Ntermediate: M.K.Gupta Ca Education

M.K.
GUPTA CA EDUCATION
CA - INTERMEDIATE
Paper - 1
accounting
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INDEX
Chapters Page No.
1 ACCOUNTING FOR DIVIDENDS 7
2 MANAGERIAL REMUNERATION 16
3 BONUS AND RIGHT ISSUE 30
4 PROFIT OR LOSS PRE AND POST INCORPORATION 54
5 REDEMPTION OF PREFERENCE SHARES 86
6 FINANCIAL STATEMENT OF COMPANIES 112

-7-
DIVIDENDS
A dividend is the distribution of divisible profits of the company among the members according to the
shares held by each of them in the capital of the company.
Under Sec 123(1) of the Companies Act, 2013, no dividend shall be declared or paid by the company
for any financial year except -
(a) out of profits of the company for that financial year arrived at after providing for depreciation
in accordance with provisions of Section 123(2); or
(b) 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;
(c) out of both above;
(d) out of moneys provided by the central government or any state government for the payment of
dividend by the company in pursuance of any guarantee given by that government.
Provided that no dividend shall be declared or paid by a company from its reserves other than
free reserves.
A company may declare dividend out of the accumulated profits earned by it in previous years and
transferred by it to the reserves, in the event of inadequacy or absence of profits in any year, subject
to the fulfillment of the following conditions as per Companies (Declaration and Payment of
Dividend) Rules, 2014:
(1) The rate of dividend declared shall not exceed the average of the rates at which dividend
was declared by it in the three years immediately preceding that year;
(2) the total amount to be drawn from such accumulated profits shall not exceed one-tenth of
the sum of its paid-up share capital and free reserves as appearing in the latest audited
financial statement.
(3) The amount so drawn shall first be utilized to set off the losses incurred in the financial year
in which dividend is declared before dividend in respect of equity shares is declared.
(4) The balance of reserves after such withdrawal shall not fall below fifteen per cent of its
paid up capital as appearing in the latest audited financial statement.
(5) (omitted via Companies (Declaration and Payment of Dividend) Second Amendment Rules,
2015 issued on 29th May, 2015)
Interim Dividend
As per Section 123 of the Companies Act, 2013, Board of Directors of a company may declare
dividend including interim dividend during any financial year out of surplus in the profits and loss
account and out of profits of the financial year in which such interim dividend is sought to be declared.
-8-
However in case the company has incurred any loss during the current financial year upto the end of
the quarter immediately preceding the date of declaration of interim dividend, such interim dividend
shall not be declared at a rate higher than the average dividends declared by the company during the
immediately preceding three financial years.
Dividend Distribution Tax :

Dividend distribution tax is leviable on gross dividend. The rate of Dividend Distribution Tax (DDT) is
15% (excluding surcharge of 12%, plus HEC 4%).
Format of calculation of Dividend Distribution Tax
Particulars Rs.
Dividend distributed by the company (a) xxx
Add : Increase for the purpose of grossing up of dividend xxx
15
 Dividend paid
100 − 15 (b)
Gross Dividend (c) xxx
(a)+(b)
Dividend Distribution Tax @ 15% of Gross Dividend (d) xxx

Add : Surcharge @12% of Dividend Distribution Tax (e) xxx
(f) xxx
(d)+(e)
Add : HEC @ 4% (4% on above amount (f)) (g) xxx
Dividend Distribution Tax (f)+(g) xxx
* Effectively DDT is 17.472% of Gross Dividend or 20.5553% on dividend paid
Disclosures and Presentation of DDT in Financial Statements

1. Dividends on shares is an appropriation of Profits and therefore is shown in 'Notes to Account' of
'Reserves and surplus' item of the Balance Sheet
2. Since the DDT relates to distribution of Profits as dividends, it is appropriate that liability in respect
of DDT should also be disclosed along with disclosure of Dividends.
Dividend xxx
Dividend Distribution Tax therein xxx xxx
3. Provision for Dividend Distribution Tax should be disclosed separately under head 'Short Term
Provisions' in the Balance Sheet.
-9-
Illustration 1
Due to inadequacy of profits during the year ended 31st March, 2020, 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 ₹100 each, fully paid up 17,50,000
8,00,000 Equity shares of ₹10 each, fully paid up 80,00,000
General Reserves as on 1.4.2019 25,00,000
Capital Reserves as on 1.4.2019 3,00,000
Revaluation Reserves as on 1.4.2019 3,50,000
st
Net profit for the year ended 31 March, 2020 3,00,000
Average rate of dividend during the last three years has been 12%.
Solution:
Amount that can be drawn from reserves for 10%

Dividend
10% dividend on ₹80,00,000 ₹ 8,00,000
Profits available
Current year profit 3,00,000
Less: Preference dividend (1,57,500)
(1,42,500
Amount which can be utilised from reserves 6,57,500
Conditions as per Companies (Declaration of dividend out of Reserves) Rules, 2011:
Condition I
Since 10% is lower than the average rate of dividend (12%), 10% dividend can be declared.
Condition II
Maximum amount that can be drawn from the accumulated profits and reserves should not exceed
10% of paid up capital plus free reserves i.e. ₹ 12,25,000 [10% of (80,00,000 + 17,50,000 +
25,00,000)]
Condition III
The balance of reserves after drawl ₹18,42,500 (₹25,00,000 - ₹6,57,500) should not fall below 15 %
of its paid up capital i.e. ₹14,62,500 (15% of ₹97,50,000]
Since all the three conditions are satisfied, the company can withdraw ₹6,57,500 from accumulated
reserves (as per Declaration and Payment of Dividend Rules, 2014.)
- 10 -
PRACTICE QUESTIONS
Q.1.
X Ltd., a domestic company, has distributed on 5th April 2019, dividend of ₹230 lakh to its
shareholders. Compute the Dividend Distribution tax payable by X Ltd.
Q.2.
On 31st March, 2019 X Ltd. declared dividend amounting to ₹425 lacs for the year 2018-2019. The
Dividend Distribution tax liability (15% of Corporate dividend tax including surcharge @ 12%, HEC @
4%) arises as per Income-tax Act,1961. In this case, calculate the grossing-up of dividend and
separately disclose the charge for DDT in the ‘Notes to Accounts’ of ‘Reserves and Surplus’.
Q.3.
Declaration of dividends for current year is made after providing for
(a) Depreciation of past years only.
(b) Depreciation on assets for the current year and arrears of depreciation of past years
(if any).
(c) Depreciation on current year only and by forgoing arrears of depreciation of past years.
Answer: (b)
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EXAMINATION QUESTIONS
NOV-2019 (OLD COURSE)
Question.7.(e) (4 Marks)
XYZ Ltd. proposes to declare 10% dividend out of General Reserves due to inadequacy of profits in
the year ending 31-03-2020. From the following particulars ascertain the amount that can be utilize
from general reserves, according to the Companies Rules, 2014:
8,00,000 Equity Shares of ₹ 10 each fully paid up 80,00,000

General Reserves 25,00,000
Revaluation Reserves 6,50,000
Net profit for the year 1,42,500
Average rate of dividend during the last five years has been 12%.
Solution:
In the given case, paid up equity share capital is ₹80,00,000 and rate of dividend is 10% i.e. amount
of dividend is ₹8,00,000 (since average rate is 12% hence dividend @ 10% is allowed)
Current profits are ₹1,42,500 hence amount to be withdrawn from general reserve shall be ₹8,00,000-
₹1,42,500 = ₹6,57,500.
AS PER COMPANIES (DECLARATION AND PAYMENTS OF DIVIDEND) RULES 2014, Maximum

amount which can be withdrawn shall be 10% of (₹80,00,000+₹25,00,000) i.e. ₹10,50,000. Further
balance amount in general reserve should not be less than 15% of ₹80,00,000 i.e. ₹12,00,000.
In the given case, if withdrawn amount is ₹6,57,500, it is not exceeding ₹10,50,000 also balance
amount left in general reserve is not less than ₹12,00,000.
- 12 -
Not Covered in Syllabus– just for reference

Section – 123 of (Companies Act, 2013)
CHAPTER VIII
DECLARATION AND PAYMENT OF DIVIDEND
123. (1) No dividend shall be declared or paid by a company for any financial year except—
(a) out of the profits of the company for that year arrived at after providing for depreciation in
accordance with the provisions of sub-section (2), or out of the profits of the company for any
previous financial year or years arrived at after providing for depreciation in accordance with
the provisions of that sub-section and remaining undistributed, or out of [both :]
[Provided that in computing profits any amount representing unrealised gains, notional
gains or revaluation of assets and any change in carrying amount of an asset or of a liability
on measurement of the asset or the liability at fair value shall be excluded; or ]
(b) out of money provided by the Central Government or a State Government for the payment of
dividend by the company in pursuance of a guarantee given by that Government:
Provided that a company may, before the declaration of any dividend in any financial year, transfer
such percentage of its profits for that financial year as it may consider appropriate to the reserves of
the company:
Provided further that where, owing to inadequacy or absence of profits in any financial year, any
company proposes to declare dividend out of the accumulated profits earned by it in previous years
and [transferred by the company to the free reserves], such declaration of dividend shall not be made
except in accordance with such rules as may be prescribed in this behalf:
Provided also that no dividend shall be declared or paid by a company from its reserves other than
free reserves:
[Provided also that no company shall declare dividend unless carried over previous losses and
depreciation not provided in previous year or years are set off against profit of the company for the
current year.]
(2) For the purposes of clause (a) of sub-section (1), depreciation shall be provided in accordance
with the provisions of Schedule II.
[ (3) The Board of Directors of a company may declare interim dividend during any financial year or
at any time during the period from closure of financial year till holding of the annual general meeting
out of the surplus in the profit and loss account or out of profits of the financial year for which such
interim dividend is sought to be declared or out of profits generated in the financial year till the
quarter preceding the date of declaration of the interim dividend:
- 13 -
Provided that in case the company has incurred loss during the current financial year up to the end
of the quarter immediately preceding the date of declaration of interim dividend, such interim
dividend shall not be declared at a rate higher than the average dividends declared by the company
during immediately preceding three financial years. ]
(4) The amount of the dividend, including interim dividend, shall be deposited in a scheduled bank in
a separate account within five days from the date of declaration of such dividend.
(5) No dividend shall be paid by a company in respect of any share therein except to the registered
shareholder of such share or to his order or to his banker and shall not be payable except in cash:
Provided that nothing in this sub-section shall be deemed to prohibit the capitalisation of profits or
reserves of a company for the purpose of issuing fully paid-up bonus shares or paying up any amount
for the time being unpaid on any shares held by the members of the company:
Provided further that any dividend payable in cash may be paid by cheque or warrant or in any
electronic mode to the shareholder entitled to the payment of the dividend.
(6) A company which fails to comply with the provisions of sections 73 and 74 shall not, so long as
such failure continues, declare any dividend on its equity shares.
Section – 124
(Companies Act, 2013)
Unpaid Dividend Account

Where a dividend has been declared by a company but has not been paid or claimed within thirty days
from the date of the declaration to any shareholder entitled to the payment of the dividend, the
company shall, within seven days from the date of expiry of the said period of thirty days, transfer the
total amount of dividend which remains unpaid or unclaimed to a special account to be opened by the
company in that behalf in any scheduled bank to be called the Unpaid Dividend Account.
(2) The company shall, within a period of ninety days of making any transfer of an amount under sub-
section (1) to the Unpaid Dividend Account, prepare a statement containing the names, their last
known addresses and the unpaid dividend to be paid to each person and place it on the website of the
company, if any, and also on any other website approved by the Central Government for this purpose,
in such form, manner and other particulars as may be prescribed.
(3) If any default is made in transferring the total amount referred to in sub-section (1) or any part
thereof to the Unpaid Dividend Account of the company, it shall pay, from the date of such default,
interest on so much of the amount as has not been transferred to the said account, at the rate of twelve
per cent per annum and the interest accruing on such amount shall enure to the benefit of the
members of the company in proportion to the amount remaining unpaid to them.
- 14 -
(4) Any person claiming to be entitled to any money transferred under sub-section (1) to the Unpaid
Dividend Account of the company may apply to the company for payment of the money claimed.
(5) Any money transferred to the Unpaid Dividend Account of a company in pursuance of this section
which remains unpaid or unclaimed for a period of seven years from the date of such transfer shall be
transferred by the company along with interest accrued, if any, thereon to the Fund established under
sub-section (1) of section 125 and the company shall send a statement in the prescribed form of the
details of such transfer to the authority which administers the said Fund and that authority shall issue
a receipt to the company as evidence of such transfer.
(6) All shares in respect of which [dividend has not been paid or claimed for seven consecutive years
or more shall be] transferred by the company in the name of Investor Education and Protection Fund
along with a statement containing such details as may be prescribed:
Provided that any claimant of shares transferred above shall be entitled to claim the transfer of shares
from Investor Education and Protection Fund in accordance with such procedure and on submission
of such documents as may be prescribed.
[Explanation.—For the removal of doubts, it is hereby clarified that in case any dividend is paid or
claimed for any year during the said period of seven consecutive years, the share shall not be
transferred to Investor Education and Protection Fund.]
(7) If a company fails to comply with any of the requirements of this section, the company shall be
punishable with fine which shall not be less than five lakh rupees but which may extend to twenty-
five lakh rupees and every officer of the company who is in default shall be punishable with fine
which shall not be less than one lakh rupees but which may extend to five lakh rupees.
- 15 -
Not Covered in Syllabus– just for reference

COMPANIES (DECLARATION AND PAYMENT OF DIVIDEND) RULES, 2014
NOTIFICATION NO. GSR 241(E) [F.NO.1/31/2013-CL.V], DATED 31-3-2014
In exercise of the powers conferred under sub-section (1) of section 123 read with section 469 of the
Companies Act, 2013 (18 of 2013) and in supersession of the Companies ( Central Government's)
General Rules and Forms, 1956 and other Rules prescribed under the Companies Act, 1956 on
matters covered under these rules, except as respects things done or omitted to be done before such
suppression, the Central Government hereby makes the following rules, namely:—
Short title and commencement
1. (1) These rules may be called the Companies (Declaration and Payment of Dividend) Rules, 2014.
(2) They shall come into force on the 1st day of April, 2014.
Definitions
2. (1) In these rules, unless the context otherwise requires,—
(a) "Act" means the Companies Act, 2013;

(b) "section" means section of the Act.
(2) Words and expressions used in these rules but not defined and defined in the Act or in the
Companies (Specification of Definitions Details) Rules, 2014, shall have the same meanings
respectively assigned to them in the Act or in the said Rules.
Declaration of dividend out of reserves
3. In the event of inadequacy or absence of profits in any year, a company may declare dividend out
of free reserves subject to the fulfillment of the following conditions, namely:—
(1) The rate of dividend declared shall not exceed the average of the rates at which dividend was
declared by it in the three years immediately preceding that year:
Provided that this sub-rule shall not apply to a company, which has not declared any
dividend in each of the three preceding financial year.
(2) The total amount to be drawn from such accumulated profits shall not exceed one-tenth of the
sum of its paid-up share capital and free reserves as appearing in the latest audited financial
statement.
(3) The amount so drawn shall first be utilised to set off the losses incurred in the financial year
in which dividend is declared before any dividend in respect of equity shares is declared.
(4) The balance of reserves after such withdrawal shall not fall below fifteen per cent of its paid
up share capital as appearing in the latest audited financial statement.
(5) [ *** ]
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MANAGERIAL REMUNERATION
1. WHEN COMPANY HAS ADEQUATE PROFITS SECTION 197/198/SCHEDULE V
The total managerial remuneration payable by a public company, to its directors, including managing
director and whole-time director, and its manager in respect of any financial year shall not exceed
eleven per cent of the net profits of that company for that financial year.
Provided further that:

(A) the remuneration payable to any one managing director; or whole-time director or manager shall
not exceed five per cent of the net profits of the company and if there is more than one such director
remuneration shall not exceed ten per cent of the net profits to all such directors and manager taken
together;
(B) the remuneration payable to directors who are neither managing directors nor whole-time directors
shall not exceed, —
(i) one per cent of the net profits of the company, if there is a managing or whole-time director or
manager;
(ii) three per cent of the net profits in any other case:
CALCULATION OF PROFITS: SECTION 198

1. In calculating the profit, credit shall be given for subsidies received from any Government,
or any public authority etc except in so far as the Central Government otherwise directs.
2. Credit shall not be given for the following sums, namely:—

(a) profits, by way of premium on shares or debentures of the company, unless the company
is an investment company u/s 186;
(b) profits on sales of forfeited shares;
(c) profits of a capital nature.
(d) any change in carrying amount of an asset or of a liability recognised in equity reserves
including surplus in profit and loss account on measurement of the asset or the liability at fair
value;
(e) any amount representing unrealised gains, notional gains or revaluation of assets.
3. The following sums shall be deducted, namely:—

(a) all the usual working charges
(b) directors' sitting fee
- 17 -
(c) bonus or commission to any staff

(d) any tax on abnormal profits.
(e) any tax on business profits imposed for special reasons or in special circumstances.
(f) interest on debentures.
(g) interest on secured or unsecured loans, advances or mortgages.
(h) repairs but not of capital nature;
(i) contributions made under section 181 i.e. contribution to charitable funds
(j) depreciation as per schedule II.
(k) Brought forward losses not adjusted till date.
(l) any compensation or damages to be paid in virtue of any legal liability including a liability
arising from a breach of contract;
(m) any sum paid by way of insurance against the risk of meeting any liability as referred in
preceding point.
(n) bad debts.
4. In making the computation aforesaid, the following sums shall not be deducted,
namely:—
(a) income-tax
(b) any compensation, damages or payments made voluntarily.
(c) loss of a capital nature.
(d) any change in carrying amount of an asset or of a liability recognised in equity reserves
including surplus in profit and loss account on measurement of the asset or the liability at fair
value.
Perquisites not included in managerial remuneration

A managerial person shall be eligible for the following perquisites which shall not be included in the
computation of the ceiling on remuneration
(a) contribution to provident fund, superannuation fund or annuity fund to the extent not taxable
under the Income-tax Act, 1961
(b) gratuity payable at a rate not exceeding half a month's salary for each completed year of
service; and
(c) encashment of leave at the end of the tenure.
- 18 -
Further an expatriate managerial person (including a non-resident Indian) shall be eligible to the
following perquisites which shall not be included in the computation of the ceiling on remuneration:
(a) Children's education allowance: In case of children studying in or outside India, an

allowance limited to a maximum of Rs. 12,000 per month per child or actual expenses
incurred, whichever is less. Such allowance is admissible up to a maximum of two children.
(b) Holiday passage for children studying outside India or family staying abroad : Return
holiday passage once in a year by economy class or once in two years by first class to
children and to the members of the family from the place of their study or stay abroad to
India if they are not residing in India, with the managerial person.
(c) Leave travel concession: Return passage for self and family in accordance with the rules
specified by the company where it is proposed that the leave be spent in home country
instead of anywhere in India.
2. For Companies having inadequate profits: [Part II of Schedule V]

In the event of absence or inadequacy of profits in any financial year, maximum managerial
remuneration payable will depend upon the effective capital of the company and the resolution passed
in the meeting.
Where effective capital of the company is Maximum yearly remuneration*
Negative or Less than Rs.5 crores Rs.60 Lakhs
Rs.5 crores and above but less than Rs.100 crore Rs.84 Lakhs
Rs.100 crores and above but less than Rs.250 crore Rs.120 Lakhs
Rs.120 Lakhs plus 0.01% of the effective

Rs.250 crores and above
capital in excess of Rs.250 crores
Other conditions
1. The Managerial person should act in a professional capacity.
2. Such person do not have any interest in the capital of the company including its holding and
subsidiary company.
3. He is not related to the directors or promoters of the company.
4. He possess at least graduate level qualification with expertise and specialized knowledge in the
field in which the company operates.
- 19 -
COMPUTATION OF EFFECTIVE CAPITAL

Effective capital shall be total of the amounts given below:
1. Paid-up share capital (excluding share application money or advances against shares);
2. Share premium account;
3. Reserves and surplus (excluding revaluation reserve);
4. Long-term loans and deposits repayable after one year (excluding working capital loans,
overdrafts, interest due on loans unless funded, bank guarantee, etc., and other short-term
arrangements)
The following amounts shall be deducted

1. Any investments (except in case of investment by an investment company whose principal
business is acquisition of shares, stock, debentures or other securities),
2. Accumulated losses and preliminary expenses not written off.
Illustration 1
The following is the Draft Profit & Loss A/c of Mudra Ltd., the year ended 31st March, 2020:
₹ ₹
To Administrative, Selling and 8,22,542 By Balance b/d 5,72,350
distribution expenses
” Directors fees 1,34,780 ” Balance from Trading 40,25,365
A/c
” Interest on debentures 31,240 ” Subsidies received 2,73,725
from Govt.
” Managerial remuneration 2,85,350
” Depreciation on fixed 5,22,543
Assets
” Provision for Taxation 12,42,500
” General Reserve 4,00,000
” Investment Revaluation 12,500
Reserve
” Balance c/d 14,20,185
48,71,640 48,71,640
Depreciation on fixed assets as per Schedule II of the Companies Act, 2013 was ₹5,75,345. You are
required to calculate the maximum limits of the managerial remuneration as per Companies Act,
2013.
- 20 -
Solution:
Calculation of net profit u/s 198 of the Companies Act, 2013
Balance from Trading A/c 40,25,365
Add: Subsidies received from Government 2,73,925
42,99,290
Less: Administrative, selling and distribution expenses 8,22,542 (15,63,907)
Director’s fees 1,34,780
Interest on debentures 31,240
Depreciation on fixed assets as per Schedule II 5,75,345
Profit u/s 198 27,35,383
Maximum Managerial remuneration under Companies Act, 2013 = 11% of ₹27,35,383 = ₹3,00,892
Illustration 2
The following extract of Balance Sheet of X Ltd. was obtained:
Balance Sheet (Extract) as on 31st March, 2020
Liabilities ₹
Authorised capital:
20,000, 14% preference shares of ₹100 20,00,000
2,00,000 Equity shares of ₹100 each 2,00,00,000
2,20,00,000
Issued and subscribed capital:
15,000, 14% preference shares of ₹100 each fully paid 15,00,000
1,20,000 Equity shares of ₹100 each, ₹ 80 paid-up 96,00,000
Share suspense account 20,00,000
Reserves and surplus:
Capital reserves (₹1,50,000 is revaluation reserve) 1,95,000
Securities premium 50,000
Secured loans:
15% Debentures 65,00,000
Unsecured loans:
Public deposits 3,70,000
Cash credit loan from SBI (short term) 4,65,000
Current Liabilities:
Trade Payables 3,45,000
Assets:
Investment in shares, debentures, etc. 75,00,000
Profit and Loss account (Dr. balance) 15,25,000
- 21 -
Share suspense account represents application money received on shares, the allotment of which is
not yet made.
You are required to compute effective capital as per the provisions of Schedule V. Would your answer
differ if X Ltd. is an investment company?
Solution:
Computation of effective capital:
Where X Ltd. Is a Where X Ltd. is
non-investment an investment
company company
₹ ₹
Paid-up share capital —
15,000, 14% Preference shares 15,00,000 15,00,000
1,20,000 Equity shares 96,00,000 96,00,000
Capital reserves (1,95,000 – 1,50,000) 45,000 45,000
Securities premium 50,000 50,000
15% Debentures 65,00,000 65,00,000
Public Deposits 3,70,000 3,70,000
(A) 1,80,65,000 1,80,65,000
Investments 75,00,000 -
Profit and Loss account (Dr. balance) 15,25,000 15,25,000
(B) 90,25,000 15,25,000
Effective capital 90,40,000 1,65,40,000
Illustration 3
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
- 22 -
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.
Solution:
Calculation of effective capital and maximum amount of monthly remuneration
(₹ in lakhs)
Reserves (including Revaluation reserve ₹10 lakhs) (150-10) 140
Long term loans 40
380
Less: Accumulated losses not written off (20)
Investments (180)
Effective capital for the purpose of managerial remuneration 180
Since Kumar Ltd. is incurring losses and no special resolution has been passed by the company for
payment of remuneration, managerial remuneration will be calculated on the basis of effective capital
of the company, therefore maximum remuneration payable to the Managing Director should be @
₹60,00,000 per annum.
Note: Revaluation reserve, and application money pending allotment are not included while
computing effective capital of Kumar Ltd.
- 23 -
MULTIPLE CHOICE QUESTIONS

1. If there is increase in managerial remuneration, exceeding the overall ceiling as given in
section 198 of the Companies Act, then sanction of which authority is required?
(a) Registrar of the company.
(b) Central Government.
(c) Board of Directors of the company.
2. For companies having profits, the overall maximum limit for managerial remuneration as per
Section 198 of the Companies Act, 2013 is
(a) 11% of net profit.
(b) 10% of net profit.
(c) 5% of net profit.
3. For the purpose of managerial remuneration, paid up share capital used for
(a) calculation of effective capital means
(b) Paid up share capital excluding share application money and advances against shares.
(c) Paid up share capital excluding share application money but including advances
against shares.
Answer:
1. (b) 2. (a) 3. (a)
- 24 -
PRACTICE PROBLEMS
Problem 1
The following extract of Balance Sheet of Star Ltd. (non- investment) company was obtained:
Liabilities ₹
Authorised capital:
60,000, 14% preference shares of ₹100 60,00,000
6,00,000 Equity shares of ₹100 each 6,00,00,000
6,60,00,000
45,000, 14% preference shares of ₹100 each fully paid 45,00,000
3,60,000 Equity shares of ₹100 each, ₹80 paid-up 2,88,00,000
Capital reserves (₹4,50,000 is revaluation reserve) 5,85,000
Securities premium 1,50,000
Secured loans:
15% Debentures 1,95,00,000
Unsecured loans:
Cash credit loan from SBI (short term) 3,95,000
Current Liabilities:
Assets:
Investment in shares, debentures, etc. 2,25,00,000
not yet made.
differ if Star Ltd. is an investment company?
Answer: (a) Effective capital: 2,71,20,000

(b) Effective capital: 4,96,20,000
Problem 2
The following extract of Balance Sheet of X Ltd. (a non-investment company) was obtained:
- 25 -

Liabilities ₹
Authorized capital:
15,000, 14% preference shares of ₹ 100 15,00,000
1,50,000 Equity shares of ₹ 100 each 1,50,00,000
1,65,00,000
15,000, 14% preference shares of ₹ 100 each fully paid 15,00,000
1,20,000 Equity shares of ₹ 100 each, ₹ 80 paid-up 96,00,000
Capital reserves (₹ 1,50,000 is revaluation reserve) 1,95,000
Investment in shares, debentures, etc. 75,00,000
Profit and Loss account (debit balance) 15,25,000
You are required to compute Effective Capital as per the provisions of Schedule V to the
Companies Act, 2013.
Answer: 86,70,000
Problem 3: RTP Nov-2018 (Old Course)

