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In this edition
Questions Solutions
May - 2010
May - 2010to
to
November - 2019
Duly incorporated in
chapters
May - 2019 Duly incorporated in chapters
November - 2019 on companion.sauda.com

v
CA Inter Group - I
(New Syllabus) Paper 1 - Accounting
Authors:
Dr. Arpita Ghose Gourab Ghose
Editors : Prof. Arun Kumar CA Mohit Bahal CS (Dr.) Himanshu Srivastava
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Sources of Questions in this Scanner _______________________
Ch. Chapter Name No.
1 Introduction to Accounting Standards
2 Framework for Preparation and Presentation of Financial Statements
3 Overview of Accounting Standards
4A Financial Statements of Companies: Preparation of Financial Statements
4B Cash flow Statement

5 Profit or Loss Pre and Post Incorporation
6 Accounting for bonus issue and right issue
7 Redemption of preference shares

8 Redemption of Debentures
9 Investment Accounts
10 Insurance Claims for Loss of Stock and Loss of Profit

11 Hire Purchase and Transactions
12 Departmental Accounts Instalment Sale
13 Accounting for Branches including Foreign Branches
14 Accounts for Incomplete Records
Notes:
1. When Questions/Chapters are taken from different levels of same course (e.g. from Final level in papers of Inter, or from Inter level in papers of Final)
or from different courses (e.g. from CS or CMA in CA) then following are not prepared in the Scanner for such Questions/Chapters:
(a) Examination Trend Analysis
(b) Line Chart Showing Relative Importance of Chapters
(c) Table Showing Importance of Chapter on the Basis of Marks (d) Bar Chart in Chapters
(e) Repeatedly Asked Questions
2. When new syllabus is introduced in a Course, then full question papers of only new course examinations are added at the end of Scanner.
viii
Sources of Questions from Old Course
CA IPCC P- 1, Chapter- 1
CS Executive P- 5, Chapter- 9 CA IPCC Paper- 5, Chapter- 1
CA IPCC Paper- 1, Chapter- 1 CA IPCC Paper- 5, Chapter- 2 CA Final Paper- 1, Chapter- 1
CA Final Paper- 1, Chapter- 1 CA IPCC Paper- 1, Chapter- 2
CA IPCC Paper- 1, Chapter- 3


CS Executive Paper- 5, Chapter- 1
CS Executive P- 5, Chapter- 1 CA IPCC Paper- 5, Chapter-7 CA IPCC Paper- 1, Chapter- 13 CA IPCC Paper- 1, Chapter- 14

CA IPCC Paper- 5, Chapter- 12 CA IPCC Paper- 5, Chapter- 13 CA IPCC Paper- 1, Chapter- 11
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xiii
Contents__________________________________________
Paper - 1 ________________________________ Accounting

Chapter Name Page No.
☐ Study Material Based Contents 1.1

☐ Syllabus 1.3
☐ Examination Trend Analysis 1.5
☐ Line Chart Showing Relative Importance of Chapters 1.9
☐ Table Showing Importance of Chapter on the Basis of Marks 1.10
1. Introduction to Accounting Standards 1.11
2. Framework for Preparation and Presentation of Financial Statements 1.19
3. Overview of Accounting Standards 1.29
4A. Financial Statements of Companies: Preparation of Financial Statements 1.132
4B. Cash Flow Statement 1.200
5. Profit or Loss Pre and Post Incorporation 1.287
6. Accounting for Bonus Issue and Right Issue 1.341
7. Redemption of Preference Shares 1.371
8. Redemption of Debentures 1.399
9. Investment Accounts 1.442
10. Insurance Claims for Loss of Stock and Loss of Profit 1.506
11. Hire Purchase and Instalment Sale Transactions 1.582
12. Departmental Accounts 1.642
13. Accounting for Branches Including Foreign Branches 1.707
14. Accounts from Incomplete Records 1.805
☹ Question Paper of May, 2019 1.913
☹ Question Paper of November, 2019 1.925
☹ Test Series 1.937
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xv
Study Material Based Contents
Paper 1 Accounting
Syllabus 1.3
Examination Trend Analysis 1.5
Line Chart Showing Relative Importance of Chapters 1.9
Table Showing Importance of Chapter on the Basis of Marks 1.10
C.N. Study
Chapters 1. (Chapter 1) 2. (Chapter 2)
3. (Chapter 3 Unit 1,2)
4A. (Chapter 4
Unit 1)
4B. (Chapter 4
Unit 2)
5. (Chapter 5) 6. (Chapter 6)
7. (Chapter 7)
8. (Chapter 8)
11. (Chapter 11)

Study Material Based Contents
Scanner Chapters P.N.
Introduction to Accounting Standards 1.11

Framework for Preparation and Presentation of Financial Statements 1.19
Overview of Accounting Standards 1.29
Financial Statements of Companies: Preparation of Financial Statements 1.132

Cash Flow Statement 1.200
Profit or Loss Pre and Post Incorporation 1.287 Accounting for Bonus Issue and Right Issue 1.341
Redemption of Preference Shares 1.371

Redemption of Debentures 1.399
Investment Accounts 1.442
Insurance Claims for Loss of Stock and Loss of Profit 1.506
Hire Purchase and Instalment Sale Transactions 1.582
14. (Chapter 14) ☹

☹
☹
Departmental Accounts 1.642

Accounting for Branches Including Foreign Branches 1.707
Accounts from Incomplete Records 1.805
Question Paper of May, 2019 1.913
Question Paper of November, 2019 1.925
Test Series 1.937
Syllabus
Paper 1 Accounting (100 marks) (One Paper - Three Hours)

Level of Knowledge: Working Knowledge
Objective:
To acquire the ability to apply specific accounting standards and legislations to different transactions and events and
in preparation and presentation of financial statements of various business entities.
Contents:
1. Process of formulation of Accounting Standards including Ind AS (IFRS converged standards) and IFRSs;
convergence vs adoption; objective and concepts of carve outs.
2. Framework for Preparation and Presentation of Financial Statements (as per Accounting Standards).
3. Applications of Accounting Standards:
AS 1 : Disclosure of Accounting Policies
AS 2 : Valuation of Inventories
AS 3 : Cash Flow Statements
AS 10 : Property, Plant and Equipment
AS 11 : The Effects of Changes in Foreign Exchange Rates AS 12 : Accounting for Government Grants
AS 13 : Accounting for Investments
AS 16 : Borrowing Costs
4. Company Accounts
(i) Preparation of financial statements – Statement of Profit and Loss, Balance Sheet and Cash Flow Statement;
(ii) Managerial Remuneration;
(iii) Profit (Loss) prior to incorporation;
(iv) Accounting for bonus issue and right issue;
(v) Redemption of preference shares;
(vi) Redemption of debentures.
5. Accounting for Special Transactions:

(i) Investment;
(ii) Insurance claims for loss of stock and loss of profit;
(iii) Hire- purchase and Instalment sale transactions.
6. Special Type of Accounting

(i) Departmental Accounting;
(ii) Accounting for Branches including foreign branches;
(iii) Accounts from Incomplete Records.
Note : If either new Accounting Standards (AS), Announcements and Limited Revisions to AS are issued or the
earlier ones are withdrawn or new AS, Announcements and Limited Revisions to AS are issued in place of existing
AS, Announcements and Limited Revisions to AS, the syllabus will accordingly include / exclude such new
developments in the place of the existing ones with effect from the date to be notified by the Institute.
Examination Trend Analysis
Paper 1 Accounting Question Paper Based Contents of Last Five Examinations

Years Q. No. Compulsory Chapter Marks Category Page No. No. Name
2017 1. (a) {C} 3 Overview of Accounting Standard
Nov. (b) {C} 3 " " (d) {C} 1 Introduction to
Standards "
Accounting 5 Practical 74 5 " 48
5 Descriptive 13 3. (a) 10 Insurance Claims for Loss of Stock and Loss of Profit 5. (a) 4B Cash Flow Statement (b) 11 Hire Purchase and Instalment
Sale Transactions
10 Practical 527 12 " 277
4 Descriptive 583
2018 1. (a) {C} 3 Overview of Accounting Standard May (b) {C} 3 " " "
2. (a) {C} 9 Investment Accounts (b) 10 Insurance Claims for Loss of Stock and Loss of Profit 3. (a) 12 Departmental Accounts (b) 13 A c c o u n t i n g f
o r B r a n c h e s Including Foreign Branches 5. (a) 5 Profit or Loss Pre and Post Incorporation
(b) 7 Redemption of Preference Share 6. (a) 2 Framework for Preparation and P r e s e n t a t i o n o f F i n a n c i a l Statements
(b) 6 Accounting for Bonus Issue and
Right Issue
(c) 8 Redemption of Debentures (e) 3 Overview of Accounting Standard 5 Practical 103 5 " 87
10 " 478
10 " 530 10 " 674
10 " 724
10 Practical 301 10 " 377
5 Descriptive 25
5 Practical 356
5 " 414
5 " 55
2018 1. (a) {C} 3 Overview of Accounting Standard 5 Practical 75
Nov. (b) {C} 3 " " " 5 " 88
(c) {C} 3 " " " 5 " 35
2. (a) 9 Investment Accounts 10 " 481
(b) 10 Insurance Claims for Loss of
Stock and Loss of Profit 10 " 532
3. (a) 14 Accounts from Incomplete
Records 15 " 908
(b) 12 Departmental Accounts 5 " 658
5. (b) 8 Redemption of Debentures 8 " 415
6. (b) 2 Framework for Preparation and
PresentationofFinancial
Statements (c) 3 O v e r v i e w Standards
5 Descriptive 24
ofAccounting
5 Practical 89
(d) 7 Redemption of Preference Share 5 Descriptive 379
May Standards 5 Practical 127
(b) {C} 3 " " " 5 " 112
(c)2. {C} 3 " " " 1 " 96
3. {C} 3 " " " 1 " 37
4. {C} 3 " " " 1 " 107
2. (a) 11 Hire Purchase and Instalment
Sale Transactions 10 " 624
Incomplete
3. (a) 14 Accounts from Records
(b) 13 A c c o u n t i n g f o r
12 " 890
Branches
Including Foreign Branches 8 " 785
5. (a) 7 Redemption of Preference Share 10 " 380
(b) 4B Cash Flow Statement 10 " 282
6. (b) 2 Framework for Preparation and
P r e s e n t a t i o n o f Statements
(c) 5 Profit or Loss Pre Incorporation 5 " 303
(e) 3 O v e r v i e w o f A c c o u n t i n g
Standards 5 " 50
F i n a n c i a l 5 " 21
and Post
Nov. Standards 5 Practical 56
(b) {C} 3 " " " 5 " 90
(c) {C} 3 " " " 5 " 51
3. (a) 9 Investment Accounts 10 " 483
4. (a) 12 Departmental Accounts 10 " 694
(b) 14 Accounts from Incomplete
Records 10 " 896
5. (a) 4A F i n a n c i a l S t a t e m e n t s o f
Companies: Preparation of
Financial Statements 10 " 154
(b) 5 Profit or Loss Pre and Post
Incorporation 10 " 304
6. (a) 4A F i n a n c i a l S t a t e m e n t s o f
Companies: Preparation of
Financial Statements 5 " 184
(b) 6 Accounting for Bonus Issue and
Right Issue 5 " 358
(e) 8 Redemption of Debentures 5 " 437
Line Chart
Table Showing Importance of Chapter on the Basis of Marks
Chap. Years 15 15 16 16 17 17 18 18 1919 No. Chapter Name May Nov. May Nov. May Nov. May Nov. May Nov. Total Ave.
1. I n t r o d u c t i o n t o 5 5 0.5
Accounting Stan...
2. F r a m e w o r k f o r 4 8 4 5 5 5 31 3.1
Preparation and...
3. O v e r v i e w o f 18 20 43 19 10 15 20 20 18 15 198 19. Accounting Standards 8
4A. Financial Statements 15 15 1.5
of Compa....
4B. Cash Flow Statement 8 8 5 12 10 43 4.3
5. Profit or Loss Pre and 10 8 8 10 5 10 51 5.1
Post...
6. Accounting for Bonus 5 5 10 1.0
Issue and...
7. R e d e m p t i o n o f 10 5 10 25 2.5
Preference Shares
8. R e d e m p t i o n o f 16 4 4 5 8 5 42 4.2
Debentures
9. Investment Accounts 8 10 8 4 8 10 10 10 68 6.8
10. Insurance Claims for 6 8 8 8 4 10 10 10 10 10 84 8.4
Loss of ...
11. Hire Purchase and 8 8 8 4 4 10 42 4.2
Instalment ...
12. D e p a r t m e n t a l 8 12 8 8 4 10 5 10 65 6.5
Accounts
13. A c c o u n t i n g f o r 8 16 8 8 8 12 10 8 78 7.8
Branches Inclu....
14. A c c o u n t s f r o m 16 5 8 16 15 12 10 82 8.2
Incomplete Records
CHAPTER
1
Introduction to Accounting Standards
This Chapter Covers: Study’s Chapter: 1
Chapter Comprises: Standards Setting Process ☹Status of Accounting Standards ☹International Accounting
Standard Board ☹International Financial Reporting Standards as Global Standards ☹Convergence to IFRS in India
☹History of IFRS Converged Indian Accounting Standards
☹Carve OUTS/INS in IND AS ☹List of IND AS

THE GRAPH . . . . . . . . . . . . . . . . . Trend Analysis
Legend
Marks of Objective, Short Notes, Distinguish Between, Descriptive and Practical Questions
Objective Short Notes Distinguish Descriptive Practical
For detailed analysis Login at www.scannerclasses.com for registration and password see first page of this
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TIMEMANAGER . . . . . . . . . Plan and Manage your Time
Time First Indepth learning
i.e.....
1. Budgeted
2. Actual
3. Variance (1-2)
............ Day 1 5
Instant
Revision (in hours)
Next After day 7 days

i.e.... i.e. on ........... ...........
Day 2 Day 8
1.15 1.00
Periodic Revision (in hours)
After After After Fix as 30 days 60 days 90 days per your

i.e. on i.e. on i.e. on need ........... .............. ............
Day 30 Day 60 Day 90
0.45 0.10 0.10

QUICK LOOK Repeatedly Asked Questions
. . . . . . . Weightage Analysis Common Answered Questions
Must Try Question
1.2, 4.1
1 Introduction
Q.1.1 2013 - May [7] (e) Descriptive
What are the issues, with which Accounting Standards deal? (4 marks) Answer :
Accounting Standards deal with the issues of:
1. Recognition of events and transactions in the financial statements,

2. Measurement of these transactions and events,
3. Presentation of these transactions and events in the financial statements in a manner that is meaningful and
understandable to the reader, and
4. Disclosure requirements which should be there to enable the public at large and the stakeholders and the potential
investors in particular, to get an insight into what these financial statements are trying to reflect and thereby
facilitating them to take prudent and informed business decisions.
Space to write important points for revision
Q.1.2 2017 - Nov [1] {C} (d) Descriptive
What are Accounting Standards? Explain the issues, with which they deal. (5 marks) [IPCC Gr. I] Answer:
Accounting Standards
Accounting Standards (AS) are written policy documents issued by an Expert Accounting Body or by Government
or by other Regulatory Body. Issues with which Accounting Standards deal are:
(i) Recognition: Accounting Standards should recognise the transactions and events in the financial statement.
(ii) Measurement: Accounting standards measure these transactions and events.
(iii) Presentation: Presentation of these transactions and events in financial statements, in a meaningful and
understandable manner. (iv) Disclosure: Requires disclosure in financial statements. Space to write important points
for revision
2 Standard Setting Process

Q.2.1 2008 - June [2] (a) Descriptive
“Accounting standards are formulated in conformity with the provisions of the applicable laws, customs, usages and
business environment of a country.” Comment. (5 marks) [CS Inter - I]
Answer :
Every effort is made to issue accounting standards which are in conformity with the provisions of the applicable
laws, customs, usages and business environment of our nation.
However, if due to subsequent amendments in the law, a particular accounting standard is found to be not in
conformity with such law, the provision of the said law will prevail and the financial statements should be prepared
in conformity with such law.
The accounting standards by their very nature cannot and do not override the local regulations which govern the
preparation and presentation of financial statements in our country.
However, the Institute of Chartered Accountants of India will determine the disclosure requirements to be made in
the financial statements and auditor's reports. Such disclosure may be by way of appropriate notes explaining the
treatment of particular items. Such explanatory notes will only be in the nature of clarification and therefore, need
not be treated as adverse comments on the related financial statements.
The accounting standards are intended to apply to items which are material. Any limitations with regard to the
applicability of a specific standard will be made clear by the Institute from time to time.
The Institute will use its best endeavours to persuade the Government, appropriate authorities, industrial and
business community to adopt these standards in order to achieve uniformity in the presentation of financial
statements. In formulation of Accounting Standards, the emphasis would be on laying down accounting principles
for application and implementation thereof.

3
Need for Convergence towards Global Standards
Q.3.1 2015 - June [2] (a) Descriptive Explain the convergence of Indian Accounting Standards (IAS) with
International Financial Reporting Standards (IFRS).
(3 marks) [CS Exe - II] Answer:
Applicability:
Companies which are not required to follow Ind AS shall continue to comply with Accounting Standards (‘AS’) as
prescribed in Companies (Accounting Standards) Rules, 2006.
Highlights of the notified Companies (Indian Accounting Standard) Rules, 2015 is provided below:
Applicability of Ind AS:
The Companies and their Auditors shall comply with the Ind AS specified in the Annexure to the Rules in
preparation of their Financial Statements (FS) and Audit respectively, in the following manner;
1. Voluntary adoption (for FY 2015-16):
Any company may comply with the Ind AS for Financial Statements for accounting periods beginning on or after 1st
April 2015, with the comparatives for the periods ending on 31st March 2015, or thereafter. This option is also
available to companies whose securities are listed or are in the process of being listed on Small and Medium
Enterprises (‘SME’) exchange.
2. Mandatory adoption:
(i) From FY 2016-17: Companies satisfying following criteria are required to comply with the Ind AS for or the
accounting periods beginning on or after 1st April 2016, with the comparatives for the periods ending on 31st March
2016, or thereafter.
(a) Companies whose Equity or Debt Securities are listed or are in the process of being listed on any stock exchange
in India or outside India and having Net Worth (NW) of ` 500 crore or more.
(b) Unlisted Companies (i.e. other than those mentioned in (a) above) having NW of ` 500 crore or more.
(c) Holding, Subsidiary, Joint Venture/Associate Companies of Companies covered in (a) and (b) above.
(ii) From FY 2017-18: Companies satisfying following criteria are
required to comply with the Ind AS for or the accounting periods
beginning on or after 1st April 2017, with the comparatives for the
periods ending on 31st March 2017, or thereafter:
(a) Companies whose Equity or Debt Securities are listed or are in the process of being listed on any stock exchange
in India or outside India and having NW of less than` 500 crore.
(b) Unlisted Companies having NW of`250 crore or more but less than ` 500 crore.
(c) Holding, Subsidiary, Joint Venture/Associate Companies of Companies covered in (a) and (b) above.
Ind AS once required to be complied with in accordance with these
rules, shall apply to both standalone financial statements (SFS) and
consolidated financial statements (CFS).
4 International Accounting Standard Board

Q.4.1 2008 - Dec [2] (a) (i) Short Notes Write short note on the Objectives of international accounting standards. (3
marks) [CS Exe - I]
Answer :
Objectives of International Accounting Standards
The objectives of the International Accounting Standard are to improve and to harmonise company reporting around
the world.
Basically the IAS has two objectives:
1. To Formulate and Publish International Accounting Standards
The IAS issues financial accounting standards on specific problems concerning elementary as well as sophisticated
accounting issues.
2. To promote their worldwide acceptance and observation The IASC has no inherent authority to do this and
instead relies on its members organisations, who have pledged to use their best efforts to have the standard adopted
by their national authoritative standards setting bodies.

Q.4.2 2010 - June [2] (a) (i) Short Notes
Write short note on the Non-acceptability of International Accounting Standards. (3 marks) [CS Exe - I] Answer :
Non acceptability of International Accounting Standard : Accounting practices in different countries are
different due to there different legislative requirement, social and economic condition, long standing practices, tax
structure and organized professional accounting. Whenever multinational company have different way of working
than national company, and of due to this. Worldwide contradiction of views have been noticed in the national
standard setting bodies and international bodies. There is a glaring diversity in accounting practices in different
countries which require harmonization for evolving uniform accounting standard for world wide application.
The above discussed factors are the basic reason for non-acceptability of International Accounting Standard
throughout the world.
Q.4.3 2013 - Dec [2] (e) Descriptive
State the objectives of the Accounting Standards Board.

(3 marks) [CS Exe - I] Answer:
Objectives of the Accounting Standards Board
1. To conceive and suggest areas in which Accounting Standards need to
be developed.
2. To formulate Accounting Standards with a view to assisting the council
of the ICAI in evolving and establishing Accounting Standards in India. 3 To examine how far the relevant
International Accounting Standards/
International Financial Reporting Standard can be adapted while
formulating the AS and to adapt the same.
4. To review, at regular intervals the Accounting Standards from the point
of view of acceptance or changed conditions and if necessary revise the
same.
5. To provide from time to time interpretations and guidance on Accounting
Standards.
6. To carry out such other functions relating to Accounting Standards.
CHAPTER Framework for Preparation

and Presentation of2 Financial Statements
Chapter Comprises: Purpose of the Framework ☹Status and Scope of the Framework ☹Components of Financial
Statements ☹Objectives and Users of Financial Statements ☹Fundamental Accounting Assumptions
☹ Qualitative Characteristics ☹True and Fair View ☹Elements of Financial Statements ☹Measurement of Elements of
Financial Statements ☹Capital Maintenance

Objective Short Notes
Legend
Distinguish Descriptive Practical
book.
1.19
TIMEMANAGER
i.e.....
1. Budgeted
2. Actual
3. Variance (1-2)
............ Day 1 5
Instant
Revision (in hours)
Next After day 7 days i.e.... i.e. on ........... ........... Day 2 Day 8
1.15 1.00
. . . . . . . . . . .Plan and Manage your Time Periodic Revision
(in hours)
After After After Fix as 30 days 60 days 90 days per your i.e. on i.e. on i.e. on need.
........... .............. ............

0.45 0.10 0.10
2.1, 2.2
. . . . . . . Weightage Analysis Common Answered Must Try Question Questions
3.1 2.1, 4.1
1 Fundamental Accounting Assumption
Q.1.1 2017 - Nov [7] (b) Descriptive
Briefly define the Fundamental Accounting Assumptions?

(4 marks) [IPCC Gr. II] Answer:
Fundamental Accounting Assumptions
As per the Framework on Preparation and Presentation of Financial Statements, there are three fundamental
accounting assumptions: Going Concern, Accrual Basis and Consistency.
1. Going Concern: Financial statements are normally prepared on the
assumption that an enterprise will continue in operation in the foreseeable future and neither there is intention, nor
there is need to materially curtail the scale of operations.
2. Accrual Basis: Under this basis of accounting, transactions are recognized as soon as they occur, whether cash or
cash equivalent is actually received or paid. Accrual basis ensures better matching between revenue and cost and
profit/loss obtained on this basis reflects activities of the enterprise during an accounting period, rather than cash
flows generated by it.
3. Consistency: It refers to the practice of using same accounting policies for similar transactions in all accounting
periods. The consistency improves comparability of financial statements through time.

Q.1.2 2019 - May [6] (b) Practical
Answer the following :

Summarised Balance Sheet of Cloth Trader as on 31.03.2017 is given below :
Liabilities
Proprietor’s Capital Profit & Loss Account 10% Loan Account Sundry Creditors
Amount (`) Assets Amount (`)
3,00,000 Fixed Assets 3,60,000

1,25,000 Closing Stock 1,50,000
2,10,000 Sundry Debtors 1,00,000
50,000 Deferred Expenses 50,000
Cash & Bank 25,000
6,85,000 6,85,000
Additional Information is as follows :
1. The remaining life of fixed assets is 8 years. The pattern of use of the asset is even. The net realisable value of
fixed assets on 31.03.2018 was ` 3,25,000.
2. Purchases and Sales in 2017-18 amounted to ` 22,50,000 and ` 27,50,000 respectively.
3. The cost and net realizable value of stock on 31.03.2018 were ` 2,00,000 and` 2,50,000 respectively.
4. Expenses for the year amounted to ` 78,000.
5. Deferred Expenses are amortized equally over 5 years.
6. Sundry Debtors on 31.03.2018 are ` 1,50,000 of which ` 5,000 is doubtful. Collection of another ` 25,000 depends
on successful re-installation of certain product supplied to the customer.
7. Closing Sundry Creditors are ` 75,000, likely to be settled at 10% discount.
8. Cash balance as on 31.03.2018 is ` 4,22,000.
9. There is an early repayment penalty for the loan of ` 25,000.
You are required to prepare:
(Not assuming going concern)
1. Profit & Loss Account for the year 2017-18.
2. Balance Sheet as on 31st March, 2018. (5 marks)
Answer:
1.
Particulars To Opening stock To Purchases

To Expenses
To Depreciation
Profit and Loss Account
for the year 2017-18:
` Particulars ` 1,50,000 By Sales 27,50,000

22,50,000 By Closing Stock 2,50,000
78,000 By Trade payables 7,500
(creditors)
35,000
To Provision for doubtful 30,000
debts
To Deferred Cost 50,000
To Loan Penalty 25,000
To Net Profit (b/f) 3,89,500
30,07,500 30,07,500
2.
Liabilities Capital
Profit and Loss A/c 10% loan A/c
Sundry creditors
Balance Sheet
as on 31st March, 2018
` Assets `
3,00,000 Fixed Assets 3,25,000
5,14,500 Stock 2,50,000
2,35,000 Debtors (less provn) 70,000
67,500 Deferred Exp. Nil Cash and Bank (Bal. fig) 4,72,000
11,17,000 11,17,000
2
Qualitative Characteristics of Financial Statements
Q.2.1 2007 - May [6] (a), 2011 - Nov [7], (e) Descriptive 2013 - May [7] (e), RTP
What are the qualitative characteristics that improve the usefulness of information provided in the financial
statements?
(4 marks each) [IPCC Gr. II]
Answer:
Qualitative characteristics are those attributes which make the information provided in the financial statement useful
to the users.
The principal qualitative characteristics are as follows: 1. Understandable The basic quality of financial
statement is that it is
understandable by the user. However to understand, the user is expected to have basic knowledge of business and
accounting.
2. Relevance
3. Materiality
4. Reliability
5. Neutrality
6. Completeness
7. Substance over form
8. Comparability
The information provided in the financial statement will loose its importance if it is not relevant. An information is
relevant when it influences the decision of users while evaluating the past, present and future.
The information provided in a financial statement is relevant only if it is material. Materiality provides a threshold
rather than being a primary qualitative characteristic.
The financial statement loses its purpose if it is not reliable. Thus it should be error free and unbiased showing the
true and fair picture. The financial statement should be neutral. It should not be a manipulated statement. The
financial statement should be complete in all respect within the boundary of materiality and cost. An omission can
cause information misleading.
The purpose of financial statement is to provide information. It should be thus presented in accordance with their
substance and economic reality and not merely their legal form.
The measurement and display of information should be consistent in order to make it comparable over times to
come.

Q.2.2 2008 - May [5] (vi), 2018 - Nov [6] (b) Descriptive “One of the characteristics of financial statements in
neutrality” – Do you agree with this statement? Explain in brief. (2, 5 marks) [IPCC Gr. II]
Answer :
Yes, one of the characteristics of financial statements is neutrality. To be reliable, the information contained in
financial statements must be neutral, that is free from bias. Financial Statements are not neutral if by the selection or
presentation of information, the focus of analysis could shift from one area of business to another thereby arriving at
a totally different conclusion based on the business results.

Q.2.3 2008 - Nov [5] (x) Descriptive
Give the four qualitative characteristics which the financial statements should observe. (2 marks) [IPCC Gr. II]
Answer :
The financial statements should have the following qualitative characteristics:
1. Understandability
2. Relevance
3. Reliability
4. Comparability.

3 Elements of a Financial Statements
Q.3.1 2017 - May [7] (a) Short Notes Write short note on main elements of Financial Statements. (4 marks) [IPCC
Gr. II] OR 2018 - May [6] (a) Descriptive Answer the following:
Briefly explain the elements of financial statements. (5 marks)
Answer :
Elements of Financial Statements:
☐ The Framework for preparation and presentation of financial statements
classifies items of financial statements. Financial statements can be classified in five broad groups depending on
their economic characteristics: Asset, Liability, Equity, Income/Gain and Expenses/Loss. 1. Asset :
☐ Resource controlled by the enterprise as a result of past events from which future economic benefits are expected
to flow to the enterprise.
2. Liability :
☐ Present obligation of the enterprise arising from past events, the settlement of which is expected to result in an
outflow of a resource embodying economic benefits.
3. Equity :
☐ Residual interest in the assets of an enterprise after deducting all its liabilities.
4. Income/Gain :
☐ Increase in economic benefits during the accounting period in the form of inflows or enhancement of assets or
decreases in liabilities that result in increase in equity other than those relating to contributions from equity
participants.
5. Expense/Loss :
☐ Decrease in economic benefits during the accounting period in the form of outflows or depletions of assets or
incurrence of liabilities that result in decrease in equity other than those relating to distributions to equity
participants.

4
Measurement of Elements of Financial Statements
Q.4.1 2016 - Nov [7] (c), RTP Descriptive
Explain in brief, the alternative measurement bases, for determining the value at which an element can be
recognized in the Balance Sheet or Statement of Profit and Loss. (4 marks) [IPCC Gr. II]
Answer:
Measurement is the process of determining money value at which an element can be recognised in the balance sheet
or statement of profit and loss. The framework recognises four alternative measurement bases for the purpose. These
basis relate explicitly to the valuation of assets and liabilities. The valuation of income or expenses, i.e. profit is
implied, by the value of change in assets and liabilities.
Measurement basis are as follows:
1. Historical cost
2. Current cost
3. Realisable value
4. Present value
In preparation of financial statements, all or any of the measurement basis can be used in varying combinations to
assign the cost.

Q.4.2 RTP Practical
Mohan started a business on 1st April 2017 with` 12,00,000 represented by 60,000 units of ` 20 each. During the
financial year ending on 31st March, 2018, he sold the entire stock for`30 each. In order to maintain the capital
intact, calculate the maximum amount, which can be withdrawn by Mohan in the year 2017-18 if Financial Capital
is maintained at historical cost.
Answer:
Particulars
Closing equity
(` 30 x 60,000 units)
Opening equity
Permissible drawings to keep Capital intact
Financial Capital Maintenance at Historical Cost (`) 18,00,000 represented by cash 60,000 units x ` 20 =
12,00,000
6,00,000 (18,00,000 – 12,00,000)
Thus, in order to maintain the capital intact Mohan can withdraw` 6,00,000 as the maximum amount.
CHAPTER
3
Overview of Accounting Standards
Chapter Comprises: Status of Accounting Standards ☹Applicability of Accounting Standards ☹AS - 1, AS - 2, AS -

3, AS - 10, AS - 11, AS - 12, AS - 13, AS - 16

Legend
book.
1.29
TIMEMANAGER
i.e.....
1. Budgeted
2. Actual
3. Variance (1-2)
............ Day 1 5
Instant
Revision (in hours)
Next After day 7 days i.e.... i.e. on ........... ........... Day 2 Day 8
1.15 1.00
(in hours)
........... .............. ............
0.45 0.10 0.10
.......
Common Answered Weightage Analysis
Must Try Question Questions 4.1

3.1, 3.2, 4.1, 4.10, 4.12 6.3, 6.18, 6.20, 7.1,7.10, 8.1, 9.5
1 Status of Accounting Standards
Q.1.1 2009 - Dec [4] (c) Descriptive “Accounting Standards are mandatory for all companies.” Comment. (3
marks) [CS Exe - I]
Answer :
Central Government to prescribe Accounting Standards According to Sec. 133 of Companies Act, 2013, the
Central Government may prescribe the standards of accounting or any addendum thereto, as recommended by the
Institute of Chartered Accountants of India, constituted under Sec. 3 of the Chartered Accountants Act, 1949, in
consultation with and after examination of the recommendations made by the National Financial Reporting
Authority. The Accounting Standard are mandatory and applicable to all companies while preparing financial
statement of the company.
Where the financial statement of the company do not comply with the accounting standard, such companies shall
disclose in its financial statement the following :
1. The deviation from the accounting standard;
2. The reasons for such deviation; and
3. The financial effect, if any, arising due to such deviation.

2 Applicability of Accounting Standards
Q.2.1 2007 - Nov [6] (e) Descriptive List the criteria to be applied for rating an enterprise as Level-I enterprise for
the purpose of Compliance of Accounting Standards in India.
(4 marks) Answer :
Enterprises which fall in any one or more of following categories are
classified as level I Enterprise –
1. Enterprises, whose equity or debt securities are either listed or are in the process to be listed in India or outside
India.
2. Banks, Insurance Companies and Financial institutions.
3. All commercial, industrial and other reporting business enterprises, whose total turnover during the previous
year exceeds`50 crores (as per the audited financial statement).
4. All commercial, industrial and other reporting business enterprises, whose total borrowings including public
deposits during the previous year exceeds ` 10 crores (as per audited financial statement).
5. Holding or subsidiary company of any of the above enterprises any time during the year.
3 AS -1 Disclosure of Accounting Policies

Q.3.1 2013 - May [7] (b) Descriptive What are the three fundamental accounting assumptions recognised by
Accounting Standard (AS) 1? Briefly describe each one of them.
(4 marks) Answer:
Accounting Standard-1 recognizes three fundamental accounting assumptions. These are as follows:
1. Going Concern: The financial statements are normally prepared on the
assumption that an enterprise will continue its operations in the foreseeable future and neither there is intention, nor
there is need to materially curtail the scale of operations.
2. Consistency: The principle of consistency refers to the practice of using same accounting policies for similar
transactions in all accounting periods unless the change is required (I) by a statute, (ii) by an accounting standard or
(iii) for more appropriate presentation of financial statements.
3. Accrual Basis of Accounting: Under this basis of accounting, transactions are recognised as soon as they occur,
whether or not cash or cash equivalent is actually received or paid.

Q.3.2 2015 - Nov [1] {C} (b), RTP Practical In the books of M/s Prashant Ltd., closing inventory as on 31.03.2015
amounts to ` 1,63,000 (on the basis of FIFO method).
The company decides to change from FIFO method to weighted
The company decides to change from FIFO method to weighted 15. On the basis of weighted average method,
closing inventory as on 31.03.2015 amounts to`1,47,000. Realisable value of the inventory as on 31.03.2015
amounts to ` 1,95,000.
Discuss disclosure requirement of change in accounting policy as per AS -1.
(5 marks) Answer:
As per AS -1, Disclosure of Accounting Policies, accounting policies refers to the accounting principles and
method of applying those principles in the preparation and presentation of financial statements.
So if there is change in the accounting policies the firm should disclose in it’s statements:
1. The fact that there is change in accounting policy.
2. The reason for change in accounting policies.
3. The effect of such change in the financial statements.
So in this case M/s. Prashant Ltd. changes valuation of inventory from FIFO to weighted average. Therefore, the
firm should disclose in it’s financial statement:
1. There is a change in valuation of inventory from FIFO to weighted
average.
2. The reason why such change is to be made: The company values its
inventory at lower of cost and net realisable value. Since net realisable
value of all items of inventory in the current year was greater than
respective costs, the company valued its inventory at cost. In the present
year i.e. 2014-15, the company has changed to weighted average
method, which better reflects the consumption pattern of inventory, for
ascertaining inventory costs from the earlier practice of using FIFO for
the purpose.
3. The effect of such change in the financial statement: The change in
policy has reduced current profit and value of inventory by ` 16,000.
Q.3.3 2017 - May [1] {C} (a) Practical
ABC Financial Services Ltd. is engaged in the business of financial services and is undergoing tight liquidity
position, since most of the assets of the company are blocked in various claims/petitions in a Special Court. ABC
Financial Services Ltd. has accepted Inter-Corporate Deposits (ICDs) and it is making its best efforts to settle the
dues. There were claims at varied rates of interest, from lenders, from the due date of ICDs to the date of repayment.
The company has provided interest, as per the terms of the contract till the due date and a note for non-provision of
interest from the due date to date of repayment was mentioned in financial statements. On account of uncertainties
existing regarding the determination of the amount and in the absence of any specific legal obligation at present as
per the terms of contracts, the company considers that these claims are in the nature of “claims against the company
not acknowledged as debt”, and the same has been disclosed by way of a note in the accounts instead of making a
provision in the Profit and Loss Account.
State whether the treatment done by the company is correct or not as per relevant Accounting Standard. (5 marks)
Answer:
As per AS -1, “Disclosure of Accounting Policies,” following are major considerations that govern selection of
a particular Policy: 1. Prudence
2. Substance over form and
3. Materiality
As per the above considerations and in view of uncertainty associated with future events, profits are not
anticipated, but losses are provided for as a matter of conservatism. Provision should be created for all known
liabilities and losses even though the amount cannot be determined with certainty and represents only a best
estimate in the light of available information.
As per AS -1, ‘Accrual’ is one of the fundamental accounting assumptions. Irrespective of the terms of the contract,
so long as the principal amount of a loan is not repaid, the lender cannot be placed in a disadvantageous position for
non-payment of interest in respect of overdue amount. From the facts given in the question, it is apparent that the
company has an obligation to pay because of the overdue interest amount.
Thus, in the given case, ABC Financial Services Ltd. should make provision for interest from the due date of ICDs
to date of repayment even though the amount cannot be determined. Thus, it should represent only a best estimate in
the light of available information.
Thus, the treatment done by the company that these claims are in nature of “claims against the company not
acknowledged as debt” and the disclosure by way of note in the accounts instead of making a provision in the P & L
A/c is not correct as per AS -1.

Q.3.4 2018 - Nov [1] {C} (c) Practical
HIL Ltd. was making provision for non-moving stocks based on no issues having occurred for the last 12 months
upto 31.03.2017. The company now wants to make provision based on technical evaluation during the year ending
31.03.2018.
Total value of stock ` 120 lakhs
Provision required based on technical evaluation ` 3.00 lakhs Provision required based on 12 months no issues ` 4.00
lakhs You are requested to discuss the following points in the light of Accounting Standard (AS) – 1:
(i) Does this amount to change in accounting policy?

(ii) Can the company change the method of accounting? (5 marks)
Answer:
The decision of making provision for non-moving inventories on the basis of technical evaluation does not amount
to change in accounting policy. Accounting policy of a company may require that provision for non-moving stocks
(inventories) should be made. The method of estimating the amount of provision may be changed. In case a more
prudent estimate can be made. In the given case, considering the total value of stock, the change in the amount of
required provision of non-moving stock from`4 lakhs to`3 lakhs is also not material. The disclosure can be made for
such change in the following lines by way of notes to the accounts in the annual accounts of HIL Ltd. for the year
2017-18:
“The company has provided for non-moving stocks on the basis of technical evaluation unlike preceding years. Had
the same method been followed as in the previous year; the profit for the year and the corresponding effect on the
year end net assets would have been lower by ` 1 lakh.”
4 AS - 2 Valuation of Inventories
Q.4.1 2008 - May [6] (f), RTP Descriptive What are the items that are to be excluded in determination of the cost
of inventories as per AS - 2? (4 marks) OR 2012 - Nov [7] (d) Descriptive
“In determining the cost of inventories, it is appropriate to exclude certain costs and recognize them as expenses in
the period in which they are incurred.” Provide example of such costs as per AS-2: Valuation of Inventories. (4
marks)
Answer:
Para 13 of AS-2 Valuation of Inventories lists down the specific costs which are to be excluded from cost of
inventories.
The list is as follows:
1. Abnormal amounts of wasted materials, labour or other production
cost.
2. Storage costs, unless those costs are necessary in the production process prior to a further production stage.
3. Administrative overheads that do not contribute to bringing the inventories to their present location and
condition; and
4. Selling and distribution costs.
As per Para 12, Interest and other borrowing costs are usually considered as not related to bringing the inventories to
their present location and condition and are therefore usually not included in the cost of inventory. Space to write
important points for revision
Q.4.2 2019 - May [1] {C} (c) Objective
State whether the following statement is ‘True’ or False’. Also give reason for your answer.
3. As per the provisions of AS-2, inventories should be valued at the
lower of cost and selling price. (1 mark)
Answer:
This statement is False
As per AS 2, inventories should be valued at the lower of cost and net realisable value.
Net reliable value = Selling Price - Cost necessary to make sell.
Q.4.3 2009 - Nov [1] (vii) Practical From the following data, find out value of inventory as on 30.04.2009 using (a)
LIFO method, and (b) FIFO method :
(1) 01.04.2009 Purchased 10 units @ ` 70 per unit
(2) 06.04.2009 Sold 6 units @ ` 90 per unit
(3) 09.04.2009 Purchased 20 units @ ` 75 per unit

(4) 18.04.2009 Sold14 units @` 100 per unit. (2 marks)
Answer :
(a) Statement showing valuation of closing inventory by LIFO method Date Receipts Issue Balance Unit Cost/
Amount Unit Cost/ Amount Unit Cost/ Amount unit unit unit
1.4.09 10 70 700 10 70 700

6.4.09 6 70 420 4 70 280
9.4.09 20 75 1,500 4 70 280
20 75 1,500
18.4.09 14 75 1,050 4 70 280
6 75 450
Value of closing inventory as per LIFO method:

Unit Rate Total 4 ` 70 ` 280 6 ` 75 ` 450
Total ` 730 (b) Statement showing valuation of closing inventory by FIFO method Date Receipts Issue Balance
Unit Cost/ Amount Unit Cost/ Amount Unit Cost/ Amount Unit Unit Unit
1.4.09 10 70 700 10 70 700

6.4.09 6 70 420 4 70 280
9.4.09 20 75 1,500 4 70 280
4 70 280 20 75 1,500
18.4.09 10 75 750 10 75 750
Value of closing inventory as per FIFO method: Unit Rate Total 10 ` 75 ` 750 Space to write important points
for revision
Q.4.4 2010 - May [6] (d) Practical
Raw materials inventory of a company includes certain material purchased at` 100 per kg. The price of the material
is on decline and replacement cost of the inventory at the year end is`75 per kg. It is possible to convert the material
into finished product at conversion cost of ` 125.
Decide whether to make the product or not to make the product, if selling price is (i)` 175 and (ii)` 225. Also find
out the value of inventory in each case. (4 marks)
Answer:
Provision:
According to Para 24 of AS-2 ‘Valuation of Inventories’, materials and other supplies held for use in the
production of inventories are not written down below cost if the finished products in which they will be incorporated
are expected to be sold at or above cost. But when there has been a decline in the price of materials and it is
estimated that the cost of the finished products will exceed net realizable value, the materials are written down to net
realisable value.
Analysis and Conclusion:
In such circumstances, the replacement cost of the materials may be the best available measure of their net
realisable value.
(i) When the selling price be ` 175

Incremental Profit= ` 175 - ` 125 = `50
Current price of the material =` 75
Therefore, it is better not to make the product. Raw material inventory would be valued at net realisable value i.e. `
75 because the selling price of the finished product is less than ` 225 (100 + 125) per kg.
(ii) When the selling price be ` 225

Incremental Profit = ` 225 - ` 125 = ` 100
Current price of the raw material = ` 75
Therefore, it is better to make the product.
Raw material inventory would be valued at` 100 per kg because the selling price of the finished product is not less
than ` 225.

Q.4.5 2010 - Nov [1] {C} (b) Practical
HP is a leading distributor of petrol. A detail inventory of petrol in hand is taken when the books are closed at the
end of each month. At the end of month following information is available :
Sales ` 47,25,000
General overheads cost ` 1,25,000
Inventory at beginning1,00,000 litres @ 15/- per litre
Purchases
June 1 two lakh litres @ 14.25
June 30 one lakh litres @ 15.15
Closing inventory 1.30 lakh litres
Compute the following by the FIFO as per AS-2 :
(i) Value of Inventory on June 30.

(ii) Amount of cost of goods sold for June.
(iii) Profit/Loss for the month of June. (5 marks)
Answer :
(i) Cost of Closing Inventory for 1,30,000 litres as on 30th June Particulars ` 1,00,000 litres @ 15.15 15,15,000
30,000 litres @ 14.25 4,27,500 Total 19,42,500
(ii) Computation of Cost of Goods Sold
Particulars ` Opening inventories (1,00,000 litres @ 15) 15,00,000 Purchases June-1 (2,00,000 litres @ 14.25)
28,50,000
June-30 (1,00,000 litres @ 15.15) 15,15,000 58,65,000 Less : Closing inventories (19,42,500) Cost of goods sold
39,22,500 (iii) Computation of Profit
Particulars ` Sales (Given) (A) 47,25,000

Cost of goods sold 39,22,500
Add: General overheads 1,25,000
Total cost (B) 40,47,500
Profit (A☐B) 6,77,500
Best Ltd. deals in five products, P, Q, R, S, and T which are neither similar nor interchangeable. At the time of
closing of its accounts for the year ending 31st March 2011, the historical cost and net realisable value of the items
of the closing stock are determined as follows:
Items Historical Cost Net realizable value ` `

P 5,70,000 4,75,000
Q 9,80,000 10,32,000
R 3,16,000 2,89,000
S 4,25,000 4,25,000
T 1,60,000 2,15,000 What will be the value of closing stock for the year ending 31st March, 2011 as per AS-2
"Valuation of inventories"? (4 marks)
Answer:
According to AS 2 “Valuation of Inventories, inventories should be valued at the lower of cost and net realizable
value. Inventories should be written down to net realizable value on an item-by-item basis.
Valuation of inventory (item wise) for the year ending 31st March 2011
Item Historical Cost Net realizable Value Valuation of closing stock (`) (`) (`)
P 5,70,000 4,75,000 4,75,000

Q 9,80,000 10,32,000 9,80,000
R 3,16,000 2,89,000 2,89,000
S 4,25,000 4,25,000 4,25,000
T 1,60,000 2,15,000 1,60,000
23,29,000 The value of inventory for the year ending 31st March 2011 =` 23,29,000 Space to write important points
for revision
Q.4.7 2012 - Nov [7] (b) Practical From the following information ascertain the value of stock as on 31st March,
2012:
` Stock as on 01.04.2011 28,500

Purchases 1,52,500
Manufacturing Expenses 30,000
Selling Expenses 12,100
Administration Expenses 6,000
Financial Expenses 4,300
Sales 2,49,000
At the time of valuing stock as on 31st March, 2011 a sum of` 3,500 was written off on a particular item, which was
originally purchased for`10,000
and was sold during the year of` 9,000. Barring the transaction relating to this item, the gross profit earned during
the year was 20% on sales.
Answer:
Statement showing valuation of stock as on 31.3.2012
Particulars ` ` Stock as on 01.04.2011 28,500 Less : Book value of abnormal stock ( 6,500) 22,000
( ` 10,000 ☐` 3,500)
Add : Purchases 1,52,500
Manufacturing Expenses 30,000
2,04,500
Less : Cost of Sales :
Sales as per Books 2,49,000 Less : Sales of Abnormal item (9,000) Less : Gross Profit @ 20% 2,40,000 Value of
Stock as on 31st March, 2012 (48,000) (1,92,000) 12,500
Q.4.8 2013 - May [7] (c) Practical
On 31stMarch 2013 a business firm finds that cost of a partly finished unit on that date is`530. The unit can be
finished in 2013-14 by an additional expenditure of` 310. The finished unit can be sold for` 750 subject to payment
of 4% brokerage on selling price. The firm seeks your advice regarding:
(i) the amount at which the unfinished unit should be valued as at 31st
March, 2013 for preparation of final accounts and

(ii) the desirability or otherwise of producing the finished unit. (4 marks)
Answer:
Valuation of unfinished unit:
` Net selling price 750 Less: Estimated cost of completion (310)
440
Less: Brokerage( 4% of 750) 30
Net Realisable Value 410
Cost of inventory 530
Value of inventory (Lower of cost and net realisable value) 410
Incremental cost ` 310 (cost to complete) is less than incremental revenue `720 (`750 `30). The enterprise will
therefore decide to finish the unit for sale at` 750.
Note: The aforesaid solution is based on assumption that partly finished unit cannot be sold in semi finished form
and its NRV is zero without processing it further.

Q.4.9 2014 - Nov [1] {C] (c) Practical
Capital Cables Ltd., has a normal wastage of 4% in the production process. During the year 2013-14 the Company
used 12,000 MT of raw material costing ` 150 per MT.
At the end of the year 630 MT of wastage was in stock. The accountant wants to know how this wastage is to be
treated in the books. Explain in the context of AS 2 the treatment of normal loss and abnormal loss and also find out
the amount of abnormal loss if any.
Answer:
According to AS-2, (Revised) ‘Valuation of Inventories’, abnormal amounts of wasted materials, labour and other
production costs are excluded from cost of inventories and such costs are recognised as expenses in the period in
which they are incurred.
The amount of normal loss will be included in computing the cost of inventories (finished goods) at the year end.
Amount of Abnormal Loss:
Material used 12,000 MT @ ` 150

=` 18,00,000
Normal Loss (12,000 MT 4%) 480 MT Net quantity of material 11,520 MT Abnormal Loss in quantity 150 MT
Abnormal Loss ` 23,437.50
[150 units @ `156.25 (` 18,00,000/11,520)]
Therefore, ` 23,437.50 will be charged to the Profit and Loss Statement. Space to write important points for revision
Q.4.10 2015 - May [1] {C} (c) Practical
Mr. Mehul gives the following information relating to items forming part of inventory as on 31-3-2015. His factory
produces Product X using Raw material A.
(i) 600 units of Raw material A (purchased @`120). Replacement cost of raw material A as on 31-3-2015 is ` 90 per
unit.
(ii) 500 units of partly finished goods in the process of producing X and cost incurred till date` 260 per unit. These
units can be finished next year by incurring additional cost of ` 60 per unit.
(iii) 1500 units of finished Product X and total cost incurred `320 per unit. Expected selling price of Product X is `
300 per unit.
Determine how each item of inventory will be valued as on 31-3-2015. Also calculate the value of total inventory as
on 31-3-2015. (5 marks)
Answer:
(i) Valuation of Raw Material: If finished product is expected to be sold below cost then raw material should be
valued at NRV if there is decline in price of material. In such circumstances, the replacement cost of materials may
be best available measure of their net realizable value.
Here product x is expected to be sold at` 300 per unit which is below than total cost per unit which is ` 320. Then
raw material is to be valued at replacement cost.
So, valuation of raw material is done as follows:
No. of units × Replacement Cost/unit = 600 × 90 = ` 54,000 Raw material is to be valued at ` 54,000
(ii) Valuation of WIP : 500 units of partly finished goods will be valued at ` 240 per unit i.e. lower of cost` 320 (`
260 + additional cost` 60) or Net estimated selling price` 240 (Estimated selling price ` 300 per unit less additional
cost of ` 60).
(iii) Cost of Finished Goods: As per AS-2, inventory is to be valued at cost or realizable value which ever is lower.
Here the cost of finished good is ` 320 per unit and finished good is expected to be sold at ` 300 which is less than
the cost of finished goods. So, finished good is valued at expected selling price, as calculated follows: 1500 units × `
300 per unit = ` 4,50,000
So, finished good is valued at ` 4,50,000 to the year end.
☐ Valuation of total inventory as on 31.3.2015
Particulars Amount (`) (i) Valuation of raw material 54,000 (ii) Valuation of partly finished goods 1,20,000 (iii)
Valuation of finished goods 4,50,000
Total valuation of inventory as on 31.3.2015 6,24,000 Space to write important points for revision
Q.4.11 2016 - May [1] {C} (d) Practical
Z Limited ordered 13,000 kg. of chemicals at ` 90 per kg. The purchase price includes GST of ` 5 per kg. in respect
of which full Input credit is admissible. Freight incurred amounted to ` 30,000. Normal transit loss is 4%. The
company actually received 12,400 kg. and consumed 10,000 kg. The company has received trade discount in the
form of cash amounting to ` 1 per kg. The chemicals were delivered in containers. The containers were not reusable,
hence sold for ` 500. The administrative expenses incurred to bring the chemicals were ` 10,000.
Compute the value of inventory and allocate the material cost as per AS-2.
[Modified] (5 marks) Answer:

Cost of inventory and allocation of material cost is shown below:
` Purchase price (13,000 Kg. × ` 89) 11,57,000
Less: Input Credit (13,000 Kg. × ` 5) (65,000) 10,92,000

Add: Freight 30,000
Allocated Administrative Expenses 10,000

A. Total material cost 11,32,000
B. Number of units to be normally received = 96% of 13,000 Kg. Kg. 12,480
C. Normal cost per Kg. (A/B) 90.705
Allocation of material cost:
Kg. `/Kg. ` Materials consumed 10,000 9,07,050
Cost of inventory 2,400 90.705 (approx.) 2,17,692
(12,400- 10,000)
Abnormal loss 80 7,258* Total material cost 12,480 11,32,000
* The difference due to rounding off of normal cost per Kg. has been adjusted. Thus the inventory will be valued at `
2,17,692.
Note:
1. The Company has received trade discount in the form of cash. Therefore, discount has been treated as trade
discount in the given answer.
2. Abnormal losses are recognized as separate expenses.
3. Containers are used for delivery of the chemicals and are not reusable. Cost of these containers is treated as
selling and distribution expense. The sale value of these containers will be credited to Profit and Loss Account and
shall not be considered for the purpose of valuation of inventory.
Alternatively, the sales value of container amount of ` 500 may be deducted, while computing material cost. In that
case the material cost will be computed as`11,31,500 (11,32,000-500) instead of`11,32,000. Accordingly the
allocation of material cost will get changed. Space to write important points for revision
Q.4.12 2017 - Nov [1] {C} (b), RTP Practical
A Limited is engaged in manufacturing of Chemical Y for which Raw Material X is required. The company
provides you following information for the year ended 31st March, 2017.
` per unit Raw Material X

Cost price 380 Unloading Charges 20 Freight Inward 40 Replacement cost 300 Chemical Y
Material consumed 440 Direct Labour 120 Variable Overheads 80
Additional Information:
(i) Total fixed overhead for the year was` 4,00,000 on normal capacity of 20,000 units.
(ii) Closing balance of Raw Material X was 1,000 units and Chemical Y was ` 2,400 units.
You are required to calculate the total value of closing stock of Raw Material X and Chemical Y according to AS 2,
when
(a) Net realizable value of Chemical Y is ` 800 per unit
(b) Net realizable value of Chemical Y is ` 600 per unit (5 marks)
Answer:
Valuation of finished goods stock:
(a) Cost per unit of finished goods:

Material 440
Add : Direct Labour 120
Direct Overhead 80
Fixed Production20
` 660 ☐ Cost per unit of finished goods = ` 660 per unit.
(b) Valuation of finished goods will be:

If NRV is` 800 per unit,
Value per unit (Lower of cost ` 660 & NRV) = 660
Total value of finished goods stock =` 660 × 2400 units
= ` 15,84,000 If NRV is` 600 per unit,

Value per unit (Lower of cost ` 660 & NRV) = 600
Total value of finished goods stock =` 600 × 2400 units
=` 14,40,000
Valuation of Raw Materials:
(a) Cost per unit of Raw Material:
Particulars Purchase Price

Add: Freight Charges
Add: Unloading cost per unit
(b) Total value of Raw Materials (Closing Stock) 1. Finished Goods are valued at cost
— Raw Materials cost per unit ` 440

— Replacement cost per unit ` 300
— Relevant value per unit ` 440 [Since
Cost per unit 380

40
20
` 440
finished goods are valued at cost.] — Total value for ` 1,000 units = 1000 ×` 440
=` 4,40,000
2. Finished goods are valued at NRV

— Raw Materials cost per unit ` 440
— Replacement cost per unit ` 300
— Relevant value per unit ` 300 [Since finished goods are valued at NRV] — Total value for ` 1,000 units = 1000 ×`
300
=` 3,00,000
Q.4.13 2019 - May [6] (e) Practical
Wooden Plywood Limited has a normal wastage of 5% in the production process. During the year 2017-18, the
Company used`16,000 MT of Raw material costing`190 per MT. At the end of the year, 950 MT of wastage was in
stock. The accountant wants to know how this wastage is to be treated in the books.
You are required to:
1. Calculate the amount of abnormal loss.
2. Explain the treatment of normal loss and abnormal loss.
[In the context of AS-2 (Revised)] (5 marks)
Answer:
• As per AS 2 (Revised) ‘Valuation of Inventories’, abnormal amounts of wasted materials, labours and other
production costs are excluded from cost of inventories and such costs are recognised as expenses in the period in
which they are incurred. The normal loss will be included in determining the cost of inventories (finished goods) at
the year end.
• Amount of Abnormal loss:
Material used 16000 MT @ ` 190 = ` 30,40,000
Normal loss (5% of 16000 MT) 800 MT
Net quantity of material 15,200 MT
Abnormal loss in quantity 150 MT
Abnormal loss ` 30,000
(150 units @ ` 200

Amount of ` 30,000 will be charged to the Profit and Loss Statement.
Mr. Rakshit gives the following information relating to items forming part of inventory as on 31stMarch, 2019. His
factory produces product X using raw material A.
(i) 800 units of raw material A (purchased @ ` 140 per unit). Replacement cost of raw material A as on 31st March,
2019 is` 190 per unit.
(ii) 650 units of partly finished goods in the process of producing X and cost incurred till date`310 per unit. These
(iii) 1,800 units of finished product X and total cost incurred ` 360 per unit.
Expected selling price of product X is ` 350 per unit.
In the context of AS-2, determine how each item of inventory will be valued as on 31st March, 2019. Also, calculate
the value of total inventory as on 31st March, 2019. (5 marks)
5 AS - 3 Cash Flow Statements

Q.5.1 1998 - May [6] (d) Descriptive
In the case of a manufacturing company :

(i) List the items of "inflows" of cash receipts from operating activities; (ii) List the items of "outflows" of investing
activities. (2×2 = 4 marks)
Answer:
(i) Inflows of cash receipts from operating activities: (a) Cash receipts from rendering of services.
(b) Cash receipts from the sale of goods.
(c) Refund of income-tax .
(d) Royalties, fees, commission and other revenues.
(ii) Outflows of investing activities:

(a) Cash payment for acquiring fixed assets.
(b) Cash advances and loans to third parties.
(c) Cash payment for acquisition of shares, warrants or debt
instruments of other enterprises and interest in joint ventures. Space to write important points for revision
Q.5.2 1999 - Nov [1](b) Descriptive What are the main features of the cash flow statement? Explain with special
reference to AS 3? (5 marks)
Answer :
Main features of cash flow statements (As per AS-3) :
1. According to AS-3, cash flow statement deals with the provisions of
information about the historical changes in cash and cash equivalents of an enterprise during the stated period from
operating, investing and financing activities.
2. Cash flow from operating activities can be reported using either:
(i) the direct method, in which mostly the classes of gross cash receipts and gross cash payments are disclosed.
(ii) the indirect method, in this net profit or loss is adjusted for the purpose of transactions of non-cash nature.
3. According to AS-3, an enterprise must disclose the components of cash and cash equivalents and must present a
reconciliation of amounts in its cash flow statement with the equivalent items reported in the balance sheet.
4. When the cash flow statement is used alongwith the other financial statements, it provides information that
enables the user to evaluate the changes in net assets of an enterprise. This statement also enhances the
comparability of the operating performances.
5. For companies listed on stock exchanges compliance of AS-3 is compulsory due to the listing agreement.
Q.5.3 2001 - May [6](d) Descriptive
Define briefly the classification of activities, as suggested in Accounting Standard 3, to be used for preparing a cash
flow statement. Give two examples of each such class of activities. (4 marks)
Answer :
According to AS-3 (Cash Flow Statement), the cash flow statement must report cash flows by operating,
investing and financing activities: 1. Operating Activities: These are the principal revenue producing
activities of the enterprise. This activity does not include in it the investing and financing activities. Examples of
operating activities are, cash receipt from the sale of goods and cash payment to the supplier of goods.
2. Investing Activities: These activities include the acquisition and disposal of long-term assets and other
investments which are not included in cash equivalents.
Example of investing activities are payment made on acquiring building for business or cash received from the sale
of furniture.
3. Financing Activities: Those activities that results in changes in the size and composition of the owner's capital
and borrowing of the enterprise. Example of the financing activities are cash proceed from issue of shares and cash
paid to redeem debentures.

Q.5.4 2016 - May [7] (d) Practical Classify the following activities as per AS-3 Cash Flow Statement:
(i) Interest paid by financial enterprise

(ii) Dividend paid
(iii) Tax deducted at source on interest received from subsidiary company (iv) Deposit with Bank for a term of two
years
(v) Insurance claim received towards loss of machinery by fire (vi) Bad debts written off
Which activity does the purchase of business falls under and whether netting off of aggregate cash flows from
disposal and acquisition of business units is possible? (4 marks)
Answer:
Classification as per AS-3
(i) Interest paid by financial enterprise: Cash flow from operating activities.
(ii) Dividend paid: Cash flow from financing activities.
(iii) TDS on Interest received from subsidiary Company: Cash flow
from investing activities.

(iv) Deposit with Bank for a term of 2 years: Cash flow from operating
activities.
(v) Insurance claim: Cash flow from investing activities
(vi) Bad debts written off: Cash flow from operating activities.
! Purchase of business falls under cash flow from investing activities or operating activities depending upon
situation.
! No cash flows from Disposal and acquisition of business.

Classify the following activities as
(i) Operating Activities, (ii) Investing activities, (iii) Financing activities and (iv) Cash Equivalents.
1. Cash receipts from Trade Receivables
2. Marketable Securities
3. Purchase of investment
4. Proceeds from long term borrowings
5. Wages and Salaries paid
6. Bank overdraft
7. Purchase of Goodwill
8. Interim dividend paid on equity shares
9. Short term Deposits
10. Underwriting commission paid. (5 marks)
Answer:
Classification of Activities
1. Cash receipt from Trade receivables

2. Marketable Securities
3. Purchase of investment
5. Wages and Salaries paid
6. Bank overdraft
7. Purchase of Goodwill
8. Interim dividend paid on equity shares
9. Short term Deposits
10. Underwriting Commission paid Operating Activities Cash Equivalents Investing Activities Financing Activities
Operating Activities Financing Activities Investing Activities Financing Activities Investing Activities Financing
Activities
Q.5.6 2019 - Nov [1] {C} (a) Practical

Answer the following questions:
(a) Prepare cash flow from investing activities as per AS 3 of M/s
Subham Creative Limited for year ended 31.3.2019.

Particulars Amount (`) Machinery acquired by issue of shares at face value 2,00,000 Claim received for loss of
machinery in earthquake 55,000 Unsecured loans given to associates 5,00,000 Interest on loan received form
associate company 70,000 Pre-acquisition dividend received on investment made 52,600 Debenture interest paid
1,45,200 Term loan repaid 4,50,000
Interest received on investment (TDS of ` 8,200 was deducted on the above interest) 73,800 Purchased debentures of
X Ltd., on 1st December, 2018 which are redeemable within 3 months 3,00,000 Book value of plant & machinery
sold (loss incurred` 9,600) 90,000 (5 marks)
6 AS - 10 Property, Plant and Equipment
Q.6.1 2008 - Nov [5] (ii) Descriptive Mention four Assets, where AS - 10 is not applicable. (2 marks) Answer :
AS-10 deals with “Property, Plant and Equipment”.
This Standard does not apply to:

1. Biological assets related to agricultural activity other than bearer plants. This Standard applies to bearer plants but
it does not apply to the produce on bearer plants; and
2. Wasting assets including mineral rights, expenditure on the exploration for and extraction of minerals, oil, natural
gas and similar nonregenerative resources.
However, this Standard applies to property, plant and equipment used to
develop or maintain the assets described in (a) and (b) above. Space to write important points for revision
Q.6.2 2008 - May [5] (v) Practical

What is the accounting entry to be passed as per AS-10 for the following situations :
(a) Increase in value of PPE by ` 50,00,000 on account of revaluation. (b) Decrease in the value of PPE by `
30,00,000 on account of
revaluation. (2 marks) Answer:

Particulars L / F Dr. (`) Cr. (`) a. PPE A/c Dr. 50,00,000
To Revaluation Reserve A/c 50,00,000 (Being the increase in value of fixed asset
due to upward revaluation)
b. Profit and Loss A/c Dr. 30,00,000
To PPE A/c 30,00,000 (Being the decrease in net book value of

fixed asset due to downward revaluation)
Note: It has been assumed that both the above instances are independent of each other and revaluation is done for
first time.
Q.6.3 2010 - May [1] (v), RTP Practical
A company acquired a machine on 1.4.2006 for `5,00,000. The company charged depreciation upto 2008-09 on
straight line basis with estimated working life of 10 years and scrap value of ` 50,000. From 2009 -10, the company
decided to change depreciation method at 20% on reducing balance method. Compute the amount of depreciation to
be debited to Profits and Loss A/c for the year 2009 - 10. (2 marks)
Answer :
Annual depreciation charged by the company up to 2008-09 =
= = ` 45,000
WDV of machine at the end of 2008-09 by Straight Line Method (SLM) =` 5,00,000 – (` 45,000 × 3) =` 3,65,000
Depreciation to be charged in 2009-2010
Book value of the machine as per SLM as on 2008-09 = 3,65,000
Dep. to be charged = 3,65,000 × = 73,000

Q.6.4 2010 - May [6] (b) Practical During the current year 2009 - 10 M/s L & C Ltd. made the following
expenditure relating to its plant and machinery :
` General repairs 4,00,000

Repairing of Electric Motors 1,00,000
Partial Replacement of parts of Machinery 50,000
Substantial improvements to the electrical wiring system
which will increase efficiency of the plant and machinery 10,00,000
What amount should be capitalised according to AS-10 ? (4 marks)
Answer :
Provision:
According to AS-10 Property, Plant and Equipment, the cost of an item of PPE shall be recognised as an asset if
and only if
(i) It is probable that future economic benefits associated with the item will flow to the firm.
(ii) The cost can be measured reliably.

Therefore, in the given case, repairs amounting ` 5 lakhs and partial replacement of parts of machinery worth `
50,000 should be charged to statement of profit & loss.`10 lakhs incurred for substantial improvement to the
electrical wiring system which will increase efficiency should be capitalized.

Q.6.5 2011 - May [7] (c) Practical Carrying amount of a machine is ` 1,00,000 (Historical cost less depreciation).
The machine is expected to generate`25,000 net cash flow for 5 years. The net realizable value (or net selling price)
of the machine on current date is` 85,000. The enterprises required rate of earning is 10% p.a. State the value at
which the enterprise should carry its machine. The present value factors at 10% are 0.909, 0.826, 0.751, 0.683 and
0.621 at the end of first, second, third, fourth and fifth year respectively.
(4 marks) [IPCC Gr. II]
Answer :
Value in use is the present value of estimated future cash flow expected to arise from the continuing use of an asset.
Therefore,
☐ Value in use* = ` 25,000x(0.909 +0.826 + 0.751+ 0.683 + 0.621)
` 94,750 Net selling price = ` 85,000

Recoverable amount is the higher of an asset’s value in use and its net selling price i.e.94,750.
Carrying value of a machine =` 1,00,000 (recorded in the books)
☐ Carrying amount is the amount at which an asset is recognized in the balance sheet after deduction any
accumulated depreciation (amortization) and accumulated impairment losses thereon.
☐ In the given case, carrying amount of machine will be lower of its recoverable amount ` 94,750 and its book
value i.e. ` 1,00,000. Therefore, the enterprise should carry its machine at value of` 94,750.

In the Trial Balance of M/s Sun Ltd. as on 31-3-2011, balance of machinery appears`5,60,000. The company follows
rate of depreciation on machinery @ 10% p.a.. On scrutiny it was found that a machine appearing in the books on 1-
4-2010 at`` 9-2010 at ` 1,35,000 in part exchange of a new machine costing ` 1,50,000.
You are required to calculate:
(i) Total depreciation to be charged in the Profit and Loss Account. (ii) Loss on exchange of machine.
(iii) Book value of machinery in the Balance Sheet as on 31-3-2011.
(5 marks) Answer :
Assumption: The question has been solved on the basis of written down value method due to absence of related
information regarding straight line method.
(i) Total Depreciation to be charged in the statement of Profit and Loss `
Depreciation on old machinery in use [10% of

(5,60,000 - 1,60,000)] 40,000 Add: Depreciation on new machine @ 10% for six months
7,500
Total depreciation on machinery in use 47,500
Add: Depreciation on machine disposed of (10% for
6 months)8,000
So, total depreciation to be charged in statement of Profit and Loss 55,500 (ii) Loss on Exchange of Machine
Particulars ` Book value of machine as on 1.4.2010 1,60,000 Less: Depreciation for 6 months @ 10% (8,000)
Written Down Value as on 30.9.2010 1,52,000 Less: Exchange value (1,35,000) Loss on exchange of machine
17,000
(iii) Book Value of Machinery in the Balance Sheet as on 31.03.2011 `

Balance as per trial balance 5,60,000
Less: Book value of machine sold (1,60,000) 4,00,000
Add: Purchase of new machine 1,50,000 5,50,000
Less: Depreciation on machinery in use (47,500) 5,02,500
Q.6.7 2011 - Nov [7] (a) Practical
M/s. Tiger Ltd. allotted 7500 equity shares of ` 100 each fully paid up to Lion Ltd. in consideration for supply of a
special machinery. The shares exchanged for machinery are quoted at National Stock Exchange (NSE) at` 95 per
share, at the time of transaction. In the absence of fair market value of the machinery acquired, how the value of the
machinery would be recorded in the books of Tiger Ltd ? (4 marks)
Answer :
Provision:
According to AS 10 ‘Property, Plant and Equipment,’ fixed asset acquired in exchange for shares or other
securities in the enterprise should be recorded at its fair market value, or the fair market value of the securities
issued, whichever is more clearly evident.
In the given case the market value of the shares exchanged for the asset is more clearly evident therefore the
company should record the value of machinery at ` 7,12,500 (i.e., 7,500 shares × ` 95 per share) being the market
price of the shares issued in exchange.

M/s Progressive Company Limited has not charged depreciation for the year ended on 31st March, 2012, in respect
of a spare bus purchased during the financial year 2011-12 and kept ready by the company for use as a stand-by , on
the ground that, it was not actually used during the year. State your views with reference to Accounting Standard 10
“Property, Plant and Equipment”.
Further during the year company made additions to its factory by using its own workforce, at a cost of ` 4,50,000 as
wages and materials. The lowest estimate from an outside contractor to carry out the same work was ` 6,00,000.
The directors contend that, since they are fully entitled to employ an outside contractor, it is reasonable to debit the
Factory Building Account with`6,00,000. Comment whether the directors’ contention is right in view of the
provisions of Accounting Standard 10? (5 marks)
Answer :
Provisions:
According to AS-10, ‘Property, Plant and Equipment,’:
• Depreciation is a measure of wearing out, consumption or other loss of
value of a depreciable asset arising from use, effluxion of time or obsolescence through technology and market
changes.
• Accordingly, depreciation may arise even when asset has not been used in the current year but was ready for use in
that year.
• The need for using the stand by bus may not have arisen during the year but that does not imply that the useful life
of the bus has not been affected. Therefore, non-provision of depreciation on the ground that the bus was not used
during the year is not tenable.
• As per AS-10, ‘Property, Plant and Equipment,’ the gross book value of the self constructed fixed asset includes
the costs of construction that relate directly to the specific asset and the costs that are attributable to the construction
activity in general can be allocated to the specific asset. If any internal profit is there it should be eliminated. Saving
of`1,50,000 on account of using its own workforce is an unrealized/internal profit, which should not be
capitalized/recorded as per the standard.
Therefore only` 4,50,000 should be debited to the factory building account
and not ` 6,00,000.
Hence, the contention of the directors of the company to capitalize
`6,00,000 as cost of factory building, on the ground that the company is fully
entitled to employ an outside contractor is not justifiable.
Q.6.9 2012 - May [7] (c) Practical A computer costing ` 60,000 is depreciated on straight line basis,
assuming 10 years working life and Nil residual value, for three years. The estimate of remaining useful life after
third year was reassessed at 5 years. Calculate depreciation as per the provisions of Accounting Standard 10
“Property, Plant and Equipment”. (4 marks)
Answer:
Depreciation per year = ` 60,000/10 = ` 6,000
Depreciation on SLM charged for three years =`6,000 × 3 years =`18,000 Book value of the computer at the end of
third year = ` 60,000 - ` 18,000 =` 42,000
Remaining useful life as per previous estimate = 7 years
Remaining useful life as per revised estimate = 5 years
Depreciation from the fourth year onwards =`42,000/5 =`8,400 per annum

Q.6.10 2012 - Nov [7] (c) Practical
PQR Ltd. constructed a fixed asset and incurred the following expenses on its construction: ` Materials 16,00,000
Direct Expenses 3,00,000 Total Direct Labour 6,00,000 (1/15th of the total labour time was chargeable to
the construction)
Total Office & Administrative Expenses 9,00,000 (4% is chargeable to the construction)
Depreciation on assets used for the construction of this asset 15,000 Calculate the cost of the fixed asset. (4 marks)
Answer : Calculation of cost of fixed assets

Particulars `
Materials 16,00,000
Direct expenses 3,00,000
Direct labour (1/15th of ` 6,00,000) 40,000
Office and administrative expenses (4% ` 9,00,000) 36,000
Depreciation on assets 15,000
Cost of fixed asset 19,91,000
Note: It is assumed that 4% of office and administrative expenses are specifically attributable to construction of a
fixed asset. Alternatively, it may be assumed that 4% of office and administrative expenses are only allocated to
construction project and is not specifically attributable to it. In such a case, the cost of fixed assets will be `
19,55,000.

Amna Ltd. contracted with a supplier to purchase a specific machinery to be installed in Department A in two
months time. Special foundations were required for the plant, which were to be prepared within this supply lead
time. The cost of site preparation and laying foundations were ` 47,290. These activities were supervised by a
technician during the entire period, who is employed for this purpose of` 15,000 per month. The Technician’s
services were given to Department A by Department B, which billed the services at ` 16,500 per month after adding
10% profit margin.
The machine was purchased at `52,78,000. GST was charged at 18% on the invoice.` 18,590 transportation charges
were incurred to bring the machine to the factory. An Architect was engaged at a fee of ` 10,000 to supervise
machinery installation at the factory premises. Also, payment under the invoice was due in 3 months. However, the
Company made the payment in 2nd month. The company operates on Bank Overdraft @ 11%. Ascertain the amount
at which the asset should be capitalized under AS 10.
(5 marks)
Answer:
Cost of machinery is calculated as under:
Particulars Amount (`) Purchase Price (given ) 52,78,000

Add : GST at 18% (Note 1) 9,50,040
Site preparation Cost (given) 47,290
Technician’s Salary for 2 months 30,000
Initial Delivery Cost (transportation) 18,590
Professional Fees for Installation 10,000
Total Cost 63,33,920
Note:
1. 18% of 52,78,000 = ` 9,50,040
2. Interest on Bank overdraft for earlier payment of invoice is not relevant under AS - 10.
3. Internally booked profits should be eliminated in arriving at the cost of Fixed Assets.
4. It has been assumed that the purchase price of` 52,78,000 excludes amount of GST.
Q.6.12 2014 - May [1] {C} (b) Practical
On 01.04.2010 a machine was acquired at ` 4,00,000. The machine was expected to have a useful life of 10 years.
The residual value was estimated at 10% of the original cost. At the end of the 3rd year, an attachment was made to
the machine at a cost of` 1,80,000 to enhance its capacity. The attachment was expected to have a useful life of 10
years and zero terminal value. During the same time the original machine was revalued upwards by ` 90,000 and
remaining useful life was reassessed at 9 years and residual value was reassessed at NIL.
Find depreciation for the year, if
(i) attachment retains its separate identity.

(ii) attachment becomes integral part of the machine. (5 marks)
Answer :
(i) If attachment retains its Separate Identify
Cost of Machine on 1.4.10 = 4,00,000
Less: Residual Value 10% = 40,000
Depreciable Value = 3,60,000
Estimated Useful life =10 years
Dep. p.a. = 3,60,000 ÷ 10 = ` 36,000 Total Dep. in 3 years = 36,000 × 3 =` 1,08,000 WDV for 4th year = 4,00,000
-1,08,000 = 2,92,000 Upward Revaluation of Original Machine = 90,000
WDV for 4th year after revaluation = 2,92,000 + 90,000 = 3,82,000 Remaining useful life = 9 years
Dep. in 4th year = 3,82,000 ÷ 9 = ` 42,444 Dep. on attachment = 1,80,000 ÷ 10 = ` 18,000 Total Depreciation =
42,444 + 18,000 = ` 60,444. Note:
1. Since, upward revaluation of the machine and reassessment of
remaining useful life had been made at the end of the 3rd year, it is implied that depreciation for the 3rd year has
been charged on the basis of old calculation & remaining useful life of 9 years is to be calculated from the beginning
of the 4th year onwards.
2. Depreciation for the 4th year i.e. 2013-14 has been given in the solution.
(ii) If attachment becomes integral part of Machine

In this case it will be added to the value of machine and depreciated alongwith machine over the life of machine.
Value of Machine after Revaluation = 3,82,000
Add: Cost of Attachment = 1,80,000
Total Value = 5,62,000
Life = 9 years
Depreciation = 5,62,000 ÷ 9 = ` 62,444 Space to write important points for revision
Q.6.13 2014 - Nov [1] {C} (a) Practical In the books of Optic Fiber Ltd., plant and machinery stood at`6,32,000 on
1.4.2013. However on scrutiny it was found that machinery worth`1,20,000
was included in the purchases on 1.6.2013. On 30.6.2013 the company disposed a machine having book value of `
1,89,000 on 1.4.2013 at ` 1,75,000 in part exchange of a new machine costing ` 2,56,000. The company charges
depreciation @ 20% WDV on plant and machinery. You are required to calculate:
(i) Depreciation to be charged to P/L

(ii) Book value of Plant and Machinery A/c as on 31.3.2014 (iii) Loss on exchange of machinery. (5 marks)
Answer :
(i) Depreciation to be charged in the statement of Profit and Loss
Particulars (`) Depreciation on old Machinery 31,600 [20% on ` 6,32,000 for 3 months]
Add: Depreciation machinery acquired on 01.06.2013

(` 1,20,000 × 20% ×10/12) 20,000 Depreciation on Machinery after adjustment of Exchange
[20% of ` (6,32,000 - 1,89,000 + 2,56,000) for 9 months] 1,04,850 Total Depreciation to be charged in statement of
Profit and
Loss 1,56,450
(ii) Book Value of Plant and Machinery A/c as on 31.03.2014 Particulars ` `
Balances as per books on 01.04.2013 6,32,000

Add: Included in purchases on 01.06.2013 1,20,000 Add: Purchase on 30.06.2013 2,56,000 3,76,000
10,08,000
Less: Book value of Machine sold on 30.06.2013 (1,89,000) 8,19,000
Less: Depreciation on machinery in use

(1,56,450-9,450) (1,47,000)
Book Value as on 31.03.2014 6,72,000 (iii) Loss on exchange of Machinery
Particulars `
Book value of machinery as on 01.04.2013 1,89,000
Less: Depreciation for 3 months 9,450

WDV as on 30.06.2013 1,79,550
Less: Exchange value 1,75,000
Loss on exchange of machinery 4,550
From the following information state the amount to be capitalized as per AS 10. Give the explanations for your
answers.
` 5 lakhs as routine repairs and` 1 lakh on partial replacement of a part of a machine.
` 10 lakhs on replacement of part of a machinery which will improve the efficiency of a machine. (4 marks)
Answer :
As per AS-10 “Property, Plant and Equipment”, only those expenditures that increase the future benefits from
the existing assets, beyond its previously assessed standard of performance, are to be included in the gross book
value.
Hence, in the given case, amount of ` 5 lakhs spent on routine repairs and` 1 lakh on partial replacement of a part of
the machinery should be charged to Profit and Loss Account as these amounts will help in maintaining the capacity
but will not improve the efficiency of the machine.
However, `10 lakhs incurred on replacement of a part of the machinery, which will increase the efficiency of a
machine, should be capitalized by inclusion in the gross book value of machinery.
Versatile Limited purchased Machinery for `4,80,000 (inclusive of GST of ` 40,000). Input Tax credit is available
for the GST paid. The Company incurred the following other expenses for installation.
Particulars ` Cost of preparation of site for installation 21,000 Total labour charges (200 out of the total 600 man
hours worked, were spent for installation of the Machinery) 66,000 Spare parts and tools consumed in installation
6,000 Total salary of supervisor (time spent for installation was 25% of the total time worked) 24,000 Total
administrative expenses (1/10 relates to the plant installation) 32,000 Test run and experimental production expenses
23,000 Consultancy charges to architect for plant set up 9,000 Depreciation on assets used for the installation 12,000
The Machine was ready for use on 15th January but was used from 1st February. Due to this delay further
costs`19,000 were incurred. Calculate the value at which the plant should be capitalized. [Modified] (4 marks)
Answer:
Cost of PPE (i.e. Machine) is calculated as under Particulars Amount (`)
Purchase Price ( ` 4,80,000 less GST for which Credit is 4,40,000

available 40,000)
Add: Site Preparation Cost 21,000
Labour Charges ` 66,000 × 22,000

Spares and Tools in Installation 6,000
Salary of Supervisor (24,000 × 25%) 6,000
Admin Expense attributable to Installation (Attributable 3,200
Costs are included) 1/10th of 32,000
Test Run & Experimental Production (Indirect Element) 23,000
Consultancy Charges to Architect for Plant setup 9,000
Depreciation on Asset used for Installation 12,000
Expenses due to delay in use (Excluded as it is abnormal) Nil Total Capitalized Cost of Asset 5,42,200
A machinery with a useful life of 6 years was purchased on 1stApril, 2012 for` 1,50,000. Depreciation was provided
on straight line method for first three years considering a residual value of 10% of cost.
In the beginning of fourth year the company reassessed the remaining useful life of the machinery at 4 years and
residual value was estimated at 5% of original cost.
The accountant recalculated the revised depreciation historically and charged the difference to profit and loss
account. You are required to comment on the treatment by accountant and calculate the depreciation to be charged
for the fourth year. (5 marks)
Answer:
According to AS-10 “Property, Plant and Equipment”, if the depreciable assets are revalued, the provision for
depreciation should be based on the revalued amount and on the estimate of the remaining useful lives of such
assets. In case the revaluation has a material effect on the amount of depreciation, the same should be disclosed
separately in the year in which revaluation is carried out.
As per the standard, when there is a revision of the estimated useful life of an asset, the unamortized depreciable
amount should be charged over the revised remaining useful life. Accordingly revised depreciation shall be
calculated prospectively. Thus, the treatment done by the accountant regarding recalculating the revised
retrospectively is incorrect.
Calculation of Depreciation
Depreciation per year charged for first three years
WDV of the machine at the beginning of the fourth year
depreciation historically i.e.
=` 1,35,000 /6 = ` 22,500
= ` 1,50,000 – (` 22,500 × 3) =` 82,500

Depreciable amount after reassessment
of residual vale
=` 82,500 - 7,500
= ` 75,000
Remaining useful life as per revised estimate = 4 years Depreciation from the fourth year onwards =` 75,000/4
=` 18,750 Space to write important points for revision

Hema Ltd. purchased a machinery on 1.04.2008 for ` 15,00,000. The company charged straight line depreciation
based on 15 years working life estimate and residual value ` 3,00,000. At the beginning of the 4th year, the company
by way of systematic evaluation revalued the machinery upward by 20% of net book value as on date and also re-
estimated the useful life as 7 years and scrap value as nil. The increase in net book value was credited directly to
revaluation reserves. Depreciation (on SLM basis) later on was charged to Profit & Loss Account. At the beginning
of 8thyear the company decided to dispose off the machinery and estimated the realizable value to ` 2,00,000.
You are required to ascertain the amount to be charged to Profit & Loss Account at the beginning of 8th year with
reference to AS-10. (5 marks)
Answer:
Calculation of Depreciation:
Cost of Machinery as on 1.4.2008 = ` 15,00,000
Depreciation p.a. = `
= ` 80,000
☐ Depreciation for 3 years (1.4.2008 to 31.3.2011) =` 80,000 × 3
= ` 2,40,000 ☐ Net Book Value of Machinery as on 1.4.2011:

Cost of Machinery (1.4.2008) ` 15,00,000 Less: Depreciation for 3 years ` (2,40,000)
` 12,60,000
Revised Net Book Value as on 1.4.2011:
Book Value (Less: Depreciation) ` 12,60,000
Add: Increase in book value @ 20% ` 2,52,000
` 15,12,000
Thus:
Increase in Revaluation to be taken to Revaluation Reserve =` 12,60,000 – ` 15,12,000 = ` 2,52,000
Revised Depreciation (p.a.) = = ` 2,16,000 (Assumption: Useful life = 7 years)

☐ Depreciation for 4 years (1.04.2011 to 31.03.2015)
= ` 2,16,000 × 4 = ` 8,64,000
Thus:
Net Book Value of Machinery as on 1.4.2015:
Revised Book Value as on 1.4.2011= ` 15,12,000 Less: Depreciation for 4 years ` (8,64,000)
` 6,48,000
Deemed Book Value of Machinery on 1.4.2015
If Revaluation had not taken place ` 15,00,000
Less: Depreciation for first 3 years ` (2,40,000) ` 12,60,000
Less: Depreciation for next 4 years = = ` 7,20,000
` 5,40,000
Loss on Disposal Book Value (1.4.2015) ` 6,48,000
Less: Realisable Value on Disposal ` 2,00,000
` 4,48,000
Deemed Book Value ` 5,40,000
Less: Realisable Value on Disposal ` 2,00,000
` 3,40,000
Thus:
Loss to be debited (Adjusted in Revaluation Reserve)
=` 4,48,000 – ` 3,40,000 =` 1,08,000
Amount to be debited (Adjusted in Profit and Loss A/c)
=` 4,48,000 – ` 1,08,000 =` 3,40,000
Balance in Revaluation Reserve transferred to General Reserve =` 2,52,000 – ` 1,08,000 =` 1,44,000.
Q.6.18 2017 - Nov [1] {C} (a), RTP Practical
ABC Ltd. is installing a new plant at its production facility. It provides you the following information:
Cost of the plant (cost as per supplier’s invoice) ` 31,25,000 Estimated dismantling costs to be incurred after 5 years
` 2,50,000 Initial Operating losses before commercial production ` 3,75,000 Initial delivery and handling costs `
1,85,000 Cost of site preparation ` 4,50,000 Consultants used for advice on the acquisition of the plant ` 6,50,000
Please advise ABC Ltd. on the costs that can be capitalised for plant in accordance with AS 10 : Property, Plant and
Equipment.
(5 marks)
Answer:
As per AS-10, PPE, the costs will be capitalised as follows:
Particulars Amount (`) Purchase Price 31,25,000

Estimated Dismantling Costs to be incurred after 5 years 2,50,000
Initial Delivery & Handling Costs 1,85,000
Site Preparation Cost 4,50,000
Consultancy Charges 6,50,000
Total Capitalized Cost of Asset 46,60,000

Neon Enterprise operates a major chain of restaurants located in different cities. The company has acquired a new
restaurant located at Chandigarh. The new restaurant requires significant renovation expenditure. Management
expects that the renovations will last for 3 months during which the restaurant will be closed.
Management has prepared the following budget for this period – Salaries of the staff engaged in preparation of
restaurant before its opening ` 7,50,000 Construction and remodelling cost of restaurant ` 30,00,000 Explain the
treatment of these expenditures as per the provisions of AS 10 “Property, Plant and Equipment”. (5 marks)
Answer:
As per provisions of AS 10, any cost directly attributable to bring the assets to the location and conditions
necessary for it to be capable of operating in the manner indicated by the management are called directly attributable
costs and would be included in the costs of an item of PPE. Management should capitalise the costs of construction
and remodeling the restaurants, because they are necessary to bring the store to the condition necessary for it to be
capable of operating in the manner intended by management. The restaurant cannot be opened without incurring the
remodeling expenditure and thus the expenditure should be considered part of the asset. So, construction and
remodeling cost of restaurant of ` 30,00,000 should be capitalised.
However, if the cost of salaries, utilities and storage of goods are in the nature of operating expenditure that would
be incurred if the restaurant was open, then these costs are not necessary to bring the store to the condition necessary
for it to be capable of operating in the manner intended by management should be expensed. So, salaries of the staff
engaged in preparation of restaurant before its opening shall not be capitalised (` 7,50,000).
Q.6.20 RTP Practical Preet Ltd. is installing a new plant at its production facility. It has incurred these costs:
1. Cost of the plant (cost per supplier’s invoice plus taxes) ` 50,00,000
2. Initial delivery and handling costs ` 4,00,000
3. Cost of site preparation ` 12,00,000
4. Consultants used for advice on the acquisition of the plant ` 14,00,000 5. Interest charges paid to supplier of plant
for deferred credit ` 4,00,000
6. Estimated dismantling costs to be incurred after 7 years ` 6,00,000

7. Operating losses before commercial production ` 8,00,000
Please advise Preet Ltd. on the costs that can be capitalised in accordance with AS 10 (Revised).
Answer :
According to AS 10 (Revised), these costs can be capitalised:
1. Cost of the plant ` 50,00,000

2. Initial delivery and handling costs ` 4,00,000
3. Cost of site preparation ` 12,00,000
4. Consultants’ fees ` 14,00,000
5. Estimated dismantling costs to be incurred after 7 years ` 6,00,000
` 86,00,000
Note: Interest charges paid on “Deferred credit terms” to the supplier of the plant (not a qualifying asset) of `
4,00,000 and operating losses before commercial production amounting to`8,00,000 are not regarded as directly
attributable costs and thus cannot be capitalised. They should be written off to the Statement of Profit and Loss in
the period they are incurred.

