Professional Documents
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FINAL
Inter AUDIT
DT
Accounting
PRACTICE
100 IMPORTANT
QUESTIONS
100 Important questions
QUESTIONS
CHAPTER 2
1. (a) Under what circumstances can an enterprise change its accounting policy?
(b) Ram Co. (P) Ltd. furnishes you the following information for the year ended 31.3.2005:
The Company wants to change its method of claiming depreciation from straight line
method to written down value method.
Decide, how the depreciation should be disclosed in the Financial Statement for the year
ended 31.3.2005.
Answer
(a) A change in accounting policy is made only if the adoption of a different accounting policy
is required by statute or for compliance with an accounting standard or if it is considered
that the change would result in a more appropriate preparation or presentation of the financial
statements of the enterprise. A more appropriate presentation of events or transactions in the
financial statements occurs when the new accounting policy results in more relevant or reliable
information about the financial position, performance or cash flows of the enterprise.
(b) As per para 21 of AS 26 ‘Intangible Assets’, when a change in the method of depreciation
is made, depreciation should be calculated in accordance with the new method from the date
of the asset coming into use. The deficiency or surplus arising from retrospective
recomputation should be adjusted in the accounts in the year in which the method of
depreciation is changed. The deficiency should be charged to profit and loss account.
Similarly, any surplus should be credited in the statement of profit and loss. Such
change is a change in the accounting policy, and its effect should be quantified and disclosed.
In the given case, the deficiency of Rs 500 lakhs would be charged to the profit and loss account
of 31.3.2005. In the notes to account, the fact of change in method of depreciation should be
elaborated along with the effect of Rs 500 lakhs. The current depreciation charge of 200 lakhs
determined in accordance with the written down value method should be debited to the profit
and loss account.
2. (i) A machinery costing Rs 10 lakhs has useful life of 5 years. After the end of 5 years, its
scrap value would be Rs 1 lakh. How much depreciation is to be charged in the books of
the company as per Accounting Standard-6?
(ii) Garden Ltd. acquired fixed assets viz. plant and machinery for Rs20 lakhs. During the same
year it sold its furniture and fixtures for Rs5 lakhs. Can the company disclose, net cash outflow
towards purchase of fixed assets in the cash flow statement as per AS-3?
(iii) ABC Ltd. gave 50,000 equity shares of Rs 10 each (fully paid up) in consideration for supply
of certain machinery by X & Co. The shares exchanged for machinery are quoted on Bombay
Stock Exchange (BSE) at Rs 15 per share, at the time of transaction. In the absence of fair
market value of the machinery acquired, how the value of machinery would be recorded in the
books of the company?
(iv) A company took a construction contract for Rs 100 lakhs in January, 2006. It was found that
80% of the contract was completed at a cost of Rs 92 lakhs on the closing date i.e. on
31.3.2007. The company estimates further expenditure of Rs 23 lakhs for completing the
contract. The expected loss would be Rs 15 lakhs. Can the company recognise the loss in the
financial statements prepared for the year ended 31.3.2007?
Answer
Rs
Cost of machinery 10,00,000
Less: Scrap value at the end of useful life 1,00,000
Amount to be written off during useful life of machinery 9,00,000
Useful life of the asset 5 Years
Depreciation to be provided each year (Rs9,00,000 / 5 years) Rs 1,80,000
(ii) According to Para 21 of AS 3 (Revised) ‘Cash Flow Statements’, an enterprise should report
separately major classes of gross cash receipts and gross cash payments arising from investing
and financing activities, except to the extent that cash flows described in paragraphs 22 and 24
are reported on a net basis. Acquisition and disposal of fixed assets is not prescribed in para 22
and 24 of the standard.
Hence, the company cannot disclose net cash flow in respect of acquisition of plant and
machinery and disposal of furnitures and fixtures.
(iii) As per paragraph 22 of AS 10 ‘Accounting for Fixed Assets’ , fixed asset acquired in
exchange for shares or other securities in the enterprise should be recorded at its fair market
value, or the fair market value of the securities issued, whichever is more clearly evident. Since,
the market value of the shares exchanged for the asset is more clearly evident, the company
should record the value of machinery at Rs 7,50,000. (i.e., 50,000 shares Rs15 per share being
the market price)
4. List the criteria to be applied for rating an enterprise as Level-I enterprise for the purpose of
compliance of Accounting Standards in India.
Answer Non-corporate entities which fall in any one or more of the following categories, at the
end of the relevant accounting period, are classified as Level I entities:
(i) Entities whose equity or debt securities are listed or are in the process of listing on any stock
exchange, whether in India or outside India.
(ii) Banks (including co-operative banks), financial institutions or entities carrying on insurance
business.
(iii) All commercial, industrial and business reporting entities, whose turnover (excluding other
income) exceeds rupees fifty crore in the immediately preceding accounting year.
(iv) All commercial, industrial and business reporting entities having borrowings (including
public deposits) in excess of rupees ten crore at any time during the immediately preceding
accounting year.
(v) Holding and subsidiary entities of any one of the above
5. Best Ltd. deals in five products, P, Q, R, S, and T which are neither similar nor
interchangeable. At the time of closing of its accounts for the year ending 31st March 2010, the
historical cost and net realizable value of the items of the closing stock are determined as
follows:
What will be the value of closing stock for the year ending 31st March, 2012 as per AS 2
“Valuation of Inventories”? (4 Marks, May, 2011) (IPCC)
Answer
As per para 5 of AS 2 “Valuation of Inventories, inventories should be valued at the lower of
cost and net relizable value. Inventories should be written down to net realizable value on an
item-by-item basis.
Valuation of inventory (item wise) for the year ending 31st March 2012
The value of inventory for the year ending 31st March 2012 = Rs 23,29,000.
6. A computer costing Rs 60,000 is depreciated on straight line basis, assuming 10 years
working life and Nil residual value, for three years. The estimate of remaining useful life after
third year was reassessed at 5 years. Calculate depreciation as per the provisions of Accounting
Standard 6 "Depreciation Accounting".
Answer
Depreciation per year = Rs 60,000 / 10 = Rs 6,000
Depreciation on SLM charged for three years = Rs 6,000 x 3 years = Rs 18,000
Book value of the computer at the end of third year = Rs 60,000 – Rs 18,000 = Rs 42,000.
Remaining useful life as per previous estimate = 7 years
7. What are the three fundamental accounting assumptions recognised by Accounting Standard
(AS) 1? Briefly describe each one of them.
Answer
Accounting Standard (AS) 1 recognizes three fundamental accounting assumptions. These are
as follows:
(i) Going Concern: The financial statements are normally prepared on the assumption that an
enterprise will continue its operations in the foreseeable future and neither there is intention,
nor there is need to materially curtail the scale of operations.
(ii) Consistency: The principle of consistency refers to the practice of using same accounting
policies for similar transactions in all accounting periods unless the change is required (i) by a
statute, (ii) by an accounting standard or (iii) for more appropriate presentation of financial
statements.
(iii) Accrual basis of accounting: Under this basis of accounting, transactions are recognised as
soon as they occur, whether or not cash or cash equivalent is actually received or paid.
8. From the following information state the amount to be capitalized as per AS 10. Give the
explanations for your answer.
9. A company lodged a claim to insurance company for Rs 5,00,000 in September, 2006. The
claim was settled in February, 2007 for Rs 3,50,000. How will you record the short fall in claim
settlement in the books of the company.
Answer
Journal Entry
Rs Rs
Profit and Loss A/c Dr. 1,50,000
To Insurance Claim A/c 1,50,000
[Being the shortfall in settlement of insurance
claim charged to Profit and Loss A/c]
10. The Managing Director of A Ltd. is entitled to 5% of the annual net profits, as his
remuneration, subject to a minimum of Rs25,000 per month. The net profits, for this purpose,
are to be taken without charging income-tax and his remuneration itself. During the year, A Ltd.
made net profit of Rs 43,00,000 before charging MD’s remuneration, but after charging
provision for taxation of Rs 17,20,000. Compute remuneration payable to the Managing
Director.
Answer
11. A company provided Rs 10,00,000 for dividend payment. Is the Corporate Dividend Tax
payable in this case? If yes, please compute Corporate Dividend Tax assuming rate of 15%
plus surcharge of 10% and disclose as it would appear in profit and loss account of the
company.
Answer
Note: Though current surcharge rate on DDT is 12% the question is solved on the basis of the
information given in the question. However, education cess of 3% is applied though not given
in the question. Therefore, total DDT arrives of 16.995%.
Yes, Corporate Dividend Tax (CDT)∗ is payable by the company which has provided for the
payment of dividend. CDT is payable even if no income tax is payable. This is payable by a
domestic company on distribution of profits to its shareholders.
In the given case Corporate Dividend Tax would be worked out as under:
(i) Grossing up of dividend:
10,00,000 x 100/85 = 11,76,470
(ii) CDT = 11,76,470 x 16.995 = 1,99,941
The liability in respect of CDT arises only if the profits are distributed as dividends
whereas the normal income-tax liability arises on the earning of the taxable profits.
Since the CDT liability relates to distribution of profits as dividends which are adjusted as
appropriation /allocation of profit in the ‘Notes to Accounts’ of ‘Reserves and Surplus’, it
is appropriate that the liability in respect of DDT should also be adjusted therein.
CDT liability should be presented separately in the ‘Notes to Accounts’ of ‘Reserves and
Surplus’, as follows:
Dividend xxxxx
Dividend Corporate tax thereon xxxxx xxxxx
12. Calculate the maximum remuneration payable to the Managing Director based on effective
capital of a non-investment company for the year, from the information given below:
(Rs in ‘000)
(i) Profit for the year (calculated as per Section 349, 350 3000
& 351 of the Companies Act, 1956)
(ii) Paid up capital 18000
(iii) Reserves & surplus 7200
(iv) Securities premium 1200
(v) Long term loans 6000
(vi) Investment 3600
(vii) Preliminary expenses not written off 3000
(viii) Remuneration paid to the Managing Director during 600
the year
Answer
Note: Under the Companies Act, 2013, the Profits for the purposes of determining managerial
remuneration are computed in accordance with Section 198. Further, there is no provision for
computation of managerial remuneration on the basis of effective capital except in the case of
loss or inadequacy of profits in a financial year, hence this question is irrelevant in the new
context as there is no inadequacy of profits. Please refer to Sec 197, 198 and Schedule V of the
Companies Act 2013.
13. What are the maximum limits of managerial remuneration for companies having adequate
profits?
Answer
For companies having adequate profits, maximum limits of managerial remuneration in
different circumstances are as under:
(i) Overall (excluding fee for attending meetings) 11% of net profit
(ii) If there is one managing director or whole time director or manager 5% of net profit
(iii) If there is more than one managing director, whole time director or manager 10% of net
profit
(iv) Remuneration of directors who are neither managing directors nor whole time directors:
(a) If there is no managing or whole-time director 3% of net profit
(b) If there is a managing or whole-time director 1% of net profit
However, the above limits can be exceeded by the company approval at general
meetings with the Central Govt. approval.
14. (a) Raj Ltd. gives you the following information for the year ended 31st March, 2006:
(i) Sales for the year Rs 48,00,000. The Company sold goods for cash only.
(ii) Cost of goods sold was 75% of sales.
(iii) Closing inventory was higher than opening inventory by Rs 50,000.
(i) Trade creditors on 31.3.2006 exceed the outstanding on 31.3.2005 by Rs 1,00,000.
(ii) Tax paid during the year amounts to Rs 1,50,000.
(iii) Amounts paid to Trade creditors during the year Rs 35,50,000.
(iv) Administrative and Selling expenses paid Rs 3,60,000.
(v) One new machinery was acquired in December, 2005 for Rs 6,00,000.
(vi) Dividend paid during the year Rs 1,20,000.
(vii) Cash in hand and at Bank on 31.3.2006 Rs 70,000.
(viii) Cash in hand and at Bank on 1.4.2005 Rs 50,000.
Prepare Cash Flow Statement for the year ended 31.3.2006 as per the prescribed
Accounting standard.
(b) What all are the differences between Cash Flow statement and Fund Flow statement?
Answer
(a) Cash flow statement of Raj Limited for the year ended 31.3.2006
Direct Method
Rs Rs
Cash flow from operating activities:
Cash receipt from customers (sales) 48,00,000
Cash paid to suppliers and expenses 39,10,000
(Rs35,50,000 + Rs3,60,000)
Cash flow from operation 8,90,000
Less: Tax paid 1,50,000
Net cash from operating activities 7,40,000
(b) The fund flow statement is no more included in the syllabus therefore the question is not
relevant.
16. From the following summarised Cash account of S Ltd., prepare cash flow statement for the
year ended 31st March, 2009 in accordance with AS 3 (revised) using direct method.
