,000 Post - 8,000
Bad Debts (30,000 + 10,000) 40,000 Sales 8,571.43 31,428.57
Commission & Brokerage to Selling Expenses 70,000 Sales 15,000 55,000
Audit Fee 60,000 Post - 60,000
Interest on Debentures 12,000 Post - 12,000
Interest on Vendors 14,000 W.N.8 5,250 8,750
Selling & Distribution Expenses 24,000 Sales 5,142.85 18,857.14
Preliminary Expenses 13,000 Post - 13,000
Underwriting Commission 18,000 Post - 18,000
Working Notes:
1) Time Ratio:
Pre incorporation Period = 1/4/2021 – 30/6/2021 = 3 Months
Post Incorporation Period = 1/7/2021 – 31/3/2022 = 9 Months
Time Ratio = 1:3
2) Sales Ratio:
Let us assume Monthly sales be X
Pre-Incorporation Period = 3 Months x X = 3X
Post Incorporation Period = X + 8(X + 0.25X) = 11X
Sales Ratio = 3:11
3) COGS Ratio:
Cost of goods ratio between pre and post incorporation periods can be calculated as follows:

Let cost of goods sold in the pre-incorporation period be Rs. 100 Then cost of goods sold in the post-
incorporation period is Rs.90 Sales Ratio (as calculated above) = 3:11
Then, cost of goods sold ratio = (100 x 3): (90 x 11) = 300: 990= 10:33
4) Rent:
Total Rent = 3,00,000
New Additional space rent from 1/7/2021 = 15,000 x 9 = 1,35,000*
Old Space rent = 1,65,000
Let the monthly rent of old space be X
Pre incorporation period = 3 x X = 3X
Post Incorporation Period = 4 x X + 5 (X + 0.2X) = 10X
Monthly Rent of Old Space
13X = 1,65,000
X = 12,692.30
Therefore,
Pre incorporation rent = 38,077
Post incorporation rent = 1,26,923 + 1,35,000 = 2,61,923
5) Salaries:
Total Salary = 1,50,000
Let us assume monthly salary be X
Pre incorporation period = 3 x X = 3X
Post incorporation period = X + 8 (3 x X) = 25X
Therefore,
Pre-Incorporation Salary = 16,071.43
Post Incorporation Salary = 1,33,928.57
6) Travelling Expenses:
Total travelling expenses = 20,000
Sales promotion = 7,500
Pre incorporation = 7,500 x 3/14 = 1,607.14
Post incorporation = 7,500 x 11/14 = 5,892.86
Balance Travelling Expenses = 12,500
Pre incorporation = 12,500 x 1/4 = 3,125
Post incorporation = 12,500 x ¾ = 9,375
Therefore,
Pre-Incorporation Travelling Expenses = 4,732.14
Post-Incorporation Travelling Expenses = 15,267.86
7) Depreciation:
Total Depreciation = 9,000
Depreciation on new asset acquired in the month of august, 2021 = 3,000 (Post)
Balance depreciation = 6,000
Pre incorporation = 6,000 x ¼ = 1,500
Post incorporation = 6,000 x ¾ = 4,500
Therefore,
Pre Incorporation Depreciation = 1,500

Post Incorporation Depreciation = 7,500
8) Interest on Vendors:
Purchase consideration was paid on 30th Nov, 2021
Therefore,
Pre incorporation = 14,000 x 3/8 = 5,250
Post incorporation = 14,000 x 5/8 = 8,750

REDEMPTION OF PREFERENCE SHARES
QUESTION 46: (RTP Nov18)

st
The following are the extracts from the Balance Sheet of Meera Ltd. as on 31 December, 2017.
Share capital: 60,000 Equity shares of Rs. 10 each fully paid – Rs. 6,00,000; 1,500 10% Redeemable preference shares
of Rs. 100 each fully paid – Rs. 1,50,000.
Reserve &Surplus: Capital reserve – Rs. 75,000; Securities premium – Rs. 75,000; General reserve – Rs. 1,12,500;
Profit and Loss Account – Rs. 62,500
st
On 1 January 2018, the Board of Directors decided to redeem the preference shares at premium of 10% by utilisation
of reserve.
You are required to prepare necessary Journal Entries including cash transactions in the books of the company.
SOLUTION
In the books of Meera Limited Journal Entries
Date Particulars Dr. (Rs) Cr. (Rs)
2018
Jan 1 10% Redeemable Preference Share Capital A/c Dr. 1,50,000
Premium on Redemption of Pref. shares Dr. 15,000
To Preference Shareholders A/c 1,65,000
(Being the amount payable on redemption transferred to
Preference Shareholders Account)
Preference Shareholders A/c Dr. 1,65,000
(Being the amount paid on redemption of preference shares)
Profit & Loss A/c Dr. 15,000
To Premium on Redemption of Pref. Shares 15,000
(Being adjustment of premium on redemption)
General Reserve A/c Dr. 1,12,500
To Capital Redemption Reserve A/c 1,50,000
(Being the amount transferred to Capital Redemption Reserve
Account as per the requirement of the Act)
Note: Securities premium and capital reserve cannot be utilized for transfer to Capital Redemption Reserve.
QUESTION 47: (EXAM May 19)

The Summarized Balance Sheet of Clean Ltd. as on 31st March, 2019 is as follows:
Particulars (Rs.)
EQUITY AND LIABILITIES
1. Shareholder's funds:

(a) Share Capital 5,80,000
(b) Reserves and Surplus 96,000
2. Current Liabilities:
Total 7,89,000
ASSETS:
1. Non-Current Assets
(a) Property, Plant and Equipment Tangible Assets 6,90,000
(b) Non-current investments 37,000
2. Current Assets
Cash and cash equivalents (Bank) 62,000
Total 7,89,000
The Share Capital of the company consists of Rs.50 each Equity shares of Rs.4,50,000 and Rs.100 each 8% Redeemable
Preference Shares of Rs.1,30,000 (issued on 1.4.2017).
Reserves and Surplus comprises statement of profit and loss only.
In order to facilitate the redemption of preference shares at a premium of 10%, the Company decided:
(a) to sell all the investments for Rs. 30,000.
(b) to finance part of redemption from company funds, subject to, leaving a Bank balance of Rs. 24,000.
(c) to issue minimum equity share of Rs.50 each at a premium of Rs. 10 per share to raise the balance of funds
required.
You are required to
(1) Pass Journal Entries to record the above transactions.
(2) Prepare Balance Sheet after completion of the above transactions.
SOLUTION
Journal Entries
Particulars Dr. (Rs.) Cr. (Rs.)
1 Bank A/c Dr. 75,000
To Share Application A/c 75,000
(For application money received on 1,250 shares @Rs.60 per
share)
2 Share Application A/c Dr. 75,000
To Equity Share Capital A/c 62,500
To Securities Premium A/c 12,500
(For disposition of application money received)
3 Preference Share Capital A/c Dr. 1,30,000
Premium on Redemption of Preference Shares A/c Dr. 13,000
(For amount payable on redemption of preference shares)
4 Profit and Loss A/c Dr. 13,000
To Premium on Redemption of Preference Shares A/c 13,000

(For writing off premium on redemption out of profits)
5 Bank A/c Dr. 30,000
Profit and Loss A/c (loss on sale) A/c Dr. 7,000
To Investment A/c 37,000
(For sale of investments at a loss of Rs.3,500)
6 Preference Shareholders A/c Dr. 1,43,000
To Bank 1,43,000
(Being amount paid to Preference shareholders)
7 Profit and Loss A/c Dr. 67,500
To Capital Redemption Reserve A/c 67,500
(For transfer to CRR out of divisible profits an amount
equivalent to excess of nominal value of preference shares over
proceeds (face value of equity shares) i.e., Rs. 1,30,000 - Rs.
62,500)
Balance Sheet of Clean Ltd. (after redemption)

Particulars Notes No.
EQUITY AND LIABILITIES
1. Shareholders’ funds
a) Share capital 1 5,12,500
b) Reserves and Surplus 2 88,500
2. Current liabilities
Total 7,14,000
ASSETS
1. Non-Current Assets
Property Plant and Equipments
Tangible asset 6,90,000
2. Current Assets
Cash and cash equivalents(bank) 3 24,000
Total 7,14,000
Notes to accounts
Rs.
1. Share Capital
Equity share capital Rs. (4,50,000 + 62,500) 5,12,500
Capital Redemption Reserve 67,500
Profit and Loss Account Rs. (96,000 – 13,000 – 7,000 – 67,500) 8,500
Security Premium 12,500
3. Cash and cash equivalents 88,500

Balances with banks Rs. (62,000 + 75,000 +30,000 – 1,43,000) 24,000
Working Note:
Calculation of Number of Shares: Rs.
Amount payable on redemption (1,30,000 + 10% Premium) 1,43,000
Less: Sale price of investment (30,000)
1,13,000
Less: Available bank balance (62,000 - 24,000) (38,000)
Funds required from fresh issue 75,000
No. of shares = 75,000/60 = 1,250 shares
QUESTION 48: (Nov 20 – 12 MARKS)

The books of Arpit Ltd. show the following balances as on 31st December 2019:
Amount (Rs.)
6,00,000 Equity Shares of Rs.10 fully paid up 60,00,000
30,000, 10% Preference shares of Rs. 100 each, Rs. 80 paid up 24,00,000
Capital Redemption Reserve 18,00,000
Under the terms of issue, the Preference Shares are redeemable on 31 March 2020 at a premium of 10%. In order to
st
finance the redemption, the board of directors decided to make a fresh issue of 1,50,000 Equity Shares of Rs. 10 each
at a premium of 20%, Rs. 2 being payable on application, Rs. 7 (including premium) on allotment and the balance on
1st January, 2021. The issue was fully subscribed and allotment made on 1st March 2020. The money due on allotment
was received by 20th March 2020.
The preference shares were redeemed after fulfilling the necessary conditions of section 55 of the Companies Act
2013.
You are required to pass necessary journal entries and also show how the relevant items will appear in the Balance
Sheet of the company after the redemption carried out on 31st March 2020.
SOLUTION
Journal Entries
Rs. Rs.
1 10% Preference Share Final Call A/c Dr. 6,00,000
To 10% Preference Share Capital A/c 6,00,000
(For final call made on preference shares @ Rs. 20 each to make
them fully paid-up)
2 Bank A/c Dr. 6,00,000
To 10% Preference Share Final Call A/c 6,00,000
(For receipt of final call money on preference shares)
3 Bank A/c Dr. 3,00,000

To Equity Share Application A/c 3,00,000
(For receipt of application money on 1,50,000 equity shares @ Rs.2
per share)
4 Equity Share Application A/c Dr. 3,00,000
(For capitalization of application money received)
5 Equity Share Allotment A/c Dr. 10,50,000
To Securities Premium A/c 3,00,000
(For allotment money due on 1,50,000 equity shares @ Rs.7 per share
including a premium of Rs.2 per share)
6 Bank A/c Dr. 10,50,000
To Equity Share Allotment A/c 10,50,000
(For receipt of allotment money on equity shares)
7 10% Preference Share Capital A/c Dr. 30,00,000
Premium on Redemption of Preference Shares A/c Dr. 3,00,000
(For amount payable to preference shareholders on redemption at
10% premium)
8 General Reserve A/c Dr. 3,00,000
To Premium on Redemption A/c 3,00,000
(Writing off premium on redemption of preference shares)
9 General Reserve A/c Dr. 19,50,000
(For transfer of CRR the amount not covered by the proceeds of fresh
issue of equity shares i.e.,30,00,000-3,00,000-7,50,000)
10 Preference Shareholders A/c Dr. 33,00,000

To Bank A/c 33,00,000
(For amount paid to preference shareholders)
Balance Sheet (extracts)

Particulars Notes No. As at 31.3.2020 As at 31.12.2019
Rs. Rs.
EQUITY ANDLIABILITIES
1. Share holders’ funds
a) Share capital 1 70,50,000 84,00,000
b) Reserves and Surplus 2 59,00,000 59,00,000
Notes to Accounts:

As at 31.3.2020 As at 31.12.2019
1. Share Capital
Issued, Subscribed and Paid up:
6,00,000 Equity shares of Rs.10 each fully paid-up 60,00,000 60,00,000
1,50,000 Equity shares of Rs.10 each Rs.7 paid-up 10,50,000 -
30,000, 10% Preference shares of Rs. 100 each, Rs.80 - 24,00,000
paid-up
70,50,000 84,00,000
Capital Redemption Reserve 37,50,000 18,00,000
Securities Premium 9,00,000 6,00,000
General Reserve 12,50,000 35,00,000
59,00,000 59,00,000
Note:
1. Securities premium has not been utilized for the purpose of premium payable on redemption of preference shares
assuming that the company referred in the question is governed by Section 133 of the Companies Act, 2013 and
comply with the Accounting Standards prescribed for them.
2. Amount received (excluding premium) on fresh issue of shares till the date of redemption should be considered
for calculation of proceeds of fresh issue of shares. Thus, proceeds of fresh issue of shares are Rs. 10,50,000 (Rs.
3,00,000 application money plus Rs. 7,50,000 received on allotment towards share capital) and balance Rs.
19,50,000 to taken from general reserve account.

The following is the summarised Balance Sheet of Bumbum Limited as at 31st March, 20X1:
Particulars Rs
Sources of funds Authorized capital
10,000 Preference shares of Rs 100 each (8% redeemable) 10,00,000
15,00,000
5,000, 8% Redeemable Preference shares of Rs 100 each 5,00,000
Reserves & Surplus
12,90,000
2,500, 9% Debentures of Rs 100 each 2,50,000

Property, Plant and Equipment (net) 7,80,000
Investments (market value Rs 5,80,000) 4,90,000
Deferred Tax Assets 3,40,000
Cash & Bank balance 2,80,000
In Annual General Meeting held on 20th June, 20X1 the company passed the following resolutions:
• To split equity share of Rs 10 each into 5 equity shares of Rs 2 each from 1st July.
• To redeem 8% preference shares at a premium of 5%.
• To redeem 9% Debentures by making offer to debenture holders to convert their holdings into equity shares at Rs
10 per share or accept cash on redemption.
• To issue fully paid bonus shares in the ratio of one equity share for every 3 shares held on record date.
On 10th July, 20X1 investments were sold for Rs 5,55,000 and preference shares were redeemed.
40% of Debenture holders exercised their option to accept cash and their claims were settled on 1st August, 20X1.
The company fixed 5th September, 20X1 as record date and bonus issue was concluded by 12th September, 20X1
You are requested to journalize the above transactions including cash transactions and prepare Balance Sheet as at
30th September, 20X1. All working notes should form part of your answer.
SOLUTION
Bumbum Limited Journal Entries
20X1 Particulars Dr. (Rs) Cr. (Rs)
July 1 Equity Share Capital A/c (Rs 10 each) Dr. 3,00,000
To Equity share capital A/c (Rs 2 each) 3,00,000
(Being equity share of Rs 10 each splitted into 5 equity shares of Rs 2 each)
{1,50,000 X 2}
July 10 Cash & Bank balance A/c Dr. 5,55,000
To Profit & Loss A/c 65,000
(Being investment sold out and profit on sale credited to Profit & Loss A/c)
July 10 8% Redeemable preference share capital A/c Dr. 5,00,000
Premium on redemption of pref. share A/c Dr. 25,000
(Being amount payable to preference shareholders on redemption) (refer
W.N.1)
July 10 Preference shareholders A/c Dr. 5,25,000
July 10 General reserve A/c Dr. 5,00,000
(Being amount equal to nominal value of preference shares
transferred to Capital Redemption Reserve A/c on its redemption as per the
law)

Aug 1 9% Debentures A/c Dr. 2,50,000
Interest on debentures A/c (2,50,000 x 9% x 4/12) Dr. 7,500
To Debenture holder’s A/c 2,57,500
(Being amount payable to debenture holders along with interest payable)
Aug. 1 Debenture holder’s A/c Dr. 2,57,500
To Cash & bank A/c (1,00,000 + 7,500) 1,07,500
To Equity share capital A/c (15,000 X 2) 30,000
To Securities premium A/c (15,000 x 8) 1,20,000
(Being claims of debenture holders satisfied) (refer W.N.2)
Sept. 5 Capital Redemption Reserve A/c Dr. 1,10,000
To Bonus to shareholders A/c 1,10,000
(Being balance in capital redemption reserve capitalized to issue bonus shares)
(refer W.N.3)
Sept. 12 Bonus to shareholders A/c Dr. 1,10,000
(Being 55,000 fully paid equity shares of Rs 2 each issued as bonus in ratio
of 1 share for every 3 shares held)
Sept. 30 General Reserve A/c Dr. 25,000
(Being premium on preference shares adjusted from general reserve)
Sept. 30 Profit & Loss A/c Dr. 7,500

To Interest on debentures A/c 7,500
(Being interest on debentures transferred to Profit and Loss Account)
Balance Sheet as at 30th September, 20X1

Particulars Notes Rs
a Trade Payables 1,70,000
Total 19,42,500
Assets
a Property, Plant and Equipment
Tangible assets 7,80,000
B Deferred tax asset 3,40,000
2 Current assets
Cash and bank balances (W.N.4) 2,02,500
Total 19,42,500

Notes to accounts
Particulars Rs
1 Share Capital
10,000 Preference shares of Rs100 each 10,00,000 15,00,000
[(30,000 x 5) + 15,000 + 55,000]
Securities Premium A/c
Add: Premium on equity shares issued on conversion of 1,20,000
debentures (15,000 x 8)
Balance 7,20,000
Capital Redemption Reserve (5,00,000-1,10,000) 3,90,000
General Reserve (6,50,000 – 5,00,000- 25,000) 1,25,000
Add: Profit on sale of investment 65,000
Less: Interest on debentures (7,500) 97,500
Total 13,32,500
Working Notes:
Rs
1. Redemption of preference share:
5,000 Preference shares of ₹ 100 each 5,00,000
Premium on redemption @ 5% 25,000
Amount Payable 5,25,000
2. Redemption of Debentures
2,500 Debentures of Rs 100 each 2,50,000
Less: Cash option exercised by 40% holders (1,00,000)
Conversion option exercised by remaining 60% 1,50,000
Equity shares issued on conversion = 1,50,000/10 = 15,000 shares
3. Issue of Bonus Shares
Existing equity shares after split (30,000 x 5) 1,50,000 shares
Equity shares issued on conversion 15,000 shares
Equity shares entitled for bonus 1,65,000 shares
Bonus shares (1 share for every 3 shares held) to be issued 55,000 shares

8,35,000
Paid to Debenture holders (7,500 + 1,00,000) (1,07,500)
Balance 2,02,500
5. Interest of Rs 7,500 paid to debenture holders have been debited to Profit & Loss
Account.
QUESTION 50: (RTP May 22)

