CA Inter Group 1 Book November 2021

CA INTER 1 ACCOUNTING CA/CMA SANTOSH KUMAR
INDEX- CA INTER GROUP 1 – ACCOUNTING
CHAPTER NAME PAGE NUMBER

1. Financial statement of companies 02--21
2. Cash flow statement 22--50
3. Profit or loss pre and post incorporation 51--57
4. Accounting for bonus shares and right issue of shares 58--62
5. Redemption of preference shares (including bonus shares) 63--75
6. Redemption of debentures 76--85
7. Investment accounts 86--94
8. Insurance claim 95--110
9. Hire purchase and instalment sale 111--118
10. Departmental accounts 119--132
11. Accounting for branches (including foreign branch) 133--178
12. Accounts from incomplete records 179--215
13. Accounting standards 216--251
Note 1- Follow the sequence given above while studying.
Note 2. All questions of your study material, RTP, MTP, Past year questions are covered in this
book.
Note 3: No any other book is recommended.
Note 4. This book is fully amended. Any further amendment by ICAI will be shared in your what’s
app group of CA Inter group 1.
COCEDUCATION.COM MOB. NO. 9999631597, 7303445575, 8448322142 Page 1

CHAPTER 1. FINANCIAL STATEMENT OF COMPANIES

Definition of company:-- As per section 2(20) of the companies act 2013, “company” means a company
incorporated under the companies act,2013 or any previous company law.
SALIENT FEATURES OF A COMPANY :-
1. Incorporated association— A company comes into operation after its registration under Companies
Act. Without such registration no company can come into existence.
2. Separate legal entity – A company has a separate legal entity and is not affected by changes in its
membership. Therefore, being a separate business entity, a company can contract, sue and be sued in
its incorporated name and capacity.
3. perpetual existence – Since company has existence independent of its members, it continues to be in
existence despite the death, insolvency or change of members.
4. common seal—Company is not a natural person, therefore, it can not sign the document in the
manner as a natural person would do. In order to enable the company to sign its documents it is
provided with legal tool called ‘common seal’.
5. Limited liability--- The liability of every shareholder of a company is limited to the amount he has
agreed to pay to the company on the shares allotted to him.
6. Distinction between ownership and management:-- Since the number of shareholders is very large
and may be distributed at different geographical locations, it becomes difficult for them to carry on the
operational management of the company on day to day basis. This gives rise to the need of separation
of the management and ownership.
7. Not a citizen—A company is not a citizen in the same sense as a natural person is.
8. Transferability of shares:- The capital is contributed by the shareholders through the subscription
of shares. Such shares are transferable by its members except in case of a private limited company,
which may have certain restrictions on such transferability.
9. Maintenance of books--- A limited company is required by law to keep a prescribed set of account
books and any failure in this regard attract penalty.
10. Periodic audit --- a company has to get its accounts periodically audited through the chartered
accountant appointed by the shareholders in their Annual General Meeting on the
recommendation of Board of Directors.
11. Right of access to information:-- The right of the shareholders of a company to inspect its books of
accounts is governed by article of association.
TYPES OF COMPANIES
1. STATUTORY COMPANY:- All those companies, which operate under the special act passed by the State
Legislature or Parliament, are called statutory companies. They are formed for special purpose by a special Act
of Parliament. Included in this category are the unit Trust of India, Life Insurance Corporation, Reserve Bank of
India, State Bank of India and so on. Such companies are not required to use the word ‘limited’ as part of
their name. For example, Reserve Bank of India. Such companies are required to get their accounts audited by
Comptroller and Auditor General of India and are publicly accountable to the State Legislature/Parliament.
2. GOVERNMENT COMPANY:- According to Section 2(45) of The Companies Act, 2013 "a Government
company means any company in which not less than 51% of the paid-up capital is held by the Central
Government, or by any State Government or Governments, or partly by the Central Government and partly by
one or more State Governments and includes a company which is a subsidiary of a government Company".
3. FOREIGN COMPANY:- According to Section 2(42) of The Companies Act, 2013 "A foreign company is
one that is incorporated outside India but has place of business or business operations in India.
4. HOLDING COMPANY:- Under Section 2(46) of The Companies Act, 2013, a company is deemed to be a
holding company if the other company is its subsidiary company. A company becomes a subsidiary company
when other company controls 51% or more of its paid-up share capital, has right to appoint directors on its
board, or is a subsidiary of another subsidiary company.

5. SUBSIDIARY COMPANY:- According to Section 2(87), a company is deemed to be a subsidiary of

another company if and only if -
(a) That other company controls the composition of its board of directors, it implies that the controlling
company (holding company) has the right to exercise the power of appointing or removing any person
or a majority of persons from the directorship at its own discretion; or
(b) That other company holds more than half in its nominal value of its equity share capital; or
(c) That other company is a subsidiary of any company, which is that other's subsidiary. For example,
Company B is a subsidiary of Company A, and Company C is a subsidiary of Company B. Since, Company
B is a subsidiary of Company A, Company C becomes the subsidiary of Company A as well.
(d) In case of a body corporate which is incorporated in a country outside India, a subsidiary or holding
company of the body corporate under the law of such country shall be deemed to be a subsidiary or
holding company within the meaning and for the purpose of this ad whether the requirements of this
section are fulfilled or not. It implies that if a company operating in India is a subsidiary of a foreign
company, it will be treated as such irrespective of the fact whether in India, if it fulfills conditions (a), (b)
and (c) listed above or no.
6. REGISTERED COMPANY:- All those companies that are registered under The Companies Act, 2013, are
called Registered Companies.
7. LIMITED LIABILITY COMPANY

(a) LIMITED BY SHARES:--According to Section 2(22) of The Companies Act, 2013 " A company in which
the liability of shareholders is restricted to the amount of unpaid calls on shares is known as limited company.
(b) LIMITED BY GUARANTEE:--According to Section 2(21) of The Companies Act, 2013 " A company in
which the
liability of shareholders is restricted to the amount of Guarantee given is called limited by guarantee.
8. UNLIMITED LIABILITY COMPANY:- According to Section 2(92) of The Companies Act, 2013 A company
in which the liability of shareholders is not restricted only to the value unpaid of shares is known as unlimited
company
9. PUBLIC COMPANY:- According to Section 2(71) of the Act, 'public company' means a company which (a)
is not a private company; (b) has a minimum paid-up capital as may be prescribed; and (c) is a private company
which is a subsidiary of a company which is not a private« company. After Companies (Amendment) Act, 2000,
a public company cannot be registered with a capital of less than Rs. 5 lakhs. Public companies invite the public
at large to participate and subscribe for the shares in, or debentures of, the company and there are no
restrictions on transfer of shares.
10. PRIVATE COMPANY:- According to Section 2(68), a private company means a company which has a
minimum paid-up capital as may be prescribed, and by its articles:
(a) Restricts the rights of members to transfer its shares.

(b) Except in one person company, limits the number of its member to 200 excluding: (i) persons who are in
employment of the company; and (ii) persons who, having been formerly in the employment of the
company, were members of the company while in that employment and have continued to be members
after the employment ceased. For this purpose joint holders of shares will be counted as single
members.
(c) Prohibits any invitation to the public to subscribe to any shares in, or debentures of, the company.
(d) Prohibits any invitation or acceptance of deposits from persons other than its member, directors, and
relatives. Private companies do not involve participation of public in general.
11. LISTED COMPANY:- A listed company is a public company which has any of its securities listed in any
recognized stock exchange.
12. UNLISTED COMPANY:- An unlisted company is one whose securities are not listed on any recognized
stock exchange for trading.

13. One person company -- According to Section 2(62) of The Companies Act, 2013, a company which has
only one person as member is called one person company.
14. Small company – as per section 2(85), a small company means a company, other than a public company,-
(i) Paid up share capital of which does not exceed 50 lakhs or such higher amount as may be prescribed which
should not be more than 5 crores; or
(ii) turnover of which as per last profit and loss account does not exceed 2 crores or such higher amount as may
be prescribed which should not be more than 20 crores. Provided that nothing in this clause should apply to
(a) A holding company or a subsidiary company

(b) A company registered under section 8
(c) A company or body corporate governed by any special act.
MAINTENANCE OF BOOKS OF ACCOUNT :-- As per section 128 of the companies Act 2013, every company
should prepare and keep at its registered office books of account and other relevant books and papers and
financial statement for every financial year which give a true and fair view of the state of affairs of the company,
including that of its branch office or offices, if any, and explain the transactions effected both at the registered
office and its branches and such books should be kept on accrual basis and according to the double entry
system of accounting.
Provided further that the company may keep such books of account or other relevant papers in electronic
mode in such manner as may be prescribed.
Maintenance at place other than registered office:- it is the duty of the company to inform the registrar of
companies within 7 days of the decision in case the board of directors decide to maintain books at place other
than the registered office.
In case of branch office :- where a company has a branch office in India or outside India, it should be deemed
to have complied with the provisions of the act, if proper books of account relating to the transactions effected
at the branch office are kept at that office and proper summarised returns periodically are sent by branch office
to the company at its registered office or such other place as as the board of directors have decided.
Statutory books: the following statutory books are required to be maintained by a company under
different sections of the companies Act 2013:
a. Register of investments of the company held in its own name.

b. Register of charges
c. Register of members
d. Register of debenture holders
e. Minute books
f. Register of contracts, or arrangements in which directors are interested.
g. Register of directors and key managerial personnel and their shareholding
h. Register of loans and investments by the company.
i. Registers and documents relating to the issue of shares are:
1. Share application and allotment book
2. Share call book
3. Certificate book
4. Register of members
5. Share transfer books
6. Dividend register
ANNUAL RETURN:- in accordance with section 92 of the companies act 2013, every company should prepare
an annual return in the form prescribed by the companies Act 2013 signed by a director and the company
secretary, or where there is no company secretary, by a company secretary in practice.

Provided that in relation to one person company and small company, the annual return should be signed by the
company secretary, or where there is no company secretary, by the director of the company.
The annual return should be filed with the registrar within 60 days from the day on which each of the annual
general meeting is held.
PREPARATION OF FINANCIAL STATEMENTS:- Under Section 129 of the Companies Act, at the annual general
meeting of a company, the Board of Directors of the company shall lay before the company. Financial
statements as per section 2(40) of the companies Act, 2013 include -
(a) A balance sheet as at the end of the financial period;
(b) A profit & loss account for that period (In case of a company not carrying on business for profit, an income
and expenditure account)
(c) cash flow statement
(d) A statement of change in equity, if applicable
(e) Any explanatory notes related to point (a) to (d) above.
Provided further that the financial statement, with respect to one person company, small company and
dormant company, a startup private company may not include cash flow statement.
Section 129 along with Schedule III of the Companies Act, 2013 deals with the preparation and
presentation of profit and loss account and the balance sheet. It requires that final accounts of a company
shall give a true and fair view of the state of affairs of the company. Schedule III prescribes the form in which
profit and loss account and Balance Sheet should be prepared.
SCHEDULE III (Section 129) (PART I—FORMAT OF BALANCE SHEET)
Particulars Note Figures as at the Figures as at the

No. end current end of previous
reporting period reporting period
I. Equity and Liabilities
Shareholder’s fund ------- -------
Share capital 1 ------- -------
Reserves and surplus 2 ------- -------
Money received against share warrants 3
(2) Share application money pending allotment 4 ------ -------

(3) Non-current liabilities
Long-term borrowings 5 ------- -------
Deferred tax liabilities (Net) 6 ------- -------
Other long term liabilities 7 ------- -------
Long-term provisions 8 ------- -------
(4) Current liabilities
Short-term borrowings 9
Trade payables 10
Other current liabilities 11
Short-term provisions 12
Total ------- -------
II. Assets
(1) Non-current assets
Property, plant & equipment
(a)Tangible assets 13 ------- -------
(b) Intangible assets 14 ------- -------
(c)Capital work-in progress 15 ------- -------
(d) Intangible assets under development 16 ------- -------
Non-current investments 17 ------- -------
Deferred tax assets (net) 18 ------- -------
Long-term loans and advances 19 ------- -------
Other non-current assets 20 ------- -------
(2) Current assets
Current investments 21 ------- -------

Inventories 22 ------- -------

Trade receivable 23 ------- -------
Cash and cash equivalent 24 ------- -------
Short-term loans and advances 25 ------- -------
Other current assets 26 ------- -------
Total ------- -------
Notes forming part of the financial statements 1-46
(Note number is not prescribed in schedule III is numbered as per individual requirement)
Format of Statement of Profit and Loss
Particulars Note Figures for the Figures for the

No. current previous reporting
reporting period period
I. Revenue from operations 28 ------ ------
II. Other income 29 ------ ------
III. Total revenue (I+II) ------ ------
IV Expenses:
Cost of materials consumed 30 ------ ------ ------
Purchases of Stock-in-Trade 31 ------ ------ ------
Changes in investments of finished goods work-in- 32 ------ ------ ------
progress and Stock-in-Trade
Employee benefits expense 33
Finance costs 34
Depreciations and amortization expenses 15&16
Other expenses 35
Total expenses ------ ------
V. Profit before exceptional and extraordinary items ------ ------
and tax (III-IV)
VI. Exceptional items 36 ------ ------
VII. Profit before extraordinary items and tax (V-VI) ------ ------
VIII. Extraordinary Items 37 ------ ------

IX. Profit before tax (VII-VIII) ------ ------
X. Tax expense: 38
Current tax ------ ------
Deferred tax ------ ------ ------ ------
XI. Profit (Loss) for the period from continuing ------ ------
operations (VII-VIII)
XII. Profit/(Loss) from discounting operations 39 ------ ------
XIII. Tax expense of discontinuing operations 40 ------ ------
XIV. Profit/(loss) from discounting operations ------ ------
(After tax) (XII – XIII)
XV. Profit (Loss for the period (XI+XIV) ------ ------
XVI. Earnings per equity share: 41
Basic ------ ------
Diluted ------ ------
PREPARATION OF FINANCIAL STATEMENTS.
Question 1. State the major heads and sub-heads under which the following items will be shown:
a. Share application pending allotment
b. Share application pending allotment became refundable
c. Income tax reserve
d. Income tax provision
e. Income tax payable
f. Dividend payable
g. Unclaimed dividend
h. Proposed dividend

i. Share option outstanding account

j. Finance lease obligations
k. Current maturity of finance lease obligation
l. Debentures/ bonds
m. Current maturity of debentures/bonds
n. Loan repayable on demand
A. Current maturity of finance lease
B. Application money received for securities and due for refund and interest accrued thereon
C. Provision for expense
D. Calls in advance
E. Calls in arrear
F. Provident fund/gratuity fund
G. PF payable
H. ESI/ Gratuity payable
I. Provision for employees
J. Stores and spare parts
K. Loose tools
L. Tools and equipment
M. Bank deposits for 3 years
N. Fixed deposits with restrictions for withdrawal after 2 years.
O. Drafts/cheques in hand
A. Receivables arising from activities being carried out during lean period, which is not in normal
course of business.
B. Capital commitments
C. Contingent liabilities
D. Forfeited share capital
E. Reserve capital
F. Capital reserve
G. Interest accrued on investments
H. Deposits with electricity supply company
I. Mining rights
J. Provision for doubtful debts
K. Long term loan/advances from debtors/customers
L. short term loan/advances from debtors/customers
A. Interest accrued on calls in advance
B. Premium on redemption of debentures
C. Balance of loss( profit and loss account Dr balance)
D. Bank overdraft
E. Work in progress( machinery)
F. Development of software in progress
G. Computer software
H. Capital advances paid for purchase of machinery.
I. Machinery
J. Machinery( fixed assets) held for sale
K. Workmen compensation fund/reserve
Question 5. Write short notes on presentation of share capital in the balance sheet of a company.
Question 6. Write short notes on presentation of tangible assets/intangible assets in the balance
sheet of a company.
Question 7. Prepare the Balance Sheet of Payal Textiles Ltd. as required under Schedule III of the Companies Act,
2013, as on 31 March 2021. Following balances are given:

Accounts Dr. Cr.

Rs. Rs.
Secured Term Loans — 10,00,000
Creditors — 11,45,000
6% Debentures Account — 27,00,000
Provision for Tax — 1,70,000
Security Premium Account — 4,75,000
General Reserves — 20,50,000
Loans from Debtors — 2,00,000
Provision for (Doubtful) Debts — 20,200
Provision for Depreciation — 5,00,000
Equity Share Capital (30,000 x 10) — 3,00,000
8% Preference Share Capital (10,000 x 100) — 10,00,000
Advances given to employee 3,72,000 —
Advances to suppliers 55,000 —
Cash and Bank 2,75,000 —
Loose Tools 50,000 —
Long term Investments 2,25,000 —
Profit and Loss Account (Losses) 3,00,000 —
Debtors 12,25,000 —
Accrued income 58,000 —
Stores Items 4,00,000 —
Fixed Assets 56,50,000 —
Capital Work-in-Progress 2,00,000 —
Finished Goods Stock 7,50,200 —
95,60,200 95,60,200
QUESTION 8 From the following particulars furnished by Pioneer Ltd., prepare the Balance Sheet as at 31 st
March, 2021. Give notes at the foot of the Balance Sheet as may be found necessary:
Debit Credit
Equity Capital (Face value of Rs. 100) 10,00,000
Calls in Arrear 1,000 —
Land 2,00,000 .—
Building 3,50,000 —
Plant and Machinery 5,25,000 —
Furniture 50,000 —
General Reserve — 2,10,000
Loan from State Financial Corporation — 1,50,000
Stock:
Finished Goods 2,00,000
Raw Materials 50,000 2,50,000 —
68,000
Provision for Taxation ---
Sundry Debtors 2,00,000 —

Advances 42,700 —
Dividend Payable — 60,000
Profit and Loss Account — 1,00,000
Cash Balance 30,000 —
Cash at Bank 2,47,000 —
Preliminary Expenses 13,300 —
Loans (Unsecured) — 1,21,000
Sundry Creditors (For Goods) — 2,00,000
19,09,000 19,09,000

The following additional information is also provided:

1. 2000 equity shares were issued for consideration other than cash.
2.Debtors of Rs. 52,000 are due for more than six months.
3.The cost of assets : Building : Rs. 4,00,000; Plant and Machinery : Rs. 7,00,000, Furniture : Rs. 62,500.
4.The balance of Rs. 1,50,000 on the loan account with State Finance Corporation is inclusive of Rs. 7,500 for interest
accrued but not due. The loan is secured by hypothecation of the Plant and Machinery.
5. Balance at Bank includes Rs. 2,000 with Perfect Bank Ltd. which is not a Scheduled Bank.
6. Bills receivable for Rs. 2,75,000 maturing on 30 June 2021, have been discounted.
7.The Company had contracts for the erection of Machinery at 1,50,000 which is still incomplete.
(IPCC- 1 2014 Nov -16 marks)
QUESTION 9 The following are the balances of Johri Aabhushan Bhandar Co. Ltd. as on31 march, 2021:
Credit Rs Debit Rs.
Share Capital (Rs. 100 Shares) 40,00,000 Premises 30,72,000
12% Debentures 30,00,000 Plant 33,00,000
Profit and Loss Account 4,00,000 Stock 7,50,000
Bills payable 3,70,000 Debtors 8,70,000
Creditors 4,00,000 Goodwill 2,50,000
Sales 41,50,000 Cash and bank 5,44,000
General Reserve 2,50,000 Calls in Arrear 75,000
Bad-Debts Provision on 1.04.2020 35,000 Interim Dividend Paid 3,92,500
Purchases 18,50,000
Preliminary Expenses 50,000
Wages 9,79,800
General Expenses 68,350
Salaries 2,02,250
Bad-debts 21,100
Debentures Interest paid 1,80,000
1,26,05,000 1,26,05,000
(a) Depreciate plant by 15%

(b) Half year’s Debenture Interest due.
(c) Create 5% provision on debtors for doubtful debts
(d) Provide for income tax @ 30%
(e) Stock on 31 March, 2021 was Rs. 9,50,000.
(f) A claim of Rs. 25,000 for workmen compensation is being disputed by the company.
(g) The Board declared a dividend of 12% on paid up capital including interim dividend.
(h) Transfer Rs 10,000 to general reserve.
QUESTION 10. The Auto Parts manufacturing Co. Ltd. was registered with an authorized capital of Rs.
10,00,000 divided into shares of Rs. 10 each of which 40,000 shares had been issued and fully paid. The
following is the Trial Balance extracted on 31 March, 2021.
Debit Rs. Credit Rs.
Stock (April 1, 2020) 1,86,420
Purchase and Sales 7,18,210 11,69,900
Returns 12,680 9,850
Manufacturing Wages 1,09,740 –
Sundry Manufacturing Expenses 19,240 –
Carriage Inward 4,910 –
18% Bank Loan (Secured) 50,000
Interest on Bank Loan (Secured) 4,500 –
Office Salaries and Expenses 17,870 –
Auditor’s Fees 8,600 –
Director’s Remuneration 26,250 –
Preliminary Expenses 6,000 –
Freehold Premises 1,64,210 –
Plant and Machinery 1,28,400 –
Furniture 5,000 –
Loose Tools 12,500 –
Debtors and Creditors 1,05,400 62,220

Cash in hand 19,530 –

Cash at Bank 96,860 –
Advance payment of Tax 84,290 –
Profit and Loss Account on 1 April, 2020 – 38,640
Share Capital – 4,00,000
17,30,610 17,30,610
You are required to prepare statement of profit and Loss for the year ended 31 March, 2021 and a Balance
Sheet as at that date after taking into consideration the following adjustments:
(i) On 31 March 2021, outstanding Manufacturing Wages and outstanding Office Salaries stood at Rs. 1,890 and
Rs. 1,200 respectively. On the same date, stock was valued at Rs. 1,24,840 and Loose Tools at Rs. 10,000.
(ii) Provide for interest on bank Loan for 6 months.
(iii) Depreciation on plant and Machinery is to be provided @ 15% while on Office Furniture it is to be 10%
(iv) Make a Provision for Income Tax @ 30%
(v) The directors recommended a maiden (first) dividend @ 15% for the year ending 31 March, 2021 after a
transfer of 5% of net profits to general Reserve
QUESTION 11. Fine Products Ltd. was registered with a nominal capital of Rs. 5,00,000 divided into shares of
Rs. 100 each. The following Trial balance is extracted from the books on 31 March, 2021.
Rs Rs.
Buildings 2,90,000 Sales 5,20,000
Machinery 1,00,000 Salaries Outstanding 2,000
Stock 90,000
Purchase (adjusted) 2,10,000
Salaries 60,000 Share Capital 2,00,000
Director’s Fees 10,000 General Reserve 40,000
Rent 26,000 Profit and Loss A/c 25,000
Depreciation 20,000 Creditors 92,000
Bad Debts 6,000 Provision for Depreciation :
Interest accrued on Investment 2,000 On Building 50,000
Investment : On Machinery 55,000 1,05,000
12,000 Shares of A Ltd. Of 14% Debentures 2,00,000
Rs. 10 each, Rs. 8 paid up 1,20,000 Interest on Debentures
Debentures Interest 28,000 Accrued but not due 14,000
Loose Tools 23,000 Interest on Investments 12,000
Advance Tax 60,000 Unclaimed Dividend 8,000
Sundry Expenses 18,000
Debtors 1,25,000
Bank 30,000
12,18,000 12,18,000
You are required to prepare statement of Profit and Loss for the year ending 31 March, 2021 and a Balance
Sheet as at the date after taking into consider the following information:
a. Provide for bad and doubtful debts @ 4% on debtors.
b. Make a provision income tax @ 30%
c. Depreciation expense includes depreciation of Rs. 8,000 on Buildings and that of Rs. 12,000 on Machinery.
d. The directors recommend a dividend @ 25% and transfer of Rs 20,000 to general reserve
(CMA inter, CA-IPCC)
QUESTION 12. DELETED FROM THE SYLLABUS.

Question 13. In the financial statements of the financial year 2021-2022, Alpha Ltd. has mentioned in the
notes to accounts that during financial year, 24,000 equity shares of Rs 10 each were issued as fully paid
bonus shares. However, the source from which these bonus shares were issued has not been disclosed. Is
such non-disclosure a violation of the Schedule III to the Companies Act? Comment. (ICAI Study material)
Answer: as per part 1 of the schedule III, a company should disclose in notes to account for the period of 5 years
immediately preceeding the balance sheet date, the agreegate number and class of shares allotted as fully paid-up
bonus shares. However, schedule III does not require a company to disclose the source from which these bonus

shares have been issued. Therefore, non-disclosure of source from which bonus shares have been issued does not
violate the schedule III to the companies act.
Question 14. The management of Loyal Ltd. contends that the work in process is not valued since it is
difficult to ascertain the same in view of the multiple processes involved. They were of the opinion that the
value of opening and closing work in process would be more or less the same. Accordingly, the management
had not separately disclosed work in process in its financial statements. Comment in line with Schedule III.
(ICAI Study material)
Answer: schedule III to the companies act does not require that the amount of WIP at the beginning and at the end
of the accounting period to be disclosed in the statement of profit and loss. Only changes in inventory of WIP need
to be disclosed in the SPL. Non-disclosure of such change in the SPL by the company may not amount to violation of
schedule III if the differences between opening and closing are not material.
Question 15. Write the differences between treatment of proposed (recommended) dividend and declared
dividend and dividend payable, unclaimed/unpaid dividend in financial statements.
Question 16. Futura Ltd. had the following items under the head “Reserves and Surplus” in the Balance
Sheet as on 31st March, 2021:
Amount in lakhs
Securities Premium Account 80
Capital Reserve 60
General Reserve 90
The company had an accumulated loss of 250 lakhs on the same date, which it has disclosed under the head
“Statement of Profit and Loss” as asset in its Balance Sheet. Comment on accuracy of this treatment in line
with Schedule III to the Companies Act, 2013. (ICAI Study material)
Question 17. Sumedha Ltd. took a loan from bank for Rs 10,00,000 to be settled within 5 years in 10 equal
half yearly instalments with interest. First instalment is due on 30.09.2021 of Rs 1,00,000. Determine how
the loan will be classified in preparation of Financial Statements of Sumedha Ltd. for the year ended 31st
March, 2021 according to Schedule III. (ICAI Study material)
Question 18. The following is the Trial Balance of Omega Limited as on 31 3.2022: (Figures in ‘000)
Debit Credit
Land at cost 220 Equity Capital (Shares of 10 each) 300

Plant & Machinery at cost 770 10% Debentures 200
Trade Receivables 96 General Reserve 130

Inventories (31.3.22) 86 Profit & Loss A/c 72
Bank 20 Securities Premium 40
Adjusted Purchases 320 Sales 700

Factory Expenses 60 Trade Payables 52
Administration Expenses 30 Provision for Depreciation 172
Selling Expenses 30 Suspense Account 4
Debenture Interest 20
Interim Dividend Paid 18
1670 1670
Additional Information:
(i) The authorised share capital of the company is 40,000 shares of Rs 10 each.
(ii) The company on the advice of independent valuer wish to revalue the land at Rs 3,60,000.

(iii) Declared final dividend @ 10% on 2nd April 2022.

(iv) Suspense account of Rs 4,000 represents cash received for the sale of some of the machinery on
1.4.2021. The cost of the machinery was Rs 10,000 and the accumulated depreciation thereon
being Rs 8,000.
(v) Depreciation is to be provided on plant and machinery at 10% on cost.
You are required to prepare Omega Limited’s Balance Sheet as on 31.3.22 and Statement of Profit&Loss with
notes to accounts for the year ended 31.3.2022 as per Schedule III. Ignore previous years’ figures & taxation.
Question 19. You are required to prepare a Statement of Profit and Loss and Balance Sheet from the
following Trial Balance extracted from the books of the International Hotels Ltd., on 31st March, 2021:
Dr. Cr.
Authorised Capital-divided into 5,000 6% Preference Shares

of 100 each and 10,000 equity Shares of 100 each 15,00,000
Subscribed Capital -
5,000 6% Preference Shares of 100 each 5,00,000
Equity Capital 8,05,000
Purchases - Wines, Cigarettes, Cigars, etc. 45,800
- Foodstuffs 36,200
Wages and Salaries 28,300
Rent, Rates and Taxes 8,900
Laundry 750
Sales - Wines, Cigarettes, Cigars, etc. 68,400
- Food 57,600
Coal and Firewood 3,290
Carriage and Cooliage 810
Sundry Expenses 5,840
Advertising 8,360
Repairs 4,250
Rent of Rooms 48,000
Billiard 5,700
Miscellaneous Receipts 2,800
Discount received 3,300
Transfer fees 700
Freehold Land and Building 8,50,000
Furniture and Fittings 86,300
Inventory on hand, 1st April, 2020
Wines, Cigarettes. Cigars, etc. 12,800
Foodstuffs 5,260

Cash in hand 2,200
Cash with Bankers 76,380
Preliminary and formation expenses 8,000
2,000 Debentures of 100 each (6%) 2,00,000
Profit and Loss Account 41,500
Trade payables 42,000
Trade receivables 19,260
Investments 2,72,300
Goodwill at cost 5,00,000
General Reserve 2,00,000
19,75,000 19,75,000
Wages and Salaries Outstanding 1,280
Inventory on 31st March, 2021:
Wines, Cigarettes and Cigars, etc. 22,500
Foodstuffs 16,400
Depreciation : Furniture and Fittings @ 5% p.a. : Land and Building @ 2% p.a. The Equity capital on 1st April,
2020 stood at ₹7,20,000, that is 6,000 shares fully paid and 2,000 shares ₹60 paid. The directors made a call
of ₹40 per share on 1st October 2020. A shareholder could not pay the call on 100 shares and his shares were
then forfeited and reissued @ ₹90 per share as fully paid. Remaining unused forfeited amount is included in
equity share capital. The Directors declare a dividend of 8% on equity shares on 2nd April 2022, transferring
any amount that may be required from General Reserve. Ignore Taxation.
Question 20. The following information has been extracted from the books of account of Hero Ltd. as at 31 st
March, 2021:
Dr. (₹ ’000) Cr. (₹

’000)
Administration Expenses 480
Cash at Bank and on Hand 228
Cash Received on Sale of Fittings 10
Long Term Loan 70
Investments 200
Depreciation on Fixtures, Fittings, Tools and Equipment 260
(1st April, 2020)
Distribution Costs 102
Factory Closure Costs 60
Fixtures, Fittings, Tools and Equipment at Cost 680
Profit & Loss Account (at 1st April, 2020) 80
Purchase of Equipment 120
Purchases of Goods for Resale 1710
Sales 3000
Share Capital (1,00,000 shares of ₹ 10 each fully paid) 1000
Stock (at 1st April, 2020) 140
Trade Creditors 80
Trade Debtors 780
4500 4500

1. The stock at 31st March, 2021 (valued at the lower of cost or net realizable value) was estimated to be
worth ₹ 2,00,000.
2. Fixtures, fittings, tools and equipment all related to administration. Depreciation is charged at a rate of
20% per annum on cost. A full year’s depreciation is charged in the year of acquisition, but no
depreciation is charged in the year of disposal.
3. During the year, the Company purchased equipment of ₹ 1,20,000. It also sold some fittings (which had
originally cost ₹60,000) for ₹10,000 and for which depreciation of ₹30,000 had been set aside.
4. The average Income tax for the Company is 30%. Factory closure cost is to be presumed as an allowable
expenditure for Income tax purpose.
5. The company proposes to pay a dividend of 20% per Equity Share.
Prepare Hero Ltd.’s Profit& Loss Account for the year to 31-3-21 and balance Sheet in accordance with the
Companies Act, 2013 along with the Notes on Accounts containing only the significant accounting policies.
Question 21.The following balances extracted from the books of Supreme Ltd., a real estate company, on 31-3-2015:
( (₹’000)
Dr. Cr
Sales 13,800
Purchases of materials 6,090
Share capital fully paid 500
Land purchased in the year as stock 365
Leasehold premises 210
Creditors 2,315
Debtors 3,675
Directors’ salaries 195
Wages 555
Work in progress on 01.04.2014 1,050
Sub-contractors’ cost 4,470
Equipment, Fixtures and Fittings at cost on 01.04.2014 1,320
Stock on 01.04.2014 295
Profit and Loss Account, Credit Balance on 01.04.2014 640
Secured Loan 560
Bank Overdraft 525
Interest on Loan and Overdraft 110
Depreciation on Equipment on 01.04.2014 820
Administration Expenses 735
Office Salaries 90
19,160 19,160

You also obtain the following information:
i. On 31st March, 2015, stock on hand including the land acquired during the year, is valued at ₹7,10,000.
Work in progress at that date is valued at ₹7,00,000.
ii. On 1st October, 2014 the company moved to new premises. The premises are on a 12 years lease and
the lease premium paid amounted to ₹ 2,10,000. The company used sub-contract labour of ₹ 2,00,000
and materials at cost of ₹ 1,90,000 in the refurbishment of the premises. These are to be considered as
part of the cost of leasehold premises.
iii. A review of the debtors reveals specific doubtful debts of ₹ 1,75,000 and the directors wish to provide
for these together with a general provision based on 2% of the balance.
iv. Depreciation on equipment, fixtures and fittings is provided at 15% on the written down value.
v. Supreme Ltd. sued Shallow Ltd. for supplying defective materials which has been written off as
valueless. The Directors are confident that Shallow Ltd. will agree for a settlement of ₹2,50,000.
vi. The directors propose a dividend of 25%.
vii. ₹ 1,00,000 is to be provided as audit fee.
viii. The company will provide 10% of the pre-tax profit as bonus to employees in the accounts before
charging the bonus.
ix. Income tax to be provided at 50% of the profits.
You are required:
a.
to prepare the company’s financial statements for the year ended 31st March, 2015 as near as
possible to proper form of company final accounts; and
b. to prepare a set of Notes to accounts including significant accounting policies.
Notes: Workings should form part of your answer. Previous year figures can be ignored. Figures are to be
rounded off to nearest thousands. (ICMAI Study material)
PAYMENT OF DIVIDEND TO SHAREHOLDERS
SOURCES OF DIVIDEND:-following are sources from which dividends may be declared, namely
(i) Dividends out of current year’s profits: A company can declare dividend out of current year’s profits
only after providing for depreciation in accordance with the provisions of Section 123(2).
(ii) Dividends out of previous year’s profits: A company can pay dividend out of profits for any
previous financial years arrived at after providing for depreciation in accordance with the provisions
of that sub section and remaining undistributed; or
(iii) Out of both the above
(iv) Out of money provided by the central government or any state government for the payment of
dividend.
PAYMENT OF DIVIDENDS OUT OF PAST YEAR’ FREE RESERVES (ACCUMULATED PROFITS):-- In case of
inadequacy or absence of profits in any year, a company can declare and pay dividends by withdrawing amount out
of free reserves. Only revenue reserves which are free and uncommitted can be used for this purpose. The
Companies (Declaration of Dividend out of Reserves) Rules, 2014 provides that in the event of inadequacy
or in the absence of profits in any year, dividend may be declared by a company for that year out of the
accumulated profits earned by it in the previous year and transferred by it to the reserves, subject to the
following conditions :
Condition (1) The rate of dividend should not exceed the average of the rates at which dividend was
declared by it in the three years immediately preceding that year.
Condition (2) The total amount which can be drawn from the accumulated profits ( free reserves) should
not exceed an amount equal to one-tenth of the sum of its paid up capital and free reserves. The amount so drawn
shall first be utilized to set off the losses of the current financial year and to pay dividend on preference shares;
Condition (3) The balance of reserves after such drawn should not fall below 15% of its paid up share capital
as appearing in the latest audited financial statement.

Condition (4) No company should declare dividend unless carried over previous losses and depreciation not
provided in previous year are set off against profit of the company of the current year the loss or depreciation,
whichever is less.
Question 22. Calculate the maximum amount that can be distributed as dividend for the year 2021 according
to Companies (Declaration of Dividend out of Reserves) Rules 2014 from the Following data:
Rs.
Paid up equity capital 10 lacs
Free reserves 5 lacs
Loss in 2021 0.6lacs
Dividends declared in 2016, 2017, 2018, 2019 and 2020: 12.5%, 15%, 13%, 16% and 13%.
Question 23. Equity share capital = Rs 15,00,000

10% preference share capital= Rs 5,00,000
General reserves = 5,00,000
Current year profit = nil
Calculate the maximum rate of dividend which can be paid out of past year general reserves. Assume
that average rate of dividend declare during last 3 years is 12%. (CA Inter)
Question 24. Due to inadequacy of profit during the year, the company proposes to declare dividend out of free
reserves. From the following particulars you are to ascertain the amount that can be drawn applying the
Companies (Declaration of dividend out of Reserves) Rules, 2014.
(i) 8,750 8% Preference shares of Rs. 100 each fully paid 8,75,000
(ii) 3,50,000 equity shares of Rs. 10 each fully paid 35,00,000
(iii) General Reserves 10,50,000
(iv) Capital reserves on revaluation of assets 1,75,000
(v) Security Premium 1,75,000
(vi) Profit and loss a/c— credit balance 31,500
(vii) Net Profit for the year 1,78,500
Average rate of dividend during the last 3 years 15%.
Question 25. Due to inadequacy of profits during the year ended 31st March, 2022, XYZ Ltd. proposes to
declare 10% dividend out of general reserves. From the following particulars, ascertain the amount that can
be utilised from general reserves, according to the Companies (Declaration of dividend out of Reserves)
Rules, 2014:
`
17,500 9% Preference shares of Rs 100 each, fully paid up 17,50,000
8,00,000 Equity shares of Rs 10 each, fully paid up 80,00,000
General Reserves as on 1.4.2021 25,00,000
Capital Reserves as on 1.4.2021 3,00,000
Revaluation Reserves as on 1.4.2021 3,50,000
Net profit for the year ended 31st March, 2022 3,00,000
Average rate of dividend during the last three years has been 12%.

Question 26. Write short notes on DECLARATION OF DIVIDEND As per section 123 of companies Act
2013.
Answer : As per section 123 of the companies act 2013, board of directors of a company may declare
dividend including interim during any financial year out of profits.
Provided that in case the company has incurred loss during the current financial year upto the end of
quarter immediately preceding the date of declaration of interim dividend, such interim dividend should
not be declare at a rate higher than the average dividend declared by the company during the immediately
preceding three financial years.
The amount of dividend including interim dividend should be deposited in a scheduled bank in a separate
bank within 5 days from the declaration of such dividend.
No dividend should be paid by a company in respect of any share therein except to the registered
shareholder or to his order or to his banker and should be payable only in cash.
Provided further that any dividend payable in cash may be paid by cheque or warrant or in any electronic
mode to the shareholders.
Question 27. Write short notes on PAYMENT OF DIVIDEND as per section 124 of companies Act 2013.
Answer:
i. Where a dividend has been declared by a company but has not been paid/claimed within 30 days from
the date of declaration to any shareholder, the company should within 7 days from the date of expiry of
said 30 days, transfer such amount of unpaid dividends to a special account called “ unpaid dividend
account”
ii. the company should within a period of 90 days of opening unpaid dividend account, prepare a
statement containing the names, their last known addresses and the amount of dividend to be paid to each
person and place it on website of the company, if any, and also on any other website approved by central
government for the purpose.
iii. in case of default in transferring amount to unpaid dividend account, the company should pay interest
@ 12% p.a. for the period of default.
iv. any person claiming to be entitled to any money transferred to the unpaid dividend account, may apply
company for payment.
v. any amount which remains in unpaid dividend account for a period of 7 years from the date of transfer
should be transferred to “Investor Education And Protection Fund” established under section 125.
vi. all shares in respect of which unclaimed dividend has been transferred to “Investor Education And
Protection Fund” should also be transferred in the name of “Investor Education And Protection Fund”.
vii. if a company fails to comply with any of the requirements of this section, the company will be
punishable with fine which will not be less than Rs 5 lakh but which may extend to Rs 25 lakh and every
officer in default will be punishable with fine not less than Rs 1 lakh but which may extend to Rs 5 lakh
MANAGERIAL REMUNERATION:-- Managerial personnel refer to managing/whole time director and

manager. Remuneration paid to managerial personnel, namely, directors (part time and whole time),
managing director or manager, is subject to overall limit as well as separate limits for each category of
managerial personnel. Under section 197A of the company act a company can have either managing
director or manager and not both. Various sections which deals with managerial remuneration are as
follows
SECTION 197—prescribes the overall maximum remuneration payable in case of profit and also in case
of inadequacy/absence of profit or loss.
SECTION 198--- lays down how the net profit of the company will be ascertained for the purpose of
calculating managerial remuneration.

LIMITS TO MANAGERIAL REMUNERATION IN CASE OF ADEQUATE PROFITS

1. Overall limits to all managerial personnel = 11%
2.All directors(part time) when the company is having
managing directors/ whole time directors or manager = 1%
3.All directors(part time) when the company is not having
managing directors/ whole time directors or manager = 3%
4. A manager, managing director or whole time director, when there is one = 5%
5. A manager, managing director or whole time director, when there is more than one = 10%
COMPUTATION OF PROFIT UNDER SECTION 198 -- CHECK NOTES GIVEN IN VIDEO

CLASSES
COMPUTATION OF ADMISSIBLE PROFITS FOR THE PURPOSE OF MANAGERIAL REMUNERATION
Question 28. COC Education Limited made a net profit of Rs. 25,000 lakhs after adjusting the following items.
(Rs. Lakhs)
(a) Provision for taxation 10,000

(b) Capital profit on sale of part of the Undertaking 200
(c) Depreciation as per books 600
(d) Managerial remuneration 55
(e) Provision for diminution in the value of investments 15
(J) Profit on sale of investments 30
(g) Provision for wealth tax 20
(h) Directors' fees 15
(i) Revenue Profit on sale of assets 40
(j) Revenue Loss on sale of assets 35
(k) Prior period adjustments (credit) 20
(i) Provision for bad debts 100
(m) Ex-gratia payment to an employee 5
You are given the following additional information:
1. Depreciation as per Section 123 Rs. 500 lakhs

2. Bad debts actually written off Rs. 60 lakhs
You are required to calculate net profits U/S 198 of the Companies Act 2013.
Question 29 From the following particulars of Ganga Limited, you are required to calculate the
managerial remuneration in the following situations.
(a) There is only one whole time director.
(b)There are two whole time directors:
(c) There are two whole time directors, a part time director and Manager.
Net profit before provision for income-tax and managerial
remuneration, but after depreciation and provision for repairs 8,70,410
Depreciation provided in the books 3,10,000
Provision for repairs of machinery during the year 25,000
Depreciation allowable under Schedule II 2,60,000
Actual expenditure incurred on repairs during the year 15,000 [C.A. (Inter) Nov. 98,]

Question 30. The following is the Profit & Loss A/c of Mudra Ltd. for the year ended 31st March, 2021
Rs. Rs.
To Administrative, Selling and By Balance b/d 5,72,350
distribution expenses 8,22,542 " Balance from Trading A/c - 40,25,365
" Donation to charitable funds 25,500 " Subsidies received from Govt 2,32,560
" Directors fees 66,750 " profit on sale Investments 15,643
" Interest on debentures 31,240 " Transfer fees 722
" Compensation for breach of " Profit on sale of
Contract 42,530 Machinery:
" Managerial remuneration 2,85,350 Amount realized 55,000
" Depreciation on fixed assets 5,22,543 Written down value 30,000 25,000
" Provision for Taxation 12,42,500
" General Reserve 4,00,000
" Investment Revaluation Reserve 12,500
" Balance c/d 14,20,185
48,71,640 48,71,640
(1) Original Cost of the machinery sold was Rs. 40,000

(2) Depreciation on fixed assets as per Schedule II of the Companies Act, 2013 was Rs.5,75,345.
You are required to comment on the managerial remuneration in the following situations:
(a) there is only one whole time director;

(b) there are two whole time directors;
(c) There are two whole time directors, a part time director and a manager.
MANAGERIAL REMUNERATION IN CASE OF INADEQUATE PROFIT OR LOSS ( without Central Govt.

approval)
EFFECTIVE CAPITAL Limits of yearly remuneration

Shall not exceed
Less than 5 crores 60 lac
5 crores or more but less than 100 crores 84lacs
100 crores or more but less than 250 crores 120 lacs
250 crores or more 120 lacs + .01% of the effective capital
In excess of 250 crores
NOTE 1. The remuneration in excess of the above limits may be paid if resolution passed by the shareholders is
a special resolution.
2. If the existence of company is less than one year, the limit should be pro-rated.
3. A managerial person should be eligible for the following perquisites which should not be included in the
computation of the ceiling on remuneration in case of adequate profit / inadequate profit/ in case of loss:
(a) Contribution to PF, superannuation fund or annuity fund to the extent they are not taxable under the
income tax act 1961.
(b) Gratuity payable at the rate not exceeding half a month’s salary for each completed year of service, and
(c) Encashment of leave at the end of tenure.

4. In addition to the perquisites specified in point 3 , an expatriate managerial person( including NRI) should
also be eligible to the following perquisites:
(a) Children’s education allowance to the maximum of Rs 12,000 per month per child or actual expenses
incurred, whichever is less.
(b) Holiday passage for children studying outside India or for family staying abroad.
(c) Leave travel concession.
MEANING OF EFFECTIVE CAPITAL:
Equity share capital and preference share capital( excluding share application pending allotment)
Add : all reserves and surplus( excluding non-cash reserves)
Add: long term borrowings
Less: non-trade investment
Less: accumulated losses
Note 1. Effective capital should be calculated as on last date of financial year proceeding the financial year in
which the appointment of managerial person is made.
2. where the appointment of the managerial person is made in the year in which the company has been
incorporated, the effective capital should be calculated on the date of such appointment.
Question 31. The following extract of Balance sheet of X Ltd. was obtained:
Balance sheet (Extract) as on 31st march, 2021
Liabilities Rs.
Authorised capital:
20,00,000,14% preference shares of Rs. 100 20,00,00,000
2,00,00,000 Equity shares of Rs. 100 each 2,00,00,00,000
2,20,00,00,000
Issued and subscribed capital:
15,00,000,14% preference shares of Rs. 100 each fully paid 15,00,00,000
1,20,00,000 Equity shares of Rs. 100 each, Rs. 80 paid-up 96,00,00,000
Share suspense account 20,00,00,000
Reserves and surplus
Capital reserves (60% is revaluation reserve) 2,50,00,000
Securities premium 50,00,000
Secured loans:
15% Debentures 65,00,00,000
Unsecured loans:
Public deposits 3,70,00,000
Cash credit loan from SB I 4,65,00,000
Sundry creditors 3,45,00,000

Assets:
Investment in shares, debentures, etc. 75,00,00,000

Profit and Loss account 15,25,00,000

Discount on debentures not written off 55,00,000
Share suspense account represents application money received on shares, the allotment of which is not yet
made.
X Ltd. has been sustaining loss for the last few years. X Ltd. has only one whole-time director Find out how
much remuneration X Ltd. can pay to its managerial person. Would your answer differ if X Ltd. is an investment
company?
Question 32: The Managing Director of A Ltd. is entitled to 5% of the annual net profits, as his
remuneration, subject to a minimum of ₹ 25,000 per month. The net profit, for the purpose, are to be
taken without charging income-tax and his remuneration itself. During the year, A Ltd. made net profit of
₹ 43,00,000 before charging MD’s remuneration, but after charging provision for taxation of ₹ 17,20,000.
Compute Remuneration payable to the Managing Director.
Answer. Calculation of remuneration payable to the Managing Director

Net profit as per books 43.00
Add: provision for taxation 17.20
Annual profit for the purpose of managerial remuneration 60.20
Managing Director’s Remuneration @ 5% of above 3.01
Minimum remuneration to be paid to the managing director
= Rs. 25,000 per month × 12 3.00
Hence, in this case,
Remuneration to be paid to the Managing director of A Ltd. = Rs. 3,01,000.
(CA IPCC- MAY 2009 (2MARKS)
Question 33. Kumar Ltd., a non-investment company has been incurring losses for the past few years.
The company provides the following information for the current year:
(`₹ in lakhs)
Paid up equity share capital 120
Paid up Preference share capital 20
Reserves (including Revaluation reserve ` 10 lakhs) 150
Securities premium 40
Long term loans 40
Deposits repayable after one year 20
Application money pending allotment 720
Accumulated losses not written off 20
Investments 180
Kumar Ltd. has only one whole-time director, Mr. X. You are required to calculate the amount of
maximum remuneration that can be paid to him if no special resolution is passed at the general meeting
of the company in respect of payment of remuneration for a period not exceeding three years.

CHAPTER 2. AS-3 (REVISED): CASH FLOW STATEMENT

Cash Flow Statement deals with the provision of information about the historical changes in cash and cash
equivalents of an enterprise by means of a cash flow statement which classifies cash flows during the
period from operating, investing and financing activities.
• Cash comprises cash on hand and demand deposits with banks.
• Cash equivalents are short term highly liquid investments that are readily convertible into known
amounts of cash and which are subject to an insignificant risk of changes in value. For example,
investments held for 3 months or less.
• Cash flows are inflows and outflows of cash and cash equivalents.
• Cash flow statement deals with flow of cash funds but does not consider the movement among
cash, bank and investments of excess of cash in cash equivalents.
CLASSIFICATION OF CASH FLOW ACTIVITIES:
• Operating activities are the principal revenue-producing activities of the enterprise. It provides
useful information about financing through working capital. Net impact of operating activities on
flow of cash is reported as “cash flow from operating activities”. The amount of cash flows from
operating activities is a key indicatorof the extent to which the opertions of the enterprise have
generated sufficient cash flows to:
a. maintain the operating capability of the enterprise.
b. pay dividends, repay loans; and
c. make new investments without recourse to external sources of financing.
• Investing activities are the acquisition and disposal of long-term assets and other investments not
included in cash equivalents.
• Financing activities are activities that result in changes in the size and composition of the owners’ capital
(including preference share capital in the case of a company) and borrowings of the enterprise.
Methods of preparing Cash Flow Statement:

1. Direct Method: In this method major classes of gross cash receipts and gross cash payments are
disclosed.
2. Indirect Method: Under this method, the following adjustment to report net profit or loss to be made:
• Effects of transactions of non-cash nature.
• Deferrals in accruals of past or future operating receipt or payments.
• Changes in current assets and liabilities
• Income & expenses associated with investing and financing cash flows.
Question 1. From the following details of COC EDUCATION Ltd. Prepare Cash Flow Statement by indirect method:

31.3.2022 31.3.2021
Share Capital 10,00,000 8,00,000
General Reserve 2,00,000 1,50,000
Profit and Loss Account 1,00,000 60,000
Debentures 4,00,000
Provision for taxation 1,00,000 70,000
Dividend Payable --- 1,00,000
Sundry Creditors 7,00,000 8,20,000
25,00,000 20,00,000
Plant and Machinery 7,00,000 5,00,000
Land/Building 6,00,000 4,00,000
Sundry Debtors 5,00,000 7,00,000
Stock 4,00,000 2,00,000
Cash on hand/bank 2,00,000 2,00,000
25,00,000 20,00,000
Question 2. From the Following Balance Sheet of Grow More Ltd., Prepare Cash Flow Statement for the
year ended 31st March,2022.
Particulars 31st March,2022 31st March,2021

Equity and Liabilities :
1 Shareholder’s Funds;
A Share Capital 10,00,000 8,00,000
B Reserve and Surplus 1 3,00,000 2,10,000
2 Non-current liabilities
Long Term borrowings 2 2,00,000 ---
3 Current liabilities
A Trade payables 7,00,000 8,20,000
B Other Current liabilities 3 --- 1,00,000
C Short term provisions 1,00,000 70,000
(Provision for tax)
Total 23,00,000 20,00,000
Assets
1 Non-Current assets;
A Property, Plant and Equipment 4 13,00,000 9,00,000
B Non-Current Investment 1,00,000 ---
2 Current assets
A Inventories 4,00,000 2,00,000
B Trade receivables 5,00,000 7,00,000
C Cash and Cash Equivalents --- 2,00,000
Total 23,00,000 20,00,000

Notes to Account:
No. Particulars 31st March,2022 31st March,2021
1 Reserve and Surplus
Revenue Reserve 2,00,000 1,50,000
Profit and Loss Account 1,00,000 60,000
Total 3,00,000 2,10,000
2 Long term borrowings
10% Debentures 2,00,000 ---
3 Other Current liabilities

Dividend payable --- 1,00,000
4 Property, Plant and Equipment

Land and building 6,00,000 4,00,000
Total 13,00,000 9,00,000
i. Depreciation @ 25% was charged on the opening value of Plant and Machinery.
ii. At the year end, one old machine costing ₹ 50,000 (WDV ₹20,000) was sold for ₹ 35,000. Purchase
was also made at the year end.
iii. ₹ 50,000 was paid towards Income tax during the year.
iv. Construction of the building got completed on 31.03.2022 and hence no depreciation will be charged
on the same. Prepare Cash flow Statement.
v. 10% Debentures were issued on 1st April 2021. (CA Inter may 2001- 16 Marks modified)
Question 3. Following are the balance sheets of X Co. Ltd. as on 31st March, 2017and 2018:
Liabilities 2021 2022 Assets 2021 2022

Pref. Share Capital ---- 2,00,000 Goodwill 20,000 30,000
Eq. Share Capital 4,20,000 5,20,000 Buildings 5,00,000 4,60,000
General Reserve 1,00,000 1,10,000 Machinery 3,00,000 3,38,000
Profit & Loss Account 61,000 71,200 Stock 2,00,000 1,48,000
14% Debentures 2,00,000 - Debtors 1,40,400 1,08,000
Creditors 4,40,000 2,68,000 Cash/ Bank 20,600 37,200
Unclaimed Dividend 2,000 furniture
Furniture 1,00,000 1,20,000
Provision for tax 60,000 70,000
12,81,000 12,41,200 12,81,000 12,41,200
Information:
(i) Dividend paid in cash Rs. 50,000 during the year.
(ii) Assets acquired for Rs. 1,00,000 payable in equity shares: stock Rs. 50,000, Machine Rs. 40,000.
(iii) Machine purchased for cash Rs. 12,000.
(iv) ) machinery of the book value of Rs. 6,000 was sold for Rs. 6,500.
(v) Provision for tax during the year Rs. 66,000.
(vi) Debenture holders accepted preference shares in settlement of their claims.
(vii) Depreciation on buildings Rs. 40,000.
(vii) furniture of the book value of 30,000 sold for 22,000. Loss on sale adjusted from general reserve.
Prepare Cash flow statement. (CA Inter- May 2007 - 16 marks)

Question 4. The Balance Sheet of New Light Ltd. as at 31st March,2021 and 2020 are as follows:
31st March,2020 31st March,2021

₹ ₹
1. Equity and Liabilities
Shareholder’s Funds:
A Share Capital 1. 16,00,000 18,80,000
B Reserves and Surplus 2. 8,40,000 11,00,000
2. Non-current liabilities
Long term borrowings 3. 4,00,000 2,80,000
3. Current Liabilities
A Other Current liabilities 4. 6,00,000 5,20,000
B Short term provision 3,60,000 3,40,000
(Provision for tax)
Total 38,00,000 41,20,000
Assets
Non-current assets
Property, plant and Equipment’s 22,80,000 26,40,000
Non-Current Investment 4,00,000 3,20,000
Current assets
Cash and Cash equivalents 10,000 10,000
Other Current assets 11,10,000 11,50,000
Total 38,00,000 41,20,000
Notes to accounts:

1. Share Capital
Equity Share Capital 12,00,000 16,00,000
10% Preference Share Capital 4,00,000 2,80,000
Total 16,00,000 18,80,000
2. Reserve and Surplus
General Reserve 6,00,000 7,60,000
Profit and Loss account 2,40,000 3,40,000
Total 8,40,000 11,00,000

3. Long term borrowings
9% Debentures 4,00,000 2,80,000
Total 4,00,000 2,80,000
4. Other Current liabilities

Dividend payable 1,20,000 ---
Current Liabilities 4,80,000 5,20,000
Total 6,00,000 5,20,000
Property, plant and Equipment:

Property, plant and equipment 32,00,000 38,00,000
Less: Depreciation (9,20,000) (11,60,000)
Net Carrying Value 22,80,000 26,40,000
i. The company sold one property, plant and equipment for ₹ 1,00,000, the cost of which was ₹ 2,00,000

and the depreciation provided on it was ₹ 80,000.

ii. The company also decided to write off another item of property, plant and equipment costing ₹ 56,000
on which depreciation amounting to ₹ 40,000 has been provided.
iii. Depreciation on property, plant and equipment provided ₹ 3,60,000
iv. Company sold some investment at a profit of ₹ 40,000.
v. Debentures and preference share capital redeemed at 5% premium.
vi. Company decided to value inventory at cost, whereas previously the practice was to value inventory at
cost less 10%. The inventory according to books on 31.3.2020 was ₹ 2,16,000. The inventory on
31.3.2021 was correctly valued at ₹ 3,00,000.
Prepare Cash Flow Statement as per revised Accounting Standard 3 by indirect method.
Question 5. From the following Balance Sheets and information, prepare Cash Flow Statement of
Ryan Ltd. by Indirect Method for the year ended 31st March,2022:
Particulars Notes 31st March,2022 31st March 2021

Equity and Liabilities
1. Shareholder’s Funds:
A Share Capital 1 6,00,000 7,00,000
B Reserve and Surplus 2 4,20,000 3,00,000
2. Non-Current liabilities;
Long term borrowings 3 2,00,000 ---
3. Current liabilities
A Trade Payables 1,15,000 1,10,000
B Other Current liabilities 4 30,000 80,000
C Short term provisions (provisions for tax) 95,000 60,000
Total 14,60,000 12,50,000

Assets
1. Non-Current assets;
A Property, plant and Equipment 5 9,15,000 7,00,000
B Non-Current Investments 50,000 80,000
2. Current assets;
A Inventories 95,000 90,000
B Trade receivables 2,50,000 2,25,000
C Cash and Cash equivalents 50,000 90,000
D Other Current assets 1,00,000 65,000
Total 14,60,000 12,50,000
Notes to accounts:
1. Share Capital
Equity Share Capital 6,00,000 5,00,000
10% Redeemable Preference Share Capital --- 2,00,000
Total 6,00,000 7,00,000

2. Reserves and Surplus
Capital redemption reserve 1,00,000 ---
Capital reserve 70,000 ---
General reserve 1,50,000 2,50,000
Profit and Loss account 1,00,000 50,000
Total 4,20,000 3,00,000

3. Long term borrowings

9% Debentures 2,00,000 ---
Total 2,00,000
4. Other current liabilities

Dividend payable --- 60,000
Liabilities for expense 30,000 20,000
Total 30,000 80,000
5. Property, plant and equipment

Land and Building 1,50,000 2,00,000
Total 9,15,000 7,00,000

i. A piece of land has been sold out for ₹ 1,50,000 (Cost – ₹ 1,20,000) and the balance land was revalued.
Capital Reserve consisted of profit on revaluation of land.
ii. On 1st April, 2021 a plant was sold for ₹ 90,000 (Original Cost – ₹ 70,000 and W.D.V. – ₹ 50,000) and
Debenture’s worth ₹ 1 lakh were issued at par as part consideration for plant of ₹ 4.5 lakhs acquired.
iii. Part of the investments (Cost – ₹ 50,000) was sold for ₹ 70,000.
iv. Pre-acquisition dividend received ₹ 5,000 was adjusted against cost of investment.
v. Interim dividend was declared and paid @ 15% during the current year.
vi. Income-tax liability for the current year was estimated at ₹ 1,35,000.
vii. Depreciation @ 15% has been charged on Plant and Machinery but no depreciation has been charged
on Building. (CA INTER Group 1 - 16 marks)
Question 6. From the following summarized balance sheets of a company, as at 31 March 2021 and 31 March
2022 respectively prepare cash flow statement. All working should form part of your answer:
Property, plant, equipment 2,40,070 2,53,730
Equity Share Capital 75,000 1,20,000 Less : Depreciation 90,020 98,480
10% Redeemable
Preference Share Capital 1,00,000 80,000 1,50,050 1,55,250
Reserve for replacement 15,000 10,000 Investments 61,000 76,000
of Machinery
Long term Loans Nil 40,000 Stock 98,000 1,04,000
Bank Overdraft 22,000 Nil Trade Debtors 88,000 85,000

Trade Creditors 84,450 75,550 Bank 11,750 32,000
Dividend payable
24,000 Nil
on Equity Shares
Profit & Loss Account 88,350 1,26,700
4,08,800 4,52,250 4,08,800 4,52,250

Additional information:
(i) During the year, additional equity capital was issued to the extent of ₹ 25,000 by way of bonus shares fully paid.
(ii) Final dividend on preference shares and interim dividend of ₹ 4,000 on equity shares were paid on 31-3-2022.
(iii) Dividends payable on equity shares for the year ended 31 March 2021 were paid in October 2021.
(iv) Movement in reserve for replacement of machinery account represents transfer to Profit and Loss A/C.
(v) ₹ 1,700 being expenditure on fixed assets for the year ended 31 March 2021 wrongly debited to sundry
debtors then, was corrected in the next year.
(vi) Fixed assets costing ₹ 6,000 (accumulated depreciation ₹ 4,800) were sold for ₹ 250, loss arising there from
was written off.

(vii) Preference shares redeemed in the year (31st March 2022) were out of a fresh issue of equity shares.
Premium paid on redemption was 10%. (CA Inter- May 1997 16 marks)
Question 7. Condensed versions of the comparative balance sheets and income statement of Scindia
Ltd. are presented below:
Comparative Balance Sheets as on December 31, 2022 and 2021
Assets 2022 2021
₹ ₹
Cash 46,000 28,900
Debtors 41,000 45,000
Inventories 48,000 51,000
Prepaid expenses 4,100 3,700
Machinery 3,30,000 3,10,000
Accumulated depreciation-Machinery (1,31,000) (1,85,000)
Buildings 5,80,000 4,75,000
Accumulated depreciation-Buildings (2,25,000) (2,15,000)
Land 60,000 50,000
7,53,100 5,63,600
Equity and liabilities:
Creditors 32,500 37,000
Wages payable 4,500 7,500
Income tax payable 7,000 5,000
Mortgage note payable 2029 1,00,000 -
Equity share capital, Rs. 20 per share 4,00,000 3,50,000
Security premium 55,000 45,000
Profit and loss(surplus) account 1,54,100 1,19,100
7,53,100 5,63,600
(i) Dividends of ₹ 40,000 were declared during the year.
(ii) Machinery with an original cost of ₹ 80,000 and accumulated depreciation of Rs. 74,000 was sold during the
year for ₹ 6,000 cash. New machinery was also purchased for ₹ 1,00,000 cash.
(iii) Land and buildings were acquired during the year at a cost of Rs. 1,15,000. In addition to the down payment
of ₹ 15,000, a ten year 10% mortgage note for ₹ 1,00,000 was issued to the vendor.
Income Statement for the year ended December 31, 2022

Sales 7,70,000
Cost of goods sold 4,60,000
Gross profit on sales 3,10,000
Operating expenses:
Depreciation expenses-machinery 20,000
Depreciation expenses-buildings 10,000
Other operating expenses 1,75,500 2,05,500
Income before income tax 1,04,500

Income tax provision 69,500
Net profit after tax 35,000
( CA final – 10 marks)
Prepare cash flow statement by indirect method.

Question 8. You are given below the balance sheet of Guruji Limited for the year ended December 31,2020.
₹
Assets
Plant and Machinery (net of depreciation) 6,00,000
Land 2,00,000
Trade debtors 2,60,000
Stock 2,00,000
Bank balance 2,40,000
18,00,000
Equity share capital 8,00,000
Retained earnings 2,40,000
Debentures 3,00,000
Long-term borrowings 2,60,000
Trade creditors 2,00,000
18,00,000
During 2021 the following transactions took place:
1. Further land was purchased for cash ₹ 1,50,000.

2. An amount of ₹ 60,000 was repaid towards long-term borrowings.
3. Dividends paid to shareholders ₹ 1,20,000.
4. Plant of ₹ 2,00,000 was purchased by issuing debentures at par ₹ 2,00,000.
5. Part of the investments was sold at ₹ 1,20,000 resulting in a profit of ₹ 20,000.
6. Net profit for the period was ₹ 3,50,000 after writing off depreciation amount of ₹ 90,000 on plant and
machinery.
7. Investment costing ₹ 50,000 purchased during the year.
8. The following were the balances as at December 31,2021:
Trade debtors 3,30,000

Stock 1,50,000
Bank balance 4,10,000
You are required to prepare the balance sheet as at December 31, 2021(Format not required) and a statement of
cash flow for the year ended December 31, 2021. ( CA Inter – 12 marks modified)
Question 9. Intelligent Ltd., a non-financial company has the following entries in its Bank Account. It has
sought your advice on the treatment of the same for preparing Cash Flow Statement.
(i) Loans and Advances given to the following and Interest earned on them:
(1) to Suppliers (2) to employees. (3) to its Subsidiaries Companies.
(ii) Investment made in Subsidiary Smart Ltd. and Dividend received.
(iii) Dividends paid for the year.
(iv) TDS on Interest Income earned on Investment made
(v) TDS on Interest earned on Investments made
(vi) Insurance Claim received received loss of fixed asset by fire. Discuss in the Context of AS-3 Cash Flow
Statement.

Question 10. From the following information, Calculate Cash Flow from Operating activities:
Particulars ₹ Particulars ₹
To Balance b/d 1,00,000 By cash purchase 1,20,000
To Cash Sales 1,40,000 By trade payables 1,57,000
To Trade receivables 1,75,000 By Office & Selling Expenses 75,000
To Trade Commission 50,000 By Income Tax 30,000
To Sale of Investment 30,000 By Investment 25,000
To Loan from Bank 1,00,000 By Repayment of loan 75,000
To Interest & Dividend 1,000 By Interest on Loan 1,00,00
By Balance C/d 1,04,000
5,96,000 5,96,000
Solution: - Cash Flow Statement for the year ended March 31 (Direct Method)
Particulars ₹ ₹
Operating Activities:
Cash received from sale of goods 1,40,000
Cash received from Trade receivables 1,75,000
Trade Commission received 50,000 3,65,000
Less: Payment for Cash Purchase 1,20,000

Payment to Trade Payables 1,57,000
Office and Selling Expenses 75,000 (352000)
Payment for Income Tax 30,000
Net Cash Flow used in Operating Activities (17000)
Question 11. The Following Summary Cash account has been extracted from the Company’s accounting
records:
Summary Cash Account
(₹’000)
Balance at 1.4.2021 35
Receipts from Customers 2,783
Issue of Shares 300
Sale of Fixed assets 128
3,246
Payments to Suppliers 2,047
Payments for Property, plant & equipment 230
Payment for overheads 115
Wages and Salaries 69
Taxation 243
Dividends 80
Repayment of Bank Loan 250 (3034)
Balance at 31.3.2022
212
Prepare Cash Flow Statement of this Company Hills Ltd. for the Year ended 31 st March, 2022 in accordance
with AS-3 (Revised). The Company does not have any Cash Equivalents.
Solution: - Cash Flow Statement for the year ended 31st March,2022 (Using Direct Method)
Particulars (₹’000)
Cash Flows from Operating activities
Cash receipts from Customers 2783
Cash Payments to Suppliers (2047)
Cash Paid to employees (69)
Other Cash Payments (for Overheads) (115)

Cash generated from operations 552

Income Taxes paid (243)
Net Cash from Operating activities 309
Cash Flows from Investing activities

Payments for Purchase of Fixed assets (230)
Proceeds from Sale of Fixed assets 128
Net Cash Used in investing activities (102)
Cash Flows from financing activities

Proceeds from issuance of Share Capital 300
Bank Loan repaid (250)
Dividend Paid (80)
Net Cash used in financing activities (30)

Net Increase in Cash and Cash equivalents 177
Cash and Cash equivalents at beginning of period 35
Cash and Cash equivalents at end of period 212
Question 12. Prepare Cash flow Statement by direct indirect of M/s MNT Ltd. for the year ended 31st
March,2021 with the help of the following information:
(1) Company Sold goods for cash only.
(2) Gross Profit Ratio was 30% for the year, gross profit amounts to ₹ 3,82,500.
(3) Opening inventory was lesser than closing inventory by ₹ 35,000.
(4) Wages paid during the year ₹ 4,92,500.
(5) Office and Selling expenses paid during the year ₹ 75,000.
(6) Dividend paid during the year ₹ 30,000.
(7) Bank loan repaid during the year ₹ 2,15,000 (included interest ₹ 15,000).
(8) Trade payables on 31st March, 2020 exceed the balance on 31st March 2021 by ₹ 25,000.
(9) Tax paid during the year amounts to ₹ 65,000 (provisions for taxation as on 31.3.2021 ₹ 45000)
(10) Investment of ₹ 7,00,000 Sold during the year at a profit of ₹ 20,000.
(11) Depreciation on Fixed assets amounts to ₹ 85,000.
(12) Plant and Machinery Purchased on 15th November,2020 for ₹ 2,50,000.
(13) Cash and Cash Equivalents on 31st March, 2020 ₹ 2,00,000.
(14) Cash and Cash Equivalents on 31st March, 2021 ₹ 6,07,500.
Question 13. Raj Ltd. gives you the following information for the year ended 31st March, 2006:
(i) Sales for the year Rs. 48,00,000. The Company sold goods for cash only.
(ii) Cost of goods sold was 75% of sales.