Summarised Cash Account
Answer
(Rs in 000)
Cash flow from Operating Activities
Cash received from customers 2800
Less: Cash paid to suppliers 2000
Cash paid for overhead expenses 200
Cash paid for wages and salaries 100 2300
500
Less: Income tax paid 250
Net cash generated from Operating Activities 250
17. On the basis of the following information prepare a Cash Flow Statement for the year ended
31st March, 2013:
(i) Total sales for the year were Rs 199 crore out of which cash sales amounted to Rs 131 crore.
(ii) Cash collections from credit customers during the year, totalled Rs 67 crore.
(iii) Cash paid to suppliers of goods and services and to the employees of the enterprise
amounted to Rs 159 crore.
(iv) Fully paid preference shares of the face value of Rs 16 crore were redeemed and equity
shares of the face value of Rs 16 crore were allotted as fully paid up at a premium of 25%.
(v) Rs 13 crore were paid by way of income tax.
(vi) Machine of the book value of Rs 21 crore was sold at a loss of Rs 30 lakhs and a new
machine was installed at a total cost of Rs 40 crore.
(vii) Debenture interest amounting Rs 1 crore was paid.
(viii) Dividends totalling Rs 10 crore was paid on equity and preference shares. Corporate
dividend tax @ 17% was also paid.
(ix) On 31st March, 2012 balance with bank and cash on hand totalled Rs 9 crore.
Answer
18. Intelligent Ltd., a non financial company has the following entries in its Bank Account. It has
sought your advice on the treatment of the same for preparing Cash Flow Statement.
(i) Loans and Advances given to the following and interest earned on them:
(1) to suppliers
(2) to employees
(3) to its subsidiaries companies
(ii) Investment made in subsidiary Smart Ltd. and dividend received
(iii) Dividend paid for the year
(iv) TDS on interest income earned on investments made
(v) TDS on interest earned on advance given to suppliers
(vi) Insurance claim received against loss of fixed asset by fire
Discuss in the context of AS 3 Cash Flow Statement
Answer
(i) Loans and advances given and interest earned
(1) to suppliers Operating Cash flow
(2) to employees Operating Cash flow
(3) to its subsidiary companies Investing Cash flow
(ii) Investment made in subsidiary company and dividend received
Investing Cash flow
19. Rama Udyog Limited was incorporated on August 1, 2008. It had acquired a running
business of Rama & Co. with effect from April 1, 2008. During the year 2008-09, the total sales
were Rs 36,00,000. The sales per month in the first half year were half of what they were in the
later half year. The net profit of the company, Rs 2,00,000 was worked out after charging the
following expenses:
(i) Depreciation Rs 1,08,000, (ii) Audit fees Rs 15,000, (iii) Directors’ fees Rs 50,000, (iv)
Preliminary expenses Rs 12,000, (v) Office expenses Rs 78,000, (vi) Selling expenses Rs 72,000
and (vii) Interest to vendors upto August 31, 2008 Rs 5,000.
Please ascertain pre-incorporation and post-incorporation profit for the year ended 31st March,
2009.
Answer
Statement showing pre and post incorporation profit for the year ended 31st March, 2009
Working Notes:
1. Sales ratio
The sales per month in the first half year were half of what they were in the later half
year. If in the later half year, sales per month is Re.1 then it should be 50 paise per
month in the first half year. So sales for the first four months (i.e. from 1st April, 2008 to
31st July, 2008) will be 4 .50 = Rs 2 and for the last eight months (i.e. from 1st August,
2008 to 31st March, 2009) will be (2 × .50 + 6 × 1) = Rs 7. Thus sales ratio is 2:7.
2. Time ratio
1st April, 2008 to 31st July, 2008 : 1st August, 2008 to 31st March, 2009
= 4 months : 8 months = 1:2
Thus, time ratio is 1:2.
3. Gross profit
Gross profit = Net profit + All expenses
= Rs 2,00,000 + Rs ( 1,08,000+15,000+50,000+12,000+78,000+72,000+5,000)
= Rs 2,00,000 +Rs 3,40,000 = Rs 5,40,000.
20. A firm M/s. Alag, which was carrying on business from 1st July, 2010 gets Itself incorporated
as a company on 1st November, 2010. The first accounts are drawn upto 31st March 2011. The
gross profit for the period is Rs 56,000. The general expenses are Rs 14,220; Director's fee
Rs 12,000 p.a.; Incorporation expenses Rs 1,500. Rent upto 31st December was Rs 1,200 p.a
after which it is increased to Rs 3,000 p.a. Salary of the manager, who upon incorporation of
the company was made a director, is Rs 6,000 p.a. His remuneration thereafter is included in
the above figure of fee to the directors.
Give statement showing pre and post incorporation profit. The net sales are Rs 8,20,000, the
monthly average of which for the first four months is one-half of that of the remaining period.
The company earned a uniform profit. Interest and tax may be ignored.
Answer
21. The promoters of Glorious Ltd. took over on behalf of the company a running business with
effect from 1st April, 2012. The company got incorporated on 1st August, 2012. The annual
accounts were made up to 31st March, 2013 which revealed that the sales for the whole year
totalled Rs 1,600 lakhs out of which sales till 31st July, 20I2 were for Rs 400 lakhs. Gross profit
ratio was 25%. The expenses from 1st April 2012, till 31st March, 2013 were as follows:
(Rs in lakhs)
Salaries 69
Rent, Rates and Insurance 24
Sundry Office Expenses 66
Travellers' Commission 16
Discount Allowed 12
Bad Debts 4
Directors' Fee 25
Audit Fee 9
Depreciation on Tangible Assets 12
Debenture Interest 11
Prepare a statement showing the calculation of Profits for the pre-incorporation and post
incorporation periods.
Answer
(a) Statement showing the calculation of Profits for the pre-incorporation and post
incorporation periods
Working Notes:
1. Sales ratio
(Rs in lakhs)
Sales for the whole year 1,600
Sales upto 31st July, 2012 400
Therefore, sales for the period from 1st August, 2012 to 31st March, 2013 1,200
22. Sneha Ltd. was incorporated on 1st July, 2013 to acquire a running business of Atul Sons
with effect from 1st April, 2013. During the year 2013-14, the total sales were Rs 24,00,000 of
which Rs 4,80,000 were for the first six months. The Gross profit of the company Rs 3,90,800.
The expenses debited to the Profit & Loss Account included:
(i) Director's fees Rs 30,000
(ii) Bad debts Rs 7,200
(iii) Advertising Rs 24,000 (under a contract amounting to Rs 2,000 per month)
(iv) Salaries and General Expenses Rs 1,28,000
Working Notes:
1. Sales ratio
Particulars Rs
Sales for period up to 30.06.2013 (4,80,000 * 3/6) 2,40,000
Sales for period from 01.07.2013 to 31.03.2014 (24,00,000 – 2,40,000) 21,60,000
23. Following items appear in the Trial Balance of Saral Ltd. as on 31st March, 2014:
Particulars Amount
4,500 Equity Shares of Rs100 each 4,50,000
Capital Reserve (including Rs40,000 being profit on sale of Plant) 90,000
Securities Premium 40,000
Capital Redemption Reserve 30,000
General Reserve 1,05,000
Profit and Loss Account (Cr. Balance) 65,000
The company decided to issue to equity shareholders bonus shares at the rate of 1 share for
every 3 shares held. Company decided that there should be the minimum reduction in free
reserves. Pass necessary Journal Entries in the books Saral Ltd. (4 Marks, IPCC May, 2014)
Answer
Capital Redemption Reserve A/c Dr. 30,000
Securities Premium A/c Dr. 40,000
Capital Reserve (Realized in cash) Dr 40,000
General Reserve A/c Dr. 40,000
To Bonus to Shareholders 1,50,000
(Being issue of bonus shares by utilization of various
Reserves, as per resolution dated …….)
Bonus to Shareholders A/c Dr. 1,50,000
To Equity Share Capital 1,50,000
(Being capitalization of Profit)
(iii) Sub-division of 10 lakh fully paid 11% preference shares of Rs 50 each into 50 lakh fully paid
11% preference shares of Rs 10 each.
(iv) Conversion of 12% preference shares of Rs 5,00,000 into 14% preference shares Rs 3,00,000
and remaining balance as 12% Non-cumulative preference shares.
Answer
Journal Entries
25. The closing capital of Mr. A on 31.3.2007 was Rs 1,50,000. On 1.4.2006 his capital
was Rs 60,000. During the year he had drawn Rs 40,000 for domestic expenses. He
introduced Rs 25,000 as additional capital in February, 2007. Find out his net profit for the
year.
Answer
Statement showing calculation of profit for the year 31.3.2007
Rs
Capital as on 31.3.2007 1,50,000
Add: Drawings during the year 40,000
1,90,000
Less: Additional capital introduced in February 2002 (25,000)
1,65,000
Less: Capital as on 1.4.2006 (60,000)
Net profit for the year 1,05,000
26. In a concern, the opening provision for doubtful debts is Rs 51,000. During the year a sum of
Rs 10,000 was written off as bad debt. The closing balance of sundry debtors amounts to Rs
6,30,000. It was decided that 10% of the debtors is to be maintained as provision.
Calculate the closing balance towards provision for doubtful debts and pass journal entry for
giving effect to the provision maintained.
Answer
Closing balance of Sundry Debtors = Rs 6,30,000
Closing provision for doubtful debts to be maintained @ 10% = Rs 63,000
Less: Opening Provision for doubtful debts = Rs 51,000
Additional provision to be maintained = Rs 12,000
Journal Entry
Rs Rs
Profit and Loss A/c Dr. 12,000
To Provision for doubtful debts 12,000
(Being additional provision on doubtful debts maintained @
10%)
27. A company sold 25% of the goods on cash basis and the balance on credit basis. Debtors are
allowed 2 months credit and their balance as on 31.3.2008 is Rs 1,40,000. Assume that the sale
is uniform through out the year. Calculate the total sales of the company for the year ended
31.3.2008.
Answer
Debtors as on 31.3.2008 = Rs 1,40,000
Credit period allowed = 2 months
i.e. Debtors as on 31.3.2008 is standing for credit sales of February and March 2008
Credit sales per month = Rs 1,40,000/2 = Rs 70,000
Credit sales for the year 2007-2008 = Rs 70,000 × 12 = Rs 8,40,000
25
Add: Cash sales 84,000 × 75 = 2,80,000
Total sales of the company for the year ended 31.3.2008 Rs 11,20,000
Closing balance of Sundry Debtors = Rs 6,30,000
Closing provision for doubtful debts to be maintained @ 10% = Rs 63,000
Less: Opening Provision for doubtful debts = Rs 51,000
Additional provision to be maintained = Rs 12,000
Journal Entry
Rs Rs
Profit and Loss A/c Dr. 12,000
To Provision for doubtful debts 12,000
(Being additional provision on doubtful debts maintained @
10%)
28. Find out the profit of Mr. A from the following information:
Capital at the beginning of the year Rs 20,00,000
Drawings made by Mr. A Rs 2,00,000
Capital at the end of the year Rs 25,00,000
Additional capital introduced during the year Rs 1,00,000
Answer
29. A trader purchased goods for Rs 1,70,000. The opening stock of inventory prior to the said
purchase was Rs 30,000. His sales was Rs 2,10,000. Find out the closing stock of inventory if
the Gross profit margin is 25% on cost.
Answer
Calculation of closing stock:
Cost of goods sold = Sales – Gross Profit
25
= Rs 2,10,000 – ( 2,10,000 × 125
= Rs 1,68,000
Closing stock = Opening Stock + Purchases – Cost of goods sold
= Rs 30,000 + Rs 1,70,000 – Rs 1,68,000
= Rs 32,000
30. Following information of the Final Accounts of Kumaran Ltd. are missing as shown below:
Trading and Profit & Loss A/c for the year ended 31-03-2012
Rs (000) Rs (000)
To Opening Stock 7,000 By Sales ?
To Purchases ? By Closing Stock ?
To Manufacturing Expenses 1,750
To Gross Profit c/d ?
Total ? Total ?
To Office and Administration 7,400 By Gross Profit b/d ?
Expenses By Commission Received 1,000
To Interest on Debentures 600
To Provision for Taxation ?
To Net Profit for the year c/d ? Total
Total ? By Balance b/d ?
To Proposed Dividends ? By Net Profit for the year 1,400
To Transfer to General Reserves ? b/d ?
To Balance Transfer to Balance Sheet ?
Total ? Total ?
You are required to provide the missing figures with the help of following information:
(i) Current Ratio 2 :1.
(ii) Closing stock is 25% of sales.
(iii) Proposed dividends are 40% of the paid up capital.
(iv) Gross profit ratio is 60%.
(v) Ratio of Current Liabilities to Debentures is 2 : 1.
(vi) Transfer to General Reserves is equal to proposed dividends.
(vii) Profit carried forward are 10% of the proposed dividends.
