Financial Accounting Notes

NEW HORIZON COLLEGE
MARATHALLI, BANGALORE
(Affiliated to Bangalore University)
A Recipient of Prestigious Rajyotsava State Award 2012 conferred by the Government of Karnataka
II SEM BBM STUDY MATERIAL
FINANCIAL ACCOUNTING
Prepared By
Mrs. Prasanna Prakash
Mrs. Sreeja Nair
Ring Road, Bellandur Post, Near Marathalli, Bangalore - 560 103

Tel : +91-80-6629 7777 Fax : +91-80-2844 0770
E-mail : principalnhc.edu@gmail.com
Web : www.newhorizonindia.edu
1
INDEX
SR. TITLE PAGE NO.

NO.
1 Departmental Accounting 4 - 12
2. Insurance claims 13-18

3. Hire purchase system 19 - 31
4. Royalty 32 – 37
5 Acquisition of Business of Non- Corporate 38 – 44
Entities
6. Books for reference 45
2
3
CHAPTER -1 DEPARTMENTAL ACCOUNTING
INTRODUCTION:
A Departmental undertaking refers to large organization or a concern
which has a number of departments, each of which is specialized in a particular
line of activity or a particular product or service.
ADVANTAGES OF DEPARTMENTAL ACCOUNTS:
The following are the major advantages of departmental accounts:
 It enables the management to know the specific results of each department, thereby
helping it in various aspects of decision making.
 The profitability of each department may help the management for taking
decisions whether to drop a department or to add a new one.
 The growth potentials of a department can be evaluated by having comparison
with the other departments.
 The users of accounting information like shareholders, investors, creditors etc can
be provided more detailed information.
 It helps the management to determine the justification of proper use of capital
invested in each department.
 It helps to have comparison of various expenses of each department with previous
period or with other department of the same concern.
 The information provided by departmental accounts may be helpful to the
management for future intelligent planning and control.
 The departmental managers and staff can be suitably rewarded on the basis of the
departmental results.
APPORTIONMENT OF REVENUE ITEMS:
ITEMS OF DIRECT BASIS OF APPORTIONMENT

EXPENDITURE
Freight & carriage inwards for Ratio of net purchases

purchases.
Import duty, octroi etc on Ratio of net purchases
purchases
Power charges Ratio of floor space occupied by
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each department
Water charges Ratio of floor space occupied by
each department
ITEMS OF INCOME BASIS OF APPORTIONMENT

Discount received Ratio of net purchases
Commission earned on sales Ratio of net sales
Reserves for discount on creditors Ratio of net purchases.
ITEMS OF INDIRECT BASIS OF APPORTIONMENT
EXPENDITURE
Discount allowed Net sales
Selling commission Net sales
Sales tax Net sales
Carriage outwards Net sales
Salesmen salary & commission Net sales
After sales service Net sales
Advertisement Net sales
Bad debts Net sales
Reserve for bad debts Net sales
Rent and rates Ratio of floor space occupied by
each department
Repairs and insurance Ratio of floor space occupied by
each department
Air conditioning expenses Ratio of floor space occupied by
each department
Electricity bills (lighting) Ratio of no. of light points in each
department
Insurance premium Ratio of value of subject matter
insured
Workman‘s compensation Ratio of wages to workers of each
insurance department
Canteen expenses Ratio of no. of workers of each
department
Recreation expenses Ratio of no. of workers of each
department
Labour welfare expenses Ratio of no. of workers of each
department
Note: If the problem specifies any particular basis for apportionment, the same
must be adopted and not the basis stated in the table above.
On preparation of departmental profit & loss A/c, the net profit or net loss of
each department can be ascertained . this profit or loss must be transferred to the
general profit and loss A/c.
5
NOTE: Common expenses and income which are not apportionable are included in
General profit and loss A/c.
 Common expenses which are not apportionable among departments include:

 Interest on capital
 Interest on debentures
 General managers salary
 Audit fees
 Directors fees
 Bank charges
 Legal charges
 Office expenses which are incurred by the administration.
Common incomes which are not apportion able among departments include:
 Dividend received
 Transfer fees
 Interest on bank deposit.
Q.1 From the following particulars prepares department trading and profit and loss
A/c and balance sheet.
Particulars Dept A Dept B

Stock on 1-04-2010 17400 14700
Purchases 35000 30000
Sales 60000 40000
Wages 8200 2700
Rent ,tax & insurance 9390 -
Sundry expenses 3600 -
Salaries 3000 -
Lighting & heating 2100 -
Discount allowed 2220 -
Discount received 650 -
Advertising 3680 -
Carriage inwards 2340 -
Furniture 3000 -
Plant & machinery 21000 -
Sundry debtors 6060 -
Capital 47660 -
Drawings 4500 -
Cash 10070 -
6
Additional information:
 Internal transfer of goods from dept A at cost price of Rs420

 Rent , taxes and insurance , sundry expenses, lighting & heating, salaries &
carriage inward to be distributed in the ratio of 2/3 and 1/3 to A & B.
 Advertising to be apportioned equally.
 Discounts allowed & received to be apportioned as per sales & purchases (ignoring
transfers).
 Depreciation at 10% p.a on furniture and plant and machinery to be charged ¾ to
A dept and ¼ to B dept.
 Services rendered by B dept to A dept included in wages of B dept Rs 500.
Stock on 31-3-2011 was: Dept A - 16740 Dept B - 12050.
Solutions
:
Departmental trading A/c for the year ended 31-03-2011
Particulars A B Total Particulars A B Total
To opening stock 17400 14700 32100 By sales 60000 40000 100000

To purchases 35000 30000 65000 By closing stock 16740 12050 28790
To wages 8700 2200 10900 By transfers to B 420 - 420
To transfer from A - 420 420
To carriage 1560 780 2340

inward(2:3)
To gross profit c/d 14500 3950 18450
77160 52050 129210 77160 52050 129210
7
Profit and loss A/c for the year ended 31-03-2011

To rent, tax & insurance 6260 3130 9390 By gross profit 14500 3950 18450
b/d
To sundry expenses 2400 1200 3600 By discount 350 300 650
recd
To salaries 2000 1000 3000
To lighting and heating 1400 700 2100
To discount allowed(sales 1332 888 2220
ratio)
To advertising 1840 1840 3680
To depreciation on furniture 225 75 300 By net loss c/d 2182 5108 7290
To plant and machinery 1575 525 2100
17032 9358 26390 17032 9358 26390
Balancesheet as on 31-03-2011
Liabilities Amt Amt Assets Amt Amt
Capital 47660 Furniture &fittings 3000
Less drawings (4500) Less depreciation 10% 300 2700
43160
Less: net loss (7290) 35870 Plant and machinery 21000
Sundry creditors 30650 Less depreciation 2100 18900
Sundry debtors 6060
Cash in hand 10070
Closing stock 28790
66520 66520
INTER - DEPARTMENTAL TRANSFERS:
Inter departmental transfer refers to selling of goods by one department to another

department.
The accounting treatment for this depends on whether the transfer is
made at cost price or selling price to the transferring department.
 When inter- departmental transfers are made at cost price to the transferring
department then in such a case, the transfer must be treated as:
(a) purchases for the transferee dept and hence must be debited to the concerned
departments trading a/c
(b) sales for the transferring dept, and hence must be credited to the concerned
departments trading a/c.
NOTE: there is no other treatment required even though the goods transferred by
one to another is not fully utilized or sold.
 When inter- departmental transfers are made at selling price to the

