PAPER  1 : ACCOUNTING

QUESTIONS
Branch Accounti ng
1. Pappu Limited with its head office in Kolkata invoiced goods to its branch at Mumbai at
20% less than the catalogue price which is cost plus 50% with instructions that cash
sales were to be made at invoice price and credit sales at catalogue price. Head office
also gave the instruction to provide discount @ 15% of catalogue price on prompt
payments by debtors. From the particulars available from the branch, prepare the
Branch Stock Account, Branch Adjustment Account and Branch Profit and Loss Account
for the year ended 31
st
March, 2008 (showing workings) in the head office books:
Rs.
Stock on 1
st
April, 2007 (Invoice Price) 12,000
Debtors on 1
st
April, 2007 10,000
Goods received from H.O. (Invoice Price) 1,32,000
Sales (Cash) 46,000
Sales (Credit) 1,00,000
Cash received from Debtors 85,635
Discount allowed to Debtors 13,365
Expenses at the Branch 6,000
Remittances to H.O. 1,20,000
Debtors on 31
st
March, 2008 11,000
Cash in hand on 31
st
March, 2008 5,635
Stock on 31
st
March, 2008 (Invoice Price) 15,000
It was further reported that a part of the stock was lost by fire (not covered by insurance)
during the year whose value is to be ascertained and a provision should be made for
discount to be allowed to debtors as on 31
st
March, 2008 on the basis of year’s trend of
prompt payments.
Hi re Purchase System
2. Welwash (Pvt.) Ltd. sells washing machines for outright cash as well as on hire-purchase
basis. The cost of a washing machine to the company is Rs. 10,500. The company has
fixed cash price of the machine at Rs. 12,300 and hire-purchase price at Rs. 13,500
payable as to Rs. 1,500 down and the balance in 24 equal monthly instalments of
Rs. 500 each.
2
On 1st April, 2007 the company had 26 washing machines lying in its showroom. On that
date 3 instalments had fallen due, but not yet received and 675 instalments were yet to
fall due in respect of machines lying with the hire purchase customers.
During the year ended 31
st
March, 2008 the company sold 130 machines on cash basis
and 80 machines on hire-purchase basis. After paying five monthly installments, one
customer failed to pay subsequent installments and the company had to repossess the
washing machine. After spending Rs. 1,000 on it, the company resold it for Rs. 11,500.
On 31
st
March, 2008 there were 21 washing machines in stock, 810 installments were yet
to fall due and 5 installments had fallen due, but not yet received in respect of washing
machines lying with the hire-purchase customers. Total selling expenses and office
expenses including depreciation on fixed assets totalled Rs. 1,60,000 for the year.
You are required to prepare for the accounting year ended 31
st
March, 2008:
1. Hire purchase Trading Account, and
2. Trading and Profit and Loss Account showing net profit earned by the company
after making provision for income-tax @ 35%.
Partnershi p Accounts (Pi ecemeal Di stributi on System)
3. A, B and C are partners sharing profits and losses in the ratio of 5:3:2. Their capitals
were Rs. 9,600, Rs. 6,000 and Rs. 8,400 respectively.
After paying creditors, the liabilities and assets of the firm were:
Rs. Rs.
Liability for interest on loans from : Investments 1,000
Spouses of partners 2,000 Furniture 2,000
Partners 1,000 Machinery 1,200
Stock 4,000
The assets realised in full in the order in which they are listed above. B is insolvent.
You are required to prepare a statement showing the distribution of cash as and when
available, applying maximum possible loss procedure.
Partnershi p Accounts: (Profi t and Loss Adjustment A/c)
4. M/s Neptune & Co.’s Balance Sheet as at 31
st
March, 2008:
Liabilities Rs. Assets Rs.
Bank overdraft
(State Bank) 54,000
Cash at Bank of India 800
Sundry Creditors 1,56,000 Sundry Debtors 2,80,000
Stock 1,00,000
3
Capital Accounts :
Mr. A
Motor Cars cost as
per last B/S
1,60,000
Balance as per last
B/S
4,02,000 Less : Depreciation till
date 54,000 1,06,000
Add : Profits for the
year 95,400
Machinery cost as per
last B/S 3,00,000
Less : Drawings
4,97,400
40,000 4,57,400
Less : Depreciation till
date 1,40,000 1,60,000
Mr. B Land and Building 2,40,000
Balance as per last
B/s 2,00,000
Add : Profit for the
year 95,400
2,95,400
Less : Drawings 76,000 2,19,400
8,86,800 8,86,800
You have examined the foregoing Draft of the Balance Sheet and have ascertained that
the following adjustments are required to be carried out:
(i) Land and Buildings are shown at cost less Rs. 60,000 being the proceeds of the
sale during the year of premises costing Rs. 70,000.
(ii) Machinery having a net book value of Rs. 4,300 had been scrapped during the year.
The original cost was Rs. 12,300.
(iii) Rs. 2,000 paid for the Licence fees for the year ending 30
th
September, 2008 had
been written off.
(iv) Debts amounting to Rs. 10,420 were considered to be bad and further debts
amounting to Rs. 5,400 were considered doubtful and required 100% provision.
Provision for doubtful debts had previously been made for Rs. 10,000.
(v) An item in the inventory was valued at Rs. 37,400, but had a realisable value of Rs.
26,000 only. Scrap material having a value of Rs. 6,600 had been omitted from the
stock valuation.
(vi) The cashier had misappropriated Rs. 700.
(vii) The cash-book for the year ending 31
st
March, 2008 included payments amounting
to Rs. 6,924, the cheques having been made out, but not despatched to suppliers
until April 2008.
(viii) Interest is to be allowed on the partners’ opening capital account balances less
drawings during the year at 9%.
4
You are required to prepare:
(a) Profit & Loss Adjustment Account for the year.
(b) Capital Accounts of the Partners.
Insolvency Accounts for Non-Corporate Enti ti es
5. Ram commenced business on 1.7.2002 with a capital of Rs. 2,00,000. On 31st March,
2008 an adjudication order for insolvency was made against him. Following are the other
details available relating to his business as on 31.3.2008:
Rs.
Sundry Creditors 1,50,000
Mortgage Loan (of building) 1,00,000
Godown Rent (2 months) 5,000
Wages due 8,000
Mrs. Ram loan (given out of her own source) 25,000
Cost of Building (estimated to realise Rs. 1,00,000) 1,60,000
Debtors (includes bad of Rs. 10,000) 90,000
Stock in trade (Realisation value 10,000) 15,000
Cash in Hand/Bank 10,000
He maintained books upto 31.3.2005 and profit upto 31.3.2005 was Rs. 1,40,000. He did
not maintain books from 1.4.2005 onwards. He has been drawing Rs. 4,000 per month
and goods worth Rs. 1,500 per month uniformly from April, 2005 onwards.
Prepare statement of affairs and deficiency account.
Company Accounts (Redempti on of Preference Shares & Bonus Issue)
6. The following is the Balance Sheet of Trinity Ltd. as at 31.3.2006:
Trinity Ltd.
Balance Sheet as at 31st March, 2006
Liabilities Rs. Assets Rs.
Share Capital Fixed Assets:
Authorised Gross Block 3,00,000
10,000 10% Redeemable
Preference Shares of Rs.
10 each 1,00,000
Less : Depreciation 1,00,000 2,00,000
90,000 Equity Shares of
Rs. 10 each 9,00,000
Investments 1,00,000
10,00,000 Current Assets and Loans
5
and Advances:
Issued, Subscribed and
Paid-up Capital:
Inventory 25,000
10,000, 10% Redeemable
Preference
Debtors 25,000
Shares of Rs. 10 each 1,00,000 Cash and Bank Balances 50,000
10,000 Equity Shares of
Rs. 10 each 1,00,000
Misc. Expenditure to the
extent not written of
20,000
Reserves and Surplus:
General Reserve 1,20,000
Securities Premium 70,000
Profit and Loss A/c 18,500
Current Liabilities and
Provisions 11,500
4,20,000 4,20,000
For the year ended 31.3.2007, the company made a net profit of Rs. 15,000 after
providing Rs. 20,000 depreciation and writing off the miscellaneous expenditure of Rs.
20,000.
The following additional information is available with regard to company’s operation :
1. The preference dividend for the year ended 31.3.2007 was paid before 31.3.2007.
2. Except cash and bank balances other current assets and current liabilities as on
31.3.2007 was the same as on 31.3.2006.
3. The company redeemed the preference shares at a premium of 10%.
4. The company issued bonus shares in the ratio of one share for every equity share
held as on 31.3.2007.
5. To meet the cash requirements of redemption, the company sold a portion of the
investments, so as to leave a minimum balance of Rs. 30,000 after such
redemption.
6. Investments were sold at 90% of cost on 31.3.2007.
You are required to
(a) Prepare necessary journal entries to record redemption and issue of bonus
shares.
(b) Prepare the cash and bank account.
(c) Prepare the Balance Sheet as at 31st March, 2007 incorporating the above
transactions.
6
Fi nal Accounts of Companies:
7. Provisional Balance Sheet of P Ltd. as at 31st March, 2008 was as under:
Balance Sheet as at 31st March, 2008
Liabilities Rs. Rs. Assets Rs.
Share Capital: Fixed Assets (at cost less
depreciation) 7,00,000 50,000 equity shares of Rs.
10 each, Rs. 7 per share
called up 3,50,000
Cash & Bank balances 2,00,000
Other Current assets 6,00,000 Less : Calls in arrear on
10,000 shares @ Rs. 2 per
share 20,000
3,30,000
Add : Calls in advance on
40,000 shares @ Rs. 3 per
share 1,20,000 4,50,000
20,000, 10% Redeemable
preference shares of Rs.
10 each, fully paid up 2,00,000
Reserves & Surplus:
General Reserve 3,00,000
Profit & Loss Account 2,70,000
Current Liabilities 2,80,000
15,00,000 15,00,000
Calls in arrear are outstanding for 6 months. Calls in advance were also received 6
months back.
Interest @ 10% p.a. on calls in advance and 12% p.a. on calls in arrear are
allowed/charged.
The Board of Directors have recommended that:
(i) Dividend for the year 2007-08 be allowed @ 20% on equity shares.
(ii) Money on calls in advance be refunded and partly paid equity shares be converted
as fully paid up by declaring bonus dividend to shareholders.
(iii) The preference shares, which are redeemable at a premium of 10% any time after
31st March, 2008 may be redeemed by issue of 10% Debentures of Rs. 100 in
cash.
7
Show Journal Entries to give effect to the above proposals including payment and receipt
of cash and redraft the Profit and Loss Account and Balance Sheet of P Ltd.
Profit or Loss Prior to Incorporation
8. The partners of Pal agencies decided to convert the partnership into a private limited
company called PA (P) Ltd with effect from 1
st
January 2007. The consideration was
agreed at Rs. 11,70,000 based on the firm balance sheet as at 31
st
December 2006.
However due to some procedural difficulties, the company could be incorporated only on
1
st
April 2007. Meanwhile, the business was continued on behalf of the company and the
consideration was settled on that day with interest at 12% p.a. the same books of
accounts were continued by the company which closed its account for the first ti me on
31
st
March 2008. Prepare the following summarized Profit and Loss Account
Rs.
Sales 23,40,000
Cost of goods sold 16,38,000
Salaries 1,17,000
Depreciation 18,000
Advertisements 70,200
Discounts 1,17,000
Managing director’s remuneration 9,000
Miscellaneous office expenses 12,000
Office cum showroom rent 72,000
Interest 95,100
21,48,300
Profit 1,91,700
The company only borrowing was a loan of Rs. 5,00,000 at 12% p.a. to pay the purchase
consideration due to the firm and for working capital requirements.
The company was able to double the average monthly sales of the firm, from 1
st
April
2007 but salaries tripled from the date. It had to occupy additional space from July 2007
rent for which was Rs. 3,000 per month.
Prepare Profit and Loss Account in columnar from apportioning costs and revenue
between pre-incorporation and post incorporation periods. Also suggest how the pre-
incorporation profits are to be dealt with.
Amal gamation
9. Star and Moon had been carrying on business independently. They agreed to
amalgamate and form a new company Neptune Ltd. with an authorised share capital of
Rs. 2,00,000 divided into 40,000 equity shares of Rs. 5 each.
8
On 31st December, 2007, the respective Balance Sheets of Star and Moon were as
follows:
Star Moon
Rs. Rs.
Fixed Assets 3,17,500 1,82,500
Current Assets 1,63,500 83,875
4,81,000 2,66,375
Less: Current Liabilities 2,98,500 90,125
Representing Capital 1,82,500 1,76,250
Additional Information :
(a) Revalued figures of Fixed and Current Assets were as follows :
Star Moon
Rs. Rs.
Fixed Assets 3,55,000 1,95,000
Current Assets 1,49,750 78,875
(b) The debtors and creditors—include Rs. 21,675 owed by Star to Moon.
The purchase consideration is satisfied by issue of the following shares and
debentures :
(i) 30,000 equity shares of Neptune Ltd., to Star and Moon in the porportion to the
profitability of their respective business based on the average net profit during
the last three years which were as follows :
Star Moon
2005 Profit 2,24,788 1,36,950
2006 (Loss)/Profit (1,250) 1,71,050
2007 Profit 1,88,962 1,79,500
(ii) 15% debentures in Neptune Ltd., at par to provide an income equivalent to 8%
return on capital employed in their respective business as on 31st December,
2007 after revaluation of assets.
You are requested to :
(1) Compute the amount of debentures and shares to be issued to Star and
Moon.
(2) A Balance Sheet of Neptune Ltd., showing the position immediately after
amalgamation.
9
Accounting of Banking Companies
10. The following is an extract from the Trial Balance of a Dena Bank as at 31
st
March 2008:
Rs. Rs.
Bills Discounted 51,50,000
Rebate on bills discounted not yet due, April 1, 2007 30,501
Discount received 1,45,500
An analysis of the bills discounted as shown above shows the following:
Date of Bills Amount Rs. Term Months Rate of Discount
p.a.(%)
January 13 7,50,000 4 12
February 17 6,00,000 3 10
March 6 4,00,000 4 11
March 16 2,00,000 2 10
Find out the amount of discount received to be credited to Profit and Loss Account and
pass appropriate Journal Entries for the same. How the relevant items will appear in the
Dena Bank’s Balance Sheet? For calculation take 1 year = 365 days.
Accounting for Insurance Compani es
11. The following are the Balances of Hercules Insurance Co. Ltd. as on 31st March, 2007:
(Rs. in ’000)
Capital 320,00
Balances of Funds as on 1.4.2006
Fire Insurance 800,00
Marine Insurance 950,00
Miscellaneous Insurance 218,65
Unclaimed Dividends 8,50
Amount Due to Other Insurance Companies 34,50
Sundry Creditors 72,50
Deposit and Suspense Account (Cr.) 22,80
Profit and Loss Account (Cr.) 80,40
Agents Balances (Dr.) 135,00
Interest accrued but not due (Dr.) 22,50
Due from other Insurance Companies 64,50
Cash in Hand 3,50
10
Balance in Current Account with Bank 74,80
Furniture and Fixtures WDV (cost 100,00) 58,00
Stationery Stock 1,40
Expenses of Management
Fire Insurance 280,00
Marine Insurance 160,00
Miscellaneous Insurance 40,00
Others 30,00 510,00
Foreign Taxes—Marine 8,00
Outstanding premium 82,00
Donation Paid (No 80G Benefit) 10,00
Transfer Fees 1,00
Reserve for Bad Debts 11,70
Income Tax Paid 120,00
Mortgage Loan (Dr.) 975,00
Sundry Debtors 25,00
Government Securities Deposited with RBI 37,00
Government Securities (1,02,000) 1020,00
Debentures 465,50
Equity Shares of Joint Stock Companies 225,00
Claims Less Re-insurance
Fire 450,00
Marine 358,90
Miscellaneous 68,00 876,90
Premium Less Re-insurance
Fire 1762,50
Marine 1022,50
Miscellaneous 262,25 3047,25
Interest and Dividends Received on
Investments
58,50
Tax Deducted at Source 11,70
Commission
Fire 500,00
Marine 350,00
11
Miscellaneous 80,00 930,00
You are required to make the following
provisions :
Depreciation on Furniture—10% of Original
Cost
Depreciation on investments of Joint Stock
Companies Shares
10,00
Transfer to General Reserve 10,00
Outstanding claims as on 31.3.2007
Fire 200,00
Marine 50,00
Miscellaneous 32,50
Provision for tax @ 50%. Proposed dividends @ 20%. Provision for the unexpired risks
is to be made as follows:
(a) On Marine Policies - 100% Premium less reinsurance.
(b) On Other Policies - 50% Premium less reinsurance.
You are required to prepare the revenue and profit and loss account for the year ended
31.3.2007
Accounting of Electrici ty Compani es
12. The Gurgaon Electricity Company Limited decided to replace one of its old plants with a
modern one with a larger capacity. The plant when installed in the year 2000 cost the
company Rs. 24 lakhs, the components of materials, labour and overheads being in the
ratio of 5:3:2. It is ascertained that the costs of materials and labour have gone up by
40% and 80% respectively. The proportion of overheads to total costs is expected to
remain the same as before.
The cost of the new plant as per improved design is Rs. 60 lakhs and in addition,
material recovered from the old plant of a value of Rs. 2,40,000 has been used in the
construction of the new plant. The old plant was scrapped and sold for Rs. 7,50,000.
The accounts of the company are maintained under Double Account system. Indicate
how much would be capitalised and the amount that would be charged to revenue. Show
the Ledger Accounts.
12
Cash Fl ow Statement
13. The following are the changes in the account balance taken from the Balance Sheets of
Raj Ltd. at the beginning and end of the year:
Changes in Rupees
in Debit or (Credit)
Equity share capital 30,000 shares of Rs. 10 each issued and
fully paid
0
Capital reserve (49,200)
8% Debentures (50,000)
Debenture discount 1,000
Freehold property at cost/revaluation 43,000
Plant and machinery at cost 60,000
Depreciation on plant and machinery (14,400)
Debtors 50,000
Stock and work-in-progress 38,500
Creditors (11,800)
Net profit for the year (76,500)
Dividend paid in respect of earlier year 30,000
Provision for doubtful debts (3,300)
Trade investments at cost 47,000
Bank (64,300)
0
You are informed that :
(a) Capital reserve as at the end of the year represented realised profits on sale of one
freehold property together with surplus arising on the revaluation of balance of
freehold properties.
(b) During the year plant costing Rs. 18,000 against, which depreciation provision of
Rs.13,500 was lying, was sold for Rs. 7,000.
(c) During the middle of the year Rs. 50,000 debentures were issued for cash at a
discount of Rs. 1,000.
(d) The net profit for the year was after crediting the profit on sale of plant and charging
debenture interest.
13
You are required to prepare a statement which will explain, why bank borrowing has
increased by Rs. 64,300 during the year end. Ignore taxation.
Accounting from Incomplete Records
14. K. Azad, who is in business as a wholesaler in sunflower oil, is a client of your
accounting firm. You are required to draw up his final accounts for the year ended
31.3.2008.
From the files, you pick up his Balance Sheet as at 31.3.2007 reading as below:
Balance Sheet as at 31.3.2007
Rs. Rs.
Liabilities:
K. Azad’s Capital 1,50,000
Creditors for Oil Purchases 2,00,000
12% Security Deposit from Customers 50,000
Creditors for Expenses :
Rent 6,000
Salaries 4,000
Commission 20,000 30,000
Total 4,30,000
Assets:
Cash and Bank Balances 75,000
Debtors 1,60,000
Stock of Oil (125 tins) 1,25,000
Furniture 30,000
Less : Depreciation 3,000 27,000
Rent Advance 12,000
Electiricity Deposit 1,000
3–Wheeler Tempo Van 40,000
Less : Depreciation 10,000 30,000
Total 4,30,000
14
A Summary of the rough Cash Book of K. Azad for the year ended 31.3.2008 is as
below :
Cash and Bank Summary
Receipts:
Cash Sales 5,26,500
Collections from Debtors 26,73,500
Payments to:
Landlord 79,000
Salaries 48,000
Miscellaneous Office Expenses 12,000
Commission 20,000
Personal Income–tax 50,000
Transfer on 1.10.2007 for 12% Fixed Deposit 6,00,000
Creditors for Oil Supplies 24,00,000
A scrutiny of the other records gives you the following information :
(i) During the year oil was purchased at 250 tins per month basis at a unit cost of Rs.
1,000. 5 tins were damaged in transit in respect of which insurance claim has been
preferred. The surveyors have since approved the claim at 80%. The damaged ones
were sold for Rs. 1,500 which is included in the cash sales. One tin has been used
up for personal consumption. Total number of tins sold during the year was 3,000 at
a unit price of Rs. 1,750.
(ii) Rent until 30.9.2007 was Rs. 6,000 per month and was increased thereafter by Rs.
1,000 per month. Additional advance rent of Rs. 2,000 was paid and this is included
in the figure of payments to landlord.
(iii) Provide depreciation at 10% and 25% of WDV on furniture and tempo van
respectively.
(iv) It is further noticed that a customer has paid Rs. 10,000 on 31.3.2008 as security
deposit by cash. One of the staff has defalcated. The claim against the Insurance
Company is pending.
You are requested to prepare final accounts for the year ended 31.3.2008
Introducti on to Government Accounts
15. Define the term consolidated fund in context of Government accounting.
15
Accounting for Agri cul tural Forms
16. Describe what records are required for the compilation of accounting information for
agricultural farm.
Theory Questi ons
17. (a) Explain the purpose of the conceptual framework for preparation and presentation
of financial statements in brief.
(b) Write short note on liquidity norms of Banking Companies under section 24 of
Banking Regulations Act.
(c) Describe the term Co-insurance.
18. (a) What do you mean by over-riding preferential payments under section 529A of the
Companies Act?
(b) What are the advantages of maintaining subsidiary books by Trading/Manufacturing
organizations?
19. Theory questions based on Accounting Standards
(a) Explain the provisions of AS 20 for restatement of shares.
(b) If a sale and lease back transaction results in an operating lease, what provisions
will be applicable? Describe in line with AS 19.
(c) What criteria is applied for rating an enterprise as Level II enterprise for the purpose
of compliance of Accounting Standards in India?
20. (a) Which borrowing costs are eligible for capitalisation as per AS 16? Describe in
brief.
(b) A retail store has a policy of refunding purchases by dissatisfied customers, even
though it is under no legal obligation to do so. Its policy of making refunds is
generally known. Is it a liability?
(c) Explain the provisions of AS 26 relating to retirement and disposal of intangible
assets.
21. (a) Describe with reference to Accounting Standards, the methods which may be used
for recognising revenue on construction contracts.
(b) Discuss the accounting principles relevant to the auditors relating to:
(i) Prior period items.
(ii) Change in accounting estimates.
(c) Summarise briefly the requirements of AS 1 relating to the disclosure of significant
accounting policies.
16
22. Practical problems based on application of Accounting Standards
(a) A raw material costing Rs. 150 has net realisable value (which can be the
replacement cost) Rs. 130. The finished goods for which this raw material is used
has other cost to incur Rs. 60. At what price raw material should be valued if
finished goods has a net realisable value (i) Rs. 210 or above (ii) less than Rs. 190
and (iii) Rs. 200.
(b) Astha Ltd. paid an interim dividend of Rs. 1,00,000 during the financial year 2007-
2008. Alongwith, it also paid Rs. 10,200 as corporate dividend tax, ABC Ltd., while
preparing cash flow statement for 2007-2008, classified dividend paid as financing
activities and Corporate Dividend Tax paid as cash flow from operating activities.
Do you agree with such treatment? Answer your question in framework of AS-3.
(c) Heera Ltd. has two divisions. It provides depreciation for both divisions on straight
line basis as per rates prescribed by Schedule XIV to the Companies Act. While
finalizing the accounts for the year ended 31-3-2007, it however wants to change
the method to Written Down Value method for one of its divisions since in the
opinion of the management the assets of the said division suffer faster wear and
tear. Please advise the company on the above and also whether the change should
be prospective or retrospective.
(d) A firm of contractors obtained a contract for construction of bridges across river
Revathi. The following details are available in the records kept for the year ended
31st March, 2007.
(Rs. in lakhs)
Total Contract Price 1,000
Work Certified 500
Work not Certified 105
Estimated further Cost to Completion 495
Progress Payment Received 400
To be Received 140
The firm seeks your advice and assistance in the presentation of accounts keeping
in view the requirements of AS 7 (Revised) issued by ICAI.
23. (a) A newly set up Private Ltd. manufacturing company has incurred following
expenditures for the acquisition of plant & Machinery:
(a) Foreign tour expenses of directors for purchasing Plant & Machinery.
(b) Technical staff’s salary for erection of Plant & Machinery.
(c) Non-techincal staff’s salary during the period of installation of Plant &
Machinery
17
(d) Other sundry expenses such as stationery, printing, postage, telegram and
telephone and local conveyance charge etc.
The company intends to capitalize the above expenses. Is the company justified?
State with reasons.
(b) Daya Ltd. acquired a machine on 1-1-2004 for Rs. 10,00,000. The useful life is 5
years. The company had applied on 1-4-2004, for a subsidy to the tune of 80% of
the cost. The sanction letter for subsidy, was received in November 2007. The
company’s Fixed Assets Account as at 31-3-2008 shows a credit balance as under:
Machine (original cost) 10,00,000
Accumulated depreciation
(from 2004-2005 to 2006-2007 at straight line method) (6,00,000)
4,00,000
Less: Grant received (8,00,000)
(4,00,000)
How should the company deal with this asset in its account for 2007-08? Does it
need to charge depreciation or negative depreciation for 2007-08? Can it credit Rs.
4,00,000 to capital reserve?
(c) X Co. Ltd., has obtained an Institutional Loan of Rs. 680 lakhs for modernisation
and renovation of its plant & machinery. Plant & machinery acquired under the
modernisation scheme and installation completed on 31.3.2008 amounted to Rs.
520 lakhs, 30 lakhs has been advanced to suppliers for additional assets and the
balance loan of Rs. 130 lakhs has been utilized for working capital purpose. The
total interest paid for the above loan amounted to Rs. 62 lakhs during 2007-2008.
You are required to state how the interest on the institutional loan is to be
accounted for in the year 2007-2008.
24. (a) A Ltd. leased a machinery to B Ltd. on the following terms:
(Rs. in Lakhs)
Fair value of the machinery 20.00
Lease term 5 years
Lease Rental per annum 5.00
Guaranteed Residual value 1.00
Expected Residual value 2.00
Internal Rate of Return 15%
18
Depreciation is provided on straight line method @ 10% per annum. Ascertain
unearned financial income and necessary entries may be passed in the books of the
Lessee in the First year.
(b) A Ltd. has income from continuing ordinary operations of Rs. 2,40,000, a loss from
discontinuing operations of Rs. 3,60,000 and accordingly a net loss of Rs. 1,20,000.
The company has 1,000 equity shares and 200 potential equity shares outstanding
as at March 31, 2008. Compute basic and diluted EPS.
(c) An enterprise has purchased an exclusive right to generate hydro-electric power for
sixty years. The costs of generating hydro-electric power are much lower than the
costs of obtaining power from alternative sources. It is expected that the
geographical area surrounding the power station will demand a significant amount
of power from the power station for at least sixty years.
25. (a) During 2004-05, Enterprise X gives a guarantee of certain borrowings of Enterprise
Y, whose financial condition at that time is sound. During 2005-06, the financial
condition of Enterprise Y deteriorates and at 30 September, 2005 Enterprise Y goes
into liquidation. How it will be dealt with by ‘X’?
(b) A company deals in petroleum products. The sale price of petrol is fixed by the
government. After the Balance Sheet date, but before the finalisation of the
company’s accounts, the government unexpectedly increased the price
retrospectively. Can the company account for additional revenue at the close of the
year? Discuss.
(c) A company had imported raw materials worth US Dollars 6,00,000 on 5
th
January,
2007, when the exchange rate was Rs.43 per US Dollar. The company had
recorded the transaction in the books at the above mentioned rate. The payment
for the import transaction was made on 5
th
April, 2007 when the exchange rate was
Rs.47 per US Dollar. However, on 31
st
March, 2007, the rate of exchange was
Rs.48 per US Dollar. The company passed an entry on 31
st
March, 2007 adjusting
the cost of raw materials consumed for the difference between Rs.47 and Rs.43 per
US Dollar.
In the background of the relevant accounting standard, is the company’s accounting
treatment correct? Discuss.
(d) A company signed an agreement with the Employees Union on 1.9.2007 for revision
of wages with retrospective effect from 30.9.2006. This would cost the company an
additional liability of Rs. 5,00,000 per annum. Is a disclosure necessary for the
amount paid in 2007-08?
19
SUGGESTED ANSWERS/HINTS
1. Cost Price 100
Catalogue Price (100x150%) 150
Invoice Price (150-20%) 120
In the books of Kolkata - Head Office
Mumbai Branch Stock Account
Rs. Rs.
To Balance b/d 12,000 By Branch Cash Account
(Cash Sales) 46,000
To Goods sent to Branch
Account 1,32,000
By Branch Debtors Account
(Credit sales)
1,00,000
To Branch Adjustment
Account (W.N.1) 20,000
By Branch Adjustment
Account (loading on stock
destroyed)
500
By Branch profit and Loss
Account (at cost) 2,500
(Stock destroyed by fire
Balancing Figure
Rs. 3,000)
By Balance c/d 15,000
1,64,000 1,64,000
Mumbai Branch Adjustment Account
Rs. Rs.
To Mumbai Branch Stock
Account (loading on stock
destroyed by fire) 500
By
By
Stock Reserve Account
(opening)
Goods sent to Branch
2,000
To Stock Reserve Account
(closing) 2,500 By
Account (loading)
Mumbai Branch Stock
22,000
To Branch Profit and Loss
Account (Gross Profit) 41,000
Account (W.N.1) 20,000
44,000 44,000
20
Branch Profit and Loss Account
Rs. Rs.
To Branch Expenses
Account (6,000 + 13,365) 19,365
By Branch Adjustment Account 41,000
To Mumbai Branch Stock
Account 2,500
(Cost of stock destroyed
by fire)
To Provision for Discount
Account (W.N.2) 1,485
To General Profit and Loss
Account 17,650
41,000 41,000
Worki ng Notes :
1. Since the Branch Stock Account is prepared at invoice price, it is necessary to
calculate the invoice price of the goods sold on credit, i.e.,
000 , 80
150
120 000 , 00 , 1
=
×
Hence, surplus of Rs.20,000 (1,00,000 – Rs.80,000) has been transferred to Branch
Adjustment Account.
2. Calculati on of Provi si on for Discount on Debtors on 31
st
March, 2008:
Rate of Discount (Given) 15%
Total discount allowed during the year (Given) Rs.13,365
Thus, the total amount of debtors who availed discount by making prompt payments
is:
100 , 89
15
100 365 , 13
=
×
But the total amount of debtors who made payments during the year:
85,635 + 13,365 Rs.99,000
Thus, the amount of debtors likely to pay promptly out of the closing debtors could
be worked out as under:
900 , 9 . Rs
000 , 99
000 , 11 100 , 89
=
×
Provision for discount: 15% on Rs.9,900 = Rs.1,485.
21
2. In the books of Welwash (Pvt.) Ltd.
Hi re Purchase Tradi ng Account
for the year ended on 31
st
March, 2008
Dr.
Rs.
Cr.
Rs.
To Hire Purchase Stock
(Rs. 500 × 675) 3,37,500
By Cash (W.N. 1) 10,02,000
To Instalments due
(Rs. 500 × 3) 1,500
By Stock Reserve
|
.
|

