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Paper 1
Accounting
1 Accounting Standards ...................................................................................................................................................................................... 1
AS-1 Disclosure of Accounting Policies .............................................................................................................................. 3
AS-2 Valuation of Inventories ....................................................................................................................................................... 7
AS-10 Property, Plant and Equipment .............................................................................................................................. 10
AS-11 The Effects of Changes in Foreign Exchange Rates ................................................................... 25
AS-12 Accounting for Government Grants ............................................................................................................... 32
AS-16 Borrowing Costs ................................................................................................................................................................................. 16
2. Financial Statements of Companies ....................................................................................................................................... 44
Unit-1 : Preparation of Financial Statements
(Final Accounts of Company) .............................................................................................................................. 47
Class work .......................................................................................................................................................................................................................... 68
Home Work .......................................................................................................................................................................................................................... 88
..............................................................................................................................
Unit-2 : Cash Flow Statement [AS-3] 101
Class Work .......................................................................................................................................................................................................................... 111
Home Work .......................................................................................................................................................................................................................... 131
3. Profit or Loss Pre and Post Incorporation .............................................................................................................................. 143
Class Work .......................................................................................................................................................................................................................... 147
Home Work .......................................................................................................................................................................................................................... 163
4. Bonus Share .......................................................................................................................................................................................................................... 159
Class Work .......................................................................................................................................................................................................................... 164
Home Work .......................................................................................................................................................................................................................... 168
5. Redemption of Preference Shares ............................................................................................................................................ 171
Class Work .......................................................................................................................................................................................................................... 177
Home Work .......................................................................................................................................................................................................................... 182
6. Redemption of Debennture ......................................................................................................................................................................... 191
Class Work .............................................................................................................................................................................................................................195
Home Work ............................................................................................................................................................................................................................ 201
7. Investment Accounts ............................................................................................................................................................................................ 205
Class Work ........................................................................................................................................................................................................................... 209
Home Work ........................................................................................................................................................................................................................... 215
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Paper 1
Accounting
8. Insurance Claims for Loss of Stock and Loss of Profit .................................................................. 219
Class Work .......................................................................................................................................................................................................... 227
Home Work .......................................................................................................................................................................................................... 234
9. Hire Purchase and Instalment Sale Transactions .......................................................................... 243
Class Work .......................................................................................................................................................................................................... 246
Home Work .......................................................................................................................................................................................................... 251
10. Departmental Accounts ............................................................................................................................................................... 267
Class Work .......................................................................................................................................................................................................... 271
Home Work .......................................................................................................................................................................................................... 282
11. Accounting for Branches Including Foreign Brances ................................................................. 287
Class Work .......................................................................................................................................................................................................... 301
Home Work .......................................................................................................................................................................................................... 314
12. Accounts from Incomplete Records ................................................................................................................................ 333
Class Work .......................................................................................................................................................................................................... 339
Home Work .......................................................................................................................................................................................................... 347-355
CHAPTER-1
ACCOUNTING STANDARDS
INTRODUCTION
Enterprises operate in diverse situations, so it is not possible to develop a single set of policies
applicable to all.
So the accounting standards permit more than one policy.
Therefore Accounting Standard-1 requires disclosure of significant accounting policies adopted.
Object is to promote better understanding of financial statements.
CLASS WORK
Q-1 Can same type of inventory at two different factories be valued by applying two different accounting
policies ?
Solution
The same type of inventory at two different factors cannot be valued by applying two different
accounting “policies. It has been clarified by expert Advisory Committee of ICAl.
Q-2 A Partnership firm was formed to secure the tenders floated by BSNL for publication of telephone
directories in 1999-2000. It bagged the tender for publishing directory for Pune circle for 5 years. It has
made a profit in 1999-2000, 2000-2001, 2001 -2002 and 2002-2003. It bid in tenders for publication of
directories for other circles Nagpur, Nashik, Mumbai, Hyderabad but failed to bag any of these. Its only
activity till date is publication of Pune directory. The contract is said to expire on 31-12-2004. You are
auditing the accounts of 2002-2003. Is the going concern assumption appropriate for preparation of
accounts for 2002-03 ?
Solution
The going concern assumption is not in doubt as far as accounts for 2002-2003 are concerned. This is
because the assumption’s validity is to be considered for the “foreseeable future” which is generally a
Period not exceeding 1 year from the balance sheet date.
Q-3 In above question if the situation continues during the year 2003-04 would your answer be different?
Solution
The going concern assumption would be in doubt, since the entity’s continuance in foreseeable future
of one year would be doubtful in the absence of any alternative business plans.
Q-4 Sanjay Ltd. follows the practice of disclosing accounting policies adopted in preparation of financial
statements in the Directors report. Comment on this practice.
INTRODUCTION
AS-2 provides guidance for determining the value at which inventories are carried in the
financial statements.
It also provides guidance on the cost formulas.
Inventories should be valued at lower of cost and net realisable value.
CLASS WORK
Q-1 The company deals in three products, A, B and C, which are neither similar nor interchangeable. At the
time of closing of its account for the year 2010-11, the Historical Cost and Net Realizable Value of the
items of closing stock are determined as follows:
Items Historical Cost(Rs. in lakhs) Net Realizable Value(Rs. in lakhs)
A 40 28
B 32 32
C 16 24
What will be the value of closing stock?
Q-2 X Co. Limited purchased goods at the cost of Rs. 40 lakhs in October, 2010. Till March,2011, 75% of the
stocks were sold. The company wants to disclose closing stock at Rs. 10 lakhs. The expected sale value
is Rs. 11 lakhs and a commission at 10% on sale ispayable to the agent. Advise, what is the correct
closing stock to be disclosed as at 31.3.2011.
Q-3 An enterprise has in its stock, 10,000 bags of cement purchased at a cost of 180 per bag. The terms of
trade are that the cement is delivered at the buyer’s door, and the cost of delivery of 10 per bag is paid
by the seller. The selling price of cement is 187 per bag. Find out the value of closing stock.
Q-4 Cap Products Ltd. has an annual capacity of 40,000 units. The production overheads for the year are
estimated at Rs. 3,20,000 whereas the total variable cost incurred is Rs.6,90,000. The administrative
costs and selling costs were Rs. 2,00,000 and Rs. 1,80,000 respectively. At the end of year, there were
6,000 units in stock. Find out the value of inventory given that the factory remained closed for one
month for non receipt of orders which is a normal practice. Would your answer be different if the
factory remained closed for any abnormal reason.
Q-5 On 31st March 2017, a business firm finds that cost of a partly finished unit on that date is Rs. 530. The
unit can be finished in 2017-18 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 the
amount at which the unfinished unit should be valued as at 31st March, 2017 for preparation of final
accounts. Assume that the partly finished unit cannot be sold in semi finished form and its NRV is zero
without processing it further
Q-6 The cost of production per unit of a product is given below:
Raw material Rs. 300
Direct labour Rs. 90
Overheads Rs. 30
Total Rs. 420
At the end of the year, the firm has 1,500 units of raw material which are to be valued for financial
Navkar Institute | CA Intermediate | Paper 1 : Accounting 7
statements. The current replacement cost of raw material is Rs. 280 per unit. Find out the value of raw
material inventory if the selling price of the finished goods is (i) Rs. 450 or (ii) Rs. 390.
Q-7 You are required to value the inventory per kg of finished goods consisting of
Rs. per kg.
Material cost Rs. 200
Direct labour Rs. 40
Direct variable overhead Rs. 20
Fixed production charges for the year on normal working capacity of 2 lakh kgs is Rs. 20 lakhs. 4,000 kgs
of finished goods are in stock at the year end.
Q-8 XYZ Ltd produced 10 Lakh units of Product A during the year 2009-10, per unit cost is as follows
Raw Material Rs. 100
Direct Wages Rs. 50
Direct Expense Rs.2
Total Rs. 152
Production overhead is Rs. 20 lakh of which 40% is fixed. The company sold 8 lakh units and 2 lakh units
were in Stock as on 31/03/2010. Normal capacity is 5 lakh units.
Calculate the value of Closing Stock.
Q-9 In a production process, normal waste is 5% of input. 5,000 MT of input were put in process resulting in
wastage of 300 MT. Cost per MT of input is Rs. 1,000. The entire quantity of waste is on stock at the year
end. State with reference to Accounting Standard, how will you value the inventories in this case?
Q-10 Asia Biscuit Ltd. has a normal capacity of 6,000 tonnes and the fixed annual overheads are Rs. 24,000.
During the year, it manufactured only 5,500 tonnes at a variable cost consisting of material and labour
@ Rs. 6 and Rs. 4 per tonne. At the end of the year, it had 1,800 tonnes of inventory. Find out the value
of inventory as per AS-2.
What would be your answer if actual production is 8,000 tonnes.
HOME WORK
Q-11 Paper Ltd. values its finished goods at lower of cost or net realizable value, and its byproducts at net
realizable value. Comment in the light of AS-2.
Solution
The policy followed by the Paper Ltd, regarding valuation of inventory is correct and in compliance
with AS- 2 “Valuation of Inventory”.
According to AS-2 the finished goods should be valued at lower of cost or NRV while byproduct are
valued at their realizable value.
Q-12 Viptanu Ltd. produces 4 different types of capacitors. A, B, C and D. For the year 2003-04 their closing
stock of finished goods have been valued as follows:
Particulars A B C D
Cost of Production Rs. 5,00,000 Rs. 6,00,000 Rs. 4,00,000 Rs. 2,50,000
Net Realizable Value Rs. 4,80,000 Rs. 6,25,000 Rs. 4,10,000 Rs. 2,10,000
Find out the value of inventory.
Solution
Scope:
Non-Applicability:
This statement does not deal with the restatement of an enterprise’s financial statements from
its reporting currency into another currency for the convenience of users accustomed to that
currency or for similar purposes.
This statement does not deal with the presentation in a cash flow statement of cash flows arising
from transactions in a foreign currency and the translation of cash flows of a foreign operation.
This statement does not deal with exchange differences arising from foreign currency borrowings
to the extent that they are regarded as an adjustment to interest costs.
Note:
This statement does not specify the currency in which an enterprise presents its financial statements.
However, an enterprise normally uses the currency of the country in which it is domiciled. If it uses a
different currency, this statement requires disclosure of the reason for using that currency. This
statement also requires disclosure of the reason for any change in the reporting currency.
Definitions:
a. Average Rate:
It is the mean of the exchange rates in force during a period.
b. Closing Rate:
It is the exchange rate at the balance sheet date.
c. Exchange Difference:
It is the difference resulting from reporting the same number of units of a foreign currency in the
reporting currency at different exchange rates.
INTRODUCTION
Government grant should not be recognised until there is reasonbale assurance that the enterprise
will comply with the conditions attached to it.
Significance in Financial Statements.
1. An Appropriate method of accounting.
2. To what extent enterprise has been benefited from such grant during the reporting period.
CLASS WORK
Q-1 Z ltd purchased a fixed asset for Rs. 50lakhs which has the estimated useful life of 5 years with the
salvage value of Rs. 5lakh. On purchase of the assets government granted it a grant of Rs. 10 lakhs. Pass
the necessary journal entries in the books of the Company for first two years if the grant is deducted
from the value of fixed asset.
Q-2 Z ltd purchased a fixed asset for Rs. 50 lakhs which has the estimated useful life of 5 years with the
salvage value of Rs. 5lakh. On purchase of the assets government granted it a grant of Rs. 10 lakhs. Pass
OR
Credited Credited Credited Credited Asset
to to to to To capital reserve
P&L Capital Asset Deferred (Recorded
Reserve Govt. at
Grant A/c Nominal
or value
Capital ` 100)
Reserve
(Non-Depreciable asset)
HOME WORK
Q-10 Santosh Ltd. has received a grant of Rs. 8 crores from the Government for setting up a factory in a
backward area. Out of this grant, the company distributed Rs. 2 crores as dividend. Also, Santosh Ltd.
received land free of cost from the State Government but it has not recorded it at all in the books as no
money has been spent. In the light of AS 12 examine, whether the treatment of both the grants is
correct.
Solution
As per AS 12 ‘Accounting for Government Grants’, when government grant is received for a specific
purpose, it should be utilised for the same. So the grant received for setting up a factory is not available
for distribution of dividend.
In the second case, even if the company has not spent money for the acquisition of land, land should be
recorded in the books of accounts at a nominal value. The treatment of both the elements of the grant
is incorrect as per AS 12.
Q-11 Z Ltd. purchased a fixed asset for Rs. 50 lakhs, which has the estimated useful life of 5 years with the
salvage value of Rs. 5,00,000. On purchase of the assets government granted it a grant for Rs. 10 lakhs
(This amount was reduced from the cost of fixed asset). Grant was considered as refundable in the end
of 2nd year to the extent of Rs. 7,00,000. Pass the journal entry for refund of the grant as per the first
method.
Solution
Fixed Assets Account Dr. Rs. 7,00,000
To Bank Account Rs. 7,00,000
(Being government grant on asset refunded)
Q-12 A Ltd. purchased a machinery for Rs. 40 lakhs. (Useful life 4 years and residual value Rs. 8 lakhs)
34 Chapter 1 : Accounting Standards
Government grant received is Rs. 16 lakhs.
Show the Journal Entry to be passed at the time of refund of grant in the third year and the value of the
fixed assets, if :
(1) the grant is credited to Fixed Assets A/c.
(2) the grant is credited to Deferred Grant A/c.
Solution
(1) If the grant is credited to Fixed Assets Account :
Fixed Assets Account Dr. Rs. 16,00,000
To Bank Account Rs. 16,00,000
(Being government grant on asset refunded)
The balance of fixed assets after two years depreciation will be Rs. 16 lakhs
(W.N.1) and after refund of grant it will become (Rs.16 lakhs + Rs.16 lakhs) =
Rs. 32 lakhs on which depreciation will be charged for remaining two years.
(2) If the grant is credited to Deferred Grant Account :
As per AS 12 ‘Accounting for Government Grants,’ income from Deferred Grant Account is allocated to
Profit and Loss account usually over the periods and in the proportions in which depreciation on
related assets is charged.Accordingly, in the first two years (Rs.16 lakhs /4 years) = Rs. 4 lakhs p.a. x 2
years = Rs. 8 lakhs were credited to Profit and Loss Account and Rs.8 lakhs was the balance of Deferred
Grant Account after two years.
Therefore, on refund in the 3rd year, following entry will be passed : Depreciation = (32-8)/2 = Rs. 12
lakhs p.a. will be charged for next two years.
Deferred Government Grant A/c. Dr. Rs. 8,00,000
P&L A/c. Dr. Rs. 8,00,000
To Bank A/c. Rs. 16,00,000
(Being grant refunded) The amount of refund should be Rs. 16 Lakhs)
Deferred grant account will become Nil. The fixed assets will continue to be shown in the books at Rs.
24 lakhs (W.N.2) and depreciation will continue to be charged at Rs. 8 lakhs per annum for the remaining
two years.
Q-13 Induga Ltd. acquired the fixed assets of Rs. 500 lakhs on which it received the grant of 10%. What will
be the cost of the fixed assets as per the AS-12 and its presentation in the Balance Sheet?
Solution
As per AS-12, Government grant related to specific fixed assets should be presented in the Balance
Sheet by showing the grant as a deduction from the gross value of the assets concerned in arriving at
their book value. Therefore, 90% of 500 lakhs should be shown as addition to the fixed assets due to
this transaction. Para 14 of AS-12 alternatively prescribed that the Government grant related to
depreciable asset may be treated as deferred income which should be recognized in the profit and loss
statement on a systematic and rational basis, over the useful life of the assets ie., such grant should be
allocated to income over the period and in the proportion in which depreciation on those assets be
charged.
Q-14 NDA Ltd. received a revenue grant of Rs. 800 lakhs during the year 2007-2008 from Government for
welfare activities to be carried on by the company for its employees. The grant prescribed the condition
for utilization, however during 2009- 2010 it was found that the condition of grants was not complied
Navkar Institute | CA Intermediate | Paper 1 : Accounting 35
with and the grant had to be refunded to the Government. How this refund should be shown in the
financial statement for the year 2009-2010?
Solution
As per AS-12 , Govt. grants that become refundable should be accounted for as an extraordinary item as
per AS-5. Therefore, refund of grant should be shown in the Profit and Loss Statement of the company
as an extraordinary item during the year 2009-2010.
Q-15 A Limited company has set-up its business in designated backward area which entitles it to receive, as
per a public scheme announced by the Govt. of India, a subsidy of 15% of the cost of investment.
Having fulfilled all the conditions laid down under the scheme, the company on its investment of Rs.
100 lakhs in capital assets, received in January 2010 during the accounting year ending on 31-3-2010, Rs.
15 lakhs from the Govt. of India. The accountant of the company would like to record the receipt as an
item of revenue and to reduce the losses on the Profit and Loss Account for the year ended 31-3-2010.
Is his action justified? Discuss.
Solution
As per AS-12, where the government grants are of the nature of promoters’ contribution, ie., they are
given with reference to the total investment in an undertaking or by way of contribution towards its
total capital outlay (for example, central investment subsidy scheme) and no repayment is ordinarily
expected in respect thereof, the grants are treated as capital reserve which can be neither distributed
as dividend not considered as deferred income. Accordingly in the given case, it is not proper to credit
the subsidy in the profit and loss account for the year ended 3 1-3-2010. It is also to be noted that the
subsidy is not related to specific fixed asset and therefore Para 8.4 of AS-12 will not be applicable.
The receipt of subsidy should be credited to capital reserve as per AS-12.
AS-16 : BORROWING COSTS
INTRODUCTION
1. According to AS-16 Borrowing cost on Qualifying asset is capitalised
2. Borrowing costs are interest and other costs incurred by an enterprise in connection with the borrowing
of funds. It would include:-
(i) Interest and commitment charges on bank borrowings and other short term and long term
borrowings
(ii) Amortisation of discount or premiums relating to borrowings
(iii) Amortisation of ancilliary costs incurred in connection with the arrangement of borrowings
(iv) Finance charge in respect of assets acquired under finance leases or under other similar
arrangements, and
(v) Exchange difference arising from foreign currency borrowings to the extent that they are regarded
as adjustment to the interest cost.
It does not include cost incurred for raising funds through equity shares or preference shares.
3. Qualifying Asset : A qualifying asset is an asset that necessarily takes a substantial period of time to get
ready for its intended use or sale.
The examples of qualifying assets are manufacturing plants, power generation facilities, inventory of
alcohol, Investment properties, Construction of bridge/factory shed, ship building, aircraft etc.
But purchase of machineries ready for use, inventory, trucks & vehicles, Computers, investments,
36 Chapter 1 : Accounting Standards
advances given to the suppliers for purchase of any asset or amount invested in working capital are not
qualifying assets.
4. Substantial period : Ordinarily, a period of 12 months is considered as substantial period of time unless
a shorter or longer period can be justified on the basis of fact and circumstances of the case.
5. Borrowing costs that are directly attributable to the acquisition, construction or production of a
qualifying asset should be capitalised. Directly attributable cost are those cost that would have been
avoided if the expenditure on the qualifying asset had not been made. Borrowing cost would result in
future economic benefit to the enterprise.
6. How to calculate and capitalise interest?
(i) Specific loan: When enterprise borrows funds specifically for the purpose of obtaining a particular
qualifying asset, the borrowing cost that directly relate to that qualifying asset can be readily
identifiable and capitalise over that specific asset.
(ii) Non specific loan: When an enterprise borrow funds by multiple debt instruments/loans at varying
rates of interest for obtaining different qualifying assets it is difficult to identify the borrowing
cost to any specific asset. In this case amount of borrowing cost eligible for capitalisation should
be determined by applying capitalisation rate to the expenditure on that asset. Capitalisation
rate is the weighted average rate of interest on such various non specific borrowings.
7. Any income earned on the temporary investment of specific borrowing should be deducted from the
borrowing cost incurred.
8. Commencement of capitalisation : Capitalisation of borrowing cost should commence when all the
following conditions are satisfied.
(i) Expenditure for acquisition, construction or production of a particular asset is being incurred.
(ii) Borrowing costs are being incurred, and
(iii) Activities that are necessary to prepare the asset for its intended use or sale are in progress.
Expenditure on qualifying asset includes:-
(a) Transfer of cash
(b) Transfer of other assets, or
(c) Assumption of interest bearing securities
Expenditure should be reduced by progress payments received and Grants received in connection with
the asset.
9. Suspension of capitalisation : Borrowing cost incurred during an extended period in which activities
necessary to prepare an asset for its intended use or sale are interrupted are not capitalised.
