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Questions Solutions
May - 2010
May - 2010to
to
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Duly incorporated in
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CA Inter Group - I
Authors:
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Sources of Questions from Old Course
CA IPCC P- 1, Chapter- 1
CS Executive P- 5, Chapter- 9 CA IPCC Paper- 5, Chapter- 1
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Syllabus 1.3
Examination Trend Analysis 1.5
Line Chart Showing Relative Importance of Chapters 1.9
Table Showing Importance of Chapter on the Basis of Marks 1.10
C.N. Study
Chapters 1. (Chapter 1) 2. (Chapter 2)
4A. (Chapter 4
Unit 1)
4B. (Chapter 4
Unit 2)
5. (Chapter 5) 6. (Chapter 6)
7. (Chapter 7)
8. (Chapter 8)
9. (Chapter 9) 10. (Chapter 10)
Profit or Loss Pre and Post Incorporation 1.287 Accounting for Bonus Issue and Right Issue 1.341
Syllabus
Contents:
1. Process of formulation of Accounting Standards including Ind AS (IFRS converged standards) and IFRSs;
convergence vs adoption; objective and concepts of carve outs.
2. Framework for Preparation and Presentation of Financial Statements (as per Accounting Standards).
3. Applications of Accounting Standards:
AS 1 : Disclosure of Accounting Policies
AS 2 : Valuation of Inventories
AS 3 : Cash Flow Statements
AS 10 : Property, Plant and Equipment
AS 11 : The Effects of Changes in Foreign Exchange Rates AS 12 : Accounting for Government Grants
AS 13 : Accounting for Investments
AS 16 : Borrowing Costs
4. Company Accounts
(i) Preparation of financial statements – Statement of Profit and Loss, Balance Sheet and Cash Flow Statement;
(ii) Managerial Remuneration;
(iii) Profit (Loss) prior to incorporation;
(iv) Accounting for bonus issue and right issue;
(v) Redemption of preference shares;
(vi) Redemption of debentures.
Note : If either new Accounting Standards (AS), Announcements and Limited Revisions to AS are issued or the
earlier ones are withdrawn or new AS, Announcements and Limited Revisions to AS are issued in place of existing
AS, Announcements and Limited Revisions to AS, the syllabus will accordingly include / exclude such new
developments in the place of the existing ones with effect from the date to be notified by the Institute.
Standards "
Accounting 5 Practical 74 5 " 48
5 Descriptive 13 3. (a) 10 Insurance Claims for Loss of Stock and Loss of Profit 5. (a) 4B Cash Flow Statement (b) 11 Hire Purchase and Instalment
Sale Transactions
10 Practical 527 12 " 277
4 Descriptive 583
2018 1. (a) {C} 3 Overview of Accounting Standard May (b) {C} 3 " " "
2. (a) {C} 9 Investment Accounts (b) 10 Insurance Claims for Loss of Stock and Loss of Profit 3. (a) 12 Departmental Accounts (b) 13 A c c o u n t i n g f
o r B r a n c h e s Including Foreign Branches 5. (a) 5 Profit or Loss Pre and Post Incorporation
(b) 7 Redemption of Preference Share 6. (a) 2 Framework for Preparation and P r e s e n t a t i o n o f F i n a n c i a l Statements
Right Issue
(c) 8 Redemption of Debentures (e) 3 Overview of Accounting Standard 5 Practical 103 5 " 87
10 " 478
10 " 530 10 " 674
10 " 724
10 Practical 301 10 " 377
5 Descriptive 25
5 Practical 356
5 " 414
5 " 55
2018 1. (a) {C} 3 Overview of Accounting Standard 5 Practical 75
Nov. (b) {C} 3 " " " 5 " 88
(c) {C} 3 " " " 5 " 35
2. (a) 9 Investment Accounts 10 " 481
(b) 10 Insurance Claims for Loss of
Stock and Loss of Profit 10 " 532
3. (a) 14 Accounts from Incomplete
Records 15 " 908
(b) 12 Departmental Accounts 5 " 658
5. (b) 8 Redemption of Debentures 8 " 415
6. (b) 2 Framework for Preparation and
PresentationofFinancial
Statements (c) 3 O v e r v i e w Standards
5 Descriptive 24
ofAccounting
5 Practical 89
(d) 7 Redemption of Preference Share 5 Descriptive 379
May Standards 5 Practical 127
(b) {C} 3 " " " 5 " 112
(c)2. {C} 3 " " " 1 " 96
3. {C} 3 " " " 1 " 37
4. {C} 3 " " " 1 " 107
2. (a) 11 Hire Purchase and Instalment
Sale Transactions 10 " 624
(b) 10 Insurance Claims for Loss of
Stock and Loss of Profit 10 " 559
Incomplete
3. (a) 14 Accounts from Records
(b) 13 A c c o u n t i n g f o r
12 " 890
Branches
Including Foreign Branches 8 " 785
5. (a) 7 Redemption of Preference Share 10 " 380
(b) 4B Cash Flow Statement 10 " 282
6. (b) 2 Framework for Preparation and
P r e s e n t a t i o n o f Statements
(c) 5 Profit or Loss Pre Incorporation 5 " 303
(e) 3 O v e r v i e w o f A c c o u n t i n g
Standards 5 " 50
F i n a n c i a l 5 " 21
and Post
Nov. Standards 5 Practical 56
(b) {C} 3 " " " 5 " 90
(c) {C} 3 " " " 5 " 51
3. (a) 9 Investment Accounts 10 " 483
(b) 10 Insurance Claims for Loss of
Stock and Loss of Profit 10 " 561
4. (a) 12 Departmental Accounts 10 " 694
(b) 14 Accounts from Incomplete
Records 10 " 896
5. (a) 4A F i n a n c i a l S t a t e m e n t s o f
Companies: Preparation of
Financial Statements 10 " 154
(b) 5 Profit or Loss Pre and Post
Incorporation 10 " 304
6. (a) 4A F i n a n c i a l S t a t e m e n t s o f
Companies: Preparation of
Financial Statements 5 " 184
(b) 6 Accounting for Bonus Issue and
Right Issue 5 " 358
(e) 8 Redemption of Debentures 5 " 437
Line Chart
Chap. Years 15 15 16 16 17 17 18 18 1919 No. Chapter Name May Nov. May Nov. May Nov. May Nov. May Nov. Total Ave.
1. I n t r o d u c t i o n t o 5 5 0.5
Accounting Stan...
2. F r a m e w o r k f o r 4 8 4 5 5 5 31 3.1
Preparation and...
3. O v e r v i e w o f 18 20 43 19 10 15 20 20 18 15 198 19. Accounting Standards 8
4A. Financial Statements 15 15 1.5
of Compa....
4B. Cash Flow Statement 8 8 5 12 10 43 4.3
5. Profit or Loss Pre and 10 8 8 10 5 10 51 5.1
Post...
6. Accounting for Bonus 5 5 10 1.0
Issue and...
7. R e d e m p t i o n o f 10 5 10 25 2.5
Preference Shares
8. R e d e m p t i o n o f 16 4 4 5 8 5 42 4.2
Debentures
9. Investment Accounts 8 10 8 4 8 10 10 10 68 6.8
10. Insurance Claims for 6 8 8 8 4 10 10 10 10 10 84 8.4
Loss of ...
11. Hire Purchase and 8 8 8 4 4 10 42 4.2
Instalment ...
12. D e p a r t m e n t a l 8 12 8 8 4 10 5 10 65 6.5
Accounts
13. A c c o u n t i n g f o r 8 16 8 8 8 12 10 8 78 7.8
Branches Inclu....
14. A c c o u n t s f r o m 16 5 8 16 15 12 10 82 8.2
Incomplete Records
CHAPTER
1
Introduction to Accounting Standards
This Chapter Covers: Study’s Chapter: 1
Chapter Comprises: Standards Setting Process ☹Status of Accounting Standards ☹International Accounting
Standard Board ☹International Financial Reporting Standards as Global Standards ☹Convergence to IFRS in India
☹History of IFRS Converged Indian Accounting Standards
i.e.....
1. Budgeted
2. Actual
3. Variance (1-2)
............ Day 1 5
Instant
Revision (in hours)
1.15 1.00
Periodic Revision (in hours)
What are the issues, with which Accounting Standards deal? (4 marks) Answer :
Accounting Standards deal with the issues of:
What are Accounting Standards? Explain the issues, with which they deal. (5 marks) [IPCC Gr. I] Answer:
Accounting Standards
Accounting Standards (AS) are written policy documents issued by an Expert Accounting Body or by Government
or by other Regulatory Body. Issues with which Accounting Standards deal are:
(i) Recognition: Accounting Standards should recognise the transactions and events in the financial statement.
(ii) Measurement: Accounting standards measure these transactions and events.
(iii) Presentation: Presentation of these transactions and events in financial statements, in a meaningful and
understandable manner. (iv) Disclosure: Requires disclosure in financial statements. Space to write important points
for revision
“Accounting standards are formulated in conformity with the provisions of the applicable laws, customs, usages and
business environment of a country.” Comment. (5 marks) [CS Inter - I]
Answer :
Every effort is made to issue accounting standards which are in conformity with the provisions of the applicable
laws, customs, usages and business environment of our nation.
However, if due to subsequent amendments in the law, a particular accounting standard is found to be not in
conformity with such law, the provision of the said law will prevail and the financial statements should be prepared
in conformity with such law.
The accounting standards by their very nature cannot and do not override the local regulations which govern the
preparation and presentation of financial statements in our country.
However, the Institute of Chartered Accountants of India will determine the disclosure requirements to be made in
the financial statements and auditor's reports. Such disclosure may be by way of appropriate notes explaining the
treatment of particular items. Such explanatory notes will only be in the nature of clarification and therefore, need
not be treated as adverse comments on the related financial statements.
The accounting standards are intended to apply to items which are material. Any limitations with regard to the
applicability of a specific standard will be made clear by the Institute from time to time.
The Institute will use its best endeavours to persuade the Government, appropriate authorities, industrial and
business community to adopt these standards in order to achieve uniformity in the presentation of financial
statements. In formulation of Accounting Standards, the emphasis would be on laying down accounting principles
for application and implementation thereof.
Applicability:
Companies which are not required to follow Ind AS shall continue to comply with Accounting Standards (‘AS’) as
prescribed in Companies (Accounting Standards) Rules, 2006.
Highlights of the notified Companies (Indian Accounting Standard) Rules, 2015 is provided below:
Applicability of Ind AS:
The Companies and their Auditors shall comply with the Ind AS specified in the Annexure to the Rules in
preparation of their Financial Statements (FS) and Audit respectively, in the following manner;
1. Voluntary adoption (for FY 2015-16):
Any company may comply with the Ind AS for Financial Statements for accounting periods beginning on or after 1st
April 2015, with the comparatives for the periods ending on 31st March 2015, or thereafter. This option is also
available to companies whose securities are listed or are in the process of being listed on Small and Medium
Enterprises (‘SME’) exchange.
2. Mandatory adoption:
(i) From FY 2016-17: Companies satisfying following criteria are required to comply with the Ind AS for or the
accounting periods beginning on or after 1st April 2016, with the comparatives for the periods ending on 31st March
2016, or thereafter.
(a) Companies whose Equity or Debt Securities are listed or are in the process of being listed on any stock exchange
in India or outside India and having Net Worth (NW) of ` 500 crore or more.
(b) Unlisted Companies (i.e. other than those mentioned in (a) above) having NW of ` 500 crore or more.
(c) Holding, Subsidiary, Joint Venture/Associate Companies of Companies covered in (a) and (b) above.
(ii) From FY 2017-18: Companies satisfying following criteria are
required to comply with the Ind AS for or the accounting periods
beginning on or after 1st April 2017, with the comparatives for the
periods ending on 31st March 2017, or thereafter:
(a) Companies whose Equity or Debt Securities are listed or are in the process of being listed on any stock exchange
in India or outside India and having NW of less than` 500 crore.
(b) Unlisted Companies having NW of`250 crore or more but less than ` 500 crore.
(c) Holding, Subsidiary, Joint Venture/Associate Companies of Companies covered in (a) and (b) above.
Ind AS once required to be complied with in accordance with these
rules, shall apply to both standalone financial statements (SFS) and
consolidated financial statements (CFS).
Space to write important points for revision
Answer :
Objectives of International Accounting Standards
The objectives of the International Accounting Standard are to improve and to harmonise company reporting around
the world.
Basically the IAS has two objectives:
1. To Formulate and Publish International Accounting Standards
The IAS issues financial accounting standards on specific problems concerning elementary as well as sophisticated
accounting issues.
2. To promote their worldwide acceptance and observation The IASC has no inherent authority to do this and
instead relies on its members organisations, who have pledged to use their best efforts to have the standard adopted
by their national authoritative standards setting bodies.
Write short note on the Non-acceptability of International Accounting Standards. (3 marks) [CS Exe - I] Answer :
Non acceptability of International Accounting Standard : Accounting practices in different countries are
different due to there different legislative requirement, social and economic condition, long standing practices, tax
structure and organized professional accounting. Whenever multinational company have different way of working
than national company, and of due to this. Worldwide contradiction of views have been noticed in the national
standard setting bodies and international bodies. There is a glaring diversity in accounting practices in different
countries which require harmonization for evolving uniform accounting standard for world wide application.
The above discussed factors are the basic reason for non-acceptability of International Accounting Standard
throughout the world.
Q.4.3 2013 - Dec [2] (e) Descriptive
be developed.
2. To formulate Accounting Standards with a view to assisting the council
of the ICAI in evolving and establishing Accounting Standards in India. 3 To examine how far the relevant
International Accounting Standards/
International Financial Reporting Standard can be adapted while
formulating the AS and to adapt the same.
4. To review, at regular intervals the Accounting Standards from the point
of view of acceptance or changed conditions and if necessary revise the
same.
5. To provide from time to time interpretations and guidance on Accounting
Standards.
6. To carry out such other functions relating to Accounting Standards.
Chapter Comprises: Purpose of the Framework ☹Status and Scope of the Framework ☹Components of Financial
Statements ☹Objectives and Users of Financial Statements ☹Fundamental Accounting Assumptions
☹ Qualitative Characteristics ☹True and Fair View ☹Elements of Financial Statements ☹Measurement of Elements of
Financial Statements ☹Capital Maintenance
i.e.....
1. Budgeted
2. Actual
3. Variance (1-2)
............ Day 1 5
Instant
Revision (in hours)
Next After day 7 days i.e.... i.e. on ........... ........... Day 2 Day 8
1.15 1.00
. . . . . . . . . . .Plan and Manage your Time Periodic Revision
(in hours)
After After After Fix as 30 days 60 days 90 days per your i.e. on i.e. on i.e. on need.
assumption that an enterprise will continue in operation in the foreseeable future and neither there is intention, nor
there is need to materially curtail the scale of operations.
2. Accrual Basis: Under this basis of accounting, transactions are recognized as soon as they occur, whether cash or
cash equivalent is actually received or paid. Accrual basis ensures better matching between revenue and cost and
profit/loss obtained on this basis reflects activities of the enterprise during an accounting period, rather than cash
flows generated by it.
3. Consistency: It refers to the practice of using same accounting policies for similar transactions in all accounting
periods. The consistency improves comparability of financial statements through time.
Liabilities
Proprietor’s Capital Profit & Loss Account 10% Loan Account Sundry Creditors
To Depreciation
Profit and Loss Account
for the year 2017-18:
Liabilities Capital
Profit and Loss A/c 10% loan A/c
Sundry creditors
Balance Sheet
as on 31st March, 2018
` Assets `
3,00,000 Fixed Assets 3,25,000
5,14,500 Stock 2,50,000
2,35,000 Debtors (less provn) 70,000
67,500 Deferred Exp. Nil Cash and Bank (Bal. fig) 4,72,000
11,17,000 11,17,000
2
Qualitative Characteristics of Financial Statements
Q.2.1 2007 - May [6] (a), 2011 - Nov [7], (e) Descriptive 2013 - May [7] (e), RTP
What are the qualitative characteristics that improve the usefulness of information provided in the financial
statements?
(4 marks each) [IPCC Gr. II]
Answer:
Qualitative characteristics are those attributes which make the information provided in the financial statement useful
to the users.
The principal qualitative characteristics are as follows: 1. Understandable The basic quality of financial
statement is that it is
understandable by the user. However to understand, the user is expected to have basic knowledge of business and
accounting.
2. Relevance
3. Materiality
4. Reliability
5. Neutrality
6. Completeness
7. Substance over form
8. Comparability
The information provided in the financial statement will loose its importance if it is not relevant. An information is
relevant when it influences the decision of users while evaluating the past, present and future.
The information provided in a financial statement is relevant only if it is material. Materiality provides a threshold
rather than being a primary qualitative characteristic.
The financial statement loses its purpose if it is not reliable. Thus it should be error free and unbiased showing the
true and fair picture. The financial statement should be neutral. It should not be a manipulated statement. The
financial statement should be complete in all respect within the boundary of materiality and cost. An omission can
cause information misleading.
The purpose of financial statement is to provide information. It should be thus presented in accordance with their
substance and economic reality and not merely their legal form.
The measurement and display of information should be consistent in order to make it comparable over times to
come.
Answer :
Yes, one of the characteristics of financial statements is neutrality. To be reliable, the information contained in
financial statements must be neutral, that is free from bias. Financial Statements are not neutral if by the selection or
presentation of information, the focus of analysis could shift from one area of business to another thereby arriving at
a totally different conclusion based on the business results.
Give the four qualitative characteristics which the financial statements should observe. (2 marks) [IPCC Gr. II]
Answer :
The financial statements should have the following qualitative characteristics:
1. Understandability
2. Relevance
3. Reliability
4. Comparability.
Answer :
Elements of Financial Statements:
☐ The Framework for preparation and presentation of financial statements
classifies items of financial statements. Financial statements can be classified in five broad groups depending on
their economic characteristics: Asset, Liability, Equity, Income/Gain and Expenses/Loss. 1. Asset :
☐ Resource controlled by the enterprise as a result of past events from which future economic benefits are expected
to flow to the enterprise.
2. Liability :
☐ Present obligation of the enterprise arising from past events, the settlement of which is expected to result in an
outflow of a resource embodying economic benefits.
3. Equity :
☐ Residual interest in the assets of an enterprise after deducting all its liabilities.
4. Income/Gain :
☐ Increase in economic benefits during the accounting period in the form of inflows or enhancement of assets or
decreases in liabilities that result in increase in equity other than those relating to contributions from equity
participants.
5. Expense/Loss :
☐ Decrease in economic benefits during the accounting period in the form of outflows or depletions of assets or
incurrence of liabilities that result in decrease in equity other than those relating to distributions to equity
participants.
Explain in brief, the alternative measurement bases, for determining the value at which an element can be
recognized in the Balance Sheet or Statement of Profit and Loss. (4 marks) [IPCC Gr. II]
Answer:
Measurement is the process of determining money value at which an element can be recognised in the balance sheet
or statement of profit and loss. The framework recognises four alternative measurement bases for the purpose. These
basis relate explicitly to the valuation of assets and liabilities. The valuation of income or expenses, i.e. profit is
implied, by the value of change in assets and liabilities.
Measurement basis are as follows:
1. Historical cost
2. Current cost
3. Realisable value
4. Present value
In preparation of financial statements, all or any of the measurement basis can be used in varying combinations to
assign the cost.
Mohan started a business on 1st April 2017 with` 12,00,000 represented by 60,000 units of ` 20 each. During the
financial year ending on 31st March, 2018, he sold the entire stock for`30 each. In order to maintain the capital
intact, calculate the maximum amount, which can be withdrawn by Mohan in the year 2017-18 if Financial Capital
is maintained at historical cost.
Answer:
Particulars
Closing equity
(` 30 x 60,000 units)
Opening equity
Permissible drawings to keep Capital intact
Financial Capital Maintenance at Historical Cost (`) 18,00,000 represented by cash 60,000 units x ` 20 =
12,00,000
6,00,000 (18,00,000 – 12,00,000)
Thus, in order to maintain the capital intact Mohan can withdraw` 6,00,000 as the maximum amount.
Space to write important points for revision
CHAPTER
3
Overview of Accounting Standards
This Chapter Covers: Study’s Chapter: 3
i.e.....
1. Budgeted
2. Actual
3. Variance (1-2)
............ Day 1 5
Instant
Revision (in hours)
Next After day 7 days i.e.... i.e. on ........... ........... Day 2 Day 8
1.15 1.00
. . . . . . . . . . .Plan and Manage your Time Periodic Revision
(in hours)
After After After Fix as 30 days 60 days 90 days per your i.e. on i.e. on i.e. on need.
........... .............. ............
Day 30 Day 60 Day 90
0.45 0.10 0.10
QUICK LOOK Repeatedly Asked Questions
.......
Answer :
Central Government to prescribe Accounting Standards According to Sec. 133 of Companies Act, 2013, the
Central Government may prescribe the standards of accounting or any addendum thereto, as recommended by the
Institute of Chartered Accountants of India, constituted under Sec. 3 of the Chartered Accountants Act, 1949, in
consultation with and after examination of the recommendations made by the National Financial Reporting
Authority. The Accounting Standard are mandatory and applicable to all companies while preparing financial
statement of the company.
Where the financial statement of the company do not comply with the accounting standard, such companies shall
disclose in its financial statement the following :
1. The deviation from the accounting standard;
2. The reasons for such deviation; and
3. The financial effect, if any, arising due to such deviation.
(4 marks) Answer :
Enterprises which fall in any one or more of following categories are
1. Enterprises, whose equity or debt securities are either listed or are in the process to be listed in India or outside
India.
2. Banks, Insurance Companies and Financial institutions.
3. All commercial, industrial and other reporting business enterprises, whose total turnover during the previous
year exceeds`50 crores (as per the audited financial statement).
4. All commercial, industrial and other reporting business enterprises, whose total borrowings including public
deposits during the previous year exceeds ` 10 crores (as per audited financial statement).
5. Holding or subsidiary company of any of the above enterprises any time during the year.
Space to write important points for revision
(4 marks) Answer:
Accounting Standard-1 recognizes three fundamental accounting assumptions. These are as follows:
1. Going Concern: The financial statements are normally prepared on the
assumption that an enterprise will continue its operations in the foreseeable future and neither there is intention, nor
there is need to materially curtail the scale of operations.
2. Consistency: The principle of consistency refers to the practice of using same accounting policies for similar
transactions in all accounting periods unless the change is required (I) by a statute, (ii) by an accounting standard or
(iii) for more appropriate presentation of financial statements.
3. Accrual Basis of Accounting: Under this basis of accounting, transactions are recognised as soon as they occur,
whether or not cash or cash equivalent is actually received or paid.
The company decides to change from FIFO method to weighted 15. On the basis of weighted average method,
closing inventory as on 31.03.2015 amounts to`1,47,000. Realisable value of the inventory as on 31.03.2015
amounts to ` 1,95,000.
Discuss disclosure requirement of change in accounting policy as per AS -1.
(5 marks) Answer:
As per AS -1, Disclosure of Accounting Policies, accounting policies refers to the accounting principles and
method of applying those principles in the preparation and presentation of financial statements.
So if there is change in the accounting policies the firm should disclose in it’s statements:
1. The fact that there is change in accounting policy.
2. The reason for change in accounting policies.
3. The effect of such change in the financial statements.
So in this case M/s. Prashant Ltd. changes valuation of inventory from FIFO to weighted average. Therefore, the
firm should disclose in it’s financial statement:
1. There is a change in valuation of inventory from FIFO to weighted
average.
2. The reason why such change is to be made: The company values its
inventory at lower of cost and net realisable value. Since net realisable
value of all items of inventory in the current year was greater than
respective costs, the company valued its inventory at cost. In the present
year i.e. 2014-15, the company has changed to weighted average
method, which better reflects the consumption pattern of inventory, for
ascertaining inventory costs from the earlier practice of using FIFO for
the purpose.
3. The effect of such change in the financial statement: The change in
policy has reduced current profit and value of inventory by ` 16,000.
ABC Financial Services Ltd. is engaged in the business of financial services and is undergoing tight liquidity
position, since most of the assets of the company are blocked in various claims/petitions in a Special Court. ABC
Financial Services Ltd. has accepted Inter-Corporate Deposits (ICDs) and it is making its best efforts to settle the
dues. There were claims at varied rates of interest, from lenders, from the due date of ICDs to the date of repayment.
The company has provided interest, as per the terms of the contract till the due date and a note for non-provision of
interest from the due date to date of repayment was mentioned in financial statements. On account of uncertainties
existing regarding the determination of the amount and in the absence of any specific legal obligation at present as
per the terms of contracts, the company considers that these claims are in the nature of “claims against the company
not acknowledged as debt”, and the same has been disclosed by way of a note in the accounts instead of making a
provision in the Profit and Loss Account.
State whether the treatment done by the company is correct or not as per relevant Accounting Standard. (5 marks)
Answer:
As per AS -1, “Disclosure of Accounting Policies,” following are major considerations that govern selection of
a particular Policy: 1. Prudence
2. Substance over form and
3. Materiality
As per the above considerations and in view of uncertainty associated with future events, profits are not
anticipated, but losses are provided for as a matter of conservatism. Provision should be created for all known
liabilities and losses even though the amount cannot be determined with certainty and represents only a best
estimate in the light of available information.
As per AS -1, ‘Accrual’ is one of the fundamental accounting assumptions. Irrespective of the terms of the contract,
so long as the principal amount of a loan is not repaid, the lender cannot be placed in a disadvantageous position for
non-payment of interest in respect of overdue amount. From the facts given in the question, it is apparent that the
company has an obligation to pay because of the overdue interest amount.
Thus, in the given case, ABC Financial Services Ltd. should make provision for interest from the due date of ICDs
to date of repayment even though the amount cannot be determined. Thus, it should represent only a best estimate in
the light of available information.
Thus, the treatment done by the company that these claims are in nature of “claims against the company not
acknowledged as debt” and the disclosure by way of note in the accounts instead of making a provision in the P & L
A/c is not correct as per AS -1.
HIL Ltd. was making provision for non-moving stocks based on no issues having occurred for the last 12 months
upto 31.03.2017. The company now wants to make provision based on technical evaluation during the year ending
31.03.2018.
Total value of stock ` 120 lakhs
Provision required based on technical evaluation ` 3.00 lakhs Provision required based on 12 months no issues ` 4.00
lakhs You are requested to discuss the following points in the light of Accounting Standard (AS) – 1:
Answer:
The decision of making provision for non-moving inventories on the basis of technical evaluation does not amount
to change in accounting policy. Accounting policy of a company may require that provision for non-moving stocks
(inventories) should be made. The method of estimating the amount of provision may be changed. In case a more
prudent estimate can be made. In the given case, considering the total value of stock, the change in the amount of
required provision of non-moving stock from`4 lakhs to`3 lakhs is also not material. The disclosure can be made for
such change in the following lines by way of notes to the accounts in the annual accounts of HIL Ltd. for the year
2017-18:
“The company has provided for non-moving stocks on the basis of technical evaluation unlike preceding years. Had
the same method been followed as in the previous year; the profit for the year and the corresponding effect on the
year end net assets would have been lower by ` 1 lakh.”
4 AS - 2 Valuation of Inventories
Q.4.1 2008 - May [6] (f), RTP Descriptive What are the items that are to be excluded in determination of the cost
of inventories as per AS - 2? (4 marks) OR 2012 - Nov [7] (d) Descriptive
“In determining the cost of inventories, it is appropriate to exclude certain costs and recognize them as expenses in
the period in which they are incurred.” Provide example of such costs as per AS-2: Valuation of Inventories. (4
marks)
Answer:
Para 13 of AS-2 Valuation of Inventories lists down the specific costs which are to be excluded from cost of
inventories.
The list is as follows:
1. Abnormal amounts of wasted materials, labour or other production
cost.
2. Storage costs, unless those costs are necessary in the production process prior to a further production stage.
3. Administrative overheads that do not contribute to bringing the inventories to their present location and
condition; and
4. Selling and distribution costs.
As per Para 12, Interest and other borrowing costs are usually considered as not related to bringing the inventories to
their present location and condition and are therefore usually not included in the cost of inventory. Space to write
important points for revision
State whether the following statement is ‘True’ or False’. Also give reason for your answer.
3. As per the provisions of AS-2, inventories should be valued at the
Answer:
This statement is False
As per AS 2, inventories should be valued at the lower of cost and net realisable value.
Net reliable value = Selling Price - Cost necessary to make sell.
Q.4.3 2009 - Nov [1] (vii) Practical From the following data, find out value of inventory as on 30.04.2009 using (a)
LIFO method, and (b) FIFO method :
(1) 01.04.2009 Purchased 10 units @ ` 70 per unit
(2) 06.04.2009 Sold 6 units @ ` 90 per unit
Total ` 730 (b) Statement showing valuation of closing inventory by FIFO method Date Receipts Issue Balance
Unit Cost/ Amount Unit Cost/ Amount Unit Cost/ Amount Unit Unit Unit
Value of closing inventory as per FIFO method: Unit Rate Total 10 ` 75 ` 750 Space to write important points
for revision
Q.4.4 2010 - May [6] (d) Practical
Raw materials inventory of a company includes certain material purchased at` 100 per kg. The price of the material
is on decline and replacement cost of the inventory at the year end is`75 per kg. It is possible to convert the material
into finished product at conversion cost of ` 125.
Decide whether to make the product or not to make the product, if selling price is (i)` 175 and (ii)` 225. Also find
out the value of inventory in each case. (4 marks)
Answer:
Provision:
According to Para 24 of AS-2 ‘Valuation of Inventories’, materials and other supplies held for use in the
production of inventories are not written down below cost if the finished products in which they will be incorporated
are expected to be sold at or above cost. But when there has been a decline in the price of materials and it is
estimated that the cost of the finished products will exceed net realizable value, the materials are written down to net
realisable value.
Analysis and Conclusion:
In such circumstances, the replacement cost of the materials may be the best available measure of their net
realisable value.
HP is a leading distributor of petrol. A detail inventory of petrol in hand is taken when the books are closed at the
end of each month. At the end of month following information is available :
Sales ` 47,25,000
General overheads cost ` 1,25,000
Inventory at beginning1,00,000 litres @ 15/- per litre
Purchases
June 1 two lakh litres @ 14.25
June 30 one lakh litres @ 15.15
Closing inventory 1.30 lakh litres
Compute the following by the FIFO as per AS-2 :
Answer :
(i) Cost of Closing Inventory for 1,30,000 litres as on 30th June Particulars ` 1,00,000 litres @ 15.15 15,15,000
30,000 litres @ 14.25 4,27,500 Total 19,42,500
(ii) Computation of Cost of Goods Sold
Particulars ` Opening inventories (1,00,000 litres @ 15) 15,00,000 Purchases June-1 (2,00,000 litres @ 14.25)
28,50,000
June-30 (1,00,000 litres @ 15.15) 15,15,000 58,65,000 Less : Closing inventories (19,42,500) Cost of goods sold
39,22,500 (iii) Computation of Profit
Best Ltd. deals in five products, P, Q, R, S, and T which are neither similar nor interchangeable. At the time of
closing of its accounts for the year ending 31st March 2011, the historical cost and net realisable value of the items
of the closing stock are determined as follows:
Answer:
According to AS 2 “Valuation of Inventories, inventories should be valued at the lower of cost and net realizable
value. Inventories should be written down to net realizable value on an item-by-item basis.
Valuation of inventory (item wise) for the year ending 31st March 2011
Item Historical Cost Net realizable Value Valuation of closing stock (`) (`) (`)
23,29,000 The value of inventory for the year ending 31st March 2011 =` 23,29,000 Space to write important points
for revision
Q.4.7 2012 - Nov [7] (b) Practical From the following information ascertain the value of stock as on 31st March,
2012:
Answer:
Statement showing valuation of stock as on 31.3.2012
Particulars ` ` Stock as on 01.04.2011 28,500 Less : Book value of abnormal stock ( 6,500) 22,000
( ` 10,000 ☐` 3,500)
Add : Purchases 1,52,500
Manufacturing Expenses 30,000
2,04,500
Less : Cost of Sales :
Sales as per Books 2,49,000 Less : Sales of Abnormal item (9,000) Less : Gross Profit @ 20% 2,40,000 Value of
Stock as on 31st March, 2012 (48,000) (1,92,000) 12,500
Space to write important points for revision
On 31stMarch 2013 a business firm finds that cost of a partly finished unit on that date is`530. The unit can be
finished in 2013-14 by an additional expenditure of` 310. The finished unit can be sold for` 750 subject to payment
of 4% brokerage on selling price. The firm seeks your advice regarding:
(i) the amount at which the unfinished unit should be valued as at 31st
440
Less: Brokerage( 4% of 750) 30
Net Realisable Value 410
Cost of inventory 530
Value of inventory (Lower of cost and net realisable value) 410
Incremental cost ` 310 (cost to complete) is less than incremental revenue `720 (`750 `30). The enterprise will
therefore decide to finish the unit for sale at` 750.
Note: The aforesaid solution is based on assumption that partly finished unit cannot be sold in semi finished form
and its NRV is zero without processing it further.
Capital Cables Ltd., has a normal wastage of 4% in the production process. During the year 2013-14 the Company
used 12,000 MT of raw material costing ` 150 per MT.
At the end of the year 630 MT of wastage was in stock. The accountant wants to know how this wastage is to be
treated in the books. Explain in the context of AS 2 the treatment of normal loss and abnormal loss and also find out
the amount of abnormal loss if any.
Answer:
According to AS-2, (Revised) ‘Valuation of Inventories’, abnormal amounts of wasted materials, labour and other
production costs are excluded from cost of inventories and such costs are recognised as expenses in the period in
which they are incurred.
The amount of normal loss will be included in computing the cost of inventories (finished goods) at the year end.
Amount of Abnormal Loss:
Mr. Mehul gives the following information relating to items forming part of inventory as on 31-3-2015. His factory
produces Product X using Raw material A.
(i) 600 units of Raw material A (purchased @`120). Replacement cost of raw material A as on 31-3-2015 is ` 90 per
unit.
(ii) 500 units of partly finished goods in the process of producing X and cost incurred till date` 260 per unit. These
units can be finished next year by incurring additional cost of ` 60 per unit.
(iii) 1500 units of finished Product X and total cost incurred `320 per unit. Expected selling price of Product X is `
300 per unit.
Determine how each item of inventory will be valued as on 31-3-2015. Also calculate the value of total inventory as
on 31-3-2015. (5 marks)
Answer:
(i) Valuation of Raw Material: If finished product is expected to be sold below cost then raw material should be
valued at NRV if there is decline in price of material. In such circumstances, the replacement cost of materials may
be best available measure of their net realizable value.
Here product x is expected to be sold at` 300 per unit which is below than total cost per unit which is ` 320. Then
raw material is to be valued at replacement cost.
So, valuation of raw material is done as follows:
No. of units × Replacement Cost/unit = 600 × 90 = ` 54,000 Raw material is to be valued at ` 54,000
(ii) Valuation of WIP : 500 units of partly finished goods will be valued at ` 240 per unit i.e. lower of cost` 320 (`
260 + additional cost` 60) or Net estimated selling price` 240 (Estimated selling price ` 300 per unit less additional
cost of ` 60).
(iii) Cost of Finished Goods: As per AS-2, inventory is to be valued at cost or realizable value which ever is lower.
Here the cost of finished good is ` 320 per unit and finished good is expected to be sold at ` 300 which is less than
the cost of finished goods. So, finished good is valued at expected selling price, as calculated follows: 1500 units × `
300 per unit = ` 4,50,000
So, finished good is valued at ` 4,50,000 to the year end.
Particulars Amount (`) (i) Valuation of raw material 54,000 (ii) Valuation of partly finished goods 1,20,000 (iii)
Valuation of finished goods 4,50,000
Total valuation of inventory as on 31.3.2015 6,24,000 Space to write important points for revision
Q.4.11 2016 - May [1] {C} (d) Practical
Z Limited ordered 13,000 kg. of chemicals at ` 90 per kg. The purchase price includes GST of ` 5 per kg. in respect
of which full Input credit is admissible. Freight incurred amounted to ` 30,000. Normal transit loss is 4%. The
company actually received 12,400 kg. and consumed 10,000 kg. The company has received trade discount in the
form of cash amounting to ` 1 per kg. The chemicals were delivered in containers. The containers were not reusable,
hence sold for ` 500. The administrative expenses incurred to bring the chemicals were ` 10,000.
Compute the value of inventory and allocate the material cost as per AS-2.
Note:
1. The Company has received trade discount in the form of cash. Therefore, discount has been treated as trade
discount in the given answer.
2. Abnormal losses are recognized as separate expenses.
3. Containers are used for delivery of the chemicals and are not reusable. Cost of these containers is treated as
selling and distribution expense. The sale value of these containers will be credited to Profit and Loss Account and
shall not be considered for the purpose of valuation of inventory.
Alternatively, the sales value of container amount of ` 500 may be deducted, while computing material cost. In that
case the material cost will be computed as`11,31,500 (11,32,000-500) instead of`11,32,000. Accordingly the
allocation of material cost will get changed. Space to write important points for revision
A Limited is engaged in manufacturing of Chemical Y for which Raw Material X is required. The company
provides you following information for the year ended 31st March, 2017.
Additional Information:
(i) Total fixed overhead for the year was` 4,00,000 on normal capacity of 20,000 units.
(ii) Closing balance of Raw Material X was 1,000 units and Chemical Y was ` 2,400 units.
You are required to calculate the total value of closing stock of Raw Material X and Chemical Y according to AS 2,
when
(a) Net realizable value of Chemical Y is ` 800 per unit
(b) Net realizable value of Chemical Y is ` 600 per unit (5 marks)
Answer:
Valuation of finished goods stock:
Fixed Production20
` 660 ☐ Cost per unit of finished goods = ` 660 per unit.
=` 14,40,000
Valuation of Raw Materials:
(a) Cost per unit of Raw Material:
(b) Total value of Raw Materials (Closing Stock) 1. Finished Goods are valued at cost
finished goods are valued at cost.] — Total value for ` 1,000 units = 1000 ×` 440
=` 4,40,000
Wooden Plywood Limited has a normal wastage of 5% in the production process. During the year 2017-18, the
Company used`16,000 MT of Raw material costing`190 per MT. At the end of the year, 950 MT of wastage was in
stock. The accountant wants to know how this wastage is to be treated in the books.
You are required to:
1. Calculate the amount of abnormal loss.
2. Explain the treatment of normal loss and abnormal loss.
Answer:
• As per AS 2 (Revised) ‘Valuation of Inventories’, abnormal amounts of wasted materials, labours and other
production costs are excluded from cost of inventories and such costs are recognised as expenses in the period in
which they are incurred. The normal loss will be included in determining the cost of inventories (finished goods) at
the year end.
• Amount of Abnormal loss:
Material used 16000 MT @ ` 190 = ` 30,40,000
Normal loss (5% of 16000 MT) 800 MT
Net quantity of material 15,200 MT
Abnormal loss in quantity 150 MT
Abnormal loss ` 30,000
Mr. Rakshit gives the following information relating to items forming part of inventory as on 31stMarch, 2019. His
factory produces product X using raw material A.
(i) 800 units of raw material A (purchased @ ` 140 per unit). Replacement cost of raw material A as on 31st March,
2019 is` 190 per unit.
(ii) 650 units of partly finished goods in the process of producing X and cost incurred till date`310 per unit. These
units can be finished next year by incurring additional cost of ` 50 per unit.
(iii) 1,800 units of finished product X and total cost incurred ` 360 per unit.
Expected selling price of product X is ` 350 per unit.
In the context of AS-2, determine how each item of inventory will be valued as on 31st March, 2019. Also, calculate
the value of total inventory as on 31st March, 2019. (5 marks)
Answer:
(i) Inflows of cash receipts from operating activities: (a) Cash receipts from rendering of services.
(b) Cash receipts from the sale of goods.
(c) Refund of income-tax .
(d) Royalties, fees, commission and other revenues.
instruments of other enterprises and interest in joint ventures. Space to write important points for revision
Q.5.2 1999 - Nov [1](b) Descriptive What are the main features of the cash flow statement? Explain with special
reference to AS 3? (5 marks)
Answer :
Main features of cash flow statements (As per AS-3) :
1. According to AS-3, cash flow statement deals with the provisions of
information about the historical changes in cash and cash equivalents of an enterprise during the stated period from
operating, investing and financing activities.
2. Cash flow from operating activities can be reported using either:
(i) the direct method, in which mostly the classes of gross cash receipts and gross cash payments are disclosed.
(ii) the indirect method, in this net profit or loss is adjusted for the purpose of transactions of non-cash nature.
3. According to AS-3, an enterprise must disclose the components of cash and cash equivalents and must present a
reconciliation of amounts in its cash flow statement with the equivalent items reported in the balance sheet.
4. When the cash flow statement is used alongwith the other financial statements, it provides information that
enables the user to evaluate the changes in net assets of an enterprise. This statement also enhances the
comparability of the operating performances.
5. For companies listed on stock exchanges compliance of AS-3 is compulsory due to the listing agreement.
Space to write important points for revision
Define briefly the classification of activities, as suggested in Accounting Standard 3, to be used for preparing a cash
flow statement. Give two examples of each such class of activities. (4 marks)
Answer :
According to AS-3 (Cash Flow Statement), the cash flow statement must report cash flows by operating,
investing and financing activities: 1. Operating Activities: These are the principal revenue producing
activities of the enterprise. This activity does not include in it the investing and financing activities. Examples of
operating activities are, cash receipt from the sale of goods and cash payment to the supplier of goods.
2. Investing Activities: These activities include the acquisition and disposal of long-term assets and other
investments which are not included in cash equivalents.
Example of investing activities are payment made on acquiring building for business or cash received from the sale
of furniture.
3. Financing Activities: Those activities that results in changes in the size and composition of the owner's capital
and borrowing of the enterprise. Example of the financing activities are cash proceed from issue of shares and cash
paid to redeem debentures.
(v) Insurance claim received towards loss of machinery by fire (vi) Bad debts written off
Which activity does the purchase of business falls under and whether netting off of aggregate cash flows from
disposal and acquisition of business units is possible? (4 marks)
Answer:
Classification as per AS-3
(i) Interest paid by financial enterprise: Cash flow from operating activities.
(ii) Dividend paid: Cash flow from financing activities.
(iii) TDS on Interest received from subsidiary Company: Cash flow
Answer:
Classification of Activities
Interest received on investment (TDS of ` 8,200 was deducted on the above interest) 73,800 Purchased debentures of
X Ltd., on 1st December, 2018 which are redeemable within 3 months 3,00,000 Book value of plant & machinery
sold (loss incurred` 9,600) 90,000 (5 marks)
6 AS - 10 Property, Plant and Equipment
Q.6.1 2008 - Nov [5] (ii) Descriptive Mention four Assets, where AS - 10 is not applicable. (2 marks) Answer :
AS-10 deals with “Property, Plant and Equipment”.
To Revaluation Reserve A/c 50,00,000 (Being the increase in value of fixed asset
due to upward revaluation)
b. Profit and Loss A/c Dr. 30,00,000
Note: It has been assumed that both the above instances are independent of each other and revaluation is done for
first time.
Space to write important points for revision
Q.6.3 2010 - May [1] (v), RTP Practical
A company acquired a machine on 1.4.2006 for `5,00,000. The company charged depreciation upto 2008-09 on
straight line basis with estimated working life of 10 years and scrap value of ` 50,000. From 2009 -10, the company
decided to change depreciation method at 20% on reducing balance method. Compute the amount of depreciation to
be debited to Profits and Loss A/c for the year 2009 - 10. (2 marks)
Answer :
Annual depreciation charged by the company up to 2008-09 =
= = ` 45,000
WDV of machine at the end of 2008-09 by Straight Line Method (SLM) =` 5,00,000 – (` 45,000 × 3) =` 3,65,000
Depreciation to be charged in 2009-2010
Book value of the machine as per SLM as on 2008-09 = 3,65,000
Answer :
Provision:
According to AS-10 Property, Plant and Equipment, the cost of an item of PPE shall be recognised as an asset if
and only if
(i) It is probable that future economic benefits associated with the item will flow to the firm.
Answer :
Value in use is the present value of estimated future cash flow expected to arise from the continuing use of an asset.
Therefore,
☐ Value in use* = ` 25,000x(0.909 +0.826 + 0.751+ 0.683 + 0.621)
☐ Carrying amount is the amount at which an asset is recognized in the balance sheet after deduction any
accumulated depreciation (amortization) and accumulated impairment losses thereon.
☐ In the given case, carrying amount of machine will be lower of its recoverable amount ` 94,750 and its book
value i.e. ` 1,00,000. Therefore, the enterprise should carry its machine at value of` 94,750.
In the Trial Balance of M/s Sun Ltd. as on 31-3-2011, balance of machinery appears`5,60,000. The company follows
rate of depreciation on machinery @ 10% p.a.. On scrutiny it was found that a machine appearing in the books on 1-
4-2010 at`` 9-2010 at ` 1,35,000 in part exchange of a new machine costing ` 1,50,000.
You are required to calculate:
(i) Total depreciation to be charged in the Profit and Loss Account. (ii) Loss on exchange of machine.
(iii) Book value of machinery in the Balance Sheet as on 31-3-2011.
(5 marks) Answer :
Assumption: The question has been solved on the basis of written down value method due to absence of related
information regarding straight line method.
7,500
Total depreciation on machinery in use 47,500
Add: Depreciation on machine disposed of (10% for
6 months)8,000
So, total depreciation to be charged in statement of Profit and Loss 55,500 (ii) Loss on Exchange of Machine
Particulars ` Book value of machine as on 1.4.2010 1,60,000 Less: Depreciation for 6 months @ 10% (8,000)
Written Down Value as on 30.9.2010 1,52,000 Less: Exchange value (1,35,000) Loss on exchange of machine
17,000
M/s. Tiger Ltd. allotted 7500 equity shares of ` 100 each fully paid up to Lion Ltd. in consideration for supply of a
special machinery. The shares exchanged for machinery are quoted at National Stock Exchange (NSE) at` 95 per
share, at the time of transaction. In the absence of fair market value of the machinery acquired, how the value of the
machinery would be recorded in the books of Tiger Ltd ? (4 marks)
Answer :
Provision:
According to AS 10 ‘Property, Plant and Equipment,’ fixed asset acquired in exchange for shares or other
securities in the enterprise should be recorded at its fair market value, or the fair market value of the securities
issued, whichever is more clearly evident.
Analysis and Conclusion:
In the given case the market value of the shares exchanged for the asset is more clearly evident therefore the
company should record the value of machinery at ` 7,12,500 (i.e., 7,500 shares × ` 95 per share) being the market
price of the shares issued in exchange.
M/s Progressive Company Limited has not charged depreciation for the year ended on 31st March, 2012, in respect
of a spare bus purchased during the financial year 2011-12 and kept ready by the company for use as a stand-by , on
the ground that, it was not actually used during the year. State your views with reference to Accounting Standard 10
“Property, Plant and Equipment”.
Further during the year company made additions to its factory by using its own workforce, at a cost of ` 4,50,000 as
wages and materials. The lowest estimate from an outside contractor to carry out the same work was ` 6,00,000.
The directors contend that, since they are fully entitled to employ an outside contractor, it is reasonable to debit the
Factory Building Account with`6,00,000. Comment whether the directors’ contention is right in view of the
provisions of Accounting Standard 10? (5 marks)
Answer :
Provisions:
According to AS-10, ‘Property, Plant and Equipment,’:
• Depreciation is a measure of wearing out, consumption or other loss of
value of a depreciable asset arising from use, effluxion of time or obsolescence through technology and market
changes.
• Accordingly, depreciation may arise even when asset has not been used in the current year but was ready for use in
that year.
• The need for using the stand by bus may not have arisen during the year but that does not imply that the useful life
of the bus has not been affected. Therefore, non-provision of depreciation on the ground that the bus was not used
during the year is not tenable.
• As per AS-10, ‘Property, Plant and Equipment,’ the gross book value of the self constructed fixed asset includes
the costs of construction that relate directly to the specific asset and the costs that are attributable to the construction
activity in general can be allocated to the specific asset. If any internal profit is there it should be eliminated. Saving
of`1,50,000 on account of using its own workforce is an unrealized/internal profit, which should not be
capitalized/recorded as per the standard.
Analysis and Conclusion:
Therefore only` 4,50,000 should be debited to the factory building account
and not ` 6,00,000.
Hence, the contention of the directors of the company to capitalize
`6,00,000 as cost of factory building, on the ground that the company is fully
entitled to employ an outside contractor is not justifiable.
Q.6.9 2012 - May [7] (c) Practical A computer costing ` 60,000 is depreciated on straight line basis,
assuming 10 years working life and Nil residual value, for three years. The estimate of remaining useful life after
third year was reassessed at 5 years. Calculate depreciation as per the provisions of Accounting Standard 10
“Property, Plant and Equipment”. (4 marks)
Answer:
Depreciation per year = ` 60,000/10 = ` 6,000
Depreciation on SLM charged for three years =`6,000 × 3 years =`18,000 Book value of the computer at the end of
third year = ` 60,000 - ` 18,000 =` 42,000
Remaining useful life as per previous estimate = 7 years
Remaining useful life as per revised estimate = 5 years
Depreciation from the fourth year onwards =`42,000/5 =`8,400 per annum
PQR Ltd. constructed a fixed asset and incurred the following expenses on its construction: ` Materials 16,00,000
Direct Expenses 3,00,000 Total Direct Labour 6,00,000 (1/15th of the total labour time was chargeable to
the construction)
Total Office & Administrative Expenses 9,00,000 (4% is chargeable to the construction)
Depreciation on assets used for the construction of this asset 15,000 Calculate the cost of the fixed asset. (4 marks)
Materials 16,00,000
Direct expenses 3,00,000
Direct labour (1/15th of ` 6,00,000) 40,000
Office and administrative expenses (4% ` 9,00,000) 36,000
Depreciation on assets 15,000
Cost of fixed asset 19,91,000
Note: It is assumed that 4% of office and administrative expenses are specifically attributable to construction of a
fixed asset. Alternatively, it may be assumed that 4% of office and administrative expenses are only allocated to
construction project and is not specifically attributable to it. In such a case, the cost of fixed assets will be `
19,55,000.
Amna Ltd. contracted with a supplier to purchase a specific machinery to be installed in Department A in two
months time. Special foundations were required for the plant, which were to be prepared within this supply lead
time. The cost of site preparation and laying foundations were ` 47,290. These activities were supervised by a
technician during the entire period, who is employed for this purpose of` 15,000 per month. The Technician’s
services were given to Department A by Department B, which billed the services at ` 16,500 per month after adding
10% profit margin.
The machine was purchased at `52,78,000. GST was charged at 18% on the invoice.` 18,590 transportation charges
were incurred to bring the machine to the factory. An Architect was engaged at a fee of ` 10,000 to supervise
machinery installation at the factory premises. Also, payment under the invoice was due in 3 months. However, the
Company made the payment in 2nd month. The company operates on Bank Overdraft @ 11%. Ascertain the amount
at which the asset should be capitalized under AS 10.
(5 marks)
Answer:
Cost of machinery is calculated as under:
On 01.04.2010 a machine was acquired at ` 4,00,000. The machine was expected to have a useful life of 10 years.
The residual value was estimated at 10% of the original cost. At the end of the 3rd year, an attachment was made to
the machine at a cost of` 1,80,000 to enhance its capacity. The attachment was expected to have a useful life of 10
years and zero terminal value. During the same time the original machine was revalued upwards by ` 90,000 and
remaining useful life was reassessed at 9 years and residual value was reassessed at NIL.
Find depreciation for the year, if
Answer :
(i) If attachment retains its Separate Identify
Cost of Machine on 1.4.10 = 4,00,000
Less: Residual Value 10% = 40,000
Depreciable Value = 3,60,000
Estimated Useful life =10 years
Dep. p.a. = 3,60,000 ÷ 10 = ` 36,000 Total Dep. in 3 years = 36,000 × 3 =` 1,08,000 WDV for 4th year = 4,00,000
-1,08,000 = 2,92,000 Upward Revaluation of Original Machine = 90,000
WDV for 4th year after revaluation = 2,92,000 + 90,000 = 3,82,000 Remaining useful life = 9 years
Dep. in 4th year = 3,82,000 ÷ 9 = ` 42,444 Dep. on attachment = 1,80,000 ÷ 10 = ` 18,000 Total Depreciation =
42,444 + 18,000 = ` 60,444. Note:
1. Since, upward revaluation of the machine and reassessment of
remaining useful life had been made at the end of the 3rd year, it is implied that depreciation for the 3rd year has
been charged on the basis of old calculation & remaining useful life of 9 years is to be calculated from the beginning
of the 4th year onwards.
2. Depreciation for the 4th year i.e. 2013-14 has been given in the solution.
Life = 9 years
Depreciation = 5,62,000 ÷ 9 = ` 62,444 Space to write important points for revision
Q.6.13 2014 - Nov [1] {C} (a) Practical In the books of Optic Fiber Ltd., plant and machinery stood at`6,32,000 on
1.4.2013. However on scrutiny it was found that machinery worth`1,20,000
was included in the purchases on 1.6.2013. On 30.6.2013 the company disposed a machine having book value of `
1,89,000 on 1.4.2013 at ` 1,75,000 in part exchange of a new machine costing ` 2,56,000. The company charges
depreciation @ 20% WDV on plant and machinery. You are required to calculate:
Answer :
(i) Depreciation to be charged in the statement of Profit and Loss
Particulars (`) Depreciation on old Machinery 31,600 [20% on ` 6,32,000 for 3 months]
From the following information state the amount to be capitalized as per AS 10. Give the explanations for your
answers.
` 5 lakhs as routine repairs and` 1 lakh on partial replacement of a part of a machine.
` 10 lakhs on replacement of part of a machinery which will improve the efficiency of a machine. (4 marks)
Answer :
As per AS-10 “Property, Plant and Equipment”, only those expenditures that increase the future benefits from
the existing assets, beyond its previously assessed standard of performance, are to be included in the gross book
value.
Hence, in the given case, amount of ` 5 lakhs spent on routine repairs and` 1 lakh on partial replacement of a part of
the machinery should be charged to Profit and Loss Account as these amounts will help in maintaining the capacity
but will not improve the efficiency of the machine.
However, `10 lakhs incurred on replacement of a part of the machinery, which will increase the efficiency of a
machine, should be capitalized by inclusion in the gross book value of machinery.
Space to write important points for revision
Q.6.15 2015 - May [7] (e) Practical
Versatile Limited purchased Machinery for `4,80,000 (inclusive of GST of ` 40,000). Input Tax credit is available
for the GST paid. The Company incurred the following other expenses for installation.
Particulars ` Cost of preparation of site for installation 21,000 Total labour charges (200 out of the total 600 man
hours worked, were spent for installation of the Machinery) 66,000 Spare parts and tools consumed in installation
6,000 Total salary of supervisor (time spent for installation was 25% of the total time worked) 24,000 Total
administrative expenses (1/10 relates to the plant installation) 32,000 Test run and experimental production expenses
23,000 Consultancy charges to architect for plant set up 9,000 Depreciation on assets used for the installation 12,000
The Machine was ready for use on 15th January but was used from 1st February. Due to this delay further
costs`19,000 were incurred. Calculate the value at which the plant should be capitalized. [Modified] (4 marks)
Answer:
A machinery with a useful life of 6 years was purchased on 1stApril, 2012 for` 1,50,000. Depreciation was provided
on straight line method for first three years considering a residual value of 10% of cost.
In the beginning of fourth year the company reassessed the remaining useful life of the machinery at 4 years and
residual value was estimated at 5% of original cost.
The accountant recalculated the revised depreciation historically and charged the difference to profit and loss
account. You are required to comment on the treatment by accountant and calculate the depreciation to be charged
for the fourth year. (5 marks)
Answer:
According to AS-10 “Property, Plant and Equipment”, if the depreciable assets are revalued, the provision for
depreciation should be based on the revalued amount and on the estimate of the remaining useful lives of such
assets. In case the revaluation has a material effect on the amount of depreciation, the same should be disclosed
separately in the year in which revaluation is carried out.
As per the standard, when there is a revision of the estimated useful life of an asset, the unamortized depreciable
amount should be charged over the revised remaining useful life. Accordingly revised depreciation shall be
calculated prospectively. Thus, the treatment done by the accountant regarding recalculating the revised
retrospectively is incorrect.
Calculation of Depreciation
Depreciation per year charged for first three years
WDV of the machine at the beginning of the fourth year
depreciation historically i.e.
=` 1,35,000 /6 = ` 22,500
of residual vale
=` 82,500 - 7,500
= ` 75,000
Remaining useful life as per revised estimate = 4 years Depreciation from the fourth year onwards =` 75,000/4
Hema Ltd. purchased a machinery on 1.04.2008 for ` 15,00,000. The company charged straight line depreciation
based on 15 years working life estimate and residual value ` 3,00,000. At the beginning of the 4th year, the company
by way of systematic evaluation revalued the machinery upward by 20% of net book value as on date and also re-
estimated the useful life as 7 years and scrap value as nil. The increase in net book value was credited directly to
revaluation reserves. Depreciation (on SLM basis) later on was charged to Profit & Loss Account. At the beginning
of 8thyear the company decided to dispose off the machinery and estimated the realizable value to ` 2,00,000.
You are required to ascertain the amount to be charged to Profit & Loss Account at the beginning of 8th year with
reference to AS-10. (5 marks)
Answer:
Calculation of Depreciation:
Cost of Machinery as on 1.4.2008 = ` 15,00,000
Depreciation p.a. = `
= ` 80,000
☐ Depreciation for 3 years (1.4.2008 to 31.3.2011) =` 80,000 × 3
` 12,60,000
Revised Net Book Value as on 1.4.2011:
Book Value (Less: Depreciation) ` 12,60,000
Add: Increase in book value @ 20% ` 2,52,000
` 15,12,000
Thus:
Increase in Revaluation to be taken to Revaluation Reserve =` 12,60,000 – ` 15,12,000 = ` 2,52,000
= ` 2,16,000 × 4 = ` 8,64,000
Thus:
Net Book Value of Machinery as on 1.4.2015:
Revised Book Value as on 1.4.2011= ` 15,12,000 Less: Depreciation for 4 years ` (8,64,000)
` 6,48,000
Deemed Book Value of Machinery on 1.4.2015
If Revaluation had not taken place ` 15,00,000
Less: Depreciation for first 3 years ` (2,40,000) ` 12,60,000
Less: Depreciation for next 4 years = = ` 7,20,000
` 5,40,000
Loss on Disposal Book Value (1.4.2015) ` 6,48,000
Less: Realisable Value on Disposal ` 2,00,000
` 4,48,000
Deemed Book Value ` 5,40,000
Less: Realisable Value on Disposal ` 2,00,000
` 3,40,000
Thus:
Loss to be debited (Adjusted in Revaluation Reserve)
=` 4,48,000 – ` 3,40,000 =` 1,08,000
Amount to be debited (Adjusted in Profit and Loss A/c)
=` 4,48,000 – ` 1,08,000 =` 3,40,000
Balance in Revaluation Reserve transferred to General Reserve =` 2,52,000 – ` 1,08,000 =` 1,44,000.
Space to write important points for revision
ABC Ltd. is installing a new plant at its production facility. It provides you the following information:
Cost of the plant (cost as per supplier’s invoice) ` 31,25,000 Estimated dismantling costs to be incurred after 5 years
` 2,50,000 Initial Operating losses before commercial production ` 3,75,000 Initial delivery and handling costs `
1,85,000 Cost of site preparation ` 4,50,000 Consultants used for advice on the acquisition of the plant ` 6,50,000
Please advise ABC Ltd. on the costs that can be capitalised for plant in accordance with AS 10 : Property, Plant and
Equipment.
(5 marks)
Answer:
As per AS-10, PPE, the costs will be capitalised as follows:
Neon Enterprise operates a major chain of restaurants located in different cities. The company has acquired a new
restaurant located at Chandigarh. The new restaurant requires significant renovation expenditure. Management
expects that the renovations will last for 3 months during which the restaurant will be closed.
Management has prepared the following budget for this period – Salaries of the staff engaged in preparation of
restaurant before its opening ` 7,50,000 Construction and remodelling cost of restaurant ` 30,00,000 Explain the
treatment of these expenditures as per the provisions of AS 10 “Property, Plant and Equipment”. (5 marks)
Answer:
As per provisions of AS 10, any cost directly attributable to bring the assets to the location and conditions
necessary for it to be capable of operating in the manner indicated by the management are called directly attributable
costs and would be included in the costs of an item of PPE. Management should capitalise the costs of construction
and remodeling the restaurants, because they are necessary to bring the store to the condition necessary for it to be
capable of operating in the manner intended by management. The restaurant cannot be opened without incurring the
remodeling expenditure and thus the expenditure should be considered part of the asset. So, construction and
remodeling cost of restaurant of ` 30,00,000 should be capitalised.
However, if the cost of salaries, utilities and storage of goods are in the nature of operating expenditure that would
be incurred if the restaurant was open, then these costs are not necessary to bring the store to the condition necessary
for it to be capable of operating in the manner intended by management should be expensed. So, salaries of the staff
engaged in preparation of restaurant before its opening shall not be capitalised (` 7,50,000).
Space to write important points for revision
Q.6.20 RTP Practical Preet Ltd. is installing a new plant at its production facility. It has incurred these costs:
1. Cost of the plant (cost per supplier’s invoice plus taxes) ` 50,00,000
2. Initial delivery and handling costs ` 4,00,000
3. Cost of site preparation ` 12,00,000
4. Consultants used for advice on the acquisition of the plant ` 14,00,000 5. Interest charges paid to supplier of plant
for deferred credit ` 4,00,000
Please advise Preet Ltd. on the costs that can be capitalised in accordance with AS 10 (Revised).
Answer :
According to AS 10 (Revised), these costs can be capitalised:
` 86,00,000
Note: Interest charges paid on “Deferred credit terms” to the supplier of the plant (not a qualifying asset) of `
4,00,000 and operating losses before commercial production amounting to`8,00,000 are not regarded as directly
attributable costs and thus cannot be capitalised. They should be written off to the Statement of Profit and Loss in
the period they are incurred.
Explain "monetary item" as per Accounting Standard 11. How are foreign currency monetary items to be recognized
at each Balance Sheet date? Classify the following as monetary or non-monetary item:
(i) Share Capital
(ii) Trade Receivables
(iii) Investments
(iv) Fixed Assets (4 marks) [IPCC Gr. II]
Answer
• According to AS 11 ‘The Effects of Changes in Foreign Exchange Rates’, Monetary items are money held and
assets and liabilities to be received or paid in fixed or determinable amounts of money.
• Foreign currency monetary items should be reported using the closing rate at each balance sheet date.
• Whereas, in certain circumstances, the closing rate may not reflect with reasonable accuracy the amount in
reporting currency that is likely to be realised from, or required to disburse, a foreign currency monetary item at the
balance sheet date.
• In such situation, the relevant monetary item should be reported in the reporting currency at the amount which is
likely to be realised from or required to disburse, such item at the balance sheet date. Share capital
Trade receivables Investments
Fixed assets
Non-monetary Monetary
Non-monetary Non-monetary Space to write important points for revision
Q.7.2 2016 - Nov [7] (a) Descriptive
Answer:
(i) Integral Foreign Operation:
It is a foreign operation, the activities of which are an integral part of those of the reporting enterprise a foreign
operation that is integral to the operations of the reporting enterprise carries on its business as if it were an extension
of the reporting enterprise’s operation.
Forward contract rate ` 48.85 Less : Spot rate ` 47.50 Loss ` 1.35
Sunshine Company Limited imported raw materials worth US Dollars 9,000 on 25th February, 2011, when the
exchange rate was ` 44 per US Dollar. The transaction was recorded in the books at the above mentioned rate. The
payment for the transaction was made on 10thApril, 2011, when the exchange rate was` 48 per US Dollar. At the
year end 31st March, 2011, the rate of exchange was ` 49 per US Dollar.
The Chief Accountant of company passed an entry on 31st March, 2011 adjusting the cost of raw material consumed
for the difference between `48 and`44 per US Dollar. Discuss whether this treatment is justified as per the provisions
of AS-11 (Revised). (4 marks) [IPCC Gr. II]
Answer:
Provision:
As per para 9 of AS 11, ‘The Effects of Changes in Foreign Exchange Rates’, initial recognition of a foreign
currency transaction is done in the reporting currency by applying the exchange rate at the date of the transaction.
Analysis and Conclusion:
Accordingly, on 25th February 2011, the raw material purchased and its creditors will be recorded at US dollar 9,000
× ` 44 = ` 3,96,000. Also, as per para 11 of the standard, on balance sheet date such transaction is reported at closing
rate of exchange, hence it will be valued at the closing rate i.e.` 49 per US dollar (USD 9,000 ×` 49 =` 4,41,000) at
31st March, 2011, irrespective of the payment made for the same subsequently at lower rate in the next financial
year.
The difference of`5 (49 – 44) per US dollar i.e.`45,000 (USD 9,000 ×`5) will be shown as an exchange loss in the
profit and loss account for the year ended 31st March, 2011 and will not be adjusted against the cost of raw
materials.
In the subsequent year on settlement date, the company would recognize or provide in the Profit and Loss Account
an exchange gain of ` 1 per US dollar, i.e. the difference from balance sheet date to the date of settlement between`
49 and` 48 per US dollar i.e. ` 9,000. Hence, the accounting treatment adopted by the Chief Accountant of the
company is incorrect i.e. it is not in accordance with the provisions of AS 11.
Stem Ltd. purchased a Plant for US$ 30,000 on 30th November, 2013 payable after 6 months. The company entered
into a forward contract for 6 months @` 62.15 per dollar. On 30th November, 2013, the exchange rate was ` 60.75
per dollar.
How will you recognise the profit or loss on forward contract in the books of Stem Ltd. for the year ended 31st
March, 2014? (5 marks) [IPCC Gr. II]
Answer:
Calculation of Profit or Loss
(i) Value at the rate prevailing at the inception of forward contract = (USD ` 30,000 × 60.75) =` 18,22,500
(ii) Value at forward rate = (USD 30,000 × 62.15) = ` 18,64,500
(iii) Total loss on entering into the forward contract = arising at inception for 6 months contract period =`42,000
(i.e.`18,64,500 `18,22,500) (iv) Loss to be recognised for the year ended 31st March, 2014
= = ` 28,000
Explain briefly the accounting treatment needed in the following cases as per AS 11 as on 31.3.2015.
Sundry Debtors include amount receivable from Umesh`5,00,000 recorded at the prevailing exchange rate on the
date of sales, transactions recorded at US $ 1 = ` 58.50.
Long term loan taken from a U.S. Company, amounting to ` 60,00,000. It was recorded at US $ 1 =` 55.60, taking
exchange rate prevailing at the date of transaction.
US $ 1 =` 61.20 on 31.3.2015 (5 marks) [IPCC Gr. II] Answer:
As per AS -11 "Accounting for Foreign Exchange transaction on initial recognition should be recorded by applying
the foreign currency at the date of the transaction.
But the transaction as on the balance sheet date should be recorded as follows:
☐ Monetary Items: Monetary items are money held and assets and
liabilities to be received or paid in fixed or determinable amounts of money. So that the monetary items as on
balance sheet date should be reported by using the closing exchange rates.
☐ Non - Monetary items: Non-Monetary items are other than monetary items. Such items which are carried in
terms of historical cost denominated in a foreign currency should be reported using the exchange rate at the date of
the transaction:
(i) Here the sundry debtors which include the receivable from Umesh `5,00,000 to be recorded initially by applying
exchange rate as on the date of transaction. As on balance sheet date this receivable recorded as rate on the
31/3/2015 i.e.`61.20 as it is monetary item as per AS 11. And such difference of rate i.e. (61.20 - 58.50) = 2.7 x
8,547 =` 23,077 is to be credited to P&L A/c as foreign exchange gain.
(ii) In this case firstly loan from US Company recorded at rate of initial recognition` 55.60. On the balance sheet
date the rate is` 61.20 so that the loss on the exchange transaction i.e. (61.20 - 55.60) =` 5.6 x 1,07,914 =` 6,04,317.
So that loss of` 6,04,317 is to be debited to foreign exchange account and the loan is recorded in B/S at` 55-60.
Shan Builders Limited has borrowed a sum of US $ 10,00,000 at the beginning of Financial Year 2014-15 for its
residential project at LIBOR + 3%. The interest is payable at the end of the Financial Year. At the time of availment,
exchange rate was ` 56 per US $ and the rate as on 31st March, 2015 was` 62 per US $. If Shan Builders Limited
borrowed the loan in India in Indian Rupee equivalent, the pricing of loan would have been 10.50%. Compute
Borrowing Cost and exchange difference for the year ending 31st March, 2015 as per applicable Accounting
Standards. (Applicable LIBOR is 1%). (5 marks) [IPCC Gr. II]
Answer:
(i) Interest for the period 2014-15
M/s Power Track Ltd. purchased a plant for US $ 50,000 on 31stOctober, 2015 payable after 6 months. The
company entered into a forward contract for 6 months @ ` 64.25 per Dollar. On 31st October, 2015 the exchange
rate was ` 61.50 per Dollar.
You are required to recognise the profit or loss on forward contract in the books of the company for the year ended
31st March, 2016.
Particulars (`) Forward Contract Rate 64.25 (-) Spot Rate (61.50) Loss 2.75 Forward Contract Amount $ 50,000
Contract Period 6 Months Loss for the period 1st Nov. 2015 to 31st March, 2016 5 Months i.e. 5 months falling in
year 2015-16 (137500 × 5/6) `1,14,583.33
Thus, the loss amounting to` 1,14,583 for the period is to be recognized in the year ended 31st March, 2016.
Space to write important points for revision
Q.7.11 2018 - May [1] {C} (b) Practical
ABC Ltd. borrowed US $ 5,00,000 on 01/01/2017, which was repaid as on 31/07/2017. ABC Ltd. prepares financial
statement ending on 31/03/2017. Rate of Exchange between reporting currency (INR) and foreign currency (USD)
on different dates are as under:
01/01/2017 1 US $ =` 68.50
31/03/2017 1 US $ =` 69.50
31/07/2017 1 US $ =` 70.00
You are required to pass necessary journal entries in the books of ABC Ltd. as per AS 11. (5 marks) Answer:
Journal Entries in the books of ABC Ltd.
Date Particulars ` (Dr.) ` (Cr.) Jan, 01 Bank A/c ($ 5,00,000 × 68.5) Dr. 3,42,50,000
2017 To Foreign Loan A/c 3,42,50,000
March, Foreign Exchange Difference A/c Dr. 5,00,000 31 2017 To Foreign Loan A/c 5,00,000 [$ 5,00,000 × (69.5 –
68.5)]
(i) ABC Ltd. a Indian Company obtained long term loan from WWW private Ltd., a U.S. company amounting to `
30,00,000. It was recorded at US $1 =`60.00, taking exchange rate prevailing at the date of transaction. The
exchange rate on balance sheet date (31.03.2018) was US $ 1 = ` 62.00.
(ii) Trade receivable includes amount receivable from Preksha Ltd., `10,00,000 recorded at the prevailing exchange
rate on the date of sales, transaction recorded at US $1 =` 59.00. The exchange rate on balance sheet date
(31.03.2018) was US $ 1 = ` 62.00.
