CA Inter Acc Book Vol-2

Redemption of Debentures 8
Question 1
On January 1, Rama Ltd. (listed company), had 500 Debentures of ` 100 each outstanding in its books
carrying interest at 6% per annum. In accordance with the regulatory requirements, the directors of the
company acquired debentures from the open market for immediate cancellation as follows:
March 1 ` 5,000 at face value ` 98.00 (cum interest)
Aug. 1 ` 10,000 at face value ` 100.25 (cum interest)
Dec. 15 ` 2,500 at face value ` 98.50 (ex-interest) Debenture interest is payable half-yearly, on 30th
June and 31st Dec.
Show ledger accounts of Debentures and Debenture interest for the full year by splitting into first and second
half years, ignoring income-tax.
(Study Material)
Answer
6% Debentures Account
1st Half Year
` ` `
Mar. 1 To Bank-Debentures Jan. 1 By Balance b/d 50,000
Purchased [(5,000 x 4,850
98 100) – 50]
To Profit & Loss on
cancellation of
debenture A/c 150 5,000
(5,000 – 4,850)
June 30 To Balance c/d 45,000
________ ____
50,000 50,000
Debenture Interest Account
` `
Mar. 1 To Bank-Interest for 2 months June 30 By Profit & Loss A/c 1,400
on ` 5,000 Debentures @ 6% 50
June 30 To Debenture-holders (Interest) 1,350
A/c (45,000 x 6% x 6/12)
1,400 1,400
2nd Half Year
` `
Aug. 1 To Bank-Debenture July 1 By Balance b/d 45,000
Purchased [(10,000 x 9,975
100.25/ 100) – 50]
To P & L A/c on
Cancellation of debentures 25
(10,000 – 9,975)
8.1
Chap. 8  Redemption of Debentures
` `
Dec. 15 To Bank-Deb. 2,462.50
(2,500 x 98.50/ 100)
Purchased
To Profit & Loss
on Cancellation
of Debentures (2,500 – 2,462.50) 37.50
Dec. 31 To Balance c/d 32,500
45,000 45,000
` `
Aug. 1 To Bank - Interest for one month Dec. By P & L 1,093.75
on ` 10,000 @ 6% 50.00 Account
Dec. 15 To Bank (2,500 x 6% x 5.5/ 12) 68.75
Dec. 31 To Debenture holders (32,500 x 975.00
6% x 6/12)
1,093.75 1,093.75
Notes:
(i) Profit or loss on redemption of debenture arises only on sale or cancellation. Adjustments related to own
purchases that have been made in the debentures account directly since the cancellation also happened
on the same day. If debentures are straightway cancelled on purchase, the profit or loss on redemption of
debentures will be ascertained by comparing (i) the nominal value of debentures cancelled, and (ii) the
price paid less interest to the date of purchase (if the transaction is cum-interest).
(ii) Alternatively, Own Debentures Account can be debited on own purchase and the same can be knocked
off against Debentures Account on cancellation i.e. Own Debentures Account will be credited and
Debenture Account debited on cancellation. The difference between the nominal value of the debentures
cancelled and the amount standing to the debit on Own Debentures Account will be profit or loss on
redemption of debentures.
(iii) In case the transaction is ex-interest, the interest to the date of transaction will be paid in addition to the
settled price and hence profit on redemption will be nominal value minus the settled price.
(iv) As per Rule 18 (7) of the Companies (Share Capital and Debentures) Amendment Rules, 2019, in
respect of debentures issued, the company would be required to deposit or invest (referred to as
Debenture Redemption Reserve Investment or DRRI), as the case may be, on or before the 30th day of
April in each year, a sum which should not be less than 15% of the amount of its debentures maturing
during the year ending on the 31st day of March of next year. In the given question, DRRI account is not
required and hence no such adjustment has been given.
Question 2
The following balances appeared in the books of a company (unlisted company other than AIFI, Banking
company, NBFC and HFC) as on December 31, 20X1: 6% Mortgage 10,000 debentures of ` 100 each;
Debenture Redemption Reserve (for redemption of debentures) `50,000; Investments in deposits with a
scheduled bank, free from any charge or lien ` 1,50,000 at interest 4% p.a. receivable on 31st December
every year. Bank balance with the company is ` 9,00,000.
The Interest on debentures had been paid up to December 31, 20X1.
On February 28, 20X2, the investments were realised at par and the debentures were paid off at 101,
together with accrued interest.
Write up the concerned ledger accounts (excluding bank transactions). Ignore taxation.
(Study Material)
8.2
Answer
6% Mortgage Debentures Account
20X2 ` 20X2 `
Feb. 28 To Debenture- holders 10,00,000 Jan. 1 By Balance b/d 10,00,000
A/c
Premium on Redemption of Debentures Account
20X2 ` 20X2 `
Feb. 28 To Debenture-holders 10,000 Feb. 28 By Profit and loss A/c 10,000
A/c
Debentures Redemption Reserve Investment Account
20X2 ` 20X2 `
Jan. 1 To Balance b/d 1,50,000 Feb. 28 By Bank 1,50,000
20X2 ` 20X2 `
Feb. 28 To Bank (10,000 x 100 x 10,000 Feb. 28 By Profit & Loss A/c 10,000
6% x 2/12)
Bank A/c
20X2 ` 20X2 `
Jan 01 To Balance b/d 9,00,000 Feb. 28 By Debenture- holders 10,10,000
Feb 28 To Interest on Debentures 1,000 (10,000 x 101)
Redemption
Investments
(1,50,000 x 4% x2/12)
To Debentures Redemption By Deb. Interest A/c 10,000

Reserve investment A/c 1,50,000 By Balance c/d 31,000
_______ _______
10,51,000 10,51,000
Debenture Redemption Reserve Account
20X2 ` 20X2 `
Feb 28 Jan.1 By Balance b/d 50,000
To General Reserve-note 1,00,000 Jan.1 By Profit & Loss (b/f) 50,000
1,00,000 1,00,000
Note
Amount to be transferred to DRR before the redemption = ` 1,00,000 [i.e. 10% of (10,000 X 100)].
Question 3
Sencom Limited (listed company) issued ` 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 31 December 20X0,
investments made for the purpose of redemption were ` 22,500.
1st March 20X2 - ` 25,000 nominal value purchased for ` 24,725 ex-interest.
1st September 20X2 - ` 20,000 nominal value purchased for ` 20,125 cum-interest. You are required to draw
up the following accounts up to the date of cancellation:
8.3
(i) Debentures Account; and
(ii) Own Debenture (Investment) Account. Ignore taxation.
(Study Material)
Answer
Sencom Limited Debenture Account
20X2 ` 20X2 `
Mar 1 To Own Debentures 24,725 Jan 1 By Balance b/d 1,50,000
Mar 1 To Profit on cancellation (25,000-24,725) 275
Sep 1 To Own Debentures (Note 3) 19,708
Sep 1 To Profit on cancellation (20,000-19,708) 292
Dec 31 Balance c/d 1,05,000
1,50,000 1,50,000
Own Debenture (Investment) Account
Nominal Interest Cost Nominal Interest Cost
Cost Cost
` ` ` ` ` `
20X2 20X2
Mar 1 To Bank 25,000 521 24,725 Mar 1 By Debentures 25,000 - 24,725
(W.N. 1) A/c
Sep 1 To Bank 20,000 417 19,708 Sep 1 By Debentures 20,000 - 19,708
(W.N. 2 A/c
& 3) 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 4
The following balances appeared in the books of Paradise Ltd (unlisted company other than AIFI, Banking
company, NBFC and HFC) as on 1-4-20X1:
(i) 12 % Debentures ` 7,50,000
(ii) Balance of DRR ` 25,000
(iii) DRR Investment 1,12,500 represented by 10% 1,125 Secured Bonds of the Government of India of ` 100
each.
Annual contribution to the DRR was made on 31st March every year. On 31-3-20X2, balance at bank was
`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.
(Study Material)
8.4
Answer
1. 12% Debentures Account
Date Particulars ` Date Particulars `
31st March, To Debenture holders A/c 7,50,000 1st April, 20X1 By Balance b/d 7,50,000
20X2
7,50,000 7,50,000
2. DRR Account
1st April, 20X1 By Balance b/d 25,000
31st March, To General reserve A/c 75,000 1st April, 20X1 By Profit and loss A/c 50,000
20X2 (Refer Note 1) (Refer Note 1)
75,000 75,000
3. 10% Secured Bonds of Govt. (DRR Investment) A/c
` `
1st April, 20X1 To Balance b/d 1,12,500 31st March, 20X2 By Bank A/c 1,12,500
1,12,500 1,12,500
4. Bank A/c
` `
31st To Balance b/d 7,50,000 31st By Debenture 8,25,000
March, To Interest on DRR Investment 11,250 March, holders A/c
20X2 (1,12,500 X 10%) 20X2
To DRR Investment A/c 1,12,500 By Balance c/d 48,750
8,73,750 8,73,750
5. Debenture holders A/c
` `
31st To Bank A/c 8,25,000 31st By 12% Debentures 7,50,000
March, March, By Premium on redemption
20X2 20X2 of debentures 75,000
(7,50,000 X 10%)
8,25,000 8,25,000
Note 1 –
Calculation of DRR before redemption = 10% of ` 7,50,000 = 75,000
Available balance = ` 25,000
DRR required = 75,000 – 25,000 = ` 50,000.
Question 5
The Balance Sheet of BEE Co. Ltd. (unlisted company other than AIFI, Banking company, NBFC and HFC)
as at 31st March, 20X1 is as under:
Particulars Note No `
I. Equity and liabilities
(1) Shareholder's Funds
(a) Share Capital 1 2,00,000
(b) Reserves and Surplus 2 1,20,000
(2) Non-current liabilities
(a) Long term borrowings 3 1,20,000
8.5
(3) Current Liabilities
(a) Trade payables 1,15,000
Total 5,55,000
II. Assets
(1) Non-current assets
(a) Property, Plant and Equipment 4 1,15,000
(2) Current assets
(a) Inventories 1,35,000
(b) Trade receivables 75,000
(c) Cash and bank balances 5 2,30,000
Total 5,55,000
Notes to Accounts
`
1. Share Capital
Authorised share capital
30,000 shares of ` 10 each fully paid 3,00,000
Issued and subscribed share capital
20,000 shares of ` 10 each fully paid 2,00,000
2. Reserve and Surplus
Profit & Loss Account 1,20,000
3. Long term borrowings
12% Debentures 1,20,000
4. Property, Plant and Equipment
Freehold property 1,15,000
5. Cash and bank balances
Cash at bank 2,00,000
Cash in hand 30,000 2,30,000
At the Annual General Meeting, it was resolved:
(a) To give existing shareholders the option to purchase one ` 10 share at ` 15 for every four shares (held
prior to the bonus distribution). This option was taken up by all the shareholders.
(b) To issue one bonus share for every five shares held.
(c) To repay the debentures at a premium of 3%.
Give the necessary journal entries and the company’s Balance Sheet after these transactions are completed.
(Study Material) (RTP May 2022)
Answer
Journal of BEE Co. Ltd.
Dr. Cr.
` `
Bank A/c Dr. 75,000
To Equity Shareholders A/c 75,000
(Application money received on 5,000 shares @ ` 15 per share to be
issued as rights shares in the ratio of 1:4)
8.6
Dr. Cr.
` `
Equity Shareholders A/c Dr. 75,000
To Equity Share Capital A/c 50,000
To Securities Premium A/c 25,000
(Share application money on 5,000 shares @ ` 10 per share transferred
to Share Capital Account, and ` 5 per share to Securities Premium
Account vide Board’s Resolution dated…)
Securities Premium A/c Dr. 25,000
Profit & Loss A/c Dr. 25,000
To Bonus to Shareholders A/c 50,000
(Amount transferred for issue of bonus shares to existing shareholders
in the ratio of 1:5 vide General Body’s resolution dated...)
Bonus to Shareholders A/c Dr. 50,000
To Equity Share Capital A/c 50,000
(Issue of bonus shares in the ratio of 1 for 5 vide Board’s resolution
dated….)
Profit and Loss A/c Dr. 12,000
To Debenture Redemption Reserve (for DRR created 10% x 12,000
1,20,000)
Debenture Redemption Reserve Investment A/c To Bank A/c (for DRR Dr. 18,000
Investment created 15% x 1,20,000) 18,000
12% Debentures A/c Dr. 1,20,000
Premium Payable on Redemption A/c @ 3% Dr. 3,600
To Debenture holders A/c 1,23,600
(Amount payable to debentures holders)
Profit and loss A/c Dr. 3,600
To Premium Payable on Redemption A/c 3,600
(Premium payable on redemption of debentures charged to Profit &
Loss A/c)
Debenture Redemption Reserve A/c To General Reserve Dr. 12,000
(for DRR transferred to general reserve) 12,000
Bank A/c Dr. 18,000
To Debenture Redemption Reserve Investment (for DRR 18,000
Investment realised)
Debenture holders A/c Dr. 1,23,600
To Bank A/c 1,23,600
(Amount paid to debenture holders on redemption)
Balance Sheet of BEE Co. Ltd. as at……………(after completion of transactions)
(b) Reserves and Surplus 2 91,400
8.7
(a) Trade payables 1,15,000
Total 5,06,400
II. Assets
(a) Property, Plant and Equipment 3 1,15,000
(2) Current assets
(a) Inventories 1,35,000
(b) Trade receivables 75,000
(c) Cash and bank balances 4 1,81,400
Total 5,06,400
Notes to Accounts
`
1. Share Capital
30,000 shares of ` 10 each fully paid (5,000 shares of ` 10 each, fully 3,00,000
paid issued as bonus shares out of securities premium and P&L
Account)
Profit & Loss Account 1,20,000
Less: Premium on redemption of debenture (3,600)
Less: Utilisation for issue of bonus shares (25,000)

Less: DRR created (12,000)
79,400
General Reserve 12,000 91,400
3. Property, Plant and Equipment
Freehold property 1,15,000
4. Cash and bank balances
Cash at bank (2,00,000 + 75,000 – 1,23,600- 1,51,400
18000+18000)
1,81,400
Cash in hand 30,000
Question 6
The Balance Sheet of Convertible Limited (unlisted company other than AIFI, Banking company, NBFC and
HFC), as at 31st March, 20X1, stood as follows:
(b) Reserves and Surplus 2 1,10,00,000
(2) Non-current liabilities
(a) Long term borrowings 3 1,65,00,000
(a) Other current liabilities 1,25,00,000
Total 4,50,00,000
8.8
II. Assets
(a) Property, Plant and Equipment 1,60,00,000
(b) Non-current investment 4 15,00,000
(2) Current assets
(a) Cash and cash equivalents 75,00,000
(b) Other current assets 2,00,00,000
Total 4,50,00,000
Notes to Accounts
`
1. Share Capital
5,00,000 shares of ` 10 each fully paid 50,00,000
General Reserve
90,00,000
Profit & Loss Account
10,00,000
Debenture redemption reserve 10,00,000 1,10,00,000
3. Long term borrowings
13.5% convertible Debentures (1,00,000 debentures of ` 100 1,00,00,000
each)
Other loans 65,00,000
1,65,00,000
4. Non-current investments
Debenture redemption reserve 15,00,000
The debentures are due for redemption on 1st April, 20X1. The terms of issue of debentures provided that
they were redeemable at a premium of 5% and also conferred option to the debenture holders to convert 20%
of their holdings into equity shares at a predetermined price of ` 15.75 per share and the payment in cash.
Assuming that:
(i) except for 100 debenture holders holding totally 25,000 debentures, the rest of them exercised the option
for maximum conversion.
(ii) the investments were realised at par on sale; and
(iii) all the transactions are put through, without any lag, on 1st July, 20X1.
Redraft the balance sheet of the company as on 1st July, 20X1 after giving effect to the redemption. Show
your calculations in respect of the number of equity shares to be allotted and the necessary cash payment.
(Study Material)
Answer
Convertible Limited Balance Sheet as at July 1, 20X1
Particulars Note No Figures as at the end of
current reporting period
I. Equity and Liabilities `
1
(a) Share Capital 60,00,000
(b) Reserves and Surplus 2 1,10,75,000
(2) Non-Current Liabilities
(a) Long-term borrowings- Unsecured Loans 65,00,000
8.9
Particulars Note No Figures as at the end of

current reporting period
(a) Other liabilities 1,25,00,000
Total 3,60,75,000
II. Assets
(a) Property, Plant & Equipment 1,60,00,000
(2) Current assets
(a) Cash and bank balances (Refer WN (iii)) 75,000
(b) Other current assets 2,00,00,000
Total 3,60,75,000
Notes to Accounts
`
1. Share Capital
6,00,000 Equity Shares (5,00,000 + 1,00,000) of ` 10 each 60,00,000
(Refer WN (i))
2. Reserves and Surplus
General Reserve 90,00,000
Profit & Loss 10,00,000
Add: Debenture Redemption Reserve transfer 10,00,000
110,00,000
Less: Premium on redemption of debentures (1,00,000 (5,00,000) 1,05,00,000
debentures x ` 5 per debenture)
Securities Premium
(1,00,000 shares x 5.75) (Refer WN (i)) 5,75,000
1,10,75,000
Working Notes:
(i) Calculation of number of shares to be allotted:
Total number of debentures 1,00,000
Less: Number of debentures for which debenture holders
did not opt for conversion (25,000)
75,000
20% of 75,000 15,000
Redemption value of 15,000 debentures (15,000 x 105) ` 15,75,000
Number of Equity Shares to be allotted:
15,75,000
= = 1,00,000 shares of ` 10 each.
15.75
(ii) Calculation of cash to be paid: `
Total number of debentures 1,00,000
Less: number of debentures to be converted into equity shares (15,000)
Balance 85,000
Redemption value of 85,000 debentures (85,000 × ` 105) ` 89,25,000
8.10
(iii) Cash and Bank Balance:
Balance before redemption 75,00,000
Add: Proceeds of investments sold 15,00,000
90,00,000
Less: Cash paid to debenture holders (89,25,000)
75,000
Theoretical Questions
Question 7
What is meant by redemption of debentures? Explain.
(Study Material)
Answer
Debentures are usually redeemable i.e. either redeemed in cash or convertible after a time period.
Redeemable debentures may be redeemed:
 after a fixed number of years; or
 any time after a certain number of years has elapsed since their issue; or
 on giving a specified notice; or
 by annual drawing.
For details, refer para 2 of the chapter.
Question 8
Write short note on Debenture Redemption Reserve.
(Study Material)
Answer
A company issuing debentures may be required to create a debenture redemption reserve account out of the
profits available for distribution of dividend and amounts credited to such account cannot be utilised by the
company except for redemption of debentures. Such an arrangement would ensure that the company will
have sufficient liquid funds for the redemption of debentures at the time they fall due for payment.
Practical Questions
Question 9
A company had issued 20,000, 13% debentures of ` 100 each on 1st April, 20X1. The debentures are due for
redemption on 1st July, 20X2. The terms of issue of debentures provided that they were redeemable at a
premium of 5% and also conferred option to the debenture holders to convert 20% of their holding into equity
shares (Nominal value ` 10) at a price of ` 15 per share. Debenture holders holding 2,500 debentures did not
exercise the option. Calculate the number of equity shares to be allotted to the debenture holders exercising
the option to the maximum.
(Study Material)
Answer
Calculation of number of equity shares to be allotted
Number of debentures
Total number of debentures 20,000
Less: Debenture holders not opted for conversion (2,500)
Debenture holders opted for conversion 17,500
Option for conversion 20%
Number of debentures to be converted (20% of 17,500) 3,500
8.11
Redemption value of 3,500 debentures at a premium of 5% [3,500 x (100+5)] ` 3,67,500
Equity shares of ` 10 each issued on conversion
[` 3,67,500/ ` 15] 24,500 shares
Question 10
Libra Limited (a listed company) recently made a public issue in respect of which the following information is
available:
(a) No. of partly convertible debentures issued- 2,00,000; face value and issue price- ` 100 per debenture.
(b) Convertible portion per debenture- 60%, date of conversion- on expiry of 6 months from the date of
closing of issue.
(c) Date of closure of subscription lists- 1.5.20X1, date of allotment- 1.6.20X1, rate of interest on debenture-
15% payable from the date of allotment, value of equity share for the purpose of conversion- ` 60 (Face
Value ` 10).
(d) Underwriting Commission- 2%.
(e) No. of debentures applied for- 1,50,000.
(f) Interest payable on debentures half-yearly on 30th September and 31st March.
Write relevant journal entries for all transactions arising out of the above during the year ended 31st March,
20X2 (including cash and bank entries).
(Study Material) (MTP April, 2022) (10 Marks)
Answer
Journal Entries in the books of Libra Ltd.
Journal Entries
Date Particulars Amount Dr. Amount Cr.
` `
1.5.20X1 Bank A/c Dr. 1,50,00,000
To Debenture Application A/c 1,50,00,000
(Application money received on 1,50,000
debentures @ ` 100 each)
1.6.20X1 Debenture Application A/c Dr. 1,50,00,000
Underwriters A/c Dr. 50,00,000
To 15% Debentures A/c 2,00,00,000
(Allotment of 1,50,000 debentures to applicants
and 50,000 debentures to underwriters)
Underwriting Commission Dr. 4,00,000
To Underwriters A/c 4,00,000
(Commission payable to underwriters @ 2% on `
2,00,00,000)
Bank A/c Dr. 46,00,000
(Amount received from underwriters in settlement
of account)
01.06.20X1 Debenture Redemption Investment A/c Dr. 12,00,000
To Bank A/c
(200,000 X 100 x 15% X 40%) 12,00,000
(Being Investments made for redemption
purpose)
8.12

30.9.20X1 Debenture Interest A/c Dr. 10,00,000
To Bank A/c 10,00,000
(Interest paid on debentures for 4 months @ 15%
on ` 2,00,00,000)
31.10.20X1 15% Debentures A/c Dr. 1,20,00,000
To Equity Share Capital A/c 20,00,000
To Securities Premium A/c 1,00,00,0000
(Conversion of 60% of debentures into shares of `
60 each with a face value of ` 10)
(Interest paid on debentures for the half year)
(Refer working note below)
Working Note:
Calculation of Debenture Interest for the half year ended 31st March, 20X2
On ` 80,00,000 for 6 months @ 15% = `6,00,000
On ` 1,20,00,000 for 1 months @ 15% = ` 1,50,000
`7,50,000
Question 11
On 1st April, 20X1, in MK Ltd.’s (unlisted company other than AIFI, Banking company, NBFC and HFC)
ledger, 9% debentures appeared with an opening balance of ` 50,00,000 divided into 50,000 fully paid
debentures of ` 100 each issued at par.
Interest on debentures was paid half-yearly on 30th of September and 31st March every year.
On 31.5.20X1, the company purchased 8,000 debentures of its own @ ` 98 (ex-interest) per debenture. On
same day, it cancelled the debentures acquired.
You are required to prepare necessary ledger accounts (excluding Bank A/c).
(Study Material)
Answer
MK Ltd.’s Ledger
(i) Debentures Account
` `
31.5.X1 To Own Debentures (8,000 X 98) 7,84,000 1.4.X1 By balance b/d 50,00,000
31.5.X1 To Profit on cancellation 16,000
31.3.X2 To balance c/d 42,00,000
50,00,000 50,00,000
(ii) Interest on Debentures Account
` `
31.5.X1 To Bank (Interest for 12,000 31.3.X2 By Profit 3,90,000
2 months on 8,000 and Loss
debentures) A/c (b.f.)
(Refer Working Note)
30.9.X1 To Bank (Interest for 6 1,89,000
months on 42,000
debentures)
(Refer Working Note)
8.13
` `
31.3.X2 To Bank (Interest for
6 months on 42,000 1,89,000
debentures)
3,90,000 3,90,000
(iii) Debentures Redemption Reserve A/c
Date Particulars Amount Date Particulars Amount
31 By General Reserve 80,000 1st April To Profit & Loss A/c 5,00,000
May 20X1 (8,000 x 100 x 10%) 20x1 (50,000 X 100 X 10%)
31 March By Balance c/d 4,20,000
20X2
5,00,000 5,00,000
(iv) Debentures Redemption Reserve Investments A/c
1 April 20x1 To Bank A/c 7,50,000 30th May 20X1 By Bank A/c (8,000 x 100 x 15%) 1,20,000
31st March 20X2 To Balance b/d 6,30,000
7,50,000 7,50,000
Working Note:
`
31.5. X1 Acquired 8,000 Debentures @ 98 per debenture (ex-interest)
Purchase price of debenture (8,000 × ` 98) = 7,84,000
31.5.X1 Interest for 2 months [` 8,00,000 × 9% × 2/12] = 12,000
30.9. X1 Interest on other debentures
` 42,00,000 × 9% × ½ = 1,89,000
Question 12
YZ Ltd (an unlisted company other than AIFI, Banking company, NBFC and HFC) had 16,000, 12%
debentures of ` 100 each outstanding as on 1st April, 20X1, redeemable on 31st March, 20X2.
On 1 April 20X1, the following balances appeared in the books of accounts- Investment in 2,000 9% secured
Govt. bonds of ` 100 each. DRR is ` 1,00,000. Interest on investments is received yearly at the end of
financial year. 2,000 own debentures were purchased on 31st March 20X2 at an average price of ` 99 and
cancelled on the same date.
On 30 March 20X2, the investments were realised at par and the debentures were redeemed on 31st March,
20X2. You are required to write up the following accounts for the year ended 31st March 20X2:
(2) 12% Debentures Account
(3) Debenture Redemption Reserve Account
(4) Debenture Redemption Investments Account.
(Study Material)
Answer
31st March, 20X2 To Own Debentures A/c 1,98,000 1st April, 20X1 By Balance b/d 16,00,000
31st March, 20X2 To Profit on cancellation 2,000
31st March, 20X2 To Bank A/c 14,00,000
16,00,000 16,00,000
8.14
31st March, To General Reserve 1,60,000 1st April, By Balance b/d 1,00,000
20X2 A/c 20X1
1st April, By Profit and loss A/c 60,000
20X1 [(16,00,000 X 10%) –
1,00,000]
1,60,000 1,60,000
Debenture Redemption Investments A/c
1st April To Balance b/d 2,00,000 30th By Bank A/c 30,000
20X1 March (2,000 x 100 x 15%)
20X2 (Refer Working Note 2)
1st April To Bank A/c 40,000 30th By Bank A/c (Refer Working
20X1 (Refer Working Note 1) March Note 3)
20X2 2,10,000
2,40,000 2,40,000
Working Note 1:
Additional investment in Debenture Redemption Investment A/c on 1 April 20X1
The company would be required to invest an amount equivalent to 15% of the value of the debentures in
specified investments which would be equivalent to:
= Total No of debentures X Face value per debenture X 15%
= 16,000 X 100 X 15%
= ` 2,40,000/-
The company has already invested in specified investments i.e. 9% Govt bonds for an amount of ` 2,00,000
as per the information given in the question.
The balance amount of ` 40,000 (i.e. ` 2,40,000 less ` 2,00,000) would be invested by the company on 1
April 20X1.
Working Note 2:
Redemption of Debenture Redemption Investments on 30 March 20X2 amounting to ` 30,000
Since the company purchased 2,000 own debentures on 31 March 20X2, the company would also realize the
investments of 15% corresponding to these debentures for which computation is as follows:
= No of own debentures to be bought X Face value per debenture X 15%
= 2,000 X 100 X 15%
= ` 30,000/-
Working Note 3:
Redemption of Debenture Redemption Investments on 30 March 20X2 amounting to ` 2,10,000
The remaining debentures i.e. total debentures less own debentures would be redeemed on 31 March 20X2
and hence the company would also realize the balance investments of 15% corresponding to these
debentures for which computation is as follows:
= (Total no of debentures - No of own debentures) X Face value per debenture X 15%
= (16,000 - 2,000) X 100 X 15%
= ` 2,10,000/-
8.15
Test Your Knowledge

MCQ
1. Which of the following statements is true?
(a) A debenture holder is an owner of the company.
(b) A debenture holder can get his money back only on the liquidation of the company.
(c) A debenture issued at a discount can be redeemed at a premium.
Answer: (c)
2. Which of the following statements is false?
(a) Debentures can be redeemed by payment in lump sum at the end of a specified period.
(b) Debentures cannot be redeemed during the life time of the company.
(c) Debentures can be redeemed by payments in annual instalments.
Answer: (b)
3. For debentures issued by unlisted companies (other than AIFIs, Banking companies, NBFCs and HFCs),
Debentures Redemption reserve will be considered adequate if it is:
(a) 25% of the value of debentures issued through public issue.
(b) 10% of the value of debentures issued through public issue.
(c) 0% of the value of debentures issued through public issue.
Answer: (b)
4. At the time of cancellation of own debentures, the account credited will be
(a) Debentures account.
(b) Own debentures account.
(c) Bank account.
Answer: (b)
5. A company has issued 6% debentures for ` 10,00,000, interest being payable on 31st March and 30th
September. The company purchases ` 10,000 debentures at ` 96 (ex-interest) on 1st August 20X1.
These debentures were cancelled on same date. The amount of Profit/loss on cancellation of debentures
will be
(a) Profit of ` 600.
(b) Profit of ` 400.
(c) Loss of ` 400
Answer: (b)
8.16
Chap. 8  Redemption of Debentures
QUESTION BANK
Question 13
Gurudev Limited purchases for immediate cancellation 6,000 of its own 12% debentures of `100 each on 1st
November, 2017. The dates of interest being 31st March, and 30th September. Pass necessary journal
entries relating to the cancellation if:
(i) Debentures are purchased at ` 98 ex-interest.
(ii) Debentures are purchased at ` 98 cum-interest.
(May 2018) (4 Marks)
Answer:
In the books of Gurudev Ltd.
Journal Entries
(i) In case of ex-interest
Date Particulars ` `
1.11.2017 Own Debentures A/c Dr. 5,88,000
Debentures Interest A/c Dr. 6,000
[6,000 x 100 x 12% x (1/12)]
(Purchase of 6,000 Debentures @ 98 ex interest
for immediate cancellation)
1.11.17 12% Debentures A/c Dr. 6,00,000
To Own Debentures A/c 5,88,000
To Profit & Loss on Cancellation A/c 12,000
(Profit on cancellation of debentures)
(Being profit on cancellation of 6,000 Debentures
transferred to capital reserve account)
(ii) In case of cum interest
1.11.17 Own Debenture A/c Dr. 5,82,000
Debenture Interest Account A/c Dr. 6,000
[6,000 × 100 × 12% × (1/12)]
(Being 6,000 debentures purchased @ ` 98 cum
interest for immediate cancellation)
1.11.17 12% Debenture A/c Dr. 6,00,000
To Own Debentures A/c 5,82,000
To Profit & Loss on Cancellation A/c 18,000
(Profit on cancellation of debentures) (Being profit
on cancellation of 6,000 Debentures transferred to
capital reserve account)
8.17
Question 14
The summarized Balance Sheet of Spices Ltd. as on 31st March, 2018 read as under:
`
Liabilities:
Share Capital: 9,000 equity shares of ` 10 each, fully paid up 90,000
General Reserve 38,000
Debenture Redemption Reserve 35,000
12% Convertible Debentures : 1,200 Debentures of ` 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
The debentures are due for redemption on 1st 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 ` 11 per share and the balance payment in
cash.
Assuming that:
(i) Except for debentureholders holding 200 debentures in aggregate, rest of them exercised the option
for maximum conversion,
(ii) The investments realized ` 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.
(RTP November 2018)
Answer:
Spices Ltd.
Balance Sheet as on 01.04.2018
Particulars Note No. Figures as at the
end of current
reporting period
I. Equity and Liabilities
(b) Reserves and Surplus 2 91,000
(2) Non-Current Liabilities
(a) Long-term borrowings - Unsecured Loans 28,000
8.18
Particulars Note No. Figures as at the
end of current
reporting period
(a) Short-term borrowings 19,000
Total 2,48,000
II. 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
`
1. Share Capital
11,000 Equity Shares of ` 10 each 1,10,000
(Out of above, 2000 shares issued to debentures holders who opted
for conversion into shares)
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 × ` 5) (6,000) 89,000
Securities Premium Account (2,000 × ` 1) 2,000
91,000
Working Notes:
[i) Calculation of number of shares to be allotted
Less: Number of debentures not opting for conversion (200)
1,000
40% of 1,000 400
Redemption value of 400 debentures (400 x ` 55) ` 22,000
Number of Equity Shares to be allotted 22,000/11 =2,000 shares of ` 10 each.
(ii) Calculation of cash to be paid `
Number of debentures 1,200
Less: Number of debentures to be converted into equity shares (400)
800
Redemption value of 800 debentures (800 × ` 55) ` 44,000
8.19
(iii) Cash and Bank Balance `
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 15
A Company had issued 20,000, 13% Convertible debentures of ` 100 each on 1st April, 20X1. The
debentures are due for redemption on 1st July, 20X2. The terms of issue of debentures provided that they
were redeemable at a premium of 5% and also conferred option to the debenture holders to convert 20% of
their holding into equity shares (Nominal value ` 10) at a price of ` 15 per share. Debenture holders holding
2,500 debentures did not exercise the option.
Calculate the number of equity shares to be allotted to the Debenture holders exercising the option to the
maximum.
(MTP April, 2018) (5 Marks)
Answer:
Number of
debentures
Redemption value of 3,500 debentures at a premium of 5%
[3,500 x (100 + 5)] ` 3,67,500
[` 3,67,500/` 15] 24,500 shares
Question 16
Omega Limited (a manufacturing company) recently made a public issue in respect of which the following
information is available:
(a) No. of partly convertible debentures issued- 2,00,000; face value and issue price-` 100 per
debenture.
closing of issue i.e 31 10.20X1.
(c) Date of closure of subscription lists- 1.5.20X1, date of allotment- 1.6.20X1, rate of interest on
debenture- 15% payable from the date of allotment, value of equity share for the purpose of
conversion- ` 60 (Face Value ` 10).
(e) Number of debentures applied for - 1,50,000.
20X2 (including cash and bank entries).
(RTP November 2019)
8.20
Answer
Journal Entries in the books of Omega Ltd. Journal Entries
` `
1.5.20X1 Bank A/c Dr. 1,50,00,000
1.6.20X1 Debenture Application A/c Dr. 1,50,00,000
(Commission payable to underwriters @ 2% on
` 2,00,00,000)
Bank A/c Dr. 46,00,000
(Amount received from underwriters in
settlement of account)
01.06.20X1 Profit & Loss A/c 20,00,000
To Debenture Redemption Reserve A/c Dr 20,00,000
(200,000 × 100 × 25% × 40%) .
(Being Debenture Redemption Reserve
created on non-convertible debentures) 12,00,000
Debenture Redemption Reserve Investment A/c 12,00,000
To Bank A/c (200,000 × 100 × 15% × 40%) Dr.
purpose)
30.9.20X1 Debenture Interest A/c Dr 10,00,000
To Bank A/c . 10,00,000
(Interest paid on debentures for 4 months @
15% on ` 2,00,00,000)
31.10.20X1 15% Debentures A/c Dr. 1,20,00,000
(Conversion of 60% of debentures into shares of ` 60
each with a face value of ` 10)
(Interest paid on debentures for the half year) (refer
working note below)
Working Note:
Calculation of Debenture Interest for the half year ended 31st March, 20X2
On ` 80,00,000 for 6 months @ 15% = ` 6,00,000
On ` 1,20,00,000 for 1 months @ 15% = ` 1,50,000
` 7,50,000
8.21
Question 17
The following balances appeared in the books of Lakshya Ltd. as on 1 -4-20X1:
(i) 10 % Debentures ` 37,50,000
(ii) Balance of DRR ` 1,25,000
(iii) DRR Investment 5,62,500 represented by 10% ` 5,625 Secured Bonds of the Government of India of
` 100 each.
Annual contribution to the DRR was made on 31st March every year. On 31 -3-20X2, balance at bank was `
37,50,000 before receipt of interest. Interest on Debentures had already been paid. The investment were
realized at par for redemption of debentures at a premium of 10% on the above date.
Lakshya Ltd. is an unlisted company (other than AIFI, Banking company, NBFC and HFC). You are required
to prepare Debenture Redemption Reserve Account, Debenture Redemption Reserve Investment Account
and Bank Account in the books of Lakshya Ltd. for the year ended 31st March, 20X2.
[RTP May 2020]
Answer:
31st To General reserve A/c 1st April, By Balance b/d 1,25,000
March, note 1 (Refer Note 1) 3,75,000 20X1
20X2
1st April, By Profit and loss A/c 2,50,000
20X1 (Refer Note 1)
3,75,000 3,75,000
10% Secured Bonds of Govt. (DRR Investment) A/c
` `
1st April, 20X1 To Balance b/d 5,62,500 31st March, By Bank A/c 5,62,500
20X2
5,62,500 5,62,500
Bank Account
` `
31st March, To Balance b/d 37,50,000 31st March, By Debenture holders 41,25,000
20X2 To Interest on 56,250 20X2 A/c
DRR Investment (110% of 37,50,000)
(5,62,500X 10%)
To DRR By Balance c/d 2,43,750
Investment A/c 5,62,500
43,68,750 43,68,750
Working note –
Calculation of DRR before redemption = 10% of ` 37,50,000 = 3,75,000 Available balance = ` 1,25,000
DRR required =3,75,000 – 1,25,000 = ` 2,50,000.
Question 18
A company had issued 40,000, 12% debentures of `100 each on 1st April, 2015. The debentures are due for
redemption on 1st March, 2019. The terms of issue of debentures provided mat they were redeemable at a
premium of 5% and also conferred option to the debenture holders to convert 20% of their holding into equity
shares (nominal value `10) at a predetermined price of `15 per share and the payment in cash. 50
debentures holders holding totally 5,000 debentures did not exercise the option. Calculate the number of
equity shares to be allotted to the debenture holders and the amount to be paid in cash on redemption.
(November 2019) (4 Marks)
8.22
Answer
Number of
debentures
Redemption value of 7,000 debentures at a premium of 5% [7,000 x (100 + 5)] ` 7,35,000

Equity shares of ` 10 each issued to debenture holders on redemption
[` 7,35,000/` 15] 49,000 shares
Amount of cash to be paid
Amount to be paid into cash [42,00,000 (40,000 x ` 105 ) – 7,35,000] on ` 34,65,000
redemption
Question 19
XYZ Ltd. has issued 1,000, 12% convertible debentures of ` 100 each redeemable after a period of five
years. According to the terms & conditions of the issue, these debentures were redeemable at a premium of
5%. The debenture holders also had the option at the time of redemption to convert 20% of their holdings into
equity shares of ` 10 each at a price of ` 20 per share and balance in cash. Debenture holders amounting `
20,000 opted to get their debentures converted into equity shares as per terms of the issue. You are required
to calculate the number of shares issued and cash paid for redemption of ` 20,000 debenture holders.
[RTP, November 2020]
Answer
Debenture holders opted for conversion (20,000 /100) 200
Number of debentures to be converted (20% of 200) 40
Redemption value of 40 debentures at a premium of 5% [40 x ` 4,200
(100+5)]
[` 4,200/ ` 20 ] 210 shares
Calculation of cash to be paid : `

Number of debentures 200
Less: number of debentures to be converted into equity shares (40)
160
Redemption value of 160 debentures (160 × ` 105) ie. ` 16,800.
Question 20
8.23
20,000 opted to get their debentures converted into equity shares as per terms of the issue.
You are required to calculate the number of shares issued and cash paid for redemption of ` 20,000
debenture holders and also pass journal entry for conversion and redemption of debentures.
(5 Marks) (MTP, May 2020)
Answer:
Number of
debentures
Redemption value of 40 debentures at a premium of 5% [40 x (100+5)] ` 4,200
[` 4,200/ ` 20] 210 shares
Calculation of cash to be paid: `
160
Journal Entry
Debentures A/c Dr. 20,000
Premium on redemption A/c Dr. 1,000
To Debenture holders A/c 21,000
(Being amount due to debenture holders at redemption)
Debenture holders A/c Dr. 21,000
To Equity Share capital A/c 2,100
To Securities premium A/c 2,100
To Cash A/c 16,800
(Discharge of amount due to Debenture holders)
Question 21
During the year 2019-2020, A Limited (a listed company) made a public issue in respect of which the
following information is available:
(i) No. of partly convertible debentures issued-1,00,000; face value and issue price `100 per debenture.
(Whole issue was underwritten by X Ltd.)
(ii) Convertible portion per debenture -60%, date of conversion -on expiry of 6 months from the date of
closing of issue.
(iii) Date of closure of subscription lists -1st May,2019, date of allotment – 1st June, 2019, rate of interest
on debenture -15% p.a. payable from the date of allotment, value of equity share for the purpose of
conversion – `60 (face value `10)
(iv) Underwriting Commission – 2%
(v) No. of debentures applied for by public –80,000
(vi) Interest is payable on debentures half yearly on 30th September and 31st March each year.
Pass relevant journal entries for all transactions arising out of the above during the year ended 31st
March,2020. (including cash and bank entries) (Suggested, January 2021) (8 marks)
8.24
Answer
Journal Entries in the books of A Ltd.
` `
1.5.2019 Bank A/c Dr. 80,00,000
To Debenture Application A/c 80,00,000
(Application money received on 80,000
debentures @ `100 each)
1.6.2019 Debenture Application A/c Underwriters A/c Dr. 80,00,000
To 15% Debentures A/c Dr. 20,00,000
(Allotment of 80,000 debentures to applicants 1,00,00,000
Underwriting Commission To Underwriters A/c Dr. 2,00,000
(Commission payable to underwriters @ 2% 2,00,000
on ` 1,00,00,000)
Bank A/c Dr. 18,00,000
01.06.2019 Debenture Redemption Investment A/c To Dr. 6,00,000
Bank A/c 6,00,000
(100,000 X 100 x 15% X 40%)
(Being Investments made for
redemption purpose)
30.9.2019 Debenture Interest A/c To Bank A/c Dr. 5,00,000
(Interest paid on debentures for 4 months @ 5,00,000
15% on ` 1,00,00,000)
31.10.2019 15% Debentures A/c Dr. 60,00,000
To Equity Share Capital A/c To Securities 10,00,000
Premium A/c
50,00,000
(Conversion of 60% of debentures into shares
of ` 60 each with a face value of ` 10)
(Interest paid on debentures for the half year) 3,75,000
Working Note:
Calculation of Debenture Interest for the half year ended 31st March, 2020
On ` 40,00,000 for 6 months @ 15% = `3,00,000
On ` 60,00,000 for 1 months @ 15% = ` 75,000
`3,75,000
Question 22
(MTP, March 2021) (5 Marks)
8.25
Answer
[` 4,200/ ` 20 ] 210 shares
160
Journal Entry
To Securities premium A/c Dr. 2,100
To Cash A/c 16,800
Question 23
Surya Limited (a listed company) recently made a public issue in respect of which the following information is
available:
(a) No. of partly convertible debentures issued- 2,00,000; face value and issue price - ` 100 per
debenture.
closing of issue.
(c) Date of closure of subscription lists- 1.5.2020, date of allotment- 1.6.2020, rate of interest on
debenture- 15% payable from the date of allotment, value of equity share for the purpose of
conversion- ` 60 (Face Value ` 10).
(e) No. of debentures applied for- 1,50,000.
Write relevant journal entries for all transactions arising out of the above during the year ended 31st
March, 2021 (including cash and bank entries).
(MTP, April, 2021) (10 Marks)
Answer
Journal Entries
` `
1.5.2020 Bank A/c Dr. 1,50,00,000
8.26
` `
1.6.2020 Debenture Application A/c Dr. 1,50,00,000
2,00,00,000)
Bank A/c Dr. 46,00,000
01.06.2020 Debenture Redemption Investment A/c Dr. 12,00,000
To Bank A/c 12,00,000
(200,000 X 100 x 15% X 40%)
purpose)
30.9.2020 Debenture Interest A/c Dr. 10,00,000
To Bank A/c 10,00,000
(Interest paid on debentures for 4 months @ 15%
on ` 2,00,00,000)
31.10.2020 15% Debentures A/c Dr. 1,20,00,000
To Securities Premium A/c
1,00,00,0000
(Conversion of 60% of debentures into shares of `
60 each with a face value of ` 10)
(Interest paid on debentures for the half year) 7,50,000
Working Note:
Calculation of Debenture Interest for the half year ended 31st March, 2021: On ` 80,00,000 for 6 months
@ 15% = `6,00,000
On ` 1,20,00,000 for 1 months @ 15% = ` 1,50,000
`7,50,000
Question 24
AB Limited (a listed company) recently made a public issue in respect of which the following information is
available:
(i) No. of partly convertible 8% debentures issued 3,00,000; face value and issue price `100 per
debenture.
(ii) Convertible portion per debenture- 60%, date of conversion- on expiry of 7 months from the date of
closing of issue.
(iii) Date of closure of subscription lists 1-5-2020, date of allotment 1-6-2020, rate of interest on
debenture 8% payable from the date of allotment, market value of equity share as on date of
conversion `60 (Face Value `10).
(iv) Underwriting Commission 1%
(v) No. of debentures applied for 2,50,000.
(vi) Interest payable on debentures half-yearly on 30th September and 31st March.
8.27
2021 (including cash and bank entries) (Suggested July 2021) (10 Marks)
Answer
Date Particulars Debit (`) Credit (`)
1.05.2020 Bank A/c Dr. 2,50,00,000
(Being application money received on 2,50,000
debentures @ `100/- each)
1.06.2020 Debenture Application A/c Dr. 2,50,00,000
(Being allotment of 2,50,000 debentures to
applicants and 50,000 debentures to underwriters)
1.06.2020 Underwriting Commission A/c Dr. 3,00,000
(Being commission payable to underwriters @ 1%
on ` 3,00,00,000)
1.06.2020 Bank A/c Dr. 47,00,000
(Being amount received from underwriters in
settlement)
1.06.2020 Debenture Redemption Investments A/c Dr. 18,00,000
To Bank A/c 18,00,000
(3, 00,000 x 100 x 15% x 40% - Being
investments for redemption purposes)
To Bank 8,00,000
(Being interest paid on debentures for 4 months @
8% on ` 3,00,00,000)
30.11.2020 8% Debentures A/c Dr. 1,80,00,000
(Being conversion of 60% of the debentures into
shares of ` 60 each with a face value of `10/-)
(Being interest paid on debentures for 6 months @
8%)
Working Note:
On ` 1, 20, 00,000 for 6 months @ 8% = `4, 80,000
On ` 1, 80, 00,000 for 2 months @ 8% = ` 2, 40,000
`7, 20,000
8.28
Question 25
The following balances appeared in the books of Omega Ltd. as on 1-4-2020:
(i) 10 % Debentures ` 75,00,000
(ii) Balance of DRR ` 2,50,000
(iii) DRR Investment ` 11,25,000 represented by 10% ` 11,250 Secured Bonds of the Government of India of
` 100 each.
Annual contribution to the DRR was made as per the requirement. On 31-3-2021, balance at bank was
`80,00,000 before receipt of interest. Interest on Debentures had already been paid. The investments were
realized at par for redemption of debentures at a premium of 10% on the above date.
Omega Ltd. is an unlisted company (other than AIFI, Banking company, NBFC and HFC). You are required to
prepare Debenture Redemption Reserve Account, Debenture Redemption Reserve Investment Account and
Bank Account in the books of Omega Ltd. for the year ended 31st March, 2021. (RTP May, 2021)
Answer
31st March, 2021 To General reserve 7,50,000 1st April, By Balance b/d 2,50,000
A/c (Refer Note) 2020
_______ 1st April, By Profit and loss A/c 5,00,000
7,50,000 2020 (Refer Note 1) 7,50,000
10% Secured Bonds of Govt. (DRR Investment) A/c
` `
1st April, 2020 To Balance b/d 11,25,000 31st March, 2021 By Bank A/c 11,25,000
11,25,000 11,25,000
Bank Account
` `
31st March, To Balance b/d 80,00,000 31st March, By Debenture holders 82,50,000
2021 To Interest on 1,12,500 2021 A/c
DRR Investment (110% of 75,00,000)
(11,25,000X 10%)
To DRR By Balance c/d 9,87,500
Investment A/c 11,25,000
92,37,500 92,37,500
Working note –
Calculation of DRR before redemption = 10% of ` 75,00,000 = 7,50,000
Available balance = ` 2,50,000
DRR required =7,50,000 – 2,50,000= ` 5,00,000.
Question 26
Sumit Ltd. (an unlisted company other than AIFI, Banking company, NBFC and HFC) had 8,000, 9%
debentures of ` 100 each outstanding as on 1st April, 2019, redeemable on 31st March, 2020.
On 1st April, 2019, the following balances appeared in the books of accounts:
 Investment in 1,000, 7% secured Govt. bonds of ` 100 each, ` 1,00,000.
 Debenture Redemption Reserve is ` 50,000.
Interest on investments is received yearly at the end of financial year.
1,000 own debentures were purchased on 30th March, 2020 at an average price of ` 96.50 and cancelled on
the same date.
8.29
On 31st March, 2020, the investments were realized at par and the debentures were redeemed. You are
required to write up the following accounts for the year ended 31st March, 2020.
(1) 9% Debentures Account.
(2) Debenture Redemption Reserve Account.
(3) DRR Investment Account.
(4) Own Debentures Account.
(10 Marks) (Suggested November 2020)
Answer
30th March, 2020 To Own Debentures A/c 96,500 1st April, By Balance b/d 8,00,000
March, 2020 To Profit on cancellation 3,500 2019
31st March, 2020 To Bank A/c 7,00,000
8,00,000 8,00,000
Debenture Redemption Reserve (DRR) Account
31st March, To General Reserve 80,000 1st April, 2019 By Balance b/d 50,000
2020 A/c 1st April, 2019 By Profit and loss A/c [Refer
Working Note 3] 30,000
80,000 80,000
Debenture Redemption Reserve Investments (DRRI) Account
1st April To Balance b/d 1,00,000 31st March, By Bank A/c (1,000 x 100 x 15,000
2019 2020 15%)
(Refer Working Note 2)
1st April To Bank A/c (Refer 20,000 31st March, By Bank A/c 1,05,000
2019 Working Note 1) 2020 (Refer Working Note 2)
1,20,000 1,20,000
Own Debentures A/c
30th March, To Bank A/c* 96,500 30th March, By 9% Debentures 96,500
2020 96,500 2020 96,500
* interest not considered.
Working Notes:
1. Debenture Redemption Reserve Investment A/c
The company would be required to invest an amount equivalent to 15% of the value of the
debentures in specified investments which would be equivalent to:
= Total No of debentures × Face value per debenture × 15%
= 8,000 × 100 × 15% = `1,20,000/-
The company has already invested in specified investments i.e. 7% Govt bonds for an amount of
`1,00,000 as per the information given in the question. The balance amount of `20,000 (i.e. `
1,20,000 less ` 1,00,000) would be invested by the company on 1 April 2019.
2. Redemption of Debenture Redemption Reserve Investments on 31.3.2020
Since the company purchased 1,000 own debentures on 31 March 2020, the company would also
realize the investments of 15% corresponding to these debentures for which computation is as
follows:
8.30
= No of own debentures to be bought X Face value per debenture X 15%
= 1,000 × 100 × 15% = ` 15,000/-
The remaining debentures i.e. total debentures less own debentures would be redeemed on 31
March 2020 and hence the company would also realize the balance investments of 15%
corresponding to these debentures for which computation is as follows:
= (Total no of debentures - No of own debentures) × Face value per debenture × 15% = (8,000 -
1,000) × 100 × 15% = `1,05,000/-
3. Debenture Redemption Reserve
The company would be required to transfer an amount equivalent to 10% of the value of the
debentures in Debentures Redemption Reserve Account. The value of debentures is 8,00,000 thus
10% of it i.e. 80,000 should be there in DRR a/c. The available balance in DRR a/c is only 50,000
therefore 30,000 (80,000 – 50,000) additional amount will be transferred from General Reserve or
Profit and loss A/c to DRR A/c.
Question 27
Aman Ltd. has issued 2,000, 12% convertible debentures of ` 100 each redeemable after a period of five
(MTP, October 2021) (5 Marks)
Answer
Calculation of number of shares issued
Number of
debentures
[` 8,400/ ` 20 ] 420 shares
320
Journal Entry
To Securities premium A/c Dr. 4,200
To Cash A/c 33,600
8.31
Question 28
Jeet Limited (listed company) recently made a public issue in respect of which the following information is
available:
(a) No. of partly convertible debentures issued - 1,00,000; face value and issue price-` 100 per debenture.
(b) Convertible portion per debenture- 60%, date of conversion-on expiry of 6 months from the date of
closing of issue i.e 31.10.2020.
(c) Date of closure of subscription lists - 1.5.2020, date of allotment- 1.6.2020, rate of interest on debenture-
15% payable from the date of allotment, value of equity share for the purpose of conversion- ` 60 (Face
Value ` 10).
(e) Number of debentures applied for - 75,000.
2021 (including cash and bank entries).
(RTP, November 2021)
Answer
Journal Entries in the books of Jeet Ltd.
Journal Entries
` `
1.5.2020 Bank A/c Dr. 75,00,000
To Debenture Application A/c 75,00,000
(Application money received on 75,000 debentures @ ` 100
each)
1.6.2020 Debenture Application A/c Dr. 75,00,000
(Allotment of 75,000 debentures to applicants and
25,000 debentures to
underwriters)
1,00,00,000)
Bank A/c Dr. 23,00,000
(Amount received from underwriters in settlement of
account)
1.6.2020 Debenture Redemption Reserve Investment A/c 6,00,000
To Bank A/c (1,00,000x100x15%x 40%) Dr. 6,00,000
(Being Investments made for redemption purpose)
(Interest paid on debentures for 4 months @ 15% on `
1,00,00,000)
8.32

31.10.2020 15% Debentures A/c Dr. 60,00,000
To Securities Premium A/c 50,00,000
(Conversion of 60% of debentures into shares of ` 60
each with a face value of ` 10)
(Interest paid on debentures for the half year) (refer
working note below)
Working Note:
On ` 40,00,000 for 6 months @ 15% = ` 3,00,000
On ` 60,00,000 for 1 months @ 15% = ` 75,000
` 3,75,000
Question 29
A Company had issued 25,000 12% Debentures of ` 100 each on 1st April, 2018. The Debentures were due
for redemption on 1st July, 2020. The terms of issue of Debentures provided that they will be redeemable at a
premium of 5% and also conferred option to convert 20% of their holding into equity Shares (Nominal value `
10 each) at a price of ` 20 per share.
Debenture holders holding 5,000 Debentures did not exercise the option. Calculate the number of Equity
shares to be allotted to the debenture holders exercising the option to the maximum.
(Suggested December 2021) (4 Marks)
Answer
Number of
debentures
Redemption value of 4,000 debentures at a premium of 5% [4,000 x (100+5)] ` 4,20,000
[` 4,20,000/ ` 20] 21,000 shares
8.33

Investment Accounts 9
Question 1
In 20X1, M/s. Wye Ltd. issued 12% fully paid debentures of ` 100 each, interest being payable half yearly on
30th September and 31st March of every accounting year.
On 1st December, 20X2, M/s. Bull & Bear purchased 10,000 of these debentures at ` 101 ex-interest price,
also paying brokerage @ 1% of ex-interest amount of the purchase. On 1st March, 20X3 the firm sold all of
these debentures at ` 103 ex- interest price, again paying brokerage @ 1 % of ex-interest amount. Prepare
Investment Account in the books of M/s. Bull & Bear for the period 1st December, 20X2 to 1st March, 20X3.
(Study Material)
Answer
In the books of M/s Bull & Bear Investment Account
for the period from 1st December 20X2 to 1st March, 20X3 (Scrip: 12% Debentures of M/s. Wye Ltd.)
Date Particulars Nominal Interest Cost (` ) Date Particulars Nominal Interest Cost (`)
Value Value
(` ) (` )
1.12.20X2 To Bank A/c 10,00,000 20,000 10,20,100 1.03.20X3 By Bank A/c 10,00,000 50,000 10,19,700
(W.N.1) (W.N.2)
1.3.20X3 To Profit & loss 1.3.20X3 By Profit &
A/c* (b.f.) - 30,000 loss A/c (b.f.) 400
10,00,000 50,000 10,20,100 10,00,000 50,000 10,20,100
* This represents income for M/s. Bull & Bear for the period 1st December, 20X2 to 1st March, 20X3, i.e.,
interest for three months- 1st December, 20X2 to 28 February, 20X3).
Working Notes:
1. Cost of 12% debentures purchased on 1.12.20X2 `
Cost Value (10,000 × ` 101) = 10,10,000
Add: Brokerage (1% of ` 10,10,000) = 10,100
Total = 10,20,100
2. Sale proceeds of 12% debentures sold `
Sales Price (10,000 × ` 103) = 10,30,000
Less: Brokerage (1% of ` 10,30,000) = (10,300)
Total = 10,19,700
Question 2
On 1.4.20X1, Mr. Krishna Murty purchased 1,000 equity shares of ` 100 each in TELCO Ltd. @ ` 120 each
from a Broker, who charged 2% brokerage. He incurred 50 paise per ` 100 as cost of shares transfer stamps.
On 31.1.20X2, Bonus was declared in the ratio of 1: 2. Before and after the record date of bonus shares, the
shares were quoted at ` 175 per share and ` 90 per share respectively. On 31.3.20X2, Mr. Krishna Murty
sold bonus shares to a Broker, who charged 2% brokerage.
Show the Investment Account in the books of Mr. Krishna Murty, who held the shares as Current assets and
closing value of investments shall be made at Cost or Market value whichever is lower.
(Study Material)
9.1
Chap. 9  Investment Accounts
Answer
In the books of Mr. Krishna Murty Investment Account for the year ended 31st March, 20X2
(Scrip: Equity Shares of TELCO Ltd.)
Date Particulars Nominal Cost (`) Date Particulars Nominal Cost (`)
Value (`) Value (`)
1.4.20X1 To Bank A/c 1,00,000 1,23,000 31.3.20X2 By Bank A/c 50,000 44,100
(W.N.1) (W.N.2)
31.1.20X2 To Bonus shares 50,000 31.3.20X2 By Balance c/d
(W.N.5) (W.N.4) 1,00,000 82,000
31.3.20X2 To Profit & loss A/c 3,100
(W.N.3)
1,50,000 1,26,100 1,50,000 1,26,100
Working Notes:
1. Cost of equity shares purchased on 1.4.20X1 = (1,000 ×` 120) + (2% of ` 1,20,000) + (½% of ` 1,20,000)
= ` 1,23,000
2. Sale proceeds of equity shares (bonus) sold on 31st March, 20X2= (500 ×` 90) – (2% of ` 45,000) = `
44,100.
3. Profit on sale of bonus shares on 31st March, 20X2
= Sale proceeds – Average cost Sale proceeds = ` 44,100
Average cost = ` (1,23,000 /1,50,000) x 50,000 = ` 41,000 Profit = ` 44,100 – ` 41,000 = ` 3,100.
4. Valuation of equity shares on 31st March, 20X2 Cost = (` 1,23,000/1,50,000) x 1,00,000 = ` 82,000
Market Value = 1,000 shares × ` 90 = ` 90,000
Closing balance has been valued at ` 82,000 being lower than the market value.
5. Bonus shares do not have any cost.
Question 3
Mr. X purchased 500 equity shares of ` 100 each in Omega Co. Ltd. for ` 62,500 inclusive of brokerage and
stamp duty. Some years later the company resolved to capitalise its profits and to issue to the holders of
equity shares, one equity bonus share for every share held by them. Prior to capitalisation, the shares of
Omega Co. Ltd. were quoted at ` 175 per share. After the capitalisation, the shares were quoted at ` 92.50
per share. Mr. X. sold the bonus shares and received at ` 90 per share.
Prepare the Investment Account in X’s books on average cost basis.
(Study Material)
Answer
In the books of X Investment Account
[Scrip: Equity shares in Omega Co. Ltd.]
Particulars Nominal Cost Particulars Nominal Cost
Value Value
` ` ` `
To Cash 50,000 62,500 By Cash - Sale (500 x 90) 50,000 45,000
To Bonus shares (W.N.1) 50,000 - By Balance c/d (W.N. 3) 50,000 31,250
To P & L A/c (W.N. 2) - 13,750
1,00,000 76,250 1,00,000 76,250
To Balance b/d 50,000 31,250
Working Notes:
1. Bonus shares do not have any cost.
2. Profit on sale of bonus shares = Sales proceeds – Average cost Sales proceeds = ` 45,000
500
Average cost=  × 62,500 =`31,250
1,000
Profit = ` 45,000 – `31,250 = ` 13,750.
9.2
3. Valuation of Closing Balance of Shares at the end of year
The total cost of 1,000 share including bonus is `62,500
500
Therefore, cost of 500 shares (carried forward) is  × 62,500 =`31,250
1,000
Market price of 500 shares = 92.50 x 500 = ` 46,250
Cost being lower than the market price, therefore shares are carried forward at cost.
Question 4
On 01-04-20X1, Mr. T. Shekharan purchased 5,000 equity shares of ` 100 each in V Ltd. @ ` 120 each from
a broker, who charged 2% brokerage. He incurred 50 paisa per ` 100 as cost of shares transfer stamps. On
31-01-20X2 bonus was declared in the ratio of 1: 2. Before and after the record date of bonus shares, the
shares were quoted at ` 175 per share and ` 90 per share respectively. On 31-03-20X2, Mr. T. Shekharan
sold bonus shares to a broker, who charged 2% brokerage.
Show the Investment Account in the books of T. Shekharan, who held the shares as Current Assets and
closing value of investments shall be made at cost or market value whichever is lower.
(Study Material)
Answer
In the books of T. Shekharan
Investment Account for the year ended 31st March, 20X2 (Script: Equity Shares of V Ltd.)
Date Particulars Nominal Cost Date Particulars Nominal Cost
Value (` ) (` ) Value (` ) (` )
1.4.20X1 To Bank A/c 5,00,000 6,15,000 31.3.20X2 By Bank A/c 2,50,000 2,20,500
(W.N.1) (W.N.2)
31.1.20X2 To Bonus 2,50,000 31.3.20X2 By Balance 5,00,000 4,10,000
shares c/d
31.3.20X2 To Profit and (W.N.4)
Loss A/c
(W.N.3) 15,500
7,50,000 6,30,500 7,50,000 6,30,500
Working Notes:
1. Cost of equity shares purchased on 1st April, 20X1
= Cost + Brokerage + Cost of transfer stamps
= (5,000 × ` 120) + (2% of ` 6,00,000) + (½% of ` 6,00,000)
= ` 6,15,000
2. Sale proceeds of equity shares sold on 31st March, 20X2
= Sale price – Brokerage
= (2,500 × ` 90) – (2% of ` 2,25,000)
= ` 2,20,500
3. Profit on sale of bonus shares
= Sales proceeds – Average cost Sales proceeds = ` 2,20,500
Average cost = ` (6,15,000 /7,50,000) x 2,50,000 = ` 2,05,000 Profit = ` 2,20,500 – ` 2,05,000= `
15,500.
4. Valuation of equity shares on 31st March, 20X2
Cost = ` [6,15,000 × 5,00,000/7,50,000] = ` 4,10,000, i.e., ` 82 per share
Market Value = 5,000 shares × ` 90 = ` 4,50,000
Closing stock of equity shares has been valued at ` 4,10,000 i.e. cost being lower than the market value.
9.3
Question 5
On 1st April, 20X1, Rajat has 50,000 equity shares of P Ltd. at a book value of ` 15 per share (nominal value
` 10 each). He provides you the further information:
(1) On 20th June, 20X1 he purchased another 10,000 shares of P Ltd. at ` 16 per share.
(2) On 1st August, 20X1, P Ltd. issued one equity bonus share for every six shares held by the shareholders.
(3) On 31st October, 20X1, the directors of P Ltd. announced a right issue which entitles the holders to
subscribe three shares for every seven shares at ` 15 per share. Shareholders can transfer their rights in
full or in part.
Rajat sold 1/3rd of entitlement to Umang for a consideration of ` 2 per share and subscribed the rest on 5th
November, 20X1.
You are required to prepare Investment A/c in the books of Rajat for the year ending 31st March, 20X2.
(Study Material)
Answer
In the books of Rajat Investment Account (Equity shares in P Ltd.)
Date Particulars No. of Amount Date Particulars No. of Amount (`)
shares (`) shares
1.4.X1 To Balance b/d To 50,000 7,50,000 31.3.X2 By Balance c/d 90,000 12,10,000
20.6.X1 Bank A/c 10,000 1,60,000 (Bal. fig.)
1.8.X1 To Bonus issue
(W.N.1) 10,000 -
5.11.X1 To Bank A/c (right
shares)
(W.N.4) 20,000 3,00,000
90,000 12,10,000 90,000 12,10,000
Working Notes:
50,000 + 10,000
(1) Bonus shares = = 10,000 shares
6
50,000 + 10,000 + 10,000
(2) Right shares = = × 3 = 30,000 shares
7
1
(3) Sale of rights = 30,000 shares × × ` 2 = ` 20,000 to be credited to statement of profit and loss
3
2
(4) Rights subscribed = 30,000 shares × × ` 15 = ` 3,00,000
3
Question 6
On 1.4.20X1, Sundar had 25,000 equity shares of ‘X’ Ltd. at a book value of ` 15 per share (Nominal value `
10). On 20.6.20X1, he purchased another 5,000 shares of the company at `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 ` 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 ` 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.
9.4
On 15.11.20X1, Sundar sold 25,000 equity shares at a premium of ` 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.
(Study Material)
Answer
Books of Sundar Investment Account
(Scrip: Equity Shares in X Ltd.)
No. Amount` No. Amount `
1.4.20X1 To Bal b/d 25,000 3,75,000 31.10.20X1 By Bank — 10,000
20.6.20X1 To Bank 5,000 80,000 (dividend
16.8.20X1 To Bonus 5,000 — on shares
acquired on
(W.N.1)
20/6/20X1)
30.9.20X1 To Bank 10,000 1,50,000
(W.N.4)
(Rights
Shares)
(W.N.3)
15.11.20X1 To Profit (on 44,444 15.11.20X1 By Bank 25,000 3,75,000
sale of (Sale of
shares) shares)
31.12.20X1 By Bal. c/d 20,000 2,64,444
(W.N.6)
45,000 6,49,444 45,000 6,49,444

Profit and Loss Account (An extract)
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:
(25, 000 + 5,000)
(1) Bonus Shares = = 5,000 shares
6
(25, 000 + 5,000 + 5,000)
(2) Right Shares = × 3 = 15,000 shares
7
(3) Right shares renounced = 15,000×1/3 = 5,000 shares
Sale of right shares = 5,000 x 2 = ` 10,000
Right shares subscribed = 15,000 – 5,000 = 10,000 shares
Amount paid for subscription of right shares = 10,000 x 15 = ` 1,50,000
(4) Dividend received = 25,000 (shares as on 1st April 20X1) × 10 × 20% = ` 50,000
Dividend on shares purchased on 20.6.20X1 = 5,000×10×20% = ` 10,000 is adjusted to Investment A/c
(5) Profit on sale of 25,000 shares
= Sales proceeds – Average cost
Sales proceeds = ` 3,75,000
(3,75,000 + 80,000 + 1,50,000 - 10,000)
Average cost = × 25,000 = `3,30,556
45,000
Profit = ` 3,75,000– ` 3,30,556= `44,444.
9.5
(6) Cost of shares on 31.12.20X1
(3,75,000 + 80,000 + 1,50,000 - 10,000)
× 20,000 = `2,64, 444
45,000
Question 7
On 1st January 20X1, Singh had 20,000 equity shares in X Ltd. Nominal value of the shares was `10 each
but their book value was ` 16 per share. On 1st June 20X1, Singh purchased 5,000 more equity shares in the
company at a premium of ` 4 per share.
On 30th June, 20X1, the directors of X Ltd. announced a bonus and rights issue. Bonus was declared at the
rate of one equity share for every five shares held and these shares were received on 2nd August, 20X1.
The terms of the rights issue were:
(a) Rights shares to be issued to the existing holders on 10th August, 20X1.
(b) Rights issue would entitle the holders to subscribe to additional equity shares in the Company at the rate
of one share per every three held at ` 15 per share-the whole sum being payable by 30th September,
20X1.
(c) Existing shareholders were entitled to transfer their rights to outsiders, either wholly or in part.
(d) Singh exercised his option under the issue for 50% of his entitlements and the balance of rights he sold to
Ananth for a consideration of ` 1.50 per share.
(e) Dividends for the year ended 31st March, 20X1, at the rate of 15% were declared by the Company and
received by Singh on 20th October, 20X1.
(f) On 1st November, 20X1, Singh sold 20,000 equity shares at a premium of ` 3 per share.
The market price of share on 31-12-20X1 was ` 14. Show the Investment Account as it would appear in
Singh’s books on 31-12-20X1 and the value of shares held on that date.
(Study Material)
Answer
Investment Account-Equity Shares in X Ltd.
Date No. of Dividend Amount Date No. of Dividend Amount
shares shares
` ` ` `
20X1 20X1
Jan. 1 To Bal. b/d 20,000 - 3,20,000 Oct. 20 By Bank (dividend) 30,000 7,500
[20,000 x 10 x
15%] [5,000 x 10 x
15%]
June 1 To Bank 5,000 - 70,000 Nov. 1 By Bank 20,000 2,60,000
Aug. 2 To Bonus 5,000 — Nov. 1 By P & L A/c 1,429
Issue (W.N.2)
Sep. 30 To Bank 5,000 - 75,000 Dec. 31 By Balance c/d 15,000 1,96,071
(Right) (W.N.3)
(W.N.1)
Dec.31 To Profit & 30,000
Loss A/c
(Dividend
income)
35,000 30,000 4,65,000 35,000 30,000 4,65,000
Jan. 1, To Balance 15,000 1,96,071
20X2 b/d
Working Notes:
1. Right shares
No. of right shares issued = (20,000 + 5,000 + 5,000)/ 3 = 10,000 shares No. of right shares subscribed =
10,000 x 50% = 5,000 shares
Amount of right shares issued = 5,000 x 15 = ` 75,000 No. of right shares sold = 10,000 – 5,000 = 5,000
shares
Sale of right shares = 5,000 x 1.5 = ` 7,500 to be credited to statement of profit and loss
9.6
2. Cost of shares sold — Amount paid for 35,000 shares
`
(`3,20,000 + ` 70,000 + ` 75,000) 4,65,000
Less: Dividend on shares purchased on June 1 (since the dividend pertains to the year (7,500)
ended 31st March, 20x1, i.e., the pre- acquisition period)
Cost of 35,000 shares 4,57,500
Cost of 20,000 shares (Average cost basis) 2,61,429
Sale proceeds 2,60,000
Loss on sale 1,429
3. Value of investment at the end of the year
Assuming investment as current investment, closing balance will be valued based on lower of cost or net
realisable value.
Here, Net realisable value is `14 per share i.e. 15,000 shares x ` 14 = ` 2,10,000 and cost =
4,57,500
×15,000 = ` 1,96,071. Therefore, value of investment at the 35,000 end of the year will be `
35,000
1,96,071.
Similar Question
Question 7A
On 1st April 2021 Ms. Jayshree has 5,000 equity shares of Rama Limited (a listed company) of face value of f
10 each. Ms. Jayshree has purchased the above shares at ` 15 per share and paid a brokerage of 2% and
stamp duty of 1%.
On 15th May, 2021 Ms. Jayshree purchased another 5,000 shares of Rama Limited at ` 18 including
brokerage and stamp duty.
On 26th August, 2021 Rama Limited issued one bonus equity share for every 1 equity share held by the
shareholders.
On 23rd October, 2021 Rama Limited announced a Right Issue which entitles the holders to subscribe 1
equity share for every 2 equity shares held at ` 20 per share. Shareholders can exercise their rights in full or
in part. Ms. Jayshree sold 1/4th of entitlement to Mr. Mike for a consideration of ` 10 per share and
subscribed the rest on 1st November 2021.
Ms. Jayshree also sold 10,000 shares at ` 25 per share on .1st November, 2021.
The shares of Rama Limited were quoted at ` 11 per share on 31st March, 2022.
You are required to prepare Investment account for Ms. Jayshree for the year ended 31st March 2022.
(Question Paper, May 2022) (4 Marks)
Question 8
A Limited purchased 5,000 equity shares (nominal value ` 100 each) of Allianz Limited for ` 105 each on 1st
April, 20X1. The shares were quoted cum dividend. On 15th May, 20X1, Allianz Limited declared & paid
dividend of 2% for year ended 31st March, 20X1. On 30th June, 20X1 Allianz Limited issued bonus shares in
ratio of 1:5. On 1st October, 20X1 Allianz Limited issued rights share in the ratio of 1:12 @ 45 per share. A
Limited subscribed to half of the rights issue and the balance was sold at ` 5 per right entitlement. The
company declared interim dividend of 1% on 30th November, 20X1. Right shares were not entitled to
dividend. The company sold 3,000 shares on 31st December, 20X1 at ` 95 per share. The company A Ltd.
incurred 2% as brokerage while buying and selling shares.
You are required to prepare Investment Account in books of A Ltd for the year ended 31st March, 20X2.
(Study Material)
9.7
Answer
In the books of A Ltd.
Investment in equity shares of Allianz Ltd. for the year ended 31st March, 20X2
Date Particulars No. Income Amount Date Particulars No. Income Amount
` ` ` `
20X1 20X1
April 1 To Bank A/c 5,000 - 5,35,500 May 15 By Bank A/c - - 10,000
(W.N.1) (dividend)
(W.N.6)
June 30 To Bonus 1,000 - -
Issue (W.N
2)
Oct. 1 To Bank A/c 250 - 11,250 Nov. 30 By Bank A/c - 6,000 -
(W.N. 3) (Interim
dividend)
(W.N.7)
Dec.31 To P & L A/c - - 21,660 Dec. 31 By Bank A/c 3,000 - 2,79,300
(W.N. 5) (W.N. 5)
20X2 20X2
March To P & L A/c - March By Balance
31 (b.f.) 6,000 - 31 c/d (W.N. 7) 3,250 - 2,79,110
6,250 6,000 5,68,410 6,250 6,000 5,68,410
Working Notes:
1. Calculation of cost of purchase on 1st April, 20X1
` 105 X 5,000 shares = ` 5,25,000
Add: Brokerage (2%) = ` 10,500
` 5,35,500
2. Calculation of number of bonus shares issued
5,000
Bonus Shares = × 1 = 1,000
5
3. Calculation of right shares subscribed
6,000
Right Shares = = 500 shares
12
500
Shares subscribed = = 250 shares
2
Value of right shares subscribed = 250 shares @ ` 45 per share = ` 11,250
4. Calculation of sale of right entitlement
250 shares x ` 5 per share = ` 1,250
(Amount received from sale of rights will be credited to P&L a/c)
5. Calculation of profit on sale of shares
Total holding = 5,000 shares original
1,000 shares bonus
250 shares right shares
6,250 shares
3,000 shares were sold on 31.12.20X1
Cost of total holdings of 6,250 shares (on average basis)
= ` 5,35,500 + ` 11,250 – ` 10,000 = ` 5,36,750
9.8
Average cost of 3,000 shares would be
5,36,750
= × 3,000 = ` 2,57,640
6,250
`
Sale proceeds of 3,000 shares (3,000 x ` 95) 2,85,000
Less: 2% Brokerage (5,700)
2,79,300
Less: Cost of 3,000 shares (2,57,640)
Profit on sale 21,660
6. Dividend received on investment held as on 15th May, 20X1
= ` 10,000 (5,000 x ` 100 x 2%) adjusted to Investment A/c
7. Dividend amounting ` 6,000 received on 30.11.20X1 will be credited to P&L A/c
8. Calculation of closing value of shares (on average basis) as on 31st March, 20X2
5,36,750
= × 3,250 = ` 2,79,110
6,250
Question 9
The following transactions of Nidhi took place during the year ended 31st March 20X2:
1st April Purchased ` 12,00,000, 8% bonds at ` 80.50 cum-interest. Interest is payable on 1st
November and 1st May.
12th April Purchased 1,00,000 equity shares of ` 10 each in X Ltd. for
` 40,00,000
1st May Received half-year's interest on 8% bonds.
15th May X Ltd. made a bonus issue of three equity shares for every two held. Nidhi sold 1,25,000
bonus shares for ` 20 each.
1st October Sold ` 3,00,000, 8% bonds at ` 81 ex-interest.
1st November Received half-year's bond interest.
1st December Received 18% interim dividend on equity shares (including bonus shares) in X Ltd.
Prepare the relevant investment account in the books of Nidhi for the year ended 31st March, 20X2.
(Study Material)
Answer
In the books of Nidhi 8% Bonds Account
[Interest Payable: 1st November & 1st May]
Date Particulars Nominal Interest Cost Date Particulars Nominal Interest Cost
Value (`) (`) (`) Value (`) (`) (`)
1.4.20X1 To Bank A/c 12,00,000 40,000 9,26,000 1.5.20X1 By Bank A/c - 48,000 -
(W.N.1) (12,00,000 x
8% x 6/12)
1.10.20X1 To Profit & Loss 1.10.20X1 By Bank A/c
A/c (W.N 6) (W.N 2) 3,00,000 10,000 2,43,000
11,500 1.11.20X1 By Bank A/c - 36,000 -
(W.N 3)
31.3.20X2 To Profit & Loss 31.3.20X2 By Balance c/d
A/c 84,000 (W.N.4) 9,00,000 30,000 6,94,500
12,00,000 1,24,000 9,37,500 12,00,000 1,24,000 9,37,500
9.9
Investment in Equity Shares of X Ltd. Account
Date Particulars No. Dividend Cost Date Particulars No. Dividend Cost
(`) (`) (`) (`)
12.4.20X1 To Bank A/c 1,00,000 40,00,000 15.5.20X1 By Bank A/c 1,25,000 25,00,000
15.5.20X1 To Bonus Issue 1,50,000 1.12.20X1 By Bank A/c 2,25,000
(W.N.7)
15.5.20X1 To Profit & Loss 5,00,000
A/c. (W.N.5)
By Balance
31.3.20X2 To Profit & Loss 31.3.20X2 c/d (W.N.8)
A/c 1,25,000 20,00,000
2,25,000
2,50,000 2,25,000 45,00,000 2,50,000 2,25,000 45,00,000
Working Notes:
1. Cost of investment purchased on 1st April, 20X1
12,000, 8% bonds were purchased @ ` 80.50 cum-interest. Total amount paid 12,000 bonds x ` 80.50 =
9,66,000 which includes accrued interest for 5 months, i.e., 1st November, 20XX to 31stMarch, 20X1.
Accrued interest will be ` 12,00,000 x 8/100x 5/12 = ` 40,000. Therefore, cost of investment purchased
= ` 9,66,000 – 40,000 = `9,26,000.
Note: It has been assumed that the nominal value of a bond is ` 100.
2. Sale of bonds on 1st October, 20X1
3,000 bonds were sold@ ` 81 ex-interest, i.e., Total amount received = 3,000 x 81 + accrued interest for
5 months =` 2,43,000 +`10,000 (3,00,000 x 8/100 x 5/12)
3. Interest received on 1st November, 20X1
Interest will be received for 9,000 bonds @ 8% for 6 months, i.e., ` 9,00,000 x 8/100x1/2 = ` 36,000.
4. Cost of bonds on 31.3.20X1
Cost of bonds on 31.3.20X1 will be ` 9,26,000/ 12,000 x 9,000 = ` 6,94,500. Interest accrued on bonds
on 31.3.20X1 = 9,00,000 x 8% x 5/12 = `30,000
Cost per share after bonus = ` 40,00,000/ 2,50,000 = ` 16 (average cost method being followed)
Profit per share sold (` 20 – ` 16) = ` 4.
Therefore, total profit on sale of 1,25,000 shares = ` 4 x 1,25,000 = ` 5,00,000.
6. Profit on sale of bonds
`
Sale value = 2,43,000
Cost of `3,00,000 8% bonds = 9,26,000/12,00,000 x 3,00,000 = 2,31,500
Profit = 11,500
7. Dividend on equity shares = 1,25,000 x 10 x 18% = ` 2,25,000
8. Value of equity shares at end of year Cost per share after bonus = ` 16
Number of shares = 1,25,000
Value of equity shares at end of year = 1,25,000 x 16 = ` 20,00,000
Question 10
Smart Investments made the following investments in the year 20X1-X2: 12% State Government Bonds
having nominal value `100
Date Particulars
01.04.20X1 Opening Balance (1200 bonds) book value of ` 126,000
02.05.20X1 Purchased 2,000 bonds @ ` 100 cum interest
30.09.20X1 Sold 1,500 bonds at ` 105 ex interest
9.10
Interest on the bonds is received on 30th June and 31st Dec. each year.
Equity Shares of X Ltd.
15.04.20X1 Purchased 5,000 equity shares @ ` 200 on cum right basis;
Brokerage of 1% (on cum-right price) was paid in
addition (Nominal Value of shares ` 10)
03.06.20X1 The company announced a bonus issue of 2 shares for every 5 shares held.
16.08.20X1 The company made a rights issue of 1 share for every 7 shares held at ` 250
per share.
The entire money was payable by 31.08.20X1.
22.8.20X1 Rights to the extent of 20% was sold @ ` 60. The remaining rights were
subscribed.
02.09.20X1 Dividend @ 15% for the year ended 31.03.20X1 was received on 16.09.20X1
15.12.20X1 Sold 3,000 shares @ ` 300. Brokerage of 1% was incurred extra.
15.01.20X2 Received interim dividend @ 10% for the year 20X1 –X2
31.03.20X2 The shares were quoted in the stock exchange @ ` 220
Prepare Investment Accounts in the books of Smart Investments. Assume that the average cost method is
followed.
(Study Material)
Answer
In the books of Smart Investments
12% Govt. Bonds for the year ended 31st March, 20X2
Date Particulars Nos. Interest Amount Date Particulars Nos. Interest Amount
1.4.X1 To Opening 1,200 3,600 1,26,000 30.6.X1 By Bank A/c - 19,200 -
balance b/d (Interest)
(W.N.7) (3,200 x 100 x
12% x 6/12)
2.5.X1 To Bank A/c 2,000 8,000 1,92,000 30.9.X1 By Bank A/c (W.N.1 1,500 4,500 1,57,500
(W.N.8) & W.N.9)
30.9.X1 To P & L A/c 8,437.50 31.12.X1 By Bank A/c - 10,200 -
(Profit on (Interest)
Sale) (1,700 x 100 x
(W.N.1)
12% x 6/12)
31.3.X2 To P & L A/c 27,400 31.3.X2 By Bal. c/d (W.N.2 1,700 5,100 1,68,937.50
(Interest) & W.N.10)
3,200 39,000 3,26,437.50 3,200 39,000 3,26,437.50
Investments in Equity shares of X Ltd. for year ended 31.3.20X2