However when such interruption is due to normal forces, the capitalisation is not suspended.
Capitalisation of borrowing cost is not suspended when a temporary delay is necessary part of the
process of getting an asset ready for its intended use or sale.
10. Cessation of Capitalisation : Capitalisation of borrowing cost should cease when:-
(i) Substantially all the activities necessary to prepare the qualifying asset for its intended use or
sale are complete.
Navkar Institute | CA Intermediate | Paper 1 : Accounting 37
(ii) Borrowing cost has ceased.
11. Disclosure:
The financial statements should disclose:
(i) The accounting policy adopted for borrowing cost; and
(ii) The amount of borrowing cost capitalised during the period.
CLASS WORK
Q-1 Paras Ltd. had the following borrowings during a year in respect of capital expansion.
Plant Cost of Asset (`) Remarks
Plant P 100 lakhs No specific borrowings
Plant G 125 lakhs Bank loan of ` 65 lakhs at 10%
Plant R 175 lakhs 9% Debentures of ` 125 lakhs were issued.
In addition to the specific borrowings stated above, the Company had obtained term loans from two
banks:
(1) ` 100 lakhs at 10% from Corporation Bank and
(2) ` 110 lakhs at 11.50% from State Bank of India, to meet its capital expansion requirements.
Determine the amount of borrowing costs to be capitalized in each of the above Plants, as per AS-16.
Q-2 An industry borrowed ` 40,00,000 for purchase of machinery on 1.6.2007. Interest on loan is 9% per
annum. The machinery was put to use from 1.1.2008. Pass journal entry for the year ended 31.3.2008 to
record the borrowing cost of loan as per AS 16.
Q-3 Enumerate two points which the financial statements should disclose in respect of Borrowing Costs as
per AS 16.
Q-4 Rohini Limited has obtained loan from an Institution for ` 500 lakhs for modernization and renovating
the Plant and Machinery. The installation of plant and machinery was completed on 31-3-2009 amounting
to ` 320 lakhs and ` 50 lakhs advanced to suppliers of additional assets and ` 320 lakhs and ` 50 lakhs
advanced to suppliers of additional assets and the balance of ` 130 lakhs has been utilized for working
capital requirements. Total interest paid for the above loan amounted to ` 65 lakhs during 2008-09.
You are required to state how the interest on institutional loan is to be accounted for in the year 2008-
09.
Q-5 When capitalisation of borrowing cost should cease as per Accounting Standard 16?
Q-6 GHI Limited obtained a loan for `70 lakhs on 15th April, 2010 from JKL Bank, to be utilized as under:
` in lakhs
Construction of Factory shed 25
Purchase of Machinery 20
Working capital 15
Advance for purchase of Truck 10
In March 2011, construction of the factory shed was completed and machinery, which was ready for its
intended use, was installed. Delivery of Truck was received in the next financial year. Total interest of
`9,10,000 was charged by the bank for the financial year ending 31-03-2011.
Show the treatment of interest under AS 16and also explain the nature of Assets.
Q-14
Amount (Rs.)
Expenditure incurred till 31-03-2008 5,00,000
Interest cost capitalized for the financial year 2007-08 @ 13% 26,000
Amount borrowed till 31-03-08 is 2,00,000
Assets transferred to construction during 2008-09 1,00,000
Cash payment during 2008-09 75,000
Progress payment received 3,50,000
New borrowing during 2008-09 @ 13% 2,00,000
Calculate the amount of borrowing cost to be capitalised.
Ans. Borrowing cost= 4,00,000 * 13%= 52,000. Money borrowed including previously capitalised interest=
4,00,000 + 26,000= 4,26,000. Expenditure incurred = 5,00,000 + 26,000 capitalised interest + 75,000 cash
+ 1,00,000 asset transferred – 3,50,000 progress payment= 3,51,000. Borrowing cost to be capitalised =
52,000 *(3,51,000/4,26,000)= 42,845.
Q-15 An industry borrowed `40,00,000 {or purchase of machinery on 1.6.2007. Interest on loan is 9% per
annum The machinery was put to use from 1.1.2008. Pass journal entry for the year ended 31.3.2008 to
record the borrowing cost of loan as per AS-16.
Ans. BC capitalised Rs. 2,10,000 and Rs. 90,000 charged to P & L.
Q-16 On 25th April, 2010 Neel Limited obtained a loan from the bank for ` 70 lakhs to be utilised as under:
THEORETICAL QUESTIONS
1. Explain the objective of “Accounting Standards” in brief. State the advantages of setting Accounting
Standards.
2. Explain the need of convergence of IFRS as Global Standards.
3. What is the significance of issue of Indian Accounting Standards?
..................... Limited
Balance Sheet
(Rupees in ___)
Note As at As at
Particulars No. 31st March, 2015 31st March, 2014
IV Expenses :
Manufacturing Expenses :
Cost of Materials Consumed -
Purchases of Stock-in-Trade -
Changes in Inventories of Finished Goods
Work-in-Progress and Stock-in-Trade - -
* Reconciliation of the number of shares at the beginning & end of the Reporting Period.
* Shares held by the Holding Co.
* Shares held by each shareholder holding more than 5% shares, specifying the number of
shares held.
* Terms of securities convertible into Equity / Preference Shares.
NOTE # 2
Reserves, and Surplus
(a) Capital Reserve
As per last Balance Sheet -
Addition during the year -
___________
___________
NOTE # 7
Other Current Liabilities
Current Maturities of Long-Term Debt
Current maturities of Finance Lease Obligations
Interest Accrued but not Due on Borrowings
Interest Received in Advance
Unpaid Dividends
Application Money received for allotment of
securities and due for refund and interest
accrued thereon
Paid Matured Deposits and interest accrued thereon
Unpaid Matured Debentures and interest accrued thereon
Other Payables (specify nature) ___________
___________
NOTE # 8
Short-Term Provisions
Provision for Employee Benefits
Others (specify nature) ___________
___________
NOTE # 11
Non-Current Investments
Investment Property
Investments in Equity Instruments
Investments in Preference Shares
Investments in Government or Trust Securities
Investments in Debentures! Bonds
Investments in Mutual Funds
Investments in Partnership Firms
Other Non-Current Investments (specify nature) ___________
___________
* Non-Current Investments shall be classified as Trade Investments & Other Investments.
* Under each classification, following details shall be given.
NOTE #13
Other Non-Current Assets
Long-Term Trade Receivables (including Receivables on deferred credit terms)
Others (specify nature) ___________
___________
NOTE # 15
Inventories
Raw Materials
Work-in-Progress
Finished Goods
Stock-in-Trade (in respect of goods acquired for trading)
Stores and Spares
Loose Tools
Others (specify nature) ___________
___________
* Debts due by Directors / Employees / Firms in which Directors are partners! Private Companies in which
Directors are Members to be separately disclosed.
NOTE # 17
Cash and Cash Equivalents
Balance with Banks
Cheques / Drafts on Hand
Cash on Hand
Others (specify nature) ___________
___________
* Earmarked Balances with Banks (e.g. Unpaid Dividend) shall be separately disclosed.
* Balances held as margin money, security against borrowings, guarantees, etc. to be
separately disclosed.
* Repatriation restrictions, if any, shall be separately disclosed
* Bank Deposits with more than 12 months maturity to be separately disclosed
NOTE # 18
Short-Term Loans and Advances
Loans and advances to Related Parties
Others (specify nature) ___________
___________
NOTE # 19
Other Current Assets (Residual Head)
Interest Receivable ___________
Dividend receivable ___________
........................ Limited
Annexures to the Profit & Loss Statement
Particulars Year Ended
31st March, 2015
NOTE # 20
Revenue From Operations
Sale of Products
Sale of Services
Other Operating Revenues
Less: Excise Duty ___________
___________
NOTE # 21
Other incomes
Interest income
Dividend Income
Net Gain / (Loss) on sale of Investments
Other Non-Operating Income ___________
___________
NOTE # 22
Other Manufacturing Expenses
Store and Hardware Consumed
Job Charges
Increase / (Decrease) in Excise Duty Provision on Closing Stock
Freight & Cartage
Packing Material Consumed
Power & Fuel ___________
___________
01.04.2 014 DURING DURING 31.03.2 015 01.04.2 014 YEAR MENT 31.03.2 015 AMOUNT AMOUNT
THE THE AS ON AS ON
1 Land - - -
2 Buildings
3 Plant & Equipment
4 Furniture & Fixtures - - -
5 Vehicle - - -
Previous Year
* Assets under Lease shall be separately classified under each class of asset.
61
62
NOTE # 10
Intangible Assets as on 31st March 2015.
01.04.2 014 DURING DURING 31.03.2 015 01.04.2 014 YEAR MENT 31.03.2 015 AMOUNT AMOUNT
THE THE AS ON AS ON
1 Goodwill - - -
2 Brands/Trademarks
3 Computer Software
5 Mining Rights - - -
6 Copyrights and Patents, Intellectual Property Rights, Services & Operating Rights
_____________________________________________________________________________________
TOTAL - - - - - - - - - -
_____________________________________________________________________________________
Fast track revision regarding elements of Profit and loss statement (various illustrations) :
1. Revenue from operation :
a. Net sales of products (it means after deducting sales return from gross sales)
b. Sale of services
The entire authorised share capital which consists of equity shares of ` 100 each has been
issued and subscribed. The share capital is paid up to the extent of 30% and there are no calls-in-
arrears. Transfer to G.R. = 10%
Required:How will you disclose the relevant items in Final Accounts?
Debit ` Credit `
Freehold land 2,50,000 Income from investment 12,000
Building 1,00,000 Provision for bad debts (1.4.2014) 2,000
Furniture 30,000 Creditors 30,000
Debtors 50,000 Provision for depreciation (1.4.2014) :
Stock (31.3.2015) 40,000 Building 5,000
Cash at bank 15,000 Furniture 5,000 10,000
Cash in hand 1,000 Suspense account 2,500
Cost of goods sold 3,00,000 Equity share capital 3,67,500
Salaries and wages 15,000 Preference share capital 80,000
Miscellaneous expenses 8,000 Securities premium 20,000
Investment in shares 2,00,000 Bank overdraft 1,00,000
Interest 3,000 Sales 4,00,000
Bad debts 1,000 Profit & loss A/c. (1.4.2014) 6,500
Repairs and maintenance 1,500
Advance payment of
Income-Tax 16,000 ________
10,30,500 10,30,500
`
17,500 9% Preference shares of `100 each, fully paid up 17,50,000
8,00,000 Equity shares of `10 each, fully paid up 80,00,000
General Reserves as on 1.4.2014 25,00,000
MANAGERIAL REMUNERATION :
PROVISIONS REGARDING MANAGERIAL REMUNERATION IN CASE OF SUFFICIENT PROFIT :
1. As per section 197 of Companies Act, 2013, maximum overall (Total) managerial remuneration (for
concerned financial year) that can be payable by public companies (having sufficient profits) = 11% of
profit calculated as per sec.198 of Companies Act, 2013.
2. Here remuneration term includes remuneration available to managerial persons (Whole Time Director,
Managing Director & Manager) & Part Time Directors (other directors) in the nature of salary, bonus,
commission, perquisites, allowances etc.
3. If public companies having sufficient profits may want to give excess managerial remuneration (i.e.
more than 11%) then prior approval of C.G. shall be required to obtain.
4. Profit u/s 198 can be calculated as under.
Net Profit as per P & L (after all appropriations)
Add : Disallowable Expenses (for the purpose managerial remuneration)
Less : Disallowable Incomes (for the purpose managerial remuneration) (xx)
Net Profit u/s 198 of Companies Act, 2013
OR
Q-8 Determine the maximum remuneration payable to the part-time directors and manager of B Ltd. (a
manufacturing company) under sections 197 of the Companies Act, 2013 from the following particulars:
Before charging any such remuneration, the Profit and Loss Account showed a credit balance of `
23,10,000 for the year ended 31st March, 2015 after taking into account the following matters:
`
(i) Capital Expenditure 5,25,000
(ii) Subsidy received from Government 4,20,000
(iii) Special Depreciation 70,000
(iv) Multiple shift allowance 1,05,000
(v) Bonus to foreign technicians 3,15,000
(vi) Provision for taxation 28,00,000
(vii) Compensation paid to injured workman 70,000
(viii) Ex-gratia to an employee 35,000
(ix) Loss on sale of fixed assets 70,000
(x) Profit on sale of investment 2,10,000
Q-9 From the following particulars of CANIH Limited, you are required to calculate the managerial
remuneration in the following situation.
(i) There is only one Whole Time Director.
(ii) There are two Whole Time Directors.
(iii) There are two Whole Time Directors, a Part Time Director and a Manager
Net Profit before provision for income-tax and
managerial remuneration `
but after depreciation and provision for repairs 8,70,410
Depreciation provided in the books 3,10,000
Provision for repairs of machinery during the year 25,000
Depreciation allowable under Schedule II of Companies Act, 2013 2,60,000
Actual expenditure incurred on repairs during the year 15,000
Provided that the above limit shall be doubled if the resolution passed by the shareholders is a special
resolution.
Practical Question regarding Managerial Remuneration (Max. yearly Remuneration
payable to managerial person) in case of inadequate profits or loss : (Part II of schedule
V) :
Q-10 Kumar Ltd., a non investment company has been incurring losses for the past few years. The company
provides the following information for the current year:
(` in lakhs)
Paid up equity share capital 120
Paid up Preference share capital 20
Reserves (including Revaluation reserve ` 10 lakhs) 150
Securities premium 40
Long term loans 40
Deposits repayable after one year 20
Application money pending allotment 720
Accumulated losses not written off 20
Investments 180
Kumar Ltd. has only one whole-time director, Mr. X. You are required to calculate the amount of maximum
remuneration that can be paid to him as per provisions of Part II of Schedule V, if no special resolution
is passed at the general meeting of the company in respect of payment of remuneration for a period
not exceeding three years.
Navkar Institute | CA Intermediate | Paper 1 : Accounting 77
LAST MINUTE REVISION
IMPORTANT POINTS :
1. Regarding Reserves & Surplus note :-
Particulars : `
(i) P & L A/C :-
Opening Balance ( Dr Bal./ Cr. Bal) ( xxx)/xxx
Add: N.P. during the year xxx
( P.A.T Provided but before
appropriations) [ from P/L statement ]
Less: Appropriations
Transfer to G.R. (xxx)
Interim dividend (xxx)
Dividend distribution Tax
(Regarding interim Dividend) (xxx)
xxx
(ii) Genral Reserve
Opening Balance xxx
Add: Transfer from P & L (appropriation) xxx
Less: Transfer to CRR (xxx)
xxx
(iii) Capital Redemption Reserve xxx
(iv) Securities premium :
Opening Balance xxx
Add: Increase due to issue of securities xxx
Less: Redemption premium (xxx)
xxx
Total xxx
Revaluation Reserve, Debenture Redemption Reserve, Capital Reserve etc. shall also be the part of
Reserves & Surplus.
15
Add: Increase for the purpose of grossing up of dividend × 425
100 -15
Gross dividend 500
Dividend distribution tax @ 17.304% 86.52
(An Extract)
- ‘Notes to Accounts’ of ‘Reserves and Surplus’
- for the year ended 31st March, 2016
The Dividend Distribution tax should be disclosed separately under, the head ‘Other Current Liabilities’.
The relevant extracts of the Balance Sheet of X Ltd. can be shown as follows:
Balance Sheet as on 31st March, 2016
‘Other Current Liabilities’ ` (lacs)
Dividend declared 425.000
Declared Distribution tax 86.52
LONG QUESTIONS
Q-11 On 31st March, 2015 Bose and Sen Ltd. provides to you the following ledger balances after preparing its
Profit and Loss Account for the year ended 31st March, 2015 :
Credit Balances : `
Equity shares capital, fully paid shares of ` 10 each 70,00,000
General Reserve 15,49,100
Loan from State Finance Corporation 10,50,000
Secured by hypothecation of Plant & Machinery
(Repayable within one year ` 2,00,000)
Loans: Unsecured (Long term) 8,47,000
Sundry Creditors for goods & expenses
(Payable within 6 months) 14,00,000
Profit & Loss Account 7,00,000
Provision for Taxation 8,16,900
1,33,63,000
Debit Balances : `
Calls in arrear 7,000
Land 14,00,000
Buildings 20,50,000
Plant and Machinery 36,75,000
Furniture & Fixture 3,50,000
Stocks : Finished goods 14,00,000
Raw Materials 3,50,000
Sundry Debtors 14,00,000
Advances: Short-term 2,98,900
Cash in hand 2,10,000
Balances with banks 17,29,000
Preliminary Expenses 93,100
Patents & Trade marks 4,00,000
1,33,63,000
88 Chapter 2 : Financial Statements of Companies
The following additional information is also provided :
(i) 4,20,000 fully paid equity shares were allotted as consideration for land & buildings.
(ii) Cost of Building ` 28,00,000
Cost of Plant & Machinery ` 49,00,000
Cost of Furniture & Fixture ` 4,37,500
(iii) Sundry Debtors for ` 3,80,000 are due for more than 6 months.
(iv) The amount of Balances with Bank includes ` 18,000 with a bank which is not a scheduled Bank and
the deposits of ` 5 lakhs are for a period of 9 months.
(v) Unsecured loan includes ` 2,00,000 from a Bank and ` 1,00,000 from related parties.
You are not required to give previous year figures. You are required to prepare the Balance Sheet of the
Company as on 31st March, 2015 as required under Schedule III of the Companies Act, 2013.
(Ans. : Balance sheet Total 13262900)
Q-12 From the following particulars furnished by Pioneer Ltd., prepare the Balance Sheet as at 31st March,
2015 as required by Schedule III of the Companies Act. Give notes at the foot of the Balance Sheet as
may be found necessary -
Debit Credit
` `
Equity Capital (Face value of `100) 10,00,000
Calls in Arrears 1,000
Land 2,00,000
Building 3,50,000
Plant and Machinery 5,25,000
Furniture 50,000
General Reserve 2,10,000
Loan from State Financial Corporation 1,50,000
Inventory :
Finished Goods 2,00,000
Raw Materials 50,000 2,50,000
Provision for Taxation 68,000
Trade receivables 2,00,000
Advances 42,700
Dividend Payable 60,000
Profit and Loss Account 86,700
Cash Balance 30,000
Cash at Bank 2,47,000
Loans (Unsecured) 1,21,000
Trade payables (For Goods and Expenses) 2,00,000
18,95,700 18,95,700
15
100 -15 × 2,49,750
Gross dividend 2,93,824
Dividend distribution tax @ 17.304% 50,843 )
Q-14 The following is the Trial Balance of Omega Limited as on 31.3.2017:
(Figures in `000)
Debit Credit
Land at cost 220 Equity Capital (Shares of ` 10 each) 300
Plant & Machinery at cost 770 10% Debentures 200
Trade Receivables 96 General Reserve 130
Inventories (31.3.17) 86 Profit & Loss A/c 72
Bank 20 Securities Premium 40
Adjusted Purchases 320 Sales 700
Factory Expenses 60 Trade Payables 52
Administration Expenses 30 Provision for Depreciation 172
Selling Expenses 30 Suspense Account 4
Debenture Interest 20
Interim Dividend Paid 18
1670 1670
Additional Information:
(i) The authorised share capital of the company is 40,000 shares of ` 10 each.
(ii) The company on the advice of independent valuer wish to revalue the land at ` 3,60,000.
(iii) Declared final dividend @ 10%.
(iv) Suspense account of ` 4,000 represents cash received for the sale of some of the machinery on
1.4.2016. The cost of the machinery was ` 10,000 and the accumulated depreciation thereon being
` 8,000.
Navkar Institute | CA Intermediate | Paper 1 : Accounting 91
(v) Depreciation is to be provided on plant and machinery at 10% on cost.
You are required to prepare Omega Limited’s Balance Sheet as on 31.3.2017 and Statement of Profit and
Loss with notes to accounts for the year ended 31.3.2017 as per Schedule III. Ignore previous years’ figures
& taxation.
(Ans. : Balance Sheet Total = 1082 ` in thousand; Profit from Profit & Loss Statement = 166 ` in thousand)
Q-15 You are required to prepare Balance sheet and statement of Profit and Loss from the following trial
balance of Haria Chemicals Ltd. for the year ended 31st March, 2017.
Haria Chemicals Ltd.