Rohan Ltd. gives you following information as at 31st March, 2021:
Particulars Rs. Rs.
Issued & subscribed capital:
Equity shares capital:
60,000 Equity shares of Rs. 10 each fully paid up 6,00,000
12% Redeemable Preference share Capital:
5,000 shares of Rs. 100 each 5,00,000
Less: Calls in arrear 4,96,000 10,96,000
(4,000)
(final call of Rs. 20 on 200 shares)
Reserve & surplus
Profit and Loss Account 3,00,000
Securities Premium Account 30,000 3,30,000
Non- current liability
Long term borrowings: 14% Debentures 1,50,000
Current liabilities
Trade payables 74,000
Assets
Non-current Assets
(i) Property, Plant & Equipment 13,00,000
(ii) Non- current Investment 1,00,000
Current Assets
(i) Inventory 50,000
(ii) Trade Receivables 20,000
(iii) Bank 1,80,000

On April 1, 2021, the Board of Directors decided to redeem the preference shares (excluding 200 shares on which there
are calls in arrear) at 10% premium and to sell the investment at its market price of Rs. 80,000. They also decided
to issue sufficient number of equity shares of Rs. 10 at a premium of Rs. 1 per share and the balance in profit and
loss account was to be maintained at Rs. 1,00,000. Premium on redemption can’t be set off against securities premium

account as Rohan Ltd. is governed by section 133 of the Companies act, 2013 and comply with Accounting Standards.
You are required to show the journal entries and the balance sheet of the company immediately after completion of
redemption as per Schedule III. Show working for availability of profits for redemption and determination of bank
balance at the end. All the above formalities and transactions were completed up to the end of 15th May, 2021.
SOLUTION
Journal Entries in the books of Rohan Ltd.
Dr. (Rs.) Cr. (Rs.)
Bank A/c Dr. 80,000
Profit & Loss A/c (Loss on sale) Dr. 20,000
(Being sale of Investments and transfer of Loss to Profit
and Loss A/c)
12% Preference Share Capital A/c Dr. 4,80,000
Premium Payable on Redemption A/c Dr. 48,000
To Preference Shareholders Account 5,28,000
(Being amount payable to Preference Shareholders on
redemption of Preference Shares at a premium of 10%)
Bank Account Dr. 3,82,800
To Equity Share Application & Allotment A/c 3,82,800
(Being application money received on Equity Shares issued)
Equity Share Application & Allotment A/c Dr. 3,82,800
To Securities Premium A/c 34,800
(Being the allotment of 34,800 equity shares of Rs. 10
each at a premium of Rs. 1 per share)
Profit & Loss Account Dr. 1,32,000
To Capital Redemption Reserve Account 1,32,000
Being creation of CRR to the extent of nominal value of
Preference Shares redeemed out of profits.)
Profit & loss Account Dr. 48,000
To PrCemium Payable on Redemption A/c 48,000
(Being Premium Payable on Redemption written off.)
Preference Shareholders Account Dr. 5,28,000
To Bank Account 5,28,000
(Being amount paid to Preference Shareholders holding
4,800 preference shares on Redemption.)
Balance Sheet of Rohan Limited

As at 15th May 2021 (After Redemption of Preference Shares)
Particulars Note No. Amount (Rs.)
I EQUITY AND LIABILITIES
1 Shareholders’ funds
(a) Share Capital 1 9,64,000
(b) Reserve and surplus 2 2,96,800
2. Non-Current Liabilities
Long Term Borrowings (14% Debentures) 1,50,000
3. Current Liabilities
(a) Trade Payables 74,000
Total 14,84,800
II ASSETS
1 Non-current Assets
(a) PPE 13,00,000
2. Current Assets
(a) Inventories 50,000
(b) Trade Receivables 20,000
(c) Cash and Cash Equivalent (W.N -4) 1,14,800
Total 14,84,800
Notes to Accounts
Rs. Rs.
1 Share Capital
Equity Share Capital
Issued Subscribed and paid up:
94,800 Equity Shares of Rs. 10 each fully paid up 9,48,000
12% Preference share Capital
200, 12% Preference Shares fully called up 20,000
Less: Calls-in-arrears (@ Rs. 20 per share) (4,000) 16,000
Total 9,64,000
2 Reserve and Surplus
(a) Capital redemption Reserve Account 1,32,000
(Transfer from Profit and Loss A/c)
(b) Securities Premium Account
Opening Balance 30,000
Add: Received on Fresh Issue (34,800 Shares × Rs. 1 each) 34,800 64,800
(c) Profit and Loss A/c balance 1,00,000
Total 2,96,800

Working Notes:
1. 200 preference shares having calls in arrears, will not be redeemed. The amount of fresh issue under section 55 of
the Companies Act has been calculated taking into consideration the redemption of 4,800 Preference shares, which
are fully paid-up.
2 Calculation of Profits Available for Redemption
Balance given in the Question 3,00,000
Less: Loss on sale of Investment (1,00,000 – 80,000) (20,000)
Less: Minimum balance to be maintained in P& L A/c (1,00,000)
Less: Premium on redemption of Preference shares (48,000)
Closing Balance 1,32,000
3 No. of shares to be issued

Total Nominal Value of Preference Shares 4,80,000
Less: Amount of profit available for redemption of Preference shares (1,32,000)
Amount required out of fresh issue 3,48,000
Amount required out of proceeds of fresh issue of shares
No. of Shares to be issued = Par value per share (proposed Issue)
3,48,000/10 = 34,800 shares of Rs. 10 each
4. Determination of closing bank balance

Opening bank balance 1,80,000
Add: Proceeds from sale of Investment 80,000
Add: Proceeds from fresh issue of 34,800 equity shares @ Rs. 11 3,82,800
Less: Paid to Preference Shareholder on Redemption (4,800 × Rs. (5,28,000)
110)
Closing Balance 1,14,800
QUESTION 51: (RTP – NOV 22) (EXAM May 18)

Dheeraj Limited had 5,000, 10% Redeemable Preference Shares of Rs. 100 each, fully paid up. The company had to
redeem these shares at a premium of 10%.
It was decided by the company to issue the following:
(i) 40,000 Equity Shares of Rs. 10 each at par
(ii) 2,000 12% Debentures of Rs. 100each.
The issue was fully subscribed and all accounts were received in full. The payment was duly made. The company
had sufficient profits. Show journal entries in the books of the company.
SOLUTION
In the books of Dheeraj Limited Journal Entries
e Particulars Dr. (Rs) Cr. (Rs)
Bank A/c Dr. 4,00,000

(Being the issue of 40,000 equity shares of Rs. 10 each at
par as per Board’s resolution No……dated….)
Bank A/c Dr. 2,00,000
To 12% Debenture A/c 2,00,000
(Being the issue of 2,000 Debentures of Rs. 100each as per
Board’s Resolution No…...dated……)
10% Redeemable Preference Share Capital A/c Dr. 5,00,000
(Being the amount payable on redemption transferred to
Preference Shareholders Account)
(Being the adjustment of premium on redemption against
Profits & Loss Account)
Profit & Loss A/c Dr. 1,00,000
To Capital Redemption Reserve A/c (Working Note) 1,00,000
Working Note:
Amount to be transferred to Capital Redemption Reserve Account
Face value of shares to be redeemed Rs. 5,00,000
Less: Proceeds from new issue (Rs. 4,00,000)
Balance Rs. 1,00,000

(a) The Board of Directors of a Company decided to issue minimum number of equity shares of ₹ 9 to redeem ₹
2,50,000 preference shares. The maximum amount of divisible profits available for redemption is ₹ 1,50,000.
Calculate the number of shares to be issued by the company to ensure that the provisions of Section 55 are not
violated. Also determine the number of shares if the company decides to issue shares in multiples of ₹ 50 only.
(b) Make Ltd. had 6,000, 14% Redeemable Preference Shares of ₹ 100 each, fully paid up. The company had to
redeem these shares at a premium of 10%.
It was decided by the company to issue the following:
(i) 50,000 Equity Shares of ₹ 10 each at par,
(ii) 2,000 12% Debentures of ₹ 100 each.
The issue was fully subscribed and all amounts were received in full. The payment was duly made. The company

had sufficient profits. Show Journal Entries in the books of the company.
Solution
(a) Nominal value of preference shares ₹ 2,50,000
Maximum possible redemption out of profits ₹ 1,50,000
Minimum proceeds of fresh issue ₹ 2,50,000 – 1,50,000 = ₹ 1,00,000
Proceed of one share = ₹ 9
Minimum number of shares = 1,00,000 / 9 = 11,111.11 shares
As fractional shares are not permitted, the minimum number of shares to be issued is 11,112 shares.
If shares are to be issued in multiples of 50, then the next higher figure which is a multiple of 50 is 11,150.
Hence, minimum number of shares to be issued in such a case is 11,150 shares.
(b) In the books of Make Ltd.

Journal Entries
Date Particulars Dr. (₹) Cr. (₹)
Bank A/c Dr. 5,00,000
(Being the issue of 5,00,000 equity shares of ₹ 10 each at par as
per Board’s resolution No……dated…..)
Bank A/c Dr. 2,00,000
To 12% Debenture A/c 2,00,000
(Being the issue of 2,000 Debentures of ₹ 100 each as per Board’s
Resolution No…..dated……)
12% Redeemable Preference Share Capital A/c Dr. 6,00,000
(Being the amount payable on redemption transferred to Preference
Shareholders Account)
(Being the adjustment of premium on redemption against Profits &
Loss Account)

Working Note:
Amount to be transferred to Capital Redemption Reserve Account
Face value of shares to be redeemed 6,00,000
Less: Proceeds from new issue (5,00,000)
Total Balance 1,00,000
Question 53: (MASTER PROBLEM )(EXAM Dec21)

The following is the summarised balance sheet of R Limited as at 31st march, 2021:
Rs.
Liabilities
Authorized Capital
1,50,000 Equity shares of Rs. 10 each 15,00,000
30,000 Redeemable Preference shares of Rs. 100 each 30,00,000
Issued, Subscribed and paid up 45,00,000

90,000 Equity shares of Rs. 10 each
Reserves & surplus 15,00,000
Securities Premium
General reserve
Profit & Loss A/c 18,00,000
7,500, 9% Debentures of Rs. 100 each 16,50,000
Sundry creditors 1,20,000
7,50,000
Assets 2,12,500
Non-Current Assets 69,32,500
Property, Plant & Equipment
Investments (Market value Rs. 17,40,000)
Debtors 31,60,000
Cash & Bank Balance 14,70,000
17,60,000
5,42,500
69,32,500
In Annual General Meeting held on 15th May, 2021 the company passed the following resolutions:
(i) To redeem 10% preference shares at a premium of 5%
(ii) To redeem 9% Debentures by making offer to Debenture holders to convert their holding into equity shares at
Rs. 40 per share or accept cash on redemption.
(iii) To issue fully paid bonus shares in the ratio of one equity share for every three shares held on 31st March, 2021.

(iv) Redemption of preference shares and debentures will be paid through company’s cash & bank balance subject
to leaving a minimum cash & bank balance of Rs. 2,00,000.
(v) To issue sufficient number of equity shares @ Rs. 40 per share as required to finance redemption of preference
shareholders and debenture holders.
On 5th June, 2021 investments were sold for Rs. 16,80,000 and preference shares were redeemed.
30% of debenture holders exercised their option and accept cash and their claims were settled on 1st august, 2021. The
bonus issue was concluded by 10th August 2021.
You are required to journalize the above transactions including cash transactions and prepare balance sheet as at 30th
September, 2021. All working notes should for part of your answer.
Solution:
Journal Entries in the Books of R Limited
Rs. Rs.
June 5 Cash & Bank A/c Dr. 16,80,000
To Profit & Loss A/c 2,10,000
(Being investment sold out and profit on sale credited to
Profit & Loss A/c)
June 5 10% Redeemable preference share capital A/c Dr. 15,00,000
Premium on redemption of pref. share A/c Dr. 75,000
(Being amount payable to preference shareholders on
redemption)
June 5 Preference shareholders A/c Dr. 15,75,000
June 5 General reserve* A/c Dr. 15,00,000
(Being amount equal to nominal value of preference shares
transferred to Capital Redemption Reserve A/c on its
redemption as per the law)
Aug. 1 9% Debentures A/c Dr. 7,50,000
Interest on debentures A/c Dr. 22,500
(Rs. 7,50,000 x 9% x 4/12) 7,72,500
To Debenture holder’s A/c
(Being amount payable to debenture holders along with
interest payable)

Aug. 1 Debenture holder’s A/c Dr. 7,72,500
To Cash & bank A/c (2,25,000 + 22,500) 2,47,500
To Equity share capital A/c (13,125 XRs. 10) 1,31,250
To Securities premium A/c (13,125 x Rs. 30) 3,93,750
(Being claims of debenture holders satisfied) (refer
W.N.1)
Aug. 10 Capital Redemption Reserve A/c Dr. 3,00,000
To Bonus to shareholders A/c
(Being balance in capital redemption reserve capitalized to 3,00,000
issue bonus shares)
Aug. 10 Bonus to shareholders A/c Dr. 3,00,000
(Being 30,000 fully paid equity shares of Rs. 10 each issued
as bonus in ratio of 1 share for every 3 shares held)
Sept.30 General Reserve* A/c Dr. 75,000
(Being premium on preference shares adjusted from
general reserve)
Sept.30 Profit & Loss A/c Dr. 22,500
To Interest on debentures A/c 22,500
(Being interest on debentures transferred to Profit and
Loss Account)
Balance Sheet as at 30th September, 2021

Particulars Notes Rs.
a Trade Payables 2,12,500
Total 53,20,000
Assets
a Property, Plant and Equipment 31,60,000
2 Current assets
a Trade receivables 17,60,000
b Cash and bank balances (W.N.2) 4,00,000
Total 53,20,000
*Alternatively, Profit & Loss A/c may also be used for the amount available.

Notes to accounts:
Rs. Rs.
1 Share Capital
1,50,000 Equity shares of Rs. 10 each 15,00,000
1,33,125 Equity shares of Rs. 10 each
[90,000+13,125+30,000] (Out of which 1,33,125 shares were 13,31,250
issued for the consideration other than cash)
Securities Premium
Add: Premium on equity shares issued on conversion of
debentures (13,125 x 30) 3,93,750
Balance 21,93,750
Capital Redemption Reserve (15,00,000 - 3,00,000) 12,00,000
General Reserve
Opening Balance 16,50,000
Less Transfer to Capital Redemption Reserve (15,00,000)
1,50,000
Less: Premium on redemption of preference shares (75,000) 75,000
Profit & Loss A/c 1,20,000
Add: Profit on sale of investment 2,10,000
Less: Interest on debentures (22,500) 3,07,500
Total 37,76,250
Working Notes:
Rs.
1. Redemption of Debentures
7,500 Debentures of Rs. 100 each 7,50,000
Less: Cash option exercised by 30% holders (2,25,000)
Conversion option exercised by remaining 70% 5,25,000
Equity shares issued on conversion = 5,25,000/40 = 13,125 shares
22,22,500

Paid to Debenture holders (2,25,000 + 22,500) (2,47,500)
Balance 4,00,000
Note:
1. There is no need to issue fresh equity shares as the company is having sufficient cash balance.
2. Securities premium has not been utilized for the purpose of premium payable on redemption of preference shares
assuming that the company referred in the question is governed by Section 133 of the Companies Act, 2013
and comply with the Accounting Standards prescribed for them. Alternative considering otherwise also possible
by utilizing securities premium.

INSURANCE CLAIMS
QUESTION 54: (RTP – Nov18, Nov22) (MTP Nov21) – LOSS OF STOCK

th
On 27 July, 2017, a fire occurred in the godown of M/s. Vijay Exports and most of the stocks were destroyed.
However, goods costing Rs. 5,000 could be salvaged. Their firefighting expenses were amounting to Rs. 1,300.
From the salvaged accounting records, the following information is available relating to the period from 1 4.2017 to
27.7.2017:
1. Stock as per balance sheet as on 31.3.2017 Rs. 63,000
2. Purchases (including purchase of machinery costing Rs. 10,000 Rs. 2,92,000
3. Wages (including wages paid for installation of machinery Rs. 3,000) Rs. 53,000
4. Sales (including goods sold on approval basis amounting to Rs. 40,000. No approval Rs. 4,12,300
th
has been received in respect of 1/4 of the goods sold on approval)
5. Cost of goods distributed as free sample Rs. 2,000
Other Information:
(i) While valuing the stock on 31.3.2017, Rs. 1,000 had been written off in respect of certain slow-moving items
costing Rs. 4,000. A portion of these goods were sold in June, 2017 at a loss of Rs. 700 on original cost of Rs.
3,000. The remainder of these stocks is now estimated to be worth its original cost.
(ii) Past record shows the normal gross profit rate is 20%.
(iii) The insurance company also admitted firefighting expenses. The Company had taken the fire insurance policy
of Rs. 55,000 with the average clause.
You are required to compute the amount of claim of stock destroyed by fire, to be lodged to the Insurance Company.
Also prepare Memorandum Trading Account for the period 1.4.2017 to 27.7.2017 for normal and abnormal items.
SOLUTION
st th
Memorandum Trading Account for the period 1 April, 2017 to 27 July,2017
Normal Abnormal Total Normal Items Abnormal Total
Items Items Items
Rs Rs Rs Rs Rs Rs
To Opening stock (W.N.5) 60,000 4,000 64,000 By Sales (W.N. 3) 4,00,000 2,300 4,02,300
To Purchases (W.N. 1) 2,80,000 - 2,80,000 By Loss - 700 700
To Wages (W.N. 4) 50,000 - 50,000 By Goods on 8,000 - 8,000
Approval (W.N. 2)
To Gross profit @20% 80,000 - 80,000 By Closing stock 62,000 1,000 63,000
(Bal. fig.)
4,70,000 4,000 4,74,000 4,70,000 4,000 4,74,000
Statement of Claim for Loss of Stock

Rs
th
Book value of stock as on 27 July, 2017 62,000

Add: Abnormal Stock 1,000
Less: Stock salvaged (5,000)
Loss of stock 58,000
Add: Firefighting expenses 1,300
Total Loss 59,300
Amount of claim to be lodged with insurance company

=Loss x Policy value / Value of stock on the date of fire
= Rs. 59,300 x (55,000/ 63,000) = Rs. 51,770 (rounded off)
Working Notes:
1. Calculation of Adjusted Purchases
Rs
Purchases 2,92,000
Less: Purchase of Machinery (10,000)
Less: Free samples (2,000)
Adjusted purchases 2,80,000
2. Calculation of Goods with Customers

Approval for sale has not been received = Rs. 40,000 X 1/4 = Rs. 10,000.
Hence, these should be valued at cost i.e. (Rs. 10,000 – 20% of Rs. 10,000)
= Rs. 8,000
3. Calculation of Actual Sales

Total Sales Rs. 4,12,300
Less: Approval for sale not received (1/4 X R s . 4 0,000) Rs. 10,000
Actual Sales Rs. 4,02,300
4. Calculation of Wages
Total Wages Rs. 53,000
Less: Wages for installation of machinery Rs. 3,000
Rs. 50,000
5. Value of Opening Stock

Original cost of stock as on 31st March, 2018= Rs. 63,000 + 1,000 (Amount written off) = Rs. 64,000.
QUESTION 55: (RTP May20) LOSS OF PROFIT

A trader intends to take a loss of profit policy with indemnity period of 6 months; however, he could not decide the
policy amount. From the following details, suggest the policy amount:
Rs

Turnover in last financial year 36,00,000
Standing charges in last financial year 7,20,000
Net profit earned in last year was 10% of turnover and the same trend expected in subsequent year.
Increase in turnover expected 25%.
To achieve additional sales, trader has to incur additional expenditure of Rs. 50,000.
SOLUTION
(a) Calculation of Gross Profit
Net Profit + Standing Charges
Gross Profit = × 100
turnover
= (3,60,000+7,20,000)/36,00,000= 30%
(b) Calculation of policy amount to cover loss of profit
Rs
Turnover in the last financial year 36,00,000
Add: 25% increase in turnover 9,00,000
45,00,000
Gross profit on increased turnover 13,50,000
Add: Additional standing charges 50,000
Policy Amount 14,00,000
Therefore, the trader should go in for a loss of profit policy of Rs. 14,00,000.
QUESTION 56: (EXAM May19) – LOSS OF PROFIT

A fire occurred in the premises of M/s Bright on 25th May, 2017. As a result of fire, sales were adversely affected up
to 30th September, 2017. The firm had taken Loss of profit policy (with an average clause) for Rs. 3,50,000 having
indemnity period of 5 months. There is an upward trend of 10% in sales.
The firm incurred an additional expenditure of Rs. 30,000 to maintain the sales.
There was a saving of Rs. 5,000 in the insured standing charges.
Actual turnover from 25th May, 2017 to 30th September, 2017 Rs. 1,75,000
Turnover from 25 th
May, 2016 to 30 September, 2016
th
Rs. 6,00,000
Net profit for last financial year Rs. 2,00,000
Insured standing charges for the last financial year Rs. 1,75,000
Total standing charges for the last financial year Rs. 3,00,000
Turnover for the last financial year Rs. 15,00,000
Turnover for one year from 25th May, 2016 to 24th May, 2017 Rs. 14,00,000
You are required to calculate the loss of profit claim amount, assuming that entire sales during the interrupted
period were due to additional expenses.
SOLUTION
Computation of the amount of claim for the loss of profit
1. Reduction in turnover Rs.