Date Particulars Nos. Dividend Amount Date Particulars Nos. Divide Amount
nd
15.4.X1 To Bank A/c 5,000 10,10,000
(W.N.3)
3.6.X1 To Bonus Issue 2,000 - - 16.9.X1 By Bank (Dividend) - - 7,500
(5,000 x 10 x
15%) (refer
note 1 and 2)
31.8.X1 To Bank A/c 800 2,00,000 15.12.X1 By Bank (Sale) 3,000 - 8,91,000
(W.N.11) (W.N.4)
15.12.X1 To P & L A/c 4,28,500 15.1.X2 By Bank (interim 4,800
(W.N.5) dividend)
(W.N.12)
31.3.X2 To P & L A/c 4,800 31.3.X2 By Bal. c/d 4,800 7,40,000
(W.N.6)
7800 4,800 16,38,500 7800 4,800 16,38,500
9.11
Working Notes:
1. Profit on sale of bonds on 30.9.X1
Sales proceeds = `1,57,500 (i.e., 1,500 x 105)
Average cost = ` [(1,26,000+1,92,000) ×1,500/3,200] = 1,49,062.50
Profit = 1,57,500– ` 1,49,062.50=`8,437.50
2. Valuation of bonds on 31st March, 20X2
Cost = `3,18,000/3,200 x1,700 = 1,68,937.50
3. Cost of equity shares purchased on 15/4/20X1
= Cost + Brokerage
= (5,000 ×` 200) + 1% of (5,000 ×` 200) =` 10,10,000
4. Sale proceeds of equity shares on 15/12/20X1
= (3,000 ×` 300) – 1% of (3,000 ×` 300) =` 8,91,000.
5. Profit on sale of shares on 15/12/20X1
Average cost = ` [(10,10,000+2,00,000-7,500) × 3,000/7,800]
= ` [12,02,500 × 3,000/7,800] = 4,62,500
Profit = ` 8,91,000 – `4,62,500=` 4,28,500.
6. Valuation of equity shares on 31st March, 20X2
Cost = ` [12,02,500× 4,800/7,800]= ` 7,40,000
Market Value = 4,800 shares × ` 220 = ` 10,56,000
Closing stock of equity shares has been valued at ` 7,40,000 i.e. cost being lower than the market value.
7. Interest accrued on opening balance of bonds = 1,200 x 100 x 12% x 3/12
= ` 3,600
8. Interest element in bonds purchased on 02.05.20X1
= 2,000 x 100 x 12% x 4/12 = ` 8,000
Cost of investment (amount in investment column)
= (2,000 x 100) – 8,000 = ` 1,92,000
9. Interest element in bonds sold on 30.09.20X1
= 1,500 x 100 x 12% x 3/12 = ` 4,500
10. Interest accrued on closing balance of bonds
= 1,700 x 100 x 12% x 3/12 = ` 5,100
11. Right shares
No. of right shares issued = (5,000 + 2,000) x 1/7 = 1,000 shares
No. of right shares sold = 1,000 x 20% = 200 shares
Proceeds from sale of right shares = 200 x 60 = ` 12,000
to be credited to statement of profit and loss
No. of right shares subscribed = 1,000 – 200 = 800 shares
Amount of right shares subscribed = 800 x 250 = ` 2,00,000
12. Amount of interim dividend = (5,000 + 2,000 + 800 – 3,000) x 10 x 10%
= ` 4,800
Note:
1. It is presumed that no dividend is received on bonus shares as bonus shares are declared on 3.6.20X1
and dividend pertains to the year ended 31.03.20X1.
2. The amount of dividend for the period, for which shares were not held by the investor, has been treated
as capital receipt.
9.12
Question 11
Mr. Brown has made following transactions during the financial year 20X1-X2:
Date Particulars
01.05.20X1 Purchased 24,000 12% Bonds of ` 100 each at ` 84 cum-interest.
Interest is payable on 30th September and 31st March every year.
15.06.20X1 Purchased 1,50,000 equity shares of ` 10 each in Alpha Limited for
` 25 each through a broker, who charged brokerage @ 2%.
10.07.20X1 Purchased 60,000 equity shares of ` 10 each in Beeta Limited for ` 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 ` 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 ` 5 per share. Mr. Brown exercised his option for 40% of his entitlements
and sold the balance rights in the market at ` 2.25 per share.
01.03.20X2 Sold 15,000 12% Bonds at ` 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.
(Study Material)
Answer
In the books of Mr. Brown
12% Bonds for the year ended 31st March, 20X2
` ` ` `
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
× 12% x 6/12)
20X2 To P & L A/c - - 1,05,000 20X2 By Bank 15,000 75,000 13,50,000
March 1 (W.N.1) Mar. 1 A/c (W.N.8)
20X2 To P & L A/c (b.f.) 2,49,000 20X2 By Bank-Interest 54,000
March Mar. 31 (9,000 x 100 x
31 12% x 6/12)
By Balance c/d
(W.N.2) 9,000 - 7,47,000
24,000 2,73,000 20,97,000 24,000 2,73,000 20,97,000
Investment in Equity shares of Alpha Ltd. for the year ended 31st March, 20X2
` ` ` `
20X1 To Bank A/c ([1,50,000 1,50,000 -- 38,25,000 20X1 By Bank A/c 80,000 - 17,60,000
June 15 x 25] + [2% x (1,50,000 Oct. 31
x 25)])
Oct. 14 To Bonus Issue 1,00,000 - - 20X2 By Bank A/c – 2,55,000
(1,50,000/3 x 2) Jan. 1 dividend
(1,70,000 x 10
x 15%)
20X1 To P & L A/c (W.N.3) 5,36,000 March 31 By Balance c/d 1,70,000 - 26,01,000
Oct. 31 (W.N.4)
20X2 To P & L A/c
Mar. 31 2,55,000
2,50,000 2,55,000 43,61,000 2,50,000 2,55,000 43,61,000
9.13
Investment in Equity shares of Beeta Ltd. for the year ended 31st March, 20X2
` ` ` `
20X1 To Bank A/c 60,000 -- 26,92,800 20X2 By Bank – - 1,18,800
July 10 ([60,000 x 44] + Mar. 15 dividend
[2% x (60,000 x [(60,000 + 6,000)
44)]) x 10 x 18%]
20X2 To Bank A/c 6,000 - 30,000 March 31 By Balance c/d
Jan. 15 (W.N. 5) (bal. fig.) 66,000 - 27,22,800
March 31 To P & L A/c - 1,18,800 -
66,000 1,18,800 27,22,800 66,000 1,18,800 27,22,800
Working Notes:
1. Profit on sale of 12% Bond
Sales price ` 13,50,000
19,92,000
Less: Cost of bond sold = x 15,000 ( ` 12, 45,000)
24,000
Profit on sale ` 1,05,000
2. Closing balance as on 31.3.20X2 of 12 % Bond
19,92,000
= x 9,000 = `7, 47,000
24,000
3. Profit on sale of equity shares of Alpha Ltd.
38,25,0 00
Less: Cost of bond sold = = x 80,000 ( `12,24,000)
2,50,000
Profit on sale ` 5,36,000
4. Closing balance as on 31.3.20X2 of equity shares of Alpha Ltd.
38,25,0 00
= x 1,70,000 = ( ` 26,01,000)
2,50,000
5. Calculation of right shares subscribed by Beeta Ltd.
60,000 shares
Right Shares = x 1 = 15,000 shares
4
Shares subscribed by Mr. Brown = 15,000 x 40%= 6,000 shares
Value of right shares subscribed = 6,000 shares @ ` 5 per share = ` 30,000
6. Calculation of sale of right entitlement by Beeta Ltd.
No. of right shares sold = 15,000 - 6,000 = 9,000 shares
Sale value of right = 9,000 shares x ` 2.25 per share = ` 20,250
Note: As per para 13 of AS 13, sale proceeds of rights is to be credited to P & L A/c.
7. Purchase of bonds on 01.05.20X1
Interest element in purchase of bonds = 24,000 x 100 x 12% x 1/12 = ` 24,000 Investment element in
purchase of bonds = (24,000 x 84) – 24,000 = ` 19,92,000
8. Sale of bonds on 01.03.20X2
Interest element in purchase of bonds = 15,000 x 100 x 12% x 5/12 = ` 75,000 Investment element in
purchase of bonds = 15,000 x 90 = ` 13,50,000
9.14
Question 12
How will you classify the investments as per AS 13? Explain in Brief.
(Study Material)
Answer
The investments are classified into two categories as per AS 13, viz., Current Investments and Long-term
Investments. A current Investment is an investment that is by its nature readily realisable and is intended to
be held for not more than one year from the date on which such investment is made. The carrying amount for
current investments is the lower of cost and fair value. Any reduction to fair value and any reversals of such
reductions are included in the statement of profit and loss. A long-term investment is an investment other than
a current investment. Long term investments are usually carried at cost. However, when there is a decline,
other than temporary, in the value of a long term investment, the carrying amount is reduced to recognise the
decline. The reduction in carrying amount is charged to the statement of profit and loss.
Question 13
Whether the accounting treatment 'at cost' under the head ‘Long Term Investments’ without providing for any
diminution in value is correct and in accordance with the provisions of AS 13. If not, what should have been
the accounting treatment in such a situation? Explain in brief.
(Study Material)
Answer
The accounting treatment 'at cost' under the head 'Long Term Investment’ in the financial statements of the
company without providing for any diminution in value is correct and is in accordance with the provisions of
AS 13 provided that there is no decline, other than temporary, in the value of investment. If the decline in the
value of investment is, other than temporary, compared to the time when the shares were purchased,
provision is required to be made.
Practical Questions
Question 14
Mr. X acquires 200 shares of a company on cum-right basis for ` 70,000. He subsequently receives an offer
of right to acquire fresh shares in the company in the proportion of 1:1 at ` 107 each. He does not subscribe
but sells all the rights for ` 12,000. The market value of the shares after their becoming ex-rights has also
gone down to ` 60,000. What should be the accounting treatment in this case?
(Study Material)
Answer
As per AS 13, where the investments are acquired on cum-right basis and the market value of investments
immediately after their becoming ex-right is lower than the cost for which they were acquired, it may be
appropriate to apply the sale proceeds of rights to reduce the carrying amount of such investments to the
market value. In this case, the amount of the ex-right market value of 200 shares bought by X immediately
after the declaration of rights falls to `60,000. In this case, out of sale proceeds of ` 12,000, ` 10,000 may be
applied to reduce the carrying amount to bring it to the market value and ` 2,000 would be credited to the
profit and loss account.
Question 15
On 1st April, 20X1, XY Ltd. has 15,000 equity shares of ABC Ltd. at a book value of ` 15 per share (nominal
value ` 10 per share). On 1st June, 20X1, XY Ltd. acquired 5,000 equity shares of ABC Ltd. for ` 1,00,000.
ABC Ltd. announced a bonus and right issue.
(1) Bonus was declared, at the rate of one equity share for every five shares held, on 1st July 20X1.
(2) Right shares are to be issued to the existing shareholders on 1st September 20X1. The company will
issue one right share for every 6 shares at 20% premium. No dividend was payable on these shares.
9.15
(3) Dividend for the year ended 31.3.20X1 were declared by ABC Ltd. @ 20%, which was received by XY
Ltd. on 31st October 20X1. XY Ltd.
(i) Took up half the right issue.
(ii) Sold the remaining rights for ` 8 per share.
(iii) Sold half of its shareholdings on 1st January 20X2 at ` 16.50 per share. Brokerage being 1%.
You are required to prepare Investment account of XY Ltd. for the year ended 31st March 20X2 assuming the
shares are being valued at average cost.
(Study Material)
Answer
In the books of XY Ltd.
Investment in equity shares of ABC Ltd. for the year ended 31st March, 20X2
` ` ` `
20X1 To Balance b/d 15,000 - 2,25,000 20X1 By Bank A/c (W.N. - 30,000 10,000
April 1 Oct. 31 5)
June 1 To Bank A/c 5,000 -- 1,00,000 20X2 By Bank A/c 13,000 - 2,12,355
Jan. 1 (W.N.4)
July 1 To Bonus Issue 4,000 - - March By Balance c/d 13,000 - 1,69,500
(W.N. 1) 31 (W.N. 6)
Sept.1 To Bank A/c 2,000 - 24,000
(W.N. 2)
20X2 To P & L A/c - - 42,855
Jan 1 (W.N. 4)
“20X2 To P & L A/c - 30,000 -
March
31
26,000 30,000 3,91,855 26,000 30,000 3,91,855
Working Notes:
1. Calculation of no. of bonus shares issued
15,000 shares + 5,000 shares
Bonus Shares = x 1 = 4,000 shares
5
15,000 shares + 5,000 shares + 4,000 shares
Right Shares = = 4,000 shares
6
4,000
Shares subscribed by XY Ltd. = = 2,000 shares
2
2,000 shares x ` 8 per share = ` 16,000
Amount received from sale of rights will be credited to statement of profit and loss.
4. Calculation of profit on sale of shares
5,000 shares purchased
4,000 shares bonus
2,000 shares right shares
26,000 shares
9.16
50% of the holdings were sold
i.e. 13,000 shares (26,000 x1/2) were sold.
Cost of total holdings of 26,000 shares (on average basis)
= ` 2,25,000 + ` 1,00,000 + ` 24,000– ` 10,000
= ` 3,39,000
Average cost of 13,000 shares would be
3,39,000
= ×13,000 = ` 1,69,500
26,000
`
Sale proceeds of 13,000 shares (13,000 x `16.50) 2,14,500
2,12,355
Less: Cost of 13,000 shares (1,69,500)
5. Dividend received on investment held as on 1st April, 20X1
= 15,000 shares x ` 10 x 20%
= ` 30,000 will be transferred to Profit and Loss A/c Dividend received on shares purchased on 1st June,
20X1
= 5,000 shares x ` 10 x 20% = `10,000 will be adjusted to Investment A/c
Note: It is presumed that no dividend is received on bonus shares as bonus shares are declared on 1st
July, 20X1 and dividend pertains to the year ended 31.3.20X1.
6. Calculation of closing value of shares (on average basis) as on 31st March, 20X2
3,39,000
13,000 × =` 1,69,500
26,000
Question 16
The following information is presented by Mr. Z (a stock broker), relating to his holding in 9% Central
Government Bonds. Opening balance (nominal value) ` 1,20,000, Cost ` 1,18,000 (Nominal value of each
unit is ` 100).
1.3.20X1 Purchased 200 units, ex-interest at ` 98.
1.7.20X1 Sold 500 units, ex-interest out of original holding at ` 100.
1.10.20X1 Purchased 150 units at ` 98, cum interest.
1.11.20X1 Sold 300 units, ex-interest at ` 99 out of original holdings.
Interest dates are 30th September and 31st March. Mr. Z closes his books every 31st December. Show the
investment account as it would appear in his books. Mr. Z follows FIFO method.
(Study Material)
Answer
In the Books of Mr. Z
9% Central Government Bonds (Investment) Account
Particulars Nominal Interest Principal Particulars Nominal Interest Principal
Value Value
20X1 ` ` ` 20X1 ` ` `
Jan.1 To Balance Mar. By Bank A/c
b/d 1,20,000 2,700 1,18,000 31 (W.N.3) - 6,300 -
(W.N.1)
March To Bank A/c July 1 By Bank A/c
1 (W.N.2) 20,000 750 19,600 (W.N.4) 50,000 1,125 50,000
9.17
Particulars Nominal Interest Principal Particulars Nominal Interest Principal
Value Value
20X1 ` ` ` 20X1 ` ` `
July 1 To P&L A/c - - 833 Sept. By Bank A/c
(W.N.5) 30 (W.N.6) - 4,050 -
Oct. 1 To Bank A/c Nov. By Bank A/c
(150 x 98) 15,000 - 14,700 1 (W.N.7) 30,000 225 29,700
Nov. 1 To P&L A/c - - 200 Dec. By Balance
(W.N.8) 31 c/d (W.N. 9 75,000 1,688 73,633
& W.N.10)
Dec. To P&L A/c
31 (b.f.) 9,938
(Transfer)
1,55,000 13,388 1,53,333 1,55,000 13,388 1,53,333
Working Note:
1. Interest element in opening balance of bonds = 1,20,000 x 9% x 3/12 = ` 2,700
2. Purchase of bonds on 1. 3.20X1
Interest element in purchase of bonds = 200 x 100 x 9% x 5/12 = ` 750
Investment element in purchase of bonds = 200 x 98 = ` 19,600
3. Interest for half-year ended 31 March = 1,400 x 100 x 9% x 6/12 = ` 6,300
Interest element = 500 x 100 x 9% x 3/12 = ` 1,125
Investment element = 500 x 100 = ` 50,000
5. Profit on sale of bonds on 1.7.20X1
Cost of bonds = (1,18,000/ 1,200) x 500 = ` 49,167
Sale proceeds = ` 50,000
Profit element = ` 833
6. Interest for half-year ended 30 September
= 900 x 100 x 9% x 6/12 = ` 4,050
Interest element = 300 x 100 x 9% x 1/12 = ` 225
Investment element = 300 x 99 = ` 29,700
8. Profit on sale of bonds on 1.11.20X1
Cost of bonds = (1,18,000/ 1,200) x 300 = ` 29,500
Sale proceeds = ` 29,700
Profit element = ` 200
9. Closing value of investment
Calculation of closing balance: Nominal `
value
Bonds in hand remained in hand at 31st December 20X1
From original holding (1,20,000 – 50,000 – 30,000) = 40,000 1,18,000 39,333
× 40,000
1,20,000
Purchased on 1st March 20,000 19,600
Purchased on 1st October 15,000 14,700
75,000 73,633
10. Interest element in closing balance of bonds = 750 x 100 x 9% x 3/12 = ` 1,688
9.18
Question 17
Mr. Purohit furnishes the following details relating to his holding in 8% Debentures ( ` 100 each) of P Ltd., held
as Current assets:
1.4.20X1 Opening balance – Nominal value ` 1,20,000, Cost ` 1,18,000
1.7.20X1 100 Debentures purchased ex-interest at ` 98
1.10.20X1 Sold 200 Debentures ex-interest at ` 100
1.1.20X2 Purchased 50 Debentures at ` 98 ex-interest
1.2.20X2 Sold 200 Debentures ex-interest at `99
Due dates of interest are 30th September and 31st March.
Mr. Purohit closes his books on 31.3.20X2. Brokerage at 1% is to be paid for each transaction (at ex-interest
price). Show Investment account as it would appear in his books. Assume FIFO method. Market value of 8%
Debentures of P Limited on 31.3.20X2 is ` 99.
(Study Material)
Answer
Investment A/c of Mr. Purohit
for the year ending on 31-3-20X2
(Scrip: 8% Debentures of P Limited)
(Interest Payable on 30th September and 31st March)
Value Value
` ` ` `
1.4.20X1 To Balance b/d 1,20,000 - 1,18,000 30.9.20X1 By Bank (1,300 x 100 - 5,200 -
x 8% x 6/12)
1.7.20X1 To Bank (ex- 10,000 200 9,898 1.10.20X1 By Bank (W.N.4) 20,000 - 19,800
Interest)
(W.N.1)
1.10.20X1 To Profit & Loss 133 1.2.20X2 By Bank (ex- Interest) 20,000 533 19,602
A/c (W.N.4) (W.N.5)
1.1.20X2 To Bank (ex- 5,000 100 4,949 1.2.20X2 By Profit & Loss A/c 64
Interest) (W.N.5)
(W.N.2)
31.3.20X2 To Profit & Loss - 9,233 31.3.20X2 By Bank (950 x 100 x - 3,800 -
A/c (Bal. fig.) 8% x 6/12)
31.3.20X2 By Balance c/d 95,000 - 93,514
(W.N.3)
1,35,000 9,533 1,32,980 1,35,000 9,533 1,32,980
Working Notes:
1. Purchase of debentures on 1.7.20X1
Investment element = (100 x 98) + [1% (100 x 98)] = ` 9,898
2. Purchase of debentures on 1.1.20X2
Investment element = {(50 x 98) + [1%(50 x 98)]} = ` 4,949
3. Valuation of closing balance as on 31.3.20X2:
Market value of 950 Debentures at ` 99 = ` 94,050
 1,18,000 
Cost of 800 Debentures cost =  ×80,000  = 78,667
 1,20,000 
100 Debentures cost = 9,898
50 Debentures cost = 4,949
93,514
Value at the end = ` 93,514, i.e., whichever is less
9.19
4. Profit on sale of debentures as on 1.10.20X1
`
Sales price of debentures (200 x ` 100) 20,000
Less: Brokerage @ 1% (200)
19,800
 1,18,000 
Less: Cost of Debentures  ×20,000  
 1,20,000  (19,667)
Profit on sale 133
5. Loss on sale of debentures as on 1.2.20X2
`
Sales price of debentures (200 x ` 99) 19,800
Less: Brokerage @ 1% (198)
19,602
 1,18,000 
Less: Cost of Debentures  ×20,000  
 1,20,000  (19,666)
Loss on sale 64
Interest element in sale of investment = 200 x 100 x 8% x 4/12 ` 533
Question 18
On 1st April, 20X1, Mr. Vijay had 30,000 Equity shares in X Ltd. at a book value of ` 4,50,000 (Face Value `
10 per share). On 22nd June, 20X1, he purchased another 5000 shares of the same company for ` 80,000.
The Directors of X Ltd. announced a bonus of equity shares in the ratio of one share for seven shares held on
10th August, 20X1.
On 31st August, 20X1 the Company made a right issue in the ratio of three shares for every eight shares
held, on payment of ` 15 per share. Due date for the payment was 30th September, 20X1, Mr. Vijay
subscribed to 2/3rd of the right shares and sold the remaining of his entitlement to Viru for a consideration of
` 2 per share.
On 31st October, 20X1, Vijay received dividends from X Ltd. @ 20% for the year ended 31st March, 20X1.
Dividend for the shares acquired by him on 22nd June, 20X1 to be adjusted against the cost of purchase.
On 15th November, 20X1 Vijay sold 20,000 Equity shares at a premium of ` 5 per share.
You are required to prepare Investment Account in the books of Mr. Vijay for the year ended 31st March,
20X2 assuming the shares are being valued at average cost.
(Study Material)
Answer
Investment Account in Books of Vijay (Scrip: Equity Shares in X Ltd.)
No. Amount No. Amount
` `
1.4.20X1 To Bal b/d 30,000 4,50,000 31.10.20X1 By Bank (dividend — 10,000
22.6.20X1 To Bank 5,000 80,000 on shares acquired
on 22.6.20X1)
10.8.20X1 To Bonus 5,000 _
30.9.20X1 To Bank (Rights 10,000 1,50,000
Shares)
15.11.20X1 To P&L A/c (Profit 32,000 15.11.20X1 By Bank 20,000 3,00,000
on sale of shares) (Sale of shares)
31.3.20X2 By Bal. c/d 30,000 4,02,000
50,000 7,12,000 50,000 7,12,000
9.20
Working Notes:
(1) Bonus Shares = (30,000 + 5,000) / 7 = 5,000 shares
(30,000 + 5,000 5,000)
8
(3) Rights shares sold = 15,000×1/3 = 5,000 shares
(4) Dividend received = 30,000×10×20% = ` 60,000 will be taken to P&L statement
(5) Dividend on shares purchased on 22.6.20X1= 5,000×10×20% = ` 10,000 is adjusted to Investment A/c
(4,50,000 + 80,000 + 1,50,000 - 10,000)
Average cost = × 20,000 = ` 2,68,000
50,000
Profit = ` 3,00,000– ` 2,68,000= ` 32,000.
(7) Cost of shares on 31.3.20X2
(4,50,000 + 80,000 + 1,50,000 - 10,000)
× 30,000 = ` 4,02,000
50,000
(8) Sale of rights amounting ` 10,000 (` 2 x 5,000 shares) will not be shown in investment A/c but will directly
be taken to P & L statement.
Test Your Knowledge

MCQ
Choose the most appropriate option as the answer:
1. The cost of Right shares is
(a) added to the cost of investments.
(b) subtracted from the cost of investments.
(c) no treatment is required.
Answer: (a)
2. Long term investments are carried at
(a) fair value.
(b) cost less ‘other than temporary’ decline.
(c) Cost and market value whichever is less.
Answer: (b)
3. Current investments are carried at
(a) Fair value.
(b) cost.
(c) Cost and fair value, whichever is less.
Answer: (c)
4. A Ltd. acquired 2,000 equity shares of Omega Ltd. on cum-right basis at ` 75 per share. Subsequently,
omega Ltd. made a right issue of 1:1 at ` 60 per share, which was subscribed for by A. Total cost of
investments at the year-end will be`
(a) 2,70,000.
(b) 1,50,000.
(c) 1,20,000.
Answer: (a)
5. Cost of investment includes
(a) Purchase costs.
(b) Brokerage and Stamp duty paid.
(c) Both (a) and (b).
Answer: (c)
9.21
6. A current investment is an investment
(a) That is readily realisable.
(b) That is intended to be held for not more than one year from the date on which such investment is
made.
(c) Both (a) and (b)
Answer: (c)
7. All the following are fixed income bearing securities except
(a) Debentures.
(b) Equity shares.
(c) Govt. Bonds.
Answer: (b)
8. If there is ‘other than temporary’ decline in the value of a long term investment then
(a) Carrying amount is reduced to recognise the decline.
(b) The reduction in carrying amount is charged to profit and loss account.
Answer: (c)
9. If investment is acquired by issue of shares, the acquisition cost of investment is
(a) Amount paid for acquisition.
(b) Fair value of securities issued.
(c) Market price of securities.
Answer: (b)
10. When long-term investments are reclassified as current investments, current investments are valued at
(a) Cost.
(b) Carrying amount.
(c) Lower of Cost and Carrying amount.
Answer: (c)
11. Violet Ltd. held shares in Omega Co. from 01.04.20X1 onwards as investment for long term purpose.
Now it wants to reclassify investment of cost of ` 50,000 out of these shares as current investments
having carrying value of ` 45000. The fair value on date of transfer is ` 48,000. These reclassified shares
would be valued on date of transfer at
(a) ` 50000
(b) ` 48000
(c) ` 45000.
Answer: (c)
12. Mr. X acquires 200 shares of a company on cum-right basis for ` 60,000. He subsequently receives an
offer of right to acquire fresh shares in the company in the proportion of 1:1 at ` 105 each. He does not
subscribe but sells the rights for ` 5,000. The market value of the shares after their becoming ex-rights
has also gone down. It would be appropriate to
(a) Credit ` 5,000 to Profit and Loss account.
(b) Reduce the carrying amount of investment by ` 5,000.
(c) Add ` 5,000 to the carrying amount of investment.
Answer: (b)
9.22
Chap. 9  Investment Accounts
QUESTION BANK
Question 19
Following transactions of Nisha took place during the financial year 2017-18:
1st April, 2017 Purchased 9,000 8% bonds of `100 each at `80.50 cum-interest. Interest
is payable on 1st November and 1st May.
1st May, 2017 Received half year's interest on 8% bonds.
10th July, 2017 Purchased 12,000 equity shares of `10 each in Moon Limited for `44
each through a broker, who charged brokerage @ 2%.
1st October, 2017 Sold 2,250 8% bonds at `81 Ex-interest.
1st November, 2017 Received half year's interest on 8% bonds.
15th January, 2018 Moon Limited made a rights issue of one equity share for every four
Equity shares held at `5 per share. Nisha exercised the option for 40% of
her entitlements and sold the balance rights in the market at `2.25 per
share.
15th March, 2018 Received 18% interim dividend on equity shares of Moon Limited.
Prepare separate investment account for 8% bonds and equity shares of Moon Limited in the books of Nisha
for the year ended on 31st March, 2018. Assume that the average cost method is followed.
Answer:
In the books of Nisha
8% Bonds for the year ended 31st March, 2018
` ` ` `
2017 1 M ay By Bank-Interest - 36,000
1 April, To Bank A/c 9,000 30,000 6,94,500 2017
Oct. 1 1 Oct.
2018 To P & L A/c - - 8,625 2017 By Bank A/c 2,250 7,500 1,82,250
March (W.N .1)
31 1 Nov. 2018 By Bank-Interest 27,000
To P & L A/c 40,500
2018 Mar. By Balance c/d
31 (W.N .2)
____ _______ _______ 6,750 - 5,20,875
9,000 70,500 7,03,125 9,000 70,500 7,03,125
Investment in Equity shares of Moon Ltd. for the year ended 31st March, 2018
` ` ` `
2017 To Bank 12,000 — 5,38,560 2018 By Bank – — 23,760
July 10 A/c March dividend
15 *
2018 To Bank 1,200 — 6,000 March By Balance c/d
Jan. 15 A/c 31 (bal. fig.) 13,200 — 5,44,560
(W.N. 3)
March 31 To P & L A/c — 23,760 _______ ——— ——— ———

13,200 23,760 5,44,560 13,200 23,760 5,44,560
* Considering that dividend was received on right shares also.
9.23
Working Notes:
1. Profit on sale of 8% Bonds
Less: Cost of bond sold = 6,94,500/9,000x 2,250 (` 1,73,625)
Profit on sale ` 8,625
2. Closing balance as on 31.3.2018 of 8 % Bonds
6,94,500/ 9,000 x 6,750= ` 5,20,875
3. Calculation of right shares subscribed by Moon Ltd.
Right Shares = 12,000/4 x 1= 3,000 shares
Shares subscribed by Nisha = 3,000 x 40%= 1,200 shares
4. Calculation of sale of right entitlement by Moon Ltd.
No. of right shares sold = 3,000 – 1,200 = 1,800 rights for ` 4,050
Note: As per para 13 of AS 13, sale proceeds of rights are to be credited to P & L A/c.
Question 20
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 `10 per share.
Date No. of Shares Terms
01.01.2016 600 Buy @ ` 20 per share
15.03.2016 900 Buy @ ` 25 per share
20.05.2016 1000 Buy@ ` 23 per share
25.07.2016 2500 Bonus Shares received
20.12.2016 1500 Sale @ ` 22 per share
01.02.2017 1000 Sale @ ` 24 per share
Addition information:
(1) On 15.09.2016 dividend @ ` 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 `20 per share. He subscribed to 60% of the shares and renounced the remaining
shares on receipt of the premium of ` 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.
(May 2018) (10 Marks)
Answer
Investment in Equity shares of JP Power Ltd.
Date Particulars No. Dividend Amount Date Particulars No. Dividend Amount
` ` ` `
1.1.16 To Bank A/c 600 12,000 31.3.16 By Balance c/d 1,500 34,500
15.3.16 To Bank A/c 900 22,500
1,500 34,500 1,500 34,500
1.4.16 To Balance 1,500 34,500 15.9.16 By Bank - 4,500 3,000
bid dividend
20.5.16 To Bank 1,000 23,000 20.12.16 By Bank 1,500 33,000

A/c
9.24
` ` ` `
25.7.16 To Bonus 2,500 — 1.2.17 By Bank 1,000 24,000
shares
12.11.16 To Bank 600 12,000 31.3.17 By Balance 3,100 36,812.50*
A/c c/d
20.12.16 To P& L A/c 15,187.50*
(profit on
sale)
1.2.17 To P& L A/c 12,125
(profit on
sale)
31.3.17 To P & L 4,500
A/c
(dividend)
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 ` 12,000
1,000 shares purchased at ` 23,000
2,500 shares at nil cost
600 right shares purchased at ` 12,000
Total cost of 5,600 shares is ` 66,500 69,500 less ` 3,000 [pre-acquisition dividend received on 1,000
shares purchased on 20.5.2017].
Hence, weighted average cost per share will be considered as ` 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 ended 31st March, 2016.
3. Calculation of right shares subscribed by Vijay
Right Shares (considering that right shares have been granted on Bonus shares also) = 5,000/5 × 1 =
1,000 shares
Shares subscribed = 1,000 × 60% = 600 shares
Calculation of sale of right renouncement
No. of right shares sold = 1,000 × 40% = 400 shares
Sale value of right = 400 shares × ` 3 per share = ` 1,200
4. Profit on sale of equity shares
As on 20.12.16
Sales price (1,500 shares at ` 22) 33,000.00
Less: Cost of shares sold (1,500 × ` 11.875) (17,812.50)
Profit on sale 15,187.50
As on 1.2.17
Sales price (1,000 shares at ` 24) 24,000
Less: Cost of shares sold (1,000 × ` 11.875) (11,875)
Balance of 3,100 shares as on 31.3.17 will be valued at ` 36,812.50 (at rate of ` 11.875 per share)
9.25
Question 21
A Ltd. purchased on 1st April, 2018 8% convertible debenture in C Ltd. of face value of ` 2,00,000 @ ` 108.
On 1st July, 2018 A Ltd. purchased another ` 1,00,000 debenture @ ` 112 cum interest.
On 1st October, 2018 ` 80,000 debenture was sold @ ` 105. On 1st December, 2018, C Ltd. give option for
conversion of 8% convertible debentures into equity share of ` 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 ` 110 and ` 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.
(RTP May 2019) (MTP April, 2022, 8 Marks)
Answer:
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]
value (`) (`) (`) Value (`) (`) (`)
1.4.18 To Bank A/c 2,00,000 - 2,16,000 30.09.18 By Bank A/c - 12,000 -

1.7.18 To Bank A/c 1,00,000 2,000 1,10,000 [`3,00,000 x 8% x
(W.N .1) (6/12]
31.12.18 To P & L A/c - 14,033 - 1.10.18 By Bank A/c 80,000 84,000

[Interest] 1.10.18 By P&L A/c (loss) (W.N 2,933
.1)
1.12.18 By Bank A/c (Accrued 733
interest)
(` 55,000 x .08 x 2/12)
1.12.18 By Equity shares in C 55,000 59,767
Ltd. (W.N . 3 and 4)
31.12.18 By Balance c/d (W.N .5) 1,65,000 3,300 1,79,300
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 (`) Date Particulars Cost (`)
1.12.18 T o 8 % debentures 59,767 31.12.18 By balance c /d 59,767
Working Notes:
(i) Cost of Debenture purchased on 1st July = `1,12,000 – `2,000 (Interest)
= `1,10,000
(ii) Cost of Debentures sold on 1st Oct.
= (`2,16,000 + `1,10,000) x 80,000/3,00,000 = ` 86,933
(iii) Loss on sale of Debentures = ` 86,933– `84,000 = `2,933
Nominal value of debentures converted into equity shares = ` 55,000
[(` 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 = (` 2,16,000 + `1,10,000) x 55,000/3,00,000
= ` 59,767
(v) Cost of closing balance of Debentures = (` 2,16,000 + `1,10,000) x 1,65,000 / 3,00,000
= ` 1,79,300
9.26
(vii) Closing balance of Debentures has been valued at cost being lower than the market value i.e.
` 1,81,500 (` 1,65,000 @ ` 110)
(viii) 5,000 equity Shares in C Ltd. will be valued at cost of ` 59,767 being lower than the market value
` 75,000 (` 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
Akash Ltd. had 4,000 equity share of X Limited, at a book value of ` 15 per share (face value of ` 10 each) on
1st April 2017. On 1st September 2017, Akash Ltd. acquired 1,000 equity shares of X Limited at a premium of
` 4 per share. X Limited announced a bonus and right issue for existing shareholders.
The terms of bonus and right issue were—
(1) Bonus was declared, at the rate of two equity shares for every five equity shares held on 30th
September, 2017.
(2) Right shares are to be issued to the existing shareholders on 1st December, 2017. The company
issued two right shares for every seven shares held at 25% premium. No dividend was payable on
these shares. The whole sum being payable by 31st December, 2017.
(3) Existing shareholders were entitled to transfer their rights to outsiders, either wholly or in part.
(4) Akash Ltd. exercised its option under the issue for 50% of its entitlements and sold the remaining
rights for ` 8 per share.
(5) Dividend for the year ended 31st March 2017, at the rate of 20% was declared by the company and
received by Akash Ltd., on 20th January 2018.
(6) On 1st February 2018, Akash Ltd., sold half of its shareholdings at a premium of ` 4 per share.
(7) The market price of share on 31.03.2018 was ` 13 per share.
You are required to prepare the Investment Account of Akash Ltd. for the year ended 31st March,
2018 and determine the value of share held on that date assuming the investment as current
investment. Consider average cost basis for ascertainment of cost for equity share sold.
(RTP November 2018)
Answer:
shares shares
` ` ` ` ` `
2017 2018
April 1 To Balance b/d 4,000 - 60,000 Jan. 20 By Bank 8,000 2,000
(dividend)
Sept 1 To Bank 1,000 - 14,000 Feb.1 By Bank 4,000 56,000
Sept.30 To Bonus Issue 2,000 — Mar. 31 By Balance c/d 4,000 42,250
Dec.1 To Bank (Right) 1,000 - 12,500
2018
Feb. 1 To Profit & Loss 13,750
A/c
Mar. 31 To Profit & Loss 8,000
A/c (Dividend
income)
8,000 8,000 1,00,250 8,000 8,000 1,00,250
April. 1 To Balance b/d 4,000 42,250
9.27
Working Notes:
`
(` 60,000 + ` 14,000 + ` 12,500) 86,500
Less: Dividend on shares purchased on 1st Sept, 2017 (2,000)
Cost of 8,000 shares 84,500
Cost of 4,000 shares (Average cost basis*) 42,250
Sale proceeds (4,000 shares @ 14) 56,000
* For ascertainment of cost for equity shares sold, average cost basis has been applied.
Closing balance will be valued based on lower of cost (` 42,250) or net realizable value (`13 × 4,000).
Thus investment will be valued at ` 42,250.
1,000 shares × ` 8 per share = ` 8,000
Amount received from sale of rights will be credited to P & L A/c as per AS 13 'Accounting for
Investments'.
4. Dividend received on investment held as on 1st April, 2017
= 4,000 shares × ` 10 × 20%
= ` 8,000 will be transferred to Profit and Loss A/c
Dividend received on shares purchased on 1st Sep. 2017
= 1,000 shares × ` 10 × 20% = ` 2,000 will be adjusted to Investment A/c
Note: It is presumed that no dividend is received on bonus shares as bonus shares are declared on 30st
Sept., 2017 and dividend pertains to the year ended 31.3.2017.
Question 23
Alpha Ltd. purchased 5,000, 13.5% Debentures of Face Value of ` 100 each of Pergot Ltd. on 1st May 2017
@ ` 105 on cum interest basis. The interest on these instruments is payable on 31st & 30th of March &
September respectively. On August 1st 2017 the company again purchased 2,500 of such debentures @ `
102.50 each on cum interest basis. On October 1st, 2017 the company sold 2,000 Debentures @ ` 103 each
on ex-interest basis. The market value of the debentures as at the close of the year was ` 106. You are
required to prepare the Investment in Debentures Account in the books of Alpha Ltd. for the year ended 31st
Dec. 2017 on Average Cost Basis.
(RTP May 2018)
Answer:
8. Books of Alpha Ltd.
Investment in 13.5% Debentures in Pergot Ltd. Account
(Interest payable on 31st March & 30th September)
Date Particulars Nominal Interest Amount Date Particulars Nominal Interest Amount
2017 ` ` ` 2017 ` ` `
May 1 To Bank 5,00,000 5,625 5,19,375 Sept.30 By Bank 50,625
(6 months Int)
Aug.1 To Bank 2,50,000 11,250 2,45,000 Oct.1 By Bank 2,00,000 2,06,000
Oct.1 To P&L A/c 2,167
Dec.31 To P&L A/c 52,313 Dec.31 By Balance c/d 5,50,000 18,563 5,60,542
7,50,000 69,188 7,66,542 7,50,000 69,188 7,66,542
Note: Cost being lower than Market Value the debentures are carried forward at Cost.
9.28
Working Notes:
1. Interest paid on ` 5,00,000 purchased on May 1st, 2017 for the month of April 2017, as part of
purchase price: 5,00,000 x 13.5% x 1/12 = ` 5,625
2. Interest received on 30th Sept. 2017
On ` 5,00,000 = 5,00,000 x 13.5% x 1/2 = 33,750
On ` 2,50,000 = 2,50,000 x 13.5% x 1/2 = 16,875
Total ` 50,625
3. Interest paid on ` 2,50,000 purchased on Aug. 1st 2017 for April 2017 to July 2017 as part of
purchase price:
2,50,000 x 13.5% x 4/12 = ` 11,250
4. Loss on Sale of Debentures Cost of acquisition
(` 5,19,375 + ` 2,45,000) x ` 2,00,000/` 7,50,000 = 2,03,833
Less: Sale Price (2,000 x 103) = 2,06,000
Profit on sale = ` 2,167
5. Cost of Balance Debentures
(` 5,19,375 + ` 2,45,000) x ` 5,50,000/` 7,50,000 = ` 5,60,542
6. Interest on Closing Debentures for period Oct.-Dec. 2017 carried forward (accrued interest)
` 5,50,000 x 13.5% x 3/12 = ` 18,563
Question 24
In 2015, Royal Ltd. issued 12% fully paid debentures of ` 100 each, interest being payable half yearly on 30th
September and 31st March of every accounting year.
On 1st December, 2016, M/s. Kumar purchased 10,000 of these debentures at `101 cum-interest price, also
paying brokerage @ 1% of cum-interest amount of the purchase. On 1st March, 2017 the firm sold all of
these debentures at `106 cum-interest price, again paying brokerage @ 1 % of cum-interest amount. Prepare
Investment Account in the books of M/s. Kumar for the period 1st December, 2016 to 1st March, 2017.
(MTP March 2019) (6 Marks)
Answer:
In the books of M/s Kumar
Investment Account
for the period from 1st December 2016 to 1st March, 2017
(Scrip: 12% Debentures of Royal Ltd.)
Value (`) (`) Value (`) (`)
1.12.2016 To Bank A/c 10,00,000 20,000 10,00,100 1.03.2017 By Bank A/c 10,00,000 50,000 9,99,400
(W.N .1) (W.N .2)
1.3.2017 To Profit & - 1.3.2017 By Profit &
loss A/c 30,000 loss A/c 700
10,00,000 50,000 10,00,100 10,00,000 50,000 10,00,100
Working Notes:
(i) Cost of 12% debentures purchased on 1.12.2016 `
Cost Value (10,000 × `101) = 10,10,000
Add: Brokerage (1% of `10,10,000) = 10,100
Less: Cum Interest (10,000 x 100 x12% x 2/12) = (20,000)
Total = 10,00,100
(ii) Sale proceeds of 12% debentures sold on 1st March, 2017 `
Sales Price (10,000 × `106) = 10,60,000
Less: Brokerage (1% of `10,60,000) = (10,600)
Less: Cum Interest (10,000 x 100 x12% x 5/12) = (50,000)
Total = 9,99,400
9.29
Question 25
Gopal holds 2,000, 15% Debentures of ` 100 each in Ritu Industries Ltd. as on April 1, 2015 at a cost of
`2,10,000. Interest is payable on June, 30 and December, 31 each year. On May 1, 2015, 1,000 debentures
are purchased cum-interest at ` 1,07,000. On November 1, 2015, 1,200 debentures are sold ex-interest at
`1,14,600. On November 30, 2015, 800 debentures are purchased ex-interest at ` 76,800. On December 31,
2015, 800 debentures are sold cum-interest for ` 1,10,000. You are required to prepare the Investment
Account showing value of holdings on March 31, 2016 at cost, using FIFO Method.
(MTP April 2019) (10 Marks)
Answer:
Investment Account of Gopal
For the year ended 31.3.2016
(Script: 15% Debentures in Ritu Industries Ltd.)
(Interest payable on 30th June and 31st December)
Date Particulars Nominal Interest ` Cost ` Date Particulars Nominal Interest ` Cost `
Value ` Value `
1.04.15 To Balance A/c 2,00,000 7,500 2,10,000 30.06.15 By Bank A/c - 22,500
30.11.15 To Bank A/c 80,000 5,000 76,800 1.11.15 By Profit & Loss - - 11,400
A/c
31.12.15 To Profit & Loss A/c 20,000 31.12.15 By Bank A/c 80,000 6,000 1,04,000
31.03.16 To Profit & Loss A/c 37,250 31.12.15 By Bank A/c - 13,500 -
(Bal. fig.) 31.12.15 By Bank A/c - 6,750 -
31.3.16 By Bal. c/d 1,80,000 - 1,78,800
3,80,000 54,750 4,08,800 3,80,000 54,750 4,08,800
Working Notes:
15 3
(i) Accrued Interest as on 1st April, 2015 = ` 2,00,000 × × = ` 7,500
100 12
15 4
(ii) Accrued Interest as on 1.5.2015 = ` 1,00,000 × = ` 5,000 ×
100 12
(iii) Cost of Investment for purchase on 1st May = ` 1,07,000 – ` 5,000 = ` 1,02,000
15 6
(iv) Interest received as on 30.6.2015 = ` 3,00,000 × × = ` 22,500
100 12
15 4
(v) Accrued Interest on debentures sold on 1.11.2015= ` 1,20,000 × × = ` 6,000
100 12
15 5
(vi) Accrued Interest = ` 80,000 × × = ` 5,000
100 12
15 6
(vii) Accrued Interest on sold debentures 31.12.2015 = ` 80,000 × = ` 6,000 ×
100 12 
(viii) Sale Price of Investment on 31st Dec. = ` 1,10,000 – ` 6,000 = ` 1,04,000
(ix) Loss on Sale of Debenture on 1.1.2015
Sale Price of Debenture 1,14,600
Less: Cost Price of debenture
2,10,000
× ` 1,20,000 1,26,000
2,00,000
Loss on sale 11,400
15 6
(x) Accrued interest as on 31.12.2015 = ` 1,80,000 × × = ` 13,500
100 12
9.30
15 3
(xi) Accrued Interest = ` 1,80,000 × ×
= ` 6,750
100 12
(xii) Cost of investment as on 31st Marc h = ` 1,02,000 + ` 76,800 = ` 1,78,800
(xiii) Profit on debentures sold on 31st Dec ember
= ` 1,04,000 –(` 2,10,000x800/2,000) =` 20,000
Question 26
Smart Investments made the following investments in the year 201 7-18:
12% State Government Bonds having face value ` 100
Date Particulars
01.04.2017 Opening Balance (1200 bonds) book value of ` 1,26,000
02.05.2017 Purchased 2,000 bonds @ ` 100 cum interest
30.09.2017 Sold 1,500 bonds at ` 105 ex interest
Interest on the bonds is received on 30th June and 31st Dec. each year.
Equity Shares of X
Ltd.
15.04.2017 Purchased 5,000 equity shares @ ` 200 on cum right basis
Brokerage of 1% was paid in addition (Face Value of shares
` 10)
03.06.2017 The company announced a bonus issue of 2 shares for every 5
shares held.
16.08.2017 The company made a rights issue of 1 share for every 7 shares
held at ` 250 per share.
The entire money was payable by 31.08.2017.
22.8.2017 Rights to the extent of 20% was sold @ ` 60. The remaining
rights were subscribed.
02.09.2017 Dividend @ 15% for the year ended 31.03.2017 was received
on 16.09.2017
15.12.2017 Sold 3,000 shares @ ` 300. Brokerage of 1% was incurred
extra.
15.01.2018 Received interim dividend @ 10% for the year 2017-18
31.03.2018 The shares were quoted in the stock exchange @ ` 220
Prepare Investment Accounts in the books of Smart Investments. Assume that the average cost method is
followed.
(MTP August, 2018) (12 Marks)
Answer:
In the books of Smart Investments
12% Govt. Bonds for the year ended 31st March, 2018
Date Particulars Nos. Income Amount Date Particulars Nos. Income Amount
1.4.17 To Opening 1,200 3,600 1,26,000 30.6.17 By Bank A/c - 19,200 -
balance b/d (Interest) (3,200 x
100 x 12% x 6/12)
2.5.17 To Bank A/c 2,000 8,000 1,92,000 30.9.17 By Bank A/c 1,500 4,500 1,57,500
31.3.18 To P & L A/c 27,400 31.12.17 By Bank A/c - 10,200 -
(Interest) (Interest) (1,700 x
100 x 12% x 6/12)
To P & L A/c 8,437.50 31.3.18 By Bal. c/d 1,700 5,100 1,68,937.50
(Profit on Sale)
3,200 39,000 3,26,437.50 3,200 39,000 3,26,437.50
9.31
Investments in Equity shares of X Ltd. for year ended 31.3.201 8
Date Particulars Nos. Income Amount Date Particulars Nos. Income Amount
15.4.17 To Bank A/c 5,000 10,10,000
3.6.17 To Bonus Issue 2,000 - - 16.9.17 By Bank (Dividend) - - 7,500
31.8.17 To Bank A/c 800 2,00,000 15.12.17 By Bank (Sale) 3,000 - 8,91,000
31.3.18 To P & L A/c 4,800 4,28,500 15.1.18 By Bank (interim 4,800
dividend)
31.3.18 By Bal. c/d 4,800 7,40,000
7,800 4,800 16,38,500 7,800 4,800 16,38,500
Working Notes:
1. Profit on sale of bonds on 30.9.1 7
Average cost = ` [(1,26,000+1,92,000) × 1,500/3,200] = 1,49,062.50
Profit = 1,57,500– ` 1,49,062.50=` 8,437.50
2. Valuation of bonds on 31st March, 2018
Cost = ` 3,18,000/3,200 x1,700 = 1,68,937.50
3. Cost of equity shares purchased on 15/4/201 7
= Cost + Brokerage
= (5,000 × ` 200) + 1% of (5,000 × ` 200) = ` 10,10,000
4. Sale proceeds of equity shares on 1 5/12/2017
= (3,000 × ` 300) – 1% of (3,000 × ` 300) = ` 8,91,000.
5. Profit on sale of shares on 15/12/2017
Average cost = ` [(10,10,000 + 2,00,000-7,500) × 3,000/7,800]
= ` [12,02,500 × 3,000/7,800] = 4,62,500
Profit = ` 8,91,000 – ` 4,62,500 = ` 4,28,500.
6. Valuation of equity shares on 31st March, 2018
Cost =` [12,02,500 × 4,800/7,800] = ` 7,40,000
Market Value = 4,800 shares ×` 220 =` 10,56,000
Closing stock of equity shares has been valued at ` 7,40,000 i.e. cost being lower than the market
value.
Note: If rights are not subscribed for but are sold in the market, the sale proceeds are taken to the
profit and loss statement as per para 13 of AS 13 “Accounting for Investments”
Question 27
Meera carried out the following transactions in the shares of Kumar Ltd.:
(1) On 1st April, 2017 she purchased 40,000 equity shares of ` 1 each fully paid up for ` 60,000.
(2) On 15th May 2017, Meera sold 8,000 shares for ` 15,200.
(3) At a meeting on 15th June 2017, the company decided:
(i) To make a bonus issue of one fully paid up share for every four shares held on 1st June 2017, and
(ii) To give its members the right to apply for one share for every five shares held on 1 st June 2017 at a
price of ` 1.50 per share of which 75 paise is payable on or before 15th July 2017 and the balance,
75 paise per share, on or before 15th September, 2017.
The shares issued under (i) and (ii) were not to rank for dividend for the year ending 31st December
2017.
9.32
(a) Meera received her bonus shares and took up 4000 shares under the right issue, paying the sum
thereon when due and selling the rights of the remaining shares at 40 paise per share; the
proceeds were received on 30 th September 2017.
(b) On 15th March 2018, she received a dividend from Kumar Ltd. of 15 per cent in respect of the
year ended 31st Dec 2017.
(c) On 30th March, 2018 she received ` 28,000 from the sale of 20,000 shares.
You are required to record these transactions in the Investment Account in Meera’s books for the year ended
31st March 2018 transferring any profits or losses on these transactions to Profit and Loss account. Apply
average cost basis.
Expenses and tax to be ignored.
(MTP October, 2018) (8 Marks)
Answer:
In the books of Meera Investment Account (Shares in Kumar Limited)
Date Particulars No. of Income Amount Date Particulars No. of Income Amount
Shares Shares
2017 ` ` 2017 ` `
April 1 To Bank 40,000 - 60,000 May By Bank (Sale) 8,000 - 15,200
(Purchases)
May To Profit & Loss - - 3,200
A/c (W.N.1)
June To Bonus Issue 8,000 - Nil 2018

July To Bank (@ 75 p. paid 4,000 - 3,000 Mar. 15 By Bank (Dividend @ 4,800 -
on 4,000 shares) 15% on ` 32,000)
To Bank (@ 75 p. paid
on 4,000 shares) By Bank (Sale)
Sept. - - 3,000 Mar. 30 20,000 - 28,000
To Profit & Loss
A/c (W.N.2)
3,455
2018 Mar. 31 By Balance c/d 24,000 - 29,455
Mar. 31
To Profit & Loss A/c  24, 000 
 × 54, 000 
- 4,800  44, 000 
______ _____ _____ _____ _____ _____
52,000 4,800 72,655 52,000 4,800 72,655
Working Notes:
(1) Profit on Sale on 15-5-2017:
Cost of 8,000 shares @ `1.50 ` 12,000
Less: Sales price ` 15,200
Profit ` 3,200
(2) Cost of 20,000 shares sold:
Cost of 44,000 shares (48,000 + 6,000) ` 54,000
 Rs. 54,000  ` 24,545
 Cost of 20,000 shares  × 20,000 shares 
 44,000 
Profit on sale of 20,000 shares (` 28,000 – ` 24,545) ` 3,455
Question 28
(1) On 1st April, 2017 she purchased 40,000 equity shares of ` 1 each fully paid up for `60,000.
(i) To make a bonus issue of one fully paid up share for every four shares held on 1st June 2017,
and
9.33
(ii) To give its members the right to apply for one share for every five shares held on 1st June 2017
at a price of ` 1.50 per share of which 75 paise is payable on or before 15th July 2017 and the
balance, 75 paise per share, on or before 15th September, 2017.
The shares issued under (i) and (ii) were not to rank for dividend for the year ending 31st December 2017.
(a) Meera received her bonus shares and took up 4000 shares under the right issue, paying the sum
thereon when due and selling the rights of the remaining shares at 40 paise per share; the proceeds
were received on 30th September 2017.
(b) On 15th March 2018, she received a dividend from Kumar Ltd. of 15 per cent in respect of the year
ended 31st Dec 2017.
(c) On 30th March she received ` 28,000 from the sale of 20,000 shares.
You are required to prepare the Investment Account in Meera's books for the year ended 31st March 2018
recording the above mentioned transactions by transferring any profits or losses on these transactions to
Profit and Loss account. Apply average cost basis. Expenses and tax to be ignored.
Answer:
Investment Account (Shares in Kumar Limited) in the books of Meera
Dare Particulars No. of Income Amount Date Particulars No of Income Amount
Shares Shares
2017 ` ` 2017 ` `
April 1 To Bank 40,000 — 60,000 May By Bank (Sale) 8,000 — 15,200
(Purchases)
May To Profit & Loss — — 3,200 2018 By Bank (Dividend @ — 4,800 —

A/c(W.N.1) Mar. 15 15% on ` 32,000)
June To Bonus Issue 8,000 — Nil Mar. 30 By Bank (Sale) 20,000 — 28,000
July To Bank (@ 75 p. 4,000 — 3,000 Mar. 31 By Balance c/d 24,000 — 29,455
paid on 4,000 (24,000/44,000 ×
shares) 54,000)
Sept. To Bank (@ 75 p. — 3,000
paid on 4,000
shares)
2018 To Profit & Loss A/c — 3,455
Mar. 31 (W.N.2)
To Profit & Loss A/c 4,800
52,000 4,800 72,655 52,000 4,800 72,655
Working Notes:
Cost of 8,000 shares @ `1.50 ` 12,000
Profit ` 3,200
Cost of 44,000 shares (48,000 + 6,000) ` 54,000
 Cost of 20,000 shares (` 54,000/44,000 shares × 20,000 shares) ` 24,545
Profit on sale of 20,000 shares 28,000 - ` 24,545) ` 3,455
Question 29
Gopal holds 2,000,15% Debentures of ` 100 each in Ritu Industries Ltd. as on April 1, 2015 at a cost of
`2,10,000. Interest is payable on June, 30 and December, 31 each year. On May 1, 2015,1,000 debentures
are purchased cum-interest at ` 1,07,000. On November 1,2015, 1,200 debentures are sold ex-interest at
`1,14,600. On November 30, 2015, 800 debentures are purchased ex-interest at ` 76,800. On December 31,
2015, 800 debentures are sold cum-interest for ` 1,10,000.
9.34
You are required to prepare the Investment Account showing value of holdings on March 31, 2016 at cost,
using FIFO Method.
Answer:
Investment Account of Gopal
For the year ended 31.3.2016
(Script: 15% Debentures in Ritu Industries Ltd.)
(Interest payable on 30th June and 31st December)
Value Value
` ` ` ` ` `
1.04.15 To Balance 2,00,000 7,500 2,10,000 30.06.15 By Bank A/c — 22,500
A/c
30.11.15 To Bank A/c 80,000 5,000 76,800 1.11.15 By Profit & Loss — — 11,400
A/c
31.12.15 To Profit & 20,000 31.12.15 By Bank A/c 80,000 6,000 1,04,000
Loss A/c
31.03.16 To Profit & 37,250 31.12.15 By Bank A/c 1,80,000 1,78,800
Loss A/c 31.12.15 By Bank A/c 13,500
(Bal. fig.) 31.3.16 By Bal. c/d 6,750
3,80,000 54,750 4,08,800 3,80,000 54,750 4,08,800
Working Notes:
15 3
(i) Accrued Interest as on 1st April, 2015 = ` 2,00,000 x 100 x 12 = ` 7,500
15 4
(ii) Accrued Interest as on 1.5.2015 = ` 1,00,000 x 100 x12 = `5,000
(iii) Cost of Investment for purchase on 1st May = ` 1,07,000 - ` 5,000 = ` 1,02,000
15 6
(iv) Interest received as on 30.6.2015= ` 3,00,000x 100 x 12 = `22,500
(v) Accrued Interest on debentures sold on 1.11.2015
15 4
= ` 1,20,000 x 100 x 12 = `6,000
15 5
(vi) Accrued Interest = ` 80,000 x 100 x 12 = `5,000
15 6
(vii) Accrued Interest on sold debentures 31.12.2015 = ` 80,000 x 100 x 12 = `6,000
(viii) Sale Price of lnvestment on 31st Dec. = ` 1,10,000 - ` 6,000 = ` 1,04,000
(ix) Loss on Sale of Debenture on 1.11.2015
Sale Price of debenture 1,14,600
Less: Cost Price of debenture 210000 1,26,000
200000 = `1,20,000
Loss on sale 11,400
15 6
(x) Accrued interest as on 31.12.2015 = ` 1,80,000 x 100 x 12 = `13,500
15 3
(xi) Accrued Interest = ` 1,80,000 x 100 x 12 = `6,750
(xii) Cost of investment as on 31st March = ` 1,02,000 + ` 76,800 = ` 1,78,800

(xiii) Profit on debentures sold on 31st December
= ` 1,04,000 - (` 2,10,000 x 800/2,000) = ` 20,000
9.35
Question 30
A Pvt. Ltd. follows the calendar year for accounting purposes. The company purchased 5,000 (nos.) 13.5%
Convertible Debentures of Face Value of ` 100 each of P Ltd. on 1st May 2018 @ ` 105 on cum interest
basis. The interest on these instruments is payable on 31st March & 30th September respectively. On August
1st 2018 the company again purchased 2,500 of such debentures @ ` 102.50 each on cum interest basis.
On 1st October, 2018 the company sold 2,000 Debentures @ ` 103 each. On 31st December, 2018 the
company received 10,000 equity shares of ` 10 each in P Ltd. on conversion of 20% of its holdings. Interest
for 3 months on converted debentures was also received on 31.12.2018. The market value of the debentures
and equity shares as at the close of the year were ` 106 and ` 9 respectively. Prepare the Debenture
Investment Account & Equity Shares Investment Account in the books of A Pvt. Ltd. for the year 2018 on
Average Cost Basis.
(RTP November 2019)
Answer
Books of A Pvt. Ltd.
Investment in 13.5% Convertible Debentures in P Ltd. Account
(Interest payable 31st March & 30th September)
` ` ` ` ` `
2018 2018
May 1 To Bank 5,00,000 5,625 5,19,375 Sept. By Bank 50,625
30 (6 months Int)
Dec. To P&L A/c 52,313 Dec. By Equity 1,10,000 1,12,108
31 31 share
Dec. By Bank 3,713
31 (See note1)
Dec. By Balance
31 c/d 4,40,000 14,850 4,48,434
7,50,000 69,188 7,66,542 7,50,000 69,188 7,66,542
Note 1: ` 3,713 received on 31.12.2018 represents interest on the debentures converted till date of
conversion.
Note 2: Cost being lower than Market Value the debentures are carried forward at Cost.
Investment in Equity shares in P Ltd. Account

Date Particulars Nominal Amount Date Particulars Nominal Amount
` ` ` `
2018 2018
Dec 31 To 13.5% 1,00,000 1,12,108 Dec.31 By P&L A/c 22,108
Deb. Dec.31 By Bal. c/d 1,00,000 90,000
1,00,000 1,12,108 1,00,000 1,12,108
Note 1: Cost being higher than Market Value the shares are carried forward at Market Value.
Working Notes:
1. Interest paid on ` 5,00,000 purchased on May 1st, 2018 for the month of April 2018, as part of purchase
price: 5,00,000 x 13.5% x 1/12 = ` 5,625
On ` 5,00,000 = 5,00,000 x 13.5% x ½ = 33,750
On ` 2,50,000 = 2,50,000 x 13.5% x ½ = 16,875
Total ` 50,625
9.36
3. Interest paid on ` 2,50,000 purchased on Aug. 1st 2018 for April 2018 to July 2018 as part of purchase
price: 2,50,000 x 13.5% x 4/12 = ` 11,250
4. Loss on Sale of Debentures Cost of acquisition
(` 5,19,375 + ` 2,45,000) x ` 2,00,000/` 7,50,000 = 2,03,833
Less: Sale Price (2,000 x 103) = 2,06,000
5. Interest on 1,100 Debentures (being those converted) for 3 months i.e. Oct-Dec. 2018 1,10,000 x 13.5% x
3/12 = ` 3,713
6. Cost of Debentures converted to Equity Shares
(` 5,19,375 + ` 2,45,000) x 1,10,000/7,50,000= ` 1,12,108
(` 5,19,375 + ` 2,45,000) x ` 4,40,000/` 7,50,000 = ` 4,48,434
8. Interest on Closing Debentures for period Oct.- Dec. 2018 carried forward (accrued interest)
` 4,40,000 x 13.5% x 3/12 = ` 14,850
Question 31
Akash Ltd. had 4,000 equity share of X Limited, at a book value of `15 per share (face value of `10 each) on
1st April 2018. On 1st September 2018, Akash Ltd. acquired 1,000 equity shares of X Limited at a premium of
`4 per share. X Limited announced a bonus and right issue for existing share holders.
The terms of bonus and right issue were—
(1) Bonus was declared, at the rate of two equity shares for every five equity shares held on 30th
September, 2018.
(2) Right shares are to be issued to the existing shareholders on 1st December, 2018. The company
issued two right shares for every seven shares held at 25% premium. No dividend, was payable on
these shares. The whole sum being payable by 31st December, 2018.
(3) Existing shareholders were entitled to transfer their rights to outsiders, either wholly or in part.
(4) Akash Ltd. exercised its option under the issue for 50% of its entitlements and sold the remaining
rights for `8 per share.
(5) Dividend for the year ended 31st March 2018, at the rate of 20% was declared by the company and
received by Akash Ltd., on 20th January 2019.
(6) On 1st February 2019, Akash Ltd., sold half of its share holdings at a premium of `4 per share.
(7) The market price of share on 31.03.2019 was `13 per share.
You are required to prepare the Investment Account of Akash Ltd. for the year ended 31st March, 2019 and
determine the value of shares held on that date assuming the investment as current investment.
[MTP October, 2019, 10 marks]
Answer
shares shares
` ` ` `
2018 2019
April 1 To 4,000 – 60,000 Jan. By Bank 8,000 2,000
Balance 20 (dividend)
b/d
Sept 1 To Bank 1,000 – 14,000 Feb.1 By Bank 4,000 56,000
Sept.30 To Bonus 2,000 – – Mar. By 4,000 42,250
Issue 31 Balance
c/d
Dec.1 To Bank 1,000 – 12,500
(Right)
9.37
shares shares
` ` ` `
2019
Feb. 1 To Profit 13,750
& Loss
A/c
Feb. 1 To Profit 8,000
& Loss
A/c
(Dividend
income)
8,000 8,000 1,00,250 8,000 8,000 1,00,250
April. 1 To 4,000 42,250
Balance
b/d
Working Notes:
`
(` 60,000 + ` 14,000 + ` 12,500) 86,500
Less: Dividend on shares purchased on 1st Sept, 2018 (2,000)
Cost of 8,000 shares 84,500
Cost of 4,000 shares (Average cost basis*) 42,250
Sale proceeds (4,000 shares @ 14/-) 56,000
* For ascertainment of cost for equity shares sold, average cost basis has been applied.
Closing balance will be valued based on lower of cost (` 42,250) or net realizable value (`13x 4,000). Thus
investment will be valued at ` 42,250.
1,000 shares x ` 8 per share = ` 8,000
Amount received from sale of rights will be credited to P & L A/c as per AS 13 'Accounting for Investments'.
= 4,000 shares x ` 10 x 20%
= ` 8,000 will be transferred to Profit and Loss A/c
Dividend received on shares purchased on 13tSep. 2018
= 1,000 shares x ` 10 x 20% = ` 2,000 will be adjusted to Investment A/c
Note: It is presumed that no dividend is received on bonus shares as bonus shares are declared on 30th
Sept., 2018 and dividend pertains to the year ended 31.3.2018.
Question 32
(1) On 1st April, 2019 she purchased 40,000 equity shares of ` 1 each fully paid up for ` 60,000.
(i) To make a bonus issue of one fully paid up share for every four shares held on 1st June 2019,
and
(ii) To give its members the right to apply for one share for every five shares held on 1st June 2019
at a price of ` 1.50 per share of which 75 paise is payable on or before 15th July 2019 and the
balance, 75 paise per share, on or before 15th September, 2019.
9.38
The shares issued under (i) and (ii) were not to rank for dividend for the year ending 31st December 2019.
(a) Meera received her bonus shares and took up 4,000 shares under the right issue, paying the sum
thereon when due and selling the rights of the remaining shares at 40 paise per share; the proceeds
were received on 30th September 2019.
(b) On 15th March 2020, she received interim dividend from Kumar Ltd. of 15 per cent in respect of the
current financial year.
(c) On 30th March 2020, she received ` 28,000 from the sale of 20,000 shares.
You are required to record these transactions in the Investment Account in Meera’s books for the year ended
31st March 2020 transferring any profits or losses on these transactions to Profit and Loss account. Apply
average cost basis. Expenses and tax to be ignored.
[RTP May 2020]
Answer
Investment Account (Shares in Kumar Limited) in the books of Meera
Date Particulars No. of Income Amount Date Particulars No. of Income Amount
Shares Shares
2019 ` ` 2019 ` `
April 1 To Bank 40,000 - 60,000 May 15 By Bank (Sale) 8,000 - 15,200
(Purchases)
May 15 To Profit & Loss - - 3,200
A/c (W.N.1)
June15 To Bonus Issue 8,000 - Nil 2020
July 15 To Bank (@ 75 p. 4,000 - 3,000 Mar. 15 By Bank (Dividend 4,800 -
paid on 4,000 @ 15% on
shares)
` 32,000)
Sept. To Bank (@ 75 p. - - 3,000 Mar. 30 By Bank (Sale) 20,000 - 28,000
paid on 4,000
shares)
2020 To Profit & Loss 3,455 Mar. 31 By Balance c/d* 24,000 - 29,455
Mar. 31 A/c (W.N.2)
To Profit & Loss - 4,800

A/c
52,000 4,800 72,655 52,000 4,800 72,655
 24,000 
*  54, 000 
 44, 000 
Working Notes:
Cost of 8,000 shares @ `1.50 ` 12,000
Profit ` 3,200
Cost of 44,000 shares (48,000 + 6,000) ` 54,000
 `54,000  ` 24,545
 Cost of 20,000 shares  × 20,000 shares 
 44,000 shares 
Profit on sale of 20,000 shares (` 28,000 – ` 24,545) ` 3,455
9.39
Question 33
Mr. Harsh provides the following details relating to his holding in 10% debentures (face value of `100 each) of
Exe Ltd., held as current assets:
1.4.2018 opening balance - 12,500 debentures, cost `12,25,000
1.6.2018 purchased 9,000 debentures @ `98 each ex-interest
1.11.2018 purchased 12,000 debentures @ `115 each cum-interest
31.1.2019 sole 13,500 debentures @ `110 each cum-interest
31.3.2019 Market value of debentures @ `115 each
Due dates of interest are 30th June and 31st December
Brokerage at 1% is to be paid for each transaction. Mr. Harsh closes his books on 31.3.2019.
Show investment account as it would appear in his books assuming FIFO method is followed
(Suggested November 2019) (10 Marks)/(RTP May 2022)
Answer
Investment Account of Mr. Harsh for the year ending on 31-3-2019
(Scrip: 10% Debentures of Exe Limited)
(Interest Payable on 30th June and 31st December)
Value Value
` ` ` ` ` `
1.4.18 To Balance 12,50,000 31,250 12,25,000 30.6.18 By Bank - 1,07,500 -
b/d 21,500 x 100 x
10% x 1/2
1.6.18 To Bank 9,00,000 37,500 8,90,820 31.12.19 By Bank 1,67,500

(ex-Interest) 33,500 x
(W.N.1) 100x10% x
1/2
1.11.18 To Bank (cum- 12,00,000 40,000 13,53,800 31.1.19 By Bank 13,50,000 11,250 14,58,900
Interest) (W.N.3)
(W.N.2)
31.1.19 To Profit & 1,34,920 31.3.19 By Balance c/d 20,00,000 50,000 21,45,640
Loss A/c (W.N.4) -
(W.N.3)
31.3.19 To Profit & 2,27,500
Loss A/c (Bal.
fig.)
33,50,000 3,36,250 36,04,540 33,50,000 3,36,250 36,04,540
Working Notes:
1. Purchase of debentures on 1.6.18
Interest element = 9,000 x 100 x 10% x 5/12 = ` 37,500
Investment element = (9,000 x 98) + [1%(9,000 x 98)] = ` 8,90,820
2. Purchase of debentures on 1.11.2018
Interest element = 12,000 x 100 x 10% x 4/12 = ` 40,000
Investment element = 12,000 X 1 15 X 101% less 40,000 = ` 13,53,800
3. Profit on sale of debentures as on 31.1.19
`
Sales price of debentures (13,500 x ` 110) 14,85,000
Less: Brokerage @ 1% (14,850)
14,70,150
9.40
Less: Interest (1,35,000/ 12) (11,250)

14,58,900
Less: Cost of Debentures [(12,25,000 + (890820 X 1,00,000/
9,00,000)] (13,23,980)
Profit on sale 1,34,920
4. Valuation of closing balance as on 31.3.2019:
Market value of 20,000 Debentures at ` 115 = ` 23,00,000
Cost of
8,000 Debentures = 8,90,820/ 9,000 X 8,000 = 7,91,840
12,000 Debentures = 13,53,800
Total 21,45,640
Value at the end is ` 21,45,640, i.e., which is less than market value of ` 23,00,000.
Question 34
(a) In 2018, Royal Ltd. issued 12% fully paid debentures of ` 100 each, interest being payable half yearly
on 30th September and 31st March of every accounting year. On 1st December, 2019, M/s. Kumar
purchased 10,000 of these debentures at ` 101 (cum-interest) price. On 1st March, 2020 the firm sold
all of these debentures at ` 106 (cum-interest) price.
You are required to prepare Investment (Debentures) Account in the books of M/s. Kumar for the
period 1st December, 2019 to 1st March, 2020.
(b) Mr. X acquires 200 shares of a company on cum-right basis for ` 60,000. He subsequently receives
an offer of right to acquire fresh shares in the company in the proportion of 1:1 at ` 105 each. He
does not subscribe but sells all the rights for ` 15,000. The market value of the shares after their
becoming ex-rights has also gone down to ` 50,000. What should be the accounting treatment in this
case?
Answer
(a) Investment Account in the books of M/s Kumar for the period from 1st December 2019 to 1st
March, 2020
(Scrip: 12% Debentures of Royal Ltd.)
Date Particulars Nominal Interest Cost (`) Date Particulars Nominal Interest Cost (`)
Value Value
(`) (`)
(W.N.1) (W.N.2)
1.3.2020 To Profit & loss A/c

30,000 20,000
10,00,000 50,000 10,10,000 10,00,000 50,000 10,10,000
Working Notes:
(i) Cost of 12% debentures purchased on 1.12.2019 `
Cost Value (10,000 x `101) = 10,10,000
Less: Interest (10,000 x 100 x12% x 2/12) = (20,000)
Total = 9,90,000
(ii) Sale proceeds of 12% debentures sold on 1st March, 2020 Sales Price `
(10,000 x `106) = 10,60,000
Less: Interest (10,000 x 100 x12% x 5/12) = (50,000)
Total = 10,10,000
9.41
(b) As per AS 13, where the investments are acquired on cum-right basis and the market value of
investments immediately after their becoming ex-right is lower than the cost for which they were acquired, it
may be appropriate to apply the sale proceeds of rights to reduce the carrying amount of such investments to
the market value. In this case, the amount of the ex-right market value of 200 shares bought by X immediately
after the declaration of rights falls to `50,000. In this case, out of sale proceeds of ` 15,000, ` 10,000 may be
applied to reduce the carrying amount to bring it to the market value `50,000 and ` 5,000 would be credited
to the profit and loss account.
Question 35
The Investment portfolio of XYZ Ltd. as on 31.03.2020 consisted of the following:
(` in lacs)
Current Investments Cost Fair Value as on
31.03.2020
(1) 1000 Equity Shares of A Ltd. 5 7
(2) 500 Equity Shares of B Ltd. 10 15
(3) 1000 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 ` 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 ` 15 lakhs.
Answer:
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 investments
individually at the lower of cost and fair value.
(i) Hence the company has to value the current investment at ` 27 Lacs (A Ltd. shares at ` 5 lacs; B Ltd.
shares at ` 10 lacs and C Ltd. shares at ` 12 lacs). The company’s decision to value the portfolio at `
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 ` 12 lacs (fair value) and not `
15 lacs (cost) as the fair value is less than cost.
Question 36
On 1st April, 2019, Mr. Vijay had 30,000 Equity shares in X Ltd. (the company) at a book value of ` 4,50,000
(Face Value ` 10 per share). On 22nd June, 2019, he purchased another 5000 shares of the same company
for ` 80,000.
The Directors of X Ltd. announced a bonus of equity shares in the ratio of one share for seven shares held on
10th August, 2019.
On 31st August, 2019 the Company made a right issue in the ratio of three shares for every eight shares
held, on payment of ` 15 per share. Due date for the payment was 30th September, 2019, Mr. Vijay
` 2 per share.
On 31stOctober,2019, Vijay received dividends from X Ltd. @ 20% for the year ended 31st March, 2019.
Dividend for the shares acquired by him on 22ndJune,2019 to be adjusted against the cost of purchase.
On 15th November, 2019 Vijay sold 20,000 Equity shares at a premium of ` 5 per share.
You are required to prepare Investment Account in the books of Mr. Vijay for the year ended 31st March,
2020 assuming the shares are being valued at average cost.
9.42
Answer:
Books of Vijay
Investment Account
(Scrip: Equity Shares in X Ltd.)
` `
1.4.2019 To Bal b/d 30,000 4,50,000 31.10.2019 By Bank — 10,000
22.6.2019 To Bank 5,000 80,000 (dividend
10.8.2019 To Bonus 5,000 - on shares
30.9.2019 To Bank (Rights 10,000 1,50,000 acquired on
Shares) 22/6/2019)
15.11.2019 To Profit (on sale of 32,000 15.11.2019 By Bank (Sale 20,000 3,00,000
shares) of shares)
_____ _______ 31.3.2020 By Bal. c/d 30,000 4,02,000
50,000 7,12,000 50,000 7,12,000
Working Notes:
(30,000 + 5,000 + 5,000)
(2) Right Shares = × 3 = 15,000shares
8
(4) Dividend received = 30,000×10×20% = `60,000 will be taken to P&L statement
(5) Dividend on shares purchased on 22.6.2019= 5,000×10×20% = ` 10,000 is adjusted to Investment
A/c
= Sales proceeds – Average cost Sales proceeds = ` 3,00,000
(4,50,000 + 80,000 + 1,50,000 - 10,000)
Average cost = = × 20,000 = Rs.2,68,000
50,000
Profit = ` 3,00,000– `2,68,000= `32,000.
(7) Cost of shares on 31.3.2018
(4,50,000 + 80,000 + 1,50,000 - 10,000)
= × 30,000 = Rs.4,02,000
50,000
(8) Sale of rights amounting ` 10,000 (` 2 x 5,000 shares) will not be shown in investment A/c but will
directly be taken to P & L statement.
Question 37
(i) 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 ` 10 per share.
Date No. of Shares Terms
01.01.2019 600 Buy @ ` 20 per share
15.03.2019 900 Buy @ ` 25 per share
20.05.2019 1000 Buy @ ` 23 per share
25.07.2019 2500 Bonus Shares received
20.12.2019 1500 Sale @ ` 22 per share
01.02.2020 1000 Sale @ ` 24 per share
9.43
Addition information:
(1) On 15.09.2019 dividend @ ` 3 per share was received for the year ended 31.03.2019.
(2) On 12.11.2019 company made a right issue of equity shares in the ratio of one share for five
shares held on payment of ` 20 per share. He subscribed to 60% of the shares and renounced
the remaining shares on receipt of ` 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 31.03.2019 and 31.03.2020.
(ii) Whether the accounting treatment 'at cost' under the head ‘Long Term Investments’ without providing
for any diminution in value is correct and in accordance with the provisions of AS 13. If not, what
should have been the accounting treatment in such a situation? What methodology should be
adopted for ascertaining the provision for diminution in the value of investment, if any. Explain in brief.
(MTP, October, 2020) (MTP, March 2022) (8 + 4 = 12 Marks)
Answer
(i) Investment in Equity shares of JP Power Ltd.
` ` ` `
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 - 4,500 3,000

dividend
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 (profit 12,125
on sale) 4,500
31.3.20 To P & L A/c
(dividend)
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
1,000 shares purchased at ` 23,000
2,500 shares at nil cost
600 right shares purchased at ` 12,000
Total cost of 5,600 shares is ` 66,500 [` 69,500 less ` 3,000 (pre-acquisition dividend received
on 1,000 shares purchased on 20.5.19].
Hence, weighted average cost per share will be considered as ` 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 ended 31st 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
9.44
Calculation of sale of right renouncement
No. of right shares sold = 1,000 x 40% = 400 shares
Sale value of right = 400 shares x ` 3 per share = ` 1,200
4. Profit on sale of equity shares
As on 20.12.19
Sales price (1,500 shares at ` 22) 33,000.00
Less: Cost of shares sold (1,500 x ` 11.875) (17,812.50)
Profit on sale 15,187.50
As on 1. 2.20
Sales price (1,000 shares at ` 24) 24,000
Less: Cost of shares sold (1,000 x ` 11.875) (11,875)
Balance of 3,100 shares as on 31.3.20 will be valued at ` 36,812.50 (at rate of ` 11.875 per
share)
(ii) The accounting treatment 'at cost' under the head 'Long Term Investment’ in the financial statements
of the company without providing for any diminution in value is correct and is in accordance with the
provisions of AS 13 provided that there is no decline, other than temporary, in the value of
investment. If the decline in the value of investment is, other than temporary, compared to the time
when the shares were purchased, provision is required to be made. The reduction in market value
should not be considered , in isolation to determine the decline, other than temporary. The amount of
the provision for diminution in the value of investment may be ascertained considering the factors
indicated in AS 13.
Question 38
Kunal Securities Ltd. wants to reclassify its investments in accordance with AS-13 (Revised). State the
values, at which the investments have to be reclassified in the following cases:
(i) Long term investment in Company A, costing ` 10.5 lakhs is to be re-classified as current investment.
The company had reduced the value of these investments to ` 9 lakhs to recognize a permanent decline
in value. The fair value on the date of reclassification is ` 9.3 lakhs.
(ii) Long term investment in Company B, costing ` 14 lakhs is to be re-classified as current investment The
fair value on the date of reclassification is ` 16 lakhs and book value is ` 14 lakhs.
(iii) Current investment in Company C, costing `12 lakhs is to be re-classified as long term investment as the
company wants to retain them. The market value on the date of reclassification is ` 13.5 lakhs.
(iv) Current investment in Company D, costing ` 18 lakhs is to be re-classified as long term investment. The
market value on the date of reclassification is ` 16.5 lakhs.
(Suggested January 2021) (5 marks)
Answer
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:
(i) In this case, carrying amount of investment on the date of transfer is less than the cost; hence this re-
classified current investment should be carried at ` 9 lakhs in the books.
(ii) The carrying/book value of the long-term investment is same as cost i.e., ` 14 lakhs. Hence this long-
term investment will be reclassified as current investment at book value of ` 14 lakhs only.
(iii) In this case, reclassification of current investment into long-term investments will be made at ` 12
lakhs as cost are less than its market value of ` 13.5 lakhs.
(iv) Market value of the investment is ` 16.5 lakhs, which is lower than its cost i.e., ` 18 lakhs. Therefore,
the transfer to long term investments should be done in the books at the market value i.e., ` 16.5
lakhs.
9.45
Question 39
P Ltd. had 8,000 equity shares of K Ltd., at a book value of ` 15 per share (face value of ` 10 each) on 1st
April, 2019. On 1st September, 2019, P Ltd. acquired another 2,000 equity shares of K Ltd. at a premium of
`4 per share. K Ltd. announced a bonus and right issue for existing shareholders.
The term of bonus and right issue were:
(i) Bonus was declared at the rate for two equity shares for every five shares held on 30th September,
2019.
(ii) Right shares are to be issued to the existing shareholders on 1st December, 219. The Company had
issued two right shares for every seven shares held at 25% premium on face value. No dividend was
payable on these shares. The whole sum being payable by 31st December, 2019.
(iii) Existing shareholders were entitled to transfer their right to outsiders either wholly or in part.
(iv) P Ltd. exercised its option under the issue for 50% of its entitlements and sold the remaining rights for
`8 per share.
(v) Dividend for the year ended 31st March, 2019 at the rate of 20% was declared by K Ltd. and received
by P Ltd. on 20th January, 2020.
(vi) On 1st February, 2020, P Ltd. sold half of its shareholdings at a premium of ` 4 per share.
(vii) The market price of share on 31st March, 2020 was `13 per share.
You are required to prepare the Investment account of P Ltd. for the year ended 31st March,2020 and
determine the value of shares held on that date, assuming the investment as current investment. Consider
average cost basis for ascertainment for cost for equity shares sold. (Suggested, January, 2021) (10 marks)
Answer
Investment Account-Equity Shares in K Ltd.
shares shares
` ` ` `
1.4.19 To Bal.b/d 8,000 - 1,20,000 20.1.20 By Bank 16,000 4,000
(dividend)
[8,000 x 10
x 20%] and
1.9.19 To Bank 2,000 - 28,000 1.2.20 [2,000 x 10 8,000 1,12,000
30.9.19 To Bonus 4,000 — x 20%]
Issue By Bank
31.12.19 To Bank 2,000 - 25,000 31.3.20 8,000 84,500
(Right)
By Balance
(W.N.1) c/d (W.N. 3)
20.1.20 To Profit & 16,000
Loss A/c
(Dividend
income)
1.2.20 To P& L A/c 27,500
(profit on
sale)
16,000 16,000 2,00,500 16,000 16,000 2,00,500
Working Notes:
1. Right shares
No. of right shares issued = (8,000 + 2,000 + 4,000)/ 7 X 2= 4,000 No. of right shares subscribed =
4,000 x 50% = 2,000 shares Value of right shares issued = 2,000 x `12.50 = ` 25,000
No. of right shares sold = 2,000 shares
Sale of right shares = 2,000 x ` 8 = ` 16,000 to be credited to statement of profit and loss
9.46
`
(`1,20,000 + ` 28,000 + ` 25,000) 1,73,000
Less: Dividend on shares purchased on Sept. 1 (since the dividend (4,000)
pertains to the year ended 31st March, 2019, i.e., the pre-acquisition
period)
Cost of 16,000 shares 1,69,000
Cost of 8,000 shares (Average cost basis) 84,500
Sale proceeds (8,000 X `14) 1,12,000
Assuming investment as current investment, closing balance will be valued based on lower of cost or
net realizable value.
Here, Net realizable value is `13 per share i.e., 8,000 shares x ` 13 = ` 1,04,000 and cost = 84,500.
Therefore, value of investment at the end of the year will be ` 84,500.
Question 40
On 1st April, 2019, Rajat has 50,000 equity shares of P Ltd. at a book value of ` 15 per share (face value ` 10
each). He provides you the further information:
(1) On 20th June, 2019 he purchased another 10,000 shares of P Ltd. at ` 16 per share.
(2) On 1st August, 2019, P Ltd. issued one equity bonus share for every six shares held by the
shareholders.
(3) On 31st October, 2019, the directors of P Ltd. announced a right issue which entitles the holders to
subscribe three shares for every seven shares at ` 15 per share. Shareholders can transfer their
rights in full or in part.
Rajat sold 1/3rd of entitlement to Umang for a consideration of ` 2 per share and subscribed the rest on 5th
November, 2019.
You are required to prepare Investment A/c in the books of Rajat for the year ending 31st March, 2020.
Answer
In the books of Rajat
Investment Account (Equity shares in P Ltd.)
Date Particulars No. of Amount Date Particulars No. of Amount (`)
shares (`) shares
1.4.19 To Balance b/d 50,000 7,50,000 31.3.20 By Balance c/d 90,000 12,10,000
20.6.19 To Bank A/c 10,000 1,60,000 (Bal. fig.)
1.8.19 To Bonus issue 10,000 -
(W.N.1)
5.11.19 To Bank A/c
(right shares)
(W.N.4) 20,000 3,00,000
90,000 12,10,000 90,000 12,10,000

Working Notes:
50,000 + 10,000
(1) Bonus shares = = 10,000 share
6
50,000 + 10,000 + 10,000
(2) Right shares = × 3 = 30,000 shares
7
9.47
1
(3) Sale of rights = 30,000 shares × × ` 2= ` 20,000 to be credited to P & L A/c as per As 13.
3
2
(4) Rights subscribed = 30,000 shares × × ` 15 = ` 3,00,000
3
Question 41
A Ltd. purchased on 1st April, 2020 8% convertible debenture in C Ltd. of face value of ` 2,00,000 @ ` 108.
On 1st July, 2020 A Ltd. purchased another ` 1,00,000 debentures @ ` 112 cum interest. On 1st October,
2020 ` 80,000 debentures were sold @ ` 105. On 1st December, 2020, C Ltd. give option for conversion of
8% convertible debentures into equity share of ` 10 each. A Ltd. received 5,000 equity shares in C Ltd. in
conversion of 25% debentures held on that date. The market price of debenture and equity share in C Ltd. on
31st December, 2020 is ` 110 and ` 15 respectively. Interest on debenture is payable each year on 31st
March, and 30th September. Prepare investment account in the books of A Ltd. on average cost basis for the
accounting year ended 31st December, 2020.
(MTP, April, 2021) (8 Marks)
Answer
Investment Account for the year ending on 31st December, 2020
Scrip : 8% Convertible Debentures in C Ltd.
[Interest Payable on 31st March and 30th September]
Date Particulars Nominal Interest Cost ` Date Particulars Nominal Interest Cost (`)
value ` ` Value (`) (`
1.4.20 To Bank A/c 2,00,000 - 2,16,000 30.09.20 By Bank A/c - 12,000 -
1.7.20 To Bank A/c 1,00,000 2,000 1,10,000 [`3,00,000 x 8% x
(W.N.1) (6/12]
31.12.20 To P & L A/c - 14,033 - 1.10.20 By Bank A/c 80,000 84,000
[Interest] 1.10.20 By P & L A/c (loss) 2,933
(W.N.3)
1.12.20 By Bank A/c 733
(Accrued interest)
(` 55,000 x .08 x
2/12)
1.12.20 By Equity shares in 55,000 59,767
C Ltd.
(W.N. 3 and 4)
31.12.20 By Balance c/d
(W.N.5) 1,65,000 3,300 1,79,300
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 (`) Date Particulars Cost (`)
1.12.20 To 8 % debentures 59,767 31.12.20 By balance c/d 59,767
Working Notes:
(i) Cost of Debenture purchased on 1st July = `1,12,000 – `2,000 (Interest) = `1,10,000
(ii) Cost of Debentures sold on 1st Oct.
= (`2,16,000 + `1,10,000) x 80,000/3,00,000 = ` 86,933
(iii) Loss on sale of Debentures = ` 86,933– `84,000 = `2,933
Nominal value of debentures converted into equity shares =` 55,000
[(` 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 = (` 2,16,000 + `1,10,000) x 55,000/3,00,000 = ` 59,767
(v) Cost of closing balance of Debentures = (` 2,16,000 + `1,10,000) x 1,65,000/3,00,000 = ` 1,79,300
9.48
(vii) Closing balance of Debentures has been valued at cost.
(viii) 5,000 equity Shares in C Ltd. will be valued at cost of ` 59,767 being lower than the market value `
75,000 (` 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 42
Mr. Z has made following transactions during the financial year 2020-21:
Investment 1: 8% Corporate Bonds having face value `100.
Date Particulars
01-06-2020 Purchased 36,000 Bonds at `86 cum-interest. Interest is payable on 30th
September and 31st March every year
15-02-2021 Sold 24,000 Bonds at `92 ex-interest
Interest on the bonds is received on 30th September and 31st March
Investment 2: Equity Shares of G Ltd having face value `10
Date Particulars
01-04-2020 Opening balance 8000 equity shares at a book value of `190 per share
01-05-2020 Purchased 7,000 equity shares @ `230 on cum right basis Brokerage of 1% was paid in
addition.
15-06-2020 The company announced a bonus issue of 2 shares for every 5 shares held
01-08-2020 The company made a rights issue of 1 share for every 7 shares held at `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 @ `75 per share. The remaining
rights were subscribed.
15-09-2020 Dividend @ `6 per share for the year ended 31.03.2020 was received on 16.09.2020. No
dividend payable on Right issue and Bonus issue.
01-12-2020 Sold 7,000 shares @ 260 per share. Brokerage of 1% was incurred extra.
25-01-2021 Received interim dividend @ `3 per share for the year 2020-21.
31-03-2021 The shares were quoted in the stock exchange @ `260.
Both investments have been classified as Current investment in the books of Mr. Z. On 15th May, 2021, Mr. Z
decides to reclassify investment in equity shares of Z Ltd. as Long term Investment. On 15th May, 2021, the
shares were quoted in the stock exchange @ `180.
You are required to:
(i) Prepare Investment Accounts in the books of Mr. Z for the year 2020-21, assuming that the average
cost method is followed.
(ii) Profit and loss Account for the year 2020-21, based on the above information.
(iii) Suggest values at which investment in equity shares should be re-classified in accordance with AS
13. (Suggested July, 2021) (20 Marks)
Answer
I. In the books of Mr. Z
Investment in 8% Corporate Bonds Account For the period 01 April 2020 to 31 March 2021
Date Particulars Nos Interest Amount Date Particulars Nos Interest Amount
(`) (`) (`) (`)
1/6/20 To Bank A/c 36,000 48,000 30,48,000 30/9/20 By Bank A/c 1,44,000
(WN1) (Interest
36,000 x 100 x
8% x 6/12)
9.49
Date Particulars Nos Interest Amount Date Particulars Nos Interest Amount
(`) (`) (`) (`)
15/2/21 To Profit & 1,76,000 15/2/21 By Bank A/c 24,000 72,000 22,08,000
Loss A/c (WN2)
(WN 3)
31/3/21 To Profit & 2,16,000 31/3/21 By Bank A/c 48,000
Loss A/c (Interest
12,000 x 100 x
8% x 6/12)
By Balance c/d 12,000 10,16,000
(WN 4)
Total 36,000 2,64,000 32,24,000 Total 36,000 2,64,000 32,24,000
Note: For computing the interest on the bonds sold on 15 Feb 2021, if number of days (138 days) is taken
instead of months, the interest received on 15.02.2021 should be `72,592 and the total interest transferred to
Profit & Loss Account should be ` 2,16,592.
Investment in Equity Shares of G Ltd
For the period 1st April 2020 to 31 March 2021
Date Particulars Nos Dividend Amount Date Particulars Nos Dividend Amount
(`) (`) (`) (`)
01/4/20 To Balance b/d 8,000 15,20,000 16/9/20 By Bank A/c 48,000 42,000
(WN 7)
01/5/20 To Bank A/c 7,000 16,26,100 1/12/20 By Bank A/c 7000 18,01,800
(WN 5) (WN 8)
15/6/20 To Bonus 6,000 25/1/21 By Bank A/c 48,300
Shares (WN 10)
25/8/20 To Bank A/c 2,100 4,83,000
(Right Shares)
(WN 6)
01/12/20 To Profit & 7,14,800
Loss A/c (Sale
of shares) (WN
9)
96,300
31/3/21 To Profit & 31/3/21 By Balance c/d 16,100 25,00,100
Loss A/c (WN 11)
Total 23,100 96,300 43,43,900 Total 23,100 96,300 43,43,900
Working Notes
1. Computation of the Interest element in the bonds purchased on 01 June 2020
No of Bonds purchased 36,000
Face value per bond ` 100
Face value of the bonds purchased ` 36,00,000
Interest Rate 8%
Interest Amount 36,00,000 x 8% x 2/12
` 48,000
Cum-interest per bond ` 86
Value of bond excluding interest 36,000 x 86 – 48,000
` 30,48,000
9.50
2. Computation of the Interest element in the bonds sold on 15 Feb 2021
No of Bonds sold 24,000
Face value of the bonds sold ` 24,00,000
Interest Rate 8%
Interest Amount 24,00,000 x 8% x 4.5/12
= ` 72,000
3. Computation of Profit on Sale of Bonds on 15 Feb 2021
No of Bonds sold 24,000
Ex- interest Rate per bond ` 92
Sales proceeds ` 22,08,000
Average Cost of Bonds (30,48,000/36,000) x 24,000
` 20,32,000
Profit on sale of bonds Sale Proceeds – Average Cost
22,08,000 – 20,32,000
` 1,76,000
4. Valuation of Bonds as on 31 March 2021
No of Bonds held as on 31 Mar 2021 12,000
Average Cost of Bonds (30,48,000/36,000) x 12,000
` 10,16,000
5. Computation of the cost of the equity shares purchased on 01 May 2020
No of shares purchased 7,000
Cum right price per share ` 230
Cost of purchase ` 16,10,000
Brokerage @1% ` 16,100
Cost including brokerage ` 16,26,100
6. Right Shares
No of Right Shares Issued (8,000+7,000+6,000)/7 = 3,000 shares
No of right shares sold 3,000 shares x 30% = 900 shares
Proceeds from sale of right shares to be credited to statement of 900 shares x ` 75 = ` 67,500
profit & loss
No of right shares subscribed 3,000-900 = 2,100 shares
Amount of right shares subscribed 2,100 x 230 = ` 4,83,000
7. Computation of Dividend Received on 16 Sept 2020
No of shares held during the period of dividend 8,000 shares
Dividend per share `6
Dividend Amount 8,000 x 6 = ` 48,000
9.51
No of shares received after the period of dividend (excluding 7,000 shares

bonus & right shares)
Dividend per share `6
Dividend Amount 7,000 x 6 = ` 42,000
The amount of dividend for the period for which the shares were not held by the investor has been treated as
capital receipt. Thus ` 42,000 shall be treated as capital receipt
8. Sale Proceeds for the shares sold on 1st Dec. 2020
No of shares sold 7,000 Shares
Sale price per share ` 260
Proceeds from sale of share 7,000 x 260 = ` 18,20,000
Less: Brokerage @ 1% ` 18,200
Net Sale Proceeds ` 18,01,800
9. Profit on sale of shares on 1st Dec. 2020
Sales Proceeds ` 18,01,800
Average Cost (15,20,000+16,26,100+4,83,000-42,000)/23,100x7000
= ` 10,87,000
Profit on sale of shares Sales Proceeds – Average Cost
= ` 18,01,800-10,87,000
= ` 7,14,800
10. Computation of Amount of Interim Dividend
No of shares held 8,000+7,000+6,000+2,100-7,000
= 16,100
Dividend per share ` 3 per share
Dividend Received 16,100 shares x ` 3 per share
= ` 48,300
11. Valuation of Shares as on 31 March 2021
Cost of Shares (15,20,000 + 16,26,100 + 4,83,000 – 42,000) / 23,100
x 16,100
= 25,00,100
Market Value of Shares ` 260 x 16,100 = ` 41,86,000
Closing stock of equity shares has been value at ` 25,00,100 i.e. cost being lower than its market value.
(II) Profit & Loss Account (Extract)
For the period 01 April 2020 to 31 March 2021
Particulars Amount (`) Particulars Amount (`)
To Balance c/d 12,70,600 By Investment in 8% Corporate Bonds Account 1,76,000
(Profit on sale of bonds)
By Investment in 8% Corporate Bonds Account 2,16,000
(Interest on bonds)
By Sale of Right Shares 67,500
By Investment in Equity Shares of G Ltd (Profit 7,14,800
on sale of shares)
By Investment in Equity Shares of G Ltd 96,300
(Dividend Income)
9.52
(III) As per AS 13, when investments are classified from Current Investments to Long term Investments,
transfer is made at Cost and Fair value, whichever is less (as on the date of transfer). So, in the given case
valuation shall be done as follows:
Date of reclassification/transfer – 15 May 2021
Per Unit Cost of 16,100 shares held – ` 25,00,100/16,100 shares – ` 155.29
Market Price/Fair Value per share – ` 180
As the cost per unit is lower than its fair value, the shares are to be transferred at its cost i.e., at ` 155.29 per
share on 15 May 2021
Note:
1. In the eight last line of the question, investment in equity shares of G Ltd. was wrongly printed as Z Ltd. in
the question paper. In the above solution, it has been considered as investment in G Ltd. If considered as
Investment in equity shares in Z Ltd. (some other investment and not investment in G Ltd.), then the cost
of the investment for shares in Z Ltd. will not be available.
2. The entire amount of sale proceeds from rights has been credited to Profit and Loss account in the above
solution. However, the sale proceeds of rights in respect of 7,000 shares (purchased cum right on 1.5.20)
can be applied to reduce the carrying amount of such investments (without crediting it to profit and loss
account) considering that the value of these shares has reduced after becoming their ex -right. In that
case, ` 22,500 (67,500X 7/21) will be applied to reduce the carrying amount of investment and ` 45,000
will be credited to profit and loss account.
Question 43
On 1st April, 2019 Mr. Shyam had an opening balance of 1000 equity shares of X Ltd ` 1,20,000 (face value
`100 each).
On 5.04.2019 he further purchased 200 cum-right shares for ` 135 each. On 8.04.2019 the director of X Ltd
announced right issue in the ratio of 1:6.
Mr. Shyam waived off 100% of his entitlement of right issue in the favour of Mr. Rahul at the rate of ` 20 each.
All the shares held by Shyam had been acquired on cum right basis and the total market price (ex-right) of all
these shares after the declaration of rights got reduced by ` 3,400.
On 10.10.2019 Shyam sold 350 shares for ` 140 each. 31.03.2020 The market price of each share is ` 125
each.
You are required to prepare the Investment account in the books of Mr. Shyam for the year ended 31.03.2020
assuming that the shares are being valued at average cost. (RTP, May 2021)
Answer
In the books of Mr. Shyam
for the year ending on 31-3-2020 (Scrip: Equity Shares of X Limited)
Date Particulars Qty Amount Date Particulars Qty Amount
1.4.2019 To Balance 1000 1,20,000 8.04.2019 By Bank A/c (W.N.1) 3,400
b/d
5.04.2019 To Bank 200 27,000 10.10.2019 By Bank A/c 350 49,000
(200x `135) (350x `140)
10.10.2019 To Profit & 7,117 31.3.2020 By Balance c/d 850 1,01,717
Loss A/c (W.N.3)
(W.N.2)
1200 1,54,117 1200 1,54,117
Working Notes:
1. Sale of Rights ` 4,000
The market price of all shares of X Ltd after shares becoming ex-rights has been reduced by ` 3,400
In this case out of sale proceeds of `4,000; ` 3,400 may be applied to reduce the carrying amount to the
market value and ` 600 would be credited to the profit and loss account.
9.53
2. Profit on sale of 350 shares
Amount
Sale price of 350 shares (350 shares X 140 each) ` 49,000
Less: Cost of 350 shares [(1,20,000+27,000-3,400) X350]/1200 ` 41,883
Profit ` 7,117
3. Valuation of 850 shares as on 31.03.2020
Particulars Amount
Cost price of 850 shares ` 1,01,717
[(1,20,000 +27,000 -3,400) x 850 /1,200]
Fair Value as on 31.03.2020 [850 X ` 125 each] ` 1,06,250
Cost price or fair value whichever is less ` 1,01,717
Question 44
A Limited invested in the shares of XYZ Ltd. on 1st December, 2019 at a cost of ` 50,000. Out of these
shares, ` 25,000 shares were purchased with an intention to hold for 6 months and ` 25,000 shares were
purchased with an intention to hold as long-term Investment.
A Limited also earlier purchased Gold of ` 1,00,000 and Silver of ` 30,00,000 on 1st April, 2019. Market value
as on 31st March, 2020 of above investments are as follows:
Shares ` 47,500 (Decline in the value of shares is temporary.) Gold ` 1,80,000
Silver ` 30,55,000
How above investments will be shown in the books of accounts of M/s A Limited for the year ended 31st
March, 2020 as per the provisions of AS 13 (Revised)?
Answer
As per AS 13 (Revised) ‘Accounting for Investments, for investment in shares - if the investment is purchased
with an intention to hold for short-term period (less than one year), then it will be classified as current
investment and to be carried at lower of cost and fair value.
In the given case ` 25,000 shares held as current investment will be carried in the books at ` 23,750
(` 47,500/2).
If equity shares are acquired with an intention to hold for long term period (more than one year), then should
be considered as long-term investment to be shown at cost in the Balance Sheet of the company. However,
provision for diminution should be made to recognize a decline, if other than temporary, in the value of the
investments. Hence, ` 25,000 shares held as long-term investment will be carried in the books at ` 25,000.
Gold and silver are generally purchased with an intention to hold them for long term period (more than one
year) until and unless given otherwise.
Hence, the investment in Gold and Silver (purchased on 1st March, 2019) should continue to be shown at
cost (since there is no ‘other than temporary’ diminution) as on 31st March, 2020. Thus Gold at ` 1,00,000
and Silver at ` 30,00,000 respectively will be shown in the books.
Question 45
On 1st April, 2019 Mr. H had 30,000 equity shares of ABC Ltd. at book value of ` 18 per share (Nominal
value 10 per share). On 10th June, 2019, H purchased another 10,000 equity shares of the ABC ltd. at ` 16
per share through a broker who charged 1.5% brokerage.
The directors of ABC Ltd. announced a bonus and a right issue. The terms of the issues were as follows:
(i) Bonus shares were declared at the rate of one equity share for every four shares held on 15th July,
2019.
(ii) Right shares were to be issued to the existing equity shareholders on 31st August, 2019. The
company decides to issue one right share for every five equity shares held at 20% premium and the
due date for payment will be 30th September, 2019. Shareholders were entitled to transfer their rights
in full or in part.
(iii) No dividend was payable on these issues.
Mr. H subscribed 60% of the rights entitlements and sold the remaining rights for consideration of ` 5 per
share.
9.54
Dividends for the year ending 31st March, 2019 was declared by ABC Ltd. at the rate of 20% and received by
Mr. H on 31st October, 2019.
On 15th January, 2020 Mr. H sold half of his shareholdings at ` 17.50 per share and brokerage was charged
@1%.
You are required to prepare Investment account in the books of Mr. H for the year ending 31st March, 2020,
assuming the shares are valued at average cost.
Answer
In the books of Mr. H
Investment in equity shares of ABC Ltd. for the year ended 31st March, 2020
` ` ` `
2019 To Balance b/d 30,000 - 5,40,000 2019 Oct. By Bank A/c - 60,000 20,000
April 1 (W.N. 5)
June To Bank A/c 10,000 -- 1,62,400 20X2 By Bank A/c 28,000 - 4,85,100
Jan. (W.N.4)
July To Bonus Issue 10,000 - - March 31 By Balance 28,000 - 3,77,200
(W.N. 1) c/d
Sept. To Bank A/c 6,000 - 72,000 (W.N. 6)
(W.N. 2)
2020 To P & L A/c - - 1,07,900
Jan. (W.N. 4)
March 31 To P & L A/c - 60,000 -
56,000 60,000 8,82,300 56,000 60,000 8,82,300
Working Notes:
1. Calculation of no. of bonus shares issued
Bonus Shares = (30,000 + 10,000) divided by 4= 10,000 shares
30,000 shares + 10,000 shares + 10,000 shares
Right Shares =
5
10,000 shares
Shares subscribed 10,000 x 60% = 6,000 shares
Amount received from sale of rights will be 4,000 shares x ` 5 per share
= ` 20,000 and it will be credited to statement of profit and loss.
4. Calculation of profit/loss on sale of shares-
10,000 shares purchased
10,000 shares bonus
6,000 shares right shares
56,000
50% of the holdings were sold i.e. 28,000 shares (56,000 x1/2) were sold. Cost of total holdings of
56,000 shares = ` 5,40,000 + ` 1,62,400 + ` 72,000– ` 20,000 = ` 7,54,400
Average cost of shares sold would be:
7,54, 400 × 28,000
= × 28,000 = `3,77,200
56,000
9.55
`
Sale proceeds of 28,000 shares (28,000 x `17.50) 4,90,000
4,85,100
Less: Cost of 28,000 shares sold (3,77,200)
Profit on sale 1,07,900