Trial Balance as at 31st March, 2017
Particulars ` Particulars `
Inventory 6,80,000 Equity Shares
Furniture 2,00,000 Capital (Shares of `10 each) 25,00,000
Discount 40,000 11% Debentures 5,00,000
Loan to Directors 80,000 Bank loans 6,45,000
Advertisement 20,000 Trade payables 2,81,000
Bad debts 35,000 Sales 42,68,000
Commission 1,20,000 Rent received 46,000
Purchases 23,19,000 Transfer fees 10,000
Plant and Machinery 8,60,000 Profit & Loss account 1,39,000
Rentals 25,000 Depreciation provision:
Current account 45,000 Machinery 1,46,000
Cash 8,000
Interest on bank loans 1,16,000
Preliminary expenses 10,000
Fixtures 3,00,000
Wages 9,00,000
Consumables 84,000
Freehold land 15,46,000
Tools & Equipments 2,45,000
Goodwill 2,65,000
Trade receivables 4,40,000
Dealer aids 21,000
Transit insurance 30,000
Trade expenses 37,000
Distribution freight 54,000
Debenture interest 55,000 _______
85,35,000 85,35,000
Additional information: Closing Inventory on 31-3-2017 : `8,23,000.
(Ans. : Balance Sheet Total = 46,66,000; Profit from Profit & Loss Statement = 6,01,000)
92 Chapter 2 : Financial Statements of Companies
Q-16 You are required to prepare a Statement of Profit and Loss and Balance Sheet from the following Trial
Balance extracted from the books of the International Hotels Ltd., on 31st March, 2017:
Dr. Cr.
` `
Authorised Capital-divided into 5,000 6%
Preference Shares of `100 each and 10,000
equity Shares of `100 each 15,00,000
Subscribed Capital -
5,000 6% Preference Shares of `100 each 5,00,000
Equity Capital 8,05,000
Purchases - Wines, Cigarettes, Cigars, etc. 45,800
- Foodstuffs 36,200
Wages and Salaries 28,300
Rent, Rates and Taxes 8,900
Laundry 750
Sales - Wines, Cigarettes, Cigars, etc. 68,400
- Food 57,600
Coal and Firewood 3,290
Carriage and Cooliage 810
Sundry Expenses 5,840
Advertising 8,360
Repairs 4,250
Rent of Rooms 48,000
Billiard 5,700
Miscellaneous Receipts 2,800
Discount received 3,300
Transfer fees 700
Freehold Land and Building 8,50,000
Furniture and Fittings 86,300
Inventory on hand, 1st April, 2016
Wines, Cigarettes. Cigars, etc. 12,800
Foodstuffs 5,260
Cash in hand 2,200
Cash with Bankers 76,380
Preliminary and formation expenses 8,000
2,000 Debentures of `100 each (6%) 2,00,000
Profit and Loss Account 41,500
Trade payables 42,000
Navkar Institute | CA Intermediate | Paper 1 : Accounting 93
Trade receivables 19,260
Investments 2,72,300
Goodwill at cost 5,00,000
General Reserve 2,00,000
19,75,000 19,75,000
Wages and Salaries Outstanding 1,280
Inventory on 31st March, 2017
Wines, Cigarettes and Cigars, etc. 22,500
Foodstuffs 16,400
PARTICULARS `
(i) Grossing-up of dividend
Dividend distributed by Ring Ltd. 25% of 4,00,000 1,00,000
Add: Increase for the purpose of grossing up of dividend 17,647
[1,00,000 x (15/(100-15)]
Gross dividend 1,17,647
(ii) Dividend distribution tax @ 17.304% of `1,17,647 20,358 )
Q-25 The following extract of Balance Sheet of Star Ltd. (Non-investment) company was obtained:
Balance Sheet (Extract) as on 31st March, 2017
Liabilities `
Authorised capital:
60,000, 14% preference shares of `100 60,00,000
6,00,000 Equity shares of `100 each 6,00,00,000
6,60,00,000
Issued and subscribed capital:
45,000, 14% preference shares of `100 each fully paid 45,00,000
3,60,000 Equity shares of `100 each, `80 paid-up 2,88,00,000
Share suspense account 60,00,000
Reserves and surplus:
INTRODUCTION
CASH FLOW STATEMENT (AS 3)
This Standard is mandatory for the enterprises, which fall in the category of level I, at the end of the relevant
accounting period. For all other enterprises though it is not compulsory but it is encouraged to prepare such
statements. Where an enterprise was not covered by this statement during the previous year but qualifies
in the current accounting year, they are not supposed to disclose the figures for the corresponding previous
years. Whereas, if an enterprises qualifies under this statement to prepare the cash flow statements during
the previous year but now disqualified, will continue to prepare cash flow statements for another two
consecutive years.
Cash flow type depends on the business of the enterprise and other factors. For example, since principal
business of financial enterprises consists of borrowing, lending and investing, loans given and interests
earned are operating cash flows for financial enterprises and investing cash flows for other enterprises.
A few typical cases are discussed below.
Loans/Advances given and Interests earned
(a) Loans and advances given and interests earned on them in the ordinary course of business are
operating cash flows for financial enterprises.
(b) Loans and advances given and interests earned on them are investing cash flows for non-financial
enterprises.
(c) Loans and advances given to subsidiaries and interests earned on them are investing cash flows
for all enterprises.
(d) Loans and advances given to employees and interests earned on them are operating cash flows
for all enterprises.
(e) Advance payments to suppliers and interests earned on them are operating cash flows for all
enterprises.
(f) Interests earned from customers for late payments are operating cash flows for non-financial
enterprises.
Navkar Institute | CA Intermediate | Paper 1 : Accounting 105
Loans/Advances taken and interests paid
(a) Loans and advances taken and interests paid on them in the ordinary course of business are operating
cash flows for financial enterprises.
(b) Loans and advances taken and interests paid on them are financing cash flows for non-financial
enterprises.
(c) Loans and advances taken from subsidiaries and interests paid on them are financing cash flows for all
enterprises.
(d) Advance taken from customers and interests paid on them are operating cash flows for non-financial
enterprises.
(e) Interests paid to suppliers for late payments are operating cash flows for all enterprises.
(f) Interests taken as part of inventory costs in accordance with AS 16 are operating cash flows.
Investments made and dividends earned
(a) Investments made and dividends earned on them in the ordinary course of business are operating cash
flows for financial enterprises.
(b) Investments made and dividends earned on them are investing cash flows for non-financial enterprises.
(c) Investments in subsidiaries and dividends earned on them are investing cash flows for all enterprises.
Dividends Paid
Dividends paid are financing cash outflows for all enterprises.
Interest and Dividends
Cash flows from interest and dividends received and paid should each be disclosed separately. Cash
flows arising from interest paid and interest and dividends received in the case of a financial enterprise
should be classified as cash flows arising from operating activities. In the case of other enterprises, cash
flows arising from interest paid should be classified as cash flows from financing activities while interest
and dividends received should be classified as cash flows from investing activities. Dividends paid should
be classified as cash flows from financing activities.
Income Tax
(a) Tax paid on operating income is operating cash outflows for all enterprises
(b) Tax deducted at source against income are operating cash outflows if concerned incomes are
operating incomes and investing cash outflows if the concerned incomes are investment incomes,
e.g. interest earned.
(c) Tax deducted at source against expenses are operating cash inflows if concerned expenses are
operating expenses and financing cash inflows if the concerned expenses are financing expenses,
e.g. interests paid.
Insurance claims received
(a) Insurance claims received against loss of stock or loss of profits are extraordinary operating cash
inflows for all enterprises.
(b) Insurance claims received against loss of fixed assets are extraordinary investing cash inflows for
all enterprises.
AS 3 requires separate disclosure of extraordinary cash flows, classifying them as cash flows from operating,
investing or financing activities, as may be appropriate.
(E) Reporting Cash Flows from Operating Activities
Net cash flow from operating activities can be reported either as direct method or as indirect method.
106 Chapter 2 : Financial Statements of Companies
In ‘Direct method’ we take the gross receipts from sales, trade receivables and other operating inflows
subtracted by gross payments for purchases, creditors and other expenses ignoring all non-cash items
like depreciation, provisions. In ‘Indirect method’ we start from the net profit or loss figure, eliminate
the effect of any non-cash items, investing items and financing items from such profit figure i.e. all such
expenses like depreciation, provisions, interest paid, loss on sale of assets etc. are added and interest
received etc. are deducted. Adjustment for changes in working capital items are also made ignoring cash
and cash equivalent to reach to the figure of net cash flow.
(F) Profit or loss on disposal of fixed assets
Profit or loss on sale of fixed asset is not operating cash flow. The entire proceeds of such transactions
should be taken as cash inflow from investing activity.
(G) Fundamental techniques of cash flow preparation
A cash flow statement is a summary of cash receipts and payments of an enterprise during an accounting
period. Any attempt to compile such a summary from cashbooks is impractical due to the large volume
of transactions. Fortunately, it is possible to compile such a summary by comparing financial statements
at the beginning and at the end of accounting period.
(H) Reporting Cash Flows on Net Basis
AS 3 forbids netting of receipts and payments from investing and financing activities.
Thus, cash paid on purchase of fixed assets should not be shown net of cash realised from sale of fixed
assets. For example, if an enterprise pays ` 50,000 in acquisition of machinery and realises ` 10,000 on
disposal of furniture, it is not right to show net cash outflow of ` 40,000. The exceptions to this rule are
stated below.
Cash flows from the following operating, investing or financing activities may be reported on a net basis.
(a) Cash receipts and payments on behalf of customers, e.g. cash received and paid by a bank against
acceptances and repayment of demand deposits.
(b) Cash receipts and payments for items in which the turnover is quick, the amounts are large and
the maturities are short, e.g. purchase and sale of investments by an investment company.
AS 3 permits financial enterprises to report cash flows on a net basis in the following three circumstances.
(a) Cash flows on acceptance and repayment of fixed deposits with a fixed maturity date
(b) Cash flows on placement and withdrawal deposits from other financial enterprises
(c) Cash flows on advances/loans given to customers and repayments received therefrom.
(I) Non-Cash transactions
Investing and financing transactions that do not require the use of cash or cash equivalents, e.g. issue
of bonus shares, should be excluded from a cash flow statement.
Such transactions should be disclosed elsewhere in the financial statements in a way that provides all
the relevant information about these investing and financing activities.
Business Purchase
The aggregate cash flows arising from acquisitions and disposals of subsidiaries or other business units
should be presented separately and classified as cash flow from investing activities.
(a) The cash flows from disposal and acquisition should not be netted off.
(b) An enterprise should disclose, in aggregate, in respect of both acquisition and disposal of
subsidiaries or other business units during the period each of the following:
(i) The total purchase or disposal consideration; and
Liabilities
Equity Share Capital 6,00,000 5,00,000
Redeemable Preference Capital — 2,00,000
Capital Redemption Reserve 1,00,000 —
Capital Reserve 1,00,000 —
General Reserve 1,00,000 2,50,000
Profit and Loss Account 70,000 50,000
9% Debentures 2,00,000 —
Trade payables 1,15,000 1,10,000
Liabilities for Expenses 30,000 20,000
Provision for Taxation 95,000 60,000
Dividend payable 90,000 60,000
_______ ________
15,00,000 12,50,000
31st March, 2015 31st March, 2014
` `
Assets
Land and Building 1,50,000 2,00,000
Plant and Machinery 7,65,000 5,00,000
Investments 50,000 80,000
Inventory 95,000 90,000
Trade receivables 2,50,000 2,25,000
Cash and Bank 65,000 90,000
Voluntary Separation Payments 1,25,000 65,000
15,00,000 12,50,000
Additional Information :
(1) A piece of land has been sold out for ` 1,50,000 (Cost — ` 1,20,000) and the balance land was
revalued. Capital Reserve consisted of Profit on sale and profit on revaluation.
(2) On 1st April, 2014 a plant was sold for ` 70,000 (Original Cost — ` 90,000 and W.D.V. — ` 50,000)
and Debentures worth ` 1 lakh issued at par as part consideration for Plant of ` 4.5 lakhs acquired.
(3) Part of the investments (Cost — ` 50,000) was sold for ` 70,000.
(4) Pre-acquisition dividend received ` 5,000 was adjusted against cost of Investment.
(7) Voluntary separation cost of ` 50,000 was adjusted against General Reserve.
(8) Income-tax liability for the current year was estimated at ` 1,35,000.
(9) Depreciation @ 15% has been written off from Plant account but no depreciation has been
charged on Land and Building.
Q-7 The Balance Sheet of New Light Ltd. for the years ended 31st March, 2014 and 2015 are as follows:
Liabilities 31st March 31st March Assets 31st March 31st March
2014 2015 2014 2015
(` ) (` ) (` ) (` )
Equity share Fixed assets 32,00,000 38,00,000
capital 12,00,000 16,00,000 Less: Depre
Preference ciation 9,20,000 11,60,000
share capital 4,00,000 2,80,000 22,80,000 26,40,000
Capital Reserve — 40,000 Investment 4,00,000 3,20,000
General Reserve 6,00,000 7,60,000 Cash 10,000 10,000
Profit & Loss A/c 2,40,000 3,00,000 Other current
9% Debentures 4,00,000 2,80,000 assets 11,10,000 13,10,000
Current liabilities 4,80,000 5,20,000
Provision for Tax 3,60,000 3,40,000
Dividend payable 1,20,000 1,60,000
________ ________ ________ _________
38,00,000 42,80,000 38,00,000 42,80,000
Additional information :
(i) The company sold one fixed asset for ` 1,00,000, the cost of which was ` 2,00,000 and the
depreciation provided on it was ` 80,000.
(ii) The company also decided to write off another fixed asset costing ` 56,000 on which depreciation
amounting to ` 40,000 has been provided.
(iii) Depreciation on fixed assets provided ` 3,60,000.
(iv) Company sold some investment at a profit of ` 40,000, which was credited to capital reserve.
(v) Debentures and preference share capital redeemed at 5% premium at begining of the year.
(vi) Company decided to value stock at cost, whereas previously the practice was to value stock at cost
less 10%. The stock according to books on 31-3-2014 was ` 2,16,000. The stock on 31-3-2015 was
correctly valued at ` 3,00,000.
Prepare Cash Flow Statement as per revised Accounting Standard-3 by indirect method.
Additional information:
(i) Depreciation charged on building and plant and machinery during the year 2014-15 were ` 50,000
and ` 1,20,000 respectively.
(ii) During the year an old machine costing ` 1,50,000 was sold for ` 32,000. Its written down value
was ` 40,000 on date of sale.
(iii) During the year, income tax for the year 2013-14 was assessed at ` 76,000. A cheque of ` 4,000 was
received along with the assessment order towards refund of income tax paid in excess, by way of
advance tax in earlier years.
(iv) Preference shares of ` 3,00,000, which were due for redemption, were redeemed during the year
2014-15 at a premium of 5%, out of the proceeds of fresh issue of Preference shares.
(v) Bonus shares were issued to the existing equity shareholders at the rate of one share for every
five shares held on 31.3.2014 out of general reserves.
(vi) Debentures were redeemed at the beginning of the year at a premium of 3%.
(vii) Interim dividend paid during the year 2014-15 was ` 50,000.
You are required to prepare a cash flow statement.
---0---0---
Identify the nature of cash flow as well as pass the necessary entries of following transactions:
1. Cash Sale of machinery = ` 80,000
Cash a/c Dr. ` 80,000
To machinery a/c 80,000
( Cash inflow )
2. Cash Purchase of long term investment= 50,000
Long term invest. a/c Dr. 50,000
To cash a/c 50,000
( cash out flow )
8. Cash repayments of amounts borrowed will be disclosed in the cash flow statement as
(a) An operating activity.
(b) A financing activity
(c) An investing activity.
9. In the cash flow statement, ‘cash and cash equivalents’ include
(a) Bank balances and Cash balances.
(b) Short-term investments readily convertible into Cash are subject to an insignificant risk of changes
in value.
(c) Both (a) and (b).
THEORETICAL QUESTIONS
Q-1 What is the significance of cash flow statement? Explain in brief.
Q-2 Explain the difference between direct and indirect methods of reporting cash flows from operating
activities with reference to Accounting Standard 3, (AS 3) revised.
Q-10 From the following Summary Cash Account of X Ltd. prepare Cash Flow Statement for the year ended
31st March, 2001 in accordance with AS 3 (Revised) using the direct method. The company does not
have any cash equivalents.
Summary Cash Account for the year ended 31.3.2001
` ’000 ` ’000
Balance on 1.4.2000 50 Payment to Suppliers 2,000
Issue of Equity Shares 300 Purchase of Fixed Assets 200
Receipts from Customers 2,800 Overhead expense 200
Sale of Fixed Assets 100 Wages and Salaries 100
Taxation 250
Dividend 50
Repayment of Bank Loan 300
____ Balance on 31.3.2001 150
3,250 3,250
(ANS. : [Net Cash Flow from operating activities = 250 ` in thousand; Net Cash Flow from investing activities=(100)
` in thousand; Net Cash Flow from financing activities =(50)` in thousand]
Q-11 The following summary cash account has been extracted from the company’s accounting records :
Summary Cash Account
(` ‘000)
Balance at l.1.2006 35
Receipts from customers 2,783
Issue of shares 300
Sale of fixed assets 128
3,246
Payments to suppliers 2,047
Payments for fixed assets 230
Payments for overheads 115
Wages and salaries 69
Taxation 243
Dividends 80
Repayments of bank loan 250 (3,034)
Balance at 31.12.2006 212
Q-26 From the following details relating to the Accounts of Grow More Ltd. prepare Cash Flow Statement:
Liabilities 31.03.2002 (`) 31.03.2001 (`)
Share Capital 10,00,000 8,00,000
Reserve 2,00,000 1,50,000
Profit and Loss Account 1,00,000 60,000
Debentures 2,00,000 –
Provision for taxation 1,00,000 70,000
Dividend payable 2,00,000 1,00,000
Sundry Creditors 7,00,000 8,20,000
25,00,000 20,00,000
INTRODUCTION
1. Concept and Introduction :
In case of conversion of business into limited company, a running business of non corporate entity is
taken over by the promoters of a company w.e.f. a date prior to the date of incorporation of Company,
the amount of profit or loss of such period is referred to as Profit Prior to Incorporation.
Such profit or loss, though belongs to the Company, is of capital nature and hence should be separately
shown from other trading profits.
2. How to calculate Profit prior to incorporation :
In case of conversion of business, profit prior to incorporation can be decided by any of the following
two methods:
(a) The existing books of accounts are closed on the date of incorporation and new set of books are
prepared for the period after incorporation.
(b) When same books of vendor are continued without break till the year end, company prepares
separate profit and loss accounts for the period prior and post incorporation. In this profit and loss
account, the incomes and expenses of the period are allocated between two periods either on
actual basis or on the basis of suitable basis of apportionment.
3. Accounting treatment of profit or loss.
(a) Post incorporation profit or loss:
Such profit or loss is from normal trading activities and is considered as revenue profit or loss.
Such profit is available for distribution of dividend. Such profit or loss is carried to balance sheet
as balance of Profit or Loss Account
(b) Profit or loss for the pre incorporation period:
(1) It is of capital nature. Such profit is not available for distribution of dividend.
(2) Pre incorporation profit is normally transferred to Capital Reserve or shown in the balance
sheet as” Prior period profit”
(3) Loss during pre incorporation is normally transferred to Goodwill Account.
(4) Pre incorporation profits can be used for:-
(i) Writing off Goodwill on acquisition
(ii) Writing off preliminary expenses
(iii) Writing off capital losses e.g. to write down over valued assets
(iv) Writing off other fictitious assets
CLASS WORK
Q-1 Flat private Limited was incorporated on 1st July, 2017 to take over the running business of Mr. Round
with effect from 1st April, 2017. The following Profit and Loss Account for the year ended 31st March,
2018 was drawn up:
Dr. Cr.
Particulars Amount Particulars Amount
` `
To Commission 2,625 By Gross profit 98,000
Advertisement 5,250 Bad debt realised 500
Managing Director’s
remuneration 9,000
Depreciation 2,800
Salaries 18,000
Insurance 600
Preliminary cexpenses 700
Rent and taxes 3,000
Discount 350
Bad debts 1,250
Net profit 54,925 _____
98,500 98,500
The following details are available: (1) The average monthly turnover from July, 2017 onwards was
double than that of the previous months. (2) Rent for the first three months was paid @ ` 200 p.m. and
thereafter at a rate increased by ` 50 p.m. (3) Bad debts ` 350 related to sales effected after 1st
September, 2017. Realisation of bad debts was in respect of debts written off during 2015 (4)
Advertisement expenses were directly proportionate to the sales. You are required to find out the
profit prior to incorporation and to state the treatment thereof in the books of the company.