You are required to calculate the amount of exchange difference and also explain the accounting treatment needed in
the above two cases as per AS 11 in the books of ABC Ltd. (5 marks)
Answer:
As per AS 11 “The effects of changes in Foreign Exchange Rates”, exchange differences arising on the
settlement of monetary items or on reporting an enterprise’s monetary items at rates different from those at which
they were initially recorded during the period, or reported in previous financial statements, should be recognised as
income or as expenses in the period in which they arise.
However, at the option of an entity, exchange differences arising on operating of long-term foreign currency
monetary items at rates different from those at which they were initially recorded during the period, or reported in
previous financial statements, in so far as they relate to the acquisition of a non-depreciable capital asset can be
accumulated in a “Foreign Currency Monetary Item Translation Difference Account” in the enterprises’s financial
statements and amortised over the balance period of such long-term asset/liability, by recognition as income or
expense in each of such periods.
Long term Loan Foreign Currency Rate (`) Initial recognition US $ 50,000
(` 30,00,000/ ` 60) 1 US $ =` 60 30,00,000
Trade Receivables Foreign Currency Rate (`) Initial recognition US $ 16949.15 10,00,000 (` 10,00,000 / ` 59) 1
US $ =` 59
Rate on Balance Sheet date 1 US $ =` 62
Exchange Difference Gain 50,847.45 US $ 16949.15 × (` 62 – ` 59)
Treatment: Credit Profit and Loss
A/c by ` 50,847.45
Thus, Exchange Difference on Long term loan amounting` 1,00,000 may
either be charged to Profit and Loss A/c or to Foreign Currency Monetary Item Translation Difference Account but
exchange difference on trade receivables amounting ` 50,847.45 is transferred to Profit & Loss A/c.
AXE Limited purchased fixed assets costing $ 5,00,000 on 1st Jan. 2018 from an American company M/s M&M
Limited. The amount was payable after 6 months. The company entered into a forward contract on 1st January 2018
for five months @`62.50 per dollar. The exchange rate per dollar was as follows: On 1st January, 2018 On 31st
March, 2018 ` 60.75 per dollar ` 63.00 per dollar
You are required to state how the profit or loss on forward contract would be recognized in the books of AXE
Limited for the year ending 2017-18, as per the provisions of AS 11. (5 marks)
Answer:
As per Para 39 of AS 11 ‘Changes in Foreign Exchange Rates’, in recording a forward exchange contract
intended for trading or speculation purpose, the premium or discount on the contract is ignored and at each balance
sheet date, the value of contract is marked to its current market price and gain or loss on the contract is recognised.
Karan Enterprises having its Head Office in Mangalore, Karnataka has a 3-2019:
(ii) Depreciation at 10% p.a. 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. (5 marks) Space to write important points for revision
You are required to ascertain the loss/gain for financial years 2016-17 and 2017- 18, also give their treatment as per
AS 11.
Answer:
As per AS 11 on ‘The Effects of Changes in Foreign Exchange Rates’, all foreign currency transactions should be
recorded by applying the exchange rate on the date of transactions. Thus, goods purchased on 1.1.2017 and
corresponding creditor would be recorded at`11,25,000 (i.e. $15,000 ×`75) According to the standard, at the balance
sheet date all monetary transactions should be reported using the closing rate. Thus, creditors of US $15,000 on
31.3.2017 will be reported at ` 11,10,000 (i.e. $15,000 ×` 74) and exchange profit of ` 15,000 (i.e. 11,25,000 –
11,10,000) should be credited to Profit and Loss account in the year 2016-17.
On 7.7.2017, creditors of $15,000 is paid at the rate of ` 73. As per AS 11, exchange difference on settlement of the
account should also be transferred to Profit and Loss Account. Therefore,`15,000 (i.e. 11,10,000 – 10,95,000) will
be credited to Profit and Loss Account in the year 2017-18.
Rau Ltd. purchased a plant for US$ 1,00,000 on 01st February 2016, payable after three months. Company entered
into a forward contract for three months @ ` 49.15 per dollar. Exchange rate per dollar on 01st Feb. was` 48.85.
How will you recognise the profit or loss on forward contract in the books of Rau Ltd.?
Answer :
Forward Rate ` 49.15
Less : Spot Rate (` 48.85)
Premium on Contract ` 0.30
Contract Amount US$ 1,00,000
Total Loss (1,00,000 × 0.30) ` 30,000
Contract period 3 months
Two falling the year 2016-17; therefore loss to be recognised (30,000/3) x 2 =` 20,000. Rest ` 10,000 will be
recognised in the following year.
8 AS - 12 Accounting for Government Grants
Q.8.1 2007 - May [6] (c), RTP Descriptive
How Government grant relating to specific fixed asset is treated in the books as per AS-12?
Answer:
As per AS - 12 'Accounting for Government Grants', Government grant relating to specific fixed asset is treated
as follows :
1. Government grants related to specific fixed assets should be presented
in the balance sheet by showing the grant as deduction from the gross value of the fixed assets concerned in arriving
at their book value. 2. When the grant related to a specific fixed asset equal to the whole, or
virtually the whole, of the cost of the asset, the asset should be shown in the balance sheet at a nominal value.
3. Alternatively, government grants related to depreciable fixed assets may be treated as deferred income which
should recognised in the profit and loss statement on a systematic and rational basis over the useful life of the asset,
i.e. Such grants should be allocated to income over the periods and in the proportions in which depreciation on those
assets is charged.
(i) Grant related to non - depreciable assets are credited to capital reserve under this method, as there is usually no
charge to income in respect of such assets.
(ii) But, when a grant related to a non - depreciable asset requires the fulfillment of certain obligations, the grant is
credited to income over the same period over which the cost of certain obligations, the grant is credited to income
over the same period over which the cost of meeting such obligations to charged to income.
(iii) Any differed income is suitably disclosed in the balance sheet pending its apportionment to profit & loss
account.
Q.8.2 2008 - May [5] (iv) Descriptive How would you record a non-monetary grant received from the Government
as per AS-12? (2 marks) [IPCC Gr. II]
Answer :
Para 7 of AS-12 deals with the accounting treatment of Non-monetary Government Grants which says that
Government grants may take the form of non-monetary assets, such as land or other resources, given at concessional
rates. In these circumstances, it is usual to account for such assets at their acquisition cost. Non-monetary assets
given free of cost are recorded at a nominal value.
Q.8.3 2011 - May [7] (b) Descriptive Siva Limited received a grant of ` 1,500 lakhs during the last accounting
year (2009-10) from Government for welfare activities to be carried on by the company for its employees. The grant
prescribed conditions for its utilization. However during the year 2010-11, it was found that the conditions of the
grant were not compiled with and the grant had to be refunded to the Government in full. Elucidate the current
accounting treatment with reference to the provisions of AS-12.(4 marks) [IPCC Gr. II]
Answer :
According to AS 12 ‘Accounting for Government Grants’, Government Grant may, sometimes, become
refundable if certain conditions are not fulfilled.
• A government grant that becomes refundable is treated as extraordinary item as per AS, 5 ‘Net Profit or Loss for
the Period, Prior Period items and Changes in Accounting Policies.
• The amount refundable in respect of a government grant related to revenue is applied first against any unamortized
deferred credit remaining in respect of the grant. To the extent that the amount refundable exceeds any such deferred
credit, or where no deferred credit exists, the amount is charged immediately to profit and loss statement.
• In the given situation the amount of refund of grant of ` 1,500 lakhs should be charged to the profit and loss
account in the year 2010-2011 as an extraordinary item.
Para 11 of AS 12, “Accounting for Government Grants”, explains treatment of government grants in following
situations:
(i) When government grant is related to revenue:
(a) When deferred credit account has a balance: The amount of government grant refundable will be adjusted
against unamortized deferred credit balance remaining in respect of the grant. To the extent that the amount
refundable exceeds any such deferred credit the amount is immediately charged to profit and loss account.
(b) Where no deferred credit account balance exists: The amount of Government grant refundable will be
charged to profit and loss account.
(ii) When government grant is related to specific fixed assets: (a) Where at the time of receipt the amount of
Government grant reduced the cost of asset: The amount of Government grant refundable will increase the book
value of the asset.
(b) Where at the time of receipt the amount of government grant was credited to “Deferred Grant Account”:
The amount of Government grant refundable will reduce the capital reserve or unamortized balance of deferred grant
account as appropriate.
State whether the following statement is ‘True’ or False’. Also give reason for your answer.
2. As per the provisions of AS-12, government grants in the nature of
promoters’ contribution which become refundable should be reduced from the capital reserve. (1 mark) Answer:
This statement is True.
As per AS 12, government grants in the nature of promoters contribution
which become refundable should be reduced from the capital reserve. Space to write important points for revision
X Ltd. received a revenue grant of ` 10 crores during 2006-07 from Government for welfare activities to be carried
on by the company for its employees. The grant prescribed the conditions for utilisation. However during the year
2008-09, it was found that the prescribed conditions were not fulfilled and the grant should be refunded to the
Government.
State how this matter will have to be dealt with in the financial statements of X Ltd. for the year ended 2008-09. (2
marks) [IPCC Gr. II]
Answer:
Provision:
According to AS 12 “Accounting for Government Grants”, a grant that became refundable should be treated as
an extra-ordinary item as per Accounting Standard 5 “Net Profit or Loss for the Period, Prior Period Items and
Changes in Accounting Policies”. The amount refundable in respect of a government grant related to revenue, is
applied first against any unamortised deferred credit remaining in respect of the grant. To the extent that the amount
refundable exceeds any such deferred credit, or where no deferred credit exists, the amount is charged immediately
to profit and loss statement.
Analysis and Conclusion:
Therefore, refund of grant of ` 10 crores should be shown in the profit and loss account of the company as an extra-
ordinary item during the financial year 2008-09.
Santosh Ltd. has received a grant of `8 crores from the Govt. for setting up a factory in a backward area. Out of this
grant, the company distributed `2 crores as dividend. Also, Santosh Ltd. received land free of cost from the State
Government but it has not recorded it at all in the books as no money has been spent. In the light of AS 12, examine,
whether the treatment of both the grants is correct. (2 marks) [IPCC Gr. II]
Answer :
Provision and Analysis:
According to AS-12 ‘Accounting for Government Grants’, when government grant is received for a specific
purpose, it should be utilised for the same. Therefore, the grant received for setting up a factory is not available for
distribution of dividend.
In the second case, even if the company has not spent money for the acquisition of land, land should be recorded in
the books of accounts at a nominal value.
Conclusion:
The treatment of both the grants is incorrect according to AS-12.
ABC Limited purchased a machinery for `25,00,000 which has estimated useful life of 10 years with the salvage
value of ` 5,00,000. On purchase of the assets Central Government pays a grant for ` 5,00,000. Pass the journal
entries with narrations in the books of the company for the first year, treating grant as deferred income. (5 marks)
[IPCC Gr. II]
Answer:
Journal Entries in the Books of ABC Ltd.
Year Particulars Dr.` Cr.(`)
1st Machinery Account Dr. 25,00,000 To Bank Account 25,00,000 (Being machinery purchased)
Bank Account Dr. 5,00,000 To Deferred Government Grant Account 5,00,000 (Being grant received from the
government treated as
deferred income)
Depreciation Account (25,00,000-5,00,000)/10 Dr. 2,00,000 To Machinery Account 2,00,000 (Being depreciation
charged on straight line method)
Profit & Loss Account Dr. 2,00,000 To Depreciation Account 2,00,000 (Being depreciation transferred to P/L
Account)
Deferred Government Grant Account (5,00,000/10)Dr. 50,000 To Profit & Loss Account 50,000
(Being proportionate government grant taken to P/L
Account)
Space to write important points for revision
M/s. A Ltd. has set up its business in a designated backward area with an investment of` 200 Lakhs. The Company
is eligible for 25% subsidy and has received` 50 Lakhs from the Government.
Explain the treatment of the Capital Subsidy received from the Government in the Books of the company. (4 marks)
[IPCC Gr. II]
Answer:
☐ As per AS-12, Accounting for Government Grants, the grant or subsidy received from government is
recognised only when there is reasonable assurance that the enterprise will comply with conditions attached to them
and the grants will be received.
☐ Here, the company has been set up in backward area and eligible to receive the capital subsidy and it has received
the subsidy so that` 50 lakhs shall be recognised in books of the company.
☐ ` 50 lakhs shall be recognised as Capital Reserve and to be written off over a period of time as expenditure
incurred.
Space to write important points for revision
Q.8.10 2016 - May [1] {C} (c) Practical
M/s ABC Ltd. purchased fixed assets for ` 50,00,000. Government grant received towards it is 20%. Residual value
is` 8,00,000 and useful life is 8 years. Assumed depreciation is on the basis of Straight Line Method. Asset is shown
in the Balance Sheet net of grant. After one year, grant becomes refundable to the extent of`7,00,000 due to non-
compliance of certain conditions.
Pass Journal entries for 2nd year in the books of the company.
asset partly refunded which increased the cost of fixed asset) Depreciation Account (W.N.) Dr.
To Fixed Asset Account (Being depreciation charged on SLM on revised value of fixed asset prospectively)
Profit & Loss Account Dr.
To Depreciation Account (Being Depreciation transferred to P & L A/c at the end of year 2)
Working Note:
Depreciation for year 2
7,00,000
5,00,000 5,00,000
5,00,000 5,00,000
Cost of the Asset
Less: Government grant received
` in lakhs
50
(10)
40
Less: Depreciation for the first year 4
Ram Ltd. purchased machinery for ` 80 lakhs. (useful life 4 years and residual value` 8 lakhs). Government grant
received is ` 32 lakhs. Show the Journal Entry to be passed at the time of refund of grant and the value of the fixed
assets in the third year and the amount of depreciation for remaining two years, if
Answer:
In the books of Ram Ltd. Journal Entries (At the time of refund of grant)
(i) If Grant is credited to Fixed Asset A/c: Amount (`) Amount (`) (i) Government Grant A/c Dr. 32,00,000 To
Bank A/c 32,00,000 (Being grant refunded)
Particulars Amount Amount (`) (`) I Deferred Grant A/c Dr. 16 lakhs Profit & Loss A/c Dr. 16 lakhs To Bank A/c
32 lakhs (Being Government grant refunded)
1. Value of Fixed Assets after two years but before refund of grant:
Fixed assets initially recorded in the books = ` 80 Lakhs Depreciation p.a. = (` 80 Lakhs ` 8 Lakhs)/4 years =` 18
Lakhs per year
Book value of fixed assets after two years = ` 80 Lakhs - (` 18 Lakhs × 2 years) = ` 44 Lakhs
Q.8.12 2018 - May [1] {C} (a) Practical On 01.04.2014, XYZ Ltd. received Government grant of`100 Lakhs for an
acquisition of new machinery costing` 500 Lakhs. The grant was received
and credited to the cost of the asset. The life span of the machinery is 5 years. The machinery is depreciated at 20%
on WDV method. The company had to refund the entire grant in 2nd April, 2017 due to non-fulfilment of certain
conditions which was imposed by the government at the time of approval of grant.
How do you deal with the refund of grant to the government in the books of XYZ Ltd., as per AS 12? (5 marks)
Answer:
! According to para 21 of AS 12 on Accounting for Government
Grant, the amount refundable in respect of a grant related to a specific fixed asset should be recorded by increasing
the book value of the asset or by reducing deferred income balance, as appropriate, by the amount refundable.
Where the book value is increased depreciation on the revised book value should be provided prospectively over the
residual useful life of the asset.
A specific government grant of ` 15 lakhs was received by USB Ltd. for acquiring the Hi-Tech Diary plant of ` 95
lakhs during the year 2014-15. Plant has useful life of 10 years. The grant received was credited to deferred income
in the balance sheet. During 2017-18, due to noncompliance of conditions laid down for the grant, the company had
to refund the whole grant to the Government. Balance in the deferred income on that date was` 10.50 lakhs and
written down value of plant was` 66.50 lakhs.
(i) What should be the treatment of the refund of the grant and the effect on cost of plant and the amount of
depreciation to be charged during the year 2017 -18 in profit and loss account?
(ii) What should be the treatment of the refund, if grant was deducted from the cost of the plant during 2014-15
assuming plant account showed the balance of ` 56 lakhs as on 1.4.2017?
Answer:
As per para 21 of AS 12, ‘Accounting for Government Grants’, “the amount refundable in respect of a grant related
to specific fixed asset should be recorded by reducing the deferred income balance. To the extent the amount
refundable exceeds any such deferred credit, the amount should be charged to profit and loss statement.
(i) In this case the grant refunded is ` 15 lakhs and balance in deferred income is`10.50 lakhs,`4.50 lakhs shall be
charged to the profit and loss account for the year 2017-18. There will be no effect on the cost of the fixed asset and
depreciation charged will be on the same basis as charged in the earlier years.
(ii) If the grant was deducted from the cost of the plant in the year 2014-15 then, para 21 of AS 12 states that the
amount refundable in respect of grant which relates to specific fixed assets should be recorded by increasing the
book value of the assets, by the amount refundable. Where the book value of the asset is increased, depreciation on
the revised book value should be provided prospectively over the residual useful life of the asset. Therefore, in this
case, the book value of the plant shall be increased by`15 lakhs. The increased cost of`15 lakhs of the plant should
be amortized over 7 years (residual life). Depreciation charged during the year 2017-18 shall be (56+15)/7 years =`
10.14 lakhs presuming the depreciation is charged on SLM.
Paridhi Electronics Ltd. has current investment (X Ltd.’s shares) purchased for `5 lakhs, which the company want to
reclassify as long term investment on 31.3.2018. The market value of these investments as on date of Balance Sheet
was ` 2.5 lakhs. How will you deal with this as on 31.3.18 with reference to AS-13?
Answer :
As per AS 13 ‘Accounting for Investments’, where investments are reclassified from current to long-term, transfers
are made at the lower of cost or fair value at the date of transfer.
In the given case, the market value of the investment (X Ltd. shares) is 2.50 lakhs, which is lower than its cost i.e.` 5
lakhs. Therefore, the transfer to long term investments should be made at cost of` 2.50 lakhs. The loss of ` 2.50 lakhs
should be charged to profit and loss account.
Space to write important points for revision
9 AS - 13 Accounting for Investments
Q.9.1 2008 - Nov [5] (iv) Descriptive
Mention two categories of investments defined by AS 13 and also State their valuation principles. (2 marks)
Answer:
As per AS 13 ‘Accounting for Investments’, there are two categories of investments, viz. Current Investments and
Long Term Investments.
According to Para 14 of the standard, the carrying amount for Current Investments is the lower of cost and fair
value whereas Long Terms Investments are valued at cost less permanent diminutions in value of investment. For
current investments, according to this standard any reduction to fair value and any reversals of such reductions are
included in the profit and loss statement.
State whether the following statement is ‘True’ or False’. Also give reason for your answer.
4. As per the provisions of AS-13, a current investments is an investment
that is by its nature is readily realisable and is intended to be held for not more than six months from the date on
which such investment is made. (1 mark)
Answer:
This statement is False
As per AS 13, 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.
M/s Innovative Garments Manufacturing Company Limited invested in the shares of another company on 1st
October, 2011 at a cost of ` 2,50,000. It also earlier purchased Gold of`4,00,000 and Silver of`2,00,000 on 1st March,
2009. Market value as on 31st March, 2012 of above investments are as follows:
`
Shares 2,25,000
Gold 6,00,000
Silver 3,50,000
How above investments will be shown in the books of accounts of M/s Innovative Garments Manufacturing
Company Limited for the year ending 31st March, 2012 as per the provisions of Accounting Standard 13
“Accounting for Investments”? (5 marks)
Answer :
Provision:
According to AS-13, Accounting for Investments, for investment in shares:
• If shares are purchased with an intention to hold for short-term period
then it will be shown at the realizable value of ` 2,25,000 as on 31st March, 2012.
• However, if equity shares are acquired with an intention to hold for long term period then it will be shown at cost
of ` 2,50,000 in the Balance Sheet of the company.
• However, provision for diminution shall be made to recognize a decline, if other than temporary, in the value of
shares.
• According to the standard, investment acquired for long term period shall be shown at cost. Gold and silver are
generally purchased with an intention to hold it for long term period until and unless given otherwise.
Analysis and Conclusion:
The investment in Gold and Silver (purchased on 1st March, 2009) shall continue to be shown at cost as on 31st
March, 2012 i.e.,` 4,00,000 and ` 2,00,000 respectively, though their realizable values have increased.
(i) Long term investments in Company A, costing ` 8.5 lakhs are to be re-classified as current. The company had
reduced the value of these investments to` 6.5 lakhs to recognize a permanent decline in value. The fair value on
date of transfer is ` 6.8 lakhs.
(ii) Long term investments in Company B, costing `7 lakhs are to be reclassified as current. The fair value on date of
transfer is ` 8 lakhs and book value is ` 7 lakhs.
(iii) Current investment in Company C, costing ` 10 lakhs are to be reclassified as long term as the company wants
to retain them. The market value on date of transfer is ` 12 lakhs.
(iv) Current investment in Company D, costing` 15 lakhs are to be reclassified as long term. The market value on
date of transfer is` 14 lakhs. (5 marks)
Answer :
(i) As per provisions of AS-13, ‘Accounting for investments’ whenever there is re-classification of investment, as
long term investments are re-classified as current investments then transfer are made at lower of cost and carrying
amount at the date of transfer. ☐ Here, cost of investment is ` 8.5 lakhs and carrying value as on
date of transfer is`6.5 lakhs. Then, investment is valued at` 6.5 lakhs on re-classification.
(ii) As, on re-classification from long term investment to current investment than it is recognised lower of cost
and carrying value on transfer date.
☐ Here, long term investment in Company B to be re-classified as
current cost of investment is ` 7 lakhs and carrying value is ` 7 lakhs. Then investment is re-classified as`7 lakhs
which is lower of cost and fair value.
(iii) As per AS-13, when there is re-classification of investment from current to long term investments then
valuation is to be done lower of cost and fair value at the date of transfer.
☐ Here, investment in Company C shall be re-classified as long
term. The cost of investment is `10 and fair value on transfer date is` 12 lakhs. Then investment is valued at ` 10
lakhs which is lower of cost and fair value.
(iv) As per AS-13, when there is re-classification of investment from current to long term investments then
valuation is to be done on lower of cost and fair value at the date of transfer.
☐ Here investment in Company D shall be re-classified as long term.
The cost of investment is `15 lakhs and fair value on transfer date is` 14 lakhs. Then investment is valued of ` 14
lakhs which is lower of cost and fair value.
Note: This question states that Blue Chip Equity Investment Ltd. wants to reclassify its investments in accordance
with AS 13. The values, at which the investments have to be reclassified, have been given in the above answer.
Q.9.5 2016 - May [1] {C} (b), RTP Practical M/s Active Builders Ltd. invested in the shares of another company
on 31st
October, 2015 at a cost of ` 4,50,000. It also earlier purchased Gold of `5,00,000 and Silver of`2,25,000 on
31stMarch, 2013. Market values as on 31st March, 2016 of the above investments are as follows: Shares ` 3,75,000;
Gold ` 7,50,000 and Silver` 4,35,000
How will the above investments be shown in the books of account of M/s Active Builders Ltd. for the year ending
31st March, 2016 as per the provision of AS-13? (5 marks)
Answer:
As per AS - 13 “Accounting for Investments”, investments which are for long-term purpose should be carried at
cost whereas short-term investments or current investments should be classified at lower of cost and fair value. In
this case, M/s. Active Builders Ltd. should disclose the investments as below as on 31/03/2016:
1. Gold = 5,00,000
2. Silver = 2,25,000
3. Shares = 3,75,000
11,00,000
Loss in shares should be charged to Profit & Loss Account of` 75,000. Space to write important points for revision
Q.9.6 2016 - Nov [1] {C} (c), RTP Practical How you will deal with following in the financial statement of the
Paridhi
(ii) Also Paridhi Electronics Ltd. has current investment (X Ltd.’s shares) purchased for` 5 lakhs, which the
company wants to reclassify as long term investment. The market value of these investments as on date of Balance
Sheet was ` 2.5 lakhs. (5 marks)
Answer:
(i) Provision:
Any reduction in the carrying amount and any reversal such as reduction should be charged and credited to Profit
and Loss A/c. Analysis:
Paridhi Electronics Ltd. invested in an unlisted company shares of `3,00,000. There is a decline in market share and
investment may not fetch more than`45,000. The facts of the case clearly indicate that the decline in the value of the
Long-Term Investment is not temporary. Hence, a provision for diminution should be made to reduce the Carrying
Amount of Long-Term Investment to`45,000 in the Financial Statements for the year ended 31.03.2016.
The Published Accounts of the unlisted company provide further evidence as to the conditions persisting at the
Balance Sheet date. Hence, this is an “Adjusting Event”under AS-4.
Conclusion:
AS-13 requires disclosure of changes in carrying amounts of long-term investments.
Hence, reduction in carrying amount should be charged to Profit and Loss A/c (i.e.;` 2,55,000).
(ii) Provision:
As per AS-13 ‘Accounting for Investments’, where investments are reclassified from current to long term, transfer
are made at lower of cost and fair value on the date of transfer.
Analysis:
In the given case Paridhi Electronics Ltd. has current investment for ` 5 lakhs and fair value as on date is ` 2.5 lakhs.
Conclusion:
Hence, reclassification will be made at` 2.5 lakhs as market value is less than the cost of ` 5 lakhs.
On 15th June, 2018, Y limited wants to re-classify its investments in accordance with AS- 13 (revised). Decide and
state the amount of transfer, based on the following information:
1. A portion of long term investments purchased on 1st March, 2017 are
to be re-classified as current investments. The original cost of these investments was`14 lakhs but had been written
down by`2 lakhs (to recognise ‘other than temporary’ decline in value). The market value of these investments on
15th June, 2018 was ` 11 lakhs.
2. Another portion of long term investments purchased on 15th January, 2017 are to be re-classified as current
investments. The original cost of these investments was`7 lakhs but had been written down to`5 lakhs (to recognise
‘other than temporary’ decline in value). The fair value of these investments on 15th June, 2018 was ` 4.5 lakhs.
3. A portion of current investments purchased on 15th March, 2018 for ` 7 lakhs are to be re-classified as long term
investments, as the company has decided to retain them. The market value of these investments on 31st March, 2018
was` 6 lakhs and fair value on 15th June, 2018 was ` 8.5 lakhs.
4. Another portion of current investments purchased on 7th December, 2017 for`4 lakhs are to be re-classified as
long term investments. The market value of these investments was:
investments are reclassified as current investments, transfers are made at the lower of cost and carrying amount at
the date of transfer.
☐ Where investments are reclassified from current to long-term, transfers are made at the lower of cost and fair
value at the date of transfers. 1. In the first case, investment is written down by` 2 lakhs as it is
10 AS - 16 Borrowing Costs
Q.10.1 2016 - May [7] (e) Short Notes Write short note on ‘Suspension of Capitalisation’ in context of Accounting
Standard 16. (4 marks) [IPCC Gr. II]
Answer:
Suspension of Capitalisation:
As per AS-16 Borrowing cost is suspension of capitalisation are as follows:
(i) When all activities necessary to prepare the qualifying asset for its intended use or sale are in progress then
capitalisation of borrowing costs should continue during the period in which active development is in progress.
(ii) When all the activities necessary to prepare the qualifying asset for its intended use or sale are interrupted then
capitalisation of borrowing costs should be suspended during extended periods in which active development is
interrupted.
(iii) When all the activities necessary to prepare the qualifying asset for its intended use or sale are complete then
capitalisation of borrowing costs should cease completion of active development.
Space to write important points for revision
Q.10.2 2009 - May [5] (vi) Descriptive Enumerate two points which the financial statements should disclose in
respect of Borrowing costs as per AS-16. (2 marks) [IPCC Gr. II]
Answer :
As per AS 16, the Financial Statements should disclose the following: 1. The accounting policy adopted for
borrowing costs and
2. The amount of borrowing costs capitalized during the period.
Q.10.3 2009 - Nov [1] (ii) Descriptive Briefly indicate the items which are included in the expressions “Borrowing
Cost” as per AS-16. (2 marks) [IPCC Gr. II]
Answer :
Borrowing costs are interest and other costs incurred by an enterprise in connection with the borrowing of funds.
Borrowing cost generally includes:
1. Interest and commitment charges on bank borrowings and other short
An industry borrowed `40,00,000 for purchase of machinery on 1.6.2007. Interest on loan is 9% per annum. The
machinery was put to use from 1.1.2008. Pass journal entry for the year ended 31.3.2008 to record the borrowing
cost of loan as per AS-16. (2 marks) [IPCC Gr. II]
Answer :
Provision:
As per AS-16 a qualifying asset is an asset which takes substantial period of time for completion;
Also reference is drawn to Accounting standard Interpretation-1 which states as follows ‘‘The issue as to what
constitutes a substantial period of time primarily depends on the facts and circumstances of each case. However,
ordinarily, a period of twelve months is considered as substantial period of time unless a shorter or longer period can
be justified on the basis of facts and circumstances of the case. In estimating the period, time which an asset takes,
technologically and commercially, to get it ready for its intended use or sale should be considered.’’
Analysis and Conclusion:
In the present question, it is assumed that the asset in question is a qualifying asset. Hence the borrowing cost
incurred till the date of asset coming into use will be capitalized.
TOTAL 10 Months
Particulars
Machinery A/c
To Loan A/c
(Being interest on loan for pre-operative period
capitalized)
Interest on loan A/c Dr. 90,000 To Loan A/c 90,000
(Being the interest on loan for the post-operative
period)
Profit and Loss A/c Dr. 90,000 To Interest on loan A/c 90,000
(Being interest on loan transferred to P &L A/c)
3,00,000
L / F (`) (`) Dr. 2,10,000
2,10,000
Q.10.5 2009 - Nov [6] (b) (i) Practical
Axe Limited began construction of a new plant on 1st April, 08 and obtained a special loan of` 4,00,000 to finance
the construction of the plant. The rate of interest on loan was 10%.
The expenditure that were made on the project of plant were as follows:
`
1st April, 08 5,00,000
1st August, 08 12,00,000
1st January, 09 2,00,000
The company’s other outstanding non-specific loan was`23,00,000 at an interest rate of 12%.
The construction of the plant completed on 31st March, 09. You are required to:
(a) Calculate the amount of interest to be capitalized as per the provisions of AS-16 “Borrowing cost”.
(b) Pass a journal entry for capitalizing the cost and the borrowing cost in respect of the plant. (5 marks) [IPCC Gr.
II] Answer :
Total expenses to be capitalized for borrowings as per AS 16 “Borrowing Costs”:
` Cost of Plant (5,00,000 + 12,00,000 + 2,00,000) 19,00,000 Add: Amount of interest to be capitalised (W.N.2)
1,54,000 20,54,000 Journal Entry
Particulars ` ` 31st Plant A/c Dr. 20,54,000 March, To Bank A/c 20,54,000 2009 [Being amount of cost of plant and
borrowing cost thereon capitalized]
Working Notes:
1. Computation of average accumulated expenses ` 1st April, 2008 ` 5,00,000 × 5,00,000
1st August, 2008 ` 12,00,000 × 8,00,000
1st January, 2009 ` 2,00,000 × 50,000
13,50,000 2. Amount of interest capitalised
` On specific borrowing (` 4,00,000 × 10%) 40,000 On non-specific borrowings (` 13,50,000 – ` 4,00,000) × 12%
1,14,000 Amount of interest to be capitalised 1,54,000 Space to write important points for revision
Q.10.6 2010 - May [1] (iii) Practical
Rohini Limited has obtained loan from an Institution for ` 500 lakhs for modernization and renovating its Plant and
Machinery. The installation of plant and machinery was completed on 31.3.2009 amounting to ` 320 lakhs and` 50
lakhs advanced to suppliers of additional assets and the balance of`130 lakhs has been utilized for working capital
requirements. Total interest paid for the above loan amounted to`` 09. You are required to state how the interest on
institutional loan is to be accounted for in the year 2008-09. (2 marks) [IPCC Gr. II]
Answer:
Provision:
According to AS 16 ‘Borrowing Costs’, borrowing costs that are directly attributable to the acquisition,
construction or production of qualifying assets (Qualifying asset means an asset that necessarily takes substantial
period of time to get ready for its intended use or sale.) should be capitalised as part of the cost of that asset. Other
borrowing costs are recognized as expense in the period in which they are incurred.
Analysis and Conclusion:
The treatment for total interest amount of ` 65 lakhs can be given as:
Particulars Nature
Interest to be capitalised (` in lakhs) Interest to be charged to Profit and Loss A/c
( ` in lakhs)
Installation of P l a n t a n d Machinery
A d v a n c e t o s u p p l i e r s f o r additional assets Qualifying
asset
= 41.60
Qualifying asset
(ii) Purchase of equipments and machineries : ` 3 crores (iii) Working capital : ` 2 crores (iv) Purchase of vehicles : `
50,00,000 (v) Advance for tools/cranes etc. : ` 50,00,000 (vi) Purchase of technical know-how : ` 1 crores
Borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset
should be capitalised as part of the cost of that asset. Other borrowing costs should be recognised as an expense in
the period in which they are incurred. (AS 16 para 6) Analysis and Conclusion:
The treatment of interest by Amazing Construction Ltd. can be shown as:
Qualifying Asset
Construction of sea-link
Purchase of equipments and machineries
Working capital
Purchase of vehicles
Advance for tools, cranes etc. Purchase of technical know-how No 2,50,000 (80,00,000*(1/32) Total 62,50,000
17,50,000
Interest to Interest to
be be
Capitalized charged
to Profit &
Loss A/c
Yes 62,50,000 (80,00,000*(25/32)
2. Purchase of machinery
3. Working capital
Total
Nature
Qualifying asset
Non
qualifying asset
Non
qualifying asset
Non
qualifying asset
Assumption:
1. It is assumed that construction of factory shed was completed at the end of March, 2011. Accordingly, interest for
the full year has been capitalized.
2. It is assumed that machinery was ready to use at the time of purchase only and on this basis it has been treated as
non-qualifying asset. Space to write important points for revision
Raj & Co. has taken a loan of US$ 20,000 at the beginning of the financial year for a specific project at an interest
rate of 6% per annum, payable annually. On the day of taking loan, the exchange rate between currencies was`48 per
1 US$. The exchange rate at the closing of the financial year was ` 50 per 1 US$. The corresponding amount could
have been borrowed by the company in Indian Rupee at an interest rate of 11% per annum. Determine the treatment
of borrowing cost in the books of accounts. (4 marks) [IPCC Gr. II]
Answer:
The following computations would be made to determine the amount of borrowing costs for the purpose of AS 16 ‘
Borrowing Costs’: Interest for the period = US $ 20,000 ×` 50 per US $ × 6% = ` 60,000. Increase in the liability
towards the principal amount
= US$ 20,000 × ` (50-48) = ` 40,000. (A)
Interest that would have resulted if the loan was taken in Indian Currency = US $ 20,000 × 48 × 11% = ` 1,05,600
Difference between interest on local currency borrowing and foreign currency borrowing = ` 1,05,600 – ` 60,000 = `
45,600 (B)
In the above case,`40,000 (A) is less than`45,600 (B), therefore the entire exchange difference of` 40,000 would be
considered as borrowing costs. The total borrowing cost would be 1,00,000 (` 60,000 + ` 40,000)
Q.10.10 2014 - May [1] {C} (b), RTP Practical Suhana Ltd. issued 12% secured debentures of ` 100 Lakhs on
01.05.2013, to be utilized as under :
Total
=` 3,60,000 NIL
NIL =` 3,60,000
= ` 5,40,000 *Note : A qualifying asset is an asset that necessarily takes a substantial period of time to get ready for
its intended use or sale.
Amount Rate of
Interest
` 6,00,000 11% p.a.
` 11,00,000 13% p.a.
The expenditure that were made on the building project were as follows: Amount (`)
☐ Out of above,`3,00,000 is from specific loan and balance`5,50,000 is from non-specific loans.
2. Calculation for Average Interest Rate:
(i) Total interest Exp. = (` 6,00,000 × 11%) + (` 11,00,000 × 13%) = 66,000 + 1,43,000 = 2,09,000 (ii) Total loan
amount =` 17,00,000
(iii) Average rate =
= = 12.29% 3. Calculation for amount to be capitalised:
Particulars Amount (`) Cost of Building (3,00,000 + 3,50,000 + 5,50,000 + 1,50,000) 13,50,000
(i) Construction of Hill link road in Kedarnath: ` 50 crores (work was held up totally for a month during the
year due to heavy rain which are common in the
geographic region involved)
(ii) Purchase of Equipment and Machineries ` 6 crores (iii) Working Capital ` 4 crores (iv) Purchase of Vehicles ` 1
crore
(v) Advances for tools/cranes etc. ` 1 crore (vi) Purchase of Technical Know how ` 2 crores
Answer:
According to AS 16 ‘Borrowing costs’, qualifying asset is an asset that necessarily takes substantial period of time
to get ready for its intended use. As per the standard, borrowing costs that are directly attributable to the acquisition,
construction or production of a qualifying asset should be capitalized as part of the cost of that asset. Other
borrowing costs should be recognized as an expense in the period in which they are incurred. Capitalization of
borrowing costs is also not suspended when a temporary delay is a necessary part of the process of getting an asset
ready for its intended use or sale.
The treatment of interest by Zen Bridge Construction Ltd. can be shown as:
Qualifying Asset
Interest to be
capitalized
` in crores Interest to be charged to Profit & Loss A/c` in
crores
Working capital No Purchase of vehicles No Advance for tools, cranes etc. No Purchase of technical know-how No
Total
1.25 1.64/64 × 50
0.025 1.6/64 × 1
0.025 1.6/64 × 1
0.05 1.6/64 × 2
0.35
* Note: It is assumed that construction of hill road will normally take more than a year (substantial period of time),
hence considered as qualifying asset.
M/s First Ltd. began construction of a new factory building on 1st April, 2017. It obtained` 2,00,000 as a special loan
to finance the construction of the factory building on 1st April, 2017 at an interest rate of 8% per annum. Further,
expenditure on construction of the factory building was financed through other non- specific loans. Details of other
outstanding non- specific loans were:
The expenditures that were made on the factory building construction were as follows:
(iv) Total Expenses to be Capitalised for Factory Building: ` Cost of factory building
(` 3,00,000 +` 2,40,000 +` 4,00,000 +` 3,60,000) 13,00,000
Q.10.14 RTP Practical A company incorporated in June 2017, has setup a factory within a period of 8 months with
borrowed funds. The construction period of the assets
had reduced drastically due to usage of technical innovations by the company. Whether interest on borrowings for
the period prior to the date of setting up the factory should be capitalized although it has taken less than 12 months
for the assets to get ready for use. You are required to comment on the necessary treatment with reference to AS 16.
Answer:
As per para 3.2 to AS 16 ‘Borrowing Costs’, a qualifying asset is an asset that necessarily takes a substantial
period of time to get ready for its intended use or sale.
Further, Explanation to the above para states that what constitutes a substantial period of time primarily depends on
the facts and circumstances of each case. However, ordinarily, a period of twelve months is considered as substantial
period of time unless a shorter or longer period can be justified on the basis of facts and circumstances of the case.
In estimating the period, time which an asset takes, technologically and commercially, to get it ready for its intended
use or sale is considered.
It may be implied that there is a rebuttable presumption that a 12 months period constitutes substantial period of
time.
Under present circumstances where construction period has reduced drastically due to technical innovation, the 12
months period should at best be looked at as a benchmark and not as a conclusive yardstick. It may so happen that
an asset under normal circumstances may take more than 12 months to complete. However, an enterprise that
completes the asset in 8 months should not be penalized for its efficiency by denying it interest capitalization and
vice versa.
The substantial period criteria ensures that enterprises do not spend a lot of time and effort capturing immaterial
interest cost for purposes of capitalization.
Therefore, if the factory is constructed in 8 months then it shall be considered as a qualifying asset. The interest on
borrowings for the same shall be capitalised although it has taken less than 12 months for the asset to get ready to
use.
i.e.....
1. Budgeted
2. Actual
3. Variance (1-2)
............ Day 1 12
Instant
Revision (in hours)
3 2.25
. . . . . . . . . . .Plan and Manage your Time Periodic Revision
(in hours)
in employment of the company; and (ii) persons who, having been formerly in the employment of the company,
were members of the company while in that employment and have continued to be members after the employment
ceased. For this purpose joint holders of shares will be counted as a single member.
3. Prohibits any invitation to the public to subscribe to any shares in, or debentures of the company.
4. Prohibits any invitation or acceptance of deposits from any person other than its members, directors and relatives.
Space to write important points for revision
2 Final Accounts
Q.2.1 2008 - May [5] (iii) Practical
In a concern, the opening provision for doubtful debts is ` 51,000. During the year a sum of` 10,000 was written off
as bad debt. The closing balance of sundry debtors amounts to`6,30,000. It was decided that 10% of the debtor is to
be maintained as provision. Calculate the closing balance toward provision for doubtful debts and pass journal entry
for giving effect to the provision maintained. (2 marks)
Answer:
For calculating balance towards provision for doubtful debts we should prepare an account for provision for
doubtful debts:
To Bal c/d
(Provision required to be maintained)
` Particulars `
63,000 63,000
Journal Entries
Particular’s L / F Dr. (`) Cr. (`)
Profit & Loss A/c Dr. 22,000 To Prov. for Doubtful Debts 22,000
(Being additional provision on doubtful
debts maintained @10%.)
Note: In this question closing debtor is given. It means that amount of Bad Debts (` 10,000) arises during the year is
already adjusted during the year, no further adjustment is therefore required.
(ii) That an amount equal to 10% of equity dividend shall be set aside for Staff bonus.
(iii) That the balance available for distribution shall be applied : (a) in paying 14% on cumulative Preference shares.
(b) in paying 20% dividend on Equity shares.
(c) one-third of the balance available as additional dividend on Preference shares and 2/3 as additional equity
dividend. A further condition was imposed by the articles viz. that the balance carried forward shall be equal to12%
on Preference shares after making provisions (i), (ii) and (iii) mentioned above. The company has issued 13,000,
14% Cumulative participating preference shares of ` 100 each fully paid and 70,000 Equity shares of ` 10 each fully
paid up. The profit for the year 2008 was`10,00,000 and balance brought from previous year`80,000. Provide`31,200
for depreciation and`80,000 for taxation before making other appropriations. Prepare Profit and Loss Appropriations
A/c. (8 marks)
Profit for the year 8,88,800 Add: Previous year profit 80,000 Profits available for appropriation 9,68,800
Less: Appropriations :
(a) Reserve Fund 1,77,760 (b) Proposed Dividend (Equity)
From the following information, calculate the amount of Sundry Debtors as on 31.3.2010:
Balance as on 1.4.2009 is ` 50,000.
Bad debts are 2% and discount to the customers is given @ 1% of the opening balance of Sundry Debtors.
Returns from the customers are ` 3,000.
Cash received from Debtors is` 2,30,000.
Cash received from Debtors in transit is ` 14,000.
Cash Sales are ` 5,00,000.
Credit Sales are ` 2,50,000. (2 marks) [IPCC Gr. II]
Answer:
Computation of Sundry Debtors as on 31.03.2010 Particulars ` `
Sundry debtors as on 31.03.2010 51,500 * It is assumed that information for cash in transit has already been
received. Space to write important points for revision
Q.2.4 2012 - Nov [4], RTP Practical Following information of the Final Accounts of Kumaran Ltd. are missing as
shown below:
Trading and Profit & Loss A/c for the year ended 31.03.2012 (` ` 000) (` ` 000)
To Opening Stock
To Purchases
To Manufacturing Expenses To Gross Profit c/d
Total
Total
To Proposed Dividends To Transfer to General
Reserves
To Balance Transfer to
Balance Sheet
Total
7,000 By Sales ?
? Total ?
By Gross Profit b/d ? 7,400 By Commission
? Total ?
? By Balance b/f 1,400 By Net Profit for the
? year b/d ?
? ? Total ?
Total
(` ` 000) Assets (` ` 000)
10,000 PPE:
Plant and Machinery 14,000 Other PPE ?
? Current Assets:
? Stock in Trade ?
? Total ?
You are required to provide the missing figures with the help of following information:
(i) Current Ratio 2:1.
(ii) Closing stock is 25% of sales.
(iii) Proposed dividends are 40% of the paid up capital.
(iv) Gross profit ratio is 60%.
(v) Ratio of Current Liabilities to Debentures is 2:1.
(vi) Transfer to General Reserves is equal to proposed dividends. (vii) Profit carried forward are 10% of the
proposed dividends. (viii) Provision for taxation is 50% of profits.
(ix) Balance to the credit of General Reserves at the beginning of the year is twice the amount transferred to that
account from the current profits. (16 marks) Answer:
1. Amount of proposed dividend
= Paid up share capital × 40% = 10,000 × 40% = 4,000 2. Transfer to general reserves
= Amount of proposed dividend i.e. 4,000
3. Profit carried forward
= 10% of proposed dividend = 10% of 4,000 = 400
= Proposed dividend + Transfer to general reserve + Profit carried forward ☐ Net profit carried forward
= (4,000 + 4,000 + 400) ☐ 1,400 = 7,000
5. Provision for taxation
Provision for taxation = 50% of profit (i.e. before net profit)
It means that net profit is 50% and provision for tax is 50%.
Therefore, if net profit is 7,000 then, Provision for taxation is also 7,000 6. Gross profit
= Net profit + All expenses ☐ Commission received
= (7,000 + 7,000 + 600 + 7,400) ☐ 1,000 = 21,000
7. Sales
=
= = 35,000
8. Closing stock
= 25% of sales
= 25% × 35,000 = 8,750
9. Purchases
= (Sales + Closing stock)☐(Opening stock + Manufacturing expenses
+ Gross profit)
= (35,000 + 8,750) ☐(7,000 + 1,750 + 21,000)
= 43,750☐ 29,750 = 14,000
= Current assets ☐ Stock in trade ☐ Bank balance = 24,000☐ 8,750 ☐ 1,250 = 14,000
= Total of Liabilities part of the balance sheet☐(Current assets + Plant and Machinery)
= 40,400☐ (24,000 + 14,000) = 2,400
Space to write important points for revision
Q.2.5 2013 - Nov [1] {C} (d) (i) Practical Vasudha Ltd. provides following information:
Raw Material stock holding period : 3.5 months Work-in progress holding period : 1 month Finished goods holding
period : 4.5 months Debtors collection period : 6 months
You are required to compute the operating cycle of Vasudha Ltd. What
would happen if the trade payables of the company are paid in 14 monthswhether these should be classified as
current or non-current liability? (2 marks) [IPCC Gr. II]
Answer:
As per Schedule III of the Companies Act, 2013, “An operating cycle is the time between the acquisition of assets
for processing and their realization in cash or cash equivalents”.
Therefore, operating cycle of Vasudha Ltd. will be computed as under: Raw material stock holding period + WIP
holding period + finished goods holding period + Debtor collection period = 3.5 + 1 + 4.5 + 6 = 15 months. A
liability shall be classified as current when it is expected to be settled in the company’s normal operating cycle.
Since the operating cycle of Vasudha Ltd. is 15 months, trade payables expected to be paid in 14 months should be
treated as a current liability.
The management of Kshitij Ltd. contends that the work in progress is not valued since it is difficult to ascertain the
same in view of the multiple processes involved. They opine that the value of opening and closing work in progress
would be more or less the same. Accordingly, the management had not separately disclosed the work in progress in
its financial statements. Comment in line with Schedule III.
Answer:
Schedule III to the Companies Act, 2013 does not require to disclose in the statement of profit and loss, the
amounts for which WIP have been completed at the beginning and at the end of the accounting period. Therefore,
the non-disclosure in the financial statements by the company may not amount to violation of Schedule III if the
differences between opening and closing WIP are not material.
On 31st March, 2013 Bose and Sen Ltd. provides to you the following ledger balances after preparing its Profit and
Loss Account for the year ended 31st March, 2013:
Credit Balances: ` Equity shares capital, fully paid shares of ` 10 each 70,00,000
General Reserve 15,49,100
Loan from State Finance Corporation 10,50,000
Secured by hypothecation of Plant & Machinery (Repayable within one year ` 2,00,000)
Loans: Unsecured (Long term) 8,47,000 Sundry Creditors for goods & expenses (Payable within 6 14,00,000
months)
1,33,63,000
The following additional information is also provided:
(i) 4,20,000 fully paid equity shares were allotted as consideration for land & buildings.
II Assets
(1) Non - Current Assets
1,32,62,900 Notes :
1. Share Capital
Tangible :
Land 14,00,000 0 14,00,000
Building 28,00,000 7,50,000 20,50,000
Furniture 4,37,500 87,500 3,50,000
Plant & M/c 49,00,000 12,25,000 36,75,000
Total 95,37,500 20,62,500 74,75,000
7. Intangible :
Patents 4,00,000
8. Inventories
Raw material 3,50,000 Finished goods 14,00,000 Total 17,50,000
9. Trade Receivables
(a) Outstanding debt for more than 6 months 3,80,000 (b) Other debts (Bal. fig.) 10,20,000 Total 14,00,000
10. Cash and Cash equivalents:
Cash at bank with scheduled Banks including
Bank deposits for period of 9` 5,00,000 17,11,000 months amounting with others 18,000 17,29,000 Cash in hand
2,10,000 Total 19,39,000 Space to write important points for revision
Q.2.8 2014 - May [2] (a) Practical The Articles of Association of Samson Ltd. provide the following : (i) That 25%
of the net profit of each year shall be transferred to reserve fund.
(ii) That an amount equal to 10% of equity dividend shall be set aside for staff bonus.
(iii) That the balance available for distribution shall be applied : (1) in paying 15% on cumulative preference shares.
(2) in paying 20% dividend on equity shares.
(3) one-third of the balance available as additional dividend on preference shares and two-third as additional equity
dividend. A further condition was imposed by the articles viz. that the balance carried forward shall be equal to 14%
on preference shares after making provision (i), (ii) and (iii) mentioned above. The company has issued 12,000, 15%
cumulative participating preference shares of`100 each fully paid and 75,000 equity shares of ` 100 each fully paid
up. The profit for the year 2013-14 was`10,00,000 and balance brought from previous year`1,50,000.
Provide`37,500 for depreciation and`1,20,000 for taxation before making other appropriations.
Show net balance of Profit and Loss Account after making above adjustments. (8 marks)
Answer:
Profit before Dep. and Tax (2013 - 2014) 10,00,000
(-) Depreciation 37,500
(-) Tax (1,20,000) Net Profit for (2013 - 2014) 8,42,500
+ Opening Balance of Profit 1,50,000
Total Profit 9,92,500
(-) Transfer to reserve fund @ 25% of (2013 - 2014) profit
(8,42,500 × 25%) (2,10,625) (-) Preference Dividend @ 15% on (12,000 × 100) (1,80,000) (-) Equity Dividend @
20% on (75,000 × 10) (1,50,000) (-) Provision for Staff Bonus @ 10% Equity Dividend
(1,50,000 × 10%) (15,000) (-) Profit to be c/f = 12,00,000 × 14% (1,68,000) Balance Profit ` 2,68,875
P & L A/c
Particulars Amount (`) Particulars Amount (`) To Dep. 37,500 By Balance 10,00,000 To Provision for Tax
1,20,000
To NP 8,42,500
10,00,000 10,00,000
P / L Appropriation A/c Particulars
To Reserve Fund
To Preference Dividend (1,80,000 + 84,023)
To Equity Dividend
(1,50,000 + 1,68,047)
To Provision for Staff Bonus (15,000 + 16,805)
To Bal. c/d
Note: Nominal Value of Equity shares should be 75,000 Equity shares @ 10 instead of ` 100 in the question. It
seems to be a misprint in the question.
From the following particulars furnished by Elegant Ltd., prepare the Balance Sheet as on 31st March 2014 as
required by Part I, Schedule III of the Companies Act.
Particulars Debit Credit ` ` Equity Share Capital (Face value of 50,00,000 ` 100 each)
Provision for Taxation 3,40,000 Sundry Debtors 10,00,000 Advances 2,13,500 Proposed Dividend 3,00,000 Profit &
Loss Account 5,00,000 Cash in Hand 1,50,000 Cash at Bank 12,35,000 Preliminary expenses 66,500 Unsecured
Loan 6,05,000
(i) Preliminary expenses included ` 25,000 Audit Fees and ` 3,500 for out of pocket expenses paid to the Auditors.
(ii) 10000 Equity shares were issued for consideration other than cash. (iii) Debtors of ` 2,60,000 are due for more
than 6 months. (iv) The cost of the PPE were:
(v) The balance of` 7,50,000 in the Loan Account with State Finance Corporation is inclusive of`37,500 for Interest
Accrued but not Due. The loan is secured by hypothecation of Plant & Machinery.
(vi) Balance at Bank includes ` 10,000 with Global Bank Ltd., which is not a Scheduled Bank. (10 marks)
Notes to Accounts
No. Particulars `
1. Share Capital
Equity share capital
Total 49,95,000
2. Reserves and Surplus
General Reserve 10,50,000
Surplus (Profit & Loss A/c) 5,00,000 Less: Preliminary expenses (66,500) 4,33,500
Total 14,83,500
3. Long-term borrowings
Secured Term Loan
State Financial Corporation (7,50,000-37,500)
(Secured by hypothecation of Plant and
Machinery) 7,12,500
Unsecured Loan 6,05,000
Total 13,17,500
4. Other current liabilities
Interest accrued but not due on loans (SFC) 37,500
Total 37,500
5. Short-term provisions
Provision for taxation 3,40,000
Proposed Dividend 3,00,000
6. Tangible assets
Land and Building 30,00,000 Less: Depreciation (2,50,000) 27,50,000 Plant & Machinery 35,00,000 Less:
Depreciation (8,75,000) 26,25,000 Furniture & Fittings 3,12,500 Less: Depreciation (62,500) 2,50,000
Total 56,25,000
7. Inventories
Raw Materials 2,50,000
Finished goods 10,00,000
Total 12,50,000
8. Trade receivables
Outstanding for a period exceeding six months 2,60,000
Other Amounts 7,40,000
Total 10,00,000
9. Cash and cash equivalents
Cash at bank
With Scheduled Banks 12,25,000 With other (Global Bank Ltd.) 10,000 12,35,000
Cash in hand 1,50,000
Note : As per para 56 of AS 26, preliminary expenses are not shown in the balance sheet, thus they are written off.
The amount of`25,000 as audit fee and out of pocket expenses paid to auditors amounting ` 3,500 have been
included in the amount of` 66,500. The combined figure of` 66,500 has been reduced from Profit and Loss Account
balance in the given solution.
From the following particulars furnished by the Prashant Ltd., prepare the Balance Sheet as at 31st March, 2019 as
required by Schedule III of the Companies Act, 2013:
Particulars Debit (`) Credit (`) Equity share capital (face value of ` 10 each) 15,00,000
Calls-in-arrears 5,000
Land 5,50,000
Building 4,85,000
Plant & machinery 5,60,000
General reserve 2,70,000 Loan from State Financial Corporation 2,10,000 Inventories 3,15,000
Provision for taxation 72,000 Trade receivables 2,95,000
Short-term loans & advances 58,500
Profit & loss account 1,06,800 Cash in hand 37,300
Cash at bank 2,85,000
Unsecured loans 1,65,000 Trade payables 2,67,000
From the following, prepare the Balance Sheet of ABC Ltd. as at 31st March as required by Companies Act. Give
Notes at the foot of the Balance Sheet as may be necessary: (amount in `)
Particulars Dr. (`) Cr. (`) Equity Capital (Face value of ` 100) 15,00,000 Calls in Arrears 5,000 Land 3,50,000
Building 9,50,000 Plant and Machinery 9,00,000 Furniture 50,000 General Reserve 2,50,000 Loan from State
Financial Corporation 3,00,000 Term Loans from Banks 5,00,000 Stock of - Finished Goods 8,00,000
Answer: Balance Sheet of ABC Ltd. as on 31st March Particulars as at 31st March Note This Year Prev. Yr
Total 40,30,000 Note: Contingent Liabilities and Commitments, refer Note 9. Note: Proposed Dividend = 14% of
Paid Up Capital`15,00,000 =`2,10,000.
Total 14,95,000 Note 2: Reserves and Surplus (showing appropriations and transfers) (all figures for this year)
Particulars Opg. Bal. Additions Deductions Clg. Bal General Reserve 2,50,000 Nil Nil 2,50,000
Note: Preliminary Expenses is not recognised as Asset as per AS-26, and is hence fully written off out of Surplus.
Note 3: Long Term Borrowings
Particulars This year Prev. Yr. (a) Term Loans from Banks
Secured - From State Finance Corpn.
Total 30,000 Note 5: Tangible Assets (Note: In the absence of data, Other Columns are not filled up in this Table).
Item Gross Block/Cost Depreciation Net Block/WDV
Opg. Addns/ Clg. Bal. Opg. Addn/ Clg Bal As at Yr As at Yr Bal. (Dedns) Bal. (Dedns) BeginEnd ning
Column (1) (2) (3)=1±2 (4) (5) (6)=4±5 (7)=1-4 8=3-6
Note 6: Inventories
Particulars This year Prev. Yr.
Note 7: Trade Receivables (assumed as Secured and considered good) Particulars This year Prev. Yr.
Sundry Debtors
(a) Debt Outstanding for a period exceeding 6 months from the date they are due for payment
(b) Commitments: Estimated Amount of Capital 2,50,000 Contract remaining to be executed (Erection
of Machinery) and not provided for
You are required to prepare a Balance Sheet as at 31st March 2018, as per Schedule III of the Companies Act, 2013,
from the following information of Mehar Ltd.:
Particulars
paid up.
2. The company declared dividend @ 5% of equity share capital. The dividend distribution tax rate is 17.647%.
(15% CDT, surcharge 12%, Health and Education Cess @ 4%)
2. Non-current Liabilities
Long term Borrowings40,00,000 Terms Loans (Secured)
3. Current Liabilities
(a) Trade Payables - 45,80,000
(b) Other current liabilities 3 20,07,612
(c) Short-term Provisions (Provision for
taxation) 10,20,000
2. Current Assets:
(a) Inventories 5 48,00,000
(b) Trade Receivables 6 48,20,000
(c) Cash and Cash Equivalents 38,40,000
(d) Short-term Loans and Advances 7 17,08,000
Total 3,74,68,000
Notes to accounts (`)
1. Share Capital
Authorized, issued, subscribed & called up
1,20,000, Equity Shares of ` 100 each 1,20,00,000 40,000 10% Redeemable Preference Shares
of 100 each 40,00,000 1,60,00,000
4. Tangible assets
Opening balance 2,26,00,000 Less: Depreciation (20,00,000) Closing balance 2,06,00,000
5. Inventories
Finished Goods 30,00,000
Stores 16,00,000
Loose Tools 2,00,000 48,00,000
6. Trade Receivables
Trade receivables 49,00,000 Less: Provision for Doubtful Debts (80,000) 48,20,000
Working Note:
Calculation of Dividend distribution tax
(i) Grossing-up of dividend:
`
10,00,000 x [15 /(100-15)] 1,76,470 Gross dividend 11,76,470 (ii) Dividend distribution tax @ 17.647% 2,07,612
Space to write important points for revision
Q.2.13 RTP Practical
Debtors 1,50,300
Trade payables 2,63,550 Freehold property at cost 10,50,000
Furniture at cost less depreciation of ` 45,000 1,05,000
6% Preference share capital 6,00,000 Equity share capital fully paid up 6,00,000
You are required to prepare the Profit and Loss Statement for the year ended 31st March, 2018 and the Balance
Sheet as on 31st March, 2018 as per Schedule III of the Companies Act, 2013 after taking into account the following
–
1. Closing Stock was valued at ` 4,27,500.
2. Purchases include ` 15,000 worth of goods and articles distributed
VI Exceptional items - VII Profit before extra ordinary items and tax (V-IV) 28,650 VIII Extraordinary items -
Balance sheet of Shweta Ltd. as on 31st March, 2018 Particulars as on 31st March Note
I LIABILITIES
(1) Shareholders’ funds:
(a) Share capital 1 12,00,000 (b) Reserves and surplus 2 66,150
Note: There is a Contingent liability for Bills receivable discounted with Bank ` 6,000.
Notes to accounts
( `) 1 Share Capital
Authorized
Less: Debts due for more than 6 months (as per information given) (18,000) Total of other Debtors i.e. Debtors
outstanding for less than 6 months 1,34,550
3 Managerial Remuneration
Q.3.1 2009 - Nov [1] (x) Descriptive
The Companies Act, 2013 limits the payment of managerial remuneration. What is the maximum managerial
remuneration, which can be paid in case of a company consistently earning profits and has more than one
managerial persons. (2 marks)
Answer:
Sec. 197 of the Indian Companies Act, 2013 prescribes the overall maximum managerial remuneration payable
and also managerial remuneration in case of absence or inadequacy of profits. In the given case, the company is
earning profits consistently and has more than one managerial person. Hence, the maximum limit is 10% of net
profit.
What are the maximum limits of managerial remuneration for companies having adequate profits? (4 marks)
Answer:
Managerial Remuneration : Maximum limits as per Sec. 197 of Companies Act, 2013.
For companies having profits:
1. Overall (excluding fee for attending meetings) 2. If there is one managerial person
3. If there are more than one managerial person 4. Remuneration of part-time directors:
(i) If there is no managing or whole-time director (ii) If there is a managing or whole-time director Space to write
important points for revision
Net profit before provision for income-tax and managerial remuneration, but after depreciation and provision for
repairs 98,04,100
Depreciation provided in the books 35,00,000
Provision for repairs of machinery during the year 2,50,000
Depreciation allowable under Schedule II of the Companies Act, 2013 28,00,000
Actual expenditure incurred on repairs during the year 1,50,000
You are required to calculate the managerial remuneration in the following cases:
(i) If there is one whole-time director; and
(ii) If there are two whole-time directors, a part-time director and a manager. (5 marks) [CS Exe - I] Answer:
Section 197 of the Companies Act, 2013 prescribe the maximum percentage of profit that can be paid as
managerial remuneration. For this purpose, profit is to be calculated in the manner as prescribed in Section 197 of
the Companies Act, 2013.
Calculation of net profit u/s 197 of the Companies Act, 2013: ` ` Net profit before provision for income-tax and
managerial remuneration but after depreciation
and provision for repairs 98,04,100
Add: Depreciation provided in the books 35,00,000 Provision for repairs of machinery 2,50,000 37,50,000
1,35,54,100
Less: Depreciation allowable under Schedule II 28,00,000 Actual expenditure incurred on repairs 1,50,000
29,50,000
1,06,04,100
(ii) If there are two whole-time directors, a part time director and a manager:
Managerial remuneration = 11% of net prof it = 1 1 % o f ` 1 , 0 6 ,
Answer:
Calculation of remuneration of the Managing Director ` in Lacs Net profit as per books 43.00 Add: Provision for
taxation 17.20 Annual profit for the purpose of managerial ____ remuneration 60.20 Managing Director’s
Remuneration @ 5% of above 3.01 Minimum remuneration to be paid to the Managing Director
= ` 25,000 per month × 12 3.00 Hence, in this case, remuneration to be paid to the Managing Director of A Ltd. = `
3,01,000.
Answer:
Assumption: It is assumed that the company is having inadequate net profit and is not exceeding the ceiling limit of
` 24,00,000 p.a.
As effective capital is less than `5 crores but more than`1 crore, therefore maximum remuneration payable to the
Managing Director should be @ ` 1,00,000 per month.
So, maximum remuneration payable to the Managing Director for the year (` 1,00,000 × 12) =` 12,00,000.
(ii) Profit on sale of machinery (cost`8,00,000 and written down value ` 4,00,000) 4,50,000
(iii) Subsidy from the Government 1,00,000
(iv) Salaries and wages 1,50,000
(v) Repairs to fixed assets 50,000
(vi) General expenses 40,000
(vii) Compensation for breach of contract 25,000
(viii) Depreciation 2,40,000
(ix) Loss on sale of investment 35,000
(x) Expenditure on scientific research (cost of setting-up a new laboratory) 2,50,000
(xi) Debenture interest 75,000
(xii) Interest on unsecured loans 15,000
(xiii) Provisions for income tax 16,00,000
(xiv) Proposed dividends 10,00,000
(xv) Net profit 10,70,000
Calculate the overall managerial remuneration under section 197 of the Companies Act, 2013. (5 marks) [CS Exe -
I] Answer:
Calculation of the Managerial Remuneration under Sec. 197 ` `
Surplus for the year 10,70,000 Add: Items not to be deducted: Sec. 198
Loss on sale of investment 35,000 Expenditure on scientific research 2,50,000
Provision for tax 16,00,000
Proposed Dividend 10,00,000 28,85,000
Less: Capital profit on sale of machinery
(` 8,00,000 - ` 4,00,000 - ` 4,50,000)
Surplus under Sec. 198 for managerial 39,55,000
remuneration
Maximum Overall managerial remuneration 50,000
11% of surplus = (11% of ` 39,05,000)
` 4,29,550 39,05,000 Q.3.8 2014 - Dec [3] (b) Practical
Calculate the managerial remuneration from the following particulars of Zen Ltd. The company has only one
Managing Director:
` Net profit 20,00,000 Net profit is calculated after considering the following:
Depreciation 4,00,000 Preliminary expenses 1,00,000 Provision for tax 31,00,000 Director’s fee 80,000 Bonus
1,50,000 Profit on sale of PPE
Net Profit 20,00,000 Add: Depreciation 4,00,000 Preliminary Expenses 1,00,000 Provision for taxation 31,00,000
Director’s fee 80,000 Bonus 1,50,000 Provision for Doubtful Debts 90,000 Scientific Research Expenses 2,00,000
MD’s Remuneration 3,00,000 44,20,000 64,20,000
Less: Depreciation allowable 3,50,000 Bonus liability 1,80,000 Director’s Fee 80,000 6,10,000 58,10,000
Less: Profit on sale of PPE (in excess of
original cost)
= ` 1,10,000 ☐ 1,55,000
=` 2,65,000
Original Cost =` 2,00,000
Profit on sale of fixed assets (in excess of original cost)
=` 2,65,000 ☐ 2,00,000
=` 65,000
Q.3.9 2015 - Dec [4] (b) Practical Following is the statement of profit and loss of Target Ltd. for the year ended
31st March, 2015:
` I Revenue from operations 40,25,360
II Other income
• Subsidy received from government 2,32,560
• Interest on investments 15,640
• Transfer fees 720
• Profit on sale of machinery 25,000 2,73,920 III Total Revenue (I+II) 42,99,280 IV Expenses
• Administrative, selling and
distribution expenses 8,22,540
• Donation to charitable funds 25,500
• Directors’ fee 66,760
• Interest on debentures 31,240
• Compensation for breach of contract 42,530
• Managerial remuneration 2,85,350
• Depreciation on PPE 5,22,540
• Provision for taxation 12,42,500
• General reserve 4,00,000
• Investment revaluation reserve 12,500 34,51,460 V Profit for the period (III - IV) 8,47,820
42,99,280
Less: Administrative, Selling and Distribution expenses 8,22,540 Donation to charitable funds 25,500 Director’s
fees 66,760 Interest on Debentures 31,240 Compensation for breach of contract 42,530 Depreciation on PPE as per
Schedule II of the
Companies Act, 2013 4,75,340 14,63,910
(ii) When there are two whole-time directors, Managerial remuneration = 10% of ` 28,35,370
=` 2,83,537
(iii) When there are two whole time directors, a part time director and a manager. Managerial remuneration = 11%
of`28,35,370 =`311890.70 Since, the managerial remuneration as per profit and loss account is ` 2,85,350 which
exceeds the maximum amount payable in situation (a) and (b) above, therefore the company should obtain the
necessary approval.
Alternate Answer for calculation of Net Profit U/s 198 of the Companies Act, 2013
Net balance (1420180-572360) 8,47,820
Share suspense account represents application money received on shares, the allotment of which is not yet made.
You are required to compute effective capital as per the provisions of Schedule V. Would your answer differ if
Prabhat Ltd. is an investment company? (5 marks)
Particulars ` 000's Particulars ` 000's Fixed Deposits from Public 2,400 Sundry debtors 24,231
Depreciation 12,424
Salary and Perquisite to Managing Director 72
Director’s Fee 4
The Authorized Capital is 3,50,000 Equity Shares of` 100 each. The Loan from the State Government is secured by
a charge on the Land. Cash Credits by hypothecation of Stocks and Book Debts and the Other Secured Loans on the
Buildings and Plant and Machinery.
The following adjustments are yet to be made:
1. Investment Allowance Reserve to be created ` 5,400 (000's) 2. Provision to be made for Income-Tax in ` 4,400
(000's)
3. Provision to be made for Managing Director’s Commission at 1% of the Net Profits.
4. Proposed Dividend at 10%.
Depreciation as per Companies Act, is ` 10,424 (000's)
Prepare:
(a) Show the computation of Commission Payable to the Managing Director, and
(b) Prepare the Balance sheet of the Company, based on all the above. Answer:
Balance Sheet of ABC Ltd. as at 31st March (in` 000's)
Total 1,35,489 Note: Proposed Dividend = 10% of Paid Up Capital ` 25,000 (000s) =` 2,500 (000s)
Dividend Per Share = = ` 10.00
Total 25,000 Note 2: Reserves and Surplus (showing appropriations and transfers) (all figures for this year)
Particulars Opg. Additions Deductions Clg. Bal.
Bal.
General Reserve 6,031 Nil Nil 6,031
Surplus (P&L A/c) Nil 9,943 Preliminary 4,535 Expenses w/off = 8 Tfr to Investment Allowance Reserve = 5,400
Total 12,302 15,343 5,408 22,237 Note: Preliminary Expenses is not recognised as Asset as per AS-26, and is
hence fully written off out of Surplus.
Note 3: Long Term Borrowings
1. Term Loans
(a) From Banks - (b) From other parties
35,435
Note 4: Short Term Borrowings
Particulars
Other Loans and Advances
(a) Secured - Cash Credits with Banks (Secured against Hypothecation of C/s and Debtors)
(b) Unsecured - Other Loans
Total
Note 5: Trade Payables
Particulars
Total
30,672 1,114
31,786
This Year Prev. Year
2,645
6,162
166
8,973
Column (1) (2) (3) = 1± 2 (4) (5) (6) =4±5 (7) =1-4 (8)=3-6 Land 2,225 0 2,225 Building 9,316 2,193 7,123 Plant&M/c 64,282 30,328 33,954 Furniture,
etc 1,594 568 1,026 Vehicles 454 245 209 Total 77,871 33,334 44,537
Note: In the absence of information, the Other Columns are not filled up in the above Table.
Note 9: Inventories
Particulars This Year Prev. Year
Raw Materials and Components 42,014
Work in Progress 6,116
Finished Goods 1,414
Stores and Spares 2,771
Tools, Jigs and Dies 9,187 Total 61,502
Note 10: Trade Receivables (assumed as Secured and considered goods
and not outstanding for a period > 6 months)
Particulars This Year Prev. Year
Sundry Debtors 24,231
9,943
14,509 Total 14,509 2. Computation of Commission to the Managing Director Particulars ` 000's ` 000's Profit
as per draft Profit and Loss Account 14,509 Add: Depreciation charged in the Profit and Loss
Account 12,424 Salary and Remuneration to Managing Director 72 Director Fees 4 12,500
27,009 Less: Depreciation as per Companies Act (10,424) Profit for the purpose of Managerial Remuneration
16,585
Maximum Remuneration (5%) 829 Less: Salaries and Remuneration Paid (Directors’ Fees (72) is excluded for this
purpose)
Note: Since the Commission Payable is within the statutory limits, it is provided for in the books.