\
|
×
500 , 13
000 , 3
500 , 37 , 3 . Rs
75,000
To Goods sold on Hire
Purchase
By Goods Repossessed
(Rs. 13,500×80) 10,80,000 (Rs. 13,500–Rs. 1,500–Rs. 2,500) 9,500
To Stock Reserve
|
|
.
|

\
|
×
500 , 13
000 , 3
000 , 05 , 4 . Rs
90,000 By Goods sold on Hire Purchase
|
|
.
|

\
|
×
500 , 13
000 , 3
000 , 80 , 10 . Rs
2,40,000
To Profit and Loss A/c 2,25,000 By Hire Purchase Stock
(Transfer of profit) (Rs. 500 × 810) 4,05,000
By Instalments due
(Rs. 500 × 5) 2,500
17,34,000 17,34,000
Tradi ng and Profit and Loss Account
for the year ended on 31
st
March, 2008
Rs. Rs.
To Opening Stock
(Rs.10,500×26)
2,73,000 By Sales (Rs. 12,300×130) 15,99,000
To Purchases(W.N.2) 21,52,500 By Goods sold on Hire
Purchase
To Gross Profit 2,34,000 (Rs. 10,80,000–Rs.
2,40,000)
8,40,000
By Closing Stock (Rs.
10,500×21) 2,20,500
26,59,500 26,59,500
22
To Sundry Expenses 1,60,000 By Gross Profit 2,34,000
To Provision for Income
Tax
By Hire Purchase Trading A/c 2,25,000
(35% of Rs.3,00,000) 1,05,000 By Goods Repossessed 1,000
To Net Profit for the year 1,95,000 (Rs. 11,500–Rs.1,000–Rs.
9,500)
4,60,000 4,60,000
Worki ng Notes :
1. Cash collected during the year Rs.
Hire purchase stock on 1.4.2007 3,37,500
Instalments due on 1.4.2007 1,500
Hire purchase price of goods sold during the year 10,80,000
14,19,000
Less : Repossessed goods 9,500
Hire purchase stock on 31.3.2008 4,05,000
Instalments due on 31.3.2008 2,500 4,17,000
Cash collected during the year 10,02,000
2. Washing machines purchased during the year
No. No.
Closing balance 21
Add : Cash Sales 130
Sales on hire purchase basis 80 231
Less : Opening stock 26
Purchase during the year 205
Purchases in Rs. 205 × Rs. 10,500 = Rs. 21,52,500
23
3. Statement of Distribution of Cash
Realisation Interest
on loans
from
partners’
spouses
Interest
on loans
from
partners
Partners’ Capitals Total
A B C
Rs. Rs. Rs. Rs. Rs. Rs. Rs
Balances due 2,000 1,000 9,600 6,000 8,400 24,000
(i) Sale of
investments 1,000 (1,000) - - - - -
1,000 1,000 9,600 6,000 8,400 24,000
(ii) Sale of
furniture 2,000 (1,000) (1,000) - - - -
(a) - - 9,600 6,000 8,400 24,000
(iii) Sale of
machinery 1,200
Maximum
possible loss
Rs. 22,800
(total of capital
A/cs Rs. 24,000
less cash
available Rs.
1,200) allocated
to partners in
the profit
sharing ratio i.e.
5 : 3 : 2 (11,400) (6,840) (4,560) (22,800)
Amounts at
credit (1,800) (840) 3,840 1,200
Deficiency of A
and B written off
against C 1,800 840 (2,640) –
Amount paid (b) – – 1,200 1,200
Balances in
capital accounts
(a-b)=(c) 9,600 6,000 7,200 22,800
(iv) Sale of
stock 4,000
Maximum
possible loss
Rs. 18,800 (Rs.
22,800 – Rs.
24
4,000) Allocated
to partners in
the ratio 5 : 3 : 2 (9,400) (5,640) (3,760) (18,800)
Amounts paid
(d) 200 360 3,440 (4,000)
Balances in
capital accounts
left unpaid —
Loss (c)-(d)=(e) 9,400 5,640 3,760 18,800
4. M/s Neptune & Co.
Profit and Loss Adjustment Account
for the year ended 31
st
March, 2008
Rs. Rs.
To Land & Building
(Loss on sale) 10,000
By Partners’
Capital
Accounts :
To Machinery (Loss on
scrapping) 4,300
Mr. A 95,400
To Provision for
Doubtful Debts
(W.N.1) 5,820 By
Mr. B
Prepaid
95,400 1,90,800
To Stock Adjustment
(Fall in the Market
value) 11,400
expenses
(Licence
fee) 1,000
To Cash (Misappropriated) 700 By Stock
Adjustment
(items
omitted) 6,600
To Interest on Capital (W.N.2)
Mr. A 32,580
Mr. B 11,160 43,740
To Profit transferred to
Partners’ Capital
Accounts:
Mr. A 61,220
Mr. B 61,220 1,22,440
1,98,400 1,98,400
25
(a) Partners’ Capi tal Accounts
as on 31
st
March, 2008
Mr. A Mr. B Mr. A Mr. B
Rs. Rs. Rs. Rs.
To Drawings 40,000 76,000 By Balance b/d 4,02,000 2,00,000
To Profit & Loss
Adjustment
By Profit & Loss
A/c
95,400 95,400
Account 95,400 95,400 By Profit & Loss
Adjustment
A/c:
To Balance c/d 4,55,800 1,96,380 Interest on
capital
32,580 11,160
Profit for the
year
61,220 61,220
5,91,200 3,67,780 5,91,200 3,67,780
Worki ng Notes :
(1) Provision for doubtful debts charged to profit and loss adjustment account
Provi si on for Doubtful Debts Accounts
Rs. Rs.
To Bad Debts 10,420 By Balance b/d 10,000
To Balance c/d (required) 5,400 By Profit & Loss Adjustment A/c
(balancing figure) 5,820
15,820 15,820
(2) Interest on Capitals
Mr. A Rs. 3,62,000 × 9% p.a. = Rs. 32,580
Mr. B Rs. 1,24,000 × 9% p.a. = Rs. 11,160
5. Statement of Affai rs as on 31.3.2008
Rs. Rs. Rs. Rs. Rs.
1,80,000 Unsecured
creditors as per list
A (W.N.1) 1,80,000
Property as per list
E:
Cash in hand 10,000 10,000
1,00,000 Creditors fully
secured as per list
B 1,00,000
Stock in hand
Book debts as per
list F:
15,000 10,000
26
Estimated value of
Security 1,00,000 -
Good 80,000 80,000
Nil Creditors partly
secured as per list
C Nil
Bad 10,000 Nil
1, 00,000
8,000 Creditors for taxes,
wages etc. being
payable in full as
per list D
8,000
Deduct creditors for
wages etc. as per
list D 8,000
92,000
_______
Deducted as per contra 8,000 Nil
_______
Deficiency as
explained in list H 88,000
2,88,000 1,80,000 1,80,000
Deficiency Account (List H)
Rs. Rs.
Excess of assets over
liabilities on 1.7.2002
Net profit upto
31.3.2005
2,00,000
1,40,000
Net loss arising from carrying on of
business from 1.4.2002 to the date of
adjudication (W.N. 2) 1,55,000
Deficiency 88,000 Loss on realisation of:
Building 60,000
Stock in trade 5,000
Debtors 10,000
_______
Drawings for household expenses
since 1.4.2005 1,98,000
4,28,000 4,28,000
Worki ng Notes:
(1) The unsecured creditors in this case will be as follows:
Rs.
Sundry Creditors 1,50,000
Godown Rent 5,000
Mrs. Ram loan (Since loan was given out of her own sources) 25,000
1,80,000
(2) Since accounts were not prepared for the period of 1.4.2002 to 31.3.2005 it is
necessary to ascertain the profit or loss incurred in these three years. Hence, the
following trial balance has been prepared with the given book figures.
27
Trial Balance
Dr. Cr.
Rs. Rs.
Building 1,60,000 Capital introduced 2,00,000
Book debts
Good
Bad
80,000
10,000
90,000
Add: Profit upto
31.3.2005 1,40,000
3,40,000
Stock in trade 15,000 Less: Drawings for
Cash in hand/bank
Loss (balancing figure)
10,000
1,55,000
(Rs. 5,500 × 36
months)
Creditors
1,98,000 1,42,000
1,50,000
Mortgage on building 1,00,000
Godown rent 5,000
Wages due 8,000
_______ Mrs. Ram’s loan 25,000
4,30,000 4,30,000
6. (a) Journal Entri es i n the Books of Tri ni ty Ltd.
Dr. Cr.
Rs. Rs.
Securities Premium A/c Dr. 10,000
To Premium on Redemption of Preference
shares A/c 10,000
(Being amount of premium payable on redemption of
preference shares)
10% Redeemable Preference Capital A/c Dr. 10,00,000
Premium on redemption of Preference Shares A/c Dr. 10,000
To Preference Shareholders 1,10,000
(Being the amount payable to preference
shareholders on redemption)
General Reserve A/c Dr. 1,00,000
To Capital Redemption Reserve A/c 1,00,000
(Being transfer to the latter account on redemption of
shares)
28
Bank A/c Dr. 45,000
Profit and Loss A/c Dr. 5,000
To Investments A/c 50,000
(Being amount realised on sale of Investments and
loss thereon adjusted)
Preference shareholders A/c Dr. 1,10,000
To Bank A/c 1,10,000
(Being payment made to preference shareholders)
Capital Redemption Reserve A/c Dr. 1,00,000
To Bonus to Shareholders A/c 1,00,000
(Amount adjusted for issuing bonus shares in the
ratio of 1 : 1)
Bonus to Shareholders A/c Dr. 1,00,000
To Equity Share Capital A/c 1,00,000
(Balance on former account transferred to latter)
(b) Cash and Bank A/c
Dr. Cr.
Rs. Rs.
To Balance b/d 50,000 By Preference
Dividend 10,000
To Cash from operations: By Preference
shareholders 1,10,000
Profit 15,000 By Balance c/d 30,000
Add : Depreciation 20,000
Add: Miscellaneous
expenditure written off 20,000 55,000
To Investments 45,000
1,50,000 1,50,000
29
(c) Balance Sheet of Tri ni ty Limi ted
as at 31st March, 2007 (after redemption)
Liabilities Rs. Assets Rs.
Share Capital: Fixed Assets:
Authorised Capital 10,00,000 Gross Block 3,00,000
Issued, Subscribed and
Paid-up Capital
Less:Depreciation
upto 31.3.2006
1,00,000
20,000 Equity
Share of Rs.
10 each fully
paid
2,00,000 For the year 20,000 1,20,000 1,80,000
allotted as
Bonus
Shares by
capitalising
capital
Redemption
Reserve)
Investments
(Market Value Rs.
45,000- W.N.5)
50,000
Reserves and Surplus:
Current Assets, Loans and
Advances
General
Reserve
(WN.2) 20,000
Inventory 25,000
Securities
Premium
(WN.3) 60,000
Debtors 25,000
Profit and
Loss A/c
(WN.1) 18,500 98,500
Cash and Bank
Balance 30,000 80,000
Current Liabilities and
Provisions:
Sundry Creditors 11,500
3,10,000 3,10,000
Worki ng Notes:
(i) Profit and Loss Account for the year ending 31st March, 2007 Rs.
Balance as on 1.4.2006 18,500
Add : Profit for the year 15,000
33,500
30
Less : Preference Dividend 10,000
Loss on sale of investments 5,000 15,000
Balance as on 31.3.2007 18,500
(ii) General Reserve 1,20,000
Less : Transfer to Capital Redemption Reserve 1,00,000
Balance as on 31.3.2007 20,000
(iii) Securities Premium 70,000
Less : Premium on Redemption of Preference shares 10,000
Balance as on 31.3.2007 60,000
(iv) Capital Redemption Reserve 1,00,000
Less : Transfer for Bonus Shares 1,00,000
Balance as on 31.3.2007 NIL
(v) Sale of Investments:
Cost of Investments 50,000
Less :Cash Received 45,000
Loss on Sale of Investments 5,000
Total Investments: 1,00,000
Less : Cost of Investments sold 50,000
Cost of Investments on hand 50,000
Market value (90% of Rs. 50,000) 45,000
7. Journal Entries
P Ltd.
Dr. Cr.
Rs. Rs.
Interest on Calls in Arrear A/c Dr. 1,200
To Profit & Loss A/c 1,200
(Being interest @ 12 % p.a. on Rs. 20,000 for 6 months
credited to Profit and Loss Account)
31
Bank A/c Dr. 21,200
To Calls in Arrear A/c 20,000
To Interest on Calls in Arrear A/c 1,200
(Being interest on calls in arrear received)
Profit & Loss A/c Dr. 6,000
To Interest on Calls in Advance A/c 6,000
(Being interest @ 10% on Rs. 1,20,000 for 6 months
allowed on calls in advance)
Profit & Loss A/c Dr. 90,000
To Preference Dividend 20,000
To Equity Dividend 70,000
(Being dividend @ 10% on Preference share capital &
20% on Equity share capital proposed)
Profit & Loss A/c Dr. 1,50,000
To Bonus to Equity Shareholders A/c 1,50,000
(Being bonus dividend declared)
Share Final Call A/c Dr. 1,50,000
To Equity Share Capital A/c 1,50,000
(Being final call made @ Rs. 3 on 50,000 shares)
Bonus to Equity shareholders A/c Dr. 1,50,000
To Share Final Call A/c 1,50,000
(Being adjustment of bonus dividend against final call)
Calls in Advance A/c Dr. 1,20,000
Interest on Calls in Advance A/c Dr. 6,000
To Bank A/c 1,26,000
(Being amount of calls in advance along with interest
refuned)
Bank A/c Dr. 2,20,000
To 10% Debentures A/c 2,20,000
(Being 2,200 Debentures of Rs.100 each issued in cash)
32
Profit & Loss A/c Dr. 20,000
To Premium on Redemption of Preference shares A/c 20,000
(Being premium payable on redemption)
Profit & Loss A/c Dr. 5,200
General Reserve A/c Dr. 1,94,800
To Capital Redemption Reserve A/c 2,00,000
(Transfer to capital redemption reserve)
Preference Share Capital A/c Dr. 2,00,000
Premium on Redemption of Preference Shares A/c Dr. 20,000
To Preference Shareholders A/c 2,20,000
(Amount due on redemption of preference shares)
Preference Shareholders A/c Dr. 2,20,000
To Bank A/c 2,20,000
(Amount paid to preference shareholders)
Profit & Loss Account of P Ltd.
for the year ended 31st March, 2008
Rs. Rs.
To Interest on calls in advance 6,000 By Balance b/d 2,70,000
To Balance c/d 2,65,200 By Interest on calls in arrear 1,200
2,71,200 2,71,200
To Premium on redemption 20,000 By Balance b/d 2,65,200
To Preference Dividend 20,000
To Equity Dividend 70,000
To Bonus Dividend 1,50,000
To Capital Redemption Reserve 5,200
2,65,200 2,65,200
33
Balance Sheet of P Ltd.
as on 31st March 2008
Liabilities Rs. Assets Rs.
Share Capital: Fixed Assets 7,00,000
50,000 equity shares of Rs. 10 each (Cost less depreciation)
fully paid up 5,00,000
(Of the above equity shares Rs. 3 per Cash & Bank balance (W.N.) 95,200
share has not been received in cash
but has been capitalised by issuing Other Current Assets 6,00,000
bonus dividend)
Reserves & Surplus:
Capital Redemption Reserve 2,00,000
General Reserve 3,00,000
Less: Utilised for redemption
of preference share 1,94,800 1,05,200
Profit & Loss Account —
10% Debentures 2,20,000
Current liabilities 2,80,000
Proposed dividend 90,000
13,95,200 13,95,200
Working Note :
Cash and Bank balance as on 31st March, 2008
Rs.
Cash and bank balance (given) 2,00,000
Add: Recovery of calls in arrear and interest thereon 21,200
Proceeds from issue of 10% Debentures 2,20,000
4,41,200
Less:Payment of calls in advance and interest thereon 1,26,000
Redemption of preference shares 2,20,000 3,46,000
95,200
Assumptions made:
1. It has been assumed that the amount of calls in arrear has been received.
2. It has also been assumed that 20% dividend on equity shares has been proposed
before the equity shares are made fully paid by way of bonus dividend.
34
8. PA (P) Ltd.
Dr. Profit and Loss Account for 15 months ended 31
st
March, 2008 Cr.
Particulars Notes Total Rs. Pre-
Incopor-
ation
1.1.2007
to 31.3.
2007
Post-
incor-
poration
1.4.2007
to 31.3.
2008
Particulars Notes Total
Rs.
Pre-
incorpora
tion
1.1.2007
to 31.3.
2007
Post-
incor-
poration
1.4.2007
to
31.3.200
8
To Salaries 2 1,17,000 9,000 1,08,000 By Gross
Profit
1 7,02,000 78,000 6,24,000
To Depreciation 3 18,000 3,600 14,400 By Goodwill - 1,900 -
To Advertisement 4 70,200 7,800 62,400
To Discounts 4 1,17,000 13,000 1,04,000
To M.D.’s
remuneration
5 9,000 - 9,000
To Misc. office
exp.
3 12,000 2,400 9,600
To Rent 6 72,000 9,000 63,000
To Interest 7 95,100 35,100 60,000
To Net Profit 1,91,700 - 1,93,600
7,02,000 79,900 6,24,000 7,02,000 79,900 6,24,000
35
Worki ng Notes:
(1) Gross Profit = Sales – Cost of goods sold
= Rs.23,40,000 – 16,38,000 = Rs.7,02,000
Gross Profit is apportioned in the ratio of sales which is calculated as follows:
Let, the average monthly sales of 3 months ending on 31
st
March, 2007 = Rs.100.
the average monthly sales of remaining 12 months starting from 1
st
April, 2007
= Rs.100 ×200. The total sales of pre-incorporation period will be = 100 × 3
= Rs.300 and that of post-incorporation period will be Rs.200 × 12 = 2400.
Therefore, the ratio of sales will be: 3:24 or 1:8.
000 78 1
9
000 02 7
, . Rs
, , . Rs
e Pr of profit Gross = × ÷
000 24 6 8
9
000 02 7
, , . Rs
, , . Rs
Post = × ÷
(2) Let, the pre-incorporation monthly salary = Rs.100. Therefore, the monthly salary
of post-incorporation period = Rs.100 × 3 = 300. Total salary of pre-incorporation
period = Rs.100 × 3 = Rs.300 and that of post-incorporation period will be Rs.300 ×
12 = 3,600. Hence, the ratio = 2300: 3,600 or 1:12.
(3) These expenses have been apportioned on the basis of time: 3:12 or 1:4.
(4) Advertisement and discounts are apportioned in the ratio of sales i.e., 1:8.
(5) Managing Directors’ remuneration is related to post-incorporation period.
(6) Rent to be apportioned as follows:
Total rent as per Profit and Loss Account =Rs.72,000
Less:Additional rent for 9 months @ Rs.30,000 =Rs.27,000
=Rs.45,000
Therefore, rent of pre-incorporation period is calculated as 000 9 3
15
000 45
, .
,
Rs = ×
And that of post-incorporation period = . , . , .
,
000 63 000 27 12
15
000 45
Rs Rs = + ×
(7) Interest for the pre-incorporation period is calculated as
100 35
12
3
000 70 11
100
12
, . , , . Rs Rs = × ×
The balance interest (Rs.95,100 – Rs.35,100) = Rs.60,000 is related to post-
acquisition period.
36
9. (1) Computation of Amount of Debentures and Shares to be issued:
Star Moon
Rs. Rs.
(i) Average Net Profit
3
962 , 88 , 1 250 , 1 – 788 , 24 , 2 +
= 1,37,500
3
500 79 1 050 71 1 950 36 1 , , , , , , + +
= 1,62,500
(ii) Equity Shares Issued
(a) Ratio of distribution
Star : Moon
1,375 1,625
(b) Number
Star : 13,750
Moon: 16,250
30,000
(c) Amount
13,750 shares of Rs. 5 each = 68,750
16,250 shares of Rs. 5 each = 81,250
(iii) Capital Employed (after revaluation of assets)
Fixed Assets 3,55,000 1,95,000
Current Assets 1,49,750 78,875
5,04,750 2,73,875
Less: Current Liabilities 2,98,500 90,125
2,06,250 1,83,750
(iv) Debentures Issued
8% Return on capital employed 16,500 14,700
15% Debentures to be issued to provide
equivalent income :
Star : 16,500 ×
15
100
= 1,10,000
Moon : 14,700 ×
15
100
= 98,000
37
(2) Balance Sheet of Neptune Ltd.
As at 31st December, 2007
Liabilities Amount Assets Amount
Rs. Rs.
Share Capital: Fixed Assets 5,50,000
Authorised Current Assets 2,06,950
40,000 Equity Shares of Rs. 5 each 2,00,000
Issued and Subscribed
30,000 Equity Shares of Rs. 5 each 1,50,000
(all the above shares are allotted
as fully paid-up pursuant to a
contract without payments being
received in cash)
Reserves and Surplus
Capital Reserve 32,000
Secured Loans
15% Debentures 2,08,000
Unsecured Loans –
Current Liabilities and Provisisons
Current Liabilties 3,66,950
Provisions –
7,56,950 7,56,950
Worki ng Notes :
Star Moon Total
Rs. Rs. Rs.
(1) Purchase Consideration
Equity Shares Issued 68,750 81,250 1,50,000
15% Debentures Issued 1,10,000 98,000 2,08,000
1,78,750 1,79,250 3,58,000
38
(2) Capital Reserve
(a) Net Assets Taken Over
Fixed Assets 3,55,000 1,95,000 5,50,000
Current Assets 1,49,750 57,200
-
2,06,950
5,04,750 2,52,200 7,56,950
Less : Current Liabilities 2,76,825
--
90,125 3,66,950
2,27,925 1,62,075 3,90,000
(b) Purchase Consideration 1,78,750 1,79,250 3,58,000
(c) Capital Reserve [(a) - (b)] 49,175
(d) Goodwill [(b) - (a)] 17,175
(e) Capital Reserve [Final Figure(c) - (d)] 32,000
10. Calculati on of Unexpired Di scounts or Rebate on Bil ls Di scounted
Date of
Bill
Date of
Maturity
including
three days
of grace
No. of
days
after
March
31
Amount
Rs.
Rate of
discount
% p.a.
Total
Annual
Discount
Proportionate Discount for
days after 31
st
March
2008 2008
Jan. 13 May 16 46 7,50,000 12 90,000
11,342 |
.
|

