Accounts Volume 2

ca FOUNDATION
ACCOUNTANCY
bOOK 2
CA FOUNDATION - ACCOUNTANCY
Book 2
INDEX
Sr. No PARTICULARS PAGE
1 Average Due Date 1-18
2 Account Current 19-40
3 Final Accounts of Sole Traders 41-141
4 Partnership 142-352
Final Accounts of Not For Profit

5 Organisation
353-402
6 Company Accounts 403-504
Objective questions asked

7 in past exams 505-507
MESSAGE TO
STUDENTS
Dear Students,
Welcome to the world of knowledge – J K Shah Classes.
Accounting is a subject which gives ample opportunity to score marks and brace
you to achieve desired results
It gives us immense pleasure of presenting this thoroughly revised & updated

study material of CA Foundation Accounts. We are sure that this book will
increase student access to a very high-quality learning material, maintaining
highest standards of academic excellence.
The book contains problems selected very carefully from wide ranging sources
which brings into focus all important concepts that you need to understand in
order to fortify yourself for your examinations.
Each and every chapter of this book is divided into six different parts : -
1. Exhaustive Theoretical Explanation

All the chapters are explained conceptually and in an exhaustive manner. Most
students will forget procedural details within a short period of time. On the other
hand, concepts, if well taught, should be remembered for a life-time. Concepts are
especially important in a world where the details are constantly changing.
2. Class work problems
These are the problems which will be solved during classroom teaching. Different
varieties of practical problems are selected to be solved in the class, based on
an intensive research, ICAI study materials , and usage of many reference books.
Students will feel very confident about understanding of the topic during classroom
teaching of these problems.
3. Home work problems

The confidence gained from solving problems in the class is further enhanced by
solving the home work problems. The homework problems are designed in a way
that it tests most of the conceptual understanding of the chapter.
4. Problems from Past ICAI Examinations

This book contains problems of CA Foundation exams from May 2018 & onwards.
Once you solve this section of the chapter, you get hang of types of questions asked
in the exams and are confident enough to face it.
5. Objectives
This section gives all types of objectives and is designed in such a way that each and
every concept learnt in the chapter is used either in form of MCQ's, Fill in the blanks,
True or False, etc. Solving this part in each chapter will be a joyous exercise.
6. Test Paper
Now is the time to test yourself. Finish all the sections of the chapter and then appear
for the test. This is the most crucial exercise to be undertaken by you. Remember,
evaluating oneself is very critical at every stage and hence writing this test paper
will enable you to gain confidence to pass the ICAI exams.
CONCLUSION
Successful and unsuccessful people do not vary greatly in their abilities. They vary
in their desires to reach their potential and at JK Shah classes we make you realise
your potential to make you successful.
We hope you will make the best use of this carefully compiled study material and
achieve success in your endeavors.
We wish you a very happy study time.
DECIDE. COMMIT. SUCCEED
BEST OF LUCK !!!

1
AVERAGE DUE DATE
THEORY SECTION
Average Due Date
When a person is supposed to make various payments to another person on different

dates, then both the persons can mutually decide one average date on which the
entire settlement can be made and there is no loss of interest to either party. Such
average date is called as “Average due date”.
Procedure:
(1) Select one particular date as base date or zero date. (Normally the earliest
due date is taken as zero date).

(2) Count the no of days from the base date up to each subsequent due date.

(3) Determine Product (Product = Amount x Number of days).

(4) Determine Average due date.

Sum of Product
Average due date = Base date + Days
Sum of Amount

Note-1
When different amounts are receivable on different dates as well as different
amounts are payable on different dates, the average due date can be determined
as under:
Difference of Product
Average due date = Base date + Days
Difference of Amount

1
i.e. Find product of receivables & product of payables (as per procedure given above)
but in doing so same base date should be used for receivable & payable (generally
the earliest due date of receivable / payable)
Note-2
If amount is lent in one installment & repayment is done in various equal installments
then
(Sum of days or months or years from date of lending to

Average Due Date is = Date of loan + date of repayment of each instalment)
Number of instalments
Points to remember
1) Average Due Date defined –

Average due date is mean or equated date when single payment is made instead
of several payments on different dates without loss of interest to any of the parties
to transaction.
2) Payment of interest
a. If payment is made on average due date no interest is payable by any parties.
b. If payment is made after average due date then payer has to pay interest for
delay from average due date to date of payment.
c. If payment is made before average due date then receiver has to pay interest
for early payment i.e. from date of payment to average due date
3) Uses of average due date

a. For calculation of interest on drawings
b. Settlement of contra accounts e.g. parties sells goods to each other
c. Settlement of accounts between agent & principal
d. Settlement of transactions when several amount are payable on different

dates or when amount is lent in one installment but repayment is done in
several equal installments.
2
CLASSWORK SECTION
Q.1 A trader having accepted the following several bills falling due on different dates,
now desires to have these bills cancelled and to accept a new bill for the whole
amount payable on the average due date.
Sr. No Date of Bill Amount Duration of the bill

1 1st March 2010 40,000 2 months
2 10th March 2010 30,000 3 months
3 5th April 2010 20,000 60 days
4 20th April 2010 37,500 1 month
5 10th May 2010 50,000 45 days
You are required to find the said average due date. If Rate of interest is 12% p.a.
and if A wants to save ` 887.5 by way of interest then when he should pay the
entire amount.
Q.2 F owes to E the following amounts:

(i) ` 5,000 due on 30th March, 2010
(ii) ` 18,000 due on 2nd April, 2010
(iii)
` 60,000 due on 30th April, 2010
(iv)
` 17,000 due on 10th June, 2010
He desires to make full payment on 30th June, 2010 with interest at 10% per
annum from the average due date. Find out the average due date and the amount
of interest.
Q.3 X has withdrawn the following amounts in anticipation of profits, during the half-
year ended 31st March, 2010.
`
October 10 500
November 20 1,000
December 15 1,500
January 17 800
February 12 2,500
March 30 700
7,000
3
As per partnership deed, interest is to be charged at 10% p.a. on all drawings.

Determine, with the help of average due date method, the amount of interest to be
paid by Mr. X for the period ended 31st March, 2010.
Q.4 Mr. Green and Mr. Red had the following mutual dealings and desire to settle their
account on the average due date :
Purchases by Green from Red : `

6th January, 2010 6,000
2nd February, 2010 2,800
31st March, 2010 2,000
Sales by Green to Red :
17th January, 2010 6,600
9th March, 2010 2,400
20th March, 2010 500
You are asked to ascertain the average due date.
Q.5 Manoj had the following bills receivables and bills payable against Sohan. Calculate
the average due date when the payment can be received or made without any loss
of interest.
Date Bills receivable Tenure Date Bills Payable Tenure

Amount ` (month) Amount ` (month)
01.06.12 3,000 3 29.05.12 2,000 2
05.06.12 2,500 3 03.06.12 3,000 3
09.06.12 6,000 1 09.06.12 6,000 1
12.06.12 1,000 2
20.06.12 1,500 3
15th August, 2012 was a public holiday. However 6th September, 2012 was also
declared as a Sudden holiday.
Q.6 ` 10,000 lent by Dass Bros. to Kumar & Sons on 1st April, 2010 is repayable in 5
equal annual installments commencing on 1st April, 2011. Find the average due
date and calculate interest at 5% per annum, which Dass Bros. will recover from
Kumar & Sons.
Situation 2: If installments were half yearly commencing from 1st April 2011 then
calculate average due date & interest @ 5% p.a.
4
HOMEWORK
HOMEWORK SECTION
SECTION
Q.1 Praveen buys goods on credit on following dates. 10 days credit is allowed to him
after which interest @ 8% p.a. is charged by supplier.
30th July ` 12,000
12th August ` 25,000
27th July ` 18,000
10th September ` 7,000
12th September ` 21,000
It was agreed to be settled on 30th September. Compute interest payable by using
Average Due Date.
Q.2 Two traders X and Y buy goods from one another, each allowing the other one
month’s credit. At the end of 3 months the accounts rendered are as follows:
Goods sold by X to Y Goods sold by Y to X

April 18 60.00 April 23 52.00
May 15 70.00 May 24 50.00
June 17 80.00
Calculate the date upon which the balance should be paid so that no interest is
due either to X or Y.
Q.3 Anand purchased goods from Amirtha, the average due date for payment in cash
is 10.08.2020 and the total amount due is ` 67,500. How much amount should
be paid by Anand to Amirtha, if total payment is made on following dates and
interest is to be considered at the rate of 12% p.a.
(i) On average due date.
(ii) On 25th August, 2020.
(iii) On 30th July, 2020.
Q.4 The following amounts are due to X by Y. Y wants to pay off (a) on 18th March or
(b) on 14th July. Interest rate of 8% p.a. is taken into consideration.
5
Due Dates `
10th January 500
26th January (Republic Day) 1,000
23rd March 3,000
18th August (Sunday) 4,000
Determine the amount to be paid in (a) and in (b).
6
PAST
PAST EXAM
EXAM
Q.1 Mr. Alok owes Mr. Chirag ` 650 on 1st January 2018. From January to March, the
following further transactions took place between Alok and Chirag
January 15 Alok buys goods ` 1,200

February 10 Alok buys goods ` 850
March 7 Alok received Cash loan ` 1,500
Alok pays the whole amount on 31st March, 2018 together with interest @ 6% per
annum.
Calculate the interest by average due date method.
Q.2 Karan purchased goods from Arjun, the average due date for payment in cash is
10.08.2018 and the total amount due is ` 1,75,800. How much amount should be
paid by Karan to Arjun, if total payment is made on following dates and interest is
to be considered at the rate of 15% p.a.
(i) On average due due
(ii) On 28th August, 2018
(iii) On 29th July, 2018
Q.3 Two Traders Yogesh and Yusuf buy goods from one another, each allowing the
others, one month’s credit. At the end of 3 months the accounts rendered are as
follows:
Goods sold by Goods sold by

Yogesh to Yusuf Yusuf to Yogesh
(`) (`)
April,18 12,000 April, 23 10,600
May, 15 14,000 May, 24 10,000
June, 16 16,000

Calculate the date upon which the balance should be paid so that no interest is due
either to Yogesh or Yusuf.
7
Q.4 The following amounts are due to X.by Y.Y wants.to pay on 10th July 2019. Interest
rate of 9% p.a. is taken into consideration.
Due dates `
10th January 750
26th January (Republic Day) 1,200
23rd March 3,300
18th August (Sunday) 4,100
Determine average due date and the amount to be paid on 10th July 2019. Assume
10th January as base date.
8
OBJECTIVE
OBJECTIVE
Q.1 State with reasons whether the following statement is True or False:
1. If payment is made on average due date it results in loss of interest to creditors.

Ans. False – Such payment neither results in loss of interest to creditors or debtors.
2. Average Due Date is median average of several due dates for payments.
Ans. False – Average Due Date is an equated date for several due date of payment.
3. In Calculation of Average Due Date, only due dates of first transaction must be
taken as base date.
Ans. False – Due Date of any transaction can be taken as base date. But it is
preferable to take due date of 1st transaction as base date.
Q.2 Multiple Choice Questions
1. If payment is made on the average due date it results in -

(a) Loss of interest to the creditor
(b) Loss of interest to the debtor
(c) No loss of interest to either of them
2. A mean date is calculated

(a) In connection with the settlement of contra accounts
(b) For a lump sum payment
(c) For several payments on different dates
3. If payment is made after average due date, the party entitled to interest is
(a) Creditor (b) Debtor (c) Bank
4. When due date is a public holiday, then due date will be

(a) Succeeding business day
(b) Preceding business day
(c) Due date will not change and will
9
5. A Bill due on 29th January, 2015 is made payable at 1 month after date, due
date of the instrument will be.
(a) 28th February, 2015
(b) 29th February, 2015
(c) 3rd March, 2015
Answer
Multiple Choice Questions
1. (c) 4. (b)
2. (c) 5. (c)
3. (a)
10
HOMEWORK SOLUTION
Q.1 Calculation of ADD

Let the Base Date be 06/08/
DATE AMOUNT NO OF DAYS FROM BASE DATE PRODUCT

06/08/ 18,000 0 0
09/08/ 12,000 3 36,000
22/08/ 25,000 16 4,00,000
20/09/ 7,000 45 3,15,000
22/09/ 21,000 47 9,87,000
83,000 17,38,000
ADD = Base Date + Total of Product

Total of Amount
17,38,000
06/08/ +
83,000
06/08/ + 20.93 Days
06/08/ + 21 Days
ADD = 27/08/
If amount is to be settled on 30/09/ then interest payable will be:
Interest = 83,000 * 8% * 34 Days = Rs.619/-
11
Q.2 Calculation of Average Due Date:

Goods sold by X to Y
DUE DATE AMOUNT NO OF DAYS FROM BASE DATE PRODUCT

18/05/ 60 0 0
15/06/ 70 28 1,960
17/07/ 80 60 4,800
210 6,760
Goods sold by Y to X

23/05/ 52 5 260
24/06/ 50 37 1,850
102 2,110
ADD = Base Date + Difference of Product

18/05/ +
6,760 – 2,110
210 – 102
18/05/ + 4,650
108
18/05/ +
43 Days
ADD = 30/06/
Q.3 i) If Amount is paid on the Average Due Date:

Principal Amount = 67,500
Add : Interest = Nil
Total Amount to be paid = 67,500
12
ii) If Amount is paid on 25th August 2020

Principal Amount = 67,500
Add : Interest = 67,500 * 12% * 15 Days 333
iii) If Amount is paid on 30th July 2020

Principal Amount 67,500
Less: Interest = 67,500 * 12% * 11 Days (244)
Q.4 Calculation of Average Due Date:

Let the Base Date be 10th January

10th January 500 0 0
25th January 1,000 15 15,000
23rd March 3,000 72 2,16,000
17th August 4,000 219 8,76,000
8,500 11,07,000
ADD = Base Date + Total pf Product

Total of Amount
10th January + 11,07,000

8,500
10th January + 131 Days
ADD = 21st May
a) If amount is paid on 18th March rebate will be allowed for unexpired time
from 18th March to 21st May i.e for 64 Days.
Rebate / Discount = 8,500 * 8% * 64 Days = 119
Amount to be paid = 8,500 – 119 = Rs.8,381/-
13
b) If payment is deferred to 14th July, interest is to be paid from 21st May to

14th July i.e. for 54 Days.
Interest = 8,500 * 8% * 54 Days = 101
Amount ot be paid = 8,500 + 101 = Rs.8,601/-
14
PAST EXAM SOLUTION
Q.1 SOLUTION OF MAY 2018.

Calculation of Average Due Date
Let the Base Date be 1st January 2018
Due Date Amount No of Days From Base Date Product

1st January 650 0 0
15th January 1,200 14 16,800
10th February 850 40 34,000
7th March 1,500 65 97,500
4,200 1,48,300

Total of Amount
1st January + 1,48,300

4,200
1st January + 35.30 Days
1st January + 36 Days
ADD = 6th February 2018
If the amount is paid on 31st March 2018 then Interest to be paid is as follows:
Interest = 4,200 * 6% * 53 Days = Rs.36.59
15
Q.2 SOLUTION OF NOV.2018.

i) If Amount is paid on the Average Due Date:
Principal Amount = 1,75,800
Add : Interest = Nil
Total Amount to be paid = 1,75,800
ii) If Amount is paid on 28th August 2018

Principal Amount = 1,75,800
Add : Interest = 1,75,800 * 15% * 18 Days 1,300

iii) If Amount is paid on 29th July 2018
Principal Amount 1,75,800
Less: Interest = 1,75,800 * 15% * 12 Days (867)
Q.3 SOLUTION OF MAY 2019

Calculation of Average Due Date:
Goods sold by Yogesh to Yusuf
Due Date Amount No of Days From base Date Product

18/05/ 12,000 0 0
15/06/ 14,000 28 3,92,000
16/07/ 16,000 59 9,44,000
42,000 13,36,000
Goods sold by Yusuf to Yogesh
Due Date Amount No of Days From base Date Product

23/05/ 10,600 5 53,000
24/06/ 10,000 37 3,70,000
20,600 4,23,000
16
ADD = Base Date + Difference of Product

18/05/ + 13,36,000 – 4,23,000

42,000 – 20,600
18/05/ + 9,13,000
21,400
18/05/ + 42.66 Days
18/05/ + 43 Days
ADD = 30/06/
Q.4 SOLUTION OF NOV.2019.

a) Calculation of Average Due Date:
Let the Base Date be 10th January
Due Date Amount No of Days From Base Date Product

10th January 750 0 0
25th January 1,200 15 18,000
23rd March 3,300 72 2,37,600
17th August 4,100 219 8,97,900
9,350 11,53,500

Total of Amount
10th January + 11,53,500

9,350
10th January + 123.37 Days
10th January + 124 Days
18/05/ + 43 Days

ADD = 14th May
17
b) If the payment is deferred to 10th July, interest is to be paid from 14th May to
10th July i.e. for 57 Days.
Interest = 9,350 * 9% * 57 Days = Rs.131.41

Total Amount to be paid = 9,350 + 131.41 = 9,481.41
18
2
ACCOUNT CURRENT
THEORY SECTION
Account Current
When there are several transactions between the two parties and the interest
agreement exists, there is always a chance of dispute on account of interest
calculations. In this case, an account current becomes an useful tool to avoid such
disputes. This is a working of interest and settlement amount done by one of the
parties which is sent to another party who can cross verify it.
 Points to remember
1) Account current defined
Account current is a running statement of transaction between parties for
given period of time showing interest calculation in ledger form.
2) Account current is prepared in following cases –

a) When there are frequent transactions between two parties and interest is
charged on outstanding.
b) In consignment transaction when consignee prepares account current if
he settles the account with interest.
c) Transaction between banker and customer
d) In joint venture when no separate books of accounts maintained and each
covertures is entitled to interest on his investments
3) There are three ways of preparing account current –

a) Interest Method
b) Product Method
c) Product of balance Method
19
Method 1: Interest Method
1. It is prepared in a form of ledger account having following 3 additional columns:

(a) Due date (b) Number of days (c) Interest
2. Record the transactions in the account current as if a normal ledger a/c is being
prepared along with their due dates. If the due date is not given separately
then the date of transaction itself will be considered as due date.
3. Count the number of days from each due date upto the date of settlement. In
this calculation, the day of due date should be excluded (however in case of
opening balances it should be included).
4. Calculate interest for each transaction on the basis of no of days so calculated

and determine the amount of the net interest to be charged or provided by
balancing the interest column.
5. Record the entry for charging / providing the interest (Rounded off)
6. Balance the amount column and the balancing figure represents settlement
amount along with interest
RED INK INTEREST

Normally in account current, interest is calculated on amount from due date of a
transaction to closing date of account. But when in an account current, the due
date of a particular transaction falls after the date of settlement (closing date of
account current) then interest from closing date of account current to due date of a
transaction is calculated and written on opposite side of transaction (on last date).
Such interest is red ink interest. Such interest is negative interest as it is written on
opposite side of a transaction and it was written in red ink in earlier periods.
Method 2: Product Method

Under this method, the interest column of method 1 is replaced by product column
(Product = Amount x Number of days). On the settlement date, the product column
should be balanced and the interest on balance of product should be calculated
20
for 1 day. Then record the entry for charging / providing the interest on the opposite
side of the balance of product and determine the settlement amount by balancing
the amount column.
Method of computing no. of days
Backward Method
Forward Method
No. of days calculated from
(Epoque Method)
No. of days are calculated from
due date of transaction to
the opening date of statement
date of closing the account
to due date of transaction

Method 3: Product of balance method (also known as periodic balance method):

This method is used for calculation of settlement amount together with interest in
respect of those transactions where the debit balance and credit balance carries
different rates of interest.
Procedure:
1. Prepare an Account Current in the form of a ledger where the closing balance
can be determined after each transaction (with debit or credit specification).
2. Count the number of days from the date of transaction to the date of next
transaction. In case of last transaction, number of days is counted to close of
the period.
3. Determine debit or credit product (Debit or Credit balance x Number of days).
4. Net interest to be charged or provided is to be determined by comparing interest

on sum of debit product for one day with sum of credit product for one day.
5. Record the entry for providing / charging the interest and determine the
settlement amount.
21
CLASSWORK SECTION
Q.1 Mehta owed ` 3,000 on 1st January, 2010 to Mr. Somesh. The following are the
transactions that took place between them during 2010. It is agreed between the
parties that interest @ 6% p.a. is to be calculated on all transactions.
2010 ` 2010 `
Jan.16 Mr. Somesh sold 2,000 Feb.10 Mr. Somesh pay cash 1,500
goods to
Mr. Mehta
Jan.29 Mr. Somesh 1,500 Mar.13 Mr. Mehta accepts 2,000
Purchased a bill drawn by Mr.
goods from Mr. Somesh
Mehta for one month
They desire to settle their accounts by one single payment on 31st March, 2010.
Ascertain the amount to be paid to the nearest rupee. Ignore days of grace.
Prepare account current by 1) Interest Method 2) Product Method
Q.2 P. Banerjee had the following transactions with P. Sen.
2010 `
Jan. 20 Sold goods to P. Sen 2,800
Mar. 2 Bought goods from P. Sen 1,500
3 Accepted P. Sen’s draft at 1 month due 1,200
April 11 Cash paid to P. Sen 1,000
30 Goods sold to P. Sen due end of May 800
May 11 Bought goods from P. Sen 2,000
June 12 P. Banerjee drew a bill on P. Sen, payable two 2,100
months after date and this was duly accepted
by P. Sen

Make out an Account Current to be rendered by P. Banerjee to P. Sen as at 30th
June, bringing interest into account @ 10% p.a. (use interest method).
22
Q. 3. The following are the transactions that took place between A and B during the half
year ended 30th June 2010:
(a) Balance due to A by B on 1st January 3,000

(b) Goods sold by A to B on January 7 4,400
(c) Goods purchased by A from B on February 16 6,400
(d) Goods returned by A to B on February 18
(out of purchases of February 16) 500
(e) Goods sold by B to A on March 24 3,500
(f) Bill accepted by A at 3 months on April 22 1,500
(g) Cash paid by A to B on April 29 2,500
(h) Goods sold by A to B on May 17 2,700
(i) Goods sold by B to A on June 22 3,000
Draw up an account current to be rendered by B to A charging interest at 20% p.a.

by Product Method.
Q.4 Following transaction took place between A & B for 3 months ending 31.3.2017.
Books of A
Date Particulars Amount

01.01.2017 Opening balance (Dr.) 1,00,000
10.01.2017 Sold goods to B 2,00,000
15.01.2017 Cash received from B 2,00,000
15.02.2017 Sold goods to B 2,00,000
01.03.2017 Cash received from B 1,00,000
You are required to calculate amount of interest to be paid by one party to another
@10% p.a. using epoque method.
Q.5 On 2nd January, 2010 Vinod opened a current account with the Allahabad Bank
Limited; and deposited a sum of ` 30,000. He further deposited the following
amounts:
23
15th January ` 12,000

12th March ` 8,000
10th May ` 16,000
His withdrawals were as follows :
15th February ` 26,000
10th April ` 30,000
15th June ` 14,000
Show Vinod’s A/c in the Ledger of Allahabad Bank. Interest is to be calculated at 5%

on the debit balance and 2% on credit balance. The account is to be prepared as on
30th June 2010.
Calculations may be made correct to the nearest rupee.
Q.6 Roshan has a current account with partnership firm. He has a debit balance of
` 75,000 as on 01.07.2012. He has further deposited following amounts:
Date Amount (`)

14.07.2012 1,38,000
18.08.2012 22,000
He further withdrew following amount:
29.07.2012 97,000
09.09.2012 11,000

Show Roshan account in the books of firm. Interest is calculated @ 10% p.a. on debit
balance & 8% p.a. on credit balance. Prepare account current as on 30.09.2012.
24
HOMEWORK SECTION
Q.1 Following transaction took place between X and Y during the month of April,
2020.
April `
1 Amount payable by X to Y 10,000
7 Received acceptance of X to Y for 2 months 5,000
10 Bills receivable (accepted by Y) on 7.2.2020 is honoured 10,000
on this due date
10 X sold goods to Y (invoice dated 10.5.2020) 15,000
12 X received cheque from Y dated 15.5.2020 7,500
15 Y sold goods to X (invoice dated 15.5.2020) 6,000
20 X returned goods sold by Y on 15.4.2020 1,000
20 Bill accepted by Y is dishonoured on this due date 5,000
You are required to make out an account current by products method to be

rendered by X to Y as on 30.04.2020, taking interest into account @ 10% p.a.
(assume 1 year = 365 days)
Q.2 From the following particulars, make up an Account Current to be rendered by Mr.
X to Mr. Y on 31st December, 2020 taking interest into account at the rate of 18%
p.a.
01.07.2020 Balance owing by Mr. Y ` 600

30.07.2020 Goods sold to Mr. Y (Credit Period allowed 1 month) ` 300
01.08.2020 Good purchased from Mr. Y (Credit Period received ` 200
1 month)
01.09.2020 Cash received from Mr. Y ` 100
01.09.2020 Mr. Y accepted Mr. X’s Draft at 3 Months date ` 400

You are required to prepare the Account Current according to interest
on individual transaction under the Forward and Backward methods.
25
PAST EXAM
Q.1 From the following prepare an account current, as sent by Avinash to Bhuvanesh on
31st March, 2018 by means of products method charging interest @ 5% per annum:
Date Particulars Amount (`)

2018 January 1 Balance due from Bhuvanesh 1,800
January 10 Sold goods to Bhuvanesh 1,500
January 15 Bhuvanesh returned goods 650
February 12 Bhuvanesh paid by cheque 1,000
February 20 Bhuvanesh accepted a bill drawn by 1,500
Avinash for one month
March 11 Sold goods to Bhuvanesh 720
March 14 Received cash from Bhuvanesh 800
Q.2 Ramesh has a Current Account with Partnership firm. He had a debit balance of
` 85,000 as on 01-07-2018. He has further deposited the following amounts:
Date Amount (`)

14-07-2018 1,23,000
18-08-2018 21,000
He withdrew the following amounts:
Date Amount (`)

29-07-2018 92,000
09-09-2018 11,500
Show Ramesh’s A/c in the books of the firm. Interest is to be calculated at 10%
on debit balance and 8% on credit balance. You are required to prepare current
account as on 30th September, 2018 by means of product of balances method.
26
Q.3 From the following particulars prepare an account current, as sent by Mr. AB to
Mr. XY as on 31st October, 2018 by means of product method charging interest @
5% p.a.

Date Particulars (`)

1st July Balance due from XY 1,500
20th August Sold goods to XY 2,500
28th August Goods returned by XY 400
25th September XY paid by cheque 1,600
20th October Received cash from XY 1,000
27
OBJECTIVE
1. In account current red ink interest is treated as negative interest.

Ans. True – Red ink interest is interest calculated on a transaction whose due date
falls beyond closing date of accounts. So extra interest is to be calculated from
closing date to due date which is written on opposite side of transaction in
account current.
2. The interest charged by banker to customer on overdrawn account is called red

ink interest.
Ans. False – Red ink interest is interest calculated on a transaction whose due date
falls beyond closing date of accounts. So extra interest is to be calculated from
closing date to due date which is written on opposite side of transaction in
account current.
3. There are 2 ways of preparing account current.

Ans. False – There are 3 ways of preparing account current i.e. Interest Method,
Product Method and Product of Balance method.
4. In case the due date of a bill falls after the date of closing the account, the
interest from the date of closing to such due date is known as Red-Ink interest.
Ans. True – In case the due date of a bill falls after the date of closing the account,
then no interest is allowed for that. However, interest from the date of closing
to such due date is written in “Red-Ink” in the appropriate side of the ‘Account
current’. This interest is called Red-Ink interest.
28
TEST PAPER
Marks - 50
Q.1 State with reasons whether the following statements are True or False. (14)
1. If payment is made on average due date it results in loss of interest to
creditors.
2. There are 2 ways of preparing account current.
3. The interest charged by banker to customer on overdrawn account is called

red ink interest.
4. Average Due Date is median average of several due dates for payments.
5. In account current red ink interest is treated as negative interest.
6. In Calculation of Average Due Date, only due dates of first transaction must
be taken as base date.
7. In case the due date of a bill falls after the date of closing the account,
the interest from the date of closing to such due date is known as Red-Ink
interest.
Q.2 Sachin drew upon Sehwag several bills of exchange due for payment on different
dates as under:
Date of Bill Amount Tenure of the Bill

01/06/2020 1,200 3 Months
19/06/2020 1,600 2 Months
10/07/2020 2,000 3 Months
27/07/2020 1,500 3 Months
07/08/2020 1,800 1 Month
15/08/2020 2,400 2 Months
Find out average due date on which payment may be made in one single
amount. (8)
29
Q.3 Mr. Virat lends Rs.25,000/- on 1st January 2015. Calculate the average due date &
interest if interest @ 18% p.a. to be charged by Mr. Virat in each of the following
alternative cases:
a). If the amount is repayable in 5 equal annual installments commencing from
1st January 2016.
b). If the amount is repayable in 5 half yearly equal installments commencing

from 1st January 2016.
c). If the amount is repayable in 3 equal installments at an interval of two years

commencing from 30th June 2017.
d). If the amount is repayable in 5 equal installments as follows : 01/01/16,

01/07/16, 01/07/17, 01/01/18 & 01/01/19. (10)

Q.4. From the following transactions, draw up an account current by means of product
method upto 31st December 2018 to be rendered by Rohit to Shikhar & calculate
interest @ 8% p.a.

(Rs.’000)
01/07/18 Balance owing by Shikhar 600
15/07/18 Goods sold to Shikhar 900
21/08/18 Goods bought from Shikhar 700
23/08/18 Cash received from Shikhar 450
23/10/18 Shikhar accepted Rohit’s bill at 3 300
Months
01/11/18 Goods bought from Shikhar 950
03/12/18 Accepted a bill drawn by Shikhar at 3 400
Months. (Due Date of bill is Sunday)
On 31st December 2018, Rohit & Shikhar settled their account after considering
the interest factor. Show the cash amount received or paid by Rohit on that
date.
(10)
30
Q.5 Mr. Shah a customer of HDFC Bank has the following transactions during the
quarter ending 31st March 2020:

01/01/2020 Credit Balance 10,000
12/01/2020 Withdrawal 11,000
15/02/2020 Deposited 10,000
10/03/2020 Withdrawal 10,000
12/03/2020 Deposited an outstation cheque (cleared on 16th 10,000
March)
Show Shah’s Account as at 31st March 2020 in the banks books assuming that
thebank allows interest @ 2% p.a. & charges interest @ 18% p.a.
31
HOMEWORK SOLUTION
Q.1
‘Y’ in Account Current with ‘X’
Date Particulars Amt. Due Date Days Product Date Particulars Amt. Due Date Days Product
07.04.20 To B/P A/c 5,000 10.06.20 - - 01.04.20 By Bal. b/d 10,000 01.04.20 30 3,00,000
10.04.20 To Sales A/c 15,000 10.05.20 - - 12.04.20 By Bank A/c 7,500 15.05.20 - -
20.04.20 To Purchase 1,000 15.05.20 - - 15.04.20 By Purchases A/c 6,000 15.05.20 - -
Return A/c
20.04.20 To B/R A/c 5,000 20.04.20 10 50,000 30.04.20 By Red Ink Product - 10.06.20 41 2,05,000
30.04.20 To Red Ink - 15.05.20 15 1,12,500 30.04.20 By Red Ink Product - 10.05.20 10 1,50,000
Product
30.04.20 To Red Ink - 15.05.20 15 90,000 30.04.20 By Red Ink Product - 15.05.20 15 15,000
Product
30.04.20 To Bal. of Product - - - 4,17,500 30.04.20 By Interest 114.38 - -
30.04.20 By Bal. c/d 2385.62
26,000 6,70,000 26,000 6,70,000
Q.2
‘Y’ in Account Current with Mr. ‘X’ (Forward Method)
01.07.20 To Bal. b/d 600 01.07.20 184 1,10,400 01.08.20 By Purchases A/c 200 01.09.20 121 24,200
30.07.20 To Sales A/c 300 30.08.20 123 36,900 01.09.20 By Cash A/c 100 01.09.20 121 12,100
01.09.20 By B/R A/c 400 04.12.20 27 10,800
31.12.20 To Interest 49.41
31.12.20 By Bal. of Product 1,00,200
31.12.20 By Bal. c/d 249.41
949.41 1,47,300 949.41 1,47,300
32
‘Y’ in Account Current with ‘X’ (Backward Method) [EPOQUE Method]
01.07.20 To Bal. b/d 600 01.07.20 - - 01.08.20 By Purchases A/c 200 01.09.20 63 12,600
30.07.20 To Sales A/c 300 30.08.20 61 18,300 01.09.20 By Cash A/c 100 01.09.20 63 6,300
01.09.20 By B/R A/c 400 04.12.20 157 62,800
31.12.20 To Bal. of Product - - - 1,00,200
31.12.20 By Bal. of Product - - - 36,800
31.12.20 To Interest 49.41 (200 x 184)
31.12.20 By Bal. c/d 249.41

949.41 1,18,500 949.41 1,18,500
33
PAST EXAM SOLUTION
Q.1
Bhuvanesh in Account Current with Avinash
01.01.18 To Bal. b/d 1,800 01.01.18 90 1,62,000 15.01.18 By Sales Return 650 15.01.18 75 48,750
A/c
10.01.18 To Sales A/c 1,500 10.01.18 80 1,20,000 12.02.18 By Bank A/c 1,000 12.02.18 47 47,000
11.03.18 To Sales A/c 720 11.03.18 20 14,400 20.02.18 By B/R A/c 1,500 23.03.18 8 12,000
14.03.18 By Cash A/c 800 14.03.18 17 13,600
31.03.18 To Interest 24 - - -
31.03.18 By Bal. of Product - - - 1,75,050
31.03.18 By Bal. c/d 94 - - -
4,044 2,96,400 4,044 2,96,400
Interest = 1,75,050 x 5% x 1D = 23.98 = 24
Q.2
Ramesh in Current Account with Partnership Firm (as on 30.09.18)
Date Particulars Dr. Cr. Balance Dr. / Cr. Days Dr. Product Cr. Product
01.07.18 To Bal. b/d 85,000 Dr. 13 11,05,000
14.07.18 By Cash A/c 1,23,000 38,000 Cr. 15 5,70,000
29.07.18 To Cash A/c 92,000 54,000 Dr. 20 10,80,000
18.08.18 By Cash A/c 21,000 33,000 Dr. 22 7,26,000
09.09.18 To Cash A/c 11,500 44,500 Dr. 22 9,79,000
30.09.18 To Interest A/c 941 45,441 Dr.
38,90,000 5,70,000
34
Interest Calculation:
Dr. Product = 38,90,000 x 10% x 1D = 1,066
Cr. Product = 5,70,000 x 8% x 1D = (125)
Net Interest to be Debited 941
Q.3
Mr. XY in Account Current with Mr. AB
01.07.18 To Bal. b/d 1,500 01.07.18 123 1,84,500 28.08.18 By Sales Return A/c 400 28.08.18 64 25,600
20.08.18 To Sales A/c 2,500 20.08.18 72 1,80,000 25.09.18 By Bank A/c 1,600 25.09.18 36 57,600
20.10.18 By Cash A/c 1,000 20.10.18 11 11,000
31.10.18 To Interest 37 - - -
31.10.18 By Bal. of Product - - - 2,70,300
31.10.18 By Bal. c/d 1,037 - - -
4,037 3,64,500 4,037 3,64,500
Interest = 2,70,300 x 5% x 1D = 37.03 = 37
35
TEST PAPER SOLUTION
Q.1 State with reasons whether the following statements are True or False.
1. False - Such payment neither results in loss of interest to creditors or debtors.
2. FALSE - There are 3 ways of preparing account current i.e. Interest Method,
Product Method & Product of Balance Method.
3. False - Red Ink interest is interest calculated on a transaction whose due date
falls beyond closing date of accounts. So extra interest is to be calculated
from closing date to due date which is written on opposite side of transaction
in account current.
4. False - Average Due Date is an equated date for several due date of payment.
5. True - Red Ink interest is interest calculated on a transaction whose due date
falls beyond closing date of accounts. So extra interest is to be calculated
from closing date to due date which is written on opposite side of transaction
in account current.
6. False - Due Date of any transaction can be taken as base date, but it is
preferable to take due date of 1st transaction as base date.
7. True - In case the due date of a bill falls after the date of closing the account,
then no interest is allowed for that. However, interest from the date of closing
to such due date is written in Red Ink in the appropriate side of the Account
Current. This interest is called Red Ink Interest.
36
Q.2 Calculation of Due Date
Bill Date Tenure Due Date Amount

01/06/2020 3 Months 04/09/2020 1,200
19/06/2020 2 Months 22/08/2020 1,600
10/07/2020 3 Months 13/10/2020 2,000
27/07/2020 3 Months 30/10/2020 1,500
07/08/2020 1 Month 10/09/2020 1,800
15/08/2020 2 Months 18/10/2020 2,400
Calculation of Average Due Date:

Let the Base Date be 22/08/2020

22/08/2020 1,600 0 0
04/09/2020 1,200 13 15,600
10/09/2020 1,800 19 34,200
13/10/2020 2,000 52 1,04,000
18/10/2020 2,400 57 1,36,800
30/10/2020 1,500 69 1,03,500
10,500 3,94,100

Total of Amount
22/08/2020 + 3,94,100
10,500
22/08/2020 + 37.53 Days
22/08/2020 + 38 Days
ADD = 29/09/2020
37
Q.3 Calculation of Average Due Date & Interest.
a).
ADD = Loan Date + Total of No.of Years from Loan Date to Instalment Date
Total No.of Instalments
01/01/15 + (1 + 2 + 3 + 4 + 5)
5
01/01/15 + 15
5
01/01/15 + 3 Years
ADD = 01/01/18
Interest = 25,000 * 18% * 3 Years = Rs.13,500/-
b).
ADD = Loan Date + Total of No.of Months from Loan Date to Instalment Date
01/01/15 + (12 + 18 + 24 + 30 + 36)
5
01/01/15 + 120
5
01/01/15 + 24 Months (2 Years)
ADD = 01/01/17
Interest = 25,000 * 18% * 2 Years = Rs.9,000/-
c).
ADD = Loan Date + Total of No.of Years from Loan Date to Instalment Date
Total No.of Installments
01/01/15 + (2.5 + 4.5 + 6.5)
3
01/01/15 + 13.5
3
01/01/15 + 4.5 Years
ADD = 01/07/19
Interest = 25,000 * 18% * 4.5 Years = Rs.20,250/-
38
d).
ADD = Loan Date + Total of No.of Months from Loan Date to Instalment Date
01/01/15 + (12 + 18 + 30 + 36 + 48)
5
01/01/15 + 144
5
01/01/15 + 28.80 Months
ADD = 25/05/17
Interest = 25,000 * 18% * 28.80 Months = Rs.10,800/-
Q.4
Shikhar in Account Current with Rohit for the period upto 31.12.18 (` in ‘000)
01.07.18 To Bal. b/d 600 01.07.18 184 1,10,400 21.08.18 By Purchase A/c 700 21.08.18 132 92,400
15.07.18 To Sales 900 15.07.18 169 1,52,100 23.08.18 By Cash A/c 450 23.08.18 130 58,500
31.12.18 To B/P A/c 400 05.03.19 - - 23.10.18 By B/R A/c 300 25.01.19 - -
01.11.18 By Purchases A/c 950 01.11.18 60 57,000
31.12.18 To Red Ink Product - 25.01.19 25 7,500 31.12.18 By Red Ink Product - 05.03.19 64 25,600
31.12.18 To Interest 8 - - - 31.12.18 By Bal. of Product - - - 36,500
31.12.18 To Cash Account 492 - - -
2,400 2,70,000 2,400 2,70,000
Q.5
Mr. Shah in Account Current with HDFC Bank as at 31st March 2020
Date Particulars Dr. Cr. Dr. / Balance Days Dr. Cr.

Cr. Product Product
01.01.20 By Bal b/d Cr. 10,000 11 1,10,000
12.01.20 To Cash Ac 11,000 Dr. 1,000 34 34,000
15.02.20 By Cash A/c 10,000 Cr. 9,000 24 2,16,000
10.03.20 To Cash A/c 10,000 Dr. 1,000 6 6,000
16.03.20 By Clearing 10,000 Cr. 9,000 16 1,44,000
31.03.20 By Interest 6 Cr. 9,006
40,000 4,70,000
39
Calculation of Interest:
Cr. Product = 4,70,000 x 2% x 1D = 25.68
Dr. Product = 40,000 x 18% x 1D = (19.67)
Net Credit Interest 6.01
6.00
40
3 FINAL ACCOUNTS OF SOLE

TRADERS
THEORY SECTION
1. Book - keeping begins with making entries in Journal and ends with classifying
and collecting all entries under various Accounts in the Ledger. At the end of the
year, the ledger contains hundreds of accounts relating to a number of items of
income, gains, expenses, losses, debtors, creditors, assets, liabilities, capital and so
on. These accounts must be grouped under main heads such as Income, Expenses,
Assets, Liabilities etc. The first step in Accounting is the grouping of such accounts.
So, Accounting includes Book - keeping, but is much wider in scope. Accounting
takes over where Book - keeping ends.
The balances of income and expense accounts appearing in the ledger are summarised
in a statement called the Profit and Loss Account. A businessman can find out his
profit or loss for the entire year from the Profit and Loss Account.
The balances of assets, liabilities and capital accounts appearing in the ledger are
summarised in a statement called Balance Sheet. Both these statements (profit and
loss account and balance sheet) together are called the Final Accounts.
41
2. Limitations of Financial Statements
a) Financial Statements are prepared on the bases of money value prevailing

at the time of transaction without taking into account subsequent changes in
value of money.
b) Financial statements does not take in to account strengths and weaknesses

which cannot be measured in money e.g. efficiency of staff.
c) Due to going concern concept, cost of the asset are arbitrarily distributed over
number of years. So accounts are not absolutely correct.
d) Different accounting policies are followed by different organisation for financial

statements.
3. Closing Entries
a) Closing Entries for Trading A/c
Trading A/c Dr.
To Opening Stock A/c
To Purchase A/c
To All other Direct Expenses A/c Individually

Sales A/c Dr.
Closing Stock A/c
To Trading A/c

Trading A/c Dr.
To P & L A/c
(For Gross Profit)
b) Closing Entries for P & L A/c

P & L A/c Dr.
To All Indirect Expenses A/c Individually

Other Incomes A/c Individually Dr.
To P & L A/c
42

P & L A/c Dr.
To Capital A/c
(For Net Profit)
4. Opening Entries
All Assets A/c Individually (of previous year) Dr.

To All liabilities A/c Individually (of previous year)
To Capital A/c
5. List of Adjustments
1. Closing Stock
(a) Trading a/c - Cr. side
(b) Balance Sheet - Asset side
Note: As per AS - 2 the inventory should be valued at its original cost or net
realisable value whichever it less (NRV = Sales proceeds expected - expected
selling expenses – expected cost of completion).
Adjusting Entries
Closing Stock A/c Dr.
To Trading A/c
2. Depreciation
(i) When provision for depreciation account is not maintained
(a) Less from Asset
(b) P & L A/c Dr. side
(ii) When provision for depreciation account is maintained

(a) Add to Provision for depreciation
(b) P & L A/c Dr. side

Note:
(1) In absence of any specification the depreciation should be
calculated on WDV of the asset.
43
(2) If depreciation is given as 10% p.a, it will mean as proportionate

depreciation on additions during the year but if it is mentioned that the
depreciation is at 10% then it will mean that it is charged as 10% flat on
closing balance.
Adjusting Entries
Depreciation A/c Dr.
To Fixed Assets/Provision for Depreciation A/c
3. Outstanding Expenses
(a) Add to concerned expenses
(b) Balance Sheet liabilities side
Adjusting Entries
Expenses A/c Dr.
To Outstanding Expenses A/c
4. Prepaid Expenses
(a) Less from Concerned Expenses
(b) Balance Sheet Assets Side
Adjusting Entries
Prepaid Expenses A/c Dr.
To Expenses A/c
5. Incomes receivable
(a) Add to Concerned Income
(b) Balance Sheet Asset side
Adjusting Entries
Incomes receivable/Accrued Income A/c Dr.
To Income A/c
6. Income received in advance

(a) Less from Concerned Income
(b) Balance Sheet liabilities side
44
Adjusting Entries
Incomes A/c Dr.
To Pre received Income A/c
7. Interest on capital
(a) P & L Dr. side
(b) Add to Capital
Note: Interest on capital should be calculated on final amount of capital after
making prior year adjustments.
Adjusting Entries
Interest on Capital A/c Dr.
To Capital A/c
8. Interest on drawings
(a) P & L Cr. side
(b) Less from capital
Note: If date of withdrawal is not given then interest on drawing should be
calculated for 6 months and it should be on all drawings (i.e., cash as well as
goods withdrawn)
Adjusting Entries
Capital A/c Dr.
To Interest on Drawings A/c
9. Goods distributed as free samples

(a) Trading A/c Cr. side (Cost)
(b) P & L A/c Dr. side (Add to Advertisement Expenses)
Adjusting Entries
Advertisement A/c Dr.
To Purchase A/c
10. Goods withdrawn for personal use

(a) Trading A/c - Cr. side
(b) Add to drawings
45
Adjusting Entries
Drawings A/c Dr.
To Purchase A/c
11. Uninsured goods lost by fire

(a) Trading A/c - Cr. side
(b) P & L A/c - Dr. side
Adjusting Entries
Loss by Fire A/c Dr.
To Purchase A/c
12. Insured goods lost by fire

(a) Trading A/c Cr. Side (Total goods cost)
(b) Balance sheet - Asset side (Insurance claim)
(c) P & L A/c Dr. side (Loss by fire)
Adjusting Entries
Loss by Fire A/c Dr.
Insurance Claim A/c
To Purchase A/c
13. Goods still on approval, included in sale

(a) Less from sales (Selling Price)
(b) Less from debtors (Selling Price)
(c) Add to closing stock (Cost)
Adjusting Entries
Sale A/c Dr.
To Trade Receivable A/c

Closing Stock A/c Dr.
To Trading A/c
14. TDS on Income

(a) Show gross income in P & L A/c Cr. Side (Net Income received + TDS)
46
(b) Show TDS as an Asset
15. TDS on Expenses

(a) Show gross expenses in P & L Dr. side (Net Expenses paid + TDS)
(b) Show TDS as Liability
6.
Presentation of Debtors and Creditors in Balance Sheet
LIABILITIES ASSETS
Sundry Debtors xxx
(±) Any other Adj xxx
xxx
(-) New BD (Adj) (xxx)
Sundry Creditors xx xxx
(±) Any other Adj xx (-) New RDD (Adj) (xxx)
xx xxx
(-) New RFDC (Adj) xx xx (-) New RFDD (Adj) (xxx) xxx
Presentation in Profit & Loss Account
DR. SIDE CR. SIDE

To Bad - debts (TB) xx By Discount Received xx
Add : New BD (Adj.) xx Add : New RFDC (Adj.) xx
Add : New RDD (Adj.) xx Less : Old RFDC (TB) (xx) xx
Less : Old RDD (TB) (xx) xx
To Discount Allowed xx
Add : New RFDD (Adj.) xx
Less : Old RFDD (TB) (xx) xx
Adjusting Entries of RDD/ Bad Debts
1. Reserve for Doubtful Debts

P & L A/c Dr.
To RDD A/c

47
2. Bad Debts
Bad Debts A/c Dr.
To Trade Receivables A/c

RDD (If exists) A/c / P & L A/c Dr.
To Bad Debts A/c
Notes:
1. RDD affects debtors (which is the part of current asset) and profits.
2. Where in examination problem requires that certain bad debts should be

written off and a provision of doubtful debts made, the amount of bad debts
to be written off should be first debited against existing RDD A/c and resulting
balance in the RDD A/c should be raised to the required figure by debiting to P
& L A/c.
3. Provision for discount should be created in the same manner as RDD A/c.
7. Assets and Liabilities
48
8. Contingent Liabilities
 Contingent Liabilities are liabilities which may or may not happen and
happening of which depends upon future uncertain events e.g. court cases,
guarantees given, bill discounted, etc.
 Contingent Liabilities are shown as foot notes to balance sheet
9. Arrangements of assets & liabilities in balance sheet

(a) Liquidity approach – All assets which are converted into cash first & all liabilities
which are to be paid first (in short term) is to be arranged at top of balance
sheet.
(b) Permanence approach – All long term assets & liabilities are presented at top
of balance sheet & short term asset & liabilities presented last.
10. Manufacturing Concerns:

A manufacturer sells finished goods manufactured by him in his factory; while a
trader sells goods purchased by him. A manufacturer purchases raw materials
and converts them into finished goods by means of machinery and labour at a
factory. So, it is necessary for a manufacturer to spend on wages to workers, on the
manufacturing process, on the factory etc. The manufacturer therefore prepares a
'Manufacturing Account' to find out his cost of manufacture. Manufacturing Account
means an account showing the summary of the cost of the manufacturing activity
during the accounting year.
49
Dr. Manufacturing Account for the year ended……. Cr.
Particulars ` ` Particulars `
To opening xx By Sale of Scrap /
work in progress byproduct xx
To Raw material consumed By Closing Work
Opening stock x in progress xx
+ Net purchase x
- Closing Stock x xx By Trading a/c
To Direct wages xx (cost of production xx
To Direct expenses xx Balancing figure)
(based on units produced)
To Indirect factory xx
Expense /overhead
(Not based on unit
produced)
Note: - Raw material consumed + Direct wages + Direct expenses = Prime cost
Purpose of manufacturing Account

1. It shows cost of manufacturing finished goods.
2. It provides details of factory cost.
3. It facilitates reconciliation of financial and cost records
11. Distinguish between

1. Provision and Reserves
Provisions Reserves
1. It is profit kept aside for known liability It is profit kept aside for
unknown liability.
2. Amount cannot be determined with Amount cannot be determined
accuracy but reliably estimated. with accuracy & cannot be
estimated.
3. Charge against profit. Appropriation of profit
4. Outflow of resources probable. No outflow of resources.
5. e.g. Depreciation, RDD, Stock spoilt, e.g. Retained profit, general
tax liability etc. reserve etc.
50
2. Income and Position statements
Income statements Position Statements

1. Purpose is to know profit and loss Purpose is to know financial
position i.e. assets and
liabilities
2. Comprises of trading and profit and Comprises of balance sheet
loss account and cash flow statement.
3. Balancing figure shows GP and NP This statement is balanced
4. Discloses profit / loss for the year Discloses financial position on

a particular date
3. Cash discount and trade discount
Cash discount Trade discount

1. Cash discount is a discount allowed to Trade discount is a deduction
a debtor on prompt payment of cash allowed to the buyers from the
gross or catalogue price
2. It is allowed only when the customer It is allowed by the seller to
makes the payment on time the purchaser for the purpose
of selling more goods.
3. It is allowed only when the customer It is allowed immediately when
make the payment within a fixed the seller sells the goods to
period the customers
4. It is separately recorded in the books Purchases and sales are
of accounts. accounted net of trade
discount. Therefore trade
discount is not separately
recorded in books of accounts.
5. It is not deducted from the invoice It is deducted from the invoice

51
4. Trial balance and balance sheet
Trial balance Balance sheet

Meaning it is a statement prepared as It is a statement on the
on a particular date to check financial position of a firm as
the arithmetical accuracy of the at a given date
ledger balance primarily
Object It is prepared to check accuracy It is prepared to ascertain the
of the ledger postings and financial position of a business
arithmetical accuracy
Periodicity It is generally prepared at the end It is generally prepared at the
of a month end of an accounting period.
Statements It includes the ledger balance of It includes only the real &
all type of accounts personal accounts
12. Some equations related to Final A/c

(a) Cost of goods sold (COGS) = Opening stock + purchase (net) + Direct expense –
Closing stock
(b) Cost (COGS) + GP = Sales
(c) Net profit = GP – indirect expenses
(d) Cost of goods available for sale = Opening stock + purchase + Direct expense
Opening stock + Closing stock

(e) Average stock = 2
GP
(f) GP margin or GP % = x 100
Sales
(g) Managers commission

If commission is on NP before charging commission, then commission =
NP × Commission %
100
If commission is on NP after charging commission, then commission =
NP × Commission %
100 + Commission %
52
(h) Working Capital = Current assets – Current Liabilities

(I) Capital = Assets – Liabilities
53
CLASSWORK SECTION
CLASSWORK SECTION
Q.1 The following is the Trial Balance of Hari as at 31st December, 1994:
Debit (`) Credit (`)

Hari’s Capital Account - 76,690
Stock 1st January, 1994 46,800 -
Sales - 3,89,600
Return Inwards 8,600 -
Purchases 3,21,700 -
Return Outwards - 5,800
Carriage Inwards 19,600 -
Rent & Taxes 4,700 -
Salaries & Wages 9,300 -
Sundry Debtors 24,000 -
Sundry Creditors - 14,800
Bank Loan @ 14% p.a. - 20,000
Bank Interest 1,100 -
Printing and Stationery Expenses 14,400 -
Bank Balance 8,000 -
Discount Earned - 4,440
Furniture & Fittings 5,000 -
Discount Allowed 1,800 -
General Expenses 11,450 -
Insurance 1,300 -
Postage & Telegram Expanses 2,330 -
Cash Balance 380 -
Travelling Expenses 870 -
Drawings 30,000 -
5,11,330 5,11,330
The following adjustments are to be made:

1) Included amongst the Debtors is ` 3,000 due from Ram and included among
the Creditors ` 1,000 due to him.
2) Provision for Bad and Doubtful Debts be created at 5% and for Discount @
2% on Sundry Debtors.
54
3) Depreciation on Furniture & Fittings @ 10% shall be written off.
4) Personal Purchases of Hari amounting to ` 600 had been recorded in the

Purchases Day Book.
5) Interest on Bank Loan shall be provided for the whole year.
6) A quarter of the amount of Printing and Stationery Expenses is to be carried

forward to the next year.
7) Credit Purchase Invoice amounting to ` 400 had been omitted from the Books.
8) Stock on 31.12.1994 was ` 78,600.

Prepare (i) Trading & Profit and Loss Account for the year ended 31.12.1994 and (ii)
Balance Sheet as on 31st December, 1994.
Q.2 Mr. James Submits you the following information for the year ended 31.3.2001:
`
Stock as on 1.4.2000 1,50,500
Purchases 4,37,000
Manufacturing Expenses 85,000
Expenses on Sales 33,000
Expenses on Administration 18,000
Financial Charges 6,000
Sales 6,25,000
During the year damaged goods costing `12,000 were sold for ` 5,000. Barring
the above transaction the Gross Profit has been @ 20% on sales. Compute the
Net Profit of Mr. James for the year ended 31.3.2001
55
Q.3 From the following particulars for the year ending 31st March, 2002 of M/s A B C
Company, prepare Trading and Profit and Loss Account and Balance Sheet on
that date:
` `
Stock 1.4.2001 23,200 Advertisement 15,950
Capital 1.4.2001 1,45,000 Apprenticeship premium 3,480
Purchases 58,000 Bill Receivable 10,150
Sales 2,32,000 Bill payable 7,250
Office Expenses 23,345 Sundry Debtors 58,000
Return Inward 4,350 Plant and Machinery 13,050
Interest on Loan 870 Sundry Creditors 45,820
Return Outward 1,160 Loan (Dr.) @ 10% 1.4.2001 14,500
Drawings 8,700 Investment 8,700
Wages 20,010 Cash at Bank 10,150
Land and Building 1,59,500 Cash in hand 725
Furniture and Fixtures 7,250
Adjustments to be made for the Current Year are:

(i) Closing stock as on 31.3.2002 Rs. 20,300
(ii) Interest on Capital to be allowed at 5% for the year.

(iii) Interest on Drawings to be charged to him as ascertained for the year ` 232.

Apprenticeship Premium is for three years received in advance on 1st April, 2001.
(iv)
(v) Stock valued at ` 8,700 destroyed by fire on 25.03.2002, but the Insurance
Company admitted a claim of ` 5,800 only to be paid in the year 2003.
(vi)
` 14,500 out of Advertisement Expenses are to be carried forward.
(vii) The Manager is entitled to a commission of 10% at the Net Profit calculated
after charging such commission.
(viii) The Stock includes material worth ` 2,900 for which bill had not been received
and therefore, not yet accounted for.
56
Q.4 From the following particulars prepare trading and profit and loss account of
Mr. R for the year ended 31 – 3 – 1997 and a balance sheet as on 31 – 3 – 1997

Building 5,00,000
Machineries 2,00,000
Furniture 1,00,000
Cash at Bank 90,000
Cash on hand 10,000
18% p.a. loan obtained by Mr. R on 1 – 6 – 1996
on mortgage of his building 3,00,000
R’s capital 5,20,000
Sundry debtors / Sundry creditors 5,00,000 4,00,000
Stock on 1 – 4 – 1996 1,20,000
Purchases / Sales 25,00,000 32,20,000
Sales returns / Purchases returns 1,20,000 1,00,000
Rent 60,000
Establishment expenses 1,80,000
Electricity charges 15,000
Telephone charges 10,000
Commission on sales 30,000
Insurance premium 10,000
Bad debts 20,000
Bills receivable 75,000
45,40,000 45,40,000
You are required to provide for depreciation on buildings at 5% p.a.; on machineries

at 25% p.a.; on furniture at 10% p.a. Provision for bad and doubtful debts is to be
made at 5%on sundry debtors. Mr. R’s manager is entitled to a commission of 10%
on the net profit after charging his commission. Closing stock was not taken on 31 –
3 – 1997 but only on 7 – 4 – 1997. Following transactions had taken place during the
period from 1 – 4 – 1997 to 7th April, 1997. Sales ` 2,50,000, purchases 1,50,000,
stock on 7th April, 1997 was ` 1,80,000 and the rate gross profit on sales was 20%.
Insurance premium mentioned in the trial balance was in respect of building and
machineries. Interest on mortgage loan to be provided up to 31.3.1997.
57
Q.5 From the following balances prepare Trading and Profit and Loss Account of Mr. X
for the year ended 31st March, 1998 and a Balance Sheet as on that date:

X's Capital Account - 10,000
Plant and Machinery 3,600 -
Depreciation on Plant and Machinery 400 -
Repairs to Plant 520 -
Wages 5,400 -
Salaries 2,100 -
Income-tax of Mr. X 100 -
Cash in Hand and at Bank 400 -
Land and Building 14,900 -
Depreciation on Building 500 -
Purchases 25,000 -
Purchases Return - 300
Sales - 49,800
Bank Overdraft - 760
Accrued Income 300 -
Salaries Outstanding - 400
Bills Receivable 3,000 -
Provision for Bad Debts - 1,000
Bills Payable - 1,600
Bad Debts 200 -
Discount on Purchases - 708
Debtors 7,000 -
Creditors - 6,252
Opening Stock 7,400 -
70,820 70,820
Information:
(i) Stock on 31 st March, 1998 was ` 6,000
(ii) Write off further ` 600 for Bad Debt and maintain a provision for Bad Debts at
5% on Debtors.
(iii) Goods costing ` 1,000 were sent to customer for ` 1,200 on 30th March, 1998
58
on sale or return basis. This was recorded as actual sales.
(iv)
` 240 paid as rent of the office were debited to Landlord account and were in-
cluded in the list of debtors.
(v) General Manager is to be given commission at 10% of net profit after charging
the commission of the works manager and his own.
(vi) Works manager is to be given commission at 12% of net profit before charging
the commission of General Menager and his own.
Q.6 The following is the Trial Balance of Shri Arihant as on 31st December, 1999.

Capital - 14,00,000
Drawings 75,000 -
Freight on Purchases 15,000 -
Wages 1,10,000 -
Sales - 25,00,000
Salaries 1,00,000 -
Travelling Expenses 23,000 -
Miscellaneous Expenses 35,000 -
Printing and Stationery 27,000 -
Advertisement Expenses 25,000 -
Postage and Telegrams 13,000 -
Discounts 7,600 14,500
Bad Debts written off (after adjustments recovery
of bad debts of ` 6,000 written off in 1997) 14,000 -
Building 10,00,000 -
Machinery 75,000 -
Furniture 40,000 -
Debtors 1,50,000
Provision for Doubtful Debts - 19,000
Creditors - 1,60,000
59
Investments (12% Purchased on 1/10/99) 6,00,000 -

Bank Balance 83,900
40,93,500 40,93,500
Adjustments:
(i) Closing Stock ` 2,25,000
(ii) Goods worth ` 5,000 were taken for personal use, but no entry was made in
the books.
(iii) Machinery worth ` 35,000 purchased on 1/1/97 was wrongly written off against
Profit and Loss Account. This asset is to be brought into account on 1/1/99
taking 10% p.a. depreciation on straight line method up to 31st December
1998.
(iv) Provide depreciation @ 2.5% p.a. on building and 10% p.a. on machinery and
furniture.
(v) Provide RDD @ 6% on debtors.
(vi) Provide manager’s commission @ 5% on net profit after charging such

commission.
Q.7 The following are the balances as at 31st March, 2004 extracted from the
books of Mr. XYZ.
` `
Plant and Machinery 19,550 Bad Debts 1,100
Furniture and Fittings 10,250 Bad Debts recovered 450
Bank Overdraft 80,000 Salaries 22,550
Capital Account 65,000 Salaries payable 2,450
Drawings 8,000 Prepaid Rent 300
Purchases 1,60,000 Rent 4,300
Opening Stock 32,250 Carriage inward 1,125
Wages 12,165 Carriage outward 1,350
Provision for doubtful debts 3,200 Sales 2,15,300
60
Provision for Discount Advertisement Expenses 3,350

on debtors 1,375 Printing and Stationery 1,250
Sundry Debtors 1,20,000 Cash in hand 1,450
Sundry Creditors 47,500 Cash at Bank 3,125
Office Expenses 10,160
Int. paid on loan 3,000
Additional Information:
1. Purchases include sales return of ` 2,575 and sales include purchase return of
` 1,725.
2. Goods withdrawn by Mr. XYZ for own consumption ` 3,500 included in purchases.
3. Wages paid in the month of April for installation of Plant and Machinery
amounting to ` 450 were included in wages account.
4. Free samples distributed for Publicity costing ` 825.
5. Create a provision for doubtful debts @ 5 % and provision for discount on

debtors @ 2.5%.
6. Depreciation is to be provided on Plant and Machinery @ 15% p.a. and on

furniture and fittings @ 10% p.a.
7. Bank overdraft is secured against hypothecation of stock. Bank overdraft

outstanding as on 31.3.2004 has been considered as 80% of real value of
stock (deducting 20% as margin) and after adjusting the marginal value 80%
of the same has been allowed to draw as an overdraft.
Prepare a trading and Profit Loss Account for the year ended 31st March, 2004,
and a Balance Sheet as on that date. Also show the rectification entries.
61
Q.8 The balance sheet of Thapar on 1st January, 2017 was as follows:
Liabilities ` Assets Amount `

Trade payables 15,00,000 Plant & Machinery 30,00,000
Expenses Payable 1,50,000 Furniture & Fixture 3,00,000
Capital 50,00,000 Trade receivables 14,00,000
Cash at Bank 6,50,000
Inventories 13,00,000
66,50,000 66,50,000
During 2017, his Profit and Loss Account revealed a net profit of ` 15,30,000. This
was after allowing for the following:
(a) Interest on capital @ 6% p.a.
(b) Depreciation on Plant and Machinery @ 10% and on Furniture and Fixtures
@ 5%.
(c) A provision for Doubtful Debts @ 5% of the trade receivables as at 31st

December, 2017.
But while preparing the Profit and Loss Account he had forgotten to provide for (1)
outstanding expenses totaling ` 1,80,000 and (2) prepaid insurance to the extent of
` 20,000. His current assets and liabilities on 31st December, 2017 were : Inventories
` 14,50,000; Trade receivables ` 20,00,000; Cash at Bank ` 10,35,000 and Trade
payables `11,40,000. During the year he withdrew ` 6,00,000 for domestic use.
Required
Draw up his Balance Sheet at the end of the year.
62
Q.9 Mr. Vimal runs a factory which produces soaps. Following details were available in
respect of his manufacturing activities for the year ended on 31.3.2016:
`
Opening Work-in-Process (10,000 units) 16,000
Closing Work-in-Process (12,000 units) 20,000
Opening inventory of Raw Materials 1,70,000
Closing inventory of Raw Materials 1,90,000
Purchases 8,20,000
Hire charges of machine @ ` 0.60 per unit manufactured
Hire charges of factory 2,20,000
Direct wages-Contracted @ ` 0.80 per unit manufactured and
@ ` 0.40 per unit of Closing W.I.P.
Repairs and Maintenance 1,80,000
Units produced – 5,00,000 units
Required
Prepare a Manufacturing Account of Mr. Vimal for the year ended 31.3.2016.
Q.10 From the following particulars extracted from the books of Ganguli, prepare trading
and profit and loss account and balance sheet as at 31st March, 2016 after making
the necessary adjustments:
` `
Ganguli’s capital account (Cr.) 5,40,500 Interest received 7,250
Stock on 1.4.2015 2,34,000 Cash with Traders Bank 40,000
Ltd.
Sales 14,48,000 Discounts received 14,950
Sales return 43,000 Investments (at 5%) as on 25,000
1.4.2015
Purchases 12,15,500 Furniture as on 1-4-2015 9,000
Purchases return 29,000 Discounts allowed 37,700
Carriage inwards 93,000 General expenses 19,600
Rent 28,500 Audit fees 3,500
Salaries 46,500 Fire insurance premium 3,000
Sundry debtors 1,20,000 Travelling expenses 11,650
Sundry creditors 74,000 Postage and telegrams 4,350
63
Loan from Dena Bank Ltd. (at 1,00,000 Cash in hand 1,900
12%)
Interest paid 4,500 Deposits at 10% as on
1-4-2015 (Dr.) 1,50,000
Printing and stationery 17,000 Drawings 50,000
Advertisement 56,000
Adjustment:
(1) Value of stock as on 31st March, 2016 is ` 3,93,000. This includes goods
returned by customers on 31st March, 2016 to the value of `15,000 for which
no entry has been passed in the books.
(2) Purchases include furniture purchased on 1st January, 2016 for ` 10,000.
(3) Depreciation should be provided on furniture at 10% per annum.

(4) The loan account from Dena bank in the books of Ganguli appears as follows:
` `
31.3.2016 To Balance c/d 1,00,000 1.4.2015 By Balance b/d 50,000
31.3.2016 By Bank 50,000
1,00,000 1,00,000
(5) Sundry debtors include ` 20,000 due from Robert and sundry creditors include
` 10,000 due to him.
(6) Interest paid include ` 3,000 paid to Dena bank.
(7) Interest received represents ` 1,000 from the sundry debtors and the balance
on investments and deposits.
(8) Provide for interest payable to Dena bank and for interest receivable on
investments and deposits.
(9) Make provision for doubtful debts at 5% on the balance under sundry debtors.
No such provision need to be made for the deposits.
64
Q.11 Trial Balance for financial the year (FY) ended 31st March, 2017 of M/s
Deepakshi shows following details:
Particulars Debit (`) Credit (`)

Purchase & Sales 10,00,000 12,00,000
Debtors & Creditors 5,00,000 4,00,000
Opening Stock 2,00,000
Closing Stock 3,00,000
Other Expenses & Incomes 7,00,000 9,00,000
Fixed Assets & Long Term Liabilities 25,00,000 6,00,000
Capital 21,00,000
52,00,000 52,00,000
Additional Information: Creditors balance as on 1st April, 2016 is ` 3,00,000.

You are required to calculate cost of goods sold and amount paid to creditors
during the year.
Q.12 On 1st Jan, 2017 provision for Doubtful Debts existed at ` 40,000. Trade receivables
on 31.12.2017 were ` 15,00,000; bad debts totalled ` 1,00,000. It is required to
write off the bad debts and create a provision equal to 5% of the Trade receivables’
balances.
Required
Show how you would compute the amount debited to the Profit and Loss Account.
Q.13 The following is the Trial Balance of C. Wanchoo on 31st Dec. 2017
Particulars Debit ` Credit `

Capital Account 10,00,000
Inventory Account 2,00,000
Cash in hand 1,44,000
Machinery Account 7,36,000
Purchases Account 18,20,000
Wages Account 10,00,000
Salaries Account 10,00,000
Discount Allowed A/c 50,000
65
Discount Received A/c 30,000

Sundry office expenses Account 6,00,000
Sales Account 50,00,000
Sums owing by customer (Trade receivables) 8,50,000
Trade payables (sums owing to suppliers) 3,70,000
Total 64,00,000 64,00,000
Value of Closing Inventory on 31st Dec. 2017 was ` 2,70,000
Required
Prepare closing entries for the above items and Prepare Trading and Profit and
Loss Account.
Q.14 BALANCE SHEET As at 31st December, 2017
Liabilities ` Assets `
Mahendra & Sons 5,60,000 Cash in hand 43,000
Capital 20,00,000 Cash at Bank 2,67,500
Trade receivables 7,49,500
Closing Inventory 9,00,000
Machinery and Equipment 6,00,000
25,60,000 25,60,000
Required
From the above given balance sheet prepare the relevant opening entry.
Q.15 Crimpson Ltd.’s profit and loss account for the year ended 31st March, 2016 includes
the following information:
`
(i) Depreciation 57,500
(ii) Bad debts written off 21,000
(iii) Increase in provision for doubtful debts 18,000
(iv) Proposed dividend 15,000
(v) Retained profit for the year 20,000
(vi) Liability for tax 4,000
66
Required
State which one of the items (i) to (vi) above are – (a) transfer to provisions; (b)
transfer to reserves; and (c) neither related to provisions nor reserves.
Q.16 Sengupta & Co. employs a team of eight workers who were paid `30,000 per month
each in the year ending 31st December, 2015. At the start of 2016, the company
raised salaries by 10% to `33,000 per month each.