(iii) Closing inventory was higher than Opening inventory by Rs. 50,000.
(iv) Trade creditors on 31.3.2006 exceed the outstanding on 31.3.2005 by Rs. 1,00,000.
(v) Tax paid during the year amounts to Rs. 1,50,000.
(vi) Amounts paid to Trade Creditors during the year Rs. 35,50,000.
(vii) Administrative and Selling Expenses paid Rs. 3,60,000.
(viii) One new machinery was acquired in December, 2005 for Rs. 6,00,000.
(ix) Dividend paid during the year Rs. 1,20,000.
(x) Cash in hand and at Bank on 31.3. 2006 Rs. 70,000.
(xi) Cash in hand and at Bank on 1.4.2005 Rs. 50,000. Prepare Cash Flow Statement for the year
ended 31.3.2006 as per AS-3. ( CA Final – 8 marks)
Question 14. Ryan Ltd Provides you the following information at the year-end, March 31,2021:
Particulars ₹ ₹
Sales 6,98,000
Cost of Goods Sold (5,20,000)
1,78,000
Operating Expenses
(including Depreciation Expenses of ₹ 37,000) (147000)
Other Income/Expenses: 31,000

Interest Expenses paid (23,000)
Interest Income received 6,000
Gain on Sale of Investments 12,000
Loss on Sale of plant (3,000) (8,000)
Profit before tax 23,000

Income Tax (7,000)
Profit after tax 16,000

Information available:
Particulars 31stMarch, 2021 31st March,2020

Plant 7,15,000 5,05,000
Less: Accumulated Depreciation (1,03,000) (68,000)
6,12,000 4,37,000
Investments (Long term) 1,15,000 1,27,000

Inventory 1,44,000 1,10,000
Trade Receivables 47,000 55,000
Cash 46,000 15,000
Prepaid Expenses 1,000 5,000
Share Capital 4,65,000 3,15,000
Reserves and Surplus 1,40,000 1,32,000
Bonds 2,95,000 2,45,000
Trade Payables 50,000 43,000
Outstanding Liabilities(expenses) 12,000 9,000
Income Taxes payables 3,000 5,000

Analysis of selected accounts and transactions during 2020-21.
1. Purchased Investment for ₹ 78000.
2. Sold Investments for ₹ 1,02,000. These investments cost ₹ 90,000.
3. Purchased Plant assets for ₹ 1,20,000.
4. Sold plant assets that cost ₹ 10,000 with accumulated depreciation of ₹ 2,000 for ₹5,000.
5. Issued ₹ 1,00,000 of bonds at face value in an exchange for plant assets on 31st March,2021.
6. Repaid ₹ 50,000 of bonds at face value at maturity.
7.Issued 15,000 shares of ₹ 10 each.
8. Paid Cash dividends ₹8,000. Prepare cash flow statement as per AS-3 (Revised) using indirect method. Also
verify it through direct method.
Question 15. The balances sheets of Sun Ltd. as at 31st March 2021 and 2022 were as:
Particulars Notes 2022 (₹) 2021 (₹)

1 Shareholder’s funds
(a) Share Capital 1 60,000 50,000
(b) Reserve & Surplus 2 5,000 4,000
2 Current Liabilities
(a) Trade Payables 4,000 2,500
(b) Other Current Liabilities 3 --- 1,000
(c) Short term Provisions 1,500 1,000
(Provisions for tax)
Total 70,500 58,500
Assets
1 Non-Current assets
(a) Property, Plant &Equipment 4 39,500 29,000
2 Current assets
(a) Current investment 2,000 1,000
(b) Inventories 17,000 14,000
(c) Trade receivables 8,000 6,000
(d) Cash & Cash Equivalents 4,000 8,500
70,500 58,500
Notes to Accounts
Particulars 2022 2021
1 Share Capital
Equity Shares of ₹ 10 each 60000 50000
2 Reserve & Surplus

Profit and Loss Account 5000 4000
3 Other Current Liabilities
Dividend Payable --- 1000
4 Property, Plant and Equipment (at WDV)

Building 10000 10000
Fixtures 17000 11000
Vehicles 12500 8000

Total 39500 29000
5 Cash and Cash Equivalents

Cash and Bank 4000 8500
The profit and loss statement for the year ended 31 st March,2022 disclosed:
Particulars ₹
Profit before tax 4500
Tax expense: Current tax (1500)
Profit for the year 3000
Declared dividend (2000)
Retained Profit 1000
Further information is available:

Particulars Fixtures ₹ Vehicles ₹
Depreciation for the year 1,000 2,500
Disposals:
Proceeds on disposal of vehicles --- 1,700
Written down Value --- (1,000)
Profit on disposal 700
Prepare a Cash Flow Statement for the year ended 31st March,2022.
Solution: - Cash Flow Statement for the year ended 31st March,2022
Particulars ₹ ₹
Cash flows from Operating activities
Net Profit before taxation 4,500
Adjustment for:
Depreciation 3,500
Profit on Sale of Vehicles (1700-1000) (700)
Operating Profit before working capital changes 7,300
Increase in Trade receivables (2,000)
Increase in Inventories (3,000)
Increase in Trade Payables 1,500
Cash generated from operations 3,800
Income taxes paid (1,000)
Net Cash generated from operating activities 2,800
Cash flows from investing activities
Sale of Vehicles 1,700
Purchase of current investments (1,000)
Purchase of fixtures (8,000)
Net Cash used in investing activities (7,000)
(14,300)
Cash Flows from financing activities
Issue of Shares for cash 10,000
Dividends paid (3,000) 7000
Net Cash generated from financing activities
(4500)
Net decrease in Cash and Cash equivalents
Cash and Cash equivalents at beginning of period 8500
Cash and cash equivalents at end of period 4000
Note to the Cash flow Statement

Cash and Cash Equivalents: 31.3.2022 31.3.2021
Bank and Cash 4000 8500
Cash and Cash Equivalents 4000 8500

Question 16. Given below are the relevant extracts of the Balance Sheet and the Statement of Profit and Loss
of ABC Ltd. along with additional information:
Extract of balance sheet:

Particulars Notes 31.3.2022 31.3.2021
(₹ in lakhs) (₹ in lakhs)
Current Liabilities:
(a) Trade Payables 250 230
(b) Short term provisions 1 200 180
(c) Other Current Liabilities 2 70 50
Assets
Current assets:
(a) Inventories 200 180
(b) Trade Receivables 400 250
(c) Other current assets 3 195 180
Statement of profit and loss for the year ended 31st March 2022
Particulars Notes ₹ in Lakhs

I Revenue from Operations 4,150
II Other Income 4 100
III Total Revenue (I+II) 4,250
Expenses:
Purchase of Stock in Trade 2400
Change in inventories of finished goods (20)
Employee’s benefits expense 800
Depreciation expense 100
Finance Cost 60
Other expense 200
IV Total Expense 3,540
V Profit before tax (III-IV) 710
VI Tax expense:
Current tax 200
Profit for the year from continuing operations 510
Appropriations:
Balance of Profit and Loss Account brought forward 50

Transfer to general reserve 200
Dividend paid 330
Notes to accounts:
2022 2021
1 Short term provisions:
Provisions for Tax 200 180
2 Other Current liabilities:
Outstanding wages 50 40
Outstanding expenses 20 10
Total 70 50
3 Other Current assets:

Advance tax 195 180
4 Other Income:
Interest and dividend 100
5 Finance Cost:
Interest 60

Compute Cash flow from Operating activities using both direct and Indirect Method.
Question 17. Prepare Cash flow for Gamma Ltd.,for the year ending 31.3.22 from the following information:
1. Sales for the year amounted to ₹ 135 crores out of which 60% was cash sales.
2. Purchases for the year amounted to ₹ 55 crores out of which credit purchase was 80%.
3. Administrative and selling expenses amounted to ₹ 18 crores and salary paid amounted to ₹ 22 crores.
4. The Company redeemed debentures of ₹ 20 crores at a premium of 10%. Debenture holders were issued
equity shares of ₹ 15 crores towards redemption and the balance was paid in cash. Debenture interest paid
during the year was ₹ 1.5 crores.
5. Dividend paid during the year amounted to ₹ 11.7 crores.
6. Investment costing ₹ 12 crores were sold at a profit of ₹ 2.4 crores.
7. ₹ 8 crores was paid towards income tax during the year.
8. A new plant costing ₹ 21 crores was purchased in part exchange of an old plant. The book value of the old
plant was ₹ 12 crores but the vendor took over the old plant at a value of ₹ 10 crores only. The balance was
paid in cash to the vendor.
9. The following balances are also provided:
₹ in Crores(31-3-21) ₹ in Crores(31-3-22)
Debtors 45 50
Creditors 21 23
Bank 6 18.2
Solution: - Cash Flow Statement for the year ended 31st March,2022 (Using Direct Method)
Particulars ₹ in Crores ₹ in Crores

Cash Flows from Operating activities:
Cash Sales (60% of 135) 81
Cash receipts from Debtors 49
(45+(135X40%)-50)
Cash purchases (20% of 55) (11)
Cash payments to supplier (42)
(21+(55X80%)-23)
Cash paid to employees (22)
Cash payments for overheads (Adm. And Selling) (18)
Cash generated from operations 37
Income tax paid (8)
Net Cash generated from operating activities 29
Cash flows from investing activities
Sale of Investments (12+2.40) 14.4
Payments for purchase of fixed assets (21-10) (11)
Net cash generated from Investing activities 3.4
Cash flows from financing activities:
Redemption of debentures (22-15) (7)
Interest paid (1.5)
Dividend paid (11.7)
Net Cash used in financing activities (20.2)
Net increase in cash 12.2

Cash at beginning of the period 6.0
Cash at end of the period 18.2

Question 18. From the following particulars prepare a Cash Flow Statement:
Last year This Year
Assets ₹ ₹
Cash 4,000 3,600
Debtors 35,000 38,400
Stock 25,000 22,000
Land 20,000 30,000
Buildings 50,000 55,000
Machinery 80,000 86,000
2,14,000 2,35,000
Liabilities
Creditors 36,000 41,000
Mrs. Neena's Loan - 20,000
Bank Loan 30,000 25,000
Capital 1,48,000 1,49,000
2,14,000 2,35,000
1) During the year, Mr. Suresh (the proprietor) had withdrawn ₹26,000 for personal use.
2) The provision for depreciation against machinery last year was ₹27,000 and this year ₹30,000.
3) During the year a part of machine costing Rs 30,000(book value ₹22,000) was sold for ₹7,000.
Question 19. Prepare Cash flow statement from the following comparative balance sheets
As on 31 March As on 31 March
Share Capital 4,50,000 5,00,000 PPE 5,00,000 5,30,000
Loans unsecured 2,00,000 2,00,000 Bank 42,000 51,000
General reserve 25,000 75,000 Current assets 5,00,000 5,50 ,000
Creditors 3,67,000 3,56,000
10,42,000 11,31,000 10,42,000 11,31,000
Additional information: (i) During the year 2020-21, the company earned a profit of ₹2,00,000 after charging
depreciation of ₹75,000. The profit was appropriated as follows: Provision for taxation ₹1,00,000, Dividend paid
₹50,000 and balance to reserve ₹50,000. (ii) Machinery worth ₹75,000 was sold at ₹60,000 and a new machinery
for ₹1,80,000 was purchased.
Question 20. You are given below the profit and loss account of Srivastava Ltd., for the year ended
December 31, 2021. The company is engaged in the manufacture of plastic cans.
Rs.
Sales 8,00,000
Operating expenses (excluding depreciation) (5,00,000)
Depreciation (1,00.000)
Net profit before tax 2,00,000
Extraordinary income-Gain on speculation 50,000
2,50,000
Provision for taxes @ 40% 1,00,000
Net profit after taxes 1,50,000
(1) Included in operating expenses is loss on sale of machinery Rs. 20,000.

(2) Actual taxes paid in respect of 2020 Rs. 90,000.

(3) The balances relating to current items taken from the balance sheets of 2020 and 2021 are given below:
31-12-2021 31-12-2020
Trade debtors 80,000 60,000
Inventory 65,000 70,000
Trade creditors 90,000 85,000
Required: Cash flow from operation

by direct and indirect methods.
(CMA Inter-8 marks)
Question 21. ABC Limited gives you its Balance Sheet as on 31st March, 2020 and its projected Profit and Loss
Account for the year ended 31st March, 2021.
Balance Sheet as on 31st March, 2020

Liabilities Amount Assets Amount
Equity share capital 6,00,000 Machinery(at cost) 7,00,000
Security premium 20,000 Less: dep. 1,40,000 5,60,000
General reserve 1,30,000 Motor car at cost 80,000
Profit and loss account 65,000 Less: dep. 30,000 50,000
8% debentures 3,00,000 Stock 5,60,000
Sundry creditors 2,85,000 Book debts 2,20,000
Provision for tax 1,40,000 Bank 1,40,000
Dividend payable 90,000 Advance income tax 1,00,000
16,30,000 16,30,000
Projected Profit and Loss Account (For the year ended 31 st March, 2021
R s. Rs.
To Opening Stock 5,60,000 By Sales :
To Purchases 14,40,000 Cash 3,70,000
To Wages 80,000 Credit 18,00,000
To Manf. Exps. 40,000 By Stock 4,20,000
To Office & Administration By Profit on Sale of Machine 10,000
Expenses 50,000
To Selling & Distribution
Expenses 30,000
To Interest 24,000
To Depreciation :
Machinery 56,000
Car 14,000 70,000
To Provision for Taxation 1,36,000

To balance profit 1,70,000
26,00,000 26,00,000
The company proposes to issue one equity share for two equity shares with a nominal value of Rs. 3,00,000 at a
premium of 10%. Machinery will be acquired for Rs.1,00,000. The cost of machinery to be sold in the year
ended 31st March, 2021 is Rs. 80,000 with a depreciation provision of Rs. 45,000. It is expected that:
(i) Tax liability up to 31st March, 2020 will be settled for Rs. 1,20,000 within 31 st March, 2021.
(ii) Advance Income Tax amounting to Rs.1,30,000 is proposed to be paid in 2020-21.

(iii) Book debts will be 10% more than warranted by the credit period of two months.
(iv) Creditors for goods will continue to extend one and half months' credit and manufacturing expenses
outstanding at the end of March, 2021 will be Rs. 5,000.
You are required to :
(i) Draft the Company's projected Balance Sheet as on 31st March, 2021(format not required).
(ii) Draft the statement showing the cash flows during the year ended 31st March, 2021.( CA Final-12 marks)
Question 22. The Balance Sheet of New Light Ltd., for the year ended 31st March, 2021 and 2022 are as follows:
Liabilities 31st March 31st March Assets 31st March 31st March
2021 (Rs.) 2022 (Rs.) 2021 (Rs.) 2022 (Rs.)
Equity share capital 12,00,000 16,00,000 Property,plant&equip 32,00,000 38,00,000
4,00,000 2,80,000 Less: Depreciation 9,20,000 11,60,000
10%Pref. share capital
22,80,000 26,40,000
Capital Reserve - 40,000 Investment 4,00,000 3,20,000
General Reserve 6,80,000 8,00,000 Cash 90,000 50,000
Profit and Loss A/c 2,40,000 4,44,000 Other current assets 11,10,000 13,10,000
9% Debentures 4,00,000 2,80,000
Current liabilities 4,80,000 5,20,000
Dividend Payable 1,20,000 ----
Provision for Tax 3,60,000 3,40,000
Unpaid dividend - 16,000
38,80,000 43,20,000 38,80,000 43,20,000
Additional information;
(i) The company sold one fixed asset for ₹ 1,00,000. the cost of which was ₹ 2,00,000 and the depreciation
provided on it was ₹ 80,000.
(ii) The company also decided to write off another fixed asset costing ₹ 56,000 on which depreciation amounting
to ₹ 40,000 has been provided.
(iii) Depreciation on fixed assets provided ₹ 3,60,000.
(iv) Company sold some investment at a profit of Rs. 40,000 which was credited to capital reserve.
(v) Debentures and preference share capital redeemed at 5% premium.
(vi) Company decided to value stock at cost whereas previously the practice was to value stock at cost less 10%.
The stock according to books on 31.3.21 was ₹ 2,16,000. The stock on 31.3.22 was correctly valued at ₹ 3,00,000.
Prepare Cash Flow Statement as per revised Accounting Standard by indirect method.
Answer: Cash Flow Statement for the year ended 31st March, 2002
A. Cash flow from operating activities
Profit during the year 2,04,000
Adjustment for inventory (24,000)
Transfer to general reserve 1,20,000
Provision for tax 3,40,000
Net profit before taxation 6,40,000
Adjustment made for:
Depreciation 3,60,000

Loss on sale of fixed assets 20,000
Decrease in value of fixed assets 16,000
Premium on redemption of preference share capital 6,000
Premium on redemption of debentures 6,000
Operating profit before change in working capital 11,28,000
Increase in current liabilities ( Rs. 5,20,000-4,80,000) 40,000
Increase in current assets (Rs. 13,10,000-(11,10,000+24,000) (1,76,000)
Cash generated from operations 9,92,000
Income tax paid (3,60,000)
Net cash from operating activities 6,32,000
B. Cash flow from investing activities

Purchase of fixed assets (8,56,000)
proceeds from sale of fixed assets 1,00,000
proceeds from sale of investments 1,20,000
net cash from investing activities -6,36,000
C. Cash flow from financial activities:

Proceeds from issuance of share capital
Redemption of preference share capital (1,20,000+6,000) 4,00,000
Redemption of debentures (Rs. 1,20,000+6,000) (1,26,000)
Dividend paid (1,26,000)
Net cash from financial activities (1,04,000)
Net increase/decrease in cash and cash equivalent during the year 44,000
Cash and cash equivalent at the end of the year is same as cash and cash equivalent at Nil
the beginning of the year i.e. Rs. 10,000
Working notes:
1. Revaluation of stock increases the opening stock by Rs. 24,000

Rs. 2,16,000
[ × 10 = Rs. 24,000] × 10 = Rs. 24,000
90
Hence, opening balance of other current assets will e as follows:
Rs. 11, 10,000 + Rs. 24,000 = Rs. 11,34,000
Due to under valuation of stock, the opening of profit and loss account be increased by Rs. 24,000.
Opening balance of profit and loss account after revaluation of stock will be 2,40,000+24,000= 2,64,000.
2. Property, plant and equipment Account

Particulars Rs. Particulars Rs.
To balance b/d 32,00,000 By bank A/c (sale of assets) 1,00,000
To bank A/c (balancing figure will be By accumulated depreciation A/c 80,000
assets purchased) 8,56,000 By profit and loss A/c 20,000
By accumulated depreciation A/c 40,000
By profit and loss A/c(assets written off) 16,000
By balance c/d 38,00,000
40,56,000 40,56,000

3. Inventory Account
To balance b/d 4,00,000 By bank A/c (balancing figure being
To capital reserve A/c (profit on sale of investment sold) 1,20,000
investment ) 40,000 By balance c/d 3,20,000
4,40,000 4,40,000
4. Accumulated depreciation Account
To fixed assets account 80,000 By balance b/d 9,20,000
To fixed assets account 40,000 By profit and loss A/c (depreciation for
To balance c/d 11,60,000 the period) 3,60,000
12,80,000 12,80,000
5. Unpaid dividend is taken as non-current item and dividend paid is shown at (Rs. 1,20,000-16,000) = Rs.
1,04,000
Question 23. Ms. Jyothi of star oils limited has collected the following information for the preparation of
cash flow statement for the year 2022.
(₹ In lakhs)
Net profit 25,000
Dividend paid 8,535
Provision for income tax 5,000
Income tax paid during the year 4,248
Loss on sale of assets (net) 40
Book value of the assets sold 185
Depreciation charged to profit & loss account 20,000
Amortization of capital grant 6
Profit on sale of investments 100
Carrying amount of investment sold 27,765
Interest income on investment s 2,506
Interest expenses 10,000
Interest paid during the year 10,520
Increase in working capital (excluding cash & bank balance) 56,075
Purchase of fixed assets 14,560
Investment in joint venture 3,850
Expenditure on construction work in progress 34,740
Proceeds from calls in arrear 2
Receipt of grant for capital projects 12

Proceeds from long –term barrowings 25,980
Proceeds from short –term barrowings 20,575
Opening cash and bank balance 5,003
Closing cash and bank balance 6,988
Prepare the cash flow statement for the year 2022 in accordance with AS-3 cash flow statement issued by the
institute of chartered accountants of India. (Make necessary assumptions). (CA Inter- May 2016 12 marks)
Question 24. J Ltd. presents you the following information for the year ended 31st March, 2007:
(Rs. in Lacs)
(1) Net Profit before tax provision 36,000
(ii) Dividend paid 10,202

(iii) Income-tax paid 5,100
(iv) Book value of Assets sold 222
Loss on sale of Asset 48
(v) Depreciation debited in P & L account 24,000
(vi) Capital grant received-amortised in P & L A/c 10
(vii) Book value of investment sold 33,318
Profit on sale of investment 120
(viii) Interest income from investment credited in P & L A/c 3,000
(IX) Interest expenditure debited in P & L A/c 12,000
(x) Interest actually paid (Financing activity) 13,042
(xi) Increase in working Capital [Excluding cash and Bank Balance]. 67,290
(xii) Purchase of fixed assets 22,092

(xiii) Expenditure on construction work 41,688
(xiv) Grant received for Capital projects 18
(xv) Long-term borrowings from Banks 55,866
(xvi) Provision for Income-tax debited in P & L A/c 6,000
Cash and Bank Balance on 1.4.2006 6,000
Cash and Bank Balance on 31.3.2007 8,000
You are required to prepare a Cash flow statement as per AS-3 (Revised). CMA FINAL -2007 - Dec(10 marks)

Question 25. Following are the balance sheet of X Ltd. as on 31st December,2000 and 2001, and income statement
for the period ending 31st December,2001. An equipment whose cost price was ₹ 15,000 was sold for ₹ 6,000 and it
had an accumulated depreciation of ₹ 8,000.
Balance sheet
2000 2001 2000 2001
Share Capital 2,50,000 4,60,000 Building and equipment 4,20,000 4,80,000
Retained earnings 2,31,000 2,11,000 Less: Depreciation. 1,05,000 1,20,000
Debentures 2,20,000 60,000 3,15,000 3,60,000
Provision for income tax 86,000 12,000 Land 60,000 60,000
Patents 55,000 65,000
Outstanding expenses 3,000 5,000 Cash 74,000 37,000
Creditors 58,000 94,000 Inventories 3,12,000 2,77,000
Bills payable 28,000 8,000 debtors 54,000 47,000
8,76,000 8,50,000 8,76,000 8,50,000
Income statement (for the year ended 31.12.2001)
Net sales 19, 70,000
Less: cost of goods sold 14, 80,000
Gross profits 4, 90,000
Less: operating expenses (includes Depreciation on
Buildings and equipment of ₹ 23,000 and patent
Amortization of ₹ 6,000 ) 5, 00,000
Net loss from operation (10,000)
Less; other revenue 7,000
Net loss: (3,000)
Add: Retained earnings 2, 31,000
2, 28,000
Less: Dividend paid 16,000
Loss on sale of asset 1,000 17,000
Retained earnings (31.12.2001) 2, 11,000
Prepare a Cash flow statement. ( CA Final – 12 marks)

Question 26. Balance sheet of Pi Ltd. For the year ended 31st March 2021 and 2022 were summarized thus:
Equity and Liabilities 31.3.2021 31.3.2022 Assets 31.3.2021 31.3.2022

Equity capital 5,00,000 9,00,000 Goodwill 10,000 14,000
Preference capital 2,00,000 1,00,000 Land and building 4,50,000 6,90,000
Security premium ……….. 45,000 Plant and machinery 1,70,000 1,60,000
General reserve 50,000 70,000 Car ……… 40,000
Capital reserve ---- 4000 Investment 40,000 20,000
Profit and loss 20,000 30,000 Stock 60,000 1,00,000
Hire vendor ………. 28,000 Debtors 75,000 1,45,000
10% debenture ………. 2,00,000 Cash 45,000 2,61,000
Creditors 95,000 60,000 Advances tax 35,000 50,000
Provision for tax 30,000 45,000 Bank 10,000 9,000
Unclaimed dividend ……… 7,000
8,95,000 14,89,000 8,95,000 14,89,000
Adjustments:
i. A car of ₹ 50,000 was purchased on Hire Purchase and ₹ 25,000 was paid to Hire Vendor during the
year.
ii. The debentures were issued @ 10% premium on 1 st April, 2021.
iii. Accumulated Depreciation on Land and Building was ₹ 1,50,000 and ₹ 2,10,000 respectively.
iv. Accumulated Depreciation on Plant and Machinery was ₹ 1,30,000 and ₹ 1,40,000 respectively.
v. Investments were sold @ 40% premium, the profit of which was taken to Capital Reserve.
vi. Bonus Shares of 1 for every 5 held was issued in the beginning the year.
vii. Land and Building worth 1,50,000
Plant and Machinery worth 50,000
Debtors worth 70,000
Stock worth 20,000
Creditors worth 30,000
Were purchased by issue of shares of ₹ 2,50,000 shares @ 10% premium.
viii. Dividend paid during the year = ₹ 43,000.
ix. The preference shares were redeemed @ 25% premium.
x. Plant & Machinery costing ₹ 50,000 (WDV 22,000) was disposed off.
xi. Bad Debts written off ₹ 5,000.
xii. Dividend received was ₹ 17,000 of which ₹ 7,000 was post acquisition. Prepare Cash Flow Statement.
( CA Inter – 20 marks modified)
Question 27. The following figures have been extracted from the Books of X Limited for the year ended on
31.3.2004. You are required to prepare a cash flow statement.
(i) Net profit before taking into account Income Tax and Income from law suits but after taking into Account
the following items was Rs. 20 lakhs:
(a) Depreciation on Fixed Assets ₹ 5 lakhs.

(b) Discount on issue of Debentures written off ₹ 30,000.
(c) Interest on Debentures paid ₹ 3,50,000.
(d) Books value of investments ₹ 3 lakhs (Sale of Investments for ₹ 3,20,000).
(e) Interest received on investments ₹ 60,000.
(f) Compensation received ₹ 90,000 by the company in a suit filed.
(ii) Income tax paid during the year ₹ 10,50,000.
(iii) 15,000,10% preference shares of ₹ 100 each were redeemed on 31.3.2004 at a premium of 5%. Further the
company issued 50,000 equity shares of ₹ 10 each at a premium of 20% on 2.4.2003. Dividend on preference
shares were paid at the time of redemption.
(iv) Dividends paid for the year 2002-2003 ₹ 5 lakhs and Interim dividend paid ₹ 3 lakhs for the year 2003-04.

(v) Land was purchased on 1.4.2003 for ₹ 2,40,000 for which the company issued 20,000 equity shares of ₹ 10
each at a premium of 20% to the land owner as consideration.
(vi) Current assets and Current liabilities in the beginning and at the end of the years were as detailed below:
As on As on
31.3.2003 31 .3.2004
Stock 12,00,000 13,18,000
Sundry Debtors 2,08,000 2,13,100
Cash in hand 1,96,300 10,300
Bills receivable 50,000 40,000
Bills payable 45,000 40,000
Sundry Creditors 1,66,000 1,71,300
Outstanding expenses 75,000 81,800 (CA Inter 2005 May (12 marks))
Question 28. Garden Ltd. acquired fixed assets viz. plant and machinery for ₹ 20 lakhs. During the same year it sold its
furniture and fixtures for ₹ 5 lakhs. Can the company disclose, net cash outflow towards purchase of fixed assets in the cash
flow statement as per AS-3? CA-2007 -May (2 marks)
Answer: As per AS - 3 (Revised) 'Cash Flow statements', an organisation should report separately major classes of
gross cash receipts and gross cash payments arising from operating, investing and financing activities except to the
extent that cash flows described in AS 3 are reported on a net basis. Acquisition and disposal of fixed assets is not
prescribed in the content of the said standard. So, the Garden Ltd. cannot disclose net cash flow in respect of
acquisition of plant and machinery and disposal of furniture and fixtures.
Question 29: The flowing particulars relate to Bee Ltd. for the year ended 31 st March 2010;
(i) Furniture of book value of ₹ 15,500 was disposed of for ₹ 12,000.

(ii) Machinery costing ₹ 3,10,000 was purchased and ₹ 20,000 were spent on its erection.
(iii) Fully paid 8% preference shares of the face value of Rs. 10,00,000 were redeemed at a premium of
3%. In this connection 60,000 equity shares of ₹ 10 each were issued at a premium of ₹ 2 per share.
The entire money being received with application.
(iv) Dividend was paid as follows:
On 8% preference shares ₹ 40,000
On equity shares for the year 2009-10 ₹ 1,10,000
(v) Total sales were ₹ 32,00,000 out of which cash sales were ₹ 11,50,000.
(vi) Total purchases were ₹ 8,00,000 including cash purchase of ₹ 60,000
(vii) Total expenses were ₹ 12,40,000
(viii) Taxes paid including dividend tax of ₹ 22,500 were ₹ 3,30,000
(ix) Cash and cash equivalents as on 31st March, 2010 were ₹ 1,25,000
You are requested to prepare cash flow statement as per AS-3 for the year ended 31st March, 2010 after taking
into consideration the following also:
On 31st March, 2009 On 31st March, 2010

Sundry debtors 1,50,000 1,47,000
Sundry creditors 78,000 83,000
Unpaid expenses 63,000 55,000 ( CA Inter – 16 marks)

Answer: Cash flow Statement for the year ended 31 st march, 2010
Particulars Rs. Rs.

1. Cash flows from operating activities
Cash receipts from customers (W. N 1) 32,03,000
Less: Cash paid to suppliers and payment for expenses (W. N. 3) (20,43,000)
Income tax paid (3,30,000-22,500) 3,07,500
Net cash from operating activities 8,52,500
2. Cash flow from investing activities
Sale of furniture 12,000
Purchase of machinery 3,30,000
Net cash used in investing activities (3,18,000)
3. Cash flow from financial activities
proceeds from issue of equity shares 7,20,000
redemption of 8% preference shares (10,30,000)
dividend paid (Rs. 40,000+1,10,000) (1,50,000)
dividend distribution tax paid (22,500)
net cash used in financial activities (4,82,500)
net increase in cash and cash equivalents 52,000
add: cash and cash equivalents as on 31st March 2009 (bal. Figure) 73,000
Cash and cash equivalents as on 31st March, 2010 1,25,000
Working Note;
1. Cash Receipt from customers:
Credit sale = total sales Rs. 32, 00,000 – cash sales Rs. 11,50,000
= 20, 50,000
Total debtors Account
To balance b/d 1,50,000 By cash/Bank (Bal. Fig) 20,53,000

To credit sales 20,50,000 By balance c/d 1,47,000
22,00,000 22,00,000
Total sale receipts = Rs. 20,53,000+11,50,000+32,03,000
2. Credit purchases = total purchases Rs. 8,00,000 – cash purchases Rs. 60,000 = Rs. 7,40,000
Total Creditors Account
To cash/bank (bal. fig) 7,35,000 By balance b/d 78,000

To balance c/d 83,000 By credit purchases 7,40,000
8,18,000 8,18,000
Total payments to suppliers = Rs. 7,35,000+60,000= Rs. 7,95,000
3. Cash paid to suppliers and payment for expenses

Particulars Rs.
Outstanding expenses as on 31.3.2009 63,000
Add: expenses charged to profit and loss account 12,40,000
13,03,000
Less: outstanding expenses as on 31.3.2010 55,000
Payment on account of expenses 12,48,000
Total of payment to suppliers and payment for expenses = Rs. 7, 95,000+ 12, 48,000= 20, 43,000

Question 30.The following are the summarized Balance Sheets of Lotus Ltd. as on 31st March, 2010 and 2011
31.3.10 31.3.11
Liabilities:
Equity share capital (Rs. 10 each) 10,00,000 12,50,000
Capital Reserve …………. 10,000
Profit and loss A/c 4,00,000 4,80,000
Long term loan from the bank 5,00,000 4,00,000
Sundry creditors 5,00,000 4,00,000
Provision for taxation 50,000 60,000
24,50,000 26,00,000
Assets:
Land and building 4,00,000 3,80,000
Machinery 7,50,000 9,20,000
Investment 1,00,000 50,000
Stock 3,00,000 2,80,000
Sundry debtors 4,00,000 4,20,000
Cash in hand 2,00,000 1,40,000
Cash at bank 3,00,000 4,10,000
24,50,000 26,00,000
1. Depreciation written off on land and building ₹ 20,000

2. The company sold some investment at a profit of ₹ 10,000 which was credited of capital Reserve.
3. Income tax provided during the year ₹ 55,000
4. During the year, the company purchased machinery for ₹ 2,25,000. They paid ₹ 1,25,000 in cash and
issue 10,000 equity shares of ₹ 10 each at par.
You are requested to prepare cash flow statement for the year ended 31-3- 2011 as per AS -3, by using indirect
method.
Answer:
Cash flow from operating activities
Net profit before tax for the year (W. N 1) 1,35,000
Add: depreciation on machinery (w. N. 2) 55,000
Depreciation on land and building 20,000
Operating profit before change in working capital 2,10,000
Add: decrease in stock 20,000
Less: increase in sundry debtors (20,000)
Less: Decrease in sundry creditors (1,00,000)
Less: income tax paid (W. N 3) (45,000)
Net cash generated from operating activities 65,000
Cash flow from investment activities
Purchased of machinery (2,25,000-1,00,000) (1,25,000)
Sale of investment (W. N 4) 60,000
Net cash used in investing activities (65,000)
Cash flow from financial activities
Issue of equity share (2,50,000-1,00,000) 1,50,000
Repayment of long term loan (1,00,000)
Net cash generated from financial activities 50,000
Net increase cash and cash equivalents 50,000
Cash and cash equivalents at the beginning of the year
(2,00,000+3,00,000) 5,00,000
Cash and cash equivalents at the end of the year (1,40,000+4,10,000)
5,50,000

Working notes;
1. Calculation of net profit before tax.

Rs.
Increase in profit and loss (cr.) balance 80,000
Add; provision for taxation made during the year 55,000
1,35,000
2. Calculation of depreciation changed on machinery

Rs. Rs.
To balance b/d 7,50,000 By depreciation (bal. fig) 55,000
To bank 1,25,000 By balance c/d 9,20,000
To equity share capital 1,00,000
9,75,000 9,75,000
Calculation of tax paid
Rs. Rs.
To cash (bal. fg) 45,000 By balance b/d 50,000
To balance c/d 60,000 By profit and loss A/c 55,000
1,05,000 1,05,000
Calculation of sales value of investment sold investment A/c

Rs. Rs.
To balance b/d 1,00,000 By bank A/c (bal. Fig) 60,000
To capital reserve (profit on sale of By balance c/d 50,000
investments) 10,000
1,10,000 1,10,000
Question 31. Oriental Bank of Commerce, received a gross ₹4,500 crores demand deposits from
customers and customers withdrawn ₹4,000 crores of demand deposits during the financial year 2017-18.
How would you classify such cash flows? (ICMAI final Study material)
Solution: It will be treated as an Operating activity, on net basis ₹500 crores, inflow.
Question 32. Balance Sheet as at 31.12.2021
(Rs. ’000)
Assets 2021 2020
Cash on hand and balances with banks 200 25
Short-term investments(for less than 3 months) 670 135
Sundry debtors 1,700 1,200
Interest receivable 100 –
Inventories 900 1,950
Long-term investments 2,500 2,500
Fixed assets at cost 2,180 1,910
Accumulated depreciation (1,450) (1,060)
Fixed assets (net) 730 850
Total assets 6,800 6,660

Liabilities
Sundry creditors 150 1,890
Interest payable 230 100
Income taxes payable 400 1,000
Long-term debt 1,110 1,040
Total liabilities 1,890 4,030
Shareholders’ Funds
Share capital 1,500 1,250
Reserves 3,410 1,380
Total shareholders’ funds 4,910 2,630
Total liabilities and shareholders’ funds 6,800 6,660
Statement of Profit and Loss for the period ended 31.12.2021

(₹ ’000)
Sales 30,650
Cost of sales (26,000)
Gross profit 4,650
Depreciation (450)
Administrative and selling expenses (910)
Interest expense (400)
Interest income 300
Dividend income 200
Foreign exchange loss (40)
Net profit before taxation and extraordinary item 3,350
Extraordinary item – Insurance proceeds from
earthquake disaster settlement 180
Net profit after extraordinary item 3,530
Income-tax (300)
Net profit 3,230
ADJUSTMENTS:
(a) An amount of ₹ 250 was raised from the issue of share capital and a further ₹ 250 was raised from
long term borrowings.
(b) Dividends paid were ₹ 1,200.
(c) Tax deducted at source on dividends received (included in the tax expense of ₹ 300 for the year)
amounted to ₹ 40.
(d) Plant with original cost of ₹ 80 and accumulated depreciation of ₹ 60 was sold for ₹ 20. Prepare cash
flow statement by both methods as per AS 3 (revised).

Question 33. (CASH FLOW STATEMENT FOR FINANCIAL ENTERPRISES) prepare cash flow statement of
financial enterprise, COC Financial services Ltd by direct method.
Profit and loss Account
Particulars Amount Particulars Amount
Interest on deposits 23,463 Interest and commission 28,447
Employees expense 997
Income tax paid 100 Recovery of loan previously 237
Dividend paid to shareholders 400 written off
Balance transferred to balance sheet 4274
Dividend received on permanent 250
investments
Interest received on permanent 300

investments
BALANCE SHEET of COC Financial services Ltd

Capital and liabilities 2020 2021 Assets 2020 2021
Equity share capital 18,350 20,150 Short term funds 4,000 4,650
Deposits from customers 3,500 4,100 Deposits held for

regulatory 2,000 1,766
Certificate of deposits 1,000 800
Funds advance to
10% Debentures 1200 1000 customers 1,000 1,288
Other long term borrowings 1,500 500 Credit card

receivables 3,000 3,360
Profit and loss A/c ---- 4,274
Other short term
securities 900 1,020
Permanent
investment 8,000 7,400
Fixed assets 2,000 2,500
Cash and cash 4,650 8.840

equivalent
25,550 30,824 25,550 30,824

CHAPTER 3. PROFIT PRIOR TO INCORPORATION
NOTE: In this chapter, we are dividing profit between pre and post incorporation period.
There is no any prescribed format to divide profit. You can solve either in vertical or
horizontal format.
A newly incorporated company may take over a running business as from a certain date which is prior to the
date of incorporation. Thus company incorporated on 1st April, 2008 may take over the business of a
partnership as from 1st January, 2008. If the business is to be purchased from the date of incorporation, stock
taking must be completed and the balances of various assets and liabilities must be extracted, if this date does
not coincide with the end of the financial year for which the partnership has prepared its last final accounts. To
avoid all this trouble, the business is conveniently purchased from the date of last balance sheet. In order to
calculate profit or loss prior to incorporation date, the following steps are recommended:
(a) Prepare one trading account for the whole period falling between the date of purchase and date of
final accounts. The date of incorporation does not affect the calculation of gross profit.
(b) Calculate the following two ratios;

i. Time Ratio. This is calculated by considering the period falling between the last date of
balance sheet and the date of incorporation and the period between the date of
incorporation and the date of present final accounts.
ii. Sales Ratio. Ascertain sales for the pre-incorporation and post-incorporation periods and
calculate the sales ratio.
(c) Now prepare a statement for calculating the net profits for pre and post-incorporation periods
separately. This is done as follows:
i. Divide the gross profit of the full period into two parts on the basis of sales ratio. This gives
gross profit separately for pre- and post incorporation periods.
ii. Divide all expenses of fixed nature, viz., rent, salary, depreciation, interest in time ratio and
other expenses in sales ratio.
iii. There are certain expenses, i.e., salary of partners, salary of directors, preliminary expenses
which are not divided because they belong exclusively to a certain period. In the above cases
the salary of partners is debited to the pre-incorporation period and preliminary expenses
and directors' salary to the post-incorporation period.
Question:1 Ganesh Ltd. was incorporated on 1st August 1999. It took over the business of M/s Shanker and
Siva with effect from 1st April 1999. From the following figures relating to the year ending 31st March 2000
ascertain profit prior to incorporation and profit after incorporation.
i. Sales for the year were Rs. 60, 00,000 out of which sales up to 1st August 1999 were Rs. 25, 00,000.
ii. Gross profit for the year was Rs. 18, 00,000.
iii. The expenses debited to profit and loss account were as follows:
Rent 90,000
Salaries 1,50,000
Directors fees 38,000
Interest of debentures 60,000
Audit fees 15,000
Discount on sales 36,000
General expenses 48,000
Advertising 1,80,000
Stationery and printing 36,000
Commission on sales 60,000
Interests to vendors on purchase consideration 30,000
Up to 1st October 1999
Bad debts 15,000
(Rs. 5,000 of bad debts mentioned above relate to debts created prior to incorporation.)

Question:2. A company incorporated on 1st April, 2000 took over a running business from 1st January, 2000.
The company prepared its first final accounts on 31st December, 2000. From the following information, you are
required to calculate the sales ratio of pre and post-incorporation periods:
(a) Sales from January 2000—December, 2000 Rs. 3,60,000, (b) Sales for the month of January twice the
average sales; for the month of February—equal to average sale; sales for four months from May to August—
1/4th of the average sale of each month; and sales for October and November three times the average sale.
Question:3 New Ventures Ltd. was incorporated on 1st January, 2000 with an authorized capital consisting of
5,000 equity shares of ₹ 10 each to take over the running business of Rundown Brothers as from 1st October,
1999. The following is the summarized profit and loss account for the year ended 30 th September, 2000:
₹ ₹
Cost of sales for the year 16,000 Sales
Administration expenses 1,768 1st October, 1999 to
Selling commission 875 31st Dec, 1999 6,000
Goodwill written off 200 1st January, 2000 to
Interest paid to vendors (Loan 30th Sept., 2000 19,000 25,000
repaid on 1st February 373
Distribution expenses (60 per
cent variable) 1,250
Preliminary expenses written off 330
Debenture interest 320
Depreciation 444
Directors' fees 100
Net profit 3,340
25,000 25,000
The company deals in one type of product. The unit cost of sales was reduced by 10 per cent in the post-
incorporation period as compared to the pre-incorporation period in the year. You are required to apportion
the net profit amount between pre-incorporation and post-incorporation periods showing the basis of
apportionment.
Question: 4 The partners of Maitri Agencies decided to convert the partnership into a private limited company
called MA (P) Ltd. with effect from 1st January, 2007. The consideration was agreed at ₹ 1,17,00,000 based on the
firm's Balance Sheet as at 31st December, 2006. However due to some procedural difficulties, the company could
be incorporated only on 1st April, 2007. Meanwhile the business was continued on behalf of the company and the
consideration was settled on that day with interest at 12% per annum. The same books of accounts were continued
by the company which closed its account for the first time on 31st March, 2008 and prepared the following
summarized profit and loss account.
Sales 2,34,00,000
Cost of goods sold: 1,63,80,000
Salaries 11,70,000
Advertisement 7,02,000
Discounts 11,70,000
Managing Director's remuneration 90,000
Miscellaneous office expenses 1,20,000
Office-cum-show room rent 7,20,000
Interest 9,51,000
2,14,83,000
Profit 19,17,000
The company's only borrowing was a loan of ₹ 50,00,000 at 12% p.a. to pay the purchase consideration due to the
firm and for working capital requirements.

The company was able to double the average monthly sales of the firm, from 1st April, 2007 but the salaries trebled
from that date. It had to occupy additional space from 1st July, 2007 for which rent was ₹ 30,000 per month.
Prepare a profit and loss account in a columnar form apportioning cost and revenue between ore-incorporation and
post-incorporation periods. Also, suggest how the pre-incorporation Profits are to be dealt with.
Question:5 ABC Ltd. was incorporated on 1.5.2006 to take over the business of DEF and Co. from 1.1.2006. The
Profit and Loss Account as given by ABC Ltd. for the year ending 31.12.2005 is as under:
Profit and Loss Account
To Rent and Taxes 90,000 By Gross Profit 10,64,000

To Salaries including manager's 3,31,000 By Interest on Investments 36,000
salary of Rs. 85,000 14,000
To Carriage Outwards
To Printing and Stationery 18,000

To Interest on Debentures 25,000
To Sales Commission 30,800
To Bad Debts (related to sales) 91,000
To Underwriting Commission 26,000
To Preliminary Expenses 28,000
To Audit Fees 45,000
To Loss on Sale of Investments 11,200
To Net Profit 3,90,000
11,00,000 11,00,000
Prepare a Statement showing allocation of pre-incorporation and post-incorporation profits after considering the
following information:
(i) G.P. ratio was constant throughout the year.

(ii) Sales for January and October were 1 ½ times the average monthly sales while sales for December were
twice the average monthly sales.
(iii) Bad Debts are shown after adjusting a recovery of ₹ 7,000 of Bad Debt for a sale made in July, 2003.
(iv) Manager's salary was increased by ₹ 2,000 p.m. from 1.5.2006.
(v) All investments were sold in April, 2006.
Question 6: The partners of Shri Enterprises decided to convert the partnership firm into a Private Limited
Shreya (p) Ltd. with effect from 1st January 2008 however, company could be incorporated only on 1 st June,
2008. The business was continued on behalf of the company and the consideration of ₹ 6, 00,000 was settled
on that day along with interest @ 12% per annum. The company availed loan of ₹ 9, 00,000 @ 10% per annum
on 1st June, 2008 to pay purchase consideration and for working capital. The company closed its accounts for
the first time on 31st March, 2009 and presents you the following summarized profit and loss account:
Sales 19,80,000
Discount to dealers 46,200
Directors' remuneration 60,000
Salaries 90,000

Rent 1,35,000
Interest 1,05,000
Depreciation 30,000
Office expenses 1,05,000
Sales promotion expenses 33,000
Preliminary expenses
(To be written off in first year itself) 15,000
Profit 1,72,800
Sales from June, 2008 to December, 2008 were 2 ½ times of the average sales, which further increased to 3 ½
times in January to March quarter, 2009. The company recruited additional work force to expand the business.
The salaries from July, 2008 doubled. The company also acquired additional showroom at monthly rent of ₹
10,000 from July, 2008.
You are required to prepare a Profit and Loss Account showing apportionment of cost and revenue
between pre-incorporation and post-incorporation periods. Also suggest how the pre-incorporation
profits/losses are to be dealt with. (CA- MAY 2008) 10 MARKS
Answer:
Particulars Pre. inc. Pos. inc. Particulars Pre. inc. Pos. inc.
(5 months) (10 months) (5 months) (10 months)
To Cost of sales 1,80,000 10,08,000 By-Sales (W.N.1) 3,00,000 16,80,000
To Gross profit 1,20,000 6,72,000
3,00,000 16,80,000 3,00,000 16,80,000
To Discount to dealers 7,000 39,200 By G.P. 1,20,000 6,72,000
To Directors' remuneration — 60,000 By Loss 750
To Salaries (W.N.2) 18,750 71,250
To Rent (W.N.3) 15,000 1,20,000
To Interest (W.N.4) 30,000 75,000
To Depreciation 10,000 20,000
To Office expenses 35,000 70,000
To Preliminary expenses — 15,000
To Sales promotion expenses 5,000 28,000
To Net profit — 1,73,550
1,20,750 6,72,000 1,20,750 6,72,000

Treatment of pre-incorporation loss: Pre-incorporation loss may, either be considered as a reduction from any
capital reserve accruing in relation to the transaction or be treated as goodwill.
Working Notes: 1.Computation of sales ratio:
Let the average sales per month in pre-incorporation period be a Average Sales (Pre-incorporation) = a x5 = 5a
Sales (Post incorporation) from June to December, 2008 = 2 ½ a x 7 = 17.5a
From January to March, 2009 =3 ½ ax3= 10.5a
Total Sales 28.0a
Sales ratio of pre-incorporation & post incorporation is 5a : 28a
2. Computation of ratio for salaries :

Let the average salary be a
Pre-incorporation salary = a x 5 = 5a
Post incorporation salary
June, 2008= a
July to March, 2009 = a x 9 x 2 = 18a
19a Ratio is 5:19
3. Computation of Rent:
Total rent 1,35,000
Less/Additional rent for 9 months @ 10,000 p.m. 90,000
Rent of old premises apportioned in time ratio 45,000
Apportionment Pre Inc. Post Inc.
Old premises rent 15,000 30,000
Additional Rent 90,000
15,000 1,20,000
4. Computation of interest:
Pre-incorporation period from January, 2008 to May 2008
6,00,000 × 12 × 5
( ) = 30,000
100 × 12
Post incorporation period from June, 2008 to March 2009
9,00,000 × 10 × 10
( ) = 75,000
100 × 12
= 1, 05,000
Question 7: A firm M/s. Alag, which was carrying on business from 1st July, 2010 gets itself incorporated as a
company on 1st November, 2010. The first accounts are drawn up to March 31, 2011. The gross profit for the
period is ₹ 56,000. The general expenses are ₹ 14,220; Director's fees ₹ 12,000 p.a.; incorporation expenses ₹
1,500. Rent up to 31st December was ₹ 1,200 p.a., after which it is increased to ₹ 3,000 p.a.
Salary of the manager, who upon incorporation of the company was made a director, is ₹ 6,000 p.a. His
remuneration thereafter is included in the above figure of fees to the directors.
Give Profit and Loss Account showing pre and post incorporation profit. The net sales are ₹ 8,20,000, the
monthly average of which for the first four months is one-half of that of the remaining period. The company
earned a uniform profit. Interest and tax may be ignored. (CA-IPCC GROUP 1)
Question 8: Sutanu formed a private Limited Company under the name of Sutanu(P)Ltd.to take over his
existing business as from 1st January, 2015 but the Company was not incorporated until 1st April, 2015.No
entries relating to transfer of the business were entered in the books, which were carried on without a break
until 31st December,2015. The following trial balance was extracted from the books as on 31 st December (end
of the year)

Particulars Debit Credit

Stock in Trade as at 1st January 4,300
Purchases and sales 18,900 27,800
Carriage Outwards 330
Travelers` Commission 750
Office Salaries and Expenses 21,00
Rent and Rates 1,200
Sutanu`s Capital Account as 1st January 23,000
Directors` fee 1,800
Fixed Assets 13,400
Current Liabilities 3,700
Current Assets(Other than Stock-in-Trade) 11,200
Preliminary Expenses 520
Total 54,500
You are also given the following information:
(1) Stock as at 31.12.15(end of the year) is ₹ 4,400

(2) Purchase Consideration was agreed at 30,000 to be settled by issue of 3,000 Equity Shares of 10 each.
(3) The Gross Profit Margin is constant and the monthly sales in January, November and December are
double the monthly sales for the remaining months of the year.
(4) Assume that Carriage Outwards and traveler`s Commission vary in direct proportion to sales.
You are required to prepare Trading and profit and Loss Account for the year ended 31 st December
apportioning the periods before and after incorporation and a balance sheet as on that date. Ignore
depreciation and taxation.
Question.9 MOURYA LTD. incorporated on 1st may 2015 received the certificate to commence business. On
31st may,2015 It had acquired a running business from Gopal and Co with effect from 1 st January, 2015.The
Purchase Consideration was ₹ 50,00,000 of which ₹ 10,00,000 was to be paid in cash and ₹ 40,00,000 in the
form of fully paid shares.
The company also issued shares for ₹ 40,00,000 for cash. Machinery Costing ₹ 25,00,000 was then installed.
Assets acquired from the vendors were: Machinery ₹ 30,00,000; Stock ₹ 6,00,000; and patents ₹ 4,00,000.
During the year ended 31st December,2015 the total sales ware ₹ 1,80,00,000. The sales per month in the first
half year being one half of what they were in the latter half year.
The net profit of the company, after charging the following expenses, was ₹ 10,00,000:
Particulars ₹
Director`s fees 86,000
Preliminary Expenses 10,000
Office Expenses 2,40,000
Selling Expenses 1,98,000
Interest to vendors 50,000

Ascertain the pre-incorporation and post-incorporation Profits and prepare the Balance Sheet of the Company
as on 31st December,2015. The Closing Stock was valued at ₹ 7,00,000. Purchase consideration was settled on
31st may,2015.
Question.10. A, B and C are in partnership sharing Profit and Losses in the ration 1/2:1/3:1/6. The Partnership
Deed states that each partner is entitled to 6% Interest on Capital. The firm was taken over by Swagata ltd for
a total consideration of ₹ 8,10,000.On the date of takeover, the Firm`s net Assets, represented by the
partner`s Capital Accounts were-A-₹ 3,10,000;B-₹ 2,50,000 and C-₹ 1,90,000.
The firm wants to indicate the mode of settlement of purchase Consideration to the company, keeping in mind
that the partner`s interests should be equitably retained in the company. The company can issue Equity shares
of ₹ 10 each and preference shares (rate to be decided) of ₹ 100 each. You are required to decide upon the
scheme for settlement of purchase consideration.

Chapter 4. Accounting for bonus issue and right issue.

Note : Accounting for bonus issue has been discussed in detail with chapter “
Redemption of preference shares”. In this chapter we will study only
“Accounting for right issue”
ACCOUNTING OF RIGHT ISSUE (section 62)

INTRODUCTION:
Provisions of section 62(1)(a) of the Companies Act, 2013 govern any company (public or private) which is
desirous of raising its subscribed share capital by issue of further shares. Whenever a company intends to
issue new shares, the voting and governance rights of the existing shareholders may be diluted, if they are not
allowed to preserve them. It may happen because new shareholders may subscribe to the issued share capital.
Companies Act, 2013 allows existing shareholders to preserve their position by offering those newly issued
shares at the first instance to them. The existing shareholders are given a right to subscribe these shares, if they
desire. However, if they do not desire to subscribe these shares, they are even given the right to renounce it in
favour of someone else (unless the articles of the company prohibit such a right to renounce).
Right issue of shares means the existing shareholders have a right to subscribe to any fresh issue of shares by the
company in proportion to their existing holding for shares. They have an implicit right to renounce this right in
favour of anyone else, or even reject it completely. In other words, the existing shareholders have right of
first refusal.
A company desirous of issuing new shares has to offer, as per Section 62(1) (a) of Companies Act 2013, the shares
to existing equity shareholders through a letter of offer subject to the following conditions, namely:
➢ The offer shall be made by notice specifying the number of shares offered and limiting a time not
being less than 15 days and not exceeding 30 days from the date of the offer within which the offer,
if not accepted, shall be deemed to have been declined;
➢ Unless the articles of the company otherwise provide, the offer aforesaid shall be deemed to
include a right exercisable by the person concerned to renounce the shares offered to him in favour of
any other person; and the notice shall contain a statement of this right;
➢ After the expiry of the time specified in the notice aforesaid, or on receipt of earlier intimation
from the person to whom such notice is given that he declines to accept the shares offered, the Board
of Directors may dispose of them in such manner which is not disadvantageous to the shareholders and
the company.
Exceptions to the rights of existing equity shareholders (important for exam)
Section 62 recognises 4 situations under which the further shares are to be issued by a company, but they
need not be offered to the existing shareholders. The shares can be offered, without being offered to the existing
shareholders, provided the company has passed a special resolution and shares are offered accordingly.
Situation 1: To employees under a scheme of employees’ stock option subject to certain specified conditions.
Situation 2: To any persons, either for cash or for a consideration other than cash, if the price of such shares
is determined by the valuation report of a registered valuer subject to specified conditions.

Situation 3: Sometimes companies borrow money through debentures / loans and give their creditor an option to
buy equity shares of a company.
Situation 4: It is a special situation where the loan has been obtained from the government, and government
in public interest, directs the debentures/loan to be converted into equity shares.
Financial Effects of a Further issue :The financial position of a business is contained in the balance sheet.
Further issue of shares increase the amount of equity (net worth) as well as the liquid resources (Bank). The
amount of equity is the product of further number of shares issued multiplied by issue price. The issue price
may be higher than the face value (issue at a premium). Companies Act does not allow issue of shares at a
discount, except issue of sweat equity shares under Section 53.
Difference between book Value and market value of a Share:
Book value of a share = Net worth (as per books)/ Number of shares
if there are 10,000 shares with net worth of ₹ 1,25,000. The book value of one share is (₹ 125,000 / 10,000
shares) ₹ 12.50 per share. However, the market value may differ from the book value of shares.
The market value of a company's shares represents the present value of future cash flows expected to be earned
from the share in the form of dividends and capital gains from expected future share price appreciation.
Difference between Cum-right Market Price and Ex-right Market Price of the shares
The market price, which exists before the rights issue, is termed as Cum-right Market Price of the share.
The market price of the shares after further issue of shares (right issue) is termed as Ex-right Market Price
of the shares. Theoretical Ex-Rights Price is a deemed value, which is attributed to a company's share
immediately after a rights issue transaction occurs.
Right of Renunciation : Right of renunciation refers to the right of the shareholder to surrender his right to
buy the securities and transfer such right to any other person. Shareholders that have received right shares
have three choices of what to do with the rights.
i. They can act on the rights and buy more shares as per the particulars of the rights issue;
ii. They can sell them in the market; or
iii. They can pass on taking advantage of their rights (i.e., reject the right offer).
The renunciation of the right is valuable and can be monetised by the existing shareholders in well-functioning
capital market. The monetised value available to the existing shareholders due to right issue is known as ‘value
of right’.
• If a shareholder decides to renounce all or any of the right shares in favour of his nominee, the value of
right is restricted to the sale price of the renouncement of a right in favour of the nominee.
• In case the right issue offer is availed by an existing shareholder, the value of right is determined as
given below:
Value of right = Cum-right value of share – Ex-right value of share
Ex-right value of the shares = [Cum-right value of the existing shares + (Rights shares X Issue Price)] / (Existing
Number of shares + Number of right shares).

Question 1. COC Education ltd is planning to raise funds by making right issue of equity shares for expansion.
The existing equity share capital of the company is ₹50,00,000 (₹10 each).
The market price of its share is ₹42. The company offers to its shareholders the right to buy 2 shares of ₹11 each
for every 5 shares held. You are required to calculate:
(a) Cum right value of equity share.
(b) Theoretical Ex-right value of share,
(c) The value of right,
(d) % increase in share capital.
Question 2. Mr. Narain has 100 shares of COC Ltd before rights issue. Market price per share is ₹25 per share.
COC Ltd announces right issue in the ratio of 1:10 at the rate of ₹14 per share. Calculate ex-right market value of
the share and value of right. (Answer: Ex-right Market value ₹ 24 per share, value of right ₹1).
Question 3. A company offers new shares of ₹ 100 each at 25% premium to existing shareholders on one for four
bases. The cum-right market price of a share is ₹ 150. Calculate the value of a right. What should be the ex-right
market price of a share?
Answer: Ex-right value of the shares = ₹ 145 per share, Value of right ₹ 5 per share.
Question 4. A company has decided to increase its existing share capital by making rights issue to its existing
shareholders. The company is offering one new share for every two shares held by the shareholder. The market
value of the share is ₹ 240 and the company is offering one share of ₹ 120 each. Calculate the value of a right.
What should be the ex-right market price of a share?
Solution: - Ex-right value of the shares = (Cum-right value of the existing shares + Rights
shares x Issue Price) / (Existing Number of shares+ No. of right shares)
= (₹ 240 x 2 Shares + 120 x 1 Share) / (2 + 1) Shares
= ₹ 600 / 3 shares = ₹ 200 per share
Value of right = ₹ 240 – ₹ 200 = ₹ 40 per share.

Hence, any one desirous of having a confirmed allotment of one share from the company at ₹ 120 will have to
pay ₹ 80 (2 shares x ₹ 40) to an existing shareholder holding 2 shares.
ACCOUNTING FOR RIGHT ISSUE: The accounting treatment of rights share is the same as that of
issue of ordinary shares and the following journal entry will be made:
Bank A/c Dr.

To Equity Shares Capital A/c
In case rights shares are being offered at a premium, the premium amount is credited to the securities
premium account.
Question 5. A Company having 70,000 shares of ₹ 10 each as its issued share capital and having market value of
₹ 21 issues rights shares in the ratio of 1:10 at an issue price of ₹ 10. Pass journal entry for issue of right shares.
Question 6. A company having 1,00,000 shares of ₹ 10 each as its issued share capital, and havinga market
value of ₹ 46, issues rights shares in the ratio of 1:10 at an issue price of ₹31. Pass journal entry for issue
of right shares.

ADVANTAGES AND DISADVANTAGES OF RIGHT ISSUE:
Advantages of right issue:
1. Right issue enables the existing shareholders to maintain their proportional holding in the company and
retain their financial and governance rights. It works as a deterrent to the management, which may like
to issue shares to known persons with a view to have a better control over the company’s affairs.
2. In well-functioning capital markets, the right issue necessarily leads to dilution in the value of share.
However, the existing shareholders are not affected by it because getting new shares at a discounted
value from their cum-right value will compensate decrease in the value of shares.
3. Right issue is a natural hedge against the issue expenses normally incurred by the company in
relation to public issue.
4. Right issue has an image enhancement effect, as public and shareholders view it positively.
5. The chance of success of a right issue is better than that of a general public issue and is logistically much
easier to handle.
Dis-advantages of right issue:
1. The right issue invariably leads to dilution in the market value of the share of the company.
2. The attractive price of the right issue should be objectively assessed against its true worth to ensure
that you get a bargained deal.
Question 7. Multiple Choice Question:
Question i. In case of further issue of shares, the right to renounce the shares in favour of a third party.
(a) Must include a right exercisable by the person concerned to renounce the shares;
(b) Should include a right exercisable by the person concerned to renounce the shares;
(c) Is deemed to include a right exercisable by the person concerned to renounce the shares (subject to the
provisions under the articles of the company).
Question ii. A company’s share’s face value is ₹ 10, book value is ₹ 20, Right issue price is ₹ 30 and Market
price is ₹ 40, while recording the issue of right share, the securities premium will be credited with
(a) ₹ 10.
(b) ₹ 20.
(c) ₹ 30.
Question iii.
A. Right shares enable existing shareholders to maintain their proportional holding in the company.
B. Right share issue does not cause dilution in the market value of the Share.
Which of the option is correct?

(a) A-Correct; B Correct

(b) A – Incorrect; B Correct
(c) A - Correct; B – Incorrect
Question iv. Right shares are normally offered at a price __ _the cum-right value of the share, causing
dilution in its value post-right issue
(a) More than.

(b) Less than.
(c) Equal
Question v. Rights issue of shares results in _ ____ of market value of per share in comparison to
market price before rights issue.
(a) Increase.
(b) Decrease.
(c) No change.
Question vi. Ex-Rights price can be calculated by which of these formulas?
(a) (Cum rights value of the existing shares + Rights share issue proceeds)/(existing number of shares + No.
of right shares).
(b) (Cum rights value of the existing shares + Rights share issue proceeds)X (existing number of shares +
No. of right shares).
(c) (Cum rights value of the existing shares - Rights share issue proceeds)/(existing number of shares –
No. of right shares).
Question vii. Issued share capital including issue of rights shares and bonus shares should be ____
Authorised capital.
(a) More than.

(b) Less than.
(c) Less than or equal to.

CHAPTER 5. REDEMPTION OF PREFERENCE SHARES AND BONUS ISSUE

Redemption of Preference Shares means paying back preference shareholders their money. Section 55
of the company Act permits a company, limited by Shares, to issue redeemable preference shares if it is so
authorized by its articles of association. Redemption of Preference Shares
CONDITIONS OF REDEMPTION:
Section 55 lays down the following conditions for the redemption of preference shares, namely:
1. Such shares must be fully paid-up. If they are not fully paid up then they must be made fully paid-
up before redemption.
2. Preference shares may be redeemed at par or at premium.
3. Such shares can be redeemed out of divisible or distributable profits
(i.e. profits which would be available for dividends) or out of the proceeds of a fresh issue of shares
made for the purpose of redemption.
4. Amount equivalent to face value of redeemable preference shares must be raised --

by an issue of shares (equity or preference) or
by transferring the equivalent amount from free reserves to Capital redemption reserve a/c, or
by applying both the orders.
Imp. Note- Free reserves/ divisible or distributable profits include profit and loss A/c, general
reserve, retained earning, surplus, dividend Equalization fund/reserve, excess provision than actually
required (e.g. workmen compensation fund, Accident compensation Fund, insurance fund,
reserve/provision for doubtful debts and provision for taxation)
Non- free reserves include security premium, Revaluation reserve, capital reserves, capital Redemption
Reserves, debentures redemption reserve e.t.c
Meaning of Proceeds of fresh issue -

(I) If shares are issued at premium- does not include security premium received with issue of
shares because various uses of security premium has been specifically mentioned U/S 52
(II) If shares are issued at Par- It is the actual amount received (i.e. par Value)
Capital Redemption Reserve Account-According to Section 55, when preference shares are redeemable
out of divisible profit then amount equivalent to nominal value of redeemable shares must be transferred
to Capital Redemption Reserve Account out of free reserves.
Capital Redemption Reserve (CRR) A/c can be used by the company only for the purpose of issuing
fully paid bonus shares to its members/ Shareholders.
Premium on redemption of preference shares :- If preference shares are redeemable at a premium

then such premium on redemption must be adjusted in the following order:
Free Reserves A/c Dr

To Premium on redemption of Shares A/C

Question 1. The balance Sheet of Komalika Ltd as on 31 March 2022 was as under:
Share Capital Sundry assets 8,50,000
2,000,7.5% Preference Shares of Cash at bank 1,50,000
Rs.100 each fully Paid 2,00,000
40,000 Equity shares of
Rs. 10 each 4,00,000
6,00,000
Profit and loss Account 1,20,000
Current Liabilities 1,80,000
10,00,000 10,00,000
The preference shares are redeemable on 1st April at a premium of 8%. The redemption was carried out on the
due date, assuming that the company raised necessary bank loan. Show the necessary journal entries in the
books of the company.
Question 2. The Balance Sheet of producers Ltd as on 31st December, 2019 is as follows:
Share Capital Non current assets:
Issued & Full paid Land & Building 1,00,000
500 Redeemable pref. Plant 30,000
shares of Rs. 100 each 50,000 Furniture 2,000
9,000 equity shares of Current Assets:
Rs.10 each 90,000 Stock 30,000
Reserves & Surplus: Debtors 15,000
Securities premium 10,000 Investments 28,000
General Reserve 20,000 Bank 20,000 93,000
Profit and loss A\c 25,000
Current Liabilities 30,000
2,25,000 2,25,000
The Company decided to redeem its preference shares at premium of 5% on 31 st January, 2020. A fresh
issue of 1,000 equity shares of ₹10 each was made at ₹12 per share, payable in full on 31st January, 2020.
These were fully subscribed and all moneys were duly collected. All the investments were sold realizing
₹ 27,000. The Directors wish that only the minimum reduction should be made in the revenue reserve.
You are required to give the journal entries, including those relating to cash to record the above
transactions and draw up the balance sheet as it would appear after redemption of preference shares.
(Ans.: Balance sheet Total ₹1,83,500)
Question 3. The balance sheet of Vivek Ltd. as on 31 March is as follows:

Liabilities ₹ Assets ₹
Share capital:
Issued and fully paid: Land and Building 20,00,000
50,000,9% Preference Shares Plant 5,00,000
of Rs. 20 each fully paid 10,00,000 Fixtures and Fitting 1,00,000
90,000 Equity shares of Rs. 20 Motor Van 40,000
each fully paid 18,00,000
Reserves and Surplus: Stock 6,60,000
Securities Premium Debtors 2,40,000
Account 2,00,000 Investments 6,00,000
General Reserve 4,00,000 Bank 3,60,000
Profit and Loss Account 5,00,000
45,00,000 45,00,000
The company exercises its option to redeem all the preference shares at a premium of 5% on 1 April. To
finance the redemption all the investments were sold realizing ₹ 5,60,000. A fresh issue of 10,000
ordinary shares of ₹ 20 was made at ₹ 24 per share payable in full on 1 April. These were duly subscribed
for and the full amount was received on that date. The directors wish that only minimum reduction be

made in the revenue reserves. You are required to draft journal entries, including those relating to cash,
to record the above transactions and to set out the balance sheet of the company as it would then appear.
Question 4. The following balance sheet of H Limited as on June 30,2020:

Share capital: Fixed Assets 1,00,000
3,000 redeemable pref. Investment 21,000
shares of Rs. 10 each full paid 30,000
6,000 equity shares of Current Assets:
Rs. 10 each full paid 60,000 Stock in trade 44,000
Securities premium Account 29,000 Sundry debtors 16,000
General reserve 40,000 Cash at bank 22,000
Profit & loss A\c 24,500
Sundry Creditors 19,500
2,03,000 2,03,000
The company exercised its option to redeem on July 1, 2020 the whole of the Preference share Capital at a
premium of 5%. To assist in financing the redemption, all the investments were sold, realizing ₹19,500. On
August 1, 2020 the company made a bonus issue of seven equity shares fully paid for every six equity shares held
on that date. The appropriate resolution having been passed, the above transactions were duly completed.
You are required to show the journal entries to record the transactions in the books of the company and the
balance sheet as it would appear after the completion of the transactions.(Ans.: Balance sheet Total 1,70,000)
Question 5. Exchange Limited has an issued share capital of 650, 7 % redeemable preference shares of ₹ 100
each and 4,500 equity shares of ₹ 50. The preference shares are redeemable at a premium of 7.5 % on April 1,
2020. The company’s Balance Sheet as on March 31, 2020 was as follows:

Share Capital: Fixed Assets 3,45,000
Issued 650, 7%redeemable Investment 18,500
Preference shares of Balance at Bank 31,000
100 each fully paid 65,000
4,500 equity shares of
Rs. 50 each fully paid 2,25,000
2,90,000
Profit and loss A/c 48,000
3,94,500 3,94,500
In order to facilitate the redemption of the preference shares, the company decided:
(a) To sell all the investments for ₹ 16,000

(b) To finance part of the redemption from company funds, subject to leaving balance of ₹ 12,000 in the profit
and Loss Account, and
(c) To issue sufficient equity shares of ₹ 50 each at a premium of ₹ 10 per share to raise the balance of funds
required.
The preference shares were redeemed on the due date and the issue of equity shares was fully subscribed.
You are required to prepare necessary journal entries to record the above transactions (Including cash).

Question 6. The following is the Balance sheet of Ajanta Limited as on June 30, 2019:

Shares capital: Fixed Assets 80,000
3,000 6% redeemable Investment 21,000
preference shares of
Rs. 10 each full paid 30,000 Current Assets:
6,000 equity shares of Stock in trade 44,000
Rs. 10 each full paid 60,000 Sundry Debtors 16,000
90,000 cash as Bank 22,000
Securities premium Account 29,000
General reserve 40,000
Profit & loss A/c balance 14,500
1,83,000 1,83,000
The company exercised its option to redeem, on July 1, 2019 the whole of the preference Share Capital at a
premium of 10 percent. To assist in financing the redemption, all the investments were sold, Realizing ₹ 25,000.
On September1, 2019, the company made a bonus issue of three equity Shares fully paid for every ten equity
Shares held on that date.
The appropriate resolution having been passed, the above transactions were duly completed. You are required to
show the Journal entries to record the transactions in the books of the company and the balance sheet as it would
appear after the completion of the transactions.
Question 7. The financial position of P Ltd. At 31st Dec., 2019 was as follows:

Authorized, issued and Other Assets 8,40,000
Subscribed capital: Cash and Bank 3,00,000
40,000, 5% redeemable
preference shares of Rs. 10 each,
fully paid 4,00,000
20,000 equity shares of Rs.
10 each, fully paid 2,00,000
Securities premium A/c 50,000
Profit and loss account 2,80,000
Sundry Liabilities 2,10,000
11,40,000 11,40,000
As per the term of issue of the preference shares these were redeemable at a premium of 5 per cent on 1 st
February, 2020 and it was decided to arrange this as far as possible out of the company’s resources subject to
leaving a balance of ₹30,000 in the credit of the Profit and Loss Account. It was also decided to raise the
balance amount by Issue of 17,000 equity shares of ₹10 each at a premium of ₹2.50 per share.
You are required to prepare the necessary Ledger Account giving effect to the above arrangements in the
company’s books. Journal Entries are not required. (6 marks)
Question 8. The following is the Balance Sheet of Abhipraya Limited as on 31 March 2020
Share Capital:
5,000 12% Redeemable Fixed Assets 24,00,000
Preference Shares of Stock 5,00,000
Rs. 100 each 5,00,000 Debtors 50,000
10,000 Equity Shares of Cash at bank 50,000
Rs.100 each 10,00,000
Capital Reserve 1,00,000
Securities Premium Account 1,00,000
30,00,000 30,00,000

The preference shares are to be redeemed on 1 April 2020 at 10 per cent premium. On 1 April 2020, a fresh
issue of equity shares was made to the extent it is required under Companies Act for the purpose of
redemption of preference shares. The shortfall in cash resources for the purpose of redemption after utilizing
the proceeds of fresh issue was met by raising a bank loan, the cash balance of ₹ 50,000 being the minimum
amount the Company requires for its trading operations. Draft Journal entries in the books of the Company to
record these transactions and prepare the balance sheet in the form prescribed by the Companies Act
immediately after redemption.
Question 9. X Ltd. whose issued share Capital on 31 March 2020 consisted of 24,000 ,10% Preference Shares
of ₹ 100 each fully paid up and 60,000 Equity shares of ₹ 100 each, ₹ 90 paid up, decided to redeem preference
shares at a premium of ₹ 10 per share. The Company’s balance sheet as on 31-3-2020 showed a general reserve
of ₹ 28,00,000. The redemption was affected partly out of the proceeds of a new issue of 12,000 equity shares of
₹ 100 each at a premium of ₹ 35 per share.
On 1 July 2020, the company at its general meeting resolved that the reserves be applied in the following
manner:
(i) The declaration of bonus at the rate of ₹ 10 per share on equity shares for the purpose of making
the said equity shares fully paid, and
(ii) The issue of bonus shares to equity shareholders in the ratio of one share for every five shares held by them.
You are required to pass necessary Journal entries.
Q10. The ledger accounts of M.N. Ltd show the following balances:
14% Preference Share capital 3,00,000
General Reserve 80,000
Securities premium 20,000
Profit and loss Account 38,600
Investment Allowance reserve 50,000
The company redeems preference shares at a premium of 10% by issue of equity shares of ₹10 each at a
premium of 20%. Fresh issue of shares is made in lots of 100 Shares for such amount as is necessary after
utilizing the available resources to the maximum extent.
Calculate (i) number of fresh shares issued. (ii) Amount transferred to Capital Redemption Reserve (iii) journal
entry for transfer. [ B.Com(Hons.) Delhi 1997 modified]
Question.11 The following is the balance sheet of Mitra Ltd. as on 31 March 2019 :
5,000, 10% preference shares Fixed Assets 13,70,000
of ₹100 each 5,00,000 Investments at cost 3,00,000
90,000 equity shares at ₹10 (market value: ₹ 2,80,000)
Each 9,00,000 Stock 9,00,000
Securities Premium Account 1,00,000 Debtors 1,00,000
Cash at bank 1,75,000
General Reserve 7,50,000 Cash in hand 5,000
Current liabilities 4,00,000
28,50,000 28,50,000
It was decided on 30 June 2019 to redeem the preference shares at a premium of 5%. To finance the
redemption, all the investments were realised at market value and 10,000 equity shares were issued at ₹ 10
per share payable on application. The company also issued 10,000, 12% debentures of ₹100 each. On 1 August
2019, the company made a bonus issue of one equity share for each two equity shares held on that date. It
was also decided that only minimum reduction should be made in the revenue reserves.
Draft journal entries including those relating to cash transactions to record these transactions and show the
balance sheet after the redemption of preference shares and issue of bonus shares.