(viii) Provision for taxation is 50% of profits.
(ix) Balance to the credit of General Reserves at the beginning of the year is twice the
amount transferred to that account from the current profits.(16 Marks, November 2012) (IPCC)
Answer
Rs ‘000
1. Amount of debentures
𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑜𝑛 𝑑𝑒𝑏𝑒𝑛𝑡𝑢𝑟𝑒𝑠 600
= × 100 = × 100 = 6,000
𝑅𝑎𝑡𝑒 𝑜𝑓 𝑖𝑛𝑡𝑒𝑟𝑒𝑠 10
2. Amount of proposed dividend
= Paid up share capital x 40%= 10,000 x 40% = 4,000
3. Transfer to general reserves
= Amount of proposed dividend i.e. 4,000
4. Profit carried forward
= 10% of proposed dividend = 10% of 4,000 = 400
5. Net profit for the year
= Proposed dividend + Transfer to general reserve + Profit carried forward – Net profit
carried forward
= (4,000 + 4,000 + 400) – 1,400 = 7,000
6. Provision for taxation
Provision for taxation = 50% of profit (i.e. before net profit)
It means that net profit is 50% and provision for tax is 50%.
Therefore, if net profit is 7,000 then, Provision for taxation is also 7,000
7. Gross profit
= Net profit + all expenses – Commission received
= (7,000 + 7,000 + 600 + 7,400) – 1,000 = 21,000
8. Sales
Gross profit 21,000
= 𝑅𝑎𝑡𝑒 𝑜𝑓 𝑝𝑟𝑜𝑓𝑖𝑡 × 100 = × 100 = 35,000
60
9. Closing stock
= 25% of sales
= 25% x 35,000 = 8,750
10. Purchases
= (Sales + Closing stock) – (Opening stock + Manufacturing expenses + Gross profit)
= (35,000 + 8,750) – (7,000 + 1,750 + 21,000)
= 43,750 - 29,750 = 14,000
11. Balance of General Reserve as on 1.4.2011
= Twice the amount transferred to general reserve during the year
= 2 x 4,000 = 8,000
12. Current Liabilities
=Current liabilities is twice of amount of debentures
= 2 x 6,000 = 12,000
13. Current Assets
Current Assets = current ratio x current liabilities
= 2 x 12,000 = 24,000
14. Sundry Debtors
Sundry Debtors = Current assets – Stock in trade – Bank balance
= 24,000 – 8,750 – 1,250 = 14,000
15. Total of Equity and Liabilities part of the balance sheet
= Shareholders capital + Non-current liabilities + Current liabilities
= (10,000 + 12,000 + 400) + 6,000+ 12,000 = 40,400
31. The details of Assets and Liabilities of Mr. 'A' as on 31-3-2012 and31-3-2013 are as follows:
31.3.2012 31.3.2013
Rs Rs
Assets:
Furniture 50,000
Building 1,00,000
Stock 1,00,000 2,50,000
Sundry Debtors 60,000 1,10,000
Cash in hand 11,200 13,200
Cash at Bank 60,000 75,000
Liabilities :
Loans 90,000 70,000
Sundry Creditors 50,000 80,000
Mr. 'A' decided to provide depreciation on building by 2.5% and furniture by 10% for the period
ended on 31-3-2013. Mr. ‘A’ purchased jewellery for Rs 24,000 for his daughter in December
2012. He sold his car on 30-3-2013 and the amount of Rs 40,000 is retained in the business.
You are required to :
(i) Prepare statement of affairs as on 31-3-2012 and 31-3-2013.
(ii) Calculate the profit received by 'A' during the year ended 31-3-2013.
Answer
Working Note:
Dep. on Building Rs 2,500 (2.5% of Rs 1,00,000)
Dep. on Furniture Rs 5,000 (10% of Rs 50,000)
(ii) Calculation of Profit earned by A during the year ended 31st March, 2013
Capital Account
Rs Rs
To Drawings 24,000 By bal. b/d 2,41,200
To bal. c/d 4,40,700 By Additional Capital (Car sale proceeds) 40,000
By P&L A/c. (Bal. figure) 1,83,500
4,64,700 4,64,700
32. Ram & Co. acquired a motor lorry on hire-purchase basis. It has to make cash down
payment of Rs 1,00,000 at the beginning. The payments to be made subsequently are Rs
2,63,000; Rs 1,85,000 and Rs 1,14,000 at the end of first year, second year and third year
respectively Interest charged is @ 14% per annum. Calculate the cost price of motor lorry and
interest paid in each installment.
Answer
Calculation of cost price and total interest to be paid on motor lorry
No. of Amount due at the time Interest on cumulative Cash Price in
instalment of instalment instalment each instalment
14
III 1,14,000 1,14,000 × 114 = 14,000 1,00,000
II 1,85,000 14
1,85,000 × = 35,000
114 1,50,000
14
I 2,63,000 2,63,000 × = 63,000 2,00,000
114
33. From the following, calculate the cash price of the asset:
Rs
Hire purchase price of the asset 50,000
Down payment 10,000
Four annual instalments at the end of each year 10,000
Rate of interest 5% p.a.
Answer
34. On 1st April, 2012 Fastrack Motors Co. sells a truck on hire purchase basis to Teja Transport
Co. for a total hire purchase price of Rs 9,00,000 payable as to Rs 2,40,000 as down payment
and the balance in three equal annual instalments of Rs 2,20,000 each payable on 31st March,
2013, 2014 and 2015. The hire vendor charges interest @ 10% per annum.
You are required to ascertain the cash price of the truck for Teja Transport Co. Calculations
may be made to the nearest rupee.
Answer
Rate of Interest 10 1
Ratio of interest and amount due = = =
100+Rate of Interest 1.10 11
There is no interest element is there in the down payment as it is paid on the date of the
transaction. Instalments paid after certain period includes interest portion also. Therefore, to
ascertain cash price, interest will be calculated from last instalment to first instalment as
follows:
35. On 1st April, 2012, M/s. Power Motors sold on hire purchase basis a truck whose cash price
was Rs 9,00,000 to M/s. Singh & Singh, a transport firm. The terms of the contract were that
the transporters were to pay Rs 3,00,000 down and six four-monthly instalments of Rs 1,00,000
plus interest on outstanding amount of cash price for the intervening four months. The
instalments were payable on 31st July, 30th November and 31st March in each one of the two
accounting years. Interest was calculated @ 12% per annum. M/s. Singh & Singh duly paid the
instalment on 31st July, 2012 but failed to pay the instalment on 30th November, 2012. M/s.
Power Motors, after legal formalities, repossessed the truck valuing it at Rs 7,00,000. M/s.
Power Motors spent Rs 80,000 on repairs and repainting of the truck and on 7th January, 2013
sold it for Rs 7,50,000 cash.
You are required to prepare M/s. Singh & Singh’s A/c and Goods Repossessed Account in the
books of M/s. Power Motors
Answer
Answer
Statement showing differences between Hire Purchase and Installment System
8. Name of Parties The parties involved are called Hirer The parties involved are
involved and Hire vendor called buyer and seller.
9. Component other Component other than Cash Price Component other than
than cash price included in installment is called Hire Cash Price included in
charges Installment is called
Interest
37. On 1st April, 2008, Mr. Neel purchased 5,000 equity shares of Rs 100 each in X Ltd. @ Rs
120 each from a Broker, who charged 2% brokerage. He incurred ½% as cost of shares transfer
stamps. On 31st January, 2009, Bonus was declared in the ratio of 1:2. Before and after the
record date of bonus shares, the shares were quoted at Rs 175 per share and Rs 90 per share
respectively. On 31st March, 2009, Mr. Neel sold bonus shares to a broker, who charged 2%
brokerage.
Show the Investment Account in the books of Mr. Neel, who held the shares as current assets
and closing value of investments shall be made at cost or Market value, whichever is lower.
Answer
Dr. Cr.
Working Notes:
1. Calculation of cost of equity shares purchased on 1.4.08
= 5,000 × Rs 120 + 2% of Rs 6,00,000 + 0.5% of Rs 6,00,000 = Rs 6,15,000
2. Calculation of profit proceeds of equity shares sold on 31.3.09
= 2,500 × Rs 90 – 2% of Rs 2,25,000 = Rs 2,20,500
3. Calculation of profit on sale of bonus shares on 31.3.09
= Sale proceeds – Average cost
2,50,000
= 2,20,500 – 2,05,000 i.e. ( 6,15,000 × ) = 15,500
7,50,000
4. Valuation of equity shares on 31.3.09
5,00,000
Cost = 6,15,000 × = Rs 4,10,000
7,50,000
Market value = 5,000 shares × Rs 90 = Rs 4,50,000
Closing Balance has been valued at Rs 4,10,000 i.e. at cost which is lower than the
market value.
38. Mr. T purchased 1,000 nos. 10% debentures of Rs 100 each on 1st April, 2009 at Rs 96
cuminterest, the previous interest date being 31st December, 2008. Compute cost of
investment.
Answer
Rs
Total amount payable 1,000 × 96 = 96,000
Less: Interest included in the price for January, February and
10 3
March i.e. 1,00,000 × 100 × 12 = 2,500
Cost of the Investment 93,500
39. H purchased 500 equity shares of Rs 100 each in the ABC Company Limited for Rs 62,500
inclusive of brokerage and stamp duty. Some years later the company decided to capitalise its
profit and to issue to the holders of equity shares one equity share as Bonus for every equity
share held by them. Prior to capitalization, the shares of ABC Company Limited were quoted
at Rs 175 per share. After the capitalization, the shares were quoted at Rs 92.50 per share. H
sold the Bonus shares and received Rs 90 per share. Show Investment A/c in H’s books on
average cost basis as per AS 13.
Answer
In the books of H
Investment Account (Equity Shares of ABC Co. Ltd.)
Working Note:
1. Calculation of profit on sale of bonus shares:
40. On 1st April, 2010, Rajat has 50,000 equity shares of P Ltd. at a book value of Rs 15 per
share (face value Rs 10 each). He provides you the further information:
(1) On 20th June, 2010, he purchased another 10,000 shares of P Ltd. at Rs 16 per share.
(2) On 1st August, 2010, P Ltd. issued one equity bonus share for every six shares held by
the shareholders.
(3) On 31st October, 2010, the directors of P Ltd. announced a right issue which entitle the
holders to subscribe three shares for every seven shares at Rs 15 per share. Shareholders can
transfer their rights in full or in part. Rajat sold 1/3rd of entitlement to Umang for a
consideration of Rs 2 per share and subscribe the rest on 5th November, 2010.
You are required to prepare Investment A/c in the books of Rajat for the year ending
31st March, 2011. (5 Marks May, 2011) (IPCC)
Answer
41. On 01-04-2011, Mr. T. Shekharan purchased 5,000 equity shares of Rs 100 each in V. Ltd. @
Rs 120 each from a broker, who charged 2% brokerage. He incurred 50 paisa per Rs 100 as
cost of shares transfer stamps. On 31-01-2012 bonus was declared in the ratio of 1 : 2. Before
and after the record date of bonus shares, the shares were quoted at Rs 175 per share and
Rs 90 per share respectively. On 31-03-2012 Mr. T. Shekharan sold bonus shares to a broker,
who charged 2% brokerage.
Show the Investment Account in the books of T. Shekharan, who held the shares as Current
Assets and closing value of investments shall be made at cost or market value whichever is
lower. (8 Marks, November 2012) (IPCC)
Answer
Working Notes:
1. Cost of equity shares purchased on 1.4.2011
= Cost + Brokerage + Shares of transfer stamps
= 5,000 Rs 120 + 2% of Rs 6,00,000 + ½% of Rs 6,00,000 = Rs 6,15,000
2. Sale proceeds of equity shares sold on 31st March, 2012
= Sales price – Brokerage = 2,500 Rs 90 – 2% of Rs 2,25,000 = Rs 2,20,500.
3. Profit on sale of bonus shares on 31st March, 2012
= Sales proceeds – Average cost
Sales proceeds = Rs 2,20,500
Average cost = Rs [6,15,000 2,50,000/7,50,000] = Rs 2,05,000
Profit = Rs 2,20,500 – Rs 2,05,000= Rs 15,500.
4. Valuation of equity shares on 31st March, 2012
Cost = Rs [6,15,000 5,00,000/7,50,000]= Rs 4,10,000 i.e Rs 82 per share
Market Value = 5,000 shares × Rs 90 = Rs 4,50,000
Closing stock of equity shares has been valued at Rs 4,10,000 i. e cost being lower than
the market value.
42. In 2011, M/s. Wye Ltd. issued 12% fully paid debentures of Rs 100 each, interest being
payable half yearly on 30th September and 31st March of every accounting year. On 1st
December, 2012, M/s. Bull & Bear purchased 10,000 of these debentures at Rs 101 cum-
interest price, also paying brokerage @ 1% of cum-interest amount of the purchase. On
1st March, 2013 the firm sold all of these debentures at Rs 106 cum-interest price, again paying
brokerage @ 1 % of cum-interest amount. Prepare Investment Account in the books of M/s.
