GM TEST SERIES

Notes for Dec 2021 attempt

Top 50 Questions

Accounting

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 CA-Inter New Course

Accounting

TOP 50 Questions

Q-1 On 31st March, 20X1, SR Ltd. provides the following ledger balances after preparing its
Profit & Loss Account for the year ended 31st March, 20X1.

Particulars Amount (Rs)

Debit Credit
Equity Share Capital, fully paid shares of Rs 50 each 80,00,000
Calls in arrear 15,000
Land 25,00,000
Buildings 30,00,000
Plant & Machinery 24,00,000
Furniture & Fixture 13,00,000
Securities Premium 15,00,000
General Reserve 9,41,000
Profit & Loss Account 5,80,000
Loan from Public Finance Corporation (Secured by Hypothecation 26,30,000
of Land)
Other Long Term Loans 22,50,000
Short Term Borrowings 4,60,000
Inventories: Finished goods 45,00,000
Raw materials 13,00,000
Trade Receivables 17,50,000
Advances: Short Term 3,75,000
Trade Payables 8,13,000

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Provision for Taxation 3,80,000
Unpaid Dividend 70,000
Cash in Hand 70,000
Balances with Banks 4,14,000
Total 1,76,24,000 1,76,24,000
The following additional information was also provided in respect of the above balances:

1) 50,000 fully paid equity shares were allotted as consideration for land.

2) The cost of assets were:

Building Rs 32,00,000
Plant and Machinery Rs 30,00,000
Furniture and Fixture Rs 16,50,000

3) Trade Receivables for Rs 4,86,000 due for more than 6 months.

4) Balances with banks include Rs 56,000, the Naya bank, which is not a scheduled bank.

5) Loan from Public Finance Corporation repayable after 3 years.

6) The balance of Rs 26,30,000 in the loan account with Public Finance Corporation is
inclusive of Rs 1,34,000 for interest accrued but not due. The loan is secured by
hypothecation of land.

7) Other long term loans (unsecured) includes:

Loan taken from Nixes Bank Rs 13,80,000
(Amount repayable within one year Rs 4,80,000
Loan taken from Directors Rs 8,50,000

8) Bills Receivable for Rs 1,60,000 maturing on 15th June, 20X1 has been discounted.

9) Short term borrowings includes:

Loan from Naya bank Rs 1,16,000 (Secured)
Loan from directors Rs 48,000

10) Transfer of Rs 35,000 to general reserve has been proposed by the Board of directors out

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 of the profits for the year.

11) Inventory of finished goods includes loose tools costing Rs 5 lakhs (which do not meet
definition of property, plant & equipment as per AS 10)
You are required to prepare the Balance Sheet of the Company as on March 31st 20X1 as
required under Part - I of Schedule III of the Companies Act, 2013.

You are not required to give previous year figures.

A-2 The following extract of Balance Sheet of Star Ltd. (non- investment) company was
obtained:

Liabilities Rs
Authorised capital:
60,000, 14% preference shares of Rs 100 60,00,000
6,00,000 Equity shares of Rs 100 each 6,00,00,000
6,60,00,000
Issued and subscribed capital:
45,000, 14% preference shares of Rs 100 each fully paid 45,00,000
3,60,000 Equity shares of Rs 100 each, Rs 80 paid-up 2,88,00,000
Share suspense account 60,00,000
Reserves and surplus:
Capital reserves (Rs 4,50,000 is revaluation reserve) 5,85,000
Securities premium 1,50,000
Secured loans:
15% Debentures 1,95,00,000
Unsecured loans:
Public deposits 11,10,000

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Cash credit loan from SBI (short term) 3,95,000
Current Liabilities:
Trade Payables 10,35,000
Assets:
Investment in shares, debentures, etc. 2,25,00,000
Profit and Loss account (Dr. balance) 45,75,000
Share suspense account represents application money received on shares, the allotment of
which is not yet made.

You are required to compute effective capital as per the provisions of Schedule V. Would your
answer differ if Star Ltd. is an investment company?

Q-3 Kartik Ltd. is a non-investment company and has been incurring losses for the past few
years. The company provides the following information for the current year:

(Rs in lakhs)
Paid up equity share capital 270
Paid up Preference share capital 45
Reserves (including Revaluation reserve Rs 22.5 lakhs) 337.5
Securities premium 90
Long term loans 90
Deposits repayable after one year 45
Application money pending allotment 1620
Accumulated losses not written off 45
Investments 405
Kartik Ltd. has only one whole-time director, Mr. Kumar. You are required to calculate the
amount of maximum remuneration that can be paid to him as per provisions of the Companies

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Act, 2013, if no special resolution is passed at the general meeting of the company in respect of
payment of remuneration.

Q-4 XYZ Ltd. is having inadequacy of profits in the year ending 31-03-2021 and it proposes to
declare 10% dividend out of General Reserves.

From the following particulars ascertain the amount that can be utilized from general reserves,
according to the Companies (Declaration of Dividend out of Reserves) Rules, 2014:

5,00,000 Equity Shares of Rs 10 each fully paid up 50,00,000

General Reserves 25,00,000
Revaluation Reserves 6,50,000
Net profit for the year 1,42,500
Average rate of dividend during the last five years has been 12%.

Q-5 From the following Balance Sheets and information, prepare Cash Flow Statement of Ryan
Ltd. by Indirect method for the year ended 31st March, 20X1:

Particulars Notes 31st March 31st March

20X1 20X0
Rs Rs
Equity and Liabilities
1 Shareholders’ funds
A Share capital 1 6,00,000 7,00,000
B Reserves and Surplus 2 4,20,000 3,00,000
2 Non-current liabilities

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 Long term borrowings 3 2,00,000 -
3 Current liabilities
A Trade Payables 1,15,000 1,10,000
B Other current liabilities 4 30,000 80,000
C Short term provision (provision for tax) 95,000 60,000
Total 14,60,000 12,50,000
Assets
1 Non-current assets
A Property, plant and Equipment 5 9,15,000 7,00,000
B Non-Current Investments 50,000 80,000
2 Current assets
A Inventories 95,000 90,000
B Trade receivables 2,50,000 2,25,000
C Cash and Cash equivalents 50,000 90,000
D Other Current assets 1,00,000 65,000
Total 14,60,000 12,50,000

Notes to accounts

No. 31st 31st

March, March,
20X1 20X0
1. Share capital
Equity share capital 6,00,000 5,00,000
10% Redeemable Preference share capital -- 2,00,000
Total 6,00,000 7,00,000
2 Reserves and Surplus
Capital redemption reserve 1,00,000 -

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 Capital reserve 70,000 -
General reserve 1,50,000 2,50,000
Profit and Loss account 1,00,000 50,000
Total 4,20,000 3,00,000
3 Long term borrowings
9% Debentures 2,00,000 --
4. Other current liabilities
Dividend payable - 60,000
Liabilities for expenses 30,000 20,000
Total 30,000 80,000
5. Property, plant and equipment
Plant and machinery 7,65,000 5,00,000
Land and building 1,50,000 2,00,000
Net carrying value 9,15,000 7,00,000
Additional Information:

(i) A piece of land has been sold out for Rs1,50,000 (Cost – Rs1,20,000) and the balance land
was revalued. Capital Reserve consisted of profit on revaluation of land.

(ii) On 1st April, 20X0 a plant was sold for Rs90,000 (Original Cost – Rs70,000 and W.D.V. – Rs
50,000) and Debentures worth Rs1 lakh were issued at par as part consideration for plant
of Rs4.5 lakhs acquired.

(iii) Part of the investments (Cost – Rs50,000) was sold for Rs70,000.

(iv) Pre-acquisition dividend received Rs5,000 was adjusted against cost of investment.

(v) Interim dividend was declared and paid @ 15% during the current year.

(vi) Income-tax liability for the current year was estimated at Rs1,35,000.

(vii) Depreciation @ 15% has been charged on Plant and Machinery but no depreciation has
been charged on Building.

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Q-6 The following figures have been extracted from the books of X Limited for the year ended
on 31.3.2019. You are required to prepare a cash flow statement as per AS 3 using indirect
method.

(i) Net profit before taking into account income tax and income from law suits but after taking
into account the following items was Rs 20 lakhs:

a) Depreciation on Property, Plant & Equipment Rs 5 lakhs.

b) Discount on issue of Debentures written off Rs 30,000.

c) Interest on Debentures paid Rs 3,50,000.

d) Book value of investments Rs 3 lakhs (Sale of Investments for Rs 3,20,000).

e) Interest received on investments Rs 60,000.

f) Compensation received Rs 90,000 by the company in a suit filed.

(ii) Income tax paid during the year Rs 10,50,000.

(iii) 15,000, 10% preference shares of Rs 100 each were redeemed on 31.3.2019 at a premium
of 5%. Further the company issued 50,000 equity shares of Rs 10 each at a premium of 20% on
2.4.2018. Dividend on preference shares were paid at the time of redemption.

(iv) Dividend paid for the year 2017-2018 Rs 5 lakhs and interim dividend paid Rs 3 lakhs for the
year 2018-2019.

(v) Land was purchased on 2 4.2018 for Rs 2,40,000 for which the company issued 20,000
equity shares of Rs 10 each at a premium of 20% to the land owner as consideration.

(vi) Current assets and current liabilities in the beginning and at the end of the years were as
detailed below:

As on 31.3.2018 As on 31.3.2019
Rs Rs

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Inventory 12,00,000 13,18,000
Trade receivables 2,58,000 2,53100
Cash in hand 1,96,300 35,300
Trade payables 2,11,000 2,11,300
Outstanding expenses 75,000 81,800

Q-7 Given below are the relevant extracts of the Balance Sheet and the Statement of Profit and
Loss of ABC Ltd. along with additional information:

Extract of Balance sheet

Particulars Notes 31.3.20X1 31.3.20X0

(Rs in lakhs) (Rs in lakhs)
Equity and Liabilities
1 Current liabilities
(a) Trade Payables 250 230
(b) Short term Provisions 1 200 180
(c) Other current liabilities 2 70 50
Assets
1 Current assets
(a) Inventories 200 180
(b) Trade Receivables 400 250
(c) Other current assets 3 195 180

Statement of Profit and Loss of ABC Ltd.

for the year ended 31st March, 20X1

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 Particulars Notes Rs in lakhs
I Revenue from operations 4,150
II Other income 4 100
III Total Revenue (I + II) 4,250
Expenses:
Purchases of Stock-in-Trade 2,400
Change in inventories of finished goods (20)
Employee benefits expense 800
Depreciation expense 100
Finance cost 5 60
Other expenses 200
IV Total expenses 3,540
V Profit before tax (III – IV) 710
VI Tax expense:
Current tax 200
VII Profit for the year from continuing operations 510

Appropriations

Balance of Profit and Loss account brought forward 50

Transfer to general reserve 200
Dividend paid 330

Notes to accounts:

20X1 20X0
(Rs in lakhs) (Rs in lakhs)
1 Short term Provisions:
Provision for Tax 200 180

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2 Other current liabilities:
Outstanding wages 50 40
Outstanding expenses 20 10
Total 70 50
3 Other current assets:
Advance tax 195 180
4 Other income:
Interest and dividend 100
5 Finance cost:
Interest 60
Compute cash flow from operating activities using both direct and indirect method.

Q-8 Ryan Ltd provides you the following information at the year-end, March 31, 20X1:

Rs Rs
Sales 6,98,000
Cost of Goods Sold (5,20,000)
1,78,000
Operating Expenses
(including Depreciation Expense of Rs 37,000) (1,47,000)
31,000
Other Income / (Expenses):
Interest Expense paid (23,000)
Interest Income received 6,000
Gain on Sale of Investments 12,000
Loss on Sale of Plant (3,000)
(8,000)

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 23,000
Income tax (7,000)
16,000
Information available:

31st March 31st March

20X1 20X0
Rs Rs
Plant 7,15,000 5,05,000
Less: Accumulated Depreciation (1,03,000) (68,000)
6,12,000 4,37,000
Investments (Long term) 1,15,000 1,27,000
Inventory 1,44,000 1,10,000
Trade receivables 47,000 55,000
Cash 46,000 15,000
Prepaid expenses 1,000 5,000
Share Capital 4,65,000 3,15,000
Reserves and surplus 1,40,000 1,32,000
Bonds 2,95,000 2,45,000
Trade payables 50,000 43,000
Outstanding liabilities 12,000 9,000
Income taxes payable 3,000 5,000
Analysis of selected accounts and transactions during 20X0 -X1

1) Purchased investments for Rs 78,000.

2) Sold investments for Rs 1,02,000. These investments cost Rs 90,000.

3) Purchased plant assets for Rs 1,20,000.

4) Sold plant assets that cost Rs10,000 with accumulated depreciation of Rs 2,000 for Rs
5,000.

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 5) Issued Rs 1,00,000 of bonds at face value in an exchange for plant assets on 31st March,
20X1.

6) Repaid Rs 50,000 of bonds at face value at maturity.

7) Issued 15,000 shares of Rs 10 each.

8) Paid cash dividends Rs 8,000.

Prepare Cash Flow Statement as per AS-3 (Revised), using indirect method.

Q-9 ABC Ltd. took over a running business with effect from 1st April, 20X1. The company was
incorporated on 1st August, 20X1. The following information for the year ended 31.3.20X2 is
given:

Rs
Gross profit 3,20,000
Expenses:
Salaries 48,000
Stationery 4,800
Travelling expenses 16,800
Advertisement 16,000
Miscellaneous trade expenses 37,800
Rent (office buildings) 26,400
Electricity charges 4,200
Director’s fee 11,200
Bad debts 3,200
Commission to selling agents 16,000
Tax Audit fee 6,000
Debenture interest 3,000

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Interest paid to vendor 4,200
Selling expenses 25,200
Depreciation on fixed assets 9,600
Net profit 87,600
Additional information:

a) Total sales for the year, which amounted to Rs 19,20,000 arose evenly up to the date of
30.9.20X1. Thereafter they recorded an increase of two-third during the rest of the year.

b) Rent of office building was paid @ Rs 2,000 per month up to September, 20X1 and
thereafter it was increased by Rs 400 per month.

c) Travelling expenses include Rs 4,800 towards sales promotion.

d) Depreciation include Rs 600 for assets acquired in the post incorporation period.

e) Purchase consideration was discharged by the company on 30th September, 20X1 by

issuing equity shares of Rs 10 each.
Prepare Statement showing calculation of profits and allocation of expenses between pre and
post incorporation periods.

Q-10 A partnership firm M/s. Nice Sons was carrying on business from 1st May, 20X1. The
partners of the firm decided to convert the partnership firm into a private company called
Zenith (P) Ltd. with effect from 1st September, 20X1. The annual accounts were drawn upto
31st March, 20X2. The related information from 1st May, 20X1 to 31st March, 20X2 is as
follows:

Particulars Amount (Rs) Amount (Rs)

Turnover 55,20,000
Interest on Investment 60,000

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Profit on sale of Investment 42,000
56,22,000
Less:
Cost of goods sold 34,50,000
Printing & Stationery 77,000
Manager's Salary 82,000
Audit Fees 41,000
Rent 1,33,000
Bad Debts 33,000
Underwriting Commission 56,000
Depreciation 71,500
Interest on Debentures 8,900
Advertising campaign expenses 69,800
Sundry office expenses 1,06,700
Interest on borrowings 1,25,000
42,53,900
Net Profit 13,68,100
Additional Information Provided:

1) The company's only borrowing was a loan of Rs 15,00,000 at 9% p.a., to pay the purchase
consideration due to the firm and for working capital requirements. The loan was taken on
1st September, 20X1.

2) The company occupied additional space from 1st September, 20X1 for which rent of Rs
8,000 per month was incurred.

3) Audit fee pertains to the company.

4) Bad debts recovered amounting to Rs 36,000 for a sale made in June 20X1, has been
deducted from bad debts mentioned above.

5) All investments were sold in August 20X1.

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6) Zenith (P) Ltd. initiated an advertising campaign on 1st September, 20X1, which resulted
increase in monthly average sales by 40%.

7) The salary of Manager was increased by Rs 3,000 p.m. from 1st July, 20X1
Prepare a statement showing pre-incorporation and post-incorporation profit for the year
ended 31st March 20X2.

Q-11 New Limited was incorporated on 01.08.2020 to take-over the business of a partnership
firm w.e.f. 01.04.2020. It provides you the following information for the year ended 31.03.2021:

Rs
Gross profit 9,00,000
Expenses:
Salaries 1,80,000
Rent, Rates & Taxes 1,20,000
Depreciation 37,500
Commission on Sales 31,500
Interest on Debentures 48,000
Director’s Fees 18,000
Advertisement 54,000
Net Profit for the Year 4,11,000

New Limited initiated an advertising campaign which resulted increase in monthly average sales
by 25% post incorporation.

The Gross profit ratio post incorporation increased to 30% from 25%.

You are required to apportion the profit for the year between pre-incorporation and post-
incorporation periods.

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Q-12 The partners of Shri Enterprises decided to convert the partnership firm into a Private
Limited Company Shreya (P) Ltd. with effect from 1st January, 2018. However, company could
be incorporated only on 1st June, 2018. The business was continued on behalf of the company
and the consideration of Rs 6,00,000 was settled on that day along with interest @ 12% per
annum. The company availed loan of Rs 9,00,000 @ 10% per annum on 1st June, 2018 to pay
purchase consideration and for working capital. The company closed its accounts for the first
time on 31st March, 2019 and presents you the following summarized profit and loss account:

Rs Rs
Sales 19,80,000
Cost of goods sold 11,88,000
Discount to dealers 46,200
Directors’ remuneration 60,000
Salaries 90,000
Rent 1,35,000
Interest 1,05,000
Depreciation 30,000
Office expenses 1,05,000
Sales promotion expenses 33,000
Preliminary expenses (to be written off in first year itself) 15,000 18,07,200
Profit 1,72,800
Sales from June, 2018 to December, 2018 were 2½ times of the average sales, which further
increased to 3½ times in January to March quarter, 2019. The company recruited additional
work force to expand the business. The salaries from July, 2018 doubled. The company also
acquired additional showroom at monthly rent of Rs 10,000 from July, 2018.

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You are required to prepare a Profit and Loss Account showing apportionment of cost and
revenue between pre-incorporation and post-incorporation periods.

Q-13 Following notes pertain to the Balance Sheet of Mars Company Limited as at 31st March
20X1:

Rs
Authorised capital:
50,000 12% Preference shares of Rs 10 each 5,00,000
5,00,000 Equity shares of Rs 10 each 50,00,000
55,00,000
Issued and Subscribed capital:
50,000 12% Preference shares of Rs 10 each fully paid 5,00,000
4,00,000 Equity shares of Rs 10 each, Rs 8 paid up 32,00,000
Reserves and surplus:
General Reserve 1,60,000
Capital Redemption Reserve 2,40,000
Securities premium (collected in cash) 2,75,000
Revaluation Reserve Profit and Loss Account 1,00,000
16,00,000
On 1st April, 20X1, the Company has made final call @ Rs 2 each on 4,00,000 equity shares. The
call money was received by 25th April, 20X1. Thereafter, on 1st May 20X1 the company decided
to capitalise its reserves by way of bonus at the rate of one share for every four shares held, it
decided that there should be minimum reduction in free reserves.

On 1st June 20X1, the Company issued Rights shares at the rate of two shares for every five
shares held on that date at issue price of Rs 12 per share. All the rights shares were accepted by
the existing shareholders and the money was duly received by 20th June 20X1.

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Show necessary journal entries in the books of the company for bonus issue and rights issue.

Q-14 A company has decided to increase its existing share capital by making rights issue
to its existing shareholders. The company is offering one new share for every two
shares held by the shareholder. The market value of the share is Rs 240 and the
company is offering one share of Rs 120 each. Calculate the value of a right. What
should be the ex-right market price of a share?

Q-15 Following is the extract of the Balance Sheet of Madhu Ltd.as at 31st March, 2020

Rs
Authorized capital:
45,000 12% Preference shares of Rs 10 each 4,50,000
6,00,000 Equity shares of Rs 10 each 60,00,000
Issued and Subscribed capital: 64,50,000
36,000 12% Preference shares of Rs 10 each fully paid 3,60,000
4,05,000 Equity shares of Rs 10 each, Rs 8 paid up 32,40,000
Reserves and surplus:
General Reserve 5,40,000
Capital Redemption Reserve 1,80,000
Securities premium (collected in cash) 1,12,500
Profit and Loss Account 9,00,000
On 1st April, 2020, the Company has made final call @ Rs 2 each on 4,05,000 equity shares. The
call money was received by 20th April, 2020. Thereafter, the company decided to capitalize its

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reserves by way of bonus at the rate of one share for every four shares held by utilizing the
balance of profit and loss account to the minimum extent.