Space to write important points for revision
Q.3.12 RTP Practical
PQ Ltd., a non-investment company has been incurring losses for the past few years. The company provides the
following information for the current year:
PQ Ltd. has only one whole-time director, Mr. Hello. You are required to calculate the amount of maximum
remuneration that can be paid to him as per provisions of Companies Act, 2013, if no special resolution is passed at
the general meeting of the company in respect of payment of remuneration for a period not exceeding three years.
Answer:
Calculation of effective capital and maximum amount of monthly remuneration
Since PQ Ltd. is incurring losses and no special resolution has been passed by the company for payment of
remuneration, managerial remuneration will be calculated on the basis of effective capital of the company, therefore
maximum remuneration payable to the Managing Director should be @ ` 60,00,000 per annum*.
*If the effective capital is less then 5 Crore, limit of yearly remuneration payable should not exceed ` 60 lakhs as per
Companies Act, 2013.
9,90,00,000
Issued and subscribed capital:
67,500, 14% preference shares of ` 100 each fully paid 67,50,000
5,40,000 Equity shares of ` 100 each, ` 80 paid-up 4,32,00,000
Share suspense account 90,00,000
Reserves and surplus
Capital reserves (` 6,75,000 is revaluation reserve) 8,77,500
Securities premium 2,25,000
Secured loans:
15% Debentures 2,92,50,000
Unsecured loans:
Public deposits 16,65,000
Cash credit loan from SBI (short term) 5,92,500
Current Liabilities
Trade Payables 15,52,500
Assets:
Investment in shares, debentures, etc. 3,37,50,000
Profit and Loss account (Dr. balance) 68,62,500
Share suspense account represents application money received on shares, the allotment of which is not yet made.
You are required to compute effective capital as per the provisions of Schedule V. Would your answer differ if
Gaurav Ltd. is an investment company?
4 Divisible Profit
Q.4.1 2009 - June [2] (a) (iii) Write a short note on the following : Taxation on distributed profits.
Short Notes
(3 marks) [CS Exe - I]
Answer:
Corporate Dividend tax : Finance Act, 1997 introduced additional income tax, called tax on distributed profits, on
Joint stock companies on the account of their profits distributed by them among the shareholder as dividends. This
tax is known as Corporate Dividend Tax.
According to Sec. 115☐O(1) of the Income tax Act, any amount declared, distributed or paid by domestic company
by way of dividends, whether interim or otherwise shall be charged tax on distributed profits at the rate of 20.555%.
(including surcharges and Health and Education cess).
As per Sec. 115 - O(3) provides that the tax has to be paid within 14 days from the date of :
1. Declaration of dividend
2. Distribution of dividend, or
3. Payment of dividend, whichever is earliest.
Note : Like rates of income tax the rate of corporate dividend tax may vary from one financial year to another
financial year.
Space to write important points for revision
Q.4.2 2011 - June [3] (a) (ii) Short Notes Write a short note on the following :
Tax on distributed profit (3 marks) [CS Exe - I]
Answer:
Tax on distributed Profits : It is a tax chargeable on any amount declared, distributed or paid by a domestic
company by way of dividend whether interim or otherwise.
It is paid in addition to the income tax chargeable on total income. Tax on distributed profit is payable to the credit
of Central Government within 14 days from the date of declaration, distribution or payment whichever is earlier.
The present rate of tax is 17.647% plus surcharge @ 12% and Health and Education cess @ 4%.
Sumo Ltd. has a profit of ` 25 lakhs before charging depreciation for Financial year 2014-15. Depreciation in the
books was ` 11 lakhs and depreciation chargeable under Section 123 comes to`17 lakhs. Compute divisible profit for
the year. (2 marks)
Answer:
Computation of Divisible Profit
Particulars Amount (` In lakhs) Profit for the year 2014-2015 25.00 Less: Depreciation chargeable under Section
123 17.00
☐ Divisible profit for the year 8 Space to write important points for revision
Q.4.4 2009 - Nov [6] (v) Practical
Answer:
Yes, Corporate Dividend Tax (CDT) is payable by the company which has provided for the payment of dividend.
CDT is payable even if no income tax is payable. This is payable by a domestic company on distribution of profits
to its shareholders.
Disclosure of CDT as per the Schedule III to the Companies Act, 2013. 1. The rate of Dividend Distribution
Tax is as follows:
= 2,58,732.456
4. Accounting for Dividend Distribution Tax
☐ According to generally accepted accounting principles, the provision for dividend is recognised in the financial
statements of the year to which the dividend relates.
☐ In view of this, Dividend Distribution Tax on dividend, being directly linked to the amount of the dividend
concerned, should also be reflected in the accounts of the same financial year even though the actual tax liability in
respect thereof may arise in a different year.
in the Statement of Profit and Loss as per the Schedule III to the Companies Act, 2013. It is shown as an
appropriation or allocation of profit in the 'Notes to Accounts' of the 'Reserves and Surplus' item of the Balance
sheet.
☐ Since dividends are appropriation to profits which is not the part of disclosure in the Statement of Profit and
Loss, therefore, a question arises with regard to disclosure and presentation of Dividend Distribution Tax, as to
whether the said tax should also be disclosed as appropriation or should be disclosed along with the normal income-
tax provision for the year.
☐ The liability in respect of Dividend Distribution Tax arises only if the profits are distributed as dividends whereas
the normal income-tax liability arises on the earning of the taxable profits
☐ Since the Dividend Distribution Tax liability relates to distribution of profits as dividends which are disclosed as
appropriation/allocation of profit in the 'Notes to Accounts' of 'Reserves and Surplus', it is appropriate that the
liability in respect of Dividend Distribution Tax should also be disclosed therein.
☐ It is felt that such a disclosure would give a proper picture regarding payments involved with reference to
dividends.
☐ Dividend Distribution Tax liability should be recognised in the accounts of the same financial year in which the
dividend concerned is recognised.
Space to write important points for revision
CHAPTER
Chapter Comprises: ☹Elements of Cash ☹Classification of Cash Flow Activities ☹Cash Flows from Operating
Activities ☹Cash Flows from Investing Activities ☹Cash Flows from Financing Activities.
1. Budgeted 12 3 2.25
2. Actual
3. Variance
(1-2)
After After After Fix as 30 days 60 days 90 days per your i.e. on i.e. on i.e. on need.
Answer:
Cash: Cash in hand and deposits repayable on demand with any bank or other financial institutions.
Cash equivalent: Are short-term, highly liquid investments that are readily convertible into known amounts of cash
and are subject to insignificant risk or change in value.
Foreign Exchange Fluctuation:
The Foreign currency monetary assets (e.g. balance with bank, debtors etc.) and liabilities (e.g. creditors) are
initially recognised by translating them into reporting currency by the rate of exchange transaction date. On the
balance sheet date, these are restated using the rate of exchange on the balance sheet date. The difference in value is
exchange gain/loss. The exchange gain and losses are recognised in the statement of profit and loss as per AS11.
The exchange gain/losses in respect of cash and cash equivalents in foreign currency. (e.g. balance in foreign
currency bank account) are recognised by the principle aforesaid, and these balances are restated in the balance sheet
in reporting currency at the rate of exchange on balance sheet date. The change in cash or cash equivalents due to
exchange gains and losses are however not cash flows. This being so, the net increases/decreases in cash or cash
equivalents in the cash flow statements are stated exclusive of exchange gains and losses.
The resultant difference between cash and cash equivalents as per the cash flow statement and that recognised in the
balance sheet is reconciled in the note on cash flow statement as per AS-3, “Cash Flow Statement.”
(i) Loans and Advances given to the following and interest earned on them:
(1) to suppliers
(2) to employees
(3) to its subsidiaries companies
(ii) Investment made in subsidiary Smart Ltd. and dividend received (iii) Dividend paid for the year
(iv) TDS on interest income earned on investments made
(v) TDS on interest earned on advance given to suppliers (vi) Insurance claim received against loss of PPE by fire
Discuss in the context of AS 3 Cash Flow Statement. (4 marks)
Answer:
Treatment of the given transaction:
As per AS - 3 Cash Flow Statement, the given transaction should be treated as follows:
1. Loans and Advances given to suppliers and to employees and interest
received thereon should be reported as operating activity whereas any investment or loans & Advances related to
its subsidiary company should be reported as Investing Activity.
2. Investment made in subsidiary Smart Ltd. and dividend received from it, is required only reporting of dividend
received i.e. Investing cash flow.
3. Dividend paid is always classified as cash outflow from financing activities.
4. TDS on interest income earned on investment made should be treated as Investing Cash Out Flow.
5. TDS on interest earned on advance given to suppliers is treated operating cash outflow.
6. Insurance claim received against loss of PPE by fire should be treated as extra-ordinary items and hence, reported
separately. Space to write important points for revision
Q.3.1 RTP Practical From the following balance sheets of ABC Ltd. find out cash from operating activities only:
II. Assets
1. Non-Current Assets:
Additional Information:
Debentures were issued on 31-3-2020
Investments were made on 31-3-2020
Answer:
Calculation of Cash from Operating Activities (For the year ended 31st March, 2014)
Particulars ` ` Net Profit before tax (Note 1) 37,000 Adjustments for non-cash and non-operating items:
53,200
Less: Interest on Non-Current Investments 600
Opening Profit before working Capital Changes 52,600
Add: Increase in Current Liabilities:
Trade Payables 8,000
Less: Increase in Current Assets: 60,000
Inventory (37,000) Net Cash flow from Operating Activities 23,600
Notes:
(1) Calculation of Net Profit before tax:
Net Profit during current year (14,000 + 12,000) 26,000 Add: Transfer to General Reserve 11,000 37,000 Space to
write important points for revision
Q.3.2 RTP Practical From the following information calculate cash from operating activities. 31.3.2016 31.3.2015
` ` Cash 10,000 15,000
Net Profit (as per Statement) 1,80,000 Add: Depreciation Charged 10,000
Increase in Provision for doubtful debts 500
Provision for taxation for the year* 70,000 80,500 2,60,000 Less: Decrease in Marketable Securities
(8,000 - 4,000) (4,000)
Increase in Trade Receivable (20,000)
(50,000 - 30,000)
Increase in stock (47,000 - 35,000) (12,000)
Increase in Prepaid Expenses (3,000)
(4,000 - 1,000)
Decrease in Trade Payable (15,000) (54,000)
(55,000 - 40,000)
2,06,500
Income Tax Paid 45,000
Cash from Operating Activities 1,61,500 Working Note:
Particulars Note Amount ` I. Revenue from operations (Sales) 85,000 II. Other Income 1 18,000
III. Total Revenue 1,03,000 IV. Expenses Employee Benefit Expenses 10,000 Depreciation 20,000 Goodwill
Written off 8,000 Other Expenses Rent 5,000 Loss on Sale of Building 5,000 48,000
Profit before tax 55,000
Less Tax Paid 21,000
Net Profit for the period 34,000
Less Appropriations proposed dividend 10,000
Balance of Profit 24,000
Note: `
1. Other Income
Profit on Sale of Machinery 5,000
Dividend Received 3,000
Commission accrued 4,000
Income Tax Refund 6,000
88,000 Less: Profit on sale of machinery 5,000 Dividend received 3,000 Commission accrued 4,000 Income Tax
Refund 6,000 18,000 Cash generated from operating activities 70,000 Less: Tax paid ` 21,000 –` 6,000 (Refund of
tax) 15,000 Net Cash from Operating Activities. 55,000
Note: Tax paid during the year is treated as to provision for taxation made during the year.
Q.3.4 Practice Practical From the following summarized Balance sheet of a company calculate the Cash Flow from
Operating activity.
Particulars 31-3-2016 31-3-2015 ` `
Particulars Details Amount ` ` Net Profit for the year (` 60,000 ` 30,000) 30,000 Add Adjustment for Interest on
Debentures (60,000 3,600 × 6%)
Q.3.5 Practice Practical From the following particulars, calculate Cash Flows from Operating activities:
Q.3.6 Practice Practical From the following balance sheet of ABC Ltd. find out Cash from operating activities.
Particulars 31.3.2016 31.3.2015 ` `
Additional information: Debentures were issued on 31.3.2016. Investment were made on 31.3.2016.
Answer: Calculation of Cash from Operating Activities
Add Transfer to General Reserve 5,000 18,000 Adjustment for non cash and non operating items
Add items to be added interest on debentures (10% 2,100 on ` 21,000)
Depreciation (` 13,000 - ` 9,000) 4,000 Goodwill written off 2,000 Discount on Debentures written off 500 8,600
Less: Interest on Investment 26,600 Operating profit before working capital charges 26,300 Add: Increase in
current Liabilities 4,000
30,300
Less: Increase in current Assets 18,500
Net Cash from operating activities 11,800
Working Note:
Profit/Loss Debit Balance` 6,000 (Loss)
(Assets side of previous year balance sheet)
In current year
Profit/Loss Credit Balance ` 7,000 (Profit)
(Liabilities side of Balance Sheet current year)
After covering the loss of` 6,000 the Profit and Loss Credit balance shows ` 7,000
It means Net Profit for current year ` 7,000 +` 6,000 =` 13,000
With the help of the following statement of Profit and Loss for the year ended 31-3-2016 and Balance sheets as on
31.3.2015 and 31.3.2014 of ABC Ltd. calculate Cash flows from operating activities.
Depreciation 17,000
Salary 35,000
Other Expenses
Rent 72,000
Commission 23,000
Other Expenses 43,000 1,90,000 Net Profit for the Period 3,10,000 Less Appropriations proposed dividend
1,50,000 Net Profit 1,60,000
Non-current Liabilities
Loan 30,000 20,000 Current Liabilities
Trade Payable 50,000 3,50,000 Proposed dividend 1,50,000 20,000
Non-current Assets:
Plant 5,40,000 4,75,000 Patents 50,000 -
Current assets
Inventories 1,20,000 1,05,000
Trade Receivable 90,000 70,000
Total 8,00,000 6,50,000
Note: Depreciation was to be allowed` 20,000 but it is charged ` 17,000. Answer:
Calculation of Cash From Operating Activities (Indirect Method)
Particulars Details Amount ` ` Cash flow from operating activities
Net Profit before tax Profit for the year 1,60,000
Add Proposed dividend for 2016 1,50,000
3,10,000
Adjustment for depreciation 17,000
Operating profit before working capital changes 3,27,000
Less: Increase in current assets
Inventories 15,000 Trade Receivable 20,000 Less: Decrease in current liabilities
Trade Payable 3,00,000 3,35,000
Cash used in operating activities (8,000)
Note: Depreciation` 17,000 will be added back, not` 10,000 as` 17,000 was deducted to find out profit.
Space to write important points for revision
Q.3.8 RTP Practical Preet Ltd. presents you the following information for the year ended 31st March, 2019:
Net profit before tax provision 72,000 Add: Non cash expenditures:
Depreciation 48,000 Loss on sale of assets 96 Interest expenditure (non-operating activity) 24,000 72,096
Less: Non cash income 1,44,096
Amortisation of capital grant received (20)
Profit on sale of investments (non-operating income) (240)
Depreciation for the year was `1,00,000. At the beginning of the year, a piece of Plant was sold for ` 40,000 which
had a W.D.V. of` 30,000.
Calculate cash flow from Investing Activities.
Answer: Cash Flow from Investing Activities
Particulars Detail Amount ` `
Inflow from sale of Machinery 40,000 Outflow from Purchase of Machinery (3,30,000) Net cash used in investing
Activities (2,90,000)
Working Notes:
Plant and Machinery Account
Date Particulars ` Date Particulars ` 2015 2015
April 1 To Balance b/d 10,00,000 April 1 By Bank A/c 40,000 To Statement of Profit and 31.3.16 By Depreciation 1,00,000 By Balance c/d 12,00,000
Loss (Profit on Sale of
Plant) 10,000 To Bank A/c (Purchases)
(Balancing Figure) 3,30,000 13,40,000 Space to write important points for revision
13,40,000
Q.4.2 RTP
Calculate cash from investing activities.
Practical
Non-Current Investments
Opening Closing ` ` 2,00,000 4,00,000 During the year 40% of the investments were sold at 25% profit on cost.
Answer: Cash Flows from Investing Activities
Furniture
Provision for Depreciation
During the year Furniture Costing ` 5,000 (Depreciation` 1,000) was sold for ` 2,000
Opening Closing ` `
20,000 30,000 5,000 8,000
Answer: Cash from Investing Activities
Particulars `
Inflow from Sale of Furniture 2,000 Outflow from Purchase of Furniture* (15,000)
Cash used in investing activities (13,000)
*Working Notes: Dr.
Particulars
To Balance b/d
To Cash A/c (Balance Figure) (Purchases of Assets)
(i) During the year 12% Debentures were purchased for ` 50,000 and some other were sold at a profit of` 20,000.
Interest on investments was received for the year.
(ii) The piece of land was purchased out of surplus for investment purpose and let out. It realised ` 10,000 as rent.
(iii) A machine costing`40,000 (Depreciation provided thereon`15,000) was sold for` 17,500. Depreciation charged
during the year was ` 35,000.
(iv) Dividend received from Reliance Industries Ltd. @12%. (v) Patents written off to the extent of`10,000. Some
patents were sold at a profit of ` 5,000.
Answer:
Calculation of Cash from Investing Activities Particulars Detail Amount `
Particulars
To Balance b/d
To Bank A/c
(Purchase)
Balancing Figure
Dr. Particulars
To Balance b/d
To Bank A/c
(Purchase)
To Statement of Profit and Loss (Profit)
Dr. Particulars
To Balance b/d
To Statement of Profit and Loss – Profit
Q.4.5 Practice Practical Calculate Cash Flow from Investing Activities from the following information: Purchase
of machinery` 2,50,000; Sale of Machinery ` 35,000 Dividend received on shares held as investment ` 6,000
Goodwill purchased ` 1,00,000; investments sold ` 50,000 Interest received on debentures held as investment ` 4,000
Investments purchased ` 1,50,000; Patents sold ` 40,000
A piece of land was purchased as investment out of surplus. It was let out for commercial use and rent received (`)
20,000.
Answer: Calculation of Cash Flow from Investing Activities
From the following particulars calculate cash flow from financing activities.
1. Issue of equity share capital ` 5,00,000 at a premium of 15%.
2. 10% Debenture issued ` 2,00,000 at 1% discount.
3. Interim dividend paid on equity share ` 50,000.
1. A Bonus issue was made during the year 2015-16 in the ratio of 2:1 by capitalising the reserves.
2. Dividend paid in equity share was ` 20,000
3. Interest on debentures paid was ` 5,000
Dividend paid to equity shareholders 20,000 Interest paid on debentures 5,000 1,25,000 Net cash inflow from
Financing Activities 75,000
Note: As bonus share issued to not effect the cash, so they do not appear in cash flow statement.
Space to write important points for revision
Q.5.3 Practice Practical From the following information taken from the books of Mahajan Ltd. calculate cash from
financial activities. Particulars
Opening Closing ` ` 10% Preference Share Capital 10,00,000 12,00,000
Securities Premium 2,50,000 2,75,000 Debentures 6,00,000 4,50,000
Additional Information:
Interest paid on debentures ` 50,000
Answer: Calculation of cash from Financial Activities Particulars Detail Amount ` `
Q.5.4 Practice Practical From the following activities, calculate cash flows from financing activities:
Opening Closing ` `
5,00,000 3,00,000
10,00,000 14,00,000
2,00,000 3,60,000
1,20,000 1,80,000
During the year furniture costing` 80,000 was sold at a profit of` 60,000. Depreciation on furniture charged during
the year amounted to`1,00,000.
` Inflow from sale of furniture 1,00,000 Outflow on purchase of furniture ` (3,60,000 -(2,00,000 (2,40,000) 80,000))
Net Cash used in Investing Activities 1,40,000
Particulars
To Balance b/d
To Profit on Sale of Furniture
1,80,000
2,20,000 2,20,000
From the following extracts taken from the Balance Sheets of M/s Khanduja Ltd., on 31stMarch and the additional
information provided, you are required to calculate:
Particulars 2015 2016 Equity and Liabilities ` ` Equity Share Capital 20,00,000 30,00,000 10% Preference Share
Capital 2,00,000 1,00,000 Securities Premium - 1,00,000 Statement of Profit and Loss 4,00,000 8,00,000 10%
Debentures 10,00,000 10,00,000
Additional Information:
Preference shares were redeemed on 31stMarch, 2016 at premium of 5%. Dividend on equity shares was paid @8%.
Fresh issue of Equity shares was done on 1st April, 2015.
Answer:
(i) Cash Flows from Operating Activities
Particulars ` Net Profit before Tax (Note 1) 6,60,000 Adjustment for non-cash and non-operating items:
Add: Premium on Redemption of Preference shares 5,000
Note: (1) Calculation of Net Profit before Tax: ` Profit and Loss Balance on 31st March, 2016 8,00,000
Less: Profit and Loss Balance on 31st March, 2015 4,00,000
4,00,000
Add: Dividend on Preference shares (10% on ` 2,00,000) 20,000
Dividend on Equity Shares (8% on` 30,00,000) 2,40,000
6,60,000
Cash Proceeds from issue of Equity Shares 11,00,000 (` 10,00,000 + Securities Premium` 1,00,000)
Cash paid for Redemption of Preference Shares (`1,00,000 + (1,05,000) Premium` 5,000)
Dividend paid on Preference shares (20,000) Dividend paid on Equity Shares (2,40,000) Interest on Debentures
(1,00,000) Net Cash flows from financing activities 6,35,000
The following particulars relate to Bee Ltd. for the year ended 31st March, 2010 :
(i) Furniture of book value of ` 15,500 was disposed off for ` 12,000. (ii) Machinery costing ` 3,10,000 was
purchased and ` 20,000 were spent on its erection.
(iii) Fully paid 8% preference shares of the face value of`10,00,000 were redeemed at a premium of 3%. In this
connection 60,000 equity shares of` 10 each were issued at a premium of ` 2 per share. The entire money being
received with applications.
(iv) Dividend was paid as follows :
On 8% preference shares ` 40,000 On equity shares for the year 2009 - 10 `1,10,000 (v) Total sales were` 32,00,000
out of which cash sales were` 11,50,000. (vi) Total purchases were` 8,00,000 including cash purchase of` 60,000.
(vii) Total expenses were ` 12,40,000.
(viii) Taxes paid including dividend tax of` 22,500 were ` 3,30,000. (ix) Cash and cash equivalents as on 31st
March, 2010 were` 1,25,000. You are requested to prepare Cash Flow Statement as per AS-3 for the year ended
31stMarch, 2010 after taking into consideration the following also: On 31st March, 2009 On 31st March, 2010 ` `
Sundry debtors 1,50,000 1,47,000 Sundry creditors 78,000 83,000 Unpaid expenses 63,000 55,000 (8 marks)
Answer:
Cash Flow Statement for the year ended 31st March, 2010 Particulars ` ` l. Cash flow from Operating
Activities
Cash receipts from customers (W.N.1) 32,03,000 Less : Cash paid to suppliers and payment (20,43,000) for
expenses (W.N.3)
Cash generated from operations 11,60,000 Income tax paid (` 3,30,000 – ` 22,500) 3,07,500 8,52,500 Net cash from
operating activities
ll. Cash flows from Investing Activities
Sale of furniture
Purchase of machinery 12,000 Net cash used in investing activities (3,30,000) (3,18,000)
To Balance c/d
` Particulars ` 7,35,000 By Balance b/d 78,000 83,000 By Credit purchases 7,40,000 8,18,000 8,18,000 Total
payments to suppliers =` 7,35,000 +` 60,000 = ` 7,95,000
3. Cash paid to suppliers and payment for expenses
Particulars ` Outstanding expenses as on 31.3.2009 63,000 Add : Expenses charged to profit and loss account
12,40,000
13,03,000
Less : Outstanding expenses as on 31.3.2010 55,000
Payment on account of expenses 12,48,000
Total of payment to suppliers and payment for expenses =`7,95,000 + ` 12,48,000 = ` 20,43,000
Space to write important points for revision
Q.6.2 2010 - Nov [3] Practical From the following information, prepare a Cash Flow Statement as per AS-3 for
Banjara Ltd., using direct method:
Balance Sheet as on March 31, 2010
(`’ 000)
2010 2009
Assets :
Cash on hand and balances with bank 200 25
Marketable securities (having one month Maturity) 670 135
Sundry Debtors 1,700 1,200
Interest Receivable 100 — Inventories 900 1,950
Investments 2,500 2,500
PPE at Cost 2,180 1,910
Accumulated Depreciation (1,450) (1,060) PPE (net) 730 850
Total Assets 6,800 6,660
Liabilities :
Sundry Creditors 150 1,890
Interest Payable 230 100
Income tax Payable 400 1,000
Long term Debt 1,110 1,040
Total Liabilities 1,890 4,030
Shareholders’ Fund :
Share Capital 1,500 1,250
Reserves 3,410 1,380
4,910 2,630
Total Liabilities and Shareholders’ Fund 6,800 6,660
Statement of Profit or Loss for the year ended 31-3-10 (`’000) Sales 30,650 Cost of sales (26,000) Gross profit
4,650 Depreciation (450) Administrative and Selling expenses (910) Interest expenses (400) Interest income 300
Dividend income 200 Net profit before taxation and extraordinary items 3,390 Extraordinary items :
Insurance proceeds from earthquake disaster settlement 140 Net profit after extraordinary items 3,530 Income tax
(300)
(ii) Interest expense was` 400 of which`170 was paid during the period`100 relating to interest expense of the
prior period was also paid during the period.
Cash flows from Operating Activities Cash receipts from customers (W.N.2)
Cash paid to suppliers, employees and for expenses (W.N.3)
Cash generated from operations
Income tax paid (W.N.4)
30,150
(27,600) 2,550 (860) 1,690 Cash flow before extraordinary item proceeds
1,830
(350) 20
200
160
30
250
250
(180) (270) (1,200) (1,150) 710
Working Notes:
(1) Cash and cash equivalents
Cash and cash equivalents includes cash in hand and balances with banks and investments in money market
instruments for short period. (`) in `000 Particulars 2010 2009
Cash in hand and balance with bank 200 25 Short-term investments 670 135 Cash and cash equivalents 870 160 (2)
Cash receipts from customers
Particulars (`) in`000 Total sales 30,650 Add: Sundry debtors at the beginning of the year 1,200
31,850
Less: Sundry debtors at the end of the year (1,700) Cash sales 30,150
(3) Cash paid to suppliers, employees and for expenses Particulars (`) in `000
Cost of sales 26,000
Administrative and selling expenses 910
26,910
Add : Sundry creditors at the beginning of the year 1,890 Inventories at the end of year 900 2,790
29,700
Less : Sundry creditors at the end of year (150) — Inventories at the beginning of the year (1,950) (2,100) 27,600
Less : Income tax liability at the end of the year (400) 900
Note : Out of`900 thousands, tax deducted at source on dividends received (amounting to ` 40 thousands) is
included in cash flows from investing activities and the balance of` 860 thousands is included in cash flows from
operating activities.
(5) Repayment of long term borrowings during the year
(i) Total sales for the year were `199 crore out of which cash sales amounted to ` 131 crore.
(ii) Cash collections from credit customers during the year totaled`67 crore. (iii) Cash paid to suppliers of goods
and services and to the
employees of the enterprise amounted to ` 159 crore. (iv) Fully paid preference shares of the face value of ` 16
crore were
redeemed and equity shares of the face value of ` 16 crore were
allotted as fully paid up at a premium of 25%.
(v) ` 13 crore were paid by way of income tax.
(vi) Machine of the book value of` 21 crore was sold at a loss of ` 30
lakhs and a new machine was installed at a total cost of ` 40 crore. (vii) Debenture interest amounting ` 1 crore was
paid.
(viii) Dividends totalling`10 crore was paid on equity and preference
shares. Corporate dividend tax @ 17.647% was also paid. (ix) On 31stMarch, 2012 balance with bank and cash
on hand totalled`9
crore. (8 marks) Answer:
Cash Flow Statement for the year ended 31st March, 2013 (` in (` in Particulars Crores) Crores) Cash flow
from Operating Activities
Cash sales 131 Cash collected from credit customers 67 Less: Cash paid to suppliers for goods & services and
to employees (159) Cash from operations 39 Less: Income tax paid (13) Net cash generated from operating activities
26.00
Prepare Cash flow for Gamma Ltd., for the year ending 31.3.2014 from the following information:
1. Sales for the year amounted to` 135 crores out of which 60% was
cash sales.
2. Purchases for the year amounted to` 55 crores out of which credit
purchase was 80%.
3. Administrative and selling expenses amounted to ` 18 crores and
salary paid amounted to ` 22 crores.
4. The Company redeemed debentures of ` 20 crores at a premium of
10%. Debenture holders were issued equity shares of ` 15 crores
towards redemption and the balance was paid in cash. Debenture
interest paid during the year was ` 1.5 crores.
5. Dividend paid during the year amounted to ` 10 crores. Dividend
distribution tax @ 20% (assumed) was also paid.
6. Investment costing ` 12 crores were sold at a profit of` 2.4 crores. 7. ` 8 crores was paid towards income tax
during the year. 8. A new plant costing`21 crores was purchased in part exchange of an
old plant. The book value of the old plant was ` 12 crores but the
vendor took over the old plant at a value of ` 10 crores only. The
balance was paid in cash to the vendor.
9. The following balances are also provided
Answer :
In the books of Gamma Ltd.
Cash Flow Statement for the year ended 31st March, 2014
Particulars
To Balance b/d To Sales
Total
Debtors A/c
Amount Particulars Amount 45 By Bank 49 54 By Balance c/d 50 99 Total 99 2. Calculation of Payment to
Creditors
Particulars To C/B
To Balance Total
Creditors A/c
Q.6.5 2015 - Nov [3] (a) Practical Prepare cash flow statement of M/s MNT Ltd. for the year ended 31st March,
2015 with the help of the following information:
Less: Cash payment for trade payables (4,60,000) Wages Paid (4,92,500)
Office and Selling Expenses (75,000) (10,27,500) Cash generated from operations before taxes 2,47,500 Income tax
paid (65,000) Net cash generated from operating activities (A) 1,82,500
Working Notes :
1. Calculation of Cash Sales:
GP Ratio = 30%
Gross Profit = 3,82,500
Sales:
30% ☐ 3,82,500 =
100% ☐ 9
Cash Sales = ` 12,75,000
2. Adjustment for opening and closing inventory is not done in direct method as there is no movement of cash.
3. Adjustment of trade payable is not done in direct method as there is no movement of cash.
4. Depreciation is a non- cash item, hence it is not considered. Space to write important points for revision
Q.6.6 2016 - Nov [3] (a) Practical On the basis of the following information prepare a Cash Flow Statement for the
year ended 31st March, 2016 (Using direct method):
(i) Total sales for the year were ` 398 crores out of which cash sales amounted to ` 262 crores.
(ii) Receipts from credit customers during the year, totaled`134 crores. (iii) Purchases for the year amounted to`220
crores out of which credit purchase was 80%.
Balance in creditors as on
1.4.2015 ` 84 crores
31.3.2016` 92 crores
(iv) Suppliers of other consumables and services were paid` 19 crores in cash.
(v) Employees of the enterprises were paid ` 20 crores in cash. (vi) Fully paid preference share of the face value of `
32 crores were redeemed. Equity shares of the face value of ` 20 crores were allotted as fully paid up at premium of
20%.
(vii) Debentures of` 20 crores at a premium of 10% were redeemed. Debenture holders were issued equity shares in
lieu of their debentures.
(viii) ` 26 crores were paid by way of income tax.
(ix) A new machinery costing ` 25 crores was purchased in part exchange of an old machinery. The book value of
the old machinery was` 13 crores. Through the negotiations, the vendor agreed to take over the old machinery at a
higher value of` 15 crores. The balance was paid in cash to the vendor.
(x) Investment costing ` 18 crores were sold at a loss of ` 2 crores. (xi) Dividends totally` 15 crores (including
dividend distribution tax of ` 2.7 crores) was also paid.
(xii) Debenture interest amounting ` 2 crores was paid.
(xiii) On 31st March, 2015, Balance with Bank and Cash on hand totaled ` 2 crores. (8 marks)
Answer:
Cash Flow Statement for the year ending on 31.03.2016 Particulars (` in (` in Crores) Crores)
Preference share 32
Dividend paid 15
Debenture Interest paid 2 (49) ☐ Net Cash Flow from Financing Activities (C) (25) D Net Increase or Decrease in
cash or cash
equivalents (A+B+C) 100 E Opening Balances of cash and cash equivalents 2
From the following details relating to the Accounts of Grow More Ltd. prepare Cash Flow Statement:
Liabilities 31.3.2002 (`) 31.3.2001 (`) Share Capital 10,00,000 8,00,000 Reserve 2,00,000 1,50,000 Profit and Loss
Account 1,00,000 60,000 Debentures 2,00,000 — Provision for taxation 1,00,000 70,000
Net cash used in investing activities (6,10,000) Cash flow from financing activities light:
Proceeds from issue of shares 2,00,000 Proceeds from issue of debentures 2,00,000 Dividend paid (1,00,000) Net
cash from in financing activities 3,00,000 Net increase in cash or cash equivalents NIL Cash and Cash equivalents at
the beginning of the
year 2,00,000 Cash and Cash equivalents at the end of the year 2,00,000
Working Notes:
Provision for taxation account Particulars ` To Cash (Paid) 50,000 To Balance c/d 1,00,000 1,50,000 Particulars
` By Balance b/d 70,000 By Profit and Loss A/c 80,000 1,50,000
Plant and Machinery account Particulars ` Particulars `
8,45,000
By Depreciation 1,25,000
By Cash (sale of machine) 20,000
By Balance c/d 7,00,000
` ` Liabilities
Equity Share Capital 6,00,000 5,00,000 10% Redeemable Preference Capital — 2,00,000 Capital Redemption
Reserve 1,00,000 — Capital Reserve 1,00,000 — General Reserve 1,00,000 2,50,000 Profit and Loss Account
70,000 50,000 9% Debentures 2,00,000 — Sundry Creditors 95,000 80,000 Bills Payable 20,000 30,000 Liabilities
for Expenses 30,000 20,000 Provision for Taxation 95,000 60,000 Proposed Dividend 90,000 60,000
15,00,000 12,50,000
Additional Information :
(i) A piece of land has been sold out for ` 1,50,000 (Cost — ` 1,20,000) and the balance land was revalued. Capital
Reserve consisted of Profit on sale and profit on revaluation.
(ii) On 1st April, 2002 a plant was sold for` 90,000 (Original Cost — ` 70,000 and W.D.V. —` 50,000) and
Debentures worth` 1 lakh was issued at par as part consideration for Plant of ` 4.5 lakh acquired.
(iii) Part of the investments (Cost — ` 50,000) was sold for ` 70,000. (iv) Pre-acquisition dividend received`5,000
was adjusted against cost of Investment.
(v) Directors have proposed 15% dividend for the current year. (vi) Voluntary separation cost of`50,000 was
adjusted against General
Reserve.
(vii) Income-tax liability for the current year was estimated at`1,35,000. (viii) Depreciation @ 15% has been written
off from Plant account but no
Answer: Cash Flow Statement of Ryan Limited For the year ended 31st March, 2003
``
Cash generated from operations 3,23,000 Income taxes paid (1,00,000) 2,23,000 Voluntary separation payments
(1,10,000)
Net cash from operating activities 1,13,000 Cash flow from investing activities
Purchase of plant (3,50,000) Purchase of investments (25,000) Proceeds from sale of land 1,50,000 Proceeds from
sale of plant 90,000 Proceeds from sale of investments 70,000 Pre☐acquisition dividend received 5,000
Net decrease in cash and cash equivalents (25,000) Cash and cash equivalents at the beginning of the 90,000 year
Working Notes:
1. Net profit before taxation: ` Retained profit 70,000 Less: Balance as on 31.3.2002 (50,000) 20,000 Provision for
taxation 1,35,000 Proposed dividend 90,000 2,45,000
To Balance b/d
To Profit and loss account To Debentures
To Bank
` Particulars `
` Particulars `
2,00,000 By Cash (Sale) 1,50,000 30,000 By Balance c/d 1,50,000
70,000
3,00,000 3,00,000
4. Particulars To Balance c/d
5. Particulars
To Balance b/d
To Profit and loss account To Bank (Balancing figure)
1,00,000 1,00,000
Investments Accounts
` Particulars `
account
1,50,000 1,50,000
7. General Reserve Account Particulars ` Particulars `
1,00,000
1,00,000
2,50,000 2,50,000 8. Provision for Taxation Account Particulars ` Particulars ` To Bank (Balancing figure) To
Balance c/d
1,95,000 1,95,000
9. Voluntary Separation Payments Account Particulars ` Particulars ` To Balance b/d
To Bank (Balancing figure) 65,000 By General reserve 50,000 1,10,000 By Balance c/d 1,25,000 1,75,000 1,75,000
Space to write important points for revision
Q.7.3 2003 - Nov [5] Practical The Balance Sheet of New Light Ltd. for the years ended 31stMarch, 2001 and 2002
are as follows :
Liabilities 31st March 31st March Assets 31st March 31st March 2001 2002 2001 2002 (`) (`) (`) (`) Equity share capital 12,00,000 16,00,000 PPE
32,00,000 38,00,000 Less: Depreciation 9,20,000 11,60,000 10% Preference share capital 4,00,000 2,80,000 22,80,000 26,40,000 Capital Reserve —
40,000 Investment 4,00,000 3,20,000 General Reserve 6,80,000 8,00,000 Cash 10,000 10,000 Profit & Loss A/c 2,40,000 3,00,000 Other current
assets11,10,000 13,10,000 9% Debentures 4,00,000 2,80,000 Preliminary expenses 80,000 40,000 Current liabilities 4,80,000 5,20,000
Additional information :
(i) The company sold one fixed asset for` 1,00,000, the cost of which was ` 2,00,000 and the depreciation provided
on it was ` 80,000. (ii) The company also decided to write off another PPE costing ` 56,000 on which depreciation
amounting to` 40,000 has been provided.
(v) Debentures and preference share capital redeemed at 5% premium. (vi) Company decided to value stock at cost,
whereas previously the practice was to value stock at cost less 10%. The stock according to books on 31-3-2001
was`2,16,000. The stock on 31-3-2002 was correctly valued at ` 3,00,000.
Prepare Cash Flow Statement as per revised Accounting Standard-3 by indirect method. (16 marks)
Particulars ` `
Working Notes:
1. Revaluation of stock increases the opening stock by ` 24,000. × 10 = ` 24,000
Hence, opening balance of other current assets will be as follows: ` 11,10,000 + ` 24,000 = ` 11,34,000
Due to under valuation of stock, the opening balance of profit and loss account be increased by ` 24,000.
Opening balance of profit and loss account after revaluation of stock will be ` 2,40,000 +` 24,000 = ` 2,64,000
By
By
By 40,56,000
Particulars ` ` Bank A/c (sale of PPE) 1,00,000
Accumulated
depreciation A/c 80,000
Profit and Loss A/c (loss
40,56,000
3. Investment Account Particulars
To Balance b/d
To Capital reserve A/c (Profit on sale of investment)
` Particulars `
80,000 By Balance b/d 9,20,000
40,000 By Profit and Loss A/c
11,60,000 (depreciation for 3,60,000 the period)
12,80,000 12,80,000
5. Unpaid dividend is taken as non☐current item and dividend paid is shown at (` 1,20,000 – ` 16,000) ` 1,04,000.
Alternatively: Unpaid dividend can be considered as current liability and
therefore dividend paid can be shown at`1,20,000, due to this assumption
cash flow from operating activities will get affected. The cash flow from
operating activities will increase by`16,000 to`6,08,000 and cash flow from
financing activities will get reduced by` 16,000 to` 28,000 i.e.` 12,000. Space to write important points for revision
Q.7.4 2004 - May [4] Practical ABC Ltd. gives you the following informations. You are required to prepare
Cash Flow Statement by using indirect methods as per AS-3 for the year ended 31.03.2004 :
Balance Sheet as on
Liabilities 31 March 31 March Assets 31 March 31 March
Earnings Debentures
Additional Information :
(i) Net profit for the year ended 31st March, 2004, after charging depreciation` 1,80,000 is ` 22,40,000.
(ii) Debtors of` 2,30,000 were determined to be worthless and were written off against the provisions for doubtful
debts account during the year.
(iii) ABC Ltd. declared dividend of ` 12,00,000 for the year 2003-2004. (16 marks) Answer :
Cash flow Statement of ABC. Ltd. for the year ended 31.3.2004 Particulars ` ` Cash flows from Operating
activities:
Net Profit 22,40,000 Add: Adjustment for Depreciation
(` 7,90,000☐` 6,10,000) 1,80,000 Operating profit before working capital 24,20,000 changes
Add: Decrease in Inventories 90,000 (` 20,10,000☐` 19,20,000)
Increase in provision for doubtful debts 2,70,000 (` 4,20,000☐` 1,50,000)
27,80,000 Less: Increase in Current Assets:
Debtors (` 30,60,000 ☐ 6,70,000
` 23,90,000)
Prepaid expenses
(` 1,20,000☐` 90,000) 30,000
Decrease in current liabilities:
Creditors (` 8,80,000 ☐ 60,000
` 8,20,000)
Expenses outstanding
(` 8,30,000☐` 2,70,000) 60,000 8,20,000 Net cash from operating activities 19,60,00 Cash flows from investing
activities
Purchase of Plant & Equipment
(` 40,70,000☐` 27,30,000) 13,40,000 Net cash used in investing activities (13,40,000) Cash flows from Financing
Activities
Bank loan raised (` 3,00,000 ☐` 1,50,000) 1,50,000 Issue of debentures 9,00,000 Payment of Dividend (`12,00,000
–`1,50,000) (10,50,000) Net cash used in financing activities NIL Net increase in cash during the year 6,20,000 Add:
Cash and cash equivalents as on
1.4.2003 (` 15,20,000 + ` 11,80,000) 27,00,000 Cash and cash equivalents as on 31.3.2004 33,20,000 (` 18,20,000 +
` 15,00,000)
Alternatively: The adjustment of writing off bad debts can be ignored and the solution can be given on the basis of
figures of debtors and provision for doubtful debts as appearing in the balance sheet on 31.3.2004. In this question
bad debts of` 2,30,000 were written off against the provision for
doubtful debts A/c during the year.
So, in this question bad debts have been added back in the closing
balance of provision for bad and doubtful debts account.
Space to write important points for revision
The following figures have been extracted from the Books of X Limited for the year ended on 31.3.2004. You are
required to prepare a cash flow statement.
(i) Net profit before taking into account Income Tax and Income from law suits but after taking into Account the
following items was ` 20 lakhs:
(a) Depreciation on PPE ` 5 lakhs.
(b) Discount on issue of Debentures written off ` 30,000. (c) Interest on Debentures paid ` 3,50,000.
(d) Books value of investments ` 3 lakhs (Sale of Investments for
` 3,20,000).
(e) Interest received on investments ` 60,000.
(f) Compensation received`90,000 by the company in a suit filed.
Q.7.6 2006 - Nov [3] Practical The following are the summarised Balance Sheets of ‘X’ Ltd. as on March 31, 2005
and 2006 :
Liabilities As on As on 31.3.2005 31.3.2006 (`) (`) Equity share capital 10,00,000 12,50,000 Capital Reserve —
10,000 General Reserve 2,50,000 3,00,000 Profit and Loss A/c 1,50,000 1,80,000 Long-term loan from the Bank
5,00,000 4,00,000 Sundry Creditors 5,00,000 4,00,000 Provision for Taxation 50,000 60,000 Proposed Dividends
1,00,000 1,25,000 25,50,000 27,25,000 Assets Year Year 2005 2006 (`) (`) Land and Building 5,00,000 4,80,000
Machinery 7,50,000 9,20,000 Investment 1,00,000 50,000 Stock 3,00,000 2,80,000 Sundry Debtors 4,00,000
4,20,000 Cash in Hand 2,00,000 1,65,000 Cash at Bank 3,00,000 4,10,000 25,50,000 27,25,000 Additional
Information :
(i) Dividend of` 1,00,000 was paid during the year ended March 31, 2006.
(ii) Machinery during the year purchased for ` 1,25,000. (iii) Machinery of another company was purchased for a
consideration
Particulars
Amount Amount (`) (`)
Cash generated from operations 2,35,000 Income tax paid (W.N.-4) (45,000)
Net cash from Operating activities 1,90,000 B. Cash Flows from Investing Activities :
Purchase of Machinery (1,25,000) Sale of Investment (` 50,000 +` 10,000) 60,000 Cash used in investing activities
(65,000)
Machinery A/c
` Particulars `
Investment A/c
Particulars
To Balance b/d
Amt. ( `) Particulars Amt. (`) 1,00,000 By Bank A/c (Bal. fig.) 60,000
1,10,000 1,10,000
Particulars To Bank
To Balance c/d
Net cash used in operating activity (3,472) (B) Cash flow from investing activity
Purchase of PPE (22,092)
Interest income 3,000
The following are the summarized Balance Sheets of Lotus Ltd. as on 31st March, 2010 and 2011.
Liabilities 31-3-10 31-3-11
5,00,000
Cash and cash equivalents at the end of the
year (1,40,000 + 4,10,000) 5,50,000
Working Notes:
1. Calculation of Net Profit before tax. ` Increase in Profit & Loss (Cr.) balance 80,000 Add: Provision for
taxation made during the year. 55,000 1,35,000 2. Calculation of Depreciation charged on Machinery
Particulars Amount Particulars Amount ` `
To Balance b/d 7,50,000 By Depreciation (Bal. fig) 55,000 To Bank 1,25,000 By Balance c/d 9,20,000 To Equity
share capital 1,00,000
Surya Ltd. has provided you the following particulars. Prepare Cash Flow from Operating Activities by Indirect
Method in accordance with AS 3: Profit & Loss Account of Surya Ltd.
for the year ended 31st March, 2013
Particulars
To Depreciation
To Patents written off
To Provision for Tax
To Proposed dividend
To Transfer to
Reserve
To Net Profit
` Particulars `
86,700 By Operating Profit
35,000 before depreciation 11,01,600 1,25,000 By Profit on Sale on
72,000 Investments 10,000
87,000 By Refund of Tax 3,000 By Insurance Claim
8,08,900 Major Fire Settlement 1,00,000 Total 12,14,600 Total 12,14,600 Additional information:
in `
Answer:
Indirect Method
Cash flow from Operating activities for the year ended 31stMarch, 2013
disclosed:
`
Profit before tax 8,000
Income Tax (3,000)
Profit after tax 5,000
Proposed Dividends (4,000)
Retained Profit 1,000 Further Information is available:
1. Depreciation on Building ` 1,000
2. Depreciation on Furniture & Fixtures for the year ` 2,000 3. Depreciation on Cars for the year ` 5,000. One car
was disposed during the year for ` 3,400 whose written down value was ` 2,000. 4. Purchase investments for ` 6,000.
5. Sold investments for ` 10,000, these investments cost ` 2,000. Prepare Cash Flow Statements as per AS-3
(revised) using indirect method. (12 marks) Answer:
Harry Ltd.
Cash Flow Statement for the year ended 31st March, 2017
``
Depreciation (1,000+2,000+5,000) 8,000 Profit on sale of Investment (8,000) Profit on sale of car (1,400)
Operating profit before working capital changes 6,600 Increase in Trade receivables (2,000) Increase in inventories
(6,000) Increase in Trade payable 3,000 Cash generated from operations 1,600 Income taxes paid (2,000) Net cash
generated from operating activities (A) (400) Cash flows from investing activities
Sale of car 3,400 Purchase of car (16,000) Sale of Investment 10,000 Purchase of Investment (6,000) Purchase of
Furniture & fixtures (14,000) Net cash used in investing activities (B) (22,600)
` 2,000 must have been declared and paid in the year 2016-17. Hence, it has been considered as cash outflow for
preparation of cash flow statement of 2016-17.
Working Notes:
1. Calculation of Income taxes paid
`
34,000 25,000
2,000 5,000
— 2,000
36,000 32,000
(22,000) (16,000) 14,000 16,000
(i) Sales for the year`48,00,000. The Company sold goods for cash only. (ii) Cost of goods sold was 75% of sales.
(iii) Closing inventory was higher than Opening inventory by ` 50,000. (iv) Trade creditors on 31.3.2006 exceed the
outstanding on 31.3.2005
by ` 1,00,000.
(v) Tax paid during the year amounts to ` 1,50,000.
(vi) Amounts paid to Trade Creditors during the year ` 35,50,000. (vii) Administrative and Selling Expenses paid `
3,60,000. (viii) One new machinery was acquired in December, 2005 for`6,00,000.
Answer:
Direct Method:
Raj Limited
Cash flow Statement for the year ended 31-3-06 Cash Flow From Operating Activities ` `
Working Notes:
(☐) Sales 48,00,000 Less: 3/4 of cost of sales (36,00,000)
12,00,000
Less: Administration Expenses 3,60,000
The following information was provided by M/s PQR Ltd. for the year ended 31st March, 2019 :
1. Gross Profit Ratio was 25% for the year, it amounts to ` 3,75,000. 2. Company sold goods for cash only.
3. Opening inventory was lesser than closing inventory by ` 25,000. 4. Wages paid during the year ` 5,55,000.
5. Office expenses paid during the year ` 35,000.
6. Selling expenses paid during the year ` 15,000.
7. Dividend paid during the year`40,000 (including dividend distribution
tax).
8. Bank Loan repaid during the year ` 2,05,000 (included interest
` 5,000)
9. Trade Payables on 31stMarch, 2018 were`50,000 and on 31stMarch,
2019 were ` 35,000.
10. Amount paid to Trade payables during the year ` 6,10,000. 11. Income Tax paid during the year amounts to `
55,000. (Provision for taxation as on 31st March, 2019` 30,000.) 12. Investments of`8,20,000 sold during the year at
a profit of`20,000. 13. Depreciation on furniture amounts to ` 40,000.
14. Depreciation on other tangible assets amounts to ` 20,000. 15. Plant and Machinery purchased on 15th
November, 2018 for ` 3,50,000.
16. On 31stMarch, 2019`2,00,000, 7% Debentures issued at face value in an exchange for a plant.
17. Cash and Cash equivalents on 31st March, 2018` 2,25,000. (A) Prepare cash flow statement for the year ended
31st March, 2019,
using direct method.
(B) Calculate cash flow from operating activities, using indirect method. (10 marks) Answer:
M/s PQR Ltd.
Cash Flow Statement for the year ended
31st March, 2019 (Using direct method)
Less: Cash payments for trade Payables (6,10,000) Wages paid (5,55,000) Office expenses (35,000) Selling
expenses (15,000) (12,15,000)
Working Note:
Calculation of net profit earned during the year:
Particulars ` ` Gross profit 3,75,000 Less: Office expenses, selling expenses 50,000 Depreciation 60,000 Interest
paid 5,000 (1,15,000)
2,60,000
Add: Profit on sale of investments 20,000
Net profit before tax 2,80,000
Space to write important points for revision
9 Miscellaneous
Statement?
Answer:
S.N. Basis Cash Flow Statement 1 Deals with Cash flow statement deals with the changes in cash.
Fund Flow Statement Fund flow statement deals with the changes in working capital position between two points
of time.
There is no such type of direct or indirect method for preparation of fund flow statement.
Fund flow statement records sources and application of funds.
4 Balances
5 Statement of change Ca s h f low statement Fund Flow Statement does contains opening as well as not contain
such balances. closing balances of cash
and cash equivalents.
Not in cash flow statement. A statement of change in
5
Profit or Loss Pre and Post Incorporation
This Chapter Covers: Study’s Chapter: 5
Chapter Comprises: ☹Introduction ☹Computing Profit or Loss Prior to Incorporation ☹Basis of Apportionment
☹Pre-Incorporation Profits & Losses
First Indepth
learning
i.e.....Time
............ Day 1
1. Budgeted 9
2. Actual
3. Variance
(1-2)
Instant
Revision (in hours)
2.15 1.5
Plan and Manage your Time Periodic Revision
(in hours)
After After After Fix as 30 days 60 days 90 days per your i.e. on i.e. on i.e. on need.
Rama Udyog Limited was incorporated on August 1, 2008. It had acquired a running business of Rama & Co. with
effect from April 1, 2008. During the year 2008-09, the total Sales were`36,00,000. The Sales per month in the first
half year were one-half of what they were in the later half year. The net Profit of the company, ` 2,00,000 was
worked out after charging the following expenses (i) Depreciation`1,08,000, (ii) Audit fees`15,000, (iii) Directors’
fees ` 50,000, (iv) Preliminary expenses ` 12,000, (v) Office expenses ` 78,000, (vi) Selling expenses ` 72,000 and
(vii) Interest to vendors upto August 31, 2008` 5,000.
Please ascertain pre-incorporation and post-incorporation profit for the year ended 31st March, 2009. (6 marks)
Answer:
Statement showing pre and post incorporation profit for the year ended 31st March, 2009
Particulars
Gross Profit
Less: Depreciation
Audit Fees
Director’s Fees
Preliminary Expenses Office Expenses
Selling Expenses
Interest to vendors
The sales per month in the first half year were half of what they were in the later half year. If in the later half year,
sales per month is` 1 then it should be 50 paise per month in the first half year. So sales for the first four months (i.e.
from 1st April, 2008 to 31st July, 2008) will be 4 × 0.50 =` 2 and for the last eight months (i.e. from 1st August, 2008
to 31st March, 2009) will be (2 × 0.50 + 6 × 1) =` 7. Thus sales ratio is 2:7.
2. Time Ratio
1st April, 2008 to 31st July, 2008 : 1st August, 2008 to 31st March, 2009 = 4 month : 8 month = 1:2
Thus, time ratio is 1:2.
3. Gross Profit
Gross profit = Net profit + All expenses
=`2,00,000 +`(1,08,000 +15,000 + 50,000 +12,000 +78,000 +72,000 + 5,000)
=` 2,00,000 +` 3,40,000 =` 5,40,000
The promoters of M/s. Glorious Ltd. took over on behalf of the company a running business with effect from 1st
April, 2012. The company got incorporated on 1st August, 2012. The annual accounts were made upto 31st March,
2013 which revealed that the sales for the whole year totaled ` 1,600 lakh out of which sales till 31st July, 2012 were
for` 400 lakhs. Gross profit ratio was 25%.
The expenses from 1st April 2012, till 31st March, 2013 were as follows:
( ` in lakhs)
Salaries 69
Rent, Rates and Insurance 24
Sundry Office Expenses 66
Travellers’ Commission 16
Discounts Allowed 12
Bad Debts 4
Directors’ Fee 25
Audit Fee 9
Depreciation on Tangible Assets 12
Debenture Interest 11
Prepare a statement showing the calculation of Profits for the preincorporation and post-incorporation periods. (8
marks)
Answer:
Statement showing the calculation of Profits for the pre-incorporation and post- incorporation periods
Particulars Total
Amount (` in lakhs)
Gross Profit (25% of ` 1,600) 400 Less: Salaries 69 Rent, rates and Insurance 24 Sundry office expenses 66
Travellers’ commission 16 Discount allowed 12 Bad debts 4 Directors’ fee 25 Audit Fees* 9 Depreciation on
tangible assets 12 Debenture interest 11 New profit 152
Working Notes:
1. Sales ratio
Sales for the whole year Sales upto 31st July, 2012 Therefore, sales for the period from 1st August, 2012 to 31st
March, 2013
Basis of Pre
Post -
Sales 2.25 Time 4
Post -
32.75
Post
incorpo
ration
(` in lakhs)
300
46
16
44
12
9
3
25
6.75
8
11
119.25
( ` in lakhs) 1,600
400
1,200
2. Time ratio
1st April, 2012 to 31st July, 2012: 1st August, 2012 to 31st March, 2013 = 4 months: 8 months = 1:2
Thus, time ratio is 1:2
__________________________
* Audit fee has been assumed to be related with tax audit and therefore apportioned into pre and post-incorporation
periods on the basis of Sales.
Space to write important points for revision
Sneha Ltd. was incorporated on 1st July, 2013 to acquire a running business of Atul Sons with effect from 1st April,
2013. During the year 2013-14, the total sales were`24,00,000 of which`4,80,000 were for the first six months. The
Gross profit of the company ` 3,90,800. The expenses debited to the Profit & Loss Account included:
month)
(iv) Salaries and General Expenses ` 1,28,000
(v) Preliminary Expenses written off ` 10,000
(vi) Donation to a political party given by the company ` 10,000. Prepare a statement showing pre-incorporation and
post-incorporation profit for the year ended 31st March, 2014. (8 marks)
Answer:
Note : Sale of 1st 6 months = 4,80,000
It seems that it should be sale of 1st 3 months. Any ways we are solving, assuming that question is correct and sale
of 4,80,000 is evenly spread even the 6 months.
To Director Fees WN - 2 - 30,000 By GP 39,080 3,51,720 To Bad Debts WN - 3 720 6,480 (24:216)
To Advertisement WN - 4 6,000 18,000 WN-1
To Sal/Gen Expanse WN - 5 32,000 96,000
4. Since it is monthly basis hence distributed on time basis Pre = 3 × 2,000 = 6,000 Post = 9 × 2,000 = 18,000
5. On time Basis : Pre = 1,28,000 × 3/12 = 32,000 Post = 1,28,000 × 9/12 = 96,000
6. Full Preliminary Expense should be in the post incorporation period.
7. Donation is given by the Company, Hence full amount is changed to post incorporation period.
Space to write important points for revision
Q.1.4 2015 - May [3] (a) Practical The partners Kamal and Vimal decided to convert their existing partnership
business into a Private Limited Company called M/s. KV Trading Private Ltd. with effect from 1-7-2014.
The same books of accounts were continued by the company which closed its account for first term on 31-3-2015.
The summarized Profit and Loss Account for the year ended 31-3-2015 is below:
Sales
Interest on Investments Bad debts recovered
Incorporation WN-1 Sales 240.00 34.29 205.71 Pre 6.00 6.00 – Pre 0.50 0.50 –
Working Notes:
1. Calculation of Sales Ratio
Let the average sales per month be x
Total sales from 01.04.2014 to 30.06.2014 will be 3x
Average sales per month from 01.07.2014 to 31.03.2015 will be 2x Total sales from 01.07.2014 to 31.03.2015 will
be 2x × 9 =18x Ratio of Sales will be 3x: 18x i.e. 3:18 or 1:6
2. Apportionment of Salary
Let the salary per month from 01.04.2014 to 30.09.2014 is x Salary per month from 01.10.2014 to 31.03.2015 will
be 2x Hence, pre incorporation salary (01.04.2014 to 30.06.2014) = 3x Post incorporation salary from 01.07.2014 to
31.03.2015 = (3x + 12x) i.e.15x
Ratio for division 3x: 15x or 1: 5
3. Apportionment of Rent ` Lakhs Total Rent 5.5 Less: Additional rent from 1.7.2014 to 31.3.2015 1.8 Rent of old
premises for 12 months 3.7 Pre Post Apportionment in time ratio 0.925 2.775 Add: Rent for new space - 1.80 Total
0.925 4.575
4. Calculation of time Ratio
3 Months: 9 Months i.e. 1:3
Space to write important points for revision
SALE Limited was incorporated on 01.08.2014 to take-over the business of a partnership firm w.e.f.01.04.2014. The
following is the extract of Profit and Loss Account for the year ended 31.03.2015:
Particulars Amount Particulars Amount (`) (`) To Salaries 1,20,000 By Gross Profit 6,00,000 To Rent Rates &
Taxes 80,000
To Commission on Sales 21,000
To Depreciation 25,000
To Interest on Debentures 32,000
To Director Fees 12,000
To Advertisement 36,000
To Net Profit for the Year 2,74,000
6,00,000 6,00,000
(i) SALE Limited initiated an advertising campaign which resulted increase in monthly average sales by 25% post
incorporation. (ii) The Gross profit ratio post incorporation increased to 30% from
25%.
You are required to apportion the profit for the year between preincorporation and post-incorporation, also explain
how pre-incorporation profit is treated in the accounts. (8 marks)
Answer:
In the books of Sale Ltd. Profit & Loss A/c
Particulars
Time ratio (1:2) Time ratio (1:2) Sales ratio (2:5) Time ratio (1:2)
Post
40,000 80,000
26,667 53,333
6,000 15,000
8,333 16,667
– 32,000
Directors fees Post – 12,000
Advertisement Post – 36,000
Working Notes:
1. Gross profit ratio
From 1.4.2014 to 31.7.2014 gross profit is 25% of sales Then, 25% of 4x = 1x
Gross profit for next 8 months (i.e. from 1.8.2014 to 31.3.2015) is 30% Then, 30% of 10x = 3x
Therefore gross profit ratio will be 1: 3
2. Time ratio
1st April, 2014 to 31st July, 2014 : 1st August, 2014 to 31st March, 2015 = 4 months : 8 months = 1: 2
Thus, time ratio is 1: 2.
3. Sales ratio
Let the monthly sales for first 4 months (i.e. from 1.4.2014 to 31.7.2014) be = x
Then, sales for 4 months = 4x
Monthly sales for next 8 months (i.e. from 1.8.2014 to 31.3.2015) = x + 25% of x = 1.25x
Then, sales for next 8 months = 1.25x × 8 = 10x
Total sales for the year = 4x + 10x = 14x
Sales Ratio = 4x : 10x i.e. 2:5.
Space to write important points for revision
Roshani & Reshma working in partnership, registered a joint stock company under the name of Happy Ltd. on May
31st 2016 to take over their existing business. The summarized Profit & Loss A/c as given by Happy Ltd. for the
year ending 31st March, 2017 is as under:
Happy Ltd.
Profit & Loss A/c for the year ending March 31, 2017 Particulars Amount in Particulars Amount in ` `
To Salary 1,44,000 By Gross Profit 4,50,000
To Interest on Debenture 36,000
To Sales Commission 18,000
To Bad Debts 49,000
To Depreciation 19,250
To Rent 38,400
To Audit fees 12,000
To Net Profit 1,33,350
Total 4,50,000 Total 4,50,000
Prepare a Statement showing allocation of expenses & calculation of preincorporation & post-incorporation profits
after considering the following information:
(i) GP ratio was constant throughout the year.
(ii) Depreciation includes ` 1,250 for assets acquired in post incorporation period.
(iii) Bad debts recovered amounting to ` 14,000 for a sale made in 2013-14 has been deducted from bad debts
mentioned above.
(iv) Total sales were` 18,00,000 of which ` 6,00,000 were for April to September.
(v) Happy Ltd. had to occupy additional space from 1st Oct. 2016 for which rent was ` 2,400 per month. (8 marks)
Answer:
A statement showing calculation of pre & post incorporation profit
Particulars Basis Ratio Pre Post Gross Profit Sales 1 : 8 50,000 4,00,000 Bad debt recovered Pre – 14,000 –
64,000 4,00,000
Less:
Salary Time 1 : 5 24,000 1,20,000
Interest on Debenture Post – – 36,000
Sales Commission Sales 1 : 8 2,000 16,000
Bad debts Sales 1 : 8 7,000 56,000
Depreciation W. N. 4 3,000 16,250
Rent W. N. 5 4,000 34,400
Audit fees Post – 12,000
Working Notes:
1. Time Ratio = 2 : 10 or 1 : 5
Pre: 1-4-16 to 31-5-16 = 2 months
Post: 31-5-16 to 31-3-17 = 10 months
2. Sales Ratio:
Total Sales 18,00,000
Ratio = 2 : 16
=1:8
3. Calculation of Bad debt:
4. Depreciation:
Total 19,250
The promotors of Shiva Ltd. took over on behalf of the company a running business with effect from 1stApril 2017.
The company got incorporated on 1st August 2017. The annual accounts were made up to 31st March, 2018 which
revealed that the sales for the whole year totalled` 2400 lakhs out of which sales till 31st July, 2017 were for ` 600
lakhs. Gross profit ratio was 20%.
The expenses from 1st April 2017, till 31st March, 2018 were as follows:
Prepare a statement showing the calculation of profits for the preincorporation and Post incorporation periods. (10
marks)
Answer:
Statement showing the calculation of Profits for the Pre-incorporation and Post-incorporation periods:
Particulars Total Books of Amount Allocation (` in
lakhs)
Gross Profit (20% of 2,400) 480 Sales Less: Salaries 75 Times Rent, Rates & insurance 30 Times Sundry office Exp. 72 Times Traveler’s commission 20
Sales Discount Allowed 16 Sales Bad debts 8 Sales Director’s fee 30 Post Tax audit fee 16 Sales
Pre
incorporation (` in lakhs) Post
incorporation (` in lakhs)
120 25
10
24
5
4
2
-
4
5
360 50
20
48
15
12
6
30
12
10
-
41
14
143
Working Notes : 1. Sales Ratio: (` in lakh) Sales for the whole year 2,400 Sales up to 31st July, 2017 600
Therefore, sales for the period from 1st
August, 2017 to 31st March, 2018 1,800
Tarun Ltd. was incorporated on 1st July, 2018 to acquire a running business of Vinay Sons with effect from 1st April,
2018. During the year 2018-19, the total sales were`12,00,000 of which`2,40,000 were for the first six months. The
Gross Profit for the year is`4,15,000. The expenses debited to the Profit and Loss account included:
1. Prepare a statement showing pre-incorporation and post-incorporation profit for the year ended 31stMarch, 2019.
2. Explain how profits are to be treated. (5 marks)
Answer:
Statement showing the calculation of Profits for the pre-incorporation and post-incorporation periods for the
year ended 31st March 2019:
Pre-incorporation profit
transfer to Capital Reserve
Working Notes:
1. Sales Ratio:
2. Time Ratio:
1st April, 2018 to 30th June 2018 : 1st July 2018 to 31st March 2019 = 3 months = 9 months = 1 : 3
Thus, Time Ratio = 1 : 3
The partners of C&G decided to convert their existing partnership business into a private limited called CG trading
Pvt. Ltd. with effect from 1.7.2018. The same books of accounts were continued by the company which closed its
accounts for the first term on 31.3.2019.
The summarized profit & loss account for the year ended 31.3.2019 is below:
Particulars
Turnover
Interest on investments
Less: Cost of goods sold
Advertisement
Sales Commission
Salaries
Managing Director’s Remuneration Interest on Debenture
Rent
Bad debt
Underwriting Commission
Audit fees
Loss on sale of Investments Depreciation
6.00 251.00
124.32
3.50
7.00
18.00
6.00
2.00
5.50
1.15
1.00
3.00
1.00
4.00 176.47
74.53
(i) The average monthly sales doubled from 1.7.2018, GP ratio was constant.
(ii) All investments were sold on 31.5.2018.
(iii) Average monthly salaries doubled from 1.10.2018.
(iv) The company occupied additional space from 1.7.2018 for which rent
ABC Ltd. was incorporated on 01.08.2017 to take over the running business of XYZ Bros. with assets from
01.04.2017. The accounts of the company were closed on 31.03.2018. The average monthly Sales during the first
four months of the year (2017 – 2018) were twice the Average Monthly Sales during each of the remaining 8
months. Calculate Time Ratio and Sales Ratio.
Answer:
Computation of Time Ratio and Sales Ratio Particulars Per-Incorporation Period
(a) No. of Months = Time Ratio
Overall Sales Ratio 01.04.2017 to 31.07.2017 = 4 months ` 2 (twice that of later period)
Post- Incorporation Total Period
01.08.2017 to 31.03.2018
= 8 months 4:8 = 1:2 Base = Say,` 1 per month
4 month ×` 2 8 months ×` 1 8:8 = 1:1 Space to write important points for revision
Q.1.11 RTP Practical
Lotus Ltd. was incorporated on 1st July, 2017 to acquire a running business of Feel goods with effect from 1st April,
2017. During the year 2017-18, the total sales were ` 48,00,000 of which` 9,60,000 were for the first six months. The
Gross profit of the company ` 7,81,600. The expenses debited to the Profit and Loss Account included:
month)
(iv) Salaries and General Expenses ` 2,56,000
(v) Preliminary Expenses written off ` 20,000
(vi) Donation to a political party given by the company ` 20,000. Prepare a statement showing pre-incorporation and
post-incorporation profit for the year ended 31st March, 2018.
Answer:
Statement showing the calculation of Profits for the pre-incorporation and post- incorporation periods
Bad debts
Advertising
` Sales for period up to 30.06.2017 (9,60,000 x 3/6) 4,80,000 Sales for period from 01.07.2017 to 31.03.2018
(48,00,000 – 4,80,000) 43,20,000 Thus, Sales Ratio = 1 : 9
2. Time ratio
1st April, 2017 to 30 June, 2017: 1st July, 2017 to 31st March, 2018 = 3 months: 9 months = 1: 3
Thus, Time Ratio is 1: 3
The Partners of ABC & Co. decided to convert the partnership into a Private Limited Company called ABCD (P)
Ltd. with effect from 1stJanuary. The consideration was agreed at`11,70,000 based on the Firm’s Balance Sheet as
on that date.
However, due to some procedural difficulties, the Company could be incorporated only on 1stApril. Meanwhile, the
business was continued on behalf of the Company, and the consideration was settled on that day with interest at 12%
p.a.
The same books of account were continued by the company, which closed its account for the first time on 31st
March of the next year and prepared the following summarized Profit and Loss Account.
Advertisement 7,02,000
Discounts 11,70,000
Managing Director’s Remuneration 90,000
Miscellaneous Office Expenses 1,20,000
Office-cum-Show Room Rent 7,20,000
Interest 9,51,000 (2,14,83,000) Profit 19,17,000
The Company’s only borrowal was a Loan `50,00,000 at 12% p.a. to pay the Purchase Consideration due to the Firm
and for Working Capital requirements.
The Company was able to double the average monthly Sales of the Firm from 1st April, but the Salaries trebled from
that date. It had to obtain additional space from 1st July, for which rent was ` 30,000 per month. Prepare a Profit and
Loss Account in columnar form apportioning costs and revenue between pre - incorporation and post-incorporation
periods. Also, suggest how the pre-incorporation profits are to be dealt with.
Answer:
1. Computation of Ratios for apportionment purposes Particulars Per-Incorpn. Post-Incorpn Total (a) Period in Months (Time
1st Jan to 31st Mar 1st April to 31st Mar 3 : 12 = 1 : 4
Ratio) = 3 months next = 12 months (b) Sales per month ratio Say, ` 1 Double of earlier
(given) period, i.e.` 2 (c) Overall Sales Ratio 3 × 1 = 3 12 × 2 = 24 3 : 24 = 1 : 8
(a) × (b)
(d) Salary per month ratio Say, ` 1 Triple of earlier
(given) period, i.e.` 3 (e) Total Salary Ratio 3 × 1 = 3 12 × 3 = 36 3 : 36 = 1 : 12
(a) × (d)
(f) Rent for additional – ` 30,000 × 9
Premises (from 1st July) =` 2,70,000 (g) So, Balance Rent
(` 7,20,000 – ` 2,70,000)
distributed in 1 : 4 (Time
Ratio) ` 90,000 ` 3,60,000 (h) Total Rent Cost (f)+(g) ` 90,000 ` 6,30,000 (i) I n t e r e s t a l l o c a b l e t o
Company – ` 6,00,000 (` 50 Lakhs × 12% from 1st Apr to
31st Mar next)
(j) So, Balance Interest for
Per-Inc. Period ` 3,51,000 –
Note:
1. Expenses apportioned on Sales Ratio Basis: (a) Cost of Goods Sold,
2. Statement showing calculation of Profit/Losses for Pre and Post Incorporation Periods
Particulars
Total Expenses
C. Profit/(Loss) (A – B)
Ratio Pre Incorpn. Post Incorpn.