Q-2 Mr. X formed a private limited company under the name and style of Exe. Pvt. Ltd. to take over his
existing business as from 1st April. 2017 but the company was not incorporated till 1.7.2017. No entries
relating to transfer of the business was entered in the books, which were carried on without a break till
31st March 2018.
The following Balances were extracted from the books as on 31st March, 2018 :
Q-4 X Ltd. was incorporated on 1st May 2017 to acquire a business as on 1st January, 2017. The first accounts
were closed on 30th September, 2017.
The gross profit for the period was ` 42,000
Details of other expenses:
General expenses ` 7,200
Directors Remuneration ` 12,000
Preliminary Expenses ` 2,000
Rent upto 30th June was ` 6,000 per annum after which it was increased by 40%.
Salary of the manager, who on formation of the company had become a whole time director and whose
remuneration has been given above, was ` 5,100 per annum.
The company earned a uniform gross profit. The sales upto 30th September 2017 were ` 98,000. The
monthly average of sales for the first four months of the year was one-half of the remaining period.
Show the Profit and Loss Account and indicate how you would deal with the pre-incorporation results.
Q-5 SALE Limited was incorporated on 01.08.20X1 to take-over the business of a partnership firm w.e.f.
01.04.20X1. The following is the extract of Profit and Loss Account for the year ended 31.03.20X2:
Particulars Amount (`) Particulars Amount (`)
To Salaries 1,20,000 By Gross Profit 6,00,000
To Rent, Rates & Taxes 80,000
To Commission on Sales 21,000
To Depreciation 25,000
To Interest on Debentures 32,000
To Director Fees 12,000
To Advertisement 36,000
To Net Profit for the Year 2,74,000
6,00,000 6,00,000
(i) SALE Limited initiated an advertising campaign which resulted increase in monthly average sales
by 25% post incorporation.
(ii) The Gross profit ratio post incorporation increased to 30% from 25%.
You are required to apportion the profit for the year between pre-incorporation and post-
incorporation, also explain how pre-incorporation profit is treated in the accounts.
Q-6 Rama Udyog Limited was incorporated on August 1, 20X1. It had acquired a running business of Rama &
Co. with effect from April 1, 20X1. During the year 20X1-X2, the total sales were ` 36,00,000. The sales
per month in the first half year were half of what they were in the later half year. The net profit of the
company, ` 2,00,000 was worked out after charging the following expenses:
(i) Depreciation ` 1,23,000, (ii) Directors’ fees ` 50,000, (iii) Preliminary expenses ` 12,000,
(iv) Office expenses ` 78,000, (v) Selling expenses ` 72,000 and (vi) Interest to vendors upto
Navkar Institute | CA Intermediate | Paper 1 : Accounting 149
August 31, 20 X1 ` 5,000.
You are required to ascertain pre-incorporation and post-incorporation profit for the year ended 31st
March, 20X2.
Q-7 ABC Ltd. was incorporated on 1.8.2017 to acquire the running business of Mr. XY w.e.f. 1.4.2017. Following
particulars are available for the year ended 31st March, 2018.
Sales during the period from 1 .4.2017 to 31.7.2017 ` 2,00,000
Sales for the period from 1.8.2017 to 31.3.2018 ` 3,30,000
Cost of sales for the year ` 4,20,000
Sales price increased by 10% in post-incorporation period as compared to pre-incorporation period.
Allocate the Gross Profit between pre and post-incorporation period. Also calculate ratio of sales value
and sales volume.
1. For dividing income and expenses between pre and post incorporation, basis of apportionment should
be applied only when actual information of division is not available
2. Dividend on share capital is an appropriation and therefore will not be shown in profit and loss account.
Similarly details of asset or liability will also not appear in profit and loss account.
3. Format of answer should be either in statement form or account form, as per the instruction. In absence
of specific information, it is convenient to follow statement form.
4. Sales value ratio and sales volume ratio would be same only when selling price per unit remains
constant.
5. Preliminary expenses would be written off in the post incorporation period. But alternatively company
can utilise pre incorporation profit to write off preliminary expenses.
6. Normally rate of GP on sales remain constant and therefore Gross profit is divided in sales ratio. But GP
rate remains constant only when either both cost price and sale price remain constant or both change
proportionately.
7. When details regarding sales are not available, the sales ratio would be same as time ratio.
8. Accounting period may be more than or less than 12 months.
9. Date of commencement of business is not relevant for calculating profit or loss prior to incorporation.
THEORETICAL QUESTION
1. Define Pre–incorporation profit/loss in brief.
Q-8 The promoters of Glorious Ltd. took over on behalf of the company a running business with effect from
1st April, 20X1. The company got incorporated on 1st August, 20X1. The annual accounts were made up
to 31st March, 20X2 which revealed that the sales for the whole year totalled ` 1,600 lakhs out of which
sales till 31st July, 20X1 were for ` 400 lakhs. Gross profit ratio was 25%.
The expenses from 1st April 20X1, till 31st March, 20X2 were as follows:
(` in lakhs)
Salaries 69
Rent, Rates and Insurance 24
Sundry Office Expenses 66
Travellers’ Commission 16
Discount Allowed 12
Bad Debts 4
Directors’ Fee 25
Tax Audit Fee 9
Depreciation on Tangible Assets 12
Debenture Interest 11
Prepare a statement showing the calculation of Profits for the pre-incorporation and post-incorporation
periods.
Ans.
PPI-32.75, Post profit- 119.25, TR- 1:2, SR- 1:3.
Q-9 Inder and Vishnu, working in partnership registered a joint stock company under the name of Fellow
Travellers Ltd. on May 31, 20X1 to take over their existing business. It was agreed that they would take
over the assets of the partnership from January 1st, 20X1 for a sum of ` 3,00,000 and that until the
amount was discharged they would pay interest on the amount at the rate of 6% per annum. The
amount was paid on June 30, 20X1. To discharge the purchase consideration, the company issued 20,000
equity shares of ` 10 each at a premium of ` 1 each and allotted 7% Debentures of the face value of `
1,50,000 to the vendors at par.
The summarised Profit and Loss Account of the “Fellow Travellers Ltd.” for the year ended 31st December,
20X1 was as follows:
INTRODUCTION
A bonus share may be defined as issue of shares at no cost to current shareholders in a company, based upon
the number of shares that the shareholder already owns.
In other words, no new funds are raised with a bonus issue While the issue of bonus shares increases the
total number of shares issued and owned, it does not increase the net worth of the company. Although the
total number of issued shares increases, the ratio of number of shares held by each shareholder remains
constant.
Bonus issue is also known as ‘capitalisation of profits’. Capitalisation of profits refers to the process of
converting profits or reserves into paid up capital. A company may capitalise its profits or reserves which
otherwise are available for distribution as dividends among the members by issuing fully paid bonus shares
to the members.
If the subscribed and paid-up capital exceeds the authorised share capital as a result of bonus issue, a
resolution shall be passed by the company at its general body meeting for increasing the authorised capital.
A return of bonus issue along with a copy of resolution authorising the issue of bonus shares is also required
to be filed with the Registrar of Companies.
SEBI REGULATIONS
A listed company, while issuing bonus shares to its members, has to comply with the following requirements
under the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009:
Regulation 92- Conditions for Bonus Issue
Subject to the provisions of the Companies Act, 2013 or any other applicable law for the time being in force,
a listed company may issue bonus shares to its members if:
(a) it is authorised by its articles of association for issue of bonus shares, capitalisation of reserves, etc.:
Provided that if there is no such provision in the articles of association, the issuer shall pass are
162 Chapter 4 : Bonus Share
solution at its general body meeting making provisions in the articles of associations for capitalisation
of reserve;
(b) it has not defaulted in payment of interest or principal in respect of fixed deposits or debt securities
issued by it;
(c) it has sufficient reason to believe that it has not defaulted in respect of the payment of statutory dues
of the employees such as contribution to provident fund, gratuity and bonus;
(d) the partly paid shares, if any outstanding on the date of allotment, are made fully paid up
Regulation 93- Restriction on bonus issue
No issuer shall make a bonus issue of equity shares unless it has made reservation of equity shares of the
same class in favour of the holders of outstanding compulsorily convertible debt instruments, if any, in
proportion to the convertible part thereof. The equity shares so reserved for the holders of fully or partly
compulsorily convertible debt instruments shall be issued at the time of conversion of such convertible debt
instruments on the same terms or same proportion at which the bonus shares were issued.
Regulation 94- Bonus shares only against reserves, etc. if capitalised in cash
The bonus issue shall be made out of free reserves built out of the genuine profits or securities premium
collected in cash only and reserves created by revaluation of fixed assets shall not be capitalised for the
purpose of issuing bonus shares. The bonus share shall not be issued in lieu of dividend.
Regulation 95- Completion of bonus issue
An issuer, announcing a bonus issue after the approval of its board of directors and not requiring shareholders’
approval for capitalisation of profits or reserves for making the bonus issue, shall implement the bonus issue
within fifteen days from the date of approval of the issue by its board of directors: Provided that where the
issuer is required to seek shareholders’ approval for capitalisation of profits or reserves for making the
bonus issue, the bonus issue shall be implemented within two months from the date of the meeting of its
board of directors wherein the decision to announce the bonus issue was taken subject to shareholders’
approval.
Once the decision to make a bonus issue is announced, the issue cannot be withdrawn.
Q-1 The Balance Sheet of COSMOS Ltd. on 31st Dec., 2010, was as follows:
Liabilities ` Assets `
4,000 Equity Shares of ` 100 Sundry Assets 10,00,000
each, ` 80 paid 3,20,000
Share Premium Account 60,000
Capital Redemption Reserve Account 70,000
General Reserve 1,00,000
Profit and Loss Account 3,00,000
Sundry Creditors 1,50,000
10,00,000 10,00,000
The directors recommended the following with a view to capitalising, whole of Share Premium Account,
Capital Redemption Reserve Account, General Reserve and ` 50,000 out of Profit and Loss Account:
(a) The existing shares be made fully paid without the shareholders having to pay anything.
(b) Each shareholder to be given fully paid bonus shares at a premium of 25% for the remaining
amount in proportion to his holdings. Assuming that the scheme is accepted and that all formalities
are gone through, give journal entries and also show in what proportion bonus shares will be
distributed among shareholders.
Q-2 Following is the Balance Sheet of XYZ Ltd. as on 3 1.3.2010.
Liabilities ` Assets `
Share Capital: Sundry Assets 14,30,000
4,000 Equity Share of ` 100
each fully paid 4,00,000
Security Premium 50,000
Capital Redemption Reserves 1,00,000
General Reserve 1,50,000
Profit and Loss A/c 2,00,000
12% Fully Convertible Debentures 1,50,000
14% Partly Convertible Debentures 2,00,000
Sundry Creditors 1,80,000
14,30,000 14,30,000
Navkar Institute | CA Intermediate | Paper 1 : Accounting 165
LAST MINUTE REVISION
JOURNAL ENTRIES
(A) (1) Upon the sanction of an issue of bonus shares
(a) Debit Capital Redemption Reserve Account
Debit Securities Premium Account1
Debit General Reserve Account
Debit Profit & Loss Account
(b) Credit Bonus to Shareholders Account.
(2) Upon issue of bonus shares
(a) Debit Bonus to Shareholders Account
(b) Credit Share Capital Account.
(B) (1) Upon the sanction of bonus by converting partly paid shares into fully paid shares
(a) Debit General Reserve Account
Debit Profit & Loss Account
(b) Credit Bonus to Shareholders Account
(2) On making the final call due
(a) Debit Share Final Call Account
(b) Credit Share Capital Account.
(3) On adjustment of final call
(a) Debit Bonus to Shareholders Account
(b) Credit Share Final Call Account
Bonus
• Conversation of partly paid up Issue of New Bonus Shares
shares in to fully paid up
Issues out of
` 1. CRR
• Issues out of Free Reserves 2. Securities Premium
[ G.R. P & L e+c ] 3. Free Reserves
Q-6 Following is the extract of the Balance Sheet of Preet Ltd. as at 31st March, 20X1
Authorised capital : `
15,000 12% Preference shares of ` 10 each 1,50,000
1,50,000 Equity shares of ` 10 each 15,00,000
16,50,000
Issued and Subscribed capital:
12,000 12% Preference shares of ` 10 each fully paid 1,20,000
1,35,000 Equity shares of ` 10 each, ` 8 paid up 10,80,000
Reserves and surplus: General Reserve 1,80,000
Capital Redemption Reserve 60,000
Securities premium (collected in cash) 37,500
Profit and Loss Account 3,00,000
On 1st April, 20X1, the Company has made final call @ ` 2 each on 1,35,000 equity shares. The call
money was received by 20th April, 20X1. Thereafter, the company decided to capitalise its reserves by
way of bonus at the rate of one share for every four shares held.
Show necessary journal entries in the books of the company and prepare the extract of the balance
sheet as on 30th April, 20X1 after bonus issue.
Solution
Journal Entries in the books of Preet Ltd.
` `
1-4-20X1 Equity share final call A/c Dr. 2,70,000
To Equity share capital A/c 2,70,000
(For final calls of ` 2 per share on 1,35,000 equity
shares due as per Board’s Resolution dated….)
20-4-20X1 Bank A/c Dr. 2,70,000
To Equity share final call A/c 2,70,000
(For final call money on 1,35,000 equity shares
received)
Securities Premium A/c Dr. 37,500
Capital Redemption Reserve A/c Dr. 60,000
1. INTRODUCTION
Redemption is the process of repaying an obligation, at prearranged amounts and timings. It is a contract
giving the right to redeem preference shares within or at the end of a given time period at an agreed price.
These shares are issued on the terms that shareholders will at a future date be repaid the amount which
they invested in the company (along with frequent payment of a specified amount as return on investment
during the tenure of the preference shares). The redemption date is the maturity date, which specifies
when repayment takes place and is usually printed on the preference share certificate. Through the process
of redemption, a company can also adjust its financial structure, for example, by eliminating preference
shares and replacing those with other securities if future growth of the company makes such change
advantageous.
2. PURPOSE OF ISSUING REDEEMABLE
PREFERENCE SHARES
A company may issue redeemable preference shares because of the following:
1 It is a proper way of raising finance in a dull primary market.
2. A company may face difficulty in raising share capital, as its shares are not traded on the stock exchange.
Potential investors, hesitant in putting money into shares that cannot easily be sold, may be encouraged
to invest if the shares are redeemable by the company.
3. The preference shares may be redeemed when there is a surplus of capital and the surplus funds
cannot be utilised in the business for profitable use.
In India, the issue and redemption of preference shares is governed by Section 55 of the Companies Act,
2013.
3. PROVISIONS OF THE COMPANIES ACT (SECTION 55)
A company limited by shares if so authorised by its Articles, may issue preference shares which at the option
of the company, are liable to be redeemed within a period, normally not exceeding 20 years from the date
of their issue. It should be noted that:
(a) no shares can be redeemed except out of profit of the company which would otherwise be available
for dividend or out of proceeds of fresh issue of shares made for the purpose of redemption;
(b) no such shares can be redeemed unless they are fully paid;
(c) (i) in case of such class of companies, as may be prescribed and whose financial statement comply with
the accounting standards prescribed for such class of companies under Section 133, the premium, if
any, payable on redemption shall be provided for out of the profits of the company, before the shares
are redeemed:
Navkar Institute | CA Intermediate | Paper 1 : Accounting 173
Provided also that premium, if any, payable on redemption of any preference shares issued on or
before the commencement of this Act by any such company shall be provided for out of the profits of
the company or out of the company’s securities premium account, before such shares are redeemed.
(ii) in case of other companies (not falling under (i) above), the premium, if any payable on redemption
shall be provided for out of the profits of the company or out of the company’s securities premium
account, before such shares are redeemed.
(d) where any such shares are proposed to be redeemed out of the profits of the company, there shall, out
of profits which would otherwise have been available for dividends, be transferred to a reserve account
to be called Capital Redemption Reserve Account, a sum equal to the nominal amount of the shares
redeemed; and the provisions of the Act relating to the reduction of the share capital of a company
shall, except as provided in the Section, apply as if the Capital Redemption Reserve (CRR) Account
were the paid-up share capital of the company. The utilisation of CRR Account is further restricted to
issuance of fully paid-up bonus shares only.
From the legal provision outlined above, it is apparent that on the redemption of redeemable preference
shares out of accumulated profits it will be necessary to transfer to the Capital Redemption Reserve
Account an amount equal to the amount repaid on the redemption of preference shares on account of
face value less proceeds of a fresh issue of capital made for the purpose of redemption. The object is
that with the repayment of redeemable preference shares, the security for creditors/ bankers, etc.
should not be reduced. At times, a part of the preference share capital may be redeemed out of
accumulated profits and the balance out of a fresh issue.
4. Redemption of Preference Shares by Fresh Issue of Shares
One of the methods for redemption of preference shares is to use the proceeds of a fresh issue of shares. A
company can issue new shares (equity share or preference share) and the proceeds from such new shares
can be used for redemption of preference shares.
The proceeds from issue of debentures cannot be utilised for the purpose.
A problem arises when a fresh issue is made for the purpose of redemption of preference shares, at a
premium. The point to ponder is that whether the proceeds of a fresh issue of shares will include the
amount of securities premium for the purpose of redemption of preference shares.
For securities premium account, Section 52 of the Companies Act, 2013 provides that the securities premium
account may be applied by the company;
(a) Towards issue of un-issued shares of the company to be issued to members of the company as fully
paid bonus securities
(b) To write off preliminary expenses of the company
(c) To write off the expenses of, or commission paid, or discount allowed on any of the securities or
debentures of the company
(d) To provide for premium on the redemption of redeemable preference shares or debentures of the
company.
(e) For the purchase of its own shares or other securities.
Note : If may be noted that certain class of Companies whose financial statements comply with the Accounting
Standards as prescribed under Section 133 of the Companies Act, 2013, can’t apply the securities premium
account for the purposes (b) and (d) mentioned above.
Note : All the questions in this chapter have been solved on the basis that the companies referred in the
questions are governed by Section 133 of the Companies Act, 2013 and comply with the Accounting Standards
prescribed for them.
174 Chapter 5 : Redemption of Preference Shares
Accordingly the balance in securities premium account has not been utilized for the purpose of premium
payable to redemption of preference share.
Any other way, except the above prescribed ways, in which securities premium account is utilised will be in
contravention of law.
Thus, the proceeds of a fresh issue of shares will not include the amount of securities premium for the
purpose of redemption of preference shares.
Reasons for issue of New Equity Shares
A company may prefer issue of new equity shares for the following reasons:
(a) When the company has come to realise that the capital is needed permanently and it makes more
sense to issue Equity Shares in place of Redeemable Preference Shares which carry a fixed rate of
dividend.
(b) When the balance of profit, which would otherwise be available for dividend, is insufficient.
(c) When the liquidity position of the company is not good enough.
Advantages of redemption of preference shares by issue of fresh equity shares
Following are the advantages of redemption of preference shares by the issue of fresh equity shares:
(1) No cash outflow of money – now or later.
(2) New equity shares may be valued at a premium.
(3) Shareholders retain their equity interest.
Disadvantages of redemption of preference shares by issue of fresh equity shares
The disadvantages are:
(1) There will be dilution of future earnings;
(2) Share-holding in the company is changed.
Accounting Entries
1. When new shares are issued at par
Bank Account
To Share Capital Account
(Being the issue of …….shares of ‘……each for the purpose of
redemption of preference shares, as per Board’s Resolution No……
dated……. ) Dr.
2. When new shares are issued at a premium
Bank Account Dr.
To Share Capital Account
To Securities Premium Account
(Being the issue of ……..shares of ‘……each at a premium of ‘……each
for the purpose of redemption of preference shares as per Board’s
Resolution No….. dated……)
3. When preference shares are redeemed at par
Redeemable Preference Share Capital Account Dr.
---0---0---
For the year ended 31.3.2016, the company made a net profit of ` 35,000 after providing ` 20,000
depreciation.
The following additional information is available with regard to company’s operation:
1. The preference dividend for the year ended 31.3.2016 was paid.
2. Except cash and bank balances other current assets and current liabilities as on 31.3.2016, was the
same as on 31.3.2015.
3. The company redeemed the preference shares at a premium of 10%.
4. The company issued bonus shares in the ratio of one share for every equity share held as on
31.3.2016.