You are required to prepare necessary journal entries in the books of the company and prepare
the relevant extract of the balance sheet as on 30th April, 2020 after bonus issue.

Q-16 X Ltd. gives you the following information as at 31st March, 20X3:

Particulars Rs
EQUITY AND LIABILITIES
1. Shareholders’ funds
a Share capital 2,90,000
b Reserves and Surplus 48,000
2. Current liabilities
Trade Payables 56,500
ASSETS
1. Property, Plant and Equipment 3,45,000
2. Non-current investments 18,500
3. Current Assets
Cash and cash equivalents (bank) 31,000
The share capital of the company consists of Rs 50 each equity shares of Rs 2,25,000 and Rs 100
each Preference shares of Rs 65,000 (issued on 1.4.20X1). Reserves and Surplus comprises
Profit and Loss Account only.

In order to facilitate the redemption of preference shares at a premium of 10%, the Company
decided:

a) To sell all the investments for Rs 15,000.

b) To finance part of redemption from company funds, subject to, leaving a bank balance of

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 Rs 12,000.

c) To issue minimum equity share of Rs 50 each share to raise the balance of funds required.
You are required to pass:

The necessary Journal Entries to record the above transactions and prepare the balance sheet
as on completion of the above transactions.

Q-17 The capital structure of a company consists of 20,000 Equity Shares of Rs 10 each fully
paid up and 1,000 8% Redeemable Preference Shares of Rs 100 each fully paid up (issued on
1.4.20X1).

Undistributed reserve and surplus stood as: General Reserve Rs 80,000; Profit and Loss Account
Rs 20,000; Investment Allowance Reserve out of which Rs 5,000, (not free for distribution as
dividend) Rs 10,000; Securities Premium Rs 2,000, Cash at bank amounted to Rs 98,000.
Preference shares are to be redeemed at a Premium of 10% and for the purpose of redemption,
the directors are empowered to make fresh issue of Equity Shares at par after utilising the
undistributed reserve and surplus, subject to the conditions that a sum of Rs 20,000 shall be
retained in general reserve and which should not be utilised.

Pass Journal Entries to give effect to the above arrangements and also show how the relevant
items will appear in the Balance Sheet of the company after the redemption carried out.

Q-18 Bumbum Limited gives you the following information as at 31st March, 20X1:

Rs
Authorized capital:

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 50,000 Equity shares of Rs 10 each 5,00,000
10,000 Preference shares of Rs 100 each (8% redeemable) 10,00,000
Issued, subscribed and paid up capital: 15,00,000
30,000 Equity shares of Rs 10 each 3,00,000
5,000, 8% Redeemable Preference shares of Rs 100 each 5,00,000
8,00,000
Reserves & Surplus:
Securities Premium 6,00,000
General Reserve 6,50,000
Profit & Loss A/c 40,000
12,90,000
2,500, 9% Debentures of Rs 100 each 2,50,000
Trade payables 1,70,000
Property, Plant and Equipment (net) 7,80,000
Investments (market value Rs 5,80,000) 4,90,000
Deferred Tax Assets 3,40,000
Trade receivables 6,20,000
Cash & Bank balance 2,80,000
In Annual General Meeting held on 20th June, 20X1 the company passed the following
resolutions:

(i) To split equity share of Rs 10 each into 5 equity shares of Rs 2 each from 1st July.

(ii) To redeem 8% preference shares at a premium of 5%.

(iii) To redeem 9% Debentures by making offer to debenture holders to convert their holdings
into equity shares at Rs 10 per share or accept cash on redemption.

(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, 20X1 investments were sold for Rs 5,55,000 and preference shares were
redeemed.

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40% of Debenture holders exercised their option to accept cash and their claims were settled
on 1st August, 20X1.

The company fixed 5th September, 20X1 as record date and bonus issue was concluded by 12th
September, 20X1

Q-19 The Balance Sheet of Convertible Limited (unlisted company other than AIFI, Banking
company, NBFC and HFC), as at 31st March, 20X1, stood as follows:

Particulars Note No Rs
I. Equity and liabilities
(1) Shareholder's Funds
(a) Share Capital 1 50,00,000
(b) Reserves and Surplus 2 1,10,00,000
(2) Non-current liabilities
(a) Long term borrowings 3 1,65,00,000
(3) Current Liabilities
(a) Other current liabilities 1,25,00,000
Total 4,50,00,000
II. Assets
(1) Non-current assets
(a) Property, Plant and Equipment 1,60,00,000
(b) Non-current investment 4 15,00,000
(2) Current assets
(a) Cash and cash equivalents 75,00,000
(b) Other current assets 2,00,00,000
Total 4,50,00,000

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Notes to Accounts

Rs
1. Share Capital
5,00,000 shares of Rs 10 each fully paid 50,00,000
2. Reserve and Surplus
General Reserve 90,00,000
Profit & Loss Account 10,00,000
Debenture redemption reserve 10,00,000 1,10,00,000
3. Long term borrowings
13.5% convertible Debentures 1,00,00,000
(1,00,000 debentures of Rs 100 each)
Other loans 65,00,000
1,65,00,000
4. Non-current investments
Debenture redemption reserve 15,00,000
The debentures are due for redemption on 1st July, 20X1. The terms of issue of debentures
provided that they were redeemable at a premium of 5% and also conferred option to the
debenture holders to convert 20% of their holdings into equity shares at a predetermined price
of Rs 15.75 per share and the payment in cash.

Assuming that:

(i) Except for 100 debenture holders holding totally 25,000 debentures, the rest of them
exercised the option for maximum conversion.

(ii) The investments were realised at par on sale; and

(iii) All the transactions are put through, without any lag, on 1st July, 20X1.
Redraft the balance sheet of the company as on 1st July, 20X1 after giving effect to the
redemption. Show your calculations in respect of the number of equity shares to be allotted
and the necessary cash payment.

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Q-20 YZ Ltd (an unlisted company other than AIFI, Banking company, NBFC and HFC) had
16,000, 12% debentures of Rs 100 each outstanding as on 1st April, 20X1, redeemable on 31st
March, 20X2.

On 1 April 20X1, the following balances appeared in the books of accounts- Investment in 2,000
9% secured Govt. bonds of Rs 100 each. DRR is Rs 1,00,000. Interest on investments is received
yearly at the end of financial year.

2,000 own debentures were purchased on 31st March 20X2 at an average price of

Rs 99 and cancelled on the same date.

On 30 March 20X2, the investments were realised at par and the debentures were redeemed
on 31st March, 20X2. You are required to write up the following accounts for the year ended
31st March 20X2:

1) 12% Debentures Account

2) Debenture Redemption Reserve Account

3) Debenture Redemption Investments Account.

Q-21 XYZ Ltd. has issued 1,000, 12% convertible debentures of Rs 100 each redeemable after a
period of five years. According to the terms & conditions of the issue, these debentures were
redeemable at a premium of 5%. The debenture holders also had the option at the time of
redemption to convert 20% of their holdings i nto equity shares of Rs 10 each at a price of Rs 20
per share and balance in cash. Debenture holders amounting Rs 20,000 opted to get their
debentures converted into equity shares as per terms of the issue. You are required to calculate
the number of shares issued and cash paid for redemption of Rs 20,000 debenture holders.

GMTESTSERIES.COM®
Q-22 The following balances appeared in the books of Omega Ltd. as on 1-4-2020:

(i) 10 % Debentures Rs 75,00,000

(ii) Balance of DRR Rs 2,50,000

(iii) DRR Investment Rs 11,25,000 represented by 10% Rs 11,250 Secured Bonds of the
Government of India of Rs 100 each.
Annual contribution to the DRR was made as per the requirement. On 31-3-2021, balance at
bank was Rs 80,00,000 before receipt of interest. Interest on Debentures had already been
paid. The investments were realized at par for redemption of debentures at a premium of 10%
on the above date.

Omega Ltd. is an unlisted company (other than AIFI, Banking company, NBFC and HFC). You are
required to prepare Debenture Redemption Reserve Account, Debenture Redemption Reserve
Investment Account and Bank Account in the books of Omega Ltd. for the year ended 31st
March, 2021.

Q-23 A Limited purchased 5,000 equity shares (nominal value Rs 100 each) of Allianz Limited for
Rs 105 each on 1st April, 20X1. The shares were quoted cum dividend. On 15th May, 20X1,
Allianz Limited declared & paid dividend of 2% for year ended 31st March, 20X1. On 30th June,
20X1 Allianz Limited issued bonus shares in ratio of 1:5. On 1st October, 20X1 Allianz Limited
issued rights share in the ratio of 1:12 @ 45 per share. A Limited subscribed to half of the rights
issue and the balance was sold at Rs 5 per right entitlement. The company declared interim
dividend of 1% on 30th November, 20X1. Right shares were not entitled to dividend. The
company sold 3,000 shares on 31st December, 20X1 at Rs 95 per share. The company A Ltd.
incurred 2% as brokerage while buying and selling shares.

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You are required to prepare Investment Account in books of A Ltd for the year ended 31st
March, 20X2.

Q-24 Smart Investments made the following investments in the year 20X1-X2: 12% State
Government Bonds having nominal value Rs100

Date Particulars
01.04.20X1 Opening Balance (1200 bonds) book value of Rs 126,000
02.05.20X1 Purchased 2,000 bonds @ Rs 100 cum interest
30.09.20X1 Sold 1,500 bonds at Rs 105 ex interest

Interest on the bonds is received on 30th June and 31st Dec. each year.

Equity Shares of X Ltd.

15.04.20X1 Purchased 5,000 equity shares @ Rs 200 on cum right basis;
Brokerage of 1% (on cum-right price) was paid in addition (Nominal
Value of shares Rs 10)
03.06.20X1 The company announced a bonus issue of 2 shares for every 5 shares
held.
16.08.20X1 The company made a rights issue of 1 share for every 7 shares held at
Rs 250 per share.
The entire money was payable by 31.08.20X1.
22.8.20X1 Rights to the extent of 20% was sold @ Rs 60. The remaining rights
were subscribed.
02.09.20X1 Dividend @ 15% for the year ended 31.03.20X1 was received on
16.09.20X1
15.12.20X1 Sold 3,000 shares @ Rs 300. Brokerage of 1% was incurred extra.

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 15.01.20X2 Received interim dividend @ 10% for the year 20X1 –X2
31.03.20X2 The shares were quoted in the stock exchange @ Rs 220
Prepare Investment Accounts in the books of Smart Investments. Assume that the average cost
method is followed.

Q-25 Following transactions of Meeta took place during the financial year 2020 -21:

1st April, 2020 Purchased Rs 4,500 8% bonds of Rs 100 each at Rs 80.50 cum-interest.
Interest is payable on 1st November and 1st May.
1st May, 2020 Received half year’s interest on 8% bonds.
10 July, 2020 Purchased 6,000 equity shares of Rs 10 each in Kamal Limited for Rs 44
each through a broker, who charged brokerage @ 2%.
1st October 2020 Sold 1,125 8% bonds at Rs 81 Ex-interest.
1st November, 2020 Received half year’s interest on 8% bonds.
15th January, 2021 Received 18% interim dividend on equity shares of Kamal Limited.
15th March, 2021 Kamal Limited made a rights issue of one equity share for every four
Equity shares held at Rs 5 per share. Meeta exercised the option for 40%
of her entitlements and sold the balance rights in the market at Rs 2.25
per share.
Prepare separate investment account for 8% bonds and equity shares of Kamal Limited in the
books of Meeta for the year ended on 31st March, 2021. Assume that the average cost method
is followed.

Q-26 (a) In 2018, Royal Ltd. issued 12% fully paid debentures of Rs 100 each, interest being
payable half yearly on 30th September and 31st March of every accounting year. On

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1st December, 2019, M/s. Kumar purchased 10,000 of these debentures at Rs 101
(cum-interest) price. On 1st March, 2020 the firm sold all of these debentures at
Rs 106 (cum-interest) price. You are required to prepare Investment (Debentures) Account in
the books of M/s. Kumar for the period 1st December, 2019 to 1st March, 2020.

(b) Mr. X acquires 200 shares of a company on cum-right basis for Rs 60,000. He
subsequently receives an offer of right to acquire fresh shares in the company in the
proportion of 1:1 at Rs 105 each. He does not subscribe but sells all the rights for
Rs 15,000. The market value of the shares after their becoming ex-rights has also gone
down to Rs 50,000. What should be the accounting treatment in this case?

Q-27 Sony Ltd.’s. Trading and profit and loss account for the year ended 31st December,
20X1 were as follows:

Trading and Profit and Loss Account for the year ended 31.12.20X1

Rs Rs
To Opening stock 20,000 By Sales 10,00,000
To Purchases 6,50,000 By Closing stock 90,000
To Manufacturing expenses 1,70,000
To Gross profit 2,50,000
10,90,000 10,90,000
To Administrative expenses 80,000 By Gross profit 2,50,000
To Selling expenses 20,000
To Finance charges 1,00,000
To Net profit 50,000
2,50,000 2,50,000

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The company had taken out a fire policy for Rs 3,00,000 and a loss of profits policy for Rs
1,00,000 having an indemnity period of 6 months. A fire occurred on 1.4.20X2 at the premises
and the entire stock were gutted with nil salvage value. The net quarter sales i.e. 1.4.20X2 to
30.6.20X2 was severely affected. The following are the other information:

Sales during the period 1.1.X2 to 31.3.X2 2,50,000

Purchases during the period 1.1.X2 to 31.3.X2 3,00,000
Manufacturing expenses 1.1.X2 to 31.3.X2 70,000
Sales during the period 1.4.X2 to 30.6.X2 87,500
Standing charges insured 50,000
Actual expense incurred after fire 60,000
The general trend of the industry shows an increase of sales by 15% and decrease in
GP by 5% due to increased cost.

Ascertain the claim for stock and loss of profit.

Q-28 A trader intends to take a loss of profit policy with indemnity period of 6 months,
however, he could not decide the policy amount. From the following details, suggest the policy
amount:

Rs
Turnover in last financial year 36,00,000
Standing charges in last financial year 7,20,000
Net profit earned in last year was 10% of turnover and the same trend expected in subsequent
year.

Increase in turnover expected 25%.

To achieve additional sales, trader has to incur additional expenditure of Rs 50,000.

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Q-29 On account of a fire on 15th June, 20X2 in the business house of a company, the working
remained disturbed upto 15th December 20X2 as a result of which it was not possible to affect
any sales. The company had taken out an insurance policy with an average clause against
consequential losses for Rs 1,40,000 and a period of 7 months has been agreed upon as
indemnity period. An increase of 25% was marked in the current year’s sales as compared to
the last year. The company incurred an additional expenditure of Rs 12,000 to make sales
possible and made a saving of Rs 2,000 in the insured standing charges. Compute the amount of
claim admissible for the loss of profit.

Rs
Actual sales from 15th June, 20X2 to 15th Dec, 20X2 70,000
Sales from 15th June 20X1 to 15th Dec 20X1 2,40,000
Net profit for last financial year 80,000
Insured standing charges for the last financial year 70,000
Total standing charges for the last financial year 1,20,000
Turnover for the last financial year 6,00,000
Turnover for one year : 16th June 20X1 to 15th June 20X2 5,60,000

Q-30 On 2.6.2021 the stock of Mr. Heera was destroyed by fire. However, following particulars
were furnished from the records saved:

Rs
Stock at cost on 1.4.2020 2,02,500
Stock at 90% of cost on 31.3.2021 2,43,000
Purchases for the year ended 31.3.2021 9,67,500

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Sales for the year ended 31.3.2021 13,50,000
Purchases from 1.4.2021 to 2.6.2021 3,37,500
Sales from 1.4.2021 to 2.6.2021 7,20,000
Sales up to 2.6.2021 includes Rs 1,12,500 being the goods not dispatched to the customers. The
sales (invoice) price is Rs 1,12,500.

Purchases up to 2.6.2021 includes a machinery acquired for Rs 22,500.

Purchases up to 2.6.2021 does not include goods worth Rs 45,000 received from suppliers, as
invoice not received up to the date of fire. These goods have remained in the godown at the
time of fire. The insurance policy is for Rs 1,80,000 and it is subject to average clause. Ascertain
the amount of claim for loss of stock.

Q-31 On January 1, 20X1 HP M/s acquired a Pick-up Van on hire purchase from FM M/s. The
terms of the contract were as follows:

a) The cash price of the van was Rs 1,00,000.

b) Rs 40,000 were to be paid on signing of the contract.

c) The balance was to be paid in annual instalments of Rs 20,000 plus interest.

d) Interest chargeable on the outstanding balance was 6% p.a.

e) Depreciation at 10% p.a. is to be written-off using the straight-line method.

You are required to:

a) Give Journal Entries and show the relevant accounts in the books of HP M/s from January
1, 20X1 to December 31, 20X3; and

b) Show the relevant items in the Balance Sheet of the purchaser as on December 31, 20X1
to 20X3.

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Q-32 A firm acquired two tractors under hire purchase agreements from HP Co., details of
which were as follows:

Date of Purchase Tractor A Tractor B

1st April, 20X1(Rs) 1st Oct., 20X1(Rs)
Cash price 14,000 19,000
Both agreements provided for payment to be made in twenty-four monthly instalments (of Rs
600 each for Tractor A and Rs 800 each for Tractor B), commencing on the last day of the
month following purchase, all instalments being paid on due dates.

On 30th June, 20X2, Tractor B was completely destroyed by fire. In full settlement, on 10th July,
20X2 an insurance company paid Rs 15,000 under a comprehensive policy. Any balance on the
hire purchase company’s account in respect of these transactions was to be written off.

The firm prepared accounts annually to 31st December and provided depreciation on tractors
on a straight-line basis at a rate of 20 per cent per annum rounded off to nearest ten rupees,
apportioned as from the date of purchase and up to the date of disposal.

You are required to record these transactions in the following accounts, carrying down the
balances on 31st December, 20X1 and 31st December, 20X2:

a) Tractors on hire purchase.

b) Provision for depreciation of tractors.

c) Disposal of tractors.

Q-33 (a) What is meant by repossession. What is the treatment for repossession in the books of
Hire Purchaser?

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(b) On 1st April 2018 M/s KMR acquired a machine on hire purchase from M/s PQR on the
following terms:

1) Cash price of the machine was Rs 2,40,000.

2) The down payment at the time of signing the contract was Rs 96,000.

3) The balance amount is to be paid in 3 equal annual instalments plus interest.

4) Interest is chargeable @ 8% p.a.

On this basis prepare the H.P. Interest Suspense Account and Account of M/s PQR in the books
of the purchaser for the period of hire purchase.

Q-34 X purchased three cars from Y on hire purchase basis, the cash price of each car being Rs
2,00,000. The hire purchaser charged depreciation @ 20% on diminishing balance method. Two
cars were seized by on hire vendor when second installment was not paid at the end of the
second year. The hire vendor valued the two cars at cash price less 30% depreciation charged
under diminishing balance method. The hire vendor spent Rs 10,000 on repairs of the cars and
then sold them for a total amount of Rs 1,70,000.

You are required to compute: (i) Agreed value of two cars taken back by the hire vendor and
book value of car left with the hire purchaser and (ii) Profit or loss to hire purchaser on two cars
taken back by the hire vendor.

Q-35 (a) How will you allocate the following expenses among different departments:

(i) Rent, rates and taxes, repairs and maintenance, insurance of building;

(ii) Maintenance of capital assets

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 (iii) PF/ESI contributions

(iv) Carriage inward/ Discount received

(v) Lighting and Heating expenses

(b) There is transfer/sale among the three departments as below:

Department X sells goods to Department Y at a profit of 25% on cost and to Department Z at

20% profit on cost.

Department Y sells goods to X and Z at a profit of 15% and 20% on sales respectively.

Department Z charges 20% and 25% profit on cost to Departments X and Y respectively.

Department Managers are entitled to 10% commission on net profit subject to urealised profit
on departmental sales being eliminated.

Departmental profits after charging Managers' commission, but before adjustment of

unrealised profit are as under:

Rs
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:

Dept. X Dept. Y Dept. Z

Transfer from Department X - 75,000 57,000
Transfer from Department Y 70,000 - 60,000
Transfer from Department Z 30,000 25,000 -
Find out the correct departmental profits after charging Managers' commission.