1:12 90 1,080
1:4 36 144
1:8 78 624
1:8 130 1,040
1:4 24 96
90 630
351 600
– 90
799 4,304
(19) 1,936
1. The Loss may be considered as a reduction from any Capital Reserve arising on acquisition.
2. Alternatively, such loss may be treated as Goodwill and shown under Non-Current Assets.
Space to write important points for revision
2
Pre-Incorporation Profit & Losses: Preparation of Financial Statements
Q.2.1 2010 - Nov [6] (a), RTP Practical
The partners of Shri Enterprises decided to convert the partnership firm into a Private Limited Company Shreya (P)
Ltd. with effect from 1st January, 2008. However, company could be incorporated only on 1stJune, 2008. The
business was continued on behalf of the company and the consideration of ` 6,00,000 was settled on that day along
with interest @ 12% per annum. The company availed loan of` 9,00,000 @ 10% per annum on 1st June, 2008 to pay
purchase consideration and for working capital. The company closed its accounts for the first time on 31st March,
2009 and presents you the following summarized profit and loss account :
` ` Sales 19,80,000 Cost of goods sold 11,88,000
Discount to dealers 46,200
Directors’ remuneration 60,000
Salaries 90,000
Rent 1,35,000
Interest 1,05,000
Depreciation 30,000
Office expenses 1,05,000
Sales promotion expenses 33,000
Preliminary expenses
(to be written off in first year itself) 15,000 18,07,200 Profit 1,72,800 Sales from June, 2008 to December, 2008
were 2½ times of the average sales, which further increased to 3½ times in January to March quarter, 2009. The
company recruited additional work force to expand the business. The salaries from July, 2008 doubled. The
company also acquired additional showroom at monthly rent of ` 10,000 from July, 2008.
You are required to prepare a Profit and Loss Account showing apportionment of cost and revenue between pre-
incorporation and postincorporation periods. Also suggest how the pre-incorporation profits/losses are to be dealt
with. (10 marks)
Answer:
Shreya (P) Limited
Profit and Loss Account
(for 15 months ended 31st March, 2009)
Sales WN-1 5:28 3,00,000 16,80,000 Less: Cost of Sales 1,80,000 10,08,000
= 30,000
Post incorporation period from June, 2008 to March, 2009 = 75,000
1,05,000
Space to write important points for revision
Q.2.2 2011 - Nov [4] (b) Practical
A firm M/s. Alag, which was carrying on business from 1st July, 2010 gets itself incorporated as a company on 1st
November, 2010. The first accounts are drawn upto March 31, 2011. The gross profit for the period is` 56,000. The
general expenses are` 14,220; Director’s fees` 12,000 p.a.; incorporation expenses ` 1,500. Rent upto 31st December
was ` 1,200 p.a., after which it is increased to ` 3,000 p.a. Salary of the manager, who upon incorporation of the
company was made a director, is `6,000 p.a. His remuneration thereafter is included in the above figure of fees to the
directors.
Give Profit and Loss Account showing pre and post incorporation profit. The net sales are ` 8,20,000, the
monthly average of which for the first four months is one-half of that of the remaining period. The company earned
a uniform profit. Interest and tax may be ignored. (6 marks)
Answer :
Profit & Loss Account
(For 9 months ended on 31st March, 2011)
Ratio
Gross Profit on the basis of Sales WN-1 2:5
Pre incorPost poration incorporation 16,000 40,000
Less: Administrative Expenses (a) General Expenses (b) Rent (600 + 750) (c) Manager’s Salary
Director’s Fees
Formation Expenses Net profit t/f to Capital Reserve Net Profit t/f to P&L App. A/c
7,280
24,650
Working Notes :
1. Calculation of sales ratio
Let the average monthly sales of first four months = 100 and next five months = 200
Total sales of first four months = 100 × 4 = 400 and total sales of next five months = 200 × 5 = 1,000
The ratio of sales = 400 : 1,000 = 2:5
2. Time Ratio
Pre : Post
= 1st July to 31st Oct : 1st Nov to 31st March
= 4 months : 5 months
Thus, Time ratio = 4:5
3. Rent
Till 31st December, 2010, rent was ` 1,200 p.a. i.e. ` 100 p.m. So, Pre-incorporation rent = ` 100 × 4 months =` 400
Post-incorporation rent = ( ` 100 × 2 months) + (` 250 × 3 months) =` 950
Space to write important points for revision
Q.2.3 RTP Practical
ABC Company limited was incorporated on 1st July to take over as from 1st April in the same year the existing
business of XYZ Brothers. Under the takeover agreement, all profits made from 1st April belong to the company.
The Purchase Consideration was`7,00,000. The Vendors received half of it in cash on 1st Oct, in the same year
together with interest at 10% per annum. For other half of the Purchase Consideration, they were allotted 3,500 fully
paid up Shares of` 100 each in the Company. The following balances appeared in the Company’s Ledger as at 31st
March (year-end):
Particulars ` Particulars `
Share Capital :
4,500 Shares of ` 100 each
fully paid (including Vendors
Shares)
Particulars PrePost Total Incorporation Incorporation Period Period No. of Months = Time 1st Apr to 30th Jun
1st Jul to 31st Mar 3:9 = 1:3 Ratio = 3 months = 9 months
To Opening Stock
To Purchases
To Profit c/d (balancing figure)
Total
` Particulars `
B. Apportionment of Expenses
Salaries and Wages 1:3
Miscellaneous Expenses 1:3
Rates and Taxes 1:3
Repairs of Building 1:3
Bad Debts (Direct)
Interest to Vendors (Note 2)
Depreciation (Total Deprn 6,500 + 1,500 + 7,000) = 15,000 1:3
Building 5% = 6,500 + Furniture 10% = 1,500 + Vehicle 20% = 7,000
Provision for Doubtful Debts
Directors Fees (Direct)
Preliminary Expenses (Direct)
Total Expenses
C. Profit (A – B)
Note:
1. Preliminary Expenses can also be written off against Capital Reserve
12,000
5,500
1,750
750
500
8,750
36,000 16,500 5,250 2,250 500 8,750
3,750 11,250
–
–
– 5,000 2,400 8,000
33,000 95,900
Total 7,99,100
Particulars as at 31st March Note This Year Prev. Yr.
II. ASSETS
(1) Non-Current Assets
PPE: (i) Tangible Assets 4 2,15,000 (ii) Intangible Assets - Goodwill 3,100
Capital Reserve
Surplus (Balance in P&L A/c, i.e. Post Incorporation Profit)
4,50,000
This Year Prev. Yr. 20,250
63,850
Total Note 3: Short Term Borrowings Particulars
(a) Bank Overdraft (Secured Borrwings) (b) Fixed Deposit Received (Unsecured Borrowings) (assumed as Short
Terms)
84,100
This Year Prev. Yr. 1,65,000
35,000
Note 4: Tangible Assets
Item Gross Block / Cost Depreciation Net Block / WDV
Opg Addns/ Clg Bal Opg Addns/ Clg Bal As at Yr. As at Yr. Bal. (Dedns) Bal. (Dedns) Beginning End
Column (1) (2) (3) = 1± 2 (4) (5) (6) = 4± 5 (7) = 1 – 4 (8) = 3 – 6
Freehold Land 50,000 – 50,000
Building 5% 1,30,000 6,500 1,23,500
Furniture & Fittings 10% 15,000 1,500 13,500
Transport
Vehicle 20% 35,000 7,000 28,000
Total 2,30,000 15,000 2,15,000
Note 5 : Trade Receivables
Particulars
Sundry Debtors
Less: Provision for Doubtful Debts Total
Space to write important points for revision
This Year Prev. Year 94,000
(5,000)
89,000
Q.2.4 RTP Practical
On 1st June, AB and Co. sold their business to ABC Private Ltd. as of 1st April for a total consideration of ` 1,00,000
- for Goodwill – ` 30,000, Building –` 30,000, Machinery – ` 15,000 and Stock –` 25,000. ABC Private Ltd. was
incorporated on 1st June, and the Purchase Consideration was met by issue of Shares. The business was carried on
by the Vendors on behalf of the Company from 1stApril, and the same set of account books was maintained till 30th
June, when the following Trial Balance was prepared –
Answer:
1. Profit & Loss Account (Extract) of ABC Pvt. Ltd. for the period from 1st April to 30th June
Particulars ` Particulars `
By Sales 1,00,000 By Closing Stock 18,000 To Opening Stock 25,000 To Purchases 36,000 To Salaries and Wages
(excl. Directors Fees) 11,000 To Rent 1,500 To Expenses 5,000 To Net Profit c/d
(balancing figure) 39,500
Total 1,18,000 Total 1,18,000 2. Statement showing Apportionment of Net Profit Particulars
Net Profit (Time Ratio) Less: Direct Fees
Profit Ratio Pre Post Incorpn. Incorpn. 2:1 26,333 13, 167
– 1,000 26,333 12,167 3. Journal Entries in the books of AB Pvt. Ltd. S. Particulars Dr. Cr. No.
1. Goodwill A/c Dr. 5,000 Building A/c Dr. 10,000
To ABC & Co. (Vendor) A/c 15,000 (Being Goodwill and Building revalued as agreed
upon and gain transferred to ABC & Co. A/c since
Revaluation Gain belongs to ABC & Co. Firm)
3. AB & Co. (Vendor) A/c Dr. 18,500 To AB Private Limited A/c 10,000 To Trade Debtors A/c (13,000 – 8,000)
5,000 (Prior to June)
To Bank A/c 3,500
To Equity Share Capital A/c 1,00,000 (Being issue of 10,000 Equity Share at ` 10 as
fully paid, in discharge of Purchase Consideration
due to ABC & Co.)
To Equity Share Capital A/c 10,000 (Being additional 1,000 Equity Shares at ` 10
each subscribed by and allotted to ABC & Co.)
6. Preliminary Expenses A/c Dr. 6,000
By Typewriter 3,000
By balance c/d 1,000
(balancing figure)
Total 10,000 Total 10,000 Note: ABC & Co. Firm’s Bank A/c is retained by the Firm only, not taken over by the
Company. Refer Journal Entry 3.
5. AB & Co. (Vendors) A/c
Particulars `
Particulars `
☐ Balance in Capital
Account of A 36,000 Balance in Capital
Account of B 30,000 Trade Creditors 5,000 (10,000 – 5,000)
By
Total 1,18,500
Gain on Revaluation of:
☐ Goodwill (30,000 –
25,000) 5,000
☐ Buildings (30,000 –
20,000) 10,000
Balance c/d (balancing
figure) 32,500
Total 1,18,500
6. Capital Reserve
Receipts ` Payment `
To Preliminary Expenses By P & L Account - Pre 26,333 written off 6,000 Incorporation Profit
To Goodwill transfer 20,333
(balance figure)
Total 26,333 Total 26,333 7. Balance Sheet of ABC Private Ltd. (Extract) as at 30th June Particulars as at 30th
June Note This Year Prev. Yr.
Total 1,27,167
Note 1 : Share Capital
Particulars This Year Prev. Yr. Authorised : ............Equity Shares of ..... each
Issued, Subscribed & Paid up: 11,000 Equity 1,10,000 Shares of ` 10 each
(Of the above, 10,000 Shares issued for non-cash
consideration on Business Takeover)
Total
Note 2 : Tangible Assets
Particulars
Total 1,10,000
This Year Prev. Yr.
30,000
25,000
3,000
58,000
Note 3 : Trade Receivables
Particulars
Sundry Debtors
Due from Vendor Company (AB & Co.) Total
Space to write important points for revision
This Year Prev. Yr. 8,000
32,500
40,500
Q.2.5 Practice Practical ABC Ltd. was incorporated on 1st July, to take over the business of XYZ as and from 1st
April XYZ’s Balance Sheet as at that date was as under:
Liabilities Trade Creditors Capital
Total ` Assets `
Debtors and Bank Balances are to be retained by the Vendor, and Creditors are to be paid off by him. Realisation of
Debtors will be made by the Company on a commission of 5% on cash collected. ABC Ltd. is to issue XYZ with
10,000 Equity Shares of`10 each,`8 per Share paid up, and cash of ` 56,000.
ABC Ltd. issued to the public for Cash, 20,000 Equity Shares of`10 each, on which` 8 per Share was called and paid
up, except in the case of 1,000 Shares on which the third call of ` 2 per Share had not been realized as at the end of
the financial year. Also, on 2,000 Shares, the Company had received the full amount of` 10 each. The Shares issued
was underwritten for 2% Commission, payable in Shares fully paid up. In addition to the balances arising out of the
above, the following were shown by the books of accounts of ABC Ltd. as at the end of the relevant financial year:
Particulars `
Answer:
Particulars
No. of Months = Time Ratio
1. Computation of Time Ratio
Per-Incorporation Post Total Period Incorporation
Period
1st Apr to 30th June 1st Jul to 31st March 3 : 9 = 1 : 3 = 3 months = 9 months
2. Computation of Goodwill on Acquisition
Particulars ` `
20,000 Equity Shares of ` 10 each, ` 8 called up Less: Calls in Arrears on 1,000 Shares at ` 2 per share Add: Calls-
in-Advance on 2000 Shares at ` 2
Total Cash Receipts from issue of Equity Shares to Public 5. Total Debtors Account Particulars
By Discount Allowed
By Vendors’ A/c – Disc Tfr
By Cash (bal. fig. for
Company)
By Balance c/d (See Note) Murali’s Debtors
–
Company’s Debtors
5,000
1,000
–
60,000 3,24,000
29,000 1,31,000
Total 90,000 4,60,000 Total 90,000
`
1,60,000
(2,000) 4,000
1,62,000
4,60,000 Note: Closing Balance of Company’s Debtors = Total Debtors 1,60,000 Less Murali’s Debtors 29,000 = `
1,31,000.
To C a sh (bal a n c e figure)
To Balance c/d
1,000
29,000
Total 2,26,000 Total 2,26,000 Note: The balance in Vendor’s A/c and Vendors’ Debtors A/c will be set off while
preparing the Co.’s Balance Sheet.
8. Trading Account for the year ended 31st March
Particulars ` Particulars `
(balancing figure)
incorporation periods
Particulars Ratio Per Incorpn. Post Incorpn.
B. Apportionment of Expenses
Salaries (Time Ratio) 1:3 12,000 36,000
Discount (Time Ratio) 1:3 1,250 3,750
Depreciation (Time Ratio) 1:3
☐ Building (80,000 × 5%) 1,000 3,000
☐ Furniture (10,000 × 10%) 250 750
Directors Fee – 12,000
Underwriting Commission – 4,000
Company’s Debtors ☐ C o l l e c t i o n f r o m
Vendor’s Debtors 1,62,000 By Total Creditors -
Payment to Creditors 2,72,000 By V e n d o r ’ s A / c -
3,24,000 Purchase
Consideration 56,000 60,000 By Preliminary Expenses 10,000 By Directors’ Fees 12,000 By Salaries 48,000 By V e
ndor’sA/c-
Remittance of
Collection from Debtors
after commission of `
3,000 at 5% on 60,000 57,000 By Balance c/d
(balancing figure) 91,000
(W.N. 11)
Total 3,59,000
Note 1 : Share Capital
Particulars This Prev.
V.I.P. Industries (P) Ltd. was incorporated on 1st May. It took over the proprietary business of ABC with effect from
1st April. The Balance Sheet of ABC as on that date is as follows:
Liabilities
Capital
Trade Creditors
Loans
Creditors for Expenses
Total
` Assets `
It was agreed to pay ` 4,50,000 in Equity Shares to ABC. The Company decided to close its first year’s accounts as
at 31stMarch of the next year. The following are the further details furnished to you:
Particulars
Sales
Purchases
Salaries and Wages General Expenses
` Particulars `
Depreciation may be provided at 10% on assets including additions. The Company requests you to prepare:
1. Journal Entries for the takeover.
2. ABC Account.
3. P and L A/c, showing separately Pre-Incorporation and PostIncorporation Profits for the year ending 31st March.
Answer:
1. Journal Entries for the takeover in the books of VIP Industries (P) Ltd.
S.No. Particulars Dr. Cr.
To Equity Share Capital A/c 4,50,000 (Being issue of Equity Shares vide
agreement dated ......, to ABC, Vendor for
Business Purchase/takeover of assets and
liabilities)
Particulars
To Purchases
To Freight
To Gross Profit c/d (balancing figure)
Total
3. Trading Account for the year ending 31st March
3,22,000 Total 3,22,000 4. Statement showing computation of Profit / Loss for Pre and Post Incorporation
Periods
Particulars Ratio
3,333 36,667
2,667 29,333
667 7,333
Roshani & Reshma working in partnership, registered a joint stock company under the name of Happy Ltd. on May
31st 2017 to take over their existing business. The summarized Profit & Loss A/c as given by Happy Ltd. for the
year ending 31st March, 2018 is as under:
Happy Ltd.
Profit & Loss Account for the year ending March 31, 2018 Particulars Amount (`) Particulars Amount (`)
You are required to prepare a Statement showing allocation of expenses and calculation of pre-incorporation and
post- incorporation profits after considering the following information:
(iii) Bad debts recovered amounting to ` 14,000 for a sale made in 2014-15 has been deducted from bad debts
mentioned above.
(iv) Total sales were` 18,00,000 of which ` 6,00,000 were for April to September.
(v) Happy Ltd. had to occupy additional space from 1st Oct. 2017 for which rent was ` 2,400 per month.
Answer:
Pre-incorporation period is for two months, from 1st April, 2017 to 31st May, 2017. 10 months’ period (from 1st
June, 2017 to 31st March, 2018) is post-incorporation period.
Statement showing calculation of profit/losses for pre and post incorporation periods
Pre-Inc ` Post-Inc ` Gross Profit 50,000 4,00,000 Bad debts Recovery 14,000 64,000 4,00,000
(ii) Gross profit, sales commission and bad debts written off have been allocated in pre and post incorporation
periods in the ratio of Sales.
(iii) Rent, salary are allocated on time basis.
(iv) Interest on debentures is allocated in post incorporation period.
(v) Audit fees charged to post incorporation period as relating to company audit.
(vi) Depreciation of` 18,000 divided in the ratio of 1:5 (time basis) and ` 1,250 charged to post incorporation period.
(vii) Bad debt recovery of ` 14,000/- is allocated in pre-incorporation period, being sale made in 2014-15.
(viii) Rent
(` 38,400 – Additional rent for 6 months) ` [38,400- 14,400 (2,400 x 6)] = 24,000 1/4/17 -31/5//17 (2,000 x 2) =
4,000 1/6/17 -31/3/18 – [(2,000 x 10) +14,400] = 34,400 38,400 Space to write important points for revision
CHAPTER
6
Accounting for Bonus Issue and Right Issue
This Chapter Covers: Study’s Chapter: 6
Chapter Comprises: ☹Issue of Bonus Shares ☹Provisions of the Companies Act, 2013 ☹Conditions for Bonus Issue
☹Restriction on Bonus Issue ☹Completion of Bonus Issue ☹Right Issue ☹Financial effects of a further issue
☹Accounting for Right Issue ☹Advantages and Disadvantages of Right Issue
First Indepth
learning
i.e.....Time
............ Day 1
1. Budgeted 9
2. Actual
3. Variance
(1-2)
. . . . . . . . . Plan and Manage your Time
Instant
Revision (in hours)
2.15 1.5
Periodic Revision (in hours)
After After After Fix as 30 days 60 days 90 days per your i.e. on i.e. on i.e. on need.
Q.1.1 2008 - Dec [8] (c) Write a note on ‘Bonus shares.’ Answer:
Bonus Shares: Bonus Shares are shares issued to existing Shareholders free of Cost by Capitalizing Free Reserves.
But Company can issue Bonus
Shares when Articles of Association authorize the same. In case the Company issuing bonus shares is a Listed
Company, the Guidelines issued by SEBI must be complied with. Only existing Shareholders are entitled to
Short Notes (3 marks) [CMA Inter Gr. II] receive Bonus Shares. Bonus Shares are be issued to only those
Shareholders who hold fully paid up Shares. An issuer, announcing a bonus
issue after the approval of its BOD, and not requiring shareholders approval for capitalisation of profits or reserves
for making the bonus issue, shall implement the bonus issue within fifteen days from the date of approval of the
issue by its BOD.
The following is the Balance Sheet of Bumbum Limited as at 31st March, 2009:
Sources of Funds ` Authorized Capital
50,000 Equity shares of ` 10 each 5,00,000 10,000 Preference shares of ` 100 each 10,00,000
15,00,000
Issued subscribed and paid up
30,000 Equity shares of ` 10 each 3,00,000
5,000 Redeemable 8% Preference shares of ` 100 each 5,00,000
Reserves & Surplus
Securities Premium 6,00,000
General Reserve 6,50,000
Profit & Loss A/c 40,000
2500, 9% Debentures of` 100 each 2,50,000
Sundry Creditors 1,70,000
25,10,000
Application of Funds
PPE (net) 7,80,000
Investments (market value` 5,80,000) 4,90,000
Deferred Tax Assets 3,40,000
Sundry Debtors 6,20,000
Cash & Bank balance 2,80,000
25,10,000
In Annual General Meeting held on 20th June, 2009 the company passed the following resolutions :
(i) To split equity share of` 10 each into 5 equity shares of ` 2 each from 1 st July, 09.
(ii) To redeem 8% preference shares at a premium of 5%. (iii) To redeem 9% Debentures by making offer to
debentureholders to convert their holdings into equity shares at`10 per share or accept cash on redemption.
(iv) To issue fully paid bonus shares in the ratio of one equity share for every 3 shares held on record date.
On 10th July, 2009 investments were sold for` 5,55,000 and preference shares were redeemed.
40% of Debentureholders exercised their option to accept cash and their claims were settled on 1st August, 2009.
The company fixed 5th September, 2009 as record date and bonus issue was concluded by 12th September, 2009.
You are requested to journalize the above transactions including cash transactions and prepare Balance Sheet as at
30th September, 2009. All working notes should form part of your answer. (12 marks)
Answer:
Bumbum Limited
Journal Entries
Date Particulars LF Dr. (`) Cr. (`)
July 1 To Equity Share Capital A/c (` 2 each) 3,00,000 (Being equity share of` 10 each splited into
5 equity shares of ` 2 each)
July 10 Cash & Bank balance A/c Dr. 5,55,000 To Investment A/c 4,90,000 To Profit & Loss A/c 65,000
July 10 General Reserve A/c Dr. 5,00,000 To Capital Redemption Reserve A/c 5,00,000 (Being amount equal to
nominal value of
preference shares transferred to Capital
Redemption Reserve A/c on its redemption
as per the law)
Aug. 1 9% Debentures A/c Dr. 2,50,000 Interest on Debentures A/c Dr. 7,500
Aug. 1 Debentureholders A/c Dr. 2,57,500 To Cash & Bank A/c (1,00,000 + 7,500) 1,07,500 To Equity Share
Capital A/c 30,000 To Securities Premium A/c 1,20,000
Sept. 5 Securities Premium A/c Dr. 1,10,000 To Bonus to Shareholders A/c 1,10,000 (Being securities premium
capitalized to
issue bonus shares)
Sept.12 Bonus to Shareholders A/c Dr. 1,10,000 To Equity Share Capital A/c 1,10,000 (Being 55,000 fully paid
equity shares of ` 2
each issued as bonus in ratio of 1 share for
every 3 shares held)
Sept.30 Profit & Loss A/c Dr. 7,500 To Interest on Debentures A/c 7,500 (Being interest on debentures transferred
to
Profit and Loss Account).
Balance Sheet as at 30th September, 2009 Particulars Notes ` Equity and Liabilities
1 Shareholders’ funds
2. Redemption of Debentures
2,500 Debentures of` 100 each 2,50,000 Less: Cash option exercised by 40% holders (1,00,000)
Conversion option exercised by remaining 60% 1,50,000 Equity shares issued on conversion
= =15,000 shares
Q.1.3 2011 - Nov [6] (a) Practical Following is the extract from the Balance Sheet of M/s. Yahoo Ltd. as at 31st
March, 2011: In ` Authorised Capital :
50,000, 10% preference share of ` 10 each 5,00,000 2,00,000 equity shares of ` 10 each 20,00,000
Answer :
Assumptions :
1. According to SEBI Guideline, only Capital Reserve and Securities
Premium collected in cash can be utilized for the purpose of issue of bonus shares. it is assumed that balance of
capital reserve and securities premium is collected in cash only.
2. It is also assumed that necessary resolutions have been passed and requisite legal requirements related to the issue
of bonus shares have been complied with before issue of bonus shares.
Working Note:
On the basis of the above assumptions, the Authorised Capital should be increased as under:
Required for bonus issue ` 6,00,000 Less: Balance of authorised equity share capital (available) (` 2,00,000)
Authorised capital to be increased ` 4,00,000 Total authorised capital after bonus issue (` 20,00,000 + ` 4,00,000) =`
24,00,000.
To Equity share capital A/c 4,50,000 (Being the final call of ` 2.50 per share on
1,80,000 equity shares made)
To Equity Share Final call A/c 4,50,000 (Being final call money on 1,80,000 shares
received)
30.4.2011 Bonus to Equity Shareholders A/c Dr. 6,00,000 To Equity share capital A/c 6,00,000 (Being bonus shares
issued)
Extract of Balance Sheet (After bonus issue)
` Authorised capital :
50,000, 10% Preference shares of ` 10 each 5,00,000 2,40,000, Equity shares of ` 10 each (refer W.N.) 24,00,000
Issued and subscribed capital :
40,000, 10% Preference shares of ` 10 each fully paid 4,00,000 2,40,000, Equity shares of ` 10 each fully paid
24,00,000 Out of the above, 60,000 equity shares of`10 each have been issued by way of bonus
Reserves and Surplus:
Capital reserve 60,000
Securities premium 20,000
Profit and loss A/c (3,00,000 - 2,40,000) 60,000
Space to write important points for revision
Q.1.4 2012 - Nov [3] (b), RTP Practical The following notes pertain to Brite Ltd.’s Balance Sheet as on 31stMarch,
2012 :
Notes : ` in lakhs
1 Share Capital
Authorised :
20 crore shares of ` 10 each 20,000 Issued and Subscribed :
10 crore Equity Shares of ` 10 each 10,000 2 crore 11% Cumulative Preference Shares of ` 10 each 2,000
Total 10,000
2 Reserve and Surplus :
Capital Reserve 485
Capital Redemption Reserve 1,000
Securities Premium 2,000
General Reserve 1,040
Surplus i.e. credit balance of Profit & Loss
(Appropriation) Account 273
Total 4,798
On 2ndApril, 2012 the company made the final call on equity shares @`2 per share. The entire money was received
in the month of April, 2012. On 1st June, 2012 the company decided to issue to equity shareholders bonus shares at
the rate of 2 shares for every 5 shares held and for this purpose, it decided to utilize the capital reserves to the
maximum possible extent.
Pass journal entries for all the above mentioned transactions. Also prepare the notes on Share Capital and Reserves
and Surplus relevant to the Balance Sheet of the company immediately after the issue of bonus shares. (8 marks)
Answer:
In the books of Brite Ltd.
Journal Entries
Date Particulars L.F. Dr. Cr. `in lakhs` in lakhs 2012 Equity Share Final Call A/c Dr. 2,000 April 2 To Equity
Share Capital A/c 2,000
(Final call of`2 per share on`10 crore
equity shares made due)
Bank A/c Dr. 2,000 To Equity Share Final Call A/c 2,000
(Final call money on ` 10 crore equity
shares received)
June 1 Capital Reserve A/c Dr. 485 Capital Redemption Reserve A/c Dr. 1,000 Securities Premium A/c Dr. 2,000
General Reserve A/c Dr. 515 To Bonus to Shareholders A/c 4,000
(Bonus issue of two shares for every five
shares held by utilising various reserves
as per Board’s resolution dated....)
Bonus to Shareholders A/c Dr. 4,000 To Equity Share Capital A/c 4,000
(Capitalisation of profit)
(e) Following items appear in the Trial Balance of Saral Ltd. as on 31st March, 2014:
Particulars Amount (`) 4,500 Equity Shares of ` 100 each 4,50,000 Capital Reserve (including ` 40,000 being
profit on sale of 90,000 Plant)
Securities Premium 40,000 Capital Redemption Reserve 30,000 General Reserve 1,05,000 Profit and Loss Account
(Cr. Balance) 65,000
The company decided to issue to equity shareholders bonus shares at the rate of 1 share for every 3 shares held.
Company decided that there should be the minimum reduction in free reserves. Pass necessary Journal Entries in the
books Saral Ltd. (4 marks)
Answer:
In the books of Saral Ltd.
Journal Entry
Q.1.6 2016 - June [1] (e) Practical Following is the extract of balance sheet of Sunrise Ltd. as on 31st March, 2015:
The company made the final call of ` 2.50 per share from equity shareholders and duly received it. Thereafter, it was
decided to capitalise its reserves by issuing bonus shares at the rate of 1 share for every 3 shares held. Capital
reserve includes ` 80,000 being profit on exchange of machinery.
Pass journal entries with necessary assumptions. (5 marks) [CS Exe - I]
Answer:
Journal Entries in the Books of Sunrise Ltd. Sr. Particulars Amount Amount No. Dr.` Cr. ` 1. Equity Share
Final Call A/c Dr. 4,50,000
To Equity Share Capital A/c 4,50,000 (Being final call made on 180000 equity
shares of` 2.50 each)
2. Bank A/c Dr. 4,50,000
To Equity Share Final Call A/c 4,50,000 (Being final call money received)
4. Bonus to Equity Shareholders A/c Dr. 6,00,000 To Equity Shareholder A/c 6,00,000 (Being issue of bonus share)
Space to write important points for revision
Q.1.7 2018 - May [6] (b) Practical Following are the balances appear in the trial balance of Arya Ltd. as at 31st
March, 2018.
Issued and Subscribed Capital: ` 10,000; 10% Preference Shares of ` 10 each fully paid. 1,00,000
1,00,000 Equity Shares of ` 10 each, ` 8 paid up 8,00,000
Reserves and Surplus:
General Reserve 2,40,000
On 1st April, 2018 the company has made final call @ ` 2 each on 1,00,000 Equity Shares. The call money was
received by 15thApril, 2018. Thereafter the company decided to issue bonus shares to equity shareholders at the rate
of 1share for every 5 shares held and for this purpose, it decided that there should be minimum reduction in free
reserves. Pass Journal entries. (5 marks)
Answer:
In the books of Arya Ltd.
Journal Entries
2018 Dr. (` ) Cr. (` )
April, 1 Equity Share Final Call A/c Dr. 2,00,000 To Equity Share Capital A/c 2,00,000 (Being Final call of`2 per
share on
100000 equity shares due as per
Board’s Resolution dated)
April, 15 Bank A/c Dr. 2,00,000 To Equity Share Final call A/c 2,00,000 (Being Final call money on
1,00,000 equity shares received)
Securities Premium A/c Dr. 25,000 General Reserve A/c Dr. 1,75,000
April, 15 Bonus to Shareholders A/c Dr. 2,00,000 To Equity Share Capital A/c 2,00,000 (Being capitalisation of
profit)
Q.1.8 2019 - Nov [6] (b) Practical
Authorized capital `
30,00,0003,00,000 equity shares of ` 10 each
25,000, 10% preference shares of ` 10 each 2,50,000
32,50,000
Issued and subscribed capital:
2,70,000 equity shares of ` 10 each fully paid up 27,00,000 24,000, 10% preference shares of`10 each fully paid up
2,40,000 29,40,000
On 1st April, 2018, the company decided to capitalize its reserves by way of bonus at the rate of two shares for every
five shares held. Show necessary journal entries in the books of the company and prepare the extract of the balance
sheet after bonus issue. (5 marks)
Q.1.9 RTP Practical The Balance Sheet of ABC Ltd. as at 31st March, having Net Assets ` 17,00,000 contained the
following:
Liabilities `
Share Capital : Authorised : 1,50,000 Equity Shares of`10 each 15,00,000 Issued, Subscribed and Paid up: 80,000
Equity Shares of ` 7.50 each called up and paid-up 6,00,000
Total 17,00,000
The Company wanted to issue Bonus Shares to its Shareholders at the rate of One Share for every Two Shares held.
Necessary resolutions were passed, requisite legal requirements were complied with.
Requires:
(a) Give effect to the proposal by passing Journal Entries in the books of
the Company,
(b) Show the amended Balance Sheet.
Answer:
Journal Entries in the Books of the ABC Ltd. S. No. Particulars Dr. (`) Cr. (`) 1. Equity Share Final Call A/c
Dr. 2,00,000
To Equity Share Capital A/c 2,00,000 (Being Final Call of ` 2.50 each on 80,000
Equity Shares to make them fully paid up)
To Bonus to Equity Shareholders A/c 2,00,000 (Being transfer from General Reserve to
make Party Paid up Shares, fully paid up)
3. Bonus to Equity Shareholders A/c Dr. 2,00,000
To Equity Share Final Call A/c 2,00,000 (Being amount due on Final Call adjusted
against transfer from General Reserve to
Bonus to Shareholders A/c)
To Equity Share Capital A/c 4,00,000 (Being the issuance of 40,000 fully paid up
shares of ` 10 each by way of Bonus)
Working Note:
1. Reserves not available for Bonus Issue: Plant Revaluation Reserve, Development Rebate Reserve and
Investment Allowance Reserve, cannot be used for any type of Bonus Issue.
2. Types of Bonus Issue: There are two types of Bonus Issue in the above case :
(a) Converting` 7.50 Paid Up Shares into ` 10 Paid Up: Securities Premium and Capital Redemption Reserve
cannot be used for this purpose. So, the Company can utilize General Reserve and P&L A/c only for this purpose.
(b) Issuing Additional Shares to Holders of Fully Paid Shares: Securities Premium and Capital Redemption
Reserve can be fully utilized for this purpose. For balance requirement, General Reserve and P&L A/c may be used.
The Paid up Capital of ABC Ltd. is `10,00,000 consisting of 60,000 Equity Shares of ` 10 each fully paid up and
50,000 Equity Shares of ` 10 each, ` 8 per share paid up. It has ` 40,000 in Securities Premium Account, ` 2,00,000
in Profit and Loss A/c (Cr.)` 3,00,000 in General Reserve and ` 60,000 in Capital Redemption Reserve Account.
By way of Bonus Dividend, the Partly Paid up Shares are converted into Fully Paid Up Shares, and the holders of
Fully Paid up Shares are also allotted Fully Paid Up Bonus Shares in the same ratio.
Pass Journal Entries showing separately the two types of Bonus Issues stated above. It is desired that there should be
minimum reduction in Free Reserves.
Answer:
Journal Entries in the Books of the ABC Ltd. S. No. Particulars Dr. (`) Cr. (`) 1. Equity Share Final Call A/c
Dr. 1,00,000
To Equity Share Capital A/c 1,00,000 (Being Equity Share Final Call of` 2 per share
due on 50,000 Shares as per Board’s
Resolution No. ..... dated....)
To Bonus to Equity Shareholders A/c 1,00,000 (Being bonus declared for making Partly Paid
Shares fully paid, as per Shareholders
Resolution .... dated....)
To Equity Share Final Call A/c 1,00,000 (Being utilisation of Bonus Payable towards
payment of Equity Share Final Call of ` 2 per
Share on 50,000 Shares)
4. Securities Premium A/c Dr. 40,000
Capital Redemption Reserve A/c Dr. 60,000 General Reserve A/c (balance figure) Dr. 50,000
To Bonus to Equity Shareholders A/c 1,50,000 (Being bonus declared for issuing Fully Paid-up
Shares as per Shareholders Resolution dated
.....)(Refer Note 2 above)
To Equity Share Capital A/c 1,50,000 (Being issue of 15,000 Fully Paid Shares of
` 10 each as Bonus Shares in the ratio of one
Share for every four Shares, as per Board’s
Resolution dated .....)
Note:
1. Additional Shares issued: Ratio of Bonus declared on partly paid shares is`2 for every`8 Paid-up Capital. So,
Bonus Shares are issued at the rate of 1 for every 4 Shares held. Hence, the amount of Bonus payable to the holders
of Fully Paid Shares is (1 Bonus Share ÷ 4 Shares Held) × 60,000 Shares × ` 10 Issue Price = ` 1,50,000.
2. Bonus issue can be done by:
(a) Converting 50,000 ` 8 Paid Up Shares into ` 10 Paid Up: Securities Premium and Capital Redemption Reserve
cannot be used for this purpose. Hence, the Company can utilize General Reserve and P&L Account only for this
purpose.
(b) Issuing Additional Shares to the holders of fully paid shares: Securities Premium and Capital Redemption
Reserve can be fully utilized for this purpose. For the balance requirements, General Reserve and Profit and Loss
Account may be used.
Q.1.11 RTP Practical Following is the extract of the Balance Sheet of Xeta Ltd. as at 31st March, 2017:
`
Authorised capital:
50,000 12% Preference shares of ` 10 each 5,00,000
4,00,000 Equity shares of ` 10 each 40,00,000
45,00,000
On 1st April, 2017, the Company has made final call @ ` 2 each on 2,70,000 equity shares. The call money was
received by 20th April, 2017. Thereafter, the company decided to capitalize its reserves by way of bonus at the rate
of one share for every four shares held.
You are required to give necessary journal entries in the books of the company and prepare the extract of the balance
sheet as on 30th April, 2017 after bonus issue.
Answer:
Journal Entries in the books of Xeta Ltd. ` ` 1-4-2017 Equity share final call A/c Dr. 5,40,000
To Equity share capital A/c 5,40,000 (For final calls of ` 2 per share on
2,70,000 equity shares due as per
Board’s Resolution dated….)
20-4-2017 Bank A/c Dr. 5,40,000
To Equity share final call A/c 5,40,000 (For final call money on 2,70,000
equity shares received)
Bonus to shareholders A/c Dr. 6,75,000 To Equity share capital A/c 6,75,000
(For issue of bonus shares)
Extract of Balance Sheet as at 30th April, 2017 (after bonus issue) `
Authorised Capital
50,000 12% Preference shares of `10 each 5,00,000
4,00,000 Equity shares of `10 each 40,00,000
Issued and subscribed capital
24,000 12% Preference shares of `10 each, fully paid 2,40,000
3,37,500 Equity shares of `10 each, fully paid 33,75,000
(Out of above, 67,500 equity shares @ `10 each were
issued by way of bonus)
Reserves and surplus
Profit and Loss Account 3,85,000
2
Q. 2.1 2011 - June [2] (a)
Distinguish between the following :
Basic
1. Meaning
Right Issue
Distinguish Between
(3 marks) [CS Exe - I]
2. Cash flow Bonus Shares Bonus shares are shares issued by a company free of cost to its existing shareholders on
a pro rata basis out of free
reserve.
In case of bonus issue there is no cash flow.
3. Consideration
4. Authorization
5. Market value
C o mp a n y d o es n o t receive any consideration in case of bonus issue. Bonus issue is made on the
recommendation of t h e B o a r d a n d a u t h o r i z a t i o n f r o m general meeting of the company.
Issue of bonus shares does not affect the market value of the company.
Right Shares
When company issues further shares to existing shareholder in ratio of their holding such issue is known as right
issue.
Fitness Ltd. is planning to raise funds by making rights issue of equity shares to part finance its expansion. The
existing equity share capital of the company is`40 lakh and the market value is`45 per share. The company offered to
its shareholders the right to buy 2 shares at` 12 each for every 5 shares held. You are required to calculate –
(i) Theoretical market price per share after the rights issue; (ii) The value of rights; and
(iii) Percentage increase in share capital. (5 marks) [CS Exe - I] Answer:
(i) Calculation of Theoretical Market Price per Share after the Right Issue:
Theoretical
Market Price = No. of Shares before No. of Shares Issued as Right Issue × Market + Right Issue × Right Issue Price
Price
=
=
= =` 35.57 (ii) The Value of Rights = Market Price - Theoretical Market Price = 45 – 35.57 = 9.43
(iii) Percentage increase in Share Capital: = × 100
= × 100 = 40% Working Notes:
1. No. of Shares Outstanding at Beginning = = 4,00,000 Shares
2. No. of Shares Issued as Right Issue = 4,00,000 × = 1,60,000 Shares. Space to write important points for revision
Q. 2.3 RTP Practical
The Share of ABC Ltd of a Face Value of `10 is being quoted at` 24. The Company has a plan to make a Rights
Issue of one Equity Share for every four shares currently held at a Premium of 40% per Share. You are required to –
1. Determine the Minimum Price that can be expected of Share after the
issue.
2. Calculate the Theoretical Value of the Rights alone.
3. Show the effect of the Right Issue on the wealth of a Shareholder who has 1,500 Shares, if
(a) He sells the entire rights, and (b) He ignores the rights.
Answer:
Theoretical Value of Right:
Ratio 1 : 4
After No. of Shares after Right issue 1,500 + 375 = 1,875 1,500
Rights Wealth of shares ` 22 × 1,875 =` 33,000 ` 22 × 1,500 =` 33,000
Sale proceeds of rights (` 8 × ` 3,000 Nil 375)
Total Value after Rights ` 36,000 ` 33,000
Effect of Rights Issue on Nil Loss (` 3,000) the Wealth
Space to write important points for revision
ABC Limited’s shares are currently selling at ` 13 per share. There are 10,00,000 shares outstanding. The Company
is planning to raise ` 20 Lakhs to finance a new project. Required:
What is the Ex-Right Price of Shares and the Value of a right, if (a) The Firm offers one right share for every two
Shares held. (b) The Firm offers one right share for every four Shares held.
Answer:
Computation of Ex-Rights Price and Value of a right
Ratio No. of Rights Issue Ex-Rights Price per Shares Rights Shares Price Value
1 : 2 ` 6 or ` 3 per share = 5 Lakhs =` 4 = ` 10
1 : 4 ` 4 or ` 1 per share = 2.50 Lakhs =` 8 =` 12 Space to write important points for revision
Zeta Ltd. has decided to increase its existing share capital by making rights issue to its existing shareholders. Zeta
Ltd. is offering one new share for every two shares held by the shareholder. The market value (cum-right) of the
share is` 360 and the company is offering one right share of ` 180 each to its existing shareholders. You are required
to calculate the value of a right. What should be the ex-right value of a share?
Answer:
Ex-right value of the shares
Value of right = (Cum-right value of the existing shares + Rights shares x Issue Price) /(Existing Number of shares +
Number of Right shares)
Shares
= ` 900 / 3 shares =` 300 per share. = Cum-right value of the share – Ex-right
Right issue
A company offers new shares of` 100 each at 25% premium to existing shareholders on one for four basis. The cum-
right market price of a share is ` 150. Calculate the value of a right
Answer :
Ex-right value of the shares = (Cum-right value of the existing shares + Rights shares Issue Price) / (Existing
Number of shares + Rights Number of shares)
= (` 150 X 4 Shares + ` 125 X 1 Share) / (4 + 1) Shares
=` 725 / 5 shares =` 145 per share.
Value of right = Cum-right value of the share – Ex-right value of the share =` 150 –` 145 = ` 5 per share.
CHAPTER
7
Redemption of Preference Shares
Chapter Comprises: ☹Purpose of Issuing Redeemable Preference Shares ☹Provisions of The Companies Act
(Section 55) ☹Methods of Redemption of Fully Paid-Up Shares ☹Redemption of Partly Called-Up Preference Shares
☹Redemption of Fully Called But Partly Paid-Up Preference Shares
i.e.....
............ Day 1
Instant
Revision (in hours)
1. Budgeted
2. Actual
3. Variance (1-2)
QUICK LOOK Repeatedly Asked Questions
. . . . . . . Weightage Analysis Common Answered Must Try Question Questions
2.6, 4.1
1 Provisions of Companies Act (Section 55)
Q.1.1 2011 - June [4] (b) Descriptive
What are the conditions which must be fulfilled for redemption of preference shares ? (6 marks) [CS Exe - I]
Answer:
As per Sec. 55 of the Companies Act, 2013 the conditions which must be fulfilled for redemption of preference
shares are as follows: 1. Such shares must be fully paid up.
2. Such shares shall be redeemed only out of profits or out of the proceeds
of a fresh issue of shares made for the purpose of redemption. 3. In case the company proposes redemption of shares
out of the profits
of the company, there shall, out of such profits, be transferred, a sum
equal to the nominal amount of the shares to be redeemed, to a
reserve, to be called the Capital Redemption Reserve Account, and the
provisions of this Act relating to reduction of share capital of a company
shall, except as provided in this section, apply as if the Capital
Redemption Reserve Account were paid-up share capital of the
company.
The capital redemption reserve account may be applied by the
company, in paying up unissued shares of the company to be issued to
members of the company as fully paid bonus shares.
4. Certain class of companies as may be prescribed and whose financial
statements comply with the accounting standards prescribed under
Section 133, for such class of companies, the premium if any, payable
on redemption shall be provided for out of the profits of the company,
before the shares are redeemed. For other companies the premium if
any, payable on redemption shall be provided for out of the profits of the
company or out of the company’s securities premium account, before
such shares are redeemed.
5. No company limited by shares shall after the commencement of the
companies issue any preference shares which is irredeemable or is
redeemable after the expiry of a period of twenty years from the date of
issue.
Method of Redemption of fully paid up Shares: 2 Redemption of Preference Shares by Fresh Issue of Shares
Jolly Ltd. has the following balance sheet as on 31st March, 2008: Liabilities ` Share capital :
Issued, subscribed and fully paid-up
General Reserves A/c Dr. 2,00,000 Profit & Loss Account Dr. 1,00,000
To Capital Redemption Reserve A/c 3,00,000 (Creation of Capital Redemption Reserve to the
maximum possible extent)
Bank A/c Dr. 2,00,000 To Equity Share Application and Allotment A/c 2,00,000
(Receipt of money for equity shares of ` 2,00,000)
Equity Share Application and Allotment Account Dr. 2,00,000 To Equity Share Capital Account 2,00,000
(Allotment of equity shares of the face value of
` 2,00,000 at par)
Preference Share Capital Account Dr. 5,00,000 Premium on Redemption of Preference Share A/c Dr. 50,000
To Sundry Preference Shareholders A/c 5,50,000 (Amount payable to sundry preference shareholders to
redeem 5,000 preference shares of` 100 each at a
premium of ` 10 per share)
Q.2.2 2016 - June [3] (a) Practical Extract of ledger balances of Kalpana Ltd. as on 31stMarch, 2015 includes the
following:
Journal Entries
(In the books of Kalpana Ltd.)
Date Particulars Amount Amount Dr.` Cr. `
2015 Bank A/c Dr. 1,68,000 Mar, To Equity Share Capital A/c 1,60,000 31 To Securities Premium A/c 8,000
" 12% Redeemable Preference Share Capital A/c Dr. 2,00,000 Premium on Redemption of Pref. Shares A/c Dr.
20,000
" Pref. Shareholders A/c Dr. 2,20,000 To Bank A/c 2,20,000 (Being payment made to Preference Shareholders)
Space to write important points for revision
Q.2.3 2018 - May [5] (b) Practical
Dheeraj Limited had 5,000 10% Redeemable Preference Shares of `100 each, fully paid up. The company had to
redeem these shares at a premium of 10%.
Answer:
In the books of Dheeraj Limited
Journal Entries
Profit & Loss A/c Dr. 1,00,000 To Capital Redemption Reserve A/c 1,00,000
(Being the amount transferred to Capital
Redemption Reserve Account as per the
requirement of the Act.)
Working Note:
1. Amount to be transferred to Capital Redemption Reserve Account Face Value of shares to be redeemed ` 5,00,000
Less: Proceeds from new issue (` 4,00,000) Total Balance ` 1,00,000 Space to write important points for revision
Answer:
A company may prefer issue of new equity shares on the basis of following conditions:
1. When the company realise that the capital is needed permanently and
it makes more sense to issue equity shares in place of Redeemable Preference Shares which carry a fixed rate of
dividend.
2. When the balance of profit, which would otherwise be available for dividend, is insufficient.
3. When the liquidity position of the company is not good enough. Advantages of redemption of preference
shares by issue of fresh equity shares:
1. No cash outflow of money is required now or later.
2. New equity shares may be valued at a premium
3. Shareholders retain their equity interest.
Disadvantages of redemption of preference shares by issue of fresh equity shares:
1. There will be dilution on future earnings:
2. Share-holding in the company is changed.
Q.2.5 2019 - May [5] (a) Practical The Summarized Balance Sheet of Clean Ltd. as on 31st March, 2019 is as
follows:
The Share Capital of the company consists of ` 50 each Equity shares of ` 4,50,000 and ` 100 each 8% Redeemable
Preference Shares of ` 1,30,000 (issued on 1.4.2017)
Reserves and Surplus comprises statement of profit and loss only. In order to facilitate the redemption of preference
shares at a premium of 10%, the Company decided :
(a) to sell all the investments for ` 30,000.
(b) to finance part of redemption from company funds, subject to, leaving
Answer:
1. Journal Entries
Date Particulars Dr. (`) Cr. (`)
Profit and Loss A/c Dr. 13,000 To Premium on Redemption of 13,000 Preference shares A/c
Profit and Loss A/c Dr. 67,500 To Capital Redemption Reserve A/c 67,500
(For transfer to CRR out of divisible profit
an amount equivalent to excess of
nominal value of preference shares over
proceeds (face value of equity shares) i.e.
` 1,30,000 - ` 62,500)
` 1. Share Capital
Equity Share Capital (4,50,000 + 62,500) 5,12,500 2. Reserves and Surplus
Capital Redemption Reserve 67,500 Profit and Loss Account
(96,000 – 13,000 – 7,000 – 67,500) 8,500
Working Note:
1. Calculation of Number of Shares:
1,13,000
Less: Available Bank Balance (62,000 – 24,000) (38,000) Fund from fresh issue 75,000
No. of Shares = 75,000/60 = 1250 shares
Date Particulars Dr. (`) Cr. (`) Bank A/c Dr. 25,000 To Equity Share Capital A/c 25,000
8% Redeemable Preference Share Capital A/c Dr. 1,00,000 Premium on Redemption of Preference
Shares A/c Dr. 10,000 To Preference Shareholders A/c 1,10,000
1. Shareholders’ funds
(a) Share capital 1 2,25,000
(b) Reserves and Surplus 2 1,00,000
Total ? Assets
2. Current Assets
22,500 Equity shares (20,000 + 2,500) of`10 each fully paid up 2,25,000
Working Note:
No of Shares to be issued for redemption of
Preference Shares:
Face value of shares redeemed `1,00,000 Less: Profit available for distribution as dividend:
General Reserve : ` (80,000-20,000) ` 60,000
Therefore, no. of shares to be issued = 25,000/ ` 10 = 2,500 shares. Space to write important points for revision
Shreya Ltd. had an issue of 1,000, 12% redeemable preference shares of ` 100 each, repayable at a premium of 10%.
These shares are to be redeemed now out of the accumulated reserves, which are more than the necessary sum
required for redemption. Show the necessary entries in the books of the company, assuming that the premium on
redemption of shares has to be written off against the company’s securities premium reserve account. (6 marks) [CS
Exe - I]
12% Redeemable Preference Shares Capital A/c Dr. 1,00,000 Premium on redemption A/c Dr. 10,000
To Preference Shareholders A/c 1,10,000 (Being the amount due to redeemable preference
shareholders on redemption)
General Reserve A/c Dr. 1,00,000 To Capital Redemption Reserve A/c 1,00,000
(Being the amount of redeemed out of profits
transferred to capital redemption reserve account)
Lily Ltd., having sufficient balance to the credit of general reserve and ` 1,00,000 balance in securities premium
account, decides to:
– Redeem 5,000, 10% redeemable preference shares of`100 each fully
Show journal entries for redemption of preference shares and issue of bonus shares. (5 marks) Answer:
Journal entries in the books of Lily Ltd.
Particulars Dr. (`) Cr. (`)
(i) 10% Redeemable Preference Share Capital A/c Dr. 5,00,000 Premium on redemption A/c Dr. 25,000
(ii) Security Premium A/c Dr. 25,000 To Premium on redemption A/c 25,000 (Premium on redemption provided)
(iii) General Reserve A/c Dr. 5,00,000 To Capital Redemption Reserve A/c 5,00,000 (Amount of redemption
transferred)
(iv) Preference Shareholders A/c Dr. 5,25,000 To Bank 5,25,000 (Amount paid to preference shareholders)
(v) Capital Redemption Reserve A/c Dr. 5,00,000
To Equity Shareholders 5,00,000 (Issue of 50,000 equity shares as fully paid up bonus
shares to existing equity shareholders)
The following are the extracts from the Balance Sheet of Meera Ltd. as on 31st December, 2017.
Share capital: 60,000 Equity shares of ` 10 each fully paid – ` 6,00,000; 1,500 10% Redeemable preference shares of
` 100 each fully paid – `1,50,000.
Reserve & Surplus: Capital reserve – ` 75,000; Securities premium – `75,000; General reserve –`1,12,500; Profit and
Loss Account –`62,500 On 1st January 2018, the Board of Directors decided to redeem the preference shares at
premium of 10% by utilisation of reserve. You are required to prepare necessary Journal Entries including cash
transactions in the books of the company.
Answer:
In the books of Meera Limited
Journal Entries
4
Redemption of Partly Called-Up Preference Shares
Q.4.1 RTP Practical
The Balance Sheet of ABC Ltd. as at the beginning of a financial year, inter alia, includes the following: (`) 50,000
8% Preference Shares of ` 100 each ` 70 paid up 35,00,000 1,00,000 Equity Shares of ` 100 each fully paid up
1,00,00,000 Securities Premium 5,00,000 Capital Redemption Reserve 20,00,000 General Reserve 50,00,000 Under
the terms of their issue, the Preference Shares are redeemable at the end of the year at a Premium of 5%. In order to
finance the redemption, the Company makes a Rights Issue of 50,000 Equity Shares of`100 each at`110 per
Share,`20 being payable on Application,`35 (including Premium) on Allotment and the balance to be called in the
next financial year. The issue was fully subscribed and allotment made on 1st December. The Moneys due on
allotment were promptly received by the end of the year.
The Preference Shares were redeemed after fulfilling the necessary conditions of the Companies Act. The Company
decided to make the minimum utilisation of General Reserve. Assume that Securities Premium A/c is usable for
providing the Premium on redemption of Preference Shares. You are asked to pass the necessary Journal Entries and
show the relevant extracts from the Balance Sheet as at the end of the year with the corresponding figures for the
previous year.
Answer:
1. Journal Entries in the books of ABC Ltd. (in` 000`s) Particulars Dr. (`) Cr. (`) 1. 8% Preference Share Final
Call A/c Dr. 15,00
To 8% Preference Share Capital A/c 15,00 (Being Final Call made on 50,000 Preference
Shares at` 30 each to make them Fully Paid Up
prior to redemption)
To 8% Preference Share Final Call A/c 15,00 (Being Final Call amount received on 50,000
Preference Shares at ` 30 each)
To Equity Share Application A/c 10,00 (Being the Application Money received on 50,000
Equity Shares at ` 20 per Share)
To Equity Share Capital A/c 10,00 (Being the Application Money on 50,000 Equity
Shares transferred to Equity Share Capital A/c
vide Board’s Resolution No.... dated.....)
5. Equity Share Allotment A/c 17,50
To Equity Share Allotment A/c 17,50 (Being Allotment Money received on 50,000
Equity Shares at ` 35 per Share)
7. 8% Preference Share Capital A/c 50,00 Premium on Redemption of Preference Shares A/c 2,50
To Capital Redemption Reserve A/c 27,50 (Being amount transferred to CRR on Redemption
of Preference Shares for the balance not covered
by proceeds of Fresh Issue of Shares, i.e. Face
Value of PSC redeemed` 50 Lakhs Less Face
Value of Fresh Issue ` 22.50 Lakhs, excluding
Securities Premium)
10. Preference Shareholders A/c 52,50 To Bank A/c 52,50 (Being payment made to Preference Shareholders)
2. Extract of Balance Sheet of ABC Ltd. as at ......(after redemption of Preference Shares) (` 000's) Particulars
I Equity and Liabilities:
(1) Shareholders’ Funds: (a) Share Capital
(b) Reserves and Surplus
Issued,
Subscribed and Paid Up:
Total 12,250 13,500 Reconciliation of Number and Amount of Shares (all figures for this year)
ESC`100 each ESC`100,` 45 Paid Up Pref. Shares of`100 eachParticulars Number Amt` 000's Number Amt ` 000's Number Amt ` 000's
Reserves and Surplus (showing Appropriations and Transfers) (all figures for this year) Particulars Opening
Balance Additions Deductions
Total
20,00 From Gen Res. = 27,50 –
5,00
50,00 Fresh Issue = 5,00 P r e m . o n P S C Redemption = 2,50
– Tfr to CRR = 27,50 7,50
22,50
75,00 32,50 30,000 77,50 Space to write important points for revision
5
Redemption of Fully Called But Partly Paid-Up Preference Shares
Q.5.1 2008 - Dec [2] (b) Practical
Following is the balance sheet of Anupam Ltd. as on 31st March, 2008 : Liabilities ` ` 2,00,000, 14% Preference
shares
of ` 100 each, fully called 2,00,00,000
Less : Calls in arrears 4,00,000 1,96,00,000 @ ` 20 per share
10,00,000 Equity shares of ` 10
General Reserve A/c Dr. 1,20,00,000 To Capital Redemption Reserve A/c 1,20,00,000
(Being capital redemption reserve account
created)
14% Preference Share Capital A/c Dr. 1,80,00,000 Premium on Redemption A/c Dr. 7,20,000
May Equity Share Capital A/c Dr. 24,000 31 To Equity Shares Allotment A/c 9,000 To Equity Share 1st Call A/c
7,500 To Forfeited Shares A/c 7,500
Aug Equity Share Capital A/c Dr. 14,000 31 To Equity Share 1st Call A/c 3,500 To Equity Share 2nd Call A/c 2,800
To Forfeited Shares A/c 7,700
8Redemption of Debentures
This Chapter Covers: Study’s Chapter: 8
i.e.....
1. Budgeted
2. Actual
3. Variance (1-2)
............ Day 1 5
Instant
Revision (in hours)
1.15 1
. . . . . . . . . Plan and Manage your Time Periodic Revision
(in hours)
Banking companies.
(ii) For other Financial Institutions within the meaning given in the
Companies Act.
(iii) For debentures issued by NBFCs registered with the RBI. (iv) For debentures issued by other companies
including manufacturing and infrastructure companies. (4 marks) [IPCC Gr. II]
Answer:
Adequacy of DRR:
(i) All India Financial institutions regulated by RBI and Banking Companies:
☐ DRR is not required for debentures issued by all India Financial
institutions as regulated by RBI & Banking Companies. (ii) For other Financial institutions within the meaning
given in the Companies Act.
☐ DRR is created of 25% of the value of outstanding debentures
issued through public issue and no DRR is required in case of privately placed debentures.
(iii) For debentures issued by NBFCS registered with RBI: ☐ DRR is created of 25% of the value of outstanding
debentures issued through public issue and no DRR is required in case of privately placed debentures.
(iv) For debentures issued by other companies including manufacturing and infrastructure companies:
☐ DRR is created of 25% of the value of outstanding debentures
issued through public issue and DRR of 25% is also required in case of privately placed debentures by listed
companies. Space to write important points for revision
Q.1.2 RTP Practical ABC Ltd. has Authorized Capital of 8,00,000 Equity Shares of ` 10 each.
But out of these 2,40,000 shares have been issued as fully paid. The Company has an outstanding 14% Debentures
Loan of ` 24,00,000 redeemable at 102% and Interest has been paid up to date. The Directors resolved to redeem the
Debentures on 1st January and the Holders are given an option to receive payment either wholly in cash or wholly in
fully Paid Equity Shares @ 8 Shares for every ` 100 of Debentures. On that date, the balance of the Debenture
Redemption Reserve Account is`20,00,000 and corresponding Investment Account`20,00,000 (at cost) of which the
Market Value is ` 18,00,000.
75% of the Holders decided to exercise the option for taking Shares in repayment and cash for the rest is procured
by realizing an adequate amount of Investment at the prevailing Market Value.
Draw up Journal Entries (including Cash Book Entries) to give effect to the above transactions.
Answer:
Working Note:
To Premium on Redemption of Debenture A/c 48,000 (Being Premium on Redemption provided out of
Profits.)
Note: Alternatively, General Reserve A/c,
Debenture Redemption Reserve A/c, may be
used for this purpose.
3. Debentureholder A/c ` 24,48,000 × 75% Dr. 18,36,000 To Equity Share Capital A/c (1,44,000 ×`10) 14,40,000 To
Securities Premium A/c (1,44,000 × 3,96,000
` 2.75)
(Being issue of 1,44,000 shares of`10 each at a
premium of` 2.75 per share to 75% debenture
holders who exercised conversion option)
(WN 1 and 2)
Answer:
The following are the ways by which Redeemable Debentures may be redeemed:
1. By Payment in Lumpsum
2. By Payment in Instalments
3. R e d e m p t i o n by Purchase in t h e o p e n market
In this method, the payment of entire debt is made in one lot at the expiry of a specified period (i.e. at maturity) or
even before expiry of the specified period after passing necessary resolution at the meeting of the debenture holders.
In this method, the payment of specified portion of debentures debt is made in instalments at specified rates for e.g.,
a debentures of ` 100 may be discharged as 20% or`20 on 1/1/2011, 20% or`20 on 1/1/2013, 30% or` 30 on
1/1/2015, 30% or` 30 on 1/1/2017 or etc.
When a company purchases its own debentures in the open market for the purpose of cancellation, such an act of
purchasing and cancelling the debentures constitutes redemption by purchase in the open market.
A Company purchased its own 11% debentures in the open market for ` 50,00,000 (cum-interest). The interest
amount included in the purchase price is ` 1,50,000. The face value of the debentures purchased is ` 52,00,000. The
Company cancelled the debentures so purchased.
Pass Journal Entries in the books of the Company for purchase and immediate cancellation of debentures. (4 marks)
[IPCC Gr. II]
Answer :
Particulars Dr. ` Cr. `
11% Own debenture Account Dr. 48,50,000
Deb. Interest A/c Dr. 1,50,000 To Bank 50,00,000
[Being the purchase of cum-interest own
debentures from the market]
11% debenture Account Dr. 52,00,000 To Own Debenture Account 48,50,000 To Capital Reserve 3,50,000
[Being profit on cancellation of own debentures
transferees to Capital Reserve Account]
Space to write important points for revision
Rama Limited issued 8% Debentures of `3,00,000 in earlier year on which interest is payable half yearly on 31st
March and 30th September. The company has power to purchase its own debentures in the open market for
cancellation thereof. The following purchases were made during the financial year 2009-10 and cancellation made
on 31st March 2010 : (a) On 1st April ` 50,000 nominal value purchased for ` 49,450, exinterest.
Answer :
In the books of Rama Limited
Journal Entries
Date Particulars Dr. (`) Cr. (`)
1st April, Own debentures A/c Dr. 49,450 2009 To Bank A/c 49,450 1st Sept. Own debentures A/c Dr. 29,250 2009
Interest on own debentures A/c Dr. 1,000 [30,000 x 8% x ]
To Bank A/c 30,250
31st March, Profit on cancellation of debentures A/c Dr. 1,300 2010 To Capital reserve A/c 1,300 Space to write
important points for revision
Q.3.3 2011 - Nov [1] {C} (c), RTP Practical
On 1stApril, 2010, A Ltd had outstanding in its books 1,00,000 Debentures of`100 each, interest @ 12% per annum.
The interest on debentures was paid half-yearly on 30th September and 31st March of every year. On 31st May, 2010
the company purchased 30,000 Debentures of its own @` 98 (ex-interest) per debenture. The company cancelled the
debentures so purchased on 31st March, 2011.
Pass the necessary Journal Entries to record the above transactions for the year ended 31st March, 2011. (5 marks)
[IPCC Gr. II]
Answer :
In the books of ‘A’ Limited
Journal Entries
2010 Investment in own debentures A/c Dr. 29,40,000 May, Debenture interest A/c Dr. 60,000
31st To Bank A/c 30,00,000 (Being the purchase of own 30,000
debentures @ ` 98 ex-interest)
Sep. Debenture interest A/c Dr. 5,40,000 30th To Bank A/c 4,20,000
To Interest on own debentures A/c 1,20,000 (Being interest @ 12% paid on 70,000
debentures and adjustment of interest on
30,000 own debentures for 4 months)
2011 Debenture interest A/c Dr. 6,00,000 March, To Bank A/c 4,20,000 31sth To Interest on own debentures A/c
1,80,000
March, 12% Debentures A/c Dr. 30,00,000 31st To Investment in own debentures A/c 29,40,000
March, Profit and Loss A/c Dr. 12,00,000 31st To Debenture interest A/c 12,00,000 (Being total interest transferred
to Profit &
Loss Account)
March, Interest on own debentures A/c Dr. 3,00,000 31st To Profit and Loss A/c 3,00,000 (Being total interest on
own debentures
credited to Profit & Loss Account)
Space to write important points for revision
Himalayas Ltd. had `10,00,000/- 8% Debentures of`100 each as on 31st March, 2011. The company purchased in the
open market following debentures for immediate cancellation:
On 01-07-2011 ☐ 1000 debentures @ ` 97/(cum interest) On 29-02-2012 ☐ 1800 debentures @ 99/(ex interest)
Debenture interest due date is 30th September and 31st March. Give Journal Entries in the books of the company for
the year ended 31st March, 2012. (8 marks) [IPCC Gr. II]
Date Particulars Dr.` Cr. ` 1.07.2011 Own Debentures A/c Dr. 95,000
Debenture Interest A/c Dr. 2,000
[1,000 × 100 × 8% × (3/12)]
To Bank A/c 97,000 (Being 1,000 Debentures purchased @
` 97 cum interest for immediate
cancellation)
1.07.2011 8% Debentures A/c Dr. 1,00,000
To Own Debentures A/c 95,000 To Capital reserve A/c 5,000 (Profit on cancellation of debentures)
(Being profit on cancellation of 1,000
Debentures transferred to capital reserve
account)
30.09.2011 Debenture interest A/c Dr. 36,000
[9,000 × 100 × 8% × (½)]
To Debentureholders A/c 36,000 (Being interest accrued on 9,000
debentures and credited to debenture
holders account)
Debentureholders A/c Dr. 36,000
To Bank A/c 36,000 (Being interest amount paid)
29.02.2012 Own Debentures A/c Dr. 1,78,200
Debenture Interest Account A/c Dr. 6,000
[1,800 × 100 × 8% × (5/12)]
To Bank A/c 1,84,200 (Purchase of 1,800 Debentures @ ` 99
ex-interest for immediate cancellation)
29.02.2012 8% Debentures A/c Dr. 1,80,000
To Own Debentures A/c 1,78,200 To Capital reserve A/c 1,800 (Profit on cancellation of debentures)
(Being profit on cancellation of 1,800
Debentures transferred to capital reserve
account)
31.03.2012 Debentures Interest A/c Dr. 28,800
[7,200 × 100 × 8% × (½)]
To Debentureholders A/c 28,800 (Being interest accrued on 7,200
debenturesandcreditedto
debentureholders account)
31.03.2012 Debentureholders A/c Dr. 28,800
To Bank A/c 28,800 (Being amount paid)
To Debentures Interest A/c 72,800 (Being interest on debentures for the year
transferred to profit and loss account at
the year end)
Answer:
(i) Debenture Redemption Reserve Account 2014 ` 2014
78,17,500 `
78,17,500
(ii) Own Debentures Account
Nominal Interest Amount Nominal Interest Amount 2014 ` ` ` 2014 ` ` ` Jan. 1 To Balance 30,00,000 _ 27,00,000 J u n e By Debenture
b/d
Feb. 1 To Bank 5,00,000 4,583
June 1 To Bank 5,00,000 22,917
Dec. 31 To Capital
Reserve
(profit on
cancella
tion)
To D e b e n 4,12,500
30
4,85,417 Interest A/c 2,20,000
4,95,000 D e c . By Debenture
31 Interest A/c 2,20,000
3,19,583 By 11%
Debentures
Account -
Answer:
In the books of Gurudev Limited
Journal Entries
Date Particulars Dr. (`) Cr. (`)
30/09/17 Debenture Interest A/c Dr. 36,000 [6,000 × 100 × 12% × (½)]
A Company had issued 1,000 12% debentures of `100 each redeemable at the company’s option at the end of 10
years at par or prior to that by purchase in open market or at` 102 after giving 6 months notice. On 31st December,
2016, the accounts of the company showed the following balances:
On debenture redemption fund`53,500 represented by 10% Govt. Loan of a nominal value of`42,800 purchased at an
average price of`101 and ` 10,272 uninvested cash in hand.
On 1st January 2017, the company purchased ` 11,000 of its own debentures at a cost of ` 10,272.
On 30th June 2017, the company gave a six months notice to the holders of ` 40,000 debentures and on 31st
December, 2017 carried out the redemption by sale of ` 40,800 worth of Govt. Loan at par and also cancelled the
own debentures held by it.
Prepare ledger account of Debenture Redemption Fund Account and Debenture Redemption Fund Investment
Account for the year ended 31.12.2017, assuming that, interest on company debentures & Govt. loan was payable on
31st December every year. (8 marks)
Answer:
Debenture Redemption Fund Account
Date Particulars ` Date Particulars ` 31.12.17 To Debenture Redemption 408 1.1.17 By Balance b/d 53,500
54,228
1.1.18 To Balance b/d 2,020
Space to write important points for revision
54,228
Q.3.8 RTP Practical
ABC Ltd. issued ` 10,00,000, 6% Debenture Stock at par on 21.01.2014. Interest was payable on 30th June and 31st
December, in each year. Under the terms of the, Debenture Trust Deed the stock is redeemable at par. The Trust
Deed obliges the Company to pay to the Trustees on 31.12.2015, and annually thereafter the sum of` 1,00,000 to be
utilised for the redemption and cancellation of an Equivalent Amount of Stock, which is to be selected by drawing
lots.
Alternatively, the Company is empowered as from 01.01.2015, to purchase its Own Debentures on the Open Market.
These Debentures must be surrendered to the Trustees for cancellation and any adjustments for Accrued Interest
recorded in the Books of Account. If in any year, the Nominal Amount of the stock surrendered under this
alternative does not amount to` 1,00,000, then the shortfall is to be paid by the company to the Trustees in cash on
31st December.
The following Purchases of Stock were made by the Company.
Assuming that the Company fulfilled all its obligations under the Trust Deed, prepare the following Ledger
Accounts - (a) Debenture Stock A/c, (b) Debenture Redemption A/c, and (c) Debenture Interest A/c. Ignore costs of
transaction and taxation.
Answer:
1. 6% Debenture Stock A/c
Date Amount of Periods Interest at 6% p.a. Debentures (in`) (in Months) (in`) (A) (B) (C) = [(A) x (B)]/12
30.06.2015 10,00,000 6 30,000 30.09.2015 1,20,000 3 1,800 31.12.2015 8,80,000 6 26,400 31.05.2016 75,000 5
1,875 30.06.2016 8,05,000 6 24,150 31.12.2016 8,05,000 6 24,150 30.06.2017 7,80,000 6 23,400 31.07.2017
1,15,000 1 575 31.12.2017 6,65,000 6 19,950 Assumption:
It has been assumed that Debentures are purchased for immediate cancellation.