Question. 12 The Balance Sheet of Quality Profit Ltd. As at 31 March 2019 is as follows:
Equity Shares of ₹ 100 each
2,00,000 Fixed Assets: 2,90,000
Less:Calls in arrears@20 each 20,000 1,80,000 Investments (Face value
12% Preference Shares of 100 each 1,00,000 Rs. 1,00,000) 80,000
Securities Premium 5,000 Stock 50,000
General Reserve 50,000 Debtors 40,000
Creditors 85,000
4,60,000 4,60,000
As per agreement with the preference shareholders, the directors decided to redeem the shares on 1 April
2019 at a premium of 10%. It was also decided to utilize profits to the minimum extent possible. For the
purpose of redemption, the Board decided to sell certain investments whose face value on 31 March 2019 was
₹ 50,000 and to issue fresh equity shares at a premium of 20% to finance the redemption. The investments
were sold at a loss of 5%. After redemption, the board decided to issue one bonus share of Rs. 100 each for
every five shares held. Holders of 100 preference shares were not traceable. Assuming that all formalities
relating to redemption and issue of bonus shares were complied with. you are requested to show necessary
journal entries in the books of Quality Products Ltd. and also prepare balance sheet of the company.
Question 13 The following is the summarised balance sheet of Disha Ltd. as on 31 March 2020:
Liabilities ₹
1,00,000 Equity Shares of ₹ 10 each fully paid 10,00,000
60,000, 10% Preference shares of ₹ 10 each,
₹ 8 Called up 4,80,000
Capital Reserve 2,00,000
Securities Premium 1,20,000
Sundry Creditors 2,00,000
26,50,000
Assets Rs.
Net Block 10,00,000
Inventories 4,50,000
Accounts Receivable 7,80,000
Cash at Bank 20,000
26,50,000
On 1 April 2020, the company made a final call on its preference shares and it was paid by all the
shareholders. Thereafter the company redeemed the fully paid preference shares at a premium of 10%. In
order to pay off the preference Shareholder, the company sold its investments, realising ₹ 4,40,000 and
issued 2,000, 11% preference shares of ₹ 100 each, the full amount was called up on application. The
company also issued fully paid bonus shares in the ratio of one equity share for every two equity shares
held. Record the above transactions in the journal of X Ltd. making necessary assumptions.
Question 14. The ledger accounts of M.N. Ltd show the following balances:
14% Preference Share capital 3,00,000

Securities premium 20,000
Profit and loss Account 38,600
Investment Allowance reserve 50,000

The company redeems preference shares at a premium of 10% by issue of equity shares of ₹10 each at a
premium of 20%. Fresh issue of shares is made in lots of 100 Shares for such amount as is necessary after
utilizing the available sources to the maximum extent.
Calculate (i) number of fresh shares issued. (ii) Amount transferred to Capital Redemption Reserve (iii) journal
entry for transfer. [ B.Com(Hons.) Delhi 1997 modified]
Question 15. (Bonus shares only to equity shareholders)

Ajanta Trading Co. Ltd. has an authorised capital of ₹ 8,00,000 divided into 10,000 6% Preference Shares of ₹10
each.; 20,000 7% Preference Shares of ₹ 10 each; and 50,000 Equity Shares ₹ 10 each.
On January 1, 2020, the whole of the two classes of preference shares and 15,000 of the equity shares stood in
the books as fully paid. The securities premium account as on that date showed a balance of ₹ 20,000. The
balance of profit was ₹ 62,000. On July 1, 2020, it was decided to redeem the whole of 6% preference shares at
a premium of ₹ 1 per share and for this specific purpose, the company issued for cash 8,000 equity shares of
₹ 10 each at a premium of ₹ 2 per share, payable full on application. All the above shares were taken up. The
cost of issue of shares amounted to ₹ 3,000. On October 1 the company issued to existing shareholders one
bonus share of ₹ 10 fully paid for each five held. It is the intention of the directors that minimum reduction
should be made in revenue reserve account which stood at ₹ 1,25,000. Give necessary journal entries.
So l utio n
Journal Entries
Date Particulars Debit Credit
2003 ₹ ₹
July 1 6% Red. Preference Share Capital Account Dr. 1,00,000
Premium on Red. of Preference Shares Account Dr. 10,000
To Preference Shareholders Account
(Amount due on redemption) 1,10,000
July 1 Bank Account Dr.
96,000
To Equity Share Application Account
(The application money received on the 96,000
issue of shares including premium)
July l Equity Share Application Account Dr. 96,000
To Equity Share Capital Account 80,000
To Securities Premium Account 16,000
(Transfer of application money to share capital
and securities premium accounts respectively)
July 1 Cost of Issue Account Dr. 3,000
To Bank Account 3,000
(Expenditure incurred on the issue of shares)
July1 Preference Shareholders Account Dr. 1,10,000
To Bank Account 1,10,000
(Amount paid on redemption)
July 1 Securities Premium Account Dr. 3,000
To Cost of Issue Account 3000
(The utilisation of premium money for writing
off cost of issue)
profit and loss account Dr 10,000
to premium on redemption of pref shares 10,000
July1 Profit and Loss Appropriation Account Dr. 20,000
To Capital Redemption Reserve Account
(Amount transferred to capital redemption reserve 20,000
account to the extent of nominal amount paid out of
profits)
Oct. 1 Securities Premium Account Dr. 23,000

Capital Redemption Reserve Account Dr. 20,000
General Reserve Account Dr. 3,000

To Bonus Issue Account (The sum required for bonus 46,000

issue taken from different reserves accounts utilizing the
minimum general reserve account)
Oct. 1 Bonus Issue Account Dr. 46,000
To Equity Share Capital Account 46,000
(Issue of bonus shares)
Question 16. Ashoka limited has an authorised equity capital of ₹ 20 lakhs divided into shares of ₹ 100. The
paid up capital was ₹ 12,50,000. Besides this, company had 9% redeemable cumulative preference shares of
₹ 10 each for ₹ 2,50,000. Balance on other accounts were : Securities Premium ₹ 18,000; Profit and Loss
Account ₹ 72,000 and General Reserve ₹ 3,40,000. Included in sundry assets were investments of the face
value of ₹ 30,000, carried in the books at a cost of ₹ 34,000. The company decided to redeem the cumulative
preference shares at a premium of 10 per cent partly by the issue of equity share of the face value of
₹ 1,20,000 at a premium of 10%. Investments were sold at 105% of their face value. All preference
shareholders were paid off except 3 holders holding 250 shares. After redemption of cumulative preference
shares, fully paid bonus shares were issued in the ratio of 1:4. Give the necessary journal entries bearing in
mind that the Directors wanted a minimum reduction in free reserves while effecting the above transactions.
Cost of issue of shares ₹ 8,000. Working should form part of your answer. [C.A (Inter) Modified]
Question 17. (Conversion) What entries can be made for the following redemptions made by the company :
(a) In 2020 Shweta Ltd. redeemed ₹ 1,00,000 preference shares by converting them into equity shares
issued at 25% premium.
(b) In 2021 Shweta Ltd. redeemed ₹ 95,000 preference shares by converting them into equity shares.
(c) In 2022 Shweta Ltd. redeemed 10,000 preference shares of ₹ 10 each at a premium of ₹ 1.25 per share
by converting them into debentures of ₹ 10 each issued at 10% discount.
Question.18 The balance sheet of Murari Ltd. as on 31 March 2020 was as follows :
Share Capital: Fixed Assets 1,30,000
10,000 Equity Shares of Investments 30,000
Rs. 10 each fully paid 1,00,000 Stock 20,000
1,000 Preference Shares of Debtors 50,000
Rs. 100 each fully called up 1,00,000 Bank 40,600
Less : Calls-in-arrear (100 shares) (2,000)
Securities Premium Account 12,000
Reserve Fund 29,600
Creditors 21,000
2,70,600 2,70,600
On 1 April 2020, fixed assets costing ₹ 20,000 were sold for ₹ 18,000. On the same date, it was decided to
redeem the preference shares at a premium of 20% by issuing sufficient number of equity shares at a
premium of 10% subject to leaving a balance of ₹ 10,000 in the reserve fund. All payments were made except
to a holder of 50 shares who could not be traced. The company also made a bonus issue to the existing equity
shareholders in the ratio of 1: 10. Give necessary journal entries and new balance sheet on 1 April 2020.
Q.19 deleted from syllabus.

Question.20 The balance sheet of Redemption Ltd. as at 31 March 2020 is as follows :
10,000 Equity Share of Fixed Assets 2,62,000
₹ 10 each fully paid 1,00,000 Debtors 90,000
11% Preference Stock 30,000
Shares of ₹ 100 each 1,00,000 Investments 30,000
Less : Calls-in-arrear Bank 4,000
@ ₹ 20 per share 6,000 94,000
Shares of ₹ 10 each fully paid

10% Preference 1,00,000
Capital Reserve 30,000
Creditors 27,000
4,16,000 4,16,000
11% preference shares were due for payment on 1 April 2003 at a premium of 10%. The company sent the
reminders for the final call on the remaining 300-11% preference shares and could collect money from
shareholders holding 200 shares @ ₹ 20 per share and forfeited the defaulting 100 shares. The company sold
all investments at 90% of the cost of such investments. The company issued adequate number of new equity
shares at par, to the extent available profits were insufficient to back-up the redemption. Draft journal
entries and prepare the balance sheet of the company after redemption.
Question.21.
(i) Preference shares to be redeemed ₹ 1,50,000.
(ii) Premium on Redemption 10%.
(in) Profits given in the Balance Sheet ₹ 25,000.
(iv) Securities Premium Account (Given) ₹ 5,000.
Determine the number and amount of fresh issue of equity shares of ₹ 10 each if company will utilize its own
resources to the maximum extent and new issue has been made at
Case no 1. at a premium of 20% to comply section 55.
Case no 2. at a premium of 5% to raise funds required for redemption.
Q.22. The following is the summarized balance sheet of Sonu limited:
Equity Share Capital fully paid Fixed Assets Less
up @₹ 100 each 5,00,000 Depreciation 7,00,514
12% Preference Share of ₹ 10 Bank 16,688
each, 80% called up and paid up 2,00,000 Other Current Assets 2,98,000
Profit and Loss Appropriation
Account 26,250
10,15,202 10,15,202
Preference shares are due for redemption at a premium of 10%. The directors desire that only minimum
number of equity shares of ₹100 each at a premium of 5% be issued to provide for redemption of preference
shares as could not otherwise be redeemed. Assuming that all formalities required under Section 55 were
complied with, you are required to give the journal entries and also prepare the balance sheet.

Question. 23 Boon Ltd. provides you the following balance sheet as on 31 March 2020:
₹ ₹
60,000 Equity Shares of Land & Buildings 50,60,000
Rs. 100 each, fully paid 60,00,000 Furniture and fixtures 8,35,000
25,000, 14% Preference Share Debtors 13,25,000
of Rs. 100 each fully paid 25,00,000 Cash in hand 25,000
Capital Reserve 50,000 Cash at Bank 46,25,000
Securities Premium 15,000
Pre-incorporation profits 25,000
Dividend Equalization Reserve 75,000
Preference dividend payable 3,50,000
Equity dividend payable 6,00,000
1,18,70,000 1,18,70,000
Dividend to shareholders was paid on 2 April 2020. The company decided to redeem the preference shares
on 5 April 2020 at a premium of 10 per cent. For this purpose, the company issued new equity shares of ₹ 100
each at a premium of 5% to the minimum possible extent, utilizing all available resources at its disposal.
Make journal entries to record the foregoing transactions and re-draft balance sheet immediately after
redemption of preference shares. Give detailed working notes.
Question 24. The Balance sheet of a Limited Company on 31st January read as under:

Share Capital Freehold property 1,15,000
Authorized: Stock 1,35,000
30,000 Equity shares of Debtors 75,000
₹ 10 each 3,00,000 Cash 30,000
Issued And subscribed: Balance at Bank 2,20,000
20,000 Equity Shares of
Rs. 10 each fully paid 2,00,000
Profit and loss Account 1,20,000
12% Debentures 1,20,000
Creditors 1,15,000
Dividend payable 20,000
5,75,000 5,75,000
At the annual General Meeting it was resolved:
(a) To pay the dividend of the 10 per cent in cash

(b) To issue one bonus share for every four existing shares held.
(c) To give existing shareholders the option to purchase one ₹10 Share at ₹ 15 for every four shares held
prior to the bonus distribution, this option being taken up by all the shareholders.
Give the necessary Journal Entries and then Company’s balance sheet after these transactions are completed.

Question 25. The balance sheet of XYZ Ltd. as at 31st December 1998 inter alia includes the following:
50,000 8% preference shares of ₹ 100 each 35,00,000
70 paid up
1,00,000 Equity shares of ₹ 100 each fully paid up 1,00,00,000
Securities premium 5,00,000
Capital Redemption Reserve 20,00,000
Under the terms of their issue the preference shares are redeemable on March 31, 1999 at a premium of
5%. In order to finance the redemption the company makes a right issue of 50,000 equity shares of ₹ 100
each at ₹ 110 per share, ₹ 20 being payable on application, ₹ 35 (including premium) on allotment and the
balance on January 1, 2000. The issue was fully subscribed and allotment made on March 1, 1999. The
monies due on allotment were received by March 30, 1999.
The preference shares were redeemed after fulfilling the necessary conditions of section 55 of the
companies act, 2013. The company decided to make the minimum utilization of general reserve.
You are asked to pass the necessary journal entries and show the relevant extracts from the Balance Sheet
as on March 31,1999. (CA -1999-november)
Question 26. The balance sheet of a A Ltd as at 31-03-1995 is as follows:
Balance sheet as at 31-03-1995

LIABILITIES AMOUNT ASSETS AMOUNT
Authorized share capital Sundry assets 17,00,000
1,50,000 equity shares of ₹10 each 15,00,000
Issued, Subscribed& paid–up
80,000 equity shares of ₹7.50 each
called-up& paid –up 6,00,000
Reserves and surplus:
Capital Redemption Reserve 1,50,000
Plant Revaluation reserve 20,000
Securities premium account 1,50,000
Development Rebate Reserve 2,30,000
Investment Allowance Reserve 2,50,000
General reserve 3,00,000
17,00,000 17,00,000
The company wanted to issue bonus shares to its shareholders at the rate of one Share for every two shares held.
Necessary resolutions were passed; requisite legal requirements were complied with:
(a) You are required to give effect to the proposal by passing journal entries in the books of A Ltd.
(B) Show the amended Balance Sheet (CA- 1995-November )
(Ans: Total of Balance sheet ₹17,00,000)

Question 27. The following is the balance sheet of trinity Ltd as at 31-03-1995:
LIABILITIES AMOUNT ASSETS AMOUNT
Share capital Fixed assets:
Authorized Gross Block 8,00,000
10,000 10% redeemable Less: prov for Dep 1,00,000
preference shares of ₹10 each 1,00,000 7,00,000
90,000 equity shares of ₹10 each 9,00,000 Investments 1,00,000
10,00,000
Issued subscribed and paid-up capital Current Assets and Loans & advances:
10,000 10% redeemable Inventory 25,000
Preference shares of ₹10 each 1,00,000 Debtors 25,000
10,000 equity shares of ₹10 1,00,000 Cash and Bank 50,000
Discount on issue of debentures 20,000
Reserves and Surpluses
General reserve 1,20,000
Security premium 70,000
Profit and loss a/c 18,500
Debentures 5,00,000
Current Liabilities and Provision 11,500
TOTAL 9,20,000 9,20,000
For the year ended 31-3-1996, the company made a net profit of ₹ 15,000 after providing ₹ 20,000 depreciation
and writing off the discount on issue of debentures ₹ 20,000
The following additional information is available with regard to company‘s operation:
1. The preference dividend for the year ended 31-3-1996 was paid before 31-3-1996
Except cash and bank balance other current assets and current liabilities as on 31-3-1996 was the same as on 31-3-95.
2. The company redeemed the preference shares at a premium of 10%
3. To meet the cash requirements of redemption, the company sold a portion of the investments so as to leave
a minimum balance of ₹ 30,000 after such redemption.
4. Investments were sold at 90% of cost on 31-3.1996.
5. The company issued bonus shares in the ratio of one share for every equity share held as on 31-3-1996
You are required to:
(a) Prepare necessary journal entries to record redemption and issue of bonus shares
(b) Prepare the cash and bank account
(c) Prepare the Balance sheet as at 31st march 1996 after incorporating adjustments given in point 1 only (
format not required). Also prepare balance sheet incorporating the above all transactions in prescribed
format. (CA INTER 1996- November modified)
Question 28. Footfault Ltd had equity capital of ₹ 2,00,000 divided into shares of ₹ 100 each, 11% cumulative
redeemable preference share of ₹ 100 each for ₹ 1,00,000 and ₹ 50,000 and ₹ 40,000 respectively to the credit of
profit and loss Account and General Reserve as on 31st March 2019. It has also ₹ 8,000 to the credit of security
premium Account.
As per the agreement with the preference shareholders, the directors decided to redeem the shares on 1-4-2019
at a premium of 10%. It was also decided to sell certain investment whose book and market values on 31-3-19
were ₹ 40,000 and ₹ 50,000 respectively to enable redemption.
For purposes of redemption, the board decided to utilize free reserve to the minimum extent possible. It was
decided to issue right equity shares at a premium of 20% to finance the redemption. After redemption, the
board decided to issue bonus shares to equity holders in the ratio of 2 for 5. Holders of 100 preference shares
were not traceable. Show necessary Journal entries to record above transaction in the books of Footfault Ltd.

Question 29. Following items appear in the trial balance of Bharat Ltd.(listed company) as on 31st March, 2020:
Particular ₹
40,000 Equity shares of ₹10 each 4,00,000
Capital Redemption Reserve 55,000
Securities Premium (collected in cash) 30,000
Surplus i.e. credit balance of Profit and Loss Account 50,000
The company decided to issue to equity shareholders bonus shares at the rate of 1 share for every 4 shares
held and for this purpose, it decided that there should be the minimum reduction in free reserve. Pass
necessary journal entries.
Question 30. Following is the extract of the Balance Sheet of Solid Ltd. as at 31st March, 2020:
Particular ₹
Authorised capital:
10,000 12% Preference shares of ₹ 10 each 1,00,000
1,00,000 Equity shares of ₹ 10 each 10,00,000
11,00,000
Issued and Subscribed capital:
8,000 12% Preference shares of ₹ 10 each 80,000
90,000 Equity shares of ₹ 10 each, ₹ 8 paid up 7,20,000
Reserve and Surplus:

Revaluation Reserve 35,000
Secured Loan:
12% Debentures @ ₹ 100 each 5,00,000
On 1st April, 2020 the Company has made final call @ ₹ 2 each on 90,000 equity shares. The call money was
received by 20th April, 2020. Thereafter the company decided to capitalise its reserve by way of bonus at the
rate of one shares for every four shares held. Show necessary entries in the books of the company and prepare
the extract of the Balance Sheet immediately after bonus issue assuming that the company has passed necessary
resolution at its general body meeting for increasing the authorised capital.
Question 31. Following is the extract of the Balance Sheet of Preet Ltd. as at 31 st March, 2020:
Authorised capital: ₹
15,000 12% Preference shares of ₹ 10 each
1,50,000 Equity shares of ₹ 10 each 1,50,000
15,00,000
16,50,000
Issued and Subscribed capital:
12,000 12% Preference shares of ₹ 10 each fully paid 1,20,000
1,35,000 Equity shares of ₹ 10 each, ₹ 8 paid up 10,08,000
Reserve and Surplus:

Capital Redemption Reserve 60,000
On 1st April, 2020, the company has made final call @ ₹ 2 each on 1,35,000 equity shares. The call money was
received by 20th April, 2020. Thereafter the company decided to capitalise its reserve by way of bonus at the
rate of one share for every four shares held. Show necessary journal entries in the books of the company and
prepare the extract of the Balance Sheet as on 30th April, 2020 after bonus issue.

CHAPTER 6. REDEMPTION OF DEBENTURES

1. INTRODUCTION OF DEBENTURES: A debenture is an instrument issued by a company
under its seal, acknowledging a debt and containing provisions as regards repayments of the
principal and interest.
Under Section 71 (1) of the Companies Act, 2013 a company may issue debentures with an option to
convert such debentures into shares, either wholly or partly at the time of redemption.
Provided that the issue of debentures with an option to convert such debentures into shares, wholly or
partly, should be approved by a special resolution passed at a duly convened general meeting.
Section 71 (2) further provides that no company can issue any debentures which carry any voting rights.
Section 71 (4) provides that where debentures are issued by a company, the company should create a
debentures redemption reserve account out of the profits of the company available for payment of
dividend and the amount credited to such account should not be utilised by the company for any purpose
other than the redemption of debentures.
2. MEANING OF REDEMPTION OF DEBENTURES:- Redemption of Debentures means discharging the liability

on account of debentures issued by a company by making repayment to the debenture holders. Debentures
are normally redeemed on the due date or earlier as per the terms of issue. Debentures may be redeemed in
instalments, i.e., by draw of lots or by purchase from the open market for cancellation or by conversion into
shares or new debentures. At the time of redemption, following should be kept in mind:
i. Time of Redemption of Debentures:
a. An issue of secured debentures may be made, provided the date of its redemption shall not
exceed ten years from the date of issue. Provided that the following classes of companies may
issue secured debentures for a period exceeding ten years but not exceeding thirty years,
(i) Companies engaged in setting up of infrastructure projects;
(ii) Infrastructure Finance Companies.
(iii) Infrastructure Debt Fund Non-Banking Financial Companies
(iv) Companies permitted by a Ministry or Department of the Central Government or by
Reserve Bank of India or by the National Housing Bank or by any other statutory
authority to issue debentures for a period exceeding ten years.
b. such an issue of debentures shall be secured by the creation of a charge on the properties or assets
of the company or its subsidiaries or its holding company or its associates companies, having a
value which is sufficient for the due repayment of the amount of debentures and interest thereon.
c. the company shall appoint a debenture trustee before the issue of prospectus or letter of offer for
subscription of its debentures and not later than sixty days after the allotment of the debentures,
execute a debenture trust deed to protect the interest of the debenture holders; and
d. the security for the debentures by way of a charge or mortgage shall be created in favour of the
debenture trustee on-
(i) any specific movable property of the company or its holding company or subsidiaries or
associate companies or otherwise.
(ii) any specific immovable property wherever situate, or any interest therein:
Provided that in case of a non-banking financial company, the charge or mortgage under sub-
clause (i) may be created on any movable property.

Provided further that in case of any issue of debentures by a Government company which is fully
secured by the guarantee given by the Central Government or one or more State Government or by
both, the requirement for creation of charge under this sub-rule shall not apply.
Provided also that in case of any loan taken by a subsidiary company from any bank or financial
institution the charge or mortgage under this sub-rule may also be created on the properties or assets
of the holding company.
ii. Methods of Redemption of Debentures:
a. By payment in lumpsum
b. By payment in instalments
c. By purchase in open market
d. By conversion into other securities
iii . Sources of Redemption of Debentures: The sources of redemption may be any of the following:
(a) Out of Capital: It means redemption of debentures without transfer of any profit from Surplus(statement
of profit and loss). Redemption only out of capital is not possible under the present law because the
Companies Act, 2013 prescribes companies (other than those exempted from creating Debentures
Redemption Reserve) to transfer amount of profits available for distribution as dividend as specified in Rule
18(7) (b) of the Companies (Share Capital and Debentures) Rules, 2014.
(b) Out of Profit: It means redemption of debentures only out of profits. In this case companies transfer 100
per cent of nominal (face) value of total redeemable debentures to Debentures Redemption Reserve out of
the surplus available for payment as dividend to the shareholders.
(c) Out of Profit and Capital: It means redemption of debentures partially out of profit and partially out of
capital. Where the company does not transfer 100 per cent of nominal (face) value of outstanding debentures
to Debentures Redemption Reserve out of the surplus available for payment as dividend to the shareholders, it
is known as redemption out of profit and capital.
3. DEBENTURES REDEMPTION RESERVE (DRR) AND DEBENTURES REDEMPTION INVESTMENT (DRI)
Debentures Redemption Reserve (DRR):-- A company issuing debentures may be required to create a
debenture redemption reserve account out of the profits available for distribution of dividend and
amounts credited to such account cannot be utilized by the company except for redemption of
debentures. Such an arrangement would ensure that the company will have sufficient liquid funds for
the redemption of debentures at the time they fall due for payment.
An appropriate amount is transferred from profits every year to Debenture Redemption Reserve and
its investment is termed as Debenture Redemption Reserve Investment (or Debenture Redemption
Fund). In the last year or at the time of redemption of debentures, Debenture Redemption Reserve
Investments are encashed and the amount so obtained is used for the redemption of debentures.
3.1 REQUIREMENT TO CREATE DEBENTURE REDEMPTION RESERVE
Section 71 of the Companies Act 2013 covers the requirement of creating a debenture redemption
reserve account. Section 71 states as follows:
(1) Where a company issues debentures under this section, it should create a debenture redemption
reserve account out of its profits which are available for distribution of dividend every year until
such debentures are redeemed.
(2) The amounts credited to the debenture redemption reserve should not be utilised by the
company for any purpose except for the purpose aforesaid.
(3) The company should pay interest and redeem the debentures in accordance with the terms and
conditions of their issue.
(4) Where a company fails to redeem the debentures on the date of maturity or fails to pay the interest on

debentures when they fall due, the Tribunal may, on the application of any or all the holders of
debentures or debenture trustee and, after hearing the parties concerned, direct, by order, the
company to redeem the debentures forthwith by the payment of principal and interest due thereon.
3.2 BALANCE IN DEBENTURE REDEMPTION RESERVE (DRR)
When the company decides to establish the Debenture Redemption Reserve Account, the amount indicated
by the Debenture Redemption Reserves tables is credited to the Debenture Redemption Reserve account
and debited to profit and loss account. That shows the intention of the company to set aside sum of money
to build up a fund for redeeming debentures. Immediately, the company should also purchase outside
investments. The entry for the purpose naturally will be to debit Debenture Redemption Reserve
Investments and credit Bank.
3.3 ADEQUACY OF DEBENTURE REDEMPTION RESERVE (DRR)
As per Rule 18 (7) of the Companies (Share Capital and Debentures) Amendment Rules, 2019, the company
shall comply with the requirements with regard to Debenture Redemption Reserve (DRR) and investment or
deposit of sum in respect of debentures maturing during the year ending on the 31st day of March of next
year , in accordance with the conditions given below—
a. the Debenture Redemption Reserve shall be created out of the profits of the company available for
payment of dividend;
b. the limits with respect to adequacy of DRR and investment or deposits, as the case may be, shall be as
under:
Adequacy of Debenture Redemption
Reserve (DRR)
(i) For debentures issued by All India Financial No DRR is required
Institutions (AIFIs) regulated by Reserve Bank of
India and Banking Companies for both public as
well as privately placed debentures.
(ii) For other Financial Institutions (FIs) within the DRR will be as applicable to NBFCs registered
meaning given in the Companies Act. with RBI.
(iii) LISTED COMPANIES: No DRR is required

Listed NBFC
Listed HFC(housing finance company)
Other listed companies
(for both, public as well privately placed
debentures)
(iv) UNLISTED COMPANIES:
Unlisted NBFC No DRR is required
Unlisted HFC No DRR is required
Other unlisted company 10% of value of outstanding debenture issued
Disclosure of Debentures Redemption Reserve (DRR) in Balance Sheet:-- Debentures Redemption Reserve is
shown in the Equity and Liabilities part of the Balance Sheet under the main-head 'Shareholders' Funds' and
sub-head 'Reserves and Surplus'.
iv. Debentures Redemption Investment (DRI):-- Further, as per Rule 18 (7) of the Companies (Share Capital and
Debentures) Amendment Rules, 2019, following companies:
(a) All listed NBFCs

(b) All listed HFCs
(c) All other listed companies (other than AIFIs, Banking Companies and Other FIs); and
(d) All unlisted companies which are not NBFCs and HFCs
shall on or before the 30th day of April in each year, in respect of debentures issued, deposit or invest, as the
case may be, a sum which should not be less than 15% of the amount of its debentures maturing during the
year ending on the 31st day of March of next year, in any one or more of the following methods, namely:

(a) in deposits with any scheduled bank, free from charge or lien;
(b) in unencumbered securities of the Central Government or of any State Government;
(c) in unencumbered securities mentioned in clauses (a) to (d) and (ee) of Section 20 of the Indian
Trusts Act, 1882;
(d) in unencumbered bonds issued by any other company which is notified under clause (f) of Section
20 of the Indian Trusts Act, 1882.
The amount deposited or invested, as the case may be, above should not be utilised for any purpose other
than for the redemption of debentures maturing during the year referred to above.
Provided that the amount remaining deposited or invested, as the case may be, shall not at any time fall
below 15% of the amount of debentures maturing during the 31st day of March of that year.
In case of partly convertible debentures, DRR shall be created in respect of non- convertible portion of
debenture issue in accordance with this sub-rule.
The amount credited to DRR shall not be utilised by the company except for the purpose of redemption of
debentures.
Important Note for exam: It should be noted that appropriation to DRR can be made any time before
redemption and Investments in specified securities as mentioned above can be done before 30th April
for the debentures maturing that year, however, for the sake of simplicity and ease, it is advisable to
make the appropriation and investment immediately after the debentures are allotted assuming that
the company has sufficient amount of profits (issued if allotment date is not given in the question).
Also, in some cases, the date of allotment could be missing, in such cases the appropriation and
investments should be done on the first day of that year for which ledgers accounts are to be drafted.
PRACTICE QUESTIONS:
NOTE:- 1 to 14 questions are covered issue of debentures. They are not in your syllabus.
DEBENTURE REDEMPTION RESERVE/FUND:--
QUESTION 15. The following balances appeared in the books of a company (unlisted company other
than AIFI, Banking company, NBFC and HFC) as on December 31, 2020: 6% Mortgage 10,000
debentures of ₹ 100 each; Debenture Redemption Reserve (for redemption of debentures) ₹50,000;
Investments in deposits with a scheduled bank, free from any charge or lien ₹ 1,50,000 at interest 4%
p.a. receivable on 31st December every year. Bank balance with the company is ₹ 9,00,000.The Interest
on debentures had been paid up to December 31, 2020.
On February 28, 2021, the investments were realised at par and the debentures were paid off at ₹101,
together with accrued interest. Write up the concerned ledger accounts. Ignore taxation.
Question 16. The following balances appeared in the books of Paradise Ltd (unlisted company other than
AIFI, Banking company, NBFC and HFC) as on 1-4-2020:
(i) 12 % Debentures ₹ 7,50,000
(ii) Balance of DRR ₹ 25,000
(iii) DRR Investment ₹1,12,500 represented by 10% 1,125 Secured Bonds of the Government of India
of ₹ 100 each.
Annual contribution to the DRR was made on 31st March every year. On 31-3-2021, balance at bank
was ₹7,50,000 before receipt of interest. The investment were realised at par for redemption of
debentures at a premium of 10% on the above date.
You are required to prepare the following accounts for the year ended 31st March, 2021:
(1) Debentures Account
(2) DRR Account

(3) DRR Investment Account

(4) Bank Account
(5) Debenture Holders Account.
Question 17. The Summarized Balance Sheet of BEE Co. Ltd. (unlisted company other than AIFI, Banking
company, NBFC and HFC) as on 31st March, 2020 is as under:
Share Capital: Freehold property 1,15,000
Authorised: Stock 1,35,000
30,000 Equity Shares of ₹ 10 each 3,00,000 Trade receivables 75,000
Issued and Subscribed: Cash 30,000
20,000 Equity Shares of ₹ 10 each Balance at Bank 2,00,000
fully paid 2,00,000
Trade payables 1,15,000
5,55,000 5,55,000
At the Annual General Meeting, it was resolved:
(a) To give existing shareholders the option to purchase one ₹ 10 share at ₹ 15 for every four
shares (held prior to the bonus distribution). This option was taken up by all the shareholders.
(b) To issue one bonus share for every five shares held.
(c) To repay the debentures at a premium of 3%.
Give the journal entries and the company’s Balance Sheet after these transactions are completed.
QUESTION 18. ( in video class I am solving question 16 under sinking fund method ) Prakash Enterprises Ltd.
issued ₹10,00,000, 10% Debentures on January 1,2019. These were to be redeemed on 31 December 2021. For
this purpose, the company established a Sinking Fund. Investments were expected to earn 5% interest per
annum. Sinking Fund Tables show that 0.317208 invested annually at 5% amount to ₹1 in three years. On 31
December 2021, the bank balance was ₹4,20,000 before receipt of interest on sinking fund investments. On
that date the investments were sold for ₹6,56,000. Interest is payable annually. Calculate the interest to the
nearest of a rupee and investments are made in multiples of ₹100. Ignore tax on debenture interest
Show the 10% Debentures Account, Sinking Fund Account, Sinking Fund Investments Account and Bank
Account in the books of the company. Also give complete journal entries.
QUESTION 19 ( in video class I am solving question 17 under sinking fund method) Instalment Supply
Business Limited issued 8% 2,000 Debentures of ₹100 each at 5% discount on 1 January 2018 payable at a
premium of 10% after 5 years. A sinking fund is created for this purpose and the money is invested in 5%
Government loan. Investments are to be made in multiples of rupees ten only. ₹1 invested p.a. @ 5% over 5
years amounts to ₹5.5256 Investments realised ₹1,75,000; the balance at bank on 31 December 2022 was
₹ 54,320. Give journal entries and show ledger accounts assuming that accounting period ends on 31st
December. Interest is payable every year.

QUESTION 20. ( in video class I am solving question 15 under sinking fund method) . X Ltd. issued 2,000,
12% debentures of ₹100 each at par on1 April, 2000. These debentures are redeemable at the end of the fifth
year at 10% premium. It was resolved that sinking fund should be formed and invested in 10% development
bonds of ₹100 each. Interest on bonds is payable on 31 March every year.
Reference to Sinking Fund Tables shows that ₹0.1638 invested at the end of every year at 10% compound
interest will produce ₹1 at the end of the fifth year.
10% Development Bonds of the required amount were purchased on different dates at the following prices :
On March 31, 2001 ₹80

On March 31, 2002 ₹90
On March 31, 2003 ₹100
You are required to show Debenture Redemption Fund Account and Debenture Redemption Fund Investment
Account for the first three years in the books of X. Ltd. Accounting year of this company ends on 31 March.
[B.Com. (Hons.) Delhi 1997 Modified]
Question 21. ( in video class I am solving question 19 under sinking fund method)
On 30 June 2020, the following balances stood in the books of a company:
₹
8% First Mortgage Debenture Stock 2,00,000
Debenture Redemption Fund 2,13,080
Debenture Redemption Fund Investments:
Rs. 70,000, 6% Punjab Electricity Board Bonds 71,260
Rs. 80,000, 5% UP Water Board’ Loan 64,068
Rs. 60,000, 8% Government of India Loan 61,710
Rs. 16,000, 7% Co-operative Bank Loan 16,042
On the same day the investments were sold: Electricity Bonds at par; 5% loan at ₹91; 8% loan at ₹109 and 7%
loan at ₹103. On 1 July the debentures were redeemed at a premium of 5%.
Write up the accounts concerned (other than the cash account) bringing down the balances, if any, after the
above transactions have been completed, and stating how such balances should be dealt with in the next
balance sheet of the company. (CA IPCC – 4 marks)
REDEMPTION BY CONVERSION
Question 22. X ltd had issued 12% debentures of ₹20,00,000 at par repayable at a premium of 5%. Company
decided to convert debentures into equity shares of ₹10 each. Make journal entries if conversion took place (1)
on the date of maturity (2) before the date of maturity.
Question 23. Y ltd issued 16% debentures of ₹10,00,000 at discount of 10% repayable at a premium of 15% at
the end of 4 years. Company decided to convert their debentures into new equity shares of ₹10 each. Make
entries if till now 40% of discount/loss have been written off from profit and loss account.
Question 24. Z ltd issued 14% debentures of ₹10,00,000 at premium of 5% repayable at a premium of 10% at the
end of 4 years. Company decided to convert their debentures into new equity shares of ₹10 each issued at a
premium of 10%. Make entries if conversion took place on the date of maturity.
Question 25. On 1 April 2019, Anju Limited issued 2,000-12% Debentures of ₹500 each at ₹475 each.
Debenture holders had an option to convert their holding into 13% Preference Shares of ₹100 each at a
premium of ₹25 per share. A holder of 100 Debentures notified his intention to convert his holding into 13%
preference shares. Journalize the above transactions.
Question 26. The summarised balance sheet of Convertible Limited as on 31 March, 2020 stood as follows:
Share Capital: 5,00,000 Equity Share of Rs. 10 each fully paid 50,00,000

Profit and loss A/c 19,00,000
Debenture Redemption reserve 1,00,000
13.5% Convertible Debentures:
1,00,000 Debentures of Rs. 100 each 1,00,00,000
Other Loans 65,00,000
Current Liabilities 1,25,00,000
4,50,00,000
Assets
Fixed Assets at cost less depreciation 1,60,00,000
Debenture Redemption reserve Investments 15,00,000
Cash and Bank Balance 75,00,000
Other Current Assets 2,00,00,000
4,50,00,000
The debentures are due for redemption on 1 April 2020. The terms of issue of debentures provided that they were
redeemable at a premium of 5% and also conferred option to the debenture holders to convert 20% of their holding
into equity shares at a pre-determined price of ₹15.75 per share and the payment in cash. Assuming that:
(i) except for 100 debenture holders holding totally 25,000 debentures, the rest of them exercised option for
maximum conversion;
(ii) the investments realised ₹20 lakhs on sale; and
(iii) All the transactions are put through, without any lag on 1 April 2020.
Redraft the balance sheet of the company as on 1 April 2020 after giving effect to the redemption. Show
your calculations in respect of the number of equity shares to be allotted and necessary cash payment if
above company is an unlisted company.
Question 27. Mahindra Ltd. (unlisted other company) gave notice of its intention to redeem its outstanding
₹ 4,00,000, 6% debenture stock at ₹102 per cent, and offered the holders the following options to apply the
redemption money to subscribe for: (a) 5% cum-pref. shares of ₹20 each at ₹22.50 per share; (b) 5% debenture
stock at 96 per cent; (c) to have their holdings redeemed for cash. Holders of ₹1,71,000 stock accepted the proposal
(a). Holders of ₹1,44,000 stock accepted the proposal (b). The remaining stockholders accepted the proposal (c).
Pass the journal entries to record the above transactions.
Question 28. Mohini limited (other unlisted company) has an authorised capital of ₹10,00,000 in shares of ₹10 each
of which 60,000 shares have been issued and are fully paid. A summary of its balance sheet on 31 March 2020 is as
follows:
Share Capital 6,00,000 Fixed Assets (net) 11,00,000
Debenture Redemption Reserve 80,000 Debenture Redemption
Profit and Loss Account 1,90,000 Fund Investments (cost) 80,000
9% Debentures redeemable (market value Rs. 40,800)
at 102% 5,00,000 Current Assets 3,00,000
14,80,000 14,80,000
Interest on debenture had been paid up to 31 March 2020. On 1 April 2020, the directors gave notice to redeem
the 9% debentures on 1 July 2020, giving the holders the option to be repaid either wholly in cash or by issue of

four shares of ₹10 each (fully paid) for every ₹100 debentures. Sixty per cent of the holders exercised the option to
take shares, and the cash for the remainder was paid. Draft journal entries to record these transactions and any
consequential transfers which you consider necessary.
REDEMPTION BY PURCHASE IN THE OPEN MARKET
Question 29. On January 1, Rama Ltd. (listed company), had 500 Debentures of ₹100 each outstanding in its
books carrying interest at 6% per annum. In accordance with the regulatory requirements, the directors of
the company acquired debentures from the open market for immediate cancellation as follows:
March 1 ₹ 5,000 at ₹98.00 (cum interest)

Aug. 1 ₹ 10,000 at ₹100.25 (cum interest)
Dec. 15 ₹ 2,500 at ₹98.50 (ex-interest)
Debenture interest is payable half-yearly, on 30th June and 31st Dec. Show ledger accounts of Debentures
and Debenture interest for the first year and Debenture redemption investment account.
Question 30. Sencom Limited (listed company) issued ₹1,50,000 5% Debentures on 30th September 2020 on
which interest is payable half yearly on 31st March and 30th September. The company has power to
purchase debentures in the open market for cancellation thereof. The following purchases were made during
the year ended 31st December, 2022 and the cancellation were made on the same date. On 31 December
2020, investments made for the purpose of redemption were ₹22,500.
1st March 2022 - ₹ 25,000 nominal value purchased for ₹ 24,725 ex-interest.
1st September 2022 - ₹ 20,000 nominal value purchased for ₹ 20,125 cum-interest. You are required to draw
up the following accounts for the year 2022 up to the date of cancellation:
(i) Debentures Account; and

(ii) Own Debenture (Investment) Account. Ignore taxation.
Question 31. On 1st April, 2021, in MK Ltd.’s (unlisted company other than AIFI, Banking company, NBFC and
HFC) ledger, 9% debentures appeared with an opening balance of ₹50,00,000 divided into 50,000 fully paid
debentures of ₹ 100 each issued at par.
Interest on debentures was paid half-yearly on 30th of September and 31st March every year.
On 31.5.2021, the company purchased 8,000 debentures of its own @ ₹98 (ex-interest) per debenture.
On same day, it cancelled the debentures acquired.
You are required to prepare necessary ledger accounts (excluding bank a/c).
Question 32. YZ Ltd (an unlisted company other than AIFI, Banking company, NBFC and HFC) had 16,000, 12%
debentures of ₹100 each outstanding as on 1st April, 2021, redeemable on 31st March, 2022.
On 1 April 2021, the following balances appeared in the books of accounts Investment in 2000 9% secured
Govt. bonds of ₹100 each. DRR is ₹1,00,000. Interest on investments is received yearly at the end of financial
year.
2,000 own debentures were purchased on 31st March, 2022 at an average price of ₹99 and cancelled on the
same date.
On 31st March 2022 the investments were realised as par and the debentures were redeemed. You are required
to write up the following accounts for the year ended 31st March 2022:
(i) 12% Debentures Account
(ii) Debentures Redemption Reserve Account
(iii) Debentures Redemption Investments Account

Question 33. COC Ltd. purchased its own 12% debentures of face value of ₹100 each, (interest payable on 30
September and 31 March) on following dates:
1 August 2020 ₹6,00,000 @ ₹94 ex-interest
31 December 2020 ₹4,00,000 @ ₹95 cum interest

these debentures were cancelled immediately. Make journal entries only related to purchase and cancellation.
Question 34(Purchase of debentures for immediate cancellation) On 1-1-2019, XYZ Ltd. has 5,000 10% Debentures
of ₹100 each outstanding. The interest on these debentures is paid half yearly on June 30, and December 31 every
year. On 1-4-2019, the company purchased 500 debentures @ ₹95 each cum-interest for immediate cancellation.
On 1-10-2019, the company purchased 600 debentures @ ₹90 each ex-interest for immediate cancellation. You are
required to record (i) the payment of interest on June 30 and Dec. 31, 2019, (ii) Purchase and cancellation of
debentures on 1-4-2019 and 1-10-2019 and (iii) legal requirement related to DRR and DRI.
Question 35 (Purchases of own debentures and interest on own debentures) On 1 October 2019, Aishwarya
Ltd.(an unlisted company) issued 2,000, 12% Debentures of ₹100 each payable after 5 years. The interest is payable
on 30 September and 31 March every year. The company is also allowed to purchase its own debentures which may
be cancelled or kept or re-issued at the company’s option. The company made the following purchases by cheques
in the open market:
On 31 August 2020: 200 Debentures at ₹98 ex-interest
On 31 December 2021: 100 Debentures at ₹97 cum-interest.
The debentures which were purchased on 31 August 2020 were cancelled on 31 March 2022. All payments were
made on the due dates. Give the journal entries to record the above transactions (including receipts and payments).
QUESTION 36. Libra Limited made a public issue in respect of which the following information is available:
(a) No. of partly convertible debentures issued- 2,00,000; face value and issue price- ₹ 100 per debenture.
(b) Convertible portion per debenture- 60%, date of conversion- on expiry of 6 months from the date of
closing of issue.
(c) Date of closure of subscription lists- 1.5.2020, date of allotment- 1.6.2020, rate of interest on debenture-
15% payable from the date of allotment, value of equity share for the purpose of conversion- ₹ 60 (Face
Value ₹ 10).
(d) Underwriting Commission- 2%.
(e) No. of debentures applied for- 1,50,000.
(f) Interest payable on debentures half-yearly on 30th September and 31st March. Make entries.
Question 37. The summarised Balance Sheet of Vasudha Ltd.(listed company) on 30 September, 2002 was:
Share Capital : ₹ ₹
Issued and fully paid : Fixed Assets 15,00,000
5000 equity shares of Rs. 100 Investments :
each fully paid 5,00,000 Own Debentures
6% Redeemable preference of nominal value of
shares of Rs. 100 each (less Rs. 1,00,000 95,000
calls in arrears on 200 shares) 4,95,000 Other Securities 1,00,000
Reserves and surplus Current Assets :
Securities Premium 50,000 Stock 2,00,000
Capital Reserve 50,000 Debtors 1,00,000
General Reserve 3,00,000 Cash at Bank 6,00,000
Profit & Loss Account 3,00,000
Creditors 7,00,000
25,95,000 25,95,000

On 30 September, 2002 the following were due for redemption:
(i) 5,000 6% Redeemable Preference Shares at a premium of ₹25 per share.

(ii) 2,000 10% Redeemable Debentures at a premium of 10%.
The redemption was made on that date and subsequently thus:
(i) For the half year ending 30 September, 2002, the debenture interest and preference dividend were
paid out of the profits of the company.
(ii) On an offer made to 10% Debenture holders, the outsiders agreed to take new 12% Debentures at
par in exchange of old debentures; the company also decided to assume the new debentures.
(iii) A fresh issue of 1,000 equity shares of ₹100 each was made at a premium of ₹50 per share and
subscribed in full. All moneys due were received forthwith.
(iv) Redemption of all preference shares was made on 10 October, 2002. You are required to show all
journal entries for the above transactions to give effect to them. [C.A. (Inter) May 1994 Modified)
QUESTION 38. Naseeb Limited (unlisted company) has an authorised capital of ₹15,00,000 divided into equity
shares of ₹10 each and its balance sheet as on 31 December 2019 was as follows:
Share Capital : Fixed Assets 12,00,000
Issued and fully paid up 5,00,000 Current Assets 1,40,000
Capital Reserve 1,20,000 Investment in Own
General Reserve 2,00,000 Debentures 85,000
Debenture Redemption reserve 20,000 (Nominal value
6 % Debentures 4,00,000 Rs. 1,00,000)
Sundry Creditors 2,60,000 Cash at Bank 75,000
15,00,000 15,00,000
The 6% debentures were due for redemption on 30 June 2020 at a premium of 5% the company decided:
(i) To issue to the public 25,000 equity shares of ₹10 each at ₹15 per share. The money was duly received;
(ii) To redeem the debentures on 30.6.2020 together with interest for 6 months;
(iii) To give the debenture holders an option to receive either cash in repayment of the amount due or new 7%
debentures 2024 at par. The holders of ₹1,00,000 of the old debentures accepted new debentures.
The debentures which the company held as an investment were cancelled. Ignore tax. Required Journal entries
to give effect to the above transactions. [C.A. (Inter)]

CHAPTER 7. INVESTMENT ACCOUNT(AS-13)

Investments are assets held by an enterprise for earning income by way of dividend, interest and rentals, for
capital appreciation, or for other benefits to the investing enterprise. Investment accounting is done as per AS-13,
Accounting for investments which deals with accounting for investments in the financial statements and related
disclosure requirement except:
(i) bases for recognition of interest, dividends and rentals earned on investments;
(ii) operating or finance leases;
(iii) Investment of retirement benefit plans and life insurance enterprises;
(iv) mutual funds,
(v) assets held as stock in trade.
According to AS-13, investments can be classified into two parts.
1) Current investments:- A current investment is an investment that is by its nature readily realisable
and is intended to be held for not more than one year from the date on which such investment is
made. They are shown in the books at lower of its cost price and fair value.
Note 1: Fair value is the amount for which an asset could be exchanged between a knowledgable,
willing seller in an arm’s length transaction. Under appropriate circumstances, market value or net
realisable value provides an evidence of fair value.
Note 2. Any reduction to fair value and any reversals of such reductions are included in the
statement of profit and loss.
2) Long term investments:- investments other than current investment are considered as long term
investments. They are always shown at its cost price.
But if there is permanent decline in value of long term investment, then provision for diminution shall
be made to recognise a decline and to show investment at market value. Loss arising should be
written off to profit and loss account.
The reduction in carrying amount is reversed when there is rise in the value of the investment, or if
the reasons for the reduction no longer exist.
Important points:-
(1) cost of investment should include acquisition charges including brokerage, fees and duties.
(2) Brokerage is always calculated on quoted price of investments.
(3) Separate investment account is prepared for separate type of investments. Classification is based on
period, type of securities, rate of interest, company etc.
(4) If an investment is acquired by issue of shares/ securities, the cost of investment is the fair value of the
securities issued.
(5) If an investment is acquired in exchange for another asset, the cost of investment is the fair value of the
asset given up or the fair value of the investment acquired, whichever is more clearly evident.

Accounting treatment of fixed income bearing scrips (government securities, debentures,

bonds etc)
i. transaction for fixed income bearing securities may occur on ex-interest basis or cum-interest basis.
ii. In case of fixed income bearing securities, if the quotation does not specify whether it is ex-interest or cum-
interest, the same will be treated as ex-interest quotation as per the general practice.
iii. interest is always calculated on nominal value (i.e. par value/nominal value)
Accounting treatment of variable income bearing scrips (investment in equity shares)

ACCOUNTING TREATMENT OF DIVIDENDS
a. dividend from investments in shares are recognized in the statement of profit and loss only when right to
receive payment has been established.
b. the amount of dividends for the period, for which the shares were not held by the investor, should be
treated as capital receipts (i.e. pre-acquisition dividend) by the investor and should be credited to cost of
investment, so as to reduce the acquisition cost.
c. Amount of post-acquistion dividend should be credited to statement of profit and loss, because it is treated
as income of the investor.
ACCOUNTING TREATMENT OF RIGHT SHARES RECEIVED:

a. When right shares offered are subscribed for, the cost of the right shares is added to the carrying amount of
the original holding.
b. If rights are not subscribed for but are sold in the market, the sale proceeds are taken to statement of profit
and loss.
Note: when the investments are acquired on cum-right basis and the market value of the investments
immediately after their becoming ex-right is lower than the cost for which they were acquired, it may be
appropriate to apply the sale proceeds of rights to reduce the carrying amount of such investments to the
market value.
Disclosure requirements:
a. The accounting policies for the determination of carrying amount of the investments.
b. The amount included in profit and loss statement for:
i. Interest, dividend and rentals showing separately from current and non-current
investments.
ii. Profit or loss on disposal of current and non-current investments separately.
c. The agreegate amount of quoted and unquoted investments, giving the agreegate market
value of the investments.
d. Other disclosures as specifically required by the relevant statute governing the enterprise.
Example: Mx X acquires 200 shares of a company on cum right basis for ₹ 50,000. He subsequently receives an
offer of right to acquire fresh shares in the company in the ratio of 1:1 at ₹ 110 each. Show its treatment if:
Case 1. X subscribes for the right issue.
Case 2. X sells his rights for ₹ 15,000.
Case 3. X sells his rights for ₹ 15,000 and it is further informed that ex-right market value of 200 shares bought
by X immediately after the right falls to ₹ 40,000.
Case 4. X sells his rights for ₹ 15,000 and it is further informed that ex-right market value of 200 shares bought
by X immediately after the right falls to ₹ 30,000.
ACCOUNTING TREATMENT OF BONUS SHARES RECEIVED: when an investment is acquired by way of issue of
bonus shares, no amount is entered in the capital column of investment account since the investor has not
paid anything.
DISPOSAL OF INVESTMENTS:
On disposal of an investment, the difference between the carrying amount and the disposal proceeds (net of
expenses) is recognized in the profit and loss account.

RE-CLASSIFICATION OF INVESTMENTS:
When investments are classified from current investments to long term investments, transfer is made at cost
and fair value whichever is less (at the date of transfer).
When investments are classified from long term investments to current investments, transfer is made at cost
and carrying amount, whichever is less (at the date of transfer).
PRACTICAL QUESTIONS
Question:1 Mr. X purchased 1000 Equity Shares of ₹ 100 each in TISCO Ltd. @ ₹ 150 each from a broker who
charged 2% brokerage. He also incurred 50 paise per ₹ 100 as cost of shares transfer stamps. Calculate the cost
of equity shares to be entered in the Investment A/c. [Ans.: ₹1,53,750]
Question.2 COC Education furnishes the following details relating to his holding in 16% Debentures (₹ 100
each) of Y Ltd. held as current assets:
01.01.2021 Opening Balance-Face values.60,000, Cost ₹ 59,000.

01.03.2021 100 Debentures purchased ex-interest at ₹ 98.
01.07.2021 Sold 200 Debentures ex-interest at ₹ 100.
01.10.2021 Purchased 50 Debentures at ₹ 98 cum interest.
01.11.2021 Sold 200 Debentures ex-interest at ₹ 99.
Interest dates are 30th September and 31s1 March. COC Education closes his books every 31sl December.
Brokerage @ 1% is to be paid for each transaction.
Show the Investment Account as it would appear in his books. FIFO Method is to be assumed. Market Value
of a 16% Debentures of Y Ltd. on 31.12.2021 ₹ 99.
Question 3. Aishwarya gives you the following details in respect of her holding in 18% Debentures (₹ 100
each) of Reliance Ltd. The interest is payable on 30th June and 31st December each year.
1-1-2022: Opening Balance - Face Value ₹ 50,000. Cost - ₹ 46,500

1 -5-2022: Purchased ₹ 30,000 Debentures @ ₹ 99 cum - interest.
1-8-2022: Sold ₹ 20,000 Debentures @ ₹ 95 Ex - interest.
1-10-2022: Purchased 400 Debentures @ ₹ 91.
1-12-2022: Sold 100 Debentures @ ₹ 99.50 cum - interest.
Show Investment Account in the books of Aishwarya assuming that
a. She held the debentures as current assets.
b. She closes her books on 31st December every year
c. Market value of 18% Debentures of Reliance Ltd., on 31-12-2022 is ₹ 93
d. FIFO method is to be assumed.
e. Brokerage @ 2% will be paid on each transaction on ex-interest value.
Question 4. Mr. Sahil Furnishes the following details relating to his investment in 16% Debentures (₹ 100 each)
of DCM Ltd.
1-01-02 Opening Balance: 800 Debentures Cost ₹ 78,000

1-03-02 Purchased 200 Debentures at ₹ 98 ex-interest.
1-07-02 Sold Rs. 30,000 Debentures at ₹ 100 ex-interest.
1-10-02 Purchased Rs. 10,000 Debentures at ₹ 98 cum-interest.
1-11-02 Sold 200 Debentures at ₹ 98(Cum interest)

Show the Investment Account in the books of Mr. Sahil considering the following;-
a. Interest payable dates are 30th September & 31st March.

b. Brokerage @ 1% is to be paid for each transaction
c. The investments are held as Current Assets.
d. Calendar year is followed as accounting year
e. Market price of Debentures on 31-12-02 is ₹ 99
f. FIFO method is to be assumed.
Question 5. Bonanza Ltd. held on 1st April, 2001 ₹ 2,00,000 of 9% Government Loan (2005) at ₹ 1,90,000.,
(Face Value of Loan ₹ 100 each): Three month’s interest had accrued on the above date. On 31 st May 2001, the
company purchased the same Government Loan of the face value of ₹ 80,000 at ₹ 95 (net) cum-interest. On 1st
June 2001, ₹ 60,000 face value of the loan was sold at ₹ 94(net) ex- interest. Interest on the loan was paid each
year on 30th June and 31st December and was credited by the bank on the same date. On 30 th November,
₹ 40,000 face value of the Loan was sold at ₹ 97 (net) cum-interest. On 1st December, the company purchased
the same loan ₹ 10,000 at par ex-interest. On 1st march 2002, the company sold ₹ 10,000 face value of the loan
at ₹ 95 ex-interest. The market price of the loan on 31st March, 2002 was ₹ 96.
Draw up the 9% Government Loan (2005) A/c in the Books of Bonanza Limited. First in First out method shall
be followed and the balance of the loan held by the company shall be valued at cost or market price whichever
is lower. Calculation shall be made to the nearest rupee or multiple thereof. [MAY – 94]—(15 MARKS)
Question.6 COC Pvt Ltd Purchased on 1st March, 2021 ₹ 24,000 5% Bharat Debenture Stock @ 90 cum-
interest, interest being payable on 31st March and 30th September each year. Stamp and expenses on purchase
amounted to ₹ 20 and brokerage @ 2% was charged on cost; interest for the half-year was received on the due
date. On 1st September ₹ 10,000 of the stock was sold @ 92 ex- interest less brokerage @ 2%. On 30th
September, ₹ 8,000 Stock was purchased @ ₹ 91 ex-interest plus brokerage @ 2% and charged ₹ 10. On 1st
December, ₹ 6,000 stock was sold @ ₹ 94 cum interest less brokerage @ 2%. The market price of stock on 31st
December was 88 ½ %. Show the Investment Account for the year ending on 31st December, 2021 assuming
FIFO Method. Calculation should be made in the multiple of rupee. COC holds the Bharat debentures Stock as
a current asset.
Question 7. On 1.4.2002, Sunder has 25,000 equity shares of X Ltd. at a book value of ₹ 15 per share (Face
Value Rs. 10). On 20th June 02, he purchased another 5,000 shares of the company @ ₹ 16 per share. The
directors of X Ltd. announced a bonus and rights issue. No dividend was payable on these issue. The terms of
the issue are as follows:
Bonus basis 1:6 (Date 16th Aug.)

Rights basis 3:7 (Date 31st Aug) Price Rs. 15 per share.
Due date for payment 30th Sept.
Shareholders can transfer their rights in full or in part. Accordingly, Sunder sold 33 1/3 % of his entitlement to
Shekhar for a consideration of ₹ 2 per share.
Dividends: Dividends for the year ended 31st march at the rate of 20% were declared by X Ltd and received by
Sunder on 31st Oct. Dividends for shares acquired by him on 20th June are to be adjusted against the cost of
purchased. On 15th Nov, Sunder sold 25,000 equity shares at a premium of ₹ 5 per share. Prepare in the books
of Sunder: (a) Investment account and (b) Profit & Loss Account. For your excise assume that the books are
closed on 31.12.2002 and shares are valued at average cost. [May-97]—(15 MARKS)

Question 8. The following transactions of COC Pvt Ltd took place during the year ended 31st March, 2018:
2017
1st April. Purchases ₹ 12, 00,000 8% bonds @ ₹ 80.5 cum-interest. Interest is payable on 1st
November and 1st May.
12th April purchased 1,00,000 equity shares of ₹ 10 each in X Ltd. for ₹ 40,00,000.
1st May Received half year's interest on 8% bonds.
15th May X Ltd. made a bonus issue of three equity shares for every two held.
Investor Ltd. sold 1,25,000 bonus shares @ ₹ 20 each.
1stJuly Purchased 50,000 equity shares of ₹ 10 each in C Ltd. @ ₹ 7.75 each.
1St October Sold ₹ 3,00,000 8% bonds @ ₹ 81 ex-interest.
1stNovember Received half year's bond interest.
1stDecember Received 18% dividend on equity shares in X Ltd.
2018
1stJanuary C Ltd. made a rights issue of one equity share for every two held @ ₹ 5 per share.
Right sold in the market @ ₹ 2.25 per share.
1stMarch Received 12.5% dividend on equity shares in C Ltd.
Prepare the relevant investment account in the books of COC Pvt Ltd. for the year ended 31st March, 2018.
Question 9. On 1st April, 1997 Anand held 20,000 fully paid equity shares of ₹ 10 each in P Ltd. appearing in
Anand’s books at ₹ 3,05,500. On 1st June, 1997 he acquired 5,000 more equity shares in the company at an all-
inclusive cost of ₹ 17 per share.
On 30th June, 1997 P Ltd. announced a bonus issue at the rate of one fully paid equity share of ₹ 10 for every
five shares held. Anand received the bonus shares on 4th August, 1997.
P Ltd. also made a rights issue; the terms being as follows:
1. The issue would entitle the shareholders to subscribe to one equity shares of ₹ 10 in the company for
every three shares held as on 9th August,1997; the new shares would be issued at a premium of ₹ 5
per share, the whole amount being payable by 30th September,1997.
2. The shareholders would be entitled to renounce their entitlement either wholly or in part to
outsiders.
Anand exercised his option under the issue for 50% of his entitlements and sold the balance of his rights to
another person @ ₹ 1.50 per share.
P Ltd. declared a dividend at the rate of 20% for the year ended 31 st March, 1997. Anand received the dividend
on 3rd October, 1997. On 1st December, 1997 Anand sold 15,000 equity shares and received a net sum of
₹ 2,62,500. Prepare Investment A/c in Anand's ledger for the year ended 31st March, 1998. Use average cost
method.

Answer: Investment Account- Equity Shares in P. Ltd.
Date Particulars No. Income Amount Date Particulars No. Income Amount
1997 1997
Apr. 1 To Balance b/d 20,000 3,05,500 ? By Bank -sale
June . 1 To Bank 5,000 85,000 of rights 7,500
Oct 3 By Bank -
Aug 4 To Bonus Share 5,000 ……… dividend for 10,000
Sept. 30 To Bank- 1996-97
Subscription to Dec 1
50% of rights By Bank - sale 15,000 40,000 2,62,500
shares 5,000 75,000
Dec. 1 To P &L A/c 1998
--Profit on sale 67,285 Mar 31 BY Balance c/d 20,000 2,60,285
Mar 31 To P & L A/c 47,500
35,000 47,500 5,32,785 35,000 47,500 5,32,785
Question 10. On 1st April, 2017 A Ltd. held 4,000 fully paid up 12% partly convertible debentures of ₹ 100 each in
B Ltd. acquired in 2016 @ ₹ 105 ex-interest. Interest on the debentures is payable each year on 30th June and 31st
Dec. The following were the other transactions during the year ended 31st March, 2018:-
2017
July.31 Purchased 2,000 debentures @ ₹ 108 cum-interest
Dec.31 Received equity shares of ₹ 10 each at a premium of ₹ 20 per share in conversion of ₹ 60 per
debenture at par; the balance of ₹ 40 per debenture being the non-convertible portion.
2018
Jan.31 Sold 4500 debentures (non-convertible portions of ₹ 40 each) @₹ 35, each, ex-Interest.
Feb. 7 Sold 50% of the shares held @ ₹ 40 per share.
On 31-3- 2018 the debentures and the shares of B Ltd. were quoted at ₹ 34 and ₹ 41 respectively. Prepare the
relevant investment account in A Ltd's ledger for the year ended 31 March, 2018 following the average cost method.
Question:11. On 1-4-2002, Mr. Krishna Murty purchased 1,000 equity shares of ₹ 100 each TELCO Ltd. @
₹ 120 each from a Broker, who charged 2% brokerage. He incurred 50 paisa per ₹ 100 as cost of shares
transfer stamps. On 31-1-2003 Bonus was declared in the ratio of 1:2. Before and after the record date of
bonus shares, the shares were quoted at ₹ 175 per share and ₹ 90 per share respectively. On 31-3-2003 Mr.
Krishna Murty sold bonus shares to a Broker, who charged 2% brokerage.
Show the Investment A/c in the books of Mr. Krishna Murty, who held the shares as Current assets and closing
value of investments shall be made at cost or market value whichever is lower. [ Nov.2003] (10 MARKS)
Question 12: Mr. X purchased 1,000, 6% Government Bonds of ₹ 100 each or 31st January, 2009 at ₹ 95 each.
Interest is payable on 30th June and 31st December. The price quoted is cum interest. Journalise the
transaction. (CA-IPCC- MAY 2010)2 MARKS
Question 13: An unquoted long-term investment is carried in the books at cost of ₹ 2 lacs. The published
accounts of unlisted company received in May, 2009 showed that the company has incurred cash losses with
decline market share and the long-term investment may not fetch more than ₹ 20,000. How you will deal with it
in the financial statement of investing company for the year ended 31.3.2009. (CA-IPCC- MAY 2010)2 MARKS

Answer: According to AS 13 'Accounting for Investments', investment classified as long term investments
should be carried in the financial statements at cost. However, provision for diminution shall be made to
recognize a decline, other than temporary, in the value of the investments. Such reduction being determined
and made for each investment individually. According to this standard, indicators of the value of an investment
are obtained by reference to its market value, the investee's assets and results and the expected cash flows
from the investment. The facts of given situation clearly suggest that there is decline in the market share of the
company and the investment will not fetch more than ₹ 20,000. Therefore, the provision of ₹ 1,80,000 should
be made to reduce the carrying amount of long term investment to ₹ 20,000 in the financial statements for the
year ended 31 March,2009.
Question 14: Gamma Investment Company hold 1,000, 15% debentures of ₹ 100 each in Beta Industries Ltd. as on
April 1, 2009 at a cost of ₹ 1,05,000. Interest is payable on June, 30 and December, 31 each year.
On May 1, 2009, 500 debentures are purchased cum-interest at ₹ 53,500. On November 1,2009, 600
debentures are sold ex-interest at ₹ 57,300. On November 30, 2009, 400 debentures are purchased ex-interest
at ₹ 38,400. On December 31, 2009, 400 debentures are sold cum-interest for ₹ 55,000. Prepare the
investment account showing value of holdings on March 31, 2010 at cost, using FIFO method.
(CA-IPCC- MAY 2010) 6 MARKS
Answer: Investment Account (15% Debentures in Beta Industries Ltd.)
Date Particulars Nominal Interest Cost Date Particulars Nominal Interes Cots
Value Value t
1.04.09 To Balance b/d (W.N.I) 1,00,000 3,750 1,05,000 30.06.09 By Bank A/c (W.N.3) — 11,250 —
1.05.09 To Bank A/c (W.N.2) 50,000 2,500 51,000 1.11.09 By Bank A/c (W.N.4) 60,000 3.000 57,300
30.11.09 To Bank A/c (W.N.5 1.11.09 By Profit 8 Loss

A/c(W.N.11)
31.12.09 To Profit & Loss A/c 31.12.09 5,700
(W.N.12) By Bank A/c (W.N 6 & 7)
40,000 2,500 38,400 31.12.09 40,000 3,000 52,000
To Profit & Loss A/c 31.03.10 By Bank A/c (W.N.8) 6,750
31.03.10 ……….. 18,625 10,000 …….. 3,375 ……….
By Bank A/c (W.N. 9 & 10) 90,000
89,400
1,90,000 27,375 2,04,400 1,90,000 27,375 2,04,400
Working notes:
15 3
1. Accrued interest as on 1.4.09 = 𝑅𝑠. 1,00,000 × × = 𝑅𝑠. 3,750
100 12
15 4
2. Accrued interest = 𝑅𝑠. 50,000 × × = 𝑅𝑠. 2,500
100 12
Cost of investment for purchase on 1.5.09 = Rs. 53,500-2,500= Rs. 51,000
15 6
3. Interest received = 1,50,000 × × = 𝑅𝑠. 11,250
100 12
15 4
100 12
15 5
5. Accrued Interest = 𝑅𝑠. 40,000 × × = 𝑅𝑠. 2,500
100 12
15 6
100 12
7. Sale price of investment on 31.12.09 = Rs. 55,000- Rs. 3,000 = Rs. 52,000
15 6
100 12
15 3
100 12
10. Cost of investment as on 31.3.10 = Rs. 51,000+ Rs. 38,400= Rs. 89,400

11. Loss on debentures sold on 1.11.2009:

Sales price of debentures 57,300
Less: Cost of investment sold = 1,05,000/1000*600 = (63,000)
Loss on sale (5,700)
12. Profit on debentures sold on 31.12.2009:

Sales price of debentures 52,000
Less: Cost of investment sold = 1,05,000/1,000*400 = (42,000)
Profit on sale 10,000
Question 15: H purchased 500 equity shares of ₹ 100 each in the ABC Company Limited for ₹ 62,500 inclusive
of brokerage and stamp duty. Some years later the company decided to capitalize its profit and to issue to the
holders of equity shares one equity share as Bonus for every equity share held by them. Prior to capitalization,
the shares of ABC Company Limited were quoted at ₹ 175 per share. After the capitalization, the shares were
quoted at ₹ 92.50 per share. H sold the Bonus shares and received ₹ 90 per share. Show Investment A/c in H's
books on average cost basis as per AS-13. (CA-IPCC- nov 2010)5 MARKS
Answer: (Equity Shares of ABC Co. Ltd.)
Particulars Face Cost Particulars Face Cost

value value
To Balance b/d 50,000 62,500 By Bank A/c 50,000 45,000
To Bonus Shares A/c 50,000 …….. By Balance c/d (W.N.2) 50,000 31,250
To Profit & Loss A/c
(W.N. 1) (Profit on sale) ………… 13,750
1,00,000 76,250 1,00,000 76,250
Working Note (1) Computation of profit on sale of bonus shares :
Sale price of bonus shares 45,000
62,500
Less: Average cost of shares sold × 50,000 = (31,250)
1,00,000
Profit 13,750
2. Valuation of closing investment:
50,000
Market value of shares × 62.50 =46.250
100
Cost price of shares (W.N. 1) =31,250
Value of investment will be least of market value or average cost price, i.e. 31,250
Question 16: On 1st April, 2010, Rajat has 50,000 equity shares of P Ltd., at a book value of ₹ 15 per share (face
value ₹ 10 each). He provides you the further information:
1. On 20th June, 2010 he purchased another 10,000 shares of P Ltd. at ₹ 16 per share.
2. On 1 August 2010, P Ltd. issue one equity bonus share for every six shares held by theshareholders.
3. On 31st October, 2010 the directors of P Ltd. announced a right issue which entitle the holders to
subscribe three shares for every seven shares at ₹ 15 per share. Shareholders can transfer their
rights in full or in part. Rajat sold 1/3rd of entitlement to Umang for a consideration of ₹ 2 per share
and subscribe the rest on 5th November, 2010. You are required to prepare Investment A/c in the
books of Rajat for the year ending 31st March, 2011. (CA-IPCC- MAY 2011)5 MARKS

Answer: Investment Account in Equity shares in P Ltd.
Date Particulars No. of Amount Date Particulars No. of Amount

shares shares
1.4.10 To Balance b/d 50,000 7,50,000
20.6.10 To Bank A/c 10,000 1,60,000
1.8.10 To Bonus issue 31.3.11
(W.N. 1) 10,000 ………….. By Balance c/d (Bal. fig) 90,000 12,10,000
5.11.10 To Bank A/c (right
shares) (W.N.4) 20,000 3,00,000
90,000 12,10,000 90,000 12,10,000
Working notes:
50,000+10,000
1. Bonus Shares = = 10,000 𝑆ℎ𝑎𝑟𝑒𝑠
6
50,000+10,000+10,000
2. Right Shares = × 3 = 30,000 𝑆ℎ𝑎𝑟𝑒𝑠
7
1
3. Sale of rights = 30,000 𝑆ℎ𝑎𝑟𝑒𝑠 × × 2 = 𝑅𝑠. 20,000
3
2
4. Right subscribed = 30,000 𝑆ℎ𝑎𝑟𝑒𝑠 × × 𝑅𝑠. 15 = 𝑅𝑠. 3,00,000
3
Question 17. A Ltd purchased 5,000 equity shares (nominal value ₹ 100 each) of Allianz Ltd for ₹ 105
each on 1st April 2021. The shares were quoted cum-dividend. On 15th May, 2021, Allianz Ltd
declared and paid dividend of 2% for year ended 31st March,2021. On 30th June,2021 Allianz Ltd
issued bonus shares in the ratio of 1:5. On 1st October 2021 Allianz issued right shares in the ratio of
1:12 @₹ 45 per share. A limited subscribed to half of the right issue and balance was sold at ₹ 5 per
right entitlement. The company declared interim dividend of 1% on 30th November 2021. Right
shares were not entitled to dividend. The company sold 3,000 shares on 31st December,2021 at ₹ 95
per share. The company A ltd incurred 2% brokerage while buying and selling shares.
You are required to prepare investment account in the books of A ltd for the year ended 31st March
2022.