On July 1, 2016 the company hired two trainees at salary of `21,000 per month
each. The work force are paid salary on the first working day of every month, one
month in arrears, so that the employees receive their salary for January on the first
working day of February etc.

You are required to calculate:
(i) Amount of salaries which would be charged to the profit and loss for
the year ended 31st December, 2016.
(ii) Amount actually paid as salaries during 2016.
(iii) Outstanding Salaries as on 31st December, 2016.
Q.17 Mr. Kotriwal is engaged in business of selling magazines. Several of his customers
pay money in advance for subscribing his magazines. Information related to year
ended 31st March 2017 has been given below:
On 1.4.2016 he had a balance of ` 2,00,000 advance from customers of which `
1,50,000 is related to year 2016-17 while remaining pertains to year 2017-18.
During the year 2016-17 he made cash sales of ` 5,00,000. You are required to
compute:
i) Total income for the year 2016-17.
ii) Total money received during the year if the closing balance in advance from
customers account is ` 1,70,000.
67
Q.18 Mr. Birla is a proprietor engaged in business of trading electronics. An extract from
his Trading & P&L account is as follows:
Trading and P&L A/c for the year ended 31st March, 2017
Particulars ` Particulars `
To Cost of Goods Sold 45,00,000 By Sales C
To Gross Profit c/d D
F F
To Rent A/c 26,00,000 By Gross Profit b/d D
To Office Expenses 13,00,000 By Miscellaneous Income E
To Selling Expenses B
To Commission to Manager (on 2,00,000
Net Profit before charging such
commission)
To Net Profit A
G 60,00,000

Commission is charged at the rate of 10%.
Selling Expenses amount to 1% of total sales.
You are required to compute the missing figures.
68
HOMEWORK SECTION
Q.1 From the following trial balance and information, prepare Trading and Profit and
Loss Account of Mr. Rishabh for the year ended 31st March, 1999 and a Balance
Sheet as on that date:
Particulars Debit ` Credit `

Capital - 1,00,000
Drawings 12,000 -
Land and Buildings 90,000 -
Plant and Machinery 20,000 -
Furniture 5,000 -
Sales - 1,40,000
Return Outward - 4,000
Debtors 18,400
Loan from Gajanand on 1.7.98 @ 6% p.a. - 30,000
Purchases 80,000 -
Return Inward 5,000 -
Carriage (Inward) 10,000 -
Sundry Expenses 600 -
Printing and Stationery 500 -
Insurance Expenses 1,000 -
Provision for Bad and Doubtful Debts - 1,000
Provision for Discount on Debtors - 380
Bad Debts 400 -
Profit of Textile Dept. - 10,000
Stock of General Goods on 1.4.98 21,300 -
Salaries and Wages 18,500 -
Creditor - 12,000
Trade Expenses 800 -
Stock of Textile Goods on 31.3.99 8,000 -
Cash at Bank 4,600 -
Cash in Hand 1,280 -
2,97,380 2,97,380
69
Information:
i. Stock of General goods on 31.3.99 valued at ` 27,300.

ii. Fire occurred on 23rd March, 1999 and ` 10,000 worth of general goods were
destroyed. The Insurance Company accepted claim for ` 6,000 only and paid
the claim money on 10th April, 1999.
iii. Bad Debts amounting to ` 400 are to be written off. Provision for Bad and
Doubtful debts is to be made at 5% and for discount at 2% on debtors. Make
a provision of 2% on creditors for discount.
iv. Received ` 6,000 worth of goods on 27th March, 1999 but the invoice of
purchase was not recorded in Purchases Book.
v. Rishabh took away goods worth ` 2,000 for personal use but no record was
made thereof.
vi. Charge depreciation at 2% on Land and Buildings, 20% on Plant and

Machinery, and 5% on Furniture.
vii. Insurance prepaid amounts to ` 200.
Q.2 The following is the Trial Balance of K on 31st March, 2000:


Capital - 8,00,000
Drawings 60,000 -
Freight on Purchases 25,000 -
Wages (11 months upto 29.02.2000) 66,000 -
Sales 23,10,000
Salaries 1,40,000 -
Postage, Telegrams, Telephones 12,000 -
Printing and Stationery 18,000 -
70
Miscellaneous Expenses 30,000 -

Creditors - 3,00,000
Investments 1,00,000 -
Discounts Received - 15,000
Debtors 2,50,000 -
Bad Debts 15,000 -
Provision for Bad Debts - 8,000
Building 3,00,000 -
Machinery 5,00,000 -
Furniture 40,000 -
Commission on Sales 45,000 -
Interest on Investments - 12,000
Insurance (Year upto 31.07.2000) 24,000 -
Bank Balance 1,50,000 -
34,45,000 34,45,000
Adjustments:
i. Closing Stock ` 2,25,000.
ii. Machinery worth ` 45,000 purchased on 1.10.99 was shown as Purchases.

Freight paid on the Machinery was ` 5,000, which is included in Freight on
Purchases.
iii. Commission is payable at 2.5% on Sales.
iv. Investments were sold at 10% profit, but the entire sales proceeds have been
taken as Sales.
v. Write off Bad Debts ` 10,000and create a provision for Doubtful Debts at 5%
of Debtors.
vi. Depreciate Building by 2 ½ % p.a. and Machinery and Furniture at 10% p.a.
Prepare Trading and Profit and Loss Account for the year ending 31st March,
2000 and a Balance Sheet as on that date.
71
Q.3 The following is the Trial Balance of Mr. ‘A’ as on 31st March, 2003. You are
required to prepare the Trading and Profit & Loss Account for the year ended
31st March, 2003 and Balance Sheet as on that date after making the necessary
adjustments

Stock 1 – 4 – 2002 5,50,000 -
Purchases and Sales 19,25,000 29,35,000
Wages and Salaries 1,25,000 -
Discount - 2,000
Carriage inward 40,000 -
Bill received and Bill payable 2,25,000 1,85,000
Insurance 35,000 -
Debtors and Creditors 15,00,000 9,32,500
Consignor’s Balance (1 – 4 – 2002) - 4,00,000
Capital - 8,95,000
Commission 40,000 -
Cash sent to Consignor 8,00,000 -
Interest 35,000 -
Trade Expenses 34,500 -
Furniture (1 – 4 – 2002) 60,000 -
Consignment Sales - 6,40,000
Cash in hand and at Bank 4,22,500 -
Rent and Taxes 1,27,500 -
Sale of Furniture (31 – 3 – 2003) - 10,000
Charges paid against Consignment 80,000 -
59,99,500 59,99,500
Adjustments:
i. Stock on 31st March, 2003 was valued at ` 8,00,000 (including stock of
stationery ` 800)
ii. Bill receivable include a dishonoured bill of ` 8,000.
iii. Trade expenses include purchase for stationery of ` 22,500.

iv. Stock in the beginning include stock of stationery ` 1,800.
72
v. Furniture sold was appearing in the Balance Sheet on 31st March, 2002 at `
13,000.
vi. Creditors at the end include creditors for stationery ` 3,000 for credit
purchases.
vii. Commission receivable on sale of consignment ` 40,000.
viii. Stationery of ` 2,000 was consumed by Mr. A.
ix. RDD is 5% on debtors.
x. Provide depreciation @ 10% p.a. on furniture.
Q.4 Mr. Neel had prepared the following Trial Balance from his Ledger as on 31st
March, 2004:

Stock as 1st April, 2003 5,00,000
Purchases and Returns 31,00,000 45,000
Sales and Returns 55,000 41,50,000
Cash in Hand 2,50,000
Trader’s Capital 22,59,200
Rates and Taxes 50,000
Drawings 45,000
Salaries 95,000
Postage and Telegram 1,05,000
Insurance 90,000
Salesman Commission 78,000
Printing and Stationery 95,500
Advertisement 1,70,000
Furniture and Fittings 5,50,000
Motor Car 48,000
Discounts 50,000 75,000
General Expenses 65,700
73
Carriage Inward 10,000

Carriage Outward 22,000
Wages 50,000
Sundry Debtors / Creditors 10,00,000 4,00,000
Total 69,29,200 69,29,200
You are required to prepare Trading and Profit & Loss Account for the year ended
on 31st March, 2004 and Balance Sheet as on that date after making the necessary
adjustments:
You are provided with the following information:

i. Closing Stock as on 31st March, 2004 ` 1,45,000.
ii. Neel had withdrawn goods worth ` 50,000 during the year.
iii. Purchases include Purchase of furniture worth ` 1,00,000.
iv. Debtors include ` 50,000 bad debts.
v. Sales include goods worth ` 1,50,000 sent out to NN & Co. on approval
and remained unsold as on 31st March, 2004. The cost of the goods was `
1,00,000.
vi. Provision for Bad debts is to be created at 5% of Sundry Debtors.
vii. Depreciate furniture and Fittings by 10% and Motor Car by 20%.
viii. The Salesman is entitled to a commission of 10% on total sales.
74
Q.5 From the following Trial Balance of Shri Shivam as on 31st March, 2005, you are
required to prepare a Trading and Profit and Loss Account for the year ended
31st March, 2005 and Balance Sheet as on that date, after making the necessary
adjustments as mentioned hereunder:

Shivam’s capital 1,60,000
Shivam’s drawings 24,000
Plant and machinery 60,000
Patents (ten years from 1.4.2004) 40,000
Stock on 1.4.2004 40,000
Purchases 1,70,000
Salaries 14,800
Wages 30,000
Sundry debtors 20,400
Sales 2,64,000
Cash in hand 13,250
Land 28,350
Loan from Shyam (at 6% from 1.10.2004) 20,000
Postage and Fax 3,000
Rent, rates and taxes 7,200
Bad debts 800
Sundry creditors 24,000
Discount 1,200
Carriage Inward 400
Interest on loan 300
Insurance 1,600
Travelling expenses 1,000
Sundry Expenses 600
Cash at bank 20,500
Bank overdraft 15,000
Total 4,84,200 4,84,200
Adjustments:
i. Stock as on 31.3.2005 is valued at ` 30,000.
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ii. A new machine was installed on 1st April, 2004 for ` 3,000. No entry in this
respect was passed in the books. Wages of ` 1,000 paid for installing the
machine were debited to Wages account.
iii. Of the Sundry debtors, ` 200 are bad and are to be written off. You are
required to maintain a provision for doubtful debts @ 5% on debtors and
provision for discount on debtors @ 2%.
iv. Goods costing ` 2,000 were given away as free samples for publicity.
v. Depreciate Plant and Machinery at 20% per annum and Furniture and Fixtures
at 10% per annum.
vi. On 1.4.2004, machinery of the value of `10,000 was destroyed by fire and
the insurance claim settled at ` 8,000 was credited to Machinery account.
vii. Goods costing `1,000 were sent to a customer for ` 1,200 on 30th March,
2005 on sale or return basis. This was recorded as actual sales.
Q.6 The following is the schedule of balances as on 31.3.17 extracted from the books
of Shri Gavaskar, who carries on business under the same name and style of
Messrs Gavaskar Viswanath & Co., at Bombay:

Cash in hand 14,000
Cash at bank 26,000
Sundry Debtors 8,60,000
Stock on 1.4.2016 6,20,000
Furniture & fixtures 2,14,000
Office equipment 1,60,000
Buildings 6,00,000
Motor Car 2,00,000
Sundry Creditors 4,30,000
Loan from Viswanath 3,00,000
Provision for bad debts 30,000
76
Purchases 14,00,000
Purchase Returns 26,000
Sales 23,00,000
Sales Returns 42,000
Salaries 1,10,000
Rent for Godown 55,000
Interest on loan from Viswanath 27,000
Rates & Taxes 21,000
Discount allowed to Debtors 24,000
Discount received from Creditors 16,000
Freight on purchases 12,000
Carriage Outwards 20,000
Drawings 1,20,000
Electricity Charges 22,000
Insurance Premium 55,000
General office expenses 30,000
Bad Debts 20,000
Bank charges 16,000
Motor car expenses 36,000
Capital A/c 16,20,000
TOTAL 47,22,000 47,22,000
Prepare Trading and Profit and Loss Account for the year ended 31st March 2017
and the Balance Sheet as at that date after making provision for the following:
1. Depreciate: (a) Building used for business by 5 percent; (b) Furniture and
fixtures by 10 present; One steel table purchased during the year for ` 14,000
was sold for same price but the sale proceeds were wrongly credited to Sales
Account; (c) Office equipment by 15 percent; Purchase of a typewriter during
the year for ` 40,000 has been wrongly debited to purchase; and (d) Motor
car by 20%.
77
2. Value of stock at the close of the year was ` 4,40,000.
3. Two month’s rent for godown is outstanding.
4. Interest on loan from Viswanath is payable at 12 percent per annum, this

loan was taken on 1.5.2016.
5. Reserve for bad debts is to be maintained at 5 percent of Sundry Debtors.
6. Insurance premium includes ` 40,000 paid for life insurance premium and
balance insurance charges are for 1st April 2016 to 30th june 2017.
Q.7
`
Opening Inventory 1,00,000
Purchases 6,72,000
Carriage Inwards 30,000
Wages 50,000
Sales 11,00,000
Returns inward 1,00,000
Returns outward 72,000
Closing Inventory 2,00,000
Required
From the above information, prepare a Trading Account of M/s. ABC Traders for
the year ended 31st March, 2017 and Pass necessary closing entries in the journal
proper of M/s. ABC Traders.
78
Q.8 Following are the Manufacturing A/c, Creditors A/c and Trading A/c provided by Ms.
Shivi related to 2016-17. There are certain figures missing from these accounts.
Raw Material A/c
Date Particulars ` Date Particulars `

To Opening Stock 1,00,000 By Raw Material …
A/c Consumed
To Creditors A/c … By Closing Stock …
A/c
Creditors A/c

To Bank A/c 22,00,000 By Balance b/d 15,00,000
To Balance c/d 6,00,000
Manufacturing A/c

To Raw Material … By Trading A/c 17,94,000
Consumed
To Wages 3,50,000
To Depreciation 2,00,000
To Direct Expenses 2,44,000
Additional Information:-
1. Purchase of machinery worth ` 10,00,000 has been omitted. Machinery are
chargeable at a depreciation rate of 10%.
2. Wages include the following

Paid to Factory Workers - ` 3,00,000
Paid to labour at office - ` 50,000
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3. Direct Expenses include following:

 Electricity charges of ` 80,000 of which 30% pertained to office.
 Fuel Charges of ` 20,000
 Freight Inwards of ` 35,000
 Delivery charges to customers - ` 20,000.
You are required to prepare revised Manufacturing A/c, and Raw Material
A/c.
Q.9 The Balance Sheet of Mr. Popatlal, a merchant on 31st March, 2017 stood as
below:
Liabilities Amount Assets Amount

` `
Capital 2,40,000 Fixed Assets 1,25,600
Trade payables 1,64,000 Inventories 2,06,400
Bank Overdraft 1,46,000 Trade receivables 1,88,000
Less: Provision (6,200) 1,81,800
Cash 36,200
5,50,000 5,50,000
Required
Show opening journal entry on 1st April, 2017 in the books of Mr. Popatlal.
Q.10 Following is trial balance of Mr. T on 31st March 2018

Capital & Drawings 70,000 6,00,000
Fixed assets (opening) 1,40,000
Fixed assets (addition 1/10/18) 2,00,000
Opening stock 60,000
Purchase & returns 16,00,000 69,000
Sales & returns 99,000 22,00,000
Debtors & Creditors 2,50,000 2,20,000
Expenses 50,000
Fixed deposit with bank 2,00,000
Interest on fixed deposit 20,000
Cash / Bank 1,69,000 8,000
80
Suspense a/c 2,000

Depreciation 14,000
Rent (17 months upto 31/8/18) 17,000
Investment 12% (1/8/17) 2,50,000
31,19,000 31,19,000
Closing stock = ` 1, 00,000, depreciation to be provided @ 10% p.a. on addition

to fixed asset. Scrutiny of books revealed following.
1. As ` 20,000 drawn from bank was debited to drawings but out of this amount
` 12,000 was used for business expenses.

2. Purchase of goods worth ` 16,000 not recorded in books but goods were
included in stock.
3. Purchase returns of ` 1,000 recorded in sale returns journal but amount was
correctly posted to party a/c
4. Expenses include ` 6,000 for period after 31/3/18.

Prepare final a/c for year ending 31st March 2018
81
PAST EXAM
Q.1 The following are the balances extracted from the books of Shri Raghuram as on
31.03.2018, who carries on business under the name and style of M/s Raghuram
and Associates at Chennai:

Capital A/c 14,11,400
Purchases 12,00,000
Purchase Returns 18,000
Sales 15,00,000
Sales Returns 24,000
Freight Inwards 62,000
Carriage Outwards 8,500
Rent of Godown 55,000
Salaries 72,000
Discount allowed 7,500
Discount received 12,000
Drawings 20,000
Insurance premium 48,000
Electricity charges 14,000
General expenses 11,000
Bank charges 3,800
Bad debts 12,200
Repairs the Motor vehicle 13,000
Interest on loan 4,400
Provision for Bad-debts 10,000
Loan from Mr. Rajan 60,000
Motor vehicles 1,00,000
Land and Buildings 5,00,000
Office equipment 2,00,000
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Stock as on 31.03.2017 3,20,000

Sundry debtors 2,80,000
Cash at Bank 22,000
Cash in Hand 16,000
Total 30,73,400 30,73,400
Prepare Trading and Profit and Loss Account for the year ended 31.03.2018 and
the Balance Sheet as at that date after making provision for the following:
(a) Depreciate Building by 5%, Furniture and Fixtures by 10%, Office Equipment
by 15% and Motor Car by 20%.
(b) Value of stock at the close of the year was ` 4,10,000.

(c) One month rent for godown is outstanding.
(d) Interest on loan from Rajan is payable @ 10% per annum. This loan was
taken on 01.07.2017
(e) Reserve for bad debts is to be maintained at 5% of Sundry debtors.
(f) Insurance premium includes ` 42,000 paid towards proprietor's life insurance
policy and the balance of the insurance charges cover the period from 01
04.2017 to 30.06.2018.
Q.2 Mr. Shyamal runs a factory, which produces detergents. Following details were
available in respect of his manufacturing activities for the year ended 31-03-
2019.
Opening work-in-progress. (9000 units) 26,000

Closing work-in-progress (14,000 units) 48,000
Opening inventory of Raw Materials 2,60,000
Closing inventory of Raw Materials 3,20,000
Purchases 8,20,000
Hire charges of Machinery @ Rs. 0.70 per unit
manufactured
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Hire charges of factory 2,60,000

Direct wages-contracted @ Rs. 0.80 per unit manufactured
and @ ` 0.40 per unit of closing W.I.P
Repairs and maintenance 1,80,000

Units produced-5,00,000 units
Required a Manufacturing Account of Mr. Shyamal for the year ended 31-03-
2019.
Q.3 The balance sheet of Mittal on 1st January, 2018 was as follows:

Trade payables Plant & Machinery
Expenses payable 2,50,000 Furniture & Fixture 4,00,000
Capital 51,00,000 Trade receivables 14,50,000
Cash at bank 7,00,000
69,50,000 69,50,000
During 2018, his profit and loss account revealed a net profit of ` 15,10,000; This
was after allowing for the following:
(i) Interest on capital @ 6% p.a.
(ii) Depreciation oh plant and machinery @ 10% and on Furniture and Fixtures
@5%.
(iii) A provision for Doubtful debts @ 5% of the trade receivables

as at , 31st December 2018.
But while preparing the profit and loss account he had forgotten to provide for (1)
outstanding expenses totalling ` 1,85,000 and (2) prepaid insurance to the extent
of ` 25,000.
His current assets and liabilities on 31st December, 2018 were: Trade receivables
` 21,00,000; Cash at bank ` 5,20,000 and Trade payables ` 13,84,000. During the
84
year he withdrew ` 6,20,000 for domestic use. Closing inventories is equal to net
trade receivables at the year-end.
You are required Draw up revised Profit and Loss account and Balance Sheet
at the end of the year.
Q.4 Following particulars are extracted from the books of Mr. Sandeep for the year
ended 31st December, 2018.
Particulars Amount Particulars Amount

Debit Balances: ` Credit Balances: `
Cash in hand 1,500 Capital 16,000
Purchase 12,000 Bank overdraft 2,000
Sales return 1,000 Sales 9,000
Salaries 2,500 Purchase return 2,000
Tax and Insurance 500 Provision for Bad debts 1,000
Bad debts 500 Creditors 2,000
Debtors 5,000 Commission 500
Investments 4,000 Bills payable 2,500
Opening stock 1,400
Drawings 2,000
Furniture 1,600
Bills receivables 3,000
35,000 35,000
Other infomation:
(i) Closing stock was valued at ` 4,500
(ii) Salary of ` 100 and Tax of ` 200 are outstanding whereas insurance ` 50 is
prepaid.
(iii) Commission received in advance is ` 100.
(iv) Interest accrued on investment is ` 210
(v) Interest on overdraft is unpaid ` 300
(vi) Reserve for bad debts is to be kept at ` 1,000
(vii) Depreciation on furniture is to be charged @ 10%
You are required to prepare the final accounts after making above adjustments.
85
OBJECTIVE SECTION
Q.1 State with reasons whether the following statements are True or False:
1. A profit & loss a/c is a point statement whereas balance sheet is a period
statement.
Ans. False – P & L A/c is a period statement as it is prepared for particular
accounting period & B/s is a point statement as it is prepared on a particular
date.
2. Provision for discount on debtors is calculated before deducting provision for

doubtful debts from debtors.
Ans. False – It is calculated after deducting provision for doubtful debts as only
those debtors are eligible for discount who are going to pay.
3. Freight & cartage expenses paid on purchase of goods is added to purchase.

Ans. True – Freight & Cartage expenses are expenses to bring the purchased
goods to present location & should be added to cost of purchase.
4. Provision for bad debts is debited to sundry debtor’s a/c.

Ans. False – Provision of bad debts is not actually bad debts so cannot be
debited (deducted) from debtors a/c but in balance sheet they are presented
as deduction from debtors.
5. Manufacturing A/c is prepared to ascertain profit or loss of goods purchased.

Ans. False – If is prepared to ascertain cost of manufactured goods.
6. Net profit is reflected in higher cash balance & net loss is reflected in lower
net worth.
Ans. Partly True – Net profit may not get reflected higher cash balance as
transactions may be on credit but net loss reflects in lower net worth
(owners capital) as loss will reduce capital.
86
7. Profit & loss a/c shows financial position of concern.

Ans. False - Balance sheet shows financial position i.e. assets, liabilities & capital
whereas P & L a/c shows results of operation i.e. profit / loss.
8. Balance sheet is a position statement.

Ans. True - As it shows financial position i.e. assets, liabilities & capital.
9. All intangible assets are fictitious assets

Ans. False – Intangible assets are assets which has no physical existence &
cannot be seen or touched e.g. goodwill, patents etc whereas fictitious
assets are not assets but deferred revenue expenditure which are
temporarily parked to asset side as their benefits accrue in future.
10. Debit balance in P & L a/c is a real asset.

Ans. False - Debit balance in P & L a/c represents loss & not a asset but may be
shown on asset side temporarily pending deduction from capital.
11. Only personal & real accounts are shown in balance sheet.
Ans. True - personal a/c are shown on liability side whereas asset side may
contain personal / real a/c – Nominal a/c shown in P & L a/c.
12. Capital is all assets (–) fictitious assets.

Ans. False – Capital is all assets (–) fictitious assets (–) outside liabilities.
13. Under liquidity approach, assets which are most liquid are presented at
bottom of balance sheet.
Ans. False – liquidity approach means assets which are realized first (liquid) are
arranged at top of balance sheet.
14. Sundry debtors are liquid assets.

Ans. True – liquid assets are assets which can be converted into cash in short
period of time.
15. Understatement of closing work in progress will understate cost of goods

manufacture & overstate net income.
Ans. False – while calculating cost of goods manufactured closing WIP is deducted
87
so it will have opposite effect on cost. So if closing WIP is understated, cost

will increase & will lead to understatement of net income.
16. Overvaluation of closing stock of previous year will result in undervaluation

of profit of last year & overvaluation of profit of current year.
Ans. False – Closing stock is written on Cr side (Income side) & previous year
closing stock is opening stock (Dr. side = expense side) of current year. So
overvaluation of closing stock of previous year will result in overvaluation of
profit of last year & undervaluation of profit of current year.
17. The results & position disclosed by final a/c are not exact.
Ans. True – as it is prepared on basis of assumption & certain estimations e.g.
depreciation, o/s expenses etc.
18. Salary paid in advance is not an expense because it neither reduces assets
nor increases liabilities.
Ans. True – Salary paid in advance is related to next year & not current year. So it
is not shown as expense but shown as current asset.
19. If Closing Stock appears in the Trial Balance:

The closing inventory is then not entered in Trading Account. It is shown only
in the balance sheet.
Ans. True: The closing stock appears in the trial balance only when it is adjusted
against purchases by passing the entry (in which Closing Stock A/c is debited
and Purchases A/c is credited). In this case, closing stock is not entered in
Trading Account and is shown only in Balance sheet.
20. Trade discount is a reduction granted by a supplier from the list price of
goods or services on business consideration for prompt payment.
Ans. False – Trade discount is a reduction allowed from the list price for purpose
of selling more goods whereas cash discount is allowed for making prompt
payment.
88
Q.2 Short Questions

1. Following is data of manufacturing concern:-
1/1 31/12
Stock of raw material 17,400 18,100
WIP 11,200 11,400
Stock of finished goods 41,500 40,700
During the year manufacturing expenses were ` 61,100 & wages were ` 40,400 &
raw material purchase ` 91,900.
1. What is cost of raw material consumed
2. What is manufacturing cost of finished goods produced.
3. What is manufacturing cost of finished goods sold.
Q.3 Fill in the blanks:
1. If sales is ` 4,000 & rate of GP on cost is 25% then cost of goods sold is
________.
2. Rent paid on 1/10/10 for year to 30/9/11 was ` 1200 & rent paid on 1/10/11
for year to 30/9/12 was ` 1600. Rent as shown in P/L A/c for year ended
31/12/11 would be _______.
3. Fixed assets are twice current assets & half the capital. Current assets are `
3 lacs & investment are ` 4 lacs. Then current liability in balance sheet will
be ________.
4. In journal entries which pertains to outstanding entries, prepaid entries, and

depreciation entries are called ___________ entry.
5. Provision for depreciation is created by debiting __________ A/c.
6. Increase in provision for doubtful debts would result in ________ in working

capital & ________ in net profit. (increase/decrease)
7. Working capital means ___________ (-) ___________.
89
8. Sales = ____________ + gross profit.

9. Trading A/c is __________ account.
10. Only personal & real A/c is shown in ___________.
11. Bill discounted but not due till date of final a/c is shown as ______________
in financial statement.
Q.4 Multiple Choice Questions:
1. A debit to an account may

(a) increase expense (b) decrease an asset.
(c) increase a liability. (d) increase income.
2. Prepayment of insurance premium will appear in the Balance Sheet and in

the Insurance Account respectively as:
(a) a liability and a debit balance.
(b) an asset and a debit balance.
(c) an asset and a credit balance.
(d) a liability and a credit balance.
3. Gross profi¬t is the difference between:

(a) sales and purchases (b) sales and cost of sales.
(c) sales and total expenses. (d) Sales and total liabilities.
4. Payment made to a creditor subject to cash discount will :

(a) reduce a liability, reduce an asset and add to expenses.
(b) reduce a liability, add to an asset, and add to revenue.
(c) reduce an asset, reduce a liability, and add to revenue.
(d) reduce a liability, reduce an asset and decrease expenses.
5. A customer returns goods already charged to him. We should:

(a) debit his account. (b) credit his account.
(c) make no entry on his account. (d) None of the above.
90
6. Capital is the difference between

(a) Income and expenses (b) Sales and Cost of goods sold
(c) Assets and liabilities (d) None of the above.
7. The capital of a sole trader would change as a result of:

(a) A creditor being paid his account by cheque.
(b) Raw materials being purchased on credit.
(c) Fixed assets being purchased on credit.
(d) Wages being paid in cash.
8. A decrease in the provision for doubtful debts would result in:

(a) An increase in liabilities. (b) A decrease in working capital.
(c) An increase in net profi¬t. (d) None of the three.
9. A Company wishes to earn a 20% pro¬fit margin on selling price. Which of

the following is the profi¬t mark up on cost, which will achieve the required
profi¬t margin?
(a) 33% (b) 25% (c) 20% (d) 30%
10. If sales is ` 2,000 and the rate of gross profi¬t on cost of goods sold is 25%,
then the cost of goods sold will be
(a) ` 2,000. (b) ` 1,500. (c) ` 1,600. (d) ` 1,000.
11. Sales for the year ended 31st March, 2016 amounted to ` 10,00,000. Sales
included goods sold to Mr. A for ` 50,000 at a profi¬t of 20% on cost. Such
goods are still lying in the godown at the buyer’s risk.
Therefore, such goods should be treated as part of

(a) Sales. (b) Closing Inventory.
(c) Goods in transit. (d) None of the above.
12. If sales revenues are `4,00,000; cost of goods sold is ` 3,10,000 and expenses
are `60,000, the gross pro¬fit is
(a) ` 30,000. (b) ` 90,000.
(c)
` 3,40,000. (d) ` 4,00,000
91
13. Under-statement of closing work in progress in the period will

(a) Understate cost of goods manufactured in that period.
(b) Overstate current assets.
(c) Understate net income in that period.
(d) None of the three.
14. Sales is equal to

(a) Cost of goods sold – Gross profi¬t.
(b) Cost of goods sold + Gross profi¬t.
(c) Gross profi¬t – Cost of goods sold.
(d) Net profi¬t + cost of goods sold.
15. Indirect Manufacturing expenses are also called

(a) Manufacturing overhead.
(b) Production overhead.
(c) Works overhead.
(d) All the three.
16. Sale value of the by-product is credited to

(a) Manufacturing account. (b) Capital account.
(c) Overheads account. (d) Trading account.
17. Manufacturing account shows

(a) Total cost of manufacturing the ¬finished products.
(b) It provides details of factory cost.
(c) It facilitates reconciliation of ¬financial books with cost records.
(d) All the three.
18. If net loss is ` 5,000, General expenses are ` 14,500.Sales amount to ` 25,000
the Gross Profit will be
(a) ` 20,000 (b) ` 11,000
(c)
` 9,000 (d) ` 9,500

19. The manager earned a commission of ` 25,000, which is based on 10 % of
Net profit. If sales is ` 3,50,000 is more than purchases. No opening & closing
stock. Find Indirect expenses.
92
(a) ` 75,000 (b) ` 1,00,000

(c)
` 2,50,000 (d) None
20. If the sales are ` 14,900 Gross Profit ` 3,300. Net Loss ` 500.The indirect
expenses will be :
(a) ` 2,800 (b) ` 3,800
(c)
` 11,100 (d) ` 11,600
21. Salaries paid in cash ` 2,00,000. It includes previous year’s outstanding

` 10,000 and salary paid in advance for the next year ` 20,000. Salary
outstanding for the year is ` 15,000. Salary of shall be debited in the profit,
and loss account.
(a) ` 2,25,000 (b) ` 1,85,000
(c)
` 2,05,000 (d) ` 1,75,000
22. A’s Balance sheet as at 31st March, 2008 shows ` 6,800 as rent payable.
His cash book shows total payment towards Rent ` 50,000 during the year
ending 31st March 2009. Rent prepaid as at 31st March, 2008 is ` 5000.
Which of the following amount should go to his Profit & Loss A/c as rent.
(a) ` 61,800 (b) ` 48,200
(c)
` 55,000 (d) ` 38,200
23. X, the Works Manager gets 5% commission of net profits after charging h i s
commission and Y's commission. Y the General Manager, gets 10% commission
on net profit after charging his commission and X's commission. If the profit
before charging commission of X and Y is 7 1,000, the commission of X will
be
(a) ` 42.5 (b) ` 43.5
(c)
` 47 (d) ` 49

24. The fixed asset of a company is double of the current assets and half of
capital. If the current assets are ` 3,00,000 and investment ` 4,00,000,
calculate the current liabilities assuming that there are no other items in the
balance sheet.
(a) ` 2,00,000 (b) ` 1,00,000
(c)
` 3,00,000 (d) ` 4,00,000
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25. Stock of stationery as on 01.01.05 and 31.12.05 amounts to ` 15,500 and

` 20,500. Trade expenses included purchases of stationary of ` 6,200 and
credit purchases of goods included purchase of stationary worth ` 15,800.
Stationary worth ` 2,000 was withdrawn by the proprietor for personal use.
Calculate the amount of stationery to be debited to P & L a/c.

(a) ` 15,000 (b) ` 20,000
(c)
` 17,000 (d) ` 20,500
26.
1. Opening stock 30,000

2. Closing Stock 40,000
3. Purchases 5,50,000
4. Purchase Return 15,000
5. Sales return 20,000
6. Carriage inward 5,000
Gross profit is 20% of net sales. Find out Gross sales

(a) 6,42,500 (b) 6,62,500
(c) 6,82,500 (d) None of the above
27. A running business was purchased by Mr. A with following assets and
liabilities
Cash in hand 1,000

Cash at bank 5,000
Stock 20,000
Land and building 1,00,000
Plant and machinery 50,000
Owing from Mr. X 12,500
Prepaid Insurance 500
Owing to Z Ltd 3,750
Interest received in advance 250
A’s capital will be

(a) ` 1,95,000 (b) ` 1,82,250
(c)
` 1,85,250 (d) ` 1,85,000
94
28.
Loan A/c credit balance on Dec 31, 2006 15,000

Loan paid on June 30, 2006 4,000
Loan paid on Sept. 30. 2006 5,000
Interest on loan is to be charged 9% p.a
Interest amount will be

(a) 1032.5 (b) 1350
(c) 1867.5 (d) None
29. The manager of a firm is entitled to a commission of 10% on net profit after
his commission’, if the net profit of the firm before charging commission is `
4,40,000, the amount of manager’s commission will be:
(a) ` 44,000 (b) ` 40,000
(c)
` 37,000 (d) ` 33,000
95
Answer
Short Questions
1. 1. 91,200
2. 1,92,500
3. 1,93,300
Fill in the blanks
1. ` 3,200
2. ` 1300
3. ` 1,00,000
4. Adjustment
5. depreciation
6. decrease, decrease
7. current asset, current liabilities
8. Cost of goods sold
9. nominal
10. Balance sheet
11. contingent liability (foot note)
96
Q. 4. Multiple Choice Question [MCQ]

10) Calculation of Cost of Goods Sold (COGS)
COGS 1600
(9) 100 (Assuming)
+ Profit 25
Sales 2000 125
Ans: (c)
12) Calculation of Gross Profit
Sales 4,00,000
(-) Cost of Goods Sold (3,10,000)
Gross Profit 90,000
Ans. (b)
Note :
Expenses are Indirect Expenses shall be Debited to Profit & Loss A/c
18) Calculation of Gross Profit

Since no information is provided related to COGS, G.P. will be calculated by
preparing P & L A/c (Reverse Method)
Profit & Loss A/c
To General Expenses 14,500 By Gross Profit b/d 9,500

By Net Loss 5,000
14,500 14,500
Ans. (d)
97
19) Since there is no opening stock and closing between sales and purchase is
Gross Profit i.e. 3,50,000.
Net Profit
Margins Commission = 10% of Net Profit
= Net Profit
Net Profit = 2,50,000
Calculation of Indirect Expenses

P & L A/c
To Indirect Expenses 1,00,000 By Gross Profit b/d 3,50,000

(Including Commission)
To Net Profit 2,50,000
3,50,000 3,50,000
Ans. (b)
20) Calculation of Indirect Expenses

P & L A/c
To Indirect Expenses 3,800 By Gross Profit b/d 3,300

By Net Loss 500
3,800 3,800
Ans. (b)
21) Salary to be debited to Profit & Loss A/c
Salary paid 2,00,000

(-) Outstanding (P.Y.) (10,000)
(-) Prepaid for Next year (20,000)
(+) Outstanding (C.Y.) 15,000
Salary debited to Profit & Loss A/c 1,85,000
Ans. (b)
98
22) Rent debited to Profit & Loss A/c
Rent paid 50,000

(-) Outstanding (P.Y.) (6,800)
(+) Prepaid in (P.Y.) 5,000
Rent debited to Profit & Loss A/c 48,200
Ans. (b)
23) Calculation of Commission of X
Net profit before Commission 1,000 115 x

(-) X’s Commission (?) 5x
(-) Y’s Commission 10 x
Net Profit After Commission 100 x (Assuming)

X’s Commission = 1,000 x = 43.48 43.5
Ans. (b)

24) Calculation of Current Liabilities
Liabilities Amt. (` ) Assets Amt. (` )

(3,00,000 x 2)
Current Liability 1,00,000 Investments 4,00,000
Current Asset 3,00,000
13,00,000 13,00,000
* Fixed Assets = Double of Current Assets

= 2 x 3,00,000
= 6,00,000
* Fixed Asset = ½ of Capital
6,00,000 x 2 = Capital
Capital = 12,00,000
Ans. (b)
99
25) Calculation of Amount of Stationery Debited to Profit & Loss A/c
Opening Stock of Stationery 15,500

(+) Purchase of Stationery (6,200 + 15,800) 22,000
(-) Stationery withdrawal by Proprietor for personal use (2,000)
(-) Closing Stock of Stationery (20,500)
Stationery Consumed Debited to P & L A/c 15,000
Ans. (a)
26) Calculation of Gross Sales

Trading Account
Liabilities Amt. (`) Amt. (`) Assets Amt. (`) Amt. (`)
To Opening Stock 30,000 By Sales 6,82,500
To Purchases 5,50,000 (-) Sales Return (20,000) 6,62,500
(-) Purchase Return (15,000) 5,35,000 By Closing Stock 40,000
To Carriage Inward 5,000
To Gross Profit 1,32,500
(# 1) 7,02,500 7,02,500
# 1) Gross Profit
= 20% on Net Sales (i.e. 1/5 on Sales)
which is
¼ on COGS
COGS = Op. Stock + Purchases (Net) + Carriage
Inward – Cl. Stock
= 30.000 + 5,35,000 + 5,000 – 40,000
= 5,30,000
Gross Profit = ¼ on COGS
= ¼ on 5,30,000
= 1,32,500
Ans. (c)

100
27) Calculation of Capital
Liabilities Amt. (` ) Assets Amt. (` )

A’s Capital 1,85,000 Land & Building 1,00,000
Owing to Z Ltd. 3,750 Plant & Machinery 50,000
Interest Received in Advance 250 Stock 20,000
Owing from Mr. X 12,500
Cash in Hand 1,000
Cash at Bank 5,000
Prepaid Insurance 500
1,89,000 1,89,000
Ans. (d)
28) Calculation of Loan Amount as on 1.1.2006 (i.e. Beginning of the year)
Loan A/c balance as on 1.1.2006 * 24,000

(-) Loan Repaid on June 30, 2006 (4,000)
(-) Loan Repaid on September 30, 2006 (5,000)
Loan A/c balance as on 31.12.2006 15,000
Calculation of Interest Amount
Interest from 1.1.06 to 30.06.06 → 24,000 x 9% x 6/12 1,080

Interest from 1.7.06 to 30.09.06 → 20,000 x 9% x 3/12 450
Interest from 1.10.06 to 31.12.06 → 15,000 x 9% x 3/12 337.5
Total Interest Amount 1867.5
Ans. (c)
101
29) Calculation of Manager’s Commission
Net profit before charging Manager’s Commission 4,40,000 110

(-) Manager’s Commission ? 10
Net profit after charging Manager’s Commission 100

Manager’s Commission → 4,40,000 x

= 40,000
Ans. (b)
Multiple Choice Questions:
1. (a) 9. (b) 17. (d) 25 (a)

2. (c) 10. (c) 18. (d) 26. (c)
3. (b) 11. (a) 19. (b) 27. (d)
4. (c) 12. (b) 20. (b) 28. (c)
5. (b) 13. (c) 21. (b) 29. (b)
6. (c) 14. (b) 22. (b)
7. (d) 15. (d) 23. (b)
8. (c) 16. (a) 24 (b)
102
TEST PAPER
Marks - 50
1. A profit & loss a/c is a point statement whereas balance sheet is a period
statement.
2. Net profit is reflected in higher cash balance & net loss is reflected in lower net
worth.
3. All intangible assets are fictitious assets
4. Trade discount is a reduction granted by a supplier from the list price of

goods or services on business consideration for prompt payment.
Q.2 Short Questions (7)
1. On 1/1/19 provision for doubtful debts existed at ` 400. Debtors on 31/12/19

were ` 15,000, bad debts totalled ` 1,000. It is required to write off bad debts
& create a provision equal to 5% of debtors.
Prepare ledger a/c to show amount to be debited to P & L A/c.
2. Following is data of manufacturing concern:-

1/1 31/12
Stock of raw material 17,400 18,100
WIP 11,200 11,400
Stock of finished goods 41,500 40,700
During the year manufacturing expenses were ` 61,100 & wages were ` 40,400
& raw material purchase ` 91,900.
1. What is cost of raw material consumed
2. What is manufacturing cost of finished goods produced.
3. What is manufacturing cost of finished goods sold.
103
Q.3 Following are the balances in the ledger of Mr. Patel for the year ended
31st March 2011:
Particulars `
Stock (1.4.2010)
Raw materials 1,00,000
Semi – finished goods 50,000
Finished goods 2,60,000
Purchases:
Raw material 8,00,000
Carriage inwards on raw materials 30,000
Manufacturing wages 1,00,000
Salary of the supervisor 36,000
Rent of the factory 70,000
Gas and water 30,000
Return of raw materials 13,000
Fuel and coal 33,000
Factory Power 1,25,000
Fire insurance 13,000
Sales return 1,20,000
Depreciation on factory building 12,000
Stock on 31. 03. 2011
Raw materials 80,000
Semi-finished goods 1,30,000
Sales 22,00,000
Carriage outwards 35,000
Office salaries 1,50,000
Prepare manufacturing account and trading and profit and loss account for the year
ended March 2011 (15)
104
Q.4 From the following particulars of Mr. Murthy, prepare Manufacturing, Trading and
Profit and Loss. Account for the year ended 31. 03. 2011 and the Balance Sheet as
on the date after making necessary adjustments:
Particulars `
Capital (1.04.2010) 2,50,000
Drawing account 70,000
Discount received 7,020
Provision for bad and doubtful debts 6,000
Purchases returns 5,300
Sales 6,75,000
Sales return 860
Stock of finished goods (1.04.2010) 90,000
Plant and Machinery (including machinery for
Rs. 50,000
purchased on 1.01.2011) 1,70,000
Furniture 15,000
Building 1,50,000
Purchases 3,02,300
Sundry debtors 1,10,000
Manufacturing wages 60,000
Manufacturing expenses 50,000
Carriage inwards 4,000
Carriage outwards 4,200
Bad debts 1,500
Salaries 28,000
Interest and bank charges (Dr.) 1,260
Discounted allowed 1,500
Insurance(Dr.) 3,000
Cash at bank 1,400
Cash in hand 300
Stock of finished goods (31.03.2011) 75,500
105
The following adjustments are to be made:
1. Interest on Capital at 10% p.a. (no interest is to be provided on drawings)
2. Outstanding expenses
a)
Salaries 1,000
b)
Manufacturing wages 500
c) Interest on bank loan 1,000
3. Depreciation on:
a) Machinery at 10%
b) Furniture at 10%
c) Building at 2.5%
4. Pre –paid expenses:

a)
Insurance 1,000
b)
Salaries 500
5. Provision for bad and doubtful debts at 10% on debtors.
Furniture costing ` 5,000 was sold for ` 3,500 on 1.04.2010 and this amount was
later credited to furniture account. (20)
106
HOMEWORK SOLUTION

Q.1 Mr. Rishabh
Dr. Trading and Profit & Loss A/c F.Y.E. 31st March, 1999 Cr.
Particulars ` ` Particulars ` `
To Purchase 80,000 (–) Return Inward (5,000) 1,35000
(+) Unrecorded 6,000 By Goods 2,000
withdrawn
(–) Return outward (4,000) 82,000 By Closing Stock 27,300
of general goods
To Trade Exp. 800 By Goods 10,000
destroyed by fire
To Carriage inward 10,000
To Gross profit c/d 60,200
1,74,300 1,74,300
To Loss by fire 4,000 By Gross profit 60,200

b/d
To Insurance Exp. 1,000 By R.F.D.D
(as per contra) 38
(–) Prepaid (200) 800 By R.F. Dis. on 360
creditors
To Depreciation By Profit of textile 10,000
Dept.
Land & Build 1,800
Plant & mach. 4,000
Furniture 250 6,050
To R.D.D.A/c
Bad debts (O) 400
+ Bad debts (N) 400
+ R.D.D. (N) 900
107
– R.D.D. (O) (1000) 700

To Discount -
allowed
+ R.F.D.D. (N) 342
– R.F.D.D. (O) (380) -
To Int. on Loan. 1,350
To Sundry Exp. 600
To Printing & stat. 500
To Salaries & 18,500
wages
To Net profit 38,098
Total 70,598 Total 70,598
Balance Sheet as at 31st March, 1999
Liabilities ` ` Assets ` `
Capital 1,00,000 Land & Building 90,000
(–) Drawings (2,000) (–) Depreciation (1,800) 88,200
(Goods) (2%)
(–) Drawings (12,000) Plant & Mach. 20,000
+ Net Profit 38,098 1,24,098 (–) Depreciation (4,000) 16,000
(20%)
Furniture 5,000
(–) Depreciation (250) 4,750
(5%)
Creditors 12,000 Cash in hand 1,280
+ Unrecorded 6,000 Closing stock of 8,000
textile goods
18,000 Insurance claim 6,000
(–) R.F.D.C (2%) (360) 17,640 Closing stock of 27,300
general goods
Loan from 30,000 Prepaid Ins. 200
Gajanand @ 6%
p.a
Accrued Interest 1,350 Cash at Bank 4,600
Debtors 18,400
108
(–) Bad Debts(N) (400)

18,000
(–) R.D.D (N) (5%) (900)
17,100
(–) R.F.Dis. on (342) 16,758
debtors (2%)
Total 1,73,088 Total 1,73,088
Int. on,loan.
Int. on loan 1350
[3000 ×6%×9/12]
(–) Int. paid 0
Outstanding Int. 1350
As sundry expenses are given in the question, trade expenses being direct expenses will
be recorded in trading account.
Q.2
Mr. K
To Purchase 15,95000 (–) Sale of (1,10,000) 22,00,000
Investment
(–) Purchase on (45,000) 15,50,000
Machinery
To Freight on pur. 25,000 By Closing 2,25,000
Stock
(–) Freight on mac. (5,000) 20,000
To Wages (11m) 66,000
(+) Outstanding 6,000 72,000
(1m)
To Gross profit c/d 7,08,000
24,25,000 24,25,000
109
To Commission on 45,000 By Gross profit 7,08,000

sales. b/d
(+) Outstanding 10,000 55,000 By Profit 10,000
[2.5% × 22,00,000] on sale of
Investment
To R.D.D.A/c By Discount 15,000
Received
Bad debts (O) 15,000 By Interest on 12,000
investment
+ Bad debts (N) 10,000
+ R.D.D. (N) 12.000
– R.D.D. (O) (8,000) 29,000
To Depreciation
Machinery 52,500
Building 7,500
Furniture 4,000 64,000
To Salaries 1,40,000
To Postage, 12,000
telegram &
telephone
To Printing & 18,000
Stationery
To Misc. Exp 30,000
To Insurance (12m) 24,000
(–) Prepaid (4m) (8,000) 16,000
To Net profit 3,81,000
Total 7,45,000 Total 7,45,000
Capital 8,00,000 Machinery 5,00,000
(–) Drawings (60,000) + Pur. Of 45,000
Machinery
+ Net Profit 3,81,000 11,21,000 + Freight on 5,000
Purchase
110
5,50,000
(–) Depreciation (52,500) 4,97,500
(W.N.)
Building 3,00,000
(–) Depreciation (7,500) 2,92,500
(2.5%)
Furniture 40,000
Outstanding wages 6,000 (–) Depreciation (4,000) 36,000
(10%)
Commission 10,000 Prepaid Ins. 8,000
payable
Creditors 3,00,000 Closing Stock 2,25,000
Investment 1,00,000
(–) Sold (100000) -
Debtors 2,50,000
(–) Bad Debts(N) (10,000)
2,40,000
(–) R.D.D (N) (5%) (12,000) 2,28,000
Bank Balance 1,50,000
Total 14,37,000 Total 14,37,000
Depreciation on Machinery
Old – 5,00,000 × 10% × 12/12 = 50,000
New – 50,000 × 10% × 6/12 = 2,500

= 52,500
111
Q.3
Mr. A
Dr. Trading and Profit & Loss A/c F.Y.E. 31st March,2003 Cr.
To Opening Stock 5,48,200 By Sales 29,35,000
[5,50,000 – 1800]
To Purchase 19,25,000
To Wages + 1,25,000
salaries
To Carriage Inward 40,000 By Closing 7,99,200
stock [8,00,000
– 800]
37,34,200 37,34,200
To Stationery By Gross profit 10,96,000

consumed b/d
Opening stock 1,800 By Commission 40,000
on consignment
sale
+ Purchase 22,500 By Discount 2,000
(–) CL. Stock (800)
23,500
(–) Stationery (2,000) 21,500
consumed by A
To Trade Exp. 34,500
(–) Pur. of stat. (22,500) 12,000
To R.D.D 75,400
To Loss on sale of 1,700
furniture
To Depn on 6,000
Furniture (#2)
To Insurance 35,000
To Commission 40,000
To Interest 35,000
112
To Rent and taxes 1,27,500

Total 11,38,000 Total 11,38,000
Capital 8,95,000 Furniture 60,000
(–) Drawings (2,000) (–) sold (wdv) (11,700)
(stationery (#1)
consumed)
+ Net Profit 7,83,900 16,76,900 (–) Depreciation (6,000) 42,300
(#2)
Debtors 15,00,000
(+) Dishonored 8,000
Bill
15,08,000
(–) R.D.D (5%) (75,400) 14,32,600
Consignor’s 1,20,000 Stock of 800
Balance (#3) stationery
Creditors
[9,32,500 – 3000] 9,29,500 Bills Receivable 2,25,000
Creditors for 3,000 (–) Dishonored (8,000) 2,17,000
stationery
Bills payable 1,85,000 Cash in hand 4,22,500
and at Bank
Total 29,14,400 Total 29,14,400
1) Sale of furniture
Books value as on 1 - 4 – 2002 = 13,000
(–) Depn For 2002 – 03 @ 10% = (1,300)
W.D.V value as on 31- 3 – 2003 = 11,700
(–) Selling price = (10,000)
Loss on sale = 1,700
113
2) Deprecation of furniture
On sold 13000 × 10% × 12/12 = 1,300

On remaining (60000 – 13000) × 10% × 12/12 = 4,700
6,000
3)
Dr. Consignor’s A/c Cr.
To Commission A/c 40,000 By Balance B/d 4,00,000
To Cash /Bank (Sent) 8,00,000 By Consignment sales 6,40,000
To Charges paid against
Consignment 80,000
To Balance c/d 1,20,000
Total 10,40,000 Total 10,40,000
Q.4
Mr. Neel
To Purchase 31,00,000 (–) Returns (55,000)
(–) Purchase of (1,00,000) (–) sale on (1,50,000) 39,45,000
Furniture Approval
(–) Returns (45,000) 29,55,000 By Goods 50,000
withdrawn
To Carriage Inward 10,000 By Closing 1,45,000
stock
To Wages 50,000 (+) Stock with 1,00,000 2,45,000
customer
42,40,000 42,40,000
To R.D.D.A/c By Gross. 7,25,000

profit b/d
114
Bad debts (O) - By Discount 75,000

+ Bad debts (N) 50,000 By Net. Loss 5,02,300
(transferred to
balance sheet)
+ R.D.D. (N) 40.000
– R.D.D. (O) - 90,000
To Depreciation
Furniture & fitting 65,000
Motor car 9,600 74,600
To Salesman 78,000
comm.
+ Outstanding (#1) 3,16,500 3,94,500
To Rates & taxes 50,000
To Salaries 95,000
To Postage & 1,05,000
telegram
To Insurance 90,000
To Printing & Stat. 95,500
To Advertisement 1,70,000
To Discount 50,000
To General Exp. 65,700
To Carriage 22,000
Outward
Total 13,02,300 Total 13,02,300
Balance Sheet as at 31st March,2004
Capital 22,59,200 Furniture& 5,50,000
Fittings
(–) Drawings (50,000) + Purchase 1,00,000
(Goods)
(–) Drawings (45,000) 6,50,000
(–) Net Loss (5,02,300) 16,61,900 (–) Depreciation (65000) 5,85,000
(10%)
Motor car 48,000
115
(–) Depreciation (9,600) 38,400

(20%)
Creditors 4,00,000 Closing stock 1,45,000
Salesman’s comm. 3,16,500 + Stock With 1,00,000 2,45,000
payable Customer
Debtors 10,00,000
(–) Sale on (1,50,000)
Approval
8,50,000
(–) Bad debts (N) (50,000)
8,00,000
(–) R.D.D (N) (5%) (40,000) 7,60,000
Cash in hand 2,50,000
Total 23,78,400 Total 23,78,400
1) Outstanding salesman Commission
Salesman Commission 3,94,500

[39,45,000 × 10%]
(–) salesman comm. Paid (78,000)
Outstanding comm. 3,16,500
Q.5
Mr. Shivam
To Purchase 1,70,000 (–) Sale on (1,200) 2,62,800
Returns
To Carriage Inward 400
To Wages 30,000 By Goods 2,000
given as free
sample
116
(–) Wages for (1,000) 29,000 By Closing 30,000

Installation Stock
To Gross profit c/d 56,400 (+) Stock with 1,000 31,000
customer
2,95,800 2,95,800
To Rent, rates & 7,200 By Gross. 56,400

taxes Profit b/d
To Postage and tax 3,000 By Discount 1,200
To Salaries 14,800
To Machinery lost 2,000
by fire [uninsured
portion]
To Advertisement
[goods distributed] 2,000
To Depreciation on
Plant & Machinery 12,400
Furniture & Fixture 800 13,200
To R.D.D.A/c
Bad debts (O) 800
+ Bad debts (N) 200
+ R.D.D. (N) 950
– R.D.D. (O) - 1,950
To R.F.D.D. (N) 361
To Amortisation of 4,000
Patents (w/o)
To Interest on loan 300
+ Outstanding 300 600
To Insurance 1,600
To Travelling Exp 1,000
To Sundry Exp 600
To Net Profit 5,289
117
Shivam ‘s 1,60,000 Plant & Mac. 60,000
Capital
(–) Drawings (24,000) (–) Loss due to (2,000)
fire
(+) Net Profit 5,289 1,41,289 + Purchase of 4,000
machinery
[3,000 +1,000]
62,000
(–) Depreciation (12,400) 49,600
(20%)
Furniture & 8,000
fixture
Sundry creditors 24,000 (–) Depreciation (800) 7,200
(10%)
Creditors for 3,000 Land 28,350
machinery
Loan from 20,000 Closing stock 30,000
shayam
+ Outstanding 300 20,300 (+) Stock with 1,000 31,000
Interest customers
Bank overdraft 15,000 Debtors 20,400
(–) Sale on (1,200)
return
(–) Bad debts (N) (200)
19,000
(–) R.D.D. (N) (950)
(5%)
18,050
(–) R.F Discount (361) 17,689
on Dr’s (2%)
Patents 40,000
(–) Amortised (4,000) 36,000
[40000 × 1/10]
Cash in hand 13,250
118
Cash at Bank 20,500

Total 2,03,589 Total 2,03,589
Interest on loan
Interest on loan 600

[20,000 × 6% × 6/12]
(–) Interest paid (300)
Outstanding interest on loan 300
Q.6
Mr. GavaskarVishwanath& Co.
Dr. Trading and Profit & Loss A/c F.Y.E. 31st March,2017 Cr.
To Purchase 14,00,000 (–) Sale on (14,000)
Furniture
(-) Purchase of (40,000) (–) Sale (42,000) 22,44,000
type writer Returns
(–) Purchase (26,000) 13,34,000
returns
To Freight on 12,000 By Closing 4,40,000
purchase stock
26,84,000 26,84,000
To Salaries 1,10,000 By Gross. 7,18,000

profit b/d
To Depreciation on By Discount 16,000
received from
creditors
Building 30,000
Furniture & fixture 20,000
Office equipment 30,000
119
Motor car 40,000 1,20,000

To Godown rent 55,000
(10m)
(+) Outstanding 11,000 66,000
(2m)
To Interest on loan 27,000
(+) Outstanding 6,000 33,000
To R.D.D. A/c
Bad Debts (O) 20,000
+ Bad Debts (N) -
+ R.D.D (N) 43,000
- R.D.D (O) (30,000) 33,000
To Insurance 55,000
premium
(–) Life Insurance (40,000)
premium
(15m) 15,000
(–) Prepaid (3m) (3,000) 12,000
To Rates and Taxes 21,000
To Discount 24,000
allowed to Debtors
To Carriage 20,000
outward
To Printing & 18,000
stationary
To Electric charge 22,000
To General office 30,000
Exp.
To Bank charge 16,000
To Motor Car Exp. 36,000
To Net. Profit 1,73,000
Total 7,34,000 Total 7,34,000
120
Capital 16,20,000 Building 6,00,000
Less : Life (40,000) (–) Depreciation (30,000) 5,70,000
Insurance (5%)
premium
(Drawings)
Less : Drawings (1,20,000) Furniture & 2,14,000
Fixture
(+) Net Profit 1,73,000 16,33,000 (–)sold (14,000)
2,00,000
(–) Depreciation (20,000) 1,80,000
(10%)
Outstanding 11,000 Office equipment 1,60,000
Godown rent
Loan from 3,00,000 + Purchase 40,000
vishwanath
(+) Outstanding 6,000 3,06,000 2,00,000
Interest
Sundry creditors 4,30,000 (–) Depreciation (30,000) 1,70,000
(15%)
Motor Car 2,00,000
(–) Depreciation (40,000) 1,60,000
(20%)
Prepaid 3,000
Insurance
Closing stock 4,40,000
Debtors 8,60,000
(–) R.D.D.(N) (5%) (43,000) 8,17,000
Cash in hand 14,000
Cash at Bank 26,000
Total 23,80,000 Total 23,80,000
121
Outstanding Interest on loan
Interest on loan 33,000

[3,00,000 × 12% × 11/12]
(–) Interest paid (27,000)
Outstanding interest 6,000
Q.7
Mr. ABC Traders
Dr. Trading A/c F.Y.E. 31st March, 2017 Cr.
To Opening 1,00,000 By Sales 11,00,000
Inventory
To Purchase 6,72,000 (–) Return (1,00,000) 10,00,000
Inward
(–) Returns (72,000) 6,00,000
outward
To Carriage Inward 30,000
To Wages 50,000 By Closing 2,00,000
stock
12,00,000 12,00,000
Journal proper in the books of M/s ABC Traders.
Date Particulars L.F. Debit (`) Credit (`)

2017
Mar 31 Return outward A/c Dr. 72,000
To Purchases A/c 72,000
(Being returns outward adjusted in
purchases).
Mar 31 Sale A/c Dr. 1,00,000
To Return inward A/c 1,00,000
(Being Return inward adjusted in sales).
Mar 31 Sale A/c Dr. 10,00,000
To Trading A/c 10,00,000
122
(Being sale A/c transferred to trading A/c).

Mar 31 Trading A/c Dr. 7,80,000
To opening Inventory 1,00,000
To purchases 6,00,000
To carriage Inward 30,000
To wages 50,000
(Being opening Inventory, purchase, carriage
& wages transferred to Trading A/c).
Mar 31 Closing Inventory A/c Dr. 2,00,000
To Trading A/c 2,00,000
(Being Closing Inventory recorded in Trading
A/c).
To Gross profit A/c 4,20,000
Mar 31 Gross profit A/c Dr. 4,20,000
To Profit & loss A/c 4,20,000
(Being Gross profit transferred from Trading
A/c to Profit and loss A/c).
Note:
As per ICAI solution, we have passed Entries for gross profit.
Alternatively following entry can be passed.

To Profit & loss A/c 4,20,000
Q.8
Ms. Shivi
Dr. Revised Manufacturing A/c Cr.
To Raw materials 10,00,000 By Trading 18,00,000
consumed A/c [Cost of
[Balancing figure] production
#2]
To Wages to 3,00,000
factory workers
123
To Depreciation 2,00,000
+ Additional
[10,00,000 × 10%] 1,00,000 3,00,000
To Direct Exp. 2,44,000
(–) Electricity
charge
[80,000 × 30%] (24,000)
(–) Delivery charge (20,000) 2,00,000
to customers
Total 18,00,000 Total 18,00,000
Wages for office 50,000

Electricity charge for office 24,000
Delivery charge for customer 20,000
(selling & Distribution)
To be debited to P & L A/c 94,000
Dr. Raw Material A/c (Revised) Cr.
To Opening Stock 1,00,000 By Raw Material 10,00,000
consumed
To Creditors A/c 13,00,000 By Closing stock 4,00,000
(Purchase) (#1)
Total 14,00,000 Total 14,00,000
124
Dr. Creditors A/c Cr.
To Bank A/c 22,00,000 By balance b/d 15,00,000
To Balance c/d 6,00,000 By purchase of 13,00,000
Raw material
Total 28,00,000 Total 28,00,000
2) Calculation of correct Amount Transferred to Trading A/c
Given cost of production transf. to Trading A/c 17,94,000

Add : Additional Depreciation on machinery 1,00,000
Less : Wages related to office (50,000)
Less : Office Electricity charges [ 80000 × 30%] (24,000)
Less : Delivery charges to customers (20,000)
Correct cost of production transferred to Trading A/c 18,00,000
Q9.
Journal proper in the books of Mr. Popatlal.
Date Particulars L.F. Debit (`) Credit (`)

2017
Apr 1 Fixed Assets A/c Dr. 1,25,600
Inventories A/c Dr. 2,06,400
Trade receivable A/c Dr. 1,88,000
Cash A/c Dr. 36,200
To Provision for doubtful Debts 6,200
To Trade payable A/c 1,64,000
To Bank overdraft A/c 1,46,000
To capital A/c 2,40,000
[ Being opening Entry recorded]
125
Q.10
Mr. T
Dr. Trading and Profit & Loss A/c F.Y.E. 31st Mar,2018 Cr.
To Purchase 16,00,000 (–) Returns (99,000)
+ Unrecorded 16,000 + Sales 1000 21,02,000
Returns
wrongly
recorded
(–) Returns (69,000) By closing 1,00,000
stock
(–) Returns
(Unrecorded) (1,000) 15,46,000
22,02,000 22,02,000
To Depreciation 24,000 By Gross. 5,96,000

[14,000 +10,000] profit b/d
To Business Exp 50,000 By Interest on 20,000
fixed deposit
+ Additional 12,000 By Interest on 20,000
Investment
[2,50,000 ×
12% × 8/12]
62,000
(–) Prepaid Exp. (6,000) 56,000
To Rent [17m] 17,000
(–) Prepaid [5m] (5,000) 12,000
To Net Profit 5,44,000
Total 6,36,000 Total 6,36,000
126
(–)Drawings (58,000) + Addition 2,00,000
(70,000-12,000)
(+) Net Profit 5,44,000 10,86,000 (–) Depreciation (10,000) 3,30,000
(200000 ×10% ×
6/12)
12% Investment 2,50,000
Debtors 2,50,000
O/S Int. on Inv. 20,000
Creditors 2,20,000 Prepaid Rent 5,000
+ Unrecorded 16,000 2,36,000 Closing Stock 1,00,000
Bank overdraft 8,000 Prepaid Exp. 6,000
Fixed deposit 2,00,000
with Bank
Cash 1,69,000
Total 13,30,000 Total 13,30,000
Rectification of Error
Wrong Entry
Party A/c Dr. 1,000

Sales Returns A/c Dr. 1,000
To Suspense A/c 2,000
Reverse Entry
Suspense A/c Dr. 2,000

To Party A/c 1,000
To Sales Returns A/c 1,000
127
Correct Entry
Party A/c Dr. 1,000

To Purchase Return A/c 1,000
Rectification Entry
Suspense A/c Dr. 2,000

To Purchase Return A/c 1,000
To Sales Return A/c 1,000
Effects:
[Suspense A/c – Cancelled]
[Less from Purchase]
[Add to sales]
128
PAST EXAM SOLUTION

Q.1
M/s Raghuram and Associates
Dr. Trading A/c for the year ended 31st March, 2018 Cr.
Particulars Amount Amount Particulars Amount Amount

To Purchase 12,00,000 (–) S/R. (24,000) 14,76,000
(–) P/R (18,000) 11,82,000
By Closing 4,10,000
Stock
To Freight Inward 62,000

18,86,000 18,86,000
Dr. Profit and Loss A/c for the year ended 31st March, 2018 Cr.

To Depreciation 80,000 By Gross Profit 3,22,000
To Carriage 8,500 By Discount 12,000
outward Received
To Rent of 55,000
godown
(+) o/s 5,000 60,000
To Rates & Taxes 24,000
To Salaries 72,000
To Discount 7,500
Allowed
To Printing & 6,000
Stationary
To Insurance 6,000
Premium
(–) Prepaid (1,200) 4,800
129
To Electricity 14,000
Charge
To General Exp. 11,000
To Bank charge 3800
To B.D (old) 12,200
(+) B.D (Adj) -
(+) R.DD (Adj) 14,000
(–) R.DD (old) (10,000) 16,200
To Repair on Motor 13,000
veh.
To Interest Loan 4,400
(+) o/s 100 4,500
To Net profit 8,700
Total 3,34,000 Total 3,34,000
Liabilities Amount Amount Assets Amount Amount

Capital 14,11,400 Motor veh. 1,00,000
(–) Drawings (20,000) (–) Dep. (20,000) 80,000
(–) Life insurance (42,000) Land & 5,00,000
Building
+ Net Profit 8,700 13,58,100 (–) Dep. (25,000) 4,75,000
Office 2,00,000
equipment
(–) Dep (30,000) 1,70,000
o/s Rent 5,000 Furniture 50,000
o/s interest 100 (–) Dep (5,000) 45,000
Sundry creditor 62,000 Prepaid 1,200
insurance
Loan from Rajan 60,000 Sundry 2,80,000
debtors
(–) R.D.D (14,000) 2,66,000
Cash 16,000
Bank 22,000
Closing stock 4,10,000
Total 14,85,200 Total 14,85,200
130
Q.2
Mr. SHYAMAL
Dr. Manufacturing A/c for the year ended in 31st Dec, 2019 Cr.

To Opening Stock 26,000
WIP
To Raw material
consumed.
Opening stock 2,60,000
Purchases 8,20,000 By Closing 48,000
Stock of WIP
Closing stock (3,20,000) 7,60,000 By Cost of 19,33,600
production
transferred to
trading A/c
To Hire Charges 3,50,000
of Machinery
[5,00,000 × 0.70]
To Hire Charges 2,60,000
of Factory
To Wages 4,00,000
[5,00,000 × 0.80]
[14,000 × 0.40] 5,600 4,05,600
To Repairs and 1,80,000
Maintance
Total 19,81,600 Total 19,81,600
Q.3
Dr. Profit and Loss Adjustment A/c for the year ended 31st Dec, 2018 Cr.

To Outstanding Exp. 1,85,000 By Net Profit 15,10,000
By Prepaid Insurance 25,000
Total 15,35,000 Total 15,35,000
131
MR. MITTAL
Dr. Balance Sheet as at 31st Dec, 2018 Cr.

Capital 51,00,000 Plant and 31,00,000
machinery
Interest on capital 3,06,000 Less: Dep. (3,10,000) 27,90,000
6% 10%
(–) Drawings (6,20,000) Furniture and 4,00,000
fixture
+ Net Profit 13,50,000 61,36,000 Less: Dep. 5% (20,000) 3,80,000
Trade Payable 13,84,000 Trade 21,00,000
receivables
Less : (1,05,000) 19,95,000
provision
for doubtful
debts 5 %
Outstanding Exp. 1,85,000 Cash at bank 5,20,000
Prepaid 25,000
Insurance
Total 77,05,000 Total 77,05,000
Q.4
Mr. Sandeep
Dr. Trading and Profit & Loss A/c F.Y.E. 31st Dec, 2018 Cr.