transferring department then in such a case, the transfer must be treated as:
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(a) purchases for the transferee dept and hence must be debited to the concerned
departments trading a/c
(b) sales for the transferring dept, and hence must be credited to the
concerned departments trading a/c.
NOTE: A special adjustment is required to be made when the transfer made by

one department to another is not fully sold. When the goods transferred by one
department to another is in the closing stock of the transferee department, the
amount of profits of transferring department included in such stock must be
considered as unrealized stock.
A stock reserve must be created for unrealized profits in the closing

stock of transferee department by debiting General Profit and Loss A/c.
The amount of stock reserve so created must be deducted from closing stock under
the assets side of the balancesheet.
Q2. X ltd has 2 department A & B. From the following particulars prepare the
department trading A/c and consolidated trading A/c separately for the year ending
31-03-2011.
Particulars A B
Opening stock 20000 12000
Purchases 92000 68000
Sales 140000 112000
Wages 12000 8000
Carriage 2000 2000
Closing stock:
Purchased goods 4500 6000
Finished goods 24000 14000
Purchased goods
transferred
By B to A 10000
By A to B - 8000
Finished goods
transferred
By B to A - 35000
By A to B 40000 -
Return of finished goods
By A to B - 10000
By B to A 7000
9
You are informed that purchase goods have been transferred mutually at their
respective departmental purchase cost and finished goods at departmental market
price and that 20% of the finished stock (closing) at each department represented,
finished goods received from the other department. Calculate also rate of gross
profit and unrealized profit of A & B department of finished stock (closing).
Departmental trading A/c for the year ending 31-03-2011

To opening stock 20000 12000 32000 By sales 140000 112000 252000
To purchases 92000 68000 160000 By transfer of 8000 10000 18000
purchased
goods
To carriage 2000 2000 4000 By transfer of 40000 35000 75000
finished
goods
To wages 12000 8000 20000 By return of 7000 10000 17000
finished
goods
To transfer of 10000 8000 18000 By closing 4500 6000 10500
purchase goods stock of
purchased
goods
To transfer of 35000 40000 75000 By closing 24000 14000 38000
finished goods stock of
finished
goods
To return of 10000 7000 17000
finished goods
To gross profit c/d 42500 42000 84500
223500 187000 410500 223500 187000 410500
Departmental general Profit and Loss A/c for the year ending 31-03-2011
Particulars Amt Amt Particulars Amt Amt

To stock By gross profit
reserve
Dept A 875 Dept A 42500
Dept B 1800 2675 Dept B 42000 84500
To net profit
Dept A 41625
Dept B 40200 81825
84500 84500
10
Working note:
Stock reserve for A dept = gross profit X 25% of FG of B

________________________________________
Sale + transfer of finished goods to B - returns of FG to B
= 42500
____________ X 25% of 14000
140000 +40000-10000
= 875
Stock reserve for B dept = 42000

____________ X 25% of 24000
112000 + 350000-7000
= 1800
NOTE : 20% on sales = 25% on cost.
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CHAPTER 2: INSURANCE CLAIMS
Introduction
The stock kept in every business is subject to risk by loss of fire. To protect itself against
such loss the business takes up a fire insurance policy by paying premium. The chapter aims
at computing the loss of stock by fire(based on closing stock on the date of fire), which can
thus be claimed as compensation from the insurance company. The following steps may be
followed to start with:
1) % of Gross profit on sales- this can be computed from the gross profit and sales figure
of the trading account for the year prior to the year of fire GP * 100
Sales
2) Memorandum trading account- this trading account must be prepared from the
beginning of the year of fire up to the date of fire. The GP must be calculated based
on the same % as above and the balancing figure of this account will be the closing
stock.
3) Calculation of claim- The final claim to be lodged with the insurance company must
be calculated on the basis of the closing stock in the memorandum trading account as
Claim = Closing stock- Salvage+ fire fighting expenses.
Note: Salvage refers to goods saved from fire,
Fire fighting expenses are incurred to save goods from fire.
Example 1: (simple problem)
The premises of a trader caught fire on 01.07.2012 and the stock was damaged. The
following information is available:
Stock on 01.01.2011 Rs. 95000 Purchase return Rs.15000
Stock on 31.12.2011 Rs.150000 Sales return Rs.30000
Purchases for 2011 Rs.421000 wages Rs.65000
Sales for 2011 Rs.550000
Purchases from 01.01.2012 to 01.07.2012 is Rs.350000
Sales from 01.01.2012 to 01.07.2012 is Rs.491000
Additional information:
1) Purchases of 2012 includes Rs10000 worth of goods distributed as free samples for
advertisement and promotion
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2) In 2012, a clerk misappropriated unrecorded cash sales Rs.4000
3)Stock worth Rs.18000 could be salvaged; fire fighting expenses incurred to save the goods
was Rs.1000.
Prepare a statement of claim to be submitted to the insurance co.
Solution: Trading account for the year ended 31.12.2011
Particulars Rs. Particulars Rs.

To, opening stock 95000 By,Sales 550000
To, purchases 421000 -returns 30000 520000
-Returns 15000 406000
To wages 65000 By, closing stock 150000
To, Gross profit 104000
670000 670000
Workings:
% gross profit on sales = 104000 *100 =20%
520000
Memorandum Trading Account from 01.01.2012 to 01.07.2012
Particulars Rs Particulars Rs
To, opening stock 150000 By sales 491000
To purchases 350000 +unrecorded cash sale
-Goods given as 4000 495000
free sample 10000
By, closing stock 94000
To gross profit (bal.fig)
(495000* 20%) 99000
589000 589000
Statement of Claim
Value of closing stock on date of fire Rs.94000

-Salvage Rs.18000
Rs.76000
+ Fire fighting expenses Rs. 1000
Total claim Rs.75000.
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Average Clause
It refers to a clause in the insurance agreement to discourage the under insurance of stock or
any other asset. This clause is applicable when the value of insurance policy is less than the
value of clasing stock on the date of fire.The claim can be computed as:
Claim= Stock destroyed by fire* Policy value

Stock on date of fire.
EXAMPLE 2: (problem with average clause)
A fire occurred in the premises of M/s unlucky on 15.04.2012 from where goods worth
Rs.30000 only could be saved. Goods worth Rs.26000 were also saved in damaged condition.
From the following information calculate the claim to be submitted to the insurance company
on a policy of Rs.342000.
Stock on 01.01.2011 Rs.288000

Purchases for 2011 Rs.1876000
Stock on 31.12.2011 Rs.484000
Sales for 2011 Rs.2320000
Purchases from 01.01.2012 to 14.04.2012 Rs.364000
Sales from 01.2012 to 14.04.2012 Rs.480000
Carriage inward during 2011 Rs.200000
Carriage inward during 2012 Rs.36000
Carriage outward during 2012 Rs.65000
A fire also broke out on 20th December 2011 and destroyed stock worth Rs.100000.The firm
had a practice of valuing stock at cost less than 10%.However the policy was changed and the
stock on 31.12.2011 was valued at 10% above cost.
Solution:
Trading Account for the year ended 31.12.2011
Particulars Rs. Particulars Rs.