CHAPTER 8. INSURANCE CLAIMS

QUESTION:1 On 31st August, 2016 a fire occurred in the premises of a firm which carried on the business
of general merchandise. From the various books, which were saved from fire, it was ascertained that
Sales from 1st January to 31st Aug., 2016 ₹ 12,80,000

Purchases from 1st Jan. to 31st Aug., 2016 ₹ 8,40,000
Stock on hand on 31st Dec., 2015 ₹ 2,36,000
Gross profit for the past five years had averaged at 35% on sales. The value of the salvaged stock was agreed
at ₹ 30,000. Draft a statement showing amount of the claim. There was no average clause.
QUESTION:2 Pacific Traders have taken out a fire policy of ₹ 80,000 covering its stock-in trade. A fire
occurred on 31st March. 2016 and stock was destroyed with the exception of the value of ₹ 20,680.
Following particulars are available from the books of account of the firm:
Stock as on 31st Dec, 2015 ₹ 30,000

Purchases to the date of fire ₹ 1,30,000
Sale to the date of fire ₹ 90,000
Commission paid to the Purchase Manager on purchases 2%
Carriage paid on purchases ₹ 800
Average gross profit on cost 50%
The policy was subject to average clause. You are required to arrive at the
(i) Total loss of stock, and
(ii) Amount of claim to be made against the insurance company.
QUESTION:3 On 31st August, 2016 the premises and stock of a firm were totally destroyed by fire, the
books of accounts, however, were saved. In order to make a claim on their fire policy, they ask you to
advise on the basis of the following information. The stock in hand has always been valued at 5% below
cost:
2013-14 2014-15 2015-16 2016-17
₹ ₹ ₹ ₹
Opening stock as valued 22,800 ---- …… ……
Purchases less returns 91,000 1,10,000 1,20,000 41,000
Sales less returns 1,40,000 1,70,000 1,86,000 75,000
Wages 28,400 31,200 34,200 12,000
Closing stock 30,400 36,100 39,900 ?
Prepare a statement for submission to the insurance company in support of your claim for loss of stock. The
company closes its books of account every year on 31st March. [C.S. (Inter) Dec. 1995 modified)
QUESTION:4 A fire occurred in the premises of Agni on 25th August, 2017 when a large part of the stock
was destroyed. Salvage was ₹ 15,000. Agni gives you the following information for the period January 1,
2017 to August 25, 2017:
(a) Purchases ₹ 85,000
(b) Sales ₹ 90,000
(c) Goods costing ₹ 5,000 were taken by Agni for personal use.
(d) Cost price of stock on January 1, 2017 was ₹ 40,000.
Over the past few years, Agni has been selling goods at a constant gross profit margin of 331/3%. The
insurance policy was for ₹ 50,000. It included an average clause. Agni asks you to prepare a statement of
claim to be made on the insurance company. [C.A. (Inter) November 1997]

QUESTION:5 A fire occurred on 15th December 1996 in the premises of Risky Co. Ltd. From the following
figures, calculate the amount of claim to be lodged with the insurance company for loss of stock
Stock at cost on 1st April, 1995 ₹ 20,000

Stock at cost on 31st March, 1996 ₹ 30,000
Purchases during the year ended 31st March. 1996 ₹ 40,000
Purchases from 1st April, 1996 to 15th Dec, 1996 ₹ 88,000
Sales during the year ended 31st March. 1996 ₹ 60,000
Sales from 1st April. 1996 to 15th December, 1996 ₹ 1,05,000
During the current year cost of purchases have risen by 10% above last year's levels. Selling prices have gone up
by 5%. Salvage value of stock after fire was ₹ 2,000. [C.S. (Inter Dec. 1997] [C.A. Inter]
QUESTION:6 The premises of RASHIKA Enterprise, a proprietary concern, were damaged by fire on 12th
February, 2017. As a result, some trading stock was totally destroyed, and in addition, stock costing
₹ 96,000 was partly damaged. The insurance company agreed to reduce the value of the damaged stock
to ₹ 52,800. On 31st December,2016, the stock-in-trade of the concern was valued at ₹ 4,12,000.
Subsequently the following purchases were made:
8th January, 2017 ₹ 1,09,920
21st January, 2017 ₹ 72,000
27th January, 2017 ₹ 5,360
14th February,2017 ₹ 42,400
20th February, 2017 ₹ 2,24,000
8th March, 2017 ₹ 1,37,600
Additional information for the three months ended on 31st March, 2017 are given below;
(a) 50% of the damaged goods were sold before 31st March, 2017 at a profit of 15%.
(b) With the exception of the damaged goods, firm has earned gross profit of 30% of the cost of goods sold.
(c) The sales during the three months ended 31st March, 2017, were ₹ 6,54,360.
(d) The undamaged stock at 31st March. 2017, was valued at ₹ 2,03,280.
(e) The firm has an insurance cover for loss and damage to stock by fire.
Prepare a statement of insurance claim. [CMA. (final) June 1998] (sirf main, bus main, yes sirf main)
QUESTION:7 Nixon prepares accounts on 30th June each year but on 30th September, 2013, fire
destroyed the greater part of his stock. Following information was collected from his books:
Stock on 30th June, 2013 ₹ 29,250

Purchases from 1st July, 2013 to 30th September, 2013 ₹ 60,000
Wages from 1st July, 2013 to 30th September, 2013 ₹ 22,750
Sales from 1st July, 2013 to 30th September, 2013 ₹ 1,00,000
Average percentage of gross profit to cost is 33.33%. Stock of the value of ₹ 7,000 was salvaged. Policy was for
₹ 25,000. Claim was subject to average clause. Following additional information is available:
(a) Stock in the beginning was calculated at 10% less than cost.
(b) Purchases include purchase of plant of ₹ 5,000.
(c) Plant was installed in August and firm's own men had spent time amounting to ₹ 250 which was included in
wages. You are required to calculate the claim for the loss of stock.
Hints:- Actual cost of opening stock= 29,250 x 100/90, Purchases = 60,000- 5,000 = 55,000
Wages = 22,750- 250 = 22,500, Gross Profit = 1/3 on cost or ¼ on sale, Stock on the date of fire = 35,000

QUESTION:8 On 1st April, 2017 the godown of Stone Ltd was destroyed by fire. The records of the
company revealed the following particulars:
Stock on 1st January, 2016 ₹ 75,000

Stock on 31st December, 2016 ₹ 80,000
Purchases during 2016 ₹ 3,10,000
Sales during 2016 ₹ 4,00,000
Purchases from 1st January, 2017 to the date of fire ₹ 75,000
Sales from 1st January, 2017 to the date of fire ₹ 1,00,000
In valuing closing stock of 2016, ₹ 5,000 was written off whose cost was ₹ 4,800. A part of this stock was sold
in 2017 at a loss of ₹ 400 on the original cost of ₹ 2,400. The remainder of the stock is now estimated at
original cost. Stock salvaged was ₹ 5,000. The godown and the stock therein were fully insured. Indicate from
above, amount of the claim to be made against the insurance company. (CMA., Final)
QUESTION:9 A fire broke out in the warehouse of Raghwan Traders Ltd, on 30 th Sept., 2015. The Company
wishes to file a claim with the insurance company for loss of stock and gives you the following information
to enable you to prepare a statement of the amount to be claimed:
(i) The last accounts of the Company were prepared on December 31st 2014; (ii) Sundry Debtors on 31st
December, 2014 ₹ 20,000; (iii) Cash received from debtors ₹ 72,000; (iv) Sundry debtors on 30th September, 2015
₹ 15,000; (v) Stock on 31st December, 2014 ₹ 7,500; (vi) Purchases from 1st January 2015 to 30th September, 2015
₹ 62,500, (vii) Cash Sales from 1st January, 2015 to 30th September, 2015, ₹ 13,000 (viii) G.P. Rate on credit sales
is 20% and on Cash sales 15%. Prepare the necessary statement, showing all your workings to arrive at the amount
of the claim.
Answer: Note: Sundry Debtors Account will be prepared to find out Sales during Jan 1st to Sept. 30th 2015
Sundry Debtors A/c
To Balance b/f. 20,000 67,000 By Cash 72,000

To Sales (credit) By Balance c/d. 15,000
(Balancing Figure)
87,000 87,000
Calculation of claim for the Loss of Stock — Trading Account for the year ended 30th September, 2015
To Opening Stock 7,500 By Sale: Credit 67,000

To Purchases 62,500 Cash 13,000
To Gross Profit 15,350 By Stock on the date of fire
(Balancing figure) 5,350
85,350 85,350
Amount of Claim — ₹ 5,350.

Working Note:
Gross profit on credit sales 67,000 x 20 = ₹ 13,400

100
Gross profit on cash sales 13,000 x 15 = ₹ 1,950
Total gross profit 100 = ₹ 15,350
QUESTION:10 ( IMP QUESTION)The storehouse of Top Manufacturer caught fire on 31 st March, 2016 and
due to fire a great part of stock was burnt to ashes. The stock was covered by an insurance policy of
₹ 1,00,000 and claim was subject to an average clause. From the following information prepare statement
showing the claim of Top Manufacturer:
(i) They used to —
(a) Sell goods to wholesalers on one month credit at wholesale price which is a catalogue price less 15%.
Further cash discount of 5% on wholesale price is allowed to those wholesalers who make immediate payment.
(b) Sell goods to retailers at retailer's price which is a catalogue price less 10%. Terms cash payment only.
(c) Send goods to branches at catalogue price which is cost plus 100%.
(ii) Figures for the goods sold or dispatched were:
(a) Credit sale upto 31st March, 2016, to wholesalers at wholesale price ₹ 3,40,000 worth.
(b) Net cash sales (after deducting cash discount) up to 31st March 2016 to wholesalers ₹ 3,23,000 worth.
(c) Cash sales to retailers up to 31st March, 2016 ₹ 90,000 worth.
(d) Goods sent to branches up to 31st March. 2016 ₹ 3,00,000 worth.
(iii) Stock on 1st Jan. 2016 was ₹ 2,50,000 at catalogue price. Purchases at catalogue price from 1st Jan,
2016 to 31st March, 2016 were ₹ 12,50,000.
(iv) Stock salvaged ₹ 45,000 at cost price.
Answer:- loss of stock by fire ₹ 1,05,000, claim under average clause= ₹ 70,000
QUESTION:11 (IMP QUESTION) Fire occurred in the premises of M/s. Low Luck Traders twice during the
accounting year 2012-13, that is on 31st July 2012 and again on 30th November 2012. From the following
particulars, calculate the claim to be lodged in respect of the goods lost by fire on the aforementioned
dates :
(1) The stock as at 31st March 2012 was valued at ₹ 9,90,000.
(2) The purchases from 1st April 2012 to 31st July 2012 amounted to ₹ 35,60,000 and included furniture
purchased of ₹ 10,000.
(3) Sales for the period from 1st April 2012 to 31st July 2012 amounted to ₹ 50,00,000.
(4) The purchases from 1st August 2012 to 30th November 2012 amounted to ₹ 49,50,000 of which
goods costing ₹ 1,05,000 were received on 10th December 2012.
(5) The sales for the period from 1st August 2012 to 30th November 2012 amounted to ₹ 60,60,000 out of
which sales on 'sales or return basis amounted to ₹ 1,00,000. No intimation was received from the customers
in respect of 60% of the goods sold on approval basis.
(6) Information regarding sales and gross profit of the last three years was as follows:
Year Sales Gross Profit
2009-10 1,00,00,000 12,00,000

2010-11 1,20,00,000 9,60,000
2011-12 1,35,00,000 13,40,000
(7) In the beginning of year 2012-13, the selling price was raised by 20%.
(8) The closing stock of 2011-12 was undervalued by ₹ 10,000.
(9) The value of the goods salvaged on 31st July 2012 was ₹ 3,00,000.

(10) The value of the goods salvaged on 30th November 2012 was also ₹ 3,00,000.
(11) The expenses of the salvage operations were Rs. 20,000 on 31st July 2012 and ₹ 10,000 on 30th
November 2012.
(12) The firm had taken out a fire insurance policy of ₹ 6,00,000 on 1st April 2012. At the time of receiving
the insurance claim on 31st July 2012, no additional premium was paid for restoration of the insurance policy
to its original amount. The policy was subject to the average clause. (CMA Final June 1993).
B—LOSS OF PROFITS POLICY

Scope and Coverage:- Fire insurance provides cover only for material damage occurring to buildings, plant and
machinery and fixtures, etc. But this result in partial or total stoppage of business, leading to trading losses
and the policy does not provide cover for such losses. In order to give complete protection to the insured, a
new type of insurance, known as 'loss of profits insurance' or 'consequential loss insurance' has come into
vogue.
Important Definitions
1. Indemnity period. Indemnity period is any period not exceeding 12months from the date of damage during which
the results of the business shall be affected due to fire.
2. Standard sales. Standard turnover refers to the sales affected in the proceeding period corresponding to the
indemnity period. Standard sales of the preceding period must be adjusted in the light of future prospects.
3. Actual turnover:- turnover during indemnity period.

4. Short sales. It is the difference between standard turnover and actual turnover or sales. It refers to loss of
sales due to fire which has resulted in dislocation of the business.
5. Annual turnover. It is the turnover during the 12months immediately before the date of damage.
Question 12: calculate claim for loss of profit.
Actual sales during indemnity period= ₹ 60,000

Standard sales = ₹ 2,00,000
Net profit during preceding year = ₹ 80,000
Standing charges (insured 80%) = ₹ 50,000
Sales during preceding year = ₹ 12,00,000
Allowed increase working expense = ₹ 3000
Saving in expense = ₹ 7,000
3. PROCEDURE/ STEPS FOR CALCULATING CLAIM
Step 1.Calculation of short sales by comparing the sales made during the abnormal period with the standard sales.
Question 13. Fire occurred on 1st March,2015. Normalcy was achieved on 1st May 2015. Sales from 1st March
to 1st May, 2015, ₹ 20,000; sales from 1st March to 1st May,2014 (preceding year), ₹ 1,00,000. Company has
shown an increase of 10% during 2015 over the sales of 2014. Calculate short sales.
Step 2. Calculate of gross profit. Calculate gross profit of the financial year preceding the year of fire. Gross
profit calculated for the Claim purpose is different from that calculated in a normal way.
Step 3.Calculation of rate of gross profit. Calculate rate of gross profit on sale with the help of gross profit
calculated. Sales for this purpose will be the sales of the preceding financial year.

Question14.(When there is a net profit) From the following trading and profit and loss account you are
required to calculate gross profit for the purpose of insurance claim :
TRADING AND PROFITANDLOSS ACCOUNT for the year ending 31st December 2014
₹ ₹
To Stock 4,00,000 By Sales 10,00,000
To Purchases 4,00,000 By Stock at the end 80,000
To Direct expenses 2,80,000
To Gross profit 3,00,000
10,80,000 10,80,000
To Variable, expenses 10,000 By Gross profit 3,00,000
To Standing charges 1,80,000
To Net profit 1,10,000
3,00,000 3,00,000
Standing charges insured only to the extent of ₹ 90,000.
Question 15.(When there is loss) From the following profit and loss account you are required to calculate the
gross profit for the purpose of insurance claim:
PROFIT AND LOSS ACCOUNT for the year ending 31st December 2015
₹ ₹
To Variable expenses 15,000 By Gross profit 60,000
To Standing charges 90,000 By Net loss 45,000
1,05,000 1,05,000
Standing charges are insured only to the extent of ₹ 60,000. Sales during previous year ₹ 10,00,000
Step 4. Calculate loss of profit on short sales.
Question 15A. Standard sales = ₹ 5,00,000

Actual sales during indemnity period = ₹ 1,00,000
Growth rate= 20%
G.P rate for purpose of claim = 25%
Calculate loss of profit
Step 5.Calculate allowed increased working expenses – it will be lower of following three:
Question 16. From the following particulars prepare a claim for loss of profit under the consequential Loss
Policy.
Date of fire ……………. 30th June, 2015

Period of indemnity six months
Sum insured ₹ 40,000
Turnover for the year ended 30th June, 2015 ₹ 2,00,000
Net profit for the accounting year ending 31st March, 2015 ₹ 12,500
Standing charges for the accounting year ending 31st March, 2015 ₹ 28,500
Turnover for the year ending 31st March, 2015 ₹ 1,98,000
Turnover for the indemnity period from 1-7-15 to 31-12-15 ₹ 56,000
Turnover for the period from 1-7-14 to 31-12-14 ₹ 1,10,000
The turnover of the year 2015-16 had shown a tendency of increase of 10% over the turnover of the preceding year.
Question 16A. Increase in working expense ₹ 60,000

Annual turnover ₹ 8,00,000

Growth factor 10%

G.P. rate = 20% (for purpose of claim)
Total sales during indemnity period = ₹ 2,00,000 (out of this sales of ₹ 1,20,000 could be maintained due to
increase in working expense. Total standing charge ₹ 1,00,000 (out of this ₹ 70,000 are insured)
Calculate allowed increase in working expense.
Step 6. calculate Saving in expenses.
Total claim Will be = step 4 + step 5 – step 6
4. EFFECT OF AVERAGE CLAUSE:-- The whole of the claim, calculated above will be reduced on average clause
basis. Following is the procedure:
Step 1. Calculate sales of preceding twelve months from the date of fire (Annual turnover).
Step 2. Calculate gross profit on annual turnover
Step 3. Calculate claim on average basis. Reduce the final claim on the basis or following formula :
Policy
------------------------------------------------------------X Total claim
Gross profit on annual turnover
Question 17 On 31st December 2015, a fire damaged the premises of Rohan Bros, and the business of the
company was disorganised until 31st March, 2016. The company is insured under a loss of profits policy for
₹ 2,60,000 with six months’ period of indemnity.
The company’s accounts for the financial year ended 31st October 2015 showed a turnover of ₹ 7,00,000 with
net profit of ₹ 80,000; the standing charges covered under insurance and debited in the accounts amounted to
₹ 2,00,000. The turnover for the twelve months ended 31st December 2015 was ₹ 7,80,000. During the period
of dislocation it was ₹ 80,000, whereas during the corresponding period in the preceding year it was
₹ 1,70,000. A sum of ₹ 22,400 was spent to reduce the effect of the loss, but there was no saving of standing
charges as the result of fire. Prepare the claim to be submitted to the insurance company.
Hints:- Short sales = ₹ 90,000, Rate of gross profit= 40%
Question 18 From the following details, determine the amount of claim under a loss of profit policy.
Indemnity period 4 months

Date of fire 1-4-2015
Dislocation continued up to 1-8-2015
Sum insured ₹ 60,000
Sales for the last accounting year ₹ 2,40,000
Net profit for the last accounting year ₹ 34,000
Standing charges for the last accounting year all insured ₹ 26,000
Sales for the dislocation period i.e. 1-4-15 to 1-8-15 ₹ 30,000
Sales for the year 1-4-14 to 31-3-15 ₹ 3,20,000
Sales for the corresponding period in the preceding year
i.e. 1-4-14 to 1-8-14 ₹ 1,00,000
The policy contains ‘special circumstances clause’ which stipulates for increase of turnover (standard and
annual) by 10% as there is an upward trend in the business.

Question 19. There was a serious fire in the premises of M/s. Fortunate on 1 st September, 2000. Their
business activities were interrupted until 31st December, 2000, when normal trading conditions were re-
established. M/s. Fortunate are insured under the loss of profit policy for ₹ 42,000 the period of indemnity
being six months. You are able to ascertain the following information:
(1) The net profit for the year ended 31st December. 1999 was ₹ 20,000.
(2) The annual insurable standing charges amounted to ₹ 30,000 of which ₹ 2,000 were not included in the
definition of insured standing charges under the policy.
(3) The additional cost of working in order to mitigate the damage caused by the fire amounted to ₹ 600,
and, but for this expenditure, the business would have had to shut down.
(4) The saving in insured charges in consequence of the fire amounted to ₹ 1,500.
(5) The turnover for the period of four months ended April 30, August 31, and December 31 in each of the
years 1999 and 2000 was as under:
₹ ₹ ₹
1999 65,000 80,000 95, 000

2000 70,000 80,000 15,000
You are required to compute the relevant claim under the terms of the loss of profits policy.[CA. (Final)]
Question 20. From the following information, you are required to work out the claim under the loss of profits
insurance policy.
(1) Cover — Gross profit ₹ 1,00,000.

(2) Indemnity period —6 months.
(3) Damage—due to a fire accident on 28th December — accounting year ends on 31st December.
(4) Net profit plus all standing charges in the prior accounting year ₹ 1,50,000.
(5) Standing charges uninsured —₹ 25,000.
(6) Turnover of the last accounting year was ₹ 5,00,000.
(7) The annual turnover, namely, the turnover for 12 months immediately preceding the fire —₹ 5,20,000.
(8) As a consequence of fire, there was a reduction in certain insured standing charges at the rate of ₹ 25,000.
(9) The standard turnover was ₹ 2,60,000.
(10) Increased costs of working during the period of indemnity were ₹ 20,000.
(11) Turnover during the period of indemnity was ₹ 1,00,000 and out of this turnover ₹ 80,000 was maintained
due to increased cost of working. [C.A. Inter (New)]
Question 21. The premises of XY Limited were partially destroyed by fire on 1st March 1992 and as a result, the
business was partially disorganized upto 31st August 1992. The Company is insured under a Loss of Profit Policy for
₹ 1,65,000 having an indemnity period of 6 months. From the following information, prepare a claim under the
policy:
(1) Actual turnover during the period of dislocation (1-3-1992 to 31-8-1992) ₹ 80,000
(2) Turnover for the corresponding period in previous year (1-3-1991 to 31-8-1991) ₹ 2,40,000
(3) Turnover for the 12 months immediately preceding the fire (1-3-91 to 28-2-92) ₹ 6,00,000
(4) Net profit for the last financial year ₹ 90,000
(5) Insured standing charges for the last financial year ₹ 60,000
(6) Uninsured standing charges ₹ 5,000
(7) Turnover for the last financial year ₹ 5,00,000 Due to substantial increase in trade, before and up to the
time of the fire, it was agreed that an adjustment of 10% should be made in respect of the upward trend in
turnover. The company incurred additional expenses amounting to ₹ 9,300 immediately after the fire and but
for this expenditure, the turnover during the period of dislocation would have been only ₹ 55,000. There was
also a saving during the indemnity period, of ₹ 2,700 in insured standing charge as a result of the fire.
(C. A. Inter, Nov 1992)

Answer: Computation of loss of profit insurance claim
(1) Rate of gross profit:

Net profit for the last financial year 90,000
Add: Insured standing charges 60,000
1,50,000
Turnover for the last financial year 5,00,000
Rate of gross profit

(2) Short sales:
Standard Turnover 2,40,000
Add: 10% increasing trend 24,000
Less: Turnover during the dislocation period (which is at par with the 2,64,000
indemnity period of 6 months) 80,000

1,84,000
(3) Annual (Adjusted) Turnover:
Annual Turnover (1-3-91 to 28-2-92) 6,00,000
Add: 10% increasing trend 60,000
6,60,000
(4) Additional Expenses:
(a) Actual Expenses 9,300
(b) Gross profit on sales generated by additional expense
7,500
(Coverage required is GP on annual (adjusted) turnover)
9,071
Least of the above three figures, i.e. Rs. 7,500 is allowable.

(5) Claim:
Loss of Profit on short sales (30% on Rs. 1,84,000) 55.200
Add: Allowable additional expenses 7,500
62,700
Less: Savings in insured standing charges 2,700
60,000
Application of average clause
= 50,000

Question 22. Raghwan Ltd. gives you the following. Trading and Profit and Loss Account for the year ending
December 31, 1994.
To Opening Stock 25,000 By Sales 4,00,000
To Purchases 1,50,000 By Closing Stock 35,000
To Wages (Rs. 10,000 for skilled labour) 80,000 .
To Manufacturing Exp. 60,000
4,35,000 4,35,000
To Office Expenses 30,000 1,20,000
To Advertising(fixed) 8,000 By Gross Profit 2,000
To Selling Exp. (fixed) 20,000 By Interest on Securities
To Commission on sales 26,000
To Carriage outward 8,000
To Net Profit 30,000
1,22,000 1,22,000
The Company had taken out a consequential loss policy for ₹ 1,00,000. Fire occurred on 1st May, 1995, as a
result of which sales were seriously affected for a period of 4 months. You are given following further information:
(a) Sales figures were as follows : From 1st January, 1994 to 30th April 1994 ₹ 1,50,000; From 1st May, 1994 to 31st
Aug., 1994 ₹ 1,80,000; From 1st May 1995 to 31st Aug., 1995 ₹ 30,000; From 1st January, 1995 to 30th April, 1995
₹ 1,20,000;
(b) Due to rise in material prices, net profit during 1995 was expected to decline by 2% on sales,
(c) Standing charges to the extent of ₹ 4,000 were not insured. Ascertain the claim for loss of profits.
(d) trend of % decline in sales in 1995 as compared to 1994 is 20%. (C.A. Inter)
SPECIAL QUESTION ONLY FOR MY STUDENTS( BECAUSE YOU ARE SPECIAL)
Question 24. A fire occurred in the premises of a businessman on 31st January, 2010, which destroyed stocks.
However, stock worth ₹ 5,940 was salvaged. The company's insurance policy covers the following:
Stocks ₹ 6,00,000
Loss of Profit (including standing charges) ₹ 3,75,000
Period of indemnity Six Months.
The summarised Profit and Loss Account for the year ended 31st December, 2009 is as follows:
Turnover 30,00,000
Closing Stock 7,87,500
37,87,500
Opening Stock 6,18,750
Purchases 27,18,750
Standing Charges 2,51,250
Variable Charges 1,20,000 37,08,750
Net Profit 78,750

The transactions for the month of January 2010 were as under:
Turnover 1,50,000
Payments to Creditors 1,60,020
Trade Creditors:
1-1-10 2,26,000
31-1-10 2,30,980
The company's business was disrupted until 30-4-10, during which period the reduction in the turnover
amounted to ₹ 2,70,000 as compared with the turnover of same period corresponding in the previous year.
You are required to submit the claim for insurance for loss of stock, and loss of profits.
Question:25. In January, 2010 a firm took an insurance policy for ₹ 60 lakhs to insure goods in its godown
against fire subject to average clause. On 7th March, 2010 a fire broke out destroying goods costing ₹ 44 lakhs.
Stock in the godown was estimated at ₹ 80 lakhs. Compute the amount of insurance claim.
(CA-IPCC- MAY 2010)2 MARKS
𝐴𝑚𝑜𝑢𝑛𝑡 𝑜𝑓 𝑖𝑛𝑠𝑢𝑟𝑎𝑛𝑐𝑒 𝑝𝑜𝑙𝑖𝑐𝑦

Answer: 𝐴𝑚𝑜𝑢𝑛𝑡 𝑜𝑓 𝐼𝑛𝑠𝑢𝑟𝑎𝑛𝑐𝑒 𝑐𝑙𝑎𝑖𝑚 = 𝐴𝑚𝑜𝑢𝑛𝑡 𝑜𝑓 𝑙𝑜𝑠𝑠 𝑑𝑢𝑒 𝑡𝑜 𝑓𝑖𝑟𝑒 ×
𝑇𝑜𝑡𝑎𝑙 𝑠𝑡𝑜𝑐𝑘 𝑖𝑛 𝑡ℎ𝑒 𝑔𝑜𝑑𝑜𝑤𝑛
𝑅𝑠. 60 𝐿𝑎𝑘ℎ𝑠
= 𝑅𝑠. 44 𝐿𝑎𝑘ℎ𝑠 × = 𝑅𝑠. 33 𝑙𝑎𝑘ℎ𝑠
𝑅𝑠. 80 𝐿𝑎𝑘ℎ𝑠
Question: 26 A trader intends to take a loss of profit policy with indemnity period of 6 months; however, he
could not decide the policy amount. From the following details, suggest the policy amount:
Turnover in last financial year ₹ 4,50,000

Standing charges in last financial year ₹ 90,000
Net profit earned in last year was 10% of turnover and the same trend expected in subsequent year.
Increase in turnover expected 25%
To achieve additional sales, trader has to incur additional expenditure of ₹ 31,250. (CA-IPCC- Nov 10)4 MARKS
Answer : policy amount Rs 2,00,000.
Question 27: On 30th March, 2011 fire occurred in the premises of M/s Suraj Brothers. The concern had taken
an insurance policy of ₹ 60,000 which was subject to the average clause. From the books of accounts, the
following particulars are available relating to the period 1st January to 30th March, 2011.
1. Stock as per Balance Sheet at 31st December, 2010, ₹ 95,600

2. Purchases (including purchase of machinery costing ₹ 30,000) ₹ 1, 70,000.
3. Wages (including wages ₹ 3,000 for installation of machinery) ₹ 50,000.
4. Sales including goods sold on approval basis amounting to ₹ 49,500.) ₹ 2,75,000. No approval has
been received in respect of 2/3rd of the goods sold on approval.
5. The average rate of gross profit is 20% of sales.
6. The value of the salvaged goods was ₹ 12,300.
You are required to compute the amount of the claim to be lodged to the insurance company.
(CA-IPCC- MAY 2011)5 MARKS
Question: 28. A fire occurred in the premises of M/s. Fireproof Co. on 31 st August, 2010. From the following
particulars relating to the period from 1st April, 2010 to 31st August, 2010 you are requested ascertain the
amount of claim to be filed with the insurance company for the loss of stock. The concern had taken an
insurance policy for Rs. 60,000 which is subject to average clause.

(i) Stock as per Balance Sheet at 31-03-2010 99,000

(ii) Purchases 1,70,000
(iii) Wages (including wages for the installation of a machine Rs. 3000) 50,000
(iv) Sales 2,42,000
(v) Sale value of goods drawn by partners 15,000
(vi) Cost of goods sent to consignees on 16th August,2010, lying unsold with them 16,500
(vii) Cost of goods distributed as free samples 1,500
While valuing the stock at 31st March, 2010, ₹ 1,000 was written off in respect of a slow moving item. The cost
of which was ₹ 5,000. A portion of these goods were sold at a loss of ₹ 500 on the original cost of ₹ 2,500. The
remainder of the stock is now estimated to be worth the original cost. The value of goods salvaged was
estimated at ₹ 20,000. The average rate of gross profit was 20% throughout. (IPCC- nov 2011)10 MARKS
Question 29. On 30th March, 20X2 fire occurred in the premises of M/s Suraj Brothers. The concern had taken
an insurance policy of ₹ 60,000 which was subject to the average clause. From the books of accounts, the
following particulars are available relating to the period 1st January to 30th March 20X2.
1. Stock as per Balance Sheet at 31st December, 20X1, ₹ 95,600.
2. Purchases (including purchase of machinery costing ₹ 30,000) ₹ 1,70,000
3. Wages (including wages 3,000 for installation of machinery) ₹ 50,000.
4. Sales (including goods sold on approval basis amounting to ₹ 49,500) ₹ 2,75,000. No approval has been
received in respect of 2/3rd of the goods sold on approval.
5. The average rate of gross profit is 20% of sales.
6. The value of the salvaged goods was ₹ 12,300.
You are required to compute the amount of the claim to be lodged to the insurance company.
(ICAI Study material)
Question 30. On 29th August, 20X2, the godown of a trader caught fire and a large part of the stock of
goods was destroyed. However, goods costing ₹1,08,000 could be salvaged incurring fire fighting
expenses amounting to ₹4,700. The trader provides you the following additional information:
Particular ₹
Cost of Stock on 1st April, 20X1 7,10,500

Cost of Stock on 31st March,20X2 7,90,100
Purchases during the year ended 31st March,20X2 56,79,600
Purchases from 1st April,20X2 to the date of fire 33,10,700
Cost of goods distributed as samples for advertising from 1st April,
20X2 to the date of Fire 41,000
Cost of goods withdrawn by trader for personal use from 1st April,
20X2 to the date of fire 2,000
Sales for the year ended 31st March,20X2 80,00,000
Sales from 1st April,20X2 to the date of fire. 45,36,000
The insurance company also admitted firefighting expenses. The trader had taken the fire insurance
policy for ₹ 9,00,000 with an average clause. Calculate the amount of the claim that will be admitted
by the insurance company. (ICAI Study material)
Question 31. A fire occurred in the premises of M/s. Fireproof Co. on 31st August, 20X1. From the following
particulars relating to the period from 1 st April, 20X1 to 31st August, 20X1, you are requested to ascertain
the amount of claim to be filed with the insurance company for the loss of stock. The concern had taken an
insurance policy for ₹ 60,000 which is subject to an average clause.

S.No Particular ₹
.
(i) Stock as per Balance Sheet at 31-03-20X1 99,000
(ii) Purchases 1,70,000
(iii) Wages (including wages for the installation of a machine 3,000) 50,000
(iv) Sales 2,42,000
(v) Sale value of goods drawn by partners 15,000
(vi) Cost of goods sent to consignee on 16th August, 20X1, lying unsold with them
16,500
(vii) Cost of goods distributed as free samples 1,500
While valuing the stock at 31st March, 20X1, ₹ 1,000 were written off in respect of a slow moving item. The
cost of which was ₹ 5,000. A portion of these goods were sold at a loss of ₹ 500 on the original cost of ₹
2,500. The remainder of the stock is now estimated to be worth the original cost. The value of goods
salvaged was estimated at ₹ 20,000. The average rate of gross profit was 20% throughout.
Question 32. A fire occurred in the premises of Sri. G. Vekatesh on 1.4.2013 and a considerable part of the
stock was destroyed. The stock salvaged was ₹28,000. Sri Venkatesh had taken a fire insurance policy for
₹17,10,000 to cover the loss of stock by fire.
You are required to ascertain the insurance claim which the company should claim from the insurance
company for the loss of stock by fire. The following particulars are available:
₹ ₹
Purchases for the year 2012 9,38,000 Stock on 1.1.12 1,44,000
Sales for the year 2012 11,60,000 Stock on 31.12.2012 2,42,000
Purchases from 1.1.13 to 1.4.13 1,82,000 Wages paid during 2012 1,00,000
Sales from 1.1.13-1.4.13 24,00,000 Wages paid 1.1.13-1.4.13 1,80,000
Sri Venkatesh had in June 2012 consigned goods worth ₹50,000, which unfortunately were lost in an
accident. Since there was no insurance cover taken, the loss had to be borne by him full.
Stocks at the end of each year for and till the end of calendar year 2011 had been valued at cost less 10%.
From 2012, however there was a change in the valuation of closing stock which was ascertained by adding
10% to its costs. (ICMAI Study material)
Question 33. On 30.09.2013 the stock of Harshvardhan was lost in a fire accident. From the available records
the following information is made available to you to enable you to prepare a statement of claim of the
insurer:
Particular Amount Particular Amount
₹ ₹
Stock at cost on 1.4.2012 75,000 Sales less returns for the year ended 6,30,000
31.3.2013
Stock at cost on 31.3.2013 1,04,000
Purchase less returns up to 30.09.2013 2,90,000
Purchases less returns for the year 5,07,500
Sales less returns up to 30.09.2013 3,68,100
ended 31.3.2013
In valuing the stock on 31.03.2013 due to obsolescence 50% of the value of the stock which originally cost ₹
12,000 had been written-off. In May 2013, ¾th of these stocks had been sold at 90% of original cost and it is
now expected that the balance of the obsolete stock would also realize the same price, subject to the above,
G.P had remained uniform throughout stock to the value of ₹14,400 was salvaged. (ICMAI Study material)

Question 34. Sony Ltd.’s. Trading and profit and loss account for the year ended 31st December, 20X1 were as
follows: Trading and Profit and Loss Account for the year ended 31.12.20X1
Particular ₹ Particular ₹
To Opening stock 20,000 By Sales 10,00,000
To Purchases 6,50,000 By Closing stock 90,000
To Manufacturing expenses 1,70,000

10,90,000 10,90,000
To Administrative expenses 80,000 By Gross profit 2,50,000
To Selling expenses 20,000
To Finance charges 1,00,000
To Net profit 50,000
2,50,000 2,50,000
The company had taken out a fire policy for ₹ 3,00,000 and a loss of profits policy for ₹ 1,00,000 having an
indemnity period of 6 months. A fire occurred on 1.4.20X2 at the premises and the entire stock were gutted
with nil salvage value. The net quarter sales i.e. 1.4.20X2 to 30.6.20X2 was severely affected. The following
are the other information:
Sales during the period 1.1.X2 to 31.3.X2 2,50,000

Purchases during the period 1.1.X2 to 31.3.X2 3,00,000
Manufacturing expenses 1.1.X2 to 31.3.X2 70,000
Sales during the period 1.4.X2 to 30.6.X2 87,500
Standing charges insured 50,000
Actual expense incurred after fire 60,000
The general trend of the industry shows an increase of sales by 15% and decrease in GP by 5% due to
increased cost. Ascertain the claim for stock and loss of profit.
Question 35. From the following particulars, you are required to calculate the amount of claim for Buildwell
Ltd., whose business premises was partly destroyed by fire:
Sum insured (from 31st December 20X1) ₹4,00,000
Period of indemnity 12 months
Date of damage 1st January, 20X2
Date on which disruption of business ceased 31 st October, 20X2
The subject matter of the policy was gross profit but only net profit and insured standing charges are
included.
The books of account revealed:
(a) The gross profit for the financial year 20X1 was ₹ 3,60,000.
(b) The actual turnover for financial year 20X1 was ₹ 12,00,000 which was also the turnover in this case.
(c) The turnover for the period 1st January to 31st October, in the year preceding the loss, was ₹ 10,00,000.

During dislocation of the position, it was learnt that in November-December 20X1, there has been an upward
trend in business done (compared with the figure of the previous years) and it was stated that had the loss
not occurred, the trading results for 20X2 would have been better than those of the previous years.
The Insurance company official appointed to assess the loss accepted this view and adjustments were made
to the pre-damaged figures to bring them up to the estimated amounts which would have resulted in 20X2.
The pre-damaged figures together with agreed adjustments were:
Period Pre-damaged Adjustment to Adjusted

figures be added standard
turnover
January 90,000 10,000 1,00,000
Feb. to October 9,10,000 50,000 9,60,000
November to December 2,00,000 10,000 2,10,000
12,00,000 70,000 12,70,000
Gross Profit 3,60,000 46,400 4,06,400
Rate of Gross Profit 30% (actual for 20X1), 32% (adjusted for 20X2). Increased cost of working amounted to
₹ 1,80,000.
There was a clause in the policy relating to savings in insured standard charges during the indemnity period and
this amounted to ₹ 28,000.
Standing Charges not covered by insurance amounted to ₹ 20,000 p.a. The actual turnover for January
was nil and for the period February to October 20X2 ₹ 8,00,000. (ICAI Study material)
Question 36. On account of a fire on 15th June, 20X2 in the business house of a company, the working
remained disturbed upto 15th December 20X2 as a result of which it was not possible to affect any sales. The
company had taken out an insurance policy with an average clause against consequential losses for
₹1,40,000 and a period of 7 months has been agreed upon as indemnity period. An increase of 25% was
marked in the current year’s sales as compared to the last year. The company incurred an additional
expenditure of ₹12,000 to make sales possible and made a saving of ₹ 2,000 in the insured standing charges.
Particular ₹
Actual sale from 15th June,20X2 to 15th Dec,20X2 70,000

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

Question 37. Monalisa & Co. runs plastic goods shop. Following details are available from quarterly GST
Return filled.
20X1 20X2 20X3 20X4
₹ ₹ ₹ ₹
From 1st January to 31st March 1,80,000 1,70,000 2,05,950 1,62,000
From 1st April to 30th June 1,28,000 1,86,000 1,93,000 2,21,000
From 1st July to 30th September 1,53,000 2,10,000 2,31,000 1,75,000
From 1 October to 31 December 1,59,000 1,47,000 1,90,000 1,48,000
Total 6,20,000 7,13,000 8,19,950 7,06,000
Period ₹
Sales from 16-09-20X3 to 30-09-20X3 34,000
Sales from 16-09-20X4 to 30-09-20X4 Nil
Sales from 16-12-20X3 to 31-12-20X3 60,000
Sales from 16-12-20X4 to 31-12-20X4 20,000
A loss of profit policy was taken for ₹ 1,00,000. Fire occurred on 15th September, 20X4. Indemnity period was
for 3 months. Net Profit was ₹ 1,20,000 and standing charges (all insured) amounted to ₹ 43,990 for year
ending 31st December, 20X3. Determine the insurance claim.

Chapter 9. Hire-Purchase and Instalment Purchase Systems
Hire purchase system:
Nature of hire purchase agreement: under the hire purchase system the hire purchaser gets
possession of the goods at the outset and can use it, while paying for it in instalments over a specified period
of time as per agreement. However, the ownership of the goods remains with the hire vendor until the hire
purchaser has paid all the installments. Each installment paid by the hire purchaser is treated as hire charges
for using the asset. In case he fails to pay any of the installments, the hire vendor has the right to take back his
goods without compensating the buyer.
Special features of hire purchase agreement:
i. Possession: the hire vendor transfers only possession of the goods to the hire purchaser immediately
after the contract for hire purchase is made.
ii. Instalments: the goods are delivered by the hire vendor on the condition that a hire purchaser should
pay the amount in periodical instalments.
iii. Down payment: the hire purchaser generally makes a down payment on signing the agreement.
iv. Constituents of hire purchase instalments: each installment consist of two elements- interest on
unpaid amount and some part of principal amount.
v. Ownership: the property in goods is passed to the hire purchaser on the payment of last installment.
vi. Repossession: in case of default of payment in any installment, the hire vendor has the right to take the
goods back without making any compensation.
Accounting for hire purchase transaction in the book of hire purchaser and
hire vendor: there are following 2 methods of recording the hire purchase transactions:
e. Cash price method. (it is called sales method in the book of hire vendor)
f. Interest suspense method.
Installment payment system: in installment payment system, the ownership of goods is passed
immediately to the buyer on the signing the agreement. The accounting entries under installment payment
system are similar to those passed under the hire purchase system.
Difference between hire purchase and installment system:

Basis of distinction Hire purchase Installment system
1. governing act It is governed by Hire Purchase It is governed by the sale of Goods Act
Act,1972. 1930.
2. Nature of contract It is an agreement of hiring. It is an agreement of sale.
3. passing of ownership The title of goods passes on last The title of goods passes immediately.
payment.

4. right to return goods The hirer may return goods without Unless seller defaults, goods are not
further payment except for accrued returnable.
installments.
5. seller’s right to The seller may take possession of the The seller can sue for the price if the
repossess. goods if hirer is in default. buyer is in default. He can not take
possession of the goods.
6. Right of disposal Hirer can not hire out sell, pledge or The buyer may dispose off the goods
assign entitling transferee to retain and give good title to the bonafide
possession as against the hire vendor. purchaser.
7. Responsibility for risk The hirer is not responsible for the risk The buyer is responsible for risk of loss
of loss of loss of goods if he has taken of goods because of the ownership has
reasonable precaution because the transferred.
ownership has not yet be transferred.
8. name of parties Parties involved are called hire The parties involved are called buyer
involved purchaser and hire vendor. and seller.
9. component other than Component other than cash price Component other than cash price
cash price included in the installment is called included in the installment is called
hire charges. interest.
COMPUTAION OF INTEREST, INSTALLMENTS AND CASH PRICE:
Question.1 (When cash price, rate of interest and instruction of payment are given) Ram purchased a
machine on hire purchase basis. The cash price was ₹ 2,40,000 payable ₹ 40,000 as down and balance in
4 equal instalments together with interest @ 10% p.a. Calculate Installment.
Question.2(when rate of interest, total cash price and installments are given) Maheer purchases a car on
hire-purchase system. The total cash price of the car is ₹ 15,980, payable ₹ 4000 down and three
installments of ₹ 6,000. ₹ 5,000 and ₹ 2000 payable at the end of first, second and third year
respectively. Interest is charged at 5% p.a. You are required to calculate interest paid by the buyer to
the seller each year.
Question.3 A Ltd. purchased machinery from B Ltd. on hire purchase basis on the following terms: Cash
Price- ₹ 7,92,500 , Cash down payment- 20% ,Balance to be discharged in 4 annual instalment of ₹ 2,00,000 each
(inclusive of interest @ 10%) to be paid at the end of each year. Compute the payment of interest to be made
each year.
Question.4. Cash price of assets purchased on hire-purchase system ₹ 37,500. Down payment ₹ 5,000, Annual
installment: 5 of ₹ 7,500 each. Rate of interest: 5% Calculation interest included in each instalment.

(when total cash price and instalments are given but rate of interest is not given)
Question 5. Happy valley Florists Ltd acquired a delivery van on hire purchase on 1.04.2021 from Ganesh
Enterprises. The terms were as follows:
Particulrs Amount(₹ )
Hire purchase price 1,80,000
Down payment 30,000
1st installment payable after 1 year 50,000
2nd installment after 2 years 50,000
3rd installment after 3 years 30,000
4th installment after 4 years 20,000
Cash price of Van ₹ 1,50,000. You are required to calculate total interest and interest included in each
installment.
Question 6. COC Ltd acquired a TRUCK on hire purchase on 1.04.2021 from Tata ltd. The terms were as
follows:
Particulrs Amount(₹ )
Hire purchase price 2,40,000
Down payment 40,000
1st installment payable after 1 year 60,000
2nd installment after 2 years 70,000
3rd installment after 3 years 50,000
4th installment after 4 years 20,000
Cash price of Van ₹ 2,00,000. You are required to calculate total interest and interest included in each
installment.
Question.7 (when only installments are given but cash price and rate of interest are not given) Mr. A
purchased a personal computer on 1st Jan. 2021 on hire-purchase paying ₹ 15,000 cash down and balance in
four annual installments of ₹ 14,000, ₹ 13,000, ₹ 12,000 and ₹ 11,000. Each installment comprising equal
amount of cash price, at the end of each accounting period. You are required to calculate total cash price, and
amount of interest in each installment.
Question.8. Company purchased a machinery on the following agreement basis. It was agreed to pay ₹ 55,000
as first installment, ₹ 50,000 as second installment, ₹ 45,000 as third installment and ₹ 40,000 as fourth
installment along with a down payment of ₹ 10,000. Find cash price, hire purchase price and total interest.
Assuming cash price portion is equal in each installments.
Question.9.(when rate of interest and instalments are given but total cash price is not given).
Cash Price ?
Down payment ₹ 10,000
First installment ₹ 14,000
Second installment ₹ 23,000
Third installment ₹ 11,000
Rate of interest 10%
Ans: Cash Price ₹ 50,000.
Question.10.(when rate of interest and instalments are given but total cash price is not given)
X purchased a radiogram on hire-purchase system. As per terms he is required to pay ₹ 800 down, ₹ 400 at
the end of first year ₹ 300 at the end of second year, and ₹ 700 at end of third year. Interest is charged

at 5% p.a. You are required to calculate total cash price of radiogram and interest paid with each
instalment.
Question.11. A acquired on 1st January, 2003 a machine under a Hire-Purchase agreement which provides
for 5 half yearly instalments of ₹ 6,000 each, the first instalment being due on 1st July, 2003. Assuming that the
applicable rate of interest is 10 per cent per annum, calculate the cash value of the machine. All working
should form part of the answer. (May 2003) 8 marks
Question 12.( ANNUITY METHOD) On 1st Jan 2021, X purchase a plant from Y on hire purchase system. The
hire purchase rate was settled at ₹ 60,000, payable as to ₹ 15,000 on 1.1.2021 and ₹ 15,000 at the end of 3
successive year. Interest @5% p.a. the asset was to be depreciated in the books of purchaser at 10% p.a. on
reducing balance method. Given the present value of an annuity of Re 1 p.a. @ 5% interest is Rs 2.7232.
Ascertain the cash price.
Question13. On 1st April 2021, Globe Press purchased a printing machine on hire-purchase system from
Modern Machinery Co. The payment was to be made as ₹ 30,000 down and the balance in three equal
installments of ₹ 20,000 each payable on 31st March every year. The vendor company charged interest
@ 8% p.a. Globe Press provided depreciation @ 10% p.a. on the diminishing balances and paid all the
instalments. It closes its books on 31st March every year. The cash down value of machine was
₹ 81,543. Show the (a) Modern Machinery Co.'s Account and (b) Printing Machine Account in the books
of Globe Press for 3 years. (C.M.A. (Inter)
Question14 (Full Repossession) A Machinery is sold on Hire Purchase. The terms of payment are four annual
instalments of ₹ 6,000 at the end of each year commencing from the date of agreement. Interest is charged @
20% and is included in the annual payment of ₹ 6,000.
Show Machinery Account and hire Vendor Account in the books of the purchaser who defaulted in the
payment of the third yearly payment where upon the vendor re-possessed the machinery. The purchaser
provides depreciation on the machinery @ 10% p.a. All working should form part of your answer.
[ANSWER: Cash price - ₹ 15,533, loss on repossession =₹ 324]
Question15. (Full Prepossession) AB Ltd. Purchased from CD Ltd. a machine costing ₹ 1,20,000 on hire
purchase system. Payment was to be made ₹ 30,000 down and the remainder in three equal installments
together with interest at 5%. AB Ltd. writes off depreciation @ 20% on the diminishing balance method. It paid
the installments at the end of the first year but could not pay the next.
Give the necessary ledger accounts in the books of parties for two years if the hire vendor took possession of
the machine. The hire vendor spent ₹ 5,800 on getting the machine thoroughly overhauled and sold them for
₹ 70,000. [Answer.: Loss on default: ₹ 13,800; Profit on sale of goods repossessed ₹ 1,200.]
Question.16(partial repossession) P purchased 4 cars at ₹ 14,000 each on hire-purchase system. The hire-
purchase price for all the four cars was ₹ 60,000, to be paid ₹ 15,000 down and three instalments of ₹ 15,000
each at the end of each year. Interest is charged at 5% p.a. Buyer depreciates cars at 10% p.a. on straight line
method.
After having paid down payment and first instalment, buyer could not pay second instalment and seller took
possession of 3 cars at an agreed value to be calculated after depreciating cars at 20% p.a. on written down
value method. One car was left with the buyer.
Seller, after spending ₹ 1,200 on repairs, sold away all the three cars to X for ₹ 35,000. Open ledger accounts in
the books of both the parties. (CA-IPCC, CMA INTER) (Really pyara question)

Question 17. (Partial repossession) X purchased seven trucks on hire-purchase on 1 -7-98. The cash price of
each truck was ₹ 50,000. He was to pay 20% of the cash price at the time of delivery and the balance in five
half-yearly instalments starting from 31-12-98 with interest @ 5% per annum.
On X’s failure to pay the installment due on 30.6.99 it was agreed that X would return 3 trucks to the vendor
and the remaining 4 would be retained by him. The vendor agreed to allow him a credit for the amount paid
against these 3 trucks less 25%. Show the relevant account in the books of X assuming that his books are
closed in June every year and depreciation @ 20% is charged on trucks.CA (Inter 16 Marks)
Question 18. (Partial repossession) Bombay Roadways Ltd. purchased three trucks costing ₹ 1,00,000 each
from Hindustan Auto Ltd. on 1st January, 1998 on the hire-purchase system. The terms were: -
Payment on delivery ₹ 25,000 for each truck and balance of the principal amount by 3 equal installments plus
interest at 15% per annum to be paid at the end of each year. Bombay Roadways Ltd. writes off 25%
depreciation each year on the diminishing balance method.
Bombay Roadways Ltd. paid the instalments due on 31st December, 1998 and 31st December, 1999 but could
not pay the final installment. Hindustan Auto Ltd. re-possessed two trucks adjusting values against the
amount due. The re-possession was done on 31st Dec. 2000 on the basis of 40% depreciation on the
diminishing balance method. You are required to:-
(a) write up the ledger accounts in the books of Bombay Roadways Ltd. showing the above transactions up to
31-12-2000, and
(b) Show the disclosure of the balances arising from the above in the Balance Sheet of Bombay Roadways Ltd.
as on 31st December, 2000. (C.A. Inter 16 Marks)
Question 19. (Partial Prepossession) X Transport Ltd. Purchased from Delhi Motors three tempos costing
₹ 50,000 each on the hire purchase system on 1. 1. 1987. Payment was to be made ₹ 30,000 down and the
remainder in three equals annual installments payable at the end of every year together with interest @ 9%.
X Transport Ltd. write off depreciations @ 20% p.a on diminishing balance. It paid, the instalment due at the
end of first year i.e., 31.12.1987 but could not pay the next on 31.12.1988. Delhi Motors agreed to leave one
tempo with the purchaser on 1.1.1989 adjusting the value of the other two tempos against the amount due on
01.01.1989. The tempos repossessed were valued on the basis of 30 % depreciation annually. Show the
necessary accounts in the books of X Transport Ltd. for the years 1987, 1988 and 1989.
[ Ans: Value of tempos taken away at the end of 2nd year ₹ 49,000. Loss on Repossession = ₹ 15,000]
Question: 20 (Partial Repossession) On 1 July 2021, X Ltd. bought from Y Ltd. a plant whose cash price was
₹ 74,340; payment to be made by four bi-annual instalments of ₹ 20,000 each. The first one being due on 31
December, 2021. Interest had been taken into account at 6% p.a. A clause in the agreement gave the vendors
the right to seize the plant if the purchaser defaulted on any instalment. X Ltd. paid the first instalment but
failed to pay the next. It was agreed that X Ltd. Should retain the plant of which the original cash price was
₹ 32,000 and bear the loss on the remainder (which was sold on 13 July 2022 for ₹ 40,248), Y Ltd. waiving the
interest accruing after 30 June 2021 included in the installments’ under the original agreement. Another
agreement was entered into for the liquidation of the balance.
Show the plant account, vendor's account and plant surrendered account in the books of X Ltd. from 1 July
2021 to 30 June 2022 taking depreciation at 5% p.a. half yearly on reducing balance assuming that X Ltd.
makes up its accounts half yearly to 30 June and 31 December.
(YE QUESTION SIRF MAIN SOLVE KAR SAKTA HU. AUR KISI KI AUKAT NAHI)

Question 21: On 1 October, 2021, five trucks were purchased by Kavita on the hire purchase system. The cash
price of each truck was ₹ 5,50,000. The payment was to be made as follows:
10% of cash price at the time of delivery and balance in four half yearly installment of ₹7,00,000. Rate of
interest charged in installment was 10% p.a.
The payment due on 30 September 2022 could not be made; hence trucks were seized by the hire vendor.
However, after negotiations, Kavita was allowed to retain three trucks on the condition that the value of the
other two trucks would be adjusted against the amount due, the trucks being valued at cost minus 25%
depreciation and Kavita would pay the balance in five half years installments together with interest at 10% half
yearly. Both the parities close their books on 31st March every year. Kavita charges 15% depreciation on trucks
on the original cost. Unfortunately, on 5 April, 2023, a fire destroyed all the three trucks in the possession of
Kavita. The insurance company admitted the full claim on the basis of the balance in Trucks Account on 31
March, 2023. Kavita settled the account with the hire vendor on 30 April, 2023 on receiving the payment from
the insurance company. The hire vendor waived the interest accrued after 31 March, 2023. Prepare necessary
accounts in the book of both the parties..
(EK AJEEB SI SHAKTI AA CHUKI HAI MERE ANDER. MAI BAHUT HI SHAKTISHALI FEEL KR RAHA HU)
INTEREST SUSPENSE METHOD

Question.22. A ltd has hire purchase business and the installments are collected over three year
period. It decides to allocate the interest as follows: 1st year 50%, 2nd year 30%: 3rd year 20%
The hire purchase sales for the first four years were as under:
1st year –Rs 10,000 of which ₹ 2000 is interest
2nd year – Rs 20,000 of which ₹ 4,000 is interest
3rd year – Rs 30,000 of which ₹ 6,000 is for interest
4th year- Rs 60,000 of which ₹ 10,000 is for interest
Show interest suspense account and profit and loss accounts for the first 4 years
Question.23. A Company sells goods on hire-purchase on the basis of 25% down, the balance, with 20%
interest thereon, being payable in 8 quarterly instalments on 31 st March, 30th June. 30th September and 31st
Dec. each year. The first instalment is payable at the end of each quarter in which the sale is made. The
company transfers 50%,30% and 20% of the interest to the profit and loss account in the first, second and
third year respectively.
Balance on 1st January, 1996: ₹

Hire-Purchase debtors 75,375
Hire-purchase interest suspense 9,900
Hire-purchase sales (exclusive of interest), which have evenly occurred over each of the calendar years, are:
1994 80,000
1995 1,00,000
1996 76,000
All dues were promptly paid in each year. Make out for the year 1996 H.P. Debtors account and H.P. Interest
suspense account. [C.A. (Final)]

ADVANCE QUESTIONS ON COMPUTATION OF INSTALLMENTS
Question.24 Cash price ?

Rate of interest 12% p.a.
Interest is charged Quarterly
Down payment on 1.01.07 50,000
Date and amount of Installments
1.7.07 = 30,000
31.12.07 = 50,000
31.12.08 = 40,000
30.6.09 = 60,000
Question.25 Cash price ?

Rate of interest 12% p.a. for 2007
13% p.a. for 2008
14% p.a. for 2009
15% p.a. for 2010
Asset was purchased on 1 May 2007

Date Amt. of Installment
31 Oct 07 40,000
31 Mar 08 30,000
31 Mar 09 45,000
30 June 10 30,000
Question.26 date of purchase = 1st Jan 2007

Cash price of asset = ?
Rate of interest
2007 = 12% p.a.
2008 = 14% p.a
2009 = 16% p.a.
Down payment = ₹ 60,000
Ist Installment after 10 months = ₹ 75,000

IInd Installment at the end of 2nd quarter of 2008 = ₹ 85,000
IIIrd Installment at the end of 3rd quarter of 2008 = ₹ 68,000
IVth Installment at the end of 6 months of 2009 = ₹ 74,000
Vth Installment at the end of 2009. = ₹ 72,000
In 2007, interest is charged monthly.

In 2008, interest is charged quarterly.
In 2009, interest is charged half early.
Question.27. Calculate Cash Price where rate of interest is 12% p.a. charged quarterly and down payment is
₹ 10,000
Date Amount Nature

1.01.2003 10,000 Down
1.04.2003 15,000 1stInstal
1.10.2003 20,000 2ndInstal
1.04.2004 20,000 3rdInstal
1.07.2005 30,000 4thInstal
Rate of interest is increasing by 2% every Year with effect from 1.1.2004.

SOME MORE PRACTICE QUESTIONS:
Question 28. On January 1, 2021 M/s HP acquired a pick-up van on hire purchase from M/s FM. The terms of
contract were as follows:
(a) the cash price of the Van was ₹ 1,00,000.

(b) 40,000 were to be paid on signing of the contract.
(c) The balance was to be paid in annual installments of ₹ 20,000 plus interest.
(d) Interest chargable on the outstanding balance was 6% p.a.
(e) Depreciation at 10% p.a. is to be written off using the straight line method.
You are required to prepare H.P Interest suspense account, interest account, FM Account and Balance sheet
in the book of hire purchaser.
Question 29. A firm acquired two tractors under hire purchase agreements from HP Co., details of which
were as follows:
Date of purchase Tractor A- 1st April 2021 Tractor B- 1st October 2021
Cash price ₹ 14,000 ₹ 19,000
Both agreements provided for payment to be made in 24 monthly installments (of 600 each for tractor A and
800 each for tractor B), commencing on the last day of the month following purchase, all installments being
paid on due dates.
On 30th June 2022, tractor B was completely destroyed by fire. In full settlement, on 10 th July 2022 an
insurance company paid ₹ 15,000 under a comprehensive policy. Any balance on the hire purchase company’s
account in respect of these transaction was to be written off.
The firm prepares account annually to 31st December and provided depreciation on tractors on a straight line
basis at the rate of 20% p.a rounded off to nearest 10 repees, apportioned as from the date of purchase and
up to date of disposal.
You are required to record these transactions in the following accounts, carrying down the balances on 31st
31st December 2021 and 31st December 2022:
a) Tractor on hire purchase account.

b) Provision for depreciation on tractors.
c) Disposal of tractors.
Question 30. On 1.1.2020, B & Brothers bought 5 computers from Chirag Computers on hire purchase. The
cash price of each computer was ₹ 20,000. It was agreed to pay ₹ 30,000 at the end of each year. The vendor
charges interest @10% p.a. the buyer depreciates computers at 20% p.a. on the diminishing balance method.
B & Brothers paid cash down of ₹ 5000 each and two installments but failed to pay the last installment.
Consequently, the computer traders repossessed 3 sets, leaving two sets with the buyer and adjusting the
value of 3 sets against the amount due. The sets repossessed were valued on the basis of 30% depreciation
p.a. on written down value. The sets repossessed were sold by the chirag computers for 30,000 after
necessary repairs amounting to ₹ 5,000 on 30th June 2023. Prepare necessary ledger accounts in the book of
both the parties.
Answer: loss on repossession ₹ 20,480. Balance due to chirag computers after repossession ₹ 9,420. Agreed
value of computers repossessed ₹ 20,580.

CHAPTER 10. DEPARTMENTAL ACCOUNTING
Types of departments: there are 2 types of departments:

i. Independent departments: departments which work independently of each other and have negligible
inter- departmental transfers are called independent departments.
ii. Dependent departments: departments which transfer goods from one department to another department
for further processing are called dependent departments. Here the output of one department becomes the input
for the other department. This transfer may be done at cost price or pre-decided selling price.
Basis of inter-departmental transfers:

i. Cost
ii. Current market price
iii. Cost plus agreed percentage of profit.
Elimination of unrealised profit: when profit is added in the inter-transfers the loading included
in the unsold inventory at the end of the year is to be excluded before final accounts are prepared so as to
eliminate any anticipatory yet unrealised profit included therein.
Stock reserve: unrealised profit included in unsold stock at the end of accounting period is eliminated by
creating an appropriate stock reserve by debiting the combined profit and loss account. The amount of stock
reserve will be calculated as:
Transfer price of unsold stock X profit included in transfer price/ transfer price.
Journal entry: at the end of accounting year, the following journal entry will be passed for elimination of
unrealised profit:
Profit and loss account Dr

To stock reserve account
Advantages of departmental accounting: The main advantages of departmental accounting are as
follows:
i. Evaluation of performance: the performance of each department can be evaluated separately on the basis
of trading results.
ii. Growth potential of each department: the growth potential of a department as compared to others can be evaluated.
iii. justification to capital outlay: it helps the management to determine the justification of capital outlay in
each department.
iv. judgement of efficiency: it helps to calculate stock turnover ratio of each department separately and thus
the efficiency of each department can be revealed.
v. planning and control: availability of separate cost and profit figures for each department facilitates better control.
Thus, effective planning and control can be achieved on the basis of departmental accounting information.

Methods of keeping departmental accounts:
Method 1. Accounts of all departments are kept in one book only: income and expenditure of department is
separately recorded in subsidiary books and then accumulated under separate heads in a ledger or ledgers. This may
be done by having columnar subsidiary books and a columnar ledger.
Method 2. Separate set of books are kept for each department: each department maintains separate books
including complete stock accounts of goods received from or transferred to other departments or as also sales.
Common expenses need to be allocated to determine profitability.
PRACTICE QUESTIONS
Question:1 From the following figures prepare accounts to disclose total profit and the profit of the two
departments. X and Y :
₹ ₹
Opening Stock: X 15,200 Sales: X 1,00,000
Y 10,800 Y 80,000
Purchase: X 75,100 Purchase Returns: X 1,100
Y 69,800 Y 800
Carriage inwards 2,860
Salaries: X 9,000 Discount Received 1,430
Y 8,500
General (Salaries) 11,600
Advertising 8,100
Insurance 1,000
Discount Allowed 1,800
Accountancy charges 500
The following Further information is supplied:
(a) Goods transferred from department X to Y were ₹5,000. This has not been recorded.
(b) General salaries are to be allocated equally.
(c) Allocate carriage inward and discount received on suitable basis.
(d) The area occupied is in the ratio of 3: 2.
(e) Insurance premium is for a comprehensive policy, allocation being inconvenient.
(f) The closing Stocks of the two departments were: X, ₹17,800 and Y, ₹15,600.
(g) Allocate Advertising, General Expenses and Discount Allowed in the ratio of Sales.
( BAHUT HI AASAN QUESTION)
Question:2 Green & Co, has two departments P and Q. Department P sells goods to Department Q at normal
selling prices. From the following particulars prepare Departmental Trading and Profit & Loss Account for
the year ended 31-3-1994 and also ascertain the Net Profit to be transferred to Balance Sheet.
Particulars Department P ₹ Department Q ₹
Opening stock 1,00,000 Nil
Purchases 23,00,000 2,00,000
Goods from Department P --------- 7,00,000
Wages -- 1,00,000 1,60,000
Traveling expenses 10,000 1,40,000
Closing stock at cost to the Dept. 5,00,000 1,80,000
Sales 23,00,000 15,00,000
Printing and stationary 20,000 16,000
The following expenses incurred for both the departments were not apportioned between the departments:

(a) Salaries ₹ 2,70,000

(b) Advertisement expenses ₹ 90,000
(c) General expenses ₹8,00,000
(d) Depreciation @ 25% on the machinery value of ₹48,000. Advertisement expenses are to be apportioned in
the turnover ratio, salaries in 2 : 1 ratio and depreciation in 1:3 ratio between the departments P and Q
General expenses are to be apportioned in 3 : 1 ratio.
(TYPICAL QUESTION BUT ………..) (CA-1994 May, 20 Marks)
Question:3 From the following balance extracted from the books of Lux cozi , Prepare Departmental
Trading Account and General Profit & Loss Account for the year ended 3 1 s t October, 2001 and a Balance
Sheet as on that date after adjusting the unrealized departmental profits if any:-
Dr, ( Rs,) Cr, { Rs,)

Capital 3,00,000
Land & Building 1,25,000
Furniture 25,000
Opening stock Dept, A 30,000
Dept, B 40,000
Purchases Dept, A 10,00,000
Dept, B 15,00,000
Sales Dept, A 20,00,000
Dept, B 32,00,00
General Expenses 14,00,000
Sundry Debtors 2,00,000
Drawings 2,80,000
Cash & Bank 10,00,000
Total 56,00,000 56,00,000
1. Closing stock of Dept A ₹1,30,000 including goods from dept B ₹40,000 at cost to Dept A and
Dept B ₹2,60,000 including goods from Dept A ₹90,000 at cost to Dept B.
2. Sale of Dept A include transfer of goods to Dept B of the value of ₹2,00,000 and sales of Dept B
include transfer of goods to Dept A of the value of ₹3,00,000 both at market price to transferor
Depts.
3. Opening stock of Dept A and Dept B, includes goods of the value of ₹10,000 and ₹15,000 taken
from Dept B and Dept A respectively at cost to transferee Dept.
4. Depreciate Land & building by 5% and furniture by 10% p.a. (CMA-INTER, CA- PE 2- 16 marks)
Question:4 A Company manufacturing electronic components operates with Departments. Transfers are
made between the departments of both purchased goods and manufactured finished goods. Goods purchased
are transferred at cost and manufacturing goods are transferred only at selling price as is the case with open
market. Transactions for the year ended 30th June, 2017 are given below:
Particulars Dept. X ₹ Dept. Y ₹

Opening stock 20,000 15,000
Sales 1,90,000 1,35,000
Wages 12,500 7,500
Purchases 1,00,000 80,000
Closing stock:
Purchased goods 2,000 5,000
Manufactured goods 7,000 8,000

The following were the transfers
From Dept. X to Dept. Y :- purchased goods ₹6,000 and Finished goods ₹20,000 and
from Dept. Y to Dept. X :- Purchased goods ₹5,000 and finished goods ₹35,000. Stocks were valued at cost to
the Dept. concerned. Only in closing stock of manufactured goods in the Dept, transferred finished goods are
20%.
Draw out Departmental Trading Account and the General P/L Account for the year ended 30 th June. 2017.
Question:5 Calculate stock Reserve. A,B,C are three departments:

Content Ratio Profit Ratio Closing stock
A Nil ¼ of sales 15,000
B 2/10 1/5 of cost 22,000
C 5/15 not available 40,000
Assume A sales to B and B sales to C. (Ans: Stock reserve 3878)
Question:6 Calculate stock Reserve. A,B,C,D are four departments:

Content Ratio Profit Ratio Closing stock
A Nil 1/10 of cost 40,000
B 7/15 ¼ of cost 50,000
C 8/20 1/6 on sales 70,000
D 6/24 1/10 of sales 80,000
Assume A sales to B, B sales to C and C Sales to D. ( KUCHH ACHCHHA SA FEEL HO RAHA HAI, PATA NAHI KYON ?)
Question:7 FGH Ltd. has three departments I.J.K. The following information is provided for the year ended
31.3.2004:
I J K
Rs. Rs. Rs.
Opening stock 5,000 8,000 19,000
Opening reserve for unrealized profit …… 2,000 3,000
Material 16,000 20,000 ……
Direct Labour 9,000 10,000 ……
Closing stock 5,000 20,000 5,000
Sales ……. ……. 80,000
Area occupied (Sq.mtr.) 2,500 1,500 1000
No. of employees 30 20 10

Stock of each department are at cost to the department concerned. Stock of dept. I are transferred to Dept. J
at cost plus 20% and stock of J are transferred to K at a gross profit of 20% on sales. Other common expenses
are Salaries and Staff Welfare ₹18,000 ,Rent ₹6,000. Prepare Departmental Trading, profit and Loss Account
for the year ending 31.3.2004. (CA-IPCC, CMA-INTER)
Question:8 A firm had two departments, cloth and readymade clothes. The clothes were made by the firm
it sells out of cloth supplied by the cloth department at its usual selling price. From the following figures
prepare departmental Trading and Profit & Loss accounts for the year ended 31st March, 2017:-
Cloth Department Readymade clothes

₹ ₹
Opening stock on 1st April, 2016 3,00,000 50,000
Purchases 20,00,000 15,000
Sales 22,00,000 4,50,000
Transfer to Readymade Clothes Department 3,00,000
Expenses—Manufacturing 60,000
Selling 20,000 6,000
Stock on 31st march, 2017 2,00,000 60,000
The stocks in the readymade clothes department may be considered as consisting of 75% cloth and 25%
other expenses. The cloth Department earned gross profit at the rate of 15% in 2015-16. General expenses of
the business as a whole came to ₹1,10,000. (CA- Inter- 12 marks)
Question:9 Complex Ltd. has three departments A, B and C the following information is provided;-
Particulars A B C
₹ ₹ ₹
Opening stock 3,000 4,000 6,000
Consumption of Direct Materials 8,000 12,000
Wages 5,000 10,000
Closing Stock 4,000 14,000 8,000
Sales 34,000
Stocks of each department are valued at cost to the department concerned. Stocks of A department are
transferred to B at a margin of 50% above departmental cost. Stocks of B department are transferred to C
department at a margin of 10% above departmental cost. Other expenses were:
Salaries ₹ 2,000 , Printing & Stationary ₹ 1,000

Rent ₹ 6,000 Interest paid ₹ 4,000
Depreciation ₹ 3,000
Allocate expenses in the ratio of departmental gross profit. Opening figures of reserves for unrealized profit
on departmental stocks were : Department B: ₹1,000, Department C: ₹2,000. Prepare Departmental Trading
and Profit & Loss a/c. (CMA- Inter 16 marks)
Question:10 X Ltd. has two departments A and B. Form the following particulars prepare the consolidated
Trading Account and Departmental Trading Account for the year ending 31 st December, 2002:

A B
₹ ₹
Opening Stock (at cost) 20,000 12,000
Purchases 92,000 68,000
Sales 1,40,000 1,12,000
Wages 12,000 8,000
Carriage 2,000 2,000
Closing Stock:
(i) Purchased Goods 4,500 6,000
(ii) Finished Goods 24,000 14,000
Purchased goods transferred:
By B to A 10,000
By A to B 8,000
Finished goods transferred:
By A to B 35,000
By B to A 40,000
Return of finished goods:
By A to B 10,000
By B to A 7,000
You are informed that purchased goods have been transferred mutually at their respective departmental
purchase cost and finished goods at a profit of 25% over dept. cost and that 20% of the finished stock (closing)
at each department represented finished goods received from the other department. (CA-INTER 16 MARKS)
Question:11 Telerad & Co. has two departments A and B. From the following particulars, Prepare
Departmental Trading Account and Consolidated Trading Account for the year ending on 31 st March, 2002
Department A (Rs.) Department B (Rs.)
Opening stock (at cost) 1,00,000 60,000
Purchase 4,60,000 3,40,000
Carriage inward. 10,000 10,000
Wages 60,000 40,000
sales (excluding inter-transfer) 7,00,000 5,60,000
Purchased goods transferred;
By B to A 50,000
By A to B 40,000
Finished goods transferred:
By B to A 1,75,000
By A to B 2,00,000
Return of finished goods:
By B to A 50,000
By A to B 35,000
Closing Stock:
Finished goods 1,20,000 70,000
Purchased goods have been transferred at their respective departmental purchase cost and finished goods at
departmental market price. 20% of finished stock (closing) at each department represented finished goods
received from the other department. (CA –Inter 1993-may)15 Marks

Ans.: Departmental trading account
Particulars Deptt. A Deptt. B Particulars Dept. A Dept. B
To opening stock 1,00,000 60,000 By Sales 7,00,000 5,60,000
To purchases 4,60,000 3,40,000 By inter-Deptt. Transfer
To Inter-Deptt. Transfer: Purchased goods 40,000 50,000
Purchases goods 50,000 40,000 Finished goods 2,00,000 1 75,000
Finished goods 1,75,000 2,00,000 Less: Stock Reserve 50,000 35,000
Less: Returns 35,000 50,000 1,50,000 1,40,000
1,40,000 1,50,000 By Closing Stock
To Carriage inward 10,000 10,000 Finished Goods 1,20,000 70,000
To Wages 60,000 40,000
To Gross Profit 2,12,500 2,10,000
10,32,000 8,50,000 10,32,000 8,50,000
Question:12 In the month of January, 1990 the following purchases were made by a business house having
three departments:
Department A 1,000 units
Department B 2,000 units at a total cost of ₹ 1,00,000.
Department C 2,400 units
Stock on 1st January were:
Department A 120 units

Department B 80 units
Department C 152 units
The sales for the month were:
Department A 1,020 units at ₹ 20.00 each
Department B 1,920 units at ₹ 22.50 each
Department C 2,496 units at ₹ 25.00 each
The rate of Gross Profit is the same in each case. Prepare Departmental Trading Accounts.
Answer. Departmental Trading Account for the ending on December 31-1-1989
Particulars A Dept. B Dept. C Dept. Total Particulars A Dept. B Dept. C Dept. Total
₹ ₹ ₹ ₹
To Stock 1,920 1,440 3,040 6,400 By Sales By 20,400 43,200 62,400 1,26,000
To Purchase 16,000 36,000 48,000 1,00,000 Stock 1,600 2,880 1,120 5,600
To Gross Profit 4,080 8,640 12,480 25,200

Total 22,000 46,080 63,520 1,31,600 Total 22,000 46,080 63,520 1,31,600
In this case, it is assumed that the cost of goods was same in earlier year also as in the current year and so the
valuation of opening stock has made at same price.