5. To meet the cash requirements of redemption, the company sold investments.
6. Investments were sold at 90% of cost on 31.3.2016.
You are required to prepare necessary journal entries to record redemption and issue of bonus
shares.
THEORETICAL QUESTIONS
1. What is the purpose of issuing redeemable preference shares?
2. What are the provisions of the Companies Act, 2013 related with redemption of preference shares?
Explain in brief.
Q-5 C Limited had 3,000, 12% Redeemable Preference Shares of ` 100 each, fully paid up. The company had
to redeem these shares at a premium of 10%.
It was decided by the company to issue the following:
(i) 25,000 Equity Shares of `10 each at par,
(ii) 1,000 14% Debentures of `100 each.
The issue was fully subscribed and all amounts were received in full .The payment was duly made. The
company had sufficient profits. Show Journal Entries in the books of the company.
Hints : Amount transfer to CRR 50,000.
Q-6 The books of B Ltd. showed the following balance on 31st December, 2015 :
30,000 Equity Shares of `10 each fully paid; 18,000 12% Redeemable Preference Shares of ` 10 each
fully paid; 4,000 10% Redeemable Preference Shares of ` 10 each, `8 paid up (all shares issued on 1st
April, 2014).
Undistributed Reserve and Surplus stood as: Profit and Loss Account ` 80,000; General Reserve ` 1,20,000;
Securities Premium Account 15,000 and Capital Reserve ` 21,000.
Preference shares are redeemed on 1st January, 2016 at a premium of ` 2 per share. The whereabouts
of the holders of 100 shares of `10 each fully paid are not known.
For redemption, 3,000 equity shares of ` 10 each are issued at 10% premium. At the same time, a bonus
issue of equity share was made at par, two shares being issued for every five held on that date out of
the Capital Redemption Reserve Account.
Show the necessary Journal Entries to record the transactions.
Hints : Working Note:
(1) Partly paid-up preference shares cannot be redeemed.
(2) Amount to be Transferred to Capital Redemption Reserve Account
Face value of share to be redeemed `1,80,000
Less: Proceeds from fresh issue (excluding premium) (` 30,000)
`1,50,000
(3) No bonus shares on 3,000 equity shares issued for redemption.
Note: No dividend has been paid on preference shares in the above solution. Alternatively, dividend
may be paid at the rate of 5% for one month because the redemption takes place on 1st February, 2002
assuming that the articles of the company and terms of contract of company with the preference
shareholders provide for such dividend.
Q-9 The following is the Balance Sheet of Bumbum Limited as at 31st March, 2009:
`
Sources of funds
Authorized capital
50,000 Equity shares of `10 each 5,00,000
10,000 Preference shares of `100 each 10,00,000
15,00,000
Issued, subscribed and paid up
30,000 Equity shares of `10 each 3,00,000
5,000, 8%Redeemable Preference shares of `100 each 5,00,000
Reserves & Surplus
Securities Premium 6,00,000
General Reserve 6,50,000
Profit & Loss A/c 1,80,000
2,500, 9% Debentures of `100 each 2,50,000
Sundry Creditors 1,70,000
26,50,000
Application of funds
Fixed Assets (net) 7,80,000
Investments (market value `5,80,000) 4,90,000
Deferred Tax Assets 3,40,000
Sundry Debtors 6,20,000
Cash & Bank balance 2,80,000
Preliminary expenses 1,40,000
26,50,000
Notes to accounts
1 Share Capital
Authorized share capital
2,50,000 Equity shares of `2 each 5,00,000
10,000 Preference shares of `100 each 10,00,000 15,00,000
Issued, subscribed and paid up
2,20,000 Equity shares of `2 each 4,40,000
2 Reserves and Surplus
Securities Premium 85,000
Capital Redemption Reserve 5,00,000
General Reserve 6,50,000
Profit & Loss A/c (1,80,000 + 65,000 – 7,500) 2,37,500
Total 14,72,500
3. Other current asset
Preliminary expenses 1,40,000
Deferred tax assets (assumed to be current asset) 3,40,000
Total 4,80,000
Working Notes: `
1. Redemption of preference share:
5,000 Preference shares of `100 each 5,00,000
Premium on redemption @ 5% 25,000
Amount Payable 5,25,000
2. Redemption of Debentures
2,500 Debentures of `100 each 2,50,000
Less: Cash option exercised by 40% holders (1,00,000)
Conversion option exercised by remaining 60% 1,50,000
Equity shares issued on conversion = 1,50,000 / 10 = 15,000 shares
INTRODUCTION
Under Section 71 (1) of the Companies Act, 2013, a company may issue debentures with an option to convert
such debentures into shares, either wholly or partly at the time of redemption. Provided that the issue of
debentures with an option to convert such debentures into shares, wholly or partly, should be approved by
a special resolution passed at a duly convened general meeting. Section 71 (2) further provides that no
company can issue any debentures which carry any voting rights. Section 71 (4) provides that where debentures
are issued by a company, the company should create a debenture redemption reserve account out of the
profits of the company available for payment of dividend and the amount credited to such account should
not be utilised by the company for any purpose other than the redemption of debentures.
THEORY
Redeemable debentures may be redeemed
after a fixed number of years or
any time after a certain number of years has elapsed since their issue,
on giving a specified notice, or by annual drawing.
DEBENTURE REDEMPTION RESERVE
A company issuing debentures is required to create a debenture redemption reserve account out of the
profits available for distribution of dividend and amounts credited to such account cannot be utilised by the
company except for redemption of debentures. Such an arrangement would ensure that the company will
have sufficient liquid funds for the redemption of debentures at the time they should fall due for payment.
An appropriate amount is transferred from profits every year to Debenture Redemption Reserve and its
investment is termed as Debenture Redemption Reserve Investment. These investment earn certain amount
of income i.e. interest which is reinvested together with the fixed appropriated amount for the purpose in
subsequent years. In last year, the interest earned and the appropriated fixed amount are not invested. In
fact, at this stage the Debenture Redemption Reserve Investments are encashed and the amount so obtained
is used for the redemption of debentures. Any profit or loss made on the encashment of Debenture
Redemption investments is also transferred to Debenture Redemption Reserve Account.
Section 71 of the Companies Act 2013 covers the requirement of creating a debenture redemption reserve
account. Section 71 states as follows:
(1) Where a company issues debentures under this section, it should create a debenture redemption
reserve account out of its profits which are available for distribution of dividend every year until such
debentures are redeemed.
ADEQUACY OF DEBENTURE REDEMPTION RESERVE (DRR)
Ministry of Corporate Affairs has made the following clarification on adequacy of Debenture Redemption
Reserve (DRR) vide Circular no. 04/2013 dated 11 February, 2013.
As 31st December, 20X1 was the date for redemption of the 2000 debentures, the company started
buying own debentures and made the following purchases in the open market :
1-2-20X1 2,000 debentures at ` 98 cum-interest.
1-6-20X1 2,000 debentures at ` 99 ex-interest.
Half yearly interest is due on the debentures on the 30th June and 31st December in the case of both
the companies.
The debentures are due for redemption on 1st July, 20X1. The terms of issue of debentures provided
that they were redeemable at a premium 5% and also conferred option to the debenture holders to
convert 20% of their holding into equity shares at a predetermined price of ` 15.75 per share and the
payment in cash.
Assuming that :
(i) except for 100 debenture holders holding totally 25,000 debentures, the rest of them exercised
the option for maximum conversion.
(ii) the investments realise ` 44 lakhs on sale; and
(iii) all the transactions are put through, without any lag, on 1st July, 20X1.
Redraft the balance sheet of the company as on 1st July, 20X1 after giving effect to the redemption.
Show your calculations in respect of the number of equity shares to be allotted and the cash payment
necessary.
INTRODUCTION
Investments are assets held by an enterprise for earning income by way of dividends, interest and rentals,
for capital appreciation, or for other benefits to the investing enterprise. Investment Accounting is done as
per AS 13.
The investments are classified into two categories as per AS 13, viz., Current Investments and Long-term
Investments. A current Investment is an investment that is by its nature readily realisable and is intended to
be held for not more than one year from the date on which such investment is made. The carrying amount for
current investments is the lower of cost and fair value. Any reduction to fair value and any reversals of such
reductions are included in the statement of profit and loss. A long-term investment is an investment other
than a current investment. Long term investments are usually carried at cost. However, when there is a
decline, other than temporary, in the value of a long term investment, the carrying amount is reduced to
recognise the decline. The reduction in carrying amount is charged to the statement of profit and loss.
THEORY:
1. AS 13, Accounting for Investments which deals with accounting for investments in the financial
statements and related disclosure requirements except:
(i) Bases for recognition of interest, dividends and rentals earned on investments
(ii) operating or financial leases
(iii) investment of retirement benefit plans and life insurance enterprises
(iv) mutual funds and banking company investments etc.
(v) Assets held as Stock-in-trade are not 'Investments'
2. The investments are classified into two categories as per AS 13, viz., Current Investments and Long-
term Investments. Current Investments: A current Investment is an investment that is by its nature
readily realisable and is intended to be held for not more than one year from the date on which such
investment is made.
The carrying amount for current investments is the lower of cost and fair value.
Long-term Investments: A long-term investment is an investment other than a current investment. o
Long term investments are usually carried at cost. o If there is a decline, other than temporary, in the
value of a long term investment; the carrying amount is reduced to recognise the decline. The reduction
in carrying amount is charged to the statement of profit and loss.
3. The cost of an investment includes acquisition charges such as brokerage, fees and duties. If an
investment is acquired, or partly acquired, by the issue of shares or other securities, the acquisition
Interest on 12% Bonds was duly received on due dates. Prepare separate investment account for 12%
Bonds, Equity Shares of Alpha Limited and Equity Shares of Beeta Limited in the books of Mr. Brown for
the year ended on 31st March, 20X2.
THEORETICAL QUESTIONS
1. How will you classify the investments as per AS 13? Explain in Brief.
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CHAPTER OVERVIEW
Actual loss (provided the goods are Actual loss (subject to goods are being
fully insured fully insured and whether average
clause is applicable or not)
222 Chapter 8 : Insurance Claims for Loss of Stock and Loss of Profit
2. MEANING OF FIRE
For purposes of insurance, fire means:
1. Fire (whether resulting from explosion or otherwise) not occasioned or happening through:
(a) Its own spontaneous fomentation or heating or its undergoing any process involving the application
of heat;
(b) Earthquake, subterraneans fire, riot, civil commotion, war, invasion act of foreign enemy, hostilities
(whether war be declared or not), civil war, rebellion, revolution, insurrection, military or usurped
power.
2. Lightning.
3. Explosion, not occasioned or happening through any of the perils specified in 1 (a) above.
(i) of boilers used for domestic purposes only;
(ii) of any other boilers or economisers on the premises;
(iii) in a building not being any part of any gas works or gas for domestic purposes or used for lighting
or heating the building.
The policy of insurance can be made to cover any of the excepted perils by agreement and payment of extra
premium, if any. Damage may also be covered if caused by storm or tempest, flood, escape of water, impact
and breakdown of machinery, etc., again by agreement with the insurer.
Usually, fire policies covering stock or other assets do not cover explosion of boilers used for domestic
purposes or other boilers or economizers in the premises but policies in respect of profit cover such
explosions.
3. CLAIM FOR LOSS OF STOCK
Fire insurance being a contract of indemnity, a claim can be lodged only for the actual amount of the loss, not
exceeding the insured value. In dealing with problems requiring determination of the claim the following
point must be noted:
a. Total Loss : If the goods are totally destroyed, the amount of claim is equal to the actual loss, provided
the goods are fully insured. However, in case of under insurance (i.e. insurable value of stock insured
is more than the sum insured), the amount of claim is restricted to the policy amount.
b. Partial Loss: If the goods are partially destroyed, the amount of claim is equal to the actual loss provided
the goods are fully insured. However in case of under insurance, the amount of claim will depend upon
the nature of insurance policy as follows:
I) Without Average clause:- Claim is equal to the lower of actual loss or the sum insured.
II) With Average Clause:- Amount of claim for loss of stock is proportionately reduced, considering
the ratio of policy amount (i.e. insured amount) to the value of stock as on the date of fire (i.e
insurable amount) as shown below:
Amount of claim = Loss of stock x sum insured / Insurable amount (Total Cost)
One should note that the average clause applies only where the insured value is less than the total cost
and not when goods are fully insured.
3.1 Relevant points
(i) Where stock records are maintained and such records are not destroyed by fire, the value of the stock
as at the date of the fire can be easily arrived at.
(ii) Where either stock records are not available or where they are destroyed by the fire the value of stock
224 Chapter 8 : Insurance Claims for Loss of Stock and Loss of Profit
Net Profit is the net trading profit (exclusive of all capital receipts and accretion and all outlay properly
chargeable to capital) resulting from the business of the Insured at the premises after due provision has
been made for all standing and other charges including depreciation.
Insured Standing Charges: Interest on Debentures, Mortgage Loans and Bank Overdrafts, Rent, Rates and
Taxes (other than taxes which form part of net profit) Salaries of Permanent Staff and Wages to Skilled
Employees, Boarding and Lodging of resident Directors and/or Manager, Directors’ Fees, Unspecified
Standing Charges [not exceeding 5% (five per cent) of the amount recoverable in respect of Specified
Standing Charges].
2. Conditions included in a Loss of Profit Insurance Policy
Insurance policies covering loss of profit contain the following conditions usually:
Rate of Gross Profit: The rate of Gross Profit earned on turnover during the financial year immediately
before the date of damage.
Annual Turnover: The turnover during the twelve months immediately before the damage.
Standard Turnover: The turnover during that period in the twelve months immediately before the date of
damage which corresponds with the Indemnity Period to which such adjustment shall be made as may be
necessary to provide for the trend of the business and for variations in or special circumstances affecting the
business either before or after the damage or which would have affected the business had the damage not
occurred, so that the figures thus adjusted shall represent, as nearly as may be reasonably practicable the
results which but for the damage would have been obtained during the relative period after damage.
Indemnity Period: The period beginning with the occurrence of the damage and ending not later than
twelve months thereafter during which the results of the business shall be affected in consequence of the
damage.
Memo 1: If during the indemnity period goods shall be sold or services shall be rendered elsewhere than at
the premises for the benefit of the business either by the insured or by others on the Insured’s behalf, the
money paid or payable in respect of such sales or service shall be brought into account in arriving at the
turnover during the indemnity period.
Memo 2: If any standing charges of the business be not insured by this policy then in computing the amount
recoverable hereunder as increase in cost of workings only that proportion of the additional expenditure
shall be brought into account which the sum of the Net Profit and the insured Standing Charges bear to the
sum of the Net Profit and all standing charges.
Amount recoverable as increase in cost of workings = Additional expenditure x
[(Net Profit + Insured Standing Charges)/ (Net Profit + All Standing Charges)]
Memo 3: This insurance does not cover loss occasioned by or happening through or in consequence of
destruction of or damage to a dynamo motor, transformer, rectifier or any part of an electrical installation
resulting from electric currents, however, arising.
The student should note the following:
(i) The word ‘turnover’ used above may be replaced by any other term denoting the basis for arriving at
the loss of profit e.g., output.
(ii) Insured standing charges may include additional items, by agreement with the insurer.
(iii) Net profit means profit before income tax based on profit.
(iv) Depending upon the nature of business, the indemnity period may extend beyond 12 months (it may
be as long as 6 years). Indemnity period shall not be confused with the period of insurance which
cannot be more than one year.
226 Chapter 8 : Insurance Claims for Loss of Stock and Loss of Profit
CLASS WORK
Q-1 The premises of a trading firm caught fire on 22.10. 2010 and the stock was damaged. The firm had made
up accounts to 31st December.
`
Stock on 1.1. 2010 13,272
Stock on 1.1. 2009 9,614
Purchase during 2009 45,258
Purchase from 1.1. 2010 to the date of fire 34,827
Sales from 1.1. 2010 to the date of fire 49,170
Sales during 2009 52,000
Additional information :
(a) In April 2010 goods which cost ` 1,000 were given away for advertising purposes, no entries being
made in the books.
(b) During 2010, a clerk had misappropriated unrecorded cash sales. It is estimated that the defalcation
amounted to ` 400.
(c) The rate of gross profit is constant.
From the above information, make an estimate of the stock on the date of fire.
Q-2 The following information is available from the books of DHG Ltd. whose premises were destroyed by
a fire on 31st May, 2010.
`
Stock (1.1.2009) 90,000
Purchases (1.1.2009 to 31.12.2009) 4,24,000
Sales (1.1.2009 to 31.12.2009) 5,00,000
Stock (31.12.2009) 1,32,000
The stock on 1st January, 2009 it was valued at 10% below cost. However this practice was changed and
the stock on 31st December, 2009 was valued at 10% above cost. After the accounts of 2009 were
audited, it was found that purchase of office equipments of ` 4,000 was wrongly included in the figure
of purchases given above.
The information for the period 1st January, 2010 to 31st May 2010 are - Purchases - ` 3,00,000; Sales
(exluding goods sent on sale or return basis) ` 4,00,000. On 31st May, 2010, goods of the cost price of `
40,000 were lying with customers on sale or return basis. On the date of fire, customers had approved
half the value of goods sent. The gross profit margin charged on the above is the normal margin the
228 Chapter 8 : Insurance Claims for Loss of Stock and Loss of Profit
`
Stock on 1.1.2009 38,400
Purchase during 2009 1,60,000
Sales during 2009 2,02,600
Stock on 31.12.2009 31,800
Purchases from 1.1.2010 to the date of fire 54,000
Sales from 1.1.2010 to the date of fire 61,400
An item of stock purchased in 2008 at a cost of ` 10,000 was valued at ` 6,000 on 31.12.2008. Half of this
stock was sold in 2009 for ` 2,600. The remaining was valued at ` 2,400 on 31st December 2009. One
fourth of the original stock was sold in March 2010 for ` 1,400 the remaining stock was considered to be
worth 60% of the original cost. The salvaged stock ` 12,000. The amount of the policy was ` 30,000 and
there was an average clause in the policy.
Q-6 On the 25th June 2010, a fire broke out in the premises of X company Ltd. All the stocks were destroyed
except some which were partly damaged and sold subsequently for ` 7,900. From the following
particulars ascertain the claim to be submitted to the Insurance company assuming that the policy was
for ` 20,000.
`
Stock on 1-1-2010 24,400
Purchases upto the date of fire 73,000
Sales upto the date of fire 97,000
Purchases during the year 2009 1,53,500
Sales during the year 2009 1,96,500
Stock as on 1-1-2009 18,500
The stock as on 1-1-2009 included a special item valued ` 5,600 which was sold at a profit of 20% on
sales. A part of this item was sold in 2009. While the balance was sold on 3rd May 2010 for ` 2,500.
Except for this item, the gross profit on all other items was at an uniform rate throughtout the period.
Q-7 From the following information provided by Tushar Tulsain, compute the amount of claim under the loss
of profit policy :
Sum Insured ` 7,50,000
Indemnity Period 6 Months
Reason for Damage Due to fire Accident on 1.3.2010
Period of interruption 1.3.2010. to 31.7.2010
Accounting Year Calender Year
Net Profit ` 2,40,000
Turnover For the year ended 31st December,2009 ` 40,00,000
Turnover For the period from 1.3.2009 to 28.2.2010 ` 44,00,000
Turnover For the period from 1.3.2009 to 31.7.2009 ` 20,00,000
Turnover For the period from the 1.3.2010 to 31.7.2010 ` 8,00,000
Standing Charges (out of which ` 80,000 have not been insured) ` 5,60,000
230 Chapter 8 : Insurance Claims for Loss of Stock and Loss of Profit
Q-10 Sony Ltd.’s Trading and Profit and Loss Account for the year ended 31st December, 2009 were as follows :
Trading and Profit and Loss Account for the year ended 31.12.2009
` `
Opening Stock 20,000 Sales 10,00,000
Purchases 6,50,000 Closing Stock 90,000
Manufacturing Expenses 1,70,000
Gross Profit 2,50,000 ________
10,90,000 10,90,000
Administrative Expenses 80,000 By Gross Profit 2,50,000
Selling Expenses 20,000
Finance Charges 1,00,000
Net Profit 50,000
2,50,000 2,50,000
The company had taken out a fire policy for ` 3,00,000 and a Loss of Profits for ` 1,00,000 having an
indemnity period of 6 months. A fire occurred on 1.4.10 at the premises and the entire stock were gutted
with nil salvage value. The net quarter sales i.e. 1.4.10 to 30.6.10 was severely affected.