= 30,000 shares x ` 10 x 20%
= ` 60,000 will be transferred to Profit and Loss A/c and Dividend received on shares purchased on
10th June, 2019
= 10,000 shares x ` 10 x 20% = `20,000 will be adjusted to Investment A/c
6. Calculation of closing value of shares (on average basis) as on 31st March, 2020
7,54, 400
× 28,000 =` 3,77,200
56,000
Question 46
On 1st April, 2019, Mr. Vijay had 30,000 Equity shares in X Ltd. (the company) at a book value of ` 4,50,000
(Face Value ` 10 per share). On 22nd June, 2019, he purchased another 5000 shares of the same company
for ` 80,000. The Directors of X Ltd. announced a bonus of equity shares in the ratio of one share for seven
shares held on 10th August, 2019.
On 31st August, 2019 the Company made a right issue in the ratio of three shares for every eight shares
held, on payment of ` 15 per share. Due date for the payment was 30th September, 2019, Mr. Vijay
` 2 per share.
On 31st October, 2019, Vijay received dividends from X Ltd. @ 20% for the year ended 31st March,2019.
Dividend for the shares acquired by him on 22nd June, 2019 to be adjusted against the cost of purchase.
On 15th November, 2019 Vijay sold 20,000 Equity shares at a premium of ` 5 per share.
You are required to prepare Investment Account in the books of Mr. Vijay for the yea rended31st March, 2020
assuming the shares are being valued at average cost.
Answer
Books of Vijay
Investment Account (Scrip: Equity Shares in X Ltd.)
` `
1.4.2019 To Bal b/d To Bank 30,000 4,50,000 31.10.2019 By Bank (dividend — 10,000
22.6.2019 5,000 80,000
10.8.2019 To Bonus To Bank 5,000 - 1,50,000 on shares acquired
30.9.2019 (Rights Shares) 10,000 on 22/6/2019)
15.11.2019 To Profit 32,000 15.11.2019 By Bank 20,000 3,00,000

(on sale of shares) (Sale of shares)
31.3.2020 By Bal. c/d 30,000 4,02,000
50,000 7,12,000 50,000 7,12,000
Working Notes:
(30,000 5,000 5,000)
8
9.56
(4) Dividend received = 30,000×10×20% = `60,000 will be taken to P&L statement
(5) Dividend on shares purchased on 22.6.2019 = 5,000 × 10 × 20% = ` 10,000 is adjusted to Investment A/c
(4,50,000 + 80,000 + 1,50,000 - 10,000)
Average cost = × 20,000 = ` 2,68,000
50,000
Profit = ` 3,00,000 – `2,68,000= `32,000.
(7) Cost of shares on 31.3.2020
(4,50,000 + 80,000 + 1,50,000 - 10,000)
× 30,000 = `4,02,000
50,000
(8) Sale of rights amounting ` 10,000 (` 2 x 5,000 shares) will not be shown in investment A/c but will directly
be taken to P & L statement.
Question 47
Nidhi Ltd. invested in the shares of another company on 1st May 2019 at a cost of `3,00,000 with the
intention of holding for more than a year. The published accounts of Nidhi Ltd. received in March, 2021
reveals that the company has incurred cash losses with decline in market share and investment of Nidhi Ltd.
may not fetch more than ` 45,000. How you will deal with the above in the financial statements of the Paridhi
Electronics Ltd. as on 31.3.21 with reference to AS-13? (MTP, October 2021) (4Marks)
Answer
As per AS 13, “Accounting for Investments” Investments classified as long term investments should be
carried in the financial statements at cost. However, provision for diminution shall be made to recognise a
decline, other than temporary, in the value of the investments, such reduction being determined and made for
each investment individually. The standard also states that indicators of the value of an investment are
obtained by reference to its market value, the investee's assets and results and the expected cash flows from
the investment.
On this basis, the facts of the case given in the question clearly suggest that the provision for diminution
should be made to reduce the carrying amount of shares to ` 45,000 in the financial statements for the year
ended 31st March, 2021 and charge the difference of loss of ` 2,55,000 to profit and loss account.
Question 48
Alpha Ltd. purchased 5,000, 13.5% Debentures of Face Value of ` 100 each of Pergot Ltd. on 1st May 2020
@ ` 105 on cum interest basis. The interest on these instruments is payable on 31st & 30th of March &
September respectively. On August 1st 2020 the company again purchased 2,500 of such debentures @
`102.50 each on cum interest basis. On October 1st, 2020 the company sold 2,000 Debentures @ ` 103
each on ex-interest basis. The market value of the debentures as at the close of the year was ` 106. You are
required to prepare the Investment in Debentures Account in the books of Alpha Ltd. for the year ended 31st
Dec., 2020 on Average Cost Basis. (MTP, November, 2021) (8 Marks)
Answer
Investment in 13.5% Debentures in Pergot Ltd. Account
(Interest payable on 31st March & 30th September)
2020 ` ` ` 2020 ` ` `
May 1 To Bank 5,00,000 5,625 5,19,375 Sept.30 By Bank 50,625
(6 months Int)
Dec.31 To P&L A/c 52,313 Dec.31 By Balance c/d 5,50,000 18,563 5,60,542
7,50,000 69,188 7,66,542 7,50,000 69,188 7,66,542
9.57
Note: Cost being lower than Market Value the debentures are carried forward at Cost.
Working Notes:
1. Interest paid on ` 5,00,000 purchased on May 1st, 2020 for the month of April 2020, as part of purchase
price: 5,00,000 x 13.5% x 1/12 = ` 5,625
On ` 5,00,000 = 5,00,000 x 13.5% x ½ = 33,750
On ` 2,50,000 = 2,50,000 x 13.5% x ½ = 16,875
Total ` 50,625
3. Interest paid on ` 2,50,000 purchased on Aug. 1st 2020 for April 2020 to July 2020 as part of purchase
price: ` 2,50,000 x 13.5% x 4/12 = ` 11,250
4. Loss on Sale of Debentures
Cost of acquisition
(` 5,19,375 + ` 2,45,000) x ` 2,00,000/` 7,50,000 = 2,03,833
Less: Sale Price (2,000 x `103) = 2,06,000
(` 5,19,375 + ` 2,45,000) x ` 5,50,000/` 7,50,000 = ` 5,60,542
6. Interest on Closing Debentures for period Oct.-Dec. 2020 carried forward (accrued interest) ` 5,50,000 x
13.5% x 3/12 = ` 18,563 (rounded off)
Question 49
Following transactions of Meeta took place during the financial year 2020 -21:
1st April, 2020 Purchased ` 4,500 8% bonds of ` 100 each at ` 80.50 cum-interest. Interest is
payable on 1st November and 1st May.
1st May, 2020 Received half year’s interest on 8% bonds.
10 July, 2020 Purchased 6,000 equity shares of ` 10 each in Kamal Limited for ` 44 each through
a broker, who charged brokerage @ 2%.
1st October 2020 Sold 1,125 8% bonds at ` 81 Ex-interest.
1st November, 2020 Received half year’s interest on 8% bonds.
15th January, 2021 Received 18% interim dividend on equity shares of Kamal Limited.
15th March, 2021 Kamal Limited made a rights issue of one equity share for every four Equity shares
held at ` 5 per share. Meeta exercised the option for 40% of her entitlements and
sold the balance rights in the market at ` 2.25 per share.
Prepare separate investment account for 8% bonds and equity shares of Kamal Limited in the books of Meeta
for the year ended on 31st March, 2021. Assume that the average cost method is followed.
Answer
In the books of Meeta
8% Bonds for the year ended 31st March, 2021
` ` ` `
2020 1 To Bank A/c 4,500 15,000 3,47,250 1 May By Bank- Interest - 18,000
April, Oct. 1 2020
2021 March To P & L A/c - - 4,312.50 1 Oct. By Bank A/c 1,125 3,750 91,125
31 (W.N.1) 2020
To P & L A/c 20,250 1 Nov. By Bank- Interest 13,500
2021
2021 By Balance c/d 3,375 - 2,60,437.50
Mar. 31 (W.N.2)
4,500 35,250 3,51,562.50 4,500 35,250 3,51,562.50
9.58
Investment in Equity shares of Kamal Ltd. for the year ended 31st March, 2021
` ` ` `
2020 July 10 To Bank A/c 6,000 -- 2,69,280 2021 By Bank – - 10,800
Jan 15 dividend
2021 March To Bank A/c 600 - 3,000 March By Balance c/d 6,600
15 (W.N. 3) 31 (bal. fig.) 2,72,280
March 31 To P & L A/c
- 10,800
6,600 10,800 2,72,280 6,600 10,800 2,72,280
Working Notes:
1. Profit on sale of 8% Bonds
Sales price ` 91,125
Less: Cost of bonds sold = 3,47,250/4,500x 1,125 (` 86,812.50)
Profit on sale ` 4,312.50
2. Closing balance as on 31.3.2021 of 8 % Bonds
3,47,250/4,500x 3,375= ` 2,60,437.50
3. Calculation of right shares subscribed by Kamal Ltd.
Right Shares = 6,000/4 x 1= 1,500 shares
Shares subscribed by Meeta = 1,500 x 40%= 600 shares
4. Calculation of sale of right entitlement by Kamal Ltd.
No. of right shares sold = 1,500 – 600 = 900 rights for 2,025
Note: As per para 13 of AS 13, sale proceeds of rights are to be credited to P & L A/c.
Question 50
During the year ended 31st March, 2021, Purple Ltd. entered into the following transactions:—
1st April, 2020 Purchased ` 4,00,000, 10% Govt. loan (interest payable on 30th April and 31st
October) at ` 70 cum interest.
1" April, 2020 Purchased 6,000 Equity shares of ` 5 each in XY Ltd. for ` 1,26,000.
1st October, 2020 Sold ` 80,000, 10% Govt. loan at 75 ex-interest.
15th January, 2021 XY Ltd made a bonus issue of four equity shares for every three shares held.
Purple Ltd sold all of the bonus shares for ` 10 each.
1st March, 2021 Received dividend @ 22% on shares in XY Ltd. for the year ended 31st
December, 2020.
Prepare Investment accounts in the books of Purple Ltd.
Answer
In the books of Purple Ltd.
10% Govt. Loan
[Interest Payable: 30th April & 31st October]
Value(`) (`) (`) Value (`) (`) (`)
1.4.20 To Bank A/c 4,00,000 16,667 2,63,333 30.4.20 By Bank A/c - 20,000 -
(W.N.1) (4,00,000 x
10% x 6/12)
1.10.20 To Profit & 1.10.20 By Bank A/c
Loss A/c 7,333 (W.N.2) 80,000 3,333 60,000
(W.N 5)
9.59
Value(`) (`) (`) Value (`) (`) (`)
31.10.20 By Bank A/c - 16,000 -
31.3.21 To Profit & 31.3.21 By Balance
Loss A/c 35,999 c/d (W.N.3) 3,20,000 13,333 2,10,666
4,00,000 52,666 2,70,666 4,00,000 52,666 2,70,666
Investment in Equity Shares of XY Ltd. Account (of ` 5 each)
Date Particulars No. Dividend Cost Date Particulars No. Dividend Cost
(`) (`) (`) (`)
1.4.20 To Bank A/c 6,000 1,26,000 15.1.21 By Bank A/c 8,000 80,000
15.1.21 To Bonus Issue 8,000 1.3.21 By Bank A/c 4,950 1,650
15.1.21 To Profit & Loss 8,000 (W.N.6)
A/c.
31.3.21 (W.N.4)
To Profit & Loss 4,950 31.3.21 By Balance 6,000 52,350
A/c c/d
14,000 4,950 1,34,000 14,000 4,950 1,34,000

Working Notes:
1. Cost of investment purchased on 1st April, 2020
4,000, 10% Govt. loan were purchased @ ` 70 cum-interest. Total amount paid 4,000 bonds x ` 70 =
2,80,000 which includes accrued interest for 5 months, i.e., 1st November, 2020 to 31st March, 2021.
Accrued interest will be ` 4,00,000 x 10% x 5/12 = ` 16,667. Therefore, cost of investment purchased = `
2,80,000 – ` 16,667 = ` 2,63,333.
2. Sale of 10% Govt. loan on 1st October, 2020
800, 10% Govt. loan were sold@ ` 75 ex-interest, i.e., Total amount received = 800 x 75 + accrued
interest for 5 months = ` 60,000 + ` 3333
3. Cost of 10% Govt. loan on 31.3.2021
Cost of 10% Govt. loan on 31.3.2021 will be ` 2,63,333 x 3,20,000/4,00,000 = ` 2,10,666.
Interest accrued on 10% Government Loan on 31.3.2021 = ` 3,20,000 x 10% x 5/12 = ` 13,333
Cost per share after bonus = ` 1,26,000/ 14,000 = ` 9 (average cost method being followed)
Profit per share sold (` 10 – ` 9) = ` 1.
Therefore, total profit on sale of 8,000 shares = 8,000 x ` 1 = ` 8,000.
5. Profit on sale of 10% Govt. loan `
Sale value = 60,000
Cost of ` 80,000 10% Government Loan = 2,63,333 x 80,000/ 4,00,000 = 52,667
Profit = 7,333
6. Dividend on equity shares = 6,000 x 5 x 22% = ` 6,600 out of which ` 1,650 will be treated as capital
receipt as it has been received for the period of 3 months during which shares were not held.
Note: It has been considered that dividend received relates for the period of 12 months ended 31st Dec.,
2020, strictly based on the information, given in the question. Hence, dividend received for the period of 3
months (1st January, 20 to 31st March, 20) has been treated as pre-acquisition.
9.60
Insurance Claims for Loss of Stock
and Loss of Profit
10
Question 1
From the following information, ascertain the value of stock as on 31st March, 20X2:
`
Stock as on 01-04-20X1 28,500
Purchases 1,52,500
Manufacturing Expenses 30,000
Selling Expenses 12,100
Administration Expenses 6,000
Financial Expenses 4,300
Sales 2,49,000
At the time of valuing stock as on 31st March, 20X1, a sum of ` 3,500 was written off on a particular item,
which was originally purchased for ` 10,000 and was sold during the year for ` 9,000. Barring the transaction
relating to this item, the gross profit earned during the year was 20% on sales.
(Study Material)
Answer
Statement showing valuation of stock as on 31.3.20X2
` `
Stock as on 01.04.20X1 28,500
Less: Book value of abnormal stock 6,500
(` 10,000 – ` 3,500) 22,000
Add: Purchases
1,52,500
Manufacturing expenses
30,000
2,04,500
Less: Cost of Sales:
Sales 2,49,000
Less: Sale of abnormal stock (9,000)
2,40,000
Less: Gross profit @ 20%
Value of Stock as on 31st March, 20X2 (48,000) (1,92,000)
12,500
Alternative Method (Trading Account Approach)
Computation of Gross Profit for the Year `
Total Sales 2,49,000
Less: Abnormal Sales (9,000)
Regular Sales 2,40,000
A. Gross Profit on Regular Sales @ 20% 48,000
B. Gross Profit on Abnormal Sales [9,000 – 6,500*] 2,500
Total Gross Profit (A+B) 50,500
* Written down cost (Original Cost 10,000 less write off for 3,500)
10.1
Chap. 10  Insurance Claims for Loss of Stock and Loss of Profit
Computation of Closing Stock as on 31st March, 20X2

Opening Stock 28,500
Add: Purchases 1,52,500
Add: Manufacturing Expenses 30,000
Add: Gross Profit (as computed above) 50,500
2,61,500
Less: Total Sales (2,49,000)
Value of Stock as on 31st March, 20X2 12,500
Question 2
Mr. A prepares accounts on 30th September each year, but on 31st December, 20X1 fire destroyed the greater
part of his stock. Following information was collected from his book:
`
Stock as on 1.10.20X1 29,700
Purchases from 1.10.20X1 to 31.12.20X1 75,000
Wages from 1.10.20X1 to 31.12.20X1 33,000
Sales from 1.10.20X1 to 31.12.20X1 1,40,000
The rate of gross profit is 33.33% on cost. Stock to the value of ` 3,000 was salvaged. Insurance policy was
for ` 25,000 and claim was subject to average clause.
Additional information:
(i) Stock at the beginning was calculated at 10% less than cost.
(ii) A plant was installed by firm’s own worker. He was paid ` 500, which was included in wages.
(iii) Purchases include the purchase of the plant for ` 5,000 You are required to calculate the claim for the
loss of stock.
(Study Material)
Answer
Computation of claim for loss of stock:
`
Stock on the date of fire i.e. 31.12.20X1(Refer working note) 30,500
Less: Salvaged stock (3,000)
Loss of stock 27,500
Amount of claim:
Insured value
= × loss of stock
Total cost of stock on the date of fire
= 27500 X 25000/30500 = ` 22,541
Working Note:
Memorandum trading account can be prepared for the period from 1.10.20X1 to 31.12.20X1 to compute the
value of stock on 31.12.20X1.
Memorandum Trading Account for period from 1.10.20X1 to 31.12.20X1
` ` `
To Opening stock (` 29,700 x 100/90) 33,000 By Sales 1,40,000
To Purchases 75,000 By Closing stock (bal. fig.) 30,500
Less: Cost of plant (5,000) 70,000
To Wages 33,000
Less: Wages paid for plant (500) 32,500
To Gross profit 35,000
(33.33% on cost or 25% on sales)
1,70,500 1,70,500
10.2
Question 3
On 20th October, 20X1, the godown and business premises of Aman Ltd. were affected by fire. From the
salvaged accounting records, the following information is available:
`
Stock of goods @ 10% lower than cost as on 31st March, 20X1 2,16,000
Purchases less returns (1.4.20X1 to 20.10.20X1) 2,80,000
Sales less returns (1.4.20X1 to 20.10.20X1) 6,20,000
(1) Sales upto 20th October, 20X1 includes ` 80,000 for which goods had not been dispatched.
(2) Purchases upto 20th October, 20X1 did not include ` 40,000 for which purchase invoices had not been
received from suppliers, though goods have been received in Godown.
(3) Past records show the gross profit rate of 25%.
(4) The value of goods salvaged from fire ` 31,000.
(5) Aman Ltd. has insured their stock for ` 1,00,000.
Compute the amount of claim to be lodged to the insurance company.
(Study Material)
Answer
Memorandum Trading A/c (1.4.20X1 to 20.10.20X1)
Particulars (`) Particulars (`)
To Opening stock (at cost, 2,16,000 / 0.90) 2,40,000 By Sales (` 6,20,000 – ` 80,000) 5,40,000
To Purchases (` 2,80,000 + ` 40,000) 3,20,000 By Closing stock (bal. fig.) 1,55,000
To Gross profit (` 5,40,000 x 25%*) 1,35,000
6,95,000 6,95,000
* It is assumed that gross profit is provided as a percentage of sales
`
Stock on the date of fire (i.e. on 20.10.20X1) 1,55,000
Less: Stock salvaged (31,000)
Stock destroyed by fire 1,24,000
Insurance claim = Loss of Stock X Insured Value / Total Cost of Stock = `1,24,000 X 1,00,000/1,55,000 =
`80,000
Question 4
On 12th June, 20X2 fire occurred in the premises of N.R. Patel, a paper merchant. Most of the stocks were
destroyed, cost of stock salvaged being ` 11,200. In addition, some stock was salvaged in a damaged
condition and its value in that condition was agreed at ` 10,500. From the books of account, the following
particulars were available.
1. His stock at the close of account on December 31, 20X1 was valued at ` 83,500.
2. His purchases from 1-1-20X2 to 12-6-20X2 amounted to ` 1,12,000 and his sales during that period
amounted to ` 1,54,000.
On the basis of his accounts for the past three years it appears that he earns on an average a gross profit of
30% of sales.
Patel has insured his stock for ` 60,000. Compute the amount of the claim.
(Study Material)
10.3
Answer
Computation of claim for loss of stock
` `
Opening Stock on 1-1-20X2 83,500
Add: Purchases during the period 1,12,000
Less: Cost of Goods Sold: Sales during the period 1,54,000 1,95,500
Gross Profit thereon (46,200) (1,07,800)
Value of Closing Stock before fire 87,700
Less: Stock Salvaged 11,200
Agreed value of damage Stock 10,500 (21,700)
Loss of Stock 66,000
Claim = Loss of Stock X Insured Value/Total Cost of Stock = 66,000 X
60,000 / 87,700 =` 45,154
Question 5
On 1st April, 20X2 the stock of Shri Ramesh was destroyed by fire but sufficient records were saved from
which following particulars were ascertained:
`
Stock at cost-1st January, 20X1 73,500
Stock at cost-31st December, 20X1 79,600
Purchases-year ended 31st December,20X1 3,98,000
Sales-year ended 31st December, 20X1 4,87,000
Purchases-1-1-201X2 to 31-3-20X2 1,62,000
Sales-1-1-20X2 to 31-3-20X2 2,31,200
In valuing the stock for the Balance Sheet at 31st December, 20X1 ` 2,300 had been written off on certain
stock which was a poor selling line having the cost ` 6,900. A portion of these goods were sold in March,
20X2 at loss of ` 250 on original cost of ` 3450. The remainder of this stock was now estimated to be worth
its original cost. Subject to the above exception, gross profit had remained at a uniform rate throughout the
year.
The value of stock salvaged was ` 5,800. The policy was for ` 50,000 and was subject to the average clause.
Work out the amount of the claim of loss by fire.
(Study Material)
Answer
Shri Ramesh Trading Account for 20X1
(to determine the rate of gross profit)
` ` `
To Opening Stock 73,500 By Sales A/c 4,87,000
To Purchases 3,98,000 By Closing Stock :
To Gross Profit (b.f.) 97,400 As valued 79,600
Add: Amount written off
to restore stock to
original cost 2,300 81,900
5,68,900 5,68,900
97, 400
The (normal) rate of gross profit to sales is = ×100 = 20%
4,87,000
10.4
Memorandum Trading Account upto March 31, 20X2
Normal Abnormal Total Normal Abnormal Total
items items items items
` ` ` ` ` `
To Opening Stock 75,000 6,900* 81,900 By Sales By Loss 2,28,000 3,200 2,31,200
— 250 250
To Purchases 1,62,000 — 1,62,000 By Closing Stock 54,600 3,450** 58,050
To Gross Profit (bal. fig.)
(20% on `
2,28,000) 45,600 — 45,600
2,82,600 6,900 2,89,500 2,82,600 6,900 2,89,500
* at cost, book value is ` 4,600
** 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 March 31, 20X2 58,050
Less: Salvage (5,800)
Claim subject to average clause:
Amount of Policy
= × Actual Loss of Stock
Value of Stock
50,000
=` × 52,250 =` 45,004
58,050
Question 6
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:
`
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, ` 1,150 had been written off on certain
stock which was a poor selling line having the cost ` 3,450. A portion of these goods were sold in March,
20X2 at a loss of ` 125 on original cost of ` 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 ` 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.
(Study Material)
10.5
Answer
Shri Garib Das
Trading Account for the year ended on 31st December, 20X1
` ` `
To Purchases 1,99,000 By Closing Stock :
To Gross Profit (b.f.) 48,700 As valued 39,800
Add: Amount written off to
restore stock to original cost
1,150 40,950
2,84,450 2,84,450
48,700
The normal rate of gross profit to sales is = = ×100 = 20%
2, 43,500
Memorandum Trading Account up to 19, May, 20X2
Normal Abnormal Total Normal Abnorma Total
l
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 By Closing
(20% on ` Stock (bal. fig.)
1,14,000) 22,800 — 22,800 27,300 1,725** 29,025
1,41,300 3,450 1,44,750 1,41,300 3,450 1,44,750
* at cost, book value is ` 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.
`
Value of Stock on 19th May, 20X2 29,025
Less: Salvage (2,900)
Therefore, insurance claim will be for ` 26,125 only.
Question 7
On 30th March, 20X2 fire occurred in the premises of M/s Suraj Brothers. The concern had taken an
insurance policy of ` 60,000 which was subject to the average clause. From the books of accounts, the
following particulars are available relating to the period 1st January 20X2 to 30th March 20X2.
(1) Stock as per Balance Sheet at 31st December, 20X1, ` 95,600.
(2) Purchases (including purchase of machinery costing ` 30,000) ` 1,70,000
(3) Wages (including wages ` 3,000 for installation of machinery) ` 50,000.
(4) Sales (including goods sold on approval basis amounting to ` 49,500) ` 2,75,000. No approval has been
received in respect of 2/3rd of the goods sold on approval.
(5) The average rate of gross profit is 20% of sales.
(6) The value of the salvaged goods was ` 12,300.
You are required to compute the amount of the claim to be lodged to the insurance company.
(Study Material)
10.6
Answer
`
Stock on the date of fire i.e. on 30th March, 20X2 (W.N.1) 62,600
Less: Value of salvaged stock (12,300)
Insured value 48,211
Amount of claim = x Loss of stock (approx.)
 60,000 
= × 50,300 
 62,600 
A claim of ` 48,211 (approx.) should be lodged by M/s Suraj Brothers to the insurance company.
Working Notes:
1. Calculation of closing stock as on 30th March, 20X2
Memorandum Trading Account for (from 1st January, 20X2 to 30th March, 20X2)
Particulars Amount Particulars Amount
(`) (`)
To Opening stock 95,600 By Sales (W.N.3) 2,42,000
To Purchases 1,40,000 By Goods with customers (for approval) (W.N.2) 26,400*
(1,70,000-30,000)
To Wages (50,000 – 3,000) 47,000 By Closing stock (Bal. fig.) 62,600
To Gross profit (20% on sales) 48,400
3,31,000 3,31,000
* For financial statement purposes, this would form part of closing stock (since there is no sale). However, this
has been shown separately for computation of claim for loss of stock since the goods were physically not with
the concern and, hence, there was no loss of such stock as a result of fire.
2. Calculation of goods with customers
Since no approval for sale has been received for the goods of ` 33,000 (i.e. 2/3 of ` 49,500) hence, these
should be valued at cost i.e. ` 33,000 – 20% of ` 33,000 = ` 26,400.
3. Calculation of actual sales
Total sales – Sale of goods on approval (2/3rd) = ` 2,75,000 – ` 33,000 = ` 2,42,000.
Similar Question
Question 7A
A fire occurred in the premises of M/s Star & Sons on 21st March 2020. The concern had taken Insurance
Policy of ` 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 ` 1,50,500
(ii) Purchases (including purchase of ` 40,000 for which purchase invoices had not been received from
suppliers, though goods have been received in godown) ` 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 ` 32,000
(iv) Sales (excluding goods sold on approval basis having sale value ` 35,000) ` 4,55,000
Approval has been received for all goods sold on approval basis, before the date of fire.
(v) Purchase return ` 15,000
(vi) Wages (including salary of Manager ` 10000) ` 65,000
(vii) Average Rate of Gross Profit @ 20% on sales.
(viii) Cost of goods salvaged ` 12,000
You are required to calculate the amount of claim to be lodged to Insurance Company.
(RTP May, 2022)
10.7
Answer
Books of M/s Star & Sons
Memorandum Trading Account for the period 1st April, 2019 to 21st March, 2020
` `
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 (20% of 98,000
Sales)
5,73,500 5,73,500
Statement of Insurance Claim
`
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.
Insured value
Claim = × Loss suffered
Total cost
Claim amount = ` 71,500X 70,000/ 83,500= ` 59,940 (rounded off)
Question 8
From the following information, compute the amount of claim under loss of profit policy:
(i) Indemnity period 13 months
(ii) Sum insured ` 2,00,000
(iii) Turnover, last financial year ended Dec. 31, 20X1 ` 12,00,000.
(iv) Gross Profit, i.e., Net profit plus insured standing charges, ` 2,00,000 giving a gross profit rate of 20%.
(v) Net profit plus all standing charges, ` 2,50,000 i.e., 50,000 of the standing charges are not insured.
(vi) Fire occurs on 31st March, 20X2, and affects business for 6 months.
(vii) Turnover for 12 months ended 31st March, 20X2, ` 11,70,000.
(viii) Turnover: 1-4-20X1 to 30-9-20X1 5,00,000
1-4-20X2 to 30-9-20X2 3,00,000
Reduction in turnover 2,00,000
(ix) Sales amounting ` 1,60,000 generated in period 1.4.20X2 to 30.9.20X2 by incurring additional expenses
of ` 30,000.
(x) Saving in insured standing charges in the indemnity period ` 10,000.
(Study Material)
10.8
Answer
The claim in respect of profit will be calculated as follows:
(a) Short Sales: `
Turnover 1-4-20X1 to 30-9-20X1 5,00,000
Less: Turnover 1-4-20X2 to 30-9-20X2 (3,00,000)
Reduction in turnover 2,00,000
Adjusted Annual Turnover: `
Sales for the period 1-4-20X1 to 31-12-20X1
(11,70,000 - 2,70,000) 9,00,000
Add: Sales from 1-1-20X2 to 31-3-20X2 2,70,000
11,70,000
(b) Gross Claim: Gross Profit @ 20% on short sales (` 2,00,000) 40,000
Add: Claim for increase in cost of working (see below) 24,718
64,718
Less: Saving in insured standing charges (10,000)
54,718
Claim for increased cost of working is subject to two tests
G.P.on Adjusted Annual Turnover
(i) Increased cost of working ×
G.P.as above + Uninsured Standing Charges
20
`11,70,000 ×
100
`30,000 ×
20
`11,70,000 × +`50,000
100
= ` 24,718.
20
(ii) Gross Profit on sales generated by increased cost of workings = 1,60,000 × =`32,000
100
Lower of the two, i.e., ` 24,718 is allowable
(c) Application of average clause: `
Gross Profit on adjusted annual turnover, 20% on ` 11,70,000 2,34,000
Sum insured 2,00,000
`2 00 000
Hence claim limited to 54,718 × 46,768
`2 34 000
Question 9
A fire occurred on 1st February, 20X2, in the premises of Pioneer Ltd., a retail store and business was
partially disorganized upto 30th June, 20X2. The company was insured under a loss of profits for ` 1,25,000
with a six months period indemnity.
From the following information, compute the amount of claim under the loss of profit policy assuming entire
sales during interrupted period was due to additional expenses.
`
Actual turnover from 1st February to 30th June, 20X2 80,000
Turnover from 1st February to 30th June, 20X1 2,00,000
Turnover from 1st February, 20X1 to 31st January, 20X2 4,50,000
Net Profit for last financial year 70,000
Insured standing charges for last financial year 56,000
Total standing charges for last financial year 64,000
Turnover for the last financial year 4,20,000
10.9
The company incurred additional expenses amounting to ` 6,700 which reduced the loss in turnover. There
was also a saving during the indemnity period of ` 2,450 in the insured standing charges as a result of the
fire.
There had been a considerable increase in trade since the date of the last annual accounts and it has been
agreed that an adjustment of 15% be made in respect of the upward trend in turnover.
(Study Material)
Answer
Computation of the amount of claim for the loss of profit
Reduction in turnover `
Standard Turnover from 1st Feb. 20X1 to 30th June, 20X1 2,00,000
Add: 15% expected increase 30,000
Adjusted Standard Turnover 2,30,000
Less: Actual Turnover from 1st Feb., 20X2 to 30th June, 20X2 (80,000)
Short Sales 1,50,000
Gross Profit on reduction in turnover @ 30% on ` 1,50,000
(see working note 1) 45,000
Add: Claim for Additional Expenses being Lower of
(i) Actual = ` 6,700
G.P.on Adjusted Annual Turnover
(ii) Additional Exp. x
G.P.as above + Uninsured Standing Charges
1,55,250
6,700 × = 6,372
1,63,250
(iii) G.P. on sales generated by additional expenses
— 80,000 x 30% = 24,000
Therefore, lower of above is 6,372
51,372
Less: Saving in Insured Standing Charges (2,450)
Amount of claim before Application of Average Clause 48,922
Application of Average Clause:
Amount of Policy
× Amount of Claim
G.P. on Annual Turnover
1,25,000
= × 48,922 39,390
1,55,250
Amount of claim under the policy = ` 39,390
Working Notes:
(i) Rate of Gross Profit for last Financial Year: `
Gross Profit:
Net Profit 70,000
Add: Insured Standing Charges 56,000
1,26,000
1,26,000
Rate of Gross Profit = ×100 = 30%
4,20,000
10.10
(ii) Annual Turnover (adjusted):
Turnover from 1st Feb., 20X1 to 31st January, 20X2 4,50,000
5,17,500
Gross Profit on ` 5,17,500 @ 30% 1,55,250
Standing charges not Insured (64,000 – 56,000) 8,000
Gross Profit plus non-insured standing charges 1,63,250
Question 10
The premises of XY Limited were partially destroyed by fire on 1st March, 20X2 and as a result, the business
was practically disorganized upto 31st August, 20X2. The company is insured under a loss of profits policy for
` 1,65,000 having an indemnity period of 6 months.
From the following information, prepare a claim under the policy:
(i) Actual turnover during the period of dislocation `
(1-3-20X2 to 31-8-20X2) 80,000
(ii) Turnover for the corresponding period (dislocation)
in the 12 months immediately before the fire
(1-3-20X1 to 31-8-20X1) 2,40,000
(iii) Turnover for the 12 months immediately preceding
the fire (1-3-20X1 to 28-2-20X2) 6,00,000
(iv) Net profit for the last financial year 90,000
(v) Insured standing charges for the last financial year 60,000
(vi) Uninsured standing charges 5,000
(vii) Turnover for the last financial year 5,00,000
Due to substantial increase in trade, before and up to the time of the fire, it was agreed that an adjustment of
10% should be made in respect of the upward trend in turnover. The company incurred additional expenses
amounting to ` 9,300 immediately after the fire and but for this expenditure, the turnover during the period of
dislocation would have been only ` 55,000. There was also a saving during the indemnity period of ` 2,700 in
insured standing charges as a result of the fire.
(Study Material)
Answer
Computation of loss of profit Insurance claim
`
(1) Rate of gross profit:
Net profit for the last financial year 90,000
Add: Insured standing charges 60,000
1,50,000
 `1,50,000 
Rate of gross profit =
 `5,00,000 ×100 = 30%
10.11
`
(2) Short sales:
Standard Turnover 2,40,000
Add: 10% increasing trend 24,000
2,64,000
Less: Turnover during the dislocation period (which is at par
with the indemnity period of 6 months) (80,000)
1,84,000
(3) Annual (Adjusted) Turnover:
Annual Turnover (1-3-20X1 to 28-2-20X2) 6,00,000
Add: 10% increasing trend 60,000
6,60,000
Note: Assumed that trend adjustment is required on total amount of annual turnover. However, part of the
annual turnover represents trend adjusted figure. Alternatively, the students may ignore trend and take
simply annual turnover. The claim would be ` 55,000 which is more than the claim computed in Para (5).
So, the Insurance Company would insist on trend adjusted on annual turnover.
(4) Additional Expenses: Least of the below shall be allowed `
(i) Actual Expenses 9,300
(ii) Gross profit on sales generated by additional expenses 30/100× (` 80,000 – ` 55,000) 7,500
Gross Profit on Annual (Adjusted) Turnover
(iii) × Additional Expenses
Gross Profit shown in the numerator + Uninsured standing charges
30% on `6,60,000
×`9,300
30% on `6,60,000 + `5,000
`1,98,000
×`9,300 9,071
`2,03,000
Least of the above three figures, i.e. ` 7,500 allowable.
(5) Claim: `
Loss of profit on short sales (30% on ` 1,84,000) 55,200
Add: Allowable additional expenses 7,500
62,700
Less: Savings in insured standing charges (2,700)
60,000
Application of average clause
 `1,65,000  50,000
 `60,000 
 `1,98,000 
Question 11
Sony Ltd.’s. Trading and profit and loss account for the year ended 31 st December, 20X1 were as follows:
Trading and Profit and Loss Account for the year ended 31.12.20X1
` `
To Opening stock 20,000 By Sales 10,00,000
To Purchases 6,50,000 By Closing stock 90,000
To Manufacturing expenses 1,70,000
To Gross profit 2,50,000
10,90,000 10,90,000
10.12
` `
To Administrative expenses 80,000 By Gross profit 2,50,000
To Selling expenses 20,000
To Finance charges 1,00,000
To Net profit 50,000
2,50,000 2,50,000
The company had taken out a fire policy for ` 3,00,000 and a loss of profits policy for ` 1,00,000 having an
indemnity period of 6 months. A fire occurred on 1.4.20X2 at the premises and the entire stock were gutted
with nil salvage value. The net quarter sales i.e. 1.4.20X2 to 30.6.20X2 was severely affected. The following
are the other information:
Sales during the period 1.1.X2 to 31.3.X2 2,50,000
Purchases during the period 1.1.X2 to 31.3.X2 3,00,000
Manufacturing expenses 1.1.X2 to 31.3.X2 70,000
Sales during the period 1.4.X2 to 30.6.X2 87,500
Standing charges insured 50,000
Actual expense incurred after fire 60,000
The general trend of the industry shows an increase of sales by 15% and decrease in GP by 5% due to
increased cost.
Ascertain the claim for stock and loss of profit.
(Study Material)
Answer
Calculation of loss of stock:
Sony Ltd.
Trading A/c
for the period 1.1.20X2 to 31.3.20X2
` `
To Purchases 3,00,000 By Closing stock (balancing figure) 2,60,000
To Manufacturing expenses 70,000
To Gross profit (20% of ` 2,50,000) 50,000
(W.N.3)
5,10,000 5,10,000
`
Stock destroyed by fire 2,60,000
Amount of fire policy 3,00,000
As the value of stock destroyed by fire is less than the policy value, the entire claim will be admitted.
Question 12
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) ` 4,00,000
Period of indemnity 12 months
Date of damage st
1 January, 20X2
Date on which disruption of business ceased 31st October, 20X2

G.P. of 20X1 25%
Less: Decrease in trend 5% 20%
10.13
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 ` 3,60,000.
(b) The actual turnover for financial year 20X1 was ` 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 ` 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 be Adjusted standard
figures added turnover
` ` `
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
` 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 ` 28,000.
Standing Charges not covered by insurance amounted to ` 20,000 p.a. The annual turnover for January was
nil and for the period February to October 20X2 ` 8,00,000
(Study Material)
Answer
1. Short sales
Period Adjusted Standard Actual Turnover Shortage
Turnover
` ` `
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
`3,86, 400
×100 = 30.425%
`1 2,70,000
3. Amount allowable in respect of additional expenses
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
10.14
Gross Profit on Annual (Adjusted) Turnover
(iii) × Additional Expenses
Gross Proft on Annual Adjusted Turnover + Uninsured standing charges
3,86, 400
×1,80,000 = 1,71,142 (approx.)
3,86, 400 + 20,000
Least i.e. = ` 1,71,142 is admissible.
4. Amount of Claim
`
30.425 79,105
Gross profit on short sales = `2,60,000 x
100
Add: Amount allowable 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 ` 4,00,000 is
higher than gross profit on annual adjusted turnover ` 3,86,400.
Therefore, insurance claim will be for ` 2,22,247.
Question 13
Explain the significance of ‘Average Clause’ in a fire insurance policy.
(Study Material)
Answer
In order to discourage under-insurance, fire insurance policies often include an average clause. The effect of
these clause is that if the insured value of the subject matter concerned is less than the total cost then the
average clause will apply, that is, the loss will be limited to that proportion of the loss as the insured value
bears to the total cost.
The actual claim amount would therefore be determined by the following formula:
Insured value
Total cost
Question 14
Define the following terms:
(i) Indemnity Period;
(ii) Standard Turnover
(Study Material)
Answer
The average clause applies only when the insured value is less than the total value of the insured subject
matter.
(i) Indemnity period is the period beginning with the occurrence of the damage and ending not later than
twelve months.
(ii) Standard Turnover is the turnover during that period in the twelve months immediately before the date
of damage which corresponds with the Indemnity Period.
10.15
Practical Questions
Question 15
On 15th December, 20X1, a fire occurred in the premises of M/s. OM Exports. Most of the stocks were
destroyed. Cost of stock salvaged being ` 1,40,000. From the books of account, the following particulars were
available:
(i) Stock at the close of account on 31st March, 20X1 was valued at ` 9,40,000.
(ii) Purchases from 01-04-20X1 to 15-12-20X1 amounted to ` 13,20,000 and the sales during that period
amounted to ` 20,25,000.
On the basis of his accounts for the past three years, it appears that average gross profit ratio is 20% on
sales.
Compute the amount of the claim, if the stock were insured for ` 4,00,000.
(Study Material)
Answer
Memorandum Trading Account
For the period 01.04.20X1 to 15.12.20X1
Particulars ` Particulars `
To Opening stock To Purchases 9,40,000 By Sales 20,25,000
To Gross Profit @20% 13,20,000 By Closing Stock (Bal. figure) 6,40,000
4,05,000
26,65,000 26,65,000
Statement of Claim
`
Estimated value of Stock as at date of fire 6,40,000
Less: Value of Salvaged Stock 1,40,000
Estimated Value of Stock lost by fire 5,00,000
As the value of stock is more than insured value, amount of claim would be subject to average clause.
Amount of Policy
Amount of Claim = × Actual Loss of Stock
Value of Stock
4,00,000
Amount of Claim = × 5,00,000 =`3,12,500
6, 40,000
Question 16
On 29th August, 20X2, the godown of a trader caught fire and a large part of the stock of goods was
destroyed. However, goods costing ` 1,08,000 could be salvaged incurring fire fighting expenses amounting
to ` 4,700.
The trader provides you the following additional information:
`
Cost of stock on 1st April, 20X1 7,10,500
Cost of stock on 31st March, 20X2 7,90,100
Purchases during the year ended 31st March, 20X2 56,79,600
Purchases from 1st April, 20X2 to the date of fire 33,10,700
Cost of goods distributed as samples for advertising from 1st April, 20X2 to the date of fire 41,000
Cost of goods withdrawn by trader for personal use from 1st April, 20X2 to the date of fire 2,000
Sales for the year ended 31st March, 20X2 80,00,000
Sales from 1st April, 20X2 to the date of fire 45,36,000
10.16
The insurance company also admitted firefighting expenses. The trader had taken the fire insurance policy for
` 9,00,000 with an average clause.
Calculate the amount of the claim that will be admitted by the insurance company.
(Study Material)
Answer
Memorandum Trading Account for the period 1st April, 20X2 to 29th August 20X2
` `
To Purchases 33,10,700 By Closing stock (Bal. fig.) 8,82,600
Less: Advertisement (41,000)
Drawings (2,000) 32,67,700
To Gross Profit [30% of Sales -
Refer Working Note]
13,60,800
54,18,600 54,18,600
`
Value of stock destroyed by fire 8,82,600
Less: Salvaged Stock (1,08,000)
Add: Fire Fighting Expenses 4,700
Insurance Claim 7,79,300
Note: Since policy amount is more than claim amount, average clause will not apply. Therefore, claim amount
of ` 7,79,300 will be admitted by the Insurance Company.
Working Note:
Trading Account for the year ended 31st March, 20X2
` `
To Purchases 56,79,600 By Closing stock 7,90,100
To Gross Profit (b.f.) 24,00,000
87,90,100 87,90,100
Rate of Gross Profit in 20X1-X2
Gross Profit 24,00,000
× 100 = ×100 = 30%
Sales 80,00,000
Question 17
A fire occurred in the premises of M/s. Fireproof Co. on 31st August, 20X1. From the following particulars
relating to the period from 1st April, 20X1 to 31st August, 20X1, you are requested to ascertain the amount of
claim to be filed with the insurance company for the loss of stock. The concern had taken an insurance policy
for ` 60,000 which is subject to an average clause.
`
(i) Stock as per Balance Sheet at 31-03-20X1 99,000
(ii) Purchases 1,70,000
(iii) Wages (including wages for the installation of a machine ` 3,000) 50,000
(iv) Sales 2,42,000
(v) Sale value of goods drawn by partners 15,000
(vi) Cost of goods sent to consignee on 16th August, 20X1, lying unsold with them 16,500
(vii) Cost of goods distributed as free samples 1,500
10.17
While valuing the stock at 31st March, 20X1, ` 1,000 were written off in respect of a slow moving item. The
cost of which was ` 5,000. A portion of these goods were sold at a loss of ` 500 on the original cost of `
2,500. The remainder of the stock is now estimated to be worth the original cost. The value of goods salvaged
was estimated at ` 20,000. The average rate of gross profit was 20% throughout.
(Study Material)
Answer
Memorandum Trading Account for the period 1st April, 20X1 to 31st August, 20X1
Items Items Items Items
` ` ` ` ` `
To Opening stock 95,000 5,000 1,00,000* By Sales 2,40,000 2,000 2,42,000
To Purchases 1,56,500 - 1,56,500 By Goods sent
(Refer W.N.) to consignee 16,500 - 16,500**
To Wages (50,000 47,000 - 47,000 By Loss - 500 500
– 3,000)
To Gross profit @ 48,000 - 48,000 By Closing 90,000 2,500 92,500
20% stock (Bal.fig.)
3,46,500 5,000 3,51,500 3,46,500 5,000 3,51,500
* 99,000 + 1,000
** For financial statement purposes, this would form part of closing stock (since there is no sale). However,
this has been shown separately for computation of claim for loss of stock since the goods were physically not
with the concern and, hence, there was no loss of such stock.
Statement of Claim for Loss of Stock
`
Book value of stock as on 31.08.20X1 92,500
Amount of claim to be lodged with insurance company
Policy value
= Loss of stock x
Value of stock on the date of fire
60,000
= ` 72,500 x = ` 47,027
92,50 0
Working Note:
Calculation of Adjusted Purchases
`
Purchases 1,70,000
Less: Drawings [15,000 – (20% x 15,000)] (12,000)
Free samples (1,500)
Adjusted purchases 1,56,500
Question 18
A fire occurred in the premises of M/s. Kailash & Co. on 30 th September 20X1. From the following particulars
relating to the period from 1st April 20X1 to 30th September 20X1, you are required to ascertain the amount of
claim to be filed with the Insurance Company for the loss of Stock. The company has taken an Insurance
policy for ` 75,000 which is subject to average clause. The value of goods salvaged was estimated at `
27,000. The average rate of Gross Profit was 20% throughout the period.
10.18
Particulars Amount in `
(i) Opening Stock 1,20,000
(ii) Purchase made 2,40,000
(iii) Wages paid (including wages for the installation of a machine ` 5,000) 75,000
(iv) Sales 3,10,000
(v) Goods taken by the Proprietor (Sale Value) 25,000
(vi) Cost of goods sent to Consignee on 20th September 20X1, lying unsold with 18,000
them
(vii) Free Samples distributed-Cost 2,500
(Study Material)
Answer
Memorandum Trading Account for the period 1st April, 20X1 to 30th Sept. 20X1
` `
To Purchases 2,40,000 By Consignment stock 18,000*
Less: Advertisement (2,500) By Closing Stock (Bal. fig.) 1,41,500
Cost of goods taken by proprietor
(20,000) 2,17,500
To Wages 70,000
(75,000 – 5,000)
To Gross Profit [20% of Sales) 62,000
4,69,500 4,69,500
the concern and, hence, there was no loss of such stock.
`
Less: Salvaged Stock (27,000)
Note: Since policy amount is less than claim amount, average clause will apply. Therefore, claim amount will
be computed by applying the formula
Insured value
Total cost
Claim amount = ` 60,689 (1,14,500 x 75,000/ 1,41,500)
Question 19
On 2.6.20X2, there occurred a fire in the warehouse of Mr. Jack and his total stock was destroyed by fire.
However, following information could be obtained from the records saved:
`
Stock at cost on 1.4.20X1 5,40,000
Stock at 90% of cost on 31.3.20X2 6,48,000
Purchases for the year ended 31.3.20X2 25,80,000
Sales for the year ended 31.3.20X2 36,00,000
Purchases from 1.4.20X2 to 2.6.20X2 9,00,000
Sales from 1.4.20X2 to 2.6.20X2 19,20,000
10.19
Sales up to 2.6.20X2 includes `3,00,000 (invoice price) being the goods not dispatched to the customers.
Purchases up to 2.6.20X2 includes a machinery acquired for `60,000. However, it does not include goods
worth ` 1,20,000 received from suppliers, as invoice not received up to the date of fire. These goods have
remained in the godown at the time of fire. The insurance policy is for ` 4,80,000 and it is subject to average
clause.
You are required to ascertain the amount of claim for loss of stock applying average clause.
(Study Material)
Answer
In the books of Mr Jack
Trading Account for the year ended 31st March 20X2
` `
To Opening stock 5,40,000 By Sales 36,00,000
To Purchases 25,80,000 By Closing Stock (at cost) 648000/90% 7,20,000
To Gross Profit 12,00,000 ____ __
43,20,000 43,20,000
Thus, the GP ratio = 12,00,000 / 36,00,000 = 33.33%

for the period 1st April 20X2 to 2nd June 20X2
` `
To Purchases 9,00,000 Less: good sold but not despatched
(3,00,000)
Less: Machinery (60,000) 16,20,000
Add: Good received but not invoiced By Closing Stock (balancing figure) 6,00,000
1,20,000 9,60,000
To Gross Profit (33.33%) 5,40,000 ————
22,20,000 22,20,000
Insurance Cover = ` 4,80,000 and amount of loss of stock = `6,00,000. Thus, the insurance claim admissible
shall be maximum up to ` 4,80,000.
Question 20
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, you are required to suggest the policy amount to him.
Turnover in last financial year ` 4,50,000
Standing Charges in last financial year ` 90,000
1. Net profit earned in last year was 10% of turnover and the same trend expected in subsequent year;
2. Increase in turnover expected 25%;
3. To achieve additional sales, trader has to incur additional expenditure of ` 31,250.
(Study Material)
Answer
(a) Calculation of Gross Profit
Gross Profit = Net Profit + Standing Charges/Turnover x 100 Gross Profit = (`45,000 + `90,000 /
`4,50,000) x 100 = 30%
(b) Calculation of policy amount to cover loss of profit
Particulars Amount (`)
Turnover in the last financial year 4,50,000
Add: 25% increase in turnover 1,12,500
Total 5,62,500
10.20

Gross profit on increase turnover (` 5,62,500 x 30%) 1,68,750
Add: Additional standing charges 31,250
Policy Amount 2,00,000
Therefore, the trader should go in for a loss of profit policy of ` 2,00,000.
Question 21
On account of a fire on 15th June, 20X2 in the business house of a company, the working remained disturbed
upto 15th December 20X2 as a result of which it was not possible to affect any sales. The company had taken
out an insurance policy with an average clause against consequential losses for ` 1,40,000 and a period of 7
months has been agreed upon as indemnity period. An increase of 25% was marked in the current year’s
sales as compared to the last year. The company incurred an additional expenditure of ` 12,000 to make
sales possible and made a saving of ` 2,000 in the insured standing charges. Compute the amount of claim
admissible for the loss of profit.
`
Actual sales from 15th June, 20X2 to 15th Dec, 20X2 70,000
Sales from 15th June 20X1 to 15th Dec 20X1 2,40,000
Net profit for last financial year 80,000
Insured standing charges for the last financial year 70,000
Total standing charges for the last financial year 1,20,000
Turnover for one year : 16th June 20X1 to 15th June 20X2 5,60,000
(Study Material)
Answer
(1) Calculation of short sales:
`
Sales for the period 15.6.20X1 to 15.12.20X1 2,40,000
Add: 25% increase in sales _ 60,000
Estimated sales in current year 3,00,000
Less: Actual sales from 15.6.20X2 to 15.12.20X2 (70,000)
Short sales 2,30,000
(2) Calculation of gross profit:
Net profit + Insured standing charges
Gross profit = ×100
Turnover
`80,000 +`70,000
= ×100
`6,00,000
`1,50,000
= ×100 = 25%
`6,00,000
(3) Calculation of loss of profit:
` 2,30,000 x 25% =` 57,500
(4) Calculation of claim for increased cost of working:
Least of the following:
(i) Actual expense= ` 12,000
10.21
Gross profit on adjusted turnover
(ii) Expenditure x
Gross profit as above Uninsured standing charges
(25 / 100) x 7,00,000

`12,000 x =`9,333 approx.
[(25 / 100) x ` 7,00,000] + `50,000
Where,
Adjusted turnover `
Turnover from 16.06.20X1 to 15.06.20X2 5,60,000
Add: 25% increase 1,40,000
7,00,000
(iii) Gross profit on sales generated due to additional expenditure = 25% x ` 70,000 = ` 17,500. ` 9,333
being the least, shall be the increased cost of working.
(5) Calculation of total loss of profit
`
Loss of profit 57,500
Add: Increased cost of working 9,333
66,833
Less: Saving in insured standing charges (2,000)
64,833
(6) Calculation of insurable amount:
Adjusted turnover x G.P. rate
= ` 7,00,000 x 25% = ` 1,75,000
(7) Total claim for consequential loss of profit – Due to Average Clause
Insuredamount
= × Total loss of profit
Insurableamount
`1, 40,000
= ×`64,833 = ` 51,866.40
`1,75,000
Question 22
Monalisa & Co. runs plastic goods shop. Following details are available from quarterly sales tax return filed.
Sales 20X1 20X2 20X3 20X4
` ` ` `
From 1st January to 31st March 1,80,000 1,70,000 2,05,950 1,62,000
From 1st April to 30th June 1,28,000 1,86,000 1,93,000 2,21,000
From 1st July to 30th September 1,53,000 2,10,000 2,31,000 1,75,000
From 1st October to 31st December 1,59,000 1,47,000 1,90,000 1,48,000
Total 6,20,000 7,13,000 8,19,950 7,06,000
Period `
Sales from 16-09-20X3 to 30-09-20X3 34,000
Sales from 16-09-20X4 to 30-09-20X4 Nil
Sales from 16-12-20X3 to 31-12-20X3 60,000
Sales from 16-12-20X4 to 31-12-20X4 20,000
A loss of profit policy was taken for ` 1,00,000. Fire occurred on 15th September, 20X4. Indemnity period was
for 3 months. Net Profit was ` 1,20,000 and standing charges (all insured) amounted to ` 43,990 for year
ending 31st December, 20X3.
10.22
Determine the Insurance Claim.
(Study Material)
Answer
(1) Gross profit ratio
`
Net profit in year 20X3 1,20,000
Gross profit 1,63,990
1,63,990
Ratio of gross profit = = 20%
8,19,950
(2) Calculation of Short sales
Indemnity period: 16.9.20X4 to 15.12.X4
Standard sales to be calculated on basis of corresponding period of year 20X3
`
Sales for period 16.9.20X3 to 30.9.X3 34,000
Sales for period 1.10.20X3 to 15.12.20X3 (Note 1) 1,30,000
Sales for period 16.9.20X3 to 15.12.20X3 1,64,000
Add: upward trend in sales (15%) (Note 2) 24,600
Standard Sales (adjusted) 1,88,600
Actual sales of disorganized period
Calculation of sales from 16.9.X4 to 15.12.X4
Sales for period 16.9.X4 to 30.9.X4 Nil
Sales for 1.10.X4 to 15.12.X4 (` 1,48,000 – ` 20,000) 1,28,000
Actual Sales 1,28,000
Short Sales (` 1,88,600 - ` 1,28,000) 60,600
(3) Loss of gross profit
Short sales x gross profit ratio = 60,600 x 20% 12,120
(4) Application of average clause
policy value
Net claim = Gross claim x
gross profit on annual turnover
1,00,000
= 12,120 x
1,63,120 (W.N.3)
Amount of claim = ` 7,430
Working Notes:
1. Sales for period 1.10.X3 to 15.12.X3 `
Sales for 1.10.X3 to 31.12.X3 (given) 1,90,000
Sales for 16.12.X3 to 31.12.X3 (given) 60,000
Sales for period 1.10.X3 to 15.12.X3 1,30,000
2. Calculation of upward trend in sales
Total sales in year 20X1 = ` 6,20,000
Increase in sales in year 20X2 as compared to 20X1 = ` 93,000
93,000 (7,13,000 - 6,20,000)
% increase = = 15%
6,20,000
Increase in sales in year 20X3 as compared to year 20X2
10.23
1,06,950 (8,19,950 - 7,13,000)
% increase = = 15%
7,13,000
Thus annual percentage increase trend is of 15%.
3. Gross profit on annual turnover
`
Sales from 16.9.X3 to 30.9.X3 (adjusted)(34,000 x1.15) 39,100
1.10.X3 to 31.12.X3(adjusted) (1,90,000 x1.15) 2,18,500
1.1.X4 to 31.3.X4 1,62,000
1.4.X4 to 30.6.X4 2,21,000
1.7.20X4 to 15.9.20X4 (1,75,000 – Nil) 1,75,000
Sales for 12 months just before date of fire 8,15,600
Gross profit on adjusted annual sales @ 20% 1,63,120
Test Your Knowledge

MCQs
1. Goods costing ` 1,00,000 were insured for ` 50,000. Out of these goods, ¾ are destroyed by fire. The
amount of claim with average clause will be
(a) ` 37,500.
(b) ` 50,000.
(c) ` 75,000.
Answer: (a)
2. Fire insurance claim will be limited to the
(a) actual loss suffered even though the insured value of the goods may be higher.
(b) proportion of the loss as the insured value bears to the total cost.
(c) both (a) and (b)).
Answer: (c)
3. The Loss of Profit Policy normally covers the following items:
(a) Loss of net profit and Standing charges.
(b) Any increased cost of working e.g., renting of temporary premises.
Answer: (c)
4. A plant worth ` 40,000 has been insured for ` 30,000, the loss on account of fire is ` 25,000. The
insurance company will bear the loss to the extent of
(a) ` 18,750.
(b) ` 25,000.
(c) ` 30,000.
Answer: (a)
5. If the policy is without average clause, a claim for loss of profit will be
(a) Sum insured.
(b) Higher of actual loss and sum insured.
(c) Lower of actual loss and sum insured
Answer: (c)
6. Standard turnover is
(a) Turnover during the last 12 months immediately before damage.
(b) Turnover during that period in 12 months immediately before damage which corresponds with
indemnity period.
(c) Turnover during the last accounting period immediately before damage.
Answer: (b)
10.24
7. Gross profit can be calculated as
(a) Net profit + Insured standing charges.
(b) Net profit - Insured standing charges.
(c) Net profit + standing charges.
Answer: (a)
8. The cost of salvaged stock must be
(a) Credited to trading account.
(b) Debited to salvaged stock account.
Answer: (c)
9. Amount of indemnity payable is
(a) Gross Profit lost – Claim for increased cost of working Capital – Saving in Insured standing Charges.
(b) Gross Profit lost– Claim for increased cost of working Capital + Saving in Insured standing Charges.
(c) Gross Profit Lost +Claim for increased cost of working Capital – Saving in Insured standing Charges.
Answer: (c)
10. Short Sales for the purposes of Loss of Profit Policy shall be:
(a) Adjusted Annual Turnover – Annual Turnover
(b) Adjusted Annual Turnover – Adjusted Standard Turnover
(c) Adjusted Standard Turnover – Actual Turnover
Answer: (c)
10.25
Chap. 10  Insurance Claims for Loss of Stock and Loss of Profit
QUESTION BANK
Question 23
A fire occurred in the premises of M/s Bright on 25th May, 2017. As a result of fire, sales adversely affected up
to 30th September, 2017. The firm had taken Loss of profit policy (with and average clause) for ` 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 ` 30,000 to maintain the sales.
There was saving of ` 5,000 in the insured standing charges.
Actual turnover from 25th May, 2017 to 30th September, 2017 `1,75,000
Turn over from 25th May, 2016 to 30th September, 2016 ` 6,00,000
Net profit for last financial year ` 2,00,000
Insured standing charges for the last financial year ` 1,75,000
Total standing charges for the last financial year ` 3,00,000
Turnover for the last financial year ` 15,00,000
Turnover for one year from 25th May, 2016 to 24th May, 2017 ` 14,00,000
You are required to calculate the loss of profit claim amount, assuming that entire sales during the interrupted
period was due to additional expenses.
(May 2019) (10 Marks)
Answer
Computation of the amount of claim for the loss of profit
1. Reduction in turnover `
Turnover from 25th May, 2016 to 30th September, 2016 6,00,000
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 ` 4,85,000 1,21,250
(see working note 1)
Add: Additional Expenses
Lower of
(i) Actual = ` 30,000
G.P. on Adjusted Annual Turnover
(ii) Additional Exp. ×
G.P. as above + Uninsured Standing Charges
30,000 x [3,85,000/(3,85,000+1,25,000)] = ` 22,647
(iii) G.P. on sales generated by additional expenses
175000 x 25% = ` 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) ` 22,647
1,43,897
Less: Saving in Insured Standing Charges (5,000)
Amount of claim before application of Average Clause 1,38,897
10.26
3. Application of Average Clause:
Amount of Policy
G.P. on Annual Turnover
(3,50,000/3,85,000) x 1,38,897= ` 1,26,270
Amount of claim under the policy = ` 1,26,270
Working Notes:
1. Rate of Gross Profit for last Financial Year: `
Net Profit for last financial year 2,00,000
Add: Insured Standing Charges 1,75,000
3,75,000
Rate of Gross Profit = ×100 = 25%
15,00,000
2. Annual Turnover (adjusted):
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 ` 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 24
A fire engulfed the premises of a business of M/s Kite Ltd. in the morning, of 1st October, 2017. The entire
stock was destroyed except, stock salvaged of `50,000. Insurance Policy was for `5,00,000 with average
clause.
The following information was obtained from the records saved for the period from 1st April to 30th
September, 2017:
`
Sales 27,75,000
Purchases 18,75,000
Carriage inward 35,000
Carriage outward 20,000
Wages 40,000
Salaries 50,000
Stock in hand on 31st March, 2017 3,50,000
Additional Information:
(1) Sales upto 30th September. 2017, includes `75,000 for which goods had not been dispatched.
(2) On 1st June, 2017, goods worth `1,98,000 sold to Hari on approval basis which was included in sales
but no approval has been received in respect of 2/3rd of the goods sold to him till 30th September,
2017.
(3) Purchases upto 30th September, 2017 did not include `1,00,000 for which purchase invoices had not
been received from suppliers, through goods have been received in godown.
(4) Past records show the gross profit rate of 25% on sales.
You are required to prepare the statement of claim for loss of stock for submission to the Insurance
Company.
10.27
Answer:
`
Stock on the date of fire (i.e. on 1.10.2017) 3,75,000
Stock destroyed by fire (Loss of stock) 3,25,000
Insurance claim = ` 3,25,000

(Average clause is not applicable as insurance policy amount (` 5,00,000) is more than the value of closing
stock ie. ` 3,75,000)
Memorandum Trading A/c
(1.4.17 to 30.9.17)
To Purchases 19,75,000 By Goods with customers* (for 99,000
(` 18,75,000+` 1,00,000) approval) (W.N.1)
To Carriage inward 35,000 By Closing stock (bal. fig.) 3,75,000
T o Wages 40,000
T o Gross profit
(` 25,68,000 x 25%) 6,42,000 ________
30,42,000 30,42,000
the entity and, hence, there was no loss of such stock.
Working Notes:
Since no approval for sale has been received for the goods of ` 1,32,000 (i.e. 2/3 of ` 1,98,000)
hence, these should be valued at cost i.e. ` 1,32,000 – 25% of ` 1,32,000 =` 99,000.
Total sales – Goods not dispatched - Sale of goods on approval (2/3rd) =
Sales (` 27,75,000 – 75,000 – `1,32,000) = ` 25,68,000
Question 25
Sun Limited took over the running business of a partnership firm 12 M/s A&N Brothers with effect from 1st
April, 2017. The company was incorporated on 1st September, 2017. The following profit and loss account
has been prepared for the year ended 31st March, 2018.
To salaries 1,33,000 By Gross Profit b/d 7,50,000
To rent 96,000
To carriage outward 75,000
To audit fees 12,000
To travelling expenses 66,000
To commission on sales 48,000
To printing and stationery 24,000
To electricity charges 30,000
10.28
To depreciation 80,000
To advertising expenses 24,000
To preliminary expenses 9,000
To Managing Director's remuneration 8,000
To Net Profit c/d 1,45,000
7,50,000 7,50,000
1. Trend of sales during April, 2017 to March, 2018 was as under:
April, May ` 85,000 per month
June, July ` 1,05,000 per month
August, September `1,20,000 per month
October, November `1,40,000 per month
December onwards `1,50,000 per month
2. Sun Limited took over a machine worth `7,20,000 from A&N Brothers and purchased a new machine
on 1st February, 2018 for `4,80,000. The company decides to provide depreciation @ 10% p.a.
3. The company occupied additional space from 1st October, 2017 @ rent of `6,000 per month.
4. Out of travelling expenses, `30,000 were incurred by office staff while remaining expenses were
incurred by salesmen.
5. Audit fees pertains to the company.
6. Salaries were doubled from the date of incorporation.
You are required to prepare a statement apportioning the expenses between pre and post incorporation
periods and calculate the profit/(loss) for such periods.
Answer:
Statement showing calculation of profits for pre and post incorporation periods for the year ended
31.3.2018
Particulars Pre-incorporation Post- incorporation
period period
` `
Gross profit (1:2) 2,50,000 5,00,000
Less: Salaries (5:14) 35,000 98,000
Carriage outward (1:2) 25,000 50,000
Audit fee - 12,000
Travelling expenses (W.N.3) 24,500 41,500
Commission on sales (1:2) 16,000 32,000
Printing & stationary (5:7) 10,000 14,000
Rent (office building) (W.N.4) 25,000 71,000
Electricity charges (5:7) 12,500 17,500
Depreciation 30,000 50,000
Advertisement (1:2) 8,000 16,000
Preliminary expenses - 9,000
MD remuneration _____- 8,000
Pre-incorporation profit ts/f to Capital reserve (Bal. Fig.) 64,000 -
Net profit (Bal. Fig.) - 81,000
10.29
Working Notes:
1. Time Ratio
Pre incorporation period = 1st April, 2017 to 31st August, 2017 i.e. 5 months
Post incorporation period is 7 months
Time ratio is 5: 7.
2. Sales ratio
April 85,000
May 85,000
June 1,05,000
July 1,05,000
August 1,20,000
5,00,000
September 1,20,000
Oct & Nov. 2,80,000
Dec . to Marc h (1,50,000 x 4) 6,00,000
10,00,000
5,00,000:10,00,000 = 1:2
3. Travelling expenses
` `
Pre-incorporation Post- incorporation
30,000 office staff (5:7) 12,500 17,500
36,000 sales (1:2) 12,000 24,000
24,500 24,000
4. Rent
`
Rent for additional space ` (6,000 x 6) Remaining 36,000
rent ` (96,000-36,000) 60,000
Pre-incorporation period (5/12 of 60,000) 25,000
Post- incorporation period `35,000 + `36,000 71,000
5. Salaries
Suppose x for a month in pre- incorporation period then salaries for pre- incorporation period = 5x
salaries for post- incorporation period = 2x X 7= 14x
Ratio = 5:14
6. Depreciation
` ` `
Pre- Post-
incorporation incorporation
Total depreciation 80,000
Less: Depreciation exclusively for
post incorporation period 8,000
(` 4,80,000 x 10 x 2/12) 8,000
72,000
Depreciation for pre-incorporation period
(` 72,000 x 5/12) 30,000
Depreciation for post incorporation period 42,000
(` 72,000 x 7/12)
——— ______
30,000 50,000
10.30
Question 26
On 30th March, 2018 fire occurred in the premises of M/s Atok & Co. The concern had taken an insurance
policy of ` 1,20,000 which was subject to the average clause. From the books of accounts the following
particulars are available relating to the period 1st January to 30th March, 2018:
(i) Stock as per Balance Sheet at 31st December, 2017 `1,91,200
(ii) Purchases (including purchase of machinery costing `60,000) `3,40,000
(iii) Wages (including wages ` 6,000 for installation of machinery) `1,00,000
(iv) Sales (including goods sold on approval basis amounting to `99,000) `5,50,000
No approval has been received in respect of 2/3rd of the goods sold on approval.
(v) The average rate of gross profit is 20% of sales.
(vi) The value of the salvaged goods was `24,600
You are required to compute the amount of the claim to be lodged to the Insurance Company.
(May 2018) (10 Marks)
Answer:
Stock on the date of fire i.e. on 30th March, 2018 (W.N.1) 1,25,200
Less: Value of salvaged stock (24,600)
Loss of stock 1,00,600
Insured value 96,422 (approx.)
Amount of claim = Total cost of stock on the date of fire × Loss of stock
 1,20,000 
=   1,00,600= 96,422(approx)
 1,25,200 
A claim of ` 96,422 (approx.) should be lodged by M/s Alok & Co. to the insurance company.
Working Notes:
1. Calculation of closing stock as on 30th March, 2018
Memorandum Trading Account for
(from 1sl January, 2018 to 30th March, 2018)
(`) (`)
To Opening stock 1,91,200 By Sales (W.N.3) 4,84,000
To Purchases (3,40,000-60,000) 2,80,000 By Goods with customers 52,800*
(for approval) (W.N.2)
To Wages (1,00,000-6,000) 94,000 By Closing stock (Bal. fig.) 1,25,200
To Gross profit (20% on sales) 96,800
6,62,000 6,62,000
* For financial statement purposes, this would form part of closing stock (since there is no sale). However,
this has been shown separately for computation of claim for loss of stock since the goods were physically
not with the concern and, hence, there was no loss of such stock.
should be valued at cost i.e. ` 66,000 - 20% of ` 66,000 = ` 52,800.
Total sales - Sale of goods on approval (2/3rd) = ` 5,50,000 - ` 66,000 = ` 4,84,000.
10.31
Question 27
A fire engulfed the premises of a business of M/s Preet on the morning of 1st July 2018. The building,
equipment and stock were destroyed and the salvage recorded the following:
Building–` 4,000; Equipment–` 2,500; Stock– ` 20,000. The following other information was obtained from
the records saved for the period from 1st January to 30th June 2018:
`
Sales 11,50,000
Sales Returns 40,000
Purchases 9,50,000
Purchases Returns 12,500
Cartage inward 17,500
Wages 7,500
Stock in hand on 31st Dec ember, 2017 1,50,000
Building (value on 31st Dec ember, 2017) 3,75,000
Equipment (value on 31st Dec ember, 2017) 75,000
Depreciation provision till 31st Dec ember, 2017 on:
Building 1,25,000
Equipment 22,500
No depreciation has been provided since December 31st 2017. The latest rate of depreciation is 5% p.a. on
building and 15% p.a. on equipment by straight line method.
Normally business makes a profit of 25% on net sales. You are required to prepare the statement of claim for
submission to the Insurance Company.
(RTP May 2019)
Answer:
Memorandum Trading Account for the Period from 1.1.2018 to 30.6.2018
` `
(1.1.2018)
To Purchases 9,50,000 Less: Sales
Less: Returns (12,500) 9,37,500 Returns (40,000) 11,10,000
To Cartage Inwards 17,500 By Closing Stock 2,80,000
To Wages 7,500 (Bal. Fig.)
To Gross Profit 2,77,500
(25% of ` 11,10,000)
13,90,000 13,90,000
Stock Destroyed Account
` `
To Trading Account 2,80,000 By Stock Salvaged Account 20,000
By Balance c/d (For Claim) 2,60,000
2,80,000 2,80,000
10.32
Statement of Claim
Items Cost Depreciation Salvage Claim
(`) (`) (`) (`)
A B C D (E=B-C-D)
Stock 2,80,000 20,000 2,60,000
Buildings 3,75,000 1,25,000 + 9,375 4,000 2,36,625
Equipment 75,000 22,500 + 5,625 2,500 44,375
5,41,000
Question 28
On 27th July, 2017, a fire occurred in the godown of M/s. Vijay Exports and most of the stocks were
destroyed. However goods costing ` 5,000 could be salvaged. Their fire fighting expenses were amounting to
` 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 ` 63,000
2. Purchases (including purchase of machinery costing ` 10,000 ` 2,92,000
3. Wages (including wages paid for installation of machinery ` 3,000) ` 53,000
4. Sales (including goods sold on approval basis amounting to ` 40,000. ` 4,12,300
No approval has been received in respect of 1/4th of the goods sold
on approval)
5. Cost of goods distributed as free sample ` 2,000
Other Information:
(i) While valuing the stock on 31.3.2017, ` 1,000 had been written off in respect of certain slow moving
items costing ` 4,000. A portion of these goods were sold in June, 2017 at a loss of ` 700 on original
cost of ` 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 fire fighting expenses. The Company had taken the fire
insurance policy of ` 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.
(RTP November 2018)
Answer:
Memorandum Trading Account for the period 1st April, 2017 to 27th July, 2017
` ` ` ` ` `
To Opening stock 60,000 4,000 64,000 By Sales (W.N. 4,00,000 2,300 4,02,300
(W.N.5) 3)
To Purchases 2,80,000 — 2,80,000 By Loss — 700 700
(W.N. 1)
To Wages (W.N. 50,000 — 50,000 By Goods on 8,000 — 8,000
4) Approval (W.N.
2)
To Gross profit 80,000 — 80,000 By Closing 62,000 1,000 63,000
@ 20% stock (Bal. fig-)
4,70,000 4,000 4,74,000 4,70,000 4,000 4,74,000
10.33
`
Book value of stock as on 27th July, 2017 62,000
Add: Abnormal Stock 1,000
Add: Fire fighting expenses 1,300
Total Loss 59.300
Policy value
= Loss × Value of stock on the date of fire
= ` 59,300 × (55,000/63,000) = `51,770 (rounded off)

Working Notes:
1. Calculation of Adjusted Purchases
`
Purchases 2,92,000
Less: Purchase of Machinery (10,000)
Less: Free samples (2,000)
2. Calculation of Goods with Customers
Approval for sale has not been received = ` 40,000 × 1/4 = ` 10,000.
Hence, these should be valued at cost i.e. (` 10,000 - 20% of ` 10,000)
= ` 8,000
3. Calculation of Actual Sales
Total Sales ` 4,12,300
Less: Approval for sale not received (1/4 X ` 40,000) ` 10,000
Actual Sales ` 4,02,300
4. Calculation of Wages
Total Wages ` 53,000
Less: Wages for installation of machinery ` 53,000
` 50,000
5. Value of Opening Stock
Original cost of stock as on 31st March, 2018
= ` 63,000 + 1,000 (Amount written off)
= ` 64,000.
Question 29
The premises of Anmol Ltd. caught fire on 22nd January 2017, and the stock was damaged. The firm makes
account up to 31st March each year. On 31st March, 2016 the stock at cost was ` 6,63,600 as against `
4,81,100 on 31st March, 2015.
Purchases from 1st April, 2016 to the date of fire were ` 17,41,350 as against ` 22,62,500 for the full year
2015-16 and the corresponding sales figures were ` 24,58,500 and ` 26,00,000 respectively. You are given
the following further information:
(i) In July, 2016, goods costing ` 50,000 were given away for advertising purposes, no entries being
made in the books.
(ii) During 2016-17, a clerk had misappropriated unrecorded cash sales. It is estimated that the
defalcation averaged ` 1,000 per week from 1st April, 2016 until the clerk was dismissed on 18th
August, 2016.
(iii) The rate of gross profit is constant.
You are required to calculate the value of stock in hand on the date of fire with the help of above information.
(RTP May 2018)
10.34
Answer:
Ascertainment of rate of gross profit for the year 2015-16
Trading A/c for the year ended 31 -3-2016
` `
32,63,600 32,63,600
Rate of gross profit = GP/Sales × 100
= 5,20,000/26,00,000 × 100 = 20%
Memorandum Trading A/c for the period from 1-4-2016 to 22-01-2017
` ` ` `
To Opening stock 17,41,350 6,63,600 By Sales 24,58,500
To Purchases Add: Unrecorded cash 20,000 24,78,500
Less: Goods used for (50,000) 16,91,350 sales (W.N.)
advertisement By Closing stock 3,72,150
(20% of ` 24,78,500)
28,50,650 28,50,650
Estimated stock in hand on the date of fire was ` 3,72,150.
Working Note:
Cash sales defalcated by the Accountant:
Defalcation period = 1.4.2016 to 18.8.2016= 140 days
Since, 140 days / 7 weeks = 20 weeks
Therefore, amount of defalcation = 20 weeks x ` 1,000 = ` 20,000.
Question 30
A trader’s godown caught fire on 29th August, 2017, and a large part of the stock of goods was destroyed.
However, goods costing ` 54,000 could be salvaged incurring fire fighting expenses amounting to ` 2,350.
`
Cost of stock on 1st April, 2016 3,55,250
Cost of stock on 31st Marc h, 2017 3,95,050
Purchases during the year ended 31st Marc h, 2017 28,39,800
Purchases from 1st April, 2017 to the date of fire 16,55,350
Cost of goods distributed as samples for advertising from 1st April,
2017 to the date of fire 20,500
Cost of goods withdrawn by trader for personal use from 1st April, 2017
to the date of fire 1,000
Sales for the year ended 31st Marc h, 2017 40,00,000
Sales from 1st April, 2017 to the date of fire 22,68,000
You are required to calculate the amount of the claim that will be admitted by the insurance company.
10.35
Answer:
Memorandum Trading Account for the period 1st April, 2017 to 29th August 2017
` `
To Purchases 16,55,350 By Closing 4,41,300
stock (Bal. fig.)
Drawings (1,000) 16,33,850
To Gross Profit [30% of Sales] 6,80,400
[W N] ________
27,09,300 27,09,300
`
Working Note:
Trading Account for the year ended 31st March, 2017
` `
To Gross Profit 12,00,000 ————
43,95,050 43,95,050
Rate of Gross Profit in 2016-17
Gross Profit ×100 = 12,00,000/40,00,000 x 100 = 30%
Sales
Question 31
On 2.6.2018 the stock of Mr. Black was destroyed by fire. However, following particulars were furnished from
the records saved:
`
Stock at cost on 1.4.2017 1,35,000
Stock at 90% of cost on 31.3.2018 1,62,000
Purchases for the year ended 31.3.2018 6,45,000
Sales for the year ended 31.3.2018 9,00,000
Purchases from 1.4.2018 to 2.6.2018 2,25,000
Sales from 1.4.2018 to 2.6.2018 4,80,000
Sales upto 2.6.2018 includes ` 75,000 being the goods not dispatched to the customers . The sales invoice
price is ` 75,000.
Purchases upto 2.6.2018 includes a machinery acquired for ` 15,000.
10.36
Purchases upto 2.6.2018 does not include goods worth ` 30,000 received from suppliers, as invoice not
received upto the date of fire. These goods have remained in the godown at the time of fire. The insurance
policy is for ` 1,20,000 and it is subject to average clause. Ascertain the amount of claim for loss of stock.
Answer:
In the books of Mr. Black
Trading Account for the year ended 31.3.2018
` `
To Purchases 6,45,000 By Closing Stock at cost 1,80,000
To Gross Profit 3,00,000  100 
1,62,000 × 
 90 
________ ________
10,80,000 10,80,000
for the period from 1.4.2018 to 02.06.2018
` `
To Opening Stock at cost 1,80,000 By Sales 4,80,000
To Purchases 2,25,000 Less: Goods not
Add: Goods received but dispatched 75,000 4,05,000
invoice not received 30,000 By Closing stock (Balancing figure) 1,50,000
2,55,000
Less: Machinery 15,000 2,40,000
To Gross Profit (Refer W.N.) 1,35,000 _______
5,55,000 5,55,000

Claim subject to average clause = 
Actual loss of stock 
× Amount of policy 
 Value of stock on the date of fire 
 1,50,000 
= 1,20,000 ×   = ` 1,20,000
 1,50,000 
Working Note:
3,00,000 1
G.P. ratio = × 100 = 33 %
9,00,000 3
1
Amount of Gross Profit = ` 4,05,000 x 33 % = ` 1,35,000
3
Question 32
On 15th December, 2017, a fire occurred in the premises of M/s. OM Exports. Most of the stocks were
destroyed. Cost of stock salvaged being ` 1,40,000. Stock on 15th December, 2017 was valued at `
6,40,000. Compute the amount of the claim, if the stock were insured for ` 4,00,000.
Answer:
`
Estimated value of Stock as at date of fire 6,40,000
Less: Value of Salvaged Stock 1,40,000
Estimated Value of Stock lost by fire 5,00,000
10.37
As the value of stock is more than insured value, amount of claim would be subject to average clause.
Amount of Policy
Amount of Claim= × Actual Loss of Stock
Value of Stock
4,00,000
Amount of Claim = 4,00,000 × 5,00,000 = ` 3,12,500
6, 40,000
Question 33
A trader's godown caught fire on 29th August, 2017, and a large part of the stock of goods was destroyed.
However, goods costing ` 54,000 could be salvaged incurring fire fighting expenses amounting to ` 2,350.
`
Cost of stock on 31st March, 2017 3,95,050
Purchases during the year ended 31st March, 2017 28,39,800
Cost of goods distributed as samples for advertising from 1st April, 2017 to the date of fire 20,500
Cost of goods withdrawn by trader for personal use from 1st April, 2017 to the date of fire 1,000
Sales for the year ended 31st March, 2017 40,00,000
You are required to calculate the amount of the claim that will be admitted by the insurance company.
Answer:
` `
To Purchases 16,55,350 By Closing stock (Bal. fig) 4,41,300
Drawings (1,000) 16,33,850
To Gross Profit [30% of Sales] 6,80,400
[W N]
27,09,300 27,09,300
`
10.38
Working Note:
` `
43,95,050 43,95,050
Gross profit/Sales x 100 = 12,00,000/40,00,000 x 100 = 30%
Question 34
The premises of Vani Ltd. caught fire on 22nd January 2015, and the stock was damaged. The firm makes
account up to 31st March each year. On 31st March, 2014 the stock at cost was `13,27,200 as against `
9,62,200 on 31st March, 2013.
Purchases from 1st April, 2014 to the date of fire were `34,82,700 as against `45,25,000 for the full year
2013-14 and the corresponding sales figures were `49,17,000 and `52,00,000 respectively. You are given
(i) In July, 2014, goods costing `1,00,000 were given away for advertising purposes, no entries being
made in the books.
defalcation averaged ` 2,000 per week from 1st April, 2014 until the clerk was dismissed on 18th
August, 2014.
From the above information calculate the stock in hand on the date of fire.
Answer:
Trading A/c for the year ended 31-3-2014
` `
To Purchased 45,25,000 By Closing stock 13,27,200
65,27,200 65,27,200
GP
Rate of gross profit = Sales x 100
1040000
5200000 x 100 = 20%
` ` ` `
To Purchases 34,82,700 Add: Unrecorded cash 40,000 49,57,000
sales
Less: Goods used for By Closing stock 7,44,100
advertisement (1,00,000) 33,82,700
To Gross profit (20% of 9,91,400
`49,57,000)
57,01,100 57,01,100
Estimated stock in hand on the date of fire = `7,44,100.
10.39
Working Note:
Defalcation period = 1.4.2014 to 18.8.2014 = 140 days
Since, 140 days/7 weeks = 20 weeks
Therefore, amount of defalcation = 20 weeks x `2,000 = `40,000.
Question 35
On 2.6.2019 the stock of Mr. Black was destroyed by fire. However, following particulars were furnished from
the records saved:
`
Stock at cost on 1.4.2018 1,35,000
Sales from 1.4.2019 to 2.6.2019 4,80,000
Sales up to 2.6.2019 includes ` 75,000 being the goods not dispatched to the custome` The sales (invoice)
price is ` 75,000.
Purchases up to 2.6.2019 includes a machinery acquired for ` 15,000.
Purchases up to 2.6.2019 does not include goods worth ` 30,000 received from suppliers, as invoice not
received up to the date of fire. These goods have remained in the godown at the time of fire. The insurance
(RTP November 2019)
Answer
In the books of Mr. Black
` `
1,62,000 
 90 
10,80,000 10,80,000
` `
To Opening Stock (at cost) 1,80,000 By Sales 4,80,000
To Purchases 2,25,000 Less: Goods not
Add: Goods received but dispatched 75,000 4,05,000
invoice not received 30,000 By Closing stock (Balancing 1,50,000
2,55,000 figure)

To Gross Profit (Refer W.N.) 1,35,000
5,55,000 5,55,000
10.40
 Actual loss of stock 
Claim subject to average clause =  × Amount of policy 
 1,50,000 
= 1,20,000 ×   =`1,20,000
 1,50,000 
Working Note:
3,00,000 1
G.P. ratio = ×100 = 33 %
9,00,000 3
1
Amount of Gross Profit = ` 4,05,000 x 33 % =`1,35,000
3
Question 36
The premises of Anmol Ltd. caught fire on 22nd January 2017, and the stock was damaged. The firm makes
account up to 31st March each year. On 31st March, 2016 the stock at cost was `6,63,600 as against
`4,81,100 on 31st March, 2015.
Purchases from 1st April, 2016 to the date of fire were `17,41,350 as against `22,62,500 for the full year
2015-16 and the corresponding sales figures were `24,58,500 and `26,00,000 respectively. You are given
(i) In July, 2016, goods costing `50,000 were given away for advertising purposes, no entries being
made in the books.
defalcation averaged `1,000 per week from 1st April, 2016 until the clerk was dismissed on 18th
August, 2016.
You are required to calculate the value of stock in hand on the date of fire with the help of above information.
Answer
Trading A/c for the year ended 31-3-2016
` `
32,63,600 32,63,600
GP 5,20,000
Rate of gross profit = x 100 = x 100 = 20%
Sales 26,00,000
` ` ` `
Less: Goods used for Add: Unrecorded 20,000
advertisement (50,000) 16,91,350 cash sales (W.N.) 24,78,500
To Gross profit (20% of By Closing stock 3,72,150
`24,78,500) 4,95,700
28,50,650 28,50,650
Estimated stock in hand on the date of fire was `3,72,150.
10.41
Working Note:
Defalcation period = 14.2016 to 18.8.2016= 140 days
Since, 140 days/7 weeks = 20 weeks
Therefore, amount of defalcation = 20 weeks x `1,000 = `20,000.
Question 37
A trader intends to take a loss of profit policy with indemnity period of 6 months, however, he could not decide
the policy amount. From the following details, suggest the policy amount:
`
Turnover in last financial year 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 ` 50,000.
[RTP May 2020]
Answer
(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
`
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 ` 14,00,000.
Question 38
A fire occurred in the premises of M/s Kirti & Co. on 15th December, 2018. The working remained disturbed
upto 15th March, 2019 as a result of which sales adversely affected. The firm had taken out an Insurance
policy with an average clause against consequential losses for `2,50,000.
Following details are available form the quarterly sales tax return filed/GST return filed:
Sales 2015-16 2016-17 2017-18 2018-19
(`) (`) (`) (`)
From 1st April to 30th June 3,80,000 3,15,000 4,11,900 3,24,000