To opening stock 3,20,000 By Sales 23,20,000
(288000 x 100 )
90 By closing stock 4,40,000
To purchases 18,76,000 (484000 x 100 )
To carriage inward 2,00,000 110
To Gross profit 4,64,000
(bal.fig) By stock destroyed by 1,00,000
fire
28,60,000 28,60,000
14
Workings: % Gross profit on sales = 464000 x 100 =20%
2320000
To opening stock 440000 By Sales 480000
To purchases 364000 By Closing stock 456000
To carriage inward 36000 (bal.fig)
To Gross profit
(480000 x 20 %) 96000
936000 936000
Stock destroyed by fire is ----

Closing stock Rs.456000
- Salvage of goods
In good condition Rs.30000
In damaged condition Rs.26000
Rs.400000
Amount of claim = Policy value x Stock destroyed by fire
Stock on date of fire
= 342000 x 400000 =RS.300000
456000
Abnormal Line of Goods
Goods which cannot be sold at the normal price or which has a slow rate of turnover (due to
obsolescence or damage) are called as abnormal goods. It is important to note that the rate of
gross profit on sales is calculated only on the basis of normal goods. Hence a separate column
is prepared in the trading and memorandum trading account for the abnormal line of goods.
EXAMPLE:3 (problem with abnormal line of goods)
On 30th September 2012,the stock of Armstrong Ltd.was lost in fire. Calculate amount of
claim from the following available information.
Stock at cost on 01.04.2011 Rs.37500
Stock at cost on 31.03.2012 Rs.52000
Purchases less returns for year ended 31.03.2012 Rs.253750
15
Sales less returns for year ended 31.03.2012 Rs.315000
Purchases less returns upto 30.09.2012 Rs.145000
Sales less returns upto 30.09.2012 Rs.184050
In valuing the stock on 31.03.2012 due to obsolescence, 50% of the stock originally costing
Rs.6000 had been written off. In May 2012, 3/4 th of the stock had been sold at 90% of the
original cost and it is expected that the balance of the abnormal goods will also realize the
same price. Subject to the above the gross profit remained same throughout. Stock salvaged
was Rs.7200.
Solution:
Trading Account for the year ended 31.03.2012
To opening stock 37500 By Sales 315000
To purchases 253750 By closing stock 52000
To gross profit 78750 +Written off 3000 55000
370000 370000
Workings:
% gross profit on sales = 78750 x 100 = 25%

315000
Particulars Normal Abnorma Total Particulars Normal Abnormal Total

l
To opening 49000 6000 55000 By Sales 180000 4050 184050
stock (6000x ¾
To 145000 --- 145000 x90 %)
purchases By gross
loss ---- 600 600
By gross 45000 --- 45000 By closing
profit stock 59000 1350 60350
(180000 x (6000 x ¼ x
25%) 90%)
239000 6000 245000 239000 6000 245000
Note: The gross loss on abnormal stock has come as balancing figure.
Calculation of amount of claim:

Closing stock on date of fire Rs.60350
Less: Salvage Rs. 7200
Amount of claim Rs. 53150
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Important points for the chapter
1. Trading account for the year prior to the year of fire need not be prepared if the %
gross profit on sales is already provided in the question.
2. Average clause can be applied only when the insurance policy value is given in the
question.
3. Average clause is not applicable if there is no under insurance (even if policy value is
given in the question).
4. Sale of abnormal goods is separate from sale of normal goods, so the % gross profit
on sales is not applicable to the sale of abnormal goods.
5. Stock destroyed by fire (for the purpose of average clause) is the stock on the date of
fire – stock saved from fire ie.salvage.
6. If the gross profits % of several previous years are provided in the question then the
average of such %gross profits must be calculated to be applied in the memorandum
trading account.
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CHAPTER 3:
HIRE PURCHASE SYSTEM
MEANING
Hire Purchase System refers to the system wherein, the seller of goods delivers the
goods to the buyer without transferring the ownership of goods till the last
installment is paid. Under this system the ownership will be transferred to the buyer on
payment of the last installment. If the buyer makes any default the vendor has the right
to repossess the goods and the installments already paid will be treated as the Hire
Charges. The transaction may result in purchasing of goods by the buyer or in hiring
the goods. Hence the system is called Hire Purchase System.
Features or Characteristics of Hire Purchase System
1. It is an agreement between the Hire Vendor and the Hire Purchaser.

2. Payment will be made by the hire purchaser in installments.
3. The possession of the goods passes from the seller to the buyer on signing the
agreement.
4. Ownership of the goods will be transferred to the buyer on payment of the last
installment.
5. Hire Vendor has the right to repossess the goods if there is any default in payment
of any instalments.
6. The buyer has an option to return the goods to the seller and can terminate the
agreement.
Instalment System
Instalment Payment system is a system where the buyer gets the ownership as well as
possession of the goods at the time of signing the contract and the buyer can make the
payment in instalments.
Features of Installment System
1. There will be an outright sale of goods.

2. The possession as well as ownership is passed on to the buyer right at the time of
signing the contract.
3. The buyer can make the payments by installments.
4. The seller cannot repossess the goods in case of default in payment.
5. The buyer cannot exercise the option of returning the goods and terminate the
contract
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Difference between Hire Purchase System & Installment System
Basis of Difference Hire Purchase System Installment System

Nature of contract Contract of Hiring Contract of Sale
Ownership Transferred after payment of all Transferred immediately on
installments. signing the contract.
Repossession of Hire vendor has the right to repossess Seller cannot repossess the
goods the goods in case of default of goods in case of default of
payment payment.
Return of Goods Buyer can exercise the option of Buyer cannot exercise the option
return of goods of return of goods.
Risk of loss or Risk is on the seller Risk is on the buyer
damage to goods
Important terms
Hire Purchaser ---- the person who obtains the possession of goods for use with an option
to either purchase it or return after use.
Hire Vendor ---- Person who owns the goods, and who parts with the possession of these
goods to the buyer with an option of Hire or Purchase.
Hire Purchase Price -----The total sum payable by the Hire Purchaser to the Hire Vendor
as per the agreement. It includes the Principal and interest.
Net Hire Purchase Price ---- Hire Purchase price less delivery charges, registration charges,
insurance if any included in the price.
Cash Price ---- It is the price of the goods at which the hire purchaser can purchase the
goods for cash. It does not include interest.
Down Payment ---- Amount which is paid at the time of taking delivery of goods.
Difference between Hire Purchase & Sale
Hire Purchase Sale

Governed by the Hire Purchase Act ,1972 Governed by the Sale of Goods Act, 1930
Ownership of goods is transferred to the Ownership of goods is transferred to the
buyer on payment of all installments buyer immediately.
Payment is made in Installments Makes payment in Lumpusum
Hire purchaser pays for the price of goods Buyer pays only for the price of goods.
and also for interest
On non- payment of any installment, the On non- payment of any installment , the
seller can repossess the goods seller cannot take back the goods.
Buyer or Seller can terminate the contract at Neither the seller nor the buyer can terminate
any point of time. the contract.
Rebate: The hirer can claim rebate from the owner or hire vendor in case he decides to remit
the balance of the purchase price in lumpsum without continuing the hire purchase
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agreement till the last installment. In case of early remittance the hire purchaser gets rebate.
It is calculated as
Rebate = 2/3 x Hire Charges x Number of Installments due