PQ 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 preference share capital 30
Reserves (including Revaluation reserve ₹15 225
lakhs)
Long term loans 60
Accumulated losses not written off 30
Investments 270
PQ Ltd. has only one whole-time director, Mr. Hello. You are required to calculate the amount of
maximum remuneration that can be paid to him as per provisions of Companies Act, 2013, 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.
Answer: 270 lakhs
- 26 -
SOLUTIONS TO PRACTICE PROBLEMS

Solution 1:
Computation of effective capital:
Where Star Ltd. Is a non- Where Star Ltd. Is an
investment company investment company
₹ ₹
Paid–up share capital —
45,000, 14% Preference shares 45,00,000 45,00,000
3,60,000 Equity shares 2,88,00,000 2,88,00,000
Capital reserves (5,85,000 – 4,50,000) 1,35,000 1,35,000
Securities premium 1,50,000 1,50,000
15% Debentures 1,95,00,000 1,95,00,000
Public Deposits 11,10,000 11,10,000
(A) 5,41,95,000 5,41,95,000
Investments 2,25,00,000 –
Profit and Loss account (Dr. balance) 45,75,000 45,75,000
(B) 2,70,75,000 45,75,000
Effective capital (A–B) 2,71,20,000 4,96,20,000
Solution 2:
Computation of Effective Capital
₹
Paid-up share capital-
15,000, 14% Preference shares 15,00,000
1,20,000 Equity shares 96,00,000
Capital reserves (excluding revaluation reserve) 45,000
(A) 1,76,95,000
Investments 75,00,000
(B) 90,25,000
Effective capital (A-B) 86,70,000
- 27 -
Solution 3:
Calculation of effective capital and maximum amount of monthly remuneration
(₹ in lakhs)
Reserve excluding Revaluation reserve (225 - 15) 210
Long term loans 60
570
Less: Accumulated losses not written off (30)
Investments (270)
Effective capital for the purpose of managerial remuneration 270
Since PQ Ltd. is incurring losses and no special resolution has been passed by the company for
payment of remuneration, managerial remuneration will be calculated on the basis of effective capital
of the company, therefore maximum remuneration payable to the Managing Director should be @ ₹
60,00,000 per annum*.
*If the effective capital is less than 5 crores, limit of yearly remuneration payable should not exceed ₹
60 lakhs as per Companies Act, 2013
- 28 -
NOV-2019 (NEW COURSE)

Question.6. (a) (5 Marks)
The following extract of Balance Sheet of Prabhat Ltd. (Non-investment Company) was obtained:
Balance Sheet (Extract) as on 31st March, 2020:
Liabilities ₹
30,000, 12 % preference shares of ₹100 each (fully paid) 30,00,000
24,00,000 equity shares of ₹ 10 each, ₹ 8 paid up 1,92,00,000
Reserve and Surplus:

Capital reserves (₹ 3,00,000 is revaluation reserve) 3,90,000
Secured loans:
12% debentures 1,30,00,000
Unsecured loans:
Current liabilities:
Trade payables 6,90,000
Cash credit from SBI (short term) 9,30,000
Assets
Investments in shares, debentures etc. 1,50,00,000
Profit & loss account (Dr. balance) 30,50,000
not yet made.
differ if Prabhat Ltd. is an investment company?
- 29 -
Solution:
Computation of effective capital as per Schedule V
(a) If it is a non-investment company
Capital reserves (₹ 3,90,000 – 3,00,000) 90,000
12% debentures 1,30,00,000
TOTAL 3,77,50,000
Less: Assets
Investments in shares, debentures etc. 1,50,00,000
EFFECTIVE CAPITAL 1,97,00,000
Computation of effective capital as per Schedule V

(b) If it is an investment company
Capital reserves (₹ 3,90,000 – 3,00,000) 90,000
12% debentures 1,30,00,000
TOTAL 3,77,50,000
Less: Assets
EFFECTIVE CAPITAL 3,47,00,000
- 30 -
ACCOUNTING FOR BONUS ISSUE

SECTION - 63
Issue of bonus shares

(1) A company may issue fully paid-up bonus shares to its members, in any manner whatsoever, out
of:
(i) its free reserves;
(ii) the securities premium account; or
(iii) the capital redemption reserve account:
Provided that no issue of bonus shares shall be made by capitalising reserves created by the
revaluation of assets.
(2) No company shall capitalise its profits or reserves for the purpose of issuing fully paid-up bonus
shares under sub-section (1), unless—
(a) it is authorised by its articles;
(b) it has, on the recommendation of the Board, been authorised in the general meeting of the
company;
(c) it has not defaulted in payment of interest or principal in respect of fixed deposits or debt
securities issued by it;
(d) it has not defaulted in respect of the payment of statutory dues of the employees, such as,
contribution to provident fund, gratuity and bonus;
(e) the partly paid-up shares, if any outstanding on the date of allotment, are made fully paid-
up;
(f) it complies with such conditions as may be prescribed.
(3) The bonus shares shall not be issued in lieu of dividend.

As per Section 2(43) of the Companies Act, 2013, “free reserves” means such reserves which,
as per the latest audited balance sheet of a company, are available for distribution as dividend.
Provided that—
(i) any amount representing unrealised gains, notional gains or revaluation of assets,
whether shown as a reserve or otherwise, or
(ii) any change in carrying amount of an asset or of a liability recognised in equity, including
surplus in profit and loss account on measurement of the asset or the liability at fair value
shall not be treated as free reserves.
- 31 -
Paragraph 39 & 40 of schedule I of companies Act, 2013

Capitalisation of profits
39. (i) The company in general meeting may, upon the recommendation of the Board, resolve—
(a) that it is desirable to capitalise any part of the amount for the time being standing to the
credit of any of the company's reserve accounts, or to the credit of the profit and loss
account, or otherwise available for distribution; and
(b) that such sum be accordingly set free for distribution in the manner specified in clause (ii)
amongst the members who would have been entitled thereto, if distributed by way of
dividend and in the same proportions.
(ii) The sum aforesaid shall not be paid in cash but shall be applied, subject to the provision
contained in clause (iii), either in or towards—
(A) paying up any amounts for the time being unpaid on any shares held by such members
respectively;
(B) paying up in full, unissued shares of the company to be allotted and distributed, credited as
fully paid-up, to and amongst such members in the proportions aforesaid;
(C) partly in the way specified in sub-clause (A) and partly in that specified in sub-clause (B);
(D) A securities premium account and a capital redemption reserve account may, for the
purposes of this regulation, be applied in the paying up of unissued shares to be issued to
members of the company as fully paid bonus shares;
(E) The Board shall give effect to the resolution passed by the company in pursuance of this
regulation.
40. (i) Whenever such a resolution as aforesaid shall have been passed, the Board shall—
(a) make all appropriations and applications of the undivided profits resolved to be capitalised
thereby, and all allotments and issues of fully paid shares if any; and
(b) generally do all acts and things required to give effect thereto.
(ii) The Board shall have power—
(a) to make such provisions, by the issue of fractional certificates or by payment in cash or
otherwise as it thinks fit, for the case of shares becoming distributable in fractions; and
(b) to authorise any person to enter, on behalf of all the members entitled thereto, into an
agreement with the company providing for the allotment to them respectively, credited as
fully paid-up, of any further shares to which they may be entitled upon such capitalisation, or
as the case may require, for the payment by the company on their behalf, by the application
thereto of their respective proportions of profits resolved to be capitalised, of the amount or
any part of the amounts remaining unpaid on their existing shares;
(iii) Any agreement made under such authority shall be effective and binding on such members.
- 32 -
SEBI REGULATIONS
A listed company, while issuing bonus shares to its members, has to comply with the following
requirements under the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018:
BONUS ISSUE
Conditions for a bonus issue
293. Subject to the provisions of the Companies Act, 2013 or any other applicable law, a listed
issuer shall be eligible to issue bonus shares to its members if:
(a) it is authorised by its articles of association for issue of bonus shares, capitalisation of
reserves, etc.:
Provided that if there is no such provision in the articles of association, the issuer shall
pass a resolution at its general body meeting making provisions in the articles of
associations for capitalisation of reserve;
(b) it has not defaulted in payment of interest or principal in respect of fixed deposits or
debt securities issued by it;
(c) it has not defaulted in respect of the payment of statutory dues of the employees such as
contribution to provident fund, gratuity and bonus;
(d) any outstanding partly paid shares on the date of the allotment of the bonus shares, are
made fully paid-up;
(e) any of its promoters or directors is not a fugitive economic offender.
Restrictions on a bonus issue

294. (1) An issuer shall make a bonus issue of equity shares only if it has made reservation of
equity shares of the same class in favour of the holders of outstanding compulsorily convertible
debt instruments if any, in proportion to the convertible part thereof.
(2)The equity shares so reserved for the holders of fully or partly compulsorily convertible debt
instruments, shall be issued to the holder of such convertible debt instruments or warrants at the
time of conversion of such convertible debt instruments, optionally convertible instruments,
warrants, as the case may be, on the same terms or same proportion at which the bonus shares
were issued.
(3) A bonus issue shall be made only out of free reserves, built out of the genuine profits or
securities premium account, capital redemption reserve account and further securities premium
should be collected in cash only (i.e. it should not be collected otherwise in cash). Reserves
created by revaluation of fixed assets shall not be capitalised for this pur pose.
(4) Bonus shares shall not be issued in lieu of dividends.
- 33 -
Completion of a bonus issue

295. (1) An issuer, announcing a bonus issue after approval by its board of directors and
not requiring shareholders' approval for capitalisation of profits or reserves for making the
bonus issue, shall implement the bonus issue within fifteen days from the date of approval of
the issue by its board of directors:
Provided that where the issuer is required to seek shareholders' approval for capitalisation of
profits or reserves for making the bonus issue, the bonus issue shall be implemented within two
months from the date of the meeting of its board of directors wherein the decision to announce
the bonus issue was taken subject to shareholders' approval.
Explanation: For the purpose of a bonus issue to be considered as 'implemented' the date of
commencement of trading shall be considered.
(2) A bonus issue, once announced, shall not be withdrawn.
The companies (share capital and Debentures) Rules 2014

Issue of Bonus shares Rule 14 —The company which has once announced the decision of its
Board recommending a bonus issue, shall not subsequently withdraw the same.
Journal entries:
1. Conversion of partly paid shares into fully paid shares
General Reserve A/c Dr.
Profit and Loss A/c Dr.
To Bonus to Shareholders A/c
Share Final Call A/c Dr.

To Share Capital A/c
Bonus to Shareholders A/c Dr.

To Share Final Call A/c
2. Upon the sanction and issue of bonus shares

Capital Redemption Reserve A/c Dr.
Securities Premium A/c (realized in cash only) Dr.

To Share Capital A/c
- 34 -
As per SEBI Regulations, such securities premium should be realised in cash, whereas under the
Companies Act, 2013, there is no such requirement. Thus, for unlisted companies, securities premium
(not realised in cash) may be used for issue of bonus shares, whereas the same cannot be used in
case of listed companies.
Illustration 1
Following items appear in the trial balance of Bharat Ltd. (a listed company) as on 31 st March,
2020:
40,000 Equity shares of ₹ 10 each 4,00,000

Capital Redemption Reserve 55,000
Securities Premium (collected in cash) 30,000
General Reserve 1,05,000
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
reserves. Pass necessary journal entries.
Solution :
Journal Entries in the books of Bharat Ltd.
Dr. ₹ Cr. ₹
Capital Redemption Reserve A/c Dr. 55,000
Securities Premium A/c Dr. 30,000
General Reserve A/c Dr. 15,000
To Bonus to Shareholders A/c 1,00,000
(Bonus issue of one share for every four shares held, by utilising
various reserves as per Board’s resolution dated…….)
Bonus to Shareholders A/c Dr. 1,00,000

To Equity Share Capital A/c (Capitalisation of profit) 1,00,000
- 35 -
Illustration 2
Authorised capital: ₹
1,50,000 Equity shares of ₹10 each 15,00,000
15,000 12% Preference shares of ₹10 each 1,50,000
16,50,000
Issued and Subscribed capital:
1,35,000 Equity shares of ₹ 10 each, ₹ 8 paid up 10,80,000
12,000 12% Preference shares of ₹ 10 each fully paid 1,20,000
Securities premium (collected in cash) 37,500
Profit and Loss Account 3,00,000
On 1 April, 2019, the Company has made final call @ ₹2 each on 1,35,000 equity shares. The call
st
money was received by 20 th April, 2019. Thereafter, the company decided to capitalise its reserves
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 30 th April, 2019 after bonus issue.
Solution :
Journal Entries in the books of Preet Ltd.
₹ ₹
1-4-2019 Equity Share Final Call A/c Dr. 2,70,000
To Equity Share Capital A/c 2,70,000
For final call of ₹2 per share on 1,35,000 equity shares
due as per Board’s Resolution dated....)
20-4- Bank A/c Dr. 2,70,000
2019 To Equity share final call A/c 2,70,000
(Final Call money on 1,35,000 equity shares received)
General Reserve A/c Dr. 1,80,000
Profit and Loss A/c (b.f.) Dr. 60,000
(For making provision for bonus issue of one share for
every four shares held)
April 20 Bonus to Shareholders A/c Dr. 3,37,500
(For issue of bonus shares)
- 36 -
Extract of Balance Sheet as at 30 th April, 2019 (after bonus issue)

Authorised Capital ₹
1,83,750 Equity shares of ₹10 each (refer working note below) 18,37,500
Issued and subscribed capital
1,68,750 Equity shares of ₹10 each, fully paid 16,87,500
(Out of above, 33,750 equity shares @ ₹10 each were issued by way of bonus)
12,000 12% Preference shares of ₹10 each, fully paid 1,20,000
Reserves and surplus
Working Notes
The authorised capital should be increased as per details given below: ₹
Existing authorised Equity share capital 15,00,000
Add: Issue of bonus shares to equity shareholders 3,37,000
18,37,500
Illustration 3
Following is the extract of the Balance Sheet of Solid Ltd. as at 31st March, 2019:
Authorised capital : ₹
10,000 12% Preference shares of ₹ 10 each 1,00,000
11,00,000
90,000 Equity shares of ₹10 each, ₹8 paid up 7,20,000
8,000 12% Preference shares of ₹10 each fully paid 80,000
Reserves and Surplus :
General reserve 1,60,000
Revaluation reserve 35,000
Secured Loan:
12% Debentures @ ₹100 each 5,00,000
On 1st April, 2019 the Company has made final call @ ₹ 2 each on 90,000 equity shares. The call
money was received by 20th April, 2019. Thereafter the company decided to capitalise its reserves
by way of bonus at the rate of one share 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 meetin g for
increasing the authorised capital.
- 37 -

1. Which of the following cannot be used for issue of bonus shares as per the Companies Act?
(a) Securities premium account
(b) Revaluation reserve
(c) Capital redemption reserve
2. Which of the following is true with regard to declaring and issuing of Bonus Shares?
(a) Assets are transferred from the company to the shareholders.
(b) A Bonus issue results in decrease in reserves and surplus.
(c) A Bonus issue is same as declaration of dividends.
3. Which of the following statement is true in case of bonus issue?

(a) Convertible debenture holders will get bonus shares in same proportion as to the
existing shareholders.
(b) Bonus shares may be issued to convertible debenture holders at the time of conversion
of such debentures into shares.
(c) Both (a) and (b).
4. Bonus issue is also known as

(a) Scrip issue.
(b) Capitalisation issue.
5. The bonus issue is not made unless

(a) Partly paid shares are made fully paid up.
(b) It is provided in its articles of association
Answers :
1. (b) 2. (b) 3. (c) 4. (c) 5. (c)
- 38 -
PRACTICE PROBLEMS
Problem 1 Following items appear in the Trial Balance of Saral Ltd. as on 31st March, 20 20:
Particulars Amount
4,500 Equity Shares of ₹100 each 4,50,000
Securities Premium(collected in cash) 40,000
Profit and Loss Account (Cr. Balance) 65,000
The company decided to issue to equity shareholders bonus shares at the ra te of 1 share for every
3 shares held. Company decided that there should be the minimum reduction in free reserves.
Pass necessary Journal Entries in the books Saral Ltd.
Problem 2
The following notes pertain to Brite Ltd.'s Balance Sheet as on 31st March, 2019:
(1) Share Capital ₹ in lakhs
Authorised:
20 crore shares of ₹10 each 20,000
Issued and Subscribed:
10 crore Equity Shares of ₹10 each 10,000
2 crore 11% Cumulative Preference Shares of ₹10 each 2,000
Total 12,000
Called and paid up:
10 crore Equity Shares of ₹10 each, ₹8 per share called and paid up 8,000
2 crore 11% Cumulative Preference Shares of ₹10 each,
fully called and paid up 2,000
Total 10,000
(2) Reserves and Surplus:
General Reserve 1,040
Surplus i.e. credit balance of Profit & Loss Account 273
Total 4,798
On 2nd April 2019, the company made the final call on equity shares @ ₹ 2 per
share. The entire money was received in the month of April, 2019.
On 1st June 2019, the company decided to issue to equity shareholders bonus shares at the rate
of 2 shares for every 5 shares held. Pass journal entries for all the above mentioned transactions.
Also prepare the notes on Share Capital and Reserves and Surplus relevant to the Balance Sheet
of the company immediately after the issue of bonus shares.
- 39 -
Problem 3: Mock Test Nov-2019 (New Course)

Following items appear in the Trial Balance of Beta Ltd. as on 31st March, 2019:
Particulars Amount ₹
3,000 Equity Shares of ₹ 100 each 3,00,000
The company decided to issue to equity shareholders bonus shares at the rate of 1 share for every
3 shares held. Company decided that there should be the minimum reduction in free reserves.
Pass necessary Journal Entries in the books of Beta Ltd.
Problem 4: RTP NOV 2019 (New Course/Old Course)/RTP May-2018 (Old Course)
Following is the extract of the Balance Sheet of Manoj Ltd. as at 31st March, 2019:
₹
Authorised capital:
4,00,000 Equity shares of ₹ 10 each 40,00,000
43,00,000
Capital Redemption Reserve 1,20,000
On 1st April, 2019, the Company has made final call @ ₹ 2 each on 2,70,000 equity shares. The call
money was received by 20th April, 2019. Thereafter, the company decided to capitalize its reserves
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 relevant extract of the
balance sheet as on 30th April, 2019 after bonus issue.
- 40 -
Problem 5: RTP May-2019 (Old Course)

Following is the extract of the Balance Sheet of Xeta Ltd. as at 31st March, 2019:
₹
Authorised capital:
45,00,000
On 1st April, 2019, the Company has made final call @ ₹ 2 each on 2,70,000 equity shares. The call
money was received by 20th April, 2019. Thereafter, the company decided to capitalize its reserves 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, 2019 after bonus issue.
Problem 6: What is meant by Bonus issue? Explain its related provisions as per the Companies
Act, 2013.
- 41 -

Solution 1:
General Reserve A/c (b.f.) Dr. 40,000
To Bonus to Shareholders 1,50,000
(Being issue of bonus shares by utilisation of various Reserves, as per resolution dated …….)
To Equity Share Capital 1,50,000
(Being capitalisation of Profit)
Solution 2:
Journal Entries in the books of Brite Ltd.
2019 Dr.` in Cr. ` in
lakhs lakhs
April 2 Equity Share Final Call A/c Dr. 2,000
To Equity Share Capital A/c 2,000
(For final call of ₹2 per share on 10 crore equity shares
made due)
Bank A/c Dr. 2,000
To Equity share final call A/c 2,000
(Final Call money on 10 crore equity shares received)
June 1 Capital Redemption Reserve A/c Dr. 1,485

General Reserve A/c (b.f.) Dr. 515
To Bonus to Shareholders A/c 4,000
(Bonus issue of two shares for every five shares held, by
utilising various reserves as per Board’s resolution
dated….)
Bonus to Shareholders A/c Dr. 4,000

(Capitalisation of profit)
- 42 -
Notes to Accounts
₹ in lakhs
1. Share Capital
Authorised share capital
20 crore shares of ₹10 each 20,000
Issued, subscribed and fully paid up share capital

14 crore Equity shares of ₹10 each, fully paid up 14,000
(Out of the above, 4 crore equity shares @ ₹10
each were issued by way of bonus)
2 crore, 11% Cumulative Preference share

capital of ₹10 each, fully paid up 2,000
16,000
2. Reserves and Surplus
Capital Redemption reserve 1,485
Less: Utilised for bonus issue (1,485)
Securities Premium 2,000

Less: Utilised for bonus issue (2,000)

Less: Utilised for bonus issue (515) 525
Surplus (Profit and Loss Account) 273

Total 798
Solution 3:
(Being issue of bonus shares by utilization of various Reserves, as per resolution dated …….)
(Being capitalization of Profit)
- 43 -
Solution 4:
₹ ₹
1-4-2019 Equity share final call A/c Dr. 5,40,000
To Equity share capital A/c 5,40,000
(For final calls of ₹ 2 per share on 2,70,000 equity shares
due as per Board’s Resolution dated….)
20-4-2019 Bank A/c Dr. 5,40,000
To Equity share final call A/c 5,40,000
(For final call money on 2,70,000 equity shares received)
Capital Redemption Reserve A/c Dr. 1,20,000
Profit and Loss A/c (b.f.) Dr. 1,20,000
To Bonus to shareholders A/c 6,75,000
(For making provision for bonus issue of one share for every
four shares held)
Bonus to shareholders A/c Dr. 6,75,000
Extract of Balance Sheet as at 30th April, 2019 (after bonus issue)

₹
Authorized Capital
30,000 12% Preference shares of ₹ 10 each 3,00, 000
3,37,500 Equity shares of ₹ 10 each, fully paid 33,75,000
(Out of the above, 67,500 equity shares @ ₹ 10 each were issued by way of bonus
shares)
Reserves and surplus 4,80,000
Profit and Loss Account
- 44 -
Solution 5:
Journal Entries in the books of Xeta Ltd
₹ ₹
01-4-2019 Equity share final call A/c Dr. 5,40,000
(For final calls of ₹ 2 per share on 2,70,000 equity
shares due as per Board’s Resolution dated….)
20-4-2019 Bank A/c Dr. 5,40,000
To Equity share final call A/c 5,40,000
(For final call money on 2,70,000 equity shares
received)
Securities Premium A/c Dr. 1,00,000
Profit and Loss A/c Dr. 2,15,000
(For making provision for bonus issue of one share for
every four shares held)
Bonus to shareholders A/c Dr. 6,75,000
Extract of Balance Sheet as at 30th April, 2019 (after bonus issue)

₹
Authorised Capital

3,37,500 Equity shares of ₹10 each, fully paid 33,75,000
(Out of above, 67,500 equity shares @ ₹10 each were issued by way of bonus)
Reserves and surplus

Answer 6: Bonus Issue means an offer of free additional shares to existing shareholders. A
company may decide to distribute further shares as an alternative to increase the dividend pay-out.
Refer answer in the book.
- 45 -
Nov-2019 (New Course)
Question.6. (b) (4 Marks)
Following is the extract of Balance Sheet of Prem Ltd. as at 31st March, 2019:
Authorized capital ₹
3,00,000 equity shares of ₹ 10 each 30,00,000
25,000, 10% preference shares of ₹ 10 each 2,50,000
32,50,000
2,70,000 equity shares of ₹ 10 each fully paid up 27,00,000
24,000,10% preference shares of ₹ 10 each fully paid up 2,40,000
29,40,000
Reserve and surplus:
Capital redemption reserve 1,20,000
Securities premium (in cash) 75,000
Profit and loss account 6,00,000
11,55,000
st
On 1 April, 2019, the company decided to capitalize its reserve by way of bonus at the rate of two
shares for every five shares held. Show necessary journal entries in the book of the company and
prepare the extract of the balance sheet after bonus issue.
Solution:
Journal Entries in the books of Prem Ltd. as on 1st April, 2019
Particulars Debit (`) Credit (`)
Securities Premium A/c Dr.
Profit & Loss A/c Dr.
To Bonus to Shareholders
(Being issue of one bonus shares for every 3 shares held, by
utilization of various Reserves, as per Board’s resolution dated……)
To Equity Share Capital A/c
(Being capitalization of profit)
- 46 -
Extract of Balance sheet on 1st April, 2019 (after bonus issue)

Notes No. ₹
Equity & Liability
Shareholders funds
(a) Share Capital 1 40,20,000
(b) Reserve and Surplus 2 75,000
Notes to Accounts
1. Share Capital
Equity share capital
Authorised share capital 30,00,000
Add: Bonus Shares 1,08,000 X 10 = 10,80,000 40,80,000
Since authorised capital has exceeded the limit because of issue of bonus shares,
it will be increased by passing appropriate resolution.
Issued, subscribed and fully paid share capital
2,70,000 + Bonus Share 1,08,000 of ₹ 10 each 37,80,000
Preference share capital

Authorised share capital
Issued, subscribed and fully paid share capital
Total Issued Share Capital 40,20,000

General Reserve Nil
Capital redemption Reserve Nil
Securities Premium Nil
Profit and Loss Account 75,000
Working Note:
The authorised capital should be increased as per details given ₹
Existing authorised Equity share capital 30,00,000
Add: Issue of bonus shares to equity shareholders (₹ 1,08,000 X 10) 10,80,000
40,80,000
- 47 -
May-2019 (Old Course)

Question 7 (a) (4 Marks)
Following items appear in the Trial Balance of Satish Limited as on 31st March, 2019:
Particulars Amount
9,000 Equity shares of ₹ 100 each 9,00,000
Capital Reserves (including ₹ 80,000 being profit on sale of plant) 1,80,000
Profit and Loss Account (Cr. Balance) 1,30,000
The company decided to issue bonus shares to equity shareholders at the rate of 1 share for every 3
shares held. Company decided that there should be the minimum reduction in free reserves. Pass
necessary Journal Entries in the books of Satish Ltd.
Answer:
Journal Entries in the Books of Satish Ltd.
Particulars Debit (`) Credit (`)
Capital Reserve A/c Dr.
General Reserve A/c * Dr.
To Bonus to Shareholders
(Being issue of one bonus shares for every 3 shares held, by
utilization of various Reserves, as per Board’s resolution
dated……)
To Equity Share Capital A/c (Being
capitalization of profit)
- 48 -
May-2018 (New Course)

Question 6 (b) 5 marks
Following are the balances that appear in the trial balance of Arya Ltd. as at 2019:
Issued and Subscribed Capital:

1,00,000 Equity Shares of ₹ 10 each ₹ 8 paid up 8,00,000
10,000; 10% Preference Shares of ₹ 10 each fully paid 1,00,000
Reserves and Surplus:
On 1st April, 2019 the company has made final call @ ₹ 2 each on 1,00,000 Equity Shares. The call
money was received by 15th April, 2019. Thereafter the company decided to issue bonus shares to
equity shareholders at the rate of 1 share for every 5 shares held and for this purpose, it decided that
there should be minimum reduction in free reserves. Pass Journal entries.
Answer : Arya Ltd.: Journal Entries