The following are the other information :
Sales during the period 1.1.10 to 31.3.10 2,50,000
Purchase during the period 1.1.10 to 31.3.10 3,00,000
Manufacturing Expenses 1.1.10 to 31.3.10 70,000
Sales during the period 1.4.10 to 30.6.10 87,500
Standing Charges Insurance 50,000
Additional expenses incurred after fire 60,000
The general trend of the industry shows an increase of sales by 15% and decrease in GP by 5% due to
increased costs.
Ascertain the claim for stock and Loss of Profits.
q
1. Claim for Claim for loss of stock can be studied under two heads:
Loss of a. Total Loss:
Stock Amount of claim = Actual loss (If goods are fully insured but the amount
of claim is restricted to the policy amount).
b. Partial Loss:
(i) Without Average clause:-
Claim =Lower of actual Loss or Sum Insured
(ii) With Average Clause:-
Claim = Loss of stock x sum insured / Insurable amount (Total Cost)
2. Claim for The Loss of Profit Policy normally covers the following items:
Loss of (1) Loss of net profit
Profit (2) Standing charges.
(3) Any increased cost of working
Gross Profit Net profit +Insured Standing charges OR
Insured Standing charges – Net Trading Loss (If any) X Insured Standing charges/
All standing charges of business
Net Profit The net trading profit (exclusive of all capital) receipts and accretion and all
outlay properly (chargeable to capital) resulting from the business of the
Insured at the premises after due provision has been made for all standing
and other charges including depreciation.
Insured Interest on Debentures, Mortgage Loans and Bank Overdrafts,Rent, Rates and
Standing Taxes (other than taxes which form part of net profit) Salaries of Permanent
Charges Staff and Wages to Skilled Employees, Boarding and Lodging of resident
Directors and/or Manager, Directors’ Fees, Unspecified Standing Charges.
Rate of Gross The rate of Gross Profit earned on turnover during the financial year
Profit immediately before the date of damage.
Annual The turnover during the twelve months immediately before the damage.
Turnover
(adjusted)
Standard The turnover during that period in the twelve months immediately before the
Turnover date of damage which corresponds with the Indemnity Period.
Indemnity The period beginning with the occurrence of the damage and ending not
Period later than twelve months.
The insurance for Loss of Profit is limited to loss of gross profit due to
(i) Reduction in turnover, and
(ii) Increase in the cost of working.
232 Chapter 8 : Insurance Claims for Loss of Stock and Loss of Profit
MULTIPLE CHOICE QUESTIONS
1. Goods costing `1,00,000 were insured for `50,000. Out of these goods, ¾ are destroyed by fire. The
amount of claim with average clause will be
(a) `37,500. (b) `50,000. (c) `75,000.
2. Fire insurance claim will be limited to the
(a) actual loss suffered even though the insured value of the goods may be higher.
(b) proportion of the loss as the insured value bears to the total cost.
(c) both (a) and (b).
3. The Loss of Profit Policy normally covers the following items :
(a) Loss of net profit and Standing charges.
(b) Any increased cost of working e.g., renting of temporary premises.
(c) Both (a) and (b).
4. A plant worth `40,000 has been insured for `30,000, the loss on account of fire is ` 25,000. the insurance
company will bear the loss to the extent of
(a) `18,750. (b) `25,000. (c) `30,000.
5. If the policy is without average clause, a claim for loss of profit will be
(a) Sum insured.
(b) Higher of actual loss and sum insured.
(c) Lower of actual loss and sum insured
6. Standard turnover is
(a) Turnover during the last 12 months immediately before damage.
(b) Turnover during that period in 12 months immediately before damage which corresponds with
indemnity period.
(c) Turnover during the last accounting period immediately before damage.
7. Gross profit can be calculated as
(a) Net profit +Insured standing charges.
(b) Net profit - Insured standing charges.
(c) Net profit + standing charges.
8. The cost of salvaged stock must be
(a) Credited to trading account.
(b) Debited to salvaged stock account.
(c) Both (a) and (b).
THEORETICAL QUESTIONS
1. Explain the significance of ‘Average Clause’ in a fire insurance policy.
2. Define the following terms:
(i) Indemnity Period; (ii) Standard Turnover
Q-11 On 1st April, 2008 the stock of Shri Ramesh was destroyed by fire but sufficient records were saved
from which following particulars were ascertained:
`
Stock at cost-1st January, 2007 73,500
Stock at cost-31st December, 2007 79,600
Purchases-year ended 31st December, 2007 3,98,000
Sales-year ended 31st December, 2007 4,87,000
Purchases-1-1-2008 to 31-3-2008 1,62,000
Sales-1-1-2008 to 31-3-2008 2,31,200
In valuing the stock for the Balance Sheet at 31st December, 2007 ` 2,300 had been written off on
certain stock which was a poor selling line having the cost ` 6,900. A portion of these goods were sold
in March, 2008 at loss of ` 250 on original cost of ` 3450. The remainder of this stock was now estimated
to be worth its original cost. Subject to the above exception, gross profit had remained at a uniform
rate throughout the year.
The value of stock salvaged was ` 5,800. The policy was for ` 50,000 and was subject to the average
clause. Work out the amount of the claim of loss by fire.
Hint : Amount of Claim = 45,004
Q-12 A fire occurred in the business premises of M/S Poonawalla on 15th October 2005. From the following
particulars ascertain the loss of stock and claim for insurance.
`
Stock as on 1-1-2004 30,600
Purchases from 1-1-2004 to 31-12-2004 1,22,000
Sales from 1-1-2004 to 3 1-12-2004 1,80,000
Stock as on 3 1-12-2004 27,000
Purchases from 1-1-2005 to 14-10-2005 1,47,000
Sales from 1-1-2005 to 14 -10-2005 1,50,000
The stock were always valued at 90 percent of cost. The stock saved from fire was worth ` 18,000. The
amount of policy was ` 63,000. There was average clause in policy.
Hint : Amount of Claim = 47,250.
234 Chapter 8 : Insurance Claims for Loss of Stock and Loss of Profit
Q-13 The Premises of M/s New and Company were gutted by fire on 31st Aug. 2004 and some stock was found
badly damaged. The accounts of the firm are closed on 31st Dec. each year. On 31st Dec. 2003 stock was
valued at cost at ` 26,544 against ` 19,228 as on 31st Dec. 2002. Purchases and sales were as follows:
Full year 2003 Period upto 31.8.2004
Purchases 90,516 69,654
Sales 1,04,000 98,340
In addition to above you collect the following information:
(1) Some time in May 2004 goods costing ` 10,000 were distributed as a part of advertisement campaign
in support thereof no entry appears to have been passed in the books.
(2) During 2004 cash sales of ` 1,190 were misappropriated and these were not recorded in the
books. Ascertain the estimated value of stock at the date of fire assuming that the rate of gross
profit was constant.
Hint : Amount of Claim 6574.
Q-14 From the following particulars you are required to prepare a statement of claim for X, Y, whose business
premises were partly destroyed by fire on 30th September, 2006. He prepares account on 30th June
each year.
`
Stock on 30th June, 2006 34,017
Purchases from 1st July, 2006 to 30th September, 2006 80,000
Wages from 1st July, 2006 to 30th September, 2006 30,500
Sales from 1St July, 2006 to 30th September, 2006 1,50,000
Average percentage of gross profit to cost is 16 2/3 %. Stock to the value of ` 10,000 was salvaged policy
was for ` 8,000. Claim was subject to average clause.
Following additional information is available :—
(i) Purchases include purchase of plant of ` 8,000.
(ii) Plant was installed in August and firm’s own men had spent time amounting to ` 500 which was
included in wages.
(iii) Stock in the beginning was calculated at 15% less than cost. you are required to calculate the claim
for the loss of stock.
Hint : Amount of claim - ` 2,052
Q-15 On 1st July 2006 a fire took place in the godown of Ram Kumar which destroyed all Stocks. Calculate the
amount of insurance claim for the stock from the following details:
`
Sales in 2004 2,00,000
Gross profit in 2004 60,000
Sales in 2005 3,00,000
Gross profit 2005 60,000
Stock as on 1-1-2006 2,70,000
Purchases from 1-1-2006 to 30-6- 2006 4,00,000
Sales from 1-1-2006 to 30-6-2006 7,20,000
Navkar Institute | CA Intermediate | Paper 1 : Accounting 235
The following are also to be taken in to consideration:
(1) Stock as on 31st Dec. 2005 had been undervalued by 10%.
(2) Stock taking conducted in March 2006 had revealed that stocks costing ` 80,000 were lying in
damaged condition. 50% of these stocks had been sold in May 2006 at 50% of cost and the balance
were expected to be sold at 40% of cost.
(3) Amount of policy ` 1,50,000.
Hint : Amount of claim is `1,46,000.
Q-16 Ashish and Co. Ltd. suffered loss of stock due to fire on May 15 2003. From the following information
prepare a statement showing the claim to be lodged:
`
Stock on 1st January, 2002 45,400
Purchases during 2002 3,16,800
Sales during 2002 4,03,900
Closing stock on 31St December 2002 36,800
Purchases from 1st January 2003 to May 15,2003 81,000
Sales from 1st January 2003 May 15, 2003 92,100
An item of stock purchased in 2001 at a cost of ` 15,000 was valued at ` 9,000 on 31st December, 2001.
Half of this stock was sold in 2002 for ` 3,900, the remaining was valued at
` 3,600 on 31st December, 2002. One fourth of the ori iginal stock was sold in March 2003 for ` 2,100.
The remaining stock was considered to be worth 50% of the original cost. Salvaged stock was ` 15,000.
The amount of the policy was ` 40,000. There was an average clause in the policy.
Hint : Amount of Claim : ` 26,387
Q-17 The premises of a company were destroyed by fire on 15th June 2004. The records, however were saved
where from the following particulars were available.
`
Stock at Cost on 1.1.2003 30,000
Stock at cost on December 31, 2003 40,000
Purchases less return for the year ended December 31, 2003 2,00,000
Sales less return for the year ended December 31, 2003 2,50,000
Purchases less return from 1.1.2004 to 15.6.2004 85,000
Sales less return from 1.1.2004 to 15.6.2004 1,20,000
` 2,500 had been written off a certain stock which was poor selling line. While valuing the stock for the
balance sheet as at Dec. 31, 2003, the cost of such stock was ` 4,000. A portion of this stock was sold in
March 2004 at a loss of `500 on the original cost of ` 2,000. The balance of this stock is now estimated
to be worth the original cost. Excepting the above the gross profit had remained at a uniform rate
throughout.
Stock saved was ` 5,000. You are required to ascertain the amount of loss of stock which was to be
claimed from the insurance company. Amount of policy was ` 30,000.
236 Chapter 8 : Insurance Claims for Loss of Stock and Loss of Profit
30,000
Hint : Amount of Claim 36,625 x 31,625 = ` 25,904.
Q-18 Fire occurred in the premises of A & Co. on 1st September 2005 and stock of the value of ` 1,01,000 was
salvaged and the business books and records were saved. The following information was obtained.
`
Purchases for the year ended 31st March, 2005 6,80,000
Sales for the year ended 31st March, 2005 11,00,000
Purchases from April, 2005 to 1st Sept. 2005 2,50,000
Sales from 1st April 2005 to 1st Sept 2005 3,60,000
Stock on 31st March 2004 3,00,000
Stock on 31st March 2005 3,40,000
Further information is that the stock on 31st March 2005 was over - valued by ` 20,000. Calculate the
claim to be presented to the Insurance Company in respect of the loss. In April 2005 selling price was
lowered by 10%.
Hint : Colsing Stock = 3,30,000
Q-19 A fire occurred in the shop of M/s. Jambheshawar & Co. on August 20, 2004 From the following particulars,
calculate claim to be made by the trader:
`
(a) Stock on December 31, 2002
(Including stock purchased during the year at ` 4,000 valued at
` 2,000 because of poor selling price) 50,000
(b) Wages paid 2003 15,000
(Including, wages paid for the construction of a show room for which workers
of the factory worked ` 1,000. Manufacturing wages ` 750 were outstanding)
(c) Freight inwards 2003 2,050
(d) Purchases 2003 60,000
(Including purchases of furniture of ` 750 wrongly passed through the invoice book)
(e) Sales 2003 1,23,400
(Including sale of 1/4 of the stock at ` 400 which had a poor selling
line and which was valued at ` 2,000 on Dec. 31,2002)
(f) Stock on December 31, 2003 21,000
(Including remaining stock which had a poor selling line at the half value)
(g) Purchases upto August 20, 2004 71,400
(h) Sales up to August 20, 2004 71,450
(Including sale of the 1/3 remaining stock which had a poor selling line at ` 450)
The remaining stock which had a poor selling line, was considered at 60% of the original cost for the
purpose of claim. The salvage was ` 23,700. The firm had taken the policy of ` 20,000. There was an
average clause in the policy.
238 Chapter 8 : Insurance Claims for Loss of Stock and Loss of Profit
The company had taken out policies both against loss of stock and against loss of profit, the amounts
being ` 80,000 and `1,72,000. A fire occurred on 1st May, 2008 and as a result of which sales were
seriously affected for a period of 4 months. You are given the following further information:
(a) Purchases, wages and other manufacturing expenses for the first 4 months of 2008 were ` 1,00,000,
` 50,000 and ` 36,000 respectively.
(b) Sales for the same period were ` 2,40,000.
(c) Other sales figures were as follows :
`
From 1st January 2007 to 30th April, 2007 3,00,000
From 1st May 2007 to 31st August, 2007 3,60,000
From 1st May, 2008 to 31st August, 2008 60,000
(d) Due to rise in wages, gross profit during 2008 was expected to decline by 2% on sales.
(e) Additional expenses incurred during the period after fire amounted to ` 1,40,000. The amount of
the policy included ` 1,20,000 for expenses leaving ` 20,000 uncovered.
Ascertain the claim for stock and for loss of profit.
All workings should form part of your answers.
Hint : N.B.: On the amount of final claim, the average clause will not apply since the amount of the policy `
1,72,000 is higher than Gross Profit on annual turnover ` 1,28,000.
Q-22 Financial year ends on 31st December, 2002 with turnover of ` 2,00,000. Fire takes place on June 1,2003,
Period of interruption being 5 months (from 1st June, 2003 to Nov. 2003), Period of indemnity according
to policy-6 months.
Net profit for 2002 ` 12,000 and insured standing charges ` 24,000. Sum insured ` 42,240. Uninsured
standing charges ` 2000; Standard turnover i.e. for corresponding months of interruption (from 1st
June to 1st Nov.) in the year preceeding the fire. ` 75,000.
Turnover in the period of interruption ` 22,500. Annual turnover (for 1st June 2002 to 31st May, 2003 `
2,20,000.)
Additional expenses ` 4,000 with a saving of insured standing charges ` 1,500. But for this additional
expenditure, the turnover after the fire would have been only ` 12,500. The expenses on putting the
fire out were ` 500. During 2003 increase in turnover (both standard and annual) is expected to be 20%
and increase in G.P. rate is expected by 2%. Calculate amount of claim for loss of profit.
Hint : Amount of Claim = 11,700
Q-23 On 1st August, 2000, a fire occurred in the premises of ABC Ltd. The company has a loss of profit policy
for ` 12,00,000. Sales from 1st August, 1999 to 31st July, 2000 were ` 1 crore; the sales from 1st August,
1999 to 30th November 1999 being ` 30,00,000. During the indemnity period, which lasted four months,
sales amounted to ` 4,00,000 only. The company closes its books of account every year on 31st March.
The profit and loss account for the year ended 3 March, 2000 is given below:
Q-24 Raghwan Ltd. gives you the following. Trading and Profit and Loss Account for the year ending December
31, 2004:
Particulars ` Particulars `
To Opening Stock 25,000 By Sales 4,00,000
To Purchases 1,50,000 By Closing Stock 35,000
To Wages (` 10.000 for
skilled labour) 80,000
To Manufacturing Exp. 60,000
To Gross Profit 1,20,000 _______
4,35,000 4,35,000
To Office Expenses 30,000 By Gross Profit 1,20,000
To Advertising 8,000 By Interest on Securities 2,000
To Selling Exp. (fixed) 20,000
To Commission on sales 26,000
To Carriage outward 8,000
To Net Profit 30,000 _______
1,22,000 1,22,000
The Company had taken out a consequential loss policy for ` 1,00,000. Fire occurred on 1st May 2005 as
a result of which sales were seriously affected for a period of 4 months. You are given following further
information :—
(a) Sales figures were as follows: From 1st January 2004 to 30th April 2004 ` 1,50,000; From 1st May 2004
to 31st Aug, 2004 ` 1,80,000; From 1st May 2005 to 31st Aug. 2005 ` 30,000; From 1st January, 2005 to 30th
April 2005 ` 1,20,000; (b) Due to rise in material prices, net profit during 2005 was expected to decline
by 2% on sales (c) Standing charges to the extent of ` 4,000 were not insured.
240 Chapter 8 : Insurance Claims for Loss of Stock and Loss of Profit
Ascertain the claim for loss of profits.
Hint : Since amount of policy is more than the amount of coverage required, average clause shall not be
applicable. Hence amount of claim = ` 23,940.
Q-25 In the dislocation period (4 months) covered by the consequential loss policy (` 1,25,000), sales of `
1,00,000 was obtained out of which ` 40,000 sale was received from another premises hired for this
period at a rent of ` 1,000 per month on the temporary basis. However, there was saving in insured
standing charges during this period @ ` 6,000 p.a.
Sales in the same period of last year amounted to ` 3,00,000 and an upward trend of 10% in the
business was expected in the current year. Sale for the period of 12 months immediately preceding the
date of fire was ` 10,00,000.
The following information is available from the last years profit and loss account:
Sales ` 9,00,000
Net Profit ` 1,00,000
Standing charges (out of which ` 20,000 uninsured) ` 1,00,000
You are require to calculate the amount of claim.
Hints :
242 Chapter 8 : Insurance Claims for Loss of Stock and Loss of Profit
Chapter 9
Hire Purchase
And Installment
Sale Transaction
Learning Objectives
After completing this chapter, you will be able to:
INTRODUCTION
When a person wants to acquire an asset, but is not sure how to make payment within a stipulated period of
time he may pay in instalments if the vendor agrees. This enables the purchaser to use the asset while paying
for it in instalments over an agreed period of time. This type of a business deal is known as hire purchase
transaction. Here, the customer pays the entire amount either in monthly or quarterly or yearly instalments,
while the asset remains the property of the seller until the buyer squares up his entire liability. For the seller,
the agreed instalments include his interest on the assets given on credit to the purchaser. Therefore, when
the total amount (being paid in instalments over a period of time) is certainly higher than the cash down
price of the asset because of interest charges. Obviously, both the parties gain in the bargain. By virtue of
this, the purchaser has the right of immediate use of the asset without making immediate payment for the
asset, by this, he gets both credit and product from the same seller. From seller’s view point, he derives the
benefits by way of increase in sales and also he recovers his own cost of credit.
THEORY:
Under the Hire Purchase System, the Hire Purchaser gets possession of the goods at the outset and can use
it, while paying for it in instalments over a specified period of time as per the agreement. However, the
ownership of the goods remains with the Hire Vendor until the hire purchaser has paid all the instalments.
Each instalment paid by the hire purchaser is treated as hire charges for using the asset. In case he fails to pay
any of the instalments (even the last one) the hire vendor has the right to take back his goods without
compensating the buyer, i.e., the hire vendor is not going to pay back a part or whole of the amount received
through instalments till the date of default from the buyer.
Terms:
Hire Vendor : Hire vendor is a person who delivers the goods along with its possession to the hire purchaser
under a hire purchase agreement.
Hire Purchaser : Hire purchaser is a person who obtains the goods and rights to use the same from hire
vendor under a hire purchase agreement.
Cash Price: Cash price is the amount to be paid by the buyer on outright purchase in cash.
Down Payment : Down payment is the initial payment made to the hire vendor by the hire purchaser at the
time of entering into a hire purchase agreement.
Hire Purchase Instalment : Hire purchase instalment is the amount which the hire purchaser has to pay after
a regular interval upto certain period as specified in the agreement to obtain the ownership of the asset
purchased (on payment of the last installment) under a hire purchase agreement. It comprises of principal
amount and the interest on the unpaid amount.