GMTESTSERIES.COM®
Q-36 Martis Ltd. has several departments. Goods supplied to each department are debited to a
Memorandum Departmental Stock Account at cost, plus a fixed percentage (mark- up) to give
the normal selling price. The mark-up is credited to a memorandum departmental 'Mark-up
account', any reduction in selling prices (mark-down) will require adjustment in the stock
account and in mark-up account. The mark up for Department A for the last three years has
been 25%. Figures relevant to Department A for the year ended 31st March, 20X2 were as
follows:

Opening stock as on 1st April, 20X1, at cost Rs 65,000

Purchase at cost Rs 2,00,000

Sales Rs 3,00,000

It is further ascertained that :

1) Shortage of stock found in the year ending 31.03.20X2, costing Rs 1,000 were written off.

2) Opening stock on 01.04.20X1 including goods costing Rs 6,000 had been sold during the
year and bad been marked down in the selling price by Rs 600. The remaining stock had
been sold during the year.

3) Goods purchased during the year were marked down by Rs 1,200 from a cost of Rs
15,000. Marked-down stock costing Rs 5,000 remained unsold on 31.03.20X2.

4) The departmental closing stock is to be valued at cost subject to adjustment for mark-up
and mark-down.
You are required to prepare:

(i) A Departmental Trading Account for Department A for the year ended 31st March, 20X2
in the books of Head Office.

(ii) A Memorandum Stock Account for the year.

(iii) A Memorandum Mark-up Account for the year.

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Q-37 M/s Omega is a departmental store having three departments X, Y and Z. The information
regarding three departments for the year ended 31st March, 20X1 are given below:

X Y Z
Rs Rs Rs
Opening Stock 36,000 24,000 20,000
Purchases 1,32,000 88,000 44,000
Debtors at end 15,000 10,000 10,000
Sales 1,80,000 1,35,000 90,000
Closing stock 45,000 17,500 21,000
Value of furniture in each department 20,000 20,000 10,000
Floor space occupied by each department 3,000 2,500 2,000
(in sq. ft.)
Number of employees in each Department 25 20 15
Electricity consumed by each department 300 200 100
(in units)

The balances of other revenue items in the books for the year are given below

Amount (Rs)
Carriage inwards 3,000
Carriage outwards 2,700
Salaries 48,000
Advertisement 2,700
Discount allowed 2,250
Discount received 1,800
Rent, Rates and Taxes 7,500
Depreciation on furniture 1,000

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Electricity expenses 3,000
Labour welfare expenses 2,400
You are required to prepare Departmental Trading and Profit and Loss Account for the year
ended 31st March, 20X1 after providing provision for Bad Debts at 5%.

A-38 Below balances are taken from the records of M/s Big Shopping Complex for the year
ended 31st March, 2020:

Details Department P (Rs) Department Q (Rs)

Opening Stock 1,00,000 80,000
Purchases 13,00,000 18,20,000
Sales 20,00,000 30,00,000

 Closing stock of Department P was Rs 2,00,000 including goods transferred from

Department Q for Rs 40,000.

 Closing stock of Department Q was Rs 4,00,000 including goods transferred from

Department P for Rs 60,000.

 Opening stock of Department P included goods for Rs 20,000 transferred from

Department Q and Opening stock of Department Q included goods for Rs 30,000
transferred from Department P.

 Assume that above transfer amounts are cost to the transferee departments and the rate
of gross profit is uniform from year to year.

 Total selling expenses incurred were Rs 2,50,000 for both the departments.
From the above information, prepare Departmental Trading Account and Profit & Loss Account
for the year ended 31st March 2020, after adjusting the unrealized departmental profits, if any.

GMTESTSERIES.COM®
A-39 Lal & Co. of Jaipur has a branch in Patna to which goods are sent @ 20% above cost. The
branch makes both cash & credit sales. Branch expenses are paid direct from Head office and
the branch has to remit all cash received into the bank account of Head office. Branch doesn't
maintain any books of accounts but sends monthly returns to the head office.

Following further details are given for the year ended 31st March, 2020:

Amount (Rs)
Goods received from Head office at Invoice Price 4,20,000
Goods returned to Head office at Invoice Price 30,000
Cash sales for the year 2019-20 92,500
Credit Sales for the year 2019-20 3,12,500
Stock at Branch as on 01-04-2019 at Invoice price 36,000
Sundry Debtors at Patna branch as on 01-04-2019 48,000
Cash received from Debtors 2,19,000
Discount allowed to Debtors 3,750
Goods returned by customer at Patna Branch 7,000
Bad debts written off 2,750
Amount recovered from Bad debts previously written off as Bad 500
Rent, Rates & taxes at Branch 12,000
Salaries & wages at Branch 36,000
Office Expenses (at Branch) 4,600
Stock at Branch as on 31-03-2020 at cost price 62,500
Prepare necessary ledger accounts in the books of Head office by following Stock and Debtors
method and ascertain Branch profit.

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Q-40 On 31st March, 20X2 Kanpur Branch submits the following Trial Balance to its Head Office
at Lucknow :

Debit Balances Rs in lacs

Furniture and Equipment 18
Depreciation on furniture 2
Salaries 25
Rent 10
Advertising 6
Telephone, Postage and Stationery 3
Sundry Office Expenses 1
Stock on 1st April, 20X1 60
Goods Received from Head Office 288
Debtors 20
Cash at bank and in hand 8
Carriage Inwards 7
448
Credit Balances
Outstanding Expenses 3
Goods Returned to Head Office 5
Sales 360
Head Office 80
448
Additional Information:

Stock on 31st March, 20X2 was valued at Rs 62 lacs. On 29th March, 20X2 the Head Office
dispatched goods costing Rs 10 lacs to its branch. Branch did not receive these goods before 1st
April, 20X2. Hence, the figure of goods received from Head Office does not include these goods.
Also, the head office has charged the branch Rs 1 lac for centralized services for which the
branch has not passed the entry.

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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.

Q-41 The Washington branch of XYZ Mumbai sent the following trial balance as on 31st
December, 20X1:

$ $
Head office A/c _ 22,800
Sales _ 84,000
Debtors and creditors 4,800 3,400
Machinery 24,000 _
Cash at bank 1,200 _
Stock, 1 January, 20X1 11,200 _
Goods from H.O. 64,000 _
Expenses 5,000 _
1,10,200 1,10,200

In the books of head office, the Branch A/c stood as follows:

Washington Branch A/c

Rs Rs
To Balance b/d 8,10,000 By Cash 28,76,000
To Goods sent to branch 29,26,000 By Balance c/d 8,60,000

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 37,36,000 37,36,000
Goods are sent to the branch at cost plus 10% and the branch sells goods at invoice price plus
25%. Machinery was acquired in past, when $ 1.00 = Rs 40.

Rates of exchange were:

1st January, 20X1 $ 1.00 = Rs 46

31st December, 20X1 $ 1.00 = Rs48
Average $ 1.00 = Rs 47
Machinery is depreciated @ 10% and the branch manager is entitled to a commission of 5% on
the profits of the branch.

You are required to:

(i) Prepare the Branch Trading & Profit & Loss A/c in dollars.

(ii) Convert the Trial Balance of branch into Indian currency and prepare Branch Trading &
Profit and Loss A/c and the Branch A/c in the books of head office.

Q-42 Alpha Ltd. has a retail shop under the supervision of a manager. The ratio of gross profit at
selling price is constant at 25 per cent throughout the year to 31st March, 2020.

Branch manager is entitled to a commission of 10 per cent of the profit earned by his branch,
calculated before charging his commission but subject to a deduction from such commission
equal to 25 per cent of any ascertained deficiency of branch stock. All goods were supplied to
the branch from head office.

The following details for the year ended 31st March, 2020 are given as follows:

Rs Rs
Opening Stock (at cost) 74,736 Chargeable expenses 49,120

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Goods sent to branch (at cost) 2,89,680 Closing Stock (Selling Price) 1,23,328
Sales 3,61,280
Manager’s commission paid 2,400
on account
From the above details, you are required to calculate the commission due to manager for the
year ended 31st March, 2020.

Q-43 Mr. Anup runs a wholesale business where in all purchases and sales are made on credit.
He furnishes the following closing balances:

31st March 31st March

20X1 20X2
Sundry debtors 70,000 92,000
Bills receivable 15,000 6,000
Bills payable 12,000 14,000
Sundry creditors 40,000 56,000
Inventory 1,10,000 1,90,000
Bank 90,000 87,000
Cash 5,200 5,300
Summary of cash transactions during the year 20X1- 20X2:

(i) Deposited to bank after payment of shop expenses @ Rs 600 p.m., salary @ Rs 9,200 p.m.
and personal expenses @ Rs 1,400 p.m. Rs 7,62,750.

(ii) Cash Withdrawn from bank Rs 1,21,000.

(iii) Cash payment to suppliers Rs 77,200 for supplies and Rs 25,000 for furniture.

(iv) Cheques collected from customers but dishonoured Rs 5,700.

(v) Bills accepted by customers Rs 40,000.

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(vi) Bills endorsed Rs 10,000.

(vii) Bills discounted Rs 20,000, discount Rs 750.

(viii) Bills matured and duly collected Rs 16,000.

(ix) Bills accepted Rs 24,000.

(x) Paid suppliers by cheque Rs 3,20,000.

(xi) Received Rs 20,000 on maturity of one LIC policy of the proprietor by cheque.

(xii) Rent received Rs 14,000 by cheque for the premises owned by proprietor.

(xiii) A building was purchased on 30-11-20X1 for opening a branch for Rs 3,50,000 and some
expenses were incurred on this building, details of which are not maintained.

(xiv) Electricity and telephone bills paid by cash Rs 18,700, due Rs 2,200.
Other transactions:

(i) Claim against the firm for damage Rs 1,55,000 is under legal dispute. Legal expenses Rs
17,000. The firm anticipates defeat in the suit.

(ii) Goods returned to suppliers Rs 4,200.

(iii) Goods returned by customers Rs 1,200.

(iv) Discount offered by suppliers Rs 2,700.

(v) Discount offered to the customers Rs 2,400.

(vi) The business is carried on at the rented premises for an annual rent of Rs 20,000 which is
outstanding at the year end.
Prepare Trading and Profit & Loss Account of Mr. Anup for the year ended 31 st March 20X2
and Balance Sheet as on that date.

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Q-44 Mr. Anil, a trader keeps his books of account under single entry system. On 31st March,
20X1 his statement of affairs stood as follows:

Liabilities Rs Assets Rs
Trade Creditors 5,80,000 Furniture, Fixtures and Fittings 1,00,000
Bills Payable 1,25,000 Stock 6,10,000
Outstanding Expenses 45,000 Trade Debtors 1,48,000
Capital Account 2,50,000 Bills Receivable 60,000
Unexpired Insurance 2,000
Cash in Hand and at Bank 80,000
10,00,000 10,00,000
The following was the summary of Cash–book for the year ended 31st March, 20X2:

Receipts Rs Payments Rs
Cash in Hand and at Bank on Payments to trade Creditors 75,07,000
1st April, 20X1 80,000 Payments for Bills payable 8,15,000
Cash Sales 73,80,000 Sundry Expenses paid 6,20,700
Receipts from Trade Debtors 15,10,000 Drawings 2,40,000
Receipts for Bills Receivable 3,40,000 Cash in Hand and at Bank on 1,27,300
31st March, 20X2
93,10,000 93,10,000
Discount allowed to trade debtors and received from trade creditors amounted to Rs 36,000
and Rs 28,000 respectively. Bills endorsed amounted to Rs 15,000. Annual Fire Insurance
premium of Rs 6,000 was paid every year on 1st August for the renewal of the policy. Furniture,
fixtures and fittings were subject to depreciation @ 15% per annum on diminishing balance
method.

You are also informed about the following balances as on 31st March, 20 X2:

Rs
Stock 6,50,000

GMTESTSERIES.COM®
Trade Debtors 1,52,000
Bills Receivable 75,000
Bills Payable 1,40,000
Outstanding Expenses 5,000

The trader maintains a steady gross profit ratio of 10% on sales.

Prepare Trading and Profit and Loss Account for the year ended 31st March, 20X2 and Balance
Sheet as at that date.

Q-45 (a) ABC Ltd. was making provision for non-moving inventories based on no issues for the
last 12 months up to 31.3.2019.

The company wants to provide during the year ending 31.3.2020 based on technical evaluation:

Total value of inventory Rs 100 lakhs

Provision required based on 12 months issue Rs 3.5 lakhs
Provision required based on technical evaluation Rs 2.5 lakhs
Does this amount to change in Accounting Policy? Can the company change the method of
provision?

(b) State whether the following statements are 'True' or 'False'. Also give reason for your
answer.

1. Certain fundamental accounting assumptions underline the preparation and presentation of

financial statements. They are usually specifically stated because their acceptance and use
are not assumed.

2. If fundamental accounting assumptions are not followed in presentation and preparation of

GMTESTSERIES.COM®
 financial statements, a specific disclosure is not required.

3. All significant accounting policies adopted in the preparation and presentation of financial
statements should form part of the financial statements.

4. Any change in an accounting policy, which has a material effect should be disclosed. Where
the amount by which any item in the financial statements is affected by such change is not
ascertainable, wholly or in part, the fact need not to be indicated.
Q-46 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, 2020.

Rs Per unit
Raw Material X
Cost price 400
Freight Inward 40
Replacement cost 320
Chemical Y
Material consumed 440
Direct Labour 120
Variable Overheads 80
Additional Information:

(i) Total fixed overhead for the year was Rs 4,00,000 on normal capacity of 25,000 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 Net realizable value of Chemical Y is Rs 600 per unit.

Q-47 You are required to give the correct accounting treatment for the following in line with
provisions of AS 10:

GMTESTSERIES.COM®
(a) Trozen Ltd. operates a major chain of supermarkets all over India. It acquires a new store in
Pune which requires significant renovation expenditure. It is expected that the renovations will
be done in 2 months during which the store will be closed. The budget for this period, including
expenditure related to construct ion and remodelling costs (Rs 18 lakhs), salaries of staff (Rs 2
lakhs) who will be preparing the store before its opening and related utilities costs (Rs 1.5
lakhs), is prepared. The cost of salaries of the staff and utilities are operating expenditures that
would be incurred even after the opening of the supermarket. What will the treatment of all
these expenditures in the books of accounts?

(b) ABC Ltd is setting up a new refinery outside the city limits. In order to facilitate the
construction of the refinery and its operations, ABC Ltd. is required to incur expenditure on the
construction/development of railway siding, road and bridge. Though ABC Ltd. incurs the
expenditure on the construction/development, it will not have ownership rights on these items
and they are also available for use to other entities and public at large. Can ABC Ltd. capitalize
expenditure incurred on these items as property, plant and equipment (PPE)?

Q-48 (i) AXE Limited purchased fixed assets costing $ 5,00,000 on 1st Jan. 2018 from an
American company M/s M&M Limited. The amount was payable after 6 months. The company
entered into a forward contract on 1st January 2018 for five months @ Rs 62.50 per dollar. The
exchange rate per dollar was as follows :

On 1st January, 2018 Rs 60.75 per dollar

On 31st March, 2018 Rs 63.00 per dollar

You are required to state how the profit or loss on forward contract would be recognized in the
books of AXE Limited for the year ending 2017 -18, as per the provisions of AS 11.

(ii) Assets and liabilities and income and expenditure items in respect of integral foreign
operations are translated into Indian rupees at the prevailing rate of exchange at the end of the

GMTESTSERIES.COM®
year. The resultant exchange differences in the case of profit, is carried to other Liabilities
Account and the Loss, if any, is charged to revenue. You are required to comment in line with
AS 11 .

Q-49

(i) Hygiene Ltd. had received a grant of Rs 50 lakh in 2012 from a State Government towards
installation of pollution control machinery on fulfilment of certain conditions. The company,
however, failed to comply with the said conditions and consequently was required to
refund the said amount in 2020.
The company debited the said amount to its machinery account in 2020 on payment of the
same. It also reworked the depreciation for the said machinery from the date of its
purchase and passed necessary adjusting entries in the year 2020 to incorporate the
retrospective impact of the same. State whether the treatment done by the company is
correct or not.

(ii) ABC Ltd. received two acres of land received for set up of plant. It also received Rs 2 lakhs
received for purchase of machinery of Rs 10 lakhs. Useful life of machinery is 5 years.
Depreciation on this machinery is to be charged on straight-line basis. How should ABC Ltd.
recognize these government grants in its books of accounts?

Q-50 (a) Vital Limited borrowed an amount of Rs 150 crores on 1.4.2019 for construction of
boiler plant @ 10% p.a. The plant is expected to be completed in 4 years. Since the weighted
average cost of capital is 13% p.a., the accountant of Vital Ltd. capitalized Rs 19.50 crores for
the accounting period ending on 31.3.20 20. Due to surplus fund out of Rs 150 crores, an
income of Rs 1.50 crores was earned and credited to profit and loss account. Comment on the
above treatment of accountant with reference to relevant accounting standard.

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(b) When capitalization of borrowing cost should cease as per Accounting Standard 16? Explain
in brief.

Suggested Answers

Accounting

TOP 50 Questions

A-1

SR Ltd.

Balance Sheet as at 31st March, 20X1

Particulars Notes Figures at the end of

current reporting
period (Rs)
Equity and Liabilities
1. Shareholders' funds
a Share capital 1 79,85,000
b Reserves and Surplus 2 30,21,000
2. Non-current liabilities
a Long-term borrowings 3 42,66,000
3. Current liabilities
a Short-term borrowings 4 4,60,000
b Trade Payables 8,13,000

GMTESTSERIES.COM®
 c Other current liabilities 5 6,84,000
d Short-term provisions 6 3,80,000
Total 1,76,09,000
Assets
1. Non-current assets
a PPE 7 92,00,000
2 Current assets
a Inventories 8 58,00,000
b Trade receivables 9 17,50,000
c Cash and cash equivalents 10 4,84,000
d Short-term loans and advances 3,75,000
Total 1,76,09,000
Notes to accounts

Rs
1 Share Capital
Equity share capital
Issued, subscribed and called up
1,60,000 Equity Shares of Rs 50 each (Out of the 80,00,000
above 50,000 shares have been issued for
consideration other than cash)
Less: Calls in arrears (15,000) 79,85,000
2 Reserves and Surplus
General Reserve 9,41,000
Add: Transferred from Profit and loss 35,000 9,76,000
account
Securities premium 15,00,000
Surplus (Profit & Loss A/c) 5,80,000
Less: Appropriation to General Reserve (35,000) 5,45,000

GMTESTSERIES.COM®
 (proposed)
30,21,000
3 Long-term borrowings
Secured: Term Loans
Loan from Public Finance Corporation [repayable 24,96,000
after 3 years (Rs 26,30,000 - Rs 1,34,000 for
interest accrued but not due)]
(secured by hypothecation of land)
Unsecured
Bank Loan (Nixes bank) 9,00,000
(Rs 13,80,000 - Rs 4,80,000 repayable within 1
year)
Loan from Directors 8,50,000
Others 20,000 17,70,000
Total 42,66,000
4 Short-term borrowings
Loan from Naya bank (Secured) 1,16,000
Loan from Directors 48,000
Others 2,96,000 4,60,000
5 Other current liabilities
Loan from Nixes bank repayable within one year 4,80,000
Unpaid dividend 70,000
Interest accrued but not due on borrowings 1,34,000 6,84,000
6 Short-term provisions
Provision for taxation 3,80,000
7 PPE
Land 25,00,000
Buildings 32,00,000

GMTESTSERIES.COM®
 Less: Depreciation (2,00,000) 30,00,000
Plant & Machinery 30,00,000
Less: Depreciation (6,00,000) 24,00,000
Furniture & Fittings 16,50,000
Less: Depreciation (3,50,000) 13,00,000
Total 92,00,000
8 Inventories
Raw Material 13,00,000
Finished goods 40,00,000
Loose tools 5,00,000 58,00,000
9 Trade receivables
Outstanding for a period exceeding six months 4,86,000
Others 12,64,000
Total 17,50,000
10 Cash and cash equivalents
Balances with banks
with Scheduled Banks 3,58,000
with others banks 56,000 4,14,000
Cash in hand 70,000
Total 4,84,000

Note: There is a contingent liability amounting to Rs 1,60,000

A-2 Computation of effective capital:

Where Star Ltd. Where Star Ltd. is an

Is a non- investment investment company
company

GMTESTSERIES.COM®
 Rs Rs
Paid-up share capital —
45,000, 14% Preference shares 45,00,000 45,00,000
3,60,000 Equity shares 2,88,00,000 2,88,00,000
Capital reserves (5,85,000 – 4,50,000) 1,35,000 1,35,000
Securities premium 1,50,000 1,50,000
15% Debentures 1,95,00,000 1,95,00,000
Public Deposits 11,10,000 11,10,000
(A) 5,41,95,000 5,41,95,000
Investments 2,25,00,000 —
Profit and Loss account (Dr. balance) 45,75,000 45,75,000

(B) 2,70,75,000 45,75,000

Effective capital (A–B) 2,71,20,000 4,96,20,000

A-3 Calculation of effective capital and maximum amount of monthly remuneration

(Rs in lakhs)
Paid up equity share capital 270
Paid up Preference share capital 45
Reserve excluding Revaluation reserve (337.5- 22.5) 315
Securities premium 90
Long term loans 90
Deposits repayable after one year 45
855
Less: Accumulated losses not written off (45)
Investments (405)
Effective capital for the purpose of managerial remuneration 405

GMTESTSERIES.COM®
Kartik Ltd. is incurring losses and no special resolution has been passed by the company for
payment of remuneration. Effective capital of the company is less than 5 crores, maximum
remuneration payable to the Managing Director should be @ Rs 60,00,000 per annum.
(Revaluation reserve and application money pending allotment are not included while
computing effective capital of Kartik Ltd.)