From 1st July to 30th September 1,86,000 3,92,000 3,86,000 4,42,000
From 1st October to 31st December 3,86,000 4,00,000 4,62,000 3,50,000
From 1st January to 31st March 2,38,000 3,19,000 3,80,000 2,96,000
Total 12,40,000 14,26,000 16,39,900 14,12,000
10.42
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
Net profit was `2,50,000 and standing charges (all insured) amounted to `77,980 for the year ending 31st
March, 2018.
You are required to calculate the loss of profit claim amount.
Answer
Gross profit ratio `
Net profit for the year 2017-18 2,50,000
3,27,980
Ratio of Gross profit = = 20% 3,27,980
16,39,900
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
`
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 (` 2,96,000 – ` 40,000) 2,56,000
Actual Sales 2,56,000
Short Sales (` 3,77,200 - ` 2,56,000) 1,21,200
Loss of gross profit
Short sales x gross profit ratio = 1,21,200 x 20% 24,240
Application of average clause
policy value
Net claim = Gross claim x
gross profit on annual turnover
2,50,000
= 24,240 x
3,26,240 (W.N.3)
Amount of loss of profit claim = ` 18,575
Working Notes:
1. Sales for period 1.1.18 to 15.3.18 `
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
10.43
2. Calculation of upward trend in sales
Total sales in year 2015-16 = ` 12,40,000
Increase in sales in year 2016 -17 as compared to 2015-16 = ` 1,86,000
1,86,000 (14,26,000 - 12, 40,000)
% increase = = 15%
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)
% increase = = 15%
14,26,000
Thus annual percentage increase trend is of 15%
3. Gross profit on annual turnover `
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 `17,98,000 (` 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 ` 3,59,720 and net claim will
be computed accordingly.
Question 39
Shyam’s godown caught fire on 29th August, 2020, and a large part of the stock of goods was destroyed.
However, goods costing ` 54,000 could be salvaged. The trader provides you the following additional
information:
`
Cost of goods distributed as samples for advertising from 1st April, 2020 to the 20,500
date of fire
Shyam had taken the fire insurance policy for ` 2,50,000 with an average clause.
Calculate the amount of the claim that will be admitted by the insurance company. Consider that the rate of
gross profit up to date of fire is same as that of previous accounting year.
10.44
Answer
` `
Drawings (1,000) 16,33,850
To Gross Profit [30% of
Sales] [W N] 6,80,400
27,09,300
27,09,300
`
Value of stock on date of fire 4,41,300
stock destroyed 3,87,300
Application of Average Clause
Amount of Insurance claim= ` 3,87,300/ 4,41,300 X 2,50,000 = ` 2,19,409 (rounded off)
Working Note:
` `
43,95,050 43,95,050
Gross Profit
×100 = 12,00,000 / 40,00,000 x 100 = 30% 
Sales
Question 40
On 2.6.2019, there occurred a fire in the warehouse of Mr. White and his total stock was destroyed by fire.
However, following information could be obtained from the records saved:
`
Stock at cost on 1.4.2018 10,80,000
Sales from 1.4.2019 to 2.6.2019 38,40,000
Sales up to 2.6.2019 includes `6,00,000 (invoice price) being the goods not dispatched to the customers.
Purchases up to 2.6.2019 includes a machinery acquired for `1,20,000. However, it does not include goods
worth ` 2,40,000 received from suppliers, as invoice not received up to the date of fire. These goods have
remained in the godown at the time of fire. The insurance policy is for ` 9,60,000 and it is subject to average
clause.
10.45
You are required to ascertain the amount of claim for loss of stock applying average clause.
Answer:
In the books of Mr. White
` `
By Closing Stock at cost (12,96,000
To Purchases 51,60,000 14,40,000
x 100/90)
86,40,000 86,40,000
` `
Opening Stock (at cost) 14,40,000 By Sales 38,40,000
Purchases 18,00,000 Less: Goods not
Add: Goods received but dispatched 6,00,000 32,40,000
invoice not received 2,40,000 By Closing stock (Balancing figure) 12,00,000
20,40,000
Less: Machinery 1,20,000 19,20,000
Gross Profit (Refer W.N.) 10,80,000
44,40,000 44,40,000
= 9,60,000 x 12,00,000/12,00,000= `9,60,000
Working Note:
1
G.P. ratio =24,00,000/ 72,00,000= 33 %
3
1
Amount of Gross Profit = `32,40,000 x 33 % = `10,80,000
3
Question 41
A fire occurred in the premises of M/s. Fireproof on 31st August, 2020. From the following particulars relating
to the period from 1st April, 2020 to 31st August, 2020, you are requested to ascertain the amount of claim to
be filed with the insurance company for the loss of stock. The concern had taken an insurance policy for `
60,000 which is subject to an average clause.
`
(i) Stock as per Balance Sheet at 31-03-2020 99,000
(ii) Purchases 1,70,000
(iii) Wages (including wages for the installation of a machine ` 3,000) 50,000
(iv) Sales 2,42,000
10.46
`
(v) Sale value of goods drawn by partners 15,000
(vi) Cost of goods sent to consignee on 16th August, 2020, lying unsold with them 16,500
(vii) Cost of goods distributed as free samples 1,500
While valuing the stock at 31st March, 2020, ` 1,000 were written off in respect of a slow moving item. The
cost of which was ` 5,000. A portion of these goods were sold at a loss of ` 500 on the original cost of `
2,500. The remainder of the stock is now estimated to be worth the original cost. The value of goods salvaged
was estimated at ` 20,000. The average rate of gross profit was 20% (on sales) throughout.
(MTP, October, 2020) (8 Marks)
Answer
Memorandum Trading Account for the period 1st April, 2020 to 31st August, 2020
` ` ` ` ` `
To Opening stock 95,000 5,000 1,00,000 By Sales 2,40,000 2,000 2,42,000
To Purchases 1,56,500 - 1,56,500 By Goods sent
(Refer W.N.) to consignee 16,500 - 16,500
To Wages 47,000 - 47,000 By Loss - 500 500
To Gross profit @ 48,000 - 48,000 By Closing 90,000 2,500 92,500
20% stock (Bal.fig.)
3,46,500 5,000 3,51,500 3,46,500 5,000 3,51,500
`
Book value of stock as on 31.08.2020 92,500
Policy value
Amount of claim to be lodged with insurance company = Loss of stock x
60,000
= ` 72,500 x = `47,027
92,500
Working Note:
Calculation of Adjusted Purchases
`
Purchases 1,70,000
Less: Drawings (12,000)
Question 42
A Fire occurred in the premises of M/S MJ & Co., on 31st December, 2019. From the following particulars
related to the period from 1st April 2019 to 31st December 2019, you are required to ascertain the amount of
claim to be filed with the insurance policy for ` 1,00,000 which is subject to average clause. The value of
goods salvaged was estimated at ` 31,000. The average rate of gross profit was 20% throughout the period:
10.47
(i) Opening stock as on 1st April,2019 1,50,000
(ii) Purchases during the year 4,20,000
(iii) Goods withdrawn by the proprietor for his self-use at Sales 10,000
Value
(iv) Goods distributed as charity at cost 4,000
(v) Purchases include ` 5,000 of Tools purchased, these tools
should have been capitalized.
(vi) Wages (include wages paid for the installation of machinery 90,000
`6,000)
(vii) Sales during the year 6,10,000
(viii) Cost of goods sent to consignee on 1st November,2019, lying 25,000
unsold with the consignee.
(ix) Sales Return 10,000
Answer
Memorandum Trading Account for the period 1st April, 2019 to 31st Dec 2019
` `
(6,10,000 - 10,000)
By Consignment stock 25,000
Less: Tools purchased (5,000)
By Closing Stock (Bal. 1,32,000
Goods distributed as (4,000) fig.)
Charity
Cost of goods taken
by proprietor (8,000) 4,03,000
84,000
To Wages (90,000 – 6,000)
[20% of Sales)
7,57,000 7,57,000
not with the concern and, hence, there was no loss of such stock.
`
Note:
Since policy amount is less than value of stock on date of fire, average clause will apply. Therefore, claim
amount will be computed by applying the formula:
Insured value
Total cost
Claim amount = ` 1,01,000/1,32,000X1,00,000 = ` 76,515 (Rounded off)
NOTE: The average rate of 20% has been given in the question. In the above solution, Gross Profit is
calculated @ 20% on sales. Alternative answer considering Gross Profit of 20% is also possible.
10.48
Question 43
A fire engulfed the premises of a business of M/s Kite in the morning, of 1st October, 2019. The entire stock
was destroyed except, stock salvaged of ` 50,000. Insurance Policy was for ` 5,00,000 with average clause.
Stock in hand on 31st March, 2019 ` 3,50,000
The following information was obtained from the records saved for the period from 1st April to 30th
September, 2019:
`
Sales 27,75,000
Purchases 18,75,000
Carriage inward 35,000
Carriage outward 20,000
Wages 40,000
Salaries 50,000
(1) Sales upto 30th September, 2019, includes ` 75,000 for which goods had not been dispatched.
(2) On 1st June, 2019, goods worth ` 1,98,000 sold to Hari on approval basis which was included in
sales but no approval has been received in respect of 2/3rd of the goods sold to him till 30th
September, 2019.
(3) Purchases upto 30th September, 2019 did not include ` 1,00,000 for which purchase invoices had
not been received from suppliers, though goods have been received in godown.
(4) Past records show the gross profit rate of 25% on sales.
You are required to prepare the statement of claim for loss of stock for submission to the Insurance
Company.
(MTP March, 2021) (MTP Aril, 2022) (8 Marks)
Answer
`
Stock on the date of fire (i.e. on 1.10.2019) 3,75,000
Stock destroyed by fire (Loss of stock) 3,25,000
Insurance claim amount= ` 3,25,000
(Average clause is not applicable as insurance policy amount ( ` 5,00,000) is more than the value of
closing stock ie. ` 3,75,000)
Memorandum Trading A/c (1.4.19 to 30.9.19)
To Purchases 19,75,000 By Goods with customers* (for 99,000
(` 18,75,000+` 1,00,000) approval) (W.N.1)
To Carriage inward 35,000 By Closing stock (bal. fig.) 3,75,000
To Wages 40,000
To Gross profit
(` 25,68,000 x 25%) 6,42,000 _______
30,42,000 30,42,000
not with the entity and, hence, there was no loss of such stock.
10.49
Working Notes:
Since no approval for sale has been received for the goods of ` 1,32,000 (i.e. 2/3 of ` 1,98,000)
hence, these should be valued at cost i.e. ` 1,32,000 – 25% of ` 1,32,000
= ` 99,000.
Total sales – Goods not dispatched- Sale of goods on approval (2/3rd) =
Sales (` 27,75,000 – 75,000 – `1,32,000) = ` 25,68,000
Question 44
A fire engulfed the premises of a business of M/s Preet on the morning of 1st July 2020. The building,
equipment and stock were destroyed and the salvage recorded the following:
Building – ` 4,000; Equipment – ` 2,500; Stock – ` 20,000. The following other information was obtained from
the records saved for the period from 1st January to 30th June 2020:
`
Sales 11,50,000
Sales Returns 40,000
Purchases 9,50,000
Purchases Returns 12,500
Cartage inward 17,500
Wages 7,500
Stock in hand on 31st December, 2019 1,50,000
Building (value on 31st December, 2019) 3,75,000
Equipment (value on 31st December, 2019) 75,000
Depreciation provided till 31st December, 2019 on:
Building 1,25,000
Equipment 22,500
No depreciation has been provided after December 31st 2019. The latest rate of depreciation is 5% p.a. on
building and 15% p.a. on equipment by straight line method.
Normally business makes a profit of 25% on net sales. You are required to prepare the statement of claim for
submission to the Insurance Company.
(MTP April, 2021) (MTP March, 2022) (8 Marks)
Answer
(b) Memorandum Trading Account for the Period from 1.1.2020 to 30.6.2020
` `
To Opening Stock (1.1.2020) 1,50,000 By Sales 11,50,000
To Purchases 9,50,000 Less: Sales Returns (40,000) 11,10,000
Less: Returns (12,500) 9,37,500
To Cartage Inwards To Wages By Closing Stock (Bal.
17,500 2,80,000
To Gross Profit Fig.)
(25% of ` 11,10,000) 7,500
2,77,500
13,90,000 13,90,000
Stock Destroyed Account
` `
To Trading Account 2,80,000 By Stock Salvaged Account By 20,000
Balance c/d (For Claim) 2,60,000
2,80,000 2,80,000
10.50
Statement of Claim
Items Cost Depreciation Salvage Claim
(`) (`) (`) (`)
A B C D (E=B-C-D)
Stock 2,80,000 20,000 2,60,000
Buildings 3,75,000 1,25,000 + 9,375 4,000 2,36,625
Equipment 75,000 22,500 + 5,625 2,500 44,375
5,41,000
Question 45
On 13th Jan, 2021 fire occurred in the premises of Mr. X, a cloth merchant. The Goods were totally
destroyed. From the books of account, for the period 01-04-2020 to the date of fire the following particulars
were available:
Particulars `
Stock as on 01 -04-2020 57,000
Purchases 3,05,000
Manufacturing Expenses 60,000
Sales 4,98,000
At the time of valuing stock as on 31st March, 2020, a sum of `7,000 was written off on a particular item,
which was originally purchased for `20,000 and was sold during the year for `18,000. Barring the transaction
relating to this item, the gross profit earned during the period was 25% on sales. Mr. X has insured his stock
for `40,000. Compute the amount of the claim. (July 2021 Suggested) (4 Marks)
Answer
Memorandum Trading Account as on 13.01.2021
Particulars Normal Abnormal Total Particulars Normal Abnormal Total
To Opening Stock 44,000 13,000 57,000 By Sales 4,80,000 18,000 4,98,000
To Purchases 3,05,000 - 3,05,000 By Closing 49,000 - 49,000
Stock
To Manufacturing 60,000 - 60,000
Expenses
To Gross Profit 1,20,000 5,000 1,25,000
Total 5,29,000 18,000 5,47,000 Total 5,29,000 18,000 5,47,000
Insurance policy was for ` 40,000 as such goods are under-insured. The amount of claim should be restricted
to the policy amount, ie. ` 40,000.
Question 46
Ram’s godown caught fire on 29th August, 2020. Large part of the stock of goods was destroyed and goods
costing ` 56,350 could be salvaged. Ram provides you the following additional information:
`
Cost of goods distributed as samples for advertising from 1st April, 2020 to the date of fire 20,500
10.51
Ram had taken the fire insurance policy for ` 4,00,000 with an average clause. You are required to compute
the amount of the claim that will be admitted by the insurance company. (RTP, May 2021)
Answer
` `
Drawings (1,000) 16,33,850
To Gross Profit [30% of Sales]
[W N] 6,80,400
27,09,300 27,09,300
`
3,84,950
Note: Since policy amount is less than the value of stock on date of fire, average clause will apply. `
4,00,000/4,41,300 X 3,84,950= ` 3,48,924 (rounded off)
Therefore, claim amount of ` 3,48,924 will be admitted by the Insurance Company.
Working Note:
` `
43,95,050 43,95,050
Gross Profit
×100 = 12,00,000 / 40,00,000 x 100 = 30%
Sales
Question 47
A Fire occurred in the premises of M/s B & Co. on 30th September, 2019. The firm had taken an insurance
policy for ` 1,20,000 which was subject to an average clause. Following particulars were ascertained from the
available records for the period from 1st April, 2018 to 30th September, 2019:
Amount
(`)
Stock at cost on 1-04-2018 2,11,000
Stock at cost on 31-03-2019 2,52,000
Purchases during 2018-19 6,55,000
Wages during 2018-19 82,000
Sales during 2018-19 8,60,000
Purchases from 01-04-2019 to 30-09-2019 (including purchase of machinery costing ` 4,48,000
58,000)
Wages from 01-04-2019 to 30-09-2019 (including wages for installation of machinery costing 85,000
` 7,000)
10.52
Amount
(`)
Sales from 01-04-2019 to 30-09-2019 6,02,000
Sale value of goods drawn by partners (1-4-19 to 30-9-19) 52,000
Cost of Goods sent to consignee on 18th September, 2019 lying unsold with them 44,800
Cost of Goods distributed as free samples(1-4-19 to 30-9-19) 8,500
While valuing the Stock at 31st March, 2019, ` 8,000 were written off in respect of a slow moving item, cost of
which was ` 12,000. A portion of these goods was sold at a loss of ` 4,000 on the original cost of ` 9,000.
The remainder of the stock is estimated to be worth the original cost. The value of Goods salvaged was
estimated at ` 35,000.
You are required to ascertain the amount of claim to be lodged with the Insurance Company for the loss of
stock.
(10 Marks) (November 2020)
Answer
for the period 1st April, 2019 to 30th September, 2019
` ` ` ` ` `
To Opening 2,48,000 12,000 2,60,000 By Sales 5,97,000 5,000 6,02,000
stock
To Purchases 3,39,900 - 3,39,900 By Goods
(W.N. 2) sent to 44,800 - 44,800
consignee
To Wages 78,000 - 78,000 By Loss - 4,000 4,000
(85,000 – 7,000)
To Gross profit 1,19,400 - 1,19,400 By Closing 1,43,500 3,000 1,46,500
@20% stock
(Bal. fig.)
7,85,300 12,000 7,97,300 7,85,300 12,000 7,97,300
`
Book value of stock as on 30.9.2019 1,46,500
Policyvalue
= Loss of stock x
= ` 1,11,500 x 1,20,000/1,46,500 = `91,331 (approx.)
Working Notes:
1. Rate of gross profit for the year ended 31st March, 2019 Trading Account for the year ended
31st March, 2019
` `
To Wages 82,000 Add: written off 8,000 2,60,000
11,20,000 11,20,000
10.53
Gross Profit
×100
Sales
= 1,72,000 X 100 / 8,60,000 = 20%
`
Purchases (4,48,000 – 58,000) 3,90,000
Less: Drawings [52,000 – (20 % of 52,000)] (41,600)
Note: The answer has been given considering that the value of stock (at cost) on 31.3.19 amounting
`2,52,000 is after adjustment of written off amount in respect of slow-moving item.
Question 48
On 27th July, 2021, a fire occurred in the godown of M/s. Vijay Exports and most of the stocks were
destroyed. However goods costing ` 5,000 could be salvaged. Their fire fighting expenses were amounting to
` 1,300.
From the salvaged accounting records, the following information is available relating to the period from
1.4.2021 to 27.7.2021:
1. Stock as per balance sheet as on 31.3. 2021 ` 63,000
2. Purchases (including purchase of machinery costing ` 10,000 ` 2,92,000
3. Wages (including wages paid for installation of machinery ` 3,000) ` 53,000
4. Sales (including goods sold on approval basis amounting to ` 40,000. No approval has been ` 4,12,300
received in respect of 1/4 th of the goods sold on approval)
5. Cost of goods distributed as free sample `2,000
` 2,000
Other Information:
(i) While valuing the stock on 31.3. 2021, ` 1,000 had been written off in respect of certain slow moving
items costing ` 4,000. A portion of these goods were sold in June, 2021 at a loss of` 700 on original cost
of ` 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 fire fighting expenses as part of insurance policy. TheCompany
had taken the fire insurance policy of ` 55,000 with the average clause.
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. 2021 to 27.7.2021 for normal and abnormal items.
Answer
Memorandum Trading Account for the period 1st April, 2021 to 27th July, 2021
` ` ` ` ` `
To Opening stock 60,000 4,000 64,000 By Sales (W.N. 3) 4,00,000 2,300 4,02,300
(W.N.5)
To Purchases (W.N. 2,80,000 - 2,80,000 By Loss - 700 700
1)
To Wages (W.N. 4) 50,000 - 50,000 By Goods on Approval 8,000 - 8,000
(W.N. 2)
To Gross profit @ 80,000 - 80,000 By Closing stock (Bal. fig.) 62,000 1,000 63,000
20%
4,70,000 4,000 4,74,000 4,70,000 4,000 4,74,000
10.54
`
Book value of stock as on 27th July, 2021 62,000
Add: Abnormal Stock 1,000
Add: Fire fighting expenses 1,300
Total Loss 59,300
Policy value
= Loss x
= ` 59,300 x (55,000/ 63,000) = ` 51,770 (rounded off)
Working Notes:
`
Purchases 2,92,000
Less: Purchase of Machinery (10,000)
Less: Free samples (2,000)
2. Calculation of Goods with Customers
Approval for sale has not been received = ` 40,000 X 1/4 = ` 10,000.
Hence, these should be valued at cost i.e. (` 10,000 – 20% of ` 10,000) = ` 8,000
3. Calculation of Actual Sales
Total Sales shown ` 4,12,300
Less: Approval for sale not received (1/4 X ` 40,000) `10,000
Actual Sales ` 4,02,300
4. Calculation of Wages
Total Wages ` 53,000
Less: Wages for installation of machinery ` 3,000
` 50,000
5. Value of Opening Stock
Original cost of stock as on 31st March,2021
= ` 63,000 + 1,000 (Amount written off)
= ` 64,000.
Question 49
A Fire occurred in the premises of M/s B & Co. on 30th September, 2019. The firm had taken an insurance
policy for ` 1,20,000 which was subject to an average clause. Following particulars were ascertained from the
available records for the period from 1st April, 2018 to 30th September, 2019:
Amount
(`)
Stock at cost on 1-04-2018 2,11,000
Stock at cost on 31-03-2019 (after adjustment of written off amount in respect of slow-moving 2,52,000
item)
10.55
Amount
(`)
Purchases during 2018-19 6,55,000
Wages during 2018-19 82,000
Sales during 2018-19 8,60,000
Purchases from 01-04-2019 to 30-09-2019 (including purchase of machinery costing ` 58,000) 4,48,000
Wages from 01-04-2019 to 30-09-2019 (including wages for installation of machinery costing ` 85,000
7,000)
Sales from 01-04-2019 to 30-09-2019 6,02,000
Sale value of goods drawn by partners (1-4-19 to 30-9-19) 52,000
Cost of Goods sent to consignee on 18th September, 2019 lying unsold with them 44,800
Cost of Goods distributed as free samples(1-4-19 to 30-9-19) 8,500
While valuing the Stock at 31st March, 2019, ` 8,000 were written off in respect of a slow moving item, cost of
which was ` 12,000. A portion of these goods was sold at a loss of ` 4,000 on the original cost of ` 9,000.
The remainder of the stock is estimated to be worth the original cost. The value of Goods salvaged was
estimated at ` 35,000.
You are required to ascertain the amount of claim to be lodged with the Insurance Company for the loss of
stock.
(MTP, November, 2021) (12 Marks)
Answer
for the period 1st April, 2019 to 30th September, 2019
` ` ` ` ` `
To Opening stock 2,48,000 12,000 2,60,000 By Sales 5,97,000 5,000 6,02,000
To Purchases (W.N. 2) 3,39,900 - 3,39,900 By Goods sent 44,800 - 44,800
to consignee
To Wages (85,000 – 78,000 - 78,000 By Loss - 4,000 4,000
7,000)
To Gross profit @20% 1,19,400 - 1,19,400 By Closing 1,43,500 3,000 1,46,500
stock (Bal. fig.)
7,85,300 12,000 7,97,300 7,85,300 12,000 7,97,300
`
Book value of stock as on 30.9.2019 1,46,500
Policy value
= Loss of stock x
= ` 1,11,500 x 1,20,000/1,46,500 = `91,331 (approx.)
10.56
Working Notes:
1. Rate of gross profit for the year ended 31st March, 2019
` `
To Wages 82,000 Add: written off 8,000 2,60,000
11,20,000 11,20,000
Gross Profit
× 100
Sales
= 1,72,000 X 100 / 8,60,000 = 20%
`
Purchases (4,48,000 – 58,000) 3,90,000
Less: Drawings [52,000 – (20 % of 52,000)] (41,600)
Question 50
On 2.6.2021 the stock of Mr. Heera was destroyed by fire. However, following particulars were furnished from
the records saved:
`
Stock at cost on 1.4.2020 2,02,500
Sales from 1.4.2021 to 2.6.2021 7,20,000
Sales up to 2.6.2021 includes ` 1,12,500 being the goods not dispatched to the customers. The sales
(invoice) price is ` 1,12,500.
Purchases up to 2.6.2021 includes a machinery acquired for ` 22,500.
Purchases up to 2.6.2021 does not include goods worth ` 45,000 received from suppliers, as invoice not
received up to the date of fire. These goods have remained in the godown at the time of fire. The insurance
10.57
Answer
In the books of Mr. Heera
` `
 2, 43,000 × 
 90 
16,20,000 16,20,000
for the period from 1 4.2021 to 02.06.2021
` `
To Opening Stock (at cost) 2,70,000 By Sales 7,20,000
To Purchases 3,37,500 Less: Goods not dispatched
Add: Goods received but 1,12,500 6,07,500
invoice not received 45,000 By Closing stock (Balancing 2,25,000
3,82,500 figure)
To Gross Profit (Refer W.N.) 2,02,500
8,32,500 8,32,500
 2,25,000 
= 1,80,000 x   =` 1,80,000
 2,25,000 
Working Note:
4,50,000 1
G.P. ratio = ×100 = 33 %
13,50,000 3
1
Amount of Gross Profit = Rs. 6,07,500 x 33 % = Rs. 2,02,500
3
Question 51
The Godown of X Ltd. caught fire on 01.06.2021, records saved from fire shows the following particulars:
`
Stock at cost on 01.01.2020 50,000
Stock at cost on 31.12.2020 80,000
Purchases for the year 2020 4,75,000
Purchase returns for the year 2020 5,000
Carriage inward for the year 2020 20,000
Sales for the year 2020 5,60,000
Sales returns for the year 2020 10,000
10.58
Following information is given for the period of 1st January 2021 to 1st June 2021.
Credit sales of ` 2,50,000, which constituted 25% of total sales.
Sales return ` 9,500, Goods used for personal purpose costing ` 5,000, Goods distributed as free sample
costing ` 2,700, Wages ` 25,000.
Sales include goods sold on approval basis amounting to ` 81,000, no confirmation had been received in
respect of 50% of such goods sold on approval basis.
Stock on 31st December, 2020 was calculated at 20% less than cost.
Purchases for the period 1st January, 2021 to 1st June, 2021 is ` 6,75,000, purchase returns ` 10,000.
Selling price was increased by 20% with effect from 01.01.2021.
Company had taken an insurance policy of ` 70,000 which was subject to an average clause. The value of
salvaged goods was ` 21,967. You are required to compute the amount of the claim.
Answer
X Ltd.
Trading Account for the year ending 31st December, 2020
(To determine the rate of gross profit)
` ` `
(5,60,000 – 10,000)
To Purchases (4,75,000 – 4,70,000 By Closing Stock: 1,00,000
5,000) (80,000/80x100)
To Carriage inward 20,000
6,50,000 6,50,000
The (normal) rate of gross profit to sales is = ` 1,10,000/ 5,50,000 x100= 20%
Memorandum Trading Account for the period
1st January, 2021 to 1st June, 2021
` `
To Opening Stock 1,00,000 By Sales (W.N. 2) 9,50,000
To Purchases 6,75,000 By Goods with customers (for 27,000
Less: Returns (10,000) approval) (W.N.1)*
Samples (2,700) By Closing stock (Bal. fig.) 1,21,967

Drawings (5,000) 6,57,300
To Wages 25,000
To Gross Profit [1/3of Sales
- Refer W.N. 3] 3,16,667
10,98,967 10,98,967
the concern and, hence, there was no loss of such stock as a result of fire.
Statement of claim for loss of stock on 18.06.2021
Book value of stock ` 1,21,967
Less: Salvaged value of stock ` 21,967
10.59
Insured Value
Amount of claim = x Loss of stock 57,393 (rounded off
 70,000 
 ×1,00,000 
 1,21,967 
A claim of ` 57,393 (rounded off) should be lodged to the insurance company.
Working Notes:
should be valued at cost i.e. ` 27,000 (40,500/120 x 80)
Total sales – Returns - Sale of goods on approval (1/2)
= ` 10,00,000 – ` 9,500 – ` 40,500 (81,000/2) = ` 9,50,000
3. Calculation of Gross Profit Ratio
For year 2020 : Cost of goods sold was 80, Gross profit rate 20% and sales 100
For year 2021 : Cost of goods sold was 80, Gross profit rate 33.33% (1/3 of sales) and sales 120
Note: It is given in the question, that selling price was increased by 20% with effect from 01.01.2021. While
solving the question in the given answer, new gross profit ratio has been computed and applied to arrive at
the value of closing stock. Alternatively, instead of computing new gross profit ratio, sales can be reduced to
the levels before increase and old gross profit ratio can be applied to arrive at the value of closing stock.
Question 52
Surya Limited, which operates a wholesale warehouse, had a fire in the premises on January 31st, 2022
which destroyed most of the building, although stock of the value off 3.961akhs was salvaged.
The company has an insurance policy covering the stock for ` 600 Lakhs, and loss of profits including
standing charges for ` 250 Lakhs with a six-month period of indemnity.
The company's last annual accounts for the year ended December 31st, 2021 showed the following position:
(in Lakhs) (in Lakhs)
To Opening Stock 412.50 By Sales 2000.00
To Purchases 1812.50 By Closing Stock 525.00
To Gross Profit c/d 300.00
2525.00 2525.00
To Variable Expenses 80.00 By Gross Profit b/d 300.00
To Standing Charges 167.50
To Net Profit 52.50
300.00 300.00
The company's record show that the turnover for January 2022 of ` 100 Lakhs had been the same as for the
corresponding month in the previous year, payments made in January 2022 to trade creditors were `106.68
Lakhs and at the end of that month the balance owing to trade creditors had increased by ` 3.32 Lakhs.:
The company's business was disrupted until the end of April 2022, during which period the turnover fell by
`180.00 Lakhs compared with the same period in the previous year.
You are required to compute the claim, to be lodged with the Insurance
Company for Loss of Stock and Loss of Profit.
10.60
Hire Purchase and
Instalment Sale Transactions
11
Question 1
Asha purchased a truck on hire purchase system. As per terms she is required to pay ` 70,000 down,
`53,000 at the end of first year, ` 49,000 at the end of second year and ` 55,000 at the end of third year.
Interest is charged @ 10% p.a.
You are required to calculate the cash price of the truck and the interest paid with each instalment.
(Study Material)
Answer
Rate of interest 10
(1) Ratio of interest and amount due = = = 1
100 Rate of interest 110 11
(2) Calculation of Interest and Cash Price
No. of Amount due at the time Interest Cash price
instalments of instalment
[1] [2] [3] [4]
3rd 55,000 1/11 of ` 55,000 =` 5,000 50,000
2nd *99,000 1/11 of ` 99,000 = ` 9,000 90,000
1st **1,43,000 1/11of ` 1,43,000 = ` 13,000 1,30,000
Total cash price = ` 1,30,000+ 70,000 (down payment) =` 2,00,000.
*` 50,000 + 2nd instalment of ` 49,000 = ` 99,000.
** ` 90,000 + 1st instalment of ` 53,000 = ` 1,43,000.
Question 2
A acquired on 1st January, 20X1 a machine under a Hire-Purchase agreement which provides for 5 half-
yearly instalments of ` 6,000 each, the first instalment being due on 1st July, 20X1. Assuming that the
applicable rate of interest is 10 per cent per annum, calculate the cash value of the machine. All working
should form part of the answer.
(Study Material)
Answer
Statement showing cash value of the machine acquired on hire-purchase basis
Instalment Interest @ 5% half yearly Principal Amount (in
Amount (10% p.a.) = 5/105 = 1/21 (in each instalment)
each instalment)
` ` `
5th Instalment 6,000 286 5,714
Less: Interest (286)
5,714
Add: 4th Instalment 6,000
11,714 558 5,442
Less: Interest (558) (6,000 – 558)
11,156
11.1
Chap. 11  Hire Purchase and Instalment Sale Transactions

Amount (10% p.a.) = 5/105 = 1/21 (in each instalment)
each instalment)
Add: 3rd instalment 6,000
17,156 817 5,183
Less: Interest (817) (6,000 – 817)
16,339
Add: 2nd instalment 6,000
22,339 1,063 4,937
Less: Interest (1,063) (6,000 – 1,063)
21,276
Add: 1st instalment 6,000
27,276 1,299 4,701
Less: Interest (1,299) (6,000 –1,299)
25,977 4,023 25,977
The cash purchase price of machinery is ` 25,977.
Question 3
On 1st April, 20X1 a manufacturing company buys on Hire-purchase system a machinery for ` 90,000,
payable by three equal annual instalments combining principal and interest, the rate of interest was 5% per
annum. Calculate the amount of cash price and interest. Assume that the present value of an annuity of one
rupee for three years at 5% interest is ` 2.723.
(Study Material)
Answer
Calculation of Cash Price – The present value of an annuity of Re. 1 paid for 3 year @ 5% = ` 2.723.
Hence, the present value of ` 30,000 for 3 years = 2.723 x 30,000 = ` 81,690.
Thus, Cash Price will be computed as ` 81,690.
Cash price may also be calculated using the annuity formula discussed above:
(1+ r)n - 1
Cash price = Annual instalment x
r(1+ r)n
= 30,000 x [(1 + 0.05)3– 1]/ 0.05 (1 + 0.05)3
= ` 81697.
Note- The difference in cash price of ` 7 is on account of approximation.
Question 4
Om Ltd. purchased a machine on hire purchase basis from Kumar Machinery Co. Ltd. on the following terms:
(a) Cash price ` 80,000
(b) Down payment at the time of signing the agreement on 1.1.20X1 ` 21,622.
(c) 5 annual instalments of ` 15,400, the first to commence at the end of twelve months from the date of
down payment.
(d) Rate of interest is 10% p.a.
You are required to calculate the total interest and interest included in cash instalment.
(Study Material)
Answer
Calculation of interest
Total (`) Interest in each Cash price in each
instalment (1) instalment (2)
Cash Price 80,000
Less: Down Payment (21,622) Nil ` 21,622
11.2

instalment (1) instalment (2)
Balance due after down payment 58,378
Interest/Cash Price of 1st instalment - ` 58,378 x10/100 = ` ` 15,400 –
5,838 ` 5,838 =
` 9,562
Less: Cash price of 1st instalment (9,562)
Balance due after 1st instalment 48,816
Interest/cash price of 2nd instalment - ` 48,816 x 10/100 = ` ` 15,400 -
4,882 ` 4,882=
` 10,518
Less: Cash price of 2nd instalment (10,518)
nd
Balance due after 2 instalment 38,298
Interest/Cash price of 3rd instalment - ` 38,298 x 10/100 = ` 15,400 -
` 3,830 ` 3,830=
` 11,570
Less: Cash price of 3rd instalment (11,570)
Balance due after 3rd instalment 26,728
Interest/Cash price of 4th instalment - ` 26,728 x10/100 = ` 15,400 -
` 2,672 ` 2,672 =
` 12,728
Less: Cash price of 4th instalment (12,728)
Balance due after 4th instalment 14,000
Interest/Cash price of 5th instalment - `14,000 x10/100 = ` 15400–
` 1,400 ` 1,400 =
14,000
Total Nil ` 18,622 ` 80,000
Total interest can also be calculated as follow:
(Down payment + instalments) – Cash Price = ` [21,622 +(15400 x 5)] – ` 80,000 = ` 18,622
Question 5
Happy Valley Florists Ltd. acquired a delivery van on hire purchase on 01.04.20 X1 from Ganesh Enterprises.
The terms were as follows:
Hire Purchase Price 180,000
Down Payment 30,000
1st instalment payable after 1 year 50,000
2nd instalment after 2 years 50,000
3rd instalment after 3 years 30,000
4th instalment after 4 years 20,000
Cash price of van ` 150,000 You are required to calculate Total Interest and Interest included in each
instalment.
(Study Material)
11.3
Answer
Calculation of total Interest and Interest included in each installment
Hire Purchase Price (HPP) = Down Payment + instalments
= 30,000 + 50,000 + 50,000 + 30,000 + 20,000 = 1,80,000
Total Interest = 1,80,000 – 1,50,000 = 30,000
Computation of IRR (considering two guessed rates of 6% and 12%)
Year Cash Flow DF @6% PV DF @12% PV
0 30,000 1.00 30,000 1.00 30,000
1 50,000 0.94 47,000 0.89 44,500
2 50,000 0.89 44,500 0.80 40,000
3 30,000 0.84 25,200 0.71 21,300
4 20,000 0.79 15,800 0.64 12,800
NPV 1,62,500 NPV 1,48,600
Interest rate implicit on lease is computed below by interpolation:
1,62,500 - 1,50,000
Interest rate implicit on lease = 6% + × 12 - 6  = 11.39%
1,62,500 - 1, 48,600
Thus, repayment schedule and interest would be as under:
Installment no. Principal at Interest included Gross Installment Principle at
beginning in each amount end
installment
Cash down 1,50,000 1,50,000 30,000 1,20,000
1 1,20,000 13,668 1,33,668 50,000 83,668
2 83,668 9,530 93,198 50,000 43,198
3 43,198 4,920 48,118 30,000 18,118
4 18,118 2,064 20,182 20,000 182*
30,182*
* the difference is on account of approximations
Question 6
On January 1, 20X1 HP M/s acquired a Pick-up Van on hire purchase from FM M/s. The terms of the contract
were as follows:
(a) The cash price of the van was ` 1,00,000.
(b) ` 40,000 were to be paid on signing of the contract.
(c) The balance was to be paid in annual instalments of ` 20,000 plus interest.
(d) Interest chargeable on the outstanding balance was 6% p.a.
(e) Depreciation at 10% p.a. is to be written-off using the straight-line method.
(a) Give Journal Entries and show the relevant accounts in the books of HP M/s from January 1, 20X1 to
December 31, 20X3; and
(b) Show the relevant items in the Balance Sheet of the purchaser as on December 31, 20X1 to 20X3.
(Study Material)
Answer
In the books of HP M/s Journal Entries
Date Particulars Dr. Cr.
` `
20X1 Pick-up Van A/c Dr. 1,00,000
Jan. 1 To FM M/s A/c 1,00,000
(Being the purchase of a pick-up van on hire purchase
from FM M/s)
11.4

` `
“ FM M/s A/c Dr. 40,000
To Bank A/c 40,000
(Being the amount paid on signing the H.P. contract)
Dec. 31 Interest A/c Dr. 3,600
To FM M/s A/c 3,600
(Being the interest payable @ 6% on ` 60,000
“ FM M/s A/c (` 20,000+` 3,600) Dr. 23,600
To Bank A/c 23,600
(Being the payment of 1st instalment along with interest)
“ Depreciation A/c Dr. 10,000
To Pick-up Van A/c 10,000
(Being the depreciation charged @ 10% p.a. on `
1,00,000)
“ Profit & Loss A/c Dr. 13,600
To Depreciation A/c 10,000
To Interest A/c 3,600
(Being the depreciation and interest transferred to Profit
and Loss Account)
20X2 Interest A/c Dr. 2,400
Dec. 31 To FM M/s A/c 2,400
(Being the interest payable @ 6% on ` 40,000)
FM M/s A/c (` 20,000 + ` 2,400) Dr. 22,400
To Bank A/c 22,400
(Being the payment of 2nd instalment along with interest)
Depreciation A/c Dr. 10,000
(Being the depreciation charged @ 10% p.a.)
(Being the depreciation and interest charged to Profit and
Loss Account)
20X3 Interest A/c Dr. 1,200
Dec. 31 To FM M/s A/c 1,200
FM M/s A/c (` 20,000 + ` 1,200) Dr. 21,200
To Bank A/c 21,200
(Being the payment of final instalment along with interest)
1,00,000)
11.5

` `
(Being the interest and depreciation charged to Profit and
Loss Account)
Ledgers in the books of HP M/s Pick-up Van Account
1.1.20X1 To FM M/s A/c 1,00,000 31.12.20X1 By Depreciation A/c 10,000
31.12.20X1 By Balance c/d 90,000
1,00,000 1,00,000
1.1.20X2 To Balance b/d 90,000 31.12.20X2 By Depreciation A/c 10,000
31.12.20X2 By Balance c/d 80,000
90,000 90,000
31.12.20X3 By Balance c/d 70,000
80,000 80,000
FM M/s Account
1.1.20X1 To Bank A/c 40,000 1.1.20X1 By Pick-up Van A/c 1,00,000
31.12.20X1 To Bank A/c 23,600 31.12.20X1 By Interest c/d 3,600
31.12.20X1 To Balance c/d 40,000
1,03,600 1,03,600
31.12.20X2 To Bank A/c 22,400 1.1.20X2 By Balance b/d 40,000
31.12.20X2 To Balance c/d 20,000 31.12.20X2 By Interest A/c 2,400
42,400 42,400
31.12.20X3 By Interest A/c 1,200
21,200 21,200
Depreciation Account
31.12.20X1 To Pick-up Van A/c 10,000 31.12.20X1 By Profit & Loss A/c 10,000
Interest Account
31.12.20X1 To FM M/s A/c 3,600 31.12.20X1 By Profit & Loss A/c 3,600
11.6
Balance Sheet of HP M/s as at 31st December, 20X1
Liabilities ` Assets `
FM M/s 40,000 Pick-up Van 90,000
Pick-up Van 70,000
Question 7
In above question 6 assume that the hire purchaser adopted the interest suspense method for recording his
hire purchase transactions. On this basis, prepare H.P. Interest Suspense Account, Interest Account and FM
M/s Accounts and Balance Sheets in the books of hire purchaser.
(Study Material)
Answer
H.P. Interest Suspense Account
1.1.20X1 To FM M/s A/c (W.N.) 7,200 31.12.20X1 By Interest A/c 3,600
31.12.20X1 By Balance c/d 3,600
7,200 7,200
1.1.20X2 To Balance b/d 3,600 31.12.20X2 By Interest A/c 2,400
31.12.20X2 By Balance c/d 1,200
3,600 3,600
1.1.20X3 To Balance b/d 1,200 31.12.20X3 By Interest A/c 1,200
Interest Account
31.12.20X1 To H.P. Interest Suspense A/c 3,600 31.12.20X1 By Profit & Loss A/c 3,600
31.12.20X2 To H.P. Interest Suspense a/c 2,400 31.12.20X2 By Profit & Loss A/c 2,400
31.12.20X3 To H.P. Interest Suspense A/c 1,200 31.12.20X3 By Profit & Loss A/c 1,200
FM M/s Account
1.1.20X1 To Bank A/c 40,000 1.1.20X1 By Pick-up Van A/c 1,00,000
31.12.20X1 To Bank A/c 23,600 1.1.20X1 By H.P. Interest Suspense A/c 7,200
31.12.20X1 To Balance c/d 43,600
1,07,200 1,07,200
31.12.20X2 To Balance c/d 21,200
43,600 43,600
11.7
FM M/s 43,600 Pick-up Van 1,00,000
Less: H.P. Interest Suspense (3,600) 40,000 Less: Depreciation (10,000) 90,000
Less: H.P. Interest Suspense (1,200) 20,000 Less: Depreciation (10,000) 80,000
Pick-up Van 80,000
Less: Depreciation (10,000) 70,000
Working Note:
Total Interest = ` 3,600 + ` 2,400 + ` 1,200 = ` 7,200.
Question 8
X Ltd. purchased 3 milk vans from Super Motors costing ` 75,000 each on hire purchase system. Payment
was to be made: ` 45,000 down and the remainder in 3 equal instalments together with interest @ 9%. X Ltd.
writes off depreciation @ 20% on the diminishing balance. It paid the instalment at the end of the 1st year but
could not pay the next. Super Motor agreed to leave one milk van with the purchaser, adjusting the value of
the other two milk vans against the amount due. The milk vans were valued on the basis of 30% depreciation
annually on written down value basis. Also, X Ltd. settled the seller’s dues.
You are required to give necessary journal entries and the relevant accounts in the books of X Ltd for the first
two years.
(Study Material)
Answer
In the Books of X Ltd.
Journal Entries
Dr. (` ) Cr. (` )
I Year
Milk Vans purchased:
Milk Vans A/c Dr. 2,25,000
To Vendor A/c 2,25,000
(Being purchase of 3 milk vans on hire purchase at ` 75,000 each)
On down payment:
Vendor A/c Dr. 45,000
To Bank 45,000
(Being down payment made)
I Year end
Interest A/c (` 1,80,000 @ 9%) Dr. 16,200
To Vendor A/c 16,200
(Being Interest due on outstanding balance)
To Bank A/c (60,000 + 16,200) 76,200
(Being First Instalment paid along with Interest)
11.8
Dr. (` ) Cr. (` )
To Milk Vans A/c 45,000
(Being depreciation provided@ 20%)
To Depreciation 45,000
To interest A/c 16,200
(Being Interest and Depreciation charged to profit and loss account)
II Year end
To Milk Vans A/c 36,000
(Being Depreciation provided @ 20%))
Interest A/c Dr. 10,800
(1,20,000 @ 9%)
To Vendor A/c 10,800
(Being interest due on balance outstanding)
For Loss on Repossession:
Super Motors A/c (1,50,000 – 45,000 – 31,500) Dr. 73,500
Profit & Loss A/c (b.f.) Dr. 22,500
To Milk Vans A/c [(2,25,000 – 45,000 – 36,000) x 2/3] (Being re- 96,000
possession of milk van)
To Bank 57,300
(Being vendor’s account settled)
Milk Vans Account
Year ` Year `
1 To Super Motors A/c 2,25,000 1 end By Depreciation A/c 45,000
” By Balance c/d 1,80,000
2,25,000 2,25,000
2 To Balance b/d 1,80,000 2 end By Depreciation 36,000
By Super Motors (value of 2 vans
after depreciation for 2 years @
30%) 73,500
By P & L A/c (balancing figure) 22,500
By Balance c/d (one van less dep. 48,000
for 2 years) @ 20%
1,80,000 1,80,000
Super Motors Account
Year ` Year `
1 To Bank A/c 45,000 1 By Milk Vans A/c 2,25,000
To Bank A/c 76,200 By Interest @ 9% on ` 1,80,000 16,200
To Balance c/d 1,20,000
2,41,200 2,41,200
11.9
Year ` Year `
2 To Milk Van A/c 73,500 2 By Balance b/d 1,20,000
To Bank A/c 57,300 By Interest A/c 10,800
1,30,800 1,30,800
Question 9
A firm acquired two tractors under hire purchase agreements from HP Co., details of which were as follows:
Date of Purchase Tractor A Tractor B
1st April, 20X1(`) 1st Oct., 20X1(`)
Cash price 14,000 19,000
Both agreements provided for payment to be made in twenty-four monthly instalments (of ` 600 each for
Tractor A and ` 800 each for Tractor B), commencing on the last day of the month following purchase, all
instalments being paid on due dates.
On 30th June, 20X2, Tractor B was completely destroyed by fire. In full settlement, on 10th July, 20X2 an
insurance company paid ` 15,000 under a comprehensive policy. Any balance on the hire purchase
company’s account in respect of these transactions was to be written off.
The firm prepared accounts annually to 31st December and provided depreciation on tractors on a straight-
line basis at a rate of 20 per cent per annum rounded off to nearest ten rupees, apportioned as from the date
of purchase and up to the date of disposal.
You are required to record these transactions in the following accounts, carrying down the balances on 31st
December, 20X1 and 31st December, 20X2:
(a) Tractors on hire purchase.
(b) Provision for depreciation of tractors.
(c) Disposal of tractors.
(Study Material)
Answer
Hire Purchase accounts in the buyer’s books
(a) Tractors on Hire Purchase Account
20X1 ` 20X1 `
April 1 To HP Co. - Cash Dec. 31 By Balance c/d
price
14,000 Tractor A 14,000
Tractor A
Oct. 1 ” HP Co. - Cash Tractor B 19,000 33,000
price
Tractor B 19,000
33,000 33,000
20X2 ` 20X2 `
Jan. 1 To Balance b/d June 30 By Disposal of
Tractor A/c - 19,000
Transfer
Tractor A 14,000 By Balance c/d 14,000
Tractor B 19,000 33,000 Dec. 31 33,000
33,000
20X3
Jan. 1 To Balance b/d 14,000
11.10
(b) Provision for Depreciation of Tractors Account
20X1 ` 20X1 `
Dec. 31 To Balance c/d 3,050 Dec.31 By P & L A/c:
Tractor A 2,100*
3,050
Tractor B 950**
3,050 3,050
* 14,000 x 20% x 9/12 = 2,100
** 19,000 x 20% x 3/12 = 950
20X2 ` 20X2 `
June30 To Disposal of Tractor 2,850 Jan. 1 By Balance b/d 3,050
account—Transfer (950 +
1,900)
Jun. 30 By P & L A/c
Dec. 31 To Balance c/d 4,900 (Dep. for Tractor B) (19,000 1,900
x 20% x 6/12)
Dec. 31 By P & L A/c
(Dep. for Tractor A) (14,000 2,800
x 20%)
7,750 7,750
20X3 `
Jan. 1 By Balance b/d 4,900
(c) Disposal of Tractor Account
20X2 ` 20X2 `
June30 To Tractors on hire 19,000 June 30 By Provision for Depn. of Tractors 2,850
purchase —Tractor B A/c
July 10 By Cash: Insurance 15,000
Dec. 31 By P & L A/c: Loss (b.f.) 1,150
19,000 19,000
Question 10
A machinery is sold on hire purchase. The terms of payment is four annual instalments of ` 6,000 at the end
of each year commencing from the date of agreement. Interest is charged @ 20% and is included in the
annual payment of ` 6,000.
Show Machinery Account and Hire Vendor Account in the books of the purchaser who defaulted in the
payment of the third yearly payment whereupon the vendor repossessed the machinery. The purchaser
provides depreciation on the machinery @ 10% per annum on WDV basis. All workings should form part of
your answers.
(Study Material)
Answer
Machinery Account
` `
I Yr. To Hire Vendor A/c (W.N.) 15,533 I Yr. By Depreciation A/c 1,553
By Balance c/d 13,980
15,533 15,533
II Yr. To Balance b/d 13,980 II Yr. By Depreciation A/c* 1,398
13,980 13,980
11.11
` `
III Yr. To Balance b/d 12,582 III Yr. By Depreciation A/c* 1,258
By Hire Vendor 11,000
By Profit & Loss A/c 324
(Loss on Surrender) (bal.fig.)
12,582 12,582
*Depreciation has been directly credited to the Machinery Account; it could have been accumulated in
provision for depreciation account.
Hire Vendor Account
` `
I Yr. To Bank A/c 6,000 I Yr. By Machinery A/c 15,533
To Balance c/d 12,639 By Interest A/c 3,106
18,639 18,639
II Yr. To Bank A/c 6,000 II Yr. By Balance b/d 12,639
15,167 15,167
III Yr. To Machinery A/c (transfer) 11,000 III Yr. By Balance b/d 9,167
By Interest A/c 1,833
11,000 11,000
Note: Alternatively, total interest could have been debited to Interest Suspense A/c and credited to Hire
Vendor A/c with consequential changes.
Working Notes:
Instalment Interest Principal
Amount
4th Instalment 6,000 ` `
Interest 20 1,000 1,000 5,000
6,000 x
120
5,000
Add: 3rd Instalment 6,000
11,000
Interest 20 1,833 1,833 4,167
11,000 x
120
9,167
Add: 2nd Instalment 6,000
15,167
Interest 20 2,528 2,528 3,472
15,167 x
120
12,639
Add: Ist Instalment 6,000
18,639
Interest 20 3,106 3,106 2,894
18,639 x
120 15,533 8,467 15,533
11.12
Question 11
X Transport Ltd. purchased from Delhi Motors 3 Tempos costing ` 50,000 each on the hire purchase system
on 1-1-20X1. Payment was to be made ` 30,000 down and the remainder in 3 equal annual instalments
payable on 31-12-20X1, 31-12-20X2 and 31-12-20X3 together with interest @ 9%. X Transport Ltd. write off
depreciation at the rate of 20% on the diminishing balance. It paid the instalment due at the end of the first
year i.e. 31-12-20X1 but could not pay the next on 31-12-20X2. Delhi Motors agreed to leave one Tempo with
the purchaser on 1-1-20X3 adjusting the value of the other 2 Tempos against the amount due on 31-12-20X2
(date of repossession).
The Tempos were valued based on 30% depreciation annually. Show the necessary accounts in the books of
X Transport Ltd. for the years 20X1, 20X2 and 20X3.
(Study Material)
Answer
X Transport Ltd. Tempo Account
20X1 ` 20X1 `
Jan. 1 To Delhi Motors 1,50,000 Dec. 31 By Depreciation A/c: 20% on
1,50,000 30,000
By Balance c/d 1,20,000
20X2 1,50,000 20X2 1,50,000
Jan 1. To Balance b/d 1,20,000 Dec.31. By Depreciation A/c 24,000
By Delhi Motors A/c (Value of 2
tempos taken away) 49,000
By Profit and Loss A/c
[(96,000 x 2/3) – 49,000] 15,000
By Balance c/d (Value
of one tempo left) (W.N.1) 32,000
1,20,000 1,20,000
20X3 20X3
Jan. 1 To Balance b/d 32,000 Dec. 31 By Depreciation A/c 6,400
32,000 32,000
Delhi Motors Account
20X1 ` 20X1 `
Jan. 1 To Bank (Down Payment) 30,000 Jan. 1 By Tempos A/c 1,50,000
Dec. 31 To Bank 50,800 Dec. 31 By Interest (9% on ` 10,800
1,20,000)
To Balance c/d 80,000
1,60,800 1,60,800
20X2 20X2
Jan. 1 To Tempo 49,000 Jan. 1 By Balance b/d 80,000
Dec. 31 To Balance c/d 38,200 Dec. 31 By Interest (9%
on ` 80,000) 7,200
87,200 87,200
20X3 ` 20X3 `
Dec. 31 To Bank 41,638 Jan. 1 By Balance b/d 38,200
Dec. 31 By Interest (9% on
` 38,200) 3,438
41,638 41,638
11.13
Working Notes:
(1) Value of a Tempo left with the buyer:
`
Cost 50,000
Depreciation @ 20% p.a. under WDV method for
2 years [i.e. ` 10,000 + ` 8,000] (18,000)
Value of the Tempo left with the buyer at the end of 2nd year 32,000
(2) Value of Tempos taken away by the seller:

No. of tempos Two
`
Cost ` 50,000 × 2 = 1,00,000
Depreciation @ 30%
Under WDV method for 2 years [i.e. ` 30,000 + ` 21,000 ] (51,000)
Value of tempos taken away at the end of 2nd year 49,000
Question 12
What is meant by Hire purchase transactions? What are the specific features of hire purchase transactions?
(Study Material)
Answer
Under the Hire Purchase System, the Hire Purchaser gets possession of the goods at the outset and can use
it, while paying for it in instalments over a specified period of time as per the agreement. However, the
ownership of the goods remains with the Hire Vendor until the hire purchaser has paid all the instalments. For
specific features of such transactions.
Question 13
What are the differences between Hire Purchase and Instalment System?
(Study Material)
Answer
Hire Purchase is an agreement of hiring the asset whereas Instalment sale is an agreement of sale. The title
to goods passes on last payment in the hire purchase transaction but the title to goods passes immediately in
the case of instalment sale. The hirer may return goods without further payment except for accrued
instalments in hire purchase transaction but in case of instalment sale, goods are not returnable unless seller
defaults.
Question 14
Describe in brief the methods of recording Hire purchase transactions in the books of Hire vendor.
(Study Material)
Answer
There are two methods of recording hire purchase transactions in the books of the hire vendor. The method
for recording transactions is selected according to the type and value of goods sold, volume of transactions,
the length of the period of purchase, etc. These methods are: Sales Method and Interest Suspense
Method.
Question 15
Describe in brief the methods of recording Hire purchase transactions in the books of Hire purchaser.
(Study Material)
Answer
There are two methods of recording hire purchase transactions in the books of the hire purchaser. The
method for recording transactions is selected according to accounting policy. These methods are: Cash Price
Method and Interest Suspense Method.
11.14
Question 16
What is meant by repossession. What is the treatment in the books of Hire Purchaser?
(Study Material)
Answer
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.
Practical Questions
Question 17
A acquired on 1st January, 20X1 a machine under a Hire-Purchase agreement which provides for 5 half-
yearly instalments of ` 6,000 each, the first instalment being due on 1st July, 20X1. Assuming that the
(Study Material)
Answer
Amount (10% p.a.) = 5/105 = 1/21) each
(in each instalment) instalment)
` ` `
5,714
11,714 558 5,442
Less: Interest (558) (6,000 – 558)
11,156
17,156 817 5,183
Less: Interest (817) (6,000 – 817)
16,339
22,339 1,063 4,937
Less: Interest (1,063) (6,000 – 1,063)
21,276
27,276 1,299 4,701
Less: Interest (1,299) (6,000 –1,299)
25,977 4,023 25,977
Question 18
On 1st April, 20X1, Fastrack Motors Co. sells a truck on hire purchase basis to Teja Transport Co. for a total
hire purchase price of ` 9,00,000 payable as to ` 2,40,000 as down payment and the balance in three equal
annual instalments of ` 2,20,000 each payable on 31st March 20X2, 20X3 and 20X4.
The hire vendor charges interest @ 10% per annum.
11.15
You are required to ascertain the cash price of the truck for Teja Transport Co. Calculations may be made to
the nearest rupee.
(Study Material)
Answer
Rate of interest 10
Ratio of interest and amount due = = = 1
100 + Rate of interest 110 11
There is no interest element in the down payment as it is paid on the date of the transaction. Instalments paid
after certain period includes interest portion also. Therefore, to ascertain cash price, interest will be calculated
from last instalment to first instalment as follows:
Calculation of Interest and Cash Price
No. of Amount due at the time of Interest Cumulative Cash
instalments instalment price
[1] [2] [3] (2-3) = [4]
3rd 2,20,000 1/11 of ` 2,20,000 = 2,00,000
` 20,000
2nd 4,20,000 [W.N.1] 1/11 of ` 4,20,000 = 3,81,818
` 38,182
1st 6,01,818 [W.N.2] 1/11of ` 6,01,818= 5,47,107
` 54,711
Total cash price = ` 5,47,107+ 2,40,000 (down payment) =` 7,87,107.
Working Notes:
1. ` 2,00,000+ 2nd instalment of ` 2,20,000= ` 4,20,000.
2. ` 3,81,818+ 1st instalment of ` 2,20,000= ` 6,01,818.
Question 19
M/s. Kodam Enterprises purchased a generator on hire purchase from M/s. Sanctum Ltd. on 1st April, 20X1.
The hire purchase price was `48,000. Down payment was ` 12,000 and the balance is payable in 3 annual
instalments of ` 12,000 each payable at the end of each financial year. Interest is payable @ 8% p.a. and is
included in the annual payment of ` 12,000.
Depreciation at 10% p.a. is to be written off using the straight-line method. You are required to:
(i) calculate the cash price of the generator and the interest paid on each instalment.
(ii) pass relevant journal entries in the books of M/s. Kodam Enterprises from 1st April, 20X1 to 31st March,
20X2 following the interest suspense method.
(Study Material)
Answer
(i) Calculation of Interest and Cash Price
Ratio of interest and amount due = 8 / (100 + rate of interest) i.e. 8/108
To ascertain cash price, interest will be calculated from last instalment to first instalment as follows:
No. of instalments Amount due at the time of Interest Cumulative Cash
instalment price
[1] [2] [3] (2-3) = [4]
3rd 12,000 8/108 of ` 12,000 11,111
=` 889
2nd 23,111 [W.N.1] 8/108 of ` 23,111 21,399
= ` 1,712
1st 33,399 [W.N.2] 8/108 of ` 33,399 30,925
= ` 2,474
5,075
Total cash price = ` 30,925 + ` 12,000 (down payment) =` 42,925
11.16
Working Notes:
1. ` 11,111+ 2nd instalment of ` 12,000= ` 23,111
2. ` 21,399+ 1st instalment of ` 12,000= ` 33,399
(ii) Journal Entries in the books of M/s Kodam Enterprises
1.4.20X1 ` `
1. Generator Account Dr. [Full cash price] 42,925
To Sanctum Ltd. Account 42,925
(Asset acquired on hire purchase)
2. H.P. Interest Suspense Account Dr. [Total interest] 5,075
To Sanctum Ltd. Account 5,075
(For total interest payment, due)
3. Sanctum Ltd. Account Dr. 12,000
To Bank Account (When down 12,000
payment is made)
31.3.20X2
4. Interest Account Dr. 2,474
To H.P. Interest Suspense Account 2,474
(For Interest of the year)
5. Sanctum Ltd. Account Dr. 12,000
To Bank Account 12,000
(Being instalment paid)
6. Depreciation Account Dr. [Calculated on cash 4,292.50
To Generator Account price i.e. 10% of `
42,925]
4,292.50
(Being depreciation charged on the
asset @ 10%)
7. Profit and Loss Account Dr. 6,766.50
To Interest Account 4,292.50
To Depreciation Account 2,474.00
(For closing interest and depreciation
account)
Question 20
Lucky bought 2 tractors from Happy on 1-10-20X1 on the following terms:
`
Down payment 5,00,000
1st instalment at the end of first year 2,65,000
2nd instalment at the end of 2nd year 2,45,000
3rd instalment 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 instalment 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.
11.17
(1) Calculate the cash price of the tractors and the interest paid with each instalment.
(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.
Answer
(Study Material)
No. of Outstanding Amount due at Outstanding Interest Outstanding
instalments balance at the the time of balance at the balance at the
end after the instalment end before the beginning
payment of payment of
instalment instalment
[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 = ` 6,50,000+ 5,00,000 (down payment) =` 11,50,000.
(ii) In the books of Lucky Tractors Account
Happy 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
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.) 1,97,225
{5,75,000-
(1,72,500+1,20,750+84,525)}
97,175
By Loss transferred to Profit and
Loss a/c on surrender (Bal.
fig.) or (2,94,400- 1,97,225)
By Balance c/d ½ (7,36,000- 2,94,400
1,47,200 = 5,88,800)
7,36,000 7,36,000

1.10.X1 To Bank (down payment) 5,00,000 1.10.X1 By Tractors a/c By Interest 11,50,000
To Bank (1st Instalment) 2,65,000 30.9.X2 a/c 65,000
30.9.X2 To Balance c/d 4,50,000
12,15,000 12,15,000
30.9.X3 To Bank (2nd Instalment) 2,45,000 1.10.X2 By Balance b/d By Interest 4,50,000
To Balance c/d 2,50,000 30.9.X3 a/c 45,000
4,95,000 4,95,000
11.18

30.9.X4 To Tractor a/c 1,97,225 1.10.X3 By Balance b/d By Interest 2,50,000
To Balance c/d (b.f.) 77,775 30.9.X4 a/c 25,000
2,75,000 2,75,000
31.12.X To Bank (Amount settled 81,275 1.10.X4 By Balance b/d By Interest 77,775
4 after 3 months) 31.12.X4 a/c (@ 18% on bal.)
(77,775x3/12x18/ 100) 3,500
81,275 81,275
Test Your Knowledge

MCQs
1. The amount paid at the time of entering the hire-purchase transaction for the goods purchased is known
as
(a) Cash price
(b) Down payment
(c) First instalment
Answer: (b)
2. Total interest on hire purchased goods is the difference between
(a) Hire purchase price and cash price
(b) Hire purchase price and down payment
(c) Cash price and first instalment
Answer: (a)
3. Depreciation on hire purchased asset is claimed by
(a) Hire vendor
(b) Hire purchaser
(c) Either the hire vendor or the hire purchaser as per the agreement between them
Answer: (b)
4. Under instalment payment system, ownership of goods
(a) is transferred at the time of payment of last instalment
(b) is not transferred
(c) is transferred at the time of signing the contract.
Answer: (c)
5. The hire purchaser records the asset at its
(a) Hire purchase price
(b) Amount paid to the vendor till date
(c) Cash price
Answer: (c)
6. The ownership of goods purchased under hire purchase is transferred only when
(a) Down payment is paid
(b) Outstanding balance is paid in full.
(c) Cash price and first instalment is paid
Answer: (b)
7. Hire purchase price is
(a) Cash price
(b) Interest on unpaid instalments.
Answer: (c)
11.19
8. Which method of recording Hire purchase transactions is not used in Hire vendor’s books?
(a) Sales method
(b) Interest suspense method.
(c) Cash price method.
Answer: (c)
9. The balance of the Interest Suspense Account is shown in the Balance Sheet of vendor as
(a) Addition to Hire Purchase Debtors.
(b) Deduction from balance of Hire Purchase Debtors.
(c) Deduction from balance of Hire Purchase Creditors.
Answer: (b)
11.20
Chap. 11  Hire Purchase and Instalment Sale Transactions
QUESTION BANK
Question 21
M/s Amar bought six Scooters from M/s Bhanu on 1st April, 2015 on the following terms:
Down payment ` 3,00,000
1st instalment payable at the end of 1st year ` 1,59,000
2nd instalment payable at the end of 2nd year ` 1,47,000
3rd instalment payable at the end of 3rd year ` 1,65,000
Interest is charged at the rate of 10% per annum.
M/s Amar provides depreciation @ 20% per annum on the diminishing balance method.
On 31st March, 2018 M/s Amar failed to pay the 3rd instalment upon which M/s Bhanu repossessed two
Scoote` M/s Bhanu agreed to leave the other four Scooters with M/s Amar and adjusted the value of the
repossessed Scooters against the amount due. The Scooters taken over were valued on the basis of 30%
depreciation per annum on written down value. The balance amount remaining in the vendor’s account after
the above adjustment was paid by M/s Amar after 5 months with interest @ 15% per annum.
M/s Bhanu incurred repairing expenses of ` 15,000 on repossessed scooters and sold scooters for ` 1,05,000
on 25th April,2018.
(1) Calculate the cash price of the Scooters and the interest paid with each instalment.
(2) Prepare Scooters Account and M/s Bhanu Account in the books of M/s Amar.
(3) Prepare Goods Repossessed Account in the books of M/s Bhanu.
(May 2019) (10 Marks)
Answer
No. of Outstandin Amount Outstanding Interest Outstanding
installments g balance due at the balance at balance at
at the end time of the end the beginning
after the installment before the
installment installment
[1] [2] [3] [4] = 2 +3 [5] = 4 x 10/110 [6] = 4-5

3rd - 1,65,000 1,65,000 15,000 1,50,000
2nd 1,50,000 1,47,000 2,97,000 27,000 2,70,000
1st 2,70,000 1,59,000 4,29,000 39,000 3,90,000
Down 3,00,000
payment
Total of interest and Total cash price 81,000 6,90,000
11.21
(ii) In the books of M/s Amar
Scooters Account
1.4.2015 To Bhanu A/c 6,90,000 31.3.2016 By Depreciation A/c 1,38,000
6,90,000 6,90,000
1.4.2016 To Balance b/d 5,52,000 31.3.2017 By Depreciation A/c 1,10,400
5,52,000 5,52,000
1.4.2017 To Balance b/d 4,41,600 31.3.2018 By Depreciation A/c 88,320
By M/s Bhanu a/c (Value of 2 78,890
Scooters taken over)
By Profit and Loss A/c (Bal. 38,870
fig.)
4
(4,41,600 - 88,320)
6
4,41,600 4,41,600
(iii) M/s Bhanu Account

1.4.15 To Bank (down 3,00,000 1.4.15 By Scooters A/c 6,90,000
payment) 31.3.16 By Interest A/c 39,000
31.3.16 To Bank (1st 1,59,000
Installment)
To Balance c/d 2,70,000 _______
7,29,000 7,29,000
31.3.17 To Bank (2nd 1,47,000 1.4.2016 By Balance b/d 2,70,000
Installment) 31.3.2017 By Interest A/c 27,000
2,97,000 2,97,000
31.3.18 To Scooter A/c 78,890 1.4.2017 By Balance b/d By 1,50,000
To Balance c/d (b.f.) 86,110 31.3.2018 Interest A/c 15,000
1,65,000 1,65,000
31.8.18 To Bank (Amount 91,492 1.4.2018 By Balance b/d 86,110
settled after 5 31.8.2018 By Interest A/c (@ 15
months) % on bal.)
(86,110 x 5/12 x 5,382
15/100)
91,492 91,492
11.22
(iv) In the Books of M/s Bhanu Goods Repossessed A/c
31.3.18 To Amar A/c 78,890 31.3.2018 By Balance c/d 78,890
78,890 78,890
1.04.2018 To Balance b/d 78,890 25.4.2018 By Bank (Sale) 1,05,000
25.4.2018 To Repair A/c 15,000
25.4.2018 To Profit & Loss A/c 11,110 _______
1,05,000 1,05,000
Working Note:
Value of Scooters taken over
`
2 Scooters (6,90,000/6 x 2) 2,30,000
Depreciation @ 30% WDV for 3 years
(69,000 + 48,300 +33,810) (1,51,110)
78,890
Question 22
The following particulars relate to hire purchase transactions:
(a) X purchased three cars from Y on hire purchase basis, the cash price of each car being ` 2,00,000.
(b) The hire purchaser charged depreciation @ 20% on diminishing balance method.
(c) Two cars were seized by on hire vendor when second installment was not paid at the end of the
second year. The hire vendor valued the two cars at cash price less 30% depreciation charged under
it diminishing balance method.
(d) The hire vendor spent ` 10,000 on repairs of the cars and then sold them for a total amount of `
1,70,000.
You are required to compute:
(i) Agreed value of two cars taken back by the hire vendor.
(ii) Book value of car left with the hire purchaser.
(iii) Profit or loss to hire purchaser on two cars taken back by their hire vendor.
(iv) Profit or loss of cars repossessed, when sold by the hire vendor.
(RTP May 2019)
Answer:
`
(i) Price of two cars = ` 2,00,000 x 2 4,00,000
Less: Depreciation for the first year @ 30% 1,20,000
2,80,000
Less: Depreciation for the second year = ` 2, 80,000 x 30
100 84,000
Agreed value of two cars taken back by the hire vendor 1,96,000
(ii) Cash purchase price of one car 2,00,000
Less: Depreciation on ` 2,00,000 @20% for the first year 40,000
Written drown value at the end of first year 1,60,000
Less: Depreciation on ` 1,60,000 @ 20% for the second year 32,000
Book value of car left with the hire purchaser 1,28,000
11.23
`
(iii) Book value of one car as calculated in working note (ii) above 1,28,000
Book value of Two cars = ` 1,28,000 x 2 2,56,000
Value at which the two cars were taken back, calculated in working 1,96,000
note (i) above
Hence, loss on cars taken back = ` 2,56,000 – ` 1,96,000 = ` 60,000
(iv) Sale proceeds of cars repossessed 1,70,000
Less: Value at which cars were taken back ` 1,96,000
Repair ` 10,000 2,06,000
Loss on resale 36,000
Question 23
(c) Two cars were seized by on hire vendor when second installment was not paid at the end of the
second year. The hire vendor valued the two cars at cash price less 30% depreciation charged under
it diminishing balance method.
(d) The hire vendor spent ` 10,000 on repairs of the cars and then sold them for a total amount of `
1,70,000.
(RTP November 2018)
Answer:
`
(i) Price of two cars = ` 2,00,000 × 2 4,00,000
2,80,000
30 84,000
Less: Depreciation for the second year = ` 2, 80,000 × 100
Book value of Two cars = ` 1,28,000 × 2 2,56,000
Value at which the two cars were taken back, calculated in working note (i) above 1,96,000
Hence, loss on cars taken back = ` 2,56,000 - ` 1,96,000 = ` 60,000
Less: Value at which Cars were taken back ` 1,96,000
Repair ` 10,000 2,06,000
11.24
Question 24
Srikumar bought 2 cars from 'Fair Value Motors Pvt. Ltd. on 1.4.2014 on the following terms (for both cars):
1st Installment at the end of first year 4,20,000
2nd Installment at the end of 2nd year 4,90,000
3rd Installment at the end of 3rd year 5,50,000
Srikumar provides depreciation @ 25% on the diminishing balances.
On 31.3.2017 Srikumar failed to pay the 3rd installment upon which 'Fair Value Motors Pvt. Ltd.' repossessed
1 car. Srikumar agreed to leave one car with Fair Value Motors Pvt. Ltd. and adjusted the value of the car
against the amount due. The car taken over was valued on the basis of 40% depreciation annually on written
down basis. The balance amount remaining in the vendor's account after the above adjustment was paid by
Srikumar after 3 months with interest @ 20% p.a.
(i) Calculate the cash price of the cars and the interest paid with each installment.
(ii) Prepare Cars Account in the books of Srikumar assuming books are closed on March 31, every year.
Figures may be rounded off to the nearest rupee.
(RTP May 2018)
Answer:
No. of Outstanding Amount due Outstanding Interest Outstanding
installments balance at the at the time of balance at the balance at the
end after the installment end before the beginning
[1] [2] [3] [4] = 2+3 [5] = 4 x 10/110 [6]4-5
3rd — 5,50,000 5,50,000 50,000 5,00,000
2nd 5,00,000 4,90,000 9,90,000 90,000 9,00,000
1st 9,00,000 4,20,000 13,20,000 1,20,000 12,00,000
Total cash price = ` 12,00,000+ 6,00,000 (down payment) = ` 18,00,000.
(ii) In the books of Srikumar
Cars Account
1.4.2014 To Fair Value 18,00,000 31.3.2015 By Depreciation A/c 4,50,000
Motors Ac By Balance c/d 13,50,000
18,00,000 18,00,000
13,50,000 13,50,000
By Fair Value Motors A/c 1,94,400
(Value of 1 Car taken over after
depreciation for 3 years @ 40% p.a.)
[9,00,000 - (3,60,000 + 2,16,000 +
1,29,600)]
11.25
By Loss transferred to Profit and Loss 1,85,288
A/c on surrender (Bal. fig.)
1/ (10,12,500 - 2,53,125)
2
10,12,500 10,12,500
Question 25
Krishan bought 2 cars from ‘Fair Value Motors Pvt. Ltd. on 1.4.2015 on the following terms (for both cars):
`
Krishan provides depreciation @ 25% on the diminishing balances.
On 31.3.2018 Krishan failed to pay the 3rd installment upon which ‘Fair Value Motors Pvt. Ltd.’ repossessed 1
car. Krishan agreed to leave one car with Fair Value Motors Pvt. Ltd. and adjusted the value of the car
down basis. The balance amount remaining in the vendor’s account after the above adjustment was paid by
Krishan after 3 months with interest @ 20% p.a.
You are required to: Calculate the cash price of the cars and the interest paid with each installment. and
prepare Car Account in the books of Krishan for the year 2017-18 assuming books are closed on March 31,
every year. Figures may be rounded off to the nearest rupee.
Answer:
No. of Outstanding balance Amount due at Outstanding Interest Outstanding
installments at the end after the the time of balance at the end balance at
payment of installment before the the beginning
installment payment of
installment
[1] [2] [3] [4] = 2 +3 [5] = 4 x [6] = 4-5
10/110
3rd - 5,50,000 5,50,000 50,000 5,00,000
2nd 5,00,000 4,90,000 9,90,000 90,000 9,00,000
1st 9,00,000 4,20,000 13,20,000 1,20,000 12,00,000
Cars Account in the books of Krishan for the year ended 31st March, 18
1.4.2017 To Balance 10,12,500 31.3.2018 By Depreciation A/c 2,53,125
b/d [18,00,000 less
depreciation
(4,50,000 +
3,37,500)]
11.26
By Fair Value Motors A/c

(Value of 1
Car taken over after
depreciation for 3 years
@ 40% p.a.) [9,00,000 -
(3,60,000 + 2,16,000
1,94,400
+1,29,600)]
By Loss transferred to Profit
and Loss A/c on surrender
(Bal. fig.) 1,85,288
By Balance c/d ½ (10,12,500-
2,53,125) 3,79,687
10,12,500 10,12,500
Question 26
st
1 Installment at the end of first year 4,20,000
nd
2 Installment at the end of 2nd year 4,90,000
On 31.3.2018 Krishan failed to pay the 3rd installment upon which ‘Fair Value Motors Pvt. Ltd.’ repossessed 1
car. Krishan agreed to leave one car with Fair Value Motors Pvt. Ltd. and adjusted the value of the car
(ii) Prepare Car Account in the books of Krishan assuming books are closed on March 31, every year.
Answer:
No. of Outstanding Amount due at Outstanding Interest Outstanding
installments balance at the end the time of balance at the end balance at the
after the payment installment before the beginning
of installment payment of
installment
[1] [2] [3] [4] = 2 +3 [5] = 4 x [6] = 4-5
10/110
3rd - 5,50,000 5,50,000 50,000 5,00,000
2nd 5,00,000 4,90,000 9,90,000 90,000 9,00,000
1st 9,00,000 4,20,000 13,20,000 1,20,000 12,00,000
Total c ash price = ` 12,00,000+6,00,000 (down payment) = ` 18,00,000.
11.27
Cars Account in the books of Krishan
1.4.2015 To Fair Value 31.3.2016 By Depreciation A/c 4,50,000
Motors A/c 18,00,000 By Balance c/d 13,50,000
18,00,000 18,00,000
13,50,000 13,50,000
By Fair Value Motors A/c
(Value of 1 Car taken
over after depreciation for
3 years @ 40% p.a.)
[9,00,000 - (3,60,00
0+2,16,000 +1,29,600)] 1,94,400
By Loss transferred to Profit
and Loss A/c on
surrender (Bal. fig.) 1,85,288
By Balance c/d ½
(10,12,500-2,53,125)
3,79,687
10,12,500 10,12,500
Similar Question
Question 26A
M/s Beta Enterprises bought 3 trucks from Gamma Ltd. on 01-04-2017 on the following terms:
`
Down Payment 6,50,000
3 Instalments to be paid, each at the end of each year:
1st Instalment ` 3,55,000
2nd Instalment ` 3,38,000
3rd Instalment ` 3,30,000
Interest is charged @ 10 % p.a. and included in above instalments.
M/s Beta Enterprises provides depreciation @ 20 % on the diminishing balance of the Trucks
On 31st March, 2020, M/s Beta Enterprises failed to pay the 3rd Instalment upon which Gamma Ltd.
repossessed 1 truck. Gamma Ltd. agreed to leave 2 trucks with M/s Beta Enterprises and adjusted the value
of 1 truck against the amount due.
The truck taken over was valued on the basis of 30% depreciation annually on written down value basis.
The balance amount remaining in the Vendor's Account after the above adjustment was paid by M/s. Beta
Enterprises after 2 months with interest @ 18 % p.a.
(i) Calculate the Cash Price of the trucks and the amount of Interest paid with each instalment.
(ii) Prepare Truck Account, Gamma Ltd.'s Account in the books of M/s Beta Enterprises assuming that the
books of accounts are closed on 31st March every year.
(RTP May, 2022)
11.28
Answer
instalments balance at the at the time of balance at the end balance at the
end after the instalment before the payment beginning
payment of of instalment
instalment
[1] [2] [3] [4] = 2 +3 [5] = 4 x [6] = 4-5
10/110
3rd - 3,30,000 3,30,000 30,000 3,00,000
2nd 3,00,000 3,38,000 6,38,000 58,000 5,80,000
1st 5,80,000 3,55,000 9,35,000 85,000 8,50,000
Total cash price = ` 8, 50,000+ 6, 50,000 (down payment) = ` 15, 00,000.
(ii) In the books of M/s Beta Enterprises Trucks Account
1.4.2017 To Gamma Ltd. A/c 15,00,000 31.3.2018 By Depreciation A/c 3,00,000
15,00,000 15,00,000
12,00,000 12,00,000
By Gamma Ltd. A/c 1,71,500
(Value of 1 truck taken
over after depreciation for
3 years @30% p.a.)
{5,00,000 - (1,50,000 +
1,05,000 +73,500)}
By Loss transferred to 84,500
Profit and Loss a/c on
surrender (Bal. fig.) or
(2,56,000 - 1,71,500)
By Balance c/d 2/3
(9,60,000 - 1,92,000 = 5,12,000
7,68,000)
9,60,000 9,60,000
Gamma Ltd. Account
1.4.17 To Bank (down payment) 6,50,000 1.4.17 By Trucks A/c
31.3.18 To Bank (1st Instalment) 3,55,000 31.3.18 By Interest A/c 15,00,000
To Balance c/d 5,80,000 85,000
15,85,000 15,85,000
31.3.19 To Bank (2nd Instalment) 3,38,000 1.4.18 By Balance b/d 5,80,000
31.3.19 To Balance c/d 3,00,000 31.3.19 By Interest a/c 58,000
6,38,000 6,38,000
31.3.20 To Trucks A/c 1,71,500 1.4.19 By Balance b/d 3,00,000
31.3.20 To Balance c/d (b.f.) 1,58,500 31.3.20 By Interest A/c 30,000
3,30,000 3,30,000
11.29
31.5.20 To Bank (Amount settled after 1,63,255 1.4.20 By Balance b/d 1,58,500
2 months) 31.5.20 By Interest A/c (@ 18% 4,755
on bal.) (1,58,500x2/12
x 18/100)
1,63,255 1,63,255
Question 27
`
On 31.3.2018 Krishan failed to pay the 3 rd installment upon which ‘Fair Value Motors Pvt. Ltd.’ repossessed
1 car. Krishan agreed to leave one car with Fair Value Motors Pvt. Ltd. and adjusted the value of the car
You are required to: Calculate the cash price of the cars and the interest paid with each installment and
Prepare Car Account in the books of Krishan assuming books are closed on March 31, every year. Figures
may be rounded off to the nearest rupee.
Answer:
No. of Outstanding balance Amount due Outstanding Interest Outstanding
installments at the end after the at the time balance at the end balance at the
payment of of before the payment beginning
installment installment of installment
[1] [2] [3] [4] = 2 +3 [5] = 4 x [6] = 4-5
10/110
3rd - 5,50,000 5,50,000 50,000 5,00,000
2nd 5,00,000 4,90,000 9,90,000 90,000 9,00,000
1st 9,00,000 4,20,000 13,20,000 1,20,000 12,00,000
Cars Account in the books of Krishan
1.4.2015 To Fair Value 31.3.2016 By Depreciation A/c 4,50,000
Motors A/c 18,00,000 By Balance c/d 13,50,000
18,00,000 18,00,000
13,50,000 13,50,000
By Fair Value Motors A/c (Value of
1 Car taken over after depreciation
for 3 years @ 40% p.a.) [9,00,000
- (3,60,000 + 2,16,000 +
1,29,600)] 1,94,400
11.30
By Loss transferred to Profit and
Loss A/c on surrender (Bal. fig.)
1,85,288
By Balance c/d
½ (10,12,500-2,53,125) 3,79,687
10,12,500 10,12,500
Question 28
Amandeep bought 2 cars from ‘Fair Value Motors Pvt. Ltd. on 1.4.2016 on the following terms (for both cars):

Amandeep provides depreciation @ 25% on the diminishing balances.
On 31.3.2019 Amandeep failed to pay the 3rd installment upon which ‘Fair Value Motors Pvt. Ltd.’
repossessed 1 car. Amandeep agreed to leave one car with Fair Value Motors Pvt. Ltd. and adjusted the
value of the car against the amount due. The car taken over was valued on the basis of 40% depreciation
annually on written down basis. The balance amount remaining in the vendor’s account after the above
adjustment was paid by
Amandeep after 3 months with interest @ 20% p.a. You are required to:
(ii) Prepare Cars Account in the books of Amandeep assuming books are closed on March 31, every
year.
(RTP November 2019)
Answer
installments balance at the at the time of balance at the end balance at the
end after the installment before the beginning
[1] [2] [3] [4] [5] [6]4-5
= 2 +3 = 4 x 10/110
3rd - 5,50,000 5,50,000 50,000 5,00,000
2nd 5,00,000 4,90,000 9,90,000 90,000 9,00,000
1st 9,00,000 4,20,000 13,20,000 1,20,000 12,00,000
(ii) In the books of Amandeep Cars Account
1.4.2016 To Fair Value 18,00,000 31.3.2017 By Depreciation A/c 4,50,000
Motors A/c By Balance c/d 13,50,000
18,00,000 18,00,000
13,50,000 13,50,000
11.31

By Fair Value Motors A/c (Value of 1
Car taken over after depreciation for 3
years @ 40% p.a.) [9,00,000 -
(3,60,000+2,16,000+1,29,600)]
1,94,400
By Loss on surrender transfer red to
Profit and Loss A/c (Bal. fig.) 1,85,288
By Balance c/d
½ (10,12,500-2,53,125) 3,79,687
10,12,500 10,12,500
Question 29
On January 1, 20X1 Kasturi Ltd. acquired a Pick-up Van on hire purchase from Shorya Ltd. The terms of the
contract were as follows:
(a) The cash price of the van was ` 25,000.
(c) The balance was to be paid in annual instalments of ` 5,000 plus interest.
(e) Depreciation at 10% p.a. is to be written-off using the straight-line method.
You are required to show the Van account & Shorya Ltd. account in the books of Kasturi Ltd. from January 1,
20X1 to December 31, 20X3.
[RTP May 2020]
Answer
Ledger Accounts in the books of Kasturi Van Account
1.1.20X1 To Shorya Ltd. 25,000 31.12.20X1 By Depreciation A/c 2,500
31.12.20X1 By Balance c/d 22,500
25,000 25,000
31.12.20X2 By Balance c/d 20,000
22,500 22,500
31.12.20X3 By Balance c/d 17,500
20,000 20,000
Shorya Ltd. Account
1.1.20X1 To Bank A/c 10,000 1.1.20X1 By Van A/c 25,000
31.12.20X1 To Bank A/c 5,900 31.12.20X1 By Interest A/c 900
31.12.20X1 To Balance c/d 10,000
25,900 25,900
11.32

31.12.20X2 To Balance c/d 5,000 31.12.20X2 By Interest A/c 600
10,600 10,600
31.12.20X3 By Interest A/c 300
5,300 5,300
Question 30
X purchased three cars from Y on hire purchase basis, the cash price of each car being ` 2,00,000. The hire
purchaser charged depreciation @ 20% on diminishing balance method. Two cars were seized by on hire
vendor when second installment was not paid at the end of the second year. The hire vendor valued the two
cars at cash price less 30% depreciation charged under diminishing balance method. The hire vendor spent `
10,000 on repairs of the cars and then sold them for a total amount of ` 1,70,000.
You are required to compute: (i) Agreed value of two cars taken back by the hire vendor and book value of
car left with the hire purchaser and (ii) Profit or loss to hire purchaser on two cars taken back by the hire
vendor.
Answer
`
2,80,000
30 84,000
Less: Depreciation for the second year = ` 2, 80,000 x
100
Cash purchase price of one car 2,00,000
(ii)
Book value of one car as calculated above 1,28,000
Value at which the two cars were taken back, calculated in (i) above 1,96,000
Hence, loss to hire purchaser on cars taken back by hire vendor
= ` 2,56,000 – ` 1,96,000 = ` 60,000
Question 31
M/s. Kodam Enterprises purchased a generator on hire purchase from M/s. Sanctum Ltd. on 1stApril, 2019.
The hire purchase price was `48,000. Down payment was `12,000 and the balance is payable in 3 annual
instalments of `12,000 each payable at the end of each financial year. Interest is payable @ 8% p.a. and is
included in the annual payment of `12,000.
Depreciation at 10% p.a. is to be written off using the straight line method.
You are required to calculate the cash price of the generator and the interest paid on each instalment.
11.33
Answer:
No. of Amount due at the Interest Cumulative
instalments time of instalment Cash price
[1] [2] [3] (2-3) = [4]
3rd 12,000 8/108 of `12,000 = ` 889 11,111
2nd 23,111 [W.N.1] 8/108 of ` 23,111 = `1,712 21,399
1st 33,399 [W.N.2] 8/108 of `33,399 = `2,474 30,925
5,075
Total cash price = ` 30,925 + ` 12,000 (down payment) =`42,925
Working Notes:
1. ` 11,111+ 2nd instalment of ` 12,000= ` 23,111
2. ` 21,399+ 1st instalment of ` 12,000= ` 33,399
Question 32
On 1st April, 2017, X Ltd. sells a Trucks on hire purchase basis to Transporters & Co. for a total purchase
price of ` 18,00,000 payable as to ` 4,80,000 as down payment and the balance in three equal annual
instalments of ` 4,40,000 each payable on 31st March 2018, 2019 and 2020.
The hire vendor charges interest @ 10% per annum.
You are required to ascertain the cash price of the truck for Transporters & Co. Calculations may be made to
the nearest rupee.
(MTP, October, 2020) (5 marks)
Answer
Rate of interest 10
Ratio of interest and amount due = = = 1 / 11
100 Rateof interest 110
There is no interest element in the down payment as it is paid on the date of the transaction. Instalments paid
after certain period includes interest portion also. Therefore, to ascertain cash price, interest will be calculated
from last instalment to first instalment as follows:
No. of instalments Amount due at the Interest Cumulative Cash
time of instalment price
[1] [2] [3] (2-3) = [4]
3rd 4,40,000 1/11 of ` 4,40,000 =` 40,000 4,00,000
2nd 8,40,000 1/11 of ` 8,40,000= ` 76,364 7,63,636
1st 12,03,636 1/11of ` 12,03,636= ` 1,09,421 10,94,215
Total cash price = ` 10,94,215 + 4,80,000 (down payment) =` 15,74,215.
Question 33
Jai Ltd purchased a machine on hire purchase basis from KM Ltd. on the following terms:
(a) Cash price ` 1,20,000.
(b) Down payment at the time of signing the agreement on 1-1-2016, ` 32,433.
(c) 5 annual instalments of `23,100, the first to commence at the end of twelve months from the date of
down payment.
Your are required to calculate the total interest and interest included in each instalment. Also prepare the
Ledger Account of KM Ltd. in the books of Jai Ltd. (Suggested January, 2021) (8 marks)
11.34
Answer
Calculation of interest
instalment instalment
(1) (2)
Cash Price 1,20,000
Interest/Cash Price of 1st - ` 87,567x10/100 ` 23,100 –
instalment = ` 8,757 =
8,757 ` 14,343
Interest/cash price of 2nd instalment - ` 73,224x 10/100 ` 23,100 -
= ` 7,322=
` 7322 ` 15,778
Balance due after 2nd instalment 57,446
Interest/Cash price of 3rd instalment - ` 57,446 x 10/100 ` 23,100 -
= ` 5745=
` 5745 ` 17,355
Interest/Cash price of 4th instalment - ` 40,091x10/100= ` 23,100 -
` 4,009 ` 4,009=
` 19,091
Interest/Cash price of 5th instalment - `21,000 x10/100 ` 23,100 –
= ` 2,100 ` 2,100= 21,000
Total Nil ` 27,933 `1,20,000
(Down payment + instalments) – Cash Price = ` [32,433 +(23,100 x 5)] – `1,20,000 = ` 27,933
KM Ltd. Account in the books of Jai Ltd
1.1. 2016 To Bank A/c 32,433 1.1.2016 By Machine A/c 1,20,000
31.12.2016 To Bank A/c 23,100 31.12.2016 By Interest A/c 8,757
31.12.2016 To Balance c/d 73,224
1,28,757 1,28,757
31.12.2017 To Bank A/c 23,100 1.1.2017 By Balance b/d 73,224
31.12.2017 To Balance c/d 57,446 31.12.2017 By Interest A/c 7,322
80,546 80,546
11.35
1.1. 2016 To Bank A/c 32,433 1.1.2016 By Machine A/c 1,20,000
63,191 63,191
44,100 44,100
____ 31.12.2020 By Interest A/c 2,100
23,100 23,100
Question 34
Identify four differences between Hire Purchase and Installment Payment agreement.
(MTP March, 2021) (MTP April, 2022) (4 Marks)
Answer
Statement showing differences between Hire Purchase and Installment System
Basis of Distinction Hire Purchase Installment System
1. Governing Act It is governed by Hire Purchase Act, It is governed by the Sale of
1972. Goods Act, 1930.
2. Nature of Contract It is an agreement of hiring. It is an agreement of sale.
3. Passing of Title The title to goods passes on last The title to goods passes
(ownership) payment. immediately as in the case of
usual sale.
4. Right to Return goods The hirer may return goods without Unless seller defaults, goods
further payment except for accrued are not returnable.
installments.
5. Seller’s right to repossess The seller may take possession of the The seller can sue for price if
goods if hirer is in default. the buyer is in default. He
cannot take possession of the
goods.
6. Right of Disposal Hirer cannot hire out, sell, pledge or The buyer may dispose off the
assign entitling transferee to retain goods and give good title to the
possession as against the hire vendor. bonafide purchaser.
7. Responsibility for Risk of The hirer is not responsible for risk of loss The buyer is responsible for risk
Loss of goods if he has taken reasonable of loss of goods because of the
precaution because the ownership has ownership has transferred.
not yet transferred.
8. Name of Parties involved The parties involved are called Hirer and The parties involved are called
Hire vendor. buyer and seller.
9. Component other than Component other than Cash Price Component other than Cash
cash price. included in installment is called Hire Price included in Installment is
charges. called Interest.
Note: Any four differences may form part of the answer.
Question 35
M/s. Kodam Enterprises purchased a generator on hire purchase from M/s. Sanctum Ltd. on 1st April, 2019.
The hire purchase price was `48,000. Down payment was `12,000 and the balance is payable in 3 annual
instalments of `12,000 each payable at the end of each financial year. Interest is payable @ 8% p.a. and is
included in the annual payment of `12,000.
Depreciation at 10% p.a. is to be written off using the straight line method.
You are required to calculate the cash price of the generator and the interest paid on each instalment.
(MTP March, 2021) (4 Marks)
11.36
Answer
No. of Amount due at the time Interest Cumulative Cash
instalments of instalment price
[1] [2] [3] (2-3) = [4]
3rd 12,000 8/108 of `12,000 =` 889 11,111
2nd 23,111 [W.N.1] 8/108 of ` 23,111 = `1,712 21,399
1st 33,399 [W.N.2] 8/108 of `33,399 = `2,474 30,925
5,075
Total cash price = ` 30,925 + ` 12,000 (down payment) =`42,925
Working Notes:
1. ` 11,111+ 2nd instalment of ` 12,000= ` 23,111
2. ` 21,399+ 1st instalment of ` 12,000= ` 33,399
Question 36
A acquired on 1st January, 2020 a machine under a Hire-Purchase agreement which provides for 5 half-
yearly instalments of ` 6,000 each, the first instalment being due on 1st July, 2020. Assuming that the
(MTP April, 2021) (4 Marks)/(MTP March, 2022) (5 Marks)
Answer
Instalment Interest @ 5% half Principal Amount (in
Amount yearly (10% p.a.) = 5/105 each instalment)
= 1/21)
(in each instalment)
` ` `
5,714
11,714 558 5,442
Less: Interest (558) (11,156–5,714)
11,156
17,156 817 5,183
Less: Interest (817) (16,339–11,156)
16,339
22,339 1,063 4,937
Less: Interest (1,063) (21,276–16,339)
21,276
27,276 1,299 4,701
Less: Interest (1,299) (25,977–21,276)
25,977 4,023 25,977
11.37
Question 37
An Engineer purchased a compressing machine on hire purchase system. As per the terms he is required to
pay `1,40,000 down, ` 1,06,000 at the end of first year, `98,000 at the' end of the second year, 87,000 at the
end of the third year and `55,000 at the end of fourth year. Interest charged @ 12% p.a. You are required to
calculate total cash price of the machine and the interest paid with each installment.
(July 2021 Suggested) (4 Marks)
Answer
Ratio of interest and amount due = Rate of interest = 12
100 + Rate of interest 112
No of instalments Instalment Amount due at the time Interest Principal due at the
amount (`) of instalment (`) (`) beginning (`)
(1) (2) (3) (4)