1. The amount paid at the time of entering the hire-purchase transaction for the goods purchased is
known as
(a) Cash price (b) Down payment (c) First instalment
2. Total interest on hire purchased goods is the difference between
(a) Hire purchase price and cash price
(b) Hire purchase price and down payment
(c) Cash price and first instalment
3. Depreciation on hire purchased asset is claimed by
(a) Hire vendor
(b) Hire purchaser
(c) Either the hire vendor or the hire purchaser as per the agreement between them
4. Under instalment payment system, ownership of goods
(a) is transferred at the time of payment of last instalment
(b) is not transferred
(c) is transferred at the time of signing the contract.
5. The hire purchaser records the asset at its
(a) Hire purchase price
(b) Amount paid to the vendor till date
(c) Cash price
6. The ownership of goods purchased under hire purchase is transferred only when
(a) Down payment is paid
(b) outstanding balance is paid in full.
(c) Cash price and first installment is paid
7. Hire purchase price is
(a) Cash price
(b) Interest on unpaid installments.
(c) Both (a) and (b).
THEORETICAL QUESTIONS
1. What is meant by Hire purchase transactions? What are the specific features of hire purchase
transactions?
2. What are the differences between Hire Purchase and Instalment System?
Q-16 Asha purchased a truck on hire purchase system. As per terms she is required to pay ` 70,000 down, `
53,000 at the end of first year, ` 49,000 at the end of second year and ` 55,000 at the end of third year.
Interest is charged @ 10% p.a.
You are required to calculate the total cash price of the truck and the interest paid with each instalment.
Solution
Rate of interest 10 1
(1) Ratio of interest and amount due = = =
100 + Rate of interest 110 11
(2) Calculation of Interest and Cash Price
No. of Amount due at the Interest Cash price
instalments time of instalment
[1] [2] [3] [4]
3rd 55,000 1/11 of ` 55,000 = ` 5,000 50,000
2nd *99,000 1/11 of ` 99,000 = ` 9,000 90,000
1st **1,43,000 1/11of ` 1,43,000 = ` 13,000 1,30,000
Total cash price = ` 1,30,000+ 70,000 (down payment) = ` 2,00,000.
*` 50,000 + 2nd instalment of ` 49,000 = ` 99,000.
** ` 90,000 + 1st instalment of ` 53,000 = ` 1,43,000.
Q-17 A acquired on 1st January, 20X1 a machine under a Hire-Purchase agreement which provides for 5 half-
yearly instalments of ‘ 6,000 each, the first instalment being due on 1st July, 20X1. Assuming that the
applicable rate of interest is 10 per cent per annum, calculate the cash value of the machine. All
working should form part of the answer.
(1 +r)n -1
Cash price = Annual instalment ×
r(1 +r)n
REPOSSESSION OF GOOD
Q-20 X Ltd. purchased 3 milk vans from Super Motors costing ` 75,000 each on hire purchase system. Payment
was to be made: ` 45,000 down and the remainder in 3 equal instalments together with interest @ 9%.
X Ltd. writes off depreciation @ 20% on the diminishing balance. It paid the instalment at the end of
the 1st year but could not pay the next. Super Motor agreed to leave one milk van with the purchaser,
adjusting the value of the other two milk vans against the amount due. The milk vans were valued on
the basis of 30% depreciation annually on written down value basis. X Ltd. settled the seller’s dues
after three months.
You are required to give necessary journal entries and the relevant accounts in the books of X Ltd.
Solution
In the Books of X Ltd.
Journal Entries
Dr. (`) Cr. (`)
I Year
Milk Vans purchased:
Milk Vans A/c Dr. 2,25,000
To Vendor A/c 2,25,000
On down payment:
Vendor A/c Dr. 45,000
To Bank 45,000
I Year end
Interest A/c (` 1,80,000 @ 9%) Dr. 16,200
To Vendor A/c 16,200
Vendor A/c Dr. 76,200
To Bank A/c (60,000 + 16,200) 76,200
Depreciation @ 20% Depreciation A/c Dr. 45,000
To Milk Vans A/c 45,000
Proft & Loss A/c Dr. 61,200
To Depreciation 45,000
To interest A/c 16,200
II Year end
Depreciation @ 20%
Depreciation A/c Dr. 36,000
To Milk Vans A/c 36,000
Interest A/c Dr. 10,800
(1,20,000 @ 9%)
To Vendor A/c 10,800
5 1
Note: (1) Interest is payable @ 5% p.a. Therefore, the ratio of interest and amount due = =
105 21
(2) Calculation of Interest and Cash Price
No. of instal- Amount due at the time of instalment Interest Cash price
ments [1 ] [2] [3] ( 2 - 3]
4th 28,200 1/21 of ` 28,200 = ` 1,343 26,857
3rd (26,857 + 28,200) 55,057 1 /21 of ` 55,057 = ` 2,622 52,435
2nd (52,435 + 28,200) 80,635 1/21 of ` 80,635 = ` 3,840 76,795
1st (76,795 + 28,200)1,04.995 1/21 of ` 1,04,995 = *` 4,995 1,00,000
Dr. An Extract of Profit and Loss Account of Real Aid Ltd. Cr.
Particulars ` P Particulars ` P
To Loss on valuation of goods By interest on H.P. Sales 103.82
repossessed 213.82 By Hire Purchase Goods
Repossessed A/c (Profit) 100.00
Calculation of agreed value of 2 personal computers taken away by Nikki Infotech Ltd.
Original cost of 2 PCs = ` 60,000
Less 35% of ` 60,000 = ` 21,000
Agreed value of the 2 PCs on 31-12-2001 = ` 39,000
Calculation of written down value of the 2 PCs left with Chetan.
Original cost of 2 PCs = ` 60,000
Less Depreciation for 2000 (15% of 60,000) = ` 9,000
WDV of 2 PCs on 1-1-2001 = 51,000
Less Depreciation for 2001 (15% of 60,000) = ` 9,000
WDV of 2 PCs on 31-12-2001 ` 42,000
INTRODUCTION
When business consists of several activities/functions, the management is usually interested to know the
profit or loss of each function/activity separately to examine the efficiency and effectiveness of each such
function. Each function or activity is designated as department. With the help of departmental accounting,
the management can achieve the following objectives.
1. It can evaluate the performance of each department. This can help the management to take decision as
to whether to continue such department or that is to be outsourced.
2. Can check the growth potential of the department.
3. It can justify whether the investment generates adequate return or not.
4. It can help to measure the efficiency of each departmental manager which in turn can be the base for
awards or incentives.
5. It can help for better and effective planning and control of the organisation as a whole.
ALLOCATION OF OVERHEADS
Q-1 M/s Omega is a departmental stores having three departments X, Y and Z. The manager of each
department is entitled to a commission of 10% of the net profit of the department besides their annual
salary of ` 3,000 each. The information regarding three departments for the year ended 30th June, 2010
are given below :
X Y Z
` ` `
Opening stock 72,000 48,000 40,000
Purchases 2,64,000 1,76,000 88,000
Debtors at end 15,000 10,000 10,000
Sales 3,60,000 2,70,000 1,80,000
Closing stock 90,000 35,000 42,000
Floor space occupied by each
department (In Sq. ft.) 3,000 2,500 2,000
Number of employees in each Dept. 25 20 15
The balance of other revenue items in the books for the year and the basis of thier allocation amongst
three departments are given below :
Items Amount Basis
Carriage Inwards 6,000 Purchase
Carriage Outwards 4,500 Turnover
Salaries including Manager’s salaries 81,000 No. of Employees
Advertisement 5,400 Turnover
Discount allowed 2,250 Turnover
Discount received 1,800 Purchases
Rent, Rates & Taxes 7,500 Floor space
occupied
Depreciation on furniture 1,500 Equal
Assets and liabilities on 30th June, were as follows:
Purchased goods have been transferred mutually at their respective departmental purchase cost and
finished goods at departmental market price an dthat 20% of the finished stock (closing) at each
department represented finished goods received from the other department.
Q-8 The Complex Ltd. Has three departments namely X, Y and Z. The following are the details:
X Y Z
` ` `
Opening stock of Finished goods 3,000 4,000 6,000
Raw materials consumed 8,000 12,000 ---
Wages 5,000 10,000 ---
Closing stock of finished goods 4,000 14,000 8,000
Sales ---- --- 34,000
Unrealised profits in opening stocks ----- 1,000 2,000
Stocks of each department is valued at cost to the department concerned, stocks of X department are
transferred to Y at a margin of 50% above cost, stocks of Y department are transferred to Z department
at a margin of 10% above cost. The other expenses were ` 16,000 which are to be allocated to all the
departments in the ratio of Gross Profits.
Prepare Departmental Trading and Departmental profit and loss account for the year ending 31st March,
2014.
Q-9 Department P sells goods to Department S at a profit of 25% on cost and to Department Q at a profit of
15% on cost. Department S sells goods to P and Q at a profit of 20% and 30% on sales respectively.
Department Q sells goods to P and S at 20% and 10% profit on cost respectively.
Departmental Managers are entitled to 10% commission on net profit subject to unrealized profit on
departmental sales being eliminated. Departmental profits after charging Manager's commission, but
before adjustment of unrealized profits are as below:
`
Department P 90,000
Department S 60,000
Department Q 45,000
Stock lying at different Departments at the end of the year are as below:
At the end of the year threre were some items in the stock of department Z, which had been marked
down to ` 2,300. With this exception, all goods marked down in 2014 were sold during the year at the
reduced prices.
4. During stock taking in Department Y, shortage of goods costing ` 240 was noticed. It was determined
that the loss should be regarded as irrecoverable.
5. The closing stock in both departments areto be value at cost for the purose of the annual accounts.
You are required to prepare for each department for the year ended 31st December 2014 :
(a) Trading Account (b) Memorandum Stock Account; and (c) Memorandum Mark-up account.
THEORETICAL QUESTIONS
1. Explain the significance of having departmental accounts for a business entity.
2. How will you allocate the following expenses among different departments?
(i) Rent, rates and taxes, repairs and maintenance, insurance of building.
(ii) Lighting and Heating expenses (e.g. energy expenses)
(iii) Selling expenses.
ALLOCATION OF OVERHEADS
Q-11 Z Ltd. has three departments and submits the following information for the year ending on 31st March,
2009:
A B C Total (`)
Purchases (units) 6,000 12,000 14,400
Purchases (Amount) 6,00,000
Sales (Units) 6,120 11,520 14,976
Selling Price (per unit) ` 40 45 50
Closing Stock (Units) 600 960 36
You are required to prepare departmental trading account of Z Ltd., assuming that the rate of profit on
sales is uniform in each case.
Ans. Rate of profit on sales is 60%. Cost per unit of A - Rs.16, B-Rs.18, C-Rs.20. Gross Profit : A-Rs.1,46,880, B-
Rs. 3,11,040, C - 4,49,280.
Q-12 Brahma Limited has three departments and submits the following information for the year ending on
31st March, 20X1:
Particulars A B C Total
Purchases (units) 5,000 10,000 15,000
Purchases (Amount) 8,40,000
Sales (units) 5,200 9,800 15,300
Selling price ( ` per unit) 40 45 50
Closing Stock (Units) 400 600 700
You are required to prepare departmental trading account of Brahma Limited assuming that the rate of
profit on sales is uniform in each case.
Ans. Rate of profit on sales is 40%. Cost per unit of A- Rs. 24, B-Rs.27, C-Rs.30. Gross profit: A- Rs. 83,200, B-
Rs. 1,76,400, C-3,06,000.
INTER DEPARTMENTAL TRANSFERS :
Q-13 Goods are transferred from Department P to Department Q at a price 50% above cost. If closing stock of
Department Q is ` 27,000, compute the amount of stock reserve.
Ans. Rs. 9,000
INTRODUCTION
A branch can be described as any establishment carrying on either the same or substantially the same
activity as that carried on by head office of the company. It must also be noted that the concept of a
branch means existence of a head office for there can be no branch without a head office - the principal
place of business.
Tutorial Notes
(i) Unless otherwise stated, goods sent to branch and branch stocks are deemed to be at invoice price.
(ii) Stock at Branch (at cost to branch) or Stock at Branch at its cost means Stock at invoice price. -
(b) STOCK AND DEBTORS METHOD
Meaning of Stock and Debtors Method
Under Stock and Debtors Method, in order to exercise more control over the working of a branch, the
head office usually maintains the following accounts:
Accounts Purpose
1. Branch Stock Account at Invoice To ascertain any shortage or surplus Price
2. Branch Debtors Account To ascertain the closing debtors
3. Branch Expenses Account To ascertain the total expenses incurred at
the Branch
4. Branch Adjustment Account To ascertain Gross Profit/Gross Loss
5. Branch Profit and Loss Account To ascertain Net Profit/Net Loss
6. Goods Sent to Branch Account To ascertain the net cost of goods sent to
branch
7. Branch Cash Account To record all cash transactions of the branch
8. Branch Fixed Assets Account To record all transactions relating to branch
fixed assets
294 Chapter 11 : Accounting for branches including foreign branches
Journal Entries under Stock and Debtors Method
1. When goods are supplied by the Branch Stock A/c Dr.
H.O/another branch To Goods sent to Branch A/c
2. When goods are returned by the Goods Sent to Branch A/c Dr.
Branch/or when goods are To Branch Stock A/c
supplied to another branch
3. When goods are returned by Goods sent to Branch A/c Dr.
branch Customers directly to H.O. To Debtors A/c
4. When goods are sold on credit Branch Debtors A/c Dr.
To Branch Stock A/c
5. When goods are sold for cash Branch Cash A/c Dr.
To Branch Stock A/c
6. When goods are returned by Branch Stock A/c Dr.
Branch Debtors to branch To Branch Debtors A/c
7. When cash is received by branch Branch Cash A/c Dr.
from its debtors To Branch Debtors A/c
8. To record bad debts, discount Branch Expenses A/c Dr.
allowed etc. To Branch Debtors A/c
9. To record branch Expenses paid Branch Expenses A/c Dr.
by branch To Branch Cash A/c
10. To record abnormal loss of Stock Branch Adjustment A/c Dr. [Loading]
(Due to abnormal factors like fire, Branch Profit & Loss a/c Dr. [Cost]
flood, theft etc.] To Branch Stock A/c Dr. [Invoice
Price]
11. To record normal loss of stock Branch Adjustment A/c Dr. [Invoice
(Due to the Inherent nature of Price]
the product] To Branch Stock A/c
12. To record surplus representing Branch Stock A/c Dr. Invoice Price
of selling price over invoice price To Branch Adjustment A/c
excess
13.(i)To remove loading from goods sent Goods sent to Branch A/c Dr. [Loading]
to branch To Branch Adjustment A/c
(ii) To remove loading from goods returns Branch adjustment A/c Dr.
by branch to H.O. To goods sent to Branch A/c (loading)
14. To remove loading from the Branch Adjustment A/c Dr. [Loading]
amount of closing stock To Stock Reserve A/c
18. To record net profit made by Branch Profit & Loss A/c Dr.
branch To General Profit & Loss A/c
Note: The entry will be reversed in case
of net loss.
19. To transfer the balance in Goods Goods Sent to Branch A/c Dr.
sent to Branch A/c To Trading A/c or Purchases A/c
Formats of Accounts opened Under Stock & Debtors method
In the books of H.O.
Dr. 1. Branch Stock Account Cr.
Particulars Rs Particulars Rs.
To Balance b/d xxx By Branch Cash A/c
To Goods Sent to Branch A/c xxx (cash Sales) xxx
To Branch Debtors A/c xxx By Branch Debtors A/c
(Return by Customers to (Credit Sales) xxx
Branch) By Goods Sent to Branch A/c
To Goods sent to Branch A/c xxx (Returns to H.O.) xxx
(T/f of goods from other By Goods Sent to Branch A/c
Branch) (T/f of Goods to other
To Branch Adjustment A/c xxx Branch) xxx
(Excess of Selling Price By Branch Adjustment A/c xxx
over Invoice Price) (Load on Abnormal Loss
(i.e. surplus) due to fire etc.)
By Branch Profit & Loss A/c xxx
(Cost of Abnormal Loss
due to fire etc.)
By Branch Adjustment A/c
(Normal Loss) xxx
By Balance c/d:
In hand xxx
In transit xxx
xxx xxx
296 Chapter 11 : Accounting for branches including foreign branches
Dr. 2. Branch Adjustment Account Cr.
Particulars Rs Particulars Rs
To Direct Expenses like wages etc. xxx By Stock Reserve A/c
To Goods sent to Branch A/c
(load to goods return) xxx
To Branch Stock A/c xxx (Load on Opening Stock) xxx
(Load on Abnormal Loss By Goods Sent to Branch A/c
due to Fire, etc.) (Load on Goods Sent) xxx
To Branch Stock A/c By Branch Stock A/c xxx
(Normal Loss) xxx (Excess of Selling Price
To Stock Reserve A/c (Load on over Invoice Price)
Closing Stock) xxx (Surplus)
To Gross Profit I/f to Branch
P and L A/c xxx
xxx xxx
Dr. 3. Branch Expenses Account Cr.
Particulars Rs Particulars Rs.
To Branch cash accounts
Salaries xxx By Branch Profit and Loss A/c xxx
Rent xxx
To Petty account
Petty Expenses xxx
To Branch Debtors account
Bad Debts xxx
Discount xxx
To Branch asset account
Depreciation xxx
xxx xxx
Dr. 4. Branch Profit and Loss Account Cr.
Particulars Rs Particulars Rs
To Branch Stock A/c (Cost of By Branch Adjustment A/c
Abnormal Loss) xxx (Gross Profit b/d) xxx
To Branch Expenses xxx By Branch Cash A/c (Insurance
*To Net Profit t/f to General claim received)/lnsurance
P & L A/c xxx Co. (claim admitted but not
received) xxx
*By Net Loss t/f to General
P & L A/c xxx
xxx xxx
*only one figure shall appear.
Navkar Institute | CA Intermediate | Paper 1 : Accounting 297
Dr. 5. Branch Debtors Account Cr.
Particulars Rs Particulars Rs
To Balance b/d xxx By Branch Cash A/c
To Branch Stock A/c (Cash paid to branch) xxx
(Credit Sales) xxx By Bills Receivable A/c xxx
To Bills Receivable A/c By Cash A/c (Cash paid
(B/A dishonoured) xxx directly to H.O) xxx
By Branch Stock A/c
(Returns to Branch) xxx
By Goods Sent to Branch A/c
(Goods returned directly
to H.O.) xxx
By Discount A/c xxx
By Bad Debts A/c xxx
___ By Balance c/d xxx
xxx xxx
Dr. 6. Goods Sent to Branch Account Cr.
Particulars Rs Particulars Rs
To Branch Stock A/c (Returns) xxx By Branch Stock A/c
To Branch Adjustment A/c xxx (goods sent) xxx
[Load on goods sent] By branch adjustment a/c
To Purchases/ Trading A/c xxx (load on goods return) xxx
___ ___
xxx xxx
Q-1 The ABC Ltd. invoiced goods to its branch at cost. Head office paid all the branch expenses (i.e. done
out of cash/cheque remitted by H.O. to Branch) except petty cash expenses which were met by the
branch. All the cash collected by the branch was banked on the same day to the credit of the Head
office. The following is a summary of the transactions entered into at the branch during the year ended
March 31, 2014.
` `
Stock, April 1 10,500 Bad debts 900
Debtors, April 1 18,900 Goods returned by
Customers 750
Petty cash, April 1 300 Salaries & Wages 9,300
Goods sent from H. O. 39,000 Rent & Rates 1,800
Goods returned from Branch 1,500 Sundry Expenses 1,200
Cash Sales 26,250 Cash received from
Credit Sales 42,600 Sundry Debtors 42,750
Allowances to customer 300 Stock, March 31 9,750
Discount to customers 2,100 Debtors, March 31 14,700
Petty cash, March 31 150
Find out the actual profit of branch for the financial year 2013-14 (a) Debtors Method, (b) Trading and
Profit and Loss Account Method, (c) Stock & Debtors System.
Q-2 A Ltd., Bombay has a branch in Surat to which office goods are invoiced at cost plus 331/3%. The branch
sells both for cash and on credit, Branch Expenses are paid from head office (i.e. done out of cash/
cheque remitted by H.O. to Branch) and the Branch has to remit all cash received into the Head Office
Bank Account.
Branch does not maintain any books of account, but sends weekly returns to the Head Office. Find out
actual profit for the financial year 2013-14
(a) Debtors metod
(b) Trading and profit & Loss account method
(c) Stock and Debtors system
Students may find a few further practical situations and it is hoped that they can pass entries on the basis
of accounting principles explained above.