To Opening Stock 1,400 By Sales 9,000
To Purchases 12,000 (–) Sales (1,000) 8,000
return
(-) Purchase return (2,000) 10,000
By Closing 4,500
stock
132
To Gross profit c/d 1,100

12,500 12,500
To Taxes and 500 By Gross profit 1,100

insurance b/d
+ Outstanding Tax 200 By Interest 210
accrued on
investment
(–) Prepaid (50) 650 By 500
Insurance Commission
To salaries 2500 (–) Advance (100) 400
+ Outstanding 100 2,600
To R.D.D. A/c
Bad debts (O) 500 By Net loss 2,500
+ Bad debts (N) -
+ R.D.D (N) 1000
- R.D.D (O) (1000) 500
To Interest on 300
overdraft
To Depreciation on 160
furniture
Balance Sheet as at 31st Dec, 2018

Capital 16,000 Furniture 1,600
(–) Drawings (2,000) (–) (160) 1,440
Depreciation
(10%)
(–) Net loss (2,500) 11,500
Investment 4,000
Bank o/d 2,000 + Accrued 210 4,210
Interest
Creditors 2,000 Closing stock 4,500
Bills payable 2,500 Debtors 5,000
133
Outstanding salary 100 (–) R.D.D (N) (1,000) 4,000

Outstanding tax 200 Prepaid 50
Insurance
Outstanding Int. 300 Bills 3,000
on overdraft receivable
Commission 100 Cash 1,500
received in advance
134
TEST PAPER SOLUTION
1. False - A profit & Loss A/c is a period Statement whereas Balance sheet is a
Point statement. A Profit & Loss A/c is prepared for the period to find out Net
Profit or Loss.
Whereas Balance sheet is Prepared as at Particular date to show Financial
Position of the business as at particular date.
2. False - Net profit is reflected in higher Net worth as it will be added to Capital.
Where as Net Loss is reflected in Lower Net Worth as it will be deducted from
capital.
3. False - All Intangible Assets are Real assets not fictitious Assets because they
have sale able value.
4. False - Trade discount is a reduction granted by supplier from the list price for
bulk purchases or for Retaining some Margin for traders to earn Profit.
Q.2 Short Questions
1. Provision for Doubtful Debts A/c

To Bad debts 1,000 By Balance b/d 400
To Balance c/d 700 By Profit & Loss A/c *1,300

[(15,000 -1,000) x 5%]
1,700 1,700
135
2.
(i) Cost of Raw Material consumed.
Opening Stock of Raw Material 17,400
+ Purchase of Raw Material 91,900
(-) Closing Stock of Raw Material (18,100)
Cost of Raw Material Consumed 91,200
(ii) Manufacturing cost of goods Produced
Manufacturing A/c
To Opening W.I.P. 11,200 By Cost of Production *1,92,500
To Raw Materials
Consumed (i) 91,200
To wages 40,400 By Closing W.I.P. 11,400
To Manufacturing Exp. 61,100
2,03,900 2,03,900
(iii) Cost of Finished Goods Sold
Opening Stock of Finished Goods 41,500
+ Cost of production of Finished Goods 1,92,500
(-) Closing Stock of Finished Goods (40,700)
Cost of Finished Goods Sold 1,93,300
136
Q.3
Mr. Patel
Dr. Manufacturing A/c For the year Ended 31st March, 2011 Cr.
To Opening stock of By Cost of Production *11,76,000
Semi- finished goods 50,000 (Transfer to Trading A/c)
To Raw Material By Closing Stock of

Consumed Semi- finished goods 1,30,000
Opening stock 1,00,000
+ Purchases 8,00,000
(-) Returns (13,000) 7,87,000
(-) Closing stock (80,000) 8,07,000
To Carriage Inward on
Raw Material 30,000
To Manufacturing wages 1,00,000
To Salary to Supervisor 36,000
To Rent of Factory 70,000
To Gas and water 30,000
To Fuel and coal 33,000
To Factory power 1,25,000
To Fire Insurance of
Factory 13,000
To Depreciation on
Factory Building 12,000
13,06,000 13,06,000
137
Dr. Trading A/c Profit & Loss A/c For the year Ended 31st March, 2011 Cr.
To Opening stock 2,60,000 By Sales 22,00,000
(Finished goods) (-) sales Return (1,20,000) 20,80,000
To Purchases 1,70,000
(Finished goods)
To Cost of Production 11,76,000 By Closing stock of 2,20,000
To Gross Profit c/d *6,94,000 Finished goods
23,00,000 23,00,000
To Carriage outward 35,000 6,94,000

To office salaries 1,50,000 By Gross profit b/d
To Net profit *5,09,000
6,94,000 6,94,000
Note:
1) It is assumed that fire Insurance is of Factory Assets hence debited to Manufacturing A/c.
138
Q.4
Mr. Murthy
Dr. Manufacturing A/c For the year Ended 31st March, 2011 Cr.
To Purchases 3,02,300 By Trading Account
Less: Return (5,300) 2,97,000 (transfer of cost of
Goods produced) 4,24,750
To Carriage 4,000
inwards
To Manufacturing
Wages 60,000
Add: Outstanding 500 60,500
To Manufacturing
Expenses 50,000
To Depreciation on
Machinery 13,250
4,24,750 4,24,750
139
Dr. Trading & Profit /Loss A/c for the year ended 31st March 2011 Cr.
To Opening Stock 90,000 By sales 6,75,000
Less: Return (860) 6,74,140
To Manufacturing A/c By Closing Stock 75,500
(Cost of goods
Produced) 4,24,750
7,49,640 7,49,640
To Salaries 28,000 By Gross Profit b/d 2,34,890

Add: Outstanding 1,000 By Discount 7,020
29,000
Less: Pre -paid (500) 28,500
To Interest and bank
Charges 1,260
Add: Outstanding 1,000 2,260
To Discount allowed 1,500
To Insurance 3,000
Less: Pre – paid (1,000) 2,000
To Carriage outwards 4,200
To Provision for bad
Debts
Bad debt (O) 1,500
Bad new (N) -

R.D.D. (N) 11,000
(-) RDD (O) (6,000) 6,500
To Loss on sale of
Furniture 1,500
To Depreciation on:
Building 3,750
Furniture 1,350 5,100
To Interest on Capital 25,000
To Net profit transferred
to capital account 1,65,350
2,41,910 2,41,910
140
Mr. Murthy
Balance Sheet as on 31st March, 2011
Capital 2,50,000 Fixed Asset:
Add: Net Profit 1,65,350 Building 1,50,000
Interest on capital 25,000 Less: Depreciation (3,750) 1,46,250
4,40,350 Plant and machinery 1,20,000
Less: Drawings (70,000) 3,70,350 Add: Additions 50,000
Current Liabilities: 1,70,000
Bank overdraft 40,000 Less: Depreciation (13,250) 1,56,750
Sundry creditors 80,000 Furniture 18,500
Outstanding Less: cost of furniture
expenses: Disposed of during the
Salaries 1,000 Year (5,000)
Manufacturing Less: Depreciation (1,350) 12,150
wages 500 Current Assets:
Interest on bank Stock 75,500
loan 1,000 2,500 Debtors 1,10,000
Less: Provision for bad
And doubtful debts (11,000) 99,000
Cash at bank 1,400
Cash in hand 300
Pre – paid expenses:
Insurance 1,000
Salary 500 1,500
4,92,850 4,92,850
(i) Book value of furniture sold has been deducted for calculating depreciation.
141
4
PARTNERSHIP
THEORY SECTION
UNIT I – GENERAL PARTNERSHIP

1. Partnership Defined:-
As per the Partnership Act, 1932, Partnership is the relation between persons
who have agreed to share the profits of business carried on by all or any one of
them acting for all.
2. Features of Partnership:-
Note:- In addition to above partnership firm is not a separate legal entity and
so it cannot buy property or investments in partnership firms name. Further the
liability of each partner is unlimited.
3. Registration of firm
Registration of the firm is not compulsory but non registration restricts the partners
or the firm from taking any legal actions.
4. General Provisions:
The rights, duties and power of partners can be changed by mutual consent.
Students should remember that in the absence of any agreement to the contrary
142
1. no partner has the right to a salary,

2. no interest is to be allowed on capital,

3. no interest is to be charged on the drawings,

4. interest at the rate of 6% p.a. is to be allowed on a partner's loan to the
firm, and

5. profits and losses are to be shared equally.
Note : In the absence of an agreement, the interest and salary payable to a partner
will be paid only if there is profit.
5. P & L Appropriation A/c

In a partnership, profit has to be divided between the partners in a certain profit
sharing ratio after making necessary adjustments stated in the partnership deed
such as interest on capitals, drawings and loans; salaries or/and commission
to partners etc. Accordingly, an additional account is prepared and net profit is
transferred from the debit side of the profit and loss account to the credit side of
this new account which is called Profit and Loss Appropriation Account and before
the profit is divided between partners, it is necessary to record the above stated
adjustments in this account.

143
Format of the P & L Appropriation A/c
To Interest on Capital By Net Profit B/d xx

A xx
B xx By Interest on Drawings
C xx xx A xx
To Salary to Partners B xx
A xx C xx xx
B xx
C xx xx
To Commission to Partners
A xx
B xx
C xx xx
To Interest on Partners Loans
A xx
B xx
C xx xx
To Profit
A xx
B xx
C xx xx
xx xx
6. Method of Maintaining Capital Account:-
144
7. Interest on Capital :
Interest is generally allowed on capitals of the partners. Interest on capital of partners
is calculated for the relevant period for which the amount of capital has been used
in the business. Normally, it is charged for full year on the balance of capital at the
beginning of the year unless some fresh capital is introduced during the year. On
the additional capital introduced, interest for the relevant period of utilisation is
calculated. Subject to contract between the partners, interest on capitals is to be
provided out of profits only. Thus in case of loss, no interest is provided. But in case
of insufficient profits (i.e.net profit less than the amount of interest on capital), the
amount of profit is distributed in the ratio of capital as partners get profit by way
of interest on capital only. In case of fixed capital account, interest is calculated on
balance of capital account only and no interest is payable / chargeable on current
account.
Interest on capital can also be calculated on effective capital method. Effective

capital means amount of capital x months / days of use of that capital.
In this case
Interest on capital = Effective capital x interest rate
No. of days / months in a year
Journal Entry to record interest on capital

Profit and Loss Appropriation Account Dr.
To (Individual) Capital (or Current) Accounts of Partners
8. Interest on Drawings:
Sometimes interest is not only allowed on the capitals, but is also charged on
drawings. If the date of drawings is given then interest will be calculated for period
from each drawings to year end.

Journal Entry to record interest on Drawing
(Individual) Capital (or Current) Accounts of Partners Dr.
To Profit and Loss Appropriation Account
145
If withdrawals are made evenly

 In the beginning of each month, interest should be calculated for the
whole of the amount for 6-1/2 months ;
 At the end of each month, interest should be calculated for the whole of
the amount for 5-1/2 months
 In middle of every month then interest should be calculated for the

whole of the amount for 6 months.
 In the beginning of each quarter, interest should be calculated for the

whole of the amount for 7-1/2 months ;
 At the end of each quarter, interest should be calculated for the whole of the
amount for 4 – 1/2 months
 In the beginning of each 6 month, interest should be calculated for the

whole of the amount for 9 months
 At the end of each 6 month, interest should be calculated for the whole
of the amount for 3 months.
9. Guarantee of Minimum Profit:

Sometimes, one partner can enjoy the right to have minimum amount of profit in
a year as per the terms of the partnership agreement. In such case allocation of
profit is done in a normal way. If share of the partner is less than the guaranteed
amount, he takes minimum profit. If share of partner who has been given guarantee
of minimum profit is more than guaranteed profit then he will be credited with
actual share of profit. i.e. guaranteed partner is entitled to share of profit as per
profit sharing ratio or minimum guaranteed profit whichever is higher. Excess of
guaranteed share of profit over the actual share is borne by the remaining partner
or partners who have given the guarantee.
There are three possibilities as far as share of deficiency by other partners is

concerned.
146
These are as follows:

 Excess is payable by one of the remaining partners.
 Excess is payable by at least two or all the partners in an agreed ratio.
 Excess is payable by remaining partners in their mutual profit sharing ratio.

If the question is silent about the nature of guarantee, the burden of guarantee is
borne by the remaining partners in their mutual profit sharing ratio.
10. Commission to partners

If commission is on NP before charging commission, then commission =
Commission %
NP x
100
If commission is on NP after charging commission, then commission =

Commission %
NP x
100 + Commission %
11. Rectification in P & L Appropriation

 In such cases prepare P & L Appropriation and Capital / Current A/c.
 Reverse entries where there is mistake and make correct entries.
 Resultant corrected profit distribute amongst partners.
 If the question ask for adjusting entries in capital account then find net effect
of above rectification on capital account.
12. Distinguish Between

1. Fixed and Fluctuating Capital
Fixed Capital Fluctuating Capital

1. When the capital remains fixed or Where the capital is not fixed
constant during the lifetime of the and the balance goes on
partnership business, it is known as fluctuating or changing, it is
fixed capital. called fluctuating capital.
147
2. There are no entries made in this There is no separate current A/c

capital A/c. The share of profit or made, so all the entries relating
loss, interest on capital or drawings, to profit of loss, interest on
personal drawings etc. of a partner capital or drawings, withdrawls
are transferred & recorded in his or salaries to partners are
current A/c. transferred and recorded in
partners Capital A/c.
3. There are two accounts maintained There is only one account
i.e. Partner Capital A/c & Partner maintained i.e. Partner Capital
Current A/c A/c.
4. It always shows a credit or positive It may show a debit or credit
balance in the capital A/c. balance in the capital A/c.
5. The Balance of both capital account The Balance is not shown
and current account are shown separately as there is only one
separately at the balance sheet. account maintained.
2. ORDINARY PARTNERSHIP FIRM AND AN LLP

No. Key Elements Partnerships LLPs

1. Applicable Law Indian Partnership Act The Limited Liability
1932 Partnerships
Act, 2008
2. Registration Optional Compulsory with ROC
3. Creation Created by an Agreement Created by Law
4. Body Corporate No Yes
5. Separate Legal No Yes
Entity
6. Perpetual Partnerships do not have It has perpetual
Succession perpetual succession succession and
individual partners may
come and
go
7. Number of Minimum 2 and Minimum 2 but no
Partners Maximum 50 maximum limit
148
8. Ownership of Firm cannot own any The LLP as an

Assets assets. The partners own independent entity
the assets of the ¬firm can own assets
9. Liability of Unlimited: Partners are Limited to the extent
Partners / severally and jointly of their contribution
Members liable for actions of other towards LLP except
partners and the fi¬rm in case of intentional
and their liability extends fraud or wrongful act of
to personal assets omission or commission
by a partner.
10. Principal Agent Partners are the agents Partners are agents of
Relationship of the -firm and of each the firm only and not of
other other partners
UNIT II – TREATMENT OF GOODWILL IN PARTNERSHIP ACCOUNTS
1. Goodwill Defined
Goodwill is capacity of business to earn above normal profits (i.e. super profits) in
future. Goodwill is intangible asset.
2. Why to value goodwill

The necessity for valuation of goodwill in a firm arises in the following cases
a) When the profit sharing ratio amongst the partners is changed;
b) When a new partner is admitted;
c) When a partner retires or dies; and
d) When the business is dissolved or sold.
3. Major factors which affects value of goodwill

(i) The quality of the goods sold.

(ii) The personal reputation of the owners i.e., their ability to attract the customers.

(iii) The location of the business premises e.g., a good position in a congested
market.
149
(iv) The possession of near monopoly right e.g. main agent for a particular vehicle
like, Maruti car, Bajaj scooter, etc.
(v) The possession of trademarks and patents.
(vi) The presence of managerial skill.
(vii) The cost of research and development which enables the production at low
cost and of good quality.
4. Treatment of goodwill in books of accounts as per Accounting Standard

 Goodwill should be recorded in the books only when some consideration in
money or money’ worth has been paid for it. Accordingly, on admission or
retirement/death of a partner or even when there is a change in profit sharing
ratio amongst the existing partners, goodwill should not be raised in the
books of account of the partnership firm because no consideration in money
or money’ worth has been paid for it. The conclusion is that only purchased
goodwill should be recorded in the books of account whether the payment is
made directly in cash or money’ worth.
 In the event of reconstitution of the firm due to admission, or retirement

or death of a partner or even a change in the profit sharing ratio without
reconstitution, goodwill of the firm is evaluated. In such a situation, the value
of goodwill should not be brought into books of account because it is inherent
or self-generated goodwill since no money or money’ worth has been paid for
it. The only way out is that the value of goodwill as calculated with the help
of different valuation methods should be adjusted through capital accounts of
the partner(s) of the firm.
5. Method of goodwill valuation

There are four methods for valuation of goodwill
1. Average profit basis,
2. Super profit basis,
3. Annuity basis, and
4. Capitalisation basis
150
1. Average Profit Method: In this case the profits of the past few years are averaged
and adjusted for any expected change in future. For averaging the past profit,
either simple average or weighted average may be employed depending upon the
circumstances. If there exists clear increasing or decreasing trend of profits, it is
better to give more weight to the profits of the recent years than those of earlier
years. But, if there is no clear trend of profit, it is better to go by simple average.
While calculating average profit only pure business profit should be taken into
consideration by eliminating non-operating items.
Average profit can be calculated as follows

Step: - 1
Past years Year I Year II Year III Year IV

Profits xx xx xx xx
Add: Reversal of non-recurring xx xx xx xx
expenses e.g. loss on sale of asset
/ loss due to natural calamities
etc.
Less: Reversal of non-recurring xx xx xx xx
incomes e.g. profit on sale of asset
Less: Reversal of non-operating xx xx xx xx
incomes e.g. interest income on
investments
Past Adjusted Profits xx xx xx xx
Step: - 2
151
Step:- 3
Average past adjusted profits (as calculated in step 2) xx
Add:- Future incomes p.a. xx
Less:- Future Expenses p.a. xx
Less:- Remuneration of proprietor or partner p.a. xx
Average profit for goodwill (future maintainable profits) xx
Goodwill = Average profit as calculated above x no. of years of purchase
2. Super Profit Method : Super profit represents excess profits earned by the firm over
and above the normal profit earned by the other firms under similar circumstances.

Step 1 :- Actual profit
Actual Profit = Average profit as calculated in step 3 above
Step 2 :- Capital Employed

Revised values of all assets xx
(Excluding Goodwill and investments)
(-) Revised values of all liabilities xx
xx
Step 3 :- Normal rate of return

= Risk free returns (interest) on investment + return for risk in business
Step 4 :- Normal profit = Capital employed x normal rate of return

Step 5 :- Super Profit
(Step 1 - Step 4)
Step 6:- Goodwill

= SP x no. of years
3. Annuity Method : In Super Profit Method, the time value of money has not been
considered. There is no devaluation done on the value of money for the time
difference. In fact the super profits will arise at different points of time, its value
should be different depending upon the rate of interest.
152
The Goodwill is valued as follows :
Steps 1 to 5 Same as Super Profit Method
Steps 6 : Goodwill = Super Profits x Annuity Factor
1
Annuity factor =∑ for no. of years of purchase
(1+R)n
Where r = rate of interest and n = no. of years
4. Capitalisation of Super Profit Method

Step 1 to 4 same as Super Profit Method
100
Step 5: Goodwill = Super Profit x
Normal Rate of Return
5. Capitalisation of Average Profit Method

Average Profit
Step 1: Capitalised Value of Business = x 100
Normal Rate of Return
Step 2: Goodwill = Capitalised Value of Business – Capital Employed
6. Hidden Goodwill :
Sometimes if a partner is bringing higher capital in proportion to existing capital of
old partners, it is to be concluded that the firm is having hidden goodwill. Hidden
goodwill can be calculated as follows:-
Total capital of the firm based on new partners capital and his share xx
Less:- Actual capital of all the partners (including new partner) xx
7. Change in Profit sharing ratio

If there is change in PSR then adjustment needs to be made for goodwill in following
manner –
Step 1 -
Calculate sacrifice ratio of all partners i.e. old ratio – new ratio
If there is negative sacrifice ratio it means partner has gained due to change in PSR
and if sacrifice ratio is positive it means partner has lost due to change in PSR
153
Step 2 -
Debit Partner’s Capital (who has gained i.e. negative sacrifice ratio)
Credit Partner’s Capital (who has lost)
By an amount = goodwill of the firm x sacrifice ratio
UNIT III – ADMISSION OF PARTNER

On admission of a partner in a partnership following changes will be made in accounts
1. Changes in profit sharing ratio

On admission of partner, new partner will have to be given share of profit which will
have to be sacrificed by old partners. So there will be change in old profit sharing
ratio.
Following are cases of calculation of new profit sharing ratio and sacrifice ratio
when new partner is admitted -
Case I: When new partner’s share is given but the question is silent about the sacrifice
made by the old partners: In this case it is assumed that the old partner will share
the remaining share (after giving new partner’s share) in their old profit sharing
ratio.
Example: A and B are partners sharing profit in the ratio 3:2. They admit C for 1/3
share in future profit. Calculate the new ratio.
Solution
Share in Firm = 1
C’s Share = 1/3
Remaining Profit = 1 - 1/3 = 2/3
This remaining share of 2/3 is divided between A and B in the ratio 3:2
So A’s share = 2/3 × 3/5 = 6/15
B’s share = 2/3 × 2/5 = 4/15
C’s share = 1/3 × 5/5 = 5/15
New ratio = 6/15: 4/15: 5/15 = 6:4:5
In this case when new ratio of new partner is given and new ratio of old partner not
given in question, sacrifice ratio = old ratio = 3 : 2.
154
Case II: When new partner purchases his share from old partner’s in a particular
ratio: In this case the new ratio of the old partners will be calculated by deducted
the proportion given to the new partner from the shares of old partner.
Example: X & Y are partners sharing profit / losses in 7:5. They admit Z as new
partner who acquires his share as 1/12th from X & 1/8th from Y.
Solution
X Y
old ratio 7/12 5/12
(–) sacrifice 1/12 1/8
New share 6/12 7/24

1 1 5
Z’s share = + = New ratio = 12 : 7 : 5
12 8 24
1 1
Sacrifice ratio = + =2:3
12 8
Case III: When the old partners surrender a particular fraction of their share in
favour of new partner.
Example 1: X & Y are partners sharing profit & losses in 7 : 3. X Surrenders 1/7th of
his share & Y surrenders 1/3rd of his share in favour of Z, a new partner.
Solution
( (
7 1 7 6
X new share = - x =
10 7 10 10
( (
3 1 3 2
Y new share = - x =
10 3 10 10
1 1 2
Sacrifice ratio = + = new ratio = 3 : 1 : 1
10 10 10
1 1
Sacrifice ratio = : = 1:1
10 10
Example 2: X & Y share profit & loses in 7 : 3. X surrenders 1/7th from his share & Y
surrenders 1/3rd of his share in favour of Z (new partner)
155
Solution
7 1 39
X new share = - =
10 7 70
( (
3 1 3 2
Y’s new share = - x =
10 10 10 3
1 1 17
Sacrifice ratio = + = new ratio = 39 : 14 : 17
7 10 70
Sacrifice = 10 : 7
Case IV: When the new partner acquires his share entirely from one old partner: In this
case the sacrificing partner share is calculated by deducting his sacrifice from his old
share.
Example: A and B are partners sharing in the ratio 3:2. They admit C for 1/5th share in
profits which he acquires entirely from A. Calculate the new ratio.
Solution:
A’s old share = 3/5; Sacrifice in favour of C = 1/5
A’s new share = 3/5 - 1/5 = 2/5
B’s share = 2/5
C’s share = 1/5
New ratio = 2:2:1
Case V: When the new partner acquires his share from the old partners in the certain
ratio: In this the sacrifice of each partner is deducted from their old shares.
Example:A & B share profits & losses in 3 : 2. C is admitted with 1/5th share which he
acquires from A & B in 2 : 1.
Solution
( (
3 1 2 7
A’s new share = - x =
5 5 3 15
( (
2 1 1 5
B new share = - x =
5 5 3 15
1 3 3
C’s new share = x = new ratio 7 : 5 : 3
5 3 15
Sacrifice ratio = 2 : 1
156
Other cases:-
1. X, Y & Z are partners in 3 : 2 : 1. W is admitted with 1/6 share in profit. Z would retain
his original share.
Sol. Let total share = 1
1 1 1
Share of z + w = + =
6 6 3
1 2
Remaining share = 1 - =
3 3
3 2 6 , 2 2 4
X’s share = x = Y’s share = x =
5 3 15 5 3 15
6 4 1 1
New ratio = : : : i.e. 12 : 8 : 5 : 5
15 15 6 6
2. A & B are partners sharing profit and losses in 3 : 2. They admit C for 1/5th share in
profit. C acquires 1/5th of his share from A.
Sol.
( (
3 1 1 14
A new share = - x =
5 5 5 25
( (
2 4 1 6
B new share = - x =
5 5 5 25
14 6 5
New PSR = : : = 14 : 6 : 5
25 21 25
1 4
Sacrifice ratio = : = 1:4
25 25
3. X & Y share profit & losses in ratio 5 : 3. Z is admitted for 3/10th share ½ of which
was gifted by X & remaining share was taken by Z equally from X & Y.
Sol.
5 3 3 16
X’s new share = - - =
8 20 40 40
3 3 12
Y’s new share = - =
8 40 40
3
Z’s new share = new ratio = 4 : 3 : 3
10
9 3
Sacrifice ratio = : i.e. 9 : 3, i.e. 3 : 1
40 40
157
4. X & Y are sharing profit & losses in 5 : 3. They admit Z & decide that PSR between Y &
Z shall be same as existing between X & Y.
Sol. X Y Z
5 : 3 5 : 3
X5 X5 X3 X3

25 15 15 9
New ratio = 25 : 15 : 9

As seen above, on admission of new partner old partners have to sacrifice some share
for new partner.
Sacrificing Ratio:
Ratio in which the old partners sacrifice their share in favour of new partner is called
Sacrificing ratio. This ratio is calculated by taking out the difference between old profit
shares and new profit shares.
Sacrificing ratio = Old Profit sharing ratio - New Profit sharing ratio
2. Distribution of Reserves :
The undistributed profits of the firm must be distributed among the old partners in
old Ratio.
Entry :
All Reserve A/c Dr. xx
To A's Capital A/c xx
To B's Capital A/c xx
Note : If it is stated in the question that General Reserve should appear as it is after
admission then the above general reserve (which is already written off) should be
recreated after admission in new Ratio.
Entry :
A's Capital A/c Dr. xx
B's Capital A/c Dr. xx
C's Capital A/c Dr. xx
To All Reserve A/c xx
158
If there are any losses in balance sheet e.g. P & L Account on asset side, deferred
revenue expenditure on asset side distribute such losses among old partners before
admission
Entry :
To P & L A/c xx
Note:- A and B are assumed to be old partners and C is a newly admitted partner
in above entries
3. Revaluation of assets & liabilities

When a new partner is admitted into the partnership, assets and liabilities are
revalued before admission of partner. A Revaluation Account (or Profit and Loss
Adjustment Account) is opened for the purpose and it is a nominal account. This
account is debited with all reduction in the value of assets and increase in liabilities
and credited with increase in the value of assets and decrease in the value of
liabilities. The difference in two sides of the account will show profit or loss. This is
transferred to the Capital Accounts of old partners in the old profifit sharing ratio.
The entries to be passed are:
1. Revaluation Account Dr.
To Assets Accounts with the reduction in the value of the assets
(individually which show a decrease)
To Liabilities Accounts with the increase in the liabilities.
(Individually which have to be increased)

2. Assets Account (Individually) Dr. with the increase in the value of assets.
Liabilities Accounts Dr. with the reduction in the amount
liabilities.
To Revaluation Account
3. Revaluation Account Dr. with the profit in the old profit

sharing ratio.
To Capital A/cs of the old partners
or
159
Capital A/cs of the old partners Dr. with the loss in old profit sharing
ratio.
As a result of the above entries, the capital account balances of the old partners
will change and the assets and liabilities will have to be adjusted to their proper
values. They will now appear in the Balance Sheet at revised figures.
Sometimes all the partners including the new partner may agree to keep the assets
and liabilities at the old values even when they agree to revalue them. To record
these, a Memorandum Revaluation Account is opened. This account is divided into
two parts.
(a) In the first part the entries for the revaluation of assets and liabilities are
made in the usual way as explained earlier. The resultant profit or loss on
revaluation in the first part of this account is transferred to the capital accounts
of old partners only in the old profit and loss sharing ratio.

Journal Entries
Assets Accounts Dr (with increase in the value of
individual assets)
Liabilities Accounts Dr. (With decrease in the value of
individual liabilities)
To Memorandum Revaluation Account
Memorandum Revaluation Account Dr.

To Assets Accounts (with decrease in the value of individual assets)
To Liabilities Accounts (with increase in the value of individual liabilities)

To Old Partners’ Capital Accounts
(in case of profit)
Old Partners’ Capital Accounts Dr.

(in case of loss)
160
(b) In order to complete the double entry, entries made in the first part of
Memorandum Revaluation Account are reversed in the second part so that
the values of the assets and liabilities remain unchanged. The balance of the
second part is transferred to the capital accounts of all the partners including
new partner in their new profit and loss sharing ratio. Thus if there is a profit
in the first part there will be a loss of the same amount in the second part. The
only point to be remembered is that the result of the first part of Memorandum
Revaluation Account is shared by old partners in the old profit sharing ratio,
while the result of the second part is shared by all partners including the new
one in the new profit sharing ratio.
Entry for sharing profit or loss of second half of memorandum revaluation Account
To All Partners’ Capital Accounts (New profit and loss sharing ratio)
(in case of profit)
All Partners’ Capital Accounts Dr. (New profit and loss sharing ratio)
(in case of loss)
Format of Memorandum Revaluation Account
↓ Assets ↑ Assets
↑ Liabilities ↓ Liabilities
Transfer Profit to old partners (old Transfer loss to old partners (old
ratio) ratio)
↑ Assets ↓ Assets
↓ Liabilities ↑ Liabilities
Transfer Profit to all partners (new Transfer loss to all partners (new
ratio) ratio)
161
Note:- Revaluation account is also known as P & L Adjustment A/c.
What is the difference between Revaluation A/c and Memorandum revaluation A/c?
Basis Revaluation A/c Memorandum Revaluation A/c

Purpose To ascertain profit or loss on To record the effect of revaluation
revalued figures appearing keeping value of assets and liabilties
is new Balance Sheet. revalued in books unchanged.
Division No division is made Account is divided into two parts:
1. For old partners.
2. For all existing partners including
new partners.
Posting Net result is transferred to Balance of 1st part is transferred old
old partners’ capital A/c in partners’ capital account is old P.S.R.
old P.S.R. and balance of 2nd part is transferred
to all partners in new P.S.R.
4. Goodwill Adjustment:-
a) The goodwill should be recorded in the books only when some consideration
in money or money’s worth has been paid for it. Therefore, only purchased
goodwill should be recorded in the books of the firm.
b) In case of admission of a partner, goodwill cannot be accounted in the books

of the firm because no consideration in money or money’s worth is paid for it.
c) On admission of partner three situation can arise for goodwill adjustment.
1) If the incoming partner brings any premium over and above his capital
contribution at the time of his admission, such premium should be
distributed to other existing partners in sacrifice ratio. If the sacrifice ratio
of the existing partner is negative (gain) then even existing partner has
to bring in goodwill amount to the extent of his negative sacrifice ratio x
total goodwill of firm
2) Sometimes, goodwill may be evaluated in case of admission of a partner

when incoming partner is unable to bring in cash for goodwill. In that
162
situation also, the value of goodwill should not be raised (accounted) in

the books since it is inherent goodwill. Rather it is preferable that such
value of goodwill should be adjusted through partners’ capital accounts.
3) It may also be noted that when the incoming partner pays any premium
for goodwill privately to the existing partners, no entry is required in the
books of the firm.

In case of admission, goodwill is compensation to old partner for the
sacrifice in connection with admission of new partner
Treatment of Goodwill in accounts (for admission)
When new partner When new partner does

brings in his share of not bring in his share of
goodwill in cash goodwill in cash
Cash/Bank a/c Dr. New partner a/c Dr.
(with his share of Goodwill)
To old partners To old partners
(in sacrifice ratio) (in sacrifice ratio)
If goodwill is withdrawn by old partners then entry is

Old Partners Capital A/c Dr.
To Cash / Bank
Note:
1. Goodwill appearing in existing balance sheet to be written off (debited to old
partners) in old ratio before passing above entries.
Old Partner’s Capital A/c Dr.
To Goodwill A/c
2. If goodwill is paid privately then will be no entry in books of firm.
163
5. Capital brought by new partner:

The capital would be introduced by new partner generally in cash but at times it
could also be in form of assets.
Cash / Bank A/c Dr. xx
Assets A/c Dr. xx
To C's Capital A/c xx
Proportionate Capital:
Sometimes the new partner may be required to bring in proportionate capital. In
this case, the capital to be brought in by new partner is to be decided on the basis
of total capital of old partners after all adjustments in relation to admission.
Example: A and B admit C as new partner, new profit sharing ratio being 3 : 2 : 1.
Capital of old partners after all adjustments relating to admission is ` 3,00,000
and ` 2,00,000. Find new partners capital
Solution
A+B's Capital
C’s Capital = x C’s New PSR
A+B's New PSR
5,00,000
i.e. = x 1 = `1,00,000
5
6. Capital Adjustment :
The partner's capital accounts after admission may have to be adjusted in new
PSR (taking C's capital as base) and the excess or deficit capitals of old partners
may have to be adjusted through cash a/c, current a/c or loan a/c as specified. (If
nothing is specified then cash / bank a/c).
In the following two cases capital adjustment should be taken as hidden adjustment.
(a) When new partner brings in proportionate capital
(b) When old capitals before admission are in old PSR
UNIT IV– RETIREMENT OF A PARTNER

A partner may retire from the partnership firm because of old age, illness, etc. Generally,
the business of the partnership firm may not come to an end when one of the partners
retires. Other partners may continue to run the business of the firm. Readjustment takes
place in case of retirement of a partner likewise the case of admission of a partner.
164
Whenever a partner retires, the continuing partners make gain in terms of profit sharing
ratio. Therefore, the remaining partners arrange for the amount to be paid to discharge
the claims of the retiring partners. Assets and liabilities are revalued, value of goodwill
and surrender value of joint life policy, if any, is taken into account. Revaluation profit and
reserves are transferred to capital or current accounts of partners. Lastly, final amount
due to the retiring partner is determined and discharged.
On retirement of a partner in a partnership following changes will be made in accounts:
1. Changes in Profit Sharing Ratio:

On Retirement of Partner, continuing partners will gain in terms of profit sharing
ratio. i.e. retiring partner’s share of profit would be taken by remaining partner.
A. When the new ratio is given, gaining ratio is calculated by deducting their
new share of profits from the old share. i.e. Gain Ratio = New Ratio - Old
Ratio
B. When the new profit sharing ratio is not given and the remaining partners
share the future profits in the same ratio as before, the gaining ratio would
be the old profit sharing ratio.
Following are cases of calculation of new profit sharing ratio and gain ratio when a
partner retires -
Case 1: When nothing is given about the new profit sharing ratio of the remaining
partners: Under this situation the calculation of new ratio is done by striking out the
share of the retiring partner.
Example : Alok, Bhaskar and Chetan are partners sharing in the ratio 3:2:1. Calculate
new ratio if:
(a) If Alok retires.
(b) If Bhaskar retires.
(c) If Chetan retires.
Solution:
Old Profit ratio = 3:2:1
(a) If Alok retires new profit ratio will be 2:1
165
(b) If Bhaskar retires new profit ratio will be 3:1

(c) If Chetan retires new profit ratio will be 3:2
Case 2: When gains of the continuing partners are specifically given in the question:
In such a case, the new shares of the continuing partners are calculated by adding
their respective gain to their old share. New share = Old share + Gain
Example:1 Aarav, Banta and Chunmun are partners sharing in the ratio 3:2:1.
Aarav retires and his share is taken over by the remaining partners as follow Banta
takes 2/6th from Aarav. Chunmun takes 1/6th from Aarav. Calculate new ratio.
Solution:
Banta’s New Share =
Banta’s old share + Banta’s gain = 2/6 + 2/6 = 4/6 Chunmun’s New Share =
Chunmun’s old share + Chunmun’s gain = 1/6 + 1/6 = 2/6
So the new share = 4/6: 2/6 = 2:1.
And gain ratio = 2 : 1
Example: 2
X, Y & Z are partners sharing profits & loses in 4/9, 1/3 & 2/9. Y retires & surrenders
1/9th of his share in favour of X & remaining in favour of Z.
Solution
( (
4 1 1 13
X’s new ratio = + x =
9 9 3 27
( (
2 8 1 14
Z is new ratio = + x =
9 9 3 27
1 8
New ratio = 13 : 14, Gain ratio = : =1:8
27 27
Example 3: X,Y & Z share profits & losses in 4 , 1 & 2 Y retires & surrenders 1/9th
9 3 9
from his share in favour of X & remaining in favour of Z.
Solution
X’s new ratio = 4 + 1 = 5
9 9 9
2 2 4
Z’s new ratio = 9 + 9 = 9
166
New ratio = 5 : 4
Gain ratio = 1 : 2
Case 3: When the ratio in which the remaining partners acquire the share of the
outgoing partner is given:
Example: Deepu , tasha and honey are partners sharing profits in the ratio 3:2:1.
Tasha retires and his share was acquired by deepu and honey in the ratio 2:1.
Calculate new ratio.
Solution:
Share acquired by Deepu = 2/6 × 2/3 = 4/18
Share acquired by Honey = 2/6 × 1/3 = 2/18
Deepu’s new Share = Deepu ‘s old share + Deepu’s gain = 3/6 + 4/18 = 13/18
Honey’s new Share = Honey’s old share + Honey’s gain = 1/6+ 2/18 = 5/18
New Ratio = 13:5
And gain ratio is 4 : 2 i.e. 2 : 1
Case-4
A , B & C are partners sharing profits and losses in the ratio of 1/2 , 3/10 and 1/5
respectively. B retires and his share is taken by A and C in the ratio of 2:1. Then
immediately W is admitted for 1/4th share of profit, half of which was gifted by A
and remaining share was taken by W equally from A and C.
A C
Their existing shares (a) 1/2 1/5
Share acquired by remaining
partners (b) 2/3 x 3/10 = 2/10 1/3 x 3/10 = 1/10
New shares of remaining partners (c= a + b) 7/10 3/10 Share
gifted by A (d) 1/2 x 1/4 = 1/8
Share acquired by W (other than gift) (e) 1/2 x 1/8 = 1/16 1/2 x 1/8 = 1/16
New Shares (c – d - e) 41/80 19/80
New ratio of A , C and W = 41/80 :
19/80 : 20/80 = 41 : 19 : 20
167
2. Distribution of Reserves
The undistributed profits of the firm must be distributed among the all partners
(including retiring partner) in old Ratio.

Entry :
All Reserve A/c Dr. xx
To A's Capital A/c xx
To B's Capital A/c xx
To C's Capital A/c xx
Note : If it is stated in the question that General Reserve should appear as it is after
retirement then the above general reserve (which is already written off) should be
recreated after retirement in new Ratio.
Entry :
To All Reserve A/c xx
If there are any losses in balance sheet e.g. P & L Account on asset side, deferred
revenue expenditure on asset side distribute such losses among all partners
(including retiring partner) before retirement
Entry :
C's Capital A/c Dr. xx
To P & L A/c xx
Note:- A and B are assume to be old partners and C is a newly admitted partner in
above entries
3. Revaluation of Assets & Liabilities

When a partner is retiring from partnership, assets and liabilities are revalued.
A Revaluation Account (or Profi¬t and Loss Adjustment Account) is opened for
the purpose. This account is debited with all reduction in the value of assets and
168
increase in liabilities and credited with increase in the value of assets and decrease
in the value of liabilities. The difference in two sides of the account will show profit
or loss. This is transferred to the Capital Accounts of all partners (including retiring
partner) in the old profit sharing ratio. The entries to be passed are:
1. Revaluation Account Dr.

To Assets Account with the reduction in the value of the assets
(individually which show a decrease)
To Liabilities Accounts with the increase in the liabilities.
(Individually which have to be increased)
2. Assets Account (Individually) Dr. with the increase in the value of the
of assets.
Liabilities Accounts Dr. with the reduction in the amount
liabilities.
3. Revaluation Account Dr. with the profit in the old profit

sharing ratio.
To Capital A/cs of the all partners
(including retiring partner)
or
Capital A/cs of the all partners Dr. with the loss in old profit sharing
(including retiring partner) ratio.
As a result of the above entries, the capital account balances of the all partners will
change and the assets and liabilities will have to be adjusted to their proper values.
They will now appear in the Balance Sheet at revised figures.
Sometimes remaining partners may agree to keep the assets and liabilities at the
old values even when they agree to revalue them. To record these, a Memorandum
Revaluation Account is opened. This account is divided into two parts.
(a) In the first part the entries for the revaluation of assets and liabilities are made
in the usual way as explained earlier. The resultant profit or loss on revaluation
169
in the first part of this account is transferred to the capital accounts of all
partners (including retiring partner) in the old profit and loss sharing ratio.
Journal Entries
Assets Accounts Dr. (with increase in the value of
individual assets)
Liabilities Accounts Dr. (With decrease in the value of
individual liabilities)

To Assets Accounts (with decrease in the value of individual assets)
To Liabilities Accounts (with increase in the value of individual liabilities)

To All Partners’ Capital Accounts (including retiring partner)
(in case of profit)
All Partners’ Capital Accounts Dr.

(including retiring partner)
(in case of loss)
(b) In order to complete the double entry, entries made in the first part of
Memorandum Revaluation Account are reversed in the second part so that
the values of the assets and liabilities remain unchanged. The balance of the
second part is transferred to the capital accounts of remaining partners in
their new pro¬fit and loss sharing ratio. Thus if there is a profit in the first part
there will be a loss of the same amount in the second part. The only point to
be remembered is that the result of the first part of Memorandum Revaluation
Account is shared by all partners in the old pro¬fit sharing ratio, while the
result of the second part is shared by remaining partners in the new profit
sharing ratio.
170
Entry for sharing profit or loss of second half of memorandum revaluation Account
Memorandum Revolution Account Dr.

To Remaining Partners’ Capital Accounts (New profit and loss sharing ratio)
(in case of profit)
Remaining Partners’ Capital Accounts Dr. (New profit and loss sharing
ratio)
(in case of loss)
Format Memorandum Revaluation Account
↓ Assets ↑ Assets
↑ Liabilities ↓ Liabilities
Transfer Profit to old partners (old Transfer loss to old partners (old
ratio) ratio)
↑ Assets ↓ Assets
↓ Liabilities ↑ Liabilities
Transfer Profit to all partners (new Transfer loss to all partners (new
ratio) ratio)
Note:- Revaluation account is also known as P & L Adjustment A/c.
4. Goodwill Adjustment :
 The goodwill should be recorded in the books only when some consideration
in money or money’s worth has been paid for it. Therefore, only purchased
goodwill should be recorded in the books of the firm.
 In case of retirement of a partner, goodwill cannot be accounted in the books

of the firm because no consideration in money or money’s worth is paid for it.
171
 In case of retirement of a partner, the continuing partners will gain in terms

of pro¬fit sharing ratio. Therefore they have to pay to retiring partner for his
share of goodwill in the fi¬rm in the gaining ratio.

Journal Entry for Goodwill on Retirement
Remaining Partner’s A/c Dr. (In gaining ratio)
To Retiring Partner (With his share of goodwill)
Note:
Goodwill appearing in existing balance sheet to be written off (debited to all partners
including retiring partner) in old ratio before passing above entries.
All Partner’s Capital A/c (including retiring partner) Dr.
To Goodwill A/c
5. Final Settlement of Retiring Partner

After adjustment of the above mentioned items, the Capital Account balance
standing to the credit of the retiring partner represents amount to be paid to him.
The continuing partners may discharge the whole claim at the time of retirement.
Then the journal entry will appear as follows:
Retiring Partner’s Capital A/c Dr.
To Bank A/c
Sometimes the retiring partner agrees to retain some portion of his claim in the
partnership as loan. The journal entry will be as follows:
Retiring partner’s Capital A/c Dr.
To Retiring Partner’s Loan A/c
To Bank A/c
6. Paying of above Partner’s Loan in Instalment

Sometimes it is stated that the loan is to be paid off in so many equal installments
and that the balance is to carry interest. In such case, what should be done is that
the loan should be divided into equal parts. The interest for the period should be
calculated and the payment should consist of the instalment on account of the loan
plus interest for the period.
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7. Joint Policy :
A partneship firm may decide to take a Joint Life Insurance Policy on the lives at all
partners.The firms pays the premium and the amount of policy is payable to the
firm on retirement / death of any partner or on the maturity of policy whichever is
earlier. The objective of taking such a policy is to minimise the finanicial hardships
to the firm in event of payment of a large sum to the legal representatives of a
deceased partner or to the retiring partner.
The accounting treatment for the premium paid and the Joint Life Policy may be in
any of the following ways :
1. When premium paid is treated as an expense : When premium is treated as

an expense, then premium paid a/c is closed every year by transferring to profit
and loss account. In this case complete amount received from the insurance
company either on a surrender of policy or on the death of the partner becomes
a gains.

Accounting entries are :
(a) On payment of premium
Joint Life Policy Insurance Premium A/c Dr. xx
To Bank A/c xx
(b) On charging to Profit and Loss A/c :

Profit and Loss Account Dr. xx
To Joint Life Policy Insurance Premium A/c xx
(c) On maturity of the policy :

Insurance Company / Bank Account Dr. xx
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To Partners' Capital A/cs (individually) xx

(including retiring / deceased partner)
2. When premium paid is treated as an asset :

a) In this case insurance premium paid is first debited to life policy account
and credited to bank account.
Joint Life Policy A/c Dr.
To Bank A/c
b) At the end of the year the amount in excess of surrender value is treated
as a loss and is transferred to Profit and Loss Account.
P & L A/c Dr.
To Joint Life Policy A/c
i.e. balance in joint life policy account is shown at surrender value
c) In this case the amount received from the insurance company in excess
of the surrender value results in a gain at the time of receipt of such
amount which is transferred to capital accounts of the partners in the
profit sharing ratio.
Bank A/c Dr.
To All Partner’s Capital A/c (in PSR)
(for amount received an excess of surrender value)
3. Creation of Joint Policy Reserve Account :

a) Under this method, premium paid is debited to policy account and credited
to bank account.
To Bank A/c
b) At the end of the year amount equal to premium is transferred from Profit
and Loss Appropriation Account to policy reserve account. After this,
policy account is brought down to its surrender value by debiting the life
policy reserve account with amount which exceeds the surrender value of
the policy.
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P & L Appropriation A/c Dr.

To Joint Life Policy Reserve A/c
Joint Life Policy Reserve A/c Dr.
Thus, in this method, policy account appears on the asset side and policy
reserve account appears on the liabilities side of Balance Sheet until
it is realised. Both these accounts appear in the Balance Sheet at the
surrender value of the policy.
c) On the death of a partner Joint Life Policy Reserve Account is transferred

to Joint Life Policy Account and then the balance is transferred to Partners'
Capital Accounts.
4. Calculation of Insurance Claim Received

1. When there is a single policy covering all partners (Joint Life Policy)
(a) On Retirement - Receive surrender value of the joint policy
(b) On death - Receive sum assured of joint policy .
2. When the policy is taken severally for each partner :
(a)
On Retirement:-
Instead of life policy taken jointly on the name of all the partners, all the
partners may take individual life policies for each of them by paying the
premium from the firm. In the event of retirement, the retired partner is
entitled for the surrender value of the life policies of all the partners x
retiring partners share.
(b) On death:- Receive sum assured of policy of deceased partner and account
for surrender values of policies of other partners
Instead of taking one joint life policy in the names of all the p a r t n e r s ,
the partners may take individual policies on the lives of respective
partners. The premium paid is charged to profit and loss account. On
the death of a partner then only the amount for which the deceased
partner was insured would be recovered from the insurance company.
The policies of the surviving partners will continue to survive but the
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surrender value of the policies of the surviving partners would also be

taken into account for the purpose of calculating the amount payable
to the legal representatives of the deceased partner. In other words the
legal representatives would be entitled to receive share in surrender value
equivalent to the profit sharing ratio of the deceased.

Bank A/c Dr. (Assured value)
To Separate Life Policy of Deceased partner A/c
(Policy value received on death of a partner)
Separate Life Policy of Deceased Partner A/c Dr. (Assured value)
Separate Life Policy of Remaining Partners A/c Dr. (Surrender value)
To Executor’s A/c (Total value distributed in profit sharing ratio)
To Remaining partners A/c (Total value distributed in profit sharing
ratio)
(Being the total of assured value of deceased partner’s life policy and surrender
value of other partners’ life policy(s) distributed in the profit and loss sharing
ratio)
UNIT V– DEATH OF PARTNER
Business of a partnership firm may not come to an end due to death of a partner as it is
known as Reconstitution of Partnership. Other partners shall continue to run the business
of the firm. The problems arising on the death of a partner are similar to those arising on
retirement. Assets and liabilities have to be revalued and the resultant profit or loss has
to be transferred to the capital accounts of all partners including the deceased partner.
Goodwill is dealt with exactly in the way already discussed in the case of retirement in the
earlier unit. Treatment of joint life policy will also be same as in the case of retirement.
However, in case of death of a partner, the firm would get the joint policy value.
Here, all accounting treatment is same as that of retirement of partner. The balance in
deceased partners’ capital account is to be transferred to his executors loan account.
Extra Adjustments in accounts:

1. When the partner dies the amount payable to him/her is paid to his/her legal
representatives / executors. The representatives are entitled to the followings:
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a. The amount standing to the credit to the capital account of the deceased
partner
b. Interest on capital, if provided in the partnership deed upto the date of death:
c. Share of goodwill of the firm;
d. Share of undistributed profit or reserves;
e. Share of profit on the revaluation of assets and liabilities;
f. Share of profit upto the date of death;
g. Share of Joint Life Policy.

Calculation of profit upto the date of death of a partner.
If the death of a partner occurs during the year, the representatives of the deceased
partner are entitled to his/her share of profits earned till the date of his/her death.
Such profit is ascertained by any of the following methods:
(i) Time Basis
(ii) Turnover or Sales Basis
In this case, it is assumed that profit has been earned uniformly throughout the year.
Share of profit of the deceased partner is calculated based on past years profits.
i.e. share of profit of deceased partner = past years profit x profit sharing ratio
of deceased partner x no.of months from end of last year to date of death
12
Example: The total profit of previous year is ` 1,25,000 and a partner dies
three months after the close of previous year.
The profit of three months is ` 31,250 i.e. 1,25,000 × 3/12,

If the deceased partner took 2/10 share of profit, his/her share of profit till the
date of death is ` 6,250 i.e. ` 31,250 × 2/10.
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(ii) Turnover or Sales Basis

In this method, share of profit of deceased partner is calculated as follows.
net profit
a. calculate net profit ratio = x 100. (of last year)
sales
b. Calculate total profit upto date of death = turnover of current year up to

date of death x net profit ratio
c. Share of profit of deceased partner = profit upto date of death (as

calculated in b above) x profit sharing ratio of deceased partner.
Example :- Arun, Tarun and Neha are partners sharing profits in the ratio of
3:2: 1. Neha dies on 31st May 2016. Sales for the year 2015-2016 amounted
to ` 4,00,000 and the profit on sales is ` 60,000. Accounts are closed on 31
March every year. Sales from 1st April 2016 to 31st May 2016 is ` 1,00,000.
Calculate the deceased partner’s share in the profit upto the date of death.
Solution
Net Profit Ratio = 60,000 / 4,00,000 x100 = 15%
Share of profit upto date of death = 1,00,000 x 15/100 = `15,000

Neha share = ` 15,000 x 1 = ` 2,500
6
Share in profits on estimated basis (calculated above) for which following

journal entry is passed :
P & L Suspense A/c Dr. xx

To Deceased Partners capital A/c xx
2. Section 37 of the Indian Partnership Act

As per provisions of Section 37 of the Indian Partnership Act., “Where any partner of
a firm has died or otherwise ceased to be a partner, and the surviving or continuing
partners carry on the business of the firm with the property of the firm without
any final settlement of accounts as between them and the outgoing partner or his
estate, then, in the absence of a contract to the contrary, the outgoing partner or his
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estate is entitled at the option of himself or his representatives to such share of the
profits made since he ceased to be a partner as may be attributable to the use of his
share of the property of the firm (retiring / deceased partners capital) or to interest
at the rate of six percent per annum on the amount of his share in the property of
the firm. following entry is passed.
P & L Suspense A/c Dr. xx
To C's Executors Loan A/c xx
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CLASSWORK SECTION
Q.1 Ram, Rahim and Karim are partners in a firm. They have no agreement in respect
of profit - sharing ratio, interest on capital, interest on loan advanced by partners
and remuneration payable to partners. In the matter of distribution of profits they
have put forward the following claims:
(i) Ram, who has contributed maximum capital demands interest on capital at
10% p.a. and share of profit in the capital ratio. But Rahim and Karim do not
agree.
(ii) Rahim has devoted full time for running the business and demands salary at
the rate of ` 500 p.m. But Ram and Karim do not agree.
(iii) Karim demands interest on loan of ` 2,000 advanced by him at the market
rate of interest which is 12% p.a.
How shall you settle the dispute and prepare Profit and Loss Appropriation
Account after transferring 10% of the divisible profit to Reserve. Net profit
before taking into account any of the above claims amounted to ` 45,000 at
the end of the first year of their business.
Q.2 Amit and Vijay started a partnership business on 1st January, 2006. Their capital
contributions were ` 2,00,000 and ` 1,50,000 respectively. The partnership deed
provided:
(i) Interest on capitals at 10% p.a.
(ii) Amit to get a salary of ` 2,000 p.m. and Vijay ` 3,000 p.m.
(iii) Profits are to be shared in the ratio of 3 : 2.
(iv) Interest on Drawings amounted to ` 2,200 for Amit and ` 2,500 for Vijay.

The profits for the year ended 31st December 2006 before making above
appropriations were ` 2,16,000. Prepare Profit & loss Appropriation Account.
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Q.3 Good ,Better and Best are in partnership sharing profits and losses in the ratio
3:2:4.Their capital account balances as on 31st March, 2012 are as follows :
`
Good 1,70,000 (Cr)
Better 1,10,000 (Cr)
Best 1,22,000 (Cr)
Following further information provided:

(1)
` 22,240 is to be transferred to General Reserve.
(2) Good, Better and Best are paid monthly salary in cash amounting ` 2,400, `
1,600 and ` 1,800 respectively.
(3) Partners are allowed interest on their closing balance @ 6% p.a. and are
changed interest on drawings @ 8% p.a.
(4) Good and Best are entitled to commission @ 8% and 10% respectively of the
net profit before making any appropriation.
(5) Better is entitled to commission @ 15% of the net profit before charging Interest
on Drawings but after making all other appropriations.
(6) During the year Good withdraw ` 2,000 at the beginning of every month, Better
` 1,750 at the end of every month and Best ` 1,250 at the middle of every
month.
(7) Firm's Accountant is entitled to a salary of ` 2,000 per month and a commission
of 12% of net profit after charging such commission.
The Net Profit of the firm for the year ended on 31st March, 2012 before
providing for any of the above adjustments was ` 2,76,000.
You are required to prepare Profit and Loss Appropriation Account for the year
ended on 31st March, 2012.
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Q.4 Weak, Able and Lazy are in partnership sharing profits and losses in the ratio of
2:1:1. It is agreed that interest on capital will be allowed @ 10% per annum and
interest on drawings will be charged @ 8% per annum.(No interest will be charged/
allowed on Current Accounts).
The following are the particulars of the Capital and Drawings Accounts of the
partners:
Weak Able Lazy

` ` `
Capital (1.1.2011) 75,000 40,000 30,000
Current Account (1.1.2011) 10,000 5,000 (Dr.) 5,000
Drawings 15,000 10,000 10,000

The draft accounts for 2011 showed a net profit of ` 60,000 before taking into
account interest on capitals and drawings and subject to following rectification of
errors:
(a) Life Insurance premium of weak amounting to ` 750 paid by the firm on 30th
June, 2011 has been charged to Miscellaneous Expenditure A/c.
(b) Repairs of Machinery amounting to ` 10,000 has been debited to Plant Account
and depreciation thereon charged @ 20%.
(c) Travelling expenses of ` 3,000 of Able for a pleasure trip to U.K. paid by the
firm on 30th June, 2011 has been debited to Travelling Expenses Account.
You are required to prepare the Profit and Loss Appropriation Account for the year
ended 31st December, 2011. And also show current account of partners.
Q.5 A, B and C are partners in a firm sharing profits and losses in the ratio of 2:3:5. Their
fixed capitals were ` 15,00,000, ` 30,00,000 and ` 60,00,000 respectively. For the
year 2016 interest on capital was credited to them @ 12% instead of 10%. Pass the
necessary adjustment entry.
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Q.6 A and B are partners sharing profits and losses in the ratio of their effective capital.
They had ` 1,00,000 and ` 60,000 respectively in their Capital Accounts as on 1st
January, 2016.

A introduced a further capital of ` 10,000 on 1st April, 2016 and another ` 5,000
on 1st July, 2016. On 30th September, 2016 A withdrew ` 40,000.
On 1st July, 2016, B introduced further capital of ` 30,000.
The partners drew the following amounts in anticipation of profit. A drew ` 1,000
per month at the end of each month beginning from January, 2016. B drew ` 1,000
on 30th June, and ` 5,000 on 30th September, 2016.
12% p.a. interest on capital is allowable and 10% p.a. interest on drawings is
chargeable. Date of closing 31.12.2016. Calculate: (a) Profit-sharing ratio; (b)
Interest on capital; and (c) Interest on drawings.
Q.7 X, a partner, has drawn the following sum of money –
`
On 29th February, 2016 500
On 31st March, 2016 400
On 30th June, 2016 600
On 31st October, 2016 800
Accounts are closed on 31st December every year. Interest is chargeable on drawings
at 6% per annum. Calculate interest on X’s drawings.
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Q.8 X and Y are partners. As per terms of agreement interest is allowed on capital at
8% p.a. and charge on drawing at 10% p.a. X withdrew Rs. 40,000 pm at the end
of each month and Y withdrew Rs. 120,000 at the end of each quarter. You are
required to fill the missing figures in following accounts:
Profit & and Loss Appropriation Account for the year ended March 31, 2017
Particular ` Particular `
To…? By Profit and Loss A/c (Net ?
To Interest on Capital A/c Profit)
X 1,60,000 By Interest on Drawing A/c ?
Y ? 2,88,000 X ?
To Profit Transferred to Y ?
Capital A/c
X (2/3) ?
Y (1/3) 2,80,000 ?
? ?
Partner’s Capital Accounts
Particulars X Y Particulars X Y
To…? ? ? By…? ? ?
To…? ? ? By Salary A/c 3,60,000 Nil
To…? ? ? By…? ?
By…? ? ?
? ? ? ?
Q.9 A and B were partners in a firm sharing profits and losses in the ratio of 3:2. They
admit C for 1/6th share in profits and guaranteed that his share of profits will not
be less than ` 250,00,000. Total profits of the firm for the year ended 31st March,
2017 were ` 900,00,000. Calculate share of profits for each partner when:
1. Guarantee is given by firm.
2. Guarantee is given by A
3. Guarantee is given by A and B equally.

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Q.1 The following particulars are available in respect of the business carried on by
Rathore.
(1) Capital Invested ` 1,50,000

(2) Trading Results
2003 Profit ` 40,000
2004 Profit ` 15,000
2005 Loss ` 6,000
2006 Profit ` 50,000
(3) Market rate of interest on investment 10%
(4) Rate of risk return on capital invested in business 2%
(5) Remuneration from alternative employment of ` 6,000
the proprietor
(if not engaged in business) Per annum
You are required to value Goodwill as per:

(1) 3 years purchase of Super Profit
(2) Capitalisation of Super Profit
(3) Capitalisation of Average Profit
Q.2 A and B are partners in a firm with capitals ` 48,000 and ` 32,000 respectively.
C is admitted for 1/5th share for which he is asked to bring ` 30,000 as capital.
Calculate Hidden Goodwill.
Q.3 Lee and Lawson are in equal partnership. They agreed to take Hicks as one-fourth
partner. For this it was decided to find out the value of goodwill. M/s. Lee and
Lawson earned profits during 2013-2016 as follows:
Year Profits `
2013 1,20,000
2014 1,25,000
2015 1,30,000
2016 1,50,000
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On 31.12.2016 capital employed by M/s. Lee and Lawson was ` 5,00,000. Rate of
normal profit is 20%.
Required
Find out the value of goodwill by average profit, weighted average profit, super
profit and Capitalisation method assuming goodwill is valued at 3 year purchase of
super profits. Also calculate goodwill by annuity method assuming 3 years purchase
of super profits & interest rate is 20% p.a.
Q.4 A, B & C are equal partners. They wanted to change the profit sharing ratio into
4:3:2. Make the necessary journal entries. Goodwill of the firm is valued at ` 90,000.
186
Q.1 A and B are partners having capitals after all adjustments as ` 55,000 and ` 45,000
respectively. C is admitted for 1/5th share and is asked to bring in proportionate
capital. Determine capital to be brought by C.
Q.2 A and B are in partnership sharing pro¬fits and losses at the ratio 3:2. They take C
as a new partner. Calculate the new profi¬t sharing ratio if -
(i) C purchases 1/10 share from A
(ii) A and B agree to sacri¬fice 1/10th share to C in the ratio of 2: 3
(iii) C gets 1/10th share of pro¬fit.
Q.3 X and Y are partners in a firm sharing profits in the ratio of 3: 2. On 31st March,
2011 the position of the business was as follows:
Balance Sheet
Sundry creditors 10,000 Goodwill 5,000
Capital account Stock 20,000
X 30,000 Plant & Machinery 25,000
Y 25,000 55,000 Debtors 18,000
General reserve 5,000 Cash 2,000
70,000 70,000
Z agrees to join the business on the following condition:

(a) He will introduce ` 20,000/- as his capital and pay ` 10,000/- to the partners
as premium for goodwill. The new profit sharing ratio is 2 : 1 : 1. It was decided
that 1/2 of the amount of the goodwill is to be withdrawn by partners.
(b) A revaluation of the assets of the firm will be made by reducing plant and
machinery account to ` 20,000/- and stock by 10% and by creating a provision
for bad debts at 5% of debtors.
You are asked to give the necessary accounts in the books of the firm recording
the above transactions and give the balance sheet of the new firm on
187
completion of the transactions. General reserve is to appear at old figure in

the new balance sheet. The partners have decided to maintain capitals after
admission in PSR.
Q.4 X and Y were trading in partnership, sharing profits and losses in the ratio of 7:
5. On 1.4.2010, they admitted Z into partnership on the following terms:
Z was to have 1/6th share which he purchased 1/8th from X and 1/24th from Y
paying ` 20,000 for that share of Goodwill. Z also brought ` 25,000 as his capital
into the firm. It was further agreed that Machinery should be reduced by 10% and
that Investments should be reduced to their market value of ` 8,000.
The Balance Sheet of the old firm at 31.3.2010, was as follows
Creditors 16,000 Machinery 20,000
Capital Accounts : Furniture 4,000
X 25,000 Investment at Cost 12,000
Y 25,000 55,000 Stock 10,000
Debtors 6,000
Cash at Bank 14,000
66,000 66,000
Interest on drawing is to be ignored but interest on capitals is to be allowed at 5%

p.a. The profits of the new firm for the year ended 31.3.2011, amounted to ` 52,450
before charging interest on capitals. Drawing of the partners during the year were :
X ` 16,325; Y ` 13,875 and Z ` 3,250.
You are required to show the capital account and prepare the Balance Sheet as at
31.3.2011
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Q.5 A and B are partners sharing profits and losses in the ratio of 3:2. Their Balance
Sheet as on 31.3.2016 is given below:
Trade payables 50,000 Freehold premises 2,00,000
Capital Accounts: Plant 40,000
A 2,00,000 Furniture 20,000
B 1,00,000 Office equipment 25,000
Inventories 30,000
Trade receivables 25,000
Bank 10,000
3,50,000 3,50,000
On 1.4.2016 they admit C on the following terms:

(1) C will bring ` 50,000 as a capital and ` 10,000 for goodwill for 1/5 share;
(2) Provision for doubtful debts is to be made on Trade receivables @ 2%
(3) Inventory to be written down by 10%.
(4) Freehold premises is to be revalued at `2,40,000, plant at ` 35,000, furniture

` 25,000 and office equipment ` 27,500.
(5) Partners agreed that the values of the assets and liabilities remain the same
and, as such, there should not be any change in their book values as a result
of the above mentioned adjustments.
You are required to make necessary adjustment in the Capital Accounts of the
partners and show the Balance Sheet of the New Firm.
Q.6 A and B are in the partnership sharing profits and losses in the proportion of three-
fourth and one-fourth respectively. Their balance sheet as on 31st March, 2016
was as follows: Cash `1,000; trade receivables `25,000; Inventory `22,000; plant
and machinery `4,000; trade payables `12,000; bank overdraft `15,000; A’s capital
`15,000; B’s capital `10,000. On 1st April, 2016, they admitted C into partnership
on the following terms:
189
(i) C to purchase one–third of the goodwill for `2,000 and provide `10,000 as
capital. Goodwill not to appear in books.
(ii) Further profits and losses are to be shared by A, B and C equally.
(iii) Plant and machinery is to be reduced by 10% and `500 is to be provided for
estimated bad debts. Inventory is to be taken at a valuation of `24,940.
(iv) By bringing in or withdrawing cash the capital of A and B are to be made
proportionate to that of C on their profit-sharing basis.
Set out entries to the above arrangement in the firm’s journal and give the
partners’ capital accounts in tabular form.
Q.7 A and B are in partnership sharing profits and losses equally. The Balance Sheet of
M/s. A and B as on 31.12.2016, was as follows:
Capital Accounts: Sundry Fixed Assets 60,000
A 45,000 Inventories 30,000
B 45,000 Bank 20,000
Trade payables 20,000
1,10,000 1,10,000
On 1.1.2017 they agreed to take C as 1/3rd partner to increase the capital base
to ` 1,35,000. C agrees to pay `60,000. Show the necessary journal entries and
prepare partners’ capital accounts.
Q.8 A and B are the partners sharing profits and losses in the ratio 3 : 2. They admitted
C as new partner for 1/5th share. Calculate new PSR and sacrifice Ratio.
Q.9 Hari and Ram were in partnership, sharing profits and losses equally. On 1st January,
2020, Suraj was admitted into partnership on the following terms:

Suraj is to have one-sixth share in the profits/losses, which he has got from Hari,
paying him ` 40000 for that share as goodwill. Out of this amount. Hari is to
withdraw ` 30000 and the balance amount is to remain in the firm. It was further
agreed that the value of investments should be reduced by ` 12,000 & ` 3,000 one
of the creditors has closed his business and gone. Plant is to be reduced by ` 6,000.
190
Suraj is to bring in proportionate capital on his admission.
The Balance sheet is at 31st December, 2019 was as follows:
Creditors 105,000 Cash at Bank 40,000
Capital Accounts : Book Debts 60,000
Hari 60,000 Stock 50,000
Ram 60,000 1,20,000 Investments 30,000
Furniture 10,000
Plant 35,000
2,25,000 2,25,000
The profits for the year ended 31st December 2020 were ` 60000 and the
drawings were: Hari ` 15000, Ram ` 22500 and Suraj ` 7500.
Journalise the entries on Suraj’s admission and give the Capital Accounts and the
Balance Sheet as at 31st December 2020.
Q.10 A, B and C are partners in a firm sharing profits and losses as 8:5:3. Their Balance
Sheet as at 31st December, 2019 was as follows:
Sundry Creditors 1,50,000 Cash 40,000
General Reserve 80,000 Bills Receivable 50,000
Partners’ Loan Accounts: Sundry Debtors 60,000
A 40,000 Stock 1,20,000
B 30,000 Fixed Assets 2,80,000
Partners’ Capital Accounts:
A 1,00,000
B 80,000
C 70,000
5,50,000 5,50,000
From 1st January, 2020 they agreed to alter their profit-sharing ratio as 5 : 6 : 5.
It is also decided that:
(a) the fixed assets should be valued at ` 3,31,000;
(b) a provision of 5% on sundry debtors be made for doubtful debts;
191
(c) the goodwill of the firm at this date be valued at three years’ purchase of the
average net profits of the last five years before charging insurance premium;
and

(d) the Stock be reduced to ` 1,12,000.