7
AS - 11 The Effects of Changes in Foreign Exchange Rates
Q.7.1 2013 - May [7] (b), RTP Descriptive
Explain "monetary item" as per Accounting Standard 11. How are foreign currency monetary items to be recognized
at each Balance Sheet date? Classify the following as monetary or non-monetary item:
(i) Share Capital
(ii) Trade Receivables
(iii) Investments
(iv) Fixed Assets (4 marks) [IPCC Gr. II]
Answer
• According to AS 11 ‘The Effects of Changes in Foreign Exchange Rates’, Monetary items are money held and
assets and liabilities to be received or paid in fixed or determinable amounts of money.
• Foreign currency monetary items should be reported using the closing rate at each balance sheet date.
• Whereas, in certain circumstances, the closing rate may not reflect with reasonable accuracy the amount in
reporting currency that is likely to be realised from, or required to disburse, a foreign currency monetary item at the
balance sheet date.
• In such situation, the relevant monetary item should be reported in the reporting currency at the amount which is
likely to be realised from or required to disburse, such item at the balance sheet date. Share capital
Trade receivables Investments
Fixed assets
Non-monetary Monetary
Non-monetary Non-monetary Space to write important points for revision
Q.7.2 2016 - Nov [7] (a) Descriptive
With reference to AS 11, define the following:

(i) Integral Foreign Operation.
(ii) Non-Integral Foreign Operation. (4 marks) [IPCC Gr. II]
Answer:
(i) Integral Foreign Operation:
It is a foreign operation, the activities of which are an integral part of those of the reporting enterprise a foreign
operation that is integral to the operations of the reporting enterprise carries on its business as if it were an extension
of the reporting enterprise’s operation.
(ii) Non-Integral Foreign Operation:

It is a foreign operation that is not an integral foreign operation when there is a change between in the exchange rate
between the reporting currency and the local currency. There is a little or no direct impact of the present and future
cash flow from operations of either the nonintegral foreign operation or the reporting enterprise the change in the
exchange rate affects the reporting enterprise’s net investment in the non-integral foreign operation rather than the
individual monetary and non-monetary items held by the non-integral foreign operation. Space to write important
points for revision
Exchange Rate Goods purchased on 1.1.2007 of US $ 10,000 ` 45

Exchange rate on 31.3.2007 ` 44
Date of actual payment 7.7.2007 ` 43
Ascertain the loss/gain for financial years 2006-07 and 2007-08, also give their treatment as per AS-11. (4 marks)
[IPCC Gr. II] Answer :
Provision:
As per AS -11 all foreign currency transaction should be recorded by applying the exchange rate at the date of
transaction.
Therefore, goods purchased on 1.1.2007 and corresponding creditor would be recorded at ` 45 = U$ 1. i.e; 10,000 ×
45 = 4,50,000
As per AS 11 at the Balance Sheet date all monetary items should be As per AS 11 at the Balance Sheet date all
monetary items should be 2007 will be reported = 10,000 × 44 = 4,40,000.
Exchange Loss/Gain (4,40,000 ☐ 4,50,000) = 10,000 Gain should be credited in P/L A/c for 2006-07.
As per AS-11, exchange difference on settlement on maturity items should be transferred to Profit and Loss A/c as
gain or loss. Therefore 10,000 × 43 = 4,30,000☐4,40,000 =`10,000 gain should be transferred to profit and loss for
the year 2007 - 08.
Q.7.4 2009 - Nov [1] (iii) Practical
Sterling Ltd. purchased a plant for US $ 20,000 on 31st December, 07

payable after 4 months. The company entered into a forward contract for 4
months @`48.85 per dollar. On 31stDecember, 07, the exchange rate was ` 47.50 per dollar.
How will you recognise the profit or loss on forward contract in the books of Sterling Limited for the year ended
31st March, 2008.
Calculation of profit or loss to be recognised in the books of Sterling Limited:
Forward contract rate ` 48.85 Less : Spot rate ` 47.50 Loss ` 1.35
Forward Contract Amount $ 20,000

Total loss on entering into forward contract = ($20,000 × ` 1.35) ` 27,000
Contract period 4 months Loss for the period 1st January, 2008 to 31st March, 2008 i.e.
3 months falling in the year 2007-2008 will be` .27,000 × =` 20,250

Balance loss of`6,750 (i.e.`27,000 –`20,250) for the month of April, 2008 will be recognised in the financial year
2008 - 2009.
Q.7.5 2011 - Nov [7] (b) Practical
Sunshine Company Limited imported raw materials worth US Dollars 9,000 on 25th February, 2011, when the
exchange rate was ` 44 per US Dollar. The transaction was recorded in the books at the above mentioned rate. The
payment for the transaction was made on 10thApril, 2011, when the exchange rate was` 48 per US Dollar. At the
year end 31st March, 2011, the rate of exchange was ` 49 per US Dollar.
The Chief Accountant of company passed an entry on 31st March, 2011 adjusting the cost of raw material consumed
for the difference between `48 and`44 per US Dollar. Discuss whether this treatment is justified as per the provisions
of AS-11 (Revised). (4 marks) [IPCC Gr. II]
Answer:
Provision:
As per para 9 of AS 11, ‘The Effects of Changes in Foreign Exchange Rates’, initial recognition of a foreign
currency transaction is done in the reporting currency by applying the exchange rate at the date of the transaction.
Accordingly, on 25th February 2011, the raw material purchased and its creditors will be recorded at US dollar 9,000
× ` 44 = ` 3,96,000. Also, as per para 11 of the standard, on balance sheet date such transaction is reported at closing
rate of exchange, hence it will be valued at the closing rate i.e.` 49 per US dollar (USD 9,000 ×` 49 =` 4,41,000) at
31st March, 2011, irrespective of the payment made for the same subsequently at lower rate in the next financial
year.
The difference of`5 (49 – 44) per US dollar i.e.`45,000 (USD 9,000 ×`5) will be shown as an exchange loss in the
profit and loss account for the year ended 31st March, 2011 and will not be adjusted against the cost of raw
materials.
In the subsequent year on settlement date, the company would recognize or provide in the Profit and Loss Account
an exchange gain of ` 1 per US dollar, i.e. the difference from balance sheet date to the date of settlement between`
49 and` 48 per US dollar i.e. ` 9,000. Hence, the accounting treatment adopted by the Chief Accountant of the
company is incorrect i.e. it is not in accordance with the provisions of AS 11.
Beekay Ltd. purchased fixed assets costing to `5,000 lakh on 01.04.2012

payable in foreign currency (US $) on 05.04.2013. Exchange rate of 1 US $ = ` 50.00 and ` 54.98 as on 01.04.2012
and 31.03.2013
respectively.
The company also obtained a soft loan of US$ 1 lakh on 01.04.2012
payable in three annual equal instalments. First instalment was due on 01.05.2013. You are required to state, how
these transactions would be accounted for in the books of accounts ending 31st March, 2013. (5 marks) [IPCC Gr. II]
Answer:
As per AS - 11
(i) Difference arising on reporting of long-term foreign currency monetary items at rates different from those at
which they were initially recorded during the period, or reported in previous financial statements, in so far as they
relate to requisition of depreciable capital asset, can be added to or deducted from cost of asset.
(ii) The MCA has given an option to capitalize the exchange differences arising on reporting of long term foreign
currency monetary items till 31st March, 2020.
Thus the company can capitalize the exchange differences arising due to long term loans linked with the acquisition
of fixed assets. 1. Calculation of exchange difference on fixed assets
Foreign Exchange Liability = = US $ 100 lakhs
Exchange Difference = US $ 100 lakhs x ( ` 54.98 ` 50) = ` 498 lakhs.

Loss due to exchange difference amounting` 498 lakhs will be capitalised and added in the carrying value of fixed
assets. Depreciation on the unamortised amount will be provided in the remaining years.
2. Soft loan exchange difference (US $ 1 lakh i.e. ` 50 lakhs) Value of loan 31.3.13 ☐ US $ 1 lakh x 54.98 = `
54,98,000 Now, AS - 11 also provides that in case of liability such as longterm foreign currency monetary item, the
exchange difference is to be accumulated in the Foreign Currency Monetary Item Translation Difference (FCMITD)
and should be written off over the useful life of such long-term liability, by recognition as income or expenses in
each of such periods.
Thus, Exchange difference between reporting currency (INR) and foreign currency (USD) as on 31.03.2013 = US $
1.00 lakh X ` (54.98 -50) = ` 4.98 lakhs.
Loan account is to be increased to 54.98 lakhs and FCMITD account is to be debited by 4.98 lakhs. Since loan is
repayable in 3 equal annual instalments, ` 4.98 lakhs/3 =` 1.66 lakhs is to be charged in Profit and Loss Account for
the year ended 31st March, 2013 and balance in FCMITD A/c ` (4.98 lakhs - 1.66 lakhs) = ` 3.32 lakhs is to be
shown on the ‘Equity & Liabilities’ side of the Balance Sheet as a negative figure under the head ‘Reserve and
Surplus’ as a separate line item.

Stem Ltd. purchased a Plant for US$ 30,000 on 30th November, 2013 payable after 6 months. The company entered
into a forward contract for 6 months @` 62.15 per dollar. On 30th November, 2013, the exchange rate was ` 60.75
per dollar.
How will you recognise the profit or loss on forward contract in the books of Stem Ltd. for the year ended 31st
March, 2014? (5 marks) [IPCC Gr. II]
Answer:
Calculation of Profit or Loss
(i) Value at the rate prevailing at the inception of forward contract = (USD ` 30,000 × 60.75) =` 18,22,500
(ii) Value at forward rate = (USD 30,000 × 62.15) = ` 18,64,500
(iii) Total loss on entering into the forward contract = arising at inception for 6 months contract period =`42,000
(i.e.`18,64,500 `18,22,500) (iv) Loss to be recognised for the year ended 31st March, 2014
= = ` 28,000

Explain briefly the accounting treatment needed in the following cases as per AS 11 as on 31.3.2015.
Sundry Debtors include amount receivable from Umesh`5,00,000 recorded at the prevailing exchange rate on the
date of sales, transactions recorded at US $ 1 = ` 58.50.
Long term loan taken from a U.S. Company, amounting to ` 60,00,000. It was recorded at US $ 1 =` 55.60, taking
exchange rate prevailing at the date of transaction.
US $ 1 =` 61.20 on 31.3.2015 (5 marks) [IPCC Gr. II] Answer:
As per AS -11 "Accounting for Foreign Exchange transaction on initial recognition should be recorded by applying
the foreign currency at the date of the transaction.
But the transaction as on the balance sheet date should be recorded as follows:
☐ Monetary Items: Monetary items are money held and assets and
liabilities to be received or paid in fixed or determinable amounts of money. So that the monetary items as on
balance sheet date should be reported by using the closing exchange rates.
☐ Non - Monetary items: Non-Monetary items are other than monetary items. Such items which are carried in
terms of historical cost denominated in a foreign currency should be reported using the exchange rate at the date of
the transaction:
(i) Here the sundry debtors which include the receivable from Umesh `5,00,000 to be recorded initially by applying
exchange rate as on the date of transaction. As on balance sheet date this receivable recorded as rate on the
31/3/2015 i.e.`61.20 as it is monetary item as per AS 11. And such difference of rate i.e. (61.20 - 58.50) = 2.7 x
8,547 =` 23,077 is to be credited to P&L A/c as foreign exchange gain.
(ii) In this case firstly loan from US Company recorded at rate of initial recognition` 55.60. On the balance sheet
date the rate is` 61.20 so that the loss on the exchange transaction i.e. (61.20 - 55.60) =` 5.6 x 1,07,914 =` 6,04,317.
So that loss of` 6,04,317 is to be debited to foreign exchange account and the loan is recorded in B/S at` 55-60.

Q.7.9 2015 - Nov [1] {C} (d) Practical
Shan Builders Limited has borrowed a sum of US $ 10,00,000 at the beginning of Financial Year 2014-15 for its
residential project at LIBOR + 3%. The interest is payable at the end of the Financial Year. At the time of availment,
exchange rate was ` 56 per US $ and the rate as on 31st March, 2015 was` 62 per US $. If Shan Builders Limited
borrowed the loan in India in Indian Rupee equivalent, the pricing of loan would have been 10.50%. Compute
Borrowing Cost and exchange difference for the year ending 31st March, 2015 as per applicable Accounting
Standards. (Applicable LIBOR is 1%). (5 marks) [IPCC Gr. II]
Answer:
(i) Interest for the period 2014-15
= US$ 10 lakhs x 4% × ` 62 per US$ = ` 24.80 lakhs

(ii) Increase in the liability towards the principal amount
= US $ 10 lakhs × ` (62 - 56) =` 60 lakhs
(iii) Interest that would have resulted if the loan was taken in Indian
currency
= US$ 10 lakhs × ` 56 x 10.5% = ` 58.80 lakhs
(iv) Difference between interest on local currency borrowing and foreign
currency borrowing = ` 58.80 lakhs - ` 24.80 lakhs = ` 34 lakhs. Therefore, out of`60 lakhs increase in the liability
towards principal amount, only ` 34 lakhs will be considered as the borrowing cost. Thus, total borrowing cost
would be ` 58.80 lakhs being the aggregate of interest of ` 24.80 lakhs on foreign currency borrowings plus the
exchange difference to the extent of difference between interest on local currency borrowing and interest on foreign
currency borrowing of ` 34 lakhs.
Hence, ` 58.80 lakhs would be considered as the borrowing cost to be accounted for as per AS 16 “Borrowing
Costs” and the remaining`26 lakhs (60 - 34) would be considered as the exchange difference to be accounted for as
per AS 11 “The Effects of Changes in Foreign Exchange Rates”. Space to write important points for revision
Q.7.10 2016 - May [1] {C} (d), RTP Practical
M/s Power Track Ltd. purchased a plant for US $ 50,000 on 31stOctober, 2015 payable after 6 months. The
company entered into a forward contract for 6 months @ ` 64.25 per Dollar. On 31st October, 2015 the exchange
rate was ` 61.50 per Dollar.
You are required to recognise the profit or loss on forward contract in the books of the company for the year ended
31st March, 2016.

Calculation of profit or loss to be charged or recognised in the books of M/s Power Track Ltd.
Particulars (`) Forward Contract Rate 64.25 (-) Spot Rate (61.50) Loss 2.75 Forward Contract Amount $ 50,000
Total loss on entering into forward contract = ($ 50,000 × ` 1,37,500 2.75)
Contract Period 6 Months Loss for the period 1st Nov. 2015 to 31st March, 2016 5 Months i.e. 5 months falling in
year 2015-16 (137500 × 5/6) `1,14,583.33
Thus, the loss amounting to` 1,14,583 for the period is to be recognized in the year ended 31st March, 2016.
ABC Ltd. borrowed US $ 5,00,000 on 01/01/2017, which was repaid as on 31/07/2017. ABC Ltd. prepares financial
statement ending on 31/03/2017. Rate of Exchange between reporting currency (INR) and foreign currency (USD)
on different dates are as under:
01/01/2017 1 US $ =` 68.50
31/03/2017 1 US $ =` 69.50
31/07/2017 1 US $ =` 70.00
You are required to pass necessary journal entries in the books of ABC Ltd. as per AS 11. (5 marks) Answer:
Journal Entries in the books of ABC Ltd.
Date Particulars ` (Dr.) ` (Cr.) Jan, 01 Bank A/c ($ 5,00,000 × 68.5) Dr. 3,42,50,000
2017 To Foreign Loan A/c 3,42,50,000
March, Foreign Exchange Difference A/c Dr. 5,00,000 31 2017 To Foreign Loan A/c 5,00,000 [$ 5,00,000 × (69.5 –
68.5)]
Jul, 01 Foreign Exchange Difference A/c

2017 [$ 5,00,000 × (70 – 69.5)] Dr. 2,50,000
Foreign Loan A/c Dr. 3,47,50,000
To Bank A/c 3,50,00,000 Space to write important points for revision
(i) ABC Ltd. a Indian Company obtained long term loan from WWW private Ltd., a U.S. company amounting to `
30,00,000. It was recorded at US $1 =`60.00, taking exchange rate prevailing at the date of transaction. The
exchange rate on balance sheet date (31.03.2018) was US $ 1 = ` 62.00.
(ii) Trade receivable includes amount receivable from Preksha Ltd., `10,00,000 recorded at the prevailing exchange
rate on the date of sales, transaction recorded at US $1 =` 59.00. The exchange rate on balance sheet date
(31.03.2018) was US $ 1 = ` 62.00.
You are required to calculate the amount of exchange difference and also explain the accounting treatment needed in
the above two cases as per AS 11 in the books of ABC Ltd. (5 marks)
Answer:
As per AS 11 “The effects of changes in Foreign Exchange Rates”, exchange differences arising on the
settlement of monetary items or on reporting an enterprise’s monetary items at rates different from those at which
they were initially recorded during the period, or reported in previous financial statements, should be recognised as
income or as expenses in the period in which they arise.
However, at the option of an entity, exchange differences arising on operating of long-term foreign currency
monetary items at rates different from those at which they were initially recorded during the period, or reported in
previous financial statements, in so far as they relate to the acquisition of a non-depreciable capital asset can be
accumulated in a “Foreign Currency Monetary Item Translation Difference Account” in the enterprises’s financial
statements and amortised over the balance period of such long-term asset/liability, by recognition as income or
expense in each of such periods.
Long term Loan Foreign Currency Rate (`) Initial recognition US $ 50,000
(` 30,00,000/ ` 60) 1 US $ =` 60 30,00,000
Rate on Balance Sheet date 1 US $ =` 62

Exchange Difference Loss
US $ 50,000 × (` 62 – ` 60) 1,00,000
Treatment: Credit Loan A/c and

debit FCMITD A/c or Profit and Loss
A/c by ` 1,00,000
Trade Receivables Foreign Currency Rate (`) Initial recognition US $ 16949.15 10,00,000 (` 10,00,000 / ` 59) 1
US $ =` 59
Rate on Balance Sheet date 1 US $ =` 62
Exchange Difference Gain 50,847.45 US $ 16949.15 × (` 62 – ` 59)
Treatment: Credit Profit and Loss
A/c by ` 50,847.45
Thus, Exchange Difference on Long term loan amounting` 1,00,000 may
either be charged to Profit and Loss A/c or to Foreign Currency Monetary Item Translation Difference Account but
exchange difference on trade receivables amounting ` 50,847.45 is transferred to Profit & Loss A/c.

AXE Limited purchased fixed assets costing $ 5,00,000 on 1st Jan. 2018 from an American company M/s M&M
Limited. The amount was payable after 6 months. The company entered into a forward contract on 1st January 2018
for five months @`62.50 per dollar. The exchange rate per dollar was as follows: On 1st January, 2018 On 31st
March, 2018 ` 60.75 per dollar ` 63.00 per dollar
You are required to state how the profit or loss on forward contract would be recognized in the books of AXE
Limited for the year ending 2017-18, as per the provisions of AS 11. (5 marks)
Answer:
As per Para 39 of AS 11 ‘Changes in Foreign Exchange Rates’, in recording a forward exchange contract
intended for trading or speculation purpose, the premium or discount on the contract is ignored and at each balance
sheet date, the value of contract is marked to its current market price and gain or loss on the contract is recognised.
Forward Rate ` 62.50

Less: Spot Rate (` 60.75) Premium on Contract ` 1.75
Contract Amount US$ 5,00,000
Total Loss (5,00,000 × 1.75) ` 8,75,000
Contract period 5 months

3 months falling in the year 2017-18; therefore loss to be recognized in
2017-18 (8,75,000/5) × 3 =` 5,25,000. Rest` 3,50,000 will be recognized in the following year 2018-19.
Karan Enterprises having its Head Office in Mangalore, Karnataka has a
Karan Enterprises having its Head Office in Mangalore, Karnataka has a 3-2019:
Particulars Amount ($) Amount ($) Dr. Cr.
Fixed assets 8,000

Opening inventory 800
Cash 700
Goods received form Head Office 2,800
Sales 24,050 Purchases 11,800
Expenses 1,800
Remittance to head office 2,450
Head office account 4,300 28,350 28,350
(i) Fixed assets were purchased on 1st April, 2015.
(ii) Depreciation at 10% p.a. is to be charged on fixed assets on straight line method.
(iii) Closing inventory at branch is $ 700 as on 31-3-2019.
(iv) Goods received form Head Office (HO) were recorded at` 1,85,500 in HO books.
(v) Remittances to HO were recorded at ` 1,62,000 in HO books.
(vi) HO account is recorded in HO books at ` 2,84,500.
(vii) Exchange rates of US Dollar at different dates can be taken as: 1-4-2015 ` 63;
1-4-2018 ` 65 and
31-3-2019 ` 67.
Prepare the trial balance after been converted into Indian rupees in
accordance with AS-11. (5 marks) Space to write important points for revision
Q.7.15 RTP Practical Exchange Rate per $
Goods purchased on 1.1.2017 for US $ 15,000 ` 75

Exchange rate on 31.3.2017 ` 74
Date of actual payment 7.7.2017 ` 73
You are required to ascertain the loss/gain for financial years 2016-17 and 2017- 18, also give their treatment as per
AS 11.
Answer:
As per AS 11 on ‘The Effects of Changes in Foreign Exchange Rates’, all foreign currency transactions should be
recorded by applying the exchange rate on the date of transactions. Thus, goods purchased on 1.1.2017 and
corresponding creditor would be recorded at`11,25,000 (i.e. $15,000 ×`75) According to the standard, at the balance
sheet date all monetary transactions should be reported using the closing rate. Thus, creditors of US $15,000 on
31.3.2017 will be reported at ` 11,10,000 (i.e. $15,000 ×` 74) and exchange profit of ` 15,000 (i.e. 11,25,000 –
11,10,000) should be credited to Profit and Loss account in the year 2016-17.
On 7.7.2017, creditors of $15,000 is paid at the rate of ` 73. As per AS 11, exchange difference on settlement of the
account should also be transferred to Profit and Loss Account. Therefore,`15,000 (i.e. 11,10,000 – 10,95,000) will
be credited to Profit and Loss Account in the year 2017-18.

Q.7.16 RTP Practical
Rau Ltd. purchased a plant for US$ 1,00,000 on 01st February 2016, payable after three months. Company entered
into a forward contract for three months @ ` 49.15 per dollar. Exchange rate per dollar on 01st Feb. was` 48.85.
How will you recognise the profit or loss on forward contract in the books of Rau Ltd.?
Answer :
Forward Rate ` 49.15
Less : Spot Rate (` 48.85)
Premium on Contract ` 0.30
Contract Amount US$ 1,00,000
Total Loss (1,00,000 × 0.30) ` 30,000
Contract period 3 months
Two falling the year 2016-17; therefore loss to be recognised (30,000/3) x 2 =` 20,000. Rest ` 10,000 will be
recognised in the following year.
8 AS - 12 Accounting for Government Grants
Q.8.1 2007 - May [6] (c), RTP Descriptive
How Government grant relating to specific fixed asset is treated in the books as per AS-12?
Answer:
As per AS - 12 'Accounting for Government Grants', Government grant relating to specific fixed asset is treated
as follows :
1. Government grants related to specific fixed assets should be presented
in the balance sheet by showing the grant as deduction from the gross value of the fixed assets concerned in arriving
at their book value. 2. When the grant related to a specific fixed asset equal to the whole, or
virtually the whole, of the cost of the asset, the asset should be shown in the balance sheet at a nominal value.
3. Alternatively, government grants related to depreciable fixed assets may be treated as deferred income which
should recognised in the profit and loss statement on a systematic and rational basis over the useful life of the asset,
i.e. Such grants should be allocated to income over the periods and in the proportions in which depreciation on those
assets is charged.
(i) Grant related to non - depreciable assets are credited to capital reserve under this method, as there is usually no
charge to income in respect of such assets.
(ii) But, when a grant related to a non - depreciable asset requires the fulfillment of certain obligations, the grant is
credited to income over the same period over which the cost of certain obligations, the grant is credited to income
over the same period over which the cost of meeting such obligations to charged to income.
(iii) Any differed income is suitably disclosed in the balance sheet pending its apportionment to profit & loss
account.
Q.8.2 2008 - May [5] (iv) Descriptive How would you record a non-monetary grant received from the Government
as per AS-12? (2 marks) [IPCC Gr. II]
Answer :
Para 7 of AS-12 deals with the accounting treatment of Non-monetary Government Grants which says that
Government grants may take the form of non-monetary assets, such as land or other resources, given at concessional
rates. In these circumstances, it is usual to account for such assets at their acquisition cost. Non-monetary assets
given free of cost are recorded at a nominal value.
Q.8.3 2011 - May [7] (b) Descriptive Siva Limited received a grant of ` 1,500 lakhs during the last accounting
year (2009-10) from Government for welfare activities to be carried on by the company for its employees. The grant
prescribed conditions for its utilization. However during the year 2010-11, it was found that the conditions of the
grant were not compiled with and the grant had to be refunded to the Government in full. Elucidate the current
accounting treatment with reference to the provisions of AS-12.(4 marks) [IPCC Gr. II]
Answer :
According to AS 12 ‘Accounting for Government Grants’, Government Grant may, sometimes, become
refundable if certain conditions are not fulfilled.
• A government grant that becomes refundable is treated as extraordinary item as per AS, 5 ‘Net Profit or Loss for
the Period, Prior Period items and Changes in Accounting Policies.
• The amount refundable in respect of a government grant related to revenue is applied first against any unamortized
deferred credit remaining in respect of the grant. To the extent that the amount refundable exceeds any such deferred
credit, or where no deferred credit exists, the amount is charged immediately to profit and loss statement.
• In the given situation the amount of refund of grant of ` 1,500 lakhs should be charged to the profit and loss
account in the year 2010-2011 as an extraordinary item.

Q.8.4 2011 - Nov [7] (d) Descriptive Explain the treatment of Refund of Government Grants as per Accounting
Standard-12. (4 marks) [IPCC Gr. II] OR 2014 - May [7] (c) Descriptive Explain in brief the treatment of Refund
of Government Grants in line with AS 12 in the following three situations :
(i) When Government Grant is related to revenue.

(ii) When Government Grant is related to specific fixed assets, (iii) When Government Grant is in the nature of
Promoter’s contribution.
(4 marks) [IPCC Gr. II] Answer :
Para 11 of AS 12, “Accounting for Government Grants”, explains treatment of government grants in following
situations:
(i) When government grant is related to revenue:
(a) When deferred credit account has a balance: The amount of government grant refundable will be adjusted
against unamortized deferred credit balance remaining in respect of the grant. To the extent that the amount
refundable exceeds any such deferred credit the amount is immediately charged to profit and loss account.
(b) Where no deferred credit account balance exists: The amount of Government grant refundable will be
charged to profit and loss account.
(ii) When government grant is related to specific fixed assets: (a) Where at the time of receipt the amount of
Government grant reduced the cost of asset: The amount of Government grant refundable will increase the book
value of the asset.
(b) Where at the time of receipt the amount of government grant was credited to “Deferred Grant Account”:
The amount of Government grant refundable will reduce the capital reserve or unamortized balance of deferred grant
account as appropriate.
(iii) When Government grant is in the nature of Promoter’s contribution:

The amount of government grant refundable in part or in full on nonfulfilment of specific conditions, the relevant
amount recoverable by the Government will be reduced from capital reserve.
A Government grant that becomes refundable is treated as an extraordinary item.

2. As per the provisions of AS-12, government grants in the nature of
promoters’ contribution which become refundable should be reduced from the capital reserve. (1 mark) Answer:
This statement is True.
As per AS 12, government grants in the nature of promoters contribution
which become refundable should be reduced from the capital reserve. Space to write important points for revision
Q.8.6 2009 - Nov [1] (ix) Practical
X Ltd. received a revenue grant of ` 10 crores during 2006-07 from Government for welfare activities to be carried
on by the company for its employees. The grant prescribed the conditions for utilisation. However during the year
2008-09, it was found that the prescribed conditions were not fulfilled and the grant should be refunded to the
Government.
State how this matter will have to be dealt with in the financial statements of X Ltd. for the year ended 2008-09. (2
marks) [IPCC Gr. II]
Answer:
Provision:
According to AS 12 “Accounting for Government Grants”, a grant that became refundable should be treated as
an extra-ordinary item as per Accounting Standard 5 “Net Profit or Loss for the Period, Prior Period Items and
Changes in Accounting Policies”. The amount refundable in respect of a government grant related to revenue, is
applied first against any unamortised deferred credit remaining in respect of the grant. To the extent that the amount
refundable exceeds any such deferred credit, or where no deferred credit exists, the amount is charged immediately
to profit and loss statement.
Therefore, refund of grant of ` 10 crores should be shown in the profit and loss account of the company as an extra-
ordinary item during the financial year 2008-09.

Q.8.7 2010 - May [1] (ii), RTP Practical
Santosh Ltd. has received a grant of `8 crores from the Govt. for setting up a factory in a backward area. Out of this
grant, the company distributed `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. (2 marks) [IPCC Gr. II]
Answer :
Provision and Analysis:
According to AS-12 ‘Accounting for Government Grants’, when government grant is received for a specific
purpose, it should be utilised for the same. Therefore, 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.
Conclusion:
The treatment of both the grants is incorrect according to AS-12.

ABC Limited purchased a machinery for `25,00,000 which has estimated useful life of 10 years with the salvage
value of ` 5,00,000. On purchase of the assets Central Government pays a grant for ` 5,00,000. Pass the journal
entries with narrations in the books of the company for the first year, treating grant as deferred income. (5 marks)
[IPCC Gr. II]
Answer:
Journal Entries in the Books of ABC Ltd.
Year Particulars Dr.` Cr.(`)
1st Machinery Account Dr. 25,00,000 To Bank Account 25,00,000 (Being machinery purchased)
Bank Account Dr. 5,00,000 To Deferred Government Grant Account 5,00,000 (Being grant received from the
government treated as
deferred income)
Depreciation Account (25,00,000-5,00,000)/10 Dr. 2,00,000 To Machinery Account 2,00,000 (Being depreciation
charged on straight line method)
Profit & Loss Account Dr. 2,00,000 To Depreciation Account 2,00,000 (Being depreciation transferred to P/L
Account)
Deferred Government Grant Account (5,00,000/10)Dr. 50,000 To Profit & Loss Account 50,000
(Being proportionate government grant taken to P/L
Account)
M/s. A Ltd. has set up its business in a designated backward area with an investment of` 200 Lakhs. The Company
is eligible for 25% subsidy and has received` 50 Lakhs from the Government.
Explain the treatment of the Capital Subsidy received from the Government in the Books of the company. (4 marks)
[IPCC Gr. II]
Answer:
☐ As per AS-12, Accounting for Government Grants, the grant or subsidy received from government is
recognised only when there is reasonable assurance that the enterprise will comply with conditions attached to them
and the grants will be received.
☐ Here, the company has been set up in backward area and eligible to receive the capital subsidy and it has received
the subsidy so that` 50 lakhs shall be recognised in books of the company.
☐ ` 50 lakhs shall be recognised as Capital Reserve and to be written off over a period of time as expenditure
incurred.
M/s ABC Ltd. purchased fixed assets for ` 50,00,000. Government grant received towards it is 20%. Residual value
is` 8,00,000 and useful life is 8 years. Assumed depreciation is on the basis of Straight Line Method. Asset is shown
in the Balance Sheet net of grant. After one year, grant becomes refundable to the extent of`7,00,000 due to non-
compliance of certain conditions.
Pass Journal entries for 2nd year in the books of the company.

Journal Entries In the books of ABC Ltd. for 2nd year Year Particulars ` in lakhs ` in lakhs (Dr.) (Cr.) Dr.
7,00,000 2nd year Fixed Assets A/c
To Bank Account (Being government grant on
asset partly refunded which increased the cost of fixed asset) Depreciation Account (W.N.) Dr.
To Fixed Asset Account (Being depreciation charged on SLM on revised value of fixed asset prospectively)
Profit & Loss Account Dr.
To Depreciation Account (Being Depreciation transferred to P & L A/c at the end of year 2)
Working Note:
Depreciation for year 2
7,00,000
5,00,000 5,00,000
5,00,000 5,00,000
Cost of the Asset
Less: Government grant received
` in lakhs
50
(10)
40
Less: Depreciation for the first year 4
Book value at the end of 1st year 36

Add: Government grant refundable in 2nd year 7
43
Depreciation for the second year 5

Ram Ltd. purchased machinery for ` 80 lakhs. (useful life 4 years and residual value` 8 lakhs). Government grant
received is ` 32 lakhs. Show the Journal Entry to be passed at the time of refund of grant and the value of the fixed
assets in the third year and the amount of depreciation for remaining two years, if
(i) the grant is credited to Fixed Assets A/c.

(ii) the grant is credited to Deferred Grant A/c. (5 marks)
Answer:
In the books of Ram Ltd. Journal Entries (At the time of refund of grant)
(i) If Grant is credited to Fixed Asset A/c: Amount (`) Amount (`) (i) Government Grant A/c Dr. 32,00,000 To
Bank A/c 32,00,000 (Being grant refunded)
(ii) The Balance of Fixed Asset in the 3rd Year:

Fixed Asset initially recorded = 80 L – 32 L
= 48 L
Depreciation p.a. = =` 10,00,000 p.a.
Value of Fixed Asset after 2 years but before

refund = 48,00,000 – (10,00,000 × 2) =` 28,00,000
Value of Fixed Asset after refund
=` 28,00,000 + 32,00,000
=` 60,00,000
(iii) The amount of depreciation for remaining 2 years:

= =` 26,00,000 p.a.
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 (` 32 lakhs / 4 years) =`8 lakhs p.a. × 2 years =` 16 lakhs will be credited to Profit
and Loss Account and ` 16 lakhs will be the balance of Deferred Grant Account after two years.
Therefore, on refund of grant, following entry will be passed:
Particulars Amount Amount (`) (`) I Deferred Grant A/c Dr. 16 lakhs Profit & Loss A/c Dr. 16 lakhs To Bank A/c
32 lakhs (Being Government grant refunded)
1. Value of Fixed Assets after two years but before refund of grant:
Fixed assets initially recorded in the books = ` 80 Lakhs Depreciation p.a. = (` 80 Lakhs ` 8 Lakhs)/4 years =` 18
Lakhs per year
Book value of fixed assets after two years = ` 80 Lakhs - (` 18 Lakhs × 2 years) = ` 44 Lakhs
2. Value of Fixed Assets after refund of grant:

On refund of grant the balance of deferred grant account will become Nil. The Fixed assets will continue to be
shown in the books at ` 44 Lakhs.
3. Amount of depreciation for remaining two years:

Depreciation will continue to be charged at ` 18 Lakhs per annum for the remaining two years.
Q.8.12 2018 - May [1] {C} (a) Practical On 01.04.2014, XYZ Ltd. received Government grant of`100 Lakhs for an
acquisition of new machinery costing` 500 Lakhs. The grant was received
and credited to the cost of the asset. The life span of the machinery is 5 years. The machinery is depreciated at 20%
on WDV method. The company had to refund the entire grant in 2nd April, 2017 due to non-fulfilment of certain
conditions which was imposed by the government at the time of approval of grant.
How do you deal with the refund of grant to the government in the books of XYZ Ltd., as per AS 12? (5 marks)
Answer:
! According to para 21 of AS 12 on Accounting for Government
Grant, the amount refundable in respect of a grant related to a specific fixed asset should be recorded by increasing
the book value of the asset or by reducing deferred income balance, as appropriate, by the amount refundable.
Where the book value is increased depreciation on the revised book value should be provided prospectively over the
residual useful life of the asset.
` in lakhs 1st April, 2014 Acquisition cost of Machinery
( ` 500 –` 100) 400.00

31st March, 2015 Less: Depreciation @ 20% (80.00)
1st April, 2015 Book Value 320.00
1st April, 2016 Book Value 256.00
1st April, 2017 Book value 204.80
2nd April, 2017 Add: Refund of grant 100.00
Revised Book Value 304.80
! Depreciation @ 20% on the revised book value amounting`304.80 Lakhs is to be provided prospectively over the
residual useful life of the asset.
A specific government grant of ` 15 lakhs was received by USB Ltd. for acquiring the Hi-Tech Diary plant of ` 95
lakhs during the year 2014-15. Plant has useful life of 10 years. The grant received was credited to deferred income
in the balance sheet. During 2017-18, due to noncompliance of conditions laid down for the grant, the company had
to refund the whole grant to the Government. Balance in the deferred income on that date was` 10.50 lakhs and
written down value of plant was` 66.50 lakhs.
(i) What should be the treatment of the refund of the grant and the effect on cost of plant and the amount of
depreciation to be charged during the year 2017 -18 in profit and loss account?
(ii) What should be the treatment of the refund, if grant was deducted from the cost of the plant during 2014-15
assuming plant account showed the balance of ` 56 lakhs as on 1.4.2017?
You are required to explain in the line with provisions of AS 12 .
Answer:
As per para 21 of AS 12, ‘Accounting for Government Grants’, “the amount refundable in respect of a grant related
to specific fixed asset should be recorded by reducing the deferred income balance. To the extent the amount
refundable exceeds any such deferred credit, the amount should be charged to profit and loss statement.
(i) In this case the grant refunded is ` 15 lakhs and balance in deferred income is`10.50 lakhs,`4.50 lakhs shall be
charged to the profit and loss account for the year 2017-18. There will be no effect on the cost of the fixed asset and
depreciation charged will be on the same basis as charged in the earlier years.
(ii) If the grant was deducted from the cost of the plant in the year 2014-15 then, para 21 of AS 12 states that the
amount refundable in respect of grant which relates to specific fixed assets should be recorded by increasing the
book value of the assets, by the amount refundable. Where the book value of the asset is increased, depreciation on
the revised book value should be provided prospectively over the residual useful life of the asset. Therefore, in this
case, the book value of the plant shall be increased by`15 lakhs. The increased cost of`15 lakhs of the plant should
be amortized over 7 years (residual life). Depreciation charged during the year 2017-18 shall be (56+15)/7 years =`
10.14 lakhs presuming the depreciation is charged on SLM.

Paridhi Electronics Ltd. has current investment (X Ltd.’s shares) purchased for `5 lakhs, which the company want to
reclassify as long term investment on 31.3.2018. The market value of these investments as on date of Balance Sheet
was ` 2.5 lakhs. How will you deal with this as on 31.3.18 with reference to AS-13?
Answer :
As per AS 13 ‘Accounting for Investments’, where investments are reclassified from current to long-term, transfers
are made at the lower of cost or fair value at the date of transfer.
In the given case, the market value of the investment (X Ltd. shares) is 2.50 lakhs, which is lower than its cost i.e.` 5
lakhs. Therefore, the transfer to long term investments should be made at cost of` 2.50 lakhs. The loss of ` 2.50 lakhs
should be charged to profit and loss account.
9 AS - 13 Accounting for Investments
Q.9.1 2008 - Nov [5] (iv) Descriptive
Mention two categories of investments defined by AS 13 and also State their valuation principles. (2 marks)
Answer:
As per AS 13 ‘Accounting for Investments’, there are two categories of investments, viz. Current Investments and
Long Term Investments.
According to Para 14 of the standard, the carrying amount for Current Investments is the lower of cost and fair
value whereas Long Terms Investments are valued at cost less permanent diminutions in value of investment. For
current investments, according to this standard any reduction to fair value and any reversals of such reductions are
included in the profit and loss statement.

4. As per the provisions of AS-13, a current investments is an investment
that is by its nature is readily realisable and is intended to be held for not more than six months from the date on
which such investment is made. (1 mark)
Answer:
This statement is False
As per AS 13, 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.

Q.9.3 2012 - May [1] {C} (b), RTP Practical
M/s Innovative Garments Manufacturing Company Limited invested in the shares of another company on 1st
October, 2011 at a cost of ` 2,50,000. It also earlier purchased Gold of`4,00,000 and Silver of`2,00,000 on 1st March,
2009. Market value as on 31st March, 2012 of above investments are as follows:
`
Shares 2,25,000
Gold 6,00,000
Silver 3,50,000
How above investments will be shown in the books of accounts of M/s Innovative Garments Manufacturing
Company Limited for the year ending 31st March, 2012 as per the provisions of Accounting Standard 13
“Accounting for Investments”? (5 marks)
Answer :
Provision:
According to AS-13, Accounting for Investments, for investment in shares:
• If shares are purchased with an intention to hold for short-term period
then it will be shown at the realizable value of ` 2,25,000 as on 31st March, 2012.
• However, if equity shares are acquired with an intention to hold for long term period then it will be shown at cost
of ` 2,50,000 in the Balance Sheet of the company.
• However, provision for diminution shall be made to recognize a decline, if other than temporary, in the value of
shares.
• According to the standard, investment acquired for long term period shall be shown at cost. Gold and silver are
generally purchased with an intention to hold it for long term period until and unless given otherwise.
The investment in Gold and Silver (purchased on 1st March, 2009) shall continue to be shown at cost as on 31st
March, 2012 i.e.,` 4,00,000 and ` 2,00,000 respectively, though their realizable values have increased.

Q.9.4 2014 - Nov [1] {C} (d) Practical Blue-chip Equity Investments Ltd., wants to re-classify its investments in
accordance with AS-13.
(i) Long term investments in Company A, costing ` 8.5 lakhs are to be re-classified as current. The company had
reduced the value of these investments to` 6.5 lakhs to recognize a permanent decline in value. The fair value on
date of transfer is ` 6.8 lakhs.
(ii) Long term investments in Company B, costing `7 lakhs are to be reclassified as current. The fair value on date of
transfer is ` 8 lakhs and book value is ` 7 lakhs.
(iii) Current investment in Company C, costing ` 10 lakhs are to be reclassified as long term as the company wants
to retain them. The market value on date of transfer is ` 12 lakhs.
(iv) Current investment in Company D, costing` 15 lakhs are to be reclassified as long term. The market value on
date of transfer is` 14 lakhs. (5 marks)
Answer :
(i) As per provisions of AS-13, ‘Accounting for investments’ whenever there is re-classification of investment, as
long term investments are re-classified as current investments then transfer are made at lower of cost and carrying
amount at the date of transfer. ☐ Here, cost of investment is ` 8.5 lakhs and carrying value as on
date of transfer is`6.5 lakhs. Then, investment is valued at` 6.5 lakhs on re-classification.
(ii) As, on re-classification from long term investment to current investment than it is recognised lower of cost
and carrying value on transfer date.
☐ Here, long term investment in Company B to be re-classified as
current cost of investment is ` 7 lakhs and carrying value is ` 7 lakhs. Then investment is re-classified as`7 lakhs
which is lower of cost and fair value.
(iii) As per AS-13, when there is re-classification of investment from current to long term investments then
valuation is to be done lower of cost and fair value at the date of transfer.
☐ Here, investment in Company C shall be re-classified as long
term. The cost of investment is `10 and fair value on transfer date is` 12 lakhs. Then investment is valued at ` 10
lakhs which is lower of cost and fair value.
(iv) As per AS-13, when there is re-classification of investment from current to long term investments then
valuation is to be done on lower of cost and fair value at the date of transfer.
☐ Here investment in Company D shall be re-classified as long term.
The cost of investment is `15 lakhs and fair value on transfer date is` 14 lakhs. Then investment is valued of ` 14
lakhs which is lower of cost and fair value.
Note: This question states that Blue Chip Equity Investment Ltd. wants to reclassify its investments in accordance
with AS 13. The values, at which the investments have to be reclassified, have been given in the above answer.
Q.9.5 2016 - May [1] {C} (b), RTP Practical M/s Active Builders Ltd. invested in the shares of another company
on 31st
October, 2015 at a cost of ` 4,50,000. It also earlier purchased Gold of `5,00,000 and Silver of`2,25,000 on
31stMarch, 2013. Market values as on 31st March, 2016 of the above investments are as follows: Shares ` 3,75,000;
Gold ` 7,50,000 and Silver` 4,35,000
How will the above investments be shown in the books of account of M/s Active Builders Ltd. for the year ending
31st March, 2016 as per the provision of AS-13? (5 marks)
Answer:
As per AS - 13 “Accounting for Investments”, investments which are for long-term purpose should be carried at
cost whereas short-term investments or current investments should be classified at lower of cost and fair value. In
this case, M/s. Active Builders Ltd. should disclose the investments as below as on 31/03/2016:
1. Gold = 5,00,000
2. Silver = 2,25,000
3. Shares = 3,75,000
11,00,000
Loss in shares should be charged to Profit & Loss Account of` 75,000. Space to write important points for revision
Q.9.6 2016 - Nov [1] {C} (c), RTP Practical How you will deal with following in the financial statement of the
Paridhi
Electronics Ltd. as on 31.3.16 with reference to AS-13?

(i) Paridhi Electronics Ltd. invested in the shares of another unlisted company on 1stMay, 2012 at a cost of`3,00,000
with the intention of holding more than a year. The published accounts of unlisted company received in Jan 2016
reveals that the company has incurred cash losses with decline market share and investment of Paridhi Electronics
Ltd. may not fetch more than ` 45,000.
(ii) Also Paridhi Electronics Ltd. has current investment (X Ltd.’s shares) purchased for` 5 lakhs, which the
company wants to reclassify as long term investment. The market value of these investments as on date of Balance
Sheet was ` 2.5 lakhs. (5 marks)
Answer:
(i) Provision:
Any reduction in the carrying amount and any reversal such as reduction should be charged and credited to Profit
and Loss A/c. Analysis:
Paridhi Electronics Ltd. invested in an unlisted company shares of `3,00,000. There is a decline in market share and
investment may not fetch more than`45,000. The facts of the case clearly indicate that the decline in the value of the
Long-Term Investment is not temporary. Hence, a provision for diminution should be made to reduce the Carrying
Amount of Long-Term Investment to`45,000 in the Financial Statements for the year ended 31.03.2016.
The Published Accounts of the unlisted company provide further evidence as to the conditions persisting at the
Balance Sheet date. Hence, this is an “Adjusting Event”under AS-4.
Conclusion:
AS-13 requires disclosure of changes in carrying amounts of long-term investments.
Hence, reduction in carrying amount should be charged to Profit and Loss A/c (i.e.;` 2,55,000).
(ii) Provision:
As per AS-13 ‘Accounting for Investments’, where investments are reclassified from current to long term, transfer
are made at lower of cost and fair value on the date of transfer.
Analysis:
In the given case Paridhi Electronics Ltd. has current investment for ` 5 lakhs and fair value as on date is ` 2.5 lakhs.
Conclusion:
Hence, reclassification will be made at` 2.5 lakhs as market value is less than the cost of ` 5 lakhs.

On 15th June, 2018, Y limited wants to re-classify its investments in accordance with AS- 13 (revised). Decide and
state the amount of transfer, based on the following information:
1. A portion of long term investments purchased on 1st March, 2017 are
to be re-classified as current investments. The original cost of these investments was`14 lakhs but had been written
down by`2 lakhs (to recognise ‘other than temporary’ decline in value). The market value of these investments on
15th June, 2018 was ` 11 lakhs.
2. Another portion of long term investments purchased on 15th January, 2017 are to be re-classified as current
investments. The original cost of these investments was`7 lakhs but had been written down to`5 lakhs (to recognise
‘other than temporary’ decline in value). The fair value of these investments on 15th June, 2018 was ` 4.5 lakhs.
3. A portion of current investments purchased on 15th March, 2018 for ` 7 lakhs are to be re-classified as long term
investments, as the company has decided to retain them. The market value of these investments on 31st March, 2018
was` 6 lakhs and fair value on 15th June, 2018 was ` 8.5 lakhs.
4. Another portion of current investments purchased on 7th December, 2017 for`4 lakhs are to be re-classified as
long term investments. The market value of these investments was:
on 31st March, 2018 ` 3.5 lakhs
on 15th June, 2018 ` 3.8 lakhs (5 marks) Answer:

☐ As per AS 13, (Revised) Accounting for Investment, where long-term
investments are reclassified as current investments, transfers are made at the lower of cost and carrying amount at
the date of transfer.
☐ Where investments are reclassified from current to long-term, transfers are made at the lower of cost and fair
value at the date of transfers. 1. In the first case, investment is written down by` 2 lakhs as it is
other than temporary decline in value. So carrying amount is ` 12

lakhs.` 2 lakhs will be charged to P&L A/c. Now this investment is reclassified as current, which will be made at
lower of cost (i.e. 14
lakhs) and carrying amount (i.e. 12 lakhs). Hence, long term investment are reclassified as current investment should
be carried at ` 12 lakhs.
2. In the second case, investment is written down to ` 5 lakhs as it is other than temporary decline in value so
carrying amount is`5 lakhs. ` 2 lakhs will be charge to P&L A/c. Now this investment is reclassified as current, so
transfer will be made at lower of cost (`7
lakhs) and carrying amount (i.e. 5 lakhs). Hence, long term investment is reclassified as current investment should
be carried at ` 5 lakhs.
3. In the third case, the fair value on 15th June 2018 was ` 8.5 lakhs, which is higher then cost i.e.`7 lakhs.
Therefore the transfer to long term investments should be carried at cost ` 7 lakhs. 4. In the forth case, the fair value
on 15th June 2018 was ` 3.8 lakhs, which is lower than cost i.e.`4 lakhs. Therefore, the transfer to long term
investments should be carried at fair value i.e.` 3.8 lakhs. The loss of ` 0.20 lakhs should be charged to P&L A/c.
10 AS - 16 Borrowing Costs
Q.10.1 2016 - May [7] (e) Short Notes Write short note on ‘Suspension of Capitalisation’ in context of Accounting
Standard 16. (4 marks) [IPCC Gr. II]
Answer:
Suspension of Capitalisation:
As per AS-16 Borrowing cost is suspension of capitalisation are as follows:
(i) When all activities necessary to prepare the qualifying asset for its intended use or sale are in progress then
capitalisation of borrowing costs should continue during the period in which active development is in progress.
(ii) When all the activities necessary to prepare the qualifying asset for its intended use or sale are interrupted then
capitalisation of borrowing costs should be suspended during extended periods in which active development is
interrupted.
(iii) When all the activities necessary to prepare the qualifying asset for its intended use or sale are complete then
capitalisation of borrowing costs should cease completion of active development.
Q.10.2 2009 - May [5] (vi) Descriptive Enumerate two points which the financial statements should disclose in
respect of Borrowing costs as per AS-16. (2 marks) [IPCC Gr. II]
Answer :
As per AS 16, the Financial Statements should disclose the following: 1. The accounting policy adopted for
borrowing costs and
2. The amount of borrowing costs capitalized during the period.
Q.10.3 2009 - Nov [1] (ii) Descriptive Briefly indicate the items which are included in the expressions “Borrowing
Cost” as per AS-16. (2 marks) [IPCC Gr. II]
Answer :
Borrowing costs are interest and other costs incurred by an enterprise in connection with the borrowing of funds.
Borrowing cost generally includes:
1. Interest and commitment charges on bank borrowings and other short
term and long term borrowings.

2. Amortisation of discounts or premiums relating to borrowings.
3. Amortisation of ancillary costs incurred in connection with the arrangement of borrowings.
4. Finance charges in respect of assets required under finance leases or under other similar arrangements; and
5. Exchange differences arising from foreign currency borrowings to the extent that they are regarded as an
adjustment to interest costs. Space to write important points for revision
Q.10.4 2008 - May [5] (vii) Practical
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. (2 marks) [IPCC Gr. II]
Answer :
Provision:
As per AS-16 a qualifying asset is an asset which takes substantial period of time for completion;
Also reference is drawn to Accounting standard Interpretation-1 which states as follows ‘‘The issue as to what
constitutes a substantial period of time primarily depends on the facts and circumstances of each case. However,
ordinarily, a period of twelve months is considered as substantial period of time unless a shorter or longer period can
be justified on the basis of facts and circumstances of the case. In estimating the period, time which an asset takes,
technologically and commercially, to get it ready for its intended use or sale should be considered.’’
In the present question, it is assumed that the asset in question is a qualifying asset. Hence the borrowing cost
incurred till the date of asset coming into use will be capitalized.
Particulars Amount Rate

9% Loan 40,00,000 9% 7 Months
3 Months
Interest Capitalised (i.e. for 2,10,000 operative period)
Charged to P& L 90,000 (i.e. for post

operation period)
TOTAL 10 Months
Particulars
Machinery A/c
To Loan A/c
(Being interest on loan for pre-operative period
capitalized)
Interest on loan A/c Dr. 90,000 To Loan A/c 90,000
(Being the interest on loan for the post-operative
period)
Profit and Loss A/c Dr. 90,000 To Interest on loan A/c 90,000
(Being interest on loan transferred to P &L A/c)
3,00,000
L / F (`) (`) Dr. 2,10,000
2,10,000
Q.10.5 2009 - Nov [6] (b) (i) Practical
Axe Limited began construction of a new plant on 1st April, 08 and obtained a special loan of` 4,00,000 to finance
the construction of the plant. The rate of interest on loan was 10%.
The expenditure that were made on the project of plant were as follows:
`
1st April, 08 5,00,000
1st August, 08 12,00,000
1st January, 09 2,00,000
The company’s other outstanding non-specific loan was`23,00,000 at an interest rate of 12%.
The construction of the plant completed on 31st March, 09. You are required to:
(a) Calculate the amount of interest to be capitalized as per the provisions of AS-16 “Borrowing cost”.
(b) Pass a journal entry for capitalizing the cost and the borrowing cost in respect of the plant. (5 marks) [IPCC Gr.
II] Answer :
Total expenses to be capitalized for borrowings as per AS 16 “Borrowing Costs”:
` Cost of Plant (5,00,000 + 12,00,000 + 2,00,000) 19,00,000 Add: Amount of interest to be capitalised (W.N.2)
1,54,000 20,54,000 Journal Entry
Particulars ` ` 31st Plant A/c Dr. 20,54,000 March, To Bank A/c 20,54,000 2009 [Being amount of cost of plant and
borrowing cost thereon capitalized]
Working Notes:
1. Computation of average accumulated expenses ` 1st April, 2008 ` 5,00,000 × 5,00,000
1st August, 2008 ` 12,00,000 × 8,00,000
1st January, 2009 ` 2,00,000 × 50,000
13,50,000 2. Amount of interest capitalised
` On specific borrowing (` 4,00,000 × 10%) 40,000 On non-specific borrowings (` 13,50,000 – ` 4,00,000) × 12%
1,14,000 Amount of interest to be capitalised 1,54,000 Space to write important points for revision
Q.10.6 2010 - May [1] (iii) Practical
Rohini Limited has obtained loan from an Institution for ` 500 lakhs for modernization and renovating its 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 the balance of`130 lakhs has been utilized for working capital
requirements. Total interest paid for the above loan amounted to`` 09. You are required to state how the interest on
institutional loan is to be accounted for in the year 2008-09. (2 marks) [IPCC Gr. II]
Answer:
Provision:
According to AS 16 ‘Borrowing Costs’, borrowing costs that are directly attributable to the acquisition,
construction or production of qualifying assets (Qualifying asset means an asset that necessarily takes substantial
period of time to get ready for its intended use or sale.) should be capitalised as part of the cost of that asset. Other
borrowing costs are recognized as expense in the period in which they are incurred.
The treatment for total interest amount of ` 65 lakhs can be given as:
Particulars Nature
Interest to be capitalised (` in lakhs) Interest to be charged to Profit and Loss A/c
( ` in lakhs)
Installation of P l a n t a n d Machinery
A d v a n c e t o s u p p l i e r s f o r additional assets Qualifying
asset
= 41.60
Qualifying asset
Working Capital Not a qualifying asset = 6.50
48.10 Space to write important points for revision

= 16.90
16.90
Q.10.7 2010 - Nov [7] (c), RTP Practical On 1st April 2009 Amazing Construction Ltd. obtained a loan of`32
crores to be utilized as under :
(i) Construction of sea link across two cities :

(work was held up totally for a month during the year
due to high water levels) : ` 25 crores
(ii) Purchase of equipments and machineries : ` 3 crores (iii) Working capital : ` 2 crores (iv) Purchase of vehicles : `
50,00,000 (v) Advance for tools/cranes etc. : ` 50,00,000 (vi) Purchase of technical know-how : ` 1 crores
(vii) Total interest charged by the bank for the year

ending 31st March 2010 : ` 80,00,000 Show the treatment of interest by Amazing Construction Ltd.

Provision:
As per AS - 16 ‘Borrowing costs’, qualifying asset is an asset that necessarily takes substantial period of time to get
ready for its intended use.
Borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset
should be capitalised as part of the cost of that asset. Other borrowing costs should be recognised as an expense in
the period in which they are incurred. (AS 16 para 6) Analysis and Conclusion:
The treatment of interest by Amazing Construction Ltd. can be shown as:
Qualifying Asset
Construction of sea-link
Purchase of equipments and machineries
Working capital
Purchase of vehicles
Advance for tools, cranes etc. Purchase of technical know-how No 2,50,000 (80,00,000*(1/32) Total 62,50,000
17,50,000
Interest to Interest to
be be
Capitalized charged
to Profit &
Loss A/c
Yes 62,50,000 (80,00,000*(25/32)
No 7,50,000 (80,00,000*(3/32) No 5,00,000 (80,00,000*(2/32) No 1,25,000 (80,00,000*(.5/32) No 1,25,000

(80,00,000*(.5/32)
Q.10.8 2011 - Nov [1] {C} (a) Practical On 25th April, 2010 Neel Limited obtained a loan from the bank for ` 70
lakhs to be utilised as under:
` in lakhs Construction of factory shed 28

Purchase of Machinery 21
Working Capital 14
Advance for purchase of truck 7
In March 2011, Construction of shed was completed and machinery installed.
Delivery of truck was not received. Total interest charged by the bank for the year ending 31st March, 2011 was` 12
lakhs. Show the treatment of interest under Accounting Standard - 16. (5 marks) [IPCC Gr. II] Answer : Treatment
of Interest as per AS 16 S. Particulars No.
1. Construction of factory shed
2. Purchase of machinery
3. Working capital
4. Advance for purchase of truck
Total
Nature
Qualifying asset
Non
qualifying asset
Non
qualifying asset
Non
qualifying asset
Interest amount to be Interest amount to be capitalized charged to P & L A/c ` 12 lakhs ×

=` 4.80 lakhs ` 12 lakhs ×
=` 3.60 lakhs ` 12 lakhs ×
=` 2.40 lakhs ` 12 lakhs ×
=` 1.20 lakhs ` 4.80 lakhs ` 7.20 lakhs
Assumption:
1. It is assumed that construction of factory shed was completed at the end of March, 2011. Accordingly, interest for
the full year has been capitalized.
2. It is assumed that machinery was ready to use at the time of purchase only and on this basis it has been treated as
non-qualifying asset. Space to write important points for revision
Q.10.9 2013 - Nov [7] (d) Practical
Raj & Co. has taken a loan of US$ 20,000 at the beginning of the financial year for a specific project at an interest
rate of 6% per annum, payable annually. On the day of taking loan, the exchange rate between currencies was`48 per
1 US$. The exchange rate at the closing of the financial year was ` 50 per 1 US$. The corresponding amount could
have been borrowed by the company in Indian Rupee at an interest rate of 11% per annum. Determine the treatment
of borrowing cost in the books of accounts. (4 marks) [IPCC Gr. II]
Answer:
The following computations would be made to determine the amount of borrowing costs for the purpose of AS 16 ‘
Borrowing Costs’: Interest for the period = US $ 20,000 ×` 50 per US $ × 6% = ` 60,000. Increase in the liability
towards the principal amount
= US$ 20,000 × ` (50-48) = ` 40,000. (A)
Interest that would have resulted if the loan was taken in Indian Currency = US $ 20,000 × 48 × 11% = ` 1,05,600
Difference between interest on local currency borrowing and foreign currency borrowing = ` 1,05,600 – ` 60,000 = `
45,600 (B)
In the above case,`40,000 (A) is less than`45,600 (B), therefore the entire exchange difference of` 40,000 would be
considered as borrowing costs. The total borrowing cost would be 1,00,000 (` 60,000 + ` 40,000)
Q.10.10 2014 - May [1] {C} (b), RTP Practical Suhana Ltd. issued 12% secured debentures of ` 100 Lakhs on
01.05.2013, to be utilized as under :
Particulars Amount (` in Lakhs) Construction of factory building 40

Purchase of Machinery 35
Working Capital 25
In March 2014, construction of the factory building was completed and machinery was installed and ready for it’s
intended use. Total interest on debentures for the financial year ended 31.03.2014 was ` 11,00,000. During the year
2013-14, the company had invested idle fund out of money raised from debentures in banks’ fixed deposit and had
earned an interest of ` 2,00,000.
Show the treatment of interest under Accounting Standard 16 and also explain nature of assets. (5 marks) [IPCC Gr.
II] Answer:
☐ As per AS 16 “Borrowing Costs”, borrowing costs that are directly attributable to the acquisition, construction
or production of a qualifying asset should be capitalised as part of the cost of that asset. ☐ The amount of borrowing
costs eligible for capitalisation should be determined in accordance with this Standard. Other borrowing costs should
be recognised as an expense in the period in which they are incurred.
☐ AS 16 also states that to the extent that funds are borrowed specifically for the purpose of obtaining a qualifying
asset, the amount of borrowing costs eligible for capitalisation on that asset should be determined as the actual
borrowing costs incurred on that borrowing during the period less any income on the temporary investment of those
borrowings. ☐ Thus, eligible borrowing cost
=` 11,00,000 –` 2,00,000 =` 9,00,000
Sr. Particulars No.

Nature of assets I n t e r e s t t o b e Capitalized (`)
(i) Construction of factory building

(ii) P u r c h a s e o f Machinery
(iii) Working Capital
Total
Qualifying Asset* Not a Qualifying Asset

Not a Qualifying Asset
9,00,000 ×40/100
=` 3,60,000 NIL
NIL =` 3,60,000
Interest to be charged to Profit and Loss

Account (`)
NIL 9,00,000 ×35/100

=` 3,15,000
9,00,000×25/100
=` 2,25,000
= ` 5,40,000 *Note : A qualifying asset is an asset that necessarily takes a substantial period of time to get ready for
its intended use or sale.

M/s. Ayush Ltd. began construction of a new building on 1stJanuary, 2014. It obtained`3 lakh special loan to finance
the construction of the building on 1st January, 2014 at an interest rate of 12% p.a.. The company’s other outstanding
two non-specific loans were:
Amount Rate of
Interest
` 6,00,000 11% p.a.
` 11,00,000 13% p.a.
The expenditure that were made on the building project were as follows: Amount (`)
January, 2014 3,00,000

April, 2014 3,50,000
July, 2014 5,50,000
December, 2014 1,50,000
Building was completed on 31stDecember, 2014. Following the principles prescribed in AS 16 ‘Borrowing Cost’,
calculate the amount of interest to be capitalized and pass one Journal Entry for capitalizing the cost and borrowing
in respect of the building. (5 marks) [IPCC Gr. II] Answer:
1. Calculation for Average Accumulated Expenses:
(i) ` 3,00,000 × 12/12 ` 3,00,000
(ii) ` 3,50,000 × 9/12 ` 2,62,500
(iii) ` 5,50,000 × 6/12 ` 2,75,000

(iv) ` 1,50,000 × 1/12 ` 12,500
` 8,50,000
☐ Out of above,`3,00,000 is from specific loan and balance`5,50,000 is from non-specific loans.
2. Calculation for Average Interest Rate:
(i) Total interest Exp. = (` 6,00,000 × 11%) + (` 11,00,000 × 13%) = 66,000 + 1,43,000 = 2,09,000 (ii) Total loan
amount =` 17,00,000
(iii) Average rate =
= = 12.29% 3. Calculation for amount to be capitalised:
Particulars Amount (`) Cost of Building (3,00,000 + 3,50,000 + 5,50,000 + 1,50,000) 13,50,000
Add: Interest Cost to be capitalised = specific 36,000

borrowings (` 3,00,000 × 12%)
Non specific borrowings (` 5,50,000 × 12.29%) 67,595 Total amount to be capitalised for building 14,53,595
4. Journal Entry
Date Particulars Dr. (`) Cr. (`) 31/12/2014 Building A/c Dr. 14,53,595 To Bank A/c 14,53,595 (i.e. cost of
building & borrowing
cost capitalised)
Q.10.12 2016 - Nov [1] {C} (b), RTP Practical M/s. Zen Bridge Construction Limited obtained a loan of`64 crores
to be utilized as under:
(i) Construction of Hill link road in Kedarnath: ` 50 crores (work was held up totally for a month during the
year due to heavy rain which are common in the
geographic region involved)
(ii) Purchase of Equipment and Machineries ` 6 crores (iii) Working Capital ` 4 crores (iv) Purchase of Vehicles ` 1
crore
(v) Advances for tools/cranes etc. ` 1 crore (vi) Purchase of Technical Know how ` 2 crores
(vii) Total Interest charged by the Bank for the year

ending 31st March, 2016 ` 1.6 crores Show the treatment of Interest according to Accounting Standard by M/s. Zen
Bridge Construction Limited. (5 marks) [IPCC Gr. II]
Answer:
According to AS 16 ‘Borrowing costs’, qualifying asset is an asset that necessarily takes substantial period of time
to get ready for its intended use. As per the standard, borrowing costs that are directly attributable to the acquisition,
construction or production of a qualifying asset should be capitalized as part of the cost of that asset. Other
borrowing costs should be recognized as an expense in the period in which they are incurred. Capitalization of
borrowing costs is also not suspended when a temporary delay is a necessary part of the process of getting an asset
ready for its intended use or sale.
The treatment of interest by Zen Bridge Construction Ltd. can be shown as:
Qualifying Asset
Interest to be
capitalized
` in crores Interest to be charged to Profit & Loss A/c` in
crores
Construction of hill road* Yes Purchase of equipment and

machineries No
Working capital No Purchase of vehicles No Advance for tools, cranes etc. No Purchase of technical know-how No
Total
1.25 1.64/64 × 50
1.25 0.15 1.6/64 × 6 0.10 1.6/64 × 4
0.025 1.6/64 × 1
0.025 1.6/64 × 1
0.05 1.6/64 × 2
0.35
* Note: It is assumed that construction of hill road will normally take more than a year (substantial period of time),
hence considered as qualifying asset.

Q.10.13 2019 - May [1] {C} (a) Practical
M/s First Ltd. began construction of a new factory building on 1st April, 2017. It obtained` 2,00,000 as a special loan
to finance the construction of the factory building on 1st April, 2017 at an interest rate of 8% per annum. Further,
expenditure on construction of the factory building was financed through other non- specific loans. Details of other
outstanding non- specific loans were:
Amount ( `) Rate of Interest per annum

4,00,000 9%
5,00,000 12%
3,00,000 14%
The expenditures that were made on the factory building construction were as follows:
Date Amount (`)

1st April, 2017 3,00,000
31st May, 2017 2,40,000
1st August, 2017 4,00,000
31st December, 2017 3,60,000
The construction of factory building was completed by 31st March, 2018. As per the provisions of AS- 16, you are
required to:
1. Calculate the amount of interest to be capitalized.
2. Pass Journal entry for capitalizing the cost and borrowing cost in
respect of the factory building. (5 marks) Answer:

(i) Computation of average accumulated expenses :
` ` 3,00,000 × 12/12 3,00,000

` 2,40,000 × 10/12 2,00,000
` 4,00,000 × 8/12 2,66,667
` 3,60,000 × 3/12 90,000
(ii)Calculation of average interest rate other than for specific borrowings:
Amount of loan (`)

4,00,000
5,00,000
3,00,000
12,00,000
Weighted average rate of interest
Rate of Interest Amount of Interest (`) 9% 36,000

12% 60,000
14% 42,000
1,38,000
11.50%
(iii) Interest on average accumulated expenses: `

Specific Borrowings (` 2,00,000 × 8%) 16,000
Non Specific Borrowings)
(` 8,56,667 - ` 2,00,000) = ` 6,56,667 × 11.50% 75,517
Amount of interest to be capitalised 91,517
(iv) Total Expenses to be Capitalised for Factory Building: ` Cost of factory building
(` 3,00,000 +` 2,40,000 +` 4,00,000 +` 3,60,000) 13,00,000
Add: Amount of interest to be capitalised 91,517
(v) Journal Entry

Date Particulars Dr. (`) Cr. (`) 31/03/18 Factory Building A/c Dr. 13,91,517
To Bank A/c 13,91,517 (Being amount of cost of building

and borrowing cost thereon
capitalised)
Q.10.14 RTP Practical A company incorporated in June 2017, has setup a factory within a period of 8 months with
borrowed funds. The construction period of the assets
had reduced drastically due to usage of technical innovations by the company. Whether interest on borrowings for
the period prior to the date of setting up the factory should be capitalized although it has taken less than 12 months
for the assets to get ready for use. You are required to comment on the necessary treatment with reference to AS 16.
Answer:
As per para 3.2 to AS 16 ‘Borrowing Costs’, a qualifying asset is an asset that necessarily takes a substantial
period of time to get ready for its intended use or sale.
Further, Explanation to the above para states that what constitutes a substantial period of time primarily depends on
the facts and circumstances of each case. However, ordinarily, a period of twelve months is considered as substantial
period of time unless a shorter or longer period can be justified on the basis of facts and circumstances of the case.
In estimating the period, time which an asset takes, technologically and commercially, to get it ready for its intended
use or sale is considered.
It may be implied that there is a rebuttable presumption that a 12 months period constitutes substantial period of
time.
Under present circumstances where construction period has reduced drastically due to technical innovation, the 12
months period should at best be looked at as a benchmark and not as a conclusive yardstick. It may so happen that
an asset under normal circumstances may take more than 12 months to complete. However, an enterprise that
completes the asset in 8 months should not be penalized for its efficiency by denying it interest capitalization and
vice versa.
The substantial period criteria ensures that enterprises do not spend a lot of time and effort capturing immaterial
interest cost for purposes of capitalization.
Therefore, if the factory is constructed in 8 months then it shall be considered as a qualifying asset. The interest on
borrowings for the same shall be capitalised although it has taken less than 12 months for the asset to get ready to
use.
CHAPTER Financial Statements of4A Companies: Preparation of Financial

Statements
This Chapter Covers: Study’s Chapter: 4A
Chapter Comprises: ☹Meaning of Company ☹Maintenance of Books of Account ☹Statutory Books ☹Annual
Return ☹Final Accounts ☹Managerial Remuneration ☹Divisible Profit.
Marks of Objective, Short Notes, Distinguish Between, Descriptive & Practical Questions
Legend
book.
1.132
TIMEMANAGER
i.e.....
1. Budgeted
2. Actual
3. Variance (1-2)
............ Day 1 12
Instant
Revision (in hours)

i.e.... i.e. on ........... ...........
Day 2 Day 8
3 2.25
(in hours)

i.e. on i.e. on i.e. on need. ........... .............. ............
1.5 1.1 1.1

QUICK LOOK . . . . . . . Weightage Analysis Repeatedly Asked Questions
Common Answered Must Try Question Questions
2.4, 2.7, 2.11, 2.12 3.11, 3.12, 3.13
1 Meaning of Company
Q.1.1 2009 - Nov [1] (v) Descriptive 2009 - Nov [1] (v) What are the basic characteristics of a Private Ltd.
Company ? (2 marks) Answer:

Characteristics of a Private Company (As per Companies Act, 2013) 1. Restricts the rights of members to
transfer its shares.
2. Limits the number of its member to 200 excluding: (i) persons who are
in employment of the company; and (ii) persons who, having been formerly in the employment of the company,
were members of the company while in that employment and have continued to be members after the employment
ceased. For this purpose joint holders of shares will be counted as a single member.
3. Prohibits any invitation to the public to subscribe to any shares in, or debentures of the company.
4. Prohibits any invitation or acceptance of deposits from any person other than its members, directors and relatives.
2 Final Accounts
In a concern, the opening provision for doubtful debts is ` 51,000. During the year a sum of` 10,000 was written off
as bad debt. The closing balance of sundry debtors amounts to`6,30,000. It was decided that 10% of the debtor is to
be maintained as provision. Calculate the closing balance toward provision for doubtful debts and pass journal entry
for giving effect to the provision maintained. (2 marks)
Answer:
For calculating balance towards provision for doubtful debts we should prepare an account for provision for
doubtful debts:
Provision for doubtful debts A/c

Particular
To Bal c/d
(Provision required to be maintained)
` Particulars `
63,000 By Bal. b/d 51,000

(Op. Provision)
By P & L 12,000
63,000 63,000
Journal Entries
Particular’s L / F Dr. (`) Cr. (`)
Profit & Loss A/c Dr. 22,000 To Prov. for Doubtful Debts 22,000
(Being additional provision on doubtful
debts maintained @10%.)
Note: In this question closing debtor is given. It means that amount of Bad Debts (` 10,000) arises during the year is
already adjusted during the year, no further adjustment is therefore required.

Q.2.2 2008 - Nov [3] (a) Practical The Articles of Association of S Ltd. provide the following:
(i) That 20% of the Profits of each year shall be transferred to Reserve fund.
(ii) That an amount equal to 10% of equity dividend shall be set aside for Staff bonus.
(iii) That the balance available for distribution shall be applied : (a) in paying 14% on cumulative Preference shares.
(b) in paying 20% dividend on Equity shares.
(c) one-third of the balance available as additional dividend on Preference shares and 2/3 as additional equity
dividend. A further condition was imposed by the articles viz. that the balance carried forward shall be equal to12%
on Preference shares after making provisions (i), (ii) and (iii) mentioned above. The company has issued 13,000,
14% Cumulative participating preference shares of ` 100 each fully paid and 70,000 Equity shares of ` 10 each fully
paid up. The profit for the year 2008 was`10,00,000 and balance brought from previous year`80,000. Provide`31,200
for depreciation and`80,000 for taxation before making other appropriations. Prepare Profit and Loss Appropriations
A/c. (8 marks)
Answer: Profit and Loss Appropriation A/c

(For the year ended 31st March 2008)
Particulars ` Amount (`)
Profit from operation 10,00,000

Less: Depreciation 31,200 Provision for Income tax 80,000 1,11,200
Profit for the year 8,88,800 Add: Previous year profit 80,000 Profits available for appropriation 9,68,800
Less: Appropriations :
(a) Reserve Fund 1,77,760 (b) Proposed Dividend (Equity)
(1,40,000 + 1,86,900) 3,26,900

(c) Proposed Dividend (Preference Share)
(1,82,000 + 93,450) 2,75,450
(d) Bonus to the employee
(14,000 + 18,690) 32,690 8,12,800
Net Profit after appropriation 1,56,000 Working Note :

Let remaining balance after staff bonus is x
Preference shareholders will get share from remaining balance =
Equity shareholders will get share from remaining balance =
Bonus to Employees
= 2,99,040 32 x = 89,71,200
x = 89,71,200/32 = ` 2,80,350 Share of preference shareholders =` = ` 93,450.
Share of equity shareholders = ` = ` 1,86,900
Bonus to employees = ` = `18,690 Space to write important points for revision
Q.2.3 2010 - May [1] (ix) Practical
From the following information, calculate the amount of Sundry Debtors as on 31.3.2010:
Balance as on 1.4.2009 is ` 50,000.
Bad debts are 2% and discount to the customers is given @ 1% of the opening balance of Sundry Debtors.
Returns from the customers are ` 3,000.
Cash received from Debtors is` 2,30,000.
Cash received from Debtors in transit is ` 14,000.
Cash Sales are ` 5,00,000.
Credit Sales are ` 2,50,000. (2 marks) [IPCC Gr. II]
Answer:
Computation of Sundry Debtors as on 31.03.2010 Particulars ` `
Sundry debtors as on 01.04.2009 50,000

Add : Credit sales 2,50,000
3,00,000
Less : Cash received from debtors 2,30,000 Cash received from debtors in transit* 14,000 Returns from the
customers 3,000 Bad debts @ 2% of ` 50,000 1,000 Discount to the customers @ 1% of ` 50,000 500 2,48,500
Sundry debtors as on 31.03.2010 51,500 * It is assumed that information for cash in transit has already been
received. Space to write important points for revision
Q.2.4 2012 - Nov [4], RTP Practical Following information of the Final Accounts of Kumaran Ltd. are missing as
shown below:
Trading and Profit & Loss A/c for the year ended 31.03.2012 (` ` 000) (` ` 000)
To Opening Stock
To Purchases
To Manufacturing Expenses To Gross Profit c/d
Total
To Office and Administration Expenses

To Interest on Debentures
To Provision for Taxation
To Net Profit for the year c/d
Total
To Proposed Dividends To Transfer to General
Reserves
To Balance Transfer to
Balance Sheet
Total
7,000 By Sales ?
? By Closing Stock ? 1,750

?
? Total ?
By Gross Profit b/d ? 7,400 By Commission
600 Received 1,000 ?

?
? Total ?
? By Balance b/f 1,400 By Net Profit for the
? year b/d ?
? ? Total ?
Balance Sheet as on 31.03.2012 Liabilities

Paid up Capital
General Reserves:
Balance at the beginning of the year

Proposed addition
Profit and Loss Appropriation A/c

10% Debentures
Current Liabilities
Total
(` ` 000) Assets (` ` 000)
10,000 PPE:
Plant and Machinery 14,000 Other PPE ?
? Current Assets:
? Stock in Trade ?
Sundry Debtors ? ? Bank Balance 1,250 ?

?
? Total ?
You are required to provide the missing figures with the help of following information:
(i) Current Ratio 2:1.
(ii) Closing stock is 25% of sales.
(iii) Proposed dividends are 40% of the paid up capital.
(iv) Gross profit ratio is 60%.
(v) Ratio of Current Liabilities to Debentures is 2:1.
(vi) Transfer to General Reserves is equal to proposed dividends. (vii) Profit carried forward are 10% of the
proposed dividends. (viii) Provision for taxation is 50% of profits.
(ix) Balance to the credit of General Reserves at the beginning of the year is twice the amount transferred to that
account from the current profits. (16 marks) Answer:
1. Amount of proposed dividend
= Paid up share capital × 40% = 10,000 × 40% = 4,000 2. Transfer to general reserves
= Amount of proposed dividend i.e. 4,000
3. Profit carried forward
= 10% of proposed dividend = 10% of 4,000 = 400
4. Net profit for the year
= Proposed dividend + Transfer to general reserve + Profit carried forward ☐ Net profit carried forward
= (4,000 + 4,000 + 400) ☐ 1,400 = 7,000
5. Provision for taxation
Provision for taxation = 50% of profit (i.e. before net profit)
It means that net profit is 50% and provision for tax is 50%.
Therefore, if net profit is 7,000 then, Provision for taxation is also 7,000 6. Gross profit
= Net profit + All expenses ☐ Commission received
= (7,000 + 7,000 + 600 + 7,400) ☐ 1,000 = 21,000
7. Sales
=
= = 35,000
8. Closing stock
= 25% of sales
= 25% × 35,000 = 8,750
9. Purchases
= (Sales + Closing stock)☐(Opening stock + Manufacturing expenses
+ Gross profit)
= (35,000 + 8,750) ☐(7,000 + 1,750 + 21,000)
= 43,750☐ 29,750 = 14,000
10. Balance of general reserve as on 1.4.2011

= Twice the amount transferred to general reserve during the year = 2 × 4,000 = 8,000
11. Amount of debentures

=
= = 6,000
12. Current liabilities

= Current liabilities are twice of amount of debentures. = 2 × 6,000 = 12,000
13. Current assets Current Assets = 2 × 12,000
14. Sundry debtors
Sundry Debtors = Current ratio × Current liabilities = 24,000
= Current assets ☐ Stock in trade ☐ Bank balance = 24,000☐ 8,750 ☐ 1,250 = 14,000
15. Total of liabilities part of the balance sheet

= Shareholders’ capital + Non-current liabilities + Current liabilities = (10,000 + 12,000 + 400) + 6,000 + 12,000 =
40,400
16. Other PPE
= Total of Liabilities part of the balance sheet☐(Current assets + Plant and Machinery)
= 40,400☐ (24,000 + 14,000) = 2,400
Q.2.5 2013 - Nov [1] {C} (d) (i) Practical Vasudha Ltd. provides following information:
Raw Material stock holding period : 3.5 months Work-in progress holding period : 1 month Finished goods holding
period : 4.5 months Debtors collection period : 6 months
You are required to compute the operating cycle of Vasudha Ltd. What
would happen if the trade payables of the company are paid in 14 monthswhether these should be classified as
current or non-current liability? (2 marks) [IPCC Gr. II]
Answer:
As per Schedule III of the Companies Act, 2013, “An operating cycle is the time between the acquisition of assets
for processing and their realization in cash or cash equivalents”.
Therefore, operating cycle of Vasudha Ltd. will be computed as under: Raw material stock holding period + WIP
holding period + finished goods holding period + Debtor collection period = 3.5 + 1 + 4.5 + 6 = 15 months. A
liability shall be classified as current when it is expected to be settled in the company’s normal operating cycle.
Since the operating cycle of Vasudha Ltd. is 15 months, trade payables expected to be paid in 14 months should be
treated as a current liability.

Q.2.6 2013 - Nov [1] {C} (d) (ii) Practical
The management of Kshitij Ltd. contends that the work in progress is not valued since it is difficult to ascertain the
same in view of the multiple processes involved. They opine that the value of opening and closing work in progress
would be more or less the same. Accordingly, the management had not separately disclosed the work in progress in
its financial statements. Comment in line with Schedule III.
Answer:
Schedule III to the Companies Act, 2013 does not require to disclose in the statement of profit and loss, the
amounts for which WIP have been completed at the beginning and at the end of the accounting period. Therefore,
the non-disclosure in the financial statements by the company may not amount to violation of Schedule III if the
differences between opening and closing WIP are not material.