Bull & Bear for the period 1st December, 2012 to 1st March, 2013.
Answer
Dat Particul Nominal Intere Cost Dat Partic Nominal Intere Cost
e ars Value st e ulars Value st
(Rs) (Rs)
1.12 To 10,00,00 20,000 10,00,10 1.3. By 10,00,00 50,000 9,99,400
.12 Bank 0 0 13 Bank 0
A/c A/c 700
(W.N.1) - (W.N.
1.3. To 30,000 2)
201 Profit &
3 loss 10,00,00 50,000 10,00,10 1.3. By 10,00,00 50,000 10,00,10
A/c 0 0 13 Profit 0 0
&
loss
A/C
Working Notes:
(i) Cost of 12% debentures purchased on 1.12.2012 Rs
Cost Value (10,000 × 101) = 10,10,000
Add: Brokerage (1% of 10,10,000) = 10,100
Less: Cum Interest (10,000 x 100 x12% x 2/12) = ( 20,000)
Total = 10,00,100
43. On 01-05-2012, Mr. Mishra purchased 800 equity shares of 10 each in Fillco Ltd. @ Rs 50
each from a broker who charged 5%. He incurred 20 paisa per 100 as cost of shares transfer
stamps. On 31-10-2012, bonus was declared in the ratio 1 : 4. The shares were quoted at
Rs 110 and Rs 60 per share before and after the record date of bonus shares respectively. On
30-11-2012, Mr. Mishra sold the bonus shares to a broker who charged 5%. You are required
to prepare Investment Account in the books of Mr. Mishra for the year ending 31-12-2012 and
closing value of lnvestment shall be made at cost or market value whichever is lower.
Answer
Working Notes:
(i) Cost of equity shares purchased on 1.5.2012 = 800 × Rs 50 + 5% of Rs 40,000 + .002 of
Rs 40,000 = Rs 42,080.
(ii) Sale proceeds of equity shares sold on 30.11.2012 = 200 × Rs 60 – 5% of Rs 12,000 = Rs
11,400
(iii) Profit on sale of bonus shares on 30.11.12
= Sales proceeds – Average cost
Sales proceeds = Rs 11,400
Average cost = Rs 42,080/10,000 × 2,000 = Rs 8,416
Profit = Rs 11,400 – Rs 8,416 = Rs 2,984
(iv) Valuation of equity shares on 31st Dec., 2012
Cost = (Rs 42,080/10,000 x 8,000) = Rs 33,664
Market Value = 800 × Rs 60 = Rs 48,000
Closing balance has been valued at Rs 33,664 being lower than the market value
Less: Brokerage (1% of Rs 10,60,000) = (10,600)
Less: Cum Interest (10,000 x 100 x12% x 5/12) = (50,000)
Total = 9,99,400
44. On 2.6.2007 the stock of Mr. Black was destroyed by fire. However, following particulars
were furnished from the records saved:
Rs
Stock at cost on 1.4.2006 1,35,000
Stock at 90% of cost on 31.3.2007 1,62,000
Purchases for the year ended 31.3.2007 6,45,000
Sales for the year ended 31.3.2007 9,00,000
Purchases from 1.4.2007 to 2.6.2007 2,25,000
Sales from 1.4.2007 to 2.6.2007 4,80,000
Sales upto 2.6.2007 includes Rs 75,000 being the goods not dispatched to the customers. The
sales invoice price is Rs 75,000.
Purchases upto 2.6.2007 includes a machinery acquired for Rs 15,000.
Purchases upto 2.6.2007 does not include goods worth Rs 30,000 received from suppliers, as
invoice not received upto the date of fire. These goods have remained in the godown at the
time of fire. Value of stock salvaged from fire Rs 22,500 and this has been handed over to the
insurance company. The insurance policy is for Rs 1,20,000 and it is subject to average clause.
Ascertain the amount of claim for loss of stock.
Answer
Answer
Rs Rs
To Opening Stock 1,35,000 By Sales 9,00,000
To Purchases 6,45,000 By Closing Stock at cost 1,80,000
100
To Gross Profit 3,00,000 (1,62,000 × 90 )
10,80,000 10,80,000
Rs Rs
To Opening Stock at cost 1,80,000 By Sales
To Purchases 2,25,000 4,80,000
Add: Goods received but Less: Goods not 4,05,000
invoice not received 30,000 dispatched
2,55,000 75,000 1,50,000
Less: Machinery 15,000 2,40,000
To Gross Profit (Refer working 1,35,000 By Closing stock (Balancing
note) 5,55,000 figure) 5,55,000
Rs
Stock as on 1.4.2006 3,75,000
Purchases from 1.4.2006 to 31.3.2007 5,20,000
Sales from 1.4.2006 to 31.3.2007 8,55,000
Stock as on 31.3.2007 2,00,000
Purchases from 1.4.2007 to 11.11.2007 3,41,000
Sales from 1.4.2007 to 11.11.2007 4,35,500
In valuing the stock on 31.3.2007, due to damage 50% of the value of the stock which
originally cost Rs 22,000 was written off. In June, 2007 about 50% of this stock was sold for Rs
5,500 and the balance of obsolete stock is expected to realize the same price (i.e., 50% of the
original cost). The gross profit ratio is to be assumed as uniform in respect of other sales. Stock
salvaged from fire amounts to Rs 11,500.
Compute the value of stock lost in fire.
Answer
Rs Rs
To Opening stock 3,75,000 By Sales 8,55,000
To Purchases 5,20,000 By Closing stock (W.N.) 2,11,000
To Gross profit (Bal. fig.) 1,71,000
10,66,000 10,66,000
Gross Profit
Gross profit ratio of 2006-2007 = × 100
Sales
1,71,000
= 8,55,000 × 100 = 20%
Answer
When a businessman wants to reduce the burden of Insurance Premium and wants to take
an insurance policy which is less than the value of average stock, it is known as under
insurance. For discouraging the under-insurance, fire insurance policies contain an
average clause. In such a case, the net claim is calculated by using following formula:
Amount of Policy
Amount of claim = Insurable Amount × Actual Loss
47. Calculate the amount of Insurance claim to be lodged, based on the following information:
Answer
Total stock before fire = Rs 90,000 + Rs 40,000 = Rs 1,30,000
Stock destroyed by fire
Amountof insurance claim × Amount Insured
Total stock before fire
90,000
= 1,30,000 × 65,000 = 45,000
48. A fire broke out in the godown of a business house on 8th July, 2009. Goods costing Rs
2,03,000 in a small sub-godown remain unaffected by fire. The goods retrieved in a damaged
condition from the main godown were valued at Rs 1,97,000.
The following particulars were available from the books of accounts:
Stock on the last Balance Sheet date at 31st March, 2009 was Rs 15,72,000. Purchases for the
period from 1st April, 2009 to 8th July, 2009 were Rs 37,10,000 and sales during the same
period amounted to Rs 52,60,000. The average gross profit margin was 30% on sales.
The business house has a fire insurance policy for Rs 10,00,000 in respect of its entire stock.
Assist the Accountant of the business house in computing the amount of claim of loss by fire.
Answer
= Rs 7,50,000
Working Note:
Memorandum Trading Account for the period from 1st April, 2009 to 8th July, 2009
Rs Rs
To Opening Stock 15,72,000 By Sales 52,60,000
To Purchases 37,10,000 By Closing Stock (Bal.Fig.) 16,00,000
To Gross Profit (30% of sales) 15,78,000
68,60,000 68,60,000
49. In January, 2010 a firm took an insurance policy for Rs 60 lakhs to insure goods in its
godown against fire subject to average clause. On 7th March, 2010 a fire broke out destroying
goods costing Rs 44 lakhs. Stock in the godwon was estimated at Rs 80 lakhs. Compute the
amount of insurance claim. (2 Marks) (May, 2010) (IPCC)
Answer
Amount of insurance Policy
Amount of insurance claim = Amount of loss due to fire × Total stock in the godown
60 Lakhs
= 44 Lakhs × = Rs 33 Lakhs
80 Lakhs
50. A trader intends to take a loss of profit policy with indemnity period of 6 months, however,
he could not decide the policy amount. From the following details, suggest the policy amount:
Rs
Turnover in last financial year 4,50,000
Answer
(a) Calculation of Gross Profit
Net Profit+Standing Charges
Gross Profit = × 100
Turnover
45000+90000
= × 100 = 30%
4,50,000
Rs
Turnover in the last financial year 4,50,000
Add: 25% increase in turnover 1,12,500
5,62,500
Gross profit on increased turnover (5,62,500 x 30%) 1,68,750
Add: Additional standing charges 31,250
Policy Amount 2,00,000
Rs
Cost of stock on 1st, April, 2011 7,10,500
Cost of stock on 31st, March, 2012 7,90,100
Purchases during the year ended 31st March, 2012 56,79,600
Purchases from 1st April, 2012 to the date of fire 33,10,700
Cost of goods distributed as samples for advertising from1st April, 2012 to the 41,000
date of fire
Cost of goods withdrawn by trader for personal use from 1st April, 2012 to 2,000
the date of fire
Sales for the year ended 31st March, 2012 80,000
Sales from 1st April, 2012 to the date of fire 45,36,000
The insurance company also admitted firefighting expenses. The trader had taken the fire
insurance policy for Rs 9,00,000 with an average clause.
Calculate the amount of the claim that will be admitted by the insurance company.
Answer
Memorandum Trading Account for the period 1st April, 2012 to 29th Aug.2012
Rs Rs
To Opening Stock 7,90,100 By Sales 45,36,000
To Purchases 33,10,700 By Closing stock (Bal. fig.) 8,82,600
Less: Advertisement (41,000)
Drawings (2,000) 32,67,700
Rs
Value of stock destroyed by fire 8,82,600
Less: Salvaged Stock (1,08,000)
Add: Fire Fighting Expenses 4,700
Insurance Claim 7,79,300
Note: Since policy amount is more than claim amount, average clause will not apply. Therefore,
claim amount of Rs 7,79,300 will be admitted by the Insurance Company.
Working Note:
Rs Rs
To Opening Stock 7,10,500 By Sales 80,00,000
To Purchases 56,79,600 By Closing stock 7,90,100
To Gross Profit 24,00,000
87,90,100 87,90,100
52. On 15th December, 2012, a fire occurred in the premises of M/s. OM Exports. Most of the
stocks were destroyed. Cost of stock salvaged being Rs 1,40,000. From the books of account,
the following particulars were available:
(i) Stock at the close of account on 31st March, 2012 was valued at Rs 9,40,000.
(ii) Purchases from 01-04-2012 to 15-12-2012 amounted to Rs 13,20,000 and the sales
during that period amounted to Rs 20,25,000. On the basis of his accounts for the past three
years, it appears that average gross profit ratio is 20% on sales.
Compute the amount of the claim, if the stock were insured for Rs 4,00,000.
Answer
Particulars Rs Particulars Rs
To Opening stock 9,40,000 By Sales 20,25,000
To Purchases 13,20,000 By Closing Stock 6,40,000
To Gross Profit @20% 4,05,000 (Bal. figure)
26,65,000 26,65,000
Statement of Claim
Rs
Estimated value of Stock as at date of fire 6,40,000
Less: Value of Salvaged Stock 1,40,000
Estimated Value of Stock lost by fire 5,00,000
As the value of stock is more than insured value, amount of claim would be subject to average
clause.
Amount of Policy
Amount of Claim= × Actual Loss of Stock
Value of Stock
4,00,000
Amount of Claim= 6,40,000 × 5,00,000 = Rs 3,12,500
53. A fire occurred in the premises of M/s. Kailash & Co. on 30th September 2013. From the
following particulars relating to the period from 1st April 2013 to 30th September 2013, you are
required to ascertain the amount of claim to be filed with the Insurance Company for the loss
of Stock. The company has taken an Insurance policy for Rs 75,000 which is subject to average
clause. The value of goods salvaged was estimated at Rs 27,000. The average rate of Gross
Profit was 20% throughout the period.