There is a joint life insurance policy for ` 2,00,000 for which an annual premium
of ` 10,000 is paid, the premium being charged to Profit and Loss Account. The
surrender value of the policy on 31st December, 2019 was ` 78,000.
The net profits of the firm for the last five years were ` 14,000, ` 17,000, ` 20,000,
` 22,000 and ` 27,000.
Goodwill and the surrender value of the joint life policy was not to appear in the
books.
Draft Journal Entries necessary to adjust the capital accounts of the partners and
prepare the revised Balance Sheet.
192
UNIT IV – RETIREMENT OF A PARTNER

Q.1 M/s X and Co. is a partnership firm with the partners A,B and C sharing profits and
losses in the ratio of 3:2:5. The balance sheet of the firm as on 30th June 2011, was
as under:
Balance Sheet of X and Co. as on 30.6.2011
A's capital A/c 1,04,000 Land 1,00,000
B' capital A/c 76,000 Building 2,00,000
C' capital A/c 1,40,000 Plant and Machinery 3,80,000
Long term Loan 4,00,000 Investments 22,000
Bank Overdraft 44,000 Inventories 1,16,000
Trade payables 1,93,000 Trade receivables 1,39,000
9,57,000 9,57,000
It was mutually agreed that B will retire from partnership and his place D will be
admitted as a partner with effect from 1st July, 2011. For this purpose, the following
adjustments are to be made:
(a) Goodwill of the firm is to valued at ` 2 lakhs due to the firm's locational
advantage but the same will not appear as an asset in the books of the
reconstituted firm.
(b) Building and plant and machinery are to be valued at 90% and 85% of the
respective balance sheet values. Investments are to be taken over by the retiring
partner at ` 25,000. Trade receivables are considered good only up to 90% of
balance sheet figure. Balance be considered bad.
(c) In the reconstituted firm, the total capital will be ` 3 lakhs, which will be
contributed by A, C and D in their new profit sharing ratio, which is 3:4:3.
(d) The amount due to retiring partner shall be transferred to his loan account.
You are required to prepare Revaluation Account and Partner's Capital accounts.
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Q.2 Dowell & Co. is a partnership firm with partners Mr. A, Mr. B and Mr. C, sharing
profits and losses in the ratio of 10:6:4. The balance sheet of the firm as at 31st
March, 2011 is as under:
Capital Land 10,000
Mr. A 80,000 Buildings 2,00,000
Mr. B 20,000 Plant and machinery 1,30,000
Mr. C 30,000 1,30,000 Furniture 43,000
Reserves Investments 12,000
(unappropriated 20,000 Inventories 1,30,000
profit)
Long term Debt 3,00,000 Trade receivables 1,39,000
Trade payables 1,70,000
6,64,000 6,64,000
It was mutually agreed that Mr. B will retire from partnership and is his place Mr.
D will be admitted as a partner with effect from 1st April, 2011. For this purpose,
the following adjustments are to be made:

(a) Goodwill is to be valued at ` 1 lakh but the same will not appear as an asset
in the books of the reconstituted firm.
(b) Buildings and plant and machinery are to be depreciated by 5% and 20%
respectively. Investments are to be taken over by retiring partner at ` 15,000.
Provision of 20% is to be made on Trade receivables to cover doubtful debts.
(c) In the reconstituted firm, the total capital will be ` 2 lakhs which will be
contributed by Mr. A. Mr. C and Mr. d in their new profit sharing ratio, which is
2:2:1.
(d) The surplus funds, if any, will be used for repaying bank overdraft.
(e) The amount due to retiring partner shall be transferred to his loan account.
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Prepare
(a) Revaluation account;
(b) Partners' capital account ;
(c) Bank account and ;
(d) Balance sheet of the reconstituted firm as on 1st April, 2011.
Q.3 F,G and K were partners sharing profits and losses at the 2:2:1. K wants to retire
on 31.12.2011.GIven below is the Balance Sheet of the partnership as well as
other information:
Balance Sheet as on 31.12.2011
Capital A/cs Sundry Fixed Assets 1,50,000
F 1,20,000 Inventories 50,000
G 80,000 Trade receivables 50,000
K 60,000 Bills Receivables 20,000
Reserves 10,000 Bank 50,000
Trade payable 50,000
3,20,000 3,20,000
F and G agree to share profits and losses at the ratio of 3 : 2 in future. Value
of goodwill is taken to be ` 50,000. Sundry Fixed Assets are revalued upward by
` 30,000 and Inventories by ` 10,000. Bills Receivables dishonoured ` 5,000 on
31.12.2011 but not recorded in the books. DIshonour of bill was due to insolvency
of the customer. F and G agree to bring sufficient cash to discharge claim of K and
to make their capital proportionate. Also they wanted to maintain ` 75,000 bank
balance for working capital. Pass necessary journal entries and draft the Balance
sheet of M/s F & G.
Q.4 Red, White and Black shared profits and losses in the ratio of 5:3:2. They took out a
joint life Policy in 2007 for ` 50,000, a premium of ` 3,000 being paid annually on
10th June. The surrender value of the policy on 31st December of various years was
as follows: 2007 nil; 2008 ` 900; 2009 ` 2,000; 2010 ` 3,600.
Black retires on 15th April, 2011. Prepare ledger accounts
(a) assuming no Joint Life Policy Account is maintained.
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(b) assuming Joint Life Policy Account is maintained on surrender value basis.
(c) assuming Joint Life Policy reserve Account is maintained.
Q.5 A, B & C were in partnership sharing profi¬ts in the proportions of 5:4:3. The
balance sheet of the fi¬rm as on 31st March, 2015 was as under:
Capital accounts: Goodwill 40,000
A 1,35,930 Fixtures 8,200
B 95,120 Inventories 1,57,300
C 61,170 Trade receivables 93,500
Trade payables 41,690 Cash 34,910
3,33,910 3,33,910
A had been suffering from ill-health and gave notice that he wished to retire.
An agreement was, therefore, entered into as on 31st March, 2015, the terms of
which were as follows:
(i) The profit and loss account for the year ended 31st March, 2015 which showed
a net profit of `48,000 was to be re-opened. B was to be credited with `4,000
as bonus, in consideration of the extra work which had devolved upon him
during the year. The profit sharing was to be revised from 1st April, 2014, as
3:4:4.
(ii) Goodwill was to be valued at two years’ purchase of the average profi¬ts of
the preceding five years. The ¬fixtures were to be valued by an independent
valuer. A provision of 2% was to be made for doubtful debts and the remaining
assets were to be taken at their book values.
The valuations arising out of the above agreement were goodwill `56,800 and
fixtures `10,980. B and C agreed, as between themselves, to continue the business,
sharing profits in the ratio of 3:2 and decided to eliminate goodwill from the balance
sheet, to retain the fixtures on the books at the revised value, and to increase the
provision for doubtful debts to 6%.
Required:
Submit the journal entries necessary to give effect to the above arrangements and
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to draw up the capital account of the partners after carrying out all adjusting
entries as stated above.
Q.6 Sona, Gabbu and Amit are partners (PSR 3:1:1)
SONA GABBU AMIT

Policy 1,00,000 2,00,000 3,00,000
Surrender Value 10,000 20,000 30,000
If Amit retires calculate the amount of policy which will be credited to his account.
Q.7 A, B and C are partners in a firm. A retires on 1st January, 2013. On the date of
retirement, `80,000 is due to him in all. It is agreed to pay him this amount in
installments every year at the end of the year. Prepare A’s Loan A/c in the following
cases.
(i) Four yearly installments plus interest @ 10% p.a.
(ii) Three installments of `25,000 including interest @ 10% p.a. on the outstanding
balance and the balance including interest in the fourth year.
Q.8 A, B and C are partners in a firm sharing profits and losses in the ratio of 4:3:2. B
decides to retire from the firm. Calculate the new profit sharing ratio of A and C in
the following circumstances:
i) If B gives his share to A and C in the original ratios of A and C.
ii) If B gives his share to A and C in equal proportion.
iii) If B gives his share to A and C in the ratio of 3:1.
iv) If B gives his share to A only.
Q.9 A, B and C are partners sharing profits in the ratio of 3:2:1. Their balance sheet as
at 31st March, 2018 stood as:
Capital Accounts: Building 10,00,000
A 8,00,000 Furniture 2,40,000
B 4,20,000 Office equipments 2,80,000
C 4,00,000 16,20,000 Stock 2,50,000
Sundry Creditors 3,70,000 Sundry debtors 3,00,000
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General Reserves 3,60,000 Less: Provision for

Doubtful debts 30,000 2,70,000
Joint Life policy 1,60,000
23,50,000 23,50,000
Mr. B retired on 1st April, 2018 subject to the following conditions:

(i) Office Equipments revalued at `3,27,000.
(ii) Building revalued at `15,00,000. Furniture is written down by `40,000 and

stock is reduced to `2,00,000.
(iii) Provision for Doubtful Debts is to be created @ 5% on debtors.
(iv) Joint life Policy will appear in the Balance Sheet at surrender value after B’s
retirement. The surrender value is `1,50,000.
(v) Goodwill was to be valued at 3 years purchase of average 4 years profit which
were:
Year `
2014 90,000
2015 1,40,000
2016 1,20,000
2017 1,30,000
(vi) Amount due to B is to be transferred to his Loan Account.

Prepare the Revaluation Account, partners’ capital Accounts and the Balance
Sheet immediately after B’s retirement.
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Q.10 On 31st March, 2019 the balance sheet of M/s Ram, Hari & Mohan sharing profits
and losses in the ratio of 2:3:2, stood as follows:
Capital Accounts: Land and Buildings 10,00,000
Ram 10,00,000 Machinery 17,00,000
Hari 15,00,000 Closing Stock 5,00,000
Mohan 10,00,000 35,00,000 Sundry Debtors 6,00,000
Sundry Creditors 5,00,000 Cash and Bank
Balances 2,00,000
40,00,000 40,00,000
On 31st March, 2019 Hari desired to retire from the firm and the remaining
partners decided to carry on. It was agreed to revalue the assets and liabilities on
that date on the following basis:
1. Land & buildings be appreciated by 30%.
2. Machinery be depreciated by 20%.
3. Closing Stock to be valued at `4,50,000.
4. Provision for bad debts be made at 5%.
5. Old credit balances of Sundry Creditors `50,000 be written back.
6. Joint Life Policy of the partners surrendered and cash obtained `3,50,000.
7. Goodwill of the entire firm be valued at `6,30,000 and Hari’s share of the
Goodwill be adjusted in the accounts of Ram and Mohan who share the future
profits & losses in the ratio of 3:2. No goodwill Account being raised.
8. The total capital of the firm is to be the same as before retirement, individual
capital be in their profit sharing ratio.
9. Amount due to Hari is to be settled on the following basis:

50% on retirement and the balance 50% within one year. Prepare revaluation
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Account, Capital Accounts of Partners, cash Account and balance sheet as on

01-4-2019 of M/s Ram & Mohan.
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UNIT V – DEATH OF A PARTNER

Q.1 The balance sheet of seed, plant and flower as at 31st December, 2010 was as
under:
Trade payables 20,000 Fixed Assets 40,000
General Reserve 5,000 Trade receivables 10,000
Capital : Bills Receivable 4,000
Seed 25,000 Inventories 16,000
Plant 15,000 Cash at Bank 10,000
Flower 15,000 55,000
80,000 80,000
The profit sharing ratio was: seed 5/10, plant 3/10 and flower 2/10. On 1st May,
2011 plant died. It was agreed that:
(a) Goodwill should be valued at 3 years purchase of the average profit for 4
years. The profit were:
2007 ` 10,000 2009 `12000

2008 ` 13,000 2010 ` 15,000
(b) The deceased partner to be given share of profit up to the date of death on the
basis of the previous year.
(c) Fixed assets were to be depreciated by 10%. A bill for ` 1000 was found to be
worthless. These are not to affect goodwill.
(d) A sum of ` 7,750 was to be paid immediately, the balance was to remain as a
loan with the firm at 9% p.a. as interest.
Seed and flower agreed to share profit and losses in future in the ratio of 3: 2.
Give necessary journal entries.
Q.2 The partnership agreement of a firm consisting of three partners - A, B and C

(who share profits in proportion of ½, ¼, and ¼ and whose fixed capital are `
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10,000, ` 6,000 and ` 4000 respectively) provides as follows:
(a) That partners be allowed interest at 10% per annum on their fixed capitals,
but no interest be allowed on undrawn profits or charged on drawing.
(b) That upon the death of partner, the Goodwill of the firm be valued at 2 years'
purchase of the average net profits (after charging interest on capital) for the
three years to 31st December preceding the death of a partner.
(c) That an insurance policy of ` 10,000 each to be taken in individual names of

each partner, the premium is to be charged against the profit of the firm.
(d) Upon the death of partner, he is to be credited with his share of the profits,
interest on capitals etc. calculated upto 31st December following his death.
(e) That the share of the partnership policy and goodwill be credited to deceased
partner as on 31st December following is death.
(f) That the partnership books be closed annually on 31st December.

A died on 30th September 2011, the amount standing to the credit of his current
account on 31st December, 2010 was ` 450 and from the date to the date of death
he had withdrawn ` 3,000 from the business.
An unrecorded liability of ` 2,000 was discovered on 30th September, 2011.It was

decided to record it and to be immediately paid off.

The trading result of the firm (before charging interest on capital) had been as
follows 2008 Profit ` 9,640; 2009 profit 6,720; 2010 loss 640; 2011 profit 3,670
Assuming the surrender value of the policy to be 20% of the sum assured, you are
required to prepare an account showing the amount due to A's legal representative
as on 31st December, 2011.
Q.3 A, B and C are in a partnership business-sharing profits and losses equally. C

dies on 31st October, 2017. The capitals of the partners, on that date after all
necessary adjustments stood at ` 50,000, ` 75,000 and `1,20,000 respectively. A
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and B continued to carry on the business further without settling the accounts of C.
Final payment to C is made on February 1, 2018. The profit made during the period
of three months amounts to `28,000.
Calculate the amount payable to the C’s legal heirs as per section 37 of the
Partnership Act, 1932.
Q.4 The following was the Balance Sheet of Om & Co. in which X, Y, Z were partners
sharing profits and losses in the ratio of 1:2:2 as on 31.3.2016. Mr. Z died on 31st
December, 2016. His account has to be settled under the following terms.
Balance Sheet of Om & Co. as on 31.3.2016
Liabilities ` ` Assets `
Trade payables 20,000 Goodwill 30,000

Bank loan 50,000 Building 1,20,000
General reserve 30,000 Computers 80,000
Capital accounts: Inventories 20,000
X 40,000 Trade receivables 20,000
Y 80,000 Cash at Bank 20,000
Z 80,000 2,00,000 Investments 10,000
3,00,000 3,00,000
Goodwill is to be calculated at the rate of two years purchase on the basis of

average of three years’ profits and losses. The profits and losses for the three years
were detailed as below:
Year ending on profit/loss

31.3.2016 30,000
31.3.2015 20,000
31.3.2014 (10,000) Loss

Profit for the period from 1.4.2016 to 31.12.2016 shall be ascer tained
proportionately on the basis of average profits and losses of the preceding three
years.
203
During the year ending on 31.3.2016 a car costing `40,000 was purchased on
1.4.2015 and debited to traveling expenses account on which depreciation is to be
calculated at 20% p.a. This asset is to be brought into account at the depreciated
value.
Other values of assets were agreed as follows: Inventory at `16,000, building at

`1,40,000, computers at `50,000; investments at `6,000.
Trade receivables were considered good.
Required:
(i) Calculate goodwill and Z’s share in the profits of the firm for the period 1.4.2016
to 31.12.2016.
(ii) Prepare revaluation account assuming that other items of assets and liabilities
remained the same.
(iii) Prepare partners’ capital accounts and balance sheet of the firm Om & Co. as
on 31.12.2016
Q.5 Peter, Paul and Prince were partners sharing profits and losses in the ratio 2:1:1.
It was provided in the partnership deed that in the event of retirement /death of a
partner he/his legal representatives would be paid:
(i) The balance in the capital Account.
(ii) His share of goodwill of the firm valued at two years purchase of normal
average profits (after charging interest on fixed capital) for the last three years
to 31st December preceding the retirement or death.
(iii) His share of profits from the beginning of the accounting year to the date of
retirement or death, which shall be taken on proportionate basis of profits of
the previous year as increased by 25%.
(iv) Interest on fixed capital at 10% p.a. though payable to the partners will not be
payable in the year of death or retirement.
204
(v) All the asset are to be revalued on the date of retirement or death and the
profit and loss be debited/ credited to the Capital Accounts in the profit sharing
ratio.
Peter died on 30th September, 2016. The books of Account are closed on calendar
year basis from 1st January to 31st December.
The balance in the Fixed Capital Accounts as on 1st January, 2016 were Peter `
10,000, Paul ` 5,000 and Prince ` 5,000. The balance in the Current Account as on
1st January, 2016 were Peter ` 20,000, Paul ` 10,000 and Prince ` 7,000. Drawings
of Peter till 30th September, 2016 were ` 10,000. The profits of the firm before
charging interest on capital for the calendar years 2013, 2014 and 2015 were `
1,00,000, ` 1,20,000 and ` 1,50,000 respectively. The profits include the following
abnormal items of credit:
2013 2014 2015

` ` `
Profit on sale of assets 5,000 7,000 10,000
Insurance claim received 3,000 - 12,000
The firm has taken out a Joint Life Policy for `1,00,000. Besides the partners had
severally insured their lives for ` 50,000 each, the premium in respect thereof being
charged to the Profit and Loss account. The surrender value of the Policies were 30%
of the face value. On 30th June, 2016 the firm received notice from the insurance
company that the insurance premium in respect of fire policy had been undercharged
to the extent of ` 6,000 in the year 2015 and the firm has to pay immediately. The
revaluation of the assets indicates an upward revision in value of assets to the
extent of ` 20,000. Prepare an account showing the amount due to Peter’s Legal
representatives as on 30th September, 2016 along with necessary workings.
Q.6 Wise, Clever and Dull were trading in partnership sharing profits and losses 4:3:3
respectively. The accounts of the firm are made up to 31st December every year. The
partnership provided, interalia, that:
On the death of a partner the goodwill was to be valued at three years’ purchase
of average profits of the three years up to the date of the death after deducting
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interest @8 percent on capital employed and a fair remuneration of each partner.

The profits are assumed to be earned evenly throughout the year.
On 30th June, 2016, Wise died and it was agreed on his death to adjust goodwill in
the capital accounts without showing any amount of goodwill in the Balance Sheet.
It was agreed for the purpose of valuation of goodwill that the fair remuneration
for work done by each partner would be `15,000 per annum and that the capital
employed would be `1,56,000. Clever and Dull were to continue the partnership,
sharing profits and losses equally after the death of Wise.

The following were the amounts of profits of earlier years before charging interest
on capital employed.
`
2013 67,200
2014 75,600
2015 72,000
2016 62,400
You are required to compute the value of goodwill and show the adjustment there
of in the books of the firm.
Q.7 Sona, Gabbu and Amit are partners (PSR 3:1:1). Firm has taken separate life
policies in name of all three partners.
SONA GABBU AMIT

Policy 1,00,000 2,00,000 3,00,000
Surrender Value 10,000 20,000 30,000
Calculate the amount which amit’s executors will get in case of amit’s death.
206
HOMEWORK SECTION

Q.1 Ram and Rahim are in partnership sharing profits profit and losses in the ratio of
3 : 2. As Ram, on account of his advancing years, feels he cannot work as hard as
before, the chief clerk of the firm, Ratan is admitted as partner with effect from
1st Jaunary, 2011, and becomes entitled to 1/10th of the net profit and nothing
else, the mutual ratio between Ram and Rahim remaining unaltered.
Before becoming a partner, Ratan was getting a salary of ` 500 p.m. together with
a commission of 4% on the net profits after deducting his salary and commission.
It is provided in the partnership deed that the share of Ratan’s profits as a partner
in excess of the amount to which he would have been entitled if he has continued
as the chief clerk, should be taken out of Ram’s share of profits.
The net profit for the year ended December 31, 2011 is ` 1,10,000. Show the
distribution of net profit amongst the partners.
Q.2 A and B are partners sharing the profits and losses in the ratio of 3 : 2 with
capitals of ` 2,00,000 and ` 1,00,000 respectively. Show the distribution of profits
in each of the following alternative cases:
Case (i):- If the partnership deed is silent as to the interest on capital and the
profits for year are ` 50,000.

Case (ii):- If the partnership deed provides for interest on capital @ 8 % p.a. and
the losses for the year are ` 50,000
Case (iii):- If the partnership deed provides for interest on capital @ 8% p.a. and
the profit for the year are ` 50,000.
Case (iv):- If the partnership deed provides for interest on capital @ 8 % p.a. and
the profits for the year are ` 15,000.
207
Case (v):- If the partnership deed provides for interest on capital @ 8 % p.a. even
if the firm incurs loss and the profits for the year are ` 15,000.
Q.3 Calculate the interest on drawings of Mr. Arjun @ 10% p.a. for the year ended
31st March, 2007 in each of the following alternative cases.
Case (a) : If he withdraw ` 5,000 p.m. in the beginning of every month.
Case (b) : If he withdraw ` 5,000 p.m. at the end of every month.
Case (c) : If he withdraw ` 5,000 p.m.
Case (d) : If he withdraw ` 60,000 during the year.
Case (e) : If he withdraw as follows:
`
1st June, 2006 20,000
31st August, 2006 10,000
31st October 2006 18,000
1st February 2007 12,000
Case (f) : If he withdraw ` 15,000 in the beginning of each quarter.

Case (g) : If he withdraw ` 15,000 at the end of each quarter.
Case (h) : If he withdraw ` 15,000 during the middle of each quarter.
208

Q.1 A, B and C are in partnership sharing profits and losses in the ratio of 4:3:3. They
decided to change the profit sharing ratio to 7:7:6. Goodwill of the firm is valued
at ` 20,000. Calculate the sacrifice / gain by the partners and make the necessary
journal entry.
Q.2 A, B, C and D are in partnership sharing profits and losses equally. They mutually
agreed to change the profit sharing ratio to 3:3:2:2. Give necessary journal entry.
Assuming goodwill of firm is ` 20,000.
209

Q.1 Gopal and Govind are partners sharing profits and losses in the ratio 60:40. The
firms' balance sheet as on 31.03.2016 was as follows :
Capital Accounts
Gopal 1,20,000 Fixed assets 3,00,000
Govind 80,000 Investments 50,000
Long term loan 2,00,000 Current assets 2,00,000
Current liabilities 2,50,000 Loans and advances 1,00,000
6,50,000 6,50,000
Due to financial difficulties, they have decided to admit Guru as partner in the
firm from 01.04.2016 on the following terms :
Guru will be paid 40% of the profits

Guru will bring in cash ` 1,00,000 as capital. It is agreed that goodwill of the firm
will be valued at 2 years' purchase of 3 years' normal average profits of the firm
and Guru will bring in cash his share of goodwill. It was also decided that the
partners will not withdraw their stage of goodwill nor will the goodwill appear in
the books of account.
The profits of the previous three years were as follows :

For the year ended 31.3.2014: profit ` 20,000 (includes insurance claim received
of ` 40,000).
For the year ended 31.3.2015: loss ` 80,000 (includes voluntary retirement
compensation paid ` 1,10,000).
For the year ended 31.3.2016: profit of ` 1,05,000 (includes a profit of ` 25,000
on the sale of assets).
210
It was decided to revaluate the assets on 31.03.2016 as follows:
Fixed assets (net) 4,00,000

Investments Nil
Current assets 1,80,000
Loans and advances 1,00,000

The new profit sharing ratio after admission of Guru was 35:25:40.
Pass Journal entries on admission, show goodwill calculation and prepare

revaluation account, partners' capital account and balance sheet as on 01.04.2016
after the admission of Guru.
Q.2 Dalal, Banerji and Mallick are partners in a firm sharing profits and losses in the
ratio 2:2:1. Their Balance Sheet as on 31st March, 2011 is as follows :
Trade payables 12,850 Land and Buildings 25,000
Outstation Liabilities 1,500 Furniture 6,500
General Reserve : 6,500 Inventory of goods 11,750
Mr. Dalal 12,000 Cash in hand 140
Mr. Banerji 12,000 Cash in Bank 960
Mr. Mallick 5,000 29,000
49,850 49,850
The partners have agreed to take Mr. Mistri as a partner with effect from 1st April,
2011 on the following terms:
(1) Mr. Mistri shall bring ` 5,000 towards his capital
(2) The value of Inventory should be increased by ` 2,500 and Furniture

should be depreciated by 10%.
(3) Reserve for bad and doubtful debts should be provided at 10% of the
Trade receivables.
(4) The value of land and buildings should be enhanced by 20%.
211
(5) The value of the goodwill be fixed at ` 15,000.
(6) General Reserve will be transferred to the Partners' Capital Accounts.
(7) The new profit sharing ratio shall be: Mr. Dalal 5/15, Mr. Banerji 5/15, Mr.
Mallick 3/15 and Mr. Mistri 2/15.
The outstanding liabilities include ` 1,000 due to Mr. Sen which has been paid by
Mr. Dalal. Necessary entries were not made in the books.
Prepare (i) Revaluation Account, and (ii) Capital Accounts of the partners.
Q.3 A, B and C are sharing profits and losses in the ratio of 5:3:2. Calculate the new
profit sharing ratio and the sacrificing ratio in each of the following alternative
cases:
Case (a) If C acquires 1/10th share from B

Case (b) If C acquired 1/10th share equally from A and B
Case (c) If C’s share is increased by 1/10th share by acquiring from A.
Case (d) If C’s share is increased to 3/10th by acquiring from B.
Case (e) if A, B and C decide to share future profits and losses in the ratio of 5:2:3.
Case (f) if A, B and C decide to share future profits and losses in the ratio of 2:3:5.
Case (g) if A, B and C decide to share future profits and losses in the ratio of 2:1:2.
Case (h) if A, B and C decide to share future profits and losses equally.
Case(i) If A , B and C decide that the future profit sharing ratio between B and C
shall be the same as existing between A and B
212
UNIT IV – RETIREMENT OF A PARTNER

Q.1 On 31st March, 2016, the balance sheet of M/s Ram, Rahul and Rohit sharing
profits and losses in proportion to their capital, stood as follows:
Capital accounts: Land & building 2,00,000
Ram 3,00,000 Machinery 2,00,000
Rahul 2,00,000 Closing stock 1,00,000
Rohit 1,00,000 6,00,000 Sundry debtors 2,00,000
2,00,000 Cash and bank balances 1,00,000
8,00,000 8,00,000

On 31st March, 2016, Ram desired to retire from the firm and remaining partners
decided to carry on. It was agreed to revalue the assets and liabilities on that
date on the following basis:
1. Land and buildings be appreciated by 30%.
2. Machinery be depreciated by 20%.
3. Closing stock to be valued at ` 80,000.
4. Provision for bad debts be made at 5%.
5. Old credit balances of sundry creditors ` 10,000 be written back.
6. Joint life policy of the partners surrendered and cash obtained ` 60,000.
7. Goodwill of the entire firm be valued at ` 1,80,000 and Ram's share of the
goodwill be adjusted in the accounts of Rahul and Rohit who share the future
profits equally. No goodwill account being raised.
8. The total capital of the firm is to be the same as before retirement. Individual
capital be in their profit sharing ratio.
213
9. Amount due to Ram is to be settled on the following basis:-

50% on retirement and the balance 50% within one year.

Prepare revaluation account, capital account of partners: Rahul & Rohit, loan
account of Ram, cash account and balance sheet as on 1.4.2016 of M/s Rahul and
Rohit.
Q.2 A,B,C were in partnership sharing profits and losses in the ratio of 3:2:1. The
balance sheet of the firm as on 31.03.2016 was as under:
Capital accounts: Goodwill 40,000
A 1,50,000 Fixtures 30,000
B 1,00,000 Stock 1,70,000
C 50,000 3,00,000 Sundry debtors 90,000
Sundry creditors 40,000 Cash 10,000
3,40,000 3,40,000
A, on account of ill-health, gave notice that he wished to retire from the firm.
A retirement agreement was, therefore, entered as on 31.3.2016, the terms of
which were as follows:

(a) The profit and loss account for the year ended 31.3.2016, which showed a
net profit of ` 42,000 was to be re-opened. B was to be credited with ` 6,000
as bonus, in consideration of the extra work, which had devolved upon him
during the year. The profit sharing basis was to be revised and the revised
ratio is to be 2:3:1 as and from 1st April 2015.
(b) Goodwill was to be valued at two years'purchase of the average profits of

five years. Profits for these five years ending on 31st March were as under:
31.3.2012 15,000
31.3.2013 23,000
31.3.2014 25,000
31.3.2015 35,000
31.3.2016 42,000
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(c) Fixtures are to be valued at ` 39,800 and a provision of 2% was to be made

for doubtful debts and the remaining assets were to be taken at their book
value.
(d) That the amount payable to A shall be paid by B.
B and C agreed, as between themselves, to continue the business, sharing

profits and losses in the ratio of 3:1 and decided to eliminate goodwill from
balance sheet, to retain fixtures in the books at the revised value and increase
the provision for doubtful debts to 6 %. Total capital of the firm will be ` 3
lakhs as before to be maintained in the new ratio as between B and C.
You are required to give the necessary entries to give effect to the above
arrangements. Prepare capital accounts of partners, cash account and
balance sheet of B and C after giving effect to the above arrangements on
the retirement of A.
Q.3 A, B and C are in partnership sharing profits and losses in the ratio of 5:3: 2. The
balance sheet of the firm as on 31.12.2015 was as follows:
Capital A/cs: Sundry Fixed Assets 80,000
A 50,000 inventories 50,000
B 40,000 Trade receivables 30,000
C 30,000 Joint Life Policy 20,000
Bank Loan 40,000 Bank 10,000
1,90,000 1,90,000
On 1.1.2016, A wants to retire, B and C agreed to continue at 2:1. Joint Life Policy
was taken on 1.1.2010 for ` 1,00,000 and its surrender value as on 31.12.2015
was ` 25,000. For the purpose of A’s retirement goodwill was raised for ` 1,00,000.
Sundry Fixed Assets was revalued for ` 1,10,000. But B and C did not prefer to
show such increase in assets in the Balance Sheet. Also they agreed to bring
necessary cash to discharge 50% of the A’s claim, to make the bank balance
`25,000 and to make their capital proportionate.
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Required:
Prepare necessary journal entries.
Q.4 Calculate gain ratio in following cases

Case -1
A, B and C are partners sharing profits and losses in the ratio of 1/2, 3/10 and
1/5 respectively. B retires from the firm and A&C decide to share future profits and
losses in the ratio of 3:2.
Case-2
W, A , B and C are partners sharing profits and losses in the ratio of 1/3, 1/6, 1/3
and 1/6 respectively. B retires and W, A and C decide to share future profits and
losses equally.
Case-3
A , B and C are partners sharing profits and losses in the ratio of 25:15:9. B
retires and it is decided that profit sharing ratio between A&C will be the same as
existing between B and C.

Case-4
A , B and C are partners sharing profits and losses in the ratio of 4/9, 1/3 and 2/9.
B retires and surrenders 1/9th of his share in favour of A and remaining in favour
of C.
Q.5 A partner’s loan stands at ` 30,000 being amount payable to partner on

retirement and that it has to be paid in four annual equal installments and
that the loan is to carry interest at 6% per annum. Prepare loan account of
retiring partner for four years.
Q.6 K, L & M are partners sharing pro¬fits and losses in the ratio 5:3:2. Due to illness,
L wanted to retire from the ¬firm on 31.3.2015 and admit his son N in his place.
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Balance Sheet of K, L and M as on 31.3.2015
Capital Goodwill 30,000
K 40,000 Furniture 20,000
L 60,000 Trade receivables 50,000
M 30,000 1,30,000 Inventory in Trade 50,000
Reserves 50,000 Cash and Bank balances 50,000
2,00,000 2,00,000

On retirement of L assets were revalued: Goodwill `50,000, furniture `10,000 and
Inventory in trade `30,000. 50% of the amount due to L was paid off in cash and
the balance was retained in the fi¬rm as capital of N. On admission of the new
partner, goodwill has been written off. M is paid off his extra balance to make
capital proportionate.
You are required to give:

(i) Necessary journal entries;
(ii) balance sheet of M/s K, M and N as on 1.4.2015;
(ii) capital accounts of partners.
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UNIT V – DEATH OF A PARTNER

Q.1 B and N were partners. The partnership deed provides inter alia:
(i) That the accounts be balanced on 31st December each year.

(ii) That the profits be divided as follows:
B: One-half; N: One-third; and carried to Reserve Account: One-sixth

(iii) That in the event of death of a partner, his executor will be entitled to the
following:
(a) The capital to his credit at the date of death;

(b) His proportion of profit to date of death based on the average profits of
the last three completed years;
(c) His share of goodwill based on three years’ purchases of the average
profits for the three preceding completed years.
Trial Balance on 31st December, 2015

B’s Capital 90,000
N’s Capital 60,000
Reserve 30,000
Investments 40,000
Cash 1,10,000
Total 2,00,000 2,00,000
The profits for the three years were 2013: ` 42,000; 2014: ` 39,000 and
2015: ` 45,000. N died on 1st May, 2016.
Show the calculation of N (i) Share of Profits; (ii) Share of Goodwill; (iii) Draw
up N’s Executors Account as would appear in the firms’ ledger transferring
the amount to the Loan Account.
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Q.2 A, B and C were carrying on business with following assets with effect from
1.1.2019. Furniture `18000, Machine `72,000, Cash `10,000, Debtors `20,000.
Their profit sharing ratio was 5:3:2. Capital is also shared in the same ratio. B died
on 30.6.2019. His son claimed his father’s interest in the firm.
The following was the settlement:

1. Allow his capital to his credit on the date of death.
2. Give 5% p.a. interest on his capital.
3. He had been drawing @ `600 per month, which he withdraw at the beginning
of each month. He be allowed to retain there drawings as a part of his share
of profit.
4. Interest @ 6% p.a. be charged on his drawings.
5. They had separate life policies for which the premium had been paid out of
profit & Loss A/c of the firm:

A ` 50,000, B `60,000, C `30,000. The surrender value of A’s policy was 50%
whereas of C’s policy it was 40%.
6. Goodwill was evaluated twice the average of profit which were `3,600
prepare B’s personal Account.
Q.3 A, B, and C are partners sharing profits of 2:1:1 they closed their books on 31st
December each year, A died on 28th February, 2011, B and C decided to share
future profit in 3:2. On this date, their Balance Sheet was as follows.
Creditors 3,790 Cash 20,000
Joint Life Policy Reserve 3,600 Sundry Debtors 3,900
profit for 2 months 3,110 Loan to A 4,000
(before interest &
salaries)
Capitals: 3,600
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A 10,000 Joint life Policy

B 6,000
C 5,000 21,000
31,500 31,500
According to the partnership deed:

(a) Interest on capital is allowed @6% p.a. A and B are entitled to salaries at
`300 and ` 250 p.m.
(b) In the event of death of a partner, goodwill was to be valued at 2 years

purchase of the average net profits of 3 completed years preceding death.
The net profit for the year 2008, 2009 and 2010 were `5,500, `4,800 and
`6,500 respectively.
Firm had taken a joint Life policy (with profit policy) of `10,000. The insurance
company admitted a claim of `12,600 including bonus.

A’s share was paid to his executors, B & C continued the firm.
Prepare profit & loss a/c, Partner’s Capital a/c & Balance sheet of B & C.
Q.4 A, B and C are partners sharing profits & losses in ratio 5:3:2. They took joint life
policy of ` 1,00,000. If ‘A’ dies pass journal entries relating to joint life policy in
each of following cases –
1. If premium paid earlier is treated as expenses.
2. If joint life policy appears in balance sheet at surrender value of ` 10,000.
3. If joint life policy appears in balance sheet at surrender value of ` 10,000

long with joint life policy reserve.
220
PAST EXAM
Q.1 A, B and C are partners sharing profits in the ratio of 3:2:1. Their Balance Sheet as
at 31st March, 2018 stood as:
Capital Accounts Building 10,00,000
A 8,00,000 Furniture 2,40,000
B 4,20,000 Office equipments 2,80,000
C 4,00,000 16,20,000 Stock 2,50,000
Sundry Creditors 3,70,000 Sundry debtors
General Reserves 3,60,000 Less: Provision for 3,00,000
Doubtful debts 30,000 2,70,000
Joint life policy 1,60,000
23,50,000 23,50,000
B retired on 1st April, 2018 subject to the following conditions:

(i) Office Equipments revalued at ` 3,27,000.
(ii) Building revalued at ` 15,00,000. Furniture is written down by ` 40,000 and

Stock is reduced to Rs,2,00,000 .
(iii) Provision for Doubtful Debts is to be created @ 5% on Debtors.
(iv) Joint Life Policy will appear in the Balance Sheet at surrender value after B's
retirement. The surrender value is ` 1,50,000
(v) Goodwill was to be valued at 3 years purchase of average 4 years profit which
were:
Year `
2014 90,000
2015 1,40,000
2016 1,20,000
2017 1,30,000
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(vi) Amount due to B is to be transferred to his Loan Account.

Prepare the Revaluation Account, Partners' Capital Accounts and the Balance Sheet
immediately after B's retirement.
Q.2 Dinesh, Ramesh and Naresh are partners in a firm sharing profits and losses in the
ratio of 3:2:1. Their Balance Sheet as on 31st March, 2018 is as below:
Trade payables 22,500 Land & Buildings 37,000
Outstanding Liabilities 2,200 Furniture & Fixtures 7,200
General Reserve 7,800 Closing stock 12,600
Capital Accounts: Trade Receivables 10,700
Dinesh 15,000
Ramesh 15,000
Naresh 10,000 40,000
Cash in hand 2,800
Cash at Bank 2,200
72,500 72,500
The partners have agreed to take Suresh as a partner with effect from 1st April,
2018 on the following items:
(i) Suresh shall bring ` 8,000 towards his capital.
(ii) The value of stock to be increased to ` 14,000 and Furniture & Fixtures to be
depreciated by 10%.
(iii) Reserve for bad and doubtful debts should be provided at 5% of the Trade
Receivables.
(iv) The value of Land & Buildings to be increased by ` 5,600 and the value of the
goodwill be fixed at ` 18,000.
(v) The new profit sharing ratio shall be divided equally among the partners.
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The outstanding liabilities include ` 700 due to Ram which has been paid by Dinesh.
Necessary entries were not made in the books. Prepare (i) Revaluation Account, (ii)
Capital Accounts of the partners, (iii) Balance Sheet of the firm after admission of
Suresh.
Q.3 Monika, Yedhant and Zoya are in partnership, sharing profits and losses equally.
Zoya died on 30th June 2018. The Balance Sheet of Firm as at 31st March 2018
stood as
Creditors 20,000 Land and Building 1,50,000
General Reserve 12,000 Investments 65,000
Capital Accounts: Stock in trade 15,000
Monika 1,00,000 Trade receivables 35,000
Yedhant 75,000 Less: Provision for (2,000) 33,000
Zoya 75,000 doubtful debt
Cash in hand 7,000
Cash in bank 12,000
2,82,000 2,82,000
In order to arrive at the balance due to Zoya, it was mutually agreed that:
(i) Land and Building be valued at ` 1,75,000
(ii) Debtors were all good, no provision is required
(iii) Stock is valued at ` 13,500
(iv) Goodwill will be valued at one Year's purchase of the average profit of the past
five years. Zoya's share of goodwill be adjusted in the account of Monika and
Yedhant.
(v) Zoya's share of profit from 1st April 2018, to the date of death be calculated
on the basis of average profit of preceding three years.
(vi) The profit of the preceding five years ended 1st March were:
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2018 2017 2016 2015 2014

25,000 20,000 22,500 35,000 28,750
You are required to prepare:

(1) Revaluation account
(2) Capital accounts of the partners and
(3) Balance sheet of the Firm as at 1st July 2018.
Q.4 Arup and Swarup were partners. The partnership deed provides inter alia:
(i) That the annual accounts be balanced on 31st December each year;
(ii) That the profits be allocated as follows: Arup: One-half; Swarup: One-third
and Carried to reserve account: One sixth;
(iii) That in the event of death of a partner, his executor will be entitled to the
following:
(1) The capital to his credit at the date of death;

(2) His proportionate share. of profit to date of death based on the average
profits of the last three completed years; and

(3) His Share of goodwill based on three years' purchase of the average
profits for the three preceding completed years.
224
Trial Balance as on 31st December, 2018
Particulars Debit ( ` ) Credit ( ` )

Arup's Capital 90,000
Swarup's Capital 60,000
Reserve 45,000
Investment 55,000
Cash 1,10,000
Total 2,15,000 2,15,000
The profits for the three year were 2016: ` 51,000; 2017: ` 39,000 and 2018:
` 45,000. Swarup died on 1st May 2019.
Show the calculation of Swarup (A) Share of profits; (B) Share of Goodwill;
(C) Draw up Swarup's Executor Account as would appear in the firms' ledger
transferring the amount to the Loan account.
225
OBJECTIVE

Q.1 State with reasons, whether the following statements are true or false:
1. Limited Liability Partnership (LLP) is governed by Indian Partnership Act, 1932.

Ans. False - The provisions of the Indian Partnership Act, 1932 shall not apply to a
limited liability partnership. Limited Liability (LLPs) Act, 2008 is applicable for
Limited Liability Partnerships.
2. A Partnership firm cannot own any asset.

Ans. True - Partnership firm is not a separate legal entity and so it cannot buy
property or investments in partnership firms name. Therefore the property and
investment of partnership firm are held in the personal name of partners.
3. The business of partnership firm must be carried on by all the partners.

Ans. False - Accounting to sec. 4 of the Indian Partnership Act. 1932, partnership
can be carried on by all or any one of them acting for all.
Q.2 Shorts Questions

1. A & B are partners sharing profit & Loss in ratio 4:1 C was a manager who
received salary of Rs2,000 pm in addition to commission of 5% on net profit
after charging such commission profit for year is Rs.3,390,00. before salary
Remuneration of C = __________.
2. Shakh & Shanti are partners with capital of Rs.50,000 & Rs.30,000 respectively
profit earned by firm is Rs.6,000. interest payable by firm on capital is 10% pa.
Subject to provisions of partnership act interest on capital of both partners is
_______________.
3. X & Y are partners in business sharing profit & losses in 5:4. After accounts for
calendar year 2004 were made up they decided to share profit & losses equally
for & from the year 2004. It was discovered that in ascertaining results in
226
prior year certain adjustments had not been noticed details of which are given
below-
2001 2002 2003 2004

Profits as per accounts 72,000 78,000 90,000 1,08,000
Income not Accounted 5,400 4,500 3,600 6,300
Expenses not provided 9,000 6,000 10,800 7,200
Capital of X & Y on 31st Dec 2004 before above adjustments were

Rs.1,26000 & Rs.96000. find correct capital balances
4. Mr. X had opening capital of Rs.1,00,000 in a partnership firm on 1/1/19.

He introduced further capital of Rs.10,000 on 1/4/19 & another Rs.5,000 on
1/7/19. On 30/9/19 he withdrew Rs.40,000. his effective capital as on 31/12/19
is _____________.
5. Mr. X a partner started business with Mr. Y on 1/4/18. His drawing for year
ended 31/12/18 was Rs.2,000 pm at end of every month. His interest on
drawing @ 10% pa will be ___________.
6. A,B & C sharing profit & losses equally have fixed capital of Rs. 60,000, Rs.
45,000 & Rs.30,000. For year 2019 profit of Rs.60,000 were distributed but
interest on capital was credited @12% instead of 10%. Adjusting entries will
be
7. X & Y are partners sharing profit / losses in ratio 2:1 on 1/1/19 Z is admitted
with ¼ share in profits with guaranteed amount of Rs. 25,000. Profit for the
year is Rs.76,000 so share of Y in profit should be ____________.
1. If a firm prefers Partners’ Capital Accounts to be shown at the amount

introduced by the partners as capital in firm then entries for salary, interest,
drawings, interest on capital and drawings and profits are made in
(a) Trading Account (b) Profit and Loss Account
(c) Partners’ Current Account
227
2. In the absence of any agreement, partners are liable to receive interest on their
Loans @
(a) 12% p.a. (b) 10% p.a. (c) 6% p.a.
3. The relationship between persons who have agreed to share the profit of a
business carried on by all or any of them acting for all is known as ………
(a) Partnership. (b) Joint Venture.
(c) Association of Persons.
4. In the absence of an agreement, partners are entitled to

(a) Interest on Loan and Advances. (b) Commission.
(c)
Salary.
5. Partners are supposed to pay interest on drawings only when ________ by

the __________.
(a) Provided, Agreement. (b) Agreed, Partners
(c) Both (a) & (b) above.
6. When a partner is given a guarantee by the other partner, loss on such

guarantee will be borne by
(a) Partner who gave the guarantee (b) All the other partners.
(c) Partnership firm.

7. A and B are partners in a firm. A is to get a commission of 10% of Net Profit
before charging any commission. B is to get a commission of 10% on Net Profit
after charging all commissions. Net Profit before charging any commission was
` 55,000. Find out the commission of A and B.
(a) A : ` 4,500 ; B : ` 5,500
(b) A's Commission = ` 5,500 ; B's Commission = ` 4,500
(c) A :` 5,000 : B : ` 5,000
(d) None of the above
8. X and Y started business on 1st April, 2006 with capitals of ` 5,00,000 and `
3,00,000 respectively. On 1st May, 2006, X introduced an additional capital of
` 1,00,000 and Y withdrew ` 50,000 from his capital. On 1st October 2006,
X withdrew ` 2,00,000 from his capital and Y introduced ` 2,50,000 on his
228
capital. Interest on capital is allowed @ 6% p.a. Calculate the interest on

capital for the year ending 31st March, 2007.
(a) X - ` 22,750 and Y - ` 29,500 (b) X - ` 29,000 and Y - ` 22,000
(c) X - ` 27,000 and Y - ` 45,000 (d) X - ` 29,500 and Y - `
22,750
9. A starts a business on 1st January, 2006 with ` 5,000. B joins on 1st May, 2006
with ` 10,000. On 1st July, C comes in as a partner with ` 15,000 and on the
same date A contributed ` 5,000 and B ` 10,000 as further capital. Find capital
ratio as per effective capital assuming year end to be 31st Dec.
(a) 9 : 14 : 9 (b) 8 : 16 : 6
(c) 5 : 3 : 2 (d) None of the above
10. Calculate the Interest on Drawings of Mr. A @ 10% p.a. for the year ended 31st
Dec. 2006, if his drawings during 2006 were ` 14,400.
(a)
` 720 (b) ` 780
(c) ` 660 (d) None of the above
11. Calculate the Interest on Drawings of Mr. E @ 10% p.a. for the year ended 31st
Dec. 2006, if he withdrew the following amounts as under : Jan. 31 - ` 3,600;
Mar. 31 - ` 2,400;July 1 - ` 4,800 ; Sept. 30 - ` 1,800 ; Nov. 1 - ` 3,000.
(a) ` 1,560 (b) ` 780
(c) ` 845 (d)
` 720
12. Calculate the Interest on Drawings of Mr. B @ 10% p.a. for the year ended 31st
Dec. 2006, if he withdrew ` 1,200 p.m. in the beginning of every month.
(a) ` 720 (b) ` 660
(c) ` 780 (d) None of the above
13. Calculate the Interest on Drawings of Mr. C @ 10% p.a. for the year ended 31st
Dec. 2006, if he withdrew ` 1,200 p.m. at the end of every month.
(a)
` 720 (b) ` 660
(c) ` 780 (d) None of the Above
14. Calculate the Interest on Drawings of Mr. D @ 10% p.a. for the year ended 31st
Dec. 2006, if he withdrew ` 1,200 p.m. at the middle of every month.
229
(a) ` 720 (b) ` 660

(c) ` 780 (d) None of the Above
15. Mr. X and Mr. Y started business on 1st April, 2006. Calculate the Interest on
Drawings of Mr. Y @ 10% p.a. for the year ended 31st Dec. 2006, if he withdrew
` 3,600 in the beginning of every quarter.
(a) ` 270 (b) ` 450
(c) ` 405 (d)
` 540
16. Mr. X and Mr. Y started business on 1st April, 2006. Calculate the Interest
on Drawings of Mr. Y @ ` 10% p.a. for the year ended 31st Dec. 2006, if he
withdrew ` 3,600 at the end of every quarter.
(a) ` 270 (b) ` 540
(c) ` 405 (d)
` 450
17. There are three partners in a firm P, Q and R. X is admitted into the firm with
1/4 share of profit with a guaranteed profit of ` 25,000 p.a. The firm's total
profit is ` 80,000, what amount would be given to X as his share of profit by
the firm?
(a) ` 25,000 (b) ` 20,000 (c) ` 15,000 (d) `
22,500

18. In the Question No. 17 if P stood as a guarantor of guaranteed profit to X, how
much profit would be given to P in the instant case?
(a) ` 20,000 (b) ` 21,667
(c)
` 15,000 (d) ` 22,500
19. Following are the essential elements of a partnership firm expect.

(a) At least two persons
(b) There is an agreement between all partners
(c) Equal share of profit and losses
(d) Partnership agreement is for some business
20. A partner acts as ________for a firm.

(a)
Agent (b) Third Party
(c)
Employee (d) None of the above
230
21. Bill and Monica are partner sharing profit and losses in ratio of 3:2 having
capital of ` 80,000 and ` 50,000 respectively. They are entitled to 9% p.a.
interest on capital before distributing the profits. During the year firm earned
` 7,800 after allowing interest on capital.
Profit apportioned among Bill and Monica is:

(a) ` 4,680 and ` 3,120 (b) ` 4,800 and ` 3,000
(c) ` 5,000 and ` 2,800 (d) None of the above
22. Ram and Shyam are partners with the capital of ` 25,000 and ` 15,000
respectively. Interest payable on capital is 10% p.a. Find the interest on
capital for both the partners when the profits earned by the firm is ` 2,400.
(a) ` 2,500 and ` 1,500 (b) ` 1,500 and ` 900
(c) ` 1,200 and ` 1,200 (d) None of the above
23. Seeta and Geeta are partners sharing profits and losses in the ratio 4 : 1.
Meeta was manager who received the salary of ` 4,000 p.m. in addition to a
commission of 5 % on net profits after charging such commission. Profit for
the year is ` 6,78,000 before charging salary. Find the total remuneration of
Meeta.
(a) ` 78,000 (b) ` 88,000
(c) ` 87,000 (d) ` 76,000
24. What time would be taken into consideration if equal monthly amount is drawn
as drawing at the beginning of each month?
(a)
7 months (b) 6 months
(c)
5 months (d) 6.5 month
25. X, Y and Z are partners in a firm. At the time of division of profit for the year
there was dispute between the partners. Profit before interest on partner’s
capital was ` 6,000 and Y determined interest @ 24% p.a. on his loan of `
80,000. There was no agreement on this point.
231
Calculate the amount payable to X, Y and Z respectively.

(a) ` 2,000 to each partner.
(b)
Loss ` 4,400 for X and Z & Y will take home ` 14,800
(c) ` 400 for X, ` 5,200 for Y and ` 400 for Z
(d)
` 2,400 to each partner

26. What balance does a Partner’s Current Account has?
(a)
Debit balance (b) Credit balance
(c) Either ‘a’ or ;b; (d) None of the above
27. A,B and C had capitals of ` 50,000, ` 40,000 and ` 30,000 respectively for
carrying on business in partnership. The firm’s reported profit for the year was
` 80,000. As per provisions of the Indian Partnership Act 1932, find out the
share of each partner in the above amount after taking into account that no
interest has been provided on an advance by A of ` 20,000, in addition to his
capital contribution.
(a) `26,267 for Partner B and C & ` 27,466 for partner A
(b)
`26,667 each Partner
(c) `33,333 for A ` 26,667 for B and ` 20,000 for C
(d)
`30,000 each Partner
28. Net profit of Ex Ltd. before allowing remuneration and commission to Mehta,
the Manager was ` 702000. Mehta was entitled to a monthly remuneration of
`6000 PM plus a commission of 5% of net profits after charging remuneration
and such commission. Find out the total amount payable to Mehta.
(a)
` 72,000 (b) ` 1,02,000
(c) ` 30,000 (d) ` 6,000

29. A partnership firm consisted of three partners A, B, C. If A pays ` 10000 against
the liability of the firm from his private funds, then what will be the entry in
the books of the firm?
(a) No entry
(b) Liability A/c debit, partner’s Capital credit
(c) Partner’s capital A/c debit, Liability credit
(d) None of these
30. A, B, C, D are in partnership sharing profit and losses equally. They agreed to
232
change their profit sharing ratio 2:2:1:1. In this case D’s share would reduce
by_________ share of profit or loss.
(a)
1/24 (b) 1/12
(c)
1/10 (d) 1/6
31. There are 3 Partners in a Firm A, B and C. D is admitted into the Firm with
1/4th share of profit with a guaranteed profit of ` 30,000 p.a. The Firm's
total profit is ` 1,00,000 what amount would be given to D as his share of
profit by the Firm?
(a) ` 30,000 (b) ` 25,000
(c) ` 35,000 (d) ` 22,500

32. X,Y and Z are sharing profits & losses in the ratio of 5:3:2. They decide to share
future profits & losses in the ratio of 2:3:5 with effect from 1st April, 20X2. They
also decide to record the effect of the following accumulated profits, losses
& reserves without affecting their book figures, by passing a single adjusting
entry.
Book Figure
General Reserve ` 24,000
Profit & Loss A/.c. ` 6,000
Advertisement Suspense A/c. (Dr.) ` 12,000
The necessary single adjusting entry will involve:
(a) Debit Z and Credit X with ` 5,400
(b) Debit X and Credit Z with ` 5,400
(c) Debit Y and Credit X with ` 5,400
(d) Debit X and Credit Y with ` 5,400
33. A and B are equal partner. Their capitals are ` 40,000 and ` 80,000 respectively.
The accounts of the year were closed before providing interest @5% per annum
as per partnership agreement. To rectify this mistake they decided to pass
an adjustment entry between the partner. Therefore, A's account need to be
debited by
(a) ` 2,000 (b) Nil
(c)
`1,000 (d) None of the above.
233
Answer
1. 39,000
2. Rs.3,750 & Rs.2,250.
3.
Capital A/c
X Y X Y
To P& L adi 1,33,333 1,06,667 By bal b/d 1,26,000 96,000
(01- 03) By P/L adj. (01 – 1,29,333 1,03,467
03)
To P & L adj. (04) 60,000 48,000 By P& L adj. 57,150 57,150
To bal c/d 1,19,150 1,01,950
3,12,483 2,56,617 3,12,483 2,56,617
01 02 03 04
Profit 72,000 78,000 90,000 1,08,000
+ o/s Income 5,400 4,500 3,600 6,300
- o/s Expenses (9,000) (6,000) (10,800) (7,200)
+ o/s Expense py - 9,000 6,000 10,800
- o/s Income py - (-5,400) (4,500) (3,600)
Current Profit 68,400 80,100 84,300 1,14,300
4. Rs12,00,000
5. Rs.600.
6. A’s current a/c Dr. 300

To C’s Current a/c 300
7. Rs.17,000
234
1. (c) 10. (a) 19. (c) 28. (b)

2. (c) 11. (c) 20. (a) 29. (b)
3. (a) 12. (c) 21. (a) 30. (b)
4. (a) 13. (b) 22. (b) 31. (a)
5. (c) 14. (a) 23. (a) 32. (b)
6. (a) 15. (d) 24. (d) 33. (c)
7. (b) 16. (a) 25. (c)
8. (d) 17. (a) 26. (c)
9. (a) 18. (c) 27. (a)
7.
Net Profit before Commission 55,000

Less: Commission to “A” (55.000 x 10%) (5,500)
49,500
Less: Commission to “B” (4,500)
49,500
x 10
110
Net profit after all commission 45,000
8. Calculation of Interest on Capital
Partner X:
5,00,000 x 6% x 1/12 = 2,500
6,00,000 x 6% x 5/12 = 15,000
4,00,000 x 6% x 6/12 = 12,000
29,500
Partner Y:
3,00,000 x 6% x 1/12 = 1,500
2,50,000 x 6% x 5/12 = 6,250
5,00,000 x 6% x 6/12 = 15,000
22,750
235
9. Effective Capital
A:
5,000 x 6 months = 30,000
10,000 x 6 months = 60,000
90,000
B: Capital Ratio
10,000 x 2 months = 20,000 = 9 :14:9
20,000 x 6 months = 1,20,000
1,40,000
C:
15,000 x 6 months = 90,000
10. 14400 x 10% x 6/12 = 720
11.
3600 x 10% x 11/12 = 330

2400 x 10% x 9/12 = 180
4800 x 10% x 6/12 = 240
1800 x 10% x 3/12 = 45
3000 x 10% x 2/12 = 50
845
12. 1200 P.M. x 10% x 6.5 months = 780
13. 1200 P.M. x 10% x 5.5 months = 660
14. 1200 P.M. x 10% x 6 months = 720
15.
3600 x 10% x 912 = 270

3600 x 10% x 6/12 = 180
3600 x 10% x 3/12 = 90
540
236
16.
3600 x 10% x 612 = 180

3600 x 10% x 3/12 = 90
3600 x 10% x 0/12 = 0
270
17. Share in Profit to X = 80000 x ¼ = 20,000

Guaranteed Profit = 25000
Whichever is higher = 25000
18. Share in Profit to ‘P’ = 80000 x ¼ = 20,000

Less: Deficit borne by ‘P’ = (5000)
[25000 – 2000]
15000
21. Bill = 78000 x 3/5 = 4680

Monica = 78000 x 2/5 = 3120
22. Insufficient Profit to Pay Interest on Capital

hence, profit dishonoured in Capital Ratio i.e. 5 : 3
Ram = 2400 x 5/8 = 1500
Shyam = 2400 x 3/8 = 900
23.
Profit before Salary 678000

Less: Salary [4000 p.m. x 12] (48000)
Profit before Commission 63000
Less: Commission 30,000 (30,000)

x5
105
6,00,000
∴ Remuneration to Meeta = 48,000 + 30,000 = 78,000
237
25.
Profit = 6000
Less: Interest on Loan (Y) = (4800)
[80,000 x 6%]
Remaining Profit = 1200
X Y Z
1 : 1 : 1
Share of Profit 400 400 400

+ Interest on Loan NA 4800 NA
400 5200 400
27.
Profit = 80,000
Less: Interest on A’s Loan [20000 x 6%] = (1200) A = 26,266
78800 B 1:1:1 = 26,267
A = 26266 + 1200 = 27,466 C = 26,267
B = 26267
C = 26267
28.
Profit before any remuneration 7,02,000

Less: Salary / Remuneration [6000 p.m. x 12] (72,000)
Profit before Commission 6,30,000
Less: Commission 6,30,000 (30,000)
x5
105
6,00,000
Total amount payable to Mehta = 72,000 + 30,000

= 1,02,000
238
30. 1 1 6-4 2 1
- = = =
4 6 24 24 12
31.
D’s Share of Profit = 1,00,000 x ¼ = 25,000

Guaranteed Profit = 30,000
Whichever is Higher = 30,000
32.
Old Ratio - New Ratio = Sacrificing Ratio (Gaining Ratio)
X 5/10 - 2/10 = 3/10
Y 3/10 - 3/10 = Nil
Z 2/10 - 5/10 = - 3/10
Gaining partner will contribute to sacrificing partner
= [(24000 + 6000 – 12000) x 3/10]
= 5400
Adjusting Entry
Z’s Capital A/c Dr. 5400 ----
To X’s Capital A/c ---- 5400
33. Capital of A = 40000

Capital of B = 80000
Particulars A B Total
Interest on Capital @ 5% 2000 4000 6000
Cr. Cr.
239
1. Goodwill is a fictitious asset.

Ans. False: Goodwill is an intangible asset.
2. Depreciation can be charged on goodwill by fixed installment method.

Ans. False: Goodwill is an intangible asset. It is written off over a reasonable period
of time and not depreciated as per fixed installment method.

1. Extra amount over & above saleable values of identifiable asset that could be
fetched by selling an existing firm as going concern is called ____________.
2. Asset which is compulsory revalued at time of admission is __________.
3. X, Y, & Z are equal partners. On 31/12/05 they agree that Z will take only
1/5th share of profit from 1-1-06 & X&Y each take 2/5th profit goodwill of
firm on that date is valued at Rs6000. Adjustment entry to record above
is
4. Following were profits of firm for last 3 years
Year ended Profits

2001 3,00,000 Including abnormal gain of Rs.90000
2002 2,40,000 After abnormal loss of Rs.120000
2002 3,60,000 Excluding Rs.12,0000 payable for insurance of
machinery
Goodwill of firm on basis of 4 years purchase of average profits of last 3 years

is _____________.
240
1. Following are the factors affecting goodwill except:

(a) Nature of business.
(b) Efficiency of management.
(c) Location of the customers.

2. Weighted average method of calculating goodwill should be followed when:
(a) Profits has increasing trend.
(b) Profits has decreasing trend.
(c) Either ‘a’ or ‘b’.

3. The capital of B and D are ` 90,000 and ` 30,000 respectively with the profit
sharing ratio 3 : 1. The new ratio, admissible after 1.4.2006 is 5 : 3. The goodwill
is valued ` 80,000 as on that date. Amount payable by a gaining partner to a
scarifying partner is:
(a) B will pay to D ` 10,000
(b) D will pay to B ` 10,000
(c) B will pay to D ` 80,000
(d) D will pay to B ` 80,000
4. A, B and C are partners sharing profits and loss in the ratio 3 : 2 : 1. They
decide to change their profit sharing ratio to 2 : 2 : 1. To give effect to this new
profit sharing ratio they decide to value the goodwill at ` 30,000. Pass the
necessary journal entry if Goodwill not appearing in the old balance sheet and
should not appear in the new balance sheet.

(a)
B's Capital Account Dr. 2,000
C's Capital Account Dr. 1,000
To A's Capital Account 3,000

(b)
Goodwill Account Dr. 30,000
To A's Capital Account 15,000
To B's Capital Account 10,000
To C's Capital Account 5,000

241
(c)
A's Capital Account Dr. 12,000
B's Capital Account Dr. 12,000
C's Capital Account Dr. 6,000
To Goodwill Account 30,000

(d)
A's Capital Account Dr. 3,000
To B's Capital Account 2,000
To C's Capital Account 1,000
5. The profits and losses were : 2001 - Profit ` 20,000 ; 2002 - Loss ` 34,000
; 2003 - Profit ` 1,00,000 ; 2004 - Profit ` 1,50,000. The average capital
employed in the business is ` 4,00,000. The rate of interest expected from
capital invested in that class of business is 10%. The remuneration of partners
is estimated to be ` 12,000 p.a. Calculate the value of goodwill on the basis of
2 years' purchase of Super Profit based on the average of 3 years.
(a) ` 60,000 (b) ` 50,000 (c) ` 20,000 (d) ` 40,000

6. The profits for the last three years are 2002 - 03 `42,500 ; 2003 - 04 Profits
` 56,000 & 2004 - 05 Profits ` 68,000. The total liabilities of the firm are
` 10,00,000 of which outsiders liabilities is ` 5,00,000. The rate of interest
expected from capital invested is 10%. Calculate the value of goodwill on
capitalisation basis.
(a) ` 97,000 (b) ` 97,250
(c)
` 97,500 (d) None
7. Calculate the value of goodwill as per Annuity method, the details given
hereunder:-
Capital employed ` 1,50,000 Normal rate of profit10%
Present value of annuity of Re.1 for 5 years at 10% ` 3.78 Net profit for 5
years:-
1st year
14,400
2nd year
15,400
3rd year
16,900
4th year
17,400
5th year
17,900

242
The profit included non-recurring profits on an average basis of ` 1,000 out

of which it was deemed that even non-recurring profits had a tendency of
appearing at the rate of ` 600 p.a.
(a) ` 5,000 (b) ` 7,000
(c)
` 11,000 (d) ` 6,048

8. An asset which is not fictitious but intangible in nature, having realizable
value _____
(a)
machinery (b) building
(c)
furniture (d) goodwill
9. Find the goodwill of the firm using capitalization method from the following
information:
Total Capital Employed in the firm ` 800000
Reasonable Rate of Return 15%
Profits for the year ` 1200000
(a) ` 82,00,000 (b) ` 12,00,000
(c) ` 72,00,000 (d) ` 42,00,000
10. A, B and C are equal partners. D is admitted to the firm for one-fourth share.
D brings 20000 capital and ` 5000 being half of the premium for good will. The
value of good will of the firm is
(a) ` 10,000 (b) ` 40,000
(c) ` 20,000 (d) none of the above
11. X and Y share profits and losses in the ratio of 2 : 1. They take Z as a partner
and the new profit sharing ratio becomes 3 : 2 : 1. Z brings ` 4500 as premium
for goodwill. The full value of goodwill will be
(a) ` 4,500 (b) ` 18,000
(c) ` 27,000 (d) ` 24,000
12. Firm has earned exceptionally high profits from a contract which will not be
renewed. In such a case the profit from this contract will not be included in
………
(a) Profit sharing of the partners.
(b) Calculation of the goodwill. (c) Both.
243
13. The profits and losses for the last years are 2007-2008 Losses ` 10000; 2008-
09 Losses ` 2500 ; 2009-10 Profits ` 98000 & 2010-11 Profits ` 76000. The
average capital employed in the business is ` 200000. The rate of interest
expected from capital invested is 12%. The remuneration of partners is
estimated to be ` 1000 per month not charged in the above loses / profits.
Calculate the value of goodwill on the basis of two years purchase of super
profits based on the average of four years.
(a) ` 9000 (b) ` 8750
(c) ` 8500 (d) ` 8250

14. The profits and losses for the last years are 2007-08 Losses ` 10000; 2008-09
Losses ` 2500; 2009-10 Profits ` 98000 & 2010-11 Profits ` 76000. The average
capital employed in the business is ` 200000. The rate of interest expected
from capital invested is 12%. The remuneration of partners is estimated to be
` 1000 per month. Calculate the value of goodwill on the basis of four years
purchase of super profits based on the annuity method. Take discounting rate
as 10%
(a) ` 13500 (b) ` 13568
(c) ` 13668 (d) ` 13868
15. Profit for 2011-12 is ` 2,000, for 2012-13 is ` 26,100 and for 2013 - 14
is ` 31,200. Closing stock for 2012 -13 and 2013-14 includes defective items
of ` 2,200 and ` 6,200 respectively which were considered as having market
value NIL. Calculate Goodwill on 2 years purchase of average profit.(Use
Simple Average Method)
(a)
` 47,400 (b) ` 35,000
(c) ` 35,400 (d) ` 34,600
16. Narendra & Co values Goodwill as 2 years purchase of super profit. The
normal earning in his line of business is 12% on Capital employed.
The Balance Sheet gives the following details -
• Fixed Assets - ` 2,10,000,
• Current Assets - `1,40,000
• Current liabilities - ` 35,000.

244
The trading profits of last 4 years are - `
2014 2015 2016 2017

1,24,000 98,000 1,00,000 1,10,000
Determine the value of Goodwill under Super profit method.

(a)
37,800 (b) 70,200
(c)
1,40,400 (d) 1,08,000
17. N & Co. values Goodwill as 2 years purchase of super profit. The normal
earning in his line of business is 12% on Capital Employed.
The Balance Sheet gives the following details :
- Fixed Assets ` 2,10,000
- Working Capital ` 1,05,000
The trading profits of last 4 years are –
2009 ` 124,000; 2008 ` 98,000; 2007 ` 100,000; 2006 ` 110,000
Determine the value of Goodwill under Super profit method.
(a) ` 140,400 (b) ` 37,800
(c) ` 108,000 (d)
` 70,200
18. Dheeraj and Gopal are partners in a firm with capitals of ` 5,00,000 each.
They admit Deepak as a partner with 1/4th share in the profits of the firm.
Deepak bring ` 8,00,000 as his share of capital. The profit and loss account
showed a credit balance of ` 4,00,000 as on the date of his admission. The
value of hidden goodwill will be:
(a) ` 14,00,000 (b) `18,00,000
(c)
` 10,00,000 (d) None of the above
245
Answer
Shorts Questions
1. goodwill.
2. goodwill.
3. X A/c Dr 400
Y A/c Dr 400
To Z 800
4. Rs.10,80,000.
1. (c) 6. (d) 11. (c) 16. (c)

2. (c) 7. (d) 12. (b) 17. (a)
3. (b) 8. (d) 13. (b) 18. (c)
4. (a) 9. (c) 14. (d)
5. (d) 10. (b) 15. (c)
3.
Goodwill = 80,000 B D
Old Ratio – Credit 60,000 Cr. 20,000 Cr
New Ratio – Debit 50,000 Dr. 30,000 Dr.
Net Effect 10,000 Cr. 10,000 Dr.
D’s capital A/c Dr 10,000

To B’s Capital A/c 10,000
4.
Goodwill = 30,000 A B C
Old Ratio – Credit 15,000 Cr. 10,000 Cr 5000 Cr.
New Ratio – Debit 12,000 Dr. 12,000 Dr. 6000 Dr.
246
Net Effect 3000 Cr. 2000 Dr. 1000 Dr.
B’s capital A/c Dr 2,000

C’s capital A/c Dr 1,000
To A’s Capital A/c 3,000

5. Valuation of Goodwill
a. Avg. profit = -34000+1,00,000+1,50,000
3
= 72,000
b. Future Maintainable profit = 72000 – 12000 = 60,000
c. Capital Employed = 4,00,000
d. Normal Rate of return = 10%
e. Normal profit = 4,00,000 × 10% = 40,000
f. Super profit = 60,000 – 40,000 = 20,000
g. Goodwill = 20,000 × 2 years = 40,000
6. Avg. profit/FMP = 42,500+56,000+68,000

3
= 55,500
Capitalised FMP 55,500 = 5,55,000

10%
Less : Capital Employed [ 10,00,000 – 5,00,000] (5,00,000)
Goodwill = 55,000
7.
a. Avg. profit = 14,400+15,400+16,900+17,400+17,900
5
= 16,400
Less : Non recurring profit = (400)
Average Normal profit = 16000
b. Capital Employed = 1,50,000
c. Expected Rate of return = 10%
d. Expected profit = 1,50,000 × 10% = 15,000
e. Super profit = 16,000 – 15,000 = 1,000
247
g. Goodwill = 1,000 × 3.78 = 3780

[1 / 1.1 = = = = = GT 3.79 OR 3.78 Approx.]
0.909
0.826
0.751
0.683
0.621
3.79
9. Capitalised profit [12,00,000 ÷ 15%] 80,00,000

Less : Total capital Employed (8,00,000)
72,00,000
10. D’s half Goodwill = 5000

∴ D’s full Goodwill = 10,000
D’s share = ¼
10,000
∴ Total Goodwill = = 40,000
1/4
4,500
11. Full value of Goodwill = = 27,000
1/6
13. a. Avg. profit = -10,000 -2500 - 98000+76000

4
= 40,375
b. FMP = 40375 – (1000 × 12M) = 28375
d. NRR = 12%
e. Normal = profit = 24,000
f. Super profit = 28,375 – 24,000 = 4375
g. Goodwill = 4375 × 2 = 8750
14. a. Avg. profit = -10,000 -2500 - 98000+76000

4
= 40,375
b. FMP = 40375 – (1000 × 12M) = 28375
d. NRR = 12%
248
e. Normal = profit = 24,000

f. Super profit = 28,375 – 24,000 = 4375
g. Annuity Factor = 3.169865 1
= = = = GT
11
h. Goodwill = 4375 × 3.169864 = 13868
15. Calculation of correct profit
Particulars 11 - 12 12 – 13 13 - 14
Profit 2000 26,100 31,200
Less : Decrease in closing NA (2200) (6200)
stock
Add : Decrease in opening NA NA 2200
stock of next year
Correct Profit 2000 23,900 27,200
Avg. Profit = 17,700

∴ Goodwill = 17,700 × 2 = 35,400

a. Avg. profit = 108,000
b. FMP = 108,000
c. Capital Employed = Fixed Asset + Current Assets – Current Liabilities
= 2,10,000 + 1,40,000 – 35000 = 315,000
d. Normal Rate = 12%
e. Normal profit = 315000 × 12% = 37,800
f. Super profit = 108,000 – 37800 = 70,200
g. Goodwill = 70,200 × 2 years = 140,400
17. Same Calculation like Q.16

Here, Working Capital = Current Assets – Current Liabilities
Here, Capital Employed = Fixed Assets + Working Capital
8,00,000
18. Total capital [taken Deepak’s capital as base] = = 32,00,000
1/4
Hidden Goodwill = Total capital – Actual Capital – Profit loss Balance
= 32,00,000 – 5,00,000 – 5,00,000 – 8,00,000 – 4,00,000
= 10,00,000
249
1. Goodwill brought in by incoming partner in cash for joining in a partnership

firm is taken away by the old partners in their new profit sharing ratio.
Ans. False-The goodwill in cash, brought in by the new partner is taken away by the
old partners in the sacrificing ratio and not in the new profit sharing ratio.

1. A&B are in partnership sharing profits & losses in ratio of 3:2. Capital of A & B
are Rs.48000 & Rs.36000. they admit C who has to contribute sufficient capital
to acquire 1/5th share acquired equally from A & B. Capital of all partners
should be in profit sharing ratio. Actual cash paid or brought in by all partners
is_______________.
2. A & B are in partnership sharing profits & losses in ¾ & ¼. They admit C who
purchased 1/3rd of goodwill for Rs.2000 & provide capital of Rs.10000. new
PSR is equal. Entry for goodwill adjustment will be-
1. Amit and Anil are partners sharing profits in the ratio of 5 : 3 with capital of `
250000 and ` 200000. Atul was admitted and would pay ` 50,000 as capital
and ` 16000 as goodwill for 1/5th profit. Find the balance of capital accounts
after admission of Atul:
(a) 260000 : 206000 : 50000 (b) 220000 : 182000 : 66000
(c) 292500 : 225500 : 50000 (d) 282500 : 219500 : 66000
2. Tom and Jerry are partners sharing profits and losses in the ratio of 3 : 2 (Tom’s
capital is ` 70000 and Jerry’s capital is ` 50000). They admitted Shiva and
agreed to give 1/5th share of profits to him. How much Shiva should bring in
towards his capital?
(a) ` 24000 (b) ` 80000
(c) ` 18000 (d) ` 30000
250
3. Which account will be prepared at the time of admission of a new partner for
giving effect of revaluation of assets and liabilities without changing the value
of assets and liabilities of old Balance Sheet?
(a) P & L Adjustment A/c (b) Revaluation A/c
(c) Memorandum Revaluation A/c (d) Realisation A/c
4. A and B are partners sharing profits and losses in the ratio of 3 : 2. A’s Capital
is ` 60000 and B’s Capital is ` 30000. They admit C for 1/5th share of profits.
How much C should bring in towards his capital?
(a) ` 18000 (b) ` 24000
(c) ` 29000 (d) ` 22500
5. The balance of memorandum revaluation account (second part), is transferred

to the capital accounts of the partners in:
(a) Capital Ratio (b) Old profit sharing ratio
(c) New profit sharing ratio (d) Sacrificing ratio
6. General Reserve at time of admission of a new partner is transferred to:

(a) Profit and Loss Adjustment Account
(b) Partners Capital Account
(c) Revaluation account
(d) Memorandum Revolution Account
7. A and B are partners of a firm sharing profits in the ratio of 3 : 2. C was admitted
for 1/5th share of profit. Machinery would be appreciated by 10% (Book value
` 80000) and building would be depreciated by 20% (` 200000). Unrecorded
debtors of ` 1250 would be bought to books and Creditors of ` 2750 died and
needn’t to pay anything. What will be the profit / loss on revaluation?
(a) Loss ` 28000 (b) Loss ` 40000
(c) Profit ` 28000 (d) Profits ` 40000
251
8. A, B, C are partners sharing profits in the ratio of 4 : 3 : 2. D is admitted for

2/9th share of profits and brings ` 30000 as capital and 10000 for his share
of goodwill. The new profit sharing ratio between partners will be 3 : 2 : 2 : 2.
Goodwill amount will be credited in the capital accounts of
(a) A only (b) A, B and C (equally)
(c) A and B (equally) (d) A and C (equally)
9. A firm has an unrecorded investment of ` 5000. Entry in the firm’s journal on

admission of a partners will
(a) Revaluation A/c Dr. 5,000
To Unrecorded investment A/c 5,000
(b) Unrecorded investment A/c Dr. 5,000
To Revaluation A/c 5,000
(c) Partner’s capital A/c Dr. 5,000
To Unrecorded Investment 5,000
(d) None of these
10. When Balance Sheet prepared after the new partnership agreement, Assets
and liabilities are recorded at:
(a) Original value (b) Revalued figure
(c) At current cost (d) At realizable value
11. A and B are partners C is admitted with 1/5th share C brings ` 120000 as his
share towards capital. The total net worth of the firm is:
(a) ` 1,00,000 (b) ` 4,00,000
(c) ` 1,20,000 (d) ` 6,00,000
12. A and B carry on business and share profit and losses in the ratio of 3 : 2.Their
respective capitals are ` 1,20,000 and ` 54,000. C is admitted for 1/3rd share
in profit and brings ` 75,000 as his share of capital. Capitals of A and B to be
adjusted according to C’s share. Calculate the amount refunded to A.
(a) ` 30,000 (b) ` 32,000
(c) ` 15,000 (d) ` 28,000
13. Amit and Anil are partners of a partnership firm sharing profits in the ratio of 5
: 3 with capital of ` 250000 and ` 200000 respectively. Atul as admitted on the
252
following terms, Atul would pay ` 50000 as capital and ` 16000 as goodwill
for 1/5th share of profit. Find the balance fo capital accounts after admission
of Atul:
(a)
` 260000; ` 206000; ` 50000 (b) ` 220000; ` 182000; ` 66000
(c) ` 292500; ` 225500; ` 50000 (d) ` 282500; ` 219500; ` 66000
14. A, B, C are three partners sharing profit in 3 : 2 : 1. They decided to admit D

and give him 1/7th share. What is the new profit sharing ratio?
(a) 1 : 1 : 1 : 1 (b) 3:2:1:1
(c) 3 : 2 : 1 : 2 (d) 2:3:1:2
15. X and Y sharing profit in the ratio 7 : 3 admit Z on 3/7th share in the new firm
which he takes 2/7th from X and 1/7th from Y. What is new ratio of partner?
(a) 29 : 11 : 30 (b) 16 : 8 : 11
(c) 25 : 15 : 20 (d) 1:1:1
16. P, Q and R are partners who share profits as 3 : 2 : 1. They admit S as a partner
and decided to share future profits as P : Q : R : S = 5 : 3 : 2 : 2. Find the sacrifice
ratio.
(a) 1 : 1 : 0 (b) 2 : 1 : 1
(c) 0 : 1 : 3 (d) 0:0:2
17. A and B are partner's sharing profit in the ratio of 2 : 1 and Mr. C share 1/4
which is to be derived from Mr. A only. What is the new profit sharing ratio?
(a) 1 : 1 : 3 (b) 1:3:2
(c) 5 : 4 : 4 (d) 5:4:3
18. X and Y are partners sharing Profit and Losses in the ratio 2 : 1. Z is admitted
as a partner with one - third share which he gets equally from X and Y. The
new profit sharing ratio will be
(a) 2 : 2 : 2 (b) 4 : 2 : 3
(c) 3 : 1 : 2 (d) None of the above
253
19. X, Y and Z are partners in the ratio of 3 : 2 : 1. W is admitted with 1/6 share in
profit. Z would retain his original share. Find out new profit sharing ratio.
(a) 3 : 1 : 1 : 1 (b) 7 : 3 : 5 : 3
(c) 12 : 8 : 5 : 5 (d) 11 : 1 : 1 : 1
20. A & B are partners sharing profits and losses in the ratio 5 : 3. On admission
C brings ` 70,000 cash and 48,000 against goodwill. New profit sharing ratio
between A, B and C are 7 : 5 : 4. Find the sacrificing ratio as A : B.
(a) 3 : 1 (b) 4 : 7
(c) 5 : 4 (d) 2:1
21. A and B shares profit and losses equally. They admit C as an equal partner
and assets were revalued as follow : Goodwill at ` 30,000 (book value NIL).
Stock at ` 20,000 (book value ` 12,000) ; Machinery at ` 60,000 (book value `
55,000). C is to bring in ` 20,000 as his capital and the necessary cash towards
his share of Goodwill. Goodwill Account will not remain in the books. Find the
profit / loss on revaluation to be shared among A, B and C.
(a) 21,500 : 21,500 : 0 (b) 14,333 : 14,333 : 14,333
(c) 6,500 : 6,500 : 0 (d) 4,333 : 4,333 : 4,333
22. A and B are partners of a partnership firm sharing profits in the ratio of 5 : 3
respectively. C was admitted on the following terms : C would pay ` 50,000 as
capital and ` 16,000 as Goodwill, for 1/5th share of profit. Machinery would be
appreciated by 10% (book value ` 80,000) and building would be depreciated by
20% (` 2,00,000). Unrecorded debtors of ` 1,250 would be bought into books
now and a creditors amounting to ` 2,750 died and need not to pay anything
to its estate. Find the distribution of profit / loss on revaluation between A, B
and C.
(a) Loss - 17,500 : 10,500 : 0
(b) Loss - 14,000 : 8,400 : 5,600
(c) Profits - 17,500 : 10,500:0.
(d) Profits - 14,000 : 8,400 : 5,600
23. Credit balance on Revaluation Account.

(a) Capital brought in by new partner (b) Goodwill written off
(c) Loss on Revaluation (d) Profit on Revaluation
254
24. Which account will be appeared at the time of admission of a new revaluation
of assets and liabilities without changing the value of assets and liabilities of
old Balance Sheet ?
(a) P & L Adjustment A/c (b) Revaluation A/c
(c) Memorandum Revaluation A/c (d) Realisation A/c
25. X and Y are partners with capital of ` 9,000 and ` 10,000 respectively Z is
admitted to into the firm with 1/3 share of profit and bring ` 12,000 as his
share of capital. How much will be the goodwill of the firm.
(a) ` 5,000 (b) ` 6,000
(c) ` 10,000 (d) ` 12,000
26. A, B and C are equal partners. D is admitted to the firm for a fourth share. D
brings ` 20,000 capital and ` 5,000 being half of the premium of goodwill. The
value of goodwill to the firm is
(a)
10,000 (b) 40,000
(c)
20,000 (d) None of the above
27. P and Q are in partnership, sharing profit and losses in the ratio of 4 : 1. They
admit R into the firm and in the new firm profits are shared equally. R pays a
premium of ` 60,000.
(a) P and Q share the premium equally
(b)
P receives ` 48,000 and Q receives ` 12,000
(c) P receives the entire ` 60,000
(d)
P receives ` 84,000 and Q also pays ` 24,000
28. P and Q are partners sharing Profits in the ratio of 2 : 1. R is admitted to the
partnership with effect from 1st April on the term that he will bring ` 20,000
as his capital for 1/4th share and pays ` 9,000 for goodwill, half of which is to
be withdrawn by P and Q. How much cash can P & Q withdraw from the firm (if
any).
(a) 3,000 : 1,500 (b) 6,000 : 3,000
(c) NIL (d) None of the above
255
29. X and Y are partners sharing profits in the ratio 5 : 3. They admitted Z for 1/5th
share of profits, for which he paid `1,20,000 against capital and ` 60,000
against goodwill. Find the capital balances for each partner taking Z's capital
as base capital.
(a) 3,00,000 ; 1,20,000 and 1,20,000
(b) 3,00,000 ; 1,20,000 and 1,80,000
(c) 3,00,000 ; 1,80,000 and 1,20,000
(d) 3,00,000 ; 1,80,000 and 1,80,000
30. C was admitted in a firm with 1/4th share of the profits of the firm. C contributes
`15,000 as his capital, A and B are other partners with the profit sharing ratio
as 3 : 2. Find the required capital of A and B, if capital should be in profit
sharing ratio taking C's as base capital :
(a) ` 27,000 and ` 16,000 for A and B respectively.
(b)
` 27,000 and ` 18,000 for A and B respectively.
(c) ` 32,000 and ` 21,000 for A and B respectively.
(d)
` 31,000 and ` 26,000 for A and B respectively.
31. A and B are in partnership sharing profits and losses in the ratio of 3 : 2. The
capitals of A and B remaining after adjustments are ` 48,000 and 36,000
respectively. They admit 'C' as a third partner who has to contribute sufficient
capital to acquire a 1/5th share of the total capital of the new firm equally
from both the partners A and B. It is decided that the Capitals off old partners
should also be in their new profit sharing ratio. Calculate the amount of actual
cash to be paid off or brought in by the old partners for his adjustment.
(a) A and B will each withdraw ` 4,500 and C will bring in `16,800
(b) A will bring ` 4,500, B will withdraw ` 4,500 and C will bring in `
21,000
(c) A will withdraw ` 4,500, B will bring in ` 4,500 and C will bring in `
35,000
(d) A and B each will bring in ` 4,500 and C will bring in ` 35,000
256
32. A and B are partners sharing profits and losses in ratio of 3:2. A’s Capital is `
30,000 B’s Capital is ` 15,000 They admit C and agreed to give 1/5th share of
profits to him. How much C should bring in towards his Capital ?
(a) ` 9,000 (b) ` 12,000
(c) ` 14,500 (d) ` 11,250
33. A and B carry on business and share profits and losses in the ratio of 3:2. Their
respective capitals are ` 1,20,000 and ` 54,000. C is admitted for 1/3rd share
in profit and brings ` 75,000 as his share of capital. Capitals of A and B to be
adjusted according to C's share.
Calculate the amount refunded to A.
(a) ` 30,000 (b) ` 32,000
(c) ` 15,000 (d) ` 28,000
34. A and B are partners C is admitted with a guarantee profit of ` 10,000 from
A with a new profit sharing ratio of 3:2:1. Profit for the year 2009-10 is `
1,20,000. How much profit C will get?
(a) ` 10,000 (b) ` 20,000
(c) ` 30,000 (d) None of these.
35. A and B shares profit and losses equally. They have ` 20,000 each as Capital.
They admit C as equal partner and Goodwill was valued as ` 30,000. C is
to bring in ` 30,000 as his Capital and necessary cash towards his share of
Goodwill. Goodwill A/c will not remain in books. If profit on revaluation is `
13,000, find Closing balance of Capital Accounts.
(a) A - ` 31,500, B - ` 31,500, C - ` 30,000
(b)
A - ` 31,500, B - ` 31,500, C - ` 20,000
(c) A - ` 26,500, B - ` 26,500, C - ` 30,000
(d)
A - ` 20,000, B - ` 20,000, C - ` 30,000
36. Which account is to be prepared when revised value are not to appear in the
new balance sheet framed after the retirement / death / admission of partner?
(a) Memorandum Revaluation Account
(b)
Revaluation Account
(c) Realisation Account
(d) Profit and loss appropriation account
257
37. What types of account is a revaluation account

(a)
Real A/c (b) Nominal A/c
(c) Personal A/c (d) Suspense A/c
38. A and B are partners in a firm sharing profits and losses in the ratio 3 : 2. They
admitted C into partnership for 1/5th share and New PSR = 5 : 3 : 2. Goodwill
appearing in the books at the time of C's admission amounted to ` 20,000.
Goodwill is valued at ` 50,000 at the time of C's admission. C bring his share
of goodwill.

What accounting adjustment should be done to give effect to above goodwill
adjustment?
(a) Write off ` 20,000 among old partners in old PSR and Credit old
partners capital account with ` 10,000 sacrificing ratio.
(b)
Write off ` 20,000 among old partners in old PSR
(c) Credit old partners capital with ` 10,000 in sacrificing ratio
(d)
No entry
39. A, B and C are equal partners in a firm with capital of ` 16,800, ` 12,600 and `
6,000 respectively. Bills payable` 3300; Creditors ` 6000; Cash ` 600; Debtors
` 10,800; Stock ` 11,400; Furniture ` 2400 and Building ` 19,500. E is admitted
to the firm and brings ` 9000 as Goodwill and ` 15,000 as capital. Half the
Goodwill is withdrawn by old partners, and Stock and Furniture is depreciated
by 10%. A provision of 10% on Debtors is created and value of Building is taken
at Rs.27,000. The profit on revaluation will be :
(a) ` 5,500 (b) `5,040
(c)
` 5,400 (d)
` 5,680
40. A and B are partners sharing profits and losses in the ratio 5:3. They admitted
C and agreed to give him 3/10th of the profit. What is the new ratio after C’s
admission?
(a)
35:42:17. (b) 35:21:24.
(c)
49:22:29.
258
41. A and B are partners sharing profits in the ratio 5:3, they admitted C giving
him 3/10th share of profit. If C acquires 1/5 from A and 1/10 from B, new profit
sharing ratio will be:
(a)
5:6:3. (b) 2:4:6.
(c)
17:11:12
42. C was admitted in a firm with 1/4th share of the profits of the firm. C contributes
`15,000 as his capital, A and B are other partners with the profit sharing ratio
as 3:2. Find the required capital of A and B, if capital should be in profit sharing
ratio taking C’s as base capital:
(a) `27,000 and `16,000 for A and B respectively.
(b)
`27,000 and `18,000 for A and B respectively.
(c)
`32,000 and `21,000 for A and B respectively.
43. A, B and C are partners sharing profits and losses in the ratio 6:3:3, they
agreed to take D into partnership for 1/8th share of profits. Find the new profit
sharing ratio.
(a)
12:27:36:42. (b) 14:7:7:4.
(c)
1:2:3:4.
44. A and B are partners sharing profits and losses in the ratio of 3:2 (A’s Capital is
`30,000 and B’s Capital is `15,000). They admitted C and agreed to give 1/5th
share of profits to him. How much C should bring in towards his capital?
(a) `9,000. (b) ` 12,000.
(c)
`11,250.
45. A and B are partners sharing the profit in the ratio of 3:2. They take C as
the new partner, who brings in `25,000 against capital and `10,000 against
goodwill. New profit sharing ratio is 1:1:1. In what ratio will this amount will
be shared among the old partners A & B.
(a) `8,000: `2,000.
(b) `5,000: `5,000.
(c) Old partners will not get any share in the goodwill brought in by C.
259
46. A and B are partners sharing the profit in the ratio of 3:2. They take C as the
new partner, who is supposed to bring `25,000 against capital and `10,000
against goodwill. New profit sharing ratio is 1:1:1. C brought cash for his share
of Capital and agreed to compensate to A and B outside the firm. How this will
be treated in the books of the firm.
(a) Cash brought in by C will only be credited to his capital account.
(b) Goodwill will be raised to full value in old ratio.
(c) Goodwill will be raised to full value in new ratio.
47. X and Y are partners sharing profits in the ratio of 3: 1. They admit Z as a
partner who pays `4,000 as Goodwill the new profit sharing ratio being 2:1: 1
among X, Y and Z respectively. The amount of goodwill will be credited to:
(a) X and Y as `3,000 and `1,000 respectively.
(b) X only
(c) Y only.
260
Answer
Shorts Questions

1. A brings Rs.4,500, B withdraws Rs.4,500, C brings Rs. 21,000.
2. Goodwill adjustment will be:

1) Cash / Bank Dr. 2000
To A’s Capital 2000

2) B’s capital a/c Dr. 500
To A’s 500
5 1 4
A Sacrifices = , B gains = & C gains
12 12 12
1. (a) 13. (a) 25. (a) 37. (b)

2. (d) 14. (b) 26. (b) 38. (a)
3. (c) 15. (a) 27. (d) 39. (b)
4. (d) 16. (a) 28. (a) 40. (b)
5. (c) 17. (d) 29. (c) 41. (c)
6. (b) 18. (c) 30. (b) 42. (b)
7. (a) 19. (c) 31. (b) 43. (b)
8. (c) 20. (a) 32. (d) 44. (c)
9. (b) 21. (c) 33. (a) 45. (a)
10. (b) 22. (a) 34. (b) 46. (a)
11. (d) 23. (d) 35. (a) 47. (b)
12. (a) 24. (c) 36. (a)
261
1. In the absence of information old partners will contribute in old ratio towards share
of profit to new partner.
Hence, Goodwill brought in by new partner will be distributed in old ratio which is
sacrificing ratio i.e. 5 : 3
Amit (5/8) 10,000
Goodwill = 16000
Amit (3/8) 6,000
Capital A/c after admission:

Amit = 2,50,000 + 10,000 = 2,60,000
Amit = 2,00,000 + 6,000 = 2,06,000
Atul = 50,000
2. Total capital (based on Tom & Jerry’s Capital) = = 150,000
Shiva’s capital = 150,000 × 1/5 = 30,000
90,000
4. Total capital (based on A & B’s Capital) = 4 = 112,500
5
C’s Share in capital = 112,500 × 1/5 = 22,500
7.
Dr. Revaluation A/c Cr.
To Building A/c 40,000 By machinery A/c 8000
By unrecorded Debtors A/c 1250
By creditors A/c 2750
By Revaluation Loss 28,000
40,000 40,000
90,000
8. Total Goodwill of firm = = 45,000
4
5
Goodwill = 45,000 A B C D
Old Ratio – Credit 20,000 Cr. 15,000 Cr 10000 Cr. NA
262
New Ratio – Debit 15,000 Dr. 10,000 Dr. 10,000 Dr. 10,000 Dr.
Net Effect 5000 Cr. 5000 Dr. NIL 10,000 Dr.
D’s capital A/c Dr 10,000


120,000
11. Total Net worth of firm = = 6,00,000
1
9
12.
Old Ratio ± Adjustment New Ratio

A
B 2 –
5
C NA
∴ New PSR = 6 : 4 : 5
Actual Capital of A 120,000

Less : Revised Capital of A (90,000)
Refund to A 30,000
13. Same like Q.1
14.

A
C 1
6
D NA
263
∴ New Ratio = 18 : 12 : 6 : 6
Or
3:2:1:1
15.

X –
Y –1
7
Z NA +3
7
∴ New Ratio = 29 : 11 : 30

16.
Sacrificing Ratio Old Ratio New Ratio

P
R 1 0
6
∴ Sacrificing Ratio = 1 : 1 : 0
17.

A 2
3
C NA
∴ New Ratio = 5 : 4 : 3
264
18.

A 2
3
C NA
∴ New Ratio = 3 : 1 : 2
19.

X –
Z 1
6
W NA
∴ New Ratio = 12 : 8 : 5 : 5
Note : X and Y will contribute to W in 3 : 2 ratio.
20.

A 5
8
B 3
8
∴ Sacrificing Ratio = 3 : 1
265
21.
To Revaluation Profit By stock 8000
A (1/2) 6500
By machinery 5000
B (1/2) 6500 13,000
13,000 13,000
22.
To Building 40,000 By machinery 8000
By debtors 1250
By creditors 2750
By loss
A (5/8) 17500
B (3/8) 10500 28,000
40,000 40,000
25. Total capital (based on z’s capital) = = 36,000
Hidden Goodwill = 36,000 – 9,000 – 10,000 – 12,000

Hidden Goodwill = 5,000
26. D’s half G/w = 5,000

∴ D’s full G/w = 10,000
D’s Share = 1 /4
∴ Total Goodwill = 40,000
266
27. Total Goodwill / premium = 180,000
Premium = 180,000 P Q R
Old Ratio – Cr. 144,000 Cr 36,000 Cr. NA
New Ratio – Cr. 60,000 Dr 60,000 Dr. 60,000 Dr
Net effect 84,000 Cr. 24,000 Dr. 60,000 Dr.
Q’s Capital A/c ..... Dr. 24,000

R’s Capital A/c ..... Dr. 60,000
To P’s Capital A/c ...... Dr. 84,000
28. In the absence of information new partner will get share from old partners on old
ratio?
Hence, sacrificing ratio = old ratio = 2 : 1
Goodwill = 9000 P(2/3) 6000
Q(1/3) 3000
Half amount of goodwill withdrawn
∴ P = 6000 × ½ = 3000
Q = 3000 × ½ = 1500
29.

X 5
8
Y 3
8
Z NA 8
40
∴ New Ratio = 20 : 12 : 8
New Ratio 20 12 8
New capital 300,000 180,000 120,000
267
30.

X 3
5
Y 2
5
Z NA
New Ratio 9 6 5
New capital 27,000 18,000 15,000
31. Total capital (based on A & B’s capital) = = 105,000
‘c’ should bring = 105000 × 1/5

= 21,000

A 3
5
B 2
5
C NA
New Ratio 5 3 2
Required capital 52,500 31,500 21,000
Actual capital before admission 48,000 36,000 NIL

4500 Bring 4500 withdraw 21000 bring
45,000
32. Total capital (based on A & B’s capital) = 4 = 56,250
5
‘c’ share of capital = 56,250 × 1/5

= 11,250
268
33.

A 3
5
B 2
5
C NA
∴ New Ratio = 6 : 4 : 5
Actual capital of ‘A’ = 120,000
Less : Required capital of ‘A’ = (90,000)

Refund = 30,000
34. ‘c’ share in profit [ 120,000 × 1/6] = 20,000

Guaranteed profit = 10,000
Which ever is higher = 20,000
35.
Particulars A B C
Capital balance 20,000 20,000 30,000
Share of goodwill in sacrificing 5000 5000 -
ratio = 1 : 1
Profit on revaluation in old ratio = 6500 6500 -
1:1
31,500 31,500 30,000
39.
To Stock 1140 By Building 7500
To Furniture 240
To provision 1080
269
To profit on revaluation 5040

7500 7500
40.

A 5
8
B 3
8
C NA
∴ New Ratio = 35 : 21 : 24
41.

A 5
8
B 3
8
C NA
∴ New Ratio = 35 : 21 : 24
OR
17 : 11 : 12
42.

A 3
5
B 2
5
C NA
New Ratio 9 6 5
Required capital 27,000 18,000 15,000
270
43.

A = – = 42
12 96
B
D NA
∴ New Ratio = 42 : 21 : 21 : 12
OR 14 : 7 : 7 : 4
44. Total capital (based on A & B’s capital) = = 56,250
‘c’ share of capital = 56,250 × 1/5

= 11,250
45.
A 3
5
B 2
5
∴ Sacrificing Ratio = 4 : 1
Goodwill = 10,000 A (4/5) = 8,000
B (1/5) = 2000
47.
Old Ratio New Ratio Sacrificing Ratio

(gaining Ratio)
X
Y NIL
Here, only ‘x’ sacrificed. Hence entire goodwill credited to ‘x’
271
UNIT IV– RETIREMENT OF A PARTNER
1. If partner retires, then other partners have a gain in their profit sharing ratio
Ans. True – If a partner retires, the share of his profit or loss will be shared by other
partners in their profit sharing ratio
2. The accounting procedure in case of retirement of partner and dissolution of

the partnership firm are same.
Ans. False – in case of dissolution of the partnership firm, realization account is
opened to transfer all assets and liabilities, while in case of retirement of
partner, profit and loss adjustment account (revaluation account) is used for
revaluation of assets and liabilities. The partners; capital account are closed
and final payment are made to partners under dissolution of the firm but in
case of retirement of a partner, only adjustments are made in partners’ capital
accounts for transfer of reserve, goodwill and profit or loss on revaluation.

1. A,B & C were partners sharing profits & losses in 5:3:2 B retired on 31-3-06
on which date capital of A,B, & C. stood at Rs.86400, Rs.73200 & Rs.22,400.
Cash& bank balance on 31-3-06 was Rs.8000 B was to be paid cash brought
in by A & C in such a way as to make their capital proportionate to new PSR ie.
3/5 & 2/5 calculate amount of cash to be paid off or brought in by continuing
partners assuming minimum cash balance of Rs6000, to be maintained is
_______________________.
2. A, B & C take joint life policy. After 5 years B retires. Old PSR is 2:2:1 joint life
policy is of Rs.2,50,000 (surrender value Rs.5000) what will be the treatment
on receiving joint life policy amount if –

a. Premium paid is fully charged to revenue
b. JLP is maintained at surrender value .
c. JLP is maintained at surrender value with reserve.

272
3. X, Y & Z are partners PSR 3:1:1. They have separate life polices whose details
are.
X X Z
Policy 1,00,000 200000 300000
Surrender value 1,0000 20000 30000
If C retires be will set ____________.
4. A, B, & C are in partnership equally. C retires on 31/10/18. Capital of all

partners an Rs.50,000, 75,000 & Rs.1,20,000 on that date. C was not paid
his dues on retirement. Final Payment to C was made on 1/2/19. Profit up to
1/2/19 was Rs.28,000. Settlement amount of C u/s 37 of partnership Act is
_____________.
1. X, Y, Z are partners sharing profits in the ratio 3:4:3 Y retires, and x and Z share
his profits in equal ratio. Find the new ratio of X and Z.
(a) 1:2 (b) 2:1
(c) 3:1 (d) 1:1
2. A, B and C were partners in a firm sharing profits and losses in the ratio of
2:2:1. The capital balances of A, B and C are `50,000. `50,000 and `25,000
respectively. B declared to retire from the firm on 1st April, 2008. Balance in
reserve on the date was `15,000. If goodwill of the firm was valued as `30,000
and profit on revaluation was `7,050. Then what amount will be transferred to
the loan account of B.
(a) ` 70,820 (b) ` 50,820
(c) ` 25,820 (d) ` 20,820
3. X, Y, Z were partners sharing profits in ratio 5:3:2. Goodwill does not appear in
books, but it is agreed to be worth `1,00,000. X retires from the firm and Y and
Z decide to share future profits equally. X’s share of goodwill will be debited to
Y’s and Z’s capital A/cs in ratio:
(a) ½:½ (b) 2:3
(c) 3:2 (d) None
273
4. A, B and C are partners sharing profits and losses in the ratio of ½, 3/10 and
1/5. B retires from the firm, A and C decide to share the future profits and
losses in 3:2. Calculate gaining ratio:
(a) 1:2 (b) 3:2
(c) 2:3 (d) None
5. P, Q and R were partners sharing profit and losses in the ratio of 2:2:1 respectively,
with the balance of capital `75,000, `50,000 and `25,000 respectively on 1st
April 2011. Q decided to retire from the firm on 31st March 2012. On that day
the balance in the reserve account was `12,000. It the goodwill of the firm was
valued as `30,000 and profit on revaluation was `10,000 then what amount
would be transferred to the loan account of Q?
(a) ` 70,800 (b) ` 95,800
(c) ` 60,400 (d) ` 35,400
6. X, Y and Z are partners sharing profits at 4 : 2 : 1. Z retires from the firm. Find
the gain ratio of X and Y.
(a) 2 : 1 (b) 1 : 1
(c) 3 : 2 (d) 4:3
7. A, B, C and D are partners sharing profit and losses as 4 : 3 : 2 : 1. D retires

and A, B and C decided to share future profit as 9/20, 13/40 and 9/40. Find the
gain ratio of A, B and C.
(a) 3 : 2 : 1 (b) 5 : 3 : 2
(c) 2 : 1 : 1 (d) 7:3:1
8. X, Y and Z are partners sharing profits and losses in the ratio of 4/9 : 1/3 : 2/9.
Y retires and surrendered 1/9th of his share in favour of X and the remaining in
favour of Z.
(A) New profit sharing ratio.
(a) 13 : 14 (b) 11 : 13
(c) 7 : 5 (d) 5:3
(B)
Gaining ratio.
(a) 2 :1 (b) 3 : 2
(c) 1 : 3 (d) 1:8
274
9. The capitals of A, B and C are ` 1,00,000 ; ` 75,000 and ` 50,000, profits are
shared in the ratio of 3 : 2 : 1. B retires on the basis of firm purchased by other
partners then the new ratio between A and C is 3 : 1. Find the capital of A and
C.
(a) ` 1,50,000 and ` 1,00,000 (b) ` 1,56,250 and ` 68,750
(c) ` 1,46,250 and ` 42,000 (d) ` 86,250 and ` 46,250
10. A, B and C are partners with profits sharing ratio 4 : 3 : 2. B retires and Goodwill
` 10,800 was shown in books of account. If A & C share profits in 5 : 3, then find
the value of goodwill shared between A and C.
(a) ` 1,850 and ` 1,950 (b) ` 2,000 and ` 1,600
(c) ` 1,650 and ` 1,750 (d) ` 1,950 and ` 1,650
11. A, B and C are partners sharing profits in the ratio 2 : 2 : 1. On retirement

of B, goodwill was valued as ` 30,000. Find the contribution of A and C to
compensate B.
(a) ` 20,000 and ` 10,000
(b)
` 8,000 and ` 4,000
(c) They will not contribute any thing
(d) Information is insufficient for any comment
12. Balance of A, B and C sharing profits and losses in proportionate to their

capitals, stood as follows : Capital Accounts : A ` 2,00,000 ; B ` 3,00,000 and
C ` 2,00,000. A desired to retire form the firm, B and C share the future profits
equally, Goodwill of the entire firm be valued at ` 1,40,000 and no Goodwill
account being raised.
(a) Credit Partner's Capital Account with old profit sharing ratio for `
1,40,000
(b) Credit Partner's Capital Account with new profit sharing ratio for `
1,40,000.
(c) Credit A's Account with ` 40,000 and debit B's Capital Account with
` 10,000 and C's Capital Accounts with ` 30,000.
(d) Credit Partner's Capital Account with gaining ratio for ` 10,000
275
13. A, B and C were partners sharing profits and losses in the ratio of 4 : 3 : 2
respectively. B retired on 31st March, 2006 on which date the capitals of A, B
and C after all necessary adjustments stood at ` 39,300, ` 39,600 & ` 18,300
respectively. The entire capital of the firm as newly constituted is fixed at `
56,000 between A and C in the proportion of five eighths and three - eighths
after passing entries in their accounts for adjustments. Calculate the actual
cash to be paid off or to be brought in by the continuing partners.
(a) A and C will each withdraw ` 800
(b) A will withdraw ` 4,300, C will bring in ` 2,700
(c) A will bring in ` 4,300, C will withdraw ` 2,700
(d) A will withdraw ` 2,700, C will bring in ` 4,300
14. A, B and C were partners sharing profits and losses in the ratio of 5 : 3 : 2
respectively. B retired on 31st March, 2006 on which date the Capitals of A, B
and C after all necessary adjustments stood at ` 86,400, ` 73,200 and ` 22,400
respectively. The Cash and Bank Balance on 31st March, 2006 amounted to `
8,000. B was to be paid through cash brought in by A and C in such a way as
to make their capitals proportionate to their new profit sharing ratio which
was to be A-3/5th and C-2/5th. Calculate the amount of Cash to be paid off
or to be brought in by the continuing partners assuming that a minimum Cash
& Bank Balance of ` 6,000 was to be maintained.
(a) A will bring in ` 49,600 and C will bring in ` 21,600
(b) A will bring in ` 21,600 and C will bring in ` 49,600
(c) A will withdraw ` 21,600 and C will bring in ` 49,600
(d) A will bring in ` 21,600 and C will withdraw ` 49,600
15. A, B and C are in partnership sharing profits and of 5 : 3 : 2 respectively. 'A'

retires from the firm as on 1st January, 2006 when his Capital Account shows
a net credit balance of ` 82,100 after the necessary adjustments.
(A) If 'A' is to be paid ` 22,100 in cash immediately on retirement and the balance in
three equal annual instalments together with interest @ 5% p.a. on diminishing
balance; his closing balance in Loan A/c at the end of 2nd year and the interest
paid to him in the third year will be -
(a) ` 20,000 and ` 1,000 (b) ` 20,000 and ` 2,000
(c) ` 40,000 and ` 3,000 (d) ` 30,000 and ` 1,000
276
(B) If 'A' is to be paid ` 22,100 in cash immediately on retirement and the balance
in three equal annual instalments of ` 22,034 each (including interest @ 5%
p.a.) ; his closing balance in Loan A/c at the end of 2nd year and the interest
paid to him in the second year will be -
(a) ` 40,996 and ` 3,000 (b) ` 20,980 and ` 2,000
(c) ` 20,980 and ` 2,048 (d) ` 20,000 and ` 1,000
16. A, B & C are partners. B retires on 31/12/99. The amount due to him, after
necessary adjustment arising in connection with such retirement, is ` 37,400.
He is to be repaid ` 7,400 on the date of retirement & the balance is to be left
in as loan to the firm to be repaid by 3 equal annual Instalment adding 10%
Interest p.a.
(A) Find the amount to be paid in first instalment
(a)
` 13,000 (b) ` 12,000
(c) ` 11,000 (d) None of the above

(B) Find the amount to be paid in last instalment
(a) ` 13,000 (b) ` 12,000
17. A, B and C takes a Joint Life Policy, after five years B retires from the firm. Old
profit sharing ratio is 2 : 2 : 1. After retirement A and C decides to share profits
equally. They had taken a Joint Life Policy of ` 2,50,000 with the surrender
value ` 50,000. What will be the treatment in the partner's capital account
on receiving the JLP amount if joint life premium is fully charged to revenue as
and when paid?
(a) ` 50,000 credited to all the partners in old ratio
(b)
` 2,50,000 credited to all the partners in old ratio
(c) ` 2,00,000 credited to all the partners in old ratio
(d) No treatment is required
18. A, B and C takes a Joint Life Policy, after five years, B retires from the firm. Old
equally. They had taken a Joint Life Policy of `2,50,000 with the surrender
value ` 50,000. What will be the treatment in the partner's capital account
on receiving the JLP amount if joint life policy is maintained at the surrender
277
value?
(b)
19. A, B and C takes a Joint Life Policy, after five years, B retires from the firm. Old
equally. They had taken a Joint Life Policy of `2,50,000 with the surrender
value `50,000. What will be the treatment in the partner's capital account on
receiving the JLP amount if joint life policy is maintained at surrender along
with the reserve?
(a) `50,000 credited to all the partners in old ratio
(b)
`2,50,000 credited to all the partners in old ratio
(c) `2,00,000 credited to all the partners in old ratio
(d) Distribute JLP Reserve Account in old profit sharing ratio
20. Balances of A, B & C sharing profits and losses in the ratio 2 : 3 : 2 stood as
follows : Capital Accounts : A `10,00,000 ; B `15,00,000 ; C `10,00,000 ;
Joint Life Policy ` 3,50,000. B desired to retire from the firm and the remaining
partners decided to carry on with the future profit sharing ratio of 3 : 2. Joint
Life Policy of the partners surrendered and cash obtained `3,50,000. What
would be the treatment for JLP?
(a) ` 3,50,000 credited to partner's capital account in new ratio.
(b)
` 3,50,000 credited to partner's capital account in old ratio.
(c) ` 3,50,000 credited to partner's capital account in capital ratio.
(d)
` 3,50,000 credited to JLP account.
21. How unrecorded assets are treated at the time of retirement of a partner?
(a) Credited to revaluation account
(b) Credited to capital account of retiring partner only
(c) Debited to revaluation account
(d) Credited to partner’s capital account
278
22. A, B and C are partners in a business sharing profits and losses in the ratio of
3:2:1. On 30th June, 2006, C retired from business, when his capital A/c. after
all necessary adjustments showed a balance of `10,950. It was agreed that he
should be paid Rs.4950 in cash. On retirement and the balance in three equal
yearly instalments with interest at 6% per annum. Amount of last installment
with interest will be :
(a) ` 2,120 (b) ` 2,100
(c)
` 2,200 (d)
` 2,500
23. C, D and E are partners sharing profits and losses in the proportion of ½, 1/3
and 1/6. D retired and the new profit sharing ratio between C and E is 3:2 and
the Reserve of ` 12,000 is divided among the partners in the ratio:
(a) ` 2,000: ` 4,000: ` 6,000. (b) ` 5,000: ` 5,000: ` 2,000.
(c) ` 6,000: ` 4,000: ` 2,000.
24. A, B and C are partners sharing profits and losses in the ratio of 3:2:1. C retires
on a decided date and Goodwill of the firm is to be valued at ` 60,000. Find
the amount payable to retiring partner on account of goodwill.
(a) ` 30,000. (b) ` 20,000.
(c) ` 10,000.
25. A, B and C were partners sharing profits and losses in the ratio of 3:2:1. A
retired and Goodwill of the firm is to be valued at ` 24,000. What will be the
treatment for goodwill?
(a) Credited to Revaluation Account at ` 24,000.
(b) Adjusted through partners’ capital accounts in gaining/sacrificing ratio.
(c) Only A’s capital account credited with ` 12,000.
26. Balances of A, B and C sharing profits and losses in proportionate to their

capitals, stood as follows: Capital Accounts : A `2,00,000 ; B ` 3,00,000 and C
` 2,00,000 ; JLP Reserve `80,000 and JLP `80,000. A desired to retire form the
firm and the remaining partners decided to carry on in equal ratio, Joint Life
Policy of the partners surrendered and cash obtained `80,000. What will be
the treatment for JLP?
(a) Cash received credited to Revaluation Account.

279
(b) JLP Reserve balance credited to Partner's Capital Account in old

profit sharing ratio.
(c) JLP Reserve balance credited to Partner's Capital Account in new profit
sharing ratio.

(d) Cash received credited to Partner's Capital Account in old profit sharing
ratio.
27. Retiring or outgoing partner:

(a) Is liable for firm’s liabilities
(b) Not liable for any liabilities of the firm
(c) Is liable for obligations incurred before his retirement
(d) Is liable for obligations incurred before and after his retirement
28. A, B and C are partners with profit sharing ratio 4:3:2. B retires. If A & C shares
profit of B in 5:3, then find new profit sharing ratio.
(a) 47:25 (b) 17:11
(c) 31:11 (d) 14:21
29. At the time of retirement of a partners, firm gets ________ from the insurance
company against the Joint Life Policy taken jointly for all the partners.
(a) Policy Amount
(b) Surrender Value
(c) Policy value for the retiring partner and surrender value for the rest
(d) Surrender Value for all the partners.
30. A, B and C are partners sharing profit and losses in the ratio of 3:2:1. C retires
on a decided date and Goodwill of the firm is to be valued at ` 60,000. Find
the amount payable to retiring partner on account of goodwill.
(a) ` 30,000 (b) ` 20,000
(c)
` 10,000 (d) ` 60,000
280
Answer
Shorts Questions

1. A will bring 21600 & C will bring 49600.
2. a. Rs.50,000 credit to all partners in old ratio
b. Rs.50,000 credited to JLP a/c & balance of JLP a/c will be zero.
c. Rs.50000 credited to JLP a/c after which JLP a/c will be zero. Balance of
Rs.50,000 in JLP reserve a/c will be credited to all partners in old ratio.
3. Rs12,000
4. Rs.1,33,714.
1. (d) 9. (b) 17. (a) 25. (b)

2. (a) 10. (d) 18. (d) 26. (b)
3. (b) 11. (b) 19. (d) 27. (c)
4. (a) 12. (c) 20. (d) 28. (a)
5. (a) 13. (b) 21. (a) 29. (b)
6. (a) 14. (b) 22. (a) 30. (c)
7. (c) 15. (a), (c) 23. (c)
8. (a), (d) 16. (a), (c) 24. (c)
281
1.

X 10
= + =
10 20 20
Y NIL
Z 10
= + =
10 20 20
∴New Ratio = 10 : 10
OR
1 : 1
2. Amount to be transferred to loan account of ‘B’
Capital of ‘B’ 50,000

Reserves [15000 × 2/5] 6000
Goodwill [30,000 × 2/5] 12,000
Profit on revaluation [7050 × 2/5] 2820
70820
3. ‘x’ share will be transferred to ‘y’ & ‘z’ in ‘gaining ratio’.
Old Ratio – New Ratio Sacrificing Ratio /

(gaining ratio)
Y
∴ Gaining Ratio = 4 : 6
OR
2:3
282
4. Old Ratio =

=5:3:2

(gaining ratio)
A =
C
5. Amount transferred to loan account of ‘Q’
Capital of ‘Q’ 50,000

Reserves [12000 × 2/5] 4800
Goodwill [30,000 × 2/5] 12,000
Profit on revaluation [10,000 × 2/5] 4000
70800
6. ‘Z’ share taken by X & Y in their old ratio = 4 : 2

7.

(gaining ratio)
A
∴ Gaining Ratio = 2 : 1 : 1
283
8.

X
∴ New Ratio = 39 : 40
OR
13 : 14
Gaining Ratio = OR 1 : 8
9.

(gaining ratio)
A
Capital of ‘B’ = 75000 A 56250
C 18750
Capital of A = 100,000 + 56250 = 156250
Capital of C = 50,000 + 18750 = 68750
10.

(gaining ratio)
A
Goodwill share A = 10800 × = 1950
Goodwill share C = 10800 × = 1650
284
11.
Old Ratio – Cr. 12,000 Cr 12,000 Cr. 6000 Cr.
[ 2 : 2 : 1]
New Ratio – Dr. 20,000 Dr NA 10,000 Dr
[ 2 : 1]
Net effect 8,000 Dr. 12,000 Cr. 4,000 Dr.
A’s Capital A/c ...... Dr. 8,000

C’s Capital A/c ...... Dr. 4,000
12.
Old Ratio – Cr. 40,000 Cr 60,000 Cr. 40,000 Cr.
[ 2 : 2 : 2]
New Ratio – Dr. NA 70,000 Dr 70,000 Dr
[ 1 : 1]
Net effect 40,000 Cr. 10,000 Dr. 30,000 Dr.
B’s Capital A/c ...... Dr. 10,000

C’s Capital A/c ...... Dr. 30,000
13.
Particulars A C
Actual capital 39300 18300
Required Capital 35000 21000
4300 Withdrawn 2700 Bring
285
14.
Capital of ‘A’ 86400

Capital of ‘B’ 73200
Capital of ‘C’ 22400
Minimum cash 6000
1,88,000
Less : Available cash (8000)
Reconstituted capital 180,000
A (3/5) C(2/5)
108000 72,000
Particulars A C
Actual capital 86400 22400
Reconstituted Capital 108000 72000
21600 Bring 49600 Bring
15.
A. Total loan Amt. = 82100 – 22100 = 60,000
A’s loan A/c
To Bank A/c 23,000 By A’s capital A/c 60,000
[20,000 + 3000]
To Bal. C/d 40,000 By int. A/c 3,000
[60,000 × 5%]
63,000 63,000
To bank A/c 22,000 By Bal. b/d 40,000
[20,000 + 20,000]
To Bal. c/d 20,000 By int. A/c 2,000
[40,000 × 5%]
42,000 42,000
[20,000 + 1,000]
By int. A/c 2,000
[20,000 × 5%]
21,000 21,000
286
B. A’s loan A/c
To Bank A/c 2,2034 By A’s capital A/c 60,000
To Bal. C/d 40,966 By int. A/c 3,000
[60,000 × 5%]
63,000 63,000
To bank A/c 22034 By Bal. b/d 40,000
To Bal. c/d 20980 By int. A/c 2048
[40966 × 5%]
43014 43014
To bank A/c 22034 By Bal. b/d 20980
By int. A/c 1054
22034 22034
16.
Total loan Amt. of ‘B’ = 37400 – 4700 = 30,000
B’s loan A/c
To Bank A/c 13,000 By B’s capital A/c 30,000
[10,000 + 3000]
To Bal. C/d 20,000 By int. A/c 3,000
[30,000 × 10%]
33,000 33,000
[10,000 + 2000]
To Bal. c/d 10,000 By int. A/c 2,000
[20,000 × 10%]
22,000 22,000
[10,000 + 1,000]
By int. A/c 1,000
[10,000 × 1%]
11,000 11,000
A. First installment = 13,000

B. Last installment = 11,000
287
22.
Total loan Amt. of ‘C’ = 10950 – 4950 = 6,000
Particulars Interest Installment

1st year 6000 × 6% = 360 2000 + 360 = 2360
2nd year 4000 × 6% = 240 2000 + 240 = 22400
3rd year 2000 × 6% = 120 2000 + 120 = 2120
23. Reserve of ` 12,000 should be dividend in old ratio = 3 : 2 : 1

12,000 C = 6000 D = 4000 E = 2000
24. Goodwill share of ‘c’ = 60,000 × 1/6 = 10,000
28.

A
B NIL
∴ New Ratio = 47 : 25
30. Goodwill share of ‘c’ = 60,000 × 1/6 = 10,000
288
UNIT V– DEATH OF PARTNER
1. X, Y and Z are the partners sharing profits in the ratio 5:4:3. Z died on 30th
September, 2016. Profits for the accounting year 2016-17 is `40,000. How
much share in profits for the period from 1st April, 2016 to 30th September,
2016 will the executors of Z would be entitled?
(a) `6000 (b) `5,000
(c)
`4,500 (d) Nil
2. J.K and L were equal partners in a firm. The firm has taken individual life policy
of `50,000 for each partner. J died on 5th March 2011. The surrender value
was `2,000 for each policy on the date of death of J. the amount payable to J
in respective policies would be________.
(a) ` 17,000 (b) ` 18,000
(c)
` 50,000 (d) ` 54,000
3. A, B, and C are partners sharing profits in the ratio 3:2:1. They had a Joint Life
policy of `3,00,000. Surrender value of JLP in Balance Sheet is `90,000. C dies.
What is share of each partner in JLP?
(a) ` 1,05,000, ` 70,000, ` 35,000
(b)
` 45,000, `30,000, `15,000
(c)
`1,50,000, `1,00,000, `50,000
(d)
` 1,95,000, `1,30,000, `65,000
4. X, Y and Z are the partners sharing profits in the ratio of 7:5:4. On 30th June,
2008 Z died and profits for the year ending 31st March, 2009 were `2,40,000.
How much share in share in profits for the period 1st April 2008 to 30th June
2008 will be credited to Z’s account assuming the profit occurred evenly
throughout the year?
(a) ` 60,000 (b) ` 15,000
(c)
` 20,000 (d) Nil
289
5. Joint Life Policy of the partners is a / an _______ account.

(a) Nominal (b) Personal
(c) Representative personal (d) Asset
6. In the absence of proper agreement, representative of the deceased partner is

entitled to the Dead partner’s share in
(a) Profits till date, goodwill, joint life policy, share in revalued assets and
liabilities.
(b) Capital, goodwill, joint life policy, interest on capital, share in revalued
assets and liabilities.
(c) Capital, profits till date, goodwill, joint life policy, share in revalued assets
and liabilities.
7. A, B and C are the partners sharing profits and losses in the ratio 2:1:1. Firm
has a joint life policy of `1,20,000 and in the balance sheet it is appearing at
the surrender value i.e. ` 20,000. On the death of A, how this JLP will be shared
among the partners.
(a) ` 50,000: ` 25,000: ` 25,000.
(b) ` 60,000: ` 30,000: ` 30,000.
(c)
` 40,000: ` 35,000: ` 25,000.
8. R, J and D are the partners sharing profits in the ratio 7:5:4. D died on 30th
June 2016. It was decided to value the goodwill on the basis of three year’s
purchase of last five years average profits. If the profits are ` 29,600; ` 28,700;
` 28,900; ` 24,000 and ` 26,800. What will be D’s share of goodwill?
(a) ` 20,700. (b) ` 27,600. (c) ` 82,800
9. As per Section 37 of the Indian Partnership Act, 1932, the executors would be
entitled at their choice to the interest calculated from the date of death till
the date of payment on the final amount due to the dead partner at ............
percentage per annum.
(a)
7 (b) 4
(c) 6 (d) 12
290
10. A, B and C are the partners sharing profits in the ratio 7 : 5 : 4. C died on 30th
June 2006 and profits for the accounting year 2005 - 2006 were ` 24,000. How
much share in profits for the period 1st April 2006 to 30th June 2006 will be
credited to C's Account.
(a) ` 6,000 (b) `1,500
(c) Nil (d) None
11. On death of partner when his executor is paid share of profit up to the date of
death, it is debited to profit & loss ____ Account.
(a) Adjustment (b) Appropriation
(c) Suspense (d) Reserve
12. At the time of retirement of a partner, firm gets ............ from the insurance
company against the Joint Life Policy taken jointly for all the partners.
(a) Policy Amount
(b) Surrender Value
(c) Policy Value for the retiring partner and Surrender Value for the rest
(d) Surrender Value for all the partners
13. At the time of death of a partner, firm gets ........... from the insurance company
against the Joint Life Policy taken jointly for all the partners.
(a) Policy Amount
(b)
Surrender Value
(c) Policy Value for the dead partner and Surrender Value for the rest
(d) Surrender Value for all the partners
14. A, B and C takes a Joint Life Policy their profit sharing ratio is 2 : 2 : 1. On death
of B, A and C decides to share profits equally. They had taken a Joint Life Policy
of ` 2,50,000 with the surrender value ` 50,000. What will be the treatment in
the partner's capital account on receiving the JLP amount if joint life policy is
maintained at the surrender value?
(b)
291
15. A, B and C takes a Joint Life Policy, their profit sharing ratio is 2 : 2 : 1. On death
of B, A and C decides to share profits equally. They had taken a Joint Life Policy
of `2,50,000 with the surrender value ` 50,000. What will be the treatment in
the partner's capital account on receiving the JLP amount if Joint Life Policy is
maintained at surrender along with the reserve?
(a) ` 2,50,000 credited to all the partners in old ratio.
(b)
` 2,00,000 credited to all the partners in old ratio.
(c) Distribute JLP Reserve Account in old profit sharing ratio.
(d) 'b' and 'c'.
16. A & B sharing profits and losses in the ratio of 2 : 3 took out a Joint Life Policy
on 1st January, 2001 for ` 20,000 for 10 years. The premium for the whole year
is ` 2,000. B died on 1st March, 2004 and claim was received on 1st May 2004.
The books of the firm are closed on 31st December each year. The surrender
values of the policy at the end of 2001, 2002, 2003 and 2004 were nil, ` 400,
`1,200, and ` 2,400 respectively.

(A) If, Ordinary Business Method has been followed -
(a) A gets `12,000, B's Executors get ` 8,000
(b)
A gets `10,000, B's Executors get `10,000
(c)
A gets ` 8,000, B's Executors get `12,000

(B) If, Surrender Value Method has been followed -
(a) A gets `6,720, B's Executors get `10,080
(b)
A gets `10,080, B's Executors get ` 6,720
(c)

(C) If, Joint Life Policy Reserve Method, has been followed -
(a) A gets ` 6,720, B's Executors get `10,080
(b)
(c)
292
17. X, Y and Z are Partners in the ratio of 5:3:2. X died on 14th August, 2014. The
Firm had taken Insurance Policies on the lives of the Partners, premium being
charged to P & L A/c every year. The Policy Amount and Surrender Value (on
14.08.2014) is as follows -
Life Insurance Policy Amount Surrender Value

Policies (`) (`)
X 1,20,000 50,000
Y 1,80,000 70,000
Z 1,20,000 30,000
The amount payable to X's legal representatives regarding insurance policies

is -
(a) ` 1,20,000 (b) ` 1,10,000
18. To provide funds to pay to the retiring partner or to the representatives of a

Deceased partner, generally Partners create –
(a) Joint life policy (b) Sinking fund
(c) Reserve fund (d) Separate Bank A/c
19. B, C, D are partners sharing profits in the ratio 7 : 5 : 4. D died on 30th June
2006 and profits for the year 2005-2006 were ` 12,000. How much share in
profits for the period 1st April 2006 to 30th June 2006 will be credited to D’s
Account ?
(a) ` 3,000 (b) ` 750 (c) Nil (d) ` 1,000
20. Andy, Tom and Bob were partners sharing profits and losses in the ratio 2:2:1.
Tom died on 1st February, 2014. The firm had taken insurance policies on the
lives of the partner premium being charged to profit and Loss A/c every years.
The policy amount and surrender value as on 1st February, 2014 were as
follows:
Policy holder Policy Amount Surrender Value (`)

Andy 5 Lakhs 50,000
Tom 7 Lakhs 70,000
Bob 4 Lakhs 40,000
293
Amount payable to Tom’s legal representatives regarding insurance policies

would be:
(a) ` 7,00,000 (b) ` 2,88,000
(c) ` 6,40,000 (d) ` 3,16,000
Answer
1. (b) 6. (c) 11. (c) 16. (c), (a),

(b)
2. (b) 7. (a) 12. (b) 17. (b)
3. (a) 8. (a) 13. (a) 18. (a)
4. (b) 9. (c) 14. (a) 19. (b)
5. (d) 10. (b) 15. (a) 20. (d)
294
Answer
1. 40,000 ×
2.
J 50,000 Policy value

K 2000 Surrender value
L 2000 Surrender value
54,000
Amount payable to J = 54,000 × = 18000
3. On Death of ‘C’ policy amount will be received

Dr. JPL A/c Cr.
To Bal. b/d 90,000 By Cash / Bank A/c 300,000
To profit
A (3/6) 105000
B (2/6) 70000
C (1/6) 35000 210,000
300,000 300,000
4. 240,000 × 15000
7. On Death of ‘A’ policy amount will be received.

Dr. JPL A/c Cr.
To profit
A (2/4) 50000
B (1/4) 25000
C (1/4) 25000 100,000
120,000 120,000
295
8. Avg. profit = = 27600
Goodwill = 27,600 × 3 years

= 82,800
A’s share of goodwill = 82800 × = 20,700
10. 24,000 × = 1500
14. On Death of ‘B’ policy value will be received.

Dr. JPL A/c Cr.
To profit credited in old ratio 200,000
[2 : 2 : 1]
250,000 250,000
15.
Dr. JPL A/c Cr.
To Bal. b/d 50,000 By JPL Reserve A/c 50,000
To partners capital By Cash / Bank A/c 250,000
A (2/5) 100,000
B (2/5) 100,000
C (1/5) 50,000 250,000
300,000 300,000
Dr. JPL A/c Cr.
To JPL A/c 50,000 By Bal. b/d 50,000
50,000 50,000
296
16. On Death policy value will be received.

20,000 A(2/5) = 8000
B (3/5) = 12000
B.
Dr. JPL A/c Cr.

1 /1 /2004 To Bal. b/d 1200 1/5/2004 By Bank A/c 20,000
1 / 1 / 2004 To Bank A/c 2000
1 /5 /2004 To profit
A (2/5) 6720
B (3/5) 10080 16800
20,000 20,000
Note : It is assumed that premium of ` 2000 paid at beginning of each year.

C.
Dr. JPL A/c Cr.

1 /1 /2004 To Bal. b/d 1200 1/5/2004 By JPL Reserve A/c 1,200
1 / 1 / 2004 To Bank A/c 2000 1/5/2004 By Bank A/c 20,000
1 /5 /2004 To profit
A (2/5) 7200
B (3/5) 10080 18000
21,200 21,200
Dr. JPL Reserve A/c Cr.

1 /5 /2004 To JPL A/c 1,200 1/1/2004 By Bal. b/d 1,200
1,200 1,200
Note : It is assumed that premium of ` 2000 paid at beginning of each year.
297
17.
X 120,000 Policy value

Y 70,000 Surrender value
X 30,000 Surrender value
2,20,000
5
X’s share = 2,20,000 × = 110,000
10
19. 12,000 x = 750
20.
Andy 50,000 Policy value

Tom 700,000 Surrender value
Bob 40,000 Surrender value
7,90,000
Tom’s share = 7,90,000 × = 3,16,000
298
TEST PAPER
(Marks 50)
Q.1 A and B are in partnership, sharing profits and losses in the ratio of 3 : 2 respectively.
Interest is charged on partners' drawings @ 8% p.a.
On 1.1.2010, C was admitted into partnership, with future profits or losses to
be shared equally and interest on drawings to continue @ 8% p.a. He brought in
52,000 as his share of capital. Goodwill was calculated as twice the average profits
after interest on drawings for 2007, 2008 and 2009. Details of drawings and profits
before interest in those years were:
Drawings: 2007 - ` 20,000; 2008 - ` 30,000; 2009 - ` 37,500.
Profit before interest: 2007 - ` 30,800; 2008 - ` 30,200; 2009 - ` 31,000. The
partners' capital balances on 31.12.2009 were: A ` 45,000; B ` 35,000. Net profit
for 2010 was ` 60,000 before interest. Drawings at the end of 2010 totalled:
A ` 24,000; B ` 22,000; C ` 20,000. Prepare Profit and Loss Appropriation Account
for the year ended 31.12.2010 and the Partners' Capital Accounts. Assume that all
drawings were made on the first day of the year. (15)
299
Q.2 A, B and C were in partnership sharing profits and losses in the ratio of 5 : 4 3
respectively. A died on 31.12.2009, which date the Balance Sheet of the firm was as
under :
Capital Accounts: 95,000 Leasehold Premises 40,000
(A - ` 42,500; Less: Accumulated
B- ` 30,000; depreciation 4,000 36,000
C - ` 22,500) Plant 46,000
Current Accounts: 16,500 Less: Accumulated
(A - ` 4,250; B - depreciation 13,500 32,500
` 6,500; C - ` 5,750) Stock 27,000
Loan Account A 20,000 Debitors 21,000
Creditors 21,250 Less: Provision for
Doubtful debts 3,750 17,250
Bank 40,000
1,52,750 1,52,750
B and C decided to carry on the business sharing profits and losses in the ratio of 7
: 5 respectively. The following adjustments were made on 31.12.2009:
(a) Plant, stock and debtors were valued at ` 34,500, ` 24,300 and ` 16,850
respectively; (b) Valuer's charge of ` 700 was to be provided for; and (c) Goodwill
was to be valued as equal to 3 years' purchase of super profits. The required return
was to be calculated as 25% on partners' capital, current and loan accounts, and
was to be set against weighted average profits of the last three years. The profits
were: 2009 ` 52,000; 2008 ` 46,000; 2007 ` 45,250. ` 25.000 was repaid to A's
executors on 1.1.2010, the balance owing to be a loan to the partnership.
Required:
Necessary Ledger Accounts and the Balance Sheet on 1.1.2010. (15)
300
Q.3 A. B and C are partners sharing profits and losses in the ratio of 2 : 2 : 1. Cretires on
31st March, 2010. The Balance Sheet of the firm on 31st December, 2009 stood as
follows :
Capital A/c Land and Buildings 1,00,000
A 60,000 Investments 12,500
B 60,000 Stock 25,000
C 40,000 Debtors 40,000
General Reserve 40,000 Cash at Bank 22,500
Creditors 10,000 Cash in Hand 10,000
2,10,000 2,10,000
In order to arrive at the balance due to C, it was mutually agreed that

(1) Land and buildings be valued at , 1,20,000.
(2) Investment be valued at 10,000.
(3) Stock be taken at 30,000.
(4) Goodwill be valued at two year's purchase of the average profit of the past
five years. Goodwill will not appear in the books of the reconstituted film.
(5) C's share of profit up to the date of retirement be calculated on the basis of
average profit of the preceding three years. The profits of the preceding five
years were as under : 2005 - ` 20,000; 2006 - ` 23,500; 2007 - ` 30,000;
2008 - ` 27,500; and 2009 - ` 32,500.
(6) Amount payable to C to be transferred to his Loan Account carrying interest

@ 15% p.a.
You are required to prepare : (i) Revaluation Account; (ii) Partners' Capital
Accounts; and (iii) a Balance Sheet as at 31st March, 2010. (20)
301
HOMEWORK SOLUTION
1. GENERAL PARTNERSHIP
Q: 1
WN 1: Amt due to Ratan as chief clerk
Salary (500 P.M. x 12 M) 6,000
[ [
Add: Comm. (110,000 – 6,000) x 4 4,000
104
10,000
Less: share of Profit as partner (11,000)
(1/10 x 110,000)
EXCESS CHARGEBLE TO RAM 1,000
WN 2: Distribution of Profit
Total Profit = 110,000
Ram Rahim Ratan
100,000 in 3:2 10,000

60,000 40,000
+1,000 Deficit borne by Ram
(1,000)
11,000
59,000
302
Dr. P/L App. A/c for the year ended 31st Dec 2011 Cr.
Particulars Rs. Particulars Rs.

To Ram’s Cap. A/c 59,000 By P/L A/c 110,000
(Net Profit)
To Rahim’s Cap. A/c 40,000
To Ratan’s Cap. A/c 11,000
110,000 110,000
Q.2 Case 1:
Dr. P/L Appropriation A/c Cr.

To Profit trf to By P/L A/c 50,000
A (3/5) 30,000 (NP)
B (2/5) 20,000 50,000
→
50,000 50,000
Note: If the P.Deed is silent, no interest will be allowed on Capitals
Case 2:
Dr. P/L Appropriation A/c Cr.

To P/L A/c 50,000 By Loss trf to
(NL) A (3/5) 30,000
B (2/5) 20,000 50,000
→
50,000 50,000
Note: If there is Loss, No int on cap will be given.
303
Case 3:
Dr. P/L App A/c Cr.

To Int on Cap By P/L A/c 50,000
A (2L x 8%) 16,000 (NP)
B (1L x 8%) 8,000 24,000
To Profit trf to →
A (3/5) 15,600
B (2/5) 10,400
→ 26,000
50,000 50,000
Case 4:
Dr. P/L App A/c Cr

To Int on Cap. By P/L A/c 15,000
A (15 000 x 2/3) 10,000 (NP)
B (15,000 x 1/3) 5,000
15,000 15,000
Note: The available Profit is 15,000 whereas Int. on Capital due is 24,000 (16,000 +
8,000). Since, the profit is less than interest, the available profit will be distributed in the
ratio of interest on cap or Capital Ratio i.e. 16,000: 8,000 or 200,000: 100,000 i.e.2:1
304
Case 5:
Dr. P/L App A/c Cr.

To Int on Cap By P/L A/c 15,000
A (2L x 8%) 16,000 (NP)
B (1L x 8%) 8,000 By Loss trf to
A (3/5) 5,400
B (2/5) 3,600 9,000
24,000 → 24,000
Q3. Calculation of Int on Drawings in Various Cases.

Case a:
Int on Drawings: 5,000 pm x 10% x 6.5 = 3,250
Case b:
Int on Drawings = 5,000 pm x 10% x 5.5 = 2,750
Case c:
Int on Drawings = 5,000 pm x 10% x 6 = 3,000
Note: Assuming that the drawing are made in the middle of every month.
Case d:
Int on Drawings = 60,000 x 10% x 6/12 = 3,000
Note: As the date of drawing is not given int will be calculated for an average period
of 6 months.
Case e:
20,000 x 10% x 10/12 = 1,667
10,000 x 10% x 7/12 = 583
18,000 x 10% x 5/12 = 750
12,000 x 10% x 2/12 = 200
Int. on Drawings = 3,200
305
Case f:
Int. on Drawings = 15,000 x 10% x 2.5 =3,750
Case g:
Int. on Drawings = 15,000 x 10% x 1.5 = 2,250
Case h:
Int .on Drawings = 15,000 x 10% x 2 = 3,000
306
Unit 2: Goodwill
Q.1 Change in PSR
G/w = 20,000 A B C
Goodwill distributed in Old Ratio 4:3:3 8,000 6,000 6,000
Cr Cr Cr
G/w reversed in NR = 7:7:6 7,000 7,000 6,000

Dr Dr Dr
Net Effect 1,000 1,000 NIL
Cr Dr
B’s Cap. A/c Dr. 1,000

To A’s Cap. A/c 1,000
(B i.e. gaining partner contributed
To A i.e. sacrificing partner)
Q.2 Change in PSR
G/w = 20,000 A B C D
G/w distributed in OR = 1:1:1:1 5,000 5,000 5,000 5,000
Cr Cr Cr Cr
G/w reversed in NR = 3:3:2:2 6,000 6,000 4,000 4,000

Dr Dr Dr Dr
Net Effect 1,000 1,000 1,000 1,000
Dr Dr Cr Cr
A’s Cap. A/c Dr. 1,000

To C’s Cap. A/c 1,000
To D’s Cap. A/c 1,000
(Being gaining partners A & B contributed to sacrificing partner C & D for share of
goodwill due to change in PSR.)
307
UNIT 3: ADMISSION
Q1.
a. Calculation of Correct Profit /Loss
Particulars 31/3/14 31/3/15 31/3/16

Profit/ [Loss] 20,000 (80,000) 105,000
Add/ Loss: Abnormal items (40,000) 110,000 (25,000)
Net Profit/ (Loss) (20,000) 30,000 80,000
b. Avg. Profit = - 20,000 + 30,000 + 80,000

3
= 30,000
c. Goodwill = 30,000 x 2 years
= 60,000
d. Net Effect of goodwill
G/W = 60,000 Gopal Govind Guru

G/W raised 36,000 24,000 NA
[OR = 60:40] Cr Cr
G/w w/off 21,000 15,000 24,000

[NR = 35:25:40] Dr Dr Dr
15,000 9,000 24,000
Cr Cr Dr

Cash/bank brought in by new partner will be distributed in sacrificing ratio
New partner will bring Cash/bank for his share of goodwill
308
2. Journal Entries
Date Particulars L. Debit Credit

F.
1/4/16 Bank A/c Dr. 100,000
To Guru’s Capital A/c 100,000
(Being Capital brought in by guru)
1/4/16 Bank A/c Dr. 24,000
To Gopal’s Capital A/c. 15,000
To Govind’s Capital A/c 9,000
(Being goodwill brought in by Guru distributed
In sacrificing ratio)
1/4/16 Revaluation A/c Dr. 70,000
To Investment A/c. 50,000
To Current Assets A/c 20,000
(Being Asset revalued)
1/4/16 Fixed Asset A/c Dr. 100,000
(Being Fixed Asset revalued)
1/4/16 Revaluation A/c Dr. 30,000
To Gopal’s Capital A/c. 18,000
To Govind’s Capital A/c 12,000
(Being revaluation profit in old ratio 60:40)
3.

To Investment A/c 50,000 By Fixed Assets 100,000
To Current asset A/c 20,000
To Partners Cap. A/c
(Revaluation Profit)
Gopal (60%) 18,000
Govind (40%) 12,000
100,000 100,000
309
4.
Dr. Partner’s Capital A/c Cr
Particulars Rs. Rs. Rs. Particulars Rs. Rs. Rs.

Gopal Govind Guru Gopal Govind Guru
By Bal b/d 120,000 80,000
By Bank
A/c 100,000
By Bank
A/c 15,000 9,000
By Reval-
uation A/c 18,000 12,000
To Bal. c/d 153,000 101,000 100,000 (profit)
153,000 101,000 100,000 153,000 101,000 100,000
Balance Sheet (after admission of Guru) as on 1st April 2016
LIABILITIES Rs. ASSETS Rs.

Capital Fixed Assets 400,000
Gopal 153,000 Current Assets 304,000
Govind 101,000 [180,000 + 124,000 ‘including
Guru 100,000 Bank balance]
Loans & Advance 100,000
Long Term Loan 200,000
Current Liab 250,000
804,000 804,000
310
Q2.

To Provision for Doubtful By Inventory A/c 2,500
Debt A/c 550 By Land & Building A/c 5,000
To Furniture & Fitting A/c 650
To Partner’s cap. A/c
(Revaluation Profit)
Dalal (2/5) 2,520
Banerji (2/5) 2,520
Mallick (1/5) 1,260
7,500 7,500
Particulars Rs. Rs. Rs. Rs. Particulars Rs. Rs. Rs. Rs.
Dalal Benerji Malick Mistri Dalal Benerji Malick Mistri
To Dalal By Bal. b/d 12,000 12,000 5,000
Cap. A/c 1,000 By General
To Banerji Reserve 2,600 2,600 1,300
Cap. A/c 1,000 By Cash 5,000
By Mistri
Cap. A/c 1,000 1,000
By Out.St.
Liab. A/c 1,000
By Reval -
To Bal. c/d 19,120 18,120 7,560 3,000 uation A/c 2,520 2,520 1,260
19,120 18,120 7,560 5,000 19,120 18,120 7,560 5,000
311
Balance Sheet of M/s Dalal, Banerji, Malick & Mistri as on 1st April 2016
LABILITIES Rs. ASSETS Rs.

Capital Land & Building 30,000
Dalal 19,120 Furniture 5,850
Banerji 18,120 Inventory 14,250
Malick 7,560 Trade Receivable 5,500
Mistri 3,000 Less: Provision (550) 4,950
Cash in hand → 140
Trade Payable 12,850 Cash at Bank 5,960
Outstanding Liab. 500
61,150 61,150
WN1: Net Effect of Goodwill
G/w = 15,000 Dalal Banerji Mallick Mistri

G/w raised 6,000 6,000 3,000 NA
(OR – 2:2:1) Cr Cr Cr
G/w W/off 5,000 5,000 3,000 2,000

(NR – 5:5:3:2) Dr Dr Dr Dr
1,000 1,000 NIL 2,000
Net Effect Cr Cr Dr
(given through Capital A/c)
Mistri’s Cap. A/c Dr. 2,000

To Dalal’s Cap. A/c 1,000
To Banerji’s Cap. A/c 1,000
Q3.
Case a.
Old ratio (OR) ± Adjustments = New Ratio (NR)
A 5/10 = 5/10
B 3/10 - 1/10 = 2/10
C 2/10 + 1/10 = 3/10
312
NR = 5:2:3
Sacrifice by ‘B’ = 1/10
Case b.
OR ± Adj = NR
A 5/10 -(1/10 x ½) = 9/20
B 3/10 - (1/10 x ½) = 5/20
C 2/10 + 1/10 = 3/10 x 2/2 = 6/20
NR = 9:5:6
Sacrifice Ratio = 1:1 (A & B)
Case c.
OR ± Adj = NR
A 5/10 - 1/10 = 4/10
B 3/10 = 3/10
C 2/10 + 1/10 = 3/10
NR = 4:3:3
Sacrifice by ‘A’ = 1/10
Case d.
OR ± Adj = NR
A 5/10 = 5/10
B 3/10 - 1/10 = 2/10
C 2/10 + 1/10 = 3/10
NR = 5:2:3
Case e.
OR ± Adj = NR
A 5/10 - NA = 5/10
B 3/10 - 1/10 = 2/10
C 2/10
+1/10 = 3/10
313
NR = 5:2:3
Case f.
OR ± Adj = NR
A 5/10 - 3/10 = 2/10
B 3/10 - NA = 3/10
C 2/10 + 3/10 = 5/10
NR = 2:3:5
Sacrifice by A = 3/10
Case g.
OR - NR = Sacrificing Ratio (gaining ratio)
A 5/10 - 2/5 = 1/10
B 3/10 - 1/5 = 1/10
C 2/10 - 2/5 = - 2/10
NR = 2:1:2
Sacrifice by A & B = 1:1
gain by ‘C’ = 2/10
Case h.
OR - NR = Sacrificing Ratio (gaining ratio)
A 5/10 - 1/3 = 5/30
B 3/10 - 1/3 = - 1/30
C 2/10 - 1/3 = - 4/30
NR = 1:1:1
Sacrifice by A = 5/30
gain by B & C = 1/30 & 4/30
Case i.
Ratio of A & B = 5:3
Ratio of B & C should be = 5:3
314
Since B’s share in relation to A is 3/5 or 60 % of A’s share, C’s share should also be 60%
of B’s share
Thus, C’s share = 60 % x 3 = 1.8

B’s share
New Ratio = 5:3:1.8

OR 25: 15: 9
Sacrifice Ratio = OR - NR Sacrificing Ratio (gaining ratio)

A = 5/10 - 25/49 = - 5/490
B = 3/10 - 15/49 = - 3/490
C = 2/10 - 9/49 = 8/490
‘C’ sacrifice by 8/490 and A gains by 5/490 & B gains by 3/490.
315
Unit 4: Retirement
Q1.
Dr. Revaluation Cr

To Machinery A/c 40,000 By Land & Building A/c 60,000
To Closing stock A/c 20,000 By Sundry Creditor A/c 10,000
To Provision for Doubtful 10,000
Debt A/c
70,000 70,000
Dr. Partner’s Capital A/c Cr.

Ram Rahul Rohit Ram Rahul Rohit
To Ram’s By Bal b/d 3,00,000 2,00,000 1,00,000
Cap. A/c 30,000 60,000
To Cash/ 2,10,000 By Cash/ 30,000 20,000 10,000
Bank Bank
A/c (JLP)
To Ram 2,10,000 By Rahul 30,000

Loan A/c Cap. A/c
By Rohit 60,000
Cap. A/c
To Bal c/d 3,00,000 3,00,000 By Cash/ *1,10,000 *2,50,000

Bank A/c
4,20,000 3,30,000 3,60,000 4,20,000 3,30,000 3,60,000
316
Dr. Ram’s Loan A/c Cr.
Date Particulars Rs. Date Particulars Rs.

31.03.16 To Bal c/d * 210,000 31.03.16 By Ram’s Capital A/c 210,000
210,000 210,000
01.04.16 By Bal b/d 210,000
Dr. Cash & Bank A/c Cr.

31.03.16 To Bal b/d 100,000 31.03.16 By Ram’s Cap A/c 210,000
To Ram’s Cap A/c 30,000 By Bal c/d * 310,000
To Rahul’s Cap A/c 20,000
To Rohit’s Cap A/c 10,000
[JLP Surrendered]
To Rahul’s Cap A/c 110,000

To Rohit’s Cap A/c 250,000
520,000 520,000
317
M/s Rahul & Rohit

Balance sheet as on 1st April 2016

Capital Land & Building 260,000
Rahul 300,000 Machinery 160,000
Rohit 300,000 Closing stock 80,000
Ram’s Loan 210,000 Debtors 200,000
Sundry Creditors 190,000 Less: Provision for
Doubtful Debt (10,000) 190,000
→
Cash & Bank 310,000

10,00,000 10,00,000
WN 1: Treatment of Goodwill
G/W = 180,000 Ram Rahul Rohit

G/W raised
[old ratio – Cr] 90,000 60,000 30,000
3:2:1 Cr Cr Cr
G/W w/off
[New Ratio – Dr.] NA 90,000 90,000
1:1 Dr Dr
Net Effect 90,000 30,000 60,000
Cr. Dr Dr
318
Rahul’s cap A/c Dr 30,000 -

Rohit’s cap A/c Dr. 60,000 -
To Ram’s Capital A/c - 90,000
WN 2: Treatment of Joint Life Policy received.

[JLP treated as revenue Expenses while paying premium]
a. C/B A/c Dr. 60,000
To JLP A/c 60,000
b. JLP A/c Dr. 60,000

To Ram 30,000
To Rahul 20,000
To Rohit 10,000
Q2. Journal Entries
Sr.no Particulars Debit Credit

1. A’s Capital A/c Dr. 21,000
B’s Capital A/c Dr. 14,000
C’s Capital A/c Dr. 7,000
To P & L Adjustment A/c 42,000
(Being profit written back for making adjustment)
2. P & L Adjustment A/c Dr. 6,000
(Being Bonus credited to B’s capital A/c)
3. P & L Adjustment A/c Dr. 36,000
To B’s cap. A/c 18,000
To C’s cap. A/c 6,000
(Being remaining profit distributed in the new ratio)
4. Fixtures A/c Dr. 9,800
(Being Fixtures revalued)
5. Revaluation A/c Dr. 1,800
To Provision for Doubtful Debt A/c 1,800
(Being Provision created)
319

(Being revaluation profit distributed in 2:3:1)
7. A’s cap. A/c Dr. 13,334
B’s cap. A/c Dr. 20,000
C’s cap. A/c Dr. 6,666
To Goodwill A/c 40,000
(Being existing goodwill w/off in 2:3:1)
8. B’s cap A/c Dr. 14,000
C’s cap A/c Dr. 4,667
To A’s cap A/c 18,667
(Being Net Effect of goodwill given)
9. B’s cap A/c Dr. 2,700
C’s cap A/c Dr. 900
To Provision for Doubtful Debt A/c 3,600
(Being raising of Provision by 4%)
10. A’s Capital A/c Dr. 1,49,000
To B’s Capital A/c 1,49,000
(Being amount payable to A paid by B)

A B C A B C
To P/L Adj A/c 21,000 14,000 7,000 By Bal b/d 1,50,000 1,00,000 5,0000
To Goodwill A/c 13,334 20,000 6,666 By P/L Adj A/c 6,000
To A’s cap.A/c 14,000 4,667 By P/L Adj a/c 12,000 18,000 6,000
To Provision for By Revaluation
Doubtful Debt 2,700 900 (profit) 2,667 4,000 1,333
To B’s cap.A/c *149,000 By B & C’s
To Cash A/c * 1,300 Cap.A/c 18,667
To Bal. c/d By A’s cap. A/c 149,000
(WN. 3) 225,000 75,000 By Cash A/c *36,900
183,334 277,000 94,233 183,334 277,000 94,233
320
Dr. Cash A/c Cr.

To Bal b/d 10,000 By B’s Cap. A/c 1,300
To C’s Cap. A/c 36,900 By Bal. c/d * 45,600
46,900 46,900
Balance Sheet of B & C

As on 31st March 2016 (after retirement of A)

Capital
B 225,000 Fixtures 39,800
C 75,000 Stock 170,000
Sundry Creditors 40,000 Debtors 90,000
Less: Provision for
Doubtful Debts (5,400) 84,600
Cash 45,600
340,000 340,000
WN. 1: Treatment of Goodwill
Average Profit = 15,000 + 23,000 + 25,000 + 35,000 + 42,000

5
= 28,000
⸫ Goodwill = 28,000 x 2yrs = 56,000
G/W raised
[old ratio = 2:3:1] 18,667 28,000 9,333
Cr Cr Cr
G/W w/off
[New Ratio = 3:1] NA 42,000 14,000
321
Dr Dr
Net Effect 18,667 14,000 4,667
Cr. Dr Dr
B’s cap A/c Dr 14,000 -

C’s cap A/c Dr. 4,667 -
To A’s Cap.A/c - 18,667
WN.3: Total Cap. = 300,000
3:1
B C
225,000 75,000
Q3. Journal Entries

1. B’s Capital A/c Dr. 49,500
(Being revaluation profit & goodwill due to A borne
By B & C in gaining ratio 11:4) WN.1
2. A’s Capital A/c Dr. 1,17,500
To A’s Loan A/c (50%) 58,750
To Bank A/c (50%) 58,750
(Being settlement of A’s claim on his retirement by
Payment of 50% in cash & transferring the balance to
his Loan A/c)
3. Bank A/c Dr. 73,750
(Being Cash brought in by continuing partners)WN4
322
Wn 1: Revaluation Profit & Goodwill Effect

Goodwill 100,000
Sundry Fixed Assets 30,000
Joint life Policy 5,000
135,000
A’s share = 135,000 x 5/10 = 67,500
Gaining Ratio
B 11:4 C
49,500 WN 2 18,000
WN. 2 Gaining Ratio = New Ratio - Old Ratio

B = 2/3 - 3/10 = 11/30
C = 1/3 - 2/10 = 4/30
WN. 3. Total Capital after retirement in PSR = 2:1 & maintaining Bank Balance = 25,000
Asset as per B/s 190,000
Bank (Additional) 15,000
205,000
Less: Bank Loan (40,000)
Sundry Creditors (30,000)
A’s Loan (58,750)
76,250
B 2:1 C
50,833 25,417
323
WN.4

A B C A B C
To A’s cap.A/c 49,500 18,000 By Bal. b/d 50,000 40,000 30,000
To Bank 58,750 By B’s cap 49,500
To A’s Loan A/c 58,750 By C’s cap 18,000
To Bal. c/d 50,833 25,417 By Bank a/c 60,333 13,417

WN3
117,500 100,333 43,417 117,500 100,333 43,417
Q4.
Case 1
Gaining Ratio = New Ratio - Old Ratio
A = 3/5 - ½ = 1/10
C = 2/5 - 1/5 = 2/10
Gaining Ratio = 1 : 2 ( A & C )
Case 2
W = 1/3 - 1/3 = NIL
A = 1/3 - 1/6 = 1/6
C = 1/3 - 1/6 = 1/6
Gaining Ratio = 1 : 1 ( A & C )
324
Case 3
Ratio of B & C = 15:9 = 5:3
New Ratio of A & C = 5:3
A = 5/8 - 25/49 = 45/392
C = 3/8 - 9/49 = 75/392

Gaining Ratio = 45 : 75 = 3:5 ( A & C )
Case 4
‘B’ surrendered 1/9th to A
‘B’ surrendered 8/9th to C
Gaining Ratio =1 : 8 ( A & C )
Q5.
Retiring Partner’s Loan A/c
1st year
Dr. Cr.

To Cash A/c [7,500 + 1,800] 9,300 By Capital A/c 30,000
To Bal c/d 22,500 By Int. A/c [30,000 x 6%] 1,800
31,800 31,800
2nd Year
To Cash A/c [7,500 + 1,350] 8,850 By Bal. b/d 22,500

To Bal. c/d 15,000 By Int. A/c [22,500 x 6%] 1,350
23,850 23,850
3rd Year
To Cash A/c [7,500 + 900] 8,400 By Bal. b/d 15,000

To Bal. c/d 7,500 By Int. A/c [15,000 x 6%] 900
15,900 15,900
325
4th Year
To Cash A/c [7,500 + 450] 7,950 By Bal. b/d 7,500

By Int. A/c [7,500 x 6%] 450
7,950 7,950
Q.6. Journal Entries

To Furniture A/c 10,000
To Inventory A/c 20,000
(Being Assets revalued)
2. K’s Capital A/c Dr. 15,000
L’s Capital A/c Dr. 9,000
M’s Capital A/c Dr. 6,000
(Being revaluation Loss distributed in 5:3:2)
3. Reserve’s A/c Dr. 50,000
To K’s Capital A/c 25,000
To L’s Capital A/c 15,000
To M’s Capital A/c 10,000
(Being reserves distributed in 5:3:2)
4. K’s Capital A/c Dr. 15,000
L’s Capital A/c Dr. 9,000
M’s Capital A/c Dr. 6,000
To Goodwill A/c 30,000
(Being old goodwill of balance sheet written off
In 5:3:2)
5. N’s Cap. A/c Dr. 15,000
To L’s cap. A/c 15,000
(Being gaining partner contribution to sacrificing
Partner for goodwill) WN.1
6. L’s Cap. A/c Dr. 72,000
To Cash A/c (50%) 36,000
326
To N’s Capital A/c 36,000

(Being 50% amt. due to ‘L’ paid in cash & balance
Retained in firm as capital of ‘N’)
7. M’s Capital A/c Dr. 14,000
To Bank A/c 14,000
(Being amount paid to ‘M’ to make his capital
Proportionate)
Particulars Rs. Rs. Rs. Rs. Particulars Rs. Rs. Rs. Rs.
K L M N K L M N
To
Revaluation 15,000 9,000 6,000 By bal. b/d 40,000 60,000 30,000
A/c (Loss)
To Goodwill By Reserve
15,000 9,000 6,000 25,000 15,000 10,000
A/c A/c
To L’s Cap. By N’s Cap.
15,000 15,000
A/c A/c
To Cash A/c By L’s Cap.
36,000 36,000
A/c
To N’s cap.
36,000
A/c
To Bank A/c 14,000
To Bal. c/d
35,000 14,000 21,000
(WN 2.)
65,000 90,000 40,000 36,000 65,000 90,000 40,000 36,000
327
Balance Sheet of M/s K, M, & N as on 1st April 2015

Capital Furniture 10,000
K 35,000 Trade Receivable 50,000
M 14,000 Inventory 30,000
N 21,000
Trade Payable 20,000

90,000 90,000
WN 1. Treatment of Goodwill
G/w = 50,000 K L M N
G/w raised 25,000 15,000 10,000 NA
(old Ratio) 5:2:3 Cr. Cr. Cr.
G/w W/off 25,000 NA 10,000 15,000

(New Ratio 5:2:3) Dr. Dr. Dr.
NIL 15,000 NIL 15,000

Net Effect Cr. Dr.
WN 2. : Capital Adjustment
K M N
5 : 2 : 3
35,000 14,000 21,000
328
UNIT 5: DEATH
Q1. Similar to Nov 2020 Exam sum

i) Ascertainment of N’s share of Profit
Average Profit = 42,000 + 39,000 + 45,000
3
= 14,000
N’s share in Profit = 14,000 x 2/5*
= 5,600
* PSR between B & N = ½ & 1/3 = 3:2
ii) Ascertainment of Goodwill

Avg. Profit = 42,000 + 39,000 + 45,000
3
= 42,000
Goodwill = 42,000 x 3 years
= 126,000
N’s share of Goodwill = 126,000 x 2/5
= 50,400
Dr. N’s Executors A/c Cr.

2016 2016
1/5 To N’s Loan A/c 128,000 1/1 By Capital A/c 60,000
1/5 By Reserve A/c 12,000
[30,000 x 2/5]
1/5 By B’s Cap. A/c 50,400
(share of Goodwill)
1/5 By P/L Suspense A/c 5,600
(share of Profit)
128,000 128,000
329
Q2. i.
Balance sheet of Firm to find out Capital of Partners

Capital (Bal. Fig) Furniture 18,000
A 60,000 Machine 72,000
B 36,000 Debtor 20,000
C 24,000 Cash 10,000
120,000 120,000
Total Capital = 120,000 - A (5/10) 60,000

- B (3/10) 36,000
- C (2/10) 24,000
ii) Int. on Cap to ‘B’ = 36,000 x 5% x 6/12 = 900

iii) Total Drawings = 600 p.m. x 6 mths = 3,600 = share of Profit
iv) Int. on Drawings
Jan = 600 x 6% x 6/12 = 18
Feb = 600 x 6% x 5/12 = 15
Mar = 600 x 6% x 4/12 = 12
April = 600 x 6% x 3/12 = 9
May = 600 x 6% x 2/12 = 6
June = 600 x 6% x 1/12 = 3
63
v) B’s share in Separate life Policy

Share in own Policy = 60,000 x 3/10 = 18,000
Share in A’s Policy = 50,000 x 50% x 3/10 = 7,500
Share in C’s Policy = 30,000 x 40% x 3/10 = 3,600
This will be contributed

by A & C in gaining ratio = 5:2*
330
A’s Cap. A/c (11,100 x 5/7) Dr. 7,929

C’s Cap. A/c (11,100 x 2/7) Dr. 3,171
To B’s Cap. A/c 11,100
* gaining Ratio = NR - OR
A = 5/7 - 5/10
= 15/70
C = 2/7 - 2/10
= 6/70
gaining Ratio = 15: 6 or 5:2
vi) Treatment of Goodwill

G/w = 3,600 x 2 = 7,200
B’s share = 7,200 x 3/10 = 2,160

Contributed by A & C
In 5:2 gaining Ratio
A’s Cap. A/c (2,160 x 5/7) Dr. 1,543
C’s Cap. A/c (2,160 x 2/7) Dr. 617
Dr. B’s Capital A/c Cr.

To Drawings [ iii ] 3,600 By Bal. b/d [ i ] 36,000
To Int. on Drawings [ iv ] 63 By Int. on Capital [ ii ] 900
By P/L Suspense A/c [ iii ] 3,600
To B’s
Executors A/c 68,097 By Life Policy A/c 18,000
By A’s Cap. [ v ] 7,929
By C’s cap. [ v ] 3.171
By A’s cap. [ vi ] 1,543
By C’s cap. [ vi ] 617
71,760 71,760
331
Q3.
Dr. P & L Appropriation A/c Cr.

To Int. on Capital A/c By profit & Loss A/c 3,110
(For 2 mths) (Profit for 2 mths)
A 100
B 60
C 50 210
To Salary A/c
(For 2 mths)
A 600
B 500 1,100
To Profit trf to
A (2/4) 900
B (1/4) 450
C (1/4) 450 1,800
3,110 3,110

A B C A B C
To A’s Cap A/c 3,920 1,680 By Bal. b/d 10,000 6,000 5,000
To Loan to A 4,000 By Int. on 100 60 50
Cap.A/c
To A’s Execut - 19,500 By Salary A/c 600 500
ors A/c By P/L App. A/c 900 450 450
By B’s cap. 3,920
By C’s cap. 1,680
To Bal.c/d 6,240 6,970 By Joint Life 6,300 3,150 3,150
Policy
23,500 10,160 8,650 23,500 10,160 8,650
332
Dr. A’s Executors A/c Cr.

To Bank A/c 19,500 By A’s cap.A/c 19,500
19,500 19,500
Balance Sheet of B & C as on 28th Feb 1991
LIABILITES Rs. ASSETS Rs.

Capital Sundry Debtors 3,900
B 6,240 Cash 13,100
C 6,970 [20,000 + 12,600 – 19,500]
Crediotrs 3,790
17,000 17,000
WN 1: Treatment of Goodwill
Avg. Profit = 5,500 + 4,800 + 6,500
3
= 5,600
Goodwill = 5,600 x 2 = 11,200
A’s share = 11,200 x 2/4 = 5,600
Contributed by gaining
Partners (B & C) in 7:3*
C’s Cap. A/c Dr. 1,680
To A’s cap. A/c 5,600
* gaining Ratio = NR - OR
B = 3/5 - ¼ = 7/20
C = 2/5 - 1/4 = 3/20
333
WN2:
Dr. Joint Life Policy Reserve A/c Cr.

To Joint Life Policy A/c 3,600 By Balance b/d 3,600
3,600 3,600
Dr. Joint Life Policy A/c Cr.

To Bal b/d 3,600 By Joint Life Policy Res. A/c 3,600
To A’s Cap.A/c (2/4) 6,300 By Bank A/c 12,600
To B’s Cap. A/c (1/4) 3,150
To C’s cap. A/c (1/4) 3,150 12,600
16,200 16,200
Q4.
Case 1:
Date Particulars L. F. Debit Credit

1. Bank A/c Dr. 100,000
To Joint Life Policy A/c 100,000
(Being Value received on death)
2. Joint life Policy A/c Dr. 100,000
To A’s Cap.A/c 50,000
(Being JLP amount distributed in 5:3:2)
334
Case 2:

1. Bank A/c Dr. 100,000
(Being amount distributed in 5:3:2) WN 1
WN1:
Dr. Joint Life Policy A/c Cr.

To Bal b/d 10,000 By Bank A/c 100,000
To C’s cap. A/c 18,000 90,000
100,000 100,000
335

1. Bank A/c Dr. 100,000
(Being balance in JLP distributed in 5:3:2)
3. Joint life Policy Reserve A/c Dr. 10,000
(Being JPL Reserve distributed in 5:3:2)
336
PAST Exam SOLUTION
May 2018
Q.1
M/S A, B & C
Dr. Revaluation Account Cr.
To Furniture A/c 40,000 By Office 47,000
To Stock A/c 50,000 equipment A/c
To JLP A/c 10,000 By Building A/c 5,00,000
To Partner’s 400 By PDD A/c 15,000
Capital Profit A/c
A 2,31,000
B 1,54,000
C 77,000 4,62,000
5,62,000 5,62,000
Dr. Cash Account Cr.
To Balance b/d 1,50,000 By Balance c/d 1,50,000
1,50,000 1,50,000
337
Dr. Partners' Capital Accounts Cr.
Particulars A B C Particulars A B C
To B’s Cap. A/c 90,000 - 30,000 By Balance b/d 8,00,000 4,20,000 4,00,000
To B’s Loan A/c - 8,14,000 - By General
Reserve A/c 1,80,000 1,20,000 60,000
To Balance c/d 11,21,000 - 5,07,000 By A’s Cap A/c - 90,000 -
By C’s Cap A/c - 30,000 -
By Revln A/c 2,31,000 1,54,000 77,000
12,11,000 8,14,000 5,37,000 12,11,000 8,14,000 5,37,000
M/s A, B & C
Balance Sheet as at 1st April 2018
Partner’s Capital Building 10,00,000
Accounts: Add : Revaluation 5,00,000 15,00,000
A 11,21,000 Furniture 2,40,000
C 5,07,000 16,28,000 Less : Revaluation (40,000) 2,00,000
Creditors 3,70,000 Office Equipment 2,80,000
Loan 8,14,000 Add : Revaluation 47,000 3,27,000
Stock 2,50,000
Less : Revaluation (50,000) 2,00,000
Debtors 3,00,000
Less : PDD (15,000) 2,85,000
JLP 1,60,000
Less : Revaluation (10,000) 1,50,000
28,12,000 28,12,000
Working Note - 1
1. Calculation of PSR
Partners A B C
Old Ratio 3/6 2/6 1/6
New Ratio 3/4 - 1/4
338
Average Profit Method
Goodwill of Firm =

= x 3

= 3,60,000
3. Appropriation of Goodwill
Goodwill ` Ratio A B C
Raised 3,60,000 3:2:1 Cr 1,80,000 Cr 1,20,000 Cr 60,000
Written Off 3,60,000 3:0:1 Dr 2,70,000 - Dr 90,000
Dr 90,000 Cr 1,20,000 Dr 30,000
A’s Capital A/c Dr. 90,000

To B’s Capital A/c 1,20,000
NOV 2018
Q.2
M/S Dinesh, Ramesh & Naresh
Particular ` ` Particular ` `
To Furniture By Closing Stock A/c 1,400
& Fixtures A/c 720 By Land &
To PDD A/c 535 Building A/c 5,600
To Partner’s
Capital A/c
Dinesh 2872.5
Ramesh 1915
Naresh 957.5 5,745
7,000 7,000
339
To Balance b/d 8,000 By Balance c/d 10,200
To Suresh’s Capital A/c 2,200
10,200 10,200
Particulars Dinesh Ramesh Naresh Suresh Particulars Dinesh Ramesh Naresh Suresh
To Sundries - - 1,500 4,500 By Bal b/d 15,000 15,000 10,000 -
To Bal c/d 26972.5 21015 10,757.5 3,500 By Cash
Bank A/c - - - 8,000
By Ram A/c 700 - - -
By Sundries 4,500 1,500 - -
By Reserve 3,900 2,600 1,300 -
By Revln A/c 2872.5 1915 957.5 -
26,972.5 21,015 12,257.5 8,000 26,972.5 21,015 12,257.5 8,000
340
Dinesh, Ramesh, Naresh and Suresh

Partner’s Capital Land & Building 37,000
Accounts: Add : Revaluation 5,600 42,600
Dinesh 26,972.5 Furniture & Fixture 7,200
Ramesh 21,015 Less : Revaluation (720) 6,480
Naresh 10,757.5 Closing Stock 12,600
Suresh 3,500 62,245 Add : Revaluation 1,400 14,000
Trade Payables 22,500 Trade Receivable 10,700
O/s Liabilities 2,200 Less : PDD (535) 10.165
Less : Ram (700) 1,500 Cash in hand 2,800
Cash at Bank 10,200

86,245 86,245
Working Note - 1
Partners Dinesh Ramesh Naresh Suresh
Old Ratio 3/6 2/6 1/6 -
New Ratio 1/4 1/4 1/4 1/4
Sacrifice Ratio -

6/24 2/24 (2/24)
Goodwill ` Ratio Dinesh Ramesh Naresh Suresh

Raised 18,000 3 : 2 : 1 : 0 Cr 9,000 Cr 6,000 Cr 3,000 -
Written Off 18,000 1 : 1 : 1 : 1 Dr 4,500 Dr 4,500 Dr 4,500 Dr 4,500
Cr 4,500 Cr 1,500 Dr 1,500 Dr 4,500
Naresh A/c Dr. 1,500

Suresh A/c Dr. 4,500
To Dinesh A/c 4,500
To Ramesh A/c 1,500
341
May 2019
Q.3
M/S Monika, Yedhant & Zoya
To Stock in By Land & 25,000
trade A/c 1,500 Building A/c
To Partner’s By RDD A/c 2,000
Capital Profit A/c
Monika 8,500
Yedhant 8,500
Zoya 8,500 25,500
27,000 27,000
To Balance b/d 12,000 By Balance c/d 12,000
12,000 12,000
Particulars Monika Yedhant Zoya Particulars Monika Yedhant Zoya

To Zoya. A/c 4,375 4,375 - By Balance b/d 1,00,000 75,000 75,000
To Zoya’s legal By Reserve A/c 4,000 4,000 4,000
replacement A/c - - 98,125 By Monika A/c - - 4,375
To Balance c/d 1,08,125 83,125 - By Yedhant A/c - - 4,375
By P & L
Suspense A/c - - 1,875
By Revln A/c 8,500 8,500 8,500
1,12,500 87,500 98,125 1,12,500 87,500 98,125
342
M/s Monika and Yedhant

Partner’s Capital Land & Building 1,50,000
Accounts: Add : Revaluation 25,000 1,75,000
Monika 1,08,125 Investment 65,000
Yedhant 83,125 1,91,250 Stock in trade 15,000
Creditors 20,000 Less : Revaluation (1,500) 13,500
Legal Repetitive 98,125 Trade Receivable 35,000
Cash in hand 7,000
Cash at Bank 12,000
P & L Suspense 1,875

3,09,375 3,09,375
Working Note
Partners Monika Yedhant Zoya
Old Ratio 1/3 1/3 1/3
New Ratio 1/2 1/2 -

Average Profit Method
Goodwill of Firm =

= x1

= 26,250

Goodwill ` Ratio Monika Yedhant Zoya

Raised 26,250 1:1:1 Cr 8,750 Cr 8,750 Cr 8,750
Written Off 26,250 1:1:0 Dr 13,125 Dr 13,125 -
Dr 4,375 Dr 4,375 Cr 8,750
343
Monika’s Capital A/c Dr. 4,375

Yedhant’s Capital A/c Dr. 4,375
To Zoya’s Capital A/c 8,750
4. Calculation of proportionate profit for Zoya for Current year

Average Profit for proceeding 3 years = = 22,500

=

= 1,875
NOV 2019
Q.4
(i) Ascertainment of Swarup's Share of Profit

2016 51,000
2017 39.000
2018 45,000
Tots Profit 1,35,000
Average Profit 45,000
4 months Profit 15,000
Swarup's Share in Profit 6,000
(2/5th of `15,000)
(ii) Ascertainment of Value of Goodwill

2016 51,000
2017 39.000
2018 45,000
Tots Profit 1,35,000
Average Profit 45,000
Goodwill - 3 years
Purchase of Average Profit 1,35,000
Swarup's Share of goodwill 54,000
(2/5 of `1,35,000)
344
Working Note:
ProfiI sharing ratio between Arun and Swarup = 1/2, 1/3, = 3 : 2, Therefore Swarup’s
share of profit = 2/5
Dr. Swarup’s Executors Account Cr.

2019 2019
May 1 To Swarup's Jan. 1 By Capital A/c 60,000
Loan A/c 1,38,000 May 1 By Reserve A/c 18,000
(2/5 of `45,000)
May 1 By Arup’s Capital A/c 54,000
(Share of
Goodwill)
May 1 By P & L
Suspense A/c 6,000
(Share of Profit)
1,38,000 1,38,000
345
TEST PAPER SOLUTION
Q.1
Workings Note:
`
Total profit for 3 years : ` (30,800 + 30,200 + 31,000) 92,000
Add: Interest on drawings for 3 years :
@ 8% on ` (20,000 + 30,000 + 37.500) 7,000
Total profit for 3 years after interest on Drawings 99,000
Therefore, Goodwill = ` 99,000 / 3 x 2 = ` 66,000.

Statement Showing Required Adjustment for Goodwill
Partners A B C
Right of goodwill before admission (3 : 2) (`) 39,600 26,400 -
Right of goodwill after admission (1: 1:1) (`) 22,000 22,000 22,000
Sacrifice (-) Gain (+) (`) (-)17,600 (-) 4,400 (+)22,000
Required journal entry :
C Capital Account Dr. 22,000

To A Capital Account 17,600
To B Capital Account 4,400
(Being the required adjustment for goodwill)
346
Profit and Loss Appropriation Account

Dr. for the year ended 31st December, 2010 Cr.
To Share of Profit A/c: By Net Profit b/d 60,000
A 21,760 By Interest on
B 21,760 Drawings A/c
C 21,760 65,280 A 1,920
B 1,760
C 1,600 5,280
65,280 65,280
Date Particulars A B C Date Particulars A B C

2010 2010
Jan.1 To A Cap. A/c - - 17,600 Jan.1 By Bal. b/d 45,000 25,000 -
Jan.1 To B Cap. A/c - - 4,400 Jan.1 By Bank A/c - - 52,000
Dec 31 To Drawings A/c 24,000 22,000 20,000 Jan.1 By C Cap A/c 17,600 4,400 -
Dec 31 To Interest on Dec 31 By Share of

Drawings A/c 1,920 1,760 1,600 Profit A/c 21,760 21,760 21,760
Dec 31 To Bal. b/d 58,440 27,400 30,160
84,360 51,160 73,760 84,360 51,160 73,760
347
Q.2
Working Notes:
(a) Ascertainment of Goodwill and the Required Adjustment
Year Profit (`) Weight `

2007 45,250 1 45,250
2008 46,000 2 92,000
2009 52,000 3 1,56,000
6 2,93,250
Weighted Average Profit = 2,93,250

6
= 48,875
Capital + Current + Loan Accounts

= ` 95,000 + ` 16,500 + ` 20,000 = ` 1,31,500
Required return = 25% × ` 1,31,500 = ` 32,875
Weighted average profit ` 48,875
Less: Required return ` 32,875
` 16,000
\ Goodwill is ` 16,000 × 3 = ` 48,000
Partners A B C
Right of goodwill before A’s
death (5: 4 : 3) (`) 20,000 16,000 12,000
Right of goodwill after
A’s death (7 : 5) (`) - 28,000 20,000
Gain (Cr.) Sacrifice (Dr.) (`) (Cr.) 20,000 (Dr.) 12,000 (Dr.) 8,000
348
In the Books of the firm

To Stock A/c 2,700 By Accumulated
To Provision for bad Depreciation A/c (Plant) 2,000
debts A/c 400 By Partner’s capital A/c
To Valuer’s A 750
charges A/c 700 B 600
C 450 1,800
3,800 3,800
To Revaluation A/c 750 600 450 By Bal. b/d 42,500 30,000 22,500
To A Cap. A/c - 12,000 8,000 By B Cap. A/c 12,000 - -
(Goodwill) (Goodwill)
To Executors of A 61,750 - - By C Cap. A/c 8,000 - -
To Bal. c/d 17,400 14,050 (Goodwill)
62,500 30,000 22,500 62,500 30,000 22,500
Dr. Executors of A Account Cr.
To Bank A/c 25,000 By A capital A/c 61,750
To Balance c/d 61,000 By A Current A/c 4,250
By A Loan A/c 20,000
86,000 86,000
349
Balance Sheet as at 1st January, 2010 (after A’s death)
Capital Accounts: Leasehold Premises 40,000
B 17,400 Less : Accumulated
C 14,050 31,450 Depreciation 4,000 36,000
Current Accounts: Plant 46,000
B 6,500 Less : Accumulated
C 5,750 12,250 Depreciation 11,500 34,500
Executors of A 61,000 Stock 24,300
Sundry Creditors Debtors 21,000
(including valuer’s Less : Provision for
charges of `700) 21,950 Doubtful debts 4,150 16,850
Bank 15,000
(`40,000 – 25,000)
1,26,650 1,26,650
Q.3
To Investment A/c 2,500 By Land & Building A/c 20,000
To Partner’s capital A/c By Stock A/c 5,000
(Revaluation profit)
A (2/5) 9,000
B (2/5) 9,000
C (1/5) 4,500
25,000 25,000
350
Partners' Capital Accounts
To C’s Cap A/c 5,340 5,340 - By Bal. b/d 60,000 60,000 40,000
To 15% C By General
Loan A/c - - 64,680 Reserve 16,000 16,000 8,000
To Bal. c/d 79,660 79,660 By Revaluation A/c 9,000 9,000 4,500
By P & L Susp A/c - - 1,500
By A’s Cap A/c - - 5,340
By B’s Cap A/c - - 5,340
85,000 85,000 64,680 85,000 85,000 64,680
Balance Sheet A & B as at 31st March 2010
Capital Accounts: Land & Building 1,20,000
A 79,660 Investment 10,000
B 79,660 Stock 30,000
15% C Loan 64,680 Debtor 40,000
Creditors 10,000 Cash at Bank 22,500
Cash in Hand 10,000
Profit & Loss Suspense A/c 1,500
2,34,000 2,34,000
Working Note :
1. Treatment of Goodwill
Average Profit of 5 years = 20,000 + 23,500 + 30,000 + 27,500 + 32,500
5
= 26,700
\ Goodwill = 26,700 × 2 yrs
= 53,400
351
Goodwill raised (2 : 2 : 1) 21360 Cr 21360 Cr 10680 Cr
Goodwill w/off (2 : 2) 26700 Dr 26700 Dr -
Net Effect 5340 Dr 5340 Dr 10680 Cr
A’s Capital Account Dr. 5340

B’s Capital Account Dr. 5340
To C’s Capital Account 10680
2. C’s Share of Profit

Average Profit of last 3 years = 30,000 + 27,500 + 32,500
3
= 30,000
3
\ Profit for Jan, Feb, Mar 2010 = 30,000 × 12
= 7,500
1
C’s Share of Profit = 7,500 × 5
= 1,500
Profit and Loss Suspense A/c Dr. 1,500

To C’s Capital Account 1,500
352
5 Final Accounts of not -

for profit organsations
THEORY SECTION
Generally the term trading means the exchange of goods and services in order to earn
profits. The sole trading concern, partnership firms and other types of organisation
commence business with the view of earning profits. Therefore, they are known as trading
concerns. However, there are some institutions like hospitals, educational institutions,
co-operative societies, clubs etc., which are non-trading organisations. It means that
these institutions are established with the object of providing services and not with the
object of profit making.
At the end of the accounting year, a non-trading institution also prepares its final
accounts, which includes :
1. Receipts and Payments Account
2. Income and Expenditure Account
3. Balance Sheet (Statement of affairs)
Treatment of Some Important Items :
Receipt of NPO
Credit to income and expenditure Balance sheet (liability side) (Non recurring)
account (recurring) 1. Donation Received for capital
1. Ordinary / General donations expenditure
2. Membership Fees / Subscriptions 2. Donation Received for special purpose
3. Amount received for special 3. Legacy
activity e.g. charity show 4. Life membership fees
collection 5. Endowments fund
4. Entrance fees (if amount is small) 6. Entrance fees
353
1. Donation
(a) Special purpose donation : (received for specific purpose) If donation has
been received to meet some capital expenditure such as purchase of books
or equipment or building, it is shown in the liability side of Balance Sheet. If
donation is received to meet some one time revenue expenses and such expenses
have not been incurred during the current financial year, such donation will
also be shown on the liability side of Balance sheet but in case expenses have
been incurred any deficit or surplus is shown in Income & Expenditure Account
(Amount raised for special activity).
(b) General donation : If donation received is not for any specific purpose, this is
shown as income in Income & Expenditure Account.
2. Legacy
When any property or amount is received under a will of deceased person, it is

treated as capital receipt shown in the liability side of the Balance Sheet (add to
capital fund)
3. Entrance or Admission Fee

Any entry fees received from the members as admission fee or entrance fees is
treated as capital receipt and shown in the liability side of the Balance Sheet.
However, small amount may be shown as income in income & expenditure account.
If question is silent then take it as capital receipt and add to capital fund.
4. Life Membership Fee

If one time subscription is received from a member for his whole life, such subscription
cannot be treated as income of one year. This item can be treated in one of the
following manner :
(a) Total amount received during the year may be credited to "Life Membership Fee
A/c' and shown in the Liability side of the Balance Sheet. In case of death of a
member, his subscription will be transferred to accumulated fund account.
354
(b) Out of the total of life membership fee received an amount equal to normal
annual subscription may be transferred to credit of Income and Expenditure
Account and balance is shown in Liability side of Balance Sheet until total
amount is exhausted. However, if a member dies before his total subscription
has been exhausted, his unexhausted amount is transferred to accumulated
fund account.
In absence of any information life membership fees is to be added to capital

fund.
5. Special Funds
Sometimes special funds are created to meet some recurring expenses such as
sports fund, prize fund etc. Any amount received for such purpose is credited to the
relevant fund account. Any expenses incurred for such purposes are debited to fund
account. If amount of fund has been invested in some securities, income earned on
such securities is also credited to Fund Account. Closing balance of fund is shown in
the Liability side of the Balance Sheet and corresponding investments in the Assets
side of Balance Sheet.
If donor, instead of paying cash, has given some securities or some other readily
saleable asset the value of such asset should be credited to the specific fund
account for which such asset has been received. Amount of fund and corresponding
investments will appear in the liabilities and assets side of Balance Sheet respec-
tively.
6. Endowment Fund
It is the donation received and only income from such donation is to be used for
certain specific purpose. In such cases income relating to such special fund should be
added to these funds on liability side and all related expenses should be deducted
from such fund.
355
7. Grants
It is a financial help received from some public funds as local bodies or other
government body, unless it is received for some special purpose, it is treated as
revenue receipt.
Distinguish between Receipt and Payment A/c & Income and Expenditure A/c.
Receipt and Payment A/c Income and Expenditure A/c

1. It is a Real A/c It is a Nominal A/c
2. Shows Cash / Bank Balance Shows Surplus / Deficit
3. Both Capital and Revenue items are Only Revenue items of current year
taken are taken
4 It start with opening balance and It does not have opening
difference between Dr. and Cr. side balance and difference between
shows closing balance of cash and debit and credit side shows surplus
Bank or Deficit
5. Dr. Side = Receipt Dr. Side = Expense
Cr. Side = Payment Cr. Side = Income
6. Only Cash transactions are entered. Both Cash and Non – Cash
All transactions relating to current, transactions (Depreciation) are
past and future are entered entered. Only current years
transactions are entered
Accounting for educational institutions
356
Meaning of a Fund
The term fund is strictly applicable to the amount collected for special purpose when
these are invested e.g. prize fund, Building fund etc. In other cases when amount
collected is not invested in securities till the time it is used the word 'account' is more
appropriate e.g. Building collection account.
Fund based accounting

Meaning -
It involves preparation of financial statements on fund wise based i.e. separate

ledgers are maintained for each fund
Purpose-
A fund may be created
a) for asset creation - e.g. purchase or construction of any asset like building.
b) for special activities - e.g.distribution of prizes
Journal Entries relating to fund
(A) Receipt / Investment entries (same for all funds whether fund related to capital
expenditure like building fund or other funds like prize fund)
(a) Receipt of Donations -

To Respective funds xx
(b) On investment of money received on funds

Respective fund investment A/c Dr. xx
To Cash / Bank xx
(c) On receipt / accrual of interest on investment

Accrued Interest A/c Dr. xx

To Respective Fund xx
357
(B) Expenditure / spending out of fund (capital expenditure related to fund e.g.
building fund)
(a) On Capital expenditure being due

Capital work in progress A/c Dr. xx
To Contractor A/c xx
(b) On making payment to contractor

Contractor A/c Dr. xx
To Cash / Bank xx
(c) On asset being ready / completed

Respective Asset (Asset Value) A/c Dr. xx
To Capital work inprogress xx
Respective Fund (Asset Value) A/c Dr. xx

To General Fund / CapitalFund A/c xx
(C) Expenditure / spending out of fund (For funds other than capital exprndiure
fund e.g. prize fund)

(a) On Expenditure being made
Respective Fund A/c Dr. xx
To Bank xx
358
CLASSWORK SECTION
Q. 1. The following is the Receipts and Payments Account of Free Medical Society for
the year ended 31st March, 2020.
Receipts ` Payments `
To Cash (1.4.19) 7,000 By Payment for medicines 30,000
To Subscriptions 50,000 By Honorarium to doctors 10,000
To Donations 14,500 By Salaries 27,500
To Interest on 7% 7,000 By Sundry Expenses 500
Investments
To Charity show proceeds 10,000 By Equipment purchased 15,000
By Charity show expenses 1,000
By Cash (31.3.20) 4,500
88,500 88,500
Additional Information :
Particulars On 1.4.19 On 31.3.20

(i) Subscription due 500 1,000
(ii) Subscription Received in advance 1,000 500
(iii) Stock of medicines 10,000 15,000
(iv) Amounts due to medicines suppliers 8,000 10,000
(v) Value of Equipments 21,000 30,000
(vi) Value of Buildings 40,000 38,000
(vii) Outstanding salaries 3,000 5,000
(viii) Prepaid Sundry Expenses 100 200
You are required to prepare :

(a) Income and Expenditure Account for the year ended 31st March 2020, and
(b) Balance sheet as on that date.
359
Q.2. The Sportwriters Club gives the following Receipts and Payments Account for the
year ended March 31, 2020:
To Balance b/d 4,820 By Salaries 12,000
To Subscriptions 28,600 By Rent and electricity 7,220
To Miscellaneous income 700 By Library books 1,000
To Interest on Fixed deposit 2,000 By Magazines and 2,172
newspapers
By Sundry expenses 10,278
By Sports equipments 1,000
By Balance c/d 2,450
36,120 36,120
Figures of other assets and liabilities are furnished as follows:
As at March 31
` 2019 ` 2020
Salaries outstanding 710 170
Outstanding rent & electricity 864 973
Outstanding for magazines and newspapers 226 340
Fixed Deposit (10%) with bank 20,000 20,000
Interest accrued thereon 500 500
Subscription receivable 1,263 1,575
Prepaid sundry expenses 417 620
Furniture 9,600 ?
Sports equipments 7,200 ?
Library books 5,000 ?
The closing values of furniture and sports equipments are to be determined after
charging depreciation at 10% and 20% p.a. respectively inclusive of the additions, if
any, during the year. The Club's library books are revalued at the end of every year
and the value at the end of March 31, 2020 was ` 5,250. Required
From the above information you are required to prepare:

(a) The Club's Balance Sheet as at March 31, 2019;
(b) The Club's Income and Expenditure Account for the year ended March 31, 2020.
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(c) The Club's Closing Balance Sheet as at March 31, 2020.
Q.3. From the following data, prepare an Income and Expenditure Account for the year
ended 31st December, 2020, and Balance Sheet as at that date of the Mayura
Hospital. Receipts and Payments Account for the year ended 31 December, 2020
Receipts ` ` Payments ` `
To Balance b/d By Salaries :
Cash 400 (` 3,600 for 2019) 15,600
Bank 2,600 3,000 By Hospital Equipment 8,500
To Subscriptions : By Furniture purchased 3,000
For 2019 2,550 By Additions to Building 25,000
For 2020 12,250
For 2021 1,200 By Printing & Stationery 1,200
To Government Grant : By Diet expenses 7,800
For building 40,000 By Rent and rates
For maintenance 10,000 (`150 for 2021) 1,000
To Fees from sundry 2,400 By electriciy & water chg 1,200
Patients
To Donations (not to be 4,000 By office expenses 1,000
capitalised) By Investments 10,000
To Net collections from By Balances :
benefit shows 3,000 Cash 700
Bank 3,400 4,100
78,400 78,400
Additional information : `
Value of building under construction as on 31.12.2020 70,000
Value of hospital equipment on 31.12.2020 25,500
Building Fund as on 1.1. 2020 40,000
Subscriptions in arrears as on 31.12.2019 3,250
Investments in 8% Govt. securities were made on 1st July, 2020.

Amount of ` 500 towards subscription for 2019 is to be written off.
361
Q. 4. The Receipts and Payments account of Trustwell Club prepared on 31st March,
2020 is as follows.
Dr. Receipts and Payments Account Cr.
Receipts Amount Payments Amount

` `
To Balance b/d 450 By Expenses (including 6,300
payment for sports material
` 2,700)
To Annual income from
subscription 4,590
Add: Outstanding of last year By Loss on sale of furniture 180
received this year 180 (WDV ` 450)
4,770
Less: Prepaid of last year (90) 4,680
To Other fees 1,800 By Balance c/d 90,450
To Donation for building 90,000
96,930 96,930
Additional information:
Trustwell club had balances as on 1.4.2019:
Furniture ` 1,800; investment at 5% ` 27,000; Sports material ` 6,660;
Balance as on 31.3.2020 ; subscription receivable ` 270; Subscription received in
advance ` 90;
Stock of sports material ` 1,800.
Do you agree with above receipts and payments account? If not, prepare correct
receipts and payments account and income and expenditure account for the year
ended 31st March, 2020 and balance sheet as on that date.
362
Q. 5. The following is the Receipts and Payments Account of Apollo Club in respect of the
year to 31st March, 2020 :
Receipts and Payments Account for the year ended 31st March 2020
Receipt ` Payments `
1.4.19 To Balance b/f 31.3.20 By Salaries 3,000
Cash in Hand 2,000 By Stationery 1,000
31.3.20 To Subscriptions : By Rates & Taxes 300
2018-19 3,000 By 8% Securities at 5,000
par
2019-20 4,000 By Sundry Expenses 200
2020-21 1,000 8,000 By Telephone 1,500
Charges
To Profits on Sports 3,000 By Balance c/d
To Interest on 8% 1,000 By Cash in Hand 3,000
Securities
14,000 14,000
The following additional facts are ascertained :

(a) There are 500 members, each paying an annual subscription of ` 10, ` 3,500
being in arrears for 2018-19 at the beginning of 2019-20. During 2018-19,
subscriptions were paid in advance by 30 members for 2019-20..
(b) Stock of stationery at 31st March, 2019 was ` 400 and at 31st March, 2020 `
500.
(c) At 31st March, 2020 the Rates and Taxes were prepaid to the following 31st
January, the yearly charge being ` 300.
(d) A quarter’s charge for telephone is outstanding, the amount accrued being `
300. The charges for each quarter is same both for 2018-19 and 2019-20.
(e) Sundry expense accruing at 31st March, 2019 were ` 50 and at 31st March
2020 ` 60.
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(f) At 31st March, 2019 Building stood in the books at ` 30,000 and it is required
to write off depreciation at 10% p.a.
(g) Value of 8% Securities at 31st March, 2019 was ` 15,000 which was purchased
at that date at par, additional securities worth ` 5,000 are purchased on 31st
March, 2020.
You are required to prepare -

(1) An Income and Expenditure Account for the year ended 31st March, 2020 and
(2) A Balance Sheet as at that date.
Q. 6. ‘Citizen Club’ was registered in a city and the accountant prepared the following
Receipts and Payments Account for the year ended March. 31, 2020 and showed a
deficit of ` 14,520.
` `
Receipts :
Subscriptions 62,130
Fair Receipts 7,200
Variety Show Receipts (net) 12,810
Interest 690
Bar Collection 22,350
Cash spent more 1,000 1,06 180
Payments :
Premises 30,000
Honorarium to Secretary 12,000
Rent 2,400
Sundry Expenses 5,350
Wages 2,520
Fair Expenses 7,170
Bar Purchases-payments 17,310
Repairs 960
New Car (less proceeds of old car ` 9,000) 37,800 1,20,700
Deficit 14,520
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The additional information could be obtained :
1.4.2019 31. 3.2020

` `
Cash in hand 450 Nil
Bank Balance as per Pass Book 24,690 10,440
Cheque issued not presented for Sundry Expenses 270 90
Subscription due 3,600 2,940
Premises at Cost 87,000 1,17,000
Accumulated depreciation on Premises 56,400 ?
Car at Cost 36,570 46,800
Accumulated depreciation on Car 30,870 ?
Bar Stock 2,130 2,610
Creditors for Bar Purchases 1,770 1,290
Cash overspent represent honorarium to secretary not withdrawn due to Cash

deficit. His annual honorarium is ` 12,000. Depreciation on premises and car is to
be provided at 5% and 20% on written down value.
You are required to prepare the correct Receipts and Payments Account, Income and
Expenditure Account and Balance Sheet as at March 31, 2020.
Q. 7
(a) Following information of TT club is related to year ended 31/3/20.
1.
1/4/2019 31/3/2020
Stock of sports material 75,000 1,12,500
Amount due for sports
Material 67,500 97,500
Subscription due 11,250 16,500
Subscription received in advance 9,000 5,250
2. Subscription received during the year = 3,75,000

3. Payment of sports material = 2,25,000
prepare sports material and subscription A/c & show how it will appear
in balance sheet.
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Q. 7 (b) During 2020, subsciption received in cash is ` 42,000. It include ` 1,600 for
2019 and ` 600 for 2021. Also ` 3,000 has still to be received for 2020.

Reuired
Calculate the amount to be credited to income and expenditure account in
respect of subsciption and show ledger account.
Q. 7 (c) Salaries paid during 2020 were ` 23,000. The following further information is
available:
`
Salaries unpaid on 31st March 2019 1,400
pre - paid on 31st March 2019 400
unpaid on 31st March 2020 1,800
pre - paid on 31st March 2020 600
Required
Calculate the amount to be debited to income and expenditure account in
respect of salaries and also show necessary ledger accounts.
Q. 7 (d) During the year ended 31st March, 2020, Sachin Cricket Club received subsciption
as follows
`
For year ending 31st March, 2019 12,000
For year ending 31st March, 2020 6,15,000
For year ending 31st March, 2021 18,000
Total 6,45,000
There are 500 members and annual subscription is ` 1,500 per member.

On 31st March, 2020, a sum of ` 15,000 was still in arrears for subscriptions
for the year ended 31st March, 2019.
Ascertain the amount of subscriptions that will appear on the credit side of
Income and Ex- penditure Account for the year ended 31st March, 2020. Also
366
show how the items would appear in the Balance Sheet as on 31st March,
2019 and the Balance Sheet as on 31st March, 2020.
Q.8. (a) Noida School Maintains separate building fund. As on 31.3.2019, balance of
building fund was ` 10,00,000 and it was represented by fixed deposit (15%
per annum) of ` 6,00,000 and current account balance of ` 4,00,000. During
the year 2019-20, the school collected as donation towards the building fund
` 5,60,000 and transferred 40% of development fees collected `22,56,500 to
building fund. Capital work progress as on 31st March, 2019 was ` 8,25,000
for which contractors’ bill upto 75% was paid on 14.4.2019. The extension of
building was finished on 31.12.2019 costing ` 7,25,000 for which contractors’
bill was fully met. It was decided to transfer the cost of completed building (`
15,50,000) to the corresponding asset account.
You are required to pass journal entries to incorporate the above transaction
in the books of Noida School of the year 2019 - 20
Q.8. (b) A club provide following data relating to prize fund as on 31st March 2020.
Prize fund balance as on 1/4/19 ` 25,000

Prize fund investment as on 1/4/19 ` 20,000
Interest received during the year
for above investment `1,000
Prizes given during the year ` 2,000
Donation received towards above
fund during the year ` 5,000
Give journal entries relating to transactions given above & show an extract of
balance sheet as on 31st March 2020 incorporating the above data.
367
Q. 9. The following is the Income and Expenditure account of Bombay Swimming Club for
the year ended 31st March, 2020 :
` `
To Salaries 24,000 By Subscription 78,000
To Stationery 1,600 By Donation 8,000
To Postage &, Telephone 3,200 By Billiard Table Collection 7,000
To Rates & Taxes 6,000 By Profit on Annual Meet 12,000
To Repairs 8,000 By Income from Investment 2,700
To Insurances 1,200
To Printing of Souvenir 2,000
To Electricity Charges 6,000
To Billiard Room Expenses 3,000
To Miscellaneous Expenses 9,400
To Depreciation on Club Asset 2,000
To Excess of Income over 41,300
expenditure
1,07,700 1,07,700
The following further information is available :
1st April, 2019 31st March, 2020

` `
Club Asset 48,000 52,000
Outstanding subscription 3,000 5,000
Advance Subscription 6,000 10,000
Stationery stock 600 400
Telephone outstanding 300 200
Electricity prepaid 700 300
Cash in Bank 1,800
Investment 27,000 47,000
From the foregoing prepare a Receipts and Payments Account for the year 2019-20
and draw the balance sheet as at 31st March, 2020.
368
Q.10.From the following account taken from the books of S.S. Hospital for the year
ending 31st March, 2020 you are required to prepare its opening, i.e. as at 1st April,
2019 and its closing, i.e. as 31st March, 2020 balance sheets :
Receipts and Payments Account for 2019-20
` `
To Balance : By Payments:
Cash 600 Furniture Purchased 1,000
Bank 7,000 Instrument purchased 2,000
Govt. Securities 1,80,000 By Surgery and dispensary 1,500
To Receipts: By Diet expenses 2,500
Subscriptions 30,000 By Rent and taxes 2,400
Donations 6,000 By Insurance 500
Interest 10,000 By Office expenses 1,200
Miscellaneous 500 By Salaries 24,000
By Miscellaneous expenses 200
By Closing balances:
Cash 1,800
Bank 17,000
Govt. Securities 1,80,000
2,34,100 2,34,100
Income and Expenditure Account for the year ending 31st March, 2020
` `
To Salaries : BySubscriptions:
Paid 24,000 Receipts 30,000
Less: for 2018-19 1,500 Less: for 2018-19 10,000
22,500 20,000
Add: Outstanding 1,000 23,500 Add: Outstanding 8,000 28,000
To Diet Expenses 2,500 By Donations 6,000
To Surgery & dispensary expenses 1,500 By Interest :
To Rent and Taxes: Received 10,000
Paid 2,400 Less: for 2018-19 2,500
Less: for 2018-19 200 Add: Outstanding 2,500 10,000
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2,200 By Miscellaneous receipts 500

Add: Outstanding 250 2,450
To Insurance 500
Less : Prepaid 100 400
To Office Expenses 1,200
To Miscellaneous Expenses 200
To Depreciation:
Building 2.5% 5,000
Furniture 10% 400
Instruments 20% 1,200
To Surplus 6,150
44,500 44,500
Depreciation of all assets has been worked out for the full year. Value of building is
exclusive of the cost of land of the hospital amounting to ` 50,000. Govt. securities
of the face value of ` 2,00,000 (cost ` 1,80,000) represent investment of the
endowment fund of the hospital.
Q.11.The following informations were obtained from the books of Delhi Club as on
31.3.2020, at the end of the first year of the club. You are required to prepare
receipts and and payments account, Income and expenditure account for the year
ended 31.3.2020 and a balance sheet as at 31.3.2020 on mercantile basis.
(i) Donations received for building and library room ` 2,00,000
(ii) Other revenue income and actual receipts :
Revenue Income Actual Receipt

` `
Entrance fees 17,000 17,000
Subscription 20,000 19,000
Locker Rents 600 600
Sundry Income 1,600 1,060
Refreshment Account ---- 16,000
370
(iii) Other revenue expenditure and actual payments :
Revenue Expenditure Actual Payments

` `
Land (Cost ` 10,000) ---- 10,000
Furniture (Cost ` 1,46,000) ---- 1,30,000
Salaries 5,000 4,800
Maintenance of playgrounds 2,000 1,000
Rent 8,000 8,000
Refreshment Account ---- 8,000
Donations to the extent of ` 25,000 were utilised for the purchase of library books,
balance was still unutilised. In order to keep it safe, 9% Government bonds of `
1,60,000 were purchased on 31.3.2020. Remaining amount was put in the bank on
31.3.2020 under the term deposit. Depreciation at 10% p.a. was to be provided
for the whole year on furniture and library books.
Q.12.From the following Trial Balance of the Bharat Educational Society as at 31st March,
2020 prepare an Income and Expenditure Account and a Balance Sheet.
Dr. Cr.
Furniture and Fittings 12,500
Additions to Furniture during the year 3,200
Library Books 17,500
Additions to Library during the year 4,300
Buildings 2,75,000
General Investments 1,50,000
Investments Reserve Fund 15,000
Sundry Debtors 5,000
Creditors 14,500
Entrance Fees 15,200
Examination Fees 2,400
Subscription Received 20,000
Certificate Fees 500
Hire of Society’s Hall 6,500
Interest realised on Investments 5,500
Sundry Receipts 600
371
Staff Salaries 10,200

Printing and Stationery and Advertising 1,000
Taxes and Insurance 800
Examination Expenses 600
Subscription of Periodicals 1,200
Prize Trust Fund 16,000
Prize Trust Investment 15,800
Prize Awarded 450
Prize Fund Bank Balance 275
Interest on Prize Trust Fund 800
Donations received (to be capitalized) 18,000
General Expenses 375
Capital Fund 3,89,000
Cash at Bank 5,500
Cash at Office 300
5,04,000 5,04,000
The following further information is supplied to enable you to make the necessary
adjustments.
`
Subscription to be received 4,500
Subscriptions received in advance 500
Interest on General Investments accrued 450
Staff Salaries outstanding 1,800
Taxes and Insurance paid in advance 500

Provide depreciation at the following rates (including the addition)
Library Books 15 per cent p.a.
Furniture and Fittings 5 per cent p.a.
Building 5 per cent p.a.
The market value of General Investments on 31st March 2020 was ` 1,30,000, but
you are not required to bring down the book value to this level. Ignore income-tax.
372
HOMEWORK SECTION
Q. 1. The receipts and payments account and the income and expenditure account of a
Club for the year ended 31st December, 2020 were as follows:
Receipts and Payments Account
Receipts ` ` Payments `
To Balance b/d 2,500 By Books purchased 1,000
To Subscriptions: By Printing and 200
2019 600 Stationery
2020 4,300 4,900 By Salary 1,500
To Interest 500 By Advertisement 200
To Donation for special 300 By Electric Charge 400
fund By Balance c/d 7,350
To Rent:
2019 150
2020 300 450
To Govt. Grants 2,000
10,650 10,650
Income and Expenditure Account
Expenditure ` Income `
To Salary 2,800 By Interest 400
To Tent Hire 200 By Subscription 4,800
To Electric charges 400 By Rent 2,300
To Depreciation on Building 750 By Govt. Grant 2,000
To Printing and Stationery 200
To Advertisement 150
To Surplus 5,000
9,500 9,500
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The club’s assets as on 1st January 2020 were :

Building ` 15,000; Books ` 10,000
Furniture ` 4,000; Investments `10,000
Liabilities as on that date were ` 50 for advertisement and ` 100 for salary.
Required
Prepare the balance sheet of the club on 31st December, 2019 and 31st December,
2020.
Q. 2. From the following balances and particulars of Republic College, prepare Income
& Expenditure Account for the year ended 31 March, 2020 and a Balance Sheet as
on the date :

` `
Seminars & Conference Receipts 4,80,000
Consultancy Receipts 1,28,000
Security Deposit - Students 1,50,000
Research Fund 8,00,000
Building Fund 25,00,000
Provident Fund 5,10,000
Tuition Fee Received 8,00,000
Government Grants 5,00,000
Donations 50,000
Interest & Dividends on Investments 1,85,000
Hostel Room Rent 1,75,000
Mess Receipts (Net) 2,00,000
College Stores-Sales 7,50,000
Outstanding expenses 2,25,000
Stock of-stores and Supplies (opening) 3,00,000
Purchases - Stores & Supplies 8,00,000
Salaries - Teaching 8,50,000
Research 1,20,000
Scholarships 80,000
Students Welfare expenses 38,000
Repairs & Maintenance 1,12,000
374
Games & Sports Expenses 50,000

Misc. Expenses 65,000
Research Fund Investments 8,00,000
Other Investments 18,50,000
Provident Fund Investment 5,10,000
Seminar & Conference Expenses 4,50,000
Consultancy Expenses 28,000
Land 1,00,000
Building 16,00,000
Plant and Machinery 8,50,000
Furniture and Fittings 6,00,000
Motor Vehicle 1,80,000
Provision for Depreciation:
Building 4,80,000
Plant & Equipment 5,10,000
Furniture & Fittings 3,36,000
Library 3,60,000
1,03,85,000 1,03,85,000
Adjustments:
(1) Materials & Supplies consumed: (From college stores)
Teaching 50,000
Research 1,50,000
Students Welfare 75,000
Games or Sports 25,000
(2) Tuition fee receivable from Government for backward class 80,000
Scholars
(3) Stores selling prices are fixed to give a net profit of 10%
on selling price
(4) Depreciation is provided on straight line basis at the
following rates:
(1) Building 5%
(2) Plant & Equipment 10%
(3) Furniture & Fixtures 10%
(4) Motor Vehicle 20%
375
Q. 3. The following is the Receipts and Payments Account of Lion Club for the year
ended 31st March, 2020.
Opening balance: Salaries 1,20,000
Cash 10,000 Creditors 15,20,000
Bank 3,850 Printing and stationary 70,000
Subscription received 2,02,750 Postage 40,000
Entrance donation 1,00,000 Telephones and telex 52,000
Interest received 58,000 Repairs and maintenance 48,000
Sale of assets 8,000 Glass and table linen 12,000
Miscellaneous income 9,000 Crockery and cutlery 14,000
Receipts at coffee room 10,70,000 Garden upkeep 8,000
Membership fees 4,000
Soft drinks 5,10,000 Insurance 5,000
Swimming pool 80,000 Electricity 28,000
Tennis court 1,02,000 Closing balance:
Cash 8,000
Bank 2,24,600
21,53,600 21,53,600
The assets and liabilities as on 1.4.2019 were as follows:
`
Fixed assets (net) 5,00,000
Stock 3,80,000
Investment in 12% Government securities 5,00,000
Outstanding subscription 12,000
Prepaid insurance 1,000
Sundry creditors 1,12,000
Subscription received in advance 15,000
Entrance donation received pending membership 1,00,000
Gratuity fund 1,50,000
The following adjustments are to be made while drawing up the accounts:

(i) Subscription received in advance as on 31st March, 2020 was ` 18,000.
376
(ii) Outstanding subscription as on 31st March, 2020 was ` 7,000.
(iii) Outstanding expenses are salaries ` 8,000 and electricity ` 15,000.
(iv) 50% of the entrance donation was to be capitalized. There was no pending
membership as on 31st March, 2020.
(v) The cost of assets sold net as on 1.4.2019 was ` 10,000.
(vi) Depreciation is to be provided at the rate of 10% on assets.
(vii) A sum of ` 20,000 received in October 2019 as entrance donation from an

applicant was to be refunded as he has not fulfilled the requisite membership
qualifications. The refund was made on 3.6.2020.
(viii) Purchases made during the year amounted ` 15,00,000.
(ix) The value of closing stock was ` 2,10,000.
(x) The club as a matter of policy, charges off to income and expenditure account
all purchases made on account of crockery, cutlery, glass and linen in the
year of purchase.
You are required to prepare an Income and Expenditure Account for the year
ended 31st March, 2020 and the Balance Sheet as on 31st March, 2020 along
with necessary workings.
Q. 4. From the following Income and Expenditure Account and the Balance Sheet of a
club, prepare its Receipts and Payments Account and Subscription Account for the
year ended 31st March, 2020:

377
Income & Expenditure Account for the year 2019-20
` `
To Upkeep of Ground 10,000 By Subscriptions 17,320
To Printing 1,000 By Sale of Newspapers (Old) 260
To Salaries 11,000 By Lectures 1,500
To Depreciation on Furniture 1,000 By Entrance Fee 1,300
To Rent 600 By Misc. Income 400
By Deficit 2,820
23,600 23,600
Balance sheet as at 31 st March, 2020
Subscription in Advance Furniture 9,000
(2020-21) 100 Ground and Building 47,000
Prize Fund : Prize Fund Investment 20,000
Opening Balance 25,000 Cash in Hand 2,300
Add : Interest 1,000 Subscription 700
26,000 (outstanding)
Less : Prizes (2,000) 24,000 (2019-20)
General Fund :
Opening Balance 56,420
Less Deficit (2,820)
53,600
Add : Entrance Fee 1,300 54,900
79,000 79,000
The following adjustments have been made in the above accounts:

1) Upkeep of ground ` 600 and Printing ` 240 relating to 2018-2019 were paid
in 2019-20.
2) One-half of entrance fee has been capitalised by transfer to General Fund.
3) Subscription outstanding in 2018-19 was ` 800 and for 2019-20 ` 700.
378
4) Subscription received in advance in 2018-19 was ` 200 and in 2019-20 for

2020- 21 ` 100.
Q. 5. The following was the Receipts and Payments Account of Exe Club for the year
ended March. 31, 2020
Cash in hand 100 Groundsman’s Fee 750
Balance at Bank as per Pass
Book: Moving Machine 1,500
Deposit Account 2,230 Rent of Ground 250
Current Account 600 Cost of Teas 250
Bank Interest 30 Fares 400
Donations and Subscriptions 2,600 Printing & Office Expenses 280
Receipts from teas 300 Repairs to Equipment 500
Contribution to fares 100 Honorarium to Secretary and
Sale of Equipment 80 Treasurer of 2019 400
Net proceeds of Variety Balance at Bank as per
Pass Book:
Entertainment 780 Deposit Account 3,090
Donation for forth coming Current Account 150
Tournament 1,000 Cash in hand 250
7,820 7,820
You are given the following additional information:

April, 1, 2019 March, 31, 2020

` `
Subscription due 150 100
Amount due for printing etc. 100 80
Cheques unpresented being payment for 300 260
repairs
Estimated value of machinery and equipment 800 1,750
Interest not yet entered in the Pass book 20
Bonus to Groundsman o/s. 300
379
For the year ended March. 31, 2020, the honorarium to the Secretary and Treasurer
are to be increased by a total of ` 200.
Required
Prepare the Income and Expenditure Account for period ending 31-03-2020 and
the relevant Balance Sheet.
380
PAST EXAM
Q.1 You are provided with the following:
Balance Sheet as on 31st March, 2017
Liabilities (`) Assets (`)

Capital Fund 1,06,200 Building 1,50,000
Subscription received in Advance 6,000 Outstanding Subscription 3,800
Outstanding Expenses 14,000 Outstanding Locker Rent 2,400
Loan 40,000 Cash in hand 20,000
Sundry Creditors 10,000
Total 1,76,200 1,76,200
The Receipts and Payment Account for the

year ended on 31st March, 2018
Receipts (`) Payment (`)

To Balance b/d By Expenses:
Cash in Hand 20,000 For 2017 12,000
To Subscriptions: For 2018 20,000 32,000
For 2017 2000 By Land 40,000
For 2018 21,000 By Interest 4,000
For 2019 1,000 24,000 By Miscellaneous Expenses 4,700
To Entrance Fees 38,000 By Balance c/d
To Locker Rent 7,000 Cash in Hand 18,300
To Sale proceeds of old 1,000
newspapers
To Miscellaneous Income 9,000
99,000 99,000
You are required to prepare Income and Expenditure account for the year ended
31st March, 2018 and a Balance Sheet as at 31st March, 2018 (Workings should
form part of your answer).
381
Q.2 From the following Income and Expenditure account and the Balance sheet of a
club, prepare its Receipts and Payments Account and subscription account for
the year ended 31st March 2019:
Income and Expenditure A/c for the year ended 31st March 2019
To Upkeep of ground 11,000 By Subscriptions 19,052
To Printing . 1,100 By Sale of Newspapers (Old) 286
To Salaries 11,100 By Lectures (Fee) 1,650
To Depreciation on furniture 1,100 By Entrance Fee 2,145
To Rent 1,660 By Misc. Income 440
By Deficit 2,387
25,960 25,960

Balance sheet as at 31st March 2019
Liabilities (`) Assets (`)

Subscriptions in advance (19-20) 110 Furniture 9,900
Prize fund
Add: Interest 1,100
28,600 Ground & Building 51,700
Less: Prize given 2,200 26,400
Prize Fund Investment 22,000
General Fund Cash in Hand 2,530
Less: Deficit 2,387
59,675 Subscription (outstanding) 770
Add:Entrance Fee 715 60,390 (2018 - 2019)
86,900 86,900
The Following adjustments have been made in the above accounts:

(i) Upkeep of ground `660 and printing ` 264 relating to 2017-18 were paid in
2018-19
(ii) One fourth of entrance fee has been capitalized by transfer to General Fund
382
(iii) Subsciption outstanding in 2017- 18 was ` 880 and for 2018 - 19 ` 770

(iv) Subscription received in advance in 2017 - 18 was ` 220 and in 2018 - 19 for
2019 - 20 was ` 110
(v) Furniture was purchased during the year.
Q.3 From the following information supplied by M.B.S. Club, prepare Receipts and
Payments account and Income and Expenditure Account for the year ended 31st
March 2019.
01.04.2018 31.03.2019
` `
Outstanding subscription 1,40,000 2,00,000
Advance subscription 25,000 30,000
Outstanding salaries 15,000 18,000
Cash in Hand and at Bank 1,10,000 ?
10% Investment 1,40,000 70,000
Furniture 28,000 14,000
Machinery 10,000 20,000
Sports goods 15,000 25,000

Subscription for the year amount to ` 3,00,000/-. Salaries paid ` 60,000. Face
value of the Investment was ` 1,75,000, 50% of the Investment was sold at 80%
of Face Value. Interest on investments was received ` 14,000. Furniture was sold
for ` 8000 at the beginning of the year. Machinery and Sports Goods purchased
and put to use at the last date of the year. Charge depreciation @ 15% p.a. on
Machinery and Sports goods and @10% p.a. on Furniture.
Following Expenses were made during the year:
Sports Expenses: ` 50,000
Rent: ` 24,000 out of which ` 2,000 outstanding
Misc. Expenses: ` 5,000
383
OBJECTIVE
1. Receipt and payment A/c is a summary of all capital Receipts and payments.
Ans. False – It is a summary of Cash / Bank receipt and payments whether Capital
/ Revenue in nature.
2. If there appears sport fund, expense on sports activity will be Dr. to Income
and Expenditure A/c.
Ans. False – Such expenses should be deducted from sports fund as the fund is
meant for such expenses.
3. Receipt and Payment A/c highlight total Income and Expenditure A/c.
Ans. False – It is a summary of Cash / Bank receipt and payments whether Capital
/ Revenue in nature.
4. Only revenue items are disclosed in Income and Expenditure A/c.