Working Notes:
1 Closing Stock of Deptt. A = Opening Stock + Purchase – Sales value of closing stock
= 120+1,000-3,020= 100 units 100 unit @ 16.00 = 1600
2 Closing Stock of Deptt. B = 80 + 2,000 - 1,920 = 160 units 160 unit @- 18.00 = 2880
3 Closing Stock of Deptt. C = 152 + 2,400 - 2,496 = 56 units 56 unit @. 20.00 = 1120
1. The rate of gross profit; Assuming all the purchase are sold, the sale-proceeds would be;
A 1,000 units @ Rs. 20.00 20,000

B 2,000 units @ Rs. 22.50 45,000
C 2,400 units @Rs. 25.00 60,000
Total Sales 1,25,000
Total Profit = Total Sales - Total Cost = Rs. 1,25,000 - Rs. 1,00,000 = Rs.25,000
GROSS PROFIT RATIO WITH SALES = Rs.25,000/ 1,25,000 x 100-20%
For each article the profit and cost:

S. P. Profit (Rs.) Cost Rs (S. P-profit)
A Rs. 20.00 (20.00x20/100) 4.00 16.00
B Rs. 22.50 (22.50x20/100) 4.50 18.00
C Rs. 25.00 (25.00x20/100) 5.00 20.00
Question:13 Becket & Co Purchased goods for its three departments as follows:
Department: X 4,000 Units
Department: Y 9,000 Units Total Cost
Department: Z 4,000 Units ₹1,10,000
Sales of three departments were as follows:
Department: X 3,600,Units @ ₹ 7.50 per unit

Department: Y 9,800 Units @ ₹ 9.00 per unit
Department: Z 3,650 Units @ ₹ 13.50 per unit
Opening Stock as on 01-01-2002 was as follows:
Department: X 200 Units

Department: Y 1,400 Units
Department: Z 150 Units
Assuming that the gross profit ratio is uniform in all the three departments, prepare trading A/c for the year
ended 31st December 2002. (CMA- INTER , IPCC Group 2)
Ans. Gross Profit -X ₹9000 ,Y ₹29,400, Z ₹16,425, GP Ratio 33.33% as Sale
Question 14. A Ltd. has a factory which has two manufacturing departments X and Y. Part of the output of X
Department is transferred to Y Department for further processing and the balance is directly transferred to the
Selling Department. Inter-departmental stock transfers are made as follows:
X Department to Y Department of 33 1/3 % over-departmental cost.

X Department to Selling Department of 50% over-departmental cost.
Y Department to Selling Department of 25% over-departmental cost.

The following information is given for the year ending 31st March, 1986:
Particulars Department X Department Y Selling Department
MT ₹ MT ₹ MT ₹
Opening Stock 60 60,000 20 40,000 50 1,45,000
Raw Material Consumption 90 1,00,000 20 20,000 - -
Labour Charges - 50,000 - 80,000 -
Sales - - - - 5,00,000
Closing Stocks 30 - 50 - 60 -
Out of the total production in X Department, 30 MT were transfer to the Selling Department. Apart from these
stocks which were transferred during the year the balance output of X Department were for transfer to Y
Department. The per tonne material and labour consumption in X Department on production to be
transferred directly to the Selling Department is 300 per cent of the labour and material consumption on
production meant for Y Department. (i) Prepare Departmental Profit and Loss Account, and (ii) General Profit
and Loss Account ignoring material wastages. [CA Inter Nov., 1976 & Nov., 1981, adapted]
RECTIFICATION OF ERROR
QUESTION 15. Department X sells goods to Department Y at a profit of 25% on cost and to Department Z at
10% profit on cost. Department Y sells goods to X and Z at a profit of 15% and 20% on sales, respectively.
Department Z charges 20% and 25% profit on cost to Department X and Y respectively.
Department Managers are entitled to 10% commission on net profit subject to unrealized profit on
Departmental sales being eliminated. Departmental profits after charging Managers' commission, but before
adjustment of unrealized profit are as under:
Department X ₹ 36,000
Department Y ₹ 27,000
Department Z ₹ 18,000
Stock lying at different departments at the end of the year are as under:
Dept. X ₹ Dept. Y ₹ Dept. Z ₹
Transfer from department X ......... 15,000 11,000
Transfer from department Y 14,000 …….. 12,000
Transfer from department Z 6,000 5,000 ……..
Find out correct profits after charging managers’ commission. (PE2, Nov 2001- 8 marks, IPCC Group 2))
QUESTION 16. Booming Limited has three departments.They are Alpha, Beta and Gamma. The profit of these
departments are ₹30,000, ₹40,000, and ₹17,400 respectively (Before charging manager’s commission and
unrealized profit on stock transfers). Department Alpha transfers its goods @ 20% profit on cost to other
departments while Beta transfers its goods @ 10% profit on cost. Department Gamma transfers its goods at cost to
other departments. However, respective Deptt.’s original goods are only transferred. On scrutiny of records you find,
(i) Purchases made for Alpha Deptt. ₹10,000 has been debited in Beta Dept. Account.
(ii) Goods sent on ‘sale or return basis’ by Beta Deptt. @ 120% , have been recorded as regular Sale at ₹8,400
(iii) General expenses amounting to ₹2,100 have been excessively charged in Gamma Dept. instead of Beta Deptt.

(iv) The following transfers were made:
Deptt. Alpha To Beta 24,000 12,000 still in closing stock
To Gamma 3,600
Deptt. Beta To Gamma 11,000 4,400 still in closing stock
Deptt. Gamma To Alpha 7,700 3,000 still in closing stock
(v) Commission payable to the Manager @ 10% on correct overall Company profit after charging such commission. Find
correct Net profit of the Company and the commission payable to the General Manager.
Solution:
Alpha Beta Gamma
Profit 30,000 40,000 17,400
Rectification of Purchase (10,000) 10,000 —
Sale on Return
Sales — (8,400) —
Stock — 7,000 —
(8,400x100/120)
Expenses — (2,100) 2,100
Profits 20,000 46,500 19,500
Calculation of Stock Reserve
Stock of Ratio 12,000 x 1/6 = 2,000
Stock of Gamma 4,400 x 1/11 = 4,000
Stock of Alpha 3,000 x 0
2,400
Calculation of Co. Profit
Alpha 20,000
Beta 46,500
Gamma 19,500
86,000
(-) Closing Stock Reserve 2,400
Correct Profit
83,600
Commission (83,600 x 10/110)
7,600
Profit after Commission
76,000
Question:- 17 Department R sells goods to Department S at a profit of 25% on cost and Department T at
10% profit on cost. Department S sells goods to R and T at a profit of 15% and 20% on sales respectively.
Department T charges 20% and 25% profit on cost to Department R and S respectively. Department Managers
are entitled to 10% commission on net profit subject to unrealised profit on departmental sales being
eliminated. Departmental profits after charging Manager's commission, but before adjustment of unrealised
profit are as under
Department R 54,000
Department S 40,500
Department T 27,000
Stock lying at different departments at the end of the year are as under:

Dept. R Dept. S Dept. T
Transfer from Department R ----- 22,500 16,500
Transfer from Department S 21,000 ---- 18,000
Transfer from Department T 9,000 7,500 -----
Find out the correct departmental profits after charging Manager's commission
Answer:- R S T
Profit 54,000 40,500 27,000

Add: Managerial commission (1/9) 6,000 4,500 3.000
60,000 45,000 30,000
Less: Unrealised profit on stock (Refer W.N.) 6,000 6.750 3,000
54,000 38,250 27,000
Less: Managers' commission @ 10% 5,400 3,825 2,700
48,600 34,425 24,300
Working Notes:: Value of unrealized profit
Transfer by department R to
S department (22,500 x25/125) = 4,500
T department (16,500 x10/110) = 1,500
6,000
Transfer by department S to
R department (21,000 x 15/100) = 3,150
T department (18,000 x 20/100) = 3,600
6,750
Transfer by department T to
R department (9,000 x 20/120) = 1,500

S department (7,500 x 25/125) = 1,500
3,000
Question:- 18 Brahma Limited has three departments and submits the following information for the year
ending on 31st March, 2011.
Particulars A B C Total (Rs.)

Purchases (units) 5,000 10,000 15,000
Purchases (Amount) ₹8,40,000
Sales (units) 5,200 9,800 15,300
Selling price (₹ per unit) 40 45 50
Closing Stock (Units) 400 600 700
You are required to prepare departmental trading account of Brahma Limited assuming that the rate of profit
on sales is uniform in each case. ( CA-IPCC Exam)
Answer: Departmental Trading Account for the year ended 31st March.2011
Particulars A₹ B₹ C₹ Particulars A ₹ B ₹ C₹
To Opening Stock 14,400 10,800 30,000 By Sales 2,08,000 4,41,000 7,65,000
(W.N. 4) By Closing stock 9,600 16,200 21,000
To Purchases 1,20,000 2,70,000 4,50,000 (W.N.4)
(W.N. 2)
To Gross profit 83,200 1,76,400 3,06,000
2,17,600 4,57,200 7,86,000 2,17,600 4,57,200 7,86,000

Working Notes: 1. Profit Margin Ratio

Department A (5,000 units x ₹40) 2,00,000
Department B (10,000 units x ₹45) 4,50,000
Department C (15,000 units x ₹50) 7,50.060
Total selling price of purchased units 14,00,000
Less: Purchases (8,40,000)
Gross profit 5,60.000
Profit Margin ratio = Gross Profit/ Selling price X 100 = 5,60,000/14,00,000 x 100 = 40%
Statement showing department-wise per unit cost and purchase cost

Particulars A B C
Selling price per unit (₹) 40 45 50
Less: Profit margin @ 40% (₹) (16) (18) (20)
Purchase price per unit (₹)

No. of units purchased 24 27 30
Purchases (purchase cost per unit x 5,000 10,000 15,000
units purchased) 1,20,000 2,70,000 4,50,000
(1) Statement showing calculation of department-wise Opening Stock (in units)
Particulars A B C
Sales (Units) 5200 9800 15300
Add: Closing Stock (Units) 400 600 700
5,600 10,400 16,000
Less: Purchases (Units) (5,000) (10,000) (15,000)
Opening Stock (Units) 600 400 1000
(2) Statement showing department-wise cost of Opening and Closing Stock
Particulars A B C
Cost of Opening Stock (₹) 600X24 400 X 27 1,000x30
14,400 10,800 30,000
Cost of Closing Stock (₹) 400X24 600X27 700x30
9,600 16,200 21,000
QUESTION 19. You are given the following particulars of a business having three departments:
Purchase Opening Stock Closing Stock

Deptt. A 1,500 units 200 units 100 units
Deptt. B 1,000 units 300 units 160 units
Deptt. C 2,000 units 150 units 200 units
1) Purchases were made at a total cost of ₹1,84,000.

2) The percentage of gross profit on turnover is the same in each case.
3) Purchases and sales prices are constant for the last few years.
4) Selling price per unit Deptt. A ₹40
Deptt. B ₹50
Deptt. C ₹60
You are required to prepare Departmental Trading Accounts.
Hints:- Computation of Sale proceeds of each Deptt.:
Opening stock + Purchases - Closing stock) x Selling Price
A 200+1,500-100 or 1,600 units @ ₹40 = 64,000
B 300+1,000-160 or 1,140 units @ ₹50 = 57,000

C 150 + 2,000-200 or 1,950 units @ ₹60 = 1,17,000
2,38,000
QUESTION 21. Gram Udyog, a retail store, has two department. ‘Khadi and Silks’ for each of which stock
account and memorandum ‘mark up’ account are kept. All the goods supplied to each department are debited
to the stock account at cost plus ‘mark up’, which together make-up the seller price of the goods and in the
account, the sale Proceeds of the goods are credited. The amount of ‘mark-up’ is credited to the Departmental
Mark up Account. If the selling price of any goods is reduced below its normal selling prices, the reduction
‘market down’ is adjusted both in the Stock Account and the Departmental Mark-up Account. The rate of
mark-up for khadi department is 33-1/3% of the cost and for Silks Department it is 50% of the cost.
The following figures have been taken from the books for the year ended Department 31,2002
Khadi D ₹ Silk D ₹
Stock as on January 1st at cost 10,500 18,600
Purchases 75,900 93,400
Sales 95,600 1,25,000
(1) The stock of Khadi on January 1,2002 included goods the selling price of which has been market
down by ₹1,260, These goods were sold during the year at the reduced prices.
(2) Certain stock of the value of ₹6,900 purchased for the khadi Department were later in the year
transferred to the Silks department and sold for ₹10,350. As a result, though cost of the goods is
included in the Khadi department the sales proceeds have been credited to the Silks Department.
(3) During the year 2002 to promote sales the goods were marked down as following:
Cost Marked down
Khadi 5,600 360
Silk 10,000 2,000
All the goods marked down, were sold except Silk of the value of ₹5,000 marked down by ₹1,000.
(4) At the time of stock-taking on December 31,2002 it was discovered that Khadi cloth of the cost of
₹390 was missing and it was decided that the amount be written off.
You are required to prepare for both the departments for the year 2002.
(a) The Memorandum Stock Account; and

(b) The Memorandum Mark up Account,
Ans: Stock Account Silk 51,350 Khadi 8,260
Stock Reserve Silk 16,450 Khadi 2,065
Profit Silk 41,000 Khadi 22,685
Hint: Stock Reserve Silk (51,350 +1,000) x 1/3 -1000 = 16,450
Khadi 8260 x ¼ = 2,065
QUESTION 22. Fairways Limited is a retail organization with several departments. Goods supplied to each
department are debited to a memorandum, departmental stock account at cost plus a fixed percentage (mark-
up) to give the normal selling price. The mark up is credited to a memorandum departmental 'Mark-up
account"; any reduction in selling prices (markdown) require adjustment in the stock account and in mark-up
account. The mark up for Department A for the last three years has been 40% of cost. Figures relevant to
Department A for the year ended 30thJune, 2012 were as follows:

Stock 1st July, 2011, at cost 80,000

Purchase, at cost 1,80,000
Sales 3,20,000
It is further ascertained that:

i. Goods purchased in the period were marked down by ₹1,400 from a cost of ₹16,000. Marked-down stock
costing ₹4,000 remained unsold on 30th June, 2012.
ii. Stock shortages at the year end, which had cost ₹1,200, were to be written off.
iii. Stock at 1st July, 2011 included goods costing ₹8,200 which had been sold during the year and had been
marked down in the selling price by ₹740. The remaining stock had been sold during the year.
iv. The departmental closing stock is to be valued at cost subject to adjustments for mark-up and mark-down.
You are required to prepare:
(i) Departmental Trading Account for ‘A’ Department for the year ended June, 2012 in Head Office
books;
(ii) A Memorandum Stock Account for the year;
(iii) A Memorandum Mark-up Account for the year.
Solution: Trading Account (Department A)

To Purchase 1,80,000 By Shortage 1,200
To Gross Profit c/d 90,150 By Closing Stock
(Working Note 3) 28,950
3,50,150 3,50,150
Memorandum Stock Account for the department

July 1 To Balance b/d By Stock shortage A/c
Cost 80,000 P & L A/c 1,200
Mark-up 32,000 Mark-up A/c 480 1,680
1,12,000 By Mark-up A/c 1,400
Less: Mark down 740 1,11,260 By Debtors A/c (Sales)
Purchase: Ex. Opening Stock 1,11,260
Cost 1,80,000 Current Purchase 2,08,740 3,20,000

72,000
Mark-up 2,52,000 2012
June30 By Balance c/d (W. N.-l) 40,180
Memorandum Mark-up accounts
To Memo-stock A/c July 1 By Balance b/d (32,000 - 740) 31,260

re-shortage 480 By Stock A/c 72,000
To mark down 1,400 1,880
To Gross profit
transferred to
P&LA/c 90,150
2012
June 30 To Balance c/d 11,230
1,03,260 1,03,260

CHAPTER 11. BRANCH ACCOUNTING

Introduction: a branch can be described as any establishment carrying on either the same or
substantially the same activity as that carried on by head office of the company. It must also be noted that the
concept of a branch means existence of a head office.
From accounting point of view, branches may be classified as follows:
i. inland branches which can be further classified as:
(a) independent branches which maintain independent accounting records.
(b) dependent branches for which whole accounting records are kept at head office.
ii. foreign branches.
DIFFERENCE BETWEEN BRANCH ACCOUNTS AND DEPARTMENTAL ACCOUNTS:
Basis Branch accounts Departmental accounts

i. maintenance of Branch accounts may be maintained Departmental accounts are maintained at
accounts either at branch or head office. one place only.
As expenses in respect of each branch

ii. apportionment of can be identified, so apportionment Common expenses are distributed among
common expenses. problem does not arise. departments on some suitable basis.
iii. reconciliation Reconciliation of head office and branch

account is necessary in case of Reconciliation is not required in
independent branches. departmental accounts.
iv. conversion of At the time of finalization of accounts,

foreign currency conversion of figures of foreign branch is Such problem never arises.
figures. necessary.
DEPENDENT BRANCH- (DEBTORS SYSTEM)
Question 1. Prepare branch Account under debtor system with following information.
Balance as on 1Jan 2015
Building = 2,00,000
Cash = 40,000
Debtors = 30,000
Stock = 35,000
Furniture = 1,00,000
Goods sent to Branch during the year = 3,80,000
Expenses paid by Branch = 28,000
Expenses paid by H.O = 22,000
Bad debts = 10,000
Cash sales = 2,20,000
Credit sales = 8,00,000
Collection from debtors = 6,30,000
Balances as on 31st December,2015
Stock = 25,000
Charge depreciation @ 10% on furniture.

Question:2 Opening balance of Cash = Nil

Cash sales = 40,000
Expenses paid by H.O = 20,000
Question:3 Opening balance of cash = 15,000

Cash sales = 80,000
Expenses Paid by Branch = 22,000
Expenses paid by H.O. = 8,000
Question:4 Opening balance of Cash = 10,000

Remittance by Branch to H.O = 2,30,000

Cash Sales = 1,40,000
Cash sent by H.O to Branch= 15,000
Expenses incurred by Branch= 22,000

Expenses incurred by Branch= 45,000
Cash sent by H.O to Branch = 12,000
Remittances by Branch = 6,70,000
Question:7 Prepare branch account under debtor system.

Debtors(opening) = 40,000
Stock(opening) = 25,000
Goods sent to Branch = 7,00,000
Credit sales = 5,80,000
Goods returned to HO = 35,000
Discount allowed = 80,000
Bad debts = 2,000
Stock lost by fire = 8,000
Normal loss of stock due to spoilage= 4,000
Expenses paid by HO = 10,000
Goods are sold at a profit of 40% on sales.
Question:8 The COC Pvt. Ltd. invoices goods to their various branches at cost and the branches sell on credit as
well as for cash. From the following details relating to the Bombay branch, prepare the necessary
accounts in the Head Office books.
Debtors, 1st January, 2011 26,200

Debtors, 31st December, 2011 31,100
Cash Balance, 1st January, 2011 300
Stock, 1st January, 2011 15,000
Stock, 31st December, 2011 13,900
Goods received from Head Office 50,800
Cash received from Head Office 1,500
Goods returned to Head Office 700
Cash sales 33,500

Credit Sales 60,000

Allowances to Customers 320
Returns from Customers 580
Discount allowed to Customers 2,400
Bad Debts 600
Remittance to Head Office 74,900
Wages and Salaries 6,000
General Trade Charges 1,300
Normal loss of goods due to wastage 1,200
Abnormal loss of goods due to pilferage 3,000
Ans.: Profit 29,300 (ICWA-INTER 16 MARKS)
Question:9 Opening Balances at Branch as on 1 Jan 2015

Cash = 30,000
Debtors = 50,000
Stock = 20,000
Machine = 1,00,000
Creditors =15,000
O/s rent = 5,000
Prepaid salary = 10,000
During the year:
Goods sent to Branch = ₹6,50,000
Cash sales = ₹2,00,000
Credit sales = ₹9,00,000
Collection from debtors = ₹7,80,000
Credit purchase of goods = ₹60,000
Expenses Paid by H.O
Rent paid @ 5,000 p.m = ₹65,000
Salary (including ₹8,000 for next year) = ₹70,000
Office expenses = ₹12,000
Insurance paid for the year ending on 31st March 16 ₹12,000
Payment to creditors by H.O = ₹ 58,000
Petty expenses paid by Branch = ₹16,000
Closing balance of Stock = ₹75,000.
Charge depreciation @ 10 % on Machine
Prepare Branch Account.
Question:10. IOCM with its Head Office at Delhi has a branch at Bombay. The Branch receives all goods
from Head Office who also remits cash for all expenses. Sales are made by the Branch on credit as well as
for cash. Total Sales by the Branch for the year ended 31 st March, 2012 amounted to ₹5,60,000 out of
which 20% is cash sales. The following further information is also relevant.
1-4-2011 31-3-2012
Stock-in-Trade 25,000 36,000
Debtors 60,000 48,000
Furniture 8,000 ?
Petty Cash 120 180
Expenses actually incurred by the Branch during the year were:
Salaries ₹36,000
Rent ₹9,000 (up to 31stDecember 2011)
Petty expenses ₹5,600
Sale of furniture on 1st October 2011 (Book value of furniture on the date of sale ₹950) amounted to ₹900.
All sales are made by the Branch at cost plus 25% Depreciation on furniture is 10% p.a.
Prepare Mumbai Branch Account in the books of IOCM(Head Office) for the year ending on 31-3-12.
[Ans. Cash received from Debtors = ₹4,60,000; Goods sent to Branch = ₹4,59,000; Profit = ₹57,600]
( ICWA-INTER, CA-INTER-16 MARKS) ( BAS DIL KHUSH HO GAYA)

When goods are sent at Invoice Price
Question:11. Hindustan Industries, Bombay has a branch in Cochin to which goods are invoiced at cost plus
25%. The Branch sells both for cash and on credit. Branch expenses are paid direct from Head Office and the
Branch has to remit all cash received into the Head office Bank Account at Cochin.
From the following details relating to the calendar year 2012, prepare the accounts in the Head Office Ledger
and ascertain the Branch Profit. Branch does not maintain any books of account, but sends weekly returns to
Head Office:
Goods received from Head Office at invoice price 6,00,000

Returns to Head Office at invoice price 12,000
Stock at Cochin as on 1st Jan. 2012 60,000
Sales in the year - Cash 2,00,000
-Credit 3,60,000
Sundry Debtors at Cochin as on 1stJan., 2012 72,000
Cash received from Debtors 3,20,000
Discount allowed to Debtors 6,000
Bad Debts in the year 4,000
Sales returns at Cochin Branch 8,000
Rent, Rates, Taxes at Branch 18,000
Salaries, Wages, Bonus at Branch 60,000
Office Expenses 17,600
Stock at Branch on 31st December 2012 at invoice Price 1,20,000
[Ans. Branch P/L surplus-24,000; Balance of Branch Debtors A/c 94,000. (Study material of ICAI)
Question:12. Gola Cloth Emporium has a head office in Bombay and many retail branches which are supplied
goods from head office at 25% profit on cost price. Accounts are kept at head office from where all expenses
(except petty expenses) are paid. Such petty expenses are paid by the branches which are allowed to maintain
petty cash balance of Rs. 1500 on imprest system. From the following balances as shown by the books, prepare
branch account:
Balances as on 1 January 2011:

Petty cash at Branch 1,500
Stock in hand at Branch at sale price 32,000
Sundry Debtors at Branch 8,700
Sundry Creditors at Branch 2,500
Furniture and fixtures at Branch 7,500
Prepaid Rent 600
Transactions for the year ended 31 December 2011 were as follows:
Goods sent to Branch (less returns) 1,15,000
Cash sales at Branch 95,000
Credit Sales at Branch 65,000
Allowances to Debtors 1,200
Cash received from customers 55,000
Bad Debts to be written off 350
Cash purchases by the Branch (on permission from head office) 15,000
Cash paid to creditors 10,000
Creditors at the end 3,500
Payments made by Head Office :

Rent for one year (paid on July 1, 2011) 2,400
Salaries (paid in advance ₹500) 2,500
Insurance paid for the year ending 31 March 2012 1,800
Payments made by the Branch:
Petty expenses 1,200

Balances on December 31, 20 11

Stock at cost 40,000
Provide Depreciation on furniture at 20% p.a.
[Ans.: Profit = ₹47,000] (CA- INTER 16 MARKS) ( BAS MAJA AA GAYA)
Question:13. X Limited invoices goods to its branch at cost plus 20%. The branch sells goods for cash as
well as on credit. The branch meets its expenses out of cash collected from its debtors and cash sales and
remits the balance of cash to head office after withholding Rs. 10,000 necessary for meeting immediate
requirements of cash. On 31st March, 2011 the assets at the branch were as follows:
₹ (,000)
Cash in Hand 10
Trade Debtors 384
Stock (at invoice price) 1,080
Furniture and fittings 500
During the accounting year ended 31st March, 2012 the invoice price of goods dispatched by the head office to
the branch amounted to ₹1crore 32 lakh. Out of the goods received by it, the branch sent back to head office
goods invoiced at ₹72,000. Other transactions at the branch during the year were as follows:
₹('000)
Cash Sales 9,700
Credit Sales 3,140
Cash collected by Branch from Debtors 2,842
Cash Discount allowed to Debtors 58
Returns by Customers 102
Bad Debts written off 37
Expenses paid by Branch 842
On 1st January, 2012, the branch purchased new furniture for ₹1 lakh for which payment was made by head
office through a cheque.
On 31st March, 2012 branch expenses amounting to ₹6,000 were outstanding and cash in hand was again
₹10,000. Furniture is subject to depreciation @ 16% per annum on diminishing balances method. Prepare
Branch Account in the books of Head office for the year ended 31st March, 2012. [CA-MAY 2001—16 MARKS],
ICWA-INTER 2004-16 MARKS)
Question:14 . Poonam Ltd., Mumbai has a branch in Delhi to which goods were sent at selling price, which is
fixed at 25% above cost. The branch makes both credit and cash sales. Branch expenses are met from branch
cash, balance money remitted to H.O. The branch does not maintain double entry books of account and
necessary accounts relating to branch are maintained in H.O.
Opening Balances (as on 1-4-2011) ₹

Stock at Branch at its cost 75,000
Petty cash Balance 1,200
Office Furniture 12,000
Branch Debtors 32,000
Outstanding Salary 1,280
Following further details are given for the year ended 31st March, 2012:
Cost of Goods sent to Branch 1,80,000

Cheques sent by H.O. to Branch:
Salaries (including ₹600 o/s paid) 10,280
Other Office Expenses 4,600
For petty Cash 3,500 18,380
Sales made by the Branch 2,51,800
(including credit sales ₹1,40,000)
Theft of Stock (at invoice price) 1,700

Other Abnormal loss of Stock (at IP) 3,500

Loss in weight at IP (Normal Loss) 1,000
Cash collected from Debtors 1,23,700
Discount allowed 1,250
Bad Debts written off 4,000
Petty Expenses paid 3,850
Office furniture purchased by branch Manager 4,500
Provide Depreciation @ 10% p.a. on furniture. You are required to prepare (a) Memorandum Debtors A/c. (b)
Memorandum Stock A/c. and (c) Branch A/c. [Ans.: Closing Debtors = ₹43,050; Closing Stock = ₹42,000
Question:15 (Goods in Transit and Closing Stock with Sales at Different G.P. Margins) A Head Office in
Calcutta has a branch in Delhi to which goods are invoiced by the Head Office at cost. All cash received by the
branch is daily remitted to Head Office. From the following particulars, Show how the Branch Account will
appear in the H.O. books.
Stock with the Branch (1-1 -2000) 60,000
Debtors (1-1-2000) 16,500
Petty Cash (1-1 -2000) 2,000
Office Furniture (1-1-2000) 10,800
Goods sent by H.O. to Branch 1,30,000
Goods received by Branch up to 31 -12-2000 1,15,000
Cheque sent to Branch:
Salaries 5,000
Rent 2,000
Other Expenses 1,500
for Petty Cash 1,000 9,500
Sales (including ₹72,000 on cash basis) 1,77,000
Cash received from Debtors 95,000
Petty Expenses paid by Branch Manager 1,800
Depreciate furniture by 10% p.a.
Closing Stock could not be ascertained, but it is known that the branch usually sells at cost
plus 20 percent on cash basis and at cost plus 25% to credit customers. Prepare Branch Account to ascertain
the profit in the books of Head office. (ICWA INTER 16 MARKS)
[Ans.: Profit = ₹20120, Closing Debtors = ₹25,000, Petty Cash = ₹1,200]
Question:- 16. XYZ Company is having its Branch at Kolkata. Goods are invoiced to the branch at 20% profit on
sale. Branch has been instructed to send all cash daily to head office. All expenses are paid by head office
except petty expenses which are met by the Branch Manager. From the following particulars prepare branch
account in the books of Head Office.
Stock on 1st April 2010 30,000 Discount allowed to debtors 160
(Invoice price)
Sundry Debtors on 1stApril, 2010 18,000 Expenses paid by head office :
Cash in hand as on 1st April, 2010 800 Rent 1,800
Salary 3,200
Office furniture on 1st April, 2010 3,000 Stationery & Printing 800
Goods invoiced from the Petty exp. Paid by the branch 600
head office (invoice price) 1,60,000 Depreciation to be
Goods return to Head office 2,000 provided on branch
Goods return by debtors 960 furniture at 10% p.a.
Cash received from debtors 60,000
Cash Sales 1,00,000 Stock on 31st March,
Credit sales 60,000 2011 (at invoice price) 28,000
( CA-IPCC- May 2011)

Answer: Kolkata Branch Account
Particulars Amt. (₹) Particulars Amt. (₹)

To Balance b/d By Stock reserve (opening) 6,000
Stock 30,000 By Remittances:
Debtors 18,000 Cash Sales 1,00,000
Cash in hand 800 Cash from Debtors 60,000 1,60,000
Furniture 3,000 By Goods sent to branch (loading) 32,000
To Goods sent to branch 1,60,000 By Goods returned by
To Goods returned by 400 Branch (Return to H.O.) 2,000
branch (loading) By Balance c/d
Stock 28,000
To Bank (expenses Debtors 16,880
Paid by H.O.) Cash (800 - 600) 200
Rent 1,800 Furniture (3,000 - 300) 2,700
Salary 3,200
Stationary &
Printing 800 5,800
To Stock reserve (closing) 5,600
To Profit transferred to
General Profit & Loss A/c 24,180
247780 247780
Working Note Debtors Account
To Balance b/d 18,000 By Cash account 60,000

To Sales account (credit) 60,000 By Sales return account 960
By Discount allowed 160
account
By Balance c/d 16,880
78,000 78,000
Stock and debtor System

Question 17. H.O. sends goods to its branch at cost + 25%. From the following information prepare necessary
accounts under stock and debtor system.
Opening balance at Branch
Furniture 50,000
Stock at invoice price 40,000
Debtors 60,000
Goods sent to Branch at invoice price 2,00,000
Cash sales 60,000
Credit sales 1,20,000
Cash collected from debtors 1,35,000
Bad debts 2,000
Expenses paid by Branch 4,000
Expenses paid by HO 3,000
Charge deprecation @ 10% on furniture
Question:18 (Concepts of abnormal loss) Prepare Branch stock Account, Branch adjustment account and
Branch profit & loss account from following information H.O sends goods to its Branch at 25% profit on cost
Opening stock at Branch (I.P) 2,00,000
Sales (Cash basis) 4,80,000

Goods Lost by fire(I.P) 12,000

Branch expenses 6,500
Goods sent to branch 5,00,000
Question:19 (Normal Loss) Assume in previous Question goods were lost due to spoilage (normal Loss).
Prepare necessary accounts.
Question:20 Delhi head office supplied goods to its branch at Kanpur at invoice price which is cost plus 50%.
Branch strictly sells at invoice price only. All cash received by the branch is remitted to Delhi and all branch
expenses are paid by the head office. From the following particulars relating to Kanpur branch for the year
2016, prepare, Branch Stock Account, Branch Debtors account, Branch Expenses Account and Branch
Adjustment Account in the books of the head office so as to find out the gross profit and net profit made by
the branch:
Stock with Branch on 1.1.2016 (at invoice price) 60,000

Branch Debtors on 1.1.2016 12,000
Petty cash balance 1.1.2016 100
Goods received from Head Office (at invoice price) 1,86,000
Goods returned to Head Office 13,000
Credit Sales less Returns 86,000
Discount allowed to Debtors 2,400
Expenses (cash paid by Head Office)

Rent 2,400
Salaries 24,000
Petty Cash 1,000 27,400
Cash Sales 1,04,000
Stock with Branch on 31.12.2016 54,000
(at invoice price)
Petty cash balance on 31.12.2016 320
[Ans. Surplus -₹11,000; Gross Profit = ₹63.334; Net Profit = ₹41,087].
Question:21(Local Purchases by Branch) Aakash established a retail business in Delhi several years ago and
has since opened branch shops at Mumbai, Calcutta and chennai. All the purchasing and administration is
done at the Head Office. Branches are also allowed to purchase locally in special circumstances. Branches sell
both for cash and credit terms, but all invoices for credit sales are sent from Delhi and payments from credit
customers received there. The branches are expected to achieve a profit of 50% on cost price. The following
information relates to the Mumbai branch for the first six months of 2016:
₹
Opening stock of goods at branch (Cost to H.O.) 28,000
Opening Debtors 9,000
Goods received by Branch at selling price 1,80,000
Credit Sales 60,000
Cash sales 1,18,000
Transfer from other branches to Mumbai
Branch at selling price 12,000
Transfer to other Branches from Mumbai at selling price 21,000
Goods returned to H.O. at selling price 6,000
Cash from Debtors received at H.O. 53,000
. Bad debts written off 2,000
Goods returned by credit customers to Branch 2,400
Goods returned by credit customers to H.O. 1,200
Goods purchased by Bombay Branch
from local suppliers (cost) 15,000
Expenses at the Branch 7,500

Closing stock at Branch:

From H.O. at selling price 45,000
From local purchases 3,000
(i) Goods amounting to ₹6,000 at cost to H.O. were in transit.
(ii) Branch had on 1 January,2016 furniture and other equipment at a book value of ₹7,500. Depreciation at
10% p.a. is to be provided on this item.
(iii) Goods purchased locally were sold at 25% profit on sales price.
Prepare : (i) Branch Stock Account; (ii) Branch Debtors Account and; (iii) Mumbai Branch
Account.(iv) branch adjustment account [Ans. Profit = ₹45,325].
Question:22 (Return by Customers Direct to H.O. at List Price) Kali Baba of Karol Bagh, Delhi invoices goods to its
Mumbai Branch at 20% less than the list price which is cost plus 100 percent with instructions that cash sales
were to be made at invoice price and credit sales at list price. From the following particulars available from
Mumbai Branch, prepare Branch Stock A/c, Branch Debtors A/c. and Branch Account to reveal the profit for
the year ending on 31st December 2011.
Stock on 1st January 2011 at invoice Price 18,000

Debtors on (1-1-2011) 10,000
Personal Computer at Branch 50,000
Goods received from H.O. at Invoice Price 1,80,000
Cash Sales 82,000
Credit Sales 1,20,000
Goods in transit on 31st Dec 2011 10,000
Cash sent to Branch for expenses 32,000
Actual expenses at Branch 30,000
Stock at the end at Invoice Price 16,000
Bad Debts written off 400
Goods returned by customers direct to
Head Office at list price 1,500
Debtors at the end 8,100
Depreciate Computers by 20% p.a.
[Ans.: Shortage = ₹4,000; Cash Received from Debtors = ₹1,20,000;Profit at the Branch = ₹47,100].
Question:23(Where Branch Sells at Price Higher Than Invoice Price)Smart Trading Ltd. with its head office at
Mumbai, invoiced goods to its branch at Noida city at 20% less than the List Price which is cost plus 100% with
general instructions that cash sales were to be made at invoice price and credit sales at list price. From the
following particulars, prepare Ledger Accounts under stock and Debtor system:
Opening Stock (at invoice price) 12,000 Allowances to customer 1,800

Opening Debtors 10,000 Exp. Paid by H.O.
Goods received from H.O. 1,60,000 Salaries 21,000
Sales: Misc. 17,000 38,000
Cash 44,800 Closing Debtors ?
Credit 1,21,375 1,66,175 Closing Stock (at IP) 28,700
Cash received from customers 91,700 Remittances to H.O. 1,36,500
Bad Debts reported 9,000
[Ans.: Gross Profit = ₹77,487; N. Profit = ₹27,812].
Question:24(Abnormal Loss of Stock)Bombay Traders Ltd. sends goods to its Madras Branch at cost plus 25%.
The following particulars are available in respect of the Branch for the year ended 31 st March 2016:
Opening Stock at Branch (at cost to Branch) 80,000

Goods sent to Branch at invoice price 12,00,000

Loss-in-transit at invoice price 15,000

Pilferage at invoice price 6,000
Sales 12,19,000
Expenses 60,000
Closing stock at Branch (at cost to Branch) 40,000
Recovered from insurance Co. against Loss-in-transit 10,000
Show ledger accounts in the head office books for
a) Branch Stock Account
b) Goods Sent to Branch Account
c) Branch Adjustment Account
d) Branch Profit & Loss Account.
[CA Nov. 1988,ICWA-INTER 2010]
Final Account Methods

Question:25 (Goods Sent by Head Office at Cost) Sonika Electronics Limited with its Head Office in Kanpur
operates a retail branch at Delhi. All purchases are made by the head office. Goods are supplied to branch at
cost only. All the branch expenses are paid by the Head Office directly with the exception of petty expenses
which are paid by branch manager out of petty cash maintained for the purpose. You are given the following
particulars relating to Delhi branch for the year ended 31st March 2001:
Balances as on 1st April'2000 Goods returned by Branch 3,500

Stock at Branch 15,900 Cash sent to Branch for expenses:
Branch Debtors 16,900 Salary 11,900
Petty Cash 110 Petty Cash 2,600
Total Sales at Branch 73,800 Rent 3,900
(including ₹20,200 for Petty Cash (as on 31.3.2001) 85
Cash Sales) Stock (as on 31.3.2001) 18,900
Goods Sent to Branch 45,200
during the year
Prepare a Branch Trading and Profit and Loss Account and Delhi Branch Account in the books of Head Office.
[Ans.: Gross Profit = 35,100; Net Profit = ₹16,675].
Question:26(Normal/Abnormal Loss & Trade Discount). A Delhi merchant has a branch at Mumbai to
which he charges the goods at cost plus 25%. From the following particulars, determine profit under final
Account system:-
Opening Stock (at IP) 75,000 Cartage and freight 18,000
Goods Sent to B.O. 2,30,000 (IP) Rent & Taxes 8,000
Goods returned by B.O. 11,250 (IP) Insurance 1,200
Cash Sales 98,500 Salaries Paid 19,000
Credit Sales 1,95,000 Salaries owing 300
[Trade Discount allowed Rs.3,000] Bad Debts 2,000
Normal Loss of Stock 1,000 (at IP) Depreciation 3,500
Shortage (Abnormal) 5,000 (at IP) Advertisement 8,250
Closing Stock at IP 35,625
[Ans.: Gross Profit = ₹73,000; Net Profit = 26,750].
Question:27(Miscellaneous Income Retained by Branch) A Delhi merchant has a branch at Madras to which
he charges the goods at cost plus 25%. The Madras Branch keeps its own sales ledger and transmits all cash
received from the head office every day. All expenses are paid from the Head Office. The transactions for the
branch were as follows:

Stock 1.1.2006 20,000

Debtors 1.1.2006 200
Petty cash 200
Cash sales 5,200
Goods sent to branch 35,000
Collections from ledger accounts 38,000
Goods returned to head office 500
Bad debts 400
Allowances to customers 350
Returns inwards 750
Cheques sent to branch:
Rent 1,000
Wages and salaries 2,000
Stock (31.12.2006) 25,000
Debtors 3,500
Petty cash (including Miscellaneous
income ₹50 not remitted on 31.12.2006) 150
Prepare the Branch Trading and Profit and Loss Account for the year ending December 31, 2006 and Branch
Account in the books of Head Office. Also verify the answer under Stock &Debtor System.
[Ans.: Gross Profit = ₹21,650; N. Profit = 19.850; Branch A/c. Balance =₹23,650].
Question:28(Provision for Discount for Prompt Payment) M/s. Bright & Co., with its head office in Madras,
invoiced goods to its branch at Bombay, at 20% less than the catalogue price which is cost plus 50%, with
instructions that cash sales were to be made at invoice price and credit sales at catalogue price. Discount on
credit sale at 15% on prompt payment will be allowed. From the following particulars available from the
branch,Prepare the branch trading and profit and loss account for the year ended 31 st March, 2006 in the head
office books, so as to show the actual profit or loss of the branch for the year 2005-06:
Stock 1-4-2005 12,000
Goods received from head office (invoice price) 1,32,000

Debtors on 1-4-2005 10,000
Sales (cash) 46,000
Sales (credit) 1,00,000
Cash realized from debtors 85,635
Discount allowed to debtors 13,365
Expenses at the branch 6,000
Remittance to head office 1,20,000
Debtors on 31 -3-2006 11,000
Cash in hand on 31-3-2006 5,635
Stock on 31-3-2006 (invoice price) 15,000
It was reported that a part of stock at the branch was lost by fire during the year whose value is to be
ascertained; and provision should be made for discount to be allowed to debtors as on 31 st March,2006,on the
basis of the year's trend of prompt payment. [C.A. (Inter) Nov. 1992 MODIFIED]
[Ans.: Cost of stock lost by fire ₹ 2,500; Provision for discount on debtors = ₹1485: Gross Profit ₹41,000; Net
Profit ₹17,650].
Question:29. X Ltd. Bombay, started on 1st January, 2011 has two branches in Kanpur and Lucknow. All goods
sold at the Branches are received from the head office invoiced at cost plus 25 percent. All expenses relating to
Branches are paid by the Head Office. Each Branch has its own Sales Ledger and sends weekly statements. All
cash collections are remitted daily to Head Office by the Branches. The following particulars relating to the
year ended 31st December 2011 have been extracted from the weekly statements sent by the branches:

Kanpur Lucknow
Credit Sales 1,25,200 1,10,000
Cash Sales 78,600 85,200
Sales Returns 2,300 1,200
Sundry Debtors 34,500 23,600
Rent and Rates 3,200 4,500
Bad Debts 6,000 --
Salaries 16,000 18,000
General Expenses 2,600 1,500
Goods received from H.O. 1,50,000 1,25,000
Advertisement 7,500 5,200
Stock on 31st December, 2011 45,000 35,000
You are required to prepare the Branch Accounts as they would appear in the books of the Head Office,
showing the Profit and Loss for the period and the Trading and Profit and Loss Account separately for each
Branch. ( ICWA-INTER 12 MARKS)
WHOLE SALE BRANCH
Question:30. A head Office send goods to its branch at 20% less than the list price. Goods are sold to
customers at cost plus 100%. From the following particulars ascertain the profit made at the Head office and
the branch on wholesale basis:
Head Office (₹) Branch (₹)
Purchases 20,00,000
Goods sent to Branch (invoice price) 8,00,000
Sales 17,00,000 8,00,000
Question:31. A Head Office sends goods to its branch at 20% less than list price i.e. catalogue price. Goods are
sold to customers at cost plus 100%. From the following particulars, ascertain the profit made at the head
office and the branch on the wholesale basis for the year ended 31 st December, 2002:
HEAD OFFICE (₹) BRANCH (₹)

Opening Stock at its cost 1,69,500 40,000
Purchases 5,10,000
Goods sent to Branch (at Invoice Price) 4,80,000
Sales (at list price) 3,40,800 5,97,500
Expenses 21,000 4,500
Assume that the head office sells goods to customers at list price.
[Ans. G. P. = ₹3,50,400 (H.O.), ₹1,19,500 (B.O.) Net Profit = Rs. 3,28,650 (H.O.), ₹1,15,000 (B.O.)].
Question:32 IOCM Ltd with their Head office at Calcutta, invoiced goods to their Mumbai Branch at invoice
price. The invoice price is 20% less than the list price, which is cost plus 100% with instruction that sales are
made at list price. From the following particulars ascertain the profit earned by the Head Office and Branch:
Calcutta H.O. Mumbai Branch

Opening Stock 40,000 32,000
Purchases 2,00,000
Goods sent to Branch (cost to H.O.) 62,500
Goods received from H.O. (invoice price) - 96,000
Sales (List price) 1,70,000 80,000
Trade Expenses 14,000 8,000
Stock at Head office are valued at cost price but those of Branch are valued at invoice price.
[Ans.:Net Profit = H.O. = ₹ 95,000 and Branch = ₹ 8,000].

Question:33 Bata Limited with its head office at Delhi has a branch at Punjab. The company supplied goods to
its branch at selling price less 20%. The company as well as branch sells goods to customers at a profit of 100%
on cost. The company also sells goods to their approved stockiest at the same price at which they are selling to
their branch at Punjab. From the following particulars, prepare Trading Account of the head office and of the
branch for the second year of their business and show the provisions for unrealized profits on stock at the
branch supplied by the head office.
Head Office Branch

Opening Stock 82,000 4,000
Purchases during the year 3,10,000 -
Goods Sent to the Branch 48,000
Goods received from the H.O. - 48,000
Goods Sold to approved stockiest 35,000 -
Goods Sold to Customers. 4,20,000 42,000
[Ans.: H.O. - G.P. ₹2,41,125; N. P. ₹2,35,725; Branch G. P. ₹8,400].
Question:34. New Textiles Limited operates a number of retail shops to which goods are invoiced at
wholesale price which is cost plus 20%. Shops sell the goods at the list price which is wholesale price plus 10%.
From the following particulars ascertain the profit or loss for 2002 at Shop No. 143:(Study Material)
Stock at shop on January 1, 2002 15,000

Goods invoiced to shop during 2002 1,40,000
Sale at the shop during the year 1,54,770
Goods destroyed by accident (retail value) 660
Expenses at the shop 7,200
Solution:
Cost Price = 100 Invoice Price = 120 Sales Price = 132
Shop Trading Account
To Opening stock 15,000 By Sales 1,54,770
To Goods received from H.O. 1,40,000 By Loss 600
To Gross profit 14,070 By Closing Stock 13,700
1,69,070 1,69,070
Shop P&L Account

To Expenses 7,200 By Gross Profit 14,070
To Loss by fire 600
To Net profit 6,270
14,070 14,070
Question:35. Ganga Ltd. having head office at Mumbai has a branch at Nagpur. The head office does
wholesale trade only at cost plus 80%. The goods are sent to branch at the wholesale price viz., cost plus 80%.
The branch at Nagpur is wholly engaged in retail trade and the goods are sold at cost to H.O. plus
100%.Following details are furnished for the year ended 31stMarch, 2009:
Head Office Branch

Opening stock (as on 1.4.2008) 2,25,000 —
Purchases 25,50,000 —
Goods sent to branch (Cost to H.O. plus 80%) 9,54,000 —
Sales 27,81,000 9,50,000
Office expenses 90,000 8,500
Selling expenses 72,000 6,300
Staff salary 65,000 12,000

You are required to prepare Trading and Profit and Loss Account of the head office and branch for the year
ended 31 March, 2009.
Solution: Trading and Profit and Loss A/c
Head office Branch Head office Branch

Rs. Rs. Rs. Rs.
To Opening stock 2,25,000 — By Sales 27,81,000 9,50,000
To Purchases 25,50,000 — By Goods sent to —
To Goods received branch 9,54,000
from head office — 9,54,000 By Closing stock
To Gross profit c/d 16,60,000 95,000 (W.N.I & 2) 7,00,000 99,000
44,35,000 10,49,000 44,35,000 10,49,000
To Office expenses 90,000 8,500 By Gross profit b/d 16,60,000 95,000
To Selling expenses 72,000 6,300
To Staff salaries 65,000 12,000
To Branch Stock Reserve (W.N.3) 44,000 -
To Net Profit 13,89,000 68,200
16,60,000 95,000 16,60,000 95,000
Working Notes:
Calculation of closing stock of head office: Rs.
Opening Stock of head office 2,25,000
Goods purchased by head office 25,50,000
27,75,000
Less: Cost of goods sold [37,35,000* x 100/180] 20,75,000 7,00,000
Calculation of closing stock of branch: Rs.
Goods received from head office [At invoice value] 9,54,000
Less: Invoice value of goods sold [9,50,000 x 180/200] 8,55,000
99,000
Calculation of unrealized profit in branch stock:
Branch stock Rs. 99,000
Profit included 80% of Cost
Hence, unrealized profit would be = Rs. 99,000 x 80/180 = Rs. 44,000
MISC.QUESTIONS
Question:36. Sellwell Lid. has two branches in Cochin and Bangalore. During the year ended 31 March, 1984,
goods have been invoiced to Cochin Branch at 20% above cost and to the Bangalore Branch at 25% above cost.
The branches do not maintain complete books of accounts but the following figures available for the year
ended 31 March, 1984:
Cochin Bangalore
Opening Stock at Invoice Price 10,000 10,000
Goods sent to Branch at Cost 50,000 40,000
Amount remitted by Branch 80,000 80,000
Amount remitted from H.O. 15,000 15,000
Goods returned by Branch at Invoice Price 3,000 _
Cash as on 1.4.1983 2,000 1,000
Cash as on 31.3.1984 1,000 500
Goods retuned by Customers at Branch at Selling Price 5,000 4,000
Expenses at Branch in cash 9,000 3,000
All sales at the branches are for cash. During the year, Cochin Branch purchased fixed assets worth ₹4,000 and
this amount is included in the figure of branch expenses. Cochin Branch transferred to the Bangalore Branch
stock costing ₹5,000 during the year. The Bangalore Branch remitted ₹2,000 to the Cochin Branch also during
the year. There was a closing stock of ₹24,000 at invoice price at the Cochin Branch. There was no closing
stock at the Bangalore Branch. Prepare Branch Stock Accounts, Branch Stock Adjustment Accounts, Goods

sent to Branch Accounts, Branch Cash Accounts and Branch Profit and Loss Accounts in the Head Office books
ignoring depreciation.
[Ans.: G. Profit = ₹11834 (Cochin) ₹13,900 (Bangalore) Net Profit = ₹35,167 (Cochin), ₹13,500 (Bangalore)]
Question:37(Closing Stock to be Ascertained) From the following particulars, prepare Branch A/c showing the
profit or loss of the Branch:
Opening Stock at Branch 82,000

Opening furniture at Branch 13,000
Goods sent to Branch 1,50,000
Sales (Cash) 2,37,500
Expenses:
Rent 5,480
Salaries 9,500
Other Misc. Expenses 3,500
Closing Stock could not be ascertained, but it is known that the branch usually sells at cost plus 25%. The
Branch manager is entitled to a commission of 5 percent on the profit of the Branch after charging such
commission. Depreciate furniture @ 10% p.a. Ascertain closing stock at branch, commission due to manager
and profit earned by the branch.
[Ans. Closing Stock = Rs.42,000; Manager's Commission — 1,320; N. P. (after Commission) -26,400].
Question:38(Determination of G. P. Margin) A business has three branches at Coimbatore, Trivandrum and

Bangalore. The Head Office at Madras purchases goods and sends them to branches, to be sold at a uniform
percentage of profit on cost. The following particulars are made available to you to enable you to prepare a
combined Trading Account for the year ended 31stMarch, 1992.
Madras Coimbatore Trivandrum Bangalore

Stock on 1st April, 1991 54,000 16,000 12,500 10,000
Purchases in the year 2,74,000 -
Sales - 1,80,000 1,20,000 1,00,000
Stock on 31st March, 1992 28,000 6,000 5,000 2,500
Branch Accounts on 1stApril, 1991:
Coimbatore 15,000
Trivandrum 32,000
Bangalore 4,000
Remittances from branches 3,20,000 1,50,000 1,00,000 70,000
Madras Office invoices goods to the branches at fixed sales prices but maintains branch accounts in its ledgers
at cost price. Show Branch Accounts in Madras Head Office Books. [C. A. (Inter) May 1992]
Question:39 IOCM who carried on a retail business opened a branch X on January 1st 2007 where all sales were
on credit basis. All goods required by the branch were supplied from the Head Office and were invoiced to the
branch at 10% above cost. The following were the transactions:
Jan. 07 Feb. 07 Mar. 07

Goods sent to Branch (Purchase Price) 40,000 50,000 60,000
Sales as shown by the branch
(Monthly report) 38,000 42,000 55,000
Cash received from Debtors
and remitted to H.O. 20,000 51,000 35,000
Returns to H.O. (Invoice price at Branch) 1,200 600 2,400

The Stock of goods held by the branch on March 31, 2007 amounted to Rs.53,400 at invoice price to the
Branch. Record these transactions in the Head Office books, showing balances as on 31 st March 2007 and the
branch gross profit for the three months ended on that day. All working should form part of your answers.
[ C.A.(Inter) May 1987] [Ans. Profit to General P/LA/c. = Rs.37,363]
Question:40 Rahul Limited operates a number of retail outlets to which goods are invoiced at wholesale price
which is cost plus 25%. These outlets sell the goods at retail price which is wholesale price plus 20%. Following
is the information regarding one of the outlets for the year ended 31.3.97:
Stock at the outlet (1-4-1996) 30,000
Goods invoiced to the outlet during the year 3,24,000
Gross Profit made by the branch 60,000
Goods lost by fire ?
Expenses of the outlet for the year 20,000
Stock at the outlet (31 -3-1997) 36,000
You are required to prepare the following account in the books of Rahul Limited for the year ended 31.3.97:
(a) Outlet Stock Account

(b) Outlet Profit & Loss Account
(c) Stock Reserve Account [C.A. (Inter) May 1997(10 marks)
Answer. Outlet Stock Account

To Balance b/d 30,000 By Sales 3,60,000
To Good sent to outlet 3,24,000 By Goods Lost by fire 18,000
To Gross Profit c/d 60,000 By Balance c/d 36,000
4,14,000 4,14,000
Outlet Profit & Loss Account
To Expenses 20,000 By Gross Profit c/d 60,000

To Good lost by fire 18,000
To Profit Transferred 22,000
60,000 60,000
Stock Reserve Account

To H.O.P&L A/c Transfer 6,000 By Balance b/d 6,000
To Balance c/d 7,200 By H.O. P&L A/c 7,200
(Stock Rs. Required)
13,200 13,200
Working Notes:
1. Whole sale Price: 100+25=125

Retail Price 125+20%=150
Gross Profit at the outlet wholesale Price – Retail Price (150 + 125) =25
Retail Sales Value = 60,000 X 150/25 = Rs. 3,60,000

2. Goods lost by fire:

Opening Stock + Goods Sent + Gross Price – Sales – Closing Stock
30,000 + 3,24,000 + 60,000 – 3,60,000 – 36,000 = Rs. 18,000
3. Stock Reserve:
Opening Stock = 30,000 X 25/125 = Rs. 6,000
Closing Stock = 36,000 X 25/125 = Rs. 7,200
Question:41 (Where Accounts are Given)From the following information, prepare a Memorandum trading and
profit & loss account of branches and also show the branches account as it would appear in the head office
books at the end of the year
Branches Cash A/c
Jan. 1 To Balance b/d 7,500 Dec. 31 By Petty Cash 3,000

Dec.31 To Receipts from Debtors 37,500 By Bank 62,000
To Cash Sales 25,000 By Balance 5,000
70,000 70,000
Branches' Debtors Account
Jan. 1 To Balance b/d 3,000 Dec.31 By Cash 37,500

Dec. To Sales 45,000 By Discount Allowed 1,000
By Bad Debt 8,000
By Balance c/d 1500
48,000 48,000
Branch Account
Jan. 1 To Balance b/d Jan. 1 By Balance b/d

Cash 7,500 outstanding expenses 1000
Debtors 3,000
Furniture 7,500 Dec. 31By Bank 62,000
Stock 10,000 28,000 By Balance c/d 20,500
During To Goods Transferred 45,000
2000 To Furniture Purchased 2,500
To Sundry Expenses 8,000
83,500 83,500
Closing Stock at branches was ₹4,000 and expenses outstanding were ₹900. Depreciation at 10% of
the book value has to be provided on furniture. (C.A. (Inter), ICWA-INTER)
Question:42 (Memorandum Column Method) A company with its Head Office at Calcutta has a Branch at New
Delhi. Goods are invoiced to the branch at cost plus 33 1/3 % which is the selling price. The following
information is given in respect of the branch for the year ended 31st March, 1998:
Goods sent to branch (invoice value) 4,80,000

Stock at Branch (1-4-1997) at selling price) 24,000
Cash Sales 1,80,000
Returns from Customers 6,000
Branch expenses paid for cash 53,500
Branch Debtor's balance (1-4-97) 30,000
Discounts allowed 1,000
Bad debts 1,500
Stock at Branch (31.3.1998) at selling price 48,000
Branch Debtor's balance (31 -3-1998) 36,500
Collections from debtors 2,70,000
Branch Debtor's cheques returned dishonoured 5,000

You are required to prepare the Branch Stock Account by Memorandum Column method to ascertain shortage/surplus
and also ascertain the Net Profit made by the Branch. [Ans.: Gross Profit = ₹1,13,500; Net Profit = ₹56,000]
Answer: BRANCH STOCK A/C
Selling Cost Price Memo (selling Cost Price

Price) Price)
Rs. Rs. Rs. Rs.
To Balance b/d 24,000 18,000 By Branch Bank 1,80,000 1,80,000
To Goods sent to branches 4,80,000 3,60,000 By Branch Debtors 2.80,000 2,80,000
To Branch Debtors (return) 6,000 6,000 By stock discrepancy
- shortage
To Branch Profit & Loss A/c 1,13,500 2,000 1,500
By Balance c/d 48,000 36,000
5,10,000 4,97,500 5,10,000 4,97,500

Branch Debtors A/c
To Balance b/d 30,000 By Return from Customers 6,000
To Bank-Cheques Dishonored 5,000 By Discounts 1,000
To Credit Sales 2,80,000 By Bad debts 1,500
By Cash Received 2.70,000
3,15,000 3,15,000
Branch Profit & Loss A/c
To Branch debtors A/c By Branch stock A/c 1,13,500

- Discount 1,000 -Gross Profit
- Bad debtors 1,500 2,500
To Branch Bank-expenses 53,500
To Branch Stock –Shortage 1,500
To Net Profit transferred to
General Profit & Loss A/c 56,000
1,13,500 1,13,500
Question 43. Following is the information of the Jammu branch of Best Ltd., New Delhi for the year ending
31st March, 2010 from the following:
(1) Goods are invoiced to the branch at cost plus 20%.

(2) The sale price is cost plus 50%.
(3) Other information’s:
Stock as on 01.04.2009 2,20,000
Goods sent during the year 11,00,000
Sales during the year 12,00,000
Expenses incurred at the branch 45,000
Ascertain
(i) The profit earned by the branch during the year
(ii) Branch stock reserve in respect of unrealized profit.

Answer : Calculation of profit earned by the branch

Trading Account
To Opening stock 2,20,000 By Sales 12,00,000
To Goods received by 11,00,000 By Closing stock 3,60,000
Head office (Refer W.N.)
To Expenses 45,000
15,60,000 15,60,000
(ii) Stock reserve in respect of unrealized profit

= Rs. 3,60,000 x (20/120) = Rs. 60,000
Working Note:
Cost Price 100
Invoice Price 120
Sale Price 150
Calculation of closing stock at invoice price
Opening stock at invoice price 2,20,000
Goods received during the year at invoice price 11,00,000
13,20,000
Less : Cost of goods sold at invoice price (9,60,000) [12,00,000 x (120/150)]
Closing stock 3,60,000
Note : It is assumed that all figures given in the questions is at invoice price
Question 44: Arnold of Delhi, trades in Ghee and Oil. It has a branch at Lucknow. He dispatches 25 tins of Oil @ Rs,
1,000 per tin and 15 tins of Ghee @ Rs. 1,500 per tin on 1st of every month. The branch incurs some expenditure
which is met out of its collections; this is in additions to expenditure directly paid by Head Office. Following are the
other details:
Delhi Lucknow
Rs. Rs.
Purchase Ghee 14,75,000 -
Oil 29,32,000 -
Direct expenses 3,83,275 -
Expenses paid by H.O. - 14,250
Sales Ghee 18,46,350 3,42,750
Oil 27,41,250 3,15,730
Collection during the year (including Cash Sales) - 6,47,330
Remittance by Branch to Head Office
- 6,13,250
(Delhi)
Balance as on: 1-1-2011 31-12-2011
Stock : Ghee 1,50,000 3,12,500
Oil 3,50,000 4,17,250
Debtors 7,32,750 -
Cash in hand 70,520 55,250
Furniture & Fittings 21,500 19,350
Plant/ Machinery 3,07,250 7,73,500
(Lucknow)
Balance as on: 1-1-2011 31-12-2011
Stock : Ghee 17,000 13,250
Oil 27,000 44,750
Debtors 75,750 ?
Cash in hand 7,540 12,350
Furniture & Fittings 6,250 5,625
Plant/ Machinery - -

Addition to Plant/Machinery on 1-1-2011 Rs. 6,02,750.
Rate of Depreciation: Furniture/Fittings @ 10% and Plant /Machinery @ 15% (already adjusted in the above
figures).
The Branch Manager is entitled to 10% commission after charging such commission whereas, the General
Manager is entitled to 10% commission on overall company profits after charging such commission. General
Manager is also entitled to a salary of Rs. 2,000 p.m. General expenses incurred by H.O. Rs. 24,000.
Prepare Branch Account in the head office books and also prepare the Arnold’s Trading and Profit and Loss A/c
(excluding branch transactions).