Total Number of Installments
Example:
Calculate the amount of rebate and the balance amount to be paid on settlement
Cash Price Rs.30,000 ; Hire Purchase Price Rs.36,000 ; Number of Installments 36.
The Hire Purchaser has already paid 24 Installments. He wants to settle the remaining
balance and terminate the agreement.
Rebate = 2/3 x Hire Charges x No.of Installments due

Total No. of Installments
Hire Charges = Hire Purchase Price --- Cash Price = 36,000 – 30,000 = 6,000
Rebate = 6,000 x2/3 x 12/36 = Rs.1,333
Calculation of amount to be paid on settlement
Total No. of Installments =36; Hire Purchase Price =36,000;Installment amount

=36,000/36 =1,000; Balance Number of Installments =36- 24 =12
Balance amount payable = 12 x1,000 =12,000 Less Rebate 1,333 = 10,667
ACCOUNTING TREATEMENT
Asset Accrual Method
Under this method asset is recorded at the cash price actually paid. As the Hire Purchaser
gets the ownership only after the payment of last installment no Journal entry is passed when
the asset is purchased . Entries are passed for Down Payment and as and when the
installment becomes due.
JOURNAL ENTRIES IN THE BOOKS OF HIRE PURCHASER
Date Particulars LF Debit Credit

1. When Asset is Purchased
No Journal Entry is required
2. When the Down Payment is made
Asset A/c
Dr
To Bank A/c
3. When the Installment becomes due
Asset A/c
Dr
Interest A/c
Dr
To Hire Vendor A/c
20
4. When the Installment is paid
Hire Vendor A/c
Dr
To Bank A/c
5. When Depreciation is charged
Depreciation A/c
Dr
To Asset A/c
6. When interest & depreciation accounts are
closed by transfer to P/L A/c
P/L A/c
Dr
To Interest A/c
To Depreciation A/c
JOURNAL ENTRIES IN THE BOOKS OF HIRE VENDOR
Date Particulars LF Debit Credit

1. When the item is sold on Hire Purchase
basis
Hire Purchaser A/c
Dr
To Sales A/c
2. When the Down Payment is received
Bank A/c
Dr
To Hire Purchaser‘s A/c
3. When the Interest becomes Due
Hire Purchaser‘s A/c
Dr
To Interest A/c
4. When the Installment is received
Bank A/c
Dr
To Hire Purchaser‘s A/c
5. When the Interest account is closed
Interest A/c
Dr
To P/L A/c
UNDER ASSET ACCRUAL METHOD STEPS IN HIRE PURCHASE SYSTEM
I. Calculation of Interest
II. Depreciation
III. Calculation of Cash Price in each Installment
Ascertainment of the amount of Interest
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1. When Rate of Interest; Total Cash Price & Installments are Given
Cash Price xxx
Less Down Payment xxx
Add Interest for the first year xxx
Less Ist Installment paid xxx
Add Interest for the second year xxx
nd
Less 2 Installment paid xxx
Add interest for the last year xxx
Less last installment paid xxx
Nil
Example :
On Ist January 2010 , Alpha Ltd bought a machine from HMT Ltd. on Hire purchase
System. The Cash Price was Rs.26,350 and the payment was to be made as follows:
Rs.10,000 on signing of the agreement and the balance in 3 yearly installment of Rs.6,000
each. 5% interest is charged by the vendor. Calculate the interest for each year.
Solution :
Cash Price , Rate of Interest & Installments are given
Calculation of Amount of Interest for each year

Cash Price 26,350
Less Down Payment 10,000
Balance Due 16,350
Add interest for the year 2010 (16,350 x5/100) 818
17,168
Less I st installment paid 6,000
Balance Due 11,168
Add 5% interest for the year 2011 (11168x5/100) 558
11,726
Less II Installment Paid 6,000
Balance Due 5,726
Add interest for the year 2012 (6,000- 5,726) 274
6,000
Less III Installment paid 6,000
Nil
Note: Installments given in the question can be ‘inclusive of interest’ or ‘Exclusive of

interest’.
22
If the total payment (Down Payment + Installments) is equal to Cash Price interest is
not included in the installment (ie. Exclusive of interest). If the total payment is more
than the cash price interest is included in the installment. (ie. Inclusive of interest)
2.When Cash Price & Installments are given, but Rate of interest is not given:
Steps
1. Calculate Total interest
Total Interest = Hire Purchase Price -- Cash Price
2. Calculate the amount of Hire Purchase Price outstanding at the beginning of
each year after substracting the Down Payment.
3. Find out the ratio of outstanding amounts calculated in step II
4. Apply this ratio to the total interest and calculate the interest on each
installment.
Example:
Calculate the amount of interest and principal included in each installment:
Cash Price of the Machine Rs.15,000 ; Rs.1,500 being paid on delivery and the balance in
5 annual installments of Rs.3,000 each payable annually.
Solution: Cash Price & Installments are given but the rate of interest is not given:
First Total Interest is to be calculated
Total interest = Hire Purchase Price – Cash Price
Hire Purchase Price = Down Payment + Total installment Amount
= 1,500 + ( 5 x 3,000)= 1,500+15,000 =16,500
Total Interest =16,500—15,000 =1,500
Second Step: Calculation of amount due at the beginning of each year:
Amount due at the beginning of Ist year (16,500 – 1,500) =15,000
Amount due at the beginning of II nd year (15,000 – 3,000) =12,000
Amount due at the beginning of 3rd year (12,000- 3,000 ) =9,000
Amount due at the beginning of 4th year (9,000 – 3,000) =6,000
Amount due at the beginning of 5th year ( 6,000- 3000) =3,000
Third Step ; Calculation of Ratio of Amount Due
15,000:12,000:9,000:6,000:3,000 =5:4:3:2:1
Fourth Step :Calculation of interest for each year:
1st year =1,500x5/15 =500
23
2nd year =1,500x4/15 = 400
3rd year =1,500 x3/15=300
4th year = 1,500 x 2/15 =200
5th year = 1,500 x1/15 =100
Calculation of Principal for each year
Principal =Installment – Interest
1st year 3,000- 500 = 2,500
2nd year 3,000- 400 =2,600
rd
3 year 3,000 - 300 =2,700
4th year 3,000 – 200 = 2,800
5th year 3,000 – 100 =2,900
II. Ascertainment of Cash Price

Some times the Cash Price will not be given in the question . To find out the cash price
two methods are there.
( i.) Without Annuity Table & (ii) With Annuity Table
a. When the installments are constant
b. When the installments are varing
Ascertainment of Cash Price without the help of Annuity Table
Under this method interest is calculated starting with the last installment
Interest= Total amount due at the time of Installment x Rate of interest
100 + rate of interest
Example : Calculate the cash price of an asset from the following:
Rs.3,000 paid at the time of agreement ; Rs.21,600 paid at the time of I year ; Rs.20,700
paid at the time of II year ; Rs.19,800 paid at the time of III year; Rs.18,900 paid at the
time of IV year ; Rate of Interest is 5% per annum ; Rate of depreciation 25% p.a.
Here the Installments are given. Rate of Interest is given. Annuity value is not given. So
to find out the Cash Price follow the first method ie. Without annuity table
Calculation of Cash Price of an Asset
Installment Closing Installment Total Interest Opening
Numbers balance Amount 5/105 Balance/
Amount Principal
IV Nil 18,900 18,900 18,900x5/105=900 18,000
III 18,000 19,800 37,800 37,800x5/105=1800 36,000
II 36,000 20,700 56,700 56,700x5/105=2700 54,000
I 54,000 21,600 75,600 75,600x5/105=3600 72,000
Add Down Payment 3,000
Cash Price 75,000
24
Note: If yearly installments are given take the same percentage of interest. When the
installments are given half yearly , rate of interest is to be divided by 2. In case of
Quarterly installments, rate of interest is to be divided by 4. For example Rate of
interest is 10% and 4 annual installments are given . in that case the rate of interest
will remain the same as 10%
( Interest =Total Amount x 10/110). Assume that the rate of interest is 10% and 4
half yearly installments are given. The effective rate of interest will be Half of 10% ie.
5% ( Interest = Total amount x 5/105). In case of Quarterly installments if the
rate of interest is given as 20%, then the effective rate of interest will be one-fourth of
20% ie.5% ( Interest = Total amount x 5/105)
Calculation of Cash Price with the help of Annuity Table