Turnover from 25th May, 2016 to 30th September, 2016 6,00,000
Add: 10% expected increase 60,000
6,60,000
Less: Actual Turnover from 25th May, 2017 to 30th September, 2017 (1,75,000)
Short Sales 4,85,000
2. Calculation of loss of Profit

Gross Profit on reduction in turnover @ 25% on Rs. 4,85,000 1,21,250
(See working note 1)
Add: Additional Expenses
Lower of
(i) Actual = Rs. 30,000
(ii) G.P. on Adjusted Annual Turnover Additional Exp. x G.P. as above + Uninsured Standing Charges
30,000x [3,85,000/(3,85,000+1,25,000)] = Rs. 22,647
(iii) G.P. on sales generated by additional expenses
175000 x 25% = Rs. 43,750
It is given that entire sales during the interrupted period was due to additional expenses.
Therefore, lower of above is (i, ii & iii) Rs. 22,647
1,43,897
Less: Saving in Insured Standing Charges (5,000)
Amount of claim before application of Average Clause 1,38,897
3. Application of Average Clause:
Amount of Policy × Amount of Claim G.P. on Annual Turnover
(3,50,000/3,85,000) x 1,38,897= Rs. 1,26,270
Amount of claim under the policy =Rs. 1,26,270
Working Notes:
1. Rate of Gross Profit for last Financial Year:
Rs
Net Profit for last financial year 2,00,000
Add: Insured Standing Charges 1,75,000
Gross Profit 3,75,000
Turnover for the last financial year 15,00,000
Rate of Gross Profit = 25% 3,75,000 ×100 15,00,000
2. Annual Turnover (adjusted):

Rs
Turnover from 25 May, 2016 to 24 May, 2017 14,00,000
Add: 10% expected increase 1,40,000
15,40,000
Gross Profit on Rs. 15,40,000 @ 25% 3,85,000

Standing charges not Insured (3,00,000 – 1,75,000) 1,25,000
Gross profit + Uninsured standing charges 5,10,000
QUESTION 57: (EXAM Nov19) – LOSS OF PROFIT

th
A fire occurred in the premises of M/s Kirti & Co. on 15 December, 2018. The working remained disturbed
th
upto15 March, 2019 as a result of which sales got adversely affected. The firm had taken out an insurance policy
with an average clause against consequential losses for Rs. 2,50,000.
Following details are available from the quarterly sales tax return filed/GST return filed:
Sales 2015-16 2016-17 2017-18 2018-19
(Rs) (Rs) (Rs) (Rs)
st
From 1 April to 30 June
th
3,80,000 3,15,000 4,11,900 3,24,000
st
From 1 July to 30thSeptember 1,86,000 3,92,000 3,86,000 4,42,000
st
From 1 October to 31 December
st
3,86,000 4,00,000 4,62,000 3,50,000
st
From 1 January to 31 March
st
2,88,000 3,19,000 3,80,000 2,96,000
Total 12,40,000 14,26,000 16,39,900 14,12,000
A period of 3 months (i.e. from 16-12-2018 to 15-3-2019) has been agreed upon as indemnity period.
Sales from 16-12-2017 to 31-12-2017 68,000
Sales from 16-12-2018 to 31-12-2018 Nil
Sales from 16-03-2018 to 31-03-2018 1,20,000
Sales from 16~03-2019 to 31-03-2019 40,000
st
Net profit was Rs. 2,50,000 and standing charges (all insured) amounted to Rs. 77,980 for the year ending 31 March,
2018.
You are required to calculate the loss of profit claim amount.
SOLUTION
Gross profit ratio Rs
Net profit for the year 2017-18 2,50,000
Add: Insured standing charges 77,980
3,27,980
Ratio of Gross profit = 16,39,900
= 20% 3,27,980
Calculation of Short sales
Indemnity period: 16.12.2018 to 15.3.19
Standard sales to be calculated on basis of corresponding period of year 2017-18
Rs
Sales for period 16.12.2017 to 31.12.17 68,000
Sales for period 1.1.2018 to 15.3.2018 (Note 1) 2,60,000
Sales for period 16.12.2017 to 15.3.2018 3,28,000
Add: upward trend in sales (15%) (Note 2) 49,200
Standard Sales (adjusted) 3,77,200

Actual sales of disorganized period
Calculation of sales from 16.12.18 to 15.3.19
Sales for period 16.12.18 to 31.12.18 Nil
Sales for 1.1.19 to 15.3.19 (Rs. 2,96,000 – Rs. 40,000) 2,56,000
Actual Sales 2,56,000
Short Sales (Rs. 3,77,200 - Rs. 2,56,000) 1,21,200
Loss of gross profit

Short sales x gross profit ratio = 1,21,200x20% = 24,240
Application of average clause

Policy Value
Net claim = Gross claim × Gross pofit on annual turnover
2,50,000
= 24,240 × 3,26,240(W.N.3)
Amount of loss of profit claim = Rs. 18,575
Working Notes:
1. Sales for period 1.1.18 to15.3.18 Rs
Sales for 1 Jan. to 31 March (2017-18) (given) 3,80,000
Less: Sales for 16.3.18 to 31.3.18 (given) (1,20,000)
Sales for period 1.1.18 to 15.3.18 2,60,000
2. Calculation of upward trend insales

Total sales in year 2015-16 = Rs 12,40,000
Increase in sales in year 2016-17 as compared to 2015-16 = Rs 1,86,000
1,86,000(14,26,000−12,40,000)
= 15%
% increase = 12,40,000
Increase in sales in year 2017-18 as compared to year 2016-17

2,13,900(16,39,900−14,26,000)
= 15%
% increase = 14,26,000
Thus, annual percentage increase trend is of 15%
3. Gross profit on annual turnover Rs

Sales from 16.12.17 to 30.12.17 (adjusted) (68,000 x 1.15) 78,200
1.1.18 to 31.3.18 (adjusted) (3,80,000 x1.15) 4,37,000
1.4.18 to 30.6.18 3,24,000
1.7.18 to 30.9.18 4,42,000
1.10.18 to 15.12.18 (3,50,000 – Nil) 3,50,000
Sales for 12 months just before date of fire* 16,31,200
Gross profit on adjusted annual sales @ 20% 3,26,240

NOTE*: Alternatively, the annual adjusted turnover may be computed as Rs. 17,98,000 (Rs. 15,64,000 X 1.15)
considering the annual % increase trend for the entire period of last 12 months preceding to the date of fire. In
that case, the gross profit on adjusted annual sales @20% will be computed as Rs. 3,59,720 and net claim will be
computed accordingly.
QUESTION 58:
On 19th May, 20X2, the premises of Shri Garib Das were destroyed by fire, but sufficient records were saved, wherefrom
the following particulars were ascertained:
Particulars Amount Rs.
Stock at cost on 1.1.20X1 36,750
Stock at cost on 31.12.20X1 39,800
Purchases less returns during 20X1 1,99,000
Sales less return during 20X1 2,43,500
Purchases less returns during 1.1.20X2 to 19.5.20X2 81,000
Sales less returns during 1.1.20X2 to 19.5.20X2 1,15,600
In valuing the stock for the balance Sheet as at 31st December, 20X1, Rs. 1,150 had been written off on certain stock
which was a poor selling line having the cost Rs. 3,450. A portion of these goods were sold in March, 20X2 at a loss
of Rs. 125 on original cost of Rs. 1,725. The remainder of this stock was now estimated to be worth the original
cost. Subject to the above exceptions, gross profit has remained at a uniform rate throughout. The stock salvaged
was Rs. 2,900.
Show the amount of the claim of stock destroyed by fire. Memorandum Trading Account to be prepared for the period
from 1-1-20X2 to 19-5-20X2 for normal and abnormal items.
Solution
Shri Garib Das
Trading Account for the year ended on 31st December, 20X1
Particulars Amount Rs. Particulars Amount Rs. Amount Rs.
To Opening Stock 36,750 By Sales A/c 2,43,500
To Purchases 1,99,000 By Closing Stock: As valued 39,800
Add: Amount written off to 1,150
restore stock to full cost 40,950
To Gross Profit (b.f.) 48,700
2,84,450 2,84,450
The normal rate of gross profit to sales is= 48,700 / 2,43,500 * 100= 20%
Memorandum Trading Account upto 19, May, 20X2
Particulars Normal Abnormal Total Particulars Normal Abnormal Total
items items items items
To Opening Stock 37,500 3,450* 40,950 By Sales 1,14,000 1,600 1,15,600

To Purchases 81,000 — 81,000 By Loss — 125 125
To Gross Profit (20% 22,800 — 22,800 By Closing 27,300 1,725** 29,025
on Rs. 1,14,000) Stock (bal. fig.)
1,41,300 3,450 1,44,750 1,41,300 3,450 1,44,750
* at cost, book value is Rs. 2,300.
** Book value will also be restored for remaining unsold abnormal stock since the remainder of this stock was now
estimated to be worth its original cost.
Calculation of Insurance Claim
Value of Stock on 19th May, 20X2 29,025
Less: Salvage (2,900)
Therefore, insurance claim will be for 26,125 only.
Q.INC.OM.59: (MASTER PROBLEM)

From the following particulars, you are required to calculate the amount of claim for Buildwell Ltd., whose business
premises was partly destroyed by fire:
Sum insured (from 31st December 20X1) Rs. 4,00,000
Period of indemnity 12 months
Date of damage 1 st January, 20X2
Date on which disruption of business ceased 31st October, 20X2
The subject matter of the policy was gross profit but only net profit and insured standing charges are included.
The books of account revealed:
(a) The gross profit for the financial year 20X1 was Rs. 3,60,000.
(b) The actual turnover for financial year 20X1 was Rs. 12,00,000 which was also the turnover in this case.
(c) The turnover for the period 1st January to 31st October, in the year preceding the loss, was Rs. 10,00,000.
During dislocation of the position, it was learnt that in November-December 20X1, there has been an upward trend in
business done (compared with the figure of the previous years) and it was stated that had the loss not occurred, the
trading results for 20X2 would have been better than those of the previous years.
The Insurance company official appointed to assess the loss accepted this view and adjustments were made to the
pre-damaged figures to bring them up to the estimated amounts which would have resulted in 20X2.
The pre-damaged figures together with agreed adjustments were:
Period Pre-damaged Adjustment to Adjusted
figures Rs. be added Rs. standard
turnover Rs.
January 90,000 10,000 1,00,000
Feb. to October 9,10,000 50,000 9,60,000
November to December 2,00,000 10,000 2,10,000
12,00,000 70,000 12,70,000
Gross Profit 3,60,000 46,400 4,06,400
Rate of Gross Profit 30% (actual for 20X1), 32% (adjusted for 20X2).

Increased cost of working amounted to Rs. 1,80,000
There was a clause in the policy relating to savings in insured standard charges during the indemnity period and this
amounted to Rs. 28,000.
Standing Charges not covered by insurance amounted to Rs. 20,000 p.a. The annual turnover for January was nil and
for the period February to October 20X2 Rs. 8,00,000
SOLUTION
1. Short sales
period Adjusted Standing Actual turnover Shortage Rs.
turnover Rs. Rs.
January 1,00,000 - 1,00,000
Feb. to October 9,60,000 8,00,000 1,60,000
10,60,000 8,00,000 2,60,000
2. Gross profit ratio for the purpose of insurance claim on loss of profit
Gross profit - Insured Standing Charges - Uninsured standing charges = Net profit
Or
Gross profit - Uninsured standing charges = Net profit +Insured Standing Charges = 4,06,400 – 20,000 = 3,86,400
Rs.3,86,400
× 100 = 30.425%
Rs.12,70,000
3. Least of the following:

(i) Actual expenses = 1,80,000
(ii) Gross profit on sales during 10 months period = 8,00,000 × 30.425% =2,43,400
(gross profit on annual adjusted turnover)
(iii) gross profit on annual adjusted turnover+uninsured standing charges
× additional expenses
3,86,400
3,86,400+20,000
× 1,80,000 = 1,71,142 (approx.)
Least i.e. = Rs. 1,71,142 is admissible.
4. Amount of claim
Rs.
Gross profit on short sales = Rs. 2,60,000 × 30.425/100 79,105
Add: Amount available in respect of additional expense 1,71,142
2,50,247
Less: Savings in Insured Standing Charges (28,000)
2,22,247
On the amount of final claim, the average clause will not apply since the amount of the policy Rs. 4,00,000 is higher
than the gross profit on annual adjusted turnover Rs. 3,86,400.
Therefore, insurance claim will be for Rs. 2,22,247.

A fire occurred in the premises of M/s Star & Sons on 21st March 2020. The concern had taken Insurance Policy
of Rs. 70,000 which was subject to average clause. From the books of accounts, the following particulars are available
relating to the period 1st April 2019 to March 21st 2020:
(i) Stock as on April 1st 2019 Rs. 1,50,500
(ii) Purchases (including purchase of Rs. 40,000 for which purchase
invoices had not been received from suppliers, though goods have
been received in godown) Rs. 3,17,000
(iii) Cost of goods distributed as, samples for advertising from
April 1st 2019 to the date of fire, included in above purchases Rs. 32,000
(iv) Sales (excluding goods sold on approval basis having sale
value Rs. 35,000) Rs. 4,55,000
Approval has been received for all goods sold on approval basis, before the date of fire.
(v) Purchase return Rs. 15,000
(vi) Wages (including salary of Manager Rs. 10000) Rs. 65,000
(vii) Average Rate of Gross Profit @ 20% on sales.
(viii) Cost of goods salvaged Rs. 12,000
You are required to calculate the amount of claim to be lodged to Insurance Company.
SOLUTION
Books of M/s Star & Sons
Memorandum Trading Account for the period 1st April, 2019 to 21st March, 2020
Rs. Rs.
To Opening Stock 1,50,500 By Sales 4,90,000
(4,55,000 + 35,000)
To Purchases 3,17,000
Less: Returns (15,000) By Closing Stock (Bal. fig.) 83,500
Goods distributed as
samples (32,000) 2,70,000
To Wages 55,000
To Gross Profit 98,000
(20% of Sales)
5,73,500 5,73,500
Statement of Insurance Claim
Rs.
Value of stock destroyed by fire 83,500
Less: Salvaged Stock 12,000
Note: Since policy amount is less than vale of stock on date of fire, average clause will apply. Therefore, claim amount

will be computed by applying the formula.
Claim= Insured value ×Loss suffered / Total cost
Claim amount = Rs. 71,500X 70,000/ 83,500= Rs. 59,940 (rounded off)

HIRE PURCHASE

(a) What is meant by repossession? What is the treatment for repossession in the books of Hire Purchaser?
(b) On 1st April 2018 M/s KMR acquired a machine on hire purchase from M/s PQR on the following terms:
1) Cash price of the machine was Rs. 2,40,000.
2) The down payment at the time of signing the contract was Rs. 96,000.
3) The balance amount is to be paid in 3 equal annual installments plus interest.
4) Interest is chargeable @ 8% p.a.
On this basis prepare the H.P. Interest Suspense Account and Account of M/s PQR in the books of the purchaser for
the period of hire purchase.
SOLUTION
a) Repossession is the Right of the Seller to take back the goods sold from the Hire purchaser in case of any default
by the Hire purchaser and can sell the goods after reconditioning to any other person. The hire purchaser closes
the Hire Vendor’s Account by transferring the balance of Hire Vendor Account to Hire Purchase Asset and then
finding the profit and loss on repossession in Asset Account.
b)
In the books of M/s KMR (purchaser)
H.P. Interest Suspense Account
Date Particulars Rs. Date Particulars Rs.
1.4.18 To M/s PQR A/c 23,040 31.3.19 By Interest A/c 11,520
(W.N.)
31.3.19 By Balance c/d 11,520
23,040 23,040
1.4.19 To Balance b/d 11,520 31.3.20 By Interest A/c 7,680
31.3.20 To Balance c/d 3,840 31.3.21 By Interest A/c 3,840
M/s PQR Account
1.4.18 To Bank/Cash A/c 96,000 1.4.18 By Machine A/c 2,40,000

31.3.19 To Bank/Cash A/c 59,520 1.4.18 By H.P. Interest 23,040
31.3.19 To Balance c/d 1,07,520 Suspense A/c
2,63,040 2,63,040
31.3.20 To Bank/Cash A/c 55,680 1.4.19 By Balance b/d 1,07,520
31.3.20 To Balance c/d 51,840
1,07,520 1,07,520
31.3.21 To Bank/Cash A/c 51,840 1.4.20 By Balance b/d 51,840