3. Debenture Interest A/c
31.05.2016 To Bank 1,875 31.12.2016 By Profit and Loss 50,175 (Note) A/c (trf)
30.06.2016 To Bank 24,150
31.12.2016 To Bank 24,150
Total 43,925 Total 43,925 Note: Interest paid on Debentures redeemed during the year can be shown through
Debenture Redemption A/c also.
4. Debenture Redemption A/c Date Particulars 30.09.2015 To Bank
[(1,200 x 98) - 1,800]
Cancellation)
31.12.2016 To B a n k - s h o r t f a l l
(1,00,000 - 75,000)
Total
31.07.2017 To Bank
[(1,150 x 92) - 575]
ABC Limited issued 10% Debentures at par for ` 8 Lakhs. Interest was payable half yearly on 30thJune and
31stDecember every year. Under the terms of the Trust Deed, the Debentures are redeemable at par (three years after
issue) by the Company purchasing them in the Open Market and cancelling, them with a minimum redemption of`
80,000 every year. In case, there is a shortfall in redemption by the Company by Open Market Operations, the
shortfall would be made good by the Company by payment on the last day of the accounting year to the Trustees,
who would then draw lots and redeem the balance Debentures.
The Company purchased its Own Debentures for cancellation as under:
• 30.09.2018 ` 1,00,000 at ` 98 cum–interest.
• 31.05.2019 ` 60,000 at ` 95 ex–interest.
• 31.07.2020 ` 90,000 at ` 96 cum–interest.
The Company carried out its obligations under the Trust Deed. Prepare the following Ledger Accounts in the books
of the Company, for Calendar Years 2018, 2019 and 2020 - (a) Debenture A/c, (b) Debenture Redemption A/c, and
(c) Debenture Interest A/c. Ignore Taxation.
Answer:
1. 10% Debentures A/c
Date Particulars 30.09.2015 To Debentures Redemption A/c (Purchase for
Cancellation)
7,00,000
8,00,000 Total 8,00,000 60,000 01.01.2019 By Balance b/d 7,00,000
20,000
6,20,000
7,00,000 Total 7,00,000 90,000 01.01.2020 By Balance c/d 6,20,000
5,30,000
6,20,000 Total 6,20,000 2. Computation of Interest paid on Debentures at 10% p.a. Date Amount of Period (in
Amount of
Debentures (in `) Months) Interest (in `) (A) (B) (C) = [(A) × (B)]/12 30.06.2018 8,00,000 6 40,000 30.09.2018
1,00,000 3 2,500 31.12.2018 7,00,000 6 35,000 31.05.2019 60,000 5 2,500 30.06.2019 6,40,000 6 32,000
31.12.2019 6,40,000 6 32,000 30.06.2020 6,20,000 6 31,000 31,07,2020 90,000 1 750 31.12.2020 5,30,000 6 26,500
Note: Refer Debentures A/c in WN1 for the amount outstanding as on the respective date.
3. Debenture Interest A/c
Total 58,250 Total 58,250 Note: Interest paid on Debentures redeemed during the year can be shown through
Debenture Redemption A/c also.
30.09.2018 To Bank (98,000 – 95,500 30.09.2018 By 10% Debenture 1,00,000 2,500) [WN2 A/c
(b)]
Answer :
Under certain cases debenture holders are offered an option to convert their debts into equity by issuing equity share
capital. In such circumstances, debentures are redeemed by issuing fresh share capital.
` Share capital :
Authorised capital 50,000 equity
shares of ` 10 each 5,00,000 Issued and subscribed capital 25,000
equity shares of ` 10 fully paid up 2,50,000 Reserves and surplus :
General reserve 2,75,000 Profit and Loss A/c 1,00,000 Debenture redemption reserve 2,50,000 Secured loans :
12% convertible debentures
22,50,000
3. Redeem the debentures at a premium of 5% and also confer option to the debentureholders to convert 50% of
their holding into equity shares at a predetermined price of`15 per share and balance payment to be made in cash.
Holders of 3,000 debentures opted to get their debentures redeemed in cash only while the rest opted for getting the
same converted into equity shares as per the terms of issue. Debenture redemption fund investments realised `
1,80,000 on sales.
You are required to redraft the Balance Sheet after giving effects of the right issue and redemption of debentures.
Also show the calculations in respect of number of equity shares issued and cash payment.
Notes to Accounts:
Particulars ` `
1. Share Capital
Authorised Share Capital
(50000 equity shares of ` 10 each) 5,00,000 Issued and Subscribed
(37,000 equity shares of`10 each fully paid up) 3,70,000
2. Reserves & Surplus
General Reserve (W.N.-2) 4,80,000 Securities Premium (W.N.-3) 60,000 Profit & Loss A/c 1,00,000 6,40,000
` 2,10,000
50% of their holding converted into equity shares ` 1,05,000
Number of equity shares to be issued to
debentureholders =7,000 shares
Total number of equity shares issued (5,000 + 7,000) 12,000 shares shares
(c) Cash payment to debentureholders:
Particulars `
20,000
2,05,000
2,50,000 2,50,000
4,80,000 4,80,000
5,05,000
Particulars Amount (`)
A Company had issued 20,000, 13% Convertible debentures of ` 100 each on 1stApril, 2007. The debentures are due
for redemption on 1stJuly, 2009. The terms of issue of debentures provided that they were redeemable at a premium
of 5% and also conferred option to the debentureholders to convert 20% of their holding into equity shares (Nominal
value ` 10) at a price of ` 15 per share. Debentureholders holding 2,500 debentures did not exercise the option.
Calculate the number of equity shares to be allotted to the Debentureholders exercising the option to the maximum.
(2 marks) [IPCC Gr. II]
Answer :
Calculation of number of equity shares to be allotted Particulars Number of debentures
Q.4.4 2011 - May [7] (a), 2017 - May [7] (b) Particulars
XYZ Ltd. had issued 30,000, 15% convertible debenture of `100 each on 1stApril 2008. The debentures are due for
redemption on 1stMarch, 2011. The terms of issue of debentures provided that they were redeemable at a premium
of 5% and also conferred option to the debentureholders to convert 20% of their holding into equity shares (Nominal
Value` 10) at a price of`15 per share. Debentureholders holding 2500 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.
Particulars Total number of debenture Less : Debentureholders not opted for conversion (2,500) 27,500 Option for
conversion 20% Number of debentures for conversion 5,500
shares allotted to be
No. of debenture 30,000
Redemption value at a premium of 5% (5,500 ×` 105) ` 5,77,500 Number of equity shares to be allotted 38,500
shares
Q.4.5 2013 - Nov [3] (a) Practical M Limited recently made a public issue of debentures. The following
information is available in respect of the issue:
(i) 3,00,000 partly convertible debentures of face value and issue price of ` 100 per debenture were issued;
(ii) Conversion of 50% of each debenture is to be done on expiry of 6 months from date of close of issue;
(iii) Date of closure of subscription list is 1stJune, 2012. Date of allotment is 1st July, 2012.
(iv) Interest on debenture at the rate of 12% is payable from date of allotment;
(v) Equity share of ` 10 each are issued at ` 50 per share for the purpose of conversion;
(vi) Underwriting commission is 2%;
(vii) 2,25,000 debentures were applied for;
(viii) Interest on debentures is payable half yearly on 30th September and 31st March.
Give Journal entries for all transactions relating to the above, including cash and bank entries for the year ended 31st
March, 2013.
(8 marks) [IPCC Gr. II] Answer:
Journal Entries in the books of M Ltd.
Date Particulars Dr. Cr. 1.6.12 Bank A/c Dr. 2,25,00,000 To D e b e n t u r e A p p l i c a t i o n a n d
Allotment A/c 2,25,00,000 (Application money received on 2,25,000
debentures @` 100 each.)
1.7.12 Debenture Application and Allotment A/c Dr. 2,25,00,000 Underwriters A/c Dr. 75,00,000 To 12%
Debentures A/c 3,00,00,000 (Allotment of 2,25,000 debentures to
applicants and 75,000 debenture to
underwriters.)
Underwriting Commission Dr. 6,00,000 To Underwriter’s A/c 6,00,000 (Commission payable to U/W @ 2% on
3,00,00,000)
1.12.12 12% Debentures A/c Dr. 1,50,00,000 To Equity Share Capital A/c 30,00,000 To Securities Premium A/c
1,20,00,000
(Conversion of 50% of debentures into
shares of ` 50 each with a face value of
` 10.)
Q.4.6 2013 - Nov [3] (b) Practical The summarised Balance Sheet of Entyce Ltd. as on 31st March, 2013 read as
under:
Liabilities: ` Share Capital : 4,00,000 equity shares of`10 each fully paid 40,00,000 up
General Reserve 50,00,000
Debenture Redemption Reserve 35,00,000 12% Convertible Debentures, 80,000 Debentures of ` 100 80,00,000 each
Other Loans 45,00,000
Assets:
PPE (at cost less depreciation) 1,50,00,000
Debenture Redemption Reserve Investments 30,00,000
Cash and Bank Balances 40,00,000
Other Current Assets 1,20,00,000
3,40,00,000
The debentures are due for redemption on 1st April, 2013. The terms of issue of debentures provided that they were
redeemable at a premium 5% and also conferred option to the debentureholders to convert 25% of their holding into
equity shares at a predetermined price of ` 11.90 per share and the balance payment in cash.
Assuming that:
(i) Except for debentureholders holding 12,000 debentures in aggregate, rest of them exercised the option for
maximum conversion,
(iii) All the transactions were taken place on 1st April, 2013 without any lag,
(iv) Premium on redemption of debentures is to be adjusted against General Reserve.
Redraft the Balance Sheet of Entyce Ltd. as on 01.04.2013 after giving
effect to the redemption. Show your calculations in respect of the number
of equity shares to be allotted and the cash payment necessary. (8 marks) [IPCC Gr. II] Answer:
Entyce Limited
Balance Sheet as on 01.04.2013
(a) PPE
(i) Tangible assets
1 55,00,000 2 85,85,000
45,00,000
90,00,000 2,75,85,000
1,50,00,000
(ii) Convertible portion per debenture - 80%, date of conversion - on expiry of 7 months from the date of closing of
issue.
(iii) Date of closure of subscription list - 01.06.2013, date of allotment 01.07.2013, Rate of interest on debentures -
10% p.a. payable from the date of allotment. Value of equity share for the purpose of conversion - ` 40 (Face value `
10)
(iv) Underwriting commission - 3%
(v) No. of debentures applied for 3,00,000
(vi) Interest payable on debentures - half yearly on 30thSeptember and 31st March.
Write relevant journal entries for all transactions arising out of the above during
the year ended on 31st March, 2014 (including cash and bank entries). (8 marks) [IPCC Gr. II]
Date Particulars Debit (`) Credit (`) 01.06.13 Bank Account Dr. 3,00,00,000
01.07.13 Debentures Application Account Dr. 3,00,00,000 Underwriters Account Dr. 1,00,00,000
Profit and Loss A/c Dr. 22,00,000 To Debentures Interest A/c 22,00,000
(Being debentures interest for the
year charged to Profit & Loss A/c)
Working Notes:
Calculation of debenture interest for the half year ended 31st March, 2014
Particulars ` On ` 80,00,000 for 6 Months @ 10% p.a. 4,00,000
On ` 3,20,00,000 for 3 Months @ 10% p.a. 8,00,000
Total 12,00,000
Space to write important points for revision
` Liabilities:
Share Capital: 9,000 equity shares of`10 each, fully paid up 90,000
2,70,000
Assets:
PPE (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
Answer:
Spices Ltd.
Balance Sheet as on 01.04.2018
2. Non-Current Liabilities
(a) Long-term borrowings - Unsecured Loans
3. Current Liabilities
(a) Short-term borrowings
Total
1 1,10,000 2 91,000
28,000
19,000 2,48,000
II. Assets
1. Non-current assets
(a) PPE
(i) Tangible assets 72,000
2. Current assets
(a) Cash and cash equivalents 98,000
(b) Other current assets 78,000
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)
(i) Calculation of number of shares to be allotted ` Total number of debentures 1,200 Less: Number of debentures
not opting for conversion (200)
1,000
40% of 1,000 400
Redemption value of 400 debentures (400 x ` 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)
CHAPTER
9Investment Accounts
This Chapter Covers: Study’s Chapter: 9
Chapter Comprises: ☹Classification of Investments ☹Cost of Investments ☹Disposal of Investments
☹Reclassification of Investment.
THE GRAPH . . . . . . . . . . . . . . . . . Trend Analysis
Marks of Objective, Short Notes, Distinguish Between, Descriptive & Practical Questions
Legend
Objective Short Notes Distinguish Descriptive Practical
For detailed analysis Login at www.scannerclasses.com for registration and password see first page of this
book. 1.442
TIME MANAGER
First Indepth
learning
i.e.....Time
............ Day 1
1. Budgeted 9
2. Actual
3. Variance
(1-2)
. . . . . . . . . Plan and Manage your Time
Instant
Revision (in hours)
2.15 1.5
Periodic Revision (in hours)
Mr. T purchased 1,000 nos. 10% debentures of ` 100 each on 1st April,
2009 at`96 cum-interest, the previous interest date being 31stDecember,
2008. Compute cost of investment. (2 marks)
Answer :
Total amount payable 1,000 × 96 = 96,000 Less: Interest included in the price for
January, February and
March i.e. 1,00,000 × × = 2,500 Cost of the Investment 93,500 Space to write important points for revision
Q.1.2 2010 - May [1] (iii) Practical
Mr. X purchased 1,000, 6% Government Bonds of ` 100 each on 31st January, 2009 at ` 95 each. Interest is payable
on 30th June and 31st December. The price quoted is cum interest. Journalise the transaction.
(2 marks) Answer :
Date
31st Jan., Investment A/c 2009
Journal Entry
Particulars Amount Amount (Dr.) ` (Cr.)` Dr. 94,500
Interest A/c Dr. 500
MY Ltd. had acquired 200 equity shares of YZ Ltd. at ` 105 per share on
01.01.2009 and paid` 200 towards brokerage, stamp duty and STT. On
31stMarch, 2009 Shares of YZ Ltd. were traded at`110 per share. At what value investment is to be shown in the
Balance Sheet of MY Ltd. as at 31st March, 2009. (2 marks) Answer :
Calculation of Cost of Investment
Particulars ` Purchase price of Equity shares of YZ Ltd. (200 shares ×` 105 per share) 21,000 Add: Brokerage,
Stamp duty and STT 200
Cost of investment 21,200 If the investment is long then it will be shown at cost. Therefore value of investment will
be ` 21,200. However, if the investment is a current investment, then it will be shown at lower of cost (i.e. ` 21,200)
or net realizable value (i.e.`200 × 110 =`22,000). Therefore, value of investment will be` 21,200.
Q.2.2 2009 - Nov [6] (iv) Practical Rose Ltd. had made an investment of` 500 lakhs in the equity shares of Nose
Ltd. on 10.01.2009. The realisable value of such investment on
31.03.2009 became ` 200 lakhs as Nose Ltd. lost a case of patent rights. Rose Ltd. follows financial year as
accounting year. How will you recognize this reduction in Financial statements for the year 2008-09. (4 marks)
Answer :
Provision and Conclusion:
Recognition of reduction in value of investment would depend upon the nature of investment and nature of decline
as per Accounting Standard 13 “Accounting for Investments”. According to provisions of the standard, if the
investments were acquired for long term and decline is temporary in nature reduction in value will not be recognized
and investments would be carried at cost. If the decline is of permanent nature, it will be charged to profit and loss
account. If the investments are current investments, then the reduction should be recognized and charged to Profit
and Loss Account as the current investments are carried at cost or fair value, whichever is less.
Space to write important points for revision
3 Disposal of Investments
Q.3.1 2009 - May [3] (b) Practical
On 1st April, 2008, Mr. Neel purchased 5,000 equity shares of` 100 each in X Ltd. @` 120 each from a Broker, who
charged 2% brokerage. He incurred ½% as cost of shares transfer stamps. On 31st January, 2009, Bonus was
declared in the ratio of 1: 2 Before and after the record date of bonus shares, the shares were quoted at` 175 per
share and` 90 per share respectively. On 31st March, 2009, Mr. Neel sold bonus shares to a broker, who charged 2%
brokerage.
Show the Investment Account in the books of Mr. Neel, who held the shares as current assets and closing value of
investments shall be made at cost or Market value, whichever is lower. (8 marks)
Answer : Investment Account in the books of Mr. Neel For the year ended 31st March, 2009 (Scrip: Equity
Shares of X Ltd.)
Dr.
Date Particulars
01.04.08 To Bank A/c (W.N.1)
31.01.09 To Bonus Shares
Working Notes: 1. Calculation of cost of equity shares purchased on 1.4.08 = 5,000 ×`120 + 2% of ` 6,00,000 +
% of ` 6,00,000 =` 6,15,000
2. Calculation of profit proceeds of equity shares sold on 31.3.09 = 2,500 ×`90 – 2% of ` 2,25,000 =` 2,20,500
3. Calculation of profit on sale of bonus shares on 31.3.09 = Sale proceeds – Average cost
Gamma Investment Company hold 1,000, 15% debentures of ` 100 each in Beta Industries Ltd. as on April 1, 2009
at a cost of` 1,05,000. Interest is payable on June, 30 and December, 31 each year.
On May 1, 2009, 500 debentures are purchased cum-interest at ` 53,500. On November 1, 2009, 600 debentures are
sold ex-interest at ` 57,300. On November 30, 2009, 400 debentures are purchased exinterest at`38,400. On
December 31, 2009, 400 debentures are sold cuminterest for ` 55,000.
Prepare the investment account showing value of holdings on March 31, 2010 at cost, using FIFO method. (6 marks)
Answer : In the books of Gaama Investments Ltd. Investment Account (15% Debentures in Beta Industries
Ltd.)
Date Particulars Nominal Interest Cost Date Value
Particulars Nominal InteCost Value rest
```
7 Sale price of investment on 31.12.09 =`55,000☐`3,000 =`52,000 8 Accrued interest = ` 90,000 × = ` 6,750
9 Accrued interest = ` 90,000 × = ` 3,375
Less : Cost of investment sold = = (` 42,000) Profit on sale ` 10,000 Space to write important points for revision
Q.3.3 2010 - Nov [1] {C} (d) Practical
H purchased 500 equity shares of `100 each in the ABC Company Limited for` 62,500 inclusive of brokerage and
stamp duty. Some years later the company decided to capitalise its profit and to issue to the holders of equity shares
one equity share as Bonus for every equity share held by them. Prior to capitalization, the shares of ABC Company
Limited were quoted at `175 per share. After the capitalization, the shares were quoted at`92.50 per share. H sold the
Bonus shares and received ` 90 per share. Show Investment A/c in H’s books on average cost basis as per AS-13.
(5 marks)
Answer :
In the books of H
Investment Account (Equity Shares of ABC Co. Ltd.)
Bonus Issue was made some year later to the purchase of initial 500 equity share.
Working Notes:
1. Computation of profit on sale of bonus shares :
On 1stApril, 2010, Rajat has 50,000 equity shares of P Ltd., at a book value of ` 15 per share (face value ` 10 each).
He provides you the further information :
1. On 20th June, 2010 he purchased another 10,000 shares of P Ltd. at
` 16 per share.
2. On 1st August, 2010, P Ltd. issue one equity bonus share for every six
shares held by the shareholders.
3. On 31st October, 2010 the directors of P Ltd. announced a right issue
which entitle the holders to subscribe three shares for every seven
shares at` 15 per share. Shareholders can transfer their rights in full
or in part.
Rajat sold 1/3rd of entitlement to Umang for a consideration of` 2 per
share and subscribe the rest on 5th November, 2010.
You are required to prepare Investment A/c in the books of Rajat for the year ending 31st March, 2011. (5 marks)
Answer :
Date Particulars
3,00,000
90,000 12,10,000 90,000 12,10,000
Working Notes: (1) Bonus shares = = 10,000 shares
(2) Right shares = × 3 = 30,000 shares
(3) Sale of rights = 30,000 shares × × ` 2 = ` 20,000
(4) Rights subscribed = 30,000 shares × × ` 15 = ` 3,00,000 Space to write important points for revision
Q. 3.5 2012 - May [5] (b) Practical Practical 12:
Date Particulars
01.05.2011 Purchased 24,000 12% Bonds of`100 each at`84 cuminterest. Interest is payable on 30th September and
31st March every year.
15.06.2011 Purchased 1,50,000 equity shares of ` 10 each in Alpha Limited for ` 25 each through a broker, who
charged brokerage @ 2%.
10.07.2011 Purchased 60,000 equity shares of ` 10 each in Beeta Limited for ` 44 each through a broker, who
charged brokerage @ 2%.
14.10.2011 Alpha Limited made a bonus issue of two shares for every three shares held.
31.10.2011 Sold 80,000 shares in Alpha Limited for ` 22 each.
01.01.2012 Received 15% interim dividend on equity shares of Alpha Limited.
15.01.2012 Beeta Limited made a right issue of one equity share for every four shares held at ` 5 per share. Mr.
Brown exercised his option for 40% of his entitlements and sold the balance rights in the market at ` 2.25 per share.
01.03.2012 Sold 15,000 12% Bonds at ` 90 ex-interest.
15.03.2012 Received 18% interim dividend on equity shares of Beeta Limited.
Interest on 12% Bonds was duly received on due dates. Prepare separate investment account for 12% Bonds, Equity
Shares of Alpha Limited and Equity Shares of Beeta Limited in the books of Mr. Brown for the year ended on 31st
March, 2012. (8 marks)
Oct. 14 To Bonus 1,00,000 2012 By Bank A/c 2,55,000 issue — —Jan. 1 -dividend (1,50,000
/3 × 2)
Shares subscribed by Mr. Brown = 15,000 × 40% = 6,000 shares Value of right shares subscribed = 6,000 shares @
` 5 per share =` 30,000
6. Calculation of sale or right entitlement by Beeta Ltd. No. of right shares sold = 15,000 - 6,000 = 9,000 shares
Sale value of right = 9,000 shares × ` 2.25 per share = ` 20,250
Note: Shares are assumed to be purchased on cum right basis, therefore, amount received from sale of rights is
credited to Investment A/c. Space to write important points for revision
Q.3.6 2012 - Nov [5] (a) Practical
On 01.04.2011, Mr. T. Shekharan purchased 5,000 equity shares of `100 each in V. Ltd. @` 120 each from a broker,
who charged 2% brokerage. He incurred 50 paisa per ` 100 as cost of shares transfer stamps. On 31.01.2012 bonus
was declared in the ratio of 1 : 2. Before and after the record date of bonus shares, the shares were quoted at ` 175
per share and ` 90 per share respectively. On 31.03.2012 Mr. T. Shekharan sold bonus shares to a broker, who
charged 2% brokerage.
Show the Investment Account in the books of T. Shekharan, who held the shares as Current Assets and closing value
of investments shall be made at cost or market value whichever is lower. (8 marks)
Working Notes :
1. Cost of equity shares purchased on 1st April, 2011
= 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, 2012 = Sale price – Brokerage
= 2,500 ×` 90 – 2% of ` 2,25,000
= ` 2,20,500
3. Profit on sale of bonus shares on 31st March, 2012
= Sales proceeds – Average cost
Sales proceeds =` 2,20,500
Average cost =` [6,15,000 × 2,50,000/7,50,000] =` 2,05,000
Profit =` 2,20,500 – ` 2,05,000 =` 15,500
4. Valuation of equity shares on 31st March, 2012
Cost =`[6,15,000 × 5,00,000/7,50,000] =`4,10,000 i.e.`82 per share Market Value = 5,000 shares × ` 90 = ` 4,50,000
Closing stock of equity shares has been valued at ` 4,10,000 i.e. cost being lower than the market value.
Space to write important points for revision
In 2011, M/s. Wye Ltd. issued 12% fully paid debentures of ` 100 each, interest being payable half yearly on 30th
September and 31st March of every accounting year.
On 1st December, 2012, M/s, Bull & Bear purchased 10,000 of these debentures at `101 cum-interest price, also
paying brokerage @ 1% of cum-interest amount of the purchase. On 1st March, 2013 the firm sold all of these
debentures at`106 cum-interest price, again paying brokerage @ 1% of cum-interest amount.
Prepare Investment Account in the books of M/s. Bull & Bear for the period 1st December, 2012 to 1st March, 2013.
(5 marks)
Particulars ` Sales Price (10,000 ×` 106) 10,60,000 Less: Brokerage (1% of ` 10,60,000) (10,600) Less: Cum
Interest (10,000 × 100 × 12% × 5/12) (50,000) Total 9,99,400
On 01-05-2012, Mr. Mishra purchased 800 equity shares of ` 10 each in Fillco Ltd. @` 50 each from a broker who
charged 5%. He incurred 20 paisa per ` 100 as cost of shares transfer stamps. On 31-10-2012, bonus was declared in
the ratio 1:4. The shares were quoted at`110 and`60 per 60 per 11-2012, Mr. Mishra sold the bonus shares to a
broker who charged 5%. You are required to prepare Investment Account in the books of Mr. Mishra for the year
ending 31-12-2012 and closing value of Investment shall be made at cost or market value whichever is lower. (4
marks)
Answer:
1. Basic Computations
Particulars Computation ` (a) Cost of shares purchased (800 × 50 = 40,000) + (5% of on 01.05.2012 40,000)+
0.2% of 40,000 42,080 (b) Sale Proceeds of shares
sold on 30.11.2012 (200 × ` 60) ☐ 5% Brokerage 11,400 (c) Profit on sale of Bonus Sale Proceeds = 11,400 shares
on 30.11.2012 Less: Average Cost = (8,416)2,984
(d) Valuation of equityCost : least of the shares of 31.12.2012 two
= 33,664
Market Value : 800 shares of 33,664 ` 60 = 48,000
1.5.2012 To Bank
31.10.2012 To Bonus Issue(1:4)
31.12.2012 To P&L (Profit) Total
Smart Investments made the following investments in the year 2013-14 : 12% State Government Bonds having face
value` 100
Date Particulars
01.04.2013 Opening Balance (1200 bonds) book value of ` 1,26,000 02.05.2013 Purchased 2,000 bonds @ ` 100
cum interest 30.09.2013 Sold 1,500 bonds at ` 105 ex interest
Interest on the bonds is received on 30th June and 31st Dec. each year. Equity shares of X Ltd.
15.04.2013 Purchased 5,000 equity shares @ ` 200 on cum right basis Brokerage of 1% was paid in addition (Face
Value of shares ` 10)
03.06.2013 The company announced a bonus issue of 2 shares for every 5 shares held.
16.08.2013 The company made a rights issue of 1 share for every 7 shares held at ` 250 per share
The entire money was payable by 31.08.2013 22.08.2013 Rights to the extent of 20% was sold @ ` 60. The
remaining
rights were subscribed.
02.09.2013 Dividend @ 15% for the year ended 31.03.2013 was received on 16.09.2013
Prepare Investment Accounts in the books of Smart Investments. Assume that the average cost method is followed.
(8 marks)
Working Notes:
1. Profit on sale of bonds on 30.9.13
= Sales proceeds - Average cost
On 1st April 2014, Hasan has 20,000 equity shares of Vayu Ltd., at a book value of`20 per share (face value of`10
each). He provides the following information:
(i) On 10th June 2014, he purchased another 5,000 shares in Vayu Ltd., @` 15 per share.
(ii) On 1st August 2014, Vayu Ltd., issued one bonus share for every five shares held by the shareholders.
(iii) On 31stAugust 2014, the directors of Vayu Ltd., announced a rights issue which entitle the shareholders to
subscribe two shares for every six shares held @ of ` 15 per share. The shareholders can transfer their rights in full
or in part.
Hasan sold 1/4th of his right shares holding to Harsh for a consideration of` 3 per share and subscribed the rest on
31st of October 2014.
Prepare Investment A/c in the books of Hasan as on 31st October 2014. (8 marks)
Answer:
Investment Account in the books of Hasan (Equity shares in Vayu Ltd.)
Date Particulars No. of Amount Date Shares (`)
Particulars No. of Amount Shares (`) 1.4.14 To Balance b/d 20,000 4,00,00031.8.14 10.6.14 To Bank A/c 5,000 75,000
1.8.14 To Bonus issue 5,000 0 (W.N. 1) 31.10.14 By Balance c/d 37,500 5,80,000
31.10.14To Bank A/c 7,500 1,12,500 (Bal. Fig.)
Working Notes:
37,500 5,87,500 37,500 5,87,500
(1) Bonus shares = = 5,000 shares
(2) Rights shares = × 2 = 10,000 shares (3) Sale of rights = 10,000 shares × 1/4 ×` 3 = ` 7,500 (4) Rights
subscribed = 10,000 × × ` 15 = ` 1,12,500 Space to write important points for revision
Q. 3.11 2015 - May [5] (b) Practical
Mr. Chatur had 12% Debentures of Face Value `100 of M/s. Unnati Ltd. as current investments.
He provides the following details relating to the investments. 1-4-2014 Opening balance 4000 debentures costing `
98 each 1-6-2014 Purchased 2000 debentures @ ` 120 cum interest 1-9-2014 Sold 3000 debentures @ ` 110 cum
interest 1-12-2014 Sold 2000 debentures @ ` 105 ex interest 31-1-2015 Purchased 3000 debentures @ ` 100 ex
interest 31-3-2015 Market value of the investments ` 105 each Interest due dates are 30th June and 31st December.
Mr. Chatur closes his books on 31-3-2015. He incurred 2% brokerage for all his transactions.
Show investment account in the books of Mr. Chatur assuming FIFO method is followed. (8 marks)
Amt. In (`)
Date Particulars Nominal Interest Cost Date Particulars Nominal Interest Cost Value Value
1.4.2014 To Balance 4,00,000 12,000 3,92,000 30.6.2014 By Bank – 36,000 b/d 6,00,00
0 × 6%
1.6.2014 To Bank 2,00,000 10,000 2,34,800 1.9.2014 By Bank 3,00,000 6,000 3,17,400
31.1.2015 To Bank 3,00,000 3,000 3,06,000 1.12.2014 By Profit & – – 9,600 Loss
A/c
Working Note:
1. Valuation of closing balance as on 31.3.2015: Market value of 4,000 Debentures at` 105 = ` 4,20,000 Cost price
of 1,000 debentures at 1,17,400 3,000 debentures at 3,06,000 4,23,400 Value at the end = ` 4,20,000 i.e. whichever
is less
2. Profit on sale of debentures as on 1.9.2014
Amount (`)
Sales price of debentures (3,000 × ` 110) 3,30,000
Less: Brokerage @ 2% (6,600) 3,23,400
Less: Interest for 2 months (6,000)
Less: Cost price of Debentures (2,94,000) Profit on sale 23,400 3. Loss on sale of debentures as on 1.12.2014
Amount ( `) Sales price of debentures cum interest (3,000 x ` 110) 3,30,000 Less: Brokerage @ 2% (6,600)
3,23,400
Less: Interest for 2 months (6,000) Sale value for 3,000 debentures 3,17,400
Space to write important points for revision
Q.3.12 2015 - Nov [6] (b) Practical
A Limited purchased 5000 equity shares (face value 100 each) of Allianz Limited for` 105 each on 1st April, 2014.
The shares were quoted cum dividend. On 15thMay, 2014, Allianz Limited declared & paid dividend of 2% for year
ended 31stMarch, 2014. On 30thJune, 2014 Allianz Limited issued bonus shares in ratio of 1:5. On 1st October, 2014
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, 2014. Right shares were not entitled to dividend. The company sold 3000 shares on 31st December, 2014
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.
(10 marks)
Answer:
Working Notes:
1. Cost of Purchase = (5000 × 105) + 2% Brokerage
Shares Shares
1\4 To Bank 5,000 5,35,500 15\5 By Bank (Div) 10,000
30\6 To Bonus 1,000 ☐ 31/12 By Bank (Sale of 3,000 2,79,300
Share)
1\10 To Bank (Right) 250 11,250 31/3 By Balance c/d 3,250 2,79,110
31\12 To P& L 21,660
6,250 5,68,410 6,250 5,68,410
= ` 5,35,500
2. Dividend = 5000 × 100 × 2%
= ` 10,000
3. Pre Acquisition No. of
= ` 11,250
6. No. of Rights share Renounced = 500 - 250 = 250 @ 5
= ` 1,250
7. Interim Dividend on 30/11/2014 = (5,000 + 1,000) ×`100 × 1%
= ` 6,000 (To be taken to P&L) 8. Cost of Shares sold on
31/12/2014 = (5,35,500+11,250-10,000) ×
A Ltd. purchased on 1st April, 2015 8% convertible debenture in C Ltd. of face value of` 2,00,000 @` 108. On 1st
July, 2015 A Ltd. purchased another ` 1,00,000 debenture @ ` 112 cum interest.
On 1st October, 2015 ` 80,000 debenture was sold @ ` 105. On 1st December, 2015, C Ltd. give option for
conversion of 8% convertible debentures into equity share of`10 each. A Ltd. receive 5000 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 2015 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.
(8 marks)
Answer: Investment Account in the Books of A Ltd. for the year ending 31/12/2015
Date PartiNominal Interest Cost Date Particulars Nominal Interest Cost culars value value
1/4/15 To Bank 2,00,000 – 2,16,000 31/9/15 By Bank(int – 12,000 – erest)
1/7/15 To Bank 1,00,000 2,000 1,10,000 1/10/15 By Bank 80,000 – 84,000
31/12/15 To P&L – 14,033 – 1/10/15 By P&L A/c – – 2,933 A/c
1/12/15 By Equity 55,000 – 59,767 share
On 1stDecember 2015, M/s. Blue & Black purchased, 20,000 12% fully paid debentures of ` 100 each at ` 105 cum
interest price, also paying brokerage @ 1% of cum interest amount of the purchase. On 1st March, 2016, the firm
sold all these debentures at` 110 cum-interest price, again paying brokerage @ 1% of cum interest amount. Prepare
Investment Account in the books of M/s. Blue & Black for the period 1st Dec., 2015 to 1st March 2016. Interest
being payable half yearly on 30th September and 31st March of every accounting year. (4 marks)
Answer: Investment A/c in the books of M/s Blue & Black for the period from 1-12-15 to 1-3-16
Date Particulars No. Val.
1.12.15 To Bank A/c 20,00,000
31.3.16 To P & L A/c
Working Notes:
(i) Cost of 12% Debenture purchased on 1st December, 2015:
Less: Cum - Interest = (40,000) Total 20,81,000 (ii) Sale proceed of 12% Debenture Sold on 31st March, 2016:
Less: Cum Interest = (1,00,000) Total 20,78,000 Space to write important points for revision
Q.3.15 2017 - May [5] (b), RTP Practical
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 2016. On 1st September 2016, 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
(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, 2016, at the rate of 20% was declared by the company and received by
Akash Ltd. on 20th January 2017.
(6) On 1st February, 2017, Akash Ltd. sold half of its share holdings at a premium of ` 4 per share.
(7) The market price of share on 31.03.2017 was ` 13 per share.
You are required to prepare the Investment Account of Akash Ltd. for the
year ended 31stMarch, 2017 and determine the value of share held on that
date assuming the investment as current investment. (8 marks)
Answer:
Investment A/c of Akash Ltd.
[Equity share of X Ltd. F.V. ` 10%]
Dr. Cr.
Date Particulars No. Amount Date Particulars No. Amount
1-4-16 To Balance b/d 1-9-16 To Cash/Bank
30-9-16 To Bonus
4,000 60,000 20-1-17 By Bank — 2,000 1,000 14,000 [Dividend on sh.
2,000 — Acquired] [on 1-9-16]
= 1,05,625 × 4,000
= 42,250
Profit = 56,000 – 42,250 = 13,750
Here, cost price of share is less than the market value of ` 13 per share. Thus, it should be valued at cost.
Space to write important points for revision
Q.3.16 2018 - May [2] (a) Practical 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.
dividend
20.5.16 To Bank A/c 1,000 23,000 20.12.16 By Bank 1,500 33,000
Working Notes:
1. Calculation of Weighted average cost of equity shares 600 shares purchased at ` 12,000
900 shares purchased at ` 22,500
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 (preacquisition dividend received on 1,000 shares
purchased on 20.5.17]. 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 x 1= 1,000 shares
Shares subscribed = 1,000 x 60%= 600 shares
Value of right shares subscribed = 600 shares @`20 per share =`12,000 Calculation of sale of right renouncement
No. of right shares sold = 1,000 x 40% = 400 shares
Sale value of right = 400 shares x ` 3 per share = ` 1,200 Note: As per para 13 of AS 13, sale proceeds of rights is to
be credited to P & L A/c.
4. Profit on sale of equity shares
As on 20.12.16
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. 2.17
Sales price (1,000 shares at ` 24) 24,000 Less: Cost of shares sold (1,000 x ` 11.875) (11,875) Profit on sale 12,125
Balance of 3,100 shares as on 31.3.17 will be valued at` 36,812.50 (at rate of ` 11.875 per share)
Space to write important points for revision
1st October, 2017 Purchased 12,000 equity shares of ` 10 each in Moon Limited for` 44 each through a broker, who
charged brokerage @ 2%.
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 31stMarch, 2018. Assume that the average cost method is followed. (10 marks)
31 To P & L A/c 40,500 31 By Balance c/d 6,750 – 5,20,875 March March (W.N.2)
, 2018 , 2018
= ` 6,94,500
2. Sale of bonds on 01/10/2017:
Interest element in Sale of bonds = 2,250 × 100 × 8% × 5/12 =` 7,500 Investment element in sale of bonds = 2,250 ×
81 = ` 1,82,250
Average Cost = × 2,250 = (` 1,73,625) Profit on Sale ` 8,625 4. Closing Balance as on 31/03/2018 of 8% Bonds:
= × 6,750 = ` 5,20,875
Interest accrued on bonds on 31/03/2018 = 6750 × 100 × 8% × =` 22,500
5. Calculation of right shares subscribed by Moon Limited
Right shares = × 1 = 3000 shares
Shares subscribed by Nisha = 3,000 × 40% = 1,200 shares Value of right shares subscribed = 1,200 shares @ ` 5 per
share
= ` 6,000
6. Calculation of Sale of right entitlement by Moon Limited: No. of right shares sold = 3,000 – 1,200 = 1,800 shares
Sale value of right = 1,800 shares × ` 2.25 per share
=` 4,050
Note: As per Para 13 of AS 13, Sale proceeds of rights is to be credited to P & L A/c
Space to write important points for revision
Q.3.18 2019 - Nov [3] (a) Practical
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 sold 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. (10 marks)
Ram furnishes the following details relating to his holding in 16% Debentures of Sita Ltd.
(a) Opening Balance (1st Jan) Face Value ` 60,000 - Cost ` 59,000 (b) 1st March Purchased 100 Debentures ex-
interest at ` 98 (c) 1st July Sold 200 Debentures ex-interest out of the original
holding at ` 100
(d) 1st October Purchased 50 Debentures at` 98 cum - interest. (e) 1st November Sold 200 Debentures ex-interest at `
99 out of the
original holdings.
(f) Interest Dates are 30th September and 31st March.
Anugraha closes his books every 31stDecember. Brokerage at 1% is to be paid for each transaction.
Prepare the Investment Account as it would appear in his books. Market Value of Debentures on 31st December is`
99.
Answer:
1. Computation of Int. at 16% p.a. on various dates (Assumed that Face Value per Debenture = ` 100)
Date Particulars FV (`) Period Interest
Amount paid
9,800 4,900
– (Purc Date = Int. Date)Nil 98 49
9,898 4,949 3. Computation of Profit / (Loss) on Sale of Investments (in`) Particulars 1st July 1st Nov Sale
Proceeds 20,000 19,800 Less: Brokerage at 1% (200) (198) Net Sale Proceeds 19,800 19,602 Less: Cost on FIFO
59,000× 59,000×basis
= (19,667) =(19,667) Profit /(Loss) on Sale 133 (65) 4. 16% Debentures of Sita Ltd Account
Date Particulars
1st Jan To balance b/d
1st Mar To Bank
1st Oct To Bank
Note:
☐ Net Gain on Sale of Investments (from Point 3) =` 133 –` 65 =` 68, transferred to P&L A/c at the end of the year.
Alternatively, the Gain of `133 and Loss of ` 65 can be separately transferred to P&L, on the dates of sale itself.
☐ Market Value of Investments at year – end = 350 ×`99 =`34,650. Cost as per above A/c Closing Balance = bal.
figure =` 34,513. So, B/Sheet Value = Lower of Cost or Market Value = Cost ` 34,513. Space to write important
points for revision
FV Int. Cost Date Particular FV Int Cost
60,000 2,400 59,000 31st Mar By Bank – 5,600 –
10,000 667 9,898 1st July By Bank 20,000 800 19,800 5,000 – 4,949 30th Sep By Bank – 4,000 –
– – 68 1st Nov By Bank 20,000 267 19,602
Answer:
Working Notes
25,000 × ` 10 × 20% ` 50,000 (a) Dividend on OB Shares taken to P&L (b) Dividend on Shares purc. on 20.06.2017
(3,75,000+80,000+1,50,000–10,000) ` 2,64,444 ×
1. Investment (Equity Shares in ABC Ltd.) Account
Date Particulars Shares `Date Particulars Shares ` Nos. Nos.
01.04.17To balance b/d at` 15 25,000 3,75,000 31.10.17 By Bank (Dvd) – 10,000 (WN 5b)
20.06.17 To Bank 5,000 80,000
16.08.17To Bonus (WN 1) 5,000 – 15.11.17 By Bank (Sale of 25,000 3,75,000 Shares)
30.09.17 To Bank (Rights) 10,000 1,50,000 (WN 4)
15.11.17To P&L-Pft tfr (WN 7) – 44,444 31.12.17 By balance c/d 20,000 2,64,444 (WN 8)
Total 45,000 6,49,444 Total 45,000 6,49,444
Particulars
To balance c/d
Total
2. Profit & Loss A/c (Abstract)
` Particulars `
Investment A/c, since the Ex-Rights Price is not lower than the Cost of Acquisition.
☐ Reduce the Dividend on Shares acquired on 20th June 2017 from the cost of acquisition, to arrive at the Net Cost
of Shares as on 31st December, 2017, since it is Pre-Acquisition Dividend.
ABC Limited held on 1st April, 2017` 2,00,000 of 9% Government Loan at ` 1,90,000 (Face Value of Loan` 100
each). Three month’s interest had accrued on the above date.
(a) On 31st May, 2017, the Company purchased the same Loan having a
Answer:
A. Computation of Interest at 9% p.a. on various dates
Date Particulars FV (`) Period Interest Amt. (months) at 9% p.a. (`) 01.04.2017 Interest Accrued on
Opening Balance (2,000 × ` 100) 2,00,000 3 4,500
31.05.2017 I n t e r e s t o n C u m
Interest Purchase (800 × ` 100) 80,000 5 3,000 01.06.2017 Interest on Ex-Interest
Sale (600 × ` 100) 60,000 5 2,250 30.06.2017 Interest Received on (2,00,000+80,000
Holding – 60,000) 2,20,000 6 9,900
30.11.2017 I n t e r e s t o n C u m
Interest Sale (400 × ` 100) 40,000 5 1,500 01.12.2017 Interest on Ex-Interest
Purchase (100 × ` 100) 10,000 5 375 31.12.2017 Interest Received on (2,20,000-40,000
Holding + 10,000) 1,90,000 6 8,550
01.03.2018 Interest on Ex-Interest
Sale (100 × ` 100) 10,000 2 150
31.03.2018 Interest Accrued on
Closing Balance (Note) 1,80,000 3 4,050
Note: Face Value of Holding on 31.03.2018 = 1,90,000 (upto 31st Dec) – 10,000 = ` 1,80,000
(700) (Nil)
Date Particulars
01.04.2017 To bal b/d
31.05.2017 To Bank
01.12.2017 To Bank
31.03.2018 To P&L - Int
Total
D. 4.9% Government Loan A/c
FV Int. Cost Date Particular FV Int Cost
2,00,000 4,500 1,90,000 01.06.2017 By Bank 60,000 2,250 56,400
80,000 3,000 73,000 01.06.2017 By P&L – – 600
10,000 375 10,000 30.06.2017 By Bank – 9,900 –
(b/fig) 18,525 – 30.11.2017 By Bank 40,000 1,500 37,300
30.11.2017 By P & L – – 700
31.12.2017 By Bank – 8,550 –
01.03.2018 By Bank 10,000 150 9,500
31.03.2018 By bal. C/d 1,80,000 4,050 1,68,500
2,90,000 26,400 2,73,000 Total 2,90,000 26,400 2,73,000
Note = Avg Cost p.u. = = ` 93.61. Since, Cost (` 93.61)
< Market Price (` 96), Investments are shown at Cost. Space to write important points for revision
Q. 3.22 RTP Practical
‘A’ carried out the following transactions in the Shares of ABC Ltd.
(a) On 1stApril 2017, he purchased 20,000 Equity Shares of`1 each fully paid up for ` 30,000.
(b) On 15th May 2017, he sold 4,000 Share for ` 7,600.
(c) 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 1st June, 2017 at a Price of`
1.50 per Share of which ` 0.75 is payable on or before 15th July, 2017 and the balance, ` 0.75 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.
(d) ‘A’ received his Bonus Shares and took up 2,000 Shares under the Rights, paying the sum thereon when due and
selling the Rights of the remaining Shares at` 0.40 per Share, the proceeds were received on 30th September 2017.
(e) On 15th March, 2018, ‘A’ received a dividend from ABC Ltd. of 15% in respect of the year ended 31st December
2017.
(f) On 30th March, 2018, ‘A’ received` 14,000 from the Sale of 10,000 Shares.
Record these transactions in the Investment Account in A’s books for the
year ended 31st March, 2018 transferring any Profits or Losses on these
transaction to Profit and Loss Account. Apply Average Basis. Expenses and
Tax to be ignored.
Answer:
Particulars
1. Profit on Sale of Shares on 15.05.17
Working Notes
Computation Result Sale Proceeds`7,600 less Cost ` 1,600 (` 30,000 × )
2. No. of Bonus Shares (20,000 – 4,000) ÷ 4 4,000 Shares 3. No. of Rights Shares
eligible
3,200 Shares(20,000 – 4,000)× (Note: No
Note:
Investment in Shares A/c can also be prepared similar to Investment in Debentures, by having Dividend Column,
instead of Interest Column. The above account has been prepared in this manner.
On 1st April, 2017, XYZ Ltd. has 15,000 Equity Shares of ABC Ltd., at a Book Value of` 15 per Share (Face Value`
10 per Share). On 1st June, 2017, XYZ Ltd. acquired 5,000 Equity Shares of ABC Ltd., for ` 1,00,000 on cum-rights
basis. Vaikuntam Ltd. announced a Bonus and Rights Issue. (a) Bonus was declared, at the rate of one Equity Share
for every five
Answer:
Working Notes
Particulars
1. No. of Bonus Shares
` 10 × 20%
7. Net Sale Proceeds for sale on 01.01.2018 (13,000 Shares × ` 16.50) less ` 2,12,355 Brokerage 1%
8. Profit on Sale of
Shares on 01.01.2018 Net Sale Proceeds ` 2,12,355 less ` 42,855 Cost ` 1,69,500
Note : 50% of the Shareholdings are sold, for which cost is`1,69,500 as per WN. 6. Hence, Cost of Balance 50%
Shareholdings at period -end is also` 1,69,500.
Important Notes
☐ Sale Proceeds of Rights is to be credited to P&L A/c and not Investment A/c, since the Ex-Rights Price is not
lower than the Cost of Acquisition.
☐ Reduce the Dividend on Shares acquired on 1st June 2017 from the cost of acquisition, to arrive at the Net Cost of
Shares as on 31st March 2018, since it is Pre-Acquisition Dividend.
Answer:
1. Computation of Interest at 8% p.a. on various dates Date Particulars FV (`) Period Int. Amt. at (months) 8% p.a. (`) 1stApril
Interest on Cum-Interest Purchase 12,00,000 5 40,000 (12,000 ×` 100)
1st May Interest Received on Holding 12,00,000 6 48,000 1st Oct Interest on Ex-Interest Sale 3,00,000 5 10,000 (3,000 ×` 100)
1st Nov Interest Received on Holding 9,00,000 6 36,000 (12,00,000 – 3,00,000)
31st Mar Interest Accrued on Closing 9,00,000 5 30,000 Balance
2. Computation of Cost of Purchase
Particulars Computation `
Amount paid on 1st April 12,000 × 80.5 9,66,000 Less: Interest (for Cum-Interest (W N 1) (40,000)
purchase only)
Profit / (Loss) on Sale 11,500 4. Computation of Profit on Sale of Bonus Shares and Dividend
Received
Particulars
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 @ ` 108. 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.
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]
Date Particulars Nominal value (`) 1.4.18 To Bank 2,00,000 A/c
1.7.18 To Bank 1,00,000 A/c (W.N.1)
31.12.18 To P & A/c – [Interest]
Interest Cost (`) Date Particulars (`)
Nominal Interest Cost value (`) (`)
– 2,16,000 30,09,18 By Bank A/c
– 12,000 –
2,000 1,10,000
14,033 – 1.10.18
2,933
1.12.18
3,00,000 1.12.18
By Bank A/c
(Accrued interest) (` 55,000 x .08x
2/12)
debentures
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. =` 86,933 = (`2,16,000 + `1,10,000) x 80,000/3,00,000
(iii) Loss on sale of Debentures = ` 86,933 –` 84,000 =` 2,933
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 (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 x 5,000)
Note: It is assumed that interest on debentures, which are converted into cash, has been received at the time of
conversion.
CHAPTER
Insurance Claims for
10
Loss of Stock and Loss of Profit
This Chapter Covers: Study’s Chapter: 10
Chapter Comprises: ☹Introduction ☹Meaning of Fire ☹Claim for Loss of Stock ☹Claim for Loss of Profit
THE GRAPH . . . . . . . . . . . . . . . . . Trend Analysis
Marks of Objective, Short Notes, Distinguish Between, Descriptive & Practical Questions
Objective Short Notes
Legend
Distinguish Descriptive Practical
For detailed analysis Login at www.scannerclasses.com for registration and password see first page of this
book.
1.506
TIME MANAGER
i.e.....
1. Budgeted
2. Actual
3. Variance (1-2)
............ Day 1 16
Instant
Revision (in hours)
4 3.12
. . . . . . . . . . . Plan and Manage your Time Periodic Revision
(in hours)
Answer:
The objective of average clause is discouraging the insured to under insurance. It is not necessary to include average
clause in fire insurance policy. It is applicable only in those areas where the insured has under insured. Under
insurance implies that insurance made for the lesser value of stock. It the amount of policy is less than the estimated
value of stock destroyed, then the insurance company will settle the claim proportionately by applying the average
clause.
On applying average clause, actual claim can be determined as :
Answer:
When a businessman wants to reduce the burden of Insurance Premium and wants to take an insurance policy which
is less than the value of average stock, it is known as under insurance. For discouraging the under-insurance, fire
insurance policies contain an average clause. In such a case, the net claim is calculated by using following formula.
Mr. 'A' prepares accounts on 30th September each year, but on 31st December, 2001 fire destroyed the greater part of
his stock. Following information was collected from his books:
Answer :
Memorandum Trading Account
(For the period 1.10.2001 to 12.2001)
Particulars ` Particulars `
A fire occurred in the workshop of Mr. A on 31stMarch, 2006 where a large part of the stock was destroyed. Scrap
realised` 7,500. Mr. A gives you the following information for the period of 1stJanuary to 31st March, 2006:
Answer:
In the books of Mr. A
Dr. Memorandum Trading A/c upto 31st March, 2006 Cr. Particular
To Opening Stock
To Purchases
To Gross Profit (W. N. l)
` Particular `
20,000 By Sales 45,000
42,500 By Goods then for personal
13,500 use 1,000 By Closing Stock 30,000
76,000 76,000 Working Note : (1) Calculation’s of Gross Profit :
GP Ratio = × 100
30 = × 100
= GP Gross Profit = ` 13,500
Statement of claim to be made on the insurance co., by Mr. A Average Clause = × Actual loss of Stock
= × (30,000☐ 7500 Salvage) ` = 18,750 ☐ Claim to be made by A =` 18,750. Space to write important points for
revision
Q.1.5 2007 - May [3] (b) Practical On 2.6.2007 the stock of Mr. Black was destroyed by fire. However, following
particulars were furnished from the records saved :
Particulars ` Particulars `
To Opening Stock 1,35,000 By Sales 9,00,000 To Purchases 6,45,000 By Closing Stock at cost 1,80,000
To Gross Profit 3,00,000
10,80,000 10,80,000 Memorandum Trading A/c
(For the period from 1.4.2007 to 02.06.2007)
Particulars ` Particulars `
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 1,50,000 2,55,000 (Balancing figure)
Less: Machinery 15,000 2,40,000
To Gross Profit (W.N) 1,35,000
5,55,000 5,55,000
Computation of Insurance Claim
Claim subject to average clause = Actual loss of stock X Amount of Policy/Value of stock on the date of fire =
1,50,000 × = ` 1,20,000
Working Note:
G.P. ratio = × 100 = 33 %
Amount of Gross Profit = ` 4,05,000 × 33 % =` 1,35,000
Note: Salvaged stock amounting ` 22,500 handed over to the insurance company is also treated as loss to Mr. Black.
Space to write important points for revision
Q.1.6 2008 - May [3] (a) Practical On 11.11.2007 the premises of Rocky Ltd. was destroyed by fire. The following
information is made available :
Answer :
Working Note 1.
Particulars To Op. stock To Purchase
GP Ratio =
= = 20%
Particulars
Closing stock on the date of fire Add: Value of abnormal stocks Total value of stock
Less: Salvage value of stock Loss of stocks
(`)
1,86,000
5,500
1,91,500
11,500
1,80,000
Q.1.7 2009 - Nov [4] (a) Practical A fire broke out in the godown of a business house on 8th July, 2009. Goods
costing`2,03,000 in a small sub-godown remain un-affected by fire. The goods retrieved in a damaged condition
from the main godown were valued at ` 1,97,000.
The following particulars were available from the books of accounts:
Stock on the last Balance Sheet date at 31st March, 2009 was `15,72,000. Purchases for the period from 1st April,
2009 to 8th July, 2009 were ` 37,10,000 and sales during the same period amounted to ` 52,60,000. The average
gross profit margin was 30% on sales.
The business house has a fire insurance policy for ` 10,00,000 in respect of its entire stock. Assist accountant of the
business house in computing amount of claim of loss by fire. (8 marks)
Answer:
Calculation of amount of claim ` `
= ` 7,50,000
Working Note:
Memorandum Trading Account for the period from 1st April, 2009 to 8th July, 2009
Particulars
To Opening Stock
To Purchases
To Gross Profit (30% of sales)
` Particulars `
68,60,000 68,60,000
Q.1.8 2010 - May [1] (ix), RTP Practical
In January, 2010 a firm took an insurance policy for ` 60 lakhs to insure goods in its godown against fire subject to
average clause. On 7th March, 2010 a fire broke out destroying goods costing` 44 lakhs. Stock in the godown was
estimated at` 80 lakhs. Compute the amount of insurance claim. (2 marks)
Answer:
Amount of insurance claim
= Amount of loss due to fire ×
=` 44 lakhs × Space to write important points for revision
Q.1.9 2011 - May [1] {C} (b) Practical
On 30th March, 2011 fire occurred in the premises of M/s Suraj Brothers. The concern had taken an insurance policy
of`60,000 which was subject to the average clause. From the books of accounts, the following particulars are
available relating to the period 1st January to 30th March, 2011.
1. Stock as per Balance Sheet at 31st December, 2010, ` 95,600 2. Purchases (including purchase of machinery
costing ` 30,000)
` 1,70,000.
3. Wages (including wages`3,000 for installation of machinery)`50,000.
4. Sales (including goods sold on approval basis amounting to`49,500.) ` 2,75,000. No approval has been received in
respect of 2/3rd of the goods sold on approval.
5. The average rate of gross profit is 20% of sales.
6. The value of the salvaged goods was ` 12,300.
You are required to compute the amount of the claim to be lodged to the insurance company. (5 marks)
Stock on the date of fire i.e. on 30th March, 2011 (W.N.3) 62,600
Less: Value of salvaged stock (12,300) Loss of stock 50,300
A claim of `48,211 (approx.) should be lodged by M/s Suraj Brothers to the insurance company.
Working Notes:
1. Calculation of closing stock as on 30th March, 2011
To Opening stock
To Purchases
(1,70,000 - 30,000)
To Wages (50,000 - 3,000)
To Gross profit (20% on sales)
95,600 By Sales (W.N.3) 2,42,000
3,31,000 3,31,000
A fire occurred in the premises of M/s. Fireproof Co. on 31stAugust, 2010. From the following particulars relating to
the period from 1st April, 2010 to 31st August, 2010 you are requested to ascertain the amount of claim to be filed
with the insurance company for the loss of stock. The concern had taken an insurance policy for`60,000 which is
subject to average clause.
To Opening
stock
To Purchase (Refer W.N.)
To Wages
To Gross profit @ 20%
95,000 5,000 1,00,000 By Sales 2,40,000 2,000 2,42,000 By Goods sent
1,56,500 - 1,56,500 to consignee 16,500 - 16,500 By Loss - 500 500 47,000 - 47,000By Closing 90,000 2,500 92,500 48,000 - 48,000 stock
(Bal. fig.)
Particulars ` Book value of stock as on 31.08.2010 92,500 Less: Stock salvaged (20,000) Loss of stock 72,500
= ` 47,027
Working Note:
Calculation of Adjusted Purchases
Particulars `
Purchases 1,70,000 Less: Drawings (12,000) Free samples (1,500) Adjusted purchases 1,56,500
On 29th August, 2012 the godown of a trader caught fire and a large part of the stock of goods was destroyed.
However, goods costing` 1,08,000 could be salvaged incurring fire fighting expenses amounting to ` 4,700. The
trader provides you the following additional information :
54,18,600 54,18,600
Statement of Insurance Claim
Particulars `
Working Note:
Trading Account for the year ended 31st March, 2012
Date Particulars
To Opening Stock
To Purchases
To Gross Profit
On 15th December, 2012, a fire occurred in the premises of M/s. OM Exports. Most of the stocks were destroyed.
Cost of stock salvaged being ` 1,40,000.
From the books of account, the following particulars were available:
(i) Stock at the close of account on 31st March, 2012 was valued at ` 9,40,000.
(ii) Purchases from 01-04-2012 to 15-12-2012 amounted to ` 13,20,000 and the sales during that period amounted to
` 20,25,000.
On the basis of his accounts for the past three years, it appears that average gross profit ratio is 20% on sales.
Compute the amount of the claim, if the stock were insured for`4,00,000. (5 marks)
Amt. `
9,40,000
13,20,000
4,05,000
26,65,000
As the value of stock is more than insured value, amount of claim would be subject to average clause.
Amount of Claim = × Actual Loss of Stock
Amount of Claim = × 5,00,000 = ` 3,12,500 Space to write important points for revision
Q.1.13 2014 - Nov [5] (a) Practical A fire occurred in the premises of M/s Kailash & Co. on 30th September
2013. From the following particulars relating to the period from 1st April
2013 to 30thSeptember 2013, you are required to ascertain the amount of claim to be filed with the Insurance
Company for the loss of stock. The company has taken an Insurance policy for` 75,000 which is subject to average
clause. The value of goods salvaged was estimated at`27,000. The average rate of Gross Profit was 20% throughout
the period.
Claim =
= × 75,000 Claim of stock = ` 60,689
Working Notes:
Memorandum Trading Account for the period 1st April, 2013 to 30th Sep. 2013
Particulars
To Opening Stock
To Purchases
2,40,000 By C o n s i g n 18,000
ment stock
On 1st April, 2016 the stock of Mr. Hariprasad was destroyed by fire but sufficient records were saved from which
following particulars were ascertained:
Stock at cost 1 Jan. 2015 1,47,000
Stock at cost 31st Dec. 2015 1,59,200
Purchases year ended 31st Dec. 2015 7,96,000
Sales year ended 31st Dec. 2015 9,74,000
Purchases 1-1-2016 to 31-3-2016 3,24,000
Sales 1-1-2016 to 31-3-2016 4,62,400
In valuing the stock for the Balance Sheet at 31st Dec. 2015 ` 4,600 had been written off on certain stock which was
a poor selling line having the cost`13,800. A portion of these goods were sold in March 2016 at a loss of` 500 on
original cost of` 6,900. 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`
11,600. The policy was for` 1,00,000 and was subject to average clause.
Work out the amount of the claim of loss by fire. (8 marks)
Answer:
(i) Trading A/c for the year ended 31st December, 2015
Particulars Normal Abnormal
To Opening Stock 1,47,000 -
To Purchase B/f
1,94,800 By A b n o r m a l
item w/f - 4,600 4,600 11,24,000 13,800 11,37,800 11,24,000 13,800 11,37,800
Normal Gross Profit Ratio = x 100 = x 100 = 20%. (ii) Particulars
To Opening stock Less: Ab. item
To Purchase
Memorandum Trading A/c
Amount Particulars Amount (`)
( `)
1,59,200 By Sales 4,62,400
(9,200) Less: Ab. item (6,400) 1,50,000 4,56,000 3,24,000 By Closing stock (B/f) 1,09,200 To Gross Profit @ 20%
91,200
5,65,200 5,65,200
Particulars Amount (`) Value of Normal Stock lost 1,09,200 Add: Value of Abnormal stock 6,900 (13,800 - 6,900)
Total value of stock lost 1,16,100 Less: Salvaged stock (11,600) Net Loss 1,04,500
On 27thJuly, 2016, 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 1.4.2016 to
27.7.2016:
1. Stock as per balance sheet as on 31.3.2016 ` 63,000
Other Information:
(i) While valuing the stock on 31.3.2016,`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, 2016 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 firefighting
expenses. The Company 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 to be for the period 1.4.2016 to 27.7.2016 for normal and abnormal items. (10
marks)
(i) Stock as per Balance Sheet at 31st December, 2017 ` 1,91,200 (ii) Purchases (including purchase of machinery
costing ` 3,40,000 ` 60,000)
Particulars ` 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
☐ 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 1st January, 2018 to 30th March, 2018) Particulars Amount Particulars Amount (`) (`)
To Opening Stock
To Purchases
(3,40,000 – 60,000)
1,91,200 By Sales (W.N.3) 4,84,000 2,80,000 By Goods with 52,800* customers (for Approval) (W.N.2)
To Wages 94,000 By Closing Stock 1,25,200
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.
2. Calculation of goods with customers
• Since no approval for sale has been received for the goods of ` 66,000 (i.e.b of` 99,000) hence, these should be
valued at cost i.e. ` 66,000 – 20% of 66,000 =` 52,800.
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 marks)
To Gross Profit
(` 25,68,000 × 25%) 3,50,000 By Sales 25,68,000 (27,75,000 - 75,000 - 2/3 × 1,98,000) 19,75,000 By Goods with
Customers (W N) 99,000
35,000 By Closing Stock (Bal. Fig.) 3,75,000 40,000
6,42,000 30,42,000 30,42,000
Stock destroyed (Loss of Stock)
Particulars ` Stock on the date of fire (i.e. 01/10/2017) 3,75,000 Less: Stock Salvaged (50,000)
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.
2. 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 entity
and, hence, there was no loss of such stock.
Ramesh prepares accounts on 30th September each year, but on 31st December, a fire destroyed the greater part of
his Stock.
Following information was collected from his books:
Stock as on 1st October 29,700 Purchases from 1st October to 31st December 75,000 Wages from 1st October to 31st
December 33,000 Sales from 1st October to 31st December 1,40,000 The Gross Profit rate 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.
Calculate the claim for the Loss of Stock from the following additional information:
☐ Stock in the beginning was valued at 10% less than cost. ☐ A Plant was installed by Firm’s own worker. He was
paid`500, which
A Fire occurred on the premises of a merchant on 15th June and a considerable part of the Stock was destroyed. The
value of Stock saved was` 9,000. The books disclosed that on 1st April, Stock was valued at `73,500, Purchases to
the date of fire amounted to`2,09,880 and Sales ` 3,13,000. On investigation, it was found that during the past five
years, the average Gross Profit on Sales was 36%. Prepare a statement showing the amount, the Merchant should
claim from the Insurance Company in respect of Stock destroyed by fire.
Answer:
Statement of Insurance Claim
Particulars ` Value of Stock Cost on 15th June 83,060 Less: Salvaged Stock (saved) (9,000)
Net Claim 74,060 Note: Since Policy Amount is not given, the issue of Average Clause is not considered.
Working Note:
Dr. 1. Memorandum Trading Account (1st Apr to 15th Jun) Cr.
Particulars
To Stock in the beginning
` Particulars ` 73,500 By Sales 3,13,000 By Stock on the date of 83,060
Due to a fire on 1st July, the entire Stock was burnt except some costing ` 70,000. The information available from
the books of accounts saved were as follows:
☐ The Average Gross Profit was 25% on Sales.
☐ The Stock on 31st December, valued as per practice at 10% above
cost was ` 2,20,000.
☐ The Purchases and Sales from 1st January upto the date of fire were
` 3,00,000 and` 6,80,000 respectively.
☐ The Wages for the period amounted to ` 1,44,000.
☐ The Company insured Stock for ` 1,20,000.
☐ The Policy had an Average Clause.
Prepare a statement showing the amount of Stock lost by fire and the claim to be lodged with the Insurance
Company.
Answer:
Dr. 1. Memorandum Trading Account (1st Jan to 30th Jun) Cr. Particulars
To O p e n i n g S t o c k
(2,20,000 ÷ 110%)
To Purchases
To Wages
To Gross Profit = 25% on
Sales
` Particulars `
1,44,000
1,70,000
2. Statement of Insurance Claim
Particulars `
On 20th July 2019, the Godown and Business Premises of Raj were affected by fire, and from the accounting records
salvaged, the following information is made available to you:
For the period from 1st April ,2019 to 20th July, 2019
Purchases less Returns ` 1,40,000
Sales less Returns ` 3,10,000
Sales upto 20thJuly, 2019 included`40,000 for which goods had not been despatched. Further, Purchases upto 20th
July, 2019 did not include ` 20,000 for which Purchase invoices had not been received for Suppliers, though goods
have been received at the Godown.
Goods salvaged from the accident were worth` 12,000 and these were handed over to the insurer.
Ascertain the value of the claim for loss of Goods/Stock.
Answer:
1. Trading Account for the year ended 31st March, 2019 (to compute
GP Rate)
Particulars To Opening Stock To Purchases
To Gross Profit
` Particulars `
1,00,000 By Sales 6,00,000
Dr. 2. Memorandum Trading Account (1stApr 2017 to 20thJul, 2019) Cr. Particulars
To Opening Stock
To Purchases (1,40,000
+ 20,000)
To Gross Profit = 1/3rd of
Sales (from WN 1)
` Particulars `
1,20,000 By Sales (3,10,000 - 2,70,000
1,60,000 40,000)
By Stock on the date of 1,00,000 90,000 fire (balancing figure)
Particulars ` Value of Stock Lost on date of Fire 1,00,000 Less: Salvaged Stock (12,000)
Net Claim 88,000 Note: Since Policy Amount is not given, the issue of Average Clause is not
considered.
Space to write important points for revision
Q.1.22 RTP Practical
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:
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.
Answer :
Memorandum Trading Account for the Period from 1.1.2018 to 30.6.2018
A
Stock
Buildings Equipment
Statement of Claim
Cost Depreciation Salvage Claim (`) (`) (`) (`)
B C D (E= B-C-D)
2,80,000 20,000 2,60,000
3,75,000 1,25,000 + 9,375 4,000 2,36,625
75,000 22,500 + 5,625 2,500 44,375
5,41,000
Space to write important points for revision
Q.1.23 Practice Practical Compute the amount of claim from the following information: ` Sum Insured against the
loss of furniture 73,000 Value of Salvaged Furniture 6,000 Actual Value of furniture as on date of fire 1,70,000
Answer:
Statement of Claim
In 2021, while valuing closing stock, some defective goods costing ` 500 were valued at` 400. These were sold for `
450 in 2022. In 2022, an item costing`600 was wrongly valued at`700. This was sold for`550 in 2023. In 2013, item
costing ` 1,200 were valued at` 1,000, 50% of these were sold in June, 2024 for` 600. Subject to this, the gross profit
rate is more or less uniform. The value of salvage was` 800 and the sum insured was ` 4,500.
Answer:
Statement of Claim
A. Estimated value of stock as at date of fire `
(a) Book-value of Normal Items 4,402 (b) Current value of Abnormal Items 600 5,002
G. P. Ratio =
Dr. (ii) Trading Account for the Period from 01.01.2022 to 31.12.2022 Cr.
Particulars Normal Abnormal Particulars Normal Abnormal Items Items Items Items ` ` ` `
(iii) Trading Account for the Period from 01.01.2023 to 31.12.2023 Dr.
Abnormal Particulars Normal Abnormal Items Items Items (`) (`) (`)
Abnormal Particulars Normal Abnormal Items Items Items (`) (`) (`)
Answer:
Consequential Loss Policy:
When a fire occurs, apart from the direct loss on accounts of stock or other assets destroyed, there is also a
consequential loss because , for sometimes, the business is disorganised or has to be discontinued, and during that
period, the standing expenses of the business like rent, salaries etc. Continue.
The consequential loss policy covered the following items: (1) Loss of net profit
(2) Standing charges
(3) Any increased cost of working e.g., renting of temporary premises.
On account of a fire on 15th June, 2002 in the business house of a company, the working remained disturbed upto
15thDec., 2002 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 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.
Ascertain the claim under the consequential loss policy keeping the following additional information in view:
Answer:
Amount of Insurance Claims
1. Amount of Short Sales
Answer:
Journal Entry
Date Particulars L.F. ` ` Profit and Loss A/c Dr. 1,50,000 To Insurance Company A/c 1,50,000 (Being the shortfall
in insurance claim is
the loss, transferred to P & L A/c)
Space to write important points for revision
Q.2.4 2008 - Nov [4] (b) Practical From the following details, calculate consequential loss claim: 1. Date of fire: 1st
September following;
2. Indemnity period: 6 months;
3. Period of disruption: 1st September to 1st February;
4. Sum insured: ` 1,08,900;
5. Sales were ` 6,00,000 for preceding financial year ended on 31st
March.
6. Net profit for preceding financial year` 36,000 plus insured standing
charges ` 72,000;
7. Rate of Gross profit 18%;
8. Uninsured standing charges ` 6,000;
9. Turnover during the disruption period ` 67,500;
10. Annual turnover for 12 months immediately preceding the date of fire
` 6,60,000;
11. Standard turnover i.e. for corresponding months (1stSeptember to 1st
February) in the year preceding the date of fire ` 2,25,000; 12. Increase in the cost of Working capital ` 12,000 with
a saving of
insured standing charges ` 4,500 during the disruption period; 13. Reduced turnover avoided through increase in
Working capital`30,000; 14. Special clause stipulated:
(a) Increase in rate of G.P. 2%
(b) Increase in turnover (Standard and Annual) 10%. (8 marks) Answer:
Computation of the amount of claim for consequential loss 1. Calculation of Short Sales
Particulars ` Standard turnover for the period 1st September to 1st February 2,25,000 (Preceding year)
Add: Increase of 10% due to upward trend 22,500 Adjusted turnover 2,47,500 Less: Actual turnover during
disruption period i.e. 1st September to 1st February (following year) 67,500 1,80,000 2. Increased rate of G.P. =
18% + 2 = 20% on sales.