If the annuity value is given in the question Second method is to be followed
Cash Price of Installment = Annuity value x Installment
Cash Price = Cash Price of Installment + Down Payment
Example:
Calculate the Cash Price of the Machine.
Down Payment Rs.10,000; 3 Installments of Rs.10,000 each annually. Interest was
charged at 5% p.a. Given the present value of an annuity of Re.1 per annum at 5% Rs.2.7232
Cash Price of Installment =Annuity Value x Installment

= 2.7232 x 10,000 = Rs.27,232
Cash Price of the machine = Down Payment + Cash Price of Installment
= 10,000 +27,232 =Rs.37,232
Example:
X Ltd purchased a machine on hire purchase system. The payment is made as follows:
Down payment Rs.23,250 ; I Installment Rs.35,000 ; II Installment Rs.40,000 ;
III Installment Rs.20,000. The payments are made at the end of 1st year, 2nd year and 3rd
year respectively. Then rate of interest is 5% p.a. The annuity table shows that the present
value of Re.1 for one, two and three years is 0.952, 0.907, and 0.864 respectively. Calculate
the cash price of the machine
Calculation of Cash Price of the machine
25
Amount Present value of Re.1 Present value of installment
@5%
Down Payment 23,250 1.000 23,250
Ist Installment 35,000 0.952 33,320
2nd installment 40,000 0.907 36,280
3rd Installment 20,000 0.864 17,280
Total Cash Price 1,10,130
Example:
Mr Ashok purchased a machine on hire purchase system from Bhararth Motors on 1- 1-
2010. The Cash price of the machine was Rs.74,500 and the payment was to be made as
follows:
On signing of the agreement Rs.20,000 and the balance in 3 installments of Rs.20,000 each
at the end of each year. 5% interest is charged by the vendor. Mr. Ashok has decided to write
off 10% depreciation annually on the diminishing balance method. Pass the necessary
Journal entries and prepare the Ledger accounts in the books of Mr. Ashok under Asset
Accrual Method
Working Note:
Here Cash Price, Installments & Rate of interest is given. So the first method can be used
for calculation of interest.
Step I
Calculation of Interest
Cash Price of the Machine 74,500
Less Down Payment 20,000
Balance Due 54,500
Add 5% interest for the year 2010 (54,500 x5/100 ) 2,725
57,225
Less First Installment paid 20,000
Balance Due 37,225
Add 5% interest for the year 2011 (37,225 x 5/100) 1,861
39,086
Less Second Installment Paid 20,000
Balance Due 19,086
Add interest (20,000 – 19086 )( in case of last installment take the 914
balancing figure as the interest ie. The last installment – Balance Due) 20,000
20,000
Less Third Installment paid Nil
26
Step II: Calculation of Cash Price in each Installment
Cash Price = Installment – Interest

Installment Interest Principal(Cash price)
1. 20,000 2,725 17,275
2. 20.000 1,861 18,139
3. 20,000 914 19,086
Step III : Calculation of Depreciation

Depreciation @10% on Diminishing Balance Method
\ Cash Price of the machine 74,500
Less 10% for the Ist year(74,500 x10/100) 7,450
Written Down Value ( Balance) 67,050
Less 10% for the IInd year (67,050 x10/100) 6,705
WDV (Balance) 60,345
Less 10% for the IIIrd year (60,345 x10/100) 6,035
Balance 54,310
27
Journal Entries in the books of Mr. Ashok ( Hire Purchaser)
Date Particulars Debit Credit
1-1-10 Machinery Account Dr 20,000
To Bank Account 20,000
( Being Down Payment made)
31.12.10 Machinery Account Dr 17,275
Interest Account Dr 2,725
To Bharath Motors A/c 20,000
( Being First Installment Due)
31.12.10 Bharath Motors Account Dr 20,000
( Being first installment paid )
31.12.10 Depreciation Account Dr 7,450
To Machinery A/c 7,450
( Being Depreciation charged )
31.12.10 Profit & Loss Account 10,175
Dr 2,725
To Interest Account 7,450
To Depreciation Account
31.12.11 ( Being interest & depreciation transferred) 18,139
Machinery Account Dr 1,861
Interest Account 20,000
Dr
31.12.11 To Bharat Motors A/c 20,000
( Being second installment due) 20,000
Bharath Motors Account
31.12.11 Dr 6,705
( Being second installment paid)
Depreciation Account
Dr
31.12.11 To Machinery A/c 8,566
( Being Depreciation charged) 1,861
6,705
31.12.12 Profit & Loss Account 19,086

Dr 914
To Interest A/c 20,000
To Depreciation A/c
31.12.12 (Being interest & depreciation transferred) 20,000
Machinery Account 20,000
Dr
31.12.12 Interest Account 6,035
Dr 6,035
To Bharath Motors
31.12.12 ( Being third installment due) 6,949
Bharath Motors Account 914
Dr 6,035
To Bank Account
28
( Being third installment paid)
Depreciation Account Dr
To Machinery A/c
( Being depreciation charged)
Profit & Loss Account
Dr
To Interest A/c
To Depreciation A/c
( Being interest & depreciation transferred)
Ledger Accounts in the books of Hire Purchaser

Important ledger accounts to be opened are:
Asset A/c ;
Hire Vendor A/c ;
Interest A/c &
Depreciation A/c
Machinery Account
Date Particulars Amount Date Particulars Amount
1 . 1. 10 To Bank 20,000 31.12.10 By Depreciation 7,450
31.12.10 To Bharat Motors 17,275 31.12.10 By Balance c/d 29,825
37,275 37,275
1 .1. 11 To Balance b/d 29,825 31.12.11 By Depreciation 6,705
31.12.11 To Bharath Motors 18,139 31.12.11 By Balance c/d 41,259
47,964 47,964
1 . 1. 12 To Balance b/d 41,259 31.12.12 By Depreciation 6,035
31.12.12 To Bharath Motors 19,086 31.12.12 By Balance c/d 54,310
60,345 60,345
Bharath Motors Account ( Hire Vendor Account)