Working Note:
Cash Price 2,40,000
Down Payment 96,000
1,44,000
Rs. 1,44,000 to be paid in 3 installments i.e., Rs. 48,000 plus interest
Total interest = Rs. 11,520 + Rs. 7,680 + Rs. 3,840 = Rs. 23,040
QUESTION 62:
Lucky bought 2 tractors from Happy on 1-10-20X1 on the following terms:
Down payment 5,00,000
1st installment at the end of 1st year 2,65,000
2nd installment at the end of 2nd year 2,45,000
3rd installment at the end of 3rd year 2,75,000
Interest is charged at 10%p.a.
Lucky provides depreciation @ 20% on the diminishing balances.
On 30-9-20X4 Lucky failed to pay the 3rd installment upon which Happy repossessed 1 tractor. Happy agreed to
leave one tractor with Lucky and adjusted the value of the tractor against the amount due. The tractor taken
over was valued on the basis of 30% depreciation annually on written down basis. The balance amount remaining
in the vendor's account after the above adjustment was paid by Lucky after 3 months with interest @18% p.a.
(1) Calculate the cash price of the tractors and the interest paid with each installment.
(2) Prepare tractor account and happy account in the books of lucky assuming that books are closed on September
30 every year. Figures may be rounded off to the nearest rupee
SOLUTION:
Calculation of Interest and Cash Price
No. of Outstanding Amount due at Outstanding Interest Outstanding
installments balance at the the time of balance at the balance at the
end after the installment end before the beginning
payment of payment of
installment installment
[1] [2] [3] [4] = 2 +3 [5] = 4 x [6] = 4-5
10/110
3rd - 2,75,000 2,75,000 25,000 2,50,000
2nd 2,50,000 2,45,000 4,95,000 45,000 4,50,000
1st 4,50,000 2,65,000 7,15,000 65,000 6,50,000
Total cash price = Rs. 6,50,000+ 5,00,000 (down payment) =Rs. 11,50,000.
In the books of Lucky Tractors Account

1.10.20X1 To Happy a/c 11,50,000 30.9.20X2 By Depreciation A/c 2,30,000
Balance c/d 9,20,000
11,50,000 11,50,000
1.10.20X2 To Balance b/d 9,20,000 30.9.20X3 By Depreciation A/c 1,84,000
Balance c/d 7,36,000
9,20,000 9,20,000
1.10.20X3 To Balance b/d 7,36,000 30.9.20X4 By Depreciation A/c 1,47,200
By Happy a/c (Value of 1 Tractor
taken over after depreciation for 3
years @30%p.a.) {5,75,000- 1,97,225
(1,72,500+1,20,750+84,525)}
By Loss transferred to Profit and
Loss a/c on surrender (Bal. fig.) or
(2,94,400-1,97,225) 97,175
By Balance c/d ½ 2,94,400

(7,36,000-1,47,200=5,88,800)
7,36,000 7,36,000
Happy Account
1.10.X1 To Bank (down payment) 5,00,000 1.10.X1 By Tractors a/c 11,50,000
30.9.X2 To Bank (1 Installment)
st
2,65,000 30.9.X2 By Interest a/c 65,000
To Balance c/d 4,50,000
12,15,000 12,15,000
30.9.X3 To Bank (2 Installment)
nd
2,45,000 1.10.X2 By Balance b/d 4,50,000
To Balance c/d 2,50,000 30.9.X3 By Interest a/c 45,000
4,95,000 4,95,000
30.9.X4 To Tractor a/c 1,97,225 1.10.X3 By Balance b/d 2,50,000
To Balance c/d (b.f.) 77,775 30.9.X4 By Interest a/c 25,000

2,75,000 2,75,000
31.12.X4 To Bank 81,275 1.10.X4 By Balance b/d 77,775
(Amount settled after 3 months) 31.12.X4 By Interest a/c (@ 18% on
bal.) (77,775x3/12x18/100) 3,500
81,275 81,275

Question 63: (RTP May23)
The following particulars relate to hire purchase transactions:
(i) R (hire purchaser) purchased three machineries from S on hire purchase system. The cash price of each machinery
being ₹ 3,00,000.
(ii) The hire purchaser charged depreciation @ 20% on written down value method.
(iii) Two machineries were seized by hire vendor when second installment was not paid at the end of the second
year. The hire vendor valued the two machineries at cash price less 30% depreciation charge for each of the
years under written down value method.
(iv) The hire vendor spent ₹ 15,000 on repairs of the machineries and then sold them for a total amount of ₹
2,55,000.
You are required to compute:
(1) Agreed value of two machineries taken back by the hire vendor.
(2) Book value of one machine left with the Hire purchaser.
(3) Profit or loss to hire purchaser on two machineries taken, back by the hire vendor.
(4) Profit or loss on machineries repossessed, when sold by the hire vendor.
Solution
₹
(i) Price of two machines = ₹ 3,00,000 x 2 6,00,000
Less: Depreciation for the first year @ 30% 1,80,000
4,20,000
Less: Depreciation for the second year = ₹ 4,20,000 x 30/ 100 1,26,000
Agreed value of two machines taken back by the hire vendor 2,94,000
(ii) Cash purchase price of one machine 3,00,000
Less: Depreciation on ₹ 3,00,000 @20% for the first year 60,000
Written drown value at the end of first year 2,40,000
Less: Depreciation on ₹ 2,40,000 @ 20% for the second year 48,000
Book value of machine left with the hire purchaser 1,92,000
(iii) Book value of one machine as calculated above 1,92,000
Book value of Two machines = ₹ 1,92,000 x 2 3,84,000
Value at which the two machines were taken back, calculated in 2,94,000
(i) above
Hence, loss to hire purchaser on machine taken back by hire
vendor (₹3,84,000 – ₹ 2,94,000) ₹ 90,000
(iv) Profit or loss on machines repossessed when sold by hire vendor
Sale proceeds 2,55,000
Less: Value at which machines were taken back 2,94,000
Repairs 15,000 (3,09,000)
Loss on resale 54,000

A acquired on 1st January, 20X1 3 Machines under a Hire-Purchase agreement which provides for 10 half-yearly
installments (principal and interest) of Rs. 60,000 each (for every machine), the first installment being due on 1st
July, 20X1. Down payment is Rs. 30000 per machine. Assuming that the applicable rate of interest is 10% per annum.
Depreciation charged by Hire Purchaser is 15% diminishing balance method.
It paid 3 installments on time, but couldn’t pay 4 th.
Vendor agreed to leave one Machine with the purchaser, adjusting the value of the other two machines against the
amount due. The machines taken over were valued on the basis of 20% depreciation annually on written down value
basis. Hire Purchaser settled the seller’s dues after three months with Interest.
The hire vendor spent Rs.20,000 on repairs of the machines and then sold them at 10% margin.
Calculate the cash values of the machines and Prepare the necessary accounts showing repossession. Also calculate
the Gain in the books of Vendor.
All working should form part of the answer.

INCOMPLETE RECORDS
QUESTION 65: (RTP May18, Nov20)

The following is the Balance Sheet of Manish and Suresh as on 1st April, 2016:
Liabilities Rs Assets Rs
Capital Account Building 1,00,000
Manish 1,50,000 Machinery 65,000
Suresh 75,000 Stock 40,000
Creditors for goods 30,000 Debtors 50,000
Creditors for expenses 25,000 Bank 25,000
2,80,000 2,80,000
They give you the following additional information:
(i) Creditors' Velocity Rs. 1.5 month & Debtors' Velocity* 2 months.
(ii) Stock level is maintained uniformly in value throughout all over the year.
(iii) Depreciation on machinery is charged @ 10%, Depreciation on building @ 5% in the current year.
(iv) Cost price will go up 15% as compared to last year and also sales in the current year will increase by 25% in
volume.
(v) Rate of gross profit remains the same.
(vi) Business Expenditures are Rs. 50,000 for the year. All expenditures are paid off in cash.
(vii) Closing stock is to be valued on LIFO Basis.
(viii) All sales and purchases are on credit basis and there are no cash purchases and sales.
You are required to prepare Trading, Profit and Loss Account, Trade Debtors Account and Trade Creditors Account for
the year ending 31.03.2017.
SOLUTION
Trading and Profit and Loss account
for the year ending 31st March, 2017
To Opening Stock 40,000 By Sales 4,31,250
To Purchases (Working Note) 3,45,000 By Closing Stock 40,000
To Gross Profit c/d (20% on sales) 86,250
4,71,250 4,71,250
To Business Expenses 50,000 By Gross Profit b/d 86,250
To Depreciation on:
Machinery 6,500
Building 5,000
To Net profit 24,750
86,250 86,250
Trade Debtors Account

To Balance b/d 50,000 By Bank (bal. fig.) 4,09,375
To Sales 4,31,250 By Balance c/d (1/6 of 4,31,250) 71,875
4,81,250 4,81,250
Trade Creditors Account

To Bank (Balancing figure) 3,31,875 By Balancing b/d 30,000
To Balance c/d 43,125 By Purchases 3,45,000
(1/8 of Rs. 3,45,000)
3,75,000 3,75,000
Working Note:
Rs.
(i) Calculation of Rate of Gross Profit earned during previous
year
A Sales during previous year (Rs. 50,000 x 12/2) 3,00,000
B Purchases (Rs. 30,000 x 12/1.5) 2,40,000
C Cost of Goods Sold (Rs. 40,000 + Rs. 2,40,000 – Rs. 40,000) 2,40,000
D Gross Profit (A-C) 60,000
E Rate of Gross Profit Rs. 60,000÷3,00,000 x 100 20%
(ii) Calculation of sales and Purchases during current year Rs
A Cost of goods sold during previous year 2,40,000
B Add: Increases in volume @ 25 % 60,000
3,00,000
C Add: Increase in cost @ 15% 45,000
D Cost of Goods Sold during Current Year 3,45,000
E Add: Gross profit @ 25% on cost (20% on sales) 86,250
F Sales for current year [D+E] 4,31,250
QUESTION 66: (MTP May19 & May22)

The following is the Balance Sheet of Chirag as on 31st March, 2015:
Liabilities Rs. Assets Rs.
Capital Account 48,000 Building 32,500
Loan 15,000 Furniture 5,000
Creditor 31,000 Motor car 9,000
Stock 20,000
Debtors 17,000
Cash in hand 2,000
Cash at bank 8,500
94,000 94,000

A riot occurred on the night of 31st March, 2016 in which all books and records were lost. The cashier had absconded
with the available cash. He gives you the following information:
(a) His sales for the year ended 31st March, 2016 were 20% higher than the previous year’s. He always sells his goods
at cost plus 25%; 20% of the total sales for the year ended 31st March, 2016 were for cash. There were no cash
purchases
(b) On 1st April, 2015 the stock level was raised to Rs. 30,000 and stock was maintained at this new level all throughout
the year.
(c) Collection from debtors amounted to Rs. 1,40,000 of which Rs. 35,000 was received in cash, Business expenses
amounted to Rs. 20,000 of which Rs. 5,000 was outstanding on 31st March, 2016 and Rs. 6,000 was paid by
cheques.
(d) Analysis of the Pass Book revealed the Payment to Creditors Rs. 1,37,500, Personal Drawing Rs. 7,500, Cash
deposited in Bank Rs. 71,500, and Cash withdrawn from Bank Rs. 12,000.
(e) Gross profit as per last year’s audited accounts was Rs. 30,000.
(f) Provide depreciation on Building and Furniture at 5% and Motor Car at 20%.
(g) The amount defalcated by the cashier may be treated as recoverable from him.
You are required to prepare the Trading and Profit and Loss Account for the year ended 31st March, 2016 and Balance
Sheet as on that date.
SOLUTION
st
Trading and Profit and Loss Account For the year ending on 31 March, 2016
Particulars Rs. Particulars Rs.
To Purchases (bal.fig.); 1,54,000 By Closing Stock 30,000
To Gross Profit c/d (@20% on sales) 36,000 2,10,000
2,10,000
To Sundry Business Expenses 20,000 By Gross Profit b/d 36,000
To Depreciation on Building 1,625
Furniture 250
Motor 1,800 3,675
To Net profit transferred to Capital 12,325
A/c
36,000 36,000
Balance Sheet as at 31stMarch, 2016

Capital Account: Building 32,500
Opening Balance 48,000 Less: Depreciation (1,625) 30,875
Add: Net profit 12,325 Furniture 5,000
60,325 Less: Depreciation (250) 4,750
Less: Drawings (7,500) 52,825 Motor Car 9,000
Loan 15,000 Less: Depreciation (1,800) 7,200

Sundry Creditors 47,500 Stock in trade 30,000
Outstanding Expenses 5,000 Sundry Debtors 21,000
Cash at Bank 22,000
Sundry Advances 4,500
(Amount recoverable from
Cashier)
1,20,325 1,20,325
Working Notes:
(i) Total Debtors Account
To Balance b/d 17,000 By Bank 1,05,000
(Rs. 1,40,000 – Rs. 35,000)
To Sales 1,44,000 By Cash A/c 35,000
(80% of Rs. 1,80,000) By Balance c/d 21,000
1,61,000 1,61,000
(ii) Total Creditors Account

To Bank 1,37,500 By Balance b/d 31,000
To Balance c/d 47,500 By Purchases 1,54,000
1,85,000 1,85,000
(iii) Cash Book

Particulars Cash Rs. Bank Rs. Particulars Cash Rs. Bank Rs.
To Balance b/d 2,000 8,500 By Business Expenses 9,000 6,000
To Sales 36,000 - By Drawings - 7,500
To Sundry Debtors 35,000 1,05,000 By Sundry Creditors - 1,37,500
To Cash (Contra) - 71,500 By Bank (Contra) 71,500 -
To Bank (Contra) 12,000 By Cash (Contra) -4,500 12,000
By Defalcation (Bal fig.) -
By Balance c/d (Bal fig.)
22,000
85,000 1,85,000 85,000 1,85,000
(iv) Last year’s Total Sales= Gross Profit x 100/20 = Rs. 30,000 x 100/20 = Rs. 1,50,000
(v) Current year’s Total Sales = Rs. 1,50,000+20% of Rs. 1,50,000 = Rs. 1,80,000
(vi) Current year’s Credit Sales = Rs. 1,80,000 x 80%= Rs. 1,44,000
(vii) Cost of Goods Sold = Sales – G.P. = Rs. 1,80,000 – Rs. 36,000 = Rs. 1,44,000
(viii) Purchases = Cost of Goods Sold + Closing Stock – Opening Stock

= Rs. 1,44,000 + Rs. 30,000 – Rs. 20,000 = Rs. 1,54,000

M/s Rohan & Sons runs a business of electrical goods on wholesale basis. The books of Accounts are closed on 31st
March every year. The Balance Sheet as on 31st March 2019 is as follows:
Capital 12,50,000 Fixed Assets 6,50,000
Trade Creditors 1,90,000 Closing Stock 3,75,000
Profit & Loss A/c 1,45,000 Trade Debtors 3,65,000
Cash & Bank 1,95,000
15,85,000 15,85,000
The management estimates the purchase & sales for the year ended 31st March 2020 as under:
Particulars Up to 31.01.2020 February 2020 March 2020
Purchases 16,20,000 1,40,000 1,25,000
Sales 20,75,000 2,10,000 1,75,000
All sales and purchases are on credit basis. It was decided to invest Rs. 1,50,000 in purchase of Fixed Assets, which
are depreciated @10% on book value. A fixed asset of book value as on 01.04.2019, Rs. 60,000 was sold for Rs. 56,000
on 31st March 2020.
The time lag for payment to Trade Creditors for purchases is one month and receipt from trade debtors for sales is 2
months. The business earns a gross profit of 25% on Turnover. The expenses against gross profit amounts to 15% of
the turnover. The amount of depreciation is not included in these expenses.
Prepare Trading & Profit & Loss account for the year ending 31st March 2020 and draft a Balance Sheet as at 31st
March 2020 assuming that creditors are all trade creditors for purchases and debtors are all trade debtors for sales
and there is no other current assets and liabilities apart from stock and cash and bank balances.
Also prepare Cash & Bank Account and Fixed Assets Account for the year ending 31st March 2020.
SOLUTION
Trading and Profit and Loss Account of M/s Rohan & Sons
For the year ended 31st March, 2020
Rs. Rs.
To Opening stock 3,75,000 By Sales 24,60,000
To Purchases 18,85,000 By Closing stock 4,15,000
To Gross Profit c/d (25%) 6,15,000 (Balancing Figure)
28,75,000 28,75,000
To Depreciation 80,000 By Gross profit b/d 6,15,000
To Expenses (15% of Rs. 3,69,000 By Profit on sale of Fixed 2,000
24,60,000) assets
To Net Profit (b.f.) 1,68,000
6,17,000 6,17,000

Balance Sheet of M/s Rohan Sons as on 31st March, 2020
Liabilities Assets Rs.
Capital 12,50,000 Fixed assets (less Dep.) 6,66,000
Profit & Loss A/c 3,13,000 Stock 4,15,000
(1,45,000+1,68,000)
Trade Creditors 1,25,000 Debtors 3,85,000
_______ Cash and bank 2,22,000
16,88,000 16,88,000
Cash and Bank Account

To Bal. b/d 1,95,000 By Creditors 19,50,000
(1,90,000+16,20,000+1,40,000)
To Debtors 24,40,000 By Expenses 3,69,000
(3,65,000+20,75,000)
To Fixed assets 56,000 By Fixed assets 1,50,000
By Bal .c/d 2,22,000
26,91,000 26,91,000
Fixed Assets Account

To Bal. b/d 6,50,000 By Cash 56,000
To Profit on sale of Fixed asset 2,000 By Depreciation on sold fixed asset 6,000
By Depreciation (59,000+15,000) 74,000
To Bank A/c 1,50,000 By Bal. c/d 6,66,000
8,02,000 8,02,000

The following is the Balance Sheet of Mr. Kumar as on 31st March, 2020:
Equity and Liabilities Rs. Assets Rs.
Capital Account 4,10,000 Machinery 1,60,000
Sundry Creditors for purchases 60,000 Furniture 35,000
Stock 25,000
Debtors 1,45,000
Cash in Hand 25,000
Cash at Bank 80,000
4,70,000 4,70,000
Riots occurred and fire broke out on the evening of 31st March, 2021, destroying the books of account and furniture.
The cash available in the cash box was stolen.
The trader gives you the following information:

(i) Sales are 25% for cash and the balance on credit. His total sales for the year ended 31st March, 2021 were
25% higher than the previous year. All the sales and purchases of goods were evenly spread throughout the
year (as also in the last year).
(ii) Terms of credit
Debtors 2 Months
Creditors 1 Month
(iii) Stock level was maintained at Rs. 25,000 all throughout the year.
(iv) A steady Gross Profit rate of 25% on the turnover was maintained throughout the year. Creditors are paid by
cheque only, except for cash purchases of Rs. 60,000.
(v) His private records and the Bank Pass-book disclosed the following transactions for the year.
a. Miscellaneous Business expenses Rs. 1,85,500 (including Rs. 20,000 paid
by cheque)
b. Travelling expenses Rs. 24,000 (paid by cash)
c. Addition to Machinery Rs. 1,00,000 (paid by cheque)
(on 1st April, 2020)
d. Private drawings Rs. 10,000 (paid by cash)
e. Introduction of additional capital by Rs. 25,000
deposited into the Bank
(vi) Collection from debtors were all through cheques.
(vii) Depreciation on Machinery is to be provided @ 15% p.a.
(viii) The Cash stolen is to be charged to the Profit and Loss Account,
(ix) Loss of furniture is to be adjusted from Capital Account.
Prepare Trading, Profit and Loss Account for the year ended 31st March, 2021 and a Balance Sheet as on that date.
Solution
Trading and Profit and Loss Account of Mr. Kumar for the year ended 31st March, 2021
Rs. Rs.
To Purchases 10,87,500 By Closing Stock 25,000
To Gross Profit c/d 3,62,500 _______
14,75,000 14,75,000
To Business Expenses 1,85,500 By Gross Profit b/d 3,62,500
To Repairs 4,000 By Net loss 14,000
To Depreciation (WDV basis) 39,000
To Travelling Expenses 20,000
To Loss by theft 1,28,000 _______
3,76,500 3,76,500
Balance Sheet of Mr. Kumar as at 31st March, 2021
Liabilities Rs. Rs. Assets Rs. Rs.
Capital 4,10,000 Machinery 1,60,000
Add: additions 1,00,000