4th 55,000 55,000 5,893 49,107
3rd 87,000 1,36,107 14,583 1,21,524
2nd 98,000 2,19,524 23,520 1,96,004
1st 1,06,000 3,02,004 32,358 2,69,646
Total Cash Price = ` 1,40,000 + ` 2,69,646 = ` 4,09,646
Question 38
(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 ` 2,40,000.
(2) The down payment at the time of signing the contract was ` 96,000.
(3) The balance amount is to be paid in 3 equal annual instalments 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.
(RTP, May 2021)
Answer
(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)
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 By Balance c/d 3,840
11,520 11,520
11.38
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
Suspense A/c
31.3.18 To Balance c/d 1,07,520
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
` 1,44,000 to be paid in 3 instalments ie. ` 48,000 plus interest
Total interest = ` 11,520 + ` 7,680 + ` 3,840 = ` 23,040
Question 39
On 1st April, 2017, Mr. Nilesh acquired a Tractor on Hire purchase from Raj Ltd. The terms of contract were
as follows:
(i) The Cash price of the Tractor was ` 11,50,000.
(ii) ` 2,50,000 were to be paid as down payment on the date of purchase.
(iii) The Balance was to be paid in annual instalments of ` 3,00,000 plus interest at the end of the year.
(iv) Interest chargeable on the outstanding balance was 8% p.a.
(v) Depreciation @ 10% p.a. is to be charged using straight line method.
Mr. Nilesh adopted the Interest Suspense method for recording his Hire purchase transactions.
Prepare the Tractor account, Interest Suspense account and Raj Ltd.’s account in the books of Mr. Nilesh for
the period of hire purchase.
Answer
Tractor Account
1.4.2017 To Raj 11,50,000 31.3.2018 By Dep. 1,15,000
_______ By Balance c/d 10,35,000
11,50,000 11,50,000
1.4.2018 To Balance b/d 10,35,000 31.3.2019 By Dep. 1,15,000
________ By Balance c/d 9,20,000
10,35,000 10,35,000
1.4.2019 To balance b/d 31.3.2020
9,20,000 By Dep. 1,15,000
_______ By Balance c/d 8,05,000
9,20,000 9,20,000
11.39
1.4.2017 To Raj Ltd. A/c (W.N.) 1,44,000 31.3.2018 By Interest A/c 72,000
31.3.2018 By Balance c/d 72,000
1,44,000 1,44,000
31.3.2019 By Balance c/d 24,000
72,000 72,000
Total Interest = ` 72,000 + ` 48,000 + ` 24,000 = ` 1,44,000
Raj Ltd. Account
1.4.2017 To Bank A/c 2,50,000 1.4.2017 By Tractor A/c 11,50,000
31.3.2018 To Bank A/c 3,72,000 By H.P. Interest 1,44,000
Suspense A/c
12,94,000 12,94,000
31.3.2019 To Bank A/c 3,48,000 1.4.2018 By Balance b/d 6,72,000
To Balance c/d 3,24,000 _______
6,72,000 6,72,000
31.3.2020 To Bank A/c 3,24,000 1.4.2019 By Balance b/d 3,24,000
Question 40
Jai Ltd purchased a machine on hire purchase basis from KM Ltd. on the following terms:
(a) Cash price ` 1,20,000.
(b) Down payment at the time of signing the agreement on 1 -1-2016, ` 32,433.
(c) 5 annual instalments of ` 23,100, the first to commence at the end of twelve months from the date of
down payment.
Your are required to calculate the total interest and interest included in each instalment.
Answer
(a) Calculation of interest
instalment instalment (2)
(1)
Cash Price 1,20,000
Interest/Cash Price of 1st instalment - ` 87,567x10/100 = ` 23,100 –
8,757 ` 8,757 =
` 14,343
11.40

instalment instalment (2)
(1)
Interest/cash price of 2nd instalment - ` 73,224x 10/100 = ` 23,100 - ` 7,322
` 7322 = ` 15,778

Balance due after 2nd instalment 57,446
Interest/Cash price of 3rd instalment - ` 57,446 x 10/100 = ` 23,100 - ` 5745
` 5745 = ` 17,355

Interest/Cash price of 4th instalment - ` 40,091x10/100 ` 23,100 - ` 4,009
= ` 4,009 = ` 19,091
Interest/Cash price of 5th instalment - `21,000 x10/100 = ` 23,100 –
Less: Cash price of 5th instalment (21,000) ` 2,100 ` 2,100 = 21,000
Total Nil ` 27,933 `1,20,000

(Down payment + instalments) – Cash Price = ` [32,433 + (23,100 x 5)] – `1,20,000 = ` 27,933
Question 41
(c) Two cars were seized by on hire vendor when second installment was not paid at the end of the second
year. The hire vendor valued the two cars at cash price less 30% depreciation charged under it
diminishing balance method.
(d) The hire vendor spent ` 10,000 on repairs of the cars and then sold them for a total amount of ` 1,70,000.
Answer
`
2,80,000
30 84,000
Less: Depreciation for the second year = ` 2, 80,000 x
100
11.41
`
Value at which the two cars were taken back, calculated in working note (i) above 1,96,000
Hence, loss on cars taken back = ` 2,56,000 – ` 1,96,000 = ` 60,000
Less: Value at which cars were taken back ` 1,96,000
Repair ` 10,000 2,06,000
Similar Question
Question 41A
(i) Mita purchased three bikes from Nita on hire purchase basis, the cash price of each bike being `
1,00,000
(ii) Mita charged depreciation @ 20% on written down value method.
(iii) Two bikes were seized by the Nita when second instalment was not paid at the end of the second
year. Nita valued the two bikes at cash price less 30% depreciation charged under it written down
valued method.
(iv) Nita spent ` 5,000 on repairs of the bikes and then sold them for a total amount of `85,000.
(i) Agreed value of two bikes taken back by Nita.
(ii) Book value of the bike left with Mita.
(iii) Profit or loss to Mita on two bikes taken back by Nita.
(iv) Profit or loss of bikes repossessed, when sold by Nita.
Question 42
On January 1, 2018 M/s Hello acquired a Machine on hire purchase from M/s Pass. The terms of the contract
were as follows:
(a) The cash price of the Machine was ` 2,00,000.
(c) The balance was to be paid in annual instalments of ` 40,000 plus interest. The first instalment was to be
paid on 31st Dec. 2018.
(e) Depreciation at 10% p.a. is to be written-off using the WDV method.
You are required to give Journal Entries in the books of M/s Hello from January 1, 2018 to December 31,
2020.
11.42
Answer
In the books of M/s Hello Journal Entries
` `
2018 Machine A/c Dr. 2,00,000
Jan. 1 To M/s Pass A/c 2,00,000
(Being the purchase of a Machine on hire purchase from
M/s Pass)
“ M/s Pass A/c Dr. 80,000
To Bank A/c 80,000
(Being the amount paid on signing the H.P. contract)
Dec. 31 Interest A/c Dr. 7,200
To M/s Pass A/c 7,200
(Being the interest payable @ 6% on
` 1,20,000
“ M/s Pass A/c (` 40,000+` 7,200) Dr. 47,200
To Bank A/c 47,200
(Being the payment of 1st instalment along with interest)
“ Depreciation A/c Dr. 20,000
To Machine A/c 20,000
2,00,000)
“ Profit & Loss A/c Dr. 27,200
(Being the depreciation and interest transferred to Profit
and Loss Account)
2019 Interest A/c Dr. 4,800
Dec. 31 To M/s Pass A/c 4,800
M/s Pass A/c (` 40,000 + ` 4,800) Dr. 44,800
To Bank A/c 44,800
(Being the payment of 2nd instalment along with interest)
(Being the depreciation and interest charged to Profit and
Loss Account)
11.43

` `
2020 Interest A/c Dr. 2,400
Dec. 31 To M/s Pass A/c 2,400
M/s Pass A/c (` 40000 + ` 2,400) Dr. 42,400
To Bank A/c 42,400
(Being the payment of final instalment along with interest)
(Being the interest and depreciation charged to Profit and
Loss Account)
Question 43
ABC Ltd. acquired a Machine on hire purchase from P Ltd. with term of payment is four equal annual
installments. The annual installment is commencing from the date of agreement signed by both the parties.
The payment of annual installments is ` 25,000 at the end of each year. The interest is charged @ 25 % and
is included in the annual installment. ABC Ltd. could not pay third annual installment and declared “Purchaser
Defaulted” whereupon the P Ltd. act to repossess the Machinery.
ABC Ltd. is providing depreciation on Machinery at the rate of 20% per annum on the diminishing balance
method.
You are required to prepare Machinery Account and P Ltd account in the books of ABC Ltd. Working notes
will form part of the answer
Answer
In the books of ABC Ltd.
Machinery Account
` `
73,800 73,800
II Yr. To Balance b/d 59,040 II Yr. By Depreciation A/c 11,808
59,040 59,040
III Yr. To Balance b/d 47,232 III Yr. By Depreciation A/c 9,446
By Hire Vendor 25,000
By Profit and Loss A/c (Loss
on surrender) (Balancing
_____ figure) 12,786
47,232 47,232
11.44
P Ltd. Account
` `
I Yr. To Bank A/c (1st Installment) 25,000 I Yr. By Machinery A/c 73,800
End of To Bank A/C (2nd Installment) 25,000
year
86,000 86,000
II Yr. To Bank A/c (3rd Installment) 25,000 II Yr. By Balance b/d 36,000
45,000 45,000
III Yr. To Machinery A/c 25,000 III Yr. By Balance b/d 20,000
(transfer) By Interest A/c 5,000
25,000 25,000
Working Note:
Installment Interest Principal
Amount
4th Installment 25,000 ` `
Interest 25,000 x 25/125 5,000 5,000 20,000
20,000
Add: 3rd Installment 25,000
45,000
Interest 45,000 x 25/125 9,000 9,000 16,000
36,000
Add: 2nd Installment 25,000
61,000
Interest 61,000 x 25/125 12,200 12,200 12,800
48,800
Add: 1st Installment (Down Payment) 25,000 _____ 25,000
73,800 26,200 73,800
Note: In the question, it is given that “the annual instalment is commencing from the date of agreement
signed by both the parties. The payment of annual instalment ` 25,000 at the end of each year”. It has been
assumed in the above answer that first instalment is paid on the date of agreement and rest instalments are
paid at the end of each year. Alternative answer assuming that the first instalment is paid at the end of first
year is also possible. The solution under this assumption will get changed and will be given as follows:
Machinery Account
` `
59,040 59,040
II Yr. To Balance b/d 47,232 II Yr. By Depreciation A/c 9,446
47,232 47,232
11.45
` `
III Yr. To Balance b/d 37,786 III Yr. By Depreciation A/c 7,557
To Profit and Loss A/c (profit on By Hire Vendor 45,000
surrender) 14,771
(Balancing figure)
52,557 52,557
P Ltd. Account
` `
I Yr. To Bank A/c 25,000 I Yr. By Machinery A/c 59,040
73,800 73,800
II Yr. To Bank A/c 25,000 II Yr. By Balance b/d 48,800
61,000 61,000
III Yr. To Machinery A/c (transfer) 45,000 III Yr. By Balance b/d 36,000
By Interest A/c 9,000
45,000 45,000
Working Note:
Instalment Amount Interest Principal
4th Instalment 25,000 ` `
Interest 25,000 x 25/125 5,000 5,000 20,000
20,000
Add: 3rd Instalment 25,000
45,000
Interest 45,000 x 25/125 9,000 9,000 16,000
36,000
Add: 2nd Instalment 25,000
61,000
Interest 61,000 x 25/125 12,200 12,200 12,800
48,800
Add: 1st Instalment 25,000
73,800
Interest 73,800 x 25/125 14,760 14,760 10,240
59,040 40,960 59,040
11.46
Departmental Accounts
12
Question 1
Goods are transferred from Department P to Department Q at a price 50% above cost. If closing stock of
Department Q is ` 27,000, compute the amount of stock reserve.
(Study Material)
Answer
`
Closing Stock of Department Q 27,000
Goods send by Department P to Department Q at a price 50% above cost
27,000 × 50 9,000
Hence profit of Department P included in the stock will be - =
150
Amount of the Stock Reserve will be ` 9,000.
Working Note:
Dept P transfers goods to Dept Q at a profit of 50% of cost. Hence, if cost is ` 100/- the profit = ` 50 and
Transfer Price = ` 150. Therefore, the profit of Dept P included in the stock value of Dept Q is one – third of
the sale value
Question 2
Z Ltd. has three departments and submits the following information for the year ending on 31st March, 20X1:
A B C Total (`)
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) ` 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.
(Study Material)
Answer
Departmental Trading Account for the year ended on 31st March, 20X1
Particulars A B C Particulars A B C
` ` ` Sales ` ` `
To Opening Stock 11,520 8,640 12,240 By A- 6120 x 40 2,44,800 5,18,400 7,48,800
(W.N.4) B- 11,520 x 45
C- 14,976 x 50
To Purchases 96,000 2,16,000 2,88,000 By Closing Stock 9,600 17,280 720
(W.N.2) (W.N.4)
To Gross Profit 1,46,880 3,11,040 4,49,280
(b.f.)
2,54,400 5,35,680 7,49,520 2,54,400 5,35,680 7,49,520
12.1
Chap. 12  Departmental Accounts
Working Notes:
(1) Profit Margin Ratio
Selling price of unit purchased: `
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)
9,00,000
Profit Margin Ratio = ×100 = 60%
15,00,000
(2) Statement showing department-wise per unit Cost and Purchase Cost
A B C
` ` `
Selling Price (Per unit) (`) 40 45 50
Less:Profit Margin @ 60% (`) (24) (27) (30)
Profit Margin is uniform for all depts at 60%
Purchase price per unit (`) 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 (`) 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 3
Brahma Limited has three departments and submits the following information for the year ending on 31st
March, 20X1:
Particulars A B C Total (`)
Purchases (units) 5,000 10,000 15,000
Purchases (Amount) 8,40,000
Sales (units) 5,200 9,800 15,300
Selling price (` per unit) 40 45 50
Closing Stock (Units) 400 600 700
12.2
You are required to prepare departmental trading account of Brahma Limited assuming that the rate of profit
on sales is uniform in each case.
(Study Material)
Answer
Departmental Trading Account for the year ended 31st March, 20X1
` ` ` ` ` `
To Opening Stock 14,400 10,800 30,000 By Sales
(W.N.4) A-5,200 x 40 2,08,000
To Purchases B-9,800 x 45 4,41,000
(W.N.2) C-15,300×50 7,65,000
1,20,000 2,70,000 4,50,000 By Closing stock (W.N.4) 9,600 16,200 21,000
To Gross profit (b.f.) 83,200 1,76,400 3,06,000
2,17,600 4,57,200 7,86,000 2,17,600 4,57,200 7,86,000
Working Notes:
(1) Profit Margin Ratio
Selling price of units purchased: `
Department A (5,000 units х ` 40) 2,00,000
Department B (10,000 units х ` 45) 4,50,000
Department C (15,000 units х ` 50) 7,50,000
Total selling price of purchased units 14,00,000
Less: Purchases (8,40,000)
Profit margin ratio = ×100 = ×100 = 40%
Selling price 14,00,000
(2) Statement showing department-wise per unit cost and purchase cost
Particulars A B C
Selling price per unit (`) 40 45 50
Less: Profit margin @ 40% (`) (16) (18) (20)
[Profit margin is uniform for all depts]
Purchase price per unit (`) 24 27 30
No. of units purchased 5,000 10,000 15,000
Purchases (purchase cost per unit x units purchased) 1,20,000 2,70,000 4,50,000
(3) Statement showing calculation of department-wise Opening Stock (in units)
Particulars A B C
Sales (Units) 5,200 9,800 15,300
Add: Closing Stock (Units) 400 600 700
5,600 10,400 16,000
Less: Purchases (Units) (5,000) (10,000) (15,000)
Opening Stock (Units) 600 400 1,000
(4) Statement showing department-wise cost of Opening and Closing Stock
Particulars A B C
Cost of Opening Stock (`) 600 х 24 400 х 27 1,000 х 30
14,400 10,800 30,000
Cost of Closing Stock (`) 400 х 24 600 х 27 700 х 30
9,600 16,200 21,000
12.3
Question 4
M/s Omega is a departmental store having three departments X, Y and Z. The information regarding three
departments for the year ended 31st March, 20X1 are given below:
X Y Z
` ` `
Opening Stock 36,000 24,000 20,000
Purchases 1,32,000 88,000 44,000
Debtors at end 15,000 10,000 10,000
Sales 1,80,000 1,35,000 90,000
Closing stock 45,000 17,500 21,000
Value of furniture in each department 20,000 20,000 10,000
Floor space occupied by each department (in sq. ft.) 3,000 2,500 2,000
Number of employees in each Department 25 20 15
Electricity consumed by each department (in units) 300 200 100
The balances of other revenue items in the books for the year are given below:
Amount (`)
Carriage inwards 3,000
Carriage outwards 2,700
Salaries 48,000
Advertisement 2,700
Discount allowed 2,250
Discount received 1,800
Rent, Rates and Taxes 7,500
Depreciation on furniture 1,000
Electricity expenses 3,000
Labour welfare expenses 2,400
You are required to prepare Departmental Trading and Profit and Loss Account for the year ended 31st
March, 20X1 after providing provision for Bad Debts at 5%.
(Study Material)
Answer
Departmental Trading & Profit and Loss Account for the year ended 31st March, 20X1
in Books of M/s Omega
Particulars Deptt. X Deptt. Y Deptt. Z Total Particulars Deptt.X Deptt.Y Deptt.Z Total
` ` ` ` ` ` ` `
To Stock (opening) 36,000 24,000 20,000 80,000 By Sales 1,80,000 1,35,000 90,000 4,05,000
To Purchases 1,32,000 88,000 44,000 2,64,000 By Stock 45,000 17,500 21,000 83,500
(closing)
To Carriage Inwards 1,500 1,000 500 3,000
To Gross Profit c/d
(b.f.) 55,500 39,500 46,500 1,41,500
2,25,000 1,52,500 1,11,000 4,88,500 2,25,000 1,52,500 1,11,000 4,88,500

To Carriage Outwards 1,200 900 600 2,700 By Gross Profit 55,500 39,500 46,500 1,41,500
b/d
To Electricity 1,500 1,000 500 3,000 By Discount 900 600 300 1,800
received
To Salaries 20,000 16,000 12,000 48,000
To Advertisement 1,200 900 600 2,700
To Discount allowed 1,000 750 500 2,250
12.4
Particulars Deptt. X Deptt. Y Deptt. Z Total Particulars Deptt.X Deptt.Y Deptt.Z Total
` ` ` ` ` ` ` `
To Rent, Rates and 3,000 2,500 2,000 7,500
Taxes
To Depreciation 400 400 200 1,000
To Provision for Bad 750 500 500 1,750
Debts @ 5% of debtors
To Labour welfare 1,000 800 600 2,400
expenses
To Net Profit (b.f.) 26,350 16,350 29,300 72,000
56,400 40,100 46,800 1,43,300 56,400 40,100 46,800 1,43,300
Working Note:
Basis of allocation of expenses
Carriage inwards Purchases (3:2:1)
Carriage outwards Turnover (4:3:2)
Salaries No. of Employees (5:4:3)
Advertisement Turnover (4:3:2)
Discount allowed Turnover (4:3:2)
Discount received Purchases (3:2:1)
Rent, Rates and Taxes Floor Space occupied (6:5:4)
Depreciation on furniture Value of furniture (2:2:1)
Labour welfare expenses No. of Employees (5:4:3)
Electricity expense Units consumed (3:2:1)
Provision for bad debts 5% of respective debtors balance
Question 5
M/s X has two departments, A and B. From the following particulars prepare the consolidated Trading
Account and Departmental Trading Account for the year ending 31st December, 20X1:
A B
` `
Opening Stock [consisting of purchased goods -at cost] 20,000 12,000
Purchases 92,000 68,000
Sales 1,40,000 1,12,000
Wages 12,000 8,000
Carriage 2,000 2,000
Closing Stock:
(i) Purchased goods 4,500 6,000
(ii) Finished goods 24,000 14,000
Purchased goods transferred:
by B to A 10,000
by A to B 8,000
Finished goods transferred:
by A to B 35,000
by B to A 40,000
Return of finished goods:
by A to B 10,000
by B to A 7,000
12.5
You are informed that purchased goods have been transferred mutually at their respective departmental
purchase cost and finished goods at departmental market price and that 20% of the finished stock (closing) at
each department represented finished goods received from the other department.
(Study Material)
Answer
M/s X
Departmental Trading A/c for the year ending 31st December, 20X1
Deptt. Deptt. Deptt. Deptt.
A. B A B
` ` ` `
To Stock 20,000 12,000 By Sales 1,40,000 1,12,000
To Purchases 92,000 68,000 By Purchased Goods 8,000 10,000
transferred
To Wages 12,000 8,000 By Finished goods transferred 35,000 40,000
To Carriage 2,000 2,000 Return of finished Goods 10,000 7,000
To Purchased By Closing Stock:
Goods
transferred 10,000 8,000 Purchased Goods 4,500 6,000
To Finished Goods 40,000 35,000 Finished Goods 24,000 14,000
transferred
To Return of finished 7,000 10,000
Goods
To Gross profit c/d 38,500 46,000
(b.f.)
2,21,500 1,89,000 2,21,500 1,89,000
Consolidated Trading Account for the year ending 31st December, 20X1
` `
To Opening Stock 32,000 By Sales 2,52,000
To Purchases 1,60,000 By Closing Stock:
To Wages 20,000 Purchased Goods 10,500
To Carriage 4,000 Finished Goods 38,000
To Stock Reserve 2,196
To Gross Profit c/d 82,304
3,00,500 3,00,500
Working note:
Deptt. A Deptt. B
Sale 1,40,000 1,12,000
Add: Transfer 35,000 40,000
1,75,000 1,52,000
Less: Returns (7,000) (10,000)
Net Sales plus Transfer 1,68,000 1,42,000
38,500 46,000
Rate of Gross profit ×100 = 22.916% ×100 = 32.394%
1,68,000 1, 42,000
Closing Stock out of transfer 4,800 2,800
(20% of closing stock)
Unrealised Profit 4,800 × 32.394% = 1,555 2,800 × 22.916% = 641
12.6
Question 6
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:
`
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 `
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.
(Study Material)
Answer
Calculation of correct Departmental Profits
Department Department Department
P (`) S (`) Q (`)
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 85,117 41,100 42,546
Commission
Working Notes:
Department P Department S Department Q Total
(`) (`) (`) (`)
Unrealised Profit of:
Department P - 25/125X18,000=3,600 15/115X14,000 5,426
=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
12.7
Question 7
M/s. Suman Enterprises has two Departments, Finished Leather and Shoes. Shoes are made by the Firm
itself out of leather supplied by Leather Department at its usual selling price. From the following figures,
prepare Departmental Trading and Profit & Loss Account for the year ended 31st March, 20X3:
Finished Shoes
Leather Department
Department
(`) (`)
Opening Stock (As on 01.04.20X2) 30,20,000 4,30,000
Purchases 1,50,00,000 2,60,000
Sales 1,80,00,000 45,20,000
Transfer to Shoes Department 30,00,000 -
Manufacturing Expenses - 5,00,000
Selling Expenses 1,50,000 60,000
Rent and Warehousing 5,00,000 3,00,000
Stock on 31.03.20X3 12,20,000 5,00,000
The following further information are available for necessary consideration:
(i) The stock in Shoes Department may be considered as consisting of 75% of Leather and 25% of other
expenses.
(ii) The Finished Leather Department earned a Gross Profit @ 15% in 20X1-X2.
(iii) General expenses of the business as a whole amount to ` 8,50,000.
(Study Material)
Answer
Departmental Trading and Profit and Loss Account for the year ended 31st March, 20X3
Particulars Finished Shoes Total Particulars Finished Shoes Total
leather (`) (`) leather (`) (`)
(`) (`)
To Opening stock 30,20,000 4,30,000 34,50,000 By Sales 1,80,00,000 45,20,000 2,25,20,000
To Purchases 1,50,00,000 2,60,000 1,52,60,000 By Transfer to
shoes Deptt.
30,00,000 - 30,00,000
To Transfer from Leather 30,00,000 30,00,000 By Closing stock 12,20,000 5,00,000 17,20,000
Department
To Manufacturing expenses 5,00,000 5,00,000
To Gross profit c/d (b.f.) 42,00,000 8,30,000 50,30,000
2,22,20,000 50,20,000 2,72,40,000 2,22,20,000 50,20,000 2,72,40,000
To Selling expenses 1,50,000 60,000 2,10,000 By Gross profit 42,00,000 8,30,000 50,30,000
b/d
To Rent & warehousing 5,00,000 3,00,000 8,00,000
To Net profit
(b.f.) 35,50,000 4,70,000 40,20,000
42,00,000 8,30,000 50,30,000 42,00,000 8,30,000 50,30,000
General Profit and Loss Account
(`) (`)
To General expenses 8,50,000 By Net profit 40,20,000
To Unrealised profit (Refer W.N.) 26,625
To General net profit (Bal. fig.) 31,43,375
40,20,000 40,20,000
12.8
Working Note:
Calculation of Stock Reserve
Rate of Gross Profit of Finished leather Department, for the year 20X2 -X3 =
Gross Profit
= x 100 = [(42,00,000) / (1,80,00,000 + 30,00,000)] x100 = 20%
Total Sales
Closing Stock of Finished leather in Shoes Department = 75% i.e. ` 5,00,000 x 75% = ` 3,75,000
Stock Reserve required for unrealised profit @ 20% on closing stock ` 3,75,000 x 20% = ` 75,000
Stock reserve for unrealised profit included in opening stock of Shoes dept. @ 15% i.e. (` 4,30,000 x 75% x
15%) = ` 48,375
Additional Stock Reserve required during the year = ` 75,000 – ` 48,375 =` 26,625
Question 8
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 the sale
proceeds of the goods are credited in the account. 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.
` `
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 ` 1,260. These goods were sold during the year at the reduced prices.
(2) Certain stock of the value of ` 6,900 purchased for the Khadi Department were later in the year
transferred to the Silks department and sold for ` 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 Marked down Cost Marked
Khadi 5,600 360
Silk 10,000 2,000
All the goods that were marked down were sold except those with Silks of the value worth ` 5,000 (that
were marked down by ` 1,000).
(4) At the time of stock-taking on December 31, 20X1 it was discovered that Khadi cloth of the cost of ` 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; and
(b) The Memorandum Mark up Account.
(Study Material)
Answer
Silk Stock Account
20X1 ` 20X1 `
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
12.9
Silk Mark-up Account
20X1 ` 20X1 `
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 [(1/3* of {51,350 + 1,000}) 16,450 By Stock A/c 3,450
– 1,000]
59,450 59,450
* 1/2 on cost is equal to 1/3 on sales `

Working Notes:
Verification of Profit
Sales 1,25,000
Add: Mark down in goods sold 1,000
1,26,000
Gross Profit 1/3 42,000
Less: Mark down (1,000)
Gross profit as per books 41,000
Khadi Stock Account
20X1 ` ` 20X1 ` `
To Balance b/d By Sales 95,600
(10,500+2,240#) 12,740 Silk Dept. 6,900
To Purchases 75,900 Mark-up A/c @ 33- 2,300 9,200
1/3%
Mark up @ 33-1/3% 25,300 1,01,200
By Loss of stock A/c 390
Mark-up A/c @ 33-1/3% 130 520
By Mark-up A/c 360
By Balance c/d (b.f.) 8,260
1,13,940 1,13,940
# [(10,500 x 33-1/3%) – 1,260] = ` 2,240
Khadi Mark-up Account
20X1 ` 20X1 `
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 Stock A/c (mark down) 360 By Stock A/c 25,300
To Profit & Loss A/c 22,685
To Balance (1/4 of ` 8,260) 2,065
27,540 27,540
Working Note:
Verification of Profit `
Sales as per books 95,600
Add: Mark-down (1,260+360) 1,620
97,220
Gross Profit on fixed selling price @ 25% on ` 97,220 24,305
Less: Mark down (1,620)
22,685
12.10
Question 9
Explain the significance of having departmental accounts for a business entity.
(Study Material)
Answer
The main advantages of departmental accounting are:
(i) Evaluation of performance;
(ii) Growth potential of each department
(iii) Justification of capital outlay;
(iv) Judgement of efficiency and
(v) Planning and control.
Question 10
How will you allocate the following expenses among different departments?
(i) Rent, rates and taxes, repairs and maintenance, insurance of building.
(ii) Lighting and Heating expenses (e.g. energy expenses)
(iii) Selling expenses.
(Study Material)
Answer
S. No. Expenses Basis
1. Rent, rates and taxes, repairs and Floor area occupied by each department (if given)
maintenance, insurance of building otherwise on time basis
2. Lighting and Heating expenses (e.g., Consumption of energy by each department
energy expenses)
3. Selling expenses Sales of each department
Practical Problems
Question 11
Department A sells goods to Department B at a profit of 50% on cost and to Department C at 20% on cost.
Department B sells goods to A and C at a profit of 25% and 15% respectively on sales. Department C
charges 30% and 40% profit on cost to Department A and B respectively.
Stock lying at different departments at the end of the year are as under:
Department A Department B Department C
` ` `
Transfer from Department A - 45,000 42,000
Transfer from Department B 40,000 - 72,000
Transfer from Department C 39,000 42,000 -
Calculate the unrealised profit of each department and also total unrealised profit.
(Study Material)
12.11
Answer
Calculation of unrealised profit of each department and total unrealised profit
Dept. A Dept. B Dept. C Total
Unrealised Profit of: ` ` ` `
Department A 45,000 x 50/150 42,000 x 20/120
= 15,000 = 7,000 22,000
Department B 40,000 x .25 72,000 x .15
= 10,000 = 10,800 20,800
Department C 39,000 x 30/130 42,000 x 40/140
= 9,000 = 12,000 21,000
63,800
Question 12
Department X sells goods to Department Y at a profit of 25% on cost and to Department Z at 10% profit on
cost. Department Y sells goods to X and Z at a profit of 15% and 20% on sales, respectively. Department Z
charges 20% and 25% profit on cost to Department X and Y, respectively. Department Managers are entitled
to 10% commission on net profit subject to unrealized profit on departmental sales being eliminated.
Departmental profits after charging Managers’ commission, but before adjustment of unrealized profit are as
under:
`
Department X 36,000
Department Y 27,000
Department Z 18,000
Dept. X Dept. Y Dept. Z
` ` `
Transfer from Department X — 15,000 11,000
Transfer from Department Y 14,000 — 12,000
Transfer from Department Z 6,000 5,000 —
Find out the correct departmental Profits after charging Managers’ commission
(Study Material)
Answer
Calculation of correct Profits
X Y Z
` ` `
Profit after charging managers’ commission 36,000 27,000 18,000
Add back: Managers’ commission (1/9) 4,000 3,000 2,000
40,000 30,000 20,000
Less: Unrealised profit on stock (Working Note) (4,000) (4,500) (2,000)
Profit before Manager’s commission 36,000 25,500 18,000
Less: Commission for Department
Manager @ 10% (3,600) (2,550) (1,800)
Departmental Profits after manager’s commission 32,400 22,950 16,200
12.12
Working Note:
Stock lying with
Dept. X Dept. Y Dept. Z Total
` ` ` `
Unrealised Profit of:
Department X 1/5×15,000 1/11×11,000 4,000
=3,000 =1,000
Department Y 0.15×14,000 0.20×12,000 4,500
=2,100 =2,400
Department Z 1/6×6,000 =1,000 1/5×5,000 2,000
=1,000
Question 13
Department R sells goods to Department S at a profit of 25% on cost and Department T at 10% profit on cost.
Department S sells goods to R and T at a profit of 15% and 20% on sales respectively. Department T charges
20% and 25% profit on cost to Department R and S respectively.
Department managers are entitled to 10% commission on net profit subject to unrealized profit on
departmental sales being eliminated. Departmental profits after charging manager’s commission, but before
adjustment of unrealized profit are as under:
`
Department R 54,000
Department S 40,500
Department T 27,000
Deptt. R Deptt. S Deptt. T
` ` `
Transfer from Department R - 22,500 16,500
Transfer from Department S 21,000 - 18,000
Transfer from Department T 9,000 7,500 -
Find out the correct departmental profits after charging manager’s commission.
(Study Material)
Answer
Correct departmental profits
Departments
R S T
` ` `
Profit before adjustment of unrealised profits 54,000 40,500 27,000
Add : Managerial commission (1/9) 6,000 4,500 3,000
60,000 45,000 30,000
Less: Unrealised profit on stock (Refer W.N.) (6,000) 6,750) (3,000)
54,000 38,250 27,000
Less: Managers’ commission @ 10% (5,400) (3,825) (2,700)
Profit after adjustment of unrealised profits 48,600 34,425 24,300
12.13
Working Notes:
Value of unrealised profit
`
Transfer by department R to
S department (22,500 ×25/125) = 4,500
T department (16,500 ×10/110) = 1,500 6,000
Transfer by department S to
R department (21,000 × 15/100) = 3,150
T department (18,000 × 20/100) = 3,600 6,750
Transfer by department T to
R department (9,000 × 20/120) = 1,500
S department (7,500 × 25/125) = 1,500 3,000
Question 14
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:
Sawmill Furniture
` `
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 consist of 75 per cent wood and 25 per cent other expenses.
The Sawmill Department earned Gross Profit at 15 per cent in 20X1. General expenses of the business as a
whole came to ` 55,000.
Answer
Department Trading and Profit and Loss Account

Particulars Saw mill Furniture Particulars Saw mill Furniture
` ` ` `
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 furniture 1,50,000
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
12.14
General Profit & Loss Account
Particulars Amount ` Particulars Amount `
To general Expenses 55,000 By Net Profit from 2,60,000
Saw Mill Furniture 34,500
To stock reserve (WN2) 4,500 By stock reserve (opening WN-1) 2,813
To Net Profit 2,37,813
2,97,313 2,97,313
Working Notes:
1. Calculation of Stock Reserve (opening), assuming FIFO
` 25,000 x 75% wood x 15% = ` 2,813
2. Calculation of closing stock reserve
Gross Profit Rate of Saw Mill of 20X2:
` 2,70,000 / (12,00,000 + 1,50,000) x 100 = 20%
` 30,000x 75% x 20% = ` 4,500
Question 15
Martis Ltd. has several departments. Goods supplied to each department are debited to a Memorandum
Departmental Stock Account at cost, plus a fixed percentage (mark- up) to give the normal selling price. The
mark-up is credited to a memorandum departmental 'Mark-up account', any reduction in selling prices (mark-
down) will require adjustment in the stock account and in mark-up account. The mark up for Department A for
the last three years has been 25%. Figures relevant to Department A for the year ended 31st March, 20X2
were as follows:
Opening stock as on 1st April, 20X1, at cost ` 65,000
Purchase at cost ` 2,00,000
Sales ` 3,00,000
It is further ascertained that :
(1) Shortage of stock found in the year ending 31.03.20X2, costing ` 1,000 were written off.
(2) Opening stock on 01.04.20X1 including goods costing ` 6,000 had been sold during the year and bad
been marked down in the selling price by ` 600. The remaining stock had been sold during the year.
(3) Goods purchased during the year were marked down by ` 1,200 from a cost of
` 15,000. Marked-down stock costing ` 5,000 remained unsold on 31.03.20X2.
(4) The departmental closing stock is to be valued at cost subject to adjustment for mark-up and mark-down.
You are required to prepare:
(i) A Departmental Trading Account for Department A for the year ended 31st March, 20X2 in the books of
Head Office.
(ii) A Memorandum Stock Account for the year.
(iii) A Memorandum Mark-up Account for the year.
(Study Material)
Answer
(i) Department Trading Account
For the year ending on 31.03.20X2 in the books of Head Office
To Purchases 2,00,000 By Shortage 1,000
To Gross Profit c/d (b.f.) 58,880 By Closing Stock 22,880
3,23,880 3,23,880
12.15
(ii) Memorandum stock account (for Department A) (at selling price)
To Balance b/d (` 65,000+ 25% of ` 81,250 By Profit & Loss A/c (Cost of 1,000
65,000) Shortage)
To Purchases (` 2,00,000+ 25% of ` 2,50,000 By Memorandum Departmental Mark- 250
2,00,000) up A/c (Load on Shortage) (` 1,000
x 25%)
By Memorandum Departmental Mark- 1,200
up A/c (Mark-down on Current
Purchases)
By Debtors A/c (Sales) 3,00,000
By Memorandum Departmental 600
Mark-up A/c (Mark Down on
Opening Stock)
By Balance c/d (b.f.) 28,200
3,31,250 3,31,250
(iii) Memorandum Departmental Mark-up Account
To Memorandum Departmental Stock 250 By Balance b/d 16,250
A/c (` 1,000 × 25/100) (` 81,250 x 25/125)
To Memorandum Departmental Stock A/c 1,200 By Memorandum Departmental Stock 50,000
A/c
To Memorandum Departmental Stock A/c 600 (` 2,50,000 x 25/125)
To Gross Profit transferred to Profit & Loss 58,880
A/c
To Balance c/d [(` 28,200
+ 400*) x 25/125 - ` 400] 5,320
66,250 66,250
*[` 1,200 ×5,000/15,000] = ` 400
Working Notes:
(i) Calculation of Cost of Sales
`
A Sales as per Books 3,00,000
B Add: Mark-down in opening stock (given) 600
C Add: mark-down in sales out of current Purchases (` 1,200 x 10,000 /15,000) 800
D Value of sales if there was no mark-down (A+B+C) 3,01,400
E Less: Gross Profit (25/125 of ` 3,01,400) subject to Mark Down (` 600 + ` 800) (60,280)
F Cost of sales (D-E) 2,41,120
(ii) Calculation of Closing Stock
`
A Opening Stock 65,000
B Add: Purchases 2,00,000
C Less: Cost of Sales (2,41,120)
D Less: Shortage (1,000)
E Closing Stock (A+B-C-D) 22,880
Note: It has been assumed that mark up (given in question) is determined as a percentage of cost.
12.16
Test Your Knowledge

MCQs
1. Departmental accounting helps in
(a) Evaluation of trading results of each department separately.
(b) Effective planning and control on each department.
Answer: (c)
2. Selling commission expense is apportioned among departments in the proportion of
(a) Average stock carried by each department.
(b) Number of units sold by each department.
(c) Sales of each department.
Answer: (c)
3. If Department A transfers goods to Department B at a price of 50% above cost, what will be the amount
of stock reserve on unsold stock worth `9,000 of Department B?
(a) 3,000.
(b) 4,500.
(c) 1,500.
Answer: (a)
4. Goods and services may be charged by one department to another on
(a) Market price.
(b) Cost plus agreed percentage of profit.
Answer: (c)
5. Administrative expenses are apportioned among various departments on basis of
(a) Time spent by employees in each department.
(b) Value of assets of each department.
Answer: (a)
6. Depreciation on assets is apportioned among various departments on basis of
(a) Value of assets of each department.
(b) Purchases of each department.
Answer: (a)
7. Expense of rent is apportioned among various departments on basis of
(a) Sales of each department.
(b) Floor area occupied by each department.
(c) Either (a) or (b).
Answer: (b)
8. When profit is added in inter-departmental transfers, unrealised profit included in the closing stock at the
year end (before preparing final accounts) is eliminated by
(a) Creating an appropriate stock reserve.
(b) Debiting the combined profit and loss account.
Answer: (c)
9. If an organisation is interested in determining the separate departmental net profit, then
(a) Accounts of all departments are kept in one book only.
(b) Separate set of books are kept for each department.
(c) Departments transfer goods to each other for further processing.
Answer: (b)
12.17
10. M/s XYZ is a departmental Store having 2 departments A and B. M/s XYZ paid ` 4,00,000/- towards
interest on loan (loan taken for the business). Please advise the basis of allocation of interest expenses
between the departments.
(a) Allocated on basis of Sales of each department.
(b) Allocated on basis of value of assets of each department.
(c) Not allocated to individual department, recognized in the combined Profit and Loss account.
Answer: (c)
11. Which of the following is not the one of the basis generally used by departments to make the inter-
departmental transfer of goods:
(a) Cost
(b) Cost plus % of profit
(c) Variable Cost
Answer: (c)
12. Which of the following expenses may not be proportioned amongst the departments using any suitable
basis:
(a) Carriage Inward
(b) Profit on Sale of Investments
(c) Labour welfare expenses
Answer: (b)
12.18
Chap. 12  Departmental Accounts
QUESTION BANK
Question 16
Axe Limited has four departments, A, B, C and D. Department A sells goods to other departments at a profit
of 25% on cost. Department B sells goods to other department at a profit of 30% on sales. Department C sells
goods to other departments at a profit of 10% on cost, Department D sells goods to other departments at a
profit of 15% on sales.
Stock lying at different departments at the year-end was as follows:
Department Department Department Department
A B C D
Transfer from Department A — 45,000 50,000 60,000
Transfer from Department B 50,000 — — 75,000
Transfer from Department C 33,000 22,000 — —
Transfer from Department D 40,000 10,000 65,000 —
Departmental managers are entitled to 10% commission on net profit subject to unrealized profit on
departmental sales being eliminated.
Departmental profits after charging manager's commission, but before adjustment of unrealized profit are as
under:
Department A 2,25,000
Department B 3,37,500
Department C 1,80,000
Department D 4,50,000
Calculate the correct departmental profits after charging Manager's commission.
Answer:
Calculation of correct departmental Profits
Department Department Department Department
A B C D
` ` ` `
Profit after charging 2,25,000 3,37,500 1,80,000 4,50,000
managers’ commission
Add back: Managers’ 25,000 37,500 20,000 50,000
commission (1/9)
2,50,000 3,75,000 2,00,000 5,00,000
Less: Unrealized profit on stock 31,000 37,500 5,000 17,250
(Working Note)
Profit before Manager’s 2,19,000 3,37,500 1,95,000 4,82,750

commission
Less: Commission for Department 21,900 33,750 19,500 48,275
Manager @ 10%
Correct Departmental Profits after
manager’s commission 1,97,100 3,03,750 1,75,500 4,34,475
12.19
Working Note:
Stock lying with
Dept. A Dept. B Dept. C Dept. D Total
` ` ` `
Unrealized Profit
of:
Department A 45,000 x 50,000 x 60,000 x 31,000
25/125 25/125 25/125
= 9,000 =10,000 = 12,000
Department B 50,000 x 0.3 75,000 x 0.3 37,500
= 15,000 = 22,500
Department C 33,000 x 22,000 x 5,000

10/110 10/110 =
= 3,000 2,000
Department D 40,000 x 0.15 10,000 x 0.15 65,000 x 0.15 17,250
= 6,000 = 1,500 = 9,750
Question 17
M/s. Delta is a Departmental Store having three departments X, Y and Z. The information regarding three
departments for the year ended 31st March, 2018 are given below:
Particulars Dept. X Dept. Y Dept. Z
Opening Stock 18,000 12,000 10,000
Purchases 66,000 44,000 22,000
Debtors at end 7,500 5,000 5,000
Sales 90,000 67,500 45,000
Closing Stock 22,500 8,750 10,500
Value of furniture in each Department 10,000 10,000 5,000
Floor space occupied by each Dept. (in sq. ft.) 1,500 1,250 1,000
Electricity consumed by each Department 300 200 100
(in units)
Amount (`)
Salaries 24,000
Advertisement 2,700
Electricity Expenses 3,000
Prepare Departmental Trading and Profit & Loss Account for the year ended 31st March, 2018 after providing
provision for Bad Debts at 5%.
(May 2018) (10 Marks)
12.20
Answer
In the Books of M/s Delta
Departmental Trading and Profit and Loss Account
for the year ended 31st March, 2018
Particulars Deptt Deptt DepttZ Total Particulars Deptt Deptt Deptt Z Total
X Y X Y
` ` ` ` ` ` ` `
To Stock (opening) 18,000 12,000 10.000 40,000 By Sales 90,000 67,500 45,000 2,02,500
To Purchases 66,000 44,000 22,000 1,32,000 By Stock (closing) 22,500 8,750 10,500 41,750
To Carriage Inwards 750 500 250 1,500
To Gross Profit c/d (b.f.) 27,750 19,750 23,250 70,750
1,12,500 76,250 55,500 2,44,250 1,12,500 76,250 55,500 2,44,250
To Carriage Outwards 1,200 900 600 2,700 By Gross Profit b/d 27,750 19,750 23,250 70,750
received
To Salaries 10,000 8,000 6,000 24,000
To Rent, Rates and Taxes 3,000 2,500 2,000 7,500
To Provision for Bad Debts 375 250 250 875
@ 5% of debtors
To Labour welfare expenses 1,000 800 600 2,400
To Net Profit (b.f.) 8,975 4,850 12,300 26,125
28,650 20,350 23,550 72,550 28,650 20,350 23,550 72,550
Working Note:
Provision for bad debts Debtors balances (3:2:2)
Question 18
The following balances were extracted from the books of M/s Division. You are required to prepare
Departmental Trading Account and Profit and Loss account for the year ended 31st December, 2018 after
adjusting the unrealized department profits if any.
Deptt. A Deptt. B
` `
Opening Stock 50,000 40,000
Purchases 6,50,000 9,10,000
Sales 10,00,000 15,00,000
12.21
General expenses incurred for both the departments were ` 1,25,000 and you are also supplied with the
following information: (a) Closing stock of Department A ` 1,00,000 including goods from Department B for `
20,000 at cost of Department A. (b) Closing stock of Department B ` 2,00,000 including goods from
Department A for ` 30,000 at cost to Department B. (c) Opening stock of Department A and Department B
include goods of the value of ` 10,000 and ` 15,000 taken from Department B and Department A respectively
at cost to transferee departments. (d) The rate of gross profit is uniform from year to year.
(RTP May 2019)
Answer:
Departmental Trading and Loss Account of M/s Division
For the year ended 31st December, 2018
Deptt. A Deptt. B Deptt. A Deptt. B
` ` ` `
To Opening stock 50,000 40,000 By Sales 10,00,000 15,00,000
To Purchases 6,50,000 9,10,000 By Closing
To Gross profit 4,00,000 7,50,000 stock 1,00,000 2,00,000
11,00,000 17,00,000 11,00,000 17,00,000
To General Expenses By Gross profit 4,00,000 7,50,000
(in ratio of sales) 50,000 75,000
To Profits/f to general 3,50,000 6,75,000
profit and loss account
4,00,000 7,50,000 4,00,000 7,50,000
` `
To Stock reserve required (additional: By Profit from:
Stock in Deptt. A Deptt. A 3,50,000
50% of (` 20,000 - ` 10,000) (W.N.1) 5,000 Deptt. B 6,75,000
Stock in Deptt. B
40% of (` 30,000 - ` 15,000) (W.N.2) 6,000
10,25,000 10,25,000
Working Notes:
1. Stock of department A will be adjusted according to the rate applicable to department B = [(7,50,000
÷ 15,00,000) х 100] = 50%
2. Stock of department B will be adjusted according to the rate applicable to department A = [(4,00,000
÷ 10,00,000) х 100] = 40%
Question 19
Deptt. A Deptt. B
` `
Purchases 6,50,000 9,10,000
Sales 10,00,000 15,00,000
12.22
at cost to transferee departments, (d) The rate of gross profit is uniform from year to year.
(RTP November 2018)
Answer:
Departmental Trading and Profit and Loss Account of M/s Division
` ` ` `
To Purchases 6,50,000 9,10,000 By Closing 1,00,000 2,00,000
To Gross profit 4,00,000 7,50,000 stock
11,00,000 17,00,000 11,00,000 17,00,000
To General Expenses (in 50,000 75,000 By Gross 4,00,000 7,50,000
ratio of sales) profit
To Profits to general profit 3,50,000 6,75,000
and loss account
4,00,000 7,50,000 4,00,000 7,50,000
` `
To Stock reserve required (additional) 5,000 By Profit from:
Stock in Deptt. A 6,000 Deptt. A 3,50,000
50% of (` 20,000 - ` 10,000) (W.N.1) 10.14,000 Deptt. B 6,75,000
Stock in Deptt. B
40% of (` 30,000 - ` 15,000) (W.N.2)
To Net Profit
10,25,000 10,25,000
Working Notes:
1. Stock of department A will be adjusted according to the rate gross profit applicable to department B =
[(7,50,000 + 15,00,000) × 100] = 50%
2. Stock of department B will be adjusted according to the gross profit rate applicable to department A =
[(4,00,000 + 10,00,000) × 100] = 40%
Question 20
Following is the Trial Balance of Mr. Mohan as on 31.03.2017:
Particulars Debit (`) Credit (`)
Capital Account 40,000
Drawing Account 1,500
Opening Stock Department A 8,500
Department B 5,700
Department C 1,200
Purchases Department A 22,000
Department B 17,000
Department C 8,000
Sales Department A 54,000
Department B 33,000
Department C 21,000
12.23
Sales Returns Department A 4,000
Department B 3,000
Department C 1,000
Freight and Carriage Department A 1,400
Department B 800
Department C 200
Furniture and fixtures 4,600
Plant and Machinery 20,000
Motor Vehicles 40,000
Sundry Debtors 12,200
Sundry Creditors 15,000
Salaries 4,500
Power and water 1,200
Telephone charges 2,100
Bad Debts 750
Rent and taxes 6,000
Insurance 1,500
Wages Department A 800
Department B 550
Department C 150
Printing and Stationeries 2,000
Advertising 3,500
Bank Overdraft 12,000
Cash in hand 850
1,75,000 1,75,000
You are required to prepare Department Trading, Profit and Loss Account and the Balance Sheet taking into
account the following adjustments:
(a) Outstanding Wages: Department B - ` 150, Department C - ` 50.
(b) Depreciate Plant and Machinery and Motor Vehicles at the rate of 10%.
(c) Each Department shall share all expenses in proportion to their sales.
(d) Closing Stock: Department A - ` 3,500, Department B - ` 2,000, Department C - `1,500.
(RTP May 2018)
Answer:
Trading and Profit and Loss Account
for the year ended on 31st Match, 2017
(`) (`) (`) (`) (`) (`)
To Opening Stock 8,500 5,700 1,200 By Sales less 50,000 30,000 20,000
Sales returns
To Purchases 22,000 17,000 8,000 By Closing Stock 3,500 2,000 1,500
To Freight & carriage 1,400 800 200

To Wages 800 700 200
To Gross profit 20,800 7,800 11,900
53,500 32,000 21,500 53,500 32,000 21,500
12.24
(`) (`) (`) (`) (`) (`)
To Salaries 2,250 1,350 900 By Gross Profit 20,800 7,800 11,900
To Power & Water 600 360 240 By Net Loss — 465 —
To Telephone 1,050 630 420
Charges
To Bad Debts 375 225 150
To Rent & Taxes 3,000 1,800 1,200
To Insurance 750 450 300
To Printing & 1,000 600 400
Stationery
To Advertising 1,750 1,050 700
To Depreciation 3,000 1,800 1,200
(2,000 + 4,000)
To Net Profit 7,025 6,390
20,800 8,265 11,900 20,800 8,265 11,900
Balance Sheet as at 31.03.2017
Liabilities ` ` Assets ` `
Capital A/c 40,000 Furniture & Fixtures 4,600
Add: Net Profit Plant & Machinery 20,000
(` 7,025 + ` 6,390) 13,415
53,415 Less: Depreciation 2,000 18,000
Less: Net loss in Dept B 465 Motor Vehicles 40,000
Less: Drawings 1,500 51,450 Sundry Debtors 12,200
Sundry Creditors 15,000 Cash in hand 850
Bank Overdraft 12,000 Closing Stock 7,000
Wages Outstanding 200
78,650 78,650
Note: All expenses have been allocated among departments in proportion of their sales in the solution as per
the specific requirement of the question.
Question 21
Deptt. A Deptt. B
` `
Purchases 6,50,000 9,10,000
Sales 10,00,000 15,00,000
at cost to transferee departments. (d) The rate of gross profit is uniform from year to year.
12.25
Answer:
Departmental Trading and Loss Account of M/s Division
` ` ` `
To Purchases 6,50,000 9,10,000 By Closing stock
To Gross profit 4,00,000 7,50,000 1,00,000 2,00,000
11,00,000 17,00,000 11,00,000 17,00,000
To General By Gross profit 4,00,000 7,50,000
Expenses
(in ratio of sales) 50,000 75,000
To Profit ts/f to general 3,50,000 6,75,000
profit and loss account
4,00,000 7,50,000 4,00,000 7,50,000
` `
To Stock reserve required (additional: By Profit from:
Stock in Deptt. A Deptt. A 3,50,000
50% of (` 20,000 - ` 10,000) (W.N.1) 5,000 Deptt. B 6,75,000
Stock in Deptt. B
40% of (` 30,000 - ` 15,000) (W.N.2) 6,000
To Net Profit 10,14,000 ________
10,25,000 10,25,000
Working Notes:
1. Stock of department A will be adjusted according to the rate appli cable to department B =
[(7,50,000 ÷ 15,00,000) х 100] = 50%
2. Stock of department B will be adjusted according to the rate applicable to department A =
[(4,00,000 ÷ 10,00,000) х 100] = 40%
Question 22
Department B 5,700
Department C 1,200
Department B 17,000
Department C 8,000
Department B 33,000
Department C 21,000
Department B 3,000
Department C 1,000
12.26
Department B 800
Department C 200
Salaries 4,500
Bad Debts 750
Insurance 1,500
Department B 550
Department C 150
Advertising 3,500
Cash in hand 850 _______
1,75,000 1,75,000
(a) Outstanding Wages: Department B- ` 150, Department C – ` 50.
(d) Closing Stock: Department A - ` 3,500, Department B - ` 2,000, Department C - ` 1,500.
Answer:
for the year ended on 31st March, 2017
Particulars A (`) B (`) C (`) Particulars A (`) B (`) C (`)
Sales returns
To Wages 800 700 200
To Gross profit 20,800 7,800 11,900 ______ ______ ______
53,500 32,000 21,500 53,500 32,000 21,500
To Power & Water 600 360 240 By Net Loss - 465 -
To Telephone Charges 1,050 630 420
To Rent & Taxes 3,000 1,800 1,200
12.27
Particulars A (`) B (`) C (`) Particulars A (`) B (`) C (`)
To Printing & 1,000 600 400
Stationery
To Depreciation 3,000 1,800 1,200
(2,000 +4,000)
To Net Profit 7,025 _____ 6,390 ______ ______ ______
20,800 8,265 11,900 20,800 8,265 11,900
Add: Net Profit Plant & Machinery 20,000
(` 7,025 + ` 6,390) 13,415
53,415
Less: Net loss in Dept B 465 Less: Depreciation 2,000 18,000
52,950 Motor Vehicles 40,000
Less: Drawings 51,450 Sundry Debtors 12,200
Wages Outstanding 200 _____
78,650 78,650
Note: All expenses have been allocated among departments in proportion of their sales in the solution as per
the specific requirement of the question.
Question 23
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 2018:
Sawmill Furniture
` `
Opening Stock on 1st January, 2018 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 --
Wages 30,000 10,000
Clsong Stock on 31st December, 2018 1,00,000 30,000
The value of stocks in the furniture department consist of 75% wood and 25% other expenses. The Sawmill
Department earned Gross Profit at 15 % on sales in 2017. General expenses of the business as a whole
came to ` 55,000. The firm adopts FIFO method for assigning costs to inventories.
(RTP November 2019)
12.28
Answer
Departmental Trading and Profit and Loss Account
Particulars Sawmill Furniture Particulars Sawmill Furniture
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 department
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 10,000 3,000 By Gross profit 2,70,000 37,500
expenses
To Net Profit 2,60,000 34,500
2,70,000 37,500 2,70,000 37,500
General Profit & Loss Account
To General Expenses 55,000 By Net Profit from
To Stock reserve (WN-2) 4,500 Saw Mill 2,60,000
To Net Profit 2,37,813 Furniture 34,500
By stock reserve (opening WN-1) 2,813
2,97,313 2,97,313
Working Notes
1. Calculation of Stock Reserve (opening)
25,000 x 75% wood x 15% = ` 2,813
2. Calculation of closing stock reserve
Gross profit Rate of Saw Mill of 2018
2,70,000 / (12,00,000 + 1,50,000) x 100 = 20%
30,000x 75% x 20% = ` 4,500
Question 24
The following balances were extracted from the books of Beta. You are required to prepare Departmental
Trading Account and general Profit & Loss Account for the year ended 31st December, 2018:
Particulars Deptt. A Deptt. B
` `
Opening Stock 3,00,000 2,40,000
Purchases 39,00,000 54,60,000
Sales 60,00,000 90,00,000
General expenses incurred for both the Departments were `7,50,000 and you are also supplied with the
following information:
(i) Closing stock of Department A `6,00,000 including goods from Department B for `1,20,000 at cost to
Department A.
(ii) Closing stock of Department B `12,00,000 including goods from Department A for `1,80,000 at cost
to Department B.
(iii) Opening stock of Department A and Department B include goods of the value of `60,000 and
`90,000 taken from Department B and Department A respectively at cost to transferee departments.
(iv) The gross profit is uniform from year to year.
12.29
Answer
Departmental Trading Account for the year ended on 31st December, 2018
Particulars A B Particulars A B
` ` ` `
To Opening Stock 3,00,000 2,40,000 By Sales 60,00,000 90,00,000
To Purchases 39,00,000 54,60,000 By Closing Stock 6,00,000 12,00,000
To Gross Profit 24.00.000 45.00.000
66,00,000 1,02,00,000 66,00,000 1,02,00,000
General profit and loss account of Beta for the year ended on 31st December, 2018
` `
To General expenses* 7,50,000 By Stock reserve (opening stock)
To Stock reserve (Closing Dept. A 30,000
Stock)
Dept. A 60,000 Dept. B 36,000
Dept. B 72.000 By Gross Profit
To Net Profit 60,84,000 Dept. A 24,00,000
Dept. B 45,00,000
69,66,000 69,66,000
* General expenses have not been allocated to individual department and are charged to General Profit
and Loss Account.
Working Notes:
Dept. A Dept. B
1. Percentage of Profit 24,00,000/60,00,000x 100 45,00,000/90,00,000 x 100
40% 50%
2. Opening Stock reserve 60,000 x 50% = 30,000 90,000x40% = 36,000
3. Closing Stock reserve 1,20,000 x 50%=60,000 1,80,000x40% = 72,000
Question 25
(a) How will you allocate the following expenses among different departments:
(i) Rent, rates and taxes, repairs and maintenance, insurance of building;
(ii) Maintenance of capital assets
(iii) PF/ESI contributions
(iv) Carriage inward/ Discount received
(v) Lighting and Heating expenses
(b) There is transfer/sale among the three departments as below:
Department X sells goods to Department Y at a profit of 25% on cost and to Department Z at 20%
profit on cost.
Department Y sells goods to X and Z at a profit of 15% and 20% on sales respectively.
Department Z charges 20% and 25% profit on cost to Departments X and Y respectively.
Department Managers are entitled to 10% commission on net profit subject to urealised profit on
departmental sales being eliminated.
12.30
Departmental profits after charging Managers' commission, but before adjustment of unrealised profit
are as under:
`
Department X 1,80,000
Department Y 1,35,000
Department Z 90,000
Stocks lying at different Departments at the end of the year are as under:
Transfer from Department X - 75,000 57,000
Transfer from Department Y 70,000 - 60,000
Transfer from Department Z 30,000 25,000 -
Find out the correct departmental profits after charging Managers' commission.
[RTP May 2020]
Answer
(a) (i) Floor area occupied by each department (if given) otherwise on time basis;
(ii) Value of assets of each department otherwise on time basis;
(iii) Wages and salaries of each department;
(iii) Purchases of each department;
(iv) Consumption of energy by each department.
(b) Calculation of Correct Profit
X Y Z
` ` `
Profit after charging managers’ commission 1,80,000 1,35,000 90,000
Add back: Managers’ commission (1/9) 20,000 15,000 10,000
2,00,000 1,50,000 1,00,000
Less: Unrealized profit on stock (W.N.) (24,500) (22,500) (10,000)
Profit before Manager’s commission 1,75,500 1,27,500 90,000
Less: Commission for Department
Manager @ 10% (17,550) (12,750) (9,000)
Departmental Profits after manager’s
commission 1,57,950 1,14,750 81,000
Working Note:
Stock lying with
` ` ` `
Unrealized Profit of:
Department X 1/5×75,000 20/120×57,000 24,500
= 15,000 = 9,500
Department Y 0.15×70,000 0.20×60,000 22,500
= 10,500 = 12,000
Department Z 20/120×30,000 25/125×25,000 10,000
= 5,000 = 5,000
12.31
Question 26
The books of account of Mr. Maan of Mumbai showed the following figures:
31.3.2018 31.3.2019
` `
Furniture & fixtures 2,60,000 2,34,000
Stock 2,45,000 3,20,000
Debtors 1,25,000 ?
Cash in hand & bank 1,10,000 ?
Creditors 1,35,000 1,90,000
Bills payable 70,000 80,000
Outstanding salaries 19,000 20,000
An analysis of the cash book revealed the following:
`
Cash sales 16,20,000
Collection from debtors 10,58,000
Discount allowed to debtors 20,000
Cash purchases 6,15,000
Payment to creditors 9,73,000
Discount received from creditors 32,000
Payment for bills payable 4,30,000
Drawings for domestic expenses 1,20,000
Salaries paid 2,36,000
Rent paid 1,32,000
Sundry trade expenses 81,000
Depreciation is provided on furniture & fixtures @10% p.a. on diminishing balance method. Mr. Maan
maintains a steady gross profit rate of 25% on sales.
You are required to prepare Trading and Profit and Loss account for the year ended 31st March, 2019 and
Balance Sheet as on that date.
[RTP May 2020]
Answer
Trading & Profit and Loss Account In the books of Mr. Maan for the year ended 31st March, 2019
` `
To Opening stock 2,45,000 By Sales:
To Purchases: Cash 16,20,000
Cash 6,15,000 Credit (W.N.3) 11,00,000
Credit (W.N. 2) 15,00,000 By Closing stock 3,20,000
To Gross profit c/d 6,80,000
30,40,000 30,40,000
12.32

` `
To Salaries (W.N.5) 2,37,000 By Gross profit b/d 6,80,000
To Rent 1,32,000 By Discount received 32,000
To Sundry trade expenses 81,000
To Discount allowed 20,000
To Depreciation on furniture & fixtures
26,000
To Net profit 2,16,000
7,12,000 7,12,000
Balance Sheet as at 31st March, 2019
Liabilities Amount Amount
` `
Capital Fixed assets
Opening balance (W.N.7) 5,16,000 Furniture & fixtures 2,34,000
Add: Net profit 2,16,000 Current assets:
7,32,000 Stock 3,20,000
Less: Drawings 1,20,000 6,12,000 Debtors (W.N.4) 1,47,000
Current liabilities & provisions: Cash & bank (W.N.6) 2,01,000
Creditors 1,90,000
Bills payable 80,000
Outstanding salaries 20,000
9,02,000 9,02,000
Working Notes:
1. Bills Payable Account
` `
To Cash/Bank 4,30,000 By Balance b/d 70,000
To Balance c/d 80,000 By Trade creditors (Bal. fig.) 4,40,000
5,10,000 5,10,000
2. Creditors Account
` `
To Cash/Bank 9,73,000 By Balance b/d 1,35,000
To Bills payable A/c (W.N.1) 4,40,000 By Credit purchases (Bal. fig.) 15,00,000
To Discount received 32,000
16,35,000 16,35,000
12.33
3. Calculation of credit sales
`
Opening stock
Add: Purchases 2,45,000
Cash purchases 6,15,000
Credit purchases 15,00,000 21,15,000
23,60,000
Less: Closing Stock 3,20,000
Cost of goods sold 20,40,000
Gross profit ratio on sales 25%
 100  27,20,000
Total sales `20,40,000 ×
 75 
Less: Cash sales 16,20,000
Credit sales 11,00,000
4. Debtors Account
` `
To Balance b/d 1,25,000 By Cash/Bank 10,58,000
To Credit sales (W.N.3) 11,00,000 By Discount allowed 20,000
By Balance c/d (Bal. fig.) 1,47,000
12,25,000 12,25,000
5. Salaries
`
Salaries paid during the year 2,36,000
Add: Outstanding salaries as on 31.3.2019 20,000
2,56,000
Less: Outstanding salaries as on 31.03.2018 19,000
2,37,000
6. Cash / Bank Account
` `
To Balance b/d 1,10,000 By Cash purchases 6,15,000
To Cash sales 16,20,000 By Creditors 9,73,000
To Debtors 10,58,000 By Bills payable 4,30,000
By Drawings 1,20,000
By Salaries 2,36,000
By Rent 1,32,000
By Sundry trade expenses 81,000
_________ By Balance c/d 2,01,000
27,88,000 27,88,000
12.34
7. Balance Sheet as at 31st March, 2018
` `
Creditors 1,35,000 Furniture & fixtures 2,60,000
Bills payable 70,000 Stock 2,45,000
Outstanding salaries 19,000 Debtors 1,25,000
Capital (Bal. fig.) 5,16,000 Cash & bank 1,10,000
7,40,000 7,40,000
Question 27
ABC Ltd. has several departments. Goods supplied to each department are debited to a Memorandum
Departmental Stock Account at cost plus a fixed percentage (mark-up) to give the normal selling price. The
amount of mark-up is credited to a Memorandum Departmental Markup account. If the selling price of goods
is reduced below its normal selling prices, the reduction (mark-down) will require adjustment both in the stock
account and the mark-up account. The mark-up for depart merit X for the last three years has been 20%.
Figures relevant to department X for the year ended 3lst March, 2019 were as follows:
Stock as on 1st April, 2018, at cost `1,50,000
Purchases at cost `4,30,000
Sales `6,50,000
It is further ascertained that:
(1) Shortage of stock found in the year ending 31.3.2019, costing `4,000 were written off.
(2) Opening stock including goods costing `12,000 had been sold during the year and had been marked-
down in the selling price by `1,600. The remaining stock had been sold during the year.
(3) Goods purchased during the year were marked down by `3,600 from a cost of `30,000. Marked down
stock costing `10,000 remained unsold on 31.3.2019.
(4) The departmental closing stock is to be valued at cost subject to adjustment for mark-up and mark-
down.
You are required to prepare for the year ended 31st March, 2019:
(i) Departmental Trading Account for department X for the year ended 31st March, 2019 in the books of
head office.
(ii) Memorandum Stock Account for the year ended 31st March, 2019.
(iii) Memorandum Mark-Up account for the year ended 31st March, 2019.
Answer
(i) Department Trading Account for Department X for the year ending on 31.03.2019
In the books of Head Office
To Purchases 4,30,000 By Shortage 4,000
To Gross Profit c/d 1,05,000 By Closing Stock 31,000
6,85,000 6,85,000
(ii) Memorandum Stock Account (for Department X) (at selling price)
To Balance b/d (` 1,80,000 By Profit & Loss A/c (Cost of 4,000
1,50,000+20% of Shortage)
` 1,50,000)
12.35
To Purchases (` 5,16,000 By Memorandum Departmental Mark 800
4,30,000 + 20% up A/c (Load on Shortage) (`
of ` 4,30,000) 4,000 x 20%)
up A/c (Mark-down on Current
Purchases)
By Debtors A/c (Sales) 6,50,000
up A/c (Mark Down on Opening
Stock)
6,96,000 6,96,000
(iii) Memorandum Departmental Mark-up Account
To Memorandum Departmental 800 By Balance b/d (` 1,80,000 30,000
Stock A/c (` 4,000 × x 20/120)
20/100)
To Memorandum Departmental 3,600 By Memorandum 86,000
Stock A/c Departmental Stock A/c
To Memorandum Departmental 1,600 (` 5,16,000 x 20/120)
Stock A/c
To Gross Profit transferred to 1,05,000
Profit & Loss A/c
To Balance c/d [(` 36,000 +
1,200*) x 20/120 - ` 1,200]
5,000
1,16,000 1,16,000
*[` 3,600 ×10,000/30,000] = ` 1,200. Alternatively, this adjustment of ` 1,200 may be routed through
Memorandum Stock Account.
Working Notes:
(i) Calculation of Cost of Sales
`
A Sales as per Books 6,50,000
B Add: Mark-down in opening stock (given) 1,600
C Add: mark-down in sales out of current Purchases (` 3,600 x 2,400
20,000 /30,000)
D Value of sales if there was no mark-down (A+B+C) 6,54,000
E Less: Gross Profit (20/120 of ` 6,54,000) subject to Mark Down (1,09,000)
F Cost of sales (D-E) 5,45,000
12.36
(ii) Calculation of Closing Stock
`
A Opening Stock 1,50,000
B Add: Purchases 4,30,000
C Less: Cost of Sales (5,45,000)
D Less: Shortage (4,000)
E Closing Stock (A+B-C-D) 31,000
Question 28
Department X sells goods to Department Y at a profit of 50% on cost and to Department Z at 20% on cost.
Department Y sells goods to Department X and Z at a profit of 25% and 15% respectively on sales.
Department Z charges 30% profit on cost to Department X and 40 profit on sale to Y.
Stocks lying at different departments at the end of the year are as under:
` ` `
Transfer from Department X 75,000 48,000
Transfer from Department Y 50,000 82,000
Transfer from Department Z 52,000 56,000
Calculate the unrealized profit of each department and also total unrealized profit.
Answer
Calculation of unrealized profit of each department and total unrealized profit
` ` ` `
Department X 75,000 x 50/150 48,000 x 20/120
= 25,000 = 8,000 33,000
Department Y 50,000 x .25 82,000 x .15
= 12,500 = 12,300 24,800
Department Z 52,000 x 30/130 56,000 x 40/100
= 12,000 = 22,400 34,400
92,200
Question 29
Trading Account and general Profit & Loss Account for the year ended 31st March, 2020:
` `
Opening Stock 3,00,000 2,40,000
Purchases 39,00,000 54,60,000
Sales 60,00,000 90,00,000
12.37
General expenses incurred for both the Departments were ` 7,50,000 and you are also supplied with the
(i) Closing stock of Department A ` 6,00,000 including goods from Department B for ` 1,20,000 at cost
to Department A.
(ii) Closing stock of Department B ` 12,00,000 including goods from Department A for ` 1,80,000 at cost
to Department B.
(iii) Opening stock of Department A and Department B include goods of the value of ` 60,000 and
`90,000 taken from Department B and Department A respectively at cost to transferee departments.
(MTP, October, 2020) (MTP March, 2022) (8 Marks)
Answer
Departmental Trading Account for the year ended on 31st March, 2020
` ` ` `
To Gross Profit 24,00,000 45,00,000
66,00,000 1,02,00,000 66,00,000 1,02,00,000
General profit and loss account of Beta for the year ended on 31st March, 2020
` `
To General expenses 7,50,000 By Stock reserve (opening stock)
To Stock reserve (Closing Stock) Dept. A 30,000
Dept. A 60,000 Dept. B 36,000
Dept. B 72,000 By Gross Profit
Dept. B 45,00,000
69,66,000 69,66,000
Working Notes:
Dept. A Dept. B
Percentage of Profit 24,00,000/60,00,000 x 100 = 45,00,000/90,00,000 x 100 =
40% 50%
Opening Stock reserve 60,000 x 50% = 30,000 90,000 X 40% = 36,000
Closing Stock reserve 1,20,000 x 50% = 60,000 1,80,000 x 40% = 72,000
Question 30
XYZ Garage consists of 3 departments: Spares, Service and Re pairs, each department being managed by a
departmental manager whose commission was respectively 5%, 10% and 10% of the respective
departmental profit subject to a minimum of `5,000 in each case.
Inter departmental transfers take place at a “loaded” price as follows:
From Spares to Service 5% above cost
From Spares to Repairs 10% above cost
From Repairs to Service 10% above cost
12.38
In respect of the year ended March 31st 2019 the firm had already prepared and closed the departmental
trading and profit and loss account. Subsequently it was discovered that the closing stocks of department had
included inter-departmentally transferred goods at “loaded” price instead of the correct cost price.
From the following information, you are required to prepare a statement re-computing the departmental profit
or loss:
Spares Service Repairs
` ` `
Final Net Profit/Loss (after charging 38,000 50,400 72,000
commission) (Loss) (Profit) (Profit)
Inter-departmental transfers 65,000 4,202
Included at “loaded” price in (21,000 from (from Spares)
the departmental stocks Spares and 44,000
from Repairs)
Answer
Calculation of correct Departmental Profits or Losses
Department Spares Department Department
(`) Service (`) Repair (`)
Profit after charging Manager’s Commission (38,000) 50,400 72,000
Add: Manager’s Commission (1/9) 5,000(Minimum) 5,600 8,000
(33,000) 56,000 80,000
Less: Unrealized profit on Stock (WN) (1,382) (4,000)
Profit Before Manager’s Commission (34,382) 56,000 76,000
Less: Manager’s Commission 10% (5,000) (5,600) (7,600)
Correct Profit after Manager’s Commission (39,382) 50,400 68,400
Working Note:
Department Department Department Repair Total (`)
Spares (`) Service (`) (`)
Department Spares 21,000X5/105 4202X10/110 = 382 1,382
= 1,000
Department Repair 44000X10/110 4,000
= 4000
Question 31
Trading Account and General Profit & Loss Account for the year ended 31st December, 2020:
Rs. Rs.
Opening Stock 3,00,000 2,40,000
Purchases 39,00,000 54,60,000
Sales 60,00,000 90,00,000
General expenses incurred for both the Departments were Rs. 7,50,000 and you are also supplied with the
(i) Closing stock of Department A Rs. 6,00,000 including goods from Department B for Rs. 1,20,000 at
cost to Department A.
(ii) Closing stock of Department B Rs. 12,00,000 including goods from Department A for Rs. 1,80,000 at
cost to Department B.
12.39
(iii) Opening stock of Department A and Department B include goods of the value of Rs. 60,000 and Rs.
90,000 taken from Department B and Department A respectively at cost to transferee departments.
(MTP March, 2021) (8 Marks)
Answer
Departmental Trading Account for the year ended on 31st December, 2020
Rs. Rs. Rs. Rs.
To Gross Profit 24,00,000 45,00,000
66,00,000 1,02,00,000
66,00,000 1,02,00,000
General profit and loss account of Beta for the year ended on 31st December, 2020
Rs. Rs.
To General expenses 7,50,000 By Stock reserve (opening stock)
To Stock reserve (Closing Dept. A 30,000
Stock)
Dept. A 60,000 Dept. B 36,000
Dept. B 72,000 By Gross Profit
Dept. B 45,00,000
69,66,000 69,66,000
Working Notes:
Dept. A Dept. B
1. Percentage of Profit 24,00,000/60,00,000 x 100 45,00,000/90,00,000 x 100
40% 50%
2. Opening Stock reserve 60,000 x 50% = 30,000 90,000 X 40% = 36,000
3. Closing Stock reserve 1,20,000 x 50%=60,000 1,80,000 x 40% = 72,000
Question 32
X Ltd has three departments A, B and C. From the particulars given below compute: (i) the values of stock as
on 31st Dec. 2020 and (ii) the departmental results showing actual amount of gross profit.
A B C
Rs. Rs. Rs.
Stock (on 1.1. 2020) 24,000 36,000 12,000
Purchases 1,46,000 1,24,000 48,000
Actual sales 1,72,500 1,59,400 74,600
Gross Profit on normal selling price 20% 25% 33 1/3%

 General expenses have not been allocated to individual department and are charged to General Profit and Loss
Account.
12.40
During the year ended 31st Dec., 2020, certain items were sold at discount and these discounts were
reflected in the value of sales shown above. The items sold at discount were:
A B C
Rs. Rs. Rs.
Sales at normal price 10,000 3,000 1,000
Sales at actual price 7,500 2,400 600
(MTP April, 2021) (MTP April, 2022) (6 Marks)
Answer
Calculation of Departmental Results (Actual Gross Profit)
A (Rs.) B (Rs.) C (Rs.)
Actual Sales 1,72,500 1,59,400 74,600
Add back: Discount (Refer W.N.) 2,500 600 400
Normal sales 1,75,000 1,60,000 75,000
Gross profit % on normal sales 20% 25% 33.33%
Normal gross profit 35,000 40,000 25,000
Less: Discount (2,500) (600) (400)
Actual gross profit 32,500 39,400 24,600
Computation of value of stock as on 31st Dec., 2020
Departments A B C
Rs. Rs. Rs.
Stock (on 1.1. 2020) 24,000 36,000 12,000
Add: Purchases 1,46,000 1,24,000 48,000
1,70,000 1,60,000 60,000
Add: Actual gross profit 32,500 39,400 24,600
2,02,500 1,99,400 84,600
Less: Actual Sales (1,72,500) (1,59,400) (74,600)
Closing stock as on 31.12.2020 (bal.fig.) 30,000 40,000 10,000
Working Note:
Calculation of discount on sales:
Departments A B C
Rs. Rs. Rs.
Sales at normal price 10,000 3,000 1,000
Less: Sales at actual price (7,500) (2,400) (600)
2,500 600 400
Question 33
The firm, M/s. K Creations has two Departments, Dyed fabric and readymade garments. Readymade
garments are made by the firm itself.
Both dyed fabric and readymade garments have independent market. Some of readymade garment
department's requirement is supplied by Dyed Fabric Department at its usual Selling Price.
From the following figures, prepare Departmental Trading and Profit & Loss Account for the year ended 31st
March, 2021.
Particulars Dyed Fabric Readymade garments
Department department
Opening stock as on April 1, 2020 5,40,000 15,20,000
Purchases (excluding inter-department transfers) 20,12,080 1,50,00,000
12.41
Particulars Dyed Fabric Readymade garments
Department department
Sales (excluding inter-department transfers) 31,06,000 3,12,50,000
Transfer to Readymade garment 5,00,000 —
Direct wages 3,00,000 67,30,000
Direct expenses 1,00,000 19,50,000
Plant and Equipments for dyeing/stitching readymade 5,00,000 15,00,000
garments (WDV as on April 1, 2020)
Rent and warehousing 4,50,000 12,00,000
Stock as on March 31st, 2021 6,00,000 22,50,000
The following further information are available for necessary consideration:
(i) The Stock In Readymade garments department may be considered as consisting of 60% of dyed
fabric and 40% of Other Expenses.
(ii) The Dyed Fabric Department earned a Gross Profit @ 30% in 2019-2020.
(iii) On the plant and equipment, Depreciation @ 20% p.a. to be provided.
(iv) The following expenses incurred for both the departments were not apportioned between the
departments:
`
(a) Salaries 2,70,000
(b) Advertisement expenses 90,000
(c) General expenses 8,00,000
(v) Salaries in 1 : 2 ratio, Advertisement expenses in the turnover ratio and General expenses in 1 : 3
ratio are to be apportioned between· the Dyed Fabric Department and Readymade Department
respectively. (July 2021 Suggested) (10 Marks)
Answer
M/s K Creations
Departmental Trading and Profit & Loss Account For the Year Ended 31st March 2021
Particulars Dyed Fabric Readymade Total Particulars Dyed Fabric Readymade Total
Department Garments (`) Department Garments (`)
(`) Department (`) Department
(`) (`)
To Opening Stock 5,40,000 15,20,000 20,60,000 By Sales 31,06,000 3,12,50,000 3,43,56,000
To Purchases 20,12,080 1,50,00,000 1,70,12,080 By Transfer to 5,00,000 5,00,000
Readymade
Garments
To Transfer from Dyed 5,00,000 5,00,000 By Closing 6,00,000 22,50,000 28,50,000
Fabric Department Stock
To Direct Wages 3,00,000 67,30,000 70,30,000
To Direct Expenses 1,00,000 19,50,000 20,50,000
*
To Depreciation 1,00,000 3,00,000 4,00,000
To Gross Profit 11,53,920 75,00,000 86,53,920

Total 42,06,000 3,35,00,000 3,77,06,000 Total 42,06,000 3,35,00,000 3,77,06,000
To Rent and 4,50,000 12,00,000 16,50,000 By Gross 11,53,920 75,00,000 86,53,920
Warehousing Profit
To Salaries 90,000 1,80,000 2,70,000
To Advertisement 8,137 81,863 90,000
Expenses

* Shown here as it relates with property, plant & equipment used for dyeing/stitching garments.
12.42
Particulars Dyed Fabric Readymade Total Particulars Dyed Fabric Readymade Total
Department Garments (`) Department Garments (`)
(`) Department (`) Department
(`) (`)
To General Expenses 2,00,000 6,00,000 8,00,000
To Net Profit 4,05,783 54,38,137 58,43,920
Total 11,53,920 75,00,000 86,53,920 Total 11,53,920 75,00,000 86,53,920
Profit and Loss Account (Combined)

Particulars Amt (`) Particulars Amt (`)
To Unrealized Profit (WN) 1,58,400 By Net Profit 58,43,920
To General Net Profit 56,85,520
Total 58,43,920 Total 58,43,920
Calculation of Stock Reserve
Rate of Gross Profit of Dyed Fabric Department for the year 2020 -21
= 11, 53,920 X (31, 06,000+5, 00,000) X 100 = 32%
Closing stock of Dyed Fabric in Readymade Garments Department
= 22, 50,000 x 60% = ` 13, 50,000
Stock reserve required for unrealized profit @ 32% on closing stock
= 13, 50,000 x 32% = ` 4, 32,000
Stock reserve for unrealized profit included in opening stock of Readymade Garments Department = ` 15,
20,000 x 60% x 30% = ` 2, 73,600
Additional stock reserve required = ` 4, 32,000 - ` 2, 73,600 = ` 1, 58,400
Question 34
Below balances are taken from the records of M/s Big Shopping Complex for the year ended 31st March,
2020:
Details Department P (`) Department Q (`)
Opening Stock 1,00,000 80,000
Purchases 13,00,000 18,20,000
Sales 20,00,000 30,00,000
 Closing stock of Department P was ` 2,00,000 including goods transferred from Department Q for
` 40,000.
 Closing stock of Department Q was ` 4,00,000 including goods transferred from Department P for
` 60,000.
 Opening stock of Department P included goods for ` 20,000 transferred from Department Q and Opening
stock of Department Q included goods for ` 30,000 transferred from Department P.
 Assume that above transfer amounts are cost to the transferee departments and the rate of gross profit is
uniform from year to year.
 Total selling expenses incurred were ` 2,50,000 for both the departments.
From the above information, prepare Departmental Trading Account and Profit & Loss Account for the year
ended 31st March 2020, after adjusting the unrealized departmental profits, if any.
(RTP, May 2021)
12.43
Answer
Departmental Trading and Profit & Loss A/c for M/s Big Shopping Complex
For the year ended 31st March 2020
Details Deptt. P Deptt. Q Details Deptt. P Deptt. Q
(`) (`) (`) (`)
To Opening Stock To 1,00,000 80,000 By Sales 20,00,000 30,00,000
Purchases 13,00,000 18,20,000 2,00,000 4,00,000
To Gross Profit 8,00,000 15,00,000 By Closing Stock
22,00,000 34,00,000 22,00,000 34,00,000
To Selling Exp 1,00,000 1,50,000 By Gross Profit 8,00,000 15,00,000
(in ratio of sales)
To Profit transferred to 7,00,000 13,50,000
General P&L A/c
8,00,000 15,00,000 8,00,000 15,00,000
General Profit and Loss A/c for M/s Big Shopping Complex For the year ended 31st March 2020
Details Amount (`) Details Amount (`)
To Stock Reserve By Profit transferred from
Deptt. P WN 1 & 2 10,000 Deptt. P 7,00,000
50% x (40,000 – 20,000) Deptt. Q 13,50,000
Deptt. Q WN 1 & 3 12,000
40% x (60,000 – 30,000) 20,28,000
To Net Profit 20,50,000 20,50,000
Working Notes:
1. Gross Profit Ratios are: Deptt. P = 8,00,000 / 20,00,000 = 40% and of Deptt. Q = 15,00,000 / 30,00,000 =
50%.
2. Stock Reserve for Deptt. P shall be adjusted as per the gross profit ratio of Deptt. Q i.e. 50% (On Closing
Stock – Opening Stock)
3. Stock Reserve for Deptt. Q shall be adjusted as per the gross profit ratio of Deptt. P i.e. 40% (On Closing
Stock – Opening Stock)
Question 35
Department A sells goods to Department B at a profit of 20% on cost and to Department C at 50% on cost.
Department B sells goods to Department A and Department C at a profit of 15% and 10% on sales
respectively. Department C sells goods to Department A and Department B at a profit of 10% and 5% on cost
respectively.
Stock lying at different departments at the end of the year are as follows:
Department A Department B Department C
(`) (`) (`)
Transfer from Department A 1,14,000 60,000
Transfer from Department B 55,000 15,200
Transfer from Department C 52,800 1,11,300
Calculate Department wise unrealized profit on Stock.
12.44
Answer
Calculation of unrealized profit of each department
Dept. A Dept. B Dept. C Total
` ` ` `
Department A 1,14,000 x 20/120 = 60,000 x 50/150 39,000
19,000 = 20,000
Department B 55,000 x .15 = 8,250 15,200 x.10 9,770
= 1,520
Department C 52,800 x 10/110 1,11,300 x 5/105
= 4,800 5,300 10,100
Question 36
Darshan Ltd. purchased a Machinery on 1st April, 2016 for ` 130 lakhs (Useful life is 4 years).
Government grant received is ` 40 lakhs for the purchase of above Machinery. Salvage value at the end of
useful life is estimated at ` 60 lakhs.
Darshan Ltd. decides to treat the grant as deferred income.
Your are required to calculate the amount of depreciation and grant to be recognized in profit &loss account
for the year ending 31st March, 2017,31st March, 2018, 31st March, 2019 & 31st March,
2020.
Darshan Ltd. follows straight line method for charging depreciation.
Answer
As per 12 “Accounting for government grants”, grants related to depreciable assets, if treated as deferred
income are recognized in the profit and loss statement on a systematic and rational basis over the useful life
of the asset.
Amount of depreciation and grant to be recognized in the profit and loss account each year
Depreciation per year:
`in lakhs
Cost of the Asset 130
Less: Salvage value (60)
70
Depreciation per year (70lakhs / 4) 17.50
` 17.50 Lakhs depreciation will be recognized for the year ending 31st March, 2017, 31st March, 2018, 31st
March, 2019 and 31st March, 2020.
Amount of grant recognized in Profit and Loss account each year:
40 lakhs /4 years = ` 10 Lakhs for the year ending 31st March, 2017, 31st March, 2018, 31st March, 2019
and 31st March, 2020.
Question 37
Ram, Sham and Mahaan sons of Prabhu Dyal are running Punya Hotel in Chennai. Ram is heading Room
division (A), Sham is heading banquet division (B) and Mahaan is heading Restaurant division (C). Each of
the three brothers would receive 60% of the profits, if any, of the department of which he was incharge and
remaining combined profits would be shared in 2:2:1 ratio. The following is the Trading and Profit and Loss
Account of the firm for the year ended March 31,20 21:
(`) (`) (`) (`)
To Opening Stock: By Sales:
Room (A) 25,650 Room (A) 2,70,000
Banquet (B) 18,000 Banquet (B) 1,65,000
12.45
(`) (`) (`) (`)

Restaurant (C) 19,500 63,150 Restaurant (C) 86,700 5,21,700
To Purchases: Room (A) 2,35,000 By Discount received 1,650
Banquet (B) 1,56,000 By Closing Stock:
Restaurant (C) 84,200 4,75,200 Room (A) 55,300
To Salaries 34,400 Banquet (B) 31,800
To Royalties 8,000 Restaurant (C) 42,500 1,29,600
To Parking fee& car washing 9,600
charges
To Misc. Exp. 7,000
To Depreciation 1,160 62,660
To Net Profit 51,940
Total 6,52,950 Total 6,52,950
Prepare: (I) Departmental Trading and Profit and Loss Account alongwith combined Profit & Loss account
and (II) Profit and Loss Appropriation Account after incorporating the following information:
(i) Closing stock of Dept. B includes goods amounting ` 3,500 being transferred from Dept. A
(ii) Stock value ` 9,300 and other goods of the value of ` 1,500 were transferred at selling price by
Departments A and C respectively to Department B.
(iii) The details of salaries were as follows:
(1) Admin Office 60%, Pantry 40%
(2) Allocate Admin Office in the proportion of 3: 2:1 among the Departments A, B, C
(3) Distribute Pantry expenses equally among the Department A and B.
(iv) The parking fee is ` 500 per month which is to be divided equally between Departments A, B& C.
(v) All other expenses are to be allocated in ratio of 2:2:1.
(vi) Discounts received are to be credited to the three Departments as follows: A :` 650; B : ` 600; C : ` 400.
(vii) The opening stock of Department B does not include any goods transfer red from other departments and
closing stock of Department B does not include any stock transferred from Department C.
Answer
Ram, Sham and Mahaan
Departmental Trading and Profit & Loss Account for the year ended 31-3-2021
A B C A B C
To Opening Stock 25,650 18,000 19,500 By Sales 2,70,000 1,65,000 86,700
To Purchases 2,35,000 1,56,000 84,200 By Transfer 9,300 1,500
To Transfer 10,800 By Closing Stock 55,300 31,800 42,500
To Gross profit c/d 73,950 12,000 27,000
3,34,600 1,96,800 1,30,700 3,34,600 1,96,800 1,30,700
12.46
A B C A B C
To Salaries: By Gross profit b/d 73,950 12,000 27,000
Admin 10,320 6,880 3,440 By Discount 650 600 400
Received
To Royalty 3,200 3,200 1,600 By Net loss - 12,064
To Parking 2,000 2,000 2,000
To Salaries: 6,880 6,880
Pantry
To Car wash 1,440 1,440 720
To Discount 1,000 1,000 500
Allowed
To Misc Expenses 2,800 2,800 1,400
To Depreciation 464 464 232
To Net Profit c/d 46,496 - 17,508
74,600 24,664 27,400 74,600 24,664 27,400
Note: Gross profit of Department A is 26.48% (approx.) of Sales price (including transfer to Department C)
73,950/(2,70,000+9,300).There is some unrealized profit only on inter departmental stock 26.48% of ` 3,500
is as stock reserve i.e. ` 927. This will be debited to Profit and Loss (combined) Account.
Profit and Loss Account (combined)
` `
To Stock Reserve (See Note) 927 By Net Profit transferred from 64,004
To Net loss transferred from profit & loss A/c 12,064 Profit & Loss A/c
To Profit transfer 51,013
64,004 64,004
Profit and Loss Appropriation Account
To Ram: 60% of Profit of Deptt. A 27,898 By Profit transfer 51,013