Particulars Amount in Rs
(i) Opening Stock 1,20,000
(ii) Purchase made 2,40,000
(iii) Wages paid (including wages for the installation of a machine 5,000) 75,000
(iv) Sales 3,10,000
(v) Goods taken by the Proprietor (Sale Value) 25,000
(vi) Cost of goods sent to Consignee on 20th September 2013, lying unsold 18,000
with them
(vii) Free Samples distributed –Cost 2,500
Answer
Memorandum Trading Account for the period 1st April, 2013 to 30th Sept. 2013
Rs Rs
To Opening Stock 1,20,000 By Sales 3,10,000
To Purchases 2,40,000 By Consignment stock 18,000
Less: Advertisement (2,500) By Closing Stock (Bal. fig.) 1,41,500
Cost of goods
taken by proprietor (20,000) 2,17,500
To Wages 70,000
To Gross Profit 62,000
[20% of Sales)
4,69,500 4,69,500
Rs
Value of stock destroyed by fire 1,41,500
Less: Salvaged Stock (27,000)
Insurance Claim 1,14,500
Note: Since policy amount is less than claim amount, average clause will apply. Therefore,
claim amount will be computed by applying the formula
Insured Value
Claim = × Loss Suffered
Total Cost
Rs in lakhs
Routine Repairs 4
Repairing 1
Partial replacement of roof tiles 0.5
Substantial improvements to the electrical wiring system which will 10
increase efficiency
Thus, book value of machinery will be Rs 12 crores in the year 2002-2003 and the
depreciation amounting Rs 2.4 crores will be charged on machinery. Annual depreciation
of Rs 2.4 crores will be charged in the next four years.
(b) As per para 5 of AS 2 on Valuation of Inventories, inventories should be valued at the
lower of cost and net realizable value. Inventories should be written down to net
realizable value on an item-by-item basis in the given case.
55. (a) X Co. Limited purchased goods at the cost of Rs40 lakhs in October, 2005. Till March,
2006, 75% of the stocks were sold. The company wants to disclose closing stock at Rs10 lakhs.
The expected sale value is Rs11 lakhs and a commission at 10% on sale is payable to the agent.
Advise, what is the correct closing stock to be disclosed as at 31.3.2006.
(b) Explain the ‘Accounting of Revaluation of Assets’ with reference to AS 10.
(c) Arjun Ltd. sold farm equipments through its dealers. One of the conditions at the time of
sale is, payment of consideration in 14 days and in the event of delay interest is chargeable @
15% per annum. The Company has not realized interest from the dealers in the past. However,
for the year ended 31.3.2006, it wants to recognise interest due on the balances due from
dealers. The amount is ascertained at Rs 9 lakhs. Decide whether the income by way of interest
from dealers is eligible for recognition as per AS 9.
Answer
(a) As per Para 5 of AS 2 “Valuation of Inventories”, the inventories are to be valued at lower
of cost and net realizable value.
In this case, the cost of inventory is Rs 10 lakhs. The net realizable value is 11,00,000 ×
90% = Rs 9,90,000. So, the stock should be valued at Rs 9,90,000.
(b) As per Para 30 of AS 10 “Accounting for Fixed Assets”, an increase in net book value
arising on revaluation of fixed assets should be credited to owner’s interests under the head of
‘revaluation reserve, except that, to the extent that such increase is related to
and not greater than a decrease arising on revaluation previously recorded as a charge
to the profit and loss statement, it may be credited to the profit and loss statement. A
decrease in net book value arising on revaluation of fixed assets is charged directly to
profit and loss statement except that to the extent such a decrease is related to an
increase which was previously recorded as a credit to revaluation reserve and which has
not been subsequently reversed or utilized , it may be charged directly to that account.
(c) As per AS 9 “Revenue Recognition”, where the ability to assess the ultimate collection
with reasonable certainty is lacking at the time of raising any claim, the revenue
recognition is postponed to the extent of uncertainty inverted. In such cases, the
revenue is recognized only when it is reasonably certain that the ultimate collection will
be made.
In this case, the company never realized interest for the delayed payments make by the
dealers. Hence, it has to recognize the interest only if the ultimate collection is certain.
The interest income hence is not to be recognized.
56. Mention six areas in which different accounting policies are followed by companies.
Answer
Following are the examples of the areas in which different accounting policies may be adopted
by different enterprises:
(i) Methods of depreciation, depletion and amortisation.
(ii) Valuation of inventories.
(iii) Methods of valuing goodwill.
(iv) Valuation of investments.
57. What is the accounting entry to be passed as per AS 10 for the following situations:
(a) Increase in value of fixed asset by Rs 50,00,000 on account of revaluation.
Answer
Rs Rs
(a) Fixed asset A/c Dr. 50,00,000
To Revaluation reserve A/c 50,00,000
(Being the increase in value of fixed asset due
to upward revaluation)
(b) Profit and loss A/c Dr. 30,00,000
To Fixed asset A/c 30,00,000
(Being the decrease in net book value of fixed
asset due to downward revaluation)
58. What are the items that are to be excluded in determination of the cost of inventories as
per AS 2 ?
Answer
Items that are to be excluded in determination of the cost of inventories as per para 13 of AS 2
on ‘Valuation of Inventories’ are:
(i) Abnormal amounts of wasted materials, labour or other production costs.
(ii) Storage costs unless those costs are necessary in the production process prior to a
further production stage.
(iii) Administrative overheads that do not contribute to bringing the inventories to their
present location and condition; and
(iv) Selling and distribution costs.
59. (i) Mention four assets, in respect of which AS 6 (revised) is not applicable.
(ii) Y Ltd. used certain resources of X Ltd. In return X Ltd. receives Rs 10 lakhs and Rs 15 lakhs as
interest and royalties respectively, from Y Ltd. during the year 2007 –2008. State on what basis
X Ltd. should recognize their revenue, as per AS 9.
(iii) Mention two categories of investments defined by AS 13 and also state their valuation
principles.
Answer
60. X Co. Ltd. having share capital of Rs 50 lakhs divided into equity shares of Rs 10 each was
taken over by Y Co. Ltd. X Co. Ltd. has General Reserve of Rs 10,00,000 and Profit and Loss
account Cr. Rs 5,00,000. Y Co. Ltd. issued 11 equity shares of Rs 10 each for every 10 shares of X
Co. Ltd. How the Journal entry would be passed in the books of Y Co. Ltd. for the shares issued
under the ‘Pooling of interest method’ of amalgamation.
Answer
Rs Rs
Business Purchase A/c Dr. 55,00,000
To Liquidator of X Co. Ltd. 55,00,000
(Being business of X Co. Ltd. purchased)
Assets A/c (Bal. Fig.) Dr. 65,00,000
To Business Purchase A/c 55,00,000
To General Reserve A/c∗(10,00,000 – 5,00,000) 5,00,000
To Profit and Loss A/c 5,00,000
(Being assets and reserves and surplus taken over)
Liquidator of X Co. Ltd Dr. 55,00,000
To Equity share capital A/c 55,00,000
(Being purchase consideration discharged through equity
shares of Y Co. Ltd.)
61. (a) As per Accounting Standard-14, what are the conditions which must be satisfied for an
amalgamation in the nature of merger?
(b) Rose Ltd. had made an investment of Rs 500 lakhs in the equity shares of Nose Ltd. On
10.01.2009. The realisable value of such investment on 31.03.2009 became Rs 200 lakhs as
Nose Ltd. lost a case of patent rights. Rose Ltd. follows financial year as accounting year. How
will you recognize this reduction in financial statements for the year 2008-09.
Answer
62. (a) During the current year 2011-12, M/s L & C Ltd. made the following expenditure relating
to its plant and machinery:
Rs
General repairs 4,00,000
Repairing of electric motors 1,00,000
Partial replacement of parts of machinery 50,000
Substantial improvements to the electrical wiring system which will increase 10,00,000
efficiency of the plant and machinery
Decide whether to make the product or not to make the product, if selling price is
(i) Rs 175 and (ii) Rs 225. ∗ Also find out the value of inventory in each case
Answer
(a) As per para 12.1 of AS 10 ‘Accounting for Fixed Assets’, expenditure that increases the
future benefits from the existing asset beyond its previously assessed standard of
performance is included in the gross book value, e.g., an increase in capacity. Hence, in
the given case, repairs amounting Rs 5 lakhs and partial replacement of parts of
machinery worth Rs50,000 should be charged to profit & loss account. Rs10 lakhs incurred
for substantial improvement to the electrical wiring system which will increase efficiency
should be capitalized.
(b) As per para 24 of AS 2 ‘Valuation of Inventories’, materials and other supplies held for
use in the production of inventories are not written down below cost if the finished
products in which they will be incorporated are expected to be sold at or above cost.
However, when there has been a decline in the price of materials and it is estimated that
the cost of the finished products will exceed net realizable value, the materials are written
down to net realisable value. In such circumstances, the replacement cost of the
materials may be the best available measure of their net realisable value.
(i) When selling price is Rs 175
Incremental Profit = Rs 175 – Rs 125 = Rs 50
Current price of the material = Rs 75
Therefore, it is better not to make the product. Raw material inventory would be valued
at net realisable value i.e. Rs 75 because the selling price of the finished product is less
than Rs225 (100+125) per kg.
(ii) When selling price is Rs225
Incremental Profit = Rs 225 – Rs 125 = Rs 100
Current price of the raw material = Rs 75.
Therefore, it is better to make the product.
Raw material inventory would be valued at Rs100 per kg because the selling price of the
finished product is not less than Rs 225.
63. (a) A company installed a plant at a cost of Rs 20 lacs with estimated useful life of 10 years
and decided to depreciate on straight line method. In the fifth year, company decided to switch
over from straight line method to written down value method. Compute the resultant
surplus/deficiency if any, and state how will you treat the same in the accounts.
(b) An amount of Rs 9,90,000 was incurred on a contract work upto 31-03-2010. Certificates
have been received to date to the value of Rs 12,00,000 against which Rs 10,80,000 has
been received in cash. The cost of work done but not certified amounted to Rs 22,500. It
is estimated that by spending an additional amount of Rs 60,000 (including provision for
contingencies) the work can be completed in all respects in another two months. The
agreed contract price of work is Rs 12,50,000. Compute a conservative estimate of the
profit to be taken to the Profit and Loss Account as per AS 7.
Answer
(a) Table showing depreciation under Straight Line Method (SLM) and depreciation under
Written Down Value Method (WDV)
Rs in Lakhs
Depreciation
Year SLM WDV
I 2.001 2.002
II 2.00 1.80
III 2.00 1.62
IV 2.00 1.46*
Total 8.00 6.88
Resultant surplus on change in method of depreciation from SLM to WDV = (8.00 – 6.88)
Rs 1.12 lakhs.
As per para 21 of AS 6 ‘Depreciation Accounting’, when a change in the method of
depreciation is made, depreciation should be re-calculated in accordance with the new
method from the date of the asset put to use. The deficiency or surplus arising from
retrospective re-computation of depreciation in accordance with the new method should
be adjusted in the accounts in the year in which the method of depreciation is changed.
In the given case, surplus amounting Rs 1.12 lakhs (8.00 – 6.88) should be credited to
profit and loss statement in the fifth year. Such a change should be treated as a change
in accounting policy and its effect should be quantified and disclosed as per AS 5 “Net
Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies”.
Rs
Expenditure incurred upto 31.3.2010 9,90,000
Estimated additional expenses (including provision for contingency) 60,000
Estimated cost (A) 10,50,000
Contract price (B) 12,50,000
Total estimated profit [(B-A)] 2,00,000
Percentage of completion (9,90,000 / 10,50,000) x 100 94.29%
9,90,000
2,00,000 × = Rs 1,88,571
10,50,000
65. (a) M/s. Tiger Ltd. allotted 7,500 equity shares of Rs 100 each fully paid up to Lion Ltd. in
consideration for supply of a special machinery. The shares exchanged for machinery are
quoted at National Stock Exchange (NSE) at Rs 95 per share, at the time of transaction. In the
absence of fair market value of the machinery acquired, show how the value of the machinery
would be recorded in the books of Tiger Ltd.?
(b) M/s. Sea Ltd. recognized Rs 5.00 lakhs, on accrual basis, income from dividend during the
year 2010-11, on shares of the face value of Rs 25.00 lakhs held by it in Rock Ltd. as at 31st
March, 2011. Rock Ltd. proposed dividend @ 20% on 10th April, 2011. However, dividend was
declared on 30th June, 2011. Please state with reference to relevant Accounting Standard,
whether the treatment accorded by Sea Ltd. is in order.
(c) What disclosures should be made in the first financial statements following the
amalgamation?
(d) From the following data, show Profit and Loss A/c (Extract) as would appear in the books of
a contractor following Accounting Standard-7:
(Rs in lakhs)
Contract price (fixed) 480.00
Cost incurred to date 300.00
Estimated cost to complete 200.00
(e) M/s. Son Ltd. charged depreciation on its assets on SLM basis. In the year ended
31st March, 2012, it changed to WDV basis. The impact of the change when computed
from the date of the assets putting into use amounts to Rs 18 lakhs being additional
depreciation. Discuss, when should an enterprise change method of charging
depreciation and how it should be dealt with in the Profit and Loss Alc.
Answer
(a) As per para 11 of AS 10 “Accounting for Fixed Assets”, fixed asset acquired in exchange
for shares or other securities in the enterprise should be recorded at its fair market value,
or the fair market value of the securities issued, whichever is more clearly evident. Since, in the
given situation, the market value of the shares exchanged for the asset is more clearly evident,
the company should record the value of machinery at Rs 7,12,500 (i.e., 7,500 shares x Rs 95 per
share) being the market price of the shares issued in exchange.