2,60,000
Add: Additional 25,000 Less: Dep. @ 15% (39,000) 2,21,000
Capital
Less: Net Loss (14,000) Stock in Trade 25,000
4,56,000 Sundry Debtors 1,81,250
Less: Loss of (35,000) Bank 34,375
Furniture
Drawings (10,000) 3,76,000
Sundry Creditors 85,625 _______
4,61,625 4,61,625
Working Notes:
1. Sales during 2020-2021 Rs.
Debtors as on 31st March, 2020 1,45,000
(Being equal to 2 months' sales)
Total credit sales in 2019- 2020, Rs. 1,45,000 × 6 8,70,000
Cash Sales, being equal to 1/3rd of credit sales or 1/4th of the total 2,90,000
Sales in 2019-2020 11,60,000
Increase, 25% as stated in the problem 2,90,000
Total sales during 2020-2021 14,50,000
Cash sales: 1/4th 3,62,500
Credit sales: 3/4th 10,87,500
2. Purchases
Sales in 2020-2021 14,50,000
Gross Profit @ 25% 3,62,500
Cost of goods sold being purchases (no change in stock level) 10,87,500
3. Debtors equal to two months credit sales 1,81,250
4. Sundry Creditors for goods
(Rs. 10,87,500 – Rs. 60,000) /12 = Rs. 10,27,500/12 85,625
5. Collections from Debtors
Opening Balance 1,45,000
Add: Credit Sales 10,87,500
12,32,500
Less: Closing Balance (1,81,250)
10,51,250
6. Payment to Creditors
Opening Balance 60,000
Add: Credit Purchases (Rs. 10,87,500 – Rs. 60,000) 10,27,500
10,87,500
Less: Closing Balance (85,625)
Payment by cheque 10,01,875

7. Cash and Bank Account
Cash Bank Cash Bank
To Balance b/d 25,000 80,000 By Payment to Creditors 60,000 10,01,875
To Collection from Debtors – 10,51,250 By Misc. Expenses 1,75,500 10,000
To Sales 3,62,500 – By Addition to Machinery – 1,00,000
To Additional Capital – 50,000 By Travelling Expenses 24,000 –
By Private Drawings 10,000 –
By Loss by theft 1,18,000
3,87,500 11,81,250 3,87,500 11,81,250
Question 69: (EXAM N22)

Ramesh had ₹ 3,30,000 in the bank account on 1st January,2021 when he started his business. He closed his
accounts on 31st March, 2022. His single-entry books (in which he did not maintain any bank account for the bank)
showed his position as follows:
31.3.2021 31.3.2022
Stock 20,900 31,900
Debtors 1,100 3,200
Cash 2,200 3,300
Creditors 5,500 4,300
On and from 1st February,2021, he began drawings at ₹ 770 per month for his personal expenses from the cash box
of the business. His account with the bank had the following entries:
Deposits Withdrawals
1.1.2021 to 31.3.2021 - 2,45,300
1.4.2021 to 31.3.2022 2,53,000 2,97,000
• The above withdrawals included payment by cheque of ₹ 2,20,000 and ₹ 66,000 during the period from 1st
January, 2021 to 31 March,2021 and from 1st April,2021 to 31st March,2022 respectively for the purchase of
Machines for the business.
• The deposits after 1st January, 2021 consisted wholly of sale proceeds received from the customers by cheques.
• One customer (Suresh) had directly deposited a cheque of ₹ 2,700 on 25th March, 2022 into bank account of
Ramesh. Ramesh has no knowledge of this and this cheque is not included in the deposits for the period 1st April
2021 to 31st March 2022 given above.
You are required to draw up Ramesh's Statement of Affairs as at 31 st March, 2021 and 31st March, 2022
respectively and work out his Profit or Loss for the year ended 31st March, 2021 and 31st March, 2022.
Solution
Statement of Affairs as on 31st March, 2021
Liabilities ₹ Assets ₹
Capital (bal. fig.) 3,23,400 Machinery 2,20,000

Sundry creditors 5,500 Inventory 20,900
Debtors 1,100
Cash at bank (W.N.1) 84,700
Cash in hand 2,200
3,28,900 3,28,900
Calculation of loss for 3 months (1.1.2021 to 31.3.2021)
₹
Capital as on 31.3.2021 3,23,400
Add: Drawings for 2 months 1,540
3,24,940
Less: Capital as on 1.1.2021 (3,30,000)
Loss for 3 months 5,060
Statement of Affairs as on 31st March, 2022
Liabilities ₹ Assets ₹
Machinery 2,20,000
Sundry Creditors 4,300 Add: Additions 66,000 2,86,000
Inventory 31,900
Debtors (3,200 – 2,700) 500
Capital (Bal. fig.) 3,60,800 Cash at bank (W.N.2) 43,400
Cash in hand 3,300
3,65,100 3,65,100
Statement of Profit and Loss for the year ended 31.3.2022

Particulars ₹
Capital as on 31.3.2022 3,60,800
Add: Drawings (₹ 770 х 12) 9,240
3,70,040
Less: capital as on 31.3.2021 (3,23,400)
Net profit for the year ended 31.3.22 46,640
Working Notes:
₹
1. Bank balance as on 31.3.2021
Balance as on 1.1.2021 3,30,000
Less: Withdrawals during 1.1.2021 to 31.3.2021 (2,45,300)
Balance as on 31.3.2021 84,700
2. Bank Balance as on 31.3.2022:
Balance as on 1.4.2021 84,700
Add: Deposits during the year (2,53,000 + 2,700) 2,55,700
3,40,400

Less: Withdrawals during the year (2,97,000)
Bank Balance as on 31.3.2022 43,400
Question 70: (MASTER PROBLEM)

Mr. Anup runs a wholesale business where in all purchases and sales are made on credit. He furnishes the following
closing balances:
31-12-2015 31-12-2016
Sundry debtors 70,000 92,000
Bills receivable 15,000 6,000
Bills payable 12,000 14,000
Sundry creditors 40,000 56,000
Inventory 1,10,000 1,90,000
Bank 90,000 87,000
Cash 5,200 5,300
Summary of cash transactions during the year 2016:

(i) Deposited to bank after payment of shop expenses @ Rs.600 p.m., salary @ Rs. 9,200 p.m. and personal
expenses @ Rs. 1,400 p.m. Rs. 7,62,750.
(ii) Withdrawals Rs.1,21,000.
(iii) Cash payment to suppliers Rs. 77,200 for supplies and Rs. 25,000 for furniture.
(iv) Cheques collected from customers but dishonored Rs. 5,700.
(v) Bills accepted by customers Rs. 40,000.
(vi) Bills endorsed Rs. 10,000.
(vii) Bills discounted Rs. 20,000, discount Rs. 750.
(viii) Bills matured and duly collected Rs. 16,000.
(ix) Bills accepted Rs. 24,000.
(x) Paid suppliers by cheque Rs. 3,20,000.
(xi) Received Rs. 20,000 on maturity of one LIC policy of the proprietor by cheque.
(xii) RentreceivedRs.14,000bychequeforthepremisesownedbyproprietor.
(xiii) A building was purchased on 30-11-2016 for opening a branch for Rs. 3,50,000 and some expenses were
incurred on this building, details of which are not maintained.
(xiv) Electricity and telephone bills paid by cash Rs. 18,700, due Rs. 2,200.
Other transactions:
(i) Claim against the firm for damage Rs. 1,55,000 is under legal dispute. Legal expenses Rs. 17,000. The firm
anticipates defeat in the suit.
(ii) Goods returned to suppliers Rs. 4,200.
(iii) Goods returned by customers Rs. 1,200.
(iv) Discount offered by suppliers Rs. 2,700.

(v) Discount offered to the customers Rs. 2,400.
(vi) The business is carried on at the rented premises for an annual rent of Rs. 20,000 which is outstanding at the
yearend.
Prepare Trading and Profit & Loss Account of Mr. Anup for the year ended 31-12- 2016 and Balance Sheet as on that
date.
Solution
Trading and Profit & Loss Account of Mr. Anup
for the year ended 31-12-2016
Rs. Rs. Rs. Rs.
To Opening Inventory 1,10,000 By Sales 9,59,750
To Purchases 4,54,100 Less: Sales Return (1,200) 9,58,550
Less: Purchases Return (4,200) 4,49,900 By Closing Inventory 1,90,000
To Gross Profit (b.f.) 5,88,650
11,48,550 11,48,550
To salary (9,200 x 12) 1,10,400 By Gross Profit 5,88,650
To Electricity & Tel. Charges By Discount 2,700
(18,700 + 2,200) 20,900
To Legal expenses 17,000
To Discount (2,400+ 750) 3,150
To Shop exp. (600 x 12) 7,200
To Provision for claims for 1,55,000
damages
To Shop Rent 20,000
To Net Profit (b.f.) 2,57,700
5,91,350 5,91,350
Balance-Sheet as on 31-12-2016
Capital A/c (W.N.vi) 2,38,200 Building (from Summary 3,72,000
cash and bank A/c)
Add: Fresh capital introduced Furniture 25,000
Maturity value from LIC 20,000 Inventory 1,90,000
Rent 14,000 Sundry debtors 92,000
Add: Net Profit 2,57,700 Bills receivable 6,000
5,29,900 Cash at Bank 87,000
Less: Drawing (14,00 x12) (16,800) 5,13,100 Cash in Hand 5,300
Rent outstanding 20,000
Sundry creditors 56,000
Bills Payable 14,000
Outstanding expenses
Legal Exp. 17,000

Electricity &
Telephone charges 2,200 19,200
Provision for claims for damages 1,55,000
7,77,300 7,77,300
Working Notes:
(i) Sundry Debtors Account
Rs. Rs.
To Balance b/d 70,000 By Bill Receivable A/c
To Bill receivable A/c-Bills dishonored 3,000 Bills accepted by 40,000
customers
To Bank A/c-Cheque dishonored 5,700 By Bank A/c - Cheque received 5,700
To Credit sales (Balancing Figure) 9,59,750 By Cash (from summary cash and 8,97,150
bank account)
By Return inward A/c 1,200
By Discount A/c 2,400
10,38,450 10,38,450
(ii) Bills Receivable Account
Rs. Rs.
To Balance b/d 15,000 By Sundry creditors A/c
To Sundry Debtors A/c 40,000 (Bills endorsed) 10,000
(Bills accepted) By Bank A/c (20,000 – 750) 19,250
By Discount A/c (Bills discounted) 750
By Bank
Bills collected on maturity 16,000
By Sundry debtors
Bills dishonored (Bal. Fig) 3,000
55,000 55,000
(iii) Sundry Creditors Account
Rs. Rs.
To Bank 3,20,000 By Balance c/d 40,000
To Cash 77,200 By Credit purchase
(Balancing figure) 4,54,100
To Bill Payable A/c 24,000
To Bill Receivable A/c 10,000
To Return Outward A/c 4,200
To Discount Received A/c 2,700
To Balance b/d 56,000
4,94,100 4,94,100
(iv) Bills Payable A/c

Rs. Rs.
To Bank A/c (Balance figure) 22,000 By Balance b/d 12,000
To Balance c/d 14,000 By Sundry creditors A/c
Bills accepted 24,000
36,000 36,000
(v) Summary Cash and Bank A/c
Cash Bank Cash Bank
Rs. Rs. Rs. Rs.
To Balance b/d 5,200 90,000 By Bank 7,62,750
To Sundry debtors By Cash 1,21,000
(Bal. Fig) 8,97,150 By Shop exp. (600 x 12) 7,200
To Cash 7,62,750 By salary (9,200 x 12) 1,10,400
To Bank 1,21,000 By Drawing A/c (1,400 x 16,800
12)
By Bills Payable 22,000
To S. Debtors 5,700 By Sundry creditors 77,200 3,20,000
To Bills receivable 19,250 By Furniture 25,000
To Bills receivable 16,000 By Sundry Debtors 5,700
To Capital (maturity 20,000 By Electricity & Tel. 18,700
value of LIC policy) Charges
To Capital (Rent 14,000 By Building (Bal. fig) 3,72,000
received)
By Balance c/d 5,300 87,000
10,23,350 9,27,700 10,23,350 9,27,700
(vi) Statement of Affairs as on31-12-2015

Sundry Creditors 40,000 Inventory 1,10,000
Bills Payable 12,000 Debtors 70,000
Capital (Balancing figure) 2,38,200 Bills receivable 15,000
Cash at Bank 90,000
Cash in Hand 5,200
2,90,200 2,90,200

AS 1 – DISCLOSURE OF ACCOUNTING POLICIES
QUESTION 71: (EXAM Nov18) (MTP May21 & May22)

HIL Ltd. was making provision for non-moving stocks based on no issues having occurred for the last 12 months upto
31.03.2019. The company now wants to change it and make provision based on technical evaluation during the year
ending 31.03.2020. Total value of stock on 31.3.20 is Rs. 120 lakhs. Provision required based on technical evaluation
amounts Rs. 3.00 lakhs. However, provision required based on 12 months (no issues) is Rs. 4.00 lakhs. You are required
to discuss the following points in the light of Accounting Standard (AS)-1:
i. Does this amount to change in accounting policy?
ii. Can the company change the method of accounting?
Explain how it will be disclosed in the annual accounts of HIL Ltd. for the year 2019 -20.
SOLUTION
The decision of making provision for non-moving inventories on the basis of technical evaluation does not amount to
change in accounting policy. Accounting policy of a company may require that provision for non-moving inventories
should be made but the basis for making provision will not constitute accounting policy. The method of estimating the
amount of provision may be changed in case a more prudent estimate can be made.
In the given case, considering the total value of inventory, the change in the amount of required provision of non-
moving inventory from Rs. 4 lakhs to Rs. 3 lakhs is also not material. The disclosure can be made for such change in
the following lines by way of notes to the accounts in the annual accounts of HIL Ltd. for the year 2019-20 in the
following manner:
“The company has provided for non-moving inventories on the basis of technical evaluation unlike preceding years. Had
the same method been followed as in the previous year, the profit for the year and the value of net assets at the end
of the year would have been lower by Rs. 1 lakh.”

In the books of Rani Ltd., closing inventory as on 31.03.2022 amounts to ₹ 1,75,000 (valued on the basis of FIFO
method).
The Company decides to change from FIFO method to weighted average method for ascertaining the costs of inventory
from the year 2021-22. On the basis of weighted average method, closing inventory as on 31.03.2022 amounts to ₹
1,59,000. Realizable value of the inventory as on 31.03.2022 amounts to ₹ 2,07,000.
Discuss disclosure requirements of change in accounting policy as per AS 1.
Solution
As per AS 1 “Disclosure of Accounting Policies”, any change in an accounting policy which has a material effect should
be disclosed in the financial statements. The amount by which any item in the financial statements is affected by
such change should also be disclosed to the extent ascertainable. Where such amount is not ascertainable, wholly or
in part, the fact should be indicated. Thus Rani Ltd. should disclose the change in valuation method of inventory and
its effect on financial statements. The company may disclose the change in accounting policy in the following manner:
“The company values its inventory at lower of cost and net realizable value. Since net realizable value of all items of

inventory in the current year was greater than respective costs, the company valued its inventory at cost. In the
present year i.e. 2021-22, the company has changed to weighted average method, which better reflects the
consumption pattern of inventory, for ascertaining inventory costs from the earlier practice of using FIFO for the
purpose. The change in policy has reduced current profit and value of inventory by ₹ 16,000 (1,75,000 – 1,59,000).”

AS 2 – VALUATION OF INVENTORIES
QUESTION 73: (RTP Nov18) (MOST IMP)

A Limited is engaged in manufacturing of Chemical Y for which Raw Material X is required. The company provides
st
you following information for the year ended 31 March, 2017.
Rs Per unit
Raw Material X
Cost price 380
Unloading Charges 20
Freight Inward 40
Replacement cost 300
Chemical Y
Material consumed 440
Direct Labour 120
Variable Overheads 80
Fixed Overheads 20
(v) Total fixed overhead for the year was Rs. 4,00,000onnormal capacity of 20,000 units.
(vi) Closing balance of Raw Material X was 1,000 units and Chemical Y was Rs. 2,400 units.
You are required to calculate the total value of closing stock of Raw Material X and Chemical Y according to AS 2,
when
(i) Net realizable value of Chemical Y is Rs. 800 per unit
(ii) Net realizable value of Chemical Y is Rs. 600 per unit
SOLUTION
(i) When Net Realizable Value of the Chemical Y is Rs. 800 per unit
NRV is greater than the cost of Finished Goods Y i.e., Rs 660 (Refer W.N.) Hence, Raw Material and Finished
Goods are to be valued at cost.
Value of Closing Stock:
Qty. Rate (Rs) Amount (Rs)
Raw Material X 1,000 440 4,40,000
Finished Goods Y 2,400 660 15,84,000
Total Value of Closing Stock 20,24,000
(ii) When Net Realizable Value of the Chemical Y is Rs 600 per unit
NRV is less than the cost of Finished Goods Y i.e., Rs. 660. Hence, Raw Material is to be valued at replacement
cost and Finished Goods are to be valued at NRV since NRV is less than the cost.
Value of Closing Stock:
Qty. Rate (Rs) Amount (Rs)
Raw Material X 1,000 300 3,00,000
Finished Goods Y 2,400 600 14,40,000

Total Value of Closing Stock 17,40,000
Working Note:
Statement showing cost calculation of Raw material X and Chemical Y
Raw Material X Rs
Cost Price 380
Add: Freight Inward 40
Unloading charges 20
Cost 440
Chemical Y Rs
Materials consumed 440
Direct Labour 120
Variable overheads 80
Fixed overheads (Rs 4,00,000/20,000 units) 20
Cost 660
QUESTION 74: (MTP Nov18)

ABC Ltd. has entered into a binding agreement with XYZ Ltd. to buy a custom-made machine amounting to Rs.
4,00,000. As on 31st March, 2018 before delivery of the machine, ABC Ltd. had to change its method of production.
The new method will not require the machine ordered and so it shall be scrapped after delivery. The expected scrap
value is ‘NIL’.
Show the treatment of machine in the books of ABC Ltd.
SOLUTION
A liability is recognized when outflow of economic resources in settlement of a present obligation can be anticipated
and the value of outflow can be reliably measured. In the given case, ABC Ltd. should recognize a liability of Rs. 4,
00,000 payable to XYZ Ltd. When flow of economic benefit to the enterprise beyond the current accounting period is
considered improbable, the expenditure incurred is recognized as an expense rather than as an asset. In the present
case, flow of future economic benefit from the machine to the enterprise is improbable. The entire amount of purchase
price of the machine should be recognized as an expense. Hence ABC Ltd. should charge the amount of Rs. 4,00,000
(being loss due to change in production method) to Profit and loss statement and record the corresponding liability
(amount payable to XYZ Ltd.) for the same amount in the books for the year ended 31st March, 2018.
QUESTION 75: (MTP Nov19)