Q.2.7 2013 - Nov [5], RTP Practical
On 31st March, 2013 Bose and Sen Ltd. provides to you the following ledger balances after preparing its Profit and
Loss Account for the year ended 31st March, 2013:
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 14,00,000
months)
Profit & Loss Account 7,00,000

Provision for Taxation 3,25,500
Proposed Dividend 4,20,000
Provision for Dividend Distribution Tax 71,400
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
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, 2013 as required under Schedule III of the Companies Act, 2013. (16 marks) Answer:
Balance Sheet of Bose & Sen Ltd. as on 31.3.2013 S.N. Particulars Note ` I Equity & Liabilities
(1) Shareholders’ Funds :
(a) Share Capital 1 69,93,000
(b) Reserves & Surplus 2 21,56,000
(2) Non-Current Liabilities
(a) (Long Term Borrowing) 3 16,97,000
(3) Current liabilities:
(a) Trade Payable 14,00,000
(b) Other Current Liabilities 4 2,00,000
(c) Short term Provision 5 8,16,900
Total 1,32,62,900
II Assets
(1) Non - Current Assets
Property Plant and Equipment

Tangible Assets 6 74,75,000 Intangible Assets (Patents & Trade Marks) 7 4,00,000
(2) Current Assets :

(a) Inventories 8 17,50,000
(b) Trade Receivables 9 14,00,000
(c) Cash & Cash Equivalents 10 19,39,000
(d) Short term Loans & Advances 2,98,900
1,32,62,900 Notes :
1. Share Capital
Issued, Subscribed & Paid up 70,00,000

Less: Calls in arrears (7,000) Total 69,93,000
2. Reserves & Surplus
Surplus (P & L A/c) 7,00,000
Less: Preliminary Expenses (93,100) Total 21,56,000
3. Long term borrowings:
Secured
Term Loan
Loan from State Financial Corporation 8,50,000
(` 10,50,000 - ` 2,00,000)
(Secured by hypothecation of Plant and machinery)
Unsecured
Bank Loan 2,00,000 Loan from related parties 1,00,000 Others 5,47,000 8,47,000
Total 16,97,000
4. Other Current Liabilities
Loan from State Finance Corporation (Repayable within one year) 2,00,000
5. Short term provisions
Provision for taxation 3,25,500
Proposed dividend 4,20,000
Provision for dividend distribution tax 71,400
Total 8,16,900
6. Tangible Assets:
Item Closing Balance Depreciation Net
Tangible :
Land 14,00,000 0 14,00,000
Building 28,00,000 7,50,000 20,50,000
Furniture 4,37,500 87,500 3,50,000
Plant & M/c 49,00,000 12,25,000 36,75,000
Total 95,37,500 20,62,500 74,75,000
7. Intangible :
Patents 4,00,000
8. Inventories
Raw material 3,50,000 Finished goods 14,00,000 Total 17,50,000
9. Trade Receivables
(a) Outstanding debt for more than 6 months 3,80,000 (b) Other debts (Bal. fig.) 10,20,000 Total 14,00,000
10. Cash and Cash equivalents:
Cash at bank with scheduled Banks including
Bank deposits for period of 9` 5,00,000 17,11,000 months amounting with others 18,000 17,29,000 Cash in hand
2,10,000 Total 19,39,000 Space to write important points for revision
Q.2.8 2014 - May [2] (a) Practical The Articles of Association of Samson Ltd. provide the following : (i) That 25%
of the net profit of each year shall be transferred to reserve fund.
(ii) That an amount equal to 10% of equity dividend shall be set aside for staff bonus.
(iii) That the balance available for distribution shall be applied : (1) in paying 15% on cumulative preference shares.
(2) in paying 20% dividend on equity shares.
(3) one-third of the balance available as additional dividend on preference shares and two-third as additional equity
dividend. A further condition was imposed by the articles viz. that the balance carried forward shall be equal to 14%
on preference shares after making provision (i), (ii) and (iii) mentioned above. The company has issued 12,000, 15%
cumulative participating preference shares of`100 each fully paid and 75,000 equity shares of ` 100 each fully paid
up. The profit for the year 2013-14 was`10,00,000 and balance brought from previous year`1,50,000.
Provide`37,500 for depreciation and`1,20,000 for taxation before making other appropriations.
Show net balance of Profit and Loss Account after making above adjustments. (8 marks)
Answer:
Profit before Dep. and Tax (2013 - 2014) 10,00,000
(-) Depreciation 37,500
(-) Tax (1,20,000) Net Profit for (2013 - 2014) 8,42,500
+ Opening Balance of Profit 1,50,000
Total Profit 9,92,500
(-) Transfer to reserve fund @ 25% of (2013 - 2014) profit
(8,42,500 × 25%) (2,10,625) (-) Preference Dividend @ 15% on (12,000 × 100) (1,80,000) (-) Equity Dividend @
20% on (75,000 × 10) (1,50,000) (-) Provision for Staff Bonus @ 10% Equity Dividend
(1,50,000 × 10%) (15,000) (-) Profit to be c/f = 12,00,000 × 14% (1,68,000) Balance Profit ` 2,68,875
(i) a to Preference Share Holder

(ii) b to Equity Share Holder
(iii) 10% of b = to Staff Bonus
☐ Total = + + = ☐ (i) Additional Dividend on Preference Share = 2,68,875 ÷ 3.2 = 84,023 (ii) Additional Dividend
on Equity Share = 2,68,875 × =1,68,047
(iii) Additional Provision for staff Bonus = 2,68,875 × = 16,805
P & L A/c
Particulars Amount (`) Particulars Amount (`) To Dep. 37,500 By Balance 10,00,000 To Provision for Tax
1,20,000
To NP 8,42,500
10,00,000 10,00,000
P / L Appropriation A/c Particulars
To Reserve Fund
To Preference Dividend (1,80,000 + 84,023)
To Equity Dividend
(1,50,000 + 1,68,047)
To Provision for Staff Bonus (15,000 + 16,805)
To Bal. c/d
Amount Particulars Amount (`) (`)
2,10,625 By Bal. b/d 1,50,000 By Net Profit 8,42,500

2,64,023
3,18,047
31,806
1,68,000
99,25,000 99,25,000
Note: Nominal Value of Equity shares should be 75,000 Equity shares @ 10 instead of ` 100 in the question. It
seems to be a misprint in the question.

From the following particulars furnished by Elegant Ltd., prepare the Balance Sheet as on 31st March 2014 as
required by Part I, Schedule III of the Companies Act.
Particulars Debit Credit ` ` Equity Share Capital (Face value of 50,00,000 ` 100 each)
Call in Arrears 5,000

Land & Building 27,50,000
Plant & Machinery 26,25,000
Furniture 2,50,000
General Reserve 10,50,000 Loan from State Financial Corporation 7,50,000 Stock:

Finished Goods 10,00,000 12,50,000
Provision for Taxation 3,40,000 Sundry Debtors 10,00,000 Advances 2,13,500 Proposed Dividend 3,00,000 Profit &
Loss Account 5,00,000 Cash in Hand 1,50,000 Cash at Bank 12,35,000 Preliminary expenses 66,500 Unsecured
Loan 6,05,000
Sundry Creditors (for Goods and 10,00,000 Expenses)

(i) Preliminary expenses included ` 25,000 Audit Fees and ` 3,500 for out of pocket expenses paid to the Auditors.
(ii) 10000 Equity shares were issued for consideration other than cash. (iii) Debtors of ` 2,60,000 are due for more
than 6 months. (iv) The cost of the PPE were:
Building` 30,00,000, Plant & Machinery ` 35,00,000 and Furniture ` 3,12,500
(v) The balance of` 7,50,000 in the Loan Account with State Finance Corporation is inclusive of`37,500 for Interest
Accrued but not Due. The loan is secured by hypothecation of Plant & Machinery.
(vi) Balance at Bank includes ` 10,000 with Global Bank Ltd., which is not a Scheduled Bank. (10 marks)
Answer: Elegant Ltd.

Balance Sheet as on 31st March, 2014
Particulars Note No. ` Equity and Liabilities

1. Shareholders’ funds
(a) Share Capital 1 49,95,000

(b) Reserves and Surplus 2 14,83,500
2. Non-current liabilities
(a) Long-term borrowings 3 13,17,500
3. Current liabilities
(a) Trade Payables 10,00,000
(b) Other current liabilities 4 37,500
(c) Short-term provisions 5 6,40,000
Total 94,73,500
Assets
1. Non-current assets
(a) Property Plant and Equipment
(i) Tangible assets 6 56,25,000
2. Current assets
(b) Trade receivables 8 10,00,000
(c) Cash and cash equivalents 9 13,85,000
(d) Short-term loans and advances 2,13,500
Notes to Accounts
No. Particulars `
1. Share Capital
Equity share capital
Issued & subscribed & called up 50,000 Equity

Share of ` 100 each (of the above 10,000
shares have been issued for consideration
other than cash) 50,00,000 Less: Calls in arrears (5,000) 49,95,000
Total 49,95,000
2. Reserves and Surplus
Surplus (Profit & Loss A/c) 5,00,000 Less: Preliminary expenses (66,500) 4,33,500
Total 14,83,500
3. Long-term borrowings
Secured Term Loan
State Financial Corporation (7,50,000-37,500)
(Secured by hypothecation of Plant and
Machinery) 7,12,500
Unsecured Loan 6,05,000
Total 13,17,500
4. Other current liabilities
Interest accrued but not due on loans (SFC) 37,500
Total 37,500
5. Short-term provisions
6. Tangible assets
Land and Building 30,00,000 Less: Depreciation (2,50,000) 27,50,000 Plant & Machinery 35,00,000 Less:
Depreciation (8,75,000) 26,25,000 Furniture & Fittings 3,12,500 Less: Depreciation (62,500) 2,50,000
Total 56,25,000
7. Inventories
Finished goods 10,00,000
Total 12,50,000
8. Trade receivables
Outstanding for a period exceeding six months 2,60,000
Other Amounts 7,40,000
Total 10,00,000
9. Cash and cash equivalents
Cash at bank
With Scheduled Banks 12,25,000 With other (Global Bank Ltd.) 10,000 12,35,000
Cash in hand 1,50,000
Note : As per para 56 of AS 26, preliminary expenses are not shown in the balance sheet, thus they are written off.
The amount of`25,000 as audit fee and out of pocket expenses paid to auditors amounting ` 3,500 have been
included in the amount of` 66,500. The combined figure of` 66,500 has been reduced from Profit and Loss Account
balance in the given solution.

From the following particulars furnished by the Prashant Ltd., prepare the Balance Sheet as at 31st March, 2019 as
required by Schedule III of the Companies Act, 2013:
Particulars Debit (`) Credit (`) Equity share capital (face value of ` 10 each) 15,00,000
Calls-in-arrears 5,000
Land 5,50,000
Building 4,85,000
Plant & machinery 5,60,000
General reserve 2,70,000 Loan from State Financial Corporation 2,10,000 Inventories 3,15,000
Provision for taxation 72,000 Trade receivables 2,95,000
Short-term loans & advances 58,500
Profit & loss account 1,06,800 Cash in hand 37,300
Cash at bank 2,85,000
Unsecured loans 1,65,000 Trade payables 2,67,000
Total 25,90,800 25,90,800

1. 10,000 equity shares were issued for consideration other than cash.
2. Trade receivables of` 55,000 are due for more than six months.
3. The cost of building and plant & machinery is`5,50,000 and`6,25,000 respectively.
4. The loan from State Financial Corporation is secured by hypothecation of plant & machinery. The balance of `
2,10,000 in this account is inclusive of` 10,000 for interest accrued but not due.
5. Balance at Bank included`15,000 with Aakash Bank Ltd., which is not a scheduled bank. (10 marks) Space to
write important points for revision
From the following, prepare the Balance Sheet of ABC Ltd. as at 31st March as required by Companies Act. Give
Notes at the foot of the Balance Sheet as may be necessary: (amount in `)
Particulars Dr. (`) Cr. (`) Equity Capital (Face value of ` 100) 15,00,000 Calls in Arrears 5,000 Land 3,50,000
Building 9,50,000 Plant and Machinery 9,00,000 Furniture 50,000 General Reserve 2,50,000 Loan from State
Financial Corporation 3,00,000 Term Loans from Banks 5,00,000 Stock of - Finished Goods 8,00,000

Provision for Taxation 80,000 Sundry Debtors 5,50,000
Advances 45,000
Profit and Loss A/c 6,10,000 Cash Balance 35,000
Cash at Bank 1,50,000
Loans (Unsecured) 2,00,000 Sundry Creditors (For Goods) 6,10,000 Total 40,50,000 40,50,000
The following additional information is provided

1. 5,000 Equity Shares were issued for consideration other than cash.
2. Debtors of ` 1,02,000 are due for more than six months.
3. Cost of Assets are as follows: (a) Building - ` 13,00,000 (b) Plant and Machinery - ` 20,00,000, and (c) Furniture -
` 65,000.
4. The Balance of` 3,00,000 in the Loan Account with State Financial Corporation is inclusive of`20,000 for interest
accrued but not due. The Loan is secured by hypothecation of building.
5. The Balance of ` 5,00,000 in the Term Loan Account with Bank is Inclusive of` 10,000 towards interest accrued
and due. The Loan is secured by hypothecation of Plant and Machinery.
6. Bills receivable for ` 2,00,000 maturing on 15th May, have been discounted.
7. The Company had a contract for the Erection of Machinery at`2,50,000 which is incomplete on 31st March.
8. Proposed Dividend ` 2,10,000.
Answer: Balance Sheet of ABC Ltd. as on 31st March Particulars as at 31st March Note This Year Prev. Yr
I Equity and Liabilities

(1) Shareholders’ Funds:
(c) Share Capital 1 14,95,000 (d) Reserves and Surplus 2 8,45,000
(2) Non-Current Liabilities:

Long Term Borrowings 3 9,70,000
(3) Current Liabilities

(d) Trade Payables - Sundry Creditors 6,10,000
(e) Other Current Liabilities 4 30,000
(f) Short Term Provisions - Provision 80,000
for Tax
Total 40,30,000 II Assets
(1) Non-Current Assets

Properly Plant and Equipment:
Tangible Assets 5 22,50,000
(2) Current Assets:

(e) Inventories 6 10,00,000
(f) Trade Receivables 7 5,50,000
(g) Cash and Cash Equivalents 8 1,85,000
(h) Short term Loans and Advances 45,000
Total 40,30,000 Note: Contingent Liabilities and Commitments, refer Note 9. Note: Proposed Dividend = 14% of
Paid Up Capital`15,00,000 =`2,10,000.
Dividend Per Share = = ` 6.00

Note 1: Share Capital
Particulars This Year Prev. Yr. Authorised: ......Equity Shares of .... each
......Preference Shares of ..... each
Issued, Subscribed and paid up:

15,000 Equity Shares of ` 100 each 15,00,000
Less: Unpaid Calls (5,000)
Total 14,95,000 Note 2: Reserves and Surplus (showing appropriations and transfers) (all figures for this year)
Particulars Opg. Bal. Additions Deductions Clg. Bal General Reserve 2,50,000 Nil Nil 2,50,000
Surplus (P&L A/c) Nil 6,10,000 Prelim Exp. 5,95,000

w/off = 15,000 Total 2,50,000 6,10,000 15,000 8,45,000
Note: Preliminary Expenses is not recognised as Asset as per AS-26, and is hence fully written off out of Surplus.
Note 3: Long Term Borrowings
Particulars This year Prev. Yr. (a) Term Loans from Banks
Secured - From State Finance Corpn.
(Secured by Hypothecation of Building)

- Term Loan 2,80,000
(Secured by Hypothecation of Plant and
Machinery) 4,90,000 (b) Loans from other Parties Unsecured 2,00,000 Note 4: Other Current Liabilities
Particulars This year Prev. Yr.
Interest Accrued but not due on Loan from SFC 20,000

Interest Accrued and due on Term Loan from
Bank 10,000
Total 30,000 Note 5: Tangible Assets (Note: In the absence of data, Other Columns are not filled up in this Table).
Item Gross Block/Cost Depreciation Net Block/WDV
Opg. Addns/ Clg. Bal. Opg. Addn/ Clg Bal As at Yr As at Yr Bal. (Dedns) Bal. (Dedns) BeginEnd ning
Column (1) (2) (3)=1±2 (4) (5) (6)=4±5 (7)=1-4 8=3-6
Land 3,50,000 0 3,50,000

Building 13,00,000 3,50,000 9,50,000
Furniture 65,000 15,000 50,000
Plant & M/c 20,00,000 11,00,000 9,00,000
Total 37,15,000 14,65,000 22,50,000
Note 6: Inventories
Particulars This year Prev. Yr.

Finished Goods 8,00,000
Note 7: Trade Receivables (assumed as Secured and considered good) Particulars This year Prev. Yr.
Sundry Debtors
(a) Debt Outstanding for a period exceeding 6 months from the date they are due for payment
(b) Other Debts (balancing figure)

1,02,000 4,48,000
Total 5,50,000
Note 8: Cash and Cash Equivalents Particulars
Balances with Banks
Cash on Hand
This year Prev. Yr.
1,50,000 35,000
Total 1,85,000 Note 9: Contingent Liabilities and Commitments (to the extent not provided for):
(a) Contingent discounted maturing on 15th May
(b) Commitments: Estimated Amount of Capital 2,50,000 Contract remaining to be executed (Erection
of Machinery) and not provided for

Particulars This year Prev. Yr. Liabilities: Bills Receivable 2,00,000
You are required to prepare a Balance Sheet as at 31st March 2018, as per Schedule III of the Companies Act, 2013,
from the following information of Mehar Ltd.:
Particulars
Term Loans (Secured) Trade payables

Other advances
40,00,000 Investments (Non-current) 9,00,000

45,80,000 Profit for the year 32,00,000
14,88,000 Trade receivables 49,00,000
Cash and Bank Balances 38,40,000 Miscellaneous Expenses 2,32,000
Staff Advances
Provision for Taxation
Securities Premium
Loose Tools
General Reserve
Capital Work-in-progress
2,20,000 Loan from other parties 8,00,000

10,20,000 Provision for Doubtful Debt 80,000
19,00,000 Stores 16,00,000
2,00,000 PPE (WDV) 2,26,00,000
62,00,000 Finished Goods 30,00,000
8,00,000
1. Share Capital consist of

(a) 1,20,000 Equity Shares of ` 100 each fully paid up. (b) 40,000, 10% Redeemable Preference Shares of ` 100 each
fully
paid up.
2. The company declared dividend @ 5% of equity share capital. The dividend distribution tax rate is 17.647%.
(15% CDT, surcharge 12%, Health and Education Cess @ 4%)
3. Depreciate Assets by ` 20,00,000.

Answer: Balance Sheet of Mehar Ltd. as at 31st March, 2018 Note `
I Equity and Liabilities:

1. (a) Share Capital 1 1,60,00,000
2. Non-current Liabilities
Long term Borrowings40,00,000 Terms Loans (Secured)
3. Current Liabilities
(a) Trade Payables - 45,80,000
(b) Other current liabilities 3 20,07,612
(c) Short-term Provisions (Provision for
taxation) 10,20,000
Total 3,74,68,000 II Assets

1. Non-current Assets
(i) Tangible Assets 4 2,06,00,000

(ii) Capital WIP 8,00,000
(b) Non- current Investments 9,00,000
2. Current Assets:
(b) Trade Receivables 6 48,20,000
(c) Cash and Cash Equivalents 38,40,000
(d) Short-term Loans and Advances 7 17,08,000
Total 3,74,68,000
Notes to accounts (`)
1. Share Capital
Authorized, issued, subscribed & called up
1,20,000, Equity Shares of ` 100 each 1,20,00,000 40,000 10% Redeemable Preference Shares
of 100 each 40,00,000 1,60,00,000

Securities Premium 19,00,000
General reserve 62,00,000
Profit & Loss Balance
Opening balance
Profit for the period 32,00,000
Less: Miscellaneous Expenditure
written off (2,32,000)
29,68,000
Less: Appropriations
Dividend (10,00,000)
Dividend distribution tax (2,07,612) 17,60,388 98,60,388
3. Other current liabilities

Loan from other parties 8,00,000
Dividend 10,00,000
Dividend Distribution tax [W.N] 2,07,612 20,07,612
4. Tangible assets
Opening balance 2,26,00,000 Less: Depreciation (20,00,000) Closing balance 2,06,00,000
5. Inventories
Finished Goods 30,00,000
Stores 16,00,000
Loose Tools 2,00,000 48,00,000
Trade receivables 49,00,000 Less: Provision for Doubtful Debts (80,000) 48,20,000
7. Short term loans & Advances

Staff Advances 2,20,000 Other Advances 14,88,000 17,08,000
Working Note:
Calculation of Dividend distribution tax
(i) Grossing-up of dividend:
`
Dividend distributed by Mehar Ltd.

Equity shares dividend 6,00,000 Preference share dividend 4,00,000 10,00,000 Add: Increase for the purpose of
grossing up of dividend
10,00,000 x [15 /(100-15)] 1,76,470 Gross dividend 11,76,470 (ii) Dividend distribution tax @ 17.647% 2,07,612
Shweta Ltd. has the Authorised Capital of `15,00,000 consisting of 6,000

6% Preference shares of` 100 each and 90,000 equity shares of ` 10
each. The following was the Trial Balance of the Company as on 31st March, 2018:
Particulars Dr. Cr. Investment in Shares at cost 1,50,000

Purchases 14,71,500
Selling Expenses 2,37,300
Inventory as at the beginning of the year 4,35,600
Salaries and Wages 1,56,000
Cash on Hand 36,000
Interim Preference dividend for the half year to
30th September 18,000
Bills Receivable 1,24,500
Interest on Bank overdraft 29,400
Interest on Debentures upto 30th Sep (1st half 11,250

year)
Debtors 1,50,300
Trade payables 2,63,550 Freehold property at cost 10,50,000
Furniture at cost less depreciation of ` 45,000 1,05,000
6% Preference share capital 6,00,000 Equity share capital fully paid up 6,00,000
5% mortgage debentures secured on Freehold 4,50,000 properties

Income tax paid in advance for the current year 30,000 Dividends 12,750 Profit and Loss A/c (opening balance)
85,500
Sales (Net) 20,11,050

Bank overdraft secured by hypothecation of 4,50,000
stocks and receivables
Technical knowhow fees at cost paid during the

year 4,50,000 Audit fees 18,000 Total 44,72,850 44,72,850
You are required to prepare the Profit and Loss Statement for the year ended 31st March, 2018 and the Balance
Sheet as on 31st March, 2018 as per Schedule III of the Companies Act, 2013 after taking into account the following
–
1. Closing Stock was valued at ` 4,27,500.
2. Purchases include ` 15,000 worth of goods and articles distributed
among valued customers.

3. Salaries and Wages include ` 6,000 being Wages incurred for
installation of Electrical Fittings which were recorded under "Furniture". 4. Bills Receivable include`4,500 being
dishonoured bills. 50% of which
had been considered irrecoverable.
5. Bills Receivable of`6,000 maturing after 31stMarch were discounted. 6. Depreciation on Furniture to be charged
at 10% on Written Down
Value.
7. Investment in shares is to be treated as non-current investments. 8. Interest on Debentures for the half year ending
on 31stMarch was due
on that date.
9. Provide Provision for taxation ` 12,000.
10. Technical Knowhow Fees is to be written off over a period of 10 years. 11. Salaries and Wages include` 30,000
being Director's Remuneration. 12. Trade receivables include ` 18,000 due for more than six months. Answer :
Statement of Profit and Loss of Shweta Ltd. for the year ended 31st March, 2018
Particulars Note ` I Revenue from Operations 20,11,050

II Other income (Divided income) 12,750
III Total Revenue (I &+ II) 20,23,800
IV Expenses :
(a) Purchases (14,71,500 – Advertisement

Expenses 15,000) 14,56,500 (b) Changes in Inventories of finished Goods
/ Work in progress (4,35,600 – 4,27,500) 8,100
(c) Employee Benefits expense 9 1,20,000

(d) Finance costs 10 51,900
(e) Depreciation and Amortization Expenses

[10% of (1,05,000 + 6,000)] 11,100
(f) Other Expenses 11 3,47,550

Total Expenses 19,95,150
V Profit before exceptional, extraordinary items 28,650

and tax (III-IV)
VI Exceptional items - VII Profit before extra ordinary items and tax (V-IV) 28,650 VIII Extraordinary items -
IX Profit before tax (VII-VIII) 28,650

X Tax expense:
Current Tax 12,000
XI Profit/Loss for the period (after tax) 16,650
Balance sheet of Shweta Ltd. as on 31st March, 2018 Particulars as on 31st March Note
I LIABILITIES
(1) Shareholders’ funds:
(a) Share capital 1 12,00,000 (b) Reserves and surplus 2 66,150
(2) Non current liabilities:

Long term borrowings 3 4,50,000
(3) Current liabilities:

(a) Short term borrowings 4 4,50,000
(b) Trade payables 2,63,550
(c) Other current liabilities 5 29,250
Total 24,58,950
II ASSETS
(1) Non-current Assets
(a) Property, Plant and Equipment
(i) Tangible assets 6 11,49,900
(ii) Intangible assets 7 4,05,000
(b) Non current investments (Shares at cost) 1,50,000
Current Assets:
(a) Inventories 4,27,500
(b) Trade receivables 8 2,72,550
(c) Cash and Cash equivalents – Cash on hand 36,000
(d) Short term loans and advances – Income tax

(paid 30,000-Provision 12,000) 18,000 Total 24,58,950
Note: There is a Contingent liability for Bills receivable discounted with Bank ` 6,000.
Notes to accounts
( `) 1 Share Capital
Authorized

6,000 6% Preference shares of ` 100 each 6,00,000 15,00,000
Issued, subscribed and called up
60,000, Equity Shares of ` 10 each 6,00,000
6,000 6% Redeemable Preference Shares of
100 each 6,00,000 12,00,000
Balance as on 1st April, 2017 85,500 Add: Surplus for current year 16,650 1,02,150
Less: Preference Dividend 36,000
Balance as on 31st March, 2018 66,150
3. Long Term Borrowings
5% Mortgage Debentures (Secured 4,50,000
against Freehold Properties)
4. Short Term Borrowings
Secured Borrowings: Loans Repayable on
Demand Overdraft from Banks (Secured by 4,50,000
Hypothecation of Stocks and Receivables)
5. Other Current liabilities
Interest Accrued and due on Borrowings (5% 11,250 Debentures)
Unpaid Preference Dividends 18,000 29,250
6. Tangible Fixed assets
Furniture
Furniture at Cost Less depreciation`45,000
(as given in Trial Balance 1,05,000 Add : Depreciation 45,000 Cost of Furniture 1,50,000 Add : Installation charge
of Electrical Fittings
wrongly included under the heading Salaries
and Wages 6,000 Total Gross block of Furniture A/c 1,56,000 Accumulated Depreciation Account: Opening
Balance - given in Trial Balance 45,000
Depreciation for the year:
On Opening WDV at 10% i.e.
(10% x 1,05,000) 10,500
On additional purchase during the year
at 10% i.e. (10% x 6,000) 600
Less: Accumulated Depreciation 56,100 99,900
Freehold property (at cost) 10,50,000
11,49,900
7. Intangible Fixed Assets
Technical knowhow 4,50,000 Less: Written off 45,000 4,05,000
Sundry Debtors (a) Debt outstanding for 18,000 more than six months
(b) Other Debts (refer Working Note) 1,34,550 Bills Receivable (1,24,500 -4,500) 1,20,000 2,72,550
9. Employee benefit expenses
Amount as per Trial Balance 1,56,000 Less: Wages incurred for installation of 6,000 electrical fittings to be
capitalised
Less: Directors’ Remuneration shown
separately 30,000 Balance amount 1,20,000
10. Finance Costs
Interest on bank overdraft 29,400 Interest on debentures 22,500 51,900
11. Other Expenses

Payment to the auditors 18,000
Director’s remuneration 30,000
Selling expenses 2,37,300
Technical knowhow written of (4,50,000/10) 45,000
Advertisement (Goods and Articles 15,000
Distributed)
Bad Debts (4,500 x50%) 2,250 3,47,550 Working Note
Calculation of Sundry Debtors-Other Debts
Sundry Debtors as given in Trial Balance 1,50,300

Add Back: Bills Receivables Dishonoured 4,500
1,54,800
Less: Bad Debts written off – 50% ` 4,500 (2,250) Adjusted Sundry Debtors 1,52,550
Less: Debts due for more than 6 months (as per information given) (18,000) Total of other Debtors i.e. Debtors
outstanding for less than 6 months 1,34,550
3 Managerial Remuneration
Q.3.1 2009 - Nov [1] (x) Descriptive
The Companies Act, 2013 limits the payment of managerial remuneration. What is the maximum managerial
remuneration, which can be paid in case of a company consistently earning profits and has more than one
managerial persons. (2 marks)
Answer:
Sec. 197 of the Indian Companies Act, 2013 prescribes the overall maximum managerial remuneration payable
and also managerial remuneration in case of absence or inadequacy of profits. In the given case, the company is
earning profits consistently and has more than one managerial person. Hence, the maximum limit is 10% of net
profit.

Q.3.2 2012 - May [7] (d) Descriptive
What are the maximum limits of managerial remuneration for companies having adequate profits? (4 marks)
Answer:
Managerial Remuneration : Maximum limits as per Sec. 197 of Companies Act, 2013.
For companies having profits:
1. Overall (excluding fee for attending meetings) 2. If there is one managerial person
3. If there are more than one managerial person 4. Remuneration of part-time directors:
(i) If there is no managing or whole-time director (ii) If there is a managing or whole-time director Space to write
11% of net profit 5% of net profit

10% of net profit
3% of net profit 1% of net profit

Q.3.3 2007 - Dec [1] {C} (c) Practical Following particulars are available from the books of Rajat Ltd. : `
Net profit before provision for income-tax and managerial remuneration, but after depreciation and provision for
repairs 98,04,100
Depreciation provided in the books 35,00,000
Provision for repairs of machinery during the year 2,50,000
Depreciation allowable under Schedule II of the Companies Act, 2013 28,00,000
Actual expenditure incurred on repairs during the year 1,50,000
You are required to calculate the managerial remuneration in the following cases:
(i) If there is one whole-time director; and
(ii) If there are two whole-time directors, a part-time director and a manager. (5 marks) [CS Exe - I] Answer:
Section 197 of the Companies Act, 2013 prescribe the maximum percentage of profit that can be paid as
managerial remuneration. For this purpose, profit is to be calculated in the manner as prescribed in Section 197 of
the Companies Act, 2013.
Calculation of net profit u/s 197 of the Companies Act, 2013: ` ` Net profit before provision for income-tax and
managerial remuneration but after depreciation
and provision for repairs 98,04,100
Add: Depreciation provided in the books 35,00,000 Provision for repairs of machinery 2,50,000 37,50,000
1,35,54,100
Less: Depreciation allowable under Schedule II 28,00,000 Actual expenditure incurred on repairs 1,50,000
29,50,000
1,06,04,100
Calculation of managerial remuneration:

(i) If there is only one whole-time director:
Managerial remuneration = 5% of net profit = 5% of`1, 06, 04,100 = ` 5,30,205
(ii) If there are two whole-time directors, a part time director and a manager:
Managerial remuneration = 11% of net prof it = 1 1 % o f ` 1 , 0 6 ,
04,100 = ` 11,66,451 Space to write important points for revision

Q.3.4 2009 - May [5] (x) Practical

The Managing Director of A Ltd. is entitled to 5% of the annual net profits, as his remuneration, subject to a
minimum of`25,000 per month. The net profits, for this purpose, are to be taken without charging income-tax and
his remuneration itself. During the year, A Ltd. made net profit of ` 43,00,000 before charging MD’s remuneration,
but after charging provision for taxation of` 17,20,000. Compute remuneration payable to the Managing Director. (2
marks)
Answer:
Calculation of remuneration of the Managing Director ` in Lacs Net profit as per books 43.00 Add: Provision for
taxation 17.20 Annual profit for the purpose of managerial ____ remuneration 60.20 Managing Director’s
Remuneration @ 5% of above 3.01 Minimum remuneration to be paid to the Managing Director
= ` 25,000 per month × 12 3.00 Hence, in this case, remuneration to be paid to the Managing Director of A Ltd. = `
3,01,000.

Q.3.5 2009 - June [3] (b) Practical Following is the profit and loss account of Azad Ltd. for the year ended 31st
March, 2009 :
` To Office and administrative expenses 3,10,000

To Selling and distribution expenses 1,92,000
To Directors' fees 39,500
To Managerial remuneration 1,70,000
To Interest on debentures 18,500
To Donation to charitable trust 15,000
To Compensation for breach of contract 27,000
To Depreciation on fixed assets 3,12,000
To Investment revaluation reserve 12,500
To Provision for taxation 7,40,000
To General reserve 2,50,000
To Balance c/d 8,46,500
29,33,000
By Balance b/d 3,43,200
By Gross profit b/d 24,15,000
By Subsidies 1,39,300
By Interest on investment 9,500
By Transfer fees 1,000
By Profit on sale of machinery (W.D.V. ` 30,000) 25,000
29,33,000
Additional information:
• Original cost of the machinery sold was ` 40,000.
• Depreciation on fixed assets as per Schedule II of the Companies Act, 2013 was ` 3,42,000.
You are required to calculate managerial remuneration in the following situations :
(i) when there is only whole-time director;
(ii) when there are two whole-time directors; and
(iii) when there are two whole-time directors, a managing director and a part-time director. (6 marks) [CS Exe - I]
Answer:
` ` Gross profit as per Profit & Loss Account 24,15,000 Add: Subsidies 1,39,300 Interest on investments 9,500
Transfer fees 1,000 Profit on sale of machinery (Cost - W.D.V.)
(40,000 - 30,000) 10,000 1,59,800 25,74,800 Less: Office and administrative expenses 3,10,000 Director’s fees
39,500 Selling and distribution expenses 1,92,000 Interest on debentures 18,500 Compensation for breach of
contract 27,000 Depreciation as per Schedule II 3,42,000 9,29,000 16,45,800 Computation of managerial
remuneration :
(i) When there is only one whole-time director :
5% of` 16,45,800 ` 82,290 (ii) When there are two whole-time directors:
10% of ` 16,45,800 ` 1,64,580 (iii) When there are two whole-time directors,
a managing director and a part-time director:
11% of ` 16,45,800 ` 1,81,038 Space to write important points for revision
Answer the following question :

Calculate the maximum remuneration payable to the Managing Director based on effective capital of a non-
investment company for the year, from the information given below :
( ` in’ 000) (i) Profit for the year 3,000

(ii) Paid up Capital 18,000
(iii) Reserves & Surplus 7,200
(iv) Securities Premium 1,200
(v) Long term Loans 6,000
(vi) Investments 3,600
(vii) Preliminary expenses not written off 3,000
(viii) Remuneration paid to the Managing
Director during the year 600
(5 marks)
Answer:
Assumption: It is assumed that the company is having inadequate net profit and is not exceeding the ceiling limit of
` 24,00,000 p.a.
Calculation of Effective Capital of the Company Particulars ` in ‘000'
Paid-up capital 18,000

Add: Reserve and surplus 7,200
Securities premium 1,200
Long term loans 6,000
32,400
Less: Investments 3,600 Preliminary expenses 3,000 (6,600) Effective capital for the purpose of managerial
remuneration 25,800
As effective capital is less than `5 crores but more than`1 crore, therefore maximum remuneration payable to the
Managing Director should be @ ` 1,00,000 per month.
So, maximum remuneration payable to the Managing Director for the year (` 1,00,000 × 12) =` 12,00,000.

Q.3.7 2014 - June [3] (a) Practical The following particulars are extracted from the statement of profit and loss of
S.S. Ltd. for the year ended 31st March, 2014:
` (i) Gross profit 40,00,000
(ii) Profit on sale of machinery (cost`8,00,000 and written down value ` 4,00,000) 4,50,000
(iii) Subsidy from the Government 1,00,000
(iv) Salaries and wages 1,50,000
(v) Repairs to fixed assets 50,000
(vi) General expenses 40,000
(vii) Compensation for breach of contract 25,000
(viii) Depreciation 2,40,000
(ix) Loss on sale of investment 35,000
(x) Expenditure on scientific research (cost of setting-up a new laboratory) 2,50,000
(xi) Debenture interest 75,000
(xii) Interest on unsecured loans 15,000
(xiii) Provisions for income tax 16,00,000
(xiv) Proposed dividends 10,00,000
(xv) Net profit 10,70,000
Calculate the overall managerial remuneration under section 197 of the Companies Act, 2013. (5 marks) [CS Exe -
I] Answer:
Calculation of the Managerial Remuneration under Sec. 197 ` `
Surplus for the year 10,70,000 Add: Items not to be deducted: Sec. 198
Loss on sale of investment 35,000 Expenditure on scientific research 2,50,000
Provision for tax 16,00,000
Proposed Dividend 10,00,000 28,85,000
Less: Capital profit on sale of machinery
(` 8,00,000 - ` 4,00,000 - ` 4,50,000)
Surplus under Sec. 198 for managerial 39,55,000
remuneration
Maximum Overall managerial remuneration 50,000
11% of surplus = (11% of ` 39,05,000)
` 4,29,550 39,05,000 Q.3.8 2014 - Dec [3] (b) Practical
Calculate the managerial remuneration from the following particulars of Zen Ltd. The company has only one
Managing Director:
` Net profit 20,00,000 Net profit is calculated after considering the following:
Depreciation 4,00,000 Preliminary expenses 1,00,000 Provision for tax 31,00,000 Director’s fee 80,000 Bonus
1,50,000 Profit on sale of PPE
(original cost ` 2,00,000; WDV ` 1,10,000 1,55,000

Provision for doubtful debts 90,000
Scientific research expenditure
(for setting-up new laboratory) 2,00,000
Managing Director’s remuneration paid 3,00,000
Other information:
• Depreciation allowable is ` 3,50,000.
• Bonus liability as per the Payment of Bonus Act, 1965 is ` 1,80,000.
• Looking at the past records of debtors, provision for doubtful debts is not required.
• Rate of managerial remuneration is 5%. (5 marks) [CS Exe - I] Answer:
Calculation of Managerial Remuneration ` `
Net Profit 20,00,000 Add: Depreciation 4,00,000 Preliminary Expenses 1,00,000 Provision for taxation 31,00,000
Director’s fee 80,000 Bonus 1,50,000 Provision for Doubtful Debts 90,000 Scientific Research Expenses 2,00,000
MD’s Remuneration 3,00,000 44,20,000 64,20,000
Less: Depreciation allowable 3,50,000 Bonus liability 1,80,000 Director’s Fee 80,000 6,10,000 58,10,000
Less: Profit on sale of PPE (in excess of
original cost)
(Working Note: 1) 65,000

Net Profit as per Sec. 198 of
Companies Act, 2013 57,45,000
Manager’s remuneration payable
(5% of net profits as per Sec. 198 of
Companies Act, 2013) 2,87,250 Working Note: 1

Sale Price of Fixed Asset = Book Value☐ Profit
= ` 1,10,000 ☐ 1,55,000
=` 2,65,000
Original Cost =` 2,00,000
Profit on sale of fixed assets (in excess of original cost)
=` 2,65,000 ☐ 2,00,000
=` 65,000
Q.3.9 2015 - Dec [4] (b) Practical Following is the statement of profit and loss of Target Ltd. for the year ended
31st March, 2015:
` I Revenue from operations 40,25,360
II Other income
• Subsidy received from government 2,32,560
• Interest on investments 15,640
• Transfer fees 720
• Profit on sale of machinery 25,000 2,73,920 III Total Revenue (I+II) 42,99,280 IV Expenses
• Administrative, selling and
distribution expenses 8,22,540
• Donation to charitable funds 25,500
• Directors’ fee 66,760
• Interest on debentures 31,240
• Compensation for breach of contract 42,530
• Managerial remuneration 2,85,350
• Depreciation on PPE 5,22,540
• Provision for taxation 12,42,500
• General reserve 4,00,000
• Investment revaluation reserve 12,500 34,51,460 V Profit for the period (III - IV) 8,47,820
VI Profit brought forward from the last 5,72,360 year’s statement
VII Profit carried forward (V + VI) 14,20,180 Additional information:

☐ Original cost of machinery sold was`55,000. The written down value
as on the date of sale was ` 30,000.

☐ Depreciation on PPE as per Schedule II of the Companies Act, 2013
was ` 4,75,340.
You are required to calculate and comment on managerial remuneration in the following cases in accordance with
the provisions of the Companies Act, 2013 if:
(i) there is only one whole-time director;
(ii) there are two whole-time directors; and
(iii) there are two whole-time directors, a part-time director and a manager. (7 marks) [CS Exe - I] Answer:
Calculation of Net Profit u/s 198 of the Companies Act, 2013:
Particulars ` ` Balance from trading account 40,25,360

Add: Subsidies received from Govt. 2,32,560
Interest on Investment 15,640
Transfer fees 720
Profit on sale of machinery 25,000 2,73,920
42,99,280
Less: Administrative, Selling and Distribution expenses 8,22,540 Donation to charitable funds 25,500 Director’s
fees 66,760 Interest on Debentures 31,240 Compensation for breach of contract 42,530 Depreciation on PPE as per
Schedule II of the
Companies Act, 2013 4,75,340 14,63,910
Net profit 28,35,370 Calculation of Managerial Remuneration
(i) When there is only one whole time director

When there is only one Whole time director, Managerial remuneration = 5% of ` 28,35,370
=` 1,41,768.50
(ii) When there are two whole-time directors, Managerial remuneration = 10% of ` 28,35,370
=` 2,83,537
(iii) When there are two whole time directors, a part time director and a manager. Managerial remuneration = 11%
of`28,35,370 =`311890.70 Since, the managerial remuneration as per profit and loss account is ` 2,85,350 which
exceeds the maximum amount payable in situation (a) and (b) above, therefore the company should obtain the
necessary approval.
Alternate Answer for calculation of Net Profit U/s 198 of the Companies Act, 2013
Net balance (1420180-572360) 8,47,820
Add: Managerial remuneration 2,85,350

Deprecation on PPE 5,22,540
Investment Revaluation reserve 12,500 24,62,890 33,10,710 Less: Deprecation on PPE as per Schedule II of
the Companies Act, 2013 4,75,340 Net profit 28,35,370 Note: calculation of Managerial Remuneration will be the
same. Space to write important points for revision
Answer the following:

(a) The following extract of Balance Sheet of Prabhat Ltd. (Noninvestment Company) was obtained:
Balance Sheet (Extract) as on 31st March, 2019
Liabilities ` Issued and subscribed capital:

30,000, 12% preference shares of ` 100 each (fully paid) 30,00,000 24,00,000 equity shares of ` 10 each, ` 8 paid up
1,92,00,000 Share suspense account 40,00,000 Reserves and Surplus:
Securities premium 1,00,000 Capital reserves (` 3,00,000 is revaluation reserve) 3,90,000 Secured loans:
12% debentures 1,30,00,000 Unsecured loans:
Public deposits 7,40,000 Current liabilities:
Trade payables 6,90,000 Cash credit from SBI (short term) 9,30,000 Assets
Investments in shares, debentures etc. 1,50,00,000 Profit & loss account (Dr. balance) 30,50,000
Share suspense account represents application money received on shares, the allotment of which is not yet made.
You are required to compute effective capital as per the provisions of Schedule V. Would your answer differ if
Prabhat Ltd. is an investment company? (5 marks)

ABC Ltd. is in the midst of finalising its accounts for the year-ended 31st March. A Profit and Loss Account has
been prepared in draft, the account balances as rounded of to the nearest thousands, are listed below:
Particulars ` 000's Particulars ` 000's
Share Capital 25,000 Finished Goods 1,414

General Reserve 6,031 Stores and Spares 2,771
Development Rebate Reserve 6,271 Tools Jigs and Dies 9,187
Land 2,225 Cash Credit from Banks 30,672
Buildings 9,316 Acceptances 2,645
Plant and Machinery 64,282 Sundry Creditors 6,162
Furniture, Fixtures and Office Other Current Liabilities 10,317
Equipment 1,594 Interest Accrued but not Vehicles 454 due on Loans 589
Loan from State Government 575 Provisions for Gratuity Other Secured Loans 32,460 and Pension 241
Interest Accrued on Deposits 2
Particulars ` 000's Particulars ` 000's Fixed Deposits from Public 2,400 Sundry debtors 24,231
Unsecured Loans 1,114 Cash in Hand 37

Depreciation Reserve Bank balances
- Building 2,193 - On Current Accounts 39
- Plant and Machinery 30,328 - On Deposit Accounts 27
- Furniture 568 Loans and Advances 4,518
- Vehicles 245 Preliminary Expenses 8
Raw Materials and Advance Income
Components 42,014 - Tax Paid 3,489
Work-in-progress 6,116 Capital Work-in Progress 596
Profit and Loss A/c 14,509
(Profit for the year)
In arriving at the Profit for the year, the following have been charged: Particulars ` 000's
Depreciation 12,424
Salary and Perquisite to Managing Director 72
Director’s Fee 4
The Authorized Capital is 3,50,000 Equity Shares of` 100 each. The Loan from the State Government is secured by
a charge on the Land. Cash Credits by hypothecation of Stocks and Book Debts and the Other Secured Loans on the
Buildings and Plant and Machinery.
The following adjustments are yet to be made:
1. Investment Allowance Reserve to be created ` 5,400 (000's) 2. Provision to be made for Income-Tax in ` 4,400
(000's)
3. Provision to be made for Managing Director’s Commission at 1% of the Net Profits.
4. Proposed Dividend at 10%.
Depreciation as per Companies Act, is ` 10,424 (000's)
Prepare:
(a) Show the computation of Commission Payable to the Managing Director, and
(b) Prepare the Balance sheet of the Company, based on all the above. Answer:
Balance Sheet of ABC Ltd. as at 31st March (in` 000's)
Particulars as at 31st March Note This Year Prev. Year

(a) Share capital 1 25,000 (b) Reserves and Surplus 2 22,237
(2) Non-Current Liabilities:

(a) Long Term Borrowings 3 35,435
(b) Long Term Provisions 241
- Provision for Employee Benefit
(3) Current Liabilities:

(a) Short Term Borrowings 4 31,786
(b) Trade Payables 5 8,973
(c) Other Current Liabilities 6 10,906
(d) Short Term Provisions 7 911
Total 1,35,489 II Assets

Property Plant and Equipment:

(i) Tangible Assets 8 44,537
(ii) Capital WIP 596
(2) Current Assets:

(a) Inventories 9 61,502
(b) Trade Receivables 10 24,231
(c) Cash and Cash Equivalents 11 103
(d) Short Term Loans and Advances 4,518

(e) Other Current Assets 2
- Interest Accrued on Deposits
Total 1,35,489 Note: Proposed Dividend = 10% of Paid Up Capital ` 25,000 (000s) =` 2,500 (000s)
Dividend Per Share = = ` 10.00

Particulars This Year Prev. Year
Authorised:
3,50,000 Equity Shares of ` 100 each 35,000
Issued, Subscribed and Paidup:

2,50,000 Equity Shares of ` 100 each 25,000
Total 25,000 Note 2: Reserves and Surplus (showing appropriations and transfers) (all figures for this year)
Particulars Opg. Additions Deductions Clg. Bal.
Bal.
General Reserve 6,031 Nil Nil 6,031
Development 6,271 Nil Nil 6,271

Rebate Reserve
Investment Nil From P&L Nil 5,400 Allowance Reserve = 5,400
Surplus (P&L A/c) Nil 9,943 Preliminary 4,535 Expenses w/off = 8 Tfr to Investment Allowance Reserve = 5,400
Total 12,302 15,343 5,408 22,237 Note: Preliminary Expenses is not recognised as Asset as per AS-26, and is
hence fully written off out of Surplus.
Note 3: Long Term Borrowings
1. Term Loans
(a) From Banks - (b) From other parties
(i) From State Government (Secured 575

by Land)
(ii) From Other Parties (Secured by 32,460
Building, Plant and Machinery)
2. Fixed Deposits from Public 2,400
35,435
Note 4: Short Term Borrowings
Particulars
Other Loans and Advances
(a) Secured - Cash Credits with Banks (Secured against Hypothecation of C/s and Debtors)
(b) Unsecured - Other Loans
Total
Note 5: Trade Payables
Particulars
Acceptances/ Bills Payable

Sundry Creditors
Dues to Managing Director
Total
Note 6: Other Current Liabilities

Particulars
Interest Accrued but not due on Borrowings
Other Payables
Total This Year Prev. Year
30,672 1,114
31,786
This Year Prev. Year
2,645
6,162
166
8,973
This Year Prev. Year 589

10,317
10,906
Note 7: Short Term Provisions

Particulars
Provision for Income Tax (Net of Advance
Tax)(4,400 - 3,489)
This Year Prev. Year 911

Total 911 Note 8: Tangible Assets
Item Gross Block/Cost Depreciation Net Block/WDV Opg Addns/ Clg Bal Opg. Addns/ Clg Bal As at yr As at Bal. (Dedns) Bal. (Dedns) beginning
yr end
Column (1) (2) (3) = 1± 2 (4) (5) (6) =4±5 (7) =1-4 (8)=3-6 Land 2,225 0 2,225 Building 9,316 2,193 7,123 Plant&M/c 64,282 30,328 33,954 Furniture,
etc 1,594 568 1,026 Vehicles 454 245 209 Total 77,871 33,334 44,537
Note: In the absence of information, the Other Columns are not filled up in the above Table.
Note 9: Inventories
Raw Materials and Components 42,014
Work in Progress 6,116
Finished Goods 1,414
Stores and Spares 2,771
Tools, Jigs and Dies 9,187 Total 61,502
Note 10: Trade Receivables (assumed as Secured and considered goods
and not outstanding for a period > 6 months)
Sundry Debtors 24,231
Total 24,231 Note 11: Cash and Cash Equivalents
Particulars This Year Prev. Year Balances with Banks (39+27) 66

Cash on Hand 37
Total 103
Working Note:
1. Profit and Loss Account (Extract) Particulars
To Commission to MD To Provision for Tax
To B a l a n c e b e f o r e Appropriation
Total
` 000's Particulars ` 000's 166 By Profit for the year (as 14,509 4,400 per Draft P&L A/c)
9,943
14,509 Total 14,509 2. Computation of Commission to the Managing Director Particulars ` 000's ` 000's Profit
as per draft Profit and Loss Account 14,509 Add: Depreciation charged in the Profit and Loss
Account 12,424 Salary and Remuneration to Managing Director 72 Director Fees 4 12,500
27,009 Less: Depreciation as per Companies Act (10,424) Profit for the purpose of Managerial Remuneration
16,585
Maximum Remuneration (5%) 829 Less: Salaries and Remuneration Paid (Directors’ Fees (72) is excluded for this
purpose)
Maximum Commission Payable to Managing Director 757

Commission to be provided for at 1% of Net Profits 166
(1% of ` 16,585)
Note: Since the Commission Payable is within the statutory limits, it is provided for in the books.
PQ Ltd., a non-investment company has been incurring losses for the past few years. The company provides the
following information for the current year:
Paid up equity share capital 180

Paid up preference share capital 30
Reserves (including Revaluation reserve ` 15 lakhs) 225
Securities premium 60
Long term loans 60
Deposits repayable after one year 30
Application money pending allotment 1080
Accumulated losses not written off 30
Investments 270
PQ Ltd. has only one whole-time director, Mr. Hello. You are required to calculate the amount of maximum
remuneration that can be paid to him as per provisions of Companies Act, 2013, if no special resolution is passed at
the general meeting of the company in respect of payment of remuneration for a period not exceeding three years.
Answer:
Calculation of effective capital and maximum amount of monthly remuneration
( ` in lakhs) Paid up equity share capital 180

Paid up Preference share capital 30
Reserve excluding Revaluation reserve (225-15) 210

Securities premium 60
Long term loans 60
Deposits repayable after one year 30
570
Less: Accumulated losses not written off (30) Investments (270)
Effective capital for the purpose of managerial remuneration (270)
Since PQ Ltd. is incurring losses and no special resolution has been passed by the company for payment of
remuneration, managerial remuneration will be calculated on the basis of effective capital of the company, therefore
maximum remuneration payable to the Managing Director should be @ ` 60,00,000 per annum*.
*If the effective capital is less then 5 Crore, limit of yearly remuneration payable should not exceed ` 60 lakhs as per
Companies Act, 2013.

Q.3.13 RTP Practical The following extract of Balance Sheet of Gaurav Ltd. was obtained: Balance Sheet
(Extract) as on 31st March, 2018
Liabilities ` Authorised capital:

90,000, 14% preference shares of ` 100 90,00,000 9,00,000 Equity shares of ` 100 each 9,00,00,000
9,90,00,000
Issued and subscribed capital:
67,500, 14% preference shares of ` 100 each fully paid 67,50,000
5,40,000 Equity shares of ` 100 each, ` 80 paid-up 4,32,00,000
Share suspense account 90,00,000
Reserves and surplus
Capital reserves (` 6,75,000 is revaluation reserve) 8,77,500
Securities premium 2,25,000
Secured loans:
15% Debentures 2,92,50,000
Unsecured loans:
Public deposits 16,65,000
Cash credit loan from SBI (short term) 5,92,500
Current Liabilities
Trade Payables 15,52,500
Assets:
Investment in shares, debentures, etc. 3,37,50,000
Profit and Loss account (Dr. balance) 68,62,500
Gaurav Ltd. is an investment company?
Answer: Computation of effective capital Where Gaurav Ltd. is a noninvestment

company
Where Gaurav Ltd. is an
investment
company
Paid-up share capital —

67,500, 14% Preference shares
5,40,000 Equity shares
Capital reserves
Securities premium
15% Debentures
Public Deposits
(A)
Investments
Profit and Loss account (Dr. balance) (B)
Effective capital (A-B)
67,50,000 4,32,00,000 2,02,500 2,25,000 2,92,50,000 16,65,000 8,12,92,500 3,37,50,000 68,62,500 4,06,12,500
4,06,80,000 67,50,000
4,32,00,000
2,02,500
2,25,000
2,92,50,000
16,65,000
8,12,92,500
- 68,62,500
68,62,500
7,44,30,000
4 Divisible Profit
Q.4.1 2009 - June [2] (a) (iii) Write a short note on the following : Taxation on distributed profits.
Short Notes
(3 marks) [CS Exe - I]
Answer:
Corporate Dividend tax : Finance Act, 1997 introduced additional income tax, called tax on distributed profits, on
Joint stock companies on the account of their profits distributed by them among the shareholder as dividends. This
tax is known as Corporate Dividend Tax.
According to Sec. 115☐O(1) of the Income tax Act, any amount declared, distributed or paid by domestic company
by way of dividends, whether interim or otherwise shall be charged tax on distributed profits at the rate of 20.555%.
(including surcharges and Health and Education cess).
As per Sec. 115 - O(3) provides that the tax has to be paid within 14 days from the date of :
1. Declaration of dividend
2. Distribution of dividend, or
3. Payment of dividend, whichever is earliest.
Note : Like rates of income tax the rate of corporate dividend tax may vary from one financial year to another
financial year.
Q.4.2 2011 - June [3] (a) (ii) Short Notes Write a short note on the following :
Tax on distributed profit (3 marks) [CS Exe - I]
Answer:
Tax on distributed Profits : It is a tax chargeable on any amount declared, distributed or paid by a domestic
company by way of dividend whether interim or otherwise.
It is paid in addition to the income tax chargeable on total income. Tax on distributed profit is payable to the credit
of Central Government within 14 days from the date of declaration, distribution or payment whichever is earlier.
The present rate of tax is 17.647% plus surcharge @ 12% and Health and Education cess @ 4%.

Q.4.3 2009 - Nov [1] (vi) Practical
Sumo Ltd. has a profit of ` 25 lakhs before charging depreciation for Financial year 2014-15. Depreciation in the
books was ` 11 lakhs and depreciation chargeable under Section 123 comes to`17 lakhs. Compute divisible profit for
the year. (2 marks)
Answer:
Computation of Divisible Profit
Particulars Amount (` In lakhs) Profit for the year 2014-2015 25.00 Less: Depreciation chargeable under Section
123 17.00
☐ Divisible profit for the year 8 Space to write important points for revision
Q.4.4 2009 - Nov [6] (v) Practical

A company provided` 10,00,000 for dividend payment. Is the Corporate Dividend Tax payable in this case? If yes,
please compute corporate Dividend and disclose as it would appear in Profit and Loss Account of the Company. (4
marks)
Answer:
Yes, Corporate Dividend Tax (CDT) is payable by the company which has provided for the payment of dividend.
CDT is payable even if no income tax is payable. This is payable by a domestic company on distribution of profits
to its shareholders.
Disclosure of CDT as per the Schedule III to the Companies Act, 2013. 1. The rate of Dividend Distribution
Tax is as follows:
Basic Rate : 17.647 Effective Rate : 20.555
2. Calculation of Effective Rate

Basic Rate 17.647
Add: Surcharge@12% 2.11764
Add: Health and Education cess @ 4% 0.7905856
☐ Effective Rate 20.5552256
Approx : 20.555
3. CDT on Dividend of` 10,00,000
= 2,58,732.456
4. Accounting for Dividend Distribution Tax
☐ According to generally accepted accounting principles, the provision for dividend is recognised in the financial
statements of the year to which the dividend relates.
☐ In view of this, Dividend Distribution Tax on dividend, being directly linked to the amount of the dividend
concerned, should also be reflected in the accounts of the same financial year even though the actual tax liability in
respect thereof may arise in a different year.
5. Disclosure and Presentation of Dividend Distribution Tax in Financial Statements

☐ Dividend on shares is an appropriation of profit which is not shown
in the Statement of Profit and Loss as per the Schedule III to the Companies Act, 2013. It is shown as an
appropriation or allocation of profit in the 'Notes to Accounts' of the 'Reserves and Surplus' item of the Balance
sheet.
☐ Since dividends are appropriation to profits which is not the part of disclosure in the Statement of Profit and
Loss, therefore, a question arises with regard to disclosure and presentation of Dividend Distribution Tax, as to
whether the said tax should also be disclosed as appropriation or should be disclosed along with the normal income-
tax provision for the year.
☐ The liability in respect of Dividend Distribution Tax arises only if the profits are distributed as dividends whereas
the normal income-tax liability arises on the earning of the taxable profits
☐ Since the Dividend Distribution Tax liability relates to distribution of profits as dividends which are disclosed as
appropriation/allocation of profit in the 'Notes to Accounts' of 'Reserves and Surplus', it is appropriate that the
liability in respect of Dividend Distribution Tax should also be disclosed therein.
☐ It is felt that such a disclosure would give a proper picture regarding payments involved with reference to
dividends.
☐ Dividend Distribution Tax liability should be recognised in the accounts of the same financial year in which the
dividend concerned is recognised.
CHAPTER
4B Cash Flow Statement

This Chapter Covers: Study’s Chapter: 4B
Chapter Comprises: ☹Elements of Cash ☹Classification of Cash Flow Activities ☹Cash Flows from Operating
Activities ☹Cash Flows from Investing Activities ☹Cash Flows from Financing Activities.

Legend
book.
1.200 TIMEMANAGER . . . . . . . . . . . Plan and Manage your Time Periodic Revision (in hours)
First InInstant depth Revision

learning (in hours)
i.e..... Next AfterTime day 7 days
i.e.... i.e. on ............ ........... ........... Day 1 Day 2 Day 8
1. Budgeted 12 3 2.25
2. Actual
3. Variance
(1-2)
........... .............. ............

1.5 1.1 1.1
QUICK LOOK . . . . . . . Weightage Analysis Repeatedly Common Answered Asked Questions Questions Must
Try Question
3.4, 4.2, 4.5, 5.4, 7.2, 7.10
1 Elements of Cash
Explain the meaning of the terms ‘cash’ and ‘cash equivalent’ for the purpose of Cash Flow Statement as per AS-3.
Ruby Exports had a bank balance of USD 25,000, stated in books at `16,76,250 using the rate of exchange`67.05 per
USD prevailing on the date of receipt of dollars. However, on the balance sheet date, the closing rate of exchange
was`67.80 and the bank balance had to be restated at ` 16,95,000.
Comment on the effect of change in bank balance due to exchange rate fluctuation and also discuss how it will be
disclosed in Cash Flow Statement of Ruby Exports with reference to AS 3. (5 marks)
Answer:
Cash: Cash in hand and deposits repayable on demand with any bank or other financial institutions.
Cash equivalent: Are short-term, highly liquid investments that are readily convertible into known amounts of cash
and are subject to insignificant risk or change in value.
Foreign Exchange Fluctuation:
On Date of Receipt (67.05) 16,76,250

On Balance Sheet Date (67.80) 16,95,000
Foreign Exchange Gain 18,750
The Foreign currency monetary assets (e.g. balance with bank, debtors etc.) and liabilities (e.g. creditors) are
initially recognised by translating them into reporting currency by the rate of exchange transaction date. On the
balance sheet date, these are restated using the rate of exchange on the balance sheet date. The difference in value is
exchange gain/loss. The exchange gain and losses are recognised in the statement of profit and loss as per AS11.
The exchange gain/losses in respect of cash and cash equivalents in foreign currency. (e.g. balance in foreign
currency bank account) are recognised by the principle aforesaid, and these balances are restated in the balance sheet
in reporting currency at the rate of exchange on balance sheet date. The change in cash or cash equivalents due to
exchange gains and losses are however not cash flows. This being so, the net increases/decreases in cash or cash
equivalents in the cash flow statements are stated exclusive of exchange gains and losses.
The resultant difference between cash and cash equivalents as per the cash flow statement and that recognised in the
balance sheet is reconciled in the note on cash flow statement as per AS-3, “Cash Flow Statement.”

2 Classification of Cash Flow Activities
Q.2.1 2014 - May [7] (b), RTP Practical

Intelligent Ltd., a non financial company has the following entries in its Bank Account. It has sought your advice on
the treatment of the same for preparing Cash Flow Statement.
(i) Loans and Advances given to the following and interest earned on them:
(1) to suppliers
(2) to employees
(3) to its subsidiaries companies
(ii) Investment made in subsidiary Smart Ltd. and dividend received (iii) Dividend paid for the year
(iv) TDS on interest income earned on investments made
(v) TDS on interest earned on advance given to suppliers (vi) Insurance claim received against loss of PPE by fire
Discuss in the context of AS 3 Cash Flow Statement. (4 marks)
Answer:
Treatment of the given transaction:
As per AS - 3 Cash Flow Statement, the given transaction should be treated as follows:
1. Loans and Advances given to suppliers and to employees and interest
received thereon should be reported as operating activity whereas any investment or loans & Advances related to
its subsidiary company should be reported as Investing Activity.
2. Investment made in subsidiary Smart Ltd. and dividend received from it, is required only reporting of dividend
received i.e. Investing cash flow.
3. Dividend paid is always classified as cash outflow from financing activities.
4. TDS on interest income earned on investment made should be treated as Investing Cash Out Flow.
5. TDS on interest earned on advance given to suppliers is treated operating cash outflow.
6. Insurance claim received against loss of PPE by fire should be treated as extra-ordinary items and hence, reported
separately. Space to write important points for revision
3 Cash Flow From Operating Activities
Q.3.1 RTP Practical From the following balance sheets of ABC Ltd. find out cash from operating activities only:
Particulars Note 31-3-2020 31-3-2019 No.
I. Equity and Liabilities

1. Share holder’s Fund: 70,000 60,000 (a) Share Capital
(b) Reserve and Surplus 1 44,000 7,000
2. Non current liabilities

Long-term Borrowings 2 50,000 42,000
Trade Payables 25,000 17,000
Total 1,89,000 1,26,000
II. Assets
1. Non-Current Assets:

(i)Tangible Assets 3 82,000 64,000
(ii) Intangible Assets 4 16,000 20,000
(b) Non-Current Investments 5 16,000 6,000
2. Current Assets:
(a) Inventory 49,000 12,000
(b) Cash and Cash Equivalents 26,000 24,000
1,89,000 1,26,000
Notes: (1) Reserve and Surplus: 2020 2019

General Reserve 30,000 19,000
Profit and Loss Balance 14,000 (12,000)
44,000 7,000 *Brackets denotes negative balance.

(2) Long Term Borrowings
10% Debentures 50,000 42,000

(3) Tangible Assets
Machinery 1,08,000 82,000
Less: Provision for Depreciation 26,000 18,000
82,000 64,000 (4) Intangible Assets:

Goodwill 16,000 20,000 (5) Rate of interest of Investment is 10% p.a.
Debentures were issued on 31-3-2020
Investments were made on 31-3-2020
Answer:
Calculation of Cash from Operating Activities (For the year ended 31st March, 2014)
Particulars ` ` Net Profit before tax (Note 1) 37,000 Adjustments for non-cash and non-operating items:
Add: Payment of interest on Long-term Borrowings

(Debentures) (10% on` 42,000) 4,200 Depreciation (` 26,000 - ` 18,000) 8,000 Goodwill written off 4,000 16,200
53,200
Less: Interest on Non-Current Investments 600
Opening Profit before working Capital Changes 52,600
Add: Increase in Current Liabilities:
Trade Payables 8,000
Less: Increase in Current Assets: 60,000
Inventory (37,000) Net Cash flow from Operating Activities 23,600
Notes:
(1) Calculation of Net Profit before tax:
Net Profit during current year (14,000 + 12,000) 26,000 Add: Transfer to General Reserve 11,000 37,000 Space to
Q.3.2 RTP Practical From the following information calculate cash from operating activities. 31.3.2016 31.3.2015
` ` Cash 10,000 15,000
Marketable Securities 8,000 4,000

Trade Receivable 50,000 30,000
Provision for Doubtful debts 2,000 1,500
Inventories 47,000 35,000
Prepaid Expenses 4,000 1,000
Trade Payable 40,000 55,000
Provision for Taxation 65,000 40,000
Provision for Depreciation 60,000 50,000
Operating Profit after tax for the year 2015-16 but before interest received (` 5,000) and claim received for disputed
land (` 10,000) was ` 1,80,000. Tax paid during the year amounted to ` 45,000.
Answer: Calculation of Cash from Operating Activities Particulars Detail Amount ` `
Net Profit (as per Statement) 1,80,000 Add: Depreciation Charged 10,000
Increase in Provision for doubtful debts 500
Provision for taxation for the year* 70,000 80,500 2,60,000 Less: Decrease in Marketable Securities
(8,000 - 4,000) (4,000)
Increase in Trade Receivable (20,000)
(50,000 - 30,000)
Increase in stock (47,000 - 35,000) (12,000)
Increase in Prepaid Expenses (3,000)
(4,000 - 1,000)
Decrease in Trade Payable (15,000) (54,000)
(55,000 - 40,000)
2,06,500
Income Tax Paid 45,000
Cash from Operating Activities 1,61,500 Working Note:
To Bank A/c (Paid) To Balance c/d
Provision to Taxation Account

45,000 By Balance b/d 40,000
65,000 By Statement of Profit and Loss 70,000
(B/F) (Tax Provided)
1,10,000 1,10,000
Q.3.3 Practice Practical From the following Statement. Calculate the Cash Flow from Operating Activities.
Statement of Profit and Loss for
the year ended 31st March 2016
Particulars Note Amount ` I. Revenue from operations (Sales) 85,000 II. Other Income 1 18,000
III. Total Revenue 1,03,000 IV. Expenses Employee Benefit Expenses 10,000 Depreciation 20,000 Goodwill
Written off 8,000 Other Expenses Rent 5,000 Loss on Sale of Building 5,000 48,000
Profit before tax 55,000
Less Tax Paid 21,000
Net Profit for the period 34,000
Less Appropriations proposed dividend 10,000
Balance of Profit 24,000
Note: `
1. Other Income
Profit on Sale of Machinery 5,000
Dividend Received 3,000
Commission accrued 4,000
Income Tax Refund 6,000
Answer: Cash Flows from Operating Activities

(Indirect Method)
Particulars Details Amount ` `
Net Profit before taxation

Net Profit as per profit and loss account 24,000 Add Proposed dividend 10,000 Add Tax Paid 21,000 31,000
35,000 Adjustment for:

Depreciation 20,000 Loss on Sale of building 5,000 Goodwill written off 8,000 33,000
88,000 Less: Profit on sale of machinery 5,000 Dividend received 3,000 Commission accrued 4,000 Income Tax
Refund 6,000 18,000 Cash generated from operating activities 70,000 Less: Tax paid ` 21,000 –` 6,000 (Refund of
tax) 15,000 Net Cash from Operating Activities. 55,000
Note: Tax paid during the year is treated as to provision for taxation made during the year.
Q.3.4 Practice Practical From the following summarized Balance sheet of a company calculate the Cash Flow from
Operating activity.
Particulars 31-3-2016 31-3-2015 ` `

Shareholder’s Fund
Equity Share Capital 50,000 50,000 Reserve and Surplus
Statement of Profit and Loss 60,000 30,000 Non Current Liabilities
6% Debentures 80,000 60,000 Current Liabilities
Other Current Liabilities 45,000 40,000 Trade Payable 30,000 40,000
Total 2,65,000 2,20,000 II. Assets
Non Current Assets

Machinery 1,40,000 1,00,000
Non Current Investment (Invested) 30,000 40,000
Current Assets
Cash 10,000 20,000
Inventories 45,000 30,000
Total 2,65,000 2,20,000
Answer: Cash Flows from Operating Activities

(Indirect Method)
Particulars Details Amount ` ` Net Profit for the year (` 60,000 ` 30,000) 30,000 Add Adjustment for Interest on
Debentures (60,000 3,600 × 6%)
Operating Profit before working capital charges 33,600

Add Increase in current liabilities 5,000 Increase in other current liabilities 5,000 10,000
Less: Decrease in current liabilities 43,600
Trade Payable 10,000 Increase in current assets:
Inventories 15,000 Trade Receivable 10,000 35,000
Net Cash from Operating Activities 8,600
Q.3.5 Practice Practical From the following particulars, calculate Cash Flows from Operating activities:
Particulars ` Net Profit 85,000

Depreciation 20,000
Loss on sale of Machinery 15,000
Provision for tax 35,000
Interim Dividend 50,000
Proposed Dividend 40,000
Premium payable on redeemable performance shares 10,000
Profit on sale of investment 50,000
Refund of tax 5,000
31.3.15 31.3.16 ` ` Trade Receivable 50,000 60,000
Provision for Tax 20,000 35,000
Prepare Expenses 10,000 5,000
Outstanding Expenses 7,000 5,000
Answer:
Calculation of Cash Flow from Operating Activities
Particulars Details Amount ` `
Net Profit as per profit and loss A/c 85,000

Add Proposed dividend 40,000
Add Interim dividend paid during the year 50,000
Add Provision for tax made during the current year 35,000
2,10,000
Less Refund of tax 5,000
Net Profit before taxation 2,05,000 2,05,000
Adjustment for Non-Cash and Non-operating

items
Add items to be added

Depreciation 20,000
Loss on Sale of Machinery 15,000
Premium Payable on redeemable Preference

shares 10,000 45,000
Less items to be deducted 2,50,000

Profit on sale of Investments 50,000 50,000
2,00,000
Operating Profit before Working Capital Changes
Add Decrease in current Assets
Prepaid Expenses 5,000 Increase in current liabilities
Less Increase in current assets 2,45,000
Trade Receivable 10,000 Decrease in current liabilities
Cash generated from (Net of refund) operation 2,33,000
Less Income tax paid (20,000 - 5,000) 15,000
Net Cash flow from operating activities 2,18,000
Q.3.6 Practice Practical From the following balance sheet of ABC Ltd. find out Cash from operating activities.
Particulars 31.3.2016 31.3.2015 ` `

Shareholder’s Fund
Equity Share Capital 35,000 30,000
Reserve and Surplus: 31.3.2015 31.3.2016

General Reserve 10,000 15,000
Profit and Loss Balance (6,000) 7,000
4,000 22,000 22,000 4,000 Non-current Liabilities
10% Debenture 25,000 21,000 Current Liabilities
Creditors 12,000 8,500 Total 94,000 63,500 II. Assets
Non-Current Assets
Machinery 54,000 41,000 Less Provision for Depreciation 13,000 9,000 41,000 32,000 Goodwill 8,000 10,000 Non
Current Investment
10% Investment 8,000 3,000 Current assets
Other Current (Discount on Debentures) - 500 Inventories 24,000 6,000 Cash and Bank 13,000 12,000 Total 94,000
63,500
Additional information: Debentures were issued on 31.3.2016. Investment were made on 31.3.2016.
Answer: Calculation of Cash from Operating Activities
Particulars Details Amount ` ` Net Profit before taxation

Profit during the year working note(i) 13,000
Add Transfer to General Reserve 5,000 18,000 Adjustment for non cash and non operating items
Add items to be added interest on debentures (10% 2,100 on ` 21,000)
Depreciation (` 13,000 - ` 9,000) 4,000 Goodwill written off 2,000 Discount on Debentures written off 500 8,600
Less: Interest on Investment 26,600 Operating profit before working capital charges 26,300 Add: Increase in
current Liabilities 4,000
30,300
Less: Increase in current Assets 18,500
Net Cash from operating activities 11,800
Working Note:
Profit/Loss Debit Balance` 6,000 (Loss)
(Assets side of previous year balance sheet)
In current year
Profit/Loss Credit Balance ` 7,000 (Profit)
(Liabilities side of Balance Sheet current year)
After covering the loss of` 6,000 the Profit and Loss Credit balance shows ` 7,000
It means Net Profit for current year ` 7,000 +` 6,000 =` 13,000

Q.3.7 Practice Practical
With the help of the following statement of Profit and Loss for the year ended 31-3-2016 and Balance sheets as on
31.3.2015 and 31.3.2014 of ABC Ltd. calculate Cash flows from operating activities.
Statement of Profit and Loss

for the year ended 2016
Particulars Amount ` Revenue from Operation 5,00,000 Less Expenses
Depreciation 17,000
Salary 35,000
Other Expenses
Rent 72,000
Commission 23,000
Other Expenses 43,000 1,90,000 Net Profit for the Period 3,10,000 Less Appropriations proposed dividend
1,50,000 Net Profit 1,60,000
Balance Sheet of ABC Ltd.

as at 31.3.2015 and 31.3.16
Particulars 31.3.15 31.3.2016 ` `

Shareholder’s Funds
Equity Share capital 3,50,000 2,00,000 Reserve and surplus 2,20,000 60,000
Non-current Liabilities
Loan 30,000 20,000 Current Liabilities
Trade Payable 50,000 3,50,000 Proposed dividend 1,50,000 20,000
Total 8,00,000 6,50,000 II. Assets
Non-current Assets:
Plant 5,40,000 4,75,000 Patents 50,000 -
Current assets
Inventories 1,20,000 1,05,000
Total 8,00,000 6,50,000
Note: Depreciation was to be allowed` 20,000 but it is charged ` 17,000. Answer:
Calculation of Cash From Operating Activities (Indirect Method)
Particulars Details Amount ` ` Cash flow from operating activities
Net Profit before tax Profit for the year 1,60,000
Add Proposed dividend for 2016 1,50,000
3,10,000
Adjustment for depreciation 17,000
Operating profit before working capital changes 3,27,000
Less: Increase in current assets
Inventories 15,000 Trade Receivable 20,000 Less: Decrease in current liabilities
Trade Payable 3,00,000 3,35,000
Cash used in operating activities (8,000)
Note: Depreciation` 17,000 will be added back, not` 10,000 as` 17,000 was deducted to find out profit.
Q.3.8 RTP Practical Preet Ltd. presents you the following information for the year ended 31st March, 2019:
( ` in lacs) (i) Net profit before tax provision 72,000

(ii) Dividend paid 20,404
(iii) Income-tax paid 10,200
(iv) Book value of assets sold 444
Loss on sale of asset 96
(v) Depreciation debited to P & L account 48,000
(vi) Capital grant received - amortized to P & L A/c 20
(vii) Book value of investment sold 66,636
Profit on sale of investment 240
(viii) Interest income from investment credited to P & L A/c 6,000
(ix) Interest expenditure debited to P & L A/c 24,000
(x) Interest actually paid (Financing activity) 26,084
(xi) Increase in working capital 1,34,580
[Excluding cash and bank balance]
(xii) Purchase of fixed assets 44,184
(xiii) Expenditure on construction work 83,376
(xiv) Grant received for capital projects 36
(xv) Long term borrowings from banks 1,11,732
(xvi) Provision for Income-tax debited to P & L A/c 12,000
Cash and bank balance on 1.4.2018 12,000
Cash and bank balance on 31.3.2019 16,000
You are required to prepare a cash flow statement as per AS-3 (Revised). Answer :
Cash Flow Statement as per As 3
Cash flows from operating activities: ` in lacs
Net profit before tax provision 72,000 Add: Non cash expenditures:
Depreciation 48,000 Loss on sale of assets 96 Interest expenditure (non-operating activity) 24,000 72,096
Less: Non cash income 1,44,096
Amortisation of capital grant received (20)
Profit on sale of investments (non-operating income) (240)
Interest income from investments (non-operating

income) (6,000) 6,260
Operating profit 1,37,836

Less: Increase in working capital (1,34,580) Cash from operations 3,256
Less: Income tax paid (10,200) Net cash generated from operating activities (6,944) Cash flows from investing
activities:
Sale of assets (444 – 96) 348 Sale of investments (66,636+240) 66,876 Interest income from investments 6,000
Purchase of fixed assets (44,184) Expenditure on construction work (83,376) Net cash used in investing activities
(54,336) Cash flows from financing activities:
Grants for capital projects 36 Long term borrowings 1,11,732 Interest paid (26,084) Dividend paid (20,404) Net
cash from financing activities 65,280
Net increase in cash 4,000
Add: Cash and bank balance as on 1.4.2018 12,000
Cash and bank balance as on 31.3.2019 16,000
4 Cash Flow From Investing Activities

Q.4.1 RTP Practical ABC Ltd. has plant and machinery whose W.D.V. on 1st April 2015 was ` 10,00,000 and on
31st March, 2016 was ` 12,00,000.
Depreciation for the year was `1,00,000. At the beginning of the year, a piece of Plant was sold for ` 40,000 which
had a W.D.V. of` 30,000.
Calculate cash flow from Investing Activities.
Answer: Cash Flow from Investing Activities
Particulars Detail Amount ` `
Inflow from sale of Machinery 40,000 Outflow from Purchase of Machinery (3,30,000) Net cash used in investing
Activities (2,90,000)
Working Notes:
Plant and Machinery Account
Date Particulars ` Date Particulars ` 2015 2015
April 1 To Balance b/d 10,00,000 April 1 By Bank A/c 40,000 To Statement of Profit and 31.3.16 By Depreciation 1,00,000 By Balance c/d 12,00,000
Loss (Profit on Sale of
Plant) 10,000 To Bank A/c (Purchases)
(Balancing Figure) 3,30,000 13,40,000 Space to write important points for revision
13,40,000
Q.4.2 RTP
Calculate cash from investing activities.
Practical
Non-Current Investments
Opening Closing ` ` 2,00,000 4,00,000 During the year 40% of the investments were sold at 25% profit on cost.
Answer: Cash Flows from Investing Activities
Particulars Details ` Inflow from sale of Investment

Cost of investment sold (40% of ` 2,00,000) 80,000 Add: Profit on Sale 20,000 1,00,000 Outflow on purchase of
Investments (2,80,000) Net cash used in Investing Activities (1,80,000)
Working Notes: Non-Current Investment Account

Particulars Detail To balance b/d
To Profit and Loss A/c
(Profit on sale of Investment)
To Bank A/c (Purchase)

(Balancing Figure)
` Particulars Detail ` 2,00,000 By Bank (Sale of Investment)
20,000 40% of ` 2,00,000 = 80,000 + Profit 25% of 80,000 = 20,000 1,00,000 2,80,000 By Balance c/d 4,00,000
5,00,000 5,00,000 Space to write important points for revision
Q.4.3 RTP Practical From the following information calculate cash flow from investing activities
Furniture
Provision for Depreciation
During the year Furniture Costing ` 5,000 (Depreciation` 1,000) was sold for ` 2,000
Opening Closing ` `
20,000 30,000 5,000 8,000
Answer: Cash from Investing Activities
Particulars `
Inflow from Sale of Furniture 2,000 Outflow from Purchase of Furniture* (15,000)
Cash used in investing activities (13,000)
*Working Notes: Dr.
Particulars
To Balance b/d
To Cash A/c (Balance Figure) (Purchases of Assets)
Furniture Account Cr. ` Particulars `
20,000 By Cash 2,000

15,000 By Provision for depreciation A/c 1,000
By Statement of Profit and Loss 2,000
By Balance c/d 30,000
35,000 35,000
Dr. Provision for Depreciation Account Cr. Particulars ` Particulars `
To Furniture 1,000 By Balance b/d 5,000

To Balance c/d 8,000 By Statement of Profit and Loss 4,000
9,000 9,000
Q.4.4 Practice Practical Assets 2017 2018
` ` Investment in land 1,00,000 1,00,000

Shares in Reliance Industries Ltd. 75,000 75,000
Goodwill 50,000 75,000
12% Debentures (Investment) 25,000 40,000
Patents 50,000 35,000
Plant and Machinery 3,00,000 3,75,000
(i) During the year 12% Debentures were purchased for ` 50,000 and some other were sold at a profit of` 20,000.
Interest on investments was received for the year.
(ii) The piece of land was purchased out of surplus for investment purpose and let out. It realised ` 10,000 as rent.
(iii) A machine costing`40,000 (Depreciation provided thereon`15,000) was sold for` 17,500. Depreciation charged
during the year was ` 35,000.
(iv) Dividend received from Reliance Industries Ltd. @12%. (v) Patents written off to the extent of`10,000. Some
patents were sold at a profit of ` 5,000.
Answer:
Calculation of Cash from Investing Activities Particulars Detail Amount `
Proceed from sale of machinery 17,500

Proceeds from sale of debentures 40,000
Proceeds from sale of patents 10,000
Interest received 3,000
Dividend received 12,000
Rent received 10,000
92,500
Less: Purchase of Machinery (1,35,000) Purchase of debentures (Investment) (50,000) Purchase of debentures
(Investment) (25,000) (2,10,000) Net Cash used in investing Activities (1,17,500)
Working Notes: Dr.
Particulars
To Balance b/d
To Bank A/c
(Purchase)
Balancing Figure
Plant and Machinery Account Cr. `

3,00,000
Particulars ` By Profit and Loss A/c 35,000 Depreciation

By Bank A/c – Sale 17,500
1,35,000 By Statement of Profit and

Loss (Profit on Sale) 7,500
By Balance c/d 3,75,000
4,35,000 4,35,000
Dr. Particulars
To Balance b/d
To Bank A/c
(Purchase)
To Statement of Profit and Loss (Profit)
12% Debentures Account Cr. `

25,000
Particulars ` By Bank A/c – Sale 40,000 (Balancing figure)
50,000 By Balance c/d 40,000

5,000 80,000 80,000
Dr. Goodwill Account Cr. Particulars ` Particulars `

To Balance b/d 50,000 By Balance c/d 75,000
To Bank A/c (Purchases) 25,000
Balancing Figure 75,000 75,000
Dr. Particulars
To Balance b/d
To Statement of Profit and Loss – Profit
Patents Account Cr. ` Particulars `
50,000 By Statement of Profit and Loss 10,000

5,000 Written off
By Bank A/c – Sale 10,000
Balancing figure
55,000 55,000
Q.4.5 Practice Practical Calculate Cash Flow from Investing Activities from the following information: Purchase
of machinery` 2,50,000; Sale of Machinery ` 35,000 Dividend received on shares held as investment ` 6,000
Goodwill purchased ` 1,00,000; investments sold ` 50,000 Interest received on debentures held as investment ` 4,000
Investments purchased ` 1,50,000; Patents sold ` 40,000
A piece of land was purchased as investment out of surplus. It was let out for commercial use and rent received (`)
20,000.
Answer: Calculation of Cash Flow from Investing Activities
` ` Proceeds from sale of machinery 35,000

Proceeds from sale of investments 50,000
Proceeds from sale of Patents 40,000
Interest received on debentures 4,000
Dividend received on shares 6,000
Rent received from land 20,000
1,55,000
Less: Purchase of Machinery (2,50,000) Purchase of goodwill (1,00,000) Purchase of investments (1,50,000)
(5,00,000) Net Cash used in investing Activities 3,45,000
5 Cash Flow from Financing Activities

From the following particulars calculate cash flow from financing activities.
1. Issue of equity share capital ` 5,00,000 at a premium of 15%.
2. 10% Debenture issued ` 2,00,000 at 1% discount.
3. Interim dividend paid on equity share ` 50,000.
Answer: Cash Flow from Financing Activities

Particulars `
1. Proceeds from issue of equity share capital
(` 5,00,000 +` 75,000) 5,75,000
(` 2,00,000 - ` 2,000) 1,98,000
3. Interim dividend paid on equity shares (50,000)
Net cash flow from Financing Activities 7,23,000 Space to write important points for revision
Q.5.2 Practice Practical From the following information calculate cash flow from financing activities. Particulars
31.3.2015 31.3.2016 ` ` Equity share capital 1,00,000 1,50,000 5% Debentures 1,00,000
7% Debentures 2,00,000
1. A Bonus issue was made during the year 2015-16 in the ratio of 2:1 by capitalising the reserves.
2. Dividend paid in equity share was ` 20,000
3. Interest on debentures paid was ` 5,000
Answer: Calculation of Cash from Financing Activities
Particulars Details Amount ` ` Inflow of cash

Issue of 7% Debentures 2,00,000 Outflow of Cash
Redemption of 5% Debenture 1,00,000
Dividend paid to equity shareholders 20,000 Interest paid on debentures 5,000 1,25,000 Net cash inflow from
Financing Activities 75,000
Note: As bonus share issued to not effect the cash, so they do not appear in cash flow statement.
Q.5.3 Practice Practical From the following information taken from the books of Mahajan Ltd. calculate cash from
financial activities. Particulars
Opening Closing ` ` 10% Preference Share Capital 10,00,000 12,00,000
Securities Premium 2,50,000 2,75,000 Debentures 6,00,000 4,50,000
Interest paid on debentures ` 50,000
Answer: Calculation of cash from Financial Activities Particulars Detail Amount ` `
10% Preference Share issued (12,00,000 - 10,00,000) 2,00,000

Add: Securities Premium received (2,75,000 - 2,50,000) 25,000
2,25,000
Less: Debentures redeemed (6,00,000 - 4,50,000) 1,50,000 Interest paid on debentures 50,000 (2,00,000) Net cash
flow from financing activities 25,000
Q.5.4 Practice Practical From the following activities, calculate cash flows from financing activities:
Particulars 31.3.2016 31.3.2015

Equity Share Capital 2,00,000 1,50,000
12% Preference Share Capital - 50,000
14% Debentures 25,000 - Additional Information:
(i) Equity shares were issued at a premium of 15%
(ii) 12% preference shares were redeemed at a premium of 15%. (iii) 14% debentures were issued at a discount of
1%.
(iv) Interim dividend paid on equity shares ` 22,500.
(v) Dividend paid on old preference shares ` 6,000.
(vi) Interest paid on debentures ` 3,500.
(vii) Underwriting commission of Equity Shares ` 2,500.
Answer: Cash Flows from Financing Activities
Particulars ` Proceeds from issue of Equity share capital

(` 50,000 + Premium ` 7,500 - underwriting Commission 55,000 ` 2,500)
Redemption of Preference Shares (` 50,000 + Premium (52,500) ` 25,000)
Proceeds from issue of Debentures (` 25,000 - ` 250) 24,750 Interim Dividend paid on Equity Shares (22,500)
Dividend paid on Preference Shares (6,000) Interest paid on Debentures (3,500) Net Cash used in Financing
Activities 4,750

Q.5.5 Practice Practical From the following information find out cash flow from investing activities and financing
activities:
Loan from Bank

Capital
Furniture at cost
Accumulated depreciation on furniture
Opening Closing ` `
5,00,000 3,00,000
10,00,000 14,00,000
2,00,000 3,60,000
1,20,000 1,80,000
During the year furniture costing` 80,000 was sold at a profit of` 60,000. Depreciation on furniture charged during
the year amounted to`1,00,000.
Answer: Cash Flow from Investing Activities
` Inflow from sale of furniture 1,00,000 Outflow on purchase of furniture ` (3,60,000 -(2,00,000 (2,40,000) 80,000))
Net Cash used in Investing Activities 1,40,000
Cash Flow from Financing Activities

` Inflow from introduction of additional capital 4,00,000 Outflow from repayment of Bank Loan (2,00,000) Net
Cash generated from financing Activities 2,00,000 Working Notes:
Dr. Furniture Account Cr.
Particulars
To Balance b/d
To Profit on Sale of Furniture
` Particulars ` 2,00,000 By Bank A/c 1,00,000
60,000 By Accumulated 40,000

depreciation
2,40,000 By Balance c/d 3,60,000 To Bank A/c - Purchase (Balancing Figure) 5,00,000 5,00,000
Dr. Accumulated Depreciation Account Cr. Particulars

To Furniture A/c
Balancing figure being
depreciation on furniture sold
To Balance c/d
` Particulars ` 40,000 By Balance b/d 1,20,000

By Depreciation 1,00,000
1,80,000
2,20,000 2,20,000
Proceeds from sale of the furniture:

= Cost - Accumulated depreciation + Profit on Sale = 80,000 - 40,000 + 60,000 = ` 1,00,000

From the following extracts taken from the Balance Sheets of M/s Khanduja Ltd., on 31stMarch and the additional
information provided, you are required to calculate:
(i) Cash Flows from Operating Activities

(ii) Cash Flows from Financing Activities
Particulars 2015 2016 Equity and Liabilities ` ` Equity Share Capital 20,00,000 30,00,000 10% Preference Share
Capital 2,00,000 1,00,000 Securities Premium - 1,00,000 Statement of Profit and Loss 4,00,000 8,00,000 10%
Debentures 10,00,000 10,00,000
Preference shares were redeemed on 31stMarch, 2016 at premium of 5%. Dividend on equity shares was paid @8%.
Fresh issue of Equity shares was done on 1st April, 2015.
Answer:
(i) Cash Flows from Operating Activities
Particulars ` Net Profit before Tax (Note 1) 6,60,000 Adjustment for non-cash and non-operating items:
Add: Premium on Redemption of Preference shares 5,000
Interest on Debentures 1,00,000

Net cash flows from operating Activities 7,65,000
Note: (1) Calculation of Net Profit before Tax: ` Profit and Loss Balance on 31st March, 2016 8,00,000
Less: Profit and Loss Balance on 31st March, 2015 4,00,000
4,00,000
Add: Dividend on Preference shares (10% on ` 2,00,000) 20,000
Dividend on Equity Shares (8% on` 30,00,000) 2,40,000
6,60,000
(ii) Cash Flow from Financing Activities

Particulars `
Cash Proceeds from issue of Equity Shares 11,00,000 (` 10,00,000 + Securities Premium` 1,00,000)
Cash paid for Redemption of Preference Shares (`1,00,000 + (1,05,000) Premium` 5,000)
Dividend paid on Preference shares (20,000) Dividend paid on Equity Shares (2,40,000) Interest on Debentures
(1,00,000) Net Cash flows from financing activities 6,35,000

6 Cash Flow by Direct Method
The following particulars relate to Bee Ltd. for the year ended 31st March, 2010 :
(i) Furniture of book value of ` 15,500 was disposed off for ` 12,000. (ii) Machinery costing ` 3,10,000 was
purchased and ` 20,000 were spent on its erection.
(iii) Fully paid 8% preference shares of the face value of`10,00,000 were redeemed at a premium of 3%. In this
connection 60,000 equity shares of` 10 each were issued at a premium of ` 2 per share. The entire money being
received with applications.
(iv) Dividend was paid as follows :
On 8% preference shares ` 40,000 On equity shares for the year 2009 - 10 `1,10,000 (v) Total sales were` 32,00,000
out of which cash sales were` 11,50,000. (vi) Total purchases were` 8,00,000 including cash purchase of` 60,000.
(vii) Total expenses were ` 12,40,000.
(viii) Taxes paid including dividend tax of` 22,500 were ` 3,30,000. (ix) Cash and cash equivalents as on 31st
March, 2010 were` 1,25,000. You are requested to prepare Cash Flow Statement as per AS-3 for the year ended
31stMarch, 2010 after taking into consideration the following also: On 31st March, 2009 On 31st March, 2010 ` `
Sundry debtors 1,50,000 1,47,000 Sundry creditors 78,000 83,000 Unpaid expenses 63,000 55,000 (8 marks)
Answer:
Cash Flow Statement for the year ended 31st March, 2010 Particulars ` ` l. Cash flow from Operating
Activities
Cash receipts from customers (W.N.1) 32,03,000 Less : Cash paid to suppliers and payment (20,43,000) for
expenses (W.N.3)
Cash generated from operations 11,60,000 Income tax paid (` 3,30,000 – ` 22,500) 3,07,500 8,52,500 Net cash from
operating activities
ll. Cash flows from Investing Activities
Sale of furniture
Purchase of machinery 12,000 Net cash used in investing activities (3,30,000) (3,18,000)
lll. Cash flow from Financing Activities

Proceeds from issue of equity shares 7,20,000 Redemption of 8% preference shares (10,30,000) Dividend paid (`
40,000 + ` 1,10,000) (1,50,000) Dividend distribution tax paid (22,500) Net cash used in financing activities
(4,82,500)
Net increase in cash and cash equivalents 52,000

Add : Cash and cash equivalents as on 31st
March, 2009 (Bal) (fig) 73,000
Cash and cash equivalents as on 31st March, 2010 1,25,000
Working Notes :
1. Cash receipt from customers:
Credit sales = Total sales ` 32,00,000 ☐ Cash sales ` 11,50,000 =` 20,50,000
Particulars To Balance b/d To Credit sales

Total Debtors Account
` Particulars ` 1,50,000 By Cash/Bank (Bal. fig.) 20,53,000 20,50,000 By Balance c/d 1,47,000 22,00,000
22,00,000 Total sale receipts =` 20,53,000 + ` 11,50,000 = ` 32,03,000
2. Cash payment to suppliers :

Credit Purchases
= Total purchases` 8,00,000 – Cash purchases` 60,000 =` 7,40,000
Total Creditors Account

Particulars
To Cash/Bank (Bal. fig.)
To Balance c/d
` Particulars ` 7,35,000 By Balance b/d 78,000 83,000 By Credit purchases 7,40,000 8,18,000 8,18,000 Total
payments to suppliers =` 7,35,000 +` 60,000 = ` 7,95,000
3. Cash paid to suppliers and payment for expenses
Particulars ` Outstanding expenses as on 31.3.2009 63,000 Add : Expenses charged to profit and loss account
12,40,000
13,03,000
Less : Outstanding expenses as on 31.3.2010 55,000
Payment on account of expenses 12,48,000
Total of payment to suppliers and payment for expenses =`7,95,000 + ` 12,48,000 = ` 20,43,000
Q.6.2 2010 - Nov [3] Practical From the following information, prepare a Cash Flow Statement as per AS-3 for
Banjara Ltd., using direct method:
Balance Sheet as on March 31, 2010
(`’ 000)
2010 2009
Assets :
Cash on hand and balances with bank 200 25
Marketable securities (having one month Maturity) 670 135
Sundry Debtors 1,700 1,200
Interest Receivable 100 — Inventories 900 1,950
Investments 2,500 2,500
PPE at Cost 2,180 1,910
Accumulated Depreciation (1,450) (1,060) PPE (net) 730 850
Total Assets 6,800 6,660
Liabilities :
Sundry Creditors 150 1,890
Interest Payable 230 100
Income tax Payable 400 1,000
Long term Debt 1,110 1,040
Total Liabilities 1,890 4,030
Shareholders’ Fund :
Share Capital 1,500 1,250
Reserves 3,410 1,380
4,910 2,630
Total Liabilities and Shareholders’ Fund 6,800 6,660
Statement of Profit or Loss for the year ended 31-3-10 (`’000) Sales 30,650 Cost of sales (26,000) Gross profit
4,650 Depreciation (450) Administrative and Selling expenses (910) Interest expenses (400) Interest income 300
Dividend income 200 Net profit before taxation and extraordinary items 3,390 Extraordinary items :
Insurance proceeds from earthquake disaster settlement 140 Net profit after extraordinary items 3,530 Income tax
(300)
Net profit 3,230 Additional information :

(i) An amount of` 250 was raised from the issue of share capital and a further ` 250 was raised from long- term
borrowings.
(ii) Interest expense was` 400 of which`170 was paid during the period`100 relating to interest expense of the
prior period was also paid during the period.
(iii) Dividends paid were ` 1,200.