Ans. True – Revenue items (expenses and incomes) pertaining to current year are
accounted in Income and Expenditure A/c.
5. Scholarship granted to students out of funds provided by government will be

debited to Income and Expenditure A/c.
Ans. False – It should be deducted from funds provided by government and as it is
for same purpose and shown in liability side.
6. Fees received for life membership is revenue receipt as it is recurring.

Ans. False – Fees received for life membership is capital receipts & non – recurring.
It will be added to capital fund.
7. Net Income in case of person practicing vocation is determined by preparing

Profit and Loss A/c.
Ans. False – It is determined by preparing Income and Expenditure A/c.
384
8. Laboratory and library deposits taken from students in education institution is

a liability.
Ans. True – Laboratory and library deposits are in nature of security deposits to be
returned to students on leaving college or university.
9. Fees received for Life Membership is a revenue receipt as it is of recurring nature.

Ans. False - Life Membership Fee received for life membership is a capital receipt
as it is of non-recurring nature. It is directly added to capital fund or general
fund.
Q.2 Multiple Choice Questions
1. Scholarship granted to students out of specific funds provided by Government

will be debited to
(a) Income and Expenditure Account
(b) Receipts and payments Account
(c) Funds
(d) None of the three
2. In case of NPO, excess of total assets over liabilities is known as

(a)
Profits (b) Surplus
(c) Capital Fund (d) Accumulated Fund
3. General donations are credited to

(a) Receipts and Payments Account
(b) Income and Expenditure Account
(c) Capital Fund
(d)
Fund Account
4. Interest on prize funds is

(a) Credited to Income and Expenditure Account
(b) Credited to Receipts and Payments Account
(c) Capital Fund
(d) Added to prize fund
385
5. Special aids are

(a) Treated as capital receipts
(b) Treated as revenue receipts
(c) Added to Capital Fund
(d) Both (a) and (c)
Answer
1. (c) 4. (d)
2. (c) 5. (d)
3. (b)
386
TEST PAPER
Marks - 50
1. Scholarship granted to students out of funds provided by governement will

be debited to Income & Expenditure A/c.
2. Fees received for life membership is revenue receipt as it is recurring.
Q.2 Distinguish between Receipts & Payment A/c & Income & Expenditure A/c. (10)
Q.3 From the following information, prepare Opening & Closing Balance Sheets
Particulars 31st March 31st March

2019 2020
Building (subject to 10% Depreciation) 30,000 ?
Furniture (subject to 10% Depreciation) ----- 10,000
Stock of Sports Material 2,500 1,000
Prepaid Insurance 1,500 3,000
Outstanding Subscription 6,000 4,000
Advance Subscription 3,000 2,000
Outstanding Locker Rent ----- 3,000
Advance Locker Rent Received ----- 1,000
Outstanding Rent for Go down 3,000 1,500
12% General Fund Investment 1,00,000 ?
Accrued Interest on above ----- 2,000
Cash Balance 500 32,000
Bank Balance 1,000 -----
Bank Overdraft ----- 1,000
Note: Entrance Fees received Rs.10,000/-, Life Membership Fees received

Rs.10,000/-, Surplus from Income & Expenditure A/c Rs.30,000/-. It is the
policy of the club to treat 60% of Entrance Fees & 40% of Life
Membership Fees as of revenue nature. (18)
387
Q.4 From the following Receipts & Payment A/c of Superb Recreation Club for the
year ended 31st March 2020 & the additional information given, prepare an
Income & Expenditure A/c for the year ended 31st March 2020 & Balance Sheet
as on 31st March 2020.

Receipts & Payment A/c for the year ended 31st March 2020
Receipts Amount Payments Amount

To Balance b/d 3,180 By Secretary’s Salary 12,000
To Subscription 18,000 By Staff Salaries 25,000
To Sale of old newspapers 2,500 By Charities 1,000
To Legacies 4,000 By Printing & Stationery 600
To Interest on Investments 2,000 By Postage Expenses 120
To Endowment Fund By Rates & Taxes 1,500
Receipts 20,000 By Maintenance of Land 2,000
To Proceeds of Concerts 4,020 By Purchase of Sports 10,000
Mat.
To Advertisement in the By Telephone Expenses 3,480
Year Book 5,000 By Balance c/d 3,000
58,700 58,700
Assets & Liablities were as follows:
Particulars 31/03/2019 31/03/2020

Subscription in Arrears 2,000 1,000
Subscription received in Advance 500 400
Furniture 2,000 ?
Land 10,000 ?
1) Depreciation shall be charged @ 10%.

2) Legacies received shall be capitalised.
3) Investments of Rs.20,000/- were made in 12% securities on 1st June
2015. Due date of interest is 31st March.
4) Stock of Sports Material on 31st March 2020 were useless & valued at
Nil price. (18)

388
HOMEWORK SOLUTION
Q.1
Balance Sheet as on 1st January 2020
Capital Fund 42,200 Building 15,000
Os/ Advertisement 50 Books 10,000
O/s Salary 100 Furniture 4,000
Investments 10,000
Accrued Interest 100
O/s Subscription 600
O/s Rent 150
Cash/Bank Balance 2,500
42,350 42,350
Balance Sheet as on 31st December 2020
Capital Fund 42,200 Building 15,000
Add: Surplus 5,000 47,200 Less: Dep. (750) 14,250
Donation for Books 10,000
Special Fund 300 Add: Purchased 1,000 11,000
O/s Salary 1,400 Furniture 4,000
O/s Tent Hire 200 Investments 10,000
O/s Rent 2,000
Cash/Bank Bal. 7,350
49,100 49,100
389
Q.2
Income & Expenditure A/c for the year ended 31st March 2020
To Salaries By Tuition Fees 8,00,000
Teaching 8,50,000 Add: Receivable 80,000 8,80,000
Research 1,20,000 9,70,000 By Govt.Grants 5,00,000
To Mat.Cons. By Interest 1,85,000
Teaching 50,000 By Hostel Rent 1,75,000
Research 1,50,000 2,00,000 By Mess Rec. 2,00,000
To Rep. & Maint 1,12,000 By Profit stores
To Sports Exp. Sales 75,000
Cash 50,000 By Donations 50,000
Material 25,000 75,000
To Seminar Exp 4,50,000 By Seminar 4,80,000
To Consultancy 28,000 By Consultancy 1,28,000
To Students
Welfare:
Cash 38,000
Materials 75,000 1,13,000
To Misc.Exp. 65,000
To Scholarship 80,000
To Depreciation:
Building 80,000
Plant 85,000
Furniture 60,000
Motor Vehicle 36,000 2,61,000
To Surplus 3,19,000
26,73,000 26,73,000
Balance Sheet as on 31st March 2020
Capital Fund 16,06,000 Land 1,00,000
Add: Surplus 3,19,000 19,25,000 Building 16,00,000
Less: PFD (5,60,000) 10,40,000
Other Funds: Equipment 8,50,000
390
Research 8,00,000 Less: PFD (5,95,000) 2,55,000

Building 25,00,000 Furniture 6,00,000
Less: PFD (3,96,000) 2,04,000
Current Liab: Vehicles 1,80,000
O/s Expenses 2,25,000 Less: PFD (36,000) 1,44,000
Provident Fund 5,10,000 Library 3,60,000
Security Dep. 1,50,000 Investments:
Research 8,00,000
P.F. 5,10,000
Stock of Mat. 1,25,000
Tuition Fees 80,000
Cash/Bank 6,42,000
61,10,000 61,10,000
Q.3
To Salaries 1,20,000 By Subscription 2,02,750
Add: Cl. O/s 8,000 1,28,000 Less: Op. O/s (12,000)
To Stock Cons. 16,70,000 Add: Op. Adv. 15,000
To Print. & Stat. 70,000 Add: Cl. O/s 7,000
To Postage 40,000 Less: Cl. Adv. (18,000) 1,94,750
To Telephone 52,000 By Entrance Don. 1,00,000
To Repairs 48,000 Add: Op. 1,00,000
To Glass 12,000 2,00,000
To Crockery 14,000 Less: Refund (20,000)
To Garden 8,000 Less:Capitalised (90,000) 90,000
To Mem.Fees 4,000 By Interest Recd 58,000
To Insurance 5,000 Add: Accrued 2,000 60,000
Add: Op. P/P 1,000 6,000 By Misc. Income 9,000
To Electricity 28,000 By Receipts:
Add: O/s 15,000 43,000 Coffee Room 10,70,000
To Loss on sale Soft Drinks 5,10,000
391
Of Asset 2,000 Swimming Pool 80,000

To Depreciation 49,000 Tennis Court 1,02,000
By Deficit 30,250
21,46,000 21,46,000
Capital Fund 10,29,850 Fixed Assets 5,00,000
Add: Ent. Don. 90,000 Less: Sold (10,000)
Less: Deficit (30,250) 10,89,600 4,90,000
Less: Dep. 10% (49,000) 4,41,000
Gratuity Fund 1,50,000 Stock 2,10,000
Adv. Sub. 18,000 O/s Sub. 7,000
Creditors 92,000 12% Govt. Sec. 5,00,000
Entrance Don. Cash Balance 8,000
Refundable 20,000 Bank Balance 2,24,600
O/s Salaries 8,000 Interest Acc 2,000
O/s Electricity 15,000
13,92,600 13,92,600
WORKING NOTES:
1)
Balance Sheet as on 1st April 2019
Capital Fund 10,29,850 Fixed Assets 5,00,000
Stock 3,80,000
Advance Subscription 15,000 O/s Subscription 12,000
Creditors 1,12,000 12% Govt. Securities 5,00,000
Entrance Donation recd. Prepaid Insurance 1,000
Pending membership 1,00,000 Cash Balance 10,000
Gratuity Fund 1,50,000 Bank Balance 3,850
14,06,850 14,06,850
392
2)
Creditors A/c
To Cash/Bank 15,20,000 By Balance b/d 1,12,000
To Balance c/d 92,000 By Purchases 15,00,000
16,12,000 16,12,000
3)
Stock A/c
To Balance b/d 3,80,000 By I & E A/c 16,70,000
To Purchases 15,00,000 By Balance c/d 2,10,000
18,80,000 18,80,000
Q.4
Receipts & Payments A/c for the year ended 31st March 2020
To Balance b/d 4,660 By Ground Upkeep 10,600
To Subscription 17,320 By Printing 1,240
To Interest on PF Invst. 1,000 By Salaries 11,000
To Lecture Fees 1,500 By Rent 600
To Entrance Fees 2,600 By Prizes 2,000
To Sale of Newspaper 260
To Misc. Income 400 By Balance c/d 2,300
27,740 27,740
Subscription A/c
To Balance b/d (Op.O/s) 800 By Bal b/d (Op.Adv) 200
To I & E A/c 17,320 By Cash 17,320
To Bal c/d (Cl. Adv) 100 By Bal c/d (Cl. O/s) 700
18,220 18,220
393
Q.5
Income & Expenditure A/c for the year ended 31st March 2020 (Rs. In ‘000)
To Ground Fees 750 By Don & Sub. 2,600
To Ground Rent 250 Less: Op. O/s (150)
To Printing 280 Add: Cl. O/s 100 2,550
Less: Op. O/s (100) By Variety 780
Proceed
Add: Cl. O/s 80 260 By Interest 30
To Repairs 460 Add: Accrued 20 50
To Fares exp 400 By Fares Cont. 100
To Tea Exp. 250 By Tea Receipts 300
To Depreciation 470
To Honorarium 600
To Bonus 300
To Surplus 40
3,780 3,780
Balance Sheet as on 31st March 2020 (Rs. In ‘000)
Capital Fund 3,080 Cash in Hand 250
Add: Surplus 40 3,120 Cash in Deposit 3,090
O/s Bonus 300 O/s Subscription 100
O/s Printing 80 Interest Accrued 20
O/s 600 Machinery 800
Honorarium
Add: Purchase 1,500
Tournament 1,000 2,300
Don
Bank O/D 110 Less: Sold (80)
Less: Dep. (470) 1,750
5,210 5,210
394
WORKING NOTE:
Balance Sheet as on 1st April 2019 (Rs. In ‘000)
Capital Fund 3,080 Cash in Hand 100
O/s Expenses 100 Cash at Bank 300
O/s Honorarium 400 Cash in Deposit A/c 2,230
Machinery 800
3,580 3,580
395
PAST EXAM SOLUTION
Q.1
To Expenses 20,000 By Subscription 21,000
To Interest 4,000 Add: Op. Adv. 6,000 27,000
To Misc.Exp. 4,700 By Locker Rent 7,000
Less: Op.O/s (2,400) 4,600
By Sale proceed
Of Newspaper 1,000
To Surplus 12,900 By Misc.Income 9,000
41,600 41,600
Capital Fund 1,06,200 Land 40,000
Add: Entrance 38,000 Building 1,50,000
Add: Surplus 12,900 1,57,100 O/s Sub.(2017) 1,800
Advance Sub. 1,000 Cash in Hand 18,300
Loan 40,000
Creditors 10,000
O/s Expenses 2,000
2,10,100 2,10,100
Q.2
Receipts & Payments A/c for the year ended 31st March 2019
To Balance b/d 16,126 By Ground Upkeep 11,660
To Subscription 19,052 By Printing 1,364
To Interest on PF Invst. 1,100 By Salaries 11,100
396
To Lecture Fees 1,650 By Rent 1,660

To Entrance Fees 2,860 By Prizes 2,200
To Sale of Newspaper 286 By furniture ( 9900+1100) 11,000
To Misc. Income 440 By Balance c/d 2,530
30,514 30,514
Subscription A/c
To Balance b/d (Op.O/s) 880 By Bal b/d (Op.Adv) 220
To I & E A/c 19,052 By Cash 19,052
To Bal c/d (Cl. Adv) 110 By Bal c/d (Cl. O/s) 770
20,042 20,042
Q.3)
Receipts & Payment A/c for the year ended 31st March 2019
To Balance b/d 1,10,000 By Salaries 60,000
To Subscription 2,45,000 By Sports Expenses 50,000
To Investment Sold 70,000 By Rent 22,000
To Interest 14,000 By Misc. Expenses 5,000
To Furniture Sold 8,000 By Machinery 10,000
By Sports Goods 10,000
By Balance c/d 2,90,000
4,47,000 4,47,000
To Salaries 60,000 By Subscription
Less: Op. O/s (15,000) Received 2,45,000
Add: Cl. O/s 18,000 63,000 Less: Op. O/s (1,40,000)
To Sports Exp. 50,000 Add: Op. Adv. 25,000
To Rent 22,000 Add: Cl. O/s 2,00,000
397
Add: Cl. O/s 2,000 24,000 Less: Cl. Adv. (30,000) 3,00,000
To Misc. Exp. 5,000
To Loss on
Sale of Furn 6,000 By Interest on
To Depreciation Investments 14,000
Furniture 1,400
Machinery 1,500
Sports Goods 2,250 5,150
To Surplus 1,60,850
3,14,000 3,14,000
WORKING NOTES:
1)
Balance Sheet as on 1st April 2018
Capital Fund 4,03,000 Cash/Bank Balance 1,10,000
Advance Subscription 25,000 O/s Subscription 1,40,000
O/s Salaries 15,000 10% Investments 1,40,000
(Face Value 1,75,000)
Machinery 10,000
Furniture 28,000
Sports Goods 15,000
4,43,000 4,43,000
398
TEST PAPER SOLUTION
1. False - It should be deducted from funds provided by government & as it is

for same purpose & shown in liability side.
2. False - Fees received for life membership is Capital Receipt & Non
Recurring. It should be added to Capital Fund.
Q.2 Distinguish between Receipts & Payment A/c & Income & Expenditure A/c.
Receipt & Payment A/c Income & Expenditure A/c

1 It is a Real A/c It is a Nominal A/c
2 Shows Cash / Bank Balance Shows Surplus / Deficit
3 Both Capital & Revenue items are Only Revenue items of Current year
taken are taken
4 It starts with opening balance and It does not have opening balance and
difference between Dr. & Cr. Side difference between Dr. & Cr. Side
shows closing balance of Cash & shows Surplus or Deficit.
Bank Balance.
5 Dr. Side = Receipts Dr. Side = Expenses

Cr. Side = Payments Cr. Side = Incomes
6 Only Cash transactions are entered. Both Cash & Non Cash transactions
are entered.
7 All transactions relating to Current, Only Current years transactions are

Past & Future are entered. Entered.
399
Q.3

Capital Fund 1,35,500 Building 30,000
Outstanding Godown Rent 3,000 Stock of Sports Material 2,500
Advance Subscription 3,000 Prepaid Insurance 1,500
General Fund Investments 1,00,000
Outstanding Subscription 6,000
Cash Balance 500
Bank Balance 1,000
1,41,500 1,41,500
Liabilities Amt Amt Assets Amt Amt

Capital Fund 1,35,500 Building 30,000
Add: Surplus 30,000 Less: Dep. (3,000) 27,000
Add: Entrance Fee 4,000 Furniture 10,000
Add: Life Mem.Fee 6,000 1,75,500 Less: Dep. (1,000) 9,000
Stock of Sp.Mat. 1,000
O/s Godown Rent 1,500 Investments 1,00,000
Adv. Subscription 2,000 O/s Subscription 4,000
Adv. Locker Rent 1,000 O/s Locker Rent 3,000
Bank Overdraft 1,000 Accrued Interest 2,000
P/P Insurance 3,000
Cash Balance 32,000
1,81,000 1,81,000
400
Q.4
Income & Expenditure A/c 0f Superb Recreation Club
for the year ended 31st March 2020
Particulars Amt Amt Particulars Amt Amt

To Sect. Salary 12,000 By Subscription 18,000
To Staff Salary 25,000 Less: Op.O/s (2,000)
To Charities 1,000 Add: Op.Adv. 500
To Print. & Stat. 600 Add: Cl.O/s 1,000
To Postage 120 Less: Cl.Adv. (400) 17,100
To Rates & Tax 1,500 By Sale of old
To Maintenance Newspapers 2,500
of Land 2,000 By Interest 2,000
To Sports Add: Accrued 400 2,400
Material w/off 10,000 By Proceeds of
To Tel.Exp. 3,480 Concerts 4,020
To Depreciation 200 By Advertisement
In the Year Book 5,000
By Deficit 24,880
55,900 55,900
Balance Sheet of Superb Recreation Club as on 31st March 2020
Liabilities Amt Amt Assets Amt Amt

Capital Fund 36,680 Land 10,000
Add: Legacies 4,000 Furniture 2,000
Less: Deficit (24,880) 15,800 Less: Dep. (200) 1,800
12% Investments 20,000
Endowment Fund 20,000 Accrued Interest 400
Adv. Subscription 400 O/s Subscription 1,000
Cash/Bank Bal. 3,000
36,200 36,200
401
Working Notes:
1). Balance Sheet of Superb Recreation Club as on 31st March 2019


Capital Fund 36,680 Cash/Bank Balance 3,180
Advance Subscription 500 O/s Subscription 2,000
12% Investments 20,000
Land 10,000
Furniture 2,000
37,180 37,180
402
6
COMPANY ACCOUNTS
UNIT I – ISSUE OF SHARES
THEORY SECTION
1. Meaning of company:-
 The word “Company” is derived from latin word ‘com’ i.e. together & ‘panis’
means bread i.e. association of persons or merchants discussing matters &
taking food together.
 In law ‘company; means a company which is incorporated under companies

Act, 2013 or any of previous company laws.
2. Salient feature of Company
1. Incorporated Association: - Company is created by law i.e. registration

compulsory.
2. Separate legal Entity: - Company is a separate entity & can contract, sue & be
sued in its own capacity.
403
3. Perpetual existence: - Its existence is independent of its members. It continues

to be in existence despite of death, insolvency or change in members
4. Common Seal: - Company signs documents by using common seal.
5. Limited liability: - Liability of shareholders is limited to face value of a share /

Amount he has agreed to pay to company on shares i.e. issue price.
6. Separation of ownership from management:- shareholders (owners) are

different from management who manage day to day affairs of the company.
7. Company is not a citizen
8. Shares are transferable except in case of private limited company.
9. Company has to get their books of accounts audited by chartered accountants.
3. Types of companies
404
1. Government Companies:
Company in which not less than 51% of paid up capital held by various
governments / government companies.
2. Foreign Company:
Company incorporated outside India but has place of business in India by itself
or through an agent and conducts business activity in India.
3. Private Company:
Company which by its articles-
1. Restricts right to transfer its shares
2. Limits number of members to 200 (except one person co.)
3. Prohibits invitation to public to subscribe for its shares.
4. Public Company:
Company which is -
1. Not a private Co.
2. A subsidiary of public company
5. One person Company:

Company which has only one person as member.
6. Listed Company:
Company which has its securities listed on recognised stock exchanges.

7. Unlisted Company:
1. Company whose shares are not listed on recognised stock exchange.
2. Unlisted Company can be public or private company.

8. Company limited by shares:-
Company having liability of its members limited to amount unpaid on shares.

9. Company limited by guarantee
Company having liability of its members limited to such amount as members
may undertake to contribute in case of winding up.
405
10. Subsidiary Company:

Company in which holding company –
1. Controls composition of director.

2. Exercises/controls more than half of total share capital on its own or
together with other subsidiaries.
11. Small Company:

Company other than public company whose -
1. Paid up capital does not exceed ` 50 lacs or such prescribed amount
not more than ` 5 crores OR
2. Latest turnover does not exceed ` 2 crores or such prescribed amount not
more than ` 20 crores.
4. Financial Statements
 Financial statement should include Balance sheet, profit & loss a/c or Income
& expenditure a/c, cash flow statement (not for one person company, small
company, Dormant company), statement of changes in equity and explanatory
notes.
 Financial statements should give true & fair view of state of affairs of company,
should comply with notified accounting standard & should be in schedule III
format.
5. Books of Accounts
As per the Companies Act, every company shall prepare and keep at its registered
office books of accounts, papers, financial statements of every financial year and
such books should be kept on accrual basis and according to double entry system
of accounts.
406
6. Types of Share Capital (share capital is divided in to following categories)
1. Authorised/Nominal/Registered Capital
1. Maximum Capital Company is authorised to raise in lifetime

2. Mentioned in capital clause of memorandum of association
3. Authorised capital is shown in the balance sheet at face value (nominal
value)
2. Issued Capital
1. Part of authorised capital offered to public

2. It includes share issued by company for cash, and for consideration other
than cash (to promoters / other)
3. Issued capital is shown in the balance sheet at face value (nominal value)
4. Unissued capital is not shown in the balance sheet.
407
3. Subscribed Capital
1. Part of issued capital which is applied by public & allotted by company. It

includes share for consideration other than cash.
2. Subscribed capital is shown in the balance sheet at face value (nominal

value)
4. Called up Capital
Part of subscribed capital which company has demanded / called from

shareholders.
5. Paid up Capital
1. Part of called up capital paid by shareholders
2. Paid up Capital = Called up Capital (-) Calls in arrears
3. If shareholders fails to pay the amount fully / partly it is called calls

in arrears. Such calls in arrears is deducted from share capital in the
balance sheet.
4. In Balance sheet called up & paid up capital is shown together.
5. Calls in advance is portion of capital which is not called by the company

but paid by shareholders.
408
6. Share Capital
Note 1:- Authorised, issued and subscribed capital are given in the balance
sheet only for information (disclosure purpose)
Note 2:- only paid up share capital is actually accounted in balance sheet.
Note 3:- If subscribed capital > issued capital then amount relating to balance
shares are refunded or shares allotted pro rata.
7. Shares
1. Total share capital (i.e. capital) of a company is divided into number of small
units of fixed amount and each unit is called a share.
2. Fixed value of a share is called nominal or face value.
3. Company can issue shares at prices different from face value and prices at
which shares are issued is called issue price.
4. Liability of a shareholder is limited to issue price of a share acquired by him.
5. Nowadays issue price is fixed by book building process through which company
determines a price band of its shares and on the basis of bids received from
409
potential investor at various prices within a price band, finally issue price is
fixed
8. Types of shares
1. Equity shares:-
 Equity shares are those shares which do not enjoy preferential rights in
matter of dividend and repayment of capital.
 Rate of dividend to such shareholders vary from year to year depending

upon profits of the company.
 This shareholder is paid dividend after paying dividend to preference

shareholders.
 Equity shareholders bears the risk and has voting rights.
2. Preference shares:-
 Preference shares are shares whose holders get preference of payment of

dividend & repayment of capital over other shareholders.
 They are entitled to fixed rate of dividend (if there is profit) but they do not
get voting right except for issues concerning their rights.
9. Types of preference shares
1. Cumulative & Non-Cumulative preference shares:-

Cumulative preference share carries right to accumulate & carry forward
410
dividend which is not paid due to insufficiency of profit. Such back log of
dividend is paid when there is profit to company. Such arrears of dividend
is shown in the balance sheet as contingent liability. If the dividends are in
arrears for 2 years such preference shareholders will get voting rights on every
matter of the company.
2. Participating & non-participating

Participating preference share carries right to get fixed dividend plus share in
surplus profit remaining after payment of stipulated dividend to equity shares.
3. Redeemable & non-redeemable

Redeemable preference share has to be repaid after fixed time frame. In India,
company can issue redeemable preference shares only & that too redeemable
in maximum 20 years (except for specified infrastructure projects).
4. Convertible / non-convertible
Convertible preference shares confer on their holders right to convert these
shares at their option into equity shares.
In absence of information preference shares are cumulative, non-participating,

non-convertible & redeemable in nature.
10. Pro rata allotment:-

Pro rata allotment means allotment in proportion of shares applied for i.e. all
applicants (who are allotted pro rata) will get shares less than their shares applied.
Under pro rata allotment excess application money is adjusted against amount due
on allotment / calls.
11. Forfeiture of shares:-

 Forfeiture is action taken by the company to cancel the shares.
 Articles authorise directors to forfeit the shares of members for non payment
of calls
 When shares are forfeited, shareholders ownership / title of shares is cancelled

and amount already paid by the shareholder up to date is not refunded to him
411
but is transferred to share forfeited account.
 Such share forfeited account is added to share capital in the balance sheet.
12. Reissue of forfeited shares:-

 Reissue of forfeited shares is not allotment of shares but only a sale of shares.
 Reissue of forfeited share can be as follows.
a. At discount to face value / at loss

1. Such discount cannot exceed share forfeited amount
2. Such discount should be debited to share forfeited account
b. At more than face value

1. In this case no discount is given on reissue
2. Amount received in excess of face value is transferred to securities
premium account.
 Profit on reissue of shares is calculated as follows.

`
Amount received from old shareholder per share on reissue xx
Less: Discount given to new shareholder per share on reissue xx
Profit per share xx

x shares reissued yy
Profit on reissue transferred to capital reserve xx

 Maximum discount which can be given to a new shareholder on reissue =
amount received from old shareholder lying in share forfeited account.
13. Points to remember in share forfeiture and reissue of shares:-
a. Share capital is debited or credited with called up amount and share forfeited
account is credited with amount received on forfeited shares from old
shareholder.
412
b. Share forfeited account consists of amount received from old shareholder who
has defaulted.
c. If shares are forfeited and reissued maximum discount to be given on reissue

is the amount received from old shareholder and minimum reissue price is
amount not received / unpaid by old shareholder.
d. Share forfeited account is used to give discount on reissue.
e. Balance in share forfeited account = amount received from old shareholder per
share x No. of share forfeited not re issued.
14. Issue of share for consideration other in cash
a. It means issue of shares in exchange for assets or payment of services like

payment to promoters / lawyers etc.
b. A separate note should be written under share capital in balance sheet as

disclosure (additional information) relating to issue of such shares.
15. Miscellaneous points to remember relating to shares:-

a. As per companies Act minimum application money should be 5% of face
value of share.
b. As per SEBI regulations minimum application money should be 25% of issue

price.
c. As per SEBI guidelines minimum subscription to be received in an issue shall

not be less than 90% of public offer failing which company has to refund all
application money.
d. Under companies Act, Companies cannot issue shares at discount to face value
except in case of sweat equity shares (issued to employees / directors)
e. Issue of shares at discount is void as per Companies Act.
413
f. If company issues shares at price more than face value it is said to be issuing
shares at premium. There is no restriction on maximum premium to be collected
on shares
g. Premium collected on shares is credited to securities premium a/c & shown

under ‘Reserve & Surplus’ in Balance sheet.
h. Securities premium can be used only for following purpose as per companies
Act -
 For giving fully paid up bonus shares
 Writing off commission, expense or discount on any securities / debenture,

purchase of own shares.
 Writing off preliminary expenses. in case of companies not covered by

section 133.
 Writing off premium on redemption of preference shares / debentures in

case of companies not covered by section 133.
i. Interest on calls in arrears & calls in advance is to be at the rates mentioned in

article of company. Table F of Companies Act gives maximum interest on calls
in arrears i.e. 10% p.a. & on calls in advance i.e. 12% p.a. Directors can waive
off interest on calls in arrears.
j. Dividends are paid as percentage on paid up share capital

k. Share application and allotment accounts are personal accounts
16. 1. Difference between reserve capital & capital reserve
Reserve Capital Capital Reserve

1. Is part of subscribed capital which Is part of reserves & surplus which
company has decided to call only is not available for declaration
in case of liquidation of company of dividend
414
2. Interest on Calls-In-Arrears and Calls-In-Advance
Interest on Calls-In-Arrears Interest on Calls in Advance

1. It is payable by shareholders to It is payable by the Company to
company on the calls due but Shareholders on the call money
remaining unpaid. received in advance but not yet
due.
2. As per Table F maximum prescribed As per Table F maximum
rate is 10%. prescribed rate is 12%
3. Period considered: From the date Period considered: From the date
call money was due to the date money was received to the day
money is -finally received. call was ¬finally made due.
4. Directors have a right to waive off Shareholders are not entitled for
such interest in individual cases at any dividend on calls in advance.
their own discretion.
5. It is a nominal account in nature It is a nominal account in nature
and is credited to statement of with interest being an expense
profi¬t and loss as an income. for the company.
3. Equity Shares and Preference Share
Preference Shares Equity Shares

1. If there is profit, Preference shares The rate of dividend on equity
are entitled to a fixed rate of shares is not fixed and depends
dividend upon the availability of net profit.
2. Dividend on preference share Dividend on equity shares is
is paid on priority to the equity paid only after the preference
shares. dividend has been paid
3. Preference Share have preference Equity Share capital cannot be
as regards to refund of capital paid before preference capital
over equity capital
4. Redeemable Preference shares Equity shares are usually
are redeemed by the company on redeemed only on winding up of
expiry of the stipulated period. the company.
415
5. A company cannot issue bonus The bonus shares and rights

shares and rights shares to shares can be issued to existing
preference shares. equity shares.
6. Voting right of preference shares Any equity shareholder can vote
is restricted. on all matters.
JOURNAL ENTRIES
(A) Issue at par
1. Entry for receipt of application money

Bank a/c Dr. xx
To Share Application a/c xx
(no. of shares applied X application money per share)
2. Entry for transfer of application money to capital

Share Application a/c Dr. xx
To Share Capital a/c xx
(no. of shares allotted X application money per share)
3. Entry for refund of excess application money

Share application a/c Dr. xx
To Bank a/c xx
(no. of share rejected X application money per share)
4. Entry for allotment money becoming due

Share allotment a/c Dr. xx
To share capital a/c xx
(no. of shares allotted X allotment money per share)
5. Entry for transfer of excess application money to allotment

Share Application a/c Dr. xx
To Share allotment a/c xx
(In case of pro-rata allotment excess application money will be adjusted in
allotment)
416
6. Entry for receiving allotment money

Bank a/c Dr. xx
Calls in Arrears a/c Dr. xx
To share allotment a/c xx
7. Entry for making a call

Share call a/c Dr. xx
To Share capital a/c xx
8. Entry for receiving call money

Bank a/c Dr. xx
Calls in Arrears a/c Dr. xx
To share call a/c xx
9. Entry for forfeiture of share

Share capital a/c Dr. xx
To calls in arrears a/c xx
To share forfeiters a/c xx
10. Entry for re issue of shares

Bank a/c Dr. xx
Share forfeiture a/c Dr. xx
(The discount on re-issue of shares can not exceed balance available in share
forfeiture a/c)
11. Entry for transfer to capital reserve

Share forfeiture a/c Dr. xx
To Capital Reserves a/c xx
(Profit on reissue of forfeited shares)
(B) Issue at Premium
When a company has issued share at premium (no limit) then normally,
the premium is collected together with allotment money and the entry for
allotment money due will be as under :
417
Share allotment a/c Dr. xx

To Securities Premium a/c xx
Forfeiture Entry
When Premium money Not received When premium money is Already received
Share Capital a/c Dr. xx Share Capital a/c Dr. xx
Securities Premium a/c Dr. xx To calls in arrears a/c xx
To calls in arrears a/c xx To share forfeiture a/c xx
To share forfeiture a/c xx
1. Hint:-If the defaulter has not paid premium money then at the time of forfeiture of
his shares, Securities Premium a/c also will get cancelled.
2. Instead of share forfeiture account, forfeited shares account can also be used.
(C) Calls-in-Advance
Some shareholders may sometimes pay a part, or whole, of the amount not yet
called up, such amount is known as Calls-in-advance. This amount is credited in
Calls-in-Advance Account. The following entry is recorded:
Bank A/c Dr. [Call amount received in advance]

To Call-in-Advance A/c
When calls become actually due, calls-in-advance account is adjusted at the time
of the call. For this the following journal entry is recorded:
Calls-in-Advance A/c Dr. [Call amount received in advance]

Bank A/c Dr. [Remaining call money received, if any]
To Particular Call A/c [Call money due]
(Being call in advance adjusted and call money due received)
418
(D) Journal entries for interest on calls-in-arrears:
(i) For interest receivable on calls-in-arrears

Shareholders’ A/c Dr.
To Interest on calls-in-arrears A/c
(Being interest on calls in arrears at the rate of ...% made due)
(ii) For receipt of interest

Bank A/c Dr.
To Shareholders’ A/c
(Being interest money received)
(E) Journal entries for interest on Calls-in-Advance:
(i) Interest Due

Interest on Calls-in-Advance A/c Dr. [Amount of interest due for payment]
To Shareholder’s A/c
(Being interest on calls in advance made due)
(ii) Payment of Interest

Shareholder’s A/c Dr. [Amount of interest paid]
To Bank A/c
(Being interest paid on calls-in-advance)
(F) Issue of Shares for Consideration Other Than Cash

Public limited companies, generally, issue their shares for cash and use such cash
to buy the various types of assets needed in the business. Sometimes, however,
a company may issue shares in a direct exchange for land, buildings or other
assets. Shares may also be issued in payment for services rendered by promoters,
lawyers in the formation of the company. These shares should be shown separately
under the heading ‘Share Capital’.
Accounting Entries
When assets are purchased in exchange of shares
Assets Account Dr.
To Share Capital Account
419
CLASSWORK SECTION
Q.1 A Ltd., made a public issue of 100,000 Equity shares of ` 10 each at par. The
payment schedule was as under:
On Application `2
On Allotment `4
On First Call `3
On Final Call `1
Applications were received for 1,20,000 shares of which 1,00,000 shares were
allotted and balance 20,000 applications were rejected and Refunded. All further
sums were duly received except from Mr. Raju holding 3,000 shares who failed to
pay last call. His shares were subsequently forfeited and re-issued @ ` 7. Show
journal entries in the books of A Ltd.
Q.2 X Ltd. issued the shares of ` 10 each and the payment schedule was as under.
On Application ` 3/-
On Allotment ` 3/-
On First Call ` 2/-
On second & final call ` 2/-
` 10/-
(1) Mr. A to whom 3,000 shares were allotted failed to pay allotment and first
call money and his shares were immediately forfeited before final Call.
(2) Mr. B to whom 2,000 shares were allotted failed to pay both the calls and
his shares were forfeited after final call.
All the shares were later re-issued as fully paid shares @ ` 8 per share. Show
forfeiture and re-issue entries.
Q.3 Moon Wanderers Limited offered for public subscription 2,000 Equity Shares of
`100/- each at a premium of ` 20/- per share of the following terms :
(a) Applications money to be paid ` 40 per share.
(b) Allotment money to be paid ` 50/- per share including ` 20/- premium.
(c) 1st and final call money to be paid ` 30/- per share.
420
The applications were received for 3,000 shares and pro-rata allotment was done
to applicants of 2400 shares.
Mr. A who has applied for 120 shares failed to pay allotment money and Mr. B who
was allotted 50 shares failed to pay final call. Later on 100 shares were re-issued
@ 90 per share. Shares of A and B are forfeited after the final call.
Show Journal Entries for all events.
Q.4 X Ltd. issued 1,00,000 equity shares of `10 each at a premium of ` 2 per
share, payable as under :
On Application `2
On Allotment `5
On 1st call `3
On Final call `2
The applications were received for 1,20,000 shares of which 20,000 applications
were rejected. Mr. A to whom 3,000 shares allotted failed to pay allotment & 1st
call money and his shares were forfeited before final call. Mr. B to whom 2,000
shares were allotted failed to pay both the calls and his shares were forfeited after
final call. All these shares were later on re-issued at the rate of ` 9 per share. Show
Journal of X Ltd.
Q.5 X Ltd. made a public issue of 90,000 shares of ` 10 each payable as under:
On Application `3
On Allotment `4
On First call `2
On Final call `1
Application were received for 1,25,000 shares and the allotment was made as
under:
(1) Applications of 30,000 shares were fully accepted
(2) Applications for 15,000 shares were fully rejected.
(3) Balance applications were accepted pro-rata.

421
Mr. A to whom 3,000 shares were allotted pro - rata failed to pay allotment & call
money. Mr. B to whom 2,000 shares were allotted had paid for 2nd call along with
1st call. All the shares of Mr. A were forfeited of which 2,000 shares were reissued
at the rate of ` 9.5 each.
Please pass journal entries.
Q.6 X Ltd. issued 10,000 shares of ` 100 each at 20% premium as under:
On Application ` 20 (Last date 31/7/10)

On Allotment ` 70 (Last date 30/9/10)
On First call ` 30 (Last date 31/1/210)
The allotment resolution was passed on 1/9/10 and 1st call was made on 1/12/10.
Mr. A holding 200 shares has failed to pay allotment & call money and Mr. B holding
400 shares failed to pay call money. All the shares were forfeited on 31/1/11 of
which 500 shares were reissued on 15/2/11 @ ` 110. Show journal entries with
appropriate dates and narrations and also show the relevant items will appear in
balance sheet.
Q.7 D Ltd. issued 2,00,000 shares of ` 100 each at a premium of ` 20 per share
payable as follows:
On Application ` 20
On Allotment ` 50 (including premium)
On First call ` 30
On second and final call ` 20
Applications were received for 3,00,000 shares and pro rata allotment was made
to applicants of 2,40,000 shares. Money excess received on application of 2,40,000
shares was employed on account of sum due on allotment as part of share capital.
E, to whom 4,000 shares were allotted, failed to pay the allotment money and
on his subsequent failure to pay the first call, his shares were forfeited and F, the
holder of 6,000 shares failed to pay the two calls and his shares were forfeited
after the second call. Of the forfeited shares, 8,000 shares were reissued to G at a
discount of 10%, the whole of E’s forfeited shares being reissued.
Show Journal Entries for all Events.
422
Q.8 X Ltd. purchased a property for ` 40,00,000 paying 10% in cash. Balance amount
was payable in Equity shares, show Journal Entries if the shares are issued.
(1) At par
(2) At 20% Premium
(3) At 25% Premium
(4) At 50% Premium
Q.9 ABC Ltd. issued 1,00,000 shares of ` 10 each payable as under
`
On Application 2.50
On Allotment 3
On First call 2
On Final call 2.50
10
Mr. X holding 10,000 shares paid his full dues along with first call money. The final
call was made 3 months after 1st call. Mr. B did not pay final call money on time
but he cleared his dues 2 months late. Mr. B held 1,000 shares.
The Interest on calls in advance and calls in arrears were applied as per Table F.
Show Journal Entries.
Q.10 A company had an authorised capital of `10,00,000 divided into 1,00,000 equity
shares of `10 each. It decided to issue 60,000 shares for subscription and received
applications for 70,000 shares. It allotted 60,000 shares and rejected remaining
applications. Upto 31-3-2017, it has demanded or called `9 per share. All
shareholders have duly paid the amount called, except one shareholder, holding
5,000 shares who has paid only `7 per share.
Prepare a balance sheet assuming there are no other details.
423
Q.11 The Delhi Artware Ltd. issued 50,000 equity shares of ` 100 each and 1,00,000
preference shares of ` 100 each. The Share Capital was to be collected as under:
Equity Shares Preference Shares

` `
On Application 25 20
On Allotment 20 30
First call 30 20
Final call 25 30
All these shares were subscribed. Final call was received on 42,000 equity shares
and 88,000 preference shares.
Prepare the cash book and journalise the remaining transactions in the books of the
company.
Q.12 Mr. Long who was the holder of 2,000 preference shares of `100 each, on which `
75 per share has been called up could not pay his dues on Allotment and First call
each at ` 25 per share. The Directors forfeited the above shares and reissued 1500
of such shares to Mr. Short at ` 65 per share paid-up as `75 per share.
Give Journal Entries to record the above forfeiture and re-issue in the books of the
company.
424
HOMEWORK SECTION
Q.1 Piyush Limited is a company with an authorized share capital of ` 2,00,00,000 in

equity shares of ` 10 each, of which 15,00,000 shares had been issued and
fully paid on 30th June, 2017. The company proposed to make a further issue
of 1,30,000 shares of ` 10 each at a price of ` 12 each, the arrangements for
payment being:
(i) ` 2 per share payable on application, to be received by 1st July, 2017;
(ii) Allotment to be made on 10th July, 2017 and a further ` 5 per share (including
the premium) to be payable;
(iii) The final call for the balance to be made, and the money received
by 30th April, 2018.
Applications were received for 4,20,000 shares and were dealt with as follows:
(1) Applicants for 20,000 shares received allotment in full;

(2) Applicants for 1,00,000 shares received an allotment of one share for every
two applied for; no money was returned to these applicants, the surplus on
application being used to reduce the amount due on allotment;
five shares applied for; the money due on allotment was retained by the
company, the excess being returned to the applicants; and
(4) The money due on final call was received on the due date.
You are required to record these transactions (including cash items) in the journal
of Piyush limited.
425
Q.2 A company made in issue of 10,000 shares of ` 10 each payable as:

` 3 an application, ` 4 on allotment and balance on call.

43,825 shares were applied for including an application for 300 shares from a
person who paid for the full face value of the shares.

Owing to over subscription, allotments were scaled down as follows:
Applicants for 11,825 shares (in respect of applications for 500 or less) received
5,750 shares (including the application for 300 shares who got 150 shares).
Applicants for 32,000 shares (in respect of application for more then 500 shares),
received 4,250 shares.
Amount received were first applied towards allotment and call money (after
satisfying amount due on application) and any balance left was returned.
You required to show cash book and ledger account to record the above transaction.
Q.3 X Ltd forfeited 20,000 equity shares of ` 10 each, ` 8 called-up, for non-payment
of ¬first call money @ ` 2 each. Application money @ ` 2 per share and allotment
money @ ` 4 per share have already been received by the company. Give Journal
Entry for the forfeiture (assume that all money due is transferred to Calls-in-
Arrears Account).
426
OBJECTIVE
1. Calls in arrears is added to subscribed capital.

Ans. False – Calls in arrears is unpaid calls which will reduce the share capital.
2. Equity shares and ordinary shares are synonyms.

Ans. True – Equity shares are also called ordinary shares as they are risky shares
and do not have any preference as to payment of dividend or repayment of
capital
3. Re-issue of forfeited shares can result in a loss to company.

Ans. False – Maximum discount given on reissue of shares cannot exceed the amount
received from original shareholder i.e. minimum reissue price is the amount
unpaid by original shareholder. Therefore there can be profit on reissue or at
the most no profit no loss.
4. Shares allotted for consideration other than cash is disclosed under share
capital.
Ans. True – In case of shares allotted for consideration other than cash, money
is not received against share but shares are issued in exchange of assets or
services which requires separate disclosures under share capital in the balance
sheet.
5. Since company has existence Independent of its members, it continues to be in

existence despite the death, insolvency or change of members.
Ans. True – one of the features of a limited company is perpetual existence
independent of its members. Further limited company is a separate legal entity
different from its members.
427
6. Forfeited shares cannot be issued at a premium.

Ans. False – There is no limit to amount to be received on forfeited shares but
minimum reissued price is amount not received from old shareholder.
7. The loss on re-issue of shares cannot be more than the gain on forfeiture of
those shares.
Ans. True – loss means discount on reissue. Discount cannot exceed amount already
received on forfeited shares from old shareholder (i.e. gain)
9. Reissue of forfeited shares is allotment of shares but not sale.

Ans. False – Reissue of forfeited shares is not original allotment of shares out of
public issue. It is available for sale to the company as calls has not been paid
on these shares.
10. Correct sequences in which capital of company is raised is subscribed, issued,

nominal & called up.
Ans. False – Correct sequence is nominal (i.e. authorised), Issued, subscribed &
called up.
11. Forfeited shares reissued cannot be reissued at discount.

Ans. False – forfeited shares can be reissued at discount limited to amount received
from original shareholder.
12. Maximum amount that can be collected as premium as percentage of face

value is 25%.
Ans. False – Company’s Act or law does not put restriction on maximum premium.
So companies can charge any amount of premium.
13. Fund flow statement is part of financial statements.

Ans. False – Cash flow statement is part of financial statement.
1. The maximum amount of capital which a company can raise is called _________
share capital.
428
2. The money received in excess of called up amount is credited to _____________.
3. Share Application account is a _________account.
4. The minimum amount that should be called by a company with application for
its shares is _____of face value of shares.
5. The minimum amount that should be called by a company with application as

per SEBI guidelines is ______ of issue price of shares.
6. Premium on issue of shares is determined by _____________.
7. When shares are forfeited, share capital a/c is debited with _____________ &
share forfeited a/c is credited with _____________.
8. The maximum amount beyond which company is not allowed to raise funds by
issue of shares is its _____________.
9. Dividends are usually paid on _____________.
10. ___________ is deducted from share capital to find paid-up capital.
11. Share application & allotment a/c is in nature of ___________.
12. _____________ is also known as Registered or Nominal Capital.
13. Liabilities of shareholder of public company is limited to

_____________________________.
14. If vendors are issued fully paid shares of ` 80,000 in consideration of net asset
of ` 60,000 then balance of ` 20,000 will be debited to _________.
15. A share of ` 100 each is forfeited for nonpayment of allotment money of ` 50

(including premium of ` 20) & 1st & final call of ` 20. Amount credited to share
forfeited account will be _______.
429
16. A company invited application for subscription of 5000 shares. Applications

were received for 6000 shares were allotted prorata.
(a) If Shyam has applied for 180 shares, shares allotted to him will be ____
( 5000
6000
x 180 shares
(
(b) If Shyam is allotted 350 shares, shares applied by him would ____
( 6000
5000
x 350 shares
(
17. X Ltd. forfeited 1000 shares. If ` 10 each called up & only ` 5 paid on application
then amount to be forfeited is _______.
18. A company has issued shares of ` 10 each at premium of ` 2 each. Whole

amount has been called up but shares were forfeited for non-payment of ` 4.
On forfeiture, share capital a/c will be debited by _____.
19. Z Ltd. forfeited 20 shares of ` 10 each on which ` 6 per share were called up &
` 4 per share were paid. Minimum price of reissue of these shares as fully paid
up is ________.
20. A Ltd. issued equity shares of ` 100 each. It has called up ` 75 on each share but
received only ` 60 per share. Share capital a/c will be credited by __________.
21. Authorised capital (` 10 per share) of a company is 5 lacs. Issued capital 3

lacs & subscribed capital 2 lacs. It received ` 5 per share on application &
allotment & ` 2 per share on 1st call except on 2500 shares, which have not
been forfeited. Share capital a/c is credited with _____________.
22. A Ltd. allotted 20000 shares to applicants of 28000 shares on prorata basis.
Amount payable on application is ` 2. Mr. X applied for 420 shares. Number
of shares allotted & amount c/f for adjustment against allotment money due
from Mr. X will be _____________.

( 20,000
28,000
x 420 = 300 shares 120 shares, x2 = 240
(
430
23. A Ltd. acquired asset worth ` 15 lacs from H Ltd. by issue of shares of ` 100 at
premium of 25%. Number of shares to be issued by A limited to settle purchase
consideration will be _______ shares
( 15 Lacs
125 (
24. Following information pertains to X Ltd.
1. Equity share capital called up ` 5,00,000.
2. Calls in arrears ` 40,000
3. Calls in advance ` 25,000
4. Proposed dividend = 12.5%
Amount of dividend is _________ [(` 5 lakhs – 40000) × 12.5%]
25. T Ltd. proposed to issue 10000 equity shares of ` 100 each at premium of 20%.
Minimum application money to be collected per share will be ______. (100 ×
5%)
26. Subscribed capital of S Ltd. is ` 80,00,000 of ` 100 each. There were no calls
in arrears till final call was made. Final call made was paid on 77500 shares.
Calls in arrears amounted to ` 75000. Final call per share = ______.
27. Authorised capital of M Ltd consists of both preference & equity shares. Each
5% cumulative preference share has par value of `100 & each equity share
has par value of ` 10. During 2005 – 06 cumulative preference share capital
was ` 2 lakhs. If dividend declaration totalled ` 25,000 in 2005 – 06, dividend
allocated to equity shareholders in 2005 – 06 will be _________.
28. Private companies are ________ companies (listed/unlisted)
29. Maximum members for all private companies is 200 except for __________
companies.
30. _________preference shares have right to receive dividend unpaid in prior

years whenever earnings become adequate.
31. As per companies Act, only preference shares which are redeemable with in
_____ years can be issued.
431
32. Unless otherwise stated preference shares are _________, ___________,

_____________.
33. Portion of uncalled subscribed capital not called except in case of winding up
is called _____________.
34. B Ltd. was registered with share capital of ` 2,00,00,000 divided into equity
shares of ` 10 each. It issued ` 1,80,00,000 equity shares to public at par
payable ` 3 on application, ` 3 on allotment & balance in 2 equal calls. Public
subscribed for 17 lac shares. Till 31st March 2019 only 1st call is made. All
shareholder has paid except Mr. C holder of 50000 shares who did not pay call
money.
(a) B Ltd. authorized capital is _____________.
(b) Issued capital is _____________.
(c) Subscribed capital is _____________.
(d) Called up capital is _____________.
(e) Paid-up capital is _____________.
35. Authorised capital of M Ltd. consists of both cumulative preference shares &
equity shares. Each 5% cumulative preference shares has par value of ` 100 &
equity share has par value of ` 10. At end of 2009-10 & 2010-11, Cumulative
preference share capital balance was ` 2 Lac & equity capital balance was `
5 lacs. If dividend declaration totalled ` 8000 & ` 15000 in 2009-10 & 2010-
11 respectively, dividend allocated to equity share holder in year 2010-11 is
________. [Pref. Div. 10000 – 8000 = 2000 short in 09-10, CY 15000 – 2000
(PY) – 10000 (CY) = 3000)
Q.3 Short Questions
1. Ronny Ltd. forfeited 200 shares of ` 10 each, ` 8 per share called up on which
application & allotment money of ` 5/- is paid but 1st call not paid. Of these
forfeited shares 150 shares were reissued as fully paid up for ` 8 per share.
Pass journal entries for forfeiture & reissue.

2. Y Ltd. forfeited 1000 equity shares of ` 10 each, ` 7 called up issued at premium
of 20% (to be paid at time of allotment) for nonpayment of allotment money
432
of ` 4 & 1st call of ` 2 per share. Out of these 600 shares reissued as fully paid
up for ` 8.50 per share. Pass entries for forfeiture & reissue.