A-4 Amount that can be drawn from reserves for (10% dividend on Rs 50,00,000 i.e. Rs
5,00,000)

Profits available

Current year profit Rs 1,42,500

Amount which can be utilized from reserves (Rs 5,00,000 – 1,42,500) Rs 3,57,500
Conditions as per Companies (Declaration of dividend out of Reserves) Rules, 20X1:

Condition I

Since 10% is lower than the average rate of dividend (12%), 10% dividend can be declared.

Condition II

Maximum amount that can be drawn from the accumulated profits and reserves should not
exceed 10% of paid up capital plus free reserves i.e. Rs 7,50,000 [10% of (50,00,000 +
25,00,000)]

Condition III

The balance of reserves after drawl Rs 21,42,500 (Rs 25,00,000 - Rs 3,57,500) should not fall
below 15 % of its paid up capital i.e. Rs 7,50,000 (15% of Rs 50,00,000]

GMTESTSERIES.COM®
Since all the three conditions are satisfied, the company can withdraw Rs 3,57,500 from
accumulated reserve (as per Declaration and Payment of Dividend Rules, 2014).

A-5 Cash Flow Statement of Ryan Limited

For the year ended 31st March, 20X1

Rs Rs
Cash flow from operating activities Net Profit before taxation 2,75,000
(W.N.1)
Adjustment for
Depreciation (W.N.3) 1,35,000
Profit on sale of land (30,000)
Profit on sale of plant (W.N.3) (40,000)
Profit on sale of investments (W.N.4) (20,000)
Interest on debentures (2,00,000 X 9%) 18,000
Operating profit before working capital changes 3,38,000
Increase in inventory (5,000)
Increase in trade receivables (25,000)
Increase in Other current assets (W.N.9) Increase in Trade (35,000)
payables 5,000
Increase in liabilities for expenses 10,000
Cash generated from operations 2,88,000
Income taxes paid (W.N.8) (1,00,000)
Net cash generated from operating activities 1,88,000
Cash flow from investing activities
Proceeds from sale of land (W.N.2) 1,50,000

GMTESTSERIES.COM®
Proceeds from sale of plant (W.N.3) 90,000
Proceeds from sale of investments (W.N.4) 70,000
Purchase of plant (W.N.3) (3,50,000)
Purchase of investments (W.N.4) (25,000)
Pre-acquisition dividend received (W.N.4) 5,000
Net cash used in investing activities (60,000)
Cash flow from financing activities
Proceeds from issue of equity shares (6,00,000 – 5,00,000) 1,00,000
Proceeds from issue of debentures (2,00,000 – 1,00,000) 1,00,000
Redemption of preference shares (2,00,000)
Dividends paid (1,50,000)
Interest paid on debentures (18,000)
Net cash used in financing activities (1,68,000)
Net decrease in cash and cash equivalents (40,000)
Cash and cash equivalents at the beginning of the year 90,000
Cash and Cash equivalents at the end of the year 50,000
Working Notes:

1.

Rs
Net profit before taxation
Retained profit 1,00,000
Less: Balance as on 31.3.20X0 (50,000)
50,000
Provision for taxation 1,35,000
Dividend 90,000
2,75,000
2. Land and Building Account

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

3. Plant and Machinery Account

Rs Rs
To Balance b/d 5,00,000 By Cash (Sale) 90,000
To Profit and loss account 40,000 By Depreciation 1,35,000
To Debentures 1,00,000 By Balance c/d 7,65,000
To Bank 3,50,000
9,90,000 9,90,000

4. Investments Account

Rs Rs
To Balance b/d 80,000 By Cash (Sale) 70,000
To Profit and loss account 20,000 By Dividend
To Bank (Balancing figure) 25,000 (Pre-acquisition) 5,000
By Balance c/d 50,000
1,25,000 1,25,000

5. Capital Reserve Account

Rs Rs

GMTESTSERIES.COM®
To Balance c/d 70,000 By Profit on revaluation of 70,000
land
70,000 70,000

6. General Reserve Account

Rs Rs
To Capital redemption reserve 1,00,000 By Balance b/d 2,50,000
To Balance c/d 1,50,000
2,50,000 2,50,000
7. Dividend payable Account

Rs Rs
To Bank (Balancing figure) 1,50,000 By Balance b/d 60,000
To Balance c/d - By Profit and loss account 90,000
1,50,000 1,50,000

8. Provision for Taxation Account

Rs Rs
To Bank (Balancing figure) 1,00,000 By Balance b/d 60,000
To Balance c/d 95,000 By Profit and loss account 1,35,000
1,95,000 1,95,000

9. Other Current Assets Account

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

GMTESTSERIES.COM®
 1,00,000 1,00,000

A-6

X Ltd.

Cash Flow Statement

for the year ended 31st March, 2019

Rs Rs
Cash flow from Operating Activities
Net profit before income tax and extraordinary items: 20,00,000
Adjustments for:
Depreciation on PPE 5,00,000
Discount on issue of debentures 30,000
Interest on debentures paid 3,50,000
Interest on investments received (60,000)
Profit on sale of investments (20,000) 8,00,000
Operating profit before working capital changes 28,00,000
Adjustments for:
Increase in inventory (1,18,000)
Decrease in trade receivable 4,900
Increase in trade payables 300
Increase in outstanding expenses 6,800 (1,06,000)
Cash generated from operations 26,94,000
Income tax paid (10,50,000)
16,44,000
Cash flow from extraordinary items:

GMTESTSERIES.COM®
Compensation received in a suit filed 90,000
Net cash flow from operating activities 17,34,000
Cash flow from Investing Activities
Sale proceeds of investments 3,20,000
Interest received on investments 60,000
Net cash flow from investing activities 3,80,000
Cash flow from Financing Activities
Proceeds by issue of equity shares at 20% premium 6,00,000
Redemption of preference shares at 5% premium (15,75,000)
Preference dividend paid (1,50,000)
Interest on debentures paid (3,50,000)
Dividend paid (5,00,000 + 3,00,000) (8,00,000)
Net cash used in financing activities (22,75,000)
Net decrease in cash and cash equivalents during the (1,61,000)
year
Add: Cash and cash equivalents as on 31.3.2018 1,96,300
Cash and cash equivalents as on 31.3.2019 35,300
Note: Purchase of land in exchange of equity shares (issued at 20% premium) has not been
considered in the cash flow statement as it does not involve any cash transaction.

A-7

Cash Flows from Operating Activities

Rs in lakhs Rs in
lakhs
Using Direct Method

GMTESTSERIES.COM®
Cash Receipts:
Cash sales and collection from Trade receivables
Sales + Opening Trade receivables – Closing Trade receivables 4,150 + 250 - 400 4,000
(A)
Cash payments:
Cash purchases & payment to Trade payables
Purchases + Opening Trade payables – Closing Trade payables 2,400 + 230 - 250 2,380
Wages and salaries paid 800 + 40 - 50 790
Cash expenses 200 + 10 – 20 190
Taxes paid – Advance tax 195
(B) 3,555
Cash flow from operating activities (A – B) 445
Using Indirect Method
Profit before tax 710
Add: Non-cash items : Depreciation 100
Add: Interest : Financing cash inflow 60
Less: Interest and Dividend : Investment cash outflow (100)
Less: Tax paid (195)
Working capital adjustments
Trade receivables 250 – 400 (150)
Inventories 180 – 200 (20)
Trade payables 250 - 230 20
Outstanding wages 50 - 40 10
Outstanding expenses 20 - 10 10 (130)
Cash flow from operating activities 445

A-8

GMTESTSERIES.COM®
 Ryan Ltd.

Cash Flow Statement

for the year ending 31st March, 20X1

Rs Rs
Cash flows from operating activities
Net profit before taxation 23,000
Adjustments for:
Depreciation 37,000
Gain on sale of investments (12,000)
Loss on sale of plant assets 3,000
Interest expense 23,000
Interest income (6,000)
Operating profit before working capital changes 68,000
Decrease in trade receivables 8,000
Increase in inventory (34,000)
Decrease in prepaid expenses 4,000
Increase in trade payables 7,000
Increase in outstanding liabilities 3,000
Cash generated from operations 56,000
Income taxes paid* (9,000)
Net cash generated from operating activities 47,000
Cash flows from investing activities
Purchase of plant (1,20,000)
Sale of plant 5,000
Purchase of investments (78,000)
Sale of investments 1,02,000
Interest received 6,000

GMTESTSERIES.COM®
Net cash used in investing activities (85,000)
Cash flows from financing activities
Proceeds from issuance of share capital 1,50,000
Repayment of bonds (50,000)
Interest paid (23,000)
Dividends paid (8,000)
Net cash from financing activities 69,000
Net increase in cash and cash equivalents 31,000
Cash and cash equivalents at the beginning of the 15,000
period
Cash and cash equivalents at the end of the period 46,000
*Working Note:

Rs
Income taxes paid:
Income tax expense for the year 7,000
Add: Income tax liability at the beginning of the year 5,000
12,000
Less: Income tax liability at the end of the year (3,000)
9,000

A-9

Statement showing calculation of profits for pre and post incorporation

periods for the year ended 31.3.20X2

Particulars Pre-incorporation Post- incorporation

period period

GMTESTSERIES.COM®
 Rs Rs
Gross profit (1:3) 80,000 2,40,000
Less: Salaries (1:2) 16,000 32,000
Stationery (1:2) 1,600 3,200
Advertisement (1:3) 4,000 12,000
Travelling expenses (W.N.4) 4,000 8,000
Sales promotion expenses (W.N.4) 1,200 3,600
Misc. trade expenses (1:2) 12,600 25,200
Rent (office building) (W.N.3) 8,000 18,400
Electricity charges (1:2) 1,400 2,800
Director’s fee (post-incorporation) - 11,200
Bad debts (1:3) 800 2,400
Selling agents commission (1:3) 4,000 12,000
Tax audit fee (1:3) 1,500 4,500
Debenture interest (post-incorporation) - 3,000
Interest paid to vendor (2:1) (W.N.5) 2,800 1,400
Selling expenses (1:3) 6,300 18,900
Depreciation on fixed assets (W.N.6) 3,000 6,600
Net profit (Bal.Fig.) 12,800 74,800
Working Notes:

1. Time Ratio

Pre incorporation period = 1st April, 20X1 to 31st July, 20X1

i.e. 4 months

Post incorporation period is 8 months

Time ratio is 1: 2.

2. Sales ratio

GMTESTSERIES.COM®
Let the monthly sales for first 6 months (i.e. from 1.4.20X1 to 30.09. 20X1) be x

Then, sales for 6 months = 6x

Monthly sales for next 6 months (i.e. from 1.10.X1 to 31.3.20X2) = x + 2/3x = 5/3x

Then, sales for next 6 months = 5/3x X 6 = 10x

Total sales for the year = 6x + 10x = 16x

Monthly sales in the pre incorporation period = Rs 19,20,000/16 = Rs 1,20,000

Total sales for pre-incorporation period = Rs 1,20,000 x 4 = Rs 4,80,000

Total sales for post incorporation period = Rs 19,20,000 – Rs 4,80,000 = Rs 14,40,000

Sales Ratio = 4,80,000 : 14,40,000 = 1 : 3

3. Rent

Rs
Rent for pre-incorporation period (Rs 2,000 x 4) 8,000 (pre)
Rent for post incorporation period
August,20X1 & September, 20X1 (Rs 2,000 x 2) 4,000
October,20X1 to March,20X2 (Rs 2,400 x 6) 14,400 18,400 (post)

4. Travelling expenses and sales promotion expenses

Pre Post
Rs Rs
Traveling expenses Rs 12,000 (i.e. Rs 16,800- Rs 4,800) 4,000 8,000
distributed in Time ratio (1:2)
Sales promotion expenses Rs 4,800 distributed in Sales 1,200 3,600
ratio (1:3)

GMTESTSERIES.COM®
5. Interest paid to vendor till 30th September, 20X1

Pre Post
Rs Rs
Interest for pre-incorporation period (Rs 4,200 / 6 x 4) 2,800
Interest for post incorporation period i.e. for August, 20X1 1,400
& September, 20X1 =(Rs 4,200 / 6 x 2)

6. Depreciation

Pre Post
Rs Rs
Total depreciation 9,600
Less: Depreciation exclusively for post incorporation period 600 600
Remaining (for pre and post incorporation period) 9,000
Depreciation for pre-incorporation period 3,000
[9,000 x 4 / 12] *
Depreciation for post incorporation period __
[9,000 x 8 / 12] * 6,000
* Time ratio = 1 : 2 3,000 6,600

A-10 Statement showing the calculation of Profits for the pre-incorporation and post-
incorporation periods

Rs

Ratio Total Pre Post

Incorporation Incorporation

GMTESTSERIES.COM®
Sales 1:2.45 55,20,000 16,00,000 39,20,000
Interest on Investments Pre 60,000 60,000 -
Bad debts recovered Pre 36,000 36,000 -
Profit on sale of investment Pre 42,000 42,000 -
(i) 56,58,000 17,38,000 39,20,000
Cost of goods sold 1:2.45 34,50,000 10,00,000 24,50,000
Advertisement Post 69,800 - 69,800
Sundry office expenses 4:7 1,06,700 38,800 67,900
Printing & Stationary 4:7 77,000 28,000 49,000
Manager Salary W.N.3 82,000 26,000 56,000
Interest on Debentures Post 8,900 - 8,900
Rent W.N.4 1,33,000 28,000 1,05,000
Bad debts 1:2.45 69,000 20,000 49,000
Underwriting Post 56,000 - 56,000
commission Post 41,000 - 41,000
Audit fees 4:7 71,500 26,000 45,500
Depreciation 1,25,000 46,250 78,750
Interest on Borrowing W.N. 5
(ii) 42,89,900 12,13,050 30,76,850
Net Profit [(i) – (ii)] 13,68,100 5,24,950 8,43,150

Working Notes:

1. Calculation of Sales Ratio

Let the average sales per month be x

Total sales from 01.05.20X1 to 31.08.20X1 will be 4x

Average sales per month from 01.09.20X1 to 31.03.20X2 will be 1.4x

GMTESTSERIES.COM®
Total sales from 01.09.20X1 to 31.03.20X2 will be 1.4x X 7 =9.8x

Ratio of Sales will be 4x: 9.8x =1:2.45

2. Calculation of time Ratio

4 Months: 7 Months i.e. 4:7

3. Manager Salary Rs

Total salary 82,000

Less: Increased salary 27,000
55,000
Monthly Salary =55,000/11 5,000
Salary from May to August 5,000 + 5,000 + 8,000 + 8,000 = 26,000
Salary from Sep to March 8,000 x 7= 56,000

4. Apportionment of Rent Rs
Total Rent 1,33,000
Less: Additional rent from 1.9.20X1 to 56,000
31.3.20X2
Rent of old premises for 11 months 77,000

Pre Post
Apportionment in time ratio (4:7) 28,000 49,000
Add: Rent for new space 56,000
Total 28,000 1,05,000

5. Interest on borrowing

Company’s Borrowing Interest = Rs 15,00,000 x 9% x 7/12= Rs 78,750

GMTESTSERIES.COM®
Interest for Pre-incorporation period = Rs 1,25,000 – 78,750 = Rs 46,250

A-11 Statement showing the calculation of Profits for the pre-incorporation and post-
incorporation periods

Particulars Total Basis of Pre- Post-

Amount Allocation incorporation incorporation
Rs Rs Rs
Gross Profit 9,00,000 1:3 2,25,000 6,75,000
Less: Salaries 1,80,000 Time 60,000 1,20,000
Rent, rates and taxes 1,20,000 Time 40,000 80,000
Commission on sales 31,500 Sales(2:5) 9,000 22,500
Depreciation 37,500 Time 12,500 25,000
Interest on debentures 48,000 Post 48,000
Directors’ fee 18,000 Post 18,000
Advertisement 54,000 post 54,000
Net profit 4,11,000 1,03,500 3,07,500
Working Notes:

1. Sales ratio

Let the monthly sales for first 4 months (i.e. from 1.4.2020 to 31.7.2020) be = x

Then, sales for 4 months = 4x

Monthly sales for next 8 months (i.e. from 1.8.20 to 31.3.2021) = x + 25% of x= 1.25x

Then, sales for next 8 months = 1.25x X 8 = 10x

Total sales for the year = 4x + 10x = 14x

GMTESTSERIES.COM®
Sales Ratio = 4 x :10x i.e. 2:5

2. Gross profit ratio

From 1.4.2020 to 31.7.2020 gross profit is 25% of sales

Then, 25% of 4x= 1x

gross profit for next 8 months (i.e. from 1.8.20 to 31.3.2021) is 30%

Then, 30% of 10x = 3x

Therefore gross profit ratio will be 1:3

3. Time ratio

1st April, 2020 to 31st July, 2020: 1st August, 2020 to 31st March, 2021

= 4 months: 8 months = 1:2

Thus, time ratio is 1:2.

A-12

Shreya (P) Limited

Profit and Loss Account

for 15 months ended 31st March, 2019

Pre. inc. (5 Post inc. (10 Pre. inc. Post inc.

months) months) (5 (10
months) months)
(Rs) (Rs) (Rs) (Rs)

GMTESTSERIES.COM®
To Cost of sales 1,80,000 10,08,000 By Sales 3,00,000 16,80,000
To Gross profit 1,20,000 6,72,000 (W.N.1)
3,00,000 16,80,000 3,00,000 16,80,000
To Discount to dealers 7,000 39,200 By Gross profit 1,20,000 6,72,000
To Directors’ - 60,000 By Loss 750
remuneration
To Salaries (W.N.2) 18,750 71,250
To Rent (W.N.3) 15,000 1,20,000
To Interest (W.N.4) 30,000 75,000
To Depreciation 10,000 20,000
To Office expenses 35,000 70,000
To Preliminary - 15,000
expenses
To Sales promotion 5,000 28,000
expenses
To Net profit - 1,73,550
1,20,750 6,72,000 1,20,750 6,72,000
Working Notes:

1. Calculation of sales ratio:

Let the average sales per month in pre-incorporation period be x

Average Sales (Pre-incorporation) = x X 5 = 5x

Sales (Post incorporation) from June to December, 2018 = 2½ x X 7 = 17.5x

From January to March, 2019 = 3½ x X 3 = = 10.5x

Total Sales 28.0x

Sales ratio of pre-incorporation & post incorporation is 5x : 28x

GMTESTSERIES.COM®
2. Calculation of ratio for salaries

Let the average salary be x

Pre-incorporation salary = x X 5= 5x

Post incorporation salary

June, 2018 =x

July 18 to March, 2019 = x X 9 X 2 = 18x

19x

Ratio is 5 : 19

3.

Calculation of Rent Rs
Total rent 1,35,000

Less: Additional rent for 9 months @ Rs 10,000 p.m. 90,000

Rent of old premises apportioned in time ratio 45,000
Apportionment Pre Inc. Post Inc.
Old premises rent 15,000 30,000
Additional Rent 90,000
15,000 1,20,000

4. Calculation of interest

Pre-incorporation period from January, 2018 to May, 2018 Rs 30,000

(6,00,000 x 12 x 5 / 199 x 12) =

GMTESTSERIES.COM®
Post incorporation period from june, 2018 to March, 2019 Rs 75,000
(9,00,000 x 10 x 10 / 100 x 12)
Rs 1,05,000

A-13

Journal Entries in the books of Mars Ltd.

20X1 Dr. Cr.

