ADVANCED ACCOUNTING SHORT NOTES PROBLEMS

BANKING COMPANIES

NPA CLASSIFICATION

Asset When it is treated as NPA?

Term Loan If interest and/or installment of principal remains
overdue for a period of more than 90 days
Cash credits and The account remains out of order for a period of more
Overdrafts than 90 days
Bills purchased and If they remain overdue and unpaid for a period of
discounted more than 90 days
Agricultural advances If interest and/or installment of principal overdue for
for short duration crops two harvest seasons
Agricultural advances If interest and/or installment of principal remains
for long duration crops overdue for one crop season

Q. 1 CLASSIFICATION OF NPA
On 31st March, 2018 Maya Bank Ltd. finds that:
(1) On a term loan of Rs.2 crores, interest for the last three quarters is in arrears
beyond the due date.
(2) The amount of Rs.10 lakhs of a discounted bill were due on 31st January, 2018
but the same has not been received.
(3) On a term loan of Rs.1 crore, interest for the last one month is past due.

Which of the above advances, will be treated as non-performing assets (NPA) as on 31st
March, 2018?

INCOME RECOGNITION FOR PERFORMING AND NON-PERFORMING ASSETS

Term Meaning Income

Recognition
Performing Assets Performing assets are such assets Accrual Basis
which generates adequate income
for the bank
Non-Performing Non-Performing assets are such Cash Basis
Assets assets which ceases to generate
adequate income for the bank
[popularly called as NPA]

• Therefore, bankers follow hybrid system for income recognition

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Q. 2 Given below the interest on advances of a commercial bank (Rs. in lakhs)

Performing assets NPA

Interest Interest Interest Interest
earned received earned received
Term Loans 120 80 75 5
Cash credits and overdrafts 750 620 150 12
Bills purchased and 150 150 100 20
discounted

Find out the income to be recognised for the year ended 31st Mar, 2018.

PARTIAL RECOVERIES OF NPA

Interest partly realized in NPAs can be taken to income. If financial position of the
customer is good and will be in a position to return the money, then journal entry will be
Party’s Loan a/c Dr.
To Interest a/c

If there is any doubt regarding customer’s ability to pay, the debt becomes doubtful and
the interest accrued on doubtful debts at the end of the accounting year should not be
credited to Interest Account because it remains unrealized and would artificially inflate the
profit of the bank company. In such cases, the following entry is to be passed:

Party’s Loan a/c Dr.

To Interest Suspense a/c

If some portion of the loan is repaid by the customer, then entry will be:
Bank a/c Dr.
To Party’s Loan a/c

Interest Suspense a/c Dr.

To Interest a/c [to the extent of recovery]
To Party’s Loan a/c [unrecovered amount]
(Interest suspense transferred to interest to the
extent of collection and balance transferred to his
loan a/c)

Bad Debts a/c Dr.

To Party’s Loan a/c
(Amount irrecoverable is written off as bad debts)

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Q. 3 On 31.3.18, there is an unsecured loan of Rs.8,00,000 to Shri Pankaj in the loan ledger
of a Sona Bank Ltd. It is found on enquiry that the financial position of the borrower is bad
and doubtful. Interest on the said loan has accrued Rs.80,000 and is yet to be recorded.
During 2018-19, the bank is able to realize only 80 paise in a rupee on account of customer’s
bankruptcy. Show how the transactions would be recorded in the books of bank.