(b) Para 8.4 of AS 9 “Revenue Recognition” states that dividend from investments in shares
are not recognized in the statement of Profit and Loss until the right to receive dividend is
established.
In the given case, the dividend is proposed on 10th April, 2011, while it was declared on 30th
June, 2011. Hence, the right to receive dividend is established on 30th June, 2011 only.
Therefore, on applying the provisions stated in the standard, income from dividend on shares
should be recognized by Sea Ltd. in the financial year 2011-2012 only. Therefore, the
recognition of income from dividend of Rs 5 lakhs, on accrual basis, in the financial year 2010-
11 is not in accordance with AS 9.
(c) Para 24 of AS 14 ‘Accounting for Amalgamations’ states that for all amalgamations
(whether for amalgamations accounted for under the pooling of interests method or
amalgamations accounted for under the purchase method), the following disclosures are
considered appropriate in the first financial statements following the amalgamation:
(a) Names and general nature of business of the amalgamating companies;
(b) Effective date of amalgamation for accounting purposes;
(c) The method of accounting used to reflect the amalgamation; and
(d) Particulars of the scheme sanctioned under a statute.
(d) Calculation of Estimated Total Cost
(Rs in lakhs)
Cost incurred to date 300.00
Estimate of cost to completion 200.00
Estimated total cost in completing the 500.00
contract
(Rs in lakhs)
Total foreseeable loss (500-480) 20
Less: Loss for the current year (300-288) 12
Expected loss to be recognized immediately as per para 35 of AS 7 8
(Rs in (Rs in
lakhs) lakhs)
To Construction cost 300 By Contract price 308
To Estimated loss on completion 8
of
contract
(e) As per para 21 of AS 6 ‘Depreciation Accounting’, an enterprise can change one method
of charging depreciation to another method only if the adoption of the new method is
required by statute or for compliance with an accounting standard or if it is considered
that the change would result in a more appropriate preparation or presentation of the
financial statements of the enterprise.
When such a change in the method of depreciation is made, depreciation should be
recalculated in accordance with the new method from the date of the asset coming into
use. The deficiency or surplus arising from retrospective recomputation of depreciation
in accordance with the new method should be adjusted in the accounts through
statement of profit and loss in the year in which the method of depreciation is changed. In
case the change in the method results in deficiency in depreciation in respect of past
years, the deficiency should be charged in the statement of profit and loss.
66. (a) M/s Excellent Construction Company Limited under took a contract to construct a
building for Rs 3 crore on 1st September, 2011. On 31st March, 2012 the company found that it
had already spent Rs 1 crore 80 lakhs on the construction. Prudent estimate of additional cost
for completion was Rs 1 crore 40 lakhs. What amount should be charged, to revenue in the final
accounts for the year ended on 31st March, 2012, as per the provisions of Accounting Standard
7 "Construction Contracts (Revised)" ?
(b) M/s Innovative Garments Manufacturing Company Limited invested in the shares of another
company on 1st October, 2011 at a cost of Rs 2,50,000. It also earlier purchased Gold of Rs
4,00,000 and Silver of Rs 2,00,000 on 1st March, 2009. Market value as on 31st March, 2012 of
above investments are as follows:
Rs
Shares 2,25,000
Gold 6,00,000
Silver 3,50,000
How above investments will be shown in the books of accounts of M/s Innovative Garments
Manufacturing Company Limited for the year ending 31st March, 2012 as per the provisions of
Accounting Standard 13 "Accounting for Investments"?
(c) MIs Progressive Company Limited has not charged depreciation for the year ended on
31st March, 2012, in respect of a spare bus purchased during the financial year 2011-12
and kept ready by the company for use as a stand-by, on the ground that, it was not
actually used during the year. State your views with reference to Accounting Standard 6
"Depreciation Accounting".
Further during the year company made additions to its factory by using its own workforce,
at a cost of Rs 4,50,000 as wages and materials. The lowest estimate from an outside
contractor to carry out the same work was Rs 6,00,000. The directors contend that, since they
are fully entitled to employ an outside contractor, it is reasonable to debit the
Factory Building Account with Rs 6,00,000. Comment whether the directors' contention is
right in view of the provisions of Accounting Standard 10 "Accounting for Fixed Assets"?
(d) Briefly explain the types of Amalgamations?
Answer
Rs in crores
Cost of construction incurred till date 1.80
Add: Estimated future cost 1.40
Total estimated cost of construction 3.20
67. What are the three fundamental accounting assumptions recognised by Accounting
Standard (AS) 1? Briefly describe each one of them.
Answer
Accounting Standard (AS) 1 recognizes three fundamental accounting assumptions. These are
as follows:
(i) Going Concern: The financial statements are normally prepared on the assumption that
an enterprise will continue its operations in the foreseeable future and neither there is
intention, nor there is need to materially curtail the scale of operations.
(ii) Consistency: The principle of consistency refers to the practice of using same
accounting policies for similar transactions in all accounting periods unless the change is
required (i) by a statute, (ii) by an accounting standard or (iii) for more appropriate
presentation of financial statements.
(iii) Accrual basis of accounting: Under this basis of accounting, transactions are
recognised as soon as they occur, whether or not cash or cash equivalent is actually
received or paid.
68. (a) On 31st March 2013 a business firm finds that cost of a partly finished unit on that date
is Rs 530. The unit can be finished in 2013-14 by an additional expenditure of Rs 310. The
finished unit can be sold for Rs 750 subject to payment of 4% brokerage on selling price.
The firm seeks your advice regarding:-
(i) the amount at which the unfinished unit should be valued as at 31st March, 2013 for
preparation of final accounts and
(ii) the desirability or otherwise of producing the finished unit.
(b) M/s. Moon Ltd. sold goods worth Rs 6,50,000 to Mr. Star. Mr. Star asked for a trade
discount amounting to Rs 53,000 and same was agreed to by M/s. Moon Ltd. The sale was
effected and goods were dispatched. On receipt of goods, Mr. Star has found that goods
worth Rs 67,000 are defective. Mr. Star returned defective goods to M/s. Moon Ltd. and
made payment due amounting to Rs 5,30,000. The accountant of M/s. Moon Ltd. booked
the sale for Rs 5,30,000. Discuss the contention of the accountant with reference to
Accounting Standard (AS) 9.
(c) What are the issues, with which Accounting Standards deal?
Answer
Rs
Net selling price 750
Less: Estimated cost of completion (310)
440
Less: Brokerage (4% of 750) 30
Net Realisable Value 410
Cost of inventory 530
Value of inventory (Lower of cost and net realisable value) 410
Incremental cost Rs 310 (cost to complete) is less than incremental revenue Rs 720 (Rs 750- Rs
30). The enterprise will therefore decide to finish the unit for sale at Rs 750.
Note: The above answer is given on the assumption that partly finished unit cannot be sold in
semi finished form and its NRV is zero without processing it further.
(b) As per AS 9 ‘Revenue Recognition’, revenue is the gross inflow of cash, receivable or other
consideration arising in the course of the ordinary activities of an enterprise from the sale of
goods. However, trade discounts and volume rebates given in the ordinary course of business
should be deducted in determining revenue. Revenue from sales should be recognized at the
time of transfer of significant risks and rewards. If the delivery of the sales is not subject to
approval from customers, then the transfer of significant risks and rewards would take place
when the sale is affected and goods are dispatched.
In the given case, if trade discounts allowed by M/s. Moon Ltd. are given in the ordinary
course of business, M/s. Moon Ltd. should record the sales at Rs 5,97,000 (i.e.
Rs 6,50,000 – Rs 53,000) and goods returned worth Rs 67,000 are to be recorded in the
form of sales return. However, when trade discount allowed by M/s. Moon Ltd. is not in
the ordinary course of business, M/s. Moon Ltd. should record the sales at gross value of
Rs 6,50,000. Discount of Rs 53,000 in price and return of goods worth Rs 67,000 are to be
adjusted by suitable provisions. M/s Moon Ltd. might have sent the credit note of
Rs 1,20,000 to Mr. Star to account for these adjustments. In both the cases, the contention
of the accountant to book the sales for Rs 5,30,000 is not correct.
(c) Accounting Standards deal with the issues of
(i) Recognition of events and transactions in the financial statements,
(ii) Measurement of these transactions and events,
(iii) Presentation of these transactions and events in the financial statements in a
manner that is meaningful and understandable to the reader, and
(iv) Disclosure requirements which should be there to enable the public at large and
the stakeholders and the potential investors in particular, to get an insight into what
these financial statements are trying to reflect and thereby facilitating them to take
prudent and informed business decisions.
69. (a) Amna Ltd. contracted with a supplier to purchase a specific machinery to be installed
in Department A in two months time. Special foundations were required for the plant, which
were to be prepared within this supply lead time. The cost of site preparation and laying
foundations were Rs 47,290. These activities were supervised by a technician during the entire
period, who is employed for this purpose of Rs 15,000 per month. The Technician's services
were given to Department A by Department B, which billed the services at Rs 16,500 per month
after adding 10% profit margin.
The machine was purchased at Rs 52,78,000. Sales Tax was charged at 4% on the
invoice Rs 18,590 transportation charges were incurred to bring the machine to the
factory. An Architect was engaged at a fee of Rs 10,000 to supervise machinery
installation at the factory premises. Also, payment under the invoice was due in 3
months. However, the Company made the payment in 2nd month. The company operates
on Bank Overdraft@ 11%.
Ascertain the amount at which the asset should be capitalized under AS 10.
(b) Narmada Ltd. purchased an existing bottling unit from Kaveri Ltd. Kaveri Ltd. followed
straight line method of charging depreciation on machinery of the sold unit whereas
Narmada Ltd. followed written down value method in its other units. The directors of
Narmada Ltd. want to continue to charge depreciation for the acquired unit in Straight
Line Method which is not consistent with the WDV method followed in other units.
Discuss the contention of the directors with reference to the Accounting Standard 6.
Further during the year, Narmada Ltd. set up a new plant on coastal land. In view of the
corrosive climate, the Company felt that its machine life is reducing faster. Can the
Company charge a higher rate of depreciation?
(c) A Ltd. entered into a contract with B Ltd. to despatch goods valuing Rs 25,000 every
month for 4 months upon receipt of entire payment. B Ltd. accordingly made the payment
of Rs 1,00,000 and A Ltd. started despatching the goods. In third month, due to a natural
calamity, B Ltd. requested A Ltd. not to despatch goods until further notice though A Ltd.
is holding the remaining goods worth Rs 50,000 ready for despatch. A Ltd. accounted
Rs 50,000 as sales and transferred the balance to Advance Received against Sales.
Comment upon the treatment of balance amount with reference to the provisions of
Accounting Standard 9.
(d) A Ltd. is amalgamating with B Ltd. They are undecided on the method of accounting to
be followed. You are required to advice the management of B Ltd. on the method of
accounting that can be adopted under AS-14.
Answer
Particulars Rs
Purchase Price Given 52,78,000
Add: Sales Tax at 4% Rs 52,78,000 x 4% 2,11,120
Site Preparation Cost Given 47,290
Technician’s Salary Specific/Attributable overheads for 30,000
2 months (See Note)
Initial Delivery Cost Transportation 18,590
Professional Fees for Installation Architect’s Fees 10,000
Total Cost of Asset 55,95,000
Note:
(i) Interest on Bank Overdraft for earlier payment of invoice is not relevant under AS 10.
(ii) Internally booked profits should be eliminated in arriving at the cost of Fixed Assets.
(iii) It has been assumed that the purchase price of Rs 52,78,000 excludes amount of
sales tax.
(b) According to para 12 of AS 6 ‘Deprecation Accounting’, there are several methods of
allocating depreciation over the useful life of the assets. The management of a business
selects the most appropriate method(s) based on various important factors e.g., (i) type
of asset, (ii) the nature of the use of such asset and (iii) circumstances prevailing in the
business. A combination of more than one method is sometimes used. A company may
adopt different methods of depreciation for different types of assets, provided the same
methods are followed consistently. Thus Narmada Ltd. can continue to charge
depreciation for the acquired unit as per straight line method.
The statute governing an enterprise may provide the basis for computation of the
depreciation. For example, the Companies Act lays down the rates of depreciation in
respect of various assets. Where the management’s estimate of the useful life of an
asset of the enterprise is shorter than that envisaged under the provisions of the relevant
statute, the depreciation provision is appropriately computed by applying a higher rate.
Therefore, in the given case, the Company can charge higher rates of depreciation based
on its estimate of the useful life of machinery, provided that such estimate is not less
than the rate prescribed by the Companies Act, for that class of assets. However, such
higher depreciation rates and/or the reduced useful lives of the assets should be
disclosed by way of notes to the accounts in the Financial Statements.