Rs Rs
April 1 Equity Share Final Call A/c Dr. 8,00,000
To Equity Share Capital A/c 8,00,000
(Final call of Rs 2 per share on 4,00,000 equity shares
made due)
April 25 Bank A/c Dr. 8,00,000
To Equity Share Final Call A/c 8,00,000
(Final call money on equity shares received)
May 1 Capital Redemption Reserve A/c Dr. 2,40,000
Securities Premium A/c Dr. 2,75,000
General Reserve A/c Dr. 1,60,000
Profit and Loss A/c Dr. 3,25,000
To Bonus to Shareholders A/c 10,00,000
(Bonus issue of one shares for every four shares held,
by utilising various reserves as per Board’s resolution
dated…….)
Bonus to Shareholders A/c Dr. 10,00,000
To Equity Share Capital A/c 10,00,000
(Capitalisation of profit)

GMTESTSERIES.COM®
June 20 Bank A/c Dr. 24,00,000
To Securities Premium A/c 4,00,000
To Equity Share Capital A/c 20,00,000
(Being Rights issue of 2 shares for every 5 shares held
as per board resolution dated)

A-14 Ex-right value of the shares = (Cum-right value of the existing shares + Rights
shares x Issue Price) / (Existing Number of shares
+ No. of right shares)

= (Rs 240 x 2 Shares + Rs 120 x 1 Share) / (2 + 1) Shares

= Rs 600 / 3 shares = Rs 200 per share.

Value of right = Cum-right value of the share – Ex-right value of

the share

= Rs 240 – Rs 200 = Rs 40 per share.

Hence, any one desirous of having a confirmed allotment of one share from the
company at Rs 120 will have to pay Rs 80 (2 shares x Rs 40) to an existing shareholder
holding 2 shares and willing to renounce his right of buying one share in favour
of that person.

A-15 Journal Entries in the books of Madhu Ltd.

Rs Rs
1-4-2020 Equity share final call A/c Dr. 8,10,000

GMTESTSERIES.COM®
 To Equity share capital A/c 8,10,000
(For final calls of Rs 2 per share on 4,05,000 equity shares
due as per Board’s Resolution dated….)
20-4-2020 Bank A/c Dr. 8,10,000
To Equity share final call A/c 8,10,000
(For final call money on 4,05,000 equity shares received)
Securities Premium A/c Dr. 1,12,500
Capital redemption reserve A/c Dr. 1,80,000
General Reserve A/c Dr. 5,40,000
Profit and Loss A/c (b.f.) Dr. 1,80,000
To Bonus to shareholders A/c 10,12,500
(For making provision for bonus issue of one share for
every four shares held)
Bonus to shareholders A/c Dr. 10,12,500
To Equity share capital A/c 10,12,500
(For issue of bonus shares)

Extract of Balance Sheet as at 30th April, 2020 (after bonus issue)

Rs
Authorized Capital
45,000 12% Preference shares of Rs 10 each 4,50,000
6,00,000 Equity shares of Rs 10 each 60,00,000
Issued and subscribed capital
36,000 12% Preference shares of RsRs10 each, fully paid 3,60,000
5,06,250 Equity shares of Rs 10 each, fully paid 50,62,500
(Out of the above, 1,01,250 equity shares @ Rs 10 each were issued by way of
bonus shares)
Reserves and surplus

GMTESTSERIES.COM®
Profit and Loss Account 7,20,000

A-16

Journal

Date Particulars Dr. (Rs) Cr. (Rs)

Bank A/c Dr. 37,500
To Share Application A/c 37,500
(For application money received on 750 shares @
Rs 50 per share)
Share Application A/c Dr. 37,500
To Equity Share Capital A/c 37,500
(For disposition of application
money received)
Preference Share Capital A/c Dr. 65,000
Premium on Redemption of
Preference Shares A/c Dr. 6,500
To Preference Shareholders A/c 71,500
(For amount payable on redemption of
preference shares)
Bank A/c Dr. 15,000
Profit and Loss A/c (loss on sale) A/c Dr. 3,500
To Investment A/c 18,500
(For sale of investments at a loss of Rs 3,500)
Profit and Loss A/c Dr. 33,750
To Capital Redemption Reserve A/c 33,750
(For transfer to CRR out of divisible profits an

GMTESTSERIES.COM®
 amount equivalent to excess of nominal value of
preference shares over proceeds (face value of
equity shares) i.e., Rs 65,000 - Rs 31,250)
Preference Shareholders A/c Dr. 71,500
To Bank A/c 71,500
(For payment of preference shareholders)
Profit and Loss A/c Dr. 6,500
To Premium on Redemption of Preference 6,500
Shares A/c
(For writing off premium on redemption out of
profits)
Balance Sheet (after redemption)

Particulars Notes No. Rs

EQUITY AND LIABILITIES
1. Shareholders’ funds
a) Share capital 1 2,62,500
b) Reserves and Surplus 2 38,000
2. Current liabilities
Trade Payables 56,500
Total 3,57,000
ASSETS
1. Property, Plant and Equipment 3,45,000
2. Current Assets
Cash and cash equivalents (bank) 3 12,000
Total 3,57,000

Notes to accounts

GMTESTSERIES.COM®
 Rs
1. Share Capital
Equity share capital (2,25,000 + 37,500) 2,62,500
2. Reserves and Surplus
Capital Redemption Reserve 33,750
Profit and Loss Account (48,000 – 6,500 – 3,500 – 33,750) 4,250
38,000
3. Cash and cash equivalents 12,000
Balances with banks (31,000 + 37,500 +15,000 – 71,500)

Working Note:

Calculation of Number of Shares: Rs

Amount payable on redemption 71,500
Less: Sale price of investment (15,000)
56,500
Less: Available bank balance (31,000 - 12,000) (19,000)
Funds from fresh issue 37,500
No. of shares = 37,500/50=750 shares

A-17

In the books of ……….

Journal Entries

Date Particulars Dr. (Rs) Cr. (Rs)

Bank A/c Dr. 25,000

GMTESTSERIES.COM®
 To Equity Share Capital A/c 25,000
(Being the issue of 2,500 Equity Shares of
Rs 10 each at a premium of Re. 1 per share as per
Board’s Resolution No…..dated…….)
General Reserve A/c Dr. 60,000
Profit & Loss A/c Dr. 10,000
Investment Allowance Reserve A/c Dr. 5,000
To Capital Redemption Reserve A/c 75,000
(Being the amount transferred to Capital
Redemption Reserve Account as per the
requirement of the Act)
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
(Being the amount paid on redemption
transferred to Preference Shareholders Account)
Preference Shareholders A/c Dr. 1,10,000
To Bank A/c 1,10,000
(Being the amount paid on redemption of
preference shares)
Profit & Loss A/c Dr. 10,000
To Premium on Redemption of 10,000
Preference Shares A/c
(Being the premium payable on redemption is
adjusted against Profit & Loss Account)

Balance Sheet as at ………[Extracts]

Particulars Notes No. Rs

GMTESTSERIES.COM®
 EQUITY AND LIABILITIES
1. Shareholders’ funds
a Share capital 1 2,25,000
b Reserves and Surplus 2 1,02,000
ASSETS
2. Current Assets
Cash and cash equivalents 13,000
(98,000 + 25,000 – 1,10,000)

Notes to Accounts

1. Share Capital
22,500 Equity shares (20,000 + 2,500) of Rs 10 each fully paid up 2,25,000
2. Reserves and Surplus
General Reserve 20,000
Securities Premium 2,000
Capital Redemption Reserve 75,000
Investment Allowance Reserve 5,000
1,02,000
Working Note:

No of Shares to be issued for redemption of Preference Shares:

Face value of shares redeemed Rs 1,00,000

Less: Profit available for distribution as dividend:

General Reserve : Rs (80,000-20,000) Rs 60,000

Profit and Loss (20,000 – 10,000 set aside for

adjusting premium payable on redemption of preference shares Rs 10,000

GMTESTSERIES.COM®
 Investment Allowance Reserve: (Rs 10,000-5,000) Rs 5,000 (Rs 75,000)

Rs 25,000

Therefore, No. of shares to be issued = Rs 25,000 / Rs 10 = 2,500 shares.

A-18

Bumbum Limited

Journal Entries

20X1 Dr. (Rs) Cr. (Rs)

July 1 Equity Share Capital A/c (Rs 10 each) Dr. 3,00,000
To Equity share capital A/c (Rs 2 each) 3,00,000
(Being equity share of Rs10 each splitted into 5 equity
shares of Rs 2 each) {1,50,000 X 2}
July 10 Cash & Bank balance A/c Dr. 5,55,000
To Investment A/c 4,90,000
To Profit & Loss A/c 65,000
(Being investment sold out and profit on sale credited to
Profit & Loss A/c)
July 10 8% Redeemable preference share capital A/c Dr. 5,00,000
Premium on redemption of pref. share A/c Dr. 25,000
To Preference shareholders A/c 5,25,000
(Being amount payable to preference share holders on
redemption) (refer W.N.1)
July 10 Preference shareholders A/c Dr. 5,25,000
To Cash & bank A/c 5,25,000

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

GMTESTSERIES.COM®
 (Being premium on preference shares adjusted from
general reserve)
Sept. 30 Profit & Loss A/c Dr. 7,500
To Interest on debentures A/c 7,500
(Being interest on debentures transferred to Profit and
Loss Account)

Balance Sheet as at 30th September, 20X1

Particulars Notes Rs
Equity and Liabilities
1 Shareholders' funds
a Share capital 1 4,40,000
b Reserves and Surplus 2 13,32,500
2 Current liabilities
a Trade Payables 1,70,000
Total 19,42,500
Assets
1 Non-current assets
a Property, Plant and Equipment 7,80,000
b Deferred tax asset 3,40,000
2 Current assets
Trade receivables 6,20,000
Cash and bank balances (W.N.4) 2,02,500
Total 19,42,500

Notes to accounts

Rs Rs

GMTESTSERIES.COM®
1 Share Capital
Authorized share capital
2,50,000 Equity shares of Rs 2 each 5,00,000
10,000 Preference shares of Rs100 each 10,00,000 15,00,000
Issued, subscribed and paid up
2,20,000 Equity shares of Rs 2 each 4,40,000
[(30,000 x 5) + 15,000 + 55,000]
2 Reserves and Surplus
Securities Premium A/c
Balance as per balance sheet 6,00,000
Add: Premium on equity shares issued on conversion of
debentures (15,000 x 8) 1,20,000
Balance 7,20,000
Capital Redemption Reserve (5,00,000-1,10,000) 3,90,000
General Reserve (6,50,000 – 5,00,000- 25,000) 1,25,000
Profit & Loss A/c 40,000
Add: Profit on sale of investment 65,000
Less: Interest on debentures (7,500) 97,500
Total 13,32,500

Working Notes:

Rs
1. Redemption of preference share:
5,000 Preference shares of Rs 100 each 5,00,000
Premium on redemption @ 5% 25,000
Amount Payable 5,25,000
2. Redemption of Debentures

GMTESTSERIES.COM®
 2,500 Debentures of Rs 100 each 2,50,000
Less: Cash option exercised by 40% holders (1,00,000)
Conversion option exercised by remaining 60% 1,50,000
Equity shares issued on conversion = 1,50,000 / 10 = 15,000
shares
3. Issue of Bonus Shares
Existing equity shares after split (30,000 x 5) 1,50,000 shares
Equity shares issued on conversion 15,000 shares
Equity shares entitled for bonus 1,65,000 shares
Bonus shares (1 share for every 3 shares held) to be issued 55,000 shares
4. Cash and Bank Balance
Balance as per balance sheet 2,80,000
Add: Realization on sale of investment 5,55,000
8,35,000
Less: Paid to preference share holders (5,25,000)
Paid to Debenture holders (7,500 + 1,00,000) (1,07,500)
Balance 2,02,500
5. Interest of Rs 7,500 paid to debenture holders have been
debited to Profit & Loss Account.

A-19

Convertible Limited

Balance Sheet as at July 1, 20X1

Particulars Note No Figures as at the end of

current reporting period

GMTESTSERIES.COM®
 Rs
I. Equity and Liabilities
(1) Shareholder's Funds
(a) Share Capital 1 60,00,000
(b) Reserves and Surplus 2 1,10,75,000
(2) Non-Current Liabilities
(a) Long-term borrowings- Unsecured Loans 65,00,000
(3) Current Liabilities
(a) Other liabilities 1,25,00,000
Total 3,60,75,000
II. Assets
(1) Non-current assets
(a) Property, Plant & Equipment 1,60,00,000
(2) Current assets
(a) Cash and bank balances (Refer WN (iii)) 75,000
(b) Other current assets 2,00,00,000
Total 3,60,75,000

Notes to Accounts

Rs
1. Share Capital
6,00,000 Equity Shares (5,00,000 + 1,00,000) of Rs 10 60,00,000
each (Refer WN (i))
2. Reserves and Surplus
General Reserve 90,00,000
Profit & Loss 10,00,000
Add: Debenture Redemption Reserve transfer 10,00,000

GMTESTSERIES.COM®
 110,00,000
Less: Premium on redemption of debentures (1,00,000 (5,00,000) 1,05,00,000
debentures x Rs 5 per debenture)
Securities Premium
(1,00,000 shares x 5.75) (Refer WN (i)) 5,75,000
1,10,75,000

Working Notes:

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

Total number of debentures 1,00,000
Less: Number of debentures for which debenture holders (25,000)
did not opt for conversion
75,000
20% of 75,000 15,000
Redemption value of 15,000 debentures (15,000 x 105) Rs 15,75,000
Number of Equity Shares to be allotted: = 1,00,000 shares
= 15,75,000 / 15.75 of Rs 10 each.

(ii) Calculation of cash to be paid: Rs

Total number of debentures 1,00,000
Less: number of debentures to be converted into equity shares (15,000)
Balance 85,000
Redemption value of 85,000 debentures (85,000 × Rs 105) Rs 89,25,000

(iii) Cash and Bank Balance: Rs

Balance before redemption 75,00,000
Add: Proceeds of investments sold 15,00,000

GMTESTSERIES.COM®
 90,00,000
Less: Cash paid to debenture holders (89,25,000)
75,000

A-20

12% Debentures Account

Date Particulars Rs Date Particulars Rs

31st March, To Own Debentures 1,98,000 1st April, 20X1 By Balance 16,00,000
20X2 A/c b/d

31st March, To Profit on 2,000

20X2 cancellation
31st March, To Bank A/c 14,00,000
20X2
16,00,000 16,00,000

Debenture Redemption Reserve Account

Date Particulars Rs Date Particulars Rs

1st April, By Balance b/d 1,00,000
20X1
31st March, To General Reserve 1,60,000 1st April, By Profit and loss 60,000
20X2 A/c 20X1 A/c [(16,00,000 X
10%) – 1,00,000]
1,60,000 1,60,000

GMTESTSERIES.COM®
 Debenture Redemption Investments A/c

Date Particulars Amount Date Particulars Amount

1st April 20X1 To Balance b/d 2,00,000 30th By Bank A/c 30,000
March 20X2 (2,000 x 100 x
15%)
(Refer Working
Note 2)

1st April 20X1 To Bank A/c (Refer 40,000 30th March By Bank A/c 2,10,000
Working Note 1) 20X2 (Refer Working
Note 3)
2,40,000 2,40,000
Working Note 1:

Additional investment in Debenture Redemption Investment A/c on 1 April 20X1

The company would be required to invest an amount equivalent to 15% of the value of the
debentures in specified investments which would be equivalent to:

= Total No of debentures X Face value per debenture X 15%

= 16,000 X 100 X 15%

= Rs 2,40,000/-

The company has already invested in specified investments i.e. 9% Govt bonds for an amount of
Rs 2,00,000 as per the information given in the question The balance amount of Rs 40,000 (i.e.
Rs 2,40,000 less Rs 2,00,000) would be invested by the company on 1 April 20X1.

Working Note 2:

Redemption of Debenture Redemption Investments on 30 March 20X2 amounting to Rs

30,000

GMTESTSERIES.COM®
Since the company purchased 2,000 own debentures on 31 March 20X2, the company would
also realize the investments of 15% corresponding to these debentures for which computation
is as follows:

= No of own debentures to be bought X Face value per debenture X 15%

= 2,000 X 100 X 15%

= Rs 30,000/-

Working Note 3:

Redemption of Debenture Redemption Investments on 30 March 20X2 amounting to Rs

2,10,000

The remaining debentures i.e. total debentures less own debentures would be redeemed on 31
March 20X2 and hence the company would also realize the balance investments of 15%
corresponding to these debentures for which computation is as follows:

= (Total no of debentures - No of own debentures) X Face value per debenture X 15%

= (16,000 - 2,000) X 100 X 15%

= Rs 2,10,000/-

A-21

Number of
debentures
Debenture holders opted for conversion (20,000 /100) 200
Option for conversion 20%
Number of debentures to be converted (20% of 200) 40

GMTESTSERIES.COM®
Redemption value of 40 debentures at a premium of 5% [40 x (100+5)] Rs 4,200
Equity shares of Rs 10 each issued on conversion
[Rs 4,200/ Rs 20 ] 210 shares

Calculation of cash to be paid : Rs

Number of debentures 200
Less: number of debentures to be converted into equity shares (40)
160
Redemption value of 160 debentures (160 × Rs 105) i.e. Rs 16,800.

A-22 Debenture Redemption Reserve Account

Date Particulars Rs Date Particulars Rs

31st March, To General 7,50,000 1st April, By Balance b/d 2,50,000
2021 reserve A/c 2020
(Refer Note)
___ 1st April, By Profit and 5,00,000
2020 loss A/c (Refer
Note 1)
7,50,000 7,50,000

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

Rs Rs
1st April, 2020 To Balance b/d 11,25,000 31st March, 2021 By Bank A/c 11,25,000
11,25,000 11,25,000

GMTESTSERIES.COM®
 Bank Account

Rs Rs
31st March, To Balance 80,00,000 31st March, By Debenture holders 82,50,000
2021 b/d 2021 A/c
(110% of 75,00,000)
To Interest on 1,12,500
DRR
Investment
(11,25,000 X
10%)
To DRR 11,25,000 By Balance c/d 9,87,500
Investment
A/c
92,37,500 92,37,500
Working note –

Calculation of DRR before redemption = 10% of Rs 75,00,000 = 7,50,000

Available balance = Rs 2,50,000

DRR required =7,50,000 – 2,50,000 = Rs 5,00,000.

A-23

In the books of A Ltd.

Investment in equity shares of Allianz Ltd.

for the year ended 31st March, 20X2

GMTESTSERIES.COM®
Date Particulars No. Income Amount Date Particulars No. Income Amount
Rs Rs Rs Rs
20X1 20X1
April To Bank 5,000 - 5,35,500 May By Bank - - 10,000
1 A/c 15 A/c
(W.N.1) (dividend)
(W.N.6)
June To Bonus 1,000 - -
30 Issue (W.N
2)
Oct. To Bank 250 - 11,250 Nov. By Bank - 6,000 -
1 A/c (W.N. 30 A/c
3) (Interim
dividend)
(W.N.7)

A-24

In the books of Smart Investments

12% Govt. Bonds for the year ended 31st March, 20X2

Date Particular Nos. Intere Amount Date Particula Nos. Interest Amoun
s st rs t
1.4.X To 1,20 3,600 1,26,000 30.6.X By Bank - 19,200 -
1 Opening 0 1 A
balance /c
b/d (Interest
(W.N.7) )

GMTESTSERIES.COM®
 (3,200 x
100 x
12% x
6/12)
2.5.X To Bank 2,00 8,000 1,92,000 30.9.X By Bank 1,50 4,500 1,57,50
1 A/ 0 1 A/c 0 0
c (W.N.8) (W.N.1 &
W.N.9)
30.9. To P & L 8,437.50 31.12. By Bank - 10,200 -
X1 A/c (Profit X1 A
on Sale) /c
(W.N.1) (Interest
)
(1,700 x
100 x
12% x
6/12)
31.3. To P & L 27,40 31.3.X By Bal. 1,70 5,100 1,68,93
X2 A/c 0 2 c/d 0 7.50
(Interest) (W.N.2
&
W.N.10)
3,20 39,00 3,26,437. 3,20 39,000 3,26,43
0 0 50 0 7.50

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

Date Particulars Nos. Dividend Amount Date Particulars Nos. Divide Amount
nd

GMTESTSERIES.COM®
15.4.X1 To Bank 5,000 10,10,000
A/c
(W.N.3)
3.6.X1 To Bonus 2,000 - - 16.9.X1 By Bank - - 7,500
Issue (Dividend)
(5,000 x 10
x 15%)
(refer note
1 and 2)
31.8.X1 To Bank 800 2,00,000 15.12.X1 By Bank 3,000 - 8,91,000
A/c (Sale)
(W.N.11) (W.N.4)
15.12.X1 To P & L 4,28,500 15.1.X2 By Bank 4,800
A/c (interim
(W.N.5) dividend)
(W.N.12)
31.3.X2 To P & L 4,800 31.3.X2 By Bal. c/d 4,800 7,40,000
A/c (W.N.6)
7800 4,800 16,38,500 7800 4,800 16,38,500

Working Notes:

1. Profit on sale of bonds on 30.9.X1

= Sales proceeds – Average cost

Sales proceeds = Rs 1,57,500 (i.e., 1,500 x 105)

Average cost = Rs [(1,26,000+1,92,000) x 1,500/3,200] = 1,49,062.50

Profit = 1,57,500– Rs 1,49,062.50=Rs 8,437.50

2. Valuation of bonds on 31st March, 20X2

Cost = Rs 3,18,000/3,200 x1,700 = 1,68,937.50

GMTESTSERIES.COM®
3. Cost of equity shares purchased on 15/4/20X1

= Cost + Brokerage

= (5,000 x Rs 200) + 1% of (5,000 x Rs 200) =Rs 10,10,000

4. Sale proceeds of equity shares on 15/12/20X1

= Sale price – Brokerage

= (3,000 x Rs 300) – 1% of (3,000 x Rs 300) =Rs 8,91,000.

