Preparation of

Financial Statements Examples

IPCC Paper 1: Financial Accounting Chapter 2

CA. Pankajj Goel

Illustration 1
2

PCC June 2009 Marks XX

Problem Statement
The Managing Director of A Ltd. is entitled to 5% of the annual
net profits, as his remuneration, subject to a minimum of
Rs.25,000 per month. The net profits, for this purpose, are to
be taken without charging income-tax and his remuneration
itself. During the year, A Ltd. made net profit of Rs.43,00,000
before charging MDs remuneration, but after charging
provision for taxation of Rs.17,20,000.
Compute remuneration payable to the Managing Director.
3

Solution
Calculation of remuneration of the Managing
Director(All Figures in Lakhs)
Net profit as per books
43.00
Add: Provision for taxation 17.20
Annual profit for the purpose of managerial remuneration
60.20
Managing Directors Remuneration @ 5% of above
=3.01
Minimum remuneration to be paid to the Managing
Director
= Rs.25,000 per month 12
=3.00
Hence, in this case, remuneration to be paid to the
Managing Director of A Ltd. = Rs.3,01,000.

Illustration 2
5

Problem Statement

XYZ Limited made a net profit of Rs. 25,000 lakh

after adjusting the following items.
Particulars
(a) Provision for taxation

Rs/Lakh
10,000

(b) Capital profit on sale of part of the Undertaking

200

(c) Depreciation as per books

600

(d) Managerial remuneration

55

(e) Provision for diminution in the value of investments

15

(f) Profit on sale of investments

30

(g) Provision for wealth tax

20

Problem Statement - 2
Particulars

Rs/Lakh

(h)Directorsfees

15

(i)ProfitonsaleofassetsU/S349(j)Lossonsaleof assetsU/S

40

349

35

(k)Priorperiodadjustments(credit)
(l)Provisionforbaddebts
(m)Exgratiapaymenttoanemployee

15
100
5

You are given the following additional information:

(1) Depreciation as per S.350 Rs.500 lakhs
(2) Bad debts actually written off Rs.60 lakhs
You are required to calculate net profits U /S 198 and 309 (5) of the Companies Act 1956

Solution
Particulars

Rs/Lakh

Rs/Lakh
25,000

NetprofitafterProv.forTaxation
Add,Provisionfortaxation
Directorsfees
Depreciationasperbooks
Managerialremuneration
Provisionfordiminutioninthevalueofinvestments
Provisionforbaddebts
Provisionforwealthtax
Exgratiapaymenttoanemployee
Total
LessDepreciationasperSec.350
Profitonsaleofinvestments
Priorperiodadjustments(credit)
CapitalprofitonsaleofpartoftheUndertaking
Baddebtwrittenoff

10,000
15
600
55
15
100
20
5
500

30

10,810

35,810
(805)

15
200
60
8

Net Profit as per section 198 and 309(5) Of the Act

35,005

Illustration 3
9

Problem Statement
From the following particulars of Prakash Limited, you
are required to calculate the managerial
remuneration in the following situations.
(i)
There is only one whole time director.
(ii) There are two whole time directors,
(iii) There are two whole time directors, a part time
director and Manager

10

Problem Statement - 2
1.

2.
3.

4.

5.

Net profit before provision for income-tax and

managerial remuneration, but after depreciation
and provision for repairs8,70,410
Depreciation provided in the books- 3,10,000
Provision for repairs of machinery during the year25,000
Depreciation allowable under Schedule XIV2,60,000
Actual expenditure incurred on repairs during the
year15,000
11

Solution:
Sections 198 and 309 of the Companies Act, 1956 prescribe the maximum percentage of profit
that can be paid as managerial remuneration. For this purpose, profit is to be calculated in the
manner as specified in Section 349.

Calculation of net profit u/s 349 of the Companies Act, 1956

Rs.
NetProfitbeforeprovisionforincometax

8,70,410

andManagerialremuneration,butafter

Rs.
12,05,410

depreciationandprovisionforrepairs
Addback:Depreciationprovidedinthe
books
Provisionforrepairsof machinery

Less: Depreciationallowableunder

3,10,000
25,000
3,35,000

ScheduleXIVActualexpenditureincurred
onrepairs
Profitundersection349

2,60,000
15,000

2,75,000
9,30,410

12

Working Notes
Calculation of managerial remuneration
(i)There is only one whole time director
Managerial remuneration= 5 % of Rs. 9,30,410
= Rs. 46,520.50
(ii)
There are two whole time directors
Managerial remuneration=10% of Rs. 9,30,410
=Rs. 93,041
(iii)There are two whole time directors, a parttime
director and a manager
Managerial remuneration =11% of Rs. 9,30,410
=Rs. 1,02,345.10

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THANK YOU