\
|
×
365
46
000 , 90
Feb.17 May 20 50 6,00,000 10 60,000
8,219 |
.
|

\
|
×
365
50
000 , 60
March 6 July 9 100 4,00,000 11 44,000
12,055 |
.
|

\
|
×
365
100
000 , 44
March 16 May 19 49 2,00,000 10 20,000
2,685 |
.
|

\
|
×
365
49
000 , 20
34,301
So, unexpired discounts on 31
st
March, 2008, Rs.34,301.
-
78, 875 - 21,675
--
2,98,500 - 21,675
39
The amount to be credited to Profit and Loss Account is ascertained from the Discount
Account as follows:
Discount Account
2008 Rs. 2008 Rs.
March
31
To Profit and Loss
A/c (Bal. fig.)
(transferred)
1,41,700
Mar. 31 By Sundries 1,45,500
March
31
To Rebate on Bills
Discounted (on
31.3.08)
34,301
March
31
By Rebate on
Bills
Discounted
(on 1-4-2007)
30,501
1,76,001 1,76,001
Journal Entries
2008 Rs. Rs.
March 31 Rebate on Bills Discounted A/c Dr. 30,501
To Discount Account 30,501
(Being unexpired discount brought forward
from the previous year, credited to Discount
Account)
March 31 Discount Account Dr. 34,301
To Rebate on Bills Discounted Account 34,301
(Being provision for unexpired discount
required at the end of the year)
March 31 Discount Account Dr. 1,41,700
To Profit and Loss Account 1,41,700
(Being discount earned for the year 2007-08
transferred)
Extracts of Balance Sheet
as at 31-3-2008
Liabilities Rs. Assets Rs.
Other Liabilities Advances
Rebate on Bills Discounted 34,301 Bills Discounted 51,50,000
40
11. Form B – RA (Prescribed by IRDA)
Hercules Insurance Co. Ltd.
Revenue Account for the year ended 31
st
March, 2007
Fire, Marine and Misc. Insurance Businesses
Sch
edu
le
Fire
Current
Year
Marine
Current
Year
Misc.
Current
Year
Rs. ‘000 Rs. ‘000 Rs. ‘000
Premiums earned (net) 1 1762,50 1022,50 262,25
Change in provision for unexpired risk (-)81,25 (-) 72,50 87,52
Interest, Dividends and Rent – Gross — — —
Double Income Tax refund — — —
Profit on sale of motor car — — —
Total (A) 1681,25 950,00 349,77
Claims incurred (net) 2 650,00 408,90 100,50
Commission 3 500,00 350,00 80,00
Operating expenses related to Insurance
business
4 280,00 160,00 40,00
Bad debts — — —
Indian and Foreign taxes — 8,00 —
Total (B) 1430,00 926,90 220,50
Profit from Marine Insurance business (A-B) 251,25 23,10 129,27
Schedules forming part of Revenue Account
Schedule –1
Fire
Current
Year
Marine
Current
Year
Misc.
Current
Year
Premiums earned (net) Rs. ‘000 Rs‘000. Rs. ‘000
Premiums less reinsurance (net) 1762,50 1022,50 262,25
Schedule – 2
Claims incurred (net) 650,00 408,90 100,50
41
Schedule – 3
Commission paid 500,00 350,00 80,00
Schedule – 4
Operating expenses related to insurance
business
Expenses of Management 280,00 160,00 40,00
Form B-PL
Hercules Insurance Co. Ltd.
Profit and Loss Account for the year ended 31st March, 2007
Particulars Sched
ule
Current
Year
Previous
Year
Rs. ’ (000) Rs. ’ (000)
Operating Profit/(Loss)
(a) Fire Insurance 251,25
(b) Marine Insurance 23,10
(c) Miscellaneous 129,27
Income From Investments
(a) Interest, Dividend & Rent–Gross 58,50
Other Income
Transfer Fees 1,00
Total (A) 463,12
Provisions (Other than taxation)
Depreciation of Furniture 10,00
Depreciation of Investments 10,00
Other Expenses
Expenses of Management 30,00
Donation 10,00
Total (B) 60,00
Profit before Tax 403,12
42
Provision for Taxation 206,56
Profit after Tax 196,56
Profit Appropriated
(a) Interim dividends paid during the year
(b) Proposed final dividend
(c) Dividend distribution tax

(64,00)