3. Loss of profit on short sales = 20% of` 1,80,000 =` 36,000. 4. Calculation of claim for increased cost of
working capital Increased cost of working will be lower of `
(i) Actual expenses 12,000
(ii) Additional expenses ×
11,523
(iii) G.P. on additional sales = 30,000 × 20% 6,000 ` 6,000 is lower of above three, so additional expenses would be
` 6,000.
Net claim for increased cost of working capital = ` 6,000 minus savings in insured standing charges.
=` 6,000 ☐` 4,500= ` 1,500
Particulars ` Sales for 12 months preceding the date of fire 6,60,000 Add: 10% of increase in trend 66,000 Adjusted
Annual Sales 7,26,000
6. Insurable Amount i.e. gross profit on adjusted annual sales ` Adjusted annual sales 7,26,000 Rate of Gross
Profit 20% Insurable amount (` 7,26,000 ×20%) 1,45,200
Answer:
(a) Computation of Gross Profit Gross Profit =
= = 30%
(b) Computation of policy amount to cover loss of profit Particulars ` Turnover in the last financial year
4,50,000 Add : 25% increase in turnover 1,12,500
5,62,500
Gross profit on increased turnover (5,62,500 × 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. Space to write important points for
revision
Q.2.6 2013 - Nov [6] Practical Monalisa & Co. runs plastic goods shop. Following details are available from
quarterly sales tax return filed.
Sales 2009 2010 2011 2012 ` ` ` ` From 1st January to 31st March 1,80,000 1,70,000 2,05,950 1,62,000 From 1st
April to 30th June 1,28,000 1,86,000 1,93,000 2,21,000 From 1st July to 30th September 1,53,000 2,10,000 2,31,000
1,75,000 From 1st October to 31st December 1,59,000 1,47,000 1,90,000 1,48,000 Total 6,20,000 7,13,000 8,19,950
7,06,000
Period ` Sales from 16-09-2011 to 30-09-2011 34,000 Sales from 16-09-2012 to 30-09-2012 Nil Sales from 16-12-
2011 to 31-12-2011 60,000 Sales from 16-12-2012 to 31-12-2012 20,000 A loss of profit policy was taken for `
1,00,000. Fire occurred on 15th September, 2012. Indemnity period was for 3 months. Net Profit was `1,20,000 and
standing charges (all insured) amounted to`43,990 for year ending 2011.
Determine the Insurance Claim. (16 marks) Answer:
1. Period of Indemnity (given) = 3 months (15.09.2012 to 15.12.2012) 2. Computation of GP Ratio
Particulars ` Net Claim for Loss of Profit = Gross Profit on short sales = 20% on ` 60,600 12,120 Admissible Claim
(based on average clause) =
=` 6,739 Space to write important points for revision
Q.2.7 2015 - May [3] (b) Practical M/s. Platinum Jewellers wants to take up a “Loss of Profit Policy” for the year
2015. The extract of the Profit and Loss Account of the previous year ended 31-12-2014 provided below:
` Variable Expenses
Working Note:
Calculation of Sales
Trading and Profit and Loss account for the year ended 31.12.2014
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:
Answer:
* Calculation of amount of policy taken: Last year’s figures:
` Turnover 6,75,000
Net Profit 67,500
(+) Insured standing charges 1,14,750
Gross Profit = 1,82,250
A firm has decided to take out a loss of profit policy for the year 2016 and given the following information for the
last accounting year 2015. Variable manufacturing expenses ` 14,20,000, Standing charges ` 1,50,000, Net profits`
80,000, Non-operating income` 2,500, Sales ` 18,00,000.
Compute the sum to be insured in each of the following alternative cases showing the anticipation for the year 2016:
(vi) If the turnover and standing charges will increase by 15% and variable expenses will decrease by 10% but only
50% of the present standing charges are to be insured. (8 marks)
Answer :
Statement showing the computation of Sum insured under various cases
Particulars (i) (ii) (iii) (iv) (v) (vi) Sale 20,70,000 20,70,000 20,70,000 20,70,000 19,80,000 20,70,000
Less: Variable expense 16,33,000 16,33,000 18,77,950 15,51,350 15,62,000 14,69,700
Gross Profit (a-b) 4,37,000 4,37,000 1,92,050 5,18,650 4,18,000 6,00,300
Note:
1. The above solution is based on the assumption that increase in sale is due to increase in volume of sales.
Alternatively, it may be assumed that this increase is because of rise in selling price. In that case, there will be no
proportionate increase in variable expenses and the answer will get changed accordingly.
2. In case (vi), it is given in the question that 50% of the present standing charges are to be insured. It is assumed in
the above answer that 50% of the increased standing charges are insured.
3. In case (iii), 15% increase in variable expenses has been calculated after proportionate increase in variable
expenses due to increase in turnover.
Space to write important points for revision
A fire occurred in the premises of M/s Bright on 25thMay, 2017. As a result of fire, sales adversely affected up to
30thSeptember, 2017. The firm had taken Loss of profit policy (with an 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 a 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. (10 marks)
Answer:
1. Calculation of Short Sales:
` Sales for the period 25th May, 2016 to 30th September, 2016 6,00,000
Add : 10% increase in sales 60,000
Estimated Sales in Current Year 6,60,000
Less : Actual Sales from 25th May, 2017 to 30th Sep., 2017 (1,75,000) Short Sales 4,85,000
(iii) Gross Profit on sales generated by additional expenses 1,75,000 × 25% = ` 43,750 It is given that entire sales
during the interrupted period was due to additional expenses
× 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 Gross Profit 3,75,000 Turnover for the last financial year 15,00,000
Rate of Gross Profit = = 25%
A fire occurred in the premises of M/s Kirti & Co. on 15thDecember, 2018. The working remained disturbed upto
15thMarch, 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 2,88,000 3,19,000 3,80,000 2,96,000 Total 12,40,000 14,26,000 16,39,900 14,12,000
A period of 3 months (i.e from 16-12-2018 to 15-3-2019) has been agreed upon as indemnity period.
Sales from 16-12-2017 to 31-12-2017 68,000 Sales from 16-12-2018 to 31-12-2018 Nil Sales from 16-03-2018 to
31-03-2018 1,20,000 Sales from 16-03-2019 to 31-03-2019 40,000 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. (10 marks)
A Loss of Profit Policy was taken for `80,000. Fire occurred on 15thMarch,
2021. Indemnity Period was for three months. Net Profit for year ending on
31st December, 2020 was` 56,000 and Standing Charges (all Insured) amounted to` 49,600. Determine the Insurance
Claim from the following details available from quarterly GST Returns:
Sales (in `) for the year 2018 2019 2020 2021 From 1st January to 31st March 1,20,000 1,30,000 1,42,000 1,30,000
From 1st April to 30th June 80,000 90,000 1,00,000 40,000 From 1st July to 30th September 1,00,000 1,10,000
1,20,000 1,00,000 From 1st October to 31st December 1,36,000 1,50,000 1,66,000 1,60,000
Other Information:
Sales from 16.03.2020 to 16.03.2017 to 16.06.2020 to 16.06.2021 to 31.03.2020 31.03.2021 30.06.2020 30.06.2021
Sales ` 28,000 ` Nil ` 24,000 ` 6,000 Amount
Answer:
1. Period of Indemnity (given) = 3 months (15.03.2021 to 15.06.2021) 2. Computation of GP Rate
GP Rate for Claim purposes =
= = 20%
Note: Sales for year 2020 = ` 1,42,000 + ` 1,00,000 + ` 1,20,000 + ` 1,66,000 =` 5,28,000.
3. Computation of Insurable Amount
Particulars ` Annual Turnover, i.e. Turnover for 12 months preceding 5,44,000 the date of Fire (Note 1)
Add: Adjustment for Increase in Turnover (10% of`5,44,000) 54,400 (Note 2)
Adjusted Annual Turnover 5,98,400
Year ending 31st Dec. 2018 31st Dec. 2019 31st Dec. 2020 1,20,000 + 80,000 + 1,30,000 + 90,000 + 1,42,000 + 1,00,000 + Sales of the year 1,00,000 +
1,36,000 = ` 1,10,000 + 1,50,000 = 1,20,000 + 1,66,000 4,36,000 ` 4,80,000 = ` 5,28,000
Percentage Increase = 10% (approx.) = 10%
in Sales
Observation: Average Trend Increase in Sales is taken as 10% 4. Computation of Short Sales
Particulars ` Std. Turnover from 16.03.2020 to 15.06.2020 (previous year 1,04,000 corresponding to Indemnity
Period)
Less: Actual Turnover during Indemnity Period, i.e. from 15.03.2021 to 15.06.2021
From 16.03.2021 to 31.03.2021 Given Nil From 01.04.2021 to 15.06.2021 computed as (for Apr to (34,000) June,
less last 15 days) 34,000
(01.04.2021 to 30.06.2021 ` 40,000) less (16.06.2021 to 30.06.2021` 6,000)
Short Sales 80,400 Note: Standard Turnover from 16.03.2020 to 15.06.2020 is computed as under:
Add: Sales from 01.04.2020 to 15.06.2020 (for the quarter Apr to Mar, less last 15 days) 76,000 (i.e. From
01.04.2020 to 30.06.2020 ` 1,00,000 less From 16.06.2020 to 30.06.2020` 24,000)
Standard Turnover from 16.03.2020 to 15.06.2020 1,04,000 5. Computation of Allowable Additional Expenses
= Not required in this Question.
6. Computation of Claim
Particulars ` Net Claim for Loss of Profit = Gross Profit on Short Sales = 20% 16,080 on ` 80,400
Admissible Claim (based on Average Clause) = Net Claim × =` 16,080 × 10,749
Space to write important points for revision
Q.2.13 RTP Practical
A fire occurred on 1st February 2018, in the premises of Fbb Ltd. a Retail Store, and business was partially
disorganised upto 30th June, 2018. The Company was insured under a Loss of Profits Policy for`1,25,000 with a six
months indemnity Period.
From the following information, compute the amount of claim under the Loss of Profit Policy.
Particulars ` Actual Turnover from 1st February, to 30th June, 2018 80,000
Turnover from 1st February, to 30th June, 2017 2,00,000
Turnover from 1st February 2017, to 31st January, 2018 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
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.
Answer:
1. Period of Indemnity
Policy Period= 6 months whichever Result: Actual Dislocation: 1st Feb, 2018 to 30th Jun, 2018 = 5 months } is lower 5 months
2. Computation of GP Rate
GP Rate for Claim purposes = = 30%
3. Computation of Insurable Amount
Particulars ` Annual Turnover, i.e. Turnover for 12 months preceding the date 4,50,000 of Fire
Allowable Additional Expenses = Least of the above 6,372 Note: Uninsured Standing Charges = Total Standing
Charges - Insured Standing Charges = 64,000 - 56,000 =` 8,000.
6. Computation of Claim
Particulars ` Loss of Profit = Gross Profit on Short Sales = 30% on ` 1,50,000 45,000 Add: Allowable Additional
Expenses (Point No. 5) 6,372* Less: Saving in Insured Standing Charges (Given) (2,450)
The premises of ABC Limited were partially destroyed by fire on 1stMarch, 2019, and as a result, the business was
practically disorganised upto 31st August, 2019. 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:
Particulars ` Actual Turnover during the period of dislocation (01-03-2019 to 31-08-2019) 80,000 Turnover for
corresponding period (dislocation) in 12 months immediately before fire (1-3-2019 to 31-8-2019) 2,40,000 2,40,000
03-2019 to 28-02-2019) 6,00,000
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 of `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.
Answer:
1. Period of Indemnity
Policy Period = 6 months whichever is Result: Actual Dislocation: 1st March 2019 to 31st Aug 2019 = 6 months lower 6 months
2. Computation of GP Rate
GP Rate for Claim purposes =
= 30%
3. Computation of Insurable Amount
Particulars ` Annual Turnover, i.e. Turnover for 12 months preceding the 6,00,000 date of Fire
Particulars ` Loss of Profit = Gross Profit on Short Sales = 30% on ` 1,84,000 55,200 Add: Allowable Additional
Expenses (Ref. Point No. 5) 7,500* Less: Saving in Insured Standing Charges (Given) (2,700)
Assumption: It is assumed that Trend Adjustment is required on the Total Amount of Annual Turnover. However,
part of the Annual Turnover represents the trend adjusted figure. Alternatively, the students may ignore trend and
take only the given Annual Turnover. The Claim would be `55,000, which is more than the Claim as computed
above. So, it is possible that the Insurance Company would insist on trend adjusted on Annual Turnover.
From the following information, compute the amount of claim under the loss of profit policy:
Sum Insured
Indemnity Period
Reason for Damage
Period of Interruption
Accounting Year
Gross Profit Ratio
Saving in Insured Standing Charges Increase in cost of working
` 1,00,000
6 Months Due to Fire Accident on 1.3.2012
1.3.2018 to 31.7.2018
Calender Year 30% ` 6,774
` 20,000 for 80% of the turnover No Clause for Upward/Downward Trend during dislocation period Turnover for
the year ended 31st December, 2017 ` 5,00,000
Turnover for the period from 1.3.2011 to 28.2.2018 ` 5,20,000
Turnover for the period from 1.3.2011 to 31.7.2017 ` 2,60,000
Turnover for the period from 1.3.2012 to 31.7.2018 ` 1,00,000
Sales were evenly throughout the period
Uninsured Standing Charges ` 25,000
Net Profit ` 90,000
Answer:
Statement of Claim
Particulars `
Notes: All Standing Charges = Gross Profit - Net Profit = 30% of` 5,00,000 ` 90,000 =`1,50,000 ` 90,000 =` 60,000
Insured Standing Charges = All Standing Charges less Uninsured Standing Charges
= ` 60,000 - ` 25,000 = ` 35,000 (ii) Claim Period being the least of the Indemnity Period (6 months) &
Dislocation Period (5 months) is 5 months.
(iii) Calculation of Turnover lost in claim period
A. Turnover for the corresponding claim period in the preceding year ` 2,60,000
B. Add: Agreed Increase — C. Less: Actual Turnover during the claim period ` 1,00,000
3. Maximum saving of liability of the insurer = Reduction in Turnover avoided through increased Cost of Working ×
Agreed G.P. Ratio
=` 80,000 × 25% = ` 20,000
From the following information, compute the amount of claim under the loss of profit policy:
Sum Insured ` 1.20 Lakh Indemnity Period 6 Months Reason for Damage Due to Fire Accident on 1.3.2018 Period
of Interruption 1.3.2018 to 31.7.2018 Accounting Year Calender Year Gross Profit Ratio 25% Increase in Cost of
working ` 0.30 Lakh Saving in Insured Standing Charges ` 0.09478 Lakh Turnover For the year ended 31st Dec.,
2017 ` 10.00 Lakh Turnover For the period from 1.3.2011 to 28.2.2018 ` 9.00 Lakh Turnover For the period from
1.3.2011 to 31.7.2017 ` 5.00 Lakh Turnover For the period from 1.3.2012 to 31.7.2018 ` 3.00 Lakh Sales were
evenly throughout the period
Standing Charges (out of which ` 50,000 have not been insured) ` 2.50 Lakh No clause for upward/Downward Trend
Note: Net Profit for the year ended 31st Dec. 2017
= Gross profit - All Standing Charges = 25% of ` 10,00,000 - ` 2,50,000 = 0
(ii) Claim Period being the least of the Indemnity Period (6 months) &
3. Maximum saving of liability of the insurer = Reduction in Turnover avoided through Increased Cost of Working
× Agreed G.P. Ratio =` 3,00,000 × 20% =` 60,000
From the following information, compute the amount of claim under the loss of profit policy:
Sum Insured ` 1,24,200 Indemnity Period 6 Months Reason for Damage Due to Fire Accident on 1.3.2018 Period of
Interruption 1.3.2018 to 31.7.2018 Accounting Year Calender Year Net Profit for 2011 ` 70,000 Increase in cost of
working ` 6,700 Saving in Insured Standing Charges ` 2,522 Turnover For the year ended 31st December, 2017 `
4,20,000 Turnover For the period from 1.3.2017 to 28.2.2018 ` 4,50,000 Turnover For the period from 1.3.2017 to
31.7.2017 ` 2,10,000 Turnover For the period from 1.3.2018 to 31.7.2018 ` 75,000 Sales were evenly throughout the
period
Standing Charges (out of which ` 8,000 have not been insured)` 64,000 Agreed Increase for upward trend in
turnover 15%
Answer:
Statement of Claim
3. Maximum saving of liability of the insurer = Reduction in Turnover avoided through Increased Cost of Working
× Agreed G.P. Ratio =` 75,000 × 30% = ` 22,500
3 Comprehensive Claim
Q.3.1 2012 - May [6] Practical
Ramda & Sons had taken out policies (without Average Clause) both against loss of stock and loss of profit, for `
2,10,000 and ` 3,20,000 respectively. A fire occurred on 1st July, 2011 and as a result of which sales were seriously
affected for a period of 3 months.
Trading and Profit & Loss A/c of Ramda & Sons for the year ended on 31st March, 2011 is given below:
Particulars Amount (`)
Total 13,85,000
To Administrative
Expenses 83,600
To Selling Expenses
(Fixed) 72,400
To Commission on Sales 34,200
To Carriage Outward 49,800
To Net Profit 60,000
Total 3,00,000
Further detail provided is as below : (a) Sales, Purchases, Wages and Manufacturing Expenses for the period
01.04.2011 to 30.06.2011 were` 3,36,000,` 2,14,000` 51,000 and ` 12,000 respectively.
(b) Other Sales figure were as follows :
` From 01.04.2010 to 30.06.2010 3,00,000 From 01.07.2010 to 30.09.2010 3,20,000 From 01.07.2011 to 30.09.2011
48,000
(c) Due to decrease in the material cost, Gross Profit during 2011-12 was expected to increase by 5% on sales.
(d) ` 1,98,000 were additionally incurred during the period after fire. The amount of policy included` 1,56,000 for
expenses leaving` 42,000 uncovered.
Compute the claim for stock, loss of profit and additional expenses.
To Opening Stock
To Purchases
To Wages
To Manufacturing expenses
To Gross Profit @ 30% on sales
(W.N.)
Amt. (`) Particulars Amt. (`)
Claim for loss of stock will be limited to ` 2,10,000 only which is the amount of Insurance policy and no average
clause will be applied.
Loss of Profit
(a) Short Sales: Amount (`)
(e) Amount allowable in respect of additional expenses Least of following Amount (`)
× 1,98,000 1,74,316
Working Note:
Rate of Gross Profit in 2010-11 × 100
× 100 = 25%
In 2011-12. Gross Profit is expected to increase by 5% as a result of decline in material cost, hence the rate of Gross
Profit for loss of stock is taken at 30%.
11
Hire Purchase and Instalment Sale Transactions
This Chapter Covers: Study’s Chapter: 11
Chapter Comprises: ☹Nature of Hire Purchase Agreement ☹Special Features ☹Terms Used ☹Ascertainment of
Total Cash Price ☹Ascertainment of Interest ☹Accounting for Hire Purchase Transaction ☹Repossession Instalment
Payment System ☹Difference of Hire Purchase Agreement and Instalment Payment Agreement
i.e.....
............ Day 1
Instant
Revision (in hours)
1. Budgeted
2. Actual
3. Variance (1-2)
QUICK LOOK Repeatedly Asked Questions 6.1
. . . . . . . Weightage Analysis Common Answered Must Try Question Questions
3.2, 5.4, 5.12, 5.13, 6.1
1 Special Features of Hire Purchase Agreement
Q.1.1 2017 - Nov [5] (b) Descriptive
The hire vender transfers possession of the goods to the hire purchaser immediately after the contract of hire
purchase is made.
2. Installments :
The goods are delivered by hire vender on the condition that a hire purchaser should pay the amount in periodical
installments.
3. Down Payment :
The hire purchaser generally makes a down payment i.e., an amount on signing the agreement.
5. Ownership :
The property in goods is to pass to the hire purchaser on the payment of the last installment and exercising the
option conferred upon him under the agreement.
6. Repossession :
In case of default in respect of payment of even the last installment, the hire vender has the right to take the goods
back without making any compensation.
A acquired on 1st January, 2003 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, 2003. 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.
(8 marks)
Answer:
Statement showing cash value of the machine acquired on hirepurchase basis
Instalment Interest@ 5% half Principal Amount yearly (10% p.a.) = Amount Particulars 5/105 =1/21 (in each
(in each instalment) instalment)
5,714
Add: 4th Instalment 6,000
Ram & Co. acquired a motor lorry on hire- purchase basis. It has to make cash down payment of` 1,00,000 at the
beginning. The payments to be made subsequently are` 2,63,000;` 1,85,000 and` 1,14,000 at the end of first year,
second year and third year respectively. Interest charged is @ 14% per annum. Calculate the cost price of motor
lorry and interest paid in each instalment. (4 marks)
Answer:
Calculation of Cost of Lorry & Interest
No. of Amount due Interest on cumulative Cash Price instalment at the time of instalment in each instalment
instalment III 1,14,000 1,00,000
II 1,85,000 1,50,000
I 2,63,000 2,00,000
Cash down payment 1,00,000
50,000
10,000
10,000
5% p.a. (2 marks)
Answer: Computation of Cash Price of the Asset Number of Closing instalments balance
40
3 9,524
2 18,594
1 27,232
Cash price of the asset = Down payment +` 35,459 =` 10,000 + ` 35,459 =` 45,459
On 1stApril, 2012 Fastrack Motors Co. sells a truck on hire purchase basis to Teja Transport Co. for a total hire
purchase price of`9,00,000 payable as to` 2,40,000 as down payment and the balance in three equal annual
instalments of` 2,20,000 each payable on 31st March, 2013, 2014 and 2015.The hire vendor charges interest @10%
per annum.
You are required to ascertain the cash price of the truck for Teja Transport Co. Calculations may be made to the
nearest rupee. (5 marks)
Answer:
Ratio of interest and amount due = = =
There is no interest element in the down payment as it is paid on the date of the transaction. Instalments paid after
certain period include interest portion also. Therefore, to ascertain cash price, interest will be calculated from last
instalment to first instalment in the following way:
[3]
1/11 of ` 2,20,000
= ` 20,000
1/11 of ` 4,20,000
=` 38,182
1/11 of ` 6,01,818
=` 54,711
2,00,000
3,81,818
5,47,107
Total cash price = 5,47,107 + 2,40,000 (down payment) =` 7,87,107. Working Notes:
(i) ` 2,00,000 + 2nd instalment of ` 2,20,000 =` 4,20,000 (ii) ` 3,81,818 + 1st instalment of ` 2,20,000 =` 6,01,818
Space to write important points for revision
A Ltd., purchased a machinery on hire purchase basis from B Ltd. on the following terms:
(a) Cash Down Payment – 33-1/3%, (b) Three half-yearly instalments of ` 16,400,` 14,880 and` 12,600, the first to
commence at the end of 6 months from the date of cash down payment, (c) Interest to be charged by the vendor 10%
p.a. calculated on half yearly rests.
Compute the Cash Price of the Machine.
Answer:
Statement Showing the Computation of Cash Price and Periodic Interest under Working Backward Method
(A) (B) (C) Instalment Balance Due Instalment Number at the end Amount a f t e r t h e
Payment of
Instalment
12,600
26,880
42,000
(E) = D*5/105
Interest
(F) = (D)–(E) Balance due
at the
Beginning
On 1.1.2018 XYZ Ltd. purchased a machine on hire purchase basis. The terms of agreement provided for 40% as
cash down payment and the balance in three instalments of ` 1,63,000 on 31.12.2018` 1,20,000 on 31.12.2019
and`1,10,000 on 31.12.2020. The rate of interest charged by the vendor is 10% p.a. compounded annually. Calculate
the Cash Price.
Answer:
Statement Showing the Computation of Cash Price and Periodic Interest under Working Backward Method
(A) (B) (C) Instalment Balance due Instalment Number at the end Amount a f t e r t h e
Payment of
Instalment
3rd Nil 1,10,000
1,10,000
(E) = D*R/100 + R)
Interest
D*10/110 (F) = (D)–(E) Balance due at the
Beginning
10,000 1,00,000
On 1.1.2017 XYZ Ltd. purchased a machine from ABC Ltd. on hire purchased basis. The terms of agreement
provided for 40% as cash down payment and the balance in three instalments of ` 1,30,000 on 31.12.2017,`
1,20,000, on 31.12.2018 and` 1,21,000, on 31.12.2019. The rate of interest charged by the vendor is 10% p.a.
compounded annually. Calculate the Cash Price.
Answer:
Statement Showing the Computation of Cash Price and Periodic Interest under Working Backward Method
(A) (B) (C) Instalment Balance due Instalment Number at the end Amount a f t e r t h e
Payment of
Instalment
(D) = (B) + (C) (E) = D*R/100 Total Amount due at the end
1,21,000
1,10,000
2,20,000
3,30,000
+ R)
Interest D*10/110 (F) = (D)–(E) Balance due at the
Beginning
11,000
10,000
20,000
30,000
X =` 3,00,000/0.6 = ` 5,00,000
1,10,000
1,00,000
2,00,000
3,00,000
3 Ascertainment of Interest
Q.3.1 2009 - May [5] (vii) Practical
Mr. X purchased a machine on hire-purchase system. `30,000 being paid on delivery and the balance in five
instalments of` 60,000 each, payable annually on 31st December. The cash price of the machine was ` 3,00,000.
Compute the amount of interest for each year. (2 marks)
Answer:
1st year = Amount outstanding for interest after down payment 3,00,000
2nd year = Amount outstanding for interest after 1st Instalment 2,40,000
3rd year = Amount outstanding for interest after 2nd instalment 1,80,000
4th year = Amount outstanding for interest after 3rd instalment 1,20,000
5th year = Amount outstanding for interest after 4th instalment 60,000
Total interest = Hire Purchase price – Cash Price
= 3,30,000 – 3,00,000 = 30,000
Instalment outstanding ratio= 3,00,000:2,40,000 :1,80,000:1,20,000:60,000
= 5:4:3:2:1
`
On 1st April, 2009 a car company sold to Arya Bros., a motor car on hirepurchase basis. The total hire-purchase
price was ` 4,60,000 with down payment of` 1,60,000. Balance amount was to be paid in three annual instalments
of`1,00,000 each. The first instalment payable on 31st March, 2010. The cash price of the car was ` 4,00,000.
How will Arya Bros. account for interest over three accounting years assuming books of accounts are closed on 31st
March every year. (2 marks)
Answer:
Total interest on hire purchase transactions =`4,60,000 `4,00,000 =`60,000 As balance payment is made in three
equal instalments, so interest is to be allocated in the ratio of 3 : 2 : 1
XYZ Ltd. purchased a machine on Hire Purchase System. The total cost price of the machine was`30,00,000 payable
20% down and four annual instalments of` 8,40,000,` 7,80,000,` 7,20,000 and` 6,60,000 at the end of first, second,
third and fourth years respectively. Calculate the interest included in each year’s instalment assuming that the sales
were made at the beginning of the year.
Answer:
Hire Purchase Price
Calculation of Ratio of Hire Purchase Price Outstanding in the Beginning of each Year
(A) (B) (C) Year Outstanding H.P.P. in the Instalment
21,60,000
13,80,000
6,60,000
Nil
Ratio of Outstanding H.P.P. at the beginning of year = 300 : 216 : 138 : 66 Calculation of Interest for each year
` 6,00,000
Space to write important points for revision
Q.3.4 Practice Practical Calculate the amount of Interest and Instalments in each of the following alternatives.
Case Down Payment I 20%
Balance to be Rate of Discharged Interest
Compounding of Interest ` 8 lacs by way of four 20% p.a. At yearly rest annual instalments
1 8 1.6
2 6 1.2
3 4 0.8
4 2 0.4
Case II
Principal
(D) = (B) + (C) (E) = 8/4 + (C) (F) = (D)–(E) Opening Instalment
Balance Plus Amount Interest
9.6 3.6 7.2 3.2 4.8 2.8 2.4 2.4
Closing Balance
6
4
2
0
= 100
= 10
110
= 11
121
(A) (B) (C) = (B) × Instalment Opening 21/100 Number Balance Interest
1 8 1.68
2 6 1.26
3 4 0.84
4 2 0.42
9.68
7.26
4.84
2.42
3.68 6
3.26 4
2.84 2
2.42 0
Space to write important points for revision
Happy Valley Florists Ltd. acquired a delivery van on hire purchase on 01.04.2010 from Ganesh Enterprises. The
terms were as follows: Particulars Amount (`) Hire Purchase Price 1,80,000 Down Payment 30,000 1st installment
payable after 1 year 50,000 2nd installment after 2 years 50,000 3rd installment after 3 years 30,000 4th installment
after 4 years 20,000 Cash price of van ` 1,50,000 and depreciation is charged at 10% WDV. You are required to
(i) Calculate Total Interest and Interest included in each installment. (ii) Prepare Van A/c., Ganesh Enterprises A/c.
in the books of Happy Valley Florists Ltd. up to 31.03.2014. (8 marks) Answer :
Calculation of Total Interest & Interest included in each installment. Total Interest
Hire Purchase Price Less : Down Payment = Hire Purchase Price - Cash Price = 1,80,000 - 1,50,000
=` 30,000
1,80,000
(30,000) Hire Purchase Price Outstanding at the beginning of the 1styear 1,50,000
Less : 1st Instalment 50,000
Hire Purchase Price Outstanding at the beginning of the 2ndyear 1,00,000
Less : 2nd Instalment 50,000
Hire Purchase Price Outstanding at the beginning of the 3rdyear 50,000
Less : 3rd Instalment 30,000
Hire Purchase Price Outstanding at the beginning of 4th year 20,000
Less : 4th Instalment 20,000
Nil Total Interest will be spread in the Ratio of Hire Purchase Price outstanding at the beginning of each year.
Ratio of Hire Purchase Price Outstanding at the beginning of each year = 1,50,000:1,00,000:50,000:20,000
= 15:10:5:2
Interest of 1st Instalment = 14,062.50
Total Interest 30,000.00 In the books of Happy Valley Florists Ltd. Van A/c Dr. Cr.
Date Particulars Amount Date Particulars Amount (`) (`) 1,50,000 31-3-11 By Depreciation A/c 15,000 1-4-10
To Ganesh Enterprise
1,21,500
By Depreciation A/c 10,935
By Balance c/d 98,415
1,09,350
Ganesh Enterprise A/c Cr. Amount (`) Date Particulars Amount (`) 30,000 1-4-10 By Van A/c 1,50,000
50,000 31-3-11 By Interest A/c 14,062.5
84,062.5
1,64,062.5 164,062.5
50,000 1-4-12 By Balance b/d 84,062.5
43,437.5 31-3-12 By Interest A/c 9375
93,437.5 93,437.5
30,000 1-4-12 By Balance b/d 43,437.0
18,125 31-3-13 By Interest A/c 4,687.5
48,125 48,125
20,000 1-4-13 By Balance b/d 18,125
31-3-14 By Interest A/c 1,875
20,000 20,000
Space to write important points for revision
5 Repossession
Q.5.1 2000 - May [4] (b) Practical
Omega Corporation sells computers on hire purchase basis at cost plus 25%. Terms of sales are ` 10,000 as down
payment and 8 monthly instalments of` 5,000 for each computer. From the following particulars prepare Hire
Purchase Trading Account for the year 1999.
As on 1st January, 1999 last instalment on 30 computers was outstanding as these were not due up to the end of the
previous year.
During 1999 the firm sold 240 computers. As on 31st December, 1999 the position of instalments outstanding were
as under:
Instalments due but not collected:
2 instalments on 2 computers and last instalment on 6 computers.
Instalments not yet due:
8 instalments on 50 computers, 6 instalments on 30 and last
instalment on 20 computers.
Two computers on which 6 instalments were due and one instalment not yet due on 31.12.99 had to be repossessed.
Repossessed stock is valued at 50% of cost. All other instalments have been received. (10 marks)
Answer :
In the books of Omega Corporation
Hire Purchase Trading Account for
Particulars `
Hire Purchase 91,40,000
Sales (W. N.-2)
Stock Reserve (`1,50,000 × 30,000
20%)
Goods Sold on Hire Purchase (`1,20,00,000 × 20%) 24,00,000
Alternatively, hire purchase trading account can be prepared in the following manner: Hire Purchase
1,45,70,000
Trading Account for the year ended on 31st Dec., 1999
Particulars
To Hire Purchase Stock (30 ×
` 5,000)
To Goods Sold on Hire
Purchase (240 ×` 50,000) To Stock Reserve 6,00,000 Purchase 24,00,000
(` 30,00,000 × 20%) (`1,20,00,000 × 20%)
To Profit & Loss A/c (Transfer By Goods Repossessed (2 ×
of profit) 18,00,000 ` 40,000 × 50%) 40,000 By Instalments Due [(2 × 2 + 1 × 6) ×` 5,000] 50,000 By Hire Purchase Stock
(8 × 50 + 6 × 30 + 1 × 20) ×` 5,000] 30,00,000 1,45,50,000 1,45,50,000 Working Notes:
1. Cash collected: ` `
Cash down payment (240 × `10,000) 24,00,000
Add: Instalments collected:
Last instalments on 30 computers
outstanding on 1.4.99 1,50,000
Instalments due and collected on
240 computers sold during the year:
Total instalments on 240 computers
(8 × 240 × ` 5,000) 96,00,000
Less: Instalments due but not collected
[(2 × 2 + 1 × 6 + 6 × 2) ×` 5,000] 1,10,000
Instalments not due on 31.12.99
[(8 × 50 + 6 × 30 +1 × 20 + 1 × 2)
×` 5,000] 30,10,000 31,20,000 64,80,000 90,30,000 2. Loss on repossessed computers:–
Cost of instalments due but not
collected (6 × 2 × ` 4,000) 48,000
Cost of instalments not yet due
(1 × 2 × ` 4,000) 8,000 56,000
Less: Estimated value of repossessed
computers (2 ×` 40,000 × 50 %) 40,000
Loss 16,000
` Particulars ` By Cash (W. N.-1) 90,30,000 1,50,000 By Stock Reserve
(`1,50,000 × 20%) 30,000 1,20,00,000 By Goods Sold on Hire
Welwash (Pvt.) Ltd. sells washing machines for outright cash as well as on hire-purchase basis. The cost of a
washing machine to the company is ` 10,500. The company has fixed cash price of the machine at` 12,300 and hire-
purchase price at ` 13,500 payable as to` 1,500 down and the balance in 24 equal monthly instalments of ` 500 each.
On 1st April, 2000 the company had 26 washing machines lying in its showroom. On that date 3 instalments had
fallen due, but not yet received and 675 instalments were yet to fall due in respect of machines lying with the hire-
purchase customers.
During the year ended 31st March, 2001 the company sold 130 machines on cash basis and 80 machines on hire-
purchase basis. After paying five monthly instalments, one customer failed to pay subsequent instalments and the
company had to repossess the washing machine. After spending ` 1,000 on it, the company resold it for ` 11,500.
On 31st March, 2001 there were 21 washing machines in stock, 810 instalments were yet to fall due and 5
instalments had fallen due, but not yet received in respect of washing machines lying with the hire-purchase
customers. Total selling expenses and office expenses including depreciation on fixed assets totaled ` 1,60,000 for
the year.
You are required to prepare for the Accounting Year ended 31st March, 2001:
(i) Hire-purchase Trading Account, and
(ii) Trading and Profit & Loss Account showing net profit earned by the company after making provision for
Income-tax @ 35%. (16 marks) Answer :
In the books of Welwash (Pvt.) Ltd.
Hire Purchase Trading Account for the year ended 31st March, 2001 Particulars
To Hire Purchase Stock (`
500 × 675)
To Instalments due`(500 × 3) To Goods sold on Hire
10,80,000 By G o o d s R e p o s s e s s e d
(` 13,500 ☐ ` 1,500 ☐
2,500) 9,500
Trading and Profit and Loss Account for the year ended 31st, March, 2001 Particulars
To Opening Stock (`10,500
× 26)
To Sundry Expenses
To Provision for Income Tax (35% of` 3,00,000) To Net profit for the year
Working Notes: 1. Cash collected during the year : ` Hire-Purchase stock on 1.4.2000 3,37,500 Instalments due
1.4.2000 1,500 Hire purchase price of goods sold during the year 10,80,000 14,19,000
`
Less: Repossessed goods 9, 500
Hire purchase stock on 31.3.2001 4,05,000
Instalments due on 31.3.2001 2,500 4,17,000 Cash collected during the year 10,02,000
Sameera Corporation sells Computers on Hire-purchase basis at cost plus 25%. Terms of sales are 5,000/- as Down
payment and 10 monthly instalments of`2,500/- for each Computer. From the following particulars, prepare Hire-
purchase Trading A/c for the year 2002-03:
As on 1st April, 2002, last instalment on 20 Computers were Outstanding as these were not due upto the end of the
Previous year. During 2002-03, the Firm sold 120 Computers. As on 31st March, 2003 the position of instalments
outstanding were as under :
Instalments due but not collected 4 Instalments on 4 Computers and
Answer :
In the books of Sameera Corporation
Hire Purchase Trading Account (for the year ended 31st March, 2003) Particulars
20%) 7,20,000
To Bad Debts [W. Note -3] 8,000 By H. P. Stock [6 × 50 + 4 To Stock Reserve [Loading: × 20 + 1 × 40 ×` 2,500]
10,50,000
` 10,50,000 × 20%] 2,10,000
To P & L A/c 4,99,000
` Cash down payment [` 5,000 × 120 computer] 6,00,000 Add: Instalment collected
(a) Outstanding last instalment on 20 computer
as on 1.4.02 50,000
(b) Instalment due and collected on 120 computer
[120 computer × 10 × ` 2,500] 30,00,000 Less: Instalment due but not collected
[` 2,500 × (4 × 4 + 1 × 9 + 8 × 2)] 1,02,500 Less: Instalment not yet due [` 2,500 ×
(6 × 50 + 4 × 20 + 1 × 40 + 1 × 2)] 10,55,000 18,42,500 Cash collected 24,92,500
2. Loss on repossession:–
Instalment due but not yet collected (at Cost)
[` 2,000 × 1 × 2] ` 32,000 Instalment not yet due (at Cost) [` 2,000 × 1 × 2] 4,000
36,000
Less: Estimated value of repossessed computer [at 50% of cost] 24,000
☐ Less on repossessed computer 12,000
ABC Ltd. sells goods on Hire-purchase by adding 50% above cost from the following particulars, prepare Hire-
purchase Trading account to reveal the profit for the year ended 31.3.2005 :
`
1.4.2004 Instalments due but not collected 10,000
1.4.2004 Stock at shop (at cost) 36,000
1.4.2004 Instalment not yet due 18,000
31.3.2005 Stock at shop 40,000
31.3.2005 Instalment due but not collected 18,000
Others details :
Total instalments became due 1,32,000
Goods purchased 1,20,000
Cash received from customers 1,21,000
Goods on which due instalments could not be collected were repossessed and valued at 30% below original cost.
The vendor spent ` 500 on getting goods overhauled and then sold for ` 2,800. (16 marks)
Answer :
Hire Purchase Trading Account
(for the year ended 31st March, 2005)
Dr. Cr.
Date Particulars ` Date Particulars ` 1.1.2004 To Hire purchase stock 18,000 1.1.2004 By Stock Reserve 6,000 (1/3 of `18,000) 1.1.2004 To H i r e p u r
c h a s e 10,000
debtors
to To Goods sold on hire 1.1.2004 By Cash (` 1,21,000 31.3.2005 purchase 1,74,000 to +` 2,800) 1,23,800
To Cash (Overhauling 31.3.2005 By Goods sold on charges) 500 hire purchase ( 1 / 3 o f 58,000 ` 1,74,000)
31.3.2005 To Stock reserve 20,000 31.3.2005 By Hire To Profit and loss stock account(Transfer of By Hire purchase 60,000
purchase
profit) 43,300 debtors 18,000 2,65,800 2,65,800
Alternatively, the Hire Purchase Trading A/c can be prepared as : In the Books of ABC Ltd.
Hire Purchase Trading Account
(for the year ended 31st March, 2005)
Dr. Cr.
Date Particulars
` Date Particulars `
Working Notes :
(1) Memorandum Hire Purchase Debtors (instalment dues but not collected) Account : Dr.
1,56,000 1,56,000
(3) Memorandum Hire Purchase Stock (Instalment yet not due) Account: Dr. Particulars
To Balance b/d
To Goods sold on hire purchase [1,16,000 + 50% of 1,16,000] Cr. ` Particulars `
To Balance b/d
To Cash account (expenses)
To Profit on sale
1,400 By Cash account 2,800
500
900
2,800 2,800
(5) Original cost of goods repossessed2,000
Answer :
Working Notes: ` 1. Opening H.P. Stock reserve, 3,20,000 × 1,20,000
2. Loading on goods sold on H.P 16,00,000 × 6,00,000
3. Closing H.P. Stock reserve 7,20,000 × 2,70,000
Instalments unpaid for repossessed goods 40,000 Closing balance of H.P. Stock 7,20,000 18,80,000
Particulars
To Hire Purchase
Stock
To Instalment due
` Particulars `
(balancing figure)
Particulars
To Opening balance
Hire Purchase Debtors Hire Purchase Stock (Instalments overdue)
` Particulars `
purchase
17,01,000 17,01,000
A/c (W.N.3)
` Particulars ` 1,62,000 By Goods repossessed
On 1stApril, 2012, M/s. Power Motors sold on hire purchase basis a truck whose cash price was ` 9,00,000 to M/s.
Singh & Singh, a firm of transporters. The terms of the contract were that the transporters were to pay` 3,00,000
down and six four-monthly instalments of` 1,00,000 plus interest on outstanding amount of cash price for the
intervening four months. The instalments were payable on 31st July, 30th November and 31st March in each one of
the two accounting years. Interest was calculated @ 12% per annum.
M/s. Singh & Singh duly paid the instalment on 31st July, 2012 but failed to pay the instalment on 30th November,
2012. M/s. Power Motors, after legal formalities, repossessed the truck valuing it at ` 7,00,000. M/s. Power Motors
spent` 80,000 on repairs and repainting of the truck and on 7th January, 2013 sold it for ` 7,50,000 cash.
You are required to prepare the account of M/s. Singh & Singh and Goods Repossessed Account in the books of
M/s. Power Motors.
(6 marks)
Answer: In the books of M/s. Power Motors
M/s. Singh & Singh’s Account
Date Particulars ` Date Particulars `
2012 2012
1.04. To Hire Purchase Sales 9,00,000 1.04. By Bank 3,00,000 A/c (Cash Price) (Down payment) 31.07. To Interest A/c 24,000 31.07. By Bank 1,24,000
(6,00,000 × 12 × ) (1,00,000+24,000)
30.11. To Interest A/c 20,000 30.11. By Goods 7,00,000 (5,00,000 × 12 × ) Repossessed A/c
30.11. To Profit & Loss Account 1,80,000 (Bal. fig.)
11,24,000 11,24,000 Goods Repossessed Account
Date Particulars ` Date Particulars `
30.11.2012 To Singh & Singh’s A/c 7,00,000 7.1.2013 By Bank A/c 7,50,000 7.1.2013 To Bank A/c (Repairs) 80,000 7.1.2013 By Profit & Loss A/c
30,000
7,80,000 7,80,000 Space to write important points for revision
Q.5.8 2015 - May [5] (a) Practical
Lucky bought 2 tractors from Happy on 1-10-2011 on the following terms:
P.a.
25,000 2,50,000
45,000 2,00,000
65,000 2,00,000
Down
Payment 5,00,000 Nil
1,35,000 11,50,000
9,20,000 9,20,000
1.10.2013 To Balance b/d 7,36,000 30.9.2014 By Depreciation A/c 1,47,200
By Happy a/c (Value
Happy Account
Date Particulars (`) Date Particulars (`)
1.10.11 To Bank (down 5,00,000 1.10.11 By Tractor A/c 11,50,000 payment) 30.9.12 By Interest A/c 65,000
30.9.12 To Bank1st 2,65,000
Installment
To Balance b/d 4,50,000
12,15,000 12,15,000 30.9.13 To Bank 2nd 2,45,000 1.10.12 By Balance b/d 4,50,000 Installment 30.9.14 By Interest
A/c 45,000 To Balance c/d 2,50,000
4,95,000 4,95,000 30.9.14 To Tractor a/c 1,97,225 1.10.13 By Balance b/d 2,50,000 To Balance c/d 77,775 30.9.14
By Interest A/c 25,000 2,75,000 2,75,000
Girish Transport Ltd., purchased from NCR Motors 3 electric rickshaws costing`60,000 each on the hire purchase
system on 1.1.2013. Payment was to be made`30,000 down and the remainder in 3 equal installments payable on
31.12.2013, 31.12.2014 and 31.12.2015 together with interest @ 10% p.a. Girish Transport Ltd. writes off
depreciation @ 20% p.a. on the reducing balance. It paid the installment due at the end of 1st year i.e. 31.12.2013 but
could not pay next on 31.12.2014. NCR Motors agreed to leave one e-rickshaw with the purchaser on 31.12.2014
adjusting the value of the other two e-rickshaws against the amount due on 31.12.2014. The e-rickshaws were
valued on the basis of 30% depreciation annually on WDV basis.
Show the necessary Ledger accounts in the books of Girish Transport Ltd. for the year 2013, 2014 and 2015. (8
marks)
Answer :
Ledgers A/c Books of Girish Transport
Date Particulars 1/1/1 To NCR Motors A/c
1/1/14 To Balance b/d
1/1/15 By Balance b/d
Date Particulars 1/1/13 To Bank (D.P.)
31/12/14 To Auto rickshaw A/c 58,800 1/4/14 By Balance b/d 1,00,000 31/12/14 To Balance c/d 51,200 By Interest A/c 10,000 1,10,000 1,10,000
31/12/15 To Bank A/c (Cost installment paid)
1/1/13 60,000
☐ depreciation (20%) 12,000
31/12/13 48,000
☐ depreciation (20%) 9,600
31/12/14 38,400
Book value adopted by NCR Motors
1/1/13 60,000
☐ depreciation (30%) 18,000
31/12/13 42,000
☐ depreciation (30%) 12,600
31/12/14 29,400
Loss per Auto rickshaw = 38,400 ☐ 29,400
= 9,000
Total loss = 9,000 × 2 = 18,000
Space to write important points for revision
56,320 1/1/15 By Balance b/d 51,200
By Interest A/c 5,120 56,320 56,320
Q.5.10 2016 - Nov [5] (a) Practical Srikumar bought 2 cars from ‘Fair Value Motors Pvt Ltd. on 1-4-2012 on the
following terms:
A/c
Motors 18,00,000 31.3.13 By Depreciation A/c 4,50,000
By Balance c/d 13,50,000
18,00,000 18,00,000
1.4.13 To Balance b/d 13,50,000 31.3.14 By Depreciation A/c 3,37,500
By Balance c/d 10,12,500
13,50,000 13,50,000
1.4.14 To Balance b/d 10,12,500 31.3.15 By Depreciation A/c 2,53,125
By Fair Value Motors A/c (Value of 1 Car taken over after depreciation for 3 y e a r s @ 4 0 % p . a . ) [9,00,000 - (3,60,000 + 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
1/2(10,12,500 - 2,53,125) 3,79,687* 10,12,500 10,12,500
* May be rounded off as 1,85,287. In that case, the balance in Cars account will be 3,79,688.
Fair Value Motor Pvt. Ltd.
Date Particulars 1.4.12 To Bank (down payment)
6,00,000
Date Particulars ` 1.4.12 By Car A/c 18,00,000
4,20,000 31.3.13 By Interest A/c 1,20,000
9,00,000
19,20,000 19,20,000
4,90,000 1.4.13 By Balance b/d 9,00,000
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 Scooters.
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. You are required to:
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. (10 marks)
Answer:
1. Calculation of Interest and Cash Price
No. of Outstanding Amount Installment Balance at due at the the end after time of the payment installment
of
installment
123
4 = 2+3
Interest Outstanding
balance at the
beginning
6 = 4 -5
3rd - 1,65,000
2nd 1,50,000 1,47,000
1st 2,70,000 1,59,000
1,65,000 2,97,000 4,29,000 15,000 27,000 39,000
Date Particulars 1/4/2015 To M/s Bhanu A/c
1/4/16 To Bal b/d
1/4/17 To Bal b/d
Total Cash Price =` 3,90,000 +` 3,00,000 (down Payment) ` 6,90,000
2. In the books of M/s Amar Scooters A/c
` Date Particulars
1,50,000
2,70,000
3,90,000
` 31/3/18 By loss transferred to 38,870 Profit and Loss A/c on
6,90,000 6,90,000
5,52,000 31/3/17 By Depreciation 1,10,400
31/3/17 By Bal. c/d 4,41,600
5,52,000 5,52,000
4,41,600 31/3/18 By Depreciation 88,320
48,300 + 33,810)]
78,890)
31/3/18 31/3/18 2,35,520 88,320) × 1/6 × 4 4,41,600 4,41,600 3. M/S Bhanu A/c
Date Particulars
` Date Particulars `
3,00,000 1/4/15 By Scooters A/c 6,90,000
1,59,000 31/3/16 By Interest A/c 39,000
2,70,000
7,29,000 7,29,000
1,47,000 1/4/16 By Bal. b/d 2,70,000
1,50,000 31/3/17 By Interest A/c 27,000
2,97,000 2,97,000
78,890 1/4/17 By Bal. b/d 1,50,000
86,110 31/3/18 By Interest A/c 15,000
1,65,000 1,65,000
91,492 91,492
4. In the books of M/S Bhanu Ltd.
A Machinery is sold on Hire Purchase. The terms of purchase is 4 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 A/c and Hire Vendor A/c in the books of the Hire Purchaser who defaulted in the payment of the
3rd yearly payment whereupon the Vendor repossessed the Machinery. The Hire Purchaser provides Depreciation on
Machine at 10% p.a.
Answer :
Working Note:
Computation of Cash Price and Interest for the Hire Purchaser Instalment Balance due
No. after Instalment
(A) (B)
Instalment Cumulative Amount Amount Interest at Paid for 20% p.a. Principal
1 Nil 2 0 + 5,000 = 5,000 6,000 6,000 1,000 5,000 6,000 11,000 1,833 4,167 3 5,000 + 4,167 6,000 15,167 2,528
3,472
= 9,167
4 9,167+3,472 = 6,000 18,639 3,107 2,893 12,639
1st To Hire Vendor (M/c 15,532 1st By Depreciation at 10% 1,553 Yr. Price) Yr. By Balance c/d 13,979 Total
15,532 Total 15,532 2nd To Balance b/d 13,979 2nd By Depreciation at 10% 1,398 Yr. Yr. By Balance c/d 12,581
Total 13,979 Total 13,979
ABC Transporters Ltd. purchased from Hans Motors 3 Trucks costing ` 50,000 each on the Hire Purchase System
on 01.01.2016. Payment was to be made`30,000 down and the remainder in 3 equal annual instalments payable on
31.12.2009, 31.12.2017 and 31.12.2018 together with interest at 9% p.a. ABC Transporters Ltd. writes off
depreciation at 20% on the diminishing balance. It paid the instalment due at the end of the first year i.e. 31.12.2016
but could not pay the next on 31.12.2017. Hans Motors agreed to leave one Trucks with the purchaser on 01.01.2018
adjusting the value of other 2 Trucks against the amount due on 01.01.2018. The Trucks were valued on the basis of
30% depreciation annually.
Prepare the necessary accounts in the books of ABC Transporters Ltd. for the years 2016, 2017 and 2018.
Answer :
Books of ABC Transporters Ltd.
Date Particulars 01.01.16 To H a n s Motors A/c
Total 01.01.17 To Balance b/d
Total 01.01.18 To Balance b/d
Total
Trucks A/c
` Date Particulars `
Value as per Purchaser Value as per Vendor 20% p.a. on Cash Price 20% p.a. on Cash Price
1,50,000 1,50,000 (30,000) (45,000)
Q.5.14 Practice Practical
Y Ltd. sold 3 Machinery for a total cash sale price of ` 6,00,000 on hire purchase basis to X on 1.1.2018 . The terms
of agreement provided for 30% as cash down and the balance of the cash price in three equal instalments together
with interest at 10% per annum compounded annually. The instalments were payable as per the following schedule:
1st instalment on 31.12.2019; 2nd instalment on 31.12.2020 and 3rd instalment on 31.12.2021. X paid the 1st
instalment on time but failed to pay thereafter. On his failure to pay the second instalment, Y Ltd. repossessed two
machineries and valued them at 50% of the cash price. X charges 10% p.a. depreciation on straight line method.
Prepare necessary ledger accounts in the books of X for 2018-2020.
Answer :
Dr. Machinery Account Cr. Date Particulars
1.1.2018 To Y Ltd.’s Account
` Date Particulars ` 6,00,000 31.12.2018 By Depreciation A/c 60,000 By Balance c/d 5,40,000 6,00,000 6,00,000
1.1.2019 To Balance b/d 5,40,000 31.12.2019 By Depreciation A/c 60,000 By Balance c/d 4,80,000 5,40,000
5,40,000
4,80,000 4,80,000
1,80,000 31.12.2018 By Machinery A/c 6,00,000 4,62,000 By Interest A/c 42,000 10% on (` 6,00,000
– ` 1,80,000)
6,42,000 6,42,000
To Balance c/d
2,28,200 1.1.2019 By Balance c/d 4,62,000
31.12.2019 By Interest A/c 46,200
( 1 0 % o n ` 4,62,000) 2,80,000
To Balance c/d
2,00,000 1.1.2020 By Balance b/d 2,80,000 1,08,000 31.12.2020 By Interest A/c 28,000
3,08,000 3,08,000 Working Notes: (i) Book Value of Machine left and Repossessed
1 left 2 repossessed A. Costs 2,00,000 4,00,000 B. Less: Depreciation for 3 years @ 10% (60,000) (1,20,000)
(iii) Loss on Default = Cash Price – 50% of cash price =` 4,00,000 – 2,00,000 = ` 2,00,000 = Agreed Value – Book
Value =` 2,00,000 – ` 2,80,000 =` 80,000
ABC and Co. purchased seven trucks on hire purchase on 1st July, 2018. The cash purchase price of each truck was`
50,000. The company has to pay 20% of the cash purchase price at the time of delivery and the balance in five half
yearly instalment starting from 31st December, 2018 with interest at 5% per annum at half yearly rest. On the
Company’s failure to pay the instalment due on 30th June 2019 it was agreed that the Company would return 3
trucks to the vendor and the remaining four would be retained. The vendor agreed to allow him a credit for the
amount paid against these 3 trucks less 25%. Vendor after spending` 1,000 on repairs sold away all the three trucks
for ` 40,000.
Prepare the relevant Accounts in the books of the purchaser and vendor assuming the books are closed in June every
year and depreciation @ 20% p.a. is charged on Trucks.
Answer :
In Books of Hire-Purchaser (ABC and Co.)
Dr.
Date Particulars
1.7.2018 To Hire Vendor’s A/c (Cost of 7 Trucks @ ` 50,000 each)
(` 3,50,000
× 20/100)
` Date Particulars ` 01.07.2018 By Trucks A/c 3,50,000 31.12.2018 By Interest A/c 7,000 70,000 (` 2 , 8 0 , 0 0 0
×5/100× 6/12)
31.12.2018 To Bank A/c 30.06.2019 By Interest A/c 5,600 [(20% of` ( ` 2,24,000 × 2,80,000)+ 5/100 × 6/12) `
7,000] 63,000
Working Notes:
(i) Credit allowed Vendor against 3 trucks `
` Date Particulars `
3,62,600 3,62,600
` Date Particulars `
On 1.1.2018 X, a television dealer, bought 5 television sets from LG Television Co. on hire-purchase. The cash
price of each set was`20,000. It was agreed that` 25,000 should be paid immediately and the balance in three
instalments of ` 30,000 each at the end of each year. The LG Television Co. charges interest @ 10% p.a. The buyer
depreciates television sets at 20% p.a. on the diminishing balance method. X paid cash down and two instalments
but failed to pay the last instalment. Consequently, the LG Television Co. repossessed three sets, leaving two sets
with the buyer and adjusting the value of 3 sets against the amount due. The sets repossessed were valued on the
basis of 30% depreciation p.a. on the written down value. The sets repossessed were sold by the LG Television Co.
for` 30,000 after necessary repairs amounting to` 5,000 on 30th June 2021.
Open the necessary ledger account in the books of both the parties.
Answer :
Dr.
Date Particulars 1.1.2018 To Dolphin
Television Co.
01.01.2019 To Balance b/d
In the Books of X
Television Account Cr.
` Date Particulars `
To Balance c/d
30,000 01.01.2019 By Balance b/d 52,500 27,750 31.12.2020 By Interest A/c 5,250
To Balance c/d
20,580 01.01.2020 By Balance b/d 27,750
31.12.2020 By Interest A/c 2,250
9,420
1,07,500 1,07,500 52,500 31.12.2018 By Cash A/c 30,000 5,250 31.12.2019 By Balance c/d 27,750 57,750 57,750
Particulars
To X
To Cash A/c (Repairs)
To Profits and Loss A/c (Profit)
(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.
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 × 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
(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 1,96,000
working note (i) above
Hence, loss on cars taken back =`2,56,000 –`1,96,000 = ` 60,000
further
7. Responsibility for Risk of Loss
6. Right of Disposal Hirer cannot hire out, sell, pledge or assign entitling t ransferee to retai n possession as against
the hire vendor.
T h e h i r e r i s n o t responsible for risk of loss of goods if he has taken reasonable precaution because the
ownership h a s n o t y e t b e e n transferred.
The seller can sue for price if the buyer is in default. He cannot take possession of the goods.
The buyer may dispose off the goods and give good title to the bona fide purchaser.
The buyer is responsible for risk of loss of goods because the ownership has transferred.
12 Departmental Accounts
This Chapter Covers: Study’s Chapter: 12
Chapter Comprises: ☹Advantages of Departmental Accounting ☹Methods of Departmental Accounting ☹Basis of
Allocation of Common
Expenditure ☹Types of Departments ☹Inter-Departmental Transfers
☹Memorandum Stock and Memorandum Mark Up Account Method
First Indepth
learning
i.e.....Time
............ Day 1
1. Budgeted 9
2. Actual
3. Variance
(1-2)
Instant
Revision (in hours)
2.15 1.5
Plan and Manage your Time Periodic Revision
(in hours)
Answer :
Basis of allocation of common expenditure among different departments: At the time of preparing department
accounts, expenses should be distributed among the different departments on the basis of the following principles:
1. Expenses incurred specially for each department are charged directly to
it. For example, insurance charges of stock held by a department. 2. The expenses which are not capable of correct
measurement are dealt
in the following ways:
(i) Expenses incurred on selling are charged on the basis of sales for e.g. discount, bad debts, selling, commission
etc.
(ii) Administrative and other expenses such as salaries of managers, directors, common advertisement expenses,
depreciation on assets etc. are allocated equally among all the departments that have benefitted thereby.
Alternatively, no allocation may be made and such expenses may be charged to the combined profit and loss
account.
3. Common expenses, the advantages of which is shared by all the
departments and which are competent enough of precise allocation (e.g.
rent, lighting expenses etc.) are distributed among the departments
related on some particular basis which are considered suitable for the
circumstances. Rent are charged to different departments as per the
floor area occupied by each department. Lighting and heating expenses
are distributed on the basis of consumption of energy by every
department and so on.
Space to write important points for revision
State the basis on which the following common expenses, the benefit of which is shared by all the departments is
distributed among the departments :
(ii) Selling expenses such as discount, bad debts, selling commission and other such selling expenses;
(iii) Carriage Inward;
(iv) Depreciation;
Answer:
S.No. Expenses
(i) Rent, rates & taxes, insurance Floor (4 marks) [IPCC Gr- II]
Basis
area occupied by each of building
(ii) Selling expenses such discount, bad-debts etc. (iii) Carriage Inward
(iv) Depreciation
(v) Interest on loan
(vi) Profit or loss on sale investment
(vii) Wages
as department (if given) otherwise on time basis.
Sales of each department.
of
Utilisation of loan amount in each department (if identifiable) otherwise in combined P&L A/c.
Q.1.3 2016 - May [7] (d) Descriptive Give the basis of allocation of the following common expenditure among
different departments:
(i) Insurance of Building
(ii) Discount and bad debts
(iii) Discount received
(iv) Repairs and maintenance of capital assets
(v) Advertisement expenses (vi) Labour welfare expenses (vii) PF/ESI contributions (viii) Carriage inward
Answer:
(4 marks) [IPCC Gr- II]
Item
(i) Insurance of Building
Basis
Floor area of each department
capital assets
(v) Advertisement expenses (vi) Labour welfare expenses
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 unrealised profit on departmental sales being eliminated. Departmental profits after charging
Managers' commission, but before adjustment of unrealised profit are as under:
` Department X 36,000
Department Y 27,000
Department Z 18,000
Stock lying at different departments at the end of the year are as under: 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.
Answer:
Profit after commission Add back: Manager's commission (1/9) 4,000 3,000 2,000
Calculation of Profits
Particulars Deptt. X Deptt. Y Deptt. Z ` ` ` charging manager's 36,000 27,000 18,000
Working Note: Stock lying with
Particulars Deptt. X` Deptt. Y` Deptt. Z` Total ` Unrealised profit of:
Department X — 1/5 of 15,000 1/11 of 11,000 4,000 = 3,000 = 1,000 Department Y 15% of 14,000 — 20% of
12,000 4,500 = 2,100 = 2,400 Department Z 1/6 of 6,000 1/5 of 5,000 — 2,000 = 1,000 = 1,000
Space to write important points for revision
Q.2.2 2009 - Nov [1] (viii) Practical
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. (2 marks) [IPCC Gr- II]
Answer :
Calculation of Stock Reserve
Particulars ` Closing stock of Department Q 27,000 Goods sent by Department P to Department Q at a price 50%
above cost
Hence, profit of Department P included in the stock will be
9,000
Amount of stock reserve will be ` 9,000 Space to write important points for revision
Q.2.3 2010 - Nov [4] (a), RTP Practical
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 unrealised profit on departmental sales being eliminated. Departmental profits after charging
Manager’s commission, but before adjustment of unrealised profit are as under:
`
Department R 54,000
Department S 40,500
Department T 27,000
Stock lying at different departments at the end of the year are as under : 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.
Answer :
(8 marks) [IPCC Gr- II]
Particulars
Profit
Add : Managerial commission (1/9)
Departments
R S T (`) (`) (`)
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
Department A sells goods to Department B at a profit of 20% on cost and Department C at 15% profit on cost.
Department B sells goods to A and C at a profit of 10% and 20% on sales respectively. Department C sells goods to
A and B at 15% and 10% profit on cost respectively.
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 36,000
Department B 27,000
Department C 18,000
Stock lying at different departments at the end of the year are as below: Department A Department B Department C
` ` ` Transfer from Department A ☐ 7,200 5,750 Transfer from Department B 19,000 ☐ 15,000 Transfer from
Department C 4,600 3,300 ☐ Find out correct departmental profits after charging manager’s commission. (8 marks)
[IPCC Gr- II]
Manager @ 10%
Correct profit after charging (3,805) (2,510) (1,910) manager’s commission ______ ______ ______
Q.2.5 2013 - May [7] (c) Practical 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 unrealized profit of each department and also total unrealized profit. (4 marks) [IPCC Gr- II] Answer:
Computation of unrealized profit of each department and total unrealized profit
Particulars Dept. A Dept. B Dept. C Total
` ` ` ` Unrealized Profit
of:
Department A 45,000 × 42,000×20/ 22,000
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 unrealized profit on departmental
sales being eliminated. Departmental profits after charging Manager’s commission, but before adjustment of
unrealized 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
Find out correct Departmental Profits after charging Managers’ Commission. (8 marks) [IPCC Gr- II]
Answer : Calculation of correct Departmental Profits Departments P (`) S (`) Q (`) P r o f i t s a f t e r c h a r g i
n g M a n a g e r ’ s 90,000 60,000 45,000 Commission
Add : Manager’s Commission (1/9) 10,000 6,667 5,000 Profit before adjustment of unrealised profit 1,00,000
66,667 50,000 on stock
Less : Unrealised profit on stock (w.n. 1) 5,426 21,000 2,727 Profit after adjustment of the unrealised 94,574 45,667
47,273 profit on stock
Less : Departmental Manager’s Commission 9,457 4,567 4,727 @ 10%
Correct Departmental profit after Manager’s 85,117 41,100 42,546 commission
Working Note:
Calculation of unrealised profit on stock
Particulars Departments Total (`)
Q.2.7 2016 - May [6] (a), RTP Practical 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 unrealised profit on departmental
sales being eliminated. 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:
Find out the correct departmental profits after charging Managers’ commission. (8 marks) [IPCC Gr- II] Answer :
Calculation of correct departmental profits after charging Manager’s commission:
Particulars Department Department Department
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:
Dept. X Dept. Y Dept. Z ` ` `
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. (4 marks) [IPCC Gr- II] Answer:
Computation of Unrealized Profits (in `)
From dept. X to – 75,000 × 48,000 × 33,000 Y & Z at 50% 50/150 = 20/120 = on cost and 25,000 8,000 20% on
cost
From dept. Y to 50,000 × 25/ – 82,000 24,800 X & Z at 25% 100 = ×15/100 = on sales and 12,500 12,300 15% on
sales
From dept. Z to 52,000 × 30/ 56,000 × – 34,400 X & Y at 30% 130 = 40/100 =
on costs and 12,000 22,400
40% on sales
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. (5 marks)
Answer:
Calculation of Correct Departmental Profits Particulars
Profit after charging managers’ commission
A d d b a c k : M a n a g e r s ’ commission (1/9)
Department Department A B
``
2,25,000 3,37,500
Department Department C D
``
1,80,000 4,50,000
25,000 37,500 20,000 50,000
Less : Unrealised Profit on stock (Working Note)
P r o f i t b e f o r e M a n a g e r s ’ commission
L e s s : C o m m i s s i o n f o r Department Manager @ 10% Correct Departmental Profits after Manager’s Commission * Working Note :
2,50,000 3,75,000 (31,000) (37,500) 2,00,000 5,00,000 (5,000) (17,250)
2,19,000 3,37,500 1,95,000 4,82,750
(21,900) (33,750) (19,500) (48,275)
1,97,100 3,03,750 1,75,500 4,34,475
Stock lying with Particulars Department Department Department A B C ` ` `
Department Total D
``
Dept. B
Dept. C
0.30 × 50,000
= 15,000
1/11 × 33,000 1/11 × 22,000
= 3,000 = 2,000
0.15 × 40,000 0.15 × 10,000 0.15 × 65,000 = 6,000 = 1,500 = 9,750 1/5 × 60,000 31,000 = 12,000
0.30 × 75,000 37,500 = 22,500
5,000
17,250
3 Departmental Trading Account
Q.3.1 2004 - Nov [5] (a) Practical
FGH Ltd has three departments I. J. K. The following information is provided for the year ended 31.3.2004
IJK
` ` ` Opening Stock 5,000 8,000 19,000 Opening Reserve for unrealised profit — 2,000 3,000 Materials consumed
16,000 20,000 — Direct labour 9,000 10,000 — Closing Stock 5,000 20,000 5,000 Sales — — 80,000 Area
occupied (sq. mtr.) 2,500 1,500 1,000 No of employees 30 20 10 Stocks of each department are valued at costs to
the department concerned. Stocks of I are transferred to J at cost plus 20% and stocks of J are transferred to K at a
Gross Profit of 20% on sales. Other common expenses are Salaries and Staff Welfare ` 18,000, Rent ` 6,000. Prepare
Departmental Trading, Profit and Loss Account for the year ending 31.3.2004. (10 marks)
Answer:
The Table is given in the Next Page
Departmental Trading and Profit & Loss A/c of FGH Ltd. (For the year ended 31.3.2004)
Dr. Cr.
Particulars Departmental Total Particulars Departmental Total
IJKIJK
To Salaries & Staff By Gross Profit 5,000 12,000 6,000 23,000 welfare 9,000
To Rent 3,000
To Stock Reserve
(unrealised profit)
(W. N. - 1) —
To Net Profit c/d —
6,000 3,000 18,000 b/d
1,800 1,200 6,000By S t o c k
Reserve
(unrealised
1,667 1,333 3,000 profit given) — 2,000 3,000 5,000 4,533 3,467 8,000By Net Loss c/d 7,000 7,000
= ` 1,667
(b) Amount of stock reserve for dept. ‘K’.
Stock reserve of dept. ‘k’ ` 5,000 Loss: Unrealised profit 5,000 × ` 1,000
Cost of production of dept. ‘J’ 4,000 Proportion of stock transfer from dept.
‘I’ =` 4,000 × = ` 2,000
* Therefore the stock reserve =` 2,000 × = ` 333. ☐ Total stock reserve of dept. ‘k’ =` 1,000 +` 333 = ` 1,333. Space
to write important points for revision
Q.3.2 2011 - May [1] {C} (c) Practical Brahma Limited has three departments and submits the following
information for the year ending on 31st March, 2011.
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 You are required to
prepare departmental trading account of Brahma Limited assuming that the rate of profit on sales is uniform in each
case.
Particulars A B C Selling price per unit (`) 40 45 50 Less: Profit margin @ 40% (`) (16) (18) (20) Purchase price
per unit (`) 24 27 30 No. of units purchased 5,000 10,000 15,000 Purchases (purchase cost per 1,20,000 2,70,000
4,50,000 unit x units purchased)
M/s. AM Enterprise had two departments, Cloth and Readymade Clothes. The Readymade clothes were made by the
firm itself out of the cloth supplied by the Cloth Department at its usual selling price. From the following figures,
prepare Departmental Trading and Profit & Loss Account for the year ended 31st March, 2011:
Cloth
Department `
Opening Stock on 1st April, 2010 31,50,000 Purchases 2,10,00,000
Readymade Clothes
Department ` 5,32,000 1,68,000 Sales 2,31,00,000 47,25,000 Transfer to Readymade
Clothes Department 31,50,000 --Manufacturing Expenses --6,30,000 Selling Expenses 2,10,000 73,500 Rent &
Warehousing 8,40,000 5,60,000 Stock on 31st March, 2011 21,00,000 6,72,000 In addition to the above, the
following information is made available for necessary consideration :
The stock in the Readymade Clothes Department may be considered as consisting of 75% cloth and 25% other
expenses. The Cloth Department earned a gross profit at the rate of 15% in 2009-10. General Expenses of the
business as a whole amount to` 10,85,000.
(8 marks) [IPCC Gr- II]
Answer :
Working Note:
Calculation of Stock Reserve:
Rate of Gross Profit of Cloth Department, for the year 2010-11
= × 100
= × 100 = 16%
Closing Stock of cloth in Readymade Clothes Department = 75% i.e. ` 6,72,000 × 75% =` 5,04,000
` 5,04,000 × 16% =` 80,640
Stock Reserve for unrealized profit included in opening stock of readymade clothes @ 15% i.e.