(iv) Tax deducted at source on dividends received (included in the tax expense of ` 300 for the year )
amounted to ` 40. (v) During the period the enterprise acquired PPE for ` 350. The payment was made in cash.
(vi) Plant with original cost of ` 80 and accumulated Depreciation of ` 60 was sold for ` 20.
(vii) Sundry debtors and Sundry creditors include amounts relating to credit sales and credit purchase only. Answer:
Cash Flow Statement (direct method)
(16 marks)
Particulars Amount in thousand (`)
Amount in thousand (`)
Cash flows from Operating Activities Cash receipts from customers (W.N.2)
Cash paid to suppliers, employees and for expenses (W.N.3)
Cash generated from operations
Income tax paid (W.N.4)
30,150
(27,600) 2,550 (860) 1,690 Cash flow before extraordinary item proceeds
from earthquake disaster settlement

Net cash from operating activities
Cash flows from Investing Activities
Purchase of PPE
Proceeds from sale of equipment
Interest received (300 – 100)
Dividends received (200 – 40)
Net cash from investing activities
Cash flows from Financing Activities Proceeds from issuance of share capital Proceeds from long term borrowings
Repayment of long term borrowings (W.N.5) Interest paid (W.N.6)
Dividends paid
Net cash used in financial activities
Net Cash flow during the year
140
1,830
(350) 20
200
160
30
250
250
(180) (270) (1,200) (1,150) 710
Cash and cash equivalents at beginning of the

period (W.N.1) 160 Cash and cash equivalents at end of the
period (W.N.1) 870
Working Notes:
(1) Cash and cash equivalents
Cash and cash equivalents includes cash in hand and balances with banks and investments in money market
instruments for short period. (`) in `000 Particulars 2010 2009
Cash in hand and balance with bank 200 25 Short-term investments 670 135 Cash and cash equivalents 870 160 (2)
Cash receipts from customers
Particulars (`) in`000 Total sales 30,650 Add: Sundry debtors at the beginning of the year 1,200
31,850
Less: Sundry debtors at the end of the year (1,700) Cash sales 30,150
(3) Cash paid to suppliers, employees and for expenses Particulars (`) in `000
Cost of sales 26,000
Administrative and selling expenses 910
26,910
Add : Sundry creditors at the beginning of the year 1,890 Inventories at the end of year 900 2,790
29,700
Less : Sundry creditors at the end of year (150) — Inventories at the beginning of the year (1,950) (2,100) 27,600
(4) Income tax paid (including TDS from dividends received)

Particulars (`) in `000
Income tax expense for the year 300

(including tax deducted at source from dividends received) Add : Income tax liability at the beginning of the year
1,000
1,300
Less : Income tax liability at the end of the year (400) 900
Note : Out of`900 thousands, tax deducted at source on dividends received (amounting to ` 40 thousands) is
included in cash flows from investing activities and the balance of` 860 thousands is included in cash flows from
operating activities.
(5) Repayment of long term borrowings during the year
Long term debts at the beginning of the year 1,040

Add : Long term borrowings made during the year 250
1,290
Less : Long term borrowings at the end of the year (1,110)
180 (6) Interest paid during the year

Interest expense for the year 400

Add : Interest payable at the beginning of the year 100
500
Less : Interest payable at the end of the year (230)
270 Space to write important points for revision

Q.6.3 2013 - May [6] (b) Practical On the basis of the following information prepare a Cash Flow Statement for the
year ended 31st March, 2013:
(i) Total sales for the year were `199 crore out of which cash sales amounted to ` 131 crore.
(ii) Cash collections from credit customers during the year totaled`67 crore. (iii) Cash paid to suppliers of goods
and services and to the
employees of the enterprise amounted to ` 159 crore. (iv) Fully paid preference shares of the face value of ` 16
crore were
redeemed and equity shares of the face value of ` 16 crore were
allotted as fully paid up at a premium of 25%.
(v) ` 13 crore were paid by way of income tax.
(vi) Machine of the book value of` 21 crore was sold at a loss of ` 30
lakhs and a new machine was installed at a total cost of ` 40 crore. (vii) Debenture interest amounting ` 1 crore was
paid.
(viii) Dividends totalling`10 crore was paid on equity and preference
shares. Corporate dividend tax @ 17.647% was also paid. (ix) On 31stMarch, 2012 balance with bank and cash
on hand totalled`9
crore. (8 marks) Answer:
Cash Flow Statement for the year ended 31st March, 2013 (` in (` in Particulars Crores) Crores) Cash flow
from Operating Activities
Cash sales 131 Cash collected from credit customers 67 Less: Cash paid to suppliers for goods & services and
to employees (159) Cash from operations 39 Less: Income tax paid (13) Net cash generated from operating activities
26.00
Cash flow from Investing Activities

Payment for purchase of Machine (40.00) Proceeds from sale of Machine 20.70 Net cash used in investing activities
(19.30) Cash flow from Financing Activities
Redemption of Preference shares (16.00) Proceeds from issue of Equity shares 20.00 Debenture interest paid (1.00)
Dividend Paid (11.77) Net cash used in financing activities (8.77) Net decrease in cash and cash equivalent (2.07)
Add: Cash and cash equivalents as on 1.04.2012 9.00 Cash and cash equivalents an on 31.3.2013 6.93

Prepare Cash flow for Gamma Ltd., for the year ending 31.3.2014 from the following information:
1. Sales for the year amounted to` 135 crores out of which 60% was
cash sales.
2. Purchases for the year amounted to` 55 crores out of which credit
purchase was 80%.
3. Administrative and selling expenses amounted to ` 18 crores and
salary paid amounted to ` 22 crores.
4. The Company redeemed debentures of ` 20 crores at a premium of
10%. Debenture holders were issued equity shares of ` 15 crores
towards redemption and the balance was paid in cash. Debenture
interest paid during the year was ` 1.5 crores.
5. Dividend paid during the year amounted to ` 10 crores. Dividend
distribution tax @ 20% (assumed) was also paid.
6. Investment costing ` 12 crores were sold at a profit of` 2.4 crores. 7. ` 8 crores was paid towards income tax
during the year. 8. A new plant costing`21 crores was purchased in part exchange of an
old plant. The book value of the old plant was ` 12 crores but the
vendor took over the old plant at a value of ` 10 crores only. The
balance was paid in cash to the vendor.
9. The following balances are also provided
` in crores ` in crores 1.4.2013 31.3.2014 Debtors 45 50

Creditors 21 23 Bank 6 (6 marks)
Answer :
In the books of Gamma Ltd.
Cash Flow Statement for the year ended 31st March, 2014
Particulars Amount Amount (in`) (in`)

Cash from Operating Activities
Cash Sales 81
Receipts from customers 49
(-) Cash purchases (11)
(-) Payment to creditors (42)
(-) Admin. & Sal. Exp. (40)
37
(-) Tax paid (8) 29
Cash from Investing Activities
Sale of investment 14.4
Plant & Machinery purchase (11) 3.4
Cash from Financing Activities

(-) Redemption of Debenture (7)
(-) Interest on Debenture (1.5) (-) Dividend paid (10)
(-) Dividend Distribution Tax (2.0) Balance (20.5)
+ Opening Bank 11.9

Closing balance of bank 6 17.9
Working Note:
1. Calculation of Receipt from Customer
Particulars
To Balance b/d To Sales
Total
Debtors A/c
Amount Particulars Amount 45 By Bank 49 54 By Balance c/d 50 99 Total 99 2. Calculation of Payment to
Creditors
Particulars To C/B
To Balance Total
Creditors A/c
Amount Particulars Amount

42 By Balance 21
23 By Purchase 44
65 Total 65
Q.6.5 2015 - Nov [3] (a) Practical Prepare cash flow statement of M/s MNT Ltd. for the year ended 31st March,
2015 with the help of the following information:
1. Company sold goods for cash only.

2. Gross Profit Ratio was 30% for the year, gross profit amounts to ` 3,82,500.
3. Opening inventory was lesser than closing inventory by ` 35,000.
4. Wages paid during the year ` 4,92,500.
5. Office and selling expenses paid during the year ` 75,000.
6. Dividend paid during the year`30,000 (including dividend distribution tax.)
7. Bank loan repaid during the year ` 2,15,000 (included interest ` 15,000)
8. Trade payables on 31st March, 2014 exceed the balance on 31st March, 2015 by ` 25,000.
9. Amount paid to trade payables during the year ` 4,60,000.
10. Tax paid during the year amounts to ` 65,000 (Provision for taxation as on 31.03.2015 ` 45,000).
11. Investments of`7,00,000 sold during the year at a profit of` 20,000.
12. Depreciation on PPE amounts to ` 85,000.
13. Plant and machinery purchased on 15th November, 2014 for ` 2,50,000.
14. Cash and Cash Equivalents on 31st March, 2014` 2,00,000.
15. Cash and Cash Equivalents on 31st March, 2015` 6,07,500. (8 marks) Answer:
M/s. MNT Ltd.
Cash Flow Statement for the year ended 31st March, 2015 (Using direct method)
Particulars ` ` Cash flows from Operating Activities

Cash Sales (W N 1) 12,75,000
Less: Cash payment for trade payables (4,60,000) Wages Paid (4,92,500)
Office and Selling Expenses (75,000) (10,27,500) Cash generated from operations before taxes 2,47,500 Income tax
paid (65,000) Net cash generated from operating activities (A) 1,82,500
Cash flows from investing activities

Sale of investments 7,20,000 Payments for purchase of Plant & Machinery (2,50,000) Net cash used in investing
activities (B) 4,70,000 Cash flows from financing activities
Bank loan repayment (including interest) (2,15,000) Dividend paid (including dividend distribution tax) (30,000)
Net cash used in financing activities (C) (2,45,000) Net increase in cash (A + B + C) 4,07,500
Cash and cash equivalents at beginning of

the period 2,00,000 Cash and cash equivalents at end of the
period 6,07,500
Working Notes :
1. Calculation of Cash Sales:
GP Ratio = 30%
Gross Profit = 3,82,500
Sales:
30% ☐ 3,82,500 =
100% ☐ 9
Cash Sales = ` 12,75,000
2. Adjustment for opening and closing inventory is not done in direct method as there is no movement of cash.
3. Adjustment of trade payable is not done in direct method as there is no movement of cash.
4. Depreciation is a non- cash item, hence it is not considered. Space to write important points for revision
Q.6.6 2016 - Nov [3] (a) Practical On the basis of the following information prepare a Cash Flow Statement for the
year ended 31st March, 2016 (Using direct method):
(i) Total sales for the year were ` 398 crores out of which cash sales amounted to ` 262 crores.
(ii) Receipts from credit customers during the year, totaled`134 crores. (iii) Purchases for the year amounted to`220
crores out of which credit purchase was 80%.
Balance in creditors as on
1.4.2015 ` 84 crores
31.3.2016` 92 crores
(iv) Suppliers of other consumables and services were paid` 19 crores in cash.
(v) Employees of the enterprises were paid ` 20 crores in cash. (vi) Fully paid preference share of the face value of `
32 crores were redeemed. Equity shares of the face value of ` 20 crores were allotted as fully paid up at premium of
20%.
(vii) Debentures of` 20 crores at a premium of 10% were redeemed. Debenture holders were issued equity shares in
lieu of their debentures.
(viii) ` 26 crores were paid by way of income tax.
(ix) A new machinery costing ` 25 crores was purchased in part exchange of an old machinery. The book value of
the old machinery was` 13 crores. Through the negotiations, the vendor agreed to take over the old machinery at a
higher value of` 15 crores. The balance was paid in cash to the vendor.
(x) Investment costing ` 18 crores were sold at a loss of ` 2 crores. (xi) Dividends totally` 15 crores (including
dividend distribution tax of ` 2.7 crores) was also paid.
(xii) Debenture interest amounting ` 2 crores was paid.
(xiii) On 31st March, 2015, Balance with Bank and Cash on hand totaled ` 2 crores. (8 marks)
Answer:
Cash Flow Statement for the year ending on 31.03.2016 Particulars (` in (` in Crores) Crores)
A Cash Flow from Operating Activities

Sale for the year
Cash sales 262
Credit sales 134 396 Less:
Cash Payments
Cash Purchases 44
Payment to Creditor 168
Payment to Supplier 19
Payment to Employees 20 (251) ☐ Cash generated from operations before taxes
and extra ordinary items 145 Less: Taxes Paid (26) 119 ☐ Net Cash Flow from Operating Activities (A)
B Cash Flow from Investing Activities:

Sale of Investments (18-2) 16 Purchase of New
Machinery (25-15) (10) 6 ☐ Net Cash Flow from Investing Activities (B)
C Cash Flow from Financing Activities

Issue of Equity Share 20
Premium on Equity Share 4 24 Less: Redemption of
Preference share 32
Dividend paid 15
Debenture Interest paid 2 (49) ☐ Net Cash Flow from Financing Activities (C) (25) D Net Increase or Decrease in
cash or cash
equivalents (A+B+C) 100 E Opening Balances of cash and cash equivalents 2
F Closing Balance of cash and cash equivalents as

on 31.3.2016 102 Space to write important points for revision
7 Cash Flow by Indirect Method
Q.7.1 2002 - Nov [5] Practical
From the following details relating to the Accounts of Grow More Ltd. prepare Cash Flow Statement:
Liabilities 31.3.2002 (`) 31.3.2001 (`) 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
Proposed dividend 2,00,000 1,00,000

Sundry Creditors 7,00,000 8,20,000
25,00,000 20,00,000
Assets
Land/Building 6,00,000 4,00,000
Investments 1,00,000 — Sundry Debtors 5,00,000 7,00,000
Stock 4,00,000 2,00,000
Cash on hand/Bank 2,00,000 2,00,000
25,00,000 20,00,000
(i) Depreciation @ 25% was charged on the opening value of Plant and Machinery.
(ii) During the year one old machine costing 50,000 (WDV 20,000) was sold for ` 35,000.
(iii) ` 50,000 was paid towards Income tax during the year. (iv) Building under construction was not subject to any
depreciation. Prepare Cash Flow Statement. (16 marks) Answer:
Grow More Ltd.
Cash Flow Statement
for the year ended 31st March, 2002
Particulars ` ` Cash flow from Operating Activities:
Net Profit 40,000 Add: Proposed Dividend 2,00,000 Provision for taxation 80,000 Transfer to General Reserve
50,000 Depreciation 1,25,000 Less: Profit on sale of Plant and Machinery (15,000) Operating Profit before changing
in Working
Capital 4,80,000 Adjustment for:
Increase in Stock (2,00,000) Decrease in debtors 2,00,000 Decrease in creditors (1,20,000) Cash generated from
operations 3,60,000 Income tax paid (50,000) Net Cash from operating activities: 3,10,000 Cash Flow from
Investing Activities:
Purchase of PPE (3,45,000) Expenses on building (2,00,000) Increase in investment (1,00,000) Sale of old machine
35,000
Net cash used in investing activities (6,10,000) Cash flow from financing activities light:
Proceeds from issue of shares 2,00,000 Proceeds from issue of debentures 2,00,000 Dividend paid (1,00,000) Net
cash from in financing activities 3,00,000 Net increase in cash or cash equivalents NIL Cash and Cash equivalents at
the beginning of the
year 2,00,000 Cash and Cash equivalents at the end of the year 2,00,000
Working Notes:
Provision for taxation account Particulars ` To Cash (Paid) 50,000 To Balance c/d 1,00,000 1,50,000 Particulars
` By Balance b/d 70,000 By Profit and Loss A/c 80,000 1,50,000
Plant and Machinery account Particulars ` Particulars `
To Balance b/d 5,00,000

To Cash (Balancing 3,45,000
figure)
8,45,000
By Depreciation 1,25,000
By Cash (sale of machine) 20,000
8,45,000 Space to write important points for revision

Q.7.2 2003 - May [1] Practical From the following Balance Sheet and information, prepare Cash Flow Statement
of Ryan Ltd. for the year ended 31st March, 2003 :
Balance Sheet
31st March, 2003 31st March, 2002
` ` Liabilities
Equity Share Capital 6,00,000 5,00,000 10% 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 — Sundry Creditors 95,000 80,000 Bills Payable 20,000 30,000 Liabilities
for Expenses 30,000 20,000 Provision for Taxation 95,000 60,000 Proposed Dividend 90,000 60,000
15,00,000 12,50,000
Additional Information :
(i) A piece of land has been sold out for ` 1,50,000 (Cost — ` 1,20,000) and the balance land was revalued. Capital
Reserve consisted of Profit on sale and profit on revaluation.
(ii) On 1st April, 2002 a plant was sold for` 90,000 (Original Cost — ` 70,000 and W.D.V. —` 50,000) and
Debentures worth` 1 lakh was issued at par as part consideration for Plant of ` 4.5 lakh acquired.
(iii) Part of the investments (Cost — ` 50,000) was sold for ` 70,000. (iv) Pre-acquisition dividend received`5,000
was adjusted against cost of Investment.
(v) Directors have proposed 15% dividend for the current year. (vi) Voluntary separation cost of`50,000 was
adjusted against General
Reserve.
(vii) Income-tax liability for the current year was estimated at`1,35,000. (viii) Depreciation @ 15% has been written
off from Plant account but no
depreciation has been charged on Land and Building. (20 marks)
Answer: Cash Flow Statement of Ryan Limited For the year ended 31st March, 2003
``
Cash flow from operating activities:

Net Profit before taxation 2,45,000
Adjustment for Depreciation 1,35,000
Preliminary expenses 15,000
Profit on sale of plant (40,000) Profit on sale of investments (20,000) Interest on debentures 18,000
Operating profit before working capital changes 3,53,000
Increase in inventory (5,000) Decrease in bills receivable 5,000
Increase in debtors (45,000) Increase in creditors 15,000
Decrease in bills payable (10,000) Increase in accrued liabilities 10,000
Cash generated from operations 3,23,000 Income taxes paid (1,00,000) 2,23,000 Voluntary separation payments
(1,10,000)
Net cash from operating activities 1,13,000 Cash flow from investing activities
Purchase of plant (3,50,000) Purchase of investments (25,000) Proceeds from sale of land 1,50,000 Proceeds from
sale of plant 90,000 Proceeds from sale of investments 70,000 Pre☐acquisition dividend received 5,000
Net cash used in investing activities:

Cash flow from financing activities (60,000) Proceeds from issue of equity shares 1,00,000 Proceeds from issue of
debentures 1,00,000 Redemption of preference shares (2,00,000) Dividends paid (60,000) Interest paid on
debentures (18,000)
Net cash used in financing activities (78,000)
Net decrease in cash and cash equivalents (25,000) Cash and cash equivalents at the beginning of the 90,000 year
Cash and Cash equivalents at the end of the year 65,000
Working Notes:
1. Net profit before taxation: ` Retained profit 70,000 Less: Balance as on 31.3.2002 (50,000) 20,000 Provision for
taxation 1,35,000 Proposed dividend 90,000 2,45,000
2. Plant and Machinery Account

Particulars
To Balance b/d
To Profit and loss account To Debentures
To Bank
` Particulars `
5,00,000 By Cash (Sale) 90,000

40,000 By Depreciation 1,35,000
1,00,000 By Balance c/d 7,65,000
3,50,000
3. Land and Building Account Particulars

To Balance b/d
To Capital reserve (profit on sale)

To Capital reserve (Revaluation profit)
` Particulars `
2,00,000 By Cash (Sale) 1,50,000 30,000 By Balance c/d 1,50,000
70,000
3,00,000 3,00,000
4. Particulars To Balance c/d
5. Particulars
To Balance b/d
To Profit and loss account To Bank (Balancing figure)
Capital Reserve Account

` Particulars `
1,00,000 By Profit on sale of land 30,000

By Profit on revaluation
of land 70,000
1,00,000 1,00,000
Investments Accounts
` Particulars `
80,000 By Cash (Sale) 70,000

20,000 By Dividend 5,000
25,000 (Pre☐acquisition)
6. Proposed Dividend Account Particulars ` Particulars `
To Bank (Balancing figure) To Balance c/d

60,000 By Balance b/d 60,000 90,000 By Profit and loss 90,000
account
1,50,000 1,50,000
7. General Reserve Account Particulars ` Particulars `
To Voluntary separation cost To Capital redemption reserve To Balance c/d

50,000 By Balance b/d 2,50,000
1,00,000
1,00,000
2,50,000 2,50,000 8. Provision for Taxation Account Particulars ` Particulars ` To Bank (Balancing figure) To
Balance c/d
1,00,000 By Balance b/d 60,000

95,000 By Profit and loss 1,35,000
account
1,95,000 1,95,000
9. Voluntary Separation Payments Account Particulars ` Particulars ` To Balance b/d
To Bank (Balancing figure) 65,000 By General reserve 50,000 1,10,000 By Balance c/d 1,25,000 1,75,000 1,75,000
Q.7.3 2003 - Nov [5] Practical The Balance Sheet of New Light Ltd. for the years ended 31stMarch, 2001 and 2002
are as follows :
Liabilities 31st March 31st March Assets 31st March 31st March 2001 2002 2001 2002 (`) (`) (`) (`) Equity share capital 12,00,000 16,00,000 PPE
32,00,000 38,00,000 Less: Depreciation 9,20,000 11,60,000 10% Preference 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 6,80,000 8,00,000 Cash 10,000 10,000 Profit & Loss A/c 2,40,000 3,00,000 Other current
assets11,10,000 13,10,000 9% Debentures 4,00,000 2,80,000 Preliminary expenses 80,000 40,000 Current liabilities 4,80,000 5,20,000
Proposed dividend 1,20,000 1,44,000

Provision for Tax 3,60,000 3,40,000
Unpaid dividend — 16,000
38,80,000 43,20,000 38,80,000 43,20,000
Additional information :
(i) The company sold one fixed asset for` 1,00,000, the cost of which was ` 2,00,000 and the depreciation provided
on it was ` 80,000. (ii) The company also decided to write off another PPE costing ` 56,000 on which depreciation
amounting to` 40,000 has been provided.
(iii) Depreciation on PPE 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. (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 31-3-2001
was`2,16,000. The stock on 31-3-2002 was correctly valued at ` 3,00,000.
Prepare Cash Flow Statement as per revised Accounting Standard-3 by indirect method. (16 marks)
Answer: New Light Ltd.

Particulars ` `
A. Cash flow from operating activities

Profit during the year 60,000 Adjustment for inventory (24,000) Transfer to general reserve 1,20,000 Proposed
dividend 1,44,000 Provision for tax 3,40,000 Net profit before taxation and extraordinary item 6,40,000
Adjustment made for:
Preliminary expenses written off 40,000 Depreciation 3,60,000 Loss on sale of PPE 20,000 Decrease in value of
PPE 16,000 Premium on redemption of preference share
capital 6,000 Premium on redemption of debentures 6,000 Operating profit before change in working capital
10,88,000
Increase in current liabilities 40,000 (` 5,20,000 ☐` 4,80,000)

Increase in other current assets (1,76,000) [` 13,10,000☐(` 11,10,000 + ` 24,000)]
Cash generated from operations 9,52,000 Income taxes paid

Net Cash from operating activities (3,60,000) 5,92,000
B. Cash Flow from investing activities

Purchase of PPE (8,56,000) Proceeds from sale of PPE 1,00,000 Proceeds from sale of investments 1,20,000 Net
Cash from investing activities (6,36,000)
C. Cash Flow from financing activities

Proceeds from issuance of share capital 4,00,000 Redemption of preference share capital (1,26,000) (` 1,20,000 +`
6,000)
Redemption of debentures (`1,20,000 +`6,000) (1,26,000) Dividend paid (1,04,000) 44,000 Net Cash from financing
activities Nil Net increase/decrease in cash and cash
equivalent during the year
Cash and cash equivalent at the end of the year
is same as
Cash and cash equivalent at the beginning of
the year i.e. ` 10,000
Working Notes:
1. Revaluation of stock increases the opening stock by ` 24,000. × 10 = ` 24,000
Hence, opening balance of other current assets will be as follows: ` 11,10,000 + ` 24,000 = ` 11,34,000
Due to under valuation of stock, the opening balance of profit and loss account be increased by ` 24,000.
Opening balance of profit and loss account after revaluation of stock will be ` 2,40,000 +` 24,000 = ` 2,64,000
2. Property Plant and Equipment Account

Particulars `
To Balance b/d 32,00,000 By To Bank A/c By (balancing figure will

be PPE purchased) 8,56,000 By
By
By
By 40,56,000
Particulars ` ` Bank A/c (sale of PPE) 1,00,000
Accumulated
depreciation A/c 80,000
Profit and Loss A/c (loss
on sale of PPE) 20,000 2,00,000 Accumulated

depreciation A/c 40,000
Profit and loss A/c 16,000 56,000 (assets written off)
Balance c/d 38,00,000
40,56,000
3. Investment Account Particulars
To Balance b/d
To Capital reserve A/c (Profit on sale of investment)
` Particulars ` 4,00,000 By Bank A/c (balancing 1,20,000 40,000 f i g u r e b e i n g

investment sold)
By Balance c/d 3,20,000 4,40,000 4,40,000 4. Accumulated depreciation Account
Particulars To PPE A/c

To PPE A/c
To Balance c/d
` Particulars `
80,000 By Balance b/d 9,20,000
40,000 By Profit and Loss A/c
11,60,000 (depreciation for 3,60,000 the period)
12,80,000 12,80,000
5. Unpaid dividend is taken as non☐current item and dividend paid is shown at (` 1,20,000 – ` 16,000) ` 1,04,000.
Alternatively: Unpaid dividend can be considered as current liability and
therefore dividend paid can be shown at`1,20,000, due to this assumption
cash flow from operating activities will get affected. The cash flow from
operating activities will increase by`16,000 to`6,08,000 and cash flow from
financing activities will get reduced by` 16,000 to` 28,000 i.e.` 12,000. Space to write important points for revision
Q.7.4 2004 - May [4] Practical ABC Ltd. gives you the following informations. You are required to prepare
Cash Flow Statement by using indirect methods as per AS-3 for the year ended 31.03.2004 :
Balance Sheet as on
Liabilities 31 March 31 March Assets 31 March 31 March
2003 2004 2003 2004

` ` ` ` Capital Retained 50,00,000 50,00,000 Plant & Machinery 27,30,000 40,70,000
Earnings Debentures
Current Liabilities Creditors

Bank Loan
26,50,000 36,90,000 Less: Depreciation 6,10,000 7,90,000
— 9,00,000 21,20,000 32,80,000

Current Assets
Debtors 23,90,000 28,30,000
Less: Provision 1,50,000 1,90,000
22,40,000 26,40,000
8,80,000 8,20,000 Cash 15,20,000 18,20,000
1,50,000 3,00,000 Marketable securities11,80,000 15,00,000
Liability for expenses 3,30,000 2,70,000 Inventories 20,10,000 19,20,000
Dividend payable 1,50,000 3,00,000 Prepaid Expenses 90,000 1,20,000
91,60,000 1,12,80,000 91,60,000 1,12,80,000
(i) Net profit for the year ended 31st March, 2004, after charging depreciation` 1,80,000 is ` 22,40,000.
(ii) Debtors of` 2,30,000 were determined to be worthless and were written off against the provisions for doubtful
debts account during the year.
(iii) ABC Ltd. declared dividend of ` 12,00,000 for the year 2003-2004. (16 marks) Answer :
Cash flow Statement of ABC. Ltd. for the year ended 31.3.2004 Particulars ` ` Cash flows from Operating
activities:
Net Profit 22,40,000 Add: Adjustment for Depreciation
(` 7,90,000☐` 6,10,000) 1,80,000 Operating profit before working capital 24,20,000 changes
Add: Decrease in Inventories 90,000 (` 20,10,000☐` 19,20,000)
Increase in provision for doubtful debts 2,70,000 (` 4,20,000☐` 1,50,000)
27,80,000 Less: Increase in Current Assets:
Debtors (` 30,60,000 ☐ 6,70,000
` 23,90,000)
Prepaid expenses
(` 1,20,000☐` 90,000) 30,000
Decrease in current liabilities:
Creditors (` 8,80,000 ☐ 60,000
` 8,20,000)
Expenses outstanding
(` 8,30,000☐` 2,70,000) 60,000 8,20,000 Net cash from operating activities 19,60,00 Cash flows from investing
activities
Purchase of Plant & Equipment
(` 40,70,000☐` 27,30,000) 13,40,000 Net cash used in investing activities (13,40,000) Cash flows from Financing
Activities
Bank loan raised (` 3,00,000 ☐` 1,50,000) 1,50,000 Issue of debentures 9,00,000 Payment of Dividend (`12,00,000
–`1,50,000) (10,50,000) Net cash used in financing activities NIL Net increase in cash during the year 6,20,000 Add:
Cash and cash equivalents as on
1.4.2003 (` 15,20,000 + ` 11,80,000) 27,00,000 Cash and cash equivalents as on 31.3.2004 33,20,000 (` 18,20,000 +
` 15,00,000)
Alternatively: The adjustment of writing off bad debts can be ignored and the solution can be given on the basis of
figures of debtors and provision for doubtful debts as appearing in the balance sheet on 31.3.2004. In this question
bad debts of` 2,30,000 were written off against the provision for
doubtful debts A/c during the year.
So, in this question bad debts have been added back in the closing
balance of provision for bad and doubtful debts account.
Q.7.5 2005 - May [1] Practical
The following figures have been extracted from the Books of X Limited for the year ended on 31.3.2004. You are
required to prepare a cash flow statement.
(i) Net profit before taking into account Income Tax and Income from law suits but after taking into Account the
following items was ` 20 lakhs:
(a) Depreciation on PPE ` 5 lakhs.
(b) Discount on issue of Debentures written off ` 30,000. (c) Interest on Debentures paid ` 3,50,000.
(d) Books value of investments ` 3 lakhs (Sale of Investments for
` 3,20,000).
(e) Interest received on investments ` 60,000.
(f) Compensation received`90,000 by the company in a suit filed.
(ii) Income tax paid during the year ` 10,50,000.

(iii) 15,000, 10% preference shares of ` 100 each were redeemed on 31.3.2004 at a premium of 5%. Further the
company issued 50,000 equity shares of ` 10 each at a premium of 20% on 2.4.2003. Dividend on preference shares
were paid at the time of redemption.
(iv) Dividends paid for the year 2002-2003 ` 5 lakhs and Interim dividend paid ` 3 lakhs for the year 2003-04.
(v) Land was purchased on 2.4.2003 for ` 2,40,000 for which the company issued 20,000 equity shares of`10 each at
a premium of 20% to the land owner as consideration.
(vi) Current assets and Current liabilities in the beginning and at the end of the years were as detailed below :
As on As on 31.3.2003 31.3.2004 ` ` Stock 12,00,000 13,18,000 Sundry Debtors 2,08,000 2,13,100 Cash in hand
1,96,300 35,300 Bills receivable 50,000 40,000 Bills payable 45,000 40,000 Sundry Creditors 1,66,000 1,71,300
Outstanding expenses 75,000 81,800 (20 marks) Answer:
X Ltd. Cash Flow Statement
` ` 1. Cash flow from operating activities:

Net profit before Income tax & extra ordinary 20,00,000 items
Adjustments for :
Depreciation on PPE 500,000 Interest on Debentures paid 350,000 Discount on issue of Debentures 30,000 Interest
on Investments received (60,000) Profit on sale of investments (20,000) 8,00,000 Operating Profit before Working
Capital 28,00,000 Changes
Adjustments for:
Increase in Sundry Debtors (5,100) Decrease in Bills receivable 10,000 Increase in Stock (1,18,000) Increase in
Outstanding Expenses 6,800 Increase in Sundry Creditors 5,300 Decrease in Bills Payable (5,000) (1,06,000) Cash
generated from operations 26,94,000 Income tax paid (10,50,000) Cash flow from extraordinary items: 16,44,000
Compensation received in a suit filed 90,000 Net Cash Flow from Operating Activities 17,34,000
2. Cash flow from Investing Activities:

Interest received on investment 60,000
Sale Proceeds of Investments 3,20,000
Net Cash Flow from Investing Activities 3,80,000 3. Cash Flow from Financing Activities:
Dividend paid (5,00,000+3,00,000) (8,00,000) Preference Dividend paid (1,50,000) Interest on Debentures paid
(3,50,000) Redemption of preference shares at 5%
Premium (15,75,000) Proceeds by issue of equity shares at 20%
Premium 6,00,000
Net Cash used in financing activities 22,75,000 Net Cash decrease in cash & cash
equivalents during the year (1,61,000) Add: Cash & cash equivalents as on 31.3.2003. 1,96,300 Cash & cash
equivalents as on 31.3.2004. 35,300 Note : Since purchase of land in exchange of equity shares (issued at 20%
Premium) does not involve any cash transaction so it has not been taken in the cash flow statement.
Q.7.6 2006 - Nov [3] Practical The following are the summarised Balance Sheets of ‘X’ Ltd. as on March 31, 2005
and 2006 :
Liabilities As on As on 31.3.2005 31.3.2006 (`) (`) Equity share capital 10,00,000 12,50,000 Capital Reserve —
10,000 General Reserve 2,50,000 3,00,000 Profit and Loss A/c 1,50,000 1,80,000 Long-term loan from the Bank
5,00,000 4,00,000 Sundry Creditors 5,00,000 4,00,000 Provision for Taxation 50,000 60,000 Proposed Dividends
1,00,000 1,25,000 25,50,000 27,25,000 Assets Year Year 2005 2006 (`) (`) Land and Building 5,00,000 4,80,000
Machinery 7,50,000 9,20,000 Investment 1,00,000 50,000 Stock 3,00,000 2,80,000 Sundry Debtors 4,00,000
4,20,000 Cash in Hand 2,00,000 1,65,000 Cash at Bank 3,00,000 4,10,000 25,50,000 27,25,000 Additional
Information :
(i) Dividend of` 1,00,000 was paid during the year ended March 31, 2006.
(ii) Machinery during the year purchased for ` 1,25,000. (iii) Machinery of another company was purchased for a
consideration
of ` 1,00,000 payable in equity shares.

(iv) Income-tax provided during the year ` 55,000.
(v) Company sold some investment at a profit of` 10,000, which was credited to Capital reserve.
(vi) There was no sale of machinery during the year.

(vii) Depreciation written off on Land and Building ` 20,000. From the above particulars, prepare a cash flow
statement for the year ended March, 2006 as per AS-3 (Indirect method). (16 marks)
Answer: X Ltd.
Cash Flow Statement for the period ended 31.03.2006
Particulars
Amount Amount (`) (`)
A. Cash Flows from Operating Activities :

Balance of P/L A/c on 31.03.06 Adjustment for : 1,80,000
Provision for Taxation 55,000
Transfer to General Reserve 50,000
Opening balance of P/L A/c (1,50,000) Net Profit before taxation & extraordinary items 2,60,000
Adjustments for Depreciation
Machinery (W.N.-1) 55,000
Building 20,000
Operating profit before working capital 3,35,000
changes
Decrease in Stock 20,000
Increase in Debtors (20,000) Decrease in Creditors (1,00,000)
Cash generated from operations 2,35,000 Income tax paid (W.N.-4) (45,000)
Net cash from Operating activities 1,90,000 B. Cash Flows from Investing Activities :
Purchase of Machinery (1,25,000) Sale of Investment (` 50,000 +` 10,000) 60,000 Cash used in investing activities
(65,000)
C. Cash Flows from Financing Activities :

Payment of Dividend (1,00,000) Loan Paid (1,00,000) Proceeds from issue of share capital (W.N.-3) 1,50,000 Cash
used in financing activities (50,000)
Net Increase in Cash and Cash equivalents A ☐(B+C) 75,000

Cash and cash equivalents at the Beginning of
period (i.e., Cash in hand & at Bank) 5,00,000
Cash and cash equivalents at the end of period 5,75,000

Working Note : 1.
Particulars To Bal. b/f

To Bank
To Share capital
Machinery A/c
` Particulars `
7,50,000 By Depreciation 55,000

1,25,000 By Bal. b/d 9,20,000
1,00,000
9,75,000 9,75,000
2. No adjustment is to be made for machinery in exchange of equity shares:

Machinery A/c Dr. 1,00,000
To Share Capital A/c 1,00,000

3. Share Capital A/c
Particulars
To Balance b/d
Amt. ( `) Particulars Amt. (`) 12,50,000 By Bal. b/f 10,00,000

By Machinery 1,00,000
By Bank 1,50,000
12,50,000 12,50,000
4. Provisions for Taxation A/c
Particulars
To Cash A/c
To Bal C/d
Amt. ( `) Particulars Amt. (`)

45,000 By Bal. b/f 50,000
60,000 By P&L A/c 55,000
1,05,000 1,05,000
Investment A/c
Particulars
To Balance b/d
Amt. ( `) Particulars Amt. (`) 1,00,000 By Bank A/c (Bal. fig.) 60,000
To Capital Reserve A/c By Balance c/d 50,000

(Profit on sale of 10,000
Investment)
1,10,000 1,10,000
Particulars To Bank
To Balance c/d
Proposed Dividend A/c

Amt. (`) Particulars Amt. (`) 1,00,000 By Balance b/d 1,00,000 1,25,000 By Profit & Loss A/c (Bal. fig.) 1,25,000
2,25,000 2,25,000

Q.7.7 2007 - Nov [3] Practical J Ltd. presents you the following information for the year ended 31stMarch, 2007:
( ` in Lacs) (i) Net Profit before tax provision 36,000

(ii) Dividend paid 10,202
(iii) Income-tax paid 5,100
(iv) Book value of PPE sold 222
Loss on sale of PPE 48
(v) Depreciation debited in P & L account 24,000
(vi) Capital grant received☐amortised in P & L A/c 10
(vii) Book value of investment sold 33,318
Profit on sale of investment 120
(viii) Interest income from investment credited in P & L A/c 3,000
(ix) Interest expenditure debited in P & L A/c 12,000
(x) Interest actually paid (Financing activity) 13,042
(xi) Increase in working Capital Excluding cash
and Bank Balance]. 67,290
(xii) Purchase of PPE 22,092
(xiii) Expenditure on construction work 41,688
(xiv) Grant received for Capital projects 18
(xv) Long-term borrowings from Banks 55,866
(xvi) Provision for Income-tax debited in P & L A/c 6,000
Cash and Bank Balance on 1.4.2006 6,000
Cash and Bank Balance on 31.3.2007 8,000
You are required to prepare a Cash flow statement as per AS-3 (Revised). (16 marks)
Answer:
Cash Flow Statement for the period ended on 31.3.2007 Particulars Amount (`) Amount (`) (A) Cash flow
from operating activity
Net profit before tax 36,000

Adjustment for:
Depreciation 24,000
Loss on sale of asset 48
Government grant amortised (10) Profit on sale of investment (120) Interest received (3000) Interest debited 12,000
Operating profit before working Capital 68,918
charge (67,290) Increase in working capital 1,628
Tax paid (5,100)
Net cash used in operating activity (3,472) (B) Cash flow from investing activity
Purchase of PPE (22,092)
Interest income 3,000
Sale of investment 33,438

Sale of asset 174
Exp. On Capital project (41,688) Net Cash used in investing activity (27,168) (C) Cash flow from financing
activity
Dividend paid (10,202) Grant received 18
Interest paid (13,042) Long term borrowing 55,866
Net cash provided from financing activity 32,640 Net increase in cash and cash equivalent 2,000 Cash and cash
equivalent of the beginning
of year. 6,000 Cash and cash equivalent at the closing
of year 8,000 Q.7.8 2011 - May [4] Practical
The following are the summarized Balance Sheets of Lotus Ltd. as on 31st March, 2010 and 2011.
Liabilities 31-3-10 31-3-11
` ` Equity share capital (` 10 each) 10,00,000 12,50,000

Capital Reserve - 10,000
Profit and Loss A/c 4,00,000 4,80,000
Long term loan from the bank 5,00,000 4,00,000
Sundry creditors 5,00,000 4,00,000
Provision for taxation 50,000 60,000
24,50,000 26,00,000
Assets ` ` Land and building 4,00,000 3,80,000
Machinery 7,50,000 9,20,000
Investment 1,00,000 50,000
Stock 3,00,000 2,80,000
Sundry Debtors 4,00,000 4,20,000
Cash in hand 2,00,000 1,40,000
Cash at bank 3,00,000 4,10,000
24,50,000 26,00,000
Additional information :
1. Depreciation written off on land and building ` 20,000. 2. The company sold some investment at a profit
of`10,000, which was credited of Capital Reserve.
3. Income-tax provided during the year ` 55,000.
4. During the year, the company purchased a machinery for` 2,25,000. They paid`1,25,000 in cash and issued 10,000
equity shares of`10 each at par.
You are required to prepare a cash flow statement for the year ended 31st March, 2011 as per AS-3, by using indirect
method. (16 marks)
Answer : In the books of Lotus Ltd.

Cash Flow Statement for the year ending 31st March, 2011
Particulars Amount Amount (`) (`)
I. Cash flow from Operating Activities

Net Profit before tax for the year (W.N.1) 1,35,000
Add: Depreciation on machinery (W.N.2) 55,000
Depreciation on land & building 20,000
Operating profit before change in working capital 2,10,000
Add: Decrease in stock 20,000
Less: Increase in sundry debtors (20,000) Less: Decrease in sundry creditors (1,00,000) Cash generated from
Operations 1,10,000
Less: Income tax paid (W.N.3) (45,000) Net cash generated from operating activities 65,000 II. Cash flow from
Investing activities
Purchase of machinery (2,25,000 -1,00,000)
Sale of investment (W.N.4) (1,25,000) Net cash used in investing activities 60,000III. Cash flow from financing activities
(65,000)
Issue of equity shares (2,50,000 -1,00,000)

Repayment of long term loan
Net cash generated from financing activities 1,50,000 Net increase in cash and cash equivalents (1,00,000) Cash and
cash equivalents at the beginning of the 50,000 year (2,00,000 + 3,00,000) 50,000
5,00,000
Cash and cash equivalents at the end of the
year (1,40,000 + 4,10,000) 5,50,000
Working Notes:
1. Calculation of Net Profit before tax. ` Increase in Profit & Loss (Cr.) balance 80,000 Add: Provision for
taxation made during the year. 55,000 1,35,000 2. Calculation of Depreciation charged on Machinery
Particulars Amount Particulars Amount ` `
To Balance b/d 7,50,000 By Depreciation (Bal. fig) 55,000 To Bank 1,25,000 By Balance c/d 9,20,000 To Equity
share capital 1,00,000
9,75,000 9,75,000 3. Calculation of tax paid.

Particulars Amount ` To Cash (Bal. fig) 45,000 To Balance c/d 60,000 1,05,000
Particulars Amount ` By Balance b/d 50,000 By Profit and Loss A/c 55,000 1,05,000 4. Calculation of Sales
values of investment sold
Particulars
To Balance b/d
To Capital reserve (Profit on sale of investments)
Investment A/c
Amount Particulars Amount ` ` 1,00,000 By Bank A/c (Bal. fig.) 60,000 By Balance c/d 50,000 10,000
1,10,000 1,10,000
Surya Ltd. has provided you the following particulars. Prepare Cash Flow from Operating Activities by Indirect
Method in accordance with AS 3: Profit & Loss Account of Surya Ltd.
Particulars
To Depreciation
To Patents written off
To Provision for Tax
To Proposed dividend
To Transfer to
Reserve
To Net Profit
` Particulars `
86,700 By Operating Profit
35,000 before depreciation 11,01,600 1,25,000 By Profit on Sale on
72,000 Investments 10,000
87,000 By Refund of Tax 3,000 By Insurance Claim
8,08,900 Major Fire Settlement 1,00,000 Total 12,14,600 Total 12,14,600 Additional information:
in `
31-3-2012 31-3-2013 Stock 1,20,000 1,60,000

Trade Debtors 7,500 75,000 Trade Creditors 23,735 87,525
Provision for Tax 1,18,775 1,25,000

Marketable Securities 11,775 29,325
Cash Balance 25,325 35,340 (8 marks)
Answer:
Indirect Method
Cash flow from Operating activities for the year ended 31stMarch, 2013
Particulars ` ` Net Profit as per Profit & Loss A/c 8,08,900

Add: Proposed dividend 72,000
Add: Transfer to reserve 87,000
Add: Provision for Tax made during the 1,25,000

Current Year
Less: Refund of tax (3,000) Less: Extraordinary items (i.e. Insurance
Claim - Major Fire Settlement) (1,00,000)
Net profit before taxation and extraordinary 9,89,900

items
Add: Depreciation 86,700
Add: Patents written off 35,000

Less: Profit on sale of investments (10,000) Operating profit before working capital changes 11,01,600
Increase in Inventory (40,000) Increase in trade receivables (67,500) Increase in trade payables 63,790 Decrease in
prepaid expenses 2,850 (40,860) Cash generated from operations 10,60,740
Income taxes paid (net of refund) 1,15,775
Cash flow before extraordinary item 9,44,965
Extraordinary Item (Insurance claim recovery) 1,00,000
Net cash from operating activities 10,44,965
Q.7.10 2017 - Nov [5] (a), RTP Practical The Balance Sheet of Harry Ltd. for the year ending 31stMarch, 2017 and
31st March, 2016 were summarised as:
2017 2016 ` ` Equity Share Capital 1,20,000 1,00,000
Reserves:
Profit and Loss Account 9,000 8,000
Current Liabilities:
Trade Payables 8,000 5,000
Income Tax Payable 3,000 2,000
Proposed Dividends 4,000 2,000
1,44,000 1,17,000
PPE (at W.D.V)
Building 19,000 20,000
Furniture & Fixture 34,000 22,000
Cars 25,000 16,000
Long Term Investments 32,000 28,000
Current Assets:
Inventory 14,000 8,000
Trade Receivables 8,000 6,000
Cash & Bank 12,000 17,000
1,44,000 1,17,000
The Profit and Loss account for the year ended 31st March, 2017
disclosed:
`
Profit before tax 8,000
Income Tax (3,000)
Profit after tax 5,000
Proposed Dividends (4,000)
Retained Profit 1,000 Further Information is available:
1. Depreciation on Building ` 1,000
2. Depreciation on Furniture & Fixtures for the year ` 2,000 3. Depreciation on Cars for the year ` 5,000. One car
was disposed during the year for ` 3,400 whose written down value was ` 2,000. 4. Purchase investments for ` 6,000.
5. Sold investments for ` 10,000, these investments cost ` 2,000. Prepare Cash Flow Statements as per AS-3
(revised) using indirect method. (12 marks) Answer:
Harry Ltd.
``
Cash flows from operating activities

Net Profit before taxation 8,000 Adjustments for:
Depreciation (1,000+2,000+5,000) 8,000 Profit on sale of Investment (8,000) Profit on sale of car (1,400)
Operating profit before working capital changes 6,600 Increase in Trade receivables (2,000) Increase in inventories
(6,000) Increase in Trade payable 3,000 Cash generated from operations 1,600 Income taxes paid (2,000) Net cash
generated from operating activities (A) (400) Cash flows from investing activities
Sale of car 3,400 Purchase of car (16,000) Sale of Investment 10,000 Purchase of Investment (6,000) Purchase of
Furniture & fixtures (14,000) Net cash used in investing activities (B) (22,600)
Cash flows from financing activities

Issue of shares for cash 20,000 Dividends paid* (2,000) 18,000 Net cash from financing activities (C)
Net decrease in cash and cash equivalents
(A+B+C) (5,000) Cash and cash equivalents at beginning of period 17,000 Cash and cash equivalents at end of
period 12,000 * Dividend proposed for the year ended 31st March, 2016 amounting
` 2,000 must have been declared and paid in the year 2016-17. Hence, it has been considered as cash outflow for
preparation of cash flow statement of 2016-17.
Working Notes:
1. Calculation of Income taxes paid
`
Income tax expense for the year 3,000

Add: Income tax liability at the beginning of the year 2,000
5,000
Less: Income tax liability at the end of the year (3,000) 2,000
2. Calculation of PPE acquisitions
W.D.V. at 31.3.2017
Add back: Depreciation for the year Disposals
Less: W.D.V. at 31.3.2016 Acquisitions during 2016-2017

Furniture & Car (`) Fixtures (`)
34,000 25,000
2,000 5,000
— 2,000
36,000 32,000
(22,000) (16,000) 14,000 16,000
8 Cash Flow by Direct and Indirect Method

Q.8.1 2006 - May [4] (a) Practical Raj Ltd. gives you the following information for the year ended 31st March,
2006 :
(i) Sales for the year`48,00,000. The Company sold goods for cash only. (ii) Cost of goods sold was 75% of sales.
(iii) Closing inventory was higher than Opening inventory by ` 50,000. (iv) Trade creditors on 31.3.2006 exceed the
outstanding on 31.3.2005
by ` 1,00,000.
(v) Tax paid during the year amounts to ` 1,50,000.
(vi) Amounts paid to Trade Creditors during the year ` 35,50,000. (vii) Administrative and Selling Expenses paid `
3,60,000. (viii) One new machinery was acquired in December, 2005 for`6,00,000.
(ix) Dividend paid during the year ` 1,20,000.

(x) Cash in hand and at Bank on 31.3.2006` 70,000.
(xi) Cash in hand and at Bank on 1.4.2005 ` 50,000.
Prepare Cash Flow Statement for the year ended 31.3.2006 as per the prescribed Accounting Standard. (12 marks)
Answer:
Direct Method:
Raj Limited
Cash flow Statement for the year ended 31-3-06 Cash Flow From Operating Activities ` `
Receipt from customers 48,00,000

Less: Cash paid to suppliers 35,50,000
Less: Cash paid for Advances and Selling exps 3,60,000
8,90,000
Less: Tax paid 1,50,000
Net cash from operating activities 7,40,000
Cash Flow From Investing Activities

Purchase of PPE 6,00,000
Net Cash used in investing activities (6,00,000)
Cash Flow From Financing Activities

Dividend paid 1,20,000
Net Cash from financing activities (1,20,000) Net increase in Cash and Cash equivalents 20,000
Add: Opening balance of Cash in hand and at Bank 50,000

Cash in hand and at bank on 31-3-06 70,000
Indirect Method:
Cash Flow From Operating Activities ` ` Net profit before tax (12,00,000☐3,60,000) 8,40,000
Add: Increase in sundry creditors 1,00,000
Less: Increase in inventory (50,000) Less: Tax paid during the year (1,50,000) Net Cash flow term operating
activities 7,40,000 Cash flow from investing activities
Purchase of machinery 6,00,000
Net cash flow from investment activities (6,00,000) Cash flow from financing activities
Dividend paid 1,20,000
Net cash from financing activities (1,20,000) Net increase in cash and cash equivalent 20,000 Add: Opening cash
and cash equivalent 50,000 Closing Cash and Cash equivalent 70,000
Working Notes:
(☐) Sales 48,00,000 Less: 3/4 of cost of sales (36,00,000)
12,00,000
Less: Administration Expenses 3,60,000
EBT (`) 8,40,000

The following information was provided by M/s PQR Ltd. for the year ended 31st March, 2019 :
1. Gross Profit Ratio was 25% for the year, it amounts to ` 3,75,000. 2. Company sold goods for cash only.
3. Opening inventory was lesser than closing inventory by ` 25,000. 4. Wages paid during the year ` 5,55,000.
5. Office expenses paid during the year ` 35,000.
6. Selling expenses paid during the year ` 15,000.
7. Dividend paid during the year`40,000 (including dividend distribution
tax).
8. Bank Loan repaid during the year ` 2,05,000 (included interest
` 5,000)
9. Trade Payables on 31stMarch, 2018 were`50,000 and on 31stMarch,
2019 were ` 35,000.
10. Amount paid to Trade payables during the year ` 6,10,000. 11. Income Tax paid during the year amounts to `
55,000. (Provision for taxation as on 31st March, 2019` 30,000.) 12. Investments of`8,20,000 sold during the year at
a profit of`20,000. 13. Depreciation on furniture amounts to ` 40,000.
14. Depreciation on other tangible assets amounts to ` 20,000. 15. Plant and Machinery purchased on 15th
November, 2018 for ` 3,50,000.
16. On 31stMarch, 2019`2,00,000, 7% Debentures issued at face value in an exchange for a plant.
17. Cash and Cash equivalents on 31st March, 2018` 2,25,000. (A) Prepare cash flow statement for the year ended
31st March, 2019,
using direct method.
(B) Calculate cash flow from operating activities, using indirect method. (10 marks) Answer:
M/s PQR Ltd.
Cash Flow Statement for the year ended
31st March, 2019 (Using direct method)
Particulars ` ` Cash flows from Operating Activity

Cash Sales (` 3,75,000/0.25) 15,00,000
Less: Cash payments for trade Payables (6,10,000) Wages paid (5,55,000) Office expenses (35,000) Selling
expenses (15,000) (12,15,000)
Cash generated from operations before taxes 2,85,000

Income tax paid (55,000) Net Cash generated from operating activities (A) 2,30,000
Cash From Investing Activities
Sale of Investments (8,20,000 + 20,000) 8,40,000 Payments for purchase of plant and machinery (3,50,000) Net
Cash used in investing activities (B) 4,90,000
Cash from Financial Activities
Bank loan repayment (including interest) (2,05,000) Dividend paid (including DDT) (40,000) Net Cash using in
financing activities (C) (2,45,000) Net increase in Cash (A + B + C) 4,75,000
Cash and Cash Equivalents at the beginning of

the period 2,25,000 Cash and Cash Equivalents at the end of the period 7,00,000 2. ‘Cash Flow from Operating
Activities’ by indirect method: Particulars ` Net Profit for the year before tax and extraordinary 2,80,000 items
Add: Non-Cash and Non-Operating Expenses:

Depreciation 60,000
Interest Paid 5,000
Less: Non-Cash and Non-Operating Incomes:
Profit on Sale of Investments (20,000) Net Profit after Adjustment for Non-Cash Items 3,25,000
Less: Decrease in trade payables 15,000 Increase in inventory 25,000 (40,000) Cash generated from operations
before taxes 2,85,000
Working Note:
Calculation of net profit earned during the year:
Particulars ` ` Gross profit 3,75,000 Less: Office expenses, selling expenses 50,000 Depreciation 60,000 Interest
paid 5,000 (1,15,000)
2,60,000
Add: Profit on sale of investments 20,000
Net profit before tax 2,80,000
9 Miscellaneous
Statement?
Answer:
S.N. Basis Cash Flow Statement 1 Deals with Cash flow statement deals with the changes in cash.
2 Methods Cash flow statement can be prepared by direct or indirect method.

3 Records Cas h f l ow statement records only inflow and outflow of cash.
Q.9.1 2006 - May [4] (b), RTP Distinguish Between What all are the differences between Cash Flow Statement
and Fund Flow (4 marks)
Fund Flow Statement Fund flow statement deals with the changes in working capital position between two points
of time.
There is no such type of direct or indirect method for preparation of fund flow statement.
Fund flow statement records sources and application of funds.
4 Balances
5 Statement of change Ca s h f low statement Fund Flow Statement does contains opening as well as not contain
such balances. closing balances of cash
and cash equivalents.
Not in cash flow statement. A statement of change in
working capital is prepared in fund flow.

Space to write important points for revision CHAPTER
5
Profit or Loss Pre and Post Incorporation
Chapter Comprises: ☹Introduction ☹Computing Profit or Loss Prior to Incorporation ☹Basis of Apportionment
☹Pre-Incorporation Profits & Losses

Legend
book.
1.287
TIME MANAGER
First Indepth
learning
i.e.....Time
............ Day 1
1. Budgeted 9
2. Actual
3. Variance
(1-2)
Instant
Revision (in hours)

i.e.... i.e. on
......... ...........
Day 2 Day 8
2.15 1.5
Plan and Manage your Time Periodic Revision
(in hours)
........... .............. ............

1.2 0.5 0.5
1.2, 1.5, 1.11, 2.4
1
Pre-Incorporation Profits & Losses: Computation
Rama Udyog Limited was incorporated on August 1, 2008. It had acquired a running business of Rama & Co. with
effect from April 1, 2008. During the year 2008-09, the total Sales were`36,00,000. The Sales per month in the first
half year were one-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`1,08,000, (ii) Audit fees`15,000, (iii) Directors’
fees ` 50,000, (iv) Preliminary expenses ` 12,000, (v) Office expenses ` 78,000, (vi) Selling expenses ` 72,000 and
(vii) Interest to vendors upto August 31, 2008` 5,000.
Please ascertain pre-incorporation and post-incorporation profit for the year ended 31st March, 2009. (6 marks)
Answer:
Statement showing pre and post incorporation profit for the year ended 31st March, 2009
Particulars
Gross Profit
Less: Depreciation
Audit Fees
Director’s Fees
Preliminary Expenses Office Expenses
Selling Expenses
Interest to vendors
Net Profit ( ` 33,000 being prei n c o r p o r a t i o n p r o f i t i s transferred to capital reserve Account)

Working Notes:
1. Sales ratio
Total Basis Pre Post
Amount of AlloIncorIncor` cation poration poration ` `
5,40,000 2:7 1,20,000 4,20,000

1,08,000 1:2 36,000 72,000
15,000 1:2 5,000 10,000
50,000 Post — 50,000
12,000 Post — 12,000
78,000 1:2 26,000 52,000
72,000 2:7 16,000 56,000
5,000 Actual 4,000 1,000
2,00,000 33,000 1,67,000
The sales per month in the first half year were half of what they were in the later half year. If in the later half year,
sales per month is` 1 then it should be 50 paise per month in the first half year. So sales for the first four months (i.e.
from 1st April, 2008 to 31st July, 2008) will be 4 × 0.50 =` 2 and for the last eight months (i.e. from 1st August, 2008
to 31st March, 2009) will be (2 × 0.50 + 6 × 1) =` 7. Thus sales ratio is 2:7.
2. Time Ratio
1st April, 2008 to 31st July, 2008 : 1st August, 2008 to 31st March, 2009 = 4 month : 8 month = 1:2
Thus, time ratio is 1:2.
3. Gross Profit
Gross profit = Net profit + All expenses
=`2,00,000 +`(1,08,000 +15,000 + 50,000 +12,000 +78,000 +72,000 + 5,000)
=` 2,00,000 +` 3,40,000 =` 5,40,000

Q.1.2 2013 - May [6] (a), RTP Practical
The promoters of M/s. Glorious Ltd. took over on behalf of the company a running business with effect from 1st
April, 2012. The company got incorporated on 1st August, 2012. The annual accounts were made upto 31st March,
2013 which revealed that the sales for the whole year totaled ` 1,600 lakh out of which sales till 31st July, 2012 were
for` 400 lakhs. Gross profit ratio was 25%.
The expenses from 1st April 2012, till 31st March, 2013 were as follows:
( ` in lakhs)
Salaries 69
Rent, Rates and Insurance 24
Sundry Office Expenses 66
Travellers’ Commission 16
Discounts Allowed 12
Bad Debts 4
Directors’ Fee 25
Audit Fee 9
Depreciation on Tangible Assets 12
Debenture Interest 11
Prepare a statement showing the calculation of Profits for the preincorporation and post-incorporation periods. (8
marks)
Answer:
Statement showing the calculation of Profits for the pre-incorporation and post- incorporation periods
Particulars Total
Amount (` in lakhs)
Gross Profit (25% of ` 1,600) 400 Less: Salaries 69 Rent, rates and Insurance 24 Sundry office expenses 66
Travellers’ commission 16 Discount allowed 12 Bad debts 4 Directors’ fee 25 Audit Fees* 9 Depreciation on
tangible assets 12 Debenture interest 11 New profit 152
Working Notes:
1. Sales ratio
Sales for the whole year Sales upto 31st July, 2012 Therefore, sales for the period from 1st August, 2012 to 31st
March, 2013
Thus, sale ratio

= 400:1200
= 1:3
Basis of Pre
Allocation incorporation (` in lakhs)
Sales 100 Time 23 Time 8

Time 22 Sales 4
Sales 3
Sales 1
Post -
Sales 2.25 Time 4
Post -
32.75
Post
incorpo
ration
(` in lakhs)
300
46
16
44
12
9
3
25
6.75
8
11
119.25
( ` in lakhs) 1,600
400
1,200
2. Time ratio
1st April, 2012 to 31st July, 2012: 1st August, 2012 to 31st March, 2013 = 4 months: 8 months = 1:2
Thus, time ratio is 1:2
__________________________
* Audit fee has been assumed to be related with tax audit and therefore apportioned into pre and post-incorporation
periods on the basis of Sales.
Sneha Ltd. was incorporated on 1st July, 2013 to acquire a running business of Atul Sons with effect from 1st April,
2013. During the year 2013-14, the total sales were`24,00,000 of which`4,80,000 were for the first six months. The
Gross profit of the company ` 3,90,800. The expenses debited to the Profit & Loss Account included:
(i) Director’s fees ` 30,000

(ii) Bad debts ` 7,200
(iii) Advertising` 24,000 (under a contract amounting to ` 2,000 per
month)
(iv) Salaries and General Expenses ` 1,28,000
(v) Preliminary Expenses written off ` 10,000
(vi) Donation to a political party given by the company ` 10,000. Prepare a statement showing pre-incorporation and
post-incorporation profit for the year ended 31st March, 2014. (8 marks)
Answer:
Note : Sale of 1st 6 months = 4,80,000
It seems that it should be sale of 1st 3 months. Any ways we are solving, assuming that question is correct and sale
of 4,80,000 is evenly spread even the 6 months.
P/L A/c for the year (2013-14)

Pre Post Pre Post
To Director Fees WN - 2 - 30,000 By GP 39,080 3,51,720 To Bad Debts WN - 3 720 6,480 (24:216)
To Advertisement WN - 4 6,000 18,000 WN-1
To Sal/Gen Expanse WN - 5 32,000 96,000
To Preliminary Expanse WN - 6 - 10,000

To Donation WN - 7 - 10,000
To Capital Reserve 360 -
To Net Profit - 1,81,240
39,080 3,71,720 39,080 3,51,720 Working Notes:
Sales Ratio = 24:216 = i.e. 1:9
2. Paid by Co. hence full amount is post incorporation period. 3. In sales Ratio (24:216) Pre = 7,200 × = 720
Post = 7,200 × = 6,480
4. Since it is monthly basis hence distributed on time basis Pre = 3 × 2,000 = 6,000 Post = 9 × 2,000 = 18,000
5. On time Basis : Pre = 1,28,000 × 3/12 = 32,000 Post = 1,28,000 × 9/12 = 96,000
6. Full Preliminary Expense should be in the post incorporation period.
7. Donation is given by the Company, Hence full amount is changed to post incorporation period.
Q.1.4 2015 - May [3] (a) Practical The partners Kamal and Vimal decided to convert their existing partnership
business into a Private Limited Company called M/s. KV Trading Private Ltd. with effect from 1-7-2014.
The same books of accounts were continued by the company which closed its account for first term on 31-3-2015.
The summarized Profit and Loss Account for the year ended 31-3-2015 is below:
( `) in lakhs (`) in lakhs Turnover 240.00

Interest on investments 6.00
246.00
Less: Cost of goods sold 102.00 Advertisement 3.00 Sales Commission 6.00 Salary 18.00
Managing directors remuneration 6.00 Interest on Debentures 2.00 Rent 5.50 Bad Debts 1.00 Underwriting
Commission 2.00 Audit fees 2.00 Loss on sale of investment 1.00 Depreciation 4.00 152.50
93.50
The following additional information was provided
(i) The average monthly sales doubled from 1-7-2014. GP ratio was constant.
(ii) All investments were sold on 31-5-2014.
(iii) Average monthly salary doubled from 1-10-2014.
(iv) The company occupied additional space from 1-7-2014 for which rent of ` 20,000 per month was incurred.
(v) Bad debts recovered amounting to` 50,000 for a sale made in 2012, has been deducted from bad debts mentioned
above. (vi) Audit fees pertains to the company.
Prepare a statement apportioning the expenses between pre and post incorporation periods and calculate the
Profit/Loss for such periods. Also suggest how the pre-incorporation profits are to be dealt with. (10 marks) Answer
:
K V Trading Private Limited
Statement showing calculations of profit/loss for pre and post incorporation periods
Sales
Interest on Investments Bad debts recovered
Cost of goods sold Advertisement

Sales commission Salary
` in lakhs Basis Total PrePost
Incorporation WN-1 Sales 240.00 34.29 205.71 Pre 6.00 6.00 – Pre 0.50 0.50 –
(i) 246.5 40.79 205.71

Sales 102.00 14.57 87.43
Sales 3.00 0.43 2.57
Sales 6.00 0.86 5.14
WN-2 1:5 18.00 3.00 15.00
Managing directors remuneration Post 6.00 - 6.00
Interest on Debentures Post 2.00 - 2.00
Rent WN-3 5.50 0.93 4.57
Bad debts Sales 1.50 0.21 1.29
Underwriting commission Post 2.00 - 2.00
Audit fees Post 2.00 - 2.00
Loss on sale of Investment Pre 1.00 1.00 - Depreciation WN-4 Time 4.00 1.00 3.00
(ii) 153 22 131
Net Profit [(i) – (ii)] 93.5 18.79* 74.71
*Note:` 18.79 lakhs pre-incorporation profit is a capital profit and will be transferred to Capital Reserve.
Working Notes:
1. Calculation of Sales Ratio
Let the average sales per month be x
Total sales from 01.04.2014 to 30.06.2014 will be 3x
Average sales per month from 01.07.2014 to 31.03.2015 will be 2x Total sales from 01.07.2014 to 31.03.2015 will
be 2x × 9 =18x Ratio of Sales will be 3x: 18x i.e. 3:18 or 1:6
2. Apportionment of Salary
Let the salary per month from 01.04.2014 to 30.09.2014 is x Salary per month from 01.10.2014 to 31.03.2015 will
be 2x Hence, pre incorporation salary (01.04.2014 to 30.06.2014) = 3x Post incorporation salary from 01.07.2014 to
31.03.2015 = (3x + 12x) i.e.15x
Ratio for division 3x: 15x or 1: 5
3. Apportionment of Rent ` Lakhs Total Rent 5.5 Less: Additional rent from 1.7.2014 to 31.3.2015 1.8 Rent of old
premises for 12 months 3.7 Pre Post Apportionment in time ratio 0.925 2.775 Add: Rent for new space - 1.80 Total
0.925 4.575
4. Calculation of time Ratio
3 Months: 9 Months i.e. 1:3
Q.1.5 2015 - Nov [4] (b), RTP Practical
SALE Limited was incorporated on 01.08.2014 to take-over the business of a partnership firm w.e.f.01.04.2014. The
following is the extract of Profit and Loss Account for the year ended 31.03.2015:
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 preincorporation and post-incorporation, also explain
how pre-incorporation profit is treated in the accounts. (8 marks)
Answer:
In the books of Sale Ltd. Profit & Loss A/c
Particulars
Gross Profit WN-1

Expenditure:
Salaries WN-2
Rent Rates & Taxes
Commission on Sales WN-3
Depreciation
Interest on debentures
Base for
Apportionment 1 : 3
PrePostIncorporation Incorporation 1,50,000 4,50,000
Time ratio (1:2) Time ratio (1:2) Sales ratio (2:5) Time ratio (1:2)
Post
40,000 80,000
26,667 53,333
6,000 15,000
8,333 16,667
– 32,000
Directors fees Post – 12,000
Advertisement Post – 36,000
Total Expenses 81,000 2,45,000

Net Profit 69,000 2,05,000
(GP - Expenses)
Working Notes:
1. Gross profit ratio
From 1.4.2014 to 31.7.2014 gross profit is 25% of sales Then, 25% of 4x = 1x
Gross profit for next 8 months (i.e. from 1.8.2014 to 31.3.2015) is 30% Then, 30% of 10x = 3x
Therefore gross profit ratio will be 1: 3
2. Time ratio
1st April, 2014 to 31st July, 2014 : 1st August, 2014 to 31st March, 2015 = 4 months : 8 months = 1: 2
Thus, time ratio is 1: 2.
3. Sales ratio
Let the monthly sales for first 4 months (i.e. from 1.4.2014 to 31.7.2014) be = x
Then, sales for 4 months = 4x
Monthly sales for next 8 months (i.e. from 1.8.2014 to 31.3.2015) = x + 25% of x = 1.25x
Then, sales for next 8 months = 1.25x × 8 = 10x
Total sales for the year = 4x + 10x = 14x
Sales Ratio = 4x : 10x i.e. 2:5.
Q.1.6 2017 - May [5] (a) Practical
Roshani & Reshma working in partnership, registered a joint stock company under the name of Happy Ltd. on May
31st 2016 to take over their existing business. The summarized Profit & Loss A/c as given by Happy Ltd. for the
year ending 31st March, 2017 is as under:
Happy Ltd.
Profit & Loss A/c for the year ending March 31, 2017 Particulars Amount in Particulars Amount in ` `
To Salary 1,44,000 By Gross Profit 4,50,000
To Interest on Debenture 36,000
To Sales Commission 18,000
To Bad Debts 49,000
To Rent 38,400
To Audit fees 12,000
To Net Profit 1,33,350
Total 4,50,000 Total 4,50,000
Prepare a Statement showing allocation of expenses & calculation of preincorporation & post-incorporation profits
after considering the following information:
(i) GP ratio was constant throughout the year.
(ii) Depreciation includes ` 1,250 for assets acquired in post incorporation period.
(iii) Bad debts recovered amounting to ` 14,000 for a sale made in 2013-14 has been deducted from bad debts
mentioned above.
(iv) Total sales were` 18,00,000 of which ` 6,00,000 were for April to September.
(v) Happy Ltd. had to occupy additional space from 1st Oct. 2016 for which rent was ` 2,400 per month. (8 marks)
Answer:
A statement showing calculation of pre & post incorporation profit
Particulars Basis Ratio Pre Post Gross Profit Sales 1 : 8 50,000 4,00,000 Bad debt recovered Pre – 14,000 –
64,000 4,00,000
Less:
Salary Time 1 : 5 24,000 1,20,000
Interest on Debenture Post – – 36,000
Sales Commission Sales 1 : 8 2,000 16,000
Bad debts Sales 1 : 8 7,000 56,000
Depreciation W. N. 4 3,000 16,250
Rent W. N. 5 4,000 34,400
Audit fees Post – 12,000
Transfer to Capital Reserve

Transfer to P&L A/c 24,000 1,09,350
Working Notes:
1. Time Ratio = 2 : 10 or 1 : 5
Pre: 1-4-16 to 31-5-16 = 2 months
Post: 31-5-16 to 31-3-17 = 10 months
2. Sales Ratio:
Total Sales 18,00,000
(–) Pre - Incorporation (2,00,000)

[6,00,000 × 2/6]
Post - Incorporation 16,00,000
Ratio = 2 : 16
=1:8
3. Calculation of Bad debt:
Bad Debt 49,000

(+) Bad Debt recovery 14,000
63,000
4. Depreciation:
Total 19,250
(–) Post - Incorporation (1,250) 18,000

(–) Pre [18,000 × 1/6] (3,000) Post 15,000 5. Rent:
Total 38,400
(–) Post [2,400 × 6] (14,400) 24,000
(–) Pre-Incorporation
2,000 × 2 (4,000) Post
(2,000 × 10 + 14,400) 34,400 38,400
The promotors of Shiva Ltd. took over on behalf of the company a running business with effect from 1stApril 2017.
The company got incorporated on 1st August 2017. The annual accounts were made up to 31st March, 2018 which
revealed that the sales for the whole year totalled` 2400 lakhs out of which sales till 31st July, 2017 were for ` 600
lakhs. Gross profit ratio was 20%.
The expenses from 1st April 2017, till 31st March, 2018 were as follows:
Particulars ` in Lakhs Salaries 75

Rent, Rates and Insurance 30
Sundry Office Expenses 72
Traveller’s Commission 20
Discount allowed 16
Bad Debts 8
Directors’ Fee 30
Tax Audit Fee 16
Depreciation on Tangible Assets 15
Debenture Interest 14
Prepare a statement showing the calculation of profits for the preincorporation and Post incorporation periods. (10
marks)
Answer:
Statement showing the calculation of Profits for the Pre-incorporation and Post-incorporation periods:
Particulars Total Books of Amount Allocation (` in
lakhs)
Gross Profit (20% of 2,400) 480 Sales Less: Salaries 75 Times Rent, Rates & insurance 30 Times Sundry office Exp. 72 Times Traveler’s commission 20
Sales Discount Allowed 16 Sales Bad debts 8 Sales Director’s fee 30 Post Tax audit fee 16 Sales
Depreciation on Tangible 15 Time Assets

Debenture Interest 14 Post Net Profit 184
Pre
incorporation (` in lakhs) Post
incorporation (` in lakhs)
120 25
10
24
5
4
2
-
4
5
360 50
20
48
15
12
6
30
12
10
-
41
14
143
Working Notes : 1. Sales Ratio: (` in lakh) Sales for the whole year 2,400 Sales up to 31st July, 2017 600
Therefore, sales for the period from 1st
August, 2017 to 31st March, 2018 1,800
Thus, Sales Ratio = 600 : 1800 = 1: 3

2. Time Ratio:
1st April, 2017 to 31st July, 2017 : 1st August, 2017 to 31st March, 2018
= 4 months : 8 months = 1 : 2
Thus, time ratio is 1 : 2
Tarun Ltd. was incorporated on 1st July, 2018 to acquire a running business of Vinay Sons with effect from 1st April,
2018. During the year 2018-19, the total sales were`12,00,000 of which`2,40,000 were for the first six months. The
Gross Profit for the year is`4,15,000. The expenses debited to the Profit and Loss account included:
(i) Director's fees ` 25,000

(ii) Bad Debts ` 6,500
(iii) Advertising ` 18,000
(under a contract amounting to` 1,500 per month)

(iv) Company Audit Fees ` 15,000
(v) Tax Audit Fees ` 10,000
1. Prepare a statement showing pre-incorporation and post-incorporation profit for the year ended 31stMarch, 2019.
2. Explain how profits are to be treated. (5 marks)
Answer:
Statement showing the calculation of Profits for the pre-incorporation and post-incorporation periods for the
year ended 31st March 2019:
Particulars Total Basis of PrePostAmt. Allocation incorporation incorporation
Gross Profit 4,15,000 Sales (1:9) 41,500 3,73,500

Less: Directors fee 25,000 Post – 25,000
Bad debts 6,500 Sales (1:9) 650 5,850
Advertising 18,000 Time (1:3) 4,500 13,500
Co. Audit fees 15,000 Post – 15,000
Tax Audit fees 10,000 Sales (1:9) 1,000 9,000
Net Profit 3,40,500 35,350 3,05,150
Pre-incorporation profit
transfer to Capital Reserve
Working Notes:
1. Sales Ratio:
Particulars ` Sales for period upto 30/06/18 (` 2,40,000 × 3/6) 1,20,000

Sales from 1/7/18 to 31/3/19 (` 12,00,000 –` 1,20,000) 10,80,000
Thus sales Ratio = 1 : 9
2. Time Ratio:
1st April, 2018 to 30th June 2018 : 1st July 2018 to 31st March 2019 = 3 months = 9 months = 1 : 3
Thus, Time Ratio = 1 : 3

The partners of C&G decided to convert their existing partnership business into a private limited called CG trading
Pvt. Ltd. with effect from 1.7.2018. The same books of accounts were continued by the company which closed its
accounts for the first term on 31.3.2019.
The summarized profit & loss account for the year ended 31.3.2019 is below:
Particulars
Turnover
Interest on investments
Less: Cost of goods sold
Advertisement
Sales Commission
Salaries
Managing Director’s Remuneration Interest on Debenture
Rent
Bad debt
Underwriting Commission
Audit fees
Loss on sale of Investments Depreciation
` in lakhs ` in lakhs 245.00
6.00 251.00
124.32
3.50
7.00
18.00
6.00
2.00
5.50
1.15
1.00
3.00
1.00
4.00 176.47
74.53
The following additional information was provided:
(i) The average monthly sales doubled from 1.7.2018, GP ratio was constant.
(ii) All investments were sold on 31.5.2018.
(iii) Average monthly salaries doubled from 1.10.2018.
(iv) The company occupied additional space from 1.7.2018 for which rent
of ` 20,000 per month was incurred.

(v) Bad debts recovered amounting to``
17 has been deducted from bad debts mentioned above. (vi) Audit fees pertains to the company.
Prepare a statement apportioning the expenses between pre and post incorporation periods and calculate the profit/
loss for such periods. (10 marks)
ABC Ltd. was incorporated on 01.08.2017 to take over the running business of XYZ Bros. with assets from
01.04.2017. The accounts of the company were closed on 31.03.2018. The average monthly Sales during the first
four months of the year (2017 – 2018) were twice the Average Monthly Sales during each of the remaining 8
months. Calculate Time Ratio and Sales Ratio.
Answer:
Computation of Time Ratio and Sales Ratio Particulars Per-Incorporation Period
(a) No. of Months = Time Ratio
(b) Sales per

Month Ratio (given)
Overall Sales Ratio 01.04.2017 to 31.07.2017 = 4 months ` 2 (twice that of later period)
Post- Incorporation Total Period
01.08.2017 to 31.03.2018
= 8 months 4:8 = 1:2 Base = Say,` 1 per month
4 month ×` 2 8 months ×` 1 8:8 = 1:1 Space to write important points for revision
Lotus Ltd. was incorporated on 1st July, 2017 to acquire a running business of Feel goods with effect from 1st April,
2017. During the year 2017-18, the total sales were ` 48,00,000 of which` 9,60,000 were for the first six months. The
Gross profit of the company ` 7,81,600. The expenses debited to the Profit and Loss Account included:

(ii) Bad debts ` 14,400
(iii) Advertising` 48,000 (under a contract amounting to` 4,000 per
month)
(iv) Salaries and General Expenses ` 2,56,000
(v) Preliminary Expenses written off ` 20,000
(vi) Donation to a political party given by the company ` 20,000. Prepare a statement showing pre-incorporation and
post-incorporation profit for the year ended 31st March, 2018.
Answer:
Statement showing the calculation of Profits for the pre-incorporation and post- incorporation periods
For the year ended 31st March, 2018

Particulars Total Basic of PrePost
Amount Allocation incorporation incorporation 7,81,600 Sales 78,160 7,03,440

60,000 Post 60,000
Gross Profit
Less: Directors’ fee
Bad debts
Advertising
S a l a r i e s a n d general expenses Preliminary

expenses
Donation to
Political Party
Net Profit
Working Notes: 1. Sales ratio Particulars 14,400 Sales 1,440 12,960
48,000 Time 12,000 36,000 2,56,000 Time 64,000 1,92,000

20,000 Post 20,000
20,000 Post 20,000
3,63,200 720 3,62,480
` Sales for period up to 30.06.2017 (9,60,000 x 3/6) 4,80,000 Sales for period from 01.07.2017 to 31.03.2018
(48,00,000 – 4,80,000) 43,20,000 Thus, Sales Ratio = 1 : 9
2. Time ratio
1st April, 2017 to 30 June, 2017: 1st July, 2017 to 31st March, 2018 = 3 months: 9 months = 1: 3
Thus, Time Ratio is 1: 3

The Partners of ABC & Co. decided to convert the partnership into a Private Limited Company called ABCD (P)
Ltd. with effect from 1stJanuary. The consideration was agreed at`11,70,000 based on the Firm’s Balance Sheet as
on that date.
However, due to some procedural difficulties, the Company could be incorporated only on 1stApril. Meanwhile, the
business was continued on behalf of the Company, and the consideration was settled on that day with interest at 12%
p.a.
The same books of account were continued by the company, which closed its account for the first time on 31st
March of the next year and prepared the following summarized Profit and Loss Account.
Particulars ` ` Sales 2,34,00,000
Less: Cost of Goods Sold and Other

Expenses
Cost of Goods Sold 1,63,80,000
Salaries 11,70,000
Depreciation 1,80,000
Advertisement 7,02,000
Discounts 11,70,000
Managing Director’s Remuneration 90,000
Miscellaneous Office Expenses 1,20,000
Office-cum-Show Room Rent 7,20,000
Interest 9,51,000 (2,14,83,000) Profit 19,17,000
The Company’s only borrowal was a Loan `50,00,000 at 12% p.a. to pay the Purchase Consideration due to the Firm
and for Working Capital requirements.
The Company was able to double the average monthly Sales of the Firm from 1st April, but the Salaries trebled from
that date. It had to obtain additional space from 1st July, for which rent was ` 30,000 per month. Prepare a Profit and
Loss Account in columnar form apportioning costs and revenue between pre - incorporation and post-incorporation
periods. Also, suggest how the pre-incorporation profits are to be dealt with.
Answer:
1. Computation of Ratios for apportionment purposes Particulars Per-Incorpn. Post-Incorpn Total (a) Period in Months (Time
1st Jan to 31st Mar 1st April to 31st Mar 3 : 12 = 1 : 4
Ratio) = 3 months next = 12 months (b) Sales per month ratio Say, ` 1 Double of earlier
(given) period, i.e.` 2 (c) Overall Sales Ratio 3 × 1 = 3 12 × 2 = 24 3 : 24 = 1 : 8
(a) × (b)
(d) Salary per month ratio Say, ` 1 Triple of earlier
(given) period, i.e.` 3 (e) Total Salary Ratio 3 × 1 = 3 12 × 3 = 36 3 : 36 = 1 : 12
(a) × (d)
(f) Rent for additional – ` 30,000 × 9
Premises (from 1st July) =` 2,70,000 (g) So, Balance Rent
(` 7,20,000 – ` 2,70,000)
distributed in 1 : 4 (Time
Ratio) ` 90,000 ` 3,60,000 (h) Total Rent Cost (f)+(g) ` 90,000 ` 6,30,000 (i) I n t e r e s t a l l o c a b l e t o
Company – ` 6,00,000 (` 50 Lakhs × 12% from 1st Apr to
31st Mar next)
(j) So, Balance Interest for
Per-Inc. Period ` 3,51,000 –
Note:
1. Expenses apportioned on Sales Ratio Basis: (a) Cost of Goods Sold,
(b) Advertisement, and (c) Discounts.

2. Expenses apportioned on Time Ratio Basis : (a) Depreciation,
(b) Miscellaneous Office Expenses.
2. Statement showing calculation of Profit/Losses for Pre and Post Incorporation Periods
Particulars
Sales (Apportioned in Sales Ratio)

Less: Cost of Goods Sold
A. Gross Profit
B. Apportionment of Expenses
Salaries
Depreciation
Advertisement
Discounts
Miscellaneous Office
Expenses
Rent (WN 1)
Interest (WN 1)
MD’s Remuneration (Direct)
Total Expenses
C. Profit/(Loss) (A – B)
Ratio Pre Incorpn. Post Incorpn.
1:8 2,600 20,800

1:8 1,820 14,560
780 6,240
1:12 90 1,080
1:4 36 144
1:8 78 624
1:8 130 1,040
1:4 24 96
90 630
351 600
– 90
799 4,304
(19) 1,936
Note: Treatment of Negative Profit Prior to Incorporation:
1. The Loss may be considered as a reduction from any Capital Reserve arising on acquisition.
2. Alternatively, such loss may be treated as Goodwill and shown under Non-Current Assets.
2
Pre-Incorporation Profit & Losses: Preparation of Financial Statements
Q.2.1 2010 - Nov [6] (a), RTP Practical
The partners of Shri Enterprises decided to convert the partnership firm into a Private Limited Company Shreya (P)
Ltd. with effect from 1st January, 2008. However, company could be incorporated only on 1stJune, 2008. The
business was continued on behalf of the company and the consideration of ` 6,00,000 was settled on that day along
with interest @ 12% per annum. The company availed loan of` 9,00,000 @ 10% per annum on 1st June, 2008 to pay
purchase consideration and for working capital. The company closed its accounts for the first time on 31st March,
2009 and presents you the following summarized profit and loss account :
` ` Sales 19,80,000 Cost of goods sold 11,88,000
Discount to dealers 46,200
Directors’ remuneration 60,000
Salaries 90,000
Rent 1,35,000
Interest 1,05,000
Depreciation 30,000
Office expenses 1,05,000
Sales promotion expenses 33,000
Preliminary expenses
(to be written off in first year itself) 15,000 18,07,200 Profit 1,72,800 Sales from June, 2008 to December, 2008
were 2½ times of the average sales, which further increased to 3½ times in January to March quarter, 2009. The
company recruited additional work force to expand the business. The salaries from July, 2008 doubled. The
company also acquired additional showroom at monthly rent of ` 10,000 from July, 2008.
You are required to prepare a Profit and Loss Account showing apportionment of cost and revenue between pre-
incorporation and postincorporation periods. Also suggest how the pre-incorporation profits/losses are to be dealt
with. (10 marks)
Answer:
Shreya (P) Limited
(for 15 months ended 31st March, 2009)
Ratio Pre Post incorporation incorporation (5 months) (10 months)
Sales WN-1 5:28 3,00,000 16,80,000 Less: Cost of Sales 1,80,000 10,08,000
Gross Profit 1,20,000 6,72,000

Less: Administrative Expenses allocated
(a) Directors Remuneration ☐ 60,000
(b) Salary WN-2 5:19 18,750 71,250
(c) Rent WN-3 15,000 1,20,000
(d) Interest WN-4 30,000 75,000
(e) Depreciation 10,000 20,000
(f) Office Expenses 35,000 70,000
Sales Promotion Expenses 5,000 28,000
Discount to dealers 7,000 39,200
Preliminary Expenses ☐ 15,000
Net Profit/Loss (750) 1,73,550
Treatment of pre-incorporation loss : Pre-incorporation loss may, either be considered as a reduction from any
capital reserve accruing in relation to the transaction or be treated as goodwill.
Working Notes :
1. Computation of sales ratio :
Let the average sales per month in pre-incorporation period be a Average Sales (Pre-incorporation) = a × 5 = 5a
Sales (Post incorporation) from June to December,
2008 = 2½a × 7 = 17.5a
From January to March, 2009 = 3½a × 3 = 10.5a
Total Sales 28.0a
Sales ratio of pre-incorporation & post incorporation is 5a : 28a 2. Computation of ratio for salaries:
Let the average salary be a
Pre-incorporation salary = a × 5 = 5a
Post incorporation salary
June, 2008 = a
July to March, 2009 = a × 9 × 2 = 18a
19a
Ratio is 5 : 19
3. Computation of Rent :
Total rent 1,35,000 Less: Additional rent for 9 months @ 10,000 p.m. 90,000 Rent of old premises apportioned in
time ratio 45,000 Apportionment Pre Inc. Post Inc. Old premises rent 15,000 30,000 Additional Rent — 90,000
15,000 1,20,000 4. Computation of interest :
Pre-incorporation period from January, 2008 to May, 2008
= 30,000
Post incorporation period from June, 2008 to March, 2009 = 75,000
1,05,000
A firm M/s. Alag, which was carrying on business from 1st July, 2010 gets itself incorporated as a company on 1st
November, 2010. The first accounts are drawn upto March 31, 2011. The gross profit for the period is` 56,000. The
general expenses are` 14,220; Director’s fees` 12,000 p.a.; incorporation expenses ` 1,500. Rent upto 31st December
was ` 1,200 p.a., after which it is increased to ` 3,000 p.a. Salary of the manager, who upon incorporation of the
company was made a director, is `6,000 p.a. His remuneration thereafter is included in the above figure of fees to the
directors.
Give Profit and Loss Account showing pre and post incorporation profit. The net sales are ` 8,20,000, the
monthly average of which for the first four months is one-half of that of the remaining period. The company earned
a uniform profit. Interest and tax may be ignored. (6 marks)
Answer :
Profit & Loss Account
(For 9 months ended on 31st March, 2011)
Ratio
Gross Profit on the basis of Sales WN-1 2:5
Pre incorPost poration incorporation 16,000 40,000
Less: Administrative Expenses (a) General Expenses (b) Rent (600 + 750) (c) Manager’s Salary
Director’s Fees
Formation Expenses Net profit t/f to Capital Reserve Net Profit t/f to P&L App. A/c
WN-2 Time Ratio(4:5) WN-3

Actual Actual Actual 6,320 7,900 400 950 2,000 ☐ ☐ 5,000 ☐ 1,500
7,280
24,650
Working Notes :
1. Calculation of sales ratio
Let the average monthly sales of first four months = 100 and next five months = 200
Total sales of first four months = 100 × 4 = 400 and total sales of next five months = 200 × 5 = 1,000
The ratio of sales = 400 : 1,000 = 2:5
2. Time Ratio
Pre : Post
= 1st July to 31st Oct : 1st Nov to 31st March
= 4 months : 5 months
Thus, Time ratio = 4:5
3. Rent
Till 31st December, 2010, rent was ` 1,200 p.a. i.e. ` 100 p.m. So, Pre-incorporation rent = ` 100 × 4 months =` 400
Post-incorporation rent = ( ` 100 × 2 months) + (` 250 × 3 months) =` 950
Q.2.3 RTP Practical
ABC Company limited was incorporated on 1st July to take over as from 1st April in the same year the existing
business of XYZ Brothers. Under the takeover agreement, all profits made from 1st April belong to the company.
The Purchase Consideration was`7,00,000. The Vendors received half of it in cash on 1st Oct, in the same year
together with interest at 10% per annum. For other half of the Purchase Consideration, they were allotted 3,500 fully
paid up Shares of` 100 each in the Company. The following balances appeared in the Company’s Ledger as at 31st
March (year-end):
Particulars ` Particulars `
Share Capital :
4,500 Shares of ` 100 each
fully paid (including Vendors
Shares)
Cash in Hand 12,000

4,50,000 Preliminary Expenses (these are to be fully written off) 8,000
Salaries and Wages 48,000
Bank Overdraft
Sundry Creditors
Fixed Deposits received
Freehold Land at Cost
Building at Cost
Furniture and Fixtures at Cost Transport Vehicle at Cost Stock in Trade on 1st April (year beginning)
Book Debts
1,65,000 Rent Received 13,000
65,000 Rates and Taxes 7,000
35,000 Repairs to Building 3,000
50,000 Miscellaneous Expenses 22,000
1,30,000 Directors Fees 2,400
15,000 Interest to Vendors 17,500
35,000 Purchases 7,70,000
Sales 9,10,000
4,20,000 Goodwill 3,100
95,000
1. Stock -in-Trade as at 31st March amounted to ` 4,80,000.

2. Depreciation has to be written off on Building at 5%, Furniture and Fixtures at 10% and Transport Vehicles at
20%.
3. Bad Debts amounting to ` 1,000 out of which` 500 related to Book Debts taken over by the Company, have to be
written off and a provision of`5,000 to be made for Doubtful Debtors as at 31stMarch. Prepare:
1. Profit and Loss Account for the period from 1stApril to 31stMarch, and compute the Profit Prior to Incorporation,
2. Balance Sheet as on 31st March.
Answer:
1. Computation of Time Ratio and Sales Ratio
Particulars PrePost Total Incorporation Incorporation Period Period No. of Months = Time 1st Apr to 30th Jun
1st Jul to 31st Mar 3:9 = 1:3 Ratio = 3 months = 9 months
2. Trading Account for the year ending 31st March Particulars
To Opening Stock
To Purchases
To Profit c/d (balancing figure)
Total
` Particulars `
4,20,000 By Sales 9,10,000

2,00,000
13,90,000 Total 13,90,000 3. Statement showing appropriation of Profit/Losses for Pre and Post Incorporation
Periods
Particulars Ratio
A. Gross Profit (Apportioned in Time Ratio) 1:3 Add: Rent received 1:3 Sub - Total
Salaries and Wages 1:3
Miscellaneous Expenses 1:3
Rates and Taxes 1:3
Repairs of Building 1:3
Bad Debts (Direct)
Interest to Vendors (Note 2)
Depreciation (Total Deprn 6,500 + 1,500 + 7,000) = 15,000 1:3
Building 5% = 6,500 + Furniture 10% = 1,500 + Vehicle 20% = 7,000
Provision for Doubtful Debts
Directors Fees (Direct)
Preliminary Expenses (Direct)
Total Expenses
C. Profit (A – B)
Note:
1. Preliminary Expenses can also be written off against Capital Reserve
arising out of Pre-Incorporation Profit.

2. Interest to Vendors =`7,00,000 × 10% × 3/12, for each of Pre and Post
Incorporation Periods.
Pre incorporation 50,000 3,250 53,250
12,000
5,500
1,750
750
500
8,750
36,000 16,500 5,250 2,250 500 8,750
3,750 11,250
–
–
– 5,000 2,400 8,000
33,000 95,900
20,250 Post incorporation
1,50,000 9,750 1,59,750

63,850
4. Balance Sheet of as on 31st March.... Particulars as at 31st March Note This Prev. Year Yr.
I. EQUITY AND LIABILITIES:

(1) Shareholder’s Funds:
(a) Share Capital 1 4,50,000 (b) Reserves and Surplus 2 84,100

(a) Short Term Borrowings 3 2,00,000
(b) Trade Payables - Sundry Creditors 65,000
Total 7,99,100
Particulars as at 31st March Note This Year Prev. Yr.
II. ASSETS
PPE: (i) Tangible Assets 4 2,15,000 (ii) Intangible Assets - Goodwill 3,100
(2) Current Assets:

(a) Inventories Stock - in - Trade 4,80,000
(b) Trade Receivable 5 89,000
(c) Cash and Cash Equivalents - Cash on Hand 12,000
Note 1: Share Capital Particulars This Year Prev.
Yr. Authorised : 4,500 Equity Shares of ` 100 each 4,50,000
Issued, Subscribed & Paid up:

(Of the above, 3,500 Share are issued for non-cash
consideration on Business Takeover)
Total Note 2: Reserves and Surplus Particulars
Capital Reserve
Surplus (Balance in P&L A/c, i.e. Post Incorporation Profit)
4,50,000
This Year Prev. Yr. 20,250
63,850
Total Note 3: Short Term Borrowings Particulars
(a) Bank Overdraft (Secured Borrwings) (b) Fixed Deposit Received (Unsecured Borrowings) (assumed as Short
Terms)
84,100
This Year Prev. Yr. 1,65,000
35,000
Note 4: Tangible Assets
Item Gross Block / Cost Depreciation Net Block / WDV
Opg Addns/ Clg Bal Opg Addns/ Clg Bal As at Yr. As at Yr. Bal. (Dedns) Bal. (Dedns) Beginning End
Column (1) (2) (3) = 1± 2 (4) (5) (6) = 4± 5 (7) = 1 – 4 (8) = 3 – 6
Freehold Land 50,000 – 50,000
Building 5% 1,30,000 6,500 1,23,500
Furniture & Fittings 10% 15,000 1,500 13,500
Transport
Vehicle 20% 35,000 7,000 28,000
Total 2,30,000 15,000 2,15,000
Note 5 : Trade Receivables
Particulars
Sundry Debtors
Less: Provision for Doubtful Debts Total
This Year Prev. Year 94,000
(5,000)
89,000
Q.2.4 RTP Practical
On 1st June, AB and Co. sold their business to ABC Private Ltd. as of 1st April for a total consideration of ` 1,00,000
- for Goodwill – ` 30,000, Building –` 30,000, Machinery – ` 15,000 and Stock –` 25,000. ABC Private Ltd. was
incorporated on 1st June, and the Purchase Consideration was met by issue of Shares. The business was carried on
by the Vendors on behalf of the Company from 1stApril, and the same set of account books was maintained till 30th
June, when the following Trial Balance was prepared –
Particulars Debit` Credit`
Capital Account – A – 36,000

Capital Account – B – 30,000
Sundry Creditors (including for June – Purchases of
` 5,000) – 10,000
Sales – 1,00,000
Salaries and Wages (including`1,000 being Sitting
Fees to Directors) 12,000 – Rent 1,500 – Purchases 36,000 – ABC Private Ltd. 10,000 – Expenses 5,000 – Bank
3,500 – Goodwill 25,000 – Building 20,000 – Machinery (Purchases after 1stApril were`10,000) 25,000 – Stocks on
1st April 25,000 – Sundry Debtors (including Sales of`8,000 in June) 13,000 –
Total 1,76,000 1,76,000
Stocks on Hand on 30th June were ` 18,000.

On 30th June, ABC & Co. paid ` 10,000 for additional Shares and out of this amount, the Company incurred
Preliminary Expenses of` 6,000 and purchased a Typewriter for`3,000. Debtors and Creditors prior to 1stJune were
to be taken over by ABC & Co.
Prepare the Profit and Loss A/c of ABC Private Ltd. for the 3 months ended 30th June, and a Balance Sheet (Extract)
as at that date.
Answer:
1. Profit & Loss Account (Extract) of ABC Pvt. Ltd. for the period from 1st April to 30th June
By Sales 1,00,000 By Closing Stock 18,000 To Opening Stock 25,000 To Purchases 36,000 To Salaries and Wages
(excl. Directors Fees) 11,000 To Rent 1,500 To Expenses 5,000 To Net Profit c/d
(balancing figure) 39,500
Total 1,18,000 Total 1,18,000 2. Statement showing Apportionment of Net Profit Particulars
Net Profit (Time Ratio) Less: Direct Fees
Profit Ratio Pre Post Incorpn. Incorpn. 2:1 26,333 13, 167
– 1,000 26,333 12,167 3. Journal Entries in the books of AB Pvt. Ltd. S. Particulars Dr. Cr. No.
1. Goodwill A/c Dr. 5,000 Building A/c Dr. 10,000
To ABC & Co. (Vendor) A/c 15,000 (Being Goodwill and Building revalued as agreed
upon and gain transferred to ABC & Co. A/c since
Revaluation Gain belongs to ABC & Co. Firm)
2. Arun’s Capital A/c Dr. 36,000

Bhat’s Capital A/c Dr. 30,000
Trade Creditors A/c (10,000 – 5,000)
(Prior to June) Dr. 5,000
To AB & Co. (Vendor) A/c 71,000 (Being Liabilities not taken over by ABC Private
Ltd. transferred to ABC & Co. Account)
3. AB & Co. (Vendor) A/c Dr. 18,500 To AB Private Limited A/c 10,000 To Trade Debtors A/c (13,000 – 8,000)
5,000 (Prior to June)
To Bank A/c 3,500
(Being Assets not taken over by ABC Pvt Ltd.

transferred to ABC & Co. A/c)
4. AB & Co. (Vendor) A/c Dr. 1,00,000
To Equity Share Capital A/c 1,00,000 (Being issue of 10,000 Equity Share at ` 10 as
fully paid, in discharge of Purchase Consideration
due to ABC & Co.)
5. Bank A/c Dr. 10,000
To Equity Share Capital A/c 10,000 (Being additional 1,000 Equity Shares at ` 10
each subscribed by and allotted to ABC & Co.)
6. Preliminary Expenses A/c Dr. 6,000
Typewriter A/c Dr. 3,000 To Bank A/c 9,000

(Being Preliminary Expenses incurred and
Typewriter purchased out of amount received on
subscription to additional Share Capital)
4. ABC Pvt Ltd’s Bank Account

Receipts ` Payments `
To Equity Share Capital – additional Shares

subscribed by AB & Co. 10,000 By Preliminary Expenses 6,000
By Typewriter 3,000
By balance c/d 1,000
(balancing figure)
Total 10,000 Total 10,000 Note: ABC & Co. Firm’s Bank A/c is retained by the Firm only, not taken over by the
Company. Refer Journal Entry 3.
5. AB & Co. (Vendors) A/c
Particulars `
To Assets not taken over by By AB Pvt. Ltd.

☐ Balance in ABC Pvt.
Ltd. A/c 10,000

☐ Trad Debtors
(13,000 - 8,000) 5,000
☐ Bank 3,500
To Equity Share Capital -
Settlement of Purchase By Consideration 1,00,000
Particulars `
Liabilities not taken over

by ABC Pvt. Ltd.
☐
☐ Balance in Capital
Account of A 36,000 Balance in Capital
Account of B 30,000 Trade Creditors 5,000 (10,000 – 5,000)
By
Total 1,18,500
Gain on Revaluation of:
☐ Goodwill (30,000 –
25,000) 5,000
☐ Buildings (30,000 –
20,000) 10,000
Balance c/d (balancing
figure) 32,500
Total 1,18,500
6. Capital Reserve
Receipts ` Payment `
To Preliminary Expenses By P & L Account - Pre 26,333 written off 6,000 Incorporation Profit
To Goodwill transfer 20,333
(balance figure)
Total 26,333 Total 26,333 7. Balance Sheet of ABC Private Ltd. (Extract) as at 30th June Particulars as at 30th
June Note This Year Prev. Yr.
I EQUITY AND LIABILITIES:

(a) Share Capital 1 1,10,000 (b) Reserves and Surplus
– Surplus (Post Incorporation 12,167 Profit)
– Trade Payables (Creditors) 5,000
Total 1,27,167 II ASSETS


(i) Tangible Assets 2 58,000
(ii) Intangible Assets - Goodwill 9,667
(30,000 – 20,333)
(2) Current Assets:
(a) Inventories - Stock - in - Trade 18,000
(b) Trade Receivables 3 40,500
(c) Cash and Cash Equivalents 1,000
- Balance with Banks
Total 1,27,167
Note 1 : Share Capital
Particulars This Year Prev. Yr. Authorised : ............Equity Shares of ..... each
Issued, Subscribed & Paid up: 11,000 Equity 1,10,000 Shares of ` 10 each
(Of the above, 10,000 Shares issued for non-cash
consideration on Business Takeover)
Total
Note 2 : Tangible Assets
Particulars
Building (at Cost )

Plant & Machinery (at Cost)
Typewriter (At Cost)
Total 1,10,000
This Year Prev. Yr.
30,000
25,000
3,000
58,000
Note 3 : Trade Receivables
Particulars
Sundry Debtors
Due from Vendor Company (AB & Co.) Total
This Year Prev. Yr. 8,000
32,500
40,500
Q.2.5 Practice Practical ABC Ltd. was incorporated on 1st July, to take over the business of XYZ as and from 1st
April XYZ’s Balance Sheet as at that date was as under:
Liabilities Trade Creditors Capital
Total ` Assets `
36,000 Building 80,000

1,94,000 Furniture and Fittings 10,000
Debtors 90,000
Stock 30,000
Bank 20,000
2,30,000 Total 2,30,000
Debtors and Bank Balances are to be retained by the Vendor, and Creditors are to be paid off by him. Realisation of
Debtors will be made by the Company on a commission of 5% on cash collected. ABC Ltd. is to issue XYZ with
10,000 Equity Shares of`10 each,`8 per Share paid up, and cash of ` 56,000.
ABC Ltd. issued to the public for Cash, 20,000 Equity Shares of`10 each, on which` 8 per Share was called and paid
up, except in the case of 1,000 Shares on which the third call of ` 2 per Share had not been realized as at the end of
the financial year. Also, on 2,000 Shares, the Company had received the full amount of` 10 each. The Shares issued
was underwritten for 2% Commission, payable in Shares fully paid up. In addition to the balances arising out of the
above, the following were shown by the books of accounts of ABC Ltd. as at the end of the relevant financial year:
Particulars `
Discount (including ` 1,000 allowed on Vendor’s Debtors) 6,000

Directors Fees 12,000
Salaries 48,000
Debtors (including Vendor’s Debtors) 1,60,000
Creditors 48,000
Purchases 3,20,000
Sales 4,60,000
Stock at year end (31st March) was ` 52,000. Depreciation at 10% on Furniture and Fittings and at 5% on Building is
to be provided. Collections from Debtors belonging to the Vendor were ` 60,000 in the period. Prepare the Trading
and Profit and Loss Account for the period ended 31st March of ABC Limited, and its Balance Sheet as at that date.
Make suitable assumptions wherever necessary.
Answer:
Particulars
No. of Months = Time Ratio
1. Computation of Time Ratio
Per-Incorporation Post Total Period Incorporation
Period
1st Apr to 30th June 1st Jul to 31st March 3 : 9 = 1 : 3 = 3 months = 9 months
2. Computation of Goodwill on Acquisition
Particulars ` `
(a) Purchase Consideration :

☐ 10,000 Equity Shares of` 10, each` 8 paid up 80,000 ☐ Consideration paid in Cash 56,000 1,36,000
(b) Value of Assets taken over:

Building 80,000
Furniture and Fittings 10,000
Stock 30,000 (1,20,000)
(c) Goodwill on Acquisition 16,000 3. Underwriters Commission:
Commission payable to Underwriters is 2% on Face Value of`2,00,000 i.e.` 4,000. Such Commission becomes due
on completion of the job relating to Shares underwritten. It is assumed that the job relating to Public Issue was
finished at the end of the year (31stMarch), and Shares were allotted to the Underwriter in discharge of his claim for
Commission.
4. Cash Inflows from Public Issue of Equity Shares Particulars
20,000 Equity Shares of ` 10 each, ` 8 called up Less: Calls in Arrears on 1,000 Shares at ` 2 per share Add: Calls-
in-Advance on 2000 Shares at ` 2
Total Cash Receipts from issue of Equity Shares to Public 5. Total Debtors Account Particulars

(assumed on Credit)
Murali’s Debtors 90,000 —

Company’s Debtors — 4,60,000
Particulars
By Discount Allowed
By Vendors’ A/c – Disc Tfr
By Cash (bal. fig. for
Company)
By Balance c/d (See Note) Murali’s Debtors
–
Company’s Debtors
5,000
1,000
–
60,000 3,24,000
29,000 1,31,000
Total 90,000 4,60,000 Total 90,000
`
1,60,000
(2,000) 4,000
1,62,000
4,60,000 Note: Closing Balance of Company’s Debtors = Total Debtors 1,60,000 Less Murali’s Debtors 29,000 = `
1,31,000.
6. Total Creditors Account

Particulars
To C a sh (bal a n c e figure)
To Balance c/d
` Particulars ` 2,72,000 By P u r c h a s e s – 3,20,000 assumed on credit

48,000
7. XYZ’s (Vendor) Account
To Cash - amount paid
To Equity Share Capital share allotted

To Cash - Collection from Vendor’s Drs
Handed over to him
To Commission Income on Cash Collection
To Vendor’s Debtors Discount per contra
To balance c/d - Suspense A/c per contra
56,000 By Building - taken over 80,000 By Furniture -taken over 10,000 80,000 By Stock - taken over 30,000
By Goodwill - on
acquisition (W.N. 1) 16,000 57,000 By Vendor’s Debtors - per
contra 90,000 3,000
1,000
29,000
Total 2,26,000 Total 2,26,000 Note: The balance in Vendor’s A/c and Vendors’ Debtors A/c will be set off while
preparing the Co.’s Balance Sheet.
8. Trading Account for the year ended 31st March
To Opening Stock To Purchases

To Gross Profit
(balancing figure)
30,000 By Sales 4,60,000 3,20,000 By Closing Stock 52,000 1,62,000

9. Statement showing appropriation of Profit/Losses for Pre and Post
incorporation periods
Particulars Ratio Per Incorpn. Post Incorpn.
A. Gross Profit (Apportioned in Time 1:3 40,500 1,21,500

Ratio)
Add: Commission-wholly related to Post – 3,000
Incorporation Period
Sub-Total 40,500 1,24,500
Salaries (Time Ratio) 1:3 12,000 36,000
Discount (Time Ratio) 1:3 1,250 3,750
Depreciation (Time Ratio) 1:3
☐ Building (80,000 × 5%) 1,000 3,000
☐ Furniture (10,000 × 10%) 250 750
Directors Fee – 12,000
Underwriting Commission – 4,000
Total Expenses 14,500 59,500

C. Profit (A – B) 26,000 65,000
10. Cash/Bank Account
Receipts ` Payments ` To Equity Share Capital A/c To Total Debtors A/c
☐Collectionfrom
Company’s Debtors ☐ C o l l e c t i o n f r o m
Vendor’s Debtors 1,62,000 By Total Creditors -
Payment to Creditors 2,72,000 By V e n d o r ’ s A / c -
3,24,000 Purchase
Consideration 56,000 60,000 By Preliminary Expenses 10,000 By Directors’ Fees 12,000 By Salaries 48,000 By V e
ndor’sA/c-
Remittance of
Collection from Debtors
after commission of `
3,000 at 5% on 60,000 57,000 By Balance c/d
(balancing figure) 91,000
Total 5,46,000 Total 5,46,000

11. Capital Reserve Account
Particulars ` Particulars ` To Goodwill 16,000 By P&L A/c - Pre 26,000 To Preliminary Incorporation Profit
Expenses written off 10,000
Total 26,000 Total 26,000
12. Balance Sheet of ABC Ltd. as on 31st March Particulars as at 31th March Note This Year Prev. Yr.
I EQUITY AND LIABILITIES:

(a) Share Capital 1 2,42,000 (b) Reserves and Surplus - Surplus 65,000 (Post Incorporation Profit)
(c) Calls in Advance 4,000

Trade Payables - Sundry Creditors 48,000
Particulars as at 31th March Note This Year Prev. Yr.
II ASSETS

(2) Tangible Assets 2 85,000 Current Assets:
(a) Inventories - Stock -in-Trade 52,000 (b) Trade Receivables - Debtors 1,31,000 (c) Cash and Cash Equivalent -
91,000
(W.N. 11)
Total 3,59,000
Note 1 : Share Capital
Particulars This Prev.
Year Yr. Authorised : ......... Equity Shares of .... each

Issued, Subscribed & Paid Up:
30,000 Equity Shares of ` 10 each – ` 8 called up 2,40,000

400 Equity Shares of ` 10 each - fully paid up 4,000
(Of the above, Shares for non-cash consideration on
Business Takeover 10,000 Shares and to Underwriters as
Commission 400 Shares) (2,000) Less: Unpaid Calls
Note 2: Tangible Assets

Item Gross Block / Cost Depreciation Net Block / WDV Opg Addns/ Clg Bal Opg Addns/ Clg Bal As at Yr. As at Yr. Bal. (Dedns) Bal. (Dedns)
Beginning End
Column (1) (2) (3) = 1± 2 (4) (5) (6) = 4± 5 (7) = 1 – 4 (8) = 3 – 6

Building 80,000 4,000 76,000
Furniture 10,000 1,000 9,000
Total 90,000 5,000 85,000
Note: In the absence of information, the other Columns are not filled up in the above table.
V.I.P. Industries (P) Ltd. was incorporated on 1st May. It took over the proprietary business of ABC with effect from
1st April. The Balance Sheet of ABC as on that date is as follows:
Liabilities
Capital
Trade Creditors
Loans
Creditors for Expenses
Total
` Assets `
4,31,500 Sundry Debtors 25,700

17,000 Building 1,10,000
8,500 Machinery 3,00,000
2,500 Loss 23,800
4,59,500 Total 4,59,500
It was agreed to pay ` 4,50,000 in Equity Shares to ABC. The Company decided to close its first year’s accounts as
at 31stMarch of the next year. The following are the further details furnished to you:
Particulars
Sales
Purchases
Salaries and Wages General Expenses
` Particulars `
3,00,000 Freight 4,700

1,40,000 Interest paid 8,000
40,000 Stock in Trade 22,000
32,000 Addition to Building 38,000
Depreciation may be provided at 10% on assets including additions. The Company requests you to prepare:
1. Journal Entries for the takeover.
2. ABC Account.
3. P and L A/c, showing separately Pre-Incorporation and PostIncorporation Profits for the year ending 31st March.
Answer:
1. Journal Entries for the takeover in the books of VIP Industries (P) Ltd.
S.No. Particulars Dr. Cr.
1. Goodwill (balance figure) Dr. 42,300

Building A/c Dr. 1,10,000
Machinery A/c Dr. 3,00,000
Sundry Debtors A/c Dr. 25,700
To Loan A/c 8,500 To Trade Creditors A/c 17,000 To Expense Creditors A/c 2,500 To Karthikeyan A/c (Vendor)
4,50,000 (Being Sundry Assets and Liabilities of ABC
taken over, vide agreement dated...... and
the balance debited to Goodwill A/c)
2. ABC A/c (Vendor) Dr. 4,50,000
To Equity Share Capital A/c 4,50,000 (Being issue of Equity Shares vide
agreement dated ......, to ABC, Vendor for
Business Purchase/takeover of assets and
liabilities)
2. ABC (Vendor) Account Particulars ` Particulars `

To Equity Share Capital
- settlement
By Sundries (Assets 4,50,000 4,50,000 Taken Over)
Total 4,50,000 Total 4,50,000
Particulars
To Purchases
To Freight
To Gross Profit c/d (balancing figure)
Total
3. Trading Account for the year ending 31st March

4,700 By Closing Stock 22,000
1,77,300
3,22,000 Total 3,22,000 4. Statement showing computation of Profit / Loss for Pre and Post Incorporation
Periods
Particulars Ratio
A. Gross Profit (1,77,300 apportioned in Time Ratio) 1:11

Salaries and Wages 1:11 General Expenses 1:11 Interest Paid 1:11 Depreciation 1:11 ☐ Building (1,48,000 × 10%)
☐ Machinery (3,00,000 × 10%)
Total Expenses
C. Profit (A – B)
Note:
1. In the absence of information, Gross Profit and Expenses have been apportioned in the Time Ratio i.e. 1:11.
Otherwise, the Net Profit for the entire period can be calculated and then apportioned in Time Ratio, i.e. 1:11 since
the ratio of apportionment of Gross Profit and each expense item, is the same.
2. Pre-Incorporation Profit of`4,375 is transferred to Capital Reserve A/c. Alternatively, this amount may be set off
against the Goodwill of`42,300 arising on acquisition of business. (Refer Journal Entry 1). Space to write important
points for revision
Pre Post Incorpon. Incorpn.

14,775 1,62,525
3,333 36,667
2,667 29,333
667 7,333
1,233 13,567 2,500 27,500 10,400 1,14,400 4,375 48,125

Q.2.7 RTP Practical
Roshani & Reshma working in partnership, registered a joint stock company under the name of Happy Ltd. on May
31st 2017 to take over their existing business. The summarized Profit & Loss A/c as given by Happy Ltd. for the
year ending 31st March, 2018 is as under:
Happy Ltd.
Profit & Loss Account for the year ending March 31, 2018 Particulars Amount (`) Particulars Amount (`)
To Salary 1,44,000 By Gross Profit 4,50,000 To Interest on Debenture 36,000

To Sales Commission 18,000
To Bad Debts 49,000
To Rent 38,400
To Audit fees (Company
Audit) 12,000
Total 4,50,000 Total 4,50,000
You are required to prepare a Statement showing allocation of expenses and calculation of pre-incorporation and
post- incorporation profits after considering the following information:
(i) GP ratio was constant throughout the year.

(ii) Depreciation includes`1,250 for assets acquired in post incorporation period.
(iii) Bad debts recovered amounting to ` 14,000 for a sale made in 2014-15 has been deducted from bad debts
mentioned above.
(iv) Total sales were` 18,00,000 of which ` 6,00,000 were for April to September.
(v) Happy Ltd. had to occupy additional space from 1st Oct. 2017 for which rent was ` 2,400 per month.
Answer:
Pre-incorporation period is for two months, from 1st April, 2017 to 31st May, 2017. 10 months’ period (from 1st
June, 2017 to 31st March, 2018) is post-incorporation period.
Statement showing calculation of profit/losses for pre and post incorporation periods
Pre-Inc ` Post-Inc ` Gross Profit 50,000 4,00,000 Bad debts Recovery 14,000 64,000 4,00,000
Less: Salaries 24,000 1,20,000

Audit fees – 12,000
Depreciation 3,000 16,250
Sales commission 2,000 16,000
Bad Debts (49,000 + 14,000) 7,000 56,000
Interest on Debentures – 36,000
Rent 4,000 34,400
Net Profit 24,000 1,09,350 Working Notes:
(i) Calculation of ratio of Sales

Sales from April to September = 6,00,000 (1,00,000 p.m. on average basis)
Oct. to March = `12,00,000 (2,00,000 p.m. on average basis) Thus, sales for pre-incorporation period = ` 2,00,000
post-incorporation period =` 16,00,000 Sales are in the ratio of 1:8
(ii) Gross profit, sales commission and bad debts written off have been allocated in pre and post incorporation
periods in the ratio of Sales.
(iii) Rent, salary are allocated on time basis.
(iv) Interest on debentures is allocated in post incorporation period.
(v) Audit fees charged to post incorporation period as relating to company audit.
(vi) Depreciation of` 18,000 divided in the ratio of 1:5 (time basis) and ` 1,250 charged to post incorporation period.
(vii) Bad debt recovery of ` 14,000/- is allocated in pre-incorporation period, being sale made in 2014-15.
(viii) Rent
(` 38,400 – Additional rent for 6 months) ` [38,400- 14,400 (2,400 x 6)] = 24,000 1/4/17 -31/5//17 (2,000 x 2) =
4,000 1/6/17 -31/3/18 – [(2,000 x 10) +14,400] = 34,400 38,400 Space to write important points for revision
CHAPTER
6
Accounting for Bonus Issue and Right Issue
Chapter Comprises: ☹Issue of Bonus Shares ☹Provisions of the Companies Act, 2013 ☹Conditions for Bonus Issue
☹Restriction on Bonus Issue ☹Completion of Bonus Issue ☹Right Issue ☹Financial effects of a further issue
☹Accounting for Right Issue ☹Advantages and Disadvantages of Right Issue

Legend
book.
1.341
TIME MANAGER
First Indepth
learning
i.e.....Time
............ Day 1
1. Budgeted 9
2. Actual
3. Variance
(1-2)
. . . . . . . . . Plan and Manage your Time
Instant
Revision (in hours)

i.e.... i.e. on
......... ...........
Day 2 Day 8
2.15 1.5
........... .............. ............

1.2 0.5 0.5
. . . . . . . Weightage Analysis Common Answered Must Try Question Questions 1.2, 1.4, 1.9, 2.4, 2.6
1
Q.1.1 2008 - Dec [8] (c) Write a note on ‘Bonus shares.’ Answer:
Bonus Shares: Bonus Shares are shares issued to existing Shareholders free of Cost by Capitalizing Free Reserves.
But Company can issue Bonus
Shares when Articles of Association authorize the same. In case the Company issuing bonus shares is a Listed
Company, the Guidelines issued by SEBI must be complied with. Only existing Shareholders are entitled to
Issue of Bonus Shares
Short Notes (3 marks) [CMA Inter Gr. II] receive Bonus Shares. Bonus Shares are be issued to only those
Shareholders who hold fully paid up Shares. An issuer, announcing a bonus
issue after the approval of its BOD, 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 BOD.

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 Redeemable 8% Preference shares of ` 100 each 5,00,000
Reserves & Surplus
Profit & Loss A/c 40,000
2500, 9% Debentures of` 100 each 2,50,000
Sundry Creditors 1,70,000
25,10,000
Application of Funds
PPE (net) 7,80,000
Investments (market value` 5,80,000) 4,90,000
Deferred Tax Assets 3,40,000
Cash & Bank balance 2,80,000
25,10,000
In Annual General Meeting held on 20th June, 2009 the company passed the following resolutions :
(i) To split equity share of` 10 each into 5 equity shares of ` 2 each from 1 st July, 09.
(ii) To redeem 8% preference shares at a premium of 5%. (iii) To redeem 9% Debentures by making offer to
debentureholders to convert their holdings into equity shares at`10 per share or accept cash on redemption.
(iv) To issue fully paid bonus shares in the ratio of one equity share for every 3 shares held on record date.
On 10th July, 2009 investments were sold for` 5,55,000 and preference shares were redeemed.
40% of Debentureholders exercised their option to accept cash and their claims were settled on 1st August, 2009.
The company fixed 5th September, 2009 as record date and bonus issue was concluded by 12th September, 2009.
You are requested to journalize the above transactions including cash transactions and prepare Balance Sheet as at
30th September, 2009. All working notes should form part of your answer. (12 marks)
Answer:
Bumbum Limited
Journal Entries
Date Particulars LF Dr. (`) Cr. (`)
2009 Equity Share Capital A/c (` 10 each) Dr. 3,00,000
July 1 To Equity Share Capital A/c (` 2 each) 3,00,000 (Being equity share of` 10 each splited into
5 equity shares of ` 2 each)
July 10 Cash & Bank balance A/c Dr. 5,55,000 To Investment A/c 4,90,000 To Profit & Loss A/c 65,000
(Being investment sold out and profit on sale

credited to Profit & Loss A/c)
July 10 8% Redeemable Preference Share
Capital A/c Dr. 5,00,000
Premium on redemption of preference
share A/c Dr. 25,000 To Preference Shareholders A/c 5,25,000
(Being amount payable to preference share

holders on redemption)
July 10 Preference Shareholders A/c Dr. 5,25,000 To Cash & Bank A/c 5,25,000 (Being amount paid to preference
shareholders)
July 10 General Reserve A/c Dr. 5,00,000 To Capital Redemption Reserve A/c 5,00,000 (Being amount equal to
nominal value of
preference shares transferred to Capital
Redemption Reserve A/c on its redemption
as per the law)
Aug. 1 9% Debentures A/c Dr. 2,50,000 Interest on Debentures A/c Dr. 7,500
To Debentureholders A/c 2,57,500 (Being amount payable to debentureholders

along with interest payable)
Aug. 1 Debentureholders A/c Dr. 2,57,500 To Cash & Bank A/c (1,00,000 + 7,500) 1,07,500 To Equity Share
Capital A/c 30,000 To Securities Premium A/c 1,20,000
(Being claims of debenture holders satisfied)
Sept. 5 Securities Premium A/c Dr. 1,10,000 To Bonus to Shareholders A/c 1,10,000 (Being securities premium
capitalized to
issue bonus shares)
Sept.12 Bonus to Shareholders A/c Dr. 1,10,000 To Equity Share Capital A/c 1,10,000 (Being 55,000 fully paid
equity shares of ` 2
each issued as bonus in ratio of 1 share for
every 3 shares held)
Sept.30 Securities Premium A/c Dr. 25,000 To Premium on Redemption of

Preference Shares A/c 25,000
(Being premium on preference shares

adjusted from securities premium account)
Sept.30 Profit & Loss A/c Dr. 7,500 To Interest on Debentures A/c 7,500 (Being interest on debentures transferred
to
Profit and Loss Account).
Balance Sheet as at 30th September, 2009 Particulars Notes ` Equity and Liabilities
1 Shareholders’ funds
(a) Share capital 1 4,40,000

2 Current liabilities
(a) Trade Payables 1,70,000
Total 19,42,500
Assets
1 Non-current assets
(a) PPE
Tangible assets 7,80,000
(b) Deferred tax asset 3,40,000
2 Current assets
Trade receivables 6,20,000
Cash and cash equivalents 2,02,500
Total 19,42,500
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 A/c
Balance as per Balance Sheet 6,00,000

Add: Premium on equity shares issued
on conversion of debentures (15,000 x 8) 1,20,000
7,20,000
Less: Adjustment for premium on
preference Shares 25,000
Less: Capitalised for Bonus Shares 1,10,000
Balance 5,85,000 Capital Redemption Reserve 5,00,000 General Reserve (6,50,000-5,00,000) 1,50,000 Profit &
Loss A/c 40,000
Add: Profit on sale of investment 65,000
Less: Interest on Debentures 7,500 97,500 Total 13,32,500 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
= =15,000 shares
3. Issue of Bonus Shares

Existing equity shares after split (30,000 x 5) 1,50,000 shares Equity shares issued on conversion 15,000 shares
Equity shares entitled for bonus 1,65,000 shares Bonus shares (1 share for every 3 shares held) to be 55,000 shares
issued
4. Cash and Bank Balance

Balance as per balance sheet 2,80,000
Add: Realization on sale of investment 5,55,000
8,35,000
Less: Paid to preference share holders (5,25,000) Paid to Debentureholders (7,500 + 1,00,000) (1,07,500) Balance
2,02,500
5. Interest of ` 7,500 paid to debenture holders have
been debited to Profit & Loss Account.
Q.1.3 2011 - Nov [6] (a) Practical Following is the extract from the Balance Sheet of M/s. Yahoo Ltd. as at 31st
March, 2011: In ` Authorised Capital :
50,000, 10% preference share of ` 10 each 5,00,000 2,00,000 equity shares of ` 10 each 20,00,000
Issued and Subscribed Capital :

40,000; 10% preference shares of ` 10 each fully paid 4,00,000
1,80,000; equity shares of ` 10 each, of which ` 7.50 paid up 13,50,000
Reserve and Surplus:
Capital Reserve 1,50,000
Securities Premium 50,000
Profit and Loss Account 3,00,000
On 1st April, 2011, the company has made a final call @ ` 2.50 each on
1,80,000 equity shares. The call money was received by 30th April, 2011. There after the company decided to
capitalize its reserves by issuing bonus shares at the rate of one share for every three shares held. Securities
premium of` 50,000 includes a premium of` 20,000 for shares issued to vendor for purchase of a special machinery.
Capital reserve includes ` 60,000 being profit on exchange of plant and machinery. Show necessary Journal Entries
in the books of the company and prepare the extract of the Balance Sheet after bonus issue. Necessary assumption, if
any should form part of your answer. (8 marks)
Answer :
Assumptions :
1. According to SEBI Guideline, only Capital Reserve and Securities
Premium collected in cash can be utilized for the purpose of issue of bonus shares. it is assumed that balance of
capital reserve and securities premium is collected in cash only.
2. It is also assumed that necessary resolutions have been passed and requisite legal requirements related to the issue
of bonus shares have been complied with before issue of bonus shares.
Working Note:
On the basis of the above assumptions, the Authorised Capital should be increased as under:
Required for bonus issue ` 6,00,000 Less: Balance of authorised equity share capital (available) (` 2,00,000)
Authorised capital to be increased ` 4,00,000 Total authorised capital after bonus issue (` 20,00,000 + ` 4,00,000) =`
24,00,000.
In the books of M/s. Yahoo Ltd.

Journal Entries
Date Particulars LF ` `
1.4.2011 Equity Share Final Call A/c Dr. 4,50,000
To Equity share capital A/c 4,50,000 (Being the final call of ` 2.50 per share on
1,80,000 equity shares made)
30.4.2011 Bank A/c Dr. 4,50,000
To Equity Share Final call A/c 4,50,000 (Being final call money on 1,80,000 shares
received)
30.4.2011 Securities Premium A/c (50,000 - 20,000) Dr. 30,000

Capital Reserve A/c (1,50,000 - 60,000) Dr. 90,000
General Reserve A/c Dr. 2,40,000
Profit and Loss A/c Dr. 2,40,000
To Bonus to Shareholders A/c 6,00,000 (Being utilisation of reserves for bonus issue
of one share for every three shares held)
30.4.2011 Bonus to Equity Shareholders A/c Dr. 6,00,000 To Equity share capital A/c 6,00,000 (Being bonus shares
issued)
Extract of Balance Sheet (After bonus issue)
` Authorised capital :
50,000, 10% Preference shares of ` 10 each 5,00,000 2,40,000, Equity shares of ` 10 each (refer W.N.) 24,00,000
Issued and subscribed capital :
40,000, 10% Preference shares of ` 10 each fully paid 4,00,000 2,40,000, Equity shares of ` 10 each fully paid
24,00,000 Out of the above, 60,000 equity shares of`10 each have been issued by way of bonus
Reserves and Surplus:
Capital reserve 60,000
Profit and loss A/c (3,00,000 - 2,40,000) 60,000
Q.1.4 2012 - Nov [3] (b), RTP Practical The following notes pertain to Brite Ltd.’s Balance Sheet as on 31stMarch,
2012 :
Notes : ` in lakhs
1 Share Capital
Authorised :
20 crore shares of ` 10 each 20,000 Issued and Subscribed :
10 crore Equity Shares of ` 10 each 10,000 2 crore 11% Cumulative Preference Shares of ` 10 each 2,000
Total 12,000 Called and paid up :

10 crore Equity Shares of ` 10 each, ` 8
per share called and paid up 8,000 2 crore 11% Cumulative Preference Shares
of ` 10 each, fully called and paid up 2,000
Total 10,000
2 Reserve and Surplus :
Capital Reserve 485
Capital Redemption Reserve 1,000
General Reserve 1,040
Surplus i.e. credit balance of Profit & Loss
(Appropriation) Account 273
Total 4,798
On 2ndApril, 2012 the company made the final call on equity shares @`2 per share. The entire money was received
in the month of April, 2012. On 1st June, 2012 the company decided to issue to equity shareholders bonus shares at
the rate of 2 shares for every 5 shares held and for this purpose, it decided to utilize the capital reserves to the
maximum possible extent.
Pass journal entries for all the above mentioned transactions. Also prepare the notes on Share Capital and Reserves
and Surplus relevant to the Balance Sheet of the company immediately after the issue of bonus shares. (8 marks)
Answer:
In the books of Brite Ltd.
Journal Entries
Date Particulars L.F. Dr. Cr. ìn lakhs` in lakhs 2012 Equity Share Final Call A/c Dr. 2,000 April 2 To Equity
Share Capital A/c 2,000
(Final call of`2 per share on`10 crore
equity shares made due)
Bank A/c Dr. 2,000 To Equity Share Final Call A/c 2,000
(Final call money on ` 10 crore equity
shares received)
June 1 Capital Reserve A/c Dr. 485 Capital Redemption Reserve A/c Dr. 1,000 Securities Premium A/c Dr. 2,000
General Reserve A/c Dr. 515 To Bonus to Shareholders A/c 4,000
(Bonus issue of two shares for every five
shares held by utilising various reserves
as per Board’s resolution dated....)
Bonus to Shareholders A/c Dr. 4,000 To Equity Share Capital A/c 4,000
(Capitalisation of profit)
Notes on Share Capital and Reserves & Surplus

Particulars ` in lakhs 1. Share Capital
Authorised share capital
20 crore shares of ` 10 each 20,000
Issued, subscribed and fully paid up share capital
14 crore Equity shares of ` 10 each, fully paid up 14,000
(Out of the above, 4 crore equity shares @` 10
each were issued by way of bonus)
2 crore, 11% Cumulative Preference share
capital of ` 10 each, fully paid up 2,000
Reserves and Surplus 16,000
2. Capital Reserves
Less : Utilized for bonus issue 485 ☐ Capital Redemption reserve (485) Less : Utilized for bonus issue 1,000
Securities Premium (1,000) ☐ Less : Utilized for bonus issue 2,000 General Reserve (2,000) ☐ Less : Utilized for
bonus issue 1,040 525
Surplus (Profit and Loss Account) (515) 273
Total 798
Notes : As per SEBI Guidelines, Capital reserve and Securities premium have been assumed as realized in cash and
hence can be used for issue of fully paid bonus shares.
Q.1.5 2014 - May [7] (e) Practical Answer the following:
(e) Following items appear in the Trial Balance of Saral Ltd. as on 31st March, 2014:
Particulars Amount (`) 4,500 Equity Shares of ` 100 each 4,50,000 Capital Reserve (including ` 40,000 being
profit on sale of 90,000 Plant)
Securities Premium 40,000 Capital Redemption Reserve 30,000 General Reserve 1,05,000 Profit and Loss Account
(Cr. Balance) 65,000
The company decided to issue to equity shareholders bonus shares at the rate of 1 share for every 3 shares held.
Company decided that there should be the minimum reduction in free reserves. Pass necessary Journal Entries in the
books Saral Ltd. (4 marks)
Answer:
In the books of Saral Ltd.
Journal Entry
Particulars L.F. Dr. Amt. Cr. Amt. (`) (`)
1. Capital Reserve A/c Dr. 40,000

Capital Redemption Reserve A/c Dr. 30,000
Securities Prem. A/c Dr. 40,000
General Reserve A/c Dr. 40,000
To Bonus Shareholders A/c 1,50,000 (Being Bonus issue of 1 share for every
3 share held, by utilising various reserves)
2. Bonus Shareholders A/c Dr. 1,50,000
To Equity Shares Capital A/c 1,50,000 (Being Capitalisation of profit)
Q.1.6 2016 - June [1] (e) Practical Following is the extract of balance sheet of Sunrise Ltd. as on 31st March, 2015:
` Issued and subscribed capital:

40,000, 10% Preference shares of ` 10 each fully paid 4,00,000 1,80,000 Equity shares of ` 10 each, ` 7.50 paid-up
13,50,000 Reserves and surplus:
Capital reserve 1,60,000 General reserve 2,00,000 Securities premium 40,000 Surplus 3,20,000
The company made the final call of ` 2.50 per share from equity shareholders and duly received it. Thereafter, it was
decided to capitalise its reserves by issuing bonus shares at the rate of 1 share for every 3 shares held. Capital
reserve includes ` 80,000 being profit on exchange of machinery.
Pass journal entries with necessary assumptions. (5 marks) [CS Exe - I]
Answer:
Journal Entries in the Books of Sunrise Ltd. Sr. Particulars Amount Amount No. Dr.` Cr. ` 1. Equity Share
Final Call A/c Dr. 4,50,000
To Equity Share Capital A/c 4,50,000 (Being final call made on 180000 equity
shares of` 2.50 each)
2. Bank A/c Dr. 4,50,000
To Equity Share Final Call A/c 4,50,000 (Being final call money received)
3. Capital Reserve A/c Dr. 80,000

Securities Premium A/c 40,000
General Reserve A/c 2,00,000
Profit & Loss A/c 2,80,000
To Bonus to Equity Shareholders A/c 6,00,000 (Being utilizations of reserves and profit &
loss balance for issue of bonus share in the
ratio of 1 : 3)
4. Bonus to Equity Shareholders A/c Dr. 6,00,000 To Equity Shareholder A/c 6,00,000 (Being issue of bonus share)
Q.1.7 2018 - May [6] (b) Practical Following are the balances appear in the trial balance of Arya Ltd. as at 31st
March, 2018.
Issued and Subscribed Capital: ` 10,000; 10% Preference Shares of ` 10 each fully paid. 1,00,000
1,00,000 Equity Shares of ` 10 each, ` 8 paid up 8,00,000
Securities Premium (collected in cash) 25,000

On 1st April, 2018 the company has made final call @ ` 2 each on 1,00,000 Equity Shares. The call money was
received by 15thApril, 2018. Thereafter the company decided to issue bonus shares to equity shareholders at the rate
of 1share for every 5 shares held and for this purpose, it decided that there should be minimum reduction in free
reserves. Pass Journal entries. (5 marks)
Answer:
In the books of Arya Ltd.
Journal Entries
2018 Dr. (` ) Cr. (` )
April, 1 Equity Share Final Call A/c Dr. 2,00,000 To Equity Share Capital A/c 2,00,000 (Being Final call of`2 per
share on
100000 equity shares due as per
Board’s Resolution dated)
April, 15 Bank A/c Dr. 2,00,000 To Equity Share Final call A/c 2,00,000 (Being Final call money on
1,00,000 equity shares received)
Securities Premium A/c Dr. 25,000 General Reserve A/c Dr. 1,75,000
To Bonus to Shareholders A/c 2,00,000 (Being Bonus issue @ one shares

for every five shares held by
utilizing various reserves as per
Board’s resolution dated –)
April, 15 Bonus to Shareholders A/c Dr. 2,00,000 To Equity Share Capital A/c 2,00,000 (Being capitalisation of
profit)

Following is the extract of Balance Sheet of Prem Ltd. as at 31st March, 2018:
Authorized capital `
30,00,0003,00,000 equity shares of ` 10 each
25,000, 10% preference shares of ` 10 each 2,50,000
32,50,000
2,70,000 equity shares of ` 10 each fully paid up 27,00,000 24,000, 10% preference shares of`10 each fully paid up
2,40,000 29,40,000
Reserves and surplus:

Capital redemption reserve 1,20,000
Securities premium (in cash) 75,000
Profit and loss account 6,00,000
11,55,000
On 1st April, 2018, the company decided to capitalize its reserves by way of bonus at the rate of two shares for every
five shares held. Show necessary journal entries in the books of the company and prepare the extract of the balance
sheet after bonus issue. (5 marks)
Q.1.9 RTP Practical The Balance Sheet of ABC Ltd. as at 31st March, having Net Assets ` 17,00,000 contained the
following:
Liabilities `
Share Capital : Authorised : 1,50,000 Equity Shares of`10 each 15,00,000 Issued, Subscribed and Paid up: 80,000
Equity Shares of ` 7.50 each called up and paid-up 6,00,000
Reserves : Capital Redemption Reserve 1,50,000

Plant Revaluation Reserve 20,000
Development Rebate Reserve 2,30,000
Investment Allowance Reserve 2,50,000
Total 17,00,000
The Company wanted to issue Bonus Shares to its Shareholders at the rate of One Share for every Two Shares held.
Necessary resolutions were passed, requisite legal requirements were complied with.
Requires:
(a) Give effect to the proposal by passing Journal Entries in the books of
the Company,
(b) Show the amended Balance Sheet.
Answer:
Journal Entries in the Books of the ABC Ltd. S. No. Particulars Dr. (`) Cr. (`) 1. Equity Share Final Call A/c
Dr. 2,00,000
To Equity Share Capital A/c 2,00,000 (Being Final Call of ` 2.50 each on 80,000
Equity Shares to make them fully paid up)
2. General Reserve A/c Dr. 2,00,000
To Bonus to Equity Shareholders A/c 2,00,000 (Being transfer from General Reserve to
make Party Paid up Shares, fully paid up)
3. Bonus to Equity Shareholders A/c Dr. 2,00,000
To Equity Share Final Call A/c 2,00,000 (Being amount due on Final Call adjusted
against transfer from General Reserve to
Bonus to Shareholders A/c)
4. Securities Premium A/c Dr. 1,50,000

Capital Redemption Reserve A/c Dr. 1,50,000
General Reserve (3,00,000–2,00,000) Dr. 1,00,000
(balancing figure)
To Bonus to Shareholders A/c 4,00,000 [Being appropriation made to facilitate issue
of Fully Paid up Bonus Shares at the rate of
1 share for every 2 shares held, i.e. for Total
Bonus Value of ` 4,00,000 (1 share ÷ 2
shares × 80,000 shares × ` 10 per shares)]
To Equity Share Capital A/c 4,00,000 (Being the issuance of 40,000 fully paid up
shares of ` 10 each by way of Bonus)
Working Note:
1. Reserves not available for Bonus Issue: Plant Revaluation Reserve, Development Rebate Reserve and
Investment Allowance Reserve, cannot be used for any type of Bonus Issue.
2. Types of Bonus Issue: There are two types of Bonus Issue in the above case :
(a) Converting` 7.50 Paid Up Shares into ` 10 Paid Up: Securities Premium and Capital Redemption Reserve
cannot be used for this purpose. So, the Company can utilize General Reserve and P&L A/c only for this purpose.
(b) Issuing Additional Shares to Holders of Fully Paid Shares: Securities Premium and Capital Redemption
Reserve can be fully utilized for this purpose. For balance requirement, General Reserve and P&L A/c may be used.
The Paid up Capital of ABC Ltd. is `10,00,000 consisting of 60,000 Equity Shares of ` 10 each fully paid up and
50,000 Equity Shares of ` 10 each, ` 8 per share paid up. It has ` 40,000 in Securities Premium Account, ` 2,00,000
in Profit and Loss A/c (Cr.)` 3,00,000 in General Reserve and ` 60,000 in Capital Redemption Reserve Account.
By way of Bonus Dividend, the Partly Paid up Shares are converted into Fully Paid Up Shares, and the holders of
Fully Paid up Shares are also allotted Fully Paid Up Bonus Shares in the same ratio.
Pass Journal Entries showing separately the two types of Bonus Issues stated above. It is desired that there should be
minimum reduction in Free Reserves.
Answer:
Journal Entries in the Books of the ABC Ltd. S. No. Particulars Dr. (`) Cr. (`) 1. Equity Share Final Call A/c
Dr. 1,00,000
To Equity Share Capital A/c 1,00,000 (Being Equity Share Final Call of` 2 per share
due on 50,000 Shares as per Board’s
Resolution No. ..... dated....)
2. General Reserve A/c Dr. 1,00,000
To Bonus to Equity Shareholders A/c 1,00,000 (Being bonus declared for making Partly Paid
Shares fully paid, as per Shareholders
Resolution .... dated....)
To Equity Share Final Call A/c 1,00,000 (Being utilisation of Bonus Payable towards
payment of Equity Share Final Call of ` 2 per
Share on 50,000 Shares)
4. Securities Premium A/c Dr. 40,000
Capital Redemption Reserve A/c Dr. 60,000 General Reserve A/c (balance figure) Dr. 50,000
To Bonus to Equity Shareholders A/c 1,50,000 (Being bonus declared for issuing Fully Paid-up
Shares as per Shareholders Resolution dated
.....)(Refer Note 2 above)
To Equity Share Capital A/c 1,50,000 (Being issue of 15,000 Fully Paid Shares of
` 10 each as Bonus Shares in the ratio of one
Share for every four Shares, as per Board’s
Resolution dated .....)
Note:
1. Additional Shares issued: Ratio of Bonus declared on partly paid shares is`2 for every`8 Paid-up Capital. So,
Bonus Shares are issued at the rate of 1 for every 4 Shares held. Hence, the amount of Bonus payable to the holders
of Fully Paid Shares is (1 Bonus Share ÷ 4 Shares Held) × 60,000 Shares × ` 10 Issue Price = ` 1,50,000.
2. Bonus issue can be done by:
(a) Converting 50,000 ` 8 Paid Up Shares into ` 10 Paid Up: Securities Premium and Capital Redemption Reserve
cannot be used for this purpose. Hence, the Company can utilize General Reserve and P&L Account only for this
purpose.
(b) Issuing Additional Shares to the holders of fully paid shares: Securities Premium and Capital Redemption
Reserve can be fully utilized for this purpose. For the balance requirements, General Reserve and Profit and Loss
Account may be used.
Q.1.11 RTP Practical Following is the extract of the Balance Sheet of Xeta Ltd. as at 31st March, 2017:
`
Authorised capital:
50,000 12% Preference shares of ` 10 each 5,00,000
4,00,000 Equity shares of ` 10 each 40,00,000
45,00,000
Issued and Subscribed capital:

24,000 12% Preference shares of ` 10 each fully paid 2,40,000
2,70,000 Equity shares of ` 10 each, ` 8 paid up 21,60,000
On 1st April, 2017, the Company has made final call @ ` 2 each on 2,70,000 equity shares. The call money was
received by 20th April, 2017. Thereafter, the company decided to capitalize its reserves by way of bonus at the rate
of one share for every four shares held.
You are required to give necessary journal entries in the books of the company and prepare the extract of the balance
sheet as on 30th April, 2017 after bonus issue.
Answer:
Journal Entries in the books of Xeta Ltd. ` ` 1-4-2017 Equity share final call A/c Dr. 5,40,000
To Equity share capital A/c 5,40,000 (For final calls of ` 2 per share on
2,70,000 equity shares due as per
Board’s Resolution dated….)
20-4-2017 Bank A/c Dr. 5,40,000
To Equity share final call A/c 5,40,000 (For final call money on 2,70,000
equity shares received)
Securities Premium A/c Dr. 1,00,000

Profit and Loss A/c Dr. 2,15,000
To Bonus to shareholders A/c 6,75,000 (For making provision for bonus issue
of one share for every four shares held)
Bonus to shareholders A/c Dr. 6,75,000 To Equity share capital A/c 6,75,000
(For issue of bonus shares)
Extract of Balance Sheet as at 30th April, 2017 (after bonus issue) `
Authorised Capital
50,000 12% Preference shares of `10 each 5,00,000
4,00,000 Equity shares of `10 each 40,00,000
Issued and subscribed capital
24,000 12% Preference shares of `10 each, fully paid 2,40,000
3,37,500 Equity shares of `10 each, fully paid 33,75,000
(Out of above, 67,500 equity shares @ `10 each were
issued by way of bonus)
Reserves and surplus
2
Q. 2.1 2011 - June [2] (a)
Distinguish between the following :
(i) ‘Bonus shares’ and ‘rights shares’. Answer:

Following are the main points of distinction between bonus shares & right shares:
Basic
1. Meaning
Right Issue
Distinguish Between
(3 marks) [CS Exe - I]
2. Cash flow Bonus Shares Bonus shares are shares issued by a company free of cost to its existing shareholders on
a pro rata basis out of free
reserve.
In case of bonus issue there is no cash flow.
3. Consideration
4. Authorization
5. Market value
C o mp a n y d o es n o t receive any consideration in case of bonus issue. Bonus issue is made on the
recommendation of t h e B o a r d a n d a u t h o r i z a t i o n f r o m general meeting of the company.
Issue of bonus shares does not affect the market value of the company.
Right Shares
When company issues further shares to existing shareholder in ratio of their holding such issue is known as right
issue.
In case of right issue there is cash inflow to the company.

C o m p a n y r e c e i v e s consideration as shares are issued against cash. In case of right issue a u t h o r i z a t i o n
f r o m m e m b e r s t h r o u g h o r d i n a r y o r s p e c i a l resolution is necessary.
Right issue of shares affects the market value of the company.

6. Section It is governed by Sec. 63 It is governed by Sec. 62
of the Companies Act, of the Companies Act, 2013. 2013.

Q. 2.2 2015 - Dec [1] (d) Descriptive
Fitness Ltd. is planning to raise funds by making rights issue of equity shares to part finance its expansion. The
existing equity share capital of the company is`40 lakh and the market value is`45 per share. The company offered to
its shareholders the right to buy 2 shares at` 12 each for every 5 shares held. You are required to calculate –
(i) Theoretical market price per share after the rights issue; (ii) The value of rights; and
(iii) Percentage increase in share capital. (5 marks) [CS Exe - I] Answer:
(i) Calculation of Theoretical Market Price per Share after the Right Issue:
Theoretical
Market Price = No. of Shares before No. of Shares Issued as Right Issue × Market + Right Issue × Right Issue Price
Price
N o . o f S h a r e s + No. of Shares Issued as outstanding before Right Issue

Right Issue
=
=
= =` 35.57 (ii) The Value of Rights = Market Price - Theoretical Market Price = 45 – 35.57 = 9.43
(iii) Percentage increase in Share Capital: = × 100
= × 100 = 40% Working Notes:
1. No. of Shares Outstanding at Beginning = = 4,00,000 Shares
2. No. of Shares Issued as Right Issue = 4,00,000 × = 1,60,000 Shares. Space to write important points for revision
Q. 2.3 RTP Practical
The Share of ABC Ltd of a Face Value of `10 is being quoted at` 24. The Company has a plan to make a Rights
Issue of one Equity Share for every four shares currently held at a Premium of 40% per Share. You are required to –
1. Determine the Minimum Price that can be expected of Share after the
issue.
2. Calculate the Theoretical Value of the Rights alone.
3. Show the effect of the Right Issue on the wealth of a Shareholder who has 1,500 Shares, if
(a) He sells the entire rights, and (b) He ignores the rights.
Answer:
Theoretical Value of Right:
Ratio 1 : 4
Ex-Rights Price per share = = ` 22

☐ Issue Price = 10 + 40% = ` 14
Rights Value = ` 8
☐ Value of Right = = ` 2
2. Effect on the Wealth of a Shareholder
Particulars Sells Rights Ignores Rights Before Value of 1,500 Shares ` 24 × 1,500 =` 36,000 ` 24 × 1,500 =` 36,000 Rights
After No. of Shares after Right issue 1,500 + 375 = 1,875 1,500
Rights Wealth of shares ` 22 × 1,875 =` 33,000 ` 22 × 1,500 =` 33,000
Sale proceeds of rights (` 8 × ` 3,000 Nil 375)
Total Value after Rights ` 36,000 ` 33,000
Effect of Rights Issue on Nil Loss (` 3,000) the Wealth
ABC Limited’s shares are currently selling at ` 13 per share. There are 10,00,000 shares outstanding. The Company
is planning to raise ` 20 Lakhs to finance a new project. Required:
What is the Ex-Right Price of Shares and the Value of a right, if (a) The Firm offers one right share for every two
Shares held. (b) The Firm offers one right share for every four Shares held.
Answer:
Computation of Ex-Rights Price and Value of a right
Ratio No. of Rights Issue Ex-Rights Price per Shares Rights Shares Price Value
1 : 2 ` 6 or ` 3 per share = 5 Lakhs =` 4 = ` 10
1 : 4 ` 4 or ` 1 per share = 2.50 Lakhs =` 8 =` 12 Space to write important points for revision
Q.2.5 RTP Practical
Zeta Ltd. has decided to increase its existing share capital by making rights issue to its existing shareholders. Zeta
Ltd. is offering one new share for every two shares held by the shareholder. The market value (cum-right) of the
share is` 360 and the company is offering one right share of ` 180 each to its existing shareholders. You are required
to calculate the value of a right. What should be the ex-right value of a share?
Answer:
Ex-right value of the shares
Value of right = (Cum-right value of the existing shares + Rights shares x Issue Price) /(Existing Number of shares +
Number of Right shares)
= (`360 x 2 Shares +`180 x 1 Share)/(2 + 1)
Shares
= ` 900 / 3 shares =` 300 per share. = Cum-right value of the share – Ex-right
value of the share

= ` 360 –` 300 = ` 60 per share.
Hence, any one desirous of having a confirmed allotment of one share from the company at` 180 will have to pay`
120 (2 shares x` 60) to an existing shareholder holding 2 shares and willing to renounce his right of buying one share
in favour of that person.

Q.2.6 RTP Practical
Right issue
A company offers new shares of` 100 each at 25% premium to existing shareholders on one for four basis. The cum-
right market price of a share is ` 150. Calculate the value of a right
Answer :
Ex-right value of the shares = (Cum-right value of the existing shares + Rights shares Issue Price) / (Existing
Number of shares + Rights Number of shares)
= (` 150 X 4 Shares + ` 125 X 1 Share) / (4 + 1) Shares
=` 725 / 5 shares =` 145 per share.
Value of right = Cum-right value of the share – Ex-right value of the share =` 150 –` 145 = ` 5 per share.
CHAPTER
7
Redemption of Preference Shares
Chapter Comprises: ☹Purpose of Issuing Redeemable Preference Shares ☹Provisions of The Companies Act
(Section 55) ☹Methods of Redemption of Fully Paid-Up Shares ☹Redemption of Partly Called-Up Preference Shares
☹Redemption of Fully Called But Partly Paid-Up Preference Shares

Legend
book.
1.371
TIME MANAGER
i.e.....
............ Day 1
Instant
Revision (in hours)

i.e.... i.e. on ........... ...........
Day 2 Day 8
. . . . . . . . . . . Plan and Manage your Time Periodic Revision

(in hours)

1. Budgeted
2. Actual
3. Variance (1-2)
2.6, 4.1
1 Provisions of Companies Act (Section 55)
Q.1.1 2011 - June [4] (b) Descriptive
What are the conditions which must be fulfilled for redemption of preference shares ? (6 marks) [CS Exe - I]
Answer:
As per Sec. 55 of the Companies Act, 2013 the conditions which must be fulfilled for redemption of preference
shares are as follows: 1. Such shares must be fully paid up.
2. Such shares shall be redeemed only out of profits or out of the proceeds
of a fresh issue of shares made for the purpose of redemption. 3. In case the company proposes redemption of shares
out of the profits
of the company, there shall, out of such profits, be transferred, a sum
equal to the nominal amount of the shares to be redeemed, to a
reserve, to be called the Capital Redemption Reserve Account, and the
provisions of this Act relating to reduction of share capital of a company
shall, except as provided in this section, apply as if the Capital
Redemption Reserve Account were paid-up share capital of the
company.
The capital redemption reserve account may be applied by the
company, in paying up unissued shares of the company to be issued to
members of the company as fully paid bonus shares.
4. Certain class of companies as may be prescribed and whose financial
statements comply with the accounting standards prescribed under
Section 133, for such class of companies, the premium if any, payable
on redemption shall be provided for out of the profits of the company,
before the shares are redeemed. For other companies 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.
5. No company limited by shares shall after the commencement of the
companies issue any preference shares which is irredeemable or is
redeemable after the expiry of a period of twenty years from the date of
issue.
Method of Redemption of fully paid up Shares: 2 Redemption of Preference Shares by Fresh Issue of Shares
Q.2.1 2009 - June [4] (a) Practical
Jolly Ltd. has the following balance sheet as on 31st March, 2008: Liabilities ` Share capital :
Issued, subscribed and fully paid-up
(10,000 equity shares of `100 each) 10,00,000

5,000 Preference shares of `100 each 5,00,000
Capital reserve 1,00,000
Securities premium account 1,00,000
Current liabilities 10,00,000
30,00,000
Assets
Property, Plant and Equipment 22,00,000
Current assets 8,00,000
30,00,000
The preference shares are to be redeemed at 10% premium. Fresh issue of equity shares is to be made to the extent it
is required under the Companies Act, 2013 for the purpose of this redemption. The shortfall in funds for the purpose
of the redemption after utilising the proceeds of the fresh issue are to be met by taking a bank loan. Show journal
entries. (6 marks) [CS Exe - I]
Answer: Journal Entries in the Books of Jolly Ltd.

Date Particulars Dr. (`) Cr. (`) Securities Premium A/c Dr. 50,000 To Premium on Redemption of Preference
Shares Account 50,000 (Utilization of securities premium on Redemption of

Preferences Shares)
General Reserves A/c Dr. 2,00,000 Profit & Loss Account Dr. 1,00,000
To Capital Redemption Reserve A/c 3,00,000 (Creation of Capital Redemption Reserve to the
maximum possible extent)
Bank A/c Dr. 2,00,000 To Equity Share Application and Allotment A/c 2,00,000
(Receipt of money for equity shares of ` 2,00,000)
Equity Share Application and Allotment Account Dr. 2,00,000 To Equity Share Capital Account 2,00,000
(Allotment of equity shares of the face value of
` 2,00,000 at par)
Preference Share Capital Account Dr. 5,00,000 Premium on Redemption of Preference Share A/c Dr. 50,000
To Sundry Preference Shareholders A/c 5,50,000 (Amount payable to sundry preference shareholders to
redeem 5,000 preference shares of` 100 each at a
premium of ` 10 per share)
Bank A/c Dr. 3,50,000 To Bank Loan Account 3,50,000

(Raising a bank loan to pay off the amount due to
sundry preference shareholders)
Sundry Preference Shareholders Account Dr. 5,50,000 To Bank A/c 5,50,000

(Payment made to sundry preference shareholders)
Q.2.2 2016 - June [3] (a) Practical Extract of ledger balances of Kalpana Ltd. as on 31stMarch, 2015 includes the
following:
` 2,000, 12% Preference shares of ` 100 each, fully paid 2,00,000

Surplus 40,000
Under the terms of issue, the preference shares are redeemable on 31st March, 2015 at a premium of 10%. The
directors desire to make a minimum fresh issue of equity shares of`10 each at a premium of 5% for redemption
purpose.
You are required to ascertain the amount of fresh issue to be made and pass necessary journal entries in the books of
the company. (5 marks) [CS Exe - I] Answer:
Calculation of no. of shares to be issued on Redemption of Preference Shares:
Face value of preference shares to be redeemed 2,00,000 Add: Premium on Redemption 20,000 2,20,000 Less: (i)
Balance in Securities Premium A/c 12,000 (ii) Balance in Profit & Loss A/c 40,000 Amount of fresh issue 52,000
1,68,000
No. of shares required to be issued =

= = 16000 shares
Equity share capital = 16000 × 10 = 1,60,000

Securities premium = 16000 × 0.50 = 8,000
Total 1,68,000
Journal Entries
(In the books of Kalpana Ltd.)
Date Particulars Amount Amount Dr.` Cr. `
2015 Bank A/c Dr. 1,68,000 Mar, To Equity Share Capital A/c 1,60,000 31 To Securities Premium A/c 8,000
(Being 16000 equity shares of` 10 each issued at a

premium of 5%)
" Securities Premium A/c Dr. 20,000 To Premium on Redemption of Preference
Shares A/c 20,000 (Being premium on redemption of preference shares

provided)
" Profit & Loss A/c Dr. 40,000

To Capital Redemption Reserve A/c 40,000 (Being amount transferred to capital Redemption
Reserve A/c not covered by fresh issue)
" 12% Redeemable Preference Share Capital A/c Dr. 2,00,000 Premium on Redemption of Pref. Shares A/c Dr.
20,000
To Preference Shareholders A/c 2,20,000 (Being amount due to Preference Shareholders on

redemption of 12% Preference shares)
" Pref. Shareholders A/c Dr. 2,20,000 To Bank A/c 2,20,000 (Being payment made to Preference Shareholders)
Dheeraj Limited had 5,000 10% Redeemable Preference Shares of `100 each, fully paid up. The company had to
redeem these shares at a premium of 10%.
It was decided by the company to issue the following:

(i) 40,000 Equity Shares of ` 10 each at par
(ii) 2,000 12% Debentures of ` 100 each.

The issue was fully subscribed and all accounts were received in full. The payment was duly made. The company
had sufficient profits. Show journal entries in the books of the company. (10 marks)
Answer:
In the books of Dheeraj Limited
Journal Entries
Date Particulars Dr. (`) Cr. (`)
Bank A/c Dr. 4,00,000 To Equity Share Capital A/c 4,00,000

(Being the issue of 40000 equity shares
of ` 10 each at par as per Board’s
Resolution No – dated –)
Bank A/c Dr. 2,00,000 To 12% Debenture A/c 2,00,000

(Being the issue of 2000 Debentures of
`100 each as per Board’s Resolution No
– dated – )
10% Redeemable Preference Share
Capital A/c Dr. 5,00,000
Premium on Redemption of Preference
Shares A/c Dr. 50,000 To Preference Shareholders A/c 5,50,000
(Being the amount payable on
redemption transferred to preference
shareholders account)
Preference Shareholders A/c Dr. 5,50,000 To Bank A/c 5,50,000
(Being the amount paid on redemption of
preference shares)
Profit & Loss A/c Dr. 50,000 To Premium on Redemption of
Preference Shares A/c 50,000 (Being the adjustment of premium on

redemption against Profit & Loss Account)
Profit & Loss A/c Dr. 1,00,000 To Capital Redemption Reserve A/c 1,00,000
(Being the amount transferred to Capital
Redemption Reserve Account as per the
requirement of the Act.)
Working Note:
1. Amount to be transferred to Capital Redemption Reserve Account Face Value of shares to be redeemed ` 5,00,000
Less: Proceeds from new issue (` 4,00,000) Total Balance ` 1,00,000 Space to write important points for revision
Q.2.4 2018 - Nov [6] (d) Descriptive
Answer of the following:

Explain the conditions when a company should issue new equity shares for redemption of the preference shares.
Also discuss the advantages and disadvantages of redemption of preference shares by issue of equity shares. (5
marks)
Answer:
A company may prefer issue of new equity shares on the basis of following conditions:
1. When the company 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.
2. When the balance of profit, which would otherwise be available for dividend, is insufficient.
3. When the liquidity position of the company is not good enough. Advantages of redemption of preference
shares by issue of fresh equity shares:
1. No cash outflow of money is required now or later.
2. New equity shares may be valued at a premium
3. Shareholders retain their equity interest.
Disadvantages of redemption of preference shares by issue of fresh equity shares:
1. There will be dilution on future earnings:
2. Share-holding in the company is changed.
Q.2.5 2019 - May [5] (a) Practical The Summarized Balance Sheet of Clean Ltd. as on 31st March, 2019 is as
follows:
Particulars (`) EQUITY AND LIABILITIES:

1. Shareholder’s funds:
(a) Share Capital 5,80,000

(b) Reserves and Surplus 96,000
2. Current Liabilities:
Total 7,89,000
ASSETS:
1. Non-Current Assets
Tangible Assets 6,90,000
(b) Non-current investments 37,000
2. Current Assets
Cash and cash equivalents (Bank) 62,000
Total 7,89,000
The Share Capital of the company consists of ` 50 each Equity shares of ` 4,50,000 and ` 100 each 8% Redeemable
Preference Shares of ` 1,30,000 (issued on 1.4.2017)
Reserves and Surplus comprises statement of profit and loss only. In order to facilitate the redemption of preference
shares at a premium of 10%, the Company decided :
(a) to sell all the investments for ` 30,000.
(b) to finance part of redemption from company funds, subject to, leaving
a Bank balance of ` 24,000.

(c) to issue minimum equity share of` 50 each at a premium of` 10 per
share to raise the balance of funds required.
You are required to
1. Pass Journal Entries to record the above tran sactions. 2. Prepare Balance Sheet as on completion of the above
transactions. (10 marks)
Answer:
1. Journal Entries
Bank A/c Dr. 75,000 To Share Application A/c 75,000

(For application money received on 1250
shares @ ` 60 per share)
Share Application A/c Dr. 75,000 To Equity Share Capital A/c 62,500 To Securities Premium A/c 12,500
(For disposal of application money
received)
Preference Share Capital A/c Dr. 1,30,000

Premium on Redemption of Preference
Shares A/c Dr. 13,000
To Preference Shareholders A/c 1,43,000 (For amount payable on redemption of
preference share)
Profit and Loss A/c Dr. 13,000 To Premium on Redemption of 13,000 Preference shares A/c
(For writing off premium of redemption out

of profit)
Bank A/c Dr. 30,000 Profit and Loss A/c Dr. 7,000
To Investment A/c 37,000 (For sale of investment at a loss of

` 7000)
Profit and Loss A/c Dr. 67,500 To Capital Redemption Reserve A/c 67,500
(For transfer to CRR out of divisible profit
an amount equivalent to excess of
nominal value of preference shares over
proceeds (face value of equity shares) i.e.
` 1,30,000 - ` 62,500)
Preference Shares A/c Dr. 1,43,000

To Bank A/c 1,43,000
(For payment of preference shareholders)
Balance Sheet (After Redemption)

Particulars Note No. `

(1) Shareholders’ fund

Total 7,14,000
II. Assets
(1) Non Current Assets
Property Plant and Equipment
(2) Current Assets
Cash and Cash Eq. (Bank) 3 24,000
Total 7,14,000
Notes to Accounts
` 1. Share Capital
Equity Share Capital (4,50,000 + 62,500) 5,12,500 2. Reserves and Surplus
Capital Redemption Reserve 67,500 Profit and Loss Account
(96,000 – 13,000 – 7,000 – 67,500) 8,500

88,500
3. Cash and Cash Equivalents

Balances with Bank
(62,000 + 75,000 + 30,000 – 1,43,000) 24,000
Working Note:
1. Calculation of Number of Shares:
` Amount Payable on Redemption 1,43,000 Less: Sale Price of Investment (30,000)
1,13,000
Less: Available Bank Balance (62,000 – 24,000) (38,000) Fund from fresh issue 75,000
No. of Shares = 75,000/60 = 1250 shares
Q.2.6 RTP Practical
The capital structure of a AP Ltd. consists of 20,000 Equity Shares of `10

each fully paid up and 1,000 8% Redeemable Preference Shares of`100
each fully paid up (issued on 1.4.2011).
Undistributed reserve and surplus stood as: General Reserve` 80,000; Profit and Loss Account` 20,000; Investment
Allowance Reserve out of which` 5,000, (not free for distribution as dividend) ` 10,000; Cash at bank amounted to`
98,000. Preference shares are to be redeemed at a Premium of 10% and for the purpose of redemption, the directors
are empowered to make fresh issue of Equity Shares at par after utilising the undistributed reserve and surplus,
subject to the conditions that a sum of ` 20,000 shall be retained in general reserve and which should not be utilised.
Pass Journal Entries to give effect to the above arrangements and also show how the relevant items will appear in
the Balance Sheet of the company after the redemption carried out.
Answer : In the books of AP Ltd.

Journal Entries
Date Particulars Dr. (`) Cr. (`) Bank A/c Dr. 25,000 To Equity Share Capital A/c 25,000
(Being the issue of 2,500 Equity Shares of

`10 each at par, as per Board’s Resolution
No…..dated…….)
8% Redeemable Preference Share Capital A/c Dr. 1,00,000 Premium on Redemption of Preference
Shares A/c Dr. 10,000 To Preference Shareholders A/c 1,10,000
(Being the amount paid on redemption

transferred to Preference Shareholders
Account)

preference shares)
Profit and Loss A/c Dr. 10,000 To Premium on Redemption of
Preference Shares A/c 10,000
(Being the premium payable on redemption

is adjusted against Profit and Loss
Account)
General Reserve A/c Dr. 60,000

Profit and Loss A/c Dr. 10,000
Investment Allowance Reserve A/c Dr. 5,000
To Capital Redemption Reserve A/c 75,000

requirement of the Act)
Balance Sheet as on ………[Extracts]

Particulars Notes No ` Equity and Liabilities
1. Shareholders’ funds
(a) Share capital 1 2,25,000
Total ? Assets
2. Current Assets
Cash and cash equivalents (98,000 + 25,000 13,000

– 1,10,000)
Total ? Notes to accounts

1. Share capital
22,500 Equity shares (20,000 + 2,500) of`10 each fully paid up 2,25,000

Capital Redemption Reserve 75,000
Investment Allowance Reserve 5,000
1,00,000
Working Note:
No of Shares to be issued for redemption of
Preference Shares:
Face value of shares redeemed `1,00,000 Less: Profit available for distribution as dividend:
General Reserve : ` (80,000-20,000) ` 60,000
Profit and Loss (20,000 – 10,000 set aside for

adjusting premium payable on redemption of
preference shares) ` 10,000
Investment Allowance Reserve: ( ` 10,000 – 5,000) ` 5,000 (` 75,000

` 25,000
Therefore, no. of shares to be issued = 25,000/ ` 10 = 2,500 shares. Space to write important points for revision
Method of Redemption of Fully Paid up 3 Shares: Redemption of Preference Share by Capitalisation of

Undistributed Profits
Q.3.1 2013 - June [3] (b) Practical
Shreya Ltd. had an issue of 1,000, 12% redeemable preference shares of ` 100 each, repayable at a premium of 10%.
These shares are to be redeemed now out of the accumulated reserves, which are more than the necessary sum
required for redemption. Show the necessary entries in the books of the company, assuming that the premium on
redemption of shares has to be written off against the company’s securities premium reserve account. (6 marks) [CS
Exe - I]
Answer: In the books of Shreya Ltd. Journal Entries
Date Particulars Debit Credit Amount Amount (`) (`)
12% Redeemable Preference Shares Capital A/c Dr. 1,00,000 Premium on redemption A/c Dr. 10,000
To Preference Shareholders A/c 1,10,000 (Being the amount due to redeemable preference
shareholders on redemption)
Securities Premium A/c Dr. 10,000 To Premium on Redemption A/c 10,000

(Being premium on redemption provided out of
securities premium reserve)
General Reserve A/c Dr. 1,00,000 To Capital Redemption Reserve A/c 1,00,000
(Being the amount of redeemed out of profits
transferred to capital redemption reserve account)

(Being amount paid on redemption to preference
shareholders)

Q.3.2 2016 - Dec [2A] (Or) (iii) Practical
Lily Ltd., having sufficient balance to the credit of general reserve and ` 1,00,000 balance in securities premium
account, decides to:
– Redeem 5,000, 10% redeemable preference shares of`100 each fully
paid-up at a premium of 5%; and

– Capital redemption reserve arising as a result of redemption be utilised in allotting the un-issued shares of the
company as fully paid equity shares of` 10 each by way of bonus to its members.
Show journal entries for redemption of preference shares and issue of bonus shares. (5 marks) Answer:
Journal entries in the books of Lily Ltd.
Particulars Dr. (`) Cr. (`)
(i) 10% Redeemable Preference Share Capital A/c Dr. 5,00,000 Premium on redemption A/c Dr. 25,000
To Preference Shareholders 5,25,000 (Amount due to redeemable preference share holders

on redemption at 5% premium)
(ii) Security Premium A/c Dr. 25,000 To Premium on redemption A/c 25,000 (Premium on redemption provided)
(iii) General Reserve A/c Dr. 5,00,000 To Capital Redemption Reserve A/c 5,00,000 (Amount of redemption
transferred)
(iv) Preference Shareholders A/c Dr. 5,25,000 To Bank 5,25,000 (Amount paid to preference shareholders)
(v) Capital Redemption Reserve A/c Dr. 5,00,000
To Equity Shareholders 5,00,000 (Issue of 50,000 equity shares as fully paid up bonus
shares to existing equity shareholders)

Q.3.3 RTP Practical
The following are the extracts from the Balance Sheet of Meera Ltd. as on 31st December, 2017.
Share capital: 60,000 Equity shares of ` 10 each fully paid – ` 6,00,000; 1,500 10% Redeemable preference shares of
` 100 each fully paid – `1,50,000.
Reserve & Surplus: Capital reserve – ` 75,000; Securities premium – `75,000; General reserve –`1,12,500; Profit and
Loss Account –`62,500 On 1st January 2018, the Board of Directors decided to redeem the preference shares at
premium of 10% by utilisation of reserve. You are required to prepare necessary Journal Entries including cash
transactions in the books of the company.
Answer:
In the books of Meera Limited
Journal Entries
Date Particulars Dr. (`) Cr. (`) 2018
Jan 1 10% Redeemable Preference Share Dr. 1,50,000

Capital A/c
Premium on Redemption of Pref. shares Dr. 15,000
To Preference Shareholders A/c 1,65,000 (Being the amount payable on
redemption transferred to Preference
Shareholders Account)

preference shares)
Profit & Loss A/c Dr. 15,000 To Premium on Redemption of Pref. 15,000 Shares
(Being adjustment of premium on
redemption)
Profit & Loss A/c Dr. 37,500 To Capital Redemption Reserve A/c 1,50,000
requirement of the Act)
Note: Securities premium and capital reserve cannot be utilized for transfer to Capital Redemption Reserve.
4
Redemption of Partly Called-Up Preference Shares
Q.4.1 RTP Practical
The Balance Sheet of ABC Ltd. as at the beginning of a financial year, inter alia, includes the following: (`) 50,000
8% Preference Shares of ` 100 each ` 70 paid up 35,00,000 1,00,000 Equity Shares of ` 100 each fully paid up
1,00,00,000 Securities Premium 5,00,000 Capital Redemption Reserve 20,00,000 General Reserve 50,00,000 Under
the terms of their issue, the Preference Shares are redeemable at the end of the year at a Premium of 5%. In order to
finance the redemption, the Company makes a Rights Issue of 50,000 Equity Shares of`100 each at`110 per
Share,`20 being payable on Application,`35 (including Premium) on Allotment and the balance to be called in the
next financial year. The issue was fully subscribed and allotment made on 1st December. The Moneys due on
allotment were promptly received by the end of the year.
The Preference Shares were redeemed after fulfilling the necessary conditions of the Companies Act. The Company
decided to make the minimum utilisation of General Reserve. Assume that Securities Premium A/c is usable for
providing the Premium on redemption of Preference Shares. You are asked to pass the necessary Journal Entries and
show the relevant extracts from the Balance Sheet as at the end of the year with the corresponding figures for the
previous year.
Answer:
1. Journal Entries in the books of ABC Ltd. (in` 000`s) Particulars Dr. (`) Cr. (`) 1. 8% Preference Share Final
Call A/c Dr. 15,00
To 8% Preference Share Capital A/c 15,00 (Being Final Call made on 50,000 Preference
Shares at` 30 each to make them Fully Paid Up
prior to redemption)
2. Bank A/c 15,00
To 8% Preference Share Final Call A/c 15,00 (Being Final Call amount received on 50,000
Preference Shares at ` 30 each)
3. Bank A/c 10,00
To Equity Share Application A/c 10,00 (Being the Application Money received on 50,000
Equity Shares at ` 20 per Share)
4. Equity Share Application A/c 10,00
To Equity Share Capital A/c 10,00 (Being the Application Money on 50,000 Equity
Shares transferred to Equity Share Capital A/c
vide Board’s Resolution No.... dated.....)
5. Equity Share Allotment A/c 17,50
To Equity Share Capital A/c 12,50

To Securities Premium A/c 5,00
(Being amount due on allotment of 50,000 Equity
Shares at` 35 per share including Premium`10,
vide Board’s Resolution No.... dated ........)
6. Bank A/c 17,50
To Equity Share Allotment A/c 17,50 (Being Allotment Money received on 50,000
Equity Shares at ` 35 per Share)
7. 8% Preference Share Capital A/c 50,00 Premium on Redemption of Preference Shares A/c 2,50
To Preference Shareholders A/c 52,50 (Being the amount payable to Preference

Shareholders on redemption at 5% Premium)
8. Securities Premium A/c 2,50 To Premium on Redemption of Preference

shares A/c 2,50
(Being Premium Payable on Redemption of

Preference Shares provided out of Securities
Premium A/c)
9. General Reserve A/c 27,50
To Capital Redemption Reserve A/c 27,50 (Being amount transferred to CRR on Redemption
of Preference Shares for the balance not covered
by proceeds of Fresh Issue of Shares, i.e. Face
Value of PSC redeemed` 50 Lakhs Less Face
Value of Fresh Issue ` 22.50 Lakhs, excluding
Securities Premium)
10. Preference Shareholders A/c 52,50 To Bank A/c 52,50 (Being payment made to Preference Shareholders)
2. Extract of Balance Sheet of ABC Ltd. as at ......(after redemption of Preference Shares) (` 000's) Particulars
(1) Shareholders’ Funds: (a) Share Capital
(b) Reserves and Surplus

Note This Year Previous Year
1 12,250 13,500 2 7,750 7,500
Authorised:
Issued,
Subscribed and Paid Up:
Particulars This Previous Year Year .......Equity Shares of... each

.......Preference Shares of .... each
1,00,000 Equity Shares of ` 100 each

Fully Paid Up 1,00,00 1,00,00
50,000 Equity Shares of`100 each`45
Called Up and Paid Up 22,50 —
8% 50,000 Redeemable Preference
Shares of ` 100 each, ` 70 Called Up
and Paid Up (redeemed during the year) — 35,00
Total 12,250 13,500 Reconciliation of Number and Amount of Shares (all figures for this year)
ESC`100 each ESC`100,` 45 Paid Up Pref. Shares of`100 eachParticulars Number Amt` 000's Number Amt ` 000's Number Amt ` 000's
Opening Balance 1,00,000 1,00,00 – – 50,000 @` 70 = 35,00

Add: Fresh Issue – – 50,000 @` 45 = 22,50 Final Call @` 30 = 15,00
Less: Redemption/ – – – – 50,000 (50,00) Buyback

Closing Balance 1,00,000 1,00,00 50,000 @` 45 = 22,50 – –
Note 2: Reserves and Surplus
Particulars This Previous Year Year
Capital Redemption Reserve 4,750 2,200

Securities Premium Account 750 500
Other Reserves – General Reserve 2,250 5,000
Total 7,750 7,500
Reserves and Surplus (showing Appropriations and Transfers) (all figures for this year) Particulars Opening
Balance Additions Deductions
Capital Redemption Reserve

Securities Premium Account
O t h e r R e s e r ve s (General Reserves)
Total
20,00 From Gen Res. = 27,50 –
Closing Balance 47,50
5,00
50,00 Fresh Issue = 5,00 P r e m . o n P S C Redemption = 2,50
– Tfr to CRR = 27,50 7,50
22,50
75,00 32,50 30,000 77,50 Space to write important points for revision
5
Redemption of Fully Called But Partly Paid-Up Preference Shares
Q.5.1 2008 - Dec [2] (b) Practical
Following is the balance sheet of Anupam Ltd. as on 31st March, 2008 : Liabilities ` ` 2,00,000, 14% Preference
shares
of ` 100 each, fully called 2,00,00,000
Less : Calls in arrears 4,00,000 1,96,00,000 @ ` 20 per share
10,00,000 Equity shares of ` 10
each, ` 8 per share called 80,00,000

Less : Calls-in-arrears 20,000
79,80,000
Add : Calls-in-advance 10,000 79,90,000 Securities premium 5,10,000 General reserve 1,50,00,000 10,000, 15%
Debentures @ ` 1,000 each, fully paid 1,00,00,000 Current liabilities and provisions 10,00,000 5,41,00,000 Assets
Fixed assets 1,30,00,000 Investments 28,00,000 Other current assets 2,15,00,000 Cash and bank balances
1,68,00,000 5,41,00,000 On 1st April, 2008, the Board of directors decided that —
(i) The fully paid preference shares are to be redeemed at a premium of 4% on 1stMay, 2008 and for that purpose 6
lakh equity shares of ` 10 each are to be issued at a premium of 5%.
(ii) 3,000 Equity shares owned by Mohan, an existing shareholder, who has failed to pay the allotment money and
the first call money @`3 and`2.50 per share respectively, equity shares are to be forfeited on 31st May, 2008.
(iii) The final call of ` 2 per share is to be made on 7th July, 2008 on equity shares.
All the above are duly complied with according to schedule. The amount due on the issue of fresh issue and on final
call are also duly received except from Sohan who had failed to pay the first call for his 1,400 equity shares, has
again failed to pay the final call also. These shares of Sohan are to be forfeited on 31st August 2008.
Show the necessary journal entries. (9 marks) [CS Exe - I]
Answer: Journal Entries

Date Particulars Dr. (`) Cr. (`) 2008 Bank A/c Dr. 63,00,000 May To Equity Shares Capital A/c 60,00,000
To Securities Premium A/c 3,00,000 (Being Equity Shares issued at premium)

Securities Premium A/c Dr. 7,20,000 To Premium on Redemption of
Redeemable Preference Shares A/c 7,20,000 (Being Premium on Redemption of

Preference shares provided)
General Reserve A/c Dr. 1,20,00,000 To Capital Redemption Reserve A/c 1,20,00,000
(Being capital redemption reserve account
created)
14% Preference Share Capital A/c Dr. 1,80,00,000 Premium on Redemption A/c Dr. 7,20,000
To Preference Shareholders A/c 1,87,20,000 (Being amount due to preference

shareholders)
Preference Shareholders A/c Dr. 1,87,20,000 To Bank A/c 1,87,20,000

(Being paid to preference shareholders)
May Equity Share Capital A/c Dr. 24,000 31 To Equity Shares Allotment A/c 9,000 To Equity Share 1st Call A/c
7,500 To Forfeited Shares A/c 7,500
(Being 3,000 shares forfeited due to non

payment of calls)
July Equity Share Final Call A/c Dr. 19,94,000 7 To Equity Shares Capital A/c 19,94,000
(Being final call due on equity shares)

Bank A/c Dr. 19,81,200
Calls in Advance A/c Dr. 10,000
To Equity Share Final Call A/c 19,91,200 (Being Final Call received on Equity Shares)
Aug Equity Share Capital A/c Dr. 14,000 31 To Equity Share 1st Call A/c 3,500 To Equity Share 2nd Call A/c 2,800
To Forfeited Shares A/c 7,700
(Being 1,400 shares forfeited due to non

payment of calls)
CHAPTER
8Redemption of Debentures
Chapter Comprises: Introduction ☹Redemption of Debentures ☹Debenture Redemption Reserve ☹Methods of

Redemption of
Debentures

Legend
book.
1.399
TIME MANAGER
i.e.....
1. Budgeted
2. Actual
3. Variance (1-2)
............ Day 1 5
Instant
Revision (in hours)

i.e.... i.e. on ........... ...........
Day 2 Day 8
1.15 1
. . . . . . . . . Plan and Manage your Time Periodic Revision
(in hours)

0.45 0.1 0.1

4.4
1.2, 3.3, 3.9, 5.2
1 Debenture Redemption Reserve
Q.1.1 2015 - May [3] (a) Descriptive
Comment on adequacy of Debenture Redemption Reserve (DRR) w.r.t. following:
Debentures issued by
(i) All India Financial Institutions regulated by Reserve Bank of India and
Banking companies.
(ii) For other Financial Institutions within the meaning given in the
Companies Act.
(iii) For debentures issued by NBFCs registered with the RBI. (iv) For debentures issued by other companies
including manufacturing and infrastructure companies. (4 marks) [IPCC Gr. II]
Answer:
Adequacy of DRR:
(i) All India Financial institutions regulated by RBI and Banking Companies:
☐ DRR is not required for debentures issued by all India Financial
institutions as regulated by RBI & Banking Companies. (ii) For other Financial institutions within the meaning
given in the Companies Act.
☐ DRR is created of 25% of the value of outstanding debentures
issued through public issue and no DRR is required in case of privately placed debentures.
(iii) For debentures issued by NBFCS registered with RBI: ☐ DRR is created of 25% of the value of outstanding
debentures issued through public issue and no DRR is required in case of privately placed debentures.
(iv) For debentures issued by other companies including manufacturing and infrastructure companies:
☐ DRR is created of 25% of the value of outstanding debentures
issued through public issue and DRR of 25% is also required in case of privately placed debentures by listed
companies. Space to write important points for revision
Q.1.2 RTP Practical ABC Ltd. has Authorized Capital of 8,00,000 Equity Shares of ` 10 each.
But out of these 2,40,000 shares have been issued as fully paid. The Company has an outstanding 14% Debentures
Loan of ` 24,00,000 redeemable at 102% and Interest has been paid up to date. The Directors resolved to redeem the
Debentures on 1st January and the Holders are given an option to receive payment either wholly in cash or wholly in
fully Paid Equity Shares @ 8 Shares for every ` 100 of Debentures. On that date, the balance of the Debenture
Redemption Reserve Account is`20,00,000 and corresponding Investment Account`20,00,000 (at cost) of which the
Market Value is ` 18,00,000.
75% of the Holders decided to exercise the option for taking Shares in repayment and cash for the rest is procured
by realizing an adequate amount of Investment at the prevailing Market Value.
Draw up Journal Entries (including Cash Book Entries) to give effect to the above transactions.
Answer:
Working Note:
` 1. For every ` 100 Debenture, amount payable on
Redemption including Premium = 102

Less : Face Value of 8 shares of` 10 each to be issued for redemption of each debenture (8 ×` 10) 80
Premium on Issue of 8 shares 22
So, Premium on issue of each share =`22 ÷ 8 shares = ` 2.75
2. Shares to be issued on conversion = 8 shares for every` 100 Debenture =
1,44,000
shares 3. Investments Cost = ` 20,00,000 but Market Value =`18,00,000. So Mkt Value realizable = 90% of Cost.
So, to realise` 6,12,000 for payment, Cost of Investments to be sold = ` 6,12,000 ÷ 90% = 6,80,000
Journal Entries
Particulars Debit Credit (`) (`)
1. 14% Debentures A/c Dr. 24,00,000 Premium on Redemption of Debentures A/c Dr. 48,000
To Debentureholder A/c 24,48,000 (Being amount payable on redemption of

` 24,00,000 Debentures at 2% Premium )
2. Profit and Loss A/c 48,000
To Premium on Redemption of Debenture A/c 48,000 (Being Premium on Redemption provided out of
Profits.)
Note: Alternatively, General Reserve A/c,
Debenture Redemption Reserve A/c, may be
used for this purpose.
3. Debentureholder A/c ` 24,48,000 × 75% Dr. 18,36,000 To Equity Share Capital A/c (1,44,000 ×`10) 14,40,000 To
Securities Premium A/c (1,44,000 × 3,96,000
` 2.75)
(Being issue of 1,44,000 shares of`10 each at a
premium of` 2.75 per share to 75% debenture
holders who exercised conversion option)
(WN 1 and 2)
4. Bank A/c ( ` 24, 48,000 × 25%) Dr. 6,12,000

Profit & Loss A/c (6,80,000 × 10%) or
(Balancing figure) Dr. 68,000
To D e b e n t u r e Redemption R e s e r v e
Investment A/c (WN. 3) 6,80,000 (Being investment sold and loss transferred to
Profit and Loss A/c)
5. Debentureholders A/c (24,48,000 × 25%) Dr. 6,12,000
To Bank A/c 6,12,000 (Being cash payment for settlement to debenture
holders of 25%)
6. Debenture Redemption Reserve A/c Dr. 19,32,000
(` 20,00,000 - 68,000)
To General Reserve A/c 19,32,000 (Being balance of Debenture Redemption
Reserve transferred on 100% redemption)
7. Investment A/c Dr. 13,20,000
To Debe n t u r e R e d e mp t ion Reserve
Investment A/c (20,00,000 - 6,80,000) 13,20,000 (Being balance of Debenture Redemption Reserve
Investment transferred to Investment (General) A/c)
2 Methods of Redemption of Debentures

Q.2.1 2016 - May [3] (b), RTP Descriptive Mention the ways by which Redeemable Debentures may be redeemed
under Companies Act, 2013. (4 marks) [IPCC Gr. II]
Answer:
The following are the ways by which Redeemable Debentures may be redeemed:
1. By Payment in Lumpsum
2. By Payment in Instalments
3. R e d e m p t i o n by Purchase in t h e o p e n market
In this method, the payment of entire debt is made in one lot at the expiry of a specified period (i.e. at maturity) or
even before expiry of the specified period after passing necessary resolution at the meeting of the debenture holders.
In this method, the payment of specified portion of debentures debt is made in instalments at specified rates for e.g.,
a debentures of ` 100 may be discharged as 20% or`20 on 1/1/2011, 20% or`20 on 1/1/2013, 30% or` 30 on
1/1/2015, 30% or` 30 on 1/1/2017 or etc.
When a company purchases its own debentures in the open market for the purpose of cancellation, such an act of
purchasing and cancelling the debentures constitutes redemption by purchase in the open market.

3
Methods of Redemption of Debentures: Redemption by Purchase in Open Market
A Company purchased its own 11% debentures in the open market for ` 50,00,000 (cum-interest). The interest
amount included in the purchase price is ` 1,50,000. The face value of the debentures purchased is ` 52,00,000. The
Company cancelled the debentures so purchased.
Pass Journal Entries in the books of the Company for purchase and immediate cancellation of debentures. (4 marks)
[IPCC Gr. II]
Answer :
Particulars Dr. ` Cr. `
11% Own debenture Account Dr. 48,50,000
Deb. Interest A/c Dr. 1,50,000 To Bank 50,00,000
[Being the purchase of cum-interest own
debentures from the market]
11% debenture Account Dr. 52,00,000 To Own Debenture Account 48,50,000 To Capital Reserve 3,50,000
[Being profit on cancellation of own debentures
transferees to Capital Reserve Account]
Q.3.2 2010 - Nov [1] {C} (i) Practical
Rama Limited issued 8% Debentures of `3,00,000 in earlier year on which interest is payable half yearly on 31st
March and 30th September. The company has power to purchase its own debentures in the open market for
cancellation thereof. The following purchases were made during the financial year 2009-10 and cancellation made
on 31st March 2010 : (a) On 1st April ` 50,000 nominal value purchased for ` 49,450, exinterest.
(b) On 1stSeptember`30,000 nominal value purchased for`30,250 cum interest.

Show the Journal Entries (without narrations) for the transactions held in the year 2009-10. (5 marks) [IPCC Gr. II]
Answer :
In the books of Rama Limited
Journal Entries
1st April, Own debentures A/c Dr. 49,450 2009 To Bank A/c 49,450 1st Sept. Own debentures A/c Dr. 29,250 2009
Interest on own debentures A/c Dr. 1,000 [30,000 x 8% x ]
To Bank A/c 30,250
30th Sept., Interest on debentures A/c Dr. 12,000

2010 To Bank A/c 8,800 To Interest on own debentures A/c 3,200
31st March, Interest on debentures A/c Dr. 12,000

2010 To Bank A/c 8,800 To Interest on own debentures A/c 3,200
31st March, 8% Debentures A/c Dr. 80,000

2010 To Own debentures A/c 78,700 To Profit on cancellation of
Debentures A/c 1,300
31st March, Interest on own debentures A/c Dr. 5,400
2010 To Profit and Loss A/c 5,400 (3,200 + 3,200 - 1,000)
31st March, Profit and Loss A/c (12,000 + 12,000) Dr. 24,000
2010 To Interest on debentures A/c 24,000
31st March, Profit on cancellation of debentures A/c Dr. 1,300 2010 To Capital reserve A/c 1,300 Space to write
Q.3.3 2011 - Nov [1] {C} (c), RTP Practical
On 1stApril, 2010, A Ltd had outstanding in its books 1,00,000 Debentures of`100 each, interest @ 12% per annum.
The interest on debentures was paid half-yearly on 30th September and 31st March of every year. On 31st May, 2010
the company purchased 30,000 Debentures of its own @` 98 (ex-interest) per debenture. The company cancelled the
debentures so purchased on 31st March, 2011.
Pass the necessary Journal Entries to record the above transactions for the year ended 31st March, 2011. (5 marks)
[IPCC Gr. II]
Answer :
In the books of ‘A’ Limited
Journal Entries
2010 Investment in own debentures A/c Dr. 29,40,000 May, Debenture interest A/c Dr. 60,000
31st To Bank A/c 30,00,000 (Being the purchase of own 30,000
debentures @ ` 98 ex-interest)
Sep. Debenture interest A/c Dr. 5,40,000 30th To Bank A/c 4,20,000
To Interest on own debentures A/c 1,20,000 (Being interest @ 12% paid on 70,000
debentures and adjustment of interest on
30,000 own debentures for 4 months)
2011 Debenture interest A/c Dr. 6,00,000 March, To Bank A/c 4,20,000 31sth To Interest on own debentures A/c
1,80,000
(Being interest @ 12% paid on 70,000

debentures and adjustment of interest on
30,000 own debentures for 6 months)
March, 12% Debentures A/c Dr. 30,00,000 31st To Investment in own debentures A/c 29,40,000
To Capital reserve A/c 60,000 (Being cancellation of 30,000,12% own

debentures)
March, Profit and Loss A/c Dr. 12,00,000 31st To Debenture interest A/c 12,00,000 (Being total interest transferred
to Profit &
Loss Account)
March, Interest on own debentures A/c Dr. 3,00,000 31st To Profit and Loss A/c 3,00,000 (Being total interest on
own debentures
credited to Profit & Loss Account)
Himalayas Ltd. had `10,00,000/- 8% Debentures of`100 each as on 31st March, 2011. The company purchased in the
open market following debentures for immediate cancellation:
On 01-07-2011 ☐ 1000 debentures @ ` 97/(cum interest) On 29-02-2012 ☐ 1800 debentures @ 99/(ex interest)
Debenture interest due date is 30th September and 31st March. Give Journal Entries in the books of the company for
the year ended 31st March, 2012. (8 marks) [IPCC Gr. II]
Answer: In the books of Himalayas Ltd.

Journal Entries
Date Particulars Dr.` Cr. ` 1.07.2011 Own Debentures A/c Dr. 95,000
Debenture Interest A/c Dr. 2,000
[1,000 × 100 × 8% × (3/12)]
To Bank A/c 97,000 (Being 1,000 Debentures purchased @
` 97 cum interest for immediate
cancellation)
1.07.2011 8% Debentures A/c Dr. 1,00,000
To Own Debentures A/c 95,000 To Capital reserve A/c 5,000 (Profit on cancellation of debentures)
(Being profit on cancellation of 1,000
Debentures transferred to capital reserve
account)
30.09.2011 Debenture interest A/c Dr. 36,000
[9,000 × 100 × 8% × (½)]
To Debentureholders A/c 36,000 (Being interest accrued on 9,000
debentures and credited to debenture
holders account)
Debentureholders A/c Dr. 36,000
To Bank A/c 36,000 (Being interest amount paid)
29.02.2012 Own Debentures A/c Dr. 1,78,200
Debenture Interest Account A/c Dr. 6,000
[1,800 × 100 × 8% × (5/12)]
To Bank A/c 1,84,200 (Purchase of 1,800 Debentures @ ` 99
ex-interest for immediate cancellation)
29.02.2012 8% Debentures A/c Dr. 1,80,000
To Own Debentures A/c 1,78,200 To Capital reserve A/c 1,800 (Profit on cancellation of debentures)
(Being profit on cancellation of 1,800
account)
31.03.2012 Debentures Interest A/c Dr. 28,800
[7,200 × 100 × 8% × (½)]
To Debentureholders A/c 28,800 (Being interest accrued on 7,200
debenturesandcreditedto
debentureholders account)
31.03.2012 Debentureholders A/c Dr. 28,800
To Bank A/c 28,800 (Being amount paid)
31.03.2012 Profit and Loss A/c Dr. 72,800
To Debentures Interest A/c 72,800 (Being interest on debentures for the year
transferred to profit and loss account at
the year end)

Q.3.5 2015 - May [3] (b) Practical M/s. Piyush Ltd. had the following among their ledger opening balances on
January 1, 2014:
`
11% Debenture A/c (2002 issue) 80,00,000

Debenture Redemption Reserve A/c 70,00,000
13.5% Debenture in Sneha Ltd. A/c (Face Value`30,00,000) 29,00,000
Own Debentures A/c (Face Value ` 30,00,000) 27,00,000
As 31st December, 2014 was the date of redemption of the 2002
debentures, the company started buying own debentures and made the following purchases in the open market:
1-2-2014 - 5000 debentures at ` 98 cum-interest
1-6-2014 - 5000 debentures at ` 99 ex-interest.
Half yearly interest is due on the debentures on 30th June and 31st December in the case of both the companies.
On 31stDecember, 2014, the debentures in Sneha Ltd. were sold for`95
each ex-interest. On that date, the outstanding debentures of M/s. Piyush Ltd. were redeemed by payment and by
cancellation.
Show the entries in the following ledger accounts of M/s. Piyush Ltd. during 2014:
(i) Debenture Redemption Reserve Account,
(ii) Own Debenture Account.
The face value of a debenture was ` 100. (12 marks) [IPCC Gr. II]
Answer:
(i) Debenture Redemption Reserve Account 2014 ` 2014
D e c . To 13.5% Deb. in Jan. 1 31 Sneha Ltd. 50,000 D e c . (Loss on sale of 31 investment)

To General
Reserve (transfer) 77,67,500
78,17,500 `
By Balance b/d 70,00,000

By 13.5% Deb. in
Sneha Ltd. 4,05,000
By Own Deb. A/c 4,12,500
(Interest on own
Deb.)
78,17,500
(ii) Own Debentures Account
Nominal Interest Amount Nominal Interest Amount 2014 ` ` ` 2014 ` ` ` Jan. 1 To Balance 30,00,000 _ 27,00,000 J u n e By Debenture
b/d
Feb. 1 To Bank 5,00,000 4,583
June 1 To Bank 5,00,000 22,917
Dec. 31 To Capital
Reserve
(profit on
cancella
tion)
To D e b e n 4,12,500
30
4,85,417 Interest A/c 2,20,000
4,95,000 D e c . By Debenture
31 Interest A/c 2,20,000
3,19,583 By 11%
Debentures
Account -
cancellation 40,00,000 40,00,000 ture

Redem ption
Reserve
40,00,000 4,40,000 40,00,000 40,00,000 4,40,000 40,00,000

Working Note:
1. 13.5% Debentures in Sneha Ltd.
2014
Jan. 1 To Balance b/d (30,00,000) D e c . To Debenture 31 Redemption Reserve
2.
2014
Interest Amount Interest Amount ` ` 2014 ` ` 29,00,000 42184 By Bank 2,02,500 Dec.31 By Bank 2,02,500
4,05,000 By Bank 28,50,000

By Debenture 50,000
Redemption
Reserve
(Loss on sale)
4,05,000 29,00,000 4,05,000 29,00,000 11% Debentures Account

` 2014 `
Dec. 31 To Own Debentures A/c 40,00,000 Jan. 1 By Balance b/d 80,00,000
To Bank 40,00,000
80,00,000 80,00,000 3. Cost of debentures purchased on 1.2.2014` Purchase price of debentures [5,000 x 98 (cum-
interest)] 4,90,000 Less: Interest (4,583)
4,85,417 4. Cost of debentures purchased on 1.6.2014
Purchase price of debentures [5,000 x 99(ex-interest)] 4,95,000 Space to write important points for revision

Gurudev Limited purchases for immediate cancellation 6,000 of its own 12% debentures of ` 100 each on 1st
November, 2017. The dates of interest being 31st March, and 30th September. Pass necessary journal entries relating
to the cancellation if:
(i) Debentures are purchased at ` 98 ex-interest.

(ii) Debentures are purchased at ` 98 cum-interest. (5 marks)
Answer:
In the books of Gurudev Limited
Journal Entries
30/09/17 Debenture Interest A/c Dr. 36,000 [6,000 × 100 × 12% × (½)]
To Debenture holders A/c 36,000 (Being deb. interest accrued)

Debenture holders A/c Dr. 36,000
To Bank A/c 36,000 (Being interest amount paid)
01/11/17 Own Debentures A/c Dr. 5,88,000

[6,000 × 100 × 12% × 1/12]
To Bank A/c 5,94,000 (Purchase of 6000 Debentures @ 98
ex–interest for immediate cancellation)
01/11/17 12% Debentures A/c Dr. 6,00,000
To Own Debentures A/c 5,88,000 To Capital Reserve A/c 12,000 (Being profit on cancellation of 6,000
account)
01/11/17 Own Debenture A/c Dr. 5,82,000
[6,000 × 100 × 12% × 1/12]
To Bank A/c 5,88,000 (Being 6,000 Debentures Purchased @
98 cum-interest for immediate cancellation)
01/11/17 12% Debentures A/c Dr. 6,00,000
To Own Debentures A/c 5,82,000 To Capital Reserve A/c 18,000 (Being profit on cancellation of 6,000
debentures transferred to capital Reserve
Account)
31/03/17 Profit and Loss A/c Dr. 36,000
To Debenture Interest 36,000 (Being interest on debentures for the year
transferred to Profit and Loss account at
the year end)
A Company had issued 1,000 12% debentures of `100 each redeemable at the company’s option at the end of 10
years at par or prior to that by purchase in open market or at` 102 after giving 6 months notice. On 31st December,
2016, the accounts of the company showed the following balances:
On debenture redemption fund`53,500 represented by 10% Govt. Loan of a nominal value of`42,800 purchased at an
average price of`101 and ` 10,272 uninvested cash in hand.
On 1st January 2017, the company purchased ` 11,000 of its own debentures at a cost of ` 10,272.
On 30th June 2017, the company gave a six months notice to the holders of ` 40,000 debentures and on 31st
December, 2017 carried out the redemption by sale of ` 40,800 worth of Govt. Loan at par and also cancelled the
own debentures held by it.
Prepare ledger account of Debenture Redemption Fund Account and Debenture Redemption Fund Investment
Account for the year ended 31.12.2017, assuming that, interest on company debentures & Govt. loan was payable on
31st December every year. (8 marks)
Answer:
Debenture Redemption Fund Account
Date Particulars ` Date Particulars ` 31.12.17 To Debenture Redemption 408 1.1.17 By Balance b/d 53,500
Fund Investment A/c

To Premium on redemption 800 31.12.17 By Interest on DRFI 4,280 of debentures
To Balance c/d 57,892

(10% of ` 42,800)
By Interest on own 1,320 debentures (i.e. 12% on` 11,000
59,100 1.1.18 59,100 To Balance b/d 57,892
Debenture Redemption Fund Investment Account Date Particulars ` Date Particulars `

1.1.17 To Balance b/d 31.12.17 By Bank A/c 40,800 (428 ×` 101) 43,228
1.1.17 To Bank 10,272
31.12.17 To Capital Reserve (Profit 728 o n c a n c e l l a t i o n o f Debentures)

By Debenture 408 redemption Fund
(1% of` 40,800)
By 12% Debentures 11,000 By Balance c/d 2,020
54,228
1.1.18 To Balance b/d 2,020
54,228
Q.3.8 RTP Practical
ABC Ltd. issued ` 10,00,000, 6% Debenture Stock at par on 21.01.2014. Interest was payable on 30th June and 31st
December, in each year. Under the terms of the, Debenture Trust Deed the stock is redeemable at par. The Trust
Deed obliges the Company to pay to the Trustees on 31.12.2015, and annually thereafter the sum of` 1,00,000 to be
utilised for the redemption and cancellation of an Equivalent Amount of Stock, which is to be selected by drawing
lots.
Alternatively, the Company is empowered as from 01.01.2015, to purchase its Own Debentures on the Open Market.
These Debentures must be surrendered to the Trustees for cancellation and any adjustments for Accrued Interest
recorded in the Books of Account. If in any year, the Nominal Amount of the stock surrendered under this
alternative does not amount to` 1,00,000, then the shortfall is to be paid by the company to the Trustees in cash on
31st December.
The following Purchases of Stock were made by the Company.
Date Nominal Value of Stock purchased (`)

30.09.2015 1,20,000
31.05.2016 75,000
31.07.2017 1,15,000
Purchase Price per ` 100 of stock (`)
98(Cum Interest) 95(Ex-Interest)

92(Cum Interest)
Assuming that the Company fulfilled all its obligations under the Trust Deed, prepare the following Ledger
Accounts - (a) Debenture Stock A/c, (b) Debenture Redemption A/c, and (c) Debenture Interest A/c. Ignore costs of
transaction and taxation.
Answer:
1. 6% Debenture Stock A/c
Date Particulars 30.09.2015 To Debenture Redemption A/c Purchase for
Cancellation 31.12.2015 To balance c/d

(bal. fig.)
Total 31.05.2016 To Debenture Redemption A/c Purchase for
Cancellation 31.12.2016 To Debenture

Redemption A/c
shortfall made
over to Trustees
To balance c/d
(bal. fig.)
Total 31.07.2017 To Debenture
Redemption A/c Purchase for Cancellation To balance c/d (bal. fig.)
Total ` Date Particulars ` 1,20,000 01.01.2015 By balance b/d 10,00,000

8,80,000
10,00,000 Total 10,00,000 75,000 01.01.2016 By balance b/d 8,80,000
25,000
7,80,000
8,80,000 Total 8,80,000 1,15,000 01.01.2017 By balance b/d 7,80,000
6,65,000
7,80,000 Total 7,80,000 2. Interest Paid on Debentures p.a.
Date Amount of Periods Interest at 6% p.a. Debentures (in`) (in Months) (in`) (A) (B) (C) = [(A) x (B)]/12
30.06.2015 10,00,000 6 30,000 30.09.2015 1,20,000 3 1,800 31.12.2015 8,80,000 6 26,400 31.05.2016 75,000 5
1,875 30.06.2016 8,05,000 6 24,150 31.12.2016 8,05,000 6 24,150 30.06.2017 7,80,000 6 23,400 31.07.2017
1,15,000 1 575 31.12.2017 6,65,000 6 19,950 Assumption:
It has been assumed that Debentures are purchased for immediate cancellation.
3. Debenture Interest A/c
Date Particulars ` Date Particulars `
30.06.2015 To Bank 30,000 31.12.2015 By Profit and Loss 58,200

30.09.2015 To Bank 1,800 A/c (trf)
(Note)
31.12.2015 To Bank 26,400
31.05.2016 To Bank 1,875 31.12.2016 By Profit and Loss 50,175 (Note) A/c (trf)
30.06.2016 To Bank 24,150
31.12.2016 To Bank 24,150
30.06.2017 To Bank 23,400 31.12.2017 By Profit and Loss 43,925

31.07.2017 To Bank 575 A/c (trf)
(Note)
31.12.2017 To Bank 19,950
Total 43,925 Total 43,925 Note: Interest paid on Debentures redeemed during the year can be shown through
Debenture Redemption A/c also.
4. Debenture Redemption A/c Date Particulars 30.09.2015 To Bank
[(1,200 x 98) - 1,800]
To P&L (Profit on Cancellation) (Note 2(b)) Total
31.05.2016 To Bank [(750 x 95) To P & L ( P r o f i t o n
Cancellation)
31.12.2016 To B a n k - s h o r t f a l l
(1,00,000 - 75,000)
Total
31.07.2017 To Bank
[(1,150 x 92) - 575]
To P&L (Profit on Cancellation) (Note 2(h)) Total

` Date Particulars `
1,15,800 30.09.2017 By Debenture 1,20,000 Stock A/c

4,200
1,20,000 Total 1,20,000 71,250 31.05.2016 By Debenture 75,000 3,750 Stock A/c
25,000 31.12.2016 By Debenture 25,000 Stock A/c
1,00,000 Total 1,00,000 1,05,225 31.07.2017 By Debenture 1,15,000 Stock A/c
9,775
1,15,000 Total 1,15,000 Space to write important points for revision
Q.3.9 RTP Descriptive
ABC Limited issued 10% Debentures at par for ` 8 Lakhs. Interest was payable half yearly on 30thJune and
31stDecember every year. Under the terms of the Trust Deed, the Debentures are redeemable at par (three years after
issue) by the Company purchasing them in the Open Market and cancelling, them with a minimum redemption of`
80,000 every year. In case, there is a shortfall in redemption by the Company by Open Market Operations, the
shortfall would be made good by the Company by payment on the last day of the accounting year to the Trustees,
who would then draw lots and redeem the balance Debentures.
The Company purchased its Own Debentures for cancellation as under:
• 30.09.2018 ` 1,00,000 at ` 98 cum–interest.
• 31.05.2019 ` 60,000 at ` 95 ex–interest.
• 31.07.2020 ` 90,000 at ` 96 cum–interest.
The Company carried out its obligations under the Trust Deed. Prepare the following Ledger Accounts in the books
of the Company, for Calendar Years 2018, 2019 and 2020 - (a) Debenture A/c, (b) Debenture Redemption A/c, and
(c) Debenture Interest A/c. Ignore Taxation.
Answer:
1. 10% Debentures A/c
Date Particulars 30.09.2015 To Debentures Redemption A/c (Purchase for
Cancellation)
31.12.2015 To Balance c/d Total

31.05.2019 To Debenture
Redemption A/c (Purchase for
Cancellation)
Redemption A/c
(Shortfall made over
to Trustees)

Redemption A/c (Purchase for
Cancellation)
` Date Particulars ` 1,00,000 01.01.2018 by Balance b/d 8,00,000
7,00,000
8,00,000 Total 8,00,000 60,000 01.01.2019 By Balance b/d 7,00,000
20,000
6,20,000
7,00,000 Total 7,00,000 90,000 01.01.2020 By Balance c/d 6,20,000
5,30,000
6,20,000 Total 6,20,000 2. Computation of Interest paid on Debentures at 10% p.a. Date Amount of Period (in
Amount of
Debentures (in `) Months) Interest (in `) (A) (B) (C) = [(A) × (B)]/12 30.06.2018 8,00,000 6 40,000 30.09.2018
1,00,000 3 2,500 31.12.2018 7,00,000 6 35,000 31.05.2019 60,000 5 2,500 30.06.2019 6,40,000 6 32,000
31.12.2019 6,40,000 6 32,000 30.06.2020 6,20,000 6 31,000 31,07,2020 90,000 1 750 31.12.2020 5,30,000 6 26,500
Note: Refer Debentures A/c in WN1 for the amount outstanding as on the respective date.
3. Debenture Interest A/c
30.06.2018 To Bank 40,000 31.12.201 By Profit and 77,500

30.09.2018 To Bank (Note) 2,500 5 Loss A/c
31.12.2018 To Bank 35,000 (transfer)
31.05.2019 To Bank (Note) 2,500 31.12.201 By Profit and 66,500

30.06.2019 To Bank 32,000 9 Loss A/c
31.12.2019 To Bank 32,000 (transfer)
30.06.2020 To Bank 31,000 31.12.202 By Profit and 58,250

31.07.2020 To Bank (Note) 750 0 Loss A/c
31.12.2020 To Bank 26,500 (transfer)
Total 58,250 Total 58,250 Note: Interest paid on Debentures redeemed during the year can be shown through
Debenture Redemption A/c also.
4. Debenture Redemption A/c

30.09.2018 To Bank (98,000 – 95,500 30.09.2018 By 10% Debenture 1,00,000 2,500) [WN2 A/c
(b)]
30.09.2018 To P&L A/c (Profit 4,500

on cancellation)
Total 1,00,000 Total 1,00,000
31.05.2019 To Bank (600 × 95) 57,000 31.05.2019 By 10% 60,000

Debentures A/c
31.05.2019 To P&L A/c (60,000 3,000 31.12.2019 By 10% 20,000
– 57,000) Debentures A/c
31.12.2019 To Bank - amount 20,000
made over to
Trustees
(assumed
redeemed at
par)
31.07.2020 To Bank [(900 × 96) 85,650 31.07.2020 By 10% 90,000
– 750] Debentures A/c
31.07.2020 To P&L A/c (Profit 4,350
on Cancellation)
[WN 2(h)]

4
Methods of Redemption of Debentures: Redemption by Conversion
Q.4.1 2009 - Nov [1] (x) Descriptive “Conversion of debt into equity is a non-cash transaction.” Comment. (2
marks) [IPCC Gr. II]
Answer :
Under certain cases debenture holders are offered an option to convert their debts into equity by issuing equity share
capital. In such circumstances, debentures are redeemed by issuing fresh share capital.
Journal Entry will be as follows:

Debentures A/c Dr.
To Equity Share Capital A/c

In such entry, no cash account is opened. Therefore, one can conclude that the conversion of debt to equity is a non-
cash transaction.

Q.4.2 2009 - Nov [3] Practical The Balance Sheet of Dee Limited on 31st March, 2009 was as follows:
Balance Sheet as at 31st March, 2009
Liabilities Amount
` Share capital :
Authorised capital 50,000 equity
shares of ` 10 each 5,00,000 Issued and subscribed capital 25,000
equity shares of ` 10 fully paid up 2,50,000 Reserves and surplus :
General reserve 2,75,000 Profit and Loss A/c 1,00,000 Debenture redemption reserve 2,50,000 Secured loans :
12% convertible debentures
(5,000 Deb. of ` 100 each) 5,00,000

Other secured loans 2,50,000
Current liabilities and provisions 6,00,000
Proposed dividend 25,000
22,50,000
At the General meeting it was resolved to :

1. Pay proposed dividend of 10% in cash.
2. Give existing shareholders the option to purchase one share of ` 10 each at` 15 for every five shares held. This
option was taken up by all the shareholder.
Assets Amount `
PPE (at cost less depreciation) 8,00,000
Debenture redemption fund
investments 2,00,000
Cash balance 2,50,000
Other current assets 10,00,000
22,50,000
3. Redeem the debentures at a premium of 5% and also confer option to the debentureholders to convert 50% of
their holding into equity shares at a predetermined price of`15 per share and balance payment to be made in cash.
Holders of 3,000 debentures opted to get their debentures redeemed in cash only while the rest opted for getting the
same converted into equity shares as per the terms of issue. Debenture redemption fund investments realised `
1,80,000 on sales.
You are required to redraft the Balance Sheet after giving effects of the right issue and redemption of debentures.
Also show the calculations in respect of number of equity shares issued and cash payment.

(a) Balance Sheet of Dee Ltd.

Particulars Note No. Amount (`)

1. Shareholders’ Funds
(a) Share Capital 1 3,70,000 (b) Reserves & Surplus 2 6,40,000
2. Non - Current Liabilities

(a) Other Secured Loan
3. Current Liabilities 2,50,000 (a) Current Liabilities & Provision 6,00,000 Total 18,60,000 II. Assets
1. Non - Current Assets
(a) PPE Less Depreciation 8,00,000
2. Current Assets
(a) Cash Balance (W.N.4) 60,000 (b) Other current asset 10,00,000 Total 18,60,000
Notes to Accounts:
Particulars ` `
1. Share Capital
Authorised Share Capital
(50000 equity shares of ` 10 each) 5,00,000 Issued and Subscribed
(37,000 equity shares of`10 each fully paid up) 3,70,000
2. Reserves & Surplus
General Reserve (W.N.-2) 4,80,000 Securities Premium (W.N.-3) 60,000 Profit & Loss A/c 1,00,000 6,40,000
(b) Calculation of number of equity shares issued:

I. Number of equity shares issued as right issue (25,000 5,000 shares shares ÷ 5)
II. Debentureholders who opted for the scheme of

conversion into equity shares
2,000 debentureholders opted for the scheme` 2,00,000Total value (2,000 debentures ×` 100) ` 10,000Premium on redemption @ 5%
` 2,10,000
50% of their holding converted into equity shares ` 1,05,000
Number of equity shares to be issued to
debentureholders =7,000 shares
Total number of equity shares issued (5,000 + 7,000) 12,000 shares shares
(c) Cash payment to debentureholders:
Particulars `
I. 3,000 Debentureholders preferred cash

Total cash paid to them 3,00,000 Premium on redemption @ 5% 15,000 3,15,000 II. 2,000 Debentureholders opted
for the scheme 2,00,000
Total value 10,000

Add: Premium on redemption @ 5% 2,10,000
1,05,000
50% of their value converted into equity shares 1,05,000 Balance paid to debentureholders in cash
Total cash paid to debentureholders 4,20,000 Working Notes:

1. Debenture Redemption Reserve Account Particulars
To Premium on redemption of debentures (15,000 + 10,000)
To Loss on sale of Debenture R e d e m p t i o n R e s e r v e Investment
To General Reserve
` Particulars ` 25,000 By Balance b/d 2,50,000
20,000
2,05,000
2,50,000 2,50,000
2. General Reserve Account Particulars

To Balance c/d
` Particulars `
4,80,000 By Balance b/d 2,75,000

By Debenture redemption 2,05,000
reserve (W.N.1)
4,80,000 4,80,000
3. Calculation of Securities Premium

Number of equity shares of ` 10 issued at ` 15 per share 12,000 shares Security premium per share ` 5 Total
securities premium (12,000 shares × ` 5) ` 60,000
4. Cash Account Particulars Amount (`)

To Equity shareholders
(5,000 × 15) 75,000
To Sale of debenture Redem
ption Reserve Investment 1,80,000
5,05,000
Particulars Amount (`)
By Proposed dividend 25,000

By Debentureholders
(`1,05,000 +`3,15,000) 4,20,000

Q.4.3 2010 - May [1] (i) Practical
A Company had issued 20,000, 13% Convertible debentures of ` 100 each on 1stApril, 2007. The debentures are due
for redemption on 1stJuly, 2009. The terms of issue of debentures provided that they were redeemable at a premium
of 5% and also conferred option to the debentureholders to convert 20% of their holding into equity shares (Nominal
value ` 10) at a price of ` 15 per share. Debentureholders holding 2,500 debentures did not exercise the option.
Calculate the number of equity shares to be allotted to the Debentureholders exercising the option to the maximum.
Answer :
Calculation of number of equity shares to be allotted Particulars Number of debentures
Total number of debentures 20,000

Less : Debenture holders not opted for conversion (2,500) Debenture holders opted for conversion 17,500
Option for conversion 20% Number of debentures to be converted (20% of 17,500) 3,500
Redemption value of 3,500 debentures at a premium of 5% [3,500 × (100 + 5)] ` 3,67,500
Equity shares of ` 10 each issued on conversion
[` 3,67,500/` 15] 24,500 shares Space to write important points for revision
Q.4.4 2011 - May [7] (a), 2017 - May [7] (b) Particulars
XYZ Ltd. had issued 30,000, 15% convertible debenture of `100 each on 1stApril 2008. The debentures are due for
redemption on 1stMarch, 2011. The terms of issue of debentures provided that they were redeemable at a premium
of 5% and also conferred option to the debentureholders to convert 20% of their holding into equity shares (Nominal
Value` 10) at a price of`15 per share. Debentureholders holding 2500 debentures did not exercise the option.
Calculate the number of equity shares to be allotted to the Debenture holders exercising the option to the maximum.

Computation of number of equity debentureholders
Particulars Total number of debenture Less : Debentureholders not opted for conversion (2,500) 27,500 Option for
conversion 20% Number of debentures for conversion 5,500
shares allotted to be
No. of debenture 30,000
Redemption value at a premium of 5% (5,500 ×` 105) ` 5,77,500 Number of equity shares to be allotted 38,500
shares
Q.4.5 2013 - Nov [3] (a) Practical M Limited recently made a public issue of debentures. The following
information is available in respect of the issue:
(i) 3,00,000 partly convertible debentures of face value and issue price of ` 100 per debenture were issued;
(ii) Conversion of 50% of each debenture is to be done on expiry of 6 months from date of close of issue;
(iii) Date of closure of subscription list is 1stJune, 2012. Date of allotment is 1st July, 2012.
(iv) Interest on debenture at the rate of 12% is payable from date of allotment;
(v) Equity share of ` 10 each are issued at ` 50 per share for the purpose of conversion;
(vi) Underwriting commission is 2%;
(vii) 2,25,000 debentures were applied for;
(viii) Interest on debentures is payable half yearly on 30th September and 31st March.
Give Journal entries for all transactions relating to the above, including cash and bank entries for the year ended 31st
March, 2013.
Journal Entries in the books of M Ltd.
Date Particulars Dr. Cr. 1.6.12 Bank A/c Dr. 2,25,00,000 To D e b e n t u r e A p p l i c a t i o n a n d
Allotment A/c 2,25,00,000 (Application money received on 2,25,000
debentures @` 100 each.)
1.7.12 Debenture Application and Allotment A/c Dr. 2,25,00,000 Underwriters A/c Dr. 75,00,000 To 12%
Debentures A/c 3,00,00,000 (Allotment of 2,25,000 debentures to
applicants and 75,000 debenture to
underwriters.)
Underwriting Commission Dr. 6,00,000 To Underwriter’s A/c 6,00,000 (Commission payable to U/W @ 2% on
3,00,00,000)
Bank A/c Dr. 69,00,000 To Underwriters A/c 69,00,000

(Amount received from U/W in settlement of
A/c)
30.9.12 Debenture Interest A/c Dr. 9,00,000
To Bank A/c 9,00,000 (Interest paid on debentures for 3 months @

12% on 3,00,00,000)
1.12.12 12% Debentures A/c Dr. 1,50,00,000 To Equity Share Capital A/c 30,00,000 To Securities Premium A/c
1,20,00,000
(Conversion of 50% of debentures into
shares of ` 50 each with a face value of
` 10.)
31.3.13 Debenture Interest A/c Dr. 12,00,000
To Bank A/c 12,00,000 (Interest paid on debentures for the half

year.)
31.3.13 P&L A/c Dr. 27,00,000 To Underwriting Commission 6,00,000
To Debenture Interest 21,00,000 Working Note :
1. On 1,50,00,000 for 6 months @ 12% 9,00,000

On 1,50,00,000 for 2 months @ 12% 3,00,000
12,00,000
Q.4.6 2013 - Nov [3] (b) Practical The summarised Balance Sheet of Entyce Ltd. as on 31st March, 2013 read as
under:
Liabilities: ` Share Capital : 4,00,000 equity shares of`10 each fully paid 40,00,000 up
Debenture Redemption Reserve 35,00,000 12% Convertible Debentures, 80,000 Debentures of ` 100 80,00,000 each
Other Loans 45,00,000
Current Liabilities and Provisions 90,00,000

3,40,00,000
Assets:
PPE (at cost less depreciation) 1,50,00,000
Debenture Redemption Reserve Investments 30,00,000
Cash and Bank Balances 40,00,000
Other Current Assets 1,20,00,000
3,40,00,000
The debentures are due for redemption on 1st April, 2013. The terms of issue of debentures provided that they were
redeemable at a premium 5% and also conferred option to the debentureholders to convert 25% of their holding into
equity shares at a predetermined price of ` 11.90 per share and the balance payment in cash.
Assuming that:
(i) Except for debentureholders holding 12,000 debentures in aggregate, rest of them exercised the option for
maximum conversion,
(ii) The investments realised ` 32,00,000 on sale, and
(iii) All the transactions were taken place on 1st April, 2013 without any lag,
(iv) Premium on redemption of debentures is to be adjusted against General Reserve.
Redraft the Balance Sheet of Entyce Ltd. as on 01.04.2013 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. (8 marks) [IPCC Gr. II] Answer:
Entyce Limited
Balance Sheet as on 01.04.2013
Particulars Note Figures as at the No. end of current reporting period

(1) Shareholders’ Funds
(a) Share Capital
(2) Non-Current Liabilities
(a) Long-term borrowings - Unsecured Loans
(a) Short-term provisions
Total II. Assets

(1) Non-current assets
(a) PPE
(i) Tangible assets
1 55,00,000 2 85,85,000
45,00,000
90,00,000 2,75,85,000
1,50,00,000
(2) Current assets

(a) Cash and cash equivalents 5,85,000
(b) Other current assets 1,20,00,000
Total 2,75,85,000 Notes to Accounts

` 1. Share Capital
5,50,000 Equity Shares of ` 10 each 55,00,000 2. Reserves and Surplus

Add: Debenture Redemption Reserve transfer 35,00,000 85,00,000
Add: Profit on sale of investments 2,00,000 87,00,000
Less: Premium on redemption of debentures (4,00,000)
(80,000 × ` 5) 83,00,000
Securities Premium (1,50,000 ×` 1.9) 2,85,000 85,85,000 Working Notes:
(i) Calculation of number of shares to be allotted
Total number of debentures 80,000 Less: Number of debentures not opting for conversion 12,000 68,000 25% of
68,000 17,000 Redemption value of 17,000 debentures ` 17,85,000 Number of Equity Shares to be allotted:
= = 1,50,000 shares of ` 10 each.
(ii) Calculation of cash to be paid

Number of debentures 80,000
Less: number of debentures to be converted into equity shares 17,000
63,000
Redemption value of 63,000 debentures (63,000 ×` 105) ` 66,15,000
(iii) Cash and Bank Balance ` Balance before redemption 40,00,000
Add: Proceeds of investments sold 32,00,000
72,00,000
Less: Cash paid to debenture holders (66,15,000) 5,85,000

Venus Limited recently made a public issue in respect of which the following information is available :
(i) No. of partly convertible debentures issued 4,00,000 ; face value and issue price of ` 100 per debenture.
(ii) Convertible portion per debenture - 80%, date of conversion - on expiry of 7 months from the date of closing of
issue.
(iii) Date of closure of subscription list - 01.06.2013, date of allotment 01.07.2013, Rate of interest on debentures -
10% p.a. payable from the date of allotment. Value of equity share for the purpose of conversion - ` 40 (Face value `
10)
(iv) Underwriting commission - 3%
(v) No. of debentures applied for 3,00,000
(vi) Interest payable on debentures - half yearly on 30thSeptember and 31st March.
Write relevant journal entries for all transactions arising out of the above during
the year ended on 31st March, 2014 (including cash and bank entries). (8 marks) [IPCC Gr. II]
Answer: In the books of Venus Ltd.

Journal Entries
Date Particulars Debit (`) Credit (`) 01.06.13 Bank Account Dr. 3,00,00,000
To Debenture Application A/c 3,00,00,000 (Being Application money received

on 3,00,000 debentures @` 100
each)
01.07.13 Debentures Application Account Dr. 3,00,00,000 Underwriters Account Dr. 1,00,00,000
To 10% Debentures Account 4,00,00,000 (Being Allotment of 3,00,000

debentures to applicants and
1,00,000 debentures to under
writers)
Underwriting Commission Dr. 12,00,000 To Underwriters Account 12,00,000

(Being commission payable to
underwriterson4,00,000
debentures of ` 100 each @ 3%)
Bank Account Dr. 88,00,000 To Underwriters Account 88,00,000

(Being amount received from
underwriters on settlement of
account)
30.09.13 Debentures Interest Account Dr. 10,00,000
To Bank Account 10,00,000 (Being interest paid on debentures

for 3 months from 01.07.2013 to
30.09.2013 on ` 4,00,00,000 @
10% p.a.)
31.12.13 10% Debentures Account Dr. 3,20,00,000
To Equity Share Capital Account 80,00,000

To Securities Premium Account 2,40,00,000
(Being conversion of 80% of
debentures into shares @`40 per
share with face value of`10 each)
31.03.14 Debentures Interest Account Dr. 12,00,000
To Bank Account 12,00,000 (Being interest paid on debentures

for the half year)
Profit and Loss A/c Dr. 22,00,000 To Debentures Interest A/c 22,00,000
(Being debentures interest for the
year charged to Profit & Loss A/c)
Working Notes:
Calculation of debenture interest for the half year ended 31st March, 2014
Particulars ` On ` 80,00,000 for 6 Months @ 10% p.a. 4,00,000
On ` 3,20,00,000 for 3 Months @ 10% p.a. 8,00,000
Total 12,00,000
Q.4.8 2019 - Nov [6] (e) Practical

A company had issued 40,000, 12% debentures of`100 each on 1stApril, 2015. The debentures are due for
redemption on 1st March, 2019. The terms of issue of debentures provided that they were redeemable at a premium
of 5% and also conferred option to the debenture holders to convert 20% of their holding into equity shares (nominal
value` 10) at a predetermined price of ` 15 per share and the payment in cash, 50 debentures holders holding totally
5,000 debentures did not exercise the option. Calculate the number of equity shares to be allotted to the debenture
holders and the amount to be paid in cash on redemption.
(5 marks) Space to write important points for revision

Q.4.9 RTP Practical The summarized Balance Sheet of Spices Ltd. as on 31st March, 2018 read as under:
` Liabilities:
Share Capital: 9,000 equity shares of`10 each, fully paid up 90,000

Debenture Redemption Reserve 35,000
12% Convertible Debentures : 1,200 Debentures of`50 each 60,000
Unsecured Loans 28,000
Short term borrowings 19,000
2,70,000
Assets:
PPE (at cost less depreciation) 72,000
Debenture Redemption Reserve Investments 34,000
Cash and Bank Balances 86,000
Other Current Assets 78,000
2,70,000
The debentures are due for redemption on 1st April, 2018. The terms of issue of debentures provided that they were
redeemable at a premium 10% and also conferred option to the debenture holders to convert 40% of their holding
into equity shares at a predetermined price of ` 11 per share and the balance payment in cash.
Assuming that:
(i) Except for debentureholders holding 200 debentures in aggregate, rest of them exercised the option for maximum
conversion, (ii) The investments realized ` 56,000 on sale,
(iii) All the transactions were taken place on 1st April, 2018 (iv) Premium on redemption of debentures is to be
adjusted against
General Reserve.
You are required to
(a) Redraft the Balance Sheet of Spices Ltd. as on 01.04.2018 after giving
effect to the redemption.

(b) Show your calculations in respect of the number of equity shares to be
allotted and the cash payment necessary.
Answer:
Spices Ltd.
Particulars Note Figures as at the No. end of current reporting period

1. Shareholder's Funds
(a) Share Capital
2. Non-Current Liabilities
(a) Long-term borrowings - Unsecured Loans
(a) Short-term borrowings
Total
1 1,10,000 2 91,000
28,000
19,000 2,48,000
II. Assets
1. Non-current assets
(a) PPE
(i) Tangible assets 72,000
2. Current assets
(a) Cash and cash equivalents 98,000
(b) Other current assets 78,000
Total 2,48,000 Notes to Accounts

` 1. Share Capital
11,000 Equity Shares of ` 10 each 1,10,000 (Out of above, 2000 shares issued to debentures
holders who opted for conversion into shares)
2. Reserve and Surplus

Add: Debenture Redemption Reserve transfer 35,000
73,000
Add: Profit on sale of investments 22,000
95,000
Less: Premium on redemption of debentures
(1,200 x ` 5) (6,000) 89,000 Securities Premium Account (2,000 x ` 1) 2,000
91,000 Working Notes:
(i) Calculation of number of shares to be allotted ` Total number of debentures 1,200 Less: Number of debentures
not opting for conversion (200)
1,000
40% of 1,000 400
Redemption value of 400 debentures (400 x ` 55) ` 22,000
Number of Equity Shares to be allotted 22,000/11 = 2,000 shares of ` 10 each.
(ii) Calculation of cash to be paid ` Number of debentures 1,200 Less: Number of debentures to be converted into
equity shares (400)
800 Redemption value of 800 debentures (800 × ` 55) ` 44,000
(iii) Cash and Bank Balance ` Balance before redemption 86,000

Add: Proceeds of investments sold 56,000
1,42,000
Less: Cash paid to debenture holders (44,000) 98,000
CHAPTER
9Investment Accounts
Chapter Comprises: ☹Classification of Investments ☹Cost of Investments ☹Disposal of Investments
☹Reclassification of Investment.
Legend
book. 1.442
TIME MANAGER
First Indepth
learning
i.e.....Time
............ Day 1
1. Budgeted 9
2. Actual
3. Variance
(1-2)
. . . . . . . . . Plan and Manage your Time
Instant
Revision (in hours)

i.e.... i.e. on
......... ...........
Day 2 Day 8
2.15 1.5

1.2 0.5 0.5

3.7, 3.15, 3.20, 3.24
1
Cost of Investments: Fixed Income Bearing Securities
Q.1.1 2009 - May [5] (viii) Practical
Mr. T purchased 1,000 nos. 10% debentures of ` 100 each on 1st April,
2009 at`96 cum-interest, the previous interest date being 31stDecember,
2008. Compute cost of investment. (2 marks)
Answer :
Total amount payable 1,000 × 96 = 96,000 Less: Interest included in the price for
January, February and
March i.e. 1,00,000 × × = 2,500 Cost of the Investment 93,500 Space to write important points for revision
Mr. X purchased 1,000, 6% Government Bonds of ` 100 each on 31st January, 2009 at ` 95 each. Interest is payable
on 30th June and 31st December. The price quoted is cum interest. Journalise the transaction.
(2 marks) Answer :
Date
31st Jan., Investment A/c 2009
Journal Entry
Particulars Amount Amount (Dr.) ` (Cr.)` Dr. 94,500
Interest A/c Dr. 500
To Bank A/c 95,000 (Being purchase of 1,000, 6% Government

bonds of ` 100 each at ` 95 each cum
interest)

2
Cost of Investments: Variable Income Bearing Securities
Q.2.1 2009 - Nov [1] (iii) Practical
MY Ltd. had acquired 200 equity shares of YZ Ltd. at ` 105 per share on
01.01.2009 and paid` 200 towards brokerage, stamp duty and STT. On
31stMarch, 2009 Shares of YZ Ltd. were traded at`110 per share. At what value investment is to be shown in the
Balance Sheet of MY Ltd. as at 31st March, 2009. (2 marks) Answer :
Calculation of Cost of Investment
Particulars ` Purchase price of Equity shares of YZ Ltd. (200 shares ×` 105 per share) 21,000 Add: Brokerage,
Stamp duty and STT 200
Cost of investment 21,200 If the investment is long then it will be shown at cost. Therefore value of investment will
be ` 21,200. However, if the investment is a current investment, then it will be shown at lower of cost (i.e. ` 21,200)
or net realizable value (i.e.`200 × 110 =`22,000). Therefore, value of investment will be` 21,200.
Q.2.2 2009 - Nov [6] (iv) Practical Rose Ltd. had made an investment of` 500 lakhs in the equity shares of Nose
Ltd. on 10.01.2009. The realisable value of such investment on
31.03.2009 became ` 200 lakhs as Nose Ltd. lost a case of patent rights. Rose Ltd. follows financial year as
accounting year. How will you recognize this reduction in Financial statements for the year 2008-09. (4 marks)
Answer :
Provision and Conclusion:
Recognition of reduction in value of investment would depend upon the nature of investment and nature of decline
as per Accounting Standard 13 “Accounting for Investments”. According to provisions of the standard, if the
investments were acquired for long term and decline is temporary in nature reduction in value will not be recognized
and investments would be carried at cost. If the decline is of permanent nature, it will be charged to profit and loss
account. If the investments are current investments, then the reduction should be recognized and charged to Profit
and Loss Account as the current investments are carried at cost or fair value, whichever is less.
3 Disposal of Investments
On 1st April, 2008, Mr. Neel purchased 5,000 equity shares of` 100 each in X Ltd. @` 120 each from a Broker, who
charged 2% brokerage. He incurred ½% as cost of shares transfer stamps. On 31st January, 2009, Bonus was
declared in the ratio of 1: 2 Before and after the record date of bonus shares, the shares were quoted at` 175 per
share and` 90 per share respectively. On 31st March, 2009, Mr. Neel sold bonus shares to a broker, who charged 2%
brokerage.
Show the Investment Account in the books of Mr. Neel, who held the shares as current assets and closing value of
investments shall be made at cost or Market value, whichever is lower. (8 marks)
Answer : Investment Account in the books of Mr. Neel For the year ended 31st March, 2009 (Scrip: Equity
Shares of X Ltd.)
Dr.
Date Particulars
01.04.08 To Bank A/c (W.N.1)
31.01.09 To Bonus Shares
31.03.09 To Profit and Loss A/c (W.N.3)
Working Notes: 1. Calculation of cost of equity shares purchased on 1.4.08 = 5,000 ×`120 + 2% of ` 6,00,000 +
% of ` 6,00,000 =` 6,15,000
2. Calculation of profit proceeds of equity shares sold on 31.3.09 = 2,500 ×`90 – 2% of ` 2,25,000 =` 2,20,500
3. Calculation of profit on sale of bonus shares on 31.3.09 = Sale proceeds – Average cost
= 2,20,500 – 2,05,000 i.e. =` 15,500 4. Valuation of equity shares on 31.3.09

Cost = 6,15,000 × = ` 4,10,000
Market value = 5,000 shares ×`90 =` 4,50,000
Closing Balance has been valued at`4,10,000 i.e. at cost which is lower than the market value.
Cr.
Nominal Cost Date Particulars Nominal Cost Value (`) (`) Value (`) (`) 5,00,000 6,15,000 31.3.09 By Bank A/c 2,50,000 2,20,500 (W.N.2)
2,50,000 31.3.09 By Balance c/d 5,00,000 4,10,000 (W.N.4)
— 15,500
7,50,000 6,30,500 7,50,000 6,30,500
Gamma Investment Company hold 1,000, 15% debentures of ` 100 each in Beta Industries Ltd. as on April 1, 2009
at a cost of` 1,05,000. Interest is payable on June, 30 and December, 31 each year.
On May 1, 2009, 500 debentures are purchased cum-interest at ` 53,500. On November 1, 2009, 600 debentures are
sold ex-interest at ` 57,300. On November 30, 2009, 400 debentures are purchased exinterest at`38,400. On
December 31, 2009, 400 debentures are sold cuminterest for ` 55,000.
Prepare the investment account showing value of holdings on March 31, 2010 at cost, using FIFO method. (6 marks)
Answer : In the books of Gaama Investments Ltd. Investment Account (15% Debentures in Beta Industries
Ltd.)
Date Particulars Nominal Interest Cost Date Value
Particulars Nominal InteCost Value rest
```
1.04.09 To Balance b/d 1,00,000 3,750 1,05,00030.06.09 (W.N.1)

1.05.09 To Bank A/c 50,000 2,500 51,0001.11.09 (W.N.2)
30.11.09 To Bank A/c 40,000 2,500 38,4001.11.09 (W.N.5)
31.12.09 To Profit & Loss — 10,00031.12.09 A/c (W.N.12)
31.03.10 To Profit & Loss — 18,625 —31.12.09 A/c
31.03.10 By Bank A/c — 11,250 — (W.N.3)
By Bank A/c 60,000 3,000 57,300 (W.N.4)
By Profit & 5,700 Loss A/c
(W.N.11)
By Bank A/c 40,000 3,000 52,000 (W.N.6 & 7)
By Bank A/c — 6,750 — (W.N.8)
By Balance c/d 90,000 3,375 89,400 (W.N. 9 &
10)
1,90,000 27,375 2,04,400 ` ` `

1,90,000 27,375 2,04,400
Working Notes:
1 Accrued interest as on 1.4.09 = ` 1,00,000 × = ` 3,750
2 Accrued interest = ` 50,000 × = ` 2,500 Cost of investment for purchase on 1.5.09 = ` 53,500 ☐ ` 2,500 =` 51,000
3 Interest received = ` 1,50,000 × = ` 11,250
4 Accrued interest = ` 60,000 × = ` 3,000
7 Sale price of investment on 31.12.09 =`55,000☐`3,000 =`52,000 8 Accrued interest = ` 90,000 × = ` 6,750
10 Cost of investment as on 31.3.10 = ` 51,000 + ` 38,400 = ` 89,400

11 Loss on debentures sold on 1.11.2009 :
Sales price of debentures ` 57,300
Less : Cost of investment sold = = (` 63,000)
Loss on sale (` 5,700) 12 Profit on debentures sold on 31.12.2009 :

Sales price of debentures ` 52,000
Less : Cost of investment sold = = (` 42,000) Profit on sale ` 10,000 Space to write important points for revision
H purchased 500 equity shares of `100 each in the ABC Company Limited for` 62,500 inclusive of brokerage and
stamp duty. Some years later the company decided to capitalise its profit and to issue to the holders of equity shares
one equity share as Bonus for every equity share held by them. Prior to capitalization, the shares of ABC Company
Limited were quoted at `175 per share. After the capitalization, the shares were quoted at`92.50 per share. H sold the
Bonus shares and received ` 90 per share. Show Investment A/c in H’s books on average cost basis as per AS-13.
(5 marks)
Answer :
In the books of H
Investment Account (Equity Shares of ABC Co. Ltd.)
Particulars Face Value Cost Particulars Face Cost Value
To Balance b/d * 50,000

To Bonus Shares A/c 50,000
To Profit & Loss A/c
(W.N. 1)
(Profit on sale)
62,500 By Bank A/c 50,000 45,000 — By Balance c/d 50,000 31,250 13,750 (W.N.2)
1,00,000 76,250 1,00,000 76,250
Bonus Issue was made some year later to the purchase of initial 500 equity share.
Working Notes:
1. Computation of profit on sale of bonus shares :
Sale price of bonus shares 45,000

Less : Average cost of shares sold × 50,000 = (31,250) Profit 13,750
2. Valuation of closing investment :

Market value of shares × 92.50 = 46,250
Cost price of shares (W.N. 1) = 31,250

= 46,250
Value of investment will be least of market value or average cost price, i.e. 31,250.
Q.3.4 2011 - May [1] {C} (d) Practical
On 1stApril, 2010, Rajat has 50,000 equity shares of P Ltd., at a book value of ` 15 per share (face value ` 10 each).
He provides you the further information :
1. On 20th June, 2010 he purchased another 10,000 shares of P Ltd. at
` 16 per share.
2. On 1st August, 2010, P Ltd. issue one equity bonus share for every six
shares held by the shareholders.
3. On 31st October, 2010 the directors of P Ltd. announced a right issue
which entitle the holders to subscribe three shares for every seven
shares at` 15 per share. Shareholders can transfer their rights in full
or in part.
Rajat sold 1/3rd of entitlement to Umang for a consideration of` 2 per
share and subscribe the rest on 5th November, 2010.
You are required to prepare Investment A/c in the books of Rajat for the year ending 31st March, 2011. (5 marks)
Answer :
Date Particulars
1.4.10 To Balance b/d

20.6.10 To Bank A/c
1.8.10 To Bonus
issue (W.N.1)
5.11.10 To Bank A/c (right shares) (W.N.4)
In the books of Rajat

Investment Account
(Equity shares in P Ltd.)
No. of Amount Date Particulars No. of Amount shares (`) shares (`) 50,000 7,50,000 5.11.10 By Bank A/c — 20,000
10,000 1,60,000 (Sale of rights)
10,000 — (W.N.3)
31.3.11 By Balance c/d 90,000 11,90,000
20,000 (Bal. fig)
3,00,000
90,000 12,10,000 90,000 12,10,000
Working Notes: (1) Bonus shares = = 10,000 shares
(2) Right shares = × 3 = 30,000 shares
(3) Sale of rights = 30,000 shares × × ` 2 = ` 20,000
(4) Rights subscribed = 30,000 shares × × ` 15 = ` 3,00,000 Space to write important points for revision
Q. 3.5 2012 - May [5] (b) Practical Practical 12:
Date Particulars
01.05.2011 Purchased 24,000 12% Bonds of`100 each at`84 cuminterest. Interest is payable on 30th September and
31st March every year.
15.06.2011 Purchased 1,50,000 equity shares of ` 10 each in Alpha Limited for ` 25 each through a broker, who
charged brokerage @ 2%.
10.07.2011 Purchased 60,000 equity shares of ` 10 each in Beeta Limited for ` 44 each through a broker, who
14.10.2011 Alpha Limited made a bonus issue of two shares for every three shares held.
31.10.2011 Sold 80,000 shares in Alpha Limited for ` 22 each.
01.01.2012 Received 15% interim dividend on equity shares of Alpha Limited.
15.01.2012 Beeta Limited made a right issue of one equity share for every four shares held at ` 5 per share. Mr.
Brown exercised his option for 40% of his entitlements and sold the balance rights in the market at ` 2.25 per share.
01.03.2012 Sold 15,000 12% Bonds at ` 90 ex-interest.
15.03.2012 Received 18% interim dividend on equity shares of Beeta Limited.
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, 2012. (8 marks)
Answer: In the books of Mr. Brown

12% Bonds for the year ended 31st March, 2012
Date Particulars No. Interest Amount Date Particulars No. Interest Amount Income (`) Income (`) (`) (`)
2011 2011
May. 1 To Bank A/c 24,000 24,000 19,92,000 Sept. 30 By Bank Interest 1,44,000
2012 2012
March To P&L A/c — — 1,05,000 Mar.1 By Bank A/c 15,000 75,000 13,50,000 31 (W.N.1) 2012 By Bank Interest 54,000 To P&L A/c 2,49,000 Mar. 31
By Balance c/d 9,000 7,47,000 (W.N.2)
24,000 2,73,000 20,97,000 24,000 2,73,000 20,97,000
Investment in Equity shares of Alpha Ltd. for the year ended 31st March, 2012
Date Particulars No. DiviAmount Date Particulars No. DiviAmount dend (`) dend (`) Income Income (`) (`)
2011 2011
June 15 To Bank A/c 1,50,000 — 38,25,000Oct. 31 By Bank A/c 80,000 — 17,60,000
Oct. 14 To Bonus 1,00,000 2012 By Bank A/c 2,55,000 issue — —Jan. 1 -dividend (1,50,000
/3 × 2)
2012 To P&L A/c Mar. 31 By Bal. c/d

Mar. 31 (W.N.3) 5,36,000 (W.N.4) 1,70,000 — 26,01,000 To P&L A/c 2,55,000
2,50,000 2,55,000 43,61,000 2,50,000 2,55,000 43,61,000
Date Particulars
Investment in Equity shares of Beeta Ltd.
No. Dividend
Income
Amount Date Particulars No. Dividend Amount (`) Income (`) (`) (`)
2011
July 10 To Bank A/c
2012 To Bank A/c Jan. 15 (W.N.5) 6,000 — 30,000 2012 dividend — 1,18,800 2012
60,000 — 26,92,800 Jan. 15 By Bank A/c — — 20,250 (W.N.6)
Mar. 15 By Bank-
Mar. 31 To P&L A/c — 1,18,800 — Mar. 31 By Bal. c/d
2012 (bal. fig.) 66,000 27,02,550
66,000 1,18,800 27,22,800 66,000 1,18,800 27,22,800
Working Notes:
1. Profit on sale of 12% Bond
Sales price ` 13,50,000 Less: Cost of bond sold = × 15,000 ` 12,45,000 Profit on sale ` 1,05,000 2. Closing balance
as on 31.3.2012 of 12% Bond
× 9,000 = ` 7,47,000
3. Profit on sale of equity shares of Alpha Ltd.
Sales price (80,000 shares × ` 22) ` 17,60,000 Less: Cost of bond sold = × 80,000 ` 12,24,000 Profit on sale `
5,36,000 4. Closing balance as on 31.3.2012 of equity shares of Alpha Ltd. × 1,70,000 = ` 26,01,000
5. Calculation of right shares subscribed by Beeta Ltd. Right Shares = × 1 = 15,000 shares
Shares subscribed by Mr. Brown = 15,000 × 40% = 6,000 shares Value of right shares subscribed = 6,000 shares @
` 5 per share =` 30,000
6. Calculation of sale or right entitlement by Beeta Ltd. No. of right shares sold = 15,000 - 6,000 = 9,000 shares
Sale value of right = 9,000 shares × ` 2.25 per share = ` 20,250
Note: Shares are assumed to be purchased on cum right basis, therefore, amount received from sale of rights is
credited to Investment A/c. Space to write important points for revision
On 01.04.2011, Mr. T. Shekharan purchased 5,000 equity shares of `100 each in V. Ltd. @` 120 each from a broker,
who charged 2% brokerage. He incurred 50 paisa per ` 100 as cost of shares transfer stamps. On 31.01.2012 bonus
was declared in the ratio of 1 : 2. Before and after the record date of bonus shares, the shares were quoted at ` 175
per share and ` 90 per share respectively. On 31.03.2012 Mr. T. Shekharan sold bonus shares to a broker, who
charged 2% brokerage.
Show the Investment Account in the books of T. Shekharan, who held the shares as Current Assets and closing value
of investments shall be made at cost or market value whichever is lower. (8 marks)
Answer: In the books of T. Shekharan

Investment Account for the year ended 31st March, 2012 (Script : Equity Shares of V Ltd.)
Date Particulars Nominal Cost (`) Date Particulars Nominal Cost (`) Value (`) Value (`)
1.4. 2011 To Bank A/c (W.N.1)

31.1.2012 To Bonus shares
31.1.2012 To Profit and Loss A/c (W.N.3) 5,00,000 6,15,000 31.3.2012 By Bank A/c 2,50,000 2,20,500 (W.N.2)
2,50,000 ☐ 31.3.2012 By Balance c/d 5,00,000 4,10,000 (W.N. 4)
15,500
7,50,000 6,30,500 7,50,000 6,30,500
Working Notes :
1. Cost of equity shares purchased on 1st April, 2011
= Cost + Brokerage + Cost of transfer stamps
= 5,000 ×` 120 + 2% of` 6,00,000 + ½ % of ` 6,00,000 = ` 6,15,000
2. Sale proceeds of equity shares sold on 31st March, 2012 = Sale price – Brokerage
= 2,500 ×` 90 – 2% of ` 2,25,000
= ` 2,20,500
3. Profit on sale of bonus shares on 31st March, 2012
= Sales proceeds – Average cost
Sales proceeds =` 2,20,500
Average cost =` [6,15,000 × 2,50,000/7,50,000] =` 2,05,000
Profit =` 2,20,500 – ` 2,05,000 =` 15,500
4. Valuation of equity shares on 31st March, 2012
Cost =`[6,15,000 × 5,00,000/7,50,000] =`4,10,000 i.e.`82 per share Market Value = 5,000 shares × ` 90 = ` 4,50,000
Closing stock of equity shares has been valued at ` 4,10,000 i.e. cost being lower than the market value.
Q. 3.7 2013 - May [1] {C} (d) Practical
In 2011, M/s. Wye Ltd. issued 12% fully paid debentures of ` 100 each, interest being payable half yearly on 30th
September and 31st March of every accounting year.
On 1st December, 2012, M/s, Bull & Bear purchased 10,000 of these debentures at `101 cum-interest price, also
paying brokerage @ 1% of cum-interest amount of the purchase. On 1st March, 2013 the firm sold all of these
debentures at`106 cum-interest price, again paying brokerage @ 1% of cum-interest amount.
Prepare Investment Account in the books of M/s. Bull & Bear for the period 1st December, 2012 to 1st March, 2013.
(5 marks)
Answer: In the books of M/s Bull & Bear

Investment Account
(for the period from 1st December 2012 to 1st March, 2013) (Scrip: 12% Debentures of M/s. Wye Ltd.)
Date Particulars Nominal Interest Cost Date Value (`)
(`)
Particulars Nominal Interest Cost Value (`) (`)
1.12.2012 To Bank A/c10,00,000 20,000 10,00,100 1.03.2013 (W.N.1)
1.3.2013 To Profit & 1.3.2013 loss A/c 30,000
By Bank A/c 10,00,000 50,000 9,99,400 (W.N.2)
By Profit &
loss A/c 700
10,00,000 50,000 10,00,100 10,00,000 50,000 10,00,100

1.461
Working Notes:
(i) Cost of 12% debentures purchased on 1.12.2012 Particulars `
Cost Value (10,000 × ` 101) 10,10,000

Add: Brokerage (1% of ` 10,10,000) 10,100
Less: Cum Interest (10,000 × 100 × 12% × 2/12) (20,000) Total 10,00,100
(ii) Sale proceeds of

12% debentures sold on 31st March, 2013
Particulars ` Sales Price (10,000 ×` 106) 10,60,000 Less: Brokerage (1% of ` 10,60,000) (10,600) Less: Cum
Interest (10,000 × 100 × 12% × 5/12) (50,000) Total 9,99,400

On 01-05-2012, Mr. Mishra purchased 800 equity shares of ` 10 each in Fillco Ltd. @` 50 each from a broker who
charged 5%. He incurred 20 paisa per ` 100 as cost of shares transfer stamps. On 31-10-2012, bonus was declared in
the ratio 1:4. The shares were quoted at`110 and`60 per 60 per 11-2012, Mr. Mishra sold the bonus shares to a
broker who charged 5%. You are required to prepare Investment Account in the books of Mr. Mishra for the year
ending 31-12-2012 and closing value of Investment shall be made at cost or market value whichever is lower. (4
marks)
Answer:
1. Basic Computations
Particulars Computation ` (a) Cost of shares purchased (800 × 50 = 40,000) + (5% of on 01.05.2012 40,000)+
0.2% of 40,000 42,080 (b) Sale Proceeds of shares
sold on 30.11.2012 (200 × ` 60) ☐ 5% Brokerage 11,400 (c) Profit on sale of Bonus Sale Proceeds = 11,400 shares
on 30.11.2012 Less: Average Cost = (8,416)2,984
(d) Valuation of equityCost : least of the shares of 31.12.2012 two
= 33,664
Market Value : 800 shares of 33,664 ` 60 = 48,000
2. Investment (Equity Shares of Fillco Ltd.) A/c

Date Particular FV Cost Date Particular FV Cost
1.5.2012 To Bank
31.10.2012 To Bonus Issue(1:4)
31.12.2012 To P&L (Profit) Total
8,000 42,080 30.11.2012 By Bank 2,000 11,400

2,000 ☐ 31.12.2012 By Bal c/d 8,000 33,664 ☐ 2,984
10,000 45,064 Total 10,000 45,064 Space to write important points for revision
Q. 3.9 2014 - May [5] (b) Practical
Smart Investments made the following investments in the year 2013-14 : 12% State Government Bonds having face
value` 100
Date Particulars
01.04.2013 Opening Balance (1200 bonds) book value of ` 1,26,000 02.05.2013 Purchased 2,000 bonds @ ` 100
cum interest 30.09.2013 Sold 1,500 bonds at ` 105 ex interest
Interest on the bonds is received on 30th June and 31st Dec. each year. Equity shares of X Ltd.
15.04.2013 Purchased 5,000 equity shares @ ` 200 on cum right basis Brokerage of 1% was paid in addition (Face
Value of shares ` 10)
03.06.2013 The company announced a bonus issue of 2 shares for every 5 shares held.
16.08.2013 The company made a rights issue of 1 share for every 7 shares held at ` 250 per share
The entire money was payable by 31.08.2013 22.08.2013 Rights to the extent of 20% was sold @ ` 60. The
remaining
rights were subscribed.
02.09.2013 Dividend @ 15% for the year ended 31.03.2013 was received on 16.09.2013
15.12.2013 Sold 3,000 shares @` 300. Brokerage of 1% was incurred extra.

15.01.2014 Received interim dividend @ 10% for the year 2013-14
31.03.2014 The shares were quoted in the stock exchange @ ` 220
Prepare Investment Accounts in the books of Smart Investments. Assume that the average cost method is followed.
(8 marks)
Answer: In the books of Smart Investment

12% State Government Bond for the year ended 31st March, 2014
Date Particulars No. Income Amount (`) Date Particulars No. Income Amount
Amount To Opening 1,200 3,600

2013 Balance b/d
Balance b/d
To Bank A/c 2,000 8,000
2013
1,26,000 30.6.13 By Bank A/c
(Interest)
1,92,000 (3,200 x 100 x
12% x 6/12) - 19,200 - To P&L A/c 27,400
(Interest)
(Interest)
To P&L A/c
30.9.13 By Bank A/c 1,500 4,500 1,57,500.00 31.12.13 By Bank A/c
8,437.50 (Interest)
2014 (Profit on (1,700 x 100 x
Sale) 12% x 6/12) - 10,200 - 31.3.14 By Bal. c/d 1,700 5,100 1,68,937.50
3,200 39,000 3,26,437.50 3,200 39,000 3,26,437.50

Investment in Equity Shares of X Ltd. for year ended 31.3.2014
Date Particulars No. Income Amount Date Particulars No. Income Amount
15.4.13 To Bank A/c 5,000 10,10,000 16.9.13 By Bank (Dividend) A/c - - 7,500
3.6.13 To Bonus 2,000 - - 15.12.13 By Bank (Sale) A/c 3,000 - 8,91,000 Issue
31.8.13 To Bank A/c 800 2,00,000 15.1.14 By Bank 4,800 (Interim dividend)
31.3.14 To P& L A/c 4,800 4,21,115 31.3.14 By Bal. c/d 4,800 7,20,615
7,800 4,800 16,31,115 7,800 4,800 16,31,115
Working Notes:
1. Profit on sale of bonds on 30.9.13
= Sales proceeds - Average cost
Sales proceeds = ` 1,57,500

Average cost = ` [(1,26,000+1,92,000) × 1,500/3,200] = 1,49,062.50
Profit = 1,57,500 - ` 1,49,062.50 =` 8,437.50
2. Valuation of bonds on 31st March, 2014

Cost = `3,18,000/3,200 × 1,700 = 1,68,937.50
3. Cost of equity shares purchased on 15/4/2013
= Cost + Brokerage
= (5,000 × ` 200) + 1% of (5,000 × ` 200) =` 10,10,000
4. Sale proceeds of equity shares on 15/12/2013
= Sale price - Brokerage
= (3,000 × ` 300) - 1% of (3,000 ×` 300) =` 8,91,000
5. Profit on sale of shares on 15/12/2013
= Sales proceeds - Average cost
Sales proceeds = ` 8,91,000
Average cost = ` [(10,10,000 + 2,00,000 - 12,000 - 7,500) × 3,000/7,800]
= ` [11,90,500 x 3,000/7,800] = 4,57,885 Profit = ` 8,91,000 - ` 4,57,885 =` 4,33,115.
6. Valuation of equity shares on 31st March, 2014
Cost =` [11,90,500 × 4,800/7,800] = ` 7,32,615
Market Value = 4,800 shares × ` 220 = ` 10,56,000
Closing stock of equity shares has been valued at` 7,32,615 i.e. cost being lower than the market value.
Note:
1. It is presumed that no dividend is received on bonus shares as bonus shares are declared on 3.6.2013 and dividend
pertains to the year ended 31.03.2013.
2. The amount of dividend for the period, for which shares were not held by the investor, has been treated as capital
receipt.
3. On sale of Right share consideration of` 12,000 received should be credited to P&L A/c as per AS13.
On 1st April 2014, Hasan has 20,000 equity shares of Vayu Ltd., at a book value of`20 per share (face value of`10
each). He provides the following information:
(i) On 10th June 2014, he purchased another 5,000 shares in Vayu Ltd., @` 15 per share.
(ii) On 1st August 2014, Vayu Ltd., issued one bonus share for every five shares held by the shareholders.
(iii) On 31stAugust 2014, the directors of Vayu Ltd., announced a rights issue which entitle the shareholders to
subscribe two shares for every six shares held @ of ` 15 per share. The shareholders can transfer their rights in full
or in part.
Hasan sold 1/4th of his right shares holding to Harsh for a consideration of` 3 per share and subscribed the rest on
31st of October 2014.
Prepare Investment A/c in the books of Hasan as on 31st October 2014. (8 marks)
Answer:
Investment Account in the books of Hasan (Equity shares in Vayu Ltd.)
Date Particulars No. of Amount Date Shares (`)
Particulars No. of Amount Shares (`) 1.4.14 To Balance b/d 20,000 4,00,00031.8.14 10.6.14 To Bank A/c 5,000 75,000
1.8.14 To Bonus issue 5,000 0 (W.N. 1) 31.10.14 By Balance c/d 37,500 5,80,000
31.10.14To Bank A/c 7,500 1,12,500 (Bal. Fig.)
By Bank A/c 0 7,500 (sale of rights)

(W.N. 3)
(Right shares
(W.N. 4))
Working Notes:
37,500 5,87,500 37,500 5,87,500
(1) Bonus shares = = 5,000 shares
(2) Rights shares = × 2 = 10,000 shares (3) Sale of rights = 10,000 shares × 1/4 ×` 3 = ` 7,500 (4) Rights
subscribed = 10,000 × × ` 15 = ` 1,12,500 Space to write important points for revision
Q. 3.11 2015 - May [5] (b) Practical
Mr. Chatur had 12% Debentures of Face Value `100 of M/s. Unnati Ltd. as current investments.
He provides the following details relating to the investments. 1-4-2014 Opening balance 4000 debentures costing `
98 each 1-6-2014 Purchased 2000 debentures @ ` 120 cum interest 1-9-2014 Sold 3000 debentures @ ` 110 cum
interest 1-12-2014 Sold 2000 debentures @ ` 105 ex interest 31-1-2015 Purchased 3000 debentures @ ` 100 ex
interest 31-3-2015 Market value of the investments ` 105 each Interest due dates are 30th June and 31st December.
Mr. Chatur closes his books on 31-3-2015. He incurred 2% brokerage for all his transactions.
Show investment account in the books of Mr. Chatur assuming FIFO method is followed. (8 marks)
Answer : Investment A/c of Mr. Chatur

for the year ending on 31-3-2015
(Scrip: 12% Debentures of Unnati Limited) (Interest Payable on 30th June and 31st December)
Amt. In (`)
Date Particulars Nominal Interest Cost Date Particulars Nominal Interest Cost Value Value
1.4.2014 To Balance 4,00,000 12,000 3,92,000 30.6.2014 By Bank – 36,000 b/d 6,00,00
0 × 6%
1.6.2014 To Bank 2,00,000 10,000 2,34,800 1.9.2014 By Bank 3,00,000 6,000 3,17,400
1.9.2014 To Profit & 23,400 1.12.2014 By Bank 2,00,000 10,000 2,05,800

Loss A/c
31.1.2015 To Bank 3,00,000 3,000 3,06,000 1.12.2014 By Profit & – – 9,600 Loss
A/c
31.3.2015 To Profit & 45,000 31.12.2014 By B a n k – 6,000 – Loss A/c 1 , 0 0 , 0 0

( B a l . 0× 6%
fig.)
31.3.2015 By Profit & – – 3,400 Loss

A/c
31.3.2015 By Balance 4,00,000 12,000 4,20,000 c/d

9,00,000 70,000 9,56,200 9,00,000 70,000 9,56,200
Working Note:
1. Valuation of closing balance as on 31.3.2015: Market value of 4,000 Debentures at` 105 = ` 4,20,000 Cost price
of 1,000 debentures at 1,17,400 3,000 debentures at 3,06,000 4,23,400 Value at the end = ` 4,20,000 i.e. whichever
is less
2. Profit on sale of debentures as on 1.9.2014
Amount (`)
Sales price of debentures (3,000 × ` 110) 3,30,000
Less: Brokerage @ 2% (6,600) 3,23,400
Less: Interest for 2 months (6,000)
Less: Cost price of Debentures (2,94,000) Profit on sale 23,400 3. Loss on sale of debentures as on 1.12.2014
Amount ( `) Sales price of debentures (2,000 × ` 105) 2,10,000
Less: Brokerage @ 2% (4,200) 2,05,800

Less: Cost price of Debentures (98,000 + 1,17,400) (2,15,400)
Loss on sale 9,600
4. 1.6.2014 Purchase cost of 2,000 debentures
Amount ( `) 2000 Debentures @` 120 cum interest 2,40,000
Add: Brokerage @ 2% 4,800

2,44,800
Less: Interest for 5 months (10,000) Purchase cost of 2,000 debentures 2,34,800
5. 1.9.2014 Sale value for 3,000 debentures
Amount ( `) Sales price of debentures cum interest (3,000 x ` 110) 3,30,000 Less: Brokerage @ 2% (6,600)
3,23,400
Less: Interest for 2 months (6,000) Sale value for 3,000 debentures 3,17,400
A Limited purchased 5000 equity shares (face value 100 each) of Allianz Limited for` 105 each on 1st April, 2014.
The shares were quoted cum dividend. On 15thMay, 2014, Allianz Limited declared & paid dividend of 2% for year
ended 31stMarch, 2014. On 30thJune, 2014 Allianz Limited issued bonus shares in ratio of 1:5. On 1st October, 2014
Allianz Limited issued rights share in the ratio of 1:12 @ 45 per share. A limited subscribed to half of the rights
issue and the balance was sold at`5 per right entitlement. The company declared interim dividend of 1% on 30th
November, 2014. Right shares were not entitled to dividend. The company sold 3000 shares on 31st December, 2014
at 95 per share. The company
A Ltd. incurred 2% as brokerage while buying and selling shares. You are required to prepare Investment Account
in books of A Ltd.
(10 marks)
Answer:
Working Notes:
1. Cost of Purchase = (5000 × 105) + 2% Brokerage
In the books of A Ltd.

Investment A/c
Date Particulars No. of ` Date Particulars No. of `
Shares Shares
1\4 To Bank 5,000 5,35,500 15\5 By Bank (Div) 10,000
30\6 To Bonus 1,000 ☐ 31/12 By Bank (Sale of 3,000 2,79,300
Share)
1\10 To Bank (Right) 250 11,250 31/3 By Balance c/d 3,250 2,79,110
31\12 To P& L 21,660
6,250 5,68,410 6,250 5,68,410
= ` 5,35,500
2. Dividend = 5000 × 100 × 2%
= ` 10,000
3. Pre Acquisition No. of
Bonus Shares = = ` 1000

4. No. of Rights share eligible = (5,000 + 1,000) × = ` 500
5. No. of Right Share subscribed = 500 × = 250 shares @ ` 45
= ` 11,250
6. No. of Rights share Renounced = 500 - 250 = 250 @ 5
= ` 1,250
7. Interim Dividend on 30/11/2014 = (5,000 + 1,000) ×`100 × 1%
= ` 6,000 (To be taken to P&L) 8. Cost of Shares sold on
31/12/2014 = (5,35,500+11,250-10,000) ×
=` 2,57,640 9. Net Sale proceeds for sale on

31/12/2014 = (3000 shares × ` 95) Less Brokerage 2%
= ` 2,79,300
10. Profit on Sale of Shares on 31/12/2014
Net Sale Proceeds ` 2,79,300 Less Cost 2,57,640 = ` 21,660 Space to write important points for revision
Q. 3.13 2016 - May [4] (b), RTP Practical
A Ltd. purchased on 1st April, 2015 8% convertible debenture in C Ltd. of face value of` 2,00,000 @` 108. On 1st
July, 2015 A Ltd. purchased another ` 1,00,000 debenture @ ` 112 cum interest.
On 1st October, 2015 ` 80,000 debenture was sold @ ` 105. On 1st December, 2015, C Ltd. give option for
conversion of 8% convertible debentures into equity share of`10 each. A Ltd. receive 5000 equity share in C Ltd. in
conversion of 25% debenture held on that date. The market price of debenture and equity share in C Ltd. at the end
of year 2015 is ` 110 and ` 15 respectively.
Interest on debenture is payable each year on 31st March, and 30th September.
The accounting year of A Ltd. is calendar year.
Prepare investment account in the books of A Ltd. on average cost basis.
(8 marks)
Answer: Investment Account in the Books of A Ltd. for the year ending 31/12/2015
Date PartiNominal Interest Cost Date Particulars Nominal Interest Cost culars value value
1/4/15 To Bank 2,00,000 – 2,16,000 31/9/15 By Bank(int – 12,000 – erest)
1/7/15 To Bank 1,00,000 2,000 1,10,000 1/10/15 By Bank 80,000 – 84,000
31/12/15 To P&L – 14,033 – 1/10/15 By P&L A/c – – 2,933 A/c
1/12/15 By Equity 55,000 – 59,767 share
1/12/15 By Bank 733 (interest

on conv
ertible
debe
nture)
31/12/15 By Balance 1,65,000 3,300 1,79,300 c/d

3,00,000 16,033 3,26,000 3,00,000 16,033 3,26,000
☐ Cost of Debenture purchased on 1st July

= ` 1,12,000 – ` 2,000 (Interest)
= ` 1,10,000
☐ Cost of Debentures sold on 1st Oct.

= (` 2,16,000 + ` 1,10,000) × 80,000/3,00,000
= ` 86,933
☐ Loss on sale of Debentures

=` 86,933 –` 84,000
=` 2,933
Nominal value of debentures converted into equity shares =` 55,000

[(` 3,00,000 – 80,000) × 0.25]
Interest received before the conversion of debentures
Interest on 25% of total debentures = 55,000 × 8% × 2/12 = ` 733 ☐ Cost of Debentures converted
= (` 2,16,000 + ` 1,10,000) × 55,000 / 3,00,000
= ` 59,767
☐ Cost of closing balance of Debentures
= (` 2,16,000 +` 1,10,000) × 1,65,000/3,00,000
= ` 1,79,300
☐ Closing balance of Debentures has been valued at cost being lower
than the market value i.e. ` 1,81,500 (` 1,65,000 @ ` 110) ☐ 5,000 equity Shares in C Ltd. will be valued at cost of`
59,767 being
lower than the market value ` 75,000 (` 15 × 5,000)
Q. 3.14 2016 - Nov [7] (c) Practical
On 1stDecember 2015, M/s. Blue & Black purchased, 20,000 12% fully paid debentures of ` 100 each at ` 105 cum
interest price, also paying brokerage @ 1% of cum interest amount of the purchase. On 1st March, 2016, the firm
sold all these debentures at` 110 cum-interest price, again paying brokerage @ 1% of cum interest amount. Prepare
Investment Account in the books of M/s. Blue & Black for the period 1st Dec., 2015 to 1st March 2016. Interest
being payable half yearly on 30th September and 31st March of every accounting year. (4 marks)
Answer: Investment A/c in the books of M/s Blue & Black for the period from 1-12-15 to 1-3-16
Date Particulars No. Val.
1.12.15 To Bank A/c 20,00,000
31.3.16 To P & L A/c
(Scrip : 12% Debenture)

Int. Cost Date Particulars No. Val. Int. Cost
40,000 20,81,000 1.3.16 By Bank A/c 20,00,000 1,00,000 20,78,000
60,000 31.3.16 By P & L A/c 3,000
20,00,000 1,00,000 20,81,000 20,00,000 1,00,000 20,81,000
Working Notes:
(i) Cost of 12% Debenture purchased on 1st December, 2015:
( `) Cost value (20,000 × ` 105) = 21,00,000

Add: Brokerage @ 1% of ` 21,00,000 = 21,000
Less: Cum - Interest = (40,000) Total 20,81,000 (ii) Sale proceed of 12% Debenture Sold on 31st March, 2016:
( `) Sales price (20,000 ×` 110) = 22,00,000 Less: Brokerage @ 1% of ` 22,00,000 = (22,000)
Less: Cum Interest = (1,00,000) Total 20,78,000 Space to write important points for revision
Akash Ltd. had 4,000 equity share of X Limited, at a book value of `15 per share (face value of ` 10 each) on 1st
April 2016. On 1st September 2016, Akash Ltd. acquired 1,000 equity shares of X Limited at a premium of` 4 per
share. X Limited announced a bonus and right issue for existing share holders.
The terms of bonus and right issue were:
(1) Bonus was declared, at the rate of two equity shares for every five
equity shares held on 30th September, 2016.

(2) Right shares are to be issued to the existing shareholders on 1st December 2016. The company issued two right
shares for every seven shares held at 25% premium. No dividend was payable on these shares. The whole sum being
payable by 31st December, 2016.
(3) Existing shareholders were entitled to transfer their rights to outsiders, either wholly or in part.
(4) Akash Ltd. exercised its option under the issue for 50% of its entitlements and sold the remaining rights for ` 8
per share.
(5) Dividend for the year ended 31st March, 2016, at the rate of 20% was declared by the company and received by
Akash Ltd. on 20th January 2017.
(6) On 1st February, 2017, Akash Ltd. sold half of its share holdings at a premium of ` 4 per share.
(7) The market price of share on 31.03.2017 was ` 13 per share.
You are required to prepare the Investment Account of Akash Ltd. for the
year ended 31stMarch, 2017 and determine the value of share held on that
date assuming the investment as current investment. (8 marks)
Answer:
Investment A/c of Akash Ltd.
[Equity share of X Ltd. F.V. ` 10%]
Dr. Cr.
Date Particulars No. Amount Date Particulars No. Amount
1-4-16 To Balance b/d 1-9-16 To Cash/Bank
30-9-16 To Bonus
4,000 60,000 20-1-17 By Bank — 2,000 1,000 14,000 [Dividend on sh.
2,000 — Acquired] [on 1-9-16]
1-12-16 To Cash/Bank 1,000 12,500 1-2-17 By Bank 4,000 56,000

1-2-17 To Profit (on sale) 13,750 31-3-17 By Balance c/d 4,000 42,250 8,000 1,00,250 8,000 1,00,250
☐ Working Notes: 1. Dividend Received on shares acquired on 1-9-16. = 1,000 shares × 10 × 20% = 2,000
2. Profit on sale of shares:
= Sale proceeds – Average Cost
Sale Proceeds = 4,000 shares ×` 14 = 56,000
Average Cost =
= 1,05,625 × 4,000
= 42,250
Profit = 56,000 – 42,250 = 13,750
Here, cost price of share is less than the market value of ` 13 per share. Thus, it should be valued at cost.
Q.3.16 2018 - May [2] (a) Practical Mr. Vijay entered into the following transactions of purchase and sale of equity
shares of JP Power Ltd. The shares have paid up value of` 10 per share.
Date No. of Shares Terms

01.01.2016 600 Buy @` 20 per share
15.03.2016 900 Buy @` 25 per share
20.05.2016 1000 Buy @` 23 per share
25.07.2016 2500 Bonus Shares received
20.12.2016 1500 Sale @` 22 per share
01.02.2017 1000 Sale @` 24 per share Additional Information:
1. On 15.09.2016 dividend @ ` 3 per share was received for the year ended 31.03.2016.
2. On 12.11.2016 company made a right issue of equity shares in the ratio of one share for five shares held on
payment of ` 20 per share. He subscribed to 60% of the shares and renounced the remaining shares on receipt of the
premium of ` 3 per share.
3. Shares are to be valued on weighted average cost basis. You are required to prepare Investment Account for the
year ended 31.03.2016 and 31.03.2017. (10 marks)
Answer: Investment in Equity Shares of JP Power Ltd.

Date Particulars No. DividAmount Date end `
`
Particulars No. DividAmount end ` `
1.1.16 To Bank A/c 600 12,000 31.3.16 By Balance c/d 1,500 34,500 15.3.16 To Bank A/c 900 22,500 ____ _____ 1,500 34,500 1,500 34,500 1.4.16 To
Balance b/d 1,500 34,500 15.9.16 By Bank 4,500 3,000
dividend
20.5.16 To Bank A/c 1,000 23,000 20.12.16 By Bank 1,500 33,000
25.7.16 To Bonus 2,500 — 1.2.17 By Bank 1,000 24,000

shares
12.11.16 To Bank A/c 600 12,000 31.3.17 By Balance c/d 3,100 36,812.50* 20.12.16 To P & L A/c 15,187.50* (profit on sale)
1.2.17 To P& L A/c 12,125 (profit on sale)
31.3.17 To P & L A/c 4,500
(dividend)
5,600 4,500 96,812.50 5,600 4,500 96,812.50
Working Notes:
1. Calculation of Weighted average cost of equity shares 600 shares purchased at ` 12,000
900 shares purchased at ` 22,500
1,000 shares purchased at ` 23,000
2,500 shares at nil cost
600 right shares purchased at ` 12,000
Total cost of 5,600 shares is ` 66,500 [` 69,500 less ` 3,000 (preacquisition dividend received on 1,000 shares
purchased on 20.5.17]. Hence, weighted average cost per share will be considered as`11.875 per share
(66,500/5,600).
2. It has been considered that no dividend was received on bonus shares as the dividend pertains to the year ended
31st March, 2016.
3. Calculation of right shares subscribed by Vijay
Right Shares (considering that right shares have been granted on Bonus Shares also) = 5,000/5 x 1= 1,000 shares
Shares subscribed = 1,000 x 60%= 600 shares
Value of right shares subscribed = 600 shares @`20 per share =`12,000 Calculation of sale of right renouncement
No. of right shares sold = 1,000 x 40% = 400 shares
Sale value of right = 400 shares x ` 3 per share = ` 1,200 Note: As per para 13 of AS 13, sale proceeds of rights is to
be credited to P & L A/c.
4. Profit on sale of equity shares
As on 20.12.16
Sales price (1,500 shares at ` 22) 33,000.00 Less: Cost of shares sold (1,500 x ` 11.875) (17,812.50) Profit on sale
15,187.50 As on 1. 2.17
Sales price (1,000 shares at ` 24) 24,000 Less: Cost of shares sold (1,000 x ` 11.875) (11,875) Profit on sale 12,125
Balance of 3,100 shares as on 31.3.17 will be valued at` 36,812.50 (at rate of ` 11.875 per share)
Q.3.17 2018 - Nov [2] (a) Practical Practical 18:

1st April, 2017 Purchased ` 9,000 8% bonds of ` 100 each at ` 80.50 cum-interest. Interest is payable on 1st
November and 1st May.
1st May, 2017 Received half year’s interest on 8% bonds. 10th July, 2017
1st October, 2017 Purchased 12,000 equity shares of ` 10 each in Moon Limited for` 44 each through a broker, who
Sold 2,250 8% bonds at` 81 Ex-interest. 1st November, 2017 Received half year’s interest on 8% bonds. 15th
January, 2018 Moon Limited made a rights issue of one equity
share for every four Equity shares held at ` 5 per share. Nisha exercised the option for 40% of her entitlements and
sold the balance rights in the market at` 2.25 per share.
15th March, 2018 Received 18% interim dividend on equity shares of Moon Limited.
Prepare separate investment account for 8% bonds and equity shares of Moon Limited in the books of Nisha for the
year ended on 31stMarch, 2018. Assume that the average cost method is followed. (10 marks)
Answer: In the books of Nisha,

8% Bonds for the year ended 31st March, 2018
Date Particulars Nos. Income Amount Date Particulars Nos. Income Amount ` ` ` ` 1 April, To Bank A/c 9,000 30,000 6,94,500 1 May By Bank
Interest – 36,000 2017 2017
1 Oct., To P & L A/c – – 8,625 1 Oct., By Bank A/c 2,250 7,500 1,82,250 2018 (W.N.1) 2017
1 Nov. Bt Bank-Interest 27,000 2018
31 To P & L A/c 40,500 31 By Balance c/d 6,750 – 5,20,875 March March (W.N.2)
, 2018 , 2018
9,000 70,500 7,03,125 9,000 70,500 7,03,125

Investment in Equity Shares of Moon Limited for the year ended 31st March, 2018
Date Particulars Nos. Income Amount Date Particulars Nos. Income Amount ` ` ` `
10 To Bank A/c 12,000 – 5,38,560 15 By Bank dividend – 23,760 July, March

2017 , 2018
15 To Bank A/c 1,200 – 6,000

Jan., (W.N.5)
2018
31 To P & L A/c 23,760 31 By Balance fig. 13,200 5,44,560 March, March

2018 , 2018
13,200 23,760 5,44,560 13,200 23,760 5,44,560

Working Notes:
1. Purchase of bonds on 01/04/2017:
Interest element in purchase of bonds = 9,000 × 100 × 8% ×
=` 30,000
Investment element in purchase of bonds = (9,000 × 80.50) – 30,000
= ` 6,94,500
2. Sale of bonds on 01/10/2017:
Interest element in Sale of bonds = 2,250 × 100 × 8% × 5/12 =` 7,500 Investment element in sale of bonds = 2,250 ×
81 = ` 1,82,250
3. Profit on Sale of 8% Bond:

Sales Price = ` 1,82,250 Less: Cost of Bond Sold
Average Cost = × 2,250 = (` 1,73,625) Profit on Sale ` 8,625 4. Closing Balance as on 31/03/2018 of 8% Bonds:
= × 6,750 = ` 5,20,875
Interest accrued on bonds on 31/03/2018 = 6750 × 100 × 8% × =` 22,500
5. Calculation of right shares subscribed by Moon Limited
Right shares = × 1 = 3000 shares
Shares subscribed by Nisha = 3,000 × 40% = 1,200 shares Value of right shares subscribed = 1,200 shares @ ` 5 per
share
= ` 6,000
6. Calculation of Sale of right entitlement by Moon Limited: No. of right shares sold = 3,000 – 1,200 = 1,800 shares
Sale value of right = 1,800 shares × ` 2.25 per share
=` 4,050
Note: As per Para 13 of AS 13, Sale proceeds of rights is to be credited to P & L A/c
Mr. Harsh provides the following details relating to his holding in 10% debentures (face value of` 100 each) of Exe
Ltd., held as current assets: 1.4.2018 opening balance – 12,500 debentures, cost ` 12,25,000 1.6.2018 purchased
9,000 debentures @` 98 each ex-interest 1.11.2018 purchased 12,000 debentures @ ` 115 each cum-interest
31.1.2019 sold 13,500 debentures @ ` 110 each cum-interest 31.3.2019 Market value of debentures @ ` 115 each
Due dates of interest are 30th June and 31st December.
Brokerage at 1% is to be paid for each transaction. Mr. Harsh closes his books on 31.3.2019. Show investment
account as it would appear in his books assuming FIFO method is followed. (10 marks)

Ram furnishes the following details relating to his holding in 16% Debentures of Sita Ltd.
(a) Opening Balance (1st Jan) Face Value ` 60,000 - Cost ` 59,000 (b) 1st March Purchased 100 Debentures ex-
interest at ` 98 (c) 1st July Sold 200 Debentures ex-interest out of the original
holding at ` 100
(d) 1st October Purchased 50 Debentures at` 98 cum - interest. (e) 1st November Sold 200 Debentures ex-interest at `
99 out of the
original holdings.
(f) Interest Dates are 30th September and 31st March.
Anugraha closes his books every 31stDecember. Brokerage at 1% is to be paid for each transaction.
Prepare the Investment Account as it would appear in his books. Market Value of Debentures on 31st December is`
99.
Answer:
1. Computation of Int. at 16% p.a. on various dates (Assumed that Face Value per Debenture = ` 100)
Date Particulars FV (`) Period Interest
(months) Amt. at 16% p.a.(`)
1st Jan Interest Accrued on

Opening Balance (600 × ` 100) 60,000 3 2,400
1st Mar I n t e r e s t o n E x
Interest Purchase (100 × ` 100) 10,000 5 667
31stMar Interest Received on (60,000 + 70,000 6 5,600 Holding 10,000)
1st July I n t e r e s t o n E x (200 × ` 100) 20,000 3 800 Interest Sale
30thSep Interest Received on (70,000 – 50,000 6 4,000 Holding 20,000)
1st Oct Interest on Cum
Interest Purchase (50 × ` 100) 5,000 — Nil (No Interest, since
the Interest Date is
only 30th Sep.)
1st Nov I n t e r e s t o n E x (200 × ` 100) 20,000 1 267 Interest Sale
31st Dec Interest Accrued on
Closing Balance (See Note) 35,000 3 1,400 Note : FV of holding on 31st Dec = 70,000 (upto 31st Mar) – 20,000 +
5,000
– 20,000 =` 35,000
2. Computation of Cost of Purchase
Particulars
Amount paid
Less: Interest (for Cum-Interest purchase only)

Add: Brokerage at 1% of amount paid
Net Cost of Purchase

1stMarch 1st Oct
9,800 4,900
– (Purc Date = Int. Date)Nil 98 49
9,898 4,949 3. Computation of Profit / (Loss) on Sale of Investments (in`) Particulars 1st July 1st Nov Sale
Proceeds 20,000 19,800 Less: Brokerage at 1% (200) (198) Net Sale Proceeds 19,800 19,602 Less: Cost on FIFO
59,000× 59,000×basis
= (19,667) =(19,667) Profit /(Loss) on Sale 133 (65) 4. 16% Debentures of Sita Ltd Account
Date Particulars
1st Jan To balance b/d
1st Mar To Bank
1st Oct To Bank
31st To P&L - Net Dec Gain

31st To P&L - Int tfr Dec
Total
Note:
☐ Net Gain on Sale of Investments (from Point 3) =` 133 –` 65 =` 68, transferred to P&L A/c at the end of the year.
Alternatively, the Gain of `133 and Loss of ` 65 can be separately transferred to P&L, on the dates of sale itself.
☐ Market Value of Investments at year – end = 350 ×`99 =`34,650. Cost as per above A/c Closing Balance = bal.
figure =` 34,513. So, B/Sheet Value = Lower of Cost or Market Value = Cost ` 34,513. Space to write important
points for revision
FV Int. Cost Date Particular FV Int Cost
60,000 2,400 59,000 31st Mar By Bank – 5,600 –
10,000 667 9,898 1st July By Bank 20,000 800 19,800 5,000 – 4,949 30th Sep By Bank – 4,000 –
– – 68 1st Nov By Bank 20,000 267 19,602
(b/fig) 9,000 – 31st Dec By bal. c/d 35,000 1,400 34,513

75,000 12,067 73,915 Total 75,000 12,067 73,915
On 1st April, 2017, ‘A’ had 25,000 Equity Shares of ABC Ltd, at a Book Value of ` 15 per Share (Face Value ` 10).
On 20th June, 2017, he purchased another 5,000 Shares of the Company at` 16 per Share. The Directors of ABC Ltd.
announced a Bonus and Rights Issue. No Dividend was payable on their issues. The terms of the issue are as
follows: Bonus Basis 1:6 (Date: 16th August 2017)
Rights Basis 3:7 (Date: 31st August 2017) Price` 15 per Share. Due date for payment 30th September 2017.
Shareholders can transfer their rights in full or in part. Accordingly, ‘A’ sold 1/3rd of his entitlement to ‘B’ for a
consideration of ` 2 per Share. Dividends: Dividends for the year ended 31st March, 2017 at the rate of 20% were
declared by ABC Ltd. and received by ‘A’ on 31stOctober, 2017. Dividends for Shares acquired by him on 20thJune
2017 are to be adjusted against cost of purchase. On 15th November, 2017, ‘A’ sold 25,000 Equity Shares at a
Premium of ` 5 per Share.
Prepare - (1) Investment Account, and (2) Profit & Loss Account in the books of ‘A’. Assume that the books are
closed on 31st December, 2017, and Shares are valued at Average Cost.
Answer:
Working Notes
Particulars Computation Result

1. No. of Bonus Shares (25,000 + 5,000) ÷ 6 5,000 Shares
2. No. of Rights Shares(25,000 + 5,000+5,000) × 15,000 Shares eligible

3. No. of Rights Shares 15,000÷3 = 5,000 Shares at` 2 will ` 10,000 Renounced be taken to P&L
4. No. of Rights Shares 15,000 – 5,000 = 10,000 Shares at ` 1,50,000

Subscribed ` 15
5. Total Dividend Received On OB+Fresh Purc. = 30,000 Shares ` 60,000
× ` 10 × 20%
25,000 × ` 10 × 20% ` 50,000 (a) Dividend on OB Shares taken to P&L (b) Dividend on Shares purc. on 20.06.2017
6. Cost of Shares sold on 15.11.2017

5,000 × ` 10 × 20% is adjusted in ` 10,000 Investment A/c.
(3,75,000+80,000+1,50,000 – 10,000) ` 3,30,556 ×

7. Profit on Sale of Shares on 15.11.2017
8. Cost of Shares as on 31.12.2017

Sale Proceeds (25,000 × ` 15) less ` 44,444 Cost ` 3,30,556
(3,75,000+80,000+1,50,000–10,000) ` 2,64,444 ×
1. Investment (Equity Shares in ABC Ltd.) Account
Date Particulars Shares `Date Particulars Shares ` Nos. Nos.
01.04.17To balance b/d at` 15 25,000 3,75,000 31.10.17 By Bank (Dvd) – 10,000 (WN 5b)
20.06.17 To Bank 5,000 80,000
16.08.17To Bonus (WN 1) 5,000 – 15.11.17 By Bank (Sale of 25,000 3,75,000 Shares)
30.09.17 To Bank (Rights) 10,000 1,50,000 (WN 4)
15.11.17To P&L-Pft tfr (WN 7) – 44,444 31.12.17 By balance c/d 20,000 2,64,444 (WN 8)
Total 45,000 6,49,444 Total 45,000 6,49,444
Particulars
To balance c/d
Total
2. Profit & Loss A/c (Abstract)
` Particulars `
1,04,444 By Profit on Sale of Share (WN 8) 44,444

By Renunciation of Right Shares (WN 3) 10,000
By Dividend (WN 4) 50,000
1,04,444 Total 1,04,444 Important Notes

☐ Sale Proceeds of Rights is to be credited to P&L A/c and not
Investment A/c, since the Ex-Rights Price is not lower than the Cost of Acquisition.
☐ Reduce the Dividend on Shares acquired on 20th June 2017 from the cost of acquisition, to arrive at the Net Cost
of Shares as on 31st December, 2017, since it is Pre-Acquisition Dividend.

ABC Limited held on 1st April, 2017` 2,00,000 of 9% Government Loan at ` 1,90,000 (Face Value of Loan` 100
each). Three month’s interest had accrued on the above date.
(a) On 31st May, 2017, the Company purchased the same Loan having a
Face Value of ` 80,000 at ` 95 (net) cum-interest.

(b) On 1stJune, 2017,`60,000 Face Value Loan was sold at`94 (net) ex
interest.
(c) Interest on the Loan was paid each year on 30th June and 31st
December and was credited by the Bank on the same date. (d) On 30th November 2017, ` 40,000 Face Value of the
loan was sold at
` 97 (net) cum-interest.
(e) On 1st December, 2017, the Company purchased the same loan
` 10,000 at ex-interest.
(f) On 1stMarch 2018, the Company sold`10,000 Face Value of the Loan
at ` 95 ex-interest.
(g) The Market Price of the Loan on 31st March, 2018 was ` 96. Prepare the 9% Government Loan Account in the
books of ABC Limited. FIFO Method shall be followed and the balance of the Loan held by the Company shall be
valued at Total Average Cost or Market Price, whichever is lower. Calculation shall be made to the nearest Rupee or
multiple thereof.
Answer:
A. Computation of Interest at 9% p.a. on various dates
Date Particulars FV (`) Period Interest Amt. (months) at 9% p.a. (`) 01.04.2017 Interest Accrued on
Opening Balance (2,000 × ` 100) 2,00,000 3 4,500
31.05.2017 I n t e r e s t o n C u m
Interest Purchase (800 × ` 100) 80,000 5 3,000 01.06.2017 Interest on Ex-Interest
Sale (600 × ` 100) 60,000 5 2,250 30.06.2017 Interest Received on (2,00,000+80,000
Holding – 60,000) 2,20,000 6 9,900
30.11.2017 I n t e r e s t o n C u m
Interest Sale (400 × ` 100) 40,000 5 1,500 01.12.2017 Interest on Ex-Interest
Purchase (100 × ` 100) 10,000 5 375 31.12.2017 Interest Received on (2,20,000-40,000
Holding + 10,000) 1,90,000 6 8,550
01.03.2018 Interest on Ex-Interest
Sale (100 × ` 100) 10,000 2 150
31.03.2018 Interest Accrued on
Closing Balance (Note) 1,80,000 3 4,050
Note: Face Value of Holding on 31.03.2018 = 1,90,000 (upto 31st Dec) – 10,000 = ` 1,80,000
B. Computation of Cost of Purchase

Particulars 31.05.2017 01.12.2017
Amount paid 76,000 10,000

Less: Interest (for CumWN 1 = (3,000) –
Interest purchase only)
Net Cost of Purchase 73,000 10,000
C. Computation of Profit /(Loss) on Sale of Investments Particulars 01.06.2017 30.05.2017 01.12.2017
Sale Proceeds 56,400 38,800WN A 9,500

Less: Interest (for Cum– = (1,500) – Interest Sale only)
Less: Cost on FIFO basis 1,90,000× 1,90,000× 1,90,000× = (57,000) = (38,000) = (9,500) Profit /(Loss) on Sale (600)
(700) (Nil)
Date Particulars
01.04.2017 To bal b/d
31.05.2017 To Bank
01.12.2017 To Bank
31.03.2018 To P&L - Int
Total
D. 4.9% Government Loan A/c
FV Int. Cost Date Particular FV Int Cost
2,00,000 4,500 1,90,000 01.06.2017 By Bank 60,000 2,250 56,400
80,000 3,000 73,000 01.06.2017 By P&L – – 600
10,000 375 10,000 30.06.2017 By Bank – 9,900 –
(b/fig) 18,525 – 30.11.2017 By Bank 40,000 1,500 37,300
30.11.2017 By P & L – – 700
31.12.2017 By Bank – 8,550 –
01.03.2018 By Bank 10,000 150 9,500
31.03.2018 By bal. C/d 1,80,000 4,050 1,68,500
2,90,000 26,400 2,73,000 Total 2,90,000 26,400 2,73,000
Note = Avg Cost p.u. = = ` 93.61. Since, Cost (` 93.61)
< Market Price (` 96), Investments are shown at Cost. Space to write important points for revision
‘A’ carried out the following transactions in the Shares of ABC Ltd.
(a) On 1stApril 2017, he purchased 20,000 Equity Shares of`1 each fully paid up for ` 30,000.
(b) On 15th May 2017, he sold 4,000 Share for ` 7,600.
(c) At a Meeting on 15th June, 2017, the Company decided – (i) To make a Bonus Issue of one fully paid up Share
for every four Shares held on 1st June, 2017, and
(ii) To give its Members, the right to apply for one Share for every five Shares held on 1st June, 2017 at a Price of`
1.50 per Share of which ` 0.75 is payable on or before 15th July, 2017 and the balance, ` 0.75 per Share, on or before
15th September, 2017. The Shares issued under (i) and (ii) were not to rank for dividend for the year ending 31st
December 2017.
(d) ‘A’ received his Bonus Shares and took up 2,000 Shares under the Rights, paying the sum thereon when due and
selling the Rights of the remaining Shares at` 0.40 per Share, the proceeds were received on 30th September 2017.
(e) On 15th March, 2018, ‘A’ received a dividend from ABC Ltd. of 15% in respect of the year ended 31st December
2017.
(f) On 30th March, 2018, ‘A’ received` 14,000 from the Sale of 10,000 Shares.
Record these transactions in the Investment Account in A’s books for the
year ended 31st March, 2018 transferring any Profits or Losses on these
transaction to Profit and Loss Account. Apply Average Basis. Expenses and
Tax to be ignored.
Answer:
Particulars
Working Notes
Computation Result Sale Proceeds`7,600 less Cost ` 1,600 (` 30,000 × )
2. No. of Bonus Shares (20,000 – 4,000) ÷ 4 4,000 Shares 3. No. of Rights Shares
eligible
3,200 Shares(20,000 – 4,000)× (Note: No
4. No. of Rights Shares subscribed

5. No. of Rights Shares Renounced
6. T o t a l D i v i d e d Received
Rights on Bonus Shares)
Given 2,000 Shares at ` 0.75 of ` 1,500 each two instalments
WN 3 - WN 4 = 1,200 Shares at ` 480 ` 0.40 taken to P&L
16,000 Shares ×` 1 × 15% ` 2,400
(30,000 – 6,000 +15,000 + ` 12,273 1,500) ×
9. Cost of Shares as on 31.03.2018

Sale Proceeds ` 14,000 less ` 1,727 Cost ` 12,273
(30,000 – 6,000 + 1,500 + ` 14,727 1,500) ×

Investment (Shares in ABC Limited) Account
Date Particulars No. of Dvd. AmountDate Particulars No. of Dvd. Amount Shares (`) (`) Shares (`) (`)
01.04.17 To Bank-Purc. (gvn)
20,000 – 30,000 15.05.17 By Bank (Sale) 4,000 – 7,600
15.05.17 To P&L-Profit on sale tfrd (WN 1)
– – 1,600 15.03.18 By Bank (Dvd)
(WN 6) – 2,400 –
01.06.17 To Bonus (WN 2) 4,000 – Nil 30.03.18 By Bank (Sale) 10,000 – 14,000
15.07.17 Tp Bank (WN 4) 2,000 – 1,500 31.03.18 By balance c/d 12,000 – 14,727 (WN 9)
15.09.17 To Bank (WN 4)
– – 1,500
30.03.18 To P&L - Profit on sale tfrd (WN 8)
– – 1,727
31.03.18 To P&L - Dvd tfrd
Total
Note:
Investment in Shares A/c can also be prepared similar to Investment in Debentures, by having Dividend Column,
instead of Interest Column. The above account has been prepared in this manner.

– 2,400 –
26,000 2,400 36,327 Total 26,000 2,400 36,327
On 1st April, 2017, XYZ Ltd. has 15,000 Equity Shares of ABC Ltd., at a Book Value of` 15 per Share (Face Value`
10 per Share). On 1st June, 2017, XYZ Ltd. acquired 5,000 Equity Shares of ABC Ltd., for ` 1,00,000 on cum-rights
basis. Vaikuntam Ltd. announced a Bonus and Rights Issue. (a) Bonus was declared, at the rate of one Equity Share
for every five
Shares held, on 1st July, 2017.

(b) Rights Shares are to be issued to the existing Shareholders on 1st
September, 2017. The Company will issue one Right Share for every
6 Shares at 20% Premium. No. dividend was payable on these Shares. (c) Dividend for year ended 31-3-2017 was
declared by ABC Ltd. at 20%,
and received by XYZ Ltd. on 31st October, 2017.
(d) XYZ Ltd. - (i) Took up half the Rights Issue, and (ii) Sold the remaining
rights for ` 8 per Share.
(e) XYZ Ltd. sold half of its share holdings on 1st January, 2018 at`16.50
per Share, Brokerage being 1%.
Prepare Investment a/c of XYZ Ltd. for the year ended 31st March, 2018, assuming the Shares are valued at Average
Cost.
Answer:
Working Notes
Particulars
1. No. of Bonus Shares
2. No. of Rights Shares eligible

3. No. of Rights Shares Renounced
Computation Result (15,000 + 5,000) ÷ 5 4,000 Shares
(15,000 + 5,000 + 4,000) × 4,000 Shares
4,000 × = 2,000 Shares at`8 will be` 16,000 taken to P&L
4. No. of Rights Shares subscribed

4,000 – 2,000 = 2,000 Shares at` 10 ` 24,000 + 20% Premium
5. Total Dividend Received On OB+Fresh Purc. = 20,000 Share × ` 40,000
` 10 × 20%
(a) Dividend on OB Shares taken to P&L

15,000× ` 10 × 20% ` 30,000
(b) D i v i d e n d o n Shares purc. on 01.06.2017

5,000 × ` 10 × 20% is adjusted in ` 10,000 Investment A/c.

(2,25,000+1,00,000+24,000–10,000) ` 1,69,500 ×
7. Net Sale Proceeds for sale on 01.01.2018 (13,000 Shares × ` 16.50) less ` 2,12,355 Brokerage 1%
8. Profit on Sale of
Shares on 01.01.2018 Net Sale Proceeds ` 2,12,355 less ` 42,855 Cost ` 1,69,500
Investment (Equity Shares in ABC Ltd.) Account

Date Particulars Shares ` Date Particulars S h a r e ` Nos. s Nos. 01.04.17 To balance b/d 15,000 2,25,000 31.10.17 By Bank (Dvd) – 10,000 at ` 15
(WN 5b)
01.06.17 To Bank 5,000 1,00,000
01.07.17 To Bonus 4,000 – 01.01.18 By Bank (Sale 13,000 2,12,355 (WN 1) of Shares)
(WN 7)
01.09.17 To Bank 2,000 24,000
(Rights)(WN 4)
15.11.17 To P&L- Pft tfr – 42,855 31.03.18 By balance c/d 13,000 1,69,500 (WN 8) (Note)
Total 26,000 3,91,855 Total 26,000 3,91,855
Note : 50% of the Shareholdings are sold, for which cost is`1,69,500 as per WN. 6. Hence, Cost of Balance 50%
Shareholdings at period -end is also` 1,69,500.
Important Notes
☐ Sale Proceeds of Rights is to be credited to P&L A/c and not Investment A/c, since the Ex-Rights Price is not
lower than the Cost of Acquisition.
☐ Reduce the Dividend on Shares acquired on 1st June 2017 from the cost of acquisition, to arrive at the Net Cost of
Shares as on 31st March 2018, since it is Pre-Acquisition Dividend.

The following transactions of Ram took place during the year ended 31st March, 2018. 1st April, 2017
12th April, 2017
1st May, 2017 15th May, 2017
1st October, 2017

1st November, 2017
1stDecember, 2017 Purchased` 12,00,000 8% Bonds at` 80.5 cuminterest. Interest is payable on 1stNovember and 1st
May.
Purchased 1,00,000 Equity Shares of` 10 each in Shyam Ltd. for ` 40,00,000.
Received half-year’s interest on 8% Bonds. Shyam Ltd. made a bonus Issue of three Equity Shares for every two
held. Ram sold 1,25,000 Bonus Shares at ` 20 each.
Sold ` 3,00,000 8% Bonds at ` 81 ex-interest. Received half year’s Bond Interest.
Received 18% Dividend on Equity Shares in Shyam Ltd.
Prepare the relevant Investment Accounts in the books of Ramajayam for the year ended 31st March, 2018.
Answer:
1. Computation of Interest at 8% p.a. on various dates Date Particulars FV (`) Period Int. Amt. at (months) 8% p.a. (`) 1stApril
Interest on Cum-Interest Purchase 12,00,000 5 40,000 (12,000 ×` 100)
1st May Interest Received on Holding 12,00,000 6 48,000 1st Oct Interest on Ex-Interest Sale 3,00,000 5 10,000 (3,000 ×` 100)
1st Nov Interest Received on Holding 9,00,000 6 36,000 (12,00,000 – 3,00,000)
31st Mar Interest Accrued on Closing 9,00,000 5 30,000 Balance
2. Computation of Cost of Purchase
Particulars Computation `
Amount paid on 1st April 12,000 × 80.5 9,66,000 Less: Interest (for Cum-Interest (W N 1) (40,000)
purchase only)
Net Cost of Purchase 9,26,000 3. Computation of Profit/(Loss) on sale of Investments

Particulars Computation `
Sale Proceeds 3,000 ×` 81 2,43,000 Less: Interest (for Cum-Interest —

Sale only)
Less: Cost on FIFO basis` 9,26,000× (2,31,500)
Profit / (Loss) on Sale 11,500 4. Computation of Profit on Sale of Bonus Shares and Dividend
Received
Particulars
(a) Total Shares on date of sale

(b) Profit on Sale of Bonus Shares
Computation Result
Purchase 1,00,000 + Bonus 1,00,000 ×
2,50,000 shares
Sale Value (1,25,000 ×` 20) 25,00,000
Less: Cost (See Note)
` 40,00,000× (20,00,000)` 5,00,000
(c) Dividend Received (` 10,00,000 +` 15,00,000–`12,50,000)× 18% ` 2,25,000 Note: Cost of Bonus Shares is taken at Average Cost of
Total Holding.
5. Investment in 8% Bonds Account
Date Particulars FV Int. Cost Date Particulars FV Int. Cost
1 Apr To Bank 12,00,000 40,000 9,26,000 1 May By Bank – 48,000 –
1 Oct To P&L A/c – – 11,500 1 Oct By Bank 3,00,000 10,000 2,43,000
- Profit tfr
31Mar To P&L A/c 84,000 1 Nov By Bank – 36,000 –
- Interest tfr 31 Mar By bal. c/d 9,00,000 30,000 6,94,500
Total 12,00,000 1,24,000 9,37,500 Total 12,00,000 1,24,000 9,37,500
6. Investment in Equity Shares of Shyam Ltd.
Date Particulars FV Int. Cost Date Particulars FV Int. Cost
12 Apr To Bank 1,00,000 – 40,00,000 15 May By Bank 1,25,000 – 25,00,000
15 May To Bonus Shares 1,50,000 – – 1 Dec By Bank – 2,25,000 – (Dividend)
15 May To P&L A/c

– Pft on Sale
– – 5,00,000 31 Mar By bal. c/d 1,25,000 – 20,00,000
31 Mar To P&L – Dividend

– 2,25,000 –
Total 2,50,000 2,25,000 45,00,000 Total 2,50,000 2,25,000 45,00,000
A Ltd. purchased on 1st April, 2018 8% convertible debenture in C Ltd. of face value of` 2,00,000 @` 108. On 1st
July, 2018 A Ltd. purchased another ` 1,00,000 debenture @` 112 cum interest.
On 1st October, 2018 ` 80,000 debenture was sold @ ` 108. On 1st December, 2018, C Ltd. give option for
conversion of 8% convertible debentures into equity share of` 10 each. A Ltd. receive 5,000 equity share in C Ltd. in
conversion of 25% debenture held on that date. The market price of debenture and equity share in C Ltd. at the end
of year 2018 is ` 110 and ` 15 respectively.
Interest on debenture is payable each year on 31st March, and 30th September. The accounting year of A Ltd. is
calendar year. Prepare investment account in the books of A Ltd. on average cost basis.
Answer:
Investment Account for the year ending on 31st December, 2018 Scrip : 8% Convertible Debentures in C Ltd.
[Interest Payable on 31st March and 30th September]
Date Particulars Nominal value (`) 1.4.18 To Bank 2,00,000 A/c
1.7.18 To Bank 1,00,000 A/c (W.N.1)
31.12.18 To P & A/c – [Interest]
Interest Cost (`) Date Particulars (`)
Nominal Interest Cost value (`) (`)
– 2,16,000 30,09,18 By Bank A/c
– 12,000 –
2,000 1,10,000
14,033 – 1.10.18
1.10.18 [(`3,00,00 × 8% × (6/12)]
By Bank A/c P&L A/c By P&L A/c

(loss) (W.N.1)
80,000 84,000
2,933
1.12.18
3,00,000 1.12.18
By Bank A/c
(Accrued interest) (` 55,000 x .08x
2/12)
By Equity shares in C Ltd. (W.N. 3 and 4) 733

55,000 59,767
31.12.18 By balance c/d (W.N.5) 16,033 3,26,000
1,65,000 3,300 1,79,300
3,00,000 16,033 3,26,000
SCRIP: Equity Shares in C LTD.

Date Particulars Cost (`) Date (`) Particulars Cost (`) 1.12.18 To 8% 59,767 31.12.18 By balance c/d 59,767
debentures
Working Notes:
(i) Cost of Debenture purchased on 1st July =`1,12,000 – ` 2,000 (Interest) =`1,10,000 (ii) Cost of Debentures sold
on 1st Oct. =` 86,933 = (`2,16,000 + `1,10,000) x 80,000/3,00,000
(iii) Loss on sale of Debentures = ` 86,933 –` 84,000 =` 2,933
Nominal value of debentures converted into equity =` 55,000 shares

[(` 3,00,000 – 80,000) x.25]
Interest received before the conversion of debentures Interest on 25% of total debentures = 55,000 x 8% x 2/12 =
733 (iv) Cost of Debentures converted
= (` 2,16,000 +` 1,10,000) x 55,000/3,00,000 =` 59,767 (v) Cost of closing balance of Debentures
= (` 2,16,000 +` 1,10,000) x 1,65,000 / 3,00,000 =` 1,79,300 (vii) Closing balance of Debentures has been valued at
cost being lower than the market value i.e. ` 1,81,500 (` 1,65,000 @ ` 110)
(viii) 5,000 equity Shares in C Ltd. will be valued at cost of ` 59,767 being lower than the market value ` 75,000 (`
15 x 5,000)
Note: It is assumed that interest on debentures, which are converted into cash, has been received at the time of
conversion.
CHAPTER
Insurance Claims for
10
Loss of Stock and Loss of Profit
Chapter Comprises: ☹Introduction ☹Meaning of Fire ☹Claim for Loss of Stock ☹Claim for Loss of Profit
Legend
book.
1.506
TIME MANAGER
i.e.....
1. Budgeted
2. Actual
3. Variance (1-2)
............ Day 1 16
Instant
Revision (in hours)

i.e.... i.e. on ........... ...........
Day 2 Day 8
4 3.12
(in hours)

2.2 1.35 1.35

QUICK LOOK . . . . . . . Weightage Analysis Repeatedly Asked Questions
Common Answered Must Try Question Questions
1.8, 1.18, 1.21, 2.4, 2.12, 2.13, 3.1
1 Claim for Loss of Stock
Q.1.1 2005 - Nov [6] (v) Short Notes Write short notes on the following :
Average clause under Fire Insurance Policy. (5 marks)
Answer:
The objective of average clause is discouraging the insured to under insurance. It is not necessary to include average
clause in fire insurance policy. It is applicable only in those areas where the insured has under insured. Under
insurance implies that insurance made for the lesser value of stock. It the amount of policy is less than the estimated
value of stock destroyed, then the insurance company will settle the claim proportionately by applying the average
clause.
On applying average clause, actual claim can be determined as :
Claim = Loss suffered ×

Note: In case the account insured is more than actual stock value, average clause is not applicable.
Q.1.2 2009 - May [5] (ii) Descriptive
What is “average clause” under insurance claim? (2 marks)
Answer:
When a businessman wants to reduce the burden of Insurance Premium and wants to take an insurance policy which
is less than the value of average stock, it is known as under insurance. For discouraging the under-insurance, fire
insurance policies contain an average clause. In such a case, the net claim is calculated by using following formula.
Amount of claim = × Actual Loss

Mr. 'A' prepares accounts on 30th September each year, but on 31st December, 2001 fire destroyed the greater part of
his stock. Following information was collected from his books:
` Stock as on 1.10.2001 29,700

Purchases from 1.10.2001 to 31.12.2001 75,000
Wages from 1.10.2001 to 31.12.2001 33,000
Sales from 1.10.2001 to 31.12.2001 1,40,000
The rate of Gross Profit is 33 1/3% on cost. Stock to the value of` 3,000
was salvaged. Insurance policy was for`25,000 and claim was subject to average clause.
Additional Informations:
(i) Stock in the beginning was calculated at 10% less than cost. (ii) A Plant was installed by firm's own worker. He
was paid ` 500, which was included in wages.
(iii) Purchases include the purchase of the plant for ` 5,000. You are required to calculate the claim for the loss of
Stock. (7 marks)
Answer :
Memorandum Trading Account
(For the period 1.10.2001 to 12.2001)
To Opening Stock [29,700 × 100/90] 33,000 By Sales 1,40,000

To Purchase A/c [75,000☐ 5,000] 70,000 By Stock (closing) 30,500
To Wages [33,000☐500] 32,500 (Bal. fig.)
To G. P. [1,40,000 × ¼] 35,000
1,70,500 1,70,500
Loss due to fire = 30,500
Salvaged value = 3,000
27,500
Claim to be lodged = 27,500 × = ` 22,541

A fire occurred in the workshop of Mr. A on 31stMarch, 2006 where a large part of the stock was destroyed. Scrap
realised` 7,500. Mr. A gives you the following information for the period of 1stJanuary to 31st March, 2006:
` (i) Purchases 42,500

(ii) Sales 45,000
(iii) Goods costing ` 1,000 were taken by Mr. A for personal use. (iv) Cost price of stock on 1st January, 2006 was `
20,000. (v) Over the past few years, Mr. A has been selling goods at a consistent gross profit margin of 30%.
(vi) The Insurance policy was for ` 25,000. It included an average clause. Prepare a statement of claim to be made on
the Insurance Company by Mr. A. (6 marks)
Answer:
In the books of Mr. A
Dr. Memorandum Trading A/c upto 31st March, 2006 Cr. Particular
To Opening Stock
To Purchases
To Gross Profit (W. N. l)
` Particular `
20,000 By Sales 45,000
42,500 By Goods then for personal
13,500 use 1,000 By Closing Stock 30,000
76,000 76,000 Working Note : (1) Calculation’s of Gross Profit :
GP Ratio = × 100
30 = × 100
= GP Gross Profit = ` 13,500
Statement of claim to be made on the insurance co., by Mr. A Average Clause = × Actual loss of Stock
= × (30,000☐ 7500 Salvage) ` = 18,750 ☐ Claim to be made by A =` 18,750. Space to write important points for
revision
Q.1.5 2007 - May [3] (b) Practical On 2.6.2007 the stock of Mr. Black was destroyed by fire. However, following
particulars were furnished from the records saved :
` Stock at cost on 1.4.2006 1,35,000

Stock at 90% of cost on 31.3.2007 1,62,000
Purchases for the year ended 31.3.2007 6,45,000
Sales for the year ended 31.3.2007 9,00,000
Purchases from 1.4.2007 to 2.6.2007 2,25,000
Sales from 1.4.2007 to 2.6.2007 4,80,000
Sales upto 2.6.2007 includes`75,000 being the goods not dispatched to the customers. The sales invoice price is
`75,000.
Purchases upto 2.6.2007 includes a machinery acquired for`15,000. Purchases upto 2.6.2007 does not include goods
worth ` 30,000
received from suppliers, as invoice not received upto the date of fire. These goods have remained in the godown at
the time of fire. Value of stock salvaged from fire` 22,500 and this has been handed over to the insurance company.
The insurance policy is for `1,20,000 and it is subject to average clause. Ascertain the amount of claim for loss of
stock. (8 marks)
Answer: In the books of Mr. Black

Trading Account for the year ended 31.3.2007 Dr. Cr.
To Opening Stock 1,35,000 By Sales 9,00,000 To Purchases 6,45,000 By Closing Stock at cost 1,80,000
To Gross Profit 3,00,000
10,80,000 10,80,000 Memorandum Trading A/c
(For the period from 1.4.2007 to 02.06.2007)
To Opening Stock at cost 1,80,000 By Sales 4,80,000
To Purchases 2,25,000 Less: Goods not
Add: Goods received but dispatched 75,000 4,05,000
invoice not received 30,000 By Closing stock 1,50,000 2,55,000 (Balancing figure)
Less: Machinery 15,000 2,40,000
To Gross Profit (W.N) 1,35,000
5,55,000 5,55,000
Computation of Insurance Claim
Claim subject to average clause = Actual loss of stock X Amount of Policy/Value of stock on the date of fire =
1,50,000 × = ` 1,20,000
Working Note:
G.P. ratio = × 100 = 33 %
Amount of Gross Profit = ` 4,05,000 × 33 % =` 1,35,000
Note: Salvaged stock amounting ` 22,500 handed over to the insurance company is also treated as loss to Mr. Black.
Q.1.6 2008 - May [3] (a) Practical On 11.11.2007 the premises of Rocky Ltd. was destroyed by fire. The following
information is made available :
` Stock as on 1.4.2006 3,75,000

Purchases from 1.4.2006 to 31.3.2007 5,20,000
Sales from 1.4.2006 to 31.3.2007 8,55,000
Stock as on 31.3.2007 2,00,000
Purchase from 1.4.2007 to 11.11.2007 3,41,000
Sales from 1.4.2007 to 11.11.2007 4,35,500
In valuing the stock on 31.3.2007, due to damage 50% of the value of the stock which originally cost ` 22,000 was
written off.
In June, 2007 about 50% of this stock was sold for ` 5,500 and the balance of obsolete stock is expected to realise
the same price (i.e. 50% of the original cost).
The gross profit ratio is to be assumed as uniform in respect of other sales. Stock salvaged from fire amounts to `
11,500. Compute the value of stock lost in fire. (8 marks)
Answer :
Working Note 1.
Particulars To Op. stock To Purchase
In the Books of Rocky Ltd.

Trading A/c
for the year ending 31-3-07
` Particulars `
3,75,000 By Sales 8,55,000

5,20,000 By Cl. stock 2,11,000
To G/P (20% on sales) 1,71,000 (1,89,000 + 22,000)
10,66,000 10,66,000 Working Note 2.

Calculation of Gross Profit rate
GP Ratio =
= = 20%
Particulars
To Op. stock To Purchase To GP (20%)
Memorandum Trading A/c

for the period from 1.4.07 to 11.11.07
Normal Abnormal Normal Abnormal Amount Amount Particulars Amount Amount 1,89,000 11,000 By Sales
4,30,000 5,500 3,41,000
86,000
6,16,000 11,000
By Closing 1,86,000 5,500 Stock (b/f)
6,16,000 11,000 Calculation of loss of stock:
Closing stock on the date of fire Add: Value of abnormal stocks Total value of stock
Less: Salvage value of stock Loss of stocks
(`)
1,86,000
5,500
1,91,500
11,500
1,80,000
Q.1.7 2009 - Nov [4] (a) Practical A fire broke out in the godown of a business house on 8th July, 2009. Goods
costing`2,03,000 in a small sub-godown remain un-affected by fire. The goods retrieved in a damaged condition
from the main godown were valued at ` 1,97,000.
The following particulars were available from the books of accounts:
Stock on the last Balance Sheet date at 31st March, 2009 was `15,72,000. Purchases for the period from 1st April,
2009 to 8th July, 2009 were ` 37,10,000 and sales during the same period amounted to ` 52,60,000. The average
gross profit margin was 30% on sales.
The business house has a fire insurance policy for ` 10,00,000 in respect of its entire stock. Assist accountant of the
business house in computing amount of claim of loss by fire. (8 marks)
Answer:
Calculation of amount of claim ` `
Value of stock as on 8th July, 2009 (Refer W. N.) 16,00,000

Less: Value of stock remaining unaffected by fire 2,03,000 Agreed value of damaged goods 1,97,000 4,00,000
Loss of Stock 12,00,000 Applying average clause:

Amount of claim =
= ` 7,50,000
Working Note:
Memorandum Trading Account for the period from 1st April, 2009 to 8th July, 2009
Particulars
To Opening Stock
To Purchases
To Gross Profit (30% of sales)
` Particulars `
15,72,000 By Sales 52,60,000

37,10,000 By Closing Stock (Bal. Fig.) 16,00,000
15,78,000
68,60,000 68,60,000
Q.1.8 2010 - May [1] (ix), RTP Practical
In January, 2010 a firm took an insurance policy for ` 60 lakhs to insure goods in its godown against fire subject to
average clause. On 7th March, 2010 a fire broke out destroying goods costing` 44 lakhs. Stock in the godown was
estimated at` 80 lakhs. Compute the amount of insurance claim. (2 marks)
Answer:
Amount of insurance claim
= Amount of loss due to fire ×
=` 44 lakhs × Space to write important points for revision
On 30th March, 2011 fire occurred in the premises of M/s Suraj Brothers. The concern had taken an insurance policy
of`60,000 which was subject to the average clause. From the books of accounts, the following particulars are
available relating to the period 1st January to 30th March, 2011.
1. Stock as per Balance Sheet at 31st December, 2010, ` 95,600 2. Purchases (including purchase of machinery
costing ` 30,000)
` 1,70,000.
3. Wages (including wages`3,000 for installation of machinery)`50,000.
4. Sales (including goods sold on approval basis amounting to`49,500.) ` 2,75,000. No approval has been received in
respect of 2/3rd of the goods sold on approval.
5. The average rate of gross profit is 20% of sales.
6. The value of the salvaged goods was ` 12,300.
You are required to compute the amount of the claim to be lodged to the insurance company. (5 marks)
Answer: Computation of claim for loss of stock

Particulars `
Stock on the date of fire i.e. on 30th March, 2011 (W.N.3) 62,600
Less: Value of salvaged stock (12,300) Loss of stock 50,300
Amount of claim = ×48,211(approx)

Loss of stock
=
A claim of `48,211 (approx.) should be lodged by M/s Suraj Brothers to the insurance company.
Working Notes:
1. Calculation of closing stock as on 30th March, 2011
Memorandum Trading Account for

(from 1st January, 2011 to 30th March, 2011) Particulars Amount Particulars Amount (`) (`)
To Opening stock
To Purchases
(1,70,000 - 30,000)
To Wages (50,000 - 3,000)
To Gross profit (20% on sales)
95,600 By Sales (W.N.3) 2,42,000
By Goods with customers 1,40,000 (for approval) (W.N.2) 26,400

47,000 By Closing stock (Bal. fig.) 62,600
48,400
3,31,000 3,31,000
2. Calculation of goods with customers

Since no approval for sale has been received for the goods of` 33,000
(i.e. 2/3 of`49,500) hence, these should be valued at cost i.e.`33,000
- 20% of` 33,000 = ` 26,400.
3. Calculation of actual sales
Total Sales - Sale of goods on approval = ` 2,75,000 ` 33,000
=` 2,42,000.
A fire occurred in the premises of M/s. Fireproof Co. on 31stAugust, 2010. From the following particulars relating to
the period from 1st April, 2010 to 31st August, 2010 you are requested to ascertain the amount of claim to be filed
with the insurance company for the loss of stock. The concern had taken an insurance policy for`60,000 which is
subject to average clause.
` (i) Stock as per Balance Sheet at 31-03-2010 99,000

(ii) Purchases 1,70,000
(iii) Wages (including wages for the installation of a machine 50,000
` 3,000)
(iv) Sales 2,42,000
(v) Sale value of goods drawn by partners 15,000
(vi) Cost of goods sent to consignees on 16th August, 16,500
2010, lying unsold with them
(vii) Cost of goods distributed as free samples 1,500
While valuing the stock at 31st March, 2010,` 1,000 were written off in respect of a slow moving item. The cost of
which was ` 5,000. A portion of these goods were sold at a loss of`500 on the original cost of`2,500. The remainder
of the stock is now estimated to be worth the original cost. The value of goods salvaged was estimated at`20,000.
The average rate of gross profit was 20% throughout. (10 marks)
Answer: Memorandum Trading Account

for the period 1st April, 2010 to
31st August, 2010
Normal Abnormal Total Normal Abnormal Total Items Items ` Items Items ` ` ` ` `
To Opening
stock
To Purchase (Refer W.N.)
To Wages
To Gross profit @ 20%
95,000 5,000 1,00,000 By Sales 2,40,000 2,000 2,42,000 By Goods sent
1,56,500 - 1,56,500 to consignee 16,500 - 16,500 By Loss - 500 500 47,000 - 47,000By Closing 90,000 2,500 92,500 48,000 - 48,000 stock
(Bal. fig.)
3,46,500 5,000 3,51,500 3,46,500 5,000 3,51,500

Statement of Claim for Loss of Stock
Particulars ` Book value of stock as on 31.08.2010 92,500 Less: Stock salvaged (20,000) Loss of stock 72,500
Amount of claim to be lodged with insurance company

= Loss of stock ×
=` 72,500 ×
= ` 47,027
Working Note:
Calculation of Adjusted Purchases
Particulars `
Purchases 1,70,000 Less: Drawings (12,000) Free samples (1,500) Adjusted purchases 1,56,500

On 29th August, 2012 the godown of a trader caught fire and a large part of the stock of goods was destroyed.
However, goods costing` 1,08,000 could be salvaged incurring fire fighting expenses amounting to ` 4,700. The
trader provides you the following additional information :
` Cost of stock on 1st April, 2011 7,10,500

Cost of stock on 31st March, 2012 7,90,100
Purchases during the year ended 31st March, 2012 56,79,600
Purchases from 1st April, 2012 to the date of fire 33,10,700
Cost of goods distributed as samples for advertising from 1st April, 2012 to the date of fire 41,000
Cost of goods withdrawn by trader for personal use from
1st April, 2012 to the date of fire 2,000
Sales for the year ended 31st March, 2012 80,00,000
Sales from 1st April, 2012 to the date of fire 45,36,000
The insurance company also admitted firefighting expenses. The trader had taken the fire insurance policy
for`9,00,000 with an average clause. Calculate the amount of the claim that will be admitted by the insurance
company. (8 marks) Answer:
for the period 1st April, 2012 to 29th August 2012 Date Particulars ` Date Particulars `
To Opening Stock 7,90,100 By Sales 45,36,000
To Purchases 33,10,700 By Closing stock 8,82,600
Less: Advertisement (41,000) (Bal. fig.) Drawing (2,000) 32,67,700
To Gross Profit [30% of sales
Refer Working Note] 13,60,800
54,18,600 54,18,600
Statement of Insurance Claim
Particulars `
Value of stock destroyed by fire 8,82,600

Less : Salvaged Stock (1,08,000) Add : Fire Fighting Expenses 4,700
Insurance Claim 7,79,300
Note: Because (policy amount is more than claim amount). Average clause will not apply. Hence, claim amount of
only`7,79,300 will be admitted by the Insurance Company.
Working Note:
Trading Account for the year ended 31st March, 2012
Date Particulars
To Opening Stock
To Purchases
To Gross Profit
` Date Particulars ` 7,10,500 By Sales 80,00,000

56,79,600 By Closing 7,90,100
24,00,000 stock
87,90,100 87,90,100
Rate of Gross Profit in 2011 ☐ 12
= = 30%

On 15th December, 2012, a fire occurred in the premises of M/s. OM Exports. Most of the stocks were destroyed.
Cost of stock salvaged being ` 1,40,000.
From the books of account, the following particulars were available:
(i) Stock at the close of account on 31st March, 2012 was valued at ` 9,40,000.
(ii) Purchases from 01-04-2012 to 15-12-2012 amounted to ` 13,20,000 and the sales during that period amounted to
` 20,25,000.
On the basis of his accounts for the past three years, it appears that average gross profit ratio is 20% on sales.
Compute the amount of the claim, if the stock were insured for`4,00,000. (5 marks)
Answer: Memorandum Trading Account

Dr. for the period 01.04.2012 to 15.12.2012 Cr. Particulars
To Opening stock
To Purchases
To Gross Profit @ 20%
Amt. `
9,40,000
13,20,000
4,05,000
26,65,000
Particulars Amt. ` By Sales 20,25,000

By Closing Stock 6,40,000
(Bal. figure)
26,65,000
Statement of Claim
Particulars Amt.` Estimated value of Stock as at date of fire 6,40,000
Less: Value of Salvaged Stock 1,40,000
Estimated Value of Stock lost by fire 5,00,000
As the value of stock is more than insured value, amount of claim would be subject to average clause.
Amount of Claim = × Actual Loss of Stock
Amount of Claim = × 5,00,000 = ` 3,12,500 Space to write important points for revision
Q.1.13 2014 - Nov [5] (a) Practical A fire occurred in the premises of M/s Kailash & Co. on 30th September
2013. From the following particulars relating to the period from 1st April
2013 to 30thSeptember 2013, you are required to ascertain the amount of claim to be filed with the Insurance
Company for the loss of stock. The company has taken an Insurance policy for` 75,000 which is subject to average
clause. The value of goods salvaged was estimated at`27,000. The average rate of Gross Profit was 20% throughout
the period.
Particulars Amount in ` I. Opening Stock 1,20,000

ii. Purchases made 2,40,000 iii. Wages paid (including wages for the installation of a 75,000 machine` 5,000)
iv. Sales 3,10,000
v. Goods taken by the Proprietor (Sale Value) 25,000 vi. Cost of goods sent to Consignee on 20th September 18,000
2013, lying unsold with them
vii. Free Samples distributed-Cost 2,500 (8 marks) Answer:
In the books of M/s Kailash & Co. Calculation of amount of claim:

Stock as on date of fire 1,41,500 (W.N.) Less: salvage value (27,000) Loss 1,14,500 Avg. Clause is applicable so,
Claim =
= × 75,000 Claim of stock = ` 60,689
Working Notes:
Memorandum Trading Account for the period 1st April, 2013 to 30th Sep. 2013
Particulars
To Opening Stock
To Purchases
2,40,000 By C o n s i g n 18,000
ment stock
Less: Advertisement (2,500) By C l o s i n g 1,41,500 Stock (Bal. Fig.)
Cost of goods taken by proprietor (20,000) 2,17,500

To Wages 70,000
To Gross Profit 62,000
(20% of Sales)
4,69,500 4,69,500

Particulars ` Value of stock destroyed by fire 1,41,500
Less: Salvaged Stock (27,000) Insurance Claim 1,14,500 Since policy amount is less than claim amount, average
clause will apply. Space to write important points for revision
On 1st April, 2016 the stock of Mr. Hariprasad was destroyed by fire but sufficient records were saved from which
following particulars were ascertained:
Stock at cost 1 Jan. 2015 1,47,000
Stock at cost 31st Dec. 2015 1,59,200
Purchases year ended 31st Dec. 2015 7,96,000
Sales year ended 31st Dec. 2015 9,74,000
Purchases 1-1-2016 to 31-3-2016 3,24,000
Sales 1-1-2016 to 31-3-2016 4,62,400
In valuing the stock for the Balance Sheet at 31st Dec. 2015 ` 4,600 had been written off on certain stock which was
a poor selling line having the cost`13,800. A portion of these goods were sold in March 2016 at a loss of` 500 on
original cost of` 6,900. 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`
11,600. The policy was for` 1,00,000 and was subject to average clause.
Work out the amount of the claim of loss by fire. (8 marks)
Answer:
(i) Trading A/c for the year ended 31st December, 2015
Particulars Normal Abnormal
To Opening Stock 1,47,000 -
To Purchase B/f
Total Particulars Normal Abnormal Total 1,47,000 By Sales 9,74,000 - 9,74,000 By C l o s i n g

7,82,200 13,800
To Gross profit (B/f) 1,94,800 -

7,96,000 stock (B/f) 1,50,000 9,200 1,59,200
1,94,800 By A b n o r m a l
item w/f - 4,600 4,600 11,24,000 13,800 11,37,800 11,24,000 13,800 11,37,800
Normal Gross Profit Ratio = x 100 = x 100 = 20%. (ii) Particulars
To Opening stock Less: Ab. item
To Purchase
Memorandum Trading A/c
Amount Particulars Amount (`)
( `)
1,59,200 By Sales 4,62,400
(9,200) Less: Ab. item (6,400) 1,50,000 4,56,000 3,24,000 By Closing stock (B/f) 1,09,200 To Gross Profit @ 20%
91,200
5,65,200 5,65,200
(iii) Statement of Insurance claim
Particulars Amount (`) Value of Normal Stock lost 1,09,200 Add: Value of Abnormal stock 6,900 (13,800 - 6,900)
Total value of stock lost 1,16,100 Less: Salvaged stock (11,600) Net Loss 1,04,500
Admissible claim = Net claim x

= 1,04,500 x = ` 90,008.61
On 27thJuly, 2016, a fire occurred in the godown of M/s. Vijay Exports and most of the stocks were destroyed.
However goods costing`5,000 could be salvaged. Their fire fighting expenses were amounting to`1,300. From the
salvaged accounting records, the following information is available relating to the period from 1.4.2016 to
27.7.2016:
1. Stock as per balance sheet as on 31.3.2016 ` 63,000
2. Purchases (including purchase of machinery costing ` 2,92,000 ` 10,000)

3. Wages (including wages paid for installation of machinery ` 3,000) ` 53,000
4. Sales (including goods sold on approval basis amounting to` 40,000). No approval has been received in respect of
1/4th of the goods sold on approval. ` 4,12,300
5. Cost of goods distributed as free sample ` 2,000
Other Information:
(i) While valuing the stock on 31.3.2016,`1,000 had been written off in respect of certain slow moving items costing
` 4,000. A portion of these goods were sold in June, 2016 at a loss of ` 700 on original cost of`3,000. The remainder
of these stocks is now estimated to be worth its original cost.
(ii) Past record shows the normal gross profit rate is 20%. (iii) The insurance company also admitted firefighting
expenses. The Company had taken the fire insurance policy of ` 55,000 with the average clause.
Compute the amount of claim of stock destroyed by fire, to be lodged to the Insurance Company. Also prepare
Memorandum Trading Account to be for the period 1.4.2016 to 27.7.2016 for normal and abnormal items. (10
marks)
Answer: Trading A/c

(For the year 1.4.2016 to 27.7.2016)
Particulars Normal A b n o r mal
Total Particulars Normal A b n o r Total mal
To Ope. Stock 60,000 4,000 64,000 By Sales 4,00,000 2,300 4,02,300
To Purchase (Note)
2,80,000 — 2,80,000 By C/s Stock with 8,000 — 8,000 Customer
To Wages
(53,000 – 3,000) 50,000 — 50,000 By Gross Loss — 700 700
To Gross Profit 80,000 80,000 By Clo. Stock 62,000 1,000 63,000 (B/f)
4,70,000 4,000 4,74,000 4,70,000 4,000 4,74,000