Mr. Mehul gives the following information relating to items forming part of inventory as on 31-3-2019. His factory
produces Product X using Raw material A.
(i) 600 units of Raw material A (purchased @ Rs. 120). Replacement cost of raw material A as on 31-3-2019 is
Rs. 90 per unit.
(ii) 500 units of partly finished goods in the process of producing X and cost incurred till date Rs. 260 per unit.
These units can be finished next year by incurring additional cost of Rs. 60 per unit.
(iii) 1500 units of finished Product X and total cost incurred Rs. 320 per unit. Expected selling price of Product X

is Rs. 300 per unit.
Determine how each item of inventory will be valued as on 31-3-2019. Also calculate the value of total inventory as
on 31-3-2019.
SOLUTION
As per AS 2 “Valuation of Inventories”, materials and other supplies held for use in the production of inventories
are not written down below cost if the finished products in which they will be incorporated are expected to be sold
at cost or above cost. However, when there has been a decline in the price of materials and it is estimated that the
cost of the finished products will exceed net realizable value, the materials are written down to net realizable value.
In such circumstances, the replacement cost of the materials may be the best available measure of their net
realizable value. In the given case, selling price of product X is Rs. 300 and total cost per unit for production is Rs.
320.
Hence the valuation will be done as under:
(i) 600 units of raw material will be written down to replacement cost as market value of finished product is less
than its cost, hence valued at Rs. 90 per unit.
(ii) 500 units of partly finished goods will be valued at 240 per unit i.e. lower of cost Rs. 320 (Rs.
260 + additional cost Rs. 60) or Net estimated selling price or NRV i.e. Rs. 240 (Estimated selling price Rs.
300 per unit less additional cost of Rs. 60).
(iii) 1,500 units of finished product X will be valued at NRV of Rs. 300 per unit since it is lower than cost Rs. 320
of product X.
Valuation of Total Inventory as on 31.03.2019:

Units Cost (Rs.) NRV / Replacement Value = units x cost or NRV
cost whichever is less (Rs.)
Raw material A 600 120 90 54,000
Partly finished goods 500 260 240 1,20,000
Finished goods X 1,500 320 300 4,50,000
Value of Inventory 6,24,000
QUESTION 76: (EXAM May19)

Wooden Plywood Limited has a normal wastage of 5% in the production process. During the year 2017-18, the Company
used 16,000 MT of Raw material costing Rs. 190 per MT. At the end of the year, 950 MT of wastage was in stock. The
accountant wants to know how this wastage is to be treated in the books.
(1) Calculate the amount of abnormal loss.
(2) Explain the treatment of normal loss and abnormal loss. [In the context of AS-2 (Revised)]
SOLUTION
1. As per AS 2 (Revised) ‘Valuation of Inventories’, abnormal amounts of wasted materials, labour and other production
costs are excluded from cost of inventories and such costs are recognised as expenses in the period in which they

are incurred. The normal loss will be included in determining the cost of inventories (finished goods) at the year
end.
2. Amount of Abnormal Loss:

Material used 16,000 MT @ Rs. 190 Rs. 30,40,000
Normal Loss (5% of 16,000 MT) 800 MT
(included in calculation of cost of inventories)
Net quantity of material 15,200 MT
(iii)Abnormal Loss in quantity (950 -800) 150 MT

Abnormal Loss Rs. 30,000
[150 units @ Rs. 200 (Rs. 30,40,000/15,200)]
Amount of Rs. 30,000 (Abnormal loss) will be charged to the Profit and Loss

(a) “In determining the cost of inventories, it is appropriate to exclude certain costs and recognize them as expenses
in the period in which they are incurred”. Provide examples of such costs as per AS 2 ‘Valuation of Inventories’.
(b) Rohan Pvt. Ltd., a wholesaler in agriculture products, has valued the inventory on Net Realizable Value on the
ground that AS 2 does not apply to inventory of agriculture products.
SOLUTION
(a) As per AS 2 “Valuation of Inventories‟, certain costs are excluded from the cost of the inventories and are
recognised as expenses in the period in which incurred. Examples of such costs are: (a) abnormal amount of
wasted materials, labour, or other production costs; (b) storage costs, unless those costs are necessary in the
production process prior to a further production stage; (c) administrative overheads that do not contribute to
bringing the inventories to their present location and condition; and (d) selling and distribution costs.
(b) AS 2 does not apply to producers of agricultural products but applies to traders in agricultural products. Hence AS
2 will apply to Rohan Pvt. Ltd. and it will have to value inventory at lower of cost or market value.
QUESTION 78: (MTP May18, May19) (RTP May22)

On the basis of information given below, find the value of inventory (by periodic inventory method) as per AS 2, to
be considered while preparing the Balance Sheet as on 31st March, 2017 on weighted Average Basis.
Details of Purchases:
Date of purchase Unit (Nos.) Purchase cost per unit (Rs.
01-03-2017 20 108
08-03-2017 15 107
17-03-2017 30 109
25-03-2017 15 107
Details of issue of Inventory

Date of Issue Unit (Nos.)
03-03-2017 10
12-03-2017 20
18-03-2017 10
24-03-2017 20
Net realizable value of inventory as on 31st March, 2017 is Rs. 107.75 per unit.
You are required to compute the value of Inventory as per AS 2.
SOLUTION
Net Realisable Value of Inventory as on 31st March, 2017
= Rs. 107.75 x 20 units = Rs. 2,155
Value of inventory as per Weighted Average basis
Total units purchased and total cost:
01.03.2017 Rs. 108 x 20 units Rs. 2,160
08.3.2017 Rs. 107 x 15 units Rs. 1,605
17.03.2017 Rs. 109 x 30 units Rs. 3,270
25.03.2017 Rs. 107 x 15 units Rs. 1,605
Total 80 units = Rs. 8640
Weighted Average Cost = Rs. 8640/80 units = Rs. 108
Total cost = Rs. 108 x 20 units = Rs. 2,160
Value of inventory to be considered while preparing Balance Sheet as on 31st March, 2017 is, Cost or Net Realisable
value whichever is lower i.e. Rs. 2,155.
Question 79: (MTP May23)

ABC Ltd. was making provision for non-moving inventories based on no issues for the last 12 months up to 31.3.2021.
The company wants to provide during the year ending 31.3.2022 based on technical evaluation:
Total value of inventory ₹ 100 lakhs

Provision required based on 12 months issue ₹ 3.5 lakhs
Provision required based on technical evaluation ₹ 2.5 lakhs
Does this amount to change in Accounting Policy? Can the company change the method of provision?
Solution
The decision of making provision for non-moving inventories on the basis of technical evaluation does not amount to
change in accounting policy. Accounting policy of a company may require that provision for non-moving inventories
should be made. The method of estimating the amount of provision may be changed in case a more prudent estimate
can be made. In the given case, considering the total value of inventory, the change in the amount of required
provision of non-moving inventory from ₹ 3.5 lakhs to ₹ 2.5 lakhs is also not material. The disclosure can be made
for such change in the following lines by way of notes to the accounts in the annual accounts of ABC Ltd. for the
year 2021-22:
“The company has provided for non-moving inventories on the basis of technical evaluation unlike preceding years.

Had the same method been followed as in the previous year, the profit for the year and the corresponding effect on
the year end net assets would have been lower by ₹ 1 lakh.”.
AS 10 - PPE

(c) Entity A has a policy of not providing for depreciation on PPE capitalized in the year until the following year, but
provides for a full year's depreciation in the year of disposal of an asset. Is this acceptable?
(d) Entity A purchased an asset on 1st January 2016 for Rs. 1,00,000 and the asset had an estimated useful life of
10 years and a residual value of nil. On 1st January 2020, the directors review the estimated life and decide that
the asset will probably be useful for a further 4 years. Calculate the amount of depreciation for each year, if
company charges depreciation on Straight Line basis.
(e) The following items are given to you:
ITEMS
(1) Costs of testing whether the asset is functioning properly, after deducting the net proceeds from selling any
items produced while bringing the asset to that location and condition (such as samples produced when
testing equipment);
(2) Costs of conducting business in a new location or with a new class of customer (including costs of staff
training);
(3) Any costs directly attributable to bringing the asset to the location and condition necessary for it to be
capable of operating in the manner intended by management
(4) Costs of opening a new facility or business, such as, inauguration costs;
(5) Purchase price, including import duties and non–refundable purchase taxes, after deducting trade discounts
and rebates.
With reference to AS 10 “Property, Plant and Equipment”, classify the above items under the following heads:
HEADS
(ii) Purchase Price of PPE
(iii) Directly attributable cost of PPE or
(iv) Cost not included in determining the carrying amount of an item of PPE.
SOLUTION
(a) The depreciable amount of a tangible fixed asset should be allocated on a systematic basis over its useful life.
The depreciation method should reflect the pattern in which the asset's future economic benefits are expected
to be consumed by the entity. Useful life means the period over which the asset is expected to be available
for use by the entity. Depreciation should commence as soon as the asset is acquired and is available for use.
Thus, the policy of Entity A is not acceptable.
(b) The entity has charged depreciation using the straight-line method at Rs. 10,000 per annum i.e. (1,00,000/10
years). On 1st January 2020, the asset's net book value is [1,00,000 – (10,000 x 4)] = Rs. 60,000.

The remaining useful life is 4 years. The company should amend the annual provision for depreciation to charge
the unamortized cost over the revised remaining life of four years. Consequently, it should charge depreciation
for the next 4 years at Rs. 15,000 per annum i.e. (60,000 / 4 years). Depreciation is recognized even if the
Fair value of the Asset exceeds its Carrying Amount. Repair and maintenance of an asset do not negate the
need to depreciate it.
(C)
(1) Costs of testing whether the asset is functioning properly, after deducting the net proceeds from selling any
items produced while bringing the asset to that location and condition (such as samples produced when testing
equipment) will be classified as “Directly attributable cost of PPE”.
(2) Costs of conducting business in a new location or with a new class of customer (including costs of staff
training) will be classified under head (iii) as it will not be included in determining the carrying amount
of an item of PPE.
(3) Any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable
of operating in the manner intended by management will be included in determination of Purchase Price of
PPE
(4) Costs of opening a new facility or business, such as, inauguration costs will be classified under head (iii) as
it will not be included in determining the carrying amount of an item of PPE.
(5) Purchase price, including import duties and non–refundable purchase taxes, after deducting trade discounts and
rebates will be included in determination of Purchase Price of PPE.

You are required to give the correct accounting treatment for the following in line with provisions of AS 10:
(a) Trozen Ltd. operates a major chain of supermarkets all over India. It acquires a new store in Pune which requires
significant renovation expenditure. It is expected that the renovations will be done in 2 months during which
the store will be closed. The budget for this period, including expenditure related to construction and remodeling
costs (Rs. 18 lakhs), salaries of staff (Rs. 2 lakhs) who will be preparing the store before its opening and
related utilities costs (Rs. 1.5 lakhs), is prepared. The cost of salaries of the staff and utilities are operating
expenditures that would be incurred even after the opening of the supermarket. What will the treatment of all
these expenditures in the books of accounts?
(b) ABC Ltd is setting up a new refinery outside the city limits. In order to facilitate the construction of the
refinery and its operations, ABC Ltd. is required to incur expenditure on the construction / development of
railway siding, road and bridge. Though ABC Ltd. incurs the expenditure on the construction/development, it will
not have ownership rights on these items and they are also available for use to other entities and public at
large. Can ABC Ltd. capitalize expenditure incurred on these items as property, plant and equipment (PPE)?
SOLUTION
(a)
Trozen Ltd. should capitalize the costs of construction and remodeling the supermarket, because they are necessary to
bring the store to the condition necessary for it to be capable of operating in the manner intended. The supermarket

cannot be opened without incurring the remodeling expenditure. Therefore, this construction and remodeling expenditure
of Rs. 18 lakhs should be considered as part of the cost of the asset. However, the cost of salaries of the staff Rs. 2
lakh and utilities cost Rs. 1.5 lakh are operating expenditures that would be incurred even after the opening of the
supermarket. Therefore, these costs are not necessary to bring the store to the condition necessary for it to be capable
of operating in the manner intended by the management and should be expensed.
(b) AS 10 states that the cost of an item of property, plant and equipment shall be recognized as an asset if, and
only if:
(i) it is probable that future economic benefits associated with the item will flow to the entity; and
(ii) The cost of the item can be measured reliably.
Further, the standard provides that the standard does not prescribe the unit of measure for recognition, i.e., what
constitutes an item of property, plant and equipment. Thus, judgment is required in applying the recognition criteria to
an entity’s specific circumstances. The cost of an item of property, plant and equipment comprise any costs directly
attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the
manner intended by management.
In the given case, railway siding, road and bridge are required to facilitate the construction of the refinery and for its
operations. Expenditure on these items is required to be incurred in order to get future economic benefits from the
project as a whole which can be considered as the unit of measure for the purpose of capitalization of the said
expenditure even though the company cannot restrict the access of others for using the assets individually. It is apparent
that the aforesaid expenditure is directly attributable to bringing the asset to the location and condition necessary for
it to be capable of operating in the manner intended by management.
In view of this, even though ABC Ltd. may not be able to recognize expenditure incurred on these assets as an individual
item of property, plant and equipment in many cases (where it cannot restrict others from using the asset), expenditure
incurred may be capitalized as a part of overall cost of the project. From this, it can be concluded that, in the given
case the expenditure incurred on these assets, i.e., railway siding, road and bridge, should be considered as the cost of
constructing the refinery and accordingly, expenditure incurred on these items should be allocated and capitalized as
part of the items of property, plant and equipment of the refinery.

A ltd has following assets. Calculate depreciation for the year ending 31st March 2020 for each asset as per AS 10
(revised)
(a) Machinery purchased for Rs. 10 Lakhs on 1st April 2015 and residual value after useful life of 5 years, based on
2015 price is Rs. 10 Lakhs
(b) Land for Rs. 50 Lakhs
(c) A machinery is constructed for Rs. 5,00,000 for its own use (useful life is 10 years). Construction is completed on
1st April 2019, but the company does not begin using the machinery till 31st March 2020.

(d) Machinery purchased on 1st April 2017 for Rs. 50,000 with useful life of 5 years and residual value is NIL.
On 1st April 2019, management decided to use this asset for further 2 years only.
SOLUTION
COMPUTATION OF AMOUNT OF DEPRECIATION AS PER AS 10
Rs.
(i) Machinery purchased on 1/4/15 for Rs. 10 lakhs (having residual value of Rs. 10 lakhs) Nil
Reason: The company considers that the residual value, based on prices prevailing at the
balance sheet date, will equal the cost. Therefore, there is no depreciable amount and
depreciation is correctly zero.
(ii) Land (50 lakhs) (considered freehold) Nil
Reason: Land has an unlimited useful life and therefore, it is not depreciated.
(iii) Machinery constructed for own use (Rs. 5,00,000/10) 50,000
Reason: The entity should begin charging depreciation from the date the machine is
ready for use i.e., 1st April,2019. The fact that the machine was not used for a period
after it was ready to be used is not relevant in considering when to begin charging
depreciation.
(iv) Machinery having revised useful life 15,000
Reason: The entity has charged depreciation using the straight-line method at Rs. 10,000
per annum i.e. (50,000/5 years). On 1st April, 2019 the asset's net book value is [50,000
– (10,000 x 2)] i.e., Rs. 30,000. The remaining useful life is 2 years as per revised
estimate. The company should amend the annual provision for depreciation to charge the
unamortized cost over the revised remaining life of 2 years. Consequently, it should charge
depreciation for the next 2 years at Rs. 15,000 per annum i.e. (30,000/2 years).
QUESTION 83: (EXAM July21)

(i) A Limited has contracted with a supplier to purchase machinery which is to be installed at its new plant in four
months’ time. Special foundations were required for the machinery which were to be prepared within this supply
lead time. The cost of the site preparation and laying foundations were Rs. 2,10,000. These activities were supervised
by an Architect during the entire period, who is employed for this purpose at a salary of Rs. 35,000 per month.
The machinery was purchased for Rs. 1,27,50,000 and a sum of Rs. 2,12,500 was incurred towards transportation
charges to bring the machinery to the plant site. An Engineer was appointed at a fee of Rs. 37,500 to supervise
the installation of the machinery at the plant site. You are required to ascertain the amount at which the machinery
should be capitalized in the books of A Limited.
(ii) B Limited, which operates a major chain of retail stores, has acquired a new store location. The new location
requires substantial renovation expenditure. Management expects that the renovation will last for 4 months during
which the store will be closed. Management has prepared the budget for this period including expenditure related
to construction and re-modelling costs, salary of staff who shall be preparing the store before its opening and
related utilities cost. How would such expenditure be treated in the books of B Limited?

SOLUTION
(i) Statement Showing the Computation of the amount at which the Machinery should be capitalized in the books of
A Limited
Particulars Amount
(Rs.)
Purchase cost of machinery Given 1,27,50,000
Add: Site Preparation Cost Given 2,10,000
Architect’s Salary Specific / Attributable 1,40,000
overheads for 4 months (Rs.
35,000 x 4)
Initial Delivery Cost Transportation 2,12,500
Professional Fees for Installation Engineer’s Fees 37,500
Total Cost of Machinery to be 1,33,50,000
capitalized
Management should capitalize the costs of construction and remodeling the store, because they are necessary to bring
the store to the condition necessary for it to be capable of operating in the manner intended by management. The
store cannot be opened without incurring the remodeling expenditure, and thus the expenditure should be considered
part of the asset. However, if the cost of salaries, utilities and storage of goods are in the nature of operating
expenditure that would be incurred if the store was open, then these costs are not necessary to bring the store to the
condition necessary for it to be capable of operating in the manner intended by management and should be expensed.