2019 Dr. Cr.₹
₹
April Equity Share Final Call A/c Dr.
1 To Equity Share Capital A/c
(Final call of ₹ 2 per share on 1,00,000 equity shares
due as per Board’s Resolution dated....)
April Bank A/c Dr.
15 To Equity Share Final Call A/c
(Final Call money on 1,00,000 equity shares received)
(Bonus issue @ one share for every 5 shares held by
utilizing various reserves as per Board’s Resolution
dated...)
April Bonus to Shareholders A/c Dr.
15 To Equity Share Capital A/c
(Capitalization of profit)
Note: Profit and Loss Account balance may also be utilized along with General Reserve for the
purpose of issue of Bonus shares.
- 49 -
RIGHT ISSUE
Rights issue is an issue of rights to a company's existing shareholders that entitles them to buy
additional shares directly from the company in proportion to their existing holdings, within a fixed time
period. In a rights offering, the subscription price at which each share may be purchased is generally
at a discount to the current market price to evoke positive response as well as to reward the existing
shareholders. Rights are often transferable, allowing the holder to sell them in the open market.
The difference between the cum-right and ex-right value of the share is the value of the right.
Need of Right Issue :

Any company, public or private, desirous of raising funds may issue further shares. However in such a
case, the voting rights of the existing shareholders may be diluted, if they are issued to public in
general. Therefore in order to protect the interest of the existing shareholders, Companies Act, 2013
allows existing shareholders to preserve their position by offering those newly issued shares to them
at the first instance. However, if they do not desire to subscribe these shares, they may renounce it in
favour of someone else (unless the articles of the company prohibits such a right to renounce).
Such right is given in proportion to their existing holding for shares.
E.g. Company has existing issued and subscribed share capital of 1,00,000 shares. Now it wishes to
issue 10,000 new shares. In such a case, such shares shall be first offered to existing shareholders
proportionately i.e. 1 share for every 10 held.
If Mr. A has 1000 shares; he'll be offered to subscribe additional 100 shares.
If Mr. B has 2500 shares; he'll be offered to subscribe additional 250 shares.
Now Initial percentage holding of Mr. A (before Right issue) = 1000/1,00,000 = 1%
Percentage holding of Mr. A (after Right issue if he subscribes the shares) = 1100/1,10,000 = 1%
Initial percentage holding of Mr. B (before Right issue) = 2500/1,00,000 = 2.5%
Percentage holding of Mr. B (after Right issue if he subscribes the shares) = 2750/1,10,000 = 2.5%
Financial effects of a further issue

Further issue of shares will 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. Such shares are generally issued at a premium (Issue price is less than the market price).
As Per Section 2(57) of Companies Act 2013, “net worth” means the aggregate value of the paid-up
share capital and all reserves created out of the profits and securities premium account, after
deducting the aggregate value of the accumulated losses, deferred expenditure and miscellaneous
expenditure not written off, as per the audited balance sheet, but does not include reserves created
out of revaluation of assets, write-back of depreciation and amalgamation.
- 50 -
Provisions relating to Right issue under Companies Act.,2013

62. Further issue of share capital. —
(1) Where at any time, a company having a share capital proposes to increase its subscribed capital
by the issue of further shares, such shares shall be offered—
(a) to persons who, at the date of the offer, are holders of equity shares of the company in proportion
to the paid-up share capital on those shares by sending a letter of offer subject to the following
conditions, namely:—
(ii) the offer shall be made by notice specifying the number of shares offered and limiting a time not
being less than fifteen days and not exceeding thirty days from the date of the offer within which
the offer, if not accepted, shall be deemed to have been declined;
(iii) 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 or
any of them in favour of any other person;
(iv) 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 dis-advantageous to the
shareholders and the company;
(b) to employees under a scheme of employees‘ stock option, subject to special resolution passed by
company and subject to such conditions as may be prescribed; or
(c) to any persons, if it is authorised by a special resolution, either for cash or for a consideration other
than cash.
(2) The notice referred to in sub-clause (i) of clause (a) of sub-section (1) shall be despatched
through registered post or speed post or through electronic mode to all the existing
shareholders at least three days before the opening of the issue.
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:
Journal entries:
Bank A/c Dr.
To Securities Premium A/c (if shares are issued at premium)
Right of Renunciation
Right of renunciation refers to the right of the shareholder to surrender his right in favour of any other
person. 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’.
- 51 -
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 shares - Ex-right value of shares

Where Cum-Right value of shares is the market price of the share which exist before the right issue.
Market capitalization immediately + cash inflows generated
Ex-right value = before the right issue from right issue
Total shares issued after right issue
E.g. The company has 1,00,000 equity share with market value of ₹ 25 per share.
The company made the right issue of 10,000 shares at ₹14 per share.
Now Cum-right value of share = ₹ 25
(1, 00, 000  25 + 10, 000 14)
Ex-right value of share = = ₹ 24
1, 00, 000 + 10, 000
Value of Right = 25 – 24 = ₹1
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.
2. Right issue is a natural hedge against the issue expenses normally incurred by the company in
relation to public issue.
3. Right issue has an image enhancement effect, as public and shareholders view it positively.
4. The chance of success of a right issue is better than that of a general public issue and is logically
much easier to handle.
Disadvantages 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.
- 52 -

1. 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).
2. 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
3. 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
Answers :
1. (c) 2. (b) 3. (c)
Question 1: Explain the financial effects of a further issue of equity shares on the market value of
the share.
Answer : The financial position of a business is contained in the balance sheet. Further issue of
shares increase the amount of share capital as well as the liquid resources (Bank ). The amount of
share capital issued 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).
Question 2: What are the advantages and disadvantages of a rights issue?

- 53 -
PRACTICE PROBLEMS
Problem 1
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 1:
Ex-right value of the shares =
(Cum-right value of the existing shares + Rights shares × Issue Price) / (Existing Number of shares
+ Rights Number of shares)
= (₹240 × 2 Shares + ₹120 × 1 Share) / (2 + 1) Shares
= ₹600 / 3 shares = ₹200 per share.
Value of right = Cum-right value of the share – Ex-right value of the share
= ₹ 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 and willing to
renounce his right of buying one share in favour of that person.

Omega company offers new shares of ₹ 100 each at 20% premium to existing shareholders on the
basis of one for four shares. The cum-right market price of a share is ₹ 190.
You are required to calculate the Value of a right share.
Solution 2:
Value of right share = Cum-right value of the share – Ex-right value of the share (as computed in
Working Note) = ₹ 190 – ₹ 176 = ₹ 14 per share.
Working Note:
Ex-right value of the shares
= (Cum-right value of the existing shares + Rights shares x Issue Price) / (Existing No. of shares +
No. of right shares) =
(₹ 190 X 4 Shares + ₹ 120 X 1 Share) / (4 + 1) Shares
= ₹ 880 / 5 shares = ₹ 176 per share.
- 54 -
PROFIT OR LOSS PRE AND POST INCORPORATION

When a running business is taken over by the promoters of a company, the amount of profit or loss of
such business for the period prior to the date the company comes into existence is referred to as pre-
incorporation profit or losses.
Generally, if there is a loss, it is either written off by debit to the Profit and Loss Account or
alternatively debited to Goodwill Account. On the other hand, if there is a profit, it is credited to
Capital Reserve Account.
BASIS OF APPROPRIATION
Item Basis of appropriation between pre
and post incorporation profits
On the basis of Turnover
Gross Profit and Gross Loss Or
On the basis of Cost of goods sold
Or
On the basis of time
Variable expenses linked with Turnover
E.g. Carriage/Cartage Outward, Selling and distribution
On the basis of Turnover
expenses, Commission to selling agents, Advertisement
expenses, Bad Debts, Sales Promotions
Fixed common charges
E.g. Salaries, Rent, Office and administration expenses, On the basis of time
Depreciation, miscellaneous expenses
Expenses exclusively relating to Pre-incorporation period Charge to pre-incorporation period
Expenses exclusively relating to post-incorporation period

E.g. Preliminary Expenses, directors' fee, Share issue
expenses, Interest on debentures, Dividends on equity Charge to post-incorporation period
shares, underwriting commission, Discount on issue of
securities, Provision for Taxation
Audit Fee:
Company's audit under Companies Act. Charge to post-incorporation period
Tax Audit under Income tax Act. On the basis of turnover
Interest on purchase consideration to vendors On time basis

- 55 -
PRACTICE PROBLEMS
Q.1. Rama Udyog Limited was incorporated on August 1, 2011. It had acquired a running business of
Rama & Co. with effect from April 1, 2011. During the year 2011-12, the total sales were ₹36,00,000.
The sales per month in the first half year were half of what they were in the later half year. The net
profit of the company, ₹2,00,000 was worked out after charging the following expenses:
(i)Depreciation ₹1,23,000,
(ii) Directors’ fees 50,000,
(iii) Preliminary expenses ₹12,000,
(iv) Office expenses ₹78,000,
(v) Selling expenses ₹72,000 and
(vi) Interest to vendors upto August 31, 2011 ₹5,000.
Please ascertain pre-incorporation and post-incorporation profit for the year ended 31st March, 2012
Q.2.
The promoters of Glorious Ltd. took over on behalf of the company a running business with effect
from 1st April, 2011. The company got incorporated on 1st August, 21. The annual accounts were
made up to 31st March, 2012 which revealed that the sales for the whole year totalled ₹1,600 lakhs out
of which sales till 31st July, 2011 were for ₹400 lakhs. Gross profit ratio was 25%.
The expenses from 1st April 2011, till 31st March, 2012 were as follows:
(₹ in lakhs)
Salaries 69
Rent, Rates and Insurance 24
Sundry Office Expenses 66
Travellers' Commission 16
Discount Allowed 12
Bad Debts 4
Directors' Fee 25
Tax Audit Fee 9
Depreciation on Tangible Assets 12
Debenture Interest 11
Prepare a statement showing the calculation of Profits for the pre-incorporation and post-incorporation
periods.
Q.3.
The partners of Maitri Agencies decided to convert the partnership into a private limited company
called MA (P) Ltd. with effect from 1st January, 2012. The consideration was agreed at ₹1,17,00,000
based on the firm’s Balance Sheet as at 31st December, 2011.
- 56 -
However, due to some procedural difficulties, the company could be incorporated only on 1st April,
2012. 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 account were continued by the
company which closed its account for the first time on 31st March, 2013 and prepared the following
summarised profit and loss account.
₹
Sales 2,34,00,000
Less: Cost of goods sold 1,63,80,000
Salaries 11,70,000
Depreciation 1,80,000
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, 2012 but the
salaries tripled from that date. It had to occupy additional space from 1st July, 2012 for which rent was
₹30,000 per month.
Prepare statement of apportioning cost and revenue between pre-incorporation and post-
incorporation periods and calculation of profits/losses for such periods
- 57 -
ILLUSTRATIONS
Illustration 1:
Inder and Vishnu, working in partnership registered a joint stock company under the name of Fellow
Travellers Ltd. on May 31, 2011 to take over their existing business. It was agreed that they would
take over the assets of the partnership from January 1st, 2011 for a sum of ₹3,00,000 and that until
the amount was is charged, they would pay interest on the amount at the rate of 6% per annum. The
amount was paid on June 30, 2011. To discharge the purchase consideration, the company issued
20,000 equity shares of ₹10 each at a premium of ₹1 each and allotted 7% Debentures of the face
value of ₹1,50,000 to the vendors at par.
The summarised Profit and Loss Account of the “Fellow Travellers Ltd.” for the year ended 31st
December, 2011 was as follows:
₹ ₹
To Purchase, Inventory 1,40,000 By Sales: 60,000
To Freight and carriage 5,000 1st January to 31st May 2011 60,000
To Gross Profit c/d 60,000 1st June to 31st Dec., 2011 1,20,000
By Inventory in hand 25,000
2,05,000 2,05,000
To Salaries and Wages 10,000 By Gross profit b/d 60,000
To Debenture Interest 5,250
To Depreciation 1,000
To Interest on purchase Consideration (up 9,000
to 30-6- 2011)
To Selling commission 9,000
To Directors’ Fee 600
To Preliminary expenses 900
To Provision for taxes (entirely related with 6,000
company)
To Dividend paid on equity shares @ 5% 5,000
To Balance c/d 13,250
60,000 60,000
Prepare statement apportioning the expenses and calculate profits/losses for the ‘post’ and ‘pre-
incorporation’ periods and also show how these figures would appear in the Balance Sheet of the
company.
- 58 -
Solution:
Fellow Travellers Ltd.
Statement showing calculation of profit /losses for pre and post incorporation periods
Pre- Post-
Ratio incorporation ₹ Incorporation ₹
Gross profit allocated on the basis of sale 1:2 20,000 40,000
Less: Administrative Expenses allocated
On time basis:
(i) Salaries and wages 10,000
(ii) Depreciation 1,000
11,000 5:7 4,583 6,417
Selling Commission on the basis of sales 1:2 3,000 6,000
Interest on Purchase
Consideration (Time basis) 5:1 7,500 1,500
Expenses applicable wholly to the
Post-incorporation period:
Debenture Interest 5,250
(1,50,000 x 7% x 6/12)
Director’s Fee 600 5,850
Preliminary expenses 900
Provision for taxes 6,000
Balance c/d to Balance Sheet 4,917 13,333
Time Ratio
Pre incorporation period = 1 January 2011 to 31 May 2011 = 5 months
Post incorporation period = 1 June 2011 to 31 December 2011 = 7 months
Time ratio = 5: 7
Sales Ratio
Sales in pre incorporation period (1 January 2011 to 31 May 2011) = ₹60,000 Sales in post
incorporation period (1 June 2011 to 31 December 2011) = ₹1,20,000
Sales ratio = 1:2
- 59 -
Fellow Travellers Ltd.

Extract from the Balance Sheet as on 31st Dec., 2011
Particulars Notes ₹
1. Equity and Liabilities
a Share capital 1 2,00,000
b Reserves and Surplus 2 33,250
2. Non-current liabilities
a Long-term borrowings 3 1,50,000
3. Current liabilities
a Short term provisions 4 6,000
Total 3,89,250
Notes to accounts
₹
1. Share Capital
20,000 equity shares of ₹10 each fully 2,00,000
paid

Profit Prior to Incorporation 4,197
Securities Premium Account 2,00,000
Profit and loss Account 13,333
Less: Dividend on equity share (5,000)
Total 33,250
3. Long term borrowings

Secured
4. Other Current liabilities

Provision for Taxes 6,000
- 60 -
Illustration 2
ABC Ltd. took over a running business with effect from 1st April, 2011. The company was
st
incorporated on 1 August, 2011. The following summarised Profit and Loss Account has been
prepared for the year ended 31.3.2012:
₹ ₹
To Salaries 48,000 By Gross profit 3,20,000
To Stationery 4,800
To Travelling expenses 16,800
To Advertisement 16,000
To Miscellaneous trade expenses 37,800
To Rent (office buildings) 26,400
To Electricity charges 4,200
To Director’s fee 11,200
To Bad debts 3,200
To Commission to selling agents 16,000
To Tax Audit fee 6,000
To Debenture interest 3,000
To Interest paid to vendor 4,200
To Selling expenses 25,200
To Depreciation on fixed assets 9,600
To Net profit 87,600
3,20,000 3,20,000
Additional information:
(a) Total sales for the year, which amounted to ₹19,20,000 arose evenly up to the date of 30.9.2011.
Thereafter they recorded an increase of two-third during the rest of the year.
(b) Rent of office building was paid @ ₹2,000 per month up to September, 2011 and thereafter it was
increased by ₹400 per month.
(c) Travelling expenses include ₹4,800 towards sales promotion.
Depreciation include ₹600 for assets acquired in the post incorporation period.
Purchase consideration was discharged by the company on 30th September, 2011 by issuing equity
shares of ₹10 each.
Prepare Statement showing calculation of profits and allocation of expenses between pre and post
incorporation periods.
- 61 -
Solution:
Statement showing calculation of profits for pre and post incorporation periods
for the year ended 31.3.2012
Particulars Pre-incorporation Post- incorporation
period ₹ period ₹
Gross profit (1:3) 80,000 ,40,000
Less: Salaries (1:2) 16,000 32,000
Stationery (1:2) 1,600 3,200
Advertisement (1:3) 4,000 12,000
Travelling expenses (W.N.4) 4,000 8,000
Sales promotion expenses (W.N.4) 1,200 3,600
Misc. trade expenses (1:2) 12,600 25,200
Rent (office building) (W.N.3) 8,000 18,400
Electricity charges (1:2) 1,400 2,800
Director’s fee (post-incorporation) - 11,200
Bad debts (1:3) 800 2,400
Selling agents commission (1:3) 4,000 12,000
Audit fee (1:3) 1,500 4,500
Debenture interest (post-incorporation) - 3,000
Interest paid to vendor (2:1) (W.N.5) 2,800 1,400
Selling expenses (1:3) 6,300 18,900
Depreciation on fixed assets (W.N.6) 3,000 6,600
Capital reserve (Bal. Fig.) 12,800 -
Net profit (Bal. Fig.) - 74,800
Working Notes:
1. Time Ratio
Pre incorporation period = 1st April, 2011 to 31st July, 2011i.e. 4 months
Post incorporation period is 8 months
Time ratio is 1: 2.
2. Sales ratio
Let the monthly sales for first 6 months (i.e. from 1.4.2011 to 30.09. 2011) be x
Then, sales for 6 months = 6x
Monthly sales for next 6 months (i.e. from 1.10.11 to 31.3.2012) = x + 2/3x = 5/3x
Then, sales for next 6 months = × 6 = 10x
Total sales for the year = 6x + 10x = 16x
Monthly sales in the pre incorporation period = ₹19,20,000/16 = ₹1,20,000
- 62 -
Total sales for pre-incorporation period = ₹1,20,000 x 4 = ₹4,80,000

Total sales for post incorporation period = ₹19,20,000 – ₹ 4,80,000 = ₹14,40,000
Sales Ratio = 4,80,000 : 14,40,000 = 1 : 3
3. Rent
₹
Rent for pre-incorporation period (₹2,000 x 4) 8,000(pre)
Rent for post incorporation period
August,2011 & September, 2011 (₹2,000 x 2) 4,000
October,2011 to March,2012 (₹2,400 x 6) 14,400 18,400 (post)
4. Travelling expenses and sales promotion expenses

Pre ₹ Post ₹
Traveling expenses ₹12,000 (I.e. ₹16,800- 4,000 8,000
₹4,800)
distributed in Time ratio (1:2)
Sales promotion expenses ₹ 4,800 1,200 3,600
distributed in Sales ratio (1:3)
5. Interest paid to vendor till 30th September, 2011

Pre ₹ Post ₹
Interest for pre-incorporation period ₹4,200/6 × 4 2,800
Interest for post incorporation period i.e. for August, 2011 & 1,400
September, 2011= ₹ 4,200/6 × 4
Pre ₹ Post ₹
Total depreciation 9,600
Less: Depreciation exclusively for post incorporation period 600 600
Remaining (for pre and post incorporation period) 9,000
Depreciation for pre-incorporation period * 300
Depreciation for post incorporation period * - 6,000

*Time ratio = 1 : 2
3,000 6,000
- 63 -
Illustration 3
ABC Ltd. was incorporated on 1.5.2011 to take over the business of DEF and Co. from 1.1.2011. The
summarised Profit and Loss Account as given by ABC Ltd. for the year ending 31.12.2011 is as
under:
Summarised Profit and Loss Account
₹ ₹
To Rent and Taxes 90,000 By Gross profit 10,64,000
To Salaries including manager’s salary of 3,31,000 By Interest on Investments 36,000
₹85,000
To Carriage Outwards 14,000
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 expenses and calculations 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 1½ 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,
2010.
(iv) Manager’s salary was increased by ₹2,000 p.m. from 1.5.2011.
(v) All investments were sold in April, 2011.
(vi) The entire audit fees relates to the company.
Solution:
Pre-incorporation period is for four months, from 1st January, 2011 to 30th April, 2011. 8 months’
period (from 1st May, 2011 to 31st December, 2011) is post- incorporation period.
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Statement showing calculation of profit/losses for pre and post incorporation periods
Pre- Inc. ₹ Post inc. ₹
Gross Profit 3,42,000 7,22,000
Interest on Investments 36,000 -
Bad debts Recovery 7,000 -
Less : Rent and Taxes 3,85,000 7,22,000
Salaries 30,000 60,000
Manager’s salary (85,000- refer note below) 23,000 62,000
Other salaries (3,31,000 – 85,000) 82,000 1,64,000
Printing and stationery 6,000 12,000
Audit fees - 45,000
Carriage outwards 4,500 9,500
Sales commission 9,900 20,900
Bad Debts (91,000 + 7,000) 31,500 66,500
Interest on Debentures - 25,000
Underwriting Commission
- 26,000
Preliminary expenses
- 28,000
Loss on sale of investments
11,200 -
Net Profit
1,86,900 2,03,100
Working Notes:
(i) Calculation of Sales ratio
Let average monthly sales be x.
Thus Sales from January to April are 4½ x (i.e., 1.5x + x + x + x) and sales from May to December
are 9½ x (x + x + x + x + x + 1.5x + x + 2x).
Sales are in the ratio of 9/2x: 19/2x or 9: 19.
Calculation of Time Ratio
Pre-incorporation period = 1.1.2011 to 30.4.2011 = 4 months Post-incorporation period = 1.5.2011
to 31.12.2011 = 8 months, Time ratio = 1:2
(ii) Gross profit, carriage outwards, sales commission and bad debts written off (after adjustment for
bad debt recovery) have been allocated in pre and post incorporation periods in the ratio of Sales
i.e. 9:19.
(iii) Rent, salaries (subject to increase in manager’s salary), printing and stationery are allocated
on time basis.
(iv) Interest on debentures, underwriting commission and preliminary expenses are allocated in
post incorporation period.
(v) Interest on investments, loss on sale of investments and bad debt recovery are allocated in pre-
incorporation period.
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Notes:
Let Pre-incorporation period manager’s monthly salary be x
Total pre-incorporation period manager’s monthly salary = 4x
Post-incorporation period manager’s monthly salary = x + 2,000
Total pre-incorporation period manager’s monthly salary = 8(x+2,000)
Total manager’s salary (pre and post) = ₹85,000
Thus, 4x + 8(x+2,000) = 85,000 x = 5,750
Total pre-incorporation period manager’s monthly salary = 4 x 5,750 = ₹23,000
Total pre-incorporation period manager’s monthly salary = 8(5,750 + 2,000) =₹62000
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1. Profit prior to incorporation is transferred to
(a) General reserve.
(b) Capital reserve.
(c) Profit and loss account.
2. The profit earned by the company from the date of purchase to the date of incorporation is
(a) Pre- incorporation profit.
(b) Post- incorporation profit.
(c) Notional profit.
3. Loss prior to incorporation is debited to which account?
(a) Goodwill account
(b) Loss prior to incorporation account
(c) Either (a) or (b)
4. Profit prior to incorporation is
(a) Available for distribution as dividend among the members of the company.
(b) Not available for distribution as dividend among the members of the company.
(c) Depends upon the Memorandum of Association.
5. Profit or loss prior to incorporation is of
(a) Revenue nature.
(b) Capital nature.
(c) Nominal nature.
6. Which of the following expenditure is allocated on the basis of time?
(a) Insurance.
(b) Bad debts.
(c) Discount allowed.
7. Which of the following is allocated on the basis of turnover?
(a) Salaries.
(b) Depreciation.
(c) Gross profit.
8. Preliminary expenses on the formation of the company are charged against
(a) Pre-incorporation profit.
(b) Post- incorporation profit.
(c) Not calculated because of bifurcation of profit into pre and post.
9. Which of the following expense is not allocated on time basis?
(a) Rent
(b) Salaries
(c) Discounts.
Answer: [1. (b), 2. (a), 3. (c), 4. (b), 5. (b),6. (a), 7. (c),8. (b), 9. (c)]
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PRACTICE PROBLEMS
Problem 1
Roshani & Reshma working in partnership registered a joint stock company under the name of
Happy Ltd. on May 31st 2018 to take over their existing business.
The summarized Profit & Loss A/c as given by Happy Ltd. for the year ending 31st March, 2019
is as under:
Happy Ltd.
Profit & Loss A/c for the year ending March 31, 2019
Particulars Amount (₹) Particulars Amount (₹)
To Salary 1,44,000 By Gross Profit 4,50,000
To Interest on Debenture To Sales 36,000 Total
Commission 18,00
To Bad Debts 49,000
To Rent 38,400
To Company Audit fees To Net 12,000
Profit 1,33,350 _______
Total 4,50,000 4,50,000
Prepare a Statement showing allocation of expenses & calculation of pre–incorporation & post–
incorporation profits after considering the following information:
(i) GP ratio was constant throughout the year.

(ii) Depreciation includes ₹1,250 for assets acquired in post incorporation period.
(iii) Bad debts recovered amounting to ₹14,000 for a sale made in 2015–16 has been deducted
from bad debts mentioned above.
(iv) Total sales were ₹ 18,00,000 of which ₹ 6,00,000 were for April to September.
(v) Happy Ltd. had to occupy additional space from 1st Oct. 2018 for which rent was ₹2,400 per
month.
Solution:
Pre–incorporation period is for two months, from 1st April, 2018 to 31st May, 2018.10 months’ period
(from 1st June, 2018 to 31st March, 2019) is post-incorporation period.
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Statement showing calculation of profit/losses for

pre and post incorporation periods
Pre-Inc Post-Inc
Gross Profit 50,000 4,00,000
Bad debts Recovery 14,000 _______
64,000 4,00,000
Less: Salaries 24,000 1,20,000
Audit fees - 12,000
Depreciation 3,000 16,250
Sales commission 2,000 16,000
Bad Debts (49,000 + 14,000) 7,000 56,000
Interest on Debentures - 36,000
Rent 4,000 34,400
Net Profit 24,000 1,09,350
Pre-incorporation profit is a capital profit and will be transferred to Capital Reserve.
Working Notes:
(i) Calculation of ratio of Sales
Sales from April to September = 6,00,000 (1,00,000 p.m. on average basis)
October to March = ₹12,00,000 (2,00,000 p.m. on average basis)
Thus, sales for pre-incorporation period = ₹2,00,000
post-incorporation period = ₹ 16,00,000
Sales are in the ratio of 1:8
(ii) Gross profit, sales commission and bad debts written off have been allocated in pre and post
incorporation periods in the ratio of Sales.
(iii) Rent, salary are allocated on time basis.
(iv) Interest on debentures is allocated in post incorporation period.
(v) Audit fees charged to post incorporation period as relating to company audit.
(vi) Depreciation of ₹ 18,000 divided in the ratio of 1:5 (time basis) and ₹ 1,250 charged to post
incorporation period.
(vii) Bad debt recovery of ₹ 14,000/- is allocated in pre-incorporation period, being sale made in
2015-16.
(viii) Rent
(₹ 38,400 – Additional rent for 6 months) ₹
[38,400- 14,400 (2,400 x 6) = ₹ 24,000 i.e. 2,000 per month]
1/4/18 -31/5//18 (2,000 x 2) = 4,000
1/6/18-31/3/19 – [(2,000 x 10) +14,400] = 34,000
38,400
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Problem 2 Sneha Ltd. was incorporated on 1st July, 2011 to acquire a running business of Atul Sons
with effect from 1st April, 2011. During the year 2001-12, the total sales were ₹24,00,000 of which
₹4,80,000 were for the first six months. The Gross profit of the company ₹3,90,800. The expenses
debited to the Profit & Loss Account included:
(i) Director's fees ₹30,000
(ii) Bad debts ₹7,200
(iii) Advertising ₹24,000 (under a contract amounting to ₹2,000 per month)
(iv) Salaries and General Expenses ₹1,28,000
(v) Preliminary Expenses written off ₹10,000
(vi) Donation to a political party given by the company ₹10,000.
Prepare a statement showing pre and post-incorporation profit for the year ended 31st March, 2012.
Solution
Statement showing the calculation of Profits for the pre and post-incorporation periods
For the year ended 31st March, 2012
Particulars Total Basis of Pre- incorporation Post- incorporation
Amount Allocation
Gross Profit 3,90,800 Sales 39,080 3,51,720
Less: Directors’ fee 30,000 Post - 30,000
Bad debts 7,200 Sales 720 6,480
Advertising 24,000 Time 6,000 18,000
Salaries & general 1,28,000 Time 32,000 96,000
expenses
Preliminary expenses 10,000 Post 10,000
Donation to Political 10,000 Post 10,000
Party
Net Profit 1,81,600 1,81,240
Pre-incorporation profit transfer 360
to Capital Reserve
Working Notes:
1. Sales ratio
Particulars ₹
Sales for period up to 30.06.2011 (4,80,000 x 3/6) 2,40,000
Sales for period from 01.07.2011 to 31.03.2012 (24,00,000 – 2,40,000) 21,60,000
Thus, Sales Ratio = 1 : 9
2. Time ratio
1st April, 2011 to 30 June, 2011: 1st July, 2011 to 31st March, 2012 = 3 months: 9 months = 1: 3
Thus, Time Ratio is 1: 3
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Problem 3
The partners Kamal and Vimal decided to convert their existing partnership business into a Private
Limited Company called M/s. KV Trading Private Ltd. with effect from 1-7-2012.
The same books of accounts were continued by the company which closed its account for first term
on 31-3-2013.
The summarised Profit and Loss Account for the year ended 31-3-2013 is below:
(₹ in lakhs) (₹ in lakhs)
Turnover 240.00
Interest on investments 6.00
246.00
Less: Cost of goods sold 102.00
Advertisement 3.00
Sales Commission 6.00
Salary 18.00
Managing director’s 6.00
remuneration 2.00
Interest on Debentures 5.50
Rent 1.00
Bad Debts 2.00
Underwriting Commission 2.00
Audit fees 1.00
Loss on sale of investment 4.00 152.50
Depreciation
93.50
The following additional information was provided:
(i) The average monthly sales doubled from 1-7-2012. GP ratio was constant.
(ii) All investments were sold on 31-5-2012.
(iii) Average monthly salary doubled from 1-10-2012.
(iv) The company occupied additional space from 1-7-2012 for which rent of ₹20,000 per month was
incurred.
(v) Bad debts recovered amounting to ₹50,000 for a sale made in 2010, has been deducted from
bad debts mentioned above.
(vi) Audit fees pertains to the company.
Prepare a statement apportioning the expenses between pre and post incorporation
periods and calculate the Profit/Loss for such periods.
- 71 -
Solution: K V Trading Private Limited

Statement showing calculation of profit/loss for pre and post incorporation periods
(₹ in lakhs)
Ratio Total Pre Post
Incorporation Incorporation
Sales 1:6 240.00 34.29 205.71
Interest on Investments Pre 6.00 6.00 -
Bad debts recovered Pre 0.50 0.50 -
(i) 246.50 40.79 205.71
Cost of goods sold 1:6 102.00 14.57 87.43
Advertisement 1:6 3.00 0.43 2.57
Sales commission 1:6 6.00 0.86 5.14
Salary (W.N.3) 1:5 18.00 3.00 15.00
Managing directors Post 6.00 - 6.00
remuneration Post 2.00 - 2.00
Interest on Debentures 5:50 093 4.57
Rent (W.N.4) 1:6 1.50 0.21 1.29
Bad debts (1 + 0.5) Post 2.00 - 2.00
Underwriting commission Post 2.00 - 2.00
Audit fees Pre 1.00 1.00 -
Loss on sale of Investment 1:3 4.00 1.00 3.00
Depreciation
153.00 22.00 131.00
(ii) 93.50 18.79 74.71
Net Profit [(i) – (ii)]
Working Notes:
1. Calculation of Sales Ratio
Let the average sales per month be x. Total sales from 01.04.2012 to 30.06.2012 will be 3x
Average sales per month from 01.07.2012 to 31.03.2013 will be 2x
Total sales from 01.07.2012 to 31.03.2013 will be 2x X 9 =18x
Ratio of Sales will be 3x: 18x i.e. 3:18 or 1:6
2. Calculation of time Ratio: 3 Months: 9 Months i.e. 1:3
3. Apportionment of Salary
Let the salary per month from 01.04.2012to 30.09.2012 is x
Salary per month from 01.10.2012 to 31.03.2013 will be 2x
Hence, pre incorporation salary (01.04.2012 to 30.06.2012) = 3x
Post incorporation salary from 01.07.20X2 to 31.03.2013 = (3x + 12x) i.e.15x
Ratio for division 3x: 15x or 1: 5
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4.
Apportionment of Rent ₹
Total Rent 5.5
Less: additional rent from 1.7.2012 to 31.3.2013 1.8
Rent of old premises for 12 months 3.7
Pre Post
Apportionment in time ratio 0.925 2.775
Add: Rent for new space - 1.80
Total 0.925 4.575
Problem 4
SALE Limited was incorporated on 01.08.2011 to take-over the business of a partnership firm w.e.f.
01.04.2011. The following is the extract of Profit and Loss Account for the year ended 31.03.2012:

To Salaries 1,20,000 By Gross Profit 6,00,000
To Rent, Rates & Taxes 80,000
To Commission on Sales 21,000
To Director Fees 12,000
To Advertisement 36,000
To Net Profit for the Year 2,74,000 ______
6,00,000 6,00,000
(i) SALE Limited initiated an advertising campaign which resulted increase in monthly average
sales by 25% post incorporation.
(ii) The Gross profit ratio post incorporation increased to 30% from 25%.
You are required to apportion the profit for the year between pre-incorporation and post-incorporation,
also explain how pre-incorporation profit is treated in the accounts.
Solution
Statement showing the calculation of Profits
for the pre-incorporation and post-incorporation periods
- 73 -
Particular Total amount ₹ Basis of Pre Pre

allocation Incorporation ₹ Incorporation ₹
Gross Profit (W.N.2) 6,00,000 1:3 1,50,000 4,50,000
Less: Salaries 1,20,000 Time 40,000 80,000
Rent, rates and 80,000 Time 26,667 53,333
taxes
Sales’ commission 21,000 Sales (2:5) 6,000 15,000
Depreciation 25,000 Time 8,333 16,667
Interest on 32,000 Post 32,000
debentures
Directors’ fee 12,000 Post 12,000
Advertisement 36,000 post 36,000
Net profit 2,74,000 69,000
2,05,000
Working Notes:
1. Sales ratio
Let the monthly sales for first 4 months (i.e. from 1.4.2011 to 31.7.2011)
be = x
Then, sales for 4 months = 4x
Monthly sales for next 8 months (i.e. from 1.8.X1 to 31.3.2012) = x + 25% of x= 1.25x
Then, sales for next 6 months = 1.25x X 8 = 10x Total sales for the year = 4x + 10x = 14x
Sales Ratio = 4 x: 10x i.e. 2:5
2. Gross profit ratio

From 1.4.2011 to 31.7.2011 gross profit is 25% of sales
Then, 25% of 4x= 1x
gross profit for next 8 months (i.e. from 1.8.X1 to 31.3.2012) is 30%
Then, 30% of 10x = 3x
Therefore gross profit ratio will be 1:3
3. Time ratio
1st April, 2011 to 31st July, 2011: 1st August, 2011 to 31st March, 2012
= 4 months: 8 months = 1:2
Thus, time ratio is 1:2.
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Problem 5 RTP May-2019 (Old Course)

Lotus Ltd. was incorporated on 1st July, 2017 to acquire a running business of Feel goods with effect
from 1st April, 2017. During the year 2017-18, the total sales were ₹ 48,00,000 of which ₹ 9,60,000
were for the first six months. The Gross profit of the company ₹ 7,81,600. The expenses debited to
the Profit & Loss Account included:
(i) Director's fees ₹ 60,000
(ii) Bad debts ₹ 14,400
(iii)Advertising ₹ 48,000 (under a contract amounting to ₹ 4,000 per month)
(iv) Salaries and General Expenses ₹ 2,56,000
(v) Preliminary Expenses written off ₹ 20,000
(vi) Donation to a political party given by the company ₹ 20,000.
Prepare a statement showing pre-incorporation and post-incorporation profit for the year ended 31st
March, 2018.
Solution:
Statement showing the calculation of Profits for the pre-incorporation and post-incorporation
periods For the year ended 31st March, 2018
Particulars Total Basis of Pre- Post-
Amount Allocation incorporation incorporation
Gross Profit 7,81,600 Sales 78,160 7,03,440
Less: Directors’ fee 60,000 Post 60,000
Bad debts 14,400 Sales 1,440 12,960
Advertising 48,000 Time 12,000 36,000
Salaries & general 2,56,000 Time 64,000 1,92,000
expenses
Preliminary expenses 20,000 Post 20,000
Donation to Political Party 20,000 Post 20,000
Net Profit 3,63,200 720 3,62,480
Working Notes:
1. Sales ratio
Particulars ₹
Thus, Sales Ratio = 1 : 9
2. Time ratio
1st April, 2017 to 30 June, 2017: 1st July, 2017 to 31st March, 2018
= 3 months: 9 months = 1: 3
- 75 -
Nov 2019 (New Course)
Question.5. (b) (10 Marks)
The partners of C&G decided to convert their existing partnership business into a private limited called
CG trading Pvt. Ltd. with effect from 1.7.2018.
The same books of accounts were continued by the company which closed its accounts for the first
term on 31.3.2019. The summarized profit & loss account for the year ended 31.3.2019 is below:
Particulars ₹ in lakhs ₹ in lakhs

Turnover 245.00
Interest on investments 6.00 251.00
Less: Cost of goods sold 124.32
Advertisement 3.50
Sales commission 7.00
Salaries 18.00
Managing Director’s Remuneration 6.00
Interest on Debenture 2.00
Rent 5.50
Bad debt 1.15
Underwriting commission 1.00
Audit fees 3.00
Loss on sale of Investments 1.00
Depreciation 4.00 176.47
74.53
The following additional information was provided:
(i) The average monthly sales doubled from 1.7.2018, GP ration was constant.
(ii) All investment were sold on 31.5.2018
(iii) Average monthly salaries doubled from 1.10.2018.
(iv) The company occupied additional space from 1.7.2018 for which rent of ₹ 20,000 per month was
incurred.
(v) Bad debts recovered amounting to ₹ 60,000 for a sale made in 2016-17 has been deducted from
bad debts mentioned above.
(vi) Audit fees pertains to the company.
Prepare a statement apportioning the expenses between pre and post incorporation periods and
calculate the profit / loss for such periods.
- 76 -
May 2019 (New Course)

Question 6 (c) (5 Marks)
ABC Ltd. was incorporated on 1st July, 2019 to acquire a running business of X Sons with effect from
1st April, 2019. During the year 2019-20, the total sales were ₹ 12,00,000 of which ₹ 2,40,000 were
for the first six months. The Gross Profit for the year is ₹ 4,15,000. The expenses debited to the Profit
and Loss account included:
(i) Director's fees ₹ 25,000
(ii) Bad Debts ₹ 6,500
(iii) Advertising ₹ 18,000 (under a contract amounting to ₹ 1,500 per month)
(iv) Company Audit Fees ₹ 15,000
(v) Tax Audit Fees ₹ 10,000
(1) Prepare a statement showing pre-incorporation and post incorporation profit for the year
ended 31st March, 2020.
(2) Explain how profits are to be treated.
Answer:
Statement showing the calculation of Profits for the pre-incorporation and post-incorporation
periods for the year ended 31st March, 2020
Particulars Total Pre- Post-
Amount Basis of Incorporation Incorporation
Allocation
Gross Profit 4,15,000 Sales (1:9) 41,500 3,73,500
Less: Directors’ fee 25,000 Post 25,000
Bad debts 6,500 Sales (1:9) 650 5,850
Advertising 18,000 Time (1:3) 4,500 13,500
Company Audit Fee 15,000 Post 15,000
Tax Audit Fee 10,000 Sales (1:9) 1,000 9,000
Net Profit 3,40,000 35,350 3,05,150
Pre-incorporation profits to be transferred to capital reserve and post-incorporation profit to be

transferred to profit & Loss A/c.
Working Notes:
(i) Sales ratio
Particulars ₹
Thus, Sales Ratio = 1 : 9 (1,20,000 : 10,80,000)
- 77 -
(ii) Time ratio

1st April, 2019 to 30 June, 2019: 1st July, 2019 to 31st March, 2020
= 3 months: 9 months = 1: 3
May 2019 (Old Course)

M/s New Venture, who was carrying on business from 1st June, 2017 gets itself incorporated as a
company on 1st October, 2017. The first accounts are drawn up to 31st March 2018. The gross profit
for the period is ₹ 1, 20,000.
Following information is given:

(a) General Expenses are ₹ 24,000.
(b) Director's Fees are ₹ 24,000 p.a.
(c) Incorporation Expenses ₹ 4,000.
(d) Rent up to 31st December, 2017 was ₹ 6,000 p.a., after which it was increased to
(e) ₹ 8,000 p.a.
(f) Salary of the Manager, who upon incorporation of the company was made a director, is ₹ 12,000
p.a. His remuneration as director is included in the above figure of fees to the directors.
(g) Advertisement Expenses of ₹ 5,000 pertains to the incorporated company.
(h) Bad debts₹ 4,000.
Give statement showing pre and post incorporation profit.
The net sales are ₹ 20,00,000, 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.

- 78 -
Answer:
Particulars Basis Pre- Post- Total
incorporation
₹ incorporation
₹ ₹
period period
Gross Profit Sales Ratio 30,000 90,000 1,20,000
Less: General expenses Time Ratio 9,600 14,400 24,000
Director’s fee Actual --- 12,000 12,000
Incorporation expenses Actual --- 4,000 4,000
Rent W.N.2 2,000 3,500 5,500
Manager’s salary Actual 4,000 --- 4,000
Advertisement expenses Post --- 5,000 5,000
Bad Debts Sales Ratio 1,000 3,000 4,000
Pre-incorporation Profit
transferred to Capital Reserve
Post-incorporation Profit 13,400 48,100 61,500
transferred to P/L Account
Working Notes:
(1) Calculation of sales ratio
Let the average monthly sales of first four months = 100
Next six months = 200
Total sales of first four months = 100 x 4 = 400
Total sales of next six months = 200 x 6 = 1,200
Ratio of sales = 400: 1,200 = 1:3
(2) Rent
Till 31st December, 2017, rent was ₹ 6,000 p.a., i.e. ₹ 500 p.m.
So, pre-incorporation rent = ₹ 500 x 4 = ₹ 2,000
Post – incorporation rent = (₹ 500 x 3) + (8,000 x 3/12) = ₹ 3,500.
(3) Time ratio

Pre-incorporation period = 1st June , 2017 to 30th Sept, 2017 = 4 months
Post-incorporation = 1st October , 2017 to 31st March, 2018 = 6 months
= 4 months: 6 months
Thus, time ratio is 2:3
- 79 -
Nov 2018 (New Course)

Question 5. (a) (12 Marks)
ABC Limited took over the running business of a partnership firm M/s A & N Brothers with effect from
1st April, 2019. The company was incorporated on 1st September, 2019. The following profit and loss
account has been prepared for the year ended 31st March, 2018:
Particulars ₹ Particulars ₹
To salaries 1,33,000 By Gross profit b/d 7,50,000
To rent 96,000
To carriage outward 75,000
To audit fees 12,000
To travelling expenses 66,000
To commission on sales 48,000
To printing and stationery 24,000
To electricity charges 30,000
To depreciation 80,000
To advertising expenses 24,000
To preliminary expenses 9,000
To Managing Director’s 8,000
remuneration 1,45,000 ________
To Net Profit c/d 7,50,000 7,50,000
Additional Information:
1. Trend of sales during April, 2019 to March, 2020 was as under:
April, May ₹85,000 per month
June, July ₹1,05,000 per month
August, September ₹ 1,20,000 per month
October, November ₹ 1,40,000 per month
December onwards ₹ 1,50,000 per month
2. ABC Limited took over a machinery worth ₹ 7,20,000 from A&N Brothers and purchased a new
machine on 1st February, 2020 for ₹ 4,80,000. The company decides to provide deprecation @
10% p.a.
3. The company occupied additional space from 1st October, 2019 @ rent of ₹ 600 per month.
4. Out of travelling expenses, ₹ 30,000 were incurred by office staff while remaining expenses were
incurred by salesmen
5. Audit fees pertain to the company.
6. Salaries were doubled from the date of incorporation.
You are required to prepare a statement apportioning to expenses between pre and post
incorporation periods and calculate the profit /loss for such periods.
- 80 -
Answer :
Statement showing calculation of profits for pre and post incorporation periods
for the year ended 31.3.2018
Particulars Pre-incorporation Post-incorporation
Period ₹ Period ₹
Gross profit (1:2) 2,50,000 5,00,000
Less: Salaries (5:14) 35,000 98,000
Carriage outward (1:2) 25,000 50,000
Audit fee - 12,000
Travelling expenses (W.N.3) 24,500 41,500
Commission on sales (1:2) 16,000 32,000
Printing & stationary (5:7) 10,000 14,000
Rent (office building) (W.N.4) 25,000 71,000
Electricity charges (5:7) 12,500 17,500
Depreciation 30,000 50,000
Advertisement (1:2) 8,000 16,000
Preliminary expenses - 9,000
MD remuneration - 8,000
Pre-incorporation profit – t/f to Capital 64,000 -
reserve (Bal. Fig.)
Net profit (Bal. Fig.) - 81,000
Working Note:
1. Time Ratio
Pre incorporation period = 1st April, 2017 to 31st August, 2017 i.e. 5 months
Post incorporation period is 7 months
Time ratio is 5:7
2. Sales Ratio
April 85,000
May 85,000
June 1,05,000
July 1,05,000
August 1,02,000
5,00,000
September 1,20,000
Oct & Nov. 2,80,000
Dec. to March (1,50,000 x 4) 6,00,000
10,00,000
5,00,000:10,00,000 = 1:2
- 81 -
3. Travelling expenses
₹ ₹
Pre-incorporation Post-incorporation
30,000 office staff (5:7) 12,500 17,500
36,000 sales (1:2) 12,000 24,000
24,500 41,500
4. Rent
₹
Rent for additional space ₹ (6,000 x 6) 36,000
Remaining rent ₹ (96,000-36,000) 60,000
Pre-incorporation period (5/12 of 60,000) 25,000
Post- incorporation period ₹35,000 + 71,000
₹36,000
5. Salaries
Suppose x for a month in pre- incorporation period then salaries for pre- incorporation
period = 5x salaries for post- incorporation period = 2x X 7= 14x Ratio = 5:14
6. Depreciation
₹ ₹ ₹
Pre Post
Incorporation Incorporation
Total depreciation 80,000
Less: Depreciation exclusively for
post incorporation period 8,000 8,000
(₹ 4,80,000 x 10 x 2/12)
0
Depreciation for pre-incorporation period
(₹ 72,000 x 5/12) 30,000
Depreciation for post incorporation period ______ 42,000
(₹ 72,000 x 7/12) 30,000 50,000
Question 5. (a) (10 Marks)
The promotors of Shiva Ltd. took over on behalf of the company a running business with effect from
1st April 2019. The company got incorporated on 1st August 2019. The annual accounts were made
up to 31st March, 2020 which revealed that the sales for the whole year totalled ₹ 2400 lakhs out of
which sales till 31st July, 2019 were for ₹ 600 lakhs. Gross profit ratio was 20%.
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The expenses from 1st April 2019, till 31st March, 2020 were as follows:
Particulars ₹ in lakhs
Salaries 75
Rent, Rates and Insurance 30
Sundry Office Expenses 72
Traveller's Commission 20
Discount allowed 16
Bad Debts 8
Directors' Fee 30
Tax Audit Fee 16
Depreciation on Tangible Assets 15
Prepare a statement showing the calculation of profits for the pre-incorporation and Post incorporation
periods.
Answer :
Statement showing the calculation of Profits for the pre-incorporation and post-incorporation periods
Particulars Total Basis of Pre- Post-
Amount Allocation Incorporation Incorporation
(₹ in lakhs) (₹ in lakhs) (₹ in lakhs)
Gross Profit (20% of ₹ 2,400) 480 Sales 120 360
Less: Salaries 75 Time 25 50
Rent, rates and Insurance 30 Time 10 20
Sundry office expenses 72 Time 24 48
Travellers’ commission 20 Sales 5 15
Discount allowed 16 Sales 4 12
Bad debts 8 Sales 2 6
Directors’ fee 30 Post - 30
Tax Audit Fees* 16 Sales 4 12
Depreciation on tangible assets 15 Time 5 10
Debenture interest 14 Post - 14
Net profit 184 41 143
* Tax Audit Fees allocated in the ratio of sales.
Thus, pre-incorporation profits is ₹ 41 lakhs and post- incorporation profit is ₹ 143 lakhs.
Working Notes:
1. Sale ratio
(₹ in lakh)
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Sales for the whole year 2400

Sales up to 31st July, 2017 600
Therefore, sales for the period from 1st August, 2017 to 31st March, 2018 1,800
Thus, sale ration = 600:1800 = 1:3
2. Time ratio
1st April, 2017 to 31st July, 2017 : 1st August, 2017 to 31st March, 2018
= 4 months: 8 months = 1:2, Thus, time ratio is 1:2.
May 2018 (Old Course)

A partnership firm M/s. Nice Sons was carrying on business from 1st May, 2017. The partners
of the firm decided to convert the partnership firm into a private company called Zenith (P) Ltd.
with effect from 1st September, 2017. The annual accounts were drawn up to 31st March, 2018.
The summarized Profit and Loss Account from 1st May, 2017 to 31st March, 2018 is as follows:
Particulars Amount ( ₹)
Turnover 55,20,000
Interest on Investment 60,000
60,00060,000
Profit on sale of Investment 42,000
56,22,000
Less:
Cost of goods sold
Printing & Stationery 77,000
34,50,00
Manager's Salary 82,000
Audit Fees 41,000
Rent 1,33,000
Bad Debts 33,000
Underwriting Commission 56,000
Depreciation 71,500
Interest on Debentures 8,900
Advertising campaign expenses 69,800
Sundry office expenses 1,06,700
Interest on borrowings 1,25,000
42,53,900
Net Profit 13,68,100
Additional Information Provided:
(1) The company's only borrowing was a loan of ₹ 15,00,000 at 9% p.a., to pay the
purchase consideration due to the firm and for working capital requirements. The loan
was taken on 1st September, 2017.
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(2) The company occupied additional space from 1 st September, 2017 for which rent of
₹ 8,000 per month was incurred.
(3) Audit fee pertains to the company.
(4) Bad debts recovered amounting to ₹ 36,000 for a sale made in June 2017, has
been deducted from bad debts mentioned above.
(5) All investments were sold in August 2017.
(6) Zenith (P) Ltd. initiated an advertising campaign on 1 st September, 2017, which
resulted increase in monthly average sales by 40%.
(7) The salary of Manager was increased by ₹ 3,000 p.m. from 1st July, 2017.
Prepare a statement showing pre-incorporation and post-incorporation profit for the year
ended 31st March 2018.
Answer
Statement showing calculation of profit/loss for pre and post incorporation periods
Ratio Total Pre- Post
Sales 1:2.45 55,20,000 I ncorpor at ion
16,00,000 Incorporation
39,20,000
Interest on Investments Pre 60,000 60,000 -
Bad debts recovered Pre 36,000 36,000 -
Profit on sale of investment Pre 42,000 42,000 -
(i) 56,58,000 17,38,000 39,20,000

Cost of goods sold 1:2.45 34,50,000 10,00,000 24,50,000
Advertisement Post 69,800 - 69,800
Sundry office expenses 4:7 1,06,700 38,800 67,900
Printing & Stationary 4:7 77,000 28,000 49,000
Manager Salary (W.N.3) 82,000 26,000 56,000

Interest on Debentures Post 8,900 - 8,900
Rent (W.N.4) 1,33,000 28,000 1,05,000
Bad debts 1:2.45 69,000 20,000 49,000
Underwriting commission Post 56,000 - 56,000
Audit fees Post 41,000 - 41,000
Depreciation 4:7 71,500 26,000 45,500
Interest on Borrowing (W.N. 5) 1,25,000 46,250 78,750
42,89,900 12,13,050 30,76,850
Net Profit [(i) – (ii)] 13,68,100 5,24,950 8,43,150
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Working Notes:
1. Calculation of Sales Ratio
Let the average sales per month be x
Total sales from 01.05.2017 to 31.08.2017 will be 4x
Average sales per month from 01.09.2017 to 31.03.2018 will be 1.4x
Total sales from 01.09.2017 to 31.03.2018 will be 1.4x X 7 =9.8x Ratio of Sales will be 4x: 9.8x
=1:2.45
2. Calculation of time Ratio

4 Months: 7 Months i.e. 4:7
3 Manager Salary ₹
Total salary 82,000
Less: Increased salary 27,000
55,000
Monthly Salary =55,000/11 5,000
Salary from May to Aug 5,000 + 5,000 + 8,000 + 8,000 = 26,000
Salary from Sep to March 8,000 x 7= 56,000
4. Apportionment of Rent ₹
Total Rent 1,33,000
Less: additional rent from 1.9.2017 to 31.3.2018 56,000
Rent of old premises for 11 months 77,000
Pre Post
Apportionment in time ratio (4:7) 28,000 49,000

Add: Rent for new space 56,000
Total 28,000 1,05,000
5. Interest on borrowing
Company’s Borrowing Interest = ₹ 15,00,000 x 9% x 7/12= ₹ 78,750
Interest for Pre-incorporation period = ₹ 1,25,000 – 78,750 = ₹ 46,250
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REDEMPTION OF PREFERENCE SHARES

The Provisions relating to Issue and Redemption of Preference shares is governed by Section 55 of
the Companies Act, 2013:
(1) No company limited by shares shall issue any preference shares which are irredeemable.
(2) A company limited by shares may, if so authorised by its articles, issue preference shares which
are liable to be redeemed within a period not exceeding twenty years from the date of their issue
subject to such conditions as may be prescribed:
Provided that a company may issue preference shares for a period exceeding twenty years for
infrastructure projects, subject to the redemption of such percentage of shares as may be
prescribed on an annual basis at the option of such preferential shareholders:
Provided further that—
(a) no such shares shall be redeemed except out of the profits of the company which would
otherwise be available for dividend or out of the proceeds of a fresh issue of shares made for
the purposes of such redemption;
(b) no such shares shall be redeemed unless they are fully paid;
(c) where such shares are proposed to be redeemed out of the profits of the company, there shall, out
of such profits, be transferred, a sum equal to the nominal amount of the shares to be redeemed,
to a reserve, to be called the Capital Redemption Reserve Account.
(d) (i) in case of such class of companies, as may be prescribed and whose financial statement
comply with the accounting standards prescribed for such class of companies under section 133,
the premium, if any, payable on redemption shall be provided for out of the profits of the company,
before the shares are redeemed:
(Previous company law provided the use of Securities premium account for this purpose; now not
allowed)
(4) The capital redemption reserve account may be applied by the company, in paying up unissued
shares of the company to be issued to members of the company as fully paid bonus shares.
(The board of studies of ICAI has solved all the questions on the basis that the companies referred in
the question are governed by Section 133. Accordingly, the balance in the securities premium account
has not been utilized for the purpose of premium payable on redemption of preference shares.)
Illustration 1
Hinduja Company Ltd. had 5,000, 8% Redeemable Preference Shares of ₹100 each, fully paid up.
The company decided to redeem these preference shares at par by the issue of sufficient number of
equity shares of ₹10 each fully paid up at par. You are required to pass necessary Journal Entries
including cash transactions in the books of the company.
- 87 -
Solution: In the books of Hinduja Company Ltd.

Journal Entries
Date Particular Dr.(₹) Cr.(₹)
Bank A/c Dr.
(Being the issue of 50,000 Equity Shares of ₹10 each at par for
the purpose of redemption of preference shares, as per Board
Resolution No ……..dated……..)
8% Redeemable Preference Share Capital A/c Dr.
To Preference Shareholders A/c
(Being the amount payable on redemption of preference shares
transferred to Preference Shareholders Account
Preference Shareholders A/c Dr.
To Bank A/c
(Being the amount paid on redemption of preference shares)
Illustration 2
C Ltd. had 10,000, 10% Redeemable Preference Shares of ₹100 each, fully paid up. The company
decided to redeem these preference shares at par, by issue of sufficient number of equity shares of
₹10 each at a premium of ₹2 per share as fully paid up. You are required to pass necessary Journal
Entries including cash transactions in the books of the company.
Solution In the books of C Ltd.
Journal Entries
Bank A/c Dr.
To Securities Premium A/c
(Being the issue of 10,00,000 Equity Shares of ₹10 each at ,a
premium of ₹2 per shares, as per Board Resolution No
……..dated……..)
transferred to Preference Shareholders A/c)
To Bank A/c
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Illustration 3
G India Ltd. had 9,000 10% redeemable Preference Shares of ₹10 each, fully paid up. The company
decided to redeem these preference shares at par by the issue of sufficient number of equity shares
of ₹9 each fully paid up. You are required to pass necessary Journal Entries including cash
transactions in the books of the company.
Solution:
In the books of G India Limited Journal
Bank A/c Dr.
(Being the issue of 10,000 Equity Shares of ₹9 each at per, as
per Board Resolution No ……..dated……..)
transferred to Preference Shareholders A/c)
To Bank A/c
Illustration 4
The Board of Directors of a Company decide to issue minimum number of equity shares of ₹9 to
redeem ₹5,00,000 preference shares. The maximum amount of divisible profits available for
redemption is ₹3,00,000. Calculate the number of shares to be issued by the company to ensure that
provisions of Section 55 are not violated. Also determine the number of shares if the company
decides to issue shares in multiples of ₹50 only.
Solution
Nominal value of preference shares ₹ 5,00,000
Maximum possible redemption out of profits ₹ 3,00,000
Minimum proceeds of fresh issue ₹ 5,00,000 – 3,00,000 = ₹ 2,00,000
Proceed of one share = ₹9
Minimum number of shares
As fractional shares are not permitted, the minimum number of shares to be issued is 22,223 shares.
If shares are to be issued in multiples of 50, then the next higher figure which is a multiple of 50 is
22,250. Hence, minimum number of shares to be issued in such a case is 22,250 shares.
- 89 -
Illustration 5
The Balance Sheet of X Ltd. as on 31st March, 2020 is as follows:
Particulars ₹
EQUITY AND LIABILITIES
1. Shareholders’ funds
a Share capital 2,90,000
b Reserves and Surplus 48,000
2. EQUITY AND LIABILITIES
Trade Payables 56,500
Total 3,94,500
1 ASSETS
PPE
Tangible asset 3,45,000
Non-current investments 18,500
2. Current Assets
Cash and cash equivalents (bank) 31,000
Total 3,94,500
The share capital of the company consists of ₹50 each equity shares of ₹2,25,000 and ₹100 each
Preference shares of ₹65,000(issued on 1.4.2018). Reserves and Surplus comprises Profit and Loss
Account only.
In order to facilitate the redemption of preference shares at a premium of 10%, the Company decided:
(a) to sell all the investments for ₹15,000.
(b) to finance part of redemption from company funds, subject to, leaving a bank balance of
₹12,000.
(c) to issue minimum equity share of ₹ 60 each share to raise the balance of funds required.
You are required to pass:
The necessary Journal Entries to record the above transactions and prepare the balance sheet as on
completion of the above transactions.
Solution
Journal
Bank A/c Dr.
To Share Application A/c
(For application money received on 625 shares @ ₹60 per share)
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Share Application A/c Dr.

(For disposition of application money received)
Preference Share Capital A/c Dr.
Premium on Redemption of Preference Shares A/c Dr.
(For amount payable on redemption of preference shares)
Profit and Loss A/c* Dr.
To Premium on Redemption of Preference Shares A/c
(For writing off premium on redemption out of profits)
Bank A/c Dr.
Profit and Loss A/c (loss on sale) A/c Dr.
To Investment A/c
(For sale of investments at a loss of ₹3,500)

To Capital Redemption Reserve A/c
(For transfer to CRR out of divisible profits an amount equivalent to
excess of nominal value of preference shares over proceeds (face
value of equity shares) i.e., ₹65,000 - ₹31,250)
To Bank A/c
(For payment of preference shareholders)
Balance Sheet (after redemption)

particulars Notes No. ₹
b Reserves and Surplus 2 38,000
2. EQUITY AND LIABILITIES
Trade Payables 56,500
Total 3,57,000
1 ASSETS
PPE
Tangible asset 3,45,000
2. Current Assets
Cash and cash equivalents (bank) 3 12,000
- 91 -
Total 3,57,000
Notes to accounts
₹
1. Share Capital
Equity share capital (2,25,000 + 37,500) 2,62,500
Profit and Loss Account (48,000 – 6,500 – 3,500 – 33,750) 4,250
38,000
3. Cash and cash equivalents
Balances with banks (31,000 + 37,500 +15,000 – 71,500) 12,000
Working Note:
Calculation of Number of Shares: ₹
Amount payable on redemption 71,500
Less: Sale price of investment (15,000)
56,500
Less: Available bank balance (31,000 - 12,000) (19,000)
Funds from fresh issue 37,500
No. of shares = 37,500/60=625 shares
Illustration 6
The following are the extracts from the Balance Sheet of ABC Ltd. as on 31st December,
2019:
Share capital: 40,000
Equity shares of ₹10 each fully paid – ₹4,00,000;
1,000 10% Redeemable preference shares of ₹ 100 each fully paid – ₹1,00,000.
Reserve & Surplus: Capital reserve – ₹ 50,000;
Securities premium – ₹50,000;
General reserve –₹75,000;
Profit and Loss Account – ₹35,000
On 1st January 2020, the Board of Directors decided to redeem the preference shares at par by
utilisation of reserve. You are required to pass necessary Journal Entries including cash transactions
in the books of the company.
- 92 -
Solution
In the books of ABC Limited Journal Entries
Date Particulars Dr.(₹) Cr.(₹)
2020
Jan 10% Redeemable Preference Share Capital A/c Dr. 1,00,000
1 To Preference Shareholders A/c 1,00,000
(Being the amount payable on redemption transferred to
Preference Shareholders Account)
Preference Shareholders A/c Dr. 1,00,000
To Bank A/c 1,00,000
Profit & Loss A/c Dr. 25,000
To Capital Redemption Reserve A/c 1,00,000
(Being the amount transferred to Capital Redemption Reserve
Account as per the requirement of the Act)
Note: Securities premium and capital reserve cannot be utilised for transfer to Capital Redemption
Reserve.
Illustration 7
C Limited had 3,000, 12% Redeemable Preference Shares of ₹100 each, fully paid up. The company
had to redeem these shares at a premium of 10%.
It was decided by the company to issue the following:
(i) 25,000 Equity Shares of ₹10 each at par,
(ii) 1,000 14% Debentures of ₹100 each.
The issue was fully subscribed and all amounts were received in full. The payment was duly made.
The company had sufficient profits. Show Journal Entries in the books of the company.
Solution
In the books of C Limited Journal Entries
Bank A/c Dr. 2,50,000
(Being the issue of 25,000 equity shares of ₹10 each at par as
per Board’s resolution No……dated…..)
Bank A/c Dr. 10,00,000
To 14% Debenture A/c 1,00,000
(Being the issue of 1,000 Debentures of ₹100 each as per
Board’s Resolution No…..dated……)
- 93 -
12% Redeemable Preference Share Capital A/c Dr. 3,00,000

Premium on Redemption of Preference Shares A/c Dr. 30,000
To Preference Shareholders A/c 3,30,000
To Premium on Redemption of Preference Shares A/c 30,000
(Being the adjustment of premium on redemption against Profits
& Loss Account)
To Capital Redemption Reserve A/c 50,000
Working Note:
Amount to be transferred to Capital Redemption Reserve Account
Face value of shares to be redeemed 3,00,000
Less: Proceeds from new issue (2,50,000)
Total Balance 50,000
Illustration 8
The capital structure of a company consists of 20,000 Equity Shares of ₹10 each fully paid up and
1,000 8% Redeemable Preference Shares of ₹100 each fully paid up (issued on 1.4.2019).
Undistributed reserve and surplus stood as: General Reserve ₹80,000; Profit and Loss Account
₹20,000; Investment Allowance Reserve out of which ₹5,000, (not free for distribution as dividend)
₹10,000; Securities Premium ₹2,000, Cash at bank amounted to ₹98,000. Preference shares are to
be redeemed at a Premium of 10% and for the purpose of redemption, the directors are empowered
to make fresh issue of Equity Shares at par after utilising the undistributed reserve and surplus,
subject to the conditions that a sum of ₹20,000 shall be retained in general reserve and which should
not be utilised.
Pass Journal Entries to give effect to the above arrangements and also show how the relevant items
will appear in the Balance Sheet of the company after the redemption carried out.
Solution
In the books of ……….
Journal Entries
- 94 -

Bank A/c Dr. 25,000
(Being the issue of 2,500 Equity Shares of ₹10 each at a
premium of `1 per share as per Board’s Resolution
No…..dated…….)
(Being the amount paid on redemption transferred to Preference
Shareholders Account)

To Premium on Redemption of Preference 10,000
Shares A/c
(Being the premium payable on redemption is adjusted against
Profit & Loss Account
Profit & Loss A/c 10,000
Investment Allowance Reserve A/c 5,000
Balance Sheet as on ………[Extracts]
b Reserves and Surplus 2 1,02,000
Total ?
2. ASSETS
Current Assets
Cash and cash equivalents 13,000
(98,000 + 25,000 – 1,10,000)
Total ?
- 95 -
Notes to accounts
1. Share Capital ₹
22,500 Equity shares (20,000 + 2,500) of ₹10 each fully paid up 2,25,000
Investment Allowance Reserve 5,000
1,02,000
Working Note:
No of Shares to be issued for redemption of Preference Shares:
Face value of shares redeemed ₹1,00,000
Less: Profit available for distribution as dividend:
General Reserve: ₹(80,000-20,000) ₹60,000
Profit and Loss (20,000 – 10,000 set aside for adjusting premium payable
on redemption of preference shares) ₹10,000
Investment Allowance Reserve: (₹ 10,000-5,000) ₹ 5,000 (₹ 75,000)
₹ 25,000
Therefore, No. of shares to be issued = 25,000/₹10 = 2,500 shares.
Illustration 9
The Balance Sheet of XYZ as at 31st December, 2019 following: inter alia includes the
following:
₹
50,000, 8% Preference Shares of ₹100 each, ₹70 paid up 35,00,000
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 31st March, 2020 at 5%
premium. In order to finance the redemption, the company makes a rights 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 1st January, 2021. The issue was fully subscribed and allotment made
on 1st March, 2020. The money due on allotment were received by 31st March, 2020. The preference
shares were redeemed after fulfilling the necessary conditions of Section 55 of the Companies Act,
2013.
You are asked to pass the necessary Journal Entries and show the relevant extracts from the balance
sheet as on 31st March, 2020 with the corresponding figures as on 31st December, 2019.
- 96 -
Solution
Journal Entries
8% Preference Share Final Call A/c Dr. 15,00,000
To 8% Preference Share Capital A/c 15,00,000
(For final call made on preference shares @ ₹30 each to make
them fully paid up)
Bank A/c Dr. 15,00,000
To 8% Preference Share Final Call A/c 15,00,000
(For receipt of final call money on preference shares)
Bank A/c Dr. 10,00,000
To Equity Share Application A/c 10,00,000
(For receipt of application money on 50,000 equity shares @
₹20 per share)
Equity Share Application A/c Dr. 10,00,000
(For capitalisation of application money received)
Equity Share Allotment A/c Dr. 17,50,000
To Securities Premium A/c 5,00,000
(For allotment money due on 50,000 equity shares @ ₹35 per
share including a premium of₹10 per share)
Bank A/c Dr. 17,50,000
To Equity Share Allotment A/c 17,50,000
(For receipt of allotment money on equity shares
8% Preference Share Capital A/c Dr. 50,00,000
Premium on Redemption of Preference Shares A/c Dr. 2,50,000
(For amount payable to preference shareholders on redemption
at 5% premium)
To Premium on Redemption A/c 2,50,000
(For writing off premium on redemption of preference shares)
(For transfer of CRR the amount not covered by the proceeds of
fresh issue of equity shares i.e., 50,00,000 - 10,00,000 -
12,50,000)
- 97 -
Preference Shareholders A/c To Bank A/c Dr. 52,50,000

(For amount paid to preference shareholders) 52,50,000
Balance Sheet (extracts)
Particulars Notes No. As at 31.3.2020 As at 31.12.2019
a) Share capital 1 1,22,50,000 1,35,00,000
b) Reserves and Surplus 2 77,50,000 75,00,000
Notes to accounts
Particulars As at 31.3.2020 As at 31.12.2019
1. Share Capital
Issued, Subscribed and Paid up:
1,00,000 Equity shares of ₹100 each fully paid up 1,00,00,000 1,00,00,000
50,000 Equity shares of ₹100 each ₹45 paid up 22,50,000 -
50,000, 8% Preference shares of ₹100 each, ₹70 - 35,00,000
called up
1,22,50,000 1,35,00,000
Capital Redemption Reserve 47,50,000 20,00,000
Securities Premium (5,00,000 + 5,00,000) 10,00,000 5,00,000
General Reserve 20,00,000 50,00,000
77,50,000 75,00,000
Note: Amount received (excluding premium) on fresh issue of shares till the date of redemption
should be considered for calculation of proceeds of fresh issue of shares. Thus, proceeds of fresh
issue of shares are ₹22,50,000 (₹10,00,000 application money plus ₹12,50,000 received on allotment
towards share capital).
- 98 -
PRACTICE PROBLEMS
Problem 1: RTP Nov-2019 (New Course)
The following are the extracts from the Balance Sheet of ABC Ltd. as on 31st December, 2019:
Share capital: 50,000
Equity shares of ₹10 each fully paid – ₹5,00,000;
2,000 10% Redeemable preference shares of ₹100 each fully paid – ₹ 2,00,000.
Reserve & Surplus: Capital reserve – ₹ 2,00,000;
General reserve –₹ 2,00,000;
Profit and Loss Account – ₹75,000.
On 1st January 2020, the Board of Directors decided to redeem the preference shares at premium of
5% by utilization of reserves.
You are required to prepare necessary Journal Entries including cash transactions in the books of the
company.
Problem 2
The books of B Ltd. showed the following balance on 31st December, 2019:
30,000 Equity Shares of ₹10 each fully paid; 18,000
12% Redeemable Preference Shares of ₹10 each fully paid;
4,000 10% Redeemable Preference Shares of ₹10 each, ₹8 paid up (all shares issued on 1st April,
2018).
Undistributed Reserve and Surplus stood as:
Profit and Loss Account ₹80,000;
General Reserve ₹1,20,000;
Securities Premium Account ₹15,000 and
Capital Reserve ₹21,000.
For redemption, 3,000 equity shares of ₹10 each are issued at 10% premium. At the same time,
Preference shares are redeemed on 1st January, 2020 at a premium of ₹2 per share. The
whereabouts of the holders of 100 shares of ₹10 each fully paid are not known.
A bonus issue of equity share was ma de at par, two shares being issued for every five held on that
date out of the Capital Redemption Reserve Account. However, equity shares, issued for redemption
are not eligible for bonus.
Show the necessary Journal Entries to record the transactions.

- 99 -
Problem 3
The following is the summarised Balance Sheet of Bumbum Limited as at 31st March, 2019:
₹
Sources of funds 5,00,000
Authorized capital
50,000 Equity shares of ₹10 each
10,000 Preference shares of ₹100 each (8% redeemable) 10,00,000
15,00,000
Issued, subscribed and paid up
30,000 Equity shares of ₹10 each 3,00,000
5,000, 8% Redeemable Preference shares of ₹100 each 5,00,000
Reserves & Surplus
2,500, 9% Debentures of ₹100 each 2,50,000
25,10,000
Application of funds 7,80,000
Fixed Assets (net) 4,90,000
Investments (market value ₹5,80,000) 3,40,000
Deferred Tax Assets 6,20,000
Trade receivables 2,80,000
Cash & Bank balance 25,10,000
In Annual General Meeting held on 20th June, 2019 the company passed the following resolutions:
(i) To split equity share of ₹10 each into 5 equity shares of ₹2 each from1st July.
(ii) To redeem 8% preference shares at a premium of 5%.
(iii) To redeem 9% Debentures by making offer to debenture holders to convert their holdings into
equity shares at ₹10 per share or accept cash on redemption.
(iv) To issue fully paid bonus shares in the ratio of one equity share for every 3 shares held on
record date.
On 10 July, 2019 investments were sold for ₹5,55,000 and preference shares were redeemed.
th
40% of Debenture holders exercised their option to accept cash and their claims were settled on 1st
August, 2019.
The company fixed 5th September, 2019 as record date and bonus issue was concluded by 12th
September, 2019
You are requested to journalize the above transactions including cash transactions and prepare
Balance Sheet as at 30th September, 2019. All working notes should form part of your answer.
- 100 -
Problem 4
The following is the summarized Balance Sheet of Trinity Ltd. as at 31.3.2019:
Liabilities ₹ Assets ₹
Share Capital Fixed Assets
Authorised Gross Block
10,000 10% Redeemable 1,00,000 Less : Depreciation
Preference Shares of ₹10 each
90,000 Equity Shares of ₹10 each 9,00,000 Investments
10,00,000 Current Assets and
Issued, Subscribed and Paid-up Loans and Advances
Capital 10,000 10% Redeemable
Preference Inventory
Shares of ₹10 each 1,00,000 Trade receivables
10,000 Equity Shares of ₹ 10 each 10,00,000 Cash and Bank
(A) 2,00,000 Balances
Reserves and Surplus
Profit and Loss A/c 18,500
(B) 2,08,500
Current Liabilities and Provisions 11,500
(C)
Total (A + B + C) 4,20,000 Total 4,20,000
For the year ended 31.3.2020, the company made a net profit of ₹35,000 after providing ₹20,000
depreciation.
The following additional information is available with regard to company’s operation:
1. The preference dividend for the year ended 31.3.2020 was paid.
2. Except cash and bank balances other current assets and current liabilities as on 31.3.2020,
was the same as on 31.3.2019.
3. The company redeemed the preference shares at a premium of 10%.
4. The company issued bonus shares in the ratio of one share for every equity share held as on
31.3.2020.
5. To meet the cash requirements of redemption, the company sold investments.
6. Investments were sold at 90% of cost on 31.3.2020.
You are required to prepare necessary journal entries to record redemption and issue of bonus
shares.
- 101 -

Solution 1:
Date Particulars Dr. (₹) Dr. (₹)
2020
Jan 10% Redeemable Preference Share Capital A/c Dr. 2,00,000
1 Premium on Redemption of Preference Shares Dr. 10,000
(Being premium on redemption charged to Profit and Loss A/c)
Solution 2:
In the books of B Limited Journal Entries
2017 12% Redeemable Preference Share Capital A/c Dr. 1,80,000
Jan Premium on Redemption of Preference Shares A/c Dr. 36,000
1 To Preference Shareholders A/c 2,16,000
(Being the amount payable on redemption of 18,000 12%
Redeemable Preference Shares transferred to Shareholders
Account)
(Being the amount paid on redemption of 17,900 preference
shares)
Bank A/c Dr. 33,000
To Equity Shares Capital A/c 30,000
To Securities Premium A/c 3,000
(Being the issue of 3,000 Equity Shares of ₹10 each at a
premium of 10% as per Board’s Resolution No. Dated……)
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(Being the amount transferred to Capital Redemption
Reserve A/c as per the requirement of the Act.)
(Being the amount appropriated for issue of bonus share in the
ratio of 5:2 as per shareholders Resolution No.….. dated…)
(Being the utilisation of bonus dividend for issue of 12,000
equity shares of ₹ 10 each fully paid)
(Being premium on redemption of preference shares adjusted
against to Profit & Loss Account)
Working Note:
(1) Partly paid-up preference shares cannot be redeemed.
(2) Amount to be Transferred to Capital Redemption Reserve Account
Face value of share to be redeemed ₹1,80,000
Less: Proceeds from fresh issue (excluding premium) (₹30,000)
₹1,50,000
(3) No bonus shares on 3,000 equity shares issued for redemption.
Solution 3:
Bumbum Limited Journal Entries
2019 Particular Dr.(₹) Cr.(₹)
July 1 Equity Share Capital A/c (₹10 each) Dr. 3,00,000
To Equity share capital A/c (₹2 each) 3,00,000
(Being equity share of ₹10 each splitted into 5 equity shares of
₹2 each) {1,50,000 X 2}
July 10 Cash & Bank balance A/c Dr. 5,55,000
To Investment A/c 4,90,000
To Profit & Loss A/c 65,000
(Being investment sold out and profit on sale credited to
Profit & Loss A/c)
July 10 8% Redeemable preference share capital A/c Dr. 5,00,000
Premium on redemption of pref. share A/c 25,000
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To Preference shareholders A/c 5,25,000

(Being amount payable to preference share holders on
redemption) (refer W.N.1)
July 10 Preference shareholders A/c Dr. 5,25,000
To Cash & bank A/c 5,25,000
(Being amount paid to preference shareholders)
July 10 General reserve A/c Dr. 5,00,000
To Capital redemption reserve A/c 5,00,000
(Being amount equal to nominal value of preference
shares transferred to Capital Redemption Reserve A/c
on its redemption as per the law)
Aug 1 9% Debentures A/c Dr. 2,50,000
Interest on debentures A/c (2,50,000 x 9% x 4/12) Dr. 7,500
To Debenture holders A/c 2,57,000
(Being amount payable to debenture holders along with
interest payable)
Aug. 1 Debenture holders A/c Dr. 2,57,000
To Cash & bank A/c (1,00,000 + 7,500) 1,07,500
To Equity share capital A/c (15,000 X 2) 30,000
To Securities premium A/c (15,000 x 8) 1,20,000
(Being claims of debenture holders satisfied)
(refer W.N.2)
Sep. 5 Capital Redemption Reserve A/c Dr. 1,10,000
(Being balance in capital redemption reserve capitalized to
issue bonus shares) (refer W.N.3)
Sep. 12 Bonus to shareholders A/c Dr. 1,10,000
(Being 55,000 fully paid equity shares of ₹2 each
issued as bonus in ratio of 1 share for every 3 shares held)
Sep. 30 General Reserve A/c Dr. 25,000
To Premium on redemption of preference shares A/c 25,000
(Being premium on preference shares adjusted from general
reserve)
Sep. 30 Profit & Loss A/c Dr. 7,500
To Interest on debentures A/c 7,500
(Being interest on debentures transferred to Profit and Loss
Account)
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Balance Sheet as at 30th September, 2019

1 Shareholders’ funds
2 Current Assets
a Trade Payables 1,70,000
Total 19,42,500
Assets
1 Non-current assets
a Property, Plant and Equipment
Tangible assets 7,80,000
b Deferred tax asset 3,40,000
2 Current assets
Cash and bank balances (W.N.4) 2,02,500
Total 19,42,500
Notes to accounts
₹ ₹
1 Share Capital
Authorized share capital
10,000 Preference shares of ₹100 each 10,00,000 15,00,000
Issued, subscribed and paid up
2,20,000 Equity shares of ₹2 each
[(30,000 x 5) + 15,000 + 55,000]
2 Reserves and Surplus
Securities Premium A/c 6,00,000
Balance as per balance sheet
Add: Premium on equity shares issued on
conversion of debentures (15,000 x 8) 1,20,000
Balance 7,20,000
Capital Redemption Reserve (5,00,000-1,10,000) 3,90,000

General Reserve (6,50,000 – 5,00,000- 25,000) 1,25,000
- 105 -
Add: Profit on sale of investment 65,000

Less: Interest on debentures (7,500) 97,500
Total 13,32500
Working Notes:
1. Redemption of preference share:

5,000 Preference shares of ₹100 each 5,00,000
Premium on redemption @ 5% 25,000
Amount Payable 5,25,000
2. Redemption of Debentures
2,500 Debentures of ₹100 each 2,50,000
Less: Cash option exercised by 40% holders (1,00,000)
1,50,000
Conversion option exercised by remaining 60% Equity shares issued
on conversion = 1,50,000 / 10 = 15,000 shares
3. Issue of Bonus Shares
Existing equity shares after split (30,000 x 5) 1,50,000 shares
Equity shares issued on conversion 15,000 shares
Equity shares entitled for bonus 1,65,000 shares
Bonus shares (1 share for every 3 shares held) to be issued 55,000 shares
4. Cash and Bank Balance
Balance as per balance sheet 2,80,000
Add: Realization on sale of investment 5,55,000
8,35,000
Less: Paid to preference share holders (5,25,000)
Paid to Debentureholders (7,500 + 1,00,000) (1,07,500)
Balance 2,02,500
5. Interest of ₹7,500 paid to debenture holders have been
debited to Profit & Loss Account.
- 106 -
Solution 4:
Journal Entries in the Books of Trinity Ltd.
Particular Dr.(₹) Cr.(₹)
To Premium on Redemption of Preference shares 10,000
(Being amount of premium payable on redemption
of preference shares)
10% Redeemable Preference Capital Dr. 1,00,000
Premium on redemption of Preference Shares Dr. 1,000
To Preference Shareholders 1,10,000
(Being the amount payable to preference shareholders on
redemption)
To Capital Redemption Reserve 1,00,000
(Being transfer to the latter account on redemption of shares)
Bank A/c Dr. 90,000
Profit and Loss A/c Dr. 10,000
To Investments 1,00,000
(Being amount realised on sale of Investments and loss thereon
adjusted)
Preference shareholders A/c Dr. 1,10,000
To Bank 1,10,000
(Being payment made to preference shareholders
(Amount adjusted for issuing bonus share in the ratio of 1 : 1)
(Balance on former account transferred to latter)
- 107 -
MAY 2019 (New Course) Question 5 (a) (10 Marks)
The Summarized Balance Sheet of ABC Ltd. as on 31st March, 2020 is as follows:
Particulars (₹)
1. Shareholder’s funds:
(a) Share capital 5,80,000
(b) Reserves and Surplus 96,000
2. Current Liabilities:
Trade Payable 1,13,000
Total 7,89,000
ASSETS:
1. Non-Current Assets
(a) Property, Plant and Equipment
Tangible Assets 6,90,000
(b) Non-current investments 37,000
2. Current-Assets
Cash and cash equivalents (Bank) 62,000
Total 7,89,000
The Share Capital of the company consists of ₹ 50 each Equity shares of ₹ 4,50,000 and ₹ 100 each
8% Redeemable Preference Shares of ₹ 1,30,000 (issued on 1.4.2019).
Reserves and Surplus comprises statement of profit and loss only.
In order to facilitate the redemption of preference shares at a premium of 10%, the Company decided:
(a) to sell all the investments for ₹ 30,000.
(b) to finance part of redemption from company funds, subject to, leaving a Bank balance of ₹ 24,000.
(c) to issue minimum equity share of ₹ 50 each at a premium of ₹ 10 per share to raise the balance of
funds required.
You are required to:
(1) Pass Journal Entries to record the above transactions.
(2) Prepare Balance Sheet after completion of the above transactions.
Answer:
Journal Entries
Particulars Dr. (₹) Cr. (₹)
1 Bank A/c Dr. 75,000
To Share Application A/c 75,000
(For application money received on 1,250 shares @
₹ 60 per share)
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2 Share Application A/c Dr. 75,000

To Securities Premium A/c 12,500
(For disposition of application money received)
3 Preference Share Capital A/c Dr. 1,30,000
(For amount payable on redemption of preference
shares)
4 Profit and Loss A/c Dr. 13,000
To Premium on Redemption of Preference 13,000
Shares A/c
(For writing off premium on redemption out of profits)
5 Bank A/c Dr. 30,000
Profit and Loss A/c (loss on sale) A/c Dr. 7,000
To Investments A/c 37,000
(For sale of investments at a loss of ₹ 7,000)
6 Preference Shareholders A/c Dr. 1,43,000
To Bank 1,43,000
(Being amount paid to Preference shareholders)
7 Profit and Loss A/c Dr. 67,500
(For transfer to CRR out of divisible profits an
amount equivalent to excess of nominal value of
preference shares over proceeds (face value of
equity shares) i.e. ₹ 1,30,000 - ₹ 62,500)
Balance Sheet of ABC Ltd. (after redemption)
No.
a) Share capital 1 5,12,500
b) Reserves and Surplus 2 88,500
Total 7,14,000
1. ASSETS
Non-Current Assets
- 109 -
Property Plant and Equipments

Tangible Assets 6,90,000
2. Current Assets
Cash and cash equivalents (bank) 3 24,000
Total 7,14,000
Notes to accounts
₹
1. Share Capital
Equity share capital ₹ (4,50,000 + 62,500) 5,12,500
2. Reserve and Surplus
Profit and Loss Account ₹ (96,000 – 13,000 – 7,000 – 67,500) 8,500
Security Premium 12,500
88,500
Balances with banks ₹ (62,000 + 75,000 + 30,000 – 1,43000) 24,000
Working Note:
Calculation of Number of Shares: ₹
Amount payable on redemption (1,30,000 + 10% Premium) 1,43,000
Less: Sale price of investment (30,000)
1,13,000
Less: Available bank balance (62,000 - 24,000) (38,000)
Funds required from fresh issue 75,000
No. of shares = 75,000/60 = 1,250 shares
Nov-2018 (New Course)

Question 6. (d) (5 Marks)
Explain the conditions when a company should issue new equity shares for redemption of the
preference shares. Also discuss the advantages and disadvantages of redemption of preference
shares by issue of equity shares.
Answer :
A company may prefer issue of new equity shares in the following situations:
(a) When the company realizes that the capital is needed permanently and it makes more sense to
issue Equity Shares in place of Redeemable Preference Shares which carry a fixed rate of
dividend.
(b) When the balance of profit, which would otherwise be available for dividend, is insufficient.
(c) When the liquidity position of the company is not good enough.
- 110 -
Advantages of redemption of preference shares by issue of fresh equity shares

(1) No cash outflow of money is required – now or later.
(2) New equity shares may be valued at a premium.
(3) Shareholders retain their equity interest.
Disadvantages of redemption of preference shares by issue of fresh equity shares
(1) There will be dilution of future earnings;
(2) Share-holding in the company is changed.

Question 5. (b) (10 Marks)
Dheeraj Limited had 5,000, 10% Redeemable Preference Shares of ₹ 100 each, fully paid up. The
company had to redeem these shares at a premium of 10%.
It was decided by the company to issue the following:
(i) 40,000 Equity Shares of ₹ 10 each at par
(ii) 2,000 12% Debentures of ₹ 100 each.
The issue was fully subscribed and all accounts were received in full. The payment was duly made.
The company had sufficient profits. Show journal entries in the books of the company.
Answer :
In the books of Dheeraj Limited
Journal Entries
Date Particulars Dr. (₹) Cr. (₹)
Bank A/c Dr. 4,00,000
(Being the issue of 40,000 equity shares of ₹ 10 each at par as
per Board’s resolution No…… dated…..)
Bank A/c Dr. 2,00,000
To 12% Debenture A/c 2,00,000
(Being the issue of 2,000 Debentures of ₹ 100 each as per
Board’s Resolution No…..dated……)
(Being the amount paid on redemption of preference
shares)
- 111 -

(Being the adjustment of premium on redemption against Profits
& Loss Account)
Profit & Loss A/c Dr. 1,00,000
To Capital Redemption Reserve A/c (Working Note) 1,00,000
Working Note:
Amount to be transferred to Capital Redemption Reserve Account
Face value of shares to be redeemed ₹ 5,00,000
Less: Proceeds from new issue (₹ 4,00,000)
Balance ₹ 1,00,000
- 112 -
FINANCIAL STATEMENTS OF COMPANIES

SCHEDULE III
PART I – Form of BALANCE SHEET
Name of the Company.…………………….
Balance Sheet as at…………………………
(Rupees in………)
Figures as at the Figures as at the
Notes
Particulars end of current end of previous
No.
reporting period reporting period
EQUITY AND LIABILITY
(a) Share capital 1
(b) Reserves and Surplus 2
(c) Money received against share warrants
2. Share application money pending allotment
3. Non-current liabilities
(a) Long term borrowings 3
(b) Deferred tax liabilities (Net)
(c) Other long-term liabilities 4
(d) Long-term provisions 5
(a) Short-term borrowings 6
(b) Trade Payables
(A) total outstanding dues of micro
enterprises and small enterprises;
and
(B) total outstanding dues of creditors
other than micro enterprises and
small enterprises.
(c) Other current liabilities 7

(d) Short-term provisions 8
Total
- 113 -
ASSETS
(a) Property, Plant & Equipments
i. Tangible assets 9
ii. Intangible assets 10
iii. Capital Work-in-progress
iv. Intangible assets under development
(b) Non-current investments 11
(c) Deferred tax assets (Net)
(d) Long-term loans and advances 12
(e) Other non-current assets 13
2 Current assets
(a) Current investments 14
(b) Inventories 15
(c) Trade receivables 16
(d) Cash and Cash Equivalents 17
(e) Short-term loans and advances 18
(f) Other current assets 19
Total
- 114 -
NOTES TO FINANCIAL STATEMENT

1. SHARE CAPITAL
Figures as at the end of Figures as at the end of
Current reporting Previous reporting
period period
(a) Authorised Share Capital XXX XXX
XXX XXX
(b) Issued, Subscribed & Paid up share
XXX XXX
capital
(c) Calls unpaid (XXX) (XXX)
(d) Forfeited Shares XXX XXX
XXX XXX
2. RESERVES & SURPLUS

Figures as at Additions Deductions Figures as at
the end of the end of
Previous current
reporting reporting
period period
(a) Capital Reserve XXX XXX XXX XXX
(b) Capital Redemption Reserve XXX XXX XXX XXX
(c) Securities Premium Reserve XXX XXX XXX XXX
(d) Debenture Redemption Reserve XXX XXX XXX XXX
(e) Revaluation Reserve XXX XXX XXX XXX
(f) General Reserve XXX XXX XXX XXX
(g) Profit & Loss Account XXX XXX XXX XXX
(h) Any other reserve XXX XXX XXX XXX
Surplus i.e. balance in Statement
of Profit & Loss disclosing
allocations and appropriations
such as dividend, bonus shares XXX XXX XXX XXX
and transfer to/from reserves etc.
XXX XXX
Debit balance of statement of profit and loss shall be shown as a negative figure under the head
‘Surplus’. Similarly, the balance of ‘Reserves and Surplus’, after adjusting negative balance of surplus,
if any, shall be shown under the head ‘Reserves and Surplus’ even if the resulting figure is in the
negative.
- 115 -
3. LONG TERM BORROWINGS

period period
(a) Bond / Debentures XXX XXX
(b) Term Loans XXX XXX
(c) Deferred Payment liabilities XXX XXX
(d) Deposits XXX XXX
(e) Long term loan and advances XXX XXX
(f) Any other loan XXX XXX
XXX XXX
4. OTHER LONG TERM LIABILITIES

period period
(a) Liability towards premium on
XXX XXX
redemption of Debentures
(b) Trade payables XXX XXX
(c) Other Liability XXX XXX
XXX XXX
5. LONG TERM PROVISIONS

Current reporting period Previous reporting period
(a) Provisions for employee Benefits XXX XXX
(b) Other provisions XXX XXX
XXX XXX
6. SHORT TERM BORROWINGS

(a) Loans repayable on demands XXX XXX
(b) Any other loan XXX XXX
XXX XXX
Borrowings shall further be sub-classified as secured and unsecured. Nature of security shall be
specified separately in each case. Where loans have been guaranteed by directors or others, the
aggregate amount of such loans under each head shall be disclosed.
- 116 -
7. OTHER CURRENT LIABILITIES

(a) Current maturity of long term debt XXX XXX
(b) Interest accrued on borrowings XXX XXX
(c) Income received in advance XXX XXX
(d) Unpaid Dividends XXX XXX
(e) Application Money received for
allotment and due for refund and XXX XXX
interest accrued thereon.
(f) Other short term liabilities
XXX XXX
8. SHORT TERM PROVISIONS

(c) Provisions for employee Benefits XXX XXX
(d) Other provisions XXX XXX
XXX XXX
9. TANGIBLE ASSETS
Particulars Cost as Addition/ Cost as Accumulated Depreciation Accumulated Net Book
on the Deduction on the Depreciation during the Depreciation as value as
end of end of as on the year on the end on
Previous current end of current the end of
reporting reporting of previous reporting current
Period Period reporting period reporting
period period
Land XXX XXX XXX XXX XXX XXX XXX
Buildings XXX XXX XXX XXX XXX XXX XXX
Plant XXX XXX XXX XXX XXX XXX XXX
Furniture XXX XXX XXX XXX XXX XXX XXX
Vehicle XXX XXX XXX XXX XXX XXX XXX
Others XXX XXX XXX XXX XXX XXX XXX
XXX XXX XXX XXX XXX XXX XXX
- 117 -
10. INTANGIBLE ASSETS

Particulars Cost as Addition/ Cost as Accumulated Amortization Accumulated Net Book
on the Deduction on the Amortization during the Amortization value as
end of end of as on the year as on
Previous current end on the end the end of
reporting reporting of previous of current current
Period Period reporting reporting reporting
period period period
Goodwill XXX XXX XXX XXX XXX XXX XXX
Trademarks XXX XXX XXX XXX XXX XXX XXX
Softwares XXX XXX XXX XXX XXX XXX XXX
Mining rights XXX XXX XXX XXX XXX XXX XXX
XXX XXX XXX XXX XXX XXX XXX
11. OTHER NON-CURRENT ASSETS

(a) Prepaid expenses (long term) XXX XXX
(b) Others XXX XXX
XXX XXX
12. INVENTORIES
(a) Raw Materials XXX XXX
(b) Work-in-progress XXX XXX
(c) Finished goods XXX XXX
(d) Stock in trade (in respect of goods
XXX XXX
acquired for trading)
(e) Stores & spares XXX XXX
(f) Loose tools XXX XXX
(g) Others XXX XXX
XXX XXX
- 118 -
13. CASH AND BANK BALANCES

(a) Balances with Bank XXX XXX
(b) Cheques, drafts on hand XXX XXX
(c) Cash on hand XXX XXX
(d) Others XXX XXX
XXX XXX
14. OTHER CURRENT ASSETS

(a) Prepaid expenses XXX XXX
(b) Others XXX XXX
XXX XXX
15. OTHER INCOMES

Figures for the Current Figures for the Previous
(a) Interest Incomes XXX XXX
(b) Dividend Incomes XXX XXX
(c) Net gain/loss on sale of Investments XXX XXX
(d) Profit on sale of assets
(e) Other non-operating income XXX XXX
XXX XXX
16. COST OF MATERIAL CONSUMED

(a) Opening Stock of raw material XXX XXX
(b) Add : Raw material purchased XXX XXX
(c) Less : Closing Stock of raw material XXX XXX
XXX XXX
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17. CHANGES IN INVENTORIES

Opening Inventories :
(a) Finished Goods XXX XXX
(b) Work in Progress XXX XXX
(c) Stock in trade XXX XXX
(a) XXX XXX
Closing Inventories :
(a) Finished Goods XXX XXX
(b) Work in Progress XXX XXX
(c) Stock in trade XXX XXX
(b) XXX XXX
Changes in inventories (a) - (b) XXX XXX
18. EMPLOYEES BENEFITS EXPENSE
(a) Salaries and wages XXX XXX
(b) Contribution to provident funds XXX XXX
(c) Staff welfare expenses XXX XXX
(d) Other expenses XXX XXX
(e) Director Salary XXX XXX
XXX XXX
19. FINANCE COST
(a) Interest Expense XXX XXX
(b) Other borrowing cost XXX XXX
(c) Applicable net gain/loss on foreign
XXX XXX
currency transaction and translation
XXX XXX
20. DEPRECIATION AND AMORTIZATION EXPENSE
(a) Depreciation on Tangible Assets XXX XXX
(b) Amortization on Intangible Assets XXX XXX
(c) Depreciation on Investment Property XXX XXX
XXX XXX
- 120 -
21. OTHER EXPENSES

(a) Consumption of stores and spare parts XXX XXX
(b) Power and Fuel XXX XXX
(c) Rent XXX XXX
(d) Repairs XXX XXX
(e) Insurance XXX XXX
(f) Rates & taxes (excluding tax on
XXX XXX
Income)
(g) Advertisement and sales Promotion XXX XXX
(h) Bad Debts XXX XXX
(i) Provision/(write off) for Doubtful debts XXX XXX
(j) Loss on Sale of Fixed Assets XXX XXX
(k) Royalty XXX XXX
(l) Director Fee XXX XXX
(j) Auditor Fee XXX XXX
XXX XXX
- 121 -
PART II – Form of STATEMENT OF PROFIT AND LOSS

Name of the Company…………………….
Profit and loss statement for the year ended ………………………
(Rupees in…………)
Particulars Note Figures as at the end of Figures as at the end of
No. current reporting period previous reporting
period
1 2 3 4
I. Revenue from operations 24 xxx xxx
II. Other income 25 xxx
III. Total Revenue (I + II) xxx
IV. Expenses xxx
Cost of materials consumed 26 xxx
Purchases of Stock-in-Trade xxx
Changes in inventories of finished 27 xxx
Goods xxx
work-in-progress xxx
and Stock-in-Trade xxx
Employee benefits expense 28 xxx
Finance costs 29 xxx
Depreciation and amortization expense 30 xxx
Other expenses 31 xxx
Total expenses xxx
V. Profit before exceptional and xxx
extraordinary items and tax (III-IV)
VI. Exceptional items xxx
VII. Profit before extraordinary items and xxx
tax (V - VI)
VIII. Extraordinary Items xxx
IX. Profit before tax (VII- VIII) xxx xxx
X Tax expense:
(1) Current tax xxx xxx
(2) Deferred tax xxx xxx
XI Profit (Loss) for the period from
continuing operations (VII-VIII) xxx xxx
XII Profit/(loss) from discontinuing xxx xxx xxx xxx
Operations xxx Xxx
XIII Tax expense of discontinuing
- 122 -
Operations xxx Xxx

XIV Profit/(loss) from Discontinuing
operations (after tax) (XII-XIII) xxx Xxx
XV Profit (Loss) for the period (XI + XIV)
XVI Earnings per equity share: xxx Xxx
(1) Basic
(2) Diluted xxx xxx
xxx xxx
xxx xxx
- 123 -
Illustration 1
The following is the Trial Balance of Omega Limited as on 31.3.2020:
(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 (31.3.20) 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
Interim Dividend Paid 18
1670 1670
(i) The authorised share capital of the company is 40,000 shares of ₹10 each.
(ii) The company on the advice of independent valuer wish to revalue the land at ₹3,60,000.
(iii) Declared final dividend @ 10%.
(iv) Suspense account of ₹4,000 represents cash received for the sale of some of the machinery on
1.4.2019. The cost of the machinery was ₹10,000 and the accumulated depreciation thereon
being ₹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 31.3.2020 and Statement of Profit
and Loss with notes to accounts for the year ended 31.3.2020 as per Schedule III. Ignore previous
years’ figures & taxation.
- 124 -
Solution: Omega Limited

Balance Sheet as at 31st March, 2020
Particulars Note No. (₹in 000)
Equity and Liabilities
1. Shareholders' funds
a. Share capital 1 300
b. Reserves and Surplus 2 500
2. Non-Current liabilities
c. Long term borrowings 3 200
a. Trade Payables 4 52
b. Other Current Liability 30
Total 1082
Assets
1. Non-current assets
a. PPE (Property, Plant & Equipment)
i. Tangible assets 5 880
2. Current assets
a. Inventories 86
b. Trade receivables 96
c. Cash and bank balances 20
Total 1082
Statement of Profit and Loss for the year ended 31st March, 2020
Particulars Notes (₹ in 000)
I. Revenue from operations 700
II. Other Income 6 2
III. Total Revenue 702
IV. Expenses:
Purchases 320
Finance costs 7 20
Depreciation (10% of 760*) 76
Other expenses 8 120
Total Expenses 536
V. Profit (Loss) for the period (III – IV) 166
Notes to accounts
(₹ in 000)
1. Share Capital
Authorised 400
40,000 shares of ₹10 each
Issued & subscribed & called up
30,000 shares of ₹10 each 300
- 125 -
Total 300

Securities Premium Account 40
Revaluation reserve (360 – 220) 140
General reserve 130
Profit & loss Balance
Opening balance 72
Profit for the period 166 238
Less: Appropriations
Interim Dividend (18)
Final Dividend (300 x 10%) (30) 190
500
3. Long term borrowing
10% Debentures
4. Other Current Liability
Dividend 30
5. Tangible assets
Land
Opening balance 200
Add: Revaluation adjustment 140
Closing balance 360
Plant and Machinery
Opening balance 770
Less: Disposed off (10)
760
Less: Depreciation (172-8+76) (240)
Closing balance 520
Total 880
6. Other Income
Profit on sale of machinery:
Sale value of machinery 4
Less: Book value of machinery (10-8) (2) 2
7. Finance costs
Debenture interest 20
8. Other expenses:
Factory expenses 60
Selling expenses 30 120
Administrative expenses 30
Illustration 2
You are required to prepare Balance sheet and statement of Profit and Loss from the following trial
balance of Haria Chemicals Ltd. for the year ended 31st March, 2020.
- 126 -
Trial Balance as at 31st March, 2020

Inventory 6,80,000 Equity Shares
Furniture 2,00,000 Capital (Shares of ₹10 each) 25,00,000
Discount 40,000 11% Debentures 5,00,000
Loan to Directors 80,000 Bank loans 6,45,000
Advertisement 20,000 Trade payables 2,81,000
Bad debts 35,000 Sales 42,68,000
Commission 1,20,000 Rent received 46,000
Purchases 23,19,000 Transfer fees 10,000
Plant and Machinery 8,60,000 Profit & Loss account 1,39,000
Rentals 25,000 Depreciation provision:
Current account 45,000 Machinery 1,46,000
Cash 8,000
Interest on bank loans 1,16,000
Preliminary expenses 10,000
Fixtures 3,00,000
Wages 9,00,000
Consumables 84,000
Freehold land 15,46,000
Tools & Equipments 2,45,00
Goodwill 2,65,000
Dealer aids 21,000
Transit insurance 30,000
Trade expenses 37,000
Distribution freight 54,000
Debenture interest 55,000
85,35,000
Additional information: Closing Inventory on 31-3-2020: ₹8,23,000.

Solution:
Haria Chemicals Ltd.
Schedule Rupees as at the No. end of 31st
(1) March 2020 (2)
1. Shareholders’ funds :
(b) Reserves and Surplus 2 7,40,000
2. Non Current Liabilities
(a) Long term borrowings 3 11,45,000
- 127 -
3. Current Liabilities
(a) Trade payables 2,81,000
Total 46,66,000
Assets
(1) Non current assets
PPE:
i. Tangible assets 4 30,05,000
ii. Intangible assets (goodwill) 2,65,000
(2) Current assets
(a) Inventories 8,23,000
(b) Trade receivables 4,40,000
(c) Cash and bank balances 5 53,0000
(d) Short term loans and advances 6 80,000
Total 46,66,000
Haria Chemicals Ltd.
Schedule Figures
Revenue from operations 42,68,000
Other income (A) 7 56,000
43,24,000
Expenses
Cost of materials consumed 8 23,19,000
Change in inventory of finished goods 9 (1,43,000)
Employee benefit expenses 10 9,00,000
Finance cost 11 ,171,000
Other expenses (B) 12 4,76,000
37,23,000
Profit before tax (A – B) 6,01,000
Provision for tax -
Profit for the period 6,01,000
Notes to Accounts
1. Share capital ₹
Authorised:
Equity share capital of ₹10 each 25,00,000
Issued and Subscribed:
Equity share capital of ₹10 each 25,00,000

Balance as per last balance sheet 1,39,000
Balance in profit and loss account 6,01,000
7,40,000
3. Long term Borrowings
- 128 -

Bank loans (assumed long-term) 6,45,000
11,45,000
4.
Tangible Assets Gross block Depreciation Net Block
Freehold land 15,46,00 15,46,00
Furniture 2,00,000 2,00,000
Fixtures 3,00,000 3,00,000
Plant & Machinery 8,60,000 1,46,000 7,14,000
Tools & Equipment 2,45,000 2,45,000
Total 31,51,000 1,46,000 30,05,000
5. Cash and bank balances
Cash and cash equivalents
Current account balance 45,000
Cash 8,000
Other bank balances Nil
53,000
6. Short-term loans and Advances
Loan to directors 80,000
7. Other Income
Rent received 46,000
Transfer fees 10,000
56,000
8. Cost of materials consumed
Purchases 23,19,000
9. Changes in inventory of finished goods, WIP & Stock in trade
Opening inventory 6,80,000
Closing inventory 8,23,000 (1,43,000)
10. Employee benefit expense

Wages 9,00,000
11. Finance cost
Interest on bank loans 1,16,000
Debenture interest 55,000
1,71,000
12. Other Expenses
Consumables 84,000
Preliminary expenses 10,000
Bad debts 35,000
Discount 40,0000
Rentals 25,000
- 129 -
Commission 1,20,000
Advertisement 20,000
Dealers’ aids 21,000
Transit insurance 30,000
Trade expenses 37,000
Distribution freight 54,000
Illustration 3
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, 2020:
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, 2019
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
- 130 -
Trade payables 42,000

Trade receivables 19,260
Investments 2,72,300
Goodwill at cost 5,00,000
19,75,000 19,75,000
Wages and Salaries Outstanding 1,280
Inventory on 31st March, 2020
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, 2019 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 2019. A shareholder could
not pay the call on 100 shares and his shares were then forfeited and reissued @ ₹90 per share as fully
paid. The Directors declare a dividend of 8% on equity shares, transferring any amount that may be
required from General Reserve. Ignore Taxation.
Solution :
Statement of Profit and Loss of International Hotels Ltd. for the year ended 31st March, 2020
Particulars Note Amount
I. Revenue from operations 10 1,83,200
II. Other income (Discount received) 3,300
III. Total Revenue (I + II) 1,86,500
IV. Expenses:
Cost of materials consumed 11 25,060
Purchases of Inventory-in-Trade 12 45,800
Changes in inventories of finished goods 13 (9,700)
work-in-
progress and Inventory-in-Trade
Employee benefits expense 14 29,580
Other operating expenses 15 18,000
Selling and administrative expenses 16 14,200
Finance costs 17 12,000
Depreciation and amortisation expense 18 21,315
Other expenses 9 8,000
Total expenses 1,64,255
V. Profit (Loss) for the period (III - IV) 22,245
Balance Sheet of International Hotels Ltd. as on 31st March, 2020

Particulars Note No ₹
a. Share Capital 1 13,00,000
- 131 -
b. Reserves and Surplus 2 1,74,745

a. Long term borrowings 3 2,00,000
a. Trade payables 4 42,000
b. Other current liabilities 5 107,280
Total 18,24,025
Assets
a. PPE:
i Tangible assets 6 9,14,985
ii Intangible assets (goodwill) 5,00,000
b Non-current investments 2,72,300
(2) Current assets
a. Inventories 7 38,900
b. Trade receivables 19,260
c. Cash and bank balances 8 78,580
Total 18,24,025
Notes to Accounts
Authorised:
10,000 Equity share capital of ₹100 each 10,00,000
Issued and Subscribed
8,000 Equity share of ₹100 8,00,000
Preference share capital
Authorised
Issued & subscribed
Total 13,00,000
Capital reserve [100 x (90 – 40)] 5,000
Less : Amount used to pay dividend (30,255) 1,69,745
Surplus (Profit & Loss A/c) 22,245
Add: Balance from previous year 41,500
Transfer from General Reserve
(94,000 – 41,500) – 22,245 30,255
Appropriations
Dividend declared (94,000) -
Profit (Loss) carried forward to Balance Sheet 0 0
- 132 -
Total 1,74,745
3. Long-term borrowings
Secured
Total 2,00,000
4. Trade Payables 42,000
5. Other current liabilities
Wages and Salaries Outstanding 1,280
Interest on debentures 12,000 13,280
Dividend payable
Preference Dividend (5,00,000 x 6%) 30,000
Equity Dividend (8,00,000 x 8%) 64,000
Total 1,07,280
6. Tangible assets
Freehold land & Buildings 8,50,000
Less: Depreciation (17,000) 8,33,000
Furniture and Fittings 86,300
Less: Depreciation (4,315) 81,985
Total 9,14,985
7. Inventories
Wines, Cigarettes & Cigars, etc. 22,500
Foodstuffs 16,400
Total 38,900
Cash at bank 76,380
Cash in hand 2,200
Rent received Total 78,580
9. Other expenses
Preliminary Expenses 8,000
Total 8,000
10. Revenue from operations
Sale of products
Wines, Cigarettes, Cigars etc. 68,400
Food 57,600 1,26,000
Sale of services
Room Rent 48,000
Billiards 5,700
Miscellaneous Receipts 2,800
Transfer fee 700 57,200
- 133 -
Total 1,83,200
11. Cost of materials consumed
Opening Inventory 5,260
Add: Purchases during the year 36,200
Less: Closing Inventory (16,400) 25,060
Total 25,060
12. Purchases of Inventory-in-Trade
Wines, Cigarettes etc. 45,800
Total 45,800
13. Changes in inventories of finished goods work-in-progress
and Inventory-in-Trade
Wines, Cigarettes etc.
Opening Inventory 12,800
Less: Closing Inventory (22,500) (9,700)
Total (9,700)
14. Employee benefits expense
Wages and Salaries 28,300
Add: Wages and Salaries Outstanding 1,280 29,580
Total 29,580
15. Other operating expenses
Rent, Rates and Taxes 8,900
Coal and Firewood 3,290
Laundry 750
Carriage and Cooliage 810
Repairs 4,250
Total 18,000
16. Selling and administrative expenses
Advertising 8,360
Total 14,200
17. Finance costs
Interest on Debentures (2,00,000 x 6%) 12,000
Total
18. Depreciation and amortisation expense
Land and Buildings (8,50,000 x 2%) 17,000
Furniture & Fittings (86,300 x 5%) 4,315 21,315
Total 21,315
Illustration 4
From the following particulars furnished by Pioneer Ltd., prepare the Balance Sheet as at 31st March,
2020 as required by Schedule III of the Companies Act. Give notes at the foot of the Balance Sheet as
may be found necessary –
- 134 -
Debit ₹ Credit₹
Equity Capital (Face value of ₹100) 10,00,000
Calls in Arrears 1,000
Land 2,00,000
Building 3,50,000
Plant and Machinery 5,25,000
Furniture 50,000
Loan from State Financial Corporation 1,50,000
Inventory:
Finished Goods 2,00,000
Raw Materials 50,000 2,50,000
Provision for Taxation 68,000
Advances 42,700
Dividend Payable 60,000
Cash Balance 30,000
Cash at Bank 2,47,000
Loans (Unsecured) 1,21,000
Trade payables (For Goods and Expenses) 2,00,000
18,95,700 18,95,700
The following additional information is also provided:

(1) 2,000 equity shares were issued for consideration other than cash.
(2) Trade receivables of ₹52,000 are due for more than six months.
(3) The cost of assets:
Building ₹4,00,000
Plant and Machinery ₹7,00,000
Furniture ₹62,500
(4) The balance of ₹1,50,000 in the loan account with State Finance Corporation is inclusive of
₹7,500 for interest accrued but not due. The loan is secured by hypothecation of the Plant and
Machinery.
(5) Balance at Bank includes ₹ 2,000 with Perfect Bank Ltd., which is not a Scheduled Bank.
(6) The company had contract for the erection of machinery at ₹1,50,000 which is still incomplete.
Solution:
Pioneer Ltd.
Balance Sheet as on 31st March, 2020
Particulars Note No ₹
a. Share Capital 1 9,99,000
- 135 -

a. Long term borrowings 3 2,63,500
a. Trade payables 2,00,000
b. Other current liabilities 4 67,500
c. Short-term provisions 5 68,000
Total 18,94,700
Assets
a. PPE:
Tangible assets 6 11,25,000
(2) Current assets
a. Inventories 7 2,50,000
b. Trade receivables 8 2,00,000
c. Cash and bank balances 9 2,77,000
d. Short-term provisions 42,700
Total 18,94,700
Note to accounts
Issued & Subscribed & called up 10,00,000
10,000 Equity Shares of ₹100 each
(Of the above 2,000 shares have been issued for consideration other
than cash)
Less: Calls in arrears (1,000)
Total 9,99,000
9,99,000
Surplus (Profit & Loss A/c) 86,700
Total 2,96,700
Secured
Term Loans
Loan from State Financial Corporation (1,50,000 – 7,500) (Secured 1,42,500
by hypothecation of Plant and Machinery)
Unsecured loan 1,21,000
Total 2,63,500
Interest accrued but not due on loans (SFC) 7,500
Dividend payable 60,000
- 136 -
Total 67,500
5. Short-term provisions
Provision for taxation 68,000
Total 68,000
6. Tangible assets
Land 2,00,000
Building 4,00,000

Less: Depreciation (1,75,000) 5,25,000
Furniture and Fixtures 62,500
Less: Depreciation (12,500) 50,000
Total 11,25,000
7. Inventories
Raw Material 50,000
Finished goods 2,00,000
Total 2,50,000
8. Trade receivables
Debts outstanding for a period exceeding six Months 52,000
Other Debts 1,48,000
Total 2,00,000
Cash at bank
with Scheduled Banks 2,45,000
with others (Perfect Bank Ltd.) 2,000 2,47,000
Cash in hand 30,000
Total 2,77,000
Note: Estimated amount of contract remaining to be executed on capital account and not provided for
₹1,50,000. It has been assumed that the company had given this contract for purchase of machinery.
- 137 -
PRACTICE PROBLEMS
Problem 1
State under which head these accounts should be classified in Balance Sheet, as per Schedule III of the
Companies Act, 2013:
(i) Share application money received in excess of issued share capital.
(ii) Share option outstanding account.
(iii) Unpaid matured debenture and interest accrued thereon.
(iv) Uncalled liability on shares and other partly paid investments.
(v) Calls unpaid.
(vi) Money received against share warrant.
Problem 2
On 31st March, 2020 Bose and Sen Ltd. provides to you the following ledger balances after preparing
its Profit and Loss Account for the year ended 31st March, 2020:
Credit Balances
₹
Equity shares capital, fully paid shares of ₹10 each 70,00,000
Loan from State Finance Corporation 10,50,000
(Secured by hypothecation of Plant & Machinery Repayable
within one year ₹2,00,000)
Loans: Unsecured (Long term) 8,47,000
Sundry Creditors for goods &expenses (Payable within 6 months) 14,00,000
Profit &Loss Account 7,00,000
Provision for Taxation 8,16,900
Total 1,33,63,000
Debit Balances:
Calls in arrear 7,000
Land 14,00,000
Buildings 20,50,000
Furniture& Fixture 3,50,000
Inventories: Finished good 14,00,000
Raw Material 3,50,000
Trade Receivables 14,00,000
Advances: Short-term 2,98,900
Cash in hand 2,10,00
Balances with banks 17,29,000
Preliminary Expenses 93,100
Patents &Trademarks 4,00,000
1,33,63,000
- 138 -
The following additional information is also provided in respect of the above balances:
(i) 4,20,000 fully paid equity shares were allotted as consideration for land & buildings.
(ii) Cost of Building ₹28,00,000
(iii) Cost of Plant & Machinery ₹49,00,000
(iv) Cost of Furniture & Fixture ₹4,37,500
(v) Trade receivables for ₹3,80,000 are due for more than 6 months.
(vi) The amount of Balances with Bank includes ₹18,000 with a bank which is not a scheduled
Bank and the deposits of ₹5 lakhs are for a period of 9 months.
(vii) Unsecured loan includes ₹2,00,000 from a Bank and ₹1,00,000 from related parties.
You are not required to give previous year figures. You are required to prepare the Balance Sheet of
the Company as on 31stMarch, 2020 as required under Schedule III of the Companies Act, 2013.
Answer: 1,32,62,900
Problem 3
From the following particulars furnished by Alpha Ltd., prepare the Balance Sheet as on 31st March
2020 as required by Part I, Schedule III of the Companies Act, 2013.
Particulars Debit ₹ Credit ₹
Equity Share Capital (Face value of ₹100 each) 50,00,000
Call in Arrears 5,000
Land & Building 27,50,000
Plant & Machinery 26,25,000
Furniture 2,50,000
Loan from State Financial Corporation 7,50,000
Inventory:
Raw Materials 2,50,000
Finished Goods 10,00,000 12,50,000
Short term Advances 2,13,500
Profit & Loss Account 4,33,500
Cash in Hand 1,50,000
Cash at Bank 12,35,000
Unsecured Loan 6,05,000
Trade payables (for Goods and Expenses) 8,00,000
Loans & advances from related parties 2,00,000
The following additional information is also provided:

(i) 10,000 Equity shares were issued for consideration other than cash.
(ii) Trade receivables of ₹2,60,000 are due for more than 6 months.
(iii) The cost of the Assets were:
- 139 -
(iv) Building ₹30,00,000, Plant & Machinery ₹35,00,000 and Furniture ₹3,12,500
(v) The balance of ₹7,50,000 in the Loan Account with State Finance Corporation is inclusive of
₹37,500 for Interest Accrued but not Due. The loan is secured by hypothecation of Plant &
Machinery.
(vi) Balance at Bank includes ₹10,000 with Omega Bank Ltd., which is not a Scheduled Bank.
(vii) Transfer ₹20,000 to general reserve is proposed by Board of directors.
(viii) Board of directors has declared dividend of 5% on the paid-up capital.
Answer: 94,73,500
Problem 4
Ring Ltd. was registered with a nominal capital of ₹10,00,000 divided into shares of ₹100 each. The
following Trial Balance is extracted from the books on 31st March, 2020:
Particular ₹ Particular ₹
Buildings 5,80,000 Sales 10,40,000
Machinery 2,00,000 Outstanding Expenses 4,000
Closing Stock 1,80,000 Provision for Doubtful 6,000
Loose Tools 46,000 Debts (1-4-2019)
Purchases (Adjusted) 4,20,000 Equity Share Capital 4,00,000
Salaries 1,20,000 General Reserve 80,000
Directors’ Fees 20,000 Profit and Loss A/c 50,000
Rent 52,000 (1-4-2019)
Depreciation 40,000 Creditors 1,84,000
Bad Debts 12,000 Provision for depreciation
Investment 2,40,000 On Building 1,00,000
Interest accrued on Investment 4,000 On Machinery 1,10,000 2,10,000
Debenture Interest 56,000 14% Debentures 4,00,000
Advance Tax 1,20,000 Interest on Debentures 28,000
Sundry expenses 36,000 accrued but not due
Debtors 2,50,000 Interest on Investments 24,000
Bank 60,000 Unclaimed dividend 10,000
24,36,000 24,36,000
You are required to prepare statement of Profit and Loss for the year ending 31st March, 2020 and
Balance sheet as at that date after taking into consideration the following information:
(a) Closing stock is more than opening stock by ₹1,60,000;
(b) Provide to doubtful debts @ 4% on Debtors
(c) Make a provision for income tax @30%.
(d) Depreciation expense included depreciation of ₹16,000 on Building and that of ₹24,000 on
Machinery.
(e) The directors declared a dividend @ 25% and transfer to General Reserve @ 10%.
- 140 -
(f) Bills Discounted but not yet matured ₹ 20,000.

Answer: 14,60,000
Problem 5: RTP NOV 2019 (New Course)

The following balance appeared in the books of Oliva Company Ltd. as on 31-03-2020.
Inventory 01-04-2019 Sales 17,10,000
-Raw material 30,000 Interest 3,900
-Finished goods 46,500 Profit and Loss A/c 48,000
Purchases 76,500 Share Capital 3,15,000
Manufacturing Expenses 12,15,000 Secured Loans:
Salaries and wages 2,70,000 Short-term 4,500
General Charges 40,200 Long-term 25,500
Interim Dividend paid 16,500 Fixed Deposits (unsecured): 21,000
(inclusive of Dividend Short-term
Distribution Tax) Long-term 1,500 4,800
Building 27,000 Trade payables 3,300 3,27,000
Furniture 70,400
Motor Vehicles 10,200
Stores and Spare Parts 40,800
Consumed 45,000
Investments:
Current 4,500
Non-Current 7,500 12,000
Cash in Bank 2,71,100 ________
24,34,200 24,34,200
From the above balance and the following information, prepare the company’s Profit and Loss
Account for the year ended 31st March, 2020 and Company’s Balance Sheet as on that date:
1. Inventory on 31st March,2020 Raw material ₹ 25,800 & finished goods ₹ 60,000.
2. Outstanding Expenses: Manufacturing Expenses ₹ 67,500 & Salaries & Wages ₹ 4,500.
3. Interest accrued on Securities ₹ 300.
4. General Charges prepaid ₹ 2,490.
5. Provide depreciation: Building @ 2% p.a., Machinery @ 10% p.a., Furniture @ 10% p.a. &
Motor Vehicles @ 20% p.a.
6. Current maturity of long term loan is ₹ 1,000.
7. The Taxation provision of 40% on net profit is considered.
Answer: 8,14,350
- 141 -

Shweta Ltd. has the Authorised Capital of ₹ 15,00,000 consisting of 6,000 6% Preference shares of ₹
100 each and 90,000 equity Shares of ₹10 each. The following was the Trial Balance of the Company
as on 31st March, 2020
Particulars Dr. Cr.
Investment in Shares at cost 1,50,000
Purchases 14,71,500
Selling Expenses 2,37,300
Inventory as at the beginning of the year 4,35,600
Salaries and Wages 1,56,000
Cash on Hand 36,000
Interim Preference dividend for the half year to 30th September 18,000
Bills Receivable 1,24,500
Interest on Bank overdraft 29,400
Interest on Debentures upto 30th Sep (1st half year) 11,250
Debtors 1,50,300
Freehold property at cost 10,50,000
Furniture at cost less depreciation of ₹ 45,000 1,05,000
6% Preference share capital 6,00,000
Equity share capital fully paid up 6,00,000
5% mortgage debentures secured on Freehold properties 4,50,000
Income tax paid in advance for the current year 30,000
Dividends 12,750
Profit and Loss A/c (opening balance) 85,500
Sales (Net) 20,11,050
Bank overdraft secured by hypothecation of stocks and receivables 4,50,000
Technical knowhow fees at cost paid during the year 4,50,000
Audit fees 18,000
Total 44,72,850 44,72,850
You are required to prepare the Profit and Loss Statement for the year ended 31st March, 2020 and the
Balance Sheet as on 31st March, 2020 as per Schedule III of the Companies Act, 2013 after taking into
account the following –
1. Closing Stock was valued at ₹ 4,27,500.
- 142 -
2. Purchases include ₹15,000 worth of goods and articles distributed among valued customers.
3. Salaries and Wages include ₹6,000 being Wages incurred for installation of Electrical Fittings
which were recorded under "Furniture".
4. Bills Receivable include ₹ 4,500 being dishonoured bills. 50% of which had been considered
irrecoverable.
5. Bills Receivable of ₹ 6,000 maturing after 31st March were discounted.
6. Depreciation on Furniture to be charged at 10% on Written Down Value.
7. Investment in shares is to be treated as non-current investments.
8. Interest on Debentures for the half year ending on 31st March was due on that date.
9. Provide Provision for taxation ₹12,000.
10. Technical Knowhow Fees is to be written off over a period of 10 years.
11. Salaries and Wages include ₹ 30,000 being Director's Remuneration.
12. Trade receivables include ₹ 18,000 due for more than six months.
Answer: 24,58,950

Prepare a Balance Sheet as at 31st March 2020, as per Schedule III of the Companies Act, 2013, from
the following information of Mehar Ltd.
Term Loans (Secured) 40,00,000 Investments (Non- current) 9,00,000
Trade payables 45,80,000 Profit for the year 32,00,000
Other advances 14,88,000 Trade receivables 49,00,000
Cash and Bank Balances 38,40,000 Miscellaneous Expenses 2,32,000
Staff Advances 2,20,000 Loan from other parties 8,00,000
Provision for Taxation 10,20,000 Provision for Doubtful 80,000
Debts
Loose Tools 2,00,000 Stores 16,00,000
General Reserve 62,00,000 Fixed Assets (WDV) 2,26,00,000
Capital Work-in- progress 8,00,000 Finished Goods 30,00,000
Additional Information: -
1. Share Capital consist of-
(a) 1,20,000 Equity Shares of ₹ 100 each fully paid up.
(b) 40,000, 10% Redeemable Preference Shares of ₹ 100 each fully paid up.
2. The company declared dividend @ 5% of equity share capital. The dividend distribution tax rate is
17.472%.
(15% CDT, surcharge 12%, HEC 4%)
3. Depreciate Assets by ₹20,00,000.
Answer: 3,74,68,000
- 143 -

Kapil Ltd. has authorized capital of ₹ 50 lakhs divided into 5,00,000 equity shares of ₹ 10 each. Their
books show the following balances as on 31st March, 2020:
₹ ₹
Inventory 1.4.2019 6,65,000 Bank Current Account 20,000
Discounts & Rebates allowed 30,000 Cash in hand 8,000
Carriage Inwards 57,500 Interest (bank overdraft) 1,11,000
Patterns 3,75,000 Calls in Arrear @ ₹2 per share 10,000
Rate, Taxes and Insurance 55,000 Equity share capital 20,00,000
Furniture & Fixtures 1,50,000 (2,00,000 shares of ₹ 10 each)
Purchases 12,32,500 Bank Overdraft 12,67,000
Wages 13,68,000 Trade Payables (for goods) 2,40,500
Freehold Land 16,25,000 Sales 36,17,000
Plant & Machinery 7,50,000 Rent (Cr.) 30,000
Engineering Tools 1,50,000 Transfer fees received 6,500
Trade Receivables 4,00,500 Profit & Loss A/c (Cr.) 67,000
Advertisement 15,000 Repairs to Building 56,500
Commission & Brokerage 67,500 Bad debts 25,500
Business Expenses 56,000
The inventory (valued at cost or market value, which is lower) as on 31st March, 2020 was ₹ 7,08,000.
Outstanding liabilities for wages ₹ 25,000 and business expenses ₹ 36,000. Dividend declared @ 12%
on paid-up capital and it was decided to transfer to reserve @ 2.5% of profits.
Charge depreciation on closing written down amount of Plant & Machinery @ 5%, Engineering Tools
@ 20%; Patterns @ 10%; and Furniture & Fixtures @10%. Provide 25,000 as doubtful debts after
writing off ₹16,000 as bad debts. Provide for income tax @ 30%. Corporate Dividend Tax Rate @
17.472% (wherein Base Rate is 15%).
You are required to prepare Statement of Profit & Loss for the year ended 31st March, 2020 and
Balance Sheet as on that date.
Answer: 40,25,500
- 144 -
SOLUTIONS TO PRACTICE
PROBLEMS
Solution 1:
(i) Current Liabilities/ Other Current Liabilities
(ii) Shareholders' Fund / Reserve & Surplus
(iii) Current liabilities/Other Current Liabilities
(iv) Contingent Liabilities and Commitments
(v) Shareholders' Fund / Share Capital
(vi) Shareholders' Fund / Money received against share warrants
Solution 2:
Bose and Sen Ltd.
Particulars Notes Figures at the end of current
reporting period (₹)
1 Shareholders’ fund
a. Share capital 1 69,93,000
2 Non-current liabilities
a. Long-term borrowings 3 16,97,000
3 Current liabilities
a. Trade Payables 14,00,000
b. Other current liabilities 4 2,00,000
c. Short-term provisions 5 8,16,900
Total 1,32,62,900
Assets
a. PPE
Intangible assets (Patents & Trade Marks) 4,00,000
2 Current assets
d. Short-term loans and advances 2,98,900
Total 1,32,62,900
- 145 -
Notes accounts
Issued & Subscribed & called up 70,00,000
7,00,000 Equity Shares of ₹100 each (Of the above
4,20,000 shares have been issued for consideration
other than cash)
Less: Calls in arrears (7,000) 69,93,000
Total 69,93,000
Surplus (Profit & Loss A/c) 7,00,000
Less: Preliminary expenses (93,100) 6,06,900
Total 21,56,000
Secured
Term Loans
Loan from State Financial Corporation (10,50,000 – 8,50,000
2,00,000)
hypothecation of Plant and Machinery)
Unsecured
Bank Loan 2,00,000
Loan from related parties 1,00,000
Others 5,47,000 8,47,000
Total 16,97,000
Current maturities of long-term debt- 2,00,000
loan Instalment repayable within one year
5. Short-term provisions
Provision for taxation 8,16,900
Total 8,16,900
6. Tangible assets
Land 14,00,000
Building 28,00,000

Furniture & Fittings 4,37,500
Total 74,75,000
7. Inventories
- 146 -
Raw Material 3,50,000

17,50,000
8. Trade receivables
Debts outstanding for a period exceeding six 3,80,000
months
Other Debts 10,20,000
Total 14,00,000
Cash at bank with Scheduled Banks 12,11,000
with others 18,000 12,29,00
Other bank balances 5,00,000
Bank deposits for period of 9 months 5,00,000
Total 19,39,000
Solution 3:
Alpha Ltd.
1 Equity and Liabilities
Shareholders' funds
a. Share capital 1 49,95,000
2 Non-current liabilities
Long term borrowings 3 13,17,500
3 Current Liabilities
a. Trade Payables 8,00,000
b. Other current liabilities 4 3,38,093
c. Short-term provisions 5 6,40,000
d. Short-term borrowings 2,00,000
Total 94,73,500
PPE
2 Current assets
d. Short-term loans and advances 2,13,500
Total 94,73,500
- 147 -
Notes to accounts
₹
1 Share Capital
Issued & subscribed & called up
50,000 Equity Shares of ₹ 100 each
(of the above 10,000 shares have been issued for consideration other than
cash) 50,00,000
Less: Calls in arrears (5,000) 49,95,000
Total 49,95,000
2 Reserves and Surplus
Add: current year transfer 20,000
Profit & Loss balance
Profit for the year 4,33,500
Less: Appropriations:
Transfer to General reserve (20,000)
Dividend Payable (Refer WN) (2,49,750)
DDT on dividend (Refer WN) (50,843) 1,12,907
Total 11,82,907
3 Long-term borrowings
Secured Term Loan
State Financial Corporation Loan (7,50,000-37,500)
(Secured by hypothecation of Plant and Machinery) 7,12,500
Unsecured Loan 6,05,000
Total 13,17,500
4 Other current liabilities
Interest accrued but not due on loans (SFC) 37,500
Dividend (Refer W N) 2,49,750
DDT on dividend (Refer W N) 50,843 3,00,593
3,38,093
5 Short-term provisions
Provision for taxation 6,40,000
6 Tangible assets
Land and Building 30,00,000
Furniture & Fittings 3,12,500
Total 56,25,000
7 Inventories
Raw Materials 2,50,000
- 148 -

Total 12,50,000
8 Trade receivables
Outstanding for a period exceeding six months 2,60,000
Other Amounts 7,40,000
Total 10,00,000
9 Cash and bank balance
Cash at bank
With scheduled Banks 12,50,000
With others (Omega Bank Ltd.) 10,000 12,35,000
Total 13,85,000
Working Note:
Particulars ₹
Dividend distributed by Alpha Ltd. (5% of 2,49,750
49,95,000)
Add: Increase for the purpose of grossing up of 44,074
dividend
Gross dividend 2,93,824

Dividend distribution tax @ 17.472% 51,337
Solution 4:
Ring Ltd.
Profit and Loss Statement for the year ended 31st March, 2020
Particulars Note No. (₹ in lacs)
I Revenue from operations 10,40,000
II Other income (interest on investment) 24,000
III Total Revenue [I + II] 10,64,000
IV Expenses:
Cost of purchase [4,20,000+ 1,60,000] 5,80,00
Changes in inventories [20,000-1,80,000] (1,60,000)
Employee Benefits Expense 1,20,000
Finance Costs (debenture interest) 56,000
Depreciation and Amortisation Expenses 40,000
Other Expenses 8 1,24,000
Total Expenses 7,60,000
V Profit before Tax (III-IV) 3,04,000
VI Tax Expenses @ 30% (91,200)
- 149 -
VII Profit for the period 2,12,800
Balance Sheet of Ring Ltd. as at 31ST March, 2020

Particulars Note (₹in 000)
No.
I Equity and Liabilities
1. Shareholders' funds
2. Non-Current liabilities
a Long term borrowings (14% debentures) 4,00,000
a. Trade Payables (Sundry Creditors) 1,84,000
b. other Current Liability 3 1,62,556
c. Short-Term Provisions 4 91,200
Total 14,60,000
II Assets
1. Non-current assets
a. PPE (Property, Plant & Equipment)
i Tangible assets 5 5,70,000
ii Non-current Investments 2,40,000
2. Current assets
c. Cash and bank balances 60,000
d. Short Term Loans and Advances (Advance Payment 1,20,000

of Tax)
e. Other Current Assets (Interest accrued on 4,000
investments)
Total 14,60,000
Note: There is a Contingent Liability for bills discounted but not yet matured amounting ₹ 20,000.
Notes to Accounts:
Authorised:
10,000 Equity share capital of ₹100 each 10,00,000
Issued and Subscribed
4,000 Equity share of ₹100 4,00,000
Subscribed Capital and fully paid

4,000 Equity share of ₹100 4,00,000
4,00,000
- 150 -

General reserve [₹80,000 + ₹21,280] 1,01,280
Balance of Statement of Profit & Loss Account
Opening Balance 50,0000
Add: Profit for the period 2,12,800
Appropriations 2,62,800
Transfer to General Reserve @ 10% (21,280)
Equity Divided payable [25% of ₹4,00,000] (1,00,000)
Dividend Distribution Tax (W. N.1) (20,556) 1,20,964
2,22,244
Unclaimed Dividend 10,000
Outstanding Expenses 4,000
Interest accrued on Debentures 28,000
Equity Dividend payable 1,00,000
Dividend Distribution Tax 20,556 120,556
1,62,556
Provision for Tax 91,200
5. Tangible assets
Buildings 5,80,000
Less: Provision for Depreciation 1,00,000 4,80,000
Plant and Equipment 2,00,000
Less: Provision for Depreciation 1,10,000 90,000
5,70,000
Inventories
Closing Stock of Finished Goods 1,80,000
Loose Tools 46,000 2,26,000
7. Trade Receivables
Sundry Debtors 2,50,000
Less: Provision for Doubtful Debts (10,000) 2,40,000
8. Other expenses
Rent 52,000
Directors’ Fees 20,000
Bad Debts 12,000
Provision for Doubtful Debts (4% of ₹2,50,000 less ₹6,000) 4,000
1,24,000
- 151 -
Working Note
Calculation of Dividend distribution tax
Particulars ₹
(i) Grossing-up of dividend
Dividend distributed by Ring Ltd. 25% of 4,00,000 1,00,000
Add: Increase for the purpose of grossing up of dividend 17,647
[1,00,000 x (15/100-15)]
(ii) Dividend distribution tax @ 17.472% of ₹ 1,17,647 20,556
Solution 5:
Oliva Company Ltd.
Statement of Profit and loss for the year ended 31.03.2020

I Revenue from operation 17,10,000
II Other income (3,900 + 300) 4,200
III Total Revenue (I+II) 17,14,200
IV Expenses:
Cost of material consumed 10 12,64,200
Purchases of inventory-in-trade --
Changes in inventories of finished goods, work-in-progress and 11 (13,500)
inventory-in-Trade
Employee benefit expenses 12 44,700
Finance costs --
Depreciation and amortization expenses 18,240
Other expenses 13 3,51,510
V Profit before exceptional and extraordinary items and tax 49,050
VI Exceptional items --
VII Profit before extraordinary items and tax 49,050
VIII Extraordinary items --
IX Profit before tax 49,050
X Tax expense (40% of 49,050) 19,620
XI Profit/Loss for the period from continuing operations 29,430
Olive Company Ltd.
Balance sheet for the year ended 31.03.2020
(i) Shareholders’ fund
(a) Share Capital 3,15,000
(b) Reserves and Surplus 1 50,430
(1) Non-current liabilities
- 152 -
(a) Long-term borrowings 2 23,300

(2) Current Liabilities
(a) Short-term borrowing 3 6,000
(b) Trade payables 3,27,000
(c) Other current liability 4 73,000
(d) Short term provision 5 19,620
8,14,350
II ASSETS
(1) Non-current assets
(a) Property, Plant & equipment
(i) Tangible assets 6 2,04,160
(b) Non-current investments 7,500
(2) Current assets
(a) Current investments 4,500
(b) Inventories 7 85,800
(c) Trade receivables 2,38,500
(d) Cash and cash equivalents 2,71,100
(e) Short-term loans and advances 8 2,490
(f) Other current assets 9 300
8,14,350
Notes to accounts
No. Particulars Amount Amount

1. Reserve & Surplus
Profit & Loss Account: Balance b/f 48,000
Net Profit for the year 29,430
Less: Interim Dividend including DDT (27,000) 50,430
2. Long term borrowings
Secured loans (21,000 less current maturities 1,000) 20,000
Fixed Deposits: Unsecured 3,300 23,300
3. Short term borrowings
Secured loans 4,500
Fixed Deposits - Unsecured 1,500 6,000
Expenses Payable (67,500 + 4,500) 72,000
Current maturities of long term borrowings 1,000 73,000
5. Short term provisions
Provision for Income tax 19,620
6. Tangible Assets
Building 1,01,000
Less: Depreciation @ 2% (2,020) 98,980
- 153 -
Plant & Machinery 70,400

Furniture 10,200
Motor vehicles 40,800
Less: Depreciation @ 20% (8,160) 32,640 2,04,160
7. Inventory:
Raw material 25,800
Finished goods 60,000 85,800
8. Short term loans & Advances
General accrued 2,490
9. Other Current Assets:
Interest accrued 300
10. Cost of material consumed
Opening inventory of raw Material & Stores 30,000
Add: Purchases 12,15,000
Stores & Spare parts consumed (45,000) 12,90,000
Less: Closing inventory (25,800) 12,64,200
11. Changes in inventory of Finished Goods & WIP
Closing Inventory of Finished Goods 60,000
Less: Opening Inventory of Finished Goods 46,500 13,500
12. Employee Benefit expenses
Salary & Wages (40,200 + 4,500) 44,700
13. Other Expenses
Manufacturing Expenses 3,37,500
(2,70,000 + 67,500)
General Charges (16,500 – 2,490) 14,010 3,51,510
Solution 6:
Statement of Profit and Loss of Shweta Ltd. for the year ended 31st March, 2020
Particulars Note ₹
I Revenue from Operations 20,11,050
II Other income (Divided income) 12,750
III Total Revenue (I &+ II) 20,23,800
IV Expenses:
(a) Purchases (14,71,500 – Advertisement Expenses 15,000) 14,56,500
(b) Changes in Inventories of finished Goods / Work in progress 8,100
(4,35,600 – 4,27,500)
(c) Employee Benefits expense 9 1,20,000
(d) Finance costs 10 51,900
(e) Depreciation & Amortization Expenses [10% of (1,05,000 + 6,000)] 11,100
(f) Other Expenses 11 3,47,550
- 154 -
V Profit before exceptional, extraordinary items and tax (III-IV) 28,650

VI Exceptional items -
VII Profit before extra ordinary items and tax (V-IV) 28,650
VIII Extraordinary items -
IX Profit before tax (VII-VIII) 28,650
X Tax expense: 12,000
Current Tax
XI Profit/Loss for the period (after tax) 16,650
Balance sheet of Shweta Ltd. as on 31st March, 2020

Particulars as on 31st March Note
I
(1) Shareholders’ funds:
(a) Share capital 1 12,00,000
(b) Reserves and surplus 2 66,150
(2) Non current liabilities:
Long term borrowings 3 4,50,000
(3) Current liabilities:
(a) Short term borrowings 4 4,50,000
(b) Trade payables 2,63,550
(c) Other current liabilities 5 29,250
Total 24,58,950
II ASSETS
(1) (a) Non-current Assets:
Property, Plant & Equipment
(i) Tangible assets 6 11,49,900
(ii) Intangible assets 7 4,05,000
(b) Non current investments (Shares at cost) 1,50,000
Current Assets:
(b) Trade receivables 8 2,72,550
(c) Cash and Cash equivalents – Cash on hand 36,000
(d) Short term loans and advances –Income 18,000
tax (paid 30,000-Provision 12,000)
Total 24,58,950
Note: There is a Contingent liability for Bills receivable discounted with Bank ₹ 6,000.
Notes to accounts
(₹)
1. Share Capital
Authorized
90,000 Equity Shares of ₹ 10 each 9,00,000
6,000 6% Preference shares of ₹ 100 each 6,00,000 15,00,000
Issued, subscribed & called up
60,000, Equity Shares of ₹ 10 each 6,00,000
- 155 -
6,000 6% Redeemable Preference Shares of 100 each 6,00,000 12,00,000

Balance as on 1st April, 2019 85,500
Add: Surplus for current year 16,650 1,02,150
Less: Preference Dividend 36,000
Balance as on 31st March, 2020 66,150
3. Long Term Borrowings
5% Mortgage Debentures (Secured against Freehold Properties) 4,50,000
4. Short Term Borrowings
Secured Borrowings: Loans Repayable on Demand Overdraft from
Banks (Secured by Hypothecation of Stocks & Receivables) 4,50,000
5. Other Current liabilities
Interest Accrued and due on Borrowings (5% Debentures) 11,250
Unpaid Preference Dividends 18,000 29,250
6. Tangible Fixed assets
Furniture
Furniture at Cost Less depreciation ₹ 45,000 (as given in Trial 1,05,000
Balance)
Add: Depreciation 45,000
Cost of Furniture 1,50,000
Add: Installation charge of Electrical Fittings wrongly included 6,000
under the heading Salaries and Wages
Total Gross block of Furniture A/c 1,56,000
Accumulated Depreciation Account: Opening Balance-given in Trial
Balance 45,000
Depreciation for the year:
On Opening WDV at 10% i.e. (10% x 1,05,000) 10,500
On additional purchase during the year at 10% i.e. (10% x 6,000)
600
Less: Accumulated Depreciation 56,100 99,900
Freehold property (at cost) 10,50,000
11,49,900
7. Intangible Fixed Assets
Technical knowhow 4,50,000
Less: Written off 45,000 4,05,000
Sundry Debtors (a) Debt outstanding for more than six months 18,000
(b) Other Debts (refer Working Note) 1,34,550
Bills Receivable (1,24,500 -4,500) 1,20,000 2,72,550
9. Employee benefit expenses
Amount as per Trial Balance 1,56,000
Less: Wages incurred for installation of electrical fittings to be 6,000
capitalized
Less: Directors’ Remuneration shown separately 30,000
- 156 -
Balance amount 1,20,000

10. Finance Costs
Interest on bank overdraft 29,400
Interest on debentures 22,500 51,900
11. Other Expenses
Payment to the auditors 18,000
Director’s remuneration 30,000
Selling expenses 2,37,300
Technical knowhow written of (4,50,000/10) 45,000
Advertisement (Goods and Articles Distributed) 15,000
Bad Debts (4,500 x50%) 2,250 3,47,550
Working Note:
Calculation of Sundry Debtors-Other Debts `
Sundry Debtors as given in Trial Balance 1,50,300
Add Back: Bills Receivables Dishonoured 4,500
1,54,800
Less: Bad Debts written off – 50% ₹ 4,500 (2,250)
Adjusted Sundry Debtors 1,52,550
Less: Debts due for more than 6 months (as per information given) (18,000)
Total of other Debtors i.e. Debtors outstanding for less than 6 months 1,34,550
Solution 7:
Balance Sheet of Mehar Ltd. as at 31st March, 2020
Note ₹
I EQUITY AND LIABILITIES:
(1) (a) Share Capital 1 1,60,00,000
(b) Reserves and Surplus 2 98,62,447
(2) Non-current Liabilities
Long term Borrowings 40,00,000
Terms Loans (Secured)
(a) Trade Payables - 45,80,000
(b) Other current liabilities 3 20,05,553
(c) Short-term Provisions (Provision for taxation) 10,20,000
Total 3,74,68,000
II ASSETS
(1) Non-current Assets
(a) Fixed Assets:
(i) Tangible Assets 4 2,06,00,000
(ii) Capital WIP 8,00,000
(b) Non- current Investments 9,00,000
(2) Current Assets:
- 157 -
(a) Inventories 5 48,00,000

(b) Trade Receivables 6 48,20,000
(c) Cash and Cash Equivalents 38,40,000
(d) Short-term Loans and Advances 7 17,08,000
Total 3,74,68,000
Notes to accounts
(₹)
1. Share Capital
Authorized, issued, subscribed & called up
1,20,000, Equity Shares of ₹ 100 each 1,20,00,000
40,000 10% Redeemable Preference Shares of 100 each 40,00,000 1,60,00,000
Securities Premium Account 19,00,000
Profit & Loss Balance
Opening balance
Profit for the period 32,00,000
Less: Miscellaneous Expenditure
written off
(2,32,000)
29,68,000
Less: Appropriations
Dividend
(10,00,000)
Dividend distribution tax (2,05,553) 17,62,447 98,62,447
Loan from other parties 8,00,000
Dividend 10,00,000
Dividend Distribution tax [W.N] 2,05,553 20,05,553
4. Tangible assets
Fixed Assets
Opening balance 2,26,00,000
Less: Depreciation (20,00,000)
Closing balance 2,06,00,000
5. Inventories
Finished Goods 30,00,000
Stores 16,00,000
Loose Tools 2,00,000 48,00,000
Less: Provision for Doubtful Debts (80,000) 48,20,000
7. Short term loans & Advances
- 158 -
Staff Advances 2,20,000

Other Advances 14,88,000 17,08,000
Working Note:
Calculation of Dividend distribution tax
(i) Grossing-up of dividend:
₹
Dividend distributed by Mehar Ltd.
Equity shares dividend 6,00,000
Preference share dividend 4,00,000 10,00,000
Add: Increase for the purpose of grossing up of dividend
10,00,000 x [15 /(100-15)] 1,76,470
(ii) Dividend distribution tax @ 17.472% 2,05,553

Solution 8:
Kapil Ltd. : Balance Sheet as at 31st March, 2020
Particulars Note. No. (₹)
(1) Shareholders' Funds
(b) Reserves and Surplus 2 59,114
(a) Trade Payables 2,40,500
(b) Other Current Liabilities 3 13,28,000
(c) Short-Term Provisions 4 4,07,886
Total 40,25,500
II ASSETS
(1) Non-Current Assets
(a) Fixed Assets
(i) Tangible Assets 5 29,30,000
(2) Current Assets
(b) Trade Receivables 6 3,59,500
(c) Cash and Cash Equivalents 7 28,000
Total 40,25,500
Kapil Ltd. : Statement of Profit and Loss for the year ended 31st March, 2020
Particulars Note No. (₹)
I Revenue from Operations 36,17,000
II Other Income 8 36,500
III Total Revenue [I + II] 36,53,500
IV Expenses:
- 159 -
Cost of purchases 12,32,500

Changes in Inventories [6,65,000-7,08,000] (43,000)
Employee Benefits Expenses 9 13,93,000
Finance Costs 10 1,11,000
Depreciation and Amortization Expenses 1,20,000
Other Expenses 11 4,40,000
V Profit before Tax (III-IV) 4,00,000
VI Tax Expenses @ 30% (1,20,000)
VII Profit for the period 2,80,000
Notes to Accounts:
1. Share Capital
Authorised Capital
5,00,000 Equity Shares of ₹ 10 each 50,00,000
Issued Capital
2,00,000 Equity Shares of ₹ 10 each 20.00.000
Subscribed Capital and fully paid
1,95,000 Equity Shares of ₹10 each 19,50,000
Subscribed Capital but not fully paid
5,000 Equity Shares of ₹10 each ₹ 8 paid 40,000
(Call unpaid ₹10,000) 19,90,000

Surplus i.e. Balance in Statement of Profit & Loss:
Opening Balance 67,000
Add: Profit for the period 2,80,000
Less: Transfer to Reserve @ 2.5% (7,000)
Less: Equity Dividend [12% of (20,00,000-10,000)] (2,38,800)
Less: Corporate Dividend Tax (Working note) (49,086) 52,114
59,114
3. Other Current Liabilities
Bank Overdraft 12,67,000
Outstanding Expenses [25,000+36,000] 61,000
13,28,000
4. Short-term Provision
Provision for Tax 1,20,000
Equity Dividend payable 2,38,800
Corporate Dividend Tax 49,086
4,07,886
5. Tangible Assets
Particulars Value given Depreciation Depreciation Written down
- 160 -
(₹) rate Charged value at

(₹) the end
(₹)
Land 16,25,000 - 16,25,000
Plant & Machinery 7,50,000 5% 37,500 7,12,500
Furniture & Fixtures 1,50,000 10% 15,000 1,35,000
Patterns 3,75,000 10% 37,500 3,37,500
Engineering Tools 1,50,000 20% 30,000 1,20,000
30,50,000 1,20,000 29,30,000
6. Trade Receivable
Trade receivables (4,00,500-16,000) 3,84,500
Less: Provision for doubtful debts (25,000)
3,59,500
7. Cash & Cash Equivalent

Cash Balance 8,000
Bank Balance in current A/c 20,000
28,000
8. Other Income
Miscellaneous Income (Transfer fees) 6,500
Rental Income 30,000
36,500
9. Employee benefits expenses

Wages 13,68,000
Add: Outstanding wages 25,000
13,93,000
10. Finance Cost

Interest on Bank overdraft 1,11,000
11. Other Expenses

Carriage Inward 57,500
Discount & Rebates 30,000
Advertisement 15,000
Rate, Taxes and Insurance 55,000
Repairs to Buildings 56,500
Commission & Brokerage 67,500
Miscellaneous Expenses [56,000+36,000] (Business Expenses) 92,000
Bad Debts [25,500+16,000] 41,500
Provision for Doubtful Debts 25,000
4,40,000
- 161 -
Working Note
Calculation of grossing-up of dividend:
Particulars ₹
Dividend distributed by Company 2,38,800
Add: Increase for the purpose of grossing up of dividend 42,141
2,38,800 x [15/(100-15)]
Dividend distribution tax @ 17.472% 49,086
- 162 -
MAY-2019 (OLD COURSE)
Question 2 (16 Marks)
Following is the trial balance of ABC Limited as on 31.3.2020.
(Figures in ₹ 000)
Particulars Debit Particulars Credit
Land at cost 800 Equity capital (shares of ₹ 10 each) 500
Calls in arrears 5 10% Debentures 300
Cash in hand 2 General reserve 150
Plant & Machinery at cost 824 Profit & Loss A/c (F.Y. 2018-19) 75
Trade receivables 120 Securities premium 40
Inventories (31-3-20) 96 Sales 1200
Cash at Bank 28 Trade payables 30
Adjusted Purchases 400 Provision for depreciation 150
Factory expenses 80 Suspense Account 10
Administrative expenses 45
Selling expenses 25
2455 2455
* It has been considered that the fair value of the investments on the date of transfer is same as the
market value on the balance sheet date.
(i) The authorized share capital of the company is 80,000 shares of ₹ 10 each.
(ii) The company revalued the land at ₹ 9,60,000.
(iii)Equity capital includes shares of ₹ 50,000 issued for consideration other than cash.
(iv) Suspense account of ₹ 10,000 represent cash received from the sale of some of the machinery on
1.4.2019. The cost of the machinery was ₹ 24,000 and the accumulated depreciation thereon being
₹20,000.
(v) Depreciation is to be provided on plant and machinery at 10% on cost.
(vi) Balance at bank includes ₹ 5,000 with Abhay Bank Ltd., which is not a Scheduled Bank.
- 163 -
You are required to prepare ABC Limited's Balance Sheet as on 31.3.2020 and Statement of Profit and
Loss with notes to accounts for the year ended 31.3.2020 as per Schedule Ill. Ignore previous year's
figures & taxation.
Answer:
ABC Limited
Particulars Note No. (₹ in ‘000)
A. Equity and Liabilities
1. Shareholder’s funds
1 495.00
(a) Share Capital
2 971.00
(b) Reserves and Surplus
2. Non-Current Liabilities 3 300.00
(a) Long Term Borrowings
(a) Trade Payables 30.00
1,796.00
Total
B. Assets
1. Non-Current Assets
(a) Property, Plant and Equipment 1,550.00
4
Tangible Assets – Machinery
2. Current Assets
96.00
(a) Inventories
120.00
(b) Trade Receivables
5 30.00
(c) Cash and Cash equivalents
1,796.00
Total
Particulars Note No. (₹ in ‘000)
I. Revenue from Operations 1200.00
II. Other Income 6 6.00
III. Total Revenue 1,206.00
IV. Expenses:
Purchases 400.00
Finance Costs 7 30.00
Depreciation (10% of 800) 80.00
Other expenses 8 150.00
Total Expenses 660.00
V. Profit / (Loss) for the period (III – IV) 546.00
- 164 -
Notes to Accounts
Particulars (₹ in ‘000)
1. Share Capital
Equity Share Capital
Authorized
80,000 Shares of ₹ 10/- each 800
Issued, Subscribed and Called-up
50,000 Shares of ₹ 10/- each 500
(Out of the above 5,000 shares have been issued for consideration other
than cash)
Less: Calls in arrears (5) 495
Securities Premium Account 40
General Reserve 150
Profit & Loss Balance
Opening Balance 75
Add: Profit for the period 546 621
Revaluation Reserve ₹ (960 – 800) 160
971
3. Long-Term Borrowings
10% Debentures 300
4. Tangible Assets
Land
Opening Balance 800
Add: Revaluation adjustment 160
Closing Balance 960
Plant and Machinery
Opening Balance 824
Less: Disposed off (24)
800
Less :Depreciation ₹ (150-20+80) (210)
Closing Balance 590
Total 1550
Cash at bank
With scheduled bank 23
With others (Abhay bank limited) 5
Cash in hand 2 30
6. Other income
Profit on a sale of machinery
- 165 -
Sale value of machinery 10

Less: book value of machinery (4) 6
7. Finance cost
Debentures interest 30
8. Other expenses:
Factory expenses 80
Selling expenses 25
Administrative expenses 45 150
MAY 2018 (OLD COURSE)

Question 2 (16 Marks)
On 31st March, 2020, SR Ltd. provides the following ledger balances after preparing its Profit &
Loss Account for the year ended 31st March, 2020.
Particulars Amount (₹)
Debit Credit
Equity Share Capital, fully paid shares of ₹ 50 each 80,00,000
Calls in arrear 15,000
Land 25,00,000
Buildings 30,00,000
Furniture & Fixture 13,00,000
Profit & Loss Account 5,80,000
Loan from Public Finance Corporation (Secured by 26,30,000
Hypothecation of Land)
Other Long-Term Loans 22,50,000
Short Term Borrowings 4,60,000
Inventories: Finished goods 45,00,000
Raw materials 13,00,000
Trade Receivables 17,50,000
Advances: Short Term 3,75,000
Unpaid Dividend 70,000
Cash in Hand 70,000
Balances with Banks 4,14,000
Total 1,76,24,000 1,76,24,000
- 166 -
The following additional information was also provided in respect of the above balances:
(1) 50,000 fully paid equity shares were allotted as consideration for land.
(2) The cost of assets were:
Building ₹ 32,00,000
Plant and Machinery
₹ 30,00,000
Furniture and Fixture
₹ 16,50,000
(3) Trade Receivables for ₹ 4,86,000 due for more than 6 months.
(4) Balances with banks include ₹ 56,000, the Naya bank, which is not a scheduled bank.
(5) Loan from Public Finance Corporation repayable after 3 years.
(6) The balance of ₹ 26,30,000 in the loan account with Public Finance Corporation is inclusive
of ₹ 1,34,000 for interest accrued but not due. The loan is secured by hypothecation of land.
(7) Other long-term loans (unsecured) includes:
Loan taken from Nixes Bank ₹ 13,80,000
(Amount repayable within one-year ₹4,80,000)
Loan taken from Directors ₹ 8,50,000
(8) Bills Receivable for ₹ 1,60,000 maturing on 15th June, 2020 has been discounted.
(9) Short term borrowings include
Loan from Naya Bank ₹1,16,000
Loan from Directors
₹ 48,000
(10) Transfer of ₹ 35,000 to general reserve has been proposed by the Board of directors out of
the profits for the year.
(11) Inventory of finished goods includes loose tools costing ₹ 5 lakhs (which do not meet
definition of property, plant & equipment as per AS-10)
You are required to prepare the Balance Sheet of the Company as on March 31 st 2020 as
required under Part - I of Schedule III of the Companies Act, 2013.
You are not required to give previous year figures.
MK GUPTA CA EDUCATION
(A PLACE YOU CAN TRUST)
PH: 9811429230 and 9212011367

Ntermediate: M.K.Gupta Ca Education

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Chapters Page No.

1 ACCOUNTING FOR DIVIDENDS 7

3 BONUS AND RIGHT ISSUE 30

4 PROFIT OR LOSS PRE AND POST INCORPORATION 54

5 REDEMPTION OF PREFERENCE SHARES 86

6 FINANCIAL STATEMENT OF COMPANIES 112

Dividend Distribution Tax :

Dividend Distribution Tax @ 15% of Gross Dividend (d) xxx

Disclosures and Presentation of DDT in Financial Statements

Amount that can be drawn from reserves for 10%

8,00,000 Equity Shares of ₹ 10 each fully paid up 80,00,000

AS PER COMPANIES (DECLARATION AND PAYMENTS OF DIVIDEND) RULES 2014, Maximum

Not Covered in Syllabus– just for reference

Unpaid Dividend Account

Not Covered in Syllabus– just for reference

(a) "Act" means the Companies Act, 2013;

Provided further that:

CALCULATION OF PROFITS: SECTION 198

2. Credit shall not be given for the following sums, namely:—

3. The following sums shall be deducted, namely:—

(c) bonus or commission to any staff

Perquisites not included in managerial remuneration

(a) Children's education allowance: In case of children studying in or outside India, an

2. For Companies having inadequate profits: [Part II of Schedule V]

Where effective capital of the company is Maximum yearly remuneration*

Negative or Less than Rs.5 crores Rs.60 Lakhs

Rs.120 Lakhs plus 0.01% of the effective

COMPUTATION OF EFFECTIVE CAPITAL

The following amounts shall be deducted

MULTIPLE CHOICE QUESTIONS

Answer: (a) Effective capital: 2,71,20,000

Balance Sheet (Extract) as on 31st March, 2020

Problem 3: RTP Nov-2018 (Old Course)

SOLUTIONS TO PRACTICE PROBLEMS

NOV-2019 (NEW COURSE)

Reserve and Surplus:

Computation of effective capital as per Schedule V

ACCOUNTING FOR BONUS ISSUE

Issue of bonus shares

(3) The bonus shares shall not be issued in lieu of dividend.

Paragraph 39 & 40 of schedule I of companies Act, 2013

Restrictions on a bonus issue

Completion of a bonus issue

The companies (share capital and Debentures) Rules 2014

Share Final Call A/c Dr.

Bonus to Shareholders A/c Dr.

2. Upon the sanction and issue of bonus shares

Bonus to Shareholders A/c Dr.

40,000 Equity shares of ₹ 10 each 4,00,000

Bonus to Shareholders A/c Dr. 1,00,000

Extract of Balance Sheet as at 30 th April, 2019 (after bonus issue)

MULTIPLE CHOICE QUESTIONS

3. Which of the following statement is true in case of bonus issue?

4. Bonus issue is also known as

5. The bonus issue is not made unless

Problem 3: Mock Test Nov-2019 (New Course)

Problem 5: RTP May-2019 (Old Course)

SOLUTIONS TO PRACTICE PROBLEMS

June 1 Capital Redemption Reserve A/c Dr. 1,485

Bonus to Shareholders A/c Dr. 4,000

Issued, subscribed and fully paid up share capital