5. Profit on sale of shares on 15/12/20X1

= Sales proceeds – Average cost

Sales proceeds = Rs 8,91,000

Average cost = Rs [(10,10,000+2,00,000-7,500) x 3,000/7,800]

= Rs [12,02,500 x 3,000/7,800] = 4,62,500

Profit = Rs 8,91,000 – Rs 4,62,500=Rs 4,28,500.

6. Valuation of equity shares on 31st March, 20X2

Cost = Rs [12,02,500 x 4,800/7,800]= Rs 7,40,000

Market Value = 4,800 shares × Rs 220 = Rs 10,56,000

Closing stock of equity shares has been valued at Rs 7,40,000 i.e. cost being lower than the
market value.

7. Interest accrued on opening balance of bonds = 1,200 x 100 x 12% x 3/12

= Rs 3,600

8. Interest element in bonds purchased on 02.05.20X1

= 2,000 x 100 x 12% x 4/12 = Rs 8,000

GMTESTSERIES.COM®
Cost of investment (amount in investment column)

= (2,000 x 100) – 8,000 = Rs 1,92,000

9. Interest element in bonds sold on 30.09.20X1

= 1,500 x 100 x 12% x 3/12 = Rs 4,500

10. Interest accrued on closing balance of bonds

= 1,700 x 100 x 12% x 3/12 = Rs 5,100

11. Right shares

No. of right shares issued = (5,000 + 2,000) x 1/7 = 1,000 shares

No. of right shares sold = 1,000 x 20% = 200 shares

Proceeds from sale of right shares = 200 x 60 = Rs 12,000

to be credited to statement of profit and loss

No. of right shares subscribed = 1,000 – 200 = 800 shares

Amount of right shares subscribed = 800 x 250 = Rs 2,00,000

12. Amount of interim dividend = (5,000 + 2,000 + 800 – 3,000) x 10 x 10%

= Rs 4,800

Note:

1. It is presumed that no dividend is received on bonus shares as bonus shares are declared on
3.6.20X1 and dividend pertains to the year ended 31.03.20X1.

2. The amount of dividend for the period, for which shares were not held by the investor, has
been treated as capital receipt.

GMTESTSERIES.COM®
A-25

In the books of Meeta

8% Bonds for the year ended 31st March, 2021

Date Particulars No. Income Amount Date Particulars No. Income Amount
Rs Rs Rs Rs
2020 1 May By - 18,000
1 April, To Bank 4,500 15,000 3,47,250 2020 Ba
Oct. 1 A/c nk- Interest
2021 To P & L - - 4,312.50 1 Oct. By Bank A/c 1,125 3,750 91,125
March A/c 2020
31 (W.N.1)
To P & L 20,250 1 Nov. By 13,500
A/c 2021 Ba
nk- Interest
2021 By Balance 3,375 - 2,60,437.50
Mar. c/d
31 (W.N.2)
4,500 35,250 3,51,562.50 4,500 35,250 3,51,562.50

Investment in Equity shares of Kamal Ltd. for the year ended 31 st March, 2021

Date Particulars No. Income Amount Date Particulars No. Income Amount
Rs Rs Rs Rs
2020 To Bank 6,000 -- 2,69,280 2021 By Bank – - 10,800
July 10 A/c Jan 15 dividend
2021 To Bank 600 - 3,000 March By Balance 6,600 2,72,280
March A/c (W.N. 31 c/d
15 3) (bal. fig.)
March To P & L
31 A/c - 10,800

GMTESTSERIES.COM®
 6,600 10,800 2,72,280 6,600 10,800 2,72,280

Working Notes:

1. Profit on sale of 8% Bonds

Sales price Rs 91,125

Less: Cost of bonds sold = 3,47,250/4,500x 1,125 (Rs 86,812.50)

Profit on sale Rs 4,312.50

2. Closing balance as on 31.3.2021 of 8 % Bonds

3,47,250 / 4,500 x 3,375 = Rs 2,60,437.50

3. Calculation of right shares subscribed by Kamal Ltd.

Right Shares = 6,000 / 4 x 1= 1,500 shares

Shares subscribed by Meeta = 1,500 x 40%= 600 shares

Value of right shares subscribed = 600 shares @ Rs 5 per share = Rs 3,000

4. Calculation of sale of right entitlement by Kamal Ltd.

No. of right shares sold = 1,500 – 600 = 900 rights for 2,025

Note: As per para 13 of AS 13, sale proceeds of rights are to be credited to P & L A/c.

A-26 (a)

Investment Account in the books of M/s Kumar

for the period from 1st December 2019 to 1st March, 2020

GMTESTSERIES.COM®
 (Scrip: 12% Debentures of Royal Ltd.)

Date Particul Nomin Intere Cost Date Particul Nomin Intere Cost
ars al st (Rs) ars al st (Rs)
Value Value
(Rs) (Rs)
1.12.20 To Bank 10,00,0 20,00 9,90,00 1.03.20 By Bank 10,00,0 50,00 10,10,0
19 A/c 00 0 0 20 A/c 00 0 00
(W.N.1) (W.N.2)
1.3.202 To
0 Profit 30,00 20,000
0
& loss
A/c
10,00,0 50,00 10,10,0 10,00,0 50,00 10,10,0
00 0 00 00 0 00

Working Notes:

(i) Cost of 12% debentures purchased on 1.12.2019 Rs

Cost Value (10,000 x Rs 101) 10,10,000
Less: Interest (10,000 x 100 x12% x 2/12) (20,000)
Total 9,90,000
(ii) Sale proceeds of 12% debentures sold on 1st March, 2020 Rs
Sales Price (10,000 x Rs 106) 10,60,000
Less: Interest (10,000 x 100 x12% x 5/12) (50,000)
Total 10,10,000

GMTESTSERIES.COM®
(b) As per AS 13, where the investments are acquired on cum-right basis and the market value
of investments immediately after their becoming ex-right is lower than the cost for which they
were acquired, it may be appropriate to apply the sale proceeds of rights to reduce the carrying
amount of such investments to the market value. In this case, the amount of the ex-right
market value of 200 shares bought by X immediately after the declaration of rights falls to Rs
50,000. In this case, out of sale proceeds of Rs 15,000, Rs 10,000 may be applied to reduce the
carrying amount to bring it to the market value Rs 50,000 and Rs 5,000 would be credited to the
profit and loss account.

A-27 Calculation of loss of stock:

Sony Ltd.

Trading A/c

for the period 1.1.20X2 to 31.3.20X2

Rs Rs
To Opening stock 90,000 By Sales 2,50,000
To Purchases 3,00,000 By Closing stock 2,60,000
To Manufacturing expenses 70,000 (balancing figure)
To Gross profit (20% of Rs 2,50,000) 50,000
(W.N.3)
5,10,000 5,10,000
Rs
Stock destroyed by fire 2,60,000
Amount of fire policy 3,00,000
As the value of stock destroyed by fire is less than the policy value, the entire claim
will be admitted.

GMTESTSERIES.COM®
Calculation of loss of profit

Computation of short sales:

Rs
Average sales for the period 1.4.20X1 to 30.6.20X1 2,60,870
(W.N.1) (Rs 7,82,610/3)
Add: Increasing trend of sales (15%) 39,130 (Approx.)
3,00,000
Less: Sales during the period 1.4.20X2 to 30.6.20X2 87,500
Short sales 2,12,500

Computation of G.P. Ratio:

Gross profit ratio = Net profit +Insured standing charges / Sales x 100

= Rs 50,000 + Rs 50,000 / Rs 10,00,000 x 100 = 10%

Less: Decreasing trend in G. P. 5%

5%

Loss of profit = 5% of Rs 2,12,500 = Rs 10,625

Amount allowable in respect of additional expenses (least of the following):-

(i) Actual expenditure Rs 60,000

(ii) G.P. on sales generated by

additional expenses 5% of Rs 87,500 Rs 4,375

(assumed that entire sales during disturbed period is due to additional expenses)

(iii) Additional Exp. X G.P. on Adjusted Annual Turnover / G.P. as above + Uninsured Standing
Charges

GMTESTSERIES.COM®
Rs 60,000 × 57,500 / 57,500 + 1,30,000 = Rs 18,400 (approx.)

least i.e. Rs 4,375 is admissible.

G.P. on annual turnover:

Adjusted annual turnover:

Rs
Average turnover for the period 1.4.20X1 to 31.12.20X1 (W.N.1) 7,82,610
Turnover for the period 1.1.20X2 to 31.3.20X2 2,50,000
Annual Turnover (1.4.20X1 to 31.3.20X2) 10,32,610
Add: Increase in trend (15% of Rs 7,82,610) (W.N.2) 1,17,390
Adjusted Annual Turnover 11,50,000
Gross profit on adjusted annual turnover (5% of Rs 11,50,000) 57,500
As the gross profit on annual turnover (Rs 57,500) is less than policy value (Rs 1,00,000),
average clause is not applicable.

Insurance claim to be submitted:

Rs
Loss of stock 2,60,000
Loss of profit 10,625
Additional expenses 4,375
2,75,000
Note: According to the given information standing charges include administrative expenses (Rs
80,000) and finance charges (Rs 1,00,000). Insured standing charges being Rs 50,000, uninsured
standing charges would be Rs 1,30,000 (Rs 1,80,000 – Rs 50,000).

Working Note:

Rs
1. Break up of sales for the year 20X1:

GMTESTSERIES.COM®
 Sales of the first quarter of 20X1
(Rs 2,50,000 x 100/115) 2,17,390*
(approx.)
Sales for the remaining three quarters of 20X1
Rs (10,00,000-2,17,390) 7,82,610
* Sales for the first quarter of 20X1 is computed on the basis of sales of the first quarter of
20X2.

2. The increase in trend of sales has been applied to the sales of 20X1 only, as the sales figure of
the first quarter of 20X2 was already trend adjusted.

3. Rate of gross profit in 20X1

= Gross profit/ Sales x 100 = 2,50,000/ 10,00,000 x 100 = 25%

In 20X2, gross profit had declined by 5% due to increased cost, hence, the rate of gross profit
for loss of stock is taken at 20%.

A-28 (a) Calculation of Gross Profit

Gross Profit = Net Profit + Standing Charges / Turnover x 100

= (3,60,000 + 7,20,000) / 36,00,000 = 30%

(b) Calculation of policy amount to cover loss of profit

Rs
Turnover in the last financial year 36,00,000
Add: 25% increase in turnover 9,00,000
45,00,000
Gross profit on increased turnover 13,50,000

GMTESTSERIES.COM®
Add: Additional standing charges 50,000
Policy Amount 14,00,000
Therefore, the trader should go in for a loss of profit policy of Rs 14,00,000.

A-29 1) Calculation of short sales:

Rs
Sales for the period 15.6.20X1 to 15.12.20X1 2,40,000
Add: 25% increase in sales 60,000
Estimated sales in current year 3,00,000
Less: Actual sales from 15.6.20X2 to 15.12.20X2 (70,000)
Short sales 2,30,000
2) Calculation of gross profit:

Gross profit = Net profit + Insured standing charges / Turnover ×100

= Rs 80,000 + Rs 70,000 / Rs 6,00,000 x 100

= Rs 1,50,000 / Rs 6,00,000 x 100

= 25%

3) Calculation of loss of profit:

Rs 2,30,000 x 25% =Rs 57,500

4) Calculation of claim for increased cost of working:

Least of the following:

(i) Actual expense= Rs 12,000

Expenditure x gross profit on adjusted turnover / Gross profit as above + uninsured standing
charges

GMTESTSERIES.COM®
Rs 12,000 x (25 /100) x Rs 7,00,000 / [(25 /100) x 7,00,000] + 50,000 = Rs 9,333 approx.

Where,

Adjusted turnover Rs
Turnover from 16.06.20X1 to 15.06.20X2 5,60,000
Add: 25% increase 1,40,000
7,00,000
(iii) Gross profit on sales generated due to additional expenditure = 25% x Rs 70,000 = Rs
17,500.

Rs 9,333 being the least, shall be the increased cost of working.

5. Calculation of total loss of profit

Rs
Loss of profit 57,500
Add: Increased cost of working 9,333
66,833
Less: Saving in insured standing charges (2,000)
64,833
6) Calculation of insurable amount:

Adjusted turnover x G.P. rate

= Rs 7,00,000 x 25% = Rs 1,75,000

(7) Total claim for consequential loss of profit – Due to Average Clause

= Insured amount / Insurable amount ×Total loss of profit

= Rs 1,40,000 / Rs 1,75,000 x Rs 64,833 = Rs 51,866.40

GMTESTSERIES.COM®
A-30

In the books of Mr. Heera

Trading Account for the year ended 31.3.2021

Rs Rs
To Opening Stock 2,02,500 Sales 13,50,000
To Purchases 9,67,500 Closing Stock at cost 2,70,000
(2,43,000× 100 / 90)
To Gross Profit 4,50,000
16,20,000 16,20,000
Memorandum Trading A/c

for the period from 1 4.2021 to 02.06.2021

Rs Rs
To Opening Stock (at cost) 2,70,000 By Sales 7,20,000
To Purchases 3,37,500 Less: Goods not
Add: Goods received but dispatched 1,12,500 6,07,500
invoice not received 45,000 By Closing stock 2,25,000
3,82,500 (Balancing figure)
Less: Machinery 22,500 3,60,000
To Gross Profit (Refer W.N.) 2,02,500
8,32,500 8,32,500
Calculation of Insurance Claim

Claim subject to average clause = (Actual loss of stock / value of stock on the date of fire x
Amount of policy)

= 1,80,000 x (2,25,000 / 2,25,000) = Rs 1,80,000

Working Note:

GMTESTSERIES.COM®
 1
G.P. ratio = 4,50,000 / 13,50,000 x 100 = 33 3%

1
Amount of Gross Profit = Rs 6,07,500 x 33 3% = Rs 2,02,500

A-31

In the books of HP M/s

Journal Entries

Date Particulars Dr. Cr.

Rs Rs
20X1 Pick-up Van A/c Dr. 1,00,000
Jan. 1 To FM M/s A/c 1,00,000
(Being the purchase of a pick-up van on hire
purchase from FM M/s)
“ FM M/s A/c Dr. 40,000
To Bank A/c 40,000
(Being the amount paid on signing the
H.P. contract)
Dec. 31 Interest A/c Dr. 3,600
To FM M/s A/c 3,600
(Being the interest payable @ 6% on
Rs 60,000
“ FM M/s A/c (Rs 20,000+Rs 3,600) Dr. 23,600
To Bank A/c 23,600
(Being the payment of 1st instalment along with
interest)

GMTESTSERIES.COM®
 “ Depreciation A/c Dr. 10,000
To Pick-up Van A/c 10,000
(Being the depreciation charged @ 10%
p.a. on Rs 1,00,000)
“ Profit & Loss A/c Dr. 13,600
To Depreciation A/c 10,000
To Interest A/c 3,600
(Being the depreciation and interest transferred to
Profit and Loss Account)
20X2 Interest A/c Dr. 2,400
Dec. 31 To FM M/s A/c 2,400
(Being the interest payable @ 6% on
Rs 40,000)
FM M/s A/c (Rs 20,000 + Rs 2,400) Dr. 22,400
To Bank A/c 22,400
(Being the payment of 2nd instalment along with
interest)
Depreciation A/c Dr. 10,000
To Pick-up Van A/c 10,000
(Being the depreciation charged @ 10% p.a.)
Profit & Loss A/c Dr. 12,400
To Depreciation A/c 10,000
To Interest A/c 2,400
(Being the depreciation and interest charged to
Profit and Loss Account)
20X3 Interest A/c Dr. 1,200
Dec. 31 To FM M/s A/c 1,200
(Being the interest payable @ 6% on

GMTESTSERIES.COM®
 Rs 20,000)
FM M/s A/c (Rs 20,000 + Rs 1,200) Dr. 21,200
To Bank A/c 21,200
(Being the payment of final instalment along with
interest)
Depreciation A/c Dr. 10,000
To Pick-up Van A/c 10,000
(Being the depreciation charged @ 10%
p.a. on Rs 1,00,000)
Profit & Loss A/c Dr. 11,200
To Depreciation A/c 10,000
To Interest A/c 1,200
(Being the interest and depreciation charged to
Profit and Loss Account)

Ledgers in the books of HP M/s

Pick-up Van Account

Date Particulars Rs Date Particulars Rs

1.1.20X1 To FM M/s A/c 1,00,000 31.12.20X1 By Depreciation A/c 10,000
31.12.20X1 By Balance c/d 90,000
1,00,000 1,00,000
1.1.20X2 To Balance b/d 90,000 31.12.20X2 By Depreciation A/c 10,000
31.12.20X2 By Balance c/d 80,000
90,000 90,000
1.1.20X3 To Balance b/d 80,000 31.12.20X3 By Depreciation A/c 10,000
31.12.20X3 By Balance c/d 70,000
80,000 80,000

GMTESTSERIES.COM®
 FM M/s Account

Date Particulars Rs Date Particulars Rs

1.1.20X1 To Bank A/c 40,000 1.1.20X1 By Pick-up Van A/c 1,00,000
31.12.20X1 Bank A/c 23,600 31.12.20X1 By Interest c/d 3,600
31.12.20X1 Balance c/d 40,000
1,03,600 1,03,600
31.12.20X2 Bank A/c 22,400 1.1.20X2 By Balance b/d 40,000
31.12.20X2 Balance c/d 20,000 31.12.20X2 By Interest A/c 2,400
42,400 42,400
31.12.20X3 Bank A/c 21,200 1.1.20X3 By Balance b/d 20,000
31.12.20X3 By Interest A/c 1,200
21,200 21,200
Depreciation Account

Date Particulars Rs Date Particulars Rs

31.12.20X1 To Pick-up Van A/c 10,000 31.12.20X1 By Profit & Loss A/c 10,000
31.12.20X2 To Pick-up Van A/c 10,000 31.12.20X2 By Profit & Loss A/c 10,000
31.12.20X3 To Pick-up Van A/c 10,000 31.12.20X3 By Profit & Loss A/c 10,000

Interest Account

Date Particulars Rs Date Particulars Rs

31.12.20X1 To FM M/s A/c 3,600 31.12.20X1 By Profit & Loss A/c 3,600
31.12.20X2 To FM M/s A/c 2,400 31.12.20X2 By Profit & Loss A/c 2,400
31.12.20X3 To FM M/s A/c 1,200 31.12.20X3 By Profit & Loss A/c 1,200

Balance Sheet of HP M/s as at 31st December, 20X1

GMTESTSERIES.COM®
 Liabilities Rs Assets Rs
FM M/s 40,000 Pick-up Van 90,000

Balance Sheet of HP M/s as at 31st December, 20X2

Liabilities Rs Assets Rs
FM M/s 20,000 Pick-up Van 80,000

Balance Sheet of HP M/s as at 31st December, 20X3

Liabilities Rs Assets Rs
Pick-up Van 70,000

Interest suspense method

Under this method, at the time of transfer of possession of asset, the total interest unaccrued is
transferred to interest suspense account. At later years, as and when interest becomes due,
interest account is debited and interest suspense account is credited.

Journal Entries in the books of Hire Purchaser

1. When the asset is acquired on hire purchase Dr. [Full cash price]
Asset Account
To Hire Vendor Account
2. For total interest payment
H.P. Interest Suspense Account Dr. [Total interest]
To Hire Vendor Account
3. When down payment is made
Hire Vendor Account Dr. [Down payment]
To Bank Account

GMTESTSERIES.COM®
4. For Interest of the relevant period
Interest Account Dr. [Interest of the
To H.P. Interest Suspense Account relevant period]
5. When an instalment is paid
Hire Vendor Account Dr.
To Bank Account
6. When depreciation is charged on the asset
Depreciation Account Dr. [Calculated on cash
To Asset Account price]
7. For closing interest and depreciation account
Profit and Loss Account Dr.
To Interest Account
To Depreciation Account

A-32

Hire Purchase accounts in the buyer’s books

(a) Tractors on Hire Purchase Account

20X1 Rs 20X1 Rs
April To HP Co. - Cash Dec. 31 By Balance
1 price c/d

Tractor A 14,000 Tractor A 14,000

Oct. 1 “ HP Co. - Cash Tractor B 19,000 33,000
price
Tractor B 19,000

GMTESTSERIES.COM®
 33,000 33,000

20X2 Rs 20X2 Rs
Jan. 1 To June 30 By Disposal of 19,000
Balance Tractor A/c -
b/d Transfer
Tractor A 14,000 By Balance c/d 14,000
Tractor B 19,000 33,000 Dec. 31 33,000
33,000
20X3
Jan. 1 To 14,000
Balance
b/d
(b) Provision for Depreciation of Tractors Account

20X1 Rs 20X1 Rs
Dec. 31 To Balance c/d 3,050 Dec.31 By P & L A/c:
Tractor A 2,100*
Tractor B 950** 3,050
3,050 3,050
* 14,000 x 20% x 9/12 = 2,100

** 19,000 x 20% x 3/12 = 950

20X2 Rs 20x2 Rs
June30 To Disposal of Tractor 2,850 Jan. 1 By Balance b/d 3,050
account—Transfer (950 +
1,900)
Jun. 30 By P & L A/c
Dec. 31 To Balance c/d 4,900 (Dep. for Tractor B) 1,900

GMTESTSERIES.COM®
 (19,000 x 20% x 6/12)
Dec. 31 By P & L A/c
(Dep. for Tractor A) 2,800
(14,000 x 20%)
7,750 7,750
20X3 Rs
Jan. 1 By Balance b/d 4,900

(c) Disposal of Tractor Account

20X2 Rs 20X2 Rs
June30 Tractors on hire 19,000 June 30 By Provision for Depn. of 2,850
purchase Tractors A/c
—Tractor B
July 10 Cash: Insurance 15,000
Dec. 31 P & L A/c: Loss (b.f.) 1,150
19,000 19,000

A-33 (a) Repossession is the Right of the Seller to take back the goods sold from the Hire
purchaser in case of any default by the Hire purchaser and can sell the goods after
reconditioning to any other person. The hire purchaser closes the Hire Vendor’s Account by
transferring the balance of Hire Vendor Account to Hire Purchase Asset and then finding the
profit and loss on repossession in Asset Account.

(b)

In the books of M/s KMR (purchaser)

H.P. Interest Suspense Account

GMTESTSERIES.COM®
 Date Particulars Rs Date Particulars Rs
1.4.18 To M/s PQR A/c (W.N.) 23,040 31.3.19 By Interest A/c 11,520
31.3.19 By Balance c/d 11,520
23,040 23,040
1.4.19 To Balance b/d 11,520 31.3.20 By Interest A/c 7,680
31.3.20 By Balance c/d 3,840
11,520 11,520
1.4.20 To Balance b/d 3,840 31.3.21 By Interest A/c 3,840

M/s PQR Account

Date Particulars Rs Date Particulars Rs

1.4.18 To Bank/Cash A/c 96,000 1.4.18 By Machine A/c 2,40,000
31.3.19 To Bank/Cash A/c 59,520 1.4.18 By H.P. Interest 23,040
Suspense A/c
31.3.18 To Balance c/d 1,07,520
2,63,040 2,63,040
31.3.20 To Bank/Cash A/c 55,680 1.4.19 By Balance b/d 1,07,520
31.3.20 To Balance c/d 51,840
1,07,520 1,07,520
31.3.21 To Bank/Cash A/c 51,840 1.4.20 By Balance b/d 51,840

Working Note:

Cash Price 2,40,000

Down Payment 96,000
1,44,000
Rs 1,44,000 to be paid in 3 instalments i.e. Rs 48,000 plus interest

Total interest = Rs 11,520 + Rs 7,680 + Rs 3,840 = Rs 23,040

GMTESTSERIES.COM®
A-34

Rs
(i) Price of two cars = Rs 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 = Rs 2, 80,000 x 30 / 100 84,000
Agreed value of two cars taken back by the hire vendor 1,96,000
Cash purchase price of one car 2,00,000
Less: Depreciation on Rs 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 Rs 1,60,000 @ 20% for the second year 32,000
Book value of car left with the hire purchaser 1,28,000
(ii) Book value of one car as calculated above 1,28,000
Book value of Two cars = Rs 1,28,000 x 2 2,56,000
Value at which the two cars were taken back, calculated in (i) above 1,96,000
Hence, loss to hire purchaser on cars taken back by hire vendor Rs 60,000
= Rs 2,56,000 – Rs 1,96,000 =

A-35 (a)

(i) Floor area occupied by each department (if given) otherwise on time basis;

(ii) Value of assets of each department otherwise on time basis;

(iii) Wages and salaries of each department;

GMTESTSERIES.COM®
 (iv) Purchases of each department;

(v) Consumption of energy by each department.

(b) Calculation of Correct Profit

Department Department Department

X Y Z
Rs Rs Rs
Profit after charging managers’ 1,80,000 1,35,000 90,000
commission
Add back: Managers’ commission (1/9) 20,000 15,000 10,000
2,00,000 1,50,000 1,00,000
Less: Unrealized profit on stock (W.N.) (24,500) (22,500) (10,000)
Profit before Manager’s commission 1,75,500 1,27,500 90,000
Less: Commission for Department
Manager @ 10% (17,550) (12,750) (9,000)
Departmental Profits after manager’s
commission 1,57,950 1,14,750 81,000

Working Note:

Dept. X Dept. Y Dept. Z Total

Rs Rs Rs Rs
Unrealized Profit of:
Department X 1/5×75,000 20/120×57,000 24,500
= 15,000 = 9,500
Department Y 0.15×70,000 0.20×60,000 22,500
= 10,500 = 12,000
Department Z 20/120×30,000 25/125×25,000 10,000

GMTESTSERIES.COM®
 = 5,000 = 5,000

A-36

(i) Department Trading Account

For the year ending on 31.03.20X2 in the books of Head Office

Particulars Rs Particulars Rs
To Opening Stock 65,000 By Sales 3,00,000
To Purchases 2,00,000 By Shortage 1,000
To Gross Profit c/d (b.f.) 58,880 By Closing Stock 22,880
3,23,880 3,23,880

(ii) Memorandum stock account (for Department A) (at selling price)

Particulars Rs Particulars Rs
To Balance b/d (Rs 65,000 + 25% 81,250 By Profit & Loss A/c 1,000
of Rs 65,000) (Cost of Shortage)
To Purchases 2,50,000 By Memorandum 250
(Rs 2,00,000 + 25% of Rs Departmental Mark-up
2,00,000) A/c (Load on Shortage)
(Rs 1,000 x 25%)
By Memorandum 1,200
Departmental Mark-up
A/c (Mark-down on
Current Purchases)
By Debtors A/c (Sales) 3,00,000

GMTESTSERIES.COM®
 By Memorandum 600
Departmental Mark-up
A/c (Mark Down on
Opening Stock)
By Balance c/d (b.f.) 28,200
3,31,250 3,31,250

(iii) Memorandum Departmental Mark-up Account

Particulars Rs Particulars Rs
To Memorandum Departmental 250 By Balance b/d 16,250
Stock A/c (Rs 1,000 × 25/100) (Rs 81,250 x 25/125)
To Memorandum Departmental 1,200 By Memorandum Departmental 50,000
Stock A/c Stock A/c
To Memorandum Departmental 600 (Rs 2,50,000 x 25/125)
Stock A/c
To Gross Profit transferred to 58,880
Profit & Loss A/c
To Balance c/d [(Rs 28,200 5,320
+ 400*) x 25/125 - Rs 400]
66,250 66,250
*[Rs 1,200 ×5,000/15,000] = Rs 400

Working Notes:

(i) Calculation of Cost of Sales

Rs
A Sales as per Books 3,00,000
B Add: Mark-down in opening stock (given) 600

GMTESTSERIES.COM®
C Add: mark-down in sales out of current Purchases
(Rs 1,200 x 10,000 /15,000) 800
D Value of sales if there was no mark-down (A+B+C) 3,01,400
E Less: Gross Profit (25/125 of Rs 3,01,400) subject to Mark Down (Rs 600 +
Rs 800) (60,280)
F Cost of sales (D-E) 2,41,120

(ii) Calculation of Closing Stock

Rs
A Opening Stock 65,000
B Add: Purchases 2,00,000
C Less: Cost of Sales (2,41,120)
D Less: Shortage (1,000)
E Closing Stock (A+B-C-D) 22,880
Note: It has been assumed that mark up (given in question) is determined as a percentage of
cost.

A-37 Departmental Trading & Profit and Loss Account for the year ended 31st March, 20X1 in
Books of M/s Omega

Particulars Deptt.X Deptt.Y Deptt.Z Total Particul Deptt.X Deptt.Y Deptt.Z Total
ars

To Stock 36,000 24,000 20,000 80,000 By Sales 1,80,00 1,35,00 90,000 4,05,00
(opening) 0 0 0
To Purchases 1,32,00 88,000 44,000 2,64,000 By Stock 45,000 17,500 21,000 83,500
0 (closing)

GMTESTSERIES.COM®
To Carriage 1,500 1,000 500 3,000
Inwards To
Gross Profit
c/d
(b.f.) 55,500 39,500 46,500 1,41,500

2,25,00 1,52,50 1,11,00 4,88,500 2,25,00 1,52,50 1,11,00 4,88,50

0 0 0 0 0 0 0
To Carriage 1,200 900 600 2,700 By Gross 55,500 39,500 46,500 1,41,50
Outwards Profit 0
b/d
To Electricity 1,500 1,000 500 3,000 By 900 600 300 1,800
Discount
received
To Salaries 20,000 16,000 12,000 48,000

To 1,200 900 600 2,700

Advertisemen
t
To Discount 1,000 750 500 2,250
allowed
To Rent, 3,000 2,500 2,000 7,500
Rates and
Taxes

To 400 400 200 1,000

Depreciation
To Provision 750 500 500 1,750
for Bad Debts
@ 5%
of debtors
To Labour 1,000 800 600 2,400
welfare
expenses

To Net Profit 26,350 16,350 29,300 72,000

(b.f.)

GMTESTSERIES.COM®
 56,400 40,100 46,800 1,43,300 56,400 40,100 46,800 1,43,30
0

Working Note:

Basis of allocation of expenses

Carriage inwards Purchases (3:2:1)
Carriage outwards Turnover (4:3:2)
Salaries No. of Employees (5:4:3)
Advertisement Turnover (4:3:2)
Discount allowed Turnover (4:3:2)
Discount received Purchases (3:2:1)
Rent, Rates and Taxes Floor Space occupied (6:5:4)
Depreciation on furniture Value of furniture (2:2:1)
Labour welfare expenses No. of Employees (5:4:3)
Electricity expense Units consumed (3:2:1)
Provision for bad debts 5% of respective debtors balance

A-38

Departmental Trading and Profit & Loss A/c for M/s Big Shopping Complex

For the year ended 31st March 2020

Details Deptt. P Deptt. Q Details Deptt. P Deptt. Q

(Rs) (Rs) (Rs) (Rs)
To Opening Stock To 1,00,000 80,000 By Sales 20,00,000 30,00,000
Purchases 13,00,000 18,20,000 2,00,000 4,00,000
To Gross Profit 8,00,000 15,00,000 By Closing

GMTESTSERIES.COM®
 Stock
22,00,000 34,00,000 22,00,000 34,00,000
To Selling Exp (in 1,00,000 1,50,000 By Gross Profit 8,00,000 15,00,000
ratio of sales)
To Profit transferred 7,00,000 13,50,000
to General P&L A/c
8,00,000 15,00,000 8,00,000 15,00,000
General Profit and Loss A/c for M/s Big Shopping Complex

For the year ended 31st March 2020

Details Amount Details Amount

(Rs) (Rs)
To Stock Reserve By Profit transferred from
Deptt. P WN 1 & 2 Deptt. P 7,00,000
50% x (40,000 – 20,000) 10,000 Deptt. Q 13,50,000
Deptt. Q WN 1 & 3
40% x (60,000 – 30,000) 12,000
To Net Profit 20,28,000
20,50,000 20,50,000
Working Notes:

1) Gross Profit Ratios are: Deptt. P = 8,00,000 / 20,00,000 = 40% and of Deptt. Q = 15,00,000
/ 30,00,000 = 50%.

2) Stock Reserve for Deptt. P shall be adjusted as per the gross profit ratio of Deptt. Q i.e.
50% (On Closing Stock – Opening Stock)

3) Stock Reserve for Deptt. Q shall be adjusted as per the gross profit ratio of Deptt. P i.e.
40% (On Closing Stock – Opening Stock)

GMTESTSERIES.COM®
A-39

Branch Stock Account

Rs Rs Rs Rs
1.4.19 To Balance b/d 36,000 31.3.20 By Sales:
(opening
stock)
31.3.20 To Goods Sent 4,20,000 Cash 92,500
to Branch A/c
Credit 3,12,500
To Branch P&L 47,000 Less: Return (7,000) 3,05,500 3,98,000
By Goods 30,000
sent to
Branch
returns

By Balance 75,000
c/d
(closing
stock)

5,03,000 5,03,000
1.4.20 To Balance b/d 75,000

Branch Debtors Account

Rs Rs
1.4.19 To Balance b/d 48,000 31.3.20 By Cash 2,19,000
31.3.20 To Sales 3,12,500 By Returns 7,000

GMTESTSERIES.COM®
 By Discounts 3,750
By Bad debts 2,750
By Balance c/d 1,28,000
3,60,500 3,60,500
1.4.20 To Balance b/d 1,28,000

Branch Expenses Account

Rs Rs
31.3.20 To Salaries & Wages 36,000 31.3.20 By Branch P&L A/c 59,100
To Rent, Rates & Taxes 12,000
To Office Expenses 4,600
To Discounts 3,750
To Bad Debts 2,750
59,100 59,100

Branch Profit & Loss Account for year ended 31.3.20

Rs Rs
31.3.20 To Branch Expenses A/c 59,100 31.3.20 By Branch stock 47,000
To Net Profit By Branch Stock 58,500
transferred to Adjustment
account
General P & L A/c 46,900 By Bad debts 500
recovered
1,06,000 106,000

Branch Stock Adjustment Account for year ended 31.3.20

GMTESTSERIES.COM®
 Rs Rs
31.3.20 To Goods sent to 5,000 31.3.20 By Balance b/d 6,000
branch (36,000x1/6)
(30,000x1/6)
-returns
To Branch P & L A/c 58,500 By Goods sent to branch 70,000
(4,20,000x1/6)
To Balance c/d 12,500
(75,000x1/6)
76,000 76,000

A-40 (i)

Books of Branch

Journal Entries

(Rs in lacs)
Dr. Cr.
Goods in Transit A/c Dr. 10
To Head Office A/c 10
(Goods dispatched by head office but not received by branch
before 1st April, 20X2)
Expenses A/c Dr. 1
To Head Office A/c 1
(Amount charged by head office for centralised services)

(ii)

GMTESTSERIES.COM®
 Trading and Profit & Loss Account of the Branch

for the year ended 31st March, 20X2

Rs in lacs Rs in lacs
To Opening Stock 60 By Sales 360
To Goods received from By Closing Stock including transit 72
Head Office 288+10
Less: Returns (5) 293
To Carriage Inwards 7
To Gross Profit c/d 72
432 432
To Salaries 25 By Gross Profit b/d 72
To Depreciation on Furniture 2
To Rent 10
To Advertising 6
To Telephone, Postage 3
& Stationery
To Sundry Office Expenses 1
To Head Office Expenses 1
(centralised services)
To Net Profit Transferred to
Head Office A/c 24
72 72

Balance Sheet as on 31st March, 20X2

Liabilities Rs in lacs Assets Rs in lacs

Head Office 80 Furniture & Equipment 20
Add: Goods in transit 10 Less: Depreciation (2) 18

GMTESTSERIES.COM®
Head Office Expenses 1 Stock in hand 62
Net Profit 24 Goods in Transit 10
115 Debtors 20
Outstanding Expenses 3 Cash at bank and in 8
hand
118 118

(iii) Books of Head Office

Journal Entries

Rs Rs
Dr. Dr.
Branch Trading Account Dr. 365
To Branch Account 365
(The total of the following items in branch trial balance debited to
branch trading account:
Rs in lacs
Opening Stock 60
Goods received from Head Office 288
Goods purchased but not received 10
Carriage Inwards 7)
Branch Account Dr. 437
To Branch Trading Account 437
(Total sales, closing stock and goods returned to Head Office
credited to branch trading account, individual amount being as
follows:
Rs in lacs
Sales 360

GMTESTSERIES.COM®
Closing Stock 62
Goods in transit 10
Goods returned to Head Office 5)
Branch Trading Account Dr. 72
To Branch Profit and Loss Account 72
(Gross profit earned by branch credited to Branch Profit and Loss
Account)
Branch Profit and Loss Account Dr. 48
To Branch Account 48
(Total of the following branch expenses debited to Branch Profit &
Loss Account:
Rs in lacs
Salaries 25
Rent 10
Advertising 6
Telephone, Postage & Stationery 3
Sundry Office Expenses 1
Head Office Expenses 1
Depreciation on furniture 2)
Branch Profit & Loss Account Dr. 24
To Profit and Loss Account 24
(Net profit at branch credited to general Profit & Loss A/c)
Branch Furniture & Equipment Dr. 18
Branch Stock Dr. 62
Branch Debtors Dr. 20
Branch Cash at Bank and in Hand Dr. 8
Goods in Transit Dr. 10
To Branch 118

GMTESTSERIES.COM®
(Incorporation of different assets at the branch in H.O. books)
Branch Dr. 3
To Branch Outstanding Expenses 3
(Incorporation of Branch Outstanding Expenses in H.O. books)

A-41 (i)

In the Books of Head Office

Branch Trading and Profit & Loss A/c (in Dollars)

for the year ended 31st December, 20X1

Particulars $ Particulars $
To Opening stock 11,200 By Sales 84,000
To Goods from H.O. 64,000 By Closing stock (W.N.2) 8,000
To Gross profit c/d 16,800
92,000 92,000
To Expenses 5,000 By Gross profit b/d 16,800
To Depreciation (24,000x10%) 2,400
To Manager’s commission 470
(W.N.1)
To Net profit c/d 8,930
16,800 16,800

(ii) (a) Converted Branch Trial Balance (into Indian Currency)

Particulars Rate per $ Dr. (Rs) Cr. (Rs)

Machinery 40 9,60,000 _

GMTESTSERIES.COM®
Stock January 1, 20X1 46 5,15,200 _
Goods from head office Actual 29,26,000 _
Sales 47 _ 39,48,000
Expenses 47 2,35,000 _
Debtors & creditors 48 2,30,400 1,63,200
Cash at bank 48 57,600 _
Head office A/c Actual _ 8,60,000
Difference in exchange rate (b.f.) 47,000 _
49,71,200 49,71,200
Closing stock $ 8,000 (W.N. 2) 48 Rs 3,84,000
(b) Branch Trading and Profit & Loss A/c for the year ended 31st December, 20X1

Rs Rs
To Opening stock 5,15,200 By Sales 39,48,000
To Goods from head office 29,26,000 By Closing stock (W.N.2) 3,84,000
To Gross profit c/d 8,90,800
43,32,000 43,32,000
To Expenses 2,35,000 By Gross profit b/d 8,90,800
To Depreciation @ 10% on Rs
9,60,000 96,000
To Exchange difference 47,000
To Manager’s commission (W.N.1) 22,560
To Net Profit c/d 4,90,240
8,90,800 8,90,800

(c) Branch Account

Rs Rs
To Balance b/d 8,60,000 By Machinery 9,60,000

GMTESTSERIES.COM®
To Net profit 4,90,240 Less: Depreciation (96,000)
To Creditors 1,63,200 8,64,000
To Outstanding By Closing stock 3,84,000
commission 22,560 By Debtors 2,30,400
By Cash at bank 57,600
15,36,000 15,36,000

Working Notes:

1. Calculation of manager’s commission @ 5% on profit

i.e. 5% of $[16,800 – (5,000 + 2,400)]

Or 5% × $9,400 = $ 470
Manager’s commission in Rupees = $ 470  Rs 48 = Rs 22,560

2. Calculation of closing stock

$
Opening stock 11,200
Add: Goods from head office 64,000
75,200
Less: Cost of goods sold (at invoice price) (67,200)
i.e. 100 / 125 x 84,000
Closing stock 8,000
Closing stock in Rupees = $8,000 x Rs 48 = Rs 3,84,000.
Note: Manager is entitled to commission on profits earned at the end of the year.