Departmental Trading and Profit and Loss Account for the year ended 31st March, 2011
Particulars Cloth ReadyTotal Particulars Cloth ReadyTotal (`) made (`) (`) made (`) Clothes Clothes (`) (`)
To Opening stock 31,50,000 5,32,000 36,82,000 By Sales 2,31,00,000 47,25,000 2,78,25,000 To Purchases 2,10,00,000 1,68,000 2,11,68,000 By Transfer
to
To Transfer from Readymade
To Rent & wareprofit b/d 42,00,000 9,17,000 51,17,000 housing 8,40,000 5,60,000 14,00,000
To Net profit 31,50,000 2,83,500 34,33,500
To General expenses
To Unrealized profit (Refer W.N.)
To General net profit (Bal. fig.)
20,790
23,27,710
34,33,500 34,33,500
Q.3.4 2014 - Nov [6] (b) Practical Mega Ltd. has two departments, A and B. From the following particulars,
prepare departmental Trading A/c and General Profit & Loss Account for the year ended 31st March, 2014.
Particulars
Amount (`)
Department Department A B
70,000 54,000
3,92,000 2,98,000
6,000 9,000
54,000 36,000
5,72,000 4,60,000
50,000 36,000
1,50,000 1,75,000
Particulars
To Opening Stock
To Purchase
To Carriage Inward
To Wages
To Transfers: Purchased Goods
Finished** Goods
To Gross
Profit c/d
Purchased goods have been transferred mutually at their respective departmental purchase cost and finished goods at
departmental market price and that 30% of the closing finished stock with each department represents finished
goods received from the other department.
Answer:
Department Trading Account in the books of Mega Ltd. for the year ended 31st March, 2014
Dept. A Dept. B Particulars Dept. A Dept. B (`) (`) (`) (`) By Sales 5,72,000 4,60,000 70,000 54,000 By Transfer:
3,31,000
Particulars
Sales
Add: Transfer of
Finished Goods
Department A (`) Department B (`) 5,72,000 4,60,000
1,75,000 1,50,000
7,47,000 6,10,000
Less: Return of
Finished Goods Gross Profit
Gross Profit margin = (45,000) (32,000)
7,02,000 5,78,000
1,74,000 1,57,000
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, 2014:
30,20,000 4,30,000
1,50,00,000 2,60,000
1,80,00,000 45,20,000
30,00,000 -
- 5,00,000
1,50,000 60,000
5,00,000 3,00,000
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
Particulars
To General Exp.
To Stock Reserve (WN) To NP
Particulars Rate of GP
Last Year This Year 15% × 100 = 20%
= 3,22,500 = 3,75,000
3,22,500 ×15% 3,75,000 × 20% = 48,375 = 75,000 Stock Reserve for this year = 75,000 - 48,375 = ` 26,625 Space
to write important points for revision
Q.3.6 2017 - May [6] (a), RTP Practical 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, 2016:
Particulars Deptt. A Deptt. B ` `
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 for
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. (8
marks) [IPCC Gr- II] Answer: Trading A/c Dr. Particulars To Opening stock To Purchases
To Gross Profit
General Profit and Loss Account of Beta for the year ended on 31stDecember, 2016
Particulars Amount Particulars Amount
To General expenses
To Net Profit
``
Working Notes: Dept. A Dept. B 1 Percentage of 24,00,000/60,00,000 × 45,00,000/90,00,000 × 100 Profit 100 =
40% = 50%
2 Opening 60,000 × 50% = 30,000 90,000 × 40% = 36,000 Stock reserve
3 Closing Stock 1,20,000 × 50% = 60,000 1,80,000 × 40% = 72,000 reserve
Space to write important points for revision
Q.3.7 2018 - May [3] (a) Practical
M/s Delta is a Departmental Store having three departments X, Y and Z. The information regarding three
departments for the year ended 31stMarch, 2018 are given below:
Prepare Departmental Trading and Profit & Loss Account for the year ended 31st March, 2018 after providing
provision for Bad Debts at 5%. (10 marks)
Answer: In the books of M/s. Delta
Departmental Trading and Profit and Loss Account for the year ended 31st March, 2018
Particulars Dep. X` Det. Y` Dept. Z Total` Particulars Dep. X` Det. Y Dept. Total` ` ` Z` 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 To Carriage outwards 1,200 900 600 2,700 By Gross 27,750 19,750 23,250 70,750
Profit b/d
To Electricity 1,500 1,000 500 3,000 By D i s c o unt 900 600 300 1,800 Received
24,000
2,700
2,250
7,500
To Salaries 10,000 8,000 6,000 To Advertisement 1,200 900 600 To Discount Allowed 1,000 750 500 To Rent, Rates and 3,000 2,500 2,000 taxes
To Depreciation 400 400 200 To Provision for Bad 375 250 250 debts @ 5% of debtors
To Labour Welfare 1,000 800 600 Expenses
To Net Profit (b.f) 8,975 4,850 12,300 28,650 20,350 23,550 1,000
875
2,400
26,125
72,550 28,650 20,350 23,550 72,550
Purchase Sales
The Total Value of Purchases is `1,00,000. It is observed that the rate of Gross Profit is the same in each department.
Prepare Departmental Trading Account for the above year.
We are informed that the GP Ratio is the same for all Departments. Selling Price is given for each Department’s
products but the Sale Quantity is different from that of Purchase Quantity. To find the Uniform GP Rate, the Sale
Value of Purchase Quantity should be compared with the Total Cost of Purchase, as under:
Assuming all Purchases are sold, the Sale Proceeds would be: Particulars
Department A
Department B
Department C
Total Sale Value of
Purchase Quantity
Less: Cost of Purchase
Gross Profit Amount Gross Profit Ratio
Computation Amount
1,25,000
(1,00,000) 25,000
(d) Cost of Purchase = 1,000 × 16 = 2,000 × 18 = 2,400 × 20 = Qty. × Cost p.u. ` 16,000 ` 36,000 ` 48,000 (e) Cost
of Op. Stock = 120 × 16 =` 1,920 80 × 18 =` 1,440 152 × 20 =` 3,040 Qty × Cost p.u.
(f) Cost of Cl. Stock = 100 × 16 =` 1,600 160 × 18 =` 56 × 20 =` 1,120 Qty. × Cost p.u. 2,880
4. Department Trading Account for the year ended 31st March (in`) B C Particulars A B C By Sales (Qty.
1,440 3,040 × SP p.u.) 20,400 43,200 62,400
Particulars A
To Opening Stock
(WN 3e) 1,920
To Purchases
(WN 3d) 16,000
To GP (20% of
Sales) 4,080
Total 22,000
36,000 48,000 By C l o s i n g 1,600 2,880 1,120 Stock (WN
8,640 12,480 3f)
46,080 63,520 Total 22,000 46,080 63,520 Space to write important points for revision
Q.3.9 RTP Practical The following balances were extracted from the books of ABC Sons. You are required to
prepare Departmental Trading Account and Profit and Loss
Account for the year ended 31st March after adjusting the unrealized Department Profits if any.
Particulars Deptt. A Deptt. B
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
To General By Gross
Expenses Profit 4,00,000 7,50,000 (in ratio of 50,000 75,000
Sales)
To Profit tfr to
General
Profit and 3,50,000 6,75,000
Loss A/c
Total 4,00,000 7,50,000 Total 4,00,000 7,50,000 2. General Profit and Loss Account
Particulars ` Particulars `
XY and Z carried on a business of Drapers and Tailors in Delhi; X was in charge of Department “A” dealing in
cloth, Y of Department “B” for selling garments and Z of Department “C” the tailoring section. It had been agreed
that each of the three partners would receive 75% of the profits disclosed by accounts of the department of which he
was in charge and the balance of the profits would be shared in the proportion. X ½, Y 1/4, and Z 1/4. The following
is the Trading and Profit and Loss Account of the firm for the six months ended 31st March, 2012.
To Purchases:
Cloth (A)
Ready-made
Garments (B)
Tailoring Goods (C)
` Particulars ` By Sales:
37,890 Cloth (A) 1,80,000
Ready-made
24,000 Garments (B) 1,30,000
20,000 Tailoring Jobs (C) 90,000
By Discount received 800
1,40,700 By Closing Stock:
Cloth (A) 45,100
80,600 Ready-made
44,400 Garments (B) 22,300
48,000 Tailoring Jobs (c) 2,400 [including ` 5,700
10,800 for goods
1,200 transferred from
12,000 department (A)] 21,600
750
67,060
4,89,800 4,89,800 After consideration of the following, prepare Departmental Accounts and Profit and Loss
Appropriation Account.
(i) Cloth of the value of ` 10,700 and other goods of the value of ` 600 were transferred at selling price by
Departments A and B respectively to Department C.
(ii) Cloth and garments are sold in the show-room. Tailoring work is carried out in the workshop.
(iii) The details of salaries and wages were as follows:
(a) General Office 50%, show-room 25% and 25% for workshop 75% of which is for tailoring alone.
Answer: Departmental Trading and Profit and Loss Account For the six months ending on 31st March,
2012Dr. Cr.
Particulars A` B` C` Total `Particulars A` B ` C` Total`
To Opening Stock 37,890 24,000 20,000 81,890By Sales 1,80,000 1,30,000 90,000 4,00,000
To Purchases 1,40,700 80,600 44,400 2,65,700 By Transfer 10,700 600 — 11,300
To Transfer — — 11,300 11,300By Closing
To Wages — — 9,000 9,000 Stock 45,100 22,300 21,600 89,000
To Gross Profit c/d 57,210 48,300 26,900 1,32,410
Note: Gross profit of Department A is 30% in Sales (including transfer to Dept C). There is some unrealised profit
only on inter departmental stock. 30% of`5,700 is required as stock reserve. This will be debited to Profit and Loss
Appropriation account.
50% of Common pool 7,527 31,482 Loss A/c 67,060 To Y:75% of Profit of Dept. B 18,623
25% of Common pool 3,763 22,386
To Z:75% of profit of Dept. C 7,718
25% of Common Pool 3,764 11,482
67,060 67,060 Space to write important points for revision
To Opening Stock 3,000 4,000 6,000 13,000By Internal t/f 18,000 33,000 – 51,000
To Direct Material By Sales – – 34,000 34,000
Consumed 8,000 12,000 – 20,000By Closing 4,000 14,000 8,000 26,000
To Wages 5,000 10,000 – 15,000 Stock
To Internal
Transfer – 18,000 33,000 51,000
To Gross Profit c/d 6,000 3,000 3,000 12,000
7,918 7,918
Working Notes:
(i) FIFO method for stock issue has been assumed. Alternatively this question could have been solved by assuming
other methods for stock issue like LIFO Basis, Weighted Average basis, etc.
(ii) Calculation of unrealised profit on Closing Stock of Deptt B ` A. Current cost incurred by Dept. B
( ` 12,000 + ` 10,000 + ` 18,000) 40,000 B. Profit included in Above (` 18,000 × 50/150) 6,000 C. Profit included in
Closing Stock of ` 14,000
(` 1,000 × 25/100)
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
Q.4.2 2016 - Nov [6] (a) Practical M/s Shyam Udyog, a retail store, has two departments, Department X and
Department Y for each of which stock account and memorandum ‘mark-up’ account are kept. All the goods
supplied to each department are debited to the stock account at cost plus a ‘mark-up’, which together make up the
selling price of the goods and in the account the sale proceeds of the goods are credited. The amount of ‘mark-up’ is
credited to the Departmental Markup 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 X Department is 33-1/3% of the cost and for Y Department it is 50% of the cost.
The following figures have been taken from the books for the year ended March 2016:
22,77,000 28,02,000
28,68,000 37,50,000
(1) The stock of Department X on April 1, 2015 included goods the selling price of which had been marked down
by` 37,800. These goods were sold during the year at the reduced prices.
(2) Certain stock of the value of `2,07,000 purchased from the Department X was later in the year transferred to the
Department Y and sold for ` 3,10,500. As a result though cost of the goods is included in the Department X the sale
proceeds have been credited to the Department Y.
(3) During the year 2015-16 to promote the goods, they were marked down as follows:
Cost (`) Marked down (`)
All the goods marked down, were sold except of Department Y of the value of ` 1,50,000 marked down by ` 30,000.
(4) At the time of stock taking on 31st March, 2016, it was discovered that cloth of Department X of the cost of `
11,700 was missing and it was decided that the amount be written-off.
You are required to prepare for both the departments for the year ended 31st March, 2016:
(a) The Memorandum Stock Account; and
(b) The Memorandum Mark-up Account. (8 marks) [IPCC Gr- II]
Answer :
1. Department X Memorandum Stock A/c
Dr. Cr.
Particulars
To Bal. b/d
(3,15,000 + 67,200)
10,800 By Stock A/c 7,59,000 (Mark down) To P & L A/c To Balance 6,80,550
61,950
8,26,200 8,26,200 3. Department Y Memorandum Stock A/c
Particulars
To Bal. b/d
To Cost 5,58,000
Mark-up 2,79,000
To Purchase 28,02,000
Mark-up 14,01,000
To X Deptt. A/c 2,07,000
Mark-up 1,03,500
To P & L A/c
To Bal. c/d
Working Notes:
1. Verification of Profit Sales as per books Add: Mark-down (37,800 + 10,800) 48,600 29,16,600 Gross Profit on
fixed selling price @ 25% on ` 29,16,600 7,29,150 Less: Mark down (48,600) 6,80,550
2. Verification of Profit ` Sales 37,50,000 Add: Mark down in goods sold 30,000 37,80,000 Gross Profit 1/3
12,60,000 Less: Mark down (30,000) Gross profit as per books 12,30,000 Space to write important points for
revision
` 28,68,000
Q.4.3 2019 - Nov [4] (a) Practical
ABC Ltd. has several departments. Goods supplied to each department are debited to a Memorandum Departmental
Stock Account at cost plus a fixed percentage (marks-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 department X for the last three years has been 20%. Figures relevant to department X for
the year ended 31st March , 2019 were as follows:
A B & C is a Retail Store having 2 Departments A and B. The Company maintains Memorandum Stock Account &
Memorandum Mark-Up Account for each of the Departments. Supplies issued to the Departments are debited to the
Memorandum Stock Account of the Department at Cost plus Mark-Up, and Departmental Sales are credited to this
Account. The MarkUp on supplies issued to the Departments is credited to the Mark-Up Account for the
Department. When it is necessary to reduce the Selling Price below the Normal Selling Price, i.e. Cost plus Mark-
Up, the reduction (Mark-Down) is entered in the Memorandum Stock Account and Mark-up Account. Department P
has a mark-up of 1/3rdon Cost, and Department Q has a mark-up of 50% on Cost.
The following information has been extracted from the records of the Company for a year ending 31st December.
Particulars A B
Opening Stock of Department A includes goods on which the Selling Price has been marked down by`510. These
goods were sold in January at the reduced Selling Price.
Certain goods purchased during the year for`2,700 for Department A, were transferred during the year to
Department B and sold for`4,500. Purchases and Sales are recorded in the Purchases of Department A and the Sales
of Department B respectively, but no entries have been made in respect of the transfer.
Goods purchased during the year were marked down as follows:
Answer:
Particulars
To Balanced b/d
(Given Cost + 1/3rd & 50% Mark-up)
1,62,00 1,90,000 By Sales (given) 2,10,000 2,85,000 54,000 95,000By Int. transfer t/f (as per
contra) 2,700 –
Value of Mark Down Goods = Cost (+) Normal Mark Up 50% (–) Amount Marked Down
=` 21,000 (+) ` 10,500 (–) ` 4,100 (given) =` 27,400
2. Trading Account for the year ended 31st December (in`) Particulars
To Opening
Stock
To Purchases
To Internal
Transfer
To Gross Profit
(bal. fig.)
A B Particulars A B 24,000 36,000 By Sales 2,10,000 2,85,000 By Internal 2,700 – 1,62,000 1,90,000 Transfer
– 2,700 By Abnormal 240 –
Loss
51,518 92,496 By Closing 24,578 36,196
Stock
(Note 2)
Particulars A
(Mark Up on Purchase)
By Memorandum Stock – 1,350 4,100 A/c (2700 × 50%)
(Mark Up on Int. t/f)
(bal. fig.)
4. Confirmation/Verification of Gross Profit (in`) Department A B Sales
Total 62,000 1,14,694 Total 62,000 1,14,694
(given) 2,10,000 2,85,000 Add back: Reduction/Mark down 510+800 = 1,310 4,100-344 = 3,756 Total 2,11,310
2,88,756
Normal Gross Profit at 1/4 (1/4) = 52,828 (1/3) = 96,252
and 1/3 of above
Less: Reduction / Mark down 1,310 3,756
Q.4.5 Practice Practical ABC Limited is a retail organisation with several departments. Goods supplied to each
department are debited to a Memorandum Departmental Stock Account at cost, plus 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 40%. Figures relevant to Department A for the ended
31st Dec. 2018 were as follows: Stock 1stJan., 2018 at cost,`80,000, Purchases at cost`1,80,000, Sales ` 3,20,000.
It is further ascertained that:
(a) Goods purchased in the period were marked down by ` 1,400 from a
cost of`16,000. Marked-down stock costing`4,000 remained unsold on 31st Dec 2018.
(b) Stock shortages at the year end, which had cost ` 1,200 were to be written off.
(c) Stock at 1st Jan. 2018 including goods costing` 8,200 had been sold during the year and has been mark down in
the selling price by` 740. The remaining stock had been sold during the year.
(d) The departmental closing stock is to be valued at cost subject to adjustments for mark-up and mark-down.
Prepare (i) A Departmental Trading Account (ii) A Memorandum Stock
Account (iii) A Memorandum Mark-up Account for the year 2018.
Answer:
(i) Departmental Trading Account
for the year ending on 31st Dec. 2018
Dr. Cr.
Particulars
To Opening Stock
To Purchase
To Gross Profit c/d
(ii) Memorandum Departmental Stock Account (At Selling Price) Dr. Particulars
To Balance b/d
(` 80,000+` 32,000) To Purchases
(` 1,80,000 +
` 72,000)
Cr. ` Particulars ` 1,12,000 By Profit & Loss A/c 1,200 (Cost of Shortage)
Particulars
To Memorandum
Departmental Stock A/c (` 1,200 × 40/100)
To Memorandum
Departmental Stock A/c
To Memorandum
Departmental Stock A/c
To Gross Profit transferred to Profit & Loss A/c
To Balance c/d
[(` 40,180 + ` 350)* × 40/140 – (` 350)]
Working Notes:
(i) Calculation of Cost of Sales ` A. Sales as per Books 3,20,000 B. Add: Mark-down in opening stock (given) 740
C. Add: Mark-down in sales out of current Purchases
Fbb Store Ltd. is a retail store operating two departments. The company maintains Memorandum Stock account and
memorandum mark-up account for each of the departments. Supplies issued to the department are debited to the
Memorandum Stock account of the department at cost plus the Markup, and departmental sales are credited to this
account. The mark-up on supplies issued to the departments is credited to the Mark-up account for the department.
When it is necessary to reduce the selling price below the normal selling price, i.e. cost plus Mark-up, the reduction
(mark down) is entered in the Memorandum Stock account and in the mark-up account. Department A has a Mark-
up of 33-1/3% on cost, and Department B 50% on cost. The following information has been extracted from the
records of Southern Store Ltd. for the year ended 31st December, 2018.
Department A ` Department B `
(a) The stock of Department A on 1st January, 2018 included goods on which the selling price has been marked
down by` 510. These goods were sold in January, 2018 at the reduced price.
(b) Certain goods purchased in 2012 for ` 2,700 for Department A were transferred during the year to Department B
and sold for ` 4,050. Purchase and sale are recorded in the purchases of Department A and the sales of Department B
respectively, but no entries in respect of the transfer have been made.
At the end of the year there were some items in the stock of Department B which had been marked down to` 2,300.
With this exception all goods marked down in 2018, were sold during the year at the reduced prices. (d) During
stock taking on 31st December 2018, goods which had cost
` 240 were found to be missing in department A, It was determined that the loss should be regarded as irrecoverable.
(e) The closing stock in both departments are to be valued at cost for the purpose of the annual accounts.
Prepare for each department for the year ended 31st December, 2018
(i) a Trading Account, (ii) a Memorandum Stock Account, and (iii) a
Memorandum Mark-up Account.
A Dept.
To Gross Profit c/d
24,000 36,000 By Sales 2,10,000 2,85,000 1,62,000 1,90,000 By Transfer to
Dept. B 2,700 –
– 2,700 By Goods Lost 240 – 51,518 92,496 By Closing Stock 24,578 36,196 (at cost)
2,37,518 3,21,196 2,37,518 3,21,196 Memorandum Stock Account (At Selling Price) Dr. Cr.
To Balance b/d
(Cost + Mark
up)
To Purchases
(Cost)
To Memorandum
Mark-up A/c
(on purchases)
To Transfer
To Memorandum
Mark-up A/c
(on t/f)
To Memorandum
Mark-up A/c
(on Marked
down goods
still in Stock)
32,000 54,000 By Balance b/d 510 By Sales 2,10,000 2,85,000 By Transfer 2,700 1,62,000 1,90,000 By
Memorandum
Mark-up A/c
54,000 95,000 (on transfer) 900 –
By Memorandum
Mark-up A/c
2,700 (Marked down
1,350 on current
purchasers) 800 4,100
By P & L A/c
344 ( C o s t o f
Shortage) 240
By M e m o r a n d u m
Mark-up A/c
(on lost Stock) 80
By Balance c/d
(Closing Stock) 32,770 54,294 2,48,000 3,43,394 2,48,000 3,43,394
(Mark-up on Transfer)
To Balance c/d
Cr. Dept. A Dept. B Particulars Dept. A Dept. B ` ` ` `
51,518 92,496
8,192 18,098
62,000 1,14,694 62,000 1,14,694 Working Notes: (i) Calculation of Closing Stock at Cost A Dept. (`) B Dept. (`)
A. Calculation of Closing Stock at
Invoice Price 32,770 54,294 B. Calculation of Closing Stock at Cost 32,770×3/4 54,294× 2/3 =` 24,578 = 36,196 (ii)
Calculation of Mark Down in unsold Stock of B Debt.
A Dept. B Debt. ` ` A. Sales 2,10,000 2,85,000 B. Add: Reduction 510 — C. Add: Mark down 800 3,756 2,11,310
2,88,756
CHAPTER
13
Accounting for Branches Including Foreign Branches
This Chapter Covers: Study’s Chapter: 13
Chapter Comprises: ☹Distinction Between Branch Accounts and Departmental Accounts ☹Dependent Branches
☹Methods of Charging Goods to Branches ☹Accounting for Dependent Branches ☹Accounting for Independent
Branches ☹Adjustment and Reconciliation of Branch & Head Office Accounts ☹Incomplete Information in Branch
Books ☹ Foreign Branches ☹Accounting for Foreign Branches ☹Change in Classification ☹Techniques for Foreign
Currency Translation
i.e.....
............ Day 1
Instant
Revision (in hours)
1. Budgeted
2. Actual
3. Variance (1-2)
QUICK LOOK Repeatedly Asked Questions
. . . . . . . Weightage Analysis Common Answered Must Try Question Questions
2.2, 3.4, 5.5, 6.3
1 Dependent Branch: Debtor Method
Q.1.1 2011 - May [7] (e) Descriptive Why goods are marked on invoice price by the head office while sending
goods to the branch? (4 marks) [IPCC Gr- II]
Answer:
Goods are marked on invoice price to achieve the following objectives: 1. 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
2. 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.
3. To dictate pricing policy to its branches, as well as save work at branch because prices have already been decided.
Space to write important points for revision
Q.1.2 2010 - May [4] (a) Practical
Ram Limited of Chennai has a branch at Nagpur to which office, goods are invoiced at cost plus 25%. The branch
makes sales 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 at Nagpur.
From the following details, relating to the year 2009, prepare the accounts in Head Office Ledger and ascertain
Branch Profit. Branch does not maintain any books of accounts, but sends weekly returns to Head Office:
To Balance b/d
To Goods sent to branch A/c To Branch Debtors A/c
(Returns)
To Branch Adjustment A/c (Surplus over invoice price)
Amount Particulars Amount (`) (`)
To Bank A/c (Rent, rates & taxes) 3,600 By Branch profit and To Bank A/c (Salaries & wages) 12,000 loss A/c
(Transfer) 16,800 To Bank A/c (Office expenses) 1,200
To Branch Stock A/c 2,400 By Branch Stock A/c 1,20,000 To Branch Adjustment A/c 23,520
To Purchases A/c 94,080
Following is the information of the Jammu branch of Best Ltd., New Delhi for the year ending 31st March 2010
from the following :
(1) Goods are invoiced to the branch at cost plus 20%.
(2) The sale price is cost plus 50%.
(3) Other informations :
` Stock as on 01-04-2009 2,20,000
Goods sent during the year 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.
(4 marks) [IPCC Gr- II]
Answer:
(i) Calculation of profit earned by the branch In the books of Jammu Branch
Trading Account
Particulars Amount
15,60,000
Particulars Amount
By Sales 12,00,000
By Closing stock 3,60,000
(Refer W.N.)
price 11,00,000
13,20,000
Less : Cost of goods sold at invoice price (9,60,000) [12,00,000 × Closing stock 3,60,000 (120/150)] Note : It is
assumed that all figures is at invoice price.
Space to write important points for revision
XYZ Company is having it's 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 prepare branch account in the books of Head
Office.
` Discount allowed to debtors 160 Expenses paid by head office : Rent 1,800 Salary 3,200 Stationery & Printing 800
Petty exp. Paid by the branch 600 Depreciation to be
provided on branch
furniture at 10% p.a.
Stock on 31st March,
2011 (at invoice price) 28,000
(8 marks) [IPCC Gr- II] Answer: In the books of Head Office - XYZ Company Kolkata Branch Account (at
invoice) Particulars Amt. (` )
To Balance b/d
Stock 30,000
Debtors 18,000
Cash in hand 800
Furniture 3,000
To Goods sent to branch 1,60,000
To Goods returned by
branch (loading) 400
To Bank (expenses
paid by H.O.)
Rent 1,800
Particulars
To Balance b/d
To Sales account (credit)
To S t o c k r e s e r v e 5,600
(closing)
To Profit transferred to
General Profit &
Loss A/c 24,180
Debtors Account
` Particulars ` 18,000 By Cash account 60,000
LMN is having branch at Mumbai. Goods are invoiced to the branch at 25% 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. From the following particulars, prepare branch account in the books of head office:
Particulars
Stock as on 1st April, 2013 (Invoice Price)
Amount Particulars Amount (`) (`)
Discount allowed to
40,000 debtors 300 Sundry Debtors as on 1st April, 2013
Debtors Account
Amount (`) Particulars Amount (`) 25,000 By Cash A/c 65,000 70,000 By Sales Return 1,250
Raju Industries, Kolkata has a branch in Delhi 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 branch has to remit all cash
received to the Head office Bank Account.
From the following details, relating to calendar year 2014, 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.
Particulars Amount in ` Goods received from Head Office at Invoice Price 6,00,000
Returns to Head Office at Invoice Price 12,000
Stock at Delhi as on 1st Jan., 2014 60,000
Sales during the year - Cash 1,80,000
- Credit 3,80,000
Sundry Debtors at Delhi as on 1st Jan., 2014 72,000
Discount allowed to debtors 8,000
Bad Debts in the year 6,000
Sales returns at Delhi Branch 6,000
Rent, Rates, Taxes at Branch 16,000
Salaries, Wages, Bonus at Branch 62,000
Office Expenses 6,000
Stock at Branch on 31st December, 2014 1,20,000
(12 marks) Answer:
Particulars
To Bal b/d
To GSTB
To Branch debtors
To Branch stock adj. A/c
24,000 By Balance b/d (Stock Reserve) 12,000 1,05,600 By GSTB A/c 1,17,600
1,29,600 1,29,600
Branch P& L A/c Particulars
8,000 By Branch Stock adj. A/c 1,05,600 6,000 By Branch Stock A/c 26,000 84,000
33,600
A/c.) 1,31,600 1,31,600
Particulars
To Bank A/c:
16,000
62,000
6,000
84,000 84,000
Particulars
To Balance b/d To Branch stock
Particulars
To Branch stock
Branch Debtors A/c
Amount Particulars Amount ` `
6,00,000 6,00,000 Note: It is assumed that there is no closing balance of debtors. So all the cash received are
adjusted in debtors A/c.
Space to write important points for revision
Q.1.7 2016 - Nov [6] (b) Practical
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:
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
Sundry Debtors 1,80,000 ? Cash in Hand 25,690 ? Furniture & Fixtures 23,800 21,420 Additional information:
(i) Addition to Building on 01-04-2015` 2,41,600 by H.O. (ii) Rate of depreciation: Furniture & Fixtures @ 10% and
Building @
By Bank A/c
(Remittance to
40,000 H.O.) 19,50,000 22,500 62,500 By Bal. c/d
Debtors
Cash on hand
Furniture & Fittings
To GSTB A/c
Ghee 12,00,000 Oil 5,40,000 To Bank
(Exp. paid by H.O.)
To Net Profit transferred to General P&L A/c
1,80,000 Closing Stock:
25,690 Ghee 90,000
23,800 Oil 19,500 1,09,500
Oil 27,50,000
- GSTB (5,40,000) 22,10,000
To Direct Exp. 6,35,800
To Gross Profit 11,27,700
87,10,500 87,10,500
To Manager’s Salary 2,40,000 By Gross Profit b/d 11,27,700 To Gen. Exp. 1,86,000 By Branch Profit 2,26,930 To
Depreciation transferred
Furniture
@ 10% 8,860
Building
@ 15% 37,620 46,480
Ghee 14,50,000
Oil 5,95,000 20,45,000 22,25,000 22,25,000 Branch Cash A/c
Dr. Cr.
Particulars Amt. (`) Particulars Amt. (`) To Bal. b/d 25,690 By Remittance 19,50,000
To Collection 20,15,000 By Exp. 45,890
By Bal. c/d (Bal. fig.) 44,800
20,40,690 20,40,690
2
Accounting for Dependent Branch: Stock and Debtor Method
Q.2.1 2018 - May [3] (b) Practical
Ayan Ltd. invoices goods to its branch at cost plus 33%. 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.
(including goods invoiced at`48,000 to Branch on 31.03.2018 but not received by Branch before close of the year).
By Balance c/d
Goods in Transit 48,000
Stock at Branch 2,88,000
Q.2.2 RTP Practical ABC Ltd. is a Company in the Retail Trade. Business had been concentrated in the past on the
Shopping Premises in the Uttam Nagar area, but it has now been decided to open a Branch at RG Towers. The
Branch was opened on 1st January, Goods were charged out to the Branch at Selling Price of 10% above Cost. The
Branch sells to its Customers at such Invoice Price.
The following information were extracted from the Head Office records relating to the branch at the end of the year,
i.e. 31st December. All the Amounts shown are at Invoice Price.
Particulars
Goods Sent to Branch (including goods invoiced at ` 1,100 to Branch, but not received by Branch till 31st
December)
Credit Sales
Cash Sales
Goods returned to Branch by Customers
Goods returned to Head Office by Branch
Goods returned to Head Office by Customers
Bad Debts
12,960 HO
9,240 Stock at Branch at 31st 770 1,100 December
Certain Stocks were lost by fire, the value of which was not yet known. Prepare the necessary Ledger Accounts in
the books of the Head Office. Answer: 1.
Particulars
To Goods sent to Branch A/c
Branch Stock Account
` Particulars `
Total
Working Notes:
Loading reversed on Goods sent to Branch (Net) = [(Sent 24,200 – Returns 484 – Returns 440) × ] = 2,116
4. Branch Cash Account
Particulars
To Branch Stock A/c
To Branch Debtors A/c
` Particulars `
9,240 By Cash A/c (Returns to HO) 18,230
9,540 By Branch Expenses 50
By balance c/d 500
18,780 Total 18,780
5. Abnormal Loss Account
Particulars ` Particulars `
Working Notes:
Loading on Stock in Hand and Goods in Transit = (1,100 + 770) × =`170 Space to write important points for
revision
Q.2.3 RTP Practical
ABC Ltd, Delhi started a Branch in Jaipur on 1stApril, to which goods were sent at 20% above Cost. The Branch
makes both Credit and Cash Sales. Branch expenses are met from Branch Cash and balance money remitted to HO.
The Branch does not maintain double entry books of account and necessary accounts relating to Branch are
maintained in H.O. Following further details are given for the year ended on 31st March:
Particulars `
Cost of Goods Sent to Branch 50,000
Goods received by Branch till 31st March at Invoice Price 54,000
Credit Sales for the year 58,000
Debtors as on 31st March 20,800
Bad Debts and Discount written off 200
Cash remitted to HO 43,000
Cash in Hand at Branch on 31st March 2,000
Cash remitted by HO to Branch during the year 3,000
Closing Stock at Branch at Invoice Price 6,000
Expenses incurred at Branch 12,000
Prepare the necessary Ledger Accounts according to Stock and Debtors System, in the books of the Head Office and
determine the Profit or Loss of the Branch for the year ended on 31st March.
1. Branch Stock Account
Particulars
To Goods sent to Branch A/c To Branch Adjustment A/c
` Particulars `
To Branch Stock A/c 58,000 By Branch Bank A/c - Colln from 37,000
Debtors (b/f)
By Branch P&L A/c (Bad Debts) 200
By Balance c/d 20,800
Receipts
To Bank A/c-Receipt from HO To Branch Debtors A/c -
(bal.fig)
To Stock Reserve on Clg Stk (12,000 × )
Total
To Branch Debtors A/c (Bad 200 By Branch Adjustment A/c 35,000 Debts
To Branch Expenses A/c 12,000
To Net Profit (bal.fig.) 22,800
Total 35,000 Total 35,000 Space to write important points for revision
Q.2.4 RTP Practical
ABC Ltd. sends Goods to its Jaipur Branch at Cost plus 25%. The following particulars are available in respect of
the Branch for the yearended 31st March:
Particulars `
Total ` Particulars `
On 31st March, 2000 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, 1999 60 Goods Received from
Head Office 288 Debtors 20 Cash at bank and in hand 8 Carriage Inwards 7
448
Credit Balances 3
Outstanding Expenses 5
Goods Returned to Head Office 360
Sales 80
Head Office 448
Additional Information :
Stock on 31st March, 2000 was valued at ` 62 lacs on 29th March, 2000 the Head Office despatched goods costing `
10 lacs to its branch. Branch did not receive these goods before 1st April, 2000. 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 centralised
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. (16 marks)
Answer:
(i) Journal Entries
in the Books of KANPUR BRANCH (`in lacs.) Particulars 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 2000)
Expenses A/c Dr. 1
To Head Office A/c 1 (Amount charged by head office for centralised services)
(ii) Trading and Profit & Loss Account of the Branch for the year ended 31st March, 2000 Particulars
To Opening Stock
To Goods received from
To Salaries
To Depreciation on Furniture To Rent
To Advertising
To Telephone, Postage &
Stationery
To Sundry Office Expenses To Head Office Expenses To Net profit Transferred to
H.O. A/c
` in Particulars ` in lacs lacs 60 By Sales 360 By Closing stock 62
283
7
72
422 422 25 By Gross Profit b/d 72 2
10
6
3
1
1
24
72 72
Liabilities
Head Office 80
Add: Goods in transit 10
Head Office expenses 1
Net Profit 24
Outstanding expenses
Less: Dep. 2 18
Stock in Hand 62
115 Goods in Transit 10
3 Debtors 20
Cash at Bank and in Hand 8
118 118 (iii) Books of Head Office Journal Entries (` in Lacs) Particulars ` `
Branch Profit & loss Account Dr. 24 To Profit & Loss Account 24
Beta Ltd. 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, 2007:
Head Office Branch ` ` Opening Stock (as on 1.4.2006) 2,25,000 — Purchases 25,50,000 — Goods sent to Branch
9,54,000 — (Cost to H.O. plus 80%)
To Op Stock
To Goods received from H.O. To Gross Profit c/d
` Particulars `
— By Sales 9,50,000
9,54,000 By Closing stock 99,000
95,000 (W.N.-1)
12,000
68,200
95,000 95,000
Trading P&L A/c of the H.O. Particulars ` To Opening Stock 2,25,000 To Purchase 25,50,000 To G.P. c/d
16,60,000
44,35,000
To Office expense . 90,000
To Selling expense. 72,000
To Staff salary 65,000
To Branch Stock
Revenue (WN-1) 44,000
To Net profit 13,89,000
16,60,000
Working Notes:
1. 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 × 180/200] 8,55,000 99,000 2. 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
[(27,81,000 ☐ 9,54,000) × 100/180] 20,75,000 7,00,000 3. Calculation of unrealised profit in branch stock :
` Branch stock 99,000 Profit included 80% of cost Therefore, unrealised profit would be = ` 99,000 × 80/180 `
44,000
16,60,000
Q.3.3 2015 - May [6] (a) Practical
M/s. Sandeep, having Head Office at Delhi has a Branch at Kolkata. 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 Kolkata
wholly engaged in retail trade and the goods are sold at cost to Head Office plus 100%.
Following details are furnished for the year ended 31st March, 2014:
Particulars Head Kolkata Office Branch (`) (`) Opening Stock (As on 01.04.2013) 1,25,000 - Purchases
21,50,000 - Goods sent to Branch (cost to H.O. plus 80%) 7,38,000 - Sales 23,79,600 7,30,000 Office Expenses
50,000 4,500 Selling Expenses 32,000 3,300 Staff Salary 45,000 8,000 You are required to prepare Trading and
Profit & Loss Account of the Head Office and Branch for the Year ended 31st March, 2014.
To Branch stock
(Reserve (W.N.3) 36,000 ☐
To Net Profit 12,22,600 57,200
13,85,600 73,000 13,85,600 73,000 Working Notes:
(1) Calculation of closing stock of head office: (`) Opening Stock of head office 1,25,000 Goods purchased by
head office 21,50,000
22,75,000 Less: Cost of goods sold [31,17,600 (23,79,600 + 7,38,000) × 100/180] (17,32,000)
5,43,000
(2) Calculation of closing stock of branch: ` Goods received from head office [At invoice value] 7,38,000
Less: invoice value of goods sold [7,30,000 × 180/200] (6,57,000) 81,000
(3) Calculation of unrealized profit in branch stock:
A and Co, with its Head Office in Mumbai invoiced goods to its Branch at Pune, at 20% less than the Catalogue
Price, which is Cost plus 50%, with instructions that Cash Sales were to be made at invoice Price and Credit Sales at
Catalogue Price. Discount on Credit Sale at 15% on prompt payment will be allowed.
From the following particulars available from the Branch, prepare the Branch Trading and Profit and Loss Account
of the Branch for the financial year:
Particulars
Credit Sales
C a s h r e a l i s e d f r o m Debtors
` Particulars `
Answer:
Branch Trading and Profit and Loss A/c for the year ended 31st March Particulars
To Opening Stock
To Goods from HO
To Gross Profit c/d
(balancing figure)
Total
To Discount
To Expenses
To Provision for Dis
count on Debtors
(W.N. 3)
To Abnormal Loss
Total
2,500
23,202 Total 23,202 Note: Stock Reserve will be shown in General Profit and Loss Account. (Refer W.N. 4)
Working Notes:
1. Computation of Catalogue Price and Invoice Price
Particulars ` Opening Stock at Invoice Price 12,000 Add: Goods Received from HO (at Invoice Price) 1,32,000
Q.3.5 RTP Practical
ABC and Bros. is a Partnership Firm. The Firm has a Branch at Delhi. As on the year ended 31st December, the
Delhi Branch Manager sent the following Branch Trial Balance for incorporation in the Head Office Books:
Particulars Dr. Cr. 18% Team Loan — 2,50,000 Goods from Head Office (at Invoice Price) 12,00,000 — Opening
Stock (at invoice Price) 4,80,000 — Salaries and Wages 1,50,000 — Branch Expenses 48,000 — Fixed Assets
2,50,000 — Sales — 16,32,000 Head Office Account — 2,46,000
1. Branch Manager is entitled to get 10% Commission on Net profit before Commission.
2. Branch Current Account in the HO books ` 3,80,000.
3. Branch Manager sent`87,500 which was not received at the HO as on 31stDecember. A Consignment valued
at`46,500 despatched from HO did not reach the Branch till the year-end.
4. Depreciation on Branch Fixed Assets was chargeable at 10% p.a.
5. Goods were sent to branch at Cost Plus 20% and Sales were made making 20% Profit on invoice Price.
6. Branch did not maintain any HO Account. In the Trial Balance, H.O. Account balance is just a Balancing Figure.
Prepare – (1) Branch Account in the Head Office, and (2) Branch Profit and Loss Account.
Answer:
☐ Since the question has given a separate Trial Balance for the Branch, it is treated as an Independent Branch.
☐ It is assumed that the Firm follows “Transfer of Profit/Loss Method” to record only the Net Profits in HO Books.
Hence, Branch Assets and Liabilities are not transferred to HO.
A. Branch Trading and Profit and Loss A/c (in the books of Delhi Branch Particulars
To Opening Stock
To Goods from Head Office
(2,50,000 × 18%)
Total
` Particulars `
400
3,600
2,72,000 Total 2,72,000 Note: Manager’s Commission = 10% of [GP 2,72,000 – Other exps in P&L (1,50,000 +
48,000 + 25,000 + 45,000)] = 400
Total ` Particulars `
Balance in Head Office A/c 2,46,000 Cr. Add: Goods-in-Transit 46,500 Cr. Add:Profit transferred to HO 3,600 Cr.
Revised Balance 2,96,100 Dr. Adjusting Dr. Cr. Adjusting Entries Dr. Cr. Entries
Branch A/c Dr. 3,600 P&L A/c Dr. 3,600 To General 3,600 To HO A/c 3,600 P&L A/c (Being Profits trfd
Working Notes:
1. Determination of Profit Margin
(a) From H e ad = 20% on Cost = 1/5th on Cost =1/6th on Invoice
O f f i c e t o Price Branch
(b) From Branch = 20% on Invoice = 1/5th on Invoice = 1/6th on Sales to Outsiders Price Price Price
2. Value of Closing Stock (at Invoice Price, i.e. Cost to Branch) Particulars `
` Particulars `
Note: Since this is only an Extract of P&L A/c, Totals and Balancing Figure are not drawn in the above account.
Space to write important points for revision
Q.3.6 RTP Practical
ABC Co. commenced business on 1st January with Head Office at Delhi and a Branch at Pune . All Goods were
purchased by Head Office and normally packed immediately but on 31st December, Goods Costing `5,000 remained
unpacked. Only Packed Goods were sent to the Branch, which were charged at Selling Price less 10%.
Following information is furnished to you on 31stDecember from the Head Office and Branch Office books:
(`)
Particulars H O Branch Capital Account 40,000
Drawing by Proprietor 10,000
Purchases 4,00,000
Packing Materials bought 6,000
Sales 3,20,000 1,00,000 Despatch of Goods to Branch 1,13,400
Selling Expenses 16,000 800 Clerks Salaries, Wages etc. 20,000 3,000 Sundry Debtors 28,000 4,200 Sundry
Creditors 26,600 5,000 Current Accounts –
– Head Office (Cr. Balance) – 12,000
– Branch Office (Dr. Balance) 19,000 – Bank Balance 1,000 1,000 Goods received from Head Office – 1,08,000
Additional Information:
1. Sales by HO were at a uniform Gross Profit (after charging Packing
To Packing 6,000
Material
- Packed Goods
(bal. fig.) 43,200 16,460
- Unpacked Goods 5,000 –
- Packing Material 1,000 –
Total 4,82,600 1,18,000 Total 4,82,600 1,18,000 To Salaries, 20,000 3,000 By Gross Profit 76,600 10,000 Wages,
etc. b/d
To S e l l i n g 16,000 800
Expenses
To Loss of Stock 770 770
(W.N.4)
To Net Profit - tfrd 39,830 5,430
to General P&L
(balancing
figure)
Total 76,600 10,000 Total 76,600 10,000 B. General Profit and Loss Account
Particulars ` Particulars `
C. Balance Sheet of Chandru and Co. as on 31st December Capital and Liabilities ` Properties and Assets `
Capital Account:
Opening Balance 40,000
Add: Net Profit (from B)42,910
82,910
Less: Drawing (given) (10,000)
Stock in Trade
(a) Packed Goods
- Head Office 43,200
- Branch 16,460 72,910 - Packed Goods
in Transit (given) 5,400
65,060
Sundry Debtors:
31,600 - Head Office 28,000
- Branch 4,200 32,200
Particulars ` (or) %
Cost to HO 100 Add: Profit Margin 25
Sales Price (by HO to Outside Customers) (and also by Branch 125 to Outside Customers
Invoice Price (i.e. for Branch) = 125 – 10% 112.5
Hence, Profit Element for HO on Sales to Outside Customers = = 1/5th on Sales Price.
Profit Element for HO on Goods sent to Branch = = 1/9th on Invoice Price.
Profit to Branch on Sales to Outsiders = 125 – 112.5 = 12.5, i.e. = 10% on Sale Price.
2. Computation of Gross Profit for Head Office
Particulars `
Profit on Sale of Goods to Outside Customers ( `3,20,000 × 1/5th 64,000 Profit on Sales) (W.N.1)
Add: Loading on Goods Sent to Branch (` 1,13,400 × 1/9th on Invoice Price) (W.N.1) 12,600
Closing Stock of Goods (Packed Goods) (as per Trading A/c 16,460 Branch Col.)
Less: Net Value of Damaged Goods includes above
Sale Price ` 2,000 Less 10% Discount = Net Invoice Loss to Branch) 1,800 Less: Reduction in Value Accounted
(1,090) (710)
Value of Stock on which Stock Reserve is to be eliminated 21,150 (at Invoice Price to Branch)
Stock Reserve Required = Value of Stock ×
2,350 =` 21,150 ×
4. Computation of Abnormal Loss
Particulars ` Abnormal Loss on Damaged Goods (given) 1,090 Add: Stock Deficit (Value ` 500 Less 10% Profit
Margin) 450 Total Loss on Stock 1,540 Share of Loss Borne by HO and Branch (each at 50%) (equally 770 shared)
Space to write important points for revision
Q.3.7 RTP Practical
ABC Ltd., Delhi started on 1st January, has 2 branches at Mumbai and Pune. All goods sold at the Branches are
received from the HO invoiced at Cost plus 25%. All expenses relating to branches are paid by the HO. Each Branch
has its own Sales Ledger and sends weekly statements. All cash collections are remitted daily to HO by the
Branches. The following particulars relating to the year-ended 31stDecember are extracted from the weekly
statements sent by the Branches:
Particulars To Goods
Received from HO (at Invoice Price) To Gross Profit c/d (bal. fig.)
Total
Prepare the Branch Account, as they would appear in the Books of the Head Office, showing the Profit or Loss
Account for the period, and the Trading and Profit and Loss Account separately for each Branch.
Answer:
Note: Goods are invoiced to Branch at Cost + 25% = Cost + 1/4th. So, Loading = 1\4th on Cost to HO = 1/5th on
Invoice Price.
A. Branch Accounts in the books of Head Office (in `)
Particulars Mumbai Pune Particulars Mumbai Pune To Goods sent to By Cash Account
Branch A/c 1,50,000 1,25,000
To B r a n c h - Cash Sales 78,600 85,200
Expenses - Coll. from Debtors 82,400 85,200
- Rent and Rates 3,200
- Salaries 16,000
- General Expenses 2,600
- Advertisement 7,500
To Stock Res. 9,000
(20% of Clg. Stk)
To Profit and Loss 82,200
4,500 By Goods sent to 30,000 25,000 18,000 B r a n c h ( S t k
1,500 Res.)
5,200 By balance c/d 34,500 23,600 7,000 - Branch Debtor A/c
- Stock-in-Trade 45,000 35,000 92,800
Account
Total 2,70,500 2,54,000 Total 2,70,500 2,54,000 B. Branch Trading and Profit and Loss Account for year
ended 31st December (in `)
Mumbai Pune Particulars Mumbai Pune 1,50,000 1,25,000 By Credit Sales 1,25,200 1,10,000 Less: Sales
Returns (2,300) (1,200) Net Sales 1,22,900 1,08,800 96,500 1,04,000 By Cash Sales 78,600 85,200 By Closing
Stock 45,000 35,000 (at Invoice Price)
2,46,500 2,29,000 Total 2,46,500 2,29,000
To Salaries 16,000 18,000 By Gross Profit b/d 96,500 1,04,000 T o G e n e r a l 2,600 1,500
Expenses
7,000 By Net Profit b/d 61,200 74,800 To Stock Reserve on 9,000 Closing Stock
(1/5th on Closing Stock)
By Loading on Goods 30,000 25,000 sent by HO
To Net Profit (Note) 82,200 92,800 (1/5th on Invoice Price)
Total 91,200 99,800 Total 91,200 99,800 Note: Net Profit of` 82,200 and` 92,800 reflect the true profits earned at
Branch (from HO viewpoint).
Working Notes:
Particulars To Sales
Total
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.
Answer:
Books of Branch Journal Entries Amount`
(vi) Goods in-transit Account Dr. 50,000 To Head Office Account 50,000 (Being goods sent by Head Office still in-
transit)
(vii) Head Office Account Dr. 10,000
(viii) Purchases Account A/c 16,000 To Head Office Account 16,000 (Being purchases booked)
Space to write important points for revision
4
Adjustment and Reconciliation of Branch and Head Office Accounts
Q.4.1 2004 - Nov [5] (b) Practical 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
Alphs & Co., having head office in Mumbai has a branch in Nagpur. The branch at Nagpur is an independent branch
maintaining separate books of account. On 31.3.2007, 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?
(2 marks)
Answer:
Nagpur branch must include the inventory in its books as goods in transit. The following journal entry must be
passed by the branch:
Goods worth `50,000 sent by head office but the branch has received till the closing date goods worth`40,000. Give
journal entry in the books of H.O. and branch for goods in transit. (2 marks) [IPCC Gr- II]
Answer:
Journal entry in the books of Head Office No entry
Journal entry in the books of Branch
Particulars L.F. Amt. (`) Amt. (`)
Global Limited has a branch which closes its books of account every year on 31st March. This is an independent
branch which maintains comprehensive books of account for recording their transactions. You are required to show
journal entries in the books of branch on 31st March, 2011 to rectify or adjust the following :
(i) Head Office allocates ` 1,35,000 to the branch as head office expenses, which have not yet been recorded by
branch.
(ii) Depreciation of branch fixed assets, whose accounts are kept by head office in its books, not yet recorded in the
branch books, ` 1,15,000.
(iii) Branch paid ` 1,40,000 as salary to an official from head office on visit to branch and debited the amount to its
Salaries Account.
(iv) Head Office collected`1,30,000 directly from a branch customer on behalf of the branch, but no intimation was
received earlier by the branch.
Now the branch learns about it.
(v) It is learnt that a remittance of` 1,50,000 sent by the branch has not been received by head office till date. (5
marks) [IPCC Gr- II] Answer:
In the books of Branch
Journal Entries
S. Particulars Dr. (`) Cr. (`)
No.
To Global Limited (H.O.) A/c 1,35,000 (Being expenses allocated to branch by head
office)
To Global Limited (H.O.) A/c 1,15,000 (Being depreciation on fixed assets of branch,
whose account are maintained by head office)
(iii) Global Limited (H.O.) A/c Dr. 1,40,000
(v) No. entry shall be passed in the books of Branch but will be shown in the books of Head Office as cash-in-
transit.
Space to write important points for revision
Q.4.5 2012 - Nov [1] {C} (d) Practical Give Journal Entries in the books of Head Office to rectify or adjust the
following:
(i) Goods sent to Branch ` 12,000 stolen during transit. Branch manager refused to accept any liability.
(ii) Branch paid` 15,000 as salary to the officer of Head Office on his visit to the branch.
(iii) On 28th March, 2012, the H.O. dispatched goods to the Branch invoiced at ` 25,000 which was not received by
Branch till 31st March, 2012.
(iv) A remittance of ` 10,000 sent by the branch on 30th March, 2012, received by the Head Office on 1st April,
2012.
(v) Head Office made payment of ` 25,000 for purchase of goods by Branch and wrongly debited its own purchase
account. (5 marks) [IPCC Gr- II]
Particulars L.F. Dr. Cr. Amount Amount ` ` (i) Loss of goods due to theft during transit Dr. 12,000
To Branch account 15,000 (Being salary paid by the branch for H.O.
employee)
* Assumption: It is assumed that refusal of branch manager (to accept liability of stolen goods) is accepted by the
Head Office. Alternatively, Branch account will be credited on the basis of assumption that refusal of branch
manager is not accepted by the Head Office.
Note: In entry (iii) the goods in transit entry will be passed in the Books of the Branch.
(i) Income of` 2,800 allocated to the Branch by Head Office but not recorded in the Branch books.
(ii) Provision for doubtful debts, whose accounts are kept by the Head Office, not provided earlier for ` 1,000.
(iii) Branch paid ` 3,000 as salary to a Head Office Manager, but the amount paid has been debited by the Branch to
Salaries Account. (iv) Branch incurred travelling expenses of` 5,000 on behalf of other Branches, but not recorded in
the books of Branch.
(v) A remittance of`1,50,000 sent by the Branch has not received by Head Office on the date of reconciliation of
Accounts. (vi) Head Office allocates ` 75,000 to the Branch as Head Office expenses, which has not yet been
recorded by the Branch. (vii) Head Office collected` 30,000 directly from a Branch Customer. The intimation of the
fact has been received by the Branch only now.
(viii) 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. (8 marks) [IPCC Gr- II] Answer:
Journal Entries
in the books of an Independent Branch
Particulars L.F. ` ` (i) Head office Account Dr. 2,800 To Income Account 2,800 (Being allocated income by Head
office
recorded in branch account)
(ii) Provision for doubtful debt A/c Dr. 1,000 To Head office A/c 1,000 (Being provision for doubtful debt provided)
(iii) Head office A/c Dr. 3,000 To Salaries A/c 3,000 (Being rectification of salary paid on behalf
of Head Office)
(iv) Head office A/c Dr. 5,000 To Cash A/c 5,000 (Being the expenses on account of branch
recorded in books)
(v) No entry in the branch books required
(vi) Expenses A/c Dr. 75,000 To Head Office A/c 75,000 (Being the allocated expenditure by Head
Office recorded in branch books)
(vii) Head Office Account Dr. 30,000 To Debtors Account 30,000
To Head Office A/c 10,000 (Being goods dispatched by head office yet
not received)
(ii) Head Office Expenses allocated to branch were ` 22,500, but these expenditure were not recorded by the branch.
(iii) HO collected`50,000 directly from the customer on branch’s behalf. (iv) Branch has sent remittance of `
1,20,000 but the same has not yet
4 Expenditure in local
currency
5 Sales Pattern
6 E f f e c t o f Cash Flows
7 Prices of Products
8 Local Market
While the reporting enterprise may control the foreign operation, the activities of the foreign operation are carried
out with a significant degree of autonomy from those of the reporting enterprise.
Transactions with the reporting enterprise are not a high proportion of the foreign operation’s activities.
The activities of the foreign operation are financed mainly from its own operations or local borrowings rather than
from reporting enterprise.
Costs of labour, material and other components of the foreign operations products or services are primarily paid or
settled in the local currency rather than in the reporting currency.
The foreign operation’s sales are mainly in currencies other than the reporting currency.
Cash Flows of the reporting enterprise are insulated from day to day activities of the foreign operation rather than
being directly affected by the activities of the foreign operation.
Sales prices for the foreign operation’s products are not primarily responsive on a short-term basis to changes in
exchange rates but are determined more by local competition or Local Government Regulations.
There is an active local sales market for the foreign operations products, although there might be significant amounts
of exports.
DM Ltd., Delhi has a branch in London. London branch is an integral foreign operation of DM Ltd. At the end of
the year 31st March, 2009, the branch furnishes the following trial balance in U.K. Pound : Particulars £ £
Particulars
To Balance B/d
To Goods sent to branch London Branch A/c
Dr Cr.
Amount Particulars Amount ` ` 20,10,000 By Bank A/c 52,16,000 49,26,000 By Balance C/d 17,20,000 69,36,000
69,36,000 The following further information are given :
(a) Fixed assets are to be depreciated @ 10% p.a. on straight line basis. (b) On 31st March, 2008 :
Expenses outstanding — £ 400
Prepaid expenses — £ 200
Closing stock — £ 8,000
(c) Rate of Exchange :
1st April, 2005 — ` 70 to £ 1
1st April, 2008 — ` 76 to £ 1
31st March, 2009 — ` 77 to £ 1
Average — ` 75 to £ 1
You are required to prepare :
(1) Trial balance, incorporating adjustments of outstanding and prepaid expenses, converting U.K. pound into Indian
rupees.
(2) Trading and profit and loss A/c for the year ended 31st March, 2009 and the Balance Sheet as on that date of
London branch as would appear in the books of Delhi head office of DM Ltd.
(16 marks) [IPCC Gr- II]
Answer:
(i) Trial Balance of London Branch as on 31st March, 2009 Particulars U.K. Rate Dr.(`) Cr.(`) Pound per U.K.
Pound
Fixed assets 24,000 70 16,80,000
Stock (as on 1st April, 2008) 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 2,46,400 Creditors 3,200 77 30,800 Outstanding
expenses 400 77
Prepaid expenses 200 77
Cash at bank 1,200 77 15,400 Head office account – 92,400 17,20,000 Difference in foreign exchange
translation 12,400
Particulars Amount (`) Particulars Amount (`) To Opening stock 8,51,200 By Sales 72,00,000
To Purchases 9,00,000 By Closing stock 6,16,000
To Goods from head office 49,26,000
To Gross profit 11,38,800
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 foreign To Net Profit 6,08,200 exchange difference 12,400
11,51,200 11,51,200
(iii) Balance Sheet as on 31st March, 2008
Liabilities ` Assets ` ` Head office Fixed Assets 16,80,000 Less: Depreciation
Balance
Add: Net profit
17,20,000 1,68,000 15,12,000
6,08,200 23,28,200 Debtors 3,69,600
Outstanding expenses 30,800 Prepaid expenses 15,400
Creditors 2,46,400 Closing stock 6,16,000
Cash at bank 92,400
26,05,400 26,05,400
Space to write important points for revision
On 31st March, 2010, the following Ledger balances have been extracted from the books of Washington branch
office :
Ledger A/c $
Building 180
Stock as on 1.4.2009 26
Cash and Bank Balances 57
Purchases 96
Sales 110
Commission receipts 28
Debtors 46
Creditors 65
You are required to convert above Ledger balances into Indian Rupees. Use the following rates of exchange :
Opening Rate $ = 46
Closing Rate $ = 50
Average Rate $ = 48
For Fixed Assets $ = 42 (2 marks) [IPCC Gr- II]
Answer:
Conversion of ledger balances (in Dollars) into Rupees Particulars $ Rate per $ Amount in `
An Indian Company Moon Star Limited has a branch at Verginia (USA). The Branch is a non-integral foreign
operation of the Indian Company. The trial balance of the Branch as at 31st March, 2012 is as follows:
US $Particulars
Dr. Cr.
Answer:
In the books of Moon Star Ltd. - an Indian Company Trial Balance (in Rupees) of Verginia (USA) Branch
US $ US $sion ` `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
D e p r e c i a t i o n o n 320 50 16,000
furniture and fixtures
Stock (1st April, 2011) 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 18,000
Salaries (3,200 + 400) 3,600 45 1,62,000
Outstanding salaries 400 45
Rent, rates and taxes 800 50 36,000 20,000 Insurance 400 45 18,000
Trade expenses 400 45 18,000
Head Office A/c 45,600 45
Trade debtors 9,600 4,80,000 20,50,000 Trade Creditors 6,800 50
Cash at bank 2,000 50 1,00,000 3,40,000 Cash in hand 400 50 20,000
Exchange gain (bal. fig.) 50 4,66,800 2,19,200 2,19,200 1,03,64,800 1,03,64,800 (b) Trading and Profit and Loss
Account of Verginia Branch for the year ended 31st March, 2012
Particulars ` Particulars ` To Opening stock 10,52,800 By Sales 74,88,000 To Purchases 43,20,000 By Closing
stock 10,75,000 To Goods from Head 15,80,000 (21,500 US $ x 50) Office 18,000
To Carriage inward 15,92,200
To Gross profit c/d
85,63,000 85,63,000 To Salaries 1,62,000 By Gross profit b/d 15,92,200 To Rent, rates and taxes 36,000
To Insurance 18,000
To Trade expenses 18,000
To Depreciation of office
equipment 2,40,000
To Depreciation on furni
ture and fixtures 16,000
To Net Profit c/d 11,02,200
15,92,200 15,92,200
ABCD Ltd., Delhi has a branch in New York, USA, which is an integral foreign operation of the company. At the
end of 31st March, 2013, the following ledger balances have been extracted from the books of the Delhi office and
the New York Branch:
Particulars
Share Capital
Reserves and Surplus
Land
Building (cost)
Buildings Depreciation Reserve Plant & Machinery (cost)
Plant & Machinery Depreciation Reserve 500 20 Trade receivables/payables 500 270 60 20 Stock (01-04-2012) 250
25 Branch Stock Reserve 65
Delhi New York (` thousands) ($ thousands) Debit Credit Debit Credit
1,250
940
475
1,000
200
2,000 100 Cash & Bank Balances 125 4 Purchases/Sales 275 600 25 125 Goods sent to Branch 1,500 30 Managing
Director's salary 50
Wages & Salaries 100 18 Rent 6
Office Expenses 25 12 Commission receipts 275 100 Branch/H.O. Current A/c 800 15
Total 5,600 5,600 280 280 The following information is also available:
(1) Stock as at 31-03-2013
Delhi ` 2,00,000
New York - $ 10 (all stock received from Delhi)
(2) Head Office always sent goods to the Branch at cost plus 25%. (3) Provision is to be made for doubtful debts at
5%.
(4) Depreciation is to be provided on Buildings at 10% and on Plant and
Machinery at 20% on written down values.
You are required:
(a) To convert the Branch Trial Balance into rupees, using the following
rates of exchange:
Opening rate 1$ =` 50
Closing rate 1$ =` 55
Average rate 1$ =` 52
For fixed assets 1$ =` 45
(b) To prepare the Trading and Profit & Loss Account for the year ended
31st March, 2013, showing to the extent possible, Head Office results
and Branch results separately.
(16 marks) [IPCC Gr- II]
Answer:
(a) ABCD Ltd.
New York Branch Trial Balance
(As on 31st March 2013)
($ ‘000) (` ‘000)
4 ` 55 220
25 125 ` 52 1,300 6,500 30 Actual 1,500
18 ` 52 936
6 ` 52 312
12 ` 52 624
100 ` 52 5,200 15 Actual 800 13,942 14,500 558
from Head
Office
To Wages & Salaries To Gross profit c/d
doubtful debts @ 5%
To Depreciation (W.N.1)
To Balance c/d
800
Depreciation @ 10% (A) 80
Plant & Machinery Cost 2,000 4,500 Less: Dep. Reserve (500) (900)
1,500 3,600
Depreciation @ 20% (B) 300 720
Total Depreciation (A + B) 380 720
(2) Calculation of Additional Branch Stock Reserve (`in ‘000) Particulars (`) Closing stock of Branch 0.55
Reserve on closing stock (0.55 × 1/5) 0.11 Less: Branch Stock Reserve (as on 1.4.2012) (65) Reversal of Stock
Reserve (64.89) Space to write important points for revision
– 312.00 312.00 By Gross profit b/d 1,675 1,514.55 3,189.55
25 624.00 649.00 By Commission 275 5,200.00 5,475.00
receipts
25 165.00 190.00
6,478.44 6,478.44
Q.5.6 2016 - May [6] (b) Practical
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 M/s ABC & Co.
Bangalore branch furnishes you with its trial balance as on 31st March, 2015 and the additional information given
thereafter:
Dr. Cr. (Rupees in thousands) Stock on 1st April, 2014 300 — Purchases and Sales 800 1,200 Sundry Debtors &
Creditors 400 300 Bills of Exchange 120 240 Wages & Salaries 560 – Rent, Rates & Taxes 360 – Sundry Charges
160 – Computers 240 – Bank Balance 420 – New York Office A/c – 1,620
3,360 3,360
Additional Information:
(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, 2015.
(c) The rates of exchange may be taken as follows:
– On 01.04.2014 @ ` 55 per US $
– On 31.03.2015 @ ` 60 pe 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, 2015 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 31.3.2015 in New York books and
there were no items pending reconciliation. (8 marks) [IPCC Gr- II] Answer:
M/s ABC & Co.
Bangalore Branch Trial Balance in (US $) as on 31st March, 2015
Conversion rate Dr. US $ Cr. US $ per US $ (`)
13,778.68 13,778.68
Balance Sheet of Bangalore Branch as on 31st March, 2015
Liabilities US $ New York Office A/c 29,845.35 Less: Net Loss (13,778.68) Sundry creditors
Bills payable
25,066.67 25,066.67
Space to write important points for revision
Q.5.7 2017 - Nov [6] (a) Practical
M & S Co. of Lucknow has a branch in Canberra, Australia. At the end of 31stMarch 2017, the following ledger
balances have been extracted from the books of the Lucknow office and the Canberra.
(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
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 2017 showing to the extent possible
H.O. results and Branch results separately. (12 marks) [IPCC Gr- II]
Answer:
Conversion of Canberra Branch Trial Balance in Rupees (` in 000s)
Particulars Dr.$ Cr.$ 1A$ =` Dr. Cr. Plant & Machinery (Cost) 200 – 46 9,200 – Plant & Machinery Depreciation
Reserve – 130 46 – 5,980 Debtors / Creditors 60 30 53 3,180 1,590 Stock (1st April) 20 – 50 1,000 – Cash/ Bank
Balance 10 – 53 530 – Purchases / Sales 20 123 51 1,020 6,273 Goods received from H.O 5 – – 100 – Wages &
Salaries 45 – 51 2,295 – Rent 12 – 51 612 – Office Expenses 18 – 51 918 – Commission Receipts – 100 51 – 5,100
HO Current A/c – 7 – – 120 Exchange loss (bal. fig.) – – – 208 –
Trading and Profit and Loss Account for the year ended 31st March, 2017
Particulars H.O. Branch Total Particulars H.O. Branch Total
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 Branch 100 – 100.000
To Goods received
from Head office – 100.000 100.000 By Closing Stock 150 165.625 315.625
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 b/d 355 2,023.625 2,378.625
To Office expenses 25 918.000 943.000 By Commission receipts 256 5,100.000 5,356.000
To Provision for
doubtful debts @5% 14 159.000 173.000
To Depreciation (W. N.) 460 644.000 1,104.000
To Balance c/d 112 4,790.625 4,902.625
611 7,123.625 7,734.625 611 7,123.625 7,734.625
To Managing Partner’s 30.000 By Balance b/d 4,902.625 Salary
To Exchange Loss 208.000 By Branch stock reserve 4.000
To Balance c/d 4,668.625
4,906.625 4,906.625
Working Note:
Calculation of Depreciation H. O .` Branch ` ‘000 ‘000
Note:
1. In the above solution, it has been assumed that the Australia branch is an integral foreign operation of M & S Co.
Alternative solution considering branch as non-integral foreign operation is also possible.
2. As the closing stock of Branch does not consist any stock transferred from M & S Co., there is no need to create
closing stock reserve. But the opening branch stock reserve has to be reversed in the P&L A/c. Space to write
important points for revision
Q.5.8 2019 - May [3] (b) Practical
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 31stMarch, 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 Office a/c — 3,040 Total 6,520 6,520
Additional information:
(a) Computers were acquired from a remittance of Singapore dollar 12,000 received from Singapore Head Office
and paid to the suppliers. 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) (8 marks)
Revenue Statement
for the year ended 31st March, 2019
25,192.16 25,192.16
Balance Sheet of Delhi Branch
as on 31st March, 2019
Liabilities SG $ Assets SG $ Singapore A/c 59897.43 Computers 12,000 Less: Net Loss (13,466.66) 46,430.76
Less: Depreciation (4,800) 7,200.00 Sundry Creditors
Bills Payables
11,538.46 Closing Stock 30,000.00
ABC Ltd. is a Company with an Authorized Share Capital of ` 10,00,000 in Shares of`10 each of which 35,000
Shares have been issued and fully paid. On 1st April 2017, it opened a Branch in a Foreign Country with a
Fluctuating Currency Yen-having purchased (in the earlier year) Freehold Premises there for Yen 1,20,000 which
were paid for by a Rupee Draft for ` 58,000. Fixtures and Fittings, costing Yen 60,000 were paid for on 1st April
2017, out of a Rupee Remittance of` 50,000 from the Head Office on that date.
All Goods were purchased by Head Office and those for Sale by the Branch were involved to it at Cost Plus 25%.
The Cost of Forwarding and Import Duty were paid by the Branch on arrival of the Goods and averaged 5% of the
Invoice Price. After making all the necessary Closing Entries, with the exception of the Branch Profit and the
appropriation of the balance on P&L Account, the following were the Trial Balance as on 31st March 2018.
Brand (Yen) H.O. (`) DEBITS: Freehold Buildings at Cost 1,20,000 1,80,000
Fixtures and Fittings at Cost 60,000 84,000
Stock in Trade 84,000 1,48,640
Debtors 57,000 22,280
Short Term Loans – 50,000
Balance at Bank 16,400 29,380
Cash in Hand 2,800 1,240
Branch Office Current Account – 1,15,060
Total 3,40,200 6,30,600
CREDITS: Share Capital – 3,50,000
-Fixtures (5%) 3,000 38,000 Head Office Current Account 2,35,800 – Profit and Loss Account as on 1stApril, –
27,800 2017
Rate of Exchange of Yen to the Rupee was as under -(a) 1st April, 2017 2.00, (b) 31st March, 2018 - 2.50, and (c)
Average for the year - 2.30. Stock in Trade at HO was valued at Cost at the Branch at the Invoice Price Plus
Forwarding Charges and Import Duty. Entries in the Current Account between the Head Office and the Branch had
all been agreed except the following: (a) Goods despatched and invoiced to the Branch on 29thMarch, 2018 ` 4,000,
and Remittance by the Branch to the Head Office on 30th March, 2018 - Bcs. 5,000. Both were received in April
2018, the remittance realizing ` 2,000. In view of the need to maintain Cash Reserves for redemption of the 12%
Debentures, the Directors decided to pay no Dividend.
Prepare: (1) Set out the Branch Trial Balance after Conversion, and (2) Prepare the Company’s Balance Sheet as on
31st March, 2018.