3. Kumar holder of 4000 preference shares of ` 100 each on which ` 75 per
share called up could not pay his dues on allotment & 1st call each at ` 25
per share. Directors forfeited above shares & reissued 3000 shares at ` 65 per
share, paid up as ` 75 per share. Pass entries for forfeiture & reissue.
1. If a share of `10 issued at premium of ` 1 on which ` 9 (Including premium) have

been called and `7 (including premium) paid is forfeited, the capital account
should be debited by.
a) ` 8 b) `9
c) ` 7 c) ` 6
2. X co. forfeits 1000 shares. If ` 10 each called up and only ` 5 paid on application.
The amount to be forfeited is.
a) `5000 b) `700
c) `200 d) `300
3. Z. Ltd. forfeited 20 shares of `10, each on which `6 per share were called up
and `4 per share were paid what is the minimum price of reissue of these
shares as fully paid up.
a) `200 b) ` 120
c) `80 c) ` 20

4. A Ltd, company issued equity shares of Rs 100 each. It has called up `75 on
each share but received only `60 per share. The share capital account will be
credited with
a) `60 per share b) ` 75 per share
c) ` 100 per share d) Any of the above
5. D Ltd. forfeited 200 shares of `10 each, `7 called up on which ram had paid
only application money `3 per share. Of these, 125 shares were reissued to
shyam for `9 per share fully paid what will be balance in the share forfeited
433
A/c after reissue of 125 shares .

a) `225 b) ` 600
c) `525 d) `450
6. If vendors are issued fully paid shares of `80,000 in consideration of net assets
of `60,000 then the balance of `20,000 will be
a) Debited to profit and loss account
b) Debited to goodwill account
c) Credited to capital reserve account
d) Credited to share premium account
7. A share of ` 100 each is forfeited for non-payment of allotment money of `50

(including premium `20) and first and final call of ` 20. Amount credited to
share forfeited account will be
a) `50 b) `30
c) `20 d) `80
8. The maximum amount beyond which a company is not allowed to raise funds
by issue of shares is
a) Issued capital b) Reserve capital
c) Authorised Capital d) subscribed capital
9. The document inviting offers from the public to subscribe share is _____.
a) A share certificate b) Prospectus
c) Stock invest d) F.D. Receipt
10. The maximum amount than can be collected as premium as a % of face value
is ______.
a)
Unlimited b) 30%
c) 15% d) 45%
11. Y Ltd. purchased machinery for ` 5,50,000 from Z.Ltd. the company settled
the purchase consideration by issue of equity shares of ` 100 each at 10%
premium, the share capital A/c will be credited by_____
a) ` 5,50,000 b) ` 4,50,000
c) ` 5,00,000 d) ` 4,75,000
434
12. Pro-rata allotment of share means allotment of share_____

a) Equally among the applicants
b) At the discretion of the directors
c) To all the applicants in proportion to shares applied
d) To a few selected applicants
13. Calls in advance account is ______

a) Shown in the balance sheet on liability side separately
b) Added to reserves
c) Deducted from loans and advances.
d) Ignored in Balance sheet
14. The balance in share application, after allotment should have ____ balance.
a) Nil b) Credit
c) Debit d) short
15. Short receipt of allotment money is called ______

a) Calls in advance b) called up amount
c) calls-in-arrears d) forfeited shares
16. ABC Ltd. issued 1,000 shares of ` 100 each at a premium of `15 per share,
payable as under:
On Application `30; on allotment ` 45 (including premium); on First and
Final call `40 Mr. Trivedi to whom 100 shares were allotted did not pay the
allotment money. As a result his shares were forfeited and they were re-issued
to Mr.Chaturvedi at `95 per share as fully paid, thereafter, the call was made,
the call money payable by Mr. Chaturvedi is-
a) `4,000 b) `500
c) Nil c) `200
17. The profit made on reissue of forfeited shares is transferred to

a) Capital reserve b) Capital redemption reserve
c) General reserve d) profit and loss A/c
435
18. The amount of capital actually offered to the public / shareholders is called
the
a) Issued capital b) Subscribed capital
c) Called – up capital d) Authorized capital
19. The following statement is false –

a) Issued capital can never be more than the authorised capital

b) In the case of “under – subscription” issued capital is less than subscribed
capital

c) Uncalled capital may be converted into Reserve capital

d) Paid-up capital is equal to called up capital less calls-in- Arrears
20. If minimum subscription is 9,000 shares of `10 each and application are
received only for 8,000 shares.
a) Allotment will be made pro-rata
b) There will be no allotment and all application money will be forfeited
c) There will be no allotment and all application money will be refunded
d) Full allotment will be made
21. Issued capital less under subscription equal to

a) Authorised capital b) subscribed capital
c) Reserve Capital d) Paid – up capital
22. _______ capital can be called up only in case of winding up of the company.
a) Authorised b) subscribed
c) Reserve d) Paid – up
23. The unpaid dividend of any year will have to be paid out of the profits of the
subsequent years in case of
a) Non-cumulative preference shares
b) Participating preference shares
c) Cumulative preference shares
d) Non-participating preference shares
436
24. The unpaid dividend of any year will lapse in case of

a) Non-cumulative preference shares
b) Participating preference shares
c) Cumulative preference shares
d) Non-participating preference shares
25. The amount of capital stated in the capital clause of the Memorandum of
association is called the
a) Issued capital b) Subscribed Capital
c) Called – up Capital d) Nominal Capital

26. X Co. Ltd. forfeited 20 shares of ` 10 each on which ` 5 per share were paid.
The company issued these shares @ ` 8 fully paid up. Amount transferred to
capital reserve will be
a) ` 40 b) ` 60 c) ` 20 d) ` 100
27. X Co. Ltd. forfeited 100 shares of ` 10 each on which ` 4 per share were paid.
The company issued 40 shares @ ` 8 per share fully paid. Amount transferred
to capital reserve will be :
a) ` 400 b) ` 160 c) ` 80 d) None
28. X Ltd. Forfeited 20 shares of ` 10 each, ` 7 called up on which John had paid
application and allotment money of ` 5 per share. Of these, 15 shares were
reissued to Parker as fully paid up for ` 6 per share. What amount should be
transferred to Capital Reserve Account.
a) ` 15 b) ` 20 c) ` 75 d) None
29. Consider the following information pertaining to the issue of shares of a

company. The company issued share of `10 each at a premium of ` 2 payable
as:
On application `3
On allotment ` 4 (including premium)
On first call `3
On second and final call `2
437
Mr. E who holds 100 shares failed to pay the first call money. The company has
forfeited the 100 shares after the first call. On forfeiture, the amount debited
to share capital account =?
a) ` 1,200 b) ` 1,000 c) ` 800 d) None
30. Z Ltd. issued 20,000 equity shares of ` 100 each at par, out of which, only `
85 is called-up. Mr. Arun did not pay the call money of ` 25 and hence all
the 1,000 shares allotted to him were forfeited. lf all these shares are to be
reissued as fully paid-up, the minimum amount to be collected is :
a) ` 40,000 b) ` 1,00,000 c) ` 15,000 d) None

31. Zed Ltd. forfeited 500 shares (face value ` 10) called up ` 6 held by A for non-
payment of 1st call of ` 2 per share. lt reissued 300 of the forfeited shares @
` 9 per share as fully paid and the amount transferred to capital reserve shall
be :
a) ` 300 b) ` 800 c) ` 900 d) None
32. A Limited Company issues 20,000 equity shares of ` 10 each at a premium

of ` 5 per share, payable as to ` 7 (including premium) on application, ` 5 on
allotment and the balance after three months of allotment.
A shareholder to whom 200 shares were allotted failed to pay the allotment
and call money and his shares were forfeited. 160 of the forfeited shares was
re-issued for ` 1,600. Transfer to Capital Reserve will be:
a) ` 1,600 b) ` 400 c) ` 320 d) None of these
33. A company forfeited 50 shares of `100 each issued at 10% premium (to be paid
at the time of allotment) on which shares first call of ` 30 was not received,
the final call of ` 20 per share is not yet called. 20 of these shares were
subsequently re-issued at ` 70 per share as ` 80 called up. The transfer to
Capital Reserve will be:
a) ` 400 b) ` 300 c) ` 800 d) None of these
34. X Limited forfeited 100 shares of `10 each (` 8 called up) issued at a premium
of ` 2 per share to Mr. R. On which he had paid application money of ` 5
per share, for non-payment of allotment money of ` 5 per share (including
premium) his shares were forfeited. Out of these 70 shares were re-issued to
438
Mr. Sanjay as ` 8 called for ` 9 per share. Transfer to Capital Reserve will be:
a) ` 350 b) ` 140 c) ` 280 d) None of these
35. G Ltd. acquired assets worth ` 7,50,000 from H Ltd. by issue of shares of ` 100
each at a premium of 25%. The number of shares to be issued by G Ltd. to
settle the purchase consideration =?
a) 6,000 shares b) 7,500 shares
c) 9,375 shares d) 5,625 shares
36. Equity shareholders are the

a) Owners of the company b) Creditor of the company
c) Debtor of the company d) Management of the company
37. T Ltd. proposed to issue 6,000 equity shares of ` 100 each at a premium of
40%. The minimum amount of application money to be collected per share = ?
a) ` 5.00 b) ` 6.00 c) ` 7.00 d) None
38. A company wants to issue equity share of ` 10 each at premium of ` 50

per share. What is the minimum amount which can be demanded by company
on Application:
a) ` 60 per share b) ` 10 per share
c) ` 3 per share d) None
39. The excess price received over the par value of shares, should be credited to
__________.
a) Calls-in-advance account
b) Share capital account
c) Securities premium account
40. The Securities Premium amount may be utilized by a company for __________.
a) Writing off any loss on sale of fi¬xed asset
b) Writing off any loss of revenue nature
c) Writing off the expenses/discount on the issue of debentures
41. When shares are forfeited, the share capital account is debited with ________
and the share forfeiture account is credited with __________.
439
a) Paid-up capital of shares forfeited; Called up capital of shares forfeited

b) Called up capital of shares forfeited; Calls in arrear of shares forfeited
c) Called up capital of shares forfeited; Amount received on shares forfeited
42. Dividends are usually paid as a percentage of ______.

a) Authorized share capital b) Net profi¬t
c) Paid-up capital
43. As per the SEBI guidelines, on issue of shares, the application money should
not be less than
a) 2.5% of the nominal value of shares
b) 2.5% of the issue price of shares
c) 25% of the issue price of shares
44. As per the Companies Act only preference shares, which are redeemable
within _______can be issued:
a) 24 years b) 30 years c) 25 years d) 20 years
45. Final accounts of a company are prepared according to Companies Act,

2013 :
a) Schedule lV b) Schedule lll
c) Schedule Vl d) Schedule Vll
46. Deepak Ltd forfeited 50 shares of 100 each (` 60 called up) issued at par to
Mukesh on which he had paid ` 20 per share. Out of these 30 shares were
reissued to Surve as ` 60 paid up for ` 45 per Share. Amount transferred to
Capital reserve will be
a) ` 150 b) ` 100
c) ` 200 d) ` 120
47. Asha Ltd. issued shares of ` 10 each at a premium of 25%. Mamta who has
2,000 shares of Asha Ltd., failed to pay first and final call totalling ` 5. Premium
was taken at the time of allotment by the company. On forfeiture of Mamta’s
shares, the amount to be debited to Securities Premium account will be:
a) ` 5,000 b) ` 10,000
c) ` 15,000 d) Nil
440
48. The difference between Subscribed Capital and Called-up Capital is called:
a) Calls in arrear b) Calls in advance
c) Uncalled capital d) None of the above
49. Free transferability of share is the characteristic of the company. lt is possessed

by –
a) All companies b) All private companies
c) All public companies d) None of these
50. A Ltd. forfeited 50 shares of ` 100 each issued at 10% premium on which
allotment money of ` 30 per share (including premium) and first call of ` 30
per share were not received, the second & final call of ` 20 per share was not
yet called. lf 20 of these shares were re-issued as ` 80 called up for ` 80 per
share, the Profit on Re-issue is -
a) ` 1,500 b) ` 1,300 c) ` 900 d) ` 600
51. Which of the following statement is not a feature of a Company?

a) Separate legal entity b) Common Seal
c) Perpetual Succession d) Members have unlimited liability
52. ln a Government Company, the holding of the Central Government in paid-up

capital should not be less than
a) 25% b) 50 % c) 51% d) 75%
53. X was issued 100 shares of ` 10 each at a premium of Re. 1, he paid application
money and allotment money which in total amounted to ` 5 (excluding
premium) and failed to pay the balance call money of ` 5. Find the maximum
discount that can be given at the time reissue of Shares:
a) `5 b) `6 c) `4 d) None

54. The amount of calls in arrear is deducted from _______ to arrive at __________
a) lssued capital; called up capital
b) Called up capital: lssued capital
c) Paid up capital; called up capital
d) called up capital; paid up capital
441
55. Z Ltd. Issued 1,00,000 equity shares of ` 10 each at par. The amount payable
is.:
On application : ` 2, On allotment : ` 3, On first & final call ` 5
Application money was received on 1,20,000 shares. Excess application money
was refunded. All amount due received except final call on 1,000 shares. The
paid up capital is __________.
a) ` 10,00,000 b) ` 9,95,000
c) ` 12,00,000 d) ` 10,40,000
56. The fixed denomination of a share mentioned in the MOA is called _______.
a) price of a share b) face value of a share
c) market value d) fair value of a share

57. A share comes into existence at the time of __________.
a)
Application b) Allotment
c) call d) full payment
58. If forfeited shares are issued at a discount, the amount of discount shall be
debited to _________.
a) Profit and Loss Account
b) Capital reserve Account
c) Forfeited shares Account
d) Share premium Account
59. The called up capital of Ragini Ltd. For 4,500 shares is ` 3,82,500. Mr. Ranjit an
allottee of 500 shares failed to pay the call money of ` 10 per share. The paid
up capital in the Balance sheet of the company is ________.
a) ` 5,05,000 b) ` 3,77,500
c) ` 3,87,500 d) ` 5,50,000
60. A company forfeited 2,000 shares of ` 10 each issued at par held by Mr. Mohan
for non-payment of allotment money of ` 4 per share. The called up value per
share ` 9 on forfeited, the amount debited to share capital will be________.
a) ` 10,000 b) ` 8,000
c) ` 18,000 d) ` 6,000
442
61. The sweat shares allotted to __________.

a)
Investor b) employees
c) vendors d) promotors
62. The amount received in excess of face value is credited to _________.

a) Profit and loss Account b) Capital Reserve
c) Securities premium d) share capital
63. The amount of capital stated in memorandum of association is called ______.

a) Called up capital b) Subscribed Capital
c) authorised capital d) Paid up Capital
Answer
Fill in the blanks:
1. authorised
2. calls in advance.
3. personal
4. 5%
5. 25%
6. Issuing Company.
7. called up amount , Amount received.
8. Authorised capital.
9. paid up capital.
10. Calls in arrears
11. personal a/c.
12. Authorised capital
13. Face value of share /Amount agreed to be paid by shareholder of company.
14. goodwill.
15. `50.
16. (a) 150 (b) 420
17. ` 5000.
18. `10.
19. ` 120
20. ` 75 per share.
21. ` 14,00,000
22. 300 shares & ` 240
443
23. 12000
24. ` 57500
25. ` 5
26. `30.
27. ` 15,000.
28. unlisted
29. one person
30. Cumulative
31. 20
32. cumulative, non participating, non convertible & redeemable.
33. reserve capital.
34. (a) ` 2,00,00,000
(b)
` 1,80,00,000
(c) ` 1,70,00,000
(d)
` 1,36,00,000
(e) ` 1,35,00,000
35. ` 3000

Short Questions
1.
1. Share capital Dr. 1,600

To share forfeited 1,000
To calls in arrears 600
2. Bank Dr. 1,200

Share forfeited Dr. 300
To share capital 1,500
3. Share forfeited Dr. 450

To capital reserve 450
444
2.
1. Equity share capital Dr. 7,000

Securities premium Dr. 2,000
To share forfeited 3,000
To calls in arrears 6,000
2. Bank Dr. 5,100

Share forfeited Dr. 900
To Equity share capital 6,000
3. Share forfeited Dr. 900

To capital reserve 900
3.
1. Preference share capital Dr. 3,00,000

To calls in arrears 2,00,000
To share forfeited 1,00,000
2. Bank Dr. 1,95,000

Share forfeited Dr. 30,000
To Preference share capital 2,25,000
3. Share forfeited Dr. 45,000

To capital reserve 45,000
1. (a) 17. (a) 33. (c) 49. (c)

2. (a) 18. (a) 34. (a) 50. (d)
3. (b) 19. (b) 35. (a) 51. (d)
4. (b) 20. (c) 36. (a) 52. (c)
5. (a) 21. (b) 37. (a) 53. (a)
6. (b) 22. (c) 38. (d) 54. (d)
7. (a) 23. (c) 39. (c) 55. (b)
8. (c) 24. (a) 40. (c) 56. (b)
445
9. (b) 25. (d) 41. (c) 57. (b)

10. (a) 26. (b) 42. (c) 58. (c)
11. (c) 27. (c) 43. (c) 59. (b)
12. (c) 28. (a) 44. (d) 60. (c)
13. (a) 29. (c) 45. (b) 61. (b)
14. (a) 30. (a) 46. (a) 62. (c)
15. (c) 31. (c) 47. (d) 63. (c)
16. (c) 32. (c) 48. (c)
Q.3. Multiple Choice Questions:

1. (a)
Capital debited with
Called up value = ` 9 – ` 1 (Premium)
=`8
2. (a)
1000 shares × ` 5 (Paid up) = ` 5000
3. (b)
20 shares × ` 6 (Called up) = ` 120
5. (a)
Shares forfeited Amt. of s.f.
200 600 (200×3)
125 (375)
Bal. in sf = 600 – 375 = ` 225
11. (c)
550000 = 50000 shares
110
Cap. Credited with = 50000 × ` 100 = 500000
26. (b)
20 × 5 = 100 sr.
20 × 2 = 40 p/s Adjusted
Cap. Rs. 60
446
27. (c)
100 sh. `400
40 sh. 160
` 160 – ` 80 (40 × 2) = ` 80
28. (a)
20 sh. 100
15 sh. 75
` 75 – ` 60 (15 × 4) = ` 15
29. (c)
100 × 8 (called up value) = 800
30. 1000 sh. ` 40 = ` 4000
31. (c)
500 sh. 2000
300 sh. 1200
`1200 – ` 300 (300 × `1) = 900
32. (c)
200 sh. 400
160 sh. 320
` 320 – 0 ` = ` 320
34. (c)
100 sh. 500
70 sh. 350
` 350 – 70 (70 × 1) = 280
750000
35. = 6000 shares.
125
46. (a)
50 sh. 1000
30 sh. 600
` 600 – ` 450 (30 × 15) ` 150
447
50. (d)
50 sh. 1500
20 sh. 600
` 600 – 0 = ` 600
55. (b)
App. 100000 × 2 = 200000
Allt 100000 × 3 = 300000
1st & final 99000 × 5 = 495000
Paid up capital = 995000
59. 382500 – 5000 = 377500
60. 2000 × 9 (called up value) = 18000
448
UNIT II – ISSUE OF DEBENTURES
THEORY SECTION
Debentures Defined
Debentures mean a loan taken by company from the general public in form of securities.
In the balance sheet of a Joint stock company, the debentures will appear under the
head "Non-Current Liabilities"
As per Companies Act debenture is a instrument of a company evidencing (Proof of) a

debt.
Distinguish between Shares & Debenture
Debentures Shares
1. They are creditors of company They are owner of company
2. They do not have voting rights They have voting right relating to
company’s affairs
3. They are paid fixed rate of interest Preference dividend are paid at
which is paid before payment to any fixed rate (on availability of profit)
type of shareholder but equity dividend is dependent on
availability of profit.
4. Interest to debentures are charge Dividends are appropriation of profit
against profit & is payable even if there & is payable only if there is profits
is a loss
5. Debentures are classified as long term Shares are classified under “Share
borrowings in company balance sheet Capital” in company balance sheet
6. Debentures cannot be forfeited for non- Shares can be forfeited for non-
payment of call money payment of allotment & call money
7. At maturity debentures are to be repaid Only preference shares are repaid
back after fixed term, equity shares
cannot be paid back expect on
liquidation of company.
449
Types of debentures

1. Secured & unsecured (naked) debentures:-
Secured debentures are secured by charge on specific assets (fixed charges) or all
the assets of company (floating charge)
2. Convertible & non-convertible debenture:-

Convertible debentures can be converted into equity shares fully or partly after
certain time from date of issue at specific price.
3. Redeemable & Irredeemable (perpetual) debentures:-

Redeemable debentures are repayable after fixed / specific time whereas
irredeemable debentures can be repaid only on liquidation of company.
4. Registered & Bearer debentures:-

Registered debentures an those which are payable to registered holder whose
details are recorded in register of debenture holders. They are transferable subject to
complying provisions of Companies Act whereas bearer debentures are transferable
by delivery & payable to bearer as no record is kept by company in respect to
debenture holder.
5. First mortgage & 2nd mortgage debentures:-

First mortgage debenture are payable first out of property / asset charged & after
satisfying them 2nd mortgage debentures are paid.
Treatment of discount on issue / loss on issue (due to premium on redemption)
 Above losses should first be taken to asset side of balance sheet (as non-current
/ current asset) & then to be transferred to P & L A/c (amortised) by any of two
methods given below.
450
Method of amortisation
Straight line method Sum of years digit method
If debenture are redeemable after If debentures are redeemable at different
certain year say after 5 years then dates then losses amortised in ratio of
above loss should be amortised equally face value of debentures outstanding
throughout life of debentures every year.
On amortisation entry is
P & L A/c Dr.
To Discount / loss on issue
(i.e. in ratio of benefits derived from debenture loan in particular year)
Debenture Interest & tax deducted at source (TDS)

 Debenture interest is always paid on face value of debentures & entry is
Debenture Interest A/c Dr.
To Debenture holders
 Sometimes company may have to deduct income tax (TDS) as per tax law from
interest payable & entry is
Debenture holders A/c Dr.
To TDS Payable
To Bank (net interest)
 Above tax deducted should be paid to government & entry is

TDS Payable A/c Dr.
To Bank
 Transfer interest to profit & loss

Profit & Loss A/c Dr.
To Debenture Interest
Entries for issue of debentures

1. Issue at par and redeemable at par
(a)
Bank a/c Dr. xx
To Debentures a/c(F.V.) xx
451
2. Issue at discount and redeemable at par

(a)
Bank a/c Dr. xx
Discount on issue of debentures a/c Dr. xx
To Debentures a/c(F.V.) xx
3. Issue at par and redeemable at premium

(a)
Bank a/c Dr. xx
Loss on issue of debenture a/c Dr. xx
To Debentures a/c (F.V.) xx
To Premium payable on redemption /
Debenture redemption premium a/c xx
4. Issue at Discount and Redeemable at Premium

(a)
Bank a/c Dr. xx
Discount on issue of debenture a/c Dr. xx
loss on issue of debenture a/c Dr. xx
To Debenture a/c(F.V.) xx
To Premium payable on redemption/
5. Issue at Premium and Redeemable at Premium

Bank a/c Dr. xx
Loss on issue of Debenture a/c Dr. xx
To Securities Premium a/c xx
To Premium payable on redemption /
Note: - Debenture redemption premium account is a personal account and will
appear in the balance sheet.
6. Issue of debentures for a consideration other than cash

Assets a/c Dr. xx
Dis. on issue of Debentures a/c (if any) Dr. xx
To Securities Premium a/c (if any) xx
452
7. Issue of debentures as collateral security (i.e. secondary / supporting security)

When a company has taken loan from some financial institution and has issued
debentures as collateral security, following two options of accounting are available
1. Pass no entry for issue of debentures, and show debentures issued an additional
information below the loan in balance sheet
2. Pass following entry for issue of such debentures

Debentures Suspense a/c Dr. xx
To Debentures a/c xx

Note 1:- The holder of such debentures (e.g. financial institution) is entitled to
interest only on the amount of loan but not on debentures.
Note 2:- In absence of information follow above option 1 as it is more logical.
453
CLASSWORK SECTION
Q.1 A Ltd. issued 5,000 6% Debenture of ` 100 each at 10% discount which are
redeemable after 6 years at par. Show journal entry.
Q.2 C Ltd. issued ` 6,00,000 7% Debentures of ` 100 each at par which are to be
redeemed after 5 years at 10% premium. Show journal entry.
Q.3 B Ltd. issued 10,000 8% Debentures of ` 100 each at 6% discount which are
redeemable after 8 years at 20% premium. Show journal entry.
Q.4 D Ltd. issued 5,000, 9% Debentures of ` 100 each at 10% Premium which will be
redeemed after 6 years at 40% Premium. Show journal entry.
Q.5 E Ltd. Purchased a Machinery for ` 7,20,000 and issued 8% Debentures of `100 each
as consideration. Show journal entries when the debentures are issued :
(a) At 10% Discount (b) At 20% Premium

Q.6 F Ltd. took a bank loan of ` 50,00,000 and issued 9% Debentures of ` 60,00,000
as collateral Security. Show journal entries. Also show alternative treatment of
debentures if journal entries are not passed. Also show balance sheet presentation
in both the cases.
Q.7 G Ltd. issued `10,00,000 8% Debenture at 6% discount which will be redeemed

after 5 year at par. Discuss how the discount will be written off over 5 years:
(a) When the debentures will be redeemed in lumpsum after 5 years.
(b) When the debentures will be redeemed in 5 equal annual instalments.
(c) ` 200,000 was redeemed at the end of 1st year, ` 1,00,000 was re d e e m e d
at the end of 2nd year, ` 2,00,000 at the end of 3rd year, ` 1,00,000 at the end
of 4th year and balance at the end.
Q.8 Agrotech Ltd. issued 150 lakh 9% debentures of `100 each at a discount of 6%,
redeemable at a premium of 5% after 3 years payable as:
`50 on application and ` 44 on allotment. Record necessary journal entries for issue
of debentures.
454
Q.9 X Ltd. issued 1,00,000 12% Debentures of `100 each at a discount of 10% payable
in full on application by 31st May, 2019. Applications were received for 1,20,000
debentures. Debentures were allotted on 9th June, 2019. Excess monies were
refunded on the same date. Pass necessary Journal Entries.
Q.10 Company issued 12% debentures of ` 10,00,000 @ 10% discount on 1/1/19.

Debenture interest after TDS of 10% is payable on 30th June & 31st December every
year.

Pass journal entries for 2019 if debentures are redeemable after expiry of 5 years at
5% premium.
455
SECTION III : FORMAT OF FINAL ACCOUNTS (Schedule III)
........................ Ltd.
Balance Sheet as on.............
Particulars Note CY PY
I. EQUITY AND LIABILITIES
(1) Shareholders’ funds
(a) Share capital (Note 1)
(b) Reserve and surplus (Note 2)
(c) Money received against share warrants
(2) Share application money pending allotment
(3) Non-current liabilities
(a) Long - term borrowings (Note 3)
(b) Deferred tax liabilities (Net)
(c) Other Long - term liabilities
(d) Long - term provisions (Note 4)
(4) Current liabilities
(a) Short - term borrowings (Note 5)
(b) Trade payables
(c) Other Current liabilities (Note 6)
(d) Short - term provisions (Note 7)
TOTAL
II. ASSETS
(1) Non-current assets
(a) Property, plant & equipments
(i) Tangible assets (Note 8)
(ii) Intangible assets (Note 9)
(iii) Capital Work – in - progress
(iv) Intangible assets under development
(b) Non - current investments (Note 10)
(c) Deferred tax assets (net)
(d) Long - term loans and advances (Note 11)
(e) Other non-current assets
(2) Current assets
(a) Current investments
(b) Inventories (Note 12)
(c) Trade receivables (Note 13)
(d) Cash and cash equivalents (Note 14)
(e) Short - term loans and advances (Note 15)
(f) Other current assets (Note 16)
TOTAL
Contingent liabilities and commitments (Note 17)
456
............. Ltd.
Profit and Loss Statement for the year ended...................
Particulars Note CY PY
I. Revenue from operations
II. Other incomes (Note 18)
III. Total Revenue
IV. Expenses :
Cost of materials consumed
Purchases of Stock - in - Trade
Changes in inventories of finished goods, Work - in - progress
and Stock-in-Trade (Note 19)
Employee benefits expenses (Note 20)
Finance Cost (Note 21)
Depreciation and amortization expenses
Other expenses (Note 22)
Total expenses
V. Profit before exceptional and extraordinary items and tax (III - IV)
VI. Exceptional items (Note 23)
VII. Profit before extraordinary items and tax (V - VI)
VIII. Extraordinary Items (Note 24)
IX. Profit before tax (VII - VIII)
X. Tax expense :
(1) Current tax
(2) Deferred tax
(3) (Excess) / Short Income Tax Provision of earlier year
XI. Profit / (Loss) for the period from Continuing operations (IX - X)
XII. Profit / (loss) from discontinuing Operations
XIII. Tax expense of discontinuing Operations
XIV. Profit / (loss) from Discontinuing Operations after tax (XII - XIII)
XV. Profit / (Loss) for the period (XI + XIV)
457
Notes to Accounts
Note 1 : Share Capital

Authorised
.........% Preference Shares of `.. each XX
......... Equity Shares of Rs... each XX XX
Issued, Subscribed and paid up
..........% Preference Shares of `.. each, fully paid / called XX
.......... Equity Shares of `.. each fully paid / called up XX
XX
Less : Call in Arrears (due from directors / officers (XX) XX
Share Forfeiture A/c XX
XX
Notes : (i) Shares issued for consideration other than cash
(ii) Shares issued as Bonus
(iii) No. of shares bought back
Note 2 : Reserves and Surplus

(a) Capital Reserves XX
(b) Capital Redemption Reserve XX
(c) Securities Premium Reserve XX
(d) Debenture Redemption Reserve XX
(e) Revaluation Reserve XX
(f) Other Reserve XX
(g) Surplus (Profit & Loss A/c)
Surplus as at the beginning of the year XX
Add : Profit / (Loss) for the period XX
Less : Dividend (XX)
Less : Transfer to Reserves (XX)
Add : Transfer from Reserves XX XX
XX
458
Note 3 : Long term borrowings

(A) Secured : Debentures, Bank Loan, loan from financial
institutions, etc. (Security information also needs to
be disclosed)
(B) Unsecured : Directors loan, loan from related parties/
subsidiaries, public deposits taken, etc.
Note 4 : Long Term Provisions

Provision for Gratuity/ Provident fund/ pernsion.
Note 5 : Short term borrowings

Bank O/D, Cash credit, Loans payable on demand
(Security information also needs to be disclosed)
Note 6 : Other Current Liabilities

O/s expenses, calls in advance, Advance from customers ,
unclaimed dividend, TDS on expense, Income Tax payable,
dividend declared etc
Note 7 : Short term provisions

Provision for Tax, etc.
Note 8 : Tangible Assets

Land & Building, Furniture, machinery, motor vehicle, office
equipment, etc. (information of cost & Accumlated Depreciation
to be disclosed)
459
Note 9 : Intangible Assets

Goodwill, Patents, Trade marks, copyrights, Computer software etc.
(information of cost & Amortisation to be disclosed)
Note 10 : Non - Current Investments

Investments in Shares, Bonds, Govt. securities, Property,Gold, etc.
(market value of Investment must be disclosed)
Note 11 : Long term Loan and Advances

Loan to subsidiaries/ related parties, housing loan to employees,
security deposit given. Deposit with Government Authorities,
Telephone deposit etc.
Note 12 : Inventories
Closing stock of RM/ WIP/FG
Stock in Trade. Loose Tools, Stores & spares, Goods in transit etc.
Note 13 : Trade Recievables

(i) Bills receivables x
(ii) Sundry Debtors
- O/s for more than 6 months x
- Other debts. x x
Note 14 : Cash & Cash equivalents

Cash in hand, Cash at Bank
460
Note 15 : Short term loans & Advances

Advance to staff, prepaid expenses, Advance Tax,
TDS on Income, Income Tax refund receivable, etc.
Note 16 : Other Current Assets

Income Receivables
Note 17 : Contingent Liabilities and Commitments

Claims against Co. not acknowledged as debts
- Bills discounted but not matured .
- Guarantee given by co.
- Uncalled amount on partly paid shares held as investments.
- Capital expenditure commitments
- Arrears of cumulative preference share Dividend.
Note 18 : Other Incomes

Rent/ Interest/Dividend / Commission Received
Note 19 : Change in Inventory of FG, WIP & Stock in trade

Opening stock xx
Less Closing stock (x) xx
Note 20 : Employee Benefit cost

Salary,wages, Bonus, allowances to staff, staff welfare expenses
461
Note 21 : Finance Cost

Interest on all borrowings
Note 22 : Other Expenses

- All Administration expenses
- All selling and distribution expenses
- Bad debts
- Auditors, Remuneration for Audit fees, Tax work,
co. law matter, consultancy fee, other matters etc.
- Reimbursement of emplyee expenses
Note 23 : Exceptional Items

Profit / Loss on sale of FA/ Investments
Note 24 : Extra Ordinary Items

Loss due to earthquake and other natural calamities
462
HOMEWORK SECTION
Q.1 Fortune Ltd. Issued ` 70,000, 12% debentures of ` 100 each at a premium of 5%
redeemable at 110%.
You are required to
1. Show by means of journal entries how you would record the above issue.
2. Also show how they would appear in the balance sheet.
Q.2 X Company Limited issued 10,000 14% Debentures of the nominal value of `
37,50,000 as follows:
(a) To sundry persons for cash at 90% of nominal value of ` 25,00,000.
(b) To a vendor for purchase of ¬fixed assets worth ` 10,00,000 – ` 12,50,000
nominal value.
463
PAST EXAM
Q.1 Piyush Limited is a company with an authorized share capital of ` 2,00,00,000 in

equity shares of ` 10 each, of which 15,00,000 shares had been issued and fully paid
on 30th June, 2017. The company proposed to make a further issue of 1,30,000
shares of ` 10 each at a price of ` 12 each, the arrangements for payment being:
(i) ` 2 per share payable on application, to be received by 1st July, 2017;
(ii) Allotment to be made on 10th July, 2017 and a further ` 5 per share (including
the premium) to be payable;
(iii) The final call for the balance to be made, and the money received by 30th
April, 2018.
Applications were received for 4,20,000 shares and were dealt with as follows:
(1) Applicants for 20,000 shares received allotment in full;
two applied for; no money was returned to these applicants, the surplus on
application being used to reduce the amount due on allotment;
(3) Applicants for 3,00,000 shares received an allotment of one share for every five
shares applied for; the money due on allotment was retained by the company,
the excess being returned to the applicants; and
(4) The money due on final call was received on the due date. You are required
to record these transactions (including cash items) in the journal of Piyush
limited.
Q.2 B Limited issued 50,000 equity shares of ` 10 each payable as ` 3 per share on
application, ` 5 per share (including ` 2 as premium) on allotment and ` 4 per
share on call. All these shares were subscribed. Money due on all shares was fully
received except from X, holding 1000 shares who failed to pay the allotment and
call money and Y, holding 2000 shares, failed to pay the call money. All those
3,000 shares were forfeited. Out of forfeited shares, 2,500 shares (including whole
464
of X's shares) were subsequently re-issued to Z as fully paid up at a discount of `

2 per share. Pass necessary journal entries in the books of B limited. Also prepare
Balance Sheet and notes to accounts of the company.
Q.3 Bhagwati Ltd. invited applications for issuing 2,00,000 equity shares of ` 10 each.
The amounts were payable as follows:
On application - ` 3 per share
On allotment - ` 5 per share
On first and final call - ` 2 per share
Applications were received for 3,00,000 shares and pro-rata allotment was made to
all the applicants. Money overpaid on application was adjusted towards allotment
money. B, who was allotted 3,000 shares, failed to pay the first and final call
money. His shares were forfeited. Out of the forfeited shares, 2,500 shares were
reissued as fully paid-up @ ` 6 per share. Pass necessary Journal entries to record
the above transactions in the books of Bhagwati Ltd.
Q.4 On 1st January 2018•Ankit Ltd. issued 10% debentures of the face value of `
20,00,000 at 10% discount. Debenture interest after deducting tax at source @10%
was payable on 30th June and 31st December every year. All the debentures were
to be redeemed after the expiry of five year period at 5% premium.
Pass necessary journal entries for the accounting year 2018.
Q.5 Give necessary journal entries for the forfeiture and re-issue of shares:
(i) X Ltd. forfeited 300 shares of ` 10 each fully called up, held by Ramesh for
nonpayment of allotment money of ` 3 per share and final call of ` 4 per
share. He paid the application money of ` 3 per share. These shares were re-
issued to Suresh for ` 8 per share.
(ii) X Ltd. forfeited 200 shares of ` 10 each ( ` 7 called up) on which Naresh had
paid application and allotment money of ` 5 per share. Out of these, 150
shares were reissued to Mahesh as fully paid up for ` 6 per share.
(iii) X Ltd. forfeited 100 shares of ` 10 each ( ` 6 called up) issued at a discount of
465
10% to Dimple on which she paid ` 2 per share. Out of these, 80 shares were
re-issued to Simple at ` 8 per share and called up for ` 6 share.
Q.6 Pure Ltd. issues 1,00,000 12% Debentures of ` 10 each at ` 9.40 on 1st January,
2018. Under the terms of issue, the Debentures are redeemable at the end of 5
years from the date of issue. Calculate the amount of discount to be written-off in
each of the 5 years.
466
OBJECTIVE
1. Debenture interest is payable after payment of preference dividend but before

payment of equity dividend.
Ans. False – Debentures holders are creditors of company & shareholders are
owners of company. So debenture interest is paid before both preference &
equity dividend.
2. Debentures cannot be issued at discount

Ans. False – There is no section in Companies Act, prohibiting issue of debentures at
discount.
3. Interest paid on debentures is appropriation of profits.

Ans. False – Interest on debentures is payable irrespective of profit or loss. So it is a
charge against profit.
4. When debentures are issued as collateral security no amount is received for

debentures.
Ans. True – as debentures are just issued for security against another loan, amount
is received against loan but not debentures.
5. Premium received on issue of debentures is shown in profit and loss account

Ans. False – Premium is capital profit and so shown in balance sheet under ‘Reserve
& Surplus’.
6. Interest on debentures is calculated on issue price.

Ans. False – it is calculated on face value.
7. Debenture redemption premium in balance sheet is a nominal account.

Ans. False – It is a liability payable on redemption of debentures and so is a personal
account.
467

1. The interest at fixed rate is payable on __________ value of debentures.
2. Debentures without asset- backing are called __________ debentures.
3. Irredeemable debentures are called as __________ debentures.
4. Collateral security means __________ security.
5. XY Ltd. has issued 12% debentures on 1st April 2005 for ` 4,00,000. Interest is
payable on 30th June and 31st December every year. Outstanding interest on
31st March 2019 will be __________.
6. ABC Ltd. Has issued 3,000 fully convertible debentures of ` 100 each. Each
debenture is convertible into 8 shares of ` 10 each. Amount on share capital
credited on conversion will be __________.
7. XYZ Ltd. Issued 4,000 12% debentures of ` 100 each on 1st April, 2005. Interest
is payable on 30th June and 31st December each year. Company deducts
income tax @ 10% on interest. Net amount of interest paid to debenture
holders on 30th June 2005 is __________.
8. Following journal entry appears in books of X Co. Ltd.
Bank A/c Dr. 4,75,000

Loss on issue of debenture A/c Dr. 75,000
To 12% Debentures 5,00,000
To Premium on redemption 50,000
Debenture has been issued at discount of ________.
1. Debentures, which are transferable by delivery, are________.

(a) Registered debentures (b) Secured debentures
(c) Bearer debentures (d) None of the above
468
2. Premium on redemption of debentures is_______.

(a)
An asset (b) Expenses
(c)
A Liability (d) Income
3. Loss on issue of debentures is ___________.

(a) Fixed asset (b) Current asset
(c) Intangible asset (d) fictitious asset
4. Debentures, which are transferable by delivery, are________.

(a) Registered debentures (b) Secured debentures
(c) Bearer debentures (d) None of the above
5. Discount on issue of debentures is a _______.

(a) Revenue loss to be charged in the year of issue
(b) Capital loss to be adjusted from capital reserve
(c) Capital loss to be written off over the tenure of debentures
(d) Capital loss to be shown as goodwill
6. Debentures carrying charge on all the assets is known as ______.

(a) Floating (b) mortgage (c) Fixed (d) naked
7. Income tax deducted from interest paid on debentures is shown as

(a) Expenses of the Co. (b) Asset of the Co.
(c) Liability of the Co. (d) Income of the Co.

8. Premium on redemption of debentures account appearing in the balance sheet
is _______.
(a) A nominal account - expenditure
(b) A nominal account - income
(c) A personal account ______.
9. Debenture interest
a) Is payable before the payment of any dividend on shares
b) Accumulates in case of losses or inadequate profi¬ts
c) Is payable after the payment of preference dividend but before the
payment of equity dividend ___.
469
10. F Ltd. purchased Machinery from G Company for a book value of ` 4,00,000.
The consideration was paid by issue of 10% debentures of ` 100 each at a
premium of 25%. The debenture account was credited with ______.
(a) ` 4,00,000 (b) ` 5,00,000 (c) ` 3,20,000
11. Which of the following is not a characteristic of Bearer Debentures?

a) They are treated as negotiable instruments
b) Their transfer requires a deed of transfer
c) They are transferable by mere delivery

12. When debentures are issued as collateral security, the ¬final entry for recording
the collateral debentures in the books is __________.
a) Credit Debentures A/c and debit Cash A/c.
b) Debit Debenture suspense A/c and credit Cash A/c.
c) Debit Debenture suspense A/c and credit Debentures A/c.

13. When debentures are redeemable at different dates, the total amount of
discount on issue of debentures should be written off
a) Every year by applying the sum of the year’s digit method
b) Every year by applying the straight line method
c) To profi¬t and loss account in full in the year of ¬final or last redemption
14. On May 01,2003, Y Ltd. Issued 7% 40,000 convertible debentures of ` 100

each at a premium of 20%. interest is payable on September 30 and March 31,
every year. Assuming that the interest runs from the date of issue, the amount
of interest expenditure debited to profit and loss account for the year ended
March 31, 2004 = ?
a) ` 2,80,000 b) ` 2,33,333
c) ` 3,36,000 d) ` 2,56,667

15. Debenture holders are
a) Owners of the company (c) Debtors of the company
b) Lenders of the company (d) Trustee of the company
470
16. J Ltd. purchased a building for ` 9,90,000 and the consideration was paid by
issuing 12% debentures of ` 100 each at 10% premium. No. of debentures
issued were -
a) 9,000 b) 9,900 c) 10,000 d) None
17. K Ltd. bought a Machinery for ` 4,00,000 payable as to `1,30,000 in cash and
the balance by an issue of 12% debentures of `100 each at 10% discount No.
of debentures issued –
a) 4,000 b) 3,000 c) 2,700 d) None
18. F Ltd. purchased Machinery from G Company for ` 6,00,000. The consideration
was paid by issue of 10% debentures of ` 100 each at a premium of 20%. The
debenture account was credited with_ .
a) ` 4,00,000 b) ` 5,00,000 (c) ` 3,20,000 d) None
19. W Ltd. issued 20,000, 8% debentures of ` 10 each at par, which are redeemable
after 5 years at a premium of 20%. The amount of loss on redemption of
debentures to be written off every year = ?
a) ` 40,000 b) `10,000 c) ` 20,000 d) None
20. A Ltd. had issued 10,000 7.5% Redeemable Debentures of ` 100 each on
1.01.05 at 9% discount. Debentures are to be redeemed as under:
Due Date of Redemption No. of Debentures to be redeemed

31.12.2005 2,000
31.12.2006 2,000
31.12.2007 2,000
31.12.2008 2,000
31.12.2009 2,000
Amount of Debenture Discount to be written off the year ended on

31.12.2007 is :
(a) `9,000 (b) ` 18,000 (c) `27,000 (d) None
471
21. X Ltd. purchased a plant for ` 20,000 payable ` 6500 in cash and
balance by issue of 13% debentures of `100 each at a discount of 10%. How
many debentures would be required to issue to the vendor.
a) 16.5 debentures of ` 100 each
b) 150 debentures of `100 each
c) 13.5 debentures of ` 100
d) 20 debentures of `100 each
22. A company has issued 2,500 6% Debenture of ` 100 each. interest on Debentures
is payable half yearly on 30th June & 31st December every year. interest
Accrued but not due on 31-3-07 is :
(a) ` 15,000 (b) ` 7,500 (c) ` 3,750 (d) None
23. On May 1, 2004 U Ltd. issued 7% 10,000 convertible debentures of ` 100 each
at a premium of 20%. Interest is payable on September 30 and March 31
every year. Assuming that the interest runs from the date of issue, the amount
of interest expenditure debited to profit and loss account for the year ended
March 31, 2005 = ?
(a) ` 70,000 (b) ` 58,333 (c) ` 84,000 (d) None
24. Premium collected on issue of debentures is transferred to _______.

(a) Securities Premium Account
(b) General Reserve Account
(c) Profit & Loss Account
Answer
Fill in the blanks:
1. Face
2. unsecured
3. perpetual
4. supporting
5. ` 12,000
6. ` 2,40,000
7. ` 10,800
8. 5%
472
1. (c) 7. (c) 13. (a) 19. (d)

2. (c) 8. (c) 14. (d) 20. (b)
3. d) 9. (a) 15. (b) 21. (b)
4. (c) 10. (c) 16. (a) 22. (c)
5. (c) 11. (b) 17. (b) 23. (d)
6. (a) 12. (c) 18. (b) 24. (a)
473
TEST PAPER
Marks - 50
Q.1 State with reasons whether following statements on true or false. (14)
1. Re-issue of forfeited shares can result in a loss to company.
2. Since company has existence Independent of its members, it continues to be in

3. Forfeited shares cannot be issued at a premium.
4. Maximum amount that can be collected as premium as percentage of face

value is 25%.
5. Fund flow statement is part of financial statements.
6. Debentures cannot be issued at discount
7. Interest on debentures is calculated on issue price.
Q.2 Fill in the blanks. (13)

1. A share of Rs. 100 each is forfeited for nonpayment of allotment money of Rs.
50 (including premium of Rs. 20) & 1st & final call of Rs. 20. Amount credited
to share forfeited account will be _______.
2. A company invited application for subscription of 5000 shares. Applications

were received for 6000 shares were allotted prorata.
(a) If Shyam has applied for 180 shares, shares allotted to him will be ____.
(b) If Shyam is allotted 350 shares, shares applied by him would _____.
3. A Ltd. issued equity shares of Rs. 100 each. If has called up Rs. 75 on each
share but received only Rs. 60 per share. Share capital a/c will be credited by
____________.
474
4. Authorised capital (Rs. 10 per share) of a company is Rs. 5 lacs. Issued capital Rs.
3 lacs & subscribed capital Rs. 2 lacs. It received Rs. 5 per share on application
& allotment & Rs. 2 per share on 1st call except on 2500 shares, which have
not been forfeited. Share capital a/c is credited with ___________.
5. Unless otherwise stated preference shares are ________ , ________ ,

_________ , __________.
6. B Ltd. was registered with share capital of Rs. 2,00,00,000 divided into equity
shares of Rs. 10 each. It issued Rs. 1,80,00,000 equity shares to public at par
payable Rs. 3 on application, Rs. 3 on allotment & balance in 2 equal calls.
Public subscribed for 17 lac shares. Till 31st March 2019 only 1st call is made.
All shareholder has paid except Mr. C holder of 50000 shares who did not pay
call money.
(a) B Ltd. authorized capital is ___________
(b) Issued capital is __________
(c) Subscribed capital is __________
(d) Called up capital is ___________
(e) Paid-up capital is ____________
7. Following journal entry appears in books of X Co. Ltd.
Bank A/c Dr. 4,75,000

Loss on issue of debenture A/c Dr. 75,000
To 12% Debentures 5,00,000
To Premium on redemption 50,000
Debenture has been issued at discount of ___________.
8. XY Ltd. has issued 12% debentures on 1st April 2005 for ` 4,00,000. Interest is
payable on 30th June and 31st December every year. Outstanding interest on
31st March 2019 will be _________.
Q.3
Difference between (10)
1. Equity Shares and Preference Share
2. Shares & Debenture
475
Q.4 Raja Ltd. invited applications for issuing 50,000 Equity Shares of ` 10 each .The
amount payable as:
On application ` 3 per share,
On allotment ` 5 per share,
On first and final call Balance
Applications for 70,000 shares were received. Allotment was made to all applicants
on pro rata basis.
Excess money received on application was adjusted towards sums due on allotment.
Ramesh, who had applied for 700 shares, did not pay the allotment money and on
his failure to pay the allotment money his shares were forfeited. Afterwards, the
first and the final call was made. Adhar, who had been allotted 500 shares, did not
pay the first and final call. His shares were also forfeited. Out of the forfeited shares
900 shares were reissued at ` 8 per share as fully paid-up.
The reissued shares included all the shares of Ramesh.
Pass necessary journal entries for the above transactions in the books of the
company. (10)
Q.5 Hawkins Ltd. Issued ` 70,000, 12% debentures of ` 100 each at a discount of 5%
redeemable at 110%.
You are required to
Show by means of journal entries how you would record the above issue. (3)
476
UNIT I – ISSUE OF SHARES
HOMEWORK SOLUTION
Q.1
Jeevan Dhara Ltd. invited applications for issuing 1,20,000 equity shares of Rs. 10 each
at a premium of Rs. 2 per share. The amount was payable as follows : -
on application Rs. 2
on allotment Rs. 5 (including premium)
on first and final call - balance amount
Applications for 1,50,000 shares were received. Shares were allotted to all the applicants
on pro rata basis. Excess money received on applications was adjusted towards sums
due on allotment. All calls were made. Manu who had applied for 3000 shares failed
to pay the allotment money due and the final call money. Madhur was was alloted
2400 shares failed to pay the first and final call. Shares of both Manu and Madhur
were forfeited. All the forfeited shares were reissued at Rs. 9 per share. Pass necessary
journal entries for the above transactions in the books of Jeevan Dhara Ltd
WORKING NOTES FOR Q.1

1,20,000 Equity shares of Rs. 12 each
(Premium = Rs. 2 on allotment)
Application @ Rs. 2 Allotment @ Rs. 5 Final Call @ Rs. 5
Amount asked Rs. 2,40,000 Rs. 6,00,000 Rs. 6,00,000
Amount received Rs. 3,00,000 Rs. 5,29,200 Rs. 5,76,000
Excess received Rs. 60,000
Excess money not to be refunded. It is to be completely adjusted against allotment

money due.
477
Shares alloted to Manu = 3000 X 120000/150000 = 2400 shares against his application
of 3000 shares.
Amount received from Manu on application 3000 shares X 2 6,000

Less : Transferred to Share capital 2400 shares X 2 4,800
Excess received 1,200
Amount due from Manu on share allotment 2400 X 5 12,000
Less : Excess received on application 1,200
Net due on allotment (not paid) 10,800
Actual amount received on allotment
Amount due on allotment 120000 shares X 5 6,00,000
Less : Excess application money adjusted 60,000
5,40,000
Less : Allotment money not received from Manu 10,800
Allotment money received 5,29,200
Amount received on call
Amount due on call 120000 shares X 5 6,00,000
Less : Call money not received from Manu & Madhur 4800 shares X 5 24,000
Call money received 5,76,000
In the books of Dhara Limited

Journal Entries
Sr. Date Particulars L. Debit (`) Credit (`)

No F.
1 Bank A/c Dr. 3,00,000
To Equity Share Application A/c 3,00,000
(Being application money received on 120000
equity shares @ Rs. 2 per share)
2 Equity share application A/c Dr. 3,00,000
To Equity Share Capital A/c 2,40,000
To Equity Share Allotment A/c 60,000
(Being application money on 120000 shares
transferred to equity share capital, on 30000
shares adjusted with allotment money)
3 Equity share allotment A/c Dr. 6,00,000
To Equity Share Capital A/c 120000 X 3 3,60,000
478
To Securities premium A/c 120000 X 2 2,40,000

(Being allotment money due on 120000
equity shares, including premium of Rs. 2
per share)
4 Bank A/c Dr. 5,29,200
Calls in arrears A/c Dr. 10,800
To Equity Share Allotment A/c 5,40,000
(Being allotment money received)
5 Equity Share final Call A/c Dr. 6,00,000
(Being final call money due on 120000 equity
shares @ Rs. 5 per share)
6 Bank A/c Dr. 5,76,000
Calls in arrears A/c 24,000
To Equity Share Final Call A/c 6,00,000
(Being final call money received)
7 Equity share capital A/c Dr. 24,000
Securities premium A/c Dr. 4,800
To calls in arrears A/c 22,800
To shares forfeited A/c 6,000
(Being 2400 equity shares of Manu forfeited
on non payment of allotment and call
money)
(Being 2400 equity shares of Madhur forfeited
on non payment of call money Rs 5 per share)
9 Bank A/c Dr. 43,200
Shares forfeited A/c Dr 4,800
To Equity Share Capital A/c 48,000
(Being all 4800 forfeited shares resissued at
Rs. 9 per share)
10 Shares forfeited A/c Dr. 13,200
To Capital Reserve A/c 13,200
(Being bal of shares forfeited trf to cap
reserve)
479
Q.2
Total Applications received and total allotment made against those applications
can be broadly classified into the following categories for calculations :
Applications for 43,825 shares
Category 1 Category 2 Category 3

Applied 300 shares (the + 11,525 shares (11,825 + 32000 shares = 43,825
shareholder who paid - 300) (after deducting (Bal Fig) (Applications)
full face value of shares the application of 300
upfront) shares of category 1)

Alloted 150 shares + 5,600 shares (after + 4250 shares (Bal = 10,000
deducting the Fig) (Allotment)
allotment of 150
shares of category 1)
Category Application Allotment Call money Refund

No of Received No of Allotment Application Adjusted Received Amt Adjusted Received
shares shares money money against due against
due Transfer excess excess
to share application application
capital money money
1 300 3,000 150 600 450 600 0 450 450 0 1,500
2 11,525 34,575 5,600 22,400 16,800 17,775 4,625 16,800 0 16,800 0
3 32,000 96,000 4,250 17,000 12,750 17,000 0 12,750 12,750 0 53,500

TOTAL 43,825 133,575 10,000 40,000 30,000 35,375 4,625 30,000 13,200 16,800 55,000
A separate category is created for 300 shares who paid full money on application itself
Dr. Bank A/c Cr.

To Share application 1,33,575 By Share application 55,000
To share allotment 4,625 By Balance c/d 1,00,000
To share call 16,800
Total 1,55,000 Total 1,55,000
480
Dr. Share Application A/c Cr.

To Share Capital 30,000 By Bank A/c 1,33,575
To share allotment 35,375
To calls in advance 13,200
To Bank - refund 55,000
Total 1,33,575 Total 1,33,575
Dr. Share Allotment A/c Cr.

To Share Capital 40,000 By Share application A/c 33,375
Bank A/c 4,625
Dr. Calls in Advance A/c Cr.

To Share Call 13,200 By Share application A/c 13,200
Dr. Share Call A/c Cr.

To Share Capital 30,000 By Calls in advance A/c 13,200
By Bank A/c 16,800
481
Dr. Share Capital A/c Cr.

To Balance b/d 1,00,000 By Share application A/c 30,000
By Share allotment A/c 40,000
By Share call A/c 30,000
Total 1,00,000 Total 1,00,000
Q.3
In the books of X Ltd
Journal Entries

No F.
1 Equity share capital A/c Dr. 1,60,000
To Calls in arrears A/c 40,000
To shares forfeited A/c 1,20,000
(Being 20000 shares @ Rs. 8 called up
forfeited for non payment of call money of
Rs. 2 per share)
482
UNIT II – ISSUE OF DEBENTURES
HOMEWORK SOLUTION
Q.1
In the books of Fortune Limited
Journal Entries

No F.
1 Bank A/c Dr. 73,500
To 12% Debenture Application A/c 73,500
(Being application received for 700
12% debentures of Rs. 100 each issued
at 5% premium)
2 12% debenture application A/c Dr. 73,500
Loss on issue of debentures A/c Dr. 7,000
To 12% Debentures A/c 70,000
To Securities Premium A/c 3,500
To Premium on redemption A/c 7,000
(Being debentures issued at 5% premium
redeeemable at a premium of 10%)
483
Fortune Limited
Balance Sheet
Particulars ` `
EQUITY & LIABILITIES
Share Capital NIL
Reserves & Surplus
Securities Premium 3,500
Less : Loss on issue of debentures 7,000
-3,500
Non Current Liabilities
12% Debentures 70,000
Premium on redemption of debentures 7,000
77,000
TOTAL 73,500
ASSETS
Current Assets
Balance with Bank 73,500
TOTAL 73,500
484
Q.2
IN the books of X Company Limited
Journal Entries

No F.
1 Bank A/c Dr. 22,50,000
To 14% Debenture Application A/c 22,50,000
(Being application received for 10000
14% debentures of Rs. 500 each issued
at 10% discount)
2 12% debenture application A/c Dr. 22,50,000
Discount on issue of debenture A/c Dr. 2,50,000
To 14% Debentures A/c 25,00,000
(Being 5000 debentures issued @ 10%
discount as per board
resolution____)
3 Fixed Assets A/c Dr. 10,00,000
To Vendor A/c 10,00,000
(Being fixed assets purchased from
a vendor)
4 Vendor A/c Dr. 10,00,000
Goodwill A/c Dr. 2,50,000
To 14% Debentures A/c 12,50,000
(Being debentures issued to vendor
for purchase of fixed assets)
485
PAST Exam SOLUTION
Q.1
WORKING NOTES FOR Q1
1,30,000 Equity shares of Rs. 12 each

(Premium = Rs. 2 on allotment)

Application @ Rs. 2 Allotment @ Rs. 5 Final Call @ Rs. 5
Amount asked Rs. 2,60,000 Rs. 6,50,000 Rs. 6,50,000
Amount received Rs. 8,40,000 Rs. 1,70,000 Rs. 6,50,000
Excess received Rs. 5,80,000

Adjustment of Excess Application Money (as per table below)
Refund Adjusted against allotment

Rs. 1,80,000 Rs. 4,00,000
Category Shares No. of Amt Amt trfr Excess Amount Amount of Amount Refund
applied shares received on to share recd on due on excess app recd on
alloted application capital appln allotment adjusted allotment
Full 20,000 20,0000 40,000 40,000 0 1,00,000 0 1,00,000 0

Prorata 1 1,00,000 50,000 2,00,000 1,00,000 1,00,000 2,50,000 1,00,000 1,50,000 0
Prorata 2 3,00,000 60,000 6,00,000 1,20,000 4,80,000 3,00,000 3,00,000 0 1,80,000
Total 4,20,000 1,30,000 8,40,000 2,60,000 5,80,000 6,50,000 4,00,000 2,50,000 1,80,000
486
In the books of Piyush Limited

Journal Entries

No F.
1 2017 Bank A/c Dr. 8,40,000
Jul-01 To Equity Share Application A/c 8,40,000
(Being application money received on
420000 equity shares @ Rs. 2 per share)
2 Jul-10 Equity share application A/c Dr. 8,40,000
To Bank A/c 1,80,000
(Being application money on 130000
shares
transferred to equity share capital, on
200000 shares adjusted with allotment
& on 90000 shares refunded)
3 Jul-10 Equity share allotment A/c Dr. 6,50,000
per share)
4 Bank A/c Dr. 2,50,000
5 Equity Share final Call A/c Dr. 6,50,000
(Being final call money due on 130000
6 Apr - Bank A/c Dr. 2,50,000
30
To Equity Share Final Call A/c 2,50,000
(Being final call money received on all
shares)
487
Q.2
In the books of B Limited
Journal Entries

No F.
1 Bank A/c Dr. 1,50,000
50,000 equity shares @ Rs. 3 per share)
(Being application money on 50000 shares
transferred to equity share capital
per share)
4 Bank A/c Dr. 2,45,000
Calls in arrears A/c Dr. 5,000
(Being allotment money received on only
49000 equity shares and balance
transferred to calls in arrears)
5 Equity share final call A/c Dr. 2,00,000
(Being share final call due on 50000 shares
@
Rs. 4 per share)
6 Bank A/c Dr. 1,88,000
To Equity Share final call A/c 2,00,000
(Being call money received on only
transferred
488
to calls in arrears)
Securities premium A/c Dr. 2,000
(Being 1000 equity shares of Mr. X forfeited
on non payment of allotment and call
money
at Rs. 5 and Rs. 4 respectively)
(Being 2000 equity shares of Mr. Y forfeited
on non payment of call money of Rs. 4 per
share)
9 Bank A/c Dr. 20,000
Shares forfeited A/c Dr. 5,000
(Being 2500 of forfeited shares resissued
at
Rs. 8 per share)
(Being profit on 2500 reissued shares
transferred to capital reserve)
Amount transferred to capital reserve

Credit balance of shares forfeited 15,000
Less : Loss on reissue of shares 5,000
10,000
Less : Profit on remaining unissued shares
On 2000 forfeited shares of Y, profit is 12,000
On 500 unissued shares of Y,
500 X 12000
2000 3,000
TRANSFER TO CAPITAL RESERVE 7,000
489
BALANCE SHEET
Particulars Note ` `
EQUITY AND LIABILITIES
Shareholders Funds
Equity Share Capital 1 4,98,000
Reserves & Surplus 2 1,05,000
6,03,000
TOTAL 6,03,000
ASSETS
Current Assets
Cash and Cash Equivalents 3 6,03,000
TOTAL 6,03,000
Notes To Accounts
1 Share Capital
Authorised : ???
Issued, Subscribed and Paid up :

49,500 equity shares of Rs. 10 each 4,95,000
Add : Shares forfeited (500 shares X Rs. 6) 3,000
TOTAL 4,98,000
2 Reserves & Surplus

Securities Premium 98,000
Capital Reserve 7,000
TOTAL 1,05,000
3 Cash and Cash Equivalents

TOTAL 6,03,000
490
Q.3
In the books of Bhagwati Limited
Journal Entries

No F.
1 Bank A/c Dr. 9,00,000
3,00,000 equity shares @ Rs. 3 per share)
(Being application money on 200000
shares transferred to equity share capital).
(Being excess application money on
100000 equity shares adjusted against
allotment)
5 Bank A/c Dr. 7,00,000
6 Equity share final call A/c Dr. 4,00,000
(Being share final call due on 200000
7 Bank A/c Dr 3,94,000
Calls in arrears A/c Dr 6,000
To Equity Share final call A/c 4,00,000
(Being call money received on only
transferred to calls in arrears)
491

(Being 3000 equity shares of Mr. B forfeited
on non payment of call money
of Rs. 2 per share)
9 Bank A/c Dr. 15,000
Shares forfeited A/c Dr. 10,000
(Being 2500 of forfeited shares resissued
at Rs. 6 per share)
Working Notes
1 Credit balance of shares forfeited 24,000
Less : Loss on reissue of shares 10,000
14,000
On 3000 forfeited shares of B, profit is 24,000
On 500 unissued shares of B,
500 X 24000
3000 4,000
TRANSFER TO CAPITAL RESERVE 10,000

2 Share application money received 300000 X 3 9,00,000
Less : Transfer to share capital 200000 X 3 6,00,000
EXCESS 3,00,000

3 Amount due on allotment 200000 X 5 10,00,000
Less : Excess application money adjusted 3,00,000
AMOUNT RECEIVED ON ALLOTMENT 7,00,000
492
Q.4
In the books of Ankit Limited
Journal Entries

No F.
1 2018 Bank A/c Dr. 18,00,000
Jan-01 Discount on issue of debentures A/c Dr. 2,00,000
Loss on issue of debentures A/c Dr. 1,00,000
To 10% debentures A/c 20,00,000
To premium on redemption of debns A/c 1,00,000
(Being debentures issued @ 10% discount &
redeemable @ 5% premium)
2 2018 Interest on debentures A/c Dr. 1,00,000
Jun-30 To 10% debenture holders A/c 90,000
To TDS payable A/c 10,000
(Being interest on debentures payable half
yearly @ 10% after 10% TDS)
3 Jun-30 10% debentureholders A/c Dr. 90,000
TDS payable A/c Dr. 10,000
(Being interest on debentures paid and TDS
also paid)
4 Dec-31 Interest on debentures A/c Dr. 1,00,000
To 10% debenture holders A/c 90,000
To TDS payable A/c 10,000
(Being interest on debentures payable half
yearly @ 10% after 10% TDS)
5 Dec-31 10% debentureholders A/c Dr. 90,000
TDS payable A/c Dr. 10,000
(Being interest on debentures paid and TDS
also paid)
6 Dec-31 Profit & Loss A/c Dr. 2,00,000
To Interest on debentures A/c 2,00,000
(Being interest on debentures transferred to
Profit & Loss A/c
493
7 Dec-31 Profit & Loss A/c Dr. 60,000

To discount on debentures A/c 60,000
(Being 1/5th of debenture discount written
off to Profit & Loss A/c - debenture
life=5years)
Q.5
In the books of A X Limited
Journal Entries

No F.
1 (a) Equity Share Capital A/c 300 X 10 Dr. 3,000
To equity share allotment A/c 300 X 3 900
To equity share final call A/c 300 X 4 1,200
To Shares Forfeited A/c 300 X 3 900
(Being 300 shares forfeited on non payment
of allotment and call money,
held by Ramesh)
(b) Bank A/c Dr. 2,400
Shares forfeited A/c Dr. 600
(Being 300 forfeited shares resissued at
Rs. 8 per share)
(c) Shares forfeited A/c Dr. 300
To Capital Reserve A/c 300
2 (a) Equity Share Capital A/c 200 X 7 Dr. 1,400
To equity share first call A/c 200 X 2 400
To Shares Forfeited A/c 200 X 5 1,000
of call money, held by Ramesh)
(b) Bank A/c 150 X 6 Dr. 900
Shares forfeited A/c Dr. 600
To Equity Share Capital A/c 150 X 10 1,500
494
(Being 150 forfeited shares resissued at

Rs. 6 per share)
transferred to capital reserve) NOTE 1
3 (a) Equity Share Capital A/c 100 X 6 Dr. 600
To equity share final call A/c 100 X 3 300
To discount on issue of shares A/c
100 X 1 100
To Shares Forfeited A/c 100 X 2 200
of call money, which were issued at a
discount)
(b) Bank A/c 80 X 6 Dr. 480
Discount on issue of shares A/c 80 X 1 Dr. 80
Shares forfeited A/c 80 X 1 Dr. 80
To Equity Share Capital A/c 80 X 8 640
(Being reissue of 80 forfeited shares out of
100 shares @ Rs. 6 per share)
transferred to capital reserve) NOTE 2
Working Notes
1 Credit balance of shares forfeited 1,000

Less : Loss on reissue of shares 600
400
On 200 forfeited shares, profit is 1,000
On 50 unissued shares,
50 X 1000/200 250
TRANSFER TO CAPITAL RESERVE 150

495
2 Credit balance of shares forfeited 200

Less : Loss on reissue of shares 80
120
On 100 forfeited shares, profit is 200
On 20 unissued shares,
20 X 200/100 40
TRANSFER TO CAPITAL RESERVE 80
Q.6 Total discount to be written off = 1,00,000 X 0.60 = Rs. 60,000

Life of debentures = 5 years
Debentures are not redeemed in parts during its lifetime and hence,
Discount to be written off equally during the life/tenure of debentures, each year
Thus, discount to be written off each year = 60000/5 = Rs. 12,000
496
TEST PAPER SOLUTION
1. False - The minimum reissue price cannot be less than the unpaid balance
on such shares. Hence, reissue of forfeited shares cannot result into a loss
for the company.
2. True - A company enjoys perpetual existence and hence is independent of

life of its members. A company is an artificial person created by law and can
enjoy individuality.
3. False - A company can reissue its forfeited shares at discount, par or

premium. There is no restriction on shares forfeited being reissued at a
premium
4. False - There is no limit on the amount of premium that can be collected

by the company. Any amount can be collected towards premium by the
company.
5. False - Cash flow statement is a part of financial statements. Preparation of

fund flow statement is optional and for company's internal workings.
6. False - Debentures can be issued at par, premium or discount. Discount on

debentures results into loss for the company and results into less cash inflow.
However, the demand for debentures can increase due to discount given on
its issue.
7. False - Interest on debentures is always calculated and paid on the face

value irrespective of its issue price.
497
Q.2 Fill in the blanks.

1. 50
2. (a) 150
(b)
420
3. 75
4. 1,40,000
5. Cumulative, Nonparticipating, Nonconvertible and redeemable
6. (a) 2,00,00,000
(b)
1,80,00,000
(c) 1,70,00,000
(d)
1,36,00,000
(e) 1,35,00,000
7. 25,000
8. 12,000
498
Q.3
(i) Distinguish between Equity shares and Preference Shares
No. Equity Shares Preference Shares

Equity shares are ordinary shares of Preference shares are those shares
1 the company which do not have any which are given preference at the time
preference in payment of dividend or of dividend payment & repayment of
repayment of capital at winding up capital at winding up
2 Equity shares do not have any Preference shares based on their type
mandatory right to receive dividend of non-cumulative or cumulative have
right to dividend
3 Rate of dividend on equity shares is Rate of dividend on preference shares
fluctuating is fixed
4 Equity shares have voting right in the Preference shares do not carry any
meetings voting rights in the meetings
5 Equity shares are never mandatorily Preference shares are compulsorily
repaid back to the investors repaid back to the investors at the
time of its redemption
6 Equity shares do not have any type, Preference shares are of various
hence they are considered as ordinary types:
stock of the company convertible/nonconvertible,
redeemable/non-redeemable,
participating/non-participating and
cumulative/non-cumulative
7 Equity shares are primarily responsible Preference shares do not have any
for the management of the company right in participation in management
of the company
8 Equity shares cannot be converted Preference shares can be converted
into preference shares into equity shares
9 Equity shares are entitled for bonus Preference shares are not entitled for
shares bonus shares
10 Equity shares can be traded on stock Preference shares are not traded on
exchange stock exchange
499
(ii) Distinguish between shares and Debentures
No. Equity Shares Debentures

1 Shares increases the capital of the Debentures add to the debt of the company
company
2 Equity shares give right of ownership Raising capital through debentures does
to the shareholder. not give any right of ownership to the
debenture holder
3 Equity shareholders are the owners of Debenture holders are the creditors of the
the company company
4 Shares are of mainly two types : Debentures are of mainly 3 types: secured/
Equity shares and preference shares unsecured, convertible/non-convertible
and registered/bearer debentures
5 Income on shares is termed as Income on debentures is termed as interest
dividend
6 Dividend is paid based on the profits Interest is paid irrespective of profit
of the company. It is paid only if position of the company. It is to be paid
company makes profits even if the company suffers a loss
7 Equity shares are primarily responsible Debentures do not have any right in
for the management of the company participation in management of the
company
8 Equity shares cannot be converted Debentures can be converted into equity
into debentures shares
9 Assets of the company cannot be Assets of the company can be mortgaged
mortgaged in lieu of the shareholders in favour of debenture holders
10 There is no trust deed for share On issuance of debentures to the public,
allocation trust deed must be executed between the
parties
500
Q.4.
IN THE BOOKS OF RAJA LIMITED
JOURNAL ENTRIES
No Particulars Debit Credit

1 Bank A/c Dr 2,10,000
To equity share application A/c 2,10,000
(Being applications received for 70000 equity
2 Equity share application A/c Dr 2,10,000
To equity share capital A/c 1,50,000
To equity share allotment A/c 60,000
(Being share application money on 50000 equity
shares transferred to share capital and excess to
be utilised on allotment
3 Equity share allotment A/c Dr 2,50,000
To equity share capital A/c 2,50,000
(Being allotment money due on 50000 equity
4 Bank A/c Dr 1,88,100
Calls in arrears A/c Dr 1,900
To equity share allotment A/c 1,90,000
(Being amount received on allotment except for
500 shares, transferred to calls in arrears)
5 Equity share capital A/c Dr 4,000
(Being 500 shares of Ramesh forfeited on
non payment of allotment money)
6 Equity share final call A/c Dr 99,000
To equity share capital A/c 99,000
(Being final call money due on 49500
501
7 Bank A/c Dr 98,000

Dr 99,000
To equity share final call A/c
(Being amount received on call except for
500 shares, transferred to calls in arrears)
8 Equity share capital A/c Dr 5,000
(Being 500 shares of Adar forfeited on
non payment of final call money)
9 Bank A/c Dr
Shares forfeited A/c Dr
To Equity share capital A/c
(Being 900 shares out of 1000 forfeited
shares reissued at Rs. 8 per share)
10 Shares forfeited A/c Dr 3,500

To capital reserve A/c 3,500
(Being profit on 900 reissued shares trfr to cap res)
502
Working Notes
1 Shares applied by Ramesh = 700 shares.

Therefore shares alloted to him would be, 700 X 50000/70000 = 500 shares

Application money received from Ramesh = 700 X 3 2,100
Less : Transfer to share capital = 500 X 3 1,500
Excess received 600
Amount due on allotment = 500 X 5 2,500
Less : Excess application money received 600
Net amount due on allotment 1,900
2 Total amount received on allotment

Amount due on allotment = 50000 X 5 2,50,000
Less : Excess received on application 20000 X 3 60,000
1,90,000
Less : allotment money not received from Ramesh 1,900
Allotment money received 1,88,100
3 Transfer to capital reserve

Credit balance of shares forfeited 6,100
Less : debit balance of shares forfeited 1,800
4,300
Less : profit on remaining unissued shares
(all shares of Ramesh issued, so unissued shares of Adar only) 800
(4000 X 100/500)
Transfer to capital reserve 3,500
503
Q.5
IN THE BOOKS OF HAWKINS LIMITED
JOURNAL ENTRIES
No Particulars Debit Credit

1 Bank A/c Dr 66,500
To 12% debenture application A/c 66,500
(Being applications received for 700, 12%
debentures of Rs. 100 each at 5% discount)
2 12% debenture application A/c Dr 66,500

Discount on issue of debentures Dr 3,500
Loss on issue of debentures A/c Dr 7,000
To 12% debentures A/c 70,000
To premium on redemption A/c 7,000
(Being debentures allotted at 5% discount and
redeemable at 10% premium)
504
Objective questions asked

in past exams
Q.1. State with reasons, whether the following statements are true or false:
1. Expenses in connection with obtaining a license for running the Cinema Hall is
Revenue Expenditure.
2. Re-issue of forfeited shares is allotment of shares but not a sale.
3. If the effect of errors committed cancel out, the errors will be called compensating
errors and the trial balance will disagree.
4. There are two ways of preparing an account current.
5. When there is no partnership deed prevails, the interest on loan of a partner

to be paid @ 6%.
6. Overhauling expenses for the engine of motor car to get better fuel
efficiency is revenue expenditure.
7. Depreciation is a non-cash expense and does not result in any cash

outflow.
8. Fees received for Life Membership is a revenue receipt as it is of recurring nature.
9. If Closing Stock appears in the Trial Balance: The closing inventory in then not
entered in Trading Account. It is shown only in the balance sheet.
10. If del-creders commission is paid to consignee, the loss of bad debts is to be

borne by the consignor.
11. Amount spent for the construction of temporary huts, which were necessary
for construction of the Cinema House and were demolished when the Cinema
House was ready, is capital expenditure.
505
12. If the amount is posted in the wrong account or it is written on the wrong side
of the account, it is called error of principle.
13. In case of consignment sale, ownership of goods will be transferred to consignee

at the time of receiving the goods.
14. In case the due date of a bill falls after the date of closing the account, the
interest from the date of closing to such due date is known as Red-Ink interest.
15. Limited Liability Partnership (LLP) is governed by Indian Partnership Act, 1932.
16. Trade Discount is a reduction granted by a supplier from the list price of goods
or services on business considerations for prompt payment.
17. M/s. XYZ & Co. runs a cafe. They renovated. some of the old cabins. Because of
this renovation some space was made free and number of cabins was increased
from 15 to 18. The total expenditure incurred was ` 30,000 and was treated as
a revenue expenditure.
18. Valuation of inventory, at cost or net realizable value, whichever less, is based
on principle of Conservatism.

19. In case of bill of exchange, the drawer and the payee may not be the same
person but in case of a promissory note, the maker and the payee may be the
same person.

20. A Partnership firm cannot own any Assets.

21. Since company has existence independent of its members, it continues to be in
Q.2 Discuss the limitations which must be kept in mind while evaluating the Financial
Statements.
Q.3 Differentiate between provision and contingent liability,
506
Q.4 Distinguish between Provision and Contingent Liability.
Q.5 Distinguish between Going Concern concept and Cost concept.
507

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Accounts Volume 2

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ca FOUNDATION

1 Average Due Date 1-18

2 Account Current 19-40

3 Final Accounts of Sole Traders 41-141

Final Accounts of Not For Profit

6 Company Accounts 403-504

Objective questions asked

Welcome to the world of knowledge – J K Shah Classes.

It gives us immense pleasure of presenting this thoroughly revised & updated

1. Exhaustive Theoretical Explanation

3. Home work problems

4. Problems from Past ICAI Examinations

We wish you a very happy study time.

DECIDE. COMMIT. SUCCEED

BEST OF LUCK !!!

Average Due Date

When a person is supposed to make various payments to another person on different

(Sum of days or months or years from date of lending to

1) Average Due Date defined –

3) Uses of average due date

b. Settlement of contra accounts e.g. parties sells goods to each other

c. Settlement of accounts between agent & principal

d. Settlement of transactions when several amount are payable on different

Sr. No Date of Bill Amount Duration of the bill

Q.2 F owes to E the following amounts:

As per partnership deed, interest is to be charged at 10% p.a. on all drawings.

Purchases by Green from Red : `

Date Bills receivable Tenure Date Bills Payable Tenure

Goods sold by X to Y Goods sold by Y to X

Determine the amount to be paid in (a) and in (b).

January 15 Alok buys goods ` 1,200

Goods sold by Goods sold by

1. If payment is made on average due date it results in loss of interest to creditors.

Q.2 Multiple Choice Questions

1. If payment is made on the average due date it results in -

2. A mean date is calculated

4. When due date is a public holiday, then due date will be

Q.1 Calculation of ADD

DATE AMOUNT NO OF DAYS FROM BASE DATE PRODUCT

ADD = Base Date + Total of Product

06/08/ + 20.93 Days

If amount is to be settled on 30/09/ then interest payable will be:

Interest = 83,000 * 8% * 34 Days = Rs.619/-

Q.2 Calculation of Average Due Date:

Let the Base Date be 18/05/

DUE DATE AMOUNT NO OF DAYS FROM BASE DATE PRODUCT

DUE DATE AMOUNT NO OF DAYS FROM BASE DATE PRODUCT

ADD = Base Date + Difference of Product

Q.3 i) If Amount is paid on the Average Due Date:

ii) If Amount is paid on 25th August 2020

iii) If Amount is paid on 30th July 2020

Q.4 Calculation of Average Due Date:

DUE DATE AMOUNT NO OF DAYS FROM BASE DATE PRODUCT

ADD = Base Date + Total pf Product

10th January + 11,07,000

10th January + 131 Days

ADD = 21st May

Rebate / Discount = 8,500 * 8% * 64 Days = 119

Amount to be paid = 8,500 – 119 = Rs.8,381/-

b) If payment is deferred to 14th July, interest is to be paid from 21st May to

Interest = 8,500 * 8% * 54 Days = 101

Amount ot be paid = 8,500 + 101 = Rs.8,601/-

PAST EXAM SOLUTION