INDEPENDENT BRANCH ACCOUNT
Question: 1 The head office of a business and its branch keep their own books and each prepares its own
profit and loss Account. The following are the balances appearing in the two sets of book as on 31 st
December.1994 after ascertainment of profit and after making all adjustments except those referred to below:
Head office Branch

Dr Cr Dr Cr
Capital 1,00,000
Fixed assets 36,000 16,000
Stock 34,200 10,740
Debtors and creditors 7,820 3,960 4,840 1,920
Cash 10,740 1,420
Profit and loss account 14,660 3,060
Branch office account 29,860
Head office account 28,020
1,18,620 1,18,620 33,000 33,000

st
Set out the balance sheet of the business as on 31 December,1994 and the journal entries necessary [in both
sets of books] to record the adjustments dealing with the following:
on 31st December,1994 the branch had sent a cheque of for ₹1,000 to the head office, not received by head-
office nor credited to Branch Account till 3rd January,1995.
(b) Goods valued at ₹840 had been forwarded by the head office to the branch and invoiced on 30 th December
1994 ,but were not received by the branch nor dealt with in branch’s books till 11 th January ,1995.
Question: 2 Sunil Enterprise operates a branch as well as a head office .the following Trial balance has been
extracted from the books of the concern as on 31st march, 2012;
HEAD OFFICE BRANCH OFFICE
Dr Cr Dr Cr
Capital account __ 4,71,000 __ __

Drawings 84,000 __ __ __
Plant at cost 2,40,000 __ 1,20,000 __
Accumulated depreciation on plant __ 1,20,000 __ 60,000
Goods to branch/from head office __ 7,92,000 7,20,000 __
Head office current account __ __ __ 1,56,000
Branch current account 2,58,000 __ __ __
Branch stock provision (1-4-2011) __ 6,000 __ __
Operating expenses 30,000 __ 15,000 __
Purchases 22,92,000 __ __ __
Rent and rates 45,000 __ 18,000 __
Sales __ 21,00,000 __ 9,00,000
Stocks (1-4-2011) 1,80,000 __ 36,000 __
Debtors 90,000 __ 75,000 __
Creditor __ 1,35,000 __ __
Salaries and wages 3,60,000 __ 1,20,000 __
Cash and bank 45,000 __ 12,000 __
36,24,000 36,24,000 11,16,000 11,16,000

(a) All goods are purchased by the head office. The goods required by the branch are invoiced by head office
to the branch at cost plus 20%.On 31st march, 2012,the head office held stocks which had cost it ₹2,40,000 On
the same date the branch held stocks which had been invoiced to it at ₹54,000.
(b) Fixed assets are to be depreciated at the rate 50% per annum based on the reducing balance method
.There had been no purchase or sale of fixed assets during the year.
(c) Goods of ₹72,000 invoiced by the head office to the branch were in transit on 31st march,2012.
(d) At 31st march,2012, cash ₹30,000 was in transit from the branch to the head office .
(e) The following expenses were outstanding on 31st March,2012;
Head office branch office

Salaries 2,000 1,000
Rent 1,000 2,000
You are required to prepare in columnar form, for (1) the head office , (2) the branch ,and (3) the business as a
whole, the Trading and Profit & Loss Accounts for the year ended 31 st march, 2012. Also, prepare a combined
Balance Sheet as on that date. (CMA-INTER-20 MARKS)
Question:3 The following trial balance is extracted from the books of Nagpur branch of XYZ Ltd as on 31st
March. 1995:
Debits Credits
Stock—opening at invoice price 25,000
Branch debtors and creditors 10,000 3,000
Cash in hand 500
Goods received from H.O. 80,000
Branch expenses 9,000
Branch sales 1,80,000
Current account with head office 58,500
1,83,000 1,83,000
As on that date, closing stocks with branch at invoice price were valued at ₹30,000. There was an amount of
₹18,500 remitted by the branch on 31st March which had not been received by the head office on that date.
The head office had sent goods, costing ₹20,000, to the branch on 29thMarch. These had not been received by
the branch till the closing date.
The head office enters in its books all goods sent to the branch at cost. The branch enters these, in its books,
at invoice price but sells them at an even higher one. At the end of each year, the difference is adjusted by
debiting the branch and crediting the profit and loss account in the books of head office. The proportionate
difference between cost and invoice price was the same at all relevant times.
The credit balance as on 31stMarch 1995, of the branch account in the head office books, was ₹60,000 before
making any of the above adjustments (though the above-mentioned dispatch of goods of ₹20,000, on 29th
March had, of course, been duly debited to the branch account).
Prepare branch profit and loss account and head office profit and loss account (relevant portions only) for the
year ended 31st March, 1995. [C.A. (Inter)
Answer: NAGPUR BRANCH ACCOUNT
₹ ₹
To Profit and loss account 40,000 By Balance b/d 60,000
(balancing figure) By Cash in transit 18,500
To Balance c/d 58,500 By Goods in transit 20,000*
(as per branch books)
98,500 98,000

The balancing figure in the above account represents the loading on goods invoiced to branch during the
year. This is because while the H.O. makes entry for goods sent to the branch at cost, the branch makes the
entry at invoice price and. therefore, the balancing difference in the branch account represents loading.
MEMORANDUM BRANCH PROFIT AND LOSS ACCOUNT

₹ ₹
To Opening stock 25,000 By Branch sales 1,80,000
To Goods received from To Closing stock 30,000
H.O. 80,000
To Branch expenses 9,000
To Net profit 96,000
2,10,000 2,10,000
Head Office PROFIT AND LOSS ACCOUNT (Relevant portion only)
₹ ₹
To Stock reserve @ 50% By Branch account—profit 96,000
—closing stock 15,000 By Loading goods sent to
To Net profit c/d 1,33,500 branch account 40,000
By Stock reserve @ 50%
—opening stock 12,500
1,48,500 1,48,500
The loading on invoice price is 50% and is calculated as follows:
Invoice price of goods sent to branch 80,000
Loading thereon—(see branch account) 40,000
Loading as a % of invoice price 40,000/80,000 x 100 = 50%
Question:4 Anil and Sunil are partners of a business having head office in Delhi and branch at Calcutta. Anil
looks after the Delhi office and Sunil looks after the Calcutta branch. Anil is entitled to 40% of the profits made
at Delhi while Sunil is entitled to 30% of the profits at Calcutta. The balance profits/losses are shared equally.
The following trial balances as on 31st December, 2000 are furnished to you.
Delhi Calcutta
Dr. Cr. Dr. Cr.
₹ ₹ ₹ ₹
Opening stock at cost 30,000 — 40,000 —
Purchases and returns 1,80,000 10,000 2,75,000 15,000
Goods sent to:
Calcutta — 50,000 — —
Delhi — — — 70,000
Goods received from:
Calcutta 65,000 — — —
Delhi — — 48,000 —
Sales and returns 15,000 3,15,000 20,000 3,70,000
Expenses 28,000 — 39,000 —
Customer accounts 64,000 4,000 71,000 3,000
Suppliers accounts 2,000 32,000 1,000 51,000
Bank account 70,000 — — 6,000
Fixed assets opening written
down value 50,000 — 80,000 —
Calcutta branch account — 5,000 — —
Delhi head office account — — 17,000 —
Capital and drawing accounts:
Anil 30,000 83,000 4,000 35,000
Sunil 5,000 40,000 25,000 70,000
5,39,000 5,39,000 6,20,000 6,20,000

You are informed that:
(a) On 30th December, 2000 Delhi head office remitted ₹5,000 by bank draft to Calcutta branch. The
envelope was received by the branch on 2nd January, 2001.
(b) Stock at cost on 31st December, 2000 was worth:

(i) ₹46,000 at Delhi and (ii) ₹54,000 at Calcutta.
(c) Depreciation is to be provided at 10%.
(d) 10% of the cash expenses relating to the head office are to be treated as overheads incurred
on behalf of the branch. You are asked by the partners to prepare:
(1) Trading and Profit and Loss Account for the year ended 31 st December, 2000 for Delhi office and
Calcutta branch in columnar form,
(2) Consolidated Balance Sheet of the firm as on 31st December, 2000, and
(3) Branch and Head office Accounts in respective books. [C.A. Inter]
Answer: TRADING and PROFIT AND LOSS ACCOUNT
Delhi H,O, Calcutta Total Delhi H,O, Calcutta Total

Branch Branch
To Opening stock, at Rs, Rs, Rs, Rs, Rs, Rs,
Cost 30,000 40,000 70,000 By Sales less returns 3,00,000 3,50,000 6,50,000
To Purchases less returns 1,70,000 2,60,000 4,30,000 By Goods sent to
To Goods received from Calcutta 48,000 — —
Calcutta 65,000 — — By Goods sent to
To Goods received from Delhi — 65,000 —
Delhi — 48,000 — By Closing stock, at
To Gross profit c/d 1,31,000 1,26,000 2,57,000 Cost 46,000 54,000 1,00,000
By Goods in transit 2,000 5,000 7,000
3,96,000 4,74,000 7,57,000 3,96,000 4,74,000 7,57,000

To Expenses 28,000 39,000 67,000 By Gross profit b/d 1,31,000 1,26,000 2,57,000
To Delhi H,O, (share By Calcutta branch
of expenses) — 2,800 — (expenses recover-
To Depreciation of able 10% of 28,000) 2,800 — —
fixed assets 5,000 8,000 13,000
To Net profit c/d 1,00,800 76,200 1,77,000
1,26,000
1,33,800 2,57,000 1,33,800 1,26,000 2,57,000
To Share of 'Branch' By Net Profit b/d 1,00,800 76,200 1,77,000
profit to partners:
Anil—40%
of 1,00,800 40,320 — 40,320
Sunil—30%
of 76,200 — 22,860 22,860
To Balance of profit-
shared equally 30,240 26,670 56,910
Anil 30,2 26,670 56,910
Sunil 40
97,230 76,200 1,77,000 1,00,800 76,200 1,77,000

Question:5 Give Journal Entries to rectify or adjust the following in the books of both the Head Office and the
Branch:
(i) Goods costing ₹8,000 purchased by Branch, but payment made by Head office. The Head Office had
debited the amount to its own purchases account.
(ii) Branch paid ₹15,000 as salary to a visiting Head Office official. The Branch had debited the amount to
Salaries account.
(iii) Depreciation ₹25,000 in respect of Branch assets whose accounts are kept in Head Office books
(iv) Expenses ₹35,000 to be charged to the Branch for work done on its behalf by the Head Office.
(v) Goods sent by the Head Office to its Branch ₹20,000, not yet received by the Branch.
Question:6. A Delhi firm has two branches - one at Bombay and another at Calcutta. The branches keep
complete set of books. On 31st March, 1999 Bombay and Calcutta Branches Accounts in Delhi books showed a
debit balance of ₹95,000 and ₹40,000 respectively before taking the following information into account:
(1) Goods valued at ₹8,000 were transferred from Bombay to Calcutta under instruction from Head Office.
(2) Bombay Branch collected ₹3500 from a local customer at the Head office.
(3) Calcutta Branch paid ₹5000 for certain goods purchased by Head office in Calcutta.
(4) ₹12,500 remitted by Bombay Branch to Delhi on 29th March 1999, received in Delhi on 3rd April 1999.
(5) Calcutta Branch received on behalf of the Head office ₹3200 as dividend from a company located at
Calcutta.
(6) For the year 1998-99 Bombay Branch showed a net loss of ₹9000 and Calcutta branch showed a net
profit of ₹15,850.
Pass journal entries to record the above transactions in the books of the Head Office (CA-IPCC 10 MARKS)
Question:7 Following are the Trial Balances of Ravindra Ltd. and its Delhi Branch as on December 31, 1989: -
Head Delhi Head Delhi
Office Branch Office Branch
Stock on 1 January, 1988 45,000 16,400 Creditors 20,300 5,400
Purchases 1,10,000 25,600 Goods sent to Branch 14,400 —
Wages 80,800 13,100 Sales 3,30,200 69,900
Manufacturing Expenses 35,400 6,800 Head Office Account — 28,000
Machinery: Capital in Shares of
Rs. 10 each 2,00,000 —
H.O. 1,00,000 — Discount earned 1,100 300
Branch 50,000 — Purchase Returns 2,500 600
Furniture:
H.O. 5,000 —
Branch 2,000 —
Rent 6,000 3,400
Salaries 32,000 11,000

Debtors 38,000 8,000
General Expenses 18,000 4,000
Goods Received from H.O — 14,400
Cash in Hand & Bank 10,300 1,500
Branch Account 36,000 —
5,68,500 1,04,200 5,68,500 1,04,200
Closing stock at head office was ₹38,700 and at Delhi, ₹28,700. Depreciation is to be allowed at 10% on
machinery and at 15% on furniture. Rent still payable in respect of 1989 is ₹300 (for Branch). ₹8000 sent by
branch but not received by H.O. till the end of year.
Prepare the Trading and Profit and Loss Account in columnar form, and the consolidated Balance Sheet. Also
show the Branch Account.
Question:8 Sri Sundaram commenced business on 1st 1 April, 1992 with head office at Madras and a branch at
Nagpur. Purchases were made exclusively by the head office where the goods were processed before sale.
There was no loss or wastage in processing. Only the processed goods received from head office were handled
by the branch and these were charged thereto at processed cost plus 10%. All sales, whether by head office
or by the branch, were at a uniform gross profit of 25% on cost. Following is the Trial Balance of Sri Sundaram
as on 31st March, 1993:
Head Office
Dr. Cr.
Capital 62,000
Drawings 11,000
Purchases 3,93,900
Cost of Processing 10,100
Sales 2,56,000
Administrative Expenses 27,800
Selling Expenses 10,000
Debtors 61,920
Creditors 1,20,280
Branch Current Account 77,960
Bank Balance 30,400 ________
6,23,080 6,23,080

Branch
Dr. Cr.
Sales 1,64,000
Goods received from Head Office 1,76,000
Administrative Expenses 3,000
Selling Expenses 1,240
Debtors 22,720
Creditors 2,160
H.O. Current Account 52,300
Bank Balance 15,500 ________________
2,18,460 2,18,460
The following further information are also available:
(i) Goods sent by H.O to the branch in March, 93 at ₹8,800 were not received by the branch until April,93.
(ii) A remittance of ₹16,860 from the branch to head office was not received until April, 1993.
(iii) Stock taking at the branch disclosed a shortage of goods of ₹4,000 (at selling value).
(iv) Cost of unprocessed goods at head office on 31stMarch, 1993 was ₹20,000.
Prepare trading and Profit & Loss Account in Columnar form and Balance sheet of the business as a whole as on
31stMarch, 1993. [CA. (Inter) Nov. 1993, ICWA-INTER- 8 TIMES]
Hint: Stock of Head Office = 11,200, Stock of Branch = 28,160

Stock Reserve on closing stock = 28,160 X 10/ 110 = 2,560
Goods in transit = 8,800 X 10/100 = 800 = 33600
[Ans. G. Profit = ₹68,000 (H.O.), ₹19,680 (B.O.), Net Profit = ₹26,840 (H.O) ₹11,920 (B.O), Total of Balance
Sheet = ₹2,12,200]
Question:9 Head Office passes adjustment entry at the end of each month to adjust the position arising out of
inter-branch transactions during the month. From the following inter-branch transactions in January, 2002,
make the entry in the books of Head Office:
(a) Mumbai Branch
(1) Received Goods: ₹6,000 from Calcutta Branch, ₹4,000 from Patna Branch.
(2) Sent Goods to: ₹10,000 to Patna ₹8,000 to Calcutta.
(3) Received B/R: ₹6,000 from Patna.
(4) Sent Acceptance: ₹4,000 to Calcutta, ₹2,000 toPatna.
(b) Chennai Branch (Apart from the above)
(5) Received Goods; ₹10,600 from Calcutta, ₹4,000 from Mumbai.

(6) Cash Sent: ₹2,000 to Calcutta, ₹6,000 to Mumbai.
(c) Calcutta Branch (Apart from the above)
(7) Sent Goods to Patna: ₹6,000

(8) Issued B/P: ₹4,000 to Patna, ₹4,000 cash to Patna. (15 marks) (1996-May )

Question:10 Show adjustment journal entry in the books of Head Office at the end of April, 2003 for
incorporation of inter-branch transactions assuming that only Head Office maintains different branch accounts
in its books.
A) Delhi Branch
1. Received goods from Mumbai - ₹35,000 and ₹15,000 from Kolkata.
2. Sent goods to Chennai - ₹25,000, Kolkata - ₹20,000.
3. Bill Receivable received - ₹20,000 from Chennai.
4. Acceptances sent to - Mumbai - ₹25,000, Kolkata - ₹10,000.
B) Mumbai Branch (apart from the above):
5. Received goods from Kolkata - ₹15,000, Delhi – ₹ 20,000.
6. Cash sent to Delhi - ₹15,000, Kolkata - ₹ 7,000.
C) Chennai Branch (apart from the above):
7. Received goods from Kolkata — ₹ 30,000.
8. Acceptances and Cash sent to Kolkata - ₹ 20,000 and ₹10,000, respectively.
D) Kolkata Branch (apart from the above):
9. Sent goods to Chennai - ₹35,000.
10. Paid cash to Chennai - ₹15,000.
11. Acceptances sent to Chennai - ₹15,000.

All working should form part of the answer. (May 2003) 8 mark
Answer: Journal Entry In the books of H. O.
30th Mumbai Branch Account Dr. 3,000

April, Chennai Branch Account Dr. 70,000
2003 To Delhi Branch Account 15,000
To Kolkata Branch Account 58,000
(Being adjustment entry passed by H. O. in respect of inter branch
transaction for the month of April, 2003)
Question:11 On 31stMarch, 2000 Kanpur Branch submits the following Trial Balance to its Head Office at
Lucknow:
Debit Balances ₹ in lacs

Furniture and Equipment 18
Depreciation on Furniture 2
Salaries 25
Rent 10
Advertising 6
Telephone, Postage and Stationery 3
Sundry Office Expenses 1
Stock on 1st April, 1999 60
Goods Received from Head Office 288
Debtors 20
Cash at bank and in hand 8
Carriage Inwards 7
448
Credit Balances
Outstanding Expenses 3
Goods Returned to Head Office 5
Sales 360
Head Office 80
448

Additional Information: Stock on 31st March, 2000 was valued at ₹ 62 lacs on 29th March, 2000 the Head Office
dispatched goods costing ₹10 lacs to its branch. Branch did not receive these goods before 1st April, 2000. Hence the
figure of goods received from Head Office does not include these goods. Also the head office has charged the
branch ₹1 lac for centralized services for which the branch has not passed the entry. You are required to:
(i) Pass Journal Entries in the books of the Branch to make the necessary adjustments.
(ii) Prepare Final Accounts of the Branch including Balance Sheet, and
(iii) Pass Journal Entries in the books of the Head Office to incorporate the whole of the Branch(CA-16 marks)
Answer (i) Journal Entries in the Books of KANPUR BRANCH (Rs. in lacs.)
Particulars Dr. Cr.

Goods in transit A/c Dr. 10
To Head office A/c 10
(Goods dispatched by head office but not received by branch 1st April 2000)
Expenses A/c before Dr.
1
To Head office A/c 1
(Amount charged by head office for centralised services)
(ii) Trading and Profit & Loss Account of the Branch for the year ended 31st March, 2000
Particulars ₹ in lacs Particulars ₹ in lacs

To Opening Stock 60 By Sales 360
To Goods received from By Closing stock 62
Head office 288
Less: Returns 5 283
7
To
To Carriage Inwards
Gross profit c/d 72
422 422
To Salaries 25 By Gross Profit b/d 72
To Depreciation on furniture 2
To Rent 10
To Advertising 6 .
To Telephone, Postage & Stationery 3
To Sundry office expenses 1
To Head office expenses 1
To Net profit Transferred to H.O. A/c 24
72 72
Liabilities ₹ In Lacs Assets ₹ In Lacs

Head office 80 Furniture & equipment 20
Add: Goods in transit 10 Less: Dep. 2 18
Head office expenses 1 Stock in Hand 62
Net Profit 24 115 Goods in transit 10
Outstanding expenses 3 Debtors 20
8
118 Cash at Bank and in Hand 118

Question: 12 Give Journal Entries in the books of Branch A to rectify or adjust the following.:
(i) Head Office expenses ₹3,500 allocated to the Branch, but not recorded in the Branch Books,
(ii) Depreciation of branch assets, whose accounts are kept by the Head Office not provided for
₹1,500.
(iii) Branch paid ₹2,000 as salary to a H.O. Inspector, but the amount paid has been debated by the
Branch to Salaries account.
(iv) H.O. collected ₹10,000 directly from a customer on behalf of the Branch, but no intimation to this
effect has been received by the Branch.
(v) A remittance of ₹15,000 sent by the Branch has not yet been received by theHead Office,
(vi) Branch A incurred advertisement expenses of ₹3,000 on behalf of Branch B.
Answer: In the Books of Branch A
Date Particulars Dr. (₹ ) CR. (₹ )

Expenses account Dr. 3,500
To Head office account 3,500
(Being the allocated expenditure by the head office recorded in branch
books)
Depreciation account 1,500
To Head office account 1,500
(Being the depreciation provided)
To Salaries account 2,000
(Being the rectification of salary paid on behalf of H.O.)
To Debtors account 10,000
(Being the adjustment of collection from branch debtors)
No entry is passed for the said transaction in the books of Brach ____ ____
Head Office account 3,000
To Cash account 3,000
(Being the expenditure on account of Branch B, recorded in books)
Question: 13. Alpha& Co., having head office in Mumbai has a branch in Nagpur. The branch at Nagpur is an
independent branch maintaining separate books of account. On 31.3.2011, it was found that the goods
dispatched by head office for ₹2,00,000 was received by the branch only to the extent of ₹1,50,000. The
balance goods are in transit. What is the accounting entry to be passed by the branch for recording the goods
in transit, in its books? (CA-May, 2007)
Answer: Nagpur branch must include the inventory in its books as goods in transit.
The following journal entry must be made by the branch:

Goods in transit A/c Dr. 50,000
To Head office A/c 50,000
[Being Goods sent by Head office is still in transit on the closing date]
Question 14.M/s Shah & Co. commenced business on 1.4.2004 with Head Office at Mumbai and a Branch at
Chennai. Purchases were made exclusively by the Head Office, where the goods were processed before sale.
There was no loss or wastage in processing. Only the processed goods received from Head Office were handled
by the Branch. The goods were sent to branch at processed cost plus 10%. All sales, whether by Head Office or
by the Branch, were at uniform gross profit of 25% on their respective cost. Following is the Trial Balance as
on 31.3.2005.

Head Office Branch

Dr. Cr. Dr. Cr.
Capital 3,10,000
Drawings 55,000
Purchases 19,69,500
Cost of processing 50,500
Sales 12,80,000 8,20,000
Administrative expenses 1,39,000 15,000
Selling expenses 50,000 6,200
Debtors 3,09,600 1,13,600
Branch Current account 3,89,800
Creditors 6,01,400 10,800
Bank Balance 1,52,000 77,500
Head Office Current account 2,61,500
Goods received from H.O. 8,80,000
31,15,400 31,15,400 10,92,300 10,92,300
Following further information is provided:
(i) Goods sent by Head Office to the Branch in March, 2005 of ₹44,000 were not received by the Branch till
2.4.2005.
(ii) A remittance of ₹84,300 sent by the Branch to Head Office was also similarly not received upto 31.3.2005.
(iii) Stock taking at the Branch disclosed a shortage of ₹20,000 (at selling price to the branch).
(iv) Cost of unprocessed goods at Head Office on 31.3.2005 was ₹1,00,000.
Prepare Trading and Profit and Loss account in columnar form and Balance Sheet of the business as at 31.3.05
Answer: Trading and Profit and Loss Account
Particulars H.O. Branch Total Particulars H.O. Branch Total
To Purchases 19,69,500 - 19,69,500 By Sales 12,80,000 8,20,000 21,00,000
To Cost of processing 50,500 - 50,500 By Goods sent to Branch 9,24,000 - -
To Goods received By Stock shortage - 16,000 14,545
from H.O. - 8,80,000 - By Goods in transit 44,000
To Gross profit c/d 3,40,000 1,64,000 5,02,545 By Closing stock:
Processed goods 56,000 2,08,000 2,64,000
Unprocessed goods 1,00,000
23,60,000 10,44,000 25,22,545 23,60,000 10,44,000 25,22,545
To Admn. Expenses 1,39,000 15,000 1,54,000 By Gross profit b/d 3,40,000 1,64,000 5,02,545
To Selling Expenses 50,000 6,200 56,200
To Stock shortage - 16,000 14,545
To Stock reserve 22,909 - 22,909
To Net profit 1,28,091 1,26,800 2,54,891
3,40,000 1,64,000 5,02,545 3,40,000 1,64,000 5,02,545

Balance Sheet as at 31st March, 2005

Capital 3,10,000 Debtors
Add: Net profit 2,54,891 H.O. 3,09,600
5,64,891 Branch 1,13,600
Less: Drawings 55,000 5,09,891 Closing stock:
Creditors: Processed goods
H.O. 6,01,400 H.O. 56,000
Branch 10,800 6,12,200 Branch 2,08,000
2,64,000
Less: Stock reserve 18,909 2,45,091
Unprocessed 1,00,000
goods Bank Balance
H.O. 1,52,000
Branch 77,500
Goods in transit 44,000 40,000
Less: Stock reserve 4,000
Cash in transit 84,300
11,22,091 11,22,091
Working Notes: 1. Calculation of closing stock: Stock at Head Office:
Cost of goods processed (19,69,500 + 50,500 – 1,00,000) 19,20,000

Less: Cost of goods sent to Branch
9,24,000 ×100/110 8,40,000
Cost of goods sold 12,80,000 ×100/125 10,24,000 18,64,000
Stock of processed goods with H.O. 56,000
Stock at Branch:
Goods received from H.O. (at invoice price) 8,80,000

Less: Invoice value of goods sold
8,20,000 × 100/125 6,56,000
Invoice value of stock shortage 20,000 x 100/125 16,000 6,72,000
Stock at Branch at invoice price 2,08,000
Less: Stock Reserve 2,08,000 x 10/110 18,909
Stock of processed goods with Branch (at cost) 1,89,091
2. Stock Reserve:
Unrealized profit on Branch stock (2,08,000x10/110) 18,909

Unrealized profit on goods in transit (44,000x10/110 4,000
22,909
Question:-15. Global Limited has a branch which closes its books of account every year on 31 st March. This is
an independent branch which maintains comprehensive books of account for recording their transactions. You
are required to show journal entries in the books of branch on 31 st March, 2011 to rectify or adjust the
following:
(i) Head Office allocates ₹1,35,000 to the branch as head office expenses, which have not yet been
recorded by branch.
(ii) Depreciation of branch fixed assets, whose accounts are kept by head office in its books, not yet
recorded in the branch books, ₹1,15,000.
(iii) Branch paid ₹1,40,000 as salary to an official from head office on visit to branch and debited the
amount to its Salaries Account,
(iv) Head Office collected ₹1,30,000 directly from a branch customer on behalf of the branch, but no
intimation was received earlier by the branch. Now the branch learns about it.
(v) It is learnt that a remittance of ₹1,50,000 sent by the branch has not been Received by head
office till date.

Question:16. The following is the Trial Balance of Malabar Hills Branch as at 30thJune, 2002:
H.O. Account 32,400

Stock on July 1,2001 60,000
Purchases 1,78,000
Goods received from H.O. 90,000
Sales 3,80,000
Goods supplied to H.O. 60,000
Salaries 15,000
Debtors 37,000
Creditors 18,500
Rent 9,600
Office Expenses 4,700
Cash in hand and at Bank 17,800
Furniture 14,000
4,58,500 4,58,500
Additional Information
a) Stock on hand was valued at ₹27,000

b) The Branch account in the Head Office Books on 30thJune, 2002 stood at ₹4,600 (Debit Balance).
c) On 28thJune, 2002, the Head Office forwarded goods to the value of ₹25,000 to the branch where
they were received on 3rdJuly, 2002.
d) A cash remittance of ₹12,000 by branch on 24thJune was received by H.O. on July 1.
Required
1. Journal entries necessary to incorporate the above trial balance.
2. The result of trading at Branch.
3. Malabar Hills Branch Account in the H.O. Books. (ICAI Study Material)
Solution: Step 1: Reconcile Books of Branch
(i) Goods in Transit A/c Dr. 25,000

To Head Office a/c 25,000
(Being goods in transit recorded)
Books of Head Office
(ii) Cash in - Transit A/c Dr. 12,000

To Branch 12,000
(Being Cash in Transit Recognised)
Step 2: Book of Branch
Trading & Profit & Loss A/C

To Purchase 1,78,000 By goods Supplied to HO 60,000
To Goods recd HO 90,000 By Closing Stock 27,000
To Gross Profit 1,39,000
4,67,000 4,67,000
To Salaries 15,000 By Gross Profit 1,39,000
To Rent 9,600
To office Expenses 4,700
To Net Profit 1,09,700
1,39,000 1,39,000

Branch Balance Sheet
To Creditors 18,500 By Debtors 37,000

By Cash 17,800
To Profit & Loss A/c 1,09,700 By Furniture 14,000
By Stock 27,000
By Goods in Transit 25,000
H.O A/c 7,400
1,28,200 1,28,200
Step 3: Book of HO - Incorporation Journal
Debtors Dr. 37,000

Cash Dr. 17,800
Furniture Dr. 14,000
Stock Dr. 27,000
Goods in Transit Dr. 25,000
To Branch A/c 1,20,800
(Being Sundry Asset incorporated)
Branch A/c Dr. 18,500
To Creditor 18,500
(Being Liability incorporated)
Branch Dr. 109700
To profit and loss account 1,09,700
(Being profit incorporated)
Question:17. KP Ltd. manufactures a range of goods which it sells to wholesale customers only from its head office.
In addition, the H.O. transfers goods to a newly opened branch at factory cost plus 15%. The branch then sells these
goods to the general public on only cash basis. The selling price to wholesale customers is designed to give a factory
profit which amounts to 30% of the sales value. The selling price to the general public is designed to give a gross
margin (i.e., selling price less cost of goods from H.O.) of 30%of the sales value. The company operates from rented
premises and leases all other types of fixed assets. The rent and hire charges for these are included in the overhead
costs shown in the trial balances. From the information given below, you are required to prepare for the year ended
31st Dec, 2002 in columnar form a Profit & Loss account for (i) H.O. (ii) the branch (iii) the entire business and a
Balance Sheet as on 31st Dec, 2002 for the entire business.
H.O. Branch
Raw materials purchased 35,000

Direct wages 1,08,500
Factory overheads 39,000
Stock on 1-1-2002
Raw materials 1,800
Finished goods 13,000 9,200
Debtors 37,000
Cash 22,000 1,000
Administrative Salaries 13,900 4,000
Salesmen's Salaries 22,500 6,200
Other administrative &
Selling overheads 12,500 2,300
lnter-unit accounts 5,000 2,000
Capital 50,000
Provision for Unrealized
Profit in stock 1,200
Sales 2,00,000 65,200
Goods sent to Branch 46,000
Goods Received from H.O. 44,500
3,10,200 3,10,200 67,200 67,200

Notes:
(1) On 28thDec, 2002 the branch remitted ₹1,500 to the H.O. and this has not yet been recorded in the
H.O. books. Also on the same date, the H.O. dispatched goods to the branch invoiced at ₹1,500 and
these too have not yet been entered into the branch books. It is the company's policy to adjust items
in transit in the books of the recipient.
(2) The stock of raw materials held at the H.O. on 31st Dec, 2002 was valued at ₹2,300.
(3) You are advised that:
a) There were no stock losses incurred at the H.O. or at the branch.
b) It is the company's practice to value finished goods stock at the H.O. at factory cost.
c) There was no opening or closing stock of work-in-progress.
(4) Branch employees are entitled to a bonus of ₹156 under a bilateral agreement.
(Study Material)
Solution: Trading & Profit & Loss A/C
H.O. Branch Total H.O. Branch Total

To Raw Materials 1,800 1,800 By Sales 65,200 2,00,000 2,65,200
To Opening Stock 9,200 13,000 22,200 By Closing 8,060 15,000 23,060
To Goods reed form Stock
Head Office 44,500 By Goods send 46,000
to purchaser
To Raw Material 35,000 35,000 By Closing
Purchase Stock-Raw
material 23,000 23,000
To Direct Wages 1,08,500 1,08,500 By Gross Total 1,500
To Factory overhead 39,000 39,000

To Gross profit 19,560 66,000 85,560
1,19,260 2,38,000 3,57,260 1,19,260 2,38,000 3,57,260
By Gross Profit 19,560 66,000 85,560
By provision
unrealised
profit 1,200 1,200
To Adm. Salaries 4,000 13,900 17,900
To Sales man's
Comm. 6,200 22,500 28,700
To Adm. & Selling of
HS 2,300 12,500 14,800
To Bonus to
employees 156 156
To Net Profit 6,904 18,300 25,204
19,560 67,200 86,760 19,560 67,200 86,760
Consolidated Balance Sheet
Capital 50,000 Debtors 37,000

Creditor 13,000 Cash 22,000
Profit & Loss 1.8,300 (+) Branch 1,000 23,000
(+)Branch 6,904
(-) Opening Profit 1,247 23,957 Cash-in-transit 1,500
Provision for unrealised Profit 12,347 Stock:
Bonus payable 156 Finished Goods - HO Finished 15,000
Goods - Branch 8,060
Raw Material - HO 2,300
Goods-in-transit 1,500
88,360 88,360

W.NOTES
Cash-in-transit Dr. 1,500

To Branch 1,500
(Being of Head Office)
Goods-in-transit Dr. 15,00
To Head Office 1,500
(Being branch)
Branch Balance Sheet
To Head Office 2000 By Cash 1,000

(+)Goods-in-transit 1,500 3,500 By Goods-in-transit 1,500
To Profit & Loss 6,904 By Stock 8,060
To Bonus payable 156
10,560 10,560
Head Office Stock Account
To Balance- Raw Materials 1,800 By Sales(30% 2,00,000) 1,40,000

- Finished Goods 13,000 By Goods sent to Branch 40,000
To Raw material 35,000 By Closing Stock-Raw material 2,300
To Direct wages 1,08,500 - Finished Goods 15,000
To Factory overhead 39,000
1,97,300 1,97,300
Question:18.M/s Surplus commenced business on 1.04.2009 with the head office at Ahmedabad and branch
at Surat. All goods were purchased by head office and normally packed immediately, but on 31.3.2010, goods
costing ₹5,000 remained unpacked. Only the packed goods were sent to the branch which was charged at
selling price less 10%. The following information is furnished to you as on 31 st March 2010, from the Head
Office and Branch Office books:
Particulars H.O. (₹ ) Branch (₹ )

Capital Account 40,000
Drawings by Proprietor 10,000
Purchases 4,00,000
Packing materials bought 6,000
Sales 3,20,000 1,00,000
Dispatch of goods to Branch 1,13,400
Selling expenses 16,000 800
Clerk's salary, wages, etc. 20,000 3,000
Sundry Debtors 28,000 4,200
Sundry Creditors 26,600 5,000
Head Office Current A/c 12,000
Branch Office Current A/c 19,000
Bank Balances 2,000
Goods received from Head Office 1,08,000
Information
a) Sales by head office were on uniform gross profit, after charging packing materials, of 20% at the fixed
selling price.
b) Sales at Branch were at fixed selling price.
c) Goods invoiced and dispatched by head office to branch in March 2010 for ₹5,400 were received in
the Branch only on 10thApril.
d) Stock of packing materials at head office as on 31stMarch 2010 was valued at ₹1,000.
e) Remittance of ₹1,600 from the branch to the Head Office was in transit on 31.3.2010.
f) ₹2,000 worth of stock at selling price was damaged at the branch. For valuing stock, this was reduced
by ₹1,090 below the invoice cost to the branch. It was decided that the Head office and branch would
share equally the loss occasioned by this and also the deficit in stock, ascertained on actual stock
taking at the Branch of goods at selling price of ₹500.

Prepare Trading and Profit and Loss Account of Surat and Ahmedabad Office and also a Balance Sheet as at
31.3.2010 of the business. (RTP-Nov-10)
Particulars H.O. Branch Particulars H.O. Branch

(₹ ) (₹ ) (₹ ) (₹ )
To Purchases 4,00,000 By Sales 3,20,000 1,00,000
To Packing material 5,000 By Goods sent to Branch A/c 1,13,400
consumed (6,000-1,000) (in transit ₹5,400)
To Goods from H.O. 1,08,000 By Stock damaged and 1,540
shortage
To Gross Profit c/d 76,600 10,000 By Closing Stock (includes 48,200 16,460
[Working Notes (i) & (ii)] unpacked goods of ₹5,000)
(Bal.fig.)
4,81,600 1,18,000 4,81,600 1,18,000
To Salaries and Wages 20,000 3,000 By Gross Profit b/d 76,600 10,000
To Selling Expenses 16,000 800
To Stock Reserve 2,350
(Unrealised Profit)
To Stock damaged and 770 770
shortage
To Net Profit t/f to 37,480 5,430
Capital A/c
76,600 10,000 76,600 10,000
Balance Sheet as at 31stMarch, 2010
Capital 40,000 Stock-in-trade:
Add: Net Profit 42,910 H.O.: Packed 43,200
82,910 Unpacked 5,000
Less: Drawings 10,000 72,910 Packing Material 1,000 49,200
Sundry Creditors: Branch: In hand 16,460
H.O. 26,600 In transit 5,400
Branch 5,000 31,600 21,860
Less: Unrealised Profit 2,350 19,510
Sundry Debtors: H.O. 28,000 32,200
Branch 4,200 2,000
Cash at Bank 1,600
Cash-in-transit
1,04.510 1,04.510
Working Notes:
₹
Gross Profit made by Head Office (20% of Sales of ₹3,20,000) 64,000
10/90 of Goods sent to Branch [(₹1,08,000 + ₹5,400) x 1/9] 12,600
(Since Invoice Price is 90% of normal selling price) 76,600
The Gross Profit made by branch is 10% of sales (10% of ₹1,00,000) 10,000
The amount to be written off at invoice value at branch is:
Amount written off on damaged goods 1,090
Invoice price of deficit in stock (₹500 x 90/100) 450 1,540
Value of damaged goods included in Closing Stock
Selling Price of Goods Damaged
Invoice Price of Goods Damaged (₹2,000 x 90/100) 2,000
Amount already written off 1,800
Amount still included in Closing Stock (B - C) 1,090

Calculation of Stock Reserve Required 710

Stock (as per Trading Account)
Less: Value of damaged goods included 16,460
Value of undamaged in hand (A-B) 710
Add: Goods-in-transit 15,750
Value to Total Goods (C + D) 5,400
Stock Reserve required (₹21,150x 10/90) 21,150
2,350
Question:19. Goods sent to a branch were charged by the head office at cost plus 10 percent. Head Office
makes a uniform gross profit of 33-1/3% on selling price. The Branch sells goods at a uniform gross profit of
25% on selling price. The following transactions have taken place during the year ended on 31 st March 2010.
a) Head Office purchases amounted to ₹15,02,350, purchases returns were ₹1,00,000 and discount
allowed by suppliers amounted to ₹30,090.
b) Sales by Head Office amounted to ₹10,80,000. Goods sent to branch were ₹5,44,500 (at invoice
price), discount allowed to customers amounted to ₹ 9,180.
c) Goods sent to Branch for ₹66,000 in March, were not received at the Branch until April.
d) Branch purchased goods locally for ₹1,87,500, discount allowed by suppliers amounted to ₹4,875.
e) Overhead expenses of Head Office were ₹2,80,260, and of Branch ₹80,475.
f) Sales by the Branch amounted to ₹7,20,000, discount allowed to customers amounted to ₹5,640 and
cost of goods lost-in-transit was ₹8,010.
g) Branch Stock as on 31st March, included stock invoiced by Head Office at ₹1,15,500. Prepare columnar
Trading and Profit and Loss Account of Head Office and the Branch for the year ending 31st March
2010. (RTP May 11)
Particulars H.O. Branch Total Particulars H.O. Branch Total

(₹ ) (₹ ) (₹ ) (₹ ) (₹ ) (₹ )
To Purchases less 14,02,350 1,87,500 15,89,850 By Sales 10,80,000 7,20,000 18,00,000
returns
To Goods from 4,78,500 - By Goods sent to 4,78,500 - -
H.O, less in transit Branch
To Gross Profit 4,03,500 1,80,000 5,83,500 By Goods lost in - 8,010 8,010
c/d (W.N .4) transit
By Closing
Stock
(W.N.1&2) 2,47,350 1,17,990 3,65,340
18,05,850 8,46,000 21,73,350 18,05,850 8,46,000 21,73,350
To Expenses 2,80,260 80,475 3,60,735 By Gross profit 4,03,500 1,80,000 5,83,500
b/d
To Discount 9,180 5,640 14,820 By Discount 30,090 4,875 34,965
Allowed allowed
To Goods lost in - 8,010 8,010
transit
To Stock Reserve 10,500 - 10,500
(W.N.3)
To Net Profit 1,33,650 90,750 2,24,400
4,33,590 1,84,875 6,18,465 4,33,590 1,84,875 6,18,465
Working Notes:
Closing stock at head office

Purchases less returns 14,02,350
Less:(a) Cost of Sales.(₹10,80,000 x 2/3) 7,20,000
(b) Cost of goods sent to Branch
(₹ 4,78,500 x 100/110) 4,35,000 11,55,000

Closing stock at Branch

Branch local purchases 1,87,500
Add: Goods received from head office 4,75,500
6,66,000
Less:(a) Cost of Branch Sales (₹7,20,000 x 3/4)
(V) Goods lost-in-transit 8,010 5,48,010
Stock Reserve at Branch [₹1,15,500x10/110] 10,500
Gross profit of Head Office (10,80,000 x 33.333%) 3,60,000
Add: Loading on goods sent to branch [4,78,500x10/110] 43,500
4,03,500
Question 20: AFFIX of Kolkata has a branch at Delhi to which the goods are supplied from Kolkata but the cost
thereof is not recorded in the Head Office books. On 31st March, 2020 the Branch Balance Sheet was as
follows:
Creditors Balance 40,000 Debtors Balance 2,00,000
Head Office 1,68,000 Building Extension A/c closed -
by transfer to H.O. A/c
Cash at Bank
8,000
2,08,000 2,08,000
During the six months ending on 30-9-2020, the following transactions took place at Delhi.
₹ ₹
Sales 2,40,000 Manager’s Salary 4,800
Purchases 48,000 Collections from Debtors 1,60,000
Wages Paid 20,000 Discounts allowed 8,000
Salaries (inclusive of advance of Discounts earned 1,200
₹ 2,000) 6,400 Cash paid to Creditors 60,000
General Expenses 1,600 Building Account (further 4,000
payment)
Fire insurance (paid for one year) 3,200 Cash in Hand 1,600
Remittance to H.O.
38,400 Cash at Bank 28,000
Set out the Head Office Account in Delhi Books and the Branch Balance Sheet as on 30-9-2021.
Also give journal entries in the Delhi books.

FOREIGN BRANCH
Question:1 Kashmir Crafts Ltd. incorporated in India with its Head Office at Delhi has a branch in New York
where the local currency is U.S. Dollar. The following balances are extracted from the books of the Head Office
and its independent branch as on 31st December 1998 :
Head Office Branch

(₹ ) ($)
Debit balances :
Fixed assets at cost 4,50,000 9,000
Debtors and cash 17,600 360
Operating costs 1,03,700 2,250
Branch current account 42,600
6,13,900 11,610
Credit balances:
Share capital 2,00,000
Reserves 1,10,800
Sales revenue 1,86,300 4,800
Creditors 9,700 250
Head Office Current A/c 4,200
Accumulated depreciation 1,07,100 2.360
6,13,900 11,610
The following information Is provided regarding exchange rates:
The fixed assets of the branch were acquired when one U.S. dollar was equal to 10 rupees.
The exchange rates ruling during 1988 were:
1st January 1$ = ₹13 , Average 1$= ₹14 , 31st December 1 $ = ₹15
There are no cash or goods in transit between H.O. and branch at the year end. You are required to prepare
the final accounts of Kashmir Crafts Ltd. after translating the branch balances by the Temporal method.
Question:2 Indian company has a branch at Washington. Its Trial Balance as at 30th September, 1998 is as
follows:
Dr.($) Cr.($)
Plant and machinery 1,20,000 —
Furniture and fixtures 8,000 —
Stock, Oct. 1,1997 56,000 —
Purchases 2,40,000 —
Sales — 4,16,000
Goods from Indian Co. (H. O.) 80,000 —
Wages 2,000 —
Carriage inward 1,000 —
Salaries 6,000 —
Rent, rates and taxes 2,000 —
Insurance 1,000 —
Trade expenses 1,000 —
Head Office A/c — 1,14,000
Trade debtors 24,000 —
Trade creditors — 17,000
Cash at bank 5,000 —
Cash in hand 1,000 —
5,47,000 5,47,000

The following further information is given:

(1) Wages outstanding—$ l,000.
(2) Depreciate Plant and Machinery and Furniture and Fixtures @ 10 per cent p.a.
(3) The Head Office sent goods to Branch for ₹39,40,000.
(4) The Head Office shows an amount of ₹43,00,000 due from Branch.
(5) Stock on 30th September, 1998—$ 52,000.
(6) There were no in transit items either at the start or at the end of the year.
(7) On September 1, 1996, when the fixed assets were purchased, the rate of exchange was ₹38 to one
$. On October 1, 1997, the rate was ₹39 to one $. On September 30, 1998. the rate was ₹41 to one
$. Average rate during the year was ₹40 to one $. You are asked to prepare:
(a) Trial balance incorporating adjustments given under 1 to 4 above, converting dollars into rupees.
(b) Trading and Profit and Loss Account for the year ended 30th September, 1998 and Balance Sheet as
on that date depicting the profitability and net position of the branch as would appear in India for
the purpose of incorporating in the main Balance Sheet. [CA Inter, Nov 1999 , may 2012](16 marks)
Question 3. The London Branch of Delhi Export sent the following Trial balance as on 31 /l 2/1991.
£( Dr.) £( Cr)
Fixed Assets 17,500
Loan (taken to purchase fixed assets) 13,000
Depreciation 2,500
Stock (01:01:1991) 8,200
Goods from H.O 58,800
Sales 1,05,200
Salaries & Wages 15,200
Interest 2,880
Cash at Bank 1,700
Debtors 21,200
H.O ______ 9,780
1,27,980 1,27,980
Fixed Assets were purchased on 01:01:1989 when £1 = ₹25.50 life was estimated to be 10 year. To
finance the fixed asset a loan amounting to £22,000 was taken @ 18% interest p.a. Annual loan installment
of £ 3,000 and interest were payable in every December. Closing Stock = £2400.
Exchange Rates: Average of 1989 £1 = ₹25.70
31:12:1989 £l =₹26.10
Average of 1990 £1 = ₹26.20
31:12:1990 £l = ₹26.40
Average of 1991 £1 = ₹36.50

31:12:1991 £1 = ₹42.20

In the Head Office Books of London Branch A/c appeared as follows:
London Branch A/c
£ ₹ £ ₹
To Balance B/d 7,000 1,84,800 By Bank 56,020 20,44,730
To Goods 58,800 21,46,200 By balance 9,780 4,12,716
To P & L A/c. — 1,26,446 _________________________________________
65,800 24,57,446 65,800 24,57,446
You are required to show:-
(1) Branch Fixed Assets A/c (2) Branch Loan A/c. (3) Branch Trial Balance in Rupee Terms, (4) Branch P&L A/c.
(5) Adjustment Entries to incorporate branch balance in the books of Head Office.
Hint: Branch Trial Balance (Rupee Terms)
Dr. Cr.
₹ ₹
Fixed Assets 4,46,250
18% Loan 5,48,600
Depreciation 63,750
Stock (8,200 x 26.4) 2,16,480
Goods from H.O. 21,46,200
Sales (105,200 x 36.5) 38,39,800
Salaries and Wages (15,200 x 36.5) 5,54,800
Interest 1,05,120
Cash at Bank (1700 x 42.20) 71,740
Debtors (21,200 x 42.20) 8,94,640
H.O. Account 4,12,716
Exchange Loss (Balancing Figures) 3,02,136
48,01,116 48,01,116
[Ans.: gross profit ₹15,78,400, Profit at Branch = ₹ 5,52,594]
Question:4 Carlin & Co. has head office at New York (U.S.A.) and branch at Mumbai (India). Mumbai branch
furnishes you with its trial Balance as on 31/3/1999 and the additional information given thereafter:
Dr. Cr.
Stock on 1/4/98 300 —
Purchases and Sales 800 1,200
S. Debtors and Creditors 400 300
Bills of exchange 120 240
Wages & Salaries 560 —

Rent, rates & taxes 360
Sundry charges 160 —
Computers 240 —
Bank 420 —
New York office A/c 1,620
3,360 3,360
(a) Computers were acquired from a remittance of US $6,000 received from New York head office &paid to
the suppliers, Depreciate computers at 60% for the year.
(b) Unsold stock of Mumbai Branch was worth ₹4,20,000 on 31/3/99.
(c) The rate of exchange may be taken as follows:
(i) On 1/4/98 @ ₹40 per US $
(ii) On 31/3/99 @ ₹42 per US $
(iii) Average exchange rate for the year @ ₹ 41 per US $
(iv) Conversion in $ shall be made up to two decimal accuracy.
You are asked to prepare in US $ the revenue statement for the year ended 31/3/99 and Balance sheet as on that
date of Mumbai branch as would appear in the books of New York H. O. of Carlin & Co. You are informed that
Mumbai branch A/c. showed a debit balance of US $ 39,609.18 and 31/3/99 in New York books and there were
no inter responding reconciliation. [C.A. (Inter) May 99 (10 Marks)
Question :5 The New York Branch of Fine Textiles Limited, Delhi sent the following Trial Balance as on 31st
December, 1978:
$ $
Fixed Assets 1,20,000
Stock, 1st January, 1978 56,000
Good from H. Office. 3,20,000
Sales 4,20,000
Expenses 25,000
Debtors and Creditors 24,000 17,000
Cash at Bank 6,000
H.O Account ______ 1,14,000
5,5 1,000 5,51,000
In the H. O. Books the Branch Account stood as shown below:

Dr. New York Branch Account
₹ ₹
To balance b/d 10,05,000 By Cash 26,08,000
To Goods sent to Branch 24,63,000 By Balance c/d 8,60,000
34,68,000 34,68,000
Goods are invoiced to the Branch at cost plus 10% and branch has instruction to sell at invoice price plus 25%.
Fixed assets were acquired on 1st January, 1970 when $ 100 = ₹380. Rates of exchange were:
1st January, 1978 $ 100 = ₹760

31st December, 1978 $ 100 = ₹770
Average: $100 = ₹750
Fixed assets have to be depreciated by 10% and the Branch manager is entitled to commission of 5% on the
profit of the branch. You are required prepare trading and profit and loss account in foreign currency and to
convert the Branch Trial Balance into rupees and prepare the branch Trading and profit & Loss Account and
the Branch Account.
Question:6 DM Ltd., Delhi has a branch in London branch is an integral foreign operation of DM Ltd. At the
end of the year 31st March, 2009, the branch furnishes the following trial balance in U.K. Pound:
Particulars £ £
Dr. Cr.
Fixed assets (Acquired on 1st April, 2005) 24,000
Stock as on 1st April, 2008 11,200
Goods from head Office 64,000
Expenses 4,800
Debtors 4,800
Creditors 3,200
Cash at bank 1,200
Head Office Account 22,800
Purchases 12,000
Sales 96,000
1,22,000 1,22,000
In head office books, the branch account stood as shown below:
Dr. London Branch A/c Cr.
Particulars Amount Particulars Amount `
To Balance B/d 20,10,000 By Bank A/c By 52,16,000

49,26,000 Balance C/d 17,20,000
To Goods sent to branch 69,36,000 69,36,000
The following further information are given:
(a) Fixed assets are to be depreciated @ 10 % p.a on straight line basis.

(b) On 31st March, 2008 :
Expenses outstanding - £ 400
Prepaid expenses - £ 200
Closing stock - £ 8,000
(c) Rate of Exchanges :
1st April, 2007 - ₹70 to £ 1

1st April, 2010 - ₹76 to £ 1
31st March, 2011 - ₹77 to £ 1
Average - ₹75 to £ 1

You are required to prepare:
2. Trial balance, incorporating adjustments of outstanding and prepaid expenses, converting U.K.
pound into Indian rupees.
3. Trading and profit and loss account for the year ended 31st March, 2009 and the Balance Sheet as
on that date of London branch as would appear in the books of Delhi head office of DM Ltd.
Answer: Trial Balance of London Branch as on 31st March, 2011

4.
Particulars U.K. Pound Rate Per Dr. (₹ ) Cr. (₹ )
Fixed Assets 24,000 U.K.Pound 70 16,80,000

Stock (as on 1st April, 2010) 11,200 76 8,51,200
Goods from Head Office 64,000 - 49,26,000
Sales 96,000 75 72,00,000
Purchases 12,000 75 9,00,000
Expenses (4,800 + 400 – 200) 5,000 75 3,75,000
Debtors 4,800 77 3,69,600
Creditors 3,200 77 2,46,400
Outstanding Expenses 400 77 30,800
Prepaid expenses 200 77 15,400
Cash at Bank 1,200 77 92,400
Head office Account - 17,20,000
Difference in Exchange 12,400
92,09,600 92,09,600
Closing stock will be (£ 8,000 ×₹77) = ₹6,16,000
Trading and Profit & Loss A/c for the year ended 31stMarch, 2009

(₹ ) (₹ )
To Opening Stock 8,51,200 By Sales 72,00,000
To Purchases 9,00,000 By Closing Stock 6,16,000
To Goods from H.O. 49,26,000
To Gross Profit 11,38,800
78,16,000 78,16,000
To Expenses 3,75,000 By Gross Profit 11,38,800
To Depreciation 1,68,000 By Profit due to 12,400
To Net Profit 6,08,200 Exchange difference
11,51,200 11,51,200

Head office Fixed Assets 16,80,000
Less: Depreciation 1,68,000 15,12,000
Balance 17,20,000 Debtors 3,69,600
Add: Net Profit 6,08,200 23,28,200 Prepaid expenses 15,400

26,05,400 26,05,400
Outstanding Expenses 30,800 Closing stock 6,16,000
Question:7 On 31st March, 2010, the following ledger balances have been extracted from the books of
Creditors
Washington branch office: 2,46,400 Cash at bank 92,400
Ledger Accounts $
Building 180
Stock as on 1.4.2009 26
Cash and Bank Balances 57
Purchases 96
Sales 110
Commission receipts 28
Debtors 46
Creditors 65
You are required to convert above Ledger balances into Indian Rupees. Use the following rates of exchange:
Per $
Opening rate 46
Closing rate 50
Average rate 48
For fixed assets 42
(CA-IPCC GROUP 2)
Answer: Conversion of ledger balances (in Dollars) into Rupees
$ Rate per $ Amount in Rupees

Building 180 42 7,560
Stock as on 01.04.2009 26 46 1,196
Cash and bank balances 57 50 2,850
Purchases 96 48 4,608
Sales 110 48 5,280
Commission receipts 28 48 1,344
Debtors 46 50 2,300
Creditors 65 50 3,250

CHAPTER 12. ACCOUNTS FROM INCOMPLETE RECORDS
TYPES OF SINGLE ENTRY:- A scrutiny of many procedures adopted in maintaining records under single entry
system brings forth the existence of following three types:
1. Pure single entry: In this, only personal accounts are maintained with the result that no
information is available in respect of cash and bank balances, sales and purchases, etc.
In view of its failure to provide even the basic information regarding cash etc., this
method exists only on paper and has no practical application.
2. Simple single entry: In this, only: (a) personal accounts, and (b) cash books are
maintained. Although these accounts are kept on the basis of double entry system,
postings from cash book are made only to personal accounts with no other account
to be found in the ledger. Cash received from debtorsor cash paid to creditors is
simply noted on the bills issued or received as the case may be.
3. Quasi single entry: In this: (a) personal accounts, (b) cash book, and (c) some subsidiary
books are maintained. The main subsidiary books kept under this system are Sales book,
Purchase’s book and Bill’s book. No separate record is maintained for discounts, which
are entered into the personal accounts. In addition, some scattered information is also
available in respect of few important items of expenses like wages, rent, rates, etc. In
fact, this is the method which is generally adopted as a substitute for double entry
system.
Types of Single-entry system
Pure Single Entry Simple Single entry Quasi Single entry
Only Personal Personal Accounts Personal accounts,

accounts are and cash book are cash book and
maintained maintained subsidiary books
are Maintained
Difference between Statement of Affairs and Balance Sheet

Basis Statement of affairs Balance sheet
Source It is prepared on the basis oftransactions It is based on transactions recorded strictly

partly recorded under the double entry book on the basis of double entry book keeping;
keeping and partly under the single entry. eachitem in the balance sheet can be
Most of the assets are recorded based on the verified from the relevantsubsidiary books,
estimates, assumptions,information ledger and documentary evidences.
gathered from memory rather from the
records.
Capital In this statement, capital is merely a Capital is derived from the capital account
balancing figure being excess of assets over in the ledger and therefore the total of
liabilities. Hence assets need not be equal to assets side will always be equal to the total

liabilities. of liabilities side.
Omission Since this statement is prepared from There is no possibility of omission of any
incomplete records, it is very difficult, to item of asset and liability since all items
identify and record those assets and areproperly recorded. Moreover, itis easy
liabilities, if omitted from the books. to locate the missing items since the
balance sheet will not agree.
Basis of The valuation of assets isgenerally done in an The valuation of assets is done on
Valuation arbitrary manner; therefore, no method of scientific basis, fixed assets are shown at
valuation is disclosed. the original costs less depreciation till
date. Any change in the method of
valuation is properly disclosed.
Objective The objective of preparing this statement The objective of preparing the balance
is to identify the capital figures in the sheet is to ascertain the financial
position on a particular date.
beginning and at the end of the
accounting period respectively.
Practice questions:
Question:1 The closing capital of Mr A on 31.3.2007 was ₹1,50,000. On 1.4.2006 his capital was ₹60,000. during
the year he had drawn ₹40,000 for domestic expense. He introduced ₹25,000 as additional capital in
February 2007. find out his profit for the year. ( CA-2007 (NOV)- 2 MARKS)
Question:2 A retail trader does not keep double entry system. His Balance Sheet as at 1st January 2017 was as follows :
Balance Sheet
Creditors 4,000 Cash in Hand 500
Capital 12,000 Cash at Bank 6,000
Stock 5,000
Debtors 3,300
Furniture 1,200
16,000 16,000
His position as at the end of the year 2017 was: Cash in Hand ₹ 4,000; Cash at Bank ₹2,000 Stock ₹5,500,
Debtors ₹4,600, Furniture ₹1,500 and Creditors ₹6,000. He withdrew during the year ₹9,000 out of which he
spent ₹6,000 on the cost of purchasing a motor car for the business. Prepare necessary Statement to
determine profit earned during the year and a balance Sheet as at 31 st December 2017 after making the
following adjustments:-
a). Depreciation: Furniture and Motor Car @ 10%

b). Write off bad debts ₹200.
c). Provide 5% for doubtful debts. [Ans.:- Net Profit: ₹7,430; Total of Statement of Affairs = ₹ 22,430]
Question:3 Mr. A does not maintain complete double entry books of accounts. From the following details
determine the profits for the year and statement of affairs at the end of the year:

1-1-2017 31-12-2017
Stock 40,000 60,000

Debtors 30,000 40,000
Cash 2,000 1,000
Bank 10,000 5,000 (O.D)
Creditors 15,000 25,000
Outstanding expenses 5,000 8,000
Furniture (cost) 3,000 2,000
₹1,000 (cost) furniture was sold for ₹5,000 on 1-1-2017; 10% depreciation is to be charged on furniture. Mr. A
has drawn ₹ 1,000 per month. ₹2,000 was invested by Mr. A into the business in 2017.
Bank balance on 1-1-2017 is as per cash book, but the bank overdraft on 31-12-2017 is as per bank statement.
Cheques of Rs 2000 drawn in December, 2017 have not been encashed within the year. (Profit Rs 7800)
Question:4 Rashika had ₹3,00,000 in bank on 1st January, 2016 when she started her business. She closed her
accounts on 31st March, 2017. Her single entry books (in which he did not maintain any account for the
bank) showed her position as follows :
31.3.16 31.3.17 31.3.16 31.3.17

₹ ₹ ₹ ₹ ₹
Cash in hand 2,000 3,000 Debtors 1,000 2,000
Stock in trade 19,000 29,000 Creditors 5,000 3,000
On 1st February,2016 She began drawing ₹700 per month for his personal expenses from the cash box of
business. Her account in the bank had the following entries :
Deposits ₹ Withdrawals ₹
1.1.2016 3,00,000 ----
1.1.16 to 31.3.16 ---- 2,23,000
1.4.16 to 31.3.17 2,30,000 2,70,000
The above withdrawals included payments by cheques of ₹2,00,000 and ₹60,000 respectively during the
periods from 1st January, 2016 to 31st March, 2016 and from 1st April 2016 to 31st March,2017 for the purchase
of machinery for the business; and the deposits after 1st January, 2016 consisted wholly of sale price received
from customers by cheques. Draw up Rashika’s statement of affairs as at 31st March, 2016 and 31st March,
2017 respectively and work out her profit or loss for the year ended 31st March, 2017. Give your comment on
accuracy of profit calculated. (ICAI study material)
Question:5 A and B are in partnership, sharing profits and losses in the ratio of two-thirds and one-third
respectively, The books are kept on a single entry system and their statement of affairs as at 31st
December 2016 showed the position as follows :
STATEMENT OF AFFAIRS 31st December, 2016
₹ ₹
Capital: Freehold buildings 6,000
A 10,000 Plant and machinery 2,000
B 4,000 Office furniture 500
Loan 1,000 Stock 4,000
Creditors 5,000 Cash 500
Bills payable 500 Bills receivable 1,500
Debtors 6,000
20,500 20,500

On 31st December 2017, the books disclosed the following position:
Debtors ₹8,000, Creditors on open account ₹8,500 creditors on loan account ₹1,600 and Cash ₹800. The stock
was valued at ₹4,200 and the bills receivable amounted to ₹1,400. An examination of the cash book showed
that during the year A had drawn on account of profits ₹1,500 and B ₹600. A had in addition withdrawn
₹2,000 on account of capital on 30th June, 2017.
The partners agree to reduce the previous valuation of the Plant and Machinery by 5% and the office furniture
by 10% by way of depreciation and to charge 5% by way of interest on capital. Prepare—
(1) A statement of profit, dividing the profits between 'A' and 'B'.
(2) A statement of affairs showing the position, as at December 2017. (C.A. Inter Modified)
Question:6 Pyare and Lal started business on 1st January 2016 with ₹50,000 as capital contributed equally but the
profit-sharing ratio was 3:2. Their drawings were ₹300 and ₹200 per month respectively. They had kept
no accounts except the following information:
31-12-16 31-12-17
Machinery at cost ₹20,000 ₹25,000
Stock-in-trade 30,000 30,000
Debtors 50,000 60,000
Cash 2,000 500
Creditors 30,000 20,000
Outstanding expenses 4,000 3,000
Bank balance (as per Pass Book) 6,000 8,000
Provision is to be made for depreciation at 10% on the cost of machinery as at the end of each year. Debtors
on 31-12-16 include ₹5,000 for goods sent out on consignment at 25% above cost, and the goods were not
sold until 2017. A cheque for ₹1,000 had been deposited on 31-12-16 but was credited on 2-1-2017.
A cheque for ₹2,000 issued on 26-12-17 was presented on 3-1-2018. A cheque for ₹1,000 was directly
deposited by a customer on 27-12-17 and a cheque for ₹500 deposited in December 2017 was dishonoured.
No adjustment for these was made. Determine the profits for 2016 and 2017 and draw up a Balance Sheet as
on 31.12.2017. (CA Inter)
Question:7 Suraj does not maintain his books of account under the double entry system but keeps slips of paper
from which he makes up his annual accounts. He has borrowed moneys from a bank to whom he has to
render figures of profits every year. He has given the bank the following profit figures:
Year ending Profits

31st December ₹
2013 20,000
2014 38000
2015 45.000
2016 58,000
2017 65,000
The bank appoints you to audit the statements and verify whether the figures of profits reported are correct
or not. For this purpose, the following figures are made available to you:
(a) Position as on 31st December, 2012: Sundry debtors ₹20,000; Stock-in-trade (at 95% of the cost) ₹47,500;
Cash in hand and at bank ₹12,600; Trade creditors ₹6,000. Expenses due ₹1,600.
(b) He had borrowed ₹5,000 from his wife on 30th September, 2012 on which he had agreed to pay simple
interest at 12% p. a. The loan was repaid along with interest on 31st December, 2014.
(c) In December,2013, he had advanced ₹8,000 to A for purchase of a vacant land. The property was registered
in March, 2015 after payment of balance consideration of ₹32,000. Costs of registration incurred for this
were ₹7,500.

(d) Suraj purchased jewellery for ₹15,000 for his daughter in October 2015. Marriage expenses incurred in
January,2016 were Rs 24,000
(e) A new DVD was purchased by him in March 2017 for ₹18,000 and presented it to his friend in November 2017.
(f) His annual household expenses amounted to a minimum of ₹24,000 .
(g) The position of assets and liabilities as on 31st December 2017 was found to be: Overdraft with bank
(secured against property) ₹12,000, Trade creditors ₹10,000 , Expenses payable ₹ 600; Sundry debtors
(including ₹ 600 due from a peon declared insolvent by court) ₹28,800; Stock-in-trade (at 125% of cost to
reflect market value) ₹ 60,000 and Cash on hand ₹ 250.
It is found that the rate of profit has been uniform throughout the period and the proportion of sales during
the years to total sales for the period was in the ratio of 3:4:4:6:8. Ascertain the annual profits and indicate
differences, if any, with those reported by Suraj to the bank earlier. (C.A. Inter, May, 1992)
CONVERSION METHOD
Question:8 From the following, prepare total debtors account and total creditors account and find out credit
sales and credit purchases:
₹ ₹
Debtors as on 1st January 5,000 Bad debts written off 1,200
Creditors as on 1st January 4,000 Bad debts recovered 300
Debtors as on 31st December 4,000 Bills receivable endorsed to creditors 4,000
Creditors as on 31st December 6,000
Bills receivable received during the year 10,000 Bills receivable dishonoured by customers 1,000
Bills payable issued during the year 8,000 Endorsed bills receivable dishonoured 500
Cash received from customers 30,000 Bills receivable discounted 2,000
Cash returned to customers 500 Discounted bills receivable
Cash paid to suppliers 20,700 Dishonoured 700
Discount allowed by suppliers 270 Sales returns 600
Discount allowed to customers 150 Purchases returns 200
Question:9 Murga Ram carries on business as retail merchant. He does not maintain regular books. From cash
sales effected by him he effects business and other payments, always retains cash of ₹1,000 in hand and
deposits the balance in the bank account. The stock inventories for the year ended 31st December, 2017 are
lost. However, he informs you that he has sold goods invariably at a price which yields him a profit of 33 1/3%
on cost. From the following additional information supplied to you, prepare necessary final accounts for the
year ended 31st December, 2017:
Assets and liabilities 1st Jan. 2017 31st Dec. 2017
Cash at bank N.A(?). 8,000
Stock of goods 28,000 N.A(?)
Analysis of the bank pass book reveals the following information:
0.
Payment to creditors 70,000
Payment for business expenses 12,000
Receipts from debtors 75,000
Loan from Ajit taken on 1st January, 2017 @ 10% p.a. 10,000
Cash deposited in the bank 10,000
In addition, he paid to the creditors for goods ₹2,000 in cash and salaries ₹4,000 in cash. He also withdrew
₹8,000 cash for his personal expenses. (Gross profit-31,000, net profit-₹14,000, Balance sheet 56,000)
Question:10 JhunjhunLal submits to you the following figures relating to his business in respect of the year ending 31 st
December, 2017. You are required to prepare a Trading and Profit and Loss Account for the year ended, and a
Balance Sheet as at 31st December 2017. Any difference in the cash balance is assumed to be drawings:
₹

Cash paid into bank 1,50,000

Private dividends paid into bank 2,000
Private payments out of Bank 26,000
Payment for goods out of Bank 1,22,000

Cash received from debtors 2,50,000
Payments for goods by cash and cheques 1,60,000
Wages 40,000
Delivery Expenses 7,000
Rents & Rates 2,000
Lighting & Heating 1,000
The Assets & Liabilities are as follows :
Assets and Liabilities 1st January 31st December
2017 2017
Stock 20,000 15,000
Bank Balance 8,000 12,000
Cash in hand 300 400
Trade Debtors 14,000 20,000
Trade Creditors 27,300 30,000
Investments 50,000 50,000
(C.A. Inter)
Question:11 Mungerilal is a small trader, and is financially incapable of engaging the services of an accountant. He keeps
no books but only an account with a bank in which all takings are lodged after meeting business expenses and his
personal drawings and through which all payments for business purchases are passed.
You are required to ascertain his trading result for the year ended 31st March, 2017 and the financial position of
his business as on that date from the following information supplied by him
(a) The Bank statement shows deposits during the year of ₹12,020 and withdrawals of ₹11,850.
(b) ₹1,000 had been placed in fixed deposit account on 31st December, 2015 at 10% per annum and withdrawn with
interest on 30th June, 2016.
(c) The assets and liabilities on 31st March, 2017 were: Stock ₹1,100; Book Debts ₹1,150;
Bank Balance ₹320: Furniture ₹2,000 and Trade creditors ₹400.
(d) In the absence of reliable information, estimates are supplied on the following matters :
(i) The Stock and Book Debts have each increased by ₹100 during the year.
(ii) The Trade creditors were ₹200 on 1st April, 2016.
(iii)During the year personal expenses amounted to ₹800 and business expenses ₹700. Ignore fractions.
( Gross profit ₹ 620, net loss ₹55, Balance Sheet total ₹ 4570) [ICMA (Inter), Dec. 97 ]
Question:12 A trader commenced business in a retail shop on 1st July, 2017 in premises for which he paid a rent of
₹160 per month. The only records he kept, apart from his bank statements, were files of paid invoices and
unpaid invoices for goods purchased, together with a notebook in which he recorded a few sales on credit to
special customers who paid him by cheques. Cash received from cash sale was paid into the till out of which
he paid certain amounts, of which he kept a rough record, and he made weekly banking out of the balance in
the till. He paid all suppliers for goods purchased by cheque.
An analysis of the bank statements for the six months ended 31st December, 2017 was as follows:
₹ ₹
Deposits into bank: Withdrawals from bank:
Capital paid into open account 3,200 Shop fixtures and fittings 1,600
Loan from father-in-law Household furniture 1,440

(Interest free) 1,600 Suppliers (for purchases) 7,872

Cheques from suppliers (for Rent 800
goods returned) 224 Rates 240
Special customers 240 Insurance on stocks 160
Total of weekly cash banking 9,544 Electricity 144
Balance on 31st December, 2017 2,552
14,808 14,808
The trader estimates that the total amounts paid out of the till before making the weekly banking for the six
months were :
Drawings ₹1,600, Wages ₹1,120 and Sundry shop expenses ₹640. You ascertain that as on 31st December,2017:
Stocks, correctly taken at cost, were ₹1,376. The balance in the till was ₹208, including a post-dated cheque for
₹120, cashed for a customer. Cheques for ₹136 from special credit customers paid into the bank had not been
cleared. One for ₹ 56 was cleared on 3rd January, 2018 and the other for ₹ 80 was returned dishonoured and the
customer could not be traced. This sum is considered as bad. Other special customers owed ₹ 192.
The following cheques had been issued but had not been presented: Rent for December ₹ 160 and Lighting charges
₹ 120. The cash paid into the bank included ₹240 from a sale of surplus shop fittings. There was no profit or loss on
this transaction.
The insurance premium covered the year to 30th June, 2018 and the rates covered the period of 9 months to 31st
March, 2018. Suppliers' unpaid invoices amounted to ₹1,792 and there was ₹32 owing for electricity.
You are required to prepare the balance sheet as at 31st December, 2017 and the trading and profit and loss
account for the half year ended on that date. [CMA (Stage I)
Question:13 The following is the balance sheet of the retail business of Mr. Padamsi as at 31st December, 2016 :
Mr. Padamsi's capital 1,25,000 Furniture and fittings 25,000

Creditors for goods 30,000 Stocks 75,000
Outstanding expenses (rent) 1,000 Sundry debtors 20,000
Cash at bank 35,000
Cash in hand 1,000
1,56,000 1,56,000
You are furnished with the following information:
(1) Mr. Padamsi always sells his goods at a profit of 25% on sales.
(2) Goods are sold for cash and credit. Credit customers pay by cheque only.
(3) Payments for purchases are always made by cheque.
(4) It is the practice of Mr. Padamsi to send to the bank every week-end the takings of the week after paying
every week salaries of ₹250 to the clerk, sundry expenses of ₹ 50 and personal expenses ₹100.
Analysis of the bank pass book for the period ending 31st March, 2017 disclosed the following:
Payments to creditors ₹75,000

Payment of rent ₹4,000
Amount remitted to the bank ₹1,35,000 (including cheques for ₹10,000 received from
customers to whom the goods were sold on credit).
The following are the balances on 31st March, 2017 :
Stocks 32,500
Creditors for goods 32,500
Sundry debtors 30,000
On the evening of 31st March, 2017, the cashier absconded with the available cash in the cash box. You are
required to prepare a statement showing the amount of cash defalcated by the cashier and also a profit and
loss account for the period ended 31st March, 2017 and a balance sheet as on that date. [ICWA Inter]
Question:14 Mr. Reddy does not maintain complete records of his business but gives you the following information:

31st March 1999 31st March 1998

₹ ₹
Machineries 2,00,000 1,50,000
Sundry Creditors 86,000 ?
Sundry Debtors ? 93,000
Stock-in-trade 70,000 50,000
Furniture 27,000 30,000
Cash at Bank 15,600 18,700
His cash transactions for the year ended 31st March. 1999 included the following (besides certain other items)
Payments to creditors 4,10,000

Cash sales (25% of total Sales) 1,70,000
Business expenses 82,000
Cash purchases 1,30,000
Collection from debtors 5,27,000
Withdrawn for household expenses 30,000
He maintains a uniform rate of gross profit of 25% on turnover. Outstanding business expenses on 31st March.
1999 amounted to ₹5,000. Addition of new machinery was made on October 1, 1998. Some old furniture (book
value ₹6,000) was sold during the year and the proceeds stands credited to Furniture Account. Provide
depreciation on Machineries @ 15% p.a. and on Furniture @ 10% p.a. (excluding sold item)
Mr Reddy requests you to prepare a Trading and Profit and Loss Account for the year ended 31 st March, 1999
and a Balance Sheet as on that date. (ICWA (Inter)
Question:15 On 31st December 1994, John's books and records were destroyed by fire. The following information
was available :
(a) The Balance Sheet of John as on 31st December 1993 was as follows:
Capital and Liabilities ₹ Property and Assets ₹

Capital 4,20,000 Fixtures 1,00,000
Creditors for: Stock 1,50,000

Goods 94,000 Debtors 1,20,000
Electricity charges 2,000 Rates in advance 4,500
Accounting charges 5,000 1,01,000 Cash in hand 15,000
5,21,000 5,21,000
(b) The Insurance company agreed to pay ₹95,000 for fixtures and ₹1,05,000 for stock without production of
accounts; the stock, however, was ₹1,15,000.
(c) From Bank statements and the cheque books which were in his house, the following information on
payments was available :
₹ ₹
Personal Expenses 80,000 Rates 13,500
Sundry Expenses 6,500 Rent 51,700
Accountancy Charges 8,000 Goods for Resale 21,58,000
Electricity 7,500 Fixtures 20,000
(d) Total banking for the year amounted to ₹24,50,200.
(e) All cash takings were banked with the exception of the following payments during the year:
(i) An assistant's salary of ₹18,000 per annum.

(ii)Goods for resale averaging ₹10,500 per month.

(iii) Drawings varied between ₹20,000 and ₹30,000 per month.
(f) ₹2,500 per month for 9 months was received in cash for subletting a portion of the shop and this was not banked.
(g) During the year sale proceeds for waste paper amounting to ₹30,500 were paid into the bank.
(h) On 31-12-1994 (i) Debtors were ₹2,05,000. (ii) Creditors for goods were ₹90,000, for electricity ₹800, for
accounting charges ₹750 and for rent ₹4,700. (iii) Rates in advance ₹6,500, (iv) Cash in hand ₹17,000, (v)
During the year a bad debt of ₹6,000 was incurred. (vi)The rate of gross profit as a percentage of sale was 20%.
You are required to compile a Trading and Profit and Loss Account for the year ended 31 st December 1994 and
Balance Sheet as on that date. [ICWA (Final), Dec, 1995]
Question:16 Shri Kapoor has a trading for which the following procedure is followed :
(1) All collections are deposited with the bank each day.
(2) All payments except petty expenses are made by cheque.
(3) To meet petty expenses a cheque for ₹1,500 is withdrawn from the bank on the 1st day of each month.
The following figures are available from Shri Kapoor's records :
1-1991 31-12-1991
Balance in Bank 30,000 21,000
Debtors 1,00,000 1,25,000
Creditors 90,000 1,00,000
Stock 15,000 25,000
Payment made to creditor during the year ₹120000.

Personal drawings out of bank ₹ 6,000.
Shri Kapoor sells goods at a profit of 25% on sales.
Prepare Profit and Loss Account for the year ended 31st December 1991 and Balance Sheet as on that date
from the above information. (CA Inter)
Question:17 A is an importer of fancy goods, operating from rented premises, which is on lease of ₹1,000 per
month. He prepares his accounts as on 31st December each year. On the night of December 31, 1997 all
his books and records were destroyed in a fire.
The following was his summarized financial position as on 31st December, 1996 :
₹ ₹
Fixed Assets :
Motor Car 20,000
Furniture 10,000 30,000
Current Assets :
Stock-in-trade (at cost) 2,00,500
Debtors 24.000
Balance at Bank 27,060
Cash in hand 590
500
Prepaid Rates 2,52,650
Current Liabilities : 1,10,200
Creditors for purchases
Accrued Rent 2,000
Due for Hire purchase Installments 2,790 1,14,990
The following further information is also available :

(a) A buys goods for resale only from one manufacturer in Japan, who allowed a rebate of 3% of the goods
purchased by him in excess of ₹5,00,000 in a calendar year. The rebate due for the year ended 31st December,
1997 was ₹12,480.
(b) All goods are sold at a standard gross profit margin of 40% on selling price. Any rebate due is to be ignored
for the purpose.
(c) Stock at cost on 31st December, 1997 amounted to ₹90,200.
(d) Weekly cash expenses out of cash sales (before depositing the same into the bank) have been :
Drawings ₹300
Carriage Outward 500
Petrol 100
General Expenses 50
Cash in hand on 31st December, 1997 amounted to ₹ 1,670
(e) His bank statements for the year reveal the following information:
Paid for purchase of goods 10,10,500

Car expenses 6,680
Rent 13,000
Rates for the year ended 31st March, 1998
3200
Hire-purchase installments (Final Payments)
2790
Salaries 1,12,460
Travelling Expenses 36,800
Printing & Stationery 6,400
Advertisement 12,280
Insurance (for business) 3,000
Lorry Hire Charges 48,700
Drawings 37,000
Balance as on 31st December, 1997 2,31,800
(f) Depreciation on motor car and furniture is to be provided @ 30% and 15% respectively.
Prepare Trading and Profit and Loss Account for the year ended on 31st December, 1997 and the Balance-
sheet as on that date. (CA Inter)
Question:18 On 1st Jan 2006, Mr X Started a business with capital of Rs 15,00,000. On the same date he purchased a
building for ₹ 4,00,000 and furniture of ₹ 2,00,000. He also purchased goods costing ₹ 1,50,000 on cash
basis and goods costing ₹ 1,00,000 on credit basis. He sold all goods for ₹ 7,50,000 (out of which ₹ 4,50,000
was on cash basis). He paid ₹ 70,000 to his creditors and received a discount of ₹ 10,000.
He received Rs 80,000 from debtors and allowed them discount of ₹ 6,000. ₹ 10,000 due from debtors could not be
recovered. During the year Mr. X had paid salary of ₹ 20,000 . Rent of ₹ 30,000 and commission of ₹ 5000.

On 1st Oct 2006, Mr. X had also taken a loan of ₹ 3,00,000 from his bank @ 10% p.a. Interest had not yet been paid.
On 1st Dec 2006, he further introduced Rs 1,00,000 as his capital. At the end of 2006, salary due but not paid was ₹
12,000 and Rent still outstanding was ₹ 8,000. Depreciate fixed assets @ 10% p.a. Calculate profit from various
methods. (CA Final - 16 marks)
Question:19 Mr. Dinesh, a trader, does not keep his books on a double entry basis. The following
information is available from his books and other records for the year ended 31st March 1994. On the basis
of the information, compile a trading A/c, profit and loss A/c for the year ended 31st March 1994 and a
Balance Sheet as on that date:
(1) 31.3.1993 (₹ ) 31.3.1994 (₹ )

Liabilities and Assets
Bank Balance 20,000 9,400
Prepaid Expenses 3,000 2,000
Stock 70,000 60,000
Debtors for Sales 2,30,000 ---
Bills Receivable Nill ?
Furniture at written down value 70,000 82,000
Creditors for purchases 2,20,000 2,60,000
Outstanding Liabilities for expenses 30,000 15,000
(2) Receipts and payments during 1993-94 : ₹
Collection from Debtors (after allowing 2 1/2 % discount) 5,85,000

Proprietor's Drawings 50,000
Capital introduced by Proprietor 95,150
Purchase of furniture in the middle of the year 20,000

96,000
14% Government Securities purchased at 96% on 1.4.1993
Expenses
1,97,000
Sale of Scrap
5,000
Payment to Creditors (after receiving 2% discount)
Proceeds of Bills Receivable discounted at 2% 3,92,000
(3) Sales are made so as to realize a profit of 33 1/3% on sale proceeds. 61,250
(4) Goods worth ₹ 5,000 were taken by the proprietor.
(5) During the year bills receivable worth ₹ 1,50,000 were drawn on debto₹ Of these, bills amounting to 30,000
were endorsed in favour of the credito₹ Of this later amount, a bill for ₹ 5,000 was dishonoured by the debtor.
(6) Sales and purchases are made only on credit. [I.C.W.A. (Final), June 1995]
Question:20 .Mr. Mukherjee commenced business on 1st January, 1996, with a capital of ₹ 50,000. He immediately
purchased furniture of ₹ 24,000. During the year he received from his uncle a gift of ₹ 3,000 and he
borrowed from his father a sum of ₹ 5,000. He had withdrawn ₹ 600 per month for his household
expenses. He had no Bank account and all dealings were in cash. He did not maintain any books but
following information is given
₹
Sales (including cash sales ₹ 30,000) 1,00,000
Purchases (including cash purchases ₹ 10,000) 75,000
Carriage Inwards 700

Wages 300
Discount allowed to Debtors 800
Salaries 6,200
Bad debts written on 1,500
Trade Expenses 1,200
Advertisements 2,200
He used goods worth ₹ 1,300 for personal purposes and paid ₹ 500 to his son for examination and college
fees. On 31st December, 1996, his Debtors were worth ₹ 21,000 and creditors ₹ 15,000. Stock-in-trade was
valued at ₹ 10,000. Furniture to be depreciated by 10% p.a. Prepare Trading and Profit and Loss Account for
the year ended on 31st December, 1996 and Balance Sheet as at 31st December. 1996. (ICWA Inter)
Question:21 The following is the Balance Sheet of Sanjay, a small trader, as on 31.3.96 : (Figures in ₹ '000)
Liabilities Assets ₹
Capital 200 Fixed Assets 145
Creditors 50 Stock 40
Debtors 50
Cash in Hand 5
. Cash at Bank 10
250 250
A fire destroyed the accounting records as well as the closing cash of the trader on 31.3.97. However, the
following Information was available:
(a) Debtors and creditors on 31.3.97 showed an increase of 20% as compared to 31.3.96.
(b) Credit Period :
Debtors — 1 month; Creditors — 2 months
(c) Stock was maintained at the same level throughout the year.
(d) Cash sales constituted 20% of total sales.
(e) All purchases were for credit only.
(f) Current ratio as on 31.3.97 was exactly 2.
(g) Total expenses excluding depreciation for the year amounted to ₹ 2,50,000.
(h) Depreciation was provided at 10% on the closing value of fixed assets.
(i) Bank and cash transactions :
(1)Payments to creditors included ₹ 50,000 by cash.
(2)Receipts from debtors included ₹ 5,90,000 by way of cheques.
(3)Cash deposited into the bank ₹ 1,20,000.
(4)Personal drawings from bank ₹ 50,000.
(5)Fixed assets purchased and paid by cheques ₹ 2,25,000.
You are required to prepare :
(a) The Trading and Profit & Loss Account of Sanjay for the year ended 31.3.97; and
(b) A Balance Sheet on that date.
Assume cash destroyed by fire is written off in Profit and Loss Account.[C.A. (Inter) May 1997, CMA INTER]
Question:22 K Azad, who is in business as a wholesaler in sunflower oil, is a client of would/accounting firm. You
are required to draw up his final accounts for the year ended 31.3.1996:
From the files, you pick up his Balance Sheet as at 31.3.1995 reading as below:
BALANCE SHEET as at 31.3.1995

Liabilities ₹ ₹
K. Azad's Capital 1,50,000
Creditors for Oil Purchases 2,00,000
12% Security Deposit from Customers 50,000
Creditors for Expenses :
Rent 6,000
Salaries 4,000
Commission 20,000
4,30,000
Assets
Cash and Bank Balances 75,000
Debtors 1,60,000
Stock of Oil (125 tins) 1,25,000
Furniture 30,000
Less : Depreciation 3,000 27,000
Rent Advance(security for 2 months) 12,000
Electricity Deposit 1,000
3-Wheeler Tempo Van 40,000
Less : Depreciation 10,000 30,000
4,30,000
A Summary of the rough Cash Bank of K. Azad for the year ended 31.3.1996 is as below:
CASH AND BANK SUMMARY
Receipts: ₹
Cash Sales 5,26,500
Collections from Debtors 26,73,500
Payments:
To Landlord 79,000
Salaries 48,000
Miscellaneous Office Expenses 12,000
Commission 20,000
Personal Income-tax 50,000
Transfer on 1.10.95 to 12% Fixed Deposit 6,00,000

To Creditors for Oil Supplies 24,00,000
A scrutiny of the other records gives you the following information :
(i) During the year oil was purchased at 250 tins per month basis at a unit cost of ₹ 1,000. 5 tins were damaged in
transit in respect of which insurance claim has been preferred. The surveyors have since approved the claim at
80%. The damaged ones were sold for ₹ 1,500 which is included in the cash sales. One tin has been used up for
personal consumption. Total number of tins sold during the year was 3,000 at a unit price of ₹ 1,750.
(ii) Rent until 30.9.95 was ₹ 6,000 per month and was increased thereafter by ₹ 1,000 per month. Additional
advance rent of ₹ 2,000 was paid and this is included in the figure of payments to landlord.
(iii) Provide depreciation at 10% and 25% of WDV on furniture and tempo van respectively.
(iv) It is further noticed that a customer has paid ₹ 10,000 on 31.3.96 as security deposit by cash. One of the
staff has defalcated. The claim against the Insurance Company is pending. You are requested to prepare final
accounts for the year ended 31.3.96. [CA. (Inter), May 1996]

TRADING AND PROFIT AND LOSS ACCOUNT

To Purchases 30,00,000 By Damaged Stock A/c 5,000
Less: Transferred to By Closing Stock 1,19,000

29,99,000
Drawings A/c 1,000
22,50,000
To Gross Profit c/d
53,74,000
53,74,000
44,000
To Salaries 22,50,000
78,000
To Miscellaneous Office Expenses By Gross Profit b/d 22,50,000
12,000
To Loss of Deposit By interest on Fixed Deposit 36,000
10,000
To Interest on Security Deposits By Profit on Damaged Stock 500
6,000
To rent
To Depreciation :
Furniture 2,700
10,200
Tempo Van 7,500
To Capital A/c
21,26,300
(Net Profit Transferred)
22,86,500 22,86,500
BALANCE SHEET as on 31st March, 1996

₹ ₹ ₹ ₹
K. Azad's Capital Furniture 27,000
Balance 1,50,000 Less: Depreciation 2,700 24,300
Add: Net Profit 21,26,300 3-WheelerTempo Van 30,000
22,76,300
Less: Drawings 51,000 22,25,300 Less: Depreciation 7,500 22,500
Closing Stock
12% Security Deposit from Customers 60,000 1,19,000
Interest Payable on Security Deposit 6,000 Debtors 22,11,500
Creditors for Oil Purchases 8,00,000 Cash and Bank Balances 66,000
Outstanding Rent 7,000 Fixed Deposit 6,00,000
Interest Accrued on Fixed
Deposit 36,000
Rent Advance(security deposit) 14,000
Electricity Deposit 1,000

Insurance Claim Receivable 4,000
30,98,300 30,98,300
Question:23 The following is the Balance Sheet of Sri Agni Dev as on 31st March, 2001:
Capital Account 2,52,500 Machinery 1,20,000
Sundry Creditors for purchases 45,000 Furniture 20,000
Stock 33,000
Debtors 1,00,000
Cash in hand 8,000
Cash at Bank 16,500
2,97,500 2,97,500
Riots occurred and fire broke out on the evening of 31st March, 2002, destroying the books of accounts and
Furniture. The cashier was grievously hurt and the cash available in the cash box was stolen. The trader gives you the
following information:

(i) Sales are affected as 25% for cash and the balance on credit. His total sales for the year ended 1 st March, 2002
were 20% higher than the previous year. All the sales and purchases of goods were evenly spread throughout the
year (as also in the last year).
(ii) Terms of credit
Debtors 2 Months
Creditors 1 Month
(iii) Stock level was maintained at ₹ 33,000 all throughout the year
(iv) A steady Gross Profit rate of 25% on the turnover was maintained throughout. Creditors are paid by
cheque only, except for cash purchase of ₹ 50,000.
(v) His private records and the Bank Pass-book disclosed the following transactions for the year.
(a) Miscellaneous business expenses ₹ 1,57,500 (including ₹ 5,000
paid by cheque and ₹ 7,500 was outstanding as on 31st March, 2002)
(b) Repairs ₹ 3,500 (paid by Cash)
(c) Addition to Machinery ₹ 60,000 (paid by cheque)
(d) Private drawings ₹ 30,000 (paid by cash)
(e) Travelling expenses ₹ 18,000 (paid by cash)
(f) Introduction of additional capital by depositing into the Bank ₹ 5,000
(vi) Collection from debtors were all through cheques.
(vii) Depreciation on Machinery is to be provided @ 15% on the Closing Book Value.
(viii) The cash stolen is to be charged to the Profit and Loss Account.
(ix) Loss of furniture is to be adjusted from the Capital Account.
Prepare Trading and Profit and Loss Account for the year ended 31 March. 2002 and Balance Sheet as on that date.
Make appropriate assumptions whenever necessary. All workings should form part of answer.[CA PE-II, Nov.2002]
Answer: TRADING AND PROFIT AND LOSS ACCOUNT OF SRI AGNI DEV
To Purchases 7,20,000 By Closing Stock 33,000
To Gross Profit c/d 2,40,000
9,93,000 9,93,000
To Business Expenses 1,57,500 By Gross Profit b/d 2,40,000
To Repairs 3,500
To Depreciation 27,000
To Travelling Expenses 18,000

To Loss by theft 1,500
To Net Profit
32,500
2,40,000 2,40,000

BALANCE SHEET OF SRI AGNI DEV as at 31st March, 2002
Liabilities ₹ ₹ Assets ₹ ₹
Capital 2,52,500 Machinery 1,80,000
Add. Additional Capital 5,000 Less: Depreciation 27,000 1,53,000
Net Profit 32,500
2,90,000 Stock in Trade 33,000
Less: Loss of Furniture 20,000 Sundry Debtors 1,20,000
Drawings 30,000 2,40,000
Bank Overdraft 2,667
Outstanding Expenses 7,500 .
3,06,000 3,06,000
Working Notes:
1. Sales during 2001-02
Debtors as on 31st March, 2001 1,00,000
(Being equal to 2 months’ sales)
Total credit sales in 2000-01, 1,00,000 x 6 6,00,000
Cash Sales, being equal to1/3rd of credit sales or ¼ of the total 2,00,000
Sales in 200-01 8,00,000
Increase, 20% as stated in the problem 1,60,000
Total sales during 2001-02 9,60,000
Cash sales : ¼th 2,40,000
Credit sales: 1/3th 7,20,000
2. Debtors equal to two months’ credit sales 1,20,000
3. Purchases
Sales in 2001-02 9,60,000
Gross Profit @ 25% 2,40,000
Cost of goods sold being purchases 7,20,000
(Since there is no change in stock level.)
4. Sundry Creditors for goods

₹ 7,20,000 – ₹ 50,000/12 = ₹ 6,70,000/12 55,833
Collections from Debtors

Opening Balance 1,00,000
Add. Credit Sales 7,20,000
8,20,000
Less: Closing Balance 1,20,000
7,00,000
Payment to Creditors
Opening Balance 45,000

Add: Credit Purchases (₹ 7,20,000 –₹ 50,000) 6,70,000

7,15,000
Less: Closing Balance 55,833
Payment by cheque 6,59,167
Question:24 Lucky does not maintain proper books of accounts. However, he maintains a record of his bank
transactions and also is able to give the following information from which you are requested to prepare his
final accounts for the year 2003:
1.1.2003 31.12.2003
Debtors 1,02,500 —
Creditors — 46,000
Stock 50,000 62,500
Bank Balance — 50,000
Fixed Assets 7,500 9,000
Details of his bank transactions were as follows: ₹
Received from debtors 3,40,000
Additional capital brought in 5,000
Sale of fixed assets (book value ₹ 2,500) 1,750
Paid to creditors 2,80,000
Expenses paid 49,250
Personal drawings 25,000
Purchase of fixed assets 5,000
No cash transactions took place during the year. Goods are soldat cost plus 25%. Cost of goods sold was ₹2,60,000.
(CA PE-II. Nov., 2004)
Question:25 Complete the following annual financial statements on the basis of ratios given below:
PROFIT AND LOSS ACCOUNT
₹ ₹
To Cost of goods sold 6,00,000 By Sales 20,00,000
To Operating expenses --
To Earnings before Interest and Tax --
To Debentures Interest 10,000 By Earnings before Interest and Tax —

To Income-tax ---
To Net Profit ---
BALANCE SHEET as at 30th June, 1990

Net worth Fixed assets —
Share capital — Current assets:
Reserve and surplus — Cash —
10% Debentures — Stock —
Sundry creditors 60,000 Debtors 35,000
(i) Net profit to sales 5%

(ii) Current ratio 1.5

(iii) Return on net worth 20%

(iv) Inventory turnover 15 times
(based on cost of goods sold)
(v) Share capital to reserves 4 : 1
(vi) Rate of Income-tax 50% [CA Inter, Nov., 1990)
Question:26 . The books of account of RukRuk Maan of Mumbai showed the following figures:
31.3.2008 31.3.2009
Furniture & Fixtures 2,60,000 2,34,000
Stock 2,45,000 3,20,000
Debtors 1,25,000 ?
Cash in hand & Bank 1,10,000 ?
Creditors 1,35,000 1,90,000
Bills Payable 70,000 80,000
Outstanding Salaries 19,000 20,000
An analysis of the cash book revealed the following :
Cash sales 16,20,000
Discount allowed to debtors 20,000
Payment to Creditors 9,73,000
Discount received from creditors 32,000
Payment for bills payable 4,30,000
Drawings for domestic expenses 1,20,000
Salaries paid 2,36,000
Rent paid 1,32,000
Sundry trade expenses 81,000
Depreciation is provided on furniture & fixtures @ 10% p.a. on diminishing balance method. RukRuk Maan
maintains a steady gross profit rate of 25% on sales. You are required to prepare trading and profit and loss
account for the year ended 31st March, 2009 and Balance Sheet as on that date.(CA- MAY 2010) 16 MARKS
Answer: Trading & Profit & Loss Account
To Opening stock 2,45,000 By Sales:
To Purchases : Cash 16,20,000
Cash 6,15,000 Credit (W.N. 3) 11,00,000
Credit (W.N.1) 15,00,000 By Closing stock 3,20,000
To Gross profit c/d 6,80,000
30,40,000 30,40,000
To Salaries (W.N.vi) 2,37,000 By Gross profit b/d 6,80,000
To Rent 1,32,000 By Discount received 32,000
To Sundry trade expenses 81,000
To Discount allowed 20,000
To Depreciation on furniture & fixtures 26,000
To Net profit 2,16,000
7,12,000 7,12,000
Capital Fixed assets
Opening balance (W.N.7) 5,16,000 Furniture & fixtures 2,34,000
Add: Net profit 2,16,000 Current assets:
7,32,000 Stock 3,20,000
Less: Drawings 1,20,000 6,12,000 Debtors (W.N.4) 1,47,000
Current liabilities & provisions: Cash & bank (W.N.6) 2,01,000
Creditors 1,90,000
Bills payable 80,000

Outstanding salaries 20,000

9,02,000 9,02,000
Working note:
1. Bills payable account

To Cash/Bank 4,30,000 By Balance b/d 70,000
To Balance c/d 80,000 By Trade creditors (Bal. fig.) 4,40,000
5,10,000 5,10,000
2. Creditors Account
To Cash/Bank 9,73,000 By Balance b/d 1,35,000
To Bills payable A/c (W.N.1) 4,40,000 By Credit purchases (Bal- fig.) 15,00,000
To Discount received 32,000
To Balance c/d 1,90,000
16,35,000 16,35,000
3. Calculation of credit sales
₹
Opening stock 2,45,000
Add: Purchases
Credit purchases 15,00,000 21,15,000
23,60,000
Less: Closing Stock 3,20,000
Gross profit ratio on sales 25%
Total sales ( 20,40,000 x 100/75) 27,20,000
Less: Cash sales 16,20,000
Credit sales 11,00,000
4. Debtors Account
To Balance b/d 1,25,000 By Cash/Bank 10,58,000
To Credit sales (W.N.3) 11,00,000 By Discount allowed 20,000
By Balance c/d (Bal. fig) 1,47,000
12,25,000 12,25,000
5. Salaries
Salaries paid during the year 2,36,000
Add: Outstanding salaries as on 31.03.2009 20,000
2,56,000
Less: Outstanding salaries as on 31.03.2008 19,000
2,37,000
6. Cash/Bank Account
To Balance b/d 1,10,000 By Cash purchases 6,15,000
To Cash sales 16,20,000 By Creditors 9,73,000
To Debtors 10,58,000 By Bills payable 4,30,000
By Drawings 1,20,000
By Salaries 2,36,000
By Rent 1,32,000
By Sundry trade expenses 81,000
By Balance c/d 2,01,000
27,88,000 27,88,000

7. Balance Sheet as on 31st March, 2008

Creditors 1,35,000 Furniture & fixtures 2,60,000
Bills payable 70,000 Stock 2,45,000
Outstanding salaries 19,000 Debtors 1,25,000
Capital (Bal. fig.) 5,16,000 Cash & bank 1,10,000
7,40,000 7,40,000
Question 27: Mr. A. runs a business of readymade garments. He closes the books of accounts on 31st March,
2010. The Balance Sheet as on 31s* March, 2010 was as follows:
A's capital a/c 4,04,000 Furniture 40,000
Creditors 82,000 Stock 2,80,000
Debtors 1,00,000
Cash in hand 28,000
Cash at bank 38,000
4, 86,000 4, 86,000
You are furnished with the following information:
1. His sales, for the year ended 31st March, 2011 were 20% higher than the sales of previous year, out of
which 20% sales was cash sales. Total sales during the year 2009-10 were ₹ 5,00,000.
2. Payments for all the purchases made by cheques only.
3 Goods were sold for cash and credit both. Credit customers pay by cheques only.
4. Depreciation on furniture is to be charged 10% p.a.
5. Mr. A sent to the bank the collection of the month at the last date of the each month after paying
salary of ₹ 2,000 to the clerk, office expenses ₹ 1,200 and personal expenses ₹ 500.
Analysis of bank pass book for the year ending 31st March, 2011 disclosed the following:
Payment to creditors 3,00,000

Payment of rent up to 31st March, 2011 16,000
Cash deposited into the bank during the year 80,000
The following are the balances on 31st March, 2011
Stock 1,60,000
Debtors 1,20,000
Creditors for goods 1,46,000
On the evening of 31st March, 2011 the cashier absconded with the available cash in the cash book.
You are required to prepare Trading and Profit and Loss A/c for the ended 31sl March,2011 and Balance Sheet
as on that date. All the workings should form part of the (CA- MAY 2011) 16 MARKS

Answer: Trading and Profit and Loss Account for the year ending 31st March 2011
To Opening stock 2,80,000 By Sales (W.N.3)
To Purchases (W.N.1) 3,64,000 Credit 4,80,000
To Gross Profit 1,16,000 Cash 1,20,000 6,00,000
By Closing stock 1,60,000
7,60,000 7,60,000
To Salary 24,000 By Gross Profit 1,16,000
To Rent 16,000
To Office expenses 14,400
To Loss of Cash (W.N.6) 23,600
To Depreciation of furniture 4,000
To Net Profit 34,000
1,16,000 1,16,000
A's Capital 4,04,000 Furniture 40,000
Add: Net Profit 34,000 Less: Depreciation (4,000) 36,000
Less: Drawings (6,000) 4,32,000 Stock 1,60,000
Creditors 1,46,000 Debtors 1,20,000
5,78,000 5,78,000
Working Notes(1) Calculation Of Purchases
Creditors Account
To bank account 3,00,000 By balance b/d 82,000
To balance c/d 1,46,000 By purchases (bal. fig) 3,64,000
4,46,000 4,46,000
(2) Calculation of total sales
₹
Sales for the year 2009-10 5, 00,000
Add: 20% increase 1, 00,000
Total sales for the year 2010-11 6, 00,000
(3) Calculation of credit sales

Total sales 6,00,000
Less: Cash sales' (20% of total sales) (1,20,000)
4,80,000
(4) Calculation of cash collected from debtors
Debtors Account
To Balance b/d 1,00,000 By Bank A/c (Bal. fig) 4,60,000
To Sales A/c 4,80,000 By Balance c/d 1,20,000
5,80,000 5,80,000
5. Calculation of closing balance of cash at bank
Bank Account
To Balance b/d 38,000 By Creditors A/c 3,00,000
To Debtors A/c 4,60,000 By Rent A/c 16,000

To cash A/c 80,000 By Balance c/d 2,62,000

5,78,000 5,78,000
(6) Calculation of the amount of cash defalcated by the cashier
Cash balance as on 1st April 2010' 28,000

Add: Cash sales during the year 1, 20,000
1, 48,000
Less: Salary (₹ 2,000x12) 24,000
Office expenses (₹ 1,200 x 12) 14,400
Drawings of A (₹ 500 x 12) 6,000
Cash deposited into bank during the year 80,000 1, 24,400
Cash balance as on 31st March 2011
(defalcated by the cashier) 23,600
Question 28. A and B are in Partnership having Profit sharing ratio 2:1. The following information is
available about their assets and liabilities:
31- 3- 2021 31- 3 - 2022
₹ ₹
Furniture 1,20,000 ?
Advance 70,000 50,000
Creditors 32,000 30,000
Debtors 40,000 45,000
Inventory 60,000 74,750
Loan 80000 ----
Cash at Bank 50,000 1,40,000
The partners are entitled to salary @ ₹ 2,000 p.m. They contributed proportionate capital.
Interest is paid @ 6%p.a on capital and charged @ 10%p.a. on drawings.
Drawing of A and B
A B
₹ ₹
April 30 2000 ___
May 31 ___ 2000
June 30 4000 __
Sept. 30 ___ 6000
Dec. 31 2000 ___
Feb 28 ___ 8000

On 30th June, they took C as 1/3rd partner who contributed ₹ 75,000. C is entitled to share of 9 months’ profit.
The new profit ratio becomes 1: 1: 1. A withdrew his proportionate share. Depreciate furniture @ 10% p.a.,
new purchases ₹ 10,000 may be depreciated for 1/4th of a year.
Current account as on 31-3-2021: A ₹ 5,000 (Cr.), B ₹ 2,000 (Dr.)
Prepare Statement of Profit, Current Accounts of partners and Statement of Affairs as on 31-3-2022
Answer : total of current account as on 31-3-22 ₹1,72,500; total of net profit ₹1,93,500; distributable
profits in profit ratio ₹1,15,067.
Question 29.The Income Tax Officer, on assessing the income of Shri Moti for the financial years 2020-2021 and
2021-2022 feels that Shri Moti has not disclosed the full income. He gives you the following particulars of assets
and liabilities of Shri Moti as on 1st April, 2020 and 1st April, 2022.
1-4-2020 Assets: Cash in hand 25,500
Inventory 56,000
Land and Building 1,90,000
Wife’s Jewellery 75,000
Liabilities: Owing to moti’s brother 40,000
Sundry creditors 35,000
1-4-2022 Assets: Cash in hand 16,000
Inventory 91,500
Land and Building 1,90,000
Motor Car 1,25,000
Wife’s jewellery 1,25,000
Loan to moti’s brother 20,000
Liabilities: Sundry creditors 55,000
During the two years the domestic expenditure was ₹ 4,000 p.m. The declared incomes of
the financial years were ₹ 1,05,000 for 2020-2021 and ₹ 1,23,000 for 2021-2022 respectively.
State whether the Income-tax Officer’s contention is correct. Explain by giving your workings.

Solution. Capital Account of shri Moti
1-4- 2020 1- 4- 2022

₹ ₹ ₹ ₹
Assets
Inventory 56000 91500
Sundry Debtors 41500 52500
Land & Building 190000 190000
Wife’s Jewellery 75000 125000
Motor Car __ 125000
Laon to Moti’s Brother __ 20000
388000 620000
Liabilities
Owing to Moti’s Brother 40000 ___
Sundry Creditors 35000 75000 55000 55000
313000 565000
Capital
Incoming During the two years:
565000
Capital as on 1- 4-2022 9600
Add: Drawing – Domestic Expenses for the two
years (₹ 4,000 x 24 month) 616000
(313000)
Less: Capitals as on 1 -4- 2020 348000
Income earned in 2020-2021 and 2021 – 2022
Income declared (₹ 1,05,000+ ₹ 123000) 228000
120000
Suppressed income
Question 30. Mr. Anup runs a wholesale business where in all purchases and sales are made oncredit.
He furnishes the following closing balances:
31-3-21 31-3-22
Bills receivable 15,000 6,000
Bills payable 12,000 14,000
Inventory 1,10,000 1,90,000
Bank 90,000 87,000
Cash 5,200 5,300
Summary of cash transactions during the year 2021- 2022:
(i) Deposited to bank after payment of shop expenses @ ₹ 600 p.m., salary @ ₹ 9,200 p.m.
and personal expenses @ ₹ 1,400 p.m. ₹ 7,62,750.
(ii) Cash Withdrawn from bank ₹ 1,21,000.

(iii) Cash payment to suppliers ₹ 77,200 for supplies and ₹ 25,000 for furniture.
(iv) Cheques collected from customers but dishonoured ₹ 5,700.
(v) Bills accepted by customers ₹ 40,000.
(vi) Bills endorsed ₹ 10,000.
(vii) Bills discounted ₹ 20,000; discount ₹ 750.
(viii) Bills matured and duly collected into bank ₹ 16,000.
(ix) Bills accepted ₹ 24,000.
(x) Paid suppliers by cheque ₹ 3,20,000.
(xi) Received ₹ 20,000 on maturity of one LIC policy of the proprietor by cheque.
(xii) Rent received ₹ 14,000 by cheque for the premises owned by proprietor.
(xiii) A building was purchased on 30-11-2021 for opening a branch for ₹ 3,50,000 and some expenses
were incurred on this building, details of which are not maintained.
(xiv) Electricity and telephone bills paid by cash ₹ 18,700, due ₹ 2,200.
Other transactions:
(i) Claim against the firm for damage ₹ 1,55,000 is under legal dispute. Legal
expenses ₹ 17,000. The firm anticipates defeat in the suit.
(ii) Goods returned to suppliers ₹ 4,200.
(iii) Goods returned by customers ₹ 1,200.
(iv) Discount offered by suppliers ₹ 2,700.
(v) Discount offered to the customers ₹ 2,400.
(vi) The business is carried on at the rented premises for an annual rent of ₹ 20,000 which
is outstanding at the year end.
Prepare Trading and Profit & Loss Account of Mr. Anup for the year ended 31 st March 20X2 and Balance
Sheet as on that date.
Solution: Trading and Profit & Loss Account of Mr. Anup for the year ended 31st March 2022
₹ ₹ ₹ ₹
To Opening Inventory 1,10,000 By Sales 9,59,750
To Purchases 4,54,100
Less: PurchasesReturn (4200) 44,9,900 Less: SalesReturn (1,200) 9,58,550
To Gross Profit (b.f.) 5,88,650

By Closing inventory 1,90,000
11,48,550 11,48,550

1,10,400 5,88,650
To salary (9,200 x 12) By Gross Profit 2,700
To Electricity & Tel. 20,900 By Discount
Charges (18,700 + 2,200)
To legal expenses o/s 17,000
3,150
To discount (2400+750) 7,200
To shop exp. (600 x 12)
To provision for claims for 155000
damages
To shop rent 20000
To Net Profit (b.f.) 257700
591350 591350
Balance sheet as on 31st March 2022
Capital A/c 2,38,200 Building (from cashA/c) 3,72,000
Add: Fresh capital introduced Furniture
Maturity value from LIC 20,000 Inventory 25,000
Rent 14,000 Sundry debtors 1,90,000
Add: Net Profit 2,57,700 Bill’s receivable 92,000
Cash at Bank 6,000
Cash in Hand 87,000
Less: Drawing (14,00 x12) 5,29,900 5,300
(16,800) 5,13,100
Rent outstanding 20,000

Sundry creditors 56,000
Bills Payable 14,000
Outstanding expenses:
Legal Exp. 17,000
Electricity &
Telephone charges 2,200 19,200
Provision for claims for damages 1,55,000
7,77,300 7,77,300

Working Notes:
(i) Sundry Debtors Account
₹ ₹
To Balance b/d 70,000 By Bill Receivable A/c-
To Bill receivable A/c-Bill dishonoured 3,000 Bills accepted by customers 40,000
To Bank A/c – cheque dishonoured 5,700 By Bank A/c - Cheque received 5,700
To Credit sales (BalancingFigure) 9,59,750 By Cash (from cash and bank 8,97,150
account)
By Return inward A/c 1,200
By Discount A/c 2,400
10,38,450 10,38,450
Bill Receivables Account

₹ ₹
To Balance b/d 15,000 By Sundry creditors A/c 10,000
To Sundry Debtors A/c 40,000 (Bills endorsed)
(Bills accepted) By Bank A/c (20,000 – 750) 19,250
By Discount A/c (Bills 750
discounted)
By Bank -Bills collected on 16,000
maturity
By Sundry debtors 3,000
Bills dishonoured (Bal. Fig)
55,000 55,000
(ii) Sundry Creditors Account
₹ ₹
To Bank 3,20,000 By Balance c/d 40,000
To Cash 77,200 By Credit purchase 4,54,100
To Bill Payable A/c 24,000 (Balancing figure)
To Bill Receivable A/c 10,000
To Return Outward A/c 4,200
To Discount Received A/c 2,700
To Balance b/d 56,000
4,94,100 4,94,100

(iii) Bills Payable A/c
₹ ₹
To Bank A/c (Balance figure) 22,000 By Balance b/d 12,000
To Balance c/d 14,000 By Sundry creditors A/c- 24,000
36,000 Bills accepted 36,000
(iv) Summary cash and Bank A/c
Particulars Cash Bank Particulars Cash Bank

By bank 7,62,750
To balance b/d 5,200 90,000 By cash 1,21,000
To debtors(bal.fig) 8,97,150 By shop expense 7,200
To cash 7,62,750 By salary 1,10,400
To bank 1,21,000 By drawings 16,800
To debtors 5,700 By bills payable 22,000
To bills receivables 19,250 By s. creditors 77,200 3,20,000
To bills receivables 16,000 By furniture 25,000
To capital(LIC) 20,000 By s. debtors 5,700
To capital (rent) 14,000 By electricity and tel 18,700
By building( bal. fig) 3,72,000
By balance c/d 5,300 87,000
10,23,350 9,27,700 10,23,350 9,27,700
(v) Statement of Affairs as on 31st March 20X1
Sundry Creditors 40,000 Inventory 1,10,000
Bills Payable 12,000 Debtors 70,000
Capital (Balancing figure) 2,38,200 Bills receivable 15,000
Cash at Bank 90,000
Cash in Hand 5,200
2,90,200 2,90,200

Question 31. Ms. Rashmi furnishes you with the following information relating to her business:
(a) Assets and Liabilities as on 1.4.20X1 31.03. 20X2
₹ ₹
Furniture (w. d. v) 12,000 12,700
Inventory at cost 16,000 14,000
Sundry Debtors 32,000 ?
Sundry Creditors 22,000 30,000
Unpaid expenses 4,000 3,600
Cash in hand and at bank 2,400 1,250
(b) Receipts and payments during the year:

Collections from debtors, after allowing discount of ₹ 3,000 amounted to ₹ 1,17,000.
Collections on discounting of bills of exchange, after deduction of discount of ₹ 250 by the bank, totaled
to ₹12,250.
Creditors of ₹ 80,000 were paid ₹ 78,400 in full settlement of their dues.
Payment for freight inwards ₹ 6,000.
Amount withdrawn for personal use ₹ 14,000.
Payment for office furniture ₹ 2,000.
Investment carrying annual interest of 4% were purchased at ₹ 192 (face value ₹ 200) on 1st October, 20X1
and payment made thereof.
Expenses including salaries paid ₹ 29,000.
Miscellaneous receipts ₹ 1,000.
(c) Bills of exchange drawn on and accepted by customers during the year amounted to ₹
20,000. Of these, bills of exchange of ₹ 4,000 were endorsed in favour of credito₹ An
endorsed bill of exchange of ₹ 800 was dishonoured.
(d) Goods costing ₹ 1,800 were used as advertising materials.
(e) Goods are invariably sold to show a gross profit of 33-1/3% on sales.
(f) Difference in cash book, if any, is to be treated as further drawing orintroduction
of capital by Ms. Rashmi.
(g) Provide at 2.5% for doubtful debts on closing debto₹
Rashmi asks you to prepare trading and profit and loss account for the year ended31st
March, 20X2 and the balance sheet as on that date.

Solution
Trading and Profit and Loss Account for the year ended 31st March, 20X2
₹ ₹
To Opening Inventory 16,000 By Sales (W.N.3) 1,46,100
To Purchases (W.N.2) 91,200 By Closing inventory 14,000
Less: For advertising (1,800) 89,400
To Freight inwards 6,000

To Gross profit c/d @33-1/3% 48,700
1,60,100 1,60,100
To Sundry expenses (W.N.6) 28,400 By gross Profit b/d 48,700
To Advertisement 1,800 By interest on investment 4
To Discount allowed: (200 x 4 / 100 x ½)
Debtors By discount received 1,600
3000 1,000
Bills Receivable By miscellaneous income
250
To Depreciation on furniture 3,250
(12,000 + 2,000 – 12,700) 1,300
To Provision for doubtful debts 972
To Net Profit (b.f.) 15,582
51,304 51,304
Balance Sheet as on 31st March, 20X2

₹ ₹ ₹ ₹
Capital as on 1.1.20X1 37,600 37,374 Furniture (w. d. v.) 12,000
Less: Drawings (15,808) Additions during the Year 2,000
Less: Depreciation(b.f.) (1,300) 12,700
Add: Net Profit 21,792
Outstandingexpenses 3,600 Investment 192
Interest accrued (200 x 4% x 6/12) 4
Closing Inventory 14,000
Less: Provision for 972 37,928
doubtful debts@ 2.5%
Bill’s receivable (W.N.7) 3,500
Cash in hand and at bank 1,250
Prepaid expenses 1,400
70,974
70,974

Working Notes:
(1) Capital on 1st April, 2021

Balance Sheet as On 1st April, 2021
Capital (Bal. fig.) 37,600 Furniture (w. d. v.) 12,000
Creditors 22,000 Inventory at cost 16,000
Outstanding expenses 4,000 Sundry debtors 32,000
Cash in hand and at bank 2,400
Prepaid expenses 1,200
63,600 63,600
(2) Purchases made during the year
Sundry Creditors Account
₹ ₹
To Cash and bank, A/c 78,400 By Balance b/d 22,000
To Discount received A/c (80,000 – 78,400) 1,600 By Sundry debtor’s A/c 800
To Bills Receivable A/c 4,000 By Purchases A/c 91,200
To Balance c/d 30,000 (Balancing figure)
1,14,000 1,14,000
(3) Sales made during the year

₹
Opening inventory 16000
Purchase 91200
Less: For advertising (1,800) 89,400
Freight inwards 6,000
1,11,400
Less: Closing inventory
(14,000)
Cost of goods sold 97,400

Add: Gross profit (@ 50% on cost) 48,700
1,46,100
(4) Debtors on 31st March, 2022

Sundry Debtors Account
₹ ₹
To Balance b/d 32,000 By Cash and bank A/c 1,17,000
To Sales A/c (W.N.3) 1,46,100 By Discount allowed A/c 3,000
To Sundry creditors A/c 800 By Bills receivable A/c 20,000
(Bill dishonoured) By Balance c/d (Bal. fig.) 38,900
1,78,900 1,78,900

(5) Additional drawings by Ms. Rashmi

Cash and Bank Account
₹ ₹
To Balance b/d 2,400 By Freight inwards A/c 6,000
To Sundry debtor’s A/c 1,17,000 By Furniture A/c 2,000
To Bills Receivable A/c 12,250 By Investment A/c 192
To Miscellaneous income 1,000 By Expenses A/c 29,000
A/c
By Creditors A/c 78,400
By Drawings A/c 15,808
[14,000 + 1,808 (b.f.)
(Additional drawings)]
By Balance c/d 1250
1,32,650 1,32,650
(6) Amount of expenses debited to Profit and Loss A/c
Sundry Expenses Account
₹ ₹
To Prepaid expensesA/c (on 1,200 By Outstanding expenses A/c (on 4,000
1.4.2021) 29,000 1.4.2021)
To Bank A/c 3,600 28,400
By Profit and Loss A/c
To Outstanding expenses A/c (on (Balancing figure)
31.03.2022) 1,400
By Prepaid expenses A/c
33,800 33,800
(7) Bills Receivable on 31st March, 2022

Bills Receivable Account
₹ ₹
To Debtors A/c 20,000 By Creditors A/c 4,000
By Bank A/c 12,250
By Discount on bills receivable A/c 250
By Balance c/d (Balancing figure) 3,500
20,000
20,000

Question 32. Mr. Anil, a trader keeps his books of account under single entry system. On 31st March,
2021 his statement of affairs stood as follows:
Trade Creditors 5,80,000 Furniture, Fixtures and Fittings 1,00,000
Bills Payable 1,25,000 Stock 6,10,000
Outstanding Expenses 45,000 Trade Debtors 1,48,000
Capital Account 2,50,000 Bills Receivable 60,000
Unexpired Insurance 2,000
Cash in Hand and at Bank 80,000
10,00,000 10,00,000
The following was the summary of Cash–book for the year ended 31st March, 2022:
Receipts ₹ Payments ₹
Cash in Hand and at Bank on Payments to Trade creditors 75,07,000
1st April, 2021 80,000 Payments for Bills payable 8,15,000
Cash Sales 73,80,000 Sundry Expenses paid 6,20,700
Receipts from Trade Debtors 15,10,000 Drawings 2,40,000
Receipts for Bills Receivable 3,40,000
Cash in Hand and at Bank 1,27,300
st
on 31 March, 2022
93,10,000 93,10,000
Discount allowed to trade debtors and received from trade creditors amounted to ₹ 36,000 and ₹ 28,000
respectively. Bills endorsed amounted to ₹ 15,000. Annual Fire Insurance premium of ₹ 6,000 was paid every
year on 1st August for the renewal of the policy. Furniture, fixtures and fittings were subject to depreciation
@ 15%per annum on diminishing balance method.
You are also informed about the following balances as on 31st March, 20 22:
₹
Stock 6,50,000
Trade Debtors 1,52,000
Bills Receivable 75,000
Bills Payable 1,40,000
Outstanding Expenses 5,000
The trader maintains a steady gross profit ratio of 10% on sales.

Prepare Trading and Profit and Loss Account for the year ended 31st March, 2022 and Balance Sheet as at
that date.
Answer
Trading and Profit and Loss Account for the year ended 31st March, 2022
₹ ₹
To Opening Stock 6,10,000 By Sales:
To Purchases(W.N. 3) 84,10,000 Cash 73,80,000
9,30,000 Credit (W.N. 2) 19,20,000

To Gross profit c/d 93,00,000

(10% of 93,00,000) By Closing stock
6,50,000
99,50,000 99,50,000
By Gross profitb/d
To Sundry expenses(w.n- 6) 5,80,700 By Discount received 9,30,000
To Discount allowed 36,000 28,000
To Depreciation 15,000
(15% x 1,00,000)
To Net Profit (b.f.) 3,26,300
9,58,000 9,58,000
₹ ₹
Capital: Furniture &Fittings 1,00,000
Less: Dep. (15,000) 85,000
Opening balance 2,50,000
Less: Drawing (2,40,000) Stock
6,50,000
10,000 Trade Debtors
1,52,000
Add: Net profit forthe years 3,26,300 3,36,300 Bill’s receivable
75,000
Unexpired insurance
2,000
Bills payable Cash in hand & at bank
1,40,000 1,27,300
Outstandingexpenses 5,000
10,91,300 10,91,300
Working Notes:
1. Bills Receivable Account

₹ ₹
To Balance b/d 60,000 By Cash 3,40,000
To Trade debtors (b.f.) 3,70,000 By Trade creditors(Bills endorsed) 15,000
4,30,000 4,30,000
2. Trade Debtors Account

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

3. Memorandum Trading Account

₹ ₹
To Opening stock 6,10,000 By Sales 93,00,000
To Purchases (Balancing figure) 84,10,000 By Closing stock 6,50,000
To Gross Profit (10% on sales) 9,30,000
99,50,000 99,50,000
4. Bills Payable Account

₹ ₹

To Balance c/d 1,40,000 By Creditors (balancingfigure) 8,30,000
9,55,000 9,55,000
5. Trade Creditors Account

₹ ₹
To Discount received 28,000 By Purchases (as calculated in w.n 3) 84,10,000
To Bills receivable 15,000
To Bills payable 8,30,000
To Balance c/d 6,10,000
(Balancing figure)
89,90,000 89,90,000
6. Computation of sundry expenses to be charged to Profit & Loss A/c
₹
Sundry expenses paid (as per cash book) 6,20,700
Add: Prepaid expenses as on 31–3–2021 2,000
6,22,700
Less: Outstanding expenses as on 31–3–2021
(45,000)
5,77,700
Add: Outstanding expenses as on 31–3–20X2
5,000
5,82,700
Less: Prepaid expenses as on 31–3–20X2 (Insurance paid till July,20X2) (6,000 x 4/12) (2,000)
5,80,700

Question 33.The following is the Balance Sheet of a Tony Pharma as on 31st March, 2021:
₹ ₹
Capital 10,00,000 Fixed Assets 4,00,000
Creditors (Trade) 1,40,000 Stock 3,00,000
Profit & loss A/c 60000 Debtors 150000
Cash & bank 350000
1200000 1200000
The management estimates the purchases and sales for the year ended 31 st March, 2022 as under:
Up to 28.2.20X2 March 20X2

₹ ₹
Purchases 14,10,000 1,10,000
Sales 19,20,000 2,00,000
It was decided to invest ₹1,00,000 in purchases of fixed assets, which are depreciated @ 10% on cost.
The time lag for payment to Trade Creditors for purchase and receipt from Sales is one month. The business
earns a gross profit of 30% on turnover. The expenses against gross profit amount to 10% of the turnover.
The amount of depreciation is not included in these expenses.
Draft a Balance Sheet as at 31st March, 2022 assuming that creditors are all Trade Creditors for purchases and
debtors for sales and there is no other item of current assets and liabilities apart from stock and cash and bank
balances. Assume that all sales and purchases are on credit basis.
Answer : In the books of Tony Pharma Projected Balance Sheet as on 31st March, 2022:
₹ ₹
Capital 10,00,000 Fixed Assets 4,00,000
Profit & Loss Account Additions 1,00,000
as on 1st April, 2021 60,000 5,00,000
Add: Profit for the year 3,74,000 4,34,000 Less: Dep. @ 10% (50,000)
4,50,000
1,10,000 3,36,000
Creditors (Trade) Stock in trade
2,00,000
Sundry Debtors
5,58,000
Cash & Bank(working. note)
15,44,000 15,44,000

Working Notes:
1. Projected Trading and Profit and Loss Account for the year ended 31st March, 2022
₹ ₹
To Purchases 15,20,000 By Closing Stock (ba. figure) 3,36,000
To Gross Profit c/d (30%on sales) 6,36,000
24,56,000 24,56,000
To Sundry Expenses (10% on sales) 2,12,000
By Gross Profit b/d
To Depreciation 50,000 6,36,000
To Net Profit (b.f.) 3,74,000
6,36,000 6,36,000
Cash and Bank Account - 1st April, 2021 to 31st March, 2022
₹ ₹
To Balance b/d 3,50,000 By Sundry Creditors 15,50,000
To Sundry Debtors 20,70,000 (₹1,40,000+₹14,10,000)
(₹ 1,50,000 + ₹ 19,20,000) By Expenses 2,12,000
By Fixed Assets 1,00,000
By Balance c/d (b.f.) 5,58,000
24,20,000 24,20,000

CHAPTER 13. ACCOUNTING STANDARDS

DISCLOSURE OF ACCOUNTING POLICIES (AS-1)
MEANING :- Accounting policies refer to specific accounting principles and the method of applying those
principles adopted by the enterprise in preparation and presentation of the financial statements.
Examples: Valuation of inventories, Valuation of Investment ,Treatment of Retirement Benefits
,Valuation of Fixed Assets ,Treatment of Contingent Liabilities etc
NEED FOR DISCLOSURE OF ACCOUNTING POLICIES

There are many areas, where more than one method can be followed for accounting. Which methods have been
followed in preparation of Balance Sheet, profit and loss account is disclosed as accounting policies. Hence
accounting policies contains the information about the method adopted for the preparation of financial
statement. Statements of accounting policies are part of financial statement.
For proper and better understanding of financial statement, it is required that all significant accounting
policies followed in preparation of financial statement should be disclosed. Because assets and liabilities in
balance sheet and profit and loss account are significantly affected by accounting policies followed.
All significant accounting policies should be disclosed at one place because it would be helpful to the reader
of financial statement.
SELECTION OF ACCOUNTING POLICIES

Major points which are considered for the purpose of selection and application of accounting policies
• Prudence - Generally maker of financial statement has to face uncertainties at the time of preparation of
financial statement. These uncertainties may be regarding collectability of receivables, number of Warranty
claims that may occur. Prudence means making of estimates, which is required under conditions of
uncertainty.
• Substance over form - It means that transaction should be accounted for in accordance with actual happening
and economic reality of the transactions not by its legal form. Like in hire purchase if the assets are purchased
on hire purchase by the hire purchaser the assets are shown in the books of hire purchaser in spite of the fact
that the hire purchaser is not the legal owner of the assets purchased. Under the hire purchase the purchaser,
becomes the owner only on the payment of last Installment. Therefore the legal form of the transaction is
ignored and the transaction is accounted as per its substance.
• Materiality- Financial Statement should disclose all the items and facts which are sufficient enough to
influence the decisions of reader or/user of financial statement.
CHANGES IN ACCOUNTING POLICIES

A change in accounting policies should be made in the following conditions:
• Adoption of different accounting policies is required by statute or
• for compliance with an Accounting Standard ,or
• It is considered that change would result in more appropriate presentation of financial statement.
(I) Fundamental Accounting Assumptions :It is generally assumed that financial statements are prepared on
the basis of fundamental accounting assumptions. Fundamental Accounting assumptions are:
• Going Concern- It means that enterprise had intention for continuing the operation in foreseeable future.
Foreseeable means coming one or two yea₹
In other words, neither there is intention of discontinuance of business, nor necessity of liquidation of
organization or discontinuance of major operations of the business.
• Consistency - It means that same accounting policies are followed from one period to another.
• Accrual- It means that financial statement is prepared on mercantile system only.
Other accounting assumption like business entity, money measurement, matching are not accounting
assumptions as per this accounting standard.
Assumption regarding fundamental accounting assumptions :If nothing has been written about the
fundamental accounting assumption in financial statements, it is assumed that fundamental accounting
assumptions have been followed in preparation of financial statements.
If any fundamental accounting assumption has not been followed, then this fact must be disclosed in financial
statements.

(II) Notes to Accounts

Notes to accounts are the explanation of the management about the items in the financial statements (Profit &
Loss Account and Balance Sheet). The management gives explanation and information about the items of profit
and loss account and balance sheet and any other items, by way of notes to accounts.
QUESTION:1 Describe briefly the term "Accounting policies".[CA Final, May 1992 (2 Marks)
QUESTION: 2Write a short note on discloser of accounting policy.

[CA PE-II Level May 2003,' Nov 2002 (4 Marks)] [CA Inter Nov 1999, May 1999 (4 Marks)]
QUESTION: 3. Mention six areas in which different accounting policies are followed by Companies.
(PCC, May - 2008; Marks 4)
Answer: Major Areas in which different accounting policies may be adopted by different enterprises includes:
• Methods of depreciation, depletion and amortisation, e.g., WDV method, SLM method
• Treatment of expenditure during construction, e.g., capitalization, written off, deferment
• Conversion or translation of foreign currency items, e.g. average rate, TT buying rate
• Valuation of inventories, e.g. FIFO, weighted average method
• Treatment of goodwill, e.g., capitalization method, super profit method
• Valuation of investments, e.g. lower of cost and fair value
• Treatment of retirement benefits, e.g., Pay-as-you-go
• Recognition of profit on long-term contracts, e.g proportionate completion method
• Valuation of fixed assets, e.g., historical cost, revalued amount
• Treatment of contingent liabilities, e.g., provision, discloser, no treatment

AS-2: (REVISED) VALUATION OF INVENTORIES
Objective: Objective of AS-2 is the determination of the value at which inventories are
carried in the financial statements until the related revenues are recognised. This Standard deals
with the determination of such value, including the ascertainment of cost of inventories and any
write-down thereof to net realisable value.
Scope: 1. This Standard should be applied in accounting for inventories otherthan:
(a) work in progress arising under construction contracts;

(b) work in progress arising in the ordinary course of business of service providers;
(c) shares, debentures and other financial instruments held as stock-in-trade; and
(d) producers’ inventories of livestock, agricultural and forest products, and mineral oils, ores
and gases to the extent that they are measured at net realisable value in accordance with
well- established practices in those industries.
Note: The inventories referred to in paragraph 1 (d) are measured at net realisable value at
certain stages of production. This occurs, for example, when agricultural crops have been
harvested or mineral oils, ores and gases have been extracted and sale is assured under a forward
contract or a government guarantee, or when a homogenous market exists and there is a negligible
risk of failure to sell. These inventories are excluded from the scope of this Standard.
Definitions:
3. The following terms are used in this Standard with the meanings specified:
3.1 Inventories are assets:
(a) held for sale in the ordinary course of business;
(b) in the process of production for such sale; or
(c) in the form of materials or supplies to be consumed in the production
process or in the rendering of services.
3.2 Net realisable value is the estimated selling price in the ordinary course of business less the
estimated costs of completion and the estimated costs necessary to make the sale.
4. Inventories encompass goods purchased and held for resale, for example, merchandise purchased by a
retailer and held for resale, computer software held for resale, or land and other property held for resale.
Inventories also encompass finished goods produced, or work in progress being produced, by the enterprise
and include materials, maintenance supplies, consumables and loose tools awaiting use in the
production process.
Inventories do not include machinery spares which can be used only in connection with an item of fixed
asset and whose use is expected to be irregular; such machinery spares are accounted for in accordance
with Accounting Standard (AS) 10.
VALUATION/MEASUREMENT OF INVENTORIES OF FINISHED GOODS/WIP:
According to AS-2 inventories should be valued at the lower of cost and net realisable value.

Cost of Inventories:
6. The cost of inventories should comprise all costs of purchase, costs of conversion and other costs
incurred in bringing the inventories to their present location and condition.
7. The costs of purchase consist of the purchase price including duties and taxes (other than those
subsequently recoverable by the enterprise from the taxing authorities), freight inwards and other
expenditure directly attributable to the acquisition. Trade discounts, rebates, duty drawbacks and other similar
items are deducted in determining the costs of purchase.
Costs of Conversion:
8. The costs of conversion of inventories include costs directly related to the units of production, such as direct
labour. They also include a systematic allocation of fixed and variable production overheads that are incurred in
converting materials into finished goods. Fixed production overheads are those indirect costs of production
that remain relatively constant regardless of the volume of production, such as depreciation and
maintenance of factory buildings and the cost of factory management and administration. Variable
production overheads are those indirect costs of production that vary directly, or nearly directly, with the
volume of production, such as indirect materials
9. The allocation of fixed production overheads for the purpose of their inclusion in the costs of
conversion is based on the normal capacity of the production facilities. Normal capacity is the production
expected to be achieved on an average over a number of periods or seasons under normal circumstances,
taking into account the loss of capacity resulting from planned maintenance. The actual level of production
may be used if it approximates normal capacity. The amount of fixed production overheads allocated to
each unit of production is not increased as a consequence of low production or idle plant. Unallocated
overheads are recognised as an expense in the period in which they are incurred. In periods of abnormally
high production, the amount of fixed production overheads allocated to each unit of production is decreased
so that inventories are not measured above cost. Variable production overheads are assigned to each unit of
production on the basis of the actual use of the production facilities.
10. A production process may result in more than one product being produced simultaneously. This is the case,
for example, when joint products are produced or when there is a main product and a by-product. When the
costs of conversion of each product are not separately identifiable, they are allocated between the products
on a rational and consistent basis. The allocation may be based, for example, on the relative sales value of
each product either at the stage in the production process when the products become separately
identifiable, or at the completion of production. Most by-products as well as scrap or waste materials, by
their nature, are immaterial. When this is the case, they are often measured at net realisable value and
this value is deducted from the cost of the main product. As a result, the carrying amount of the main
product is not materially different from its cost.
Other Costs:
11. Other costs are included in the cost of inventories only to the extent that they are incurred in bringing
the inventories to their present location and condition. For example, it may be appropriate to include
overheads other than production overheads or the costs of designing products for specific customers in
the cost of inventories.
12. Interest and other borrowing costs are usually considered as not relating to bringing the inventories to
their present location and condition and are, therefore, usually not included in the cost of inventories.
Exclusions from the Cost of Inventories:
13. In determining the cost of inventories in accordance with paragraph 6, it is appropriate to exclude
certain costs and recognise them as expenses in the period in which they are incurred. Examples of such
costs are:

(a) abnormal amounts of wasted materials, labour, or other productioncosts;

(b) storage costs, unless those costs are necessary in the production process prior to a further
production stage;
(c) administrative overheads that do not contribute to bringing the inventories to their present
location and condition; and
(d) selling and distribution costs.
Cost Formulas:
14. The cost of inventories of items that are not ordinarily interchangeable and goods or services
produced and segregated for specific projects should be assigned by specific identification of their
individual costs.
15. Specific identification of cost means that specific costs are attributed to identified items of inventory.
This is an appropriate treatment for items that are segregated for a specific project, regardless of
whether they have been purchased or produced. However, when there are large numbers of items of
inventory which are ordinarily interchangeable, specific identification of costs is inappropriate since, in such
circumstances, an enterprise could obtain predetermined effects on the net profit or loss for the period by
selecting
16. The cost of inventories, other than those dealt with in paragraph 14, should be assigned by using
the first-in, first-out (FIFO), or weighted average cost formula. The formula used should reflect the
fairest possible approximation to the cost incurred in bringing the items of inventory to their present
location and condition.
17. A variety of cost formulas is used to determine the cost of inventories other than those for which
specific identification of individual costs is appropriate. The formula used in determining the cost of an item
of inventory needs to be selected with a view to providing the fairest possible approximation to the cost incurred
in bringing the item to its present location and condition. The FIFO formula assumes that the items of inventory
which were purchased or produced first are consumed or sold first, and consequently the items remaining
in inventory at the end of the period are those most recently purchased or produced. Under the weighted
average cost formula, the cost of each item is determined from the weighted average of the cost of similar
items at the beginning of a period and the cost of similar items purchased or produced during the period. The
average may be calculated on a periodic basis, or as each additional shipment is received, depending upon
the circumstances of the enterprise.
Techniques for the Measurement of Cost:

18. Techniques for the measurement of the cost of inventories, such as the standard cost method or the
retail method, may be used for convenience if the results approximate the actual cost. Standard costs take
into account normal levels of consumption of materials and supplies, labour, efficiency and capacity
utilization. They are regularly reviewed and, if necessary, revised in the light of current conditions.
19. The retail method is often used in the retail trade for measuring inventories of large numbers of
rapidly changing items that have similar margins and for which it is impracticable to use other costing
methods. The cost of the inventory is determined by reducing from the sales value of the inventory the
appropriate percentage gross margin. The percentage used takes into consideration inventory which has
been marked down to below its original selling price. An average percentage for each retail department is
often used.
Net Realisable Value:

20. The cost of inventories may not be recoverable if those inventories are damaged, if they have become
wholly or partially obsolete, or if their selling prices have declined. The cost of inventories may also not be
recoverable if the estimated costs of completion or the estimated costs necessary to make the sale have

increased. The practice of writing down inventories below cost to net realisable value is consistent with
the view that assets should not be
21. Inventories are usually written down to net realisable value on an item- by-item basis. In some
circumstances, however, it may be appropriate to group similar or related items. This may be the case with
items of inventory relating to the same product line that have similar purposes or end uses and are
produced and marketed in the same geographical area and cannot be practicably evaluated separately
from other items in that product line. It is not appropriate to write down inventories based on a
classification of inventory, for example, finished goods, or all the inventories in a particular business segment.
22. Estimates of net realisable value are based on the most reliable evidence available at the time the
estimates are made as to the amount the inventories are expected to realise. These estimates take into
consideration fluctuations of price or cost directly relating to events occurring after the balance sheet date
to the extent that such events confirm the conditions existing at the balance sheet date.
24. Materials and other supplies held for use in the production of inventories are not written down
below cost if the finished products in which they will be incorporated are expected to be sold at or
above cost. However, when there has been a decline in the price of materials and it is estimated that
the cost of the finished products will exceed net realisable value, the materials are written down to net
realisable value. In such circumstances, the replacement cost of the materials may be the best
available measure of their net realisable value.
25. An assessment is made of net realisable value as at each balance sheet date.
Disclosure requirements:
26. The financial statements should disclose:
(a) the accounting policies adopted in measuring inventories,including the cost formula used;
and
(b) the total carrying number of inventories and its classificationappropriate to the enterprise.
27. Information about the carrying amounts held in different classifications of inventories and
the extent of the changes in these assets is useful to financial statement use₹ Common
classifications of inventories are raw materials and components, work in progress, finished
goods, stores and spares,and loose tools.
QUESTION:1 The company deals in three products, A, Band C, which are neither similar nor interchangeable.
At the time of closing of its account for the -year 2002-03. The Historical Cost and net realisable value of the
items of closing stock are determined as follows:
Items Historical Cost Net Realisable Value
A 40 28
B 32 32
C 16 24
What will be the value of Closing Stock? [May 2004, 4 marks]
Question 2. X ltd has stock of 100 kg of shampoo. Standard cost per kg Rs 40. Calculate cost of stock.
Question 3. Y ltd has stock of 500 pkd of shampoo. Retail price/pkd Rs 90. G.P. Rate 20%. Calculate cost of
stock.

Question 4. Rashika ltd produces PEPSI. In the month of April, it produces 1,00,000pkd of PEPSI . Following
expenses were incurred during the month of April:
Direct material = 8,00,000
Direct labour = 2,00,000
Indirect material ( e.g. bottle) = 1,00,000( variable factory overhead)
Fixed production overhead = 2,50,000
Transport cost to stores = 50,000
Assume normal production capacity = 1,20,000pkd.
Calculate cost per unit.
Question:5 The cost structure per kilogram of finished product is given below:
Material cost ₹100 per kg
Direct labour cost ₹20 per kg
Direct variable production overhead ₹10 per kg
Fixed production charges for the year on normal capacity of 1,00,000 kgs is ₹ 10 per kg. 2,000 kgs of finished
goods are in stock at the year end. How do you value the quantity in stock as per AS-2.
Question:6 In a production process normal waste is 5% of input. 5,000 MT of input were put in process
resulting in a wastage of 300 MT. Cost per MT of input is ₹ 1,000. The entire quantity of waste is in stock at
the year end. How will you value the inventory in accordance with the requirements of AS-2?
Answer: Abnormal amounts of waste materials, labour or other production costs are excluded from cost of
inventories and as such costs are recognized in the period in which they are incurred. In this case normal
wastage is 5% of 5,000 MT i.e. 250 MT. The balance of 50 MT is abnormal loss. The cost of normal loss will be
included in the cost of finished goods. The cost of abnormal loss being 50 x 1,000 i.e. ₹ 50.000 will be charged
to profit and loss account.
Question: 7
Receipts
3rd January 500 units @ ₹ 10 per unit
6th January 300 units @ ₹ 10.50 per unit
Issues
8th January 600 units
Valuation of issue price
500 units @ ₹ 10 per unit ₹ 5,000
100 units @ ₹ 10.50 per unit 1,050
Total value issues (FIFO) ₹ 6,050
Value of inventory 200 units @ Rs 10.50 = ₹ 2,100
Question: 8 The Aroma Flour Mills Ltd. does not maintain a perpetual inventory of wheat which it buys and
issues to the mills. The physical inventory taken on 28th February, 2000 shows the following quantity of wheat
on hand.
10 tonnes @ ₹ 420 per tonne.
The purchases during March were as under:
10-3-2000 100 tonnes @ ₹ 425 per tonne.
20-3-2000 50 tonnes @ ₹ 450 per tonne.
30-3-2000 10 tonnes @ ₹ 460 per tonne.
A physical inventory taken on 31st March, 2000 shows a stock of 15 tonnes of wheat in hand. Compute the
inventory value on 31st March, 2000 by FIFO method.

Question: 9 Below given the accounting data of Raghu running retail business in paints for ending 31 st
December,2012.
At cost At retail
Beginning inventory 20,000 30,000
Paints purchased 1,00,000 1,70,000
Paints available for sales 1,20,000 2,00,000
Net sales for the year 1,60,000
Ending inventory retail 40,000
You are required to estimate the cost of inventory as on 31 st December, 2012 using retail method.
Question: 10. A Ltd. uses a single raw material and converts that into a finished product, During the current
period the cost of production and sale prices are as shown below :
Raw material 3 units at ₹8 each = ₹24.00
Costs of conversion = ₹26.00
Manufacturing cost = ₹50.00
Selling price = ₹75.00
On the balance sheet date there is a steep fall in the price of the product to ₹45 because of competition and a
steep fall in the material prices. Currently materials can be purchased at ₹4 per unit. On the balance sheet date
there are 1,00,000 units of raw material in stock purchased at a cost of ₹8 per unit. You are required to value
inventory as on the balance sheet date.
Question: 11. Raw material purchased at ₹100 per kilo. Price of raw material is on the decline. The finished
goods in which the raw material is incorporated is expected to be sold at below cost. 10.000 kilograms of raw
material is in stock at the year end. Replacement cost of the material is ₹80 per kilogram. How will you value
the inventory having regard to AS-2?
Answer: Materials and other supplies held for use in the production of inventories are not written down below
cost if the finished products in which they will be incorporated are expected to be sold at or above cost.
However, when there has been a decline in the price of material and it is estimated that the cost of the
finished products will exceed the net realisable value, the materials are written down to net realisable value
(paragraph 24 of AS-2).
In the given case since prices are on the decline and also the finished product is likely to be sold at
below cost, raw materials will have to be valued at net realisable value. Replacement cost is the best available
measure of net realisable value. Hence 10,000 kilograms of material will be valued at ₹ 80 per kilogram.
QUESTION:12 Inventories of a car manufacturing company include the value of items, required for the
manufacturing of a model-which was removed from the production line five years back, at cost price. As a
company auditor how would you react on the above situations?[CA Inter, Nov 2002 (4 Marks)]
Answer: Inventory valuation: AS-2 on "Valuation of Inventories" provides that the cost of inventories
may not be recoverable if those inventories are damaged, have become wholly or partially obsolete, or if their
selling prices have declined. Accordingly, the auditor should examine whether appropriate allowance has
been made for the defective, damaged, obsolete and slow-moving inventories in determining the net
realizable value.
In this case, items required for the manufacture of a model, which has been withdrawn from the production
line five years ago, are included in the stock at cost price resulting in overstatement of inventory and profit.
As it appears from the facts given that the net realizable value of these items is likely to much lower than the
cost necessary to write down the inventory to "net realizable value" if the items of inventories become
wholly or partially obsolete. Under the circumstance, the auditor should qualify the report appropriately.
QUESTION:13.The auditor of a company has a difference of opinion with its chief accountant on the
Following matters concerning inventories. What would be v our advice to the auditor?
(a) It has been policy of the company to valu e the inventories of finished goods (textiles) at selling
price since the items have a ready market. However, the auditor objects to this valuation on the
basis that it amount to recognizing unrealized profit.