GMTESTSERIES.COM®
A-42 In the books of Alpha Ltd.

Step 1: Calculation of Deficiency

Branch stock account (at invoice price)

Particulars Rs Particulars Rs
To Opening Stock (Rs 74,736 + 1/3 99,648 By Sales 3,61,280
of Rs 74,736)
To Goods sent to Branch A/c (Rs 3,86,240 By Closing Stock 1,23,328
2,89,680 + 1/3 of Rs 2,89,680)
By Deficiency at sale price 1,280
[Balancing figure]
4,85,888 4,85,888
Step 2: Calculation of Net Profit before Commission

Branch account

Particulars Rs Particulars Rs
To Opening Stock 99,648 By Sales 3,61,280
[Rs74,736 + 1/3 of Rs 74,736]
To Gross sent to Branch A/c Rs 3,86,240 By Closing Stock 1,23,328
2,89,680 + 1/3 of Rs 2,89,680)
To Expenses 49,120 By Stock Reserve A/c 24,912
To Stock Reserve A/c 30,832 By Goods sent to Branch A/c 96,560
[Rs 1,23,328 x 25/100]

To Net Profit – subject to 40,240

manager’s commission
6,06,080 6,06,080

GMTESTSERIES.COM®
Step 3: Calculation of Commission still due to manager

Rs
A Calculation at 10% profit before charging his commission [Rs 40,240 x 10/100] 4,024
B Less: 25% of cost of deficiency in stock [25% of (75% of Rs 1,280)] (240)
C Commission for the year [A-B] 3,784
D Less: Paid on account (2,400)
E Balance due (C-D) 1,384

A-43

Trading and Profit & Loss Account of Mr. Anup

for the year ended 31st March 20X2

Rs Rs Rs Rs
To Opening 1,10,000 By Sales 9,59,750
Inventory
To Purchases 4,54,100 Less: Sales Return (1,200) 9,58,550
Less: Purchases (4,200) 4,49,900 By Closing 1,90,000
Return Inventory
To Gross Profit (b.f.) 5,88,650
11,48,550 11,48,550
To salary (9,200 x 12) 1,10,400 By Gross Profit 5,88,650
To Electricity & Tel. 20,900 By Discount 2,700
Charges
(18,700 + 2,200)
To Legal expenses 17,000
To Discount (2,400 + 3,150

GMTESTSERIES.COM®
750)
To Shop exp. 7,200
(600 x 12)
To Provision for 1,55,000
claims for damages
To Shop Rent 20,000
To Net Profit (b.f.) 2,57,700
5,91,350 5,91,350

Balance-Sheet as on 31st March 20X2

Liabilities Rs Assets Rs
Capital A/c (W.N.vi) 2,38,200 Building (from summary 3,72,000
cash and bank A/c)
Add : Fresh capital introduced Furniture 25,000
Maturity value from LIC 20,000 Inventory 1,90,000
Rent 14,000 Sundry debtors 92,000
Add : Net Profit 2,57,700 Bills receivable 6,000
5,29,900 Cash at Bank 87,000
Less : Drawing(14,00 x12) (16,800) 5,13,100 Cash in Hand 5,300
Rent outstanding 20,000
Sundry creditors 56,000
Bills Payable 14,000
Outstanding expenses
Legal Exp. 17,000
Electricity &
Telephone charges 2,200 19,200
Provision for claims for damages 1,55,000
7,77,300 7,77,300

GMTESTSERIES.COM®
Working Notes:

(i) Sundry Debtors Account

Rs Rs
To Balance b/d 70,000 By Bill Receivable A/c
To Bill receivable A/c - Bills 3,000 Bills accepted by customers 40,000
dishonoured
To Bank A/c-Cheque 5,700 By Bank A/c - Cheque 5,700
dishonoured received
To Credit sales (Balancing Figure) 9,59,750 By Cash (from summary cash 8,97,150
and bank account)
By Return inward A/c 1,200
By Discount A/c 2,400
By Balance c/d 92,000
10,38,450 10,38,450

(ii) Bills Receivable Account

Rs Rs
To Balance b/d 15,000 By Sundry creditors A/c
To Sundry Debtors A/c 40,000 (Bills endorsed) 10,000
(Bills accepted) By Bank A/c (20,000 – 750) 19,250
By Discount A/c (Bills 750
discounted)
By Bank
Bills collected on maturity 16,000
By Sundry debtors
Bills dishonoured (Bal. Fig) 3,000
By Balance c/d 6,000

GMTESTSERIES.COM®
 55,000 55,000

(iii) Sundry Creditors Account

Rs Rs
To Bank 3,20,000 By Balance c/d 40,000
To Cash 77,200 By Credit purchase
(Balancing figure) 4,54,100
To Bill Payable A/c 24,000
To Bill Receivable A/c 10,000
To Return Outward A/c 4,200
To Discount Received A/c 2,700
To Balance b/d 56,000
4,94,100 4,94,100

(iv) Bills Payable A/c

Rs Rs
To Bank A/c (Balance figure) 22,000 By Balance b/d 12,000
To Balance c/d 14,000 By Sundry creditors A/c
Bills accepted 24,000
36,000 36,000

(v) Summary Cash and Bank A/c

Cash Bank Cash Bank

Rs Rs Rs Rs
To Balance b/d 5,200 90,000 By Bank 7,62,750
To Sundry By Cash 1,21,000

GMTESTSERIES.COM®
debtors By Shop exp. (600 x 7,200
(Bal. Fig) 8,97,150 12)
To Cash 7,62,750 By Salary (9,200 x 1,10,400
12)
To Bank 1,21,000 By Drawing A/c 16,800
(1,400 x 12)
By Bills Payable 22,000
To Sundry 5,700 By Sundry creditors 77,200 3,20,000
Debtors
To Bills receivable 19,250 By Furniture 25,000
To Bills receivable 16,000 By Sundry Debtors 5,700
To Capital 20,000 By Electricity & Tel. 18,700
(maturity value of Charges
LIC policy)
To Capital (Rent 14,000 By Building 3,72,000
received) (Bal. fig)
By Balance c/d 5,300 87,000
10,23,350 9,27,700 10,23,350 9,27,700

(vi) Statement of Affairs as on 31st March 20X1

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

GMTESTSERIES.COM®
A-44 In the books of Mr. Anil Trading and Profit and Loss Account for the year ended 31st
March, 20X2

Rs Rs
To Opening Stock 6,10,000 By Sales
To Purchases (W.N. 3) 84,10,000 Cash 73,80,000
To Gross profit c/d 9,30,000 Credit (W.N. 2) 19,20,000 93,00,000
(10% of 93,00,000) By Closing stock 6,50,000
99,50,000 99,50,000
To Sundry expenses 5,80,700 By Gross profit b/d 9,30,000
(W.N. 6)
To Discount allowed 36,000 By Discount received 28,000
To Depreciation 15,000
(15% Rs 1,00,000)
To Net Profit (b.f.) 3,26,300
9,58,000 9,58,000

Balance Sheet as at 31st March, 20X2

Liabilities Amount Assets Amount

Rs Rs
Capital Furniture & Fittings 1,00,000
Opening balance 2,50,000 Less : Dep. (15,000) 85,000
Less: Drawing (2,40,000) Stock 6,50,000
10,000 Trade Debtors 1,52,000
Add: Net profit for the years Bills receivable 75,000

GMTESTSERIES.COM®
 3,26,300 3,36,300
Bills payable 1,40,000 Unexpired insurance 2,000
Trade creditors 6,10,000 Cash in hand & at bank 1,27,300
Outstanding expenses 5,000
10,91,300 10,91,300
Working Notes:

1. Bills Receivable Account

Rs Rs
To Balance b/d 60,000 By Cash 3,40,000
To Trade debtors (b.f.) 3,70,000 By Trade creditors (Bills 15,000
endorsed)
By Balance c/d 75,000
4,30,000 4,30,000

2. Trade Debtors Account

Rs Rs
To Balance b/d 1,48,000 By Cash/Bank 15,10,000
To Credit sales 19,20,000 By Discount allowed 36,000
(Bal. fig.) By Bills receivable 3,70,000
By Balance c/d 1,52,000
20,68,000 20,68,000
3. Memorandum Trading Account

Rs Rs
To Opening stock 6,10,000 By Sales 93,00,000
To Purchases (Balancing figure) 84,10,000 By Closing stock 6,50,000
To Gross Profit (10% on sales) 9,30,000

GMTESTSERIES.COM®
 99,50,000 99,50,000
4. Bills Payable Account

Rs Rs
To Cash/Bank 8,15,000 By Balance b/d 1,25,000
To Balance c/d 1,40,000 By Creditors (balancing figure) 8,30,000
9,55,000 9,55,000

5. Trade Creditors Account

Rs Rs
To Cash/Bank 75,07,000 By Balance b/d 5,80,000
To Discount received 28,000 By Purchases (as calculated 84,10,000
To Bills receivable 15,000 in W.N. 3)
To Bills payable 8,30,000
To Balance c/d
(balancing figure) 6,10,000
89,90,000 89,90,000

6. Computation of sundry expenses to be charged to Profit & Loss A/c

Rs
Sundry expenses paid (as per cash book) 6,20,700
Add : Prepaid expenses as on 31–3–20X1 2,000
6,22,700
Less: Outstanding expenses as on 31–3–20X1 (45,000)
5,77,700
Add : Outstanding expenses as on 31–3–20X2 5,000
5,82,700

GMTESTSERIES.COM®
Less : Prepaid expenses as on 31–3–20X2 (Insurance paid till July, 20X2) (2,000)
(6,000 x 4/12)
5,80,700

A-45 (a) (i) The decision of making provision for non-moving inventories on the basis of
technical evaluation does not amount to change in accounting policy. Accounting policy of a
company may require that provision for non-moving inventories should be made. The method
of estimating the amount of provision may be changed in case a more prudent estimate can be
made. In the given case, considering the total value of inventory, the change in the amount of
required provision of non-moving inventory from Rs 3.5 lakhs to Rs 2.5 lakhs is also not
material. The disclosure can be made for such change in the following lines by way of notes to
the accounts in the annual accounts of ABC Ltd. for the year 2019-20:

“The company has provided for non-moving inventories on the basis of technical evaluation
unlike preceding years. Had the same method been followed as in the previous year, the profit
for the year and the corresponding effect on the year end net assets would have been lower by
Rs 1 lakh.”

(b)

1. False; As per AS 1 “Disclosure of Accounting Policies”, certain fundamental accounting

assumptions underlie the preparation and presentation of financial statements. They are
usually not specifically stated because their acceptance and use are assumed. Disclosure is
necessary if they are not followed.

2. False; As per AS 1, if the fundamental accounting assumptions, viz. Going Concern,

Consistency and Accrual are followed in financial statements, specific disclosure is not
required. If a fundamental accounting assumption is not followed, the fact should be
disclosed.

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3. True; To ensure proper understanding of financial statements, it is necessary that all
significant accounting policies adopted in the preparation and presentation of financial
statements should be disclosed. The disclosure of the significant accounting policies as such
should form part of the financial statements and they should be disclosed in one place.

4. False; Any change in the accounting policies which has a material effect in the current
period or which is reasonably expected to have a material effect in later periods should be
disclosed. Where such amount is not ascertainable, wholly or in part, the fact should be
indicated.

A-46 Net Realizable Value of the Chemical Y (Finished Goods) is Rs 600 per unit which is less
than its cost Rs 656 per unit. Hence, Raw Material is to be valued at replacement cost and
Finished Goods are to be valued at NRV since NRV is less than the cost.

Value of Closing Stock:

Qty. Rate (Rs) Amount (Rs)

Raw Material X 1,000 320 3,20,000
Finished Goods Y 2,400 600 14,40,000
Total Value of Closing Stock 17,60,000
Working Note:

Statement showing cost calculation of Raw material X and Chemical Y

Raw Material X Rs
Cost Price 400
Add: Freight Inward 40
Cost 440
Chemical Y Rs
Materials consumed 440

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Direct Labour 120
Variable overheads 80
Fixed overheads (Rs4,00,000/25,000 units) 16
Cost 656

A-47 (a) Trozen Ltd. should capitalize the costs of construction and remodelling the
supermarket, because they are necessary to bring the store to the condition necessary for it to
be capable of operating in the manner intended. The supermarket cannot be opened without
incurring the remodelling expenditure. Therefore, this construction and remodelling
expenditure of Rs 18 lakh should be considered as part of the cost of the asset. However, the
cost of salaries of the staff Rs 2 lakh and utilities cost Rs 1.5 lakh are operating expenditures
that would be incurred even after the opening of the supermarket. Therefore, these costs are
not necessary to bring the store to the condition necessary for it to be capable of operating in
the manner intended by the management and should be expensed.

(b) AS 10 states that the cost of an item of property, plant and equipment shall be recognized
as an asset if, and only if:

(a) It is probable that future economic benefits associated with the item will flow to the
entity; and

(b) The cost of the item can be measured reliably.

Further, the standard provides that the standard does not prescribe the unit of measure for
recognition, i.e., what constitutes an item of property, plant and equipment. Thus, judgement is
required in applying the recognition criteria to an entity’s specific circumstances. The cost of an
item of property, plant and equipment comprise any costs directly attributable to bringing the
asset to the location and condition necessary for it to be capable of operating in the manner
intended by management.

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In the given case, railway siding, road and bridge are required to facilitate the construction of
the refinery and for its operations. Expenditure on these items is required to be incurred in
order to get future economic benefits from the project as a whole which can be considered as
the unit of measure for the purpose of capitalization of the said expenditure even though the
company cannot restrict the access of others for using the assets individually. It is apparent that
the aforesaid expenditure is directly attributable to bringing the asset to the location and
condition necessary for it to be capable of operating in the manner intended by management.

In view of this, even though ABC Ltd. may not be able to recognize expenditure incurred on
these assets as an individual item of property, plant and equipment in many cases (where it
cannot restrict others from using the asset), expenditure incurred may be capitalized as a part
of overall cost of the project. From this, it can be concluded that, in the given case the
expenditure incurred on these assets, i.e., railway siding, road and bridge, should be considered
as the cost of constructing the refinery and accordingly, expenditure incurred on these items
should be allocated and capitalized as part of the items of property, plant and equipment of the
refinery.

A-48 As per AS 11 “The Effects of Changes in Foreign Exchange Rates”, an enterprise may enter
into a forward exchange contract to establish the amount of the reporting currency required,
the premium or discount arising at the inception of such a forward exchange contract should be
amortized as expenses or income over the life of the contract.

Forward Rate Rs 62.50

Less: Spot Rate (Rs 60.75)

Premium on Contract Rs 1.75

Contract Amount US$ 5,00,000

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 Total Loss (5,00,000 x 1.75) Rs 8,75,000

Contract period 5 months

3 months falling in the year 2017-18; therefore loss to be recognized in 2017-18 (8,75,000/5) x
3 = Rs 5,25,000. Rest Rs 3,50,000 will be recognized in the following year 2018-19.

(ii) Financial statements of an integral foreign operation (for example, dependent foreign
branches) should be translated using the principles and procedures described in paragraphs 8
to 16 of AS 11 (Revised 2003). The individual items in the financial statements of a foreign
operation are translated as if all its transactions had been entered into by the reporting
enterprise itself. Individual items in the financial statements of the foreign operation are
translated at the actual rate on the date of transaction. The foreign currency monetary i tems
(for example cash, receivables, payables) should be reported using the closing rate
at each balance sheet date. Non-monetary items (for example, fixed assets, inventories,
investments in equity shares) which are carried in terms of historical cost denominated in a
foreign currency should be reported using the exchange date at the date of transaction. Thus
the cost and depreciation of the tangible fixed assets is translated using the exchange rate at
the date of purchase of the asset if asset is carried at cost. If the fixed asset is carried at fair
value, translation should be done using the rate existed on the date of the valuation.
The cost of inventories is translated at the exchange rates that existed when the cost of
inventory was incurred and realizable value is translated applying exchange rate when
realizable value is determined which is generally closing rate. Exchange difference arising on the
translation of the financial statements of integral foreign operation should be charged to profit
and loss account. Thus, the treatment by the management of translating all assets and
liabilities; income and expenditure items in respect of foreign branches at the prevailing rate at
the year end and also the treatment of resultant exchange difference is not in consonance with
AS 11 (Revised 2003).

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A-49 (i) As per the facts of the case, Hygiene Ltd. had received a grant of Rs 50 lakh in 2012
from a State Government towards installation of pollution control machinery on fulfilment of
certain conditions. However, the amount of grant has to be refunded since it failed to comply
with the prescribed conditions. In such circumstances, AS 12, “Accounting for Government
Grants”, requires that the amount refundable in respect of a government grant related to a
specific fixed asset is recorded by increasing the book value of the asset or by reducing the
capital reserve or the deferred income balance, as appropriate, by the amount refundable. The
Standard further makes it clear that in the first alternative, i.e., where the book value of the
asset is increased, depreciation on the revised book value should be provided prospectivelyover
the residual useful life of the asset. Accordingly, the accounting treatment given by Hygiene Ltd.
of increasing the value of the plant and machinery is quite proper. However, the accounting
treatment in respect of depreciation given by the company of adjustment of depreciation with
retrospective effect is improper and constitutes violation of AS 12.

(ii) ABC Ltd. should recognize the grants in the following manner:

 As per AS 12, government grants may take the form of non -monetary assets, such as land or
other resources, given at concessional rates. In these circumstances, it is usual to account for
such assets at their acquisition cost. Non-monetary assets given free of cost are recorded at
a nominal value. Accordingly, land should be recognised at nominal value in the balance
sheet.

 The standard provides option to treat the grant either as a deduction from the gross value of
the asset or to treat it as deferred income as per provisions of the standard. Under first
method, the grant is shown as a deduction from the gross value of the asset concerned in
arriving at its book value. The grant is thus recognised in the profit and loss statement over
the useful life of a depreciable asset by way of a reduced depreciation charge. Accordingly,
the grant of Rs 2 lakhs is deducted from the cost of the machinery. Machinery will be
recognised in the books at Rs 10 lakhs – Rs 2 lakhs = Rs 8 lakhs and depreciation will be
charged on it as follows:
Rs 8 lakhs/ 5 years = Rs 1.60 lakhs per year.

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Under the second method, grants related to depreciable assets are treated as deferred income
which is recognised in the profit and loss statement on a systematic and rational basis over the
useful life of the asset. Such allocation to income is usually made over the periods and in the
proportion s in which depreciation on related assets is charged. Rs 2 lakhs should be recognised
as deferred income and will be transferred to profit and loss over the useful life of the asset. In
this case, Rs 40,000 [Rs 2 lakhs / 5 years] should be credited to profit and loss each year over
the period of 5 years.

A-50 (a) Para 10 of AS 16 ‘Borrowing Costs’ states that to the extent the funds are borrowed
specifically for the purpose of obtaining a qualifying asset, the amount of borrowing costs
eligible for capitalization on that asset should be determined as the actual borrowing costs
incurred on that borrowing during the period less any income on the temporary investment of
those borrowings. The capitalization rate should be the weighted average of the borrowing
costs applicable to the borrowings of the enterprise that are outstanding during the period,
other than borrowings made specifically for the purpose of obtaining a qualifying asset. Hence,
in the above case, treatment of accountant of Vital Ltd. is incorrect. T he amount of borrowing
costs capitalized for the financial year 2019-20 should be calculated as follows:

Actual interest for 201 9-20 (10% of Rs 150 crores) (Rs 15.00 crores)
Less: Income on temporary investment from specific borrowings (Rs 1.50 crores)
Borrowing costs to be capitalized during year 2019-2020 Rs 13.50 crores

(b) Capitalization of borrowing costs should cease when substantially all the activities necessary
to prepare the qualifying asset for its intended use or sale are complete. An asset is normally
ready for its intended use or sale when its physical construction or production is complete even
though routine administrative work might still continue. If minor modifications such as the
decoration of a property to the user’s specification, are all that are outstanding, this indicates

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that substantially all the activities are complete. When the construction of a qualifying asset is
completed in parts and a completed part is capable of being used while construction continues
for the other parts, capitalization of borrowing costs in relation to a part should cease when
substantially all the activities necessary to prepare that part for its intended use or sale are
complete.

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