(d) Transfer to General Reserves or Other
Accounts (to be specified) (10,00)
122,56
Balance of profit/loss brought forward from last
year 80,40
Balance carried forward to Balance Sheet 202,96
Worki ng Notes :
1. Reserve for unexpired risk 50% of net premium for fire and miscellaneous and
100% of net premium for marine.
2. Provision for Taxation Rs.
Net Profit before tax 403,12
Add : Donation 10,00
Taxable Profit 413,12
Tax @ 50% 206,56
12. Gurgaon Electricity Company Limited
Plant Account
Dr. Cr.
Rs. Rs.
To Balance b/d 24,00,000 By Balance c/d 49,20,000
To Bank Account 22,80,000
(Cost of new plant-
capitalised)
To Replacement Account
(Old parts) 2,40,000
49,20,000 49,20,000
To Balance b/d 49,20,000
43
Replacement Account
Dr. Cr.
Rs. Rs.
To Bank Account 37,20,000 By Bank Account 7,50,000
(Current cost of
replacement)
(Sale of scrap)
By Plant Account
(Old material used) 2,40,000
By Revenue Account
(Transfer) 27,30,000
37,20,000 37,20,000
Working Notes :
(1) Cost to be incurred for replacement of present plant :
Cost of
Existing Plant
Rs.
Increase
%
Current Cost
Rs.
Materials 12,00,000 40% 16,80,000
Labour 7,20,000 80% 12,96,000
29,76,000
Overheads (1/4 of above or 1/5 of
total)
7,44,000
Current Replacement Cost 37,20,000
Total Cash Cost 60,00,000
Amount capitalised, excluding old materials used 22,80,000
13. Cash Flow Statement of Raj Ltd.
for the year ended ...........
Rs. Rs.
Cash flows from operating activities
Net profit 76,500
Adjustments for
44
Depreciation (W.N.4) 27,900
Profit on sale of plant (W.N.2) (2,500)
Accrued Interest on debentures for half year 2,000
Operating profit before working capital changes 1,03,900
Adjustments for:
Increase in debtors less provision for doubtful debts (46,700)
Increase in stock and work-in-progress (38,500)
Increase in creditors 11,800
Net cash from operating activities 30,500
Cash flows from investing activities
Purchase of plant and machinery (W.N.1) (78,000)
Proceeds from sale of plant 7,000
Proceeds from sale of freehold property (W.N.3) 6200
Increase in trade investments (47,000)
Net cash used in investing activities (1,11,800)
Cash flows from financing activities
Proceeds from issuance of debentures at discount 49,000
Debenture interest paid (2,000)
Dividend paid in respect of earlier year (30,000)
Net cash from financing activities 17,000
Excess of outflows over inflows (64,300)
Add: Cash and cash equivalents at the beginning of the year Nil
Cash & cash equivalents at the end of the year (64,300)
Thus, the shortfall of Rs. 64,300 was made up through borrowings from bank.
45
Worki ng Notes:
Rs.
1. Acquisition of plant and machinery:
Amount of increase, at cost 60,000
Add: Cost of plant disposed of 18,000
Cost of plant and machinery purchased 78,000
2. Profit on sale of plant = Rs. 7,000 - (Rs. 18,000 - Rs. 13,500)
= Rs. 7,000 - Rs. 4,500 = Rs. 2,500
3. Proceeds from sale of freehold property:
Capital reserve 49,200
Less: Increase in freehold property (given) 43,000
Proceeds from sale 6,200
4. Depreciation on Plant and Machinery provided for the year:
Increase in Provision for Depreciation (given) 14,400
Add: Accumulated depreciation on plant sold 13,500
Depreciation for the year .. 27,900
14. In the books of K. Azad
Trading and Profit and Loss Account
for the year ended 31st March, 2008
Rs. Rs.
To Opening Stock 1,25,000 By Sales 52,50,000
To Purchases 30,00,000 By Damaged Stock A/c 5,000
Less : Transferred to By Closing Stock 1,19,000
Drawings A/c 1,000 29,99,000
To Gross Profit c/d 22,50,000
53,74,000 53,74,000
To Salaries 44,000 By Gross Profit b/d 22,50,000
To Rent 78,000 By Interest accrued
To Miscellaneous Office Expenses 12,000 on fixed deposit 36,000
To Loss of Deposit 10,000 By Profit on Damaged Stock 500
To Interest on Security Deposits 6,000
46
To Depreciation :
Furniture 2,700
Tempo Van 7,500 10,200
To Net profit 21,26,300
22,86,500 22,86,500
Balance Sheet as on 31st March, 2008
Liabilities Amount Assets Amount
Rs. Rs. Rs. Rs.
K.Azad’s Capital Furniture 27,000
Balance 1,50,000 Less : Depreciation 2,700 24,300
Add : Net Profit 21,26,300
22,76,300 3–Wheeler Tempo Van 30,000
Less : Drawings 51,000 22,25,300 Less : Depreciation 7,500 22,500
12% Security Deposit from Customers 60,000 Closing Stock 1,19,000
Interest Payable on Security Deposit 6,000 Debtors 22,11,500
Creditors for Oil Purchases 8,00,000 Cash and Bank Balances 66,000
Outstanding Rent 7,000 Fixed Deposit 6,00,000
Interest Accrued on Fixed Deposit 36,000
Rent Advance 14,000
Electricity Deposit 1,000
Insurance Claim Receivable 4,000
30,98,300 30,98,300
Working Notes :
(1) Memorandum Stock Account
No. Cost (Rs.) No. Cost (Rs.)
To Opening Stock 125 1,25,000 By Damages 5 5,000
To Purchases 3,000 30,00,000 By Drawings 1 1,000
By Sales 3,000 30,00,000
By Closing Stock 119 1,19,000
3,125 31,25,000 3,125 31,25,000
47
(2) Damaged Stock Account
Rs. Rs.
To Trading Account 5,000 By Insurance Claim Receivable A/c 4,000
To Profit and Loss Account By Cash and Bank A/c (Sale) 1,500
(Balance Transferred) 500
5,500 5,500
(3) Debtors Account
Rs. Rs.
To Balance b/d 1,60,000 By Cash and Bank A/c 26,73,500
To Sales A/c (Credit Sales*) 47,25,000 By Balance c/d 22,11,500
48,85,000 48,85,000
*Credit Sales in respect of (normal) sales of 3,000 tins
Total Sales (3,000 × Rs. 1,750) = 52,50,000
Less : Cash Sales (5,26,500 – 1,500) = 5,25,000
47,25,000
(4) Creditors Account
Rs. Rs.
To Cash and Bank A/c 24,00,000 By Balance b/d 2,00,000
To Balance c/d 8,00,000 By Purchases A/c 30,00,000
32,00,000 32,00,000
(5) Cash and Bank Account
Rs. Rs.
To Balance b/d 75,000 By Rent A/c 79,000
To Sales A/c 5,25,000 By Salaries A/c 48,000
To Damaged Stock A/c 1,500 By Miscellaneous Office Expenses 12,000
To Debtors A/c 26,73,500 By Commission 20,000
To Security Deposit A/c 10,000 By Drawings A/c 50,000
(Personal Income–tax)
By Fixed Deposit A/c 6,00,000
By Creditors A/c 24,00,000
48
By Loss of deposit A/c 10,000
(Defalcation of security deposit)
By Balance c/d 66,000
32,85,000 32,85,000
Notes :
(1) 12% interest on Fixed Deposit is assumed to be per annum. Similar assumption
applies to 12% Security Deposit from customers.
(2) The treatment of claim pending against the Insurance Company in respect of
defalcation of security deposit by one of the staff has been considered on the basis of
Conservatism Concept. Conservatism suggests non–consideration of claim as an asset in
anticipation. Where the ability to assess the ultimate collection with reasonable certainly is
lacking at the time of raising any claim, revenue recognition is postponed to the extent of
uncertainty involved (AS 9). In this case, it may reasonably assume that collectability of
claim is not certain.
15. In India, Government accounts are kept in three main parts i.e., consolidated fund,
contingency fund and public account.
Revenue of the Government arising out of taxation, other receipts classified as revenue,
certain capital receipts by way of deposits, advances and expenditure there from are
classified and accounted under “Consolidated fund”.
Accounting for the Central Government and State Government is done separately i.e., in
consolidated fund of India for the Central Government and a separate consolidated fund
for each state and Union Territory. The two main sub-divisions under the consolidated
fund are Revenue A/c and Capital A/c.
16. Agricultural activities are carried on mostly in an unorganized manner. The farmer has no
office and also does not find time for day by day record keeping. The transactions and
events are also not supported by vouchers or other documents in most of the cases. So it
is desirable to maintain a Diary to record happenings of the day. This Diary becomes the
source document for record keeping.
Seven registers are required for running the accounting system.
1. Cash Book: to record cash transactions.
2. Fixed Assets Register: to record details of fixed assets like description of assets,
cost of purchases/construction/generation, disposal, depreciation and balance.
3. Loan Register: to record borrowings from bank, cooperatives and other agencies
trade creditors along with interest paid or payable.
4. Stock Register: to record details of input, output and by product – receipts,
utilization, wastage and balance.
49
5. Debtors and Creditors Register: to record credit transactions classified by parties
involved.
6. Register for National Transactions: to record transactions between farm and farm
household.
7. Cost Analysis Register: to record cropwise input and output inclusive of
apportionment of common costs and finding out crop profit.
17. (a) Purpose of the Conceptual Framework:
The framework sets out the concepts underlying the preparation and presentation of
general-purpose financial statements prepared by enterprises for external users.
The main purpose of the framework is:
(a) To assist enterprises in preparation of their financial statements in compliance
with the accounting standards and in dealing with the topics not yet covered by
any accounting standard.
(b) To assist Accounting Standard Board (ASB) of ICAI in its task of development
and review of accounting standards.
(c) To assist ASB in promoting harmonisation of regulations, accounting standards
and procedures relating to the preparation and presentation of financial
statements by providing a basis for reducing the number of alternative
accounting treatments permitted by accounting standards.
(d) To assist auditors in forming an opinion as to whether financial statements
conform to the accounting standards.
(e) To assist the users in interpretation of financial statements.
(b) Li qui di ty Norms: Banking companies have to maintain sufficient liquid assets in
the normal course of business. In order to safeguard the interest of depositors and
to prevent banks from over-extending their resources, liquidity norms have been
settled and given statutory recognition. Every banking company has to maintain in
cash, gold or unencumbered approved securities, an amount not less than 25% of
its demand and time liabilities in India. However, this percentage is changed by the
Reserve Bank of India from time to time considering the general economic
conditions. This is in addition to the average daily balance which a scheduled bank
is required to maintain under Section 42 of the Reserve Bank of India Act and in
case of other banking companies, the cash reserve required to be maintained under
Section 18 of the Banking Regulations Act.
(c) Co-Insurance: In cases of large risks the business is shared between more than
one insurer under co-insurance arrangements at agreed percentages. The leading
insurer issues the documents, collects premium and settles claims. Statements of
Account are rendered by the leading insurer to the other co-insurers. Accounting
for premium, claims etc. under co-insurance is done in the same manner as that of
the direct business except in respect of the following peculiar features:
50
(i) Premium: The co-insurer books the premium based on the statement received
from the leading insurer usually by issuing dummy documents. Entries are
made in the Premium Register from which the Premium Account is credited
and the Leading Insurer Company’s Account debited. In case the statement is
not received, the premium is accounted for on the basis of advices to ensure
that all premium in respect of risk assumed in any year is booked in the same
year; share of premium relatable to further extension/endorsements on policies
by the leading insurer are also accounted for on the basis of subsequent
advices. Reference to the relevant communications should be made from the
concerned companies to ensure that premium collected by them and
attributable to the company is recorded.
(ii) Claims Paid: Normally, on the basis of claims paid, advices received from the
leading insurer, the Claims Paid Account is debited with a credit to the co-
insurer. All such advices are entered into the Claims Paid Register. It is a
practice to treat all claims paid advices relating to the accounting year received
upto 31st January of the subsequent year from leading insurer as claims paid.
Outgoing co-insurance: The share of the insurer only for both premium and claims
has to be accounted under respective accounts. The share of other co-insurers is
credited or debited, as the case may be, to their personal accounts and not routed
through revenue accounts.
18. (a) Over-ri di ng preferenti al payments under Section 529A of the Companies Act,
1956:
The Companies (Amendment) Act, 1985 introduced Section 529A which states that
certain dues are to be settled in the case of winding up of a company even before
the payments to preferential creditors under Section 530. Section 529A states that
in the event of winding up of a company, workmen’s dues and debts due to secured
creditors, to the extent such debts rank under Section 529(1)(c), shall be paid in
priority to all other debts. The workmen’s dues and debts to secured creditors shall
be paid in full, unless the assets are insufficient to meet them, in which case they
shall abate in equal proportions.
Workmen’s dues, in relation to a company, means the aggregate of the following
sums:
1. all wages or salary including wages payable for time or piece work and salary
earned wholly or in part by way of commission of any workman, in respect of
services rendered to the company and any compensation payable to any
workman under any of the provisions of the Industrial Disputes Act, 1947;
2. all accrued holiday remuneration becoming payable to any workman, or in the
case of his death to any other person in his right, on the termination of his
employment before, or by the effect of, the winding up order or resolution;
3. all amounts due in respect of any compensation or liability for compensation
under Workmen’s Compensation Act, 1923 in respect of death or disablement
51
of any workman of the company.
4. all sums due to any workman from a provident fund, pension fund, a gratuity
fund or any other fund for the welfare of the workmen, maintained by the
company.
(b) Advantages of maintaining subsidiary books by a trading/manufacturing
organization are:
(i) Di vision of work: In place of one journal, there are many subsidiary books.
The accounting work can be divided amongst a number of people.
(ii) Special isation and effi ci ency: As a person is handling only one type of work,
he acquires full knowledge and becomes efficient in handling the work.
Accounting work is done efficiently.
(iii) Savi ng of time: Various accounting processes can be undertaken
simultaneously because of the use of a number of books. This results in
quicker completion of work.
(iv) Avai labil ity of information: Since a separate register is kept for each class of
transactions, the information relating to each class of transaction is available at
one place.
Additional information for sales tax, excise, octroi etc., can also be compiled
from the appropriate columns in the pruchases and sales registers.
(v) Faci li ty i n checking: When the trial balance does not agree, the location of
errors is facilitated by the existence of separate books. Similarly audit of the
various books of prime entry can be conducted simultaneously by a team of
audit staff.
19. (a) According to para 44 of AS 20, ‘If the number of equity or potential equity shares
outstanding increases as a result of a bonus issue or share split or decreases as a
result of a reverse share split (consolidation of shares), the calculation of basic and
diluted earnings per share should be adjusted for all the periods presented. If these
changes occur after the balance sheet date but before the date on which the
financial statements are approved by the board of directors, the per share
calculations for those financial statements and any prior period financial statements
presented should be based on the new number of shares. When per share
calculations reflect such changes in the number of shares, that fact should be
disclosed.
(b) As per para 50 and 52 of AS 19, ‘if a sale and leaseback transaction results in an
operating lease, and it is clear that the transaction is established at fair value, any
profit or loss should be recognised immediately. If the sale price is below fair value,
any profit or loss should be recognised immediately except that, if the loss is
compensated by future lease payments at below market price, it should be deferred
and amortised in proportion to the lease payments over the period for which the
asset is expected to be used. If the sale price is above fair value, the excess over
52
fair value should be deferred and amortised over the period for which the asset is
expected to be used.
For operating leases, if the fair value at the time of a sale and leaseback transaction
is less than the carrying amount of the asset, a loss equal to the amount of the
difference between the carrying amount and fair value should be recognised
immediately.’
(c) Enterprises which are not Level I enterprises but fall in any one or more of the
following categories are classified as Level II enterprises:
(i) All commercial, industrial and business reporting enterprises, whose turnover
for the immediately preceding accounting period on the basis of audited
financial statements exceeds Rs. 40 lakhs but does not exceed Rs. 50 crores.
Turnover does not include ‘other income’.
(ii) All commercial, industrial and business reporting enterprises having
borrowings, including public deposits, in excess of Rs. 1 crore but not in
excess of Rs. 10 crores at any time during the accounting period.
(iii) Holding and subsidiary enterprises of any one of the above at any time during
the accounting period.
20. (a) To the extent that funds are borrowed specifically for the purpose of obtaining a
qualifying asset, the amount of borrowing costs eligible for capitalisation 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.
To the extent that funds are borrowed generally and used for the purpose of
obtaining a qualifying asset, the amount of borrowing costs eligible for capitalisation
should be determined by applying a capitalisation rate to the expenditure on that
asset. 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. The amount of borrowing costs capitalized during a period should not exceed
the amount of borrowing costs incurred during that period.
(b) It is a present obligation as a result of past obligating event. The obligating event is
the sale of the product which gives rise to an obligation because obligations also
arise from normal business practices. An outflow of resources, embodying
economic benefits in settlement is probable because a proportion of goods are
returned for refund. For the best estimate of the cost of refunds, a provision should
be recognized as per AS 29.
(c) Para 87, 88 and 89 of AS 26 states that an intangible asset should be derecognised
(eliminated from the balance sheet) on disposal or when no future economic
benefits are expected from its use and subsequent disposal.
53
Gains or losses arising from the retirement or disposal of an intangible asset should
be determined as the difference between the net disposal proceeds and the carrying
amount of the asset and should be recognised as income or expense in the
statement of profit and loss.
An intangible asset that is retired from active use and held for disposal is carried at
its carrying amount at the date when the asset is retired from active use. At least at
each financial year end, an enterprise tests the asset for impairment under
Accounting Standard on Impairment of Assets, and recognises any impairment loss
accordingly.
21. (a) As per AS 7, when the outcome of a construction contract can be estimated reliably,
contract revenue and contract costs associated with the construction contract
should be recognised as revenue and expenses respectively by reference to the
stage of completion of the contract activity at the reporting date. An expected loss
on the construction contract should be recognised as an expense immediately in
accordance with paragraph 35 of the same standard.
(b) (i) The nature and amount of prior period items should be separately disclosed in
the statement of profit and loss in a manner that their impact on the current
profit or loss can be perceived.
(ii) The effect of a change in an accounting estimate should be included in the
determination of net profit or loss in:
(a) the period of the change, if the change affects the period only; or
(b) the period of the change and future periods, if the change affects both.
The effect of a change in an accounting estimate should be classified
using the same classification in the statement of profit and loss as was
used previously for the estimate.
The nature and amount of a change in an accounting estimate which has
a material effect in the current period, or which is expected to have a
material effect in subsequent periods, should be disclosed. If it is
impracticable to quantify the amount, this fact should be disclosed.
(c) For disclosure of significant accounting policies, AS 1 in its para nos. 24, 25, 26 and
27 requires, ‘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 the significant accounting policies should normally be
disclosed in one place.
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. In the case of a change in accounting policies which has a
material effect in the current period, the amount by which any item in the financial
54
statements is affected by such change should also be disclosed to the extent
ascertainable. Where such amount is not ascertainable, wholly or in part, the fact
should be indicated.
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.’
22. (a) (i) The raw material price has declined to Rs. 130 but the cost of finished goods
Rs. 210 including raw material cost Rs. 150 is fully realizable hence no need to
write down inventory to Rs. 130 i.e. raw material will be valued at Rs. 150.
(ii) If the net realizable value of finished goods say Rs. 190 or less, is less than its
cost of Rs. 210 then raw material should be valued at Rs. 130.
(iii) Although wordings of AS 2 does not say so clearly but if finished goods can be
sold at Rs. 10 less than its expected total cost, then raw material can be
valued at Rs.140 i.e. Rs. 10 less than its cost. That is, it need not be written
down to Rs.130. This is in view of the purpose of writing down to net reali zable
in AS 2. According to AS 2, the practice of writing down inventories below cost
to net realizable value is consistent with the view that assets should not be
carried in excess of the amount that can be realized from its use since it is
held for the purpose of that use. Hence the entire cost of Rs. 150 is not
recovered by use in finished production. Only Rs. 140 is recoverable by use in
production i.e. (Rs. 140+60= 200). Hence, the stock of raw materials should be
valued at Rs. 140.
(b) Both dividend paid and Corporate Dividend Tax paid should be shown as financing
activities as per AS 3.
(c) According to the Guidance Note on Accounting for Depreciation in Companies
issued by ICAI, it is permissible for a company to adopt more than one method of
depreciation simultaneously that is to say that-
1. Company may follow different methods for different types of assets; and
2. Company geographical locations can follow different methods.
Only condition is that same methods should be consistently adopted from year
to year.
Change in the method of depreciation is a change in accounting policy.
According to AS 6, such a change is permissible only when at least one of the
following 3 conditions is satisfied:-
(i) Such change is required by law.
(ii) Such change is required by the Accounting Standards
(iii) Such change will result in more appropriate presentation.
Here, from the facts given it appears that condition (iii) is satisfied i.e. change
55
will lead to more appropriate presentation (since WDV method will better
represent the pattern of faster wear & tear instead of SLM).
According to AS 6, change should be retrospective. Any difference arising
thereon should be changed/ credited to P&L account in the year of change.
(d) (i) Amount of foreseeable loss (Rs in lakhs)
Total cost of construction (500 + 105 + 495) 1,100
Less: Total contract price 1,000
Total foreseeable loss to be recognized as expense 100
According to para 35 of AS 7 (Revised 2002), when it is probable that total
contract costs will exceed total contract revenue, the expected loss should be
recognized as an expense immediately.
(ii) Contract work-in-progress i.e. cost incurred to date are
Rs. 605 lakhs
(Rs in lakhs)
Work certified 500
Work not certified 105
605
This is 55% (605/1,100 × 100) of total costs of construction.
(iii) Proportion of total contract value recognised as revenue as per para 21 of AS
7 (Revised).
55% of Rs. 1,000 lakhs = Rs. 550 lakhs
(iv) Amount due from/to customers = Contract costs + Recognised profits –
Recognised losses – (Progress payments received + Progress payments to be
received)
= [605 + Nil – 100 – (400 + 140)] Rs. in lakhs
= [605 – 100 – 540] Rs. in lakhs
Amount due to customers = Rs. 35 lakhs
The amount of Rs. 35 lakhs will be shown in the balance sheet as liability.
(v) The relevant disclosures under AS 7 (Revised) are given below:
Rs. in lakhs
Contract revenue 550
Contract expenses 605
Recognised profits less recognized losses (100)
56
Progress billings (400 + 140) 540
Retentions (billed but not received from contractee) 140
Gross amount due to customers 35
23. (a) 1. Yes, as foreign tour expenses of directors for purchase of Plant and Machinery
is for the acquisition of the asset, therefore it should be capitalised.
2. Yes, salary of technical staff for erection of Plant and Machinery is the cost
directly attributable for bringing the asset to its working conditions for its
intended use. Therefore, it should be capitalised.
3. No, as per para 9 of AS 10 only salary of technical staff can be said to as
directly attributable to bring the asset to its working conditions for its intended
use. Therefore, salary of non-technical staff cannot be capitalised.
4. No, as per para 9.3 of AS 10, ‘administration and other general overhead
expenses are usually excluded from the cost of fixed assets because they do
not relate to a specific fixed asset.’ Hence the same should not be capitalized.
(b) In respect of depreciable assets, AS 12 does not permit the crediting of the grant or
any part thereof to capital reserve. The company has only two options – reduce the
grant from the cost of fixed assets or treat it as deferred income. It appears that
company follows the first option. Out of the Rs. 8,00,000 that has been received,
Rs. 4,00,000 is the balance in Machinery account and so Rs. 4,00,000 should be
credited to the Machinery account. The balance Rs. 4,00,000 may be credited to
profit & loss account as already the cost of the assets to the tune of Rs. 6,00,000
has been debited to profit and loss account in the earlier years and Rs. 4,00,000
transferred to profit & loss account would be partial recovery of that cost. There is
no need to provide depreciation for 2007-08 or 2008-09 as the depreciable amount
is now Nil.
(c) Statement showi ng the treatment for total interest amount of Rs. 62 lakhs
Purpose Nature Interest to be
capitalized
Interest to be charged
to profit and loss
account
Rs. in lakhs Rs. in lakhs
Modernisation and
renovation of plant
and machinery
Qualifying
asset
-
Advance to
suppliers for
additional assets
Qualifying
asset
-
47.41
680
520 62
=
×
2.74
680
30 62
=
×
57
Working Capital Not a qualifying
asset
_____ = 11.85
50.15 11.85
24. (a) Computation of Unearned Fi nance Income
(i) Gross investment = Minimum lease payments + Unguaranteed residual value
= (Total lease rent + Guaranteed residual value) +
Unguaranteed residual value
= [(Rs. 5,00,000 × 5 years) + Rs. 1,00,000] + Rs. 1,00,000
= Rs. 27,00,000
(ii) Table showing present value of (i) Minimum lease payments (MLP) and (ii)
Unguaranteed residual value (URV).
Year MLP inclusive of URV Internal rate of
return
(Discount
factor 15%)
Present
Value
Rs. Rs.
1 5,00,000 .8696 4,34,800
2 5,00,000 .7561 3,78,050
3 5,00,000 .6575 3,28,750
4 5,00,000 .5718 2,85,900
5 5,00,000 .4972 2,48,600
1,00,000 .4972 49,720
(guaranteed residual value) ________
17,25,820 (1)
1,00,000 .4972 49,720 (2)
(unguaranteed residual value) ________
(1) + (2) 17,75,540
Unearned Finance Income = Gross investment – PV of MLP
= Rs. 27,00,000 – Rs. 17,75,540
= Rs. 9,24,460
680
130 62×
58
Journal Entri es i n the books of B Ltd.
Rs. Rs.
At the inception of lease
Machinery account Dr. 17,25,820
-
To A Ltd.’s account 17,25,820*
(Being lease of machinery recorded at
present value of MLP)
At the end of the first year of lease
Finance charges account (Refer W. N.) Dr. 2,58,873
To A Ltd.’s account 2,58,873
(Being the finance charges for first year
due)
A Ltd.’s account Dr. 5 ,00,000
To Bank account 5,00,000
(Being the lease rent paid to the lessor
which includes outstanding liability of
Rs. 2,41,127 and finance charge of Rs.
2,58,873)
Depreciation account Dr. 1,72,582
To Machinery account 1,72,582
(Being the depreciation provided @
10% p.a. on straight line method)
Profit and loss account Dr. 4,31,455
To Depreciation account 1,72,582
To Finance charges account 2,58,873
(Being the depreciation and finance
charges transferred to profit and loss
account)
59
Worki ng Note:
Table showing apportionment of lease payments by B Ltd. between the finance
charges and the reduction of outstanding liability.
Year Outstanding
liability
(opening
balance)
Lease rent Finance
charge
Reduction
in
outstanding
liability
Outstanding
liability
(closing
balance)
Rs. Rs. Rs. Rs. Rs.
1 17,25,820 5,00,000 2,58,873 2,41,127 14,84,693
2 14,84,693 5,00,000 2,22,704 2,77,296 12,07,397
3 12,07,397 5,00,000 1,81,110 3,18,890 8,88,507
4 8,88,507 5,00,000 1,33,276 3,66,724 5,21,783
5 5,21,783 5,00,000 78,267 5,21,783 1,00,050*
8,74,230 17,25,820
*The difference between this figure and guaranteed residual value (Rs.
1,00,000) is due to approximation in computing the interest rate implicit in the
lease.
(b) As per para 39 of AS 20, ‘Potential Equity Shares should be treated as dilutive
when, and only when, their conversion to equity shares would decrease net profit
per share from continuing ordinary operations.’
As income from continuing operations is the control figure as per para 40, Rs.
2,40,000 should be considered and not Rs. (1,20,000) for deciding whether the
potential equity shares are dilutive or anti-dilutive. Accordingly, 200 potential equity
shares would be dilutive potential equity shares since their inclusion decrease the
net profit per share from continuing operations from Rs. 240 (i.e. Rs.2,40,000/ 1,000
shares) to Rs. 200 (i.e. Rs.2,40,000/1,200 shares). In view of the above, the basic
loss per share would be Rs. 120 and diluted loss per share would be Rs. 100.
(c) According to AS 26, the enterprise should amortise the right to generate power over
sixty years, unless there is evidence that its useful life is shorter. But the enterprise
should subject this right to impairment testing at each year end during its useful life
since useful life is considered to be more than 10 years.
25. (a) (i) At 31 March, 2005
The giving of the guarantee, gives rise to a possible obligation.
No outflow of benefits is probable at 31 March, 2005 since financial position of
Y is sound. Hence, no provision is recognised. The guarantee is disclosed as a
contingent liability unless the probability of any outflow is regarded as remote.
60
(ii) At 31 March, 2006
The obligating event is the giving of the guarantee, which gives rise to a legal
obligation to make good enterprise Y’s defaults.
At 31 March 2006, it is probable that an outflow of resources embodying
economic benefits will be required to settle the obl igation, since enterprise Y
has gone into liquidation.
A provision should be recognised for the best estimate of the obligation.
Note: This example deals with a single guarantee. If an enterprise has a
portfolio of similar guarantees, it will assess that portfolio as a whole in
determining whether an outflow of resources embodying economic benefit is
probable. Where an enterprise gives guarantees in exchange for a fee,
revenue is recognised under AS 9, Revenue Recognition.
(b) According to para 8 of AS 4 (Revised 1995), the unexpected increase in sale price
of petrol by the government after the balance sheet date cannot be regarded as an
event occurring after the Balance Sheet date, which requires an adjustment at the
Balance Sheet date, since it does not represent a condition present at the balance
sheet date. The revenue should be recognized only in the subsequent year with
proper disclosures. The retrospective increase in the petrol price should not be
considered as a prior period item, as per AS 5, because there was no error in the
preparation of previous period’s financial statements.
(c) As per AS 11 (revised 2003), ‘The Effects of Changes in Foreign Exchange Rates’,
monetary items denominated in a foreign currency should be reported using the
closing rate at each balance sheet date. The effect of exchange difference should
be taken into profit and loss account. Sundry creditors is a monetary item, hence
should be valued at the closing rate i.e, Rs.48 at 31
st
March, 2007 irrespective of
the payment for the same subsequently at lower rate in the next financial year. The
difference of Rs.5 (48-43) per US dollar should be shown as an exchange loss in
the profit and loss account for the year ended 31
st
March, 2007 and is not to be
adjusted against the cost of raw- materials. In the subsequent year, the company
would record an exchange gain of Re.1 per US dollar, i.e., the difference between
Rs.48 and Rs.47 per Us dollar. Hence, the accounting treatment adopted by the
company is incorrect.
(d) It is given that revision of wages took place on 1st September, 2007 with
retrospective effect from 30.9.2006. Therefore wages payable for the half year from
1.10.2006 to 31.3.2007 cannot be taken as an error or omission in the preparation
of financial statements and hence this expenditure cannot be taken as a prior period
item.
Additional wages liability of Rs. 7,50,000 (for 1½ years @ Rs. 5,00,000 per annum)
should be included in current year’s wages.
61
It may be mentioned that additional wages is an expense arising from the ordinary
activities of the company. Although abnormal in amount, such an expense does not
qualify as an extraordinary item. However, as per para 12 of AS 5 (Revised), when
items of income and expense within profit or loss from ordinary activities are of such
size, nature or incidence that their disclosure is relevant to explain the performance
of the enterprise for the period, the nature and amount of such items should be
disclosed separately.
Note: AS 1 to AS 29 are appl i cabl e for November, 2008 Examination
APPENDIX
Announcement
Wi thdrawal of the Announcement i ssued by the Council on ‘Treatment of exchange
di fferences under Accounting Standard (AS) 11 (revi sed 2003), The Effects of Changes in
Forei gn Exchange Rates vis-à-vi s Schedule VI to the Compani es Act, 1956’
1. The Council of the Institute of Chartered Accountants of India had issued an
Announcement on ‘Treatment of exchange differences under Accounting Standard (AS) 11
(revised 2003), The Effects of Changes in Foreign Exchange Rates vis-à-vis Schedule VI to
the Companies Act, 1956’, which was published in the November 2003 issue of ‘The
Chartered Accountant’ (pp. 497)
1
2. Subsequent to the issuance of the above Announcement, the Ministry of Company Affairs
(now known as the Ministry of Corporate Affairs) issued the Companies (Accounting
Standards) Rules, 2006, by way of Notification in the Official Gazette dated 7th December,
2006. As per Rule 3(2) of the said Rules, the Accounting Standards shall come into effect in
respect of accounting periods commencing on or after the publication of these accounting
standards under the said Notification.
3. AS 11, as published in the above Government Notification, carries a footnote that “it may
be noted that the accounting treatment of exchange differences contained in this Standard is
required to be followed irrespective of the relevant provisions of Schedule VI to the
Companies Act, 1956”.
4. In view of the above footnote to AS 11, the Council of the Institute of Chartered
Accountants of India has decided at its 269th meeting held on July 18, 2007, to withdraw the
Announcement on ‘Treatment of exchange differences under Accounting Standard (AS) 11
(revised 2003), The Effects of Changes in Foreign Exchange Rates vis-à-vis Schedule VI to
the Companies Act, 1956’, published in ‘The Chartered Accountant’ of November 2003.
Accordingly, the accounting treatment of exchange differences contained in AS 11 notified as
above is applicable and not the requirements of Schedule VI to the Act, in respect of
accounting periods commencing on or after 7th December, 2006.
62
Students are advised to refer the fol lowi ng rates of Non-Performing Assets i n case of
Banki ng Compani es
PROVISIONS
Taking into account the time lag between an account becoming doubtful of recovery, its
recognition as such, the realisation of the security and the erosion over time in the value of
security charged to the banks, it has been decided that banks should make provision against
sub-standard assets, doubtful assets and loss assets on the following basis:
(a) Loss assets : The entire amount should be written off or full provision should be made for
the amount outstanding.
(b) Doubtful assets : (i) Full provision to the extent of the unsecured portion should be
made. In doing so, the realisable value of the security available to the bank should be
determined on a realistic basis. DICGC/ECGC cover is also taken into account (this aspect is
discussed later in this chapter). In case the advance covered by CGTSI guarantee becomes
non-performing, no provision need be made towards the guaranteed portion. The amount
outstanding in excess of the guaranteed portion should be provided for as per the extant
guidelines on provisioning for non-performing advances.
(ii) Additionally, 20% - 100% of the secured portion should be provided for, depending upon
the period for which the advance has been considered as a doubtful asset, as follows:
Period for which the advance has been considered as doubtful % of provision on secured
portion
Upto 1 year 20%
More than 1 year and upto 3 years 30%
More than three years
i. Outstanding stock of NPA’s as on 31.03.2004 60% w.e.f. 31.03.2005
75% w.e.f. 31.03.2006
100% w.e.f. 31.03.2007
ii. Advances classified as doubtful for more than three years on or
after 01.04.2004
100% w.e.f. 31.03.2005
(iii) Banks are permitted to phase the additional provisioning consequent upon the reduction
in the transition period from substandard to doubtful asset from 18 to 12 months over a four
year period commencing from the year ending March 31, 2005, with a minimum of 20% each
year.
(c) Sub-standard assets : A general provision of 10% on total outstanding should be made
without making any allowance for DICGC/ECGC cover and securities available. An additional
provision of 10% (i.e., total 20% of total outstanding) is required to be made on ‘unsecured
exposure’ ab initio sanction of loan. Generally such a situation may arise in case of personal
and education loans etc. Unsecured exposure is defined as ‘an exposure where the realizable
value of security is not more than 10% of the outstanding exposure (fund based and non-fund
based). Security should not include guarantees, comfort letters etc
63
(d) Standard assets : A general provision of a minimum of 0.40% of total standard assets
should be made. It has been clarified that the provision should be made on global loan
portfolio basis and not on domestic advances alone.
For the practice of students following illustrations are given below:
Illustration 1 (Existing stock of advances classified as ‘doubtful more than 3 years’ as on 31
March, 2004.)
The outstanding amount as on 31
st
March, 2004: Rs.25,000.
Realisable value of security: Rs.20,000.
Period for which the advance has remained in ‘doubtful’ category as on 31
st
March, 2004: 4
years (i.e., Doubtful more than 3 years)
Solution:
Provisioning requirement:
As on…. Provisions on secured
portion
Provisions on unsecured portion Total (Rs.)
Rate (in %) Amount Rate (in %) Amount
31 March 2004 50 10,000 100 5,000 15,000
31 March 2005 60 12,000 100 5,000 17,000
31 March 2006 75 15,000 100 5,000 20,000
31 March 2007 100 20,000 100 5,000 25,000
Illustration 2 (Advances classified as ‘doubtful more than three years’ on or after 1 April, 2004.)
The outstanding amount (funded as well as unfunded) as on 31
st
March, 2004: Rs.10,000
Realisable value of security: Rs.8,000
Period for which the advance has remained in ‘doubtful’ category as on 31
st
March, 2004: 2.5
years.
Sol ution:
Provi si oni ng requi rement:
As on… Asset Cl assi fi cation Provi si ons on
secured portion
Provi si ons on
unsecured
porti on
Total
(Rs.)
% Amount % Amount
31 March, 2004 Doubtful 1 to 3 years 30 2,400 100 2,000 4,400
31 March, 2005 Doubtful more than 3
years
100 8,000 100 2,000 10,000

2

On 1st April, 2007 the company had 26 washing machines lying in its showroom. On that date 3 instalments had fallen due, but not yet received and 675 instalments were yet to fall due in respect of machines lying with the hire purchase customers. During the year ended 31 st March, 2008 the company sold 130 machines on cash basis and 80 machines on hire-purchase basis. After paying five monthly installments, one customer failed to pay subsequent installments and the company had to repossess the washing machine. After spending Rs. 1,000 on it, the company resold it for Rs. 11,500. On 31st March, 2008 there were 21 washing machines in stock, 810 installments were yet to fall due and 5 installments had fallen due, but not yet received in respect of washing machines lying with the hire-purchase customers. Total selling expenses and office expenses including depreciation on fixed assets totalled Rs. 1,60,000 for the year. You are required to prepare for the accounting year ended 31st March, 2008: 1. 2. Hire purchase Trading Account, and Trading and Profit and Loss Account showing net profit earned by the company after making provision for income-tax @ 35%.

Partnership Accounts (Piecemeal Distribution System) 3. A, B and C are partners sharing profits and losses in the ratio of 5:3:2. Their capitals were Rs. 9,600, Rs. 6,000 and Rs. 8,400 respectively. After paying creditors, the liabilities and assets of the firm were: Rs. Liability for interest on loans from : Spouses of partners Partners Investments 2,000 Furniture 1,000 Machinery Stock Rs. 1,000 2,000 1,200 4,000

The assets realised in full in the order in which they are listed above. B is insolvent. You are required to prepare a statement showing the distribution of cash as and when available, applying maximum possible loss procedure. Partnership Accounts: (Profit and Loss Adjustment A/c) 4. Liabilities Bank overdraft (State Bank) Sundry Creditors M/s Neptune & Co.’s Balance Sheet as at 31 st March, 2008: Rs. Assets 54,000 Cash at Bank of India Rs. 800 2,80,000 1,00,000

1,56,000 Sundry Debtors Stock

3

Capital Accounts : Mr. A Balance as per last 4,02,000 B/S Add : Profits for the year Less : Drawings Mr. B Balance as per last B/s 2,00,000 Add : Profit for the year Less : Drawings 95,400 2,95,400 76,000 2,19,400 8,86,800 95,400 4,97,400 40,000

Motor Cars cost as 1,60,000 per last B/S Less : Depreciation till date 54,000 1,06,000

Machinery cost as per last B/S 3,00,000 Less : Depreciation till 4,57,400 date 1,40,000 1,60,000 Land and Building 2,40,000

8,86,800

You have examined the foregoing Draft of the Balance Sheet and have ascertained that the following adjustments are required to be carried out: (i) Land and Buildings are shown at cost less Rs. 60,000 being the proceeds of the sale during the year of premises costing Rs. 70,000.

(ii) Machinery having a net book value of Rs. 4,300 had been scrapped during the year. The original cost was Rs. 12,300. (iii) Rs. 2,000 paid for the Licence fees for the year ending 30th September, 2008 had been written off. (iv) Debts amounting to Rs. 10,420 were considered to be bad and further debts amounting to Rs. 5,400 were considered doubtful and required 100% provision. Provision for doubtful debts had previously been made for Rs. 10,000. (v) An item in the inventory was valued at Rs. 37,400, but had a realisable value of Rs. 26,000 only. Scrap material having a value of Rs. 6,600 had been omitted from the stock valuation. (vi) The cashier had misappropriated Rs. 700. (vii) The cash-book for the year ending 31 st March, 2008 included payments amounting to Rs. 6,924, the cheques having been made out, but not despatched to suppliers until April 2008. (viii) Interest is to be allowed on the partners’ opening capital account balances less drawings during the year at 9%.

2006: Trinity Ltd. 10. Following are the other details available relating to his business as on 31. He has been drawing Rs.00.000 5.2005 and profit upto 31.000. The following is the Balance Sheet of Trinity Ltd.00. Ram loan (given out of her own source) Cost of Building (estimated to realise Rs. 1.000 1. On 31st March.500 per month uniformly from April.00. 2005 onwards. He did not maintain books from 1.00.00.60.2008: Rs.2005 was Rs. (b) Capital Accounts of the Partners.00.000 Investments 1.40. Sundry Creditors Mortgage Loan (of building) Godown Rent (2 months) Wages due Mrs.000 per month and goods worth Rs.00.2005 onwards.000 9.000 15.000) Stock in trade (Realisation value 10. Balance Sheet as at 31st March.000 3. Assets Fixed Assets: Gross Block Less : Depreciation 1. 2.4 You are required to prepare: (a) Profit & Loss Adjustment Account for the year. 1.000 10% Redeemable Preference Shares of Rs.000 1. 2008 an adjudication order for insolvency was made against him.00.000) Debtors (includes bad of Rs. 2006 Liabilities Share Capital Authorised 10.000 He maintained books upto 31. 10 each Rs.000 Current Assets and Loans . Insolvency Accounts for Non-Corporate Entities 5.00.000 2.3.3.000 25.3. Prepare statement of affairs and deficiency account.000 1. 10 each 90.000 Rs. Company Accounts (Redemption of Preference Shares & Bonus Issue) 6. 10.000 Equity Shares of Rs.000 8.50.000) Cash in Hand/Bank 1. as at 31.7.000 90. 4.3.4.000 10.000. 1.00. Ram commenced business on 1.2002 with a capital of Rs.

2007 incorporating the above transactions. 20. 30.000 50.000 after providing Rs. Subscribed and Paid-up Capital: 10. 10% Redeemable Preference Shares of Rs. so as to leave a minimum balance of Rs. (b) Prepare the cash and bank account. The preference dividend for the year ended 31.3.000 4.00.2007.20. 15. 2. You are required to (a) Prepare necessary journal entries to record redemption and issue of bonus shares.2007.20.000 Cash and Bank Balances Misc. . To meet the cash requirements of redemption.2007 was the same as on 31.00. the company sold a portion of the investments.2007 was paid before 31.3.000 For the year ended 31.000 18.000. The company issued bonus shares in the ratio of one share for every equity share held as on 31. Investments were sold at 90% of cost on 31.000 Inventory Debtors 1. Except cash and bank balances other current assets and current liabilities as on 31.3.000 Equity Shares of Rs.2007.000 25.20.5 and Advances: Issued. the company made a net profit of Rs. 10 each Reserves and Surplus: General Reserve Securities Premium Profit and Loss A/c Current Liabilities Provisions and 1. 3.000 after such redemption.2007.500 11.3. 6.000 depreciation and writing off the miscellaneous expenditure of Rs. 5.2006.000. 20. The following additional information is available with regard to company’s operation : 1.000 70. 4.500 4. Expenditure to the 1.000 extent not written of 25.3. 10 each 10.3. The company redeemed the preference shares at a premium of 10%.000 20. (c) Prepare the Balance Sheet as at 31st March.3.

Assets Fixed Assets (at cost less depreciation) Cash & Bank balances Other Current assets 20.000.000 15.50. 2008 may be redeemed by issue of 10% Debentures of Rs.000 2.6 Final Accounts of Companies: 7.00. The Board of Directors have recommended that: (i) Dividend for the year 2007-08 be allowed @ 20% on equity shares. 3 per share 20.000 15.50. Provisional Balance Sheet of P Ltd. Rs.000 7. 10 each.00.00. 100 in cash. 2 per share Add : Calls in advance on 40. (iii) The preference shares. Interest @ 10% p.000 3. (ii) Money on calls in advance be refunded and partly paid equity shares be converted as fully paid up by declaring bonus dividend to shareholders. which are redeemable at a premium of 10% any time after 31st March.a.000 Less : Calls in arrear on 10.00.000 equity shares of Rs. 2008 was as under: Balance Sheet as at 31st March.80. 10 each. .00. Calls in advance were also received 6 months back. Rs. 10% Redeemable preference shares of Rs.000 shares @ Rs.000 6.00. fully paid up Reserves & Surplus: General Reserve Profit & Loss Account Current Liabilities 3. 7 per share called up 3.000 Rs. as at 31st March. on calls in arrear are allowed/charged.000 2.000 1.a. 2008 Liabilities Share Capital: 50. 2.70.30.000 Rs.000 4.000 Calls in arrear are outstanding for 6 months.00.000 2. on calls in advance and 12% p.000 shares @ Rs.20.

000 9.40. The company was able to double the average monthly sales of the firm. 11. 5 each. .000 divided into 40.a. to pay the purchase consideration due to the firm and for working capital requirements.91.7 Show Journal Entries to give effect to the above proposals including payment and receipt of cash and redraft the Profit and Loss Account and Balance Sheet of P Ltd. Amalgamation 9.17. the company could be incorporated only on 1st April 2007.000 95. Meanwhile. Prepare Profit and Loss Account in columnar from apportioning costs and revenue between pre-incorporation and post incorporation periods. It had to occupy additional space from July 2007 rent for which was Rs. Star and Moon had been carrying on business independently. Prepare the following summarized Profit and Loss Account Rs.00. the business was continued on behalf of the company and the consideration was settled on that day with interest at 12% p.000 at 12% p.300 1.000 1. 2. from 1 st April 2007 but salaries tripled from the date.48.200 1. 5. The partners of Pal agencies decided to convert the partnership into a private limited company called PA (P) Ltd with effect from 1 st January 2007.38.000 70.00.100 21.000 equity shares of Rs.000 72.70. Sales Cost of goods sold Salaries Depreciation Advertisements Discounts Managing director’s remuneration Miscellaneous office expenses Office cum showroom rent Interest Profit 23. the same books of accounts were continued by the company which closed its account for the first time on 31st March 2008.000 12.a. They agreed to amalgamate and form a new company Neptune Ltd.000 18. The consideration was agreed at Rs. Profit or Loss Prior to Incorporation 8. 3.17.000 per month.700 The company only borrowing was a loan of Rs. Also suggest how the preincorporation profits are to be dealt with. with an authorised share capital of Rs. However due to some procedural difficulties.000 based on the firm balance sheet as at 31 st December 2006.000 16.

1.79.500 Moon Rs. You are requested to : (1) Compute the amount of debentures and shares to be issued to Star and Moon. (2) A Balance Sheet of Neptune Ltd.66.98. showing the position immediately after amalgamation. the respective Balance Sheets of Star and Moon were as follows: Star Rs.36. 2007. to Star and Moon in the porportion to the profitability of their respective business based on the average net profit during the last three years which were as follows : Star 2005 2006 2007 Profit (Loss)/Profit Profit 2. Fixed Assets Current Assets Less: Current Liabilities Representing Capital Additional Information : (a) Revalued figures of Fixed and Current Assets were as follows : Star Rs.500 1. The purchase consideration is satisfied by issue of the following shares and debentures : (i) 30.125 1. 2007 after revaluation of assets.88..750 Moon Rs.81.55.962 Moon 1. 21.95.050 1. at par to provide an income equivalent to 8% return on capital employed in their respective business as on 31st December.675 owed by Star to Moon.000 78.950 1.63.500 1.24.250 (b) The debtors and creditors—include Rs.788 (1.375 90.82.250) 1.82..875 3.17.49.. Fixed Assets Current Assets 3.76.000 equity shares of Neptune Ltd.500 (ii) 15% debentures in Neptune Ltd.000 2. 1.71.8 On 31st December.000 1.500 83.875 2.500 4. .

00 218. Ltd.00.9 Accounting of Banking Companies 10.65 8. as on 31st March.00 22.a. Accounting for Insurance Companies 11.50 64.2006 Fire Insurance Marine Insurance Miscellaneous Insurance Unclaimed Dividends Amount Due to Other Insurance Companies Sundry Creditors Deposit and Suspense Account (Cr.50 3.50 72. in ’000) Capital Balances of Funds as on 1. 2007: (Rs. Find out the amount of discount received to be credited to Profit and Loss Account and pass appropriate Journal Entries for the same.000 6.80 80. Bills Discounted Rebate on bills discounted not yet due.) Profit and Loss Account (Cr.50 22. The following is an extract from the Trial Balance of a Dena Bank as at 31 st March 2008: Rs.) Agents Balances (Dr.50.000 Term Months 4 3 4 2 Rate of Discount p. April 1.00 800.000 4.50 34.4.) Due from other Insurance Companies Cash in Hand 320. 7.00 950. The following are the Balances of Hercules Insurance Co.50 .45. 2007 Discount received An analysis of the bills discounted as shown above shows the following: Date of Bills January 13 February 17 March 6 March 16 Amount Rs.500 Rs.50.00.00.501 1.000 30.000 2. How the relevant items will appear in the Dena Bank’s Balance Sheet? For calculation take 1 year = 365 days.40 135.(%) 12 10 11 10 51.) Interest accrued but not due (Dr.

70 120.00 876.00 30.00 350.00 25.50 225.70 Tax Deducted at Source .50 1022.00 1.00 975.00 40.00 1762.00 Dividends Received on 450.00 11.40 510.50 262.00 160.00) Stationery Stock Expenses of Management Fire Insurance Marine Insurance Miscellaneous Insurance Others Foreign Taxes—Marine Outstanding premium Donation Paid (No 80G Benefit) Transfer Fees Reserve for Bad Debts Income Tax Paid Mortgage Loan (Dr.80 58.00 8.90 3047.00 358.50 11.02.00 82.00 10.90 68.00 1020.25 280.10 Balance in Current Account with Bank Furniture and Fixtures WDV (cost 100.) Sundry Debtors Government Securities Deposited with RBI Government Securities (1.25 58.000) Debentures Equity Shares of Joint Stock Companies Claims Less Re-insurance Fire Marine Miscellaneous Premium Less Re-insurance Fire Marine Miscellaneous Interest and Investments Commission Fire Marine 500.00 74.00 37.00 1.00 465.

00 Provision for tax @ 50%.3. The Gurgaon Electricity Company Limited decided to replace one of its old plants with a modern one with a larger capacity.2007 Fire Marine Miscellaneous 200.100% Premium less reinsurance. the components of materials. 24 lakhs. Show the Ledger Accounts. The old plant was scrapped and sold for Rs. .00 930. 60 lakhs and in addition. material recovered from the old plant of a value of Rs.11 Miscellaneous You are required to make the following provisions : Depreciation on Furniture—10% of Original Cost Depreciation on investments of Joint Stock Companies Shares Transfer to General Reserve Outstanding claims as on 31. 7. The accounts of the company are maintained under Double Account system.000. Indicate how much would be capitalised and the amount that would be charged to revenue.00 10. The proportion of overheads to total costs is expected to remain the same as before. It is ascertained that the costs of materials and labour have gone up by 40% and 80% respectively.000 has been used in the construction of the new plant.50% Premium less reinsurance. The cost of the new plant as per improved design is Rs. 2.3.50 80.2007 Accounting of Electricity Companies 12.00 10.00 50.00 32.50. (b) On Other Policies . The plant when installed in the year 2000 cost the company Rs. Provision for the unexpired risks is to be made as follows: (a) On Marine Policies . You are required to prepare the revenue and profit and loss account for the year ended 31. Proposed dividends @ 20%.40. labour and overheads being in the ratio of 5:3:2.

0 (49. (b) During the year plant costing Rs.800) (76. 50. 7.000. 10 each issued and fully paid Capital reserve 8% Debentures Debenture discount Freehold property at cost/revaluation Plant and machinery at cost Depreciation on plant and machinery Debtors Stock and work-in-progress Creditors Net profit for the year Dividend paid in respect of earlier year Provision for doubtful debts Trade investments at cost Bank You are informed that : (a) Capital reserve as at the end of the year represented realised profits on sale of one freehold property together with surplus arising on the revaluation of balance of freehold properties. which depreciation provision of Rs.000 against.000) 1. was sold for Rs.000 43. (c) During the middle of the year Rs. 1.13.000 debentures were issued for cash at a discount of Rs.000.200) (50.000 (3.300) 0 .000 38.300) 47.12 Cash Flow Statement 13.000 shares of Rs.000 (64. (d) The net profit for the year was after crediting the profit on sale of plant and charging debenture interest. The following are the changes in the account balance taken from the Balance Sheets of Raj Ltd.000 (14. at the beginning and end of the year: Changes in Rupees in Debit or (Credit) Equity share capital 30.400) 50.500) 30. 18.000 60.500 (11.500 was lying.

000 75.000 12. who is in business as a wholesaler in sunflower oil.3.000 3.30.000 4.2008. Ignore taxation.000 Rs.000 1.25. Azad.000 1.000 30. From the files.000 1. Accounting from Incomplete Records 14. you pick up his Balance Sheet as at 31.000 27.2007 Rs.000 20.13 You are required to prepare a statement which will explain.3. is a client of your accounting firm.60.50.000 30. Azad’s Capital Creditors for Oil Purchases 12% Security Deposit from Customers Creditors for Expenses : Rent Salaries Commission Total Assets: Cash and Bank Balances Debtors Stock of Oil (125 tins) Furniture Less : Depreciation Rent Advance Electiricity Deposit 3–Wheeler Tempo Van Less : Depreciation Total 40.00.000 10.000 4.2007 reading as below: Balance Sheet as at 31.300 during the year end.000 30.000 6. .000 4.000 50.3. Liabilities: K. 64. why bank borrowing has increased by Rs. You are required to draw up his final accounts for the year ended 31.000 1. K.30.000 2.

Total number of tins sold during the year was 3. The surveyors have since approved the claim at 80%.9.2008 as security deposit by cash.500 26.73.750.000 6.500 (ii) Rent until 30. Additional advance rent of Rs.000 per month. You are requested to prepare final accounts for the year ended 31. The damaged ones were sold for Rs.2007 was Rs.000 48. 1.00.3. 79.500 which is included in the cash sales.000 50. (iv) It is further noticed that a customer has paid Rs.3. One tin has been used up for personal consumption. 5 tins were damaged in transit in respect of which insurance claim has been preferred. One of the staff has defalcated.000 12. 1.2008 is as below : Cash and Bank Summary Receipts: Cash Sales Collections from Debtors Payments to: Landlord Salaries Miscellaneous Office Expenses Commission Personal Income–tax Transfer on 1.10.00.26. 2.000 5. . Azad for the year ended 31.000 24. 10.000. 6.2008 Introduction to Government Accounts 15.000 20.3.000 was paid and this is included in the figure of payments to landlord.000 at a unit price of Rs. 1. (iii) Provide depreciation at 10% and 25% of WDV on furniture and tempo van respectively. 1.000 on 31.14 A Summary of the rough Cash Book of K.000 per month and was increased thereafter by Rs. The claim against the Insurance Company is pending. Define the term consolidated fund in context of Government accounting.2007 for 12% Fixed Deposit Creditors for Oil Supplies A scrutiny of the other records gives you the following information : (i) During the year oil was purchased at 250 tins per month basis at a unit cost of Rs.

(a) What do you mean by over-riding preferential payments under section 529A of the Companies Act? (b) What are the advantages of maintaining subsidiary books by Trading/Manufacturing organizations? 19. (b) Write short note on liquidity norms of Banking Companies under section 24 of Banking Regulations Act. (b) Discuss the accounting principles relevant to the auditors relating to: (i) Prior period items. (c) What criteria is applied for rating an enterprise as Level II enterprise for the purpose of compliance of Accounting Standards in India? 20. even though it is under no legal obligation to do so. Describe what records are required for the compilation of accounting information for agricultural farm. (c) Summarise briefly the requirements of AS 1 relating to the disclosure of significant accounting policies. (c) Describe the term Co-insurance.15 Accounting for Agricultural Forms 16. (ii) Change in accounting estimates. . what provisions will be applicable? Describe in line with AS 19. (b) A retail store has a policy of refunding purchases by dissatisfied customers. (a) Explain the purpose of the conceptual framework for preparation and presentation of financial statements in brief. 18. Theory questions based on Accounting Standards (a) Explain the provisions of AS 20 for restatement of shares. the methods which may be used for recognising revenue on construction contracts. Theory Questions 17. 21. Its policy of making refunds is generally known. Is it a liability? (c) Explain the provisions of AS 26 relating to retirement and disposal of intangible assets. (a) Which borrowing costs are eligible for capitalisation as per AS 16? Describe in brief. (a) Describe with reference to Accounting Standards. (b) If a sale and lease back transaction results in an operating lease.

23. (b) Astha Ltd. 200. At what price raw material should be valued if finished goods has a net realisable value (i) Rs. The finished goods for which this raw material is used has other cost to incur Rs. 2007. 190 and (iii) Rs. (a) A newly set up Private Ltd.. it however wants to change the method to Written Down Value method for one of its divisions since in the opinion of the management the assets of the said division suffer faster wear and tear. paid an interim dividend of Rs. 10. classified dividend paid as financing activities and Corporate Dividend Tax paid as cash flow from operating activities. (d) A firm of contractors obtained a contract for construction of bridges across river Revathi. 1. 60. 150 has net realisable value (which can be the replacement cost) Rs. 210 or above (ii) less than Rs.200 as corporate dividend tax. (c) Non-techincal staff’s salary during the period of installation of Plant & Machinery . in lakhs) Total Contract Price Work Certified Work not Certified Estimated further Cost to Completion Progress Payment Received To be Received 1. It provides depreciation for both divisions on straight line basis as per rates prescribed by Schedule XIV to the Companies Act.00. While finalizing the accounts for the year ended 31-3-2007. it also paid Rs. (Rs. The following details are available in the records kept for the year ended 31st March.000 500 105 495 400 140 The firm seeks your advice and assistance in the presentation of accounts keeping in view the requirements of AS 7 (Revised) issued by ICAI. while preparing cash flow statement for 2007-2008. Do you agree with such treatment? Answer your question in framework of AS-3. manufacturing company has incurred following expenditures for the acquisition of plant & Machinery: (a) Foreign tour expenses of directors for purchasing Plant & Machinery. Alongwith. (c) Heera Ltd. ABC Ltd. (b) Technical staff’s salary for erection of Plant & Machinery.000 during the financial year 20072008. has two divisions.16 22. Please advise the company on the above and also whether the change should be prospective or retrospective. 130. Practical problems based on application of Accounting Standards (a) A raw material costing Rs.

17 (d) Other sundry expenses such as stationery.000) (4.000) How should the company deal with this asset in its account for 2007-08? Does it need to charge depreciation or negative depreciation for 2007-08? Can it credit Rs.00. 10. postage.00 5 years 5.00. The company intends to capitalize the above expenses. Plant & machinery acquired under the modernisation scheme and installation completed on 31. acquired a machine on 1-1-2004 for Rs.00.00. 680 lakhs for modernisation and renovation of its plant & machinery. 62 lakhs during 2007-2008.000 to capital reserve? (c) X Co.00 2. 4.000 (8. (a) A Ltd. (b) Daya Ltd. telegram and telephone and local conveyance charge etc.00.00. 520 lakhs.00 15% .00.000) 4.000 (6.2008 amounted to Rs. The company’s Fixed Assets Account as at 31-3-2008 shows a credit balance as under: Machine (original cost) Accumulated depreciation (from 2004-2005 to 2006-2007 at straight line method) Less: Grant received 10. in Lakhs) Fair value of the machinery Lease term Lease Rental per annum Guaranteed Residual value Expected Residual value Internal Rate of Return 20.00 1. leased a machinery to B Ltd. printing.. 30 lakhs has been advanced to suppliers for additional assets and the balance loan of Rs. 130 lakhs has been utilized for working capital purpose. The useful life is 5 years. The total interest paid for the above loan amounted to Rs. The company had applied on 1-4-2004. Ltd. The sanction letter for subsidy. You are required to state how the interest on the institutional loan is to be accounted for in the year 2007-2008.000. on the following terms: (Rs. 24. Is the company justified? State with reasons. was received in November 2007. has obtained an Institutional Loan of Rs.3. for a subsidy to the tune of 80% of the cost.

It is expected that the geographical area surrounding the power station will demand a significant amount of power from the power station for at least sixty years.2006. the government unexpectedly increased the price retrospectively.00. (b) A Ltd.000 per annum. (c) An enterprise has purchased an exclusive right to generate hydro-electric power for sixty years. During 2005-06. Can the company account for additional revenue at the close of the year? Discuss. whose financial condition at that time is sound.60. This would cost the company an additional liability of Rs.20. The company has 1.000 equity shares and 200 potential equity shares outstanding as at March 31.47 per US Dollar. In the background of the relevant accounting standard. 25. 2007. 2008. 5. the rate of exchange was Rs. Compute basic and diluted EPS.43 per US Dollar. but before the finalisation of the company’s accounts. How it will be dealt with by ‘X’? (b) A company deals in petroleum products. on 31 st March. The company passed an entry on 31 st March.9. when the exchange rate was Rs.40. 3. 2007 adjusting the cost of raw materials consumed for the difference between Rs.00. The sale price of petrol is fixed by the government. The company had recorded the transaction in the books at the above mentioned rate. The costs of generating hydro-electric power are much lower than the costs of obtaining power from alternative sources. After the Balance Sheet date.9.47 and Rs.2007 for revision of wages with retrospective effect from 30.48 per US Dollar. is the company’s accounting treatment correct? Discuss.18 Depreciation is provided on straight line method @ 10% per annum. The payment for the import transaction was made on 5 th April. 2. a loss from discontinuing operations of Rs. Enterprise X gives a guarantee of certain borrowings of Enterprise Y. 2007 when the exchange rate was Rs. 2007.43 per US Dollar. 1.000. (c) A company had imported raw materials worth US Dollars 6. 2005 Enterprise Y goes into liquidation. (a) During 2004-05. However. (d) A company signed an agreement with the Employees Union on 1.000.000 and accordingly a net loss of Rs.000 on 5 th January. Ascertain unearned financial income and necessary entries may be passed in the books of the Lessee in the First year. has income from continuing ordinary operations of Rs. the financial condition of Enterprise Y deteriorates and at 30 September. Is a disclosure necessary for the amount paid in 2007-08? .

N.000 20.000 44.000) 500 By 2.000 By By Stock Reserve Account (opening) Goods sent to Branch Account (loading) Mumbai Branch Stock Account (W.000 Rs.000 20. 46.1) 2.500 41.000 To To Branch Profit and Loss Account (Gross Profit) 44.000 22. To To To Balance b/d Goods sent to Branch Account Branch Adjustment Account (W. Cost Price Catalogue Price (100x150%) Invoice Price (150-20%) 100 150 120 In the books of Kolkata .32. 3.000 1. 1. To Mumbai Branch Stock Account (loading on stock destroyed by fire) Stock Reserve (closing) Account By 500 2.000 Mumbai Branch Adjustment Account Rs.500 By Balance c/d 15.000 By By By Branch Cash (Cash Sales) Account Rs.1) 12.00.000 Branch Debtors Account (Credit sales) Branch Adjustment Account (loading on stock destroyed) Branch profit and Loss Account (at cost) (Stock destroyed by fire Balancing Figure Rs.Head Office Mumbai Branch Stock Account Rs.000 1.N.64.000 .000 1.64.19 SUGGESTED ANSWERS/HINTS 1.

365 Rs.485.000 Working Notes : 1.00. 41.1. the total amount of debtors who availed discount by making prompt payments is: 13.2) General Profit and Loss Account 1.80.100 15 But the total amount of debtors who made payments during the year: 85.9.365 Thus.365 100 89.000 Provision for discount: 15% on Rs. 1.365) Mumbai Branch Account Stock 19.000 120 80.365 2.9. To To Branch Expenses Account (6.N. it is necessary to calculate the invoice price of the goods sold on credit.000 41.000) has been transferred to Branch Adjustment Account.900 = Rs.000 – Rs.900 99. Calculation of Provision for Discount on Debtors on 31 st March.000 (Cost of stock destroyed by fire) To To Provision for Discount Account (W.000 Rs.99.e. ..100 11. Since the Branch Stock Account is prepared at invoice price.500 By Branch Adjustment Account Rs.000 Thus.13.000 150 Hence.20.635 + 13.20 Branch Profit and Loss Account Rs. 2.000 + 13. surplus of Rs.650 41.000 (1.485 17. i. the amount of debtors likely to pay promptly out of the closing debtors could be worked out as under: 89. 2008: Rate of Discount (Given) Total discount allowed during the year (Given) 15% Rs.00.

12. In the books of Welwash (Pvt.20.500 By 2.80.500–Rs.80.000 Rs.000 2.40.34.500 3.10. 1) Stock Reserve Rs .000 By 21.500 26. 500 × 3) due Rs.000 To By Goods sold on Hire Purchase 3.000) Closing Stock (Rs.000 Rs.25.000 17.02.500×21) 8.05.000 By 26. 10. To To To Opening Stock (Rs. 15.000 90. 10.73. 13.500) 9.10. 2008 Rs. 2008 Dr.2) Gross Profit 2.000 13. 13.300×130) Goods sold on Hire Purchase (Rs.05.N.500 .80.500×80) 10.000 Trading and Profit and Loss Account for the year ended on 31 st March.000 Stock Reserve By Goods Repossessed (R s.500×26) Purchases(W. Rs.500 3.500 By By Cash (W.500 Cr.37.40.) Ltd. Hire Purchase Trading Account for the year ended on 31 st March. 2.500 17. 10.000 By By Hire Purchase Stock (Rs.000 4. To To Hire Purchase Stock (Rs.52.40. 1. 500 × 5) 2.34.000 Rs.500 1.99.500–R s.000 To Goods sold on Hire Purchase (Rs. 500 × 810) Instalments due (Rs. 3.500 To Profit and Loss A/c (Transfer of profit) 2.000 75.34.500 2.59.4.000 13.21 2.500 Sales (Rs. 3. 500 × 675) Instalments (Rs.000–Rs.59.37 .N. 2. 000 13 .

2008 Instalments due on 31.500 10.000) Net Profit for the year 1.000 Gross Profit Hire Purchase Trading A/c Goods Repossessed (R s.25.000 By By 1.500 1. 3.500 4. 9.500–R s.500 4.000 2.500) 2. 21.2008 Cash collected during the year 2.2007 Hire purchase price of goods sold during the year Less : Repossessed goods Hire purchase stock on 31.95.02.05.2007 Instalments due on 1.52.4.000 1.3.000–R s.19.34.000 2. Washing machines purchased during the year No.000 10. 11.4.22 To To Sundry Expenses Provision for Income Tax (35% of Rs.000 Rs.80. 9.3.000 Working Notes : 1.60.500 = Rs.000 .05. Cash collected during the year Hire purchase stock on 1.000 By 1.1.500 No.000 4. Closing balance Add : Cash Sales Sales on hire purchase basis Less : Opening stock Purchase during the year Purchases in Rs.000 To 4.17.37. 21 130 80 231 26 205 205 × Rs.60.60. 10.000 14.3.00.

000) Interest on loans from partners A Rs. 1. 18.200) allocated to partners in the profit sharing ratio i. 24.400 8.800 (total of capital A/cs Rs.800 Deficiency of A and B written off against C Amount paid (b) Balances in capital accounts (a-b)=(c) (iv) Sale stock of Maximum possible loss Rs.640) 1.e.000 24.600 Partners’ Capitals Total B Rs.000 24. 9. Balances due (i) Sale of investments Rs.200 (22. 8.600 9. .840 (2. 6.000 6.000 6.000 (4.000 1.400 Rs 24.000 Maximum possible loss Rs.200 7.800 – Rs.000 (1.400 8.200 of 2.000 1. 2. 1.000 (6.23 3.000) 1. Statement of Distribution of Cash Realisation Interest on loans from partners’ spouses Rs.600 9. 22.200 – 1.800 (Rs.840) (840) 840 – 6.800 – 9.560) 3. 22.000 C Rs.000 (1.800) 1.000 (1.800) 1.000 less cash available Rs.000 (ii) Sale furniture (a) (iii) Sale machinery of 1.000) Rs. 5:3:2 Amounts credit at (11.200 22.400) (1.600 4.

440 1.800 4.800) (4.000 By Partners’ Capital Accounts : Mr.220 1.160 43.2) Mr.760) 3.300 To Stock Adjustment (Fall in the Market value) To Cash (Misappropriated) 11.24 4.400 1.440 (18. A Mr.580 11.N.98.640 3.820 By Prepaid expenses (Licence fee) By Stock Adjustment (items omitted) 95.N.000) Allocated to partners in the ratio 5 : 3 : 2 Amounts (d) paid (9.000) Balances in capital accounts left unpaid — Loss (c)-(d)=(e) 9. To Land & Building (Loss on sale) To Machinery (Loss on scrapping) To Provision Doubtful (W.400 5. B 5.400 1. 4.800 Rs.400) 200 (5. B 61.760 18.90. M/s Neptune & Co.220 61.98.400 95.22.640) 360 (3. A Mr.000 6.1) for Debts 10. Profit and Loss Adjustment Account for the year ended 31 st March. 2008 Rs. B To Profit transferred to Partners’ Capital Accounts: Mr.600 To Interest on Capital (W. A Mr.400 32.740 .400 700 1.

820 Rs.400 Mr.N.55.000 5. = Rs. To Drawings To Profit & Loss Adjustment Account To Balance c/d 95. To Bad Debts To Balance c/d (required) 10.a. 76. 1.000 By Balance b/d By Profit & Loss A/c By Profit & Loss Adjustment A/c: Interest capital on 32.160 61.00.000 Mr.000 Book debts as per list F: Rs.000 2.1) Creditors fully secured as per list B Rs.780 (1) Provision for doubtful debts charged to profit and loss adjustment account Provision for Doubtful Debts Accounts Rs.400 95.000 10.000 × 9% p.580 Rs.200 3.000 4.00.000 10.580 61.800 1.000 15.2008 Rs. 32.220 11. = Rs.24. 2008 Mr.3.820 15.02. 10. 10.000 .000 × 9% p.96.80. 95.00.400 40. B Rs.62.91.200 3. 95. A Mr.91.400 15. Rs.67.000 Cash in hand Stock in hand 1.780 5. 3. 1.160 Statement of Affairs as on 31.820 By Profit & Loss Adjustment A/c (balancing figure) (2) Interest on Capitals Mr.67. A Rs. B 5.25 (a) Partners’ Capital Accounts as on 31st March.220 Mr.a. B Rs. 11.400 4.000 1.420 By Balance b/d 5. Property as per list E: 1. Rs.000 Unsecured creditors as per list A (W. A Rs.380 Profit for the year Working Notes : 5.80. Rs.

000 adjudication (W.88. 00. Excess of assets over liabilities on 1.2002 to 31.000 80.000 _______ 2.2005 Deficiency Net loss arising from carrying on of 2.4.000 8.000 1.3. .7.000 88.000 5.4. wages etc.000 10. being payable in full as per list D Deducted as per contra 1. as per list D 80.000 - Good Bad Nil Deduct creditors for wages etc.28.N.000 (2) Since accounts were not prepared for the period of 1.000 Rs.000 1.000 1.000 10.98. Hence.000 92.000 8.2002 Net profit upto 31. Sundry Creditors Godown Rent Mrs.55.2002 to the date of 1.000 Nil Deficiency as _______ explained in list H 1.26 Estimated value of Security Nil Creditors partly secured as per list C Creditors for taxes.000 Loss on realisation of: Building Stock in trade Debtors Drawings for household expenses _______ since 1. 1.000 4.4. Ram loan (Since loan was given out of her own sources) 1.3. 2) 88.000 (1) The unsecured creditors in this case will be as follows: Rs.000 25.000 8.2005 it is necessary to ascertain the profit or loss incurred in these three years.000 business from 1.80.000 60.000 8.2005 Working Notes: 4.000 Nil 1.00. the following trial balance has been prepared with the given book figures.40.50.000 Deficiency Account (List H) Rs.80.28.000 5.80.00.

Rs.3.000 Dr. . Less: Drawings for (Rs.000 1.10.000 1. Building Book debts Good Bad Stock in trade Cash in hand/bank Loss (balancing figure) 80.55.000 1.000 1.000 15.27 Trial Balance Dr. 1.00. Securities Premium A/c To Premium on Redemption of Preference shares A/c (Being amount of premium payable on redemption of preference shares) 10% Redeemable Preference Capital A/c Premium on redemption of Preference Shares A/c To Preference Shareholders (Being the amount payable shareholders on redemption) General Reserve A/c To Capital Redemption Reserve A/c (Being transfer to the latter account on redemption of shares) to preference Dr.40.000 1.000 Capital introduced Add: 90.000 3.60. Rs. Dr. 10.000 Dr. Dr.00.000 25.30.000 1. Ram’s loan 6.42.00.000 4.000 Cr.50.000 1.00. Rs.000 _______ 4. 5.000 10.000 5. 10.2005 2.000 10.98.000 1.500 × 36 months) Creditors Mortgage on building Godown rent Wages due 1. (a) Journal Entries in the Books of Trinity Ltd.000 Cr. Rs.000 Profit upto 31.30.000 10.000 Mrs.000 10.40.00.000 8.

1.000 To Investments 1.000 . Rs. Rs.10.00.50.000 45.000 Cash and Bank A/c Cr.000 Dr.00. 45.00.000 20.000 Dr.000 1.000 1. 1.000 Dr. To To Balance b/d Cash from operations: Profit Add : Depreciation 15.000 By Preference Dividend By Preference shareholders By Balance c/d Add: Miscellaneous expenditure written off 20. Dr.000 1.000 1.10. 10.000 30.28 Bank A/c Profit and Loss A/c To Investments A/c (Being amount realised on sale of Investments and loss thereon adjusted) Preference shareholders A/c To Bank A/c (Being payment made to preference shareholders) Capital Redemption Reserve A/c To Bonus to Shareholders A/c (Amount adjusted for issuing bonus shares in the ratio of 1 : 1) Bonus to Shareholders A/c To Equity Share Capital A/c (Balance on former account transferred to latter) (b) Dr.000 50.000 Dr.000 1.50. 1.10.000 55.00.000 5.000 50.

45.000 Rs.4.500 15. Subscribed and Paid-up Capital 20.500 Current Liabilities and Provisions: Sundry Creditors 11. Loans and Advances Inventory 25.29 (c) Liabilities Share Capital: Authorised Capital Balance Sheet of Trinity Limited as at 31st March.000 80.500 3.000 3.000 20.00.10. 18.500 . 10 each fully paid allotted as Bonus Shares by capitalising capital Redemption Reserve) Reserves and Surplus: General Reserve (WN. 2007 Balance as on 1.000 Working Notes: (i) Profit and Loss Account for the year ending 31st March.3) Profit Loss (WN.000 20.00.1) and A/c Investments (Market Value Rs.5) 50.000 25.W.000 Equity Share of Rs.000.2006 2.20.000 1.500 98.80.00.N.000 3.000 Assets Fixed Assets: Gross Block Less:Depreciation upto 31.000 For the year 1. Issued.3. 10.2006 Add : Profit for the year Rs.000 1.000 Cash and Bank Balance 30.000 33.10.000 Current Assets.000 18.00.2) Securities Premium (WN.000 Debtors 60. 2007 (after redemption) Rs.

Rs.000 70. 20. Interest on Calls in Arrear A/c To Profit & Loss A/c (Being interest @ 12 % p.200 Cr.a.3.2007 (v) Sale of Investments: Cost of Investments Less :Cash Received Loss on Sale of Investments Total Investments: Less : Cost of Investments sold Cost of Investments on hand Market value (90% of Rs.2007 (ii) General Reserve Less : Transfer to Capital Redemption Reserve Balance as on 31. Journal Entries P Ltd.000 10. on Rs.000 20.00.000 15. 50.000) 7.00.000 5.000 5.000 1.000 NIL 50. 1.00.2007 (iv) Capital Redemption Reserve Less : Transfer for Bonus Shares Balance as on 31.000 60.3. 1. Rs. 10.000 45.500 1.00.3.200 .2007 (iii) Securities Premium Less : Premium on Redemption of Preference shares Balance as on 31.000 50.000 50.3.20.000 1.000 45.000 18.30 Less : Preference Dividend Loss on sale of investments Balance as on 31.000 1.000 Dr.000 1.000 for 6 months credited to Profit and Loss Account) Dr.

1.100 each issued in cash) Dr.50.000 Dr.50.000 for 6 months allowed on calls in advance) Profit & Loss A/c To Preference Dividend To Equity Dividend (Being dividend @ 10% on Preference share capital & 20% on Equity share capital proposed) Profit & Loss A/c To Bonus to Equity Shareholders A/c (Being bonus dividend declared) Share Final Call A/c To Equity Share Capital A/c (Being final call made @ Rs.200 Dr.000 1. 3 on 50. 1. 2.50.000 1.000 shares) Bonus to Equity shareholders A/c To Share Final Call A/c (Being adjustment of bonus dividend against final call) Calls in Advance A/c Interest on Calls in Advance A/c To Bank A/c (Being amount of calls in advance along with interest refuned) Bank A/c To 10% Debentures A/c (Being 2. 1.000 6. 1.20.200 20. Dr.000 Dr.20.000 Dr. 90.000 20. 1.50.50.000 70.000 .000 1.000 1.20. 21.000 1.200 Debentures of Rs.000 Dr.000 Dr.31 Bank A/c To Calls in Arrear A/c To Interest on Calls in Arrear A/c (Being interest on calls in arrear received) Profit & Loss A/c To Interest on Calls in Advance A/c (Being interest @ 10% on Rs.000 Dr. 6.50.20.000 6.26.000 2.

000 2.200 . 2.00.200 Dr.200 20.20.000 2.71.200 2. 2.000 1. To Interest on calls in advance To Balance c/d To Premium on redemption To Preference Dividend To Equity Dividend To Bonus Dividend To Capital Redemption Reserve 6.000 Dr.70.65.94.00.200 2.200 2.200 1.000 Rs. Dr. 5.50. 20.20.000 20.200 2. for the year ended 31st March.000 Dr.000 20.65.000 2. 2008 Rs.000 20.000 70.000 1.71.20. Dr.000 Dr. By Balance b/d By Interest on calls in arrear By Balance b/d 2.32 Profit & Loss A/c To Premium on Redemption of Preference shares A/c (Being premium payable on redemption) Profit & Loss A/c General Reserve A/c To Capital Redemption Reserve A/c (Transfer to capital redemption reserve) Preference Share Capital A/c Premium on Redemption of Preference Shares A/c To Preference Shareholders A/c (Amount due on redemption of preference shares) Preference Shareholders A/c To Bank A/c (Amount paid to preference shareholders) Profit & Loss Account of P Ltd.200 2.800 2.65.65.000 5.

20.95. 7.000 4.000 Rs.000 21.000 2.200 2.20. 3 per share has not been received in cash but has been capitalised by issuing bonus dividend) Reserves & Surplus: Capital Redemption Reserve General Reserve 3.000 Less: Utilised for redemption of preference share 1.200 13. It has also been assumed that 20% dividend on equity shares has been proposed before the equity shares are made fully paid by way of bonus dividend.00. 10 each fully paid up (Of the above equity shares Rs.000 Cash & Bank balance (W.000 equity shares of Rs.800 Profit & Loss Account 10% Debentures Current liabilities Proposed dividend Rs.94.00.200 — 2.000 2.00.200 3.80.00.) 95.05.200 .00. 2.200 Other Current Assets 6.000 2.000 Rs.00.000 90.20. 2008 Cash and bank balance (given) Add: Recovery of calls in arrear and interest thereon Proceeds from issue of 10% Debentures Less:Payment of calls in advance and interest thereon Redemption of preference shares Assumptions made: 1.33 Balance Sheet of P Ltd.N.200 Working Note : Cash and Bank balance as on 31st March.95. 1.46. Assets Fixed Assets (Cost less depreciation) 5. It has been assumed that the amount of calls in arrear has been received.000 13.000 95.26. as on 31st March 2008 Liabilities Share Capital: 50. 2.41.000 1.

2007 to 31.34 8. Rent Interest Net Profit office 2 3 4 4 5 3 6 7 1.000 70.000 Gross Profit Goodwill 1 7.D.1. 2008 Postincorporation 1.91. Dr.93.400 By 62.000 72. 2008 1.100 1.200 8 6. Preincorpora tion 1.2007 to 31. 2007 78.000 18.600 7. Particulars Notes Total Rs.’s remuneration Misc.200 1.000 - .400 9.000 7.600 6.02.4.17.000 9. Postincorporation 1.000 1.3.08.02.1.04.000 9.000 Particulars Notes Total Rs.3.000 3.17.000 2.000 79. 2007 9.700 7.000 60.000 By 14.000 9.900 PA (P) Ltd.3. PreIncoporation 1.900 6.4.24.600 63. Profit and Loss Account for 15 months ended 31st March.000 - To To To To To To To To To Salaries Depreciation Advertisement Discounts M.02.000 1.2007 to 31.900 Cr.24.000 35.400 1.3.2007 to 31. exp.000 12.100 79.000 95.800 13.24.

100 – Rs.600 or 1:12.60.100 × 3 = Rs. the monthly salary of post-incorporation period = Rs. Advertisement and discounts are apportioned in the ratio of sales i.200 × 12 = 2400.000 1 Rs.40.000 3 Rs.600.7.27.e.000 45.30. 15 pre-incorporation period is calculated as 12 3 Rs.7.300 and that of post-incorporation period will be Rs. 2007 = Rs.000 15 Therefore.000 =Rs. Managing Directors’ remuneration is related to post-incorporation period. These expenses have been apportioned on the basis of time: 3:12 or 1:4. Therefore.70.000 9 Rs. .63. Rent to be apportioned as follows: Total rent as per Profit and Loss Account Less:Additional rent for 9 months @ Rs.000 Rs.300 × 12 = 3.100 × 3 = 300.02. The total sales of pre-incorporation period will be = 100 × 3 = Rs.02.11.000 Rs.000 8 Rs.9.27. Hence.300 and that of post-incorporation period will be Rs.95.000. the pre-incorporation monthly salary = Rs.000 (3) (4) (5) (6) =Rs. rent of pre-incorporation period is calculated as And that of post-incorporation period = (7) Interest for the 45.02.000 is related to postacquisition period. 1:8. the ratio = 2300: 3. Therefore.000 =Rs.100 100 12 The balance interest (Rs.7.000 12 Rs. Total salary of pre-incorporation period = Rs.35. the average monthly sales of remaining 12 months starting from 1 st April. 2007 = Rs.35 Working Notes: (1) Gross Profit = Sales – Cost of goods sold = Rs. Gross profit of Pr e Post Rs.000 – 16. the average monthly sales of 3 months ending on 31st March.6.78. the ratio of sales will be: 3:24 or 1:8.000 9 (2) Let.000 = Rs.100.24.45..000 Gross Profit is apportioned in the ratio of sales which is calculated as follows: Let.35.72.100.100) = Rs.38.100 ×200.23.

500 = (ii) Equity Shares Issued (a) Ratio of distribution Star : Moon 1.500 1. 5 each = (iii) Capital Employed (after revaluation of assets) Fixed Assets Current Assets Less: Current Liabilities (iv) Debentures Issued 8% Return on capital employed 15% Debentures to be issued to provide equivalent income : Star : 16.750 5.000 Moon : 14.250 1.49.962 = 3 1.04.73.750 81.62.125 1.000 1.700 1. 1.06.250 3.36 9.500 1.875 90.250 shares of Rs.875 2.700 × 100 15 . (1) Computation of Amount of Debentures and Shares to be issued: Star Rs.37.750 Moon: 16.79.10. (i) Average Net Profit 2.71. 5 each = 16.375 1.000 = 98.500 2.98.36.750 shares of Rs.000 (c) Amount 13.55.83.950 1.24.250 16.88.500 × 100 = 15 68.750 2.250 30.050 1.788 – 1.750 14.95.000 78.500 3 Moon Rs.625 (b) Number Star : 13.

000 Equity Shares of Rs.950 40.56.000 2.50. 2007 Amount Rs.50.000 2.58. Fixed Assets Current Assets 2.950 – 7.08.950 Total Rs.10.79.000 Assets Amount Rs.56. As at 31st December.950 Star Rs. Moon Rs.000 1.750 1.37 (2) Liabilities Share Capital: Authorised Balance Sheet of Neptune Ltd.000 Equity Shares of Rs.06. 5 each Issued and Subscribed 30.000 3. 5 each (all the above shares are allotted as fully paid-up pursuant to a contract without payments being received in cash) Reserves and Surplus Capital Reserve Secured Loans 15% Debentures Unsecured Loans Current Liabilities and Provisisons Current Liabilties Provisions Working Notes : 32.000 (1) Purchase Consideration Equity Shares Issued 15% Debentures Issued 68.000 2.50. 5.66.00.000 – 3.000 1.250 7.250 98.08. 1. 81.750 .78.000 1.

675 .000 34.49.52.055 44.90.00.(b)] (d) Goodwill [(b) .000 6.175 5.925 1.342 90. 2008.000 60.000 12 10 11 10 90.27.000 32.750 2.76.(a)] (e) Capital Reserve [Final Figure(c) . 875 . Rate of discount % p.00.685 20.a.17 March 6 March 16 46 365 50 365 100 365 49 365 So.000 44.(d)] 10.950 7.219 60.950 3.000 12.000 2.950 3. Rs.34.250 17.06.301 No. 13 Feb.000 3.200 90.56.200 2.000 57.50.000 1. 78. of days after March 31 Amount Rs. unexpired discounts on 31 st March.21.675 2.000 8.98.58.125 1.66.62. Total Annual Discount Proportionate Discount for days after 31st March 3.000 2.500 .000 2.825 2.21.50.000 4.075 1.04.38 (2) Capital Reserve (a) Net Assets Taken Over Fixed Assets Current Assets Less : Current Liabilities (b) Purchase Consideration (c) Capital Reserve [(a) .95.55.00. Calculation of Unexpired Discounts or Rebate on Bills Discounted Date Bill of Date of Maturity including three days of grace 2008 May 16 May 20 July 9 May 19 46 50 100 49 7.750 49.301.000 2008 Jan.175 1.000 11.750 5.78.79.000 20.

301 Bills Discounted Rs.000 . Liabilities Other Liabilities Rebate on Bills Discounted Extracts of Balance Sheet as at 31-3-2008 Rs. 30.3.) (transferred) Rebate on Bills Discounted (on 31. 31 1.41.76.001 Journal Entries 2008 March 31 Rebate on Bills Discounted A/c To Discount Account (Being unexpired discount brought forward from the previous year. fig.001 30.501 Rs. Rs.700 Dr.500 To 34.301 1. credited to Discount Account) March 31 Discount Account To Rebate on Bills Discounted Account (Being provision for unexpired discount required at the end of the year) March 31 Discount Account To Profit and Loss Account (Being discount earned for the year 2007-08 transferred) Dr.08) Rs.501 30.301 Dr.39 The amount to be credited to Profit and Loss Account is ascertained from the Discount Account as follows: Discount Account 2008 March 31 March 31 To Profit and Loss A/c (Bal.45.41.501 1. 1. Assets Advances 34. 51.700 March 31 By Rebate on Bills Discounted (on 1-4-2007) By Sundries Rs. 34. 1. 2008 Mar.700 1.76.301 34.50.41.

‘000 262.25 — — — 1681. Current Year Rs. Current Year Rs.90 100. ‘000 1762. ‘000 1022. Marine and Misc.50 (-)81.00 — 8.25 87. ‘000 1762.10 Misc. 1022.00 500.50 Misc. Revenue Account for the year ended 31st March. 2007 Fire.50 129.00 408. ‘000 262.52 — — — 349.27 .00 280. Ltd.25 2 3 4 1 Fire Current Year Rs.90 23.50 Marine Current Year Rs‘000.25 Marine Current Year Rs.40 11.90 350.00 160. Insurance Businesses Sch edu le Premiums earned (net) Change in provision for unexpired risk Interest.50 Rs.00 — — 1430.77 100.00 251.00 40. Dividends and Rent – Gross Double Income Tax refund Profit on sale of motor car Total (A) Claims incurred (net) Commission Operating expenses related to Insurance business Bad debts Indian and Foreign taxes Total (B) Profit from Marine Insurance business (A-B) Schedules forming part of Revenue Account Schedule –1 Fire Current Year Premiums earned (net) Premiums less reinsurance (net) Schedule – 2 Claims incurred (net) 650.50 (-) 72. Form B – RA (Prescribed by IRDA) Hercules Insurance Co.50 80.50 — — — 950.25 650.00 926.00 408.00 — — 220.

12 10.00 403.12 Other Income Transfer Fees Total (A) Provisions (Other than taxation) Depreciation of Furniture Depreciation of Investments Other Expenses Expenses of Management Donation Total (B) Profit before Tax 251.00 350.00 500.41 Schedule – 3 Commission paid Schedule – 4 Operating expenses related to insurance business Expenses of Management 280. ’ (000) Operating Profit/(Loss) (a) Fire Insurance (b) Marine Insurance (c) Miscellaneous Income From Investments (a) Interest.00 30. Ltd.10 129. Profit and Loss Account for the year ended 31st March.00 60.25 23.00 Form B-PL Hercules Insurance Co. ’ (000) .50 1.27 Previous Year Rs. 2007 Particulars Sched ule Current Year Rs. Dividend & Rent–Gross 58.00 40.00 463.00 160.00 80.00 10.00 10.

00.56 — (64.20.20. 2.56 Balance of profit/loss brought forward from last year Balance carried forward to Balance Sheet Working Notes : 1.42 Provision for Taxation Profit after Tax Profit Appropriated (a) (b) (c) (d) Interim dividends paid during the year Proposed final dividend Dividend distribution tax Transfer to General Reserves or Other Accounts (to be specified) 206.00) 122.20.000 .00 413. Provision for Taxation Net Profit before tax Add : Donation Taxable Profit Tax @ 50% Rs. 49.56 196.20.000 (Cost of new plantcapitalised) To Replacement Account (Old parts) To Balance b/d 2.000 By Balance c/d 22. Dr.00) — (10. 403.12 10. 12.40 202.56 Gurgaon Electricity Company Limited Plant Account Rs.000 49. To Balance b/d To Bank Account Cr.000 24.12 206.000 49. 80. Rs.000 49.96 Reserve for unexpired risk 50% of net premium for fire and miscellaneous and 100% of net premium for marine.40.80.

00.000 37. Rs..00.000 ..96... Cash flows from operating activities Net profit Adjustments for 76. for the year ended .40.000 7.000 29.20.000 27.20.000 2.20.000 37..44.20.000 Cr.000 7.80..000 40% 80% 16.80.000 22.. Rs.76.30.20. excluding old materials used 13. Rs. Materials Labour Overheads (1/4 of above or 1/5 of total) Current Replacement Cost Total Cash Cost Amount capitalised.43 Replacement Account Dr..000 Working Notes : (1) Cost to be incurred for replacement of present plant : Cost of Increase Current Cost Existing Plant % Rs.000 60. Rs.000 12..50. 7..500 Rs. 12.000 By Bank Account (Sale of scrap) By Plant Account (Old material used) By Revenue Account (Transfer) 37. Cash Flow Statement of Raj Ltd. To Bank Account (Current cost of replacement) 37.

300) Nil (64. 64.000 6200 (47.N.900 (2.11.000 (2.000 (64. the shortfall of Rs.3) Increase in trade investments Net cash used in investing activities Cash flows from financing activities Proceeds from issuance of debentures at discount Debenture interest paid Dividend paid in respect of earlier year Net cash from financing activities Excess of outflows over inflows Add: Cash and cash equivalents at the beginning of the year Cash & cash equivalents at the end of the year 27.000) 17.1) Proceeds from sale of plant Proceeds from sale of freehold property (W.800 30.800) 49.500) 11.000) (1.N. .300) Thus.44 Depreciation (W.500 (78.03.2) Accrued Interest on debentures for half year Operating profit before working capital changes Adjustments for: Increase in debtors less provision for doubtful debts Increase in stock and work-in-progress Increase in creditors Net cash from operating activities Cash flows from investing activities Purchase of plant and machinery (W.N.500) 2.300 was made up through borrowings from bank.4) Profit on sale of plant (W.000) (30.000 1.900 (46.N.000) 7.700) (38.

To Opening Stock To Purchases Less : Transferred to Drawings A/c To Gross Profit c/d To Salaries To Rent To Miscellaneous Office Expenses To Loss of Deposit 1.000 44. In the books of K.500 = Rs.000 5.000 By Gross Profit b/d 78.000 1.500 27. 4. 7. Depreciation on Plant and Machinery provided for the year: Increase in Provision for Depreciation (given) Add: Accumulated depreciation on plant sold Depreciation for the year ..Rs.000 By Sales By Damaged Stock A/c By Closing Stock Rs.(Rs. Profit on sale of plant = Rs.000 49. 13.50.19.000 .000 53. 2.74. 52. 2008 Rs.000 By Interest accrued 12.500 3. 14. at cost Add: Cost of plant disposed of Cost of plant and machinery purchased 2.000 6.00.000 29.99.74.200 43.000 22. Proceeds from sale of freehold property: Capital reserve Less: Increase in freehold property (given) Proceeds from sale 4.200 14. 7. Azad Trading and Profit and Loss Account for the year ended 31st March.Rs.000 22.50.900 To Interest on Security Deposits . 18.500) = Rs.000 18.000 .000 Rs.000 By Profit on Damaged Stock 53.000 .000 30.000 1. 60.50.400 13.000 500 10.45 Working Notes: 1.000 on fixed deposit 36.000 6.25.000 78. Acquisition of plant and machinery: Amount of increase.

500 1.200 21.26.00.000 31.19.700 24.25.500 Balance Sheet as on 31st March.76.46 To Depreciation : Furniture Tempo Van To Net profit 2.000 .000 Memorandum Stock Account Cost (Rs.000 No.00.500 10.300 22.000 2. Working Notes : (1) No.000 1.000 7.125 31.000 8.000 14.000 30.300 Rs.000 36.) 5.26.000 30.86.000 119 3.500 66.25. Rs.000 6.000 By Damages 30.50.000 6.000 1.19.000 21.125 Cost (Rs.98.300 Assets Amount Rs.300 51.11.00.000 7.500 22.000 22.00. 5 1 3.) 1.000 4.000 By Drawings By Sales By Closing Stock 3. K.25.000 1.500 22.700 7.86.000 12% Security Deposit from Customers Interest Payable on Security Deposit Creditors for Oil Purchases Outstanding Rent 3–Wheeler Tempo Van Less : Depreciation Closing Stock Debtors Cash and Bank Balances Fixed Deposit Interest Accrued on Fixed Deposit Rent Advance Electricity Deposit Insurance Claim Receivable 30.Azad’s Capital Balance Add : Net Profit Less : Drawings 1. 2008 Liabilities Amount Rs.300 60.300 22. Furniture Less : Depreciation 27.25. To Opening Stock To Purchases 125 3.98.300 30.000 22.

500 48.50.000 Rs.26.85.000 20.47 (2) To Trading Account To Profit and Loss Account (Balance Transferred) (3) To Balance b/d To Sales A/c (Credit Sales*) Damaged Stock Account Rs.00.000 By Balance b/d 8.25.500 By Commission 10.00.73.73.000 .000 By Balance c/d 48.25.11.00.000 24.000 = 5.000 12. 4.00. 2.000 Rs.000 By Cash and Bank A/c 47.00.85. 79.000 5.00.000 By Salaries A/c 1.000 By Rent A/c 5.000 By Insurance Claim Receivable A/c By Cash and Bank A/c (Sale) 500 5.000 tins Total Sales (3. 1. 26. 24.000 1.500 By Miscellaneous Office Expenses 26. 75.500 – 1.000 50.000 47.00.25.500 Debtors Account Rs.000 Rs.000 × Rs. 5.000 = 52.500 22.000 30.60.500 Rs. 1.000 Cash and Bank Account Rs.00.500 *Credit Sales in respect of (normal) sales of 3.000 By Drawings A/c (Personal Income–tax) By Fixed Deposit A/c By Creditors A/c 6.25.000 By Purchases A/c 32.500) (4) To Cash and Bank A/c To Balance c/d (5) To Balance b/d To Sales A/c To Damaged Stock A/c To Debtors A/c To Security Deposit A/c Creditors Account Rs.000 32.750) Less : Cash Sales (5.000 48.

48

By Loss of deposit A/c (Defalcation of security deposit) By Balance c/d 32,85,000 Notes :

10,000 66,000 32,85,000

(1) 12% interest on Fixed Deposit is assumed to be per annum. Similar assumption applies to 12% Security Deposit from customers. (2) The treatment of claim pending against the Insurance Company in respect of defalcation of security deposit by one of the staff has been considered on the basis of Conservatism Concept. Conservatism suggests non–consideration of claim as an asset in anticipation. Where the ability to assess the ultimate collection with reasonable certainly is lacking at the time of raising any claim, revenue recognition is postponed to the extent of uncertainty involved (AS 9). In this case, it may reasonably assume that collectability of claim is not certain. 15. In India, Government accounts are kept in three main parts i.e., consolidated fund, contingency fund and public account. Revenue of the Government arising out of taxation, other receipts classified as revenue, certain capital receipts by way of deposits, advances and expenditure there from are classified and accounted under “Consolidated fund”. Accounting for the Central Government and State Government is done separately i.e., in consolidated fund of India for the Central Government and a separate consolidated fund for each state and Union Territory. The two main sub-divisions under the consolidated fund are Revenue A/c and Capital A/c. 16. Agricultural activities are carried on mostly in an unorganized manner. The farmer has no office and also does not find time for day by day record keeping. The transactions and events are also not supported by vouchers or other documents in most of the cases. So it is desirable to maintain a Diary to record happenings of the day. This Diary becomes the source document for record keeping. Seven registers are required for running the accounting system. 1. 2. 3. 4. Cash Book: to record cash transactions. Fixed Assets Register: to record details of fixed assets like description of assets, cost of purchases/construction/generation, disposal, depreciation and balance. Loan Register: to record borrowings from bank, cooperatives and other agencies trade creditors along with interest paid or payable. Stock Register: to record details of input, output and by product – receipts, utilization, wastage and balance.

49

5. 6. 7.

Debtors and Creditors Register: to record credit transactions classified by parties involved. Register for National Transactions: to record transactions between farm and farm household. Cost Analysis Register: to record cropwise input and output inclusive of apportionment of common costs and finding out crop profit. The framework sets out the concepts underlying the preparation and presentation of general-purpose financial statements prepared by enterprises for external users. The main purpose of the framework is: (a) To assist enterprises in preparation of their financial statements in compliance with the accounting standards and in dealing with the topics not yet covered by any accounting standard. (b) To assist Accounting Standard Board (ASB) of ICAI in its task of development and review of accounting standards. (c) To assist ASB in promoting harmonisation of regulations, accounting standards and procedures relating to the preparation and presentation of financial statements by providing a basis for reducing the number of alternative accounting treatments permitted by accounting standards. (d) To assist auditors in forming an opinion as to whether financial statements conform to the accounting standards. (e) To assist the users in interpretation of financial statements.

17. (a) Purpose of the Conceptual Framework:

(b) Liquidity Norms: Banking companies have to maintain sufficient liquid assets in the normal course of business. In order to safeguard the interest of depositors and to prevent banks from over-extending their resources, liquidity norms have been settled and given statutory recognition. Every banking company has to maintain in cash, gold or unencumbered approved securities, an amount not less than 25% of its demand and time liabilities in India. However, this percentage is changed by the Reserve Bank of India from time to time considering the general economic conditions. This is in addition to the average daily balance which a scheduled bank is required to maintain under Section 42 of the Reserve Bank of India Act and in case of other banking companies, the cash reserve required to be maintained under Section 18 of the Banking Regulations Act. (c) Co-Insurance: In cases of large risks the business is shared between more than one insurer under co-insurance arrangements at agreed percentages. The leading insurer issues the documents, collects premium and settles claims. Statements of Account are rendered by the leading insurer to the other co-insurers. Accounting for premium, claims etc. under co-insurance is done in the same manner as that of the direct business except in respect of the following peculiar features:

50

(i)

Premium: The co-insurer books the premium based on the statement received from the leading insurer usually by issuing dummy documents. Entries are made in the Premium Register from which the Premium Account is credited and the Leading Insurer Company’s Account debited. In case the statement is not received, the premium is accounted for on the basis of advices to ensure that all premium in respect of risk assumed in any year is booked in the same year; share of premium relatable to further extension/endorsements on policies by the leading insurer are also accounted for on the basis of subsequent advices. Reference to the relevant communications should be made from the concerned companies to ensure that premium collected by them and attributable to the company is recorded.

(ii) Claims Paid: Normally, on the basis of claims paid, advices received from the leading insurer, the Claims Paid Account is debited with a credit to the coinsurer. All such advices are entered into the Claims Paid Register. It is a practice to treat all claims paid advices relating to the accounting year received upto 31st January of the subsequent year from leading insurer as claims paid. Outgoing co-insurance: The share of the insurer only for both premium and claims has to be accounted under respective accounts. The share of other co-insurers is credited or debited, as the case may be, to their personal accounts and not routed through revenue accounts. 18. (a) Over-riding preferential payments under Section 529A of the Companies Act, 1956: The Companies (Amendment) Act, 1985 introduced Section 529A which states that certain dues are to be settled in the case of winding up of a company even before the payments to preferential creditors under Section 530. Section 529A states that in the event of winding up of a company, workmen’s dues and debts due to secured creditors, to the extent such debts rank under Section 529(1)(c), shall be paid in priority to all other debts. The workmen’s dues and debts to secured creditors shall be paid in full, unless the assets are insufficient to meet them, in which case they shall abate in equal proportions. Workmen’s dues, in relation to a company, means the aggregate of the following sums: 1. all wages or salary including wages payable for time or piece work and salary earned wholly or in part by way of commission of any workman, in respect of services rendered to the company and any compensation payable to any workman under any of the provisions of the Industrial Disputes Act, 1947; all accrued holiday remuneration becoming payable to any workman, or in the case of his death to any other person in his right, on the termination of his employment before, or by the effect of, the winding up order or resolution; all amounts due in respect of any compensation or liability for compensation under Workmen’s Compensation Act, 1923 in respect of death or disablement

2.

3.

any profit or loss should be recognised immediately. (a) According to para 44 of AS 20.. (b) Advantages of maintaining subsidiary books by a trading/manufacturing organization are: (i) Division of work: In place of one journal. 4. the location of errors is facilitated by the existence of separate books. The accounting work can be divided amongst a number of people. there are many subsidiary books. Accounting work is done efficiently. (b) As per para 50 and 52 of AS 19. the per share calculations for those financial statements and any prior period financial statements presented should be based on the new number of shares. excise. Similarly audit of the various books of prime entry can be conducted simultaneously by a team of audit staff. can also be compiled from the appropriate columns in the pruchases and sales registers. and it is clear that the transaction is established at fair value. (iii) Saving of time: Various accounting processes can be undertaken simultaneously because of the use of a number of books. the information relating to each class of transaction is available at one place. (iv) Availability of information: Since a separate register is kept for each class of transactions. If these changes occur after the balance sheet date but before the date on which the financial statements are approved by the board of directors. (v) Facility in checking: When the trial balance does not agree. If the sale price is below fair value. ‘if a sale and leaseback transaction results in an operating lease. if the loss is compensated by future lease payments at below market price. the calculation of basic and diluted earnings per share should be adjusted for all the periods presented. a gratuity fund or any other fund for the welfare of the workmen. it should be deferred and amortised in proportion to the lease payments over the period for which the asset is expected to be used. ‘If the number of equity or potential equity shares outstanding increases as a result of a bonus issue or share split or decreases as a result of a reverse share split (consolidation of shares).51 of any workman of the company. octroi etc. all sums due to any workman from a provident fund. 19. This results in quicker completion of work. (ii) Specialisation and efficiency: As a person is handling only one type of work. any profit or loss should be recognised immediately except that. he acquires full knowledge and becomes efficient in handling the work. maintained by the company. When per share calculations reflect such changes in the number of shares. the excess over . pension fund. If the sale price is above fair value. Additional information for sales tax. that fact should be disclosed.

(a) To the extent that funds are borrowed specifically for the purpose of obtaining a qualifying asset. (ii) (iii) Holding and subsidiary enterprises of any one of the above at any time during the accounting period. including public deposits. An outflow of resources. other than borrowings made specifically for the purpose of obtaining a qualifying asset. 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. For the best estimate of the cost of refunds. (c) Para 87. To the extent that funds are borrowed generally and used for the purpose of obtaining a qualifying asset. 10 crores at any time during the accounting period. in excess of Rs. For operating leases.52 fair value should be deferred and amortised over the period for which the asset is expected to be used. if the fair value at the time of a sale and leaseback transaction is less than the carrying amount of the asset. 1 crore but not in excess of Rs. (b) It is a present obligation as a result of past obligating event. 88 and 89 of AS 26 states that an intangible asset should be derecognised (eliminated from the balance sheet) on disposal or when no future economic benefits are expected from its use and subsequent disposal. the amount of borrowing costs eligible for capitalisation 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. industrial and business reporting enterprises having borrowings. embodying economic benefits in settlement is probable because a proportion of goods are returned for refund. The amount of borrowing costs capitalized during a period should not exceed the amount of borrowing costs incurred during that period. 50 crores. All commercial. The obligating event is the sale of the product which gives rise to an obligation because obligations also arise from normal business practices. a provision should be recognized as per AS 29. 20. the amount of borrowing costs eligible for capitalisation should be determined by applying a capitalisation rate to the expenditure on that asset. 40 lakhs but does not exceed Rs. whose turnover for the immediately preceding accounting period on the basis of audited financial statements exceeds Rs.’ (c) Enterprises which are not Level I enterprises but fall in any one or more of the following categories are classified as Level II enterprises: (i) All commercial. . industrial and business reporting enterprises. a loss equal to the amount of the difference between the carrying amount and fair value should be recognised immediately. Turnover does not include ‘other income’.

24. ‘all significant accounting policies adopted in the preparation and presentation of financial statements should be disclosed. when the outcome of a construction contract can be estimated reliably. 26 and 27 requires. or which is expected to have a material effect in subsequent periods. (b) (i) The nature and amount of prior period items should be separately disclosed in the statement of profit and loss in a manner that their impact on the current profit or loss can be perceived. this fact should be disclosed. AS 1 in its para nos. if the change affects both. 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. (a) As per AS 7. An expected loss on the construction contract should be recognised as an expense immediately in accordance with paragraph 35 of the same standard. The effect of a change in an accounting estimate should be classified using the same classification in the statement of profit and loss as was used previously for the estimate. contract revenue and contract costs associated with the construction contract should be recognised as revenue and expenses respectively by reference to the stage of completion of the contract activity at the reporting date. If it is impracticable to quantify the amount. 21. In the case of a change in accounting policies which has a material effect in the current period. At least at each financial year end. an enterprise tests the asset for impairment under Accounting Standard on Impairment of Assets. The nature and amount of a change in an accounting estimate which has a material effect in the current period. (ii) The effect of a change in an accounting estimate should be included in the determination of net profit or loss in: (a) the period of the change. should be disclosed.53 Gains or losses arising from the retirement or disposal of an intangible asset should be determined as the difference between the net disposal proceeds and the carrying amount of the asset and should be recognised as income or expense in the statement of profit and loss. The disclosure of the significant accounting policies as such should form part of the financial statements and the significant accounting policies should normally be disclosed in one place. An intangible asset that is retired from active use and held for disposal is carried at its carrying amount at the date when the asset is retired from active use. 25. if the change affects the period only. and recognises any impairment loss accordingly. (c) For disclosure of significant accounting policies. or (b) the period of the change and future periods. the amount by which any item in the financial .

130 i. then raw material can be valued at Rs. from the facts given it appears that condition (iii) is satisfied i. change . Only condition is that same methods should be consistently adopted from year to year.130. Only Rs. (c) According to the Guidance Note on Accounting for Depreciation in Companies issued by ICAI. Change in the method of depreciation is a change in accounting policy. the fact should be indicated. 150 is not recovered by use in finished production. 10 less than its expected total cost. (ii) Such change is required by the Accounting Standards (iii) Such change will result in more appropriate presentation. Here. is less than its cost of Rs.e. According to AS 6. 190 or less. viz. (a) (i) The raw material price has declined to Rs. Consistency and Accrual are followed in financial statements. 150 is fully realizable hence no need to write down inventory to Rs. (ii) If the net realizable value of finished goods say Rs. That is. 140 is recoverable by use in production i.e. Where such amount is not ascertainable. 210 then raw material should be valued at Rs. wholly or in part. Company may follow different methods for different types of assets.e. it need not be written down to Rs. specific disclosure is not required. raw material will be valued at Rs.e. 140+60= 200). 150. the practice of writing down inventories below cost to net realizable value is consistent with the view that assets should not be carried in excess of the amount that can be realized from its use since it is held for the purpose of that use. such a change is permissible only when at least one of the following 3 conditions is satisfied:(i) Such change is required by law. This is in view of the purpose of writing down to net realizable in AS 2.’ 22. According to AS 2. Rs.54 statements is affected by such change should also be disclosed to the extent ascertainable. the stock of raw materials should be valued at Rs. (iii) Although wordings of AS 2 does not say so clearly but if finished goods can be sold at Rs. and Company geographical locations can follow different methods. 140.140 i. (Rs. 130 but the cost of finished goods Rs. Going Concern. Hence the entire cost of Rs. 210 including raw material cost Rs. Hence. 130. 2. If a fundamental accounting assumption is not followed. (b) Both dividend paid and Corporate Dividend Tax paid should be shown as financing activities as per AS 3. 10 less than its cost. If the fundamental accounting assumptions. the fact should be disclosed. it is permissible for a company to adopt more than one method of depreciation simultaneously that is to say that1.

100 100) of total costs of construction. (d) (i) Amount of foreseeable loss Total cost of construction (500 + 105 + 495) Less: Total contract price Total foreseeable loss to be recognized as expense (Rs in lakhs) 1.100 1. 35 lakhs The amount of Rs.55 will lead to more appropriate presentation (since WDV method will better represent the pattern of faster wear & tear instead of SLM). 605 lakhs Work certified Work not certified This is 55% (605/1.e.000 lakhs = Rs. (v) The relevant disclosures under AS 7 (Revised) are given below: Rs. the expected loss should be recognized as an expense immediately. in lakhs Contract revenue Contract expenses Recognised profits less recognized losses 550 605 (100) . 1. in lakhs = [605 – 100 – 540] Rs. in lakhs Amount due to customers = Rs. 550 lakhs (iv) Amount due from/to customers = Contract costs + Recognised profits – Recognised losses – (Progress payments received + Progress payments to be received) = [605 + Nil – 100 – (400 + 140)] Rs. 55% of Rs. cost incurred to date are Rs. 35 lakhs will be shown in the balance sheet as liability. change should be retrospective. According to AS 6.000 100 According to para 35 of AS 7 (Revised 2002). (ii) Contract work-in-progress i. Any difference arising thereon should be changed/ credited to P&L account in the year of change. (Rs in lakhs) 500 105 605 (iii) Proportion of total contract value recognised as revenue as per para 21 of AS 7 (Revised). when it is probable that total contract costs will exceed total contract revenue.

in lakhs 62 520 47. Out of the Rs.’ Hence the same should not be capitalized.00. ‘administration and other general overhead expenses are usually excluded from the cost of fixed assets because they do not relate to a specific fixed asset.00. 540 140 35 Yes. Therefore. as foreign tour expenses of directors for purchase of Plant and Machinery is for the acquisition of the asset.56 Progress billings (400 + 140) Retentions (billed but not received from contractee) Gross amount due to customers 23.000 should be credited to the Machinery account. (a) 1.00. The balance Rs.000 may be credited to profit & loss account as already the cost of the assets to the tune of Rs.41 680 62 30 680 2.000 transferred to profit & loss account would be partial recovery of that cost. 2. Rs. Yes. Therefore. 4. as per para 9 of AS 10 only salary of technical staff can be said to as directly attributable to bring the asset to its working conditions for its intended use. No. (b) In respect of depreciable assets. therefore it should be capitalised. 4. it should be capitalised. salary of non-technical staff cannot be capitalised.00. It appears that company follows the first option. as per para 9. 4.000 is the balance in Machinery account and so Rs. 62 lakhs Purpose Nature Interest to be capitalized Rs. AS 12 does not permit the crediting of the grant or any part thereof to capital reserve.000 that has been received. 4. No. salary of technical staff for erection of Plant and Machinery is the cost directly attributable for bringing the asset to its working conditions for its intended use.000 has been debited to profit and loss account in the earlier years and Rs. 6.00. The company has only two options – reduce the grant from the cost of fixed assets or treat it as deferred income. 3. 4. (c) Statement showing the treatment for total interest amount of Rs.00. 8.3 of AS 10.74 . in lakhs Modernisation and renovation of plant and machinery Advance to suppliers for additional assets Qualifying asset Qualifying asset Interest to be charged to profit and loss account Rs. There is no need to provide depreciation for 2007-08 or 2008-09 as the depreciable amount is now Nil.

75.8696 .050 3. 27.15 62 130 680 = 11.00.57 Working Capital Not a qualifying asset _____ 50.4972 (unguaranteed residual value) (1) + (2) Unearned Finance Income Rs.000 (ii) Table showing present value of (i) Minimum lease payments (MLP) and (ii) Unguaranteed residual value (URV).5718 .000 – Rs.000 5.000 5.000 Rs.00.00.000 1. 5. 1.00.24. Year MLP inclusive of URV Internal rate of return (Discount factor 15%) .000] + Rs.000 (guaranteed residual value) 1.750 2.00.000 5. 4.00.85.7561 .00.85 24.25.48.820 49.00.540 (1) (2) = Gross investment – PV of MLP = Rs.4972 Present Value Rs.28. 9.00.720 ________ 17.000 5 years) + Rs.900 2. 1 2 3 4 5 5. 1.00.800 3.600 49. 27.78. (a) Computation of Unearned Finance Income (i) Gross investment = = = = Minimum lease payments + Unguaranteed residual value (Total lease rent + Guaranteed residual value) + Unguaranteed residual value [(Rs.720 ________ 17.6575 .00.75.460 .4972 .00.540 = Rs.85 11.34. 17.000 .000 5.

820 17.72.820* Rs. on straight line method) Profit and loss account To Depreciation account To Finance charges account (Being the depreciation and finance charges transferred to profit and loss account) Dr. 1.873 2.58 Journal Entries in the books of B Ltd.58.873) Depreciation account To Machinery account (Being the depreciation provided @ 10% p.a.000 5.582 1.’s account (Being lease of machinery recorded at present value of MLP) At the end of the first year of lease Finance charges account (Refer W.455 1.31.58.’s account (Being the finance charges for first year due) A Ltd.25.582 2.) To A Ltd. N.00. Rs. 2. 2.’s account To Bank account (Being the lease rent paid to the lessor which includes outstanding liability of Rs.25.000 Dr. 4. 2.58. At the inception of lease Machinery account To A Ltd.582 Dr.72. . 17.127 and finance charge of Rs.41. 5 .873 Dr.58.873 Dr.72.00.

120 and diluted loss per share would be Rs. the enterprise should amortise the right to generate power over sixty years.66. and only when.276 78. Hence.000/1. No outflow of benefits is probable at 31 March. Rs. the basic loss per share would be Rs.00.25.25.507 5.110 1.2.783 17.22.07.00. Year Outstanding liability (opening balance) Rs. Accordingly. The guarantee is disclosed as a contingent liability unless the probability of any outflow is regarded as remote. 14.693 12. (c) According to AS 26. .00.21.000/ 1. (b) As per para 39 of AS 20.2.000 5.200 shares).88.88.e. In view of the above.000 5.00. 2005 The giving of the guarantee. 2.84.000) for deciding whether the potential equity shares are dilutive or anti-dilutive.820 Outstanding liability (closing balance) Rs.59 Working Note: Table showing apportionment of lease payments by B Ltd.890 3. 2005 since financial position of Y is sound.41.704 1.267 8.000 5. 2. 2.000 shares) to Rs.724 5.21.84. Rs. 240 (i. (1.397 8.00. unless there is evidence that its useful life is shorter. (a) (i) At 31 March.397 8.127 2.81.000 5.00.693 12.873 2.820 14.000 should be considered and not Rs.783 Lease rent Finance charge Reduction in outstanding liability Rs. 100.58. But the enterprise should subject this right to impairment testing at each year end during its useful life since useful life is considered to be more than 10 years.000) is due to approximation in computing the interest rate implicit in the lease. their conversion to equity shares would decrease net profit per share from continuing ordinary operations. 200 (i.77.07.74.21. between the finance charges and the reduction of outstanding liability. ‘Potential Equity Shares should be treated as dilutive when.18. gives rise to a possible obligation. 1.507 5. 5. 200 potential equity shares would be dilutive potential equity shares since their inclusion decrease the net profit per share from continuing operations from Rs.00. 25.20. no provision is recognised.40.230 *The difference between this figure and guaranteed residual value (Rs.40.050* Rs.296 3. 1 2 3 4 5 17.783 1.000 Rs.40.33. Rs.e.’ As income from continuing operations is the control figure as per para 40.

the accounting treatment adopted by the company is incorrect.1 per US dollar. Therefore wages payable for the half year from 1. The revenue should be recognized only in the subsequent year with proper disclosures. revenue is recognised under AS 9.e.000 (for 1½ years @ Rs. At 31 March 2006. Revenue Recognition. 2007 and is not to be adjusted against the cost of raw.2006.materials. it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation. 2006 The obligating event is the giving of the guarantee. 2007 with retrospective effect from 30. Hence. . The effect of exchange difference should be taken into profit and loss account.000 per annum) should be included in current year’s wages.47 per Us dollar.00. Note: This example deals with a single guarantee. hence should be valued at the closing rate i. it will assess that portfolio as a whole in determining whether an outflow of resources embodying economic benefit is probable. Additional wages liability of Rs. If an enterprise has a portfolio of similar guarantees. The difference of Rs.60 (ii) At 31 March.2007 cannot be taken as an error or omission in the preparation of financial statements and hence this expenditure cannot be taken as a prior period item. Sundry creditors is a monetary item.50. Rs. which gives rise to a legal obligation to make good enterprise Y’s defaults. In the subsequent year. which requires an adjustment at the Balance Sheet date. 2007 irrespective of the payment for the same subsequently at lower rate in the next financial year. 7. the unexpected increase in sale price of petrol by the government after the balance sheet date cannot be regarded as an event occurring after the Balance Sheet date. (c) As per AS 11 (revised 2003)..9.48 and Rs.10. ‘The Effects of Changes in Foreign Exchange Rates’.e. the difference between Rs.2006 to 31. Where an enterprise gives guarantees in exchange for a fee. monetary items denominated in a foreign currency should be reported using the closing rate at each balance sheet date. since enterprise Y has gone into liquidation.3.5 (48-43) per US dollar should be shown as an exchange loss in the profit and loss account for the year ended 31 st March. (d) It is given that revision of wages took place on 1st September. because there was no error in the preparation of previous period’s financial statements. as per AS 5. 5. i. (b) According to para 8 of AS 4 (Revised 1995). A provision should be recognised for the best estimate of the obligation.48 at 31 st March. the company would record an exchange gain of Re. The retrospective increase in the petrol price should not be considered as a prior period item. since it does not represent a condition present at the balance sheet date.

1956’. 1956’. the Accounting Standards shall come into effect in respect of accounting periods commencing on or after the publication of these accounting standards under the said Notification. 2006. published in ‘The Chartered Accountant’ of November 2003. carries a footnote that “it may be noted that the accounting treatment of exchange differences contained in this Standard is required to be followed irrespective of the relevant provisions of Schedule VI to the Companies Act. the Ministry of Company Affairs (now known as the Ministry of Corporate Affairs) issued the Companies (Accounting Standards) Rules. in respect of accounting periods commencing on or after 7th December. 4. as published in the above Government Notification. However. The Effects of Changes in Foreign Exchange Rates vis-à-vis Schedule VI to the Companies Act. to withdraw the Announcement on ‘Treatment of exchange differences under Accounting Standard (AS) 11 (revised 2003). 2006. 497) 1 2. nature or incidence that their disclosure is relevant to explain the performance of the enterprise for the period. 2007. as per para 12 of AS 5 (Revised). AS 11.61 It may be mentioned that additional wages is an expense arising from the ordinary activities of the company. which was published in the November 2003 issue of ‘The Chartered Accountant’ (pp. As per Rule 3(2) of the said Rules. 1956’ 1. The Effects of Changes in Foreign Exchange Rates vis-à-vis Schedule VI to the Companies Act. the nature and amount of such items should be disclosed separately. Subsequent to the issuance of the above Announcement. by way of Notification in the Official Gazette dated 7th December. Accordingly. 1956”. The Effects of Changes in Foreign Exchange Rates vis-à-vis Schedule VI to the Companies Act. when items of income and expense within profit or loss from ordinary activities are of such size. such an expense does not qualify as an extraordinary item. In view of the above footnote to AS 11. 2006. the accounting treatment of exchange differences contained in AS 11 notified as above is applicable and not the requirements of Schedule VI to the Act. . Although abnormal in amount. The Council of the Institute of Chartered Accountants of India had issued an Announcement on ‘Treatment of exchange differences under Accounting Standard (AS) 11 (revised 2003). 2008 Examination APPENDIX Announcement Withdrawal of the Announcement issued by the Council on ‘Treatment of exchange differences under Accounting Standard (AS) 11 (revised 2003). Note: AS 1 to AS 29 are applicable for November. 3. the Council of the Institute of Chartered Accountants of India has decided at its 269th meeting held on July 18.

03.2005 ii. Generally such a situation may arise in case of personal and education loans etc. DICGC/ECGC cover is also taken into account (this aspect is discussed later in this chapter). Security should not include guarantees.f. its recognition as such. depending upon the period for which the advance has been considered as a doubtful asset.2007 100% w. the realisable value of the security available to the bank should be determined on a realistic basis. it has been decided that banks should make provision against sub-standard assets.03. as follows: Period for which the advance has been considered as doubtful Upto 1 year More than 1 year and upto 3 years More than three years i. 31. (b) Doubtful assets : (i) Full provision to the extent of the unsecured portion should be made.04. 20% . 2005. (c) Sub-standard assets : A general provision of 10% on total outstanding should be made without making any allowance for DICGC/ECGC cover and securities available. doubtful assets and loss assets on the following basis: (a) Loss assets : The entire amount should be written off or full provision should be made for the amount outstanding. An additional provision of 10% (i. total 20% of total outstanding) is required to be made on ‘unsecured exposure’ ab initio sanction of loan. with a minimum of 20% each year.f. comfort letters etc . In case the advance covered by CGTSI guarantee becomes non-performing. (ii) Additionally. In doing so. no provision need be made towards the guaranteed portion.e.e.2004 % of provision on secured portion 20% 30% 60% w. the realisation of the security and the erosion over time in the value of security charged to the banks.e. 31.f. Unsecured exposure is defined as ‘an exposure where the realizable value of security is not more than 10% of the outstanding exposure (fund based and non-fund based). The amount outstanding in excess of the guaranteed portion should be provided for as per the extant guidelines on provisioning for non-performing advances.2006 100% w. Outstanding stock of NPA’s as on 31.2005 75% w. Advances classified as doubtful for more than three years on or after 01.e.03. 31. 31.100% of the secured portion should be provided for.03.03.62 Students are advised to refer the following rates of Non-Performing Assets in case of Banking Companies PROVISIONS Taking into account the time lag between an account becoming doubtful of recovery.e.f..2004 (iii) Banks are permitted to phase the additional provisioning consequent upon the reduction in the transition period from substandard to doubtful asset from 18 to 12 months over a four year period commencing from the year ending March 31.

400 10. 31 March 2004 31 March 2005 31 March 2006 31 March 2007 Provisions portion Rate (in %) 50 60 75 100 on secured Provisions on unsecured portion Rate (in %) 100 100 100 100 Amount 5.10.000 5.25.000.000 Illustration 2 (Advances classified as ‘doubtful more than three years’ on or after 1 April.000 17.63 (d) Standard assets : A general provision of a minimum of 0.000 20.000 Realisable value of security: Rs. Realisable value of security: Rs. It has been clarified that the provision should be made on global loan portfolio basis and not on domestic advances alone. 2004: 4 years (i.000 25. Period for which the advance has remained in ‘doubtful’ category as on 31 st March.000 12. 2004: Rs.e.. 2005 % Doubtful 1 to 3 years 30 Doubtful more than 3 100 years . 2004: 2.000 Period for which the advance has remained in ‘doubtful’ category as on 31 st March.000 5. Solution: Provisioning requirement: As on… Asset Classification Provisions on secured portion Amount 2. Doubtful more than 3 years) Solution: Provisioning requirement: As on….5 years. 2004.000 Provisions on unsecured portion % Amount 100 2.000 15.000 Total (Rs.000 20. 2004. 2004 31 March.) 4.20.) The outstanding amount (funded as well as unfunded) as on 31 st March.000 31 March.000 100 2. 2004: Rs.000 Amount 10.) The outstanding amount as on 31 st March.) 15.000 5. For the practice of students following illustrations are given below: Illustration 1 (Existing stock of advances classified as ‘doubtful more than 3 years’ as on 31 March.40% of total standard assets should be made.000 Total (Rs.8.400 8.000.

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