31.12.10 To Bank 20,000 31.12.10 By Machinery 17,275
By Interest 2,725
20,000 20,000
By Interest 1,861
20,000 20,000
By Interest 914
20,000 20,000
29
Depreciation Account
31.12.10 To Machinery 7,450 31.12.10 By Profit & Loss A/c 7,450
7,450 7,450
6,705 6,705
6,035 6,035
Interest Account
31.12.10 To Bharath Motors 2,725 31.12.10 By Profit & Loss A/c 2,725
2,725 2,725
31.12.11 To Bharath Motors 1,861 31.12.11 By P/L A/c 1,861
1,861 1,861
31.12.12 To Bharath Motors 914 31.12.12 By P/L A/c 914
914 914
30
CHAPTER – 4
ROYALTY ACCOUNTS
Introduction
There are some special rights over something which are possessed by some persons
For example Landlord possesses an exclusive right over the mine or Quarry in his land, A
patentee who has invented something new has the right over his patent rights, An Author
has an exclusive copy-right over the work or his writing in the form of a book.
These rights can be given to some other person on lease basis for some consideration. Here
comes the existence of royalty agreement. It is an agreement between two parties
Lessor or Landlord --- Lessee or Tenant
Patentee --- Patentor
Author --- Publisher
Royalty is a periodical sum based on output or sale payable by the lessee to the lessor for
having utilized the rights of the Lessor.
Types of Royalty
Mining Royalty, Patent Royalty, Copyright Royalty
Minimum Rent or Dead Rent: Royalty agreements are usually associated with a clause that
the lessee must pay a minimum amount in a particular period. Such minimum amount is
known as minimum rent or Dead rent.
Shortworkings
The excess of minimum rent over actual royalty is called shortworking.
Recoupment or Recovery of shortworking
Recoupment of shortworking refers to recovering the shortworking of any year, from the
surplus royalty of the succeeding years. The right of recoupment can be either Fixed or
Floating.
In case of fixed recoupment the right to recover the shortworking is permitted only over a
fixed or stipulated period. For example the right to recover shortworking is given for a period
of first 3 years or first 4 years or 5 years as the case may be. After that stipulated period the
shortworking which could not recover will become irrecoverable.
In case of floating recoupment the right to recover shortworking is permitted over a

subsequent period following the year of shortworking. For example. The shortworkings can
31
be recovered in the following two years of the year of deficit. (Next two years or subsequent
two years)
Minimum rent is applicable only when the actual royalty is less than minimum rent .
When the actual royalty is more after making the adjustment for the recovery of
shortworking the remaining amoun t is to be paid to the landlord.
For example: Minimum Rent---10,000, Actual royalty 8,000 , Shortworking is 2,000

Amount paid to landlord is 10,000
Example 2. Actual royalty Rs.15,000 ; Shortworkings to be recovered Rs. 2,000; Amount

paid to landlord Rs.13,000.
Example 3. Actual royalty Rs.20,000. Shortworking to be recovered nil. Amount paid to

landlord Rs.20,000.
Accounting Treatment
Journal Entries in the books of Lessee
(I ) When Minimum Rent Account is not required
i. For Royalties Payable (when the actual royalty is less than Minimum Rent)
Royalties A/c Dr
Shortworkings A/c Dr
To Landlord Account
ii. For Payment of Royalty

Landlord A/c Dr
To Bank Account
iii. For transfer of Royalties to P&L A/c or Production A/c

Production A/c Dr
To Royalties Account
Note: When the actual royalties is more than shortworking and the previous
year’s shortworking is to be recovered. The first journal entry will be as
follows:
Royalties A/c Dr
To Shortworking Account (recovered)
To Landlord Account
iv. For transfer of Shortworking Irrecovered to P &L A/c
P &L A/c Dr
To Shortworking A/c
(II.) When Minimum Rent Account is Required
i. For Royalties payable (When actual royalties is less than Minimum Rent)
32
Minimum Rent A/c Dr
To Landlord A/c
ii. For splitting minimum rent to Royalties & Shortworking
Royalties A/c Dr
Shortworking A/c Dr
To Minimum Rent A/c
iii. For payment of Minimum Rent
Landlord A/c Dr
To Bank A/c
iv. For transfer of Royalties to to production A/c or P& L A/c
Production A/c
To Royalties A/c
Or
Profit& Loss A/c Dr
To Royalties A/c
Example
Bihar Coal Company undertook some coal bearing land from Mr. Gupta at a royalty of Re.1.
per ton, with a minimum rent of Rs.17,000 per annum. Each year‘s excess of minimum rent
over actual royalties were recoverable during the subsequent three years. The lease, however ,
stipulated that in any year the minimum rent was not attained due to strike, the minimum rent
was to be regarded as having been reduced proportionately having regard to the length of the
stoppage. The output was as follows:
Year Production (Tons)

2005 2,000
2006 14,000
2007 19,000
2008 23,000
2009 15,000(Strike for 3 months)
2010 25,000
Pass Journal entries and prepare ledger account in the books of the Lessee.
Solution: In this question the Minimum Rent A/c is not asked to prepare. So we can
follow the first situation ( without Minimum Rent A/c). When the question specifies to
open Minimum Rent A/c the second situation to be followed. Here the terms for
recovery of shortworkings is given as subsequent three years. That is Floating
Recoupment. Another adjustment is regarding the strike. Some times in the question
some adjustments will be given about the stike. It can be --- During the strike actual
royalty may discharge all rental obligations for that year, or minimum rent will be
proportionately reduced. Make the adjustment accordingly.
33
Analysis Table
Year Output Actual Minimum shortworki s.w.recove s.w.Irreco Amount

Royalty Rent ng red vered paid to
landlord
2005 2000 2000 17000 15000 --- --- 17,000
2006 14000 14,000 17,000 3000 --- --- 17,000
2007 19000 19000 17000 --- 2000 --- 17000
2008 23000 23000 17000 --- 6000 7000 17000
2009 15000 15000 12750 --- 2250 750 12750
2010 25000 25000 17000 --- ---- --- 25000
Note:In the year 2009 there was a strike for 3 months . As per the information given the
minimum rent of 2009 is to be reduced proportionately. The period of strike was 3 months.
The minimum rent is to be calculated for the remaining 9 months.(17000x9/12=12750).
Here the right to recover shortworking is given as the subsequent three years. In 2005 the
shortworking is 15000 and can be recovered for the next three years that is 2006,07 & 08. In
2006 there is no surplus. In 2007 there is a surplus of 2000 and it can be recovered. In 2008
the surplus is 6000 which is used for recovering shortworking and time of recovery of2005
is over (15000-(2000+6000)= 7000 will become irrecoverable. And for 2006 three years will
be expired in 2009 and the balance of750 (3000—2250) will become irrecovered.
Journal Entries in the books of Bihar Coal Company ( Lessee)
Particulars Debit Credit

2005 Royalties A/C Dr 2000
Shortworkings A/C Dr 15000
To Gupta ( Landlord) A/c 17000
( Being Royalties Due)
Gupta (Landlord) A/c Dr 17000
To Bank 17000
( Being the royalties Paid)
Production A/c Dr 2000

To Royalties A/c 2000
( Being royalties transferred to production a/c)
2006 Royalties A/c Dr 14000
Shortworkings A/c Dr 3000
To Gupta 17000
Gupta A/c Dr 17000
To Bank 17000
To Royalties 14000
To Shortworkings 2000
To Gupta 17000
( Being royalties due and shortworkings recovered)
Gupta A/c Dr 17000
34
To Bank 17000
To Royalties 19000
To Shortworking 6000
To Gupta 17000
Gupta A/c Dr 17000
To Bank 17000
To Royalties 23000
Profit & Loss A/c Dr 7000
To Gupta 12750
Gupta A/c Dr 12750
To Bank 12750
To Royalties 15000
Profit & Loss A/c Dr 750

To shortworking 750
To Gupta 25000
Gupta A/c Dr 25000
To Bank 25000
To Royalties 25000
Ledger Accounts
Royalties Account
Year Particulars Amount year Particulars Amount
2005 To Gupta 2000 2005 By Production A/c 2000
2000 2000
14000 14000
2007 To Shortworking 2000
To Gupta 17000 2007 By Production A/c 19000
19000 19000
23000 23000
15000 15000
25000 25000
35
Gupta’s Account
Year Particulars Amount Year Particulars Amount

2005 To Bank 17,000 2005 By Royalties A/c 2000
By Shortworking A/c 15000
17000 17000
2006 To Bank 17000 2006 By Royalties A/c 14000
By Shortworking A/c 3000
17000 17000
17000 17000
17000 17000

12750 12750
25000 25000
Shortworkings Account
Year Particulars Amount Year Particulars Amount

2005 To Gupta‘s A/c 15000 2005 By Balance c/d 15000
15000 15000
2006 To Balance b/d 15000 2006 By Balance c/d 18000
To Gupta‘s A/c 3000
18000 18000
2007 To Balance b/d 18000 2007 By Royalties A/c 2000
By Balance c/d 16000
18000 18000
By Profit & Loss A/c 7000
By Balance c/d 3000
16000 16000
By Profit & Loss 750
3000 A/c 3000
Note: In the question if the opening stock or closing stock is given in that case read the
question carefully and find out whether the royalty is on the basis of number of units
produced or number of units sold.
No of copies sold= copies printed +Opening Stock -- closing stock
No of units produced or no of units printed= No of copies sold+ closing stock -

Opening stock
36
CHAPTER 5:
ACQUISITION OF BUSINESS OF NON- CORPORATE ENTITIES
Sale of non-corporate entities to a company refers to, the sale of a sole trading concern or a
partnership firm to a company.
Conversion of partnership firm into a company also amounts to ‗Acquisition of Business of

Non- Corporate Entities‘ for accounting purposes.
The firm which is being sold to the company is called Transferor Firm and the company
which is the purchasing the firm is called Transferee firm.
Accounting for Acquisition of non- corporate entities
The following are the steps involved in accounting for Acquisition of a firm:
1. Calculating of purchase consideration

2. Ascertaining the form of discharge of purchase consideration
3. Closing the books of Transferor firm
4. Passing incorporation entries in the books of Transferee Company and preparing
Balance Sheet.
Step no 1 - Calculating of purchase consideration

The price or consideration payable by the transferee company for taking over assets
and liabilities of the transferor firm is called ―Purchase Consideration‖
Method of calculating Purchase Consideration

The purchase consideration payable by the transferee company to the transferor firm
may be calculated under any of the following methods:
 Lump sum method
 Net Asset Method
 Net payment Method
Lump sum Method –
Under this method, a fixed amount or a lump sum is paid by the
transferee company for the assets and liabilities taken over by the transferor
company.
Net Assets Method –

Under this method the purchase consideration can be calculated as follows:
Particulars Rs
Total Assets taken over at an agreed value by transferor company xxx
Less: Total liabilities taken over at an agreed value xxx
Purchase Consideration xxx
37
Net Payment method –
Under this method, actual payment made by the transferee company against each item
of liability would be specified.
Step no 2 – Ascertaining the form of discharge of purchase consideration
The purchase consideration may be discharged by the transferee company in any of the
following forms:
1) Completely in Cash
2) Completely in Shares
3) Completely in Debentures
4) Partly in cash and partly in shares
5) Partly in cash and partly in Debentures
6) Partly in Shares and partly in Debentures
7) Combination of Cash, Shares and Debentures
Step no 3 - Closing the books of the Transferor Firm
When the firm is acquired by a company, its books of accounts have to be closed. The
following is the treatment for closing the books of accounts in the firm.
1) For transfer of Assets including Cash at Book Values

Realisation A/c Dr
To Individual Assets A/c
2) For transfer of liabilities at book value
Individual liabilities A/c Dr
To Realisation A/c
3) For the amount of purchase consideration due
Transferee Company A/c Dr
To Realisation A/c
4) For Sale of Assets( not taken over by transferee company)
Bank A/c Dr
To Realisation A/c
5) For payment of Liabilities(not taken over by transferee company)
Realisation A/c Dr
To Bank A/c
6) For assets taken over by Partner‘s(not taken over by transferee company)
Partner‘s Capital A/c Dr
To Realisation A/c
38
7) For Liabilities taken over by Partner‘s(not taken over by transferee company)
Realisation A/c Dr
To Partner‘s Capital A/c
8) For payment of Expenses on Realisation
Realisation A/c Dr
To Bank A/c
9) For Profit on Realisation
Realisation A/c Dr
To Partners Capital A/c
10) For Loss on Realisation
Partner‘s Capital A/c Dr
To Realisation A/c
11) For Receipt of Purchase Consideration
Cash/Bank A/c Dr
Shares in transferee A/c Dr
Debentures in transferee A/c Dr
To Transferee Company A/c
12) For transfer of Reserve/ Undistributed Profits
Reserve A/c Dr
Profit and Loss A/c Dr
To Partner‘s Capital/Current A/c
13) For Transfer of Profit and Loss Debit Balance(loss)
Partner‘s Capital/Current A/c Dr
To Profit and Loss A/c
14) For payment of Partner‘s Loans
Partner‘s Loan A/c Dr
To Bank A/c
15) For Distribution of Cash/Shares/Debentures
Partner‘s capita A/c Dr
To Cash/Bank A/c
To Shares in Transferee Company A/c
To Debentures in Transferee Company A/c
Step no 4 – Passing Incorporation Entries and Other Entries and Preparing Balance
Sheet Entries in the books of purchasing company
1) Purchase Consideration due:

Business purchase A/c Dr
To Transferor Firm A/c
2) For assets and liabilities taken over:
Individual Asset A/c Dr
To Individual liability A/c
39
To Transferor Firm A/c
3) For discharging of purchase consideration:
Transferor Firm A/c Dr
To Cash/Bank A/c
To Shares in Transferee Company A/c
To Debentures in Transferee company A/c
To Share Premium A/c (if any)
Illustration
Mahadev and Govind are partners sharing profits and losses in the ratio 2:1 and their Balance
sheet as on 31.12.2012 is as follows .
Liabilities Amount Asset Amount

Creditors 20,000 Cash in hand 150
Bills payable 5,000 Bills receivable 2,500
Mahadev‘s Loan 10,000 Debtors 30000 28,500
Less:Reserve for 1500
Doubtful debt
Mahadev‘s capital 15,000 Stock 21,850
Govind‘s capital 10000
Reserve fund 3,000 Machinery 10,000
63000 63000
They agreed to sell the business to a limited company and the company to take over the asset
including cash and others assets is as follows:
Machinery at 8,000
Goodwill at 3,000
Debtors at 25,350
Bills receivable: 2500
Stock at17,500
Company agreed to take over the creditors at 19,500. The expenses of realizations amounted
to 150. The firm received the Rs. 20,000 of the purchase price in Rs10. Fully paid equity
shares and balance in cash. Pass necessary journal entries and prepare ledger accounts in the
book company .
40
Solution:
Calculation of purchase consideration{Net asset method}
Asset taken over value
Machinery 8,000
Goodwill 3,000
Debtors 25,350
Bills receivable: 2500
Stock 17,500
cash 150
56500
(-) Liabilities agreed
Creditors and bills payable 24500
PURCHASE CONSIDERATION 32000
Discharge of purchase consideration.

By equity Shares 20,000
By cash 12,000
32000
JOURNAL ENTRIES IN THE BOOKS OF THE FIRM

Particulars Debit Credit
Realization A/c Dr 64,500
To Machinery 8,000
To Debtors 25,350
To Bills receivable: 2500
To Stock 17,500
To Cash 150
(For transfer of asset at book value)
Creditors A/c 20,000
Bills payable A/c 5,000
Reserve for BDD A/c 1,000
To Realization A/c 26,500
(For transfer of liability at book value)
Purchase company A/c 32,000
(For amount of purchase consideration )
Realization A/c 150
To cash/Bank 150
(For expense on realization )
Mahadev‘s Capital A/c 4,100
Govind‘s Capital A/c 2,050
(For loss on realization )
Equity share in p[purchase company A/c 20,000
41
Cash A/c 12,000
To purchase company 32,000
(For receipt of purchase consideration )
Reserve fund A/c 3,000
To Mahadev‘s Capital 2,000
To Govind‘s Capital 1,000
(For transfer of reserve into P/L a/c)
Mahadev‘s loan A/c 10,000
To cash A/c 10,000
(For payment of loan)
To Equity share in purchasing company A/c 20,000
(For distribution of shares)
Govind‘s Capital A/c 790
To Cash 1,850
Ledger account in the book of the firm.
Realization Account
Particular Amount Particular Amount

To Machinery 8,000 By Creditors 20,000
To Debtors 25,350 By Bills payable 5,000
To Bills receivable: 2500 By Reserve for BDD 1,000
To Stock 17,500 By Purchase Co. A/c 32,000
To Cash 150 By Loss on realization
To Cash(Expenses) 150 transferred to capital A/c
Mahadev = 6,150 x 2/3 =
4,100 6,150
Govind = 6,150 x 1/3 = 2,050
64,650 64,650
Purchasing Company A/c

To Realization A/c 32,000 By Eq. share in purchasing co. 20,000
A/c 12,000
By Cash
32,000 32,000
Equity share in purchasing company

Purchase company A/c 20,000 Mahadev‘s Capital A/c 11,808
20,000 20,000
42
Capital Account
Particular M G Particular M G
To Realization A/c 4,100 2,050 By Balance b/d 15,000 10,000
To Equity share in 11,808 8,192 By Reserve fund 2,000 1,000
purchasing company (2:1Ratio )
To Cash 1,090 760
17,000 11,000 17,000 11,000
Mahadev‘s loan Account

To cash 10,000 By Balance b/d 10,000
10,000 10,000
Cash Account
To Balance b/d 150 By Realization A/c 150
To Purchasing Company A/c 12,000 ByRealizationA/c(Expenses) 150
ByMahadev‘s Capital A/c 1,092
ByGovind‘s Capital A/c 758
ByMahadev‘s Loan 10,000
12,150 12,150
Note 1. CALCULATION OF FINAL CAPITAL RATIO.
M G
Total credit balance 17,000 11,000
Less: Debit balance 4,100 2,050
12,900 8,950
1,290 : 895
258 : 179
Note 2. DISRIBUTION OF SHARES.
M = 2,000 x 258 = 1,181 shares of 10 each = Rs 11,810

437
G = 2,000 x 179 = 819 shares of 10 each = Rs 8190.

437
43
IMPORTANT QUESTIONS:
1. What is purchase consideration?

2. What is final claim ratio?
3. What are the modes of discharge of purchase consideration?
4. What is net asset method?
5. Elaborate the accounting steps of acquisition of business of non corporate entities by a
company.
BOOKS FOR REFERENCE
R.L GUPTA RADHASWAMY
V S RAMAN
DR. S ANIL KUMAR
44

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NEW HORIZON COLLEGE

II SEM BBM STUDY MATERIAL

Mrs. Prasanna Prakash

Mrs. Sreeja Nair

Ring Road, Bellandur Post, Near Marathalli, Bangalore - 560 103

SR. TITLE PAGE NO.

2. Insurance claims 13-18

ADVANTAGES OF DEPARTMENTAL ACCOUNTS:

The following are the major advantages of departmental accounts:

APPORTIONMENT OF REVENUE ITEMS:

ITEMS OF DIRECT BASIS OF APPORTIONMENT

Freight & carriage inwards for Ratio of net purchases

ITEMS OF INCOME BASIS OF APPORTIONMENT

 Common expenses which are not apportionable among departments include:

Particulars Dept A Dept B

 Internal transfer of goods from dept A at cost price of Rs420

Stock on 31-3-2011 was: Dept A - 16740 Dept B - 12050.

To opening stock 17400 14700 32100 By sales 60000 40000 100000

To carriage 1560 780 2340

To gross profit c/d 14500 3950 18450

77160 52050 129210 77160 52050 129210

Particulars A B Total Particulars A B Total

INTER - DEPARTMENTAL TRANSFERS:

Inter departmental transfer refers to selling of goods by one department to another

 When inter- departmental transfers are made at selling price to the

NOTE: A special adjustment is required to be made when the transfer made by

A stock reserve must be created for unrealized profits in the closing

Departmental trading A/c for the year ending 31-03-2011

Particulars Amt Amt Particulars Amt Amt

Stock reserve for A dept = gross profit X 25% of FG of B

Stock reserve for B dept = 42000

NOTE : 20% on sales = 25% on cost.

Claim = Closing stock- Salvage+ fire fighting expenses.

Note: Salvage refers to goods saved from fire,

Fire fighting expenses are incurred to save goods from fire.

Example 1: (simple problem)

Stock on 01.01.2011 Rs. 95000 Purchase return Rs.15000

Stock on 31.12.2011 Rs.150000 Sales return Rs.30000

Purchases for 2011 Rs.421000 wages Rs.65000

Sales for 2011 Rs.550000

Purchases from 01.01.2012 to 01.07.2012 is Rs.350000

Sales from 01.01.2012 to 01.07.2012 is Rs.491000

Prepare a statement of claim to be submitted to the insurance co.

Solution: Trading account for the year ended 31.12.2011

Particulars Rs. Particulars Rs.

Memorandum Trading Account from 01.01.2012 to 01.07.2012

Value of closing stock on date of fire Rs.94000

Claim= Stock destroyed by fire* Policy value

Stock on 01.01.2011 Rs.288000

Trading Account for the year ended 31.12.2011

Particulars Rs. Particulars Rs.

Memorandum Trading Account from 1.1.2012 to 14.04.2012

Stock destroyed by fire is ----

Amount of claim = Policy value x Stock destroyed by fire

Stock on date of fire

= 342000 x 400000 =RS.300000

Abnormal Line of Goods

EXAMPLE:3 (problem with abnormal line of goods)

Stock at cost on 01.04.2011 Rs.37500

Stock at cost on 31.03.2012 Rs.52000

Purchases less returns for year ended 31.03.2012 Rs.253750

Purchases less returns upto 30.09.2012 Rs.145000

Sales less returns upto 30.09.2012 Rs.184050