70. What are depreciable assets as per Accounting Standard-6? Explain why AS 6 does not
apply to Land. (4 Marks, IPCC May, 2014)
Answer
As per AS 6 ‘Depreciation Accounting’, depreciable assets are the assets which
(i) are expected to be used during more than one accounting period; and
(ii) have a limited useful life; and
(iii) are held by an enterprise for use in the production or supply of goods and services, for
rental to others, or for administrative purposes and not for the purpose of sale in the
ordinary course of business.
AS 6 does not apply to ‘land’ as land is considered to have unlimited useful life. Therefore, it is
not appropriate to charge depreciation on land
71. (i) What are the basic characteristics of a Private Ltd. Company?
(ii) Sumo Ltd. has a profit of Rs 25 lakhs before charging depreciation for financial year 2008-09.
Depreciation in the books was Rs 11 lakhs and depreciation chargeable under Section 205*
comes to Rs 17 lakhs. Compute divisible profit for the year.
(iii) The Companies Act, 1956∗ limits the payment of managerial remuneration. What is the
maximum managerial remuneration, which can be paid in case of a company consistently
earning profits and has more than one managerial person?
Answer
(i) According to Section 2 (68) of the Companies Act 2013, a private company means a company
which has a minimum paid-up capital of one lakh rupees or such higher paidup capital as may
be prescribed, and which by its articles:
(a) Restricts the rights of members to transfer its shares.
(b) Except in the case of a one man company, limits the number of its member to 200
excluding: (i) persons who are in employment of the company; and (ii) persons who, having
been formerly in the employment of the company, were members of the company while in that
employment and have continued to be members after the employment ceased. For the
purpose of determining the number of members joint holders of shares will be counted as
single members.
(c) Prohibits any invitation to the public to subscribe to any securities of, the company.
(ii)
Note: Under section 123 (2) of the Companies Act 2013, depreciation has to be provided
in accordance with schedule II.
(iii) Under section 197(1) of the Companies Act 2013, the managerial remuneration payable
by a public company, to its directors, including managing director or whole time director
and its manager in respect of any financial year shall not exceed eleven percent of the
net profits of that company for that financial year computed in accordance with the provisions
of section 198 of the Companies Act 2013 provided that the remuneration of
the directors shall not be deducted from the gross profits.
Provided that the company may in a general meeting may, with the approval of the
Central Govt., authorize the payment of managerial remuneration exceeding eleven
percent of the net profits subject to the provisions of schedule V of the Act.
Provided further that, except with the approval of the company in a general meeting:
(a) the remuneration payable to one managing director or a whole time director or a
manager shall not exceed 5% of its net profits, and if there is more than one such
director the maximum remuneration payable to all such directors and manager
taken together cannot exceed 10% of its net profits
(b) the remuneration payable to directors who are neither the managing director or
whole time director shall not exceed 1% of the net profits if there is a managing
director or a whole time director and 3% of the net profits in any other case.
Note: Since the question does not specify the nature of the managerial person an
elaborate answer as above is required.
72. J Ltd. presents you the following information for the year ended 31st March, 2007:
Answer
73. Prepare Cash flow for Gamma Ltd., for the year ending 31.3.2014 from the following
information:
(1) Sales for the year amounted to Rs 135 crores out of which 60% was cash sales.
(2) Purchases for the year amounted to Rs 55 crores out of which credit purchase was 80%.
(3) Administrative and selling expenses amounted to Rs 18 crores and salary paid amounted to
Rs 22 crores.
(4) The Company redeemed debentures of Rs 20 crores at a premium of 10%. Debenture
holders were issued equity shares of Rs 15 crores towards redemption and the balance was
paid in cash. Debenture interest paid during the year was
Rs 1.5 crores.
(5) Dividend paid during the year amounted to Rs 10 crores. Dividend distribution tax @ 17%
was also paid.
(6) Investment costing Rs 12 crores were sold at a profit of Rs 2.4 crores.
(7) Rs 8 crores was paid towards income tax during the year.
(8) A new plant costing Rs 21 crores was purchased in part exchange of an old plant. The
book value of the old plant was Rs 12 crores but the vendor took over the old plant at a
value of Rs 10 crores only. The balance was paid in cash to the vendor.
(9) The following balances are also provided:
Rs in crores Rs in crores
1.4.2013 31.3.2014
Debtors 45 50
Creditors 21 23
Bank 6
Answer
Gamma Ltd.
Cash Flow Statement for the year ended 31st March, 2014
(Using direct method)
Rs
Bills receivable on 1st January, 7,800
Debtors on 1st January 30,800
Cash received on maturity of bills receivable during the month 20,900
Cash received from debtors 70,000
Bad debts written off 4,800
Returns inwards 8,700
Bills receivable dishonored 1,800
Bills receivable on 31st January, 6,000
Debtors on 31st January, 25,500
Cash sales during the month 15,900
Answer
Credit sales results in to Debtors & Debtors gives rise to Bills Receivable, hence the following
Accounts are prepared to ascertain Credit Sale.
Debtors A/c
Particulars Rs Particulars Rs
To Opening Balance b/f 30,800 By Cash a/c (collection) 70,000
To Bills Receivable a/c(Bills 1,800 By Bad debt a/c 4,800
dishonored) By Sales Return a/c 8,700
To Sales a/c (Credit sale – Balancing 97,300 By Bills Receivable a/c (Bills 20,900
figure) received)
By Closing Balance c/f 25,500
1,29,900 1,29,900
28,700 28,700
Note : 1st balance Bills Receivable a/c to get the figure of bills received from debtors, account it
& then balance
debtors a/c to get credit sales.
Credit sale Rs. 97,300
15,90
Cash sale Rs.
0
Total sale Rs. 1,13,200
75. From he following information calculate sales and purchases for the current year. His sales
for the year ended 30th June, 2011 were 20% higher than the previous year's. He always sells
his goods at cost plus 25%. 20% of the total sales for the year ended 30th June, 2011 are for
cash. There were no cash purchases.
On 30th June, 2010, the stock was Rs.40,000 on 1st July, 2010 level was raised to Rs.60,000 and
stock was maintained at this new level all throughout the year. Gross Profit as per last year's
audited accounts was Rs.60,000.
Solution:
Calculation of missing information with the help of Ratios
76. Black and White are partners started business with capital Rs. 30,000 and Rs. 20,000. Profits
for the year ended 31st March, 2006 amounts to Rs. 27,100. It is agreed that 5% interest on
capital as such shall be allowable. There is no agreement regarding sharing of profits or
partnership salary. Black is a whole time partner whereas white does not attend business
regularly. Black claims Rs. 600 salary p.m. and 60% of balance profit. White advanced Rs. 10,000
loan and he now claims 10% interest.
Show distribution of profit by a statement.
Solution:
Salary was not agreed among them hence Black’s claim of salary will not be sustainable.
Interest on Loan was not agreed by them hence as per law 6% interest will be allowed to
White & not 10%.
Interest on Capital was agreed among them @5%, hence will be allowed
Profit sharing ratio was not agreed among them hence, they will be treated as equal
partners i.e. 50:50, Black’s claim of 60% will not be sustainable.
To Interest on Whites Loan a/c By Net Profit as per P&L a/c 27,100
White 10,000 X 6% = 600 600
To Interest on Capital a/c
Black 30,000 X 5% = 1,500
White 20,000 X 5% = 1,000 2,500
To Balance Profit transferred
Black 24,000 X 50% = 12,000
White 20,000 X 50% = 12,000 24,000
27,100 27,100
77. A, B and C enter into partnership and agree to share profits and losses as under A - ½th of
the profits/losses B - 1/4th of the profits/losses C - 1/8th of the profits/losses
Comment on the profits/loss sharing ratio agreed to by the partners.
Solution: The total of the ratios is 7/8 which is less than 8/8 i.e 1. They should change the ratios
so that total comes to 8/8 i.e. 1.
78. The Chartered Accountants X, Y and Z form a partnership, profits being divisible in the ratio
of 3:2:1 subject to the following:
i. Z's share of profit is guaranteed to be not less than Rs. 15,000 p.a.
ii. Y gives guarantee to the effect that gross fees earned by him for the firm shall be equal to
his average gross fee of the preceding five years when he was carrying on profession alone
(which average works out at Rs. 25,000/-).
The profit for the first year of the Partnership is Rs. 75,000/-. The gross fees earned by Y for the
firm are Rs. 16,000/-. You are required to show the distribution of profits.
Solution:
Profit as given 75,000
Shortfall to be contributed by Y (25,000 – 16,000) 9,000
84,000
Z’s share (1/6) Rs. 14,000
Minimum allowed 15,000
Balance for X and Y 69,000
X’s 3/5 41,400
Y’s 2/5 27,600 69,000
Nil
Summary
Partner Share Adjustment Total
X 41,400 41,400
Y 27,600 - 9,000 18,600
Z 15,000 15,000
84,000 75,000
79. A and B were in partnership sharing profits and losses in the ratio of 3:2. In appreciation of
the services of their clerk C. Who was in receipt of a salary of Rs. 2,400 p.a. and a commission of
5% on the net profit after charging such salary and commission. They took him into partnership
as from 1st April, 2010, giving him one-eight share of profits. The agreement provided that any
excess over his former remuneration to which, C becomes entitled will be born by A and B in
the ratio of 2:3 The profit for the year ended 31st March, 2011, amounted to Rs. 44,400.
Prepare statement showing the distribution of the profit amongst all the partners.
Solution:
(i) Share of ‘C’ as partner 44,400 x 1/8 = 5,550
(ii) C’s remuneration as clerk
Profit 44,400
(-) Salary to clerk 2,400
42,000
(-) Commission 42000x5/105 2,000
40,000
Summary
Partner Share Adjustment Total
A (40,000 x 3/5) 24,000 - 460 23,540
B (40,000 x 2/5) 16,000 - 690 15,310
40,000
C 4,400 + 1,150 5,550
44,400 44,400
80. X,Y & Z start business in partnership, X put in Rs. 20,000 for the whole year, Y Puts
Rs. 30,000 at first and increases it to Rs. 40,000 at the end of four months but withdraws Rs.
20,000 at the end of six months, while Z puts Rs. 40,000 at first but withdraws Rs. 10,000 at the
end of ninemonths. At the end of the year how should they divide a profit of Rs. 79,000 on the
basis of effective capital employed by each partner?
Answer
Profit = 79,000
To be divided in 2,40,000 : 3,20,000 : 4,50,000 among X, Y & Z. i.e. 24 : 32 : 45
81. X and Y are partners, sharing profit and loss in the ratio of 4:3. They decide to
admit Z. New profit sharing ratio is 7:4:3. Calculate ratio of sacrifice by X and Y.
Answer
Solution:
(i) When A&B will withdraw their share in goodwill
Hence, their capital will remain at Rs. 1,00,000 for 2/3rd share together
Total capital should be = 1,00,000 x 3/ 2 = 1,50,000 &
C’s capital should be = 1,50,000 x 1/3 = 50,000
Goodwill is the excess amount contributed = 65,000 – 50,000 = 15,000/-
This will be equally credited to A&B and withdrawn by them. Hence, capital now will be
50,000/- of each of A,B,C.
(ii) If goodwill is to be retained
Capital after admission will be = 50000 + 50000 + 65000 = 1,65,000
Capital of C should be = 165000 x 1/ 3 = 55,000
Goodwill contributed by C = 65000 – 55000 = 10,000 for 1/3rd share
Total goodwill of the firm = 10,000/1 X 3 = 30,000
Share in Goodwill contributed by C, will be credited to A&B Rs. 5000 each. Thus making capital
of the three partners as Rs. 55,000 each.
83. Hari and Ram were in partnership, sharing profits and losses in 4:2 ratio. On 1st January,
2006, 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 & Ram equally, paying Rs. 40,000 for
share in goodwill. Hari & Ram withdraws 50% of their share in goodwill.
Journalise the entries related to goodwill on Suraj’s admission.
Answer
Journal Entries
Answer
85. 1,000 12% Debentures of Reliance Ltd. which pays interest on every 31st March & 30th
Sept., are purchased by A from B on 31st July at Rs. 107 cum-interest & again 500 debenture on
30th November at Rs 102 Ex-interest. Pass entries.
Answer
Student must have observed that Investment a/c is always debited or credited with ex-interest
value, interest a/c with interest amount & Bank a/c with cum-interest value.
86. 1000 shares of Rs. 100 each purchased on 1.7.2010 at a cost of Rs. 1,50,000 through a
broker who is entitled for 2% brokerage and stamp duties for transfer is Rs. 5,000. On
1.10.2011, 20% dividend is received from the above company for the year 1.4.2010 to
31.3.2011
Answer:
Answer
88. Cash price is Rs. 2,400/- Hire purchase is Rs. 3,000 payable as Rs 1,200, Rs. 1,000
& Rs. 800 payable at the end of every year.