Answer:
1. Branch Trial Balance as on 31st March, 2018
` Credit Balances Rate Yen ` 58,000 Creditors 2.50 46,000 18,400
Debit Balances Rate Yen Freehold Bldgs. Actual 1,20,000 at Cost
F i x t u r e s a n d 2 60,000 Fittings at Cost
Stock in Trade 2.50 84,000
Note: Provision for Depreciation of Building =` 58,000 =` 1,740 HO Current A/c Revised (as per Branch Books) =
2,35,800 (given) + Goods in Transit 10,000 = Yen 2,45,800
Branch Current A/c Revised (as per HO Books) = 1,15,060 (given) (-) Cash in Transit 2,000 = ` 1,13,060
2. Non-Current Liabilities:
Long Term Borrowings - 12% Debentures 80,000 (redeemable on 30.09.2015)
3. Current Liabilities:
(a) Trade Payables - Creditors 47,600
2. Current Assets:
(a) Inventories (HO 1,48,640 + Branch 1,79,040 33,600 + In Transit 4,000 - Stock
Reserve 7,200)
(b) Trade Receivables (HO 22,280 + 45,080
Branch 22,800)
(c) Cash and Cash Equivalents 4 40,300
(d) Short Term Loans and Advances 50,000
Total 3,52,000
Depreciation Net Block/WDV HO Branch Total Opening Balance (4) (5) (6) = 4+5 (7) 26,000 1,740 27,740
Closing Balance (8) = 3-6 2,10,260
38,000 1,500 39,500 74,500
67,240 2,84,760 Note: 4 Cash and Cash Equivalents
Particulars This Previous
Year Year Balances with Banks (HO 29,380 + Branch 6,560) 35,940
Show Adjustment Journal Entry alongwith working notes in the books of head office at the end of April, 2017 for
incorporation of inter branch transactions assuming that only head office maintains different branch account in its
books:
(A) Delhi Branch:
Kolkata.
(ii) Sent goods to Chennai ` 1,00,000, Kolkata` 80,000 (iii) Bill receivable received ` 80,000 from Chennai
(iv) Acceptances sent to Mumbai ` 1,00,000, Kolkata` 40,000
respectively.
(D) Kolkata Branch (Apart from the above)
(i) Sent goods to Chennai ` 1,40,000
(ii) Paid cash to Chennai ` 60,000
(iii) Acceptances sent to Chennai ` 60,000 (8 marks) [IPCC Gr- II] Answer:
Journal Entries in the books of H.O.
Date Particulars Dr. (`) Cr.(`) 30th April, 2017 Mumbai Branch A/c 12,000
Chennai Branch A/c 2,80,000
To Delhi Branch A/c 60,000 To Kolkata Branch A/c 2,32,000 (Being Adjustment entry passed by H.O. in respect of
inter-branch
B. Mumbai Branch:
5. Received Goods 80,000 (Cr.) 1,40,000 (Dr.) - 60,000 (Cr.)
6. Sent Cash 60,000 (Dr.) 88,000 (Cr.) - 28,000 (Dr.) C. Chennai Branch:
7. Received Goods 1,20,000 (Dr.) 1,20,000 (Cr.)
D. Kolkata Branch:
9. Sent Goods 1,40,000 (Dr.) 1,40,000 (Cr.)
10. Sent Cash 60,000 (Dr.) 60,000 (Cr.)
11. Sent Acceptance 60,000 (Dr.) 60,000 (Cr.) 60,000 (Cr.) 12,000 (Dr.) 2,80,000 (Dr.) 2,32,000 (Cr.)
ABC Ltd. has four Branches in Mumbai, Kolkata and Mohali at each of which it manufactures Plastic Bottles. Each
of the Branches has been controlled by a Manager with full responsibility for all aspects of the Branch affairs
including the purchase locally of Fixed Assets.
During 2017, there have been problem in that, although in total the Company has had cash funds, because the
Branches operate separate Bank Accounts, there have been simultaneous debit and credit Bank Balances.
The Directors of Partha Ltd. have therefore decided to centralize the purchase of Fixed Assets, the raising of Loans
and the payments of Tax and Dividends.
Sources of Funds:
Share Capital:
- Equity Shares of ` 50 each fully paid up 50,00,000
- 5% Preference Shares of`10 each fully paid up 5,00,000 55,00,000 Reserves and Surplus 37,12,500
Other Information:
1. The Proposed Capital Expenditure for 2018 is: (a) Mumbai ` 10,00,000, (b) Kolkata - ` 62,500, (c) Pune `
1,25,000, and (d) Mohali` 2,50,000. There was no proposed sale of Fixed Assets.
2. Branch Working Capital at 31.12.2017 was: (Amount in `)
Branches
Mumbai
Kolkata
Pune
Mohali
Branches Mumbai
Kolkata
Pune
Mohali
(Amount in `) Materials WIP Fin. Good Debtors Creditors 7,12,500 72,500 13,12,500 4,00,000 1,60,000
2,73,750 26,350 4,62,500 2,25,000 62,500 1,00,000 18,750 71,250 78,750 17,500 38,750 7,500 28,750 46,250
10,000
4. ABC Ltd. proposes to raise ` 6,25,000 by the issue of 12% Debentures on 01.01.2018. Interest on Overdraft is
estimated to be ` 12,500.
5. The Opening Balances at Bank on 01.01.2018 were - (a) Mumbai ` 60,000, (b) Kolkata` 25,000 (c) Pune ` 30,000,
and (d) Mohali ` 10,000.
Branches Mumbai
Kolkata
Pune
Mohali
7. The Company pays the Preference Dividend for the year on 30th December every year. It is proposed to pay a
Dividend for 2018 of 5% on the Equity Shares.
8. The Corporate Tax charge for 2018 has been estimated at`3,12,500. Prepare: (1) Prepare a statement to show
how much cash each Branch will be able to transfer to Head Office and still maintain a Bank Balance of ` 30,000 at
each Branch as at 31.12.2018, and (2) Prepare a Forecast Balance Sheet for ABC Ltd. as at 31.12.2018.
Answer:
1. Statement of Estimated Remittance to Head Office (Amount in `) Particulars Mumbai Kolkata Pune
Mohali Total Bank Balance as on 60,000 25,000 30,000 10,000 1,25,000 01.01.2018
Adjust: (Increase)/
Decrease in–
Adjust: (Increase)/
Decrease in–
- Creditors 37,500 12,500 7,500 5,000 62,500 B a l a n c e a s o n 4,75,000 5,46,150 1,47,500 43,750 12,12,400
31.12.2018
Less: Bank Balance to (30,000) (30,000) (30,000) (30,000) (1,20,000) be retained
Balance to be transferred 4,45,000 5,16,150 1,17,500 13,750 10,92,400 to HO
Interest on Debentures (75,000) Corporate Tax (3,12,500) Preference Dividend (paid) (25,000)
Total 1,09,32,600
II. ASSETS
(1) Non-Current Assets
- Fixed Assets Cost 89,37,500
- Less: Depreciation 20,00,000 69,37,500
(2) Current Assets:
(a) Inventories (Raw Material 11,25,000+
WIP 1,25,100 + Finished Goods
18,75,000) 31,25,100 (b) Trade Receivables - Debtors 7,50,000 (c) Cash and Cash Equivalents
- Balance at
Branches 1,20,000
Total 1,09,32,600
Note: This is only a Forecast Balance Sheet, therefore all disclosure requirements of Schedule III are not given.
Alternatively. The forecast Balance Sheet can be prepared in T form as under:
Equity and Liabilities Shareholders’ Funds:
Share Capital
Total
` Assets ` Fixed Assets: Cost 89,37,500
Less: Depreciation (20,00,000) 69,37,500
50,00,000
5,00,000 Current Assets:
3,12,500
2,50,000
1,09,32,600
ABC Ltd. operates a number of Retail Outlets to which goods are invoiced at Wholesale Price, which is Cost Plus
25%. These 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 31st March
Particulars ` Opening Stock at the Outlet 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
Closing Stock at the Outlet 36,000
Prepare the following accounts in the books of ABC Ltd. for the year-ended 31st March
1.
Outlet Stock Account
` Particulars ` 30,000 By Sales (See W.N.) 3,60,000
Particulars To balance b/d To Goods Sent to Outlet 3,24,000 By Goods Lost by fire (bal. fig.) 18,000 To Gross
Profit 60,000 By balance c/d 36,000
Chapter Comprises: ☹Introduction ☹Types of Single Entry System ☹Ascertainment of Profit by Capital
Comparison ☹Techniques of
Obtaining Complete Accounting Information
i.e.....
1. Budgeted
2. Actual
3. Variance (1-2)
............ Day 1 16
Instant
Revision (in hours)
4 3.12
Periodic Revision (in hours)
Answer:
Computation of Profit for the year ended 31.3.2007.
On 1st April, 2008, Chhotu started business with an initial Capital of ` 70,000. On 1st October, 2008, he introduced
additional capital of ` 40,000. On 7th of every month, he withdraw ` 5,000 for household expenses. On 31stMarch,
2009 his Assets and Liabilities were`2,00,000 and` 70,000 respectively.
Ascertain the Profit earned by Chhotu during the year ended 31st March, 2009. (2 marks) Answer:
Calculation of Profit Earned
Particulars Amount(`)
Profit for the year ended as on 31.3.2009 80,000 Space to write important points for revision
Q.1.3 2013 - Nov [3] (a) Practical
Practical
2013 are as follows:
31-3-2012 31-3-2013 ` `
Assets:
Furniture 50,000
Building 1,00,000
Stock 1,00,000 2,50,000 Sundry Debtors 60,000 1,10,000 Cash in hand 11,200 13,200 Cash at Bank 60,000 75,000
Liabilities:
Loans 90,000 70,000 Sundry Creditors 50,000 80,000
Mr. ‘A’ decided to provide depreciation on building by 2.5% and furniture by 10% for the period ended on 31-3-
2013. Mr. ‘A’ purchased jewellery for `24,000 for his daughter in December 2012. He sold his car on 30-3-2013 and
the amount of ` 40,000 is retained in the business.
You are required to :
(i) Prepare statement of affairs as on 31-3-2012 & 31-3-2013. (ii) Calculate the profit received by ‘A’ during the
year ended 31-3-2013. (8 marks) Answer: 1.
Statement of Affairs (`)
Capital & Liabilities 31.3.12 31.3.13 Assets 31.3.12 31.3.13
Total Current
Assets:
Shri Rashid furnishes you with the following information relating to his business:
(a) Assets and liabilities as on
1.1.1997 31.12.1997
` ` Furniture (W.D.V.) 6,000 6,350
Stock at cost 8,000 7,000
Sundry debtors 16,000 ? Sundry creditors 11,000 15,000
Prepaid expenses 600 700
Unpaid expenses 2,000 1,800
Cash in hand and at bank 1,200 625
(b) Receipts and payments during 1997:
Collections from debtors, after allowing discount of`1,500 amounted to ` 58,500.
Collections on discounting of bills of exchange, after deduction of discount of ` 125 by the bank, totaled to ` 6,125.
Creditors of ` 40,000 were paid ` 39,200 in full settlement of their dues.
Payment for freight inwards ` 3,000. Amounts withdrawn for personal use ` 7,000. Payment for office furniture `
1,000. Investment carrying annual interest of 4% were purchased at`96 on 1st July, 1997 and payment made therefor.
Expenses including salaries paid ` 14,500. Miscellaneous receipts ` 500. (c) Bills of exchange drawn on and
accepted by customers during the year amounted to ` 10,000. Of these, bills of exchange of` 2,000 were endorsed in
favour of creditors. An endorsed bill of exchange of ` 400 was dishonoured.
(d) Goods costing ` 900 were used as advertising materials. (e) Goods are invariably sold to show a gross profit of
33 and 1/3% on sales.
(f) Difference in cash book, if any, is to be treated as further drawing or introduction by Shri Rashid.
(g) Provide at 2.5% for doubtful debts on closing debtors. Rashid asks you to prepare Trading and Profit and Loss
A/c for the year ended 31st December, 1997 and the Balance Sheet as on that date. (20 marks)
Answer:
Working Notes :
(1) Capital on Ist January, 1997
` Assets `
Purchases
Less: For advertising
Freight inwards
8,000
45,600
900 44,700
3,000
55,700
7,000
48,700
24,350
73,050
(4) Debtors on 31.12.1997
Sundry Debtors Account Particulars `
Balance b/d
Sundry debtors A/c
Bills receivable A/c
Miscellaneous income A/c
` Particulars `
66,325 66,325 (6) Amount of expenses debited to Profit and Loss A/c Expenses Account
Particulars ` Particulars ` Prepaid expenses A/c By Outstanding expenses 2,000 (on 1.1.1997) 600 A/c (on
1.1.1997)
10,000 10,000 Note : It has been assumed that investment purchased for`96 has the face value ` 100.
Trading and Profit and Loss Account of Shri Rashid for the year ended 31st December, 1997
Particulars
To Opening stock
To Purchases
Less: For advertising
To Freight inwards
To Gross profit c/d
900 44,700
3,000
24,350
Liabilities
Capital as on Ist January, 1997 18,800
Less: Drawings 7,904
10,896
Add: Net Profit 7,791
Sundry creditors Outstanding expenses
Shri Kisan, a farmer, maintains a cash book, through which he records all receipts and payments and a diary in
which he records other relevant information. On 31st March, 1999 he had cash in hand ` 1,000 and balance of` 500
with local Grameen Bank. He also owed ` 600 to Beej Bhandar for seeds purchased by that date.
During the year ended 31st March, 2000, he realised:
Particulars ` `
Receipts:
Sale proceeds Crops 59,100
Cattle and cattle products 12,500
Wood and grass 3,000
Cowdung 5,000
Collection from Babu 12,000
Grant from Zila Parishad 10,000 1,01,600 Payments 1,03,100 Farm expenses - 65,000
Wages 3,000
Seeds, feeds and fertilizers 5,000
Power Land revenue 2,000
Payment to Beej Bhandar 600
Tools purchased 2,500
Household expenses 10,000 88,100 Closing balances (on 31st March, 2000) :
Cash in hand 2,500
Grameen Bank balance (Balancing figure) 12,500 15,000
1,03,100
Income summary for the year ended on 31st March, 2000
` ` Revenues:
Sales-Crops (Cash sales: 59,100 + Credit sales: 20,000) 79,100
Power 5,000 Land revenue 2,000 Efforts of self and family members 60,000 1,77,000
Loss 7,400
60,900
Cash 10,000
Crop 30,000
Loss as per
Income 7,400
summary 47,400 13,500
Grant (for tubewell) 10,000
Creditors (Beej Bhandar) 2,000
25,500 25,500
` Particulars `
A trader keeps his books of account under single entry system. On 31st March, 2000 his statement of affairs stood as
follows:
Liabilities
Trade Creditors
Bills Payable
Outstanding Expenses Capital Account
The following was the summary of Cash-book for the year ended 31st March, 2001: Receipts
Cash in Hand and at
` Assets `
5,80,000 Furniture, Fixtures and Fittings 1,00,000
1,25,000 Stock 6,10,000
45,000 Trade Debtors 1,48,000
2,50,000 Bills Receivable 60,000
Unexpired Insurance 2,000
Cash in Hand and at Bank 80,000
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 balances method.
You are also informed about the following balances as on 31stMarch, 2001:
` 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, 2001 and Balance Sheet as at that date. (16 marks)
Answer:
To Depreciation 15,000
(15%` 1,00,000)
To Net Profit 3,26,300
(balancing figure)
(4)
Particulars
To Cash/Bank
To Discount received To Bills receivable To Bills payable
To Balance c/d
(balancing figure)
figure)
9,55,000 9,55,000 Trade Debtors Account
` Particulars `
20,68,000 20,68,000
Particulars
To Opening stock
To Purchases
(Balancing figure)
To Gross Profit (10% on sales)
9,30,000
(6) Computation of Sundry expenses to be charged to Profit & Loss A/c
Add: Profit for the year 3,74,000 4,34,000 Less: Depreciation 50,000 4,50,000 Creditors (Trade) 1,10,000 Stock in trade 3,36,000
To Purchases
To Gross Profit c/d (30% on sales)
To Sundry Expenses (10% on sales)
24,56,000 24,56,000
2,12,000 By Gross Profit b/d 6,36,000
To Depreciation To Net Profit
2.
50,000
3,74,000
6,36,000 6,36,000
Cash and Bank Account for the period
For the year ended 31st March, 2001
Particulars
To Balance b/d
To Sundry Debtors
(`1,50,000 +`19,20,000)
` Particulars ` 3,50,000 By Sundry Creditors 15,50,000
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, 2003 and a Balance Sheet as on that date : (a)
Building
Furniture
Motorcar
Stocks
Bills payable 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 —
` ` 3,20,000 3,60,000
60,000 68,000
80,000 80,000
— 40,000
28,000 16,000
(b) Cash transactions during the year included the following besides certain other items :
Sale of old papers and
miscellaneous income
Miscellaneous Trade
expenses (including salaries etc.)
Collection from debtors
(c) Other information :
` ` Cash purchases 48,000
20,000 Payment to creditors 1,84,000
Cash Sales 80,000
80,000
2,00,000
(i) Bills receivable drawn during the year amount to` 20,000 and Bills payable accepted ` 16,000.
(ii) Some items of old furniture, whose written down value on 31st March, 2002 was`20,000 was sold on
30thSeptember, 2002 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.
Answer:
Particulars To Opening stock (balancing figure) To Purchases
To Gross profit c/d [i.e. 30%]
Furniture
Motor Car
To Loss on sale of furniture To Bad debts
Capital as on 1
Liabilities ` st April 2002 Profit and Loss A/c Opening balance 40,000
Outstanding salary
Balance Sheet of Mr. Shiv Kumar
as on 31st March, 2003
` Assets ` ` 7,16,000 Building 3,20,000 Add: Addition
during the year 40,000
Working Notes:
1. Sundry Debtors Account
Particulars ` To Balance b/d 1,60,000 To Sales A/c 3,20,000
4,80,000
Particulars `
4,80,000
2. Sundry Creditors Account
Particulars
To Cash/Bank A/c
To Bills payable A/c
To Balance c/d (balancing
figure)
3,12,000 3,12,000
3. Bills Receivable Account
4. Particulars
` Particulars `
32,000 By Cash/Bank A/c (bal. fig.) 24,000
20,000 By Balance c/d 28,000
52,000 52,000
5.
receipts A/c
To Sundry debtors A/c To Sales A/c
To Furniture A/c (sale) To Bills receivable A/c
6.
Particulars To Balance b/d
To Bank A/c
44,000 44,000
Cash/Bank Account
` Particulars `
1,80,000 By Misc. trade expenses A/c 80,000 By Purchases A/c 48,000 20,000 By Furniture A/c (bal. fig.) 28,000
2,00,000 By Sundry creditors A/c 1,84,000 80,000 By Bills payable A/c 28,000 8,000 By Building A/c 40,000
24,000 By Balance c/d 1,04,000
5,12,000 5,12,000
Furniture Account
` Particulars ` 60,000 By Bank/Cash A/c 8,000 28,000 By Depreciation A/c 1,000
Lucky does not maintain proper books of accounts. However he maintains a record of his bank transactions and also
is able to give the following information from which you are requested to prepare his final accounts for the year
2003:
1.1.2003 31.12.2003 ` ` Debtors 1,02,500 — Creditors — 46,000 Stock 50,000 62,500 Bank Balance — 50,000
Fixed Assets 7,500 9,000 Details of his bank transactions were as follows:
Answer:
Trading and P & L A/c
(for the year ended 31st Dec. 2003)
Dr. Cr.
Particular Amt. (`) Particular Amt (`) By sales
To Opening stock 50,000 3,25,000
65,000
3,87,500 3,87,500 750 By Gross Profit b/d 65,000 49,250
1,000
14,000
65,000 65,000
Balance Sheet
(As on 31st December 2003)
Dr. Cr.
Liabilities Amount
Capital 1,69,000
Add: Additional Capital 5,000
4,09,250 4,09,250
2. Fixed Assets A/c
Particulars Amt. (`) Particulars Amt (`) To bal. b/d 7,500 By Bank (sale) 1,750 To Bank (Purchase) 5,000 By P&
L A/c (loss on sale) 750
3. Debtors
Particulars Amt. (`) Particulars Amt (`) To Bal. b/d 1,02,500 By Bank 3,40,000 To Sales 3,25,000 By Bal. c/d
(bal. fig.) 87,500 4.
Particulars To Bank
To Bal. c/d
From the following furnished by Shri Ramji, prepare Trading and Profit and Loss account for the year ended
31.3.2005. Also draft his Balance Sheet as at 31.3.2005:
1.4.2004 31.3.2005
` ` Creditors 3,15,400 2,48,000
Expenses outstanding 12,000 6,600
Fixed assets (includes Machinery) 2,32,200 2,40,800
Stock in hand 1,60,800 2,22,400
Cash in hand 59,200 24,000
Cash at Bank 80,000 1,37,600
Sundry Debtors 3,30,600 ? Details of the year's transactions are as follows:
Cash and discount credited to debtors 12,80,000 Returns from Debtors 29,000 Bad Debts 8,400 Sales (Both Cash
and Credit) 14,36,200 Discount allowed by creditors 14,000 Returns to creditors 8,000 Capital introduced by
Cheque 1,70,000 Collection from debtors (Deposited into Bank after receiving cash) 12,50,000 Cash purchases
20,600 Expenses paid by cash 1,91,400 Drawings by Cheque 8,600 Machinery acquired by Cheque 63,600 Cash
deposited into Bank 1,00,000 Cash withdrawn from Bank 1,84,800 Cash Sales 92,000 Payment to creditors by
Cheque 12,05,400 Note : Ramji has not sold any Fixed Asset during the year. (16 marks)
Answer:
– Cash 92,000
20,600 – Credit 13,44,200
– Credit 11,60,000 14,36,200
(☐) Return (8,000) 11,72,600 (☐) Return (29,000) 14,07,200 To Gross Profit c/d 2,96,200 By Closing stock
2,22,400 16,29,600 16,29,600 To Bad Debts 8,400 By Gross profit b/d 2,96,200 To Discount 30,000 By Discount
received 14,000 To Expense (Note - 7) 1,86,000
To Depreciation (Note - 4) 55,000
To N. P. transfer to capital A/c 30,800
Liabilities
Capital
Opening Balance (+) Fresh brought (☐) Drawings
Balance Sheet
(As on 31.3.05)
` Assets `
Fixed Assets
5,35,400 Opening Balance 2,32,200
1,70,000 (+) Purchase 63,600
(8,600) (☐) Depreciation (55,000) 2,40,800
(+) N.P.
Creditors
Expenses Outstanding 30,800 7,27,600 Stock 2,22,400
Particulars To Discount
To Returns
To Bank
To Bal. c/d
2.
Creditor’s Account
` Particulars ` 14,000 By Balance b/d 3,15,400 8,000 By Purchase 11,60,000
12,05,400
2,48,000
14,75,400 14,75,400
Debtor’s Account
Particulars ` Particulars `
To Balance b/d To Sales
12,50,000 By Expenses 1,91,400 — 12,50,000 By Drawings 8,600 — 1,00,000 By Fixed Assets — 63,600
` Particulars ` 12,000 By Balance b/d 12,000 6,600 By Expenses A/c 6,600 18,600 18,600 6. Balance Sheet (as on
1.4.04)
Liabilities Capital
Creditors
Expense Outstanding
` Assets `
7. Calculation of Expenses :
Expenses paid 1,91,400 (☐) Outstanding as on 1.4.04 (12,000) (+) Outstanding as on 31.3.05 6,600
Mr. X runs a retail business. Suddenly he finds on 31.3.2006 that his Cash and Bank balances have reduced
considerably. He provides you the following information :
1,08,400 By Bank (as per contra) 10,34,000 — — By Wages 78,000 — By Rent 30,000 — — By Electricity &
To Opening Stock
To Purchase
To Gross Profit c/d
11,400 By Sales :
To Wages
To Rent (30,000 + 3,000 - 2,400)
To Electricity & Telephone
(24,000 + 6,400)
To Professional Charges
To Shop Expenses
To Depreciation [10% of 54,000 ×
]
To Net profit
78,000 By Gross b/d 3,78,100 30,600
30,400
34,000
18,000
2,700
1,84,400
3,78,100 3,78,100
Statement of Affairs of Mr. X as on 31-3-2005 Liabilities ` Assets `
Capital (Bal. fig.) 78,800 Furniture — Sundry Creditors 84,400 Stock 11,400
Outstanding exp. 2,400 Sundry Debtors 35,400
Rent Bank 1,08,400
Cash 10,400
1,65,600 1,65,600
Statement of Affairs of Mr. X as on 31-03-2006
Liabilities ` Assets ` Opening Capital 78,800 Furniture 54,000 + Profit for the year 1,84,400 (☐) Depreciation
2,700 51,300 2,63,200 Stock 20,000 (☐) Drawings (☐) 1,61,900 1,01,300 Sundry Debtors 58,800
Creditors Exps. :– 22,400 Bank 2,500 ☐ Rent 3,000 Cash 500 ☐ Electricity 6,400 9,400
1,33,100 1,33,100
Reconciliation of profit:–
` Capital as on 31-3-2006 1,01,300 Add: Drawings 1,61,900
2,63,200
Less: Opening Capital ☐ 78,800
Profit for the year ending 31-3-2006 1,84,400
Space to write important points for revision
Mr. Ashok keeps his books in Single Entry system. From the following information, prepare Trading and Profit &
Loss Account for the year ended 31st March, 2006 and the Balance Sheet as on that date :
Answer:
In the books of Mr. Ashok
Trading and Profit and Loss A/c for the year ended 31.03.06
Particulars Amt. (`) Particulars Amt. (`)
Less: Return Outward 1,000 1,18,500 Less: Return Inward 3,000 1,47,000
To Gross profit b/d 35,000 By Closing Stock 22,500
1,69,500 1,69,500
To Expenses By Gross Profit b/d 35,000 (20,000+500☐1,000) 19,500 By Discount Received 1,500
To Bad debts 1,000
To Discount 1,000
To Depreciation on Fixed
Assets (Note-5) 2,000
To Net Profit (transferred to capital) 13,000
36,500 36,500
77,500
Less: Drawings 6,500 71,000
Sundry Creditors 25,000
Outstanding expenses 500
Particulars
To Bal. b/d
To Capital
To Sundry debtors To Sundries (contra) To Sundries (contra) To Sales
(Cash sales
Balancing fig.)
2.
(1,50,000☐11,500)
Amt. ( `) Particulars Amt. (`) 14,000 By Purchases 2,000 15,000 By Fixed Assets 1,000
To Bank
To Returns Outward To Discount Received To Bal. c/d
5. Particulars
To Bal. b/d
To Bank A/c (Purchase)
Amt. Assets Amt. (`) (`)
Mr. Y keeps his books under single entry system. On 31stMarch, 2006 his Balance Sheet was as follows :
Liabilities
Capital of Mr. Y
Creditors
Bills payable
Expenses outstanding
` Assets `
4,50,000 Fixed assets 2,25,000
8,70,000 Stock 9,15,000
1,87,500 Debtors 2,22,000
67,500 Bills receivable 90,000
Prepaid insurance 3,000
Cash/Bank balance 1,20,000
15,75,000 15,75,000
(i) Following are the summary of cash and bank transactions for the year ended 31st March, 2007 :
` Cash sales 1,10,70,000
Collection from debtors 22,65,000
Payments to creditors 1,12,60,500
Paid for bills payable 12,22,500
Sundry expenses paid 9,31,050
Drawings for domestic expenses by Mr. Y 3,60,000
Cash and bank balance as on 31.3.2007 1,90,950
14,32,500 14,32,500
4. Creditors Account
To Cash/Bank
To Discount
To B/R endorsed
To B/P
To Balance c/f (Balancing figure) `
12,45,000
10,02,750
1,35,72,750
Stock Account `
Expenses shown in the profit and loss account for the year 8,71,050
ended 31.3.2007
Trading and Profit and Loss Account of Mr. Y for the year 31.3.2007 Dr.
Particulars
To Opening stock To Purchase (W.N.5) To Gross profit
To Expenses
(W.N.6)
Liabilities
Capital 4,50,000
Add: 4,99,200
9,49,200
Less: Drawing 3,60,000
Bills payable
Creditors
Outstanding expenses
54,000
22,500
4,99,200
14,67,750 14,46,750 Balance Sheet of Mr. Y
(as on 31st March, 2007)
` Assets `
(2 marks)
Answer:
Calculation of total sales ` Total sales always equal to cash sales and credit sales
First we calculate credit sale
Debtor balance is 2 month outstanding
and sale is uniform throughout the year 1,40,000 Total credit Sale is
12 (A) (it is 75% if total sales) 8,40,000 Cash Sales is 25% of total sale
2,80,000 Total sales (A+ B) 11,20,000 Space to write important points for revision
Q.2.12 2008 - Nov [2] (a), RTP Practical The books of Mr. Z showed the following information :
1.1.2007 31.12.2007
2,22,500 2,22,500
Debtors Account Cr. ` Particulars `
1,02,500 By Bank 3,40,000 3,25,000 By bal c/d 87,500
4,27,500 4,27,500
(b) Dr. Particulars To Bank
To bal c/d
Fixed Assets Account Cr. ` Particulars ` 7,500 By Bank (sale) 1,750 5,000 By P/L (loss) 750
By Dep. (bal fig) 1,000 By Bal c/d 9,000 12,500 12,500 (d) Dr.
Following is the Balance Sheet of Mr. Ram, a small trader, as on 31st March, 2008:
Liabilities ` Assets ` Creditors 1,00,000 Cash 10,000 Capital 4,00,000 Bank 20,000 Stock 80,000 Debtors 1,00,000
Fixed Assets 2,90,000 5,00,000 5,00,000 A fire occurred on the night of 31st March, 2009, destroying the
accounting records as well as the closing cash of the trader. However, the
following information was available :
(i) Debtors and creditors as on 31st March, 2009 showed an increase of 20% as compared to 31st March, 2008.
(ii) Credit period :
Debtors : 1 month
Creditors : 2 months
(iii) Stock was maintained at the same level throughout the year. (iv) Cash sales constituted at 20% of the total sales.
(v) All purchases were on credit basis only.
(vi) Current ratio on 31st March, 2009 was exactly 2.
(vii) Total expenses excluding depreciation for the year amounted to ` 5,00,000.
(viii) Depreciation was provided @ 10% on the closing book value of fixed assets.
(ix) Bank and cash transactions for the financial year 2008-09 were as under :
(a) Payment to creditors included` 1,00,000 by cash. (b) Received from debtors included`11,80,000 by way of
cheques. (c) Cash deposited into the Bank ` 2,40,000.
(d) Personal drawings from Bank ` 1,00,000.
(e) Fixed assets purchased and paid by cheques ` 4,50,000.
(f) Assume that cash destroyed by fire is written off in the Profit and Loss account.
You are required to prepare :
(i) Trading and Profit and Loss account of Shri Ram for the year ended 31st March, 2009.
(ii) A Balance Sheet as at that date. (8 marks)
Answer:
Trading and Profit and Loss Account for the year ended 31.3.2009
To Expenses
To Loss of cash by fire To Depreciation
To Net profit transferred
to Capital A/c
` Particulars ` 80,000 By Sales (W.N.2)
7,20,000 Cash 3,60,000
10,80,000 Credit 14,40,000 18,00,000
By Closing Stock 80,000
18,80,000 18,80,000
5,00,000 By Gross Profit 10,80,000
20,000
74,000
4,86,000
Working Notes:
(1) Calculation of creditors as on 31.3.2009 and credit purchase for 2008-2009
Creditors = Previous year creditors + 20% increase
= 1,00,000 + 20,000
= ` 1,20,000
(2) Calculation of Debtors as 31.3.2009 and Cash and Credit Sales for 2008-2009
Debtors on 31.3.2009 = Debtors on 31.3.2008 + 20% Increase
= 1,00,000 + 20,000
=` 1,20,000
Credit sales for 2008-2009 = Debtors at the end (i.e. one month credit) × 12
= ` 1,20,000 × 12 = ` 14,40,000 Total sales = ` 14,40,000 × = ` 18,00,000
Particulars
To Balance b/d
To Sales A/c
To Debtors A/c (W.N.6) `
By 6,10,000
Particulars ` Creditors A/c 1,00,000
(6) Particulars
To Cash A/c
To Bank (Bal. fig.) To Balance c/d
Bank Account
` Particulars `
20,000 By Creditors A/c (W.N.7) 6,00,000
14,40,000 14,40,000
Debtors Account
` Particulars `
15,40,000 15,40,000
Creditors Account
` Particulars ` 1,00,000 By Balance b/d 1,00,000 6,00,000 By Purchases A/c 7,20,000 1,20,0002
1. Debtors on 31.3.2009 = Debtors on 31.3.2008 × 120% i.e. 1,00,000 x
120% = ` 1,20,000
2. Creditors on 31.3.2009 = Creditors on 31.3.2008 x 120% i.e. 1,00,000
x 120% =` 1,20,000.
Space to write important points for revision
Q.2.14 2010 - May [2] Practical The books of account of Ruk Ruk Maan of Mumbai showed the following figures
:
31.3.2008 31.3.2009
` ` Furniture & Fixtures 2,60,000 2,34,000
Stock 2,45,000 3,20,000
Debtors 1,25,000 ? Cash in hand & Bank 1,10,000 ? Creditors 1,35,000 1,90,000
Bills Payable 70,000 80,000
Outstanding Salaries 19,000 20,000
An analysis of the cash book revealed the following :
` Cash sales 16,20,000
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. Ruk Ruk Maan
maintains a steady gross profit rate of 25% on sales.
You are required to prepare trading and profit and loss account for the year ended 31st March, 2009 and Balance
Sheet as on that date. (16 marks)
Answer:
Particulars
2,45,000 By Sales :
Cash 16,20,000
6,15,000 Credit (W.N.iii) 11,00,000
15,00,000 By Closing stock 3,20,000
6,80,000
30,40,000 30,40,000
2,37,000 By Gross profit b/d 6,80,000
1,32,000 By Discount 32,000
81,000 received
20,000
26,000 2,16,000
Liabilities
Capital
Opening balance (W.N.7) 5,16,000
Add : Net profit 2,16,000
7,32,000
Less : Drawings 1,20,000
Current liabilities & provisions : Creditors
Bills payable
Outstanding salaries
Balance Sheet
as at 31st March, 2009
Amount Assets Amount ` `
Fixed assets
Furniture & fixtures 2,34,000 Current assets :
Stock 3,20,000
Working Notes :
9,02,000 9,02,000
(i) Bills Payable Account
Particulars ` Particulars ` 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 (ii)
Particulars
To Cash/Bank
To Bills payable A/c (W.N.1)
To Discount received To Balance c/d
Creditors Account
` Particulars `
9,73,000 By Balance b/d 1,35,000
27,20,000 16,20,000
11,00,000
(iv)
Particulars
To Balance b/d
To Credit sales (W.N.3)
Particulars `
Particulars ` Particulars ` 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
(vii) Balance Sheet
(As on 31st March, 2008)
Liabilities
Creditors
Bills payable
Outstanding salaries
Capital (Bal. fig.)
M/s. Ice Limited gives you the following information to find out Total Sales and Total Purchases :
Particulars Amount (`)
Debtors as on 01.04.2011 70,000
Creditors as on 01.04.2011 81,000
Bills Receivables received during the year 47,000
Bills Payable issued during the year 53,000
Cash received from customers 1,56,000
Cash paid to suppliers 1,72,000
Bad Debts recovered 16,000 Bills Receivables endorsed to creditors 27,000 Bills Receivables dishonoured by
customers 5,000 Discount allowed by suppliers 7,000 Discount allowed to customers 9,000 Endorsed Bills
Receivables dishonoured 3,000 Sales Return 11,000 Bills Receivable discounted 8,000 Discounted Bills Receivable
dishonoured 2,000 Cash Sales 1,68,500 Cash Purchases 1,97,800 Debtors as on 31.03.2012 82,000 Creditors as on
31.03.2012 95,000 (8 marks) Answer :
(a) 1. Total Sales
2. Purchases
Working Notes: 1.
Particulars
To Balance b/d
To Bills receivable dishonoured To Bills receivable dishonoured
(endorsed)
2,25,000
3,05,000 3,05,000
3,54,000 Note: It is assumed that sales return is out of credit sales only. Space to write important points for revision
Q.2.16 2013 - May [4], RTP Practical
A sole trader requests you to prepare his Trading and Profit & Loss Account for the year ended 31stMarch, 2013 and
Balance Sheet as at that date. He provides you the following information:
Bank Overdraft 4,270 Furniture 96,000 Outstanding Expenses Computer 24,300 Salaries 8,000 Mobile Phone 8,000
Rent 6,000 14,000 Stock 89,500 Bills Payable 22,500 Trade Debtors 55,000 Trade Creditors 52,500 Bills
Receivable 15,000 Capital (balancing figure) 1,97,430 Unexpired Insurance 2,400 Stock of Stationery 200 Cash in
Hand 300 Total 2,90,700 Total 2,90,700 He informs you that there has been no addition to or sale of Furniture,
Computer and Mobile Phone during the accounting year 2012-13. The other assets and liabilities on 31st March,
2013 are as follows:
` Stock 95,400
Trade Debtors 65,000
Bills Receivable 20,000
Unexpired Insurance 2,500
Stock of Stationery 250
Cash at Bank 18,000
Cash at Hand 7,230
Salaries Outstanding 8,300
Rent Outstanding 6,000
Bills Payable 26,500
Trade Creditors 76,000
He also provides to you the following summary of his cash transactions:
Receipts ` Payments ` Cash Sales 5,09,800 Trade Creditors 3,06,000
Trade Debtors 1,51,900 Bills Payable 80,000
Bills Receivable 65,000 Salaries 99,000
Rent 72,000
Insurance Premium 10,000
Stationery 1,500
Mobile Phone Expenses 9,000
Drawings 1,20,000
It is found prudent to depreciate Furniture @ 5%, Computer @ 10% and Mobile Phone @ 25%. A provision for bad
debts @ 5% on Trade Debtors is also considered desirable. (16 marks)
Answer: Trading and Profit and Loss Account (For the year ended 31st March, 2013)
Particulars Amt. ` To Opening Stock 89,500 By To Purchase (W.N. 3) 4,13,500 To Gross profit c/d (Bal. Fig.)
3,34,100
By 8,37,100 To Insurance (W.N. 5) 9,900 By To Salaries (W.N. 6) 99,300 To Rent (W.N. 7) 72,000 To Stationery
(W.N.8) 1,450 To Mobile Phone expenses 9,000
To Depreciation: Furniture
Computer
Mobile Phone
To Net Profit
Liabilities
Capital A/c:
Opening Balance 4,800
2,430
2,000 9,230
1,29,970 3,34,100
Furniture 96,000
1,97,430 Less: Depreciation (4,800) 91,200 Less: Drawings (1,20,000) Computer 24,300
77,430 Less: Depreciation (2,430) 21,870 Add: Net Profit 1,29,970 2,07,400 Mobile Phone 8,000
Bills Payable 26,500 Less: Depreciation (2,000) 6,000 Trade Creditors (W.N.3) Outstanding expenses: Salaries
Rent
Working Notes: 1.
Particulars
To Balance b/d To Credit Sales (bal. fig.) 2,31,900 By Bills Receivable A/c 70,000 (W.N.2)
By Balance c/d (given) 65,000 2,86,900 2,86,900 2. Bills Receivable Account
76,000 Trade Debtors (W.N.1) 65,000
Less: Provision for
8,300 doubtful debts (3,250) 61,750 6,000 Bills Receivable (W.N.2) 20,000
3,24,200 3,24,200
Trade Debtors Account
Amt. (`) Particulars Amt. (`) 55,000 By Cash/ Bank 1,51,900
Particulars
To Balance b/d
To Sundry Debtors (bal. fig.)
4,66,000 4,66,000
4.
Particulars
To Cash/Bank A/c To Bal. c/d (given)
Bills Payable Account
Amt. (`) Particulars Amt. (`)
80,000 By Bal. b/d 22,500 26,500 By Sundry Creditors (bal. fig.) 84,000 1,06,500 1,06,500
9,900
99,300
7. Rent expenses for the year 2012-2013
Particulars Amt. (`)
72,000
8. Stationary expenses for the year 2012-2013 Particulars Amt. (`) Stock of stationery as on 1.4.2012 200 Add:
Stationary purchased during the year 1,500
1,700
Less: Stock of stationery as on 31.3.2013 (250)
1,450
Space to write important points for revision
Q.2.17 2014 - June [1] {C} (viii) Practical Answer the following questions (give workings):
(viii) Calculate the average collection period from the following details by adopting 360 days an year.
Average Inventory –` 10,80,000 Gross Profit Ratio – 10% Debtors – ` 6,90,000 Credit sales to total sales – 20%
Inventory Turnover ratio – 6 Times 1 year – 360
P/L A/c of Moonlight Traders for the year ended 31.3.2014 Particulars
To Discount
To Salaries Expenses
To Office Expenses (W.N.3) To Selling expenses
Balance Sheet
as on 31.3.2014
Liabilities `
` Assets `
Working Notes: 1.
Cash Sales
Calculation of Total Sales
Particulars `
Particulars
To Bank A/c
To Balance c/d
Particulars
To Opening Balance
To Bank (Purchases)
Particulars
Creditors
Creditor for Exp.
Loan
Provision for Tax
Capital (Bal. fig.)
7.
Particulars
To Balance b/d (bal. fig.) To Sales
8.
Particulars
To Bank
To Discount
To Balance c/d (bal. fig.)
9.
Particulars
To Balance b/d To Debtors
To Cash Sales
Bank Account
Amt.` Particulars Amt.` 25,000 By Creditors 5,25,000
By Bank Loan & Interest (W.N. 11) 40,000 By Tax (W.N.10) 25,700 By Balance c/d (bal. fig.) 53,300
Note:
The aforesaid solution has been worked out on the basis of the following assumptions:
Particulars
To B/P
To Cash
To Discount
To Total debtors A/c To Balance c/d
Total Creditors A/c
Amount Particulars Amount
` Sources of Funds
Share Capital 10,00,000 Profit and Loss 1,47,800 Unsecured loan @ 10% 1,75,000 Trade Payables 45,800
13,68,600
Application of Funds
Machinery 8,25,500
Furniture 1,28,700
Inventory 1,72,000
Trade Receivables 2,29,600
Bank Balance 12,800
13,68,600
A fire broke out in the premises on 31-3-2015 and destroyed the books of account. The accountant could however
provide the following information: (1) Sales for the year ended 31-3-2014 was ` 18,60,000. Sales for the
Debtors : 2 months
Creditors : 1 month
All creditors are paid by cheque and all credit sales are collected in cheque.
(5) The Bank Pass Book has the following details (other than payment to creditors and collection from debtors)
By
By By By By
22,04,900
Particulars Amount (`) Creditors (Payment made) 14,86,250 (WN 6)
Machinery Purchased 1,14,000 Advertisement expenses 80,000 Rent 1,32,000
Travelling expenses 86,200 (78,400 + 7,800)
Repairs 36,500
Petty Cash 28,300
Interest on unsecured loan 8,750
Balance c/d (bal. fig.) 2,32,900
22,04,900
Particulars
To Net Profit
Trading and Profit and Loss Account
for the year ended 31st March, 2015
Amount Particulars Amount (`) (`)
88,250
23,260
1,82,690
6,69,600 6,69,600
Balance Sheet of M/s. Care Traders
as on 01.04.2015
Liabilities (`)
17,43,400 Less: Opening stock (1,72,000) Purchases during the year 15,71,400
2,29,600 By Bank (collection) Bal. fig. 16,24,600 16,74,000 By Closing balance 2,79,000
19,03,600 19,03,600
5. Creditors as on 31.03.2015 `
Total Credit purchases (all creditors paid by cheque hence there 15,71,400
are no cash purchases)
Creditors 1 month credit
(15,71,400 x 1/12) 1,30,950
To Bank (Payment) Bal. fig. 14,86,250 By Opening Balance 45,800 To Closing Balance 1,30,950 By Credit
Purchases 15,71,400 16,17,200 16,17,200 7. Machinery Account
8. Depreciation on Machinery ` Existing Machinery for 1 Year (` 8,25,500 x 10%) 82,550 New Machinery
(Purchased on 1.10.2014)
For 6 months (` 1,14,000 x ½ x 10%) 5,700
Q.2.21 2015 - Nov [1] {C} (c) Practical Balance Sheet of Anurag Trading Co. on 31stMarch, 2014 is given below:
Answer :
Calculation of Credit sales:
Debtor × = 1,25,000 x = 10,00,000
Building 1,00,000
1,50,000 Machinery 65,000
75,000 Stock 40,000
30,000 Debtors 50,000
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.
Prepare Trading, Profit and Loss Account, Trade Debtors A/c and Trade Creditors A/c for the year ending
31.03.2016. (8 marks) Answer:
Trading A/c
Amount Particulars Amount
Particulars Capital:
Manish
Suresh
Profit & Loss A/c Creditor for goods
Trade Creditors A/c
Amount Particulars Amount
1.5 = × 12
Debtor velocity = × 12
2 = × 12
Sales = 3,00,000
= Sales - Purchase = 3,00,000 - 2,40,000 = 60,000
Purchase New
= Old purchase × 115% × 125%
= 2,40,000 × 115% × 125%
= 3,45,000
Cash Balance
Opening cash 25,000
Add: Cash receipt (from debtor) 4,09,375
Less: Cash paid (to creditors) 3,31,875
Less: Business expenditure 50,000
Less: Cash paid (to creditor for expense) 25,000
Closing Balance 27,500
Space to write important points for revision
Q.2.24 2017 - May [4], RTP Practical 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
Stock 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
Answer:
Trading and Profit and Loss Account of
ABC enterprise for the year ended 31st March, 2017
Bills Receivable
To Depreciation on furniture
To P r o v i s i o n f o r doubtful debts
To Net profit
92,000 By Gross profit b/d 1,21,750 9,000 By I n t e r e s t o n 600 investment
15,000 (20,000×6/100 ×½)
1,250 16,250 By Discount received 8,000 6,500 By Miscellaneous 5,000 income
1,455
10,145
1,35,350 1,35,350
Liabilities
Capital as on 1.4.2016 Less: Drawings
Creditors
Outstanding expenses
` Assets ` 1,88,000 Furniture (w.d.v.) 60,000
8,000
20,000
1,50,000
By Sundry debtors A/c 4,000 By Purchases A/c 4,56,000 (Balancing figure)
Purchases
Less: For advertising Freight inwards
80,000 4,56,000
(9,000) 4,47,000
30,000
5,57,000
(70,000) 4,87,000
1,21,750
6,08,750
To Sales A/c
To Sundry creditors A/c (bill dishonoured) ` `
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. Space
to write important points for revision
Q.2.25 2019 - May [3] (a) Practical The following balances appeared in the books of M/s Sunshine Traders:
— On 01.10.2018 the firm sold machine having Book Value`20,000 (as on 31.03.2018) at a loss of ` 7,500. New
machine was purchased 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.
You are required to prepare:
(i) Trading and Profit & Loss account for the year ended 31st March, 2019.
(ii) Balance Sheet as on 31st March, 2019.
(12 marks) Answer:
Particulars ` To Opening Stock (Balancing figure)
To Purchases-Cash 1,80,000
Credit (W.N.1) 2,70,000
To Gross Profit c/d
30,750
42,000
2,250
2,750
6,250
35,750
Working Notes: 1. Calculation of Sales and Purchases: Total Sales Cash Sales Credit Sales = ` 6,25,000
= 20% of total sales = (6,25,000) = ` 1,25,000 = 80% of total sales = (6,25,000) = ` 5,00,000 Gross Profit 25% on
cost = 6,25,000 × = ` 1,25,000
1,85,000 1,85,000
×½
By Profit and Loss A/c 7,500
By Bank (Balancing figure) 11,500
20,000 20,000
3. Creditors Account
``
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
To Balance b/d (Given) To Sales (Credit)
Debtors Account
``
77,750 By Cash 4,62,500 5,00,000 By Discount allowed 2,750 By Bad debts 2,250 By Balance c/d 1,10,250
5,77,750 5,77,750 Provision for Office Expenses Account
To Bank
To balance c/d
4.
To Balance b/d
To Debtors
To Office Equipment
(sales)
``
Q.2.26 2019 - Nov [4] (b) Practical 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
Trade creditors
Outstanding exp.
6,75,000 Furniture & fixtures 1,50,000 7,57,500 Stock 9,15,000
The following was the summary of cash and bank book for the year ended 31st March, 2019: Receipts
Payment to trade
1,20,000 creditors 1,24,83,000
1,10,70,000 Sundry expenses paid 9,31,050
Drawings 3,60,000
1,39,65,000 1,39,65,000
Additional Information:
(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
Liabilities
Sri Srinivas's capital Liabilities for goods Rent
` Assets `
Trading and Profit and Loss Account of Sri Srinivas (for the 13 week period ended 31st March, 1999)
Liabilities
Capital as on 1.1.99 1,00,000
Add: Profit 5,300
1,05,300
Creditors 36,500
1,40,500 1,40,500 Working Notes:
(1) Determination of Purchases
Creditors Account
` Particulars ` 75,000 By Balance b/d 20,500 36,500 By Purchases A/c 91,000
(Balancing figure)
(2) Determination of Cash Sales
Particulars ` Total sales 1,51,250 Less: Credit sales 35,000 Cash sales 1,16,250
Particulars
To Balance b/d
To Sales A/c (Balancing figure)
` Particulars `
25,000 By Bank A/c 30,000
35,000 By Balance c/d 30,000
60,000 60,000
Notes :
1. All purchases are taken as credit purchase.
2. In the absence of information about the depreciation rate, no depreciation has been charged on furniture.
3. The amount defalcated by the cashier may be treated as recoverable from him. In that situation,`17,400 may be
treated as sundry advances and shown on assets side in the Balance Sheet and net profit for 13
week period ending 31st March, 1999 would amount ` 22,700. Space to write important points for revision
The following is the Balance Sheet of Sri Agni Dev as on 31stMarch, 2001: Liabilities ` Assets ` Capital account
2,52,500 Machinery 1,20,000 Sundry Creditors for purchases 45,000 Furniture 20,000
Stock 33,000
Debtors 1,00,000
Cash in hand 8,000
Cash at Bank 16,500
2,97,500 2,97,500
Riots occurred and fire broke out on the evening of 31st March, 2002, destroying the books of account and
Furniture. The cashier was grievously hurt and the cash available in the cash box was stolen.
The trader gives you the following information :
(i) Sales are effected as 25% for cash and the balance on credit. His total sales for the year ended 31st March, 2002
were 20% 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 ` 33,000 all throughout the year. (iv) A steady Gross Profit rate of 25% on the
turnover was maintained throughout. Creditors are paid by cheque only, except for cash purchase of ` 50,000.
(v) His private records and the Bank Pass-book disclosed the following transaction for the year:
(i) Miscellaneous Business expenses ` 1 , 5 7 , 5 0 0 ( i n c l u d i n g ` 5,000 paid by cheque a n d ` 7 , 5 0 0 w a s
outstanding as on 31st March, 2002) (ii) Repairs
(iii) Addition to Machinery
(iv) Private drawings
(v) Travelling expenses
(vi) Introduction of Additional
` 3,500 (paid by cash) ` 60,000 (paid by cheque) ` 30,000 (paid by cash) ` 18,000 (paid by cash)
Prepare Trading, Profit and Loss Account for the year ended 31st March, 2002 and a Balance Sheet as on that date.
Make appropriate assumptions wherever necessary. All workings should form part of your answer. (20 marks)
Answer :
from Debtors
To Sales
To Additional
Capital
To Balance c/d
(i.e. Bank
overdraft)
Cash Bank Particulars Cash Bank 8,000 16,500 By Payment to Creditors 50,000 6,59,167
By Misc. Expenses 1,45,000 5,000
— 7,00,000 By Repairs 3,500 — 2,40,000 — By Machinery
(Addition) — 60,000
— 5,000 By Travelling Expenses 18,000 — 2,667 By Drawings 30,000 — By Balance c/d
(lost by theft) 1,500 — 2,48,000 7,24,167 2,48,000 7,24,167
Space to write important points for revision
Mr. A. runs a business of readymade garments. He closes the books of accounts on 31stMarch, 2010. The Balance
Sheet as on 31stMarch, 2010 was as follows : Liabilities
A's capital a/c Creditors
Particulars
To Opening stock
To Purchases (W.N.1) To Gross Profit
To Salary
To Rent
To Office expenses
To Loss of Cash (W.N.6) To Depreciation of furniture To Net Profit
1,16,000 1,16,000
Working Notes:
(1) Calculation of Purchases
`
5,00,000
1,00,000
6,00,000
Debtors Account
(`) Particulars (`) 1,00,000 By Bank A/c (Bal. fig) 4,60,000 4,80,000 By Balance c/d 1,20,000 5,80,000 5,80,000
Bank Account
(`) Particulars (`)
Particulars Amount (`) Cash balance as on 1st April 2010 28,000 Add: Cash sales during the year 1,20,000
Office expenses ( ` 1,200 × 12) 14,400 Drawings of A (` 500 × 12) 6,000 Cash deposited into bank during the year
80,000 1,24,400
Aman, a readymade 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:
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%.
6. His private records and the Bank Pass Book disclosed the following transactions for the year 2017-18:
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. (15 marks)
Answer: Trading and Profit and Loss Account of Aman for the year ended on 31st March, 2018.
Liabilities `
Capital 4,80,000
Add : Net Profit 78,250
5,58,250
Less : Drawings (75,000)
Debtors 2,10,000
Cash at Bank 2,20,000
11,58,250 11,58,250
* Working Notes :
1. Sales for the year ended on 31st March, 2018
Particulars ` Gross Profit as per last year’s accounts 3,00,000 GP Ratio is cost plus 25%
So, Sales for last year 15,00,000
Particulars ` Debtors as on 31st March, 2017 1,70,000 Credit Sales during 2017 - 18 14,40,000 (-) Collection from
debtors (14,00,000) Debtors as on 31st March, 2018 2,10,000
To Collection From
Debtors
To Sales
To Cash
To Bank
Cash Bank Particulars Cash Bank 20,000 85,000 By Payment to Creditors – 13,75,000
May - 2019
CA Inter Gr. I
Paper - 1 (New Syllabus) Accounting
1. (a) M/s First Ltd. began construction of a new factory building on 1st April, 2017. It obtained` 2,00,000 as a
special loan to finance the construction of the factory building on 1st April, 2017 at an interest rate of 8% per annum.
Further, expenditure on construction of the factory building was financed through other non- specific loans. Details
of other outstanding non- specific loans were:
3,00,000 14%
The expenditures that were made on the factory building construction were as follows:
1.913
of promoters’ contribution which become refundable should be reduced from the capital reserve.
3. As per the provisions of AS-2, inventories should be valued at the lower of cost and selling price.
4. As per the provisions of AS-13, a current investments is an investment that is by its nature is readily realisable
and is intended to be held for not more than six months from the date on which such investment is made.
(d) The financial statements of PQ Ltd. for the year 2017-18 approved by the Board of Directors on 15th July, 2018.
The following information was provided :
(i) A suit against the company’s advertisement was filed by a party
on 20th April, 2018, claiming damges of ` 25 lakhs. (ii) The terms and conditions for acquisition of business of
another
company have been decided by March, 2018. But the financial
resources were arranged in April, 2018 and amount invested
was ` 50 lakhs.
(iii) Theft of cash of`5 lakhs by the cashier on 31stMarch, 2018 but
was detected on 16th July, 2018.
(iv) Company sends a proposal to sell an immovable property for
`40 lakhs in March, 2018. The book value of the property is`30
lakhs on 31stMarch, 2018. However, the deed was registered on
15th April, 2018.
(v) A major fire has damaged the assets in a factory on 5th April,
2018. However, the assets are fully insured.
With reference to AS-4 “Contingencies and events occurring after the balance sheet date”, state whether the above
mentioned events will be treated as contingencies, adjusting events or non- adjusting events occurring after the
balance sheet date.
(4 × 5 = 20 marks) 2. (a) M/s Amar bought six Scooters from M/s Bhanu on 1stApril, 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 3rdinstalment upon which M/s Bhanu repossessed two Scooters.
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. You are required to:
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. (10 marks) (b) A fire occurred in the premises of M/s Bright on 25th May, 2017. As a result of fire, sales
adversely affected up to 30thSeptember, 2017. The firm had taken Loss of profit policy (with an 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 a saving of` 5,000 in the insured standing charges.
Turnover for one year from 25thMay, 2016 to 24thMay, 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. (10 marks)
3. (a) The following balances appeared in the books of M/s Sunshine Traders:
Creditors for Purchases 47,500 ? Provision for office expenses 10,000 7,500
Stock ? 32,500
Other information was as follows: in (`) — Collection from Sundry Debtors 4,62,500 — 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
` 20,000 (as on 31.03.2018) at a loss of`7,500. New machine was purchased 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.
You are required to prepare:
(i) Trading and Profit & Loss account for the year ended 31stMarch, 2019.
(ii) Balance Sheet as on 31st March, 2019. (12 marks) (b) 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
Rent, rates and taxes 720 — Sundry Expenses 320 — Computers 600 —
Bank Balance 520 — Singapore Office a/c — 3,040
Total 6,520 6,520
Additional information:
(a) Computers were acquired from a remittance of Singapore dollar 12,000 received from Singapore Head Office
and paid to the suppliers. 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) (8 marks) 5. (a) The Summarized Balance Sheet of Clean Ltd.
as on 31st March, 2019 is as follows:
Total 7,89,000
The Share Capital of the company consists of` 50 each Equity shares of` 4,50,000 and` 100 each 8% Redeemable
Preference Shares of ` 1,30,000 (issued on 1.4.2017)
Reserves and Surplus comprises statement of profit and loss only. In order to facilitate the redemption of preference
shares at a premium of 10%, the Company decided :
(a) to sell all the investments for ` 30,000.
(b) to finance part of redemption from company funds, subject to,
Liabilities
Proprietor’s Capital
P r o f i t & L o s s Account
10% Loan Account
Sundry Creditors
Amount (`) Assets Amount (`) 3,00,000 Fixed Assets 3,60,000
1,25,000 Closing Stock 1,50,000
2,10,000 Sundry Debtors 1,00,000
November - 2019
CA Inter Gr. I
Paper - 1 (New Syllabus)
Accounting
(5 marks) (b) 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 ($) Amount ($) Dr. Cr. Fixed assets 8,000
Opening inventory 800 Cash 700
Goods received form Head Office 2,800
Sales 24,050
Purchases 11,800 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% p.a. 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. (5 marks)
(c) Mr. Rakshit gives the following information relating to items forming part of inventory as on 31st March, 2019.
His factory produces product X using raw material A.
(i) 800 units of raw material A (purchased @ ` 140 per unit). Replacement cost of raw material A as on 31st March,
2019 is ` 190 per unit.
(ii) 650 units of partly finished goods in the process of producing X and cost incurred till date ` 310 per unit. These
units can be finished next year by incurring additional cost of ` 50 per unit.
(iii) 1,800 units of finished product X and total cost incurred ` 360 per unit.
Expected selling price of product X is ` 350 per unit.
In the context of AS-2, determine how each item of inventory will be valued as on 31st March, 2019. Also, calculate
the value of total inventory as on 31st March, 2019. (5 marks)
3. (a) 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 cuminterest
Total 12,40,000 14,26,000 16,39,900 14,12,000 A period of 3 months (i.e from 16-12-2018 to 15-3-2019) has been
agreed upon as indemnity period.
Sales from 16-12-2017 to 31-12-2017 68,000
Sales from 16-12-2018 to 31-12-2018 Nil Sales from 16-03-2018 to 31-03-2018 1,20,000
Sales from 16-03-2019 to 31-03-2019 40,000
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.
(10 marks) 4. (a) ABC Ltd. has several departments. Goods supplied to each department are debited to a
Memorandum Departmental Stock Account at cost plus a fixed percentage (marks-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 department X for the last three years has been 20%.
Figures relevant to department X for the year ended 31st March , 2019 were as follows:
Additional Information: (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
Amount (`)
1,20,000
Payment Amount (`)
Payment to trade
creditors 1,24,83,000
1,10,70,000 Sundry expenses paid 9,31,050
Drawings 3,60,000
1,39,65,000 1,39,65,000
5. (a) From the following particulars furnished by the Prashant Ltd., prepare the Balance Sheet as at 31st March,
2019 as required by Schedule III of the Companies Act, 2013:
Particulars Debit (`) Credit (`) Equity share capital (face value of` 10 15,00,000 each)
Calls-in-arrears 5,000
Land 5,50,000
Building 4,85,000
Plant & machinery 5,60,000
General reserve 2,70,000 Loan from State Financial Corporation 2,10,000 Inventories 3,15,000
Provision for taxation 72,000 Trade receivables 2,95,000
Short-term loans & advances 58,500
Profit & loss account 1,06,800 Cash in hand 37,300
Cash at bank 2,85,000
Unsecured loans 1,65,000 Trade payables 2,67,000 Total 25,90,800 25,90,800
1. 10,000 equity shares were issued for consideration other than cash.
2. Trade receivables of`55,000 are due for more than six months.
3. The cost of building and plant & machinery is` 5,50,000 and ` 6,25,000 respectively.
4. The loan from State Financial Corporation is secured by hypothecation of plant & machinery. The balance of`
2,10,000 in this account is inclusive of` 10,000 for interest accrued but not due.
5. Balance at Bank included ` 15,000 with Aakash Bank Ltd., which is not a scheduled bank. (10 marks) (b) The
partners of C&G decided to convert their existing partnership business into a private limited called CG trading Pvt.
Ltd. with effect from 1.7.2018.
The same books of accounts were continued by the company which closed its accounts for the first term on
31.3.2019.
The summarized profit & loss account for the year ended 31.3.2019 is below: Particulars
Turnover
Interest on investments
Less: Cost of goods sold
Advertisement
Sales Commission
Salaries
Managing Director’s Remuneration Interest on Debenture
Rent
Bad debt
Underwriting Commission
Audit fees
Loss on sale of Investments Depreciation
(i) The average monthly sales doubled from 1.7.2018, GP ratio was constant.
(ii) All investments were sold on 31.5.2018.
(iii) Average monthly salaries doubled from 1.10.2018. (iv) The company occupied additional space from 1.7.2018
for which rent of ` 20,000 per month was incurred.
(v) Bad debts recovered amounting to`60,000 for a sale made in 2016-17 has been deducted from bad debts
mentioned above. (vi) Audit fees pertains to the company.
Prepare a statement apportioning the expenses between pre and post incorporation periods and calculate the profit/
loss for such periods. (10 marks)
Unsecured loans:
Public deposits 7,40,000 Current liabilities:
Trade payables 6,90,000 Cash credit from SBI (short term) 9,30,000 Assets
Investments in shares, debentures etc. 1,50,00,000 Profit & loss account (Dr. balance) 30,50,000
Share suspense account represents application money received on shares, the allotment of which is not yet made.
You are required to compute effective capital as per the provisions of Schedule V. Would your answer differ if
Prabhat Ltd. is an investment company? (5 marks)
(b) Following is the extract of Balance Sheet of Prem Ltd. as at 31st March, 2018:
Authorized capital `
3,00,000 equity shares of ` 10 each 30,00,000
25,000, 10% preference shares of ` 10 each 2,50,000
32,50,000
29,40,000
Reserves and surplus:
General reserve 3,60,000
Capital redemption reserve 1,20,000
Securities premium (in cash) 75,000
Profit and loss account 6,00,000
11,55,000
On 1stApril, 2018, the company decided to capitalize its reserves by way of bonus at the rate of two shares for every
five shares held. Show necessary journal entries in the books of the company and prepare the extract of the balance
sheet after bonus issue.
(5 marks) (e) 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 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 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. (5 marks)
Test Series
CA Inter Gr.I Paper-1 (New Syllabus)
Accounting
1. (a) HIL Ltd. was making provision for non-moving stocks based on no issues having occurred for the last 12
months upto 31.03.2017. The company now wants to make provision based on technical evaluation during the year
ending 31.03.2018.
Total value of stock ` 120 lakhs
Provision required based on technical evaluation ` 3.00 lakhs Provision required based on 12 months no issues ` 4.00
lakhs You are requested to discuss the following points in the light of Accounting Standard (AS) – 1:
(i) Does this amount to change in accounting policy? (ii) Can the company change the method of accounting?
(5 marks)
(b) Best Ltd. deals in five products, P, Q, R, S, and T which are neither similar nor interchangeable. At the time of
closing of its accounts for the year ending 31st March 2011, the historical cost and net realisable value of the items
of the closing stock are determined as follows:
1.937
(c) Tiger Motor Car Limited signed an agreement with its employees union for revision of wages on 01.07.2011.
The revision of wages is with retrospective effect from 01.04.2008. The arrear wages up to 31.03.2011 amounts to `
40,00,000 and that for the period from 01.04.2011 to 01.07.2011 amount to ` 3,50,000. In view of the provisions of
AS 5 “Net Profit or Loss for the period, Prior Period Items and Changes in Accounting Policies”, decide whether a
separate disclosure of arrear wages is required while preparing financial statements for the year ending 31.03.2012.
(5 marks)
(d) Preet Ltd. is installing a new plant at its production facility. It has incurred these costs:
1. Cost of the plant (cost per supplier’s invoice plus
taxes) ` 50,00,000 2. Initial delivery and handling costs ` 4,00,000
3. Cost of site preparation ` 12,00,000 4. Consultants used for advice on the acquisition of
the plant ` 14,00,000
5. Interest charges paid to supplier of plant for
deferred credit ` 4,00,000
6. Estimated dismantling costs to be incurred after
7 years ` 6,00,000 7. Operating losses before commercial production ` 8,00,000
Please advise Preet Ltd. on the costs that can be capitalised in accordance with AS 10 (Revised).
(5 marks) 2. (a) From the following, prepare the Balance Sheet of ABC Ltd. as at 31st March as required by
Companies Act. Give Notes at the foot of the Balance Sheet as may be necessary:
(Amount in `) Particulars Dr. (`) Cr. (`) Equity Capital (Face value of ` 100) 15,00,000 Calls in Arrears 5,000 Land
3,50,000 Building 9,50,000 Plant and Machinery 9,00,000 Furniture 50,000 General Reserve 2,50,000 Loan from
State Financial Corporation 3,00,000 Term Loans from Banks 5,00,000 Stock of - Finished Goods 8,00,000
1. 5,000 Equity Shares were issued for consideration other than cash.
2. Debtors of ` 1,02,000 are due for more than six months.
3. Cost of Assets are as follows: (a) Building - ` 13,00,000 (b) Plant and Machinery `20,00,000, and (c) Furniture
`65,000.
4. The Balance of ` 3,00,000 in the Loan Account with State Financial Corporation is inclusive of ` 20,000 for
interest accrued but not due. The Loan is secured by hypothecation of building.
5. The Balance of`5,00,000 in the Term Loan Account with Bank is Inclusive of` 10,000 towards interest accrued
and due. The Loan is secured by hypothecation of Plant and Machinery.
6. Bills receivable for`2,00,000 maturing on 15thMay, have been discounted.
7. The Company had a contract for the Erection of Machinery at ` 2,50,000 which is incomplete on 31st March.
8. Proposed Dividend ` 2,10,000. (10 marks) (b) ABC Ltd. is in the midst of finalising its accounts for the year-
ended
31st March. A Profit and Loss Account has been prepared in draft, the account balances as rounded of to the nearest
thousands, are listed below:
Particulars
Share Capital
General Reserve
Development Rebate Reserve Land
Buildings
Plant and Machinery
Furniture, Fixtures and Office Equipment
Vehicles
Particulars
- Building
- Plant and Machinery
- Furniture
- Vehicles
In arriving at the Profit for the year, the following have been charged: Particulars ` 000's
Depreciation 12,424
Salary and Perquisite to Managing Director 72
Director’s Fee 4
The Authorized Capital is 3,50,000 Equity Shares of ` 100 each.
The Loan from the State Government is secured by a charge on the
Land. Cash Credits by hypothecation of Stocks and Book Debts and
the Other Secured Loans on the Buildings and Plant and Machinery.
The following adjustments are yet to be made:
1. Investment Allowance Reserve to be created ` 5,400 (000's)
2. Provision to be made for Income-Tax in ` 4,400 (000's) 3. Provision to be made for Managing Director’s
Commission at 1% of the Net Profits.
4. Proposed Dividend at 10%.
Depreciation as per Companies Act, is ` 10,424 (000's) Prepare:
(a) Show the computation of Commission Payable to the Managing Director, and
(b) Prepare the Balance sheet of the Company, based on all the above. (10 marks) 3. (a) With the help of the
following statement of Profit and Loss for the year ended 31-3-2016 and Balance sheets as on 31.3.2015 and
31.3.2014 of ABC Ltd. calculate Cash flows from operating activities.
Non-current Assets:
Plant 5,40,000 4,75,000 Patents 50,000 -
Current assets
Inventories 1,20,000 1,05,000
Trade Receivable 90,000 70,000
Total 8,00,000 6,50,000
(12 marks) (b) The partners Kamal and Vimal decided to convert their existing partnership business into a Private
Limited Company called M/s. KV Trading Private Ltd. with effect from 1-7-2014.
The same books of accounts were continued by the company which closed its account for first term on 31-3-2015.
closed its account for first term on 31-3-2015.
2015 is below:
Turnover
Interest on investments
240.00
6.00
246.00
102.00
3.00
6.00
18.00
6.00
2.00
5.50
1.00
2.00
2.00
1.00
4.00 152.50
93.50
(i) The average monthly sales doubled from 1-7-2014. GP ratio was constant.
(ii) All investments were sold on 31-5-2014.
(iii) Average monthly salary doubled from 1-10-2014. (iv) The company occupied additional space from 1-7-2014
for
which rent of ` 20,000 per month was incurred. (v) Bad debts recovered amounting to ` 50,000 for a sale
made in 2012, has been deducted from bad debts
mentioned above.
(vi) Audit fees pertains to the company.
Prepare a statement apportioning the expenses between pre and post incorporation periods and calculate the
Profit/Loss for such periods.
Also suggest how the pre-incorporation profits are to be dealt with. (8 marks)
4. The Balance Sheet of Dee Limited on 31st March, 2009 was as follows:
Balance Sheet as at 31st March, 2009
Liabilities Amount
` Share capital :
Authorised capital 50,000 equity
shares of ` 10 each 5,00,000 Issued and subscribed capital 25,000
equity shares of ` 10 fully paid up 2,50,000
Assets Amount `
PPE (at cost less depreciation) 8,00,000
Debenture redemption fund
investments 2,00,000
Cash balance 2,50,000
Other current assets 10,00,000
22,50,000
22,50,000
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
1st October, 2017 1st November, 2017
15th January, 2018
15thMarch, 2018 Purchased 12,000 equity shares of` 10 each in Moon Limited for ` 44 each through a broker, who
charged brokerage @ 2%.
Sold 2,250 8% bonds at`81 Ex-interest. Received half year’s interest on 8% bonds.
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.
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. (8 marks) 6. (a) Happy Valley
Florists Ltd. acquired a delivery van on hire purchase
on 01.04.2010 from Ganesh Enterprises. The terms were as follows: Particulars Amount (`) Hire Purchase Price
1,80,000 Down Payment 30,000 1st installment payable after 1 year 50,000 2nd installment after 2 years 50,000 3rd
installment after 3 years 30,000 4th installment after 4 years 20,000
installment.
(ii) Prepare Van A/c., Ganesh Enterprises A/c. in the books of
Happy Valley Florists Ltd. up to 31.03.2014. (5 marks) (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 unrealised profit on departmental
sales being eliminated. 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:
Find out the correct departmental profits after charging Managers’ commission. (5 marks)
(c) ABC Ltd. sends Goods to its Jaipur Branch at Cost plus 25%. The following particulars are available in respect
of the Branch for the year- ended 31st March:
Particulars `
Prepare Ledger Accounts in the HO Books for -(1) Branch Stock Account, (2) Goods Sent to Branch Account, (3)
Branch Adjustment Account, and (4) Branch Profit and Loss Account.
(5 marks) (d) Write short notes on Designated Partner in a Limited Liability Partnership and what are their
liabilities. (5 marks)
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