REBATE ON BILLS DISCOUNTED

• When a bank discounts a bill of exchange, full amount of discount earned is credited
to “Discount Account”
At the end of the year

All the Bills All the Bills discounted

discounted, matures do not matures

Entire discount will be Unexpired portion should be

transferred to P & L a/c transferred to “Rebate on Bills
discounted” & balance should be
transferred to p & l a/c

• Rebate on Bills discounted will be shown in liabilities side of balance sheet

• At the beginning of next period, the “Rebate on Bills Discounted” a/c is closed off by
transferring it to “Discount a/c”
1 Reversal of Rebate on bills discounted at the beginning of the year
Rebate on bills discounted a/c dr.
To Discount a/c

2 For bills purchased and discounted during the year

Bills purchased and discounted a/c dr.
To clients a/c
To Discount a/c

3 At the end of the year

A If all the bills are matured
Discount a/c dr
To P & l a/c
B If all the bills are not matured
 For expired portion
Discount a/c dr
To P & l a/c
 For unexpired portion
Discount a/c dr.
To Rebate on bills discounted

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Q. 4 On 31st Mar, 2018, Uncertain Bank Ltd. had a balance of Rs. 9 Crores in “rebate on bills
discounted” account. During the year ended 31st Mar, 2019, Uncertain Bank Ltd. discounted
Bills of exchange of Rs. 4000 crores charging interest at 18% per annum the average period
of discount being for 73 days. Of these, bills of exchange of Rs. 600 crores were due for
realisation from the acceptors/customers after 31st Mar, 2019, the average period outstanding
after 31st Mar, 2019, being 36.5 days. Uncertain Bank Ltd. asks you to pass journal entries
and show the ledger accounts pertaining to:

(a) Discounting of bills of exchange and

(b) Rebate on bills discounted.

Q. 5 The following is an extract from Trial Balance of overseas Bank Ltd. as on 31.3.2019
Rs. Rs.
Bills discounted 12,64,000
Rebate on bills discounted not due on 31st Mar 2018 22160
Discount received 105708

An analysis of the bills discounted is as follows:

Amount Due date 2019 Rate of Discount
(i) Rs. 1,40,000 June 5 14%
(ii) Rs. 4,36,000 June 12 14%
(iii) Rs. 2,82,000 June 25 14%
(iv) Rs. 4,06,000 July 6 16%

Calculate Rebate on Bills Discounted as on 31-3-2019 and show necessary journal entries.

BILLS FOR COLLECTION

The bank may accept bills receivable of customers for collection on their behalf. These bills
are recorded in a special book known as “Bills for Collection Register”. Unless these bills are
collected no entry is required. On the collection of bill, cash will be debited with the amount
received and customer’s account will be credited by the amount after deducting commission,
and commission charged will be credited to Commission account. Bills held by the bank for
collection are shown as information below the Balance Sheet as per new format.

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Q. 6 From the following information prepare “Bills for collection (Asset) a/c and Bills for
Collection (Liability) a/c.

On 1.4.18, Bills for Collection were 5100

During the 2018-19 bills received for collection amounted to 7500
Bill collected during the year 2018-19 9847
Bills dishonoured and returned during the year 2710

PROVISIONING FOR VARIOUS TYPES OF ASSETS

S.N. Category of Advances Rate (%)

1 Standard Advances
a. Direct advances to agricultural and 0.25
SME
b. Advances to Commercial Real 1.00
Estate (CRE) Sector
c. All other loans and advances not 0.40
included in (a) and (b) above

2 Sub-Standard Advances
a. Secured Exposures 15
b. Unsecured Exposures 25
c. Unsecured Exposures in respect of 20
Infrastructure loan accounts where
certain safeguards such as escrow
accounts are available

3 Doubtful Advances
a. Unsecured Portion 100
b. Secured Portion
i. Doubtful upto 1 year 25
ii. Doubtful > 1 year and upto 3 40
years
iii. Doubtful > 3 years 100

4 Loss Advances 100

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Q. 7 From the following information, find out the amount of provisions to be shown in the
Profit and Loss Account of a commercial bank.