On 1 April 20X1, Sun Ltd purchased some Land for Rs. 10000 (including legal costs of Rs. 1000) in order to construct
a new factory. Construction work commenced on 1 May 20X1. Sun ltd incurred the following costs in relation with
its construction:
– Preparation and leveling of the land – Rs. 300
– Purchase of materials for the construction – Rs. 6080 in total.
– Employment costs of the construction workers – Rs. 200 per month.
– Overhead costs incurred directly on the construction of the factory – Rs. 100 per month.
– Ongoing overhead costs allocated to the construction project using the company’s normal overhead allocation
model – Rs. 50 per month.
– Income received during the temporary use of the factory premises as a car park during the construction period
– Rs. 50.
– Costs of relocating employees to work at the new factory – Rs. 300
– Costs of the opening ceremony on 31 January 20X1 – Rs. 150
The factory was completed on 30 November 20X1 and production began on 1 February 20X2.
At the end of the 40-year period, Sun Ltd has a legally enforceable obligation to demolish the factory and restore the
site to its original condition. The directors estimate that the cost of demolition in 40 years’ time (based on prices

prevailing at that time) will be Rs. 20000. An annual risk adjusted discount rate which is appropriate to this project
is 8%. The present value of Rs. 1 payable in 40 years’ time at an annual discount rate of 8% is Rs. 0.046
The construction of the factory was partly financed by a loan of Rs. 17500 taken out on 1 April 20X1. The loan was
at an annual rate of interest of 6%. During the period 1 April 20X1 to 31 August 20X1 (when the loan proceeds had
been fully utilised to finance the construction), Sun Ltd received investment income of Rs. 100 on the temporary
investment of the proceeds.
Required:
Compute the Cost of the factory to be capitalised in the Balance Sheet of Sun Ltd at 31 March 20X2.
SOLUTION
Computation of the cost of the factory
Description Included in P.P.E. Explanation
Purchase of land 10,000 Both the purchase of the land and the associated legal
costs are direct costs of constructing the factory.
Preparation and leveling 300 A direct cost of constructing the factory
Materials 6,080 A direct cost of constructing the factory
Employment costs of 1,400 A direct cost of constructing the factory for a
construction workers seven-month period
Direct overhead costs 700 A direct cost of constructing the factory for a seven-
month period
Allocated overhead costs Nil Not a direct cost of construction
Income from use as a car park Nil Not essential to the construction so recognised
directly in profit or loss
Relocation costs Nil Not a direct cost of construction
Opening ceremony Nil Not a direct cost of construction
Finance costs 612.50 Capitalise the interest cost incurred in a seven months
period (purchase of land would not trigger off
capitalisation, since land is not qualifying Asset. Infact,
the construction started from 1st May 20X1)
Investment income on (100) offset against the amount capitalized
temporary investment of the
loan proceeds
Demolition cost recognised as 920 Where an obligation must recognise as part of the
a provision initial cost
Total 19,912.50

QUESTION 85:
Star Limited purchased machinery for ₹ 6,80,000 (inclusive of GST of ₹ 40,000). Input credit is available for entire
amount of GST paid. The company incurred the following other expense for installation.
₹
Cost of preparation of site for installation 21,200
Total Labour charges (200 out of the total of 500 men hours 56,000
worked, were spent on installation of the machinery)
Spare parts and tools consumed in installation 5,000
Total salary of supervisor 26,000
(Time spent for installation was 25% of the total time worked)
Total technical expense (1/10 relates to the plant installation) 34,000
Test run and experimental production expenses 18,000
Consultancy charges to architect for plant set up 11,000
Depreciation on assets used for installation 12,000
The machine was ready for use on 15.01.2021 but was used from 01.02.2021. Due to this delay further expenses of ₹
8,900 were incurred. Calculate the value at which the plant should be capitalized in the books of Star Limited.
Solution
Calculation of Cost of Plant
Particulars ₹
Purchase Price Given 6,80,000
Add: Site Preparation Cost Given 21,200
Labour charges (56,000×200/500) 22,400
Given
Spare parts 5,000
Supervisor’s Salary 25% of ₹ 26,000 6,500
Technical costs 1/10 of ₹ 34,000 3,400
Test run and experimental production Given 18,000
charges
Architect Fees for set up Given 11,000
Depreciation on assets used for installation Given 12,000
Total Cost of Asset 7,79,500
Less: GST credit receivable (40,000)
Value to be capitalized 7,39,500
Note: Further Expenses of ₹ 8,900 from 15.1.2021 to 1.2.2021 to be charged to profit and loss A/c as plant was ready
for production on 15.1.2021.

AS 11 – EFFECT OF CHANGES IN FOREIGN EXCHANGE RATE
QUESTION 86: (RTP Nov18, Nov20)

(i) Classify the following items as monetary or non-monetary item: Share Capital Trade Receivables Investment in
Equity shares Fixed Assets.
(ii) You are required to ascertain the loss/gain for financial years 2016-17 and 2017- 18, also give their treatment as
per AS 11.
Exchange Rate per $

Goods purchased on 1.1.2017 for US $ 15,000 Rs. 75
Exchange rate on 31.3.2017 Rs. 74
Date of actual payment 7.7.2017 Rs. 73
SOLUTION
(i)
Share capital Non-monetary
Trade receivables Monetary
Investment in equity shares Non-monetary
Fixed assets Non-monetary
(ii) As per AS 11 on ‘The Effects of Changes in Foreign Exchange Rates’, all foreign currency transactions should be recorded
by applying the exchange rate on the date of transactions. Thus, goods purchased on 1.1.2017 and corresponding
creditor would be recorded at Rs. 11,25,000 (i.e., $15,000 × Rs. 75)
According to the standard, at the balance sheet date all monetary transactions should be reported using the
closing rate. Thus, creditors of US $15,000 on 31.3.2017 will be reported at Rs. 11,10,000 (i.e., $15,000 × Rs. 74) and
exchange profit of Rs. 15,000 (i.e., 11,25,000 – 11,10,000) should be credited to Profit and Loss account in the year
2016-17.
On 7.7.2017, creditors of $15,000 is paid at the rate of Rs. 73. As per AS 11, exchange difference on settlement
of the account should also be transferred to Profit and Loss account. Therefore, Rs. 15,000 (i.e., 11,10,000–
10,95,000) will becreditedtoProfitandLossaccountintheyear2017-18.
QUESTION 87: (RTP May20) (MTP Nov22) (EXAM Nov18)

(i) AXE Limited purchased fixed assets costing $ 5,00,000 on 1st Jan. 2018 from an American company M/s M&M
Limited. The amount was payable after 6 months. The company entered into a forward contract on 1st January
2018 for five months @ Rs. 62.50 per dollar. The exchange rate per dollar was as follows:
On 1st January, 2018 Rs. 60.75 per dollar
On 31st March, 2018 Rs. 63.00 per dollar

You are required to state how the profit or loss on forward contract would be recognized in the books of AXE
Limited for the year ending 2017-18, as per the provisions of AS 11.
(ii) Assets and liabilities and income and expenditure items in respect of integral foreign operations are translated
into Indian rupees at the prevailing rate of exchange at the end of the year. The resultant exchange differences
in the case of profit, is carried to other Liabilities Account and the Loss, if any, is charged to revenue. You are
required to comment in line with AS 11.
SOLUTION
(i) As per AS 11 “The Effects of Changes in Foreign Exchange Rates”, an enterprise may enter into a forward
exchange contract to establish the amount of the reporting currency required, the premium or discount arising at
the inception of such a forward exchange contract should be amortized as expenses or income over the life of the
contract.
Forward Rate Rs. 62.50
Less: Spot Rate (Rs. 60.75)
Premium on Contract Rs. 1.75
Contract Amount US$ 5,00,000
Total Loss (5,00,000 x 1.75) Rs. 8,75,000
Contract period 5 months 3 months falling in the year 2017-18; therefore, loss to be recognized in 2017-18
(8,75,000/5) x 3 = Rs. 5,25,000. Rest Rs. 3,50,000 will be recognized in the following year 2018-19.
(ii) Financial statements of an integral foreign operation (for example, dependent foreign branches) should be
translated using the principles and procedures described in paragraphs 8 to 16 of AS 11 (Revised 2003). The
individual items in the financial statements of a foreign operation are translated as if all its transactions had
been entered into by the reporting enterprise itself. Individual items in the financial statements of the foreign
operation are translated at the actual rate on the date of transaction. The foreign currency monetary items (for
example cash, receivables, payables) should be reported using the closing rate at each balance sheet date. Non-
monetary items (for example, fixed assets, inventories, investments in equity shares) which are carried in terms
of historical cost denominated in a foreign currency should be reported using the exchange date at the date of
transaction. Thus, the cost and depreciation of the tangible fixed assets is translated using the exchange rate at
the date of purchase of the asset if asset is carried at cost. If the fixed asset is carried at fair value, translation
should be done using the rate existed on the date of the valuation. The cost of inventories is translated at the
exchange rates that existed when the cost of inventory was incurred and realizable value is translated applying
exchange rate when realizable value is determined which is generally closing rate. Exchange difference arising on
the translation of the financial statements of integral foreign operation should be charged to profit and loss
account.
Thus, the treatment by the management of translating all assets and liabilities; income and expenditure items in
respect of foreign branches at the prevailing rate at the year end and also the treatment of resultant exchange
difference is not in consonance with AS 11 (Revised 2003).

QUESTION 88: (EXAM Jan21)
Explain briefly the accounting treatment needed in the following cases as per AS 11 as on 31.03.2020.
(i) Debtors include amount due from Mr. S Rs. 9,00,000 recorded at the prevailing exchange rate on the date of sales,
transaction recorded at US $ 1 = Rs. 72.00
US $ 1 = Rs. 73.50 on 31st March 2020
US $ 1 = Rs. 72.50 on 1st April 2019
(ii) Long term loan taken on 1st April 2019 from a US Company amounting to Rs. 75,00,000. Rs. 5,00,000 was repaid
on 31st December 2019 recorded at US $ 1 = Rs. 70.50. Interest has been paid as and when debited by the US
Company.
US $ 1 = Rs. 73.50 on 31st March 2020
US $ 1 = Rs. 72.50 on 1st April 2019
SOLUTION
As per AS 11 “The Effects of Changes in Foreign Exchange Rates”, exchange differences arising on the settlement of
monetary items or on reporting an enterprise’s monetary items at rates different from those at which they were
initially recorded during the period, or reported in previous financial statements, should be recognized as income or as
expenses in the period in which they arise.
However, at the option of an entity, exchange differences arising on reporting of long term foreign currency monetary
items at rates different from those at which they were initially recorded during the period, or reported in previous
financial statements, in so far as they relate to the acquisition of a non-depreciable capital asset can be accumulated
in a “Foreign Currency Monetary Item Translation Difference Account” in the enterprise’s financial statements and
amortized over the balance period of such long-term asset/ liability, by recognition as income or expense in each of
such periods.

Foreign Currency Rs.
Rate
Debtors
Initial recognition US $12,500 (9,00,000/72) 1 US $ = Rs. 72 9,00,000
Rate on Balance sheet date 1 US $ = Rs. 73.50
Exchange Difference Gain US $ 12,500 X (73.5072) 18,750
Treatment: Credit Profit and Loss A/c by Rs. 18,750
Long term Loan
Initial recognition US $ 1,03,448.28 (75,00,000/72.50) 1 US $ = Rs. 73.50 75,00,000
Rate on Balance sheet date 1 US $ = Rs. 73.50
Exchange Difference Loss after adjustment of exchange gain on
repayment of Rs. 5,00,000
Rs. 67,987.48 [82,171.88 (US $ 96,356.08 X Rs. 73.5 less Rs.
70,00,000) less profit 14,184.40 [US $ 7,092.2 (5,00,000/70.5) X
Rs. 2)] NET LOSS 67,987.48*
Treatment: Credit Loan A/c and
Debit FCMITD A/C or Profit and Loss A/c by Rs. 67,987.48
Thus, Exchange Difference on Long term loan amounting Rs. 67,987.48 may either be charged to Profit and Loss A/c
or to Foreign Currency Monetary Item Translation Difference Account but exchange difference on debtors amounting
Rs. 18,750 is required to be transferred to Profit and Loss A/c.
NOTE 1: *Exchange Difference Loss (net of adjustment of exchange gain on repayment of Rs. 5,00,000) has been
calculated in the above solution. Alternative considering otherwise also possible.
NOTE 2: Date of sales transaction of Rs. 9 lakhs has not been given in the question and hence it has been assumed
that the transaction took place during the year ended 31 March 2020.

Vsmart Ltd. took a Foreign Currency Loan of $1,00,000 to purchase machine of the same amount. On 1st April, 2022
Loan is of 5Years. To be repaid in lumpsum after 5 Years.
Depreciation Rate is 10%
Exchange rates are as follows:
On 1/4/22 - $1 = ₹ 78
On 31/3/23 - $1 = ₹ 82
On 31/3/24 - $1 = ₹ 80.5
Show A/c as per AS 11 in following cases:
(a) Without PARA 46
(b) With PARA 46
Solution:
1) Initial Recognition:
Foreign Currency should recognise at the rate prevailing on transaction Date (i.e. SPOT Rate) i.e. $1 = ₹ 78

Transaction Value = $1,00,000 x 78 = 78,00,000
1/4/22
Machine A/c Dr. 78,00,000
To Foreign Currency Loan A/c 78,00,000
(Note: assuming machine is measured at cost always)
(Note: Foreign Currency Loan is a LTFCMI)
2) Subsequent measurement:
Case 1: without PARA 46
Exchange Difference due to Subsequent measurement shall be transfer to Profit & Loss A/c
1st Year end: 31/3/23
Foreign Currency Loan Should be = $1,00,000 x 82 = 82,00,000
Exchange Difference (Loss) = 4,00,000
31/3/23
Exchange Difference (P&L) A/c Dr. 4,00,000
To Exchange Difference A/c 4,00,000
2nd Year end: 31/3/24

Foreign Currency Loan Should be = $1,00,000 x 80.5 = 80,50,000
Exchange Difference (Gain) = 82 – 80.5 = 1,50,000
Foreign Currency Loan A/c Dr. 1,50,000
To Exchange Difference (P&L) A/c 1,50,000
Exchange Difference (Gain) A/c Dr. 1,50,000
To Profit & Loss A/c 1,50,000
Case 2: with PARA 46

Exchange Difference should be adjusted to the cost of machine
31/3/23
Exchange Difference (Loss) = 4,00,000
Machine A/c Dr. 4,00,000
Depreciation @10& = 82,00,000 x 10% = 8,20,000

Remaining Balance of Machine = 73,80,000
31/3/24
Exchange Difference (Gain) = 1,50,000
Deduct From Machines Book Value
Foreign Currency Loan A/c Dr. 1,50,000
To Machine A/c 1,50,000

Depreciation @10% on (73,80,000 – 1,50,000) = 72,30,000 x 10% = 7,23,000

Vsmart Ltd. took a loan of $75,000 on 1/4/22 when $1 = ₹ 78. Loan is utilized for working capital requirement loan
is of 6 Years. Principal repayment equally every year.
1st year end - $1 = ₹ 81.30
2nd year end - $1 = ₹ 82.15
3rd year end - $1 = ₹ 82
4th year end - $1 = ₹ 81.50
5th year end - $1 = ₹ 81.90
6th year end - $1 = ₹ 82
Apply PARA 46 of AS 11:
Solution:
1) Initial Recognition:
Bank A/c Dr. 58,50,000
2) Subsequent Measurement:
31/3/23 (Fist remeasure then pat installment)
FCMIT Difference A/c Dr. 2,47,500
To FC Loan A/c ($75,000 x 3.30) 2,47,500
FC Loan A/c Dr. 10,16,250
To Bank A/c ($12,500 x 81.30) 10,16,250
Foreign Currency Book Value = 50,81,250

Amortize FCMIT Difference in 6 Years = 2,47,500 / 6 = 41,250
To FCMIT Difference A/c 41,250
Balance unamortised FCMIT = 2,06,250 (Dr. Balance)

31/3/25 31/3/25 31/3/26 31/3/27 31/3/28
$1 = ₹ 82.15 $1 = ₹ 82 $1 = ₹ 81.50 $1 = ₹ 81.90 $1 = ₹ 82
Prev. rate = 81.30 Prev. rate = 81.25 Prev. rate = 82 Prev. rate = 81.50 Prev. rate = 81.90
Loss = 0.85 x $62,500 Gain = 0.15 x $50,000 Gain = 0.5 x $37,500 Loss = 0.4 x $12,500 Loss = 0.10 x $12,500
Total Loss = 53,125 Total Gain = 7,500 Total Gain = 18,750 Total Loss = 10,000 Total Loss = 1,250
Loss added to FCMIT Deduct from FCMIT Deduct from FCMIT Added to FCMIT Added to FCMIT
Difference Difference Difference Difference Difference
Revised FCMIT Revised FCMIT Revised FCMIT Revised FCMIT Revised FCMIT
Difference = 2,59,375 Difference = 2,00,000 Difference = 1,31,250 Difference = 97,500 Difference = 50,000
Year = 5 Year = 4 Year = 3 Year = 2 Year = 1

P&L A/c = 51,875 P&L A/c amortised = P&L A/c amortised = P&L A/c amortised = Fully amortised to P&L
50,000 43,750 48,750 A/c = 50,000
Closing Balance of Closing Balance of Closing Balance of Closing Balance of
FCMIT = 2,07,500 FCMIT = 1,50,000 FCMIT = 87,500 FCMIT = 48,750

AS 12 – GOVERNMENT GRANTS
QUESTION 91: (RTP May20, Nov20) (MTP Nov22)

How would you treat the following in the accounts in accordance with AS 12 'Government Grants'?
(i) Rs. 35 Lakhs received from the Local Authority for providing medical facilities to the employees.
(ii) Rs. 100 Lakhs received as Subsidy from the Central Government for setting up a unit in a notified backward
area.
(iii) Rs. 10 Lakhs Grant received from the Central Government on installation of anti-pollution equipment.
SOLUTION
(i) Rs. 35 lakhs received from the local authority for providing medical facilities to the employees is a grant received
in the nature of revenue grant. Such grants are generally presented as a credit in the profit and loss statement,
either separately or under a general heading such as ‘Other Income’. Alternatively, Rs. 35 lakhs may be deducted
in reporting the related expense i.e., employee benefit expenses.
(ii) As per AS 12 ‘Accounting for Government Grants’, where the government grants are in the nature of promoters’
contribution, i.e., they are given with reference to the total investment in an undertaking or by way of contribution
towards its total capital outlay and no repayment is ordinarily expected in respect thereof, the grants are treated
as capital reserve which can be neither distributed as dividend nor considered as deferred income.
In the given case, the subsidy received from the Central Government for setting up a unit in notified backward
area is neither in relation to specific fixed asset nor in relation to revenue. Thus, amount of Rs 100 lakhs should
be credited to capital reserve.
(iii) Rs 10 lakhs grant received for installation anti-pollution equipment is a grant related to specific fixed asset. Two
methods of presentation in financial statements of grants related to specific fixed assets are regarded as acceptable
alternatives. Under first method, the grant is shown as a deduction from the gross value of the asset concerned
in arriving at its book value. The grant is thus recognised in the profit and loss statement over the useful life of
a depreciable asset by way of a reduced depreciation charge. Under the second method, grants related to depreciable
assets are treated as deferred income which is recognised in the profit and loss statement on a systematic and
rational basis over the useful life of the asset.
Thus, Rs 10 lakhs may either be deducted from the cost of equipment or treated as deferred income to be
recognized on a systematic basis in profit & Loss A/c over the useful life of equipment.
QUESTION 92: (RTP May21, May23)

(a) Hygiene Ltd. had received a grant of Rs. 50 lakhs in 2012 from a State Government towards installation of
pollution control machinery on fulfilment of certain conditions. The company, however, failed to comply with
the said conditions and consequently was required to refund the said amount in 2020. The company debited
the said amount to its machinery account in 2020 on payment of the same. It also reworked the depreciation
for the said machinery from the date of its purchase and passed necessary adjusting entries in the year 2020
to incorporate the retrospective impact of the same. State whether the treatment done by the company is

correct or not.
(b) ABC Ltd. received two acres of land received for set up of plant. It also received Rs.2 lakhs received for
purchase of machinery of Rs. 10 lakhs. Useful life of machinery is 5 years. Depreciation on this machinery is
to be charged on straight-line basis. How should ABC Ltd. recognize these government grants in its books of
accounts?
SOLUTION
(a) As per the facts of the case, Hygiene Ltd. had received a grant of Rs. 50 lakh in 2012 from a State Government
towards installation of pollution control machinery on fulfilment of certain conditions. However, the amount of
grant has to be refunded since it failed to comply with the prescribed conditions. In such circumstances, AS
12, “Accounting for Government Grants”, requires that the amount refundable in respect of a government grant
related to a specific fixed asset is recorded by increasing the book value of the asset or by reducing the capital
reserve or the deferred income balance, as appropriate, by the amount refundable. The Standard further makes
it clear that in the first alternative, i.e., where the book value of the asset is increased, depreciation on the
revised book value should be provided prospectively over the residual useful life of the asset. Accordingly, the
accounting treatment given by Hygiene Ltd. of increasing the value of the plant and machinery is quite proper.
However, the accounting treatment in respect of depreciation given by the company of adjustment of
depreciation with retrospective effect is improper and constitutes violation of AS 12.
(b) ABC Ltd. should recognize the grants in the following manner:
• As per AS 12, government grants may take the form of non-monetary assets, such as land or other resources,
given at concessional rates. In these circumstances, it is usual to account for such assets at their acquisition
cost. Non-monetary assets given free of cost are recorded at a nominal value. Accordingly, land should be
recognised at nominal value in the balance sheet.
• The standard provides option to treat the grant either as a deduction from the gross value of the asset or
to treat it as deferred income as per provisions of the standard. Under first method, the grant is shown as
a deduction from the gross value of the asset concerned in arriving at its book value. The grant is thus
recognised in the profit and loss statement over the useful life of a depreciable asset by way of a reduced
depreciation charge. Accordingly, the grant of Rs. 2 lakhs is deducted from the cost of the machinery.
Machinery will be recognised in the books at Rs. 10 lakhs – Rs. 2 lakhs = Rs. 8 lakhs and depreciation will
be charged on it as follows:
Rs. 8 lakhs/ 5 years = Rs. 1.60 lakhs per year.
Under the second method, grants related to depreciable assets are treated as deferred income which is
recognised in the profit and loss statement on a systematic and rational basis over the useful life of the
asset. Such allocation to income is usually made over the periods and in the proportions in which depreciation
on related assets is charged. Rs. 2 lakhs should be recognised as deferred income and will be transferred to
profit and loss over the useful life of the asset. In this case, Rs. 40,000 [Rs. 2 lakhs / 5 years] should be
credited to profit and loss each year over the period of 5 years.

AS 16 – BORROWING COSTS

Zen Bridge Construction Limited obtained a loan of Rs64 crores to be utilized as under:
(i) Construction of Hill link road in Kedarnath Rs 50 crores
(ii) Purchase of Equipment and Machineries Rs 6 crores
(iii) Working Capital Rs 4 crores
(iv) Purchase of Vehicles Rs 1crore
(v) Advances for tools/cranes etc. Rs 1crore
(vi) Purchase of Technical Know how Rs 2 crores
(vii) Total Interest charged by the Bank for the year ending 31st Rs 1.6 crores
March, 2018
Show the treatment of Interest according to Accounting Standard by Zen Bridge Construction Limited.
SOLUTION
According to AS 16 ‘Borrowing costs’, qualifying asset is an asset that necessarily takes substantial period of time to
get ready for its intended use. As per the standard, borrowing costs that are directly attributable to the acquisition,
construction or production of a qualifying asset should be capitalized as part of the cost of that asset. Other borrowing
costs should be recognized as an expense in the period in which they are incurred. Capitalization of borrowing costs is
also not suspended when a temporary delay is a necessary part of the process of getting an asset ready for its intended
use or sale.
The treatment of interest by Zen Bridge Construction Ltd. can be shown as:
Qualifying Interest to be Interest to be
Asset capitalized Rs. in charged to Profit &
crores Loss A/c Rs. in crores
Construction of hill Yes 1.25 1.6/64 x 50
road*
Purchase of equipment No 0.15 1.6/64 x 6
and machineries
Working capital No 0.10 1.6/64 x 4
Purchase of vehicles No 0.025 1.6/64 x 1
Advance for tools, No 0.025 1.6/64 x 1
cranes etc.
Purchase of technical No 0.05 1.6/64 x 2
know-how
Total 1.25 0.35
*Note: It is assumed that construction of hill road will normally take more than a year (substantial period of time),
hence considered as qualifying asset.

QUESTION 94: (RTP Nov20 & MTP May23)
(a) Vital Limited borrowed an amount of Rs.150 crores on 1.4.2019 for construction of boiler plant @ 10% p.a. The
plant is expected to be completed in 4 years. Since the weighted average cost of capital is 13% p.a., the accountant
of Vital Ltd. capitalized Rs.19.50 crores for the accounting period ending on 31.3.2020. Due to surplus fund out of
Rs.150 crores, an income of Rs.1.50 crores were earned and credited to profit and loss account. Comment on the
above treatment of accountant with reference to relevant accounting standard.
(b) When capitalization of borrowing cost should cease as per Accounting Standard 16? Explain in brief.
SOLUTION
(a) Para 10 of AS 16 ‘Borrowing Costs’ states that to the extent the funds are borrowed specifically for the purpose of
obtaining a qualifying asset, the amount of borrowing costs eligible for Capitalisation on that asset should be
determined as the actual borrowing costs incurred on that borrowing during the period less any income on the
temporary investment of those borrowings. The Capitalisation rate should be the weighted average of the borrowing
costs applicable to the borrowings of the enterprise that are outstanding during the period, other than borrowings
made specifically for the purpose of obtaining a qualifying asset. Hence, in the above case, treatment of accountant
of Vital Ltd. is incorrect. The amount of borrowing costs capitalized for the financial year 2019-20 should be
calculated as follows:
Actual interest for 2019-20 (10% of Rs.150 crores) Rs.15.00 crores
Less: Income on temporary investment from specific (Rs.1.50 crores)
borrowings
Borrowing costs to be capitalized during year 2019-2020 Rs.13.50 crores
(b) Capitalisation of borrowing costs should cease when substantially all the activities necessary to prepare the
qualifying asset for its intended use or sale are complete. An asset is normally ready for its intended use or
sale when its physical construction or production is complete even though routine administrative work
might still continue. If minor modifications such as the decoration of a property to the user’s specification,
are all that are outstanding, this indicates that substantially all the activities are complete. When the
construction of a qualifying asset is completed in parts and a completed part is capable of being used while
construction continues for the other parts, Capitalisation of borrowing costs in relation to a part should cease
when substantially all the activities necessary to prepare that part for its intended use or sale are complete.

(a) An enterprise has constructed a complex piece of equipment (qualifying asset) that is to be installed on the
production line of a manufacturing plant. The equipment has been constructed over a period of 15 months. However,
on installation, certain calibrations are required to achieve the desired level of production before it is finally
commissioned. This process is expected to take approximately 2 months during which test runs will be made.
Should the borrowing costs attributable to borrowings pertaining to the 2 months test run period be capitalized?
(b) Should capitalization of borrowing costs be continued when the qualifying asset has been constructed but marketing
activities to sell the asset are still in progress?

SOLUTION
(a) As per AS 16 Borrowing Costs “Capitalization of borrowing costs should cease when substantially all the activities
necessary to prepare the qualifying asset for its intended use or sale are complete”. On installation of the
equipment, an evaluation has to be made to conclude whether substantially all the activities necessary to prepare
the asset are complete. After an equipment has been installed it is usually tested and adjusted for commercial
production before it is finally commissioned. The calibrations and adjustments required during this period are
performed in order to bring the equipment up to the stage at which it is ready to commence commercial production.
Until the asset reaches the stage when it is ready to support commercial levels of production, it is not appropriate
to conclude that substantially all the activities necessary to prepare the asset are complete. Thus, the borrowing
cost incurred during the normal period of test runs (after the installation) are required to be capitalized.
(b) As per provisions of AS 16, capitalization of borrowing costs should cease when substantially all the activities
necessary to prepare the qualifying asset for its intended use or sale are complete. Further, the standard also
explains that “An asset is normally ready for its intended use or sale when its physical construction or production
is complete even though routine administrative work might sill continue. If minor modifications, such as the
decoration of a property to the user’s specification, are all that are outstanding, this indicates that substantially
all the activities are complete”. The emphasis in the Standard is on “to prepare the qualifying asset for its
intended use or sale” and not the actual activity of sale. Therefore, where the physical construction of the asset
is complete, substantially all the activities necessary to prepare the qualifying asset for its intended use or sale
are complete. Therefore, in the given case, the borrowing costs pertaining to the period during which the marketing
activities to sell the asset are still in progress should not be capitalized as part of the cost of the asset.
QUESTION 96: - (Foreign Exchange Difference) (MOST IMP)

Vsmart took FC Loan of $50,000 on 1/4/22 @4% interest p.a.
Same loan Could have neem borrowed in ₹ @10.5% p.a.
Exchange Rate 1/4/22 = $1 = 81.26/- & 31/3/23 = 84.57/-
Calculate Total Borrowing Cost.
Solution:
Step 1: Calculate Borrowing Cost on FC Loan: -
$50,000 x 4% = $2,000 x 84.57 = 1,69,140
Step 2: Calculate interest on Indian Loan
Loan Amount in ₹ = $50,000 x 81.26 = 40,63,000
Interest @10.5% = 4,26,615
Step 3:
Saving Interest = 4,26,615 – 1,69,140 = 2,57,475
Step 4: Calculate Exchange Loss:
$50,000 x (84.57 – 81.26) = 1,65,500

Borrowing Cost Should be Lower of: -
(a) Saving in Interest – 2,57,475/-
(Or)
(b) Exchange Loss – 1,65,000/-
Total Borrowing Cost = 1,69,140 + 1,65,500 = 3,34,640
QUESTION 97A: (MASTER PROBLEM)

Financial Year 22 – 23
1st April SBO Loan @10% 20 lakhs
1 June
st
HDFC Loan @12% 25 lakhs
1 Dec
st
ICICI Loan @10.5% 30 lakhs
75 lakhs
Calculate Weightage Average Borrowing Rate.
SOLUTION:
Interest on SBI 20,00,000 x 10% 2,00,000
Interest on HDFC 25,00,000 x 12% x 10/12 2,50,000
Interest on ICICI 30,00,000 x 10.5% x 4/12 1,05,000
Total BC 5,55,000
Weighted Average Borrowing Rate (or) Weighted Average Capital Rate.

20,00,000x12 25,00,000x10 30,00,000x4
= (5,55,000)/ ( )+( )+ ) x 100
12 12 12
= 5,55,000 / 50,83,333 x 100
= 10.918%
QUESTION 98B: (MASTER PROBLEM)

Continuing with above Question above with following Information:
Out of above Borrowings, entity has incurred following Capital Expenditure as Qualifying Asset: -
Date Qualifying Asset Expenditure
1/4/22 Machine A 6,50,000
1 June
st
Machine B 20,00,000
1 July
st
Building A 18,00,000
1 Jan
st
Building A 21,00,000
65,50,000
How Much Borrowing Cost to be Capitalised in Qualifying Asset & How Much Transfer to Profit & Loss A/c.
SOLUTION
Weighted Average Capital Rate = 10.918% p.a.
This Rate shall be applied to the Expenditure Amount
1) Machine A: 6,50,000 x 10.918% x 12/12 = 70,967/-
2) Machine B: 20,00,000 x 10.918% x 10/12 = 1,81,967/-

3) Building A: 1/7 = 18,00,000 x 10.918% x 9/12 = 1,47,393/-
4) Building A: 1/Jan = 21,00,000 x 10.918% x 3/12 = 57,320/-
Total on Building A = 2,04,713/-
Total BC Capitalised on all Qualifying Assets = 4,57,647/-
Total BC Transfer to P&L = 5,55,000 – 4,57,647 = 97,353/-

FY 22-23 Entity is in Construction of Office Building out of general borrowings.
Date of Expenditure
1/Dec/22 = 1,00,000; 1/Jan/23 = 2,50,000; 1/Feb/23 = 2,50,000 & 1/March/23 = 2,50,000
Following are General Borrowings:
(a) 10% Debentures issued during the year = 20 lakhs
(b) One Over Draft Facility availed as under: -
5,00,000 during Dec to Feb & 7,50,000 in March
Interest on Over Draft is 15% in Dec & 16% from Jan to March
Calculate Weighted Average Capital Rate.
SOLUTION:
Working Note 1: Calculation of Total Borrowing Cost
Particular Amount
10% Debentures for Full Year (20,00,000 x 10%) 2,00,000
5,00,000 Over Draft @15% on Dec (5,00,000 x 15% x 1/12) 6,250
5,00,000 Over Draft @16% in Jan & Feb (5,00,000 x 16% x 2/12) 13,333
7,50,000 Over Draft @16% in March (7,50,000 x 16% x 1/12) 10,000
2,29,583
Working Note 2:
Total Borrowing Outstanding During the Year.
1 20,00,000 x 12/12 20,00,000
OD 5,00,000 x 3/12 1,25,000
7,50,000 x 3/12 62,500
21,87,500
Weighted Average Capital Rate = 2,29,583 / 21,87,500 x 100 = 10.495%

1/Dec/22 1,00,000 x 10.495% x 4/12 3,498
1/Jan/23 2,50,000 x 10.495% x 3/12 6,559
1/Feb/23 2,50,000 x 10.495% x 2/12 4,373
1/March/23 2,50,000 x 10.495% x 1/12 2,186
Borrowing Cost Capitalised 16,616

Entity Borrowed on 1/4/22 9%, 30 lakhs for Construction of two Qualifying assets. Construction Begins from 1/4/22.
The loan was availed on 1/4/22 & started utilizing in Qualifying Asset. Remaining funds were temporarily invested
@7% p.a.
QA 1 QA 2
Expenditure on 1/4/22 5,00,000 10,00,000
Expenditure on 1/10/22 5,00,000 10,00,000
Calculate Total Borrowing Cost & Capitalised Borrowing Cost.
SOLUTION:
Particulars QA 1 QA 2
Borrowing Cost 10,00,000 x 9% = 90,000 20,00,000 x 9% = 1,80,000
(-) Investment Income 5,00,000 x 7% x6/12 = (17,500) 10,00,000 x 7% x 6/12 = (35,000)
Net Borrowing Cost to be Capitalised 72,500 1,45,000
Total Cost of QA 10,72,500 21,45,000
(After Capitalisation)

Framework
QUESTION 101:
A Ltd. has entered into a binding agreement with Gamma Ltd. to buy a custom-made machine ₹ 1,00,000. At the
end of 20X1-X2, before delivery of the machine, A Ltd. had to change its method of production. The new method
will not require the machine ordered and it will be scrapped after delivery. The expected scrap value is nil.
You are required to advise the accounting treatment and give necessary journal entry in the year 20X1-X2.
Solution
A liability is recognised when outflow of economic resources in settlement of a present obligation can be anticipated
and the value of outflow can be reliably measured. In the given case, A Ltd. should recognise a liability of ₹ 1,00,000
to Gamma Ltd.
When flow of economic benefit to the enterprise beyond the current accounting period is considered improbable, the
expenditure incurred is recognised as an expense rather than as an asset. In the present case, flow of future economic
benefit from the machine to the enterprise is improbable. The entire amount of purchase price of the machine should
be recognised as an expense.
Journal entry
Loss on change in production method Dr. 1,00,000
To Gamma Ltd. 1,00,000
(Loss due to change in production method)
Profit and loss A/c Dr. 1,00,000
To Loss on change in production method 1,00,000
(Loss transferred to profit and loss account)

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Compiled by CA. Jai Chawla Sir

S.NO TOPIC NAME NO. OF QNS PAGE. NO.

JAI CHAWLA SIR (V’SMART ACADEMY) 1

JAI CHAWLA SIR (V’SMART ACADEMY) 2

JAI CHAWLA SIR (V’SMART ACADEMY) 3

JAI CHAWLA SIR (V’SMART ACADEMY) 4

JAI CHAWLA SIR (V’SMART ACADEMY) 5

QUESTION 03: (RTP May22)

JAI CHAWLA SIR (V’SMART ACADEMY) 6

JAI CHAWLA SIR (V’SMART ACADEMY) 7

JAI CHAWLA SIR (V’SMART ACADEMY) 8

JAI CHAWLA SIR (V’SMART ACADEMY) 9

Book Accumulated WDV Current year Current year

JAI CHAWLA SIR (V’SMART ACADEMY) 10

PARTICULARS DR. CR.

JAI CHAWLA SIR (V’SMART ACADEMY) 11

JAI CHAWLA SIR (V’SMART ACADEMY) 12

Already Fully Paid Shares 12,000 no.

3) Land Revaluation by 4,00,000

5) Depreciation of Plant & Machinery

JAI CHAWLA SIR (V’SMART ACADEMY) 13

Revised Debenture Value after Rectification entry = 4,80,000 + 20,000 = 5,00,000

Interest on Debenture (2nd Half) = 5,00,000 x 10% x 6/12 = 25,000

8) Provision for Bad Debts A/c

9) Provision for Tax

10) Cost of Material Consumed:

11) Advertisement = 16,000

JAI CHAWLA SIR (V’SMART ACADEMY) 14

13) Outstanding Expenses = 21,000

14) Interest on Investment

15) Managerial Remuneration

2 Non Current Liabilities

JAI CHAWLA SIR (V’SMART ACADEMY) 15

1 Revenue from Operation 90,00,000

JAI CHAWLA SIR (V’SMART ACADEMY) 16

*Transfer to General Reserve @20% = 3,51,902

JAI CHAWLA SIR (V’SMART ACADEMY) 18

Conditions as per Companies (Declaration of dividend out of Reserves) Rules, 20X1:

JAI CHAWLA SIR (V’SMART ACADEMY) 19

Own Debenture (Investment) Account

JAI CHAWLA SIR (V’SMART ACADEMY) 20

3. 10% Secured Bonds of Govt. (DRR Investment) A/c

JAI CHAWLA SIR (V’SMART ACADEMY) 21

5. Debenture holder’s A/c

QUESTION 09: (RTP Nov18)

JAI CHAWLA SIR (V’SMART ACADEMY) 22

JAI CHAWLA SIR (V’SMART ACADEMY) 23

(i) Calculation of number of shares to be allotted Rs

QUESTION 10: (EXAM Nov 18)

JAI CHAWLA SIR (V’SMART ACADEMY) 24

(2) Debenture Redemption Fund Account

(3) Debenture Redemption Fund Investment Account

QUESTION 11: (EXAM Nov22)

JAI CHAWLA SIR (V’SMART ACADEMY) 25

To Profit on cancellation of debentures 12,500

Debenture Redemption Reserve Account

Debenture Redemption Reserve Investment Account

JAI CHAWLA SIR (V’SMART ACADEMY) 26

JAI CHAWLA SIR (V’SMART ACADEMY) 27

QUESTION 12A: (RTP May20)