To Mahaan: 60% of Profit of Deptt. C 10,505
To Share in Combined profits
Ram 5,044
Sham 5,044
Mahaan 2,522 12,610
51,013 51,013
Working Note:
Calculation of combined profit `
Ram 46,496
Mahaan 17,508
Sham (12,064)
Total 51,940
Less: Ram share (27,898)
Less: Mahaan share (10,505)
Less: stock reserve (927)
Remaining profit 12,610
12.47
Question 38
Department B 5,700
Department C 1,200
Department B 17,000
Department C 8,000
Department B 33,000
Department C 21,000
Department B 3,000
Department C 1,000
Department B 800
Department C 200
Salaries 4,500
Bad Debts 750
Insurance 1,500
Department B 550
Department C 150
Advertising 3,500
Cash in hand 850
1,75,000 1,75,000
12.48
(a) Outstanding Wages: Department B- ` 150, Department C – ` 50.
(d) Closing Stock: Department A - ` 3,500, Department B - ` 2,000, Department C - ` 1,500.
Answer
Trading and Profit and Loss Account for the year ended on 31st Match, 2021
Particulars A (` ) B (` ) C (` ) Particulars A (` ) B (` ) C (` )
Sales returns
To Wages 800 700 200
To Gross profit 20,800 7,800 11,900
53,500 32,000 21,500 53,500 32,000 21,500
To Power & Water 600 360 240 By Net Loss - 465 -
To Telephone Charges 1,050 630 420
To Rent & Taxes 3,000 1,800 1,200
To Printing & Stationery 1,000 600 400
To Depreciation (2,000 3,000 1,800 1,200
+4,000)
To Net Profit 7,025 6,390
20,800 8,265 11,900 20,800 8,265 11,900
Add: Net Profit (` 7,025 + ` 6,390) 13,415 Plant & Machinery 20,000
Less: Net loss in Dept. B 465 Motor Vehicles 40,000
Less: Drawings 1,500 51,450 Sundry Debtors 12,200
Wages Outstanding 200
78,650 78,650
12.49
Question 39
M/s. Hero is a Departmental Store having three departments X, Y and Z. The information regarding three
departments for the year ended 31st March, 2021 are given below:
Particulars Dept. X Dept. Y Dept. Z
Opening Stock 18,000 12,000 10,000
Purchases 66,000 44,000 22,000
Debtors at end 7,500 5,000 5,000
Sales 90,000 67,500 45,000
Closing Stock 22,500 8,750 10,500
Value of furniture in each Department 10,000 10,000 5,000
Floor space occupied by each Dept. (in Sq. ft.) 1,500 1,250 1,000
Electricity consumed by each Department (in units) 300 200 100
Amount (`)
Salaries 24,000
Advertisement 2,700
Electricity Expenses 3,000
Prepare Departmental Trading and Profit & Loss Account for the year ended 31st March, 2021 after providing
provision for Bad Debts at 5%.
Answer
In the Books of M/s Hero
Departmental Trading and Profit and Loss Account for the year ended 31st March, 2021
Particulars Deptt. X Deptt. Y Deptt. Z Total Particulars Deptt. X Deptt.Y Deptt.Z Total
` ` ` ` ` ` ` `
To Stock (opening) 18,000 12,000 10,000 40,000 By Sales 90,000 67,500 45,000 2,02,500
To Purchases 66,000 44,000 22,000 1,32,000 By Stock 22,500 8,750 10,500 41,750
(closing)
To Carriage Inwards 750 500 250 1,500
To Gross Profit c/d 27,750 19,750 23,250 70,750
(b.f.)
1,12,500 76,250 55,500 2,44,250 1,12,500 76,250 55,500 2,44,250
12.50
Particulars Deptt. X Deptt. Y Deptt. Z Total Particulars Deptt. X Deptt.Y Deptt.Z Total
` ` ` ` ` ` ` `
To Carriage Outwards 1,200 900 600 2,700 By Gross Profit b/d 27,750 19,750 23,250 70,750
received
To Salaries 10,000 8,000 6,000 24,000
To Rent, Rates and 3,000 2,500 2,000 7,500
Taxes
To Provision for Bad 375 250 250 875
Debts @ 5% of debtors
To Labour welfare 1,000 800 600 2,400
expenses
To Net Profit (b.f.) 8,975 4,850 12,300 26,125
28,650 20,350 23,550 72,550 28,650 20,350 23,550 72,550
Working Note:
Provision for bad debts Debtors balances (3:2:2)
Question 40
M/s Wee has two Departments X and Y. From the following particulars, Prepare Departmental Trading
Account and Consolidated Trading Account for the year ending 31st March, 2021.
Particulars Department Department
X Y
` `
Opening stock (at Cost) 1,40,000 1,08,000
Purchases 4,28,000 3,32,000
Carriage inwards 12,000 12,000
Carriage Outwards 5,000 4,000
Wages 42,000 48,900
Sales 5,70,000 4,74,000
12.51
Particulars Department Department

X Y
` `
Purchased goods transferred by Dept. Y to Dept. X 60,000 -
Purchased goods transferred by Dept. X to Dept. Y - 48,000

Finished goods transferred by Dept. Y to Dept. X 1,60,000 -
Finished goods transferred by Dept. X to Dept. Y — 2,00,000
Closing Stock of Purchased Goods 24,000 30,000
Closing Stock of Finished Goods 1,54,000 1,20,000
Purchased goods have been transferred mutually at their respective departmental purchase cost and finished
goods at departmental market price and that 15% of the finished stock (closing) at each department
represented finished goods received from the other department.
Answer
M/s Wee
Departmental Trading A/c for the year ending 31st March, 2021
Deptt. Deptt. Y Deptt. X. Deptt. Y
X.
` ` ` `
To Stock 1,40,000 1,08,000 By Sales 5,70,000 4,74,000
To Purchases 4,28,000 3,32,000 By Purchased Goods transferred 48,000 60,000
To Wages 42,000 48,900 By Finished goods transferred 2,00,000 1,60,000
To Carriage inward 12,000 12,000 By Closing Stock:
To Purchased Goods Purchased Goods 24,000 30,000
transferred 60,000 48,000 Finished Goods 1,54,000 1,20,000
To Finished Goods 1,60,000 2,00,000
transferred
To Gross profit c/d (b.f.) 1,54,000 95,100
9,96,000 8,44,000 9,96,000 8,44,000
Consolidated Trading Account for the year ending 31st March 2021
` `
To Carriage inward 24,000 Finished Goods 2,74,000
To Stock Reserve* 7,065
To Gross Profit c/d 2,42,035
13,72,000 13,72,000
12.52
Working Note:
Deptt. X Deptt. Y
Sale 5,70,000 4,74,000
Add: Transfer 2,00,000 1,60,000
Net Sales plus Transfer 7,70,000 6,34,000
Rate of Gross profit 1,54,000/7,70,000 x 100 = 20% 95,100/6,34,000 x 100 = 15%
Closing Stock out of transfer 1,54,000 x 15% = 23,100 1,20,000 x 15% = 18,000
(15% of closing stock)
Unrealized Profit 23,100 × 15% = 3,465 18,000 × 20% = 3,600
Note: *Stock reserve has been shown separately in the above solution and the closing stock has been given
at the full value without reducing stock reserve from it. Alternatively, stock reserve may not be shown and the
closing stock can be shown at the net amount (after deducting amount of stock reserve).
Similar Question
Question 40A
P Ltd. has two Departments X and Y. From the following particulars you are required to prepare Departmental
Trading Account and Combined Trading and P & L Account for the year ending 31st March, 2021.
Particulars Department X Department Y
` `
Opening stock (at Cost) 70,000 54,000
Purchase 2,14,000 1,66,000
Carriage inwards 6,000 6,000
Wages 21,000 24,450
Sales 3,10,000 2,54,000
Purchased goods transferred by Dept. Y to Dept. X 30,000 -
Purchased goods transferred by Dept. X to Dept. Y - 24,000
Finished goods transferred by Dept. Y to Dept. X 80,000 -
Finished goods transferred by Dept. X to Dept. Y - 1,00,000
Return of Finished Goods by Dept. Y to Dept. X 25,000 -
Return of Finished Goods by Dept. X to Dept. Y - 17,000
Closing Stock of Purchased Goods 12,000 15,000
Closing Stock of Finished Goods 60,000 35,000
Purchased goods have been transferred mutually at their respective departmental purchase cost and finished
goods at departmental market price and that 20% of the finished stock (closing) at each department
represented finished goods received from the other department.
(RTP May, 2022)
Answer
P Ltd.
Departmental Trading A/c for the year ending 31st March, 2021
Deptt. X. Deptt. Y Deptt. X Deptt. Y
` ` ` `
To Stock 70,000 54,000 By Sales 3,10,000 2,54,000
To Purchases 2,14,000 1,66,000 By Purchased Goods transferred 24,000 30,000
To Wages 21,000 24,450 By Finished goods transferred 1,00,000 80,000
To Carriage inward 6,000 6,000 Return of finished Goods 17,000 25,000
12.53
Deptt. X. Deptt. Y Deptt. X Deptt. Y
` ` ` `
To Purchased Goods By Closing Stock:
transferred 30,000 24,000 Purchased Goods 12,000 15,000
To Finished Goods 80,000 1,00,000 Finished Goods 60,000 35,000
transferred
To Return of finished 25,000 17,000
Goods
To Gross profit c/d 77,000 47,550
5,23,000 4,39,000 5,23,000 4,39,000
Combined Trading and P & L Account for the year ending 31st March, 2021
` `
(` 70,000 + ` 54,000) (` 3,10,000 + ` 2,54,000)
(` 2,14,000 + ` 1,66,000)
(` 21,000 + ` 24,450) (` 12,000 + ` 15,000)
To Carriage 12,000 Finished Goods 95,000
(` 6,000 + ` 6,000) (` 60,000 + ` 35,000)
6,86,000 6,86,000
To Stock Reserve 3,200 By Gross Profit b/d 1,24,550
1,24,550 1,24,550
Working note:
1. Calculation of Rate of Gross Profit Deptt. X Deptt. Y
Closing Stock out of transfer (20%) 12,000 7,000
Sale 3,10,000 2,54,000
Add: Transfer 1,00,000 80,000
4,10,000 3,34,000
Less: Returns (25,000) (17,000)
Net Sales plus Transfer Rate of Gross profit 3,85,000 3,17,000
77,000 47,550
× 100 = 20% × 100 = 15%
3,85,000 3,17,000
2. Unrealized Profit Deptt. X ` 12,000 × 15% = ` 1,800

Deptt. Y ` 7,000 × 20% = ` 1,400
12.54
Question 41
PQR Limited has three departments L, M and N. The following information is provided for the year ended
31.3.2022:
L M N
` ` `
Opening stock 10,000 16,000 38,000
Opening reserve for unrealized Profit — 4,000 6,000
Materials Consumed 32,000 40,000 —
Direct labour 18,000 20,000 —
Closing stock 10,000 40,000 10,000
Sales — — 1,60,000
Area occupied (sq. mtr.) 5,000 3,000 2,000
No. of employees 60 60 40 20
The following informations are provided:
- Stocks of each department are valued at cost to the department concerned.
- Stocks of L are transferred to M at cost plus 20% and stocks of M are transferred to N at a gross
profit of 20% on sales.
- Other common expenses are salaries and staff welfare ` 36,000 and Rent ` 12,000.
You are required to prepare Departmental Trading, Profit and Loss Account for the year ending 31.3.2022.
12.55
Accounting for Branches including
Foreign Branches
13
Question 1
XP Ltd opened a branch at Delhi and sent goods costing `50,000 to Delhi branch. Delhi Branch sold entire
goods on credit at ` 62,000. No other transaction occurred at the branch. Prepare branch account in Head
Office Books and find out the profit.
(Study Material)
Answer
We know that branch earned net profit of `12,000, now see how same can be find out by branch account.
Branch Account
` `
To Opening branch assets Nil By Closing branch assets
To Goods sent to branch 50,000 Stock Nil
To Net Profit 12,000 Debtor 62,000 62,000

62,000 62,000
Question 2
XP Ltd opened a new branch at Delhi. XP Ltd sent goods costing ` 50,000 to Delhi branch. Delhi branch sold
entire goods in cash at ` 70,000. Branch paid expenses of ` 8,000. No other transaction occurred at the
branch. Prepare branch account in HO Books and find out the profit.
(Study Material)
Answer
We know that branch earned net profit of `12,000 (i.e. Gross Profit ` 20,000 less expenses of ` 8,000), Let’s
see how same can be find out by branch account:
Branch Account
To Opening branch assets Nil By Closing branch assets
Stock Nil
To Goods sent to branch 50,000 Debtor Nil
To Net Profit transferred 12,000 Cash 62,000 62,000

General to P&L A/c (70,000 - 8,000)
62,000 62,000
Question 3
Prepare branch account and find out profit earned by branch if transactions are as under:
Goods sent to branch ` 50,000
Furniture sent to branch ` 10,000 (at the beginning of year)
Credit sales at branch ` 62,000
Bad Debts ` 1,000
13.1
Chap. 13  Accounting for Branches including Foreign Branches
Other information:
Closing stock at branch `10,000
Closing Debtor `61,000
Furniture (after depreciation@20%) ` 8,000
(Study Material)
Answer:
Branch Account
To Opening branch assets-
(Furniture) 10,000 By Closing branch assets-
To Goods sent to branch 50,000 Stock 10,000
To Net Profit transferred to General P&L A/c 19,000 Debtor 61,000
Furniture 8,000 79,000
79,000 79,000
Question 4
Buckingham Bros, Bombay have a branch at Nagpur. They send goods at cost to their branch at Nagpur.
However, direct purchases are also made by the branch for which payments are made at head office. All the
daily collections are transferred from the branch to the head office.
From the following, prepare Nagpur branch account in the books of head office by Debtors method:
` `
Opening balance (1-1-20X1) Bad Debts 1,000
Imprest Cash 2,000
Sundry Debtors 25,000 Discount to Customers 2,000
Stock: Transferred from H.O. 24,000 Remittances to H.O.
Direct Purchases 16,000 (received by H.O.) 1,65,000
Cash Sales 45,000 Remittances to H.O.
Credit Sales 1,30,000 (not received by H.O. so far) 5,000
Direct Purchases 45,000 Branch Exp. directly paid by H.O. 30,000
Returns from Customers 3,000 Closing Balance (31-12- 20X1)
Goods sent to branch from H.O. 60,000 Stock: Direct Purchase 10,000
Transfer from H.O. for Petty 4,000 Transfer from H.O. 15,000
Cash expenses Debtors ?
Imprest Cash ?
Petty Cash expenses 4,000
(Study Material)
Answer
In the Books of Buckingham Bros, Bombay Nagpur Branch Account
To Opening Branch Assets- By Bank –
Remittances received
from branch
Stock (24,000+16,000) 40,000 Cash Sales 45,000
Debtors 25,000 Cash from Debtors * 1,20,000
Cash in transit * 5,000 1,70,000
13.2
Imprest Cash 2,000 By Closing Branch Assets
To Goods sent to Branch A/c 60,000 Stock (15,000 +10,000) 25,000
To Creditors (Direct Purchases) 45,000 Debtors (W.N. 1) 24,000
Imprest Cash (W.N. 2) 2,000
To Bank (Sundry exp.) 30,000
To Bank (Petty cash exp.) 4,000
To Net Profit transferred to General 15,000
Profit & Loss A/c
2,21,000 2,21,000
Working Notes:
1. Memorandum Debtors A/c
To To Bal b/d 25,000 By By Sales Return 3,000
To To Sales 130,000 By By Bad Debts 1,000
By By Discount 2,000
By By Cash * 125,000
By By Bal c/d 24,000
155,000 155,000
2. Memorandum Petty Cash
To Bal b/d 2,000 By Expenses (met by Branch) 4,000
To Transfer from H.O. 4,000 By Bal c/d 2,000
6,000 6,000
* Collection from Debtors = Total Remittances (1,65,000+5,000) – Cash Sales (45,000) = ` 1,25,000
Question 5
From the information given in the question, prepare Nagpur Branch Trading and Profit and Loss Account in
the books of head office.
(Study Material)
Answer
Buckingham Bros. Bombay
Nagpur Branch-Trading and Profit and Loss Account for the year ending 31st December, 20X1
Particulars ` Particulars ` `
To Opening Stock 40,000 By Sales
To Goods transferred from Head 60,000 Cash 45,000
Office Credit sales 1,30,000
To Purchases 45,000 1,75,000
To Gross Profit c/d 52,000 Less: Returns (3,000) 1,72,000
By Closing Stock 25,000
1,97,000 1,97,000
To Expenses 30,000 By Gross Profit b/d 52,000
To Discounts 2,000
To Bad Debts 1,000
To Petty Cash Expenses 4,000
To Net Profit transferred to 15,000
General P&L A/c
52,000 52,000
13.3
Question 6
The Bombay Traders invoiced goods to its Delhi branch at cost. Head Office paid all the branch expenses
from its bank account, except petty cash expenses which were met by the Branch. All the cash collected by
the branch was banked on the same day to the credit of the Head Office. The following is a summary of the
transactions entered into at the branch during the year ended December 31, 20X1.
` `
Balances as on 1.1.20X1:
Stock 7,000 Bad Debts 600
Debtors 12,600 Goods returned by customers 500
Petty Cash, 200 Salaries & Wages 6,200
Goods sent from H.O. 26,000 Rent & Rates 1,200
Goods returned to H.O. 1,000 Sundry Expenses 800
Cash Sales 17,500 Cash received from Sundry
Credit Sales 28,400 Debtors 28,500
Allowances to customers 200 Balances as on 31.12.20X1:
Discount to customers 1,400 Stock 6,500
Debtors 9,800
Petty Cash 100
Prepare: (a) Branch Account (Debtors Method), (b) Branch Stock Account, Branch Profit & Loss Account,
Branch Debtors and Branch Expenses Account by adopting the Stock and Debtors Method and (c) Branch
Trading and Profit & Loss Account to prove the results as disclosed by the Branch Account.
(Study Material)
Answer
(a) Debtors Method
Delhi Branch Account
20X1 ` ` 20X1 ` `
Jan. 1 To Opening branch Dec 31 24 Bank
assets:
Stock 7,000 Cash Sales 17,500
Debtors 12,600 Cash from sundry
Petty cash 200 19,800 Debtors 28,500
46,000
Dec. To Goods sent to By Goods sent to
31 Branch A/c 26,000 Branch A/c –
To Bank: Returns to H.O. 1,000
Salaries & Wages 6,200 By Closing branch
assets
Rent & Rates 1,200 Stock 6,500
Sundry Exp. 800 8,200 Debtors 9,800
Petty Cash 100 16,400
To Net profit ts/f to 9,400
General P&L A/c
63,400 63,400
To Balance b/d 16,400
Jan. 1,
20X2
13.4
(b) Stock and Debtors Method
Branch Stock Account
20X1 ` 20X1 `
Jan. 1 To Balance b/d - 7,000 Dec. 31 By Sales:
Opening Stock
Dec. 31 To Goods Sent to 26,000 Cash 17,500
Branch A/c Credit 28,400
To Branch P&L A/c 19,900 Less: Return (500) 45,400
By Goods sent to Branch 1,000
A/c - Return
By Balance c/d-Closing 6,500
Stock
52,900 52,900
20X2 To Balance b/d - 6,500
Jan. 1 Opening Stock
Delhi Branch Debtors Account
20X1 ` 20X1 `
Jan. 1 To Balance b/d 12,600 Dec. 31 By Cash 28,500
Dec. 31 To Sales 28,400 By Returns 500
By Allowances 200
By Discounts 1,400
By Bad debts 600
41,000 41,000
20X2 Jan. 1 To Balance b/d 9,800
Delhi Branch Expenses Account
20X1 ` 20X1 `
Dec. 31 To Salaries & Wages 6,200 Dec. 31 By Branch P&L A/c 10,500
To Rent & Rates 1,200
To Sundry Expenses 800
To Petty Cash expenses 100
(200-100)
To Allowance to customers 200
To Discount 1,400
To Bad Debts 600
10,500 10,500
Delhi Branch Profit & Loss Account

20X1 ` 20X1 `
Dec. 31 To Branch Exp. A/c 10,500 Dec. 31 By Gross Profit b/d 19,900
To Net Profit ts/f to
General P & L A/c 9,400
19,900 19,900
13.5
(c) Branch Trading and Profit and Loss Account
` ` ` `
To Stock 7,000 By Sales:
To Goods sent Cash 17,500
from H.O. 26,000 Credit 28,400
Less: Returns to H.O. (1,000) 25,000 Less:
returns (500) 27,900 45,400
To Gross profit c/d 19,900 By Closing Stock 6,500
51,900 51,900
To Salaries & Wages 6,200 By Gross Profit 19,900
b/d
To Rent & Rates 1,200
To Sundry Exp. 800
To Petty Cash Exp. 100
To Allowances to 200
Customers
To Discounts 1,400
To Bad Debts 600
To Net Profit 9,400
19,900 19,900
Question 7
Harrison of Chennai has a branch at New Delhi to which goods are sent @ 20% above cost. The branch
makes both cash and credit sales. Branch expenses are met partly from H.O. and partly by the branch. The
statement of expenses incurred by the branch every month is sent to head office for recording.
Following further details are given for the year ended 31st December, 20X1:
`
Cost of goods sent to Branch at cost 2,00,000
Goods received by Branch till 31-12-20X1 at invoice price 2,20,000
Credit Sales for the year @ invoice price 1,65,000
Cash Sales for the year @ invoice price 59,000
Cash Remitted to head office 2,22,500
Expenses paid by H.O. 12,000
Bad Debts written off 750
Balances as on 1-1-20X1 31-12-20X1
` `
Stock 25,000 (Cost) 28,000 (invoice price)
Debtors 32,750 26,000
Cash in Hand 5,000 2,500
Show necessary ledger accounts in the books of the head office and determine the Profit or Loss of the
Branch for the year ended 31st December, 20X1.
(Study Material)
13.6
Answer
Books of Harrison Branch Stock Account
` `
To Balance b/d – Op Stock 30,000 By Branch Debtors (Sales) 1,65,000
To Goods Sent to Branch A/c 2,40,000 By Branch Cash 59,000
To Branch Adjustment A/c 2,000 By Balance c/d
(Balancing Figure – Excess of Sale Goods in Transit
over Invoice Price) (` 2,40,000 – ` 2,20,000) 20,000
Closing Stock at Branch 28,000
2,72,000 2,72,000
Branch Debtors Account
` `
To Balance b/d 32,750 By Bad debts written off 750
To Branch Stock A/c (Sales) 1,65,000 By Branch Cash (bal. fig.) 1,71,000
1,97,750 1,97,750
Branch Cash Account
` `
To Balance b/d 5,000 By Bank Remittance to H.O. 2,22,500
To Branch Stock 59,000 By Branch Expenses 10,000
To Branch Debtors 1,71,000 [met by Branch (Bal. fig.)]
2,35,000 2,35,000
Branch Adjustment Account
` `
By Stock Reserve opening (25,000 × 5,000
20%)
To Branch P &L - Gross Profit (Bal. 39,000 By Goods sent to Branch A/c 40,000
fig.)
To Stock Reserve (on closing stock 8,000 By Branch Stock A/c 2,000
(48,000 × 1/6)
47,000 47,000
Branch Expenses
` `
To Cash (H.O) 12,000
To Branch Cash 10,000 By Branch P&L A/c 22,000
22,000 22,000
Branch Profit and Loss Account
` `
To Branch Expenses 22,000 By Gross Profit (from Branch 39,000
To Branch Debtors (bad debts) 750 Adjustment A/c)
39,000 39,000
13.7
Goods Sent to Branch Account
` `
To Branch Adjustment A/c 40,000 By Branch to Stock A/c 2,40,000
To Purchase A/c - Transfer 2,00,000
2,40,000 2,40,000
Question 8
Take figures from Illustration 3 (a) and prepare branch account following debtors’ method.
(Study Material)
Answer
Books of Harrison New Delhi Branch Account
` `
To Balance B/d
Stock 30,000 By Stock Reserve 5,000
Debtors 32,750
Cash 5,000
To Goods Sent to Branch A/c 2,40,000 By Goods Sent to Branch A/c 40,000
(2,00,000 + 20%)
To Cash (Exp. paid by H.O.) 12,000 By Cash – Remittance from branch :
To Net Profit ts/f to H.O. 16,250 Cash Sales 59,000
Profit & Loss A/c (Balancing Debtors (W.N.1) 1,63,500 2,22,500
Figure)
By Balance c/d Debtors 26,000
To Stock reserve 8,000 Stock (including Transit– W.N 2) 48,000
(48,000X20/120) Cash 2,500
3,44,000 3,44,000
Working Note:
1. Collection from Debtors = Total Cash Remitted – Cash Sales = ` 2,22,500 - ` 59,000 = ` 1,63,500
2. Closing Stock = Stock at branch + Stock in Transit (Goods sent by HO – Goods Received by Branch) = `
28,000 + (` 2,40,000 - ` 2,20,000) = ` 48,000.
Question 9
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
` ` `
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 ` 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.
(Study Material)
13.8
Answer
Books of Sell Well Branch Account
` `
To Goods sent to Branch A/c 1,65,000 By Goods sent to Branch- 15,000
(1,50,000+10%) Loading
To Goods sent to Branch A/c 382 By Goods sent to Branch- 4,200
returns
(4,200 X 10/110)
By Bank 1,06,000
By Balance c/d -
Closing Branch Assets
To Stock Reserve (53,400 × 4,855 Stock 53,400
10/110)
To Net Profit (Bal fig) ts/f to 37,363 Debtors (Sales- Collection) 29,000 82,400
General P&L A/c
2,07,600 2,07,600
Working Note:
Memorandum Branch Debtors Account
` `
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
` `
To Branch A/c – Loading 15,000 By Branch A/c 1,65,000
To Branch A/c – Returns 4,200 By Branch A/c – Loading on returns 382
To Purchases A/c 1,46,182
1,65,382 1,65,382
Question 10
Following is the information of the Jammu branch of Best New Delhi for the year ending 31st March, 20X2
from the following:
(1) Goods are invoiced to the branch at cost plus 20%.
(2) The sale price is cost plus 50%.
(3) Other information:
`
Stock as on 01.04.20X1(invoice price) 2,20,000
Goods sent during the year (invoice price) 11,00,000
Sales during the year 12,00,000
Expenses incurred at the branch 45,000
Ascertain
(i) the profit earned by the branch during the year.
(ii) branch stock reserve in respect of unrealized profit.
(Study Material)
13.9
Answer
(i) Calculation of profit earned by the branch In the books of Jammu Branch
Trading Account and Profit and Loss Account
` `
To Goods received by Head office 11,00,000 By Closing stock (Refer W.N.) 3,60,000
To Expenses 45,000
To Net profit (Bal fig) 1,95,000
15,60,000 15,60,000
(ii) Stock reserve in respect of unrealised profit = ` 3,60,000 x (20/120) = ` 60,000
Working Note:
`
Cost Price 100
Invoice Price 120
Sale Price 150
Calculation of closing stock at invoice price `
Opening stock at invoice price 2,20,000
Goods received during the year at invoice price 11,00,000
13,20,000
Less: Cost of goods sold at invoice price (9,60,000) [12,00,000 x (120/150)]
Closing stock 3,60,000
Question 11
Hindustan Industries Mumbai has a branch in Cochin to which office goods are invoiced at cost plus 25%.
The branch sells both for cash and on credit. Branch Expenses are paid direct from head office, and the
Branch has to remit all cash received into the Head Office Bank Account.
From the following details, relating to calendar year 20X1, prepare the accounts in the Head Office Ledger
and ascertain the Branch Profit. Branch does not maintain any books of account, but sends weekly returns to
the Head Office:
`
Goods received from Head Office at invoice price 6,00,000
Returns to Head Office at invoice price 12,000
Stock at Cochin as on 1st Jan., 20X1 60,000
Sales in the year - Cash 2,00,000
Credit 3,60,000
Sundry Debtors at Cochin as on 1st Jan. 20X1 72,000
Cash received from Debtors 3,20,000
Discount allowed to Debtors 6,000
Bad debts in the year 4,000
Sales returns at Cochin Branch 8,000
Rent, Rates, Taxes at Branch 18,000
Salaries, Wages, Bonus at Branch 60,000
Office Expenses 6,000
Stock at Branch on 31st Dec. 20X1 at invoice price 1,20,000
Prepare Branch accounts in books of head office by Stock and debtors method.
(Study Material)
13.10
Answer
Books of Hindustan Industries, Mumbai Cochin Branch Stock Account
` `
To Balance b/d – Op Stock 60,000 By Bank A/c – Cash Sales 2,00,000
To Branch Debtors A/c – Sales Return 8,000 By Branch Debtors A/c - Credit Sales 3,60,000
To Goods sent to Branch A/c 6,00,000 By Goods sent to Branch (Returns to 12,000
H.O.)
To Branch Adjustment A/c (Excess of 24,000 By Balance c/d - Closing stock 1,20,000
Selling Price over Invoice Price)
6,92,000 6,92,000
Cochin Branch Stock Adjustment Account
` `
To Goods sent to Branch A/c (1/5 of ` 2,400 By Balance b/d (1/5 of ` 60,000) 12,000
12,000) (on returns)
To Branch P & L A/c (Profit on sale) – 1,29,600 By Goods sent to Branch A/c (1/5 1,20,000
Bal fig of ` 6,00,000)
To Balance c/d (1/5 of ` 1,20,000) 24,000 By Branch Stock 24,000
1,56,000 1,56,000
` `
To Cochin Branch Stock Adjustment A/c 1,20,000 By Cochin Branch Stock A/c 6,00,000
To Cochin Branch Stock A/c (Returns) 12,000 By Cochin Branch Stock Adj. A/c 2,400
6,02,400 6,02,400
` `
To Balance b/d 72,000 By Bank 3,20,000
To Branch Stock A/c 3,60,000 By Branch P&L A/c Discount 6,000
By Branch P&L A/c - Bad Debts 4,000
By Branch Stock - Sales Returns 8,000
4,32,000 4,32,000
Branch Expenses Account
` `
To Bank A/c (Rent, Rates & Taxes) 18,000 By Branch Profit & Loss A/c 84,000
To Bank A/c (Salaries & Wages) 60,000 (Transfer)
To Bank A/c (office exp.) 6,000
84,000 84,000
Branch Profit & Loss Account for the year ending 31st Dec. 20X1
` `
To Branch Expenses A/c 84,000 By Branch Stock Adj. A/c 1,29,600
To Branch Debtors A/c 6,000
To Branch Debtors A/c 4,000
To Net Profit transferred to
Profit & Loss A/c 35,600
1,29,600 1,29,600
13.11
Question 12
Arnold of Delhi, trades in Ghee and Oil. It has a branch at Lucknow. He dispatches 25 tins of Oil @ ` 1,000
per tin and 15 tins of Ghee @ ` 1,500 per tin on 1st of every month. The branch incurs some expenditure
which is met out of its collections; this is in addition to expenditure directly paid by Head Office.
Following are the other details:
Delhi Lucknow
` `
Purchases Ghee 14,75,000 -
Oil 29,32,000 -
Direct expenses 3,83,275 -
Expenses paid by H.O. - 14,250
Sales Ghee 18,46,350 3,42,750
Oil 27,41,250 3,15,730
Collection during the year (including Cash Sales) - 6,47,330
Remittance by Branch to Head Office - 6,13,250
(Delhi)
Balance as on: 1-1-20X1 31-12-20X1
Stock: Ghee 1,50,000 3,12,500
Oil 3,50,000 4,17,250
Debtors 7,32,750 -
Cash on Hand 70,520 55,250
Furniture & Fittings 21,500 19,350
Plant/Machinery 3,07,250 7,73,500
(Lucknow)
Balance as on: 1-1-20X1 31-12-20X1
Stock: Ghee 17,000 13,250
Oil 27,000 44,750
Debtors 75,750 ?
Cash on Hand 7,540 12,350
Furniture & Fittings 6,250 5,625
Plant/Machinery -
Addition to Plant/Machinery on 1-1-20X1 ` 6,02,750.
Rate of Depreciation: Furniture / Fittings @ 10% and Plant / Machinery @ 15% (already adjusted in the above
figures).
The Branch Manager is entitled to 10% commission after charging such commission whereas, the General
Manager is entitled to 10% commission on overall company profits after charging such commission. General
Manager is also entitled to a salary of ` 2,000 p.m. General expenses incurred by H.O. ` 24,000.
Prepare Branch Account in the head office books and also prepare the Arnold’s
Trading and Profit and Loss A/c (excluding branch transactions).
(Study Material)
13.12
Answer
In the books of Arnold Lucknow Branch Account
` `
To Balance b/d By Bank (Remittance) 6,13,250
-Opening Branch Assets By Closing Branch Assets
Opening stock: Closing stock:
Ghee 17,000 Ghee 13,250
Oil 27,000 Oil 44,750
Debtors 75,750 Debtors (W.N. 1) 86,900
Cash on hand 7,540 Cash on hand (W.N. 2) 12,350
Furniture & fittings 6,250 Furniture & fittings 5,625
To Goods sent to Branch A/c
Ghee (15 x 1500 x 12) 2,70,000
Oil (25 x 1000 x 12) 3,00,000
To Bank (Expenses paid) 14,250
To Branch Manager commission
(` 58,335 × 1/11) 5,303
To Net Profit transferred
to General P & L A/c 53,032
7,76,125 7,76,125
Arnold
Trading and Profit and Loss account for the year ended 31st December, 20X1
(Excluding branch transactions)
` `
Ghee 1,50,000 Ghee 18,46,350
Oil 3,50,000 Oil 27,41,250
To Purchases: By Closing Stock:
Ghee 14,75,000 Ghee 3,12,500
Less: Goods sent Oil 4,17,250
to Branch (2,70,000) 12,05,000
Oil 29,32,000
Less: Goods sent
to Branch (3,00,000) 26,32,000
To Direct Expenses 3,83,275
53,17,350 53,17,350
To Manager’s Salary 24,000 By Gross Profit b/d 5,97,075
To General Expenses 24,000 By Branch Profit transferred 53,032
To Depreciation:
Furniture @10% 2,150
Plant & Machinery
@ 15% (W.N.3) 1,36,500 1,38,650
To General Manager’s Commission @
10% (i.e., 4,63,457 × 1/11) 42,132
6,50,107 6,50,107
13.13
Working Notes:
(1) Memorandum Branch Debtors Account
` `
To Balance b/d 75,750 By Cash Collections (including 6,47,330
Cash Sales)
To Sales (including Cash Sales) By Balance c/d 86,900
Ghee 3,42,750
Oil 3,15,730
7,34,230 7,34,230
(2) Memorandum Branch Cash Account
` `
To Balance b/d 7,540 By Remittance 6,13,250
To Collections 6,47,330 By Exp. (Balance fig.) 29,270
6,54,870 6,54,870
(3) Depreciation on Plant & Machinery
3,07,250 x 15% + 6,02,750 x 15% = `1,36,500
Similar Question
Question 12A
Mr. Chena Swami of Chennai trades in Refined Oil and Ghee. It has a branch at Salem. He despatches 30
tins of Refined Oil @ ` 1,500 per tin and 20 tins of Ghee @ ` 5,000 per tin on 1st of every month. The Branch
has incurred expenditure of ` 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 (`) Amount (`)
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
13.14
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 ` 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 ` 20,000 per month.
(v) General expenses incurred by Head Office is ` 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.
(RTP May, 2022)
Answer
In the books of Mr. Chena Swami Salem Branch Account
` `
To Balance b/d Opening stock: By Bank (Remittance to H.O.) 19,50,000
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 5,40,000 Furniture & fittings 21,420
(30 x ` 1,500x12)
Ghee 12,00,000
(20 x ` 5,000 x12)
To Bank (Expenses paid by H.O.) 76,800
To Manager’s commission in profits
10% (2,26,930x10/110) 20,630
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)
` `
Refined Oil 44,000 Refined Oil 24,10,000
Ghee 10,65,000 Ghee 38,40,500
13.15
` `
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
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 transferred 2,06,300
To Depreciation
Furniture (88,600 - 79,740) 8,860
Building
(5,10,800 + 2,41,600 - 7,14,780) 37,620
13,34,000 13,34,000
Working Notes:
(1) Debtors Account
` `
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
` `
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 13
M/s Rahul operates a number of retail outlets to which goods are invoiced at wholesale price which is cost
plus 25%. These outlets sell the goods at the retail price which is wholesale price plus 20%.
Following is the information regarding one of the outlets for the year ended 31.3.20X2:
`
Stock at the outlet 1.4.20X1 30,000
Goods invoiced to the outlet during the year 3,24,000
Gross profit made by the outlet 60,000
Goods lost by fire ?
Expenses of the outlet for the year 20,000
Stock at the outlet 31.3.20X2 36,000
13.16
You are required to prepare the following accounts in the books of Rahul Limited for the year ended
31.3.20X2:
(a) Outlet Stock Account.
(b) Outlet Profit & Loss Account.
(c) Stock Reserve Account.
(Study Material)
Answer
Outlet Stock Account
` `
To Balance b/d 30,000 By Sales (Working Note 1) 3,60,000
To Goods sent to outlet 3,24,000 By Goods lost by fire (b.f.) 18,000
To Gross Profit c/d 60,000 By Balance c/d 36,000
4,14,000 4,14,000
Outlet Profit & Loss Account
` `
To Expenses 20,000 By Gross Profit b/d 60,000
To Goods lost by fire (W.N.2) 18,000
To Profit transferred 22,000
60,000 60,000
Stock Reserve Account
` `
To HO P & L A/c – Transfer 6,000 By Balance b/d 6,000
To Balance c/d (Stock Res. required) 7,200 By HO P&L A/c (W.N. 3) 7,200
13,200 13,200
Working Notes:
`
(1) Wholesale Price 100+25 = 125
Retail Price 125 + 20% = 150
Gross Profit at the outlet
Wholesale Price – Retail Price (150 – 125) 25
150
Retail sales value  =`3,60,000
25
(2) Goods lost by fire
Opening Stock + Goods Sent + Gross Profit – Sales – Closing
Stock 30,000 + 3,24,000 + 60,000 – 3,60,000 – 36,000 = ` 18,000
(3) Stock Reserve
25
Opening Stock = 30,000 × = ` 6,000
125
25
Closing Stock = 30,000 × = `7, 200
125
13.17
Question 14
The following Trial balances as at 31st December, 20X1 have been extracted from the books of Major Ltd.
and its branch at a stage where the only adjustments requiring to be made prior to the preparation of a
Balance Sheet for the undertaking as a whole are to be done.
Head Office Branch
Dr. Cr. Dr. Cr.
` ` ` `
Share Capital 1,50,000
Fixed Assets 75,125 18,901
Current Assets 1,21,809 23,715 (Note 3)
Current Liabilities 34,567 9,721
Stock Reserve, 1st Jan., 20X1
(Note 2) 693
Revenue Account 43,210 10,250
Branch Account 31,536
Head Office Account 22,645
2,28,470 2,28,470 42,616 42,616
You are required to record the following in the appropriate ledger accounts in both sets of books.
Note:
1. Goods transferred from Head Office to the Branch are invoiced at cost plus 10% and both Revenue
Accounts have been prepared on the basis of the prices charged.
2. Relating to the Head Office goods held by the Branch on 1st January, 20X1.
3. Includes goods received from Head Office at invoice price ` 4,565.
4. Goods invoiced by Head Office to Branch at ` 3,641 were in transit at 31st December, 20X1, as was also
a remittance of ` 3,500 from the Branch.
5. At 31st December, 20X1, the following transactions were reflected in the Head Office books but
unrecorded in the Branch books.
The purchase price of lorry, ` 2,500, which reached the Branch on December 25th; a sum received on
December 30, 20X1 from one of the Branch debtors, ` 750.
(Study Material)
Answer
H.O. Books
Branch Account
20X1 ` 20X1 `
Dec. 31 To Balance b/d 31,536 Dec. 31 By Cash in transit 3,500
31,536 31,536
Cash in transit Account
20X1 ` 20X1 `
Dec. 31 To Branch A/c 3,500 Dec. 31 By Balance c/d 3,500
Stock Reserve Account
20X1 ` 20X1 `
Dec. 31 To Balance c/d 746 Jan. 1 By Balance b/d 693
(4,565+3,641) x 10/110 By Revenue A/c (b.f.) 53
746 746
13.18
Revenue Account
20X1 ` 20X1 `
Dec. 31 To Stock Reserve To 53 Dec. 31 By Balance b/d 43,210
Balance c/d 43,157
43,210 43,210
Branch Books
Head Office Account
20X1 ` 20X1 `
Dec. 31 To Current Assets 750 Dec. 31 By Balance b/d 22,645
By Goods in transit 3,641
To Balance c/d 28,036 By Motor Vehicle 2,500
28,786 28,786
Goods in Transit Account
20X1 ` 20X1 `
Dec. 31 To Head Office 3,641 Dec. 31 By Balance c/d 3,641
Motor Vehicle Account
20X1 ` 20X1 `
Dec. 31 To Head Office 2,500 Dec. 31 By Balance c/d 2,500
Sundry Current Assets A/c
20X1 ` 20X1 `
Dec. 31 To Balance b/d 23,715 Dec. 31 By H.O. (Remittance by Debtor) 750
23,715 23,715
Question 15
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
` ` ` `
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
13.19
H.O. Branch
` ` ` `
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
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
Note:
(1) On 28th Dec., 20X1 the branch remitted ` 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 ` 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 ` 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 ` 156 under a bilateral agreement.
(Study Material)
Answer
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
` ` ` ` ` `
To Opening stock of finished 13,000 9,200 22,200 By Sales 2,00,000 65,200 2,65,200
goods
To Material consumed
(W.N.1) 34,500 - 34,500
To Wages 1,08,500 - 1,08,500 By Goods Sent to 46,000 - -
To Factory Overheads 39,000 - 39,000 Branch
To Goods from H.O. 46,000 By Closing stock 15,000 9,560 24,560
including transit (Bal Fig)
(W.N.2)
To Gross Profit c/d (W.N.3) 66,000 19,560 85,560
(Bal Fig)
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
Overheads 12,500 2,300 14,800
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
13.20
Balance Sheet as on 31st Dec., 20X1
` ` ` ` ` ` `
Capital 50,000 - 50,000 Fixed Assets - - -
Profit: H.O. 17,053 Current Assets:
Branch 6,904 23,957 23,957 Raw material 2,300 2,300
Trade Creditors 13,000 13,000 Finished Goods 15,000 9,560 23,313*
Bonus Payable 156 156 (Less Stock Res.)
H.O. Account* 10,404 Debtors 37,000 - 37,000
Stock Reserve Cash (including transit 23,500 1,000 24,500
(W.N.4) 1,247 item)
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) = ` 23,313 or (15,000 + 9,560) – 1,247 (Stock reserve)
** (5,000 + 6,904) – 1500 = ` 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 = 1,82,000
(b) Cost (factory cost) of goods sold = Sales – Gross profit
= 2,00,000 – 2,00,000 x 30% = 1,40,000
(c) Stock transferred to branch = 46,000 x 100/115 = 40,000
(d) Closing stock = 13,000 (Opening Stock) + 1,82,000 – 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 = 1,247
Charge to profit and loss = 1,247 – 1,200 (existing) = 47
Question 16
AFFIX of Kolkata has a branch at Delhi to which the goods are supplied from Kolkata but the cost thereof is
not recorded in the Head Office books.
On 31st March, 20X1 the Branch Balance Sheet was as follows:
Creditors Balance 40,000 Debtors Balance 2,00,000
Head Office 1,68,000 Building Extension A/c closed by —
transfer to H.O. A/c
Cash at Bank 8,000
2,08,000 2,08,000
During the six months ending on 30-9-20X1, the following transactions took place at Delhi.
` `
Sales 2,40,000 Manager’s Salary 4,800
Purchases 48,000 Collections from Debtors 1,60,000
Wages paid 20,000 Discounts allowed 8,000
Salaries (inclusive of advance Discount earned 1,200
of ` 2,000) 6,400 Cash paid to Creditors 60,000
General Expenses 1,600 Building Account (further payment) 4,000
Fire Insurance (paid for one year) 3,200 Cash in Hand 1,600
Remittance to H.O. 38,400 Cash at Bank 28,000
13.21
Set out the Head Office Account in Delhi books and the Branch Balance Sheet as on 30-9-20X1. Also give
journal entries in the Delhi books.
(Study Material)
Answer
Journal Entries
20X1 Dr. Cr.
30 Sept. ` `
Salary Advance A/c Dr. 2,000
To Salaries A/c 2,000
(The amount paid as advance adjusted by debit to Salary Advance Account)
Prepared Insurance A/c (3,200 x 6/12) Dr. 1,600
To Fire Insurance A/c 1,600
(Six months premium transferred to the Prepaid Insurance A/c)
Head Office Account Dr. 88,400
To Purchases A/c 48,000
To Wages A/c 20,000
To Salaries A/c (6,400 – 2,000) 4,400
To General Expenses A/c 1,600
To Fire Insurance A/c (3,200 x 6/12) 1,600
To Manager’s Salary A/c 4,800
To Discount Allowed A/c 8,000
(Transfer of various revenue accounts (Dr.) to the
H.O. Account for closing the accounts)
Sales Accounts Dr. 2,40,000
Discount Earned A/c Dr. 1,200
To Head Office A/c 2,41,200
[Revenue accounts (Cr.) transferred to H.O.]
Head Office Account Dr. 4,000
To Building Account 4,000
(Transfer of amounts spent on building extension to H.O. A/c)
Head Office Account
20X1 ` 20X1 `
Sep. 30 To Cash-remittance 38,400 April 1 By Balance b/d 1,68,000
To Sundries (Revenue A/cs) 88,400 Sep. 30 By Sundries (Revenue 2,41,200
A/cs)
To Building A/c 4,000
To Balanced c/d 2,78,400
4,09,200 4,09,200
Balance Sheet of Delhi Branch as on Sept. 30, 20X1
Creditors Balances 26,800 Debtors Balances 2,72,000
Head Office Account 2,78,400 Salary Advance 2,000
Prepaid Insurance 1,600
13.22
Building Extension A/c
transferred to H.O. —
Cash in Hand 1,600
Cash at Bank 28,000
3,05,200 3,05,200
Cash and Bank Account
` `
To Balance b/d 8,000 By Wages 20,000
To Collection from Debtors 1,60,000 By Salaries 6,400
By Insurance 3,200
By General Exp. 1,600
By H.O. A/c 38,400
By Manager’s Salary 4,800
By Creditors 60,000
By Building A/c 4,000
By Balance c/d
By Cash in Hand 1,600
By Cash at Bank 28,000 29,600
1,68,000 1,68,000
Debtors Account
` `
To Balance b/d 2,00,000 By Cash Collection 1,60,000
To Sales 2,40,000 By Discount (allowed) 8,000
4,40,000 4,40,000
To Balance b/d 2,72,000
Creditors Account
` `
To Cash 60,000 By Balance b/d 40,000
To Discount (earned) 1,200 By Purchases 48,000
88,000 88,000
By Balance b/d 26,800
Question 17
Ring Bell Ltd. Delhi has a Branch at Bombay where a separate set of books is used. The following is the trial
balance extracted on 31st December, 20X1.
Head Office Trial Balance
` `
Share Capital (Authorised: 10,000 Equity Shares of ` 100 each):
Issued: 8,000 Equity Shares 8,00,000
Profit & Loss Account - 1-1-20X1 25,310
General Reserve 1,00,000
Fixed Assets 5,30,000
13.23
` `
Stock 2,22,470
Debtors and Creditors 50,500 21,900
Profit for 20X1 52,200
Cash Balance 62,730
Branch Current Account 1,33,710
9,99,410 9,99,410
Branch Trial Balance
` `
Fixed Assets 95,000
Profit for 20X1 31,700
Stock 50,460
Debtors and Creditors 19,100 10,400
Cash Balance 6,550
Head Office Current Account 1,29,010
1,71,110 1,71,110
The difference between the balances of the Current Account in the two sets of books is accounted for as
follows:
(a) Cash remitted by the Branch on 31st December, 20X1, but received by the Head Office on 1st January
20X2 - ` 3,000.
(b) Stock stolen in transit from Head Office and charged to Branch by the Head Office, but not credited to
Head Office in the Branch books as the Branch Manager declined to admit any liability (not covered by
insurance) - ` 1,700.
Give the Branch Current Account in Head Office books after incorporating Branch Trial Balance through
journal.
(Study Material)
Answer
The Branch Current Account in the Head Office Books and Head Office Current Account in the Branch Books
do not show the same balances. Therefore, in order to reconcile them, the following journal entries will be
passed in the Head Office books:
Journal Entries
Dr. Cr.
20X1 ` `
Dec., 31 Cash in Transit A/c Dr. 3,000
To Branch Current A/c 3,000
(Cash sent by the Branch on 31st Dec., 20X1 but received at H.O. on
1st Jan., 20X2)
Loss by theft A/c Dr. 1,700
To Branch Current A/c 1,700
(Stock lost in transit from H.O. to Branch)
In order to incorporate, in the H.O. books, the given Branch trial balance which has been drawn up after
preparing the Branch Profit & Loss Account, the following journal entries will be necessary:
13.24
Journal Entries
20X1 ` `
Dec. 31 Branch Current Account Dr. 31,700
To Profit & Loss Account 31,700
(Branch Profit for the year)
Branch Fixed Assets Dr. 95,000
Branch Stock Dr. 50,460
Branch Debtors Dr. 19,100
Branch Cash Dr. 6,550
To Branch Current Account 1,71,110
(Branch assets brought into H.O. Books)
Branch Current A/c Dr. 10,400
To Branch Creditors 10,400
(Branch creditors brought into H.O. Books)
Branch Current Account
` `
To Balance b/d 1,33,710 By Cash in transit 3,000
To Profit & Loss A/c 31,700 By Loss of theft 1,700
To Branch Creditors 10,400 By Sundry Branch Assets 1,71,110
1,75,810 1,75,810
Profit and Loss Account for 20X1
` `
To Loss by Theft 1,700 By Balance b/d 25,310
To Balance c/d 1,07,510 By Year’s Profit: H.O. 52,200
Branch
31,700
1,09,210 1,09,210
Question 18
Messrs Ramchand & Co., Hyderabad have a branch in Delhi. The Delhi Branch deals not only in the goods
from Head Office but also buys some auxiliary goods and deals in them. They, however, do not prepare any
Profit & Loss Account but close all accounts to the Head Office at the end of the year and open them afresh
on the basis of advice from their Head Office. The fixed assets accounts are also maintained at the Head
Office.
The goods from the Head Office are invoiced at selling prices to give a profit of 20 per cent on the sale price.
The goods sent from the branch to Head Office are at cost. From the following prepare Branch Trading and
Profit & Loss Account and Branch fixed Assets Account in the Head Office Books.
Trial Balance of the Delhi Branch as on 31-12-20X1
Debit ` Credit `
Head office opening balance on 1-1-20X1 15,000 Sales 1,00,000
Goods from H.O. 50,000 Goods to H.O. 3,000
Purchases 20,000 Head Office Current A/c 15,000
Opening Stock Sundry Creditors 3,000
(H.O. supplies goods at invoice prices) 4,000
Opening Stock of other goods 500
Salaries 7,000
Rent 3,000
Office expenditure 2,000
13.25
Debit ` Credit `
Cash on Hand 500
Cash at Bank 4,000
1,21,000 1,21,000
The Branch balances as on 1st January, 20X1, were as under: Furniture ` 5,000; Sundry Debtors ` 9,500;
Cash ` 1,000, Creditors ` 30,000. The closing stock at branch of the head office goods at invoice price is `
3,000 and that of purchased goods at cost is ` 1,000. Depreciation is to be provided at 10 per cent on branch
assets.
Answer
Delhi Branch Trading and Profit & Loss Account for the year ended 31st Dec., 20X1
` `
To Opening Stock: By Sales 1,00,000
Head office Goods 3,200 By Goods from Branch 3,000
(4,000 x 80%) By Closing Stock:
Others 500 3,700 Head Office goods 2,400
(3,000 x 80%)
To Goods to Branch 40,000 Others 1,000 3,400
(50,000 x 80%)
To Purchases 20,000
1,06,400 1,06,400
To Salaries 7,000 By Gross profit b/d 42,700
To Rent 3,000
To Office Expenses 2,000
To Dep. on furniture @ 500
10%
42,700 42,700
Branch (Fixed) Assets Account (In Head Office Books)
20X1 ` 20X1 `
Jan. 1 To Balance b/d 5,000 Dec. 31 By Delhi Branch A/c 500
(Depreciation)
5,000 5,000
20X2 Jan. 1 To Balance b/d
4,500
Note: Furniture A/c is maintained in Head office books; it is not a part of either opening or closing balance.
Question 19
On 31st December, 20X2 the following balances appeared in the books of Chennai Branch of an English firm
having its HO office in New York:
Amount in` Amount in`
Stock on 1st Jan., 20X2 2,34,000
Purchases and Sales 15,62,500 23,43,750
Debtors and Creditors 7,65,000 5,10,000
13.26
Amount in` Amount in`

Bills Receivable and Payable 2,04,000 1,78,500
Salaries and Wages 1,00,000 -
Rent, Rates and Taxes 1,06,250 -
Furniture 91,000 -
Bank A/c 5,68,650
New York Account - 5,99,150
36,31,400 36,31,400
Stock on 31st December, 20X2 was ` 6,37,500.
Branch account in New York books showed a debit balance of $ 13,400 on 31st December, 20X2 and
Furniture appeared in the Head Office books at $ 1,750.
The rate of exchange for 1 $ on 31st December, 20X1 was ` 52 and on 31st December, 20X2 was ` 51. The
average rate for the year was ` 50.
Prepare in the Head Office books the Profit and Loss a/c and the Balance Sheet of the Branch assuming
integral foreign operation.
Answer
In the books of English Firm (Head Office in New York)
Chennai Branch Profit and Loss Account for the year ended 31st December, 20X2
$ $
To Opening stock 4,500 By Sales 46,875
To Purchases 31,250 By Closing stock 12,500
To Gross profit c/d 23,625 (6,37,500 / 51)
59,375 59,375
To Rent, rates and taxes 2,125
To Exchange translation loss 2,000
To Net Profit c/d 17,500
23,625 23,625
Balance Sheet of Chennai Branch as on 31st December, 20X2
Liabilities $ $ Assets $
Head Office A/c 13,400 Furniture 1,750
Add: Net profit 17,500 30,900 Closing Stock 12,500
Trade creditors 10,000 Trade Debtors 15,000
Bills Payable 3,500 Bills Receivable 4,000
Cash at bank 11,150
44,400 44,400
Working Note:
Calculation of Exchange Translation Loss
Chennai Branch Trial Balance (converted in $) as on 31st December, 20X2
Dr. Cr. Conversion Dr. Cr.
` ` Rate ($) ($)
Stock on 1st Jan., 20X2 2,34,000 52 4,500
Purchases & Sales 15,62,500 23,43,750 50 31,250 46,875
Debtors & creditors 7,65,000 5,10,000 51 15,000 10,000
13.27
` ` Rate ($) ($)
Bills Receivable and Bills Payable 2,04,000 1,78,500 51 4,000 3,500
Salaries and wages 1,00,000 50 2,000
Rent, Rates and Taxes 1,06,250 50 2,125
Bank A/c 5,68,650 51 11,150
New York Account 5,99,150 13,400
Exchange translation loss (bal. fig.) 2,000
36,31,400 36,31,400 73,775 73,775
Question 20
S & M Ltd., Bombay, have a branch in Sydney, Australia. Sydney branch is an integral foreign operation of S
& M Ltd.
At the end of 31st March, 20X2, the following ledger balances have been extracted from the books of the
Bombay Office and the Sydney Office:
Bombay (` thousands) Sydney
(Austr dollars
thousands)
Debit Credit Debit Credit
Share Capital – 2,000 – –
Reserves & Surplus – 1,000 – –
Land 500 – – –
Buildings (Cost) 1,000 – – –
Buildings Dep. Reserve – 200 – –
Plant & Machinery (Cost) 2,500 – 200 –
Plant & Machinery Dep. Reserve – 600 – 130
Debtors / Creditors 280 200 60 30
Stock (1.4.20X1) 100 – 20 –
Branch Stock Reserve – 4 – –
Cash & Bank Balances 10 – 10 –
Purchases / Sales 240 520 20 123
Goods sent to Branch – 100 5 –
Managing Director’s salary 30 – – –
Wages & Salaries 75 – 45 –
Rent – – 12 –
Office Expenses 25 – 18 –
Commission Receipts – 256 – 100
Branch / H.O. Current A/c 120 – – 7
4,880 4,880 390 390
The following information is also available:
(1) Stock as at 31.3.20X2:
Bombay ` 1,50,000
Sydney A $ 3,125
13.28
You are required to convert the Sydney Branch Trial Balance into rupees; (use the following rates of
exchange :
Opening rate A $ = ` 20
Closing rate A $ = ` 24
Average rate A $ = ` 22
For Fixed Assets A $ = ` 18
(Study Material)
Answer
Sydney Branch Trial Balance (in Rupees)
As on 31st March, 20X2
(` ‘000)
Conversion Rate per A$ Dr. Cr.
Plant & Machinery (cost) ` 18 36,00
Plant & Machinery Dep. Reserve ` 18 23,40
Debtors/Creditors ` 24 14,40 7,20
Stock (1.4.20X1) ` 20 4,00
Cash & Bank Balances ` 24 2,40
Purchase/Sales ` 22 4,40 27,06
Goods received from H.O. – 1,00
Wages & Salaries ` 22 9,90
Rent ` 22 2,64
Office expenses ` 22 3,96
Commission Receipts ` 22 22,00
H.O. Current A/c 1,20
78,70 80,86
Exchange loss (balancing figure) 2,16
80,86 80,86
Question 21
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
13.29
(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 ` 4,20,000 on 31st March, 20X2.
(c) The rates of exchange may be taken as follows:
 on 1.4.20X1 @ ` 40 per US $
 on 31.3.20X2 @ ` 42 per US $
 average exchange rate for the year @ ` 41 per US $
 conversion in $ shall be made upto 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 items pending reconciliation.
(Study Material)
Answer
M/s Carlin
Mumbai Branch Trial Balance in (US $) as on 31st March, 20X2
Conversion Dr. Cr.
rate per US $ US $ US $
(` )
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 10,000.00
(4,20,000/42)
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
13.30
Balance Sheet of Mumbai Branch as on 31st March, 20X2
Liabilities US $ Assets US $ US $
New York Office 39,609.18 Computers 6,000.00
A/c
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 22
Why goods are marked on invoice price by the head office while sending goods to the branch?
(Study Material)
Answer
Goods are marked on invoice price to achieve the following objectives:
(i) To keep secret from the branch manager, the cost price of the goods and profit made, so that the branch
manager may not start a rival and competitive business with the concern; and
(ii) To have effective control on stock i.e. stock at any time must be equal to opening stock plus goods
received from head office minus sales made at branch.
(iii) To dictate pricing policy to its branches, as well as save work at branch because prices have already
been decided.
Question 23
Differentiate Branch Accounts with Departmental accounts.
(Study Material)
Answer
Branch accounts may be maintained either at branch or at head office and no allocation problem arises since
the expenses in respect of each branch can be identified However, Departmental accounts are maintained at
one place only.
Common expenses are distributed among the departments concerned on some equitable basis considered
suitable in the case.
Practical Questions
Question 24
Goods worth ` 50,000 sent by head office but the branch has received till the closing date goods for worth `
40,000 only. Give journal entry in the books of H.O. and branch for goods in transit.
(Study Material)
Answer
Journal entry in the books of Head Office No entry
Journal entry in the books of Branch
` `
Goods-in-transit account Dr. 10,000
To Head Office account 10,000
(Being goods sent by head office is still in transit)
13.31
Question 25
Alphs having head office in Mumbai has a branch in Nagpur. The branch at Nagpur is an independent branch
maintaining separate books of account. On 31.3.20X1, it was found that the goods dispatched by head office
for ` 2,00,000 was received by the branch only to the extent of ` 1,50,000. The balance goods are in transit.
What is the accounting entry to be passed by the branch for recording the goods in transit, in its books?
(Study Material)
Answer
Nagpur branch must include the inventory in its books as goods in transit.
The following journal entry must be made by the branch:
Goods in transit A/c Dr. 50,000
To Head office A/c 50,000
[Being Goods sent by Head office is still in transit on the closing date]
Question 26
Show adjustment journal entry in the books of head office at the end of April, 20X1 for incorporation of inter-
branch transactions assuming that only head office maintains different branch accounts in its books.
A. Delhi branch:
(1) Received goods from Mumbai – ` 35,000 and ` 15,000 from Kolkata.
(2) Sent goods to Chennai – ` 25,000, Kolkata – ` 20,000.
(3) Bill Receivable received – ` 20,000 from Chennai.
(4) Acceptances sent to Mumbai – ` 25,000, Kolkata – ` 10,000.
B. Mumbai Branch (apart from the above) :
(5) Received goods from Kolkata – ` 15,000, Delhi – ` 20,000.
(6) Cash sent to Delhi – ` 15,000, Kolkata – ` 7,000.
C. Chennai Branch (apart from the above) :
(7) Received goods from Kolkata – ` 30,000.
(8) Acceptances and Cash sent to Kolkata – ` 20,000 and `10,000 respectively.
D. Kolkata Branch (apart from the above) :
(9) Sent goods to Chennai – ` 35,000.
(10) Paid cash to Chennai – `15,000.
(11) Acceptances sent to Chennai – `15,000.
(Study Material)
Answer
(a) Journal entry in the books of Head Office
` `
30th April, 20X1 Dr.
Mumbai Branch Account 3,000
Chennai Branch Account Dr. 70,000
To Delhi Branch Account 15,000
To Kolkata Branch Account 58,000
(Being adjustment entry passed by head office in respect of
inter-branch transactions for the month of April, 20X1)
13.32
Working Note:
Inter – Branch transactions
Delhi Mumbai Chennai Kolkata
` ` ` `
A. Delhi Branch
(1) Received goods 50,000 (Dr.) 35,000 (Cr.) 15,000 (Cr.)
(2) Sent goods 45,000 (Cr.) 25,000 (Dr.) 20,000 (Dr.)
(3) Received Bills receivable 20,000 (Dr.) 20,000 (Cr.)
(4) Sent acceptance 35,000 (Cr.) 25,000 (Dr.) 10,000 (Dr.)
B. Mumbai Branch
(5) Received goods 20,000 (Cr.) 35,000 (Dr.) 15,000 (Cr.)
(6) Sent cash 15,000 (Dr.) 22,000 (Cr.) 7,000 (Dr.)
C. Chennai Branch
(7) Received goods 30,000 (Dr.) 30,000 (Cr.)
(8) Sent cash and 30,000 (Cr.) 30,000 (Dr.)
acceptances
D. Kolkata Branch
(9) Sent goods 35,000 (Dr.) 35,000 (Cr.)
(10) Sent cash 15,000 (Dr.) 15,000 (Cr.)
(11) Sent acceptances 15,000 (Dr.) 15,000 (Cr.)
15,000 (Cr.) 3,000 (Dr.) 70,000 (Dr.) 58,000 (Cr.)
Question 27
Give Journal Entries in the books of Branch A to rectify or adjust the following:
(i) Head Office expenses ` 3,500 allocated to the Branch, but not recorded in the Branch Books.
(ii) Depreciation of branch assets, whose accounts are kept by the Head Office not provided earlier for `
1,500.
(iii) Branch paid ` 2,000 as salary to a H.O. Inspector, but the amount paid has been debited by the Branch
to Salaries account.
(iv) H.O. collected ` 10,000 directly from a customer on behalf of the Branch, but no intimation to this effect
has been received by the Branch.
(v) A remittance of ` 15,000 sent by the Branch has not yet been received by the Head Office.
(vi) Branch A incurred advertisement expenses of ` 3,000 on behalf of Branch B.
(Study Material)
Answer
Books of Branch A Journal Entries
Particulars Dr. Cr.
Amount Amount
` `
(i) Expenses account Dr. 3,500
To Head office account 3,500
(Being the allocated expenditure by the head office recorded in
branch books)
(ii) Depreciation account Dr. 1,500
To Head office account 1,500
(Being the depreciation provided)
13.33
Particulars Dr. Cr.
Amount Amount
` `
(iii) Head office account Dr. 2,000
To Salaries account 2,000
(Being the rectification of salary paid on behalf of H.O.)
(iv) Head office account Dr. 10,000
To Debtors account 10,000
(Being the adjustment of collection from branch debtors)
(v) No entry in branch books
(vi) Head Office account Dr. 3,000
To Cash account 3,000
(Being the expenditure on account of Branch B, recorded in
books)
Note: Entry (vi) Inter branch transactions are routed through Head Office.
Question 28
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 withholding ` 10,000 necessary for meeting immediate requirements of
cash. On 31st March, 20X1 the assets at the branch were as follows:
` (‘000)
Cash in Hand 10
Trade Debtors 384
Stock, at Invoice Price 1,080
Furniture and Fittings 500
During the accounting year ended 31st March, 20X2 the invoice price of goods dispatched by the head office
to the branch amounted to ` 1 crore 32 lakhs. Out of the goods received by it, the branch sent back to head
office goods invoiced at ` 72,000. Other transactions at the branch during the year were as follows:
(` ‘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 ` 6,000 were outstanding and cash in hand was again `
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.
(Study Material)
13.34
Answer
In the Head Office Books Branch Account
for the year ended 31st March, 20X2
` ‘000 `’000
To Balance b/d By Balance b/d
Cash in hand 10 1 180
Stock reserve ` 1,080 ×
Trade debtors 384 6
Stock 1,080 By Goods sent to branch A/c (Returns 72
Furniture and fittings 500 to H.O.)
To Goods sent to branch A/c 13,200 By Goods sent to branch A/c (Loading 2,188
To Bank A/c (Payment for furniture) 100 on net goods sent to branch –
To Balance c/d Stock reserve 245  1
 1  13,128 × 
 6
 1, 470 × 
 6
By Bank A/c (Remittance from branch 11,700
to H.O.) (W.N.5)
To Net profit transferred to General P/L 1,096 By Balance c/d
account
Cash in hand 10
To Balance c/d-Outstanding expenses 6 Trade debtors (W.N.3) 485
Stock (W.N.1) 1,470
Furniture and 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. Memorandum Branch Stock Account
` ‘000 ` ‘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
14,382 14,382
3. Memorandum Branch Debtors Account
` ‘000 ` ‘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
13.35
4. Memorandum Branch Furniture and Fittings Account
` ‘000 ` ‘000
To Balance b/d 500 By Depreciation [(500x16%) + (100x16%x3/12)] 84
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. Memorandum Branch Cash Account
` ‘000 ` ‘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
Question 29
On 31st March, 20X2 Kanpur Branch submits the following Trial Balance to its Head Office at Lucknow :
Debit Balances ` in lacs
Furniture and Equipment 18
Depreciation on furniture 2
Salaries 25
Rent 10
Advertising 6
Telephone, Postage and Stationery 3
Sundry Office Expenses 1
Stock on 1st April, 20X1 60
Goods Received from Head Office 288
Debtors 20
Cash at bank and in hand 8
Carriage Inwards 7
448
Credit Balances
Outstanding Expenses 3
Goods Returned to Head Office 5
Sales 360
Head Office 80
448
Stock on 31st March, 20X2 was valued at ` 62 lacs. On 29th March, 20X2 the Head Office dispatched goods
costing ` 10 lacs to its branch. Branch did not receive these goods before 1st April, 20X2. Hence, the figure of
goods received from Head Office does not include these goods. Also, the head office has charged the branch
` 1 lac for centralized services for which the branch has not passed the entry. You are required to:
(i) Pass Journal Entries in the books of the Branch to make the necessary adjustments
(ii) Prepare Final Accounts of the Branch including Balance Sheet, and
(iii) Pass Journal Entries in the books of the Head Office to incorporate the whole of the Branch Trial
Balance.
(Study Material)
13.36
Answer
(i) Books of Branch
Journal Entries
(` in lacs)
Dr. Cr.
Goods in Transit A/c Dr. 10
To Head Office A/c 10
(Goods dispatched by head office but not received by branch before 1st
April, 20X2)
Expenses A/c Dr. 1
(Amount charged by head office for centralised services)
(ii) Trading and Profit & Loss Account of the Branch for the year ended 31st March, 20X2
` in lacs ` in lacs
To Opening Stock 60 By Sales 360
To Goods received from By Closing Stock 72
including transit
Head Office 288 +10
Less: Returns (5) 293
To Carriage Inwards 7
To Gross Profit c/d 72
432 432
To Salaries 25 By Gross Profit b/d 72
To Depreciation on Furniture 2
To Rent 10
To Advertising 6
To Telephone, Postage & Stationery 3
To Sundry Office Expenses 1
To Head Office Expenses (centralised services) 1
To Net Profit Transferred to
Head Office A/c 24
72 72
Balance Sheet as on 31st March, 20X2
Liabilities ` in lacs Assets ` in lacs
Head Office 80 Furniture & Equipment 20
Add: Goods in transit 10 Less: Depreciation (2) 18
Head Office Expenses 1 Stock in hand 62
Net Profit 24 Goods in Transit 10
115 Debtors 20
Outstanding Expenses 3 Cash at bank and in hand 8
118 118
13.37
(iii) Books of Head Office
Journal Entries
` `
Dr. Dr.
Branch Trading Account Dr. 365
To Branch Account 365
(The total of the following items in branch trial balance
debited to branch trading account:
` in lacs
Opening Stock 60
Goods received from Head Office 288
Goods purchased but not received 10
Carriage Inwards 7)
Branch Account Dr. 437
To Branch Trading Account 437
(Total sales, closing stock and goods returned to Head Office credited to
branch trading account, individual amount being as follows:
` in lacs
Sales 360
Closing Stock 62
Goods in transit 10
Goods returned to Head Office 5)
Branch Trading Account Dr. 72
To Branch Profit and Loss Account 72
(Gross profit earned by branch credited to Branch Profit and Loss Account)
Branch Profit and Loss Account Dr. 48
To Branch Account 48
(Total of the following branch expenses debited to Branch Profit & Loss
Account:
` in lacs
Salaries 25
Rent 10
Advertising 6
Telephone, Postage & Stationery 3
Head Office Expenses 1
Depreciation on furniture 2)
Branch Profit & Loss Account Dr. 24
To Profit and Loss Account 24
(Net profit at branch credited to general Profit & Loss A/c)
Branch Furniture & Equipment Dr. 18
Branch Stock Dr. 62
Branch Debtors Dr. 20
Branch Cash at Bank and in Hand Dr. 8
13.38
` `
Dr. Dr.
Goods in Transit Dr. 10
To Branch 118
(Incorporation of different assets at the branch in H.O. books)
Branch Dr. 3
To Branch Outstanding Expenses 3
(Incorporation of Branch Outstanding Expenses in H.O. books)
Question 30
M/s Marena, Delhi has a branch at Bangalore to which office goods are invoiced at cost plus 25%. The
branch sells both for cash and on credit. Branch Expenses are paid direct from head office and the Branch
has to remit all cash received into the Head Office Bank Account.
From the following details, relating to calendar year 20X1, prepare the accounts in the Head Office Ledger
and ascertain the Branch Profit under Stock and Debtors Method’.
Branch does not maintain any books of account, but sends weekly returns to the Head Office.
`
Goods received from Head Office at invoice price 45,00,000
Returns to Heads Office at invoice price 90,000
Stock at Bangalore as on 1st January, 20X1 4,50,000
Sales during the year - Cash 15,00,000
- Credit 27,00,000
Sundry Debtors at Bangalore as on 1st January, 20X1 5,40,000
Bad Debts in the year 30,000
Sales returns at Bangalore Branch 60,000
Rent, Rates and Taxes at Branch 1,35,000
Salaries, Wages and Bonus at Branch 4,50,000
Office Expenses 45,000
Stock at Branch on 31st December, 20X1 at invoice price 9,00,000
(Study Material)
Answer
Bangalore Branch Stock Account
(`) (`)
To Balance b/d Goods sent to 4,50,000 By Goods sent to branch A/c 90,000
(Returns)
branch A/c 45,00,000 By Bank A/c (Cash sales) 15,00,000
To Branch debtors A/c (Returns) 60,000 By Branch debtors A/c (credit sales) 27,00,000
To Branch adjustment A/c By Balance c/d 9,00,000
(Surplus over invoice price)* 1,80,000 ————
51,90,000 51,90,000
*Alternatively, this may directly be transferred to Branch P&L A/c without routing it through Branch Adjustment
Account.
13.39
Bangalore Branch Adjustment Account
(`) (`)
To Stock reserve - 20% of ` 9,00,000 1,80,000 By Stock reserve - 20% of ` 4,50,000 90,000
(closing stock) (Opening stock)
To Branch profit & loss A/c (Gross 9,72,000 By Goods sent to branch A/c – 20% of 8,82,000
profit) ` 44,10,000 (45,00,000 – 90,000)
By Branch stock A/c 1,80,000
11,52,000 11,52,000
Branch Profit & Loss Account
(`) (`)
To Branch expenses A/c 6,30,000 By Branch adjustment A/c 9,72,000
To Branch debtors A/c (Discount) 45,000 (Gross Profit)
To Branch Debtors A/c (Bad debts) 30,000
To Net profit (transferred to Profit & Loss 2,67,000
A/c) ———
9,72,000 9,72,000
(`) (`)
To Bank A/c (Rent, rates & taxes) 1,35,000 By Branch profit and loss A/c 6,30,000
(Transfer)
To Bank A/c (Salaries, wages& 4,50,000
bonus)
To Bank A/c (Office expenses) 45,000
6,30,000 6,30,000
(`) (`)
To Balance b/d 5,40,000 By Bank A/c 24,00,000
To Branch stock A/c 27,00,000 By Branch profit and loss A/c (Bad 75,000
debts and discount)
By Branch stock A/c (Sales returns) 60,000
By Balance c/d (bal. fig.) 7,05,000
32,40,000 32,40,000
Goods sent to Branch Account
(`) (`)
To Branch stock A/c 90,000 By Branch stock A/c 45,00,000
To Branch adjustment A/c 8,82,000
45,00,000 45,00,000
13.40
Question 31
Beta, having head office at Mumbai has a branch at Nagpur. The head office does wholesale trade only at
cost plus 80%. The goods are sent to branch at the wholesale price viz., cost plus 80%. The branch at
Nagpur is wholly engaged in retail trade and the goods are sold at cost to H.O. plus 100%.
Following details are furnished for the year ended 31st March, 20X1:
Head Office Branch
(`) (`)
Opening stock 2,25,000
Purchases 25,50,000
Goods sent to branch (Cost to H.0. plus 80%) 9,54,000
Sales 27,81,000 9,50,000
Office expenses 90,000 8,500
Staff salary 65,000 12,000
You are required to prepare Trading and Profit and Loss Account of the head office and branch for the year
ended 31st March, 20X1.
(Study Material)
Answer
Trading and Profit and Loss A/c For the year ended 31st March 20X1
Head office Branch Head office Branch
` ` ` `
To Opening stock 2,25,000 - By Sales 27,81,000 9,50,000
To Purchases 25,50,000 - By Goods sent to 9,54,000 _
branch
To Goods received from - 9,54,000 By Closing stock 7,00,000 99,000
head office (W.N.1 & 2)
To Gross profit c/d 16,60,000 95,000
44,35,000 10,49,000 44,35,000 10,49,000
To Office expenses 90,000 8,500 By Gross profit b/d 16,60,000 95,000
To Selling expenses 72,000 6,300
To Staff salaries 65,000 12,000
To Branch Stock Reserve 44,000 _
(W.N.3)
To Net Profit 13,89,000 68,200
16,60,000 95,000 16,60,000 95,000
Working Notes:
(1) Calculation of closing stock of head office: `
Opening Stock of head office 2,25,000
Goods purchased by head office 25,50,000
27,75,000
Less: Cost of goods sold [37,35,000 x 100/180] (20,75,000)
7,00,000
13.41
(2) Calculation of closing stock of branch: `

Goods received from head office [At invoice value] 9,54,000
Less: Invoice value of goods sold [9,50,000 x 180/200] (8,55,000)
99,000
(3) Calculation of unrealized profit in branch stock:
Branch stock ` 99,000
Profit included 80% of cost
Hence, unrealized profit would be = ` 99,000 x 80/180 ` 44,000
Question 32
Pass necessary Journal entries in the books of an independent Branch of a business entity to rectify or adjust
the following:
(i) Income of ` 2,800 allocated to the Branch by Head Office but not recorded in the Branch books.
(ii) Branch paid `3,000 as salary to a Head Office Manager, but the amount paid has been debited by the
Branch to Salaries Account.
(iii) Branch incurred travelling expenses of `5,000 on behalf of other Branches, this was not recorded in the
books of Branch.
(iv) A remittance of ` 1,50,000 sent by the Branch has not received by Head Office on the date of
reconciliation of Accounts.
(v) Head Office allocates `75,000 to the Branch as Head Office expenses, which has not yet been recorded
by the Branch.
(vi) Head Office collected `30,000 directly from a Branch Customer. The intimation of the fact has been
received by the Branch only now, not recorded till now.
(vii) Goods dispatched by the Head office amounting to `10,000, but not received by the Branch till date of
reconciliation. The Goods have been received subsequently.
(Study Material)
Answer
Books of Branch Journal Entries
Amount in `
Sr. No Particulars Dr. Cr.
(i) Head Office Account Dr. 2,800
To Income Account 2,800
(Being the income allocated by the Head office not recorded
earlier, now recorded)
(ii) Head Office Account Dr. 3,000
To Salaries Account 3,000
(Being rectification of salary paid on behalf of Head Office)
(iii) Head Office Account Dr. 5,000
To Cash Account 5,000
(Being expenditure incurred on account of other branch, now
recorded in books)
(iv) No entry in Branch Books is required.
(v) Expenses Account Dr. 75,000
To Head Office Account 75,000
(Being allocated expenses of Head Office recorded)
(vi) Head Office Account Dr. 30,000
To Debtors Account 30,000
(Being adjustment entry for collection from Branch Debtors
directly by Head Office)
13.42
Amount in `
Sr. No Particulars Dr. Cr.
(vii) Goods -in- transit Account Dr. 10,000
(Being goods sent by Head Office still in-transit)
Question 33
The Washington branch of XYZ Mumbai sent the following trial balance as on 31st December, 20X1:
$ $
Head office A/c _ 22,800
Sales _ 84,000
Debtors and creditors 4,800 3,400
Machinery 24,000 _
Cash at bank 1,200 _
Stock, 1 January, 20X1 11,200 _
Goods from H.O. 64,000 _
Expenses 5,000 _
1,10,200 1,10,200
In the books of head office, the Branch A/c stood as follows:
Washington Branch A/c
` `
To Balance b/d 8,10,000 By Cash 28,76,000
To Goods sent to branch 29,26,000 By Balance c/d 8,60,000
37,36,000 37,36,000
Goods are sent to the branch at cost plus 10% and the branch sells goods at invoice price plus 25%.
Machinery was acquired in past, when $ 1.00 = ` 40.
Rates of exchange were:
1st January, 20X1 $ 1.00 = ` 46
31st December, 20X1 $ 1.00 = `48
Average $ 1.00 = ` 47
Machinery is depreciated @ 10% and the branch manager is entitled to a commission of 5% on the profits of
the branch.
(i) Prepare the Branch Trading & Profit & Loss A/c in dollars.
(ii) Convert the Trial Balance of branch into Indian currency and prepare Branch Trading & Profit and Loss
A/c and the Branch A/c in the books of head office.
(Study Material)
Answer
(i) In the Books of Head Office
Branch Trading and Profit & Loss A/c (in Dollars) for the year ended 31st December, 20X1
Particulars $ Particulars $
To Goods from H.O. 64,000 By Closing stock (W.N.2) 8,000
To Gross profit c/d 16,800
92,000 92,000
13.43
Particulars $ Particulars $
To Expenses 5,000 By Gross profit b/d 16,800
To Depreciation (24,000 x 10%) 2,400
To Manager’s commission (W.N.1) 470
To Net profit c/d 8,930
16,800 16,800
(ii) (a) Converted Branch Trial Balance (into Indian Currency)
Particulars Rate per $ Dr. (`) Cr. (`)
Machinery 40 9,60,000 _
Stock January 1, 20X1 46 5,15,200 _
Goods from head office Actual 29,26,000 _
Sales 47 _ 39,48,000
Expenses 47 2,35,000 _
Debtors & creditors 48 2,30,400 1,63,200
Cash at bank 48 57,600 _
Head office A/c Actual _ 8,60,000
Difference in exchange rate (b.f.) 47,000 _
49,71,200 49,71,200
Closing stock $ 8,000 (W.N. 2) 48 ` 3,84,000
(b) Branch Trading and Profit & Loss A/c for the year ended 31st December, 20X1
` `
To Goods from head office 29,26,000 By Closing stock (W.N.2) 3,84,000
43,32,000 43,32,000
To Expenses 2,35,000 By Gross profit b/d 8,90,800
To Depreciation @ 10% on `
9,60,000 96,000
To Exchange difference 47,000
To Manager’s commission (W.N.1) 22,560
To Net Profit c/d 4,90,240
8,90,800 8,90,800
(c) Branch Account
` `
To Balance b/d 8,60,000 By Machinery 9,60,000
To Net profit 4,90,240 Less: Depreciation (96,000)
To Creditors 1,63,200 8,64,000
To Outstanding By Closing stock 3,84,000
commission 22,560 By Debtors 2,30,400
By Cash at bank 57,600
15,36,000 15,36,000
13.44
Working Notes:
1. Calculation of manager’s commission @ 5% on profit
i.e. 5% of $[16,800 – (5,000 + 2,400)]
Or 5% × $9,400 = $ 470
Manager’s commission in Rupees = $ 470 $ ` 48 = ` 22,560
2. Calculation of closing stock
$
Opening stock 11,200
Add: Goods from head office 64,000
Less: Cost of goods sold (at invoice price) 75,200
100 (67,200)
i.e. × 84,000
125
Closing stock 8,000
Closing stock in Rupees = $8,000 x ` 48 = ` 3,84,000.
Note: Manager is entitled to commission on profits earned at the end of the year.
Test your Knowledge

MCQs
1. If goods are invoiced to branches at cost, trading results of branch can be ascertained by
(a) Debtors method.
(b) Stock and debtors method.
(c) Either (a) or (b).
Answer: (c)
2. Under branch trading and profit loss account method
(a) H.O prepares profit and loss account.
(b) Each branch is treated separate entity.
Answer: (c)
3. Goods may be invoiced to branch at
(a) Cost or Selling price.
(b) Wholesale price.
Answer: (c)
4. Under debtors method, opening balance of debtors is
(a) Debited to branch account.
(b) Credited to branch account.
(c) Debited to H.O account.
Answer: (a)
5. Cost of goods returned by branch will have the following effect
(a) Goods sent to branch account will be debited.
(b) Branch stock account will be credited.
(c) (a) and (b).
Answer: (c)
6. Assets and liabilities of a non-integral foreign operation should be converted at
(a) Closing exchange rate.
(b) Average exchange rate.
(c) Opening exchange rate.
Answer: (a)
13.45
7. All of the following are examples of monetary assets except:
(a) Trade Payables.
(b) Inventory.
(c) Trade Receivables.
Answer: (b)
8. If asset of an integral foreign operation is carried at cost, cost and depreciation of tangible fixed assets is
translated at
(a) Average exchange rate.
(b) Closing exchange rate.
(c) Exchange rate at the date of purchase of asset.
Answer: (c)
9. Incomes and expenses of a NFO is translated at
(a) Average rate that approximates the actual exchange rates.
(b) Exchange rate at the date of transaction.
(d) Either (a) or (b).
Answer: (c)
10. AS 11 classifies foreign branches are classified as
(a) Autonomous branches and non-autonomous branches.
(b) Uncontrolled and fully controlled branches.
(c) Integral and non-integral foreign operations.
Answer: (c)
13.46
Chap. 13  Accounting for Branches including Foreign Branches
QUESTION BANK
Question 34
M/s Rani & Co. has head office at Singapore and branch at Delhi (India). Delhi branch is an integral foreign
operation of M/s Rani & Co., Delhi branch furnishes you with its Trial Balance as on 31st March, 2019 and the
additional information thereafter.
Dr. Cr.
Rupees in thousands
Stock on 1st April, 2018 600 -
Purchases and Sales 1,600 2,400
Sundry Debtors and Creditors 800 600
Bills of Exchange 240 480
Wages 1,120 -
Rent, rates and taxes 720 -
Sundry Expenses 320 -
Computers 600 -
Bank Balance 520 -
Singapore Officer a/c - 3,040
Total 6,520 6,520
(a) Computers were acquired from a remittance of Singapore dollar 12,000 received from Singapore
Head Office and paid to the supplie ` Depreciate Computers at the rate of 40% for the year.
(b) Closing Stock of Delhi branch was ` 15,60,000 on 31st March, 2019.
(c) The Rates of Exchange may be taken as follows:
(i) on 1.4.2018 @ ` 50 per Singapore Dollar
(ii) on 31.3.2019 @ ` 52 per Singapore Dollar
(iii) average Exchange Rate for the year @ ` 51 per Singapore Dollar
(iv) conversion in Singapore Dollar shall be made upto two decimal accuracy.
(d) Delhi Branch Account showed a debit balance of Singapore Dollar 59,897.43 on 31.3.2019 in the
Head office books and there were no items pending for reconciliation.
In the books of Head office, you are required to prepare:
(1) Revenue statement for the year ended 31st March, 2019. (in Singapore Dollar)
(2) Balance Sheet as on that date. (in Singapore Dollar)
(May 2019) (8 Marks)
Answer
Revenue Statement
Singapore dollar Singapore dollar
To Wages 21,960.78 (15,60,000/52)
To Gross profit b/d 11,725.49 _________
77,058.82 77,058.82
13.47
Singapore dollar Singapore dollar
To Rent, rates and taxes 14,117.65 By Gross profit c/d 11,725.49
To Sundry Expenses 6,274.51 By Net loss b/d 13,466.67
To Depreciation on computers
(Singapore dollar 12,000 × 0.4) 4,800.00
25,192.16 25,192.16
Balance Sheet of Delhi Branch as on 31st March, 2019
Liabilities Singapore Assets Singapore Singapore
dollar dollar dollar
Singapore Office 59,897.43 Computers 12,000.00
A/c
67,199.99 67,199.99
Working Note:
M/s Rani & Co.
Delhi Branch Trial Balance in (Singapore $) as on 31st March, 2019
Conversion Dr. Cr.
rate per Singapore Singapore
Singapore dollar dollar
dollar
(` )
Stock on 1.4.18 6,00,000.00 50 12,000.00 –
Purchases and sales 16,00,000.00 24,00,000.00 51 31,372.55 47,058.82
Sundry Debtors and 8,00,000.00 6,00,000.00 52 15,384.61 11,538.46
Creditors
Bills of exchange 2,40,000.00 4,80,000.00 52 4,615.38 9,230.77
Wages 11,20,000.00 51 21,960.78 –
Rent, rates and taxes 7,20,000.00 51 14,117.65 –
Sundry Expenses 3,20,000.00 51 6,274.51 –
Computers 6,00,000.00 – 12,000.00 –
Bank balance 5,20,000.00 52 10,000.00 –
Singapore office A/c – 59,897.43
1,27,725.48 1,27,725.48
Question 35
Ayan Ltd. invoices goods to its branch at cost plus 33 31 %*. From the following particulars prepare Branch
Stock Account, Branch Stock Adjustment Account and Branch Profit and Loss Account as they would appear
in the books of head office.
`
Stock at commencement at Branch at invoice Price 3,60,000
Stock at close at Branch at Invoice Price 2,88,000
Goods sent to Branch during the year at invoice price (including goods invoiced at ` 24,00,000
48,000 to Branch on 31.03.2018 but not received by Branch before close of the
year).
Return of goods to head office (invoice Price) 1,20,000
13.48
`
Credit Sales at Branch 1,20,000
Invoice value of goods pilfered 24,000
Normal loss at Branch due to wastage and deterioration of stock (at invoice price) 36,000
Cash Sales at Branch 21,60,000
Ayan closes its books on 31st March, 2018.
(May 2018) (10 Marks)
* There was a printing error in the question. 33 31 % was wrongly printed as 3331 % in the question paper.
Answer
In the books of Head Office
To Balance bid 3,60,000 By Bank A/c (cash Sales) 21,60,000
To Goods sent to Branch A/c 24,00,000 By Branch Debtors A/c 1,20,000
(Credit Sales)
To Branch Adjustment A/c - 36,000 By Goods sent to Branch A/c 1,20,000
balancing fig. (Surplus)*** (Returns to H.O.)
By Branch Adjustment A/c* 6,000
(*24,000 × 25/100)
By Branch P&L A/c* 18,000
(Cost of Abnormal Loss)
By Branch Adjustment 36,000
A/c** (Invoice price of normal
loss)
By Balance c/d:
In hand 2,88,000
In transit 48,000
27,96,000 27,96,000
* Alternatively, combined posting for the amount of ` 24,000 may be passed through Goods pilfered
account.
** Alternatively, it may first be transferred to normal Loss account which may ultimately be closed by
transfer to Branch Adjustment account. The final amount of net profit will however remain same.
*** It has been considered that the surplus may be due to sale of goods by branch at price higher than
invoice price.
Branch Stock Adjustment Account
To Branch Stock A/c 6,000 By Stock Reserve A/c 90,000
(Loading on Abnormal Loss) (` 3,60,000 × 25/100)
To Branch Stock A/c 36,000 By Goods Sent to Branch A/c 5,70,000
(Normal Loss) (` 24,00,000 - ` 1,20,000) × 25/100
To Stock Reserve A/c 84,000 By Branch Stock A/c (Surplus) 36,000
(`3,36,000 × 25/100)
To Gross Profit t/f to P & L A/c 5,70,000
6,96,000 6,96,000
13.49
Branch Profit and Loss Account
To Branch Stock A/c 18,000 By Branch Adjustment A/c 5,70,000
(Cost of Abnormal Loss) (Gross Profit)
To Net Profit t/f to General P&LA/c 5,52,000
5,70,000 5,70,000
Question 36
M/s ABC & Co. has head office at New York (U.S.A.) and branch in Bangalore (India). Bangalore branch is an
integral foreign operation of ABC & Co.
Bangalore branch furnishes you with its trial balance as on 31st March, 2018 and the additional information
given thereafter:
Dr. Cr.
(Rupees in thousands)
Stock on 1st April, 2017
Purchases and Sales 300
Sundry Debtors & Creditors 800 1,200
Wages & Salaries 120 240
Rent, Rates & T axes 560 -
Sundry Charges 360 -
Computers 160 -
Bank Balance 240 -
New York Office A/c 420 -
- 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 Bangalore branch was worth ` 4,20,000 on 31st March, 2018.
- On 01.04.2017 @ ` 55 per US $
- On 31.03.2018 @ ` 60 per US $
- Average exchange rate for the year @ ` 58 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, 2018 and the
balance sheet as on that date of Bangalore branch as would appear in the books of New York head office of
ABC & Co. You are informed that Bangalore branch account showed a debit balance of US $ 29845.35 on
31.3.2018 in New York books and there were no items pending reconciliation.
(RTP May 2019)
13.50
Answer:
M/s ABC & Co.
Bangalore Branch Trial Balance in (US $)
as on 31st March, 2018
Conversion Dr. Cr.
(`)
Stock on 1.4.17 55 5,454.55 –
Wages and salaries 58 9,655.17 –
Rent, rates and taxes 58 6,206.90 –
Sundry charges 58 2,758.62 –
Computers – 6,000.00 –
Bank balance 60 7,000.00 –
New York office A/c – – 29,845.35
59,535.01 59,535.01
Trading and Profit & Loss Account
US $ US $
To Wages and salaries 9,655.17 (` 4,20,000/60)
By Gross Loss c /d 1,213.16
28,902.82 28,902.82
To Depreciation on 3,600.00
computers
(US $ 6,000 × 0.6)
13,778.68 13,778.68
Balance Sheet of Bangalore Branch as on 31st March, 2018
New York Office A/c 29,845.35 Computers 6,000.00
Less: Net Loss (13,778.68) 16,066.67 Less: (3,600.00) 2,400.00
Depreciation
25,066.67 25,066.67
13.51
Question 37
XYZ is having its Branch at Kolkata. Goods are invoiced to the branch at 20% profit on sale. Branch has been
instructed to send all cash daily to head office. All expenses are paid by head office except petty expenses
which are met by the Branch Manager. From the following particulars, you are required to prepare branch
account in the books of Head Office.
` `
Stock on 1st April 2017 (invoice price) 30,000 Discount allowed to debtors 160
Sundry Debtors on 1st April, 2017 18,000 Expenses paid by head office:
Cash in hand as on 1st April, 2017 800 Rent 1,800
Office furniture on 1st April, 2017 3,000 Salary 3,200
Goods invoiced from the head office (invoice 1,60,000 Stationery S Printing 800
price)
Goods returned to Head Office 2,000 Petty expenses paid by the branch 600
Goods returned by debtors 960 Depreciation to be provided on
branch furniture at 10% p.a.
Cash received from debtors 60,000 Stock on31st March, 2018
Cash Sales 1,00,000 (at invoice price) 28,000
Credit sales 60,000
Answer:
In the books of Head Office - XYZ
Kolkata Branch Account (at invoice)
` `
To Balance b/d By Stock reserve (opening) 6,000
Stock 30,000 By Remittances:
Debtors 18,000 Cash Sales 1,00,000
Cash in hand 800 Cash from Debtors 60,000 1,60,000
Furniture 3,000 By Goods sent to branch (loading) 32,000
To Goods sent to By Goods returned by
branch 1,60,000 branch (Return to H.O.) 2,000
To Goods returned by 400 By Balance c/d
branch (loading) Stock 28,000
To Bank (expenses Debtors 16,880
paid by H.O.) Cash (800-600) 200
Rent 1,800 Furniture (3,000-300) 2,700
Salary 3,200
Stationary & printing 800 5,800
To Stock reserve (closing) 5,600
To Profit transferred to
General Profit & Loss A/c 24,180
2,47,780 2,47,780
13.52
Working Note:
Debtors Account
` `
To Balance b/d 18,000 By Cash account 60,000
To Sales account (credit) 60,000 By Sales return account 960
By Discount allowed account 160
78,000 78,000
Note: It is assumed that goods returned by branch are at invoice price.
Question 38
Pass necessary Journal entries in the books of an independent Branch of M/s TPL Sons, wherever required,
to rectify or adjust the following transactions:
(i) Branch paid ` 5,000 as salary to a Head Office Manager, but the amount paid has been debited by
the Branch to Salaries Account.
(ii) A remittance of ` 1,50,000 sent by the Branch has not received by Head Office on the date of
reconciliation of Accounts.
(iii) Branch assets accounts retained at head office, depreciation charged for the year `15,000 not
recorded by Branch.
(iv) Head Office expenses ` 75,000 allocated to the Branch, but not yet been recorded by the Branch.
(v) Head Office collected ` 60,000 directly from a Branch Customer. The intimation of the fact has not
been received by the Branch.
(vi) Goods dispatched by the Head office amounting to ` 50,000, but not received by the Branch till date
of reconciliation.
(vii) Branch incurred advertisement expenses of ` 10,000 on behalf of other Branches, but not recorded in
the books of Branch.
(viii) Head office made payment of ` 16,000 for purchase of goods by branch, but not recorded in branch
books.
(RTP November 2018)
Answer:
Books of Branch
Journal Entries
Amounts `
Dr. Cr.