The final result of these adjustments will be that so far as the Head Office is concerned, the branch will be
looked upon either as a debtor or creditor, as a debtor if the amount of its assets is in excess of its
liabilities and as a creditor if the position is reverse.
A debit balance in the Branch Account should always be equal to the net assets at the branch. The important
thing to remember, when independent sets of accounts are maintained, is that the branch and head
office books are connected with each other only through the medium of the Branch and the Head Office
Account which are converse of each other.; also when accounts of the branch and head office are
consolidated both the Branch and Head Office Accounts will be eliminated.
Q-6 The following is the Trial Balance of Meerut Branch as on 31st December, 2014 :
Dr. (`) Cr. (`) Dr. (`) Cr. (`)
Delhi head office 5,000 Debtors 3,700
Stock 1st January 2014 6,000 Creditors 1,850
Purchases 1,06,040 Rent 1,960
Goods received from H.O 19,000 Sundry office Expenses 1,470
Sales 1,38,000 Cash at bank 1,780
Goods supplied to H. O. 6,000 Furniture 6,000
Salaries 4,500 Depreciation on Furniture 400
Total 1,50,850 1,50,850
Stock at branch on 31st December, 2014 was valued at ` 7,700.
Meerut Branch Account in the head office books on 31st December, 2014 stood at ` 8,700 (debit balance).
On 28th December, 2014 the head office forwarded goods of the value of ` 3,700 to the branch where
they received on 3rd January, 2015.
(i) Prepare Trading and Profit and Loss Account of Meerut branch for the year ended 31st December,
2014 and its Balance Sheet as on that date.
(ii) Pass Journal Entries in the books of the head office to incorporate the above-mentioned trial
balance, and
(iii) Show Meerut branch Account as it would be closed in the head office’s ledger.
Q-7 Give Journal entries in the books of head office & Branch to adjust or rectify the following transactions.
(i) Provide depreciation @ 10% p.a. on furniture when Delhi Branch furniture account is also
maintained in the head office books.
Head office furniture is ` 60,000
Delhi branch furniture is ` 30,000
(ii) Delhi branch collected ` 1,000 from a customers of head office.
(iii) Delhi branch paid ` 4,000 for a machine purchased by the head office for the head office.
(iv) Goods sent by Head Office to the Branch ` 10,000, not yet received by the branch.
Q-8 M/s Patel & Co. commenced business on 1st April, 2013 Purchases were made exclusively by the head
office where the goods processed before sale. There was no loss or wastage.
Only processed goods received from head office were handled by the branch, and these goods are
charged to the branch at processed cost plus 10%.
All sales, whether by head office or the branch, were at uniform gross profit of 25% on their respective
cost.
306 Chapter 11 : Accounting for branches including foreign branches
The following Trial Balance as on 31st March, 2014 were extracted from the books:
HEAD OFFICE BRANCH
Dr. Cr. Dr. Cr.
` ` ` `
Capital 4,00,000
Purchases 19,93,350
Cost of processing 34,650
Sales 14,20,000 6,40,000
Goods sent to Branch 6,51,200
Goods received by Branch 6,40,200
Selling & General Expenses 2,24,000 27,000
Debtors/Creditors 2,55,000 4,03,350 92,000 2,400
Branch/ H. O.
Current A/c 2,05,550 1,50,800
Balance at Bank 1,62,000 34,000
Total 28,74,550 28,74,550 7,93,200 7,93,200
Further details are :
(i) Goods charged by head office to branch in March, 2014 at ` 11,000, were not received until April,
2014. A remittance of ` 43,750 from the branch to head office in March, 2014, is still in transits.
(ii) Stock-taking at Branch disclosed shortage of ` 5,000 (at selling price).
(iii) Cost of unprocessed goods at head office as on 31st March, 2014 was ` 1,80,000.
You are required to prepared in columnar form trading and Profit & Loss Account and Balance Sheet of
the Head Office, branch and the business as a whole.
FOREIGN BRANCHES
Foreign branches generally maintain independent and complete record of business transacted by them
in currency of the country in which they operate. Thus problems of incorporating balances of foreign
branches relate mainly to translation of foreign currency into Indian rupees. This is because exchange
rate of Indianrupee is not stable in relation to foreign currencies due to international demand and supply
effects on various currencies. The accounting principles which apply to inland branches also apply to a
foreign branch after converting the trial balance of the foreign branch in the Indian currency.
Accounting for Foreign Branches
For the purpose of accounting, AS 11 (revised 2003) classifies the foreign branches may be classified into
two types:
Integral Foreign Operation;
Non- Integral Foreign Operation.
Let us discuss these two types of foreign branches in detail.
Integral Foreign Operation (IFO)
It is a foreign operation, the activities of which are an integral part of those of the reporting enterprise.
The business of IFO is carried on as if it were an extension of the reporting enterprise’s operations.
Types of branches
- Dependent branches
- Independent branches
Based on accounting point of view, branches may be classified as follows:
- Branches in respect of which the whole of the accounting records are kept at the head office
- Branches which maintain independent accounting records, and
- Foreign Branches.
System of accounting
- Debtors System: under this system head office makes a branch account. Anything given to branch is
debited and anything received from branch would be credited.
- Branch trading and profit and loss account method/Final accounts method: Under this system head
office prepares (a) profit and loss account (b) branch account taking each branch as a separate entity.
Stock and debtors system: Under this system head office opens:
- Branch stock account
- Branch debtors account
- Branch asset account
- Branch expenses account
- Branch adjustment account
- Branch profit and loss account
Types of Foreign branches :
- Integral Foreign Operation (IFO): It is a foreign operation, the activities of which are an integral part of
those of the reporting enterprise.
- Non-Integral Foreign Operation (NFO): It is a foreign operation that is not an Integral Foreign Operation.
The business of a NFO is carried on in a substantially independent way by accumulating cash and other
monetary items, incurring expenses, generating income and arranging borrowing in its local currency.
Non-Integral Foreign Operation -translation
- Balance sheet items i.e. Assets and Liabilities both monetary and non-monetary – apply closing exchange
rate.
- Items of income and expenses – At actual exchange rates on the date of transactions
- Resulting exchange rate difference should be accumulated in a “foreign currency translation reserve”
until the disposal of “net investment in non-integral foreign operation”.
Integral Foreign Operation (IFO) – translation at the rate prevailing on the date of transaction.
THEORETICAL QUESTIONS
1. Why goods are marked on invoice price by the head office while sending goods to the branch?
2. Differentiate Branch Accounts with Departmental accounts.
DEPENDENT BRANCH
Q-11 Buckingham Bros, Bombay have a branch at Nagpur. They send goods at cost to their branch at Nagpur.
However, direct purchases are also made by the branch for which payments are made at head office.
All the daily collections are transferred from the branch to the head office.
From the following :
(A) Prepare Nagpur branch account in the books of head office.
(B) Prepare following ledgers :
(i) Branch Petty cash account
(ii) Branch Debtors account
(iii) Branch cash account
(iv) Nagpur Branch stock account
(v) Nagpur Branch expense account
(vi) Nagpur Branch P & L account
(C) Prepare Nagpur branch trading and P & L account.
Opening balance 1-1-2008 ` `
Imprest Cash 2,000 Bad Debts 1,000
Sundry Debtors 25,000 Discount to Customers 2,000
Stock: Transferred from H.O. 24,000 Remittances to H.O.
Direct Purchases 16,000 (recd. by H.O.) 1,65,000
Cash Sales 45,000 remittances to H.O.
Credit Sales 1,30,000 (not recd. by H.O. so far) 5,000
Direct Purchases 45,000 Branch Exp. directly paid by 30,000
H.O.
Returns from Customers 3,000 Closing Balance (31-12-2008)
Goods sent to branch from H.O. 60,000 Stock: Direct Purchase 10,000
Transfer from H.O. for Petty Transfer from H.O. 15,000
Cash Exp. 4,000 Debtors ?
Imprest Cash ?
100
Less: Cost of goods sold (at invoice price) i.e. × 84,000 (67,200)
125
Closing stock 8,000
Closing stock in Rupees = $8,000 x ` 48 = ` 3,84,000.
Note : Manager is entitled to commission on profits earned at the end of the year.
INTER BRANCH TRANSACTIONS
Q-25 Show adjustment Journal entry in the books of Head Office at the end of April, 2003 for incorporation
of inter-branch transactions assuming that only Head Office maintains different branch accounts in its
books.
A. Delhi Branch:
(1) Received goods from Mumbai – ` 35,000 and ` 15,000 from Kolkata.
(2) Sent goods to Chennai – ` 25,000, Kolkata – ` 20,000.
(3) Bill Receivable received – ` 20,000 from Chennai.
(4) Acceptances sent to Mumbai – ` 25,000, Kolkata – ` 10,000.
B. Mumbai Branch (apart from the above) :
(5) Received goods from Kolkata – ` 15,000, Delhi – ` 20,000.
(6) Cash sent to Delhi – ` 15,000, Kolkata – ` 7,000.
C. Chennai Branch (apart from the above) :
(7) Received goods from Kolkata – ` 30,000.
(8) Acceptances and Cash sent to Kolkata – ` 20,000 and ` 10,000 respectively.
FOREIGN BRANCH
Q-26 On 31st December, 2017 the following balances appeared in the books of Chennai Branch of an English
firm having its HO office in New York:
Amount in Amount in
(`) (`)
Stock on 1st Jan., 2017 2,34,000
Purchases and Sales 15,62,500 23,43,750
Debtors and Creditors 7,65,000 5,10,000
Bills Receivable and Payable 2,04,000 1,78,500
Salaries and Wages 1,00,000 -
Rent, Rates and Taxes 1,06,250 -
Furniture 91,000 -
Bank A/c 5,68,650
New York Account - 5,99,150
36,31,400 36,31,400
INTRODUCTION
Very often the small sole proprietorship and partnership businesses do not maintain double entry book
keeping system. Sometimes they keep record only of the cash transactions and credit transactions. Sometimes
they maintain no record of many transactions. But at the end of the accounting period they want to know the
performance and financial position of their businesses. This creates some special problems to the accountants.
This study discusses how to complete the accounts from available incomplete records.
The term “Single Entry System”is popularly used to describe the problems of accounts from incomplete
records. In fact there is no such system as single entry system. In practice the quack (untrained) accountants
follow some hybrid methods. For some transactions they complete double entries. For some others they
just maintain one entry. Still for some others, they even do not pass any entry. This is no system of accounting.
Briefly, this may be stated as incomplete records. The task of the accountant is to establish linkage among
the available information and to finalise the accounts.
THEORY AND CONCEPTWISE PRACTICALS
THEORY
(A) Difference between Statement of Affairs and Balance Sheet
Basis Statement of affairs Balance sheet
Reliability It is prepared on the basis of It is based on transactions
transactions partly recorded on the recorded strictly on the basis of
basis of double entry book keeping double entry book keeping; each
and partly on the basis of single item in the balance sheet can be
basis. Most of the assets are verified from the relevant
recorded on the basis of estimates, subsidiary books and ledger.
assumptions, information gathered Hence the balance sheet is not
from memory rather than records. only reliable, but also
dependable.
Capital In this statement, capital is merely Capital is derived from the
a balancing figure. In short capital account in the ledger
total assets- liabilities and therefore the total of
(other than capital) = capital. assets side will always be
equal to the total of liabilities
side.
Navkar Institute | CA Intermediate | Paper 1 : Accounting 335
Omission Since this statement is prepared There is no possibility of
on the basis of incomplete omission of any item of asset
records, it is very difficult, to and liability since all items are
locate the assets and liabilities, if properly recorded. Moreover, it
they are omitted from the books. is easy to locate the missing
items since the balance sheet
will not agree.
Basis of The valuation of assets is The valuation of assets is done
Valuation generally done unsceintific on scientific basis, that is original
manner; therefore no method of cost in the case of new assets
valuation is disclosed. and depreciated amount on the
basis of cost minus depreciation
to date for used assets. Any
change in the method of
valuation is properly disclosed.
Objects The object of preparing this The object of preparing the
statement in the calculation of balance sheet is to ascertain
capital figures in the beginning the financial position on a
and at the end of the accounting particular date.
period respectively.
(B) TYPES :
A scrutiny of many procedures adopted in maintaining records under single entry system brings forth the
existence of following three types:
(i) Pure single entry: In this, only personal accounts are maintained with the result that no information
is available in respect of cash and bank balances, sales and purchases, etc. In view of its failure to
provide even the basic information regarding cash etc., this method exists only on paper and has no
practical application.
(ii) Simple single entry: In this, only: (a) personal accounts, and (b) cash book are maintained. Although
these accounts are kept on the basis of double entry system, postings from cash book are made only
to personal accounts and no other account is to be found in the ledger. Cash received from debtors
or cash paid to creditors is simply noted on the bills issued or received as the case may be.
(iii) Quasi single entry: In this: (a) personal accounts, (b) cash book, and (c) some subsidiary books are
maintained. The main subsidiary books kept under this system are Sales book, Purchases book and
Bills book. No separate record is maintained for discounts, which are entered into the personal
accounts. In addition, some scattered information is also available in respect of few important items
of expenses like wages, rent, rates, etc. In fact, this is the method which is generally adopted as a
substitute for double entry system.
Step No. 2 : To calculate profit (of related time period) by way of preparing statement of calculating
profit
Above mentioned statement can be illutrated as under :
Statement of calculating profit during the year (2016-17)(as per conceptual clarity)
Particular `
Opening Capital (31/3/2016) xxx
Add: Additional capital xxx
Add: Interest on Capital xxx
Add: Profit (2016-2017) ?
xxx
Less: Drawings (xxx)
Less: Interest on drawings (xxx)
Closing capital (31/3/2017) xxx
OR
Statement of calculating the profit during the year (2016-17)(as demanded by ICAI)
Q-1 Mr. X could not keep complete records. He furnishes you the following information for the year 2013-
2014 :
(a) Particulars of Assets and Liabilities
1-4-2013 1-4-2014
` `
Stock in hand 37,400 46,800
Sundry Debtors 24,000 28,000
Sundry Creditors 18,000 3,000
Bills Receivable 8,000 10,000
Bills Payable 2,000 400
Furniture & Fixtures 1,200 1,200
Buildings 24,000 24,000
Bank Balance 8,700 1,660
(Overdraft)
Information : Additional capital introduced ` 5,000, drawings ` 15,000; A provision @ 10% is required
for doubtful debts and depreciation @ 5% p.a. is to be written-off for furniture and fixtures and buildings,
` 6,000 is outstanding for wages and ` 2,400 for salaries, prepaid insurance amounted to ` 400,
outstanding legal expenses are ` 1,400.
Required : Find out by statement of affairs method, the Profit or Loss made by Mr. X during 2013-2014.
Q-2 Suresh does not maintain his books of account under the double entry system. But keeps slips of
papers from which he makes up his annual accounts. He has borrowed moneys from a bank to whom he
has to render figures to profits every year. He has given the bank the following profit figures :
A fire occured in the evening of 31st March, 2014, destroying the books of account and furniture. The
cashiner absconded with the available cash in the Cash Box.
The trader gives the following information :
(1) Sales are effected as 20% for cash and the balance on credit. His total sales for the year ended March
31, 2014 were 20% higher than the previous year. All sales and purchases of goods were evenly
spread throughout the year (as also in the last year).
(2) Terms of Credit
Debtors 2 months
Creditors 1 month
(3) Stock level was maintained at ` 35,000 all throughout the year.
(4) A steady Gross Profit rate of 33-1/3% on turnover was maintained throughout. Creditors are paid by
cheque only. There is no cash purchase.
(5) His private records and the Bank Pass Book kept with him disclosed the following transactions for
the year.
(i) Miscellaneous Business Expenses ` 1,80,000 (including ` 35000 paid by cheque)
(of which ` 5000 was outstanding on 31-3-2014)
Types Methods
345
MULTIPLE CHOICE QUESTIONS
THEORETICAL QUESTIONS
1. What is meant by Single entry System? What are the types of procedures adopted for this system?
Q-8 Assets and Liabilities of Mr. X as on 31-12-2013 and 31-12-2014 are as follows:
31-12-2013 31-12-2014
` `
Assets
Building 1,00,000 ?
Furniture 50,000 ?
Stock 1,20,000 2,70,000
Sundry Debtors 40,000 90,000
Cash at Bank 70,000 85,000
Cash in Hand 1,200 3,200
Liabilities
Loans 1,00,000 80,000
Sundry Creditors 40,000 70,000
Decided to depreciate building by 2.5% and furniture by 10%. One Life Insurance Policy of the Proprietor
was matured during the period and the amount ` 40,000 is retained in the business.
Proprietor took @ ` 2,000 p.m. for meeting family expenses.
Prepare Statement of Affairs and also calculate profit of Mr.X.
(ANS. : Capital as on 31-12-13 = 2,41,200; Capital as on 31-12-14 = 4,40,700; Profit (2014) = 183,500)
Q-9 A and B are in Partnership having Profit sharing ratio 2:1 The following information is available about
their assets and liabilities :
31-3-2013 31-3-2014
` `
Furniture 1,20,000
Advances 70,000 50,000
Creditors 32,000 30,000
Debtors 40,000 45,000
Q-11 The following information relates to the business of Mr. Shiv Kumar, who requests you to prepare a
Trading and Profit & Loss Account for the year ended 31st March, 2014 and a Balance Sheet as on that
date:
(a) Balance as on 31st Balance as on 31st
March, 2013 March, 2014
` `
Building 3,20,000 3,60,000
Furniture 60,000 68,000
Motorcar 80,000 80,000
Stocks - 40,000
Bills payable 28,000 16,000
Cash and Bank balances 1,80,000 1,04,000
Sundry Debtors 1,60,000 -
Bills receivable 32,000 28,000
Sundry Creditors 1,20,000 -
(b) Cash transactions during the year included the following besides certain other items:
` `
Sale of old papers and Cash purchases 48,000
miscellaneous income 20,000 Payment to creditors 1,84,000
Miscellaneous Trade expenses Cash sales 80,000
(including salaries etc.) 80,000
Collection from debtors 2,00,000
(c) Other information:
* Bills receivable drawn during the year amount to ` 20,000 and Bills payable accepted ` 16,000.
* Some items of old furniture, whose written down value on 31st March, 2013 was ` 20,000 was sold
on 30th September, 2013 for ` 8,000. Depreciation is to be provided on Building and Furniture @
Liabilities ` Assets `
Sri Srinivas’s capital 1,00,000 Furniture 10,000
Liabilities for goods 20,500 Stock 70,000
Rent 1,000 Debtors 25,000
Cash at bank 14,500
_______ Cash in hand 2,000
1,21,500 1,21,500
You are furnished with the following information :
(1) Sri Srinivas sells his goods at a profit of 20% on sales.
(2) Goods are sold for cash and credit. Credit customers pay by cheques only.
(3) Payments for purchases are always made by cheques.
(4) It is the practice of Sri Srinivas to send to the bank every weekend the collections of the week
after paying every week, salary of `300 to the clerk, Sundry expenses of ` 50 and personal expenses
` 100.
`
Stock 40,000
Debtors 30,000
Creditors for goods 36,500
On the evening of 31st March, 2014 the Cashier absconded with the available cash in the cash box.
There was no cash deposit in the week ended on that date.
You are required to prepare a statement showing the amount of cash defalcated by the Cashier and
also a Profit and Loss Account for the period ended 31st March, 2014 and a Balance Sheet as on that
date.
(ANS. : Gross Profit = 30,250; Net Profit = 5,300; Total of Closing Balance Sheet = 1,40,500)
Q-16 Mr. A runs a business of readymade garments. He closes the books of accounts on 31st March. The
Balance Sheet as on 31st March, 2016 was as follows:
Liabilities ` Assets `
A’s capital a/c 4,04,000 Furniture 40,000
Creditors 82,000 Stock 2,80,000
Debtors 1,00,000
Cash in hand 28,000
Cash at bank 38,000
4,86,000 4,86,000
You are furnished with the following information :
(1) His sales, for the year ended 31st March, 2017 were 20% higher than the sales of previous year, out
of which 20% sales was cash sales.
Total sales during the year 2015-16 were ` 5,00,000.
(2) Payments for all the purchases were made by cheques only.
(3) Goods were sold for cash and credit both. Credit customers pay be cheques only.
(4) Deprecition on furniture is to be charged 10% p.a.
(5) Mr. A sent to the bank the collection of the month at the last date of the each month after paying
salary of ` 2,000 to the clerk, office expenses ` 1,200 and personal expenses ` 500.
Analysis of bank pass book for the year ending 31st March 2017disclosed the following: