MB131 - 2003 - 10 (October)

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Question Paper
Financial Accounting (MB131) : October 2003
Section A : Basic Concepts (40 Points)
• This section consists of questions with serial number 1 - 40.
• Answer all questions.
• Each question carries one point.
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1. If a Company believes that some of its debtors may "default", it should act on this by making sure that Answer
sufficient provision is created in the books. This is an example of >
a. Matching concept
b. Money measurement concept
c. Consistency concept
d. Conservatism concept
e. Business entity concept.
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2. Which of the following best describes a trial balance? Answer
a. It is a special type of account >
b. It shows the double entries made
c. It is a list of balances in accounts in the books
d. It shows the financial position of the business
e. It is a special type of subsidiary book.
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3. Manoj Ltd. forfeited 200 shares of Rs.10 each, Rs.8 called up, for non-payment of call money of Rs.2 per Answer
share. Application money of Rs.2 per share and allotment money of Rs.4 per share have already been received >
by the company. The company has the practice of transferring the money due to Calls in arrears account. The
journal entry for forfeiture involves
a. Debit to Share capital account of Rs.2,000
b. Credit to Share Final call account of Rs.400
c. Credit to Share Forfeiture account of Rs.1,600
d. Credit to Calls in arrears account of Rs.400
e. (a), (b) and (c) above.
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4. Which of the following is not an error of commission? Answer
a. Recording of wrong amount in the subsidiary books >
b. Wrong totaling of subsidiary books
c. Not recording of a transaction in the subsidiary books
d. Posting on the wrong side of an account
e. Posting of wrong amount in an account.
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5. The credit balance as per pass book as on March 31, 2003 of Madhu Ltd. was Rs.10,000. As on that date it Answer
was further revealed that cheques issued but not presented for payment amounted to Rs.8,000 and cheques >
deposited but not yet cleared amounted to Rs.20,000. The bank balance as per Cash book stood at
a. Rs.38,000 (favorable)
b. Rs.22,000 (favorable)
c. Rs. 2,000 (unfavorable)
d. Rs.18,000 (unfavorable)
e. Rs.20,000 (unfavorable).
http://www.icfai.org/suggested/MB131-1003.htm (1 of 31)12/22/2003 5:32:39 PM

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6. Dividend recommended by the Board of Directors till it is adopted in the Annual General Meeting by the Answer
shareholders is >
a. Shown in Balance Sheet as proposed dividends under the head of current liabilities
b. Shown in Balance Sheet as proposed dividends under the head of provisions
c. Shown in Balance Sheet as declared dividends under the head of provisions
d. Shown in Balance Sheet as a deduction under profit and loss account
e. Shown in Balance Sheet as unclaimed dividends under current liability.
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7. Mannu Ltd. forfeited 200 equity shares of Rs.10 each fully paid up for non-payment of final call of Rs.2 per Answer
share. These shares were originally issued at a discount of 10%. Application, allotment, and first call money of >
Rs.2, Rs.3 and Rs.2 respectively in respect of each share were received in time. The journal entry for the
forfeiture of shares is
Rs. Rs.
a. Equity Shares Capital A/c Dr. 2,000
To Equity Share final call A/c 400
To Forfeited shares A/c 1,600
b. Equity Shares Capital A/c Dr. 2,200
To Equity share final call A/c 400
To Discount on issue of shares A/c 200
c. Equity Share final call A/c Dr. 400
Forfeited shares A/c Dr. 1,600
To Equity shares Capital A/c 2,000
d. Equity Shares Capital A/c Dr. 2,000
To Equity share final call A/c 400
e. Equity share final call A/c Dr. 400
Forfeited shares A/c Dr. 1,400
Discount on issue of shares A/c Dr. 200
To Equity shares Capital A/c 2,000
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8. If the shares are reissued at a price which is more than the face value of the shares, the excess amount will be Answer
credited to >
a. General Reserve
b. Share premium account
c. Share forfeiture account
d. Profit & Loss account
e. Share capital account.
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9. The journal entry to record the replenishment of a petty cash fund involves Answer
>
a. A debit to office expenses account
b. A credit to petty cash account
c. A debit to miscellaneous expenses account
d. A credit to cash account
e. A debit to cash account.

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10. The amount on shares actually demanded by the company is called Answer
>
a. Nominal capital
b. Issued capital
c. Subscribed capital
d. Called up capital
e. Reserve capital.
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11. Manish Ltd. maintains its current ratio at 2.5. If the working capital as on March 31, 2003 stood at Rs.60,000, Answer
then the current liabilities as on that date stood at >
a. Rs. 24,000
b. Rs.1,00,000
c. Rs. 40,000
d. Rs. 60,000
e. Rs.1,50,000.
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12. In a Funds flow statement, the excess of uses of funds over sources of funds is known as Answer
>
a. Net profit
b. Funds from operations
c. Increase in working capital
d. Decrease in working capital
e. Net Loss.
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13. Which of the following concepts is not considered as basic principle of accounting? Answer
>
a. Materiality concept
b. Substance over form
c. Consistency concept
d. Matching concept
e. Cost concept.
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14. Which of the following factors are not primarily considered for determination of life of the useful asset? Answer
a. Asset usage >
b. SEBI guidelines
c. Consumption or extraction
d. Physical deterioration
e. Obsolescence.
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15. ‘Outstanding salaries’ represents Answer
>
a. A personal account
b. A real account
c. A nominal account
d. A deferred expense account
e. An asset.
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16. If closing stock appears in the trial balance, it should be Answer
a. Credited to the trading account >
b. Credited to the profit and loss account
c. Deducted from the purchases in the trading account
d. Credited to the trading account and shown on the assets side of the Balance sheet
e. Shown on the assets side of the Balance sheet.

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17. Calls in advance account is shown on Answer
a. The assets side of the balance sheet >
b. The liabilities side of the balance sheet as a deduction from paid up share capital
c. The liabilities side of the balance sheet as an addition to the paid up share capital
d. The liabilities side of the balance sheet separately from the paid up share capital
e. The liabilities side of the balance sheet as a contingent liability.
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18. The main objective of providing depreciation is to Answer
a. Calculate the true net profit >
b. Compute the actual cash profit
c. Create funds for replacement of fixed assets
d. Reduce tax burden
e. Value the equity shares of a company.
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19. On July 01, 2003 a company purchased 200 of its own 12% Debentures of Rs.100 each at the rate of Rs.97 (ex Answer
-interest). The company pays interest on March 31 and September 30 every year. At the time of purchase the >
amount debited to own debenture account was
a. Rs.20,000
b. Rs.19,400
c. Rs.20,600
d. Rs.18,800
e. Rs.19,200.
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20. The maximum commission allowable to underwriters on issue of shares is Answer
a. 5% of issue price of the shares >
b. 10% of nominal value of the shares
c. 6 % of issue price of the shares
d. 5 % of the nominal value of the shares
e. 2.5 % of the issue price of the shares.
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21. The logic behind the creation of Capital Redemption Reserve is that Answer
a. It is required under the Companies Act, 1956 >
b. It is required to facilitate the redemption of preference shares
c. It is required to maintain the capital intact
d. It is required to protect the creditors’ interest
e. Both (c) and (d) above.
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22. Mega Ltd. proposed a dividend of 12.5 %. The called-up equity share capital of Mega Ltd. is Rs.5,00,000; the Answer
share premium account is Rs.50,000. If the amount of calls-in-arrears is Rs.15,000, the amount of dividend >
payable by the company is
a. Rs.62,500
b. Rs.60,625
c. Rs.68,750
d. Rs.56,250
e. Rs.64,375.

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23. Manasa Ltd. offers 5 right shares to its existing shareholders for every 3 shares held by them. If the price of Answer
right issue is Rs.150 per share and its market value is Rs.220 per share, then the value of a right is >
a. Rs. 26.25
b. Rs. 40.00
c. Rs. 43.50
d. Rs. 43.75
e. Rs.176.25.
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24. Which of the following statements pertaining to revaluation of assets of the subsidiary company revalued at Answer
the time of acquisition of shares in the subsidiary is false? >
a. The upwards revaluation of the asset will be treated as pre acquisition profit and treated accordingly
b. The downward revaluation of the asset will be treated as pre acquisition loss and treated accordingly
c. Share of minority shareholders is added or deducted to the minority interest depending on whether
there is an upward or downward revaluation
d. The Holding company’s share of revaluation is adjusted in the Cost of Control
e. The depreciation in respect of the revalued asset is treated as pre acquisition expense and adjusted
in the pre acquisition profits or losses.
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25. If the holding company receives dividend out of pre-acquisition profits of the subsidiary company it will be Answer
a. Credited to the investment account >
b. Debited to the investment account
c. Credited to the consolidated profit and loss account
d. Debited to the consolidated profit and loss account
e. Ignored completely.
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26. Mitra and Mayura, two underwriters, underwrite 10,000 shares and 15,000 shares of a company. The company Answer
received applications for 12,000 equity shares of which marked applications were as follows: >
Mitra –– applications in respect of 4,000 shares
Mayura –– applications in respect of 6,000 shares
The liability of the two underwriters for unsubscribed shares were
a. Mitra 6,000 shares and Mayura 9,000 shares
b. Mitra 9,000 shares and Mayura 6,000 shares
c. Mitra 5,200 shares and Mayura 7,800 shares
d. Mitra 7,800 shares and Mayura 5,200 shares
e. Mitra 7,000 shares and Mayura 8,000 shares.
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27. If machinery account is debited with the amount of repairs incurred on the machine, this is an example of Answer
a. Compensating error >
b. Error of principle
c. Error of commission
d. Error of omission
e. Error of partial omission.

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28. Mishra Ltd. has furnished the following data for the month of September 2003: Answer
>
Credit purchases Rs.3,00,000
Opening balance of sundry creditors Rs. 75,000
Closing balance of sundry creditors Rs. 50,000
Discount received Rs. 5,000
Cash paid to creditors by Mishra Ltd. during the month was

a. Rs.3,30,000
b. Rs.3,25,000
c. Rs.3,20,000
d. Rs.3,00,000
e. Rs.2,85,000.
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29. Maple Ltd. has furnished the following data for the year 2002-2003: Answer
>
Salary for the year Rs.2,90,000
Salary outstanding on March 31, 2002 Rs. 40,000
Salary outstanding on March 31, 2003 Rs. 20,000
Salary paid in advance on March 31, 2003 Rs. 15,000

The amount of salary paid during the year 2002-2003 was
a. Rs.3,65,000
b. Rs.3,25,000
c. Rs.3,10,000
d. Rs.2,85,000
e. Rs.2,20,000.
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30. The starting point of the financial forecasting exercise is the Answer
a. Sales forecast >
b. Forecast of labor cost
c. Forecast of material cost
d. Forecast of operating expenses
e. Cash flow statement.
END OF PART A

Part B : Problems (50 Points)

• This part consists of questions with serial number 1 – 5.
• Points are indicated against each question.
• Detailed workings should form part of your answer.
• Do not spend more than 110 - 120 minutes on Part B.
1. Manisha & Co., a sole proprietorship concern, is in the business of manufacturing chemicals. The enterprise has a
current account with Bank of Baroda. It records transactions with the bank in the bank column of a three column cash
book . On March 31, 2003, the bank balance as per cash book showed a favorable balance of Rs.42,800, and did not tally
with the balance as per bank statement. On scrutiny the following facts were revealed:
i. The total of cheques sent to bank for collection during the month of March 2003 amounted to
Rs.1,25,600. Of these, cheques amounting to Rs.74,600 were credited in the bank statement upto March 31, 2003.
ii. Rent for building taken on lease by the proprietor for business amounting to Rs.28,000 was paid by the
bank as per standing instructions on March 28, 2003. There was no entry in the cash book.
iii. The total of cheques issued to creditors amounted to Rs.95,000 for the month of March 2003. Of these,
cheques amounting to Rs.92,500 were debited in the bank statement upto March 31, 2003.
iv. On March 30, 2003, Rs.220 were debited by the bank in respect of bank charges. No entry was made in
the cash book.
v. A cheque amounting to Rs.4,000 was received from a customer on March 30, 2003, the same was
recorded in the bank column of the cash book, but was deposited in bank on April 01, 2003.
vi. Interest and dividends on investments amounting to Rs.12,300 was directly collected by the bank on
March 30, 2003.
You are required to prepare a Bank reconciliation statement and arrive at the bank balance as per bank statement as
on March 31, 2003.
(9 points) < Answer >
2. Matrushri Petrochemicals is the largest manufacturer of petrochemicals in India. The company is capital intensive
and has been in operation for the last ten years. The capital employed is Rs.3,40,00,000 which is represented by
Particulars Amount in Rs.
Equity Share Capital & Reserves 2,00,00,000
Long term borrowings on debentures 1,00,00,000
Cash credit from banks 40,00,000
The Gross Working Capital of the company is Rs.170,00,000 and is made up of
Particulars Amount in Rs.
Inventory 60,00,000
Stores 28,00,000
Debtors 70,00,000
Advances and deposits 12,00,000

The annual sales for the year 2002-03 is Rs.1,60,00,000.
The management of Matrushri Petrochemicals Ltd. is undertaking an analysis of the long term solvency and the short term

solvency position of the company.

You are required to calculate four financial ratios from the above data for use of the management. (Students are required
to quote the ratios and all workings should form part of the solution.)
3. Mirinda Ltd. is one of the country’s leading industrial houses, focusing on the niche areas of Telecommunications,
Metallurgicals and Electricals. The company in its pursuit for new businesses, acquiring special expertise acquired 3,000
equity shares of Namrutha Ltd. The Balance sheets of Mirinda Ltd., and Namrutha Ltd as on March 31, 2003 stood as
follows:
Mirinda Ltd. Namrutha Namrutha

Liabilities Assets Mirinda Ltd. Rs
Rs. Ltd. Rs. Ltd. Rs
Share Capital: Land & Building at cost
31,00,000 16,00,000
10% Preference shares of Machinery less 10%
Rs.1,000 each depreciation
-- 10,00,000 27,00,000 13,50,000

3,000 Shares in
Namrutha Ltd.
Equity shares of Rs.1,000 each 100,00,000 40,00,000

45,00,000 ----
General Reserve Stock at cost
10,00,000 5,00,000 22,00,000 15,00,000

Profit & loss A/c.
Balance on 1-4-2002
4,00,000 3,00,000 Sundry Debtors

15,50,000 9,00,000
Profit for 2002-03 Cash & Bank Balance
20,00,000 8,00,000 8,50,000 19,50,000

Creditors
15,00,000 7,00,000
149,00,000 73,00,000
149,00,000 73,00,000
Additional Information:
i. Mirinda Ltd. acquired Equity shares in Namrutha Ltd. on October 01, 2002.
ii. On the date of acquisition, Mirinda Ltd. found that the value of land and buildings and machinery of
Namrutha Ltd. should be Rs.15,00,000 and Rs.19,25,000 respectively.
iii. Provide for preference dividends on 10% Preference shares for 2002-2003.
You are required to prepare the consolidated Balance Sheet of Mirinda Ltd. and its subsidiary Namrutha Ltd. as on
March 31, 2003, taking into consideration the fact that assets are to be taken at their proper values.
4. Minerva Ltd. is one of the largest industrial corporations in India. Its shares are listed on the Bombay stock
exchange only. The company at its General Meeting decided to redeem its preference shares. The balance sheet of a
company on March 31, 2003 stood as follows:
Amount
Liabilities Assets Amount in Rs.
in Rs.
Equity share capital (Rs.10) 40,00,000 Plant 25,00,000
Preference share capital (Rs.20) 12,00,000 Furniture 9,00,000
Securities Premium 20,000 Investment 3,50,000
Profit and Loss Account 6,80,000 Stock 15,00,000
Creditors 11,00,000 Debtors 14,00,000
Bank 3,50,000
70,00,000 70,00,000
Additional information:
i. Preference shares are redeemed on April 01, 2003, at a premium of 10%.
ii. To provide cash for redemption, investments are sold for Rs. 3,00,000.
iii. Minimum balance of Rs. 2,10,000 is required in profit and loss account after redemption of preference shares.
iv. 80,000 Equity shares of Rs. 10 each are issued at 10% premium for the purpose of redemption.
You are required to pass journal entries to give effect to the above transactions.
5. Mrudula Ltd. a wholly owned subsidiary of Mrudula International Ltd. is an export house recognised by the
Government of India. The company has its presence in almost every continent. The company was registered with an
authorised capital of Rs. 10,00,00,000 divided into shares of Rs. 10 each, of which 40,00,000 shares had been issued and
fully paid:

The companies Trial Balance as on March 31, 2003 stood as follows:
Debit Credit
Particulars
Rs. Rs.
Stock (as on April 01, 2002) 1,86,42,000
Purchase returns and Sales returns 12,68,000 9,85,000
Sundry manufacturing expenses 19,24,000
Purchases and Sales 7,18,21,000 11,69,90,000
Manufacturing Wages 1,09,74,000
Carriage Inward 4,91,000
18% Bank loan(secured) (availed on 01.04.01) 50,00,000
Office salaries and expenses 17,87,000
Directors remuneration 26,25,000
Freehold Premises 1,64,21,000
Interest on Bank loan 4,50,000
Auditors fees 8,60,000
Preliminary expenses 6,00,000
Plant and Machinery 1,28,40,000
Furniture 5,00,000
Debtors and Creditors 1,05,40,000 62,22,000
Cash at Bank 96,86,000
Loose tools 12,50,000
Cash in hand 19,53,000
Advance payment of Tax 84,29,000
Profit and Loss Account of April 01, 2002 38,64,000
Share capital 4,00,00,000
17,30,61,000 17,30,61,000
Additional information:
i. On March 31, 2003 outstanding manufacturing wages and outstanding office salaries stood at Rs. 1,89,000
and Rs. 1,20,000 respectively.
ii. On the same date stock was valued at Rs 1,24,84,000 and loose tools at Rs. 10,00,000.
iii. Depreciation on plant and Machinery is to be provided @15 % p.a. while on Office furniture it is to be
provided @10% p.a.
iv. Make a provision for income tax @ 50%

v. Write-off one-third of preliminary expenses

vi. The directors are recommended dividend @15% for the year ending March 31, 2003 after a transfer of 5% of
net profits to General Reserve.
After taking into consideration the above Trial Balance and additional information, you are required to prepare Profit and
Loss Account of Mrudula Ltd. for the year ended March 31, 2003 and a Balance Sheet as at that date.
END OF PART B
Part C : Applied Theory (20 Points)

• This part consists of questions with serial number 6 - 7.
• Points are indicated against each question.
• Do not spend more than 25 -30 minutes on Part C.
6. Inventory is one of the largest current assets of a business concern, hence inventories should be properly valued
periodically and recorded in the books of accounts for proper measurement of periodic profit and for inclusion in the
Balance sheet. Accounting for inventories involves numerous problems including choice in the selection of inventory
system. In this respect discuss the two types of inventory systems and differentiate between them.
7. ‘Customer loyalty and a reputation for quality are unidentifiable intangibles which cannot be realized without selling
the entire enterprise’. However value needs to be placed on the goodwill of the business. In this respect identify and
discuss the circumstances in which there may be a need to value such unidentifiable intangible. Also enlist a few factors
having a bearing on the unidentifiable intangible
END OF PART C
END OF QUESTION PAPER
Suggested Answers
Financial Accounting (MB131) : October 2003

1. Answer : (d) < TOP >
Reason : Matching concept (a) emphasizes that the whole of the revenue earned by an enterprise
is not income. To earn the revenue, resources are consumed and the cost of the resources consumed
should be set off to obtain income. This concept states that expenses are to be recognized in the
period of their related revenue. In financial accountancy, a record is made only of information that
can be expressed in monetary terms. If events cannot be quantified in monetary terms then they do
not facilitate accounting. This is because of money measurement concept (b). The concept of
consistency (c) requires a business enterprise to follow consistent accounting procedures and
practices from period to period. The steady application of practices and procedures is required to
enable a comparative study of the performance of the business over a period of time and also to
make objective comparison of various enterprise within an industry Conservatism concept (d) can
be viewed as a practical justification for certain accounting treatments. This requires the business
enterprise to record an event in such as way as to ‘play safe’ at the time of uncertainty. The
practice of reporting the Closing inventory at lower of the cost or market value appears to be in
justification of this principle of conservatism. The practice of bringing into books the anticipated
losses on default and making sure all losses are brought to books is because of Conservatism
concept. Hence (d) is the right option. In Accounting, business is considered to have a separate
existence from that of its proprietors or owners. It implies, a distinction between the economic
activities of the enterprise and that of the owners is to be maintained. All the transactions and the
events are analyzed and recorded in the books from the point of business enterprise. This concept i.
e. business entity concept (e) ensures that accounting records only reflect the economic activities of
business and not that of its owners. Hence option (e) is incorrect.
2. Answer : (c) < TOP >
Reason : A trial balance is simply a list of names and balances of all accounts in the ledger and
the cashbook. It is not a part of double entry system of book keeping hence, neither it is special type
of account (option a is incorrect), nor a special type of subsidiary book (option e is incorrect). It
does not show any double entries made. Financial position of the company cannot be ascertained
from a Trial balance. It is to ensure the arthermatical accuracy of the accounts.
Reason : Since the called up amount is Rs.8 on the shares issued and forfeited, the Share capital
account is to be debited with Rs.8 x 200 = Rs.1,600 only and not Rs.2,000. Hence option (a) is
incorrect. Since the money in arrears has been transferred to Calls in arrears account, no credit is
further required to final call account [option (b) is incorrect] and the credit of Rs.400 to Calls in
arrears account (d) is correct. Since the called up amount is Rs.8 and the amount earlier received is
Rs.6 in respect of each share hence the share forfeiture account is credited with Rs.6 x 200 shares =
Rs.1200. Hence option (c) is incorrect. Option (e) stating that statements (a), (b) and (c) are correct
and are all required is incorrect. Thus the journal entry involves credit to calls in arrears a/c of
Rs.400.
Share Capital A/c Dr Rs.1,600
To share forfeiture A/c Rs.1,200
To Calls in arrears A/c Rs. 400
Reason : Wrong recording or posting of transactions is referred to as error of commission . These

involves errors of principle, compensating errors, errors in posting, errors of casting etc. Recording
of wrong amount in the subsidiary books (a) and in wrong account (e) and posting on the wrong side
(d) of an account and wrong totaling of subsidiary books being errors of casting are all errors in
posting and are errors of commission. Not recording a transaction in the subsidiary books is an error
of omission and not an error of commission. Thus (c) is the correct answer.

5. Answer : (b) < TOP >
Reason : This requires the preparation of BRS
Amount
Particulars Rs.
Balance as per pass book as on March 31, 2003 (favorable) 10,000
Add : Cheques deposited but not yet cleared 20,000
Less Cheques issued but not yet presented for payment (8,000)
Balance as per cash book as on March 31, 2003 (debit balance or

favorable balance) 22,000
Reason : The dividends recommended by the Board of Directors is known as Proposed dividends.
It is debited to Profit and Loss Appropriation account and not to Profit and Loss a/c. Hence, option
(d) is false and shown in the Balance Sheet as a provision, hence (a) is false. When the proposed
dividends are adopted in the Annual General Meetings by the shareholders it is termed as Declared
dividends and shown in the Balance Sheet as a current liability until paid off. These declared
dividends are to be paid within 42 days of declaration. Hence, (b) is the only correct option.
Reason : When the shares are issued at a discount , the discount account is debited , therefore at
the time of forfeiture of such shares the discount account will be credited to cancel it. Hence the
right journal entry is
Equity Share Capital A/c Dr. 2,000
To Equity Share final call A/c 400
Reason : Reissue of forfeited shares is not allotment of shares but only a sale. Loss on reissue of
forfeited shares is debited to Share forfeiture account. However, loss on reissue should not exceed
the forfeited amount. If the shares are reissued at a price which is more than the face value of the
shares, the excess amount will be credited to Share premium account only. Hence only option (b) is
correct. All other options are incorrect. The amount of gain is transferred to capital reserve account.
Reason : Where a petty cash fund is established, the receipt of cash by the petty cashier is entered
on the debit side of the petty cash book and not credit (Hence option (b) is incorrect. In the general
cash book , cash is credited or bank is credited. Hence, option (e) is incorrect. Office expenses
account and miscellaneous expenses account are not affected. Hence option (a) and (c) are incorrect.

Reason : Nominal capital is the maximum amount which the company authorized to raise by way
of public subscription. Issued capital is the part of the authorized or nominal capital which is offered
to the public for subscription. Subscribed capital is the part of the issued capital for which
applications are received from the public. Called up capital is the amount on the shares which is
actually demanded by the Company to be paid. Reserve capital is the portion of the share capital
which has not been already called up and shall not be capable of being called up except in the event
of winding up of the company. Hence, option (d) is the right option.
Reason : Current Ratio =

And Working capital = Current Assets – Current Liabilities
Supposing CL = 100
Then CA = 250 (as current ratio is 2.5)
Then Working capital = CA – CL = 150
If the working capital is 150, current assets is 250
If working capital is Rs.60,000 then current Assets = Rs.60,000 x 250/150 = Rs.1,00,000.
Therefore current liabilities = Rs.1,00,000 (CA) less Rs.60,000 (Working cap) = Rs.40,000.
Reason : In the preparation of funds flow statement, the excess of sources over application is
known as increase in working capital, hence option (c ) is incorrect, and the excess of applications
over sources is known as decrease in working capital. The terms Net profit, Net loss are used in the
case of Income statements and not funds flow statement, hence option (a) and (e) are incorrect.
Similarly the term Funds from Operation is a source of fund (component in the Funds Flow
Statement) hence, option (b) is incorrect.
Reason : According to Generally Accepted Accounting Principles, materiality concept, cost

concept, consistency concept and matching concept are considered as basic principles of accounting.
Substance over form is not considered as basic principle of accounting.
Reason : The economic life of an asset should be estimated on the basis of passage of time,
physical deterioration , asset usage and obsolescence, consumption or extraction as in case of
mines , of the asset. It does not consider the factors like tax regulations, SEBI guidelines,
management and external factors
15. Answer : (a) < TOP >
Reason : Outstanding salaries is the amount payable during a particular period which is not yet
paid. It is Personal Account representing salaries due to employees. It is a representative personal
account
16. Answer : (e) < TOP >
Reason : When Closing stock appears in the trial balance it implies that it is already adjusted
against the purchases figure in the trial balance , so no more adjustment is required in the purchases
account in the trading account. Only when closing stock is given as an adjustment , closing stock is
credited to the trading account and shown on the assets side of the Balance sheet, hence both (a) and
(d) are incorrect. When closing stock appears in the trial balance , only one effect is given i.e. it is
shown on the assets side of the Balance sheet. Only option (e) is correct

Reason : Calls in advance results when a shareholder pays the entire amount on the shares i.e. in
respect of future calls also in advance. Calls in advance is a liability and not an asset, hence option
(a) is false. Calls in advance does not form a part of the Company’s share capital, hence it is not
deducted like Calls in arrears nor added as amount in forfeited account. It is shown separately from
the Paid up share capital
Reason : According to AS-6, depreciation is a measure of wearing out, lost usefulness, expired
utility, loss of value of an asset arising from use, efluxion of time or through technology and market
changes. The main objective of providing depreciation is to create funds/generate funds for
replacement of depreciable fixed assets over a period of its useful life and to prevent the owner of a
fixed asset from consuming his capital. The original monetary investment of the asset should be
intact.
The other statements are not correct because they are incidental to the main objective.
(a) Calculation of the true net profit may be one of the objectives of providing depreciation
as per accrual concept, but it is not the primary objective
(b) Cash profit is the actual profit before providing for depreciation. Provision for
depreciation which is a non-cash expense does not affect the calculation of cash profit.
(d) Some expenses are deducted on tax returns before being deducted in the books.
Depreciation is a citing example. As such the provision for depreciation has no impact on the
tax burden.
(e) The provision of depreciation has no direct impact in valuation of the equity shares of a
company.
Reason : Since here the company debentures have been purchased ex-interest at Rs.97, the amount
to be debited to own debentures account is only the Cost of own debentures (200 x Rs.97) =
Rs.19,400. No interest needs to be included . Hence interest factor can be ignored
Reason : Provisions of Sec 76 of the companies Act 1956 states that commission paid or agreed to
be paid does not exceed in the case of shares five per cent of the price at which the shares are issued
or the amount or rate authorized by the articles. Hence option (a) is the correct answer. In option (b)
and (c) the percentage is wrong, hence incorrect. In the option (d), it is not the nominal value of the
share on which percentage is to be calculated but on the issue price, implies when the shares are
issued at premium, the premium amount is also taken into account to compute the underwriting
commission. Option (e) pertains to issue of debentures and not shares.
Reason : All legal restriction provided in the Companies Act 1956 is not to allow redemption of
preference shares which may adversely affect the security available to the creditors. The logic
behind the creation of capital redemption reserve when the preference shares are redeemed as
provided by the Companies Act is to maintain the capital intact. Hence Companies Act only ensures
such maintenance and is not the logic behind creation. Similarly another logic is the protection of
interest of the creditors which will be adversely affected when preference shareholders are paid and
assets of the company or profits are used for such purpose.

< TOP >

22. Answer : (b)
Reason :
Called up equity share capital Rs.5,00,000
Less: Calls in arrear Rs. 15,000
Paid-up Capital Rs.4,85,000
Amount of dividend = 12.5 % on Rs.4,85,000 = Rs.60,625
< TOP >
23. Answer : (d)
Reason : Value of the right
=
= = 5/8 × 70 = Rs.43.75
Reason : If the assets and liabilities of the subsidiary company are revalued at the time of
acquisition of shares in the subsidiary company , profit or loss on account of such revaluation is
treated as a capital profits or capital loss . Share of minority shareholders is deducted or added to
the minority interest depending on whether there is a upward or downward revaluation. The Holding
company’s share of revaluation is adjusted in the cost of control. Adjustment for depreciation on
account of revaluation is made in the revenue profits and not hence not adjusted in the pre
acquisition profits , but in the post acquisition profits. Hence option (e) is incorrect.
Reason : If holding company receives dividend out of preacquisition profits of the subsidiary
company, it should be credited to investment account. It should not be debited to investment
account. It should not be debited or credited to profit and loss account. Hence, (a) is true.
Reason :
Particulars
Mitra Mayura Total
Gross liability
10,000 15,000 25,000
Less: Unmarked applications (12,000 – 10,000) in the ratio of
10:15
800 1,200 2,000
9,200 13,800 23,000

Less: Marked applications
4,000 6,000 10,000
Liabilities
5,200 7,800 13,000

Reason : If machinery account is debited with the amount of repairs incurred on the machine, this
is an example of error of principle. If two or more errors are made and the amount compensates in
such a way that the error is not disclosed by trial balance, such errors are compensating errors. The
mistake made by recording the amount incorrectly, either wholly or partly is known as error of
commission. If any transaction is omitted, to be recorded, it is known as error or omission. If any
transaction is partially omitted, to be recorded, it is known as error of partial omission.
Reason :
Mishra Ltd.
Opening balance of sundry creditors Rs. 75,000
Add: Credit purchases Rs.3,00,000
Rs.3,75,000
Less: Closing balance of sundry creditors (Rs. 50,000)
Discount received (Rs. 5,000)
Amount of cash paid to creditors Rs.3,20,000
Reason :
Maple Co.
Salary for the year Rs.2,90,000
Add: Outstanding on March 31, 2002 Rs. 40,000
Rs.3,30,000
Less: Outstanding as on March 31, 2003 Rs. 20,000
Rs.3,10,000
Add: Prepaid as on March 31, 2003 Rs. 15,000
Salary paid during the year Rs.3,25,000
Reason : The starting point in the preparation of proforma operating statement is a projection of
the unit and rupee volume of sales. Only (a) is the correct option. All other options (b), (c), (d) and
(e) are incorrect

Part B : Problems
1. Bank Reconciliation statement as on March 31, 2003

Particulars Amount in Amount in
Rs. Rs.
Debit or Favorable balance as per cash book (bank column) 42,800
Add:
Cheques issued but not presented for payment (Rs.95,000- Rs.92,500) (adj iii) 2,500
Interest and dividends on investments directly credited by bank (adj vi) 12,300 14,800
Less: 57,600
Cheques sent for collection but not yet collected (Rs.1,25,600- Rs.74,600) 51,000
(adj i)
Rent for building paid by the bank as per standing instructions 28,000
(adj ii)
Bank charges levied by the bank (adj iv) 220
Cheque received but not deposited in the bank (adj v) 4,000 83,220
Debit balance or Unfavorable balance as per bank statement 25,620
< TOP >
2. Solvency ratios are calculated to determine the ability of the business to service its indebtness . Ratios which throw
light on the debt servicing ability of the businesses in the long run are known as solvency ratios.
Few of the solvency ratios which throw light on the long term solvency of the company are:
a. Debt – equity Ratio =
Outside funds = Long term debentures = Rs.100,00,000
Shareholders funds = Share capital + Reserves = Rs.200,00,000
Debt Equity ratio = = 0.5 : 1.0
b. Fixed Assets Ratio =
Fixed assets = Total assets less Working capital
= Rs.340,00,000 less Rs.170,00,000 = Rs.170,00,000
Fixed assets Ratio = = 0.57 :1
Short term solvency is determined by liquidity ratios.
c. Current Ratio =
Current assets = stocks + stores + debtors + advances and deposits
= Rs.170,00,000
Current liabilities = Cash credit from banks = Rs.40,00,000.
Current Ratio = = 4.25 : 1
d. Liquidity Ratio =
Liquid assets = Current assets less inventory less stores
= Rs.170,00,000 – Rs.60,00,000 – Rs.28,00,000 = Rs.82,00,000

Liquidity Ratio = = = 2.05 : 1.

< TOP >
3. Consolidated Balance Sheet of Mirinda Ltd & its subsidiary Namrutha Ltd
as on March 31, 2003
Liabilities Assets
Rs. Rs. Rs. Rs.

Share capital:
10% Equity share
of Rs. 1,000 each
fully paid Goodwill (4) 3,37,500
100,00,000
Land and
Building at
cost:
General Reserve Mirinda Ltd
10,00,000 31,00,000
Namrutha
Ltd
15,00,000 46,00,000
Profit & Loss Machinery

Account:

Mirinda Ltd
Less:
Balance as per depreciation
24,00,000
Mirinda Ltd
30,00,000
3,00,000
Add: Profit of
Namrutha Ltd, (2)
2,43,750 26,43,750 27,00,000
Namrutha
Ltd.
15,00,000
+5,00,000)
20,00,000
Creditors: Less:
depreciation
1,75,000
Mirinda Ltd. 15,00,000 18,25,000 45,25,000
Namrutha Ltd.
7,00,000 22,00,000
Stock at
cost:
Mirinda Ltd
22,00,000
Minority interest Namrutha

(4) Ltd
25,68,750 15,00,000 37,00,000

Sundry
Debtors:
Mirinda Ltd
15,50,000
Namrutha
Ltd
9,00,000 24,50,000
Cash at Bank
Mirinda Ltd
8,50,000
Namrutha
Ltd
19,50,000 28,00,000

184,12,500
184,12,500
Working Notes:
(1) Calculation Of Capital Profits:
Rs. Rs.
General Reserve
5,00,000
Profit & Loss Account Balance on 1-4-2002
3,00,000
Profit up to 30th September, 2002
Profit for the year ending 31-03-2003

8,00,000
Less: Preference Dividend (10/100 × 10,00,000)
1,00,000
7,00,000
Half of Rs. 7,00,000
3,50,000
Add: Increase in the value of Machinery:
Book value on 31-03-03 after 10% depreciation
13,50,000
Book value on 1-4-2002
(13,50,000 × 100/90)
15,00,000
Less: 10% depreciation for ½ year
75,000
Increased value
14,25,000
19,25,000 5,00,000
16,50,000
Less: Reduction in the value of land and buildings
(Rs.16,00,000–Rs. 15,00,000)
(1,00,000)
Capital profits
15,50,000
Less: Mirinda Ltd share (3/4)
11,62,500
Minority Interest
3,87,500
(2) Calculation of Revenue Profits
Profits (after deduction of preference dividend) after 30th September,2002

3,50,000
Less: Depreciation @ 10% for 6 months from October 1, 2002 to March
31, 2003 on the increase in the value of machinery (5,00,000 × 10/100 × ½)
25,000

Revenue Profits
3,25,000
Less: Mirinda Ltd ‘s share (3/4)
2,43,750
Minority Interest
81,250
(3) Calculation of Goodwill or Cost of Control amount paid for shares

acquired in Namrutha Ltd.,
45,00,000
Less: Face value of 3,000 shares of Rs.1000 each
30,00,000
Capital profits (wn – 1)
11,62,500 41,62,500
Goodwill
3,37,500
(4) Calculation of minority Interest
10% preference share capital

10,00,000
Add: Dividend for the year
1,00,000
11,00,000
Equity share holders:
1,000 shares of Rs.1000 each

10,00,000
Share of capital profits (wn – 1)
3,87,500
Share of Revenue profits (wn – 2)
81,250 14,68,750
Total Minority Interest
25,68,750
< TOP >
4. i. Calculation of minimum number of New shares:
Amount in
Rs.
Nominal value of preference shares
12,00,000
Profit available for Redemption Rs.6,30,000
Rs.6,80,000- Rs.50,000(loss on sale of investment)
Less minimum balance required Rs.2,10,000

4,20,000
Assuming that profit available for redemption is not needed for paying premium on
redemption then

Minimum proceeds = Rs.12,00,000 – Rs.4,20,000

7,80,000
Minimum proceeds = Nominal value of shares ( Fresh issue is at a premium)
Premium on fresh issue = 10% of Rs. 7,80,000 = Rs. 78,000
Securities premium = 20,000 (given in balance sheet) + 78,000 fresh issue = Rs. 98,000
Premium on redemption = 10% of Rs. 12,00,000 = Rs. 1,20,000
As premium on redemption is more than securities premium, our assumption does not hold good.
Hence equation should be used to calculate minimum fresh issue of shares.
Suppose, nominal value of fresh issue =A
Preference share capital + Premium on redemption = Profit available for Redemption + Securities Premium+ Fresh issue
+ premium of fresh Issue
12,00,000 + 1,20,000 = 4,20,000 + 20,000+ A + A/10
A + A/10 = 8,80,000
A = 8,80,000 × 10/11 = Rs.8,00,000.
Minimum number of shares = 8,00,000/10 = 80,000 shares.
Journal Entries
Amount Amount
Particulars
Debit Rs. Credit Rs.
Bank A/c Dr. 8,80,000
To Equity share Application A/c 8,80,000
(For application money on 80,000 shares @ Rs. 11 per share)
Equity share Application A/c. Dr. 8,80,000
To Equity share Capital A/c. 8,00,000
To Securities Premium A/c. 80,000
(For disposition of application money received)
Preference share capital A/c. Dr. 12,00,000
Premium on Redemption of preference shares A/c. Dr. 1,20,000
To Preference share holders A/c. 13,20,000
(for amount payable on redemption)
Securities Premium a/c. Dr. 1,00,000
Profit and Loss A/c Dr. 20,000
To premium on Redemption of preference shares A/c. 1,20,000
Bank A/c. Dr. 3,00,000
Profit and Loss A/c.(Loss on sale) Dr. 50,000
To Investment A/c. 3,50,000
Profit and Loss A/c. Dr. 4,00,000
To Capital Redemption Reserve A/c. 4,00,000
Preference share holders A/c. Dr. 13,20,000
To Bank A/c. 13,20,000
(For payment to preference shareholders)

< TOP >
5. Trading and Profit and Loss Account of Mrudula Ltd. for the year ended March 31, 2003
Particulars Amount in Rs. Amount in Rs Particulars Amount in Rs Amount in Rs

To Opening stock By Sales
1,86,42,000 11,69,90,000
To Purchases Less: Returns
7,18,21,000
12,68,000 11,57,22,000
Less: Returns By Closing Stock
9,85,000 7,08,36,000
1,24,84,000
To Wages
1,09,74,000
Add: Outstanding
1,89,000 1,11,63,000
To Sundry Manufacturing
Expenses
19,24,000
To Carriage Inwards
4,91,000
To Gross profit c/d
2,51,50,000

12,82,06,000
12,82,06,000
By Gross Profit b/d
To Interest on Bank loan 4,50,000
2,51,50,000
Add: Out standing
4,50,000 9,00,000
To Office salaries and

Expenses
17,87,000
Add: Outstanding
1,20,000 19,07,000
To Auditors Fees
8,60,000
To Directors Remuneration
26,25,000
To Provision for Depreciation

Plant and machinery
Furniture
19,26,000
50,000
Loose Tools
2,50,000 22,26,000

To Preliminary expenses
2,00,000
To Income Tax
82,16,000
To Net Profit c/d
82,16,000
2,51,50,000
2,51,50,000
To Dividends (15% of Rs
400,00,000)
By Balance b/d 38,64,000
60,00,000
To General Reserve (5% of Rs

82,16,000)
By Net Profit
b/d 82,16,000
4,10,800
To Balance c/d.
56,69,200
1,20,80,000
1,20,80,000
Balance sheet of Mrudula Ltd., as at 31st March, 2003

Amount in
Liabilities Amount in Rs. Assets Amount in Rs.
Rs.
Share Capital
Fixed Assets :
Auth issued and subscribed paid-

up
40,00,000 Eq. sh. of Rs. 10 each
fully paid-up
4,00,00,000 Free hold Premises (at cost)

1,64,21,000
Reserves and surplus
Plant and Machinery (at cost) 1,28,40,000
General Reserve 4,10,800 Less: Provision for depreciation

19,26,000 1,09,14,000
Profit & Loss A/c.
56,69,200 Furniture (at cost)

5,00,000
Secured Loans:
Less: Provision for depreciation 50,000 4,50,000

18% Bank Loan
50,00,000 Investments
NIL
Current Assets, Loans and

Unsecured Loan NIL Advances

Current Liabilities and provisions
A. Current Assets
A current Liabilities:
Loose tools (as valued)

10,00,000
Creditors
62,22,000 Stock-in-trade
1,24,84,000
Manufacturing wages
1,89,000
Office Salaries
1,20,000 Debtors
1,05,40,000
Interest on Bank Loan
4,50,000 Cash at Bank

96,86,000
B. Provisions:
Cash In Hand
19,53,000
Provision for Taxation
82,16,000 B. Loans and Advances

Proposed dividend 60,00,000

Advance payment of Income –
Tax
84,29,000
Miscellaneous Expenditure
Preliminary Expenses
(Rs.6,00,000 – 2,00,000)
4,00,000
7,22,77,000
7,22,77,000
< TOP >
Part C: Applied Theory
6. The basic feature of perpetual system is maintenance of a “stock Ledger” to have record of goods on continuous
basis. Stock ledger contains information about flow of each and every item of goods in which the business deals. Under
perpetual system cost of goods issued is directly determined and stock of goods is taken as residual figure.
The basic feature of periodic system is physical stock taking. Physical count of stock is done to determine the number of
units possessed by the business enterprises. After determination of quantity of goods owned by the business, its pricing is
done to value the inventory. This system is simple and less expensive than the perpetual system.
Differences between the two systems
Periodic system Perpetual system
It is based on physical verification It is based on book records.
It provides periodic information about stock and It provides continues information about stock cost of
cost of sales. sales.
It directly determines stock and takes cost of goods It directly determines cost of goods sold and takes stock
sold as residual figure. as balancing figure.
Cost of sales includes loss of goods as goods not in Closing stock includes loss of goods as all unsold
stock are assumed to be sold. goods are assumed to be in stock.
It is simple and less expensive method. It is costlier method.
Inventory control is not possible Inventory control can be exercised under this system.
It requires closure of business for counting of stock Stock can be determined without affecting the operation
of business.

< TOP >
7. The unidentifiable intangible asset is goodwill.

The need for evaluating goodwill may arise the following cases:
a. When the business or when the company is to be sold to another company or when the company is to be
amalgamated with another company;
b. When, stock exchange quotations not being available, shares have to be valued for taxation purposes, gift tax,
etc.,
c. When a large block of shares, so as to enable the holder to exercise control over the company concerned, has
to be bought or sold; and
d. When the company has previously written off goodwill and wants to write it back.
In valuation, of goodwill consideration of the following factors will have a bearing:
a. Nature of the industry, its history and the risks to which it is subject to.
b. Prospects of the industry in the future.
c. The company’s history-its past performance and its record of past profits and dividends.
d. The basis of valuation of assets of the company and their value.
e. The ratio of liabilities to capital.
f. The nature of management and the chance for its continuation.
< TOP >
< TOP OF THE DOCUMENT >

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Suggested Answers with Examiner's Feedback

http://www.icfai.org/suggested/MB131-1003.htm (1 of 31)12/22/2003 5:32:39 PM

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Opening balance of sundry creditors Rs. 75,000

Closing balance of sundry creditors Rs. 50,000

Discount received Rs. 5,000

Cash paid to creditors by Mishra Ltd. during the month was

Salary outstanding on March 31, 2002 Rs. 40,000

Salary outstanding on March 31, 2003 Rs. 20,000

Salary paid in advance on March 31, 2003 Rs. 15,000

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Part B : Problems (50 Points)

Particulars Amount in Rs.

Advances and deposits 12,00,000

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solvency position of the company.

Mirinda Ltd. Namrutha Namrutha

-- 10,00,000 27,00,000 13,50,000

Equity shares of Rs.1,000 each 100,00,000 40,00,000

10,00,000 5,00,000 22,00,000 15,00,000

4,00,000 3,00,000 Sundry Debtors

20,00,000 8,00,000 8,50,000 19,50,000

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The companies Trial Balance as on March 31, 2003 stood as follows:

Stock (as on April 01, 2002) 1,86,42,000

Purchase returns and Sales returns 12,68,000 9,85,000

Sundry manufacturing expenses 19,24,000

Purchases and Sales 7,18,21,000 11,69,90,000

Manufacturing Wages 1,09,74,000

Carriage Inward 4,91,000

18% Bank loan(secured) (availed on 01.04.01) 50,00,000

Office salaries and expenses 17,87,000

Directors remuneration 26,25,000

Freehold Premises 1,64,21,000

Interest on Bank loan 4,50,000

Auditors fees 8,60,000

Preliminary expenses 6,00,000

Plant and Machinery 1,28,40,000

Debtors and Creditors 1,05,40,000 62,22,000

Cash at Bank 96,86,000

Loose tools 12,50,000

Cash in hand 19,53,000

Advance payment of Tax 84,29,000

Profit and Loss Account of April 01, 2002 38,64,000

Share capital 4,00,00,000

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v. Write-off one-third of preliminary expenses

Part C : Applied Theory (20 Points)

END OF QUESTION PAPER

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1. Answer : (d) < TOP >

Reason : Wrong recording or posting of transactions is referred to as error of commission . These

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5. Answer : (b) < TOP >

Reason : This requires the preparation of BRS

Balance as per pass book as on March 31, 2003 (favorable) 10,000

Add : Cheques deposited but not yet cleared 20,000

Balance as per cash book as on March 31, 2003 (debit balance or

6. Answer : (b) < TOP >

Equity Share Capital A/c Dr. 2,000