Assets Rs. in lakhs

Standard 5000
Sub-standard 4000
Doubtful : for one year 800
For three years 600
For more than three years 200
Loss Assets 1000

DICGC/ECGC GURANTEE
• DICGC – Deposit Insurance & Credit Guarantee Corporation
• ECGC – Export Credit Guarantee Corporation
• If the advances are guaranteed by ECGC/DICGC coverage, the provision is required
to be made only for the balance in excess of amount guaranteed
• In case, the bank also holds a security in respect of an advance guaranteed by
ECGC/DICGC, the realisable value of the security should be deducted from the
outstanding balance before the ECGC/DICGC guarantee is off-set.
• In addition, 25%/40%/100% of the secured portion should be provided for, depending
upon the period for which the advance has been considered as a doubtful asset, as
follows:

Period for which the advance has been considered as doubtful % of provision on
secured portion
Upto 1 year 25
More than 1 year and upto 3 years 40
More than 3 years 100

Format for ascertaining provision:

Step: 1 Ascertaining Unsecured Portion

A Amount outstanding Xxxx
B Less: Realisable value of securities Xxxx
C Gross Unsecured portion [A – B] Xxxx
D Less: ECGC/DICGC coverage [Gross unsecured portion x prescribed Xxxx
coverage]
E Net Unsecured Portion Xxxx

Step: 2 Ascertaining Total Provision to be made:

A Provision for Unsecured Portion [@ 100% of net unsecured portion] Xxxx
B Provision for Secured portion  25%/40%/100% (depends upon the period for Xxxx
which advance has been considered as a doubtful asset)
C Total Provision to be made [A+B] Xxxx

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Q. 8 Gajana Bank Ltd. had extended the following credit lines to a Small Scale Industry,
which had not paid any interest since March 2014

Term Loan Export Credit

Balance Outstanding on 31.03.2018 Rs. 35 lakhs Rs. 30 lakhs
DICGC/ECGC cover 40% 50%
Securities held Rs. 15 lakhs Rs. 10 lakhs
Realisable value of Securities Rs. 10 lakhs Rs. 8 lakhs

Compute necessary provisions to be made for the year ended 31st Mar, 2018.

ACCEPTANCE, ENDORSEMENTS AND OTHER OBLIGATION

A bank is frequently called upon to accept or endorse a bill of exchange on behalf of its
customer. For greater security, the drawer of the bill wants acceptance of the drawee bank.
The bank incurs a liability by accepting bills on behalf of its customers. On maturity of the bill,
the bank pays and collects the amount from its customer. Generally, the bank requires the
customer to deposit the security equal to the sum of the bill accepted. The bill accepted
register is used for recording particulars of bills accepted and/or endorsed and securities
provided.

At the end of the accounting period, if there are any outstanding bills, it is shown as
“contingent liability” as per the new format. As per the new format, Acceptances,
Endorsements and other obligation are off Balance Sheet items. In the general ledger, no
account is maintained for this. The details are maintained on the memorandum basis. A
Record of the particulars of bills accepted as well as securities collected from the customer
is kept in the Bills Accepted Register. A bank may not treat this book as part of system of its
accounts. In such a case, no further record of the transactions is kept until the bill matures
for payment. If the bill, at the end of its term, has to be retired by the bank and the amount
cannot be collected from the customer on demand, the bank reimburses itself by disposing
of the security deposited by the customer.

Q. 9 From the following details prepare “Acceptance, Endorsements and other Obligation
A/c” as would appear in the general ledger. On 1.4.2018 Acceptances not yet satisfied stood
at Rs. 22,30,000. Out of which Rs. 20 lacs were subsequently paid off by clients and bank had
to honour the rest. A scrutiny of Acceptance Register revealed the following:

Client Acceptances/Guarantees Remarks

A Rs. 10,00,000 Bank honored on
10.6.18
B Rs. 12,00,000 Party paid off on 30.9.18
C Rs. 5,00,000 Party failed to pay and
bank had to honour on
30.11.18

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D Rs. 8,00,000 Not satisfied upto
31.3.19
E Rs. 5,00,000 -do-
F Rs. 2,70,000 -do-
Total Rs. 42,70,000

PREPARATION OF FINANCIAL STATEMENTS

Profit and Loss Account for the year ended 31st March
Schedule No. Amount
I Income:
Interest earned 13
Other Income 14
Total