To Salaries Account 5,000
(ii) No entry in Branch Books is required.

(iii) Depreciation A/c Dr. 15,000
(Being depreciation of assets accounted for)
(iv) Expenses Account Dr. 75,000

(Being allocated expenses of Head Office recorded)
13.53
Amounts `
Dr. Cr.
(v) Head Office Account Dr. 60,000

To Debtors Account 60,000
(Being adjustment entry for collection from Branch Debtors
directly by Head Office)
(vi) Goods in-transit Account Dr. 50,000

(vii) Head Office Account Dr. 10,000
To expenses Account 10,000
(Being expenditure incurred, wrongly recorded in books)
(vii) Purchases account A/c Dr. 16,000

(Being purchases booked)
Question 39
Alpha Ltd. has a retail shop under the supervision of a manager. The ratio of gross profit at selling price is
constant at 25 per cent throughout the year to 31st March, 2017.
Branch manager is entitled to a commission of 10 per cent of the profit earned by his branch, calculated
before charging his commission but subject to a deduction from such commission equal in 25 per cent of any
ascertained deficiency of branch stock. All goods were supplied to the branch in head office.
The following details for the year ended 31st March, 2017 are given as follows:
` `
Opening Stock (at cost) 74,736 Chargeable expenses 49,120
Goods sent to branch (at cost) 2,89,680 Closing Stock (Selling Price) 1,23,328
Sales 3,61,280
Manager's commission paid on account 2,400
From the above details, you are required to calculate the commission due to manager for the year ended 31st
March, 2017.
(RTP May 2018)
Answer:
Step 1: Calculation of Deficiency
Branch stock account (at invoice price)
To Opening Stock (` 74,736 + 1/3 By Sales 3,61,280
of ` 74,736) 99,648 By Closing Stock 1,23,328
To Goods sent to Branch A/c By Deficiency at sale
(` 2,89,680 + 1/3 of ` 2,89,680) 3,86,240 price [Balancing figure] 1,280
4,85,888 4,85,888
13.54
Step 2: Calculation of Net Profit before Commission
Branch account
To Opening [`74,736 + 1/3 of ` 74,736] 99,648 By Sales 3,61,280
To Gross sent to Branch A/c 3,86,240 By Closing Stock 1,23,328
(`2,89,680 + 1/3 of ` 2,89,680) By Stock Reserve A/c 24,912
To Expenses 49,120 By goods sent to Branch A/c 96,560
To Stock Reserve A/c (`1,23,328x25/100) 30,832
To Net Profit - subject to manager's 40,240
commission
6,06,080 6,06,080
Step 3: Calculation of Commission still due to manager
`
A Calculation at 10% profit before charging his commission [` 40,240x 10/100] 4,024
B Less: 25% of cost of deficiency in stock (25% of (75% of ` 1,280) (240)
C Commission for the year [A-B] 3,784
D Less: Paid on account (2,400)
E Balance due (C-D) 1,384
Question 40
XYZ is having its Branch at Kolkata. Goods are invoiced to the branch at 20% profit on sale. Branch has been
instructed to send all cash daily to head office. All expenses are paid by head office except petty expenses
which are met by the Branch Manager. From the following particulars, you are required to prepare branch
account in the books of Head Office.
(`) (`)
Stock on 1st April 2017 30,000 Discount allowed to
(invoice price) debtors 160
Sundry Debtors on 1st April, 2017 18,000 Expenses paid by head office:
Cash in hand as on 1st April, 2017 - Rent 1,800
Office furniture on 1st April, 2017 3,000 Salary 3,200
Goods invoiced from the head 1,60,000 Stationery & Printing 800
office (invoice price)
Goods returned to Head Office 2,000 Petty expenses paid by the 600
(invoice price) branch
Goods returned by debtors 960 Depreciation to be provided on
branch
Cash received from debtors 60,000 furniture at 10% p.a.
Cash Sales 1,00,000 Stock on 31st March, 2018
Credit sales 60,000 (at invoice price) 28,000
13.55
Answer:
In the books of Head Office – XYZ
Kolkata Branch Account (at invoice)
` `
To Balance b/d By Stock reserve (opening) 6,000
Stock 30,000 By Remittances:
Debtors 18,000 Cash Sales 1,00,000
Furniture 3,000 Cash from Debtors 60,000
To Goods sent to Less: Petty expenses (600) 1,59,400
branch 1,60,000 By Goods sent to branch (loading) 32,000
To Goods returned by 400 By Goods returned by
branch (loading) branch (Return to H.O.) 2,000
To Bank (expenses By Balance c /d
paid by H.O.) Stock 28,000
Rent 1,800 Debtors 16,880
Salary 3,200 Furniture (3,000-300) 2,700
Stationary &
printing 800 5,800
To Stock reserve (c losing) 5,600
T o Profit transferred to
General Profit & Loss A/c 24,180
2,46,980 2,46,980
Working Note:
Debtors Account
` `
To Balance b/d 18,000 By Cash account 60,000
To Sales account (credit) 60,000 By Sales return account 960
By Discount allowed ac count 160
By Balance c /d 16,880
78,000 78,000
Note: In the absence of opening c ash balance, remittance to Head Office has been made after payment of
petty expenses.
Question 41
On 31st December, 2016 the following balances appeared in the books of Kolkata Branch of an English firm
Amount in ` Amount in `
Stock on 1st Jan., 2016 2,34,000
Rent, Rates and T axes 1,06,250 -
Furniture 91,000 -
Bank A/c 5,68,650
36,31,400 36,31,400
13.56
Stock on 31st December, 2016 was ` 6,37,500.
Branch account in New York books showed a debit balance of $ 13,400 on 31st December, 2016 and
The rate of exchange on 31st December, 2015 was ` 52 and on 31st December, 2016 was ` 51. The average
rate for the year was ` 50.
Prepare in the Head Office books the Profit and Loss a/c and the Balance Sheet of the Branch
Answer:
Kolkata Branch Profit and Loss Account
for the year ended 31st December, 2016
$ $
To Gross profit c /d 23,625 (6,37,500/51)
59,375 59,375
To Net Profit c /d 17,500
23,625 23,625
Balance Sheet of Kolkata Branch as on 31st December, 2016

Add : Net profit 17,500 30,900 Closing Stock 12,500
Cash at bank 11,150
44,400 44,400
Working Note:
Require for calculation of Exchange Translation Loss
Kolkata Branch Trial Balance (converted in $) as on 31st December, 2016
` ` rate ($) ($)
Stock on 1st Jan., 2016 2,34,000 52 4,500

Purchases & Sales 15,62,500 23,43,750 50 31,250 46,875
13.57
` ` rate ($) ($)

Rent, Rates and T axes 1,06,250 50 2,125
Bank A/c 5,68,650 51 11,150
Exchange translation loss (bal.
fig.) 2,000
36,31,400 36,31,400 73,775 73,775
Question 42
M/s Heera & Co. has head office at U.S.A. and branch in Patna (India). Patna branch is an integral foreign
operation of Heera & Co.
Patna branch furnishes you with its trial balance as on 31st March, 2018 and the additional information given
thereafter:
Dr. Cr.
(Rupees in thousands)
Stock on 1st April, 2017 300
Purchases and Sales 800 1,200
Sundry Debtors & Creditors 400 300
Wages & Salaries 560 -
Rent, Rates & Taxes 360 -
Sundry Charges 160 -
Plant 240 -
Bank Balance 420 -
New York Office A/c - 1,620
3,360 3,360
Information:
(a) Plant was acquired from a remittance of US $ 6,000 received from USA head office and paid to the
suppliers. Depreciate Plant at 60% for the year.
(b) Unsold stock of Patna branch was worth ` 4,20,000 on 31st March, 2018.
- On 01.04.2017 @ ` 55 per US $
- On 31.03.2018 @ ` 60 per US $
- Average exchange rate for the year @ `58 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, 2018 and the
balance sheet as on that date of Patna branch as would appear in the books of USA head office of Heera &
Co. You are informed that Patna branch account showed a debit balance of US $ 29845.35 on 31.3.2018 in
USA books and there were no items pending reconciliation.
13.58
Answer:
M/s Heera & Co.
Patna Branch Trial Balance in (US $)
Conversion Dr. Cr.
(`)
Stock on 1.4.15 55 5,454.55 –
Wages and salaries 58 9,655.17 -
Rent, rates and taxes 58 6,206.90 -
Sundry charges 58 2,758.62 -
Plant – 6,000.00 -
Bank balance 60 7,000.00 -
USA office A/c – - 29,845.35
59,535.01 59,535.01
Trading and Profit & Loss Account
US $ US $
To Wages and salaries 9,655.17 (` 4,20,000/60)
By Gross Loss c/d 1,213.16
28,902.82 28,902.82
To Depreciation on Plant 3,600.00
(US $ 6,000 × 0.6)
13,778.68 13,778.68
Balance Sheet of Patna Branch
USA Office A/c 29,845.35 Plant 6,000.00
25,066.67 25,066.67
13.59
Question 43
having its Head office in New York:
Stock on 1st Jan., 2016 2,34,000
Rent, Rates and Taxes 1,06,250 -
Furniture 91,000 -
Bank A/c 5,68,650
36,31,400 36,31,400
Stock on 31st December, 2016 was `6,37,500.
Prepare in the Head Office books the Profit and Loss A/c and the Balance Sheet of the Branch assuming
branch to be an integral foreign operation of H.O.
Answer:
$ $
To Gross profit c/d 23,625 (6,37,500 / 51)
59,375 59,375
To Net Profit c/d 17,500 _______
23,625 23,625
Balance Sheet of Kolkata Branch as on 31st December, 2016
Add : Net profit 17,500 30,900 Closing Stock 12,500
Cash at bank 11,150
44,400 44,400
13.60
Working Note:
Calculation of Exchange Translation Loss
Kolkata Branch Trial Balance (converted in $)
as on 31st December, 2016
` ` rate ($) ($)
Stock on 1st Jan., 2016 2,34,000 52 4,500
Purchases & Sales 15,62,500 23,43,750 50 31,250 46,875
Bank A/c 5,68,650 51 11,150
Exchange translation loss (bal. fig.) ________ ________ 2,000
36,31,400 36,31,400 73,775 73,775
Question 44
Stock on 1st Jan., 2016 2,34,000
Salaries and Wages 1,00,000 —
Rent, Rates and Taxes 1,06,250 —
Furniture 91,000 —
Bank A/c 5,68,650
New York Account — 5,99,150
36,31,400 36,31,400
Stock on 31st December, 2016 was ` 6,37,500.
You are required to prepare the Profit and Loss A/c and the Balance Sheet of the Branch in the Head Office
books.
13.61
Answer:
$ $
To Purchases 31,250 By Closing stock (6,37,500/51) 12,500
To Gross profit c/d 23,625
59,375 59,375
To Net Profit c/d 17,500
23,625 23,625
Balance Sheet of Kolkata Branch
Add: Net profit 17,500 30,900 Closing Stock 12,500
Cash at bank 11,150
44,400 44,400
Working Note:
Require for calculation of Exchange Translation Loss
Kolkata Branch Trial Balance (converted in $)
` ` rate ($) ($)
Stock on 1st Jan., 2016 2,34,000 52 4,500
Purchases & Sales 15,62,500 23,43,750 50 31,250 46,875
Bank A/c 5,68,650 51 11,150
Exchange translation loss (bal. fig.) 2,000
36,31,400 36,31,400 73,775 73,775
13.62
Question 45
From the following particulars relating to Pune branch for the year ending December 31, 2018, prepare
Branch Account in the books of Head office.
`
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 ` 1,200 were destroyed due to fire and a sum of ` 1,000 was received from the Insurance
Company.
(RTP November 2019)
Answer
Pune Branch Account
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 35,000
debtors
Prepaid Insurance 150 Cash Paid by debtors 2,000
directly to H.O.
13.63
To Goods sent to 80,000 Received from Insurance 1,000 1,68,000
Branch Account Company
To Bank (expenses) By Goods sent to branch 1,000
Rent 2,000 (return of goods by
Salaries 2,400 the 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 (2,000 – 10% 1,800
depreciation)
Prepaid insurance (1/4 x ` 150
600)
1,81,600 1,81,600
Working Note:
Calculation of petty cash balance at the end: `
Opening balance 500
Add: Cash received form the Head Office 1,000
Total Cash with branch 1,500
Less: Spent by the branch 850
Closing balance 650
Question 46
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 Canberra Branch
(` In thousand) (Aust. Dollars in thousand)
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.
Reserves 600 130
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
13.64
Lucknow office Canberra Branch
(` In thousand) (Aust. Dollars in thousand)
Dr. Cr. Dr. Cr.
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:
(i) Stock as at 31st March, 2019
Lucknow `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 at 5%
(iv) Depreciation is to be provided on Buildings at 10% and on Plant and Machinery at 20% on written
down value.
(1) Convert the Branch Trial Balance into rupees by using the following exchange rates:
Opening rate 1A$ = `50
Closing rate 1A$ = `53
Average rate 1A$ = `51.00
For Fixed Assets 1A$ = `46.00
(2) 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.
Answer
M & S Co. Ltd.
Canberra, Australia Branch Trial Balance
As on 31st March 2019
($ 'thousands) (` thousands)
rate per $
Plant & Machinery (cost) 200 ` 46 9,200
Plants Machinery Dep. Reserve 130 ` 46 5,980
Trade receivable/payable 60 30 ` 53 3;180 1,590
Stock (1.4.2018) 20 ` 50 1,000
Cash & Bank Balances 10 ` 53 530
Purchase/Sales 20 123 ` 51 1,020 6,273
Goods received from H.O. 5 Actual 100
Wages & Salaries 45 ` 51 2,295
Rent 12 ` 51 612
Office expenses 18 ` 51 918
Commission Receipts 100 ` 51 5,100
H.O. Current Ale 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
13.65
Trading and Profit & Loss Account for the year ended 31st March, 2019
(` '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
bid
To Office expenses To 25 918.000 943.000 By Commission 256 5,100.000 5,356.000
Provision for receipts
doubtful debts @ 5% 14 159.000 173.000
To Depreciation 460 644.000 1,104.000
(W. N.)
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 bid 4,902.625
Salary
To Exchange Loss 208.000 By Branch stock 4.000
reserve
To Balance c/d 4,668.625
4,906.625 4,906.625
Working Note:
Calculation of Depreciation
H.O Branch
` 000 ` 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 MS 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.
13.66
Question 47
On 31st March, 2019 Chennai Branch submits the following Trial Balance to its Head Office at Lucknow:
Debit Balances ` in lacs
Furniture and Equipment 18
Depreciation on furniture 2
Salaries 25
Rent 10
Advertising 6
Telephone, Postage and Stationery 3
Stock on 1st April, 2018 60
Goods Received from Head Office 288
Debtors 20
Carriage Inwards 7
Credit Balances 448
Outstanding Expenses 3
Goods Returned to Head Office 5
Sales 360
Head Office 80
448
Stock on 31st March, 2019 was valued at ` 62 lacs. On 29th March, 2019 the Head Office dispatched goods
costing ` 10 lacs to its branch. Branch did not receive these goods before 1st April, 2019. Hence, the figure of
goods received from Head Office does not include these goods. Also the head office has charged the branch
` 1 lac for centralized services for which the branch has not passed the entry.
You are required to: (i) pass Journal Entries in the books of the Branch to make the necessary adjustments
and (ii) prepare Final Accounts of the Branch including Balance Sheet.
[RTP May 2020]
Answer
(i) Books of Branch
Journal Entries
(` in lacs)
Dr. Cr.
Goods in Transit A/c Dr. 10
(Goods dispatched by head office but not received by branch
before 1st April, 2019)
Expenses A/c Dr. 1
(Amount charged by head office for centralised services)
13.67
(ii) Trading and Profit & Loss Account of the Branch for the year ended 31st March, 2019
` in lacs ` in lacs
To Opening Stock 60 By Sales 360
To Goods received from By Closing Stock 62
Head Office 288
Less: Returns (5) 283
To Carriage Inwards 7
To Gross Profit c/d 72
422 422
To Salaries 25 By Gross Profit b/d 72
To Depreciation on Furniture 2
To Rent 10
To Advertising 6
To Telephone, Postage & Stationery 3
To Sundry Office Expenses 1
To Head Office Expenses 1
To Net Profit Transferred to
—
Head Office A/c 24 72
72
Balance Sheet as on 31st March, 2019
Liabilities ` in lacs Assets ` in lacs
Head Office 80 Furniture & Equipment 20
Add: Goods in transit 10 Less: Depreciation (2) 18
Head Office Expenses 1 Stock in hand 62
Net Profit 24 115 Goods in Transit 10
Outstanding Expenses 3 Debtors 20
118 118
Question 48
Karan Enterprises having its Head Office in Mangalore, Karnataka has a branch in Greenville. USA. Following
is the trial balance of Branch as at 31-3-2019:
Particulars Amount ($) Amount (S)
Dr. Cr.
Fixed assets 8,000
Opening inventory 800
Cash 700
Goods received form Head Office 2,800
Sales 24,050
Purchases 11,800
13.68
Particulars Amount ($) Amount (S)

Dr. Cr.
Expenses 1,800
Remittance to head office 2,450
Head office account 4,300
28,350 28,350
(i)
Fixed assets were purchased on 1st April, 2015.
(ii)
Depreciation at 10% is to be charged on fixed assets on straight line method.
(iii)
Closing inventory at branch is $ 700 as on 31-3-2019.
(iv)Goods received form Head Office (HO) were recorded at `1,85,500 in HO books.
(v)Remittances to HO were recorded at `1,62,000 in HO books.
(vi)HO account is recorded in HO books at `2,84,500.
(vii)Exchange rates of US Dollar at different dates can be taken as:
1-4-2015 `63;
1-4-2018 `65 and
31-3-2019 `67.
Prepare the trial balance after been converted into Indian rupees in accordance with AS-11.
Answer
Trial Balance of Foreign Branch (converted into Indian Rupees) as on March 31, 2019
Particulars $ (Dr.) $ (Cr.) Conversion Rate ` (Dr.) ` (Cr.)
Basis
Fixed Assets 8,000 Transaction Date 63 5,04,000
Rate
Opening Inventory 800 Opening Rate 65 52,000
Goods Received 2,800 Actuals 1,85,500
from HO
Sales 24,050 Average Rate 66 15,87,300
Purchases 11,800 Average Rate 66 7,78,800
Expenses 1,800 Average Rate 66 1,18,800
Cash 700 Closing Rate 67 46,900
Remittance to HO 2,450 Actuals 1,62,000
HO Account 4,300 Actuals 2,84,500
Exchange Rate Balancing Figure 23,800
Difference
28,350 28,350 18,71,800 18,71,800
Closing Stock 700 Closing Rate 67 46,900
Depreciation 800 Fixed Asset Rate 63 50,400
13.69
Question 49
M & S Co. of Lucknow has an integral foreign branch in Canberra, Australia. At the end of 31st March 2020,
the following ledger balances have been extracted from the books of the Lucknow office and the Canberra.
Lucknow office Canberra Branch (Aust.
(` In thousand) Dollars in thousand)
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.
Reserves 600 130
Debtors/Creditors 280 200 60 30
Stock as on 1- 4-2019 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 Salaries 75 45
Rent 12
Office Expenses 25 18
Commission Receipts 256 100
Branch/HO Current Account 120 7
4,880 4,880 390 390
You are required to convert the Branch Trial Balance given above into rupees by using the following
exchange rates:
Opening rate 1 A $ = ` 50
Closing rate 1 A $ = ` 53
Average rate 1 A $ = ` 51.00
for Fixed Assets 1 A $ = ` 46.00
13.70
Answer
M & S Co. Ltd.
Canberra, Australia Branch Trial Balance As on 31st March 2020
($ ‘thousands) (` ‘thousands)
rate per $
Plant & Machinery (cost) 200 ` 46 9,200
Plant & Machinery Dep. Reserve 130 ` 46 5,980
Trade receivable/payable 60 30 ` 53 3,180 1,590
Stock (1.4.2019) 20 ` 50 1,000
Cash & Bank Balances 10 ` 53 530
Purchase / Sales 20 123 ` 51 1,020 6,273
Goods received from H.O. 5 Actual 100
Wages & Salaries 45 ` 51 2,295
Rent 12 ` 51 612
Office expenses 18 ` 51 918
Commission Receipts 100 ` 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
Question 50
From the following details of Western Branch Office of M/s. XYZ Corp. for the year ending 31st March, 2020,
ascertain branch stock reserve in respect of unrealized profit in opening stock and closing stock:
(i) Goods are sent to the branch at invoice price and branch also maintains stock at the same price.
(ii) Sale price is cost plus 40%.
(iii) Invoice price is cost plus 15%.
(iv) Other information from accounts of branch:
Opening Stock as on 01-04-2019 3,45,000
Goods sent during the year by Head Office to Branch 16,10,000
Answer:
Branch Stock Reserve in respect of unrealized profit
on opening stock = ` 3,45,000 x (15/115) = ` 45,000
on closing stock = ` 2,30,000 x (15/115) = ` 30,000
13.71
Working Note: `
Cost Price 100
Invoice Price 115
Sale Price 140
19,55,000
Less: Cost of goods sold at invoice price [21,00,000 X (115/140)] (17,25,000)
Question 51
L Ltd. has its head office at Mumbai and two branches at Pune and Goa. The branches purchase goods
independently. Pune branch makes a profit of one third on cost and Goa branch makes a profit of 20% on
sales. Goods are also supplied by one branch to another at the respective sales price. From the following
particulars, prepare the Trading and Profit and Loss Account of Pune branch and find out the profit or loss
made by it considering the reserve for unrealised profits:
Particulars Pune Branch ` Goa Branch `
Purchases (Including Inter Branch transfers) 2,00,000 2,50,000
Sales 2,80,000 2,95,625
Chargeable Expenses 15,000 27,500
Closing Stock 30,000 43,500
Office and Administration Expenses 13,250 7,000
Selling and Distribution Expenses 15,000 10,000
Information:
(i) Opening stock at Pune Branch includes goods of ` 10,000 (invoice price) taken from Goa Branch,
(ii) Opening stock at Goa Branch includes goods of invoice price ` 17,000 taken from Pune Branch,
(iii) The Pune Branch sales includes transfer of goods to Goa Branch at selling price ` 20,000
(iv) The sales of Goa Branch include transfer of goods to Pune Branch at selling price ` 15,000.
(v) Closing stock at Pune Branch includes goods received from Goa Branch (invoice price ` 5,000).
(vi) Closing stock at Goa Branch includes goods of ` 4,000 (invoice price).
(MTP, October, 2020) (MTP March, 2022) (6 marks)
Answer
Pune Branch Trading and Profit and Loss Account
To Opening Stock (including `10,000 40,000 By Sales (including `20,000 to Goa 2,80,000
from Goa Branch) Branch)
To Purchases 2,00,000 By Closing Stock (including `5,000 30,000
from Goa Branch)
To Chargeable Expenses 15,000
13.72
To Gross Profit c/d (before making
adjustment for unrealised profit) 55,000
3,10,000 3,10,000
To Stock Reserve (for unrealised profit 1,000 By Gross Profit b/d 55,000
in Closing Stock lying at Goa
Branch) (`4,000 x 25/100)
To Office & Adm. Expenses 13,250 By Stock Reserve (for unrealised 4,250
profit in Opening Stock lying at
To Selling & Distribution Expenses
Goa Branch) (` 17,000 x
15,000 25/100)
59,250 59,250
Question 52
Ganesh Ltd. has head office at Delhi (India) and branch at New York. New York branch is an integral foreign
operation of Ganesh Ltd. New York branch furnishes you with its trial balance as on 31st March, 2020 and the
additional information given thereafter:
Dr. ($) Cr. ($)
Stock on 1st April, 2019 300 –
5Purchases and sales 800 1,500
Sundry Debtors and creditors 400 300
Bills of exchange 120 240
Sundry expenses 1,080 –
Bank balance 420 –
Delhi office A/c – 1,080
3,120 3,120
The rates of exchange may be taken as follows:
 on 1.4.2019 @ ` 40 per US $
 on 31.3.2020 @ ` 42 per US $
 average exchange rate for the year @ ` 41 per US $.
New York branch account showed a debit balance of ` 44,380 on 31.3.2020 in Delhi books and there were no
items pending reconciliation.
You are asked to prepare trial balance of New York in ` in the books of Ganesh Ltd.
(MTP, October, 2020) (MTP March, 2022) (4 marks)
Answer
In the books of Ganesh Ltd. New York Branch Trial Balance in (`) as on 31st March, 2020
Conversion rate per US $ Dr. Cr.
(` ) ` `
Stock on 1.4.19 40 12,000
Purchases and sales 41 32,800 61,500
Sundry debtors and creditors 42 16,800 12,600
Bills of exchange 42 5,040 10,080
13.73
Conversion rate per US $ Dr. Cr.

(` ) ` `
Sundry expenses 41 44,280
Bank balance 42 17,640
Delhi office A/c – 44,380
1,28,560 1,28,560
Question 53
Give Journal Entries in the books of Branch to rectify or adjust the following:
(1) Branch paid ` 5,000 as salary to H.O supervisor, but the amount paid by branch has been debited to
salary account in the books of branch.
(2) Asset Purchased by branch for ` 25,000, but the Asset account was retained in H.O Books.
(3) A remittance of `8,000 sent by the branch has not been received by H.O.
(4) H.O collected ` 25,000 directly from the customer of Branch but fails to give the intimation to branch.
(5) Remittance of funds by H.O to branch `5,000 not entered in branch books.
(Suggested January 2021)
Answer
Journal Entries in Books of Branch A
Particulars Dr. Amount Cr. Amount
` `
(i) Head office account Dr. 5,000
To Salaries account 5,000
(Being the rectification of salary paid on behalf of H.O.)
(ii) Head office account Dr. 25,000
To Bank /Liability A/c 25,000
(Being Asset purchased by branch but Asset account retained at
head office books)
(iii) No Entry in Branch Books
(iv) Head office account Dr. 25,000
To Debtors account 25,000
(Being the amount of branch debtors collected by H.O.)
(v) Bank A/c Dr. 5,000
To Head Office 5,000
(Remittance of Funds by H.O. to Branch)
Question 54
Moon Star has a branch at Virginia (USA). The Branch is a non-integral foreign operation of the Moon Star.
The trial balance of the Branch as at 31st March, 2020 is as follows:
Particulars US $
Dr. Cr.
Office equipments 48,000
Furniture and Fixtures 3,200
Stock (April 1, 2019) 22,400
Purchases 96,000
Sales --- 1,66,400
Goods sent from H.O 32,000
Salaries 3,200
13.74
Particulars US $
Dr. Cr.
Carriage inward 400
Rent, Rates & Taxes 800
Insurance 400
Trade Expenses 400
Head Office Account --- 45,600
Sundry Creditors --- 6,800
Cash at Bank 2,000
Cash in Hand 400
2,18,800 2,18,800
The following further information is given:
(1) Salaries outstanding $ 400.
(2) Depreciate office equipment and furniture & fixtures @10% p.a. at written down value.
(3) The Head Office sent goods to Branch for `15,80,000.
(4) The Head Office shows an amount of ` 20,50,000 due from Branch.
(5) Stock on 31st March, 2020 -$21,500.
(6) There were no transit items either at the start or at the end of the year.
(7) On April 1, 2018 when the fixed assets were purchased the rate of exchange was ` 43 to one $. On
April 1, 2019, the rate was 47 per $. On March 31, 2020 the rate was ` 50 per $. Average rate during
the year was ` 45 to one $.
Prepare Trial balance incorporating adjustments given converting dollars into rupees and Trading, Profit and
Loss Account for the year ended 31st March, 2020 of the Branch as would appear in the books of Moon Star
for the purpose of incorporating in the main Balance Sheet.
Answer
In the books of Moon Star
Trial Balance (in Rupees) of Virginia (USA) Branch as on 31st March, 2020
US $ US $ rate ` `
Office Equipment 43,200 50 21,60,000
Depreciation on Office 4,800 50 2,40,000
Equipment
Furniture and fixtures 2,880 50 1,44,000
Depreciation on furniture and 320 50 16,000
fixtures
Stock (1st April, 2019) 22,400 47 10,52,800
Purchases 96,000 45 43,20,000
Sales 1,66,400 45 74,88,000
Goods sent from H.O. 32,000 15,80,000
Carriage inward 400 45 18,000
Salaries (3,200+400) 3,600 45 1,62,000
Outstanding salaries 400 50 20,000
Rent, rates and taxes 800 45 36,000
Insurance 400 45 18,000
13.75
US $ US $ rate ` `
Trade expenses 400 45 18,000
Head Office A/c 45,600 20,50,000
Trade debtors 9,600 50 4,80,000
Trade creditors 6,800 50 3,40,000
Cash at bank 2,000 50 1,00,000
Cash in hand 400 50 20,000
Exchange gain (bal. fig.) 4,66,800
2,19,200 2,19,200 1,03,64,800 1,03,64,800
Question 55
DM Delhi has a branch in London which is an integral foreign operation of DM. At the end of the year 31st
March, 2021, the branch furnishes the following trial balance in U.K. Pound:
Particulars £ £
Dr. Cr.
Fixed assets (Acquired on 1st April, 2017) 24,000
Stock as on 1st April, 2020 11,200
Goods from head Office 64,000
Expenses 4,800
Debtors 4,800
Creditors 3,200
Cash at bank 1,200
Head Office Account 22,800
Purchases 12,000
Sales 96,000
1,22,000 1,22,000
In head office books, the branch account stood as shown below:
London Branch A/c
` `
To Goods sent to branch 49,26,000 By Balance c/d 17,20,000
69,36,000 69,36,000
The following further information is given:
(a) Fixed assets are to be depreciated @ 10% p.a. on WDV.
(b) On 31st March, 2021:
Expenses outstanding - £ 400
Prepaid expenses - £ 200
Closing stock - £ 8,000
(c) Rate of Exchange:

1st April, 2017 - ` 70 to £ 1
1st April, 2020 - ` 76 to £ 1
31st March, 2021 - ` 77 to £ 1
Average - ` 75 to £ 1
13.76
You are required to prepare: (1) Trial balance, incorporating adjustments of outstanding and prepaid
expenses, converting U.K. pound into Indian rupees; and (2) Trading and profit and loss account for the year
ended 31st March, 2021 of London branch as would appear in the books of Delhi head office of DM.
(MTP April, 2021) (MTP April, 2022) (8 Marks)
Answer
Trial Balance of London Branch as on 31st March, 2021
Particulars U.K. Rate Per Dr. (`) Cr. (`)
Pound U.K. Pound
Fixed Assets 24,000 70 16,80,000
Stock (as on 1st April, 2020) 11,200 76 8,51,200
Goods from Head Office 64,000 - 49,26,000
Sales 96,000 75 72,00,000
Purchases 12,000 75 9,00,000
Expenses (4,800 + 400 – 200) 5,000 75 3,75,000
Debtors 4,800 77 3,69,600
Creditors 3,200 77 2,46,400
Outstanding Expenses 400 77 30,800
Prepaid expenses 200 77 15,400
Cash at Bank 1,200 77 92,400
Head office Account - 17,20,000
Difference in Exchange 12,400
92,09,600 92,09,600
Closing stock will be (8,000 × 77) = ` 6,16,000
Trading and Profit & Loss A/c for the year ended 31st March, 2021
(`) (`)
To Purchases 9,00,000 By Closing Stock 6,16,000
To Goods from H.O. 49,26,000
78,16,000 78,16,000
To Expenses 3,75,000 By Gross Profit 11,38,800
To Depreciation 1,68,000 By Profit due to
Exchange
To Net Profit 6,08,200 12,400
difference
11,51,200 11,51,200
Working Note:
Since London Branch is an integral foreign operation. Hence, (1) Fixed assets (cost and depreciation) are
translated using the exchange rate at the date of purchase of the assets. (2) Exchange difference arising on
translation of the financial statement is charged to Profit and Loss Account.
13.77
Question 56
Manohar of Mohali has a branch at Noida to which the goods are supplied from Mohali but the cost thereof is
not recorded in the Head Office books. On 31st March, 2020 the Branch Balance Sheet was as follows:
Creditors Balance 62,000 Debtors Balance 2,24,000
Head Office 1,88,000 Building Extension A/c.
Closed by transfer to H.O. A/c. —
Cash at Bank 26,000
2,50,000 2,50,000
During the Six months ending on 30-09-2020, the following transactions took place at Noida:
` `
Sales 2,78,000 Manager's salary 16,400
Purchases 64,500 Collections from debtors 2,57,000
Wages Paid 24,000 Discounts allowed 16,000
Salaries (inclusive of advance of 5,000) 15,600 Discount earned 4,600
Cash paid to creditors 88,500
General Expenses 7,800 Building Account : 14,000
Fire Insurance (Paid for one year) 11,200 (further payment) Cash in Hand 5,600
Remittance to H;O. 52,900 Cash at Bank 47,000
Set out -the Head Office Account in Noida Books and the Branch Balance Sheet as on 30.09.2020. Also give
journal entries in the Noida books. (Suggested July 2021) (10 Marks)
Answer
Journal Entries in the Books of Noida Branch
Salary Advance A/c Dr. 5,000
To Salaries A/c 5,000
(Being the amount paid as advance adjusted by debit to Salary Advance
A/c)
Prepaid Insurance A/c (11,200 X 6/12) Dr. 5,600
To Fire Insurance A/c 5,600
(Being the six months premium transferred to the Prepaid Insurance A/c)
Head Office A/c Dr. 1,44,900
To Wages A/c 24,000
To Salaries A/c (15,600 - 5000) 10,600
To General Expenses A/c 7,800
To Fire Insurance A/c (11,200 X 6/12) 5,600
To Manager’s Salary A/c 16,400
To Discount Allowed A/c 16,000
(Being the transfer of various revenue accounts to the HO A/c for closing
the accounts)
Sales A/c Dr. 2,78,000
Discount Earned A/c Dr. 4,600
To Head Office A/c 2,82,600
(Being the transfer of various revenue accounts to HO)
13.78

Head Office A/c Dr. 14,000
(Being the transfer of amounts spent on building extension to HO A/c)
Head Office Account
2020 Particulars Amount 2020 Particulars Amount
(`) (`)
Sept 30 To Cash Remittance 52,900 April 1 By Balance b/d 1,88,000
To Sundries* (Revenue) 1,44,900 By Sundries* (Revenue) 2,82,600
Total 4,70,600 Total 4,70,600
* Instead of using Sundries (Revenue) A/c, the concerned revenue accounts can be posted in the ledger.
Balance Sheet of Noida Branch
As at 30th Sept 2020
Liabilities Amt (`) Assets Amt (`)
Creditors 33,400 Debtors 2,29,000
Head Office A/c 2,58,800 Salary Advance 5,000
Prepaid Insurance 5,600
Building Extension A/c transferred to HO
Cash in Hand 5,600
Cash at Bank 47,000
Total 2,92,200 Total 2,92,200
Working Notes
To Balance b/d 26,000 By Wages 24,000
To Collection from debtors 2,57,000 By Salaries 15,600
By Insurance 11,200
By General Expenses 7,800
By HO A/c 52,900
By Manager’s Salary 16,400
By Creditors 88,500
By Building A/c 14,000
By Balance c/d
- Cash in Hand 5,600
- Cash at bank 47,000
Total
2,83,000 Total 2,83,000
13.79
Debtors Account
To Balance b/d 2,24,000 By Cash Collection 2,57,000
To Sales A/c 2,78,000 By Discount (Allowed) 16,000
Total 5,02,000 Total 5,02,000
Creditors Account
To Cash A/c 88,500 By Balance b/d 62,000
To Discount (Earned) 4,600 By Purchases 64,500
Total 1,26,500 Total 1,26,500
Note:
Since the date of payment of fire insurance has not been mentioned in the question, it is assumed that it was
paid on 01 April 2020. Alternative answer considering otherwise also possible.
Question 57
Alpha Ltd. has a retail shop under the supervision of a manager. The ratio of gross profit at selling price is
constant at 25 per cent throughout the year to 31st March, 2020.
Branch manager is entitled to a commission of 10 per cent of the profit earned by his branch, calculated
before charging his commission but subject to a deduction from such commission equal to 25 per cent of any
ascertained deficiency of branch stock. All goods were supplied to the branch from head office.
The following details for the year ended 31st March, 2020 are given as follows:
` `
Opening Stock (at cost) 74,736 Chargeable expenses 49,120
Goods sent to branch (at cost) 2,89,680 Closing Stock (Selling Price) 1,23,328
Sales 3,61,280
Manager’s commission paid
on account 2,400
From the above details, you are required to calculate the commission due to manager for the year ended 31st
March, 2020. (RTP, May 2021)
Answer
In the books of Alpha Ltd.
Step 1: Calculation of Deficiency
Branch stock account (at invoice price)
To Opening Stock (` 74,736 + 1/3 of ` 74,736) 99,648 By Sales 3,61,280
To Goods sent to Branch A/c (` 2,89,680 + By Closing Stock 1,23,328
1/3 of ` 2,89,680) 3,86,240 By Deficiency at sale price
[Balancing figure] 1,280
4,85,888 4,85,888
13.80
Step 2: Calculation of Net Profit before Commission
Branch account
[`74,736 + 1/3 of ` 74,736]
To Gross sent to Branch A/c (`2,89,680 + 3,86,240 By Closing Stock 1,23,328
1/3 of ` 2,89,680)
To Expenses 49,120 By Stock Reserve A/c 24,912
To Stock Reserve [` 1,23,328 x 25/100] 30,832 By Goods Branch 96,560
A/c A/c sent
To Net to
Profit–subject manager’s commission to 40,240
6,06,080 6,06,080
Step 3: Calculation of Commission still due to manager
`
A Calculation at 10% profit before charging his commission [` 40,240 x 10/100]
4,024
B Less: 25% of cost of deficiency in stock [25% of (75% of ` 1,280)] (240)
C Commission for the year [A-B] 3,784
D Less: Paid on account (2,400)
E Balance due (C-D) 1,384
Question 58
Vijay & Co. of Jaipur has a branch in Patna to which goods are sent @ 20% above cost. The branch makes
both cash & credit sales. Branch expenses are paid direct from Head office and the branch has to remit all
cash received into the bank account of Head office. Branch doesn't maintain any books of accounts, but
sends monthly returns to the head office.
Following further details are given for the year ended 31st March, 2020:
Amount (`)
Goods received from Head office at Invoice Price 8,40,000
Goods returned to Head office at Invoice Price 60,000
Cash sales for the year 2019-20 1,85,000
Credit Sales for the year 2019-20 6,25,000
Stock at Branch as on 01-04-2019 at Invoice price 72,000
Sundry Debtors at Patna branch as on 01-04-2019 96,000
Goods returned by customer at Patna Branch 14,000
Bad debts written off 5,500
Amount recovered from Bad debts previously written off as Bad 1,000
Rent, Rates & taxes at Branch 24,000
Salaries & wages at Branch 72,000
Office Expenses (at Branch) 9,200
Stock at Branch as on 31-03-2020 at cost price 1,25,000
Prepare necessary ledger accounts in the books of Head office by following Stock and Debtors method and
ascertain Branch profit.
13.81
Answer
` ` ` `
1.4.19 To Balance b/d 72,000 31.3.20 By Sales:
(opening
stock)
31.3.20 To Goods Sent 8,40,000 Cash 1,85,000
to Branch A/c Credit 6,25,000
To Branch P&L 94,000 Less:
Return (14,000) 6,11,000 7,96,000
By Goods 60,000
sent to
branch -
returns
(closing
stock) ________
1.4.20 To Balance b/d 10,06,000 10,06,000
1,50,000
` `
1.4.19 To Balance b/d 96,000 31.3.20 By Cash 4,38,000
31.3.20 To Sales 6,25,000 By Returns 14,000
By Discounts 7,500
By Bad debts 5,500
7,21,000 7,21,000
1.4.20 To Balance b/d 2,56,000
` `
31.3.20 To Salaries & Wages 72,000 31.3.20 By Branch P&L A/c 1,18,200
To Rent, Rates & 24,000
Taxes
To Discounts 7,500
To Bad Debts 5,500
1,18,200 1,18,200
Branch Profit & Loss Account for year ended 31.3.20
` `
31.3.20 To Branch Expenses A/c 1,18,200 31.3.20 By Branch stock 94,000
To Net Profit transferred to By Branch Stock 1,17,000
Adjustment account
General P & L A/c 93,800 By Bad debts 1,000
recovered
2,12,000 2,12,000
13.82
Branch Stock Adjustment Account for year ended 31.3.20
` `
31.3.20 To Goods sent to branch 10,000 31.3.20 By Balance b/d 12,000
(60,000x1/6) - (72,000x1/6)
returns
To Branch P & L A/c 1,17,000 By Goods sent to 1,40,000
To Balance c/d 25,000 branch
(1,50,000x1/6) (8,40,000x1/6)
1,52,000 1,52,000
Question 59
From the following details of Western Branch Office of M/s. Alpha for the year ending 31st March, 2020,
ascertain branch stock reserve in respect of unrealized profit in opening stock and closing stock:
(i) Goods are sent to the branch at invoice price and branch also maintains stock at the same price.
(ii) Sale price is cost plus 40%.
(iii) Invoice price is cost plus 15%.
(iv) Other information from accounts of branch:
Opening Stock as on 01-04-2019 3,45,000
Goods sent during the year by Head Office to Branch 16,10,000
Answer
Branch Stock Reserve in respect of unrealized profit
on opening stock = ` 3,45,000 x (15/115) = ` 45,000
on closing stock = ` 2,30,000 x (15/115) = ` 30,000
Working Note: `
Cost Price 100
Invoice Price 115
Sale Price 140
19,55,000
Less: Cost of goods sold at invoice price [21,00,000 X (115/140)] (17,25,000)
Question 60
Pass necessary Journal entries in the books of an independent Branch of a Company, wherever required, to
rectify or adjust the following:
(i) Branch incurred travelling expenses of ` 4,000 on behalf of other Branches, but not recorded in the
books of Branch.
(ii) Goods dispatched by the Head office amounting to ` 8,000, but not received by the Branch till date of
reconciliation. The Goods have been received subsequently.
(iii) Provision for doubtful debts, whose accounts are kept by the Head Office, not provided earlier for `
2,000.
13.83
(iv) Branch paid ` 2,000 as salary to a Head Office Manager, but the amount paid has been debited by the
Branch to Salaries Account. (MTP, November, 2021) (4 Marks)
Answer
Journal Entries in Books of Branch
Amount in `
Dr. Cr.
To Cash Account 4,000
(Being expenditure incurred on account of other branch, now recorded in
books)
(ii) Goods–in- transit Account Dr. 8,000
(iii) Provision for Doubtful Debts A/c Dr. 2,000
(Being the provision for doubtful debts not provided earlier, now provided
for)
(iv) Head Office Account To Salaries Account Dr. 2,000
2,000
Question 61
Lal & Co. of Jaipur has a branch in Patna to which goods are sent @ 20% above cost. The branch makes
both cash & credit sales. Branch expenses are paid direct from Head office and the branch has to remit all
cash received into the bank account of Head office. Branch doesn't maintain any books of accounts but sends
monthly returns to the head office.
Following further details are given for the year ended 31st March, 2020:
Amount (`)
Goods received from Head office at Invoice Price 4,20,000
Goods returned to Head office at Invoice Price 30,000
Cash sales for the year 2019-20 92,500
Credit Sales for the year 2019-20 3,12,500
Stock at Branch as on 01-04-2019 at Invoice price 36,000
Sundry Debtors at Patna branch as on 01-04-2019 48,000
Goods returned by customer at Patna Branch 7,000
Bad debts written off 2,750
Amount recovered from Bad debts previously written off as Bad 500
Rent, Rates & taxes at Branch 12,000
Salaries & wages at Branch 36,000
Office Expenses (at Branch) 4,600
Stock at Branch as on 31-03-2020 at cost price 62,500
13.84
Prepare necessary ledger accounts in the books of Head office by following Stock and Debtors method and
ascertain Branch profit.
Answer
` ` ` `
1.4.19 To Balance b/d 36,000 31.3.20 By Sales:
(opening
stock)
31.3.20 To Goods Sent to 4,20,000 Cash 92,500

Branch A/c
Credit 3,12,500
To Branch P&L 47,000 Less: Return (7,000) 3,05,500 3,98,000
By Goods sent to 30,000
branch -
returns
(closing
stock)
5,03,000 5,03,000
1.4.20 To Balance b/d 75,000
` `
1.4.19 To Balance b/d 48,000 31.3.20 By Cash 2,19,000
31.3.20 To Sales 3,12,500 By Returns 7,000
By Discounts 3,750
By Bad debts 2,750
3,60,500 3,60,500
1.4.20 To Balance b/d 1,28,000
` `
31.3.20 To Salaries & Wages 36,000 31.3.20 By Branch P&L A/c 59,100
To Rent, Rates & Taxes 12,000
To Discounts 3,750
To Bad Debts 2,750
59,100 59,100
13.85
Branch Profit & Loss Account for year ended 31.3.20
` `
31.3.20 To Branch Expenses A/c 59,100 31.3.20 By Branch stock 47,000
To Net Profit transferred By Branch Stock Adjustment
to account 58,500
General P & L A/c 46,900 By Bad debts recovered 500
1,06,000 106,000
Branch Stock Adjustment Account for year ended 31.3.20
` `
31.3.20 To Goods sent to branch 5,000 31.3.20 By Balance b/d 6,000
(30,000x1/6)-returns (36,000x1/6)
To Branch P & L A/c 58,500 By Goods sent to branch 70,000
(4,20,000x1/6)
To Balance c/d (75,000x1/6)
12,500
76,000 76,000
Question 62
Delta Ltd. has a branch at Kanpur. Goods are invoiced from head office to Branch at cost plus 50%. Branch
remits all cash received to head office and all expenses are met by head office.
Prepare necessary Ledger accounts in the books of Delta Ltd under Stock and Debtors system to show profit
earned at the branch for the year ending 31st March, 2021
Following information related to Branch is given (`)
Stock on 1st April, 2020 31,200 Goods returned by 3,000
(Invoice price) Debtors
Surplus in stock 600
(Invoice price)
Debtors on 1st April, 2020 17,400 Expenses at Branch 13,400
Goods invoiced at cost 72,000 Discount allowed to 700
Debtors
Sales at Branch: Cash sales 20,000 Debtors on 31st March, 2021 14,300
Credit sales 68,200

Answer
Books of Delta Ltd.
Kanpur Branch Stock Account
` `
To Balance b/d – Opening Stock 31,200 By Bank A/c – Cash Sales 20,000
To Branch Debtors A/c – Sales Return 3,000 By Branch Debtors A/c - Credit Sales 68,200
To Goods sent to Branch A/c (72,000 1,08,000 By Balance c/d - Closing stock 54,600
+50% of 72,000)
To Surplus in stock 600
1,42,800 1,42,800
13.86
Kanpur Branch Stock Adjustment Account
` `
To Branch Profit and Loss Account 28,400 By Balance b/d 10,400
(1/3 of ` 31,200)
To Balance c/d (1/3 of 54,600) By Goods sent to Branch A/c (1/3 of ` 36,000
18,200 1,08,000)
____ By Surplus in stock 200
46,600 46,600
` `
To Kanpur Branch Stock Adjustment A/c 36,000 By Kanpur Branch Stock A/c 1,08,000
1,08,000 1,08,000
` `
To Balance b/d 17,400 By Bank (Bal fig.) 67,600
To Branch Stock A/c 68,200 By Branch Expenses A/c (Discount allowed) 700
By Branch Stock - Sales Returns 3,000
85,600 85,600
` `
To Bank A/c (expenses) 13,400 By Branch Profit & Loss A/c (Transfer) 14,100
To Branch Debtors A/c 700
(Discount allowed)*
14,100 14,100
Branch Profit & Loss Account for the year ending 31st March 2021
` `
To Branch Expenses A/c 14,100 By Branch Adjustment A/c 28,400
To Net Profit 14,700 By surplus in stock (Cost) 400
28,800 28,800
Note: * Discount allowed to debtors may be shown in Branch Profit and Loss account directly instead of
transferring it through Branch Expenses account.
Question 63
Walkaway Footwears has its head office at Nagpur and Branch at Patna. It invoiced goods to its branch at
20% less than the list price which is cost plus 100%, with instruction that cash sales were to be made at
invoice price and credit sales at catalogue price (i.e. list price).
The following information was available at the branch for the year ended 31st March, 2022.
(Figures in `)
Stock on 1st April, 2021 (invoice price) 12,000
Debtors on 1st April, 2021 10,000
Goods received from head office (invoice price) 1,32,000
13.87
Sales: Cash 46,000
Credit 1,00,000 1,46,000
Cash received from debtors 85,000
Expenses at branch 17,500
Debtors on 31st March, 2022 25,000
Stock on 31st March, 2022 (invoice price) 17,600
Remittances to head office 1,20,000
You are required to prepare Branch Stock Account, Branch Adjustment Account, Branch Profit & Loss
Account and Branch Debtor Account for the year ended 31st March, 2022.
13.88
Accounts from Incomplete Records
14
Question 1
Assets and Liabilities of Mr. X as on 31-03-20X1 and 31-03-20X2 are as follows:
31-03-20X1 31-03-20X2
` `
Assets
Building 1,00,000 ?
Furniture 50,000 ?
Inventory 1,20,000 2,70,000
Sundry debtors 40,000 90,000
Cash at bank 70,000 85,000
Cash in hand 1,200 3,200
Liabilities
Loans 1,00,000 80,000
Sundry creditors 40,000 70,000
Decided to depreciate building by 2.5%p.a. and furniture by 10% p.a. One Life Insurance Policy of the
Proprietor was matured during the period and the amount ` 40,000 is retained in the business. Proprietor took
@ ` 2,000 p.m. for meeting family expenses.
Prepare Statement of Affairs as on 31-03-20X1 and 31-03-20X2.
(Study Material)
Answer
Mr. X
Statement of Affairs
as on 31-03-20X1 & 31-03-20X2
Liabilities 31-03-20X1 31-03-20X2 Assets 31-03-20X1 31-03-20X2
` ` ` `
Capital 2,41,200 4,40,700 Building 1,00,000 97,500
Furniture 50,000 45,000
Loans 1,00,000 80,000 Inventory 1,20,000 2,70,000
Sundry 40,000 70,000 Sundry debtors 40,000 90,000
creditors Cash at bank 70,000 85,000
3,81,200 5,90,700 3,81,200 5,90,700
14.1
Chap. 14  Accounts from Incomplete Records
Question 2
Take figures given in question 1. Find out profit of Mr. X for the year ended 31-03- 20X2.
(Study Material)
Answer
Determination of Profit by applying the method of the capital comparison
`
Capital Balance as on 31-03-20X2 4,40,700
Less: Fresh capital introduced (40,000)
4,00,700
Add: Drawings (` 2000 × 12) 24,000
4,24,700
Less: Capital Balance as on 31-03-20X1 (2,41,200)
Profit 1,83,500
Note:
 Closing capital is increased due to fresh capital introduction, so it is deducted.
 Closing capital was reduced due to withdrawal by proprietor; so it is added back.
ALTERNATIVELY
Capital account can be prepared as follows:
By Balance b/d 2,41,200
To drawings 24,000 By additional capital 40,000
By Net Profit (Bal Fig) 1,83,500
4,64,700 4,64,700
Question 3
A and B are in Partnership having Profit sharing ratio 2:1. The following information is available about their
assets and liabilities:
31-3-20X1 31-3-20X2
` `
Furniture 1,20,000 ?
Advances 70,000 50,000
Creditors 32,000 30,000
Debtors 40,000 45,000
Inventory 60,000 74,750
Loan 80,000 —
Cash at Bank 50,000 1,40,000
The partners are entitled to salary @ ` 2,000 p.m. They contributed proportionate capital. Interest is paid @
6% on capital and charged @ 10% on drawings.
Drawings of A and B
A B
` `
April 30 2,000 —
May 31 — 2000
June 30 4,000 —
14.2
A B
` `
Sept. 30 — 6,000
Dec. 31 2,000 —
Feb. 28 — 8,000
On 30th June, they took C as 1/3rd partner who contributed ` 75,000. C is entitled to share of 9 months’
profit. The new profit ratio becomes 1:1:1. A withdrew his proportionate share. Depreciate furniture @ 10%
p.a., new purchases ` 10,000 may be depreciated for 1/4th of a year.
Current account as on 31-3-20X1: A ` 5,000 (Cr.), B ` 2,000 (Dr.)
Prepare Statement of Profit, Current Accounts of partners and Statement of Affairs as on 31-3-20X2.
(Study Material)
Answer
Statement of Affairs
As on 31-3-20X1 and 31-3-20X2
Liabilities 31-3-20X1 31-3-20X2 Assets 31-3-20X1 31-3-20X2
` ` ` `
Capital A/cs: Furniture 1,20,000 1,17,750
A 1,50,000 75,000 Advances 70,000 50,000
B 75,000 75,000 Inventory 60,000 74,750
C — 75,000 Debtors 40,000 45,000
Loan 80,000 — Cash at bank 50,000 1,40,000
Creditors 32,000 30,000 Current A/c B 2,000 —
Current A/c’s
A 5,000 74,036*
B — 48,322*
C 50,142*
3,42,000 4,27,500 3,42,000 4,27,500
*See current A/cs.
Notes:
(i) Depreciation on Furniture
10% on ` 1,20,000 12,000
10% on ` 10,000 for 1/4 year 250
12,250
(ii) Furniture as on 31-3-20X1
Balance as on 31-3-20X1 1,20,000
Add: new purchase 10,000
1,30,000
Less: Depreciation (12,250)
1,17,750
(iii) Total of Current Accounts as on 31-3-20X2
Total of Assets (1,17,750 + 50,000 + 74,750 + 45,000 + 1,40,000) 4,27,500
Less: Fixed Capital (75,000 + 75,000 + 75,000) + Liabilities (30,000) (2,55,000)
1,72,500
This is after adding salary, interest on capital and deducting drawings and interest on drawings.
14.3
(iv) Interest on Capital : `
A: on 1,50,000 @ 6% for 3 months 2,250
on 75,000 @ 6% for 9 months 3,375
5,625
B: on 75,000 @ 6% for 1 year 4,500
C: on 75,000 @ 6% for 9 months 3,375
7,875
(v) Interest on Drawings :
A: on 2,000 @ 10% for 11 months 183
on 4,000 @ 10% for 9 months 300
on 2,000 @ 10% for 3 months 50
533
B: on 2,000 @ 10% for 10 months 167
on 6,000 @ 10% for 6 months 300
on 8,000 @ 10% for 1 month 67
534
Allocation of Profit `1,15,067
3 months Profit ` 28,767
9 months Profit ` 86,300
A : 2/3 × ` 28,767 + 1/3 ×`86,300 = ` 47,944
B : 1/3 × ` 1,15,067 = ` 38,356
C: 1/3 × ` 86,300 = `28,767
` 1,15,067
Current Accounts
A B C A B C
To Balance b/d — 2,000 — By Balance b/d 5,000 — —
To Drawings 8,000 16,000 — By Salary 24,000 24,000 18,000
To Interest on 533 534 — By Interest on capital 5,625 4,500 3,375
drawings
To Balance c/d 74,036 48,322 50,142 By Share of Profit 47,944 38,356 28,767
(b.f.)
82,569 66,856 50,142 82,569 66,856 50,142
Statement of Profit
`
Current Account Balances as on 31-3-20X2 1,72,500
Less: Salary
A ` 2,000 × 12 = 24,000
B ` 2,000 × 12 = 24,000
C ` 2,000 × 9 = 18,000 (66,000)
Less: Interest on Capital
A 5,625
B 4,500
C 3,375 (13,500)
14.4
`
Add: Drawings
A 8,000
B 16,000 24,000
Add: Interest on Drawings
A 533
B 534 1,067
1,18,067
Less: Current A/c Balances as on 31-3-20X1 (` 5,000 – ` 2,000) (3,000)
NET PROFIT FOR THE YEAR 1,15,067
Question 4
The Income Tax Officer, on assessing the income of Shri Moti for the financial years 20X0- 20X1 and 20X1-
20X2 feels that Shri Moti has not disclosed the full income. He gives you the following particulars of assets
and liabilities of Shri Moti as on 1st April, 20X0 and 1st April, 20X2.
`
1-4-20X0 Assets : Cash in hand 25,500
Inventory 56,000
Sundry debtors 41,500
Land and Building 1,90,000
Wife’s Jewellery 75,000
Liabilities : Owing to Moti’s Brother 40,000
Sundry creditors 35,000
1-4-20X2 Assets : Cash in hand 16,000
Inventory 91,500
Land and Building 1,90,000
Motor Car 1,25,000
Wife’s Jewellery 1,25,000
Loan to Moti’s Brother 20,000
Liabilities : Sundry creditors 55,000
During the two years the domestic expenditure was ` 4,000 p.m. The declared incomes of the financial years
were ` 1,05,000 for 20X0-20X1 and ` 1,23,000 for 20X1-20X2 respectively.
State whether the Income-tax Officer’s contention is correct. Explain by giving your workings.
(Study Material)
Answer
Capital Account of Shri Moti
1-4-20X0 1-4-20X2
Assets ` ` ` `
Cash in hand 25,500 16,000
Inventory 56,000 91,500
Land & Building 1,90,000 1,90,000
Wife’s Jewellery 75,000 1,25,000
14.5
1-4-20X0 1-4-20X2
Assets ` ` ` `
Motor Car — 1,25,000
Loan to Moti’s Brother — 20,000
3,88,000 6,20,000
Liabilities:
Owing to Moti’s Brother 40,000 —
Sundry creditors 35,000 75,000 55,000 55,000
Capital 3,13,000 5,65,000
Income during the two years:
Capital as on 1-4-20X2 5,65,000
Add: Drawings – Domestic Expenses for the two years (` 4,000 × 24 months) 96,000
6,61,000
Less: Capital as on 1-4-20X0 (3,13,000)
Income earned in 20X0-20X1 and 20X1-20X2 3,48,000
Income declared (` 1,05,000 + ` 1,23,000) 2,28,000
Suppressed Income 1,20,000
The Income-tax officer’s contention that Shri Moti has not declared his true income is correct. Shri Moti’s true
income is in excess of the disclosed income by ` 1,20,000.
Question 5
The following information relates to the business of Mr. Shiv Kumar, who requests you to prepare a Trading
and Profit & Loss Account for the year ended 31st March, 20X2 and Balance Sheet as on that date:
(a)
Balance as on 31st Balance as on 31st
March, 20X1 March, 20X2
` `
Building 3,20,000 3,60,000
Furniture 60,000 68,000
Motorcar 80,000 80,000
Inventory ? 40,000
Cash and bank balances 1,80,000 1,04,000
Sundry debtors 1,60,000 ?
Bills receivable 32,000 28,000
Sundry creditors 1,20,000 ?
(b) Cash transactions during the year included the following besides certain other items:
` `
Sale of old papers and miscellaneous 20,000 Cash purchases 48,000
income Payment to creditors 1,84,000
Miscellaneous Trade expenses (including 80,000 Cash sales 80,000
salaries etc.)
14.6
(c) Other information:
 Bills receivable drawn during the year amount to ` 20,000 and Bills payable accepted ` 16,000.
 Some items of old furniture, whose written down value on 31st March, 20X1 was ` 20,000 was sold
on 30th September, 20X1 for ` 8,000. Depreciation is to be provided on Building and Furniture @
10% p.a. and on Motorcar @ 20% p.a. Depreciation on sale of furniture to be provided for 6 months
and for additions to Building for whole year.
 Of the Debtors, a sum of ` 8,000 should be written off as Bad Debt and a reserve for doubtful debts is
to be created @ 2%.
 Mr. Shivkumar has been maintaining a steady gross profit rate of 30% on turnover.
 Outstanding salary on 31st March, 20X1 was ` 8,000 and on 31st March, 20X2 was ` 10,000. On
31st March, 20X1, Profit and Loss Account had a credit balance of ` 40,000.
 20% of total sales and total purchases are to be treated as for cash.
 Additions in Furniture Account took place in the beginning of the year and there was no opening
provision for doubtful debts.
(Study Material)
Answer
Mr. Shiv Kumar
Trading and Profit and Loss Account for the year ended 31st March, 20X2
` `
To Opening inventory (balancing By Sales (3,20,000 x 100/80) 4,00,000
figure) 80,000 By Closing inventory
To Purchases (1,92,000 x 100/80) 2,40,000 40,000
To Gross profit c/d @ 30% on sales 1,20,000
4,40,000 4,40,000
To Miscellaneous expenses By Gross profit b/d Miscellaneous 1,20,000
(` 80,000 – ` 8,000 + ` 10,000) 82,000 By receipts Net loss transferred to 20,000
By Capital A/c (b.f.) 25,840
To Depreciation:
Building ` 36,000
Furniture ` 7,800
(`6,800 + ` 1,000)
Motor Car ` 16,000 59,800
To Loss on sale of furniture 11,000
To Bad debts 8,000
To Provision for doubtful debts 5,040
1,65,840 1,65,840
Capital as on 1st April, 20X1 7,16,000 Building 3,20,000
Add: Addition during 40,000
the year
Profit and Loss A/c 3,60,000
Opening balance 40,000 Less: Provision for
depreciation (36,000) 3,24,000
Less: Loss for the year Furniture 60,000
(25,840) 14,160 Less: Sold during
Sundry creditors 1,12,000 the year (20,000)
14.7
Outstanding salary 10,000 Add: Addition during
the year 28,000
68,000
Motor car (at cost) 80,000
Inventory in trade 40,000
Sundry debtors 2,52,000
Less: Provision for
doubtful debts @ 2% (5,040) 2,46,960
Bills receivable 28,000
Cash in hand and at bank 1,04,000
8,68,160 8,68,160
Working Notes:
(i) Sundry Debtors Account
` `
To Balance b/d 1,60,000 By Cash/Bank A/c 2,00,000
To Sales A/c (credit)1 3,20,000 By Bills Receivable A/c 20,000
By Bad debts A/c 8,000
By Balance c/d (bal. fig.) 2,52,000
4,80,000 4,80,000
(ii) Sundry Creditors Account
` `
To Cash/Bank A/c 1,84,000 By Balance b/d 1,20,000
To Bills Payable A/c 16,000 By Purchases A/c2 1,92,000
To Balance c/d (bal. fig.) 1,12,000
3,12,000 3,12,000
(iii) Bills Receivable Account
` `
To Balance b/d 32,000 By Cash/ Bank A/c(bal. fig.) 24,000
To Sundry Debtors A/c 20,000 By Balance c/d 28,000
52,000 52,000
(iv) Bills Payable Account
` `
To Cash/Bank A/c (bal. fig.) 28,000 By Balance b/d 28,000
To Balance c/d 16,000 By Sundry Creditors A/c 16,000
44,000 44,000
1 Total sales (80,000 x 100/ 20) – cash sales (80,000)

2 Total purchases (48,000 x 100/ 20) – cash purchases (48,000)
14.8
(v) Furniture Account

` `
To Balance b/d 60,000 By Bank/Cash A/c 8,000
To Bank A/c (b.f.) 28,000 By Depreciation A/c (on furniture sold) 1,000
By Profit and loss A/c (loss on sale) (20,000 – 11,000
1,000 – 8,000)
By Depreciation A/c (68,000 x 10%) 6,800
By Balance c/d (68,000 – 6,800) 61,200
88,000 88,000
(vi) Cash/Bank Account
` `
To Balance b/d 1,80,000 By Misc. trade expenses A/c 80,000
To Miscellaneous receipts A/c 20,000 By Purchases A/c 48,000
To Sundry debtors A/c 2,00,000 By Furniture A/c 28,000
To Sales A/c 80,000 By Sundry creditors A/c 1,84,000
To Furniture A/c (sale) 8,000 By Bills payable A/c 28,000
To Bills receivable A/c 24,000 By Building A/c (3,60,000 – 3,20,000) 40,000
5,12,000 5,12,000
(vii) Opening Balance Sheet as on 31st March, 20X1
Capital (balancing figure) 7,16,000 Building 3,20,000
Profit and loss A/c 40,000 Furniture 60,000
Sundry Creditors 1,20,000 Motor car 80,000
Bills Payable 28,000 Inventory in trade 80,000
Outstanding salary 8,000 Sundry Debtors 1,60,000
Bills Receivable 32,000
Cash in hand and at bank 1,80,000
9,12,000 9,12,000
Question 6
A. Adamjee keeps his books on single entry basis. The analysis of the cash book for the year ended on 31st
March, 20X2 is given below:
Receipts ` Payments `
Bank Balance as on 1st April, 20X1 2,800 Payments to Sundry creditors 35,000
Received from Sundry 48,000 Salaries 6,500
Debtors
Cash Sales 11,000 General expenses 2,500
Capital brought during the year 6,000 Rent and Taxes 1,500
Interest on Investments 200 Drawings 3,600
Cash purchases 12,000
Balance at Bank on 31st
March, 20X2 6,400
Cash in hand on 31st
_____ March, 20X2 500
68,000 68,000
14.9
Particulars of other assets and liabilities are as follows:
1st April, 20X1 31st March, 20X2
Machinery 7,500 7,500
Inventory 3,900 5,700
Investments 5,000 5,000
Prepare final accounts for the year ending 31st March, 20X2 after providing depreciation at 10 per cent on
machinery and furniture and ` 800 against doubtful debts.
(Study Material)
Answer
A. Adamjee
Trading and Profit & Loss Account for the year ended 31st March 20X2
` ` `
To Opening Inventory 3,900 By Sales 62,100
To Purchases 49,100 By Closing Inventory 5,700
To Gross profit c/d (b.f.) 14,800
67,800 67,800
To Salaries 6,500 By Gross Profit b/d 14,800
To Rent and Taxes 1,500 By Interest on investment 200
To General expenses 2,500
To Dep:
Machinery@ 10% 750
Furniture @ 10% 120 870
To Provision for doubtful 800
debts
To Net profit
carried to Capital A/c (b.f.) 2,830
15,000 15,000
Balance Sheet as on 31st March 20X2
A. Adamjee’s Capital Machinery 7,500
on 1st April, 20X1 29,100 Less : Depreciation (750) 6,750
Add: Fresh Capital 6,000 Furniture 1,200
Add: Profit for the year 2,830 Less : Depreciation (120) 1,080
37,930
Less: Drawings (3,600) 34,330 Inventory-in-trade 5,700
Sundry creditors 7,900 Less : Provision for
Doubtful debts (800) 16,800
Investment 5,000
Cash at bank 6,400
Cash in hand 500
42,230 42,230
14.10
Working Notes:
1. Balance sheet of A. Adamjee as on 1st April 20X1
Sundry creditors 5,800 Machinery 7,500
A. Adamjee’s capital 29,100 Furniture 1,200
(balancing figure) Inventory 3,900
Investments 5,000
Bank balance (from Cash statement) 2,800
34,900 34,900
2. Ledger Accounts
A. Adamjee’s Capital Account
` `
March 31 To Drawings 3,600 April 1 March 31 By Balance b/d 29,100
By Net Profit 2,830
March 31 To Balance c/d (b.f.) 34,330 March 31 By Cash 6,000
37,930 37,930
Sales Account
` `
March 31 To Trading A/c (b.f.) 62,100 March 31 By Cash 11,000
March 31 By Total Debtors Account 51,100
(Credit Sales)
62,100 62,100
Total Debtors Account
` `
April 1 To Balance b/d 14,500 March 31 By Cash 48,000
March 31 To Credit sales (Balancing figure) 51,100 March 31 By Balance c/d 17,600
65,600 65,600
Purchases Account
` `
March 31 To Cash A/c 12,000 March 31 By Trading Account 49,100
To total Creditors A/c (credit 37,100 (b.f.)
Purchases) 49,100 49,100
Total Creditors Account
` `
March 31 To Cash 35,000 April 1 By Balance b/d 5,800
March 31 To Balance b/d 7,900 March 31 By Credit 37,100
Purchases (Balancing figure)
42,900 42,900
14.11
Question 7
From the following data furnished by Mr. Manoj, you are required to prepare a Trading and Profit and Loss
Account for the year ended 31st March, 20X2 and Balance Sheet as at that date. All workings should form
part of your answer.
Assets and Liabilities As on 1st As on 31st
April 20X1 March 20X2
` `
Creditors 15,770 12,400
Sundry expenses outstanding 600 330
Sundry Assets 11,610 12,040
Inventory in trade 8,040 11,120
Cash in hand and at bank 6,960 8,080
Trade debtors ? 17,870
Details relating to transactions in the year:
Cash and discount credited to debtors 64,000
Sales return 1,450
Bad debts 420
Sales (cash and credit) 71,810
Discount allowed by trade creditors 700
Purchase returns 400
Additional capital-paid into Bank 8,500
Realisations from debtors-paid into Bank 62,500
Cash expenses 9,570
Paid by cheque for machinery purchased 430
Household expenses drawn from Bank 3,180
Cash paid into Bank 5,000
Cash drawn from Bank 9,240
Cash in hand on 31-3-20X2 1,200
Cheques issued to trade creditors 60,270
(Study Material)
Answer
In the books of Mr. Manoj
Trading and Profit & Loss Account for the year ending 31st March, 20X2
` ` ` `
To Opening Inventory 8,040 By Sales
Cash 4,600
To Purchases (58,000 + 1,030) 59,030 Credit 67,210
Less: Returns (400) 58,630 71,810
To Gross profit c/d 14,810 Less: Returns (1,450) 70,360
By Closing inventory 11,120
81,480 81,480
To Sundry expenses (W.N.(v)) 9,300 By Gross profit b/d 14,810
14.12
` ` ` `
To Discount 1,500 By Discount 700
To Bad Debts 420
To Net Profit transfer to Capital 4,290
15,510 15,510
Balance Sheet of Mr. Manoj as on 31st March, 20X2
Liabilities ` ` Assets `
Capital Sundry assets 12,040
Opening balance 26,770 Inventory in trade 11,120
Add: Addition 8,500 Sundry debtors 17,870
Net Profit 4,290 Cash in hand & at bank 8,080
39,560
Less: Drawings (3,180) 36,380
Outstanding expenses 330
49,110 49,110
Working Notes:
(i) Cash sales
Combined Cash & Bank Account
` `
To Balance b/d 6,960 By Sundry creditors 60,270
To Sundries (Contra) 5,000 By Sundries (Contra) 5,000
To Sundries (Contra) 9,240 By Sundries (Contra) 9,240
To Sundry debtors 62,500 By Drawings 3,180
To Capital A/c 8,500 By Machinery 430
To Sales (Cash Sales-Balancing Figure) 4,600 By Sundry expenses 9,570
By Purchases 1,030
96,800 96,800
(ii) Total Debtors Account
` `
To Balance b/d 16,530 By Bank 62,500
To Sales (71,810–4,6003) 67,210 By Discount(64,000 - 62,500) 1,500
By Return Inward 1,450
By Bad Debts 420
83,740 83,740
(iii) Total Creditors Account
` `
To Bank 60,270 By Balance b/d 15,770
To Discount 700 By Purchases 58,000
3 From combined cash and bank account

14.13
` `
To Return Outward 400
73,770 73,770
(iv) Balance Sheet as on 1st April, 20X1
Capital 26,770 Sundry Assets 11,610
Sundry Creditors 15,770 Inventory in Trade 8,040
Outstanding Expenses 600 Sundry Debtors (from total 16,530
debtors A/c)
Cash in hand & at bank 6,960
43,140 43,140
(v)
Expenses paid in Cash 9,570
Add: Outstanding on 31-3-20X2 330
9,900
Less: Outstanding on 1-4-20X1 (600)
9,300
(vi) Due to lack of information, depreciation has not been provided on fixed assets.
Question 8
Mr. Anup runs a wholesale business where in all purchases and sales are made on credit. He furnishes the
following closing balances:
31st March 31st March
20X1 20X2
Bills receivable 15,000 6,000
Inventory 1,10,000 1,90,000
Bank 90,000 87,000
Cash 5,200 5,300
Summary of cash transactions during the year 20X1- 20X2:
(i) Deposited to bank after payment of shop expenses @ ` 600 p.m., salary @ ` 9,200 p.m. and personal
expenses @ ` 1,400 p.m. ` 7,62,750.
(ii) Cash Withdrawn from bank ` 1,21,000.
(iii) Cash payment to suppliers ` 77,200 for supplies and ` 25,000 for furniture.
(iv) Cheques collected from customers but dishonoured ` 5,700.
(v) Bills accepted by customers ` 40,000.
(vi) Bills endorsed ` 10,000.
(vii) Bills discounted ` 20,000, discount ` 750.
(viii) Bills matured and duly collected ` 16,000.
(ix) Bills accepted ` 24,000.
(x) Paid suppliers by cheque ` 3,20,000.
(xi) Received ` 20,000 on maturity of one LIC policy of the proprietor by cheque.
(xii) Rent received ` 14,000 by cheque for the premises owned by proprietor.
14.14
(xiii) A building was purchased on 30-11-20X1 for opening a branch for ` 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 ` 18,700, due ` 2,200.
Other transactions:
(i) Claim against the firm for damage ` 1,55,000 is under legal dispute. Legal expenses ` 17,000. The firm
anticipates defeat in the suit.
(ii) Goods returned to suppliers ` 4,200.
(iii) Goods returned by customers ` 1,200.
(iv) Discount offered by suppliers ` 2,700.
(v) Discount offered to the customers ` 2,400.
(vi) The business is carried on at the rented premises for an annual rent of ` 20,000 which is outstanding at
the year end.
Prepare Trading and Profit & Loss Account of Mr. Anup for the year ended 31 st March 20X2 and Balance
Sheet as on that date.
(Study Material)
Answer
Trading and Profit & Loss Account of Mr. Anup for the year ended 31st March 20X2
` ` ` `
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
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 20,900 By Discount 2,700
(18,700 + 2,200)
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 31st March 20X2
Capital A/c (W.N.vi) 2,38,200 Building (from summary cash 3,72,000
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
14.15
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
` `
To Balance b/d 70,000 By Bill Receivable A/c
To Bill receivable A/c-Bills dishonoured 3,000 Bills accepted by customers 40,000
To Bank A/c-Cheque dishonoured 5,700 By Bank A/c - Cheque received 5,700
To Credit sales (Balancing Figure) 9,59,750 By Cash (from summary cash 8,97,150
and 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
` `
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 dishonoured (Bal. Fig) 3,000
55,000 55,000
(iii) Sundry Creditors Account
` `
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
14.16
(iv) Bills Payable A/c

` `
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
` ` ` `
To Balance b/d 5,200 90,000 By Bank 7,62,750
To Sundry debtors (Bal. By Cash 1,21,000
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 12) 16,800
By Bills Payable 22,000
To Sundry 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 value 20,000 By Electricity & Tel. Charges 18,700
of LIC policy)
To Capital (Rent received) 14,000 By Building (Bal. fig) 3,72,000
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 on 31st March 20X1
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
Question 9
Ms. Rashmi furnishes you with the following information relating to her business:
(a) Assets and liabilities as on 1.4.20X1 31.03.20X2
` `
Furniture (w.d.v) 12,000 12,700
Inventory at cost 16,000 14,000
Sundry Debtors 32,000 ?
Sundry Creditors 22,000 30,000
Prepaid expenses 1,200 1,400
Unpaid expenses 4,000 3,600
Cash in hand and at bank 2,400 1,250
14.17
(b) Receipts and payments during the year:
Collections from debtors, after allowing discount of ` 3,000 amounted to ` 1,17,000.
Collections on discounting of bills of exchange, after deduction of discount of ` 250 by the bank, totaled to
` 12,250.
Creditors of ` 80,000 were paid ` 78,400 in full settlement of their dues. Payment for freight inwards `
6,000.
Amount withdrawn for personal use ` 14,000. Payment for office furniture ` 2,000.
Investment carrying annual interest of 4% were purchased at ` 192 (face value ` 200) on 1st October,
20X1 and payment made thereof. Expenses including salaries paid ` 29,000.
Miscellaneous receipts ` 1,000.
(c) Bills of exchange drawn on and accepted by customers during the year amounted to ` 20,000. Of these,
bills of exchange of ` 4,000 were endorsed in favour of creditors. An endorsed bill of exchange of ` 800
was dishonoured.
(d) Goods costing ` 1,800 were used as advertising materials.
(e) Goods are invariably sold to show a gross profit of 33 -1/3% on sales.
(f) Difference in cash book, if any, is to be treated as further drawing or introduction of capital by Ms.
Rashmi.
(g) Provide at 2.5% for doubtful debts on closing debtors.
Rashmi asks you to prepare trading and profit and loss account for the year ended 31st March, 20X2 and the
balance sheet as on that date.
(Study Material)
Answer
Trading and Profit and Loss Account of Ms. Rashmi for the year ended 31st March, 20X2
` `
To Opening Inventory 16,000 By Sales (W.N.3) 1,46,100
To Purchases (W.N.2) 91,200 By Closing inventory 14,000
Less : For advertising (1,800) 89,400
To Freight inwards 6,000
To Gross profit c/d @ 33-1/3% 48,700
1,60,100 1,60,100
To Sundry expenses (W.N.6) 28,400 By Gross profit b/d 48,700
To Advertisement 1,800 By Interest on 4
To Discount allowed investment (200x 4/100 x ½)
Debtors 3,000 By Discount received 1,600
Bills Receivable 250 3,250 By Miscellaneous income 1,000
To Depreciation on furniture 1,300
(12,000 + 2,000 – 12,700)
To Provision for doubtful debts 972
To Net Profit (b.f.) 15,582
51,304 51,304
Liabilities Amount Assets Amount
` ` ` `
Capital as on 1.1.20X1 37,600 Furniture (w.d.v.) 12,000
(W.N.1) Additions during the
Less: Drawings (15,808) Year 2,000
21,792 Less: Depreciation (b.f.) (1,300) 12,700
14.18
Add: Net Profit 15,582 37,374 Investment 192
Sundry creditors 30,000 Interest accrued (200 x 4% x 4
6/12)
Outstanding expenses 3,600 Closing Inventory Sundry 14,000
debtors 38,900
Less: Provision for
doubtful debts @ 2.5% 972 37,928
Bills receivable (W.N.7) 3,500
Cash in hand and at bank 1,250
Prepaid expenses 1,400
70,974 70,974
Working Notes:
(1) Capital on 1st April, 20X1
Balance Sheet As On 1st April , 20X1
Capital (Bal. fig.) 37,600 Furniture (w.d.v.) 12,000
Creditors 22,000 Inventory at cost 16,000
Outstanding expenses 4,000 Sundry debtors 32,000
63,600 63,600
(2) Purchases made during the year
Sundry Creditors Account
` `
To Cash and bank A/c 78,400 By Balance b/d 22,000
To Discount received A/c (80,000 – 78,400) 1,600 By Sundry debtors A/c 800
To Bills Receivable A/c 4,000 By Purchases A/c 91,200
To Balance c/d 30,000 (Balancing figure)
1,14,000 1,14,000
(3) Sales made during the year
`
Opening inventory 16,000
Purchases 91,200
Less: For advertising (1,800) 89,400
Freight inwards 6,000
1,11,400
Less: Closing inventory (14,000)
Cost of goods sold 97,400
Add: Gross profit (@ 50% on cost) 48,700
1,46,100
14.19
(4) Debtors on 31st March , 20X2
Sundry Debtors Account
` `
To Balance b/d 32,000 By Cash and bank A/c 1,17,000
To Sales A/c (W.N.3) 1,46,100 By Discount allowed A/c 3,000
To Sundry creditors A/c By Bills receivable A/c 20,000
(bill dishonoured) 800 By Balance c/d (Bal. fig.) 38,900
1,78,900 1,78,900
(5) Additional drawings by Ms. Rashmi
` `
To Balance b/d 2,400 By Freight inwards A/c 6,000
To Bills Receivable A/c 12,250 By Investment A/c 192
To Miscellaneous income A/c 1,000 By Expenses A/c 29,000
By Creditors A/c 78,400
By Drawings A/c 15,808
[14,000 + 1,808 (b.f.)
(Additional drawings)]
1,32,650 1,32,650
(6) Amount of expenses debited to Profit and Loss A/c
Sundry Expenses Account
` `
To Prepaid expenses A/c (on 1,200 By Outstanding expenses A/c (on 1.4.20X1) 4,000
1.4.20X1)
To Bank A/c 29,000 By Profit and Loss A/c (Balancing figure) 28,400
To Outstanding expenses A/c (on 3,600 By Prepaid expenses A/c 1,400
31.03.20X2)
33,800 33,800
(7) Bills Receivable on 31st March, 20X2
Bills Receivable Account
` `
To Debtors A/c 20,000 By Creditors A/c 4,000
By Bank A/c 12,250
By Discount on bills receivable A/c 250
By Balance c/d (Balancing figure) 3,500
20,000 20,000
Theory Questions
Question 10
What is meant by Single entry System? What are the types of procedures adopted for this system?
(Study Material)
14.20
Answer
Single entry system is an inaccurate and unsystematic method of recording business transactions. The
procedures adopted are: Pure single entry; Simple entry and Queasy single entry.
Practical Questions
Question 11
A company sold 20% of the goods on cash basis and the balance on credit basis. Debtors are allowed 1½
month's credit and their balance as on 31.03.20X1 is ` 1,25,000. Assume that the sale is uniform throughout
the year. Calculate the credit sales and total sales of the company for the year ended 31.03.20X2.
(Study Material)
Answer
Calculation of Credit Sales and Total sales
12 months
Credit Sales for the year ended 20X1-X2 = Debtors x
1.5 months
12 months
= `1,25,000 x
1.5 months
= ` 10,00,000
100%
Total sales for the year ended 20X1-X2 = = Credit sales x
80%
100%
= `10,00,000 x
80%
= ` 12,50,000
Question 12
The following is the Balance Sheet of the retail business of Sri Srinivas as at 31st December, 20X1:
Sri Srinivas’s capital 1,00,000 Furniture 10,000
Liabilities for goods 20,500 Stock 70,000
Rent 1,000 Debtors 25,000
Cash at bank 14,500
Cash in hand 2,000
1,21,500 1,21,500
You are furnished with the following information:
(1) Sri Srinivas sells his goods at a profit of 20% on sales.
(2) Goods are sold for cash and credit. Credit customers pay by cheques only.
(3) Payments for purchases are always made by cheques.
(4) It is the practice of Sri Srinivas to send to the bank every weekend the collections of the week after
paying every week, salary of ` 300 to the clerk, Sundry expenses of ` 50 and personal expenses ` 100.
Analysis of the Bank Pass–Book for the 13 weeks period ending 31st March, 20X2 disclosed the following:
`
Payments to creditors 75,000
Payments of rent up to 31.3.20X2 4,000
Amounts deposited into the bank 1,25,000
(include ` 30,000 received from debtors by cheques)
14.21
`
The following are the balances on 31st March, 20X2: `
Stock 40,000
Debtors 30,000
Creditors for goods 36,500
On the evening of 31st March, 20X2 the Cashier absconded with the available cash in the cash box. There
was no cash deposit in the week ended on that date.
You are required to prepare a statement showing the amount of cash defalcated by the Cashier and also a
Profit and Loss Account for the period ended 31st March, 20X2 and a Balance Sheet as on that date.
(Study Material)
Answer
Statement showing the amount of cash defalcated by the Cashier
` `
Cash balance as on 1.1.20X2 2,000
Add : Cash sales (W.N.2 and W.N.4) 1,16,250 1,18,250
Less : Salary to clerk (` 300 × 13) 3,900
Sundry expenses (` 50 × 13) 650
Drawings of Sri Srinivas (` 100 × 13) 1,300
Deposit into bank (` 1,25,000 – ` 30,000) 95,000 (1,00,850)
Cash balance as on 31.3.20X2 (defalcated by cashier) 17,400
Trading and Profit and Loss Account of Sri Srinivas for the 13 week period ended 31st March, 20X2
` ` `
To Opening stock 70,000 By Sales :
To Purchases 91,000 Cash (W.N.2 and W.N.4) 1,16,250
To Gross Profit c/d 30,250 Credit (W.N.3) 35,000 1,51,250
By Closing stock 40,000
191,250 1,91,250
To Salaries (300 x 13) 3,900 By Gross profit b/d 30,250
To Rent (` 4,000 – ` 1,000) 3,000
To Sundry Expenses (50 x 13) 650
To Loss of cash by theft 17,400
30,250 30,250
Balance Sheet of Sri Srinivas as on 31st March, 20X2
Capital as on 1.1.20X2 1,00,000 Furniture 10,000
Add : Profit 5,300 Stock 40,000
1,05,300 Debtors 30,000
Less : Drawings (1,300) 1,04,000 Cash at bank 60,500
Liabilities for goods 36,500
1,40,500 1,40,500
14.22
Working Notes:
(1) Purchases
Creditors Account
` `
To Bank A/c 75,000 By Balance b/d 20,500
To Balance c/d 36,500 By Purchases A/c (Bal. fig.) 91,000
1,11,500 1,11,500
(2) Total sales
`
Opening stock 70,000
Add : Purchases 91,000
1,61,000
Less : Closing stock (40,000)
Add : Gross profit @ 25% on cost 30,250
(3) Credit Sales
Debtors Account
` `
To Balance b/d 25,000 By Bank A/c 30,000
To Sales A/c (Bal. fig.) 35,000 By Balance c/d 30,000
60,000 60,000
(4) Cash Sales
`
Total sales 1,51,250
Less : Credit Sales (35,000)
Cash sales 1,16,250
(5) Bank balance as on 31.3.20X2
` `
To Balance b/d 14,500 By Creditors A/c 75,000
To Debtors A/c 30,000 By Rent A/c 4,000
To Cash A/c (1,25,000 – 30,000) 95,000 By Balance c/d (b.f.) 60,500
1,39,500 1,39,500
Notes:
1. All purchases are taken on credit basis.
2. In the absence of information about the rate of depreciation, no depreciation has been charged on
furniture.
3. The amount defalcated by the cashier may be treated as recoverable from him. In that case, ` 17,400
may be shown as sundry advances on assets side in the Balance Sheet and net profit for the 13 week
period ending 31st March, 20X2 would amount ` 22,700.
14.23
Question 13
Mr. A runs a business of readymade garments. He closes the books of accounts on 31st March. The Balance
Sheet as on 31st March, 20X1 was as follows:
A’s capital a/c 4,04,000 Furniture 40,000
Creditors 82,000 Stock 2,80,000
Debtors 1,00,000
Cash in hand 28,000
Cash at bank 38,000
4,86,000 4,86,000
You are furnished with the following information:
(1) His sales, for the year ended 31st March, 20X2 were 20% higher than the sales of previous year, out of
which 20% sales was cash sales.
Total sales during the year 20X0-X1 were ` 5,00,000.
(2) Payments for all the purchases were made by cheques only.
(3) Goods were sold for cash and credit both. Credit customers pay be cheques only.
(4) Deprecation on furniture is to be charged 10% p.a.
(5) Mr. A sent to the bank the collection of the month at the last date of the each month after paying salary of
` 2,000 to the clerk, office expenses ` 1,200 and personal expenses ` 500.
Analysis of bank pass book for the year ending 31st March 20X2 disclosed the following:
`
Payment of rent up to 31st March, 20X2 16,000
Cash deposited into the bank during the year 80,000
The following are the balances on 31st March, 20X2:
`
Stock 1,60,000
Debtors 1,20,000
Creditors for goods 1,46,000
On the evening of 31st March 20X2, the cashier absconded with the available cash in the cash book.
You are required to prepare Trading and Profit and Loss A/c for the year ended 31st March, 20X2 and
Balance Sheet as on that date. All the workings should form part of the answer.
(Study Material)
Answer
In the books of Mr. A
Trading and Profit and Loss Account for the year ending 31st March 20X2
To Opening stock 2,80,000 By Sales (W.N. 3)
To Purchases (W.N. 1) 3,64,000 Credit 4,80,000
To Gross profit (b.f.) 1,16,000 Cash 1,20,000 6,00,000
By Closing stock 1,60,000
7,60,000 7,60,000
To Salary (2,000 x 12) 24,000 By Gross profit 1,16,000
To Rent 16,000
To Office expenses (1,200 x 12) 14,400
14.24
To Loss of cash (W.N. 6) 23,600
1,16,000 1,16,000
A’s Capital 4,04,000 Furniture 40,000
Add: Net Profit 34,000 Less: Depreciation (4,000) 36,000
Less: Drawings (500 x 12) (6,000) 4,32,000 Stock 1,60,000
Creditors 1,46,000 Debtors 1,20,000
Cash at bank 2,62,000
5,78,000 5,78,000
Working Notes:
(1) Calculation of purchases
Creditors Account
To Bank A/c 3,00,000 By Balance b/d 82,000
To Balance c/d 1,46,000 By Purchases (Bal. fig.) 3,64,000
4,46,000 4,46,000
(2) Calculation of total sales
`
Sales for the year 20X0-X1 5,00,000
Total sales for the year 20X1-X2 6,00,000
(3) Calculation of credit sales
`
Total sales 6,00,000
Less: Cash sales (20% of total sales) (1,20,000)
4,80,000
(4) Calculation of cash collected from debtors
Debtors Account
To Balance b/d 1,00,000 By Bank A/c (Bal. fig.) 4,60,000
To Sales A/c 4,80,000 By Balance c/d 1,20,000
5,80,000 5,80,000
(5) Calculation of closing balance of cash at bank
Bank Account
To Balance b/d 38,000 By Creditors A/c 3,00,000
To Debtors A/c 4,60,000 By Rent A/c 16,000
To Cash A/c 80,000 By Balance c/d (b.f.) 2,62,000
5,78,000 5,78,000
14.25
(6) Calculation of the amount of cash defalcated by the cashier
`
Cash balance as on 1st April 20X1 28,000
Add: Cash sales during the year 1,20,000
1,48,000
Less: Salary (`2,000x12) 24,000
Office expenses (`1,200 x 12) 14,400
Drawings of A (`500x12) 6,000
Cash deposited into bank during the year 80,000 (1,24,400)
Cash balance as on 31st March 20X2 (defalcated by the cashier) 23,600
Question 14
Mr. Anil, a trader keeps his books of account under single entry system. On 31st March, 20X1 his statement
of affairs stood as follows :
Trade Creditors 5,80,000 Furniture, Fixtures and Fittings 1,00,000
Bills Payable 1,25,000 Stock 6,10,000
Outstanding Expenses 45,000 Trade Debtors 1,48,000
Capital Account 2,50,000 Bills Receivable 60,000
Unexpired Insurance 2,000
Cash in Hand and at Bank 80,000
10,00,000 10,00,000
The following was the summary of Cash–book for the year ended 31st March, 20X2:
Receipts ` Payments `
Cash in Hand and at Bank on Payments to Trade Creditors 75,07,000
1st April, 20X1 80,000 Payments for Bills payable 8,15,000
Cash Sales 73,80,000 Sundry Expenses paid 6,20,700
Receipts from Trade Debtors 15,10,000 Drawings 2,40,000
Receipts for Bills Receivable 3,40,000 Cash in Hand and at Bank
on 31st March, 20X2 1,27,300
93,10,000 93,10,000
Discount allowed to trade debtors and received from trade creditors amounted to ` 36,000 and ` 28,000
respectively. Bills endorsed amounted to ` 15,000. Annual Fire Insurance premium of ` 6,000 was paid every
year on 1st August for the renewal of the policy. Furniture, fixtures and fittings were subject to depreciation @
15% per annum on diminishing balance method.
You are also informed about the following balances as on 31st March, 20 X2:
`
Stock 6,50,000
Trade Debtors 1,52,000
Bills Receivable 75,000
Bills Payable 1,40,000
Outstanding Expenses 5,000
The trader maintains a steady gross profit ratio of 10% on sales.
Prepare Trading and Profit and Loss Account for the year ended 31st March, 20X2 and Balance Sheet as at
that date.
(Study Material)
14.26
Answer
In the books of Mr. Anil Trading and Profit and Loss Account for the year ended 31st March, 20X2
` `
To Opening Stock 6,10,000 By Sales
To Purchases (W.N. 3) 84,10,000 Cash 73,80,000
To Gross profit c/d 9,30,000 Credit (W.N. 2) 19,20,000 93,00,000
(10% of 93,00,000) By Closing stock 6,50,000
99,50,000 99,50,000
To Sundry expenses (W.N. 6) 5,80,700 By Gross profit b/d 9,30,000
To Discount allowed 36,000 By Discount received 28,000
(15% ` 1,00,000)
9,58,000 9,58,000
Balance Sheet as at 31st March, 20X2
` `
Capital Furniture & Fittings 1,00,000
Opening balance 2,50,000 Less : Dep. (15,000) 85,000
Less: Drawing (2,40,000) Stock 6,50,000
10,000 Trade Debtors 1,52,000
Add: Net profit for the years 3,26,300 3,36,300 Bills receivable 75,000
Bills payable 1,40,000 Unexpired insurance 2,000
Trade creditors 6,10,000 Cash in hand & at bank 1,27,300
Outstanding expenses 5,000
10,91,300 10,91,300
Working Notes:
1. Bills Receivable Account
` `
To Balance b/d 60,000 By Cash 3,40,000
To Trade debtors (b.f.) 3,70,000 By Trade creditors (Bills endorsed) 15,000
4,30,000 4,30,000
2. Trade Debtors Account
` `
To Credit sales 19,20,000 By Discount allowed 36,000
(Bal. fig.) By Bills receivable 3,70,000
20,68,000 20,68,000
14.27
3. Memorandum Trading Account
` `
To Purchases (Balancing figure) 84,10,000 By Closing stock 6,50,000
To Gross Profit (10% on sales) 9,30,000
99,50,000 99,50,000
4. Bills Payable Account
` `
To Balance c/d 1,40,000 By Creditors (balancing 8,30,000
figure)
9,55,000 9,55,000
5. Trade Creditors Account
` `
To Discount received 28,000 By Purchases (as calculated 84,10,000
To Bills receivable 15,000 in W.N. 3)
To Bills payable 8,30,000
To Balance c/d
(balancing figure) 6,10,000
89,90,000 89,90,000
6. Computation of sundry expenses to be charged to Profit & Loss A/c
`
Sundry expenses paid (as per cash book) 6,20,700
Add : Prepaid expenses as on 31–3–20X1 2,000
6,22,700
Less: Outstanding expenses as on 31–3–20X1 (45,000)
5,77,700
Add : Outstanding expenses as on 31–3–20X2 5,000
5,82,700
Less : Prepaid expenses as on 31–3–20X2 (Insurance paid till July, 20X2) (6,000 x 4/12) (2,000)
5,80,700
Question 15
The following is the Balance Sheet of a Tony Pharma as on 31st March, 20X1 :
` `
Capital 10,00,000 Fixed Assets 4,00,000
Creditors (Trade) 1,40,000 Stock 3,00,000
Profit & Loss A/c 60,000 Debtors 1,50,000
Cash & Bank 3,50,000
12,00,000 12,00,000
14.28
The management estimates the purchases and sales for the year ended 31st March, 20X2 as under:
Up to 28.2.20X2 March 20X2
` `
Purchases 14,10,000 1,10,000
Sales 19,20,000 2,00,000
It was decided to invest ` 1,00,000 in purchases of fixed assets, which are depreciated @ 10% on cost.
The time lag for payment to Trade Creditors for purchase and receipt from Sales is one month. The business
earns a gross profit of 30% on turnover. The expenses against gross profit amount to 10% of the turnover.
The amount of depreciation is not included in these expenses.
Draft a Balance Sheet as at 31st March, 20X2 assuming that creditors are all Trade Creditors for purchases
and debtors for sales and there is no other item of current assets and liabilities apart from stock and cash and
bank balances. Assume that all sales and purchases are on credit basis.
(Study Material)
Answer
In the books of Tony Pharma Projected Balance Sheet as on 31st March, 20X2
` `
Capital 10,00,000 Fixed Assets 4,00,000
Profit & Loss Account Additions 1,00,000
as on 1st April, 20X1 60,000 5,00,000
Add: Profit for the year 3,74,000 4,34,000 Less: Dep. @ 10% (50,000) 4,50,000
Creditors (Trade) 1,10,000 Stock in trade 3,36,000
Sundry Debtors 2,00,000
Cash & Bank Balances (working 5,58,000
note)
15,44,000 15,44,000
Working Notes:
1. Projected Trading and Profit and Loss Account for the year ended 31st March, 20X2
` `
To Purchases 15,20,000 By Closing Stock (balancing figure) 3,36,000
To Gross Profit c/d (30% on sales) 6,36,000
24,56,000 24,56,000
To Sundry Expenses (10% on sales) 2,12,000 By Gross Profit b/d 6,36,000
6,36,000 6,36,000
1st April, 20X1 to 31st March, 20X2
` `
To Balance b/d 3,50,000 By Sundry Creditors 15,50,000
To Sundry Debtors 20,70,000 (` 1,40,000+` 14,10,000)
(`1,50,000+` 19,20,000) By Expenses 2,12,000
By Fixed Assets 1,00,000
By Balance c/d (b.f.) 5,58,000
24,20,000 24,20,000
14.29
Question 16
From the following information, prepare Trading and Profit & Loss Account for the year ended 31.03.20X2
and the Balance Sheet as at 31.03.20X2 of M/s Prasad & Co., a proprietorship firm.
Assets & Liabilities As on As on
01.04.20X1 31.03.20X2
Creditors 20,000 15,000
Outstanding Expenses 600 800
Stock 10,000 12,000
Cash in hand & at bank 10,000 12,000
Debtors ? 18,000
Details of the year’s transactions are as follows:
(1) Discounts allowed to Debtor 4,000
(2) Returns from debtors 1,450
(3) Bad debts 500
(4) Total sales (Cash and Credit) 72,000
(5) Discount allowed by creditors 700
(6) Returns to creditors 400
(7) Receipts from debtors paid into Bank 76,000
(8) Cash purchases 1,000
(9) Expenses paid by cash 9,000
(10) Drawings by cheque 500
(11) Purchase of Fixed Assets by cheque 4,000
(12) Cash deposited into bank 5,000
(13) Cash withdrawn from bank 9,000
(14) Cash in hand at 31.03.20X2 2,000
(15) Payments to creditors by cheque 60,000
No assets were sold during the year.
(Study Material)
Answer
In the books of M/s Prasad & Co.
Trading and Profit and Loss
Account for the year ended 31st March, 20X2
` ` ` `
To Opening stock 10,000 By Sales:
To Purchases: Cash 500
Cash 1,000 Credit 71,500
Credit (W.N. 3) 56,100 Less: Returns (1,450) 70,550
57,100 By Closing stock 12,000
Less: Returns (400) 56,700
82,550 82,550
To Discount allowed 4,000 By Gross profit b/d 15,850
To Bad debts 500 By Discount received 700
To General expenses (W.N. 5) 9,200 By Net Loss (balancing fig.) 150
To Depreciation (W.N. 4) 3,000
16,700 16,700
14.30
Balance Sheet as at 31st March, 20X2
Capital (W.N. 1) 39,850 Fixed Assets 12,000
Less: Net loss 150 Add: New asset 4,000
39,700 16,000
Less: Drawings (500) 39,200 Less: Dep. (3,000) 13,000
Sundry creditors 15,000 Stock in trade 12,000
Expenses outstanding 800 Sundry debtors (W.N. 2) 18,000
Cash in hand 2,000
____ _ Cash in Bank 10,000
55,000 55,000
Working Notes:
(1) Ascertainment of Opening Capital - Statement of Affairs as at 1.4.20X1
Sundry creditors 20,000 Fixed Assets 12,000
Outstanding expenses 600 Stock 10,000
Prasad’s Capital Debtors 28,450
(Balancing figure) 39,850 Cash in hand 7,500
____ _ Cash at Bank 2,500
60,450 60,450
(2) Sundry Debtors Account
` `
To Balance b/d (bal. fig) 28,450 By Cash 76,000
To Sales (72,000 – 500) 71,500 By Discount 4,000
By Returns (sales) 1,450
By Bad debts 500
____ __
By Balance c/d (given) 18,000
99,950 99,950
(3) Sundry Creditors Account
` `
To Bank – Payments 60,000 By Balance b/d 20,000
To Discount 700 By Purchases - credit 56,100
To Returns 400 (Balancing figure)
To Balance c/d (closing balance)
15,000 ____ __
76,100 76,100
(4) Depreciation on Fixed Assets
`
Opening balance of fixed assets 12,000
Add: Additions 4,000
16,000
Less: Closing balance of fixed assets (13,000)
Depreciation 3,000
14.31
(5) Expenses to be shown in profit and loss account
Expenses (in cash) 9,000
Add: Outstanding of 20X2 800
9,800
Less: Outstanding of 20X1 600
9,200
(6) Cash and Bank Account
Cash Bank Cash Bank
` ` ` `
To Balance b/d 7,500 2,500 By Purchases 1,000
To Debtors - 76,000 By Expenses 9,000
To Bank (C) 9,000 - By Fixed Asset 4,000
To Cash (C) - 5,000 By Drawings 500
To Sales (balancing figure 500 - By Creditors 60,000
considered as cash By Cash (C) 9,000
sales)
By Bank (C) 5,000
17,000 83,500 17,000 83,500
Test Your Knowledge

MCQs
1. In case of net worth method, profit is determined by
(a) Preparing a trading and profit and loss account.
(b) Comparing the capital in the beginning with the capital at the end of the accounting period.
(c) Comparing the net assets in the beginning with the net assets at the end of the accounting period.
Answer: (b)
2. Single entry system can be followed by
(a) Small firms.
(b) Joint stock companies.
(c) Co-operative societies.
Answer: (a)
3. Closing capital is calculated as
(a) Opening capital +Additional capital -Drawings.
(b) Opening capital +Additional capital –Drawings + Profit.
(c) Opening capital +Additional capital +Drawings - Profit.
Answer: (b)
4. Under single entry system, only personal accounts are kept and in some cases
(a) Cash book is maintained
(b) Fixed assets’ accounts are maintained
(c) Liabilities’ accounts are maintained.
Answer: (a)
5. The closing capital of Mr. B as on 31.3.20X2 was `4,00,000. On 1.4.20X1 his capital was ` 3,50,000. His
net profit for the year ended 31.3.20X2 was ` 1,00,000. He introduced `30,000 as additional capital in
February, 20X2 Find out the amount drawn by Mr. B for his domestic expenses.
(a) `1,00,000;
(b) `80,000;
(c) `1,20,000;
Answer: (b)
14.32
Chap. 14  Accounts from Incomplete Records
QUESTION BANK
Question 17
The following balances appeared in the books of M/s Sunshine Traders:
As on As on
31-03-2018 (`) 31-03-2019 (`)
Land and building 2,50,000 2,50,000
Plant and Machinery 1,10,000 1,65,000
Office Equipment 52,500 42,500
Sundry Debtors 77,750 1,10,250
Creditors for Purchases 47,500 ?
Provision for office expenses 10,000 7,500
Stock ? 32,500
Long Term loan from ABC Bank @ 10% per annum 62,500 50,000
Bank 12,500 ?
Capital 4,65,250 ?
Other information was as follows:
In (`)
- Collection from Sundry Debtors 4,62,5000
- Payments to Creditors for Purchases 2,62,500
- Payment of office Expenses 21,000
- Salary paid 16,000
- Selling Expenses paid 7,500
- Total sales 6,25,000
Credit sales (80% of Total sales)
- Credit Purchases 2,70,000
Cash Purchases (40% of Total Purchases)
- Gross Profit Margin was 25% on cost
- Discount Allowed 2,750
- Discount Received 2,250
- Bad debts 2,250
- Depreciation to be provided as follows:

Land and Machinery 5% per annum
Plant and Machinery 10% per annum
Office Equipment 15% per annum
- On 01.10.2018 the firm sold machine having Book Value ` 20,000 (as on 31.03.2018) at a loss of `7,500.
- Now machine was purchases on 01.01.2019.
- Office equipment was sold at its book value on 01.04.2018.
- Loan was partly repaid on 31.03.2019 together with interest for the year.
(i) Trading and Profit & Loss account for the year ended 31st March, 2019.
(ii) Balance Sheet as on 31st March, 2019.
(May 2019) (12 Marks)
14.33
Answer
Trading and Profit and Loss A/c for the year ended 31.3.2019
` `
To Opening stock 82,500 By Sales- Cash 1,25,000
(Balancing figure) (W.N.1)
To Purchases-Cash 1,80,000 Credit 5,00,000 6,25,000
Credit (W.N.1) 2,70,000 4,50,000 By Closing stock 32,500
6,57,500 6,57,500
To Loss on sale of 7,500 By Gross profit b/d 1,25,000
Machine By Discount
To Depreciation received 2,250
Land & Building 12,500
Plant & Machinery 11,875
Office Equipment 6,375 30,750
To Expenses paid
Salary 16,000
Office Expenses 18,500 42,000
To Bed debt 2,250
To Interest on loan 6,250
1,27,250 1,27,250
Balance Sheet as on 31-3-2019
Capital (Balancing Figure) 4,65,250 Land & Building 2,50,000
Add: Net profit 35,750 5,01,000 Less: Depreciation (12,500) 2,37,500
Sundry creditors (W.N.3) 52,750 Plant & Machinery 1,65,000
Bank loan 50,000 Less: Depreciation (10,875) 1,54,125
Provision for expenses 7,500 Office Equipment 42,500
Debtors 1,10,250
Stock 32,500
Bank balance (W.N.4) 40,750
6,11,250 6,11,250
Working Notes:
1. Calculation of Sales and Purchases
Total sales= ` 6,25,000
Cash sales = 20% of total sales (6,25,000) = ` 1,25,000
Credit sales = 80% of total sales = (6,25,000) ` 5,00,000
14.34
25
Gross Profit 25% on cost = 6,25,000 × = `1,25,000
125
Credit purchases= ` 2,70,000
Credit purchases= 60% of total purchases
Cash purchases= 40% of total purchases
2,70,000
Total purchases = × 100 = ` 4,50,000
60
Cash purchases= 4,50,000 – 2,70,000 = ` 1,80,000
2. Plant & Machinery
` `
To Balance b/d 1,10,000 By Sale of Machinery A/c 20,000
To Cash-purchase (Bal. Fig.) 75,000 By Balance c/d 1,65,000
1,85,000 1,85,000
Depreciation on Plant & Machinery:
@ 10% p.a. on ` 20,000 for 6 months = 1,000
@ 10% p.a. on ` 90,000 (i.e. ` 1,10,000 – ` 20,000) = 9,000
@ 10% p.a. on ` 75,000 for 3 months (i.e. during the year) = 1,875
11,875
Sale of Machinery Account
To Plant and Machinery 20,000 By Depreciation (20,000 x 10% x 1/2 1000
By Profit and Loss A/c 7,500
By Bank (Balancing figure) 11,500
20,000 20,000
` `
To Cash 2,62,500 By Balance b/d 47,500
To Discount received 2,250 By Credit purchases (W.N.2) 2,70,000
To Balance c/d (Bal. Fig.) 52,750
3,17,500 3,17,500
Debtors Account
` `
To Balance b/d (Given) 77,750 By Cash 4,62,500
To Sales (Credit) 5,00,000 By Discount allowed 2,750
By Bad debts 2,250
5,77,750 5,77,750
14.35
Provision for Office Expenses Account
` `
To Bank 21,000 By balance b/d 10,000
To balance c/d 7,500 By Expenses. (Bal. fig.) 18,500
28,500 28,500
4. Bank Account
` `
To Balance b/d 12,500 By Creditors 2,62,500
To Debtors 4,62,500 By Purchases 1,80,000
To Office Equipment 10,000 By Expenses 44,500
(sales) ` (16,000 + 7,500 + 21,000)
To Cash sales (W.N.1) 1,25,000 By Bank loan paid 18,750
To Machine sold 11,500 By Machine purchased (W.N.4) 75,000
By Balance c/d (Bal. Fig.) 40,750
6,21,500 6,21,500
5. Office Equipment Account

To balance b/d 52,500 By Sales 10,000
_____ By balance c/d 42,500
52,500 52,500
Question 18
Aman, a ready made garment trader, keeps his books of account under single entry system. On the closing
on 31st March, 2017 his statement of affairs stood as follows:
Liabilities Amount ` Assets Amount `
Aman's capital 4,80.000 Building 3,25,000
Loan 1,50,000 Furniture 50,000
Creditors 3,10,000 Motor car 90,000
Stock 2,00,000
Debtors 1,70,000
Cash in hand 20,000
Cash at bank 85,000
9,40,000 9,40,000
Riots occurred and a fire broke out on the evening of 31st March, 2018, destroying the books of accounts. On
that day, the cashier had absconded with the available cash. You are furnished with the following information:
1. Sales for the year ended 31st March, 2018 were 20% higher than the previous year's sales, out of
which, 20% sales were for cash. He always sells his goods at cost plus 25%. There were no cash
purchases.
2. Collection from debtors amounted to `14,00,000, out of which `3,50,000 was received in cash.
3. Business expenses amounted to `2,00,000, of which `50,000 were outstanding on 31st March, 2018
and `60,000 paid by cheques.
4. Gross profit as per last year's audited accounts was `3,00,000.
5. Provide depreciation on building and furniture at 5% each and motor car at 20%.
14.36
6. His private records and the Bank Pass Book disclosed the following transactions for the year 2017-
18:
`
Payment to creditors (paid by cheques) 13,75,000
Personal drawings (paid by cheques) 75,000
Repairs (paid by cash) 10,000
Travelling expenses (paid by cash) 15,000
Cash deposited in bank 7,15,000
Cash withdrawn from bank 1,20,000
7. Stock level was maintained at `3,00,000 all throughout the year.
8. The amount defalcated by the cashier is to be written off to the Profit and Loss Account.
You are required to prepare Trading and Profit and Loss A/c for the year ended 31st March, 2018 and
Balance Sheet as on that date of Aman. All the workings should form part of the answer.
Answer:
Trading and Profit and Loss Account of Aman for the year ended 31st March, 2018
` `
To Purchases (Bal. fig.) 15,40,000 By Closing Stock 3,00,000
To Gross Profit c /d 3,60,000 _______
21,00,000 21,00,000
To Business Expenses 2,00,000 By Gross Profit b/d 3,60,000

To Repairs 10,000
To Depreciation: Building 16,250
Machinery 2,500
Motor Car 18,000 36,750
To Travelling Expenses 15,000
To Loss by theft (cash defalcated) 20,000
To Net Profit
78,250 _______
3,60,000 3,60,000
Balance Sheet of Aman as at 31st March, 2018
Capital 4,80,000 Building 3,25,000
Add: Less: Depreciation (16,250) 3,08,750

Net Profit 78,250 Furniture 50,000
Drawings (75,000) 4,83,250 Less: Depreciation (2,500) 47,500
Loan 1,50,000 Motor car 90,000
Sundry Creditors 4,75,000 Stock in Trade 3,00,000
Outstanding
Sundry Debtors 2,10,000
business
50,000 Bank Balance 2,20,000
Expenses
________ ________
11,58,250 11,58,250
14.37
Working Notes:
1. Cash and Bank Account
Particulars Cash Bank Particulars Cash Bank
To Balance b/d 20,000 85,000 By Payment to - 13,75,000
Creditors
To Collection from 3,50,000 10,50,000 By Business 90,000 60,000
Debtors Expenses
To Sales 3,60,000 - By Repairs 10,000 -

(18,00,000 x 20%)
To Cash (C) – 7,15,000 By Cash (C) 1,20,000

(withdrawal)
By Bank (C) 7,15,000
To Bank (C) 1,20,000 By Travelling 15,000
Expenses
By Private - 75,000
Drawings

By Cash defalcated 20,000
(balancing fig.)
_______ _______
8,50,000 18,50,000 8,50,000 18,50,000
2. Calculation of sales during 2017-18 `
Gross profit (last year i.e. for year ended 31.3.2017 3,00,000
Goods sold at cost plus 25% i.e. 20% of sales 15,00,000
Sales for 2016-17 3,00,000/0.2
Sales for 2017-18 (15,00,000 x 1.2) 18,00,000
Credit sales for 2017-18 14,40,000
(80% of 18,00,000)
3. Debtors Account
To Bal. b/d. 1,70,000 By Cash Bank 3,50,000
To Sales (18,00,000 x 80%) 14,40,000 By Bal. 10,50,000
By c /d 2,10,000
________ ________
16,10,000 16,10,000
To Bank 13,75,000 By Bal. b/d 3,10,000
To Bal. c /d (bal. fig.) 4,75,000 By Purchases 15,40,000
________ ________
18,50,000 18,50,000
14.38
Question 19
From the following information in respect of Mr. Preet, prepare Trading and Profit and Loss Account for the
year ended 31st March, 2018 and a Balance Sheet as at that date:
31-03-2017 31-03-2018
(1) Liabilities and Assets ` `
Stock in trade 1,60,000 1,40,000
Debtors for sales 3,20,000 ?
Bills receivable - ?
Creditors for purchases 2,20,000 3,00,000
Furniture at written down value 1,20,000 1,27,000
Expenses outstanding 40,000 36,000
Prepaid expenses 12,000 14,000
Cash on hand 4,000 3,000
Bank Balance 20,000 1,500
(2) Receipts and Payments during 2017-2018:
Collections from Debtors
(after allowing 2-1/2% discount) 11,70,000
Payments to Creditors
(after receiving 2% discount) 7,84,000
Proceeds of Bills receivable discounted at 2%) 1,22,500
Proprietor’s drawings 1,40,000
Purchase of furniture on 30.09.2017 20,000
12% Government securities purchased on1-10-2017 2,00,000
Expenses 3,50,000
Miscellaneous Income 10,000
(3) Sales are effected so as to realize a gross profit of 50% on the cost.
(4) Capital introduced during the year by the proprietor by cheques was omitted to be
recorded in the Cash Book, though the bank balance on 31st Marc h, 2018 (as shown
above), is after taking the same into account.
(5) Purchases and Sales are made only on credit.
(6) During the year, Bills Receivable of ` 2,00,000 were drawn on debtors. out of these,
Bills amount to ` 40,000 were endorsed in favour of creditors. Out of this latter
amount, a Bill for ` 8,000 was dishonoured by the debtor.
(RTP May 2019)
Answer:
Trading and Profit and Loss Account of Mr. Preet
Amount Amount
` `
To Purchases (W.N.5) 9,12,000 By Closing stock 1,40,000
To Gross profit c /d (Bal.fig.) 4,66,000 _______
15,38,000 15,38,000
To Expenses (W.N.7) 3,44,000 By Gross profit b/d 4,66,000
14.39
Amount Amount
` `
(W.N.9) (W.N.10)
To Depreciation on furniture 13,000 By Interest on Govt. 12,000
(W.N.1) Securities (W.N.8)
To Net profit 1,14,500 By Miscellaneous 10,000
income
5,04,000 5,04,000
Balance Sheet of Mr. Preet as on 31st March, 2018
Amount Amount
Capital (W.N.6) 3,76,000 Furniture 1,27,000
Add: Additional capital 1,72,000 12% Government 2,00,000
(W.N.2) Securities
Accrued interest on
Govt.
Add: Profit during the year 1,14,500 securities (W.N.8) 12,000
6,62,500 Debtors (W.N.3) 3,26,000
Less: Drawings (1,40,000) Bills Receivable 35,000
5,22,500 (W.N.4)
Creditors 3,00,000 Stock 1,40,000
Outstanding expenses 36,000 Prepaid expenses 14,000
Cash on hand 3,000
Bank balance 1,500
8,58,500 8,58,500
Working Notes:
1. Furniture account
` `
To Balance b/d 1,20,000 By Depreciation (bal.fig.) 13,000
To Bank 20,000 By Balance c /d 1,27,000
1,40,000 1,40,000
2. Cash and Bank account
` `
To Balance b/d By Creditors 7,84,000
Cash 4,000 By Drawings 1,40,000
Bank 20,000 By Furniture 20,000
To Debtors 11,70,000 By 12% Govt. securities 2,00,000
To Bill Receivable 1,22,500 By Expenses 3,50,000
To Miscellaneous income 10,000 By Balance c /d
14.40
` `
To Additional Capital 1,72,000 Cash 3,000
(bal.fig.)
_______ Bank 1,500
14,98,500 14,98,500
3. Debtors account
` `
To Balance b/d 3,20,000 By Cash and Bank 11,70,000
To Creditors (Bills 8,000 By Discount 30,000
Receivable dishonoured)
To Sales (W.N.11) 13,98,000 By Bills Receivable 2,00,000
By Balance c /d (bal.fig.) 3,26,000
17,26,000 17,26,000
4. Bills Receivable account
` `
To Debtors 2,00,000 By Bank 1,22,500
By Discount 2,500
By Creditors 40,000
By Balance c /d (bal. fig.) 35,000
2,00,000 2,00,000
5. Creditors account
` `
To Bank 7,84,000 By Balance b/d 2,20,000
To Discount 16,000 By Debtors (Bills receivable 8,000
dishonoured)
To Bills receivable 40,000 By Purchases (bal. fig.) 9,12,000
11,40,000 11,40,000
st
6. Balance Sheet as on 1 April, 2017
Creditors 2,20,000 Furniture 1,20,000
Outstanding expenses 40,000 Debtors 3,20,000
Capital (balancing figure) 3,76,000 Stock 1,60,000
Cash 4,000
_______ Bank balance 20,000
6,36,000 6,36,000
14.41
7. Expenses incurred during the year
`
Expenses paid during the year 3,50,000
Add: Outstanding expenses as on 31.3.2018 36,000
Prepaid expenses as on 31.3.2017 12,000 48,000
3,98,000
Less: Outstanding expenses as on 31.3.2017 40,000
Prepaid expenses as on 31.3.2018 14,000 (54,000)
Expenses incurred during the year 3,44,000
8. Interest on Government securities
2,00,000 x 12% x 6/12= ` 12,000
Interest on Government securities receivables for 6 months = ` 12,000
9. Discount allowed
`
Discount to Debtors
 11, 70, 000  30,000
  2.5% 
 97.5% 
 1, 22, 500  2,500
Discount on Bills Receivable   2% 
 98% 
32,500
10. Discount received
`
Discount to Creditors
 7, 84, 000  16,000
  2% 
 98% 
11. Credit sales
Cost of Goods sold = Opening stock + Net purchases – Closing stock
= ` 1,60,000 + ` 9,12,000 – ` 1,40,000
= ` 9,32,000
Sale price = ` 9,32,000 + 50% of 9,32,000 = ` 13,98,000
Question 20
The following information relates to the business of ABC Enterprises, who requests you to prepare a Trading
and Profit & Loss A/c for the year ended 31st March, 2017 and a Balance Sheet as on that date.
(a) Assets and Liabilities as on:
in `
1.4.2016 31.3.2017
Furniture 60,000 63,500
Inventory 80,000 70,000
Sundry Debtors 1,60,000 ?
Sundry Creditors 1,10,000 1,50,000
Prepaid Expenses 6,000 7,000
Outstanding Expenses 20,000 18,000
Cash in Hand & Bank Balance 12,000 26,250
14.42
(b) Cash transaction during the year:
(i) Collection from Debtors, after allowing discount of ` 15,000 amounted to `5,85,000.
(ii) Collection on discounting of Bills of Exchange, after deduction of discount of `1,250 by bank, to
talled to ` 61,250.
(iii) Creditors of ` 4,00,000 were paid ` 3,92,000 in full settlement of their dues.
(iv) Payment of Freight inward of ` 30,000.
(v) Amount withdrawn for personal use ` 70,000.
(vi) Payment for office furniture ` 10,000.
(vii) Investment carrying annual interest of 6% were purchased at ` 95 (200 shares, face value ` 100
each) on 1st October 2016 and payment made thereof.
(viii) Expenses including salaries paid ` 95,000.
(ix) Miscellaneous receipt of ` 5,000.
(c) Bills of exchange drawn on and accepted by customers during the year amounted to ` 1,00,000. Of
these, bills of exchange of ` 20,000 were endorsed in favour of creditors. An endorsed bill of
exchange of ` 4,000 was dishonoured.
(d) Goods costing ` 9,000 were used as advertising material.
(e) Goods are invariably sold to show a gross profit of 20% on sales.
(f) Difference in cash book, if any, is to be treated as further drawing or introduction of capital by
proprietor of ABC enterprises.
(g) Provide at 2% for doubtful debts on closing debtors.
(RTP November 2018)
Answer:
Trading and Profit and Loss Account of ABC enterprise
` ` `
To Opening Inventory 80,000 By Sales 6,08,750
To Purchases 4,56,000 By Closing inventory 70,000
Less: For advertising (9,000) 4,47,000
To Freight inwards 30,000
6,78,750 6,78,750
To Sundry expenses 92,000 By Gross profit b/d 1,21,750
To Advertisement 9,000 By Interest on investment 600
(20,000 × 6/100 × 1/ )
To Discount allowed- 2
Debtors 15,000 By Discount received 8,000

Bills Receivable 1,250 16,250 By Miscellaneous income 5,000
To Depreciation on 6,500
furniture
To Provision for doubtful 1,455
debts
1,35,350 1,35,350
14.43
` ` ` `
Capital as on 1,88,000 Furniture (w.d.v.) 60,000
1.4.2016
Less: Drawings (91,000) Additions during the year 10,000
97,000 Less: Depreciation (6,500) 63,500
Add: Net Profit 10,145 1,07,145 Investment (200 x 95) 19,000
Sundry creditors 1,50,000 Interest accrued 600
Outstanding 18,000 Closing inventory Sundry 72,750 70,000
expenses debtors
Less: Provision for 1,455 71,295
doubtful debts
Bills receivable 17,500
2,75,145 2,75,145
Working Notes:
(1) Capital on 1st April, 2016
Balance Sheet as on 1st April, 2016
Capital (Bal.fig.) 1,88,000 Furniture (w.d.v.) 60,000
Creditors 1,10,000 Closing Inventory 80,000
Outstanding expenses 20,000 Sundry debtors 1,60,000
3,18,000 3,18,000
(2) Purchases made during the year
Sundry Creditors Account
` `
To Cash and bank A/c 3,92,000 By Balance b/d 1,10,000
To Discount received A/c 8,000 By Sundry debtors A/c 4,000
To Bills Receivable A/c 20,000 By Purchases A/c 4,56,000
To Balance c/d 1,50,000 (Balancing figure)
5,70,000 5,70,000
(3) Sales made during the year
` `
Opening inventory 80,000
Purchases 4,56,000
Less: For advertising (9,000) 4,47,000
Freight inwards 30,000
5,57,000
Less: Closing inventory (70,000)
14.44
` `
Add: Gross profit (25% on cost) 1,21,750
6,08,750
(4) Debtors on 31st March, 2017
Sundry Debtors Account
` `
To Balance b/d 1,60,000 By Cash and bank A/c 5,85,000
To Sales A/c 6,08,750 By Discount allowed A/c 15,000
To Sundry creditors A/c By Bills receivable A/c 1,00,000
(bill dishonoured) 4,000 By Balance c/d (Bal. fig.) 72,750
7,72,750 7,72,750
(5) Additional drawings by proprietors of ABC enterprises
` `
To Balance b/d 12,000 By Freight inwards A/c 30,000
To Bills Receivable A/c 61,250 By Investment A/c 19,000
To Miscellaneous income A/c 5,000 By Expenses A/c 95,000
By Creditors A/c 3,92,000
By Drawings A/c
(` 70,000 + `21,000) 91,000
(Additional drawings)]
6,63,250 6,63,250
(6) Amount of expenses debited to Profit and Loss A/c
Sundry Expenses Account
` `
To Prepaid expenses A/c 6,000 By Outstanding expenses A/c 20,000
(on 1.4.2016) (on 1.4.2016)
To Bank A/c 95,000 By Profit and Loss A/c 92,000
(Balancing figure)
To Outstanding expenses A/c 18,000 By Prepaid expenses A/c 7,000
(on 31.3.2017) (on 31.3.17)
1,19,000 1,19,000
14.45
(7) Bills Receivable on 31st March, 2017
Bills Receivable Account
` `
To Debtors A/c 1,00,000 By Creditors A/c 20,000
By Bank A/c 61,250
By Discount on bills receivable A/c 1,250
By Balance c/d (Balancing figure) 17,500
1,00,000 1,00,000
Note: All sales and purchases are assumed to be on credit basis.
Question 21
The following is the Balance Sheet of Manish and Suresh as on 1st April, 2016:
Capital Accounts: 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* 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 ` 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.
*Velocity indicates the no. of times the creditors and debtors are turned over a year.
(RTP May 2018)
Answer:
Trading and Profit and Loss account for the year ending 31st March, 2017
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
14.46
To Business Expenses 50,000 By Gross Profit b/d 86,250
To Depreciation on:
Machinery 6,500
Building 5,000 11,500
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/ (1/8 of ` 3,45,000) 43,125 By Purchases 3,45,000
3,75,000 3,75,000
Working Note:
(i) Calculation of Rate of Gross Profit earned during previous year

A Sales during previous year (` 50,000 x 12/2) 3,00,000
B Purchases (` 30,000 x 12/1.5) 2,40,000
C Cost of Goods Sold (` 40,000 + ` 2,40,000 - ` 40,000) 2,40,000
D Gross Profit (A-C) 60,000
E Rate of Gross Profit ` 60,000/` 3,00,000 × 100 20%
(ii) Calculation of sates and Purchases during current year `
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
14.47
Question 22
Ram carried on business as retail merchant. He has not maintained regular account books. However, he
always maintained ` 10,000 in cash and deposited the balance into the bank account. He informs you that he
has sold goods at profit of 25% on sales.
Following information is given to you:
Assets and Liabilities As on 1.4.2016 As on 31.3.2017
Cash in Hand 10,000 10,000
Cash at Bank 50,000 (Cr.) 80,000 (Dr.)
Sundry Debtors 1,00,000 3,50,000
Stock in Trade 2,80,000 ?
Ram’s capital 3,00,000
Analysis of his bank pass book reveals the following information:
(a) Payment to creditors ` 7,00,000
(b) Payment for business expenses ` 1,20,000
(c) Receipts from debtors ` 7,50,000
(d) Loan from Laxman ` 1,00,000 taken on 1.10.2016 at 10% per annum
(e) Cash deposited in the bank ` 1,00,000
He informs you that he paid creditors for goods ` 20,000 in cash and salaries ` 40,000 in cash. He has drawn
` 80,000 in cash for personal expenses. During the year Ram had not introduced any additional capital.
Surplus cash if any, to be taken as cash sales.
(i) Trading and Profit and Loss Account for the year ended 31.3.2017.
(ii) Balance Sheet as at 31st March, 2017.
Answer:
` `
To Opening stock 2,80,000 By Sales
To Purchases 7,70,000 Cash 2,40,000
To Gross Profit @ 25% 3,10,000 Credit 10,00,000 12,40,000
By Closing Stock (bal.fig.) 1,20,000
13,60,000 13,60,000
To Salaries 40,000 By Gross Profit 3,10,000
To Business expenses 1,20,000
(10% of 1,00,000*6/12)
3,10,000 3,10,000
14.48
st
Balance Sheet as at 31 March, 2017
Ram’s capital: Cash in hand 10,000
Opening 3,00,000 Cash at Bank 80,000
Add: Net Profit 1,45,000 Sundry Debtors 3,50,000
4,45,000 Stock in trade 1,20,000
Less: Drawings (80,000) 3,65,000
Loan from Laxman (including 1,05,000
interest due)
Sundry Creditors 90,000 _______
5,60,000 5,60,000
Working Notes:
1. Sundry Debtors Account
` `
To Credit sales (Bal. fig) 10,00,000 By Balance c /d 3,50,000
11,00,000 11,00,000
2. Sundry Creditors Account
` `
To Cash A/c 20,000 By Purc hases (Bal. fig.) 7,70,000
To Balance c /d 90,000
8,10,000 8,10,000
Cash Bank Cash Bank
` ` ` `
To Balance b/d 10,000 By Balance b/d 50,000
To Sales (bal. fig) 2,40,000 By Bank A/c (C) 1,00,000
To Cash (C) 1,00,000 By Salaries 40,000
To Debtors 7,50,000 By Creditors 20,000 7,00,000
To Laxman’s loan 1,00,000 By Drawings 80,000
By Business
expenses 1,20,000
By Balance c/d 10,000 80,000
2,50,000 9,50,000 2,50,000 9,50,000
14.49
Question 23
The following is the Balance Sheet of Chirag as on 31st March, 2015:
Capital Ac count 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 ` 30,000 and stock was maintained at this new level
all throughout the year.
(c) Collection from debtors amounted to ` 1,40,000 of which ` 35,000 was received in cash, Business
expenses amounted to ` 20,000 of which ` 5,000 was outstanding on 31st March, 2016 and ` 6,000
was paid by cheques.
(d) Analysis of the Pass Book revealed the Payment to Creditors ` 1,37,500, Personal Drawing ` 7,500,
Cash deposited in Bank ` 71,500, and Cash withdrawn from Bank ` 12,000.
(e) Gross profit as per last year’s audited accounts was ` 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.
Answer:
For the year ending on 31st March, 2016
To Purchases (bal.fig.); 1,54,000 By Closing Stock 30,000
To Gross Profit c /d (@ 20% on 2,10,000
sales) 36,000
2,10,000
To Sundry Business Expenses 20,000 By Gross Profit 36,000
b/d
To Depreciation on Building 1,625
Furniture 250
Motor 1,800 3,675
To Net profit transferred to Capital
A/c 12,325
36,000 36,000
14.50
st
Balance Sheet as at 31 March, 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 5,000 Sundry Debtors 21,000
Expenses
Cash at Bank 22,000
Sundry Advances
(Amount recoverable
from Cashier)
4,500
1,20,325 1,20,325
Working Notes:
(i) Total Debtors Account
To Balance b/d 17,000 By Bank (` 1,40,000 – ` 35,000) 1,05,000
To Sales (80% of ` 1,80,000) 1,44,000 By Cash A/c 35,000
_______ 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 ` Bank ` Particulars Cash ` Bank `
To Balance b/d 2,000 8,500 By Business 9,000 6,000
Expenses
To Sales 36,000 - By Drawings - 7,500
To Sundry Debtors 35,000 1,05,000 By Sundry - 1,37,500
Creditors
To Cash (Contra) - 71,500 By Bank (Contra) 71,500 -
To Bank (Contra) 12,000 By Cash (Contra) - 12,000
By Defalcation 4,500 -
(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 = ` 30,000 x 100/20 = ` 1,50,000
(v) Current year’s Total Sales = ` 1,50,000+ 20% of ` 1,50,000= ` 1,80,000
14.51
(vi) Current year’s Credit Sales = ` 1,80,000 x 80%= ` 1,44,000
(vii) Cost of Goods Sold = Sales – G.P. = `1,80,000 – ` 36,000 = ` 1,44,000
(viii) Purchases = Cost of Goods Sold + Closing Stock – Opening Stock
= ` 1,44,000 + ` 30,000 – ` 20,000 = ` 1,54,000
Similar Question
Question 23A
The following is the Balance Sheet of Mr. Kumar as on 31st March, 2020:
Equity and Liabilities ` Assets `
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 ` 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 ` 60,000.
(v) His private records and the Bank Pass-book disclosed the following transactions for the year.
(a) Miscellaneous Business expenses ` 1,85,500 (including ` 20,000 paid by cheque)
(b) Travelling expenses ` 24,000 (paid by cash)
(c) Addition to Machinery ` 1,00,000 (paid by cheque) (on 1st April, 2020)
(d) Private drawings ` 10,000 (paid by cash)
(e) Introduction of additional capital by ` 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.
(RTP May, 2022)
14.52
Answer
Trading and Profit and Loss Account of Mr. Kumar for the year ended 31st March, 2021
` `
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
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 Furniture (35,000) Bank 34,375
Drawings (10,000) 3,76,000
4,61,625 4,61,625
Working Notes:
1. Sales during 2020-2021 `
Debtors as on 31st March, 2020 1,45,000
(Being equal to 2 months' sales)
Total credit sales in 2019- 2020, ` 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
(` 10,87,500 – ` 60,000) /12 = ` 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
14.53
6. Payment to Creditors
Opening Balance 60,000
Add: Credit Purchases (` 10,87,500 – ` 60,000) 10,27,500
10,87,500
Less: Closing Balance (85,625)
Payment by cheque 10,01,875
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 24
Cash in Hand 10,000 10,000
Cash at Bank 50,000 (Cr.) 80,000 (Dr.)
Ram's capital 3,00,000
(i) Trading and Profit and Loss Account for the year ended 31.3.2017.
Answer:
` `
13,60,000 13,60,000
14.54
` `
To Interest on loan (10% of 5,000
1,00,000 × 6/12)
3,10,000 3,10,000
Ram's capital: Cash in hand 10,000
4,45,000 Stock in trade 1,20,000
Less: Drawings (80,000) 3,65,000
Loan from Laxman (including 1,05,000
interest due)
5,60,000 5,60,000
Working Notes:
` `
To Credit sales (Bal. fig) 10,00,000 By Balance c/d 3,50,000
11,00,000 11,00,000
` `
To Cash A/c 20,000 By Purchases (Bal. fig.) 7,70,000
8,10,000 8,10,000
Cash Bank Cash Bank
` ` ` `
To Laxman's loan 1,00,000 By Drawings 80,000
By Business
expenses 1,20,000
By Balance c/d 10,000 80,000
2,50,000 9,50,000 2,50,000 9,50,000
14.55
Question 25
Capital Account 48,000 Building 32,500
Stock 20,000
Debtors 17,000
Cash in hand 2,000
Cash at bank 8,500
94,000 94,000
(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 ` 30,000 and stock was maintained at this new level
all throughout the year.
expenses amounted to ` 20,000 of which ` 5,000 was outstanding on 31st March, 2016 and ` 6,000
was paid by cheques.
Cash deposited in Bank ` 71,500, and Cash withdrawn from Bank `12,000.
(e) Gross profit as per last year's audited accounts was ` 30,000.
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.
Answer:
For the year ending on 31st March, 2016
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 A/c 12,325
36,000 36,000
14.56
Outstanding Expenses 5,000 Sundry Debtors 21,000
Cash at Bank 22,000
Sundry Advances (Amount 4,500
recoverable from Cashier)
1,20,325 1,20,325
Working Notes:
(i) Total Debtors Account
To Balance b/d 17,000 By Bank (` 1,40,000 - `35,000) 1,05,000
To Sales (80% of `1,80,000) 1,44,000 By Cash A/c 35,000
1,61,000 1,61,000
(ii) Total Creditors Account
To Bank 1,37,500 By Balance b/d By Purchases 31,000
To Balance c/d 47,500 1,54,000
1,85,000 1,85,000
(iii) Cash Book
Particulars Cash Bank Particulars Cash Bank
` ` ` `
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) — 12,000
By Defalcation (Bal fig.) 4,500 —
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 = ` 30,000 x 100/20 = ` 1,50,000
(v) Current year's Total Sales = ` 1,50,000+ 20% of ` 1,50,000= ` 1,80,000
14.57
(vi) Current year's Credit Sales = ` 1,80,000 x 80%= ` 1,44,000
(vii) Cost of Goods Sold = Sales - G.P. = `1,80,000 - ` 36,000 = ` 1,44,000
(viii) Purchases = Cost of Goods Sold + Closing Stock - Opening Stock
= ` 1,44,000 + ` 30,000 - ` 20,000 = ` 1,54,000
Question 26
Following is the incomplete information of Jyotishikha Traders:
The following balances are available as on 31.03.2018 and 31.03.2019.
Balances 31.03.2018 31.03.2019
Land and Building 5,00,000 5,00,000
Office equipment 1,05,000 85,000
Debtors (before charging for Bad debts) ? 2,25,000
Creditors for purchases 95,000 ?
Creditors for office expenses 20,000 15,000
Stock ? 65,000
Long term loan from SBI @ 12%. 1,60,000 100,000
Bank 25,000 ?
Other Information In `
Payment to creditors for purchases 5,25,000
Payment of office expenses (excluding interest on loan) 42,000
Salary paid 32,000
Selling expenses 15,000
Cash sales 2,50,000
Credit sales (80% of total sales)
Credit purchases 5,40,000
Cash purchases (40% of total purchases)
GP Margin at cost plus 25%
Discount Allowed 5,500
Discount Received 4,500
Bad debts (2% of closing debtors)
Depreciation to be provided as follows:
Land and Building 5%
Plant and Machinery 10%
Office Equipment 15%
Other adjustments:
(i) On 01.10.18 they sold machine having Book Value ` 40,000 (as on 31.03.2018) at a loss of ` 15,000.
New machine was purchased on 01.01.2019.
(ii) Office equipment was sold at its book value on 01.04.2018.
14.58
(iii) Loan was partly repaid on 31.03.19 together with interest for the year.
You are required to prepare Trading, Profit & Loss Account and Balance Sheet as on 31.03.2019.
(RTP November 2019)
Answer
In the Books of Jyotishikha Traders Trading Account for the year ended 31.03.2019
To Opening Stock A/c (Bal. fig.) 1,65,000 By Sales (W.N.1) 12,50,000
To Purchases (W.N.2) 9,00,000 By Closing Stock 65,000
To Gross profit (12,50,000x25/125)
2,50,000
13,15,000 13,15,000
Profit and Loss Account for the year ended 31.03.2019
To Discount 5,500 By Gross profit 2,50,000
To Salaries Expenses 32,000 By Discount 4,500
To Office expenses (W.N.3) 37,000
To Selling expenses 15,000 84,000
To Interest on loan (12% on `1,60,000) 19,200
To Bad debts (2% of `2,25,000) 4,500
To Loss on sale of Machinery 15,000
To Depreciation:
Land & Building 25,000
Plant &Machinery (W.N 4b) 23,750
Office Equipment (W.N. 5) 12,750 61,500
To Net profit after tax 64,800
2,54,500 2,54,500
Balance sheet as on 31.3.2019
Capital (W.N. 6) 8,95,500 Land and Building (5,00,000- 4,75,000
25,000)
Add: Net Profit 64,800 9,60,300 Plant and Machinery (W.N.4a) 3,08,250
(3,30,000-21,750)
Creditors for 1,05,500 Office Equipment (85,000- 72,250
Purchases 12,750)
(W.N. 8)
Outstanding Debtors less Bad debts (W.N. 2,20,500
expenses 15,000 7)
Loan from SBI 1,00,000 Stock 65,000
Bank Balance (W.N. 9) 39,800
11,80,800 11,80,800
14.59
Working Notes:
1. Calculation of Total Sales
`
Cash Sales 2,50,000
Credit Sales (80% of total sales)
Cash Sales (20% of total sales)
Thustotal Sales (250000 x 100/20) 12,50,000
Credit Sales (1250000 x 80/100) 10,00,000
2. Calculation of Total Purchases
`
Credit Purchases 5,40,000
Cash Purchases (40% of total purchases)
Credit Purchases (60% of total purchases)
Thus total Purchases (5,40,000 x 100/60) 9,00,000
Cash Purchases 9,00,000 x 40/100) 3,60,000
3. Office Expenses Account
` `
To Bank A/c 42,000 By Balance b/d 20,000
To Balance c/d 15,000 By Profit & loss A/c 37,000
57,000 57,000
4. (a) Plant and Machinery Account
` `
To Opening balance 2,20,000 By Sale 40,000
To Purchases 1,50,000 By Closing Balance 3,30,000
3,70,000 3,70,000
(b) Depreciation calculations on Plant & Machinery
`
Depreciation on 1,80,000 x 10% (for full year) 18,000
1,50,000 x 10% x 3/12 (for 3 months) 3,750
40,000 x 10% x 6/12 (for 6 months) 2,000
23,750
(c) Sale of Machinery Account
To Plant & Machinery 40,000 By Depreciation 2,000
By Profit and Loss A/c 15,000
By Bank 23,000
40,000 40,000
14.60
5. Depreciation calculations on Office Equipments
`
Opening Balance 1,05,000
Less: Closing Balance 85,000
Sale of Office Equipment 20,000
Balance of Office Equipment after sale 85,000
Depreciation @15% 12,750
6. Opening Balance Sheet as on 31.03.2018
` `
Creditors 95,000 Land & Building 5,00,000
Creditor for Exp. 20,000 Plant & Machinery 2,20,000
Loan 1,60,000 Office Equipment 1,05,000
Capital (Bal. fig.) 8,95,500 Debtors 1,55,500
Stock 1,65,000
Bank 25,000
11,70,500 11,70,500
7. Sundry Debtors A/c
` `
To Balance b/d 1,55,500 By Bank 9,25,000
To Sales 10,00,000 By Discount 5,500
By Bad debts 4,500
By Bal. c/d 2,20,500
11,55,500 11,55,500
8. Sundry Creditors A/c
` `
To Discount 4,500 By Purchases 5,40,000
6,35,000 6,35,000
9. Bank Account
` `
To Balance b/d 25,000 By Creditors 5,25,000
To Debtors 9,25,000 By Office Expenses 42,000
To Cash Sales 2,50,000 By Salary Expense 32,000
To Sale of Machinery (W.N. 4c) 23,000 By Selling Expenses 15,000
To Sale of equipment 20,000 By Purchases (cash) 3,60,000
By Purchase of Machinery 1,50,000
By Bank Loan & Interest 79,200
12,43,000 12,43,000
14.61
Question 27
Mr. Aman is running a business of readymade garments. He does not maintain his books of accounts under
double entry system. While assessing the income of Mr. Aman for the financial year 2018-19, Income Tax
Officer feels that he has not disclosed the full income earned by him from his business. He provides you the
On 31st March, 2018
Sundry Assets `16,65,000
Liabilities `4,13,000
On 31st March, 2019
Mr. Aman's drawings for the year 2018-19 `32,000 per month
Income declared to the Income Tax Officer `9,12,000
During the year 2018-19, one life insurance policy of Mr. Aman was matured and amount received `50,000
was retained in the business.
State whether the Income Tax Officer's contention is correct. Explain by giving your working.
[MTP October, 2019, 4 marks] (MTP March, 2022) (5 marks)
Answer
Determination of Capital balances of Mr. Aman on 31.3.2018 and 31.3.2019
31.3.2018 31.3.2019
` `
Assets 16,65,000 28,40,000
Less: Liabilities Capital (4,13,000) (5,80,000)
12,52,000 22,60,000
`
Capital Balance as on 31-3-2019 22,60,000
Less: Fresh capital introduced (matured life insurance policy amount) (50,000)
22,10,000
Add: Drawings (` 32,000  12) 3,84,000
25,94,000
Less: Capital Balance as on 1.4.2018 (12,52,000)
Profit 13,42,000
Income declared 9,12,000
The Income-tax officer's contention that Mr. Aman has not declared his true income is correct. Mr. Aman's
true income is in excess of the disclosed income by ` 4,30,000.
Note:
• Closing capital is increased due to fresh capital introduction, so it is deducted.
• Closing capital was reduced due to withdrawal by proprietor; so it is added back.
14.62
Question 28
Archana Enterprises maintain their books of accounts under single entry system. The Balance Sheet as on
31st March, 2018 was as follows:
Liabilities Amount (`) Assets Amount (`)
Capital A/c 6,75,000 Furniture & fixtures 1,50,000
Trade creditors 7,57,500 Stock 9,15,000
Outstanding exp. 67,500 Trade debtors 3,12,000
Prepaid insurance 3,000
Cash in hand & at bank 1,20,000
15,00,000 15,00,000
The following was the summary of cash and bank book for the year ended 31st March, 2019:
Receipts Amount (`) Payments Amount (`)
Cash in hand & at Bank on 1st Payment to trade creditors 1,24,83,000
April, 2013 1,20,000
Cash sales 1,10,70,000 Sundry expenses paid 9,31,050
Receipts from trade debtors 27,75,000 Drawings 3,60,000
Cash in hand & at Bank on
31st March, 2019 1,90,950
1,39,65,000 1,39,65,000
(i) Discount allowed to trade debtors and received from trade creditors amounted to `54,000 and
`42,500 respectively, (for the year ended 31st March, 2019)
(ii) Annual fire insurance premium of `9,000 was paid every year on 1st August for the renewal of the
policy.
(iii) Furniture & fixtures were subject to depreciation @ 15% p.a. on diminishing balance method.
(iv) The following are the balances as on 31st March, 2019:
Stock `9,75,000
Trade debtors `3,43,000
Outstanding expenses `55,200
(v) Gross profit ratio of 10% on sales is maintained throughout the year.
You are required to prepare Trading and Profit &. Loss account for the year ended 31st March, 2019, and
(November 2019) (10 Marks)/(MTP April, 2022) (12 Marks)
Answer
Trading and Profit and Loss Account of Archana Enterprises for the year ended 31st March, 2019
` `
149,05,000 149,05,000
14.63
` `
To Sundry expenses 9,18,750 By Gross profit b/d 13,93,000
(W.N. 4)
(15% ` 1,50,000)
14,35,500 14,35,500
Balance Sheet of Archana Enterprises as at 31st March, 2019
` `
Opening balance 6,75,000 Less: Depreciation (22,500) 1,27,500

3,15,000 Trade Debtors 3,43,000
Add: Net profit for the 7,55,250 Unexpired insurance 3,000
years 4,40,250
Trade creditors (W.N. 3) 8,29,000 Cash in hand & at bank 1,90,950
Outstanding expenses 55,200
16,39,450 16,39,450
Working Notes:
` `
(Bal. fig.) By Balance c/d 3,43,000
31,72,000 31,72,000
` `
To Purchases (Balancing 125,97,000 By Closing stock 9,75,000
figure)
149,05,000 149,05,000
` `
To Discount received 42,500 By Purchases (as 125,97,000
To Balance c/d calculated in W.N. 2)
133,54,500 133,54,500
14.64
`
Sundry expenses paid (as per cash and Bank book) 9,31,050
Add: Prepaid expenses as on 31–3–2018 3,000
9,34,050
Less: Outstanding expenses as on 31–3–2018 (67,500)
8,66,550
Add: Outstanding expenses as on 31–3–2019 55,200
9,21,750
Less: Prepaid expenses as on 31–3–2019 (Insurance paid till July, 2019) (3,000)
(9,000 x 4/12)
9,18,750
Similar Question
Question 28A
Archana Enterprises maintain their books of accounts under single entry system. The Balance - Sheet as on
Outstanding expenses 67,500 Trade debtors 3,12,000
15,00,000 15,00,000
Cash in hand & at Bank on 1,20,000 Payment to trade creditors 1,24,83,000
1st April, 2020
Cash in hand & at Bank on 31st
March, 2021 1,90,950
1,39,65,000 1,39,65,000
(i) Discount allowed to trade debtors and received from trade creditors amounted to ` 54,000 and ` 42,500
respectively (for the year ended 31st March, 2021).
(ii) Annual fire insurance premium of ` 9,000 was paid every year on 1st August for the renewal of the policy.
Stock ` 9,75,000
Trade debtors ` 3,43,000
Outstanding expenses ` 55,200
(v) Gross profit ratio of 10% on sales is maintained throughout the year.
You are required to prepare Trading and Profit & Loss account for the year ended 31st March, 2021, and
Balance Sheet as on that date. (MTP April, 2022) (12 Marks)
14.65
Answer
Trading and Profit and Loss Account of Archana Enterprises for the year ended 31st March, 2021
` `
149,05,000 149,05,000
To Sundry expenses (W.N. 4) 9,18,750 By Gross profit b/d 13,93,000
(15% ` 1,50,000)
14,35,500 14,35,500
` `
3,15,000 Trade Debtors 3,43,000
Add: Net profit for Unexpired insurance 3,000
the years 4,40,250 7,55,250
(W.N. 3)
Outstanding 55,200
expenses
16,39,450 16,39,450
Working Notes:
` `
31,72,000 31,72,000
` `
149,05,000 149,05,000
14.66
` `
To Balance c/d in W.N. 2)
133,54,500 133,54,500

`
Add: Prepaid expenses as on 31-3-2020 3,000
9,34,050
Less: Outstanding expenses as on 31-3-2020 (67,500)
8,66,550
Add: Outstanding expenses as on 31-3-2021 55,200
9,21,750
Less: Prepaid expenses as on 31-3-2021 (Insurance paid till July, 2021) (9,000 x 4/12) (3,000)
9,18,750
Question 29
2,80,000 2,80,000
(i) Sales and purchases for the year ended 31st March, 2019 were ` 3,00,000 and ` 2,40,000
respectively.
(iv) Sales in the current year will increase by 43.75% in volume.
(vii) All sales and purchases are on credit basis and there are no cash purchases and sales.
You are required to prepare Trading and Profit and Loss Account for the year ended 31.03.2020.
Answer
4,71,250 4,71,250
14.67
To Depreciation on:
Machinery 6,500
Building 5,000 11,500
86,250 86,250
Working Note:
`
A Sales during previous year 3,00,000
B Purchases 2,40,000
C Cost of Goods Sold (` 40,000 + ` 2,40,000 – ` 40,000) 2,40,000
E `60,000 20%
Rate of Gross Profit ×100
`3,00,000
(ii) Calculation of sales and Purchases during current year `
B Add: Increases in volume @ 43.75 % 1,05,000
C Cost of goods sold during Current Year 3,45,000
D Add: Gross profit @ 25% on cost (20% on sales) 86,250
E Sales for current year [C+D] 4,31,250
Question 30
From the following information, prepare Trading and Profit & Loss Account for the year ended 31.03.2020 and
the Balance Sheet as at 31.03.2020 of M/s Prasad & Co., a proprietorship firm.
Assets & Liabilities As on 01.04.2019 As on 31.03.2020
Creditors 20,000 15,000
Stock 10,000 12,000
Cash at Bank 2,500 10,000
Debtors ? 18,000
(3) Bad debts 500
14.68
(14) Cash in hand at 31.03.2020 2,000
No assets were sold during the year. Any difference in cash account to be considered as cash sales.
Answer:
In the books of M/s Prasad & Co.
` ` ` `
82,550 82,550
To General expenses 9,200 By Net Loss (balancing fig.) 150
(W.N. 5)
To Depreciation (W.N. 4) 3,000 __
16,700 16,700
39,700 16,000
Less: Drawings (500) 39,200 Less: Depreciation (3,000) 13,000
Cash in hand 2,000
_______ Cash in Bank 10,000
55,000 55,000
14.69
Working Notes:
(1) Ascertainment of Opening Capital - Statement of Affairs as at 1.4.19
_______ Cash at Bank 2,500
60,450 60,450
` `
By Bad debts 500
________ By Balance c/d (given) 18,000
99,950 99,950
` `
By Purchases - credit
To Discount 700 56,100
(Balancing figure)
To Returns 400
To Balance c/d (closing
balance) 15,000 ______
76,100 76,100
`
16,000
Depreciation 3,000
Add: Outstanding of 2020 800
9,800
Less: Outstanding of 2019 600
9,200
14.70
Cash Bank Cash Bank
` ` ` `
To Balance b/d 7,500 2,500 By Purchases 1,000 —
considered as cash sales)
By Cash (C) 9,000
By Bank (C) 5,000
17,000 83,500 17,000 83,500
Question 31
Cash in Hand 10,000 10,000
Cash at Bank 50,000 (Cr.) 80,000 (Dr.)
Ram’s capital 3,00,000
You are required to prepare: (i) Trading and Profit and Loss Account for the year ended 31.3.2020.
(MTP, October, 2020) (12 Marks)
14.71
Answer
Trading and Profit and Loss Account for the year ended 31st March, 2020
` `
12,40,000
To Gross Profit @ 25% 3,10,000 Credit 10,00,000
13,60,000 13,60,000
(10% of 1,00,000 x 6/12)
3,10,000 3,10,000
4,45,000 Stock in trade 1,20,000
Less: Drawings (80,000) 3,65,000
Loan from Laxman (including interest due) 1,05,000
5,60,000 5,60,000
Working Notes:
` `
11,00,000 11,00,000
` `
8,10,000 8,10,000
14.72
Cash Bank Cash Bank
` ` ` `
To Laxman’s loan 1,00,000 By Drawings 80,000
By Business
expenses 1,20,000
By Balance c/d 10,000 80,000
2,50,000 9,50,000
2,50,000 9,50,000
Question 32
Mr. Aman is running a business of readymade garments. He does not maintain his books of accounts under
double entry system. While assessing the income of Mr. Aman for the financial year 2018-19, Income Tax
Officer feels that he has not disclosed the full income earned by him from his business. He provides you the
On 31st March, 2018
On 31st March, 2019
Mr. Aman’s drawings for the year 2018-19 `32,000 per month
Income declared to the Income Tax Officer `9,12,000
During the year 2018-19, one life insurance policy of Mr. Aman was matured and amount received ` 50,000
was retained in the business.
State whether the Income Tax Officer's contention is correct. Explain by giving your working.
Answer
Determination of Capital balances of Mr. Aman on 31.3.2018 and 31.3.2019
31.3.2018 31.3.2019
` `
Assets 16,65,000 28,40,000
Less: Liabilities (4,13,000) (5,80,000)
Capital 12,52,000 22,60,000
14.73
`
Capital Balance as on 31-3-2019 22,60,000
Less: Fresh capital introduced (matured life insurance policy amount) (50,000)
22,10,000
Add: Drawings (`32,000 × 12) 3,84,000
25,94,000
Less: Capital Balance as on 1.4.2018 (12,52,000)
Profit 13,42,000
Income declared 9,12,000
The Income-tax officer’s contention that Mr. Aman has not declared his true income is correct. Mr. Aman’s
true income is in excess of the disclosed income by `4,30,000.
Question 33
Mr. Prakash furnishes following information for his readymade garments business:
(i) Receipts and Payments during 2019-20:
Receipts Amount ` Payments Amount `
Bank Balance as on Payment to Sundry
1-4-2019 16,250 Creditors 3,43,000
Received from Sundry Salaries 75,000
Debtors 4,81,000
General Expenses 22,500
Cash sales 1,70,800 Rent and Taxes 11,800
Capital brought in the Drawings 96,000
Business during the year 50,000
Cash Purchases 1,22,750
Interest on Investment Balance at Bank on
Received 9,750 31-03-2020 36,600
Cash in hand on
31-03-2020 20,150
7,27,800 7,27,800
(ii) Particulars of other Assets and Liabilities are as follows:
1st April, 2019 31st March, 2020
(`) (`)
Machinery 85,000 85,000
Furniture 24,500 24,500
Trade Debtors 1,55,000 ?
Trade Creditors 60,200 ?
Stock 38,600 55,700
12% Investment 85,000 85,000
Outstanding Salaries 12,000 14,000
14.74
(iii) Additional information:
(1) 20% of Total sales and 20% of total purchases are in cash.
(2) Of the Debtors, a sum of ` 7,200 should be written off as Bad debt and further a provision for
doubtful debts is to be provided @2%.
(3) Provide depreciation @10% p.a. on Machinery and Furniture.
Balance Sheet as on that date. (Suggested January 2021) (10 marks)
Answer
Trading and Profit & Loss Account for the year ended 31-03-2020
` ` `
To Opening Inventory 38,600 By Sales 8,54,000
To Purchases 6,13,750 By Closing Inventory 55,700
To Gross profit c/d (b.f.) 2,57,350
9,09,700 9,09,700
To Salaries 77,000 By Gross Profit b/d 2,57,350
(75,000+14,000-12,000)
To Rent 11,800 By Interest on investment 10,200
To General expenses 22,500 (9,750+450)
To Depreciation:
Machinery @ 10% 8,500
Furniture @ 10% 2,450 10,950
To Bad Debts 7,200
To Provision for doubtful debts 7,000 14,200
To Balance being profit
carried to Capital A/c (b.f.) 1,31,100
2,67,550 2,67,550
A. Adamjee’s Capital Machinery 85,000
on 1st April, 2019 3,32,150 Less: Depreciation Furniture (8,500) 76,500
Less: Depreciation
Add: Fresh Capital 50,000 24,500
Add: Profit for the year 1,31,100 (2,450) 22,050
5,13,250 Inventory-in-trade
Less: Drawings (96,000) 4,17,250 Sundry debtors 55,700
Less: Provision for 3,57,200
Sundry creditors 2,08,200 Doubtful debts Investment
(including accrued
Outstanding expenses 14,000 (14,200) 3,43,000
interest ` 450)
Cash at bank 85,450
Cash in hand 36,600
20,150
6,39,450 6,39,450
14.75
Working Notes:
1. Balance sheet as on 1-4-2019
` `
Sundry creditors 60,200 Machinery 85,000
Capital 3,32,150 Furniture 24,500
(balancing figure) Inventory 38,600
Outstanding salaries 12,000 Sundry debtors 1,55,000
Investments 85,000
Bank balance (from Cash statement) 16,250
4,04,350 4,04,350
2. Total Debtors Account
` `
1.4.19 To Balance b/d 1,55,000 31.3.20 By Cash 4,81,000
31.3.20 To Credit sales 6,83,200 31.3.20 By Bad debts 7,200
(1,70800/20x80) By Balance c/d 3,50,000
(Bal. Fig.)
8,38,200 8,38,200
3. Total Creditors Account
` `
31.3.20 To Cash 3,43,000 1.4.19 By Balance b/d 60,200
31.3.20 To Balance 2,08,200 31.3.20 By Credit Purchases 4,91,000
c/d (1,22,750/20x80)
(Bal. Fig.)
5,51,200 5,51,200
Question 34
Archana Enterprises maintain their books of accounts under single entry system. The Balance- Sheet as on
Outstanding expenses 67,500 Trade debtors 3,12,000
15,00,000 15,00,000
Cash in hand & at Bank on 1st 1,20,000 Payment to trade creditors 1,24,83,000
April, 2018
Cash in hand & at
Bank on 31st March, 2019
1,90,950
1,39,65,000 1,39,65,000
14.76
(i) Discount allowed to trade debtors and received from trade creditors amounted to `54,000 and
`42,500 respectively (for the year ended 31st March, 2019).
(ii) Annual fire insurance premium of ` 9,000 was paid every year on 1st August for the renewal of the
policy.
(v) Stock ` 9,75,000
Trade debtors ` 3,43,000
Outstanding expenses ` 55,200
(vi) Gross profit ratio of 10% on sales is maintained throughout the year.
Balance Sheet as on that date. (MTP March, 2021) (12 Marks)
Answer
Trading and Profit and Loss Account of Archana Enterprises
` `
149,05,000 149,05,000
To Sundry expenses 9,18,750 By Gross profit b/d 13,93,000
(W.N. 4)
(15% ` 1,50,000)
14,35,500 14,35,500
` `
3,15,000 Trade Debtors 3,43,000
Add: Net profit for Unexpired insurance 3,000
the years 4,40,250 7,55,250
(W.N. 3)
Outstanding 55,200
expenses
16,39,450 16,39,450
14.77
Working Notes:
` `
31,72,000 31,72,000
` `
149,05,000 149,05,000
` `
To Balance c/d in W.N. 2)
133,54,500 133,54,500

`
Add: Prepaid expenses as on 31–3–2018 3,000
9,34,050
Less: Outstanding expenses as on 31–3–2018 (67,500)
8,66,550
Add: Outstanding expenses as on 31–3–2019 55,200
9,21,750
Less: Prepaid expenses as on 31–3–2019 (Insurance paid till July, 2019) (9,000 x 4/12) (3,000)
9,18,750
Question 35
Capital Account 48,000 Building 32,500
Stock 20,000
Debtors 17,000
Cash in hand 2,000
Cash at bank 8,500
94,000 94,000
14.78
(a) His sales for the year ended 31st March, 2021 were 20% higher than the previous year’s sales. He
always sells his goods at cost plus 25%; 20% of the total sales for the year ended 31st March, 2021 were
for cash. There were no cash purchases.
(b) On 1st April, 2020 the stock level was raised to ` 30,000 and stock was maintained at this new level all
throughout the year.
expenses amounted to ` 20,000 of which ` 5,000 was outstanding on 31st March, 2021 and ` 6,000 was
paid by cheques.
Cash deposited in Bank ` 71,500, and Cash withdrawn from Bank ` 12,000.
(e) Gross profit as per last year’s audited accounts was ` 30,000.
You are required to prepare the Trading and Profit and Loss Account for the year ended 31 st March, 2021 and
(MTP April 2021) (MTP March, 2022) (12 Marks)
Answer
Trading and Profit and Loss Account for the year ending on 31st March, 2021
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:
Building 1,625
Furniture 250
Motor 1,800 3,675
To Net profit transferred to Capital A/c 12,325
36,000 36,000
Outstanding Expenses 5,000 Sundry Debtors 21,000
Cash at Bank 22,000
Sundry Advances (Amount
recoverable from Cashier)
4,500
1,20,325 1,20,325
14.79
Working Notes:
(ii) Total Debtors Account
To Balance b/d 17,000 By Bank (` 1,40,000 – ` 35,000) 1,05,000
To Sales (80% of ` 1,80,000) 1,44,000 By Cash A/c 35,000
1,61,000 1,61,000
(iii) Total Creditors Account
To Balance c/d 47,500 By Purchases 1,54,000
1,85,000 1,85,000
(iv) Cash Book
Particulars Cash ` Bank ` Particulars Cash ` Bank `
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) - 12,000
By Defalcation (Bal fig.) 4,500 -
By Balance c/d (Bal fig.) 22,000
85,000 1,85,000 85,000 1,85,000
(v) Last year’s Total Sales = Gross Profit x 100/20 = ` 30,000 x 100/20 = ` 1,50,000 (v) Current
year’s Total Sales = ` 1,50,000+ 20% of ` 1,50,000= ` 1,80,000
(vi) Current year’s Credit Sales = ` 1,80,000 x 80%= ` 1,44,000
(vii) Cost of Goods Sold = Sales – G.P. = `1,80,000 – ` 36,000 = ` 1,44,000
(viii) Purchases = Cost of Goods Sold + Closing Stock – Opening Stock
= ` 1,44,000 + ` 30,000 – ` 20,000 = ` 1,54,000
Question 36
Mr. Arun runs a business of readymade garments. He closes the books of accounts on 31st March. The
Balance Sheet as on 31st March, 2020 was as follows:
Capital A./c, 5,05,000 Furniture 50,000
Creditors 1,02,500 Closing Stock 3,50,000
Debtors 1,25,000
Cash in Hand 35,000
Cash at Bank 47,500
6,07,500 6,07,500
You are furnished with following information:
(1) His sales, for the year ended 31st March, 2021 were 20% higher than the sales of previous year, out
of which 20% sales was cash sales.
Total Sales during the year 2019-20 were `6,25,000
(2) Payments for all the purchases were made by cheques only.
(3) Goods were sold for cash and credit both. Credit customers pay by cheques only.
(4) Depreciation on furniture is to be charged 10% p.a.
14.80
(5) Mr. Arun sent to the bank the collection of the month at the last date of each month after paying
salary of `2,500 to the clerk, office expanses `1,500 and personal expanses `625.
Analysis of bank pass book for the year ending 31st March, 2021 disclosed the following:
`
Payment to rent up to 31st March, 2021 20,000
Cash deposited into bank during the year 1,00,000
The following are the balances on 31st March, 2021:
`
Stock 2,00,000
Debtors 1,50,000
Creditors for goods 1,82,500
On the evening of 31st March, 2021, the cashier absconded with the available cash in the cash book.
You are required to prepare Trading and Profit and Loss A/c. for the year ended 31st March, 2021 and
Balance Sheet as on that date. All the working should form part of the answer.
(July 2021 Suggested) (10 Marks)
Answer
In the books of Mr. Arun
Trading and Profit and Loss Account for the Year Ended 31st March 2021
(`) (`)
To Opening Stock 3,50,000 By Sales (W.N. 3)
To Purchases (W.N.1) 4,55,000 Credit 6,00,000
To Gross Profit (b.f.) 1,45,000 Cash 1,50,000
By Closing Stock 2,00,000
Total 9,50,000 Total 9,50,000
To Salary (` 2,500 x 12) 30,000 By Gross Profit 1,45,000
To Rent 20,000
To Office Expenses (` 1,500 x 12) 18,000
To Loss of Cash (W.N.6) 29,500
Total 1,45,000 Total 1,45,000
Balance Sheet
As on 31st March 2021
(`) (`)
Arun’s Capital 5,05,000 Furniture 50,000
Add: Profit 42,500 Less: Depreciation (5,000) 45,000
Less: Drawings (7,500) 5,40,000 Stock 2,00,000
(` 625 X12) Debtors 1,50,000
Creditors 1,82,500 Cash at bank 3,27,500
Total 7,22,500 Total 7,22,500
14.81
Working Notes:
(1) Calculation of Purchases
Creditors Account
Particulars Amount (`) Particulars Amount (`)
To Bank A/c 3,75,000 By Balance b/d 1,02,500
To Balance c/d 1,82,500 By Purchases (Bal Fig) 4,55,000
Total 5,57,500 Total 5,57,500
(2) Calculation of Total Sales
Sales for the year 2019-20 6,25,000
Total sales for the year 2020-21 7,50,000
(3) Calculation of Credit Sales
Less: Cash sales (20% of total sales) (1,50,000)
Credit sales 6,00,000
(4) Calculation of cash collected from debtors
Debtors Account
To Balance b/d 1,25,000 By Bank A/c (Bal Fig) 5,75,000
To Sales A/c 6,00,000 By Balance c/d 1,50,000
Total 7,25,000 Total 7,25,000
(5) Calculation of closing balance of cash at bank
Bank Account
To Balance b/d 47,500 By Creditors A/c 3,75,000
To Debtors A/c 5,75,000 By Rent A/c 20,000
To Cash A/c 1,00,000 By Balance c/d (b.f) 3,27,500
Total 7,22,500 Total 7,22,500
(6) Calculation of the amount of cash defalcated by the cashier
Cash Balance as on 1st April 2020 35,000
Add: Cash sales during the year 1,50,000
Less: Salary (30,000)
Office Expenses (18,000)
Drawings of Arun (7,500)
Cash deposited into bank during the year (1,00,000)
Cash Balance as on 31 March 2021 (defalcated by the cashier) 29,500
14.82
Question 37
Cash in Hand 10,000 10,000
Cash at Bank 50,000 (Cr.) 80,000 (Dr.)
Ram’s capital 3,00,000 ?
(d) Loan ` 1,00,000 taken on 1.10.2020 at 10% per annum
Surplus cash if any, to be taken as cash sales. All purchases are on credit basis.
You are required to prepare: Trading and Profit and Loss Account for the year ended 31.3.2021 and Balance
Sheet as at 31st March, 2021.
Answer
Trading and Profit and Loss Account of Ram for the year ended 31st March, 2021
` `
13,60,000 13,60,000
(10% of 1,00,000 x 6/12)
To Net Profit
1,45,000
3,10,000 3,10,000
Balance Sheet of Ram as at 31st March, 2021
4,45,000 Stock in trade 1,20,000
Less: Drawings (80,000) 3,65,000
Loan (including interest due) 1,05,000
5,60,000 5,60,000
14.83
Working Notes:
` `
11,00,000 11,00,000
` `
8,10,000 8,10,000
Cash Bank Cash Bank
` ` ` `
To Loan 1,00,000 By Drawings 80,000
By Business 1,20,000
2,50,000 expenses
By Balance c/d 10,000 80,000
9,50,000
2,50,000 9,50,000
Question 38
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 Debtors 3,65,000
Trade Creditors 1,90,000 Cash & Bank 1,95,000
Profit & Loss A/c 1,45,000
15,85,000 15,85,000
The management estimates the purchase & sales for the year ended 31st March,2020 as under:
Particulars Upto 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 ` 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, ` 60,000 was
sold for ` 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 two 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.
14.84
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 asset and liability apart from stock and cash and bank
balances.
Also, prepare Cash & Bank account and Fixed Assets account for the year ending 31st March, 2020.
Answer
Trading and Profit and Loss Account of M/s Rohan & Sons for the year ended 31st March, 2020
` `
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 ` 24,60,000) 3,69,000 By Profit on sale of Fixed assets 2,000
6,17,000 6,17,000
Balance Sheet of M/s Rohan Sons as on 31st March, 2020
Liabilities Assets `
Capital 12,50,000 Fixed assets (less Dep.) 6,66,000
Profit & Loss A/c (1,45,000 + 1,68,000) 3,13,000 Stock 4,15,000
Trade Creditors 1,25,000 Debtors 3,85,000
_______ Cash and bank 2,22,000
16,88,000 16,88,000
To Bal. b/d 1,95,000 By Creditors (1,90,000 + 19,50,000
16,20,000 + 1,40,000)
To Debtors (3,65,000 + 20,75,000) 24,40,000 By Expenses 3,69,000
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 6,000
asset
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
Question 39
M/s Shyam, a proprietorship firm runs a business of stationary items. It provides you the following information
relating to assets and liabilities:
Assets & Liabilities As on 01.04.2019 As on 31.03.2020
Creditors 20,000 15,000
Stock 10,000 12,000
Cash at Bank 2,500 10,000
Debtors ? 18,000
14.85
(3) Bad debts 500
No fixed assets were sold during the year. Any difference in cash account to be considered as cash sales.
You are required to prepare Trading and Profit & Loss Account for the year ended 31.03.20 20 and the
Balance Sheet as at 31.03.2020 from the given information.
Answer
In the books of M/s Shyam
` ` ` `

82,550 82,550
To General expenses (W.N. 5) 9,200 By Net Loss (balancing fig.) 150
16,700 16,700
14.86
39,700 16,000
Less: Drawings (500) 39,200 Less: Depreciation (3,000) 13,000
Cash in hand 2,000
_______ Cash in Bank 10,000
55,000 55,000
Working Notes:
(1) Ascertainment of Opening Capital - Statement of Affairs as at 1.4.19
_______ Cash at Bank 2,500
60,450 60,450
` `
By Bad debts 500
______ By Balance c/d (given) 18,000
99,950 99,950
` `
To Discount 700 By Purchases - credit 56,100
To Returns 400 (Balancing figure)
To Balance c/d
(closing balance) 15,000 _______
76,100 76,100
14.87
`
16,000
Depreciation 3,000
Add: Outstanding of 2020 800
9,800
Less: Outstanding of 2019 600
9,200
Cash Bank Cash Bank
` ` ` `
considered as cash sales)
By Cash (C) 9,000
By Bank (C) 5,000
17,000 83,500 17,000 83,500
Question 40
Equity and Liabilities ` Assets `
2,80,000 2,80,000
(i) Creditors' Velocity 1.5 month & Debtors' Velocity 2 months. Here velocity indicates the no. of times the
creditors and debtors are turned over a year.
14.88
(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.
(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 31.03.2021.
Answer
4,71,250 4,71,250
To Depreciation on:
Machinery 6,500
Building 5,000 11,500
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/ (1/8 of ` 3,45,000) 43,125 By Purchases 3,45,000
3,75,000 3,75,000
Working Note:
`
A Sales during previous year (` 50,000 x 12/2) 3,00,000
B Purchases (` 30,000 x 12/1.5) 2,40,000
C Cost of Goods Sold (` 40,000 + ` 2,40,000 – ` 40,000) 2,40,000
14.89
`
E `60,000 20%
Rate of Gross Profit ×100
`3,00,000
(ii) Calculation of sales and Purchases during current year `
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 41
From the following details furnished by Mittal ji, prepare Trading and Profit and Loss account for the year
ended 31.3.2021. Also draft his Balance Sheet as at 31.3.2021:
1.4.2020 31.3.2021
` `
Creditors 3,15,400 2,48,000
Expenses outstanding 12,000 6,600
Stock in hand 1,60,800 2,22,400
Cash in hand 59,200 24,000
Cash at bank 80,000 1,37,600
Sundry debtors 3,30,600 ?
Cash and discount credited to debtors 12,80,000
Returns from debtors 29,000
Bad debts 8,400
Sales (Both cash and credit) 14,36,200
Discount allowed by creditors 14,000
Returns to creditors 8,000
Capital introduced by cheque 1,70,000
Collection from debtors (Deposited into bank after receiving cash) 12,50,000
Expenses paid by cash 1,91,400
Drawings by cheque 8,600
Machinery acquired by cheque 63,600
Cash deposited into bank 1,00,000
Cash withdrawn from bank 1,84,800
Cash sales 92,000
Payment to creditors by cheque 12,05,400
Note: Mittal ji has not sold any machinery during the year.
14.90
Answer
In the books of Mittal ji
Trading and Profit and Loss Account for the year ended 31st March, 2021
` ` ` `
To Opening stock 1,60,800 By Sales:
To Purchases: Cash 92,000
Cash 20,600 Credit 13,44,200
Credit (W.N. 3) 11,60,000 14,36,200
11,80,600 Less: Returns (29,000) 14,07,200
Less: Returns (8,000) 11,72,600
To Gross Profit c/d 2,96,200 By Closing stock 2,22,400
16,29,600 16,29,600
To Discount allowed 30,000 By Gross profit b/d 2,96,200
To Bad debts 8,400 By Discount 14,000
To General expenses 1,86,000
(W.N. 5)
3,10,200 3,10,200
Capital (W.N. 1) 5,35,400 Plant & Machinery 2,32,200
Add: Additional capital 1,70,000 Add: New
machinery 63,600
Net profit 30,800 2,95,800
7,36,200 Less: Depreciation (55,000) 2,40,800
Less: Drawings (8,600) 7,27,600 Stock in trade 2,22,400
Sundry creditors 2,48,000 Sundry debtors (W.N. 2) 3,57,400
Expenses outstanding 6,600 Cash in hand 24,000
Cash in Bank 1,37,600
_______
9,82,200 9,82,200
Working Notes:
(1) Statement of Affairs as at 31st March, 2020
Sundry creditors 3,15,400 Plant & Machinery 2,32,200
Outstanding expenses 12,000 Stock 1,60,800
Mittal’s Capital Debtors 3,30,600
(Balancing figure) 5,35,400 Cash in hand 59,200
_______ Cash at Bank 80,000
8,62,800 8,62,800
14.91
` `
To Balance b/d 3,30,600 By Cash 12,50,000
To Sales (14,36,200 – 92,000) 13,44,200 By Discount 30,000
By Bad debts 8,400
________ By Balance c/d (Bal. fig.) 3,57,400
16,74,800 16,74,800
` `
To Bank – Payments 12,05,400 By Balance b/d 3,15,400
To Discount 14,000 By Purchases credit 11,60,000
To Returns 8,000 (Balancing figure)
To Balance c/d (closing balance) 2,48,000
14,75,400 14,75,400
(4)
Depreciation on Plant & Machinery: `
Opening balance 2,32,200
2,95,800
Less: Closing balance (2,40,800)
Depreciation 55,000
Expenses (in cash) 1,91,400
Add: Outstanding of 2021 6,600
1,98,000
Less: Outstanding of 2020 12,000
1,86,000
Cash Bank Cash Bank
` ` ` `
To Capital 1,70,000 By Expenses 1,91,400
To Debtors 12,50,000 By Plant and 63,600
Machinery
To Bank 1,84,800 By Drawings 8,600
To Cash 1,00,000 By Creditors 12,05,400
To Sales 92,000 By Cash 1,84,800
By Bank 1,00,000
_______ ________ By Balance c/d 24,000 1,37,600
3,36,000 16,00,000 3,36,000 16,00,000
14.92
Question 42
A Company sold 20% of the Goods on Cash Barrie and the balance on Credit basis. Debtors are allowed 1.5
month's credit and their balance as on 31st March, 2021 is ` 1,50,000. Assume that sale is evenly spread
throughout the year.
Purchases during the year ` 9,50,000.
Closing stock is `10,000 less than the Opening Stock. Average stock maintained during the year ` 60,000.
Direct Expenses amounted to ` 35,000.
Calculate Credit sales, Total sales and Gross profit for the year ended 31st March, 2021.
Answer
Calculation of Credit Sales, Total Sales and Gross Profit
12 months
Credit Sales for the year ended 31st March, 2021 = Debtors x
1.5 months
12 months
=` 1,50,000 x
1.5 months
= ` 12,00,000
100%
Total sales for the year ended 2020 - 21 = Credit sales x
80%
100%
= ` 12,00,000 x
80%
= ` 15,00,000
` `
To Direct expenses 35,000 By Closing Stock 55,000
15,55,000 15,55,000
Working Note:
Calculation of opening stock and closing stock
If closing stock is x then opening stock is x+10,000
Average stock ` 60,000
Average stock = Opening stock + Closing stock /2
Thus Opening stock is ` 65,000 and closing stock is ` 55,000.
Question 43
Stevie and Alicia are in partnership sharing profits and losses equally.
They maintain their books on Single Entry System.
The following balances are available from their books as on 31.3.2021 and 31.3.2022:
Particulars 31.3.2021 31.3.2022
` `
Building 3,00,000 3,00,000
Equipment 4,80,000 5,44,000
Furniture 50,000 50,000
Debtors ? 2,00,000
Creditors 1,30,000 ?
14.93
Particulars 31.3.2021 31.3.2022
` `
Stock ? 1,40,000
Bank loan 90,000 70,000
Cash 1,20,000 ?
The transactions during the year ended 31.3 .2022 were the following:
`
Collection from Debtors 7,60,000
Payment to Creditors 5,00,000
Expenses Paid 80,000
Drawings by Stevie 60,000
Other Information:
(i) On 1.4.2021, an equipment of book value ` 40,000 was sold for ` 30,000. On 1.10.2021, some more
equipment were purchased.
(ii) Cash sales amounted to 10% of total sales.
(iii) Credit sales amounted to ` 9,00,000.
(iv) Credit purchases were 80% of total purchases.
(v) Cash Purchases amounted to ` 1,30,000.
(vi) The firm sells goods at cost plus 25%.
(vii) Outstanding expenses were ` 6,000 as on 31.3.2022.
(viii) Capital of Stevie as on 31.3.2021 was ` 30,000 more than the capital of Alicia, equipment and furniture
to be depreciated at 10% p.a. and building @ 2% p.a. (apply depreciation of new equipment for 1/2 year)
(i) Trading and Profit and Loss Account for the year ended 31.3.2022; and
(ii) The Balance Sheet as on that date.
14.94

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Redemption of Debentures 8

To Debentures Redemption By Deb. Interest A/c 10,000

Less: Utilisation for issue of bonus shares (25,000)

Particulars Note No Figures as at the end of

Date Particulars Amount Dr. Amount Cr.

Test Your Knowledge

Redemption value of 7,000 debentures at a premium of 5% [7,000 x (100 + 5)] ` 7,35,000

Calculation of cash to be paid : `

Date Particulars Amount Dr. Amount Cr.

45,000 6,49,444 45,000 6,49,444

Investments in Equity shares of X Ltd. for year ended 31.3.20X2

50,000 7,12,000 50,000 7,12,000

Test Your Knowledge

March 31 To P & L A/c — 23,760 _______ ——— ——— ———

* Considering that dividend was received on right shares also.

20.5.16 To Bank 1,000 23,000 20.12.16 By Bank 1,500 33,000

1.4.18 To Bank A/c 2,00,000 - 2,16,000 30.09.18 By Bank A/c - 12,000 -

31.12.18 To P & L A/c - 14,033 - 1.10.18 By Bank A/c 80,000 84,000

SCRIP: Equity Shares in C LTD.

June To Bonus Issue 8,000 - Nil 2018

May To Profit & Loss — — 3,200 2018 By Bank (Dividend @ — 4,800 —

(xii) Cost of investment as on 31st March = ` 1,02,000 + ` 76,800 = ` 1,78,800

Investment in Equity shares in P Ltd. Account

To Profit & Loss - 4,800

1.6.18 To Bank 9,00,000 37,500 8,90,820 31.12.19 By Bank 1,67,500

Less: Interest (1,35,000/ 12) (11,250)

1.3.2020 To Profit & loss A/c

10,00,000 50,000 10,10,000 10,00,000 50,000 10,10,000

1.4.19 To Balance b/d 1,500 34,500 15.9.19 By Bank - 4,500 3,000

90,000 12,10,000 90,000 12,10,000

3,00,000 16,033 3,26,000 3,00,000 16,033 3,26,000

No of shares received after the period of dividend (excluding 7,000 shares

5. Dividend received on investment held as on 1st April, 2019

15.11.2019 To Profit 32,000 15.11.2019 By Bank 20,000 3,00,000

14,000 4,950 1,34,000 14,000 4,950 1,34,000

Computation of Closing Stock as on 31st March, 20X2

Thus, the GP ratio = 12,00,000 / 36,00,000 = 33.33%

Particulars Amount (`)

(25 / 100) x 7,00,000

Test Your Knowledge

Insurance claim = ` 3,25,000

= ` 59,300 × (55,000/63,000) = `51,770 (rounded off)

Less: Machinery 15,000 2,40,000

From 1st April to 30th June 3,80,000 3,15,000 4,11,900 3,24,000

Samples (2,700) By Closing stock (Bal. fig.) 1,21,967

Instalment Interest @ 5% half yearly Principal Amount (in

Total (`) Interest in each Cash price in each

Date Particulars Dr. Cr.

Date Particulars Dr. Cr.

(2) Value of Tempos taken away by the seller:

Date Particulars ` Date Particulars `

Date Particulars ` Date Particulars `

Test Your Knowledge

[1] [2] [3] [4] = 2 +3 [5] = 4 x 10/110 [6] = 4-5

(iii) M/s Bhanu Account

By Fair Value Motors A/c

2nd Installment at the end of 2nd year 4,90,000

Date Particulars ` Date Particulars `

Date Particulars ` Date Particulars `