(b) The company incurs ₹ 20,00,000 as fixed production overheads even-year. It normally produces 1,00,000
units in a year. In 2000-01, however, it produces only 40,000 units. Fixed production overheads per unit for the
year 2000-01 have been determined by the chief accountant as ₹ 50 (₹ 20,00,000 / 40,000).
(c) What would be your answer in case (b) above if the actual production during the year were 1,25,000
units?
(d) The company deals in five products — A, B, C, D and E. At the time of closing of its accounts for the year,
the historical cost and the net realizable value of the items of closing stock are determined as below:
Items Historical Net realizable value
(₹ in million) (₹ in million)
A 20 14
B 16 16
C 8' 12
D 16 25
E 12 8
Total 72 75
The chief accountant values the closing stock in the draft financial statements at ₹ 72 million. The auditor,
however, does not concur with this valuation.
Answer:
(a) The auditor's stand is correct. AS-2 on "Valuation of Inventories' issued by the 'Institute of Chartered
Accountants of India', requires that inventories should be valued at the lower of cost and net
realizable value. Valuation of Inventories at selling price is not in accordance with AS-2.
(b) AS-2 on 'Valuation of inventories' requires that fixed production overheads should generally
be allocated on the basis of normal capacity of production facilities. Accordingly in the instant case, the
allocation should be on the basis of 1,00,000 units; i.e. fixed production overheads allocated to each unit of
production should be ₹ 20 and not ₹ 50.
(c) AS-2 on 'Valuation of inventories' requires that fixed production overheads should generally be
allocated on the basis of normal capacity of production facilities. However in case the actual
production during a period is abnormally high, the standard requires such allocation to be made on
the basis of actual production. Accordingly in the instant case the allocation should be on the basis of
1,25,000 units, i.e. fixed production overheads allocated to each unit of production should be on the
basis of 1,25,000 units, i.e. fixed production overheads allocated to each unit of production should be
₹ 16.
(d) As the 5 products are neither similar nor interchangeable, the valuation of inventory of each product
should be on the basis of the lower of its costand net realisable value as follows:
Items Balance Sheet valuation
(₹ in million)
X 14
Y 16
Z 8
Total 38
QUESTION: 14.An enterprise has in its stock 10000 bags of cement purchased at a cost of ₹ 180 per bag. The
terms of trade are that the cement is delivered at the buyer's door and the cost of delivery of ₹ 10 per bag is
paid by the seller. The selling price of cement is ₹ 187 per bag. Find out the value of closing stock ?
Answer:₹ 17,70,000
QUESTION:15. Normal Production 1,00,000 Units

Fixed Production overheads ₹ 5,00,000
Actual Production
Case I 1,00,000
Case II 80,000
Case lll 1,25,000
Discuss how the fixed production overheads will be allocated to inventor).
Answer: ₹ 5, ₹ 5, ₹ 4.
QUESTION : 16. A has purchased 10000 TV's at the cost of ₹ 8,000/- each. On Balance Sheet date there were
2000 TV's in stock. Of these 500 were earmarked against a sales contract at a price of ₹ 9,000/ each. The

general price of this brand has dropped to ₹ 7,500/-. Sales contract is committed by both parties. You are
required to value stock.
Answer .₹ 152, 50,000/-
QUESTION:17 A Ltd. uses a single raw material that converts that info finish product. During the current
period the cost of production and sales are as follows :
Raw material 3 units at ₹ 8 each ₹ 24.00
Cost of conversion ₹ 26.00
Selling Price ₹ 75.00
On the balance sheet date there is a steep fall in the price of product to ₹ 45/-because of competition and a
steep fall in material price. Currently materials can be purchased at ₹ 4 per unit. On the balance sheet date
there are 1,00,000 units of raw material in stock purchased on 31.3.2004 at cost of ₹ 5 per unit. You are
required to value inventory as on the balance date.
QUESTION: 18. State with reference to accounting standard, how you will value the inventories in the
following cases:
1. Raw material was purchased at ₹ 100 per kilo. Price of raw material is on the decline. The finished goods
in which the raw material is incorporated is expected to be sold at below cost. 10,000 kgs. of raw material is on
stock at the year end. Replacement cost is ₹ 80 per kg.
2. In a production process, normal waste is 5% of input, 5,000 MT of input were put in process resulting in a
wastage of 300 MT. Cost MT of input is ₹ 1,000. The entire quantity of waste is on stock at the year end.
Suggest accounting treatment of abnormal Loss
3. Per Kg. of finished goods consisted of:
Material Cost ₹ 100 per kg.
Direct labour cost ₹20 per kg.
Direct variable production overhead ₹10 per Kg.
Fixed production charges for the year on normal capacity of one lakh kgs. Is ₹10 lakhs. 2,000 Kgs. of finished
goods are on stock at the year end.CA Final November, 2000 (12 Marks)
Answer: 8, 00,000 (b) 52631(c) 2,80,000
QUESTION: 19 C Ltd., a Pharmaceutical Company, while valuing its finished stock at the year-end wants to
include interest on Bank Overdraft as an element of cost, for the reason that overdraft has been taken
specifically for the purpose of financing current assets like inventory and for meeting day to day working
expenses. [May 2005, Audit 5 marks]
Answer: As per Accounting Standard 2 "Valuation of Inventories", cost of inventories comprises all costs of
purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and
condition. However, it makes clear that interest and other borrowing costs are usually not included in the cost
of inventories because generally such costs are not related in bringing the inventories to their present location
and condition. Therefore, the proposal of C Ltd. to include interest on bank overdraft as an element of cost is
not acceptable because it does not form part of cost of production.
Question: 20 .Sonar Bhandar deals in old colour TVs. It has 4 TVs the particulars of which are given below :
You are asked to compute the value of stock to be included, in Balance Sheet for the year ended 31stMarch
2009:
TVs Onida Philips EC Sony Total

₹ ₹ ₹ ₹ ₹
Cost Price 10,000 20,000 35,000 50,000 1,15,000
(freight incurred to bring 3,000 2,000 5,000 10,000
into godown)
Net Realisable Value 18,000 30,000 36,000 55,000 1,39,000

Question: 21. Value of opening stock =₹ 70,000

Purchases = ₹ 3,40,000
Manufacturing expense = ₹ 20,000
Gross Profit Margin = 25% on cost.
Selling expense = ₹ 10,000
Sales (Net) = ₹ 5,00,000
Calculate (i) Closing stock
(ii) Cost of goods available for sale
(iii) Cost of goods sold.
(iv) Net profit.
Question: 22.Purchases = ₹ 3,00,000

Manufacturing expenses = ₹ 40,000
Sales = 33 1/3 % above cost
Opening Stock = ₹ 40,000
Sales (Net) = 4,50,000
Sales return = ₹ 20,000
Calculate Closing stock and gross sales.
Question 23. (DELETED)

Question: 24. Opening stock( 1st April 2012) = 400 kg@ Rs 24
On 12 April – 500 kg purchased @ Rs22
On 28April company issued 1000 kg to the factory.
Calculate value of closing stock and cost of issue under periodic system by
FIFO Method
Weighted average method
Question: 25.
1, April, 2012
Opening stock = 100 Kg @ ₹ 20
Date Purchases Issue Rate

4 April 200 Kg ₹ 21
7 April 300 Kg ₹ 18
10 April --- 150 Kg ---
12 April 100 Kg --- ₹ 22
15 April --- 250 Kg ---
18 April 400kg --- ₹ 20
20 April 100Kg --- ₹ 15
22 April Goods returned to suppliers from the lot purchased on 20 th April
25 April --- 400 Kg ---
28 April Shortage of 50 Kg
30 April 150 Kg --- 17
CALCULATE
Value of Closing stock
Cost of goods available for sale
Cost of goods sold
Profit earned if total sales is ₹ 2,00,000
Under:
(a) FIFO
(b) Weighted Average method
Following perpetual system of recording .

(Detail explanation of para 10 of AS-2):
ALLOCATION OF COST TO JOINT PRODUCTS AND BY-PRODUCTS:-- a production process

may result in more than one product being produced simultaneously. This is the case when joint
products are produced or when there is a main product and a by-product.
• when joint products are produced or when there is a main product and a by-product and the costs
of conversion of each product are not separately identifiable — they are allocated between the
products on a rational and consistent basis.
• The allocation may be based, for example, on the relative sales value of each product either at the stage in
the production process when the products become separately identifiable ( point of split off), or at the
completion of production.
• In case of by-products which are by their nature immaterial, then they are often measured at net
realisable value and this value is deducted from the cost of the main product.
Question 26. In a manufacturing process of Mars Ltd one by-product BP emerges besides two main
products MP1 and MP2 apart from scrap. Details of cost of production process are here under:
Items Unit Amount Output Closing

stock
Raw materials 14,500 1,50,000 MP1- 5000units 250 units
Wages ---- 90,000 MP2 -4000Units 100 units
Fixed overhead ---- 65,000 BP-2000 Units --
Variable overhead ---- 50,000
Average market price of MP1 and MP2 is ₹60 per unit and ₹50 per unit respectively, by-product is sold @
₹20 per unit. There is a profit of ₹5000 on sale of by-product after incurring separate processing charges
of ₹8,000 and packing charges of ₹2,000. ₹5,000 was realised from sale of scrap. Calculate the value of
closing stock of MP1 and MP2 as at end. Assuming amount of BP is immaterial.
Question: 27. M/s P & Q purchase shirts @ ₹ 200 per piece. The average freight is ₹10 and insurance
in transit is 1%. Octroi duty is 5 %. On the average, the firm earns a rebate of 4% on its purchase. Godown
and storekeeping charges amount to 10% of the purchase price per annum. In 1999-2000, the firm
purchased 10,000 shirts of which 1,500 remained in stock at the end of the year. Of the latter, 100 were
such as were out of fashion and were expected to be sold @ ₹150 per shirt. Ascertain the value of closing
stock.
Question: 28. M/s X, Y and Z are in retail business, following information are obtained from their records
for the year ended 31.3.2012:
Goods received from suppliers (Subject to trade dis. & taxes) ₹15,75.500
Trade discount 3% and sales tax 11 %
Packaging and transportation charges ₹ 87,500

Sales during the year ₹ 22,45,400
Sales price of closing inventories ₹2,35,000
Find out the historical cost of inventories using adjusted selling price method.
Question 29. Cost of a partly finished unit at the end of 2021-22 is ₹150. The unit can be finished next year by a
further expenditure of ₹100. The finished product can be sold at ₹250, subject to a payment of 4% brokerage on
selling price. Calculate value of inventory of 1200 units of work in progress.

Question 30. X Ltd purchased goods at the cost of ₹40 Lakhs in October 2021. Till march 2022, 75% of the
stock were sold. The company wants to disclose closing stock at ₹10 lakhs. The expected sale value is ₹11 lakhs
and a commission at 10% on sale is payable to the agent. Advise, what is the correct closing stock to be
disclosed as at 31-3-2022.
Inventory system:-There are two inventory systems, viz. Periodic Inventory System and
Perpetual Inventory System.
(i) Periodic Inventory System:
Periodic Inventory System is a method of ascertaining inventory by taking an actual physical

count (or measure or weight) of all the inventory items on hand at a particular date on which information
about inventory is required. Under this system, all purchases and purchase returns of inventories arc
recorded. But issues of materials are not recorded on regular basis. Therefore the inventories used during
the year is calculated by adding opening stock to purchases and deducting closing stock of inventories.
Cost of goods Sold = Opening Inventory + Purchases – Closing Inventory
(i) Perpetual Inventory System:

Perpetual Inventory System is a method of recording inventory balances after each receipt and
issue. Under this system all purchases of material, issue Jo production, return to suppliers, and
balance of materials are recorded in store ledger. Under this system store ledger shows complete
movement of materials. In order to ensure accuracy of perpetual inventory records, physical stocks
should be checked and compared with recorded balances. The discrepancies, if any, should be
investigated and adjusted in the accounts properly. The closing inventory is calculated as residual figure
(which includes lost goods also.) as follows:-
Distinction between periodic Inventory System and Perpetual Inventory System (most imp)
Periodic Inventory System Perpetual Inventory System
➢ Inventory is ascertained by taking an ➢ Inventor is ascertained on the basis of

actual physical count. records.
➢ Inventory is directly calculated by ➢ Inventory is calculated as a residual figure as
applying the method of valuation. Cost of follows:
goods sold = Op. Inventory + Purchases- Op. Inventory + Purchases - Cost of goods
Closing Stock. sold.
➢ Cost of goods sold includes cost of lost
goods (if any).
➢ It requires, closing down of work for stock-
taking. ➢ The cost of closing inventory includes cost of
➢ It does not facilitate the continuous stock lost goods (if any)
checking. ➢ It does not require closing down of work for
➢ It is a simple and Inexpensive. stock- taking.
➢ The method of valuation (e.g. FIFO / ➢ It facilitates the continuous stock checking
Weighted Average) is applied only once at ➢ It is elaborate and expensive.
the end of the accounting period to ➢ The method of valuation (e.g. FIFO /
ascertain the cost of closing inventory. Weighted Average) is applied on continuous
basis during the accounting period to
ascertain the cost of goods sold.

PROPERTY, PLANT AND EQUIPMENT -- AS 10 (Revised)
Objective:
The objective of this Standard is to prescribe the accounting treatment for property, plant and equipment
so that users of the financial statements can discern information about investment made by an enterprise
in its property, plant and equipment and the changes in such investment. The principal issues in
accounting for property, plant and equipment are the recognition of the assets, the determination of their
carrying amounts and the depreciation charges and impairment losses to be recognised in relation to
them.
Scope / Applicability:
This Standard should be applied in accounting for property, plant and equipment except when another
Accounting Standard requires or permits a different accounting treatment.
This Standard does not apply to:

(a) Biological assets related to agricultural activity other than bearer plants. This Standard applies to
bearer plants but it does not apply to the produce on bearer plants; and
(b) Wasting assets including mineral rights, expenditure on the exploration for and extraction of
minerals, oil, natural gas and similar non-regenerative resources.
However, this Standard applies to property, plant and equipment used to develop or maintain the assets
described in (a) and (b) above.
Other Accounting Standards may require recognition of an item of property, plant and equipment based
on an approach different from that in this Standard. For example, AS 19, Leases, requires an enterprise to
evaluate its recognition of an item of leased property, plant and equipment on the basis of the transfer of
risks and rewards.
However, in such cases other aspects of the accounting treatment for these assets, including depreciation,
are prescribed by this Standard.
Investment property, as defined in AS 13, Accounting for Investments, should be accounted for only in
accordance with the cost model prescribed in this standard.
Important Terminology:
1. Agricultural Activity is the management by an enterprise of the biological transformation and harvest of
biological assets for sale or for conversion into agricultural produce or into additional biological assets.
2. Agricultural Produce is the harvested product of biological assets of the enterprise.
3. Bearer plant is a plant that:
a) is used in the production or supply of agricultural produce;
b) is expected to bear produce for more than a period of twelve months; and
c) has a remote likelihood of being sold as agricultural produce, except for incidental scrap sales. The
following are not bearer plants:
a) plants cultivated to be harvested as agricultural produce (for example, trees grown for use as lumber);
b) plants cultivated to produce agricultural produce when there is more than a remote likelihood that the
entity will also harvest and sell the plant as agricultural produce, other than as incidental scrap sales
(for example, trees that are cultivated both for their fruit and their lumber); and
c) annual crops (for example, maize and wheat). When bearer plants are no longer used to bear produce,
they might be cut down and sold as scrap, for example, for use as firewood. Such incidental scrap
sales would not prevent the plant from satisfying the definition of a bearer plant.
4. Biological Asset is a living animal or plant.
5. Carrying amount is the amount at which an asset is recognised after deducting any accumulated
depreciation and accumulated impairment losses.

6. Cost is the amount of cash or cash equivalents paid or the fair value of the other consideration given to
acquire an asset at the time of its acquisition or construction or, where applicable, the amount
attributed to that asset when initially recognised in accordance with the specific requirements of other
Accounting Standards.
7. Depreciable amount is the cost of an asset, or other amount substituted for cost, less its residual value.
8. Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life.
9. Enterprise -specific value is the present value of the cash flows an enterprise expects to arise from the
continuing use of an asset and from its disposal at the end of its useful life or expects to incur when
settling a liability.
10. Fair value is the amount for which an asset could be exchanged between knowledgeable, willing parties
in an arm’s length transaction.
11. Gross carrying amount of an asset is its cost or other amount substituted for the cost in the books of
account, without making any deduction for accumulated depreciation and accumulated impairment
losses.
12. An impairment loss is the amount by which the carrying amount of an asset exceeds its recoverable
amount.
13. Property, plant and equipment are tangible items that: a) are held for use in the production or supply of
goods or services, for rental to others, or for administrative purposes; and b) are expected to be used
during more than a period of twelve months.
14. Recoverable amount is the higher of an asset’s net selling price and its value in use.
15. The residual value of an asset is the estimated amount that an enterprise would currently obtain from
disposal of the asset, after deducting the estimated costs of disposal, if the asset were already of the age
and in the condition expected at the end of its useful life.
16. Useful life is:
a) the period over which an asset is expected to be available for use by an enterprise; or
b) The number of production or similar units expected to be obtained from the asset by an enterprise.
Recognition:
• The cost of an item of property, plant and equipment should be recognised as an asset if, and only if:
(a) it is probable that future economic benefits associated with the item will flow to the enterprise;
and
(b) The cost of the item can be measured reliably.
• Items such as spare parts, stand-by equipment and servicing equipment are recognised in
accordance with this Standard when they meet the definition of property, plant and equipment.
Otherwise, such items are classified as inventory.
• This Standard does not prescribe the unit of measure for recognition, i.e., what constitutes an item
of property, plant and equipment. Thus, judgment is required in applying the recognition criteria to
specific circumstances of an enterprise.
• An enterprise evaluates under this recognition principle all its costs on property, plant and
equipment at the time they are incurred. These costs include costs incurred:
(a) Initially to acquire or construct an item of property, plant and equipment; and
(b) Subsequently to add to, replace part of, or service it.
Initial Costs: The definition of ‘property, plant and equipment’ covers tangible items which are held for
use or for administrative purposes. The term ‘administrative purposes’ has been used in wider sense to
include all business purposes other than production or supply of goods or services or for rental for othe₹
Thus, property, plant and equipment would include assets used for selling and distribution, finance and
accounting, personnel and other functions of an enterprise. Items of property, plant and equipment may
also be acquired for safety or environmental reasons. The acquisition of such property, plant and
equipment, although not directly increasing the future economic benefits of any particular existing item
of property, plant and equipment, may be necessary for an enterprise to obtain the future economic
benefits from its other assets. Such items of property, plant and equipment qualify for recognition as
assets because they enable an enterprise to derive future economic benefits from related assets in excess
of what could be derived had those items not been acquired. For example, a chemical manufacturer may

install new chemical handling processes to comply with environmental requirements for the production
and storage of dangerous chemicals; related plant enhancements are recognised as an asset because
without them the enterprise is unable to manufacture and sell chemicals. The resulting carrying amount
of such an asset and related assets is reviewed for impairment in accordance with AS 28, Impairment of
Assets.
Subsequent Costs:
• Under the recognition principle (as mentioned above), an enterprise does not recognise in the
carrying amount of an item of property, plant and equipment the costs of the day-today servicing of
the item. Rather, these costs are recognised in the statement of profit and loss as incurred. Costs of
day-to-day servicing are primarily the costs of labour and consumables, and may include the cost of
small parts. The purpose of such expenditures is often described as for the ‘repairs and
maintenance’ of the item of property, plant and equipment.
• Parts of some items of property, plant and equipment may require replacement at regular intervals
or it may require replacement several times. Items of property, plant and equipment may also be
acquired to make a less frequently recurring replacement or to make a non-recurring replacement.
Under the recognition principle (as discussed above), an enterprise recognises in the carrying
amount of an item of property, plant and equipment the cost of replacing part of such an item when
that cost is incurred if the recognition criteria are met. The carrying amount of those parts that are
replaced is derecognised in accordance with the ‘derecognition provisions’ of this Standard.
• A condition of continuing to operate an item of property, plant and equipment may be performing
regular major inspections for faults regardless of whether parts of the item are replaced. When each
major inspection is performed, its cost is recognised in the carrying amount of the item of property,
plant and equipment as a replacement if the recognition criteria are satisfied. Any remaining
carrying amount of the cost of the previous inspection is derecognised.
• The derecognition of the carrying amount occurs regardless of whether the cost of the previous part
inspection was identified in the transaction in which the item was acquired or constructed. If it is not
practicable for an enterprise to determine the carrying amount of the replaced part/ inspection, it
may use the cost of the replacement or the estimated cost of a future similar inspection as an
indication of what the cost of the replaced part/ existing inspection component was when the item
was acquired or constructed.
Measurement at Recognition:
An item of property, plant and equipment that qualifies for recognition as an asset should be measured at
its cost.
Elements of Cost:
The cost of an item of property, plant and equipment comprises:
(a) its purchase price, including import duties and non –refundable purchase taxes, after deducting
trade discounts and rebates.
(b) any costs directly attributable to bringing the asset to the location and condition necessary for it to
be capable of operating in the manner intended by management.
(c) the initial estimate of the costs of dismantling, removing the item and restoring the site on which it is
located, referred to as ‘decommissioning, restoration and similar liabilities’, the obligation for which
an enterprise incurs either when the item is acquired or as a consequence of having used the item
during a particular period for purposes other than to produce inventories during that period.
Measurement of Cost:
• The cost of an item of property, plant and equipment is the cash price equivalent at the
recognition date. If payment is deferred beyond normal credit terms, the difference between the

cash price equivalent and the total payment is recognised as interest over the period of credit
unless such interest is capitalised in accordance with AS 16.
• One or more items of property, plant and equipment may be acquired in exchange for a non-
monetary asset or assets, or a combination of monetary and non-monetary assets. The following
discussion refers simply to an exchange of one non-monetary asset for another, but it also
applies to all exchanges described in the preceding sentence. The cost of such an item of
property, plant and equipment is measured at fair value unless (a) the exchange transaction lacks
commercial substance or (b) the fair value of neither the asset(s) received nor the asset(s) given
up is reliably measurable.
The acquired item(s) is/are measured in this manner even if an enterprise cannot immediately
derecognise the asset given up. If the acquired item(s) is/are not measured at fair value, its/their
cost is measured at the carrying amount of the asset(s) given up.
• An enterprise determines whether an exchange transaction has commercial substance by
considering the extent to which its future cash flows are expected to change as a result of the
transaction. An exchange transaction has commercial substance if:
(a) the configuration (risk, timing and amount) of the cash flows of the asset received differs
from the configuration of the cash flows of the asset transferred; or
(b) the enterprise-specific value of the portion of the operations of the enterprise affected by
the transaction changes as a result of the exchange;
(c) and the difference in (a) or
(d) is significant relative to the fair value of the assets exchanged.
• For the purpose of determining whether an exchange transaction has commercial substance, the
enterprise -specific value of the portion of operations of the enterprise affected by the
transaction should reflect post-tax cash flows. In certain cases, the result of these analyses may
be clear without an enterprise having to perform detailed calculations.
• The fair value of an asset is reliably measurable if (a) the variability in the range of reasonable fair
value measurements is not significant for that asset or (b) the probabilities of the various
estimates within the range can be reasonably assessed and used when measuring fair value. If an
enterprise is able to measure reliably the fair value of either the asset received or the asset given
up, then the fair value of the asset given up is used to measure the cost of the asset received
unless the fair value of the asset received is more clearly evident.
• Where several items of property, plant and equipment are purchased for a consolidated price,
the consideration is apportioned to the various items on the basis of their respective fair values
at the date of acquisition. In case the fair values of the items acquired cannot be measured
reliably, these values are estimated on a fair basis as determined by competent value₹
Measurement after Recognition:

An enterprise should choose either the cost model or the revaluation model as its accounting policy and
should apply that policy to an entire class of property, plant and equipment. It is discussed hereunder:
(a) Cost Model:

After recognition as an asset, an item of property, plant and equipment should be carried at its cost less
any accumulated depreciation and any accumulated impairment losses.
(b) Revaluation Model:

• After recognition as an asset, an item of property, plant and equipment whose fair value can be
measured reliably should be carried at a revalued amount, being its fair value at the date of the
revaluation less any subsequent accumulated depreciation and subsequent accumulated
impairment losses. Revaluations should be made with sufficient regularity to ensure that the

carrying amount does not differ materially from that which would be determined using fair value
at the balance sheet date.
• The fair value of items of property, plant and equipment is usually determined from market-
based evidence by appraisal that is normally undertaken by professionally qualified value₹
• If there is no market-based evidence of fair value because of the specialised nature of the item of
property, plant and equipment and the item is rarely sold, except as part of a continuing
business, an enterprise may need to estimate fair value using an income approach (for example,
based on discounted cash flow projections) or a depreciated replacement cost approach which
aims at making a realistic estimate of the current cost of acquiring or constructing an item that
has the same service potential as the existing item.
• The frequency of revaluations depends upon the changes in fair values of the items of property,
plant and equipment being revalued. When the fair value of a revalued asset differs materially
from its carrying amount, a further revaluation is required. Some items of property, plant and
equipment experience significant and volatile changes in fair value, thus necessitating annual
revaluation. Such frequent revaluations are unnecessary for items of property, plant and
equipment with only insignificant changes in fair value. Instead, it may be necessary to revalue
the item only every three or five yea₹
• When an item of property, plant and equipment is revalued, the carrying amount of that asset is
adjusted to the revalued amount. At the date of the revaluation, the asset is treated in one of the
following ways:
a. the gross carrying amount is adjusted in a manner that is consistent with the revaluation of
the carrying amount of the asset; or
b. the accumulated depreciation is eliminated against the gross carrying amount of the asset.
• If an item of property, plant and equipment is revalued, the entire class of property, plant and
equipment to which that asset belongs should be revalued.
• The items within a class of property, plant and equipment are revalued simultaneously to avoid
selective revaluation of assets and the reporting of amounts in the financial statements that are
a mixture of costs and values as at different dates. However, a class of assets may be revalued on
a rolling basis provided revaluation of the class of assets is completed within a short period and
provided the revaluations are kept up to date.
• An increase in the carrying amount of an asset arising on revaluation should be credited directly
to owners’ interests under the heading of revaluation surplus. However, the increase should be
recognised in the statement of profit and loss to the extent that it reverses a revaluation
decrease of the same asset previously recognized in the statement of profit and loss.
• A decrease in the carrying amount of an asset arising on revaluation should be charged to the
statement of profit and loss. However, the decrease should be debited directly to owners’
interests under the heading of revaluation surplus to the extent of any credit balance existing in
the revaluation surplus in respect of that asset.
• The revaluation surplus included in owners’ interests in respect of an item of property, plant and
equipment may be transferred to the revenue reserves when the asset is derecognised. This may
involve transferring the whole of the surplus when the asset is retired or disposed of. However,
some of the surplus may be transferred as the asset issued by an enterprise. In such a case, the
amount of the surplus transferred would be the difference between depreciation based on the
revalued carrying amount of the asset and depreciation based on its original cost. Transfers from
revaluation surplus to the revenue reserves are not made through the statement of profit and
loss.
Depreciation:
• Each part of an item of property, plant and equipment with a cost that is significant in relation to
the total cost of the item should be depreciated separately.
• An enterprise allocates the amount initially recognised in respect of an item of property, plant
and equipment to its significant parts and depreciates each such part separately. For example, it

may be appropriate to depreciate separately the airframe and engines of an aircraft, whether
owned or subject to a finance lease.
• A significant part of an item of property, plant and equipment may have a useful life and a
depreciation method that are the same as the useful life and the depreciation method of another
significant part of that same item. Such parts may be grouped in determining the depreciation
charge.
• To the extent that an enterprise depreciates separately some parts of an item of property, plant
and equipment, it also depreciates separately the remainder of the item. The remainder consists
of the parts of the item that are individually not significant. If an enterprise has varying
expectations for these parts, approximation techniques may be necessary to depreciate the
remainder in a manner that faithfully represents the consumption pattern and/or useful life of its
parts.
• An enterprise may choose to depreciate separately the parts of an item that do not have a cost
that is significant in relation to the total cost of the item.
• The depreciation charge for each period should be recognised in the statement of profit and loss
unless it is included in the carrying amount of another asset.
• The depreciation charge for a period is usually recognised in the statement of profit and loss.
However, sometimes, the future economic benefits embodied in an asset are absorbed in
producing other assets. In this case, the depreciation charge constitutes part of the cost of the
other asset and is included in its carrying amount. For example, the depreciation of
manufacturing plant and equipment is included in the costs of conversion of inventories (see AS
2). Similarly, the depreciation of property, plant and equipment used for development activities
may be included in the cost of an intangible asset recognised in accordance with AS 26,
Intangible Assets.
Depreciable Amount and Depreciation Period:

• The depreciable amount of an asset should be allocated on a systematic basis over its useful life.
• The residual value and the useful life of an asset should be reviewed at least at each financial year-
end and, if expectations differ from previous estimates, the change(s) should be accounted for as a
change in an accounting estimate in accordance with AS 5, Net Profit or Loss for the Period, Prior
Period Items and Changes in Accounting Policies.
• Depreciation is recognised even if the fair value of the asset exceeds its carrying amount, as long as
the asset’s residual value does not exceed its carrying amount. Repair and maintenance of an asset
do not negate the need to depreciate it.
• The depreciable amount of an asset is determined after deducting its residual value.
• The residual value of an asset may increase to an amount equal to or greater than its carrying
amount. If it does, depreciation charge of the asset is zero unless and until its residual value
subsequently decreases to an amount below its carrying amount.
• Depreciation of an asset begins when it is available for use, i.e., when it is in the location and
condition necessary for it to be capable of operating in the manner intended by management.
Depreciation of an asset ceases at the earlier of the date that the asset is retired from active use and
is held for disposal and the date that the asset is derecognised. Therefore, depreciation does not
cease when the asset becomes idle or is retired from active use (but not held for disposal) unless the
asset is fully depreciated. However, under usage methods of depreciation, the depreciation charge
can be zero while there is no production.
• The future economic benefits embodied in an asset are consumed by an enterprise principally
through its use. However, other factors, such as technical or commercial obsolescence and wear and
tear while an asset remains idle, often result in the diminution of the economic benefits that might
have been obtained from the asset. Consequently, all the following factors are considered in
determining the useful life of an asset:
a. expected usage of the asset. Usage is assessed by reference to the expected capacity or
physical output of the asset.

b. expected physical wear and tear, which depends on operational factors such as the number
of shifts for which the asset is to be used and the repair and maintenance programme, and
the care and maintenance of the asset while idle.
c. technical or commercial obsolescence arising from changes or improvements in production,
or from a change in the market demand for the product or service output of the asset.
Expected future reductions in the selling price of an item that was produced using an asset
could indicate the expectation of technical or commercial obsolescence of the asset, which,
in turn, might reflect a reduction of the future economic benefits embodied in the asset.
d. legal or similar limits on the use of the asset, such as the expiry dates of related leases.
• The useful life of an asset is defined in terms of its expected utility to the enterprise. The asset
management policy of the enterprise may involve the disposal of assets after as specified time or
after consumption of specified proportion of the future economic benefits embodied in the asset.
Therefore, the useful life of an asset may be shorter than its economic life. The estimation of the
useful life of the asset is a matter of judgment based on the experience of the enterprise with similar
assets.
• Land and buildings are separable assets and are accounted for separately, even when they are
acquired together. With some exceptions, such as quarries and sites used for landfill, land has an
unlimited useful life and therefore is not depreciated. Buildings have a limited useful life and
therefore are depreciable assets. An increase in the value of the land on which a building stands does
not affect the determination of the depreciable amount of the building.
• If the cost of land includes the costs of site dismantlement, removal and restoration, that portion of
the land asset is depreciated over the period of benefits obtained by incurring those costs. In some
cases, the land itself may have a limited useful life, in which case it is depreciated in a manner that
reflects the benefits to be derived from it.
Depreciation Method:
• The depreciation method used should reflect the pattern in which the future economic benefits of
the asset are expected to be consumed by the enterprise.
• The depreciation method applied to an asset should be reviewed at least at each financial year-end
and, if there has been a significant change in the expected pattern of consumption of the future
economic benefits embodied in the asset, the method should be changed to reflect the changed
pattern. Such a change should be accounted for as a change in an accounting estimate in accordance
with AS 5.
• A variety of depreciation methods can be used to allocate the depreciable amount of an asset on a
systematic basis over its useful life. These methods include the straight-line method, the diminishing
balance method and the units of production method. Straight-line depreciation results in a constant
charge over the useful life if the residual value of the asset does not change. The diminishing balance
method results in a decreasing charge over the useful life. The units of production method results in a
charge based on the expected use or output. The enterprise selects the method that most closely
reflects the expected pattern of consumption of the future economic benefits embodied in the asset.
That method is applied consistently from period to period unless there is a change in the expected
pattern of consumption of those future economic benefits or that the method is changed in
accordance with the statute to best reflect the way the asset is consumed.
• A depreciation method that is based on revenue that is generated by an activity that includes the use
of an asset is not appropriate. The revenue generated by an activity that includes the use of an asset
generally reflects factors other than the consumption of the economic benefits of the asset. For
example, revenue is affected by other inputs and processes, selling activities and changes in sales
volumes and prices. The price component of revenue may be affected by inflation, which has no
bearing upon the way in which an asset is consumed.

Changes in Existing Decommissioning, Restoration and Other Liabilities:

• The cost of property, plant and equipment may undergo changes subsequent to its acquisition or
construction on account of changes in liabilities, price adjustments, changes in duties, changes in
initial estimates of amounts provided for dismantling, removing, restoration and similar factors and
included in the cost of the asset. Such changes in cost should be accounted for as under:
If the related asset is measured using the cost model:

✓ Changes in the liability should be added to, or deducted from, the cost of the related asset in the
current period.
• The amount deducted from the cost of the asset should not exceed its carrying amount. If a
decrease in the liability exceeds the carrying amount of the asset, the excess should be
recognised immediately in the statement of profit and loss.
✓ If the adjustment results in an addition to the cost of an asset, the enterprise should consider
whether this is an indication that the new carrying amount of the asset may not be fully
recoverable. If it is such an indication, the enterprise should test the asset for impairment by
estimating its recoverable amount, and should account for any impairment loss, in accordance
with AS 28.
If the related asset is measured using the revaluation model:

✓ Changes in the liability alter the revaluation surplus or deficit previously recognised on that asset,
so that:
✓ a decrease in the liability should be credited directly to revaluation surplus in the owners’
interest, except that it should be recognised in the statement of profit and loss to the
extent that it reverses a revaluation deficit on the asset that was previously recognised in
the statement of profit and loss;
An increase in the liability should be recognised in the statement of profit and loss, except
that it should be debited directly to revaluation surplus in the owners’ interest to the
extent of any credit balance existing in the revaluation surplus in respect of that asset.
✓ In the event that a decrease in the liability exceeds the carrying amount that would have been
recognised had the asset been carried under the cost model, the excess should be recognised
immediately in the statement of profit and loss.
✓ A change in the liability is an indication that the asset may have to be revalued in order to ensure
that the carrying amount does not differ materially from that which would be determined using
fair value at the balance sheet date. Any such revaluation should be taken into account in
determining the amounts to be taken to the statement of profit and loss and the owners’
interest. If are valuation is necessary, all assets of that class should be revalued.
The adjusted depreciable amount of the asset is depreciated over its useful life. Therefore, once the
related asset has reached the end of its useful life, all subsequent changes in the liability should be
recognised in the statement of profit and loss as they occur. This applies under both the cost model and
the revaluation model.
Impairment: To determine whether an item of property, plant and equipment is impaired, an

enterprise applies AS 28, Impairment of Assets. AS 28 explains how an enterprise reviews the carrying
amount of its assets, how it determines the recoverable amount of an asset, and when it recognises, or
reverses the recognition of, an impairment loss.
Compensation for Impairment:

✓ Compensation from third parties for items of property, plant and equipment that were impaired,
lost or given up should be included in the statement of profit and loss when the compensation
becomes receivable.
✓ Impairments or losses of items of property, plant and equipment, related claims for or payments of
compensation from third parties and any subsequent purchase or construction of replacement
assets are separate economic events and are accounted for separately as follows:
✓ Impairments of items of property, plant and equipment are recognized in accordance with AS
28;
✓ Derecognition of items of property, plant and equipment retired or disposed of is determined
in accordance with this Standard;
✓ Compensation from third parties for items of property, plant and equipment that were
impaired, lost or given up is included in determining profit or loss when it becomes
receivable; and
✓ The cost of items of property, plant and equipment restored, purchased or constructed as
replacements is determined in accordance with this Standard.
Retirements: Items of property, plant and equipment retired from active use and held for disposal
should be stated at the lower of their carrying amount and net realizable value. Any write-down in this
regard should be recognised immediately in the statement of profit and loss.
Derecognition:
• The carrying amount of an item of property, plant and equipment should be derecognised
✓ on disposal; or
✓ when no future economic benefits are expected from its use or disposal.
• The gain or loss arising from the derecognition of an item of property, plant and equipment should
be included in the statement of profit and loss when the item is derecognised (unless AS 19, Leases,
requires otherwise on a sale and leaseback).Gains should not be classified as revenue, as defined in
AS 9, Revenue Recognition.
• However, an enterprise that in the course of its ordinary activities, routinely sells items of property,
plant and equipment that it had held for rental to others should transfer such assets to inventories
at their carrying amount when they cease to be rented and become held for sale. The proceeds from
the sale of such assets should be recognised in revenue in accordance with AS 9, Revenue
Recognition.
• The disposal of an item of property, plant and equipment may occur in a variety of ways (e.g. by
sale, by entering into a finance lease or by donation). In determining the date of disposal of an item,
an enterprise applies the criteria in AS 19 for recognizing revenue from the sale of goods. AS 19,
Leases, applies to disposal by a sale and lease back.
• If, under the recognition principle, an enterprise recognises in the carrying amount of an item of
property, plant and equipment the cost of a replacement for part of the item, then it derecognises
the carrying amount of the replaced part regardless of whether the replaced part had been
depreciated separately. If it is not practicable for an enterprise to determine the carrying amount of
the replaced part, it may use the cost of the replacement as an indication of what the cost of the
replaced part was at the time it was acquired or constructed.
• The gain or loss arising from the derecognition of an item of property, plant and equipment should
be determined as the difference between the net disposal proceeds, if any, and the carrying amount
of the item.
• The consideration receivable on disposal of an item of property, plant and equipment is recognised
in accordance with the principles enunciated in AS 9.

Disclosure:
• The financial statements should disclose, for each class of property, plant and equipment:
a. the measurement bases (i.e., cost model or revaluation model) used for determining the
gross carrying amount;
b. the depreciation methods used;
c. the useful lives or the depreciation rates used. In case the useful lives or the depreciation
rates used are different from those specified in the statute governing the enterprise, it
should make a specific mention of that fact;
d. the gross carrying amount and the accumulated depreciation (aggregated with accumulated
impairment losses) at the beginning and end of the period; and
e. a reconciliation of the carrying amount at the beginning and end of the period showing:
additions; assets retired from active use and held for disposal; acquisitions through business
combinations; increases or decreases resulting from revaluations and from impairment
losses; recognised or reversed directly in revaluation surplus in accordance with AS
28;impairment losses recognised in the statement of profit and loss in accordance with AS
28;impairment losses reversed in the statement of profit and loss in accordance with AS
28;depreciation;the net exchange differences arising on the translation of the financial
statements of a non-integral foreign operation in accordance with AS 11, The Effects of
Changes in Foreign Exchange Rates; and other changes.
• The financial statements should also disclose: the existence and amounts of restrictions on title, and
property, plant and equipment pledged as security for liabilities; the amount of expenditure
recognised in the carrying amount of an item of property, plant and equipment in the course of its
construction; the amount of contractual commitments for the acquisition of property, plant and
equipment; if it is not disclosed separately on the face of the statement of profit and loss, the
amount of compensation from third parties for items of property, plant and equipment that were
impaired, lost or given up that is included in the statement of profit and loss; and the amount of
assets retired from active use and held for disposal.
• Selection of the depreciation method and estimation of the useful life of assets are matters of
judgement. Therefore, disclosure of the methods adopted and the estimated useful lives or
depreciation rates provides users of financial statements with information that allows them to
review the policies selected by management and enables comparisons to be made with other
enterprises. For similar reasons, it is necessary to disclose: depreciation, whether recognised in the
statement of profit and loss or as a part of the cost of other assets, during a period; and
accumulated depreciation at the end of the period.
• In accordance with AS 5, an enterprise discloses the nature and effect of a change in an accounting
estimate that has an effect in the current period or is expected to have an effect in subsequent
periods. For property, plant and equipment, such disclosure may arise from changes in estimates
with respect to: residual values; the estimated costs of dismantling, removing or restoring items of
property, plant and equipment; useful lives; and depreciation methods.
• If items of property, plant and equipment are stated at revalued amounts, the following should be
disclosed: the effective date of the revaluation; whether an independent valuer was involved; the
methods and significant assumptions applied in estimating fair values of the items; the extent to
which fair values of the items were determined directly by reference to observable prices in an
active market or recent market transactions on arm’s length terms or were estimated using other
valuation techniques; and the revaluation surplus, indicating the change for the period and any
restrictions on the distribution of the balance to shareholde₹
• An enterprise is encouraged to disclose the following: the carrying amount of temporarily idle
property, plant and equipment; the gross carrying amount of any fully depreciated property, plant
and equipment that is still in use; for each revalued class of property, plant and equipment, the
carrying amount that would have been recognised had the assets been carried under the cost

model; the carrying amount of property, plant and equipment retired from active use and not held
for disposal.
Translation Provisions:
• Where an entity has in past recognized expenditure in the statement of profit and loss which is
eligible to be included as a part of the cost of a project for construction of property, plant and
equipment in accordance with the requirements, it may do so retrospectively for such a project. The
effect of such retrospective application of this requirement, should be recognised net-of-tax in
revenue reserves.
• The requirements regarding the initial measurement of an item of property, plant and equipment
acquired in an exchange of assets transaction should be applied prospectively only to transactions
entered into after this Standard becomes mandatory.
• On the date of this Standard becoming mandatory, the spare parts, which hitherto were being
treated as inventory under AS 2, Valuation of Inventories, and are now required to be capitalised in
accordance with the requirements of this Standard, should be capitalised at their respective carrying
amounts. The spare parts so capitalised should be depreciated over their remaining useful lives
prospectively as per the requirements of this Standard.
• The requirements regarding the revaluation model should be applied prospectively. In case, on the
date of this Standard becoming mandatory, an enterprise does not adopt the revaluation model as
its accounting policy but the carrying amount of item(s) of property, plant and equipment reflects
any previous revaluation it should adjust the amount outstanding in the revaluation reserve against
the carrying amount of that item. However, the carrying amount of that item should never be less
than residual value. Any excess of the amount outstanding as revaluation reserve over the carrying
amount of that item should be adjusted in revenue reserves.

AS-11: (REVISED)THE EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATES
The statement applies mandatorily in respect of:

(a) Accounting for transaction in foreign currencies
(b) Translating the financial statements of foreign branches for inclusion in the financial statements of
the reporting enterprise.
A transaction in a foreign currency is recorded in the financial records of an enterprise normally at the
rate.
(a) On the date of transaction i.e. spot rate,
(b) Approximate actual rate i.e. averaging the rates during the week/month in which transactions occur
if there is no significant fluctuations.
(c) Weighted average in the above line.
However, for interrelated transaction (by virtue of being set off against receivables and payables) it is
translated with reference to the net amount on the date of transaction.
After initial recognition, the exchange difference on the reporting date of financial statement should be
treated as under:
(a) Monetary items like foreign currency balance, receivables, payables, loans at closing rate (in case of
restriction or remittance other than temporary or when the closing rate is unrealistic, it is reported
at the rate likely to be realized).
(b) Non-monetary items like fixed assets, which are recorded at historical cost, should be made at the
rate on the date of transaction.
(c) Non-monetary items other than fixed assets are carried at fair value or net realizable value on the
date which they are determined i.e. B/S date (inventories, investments in equity-shares).
Exchange difference on repayment of liabilities incurred for acquiring fixed assets should be adjusted in
the carrying amount of fixed assets on reporting date. The same concept applies to revaluation as well but
in case such adjustment on revaluation should result into showing the actual book value of the fixed
assets/or class of, exceeding the recoverable amount, the remaining amount of the increase in liability
should be debited to Revaluation Reserve or P/L Statement in case of inadequacy/ absence of Revaluation
Reserve.
Except as stated above (fixed assets) other exchange difference should be recognized as income or
expense in the period in which they arise or spread over to pertaining accounting period.
Disclosure under AS -11: An enterprise should disclose:

(a) The amount of exchange difference included in the net profit or loss for the period.
(b) The amount of exchange difference adjusted in the carrying amount of fixed assets during the
accounting period.
(c) The amount of exchange difference in respect of forward contracts to be recognized in the
profit/loss for one or more subsequent accounting period.
(d) Foreign currency risk management policy.

Question 1: A business having the head office in Mumbai has a branch( integral) in UK. The following is the
trial balance of branch as at 31.3.2020.
Account Name Amount in £

Dr. Cr.
Fixed Assets (Purchased on 1.4.2017) 10,000
Debtors 3,200
Opening stock 800
Goods received from Head Office Account 12,200
(Recorded in H.O. Books as ₹ 8,04,000)
Sales 40,000
Purchases 20,000
Wages 2,000
Salaries 2,400
Cash 6,400
Remittances to Head Office 5,800
Head Office Account 14,800
Creditors 8,000
62,800 62,800
- Closing stock at branch is £ 1,400 on 31.3.2020.
- Depreciation @ 10% p.a. is to be charged on fixed assets.
- Prepare the trial balance after conversion in Indian rupees.
- Exchange rates of pounds on different dates are as follows:
1.4.2017 - ₹ 61; 1.4.2019 - ₹ 63 and 31.3.2020 - ₹ 67.
Question 2. AD Softex India Ltd. imports certain stock worth US $ 600000 on 15th Aug., 2001 at which date
the exchange rate is ₹46 per dollar. The payments are made on March 31, 2002. When the exchange rate is
₹47.10 per dollar. The stock is in hand as on 31st March, 2002. Make entries for above and calculate value of
stock at the end of year. (CMA Inter 2015 June 3 marks)
Question 3. Almaz Ltd. obtains a long-term foreign exchange loan of US $ 20,00,000 on 2nd Sept., 2001 when
the exchange rate is ₹ 44.50 per dollar. On 31st March, 2002, the exchange rate has gone up to Rs, 47.40 per
dollar. Show its treatment.
[Ans. : ₹ 58 lakhs debited in P&L Account]
Question 4. Comment:
(a) The account of a foreign branch is incorporated in the head office books at a standard rate and a resultant
notional profit is credited to the head office profit & loss account. [Ans. : Not correct]
(b) ABC Ltd. had acquired an asset from USA at cost of US $ 2,00,000 immediately after the acquisition of
asset, the Indian rupee was devalued by 10%. The company transferred the additional liability to exchange
fluctuation reserve account.
(c) The foreign exchange liabilities outstanding as at the year-end are stated at the forward rate where forward
exchange contract exist and in other cases at the exchange rate at which it is actually settled. The resultant
gain/loss are charged to interest and finance charges in the profit & loss account.
[Ans. : Policy not as per AS-11]
Question 5. A Ltd. purchased fixed assets costing ₹ 24,00,000 on 1.4.2020 and the same was fully financed by
foreign currency loan (US Dollars) payable in 4 annual equal instalments. Exchange rates were 1 Dollar = Rs 60
and Rs 62.50 as on 1.4.2020 and 31.3.2021. first instalment was paid on 31.3.2021. you are required to state that
how these transactions would be accounted for as per AS-11. (CMA Inter 2007 june – 4 marks, modified)

Question 6. AlmazImpex Ltd. an Indian Company took a foreign currency loan of US $ 5,00,000 @ 10 % p.a.
on 1-1-2020. Interest is payable half-yearly with an installment for principal of US $ 50,000. The company
closes books of account as on 31st March every year. Exchange rates are:
1-1-2020 72.25
31-3-2020 72.50
30-6-2020 72.90
31-12-2020 73.90
31.3.2021 73.50
Prepare loan account of the company and calculate the exchange fluctuation loss/ gain for the financial year
ended on 31-3-2020 and 31-3-2021 respectively.
[Ans. : Loss - ₹ 1,25,000 (31-3-2020); Loss - ₹ 4,90,000 (31-3-2021)]
Question7. Z Ltd. sold goods to US Company for US $ 10, 00,000 on 12-2-2020 and realized the due on 30-6-
2021. Z Ltd. closes the books of account on 31 st March. Exchange rates were as follows:
Date Rate
12-2-2020 45.20
31-3-2021 46.10
30-6-2021 45.90
Calculate the exchange fluctuation loss/gain on the balance sheet date and on the settlement date respectively.
[Ans. : Gain (₹ 9,00,000); Loss (₹ 2,00,000)]
Question8. What would be the exchange rate of the translation of following items while translating the financial
statement of foreign operation, if these are part of no integral foreign operation?
➢ Depreciation
➢ Salaries and wages
➢ Opening stocks
➢ Closing stocks
➢ Debtors
➢ Fixed assets (these were acquired out of funds raised from issue of equity shares) .
➢ Accounts payable
➢ Provision for taxes
➢ Head office account.
Question 9. Exchange Rate

Goods purchased on 24.3.16 of US $1,00,000 Rs, 64.60
Exchange rate on 31.3.2016 Rs, 65.00
Date of actual payment 5.6.2017 Rs, 65.50
Calculate the loss/gain for the financial years 2015-16 and 2016-17. (CMA Final 4 marks)
Solution:
As per AS-11, all foreign currency transactions should be recorded by applying the exchange rate at the
date of transaction. Therefore, goods purchased on 24.03.2016 and coresponding creditor would be
recorded at ₹ 64.60
= 1,00,000 x 64.60 = ₹64,60,000
As per AS-11, at the balance sheet date all monetary items should be reported using the closing rate.
Therefore, the creditors of US $1,00,000 outstanding on 31.3.2016 will be reported as:
1,00,000 x 65.00 =₹ 65,00,000.
Exchange loss₹ 40,000 (= 65,00,000 – 64,60,000) should be debited in Profit and Loss Account for 2016-17.
As per AS-11, exchange difference on settlement on monetary items should be transferred to Profit and
Loss Account as gain or loss thereof:
1,00,000 x 65.50 =₹ 65,50,000 – 65,00,000 =₹50,000 should be debited to profit or loss for the year 2016-17.

Question 10. Z Ltd. acquired a machine on 1.4.2016 costing US $ 1,00,000. The suppliers agreed to the
following terms of payment:
1.4.2016 : down payment 50%
1.4.2017 : 25%
1.4.2018 : 25%
The company depreciates machinery @ 10% on the Straight-Line Method. The rate of exchange is steady
at US $ 1=₹60 up to 30.9.2017. On 1.10.2017, due to an official revaluation of rates, the exchange rate is
adjusted to US $ 1=₹68.
Show the extracts of the relevant entries in the Profit and Loss Account for the year ending 31st March,
2018 and the Balance Sheet as on that date, showing such workings as necessary.
Question 11. Rau ltd purchased a plant for US$ 1,00,000 on 1 february 2016 payable after 3 months.
Company entered into a forward contract for 3 months @ Rs 49.15 per dollar. Exchange rate per dollar
on 1 Feb was Rs 48.85 per dollar. Actual rate on 1 May 2016 was Rs 49.45 per dollar How will you
recognise the profit or loss on forward contract in the book of Rau ltd.
Question 12. COC ltd purchased a plant for US$ 2,00,000 on 1 December 2019 payable after 3 months.
Company entered into a forward contract for 3 months @ Rs 69.15 per dollar. Exchange rate per dollar
on 1 December 2019 was Rs 68.85 per dollar. Actual rate on 1 March 2020 was Rs 69.45 per dollar. How
will you recognise the profit or loss on forward contract in the book of Rau ltd.
Question 13. Mr X bought a forward contract for 3 months of US$ 1,00,000 on 1 st December at 1 US$ = Rs
47.10 when exchange rate was US$ 1=Rs 47.02. On 31st December when he closed his books his exchange
rate was US$ 1= Rs 47.15. on 31st January he decided to sell the contract at Rs 47.18 per dollar. Show how
the profit from contract will be recognised in the books.

AS 12-( GOVERNMENT GRANTS)

Problem 1: Koit Ltd. Received ₹ 3,00,000 as share application money from Govt. Comment whether it is
a Government Grants as per AS-12?
Solution: Government participation as equity holders is not covered by AS–12. Government is also one of
the shareholders of the company hence the receipt is a contribution towards capital.
Problem 2: On 1st April 2010 Sizzler Ltd purchases an asset at ₹ 10,00,000, Salvage value ₹ 1,00,000, life 5
years. Government grant received in September 2010 ₹ 3,00,000. Due to non–compliance of some
conditions attached with the asset the whole grant become refundable in the year 2012-13. Compute
Depreciation in the year 2012-13. (Assume SLM depreciation). Sizzler Ltd. adopts capital approach.
Problem 3: Top & Limited has set up its business in a designated backward area which entitles the
company to receive from the Government of India a subsidy of 20% of the cost of investment. Having
fulfilled all the conditions under the scheme, the company on its investment of ₹ 50 crore in capital
assets, received ₹ 10 crore from the Government in January, 2005 (accounting period being 2004-2005).
The company wants to treat this receipt as an item of revenue and thereby reduce the losses on profit
and loss account for the year ended 31st March, 2005.
Keeping in view the relevant Accounting Standard, discuss whether this action is justified or not.
(C.A. Final Nov. 1995 & May 2005) (3/4 Marks respectively)
Solution: As per AS 12 ‘Accounting for Government Grants’, where the government grants are of the
nature of promoter’s contribution, i.e. they are given with reference to the total investment in an
undertaking or by way of contribution towards it total capital outlay (for example, central investment
subsidy scheme) and no repayment is ordinarily expected in respect thereof, the grants are treated as
capital reserve which can be neither distributed as dividend nor considered as deferred income.
In the given case, the subsidy received is neither in relation to specific fixed asset no in relation to
revenue.
Thus it is inappropriate to recognize government grants in the profit and loss statement, since they are
not earned but represent an incentive provided by government without related costs. The correct
treatment is to credit the subsidy to capital reserve. Therefore, the accounting treatment followed by the
company is not proper.
Problem :4 Dark Ltd has received grant of ₹ 20 lacs under the Government subsidy scheme for acquiring
imported machinery for setting up an oil exploration plant and the entire grant received is credited to
profit and loss account.
Solution: The treatment given is wrong, because when we received grant against machine then it called
capital grant. So it should be reduced from the cost of machinery (capital approach) or transfer to Balance
Sheet on liabilities side as deferred income (income approach). It is incorrect to transfer the grant to profit
and loss a/c.
Problem 5: A Company receives a grant from the State Government as compensation for loss of stocks
due to unseasonal floods. The entire grant received is credited to “Capital Reserve”. Comment on the
accounting treatment.
Solution: Where the grant is in the nature of compensation for any past losses (sick companies) or
immediate financial support (flood affected company) then such grant should be treated as per AS – 5
(Extra-ordinary activity). In the present case the company has to show such govt. receipt as extraordinary
receipt.
Problem 6: Primus hospitals Ltd. had acquired 40 units of Doppler scan machines from Holiver USA at a
cost of US$ 1,65,100 per unit in the beginning of Financial Year 2008-09. The prevailing rate of exchange
was ₹ 50 to the US$. The acquisition was partly funded out of a government grant of ₹ 5 crores. The grant

relating to such machines was given with a rider that in the event of a change in management, the entity is
bound to return the grant. In April 2011, 51% control in the company was taken over by an overseas
investor. The expected productive period of such an asset is normally reckoned at 5 years. The
depreciation rate adopted was 20% p.a. S.L.M. basis. The company had incurred expenditure of US$4,000
towards bank charges and ₹ 7,500 per unit as sea freight. you are also informed that neither capital
reserve nor deferred income account has been maintained by the company. You are required to suggest
the accounting treatment as a result of the return of the grant, in the light of the relevant AS.
(C.A. Final Nov 2011 Marks 5)
Problem 7. X ltd received a grant of Rs 50,00,000 to bear incremental loss for to establish factory in
backward area. Incremental cost incurred during next three years were Rs 40,00,000, Rs 40,00,000 and
Rs 20,00,000 respectively. Show treatment as per AS 12 for all 3 years.
Problem 8. Z ltd purchased a fixed asset for Rs 50,00,000, which has estimated life of 5 years with salvage
value of Rs 5,00,000. On purchase of the assets government granted it a grant for Rs 10 lakhs. Pass the
necessary journal entries in the book of the company for first 2 years if the grant is deducted from the value
of asset.
Solution: journal entries in the book of Z Ltd
Year Particulars Dr Cr
1st Fixed asset account dr. 50,00,000
To bank account 50,00,000
(being asset purchased)
Bank account dr. 10,00,000
To fixed asset account 10,00,000
(being grant received from govt)
Depreciation account dr 7,00,000
(depreciation charged on SLM)
Profit and loss account Dr 7,00,000
To depreciation account 7,00,000
(being dep. Charged to p/l account)
2nd year Depreciation account dr 7,00,000
Problem 9. COC ltd purchased a fixed asset for Rs 50,00,000, which has estimated life of 5 years with salvage
value of Rs 5,00,000. On purchase of the assets government granted it a grant for Rs 10 lakhs. Pass the
necessary journal entries in the book of the company for first 2 years if the grant is treated as deffered
income.

Solution: journal entries in the book of Z Ltd
Year Particulars Dr Cr
1st Fixed asset account dr. 50,00,000
To bank account 50,00,000
(being asset purchased)
Bank account dr. 10,00,000
To deffered govt grant account 10,00,000
(being grant received from govt)
Depreciation account dr 9,00,000
Deffered govt grant account Dr 2,00,000

To Profit and loss account 2,00,000
(Being proportionate govt grant taken to
p/l account)
2nd year Depreciation account dr 9,00,000

Deffered govt grant account Dr 2,00,000

To Profit and loss account 2,00,000
(Being proportionate govt grant taken to
p/l account)
Problem 10. Santosh Ltd has received a grant of Rs 8 crores from the government for setting up a factory in a
backward area. Out of this grant, the company distributed Rs 2 crore as dividend. Also Santosh Ltd received
land free of cost from the state government but it has not recorded it at all in the book as no money has
been spent. In the light of AS 12, examine, whether the treatment of both the grants is correct.
Solution: As per AS-12 ‘accounting for government grants’, when government grant is received for a specific
purpose, it should be utilised for the same. So the grant received for setting up a factory is not available for
distribution of dividend.
In the second case, even if the company has not spent money for the acquisition of land, land should be
recorded in the book of accounts at its nominal value.
The treatment of both the element of grant is incorrect as per AS-12.
Problem 11. How would you treat the following in the accounts in accordance with AS-12 ‘government grants’?
i) Rs 35 lakhs received from the local authority for providing Medical facilities to the employees.
ii) Rs 100 lakhs received as subsidy from the central government for setting up a unit in notified backward
area. This subsidy is in nature of promoter’s contribution.

Solution: i) Rs 35 lakhs received from the local authority for providing medical facilities to the employees is a
grant received in the nature of revenue grant. Such grants are generally presented as a credit in the profit and
loss statement, either separately or under a general heading such as ‘other income’. Alternatively, Rs 35 lakhs
may be deducted in reporting the related expense i.e. employee benefit expenses.
ii) as per AS-12 ‘accounting for government grants’, where the government grants are in the nature of
promoters’contribution, i.e. they are given with reference to the total investment in an undertaking or by the
way of contribution towards its total capital outlay and no repayment is ordinarily expected in respect thereof,
the grants are treated as capital reserve which can be neither distributed as dividend nor considered as
deffered income. In the given case, the subsidy received from the central government for setting up a unit in
notified backward area is neither in relation to specific asset nor in relation to revenue. Thus, amount of Rs
100 lakhs should be credited to capital reserve.
Question 12. A fixed asset is purchased for ₹ 20 lakhs. Government grant received towards it is ₹ 8 lakhs.
Residual value is ₹ 4 lakhs and useful life is 4 years. Assume depreciation on the basis of straight line
method. Asset is shown in the balance sheet at net of grant. After 1 year, grant becomes refundable to the
extent of ₹5 lakhs due to non-compliance with certain conditions. Pass journal entries for 2 years.
Solution:
Year Particulars Dr (₹ in lakhs) Cr (₹ in lakhs)

1 Fixed asset account Dr 20
To Bank account 20
(being fixed asset purchased)
Bank account Dr 8
To fixed asset account 8
(being grant received)
Depreciation account Dr 2
To fixed asset account 2
(being depreciation charged on SLM Method)
Profit and loss account Dr 2
To depreciation account 2
(being dep. Charged to p/l account at the end of year 1)
2 Fixed asset account Dr 5
To Bank account 5
(being govt grant on fixed asset partially refunded which
increase the cost of fixed asset)
Depreciation account Dr 3.67
To fixed asset account 3.67
(being depreciation charged on SLM Method on revised
value)
Profit and loss account Dr 3.67
To depreciation account 3.67
(being dep. Charged to p/l account at the end of year 2)
Working notes: depreciation for year 2
(₹ in lakhs)
Cost of the asset 20
Less: govt grant received -8
12
Less: dep for first year (12-4)/4 2
10
Add: govt grant refundable 5
15
Depreciation for 2nd year 3.67

Problem 13: On 1.4.2021, ABC Ltd received grant of ₹300 lakhs for acquisition of machinery costing ₹1500 lakhs. The
grant was credited to the cost of asset. The life of machinery is 5 years. The machinery is depreciated at 20% on
WDV basis. The company had to refund the grant in may 2024 due to non-fulfillment of certain conditions.
How you would deal with the refund of grant in the books of ABC Ltd assuming that the company did not charge any
depreciation for the year 2024.
Solution: according to AS-12 on accounting for government grants, the amount refundable in respect of a grant
related to a specific fixed asset should be recorded by increasing the book value of the asset or by reducing deffered
income balance, as appropriate, by the amount refundable. Where the book value is increased, depreciation on the
revised book value should be provided prospectively over the residual useful life of the asset.
₹ in lakhs
1st April 2021 Acquisition cost of machinery ( 1500-300) 1200.00
31st March 2022 Less: depreciation @ 20% (240.00)
Book value 960.00
31st March 2023 Less: depreciation @ 20% (192.00)
Book value 768.00
31st March 2024 Less: depreciation @ 20% 153.60
Book value 614.40
May 2024 Add: refund of grant 300.00
Revised book value 914.40
Depreciation @ 20% on the revised book value amounting ₹914.40 lakhs is to be provided prospectively over the
residual useful life of the asset.
Problem 14. A ltd purchased a machinery for ₹40 lakhs. Useful life 4 years and residual value ₹8 lakhs. Government
grant received is ₹16 lakhs. Show journal entry to be passed at the time of refund of grant in the 3rd year and the
value of fixed assets, if:
(i) the grant is credited to fixed assets a/c.
(ii) the grant is credited to deffered grant a/c.
Solution: Case 1. If the grant is credited to fixed assets account:
Fixed assets account Dr 16 lakhs

To bank account 16 lakhs
( being grant refunded)
Note: The balance of fixed assets after 2 years of depreciation will be ₹ 16 lakhs and after refund of grant, it will
become (16 lakhs + 16 lakhs) = 32 lakhs on which depreciation will be charged for remaining 2 years. Depreciation =
32-8/2 = ₹12 lakhs p.a. will be charged for next 2 years.
Case 2. If the grant is credited to deffered grant account: as per AS-12 ‘Accounting for Government Grants’, income
from deffered grant account is allocated to profit and loss account usually over the periods and in the proportions in
which depreciation on related assets is charged. Accordingly, in the first 2 years (16lakhs/4years) = 4 lakhs p.a. X 2
years = 8 lakhs were credited to profit and loss account and 8 lakhs was the balance of deffered grant account after
2 years.
Therefore, on refund in the 3rd year, the following entry will be passed:
Deffered grant a/c Dr 8 lakhs

Profit and loss a/c Dr 8 lakhs
To bank account 16 lakhs
Note: deffered grant account will become nil. The fixed assets will continue to be shown in the books at ₹24 lakhs and
depreciation will continue to be charged at ₹8 lakhs p.a. for the remaining 2 years.

AS 16 (BORROWING COST)
QUESTION 1.A Ltd. wanted to construct a factory building for which it borrowed a sum of Rs. 10 lakhs at an
interest rate of 15%. The funds were kept on deposit with a cooperative bank and at the end of the year
earned an interest of Rs. 28,000. The amounts necessary for construction were drawn from this deposit and
also cash from operations. The building was completed at a cost of Rs. 18 lakhs. State the value at which the
building will be shown in the books.
QUESTION 2.X Ltd. has obtained an institutional loan of Rs. 680 lakhs for modernization and renovation of its
plant and machinery. Plant and machinery acquired under the modernisation scheme and installation
completed on 31.3.98 amounted to Rs. 520 lakhs, 30 lakhs has been advanced to suppliers for additional
assets and the balance of Rs. 130 lakhs has been utilised for working capital purpose. The total interest paid
for the above loan amounted to Rs. 68 lakhs during 97-98. You are required to state how the interest on the
institutional loan is to be accounted for in the year 97-98.
QUESTION 3.A Ltd. commences building an asset on 1-4-2001. For this purpose it issues debentures on the
same date for Rs. 10,00,000 bearing an interest of 10%. During the year ending the company also raised
general loans from financial Institutions as per details below :
1.7.2001 Rs. 5,00,000 @12% per annum
1.10.2001 Rs. 3,00,000 @15% per annum
Expenditures on the asset were as per details given below :
Date Amount (Rupees)
1.4.2001 4,00,000
1.7.2001 8,00,000
1.10.2001 6,00,000
1.2.2001 3,00,000
The company earned an interest of Rs. 15.000 on temporary investments made with funds borrowed
specifically for the asset.
You are required to compute the amount of borrowing cost to be capitalised in relation to this asset.
Problem 4: A company obtained term loan during the year ended 31st March, 2002 to an extent of ₨ 650
lakhs for modernization and development of its factory. Buildings worth ₨ 120 lakh were completed and Plant
and Machinery worth ₨ 350 lakhs were installed by 31st March, 2002. A sum of ₨ 70 lakhs has been advanced
for assets, the installation of which is expected in the following year. ₨ 110 lakhs has been utilized for Working
Capital requirement. Interest paid on the loan of ₨ 650 lakhs during the year 2001-2002 amounted to ₨ 58.50
lakhs. How should the interest amount be treated amount be treated in the Accounts of the Company?
(C.A. Final Nov. 2005) (6 Marks)
Problem 5: On 01.04.2006 Nidhi Ltd. borrowed ₨ 2,00,000 @12% p.a for construction of qualifying assets.
The construction commences on 01.06.2006 and completes on 28.02.2007. Income earned on investing the
same borrowing temporally was ₨ 5,000 of which ₨ 2,000 represents, income earned after 01.06.2006.
Ascertain the amount of borrowing cost for capitalization.

Problem 6: Kirloskar Ltd. had following general borrowings and investments in qualifying assets.
Source Date of raising Amount (₨)
12% Debentures 0.1.04.2005 15,00,000
15% Term Loan 0.1.04.2005 600.000
18% Term Loan 0.1.04.2005 4,00,000
Qualifying Assets Amount (₨) Data of Commencement Data of Completion
A 6,00,000 0.1.04.2005 31.01.2006

B 5,00,000 0.1.05.2005 31.03.2006
C 4,00,000 0.1.07.2005 ---
With the help of these details determine for the year ended 31.03.2006
1. The amount of the borrowing cost incurred
2. The amount of borrowing cost to be capitalized for qualifying assets
3. The amount of borrowing cost to be charged to revenue
Problem 7: X Ltd began construction of a new building on 1st January. It obtained ₨ 1 Lakh special loan to
finance the construction of the building on January at an interest rate of 10%. The Company's other two
outstanding non-specific loans were-
a) ₨ 5,00,000 Loan at 11% Interest, and (b) ₨ 9,00,000 Loan at 13% Interest.
The expenditure that were made on the building project were as follows-
b) January ₨ 2,00,000, (b) April ₨ 2,50,000, (c) July ₨ 4,50,000, (d) Dec. ₨ 1,20,000.
Building was completed by 31st Dec 2007. Following the principles prescribed in AS-16 "Borrowing
Cost," calculate the amount of interest to be capitalized and pass one Journal Entry for capitalizing the
cost and borrowing cost in respect of the building.
(C.A. Final Nov 2008 Marks 10)
Problem 9: On April 1, 2014, MGH constructions undertook construction of a factory building for expansion
purpose. Total cost of project was ₨ 3,00,00,000. The building was completed by end of March 2015 and
during the period following payments were made:
Payment made Amount
1st April 2014 20,00,000
30th June 2014 60,00,000
31st December 2014 1,80,00,000
31st March 2015 40,00,000
Total 3,00,00,000
MGH construction borrowings as at March 31, 2015 were as follow:
i. 9% term loan amounting to ₨ 80,00,000 taken on December 31, 2013. Simple interest is payable
annually. Amount outstanding as March 31, 2014 and during 14-15 is ₨ 80,00,000. The loan was
taken specifically for the project.
ii. 11% debentures issued on March 31, 2013 with simple interest payable annually. Amount
outstanding for the year 14-15 is ₨ 1,50,00,000.
iii. 10% bonds issued on December 31, 2012 amounting to ₨ 1,70,00,000. Simple interest payable at
annual rest. Amount outstanding for the year 14-15 is ₨ 1,60,00,000.

How much borrowing cost should be capitalized for construction of the building as per AS-16 "Borrowing
Cost"?
Solution:
Step 1) Calculation of BC incurred: (Only for GB) (₨ in lakhs)
SOURCE BORROWINGS AVG. O/S INTEREST
11% Debn. 150,000 150,000 16,500
10% Bonds 160,000 160,000 16,000
Total 310.000 310.000 32.500
Step 2) Calculation of Capitalization rate for general borrowing:
Capitalization % = Interest/Avg. O/S 10.484 % p.a
Ste[ 3) Calculation of Average Investment in QA:
Q.A. EXPENDITURE INCURRED ON QA PERIOD PRODUCT
1st April 2005 ---- Specific B ----
30th June 2005 ---- Specific B ----
31st Dec. 2005 180 3/12 45
31st March2006 40 0/12 0
Total: 220 45
Net Investments in General Borrowings
Capitalization rate

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CA INTER 1 ACCOUNTING CA/CMA SANTOSH KUMAR

INDEX- CA INTER GROUP 1 – ACCOUNTING

CHAPTER NAME PAGE NUMBER

Note 1- Follow the sequence given above while studying.

Note 3: No any other book is recommended.

COCEDUCATION.COM MOB. NO. 9999631597, 7303445575, 8448322142 Page 1

CHAPTER 1. FINANCIAL STATEMENT OF COMPANIES

SALIENT FEATURES OF A COMPANY :-

COCEDUCATION.COM MOB. NO. 9999631597, 7303445575, 8448322142 Page 2

5. SUBSIDIARY COMPANY:- According to Section 2(87), a company is deemed to be a subsidiary of

7. LIMITED LIABILITY COMPANY

(a) Restricts the rights of members to transfer its shares.

COCEDUCATION.COM MOB. NO. 9999631597, 7303445575, 8448322142 Page 3

(a) A holding company or a subsidiary company

a. Register of investments of the company held in its own name.

COCEDUCATION.COM MOB. NO. 9999631597, 7303445575, 8448322142 Page 4

SCHEDULE III (Section 129) (PART I—FORMAT OF BALANCE SHEET)

Particulars Note Figures as at the Figures as at the

(2) Share application money pending allotment 4 ------ -------

COCEDUCATION.COM MOB. NO. 9999631597, 7303445575, 8448322142 Page 5

Inventories 22 ------- -------

Format of Statement of Profit and Loss

Particulars Note Figures for the Figures for the

VIII. Extraordinary Items 37 ------ ------

PREPARATION OF FINANCIAL STATEMENTS.

COCEDUCATION.COM MOB. NO. 9999631597, 7303445575, 8448322142 Page 6

i. Share option outstanding account

COCEDUCATION.COM MOB. NO. 9999631597, 7303445575, 8448322142 Page 7

Accounts Dr. Cr.

Sundry Debtors 2,00,000 —

COCEDUCATION.COM MOB. NO. 9999631597, 7303445575, 8448322142 Page 8

The following additional information is also provided:

(a) Depreciate plant by 15%

COCEDUCATION.COM MOB. NO. 9999631597, 7303445575, 8448322142 Page 9

Cash in hand 19,530 –

(ii) Provide for interest on bank Loan for 6 months.

(iv) Make a Provision for Income Tax @ 30%

QUESTION 12. DELETED FROM THE SYLLABUS.

COCEDUCATION.COM MOB. NO. 9999631597, 7303445575, 8448322142 Page 10

Securities Premium Account 80

Land at cost 220 Equity Capital (Shares of 10 each) 300

Trade Receivables 96 General Reserve 130

Adjusted Purchases 320 Sales 700

COCEDUCATION.COM MOB. NO. 9999631597, 7303445575, 8448322142 Page 11

(iii) Declared final dividend @ 10% on 2nd April 2022.

Authorised Capital-divided into 5,000 6% Preference Shares

5,000 6% Preference Shares of 100 each 5,00,000

Equity Capital 8,05,000

Purchases - Wines, Cigarettes, Cigars, etc. 45,800

Wages and Salaries 28,300

Rent, Rates and Taxes 8,900

Sales - Wines, Cigarettes, Cigars, etc. 68,400

Coal and Firewood 3,290

Carriage and Cooliage 810

Sundry Expenses 5,840

Rent of Rooms 48,000

Miscellaneous Receipts 2,800

Discount received 3,300

Transfer fees 700

Freehold Land and Building 8,50,000

Furniture and Fittings 86,300

Inventory on hand, 1st April, 2020

Wines, Cigarettes. Cigars, etc. 12,800

COCEDUCATION.COM MOB. NO. 9999631597, 7303445575, 8448322142 Page 12