II Expenditure:
Interest expended 15
Operating expenses 16
Provisions and Contingencies
Total

III Profit/Loss:
Net Profit/Loss (-) for the year
Profit/Loss (-) brought forward
Total

IV Appropriations:
Transfer to statutory reserves
Transfer to other reserves
Transfer to proposed dividend
Balance carried over to balance sheet
Total

Schedule 13 – Interest Earned

Interest on advances/Discount on Bills Xxxx

Income on Investments Xxxx
Interest on Balances with RBI and other inter-bank funds Xxxx

Note:
When there is opening and/or closing rebate on bills discounted, adjust the discount during
the year for the same.

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Schedule 14 – Other Income

Brokerage/Commission/Dividend/Exchange Xxxx
Profit/Loss on revaluation/sale/exchange Xxxx
transactions
Miscellaneous Xxxx

Schedule 15 – Interest Expended

Interest on deposits Xxxx

Interest on RBI and other inter-bank borrowings Xxxx

Note: It is opposite to Schedule 13

Schedule 16 – Operating Expenditure

Salary Xxxx
Rent Xxxx
Insurance Xxxx
Advertisement etc. Xxxx

Provisions and Contingencies

Provisions for bad & doubtful debts Xxxx

Provision for taxation Xxxx

Q. 10 From the following information, prepare Profit and Loss Account of Indian Bank Ltd.,
for the year ended 31.12.2018.

Rs. In (000’s)
Interest on Fixed Deposits 430
Interest on loans 650
Discount on bill discounted 415
Interest on overdrafts 210
Interest on cash credit 410
Interest on savings bank deposits 125
Salaries and allowances 140
Rent, taxes, insurance and lighting 40
Locker rent 7
Repairs to bank property 2
Commission, exchange and brokerage 24
Director’s fees and allowances 25
Provident fund contribution 12
Local committee fees and allowances 10
Audit fees 12

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Printing and Stationery 4
Loss on sale of Government Securities 5
Loss on sale of furniture 2
Postage charges 2
Depreciation 10
Advertisement 4
Legal Charges 3

Additional information:
a. Rebate on bills discounted on 31.12.2017 Rs.19,000
b. Rebate on bills discounted on 31.12.2018 Rs.26,000
c. Bad debts to be written off Rs.40,000
d. Provide for taxation Rs.50,000

Q. 11 Some of the items in the Trial Balance of Modern Bank Ltd. as on December 31,
2018 were as follows:

Loans and advances 71,50,000

Current accounts [including overdraft of Rs.15,00,000] 66,00,000
Bills discounted and purchased 19,20,000
Interest on fixed deposits 1,55,000
Interest on loans 2,25,000
Discount [subject to unexpired discounts Rs.30,000] 2,01,000
Interest on cash credits 1,05,000
Commission earned 46,500
Loss on sale of investments 34,000
Salaries and allowances 82,000
Printing and Stationery 4,500
Interest on savings bank deposits 75,000
Auditor’s Fees 5,000
Director’s Fees 2,500
Interest on Overdrafts 95,000
Provision for bad debts, January 1, 2018 42,000
Bad debts 21,000
Provision for income tax, January 1, 2018 66,000
Income tax paid for 2018 54,000

You are required to prepare the Profit and Loss Account of the bank, maintaining the
provisions for income tax at Rs.84,000 and provision for bad debts at Rs.52,000 for the year
ended December 31, 2018. All workings should form part of your answer.

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CAPITAL ADEQUACY RATIO

Capital adequacy ratio is the ratio which determines the bank's capacity to meet the time
liabilities and other risks such as credit risk, operational risk, etc. To be precise, a bank's
capital is the "cushion" for potential losses, and protects the bank's depositors and other
lenders.