Solution : Interest = Rs. 3,000 – Rs. 2,400 = Rs. 600/- to be apportioned as follows :
Outstanding at Closing
Year Installment Interest
the beginning O/S
1st year 3,000 1,200 1,800 600 ÷ 5600 x 3000 =Rs. 321
2nd year 1,800 1,000 800 600 ÷ 5600 x 1800 =Rs. 193
3rd year 800 800 - 600 ÷ 5600 x 800 =Rs. 86
5,600 3,000 600
The calculation in above Question is only an approximate allocation of interest & is acceptable
for solving the problem. Although accurate calculation can be done by ascertaining implicit
interest rate by IRR (Internal Rate of Return) method. IRR calculation is part of your Financial
Management syllabus.
89. Down payment is Rs.50,000, Balance hire purchase price payable in 4 annual installments of
Rs.1,40,000, Rs.1,30,000, Rs.1,20,000, Rs.1,10,000, which includes equal amount of cash price
portion. Calculate cash price.
90. The Hire purchaser defaulted in the payment when the amount outstanding in Vendor
account was Rs.30,000 and the balance in Machine a/c after depreciation till that date was
Rs.51,000. Interest suspense account has balance Rs.3,000 after adjusting accrued interest. The
Vendor repossessed the whole of machinery. Pass journal entry.
Solution:
91. Delhi Motors sold to X Transport Ltd. three tempos costing Rs. 50,000 each on the hire-
purchase system on 1-1-2008. Payment was to be made Rs. 20,000 down and the remainder in
three equal annual installments payable on 31-12-2008, 31-12-2009 and 31-12-2010 together
with interest @ 9%. X Transport Ltd. paid the installment due at the end of the first year i.e. 31-
12-2008 but could not pay the next on 31-12-2009. Delhi Motors repossessed all the tempos
and valued them at Rs.20,000. After repairing them at a cost of Rs.5,000. The same were
sold for Rs.28,000. Show the necessary accounts in the books of Delhi Motors for the years
2009.
Solution:
Date of default 31.12.09 the following balances were outstanding in Vendors Books
Hire Purchasers A/c Dr. Rs.65,400 (Due 35,400 and not due 30,000)
92. Fine Radios Ltd., sell radio sets for cash as well as on hire purchase basis. Cash price is
Rs.400 and hire purchase price Rs.500, payable in 20 installments of Rs.25 each. The price
includes free maintenance for 2 years; experience indicates that Rs.20 is the cost of
maintenance in the first year andRs.40 in the second year. During 1993, 200 sets were sold for
cash and 300 on hire purchase basis. Actual maintenance cost were:- Rs.3,500 in 1993,
Rs.16800, in 1994 Rs.8000 in 1995.
Solution:
Provision For Maintenance A/c
30,000
1994 By Balance b/d
To Cash A/c 16,800 By Profit & Loss A/c 26,500
1994
To Balance c/f 10,000 (Excess of expense over 300
prov. transferred)
26,800 26,800
To Cash A/c
8,000
1995 To Profit & Loss (Surplus 1995 By Balance b/d 10,000
2,000
provision)
10,000 10,000
93. Mr. PQ has a small trading business for which the following procedures are followed:
(1) All collections are deposited with the Bank each day.
(2) All Payments except petty expenses are made by Cheque.
(3) To meet petty expenses a cheque of Rs.500 is withdrawn from the Bank on the 1st day of
each month.
(4) Mr. PQ makes personal drawings from the Bank.
The following figures are available from Mr. PQ's records:
Answer
Apart from opening & closing balances of Assets & Liabilities some transactions of the year are
also given. Hence by correlating them, we can ascertain missing transactions & balances. Thus
we can complete it in to Double Entry based Books of Accounts.
In examination what is generally asked is the final accounts hence there is no need to prepare
all accounts. Wherever it is observed that an item has single debit or single credit, giving the
same balance then to save time instead of preparing account for such item write it directly in
Trial balance/ Final a/c. Accounts which has more items should be prepared and ascertain
missing information. Opening balance sheet is not given hence the same should be prepared to
ascertain the opening capital (or any other missing figure)
While preparing an account remember that –
- Opening debit balance will be written on debit side & opening credit balance will be
written on credit side.
- But closing debit balance will be written on credit side & closing credit balance on debit
side, so as to
balance the sides of the account.
- All Assets have debit balance & All liabilities have credit balance.
- Complete double entry for every transaction & post debit & credit to respective accounts.
Working Notes:
Cash a/c
Bank a/c
Debtors a/c
Creditors a/c
Cash 320
Opening Capital (Balancing 12,820
Bank 2500
figure)
Debtors 20,000
Creditors 20,000
Stock 10,000
32,820 32,820
Dr. Cr.
Cash 200
Bank a/c (over draft) 5,000
Debtors 30,000
Creditors 30,000
Opening Stock 10,000
Sales 30,000
Drawings Through Cash 200
(+) Through Bank 1,500 1,700
Purchases 30,000
Petty expenses 5,920
Capital 12,820
77,820 77,820
Adjustment Closing Stock Rs. 30,000
Note: With the help of above Trial Balance & Adjustment, Profit & Loss a/c & Balance Sheet be
made.
Trading & Profit & Loss A/c for the year ended on 31.12.2011
Amount Amount
Particulars Particulars
Rs. Rs
To Opening stock 10,000 By Sales 30,000
To Purchases 30,000 By Closing stock 30,000
To Gross profit c/d 20,000
60,000 60,000
To Petty Expenses 5,920 By Gross profit b/d 20,000
To Net profit 14,080
20,000 20,000
Balance-sheet as on 31.12.2011
94. On 31st March 2006, the Balance Sheet of M/s Ram, Rahul and Rohit stood as follows:
Liabilities Rs Assets Rs
Capital Accounts: Land & Buildings 2,00,000
Ram 3,00,000 Machinery 2,00,000
Rahul 2,00,000 Closing Stock 1,00,000
Rohit 1,00,000 Sundry Debtors 2,00,000
6,00,000 Cash and bank balances 1,00,000
Sundry Creditors 2,00,000
8,00,000 8,00,000
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 Rs. 80,000.
4. Provision for bad debts be made at 5%.
5. Old credit balances of Sundry Creditors Rs. 10,000 be written back.
Prepare Revaluation Account.
Solution:
Revaluation Account
70,000 70,000
95. The following is the balance sheet of A and B who share profits and losses as 4/7 and 3/7:
Rs Rs
Creditors 15,000 Land and Buildings 36,000
Bills payable 5000 Machinery 20,000
Capital Accounts Furniture 2000
A : 45,000 Stock 25,000
B : 35,000 80,000 Sundry Debtors 16,000
Cash 1,000
1,00,000 1,00,000
They agree to take C into partnership and the new ratio is 16:12:7 subject to the following
among the other terms and conditions:
i. Land and Buildings are to be increased to Rs. 78,000.
ii. Machinery is to be depreciated by 10% and Furniture by Rs. 500.
iii. Stock is to be appreciated by Rs. 1000.
iv. A provision of 2½% is to be made for bad debts and another of Rs. 2500 for outstanding
expenses.
v. A trade creditor for Rs. 1600 is not traceable for a number of years and the amount is to be
written back.
Show Journal entry assuming that the book values of assets and liabilities are not to be
disturbed.
Solution:
Question requires that value of the asset and liability should not change i.e. application of
method 3.
Ascertain profit/loss on revaluation of asset & liability by preparing Memorandum Revaluation
account and adjust
Adjustment required :-
A B C
Profit credited in the old ratio of 4 : 3 +22,400 + 16,800 ---
Profit written back in the new ratio of 16 : 12 : -17,920 -13,440 - 7,840
7
Net adjustment + 3,360 - 7,840
+ 4,480
A, B and C Journal
Rs. Rs.
? C’s Capital A/c 7,840
To A’s Capital A/c 4,480
To B’s Capital A/c 3,360
(Adjustment for Revaluation of assets and
liabilities without altering the book values on
admission of C)
96. X, Y and Z were sharing profits and losses in the ratio of 3:2:1 respectively. The firm had
insured the partner’s lives severally the premium thereof is charged to Profit & Loss a/c. The
surrender values of the life policies as at 31st March, 2006 were – X for Rs. 5,000, Y for Rs.
4,000 and Z for Rs. 3,000. The surrender values represents 50% of the sum assured in each case.
Y and Z decide to share equally in future. Give the necessary journal entries assuming (a) If X
retires on 31.03.2006 (b) If X dies on 31.03.2006.
Answer
Dr. Cr.
Date Particulars L.F.
(Rs.) (Rs.)
31.3.06 Case (a)
Life policy a/c Dr. 12,000
To X’s Capital A/c 6,000
To Y’s Capital A/c 4,000
To Z’s Capital A/c 2,000
(Being the creation of life policy A/c. at surrender value
and transfer of consequent profit)
31.3.06 Case (b)
Insurance Company’s A/c Dr. 10,000
To Profit on Life Policy A/c 10,000
(Being the claim due on X’s death recorded by crediting
Profit on Life Policy A/c. Policy amount = 5,000 x100/50
= 10,000)
Life policy a/c Dr. 7,000
To Profit on Life Policy A/c 7,000
(Being revaluation of life policy on the life of Y & Z at
surrender value)
97. X, Y and Z were sharing profits and losses in the ratio of 1/2: 1/3: 1/6 respectively. The firm
had insured the partner’s lives severally. The surrender values of the life policies appearing
in the balance sheet as at 31st March, 2006 were – X for Rs. 5,000, Y for Rs. 4,000 and Z for Rs.
3,000. The surrender values represents 50% of the sum assured in each case. Y and Z decide to
share equally in future. Give the necessary journal entries assuming (a) If X retires on
31.03.2006 (b) If X dies on 31.03.2006.
Answer
Dr. Cr.
Date Particulars L.F.
(Rs.) (Rs.)
31.3.06 Case (a)
No entry is to be passed since policies appear at
surrender value
and its real value is also surrender value, hence no
unaccounted/undivided profit.
Solution:
(i) When A&B will withdraw their share in goodwill
Hence, their capital will remain at Rs. 1,00,000 for 2/3rd share together
Total capital should be = 1,00,000 x 3/ 2 = 1,50,000 &
C’s capital should be = 1,50,000 x 1/3 = 50,000
Goodwill is the excess amount contributed = 65,000 – 50,000 = 15,000/-
This will be equally credited to A&B and withdrawn by them. Hence, capital now will be
50,000/- of each of A,B,C.
(ii) If goodwill is to be retained
Capital after admission will be = 50000 + 50000 + 65000 = 1,65,000
Capital of C should be = 165000 x 1/ 3 = 55,000
Goodwill contributed by C = 65000 – 55000 = 10,000 for 1/3rd share
Total goodwill of the firm = 10,000/1 X 3 = 30,000
Share in Goodwill contributed by C, will be credited to A&B Rs. 5000 each. Thus making capital
of the three partners as Rs. 55,000 each.
99. X and Y are partners in a firm sharing profits and losses in the ratio of 3:2. They admit Z as a
partner for 1/4th share. Z acquires his share from X and Y in the ratio of 2:1. Z brings in his
personal goodwill worth Rs. 6,000 in the firm. Pass the necessary journal entries under each of
the following alternative cases:
Case (a) When adjustments is to be made through Goodwill Account and Goodwill Account is to
be written off immediately. Case (b) When adjustment is to be made through capital Accounts.
Answer
Journal
Dr. Cr.
Particulars L.F.
(Rs.) (Rs.)
Case (a)
(i) Goodwill A/c Dr. 6,000
To Z’s Capital A/c 6,000
(Being personal goodwill brought in by Z)
Case (b)
X’s Capital A/c 2,600
Y’s Capital A/c 1,900
To Z’s Capital A/c 4,500
[Being old partners contributed towards their share in
personal goodwill brought in by Z (i.e. 3/4th of Rs.
6,000)]
100. Hire purchase price is Rs.3000, Interest is charged 10% p.a. amount payable in 3
equal annual installments. Calculate cash price.
Answer
Rs. 2486 is cash price. If any down payment i.e. initial payment is made then it should be added
to this amount to get the total cash price.
Alternative calculation using Discount Factor: It can also be calculated by multiplying the
amount with the discount factor of the respective year (as studied by you for present value
calculation in financial management). The above calculation is shown below:
Year PVF at 10% Installment Rs. Cash Price Portion Interest portion
(1) (2) (3) (2) X (3) = (4) (3) – (4) = (5)
1 .909 1000 1000 x .909 = 909 1000/110 x 10 = 91
2 .826 1000 1000 x .826 = 826 1909/110 x 10 = 174
3 .751 1000 1000 x .751 = 751 2735/110 x 10 = 249
3000 2486 514