Every bank should maintain a minimum capital adequacy ratio based on capital funds and
risk assets. All banks (excluding RRB’s) are required to maintain a capital adequacy ratio (or
Capital to Risk Weighted Assets Ratio) which is specified by RBI from time to time. At present
capital adequacy ratio is 9%.

Step: 1 Calculate Capital Funds

Step: 2 Calculate Risk adjusted/weighted Assets
Step: 3 Calculate Risk adjusted/Weighted Assets Ratio
Step: 4 Compare the computed ratio with 9%

Step: 1 Calculation of Capital Funds (According to BASLE COMMITTEE)

A) Tier – I Capital xxxx

B) Tier – II Capital xxxx
Capital Funds xxxx
Tier- I Capital
A) Paid up Capital Xxxx
Less: Equity Investment in subsidiaries (Xxxx)
Less: Intangible Assets (including Deferred Tax Assets) (Xxxx)
Less: Current and brought forward losses (Xxxx) Xxxx

B) Reserves and Surplus.

1. Statutory Reserves Xxxx
2. Security Premium Xxxx
3. Capital Reserve Xxxx Xxxx
(representing surplus on sale of assets)
Tier – I Capital [A + B] Xxxx

TIER – II CAPITAL

a) Undisclosed reserves and cumulative perpetual preference shares Xxxx

b) Revaluation reserves @ discount of 55% Xxxx
c) General provision and loss reserves Xxxx
d) Hybrid debt capital instruments Xxxx
e) Subordinate debts Xxxx
Tier – II Capital Xxxx

Note: The quantum of Tier II Capital is limited to a maximum of 100% of Tier I Capital. It may
be clarified that the Tier II capital of a bank can exceed its Tier I Capital; however, in such a
case, the excess will be ignored for the purpose of computing the capital adequacy ratio.

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Step: 2 Calculation of Risk Adjusted Assets

Funded Risk Assets I.e. Balance Sheet items Xxxx

Non-funded Risk Assets i.e. Off-Balance Sheet items Xxxx
Risk Adjusted Assets Xxxx

A) Funded Risk Assets

Particulars Book Risk Adjusted
Value Weight Value
I) Balances
Cash and Balance with RBI 0
Balance in current account with other banks 20%
Claims on Bank 20%

II) Investments
Government and other approved securities 0
Others (net of depreciation provided) 100%

III) Loans and Advances

Guaranteed by Government of India/State 0
Government
Granted to public sector undertaking of Government 100%
of India/state government
Others 100%

IV) Other Assets (premises, furniture etc.) 100%

Non Funded Risk Assets = Face Value of “Off Balance Sheet Items” x Credit
Conversion Factor x Risk weights

B) Non-Funded Risk Asset

Particulars Book Credit Equivalent Risk Risk
Value Conversion Value Weight Adjusted
Factor Value
Acceptances, Endorsement and
Letters of Credit guaranteed by
a. Central/State government 100% 0
b. Other banks 100% 20%
c. Others 100% 100%
Guarantee and other obligations 100% 100%

Step: 3
Capital Adequacy Ratio= [CAPITAL FUNDS/RISK WEIGHTED ASSETS] X 100

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Q. 12 A commercial bank has the following capital funds and assets. Segregate the capital
funds into Tier I and Tier II capitals. Find out the risk-adjusted asset and risk weighted
assets ratio -.
Capital Funds: Rs. In Lakhs
Equity Share Capital 4,80,00
Statutory Reserve 2,80,00
Capital Reserve (Rs. 280 lakhs were due to revaluation of assets & sale) 12,10
Assets:
Cash Balance with RBI 4,80
Balances with other Bank 12,50
Certificate of Deposits with other 28,50
Commercial Banks
Other Investments 782,50
Loans and Advances:
(i) Guaranteed by government 128,20
(ii) Guaranteed by public sector undertakings of Government of India 702,10
(iii) Others 52,02,50
Premises, furniture and fixtures 182,00
Other Assets 201,20
Off-Balance Sheet Items:
Acceptances, endorsements and letters of credit 37,02,50

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