Total stock on date of fire

Normal stock 62,000
Add : Abnormal stock 1,000
63,000
Less: Salvaged stock (5,000)
58,000
Add : Fire fighting expenses 1,300
☐Total Loss 59,300
Calculation of net claim with average clause since policy amount is less than insurable amount.
(a) × Total Loss

= × 59,300 = 51,770 or
(b) × 58,000 = 50,635
Add : Fire fighting expense 1,300

51,935

On 30th March, 2018 fire occurred in the premises of M/s Alok & Co. The concern had taken an insurance policy
of`1,20,000 which was subject to the average clause. From the books of accounts, the following particulars are
available relating to the period 1st January to 30th March, 2018.
(i) Stock as per Balance Sheet at 31st December, 2017 ` 1,91,200 (ii) Purchases (including purchase of machinery
costing ` 3,40,000 ` 60,000)
(iii) Wages (including wages ` 6,000 for installation of ` 1,00,000

machinery)
(iv) Sales (including goods sold on approval basis ` 5,50,000
amounting to` 99,000)
No approval has been received in respect of 2/3rd of the goods sold on approval.
(v) The average rate of gross profit is 20% of sales.
(vi) The value of the salvaged goods was ` 24,600

You are required to compute the amount of the claim to be lodged to the Insurance Company. (10 marks) Answer:
Computation of claim for loss of stock
Particulars ` Stock on the date of fire i.e. on 30th March, 2018 (W.N.1) 1,25,200 Less: Value of Salvaged Stock
(24,600) Loss of Stock 1,00,600
Amount of Claim = × Loss of Stock

= 96,422 (approx)
☐ A claim of`96,422 (approx) should be lodged by M/s. Alok & Co. to the insurance company.
Working Notes:
1. Calculation of Closing Stock as on 30th March, 2018
Memorandum Trading Account for
(from 1st January, 2018 to 30th March, 2018) Particulars Amount Particulars Amount (`) (`)
To Opening Stock
To Purchases
(3,40,000 – 60,000)
1,91,200 By Sales (W.N.3) 4,84,000 2,80,000 By Goods with 52,800* customers (for Approval) (W.N.2)
To Wages 94,000 By Closing Stock 1,25,200
(1,00,000 – 6,000) (Bal. Fig.)

(20% on sales)
6,62,000 6,62,000 For financial statement purposes, this would form part of closing stock (since there is no sale).
However, this has been shown separately for computation of claim for loss of stock since the goods were physically
not with the concern and, hence, there was no loss of such stock.
• Since no approval for sale has been received for the goods of ` 66,000 (i.e.b of` 99,000) hence, these should be
valued at cost i.e. ` 66,000 – 20% of 66,000 =` 52,800.
3. Calculation of actual sales

• Total sales - sales of goods on approval (brd) = ` 5,50,000 – ` 66,000 = ` 4,84,000
A fire engulfed the premises of a business of M/S Kite Ltd. in the morning, of 1st October, 2017. The entire stock
was destroyed except, stock salvaged of` 50,000. Insurance Policy was for` 5,00,000 with average clause.
The following information was obtained from the records saved for the period from 1st April to 30th September,
2017:
` Sales 27,75,000
Purchases 18,75,000
Carriage inward 35,000
Carriage outward 20,000
Wages 40,000
Salaries 50,000
Stock in hand on 31st March, 2017 3,50,000
(1) Sales upto 30th September, 2017, includes` 75,000 for which goods had not been dispatched.
(2) On 1st June, 2017, goods worth ` 1,98,000 sold to Hari on approval basis which was included in sales but no
approval has been received in respect of 2/3rd of the goods sold to him till 30th September, 2017.
(3) Purchases upto 30th September, 2017 did not include` 1,00,000 for which purchase invoices had not been
received from suppliers, through goods have been received in godown.
(4) Past records show the gross profit rate of 25% on sales.
You are required to prepare the statement of claim for loss of stock for
submission to the Insurance Company. (10 marks)
Answer: Memorandum Trading A/c (01/04/2017 to 30/09/2017)
Particulars ` Particulars ` To Opening Stock

To Purchases
(18,75,000+1,00,000)
To Carriage inward To Wages
To Gross Profit
(` 25,68,000 × 25%) 3,50,000 By Sales 25,68,000 (27,75,000 - 75,000 - 2/3 × 1,98,000) 19,75,000 By Goods with
Customers (W N) 99,000
35,000 By Closing Stock (Bal. Fig.) 3,75,000 40,000
6,42,000 30,42,000 30,42,000
Stock destroyed (Loss of Stock)
Particulars ` Stock on the date of fire (i.e. 01/10/2017) 3,75,000 Less: Stock Salvaged (50,000)
Stock destroyed by fire (Loss of Stock) 3,25,000 Insurance claim =` 3,25,000

(Average clause is not applicable as insurance policy amount (`5,00,000) is more than the value of closing stock i.e.
` 3,75,000)
Working Note:
Since no approval for sale has been received for the goods of `1,32,000 (i.e. 2/3 of ` 1,98,000) hence, these should
be valued at cost i.e. ` 1,32,000 – 25% of` 1,32,000 =` 99,000.
2. For financial statement purposes, this would form part of closing stock (since there is no sale). However, this has
been shown separately for computation of claim for loss of stock since the goods were physically not with the entity
and, hence, there was no loss of such stock.

Ramesh prepares accounts on 30th September each year, but on 31st December, a fire destroyed the greater part of
his Stock.
Following information was collected from his books:
Stock as on 1st October 29,700 Purchases from 1st October to 31st December 75,000 Wages from 1st October to 31st
December 33,000 Sales from 1st October to 31st December 1,40,000 The Gross Profit rate is 33.33% on Cost. Stock
to the value of`3,000 was salvaged. Insurance Policy was for ` 25,000 and claim was subject to Average Clause.
Calculate the claim for the Loss of Stock from the following additional information:
☐ Stock in the beginning was valued at 10% less than cost. ☐ A Plant was installed by Firm’s own worker. He was
paid`500, which
was included in Wages.

☐ Purchases include Purchase of the plant for ` 5,000.
Answer:
Dr. 1. Memorandum Trading Account (1st Jan. to 31st Dec.) Cr.
Particulars ` Sales 1,40,000
Stock on the date of 30,500

fire (balancing figure)
Particulars ` To Opening Stock (29,700 ÷ 90%) 33,000 By
To Purchases Less Cost of Plant 70,000 By (75,000 - 5,000)

To Wages Less Wages paid for 32,500 Plant (33,000 - 500)
To Gross Profit = 1/3rd on Cost = 35,000 1/4th on Sales
Total 1,70,500 Total 1,70,500 2. Statement of Insurance Claim
Particulars ` Value of Stock Lost on 31st December (WN 1) 30,500 Less: (3,000) Salvaged Stock
Gross Claim 27,500
Net Claim=GrossClaim× =`27,500× 22,541
A Fire occurred on the premises of a merchant on 15th June and a considerable part of the Stock was destroyed. The
value of Stock saved was` 9,000. The books disclosed that on 1st April, Stock was valued at `73,500, Purchases to
the date of fire amounted to`2,09,880 and Sales ` 3,13,000. On investigation, it was found that during the past five
years, the average Gross Profit on Sales was 36%. Prepare a statement showing the amount, the Merchant should
claim from the Insurance Company in respect of Stock destroyed by fire.
Answer:
Particulars ` Value of Stock Cost on 15th June 83,060 Less: Salvaged Stock (saved) (9,000)
Net Claim 74,060 Note: Since Policy Amount is not given, the issue of Average Clause is not considered.
Working Note:
Dr. 1. Memorandum Trading Account (1st Apr to 15th Jun) Cr.
Particulars
To Stock in the beginning
` Particulars ` 73,500 By Sales 3,13,000 By Stock on the date of 83,060
2,09,880 Fire (balancing figure)

1,12,680
To Purchases
To Gross Profit on Sales (3,13,000 × 36%

Total
3,96,060 Total 3,96,060 Q.1.20 RTP Practical
Due to a fire on 1st July, the entire Stock was burnt except some costing ` 70,000. The information available from
the books of accounts saved were as follows:
☐ The Average Gross Profit was 25% on Sales.
☐ The Stock on 31st December, valued as per practice at 10% above
cost was ` 2,20,000.
☐ The Purchases and Sales from 1st January upto the date of fire were
` 3,00,000 and` 6,80,000 respectively.
☐ The Wages for the period amounted to ` 1,44,000.
☐ The Company insured Stock for ` 1,20,000.
☐ The Policy had an Average Clause.
Prepare a statement showing the amount of Stock lost by fire and the claim to be lodged with the Insurance
Company.
Answer:
Dr. 1. Memorandum Trading Account (1st Jan to 30th Jun) Cr. Particulars
To O p e n i n g S t o c k
(2,20,000 ÷ 110%)
To Purchases
To Wages
To Gross Profit = 25% on
Sales
` Particulars `
2,00,000 By Sales 6,80,000

By Stock on the date of 1,34,000
3,00,000 fire (balancing figure)
1,44,000
1,70,000
2. Statement of Insurance Claim
Particulars `
Value of Stock Lost on 1st July 1,34,000

Less: Salvaged Stock (70,000) Net Claim 64,000
Admissible Claim = Net Claim ×

57,313 =` 64,000 ×
On 20th July 2019, the Godown and Business Premises of Raj were affected by fire, and from the accounting records
salvaged, the following information is made available to you:
Stock of Goods at cost on 1st April ,2018 ` 1,00,000

Stock of Goods at 10% lower than Cost as on 31st March, 2019 ` 1,08,000
Purchases of Goods ` 4,20,000

For the year from 1st April, 2018 to
31st March, 2019

Sales ` 6,00,000
For the period from 1st April ,2019 to 20th July, 2019
Purchases less Returns ` 1,40,000
Sales less Returns ` 3,10,000
Sales upto 20thJuly, 2019 included`40,000 for which goods had not been despatched. Further, Purchases upto 20th
July, 2019 did not include ` 20,000 for which Purchase invoices had not been received for Suppliers, though goods
have been received at the Godown.
Goods salvaged from the accident were worth` 12,000 and these were handed over to the insurer.
Ascertain the value of the claim for loss of Goods/Stock.
Answer:
1. Trading Account for the year ended 31st March, 2019 (to compute
GP Rate)
Particulars To Opening Stock To Purchases
To Gross Profit
(balancing figure) Total
` Particulars `
1,00,000 By Sales 6,00,000

2,00,000 (1,08,000 ÷ 90%)
7,20,000 Total 7,20,000
Gross Profit Ratio = = = 33.33%
Dr. 2. Memorandum Trading Account (1stApr 2017 to 20thJul, 2019) Cr. Particulars
To Opening Stock
To Purchases (1,40,000
+ 20,000)
To Gross Profit = 1/3rd of
Sales (from WN 1)
` Particulars `
1,20,000 By Sales (3,10,000 - 2,70,000
1,60,000 40,000)
By Stock on the date of 1,00,000 90,000 fire (balancing figure)
3. Statement of Insurance Claim
Particulars ` Value of Stock Lost on date of Fire 1,00,000 Less: Salvaged Stock (12,000)
Net Claim 88,000 Note: Since Policy Amount is not given, the issue of Average Clause is not
considered.
A fire engulfed the premises of a business of M/s Preet on the morning of 1st July 2018. The building, equipment
and stock were destroyed and the salvage recorded the following:
Building –`4,000; Equipment –`2,500; Stock – `20,000. The following other information was obtained from the
records saved for the period from 1st January to 30th June 2018:

Sales Return 40,000
Purchases 9,50,000
Purchase return 12,500
Cartage inward 17,500
Wages 7,500
Stock in hand on 31st December, 2017 1,50,000
Building (value on 31st December, 2017) 3,75,000
Equipment (value on 31st December, 2017) 75,000
Depreciation provision till 31st December, 2017 on:
Building 1,25,000
Equipment 22,500
No depreciation has been provided since December 31st 2017. The latest rate of depreciation is 5% p.a. on building
and 15% p.a. on equipment by straight line method.
Normally business makes a profit of 25% on net sales. You are required to prepare the statement of claim for
submission to the Insurance Company.
Answer :
Memorandum Trading Account for the Period from 1.1.2018 to 30.6.2018
Particulars ` To Opening Stock (1.1.2018) 1,50,000 By To Purchase 9,50,000
Less: Returns (12,500) 9,37,500
To Cartage Inwards 17,500 By To Wages 7,500

(25% of` 11,10,000)

Less: Sales
Return (40,000) 11,10,000 Closing Stock 2,80,000 (Bal. Fig)
13,90,00 13,90,000 Stock Destroyed Account

``
To Trading Account 2,80,000 By Stock Salvaged Account 20,000

By Balance c/d (For Claim) 2,60,000
2,80,000 2,80,000
Items
A
Stock
Buildings Equipment
Statement of Claim
Cost Depreciation Salvage Claim (`) (`) (`) (`)
B C D (E= B-C-D)
2,80,000 20,000 2,60,000
3,75,000 1,25,000 + 9,375 4,000 2,36,625
75,000 22,500 + 5,625 2,500 44,375
5,41,000
Q.1.23 Practice Practical Compute the amount of claim from the following information: ` Sum Insured against the
loss of furniture 73,000 Value of Salvaged Furniture 6,000 Actual Value of furniture as on date of fire 1,70,000
Answer:
Statement of Claim
` A. Estimated value of furniture as at date of fire 1,70,000

B. Value of Salvaged furniture 6,000
C. Estimated value of furniture lost by fire (A - B) 1,64,000
D. Amount of claim by applying Average clause:
Loss suffered × =`1,64,000 × 70,424

The premises of Fire Proof Ltd. were destroyed by fire on 30.6.2024. The following figures were ascertained. You
are required to prepare a statement of claim in respect of loss of stock to be submitted to the insurance company.
Particulars 2011 2012 2013 1.1.2014 to 30.6.2024 ` ` ` `
Opening Stock 2,000 2,200 1,180 3,402

Purchases 16,000 14,500 17,000 3,500
Sales 20,000 19,850 18,750 2,600
Carriage Inwards 500 300 500 100
Freight Outwards 600 700 300 25
In 2021, while valuing closing stock, some defective goods costing ` 500 were valued at` 400. These were sold for `
450 in 2022. In 2022, an item costing`600 was wrongly valued at`700. This was sold for`550 in 2023. In 2013, item
costing ` 1,200 were valued at` 1,000, 50% of these were sold in June, 2024 for` 600. Subject to this, the gross profit
rate is more or less uniform. The value of salvage was` 800 and the sum insured was ` 4,500.
Answer:
Statement of Claim
A. Estimated value of stock as at date of fire `
(a) Book-value of Normal Items 4,402 (b) Current value of Abnormal Items 600 5,002
B. Value of Salvaged Stock 800

C. Estimated value of stock lost by fire (A - B) 4,202
D. Amount of claim by applying Average clause:
Loss suffered = =` 4,202 × 3,780

Working Notes:
Dr. (i) Trading Account for the Period from 01.01.2021 to 31.12.2021 Cr. Particulars

To Carriage Inwards To Gross Profit
G. P. Ratio =
Normal Abnormal Particulars Normal Abnormal Items Items Items Items ` ` ` `
1,500 500 By Sales 20,000 — 16,000 — By Closing Stock 1,800 400

500 — By Gross Loss 100
3,800 —
21,800 500 21,800 500
× 100 = × 100 = 19%
Dr. (ii) Trading Account for the Period from 01.01.2022 to 31.12.2022 Cr.
Particulars Normal Abnormal Particulars Normal Abnormal Items Items Items Items ` ` ` `
To Opening Stock 1,800 400 By Sales 19,400 450

To Purchases 13,900 600 By Closing Stock 480 700
To Carriage Inwards 300 —
To Gross Profit 3,880 150
19,880 1,150 19,880 1,150
G. P. Ratio = × 100 = × 100 = 20%
(iii) Trading Account for the Period from 01.01.2023 to 31.12.2023 Dr.
Particulars Normal Items (`)
To Opening Stock 480

To Purchases 15,800
To Carriage Inwards 500
20,602 G. P. Ratio =
Cr.
Abnormal Particulars Normal Abnormal Items Items Items (`) (`) (`)
700 By Sales 18,200 550

1,200 By Closing Stock 2,402 1,000
— By Gross Loss — 350
—
1,900 20,602 1,900 × 100 = × 100 = 21%
(iv) Average of Gross Profit Ratio based on Profits of 3 years (v) Memorandum Trading Account for the period
from 01.01.2024 to 30.06.2024
Particulars Normal Items (`)
To Opening Stock 2,402

To Purchases 3,500
To Carriage Inwards 100
To Gross Profit 400
6,402
Abnormal Particulars Normal Abnormal Items Items Items (`) (`) (`)
1,000 By Sales 2,000 600

— By Closing Stock 4,402 500
—
100
1,100 6,402 1,100
2 Claim for Loss of Profit

Q.2.1 2017 - May [7] (c) Descriptive

What is Consequential loss policy and what items are generally covered by such policy? (4 marks)
Answer:
Consequential Loss Policy:
When a fire occurs, apart from the direct loss on accounts of stock or other assets destroyed, there is also a
consequential loss because , for sometimes, the business is disorganised or has to be discontinued, and during that
period, the standing expenses of the business like rent, salaries etc. Continue.
The consequential loss policy covered the following items: (1) Loss of net profit
(2) Standing charges
(3) Any increased cost of working e.g., renting of temporary premises.

On account of a fire on 15th June, 2002 in the business house of a company, the working remained disturbed upto
15thDec., 2002 as a result of which, it was not possible to affect any sales. The company had taken out an insurance
policy with an average clause against consequential losses for` 1,40,000 and a period of 7 months has been agreed
upon as indemnity period. An increase of 25% was marked in the current year's sales as compared to last year. The
company incurred an additional expenditure of ` 12,000 to make sales possible and made a saving of ` 2,000 in the
insured standing charges.
Ascertain the claim under the consequential loss policy keeping the following additional information in view:
` Actual sales from 15 June, 2002 to 15th Dec., 2002 70,000

Sales from 15th June, 2001 to 15th Dec., 2001 2,40,000
Net profit for last Financial year 80,000
Insured standing charges for the last Financial year 70,000
Total standing charges for the last Financial year 1,20,000
Turnover for the last Financial year 6,00,000
Turnover for one year : 16th June, 2001 to 15th June, 2002 5,60,000
(9 marks)
Answer:
Amount of Insurance Claims
1. Amount of Short Sales
Sale of dislocation period of Previous year 2,40,000

Add: Upward trend (25%) 60,000
Less: Actual sale of dislocation period (–)70,000
Amount of Short sales 2,30,000 2. G/P Ratio

×100
= ×100 = 25%
3. Amount of Loss of Profit
Short sales × G/P Ratio 2,30,000 × = 5,75,000
4. Adjusted Additional Sales ` Turnover for 12 months preceding date of fire sales 5,60,000 Add: Upward trend
(25%) 1,40,000 7,00,000 Total Insurable value 7,00,000 x 25/100 =1,75,000
5. Adjusted Additional cost of working least of following: (a) Actual Expenses ` 12,000.
(b) ☐ 12,000 × =` 9,000
6. Amount of Net Claim ` Loss of Profit 57,500 Add: Adjusted Additional Cost of Working 9,000 Less: Savings in
Exp. 66,500 2,000 Amount of Net claim 64,500
7. Average Clause =
= =` 51,600
Q.2.3 2007 - Nov [5] (ii) Practical Answer the following:

A Company lodged a claim to insurance company for ` 5,00,000 in September, 2006. The claim was settled in
February, 2007 for`3,50,000. How will you record the short fall in claim settlement in the books of the company. (2
marks)
Answer:
Journal Entry
Date Particulars L.F. ` ` Profit and Loss A/c Dr. 1,50,000 To Insurance Company A/c 1,50,000 (Being the shortfall
in insurance claim is
the loss, transferred to P & L A/c)
Q.2.4 2008 - Nov [4] (b) Practical From the following details, calculate consequential loss claim: 1. Date of fire: 1st
September following;
2. Indemnity period: 6 months;
3. Period of disruption: 1st September to 1st February;
4. Sum insured: ` 1,08,900;
5. Sales were ` 6,00,000 for preceding financial year ended on 31st
March.
6. Net profit for preceding financial year` 36,000 plus insured standing
charges ` 72,000;
7. Rate of Gross profit 18%;
8. Uninsured standing charges ` 6,000;
9. Turnover during the disruption period ` 67,500;
10. Annual turnover for 12 months immediately preceding the date of fire
` 6,60,000;
11. Standard turnover i.e. for corresponding months (1stSeptember to 1st
February) in the year preceding the date of fire ` 2,25,000; 12. Increase in the cost of Working capital ` 12,000 with
a saving of
insured standing charges ` 4,500 during the disruption period; 13. Reduced turnover avoided through increase in
Working capital`30,000; 14. Special clause stipulated:
(a) Increase in rate of G.P. 2%
(b) Increase in turnover (Standard and Annual) 10%. (8 marks) Answer:
Computation of the amount of claim for consequential loss 1. Calculation of Short Sales
Particulars ` Standard turnover for the period 1st September to 1st February 2,25,000 (Preceding year)
Add: Increase of 10% due to upward trend 22,500 Adjusted turnover 2,47,500 Less: Actual turnover during
disruption period i.e. 1st September to 1st February (following year) 67,500 1,80,000 2. Increased rate of G.P. =
18% + 2 = 20% on sales.
3. Loss of profit on short sales = 20% of` 1,80,000 =` 36,000. 4. Calculation of claim for increased cost of
working capital Increased cost of working will be lower of `
(i) Actual expenses 12,000
(ii) Additional expenses ×
11,523
(iii) G.P. on additional sales = 30,000 × 20% 6,000 ` 6,000 is lower of above three, so additional expenses would be
` 6,000.
Net claim for increased cost of working capital = ` 6,000 minus savings in insured standing charges.
=` 6,000 ☐` 4,500= ` 1,500
5. Calculation of Adjusted Annual Sales
Particulars ` Sales for 12 months preceding the date of fire 6,60,000 Add: 10% of increase in trend 66,000 Adjusted
Annual Sales 7,26,000
6. Insurable Amount i.e. gross profit on adjusted annual sales ` Adjusted annual sales 7,26,000 Rate of Gross
Profit 20% Insurable amount (` 7,26,000 ×20%) 1,45,200
7. Amount of Insurance Claim

= (Loss of Profit + Claim for increased cost)
= = ` 28,125.
Q.2.5 2010 - Nov [7] (d) Practical

A trader intends to take a loss of profit policy with indemnity period of 6 months, however, he could not decide the
policy amount. From the following details, suggest the policy amount :
` Turnover in last financial year 4,50,000

Standing charges in last financial year 90,000
Net profit earned in last year was 10% of turnover and the same trend expected in subsequent year.
Increase in turnover expected 25%
To achieve additional sales, trader has to incur additional expenditure of ` 31,250. (4 marks)
Answer:
(a) Computation of Gross Profit Gross Profit =
= = 30%
(b) Computation of policy amount to cover loss of profit Particulars ` Turnover in the last financial year
4,50,000 Add : 25% increase in turnover 1,12,500
5,62,500
Gross profit on increased turnover (5,62,500 × 30%) 1,68,750
Add : Additional standing charges 31,250
Policy Amount 2,00,000
Therefore, the trader should go in for a loss of profit policy of ` 2,00,000. Space to write important points for
revision
Q.2.6 2013 - Nov [6] Practical Monalisa & Co. runs plastic goods shop. Following details are available from
quarterly sales tax return filed.
Sales 2009 2010 2011 2012 ` ` ` ` From 1st January to 31st March 1,80,000 1,70,000 2,05,950 1,62,000 From 1st
April to 30th June 1,28,000 1,86,000 1,93,000 2,21,000 From 1st July to 30th September 1,53,000 2,10,000 2,31,000
1,75,000 From 1st October to 31st December 1,59,000 1,47,000 1,90,000 1,48,000 Total 6,20,000 7,13,000 8,19,950
7,06,000
Period ` Sales from 16-09-2011 to 30-09-2011 34,000 Sales from 16-09-2012 to 30-09-2012 Nil Sales from 16-12-
2011 to 31-12-2011 60,000 Sales from 16-12-2012 to 31-12-2012 20,000 A loss of profit policy was taken for `
1,00,000. Fire occurred on 15th September, 2012. Indemnity period was for 3 months. Net Profit was `1,20,000 and
standing charges (all insured) amounted to`43,990 for year ending 2011.
Determine the Insurance Claim. (16 marks) Answer:
1. Period of Indemnity (given) = 3 months (15.09.2012 to 15.12.2012) 2. Computation of GP Ratio
GP Rate for Claim Purposes

=
= = 20% 3. Computation of Insurable Amount
Particulars ` Annual Turnover i.e. Turnover for 12 months preceding the

date of Fire (Note 1 below) 7,82,000
Add : Adjustment for increase in turnover (15% of

7,82,000) (Note 2 below) 1,17,300
Adjusted Annual Turnover 8,99,300

GP on Adjusted Annual Turnover at 20% on ` 8,99,300 =
Insurable Amount 1,79,860
Note :1
Computation of Turnover for 12 months preceding the date of Fire (from 15.09.2011 to 15.09.2012)
Particulars ` Sales from 16.09.2011 to 30.09.2011 (given) 34,000
Sales from 01.10.2011 to 31.12.2011 (given) 1,90,000
Sales from 16.09.2012 to 30.09.2012 NIL Turnover for 12 months preceding the date of fire 7,82,000
Note : 2 Trend Increase in Sales
Year ending 31st Dec 2009 31st Dec 2010 31st Dec 2011 Sales for the year 6,20,000 7,13,000 8,19,950
Percentage = 15%Increase
in sales
=15% 4. Computation of Short Sales
Particulars `
Std Turnover from 16.09.2011 to 15.12.2011 1,64,000

Add: Adjustment for increase in Turnover
(1,64,000 × 15%) 24,600
Adjustment /Expected Turnover during indemnity period 1,88,600 Less: Actual turnover during indemnity period
i.e.
For the period 16.09.2012 to 15.12.2012
Sales for the period 16.09.2012 to 30.09.2012 (given NIL)
Sales for the period 1.10.2012 to 31.12.2012 (given)1,48,000 Less: Sales for the period 16.12.2012 to 31.12.2012
(given) (20,000) (1,28,000)
Short Sales 60,600 5. Computation of Allowable Additional Expenses =

Not Applicable in this Question.
6. Computation of Claim
Particulars ` Net Claim for Loss of Profit = Gross Profit on short sales = 20% on ` 60,600 12,120 Admissible Claim
(based on average clause) =
=` 6,739 Space to write important points for revision
Q.2.7 2015 - May [3] (b) Practical M/s. Platinum Jewellers wants to take up a “Loss of Profit Policy” for the year
2015. The extract of the Profit and Loss Account of the previous year ended 31-12-2014 provided below:
` Variable Expenses
Cost of Materials 18,60,000

Fixed Expenses
Wages for skilled craftsmen 1,60,000
Salaries 2,80,000
Audit Fees 40,000
Rent 64,000
Bank Charges 18,000
Interest income 44,000
Net Profit 6,72,000
Turnover is expected to grow by 25% next year.
To meet the growing working capital needs the partners have decided to avail overdraft facilities from their bankers
@ 12% p.a. interest. The average daily overdraft balance will be around ` 2 lakhs. The wages for the skilled
craftsmen will increase by 20% and salaries by 10% in the current year. All other expenses will remain the same.
Determine the amount of policy to be taken up for the current year by M/s. Platinum Jewellers. (6 marks) Answer:
In the books of M/s. Platinum Jewellers
Insurance Policy to be taken (`) Turnover of previous year 30,50,000 Add: Increase in sales by 25% 7,62,500
Sales for Current Year 38,12,500 Less: Cost of Materials (18,60,000 + 25% increase) (23,25,000) 14,87,500 Less:
Wages of Skilled Craftsmen(1,60,000 + 20%
increase) (1,92,000) Gross Profit for Current Year 12,95,500 Add: Increased standing charges: 24,000 Interest on
overdraft 28,000 Salaries 52,000 Policy to be taken for current year 2015 13,47,500
Working Note:
Calculation of Sales
Trading and Profit and Loss account for the year ended 31.12.2014
Particulars Amount Particulars Amount (`) (`)
To Cost of material 18,60,000 By Sales (Balancing 30,50,000

To Wages of skilled craftsman 1,60,000 figure)
To Salaries 2,80,000 By Interest Income 44,000
To Audit Fees 40,000
To Rent 64,000
To Bank Charges 18,000

A trader intends to take a loss of profit policy with indemnity period of 6 months, however, he could not decide the
policy amount. From the following details, suggest the policy amount:
` Turnover in last financial year 6,75,000

Standing charges in the last financial year 1,14,750
Net profit earned in last year was 10% of turnover and the same trend expected in subsequent year.
Increase in turnover expected 30%.
To achieve additional sales, trader has to incur additional expenditure of ` 42,500. (8 marks)
Answer:
* Calculation of amount of policy taken: Last year’s figures:
` Turnover 6,75,000
Net Profit 67,500
(+) Insured standing charges 1,14,750
Gross Profit = 1,82,250
Gross Profit Ratio = = 27%
Next year forecast:

` Turnover = 6,75,000 + 30% = 8,77,500 Gross Profit @ 27% = 2,36,925 (+) Additional Expenses = 42,500 Policy
should be taken for = 2,79,425
The Trader should take a Profit Policy of ` 2,79,425

A firm has decided to take out a loss of profit policy for the year 2016 and given the following information for the
last accounting year 2015. Variable manufacturing expenses ` 14,20,000, Standing charges ` 1,50,000, Net profits`
80,000, Non-operating income` 2,500, Sales ` 18,00,000.
Compute the sum to be insured in each of the following alternative cases showing the anticipation for the year 2016:
(i) If sales will increase by 15%.

(ii) If sales will increase by 15% and only 50% of the present standing charges are to be insured.
(iii) If sales and variable expenses will increase by 15% and standing charges will increase by 10%.
(iv) If sales will increase by 15% and variable expenses will decrease by 5%.
(v) If sales will increase by 10% and standing charges will increase by 15%.
(vi) If the turnover and standing charges will increase by 15% and variable expenses will decrease by 10% but only
50% of the present standing charges are to be insured. (8 marks)
Answer :
Statement showing the computation of Sum insured under various cases
Particulars (i) (ii) (iii) (iv) (v) (vi) Sale 20,70,000 20,70,000 20,70,000 20,70,000 19,80,000 20,70,000
Less: Variable expense 16,33,000 16,33,000 18,77,950 15,51,350 15,62,000 14,69,700
Gross Profit (a-b) 4,37,000 4,37,000 1,92,050 5,18,650 4,18,000 6,00,300
Add: Increase in Insured ☐ ☐ 15,000 ☐ 22,500 11,250* standing charges

Less: Uninsured standing ☐ (75,000) ☐ ☐ ☐ (75,000) charges
Sum insurable 4,37,000 3,62,000 2,07,050 5,18,650 4,40,500 5,36,550
Note:
1. The above solution is based on the assumption that increase in sale is due to increase in volume of sales.
Alternatively, it may be assumed that this increase is because of rise in selling price. In that case, there will be no
proportionate increase in variable expenses and the answer will get changed accordingly.
2. In case (vi), it is given in the question that 50% of the present standing charges are to be insured. It is assumed in
the above answer that 50% of the increased standing charges are insured.
3. In case (iii), 15% increase in variable expenses has been calculated after proportionate increase in variable
expenses due to increase in turnover.
A fire occurred in the premises of M/s Bright on 25thMay, 2017. As a result of fire, sales adversely affected up to
30thSeptember, 2017. The firm had taken Loss of profit policy (with an average clause) for` 3,50,000 having
indemnity period of 5 months.
There is an upward trend of 10% in sales.
The firm incurred an additional expenditure of ` 30,000 to maintain the sales.
There was a saving of` 5,000 in the insured standing charges.
Actual turnover from 25th May, 2017 to 30th September, 2017 ` 1,75,000
Turn over from 25th May, 2016 to 30th September, 2016 ` 6,00,000
Net profit for last financial year ` 2,00,000
Insured standing charges for the last financial year ` 1,75,000
Total standing charges for the last financial year ` 3,00,000
Turnover for the last financial year ` 15,00,000
Turnover for one year from 25th May, 2016 to 24th May, 2017 ` 14,00,000
You are required to calculate the loss of profit claim amount, assuming that entire sales during the interrupted period
was due to additional expenses. (10 marks)
Answer:
1. Calculation of Short Sales:
` Sales for the period 25th May, 2016 to 30th September, 2016 6,00,000
Add : 10% increase in sales 60,000
Estimated Sales in Current Year 6,60,000
Less : Actual Sales from 25th May, 2017 to 30th Sep., 2017 (1,75,000) Short Sales 4,85,000
2. Calculation of Loss of Profit :

Gross Profit on reduction in turnover @ 25% on ` 4,85,000 1,21,250 (see working note 1)
Add: Additional Expenses
Lower of
(i) Actual = ` 30,000
(ii) Additional Exp. ×

= =`22,647
(iii) Gross Profit on sales generated by additional expenses 1,75,000 × 25% = ` 43,750 It is given that entire sales
during the interrupted period was due to additional expenses
Therefore, lower of above is (i, ii & iii) ` 22,647

1,43,897
Less: Saving in Insured Standing Charges (5,000) Amount of claim before application of Average Clause 1,38,897
3. Application of Average Clause:

× Amount of Claim
× 1,38,897 = ` 1,26,270
Amount of claim under the policy = ` 1,26,270
Working Notes:
1. Rate of Gross Profit for last Financial Year: ` Net Profit for last financial year 2,00,000 Add: Insured Standing
Charges 1,75,000 Gross Profit 3,75,000 Turnover for the last financial year 15,00,000
Rate of Gross Profit = = 25%
2. Annual Turnover (Adjusted)

Turnover from 25 May, 2016 to 24 May, 2017 14,00,000
Add: 10% expected increase 1,40,000
15,40,000
Gross Profit on ` 15,40,000 @ 25% 3,85,000
Standing charges not Insured (3,00,000 – 1,75,000) 1,25,000
Gross profit + Uninsured standing charges 5,10,000
A fire occurred in the premises of M/s Kirti & Co. on 15thDecember, 2018. The working remained disturbed upto
15thMarch, 2019 as a result of which sales adversely affected. The firm had taken out an insurance policy with an
average clause against consequential losses for ` 2,50,000. Following details are available form the quarterly sales
tax return filed / GST return filed:
Sales 2015-16 2016-17 2017-18 2018-19 (`) (`) (`) (`) From 1st April to 30th June 3,80,000 3,15,000 4,11,900
3,24,000 From 1st July to 30th
September 1,86,000 3,92,000 3,86,000 4,42,000 From 1st October to 31st
December 3,86,000 4,00,000 4,62,000 3,50,000 From 1st January to 31st
March 2,88,000 3,19,000 3,80,000 2,96,000 Total 12,40,000 14,26,000 16,39,900 14,12,000
A period of 3 months (i.e from 16-12-2018 to 15-3-2019) has been agreed upon as indemnity period.
Sales from 16-12-2017 to 31-12-2017 68,000 Sales from 16-12-2018 to 31-12-2018 Nil Sales from 16-03-2018 to
31-03-2018 1,20,000 Sales from 16-03-2019 to 31-03-2019 40,000 Net profit was` 2,50,000 and standing charges
(all insured) amounted to ` 77,980 for the year ending 31st March, 2018.
You are required to calculate the loss of profit claim amount. (10 marks)

A Loss of Profit Policy was taken for `80,000. Fire occurred on 15thMarch,
2021. Indemnity Period was for three months. Net Profit for year ending on
31st December, 2020 was` 56,000 and Standing Charges (all Insured) amounted to` 49,600. Determine the Insurance
Claim from the following details available from quarterly GST Returns:
Sales (in `) for the year 2018 2019 2020 2021 From 1st January to 31st March 1,20,000 1,30,000 1,42,000 1,30,000
From 1st April to 30th June 80,000 90,000 1,00,000 40,000 From 1st July to 30th September 1,00,000 1,10,000
1,20,000 1,00,000 From 1st October to 31st December 1,36,000 1,50,000 1,66,000 1,60,000
Other Information:
Sales from 16.03.2020 to 16.03.2017 to 16.06.2020 to 16.06.2021 to 31.03.2020 31.03.2021 30.06.2020 30.06.2021
Sales ` 28,000 ` Nil ` 24,000 ` 6,000 Amount
Answer:
1. Period of Indemnity (given) = 3 months (15.03.2021 to 15.06.2021) 2. Computation of GP Rate
GP Rate for Claim purposes =
= = 20%
Note: Sales for year 2020 = ` 1,42,000 + ` 1,00,000 + ` 1,20,000 + ` 1,66,000 =` 5,28,000.
3. Computation of Insurable Amount
Particulars ` Annual Turnover, i.e. Turnover for 12 months preceding 5,44,000 the date of Fire (Note 1)
Add: Adjustment for Increase in Turnover (10% of`5,44,000) 54,400 (Note 2)
GP on Adjusted Annual Turnover at 20% on ` 5,98,400 1,19,680 = Insurable Amount

Note 1: Computation of Turnover for 12 months preceding the date of Fire (from 16.03.2016 to 15.03.2017)
Particulars ` Sales from 16.03.2020 to 31.03.2020 (Given) 28,000

Sales from 01.04.2020 to 30.06.2020 (Given) 1,00,000
Sales from 01.01.2021 to 15.03.2021 (Given 1,30,000 - Nil) 1,30,000
Turnover for 12 months preceding the date of Fire 5,44,000
Note 2: Trend Increase in Sales
Year ending 31st Dec. 2018 31st Dec. 2019 31st Dec. 2020 1,20,000 + 80,000 + 1,30,000 + 90,000 + 1,42,000 + 1,00,000 + Sales of the year 1,00,000 +
1,36,000 = ` 1,10,000 + 1,50,000 = 1,20,000 + 1,66,000 4,36,000 ` 4,80,000 = ` 5,28,000
Percentage Increase = 10% (approx.) = 10%
in Sales
Observation: Average Trend Increase in Sales is taken as 10% 4. Computation of Short Sales
Particulars ` Std. Turnover from 16.03.2020 to 15.06.2020 (previous year 1,04,000 corresponding to Indemnity
Period)
Add: Adjustment for Increase in Turnover ( ` 1,04,000 × 10%) 10,400

Adjusted / Expected Turnover during Indemnity Period 1,14,400
Less: Actual Turnover during Indemnity Period, i.e. from 15.03.2021 to 15.06.2021
From 16.03.2021 to 31.03.2021 Given Nil From 01.04.2021 to 15.06.2021 computed as (for Apr to (34,000) June,
less last 15 days) 34,000
(01.04.2021 to 30.06.2021 ` 40,000) less (16.06.2021 to 30.06.2021` 6,000)
Short Sales 80,400 Note: Standard Turnover from 16.03.2020 to 15.06.2020 is computed as under:
Particulars ` Sales from 16.03.2020 to 31.03.2020 (Given) 28,000
Add: Sales from 01.04.2020 to 15.06.2020 (for the quarter Apr to Mar, less last 15 days) 76,000 (i.e. From
01.04.2020 to 30.06.2020 ` 1,00,000 less From 16.06.2020 to 30.06.2020` 24,000)
Standard Turnover from 16.03.2020 to 15.06.2020 1,04,000 5. Computation of Allowable Additional Expenses
= Not required in this Question.
Particulars ` Net Claim for Loss of Profit = Gross Profit on Short Sales = 20% 16,080 on ` 80,400
Admissible Claim (based on Average Clause) = Net Claim × =` 16,080 × 10,749
A fire occurred on 1st February 2018, in the premises of Fbb Ltd. a Retail Store, and business was partially
disorganised upto 30th June, 2018. The Company was insured under a Loss of Profits Policy for`1,25,000 with a six
months indemnity Period.
From the following information, compute the amount of claim under the Loss of Profit Policy.
Particulars ` Actual Turnover from 1st February, to 30th June, 2018 80,000
Turnover from 1st February, to 30th June, 2017 2,00,000
Turnover from 1st February 2017, to 31st January, 2018 4,50,000
Net Profit for last Financial Year 70,000
Insured Standing Charges for last Financial Year 56,000
Total Standing Charges for last Financial Year 64,000
Turnover for the last Financial Year 4,20,000
The Company Incurred Additional Expenses amounting to ` 6,700 which reduced the loss in Turnover. There was
also a saving during the Indemnity Period of ` 2,450 in the Insured Standing Charges as a result of the fire. There
had been a considerable increase in trade since the date of the Last Annual Accounts and it has been agreed that an
adjustment of 15% be made in respect of the upward trend in Turnover.
Answer:
1. Period of Indemnity
Policy Period= 6 months whichever Result: Actual Dislocation: 1st Feb, 2018 to 30th Jun, 2018 = 5 months } is lower 5 months
2. Computation of GP Rate
GP Rate for Claim purposes = = 30%
Particulars ` Annual Turnover, i.e. Turnover for 12 months preceding the date 4,50,000 of Fire
Add: Adjustment for Increase in Turnover (15% of ` 4,50,000) 67,500

GP on Adjusted Annual Turnover at 30% on ` 5,17,500 = 1,55,250
Insurable Amount
4. Computation of Short Sales

Particulars ` Std. Turnover from 01.02.2017 to 30.06.2017 (previous year 2,00,000 corresponding to Indemnity
Period)
Add: Adjustment for Increase in Turnover (` 2,00,000 × 15%) 30,000 Adjusted / Expected Turnover during
Indemnity Period 2,30,000 Less: Actual Turnover during Indemnity Period, i.e. from 01.02.2018 to 30.06.2018
(80,000) Short Sales 1,50,000 5. Computation of Allowable Additional Expenses
Particulars ` (a) Actual Additional Expenses 6,700

(b) GP on Sales generated by Additional Expenses (` 80,000 × 30%) 24,000
(c) Additional Expenses ×
=` 6,700 × =` 6,700 × = 6,372*
Allowable Additional Expenses = Least of the above 6,372 Note: Uninsured Standing Charges = Total Standing
Charges - Insured Standing Charges = 64,000 - 56,000 =` 8,000.
Particulars ` Loss of Profit = Gross Profit on Short Sales = 30% on ` 1,50,000 45,000 Add: Allowable Additional
Expenses (Point No. 5) 6,372* Less: Saving in Insured Standing Charges (Given) (2,450)
Net Claim for Loss of Profit 48,922

Admissible Claim (based on Average Clause)
= Net Claim × =` 48,922 ×39,390

The premises of ABC Limited were partially destroyed by fire on 1stMarch, 2019, and as a result, the business was
practically disorganised upto 31st August, 2019. The Company is insured under a Loss of Profits Policy for `
1,65,000 having an Indemnity Period of 6 months. From the following information, prepare a claim under the
policy:
Particulars ` Actual Turnover during the period of dislocation (01-03-2019 to 31-08-2019) 80,000 Turnover for
corresponding period (dislocation) in 12 months immediately before fire (1-3-2019 to 31-8-2019) 2,40,000 2,40,000
03-2019 to 28-02-2019) 6,00,000
Net Profit for the last financial year 90,000

Insured Standing Charges for the last financial year 60,000
Uninsured Standing Charges 5,000
Turnover for the last financial year 5,00,000
Due to substantial Increase in trade, before and up to the time of the fire, it was agreed that an adjustment of 10%
should be made in respect of the upward trend in turnover. The Company incurred Additional Expenses of `9,300
immediately after the fire and but for this expenditure, the Turnover during the period of dislocation would have
been only` 55,000. There was also a saving during the indemnity period of ` 2,700 in insured standing charges as a
result of the fire.
Answer:
1. Period of Indemnity
Policy Period = 6 months whichever is Result: Actual Dislocation: 1st March 2019 to 31st Aug 2019 = 6 months lower 6 months
2. Computation of GP Rate
GP Rate for Claim purposes =
= 30%
Particulars ` Annual Turnover, i.e. Turnover for 12 months preceding the 6,00,000 date of Fire
Add: Adjustment for Increase in Turnover (10% of ` 6,00,000) 60,000

GP on Adjusted Annual Turnover at 30% on` 6,60,000 = 1,98,000

Insurable Amount
4. Computation of Short Sales
Particulars ` Std. Turnover from 01.03.2019 to 31.08.2019 (previous year corresponding to Indemnity Period)
2,40,000 Add: Adjustment for Increase in Turnover (` 2,40,000 × 10%) 24,000 Adjusted / Expected Turnover during
Indemnity Period 2,64,000 Less: Actual Turnover during Indemnity Period, i.e. from 01.03.2019 to 31.08.2019
(80,000) Short Sales 1,84,000 5. Computation of Allowable Additional Expenses
Particulars ` (a) Actual Additional Expenses 9,300
(b) GP on Sales generated by Additional Expenses [(` 80,000 - 55,000) 7,500

× 30%]
(c) Additional Expenses ×
= ` 9,300 × = ` 9,300 × = 9,071
Allowable Additional Expenses = Least of the above 7,500 6. Computation of Claim
Particulars ` Loss of Profit = Gross Profit on Short Sales = 30% on ` 1,84,000 55,200 Add: Allowable Additional
Expenses (Ref. Point No. 5) 7,500* Less: Saving in Insured Standing Charges (Given) (2,700)
Net Claim for Loss of Profit 60,000

Admissible Claim (based on Average Clause)
= Net Claim × =` 60,000 ×50,000
Assumption: It is assumed that Trend Adjustment is required on the Total Amount of Annual Turnover. However,
part of the Annual Turnover represents the trend adjusted figure. Alternatively, the students may ignore trend and
take only the given Annual Turnover. The Claim would be `55,000, which is more than the Claim as computed
above. So, it is possible that the Insurance Company would insist on trend adjusted on Annual Turnover.

From the following information, compute the amount of claim under the loss of profit policy:
Sum Insured
Indemnity Period
Reason for Damage
Period of Interruption
Accounting Year
Gross Profit Ratio
Saving in Insured Standing Charges Increase in cost of working
` 1,00,000
6 Months Due to Fire Accident on 1.3.2012
1.3.2018 to 31.7.2018
Calender Year 30% ` 6,774
` 20,000 for 80% of the turnover No Clause for Upward/Downward Trend during dislocation period Turnover for
the year ended 31st December, 2017 ` 5,00,000
Turnover for the period from 1.3.2011 to 28.2.2018 ` 5,20,000
Sales were evenly throughout the period
Uninsured Standing Charges ` 25,000
Net Profit ` 90,000
Answer:
Statement of Claim
Particulars `
A. Gross Profit on Turnover lost in claim period 40,000

B. Add: Net claim for the Increased Cost of Working 10,000
C. Total Claim (A + B) 50,000
D. Net Claim = Total Claim × = 38,462

Working Notes:
(i) Agreed G.P. Ratio = G.P. Ratio as per last accounting year + Agreed Increase/Decrease
G.P. Ratio = × 100
= × 100 = 25%
Notes: All Standing Charges = Gross Profit - Net Profit = 30% of` 5,00,000 ` 90,000 =`1,50,000 ` 90,000 =` 60,000
Insured Standing Charges = All Standing Charges less Uninsured Standing Charges
= ` 60,000 - ` 25,000 = ` 35,000 (ii) Claim Period being the least of the Indemnity Period (6 months) &
Dislocation Period (5 months) is 5 months.
(iii) Calculation of Turnover lost in claim period
A. Turnover for the corresponding claim period in the preceding year ` 2,60,000
B. Add: Agreed Increase — C. Less: Actual Turnover during the claim period ` 1,00,000
D. Turnover lost in claim period (A + B - C) ` 1,60,000

(iv) Gross Profit lost = Turnover lost during the claim period × Agreed G.P. Ratio
= ` 1,60,000 × 25% =` 40,000
(v) Sum Insurable = Adjusted Turnover during 12 months immediately preceding the fire × Agreed G.P. Ratio = `
5,20,000 × 25% =` 1,30,000
(vi) Calculation of the Net claim for the Increased Cost of Working
A. Gross claim for Increased Cost of Working

(being the least of the following three amounts) ` 16,774 1. Actual Expenses ` 20,000
2. Proportionate Increase in Cost of Working
Increase Cost of Working ×
=` 20,000 × =` 16,774
3. Maximum saving of liability of the insurer = Reduction in Turnover avoided through increased Cost of Working ×
Agreed G.P. Ratio
=` 80,000 × 25% = ` 20,000
B. Less: Saving in Insured Standing Charges ` 6,774

C. Net Claim for Increased Cost of Working (A-B) ` 10,000
Sum Insured ` 1.20 Lakh Indemnity Period 6 Months Reason for Damage Due to Fire Accident on 1.3.2018 Period
of Interruption 1.3.2018 to 31.7.2018 Accounting Year Calender Year Gross Profit Ratio 25% Increase in Cost of
working ` 0.30 Lakh Saving in Insured Standing Charges ` 0.09478 Lakh Turnover For the year ended 31st Dec.,
2017 ` 10.00 Lakh Turnover For the period from 1.3.2011 to 28.2.2018 ` 9.00 Lakh Turnover For the period from
1.3.2011 to 31.7.2017 ` 5.00 Lakh Turnover For the period from 1.3.2012 to 31.7.2018 ` 3.00 Lakh Sales were
evenly throughout the period
Standing Charges (out of which ` 50,000 have not been insured) ` 2.50 Lakh No clause for upward/Downward Trend
Answer: Statement of Claim
` A. Gross Profit on Turnover lost in claim period 40,000

D. Net Claim= = 36,000

Working Notes:
(i) Agreed G.P. Ratio = G.P. Ratio as per last accounting year + Agreed increase/Decrease
G.P. Ratio = × 100
= × 100 = 20%
Note: Net Profit for the year ended 31st Dec. 2017
= Gross profit - All Standing Charges = 25% of ` 10,00,000 - ` 2,50,000 = 0
(ii) Claim Period being the least of the Indemnity Period (6 months) &

B. Add: Agreed Increase —
C. Less: Actual Turnover during the claim period ` 3,00,000
D. Turnover lost in claim period (A + B - C) ` 2,00,000 (iv) Gross Profit lost = Turnover lost during the claim period
× Agreed G.P. Ratio
= ` 2,00,000 × 20% =` 40,000
9,00,000 × 20% =` 1,80,000
(vi) Calculation of the Net claim for the Increased Cost of Working
= Increased Cost of Working ×
=` 30,000 × = ` 23,478
3. Maximum saving of liability of the insurer = Reduction in Turnover avoided through Increased Cost of Working
× Agreed G.P. Ratio =` 3,00,000 × 20% =` 60,000

C. Net claim for Increased Cost of Working (A - B) ` 14,000
(vii) In the absence of information, it has been assumed that the Actual Turnover in the claim period has been
effected as a result of additional expenses.
Sum Insured ` 1,24,200 Indemnity Period 6 Months Reason for Damage Due to Fire Accident on 1.3.2018 Period of
Interruption 1.3.2018 to 31.7.2018 Accounting Year Calender Year Net Profit for 2011 ` 70,000 Increase in cost of
working ` 6,700 Saving in Insured Standing Charges ` 2,522 Turnover For the year ended 31st December, 2017 `
4,20,000 Turnover For the period from 1.3.2017 to 28.2.2018 ` 4,50,000 Turnover For the period from 1.3.2017 to
31.7.2017 ` 2,10,000 Turnover For the period from 1.3.2018 to 31.7.2018 ` 75,000 Sales were evenly throughout the
period
Standing Charges (out of which ` 8,000 have not been insured)` 64,000 Agreed Increase for upward trend in
turnover 15%
Answer:
Statement of Claim
` A. Gross Profit on Turnover lost in claim period 49,950

D. Net Claim = Total Claim =` 53,800 × 43,040

Working Notes:
(i) Agreed G.P. Ratio = G.P. Ratio as per last accounting year + Agreed increase/Decrease
G.P. Ratio = × 100
= × 100 = 30%
(ii) Claim Period being the least of the Indemnity Period (6 months) &

B. Add: Agreed Increase ` 31,500
C. Less: Actual Turnover during the claim period (` 75,000)
D. Turnover lost in claim period (A + B - C) ` 1,66,500 (iv) Gross Profit lost = Turnover lost during the claim period
× Agreed G.P. Ratio
= ` 1,66,500 × 30% =` 49,950
4,50,000 × 115% × 30% = ` 1,55,250 (vi) Calculation of the Net claim for the Increased Cost of Working
= Increase Cost of Working ×
=` 6,700 × = ` 6,372
3. Maximum saving of liability of the insurer = Reduction in Turnover avoided through Increased Cost of Working
× Agreed G.P. Ratio =` 75,000 × 30% = ` 22,500

C. Net claim for Increased Cost of Working (A - B) ` 3,850
Assumption: In the absence of information it has been assumed that the Actual Turnover during claim period has
been effected as a result of additional expenses.
3 Comprehensive Claim
Ramda & Sons had taken out policies (without Average Clause) both against loss of stock and loss of profit, for `
2,10,000 and ` 3,20,000 respectively. A fire occurred on 1st July, 2011 and as a result of which sales were seriously
affected for a period of 3 months.
Trading and Profit & Loss A/c of Ramda & Sons for the year ended on 31st March, 2011 is given below:
To Opening Stock 96,000

To Purchases 7,56,000
To Wages 1,58,000
To Manufacturing
Expenses 75,000
To Gross Profit c/d 3,00,000
Total 13,85,000
To Administrative
Expenses 83,600
To Selling Expenses
(Fixed) 72,400
To Commission on Sales 34,200
To Carriage Outward 49,800
To Net Profit 60,000
Total 3,00,000
Further detail provided is as below : (a) Sales, Purchases, Wages and Manufacturing Expenses for the period
01.04.2011 to 30.06.2011 were` 3,36,000,` 2,14,000` 51,000 and ` 12,000 respectively.
(b) Other Sales figure were as follows :
` From 01.04.2010 to 30.06.2010 3,00,000 From 01.07.2010 to 30.09.2010 3,20,000 From 01.07.2011 to 30.09.2011
48,000
(c) Due to decrease in the material cost, Gross Profit during 2011-12 was expected to increase by 5% on sales.
Particulars Amount (`) By Sales 12,00,000 By Closing stock 1,85,000

Total 13,85,000 By Gross Profit
b/d 3,00,000
Total 3,00,000
(d) ` 1,98,000 were additionally incurred during the period after fire. The amount of policy included` 1,56,000 for
expenses leaving` 42,000 uncovered.
Compute the claim for stock, loss of profit and additional expenses.
(16 marks) Answer :

Claim for loss of stock
(for the period 1st April to 1st July, 2011)
Particulars
To Opening Stock
To Purchases
To Wages
To Manufacturing expenses
To Gross Profit @ 30% on sales
(W.N.)
Amt. (`) Particulars Amt. (`)
1,85,000 By Sales 3,36,000

2,14,000 By Closing stock 2,26,800
51,000 (Bal. fig.)
12,000
1,00,800
5,62,800 5,62,800
Claim for loss of stock will be limited to ` 2,10,000 only which is the amount of Insurance policy and no average
clause will be applied.
Loss of Profit
(a) Short Sales: Amount (`)
Sales from 1st July, 2010 to 30th Sept. 2010 3,20,000

Add: 12% rise observed in 2011-12 over 2010-11
(April-June` 3,36,000 instead of ` 3,00,000) 38,400
3,58,400
Less: Actual Sales from 1st July, 2011 to 30th Sept. 2011 (48,000) Short-Sales 3,10,400
(b) Gross profit ratio × 100

× 100 18% Add: Expected rise due to decline in material cost 5% Hence, Gross Profit Ratio 23%
(c) Loss of Gross Profit

23% on short sales ` 3,10,400 = ` 71,392
(d) Annual turnover (12 months to 1st July, 2011):
Amount (`) Sales for April 2010- March, 2011 12,00,000 Less: From 1-4-2010 to 30-6-2010 (3,00,000) 9,00,000
Add: 12% increasing trend 1,08,000 10,08,000 Add: From 1-4-2011 to 30-6-2011 3,36,000 13,44,000 Gross Profit
on annual turnover @ 23% 3,09,120
(e) Amount allowable in respect of additional expenses Least of following Amount (`)
(i) Actual expenses 1,98,000

(ii) Gross Profit on sales during indemnity period 23% of ` 48,000 11,040
(iii) × Additional Expenses
× 1,98,000 1,74,316
Least i.e. ` 11,040 is admissible.

Claim
Loss of Gross Profit ` 71,392 Add: Additional expenses ` 11,040
` 82,432 Insurance claim for loss of profit will be of ` 82,432 only.
Working Note:
Rate of Gross Profit in 2010-11 × 100
× 100 = 25%
In 2011-12. Gross Profit is expected to increase by 5% as a result of decline in material cost, hence the rate of Gross
Profit for loss of stock is taken at 30%.

CHAPTER
11
Hire Purchase and Instalment Sale Transactions
Chapter Comprises: ☹Nature of Hire Purchase Agreement ☹Special Features ☹Terms Used ☹Ascertainment of
Total Cash Price ☹Ascertainment of Interest ☹Accounting for Hire Purchase Transaction ☹Repossession Instalment
Payment System ☹Difference of Hire Purchase Agreement and Instalment Payment Agreement

Legend
book.
1.582
TIME MANAGER
i.e.....
............ Day 1
Instant
Revision (in hours)

i.e.... i.e. on ........... ...........
Day 2 Day 8

(in hours)

1. Budgeted
2. Actual
3. Variance (1-2)
QUICK LOOK Repeatedly Asked Questions 6.1
3.2, 5.4, 5.12, 5.13, 6.1
1 Special Features of Hire Purchase Agreement
Q.1.1 2017 - Nov [5] (b) Descriptive
Explain the special features of hire purchase agreement. (4 marks) Answer:

1. Possession :
The hire vender transfers possession of the goods to the hire purchaser immediately after the contract of hire
purchase is made.
2. Installments :
The goods are delivered by hire vender on the condition that a hire purchaser should pay the amount in periodical
installments.
3. Down Payment :
The hire purchaser generally makes a down payment i.e., an amount on signing the agreement.
4. Constituents of Hire Purchase Installments :

Each installment consists partly of a finance charges (interest) and partly of a capital payment.
5. Ownership :
The property in goods is to pass to the hire purchaser on the payment of the last installment and exercising the
option conferred upon him under the agreement.
6. Repossession :
In case of default in respect of payment of even the last installment, the hire vender has the right to take the goods
back without making any compensation.

2 Ascertainment of Total Cash Price
A acquired on 1st January, 2003 a machine under a Hire-Purchase agreement which provides for 5 half-yearly
instalments of` 6,000 each, the first instalment being due on 1st July, 2003. Assuming that the applicable rate of
interest is 10 per cent per annum, calculate the cash value of the machine. All working should form part of the
answer.
(8 marks)
Answer:
Statement showing cash value of the machine acquired on hirepurchase basis
Instalment Interest@ 5% half Principal Amount yearly (10% p.a.) = Amount Particulars 5/105 =1/21 (in each
(in each instalment) instalment)
` ` ` 5th Instalment 6,000 286 5,714 Less: Interest ☐ 286
5,714
Add: 4th Instalment 6,000
11,714 558 5,442 Less: Interest ☐558 (11,156☐5,714)

11,156
Add: 3rd instalment +6,000
17,156 817 5,183 Less: Interest ☐817 (16,339☐11,156)
16,339
Add: 2nd instalment .6,000
22,339 1,063 4,937 Less: Interest ☐1,063 (21,276☐16,339)
21,276
Add: 1st instalment 6000
27,276 1,299 4,701 Less: Interest ☐1,299 (25,977☐21,276)
25,977 4,023 25,977 The cash purchase price of machinery is ` 25,977.
Ram & Co. acquired a motor lorry on hire- purchase basis. It has to make cash down payment of` 1,00,000 at the
beginning. The payments to be made subsequently are` 2,63,000;` 1,85,000 and` 1,14,000 at the end of first year,
second year and third year respectively. Interest charged is @ 14% per annum. Calculate the cost price of motor
lorry and interest paid in each instalment. (4 marks)
Answer:
Calculation of Cost of Lorry & Interest
Year Instalment Interest Cost Involved 1st 2,63,000 63,000 2,00,000

2nd 1,85,000 35,000 1,50,000
3rd 1,14,000 14,000 1,00,000
4,50,000
` Total cost of lorry Down payment 1,00,000 Total Subsequent cost 4,50,000 Total cost price 5,50,000 Total Interest
involved
1 Year 63,000 2 Year 35,000 3 Year 14,000 Total interest 1,12,000 Working Note :
Third instalment = ` 1,14,000
Interest = = 14,000 (I1)
☐ Principal = ` 1,00,000 (P1) Second instalment = ` 1,85,000

Amount outstanding = ` 1,00,000
Total 1,85,000☐ 1,00,000 = 2,85,000
Interest) = = 35,000 (I2)
☐ Principal = 1,50,000 (P2) First instalment = ` 2,63,000

Amount outstanding ` 2,50,000
Total = 2,63,000 ☐ 2,50,000 = 5,13,000
Interest = 63,000 (I3)
Principal = ` 2,00,000 (P3)

Total Interest = I1☐I2☐ I3 = 1,12,000
Total Principal = P1 ☐ P2☐ P3 = 4,50,000
Cash Price = Principal ☐ Down payment = 4,50,000 ☐ 1,00,000 =` 5,50,000 Alternatively :
Calculation of Cost Price and Total Interest to be paid on Motor Lorry
No. of Amount due Interest on cumulative Cash Price instalment at the time of instalment in each instalment
instalment III 1,14,000 1,00,000
II 1,85,000 1,50,000
I 2,63,000 2,00,000
Cash down payment 1,00,000
Total 1,12,000 5,50,000

*1,00,000 + 1,85,000 = 2,85,000.
** 2,63,000 + 1,50,000 + 1,00,000 = 5,13,000
Q.2.3 2010 - May [1] (ii)

From the following, calculate the cash price of the asset:
Practical
Hire purchase price of the asset

Down payment
Four annual instalments at the end of each year Rate of Interest
`
50,000
10,000
10,000
5% p.a. (2 marks)
Answer: Computation of Cash Price of the Asset Number of Closing instalments balance
40
3 9,524
2 18,594
1 27,232
Amount of Total Interest instalment 5/105 10,000 10,000 476

10,000 19,524 930
10,000 28,594 1,362
10,000 37,232 1,773
Opening balance 9,524

18,594 27,232 35,459
Cash price of the asset = Down payment +` 35,459 =` 10,000 + ` 35,459 =` 45,459

On 1stApril, 2012 Fastrack Motors Co. sells a truck on hire purchase basis to Teja Transport Co. for a total hire
purchase price of`9,00,000 payable as to` 2,40,000 as down payment and the balance in three equal annual
instalments of` 2,20,000 each payable on 31st March, 2013, 2014 and 2015.The hire vendor charges interest @10%
per annum.
You are required to ascertain the cash price of the truck for Teja Transport Co. Calculations may be made to the
nearest rupee. (5 marks)
Answer:
Ratio of interest and amount due = = =
There is no interest element in the down payment as it is paid on the date of the transaction. Instalments paid after
certain period include interest portion also. Therefore, to ascertain cash price, interest will be calculated from last
instalment to first instalment in the following way:
Calculation of Interest and Cash Price No. of Amount due at the
Instalments time of Instalment [1] [2]

3rd 2,20,000
2nd 4,20,000 [W.N.(i)]

1st 6,01,818 [W.N.(ii)]
Interest
[3]
1/11 of ` 2,20,000
= ` 20,000
1/11 of ` 4,20,000
=` 38,182
1/11 of ` 6,01,818
=` 54,711
Cumulative Cash price (2 ☐3) = [4]
2,00,000
3,81,818
5,47,107
Total cash price = 5,47,107 + 2,40,000 (down payment) =` 7,87,107. Working Notes:
(i) ` 2,00,000 + 2nd instalment of ` 2,20,000 =` 4,20,000 (ii) ` 3,81,818 + 1st instalment of ` 2,20,000 =` 6,01,818
Q.2.5 RTP Practical
A Ltd., purchased a machinery on hire purchase basis from B Ltd. on the following terms:
(a) Cash Down Payment – 33-1/3%, (b) Three half-yearly instalments of ` 16,400,` 14,880 and` 12,600, the first to
commence at the end of 6 months from the date of cash down payment, (c) Interest to be charged by the vendor 10%
p.a. calculated on half yearly rests.
Compute the Cash Price of the Machine.
Answer:
Statement Showing the Computation of Cash Price and Periodic Interest under Working Backward Method
(A) (B) (C) Instalment Balance Due Instalment Number at the end Amount a f t e r t h e
Payment of
Instalment
3rd Nil 12,600

2nd 12,000 14,880
1st 25,600 16,400
Let the Cash Price = X
(D) = (B) + (C) Total Amount due at the end
Before the Payment of Instalment
12,600
26,880
42,000
(E) = D*5/105
Interest
(F) = (D)–(E) Balance due
at the
Beginning
600 1,280 2,000 12,000 25,600 40,000
X =` 40,000 + 33 – 1/3% of X 66 – 2/3% of X =` 40,000

X =` 60,000
On 1.1.2018 XYZ Ltd. purchased a machine on hire purchase basis. The terms of agreement provided for 40% as
cash down payment and the balance in three instalments of ` 1,63,000 on 31.12.2018` 1,20,000 on 31.12.2019
and`1,10,000 on 31.12.2020. The rate of interest charged by the vendor is 10% p.a. compounded annually. Calculate
the Cash Price.
Answer:
(A) (B) (C) Instalment Balance due Instalment Number at the end Amount a f t e r t h e
Payment of
Instalment
3rd Nil 1,10,000
(D) = (B) + (C) Total Amount due at the end
Before the Payment of Instalment
1,10,000
(E) = D*R/100 + R)
Interest
D*10/110 (F) = (D)–(E) Balance due at the
Beginning
10,000 1,00,000
2nd 1,00,000 1,20,000 1,20,000 20,000 2,00,000

1st 2,00,000 1,63,000 1,63,000 33,000 3,30,000
3,30,000 — — 30,000 3,00,000
Let the Cash Price be X
X =` 3,00,000 + 40% of X
0.6 X =` 3,00,000
X =` 3,00,000/0.6 = ` 5,00,000
On 1.1.2017 XYZ Ltd. purchased a machine from ABC Ltd. on hire purchased basis. The terms of agreement
provided for 40% as cash down payment and the balance in three instalments of ` 1,30,000 on 31.12.2017,`
1,20,000, on 31.12.2018 and` 1,21,000, on 31.12.2019. The rate of interest charged by the vendor is 10% p.a.
compounded annually. Calculate the Cash Price.
Answer:
(A) (B) (C) Instalment Balance due Instalment Number at the end Amount a f t e r t h e
Payment of
Instalment
3rd Nil 1,21,000

2nd 1,10,000 — 1,00,000 1,20,000
1st 2,00,000 1,30,000
Let the Cash Price be X
(D) = (B) + (C) (E) = D*R/100 Total Amount due at the end
before the Payment of Instalment
1,21,000
1,10,000
2,20,000
3,30,000
X =` 3,00,000 + 40% of X 0.6 X =` 3,00,000
+ R)
Interest D*10/110 (F) = (D)–(E) Balance due at the
Beginning
11,000
10,000
20,000
30,000
X =` 3,00,000/0.6 = ` 5,00,000
1,10,000
1,00,000
2,00,000
3,00,000
3 Ascertainment of Interest
Mr. X purchased a machine on hire-purchase system. `30,000 being paid on delivery and the balance in five
instalments of` 60,000 each, payable annually on 31st December. The cash price of the machine was ` 3,00,000.
Compute the amount of interest for each year. (2 marks)
Answer:
1st year = Amount outstanding for interest after down payment 3,00,000
2nd year = Amount outstanding for interest after 1st Instalment 2,40,000
3rd year = Amount outstanding for interest after 2nd instalment 1,80,000
4th year = Amount outstanding for interest after 3rd instalment 1,20,000
5th year = Amount outstanding for interest after 4th instalment 60,000
Total interest = Hire Purchase price – Cash Price
= 3,30,000 – 3,00,000 = 30,000
Instalment outstanding ratio= 3,00,000:2,40,000 :1,80,000:1,20,000:60,000
= 5:4:3:2:1
`
Interest for 1 year = × 30,000 = 10,000

Interest for II year = × 30,000 = 8,000
Interest for III year = × 30,000 = 6,000
Interest for IV year = × 30,000 = 4,000
Interest for V year = × 30,000 = 2,000 30,000
Q.3.2 2010 - May [1] (x), RTP Practical
On 1st April, 2009 a car company sold to Arya Bros., a motor car on hirepurchase basis. The total hire-purchase
price was ` 4,60,000 with down payment of` 1,60,000. Balance amount was to be paid in three annual instalments
of`1,00,000 each. The first instalment payable on 31st March, 2010. The cash price of the car was ` 4,00,000.
How will Arya Bros. account for interest over three accounting years assuming books of accounts are closed on 31st
March every year. (2 marks)
Answer:
Total interest on hire purchase transactions =`4,60,000 `4,00,000 =`60,000 As balance payment is made in three
equal instalments, so interest is to be allocated in the ratio of 3 : 2 : 1
☐ Interest for 1st year = ` 60,000 × =` 30,000

2nd year = ` 60,000 × =` 20,000
3rd year = ` 60,000 × =` 10,000 Space to write important points for revision
XYZ Ltd. purchased a machine on Hire Purchase System. The total cost price of the machine was`30,00,000 payable
20% down and four annual instalments of` 8,40,000,` 7,80,000,` 7,20,000 and` 6,60,000 at the end of first, second,
third and fourth years respectively. Calculate the interest included in each year’s instalment assuming that the sales
were made at the beginning of the year.
Answer:
Hire Purchase Price
Total Interest = Down Payment + Instalments

= `6,00,000 + (`8,40,000 +`7,80,000 +`7,20,000
+ ` 6,60,000)
= H.P. Price – Cash Price = 36,00,000 –` 30,00,000 =` 6,00,000
Calculation of Ratio of Hire Purchase Price Outstanding in the Beginning of each Year
(A) (B) (C) Year Outstanding H.P.P. in the Instalment
Beginning of each Year Paid

1st 30,00,000 8,40,000
2nd 21,60,000 7,80,000
3rd 13,80,000 7,20,000
4th 6,60,000 6,60,000
(D) = (B) – (C) Outstanding H.P.P. at the end of each Year
21,60,000
13,80,000
6,60,000
Nil
Ratio of Outstanding H.P.P. at the beginning of year = 300 : 216 : 138 : 66 Calculation of Interest for each year
Interest for 1st year =` 6,00,000 × 300/720 = ` 2,50,000

Interest for 2nd year =` 6,00,000 × 216/720 = ` 1,80,000
Interest for 3rd year =` 6,00,000 × 138/720 = ` 1,15,000
Interest for 4th year =` 6,00,000 × 66/720 = ` 55,000
` 6,00,000
Q.3.4 Practice Practical Calculate the amount of Interest and Instalments in each of the following alternatives.
Case Down Payment I 20%
Balance to be Rate of Discharged Interest
Compounding of Interest ` 8 lacs by way of four 20% p.a. At yearly rest annual instalments
II 20% ` 8 lacs by way of four annual instalments

III 20% ` 6 lacs by way of three Half yearly instalments Answer:
Case I: Statement showing the Calculation of Interest and Instalment
20% p.a. At half yearly rest

20% p.a. At half yearly rest
(A) (B) (C) = (B) × Instalment Opening 20/100 Number Balance Interest
1 8 1.6
2 6 1.2
3 4 0.8
4 2 0.4
Case II
Principal
(D) = (B) + (C) (E) = 8/4 + (C) (F) = (D)–(E) Opening Instalment
Balance Plus Amount Interest
9.6 3.6 7.2 3.2 4.8 2.8 2.4 2.4
Add: Interest @ 20%. a. for the 1st half year

Principal interest at the end of 1st half year
Add: Interest @ 20% p.a. for the 2nd half year
Principal for interest at the end of year
Thus, every payment of ` 121 includes an interest of ` 21. Statement showing the Calculation of Interest and
Instalment
Closing Balance
6
4
2
0
= 100
= 10
110
= 11
121
(A) (B) (C) = (B) × Instalment Opening 21/100 Number Balance Interest
1 8 1.68
2 6 1.26
3 4 0.84
4 2 0.42
(D) = (B) + (C) Opening

Balance Plus Interest
9.68
7.26
4.84
2.42
(E) = 8/4 + (C) (F) = (D)–(E) Instalment Closing Amount Balance
3.68 6
3.26 4
2.84 2
2.42 0
4 Accounting for Hire Purchase Transaction

Happy Valley Florists Ltd. acquired a delivery van on hire purchase on 01.04.2010 from Ganesh Enterprises. The
terms were as follows: Particulars Amount (`) Hire Purchase Price 1,80,000 Down Payment 30,000 1st installment
payable after 1 year 50,000 2nd installment after 2 years 50,000 3rd installment after 3 years 30,000 4th installment
after 4 years 20,000 Cash price of van ` 1,50,000 and depreciation is charged at 10% WDV. You are required to
(i) Calculate Total Interest and Interest included in each installment. (ii) Prepare Van A/c., Ganesh Enterprises A/c.
in the books of Happy Valley Florists Ltd. up to 31.03.2014. (8 marks) Answer :
Calculation of Total Interest & Interest included in each installment. Total Interest
Hire Purchase Price Less : Down Payment = Hire Purchase Price - Cash Price = 1,80,000 - 1,50,000
=` 30,000
1,80,000
(30,000) Hire Purchase Price Outstanding at the beginning of the 1styear 1,50,000
Less : 1st Instalment 50,000
Hire Purchase Price Outstanding at the beginning of the 2ndyear 1,00,000
Less : 2nd Instalment 50,000
Hire Purchase Price Outstanding at the beginning of the 3rdyear 50,000
Less : 3rd Instalment 30,000
Hire Purchase Price Outstanding at the beginning of 4th year 20,000
Less : 4th Instalment 20,000
Nil Total Interest will be spread in the Ratio of Hire Purchase Price outstanding at the beginning of each year.
Ratio of Hire Purchase Price Outstanding at the beginning of each year = 1,50,000:1,00,000:50,000:20,000
= 15:10:5:2
Interest of 1st Instalment = 14,062.50
Interest of 2nd Instalment = 9,375.00

Interest of 3rd Instalment = 4,687.50
Interest of 4th Instalment = 1,875.00
Total Interest 30,000.00 In the books of Happy Valley Florists Ltd. Van A/c Dr. Cr.
Date Particulars Amount Date Particulars Amount (`) (`) 1,50,000 31-3-11 By Depreciation A/c 15,000 1-4-10
To Ganesh Enterprise
1-4-11 To Balance b/d By Balance c/d 1,35,000

1,50,000 1,50,000
1,35,000 31-3-12 By Depreciation A/c 13,500
1,35,000 1,35,000
1-4-12 To Balance b/d 1,21,500 31-3-13

1-4-13 To Balance b/d
Dr.
Date Particulars
1-4-10 To Bank A/c 31-3-11 To Bank A/c 31-3-11 To Balance c/d
31-3-12 To Bank A/c 31-3-12 To Balance c/d

31-3-13 To Bank A/c 31-3-13 To Balance c/d
31-3-14 To Bank A/c 1,21,500

1,09,350 31-3-14
1,09,350 By Depreciation A/c 12,150 By Balance c/d 1,09,350
1,21,500
By Depreciation A/c 10,935
1,09,350
Ganesh Enterprise A/c Cr. Amount (`) Date Particulars Amount (`) 30,000 1-4-10 By Van A/c 1,50,000
50,000 31-3-11 By Interest A/c 14,062.5
84,062.5
1,64,062.5 164,062.5
50,000 1-4-12 By Balance b/d 84,062.5
43,437.5 31-3-12 By Interest A/c 9375
93,437.5 93,437.5
30,000 1-4-12 By Balance b/d 43,437.0
18,125 31-3-13 By Interest A/c 4,687.5
48,125 48,125
20,000 1-4-13 By Balance b/d 18,125
31-3-14 By Interest A/c 1,875
20,000 20,000
5 Repossession
Omega Corporation sells computers on hire purchase basis at cost plus 25%. Terms of sales are ` 10,000 as down
payment and 8 monthly instalments of` 5,000 for each computer. From the following particulars prepare Hire
Purchase Trading Account for the year 1999.
As on 1st January, 1999 last instalment on 30 computers was outstanding as these were not due up to the end of the
previous year.
During 1999 the firm sold 240 computers. As on 31st December, 1999 the position of instalments outstanding were
as under:
Instalments due but not collected:
2 instalments on 2 computers and last instalment on 6 computers.
Instalments not yet due:
8 instalments on 50 computers, 6 instalments on 30 and last
instalment on 20 computers.
Two computers on which 6 instalments were due and one instalment not yet due on 31.12.99 had to be repossessed.
Repossessed stock is valued at 50% of cost. All other instalments have been received. (10 marks)
Answer :
In the books of Omega Corporation
Hire Purchase Trading Account for
the year ended on 31st Dec., 1999

Dr. Cr. Particulars `
To Hire Purchase Stock (30 × By
` 5,000) 1,50,000
To Goods Sold on Hire Purchase By
(240 × ` 50,000) 1,20,00,000
To Bad Debts 12,000 By
To Loss on Re-possession 16,000
Less: Instalments not yet due 8,000 8,000
To Stock Reserve (` 30,00,000 ×
20%) 6,00,000 By
To Profit & Loss A/c (Transfer of
profit) 18,00,000
1,45,70,000
Particulars `
Hire Purchase 91,40,000
Sales (W. N.-2)
Stock Reserve (`1,50,000 × 30,000
20%)
Goods Sold on Hire Purchase (`1,20,00,000 × 20%) 24,00,000
Hire Purchase Stock [(8×50 30,00,000 ÷ 6 × 30 + 1 × 20) ×` 5,000]
Alternatively, hire purchase trading account can be prepared in the following manner: Hire Purchase
1,45,70,000
Trading Account for the year ended on 31st Dec., 1999
Particulars
To Hire Purchase Stock (30 ×
` 5,000)
To Goods Sold on Hire
Purchase (240 ×` 50,000) To Stock Reserve 6,00,000 Purchase 24,00,000
(` 30,00,000 × 20%) (`1,20,00,000 × 20%)
To Profit & Loss A/c (Transfer By Goods Repossessed (2 ×
of profit) 18,00,000 ` 40,000 × 50%) 40,000 By Instalments Due [(2 × 2 + 1 × 6) ×` 5,000] 50,000 By Hire Purchase Stock
(8 × 50 + 6 × 30 + 1 × 20) ×` 5,000] 30,00,000 1,45,50,000 1,45,50,000 Working Notes:
1. Cash collected: ` `
Cash down payment (240 × `10,000) 24,00,000
Add: Instalments collected:
Last instalments on 30 computers
outstanding on 1.4.99 1,50,000
Instalments due and collected on
240 computers sold during the year:
Total instalments on 240 computers
(8 × 240 × ` 5,000) 96,00,000
Less: Instalments due but not collected
[(2 × 2 + 1 × 6 + 6 × 2) ×` 5,000] 1,10,000
Instalments not due on 31.12.99
[(8 × 50 + 6 × 30 +1 × 20 + 1 × 2)
×` 5,000] 30,10,000 31,20,000 64,80,000 90,30,000 2. Loss on repossessed computers:–
Cost of instalments due but not
collected (6 × 2 × ` 4,000) 48,000
Cost of instalments not yet due
(1 × 2 × ` 4,000) 8,000 56,000
Less: Estimated value of repossessed
computers (2 ×` 40,000 × 50 %) 40,000
Loss 16,000
` Particulars ` By Cash (W. N.-1) 90,30,000 1,50,000 By Stock Reserve
(`1,50,000 × 20%) 30,000 1,20,00,000 By Goods Sold on Hire
3. Hire purchase sales:

Cash collected 90,30,000 Add: Instalments due but not collected
[(2 × 2 + 1× 6 + 6 × 2) × ` 5,000] 1,10,000

91,40,000
4. Bad debts (in respect of repossessed computers):–
Instalments due but not collected (6 × 2 ×` 5,000) 60,000
Cost of instalments not due on 31.12.99
(1 × 2 × ` 5,000 × 80%) 8,000
68,000
Less: Cost of instalments but not collected
6 × 2 × `4,000 48,000
Cost of instalments not yet due
(1 × 2 ×` 4,000) 8,000 56,000
Bad debts 12,000

Welwash (Pvt.) Ltd. sells washing machines for outright cash as well as on hire-purchase basis. The cost of a
washing machine to the company is ` 10,500. The company has fixed cash price of the machine at` 12,300 and hire-
purchase price at ` 13,500 payable as to` 1,500 down and the balance in 24 equal monthly instalments of ` 500 each.
On 1st April, 2000 the company had 26 washing machines lying in its showroom. On that date 3 instalments had
fallen due, but not yet received and 675 instalments were yet to fall due in respect of machines lying with the hire-
purchase customers.
During the year ended 31st March, 2001 the company sold 130 machines on cash basis and 80 machines on hire-
purchase basis. After paying five monthly instalments, one customer failed to pay subsequent instalments and the
company had to repossess the washing machine. After spending ` 1,000 on it, the company resold it for ` 11,500.
On 31st March, 2001 there were 21 washing machines in stock, 810 instalments were yet to fall due and 5
instalments had fallen due, but not yet received in respect of washing machines lying with the hire-purchase
customers. Total selling expenses and office expenses including depreciation on fixed assets totaled ` 1,60,000 for
the year.
You are required to prepare for the Accounting Year ended 31st March, 2001:
(i) Hire-purchase Trading Account, and
(ii) Trading and Profit & Loss Account showing net profit earned by the company after making provision for
Income-tax @ 35%. (16 marks) Answer :
In the books of Welwash (Pvt.) Ltd.
Hire Purchase Trading Account for the year ended 31st March, 2001 Particulars
To Hire Purchase Stock (`
500 × 675)
To Instalments due`(500 × 3) To Goods sold on Hire
Purchase (` 13,500 × 80) To Stock Reserve

To Profit and Loss A/c (Transfer of profit)
` Particulars ` By Cash (Working Note-1) 10,02,000

3,37,500By Stock Reserve 75,000
1,500
10,80,000 By G o o d s R e p o s s e s s e d
(` 13,500 ☐ ` 1,500 ☐
2,500) 9,500
90,000By Goods sold on Hire

Purchase
2,25,000 2,40,000
By Hire Purchase Stock 4,05,000(` 500 × 810) 2,500By Instalments due (`500 × 5)
17,34,000 17,34,000
Trading and Profit and Loss Account for the year ended 31st, March, 2001 Particulars
To Opening Stock (`10,500
× 26)
To Purchases ` 10,500 × (130 + 80 + 21 ☐ 26)

To Gross Profit
To Sundry Expenses
To Provision for Income Tax (35% of` 3,00,000) To Net profit for the year
Working Notes: 1. Cash collected during the year : ` Hire-Purchase stock on 1.4.2000 3,37,500 Instalments due
1.4.2000 1,500 Hire purchase price of goods sold during the year 10,80,000 14,19,000
`
Less: Repossessed goods 9, 500
Hire purchase stock on 31.3.2001 4,05,000
Instalments due on 31.3.2001 2,500 4,17,000 Cash collected during the year 10,02,000
2. Washing machines purchased during the year :
No. No. Closing balance 21

Add: Cash Sales 130
Sales on hire purchase basis 80 231 Less: Opening stock 26 Purchase during the year 205 Purchases 205 × ` 10,500
= ` 21,52,500

` Particulars ` By Sales (` 12,300 × 130) 15,99,000
2,73,000 By Goods sold on Hire Purchase

(` 10,80,000☐` 2,40,000) 8,40,000
21,52,500 By Closing Stock (`10,500 × 21) 2,20,500
2,34,000
26,59,500 26,59,500
1,60,000 By Gross Profit 2,34,000
By Hire Purchase Trading A/c 2,25,000
1,05,000 By G o o d s R e p o s s e s s e d
1,95,000 (`11,500☐`1,000☐`9,500) 1,000
4,60,000 4,60,000
Sameera Corporation sells Computers on Hire-purchase basis at cost plus 25%. Terms of sales are 5,000/- as Down
payment and 10 monthly instalments of`2,500/- for each Computer. From the following particulars, prepare Hire-
purchase Trading A/c for the year 2002-03:
As on 1st April, 2002, last instalment on 20 Computers were Outstanding as these were not due upto the end of the
Previous year. During 2002-03, the Firm sold 120 Computers. As on 31st March, 2003 the position of instalments
outstanding were as under :
Instalments due but not collected 4 Instalments on 4 Computers and
Last instalment on 9 Computers. Instalment not yet due 6 Instalments on 50 Computers, 4

Instalments on 20 and Last Instalment
on 40 Computers.
Two Computers on which 8 Instalments were due and one Instalment not yet due on 31.03.2003, had to be
repossessed. Repossessed stock is valued at 50% of cost. All other Instalments have been received. (14 marks)
Answer :
In the books of Sameera Corporation
Hire Purchase Trading Account (for the year ended 31st March, 2003) Particulars
To H. P. Stock [20 ×` 2,500]

To Goods Sold on H. P. [`30,000 × 120]
To Loss on repossession`12,000 Less: Inst. not yet due ` 4,000
Amount Particulars Amount (`) (`) 50,000 By H.P. Sales (`24,92,500
+` 1,02,500) 25,95,000 By Stock Reserve Loading:

36,00,000 [` 50,000 × 20%] 10,000 By Goods sold on H.P.
8,000 (Loading;`36,00,000 ×
20%) 7,20,000
To Bad Debts [W. Note -3] 8,000 By H. P. Stock [6 × 50 + 4 To Stock Reserve [Loading: × 20 + 1 × 40 ×` 2,500]
10,50,000
` 10,50,000 × 20%] 2,10,000
To P & L A/c 4,99,000
43,73,000 43,73,000 Working Notes:

(1) Collection of Cash:–
` Cash down payment [` 5,000 × 120 computer] 6,00,000 Add: Instalment collected
(a) Outstanding last instalment on 20 computer
as on 1.4.02 50,000
(b) Instalment due and collected on 120 computer
[120 computer × 10 × ` 2,500] 30,00,000 Less: Instalment due but not collected
[` 2,500 × (4 × 4 + 1 × 9 + 8 × 2)] 1,02,500 Less: Instalment not yet due [` 2,500 ×
(6 × 50 + 4 × 20 + 1 × 40 + 1 × 2)] 10,55,000 18,42,500 Cash collected 24,92,500
2. Loss on repossession:–
Instalment due but not yet collected (at Cost)
[` 2,000 × 1 × 2] ` 32,000 Instalment not yet due (at Cost) [` 2,000 × 1 × 2] 4,000
36,000
Less: Estimated value of repossessed computer [at 50% of cost] 24,000
☐ Less on repossessed computer 12,000
3. Bad Debts in respect of repossessed computer:–

``
Instalment due but not yet collected

[` 2,500 × 2 × 8] 40,000
Instalment not yet due (at cost) [` 2,000 × 1 × 2] 4,000
Less: Instalment due but not collected
[at cost i.e. ` 2,000 × 2 × 8] 32,000 Instalment not yet due [at cost i.e.` 2,000 × 1 × 2] 4,000 36,000
☐ Bad Debts 8,000
Q.5.4 2005 - May [3], RTP Practical
ABC Ltd. sells goods on Hire-purchase by adding 50% above cost from the following particulars, prepare Hire-
purchase Trading account to reveal the profit for the year ended 31.3.2005 :
`
1.4.2004 Instalments due but not collected 10,000
1.4.2004 Stock at shop (at cost) 36,000
1.4.2004 Instalment not yet due 18,000
31.3.2005 Stock at shop 40,000
31.3.2005 Instalment due but not collected 18,000
Others details :
Total instalments became due 1,32,000
Goods purchased 1,20,000
Cash received from customers 1,21,000
Goods on which due instalments could not be collected were repossessed and valued at 30% below original cost.
The vendor spent ` 500 on getting goods overhauled and then sold for ` 2,800. (16 marks)
Answer :
Hire Purchase Trading Account
(for the year ended 31st March, 2005)
Dr. Cr.
Date Particulars ` Date Particulars ` 1.1.2004 To Hire purchase stock 18,000 1.1.2004 By Stock Reserve 6,000 (1/3 of `18,000) 1.1.2004 To H i r e p u r
c h a s e 10,000
debtors
to To Goods sold on hire 1.1.2004 By Cash (` 1,21,000 31.3.2005 purchase 1,74,000 to +` 2,800) 1,23,800
To Cash (Overhauling 31.3.2005 By Goods sold on charges) 500 hire purchase ( 1 / 3 o f 58,000 ` 1,74,000)
31.3.2005 To Stock reserve 20,000 31.3.2005 By Hire To Profit and loss stock account(Transfer of By Hire purchase 60,000
purchase
profit) 43,300 debtors 18,000 2,65,800 2,65,800
Alternatively, the Hire Purchase Trading A/c can be prepared as : In the Books of ABC Ltd.
Dr. Cr.
Date Particulars
1.1.2004 To Hire purchase stock

To Goods sold on Hire
1.1.2004 Purchase
to To Loss on repossession
31.3.05 of goods (W. N. 5)
31.3.05 To Stock reserve
To Profit and loss
account (Transfer of
profit)
18,000 1.1.2004 By Stock reserve (1/3 of` 6,000

18,000)
1,74,000 1.1.2004 By Hire purchase sales 1,32,000
to
1,600 31.3.2005 By Goods sold on hire 20,000 purchase (1/3 of ` 58,000
1,74,000)
43,000 By Profit on sale of repossessed goods (W.N.4) 900
31.3.2005 By Hire purchase stock (W.N.3) 60,000
Working Notes :
(1) Memorandum Hire Purchase Debtors (instalment dues but not collected) Account : Dr.
Particulars To Balance b/d

To Hire purchase sales
Cr. ` Particulars `
10,000 By Cash 1,21,000

1,32,000 By Repossessed stock
(Balancing figure) 3,000
1,42,000 1,42,000 (2) Dr. Particulars To Balance b/d To Purchases

Memorandum shop stock account : Cr. ` Particulars `
36,000 By Goods sold on hire purchase 1,16,000

1,20,000 (Balancing figure)
1,56,000 1,56,000
(3) Memorandum Hire Purchase Stock (Instalment yet not due) Account: Dr. Particulars
To Balance b/d
To Goods sold on hire purchase [1,16,000 + 50% of 1,16,000] Cr. ` Particulars `
18,000 By Hire purchase sales 1,32,000

1,74,000 By Balance c/d 60,000
(Balancing figure)
(4) Goods Repossessed account :

Dr. Cr. Particulars ` Particulars `
To Hire purchase debtors 3,000 By Hire purchase trading 1,600

account (W.N.5)
By Balance c/d (W.N.5) 1,400
3,000 3,000
To Balance b/d
To Cash account (expenses)
To Profit on sale
1,400 By Cash account 2,800
500
900
2,800 2,800
(5) Original cost of goods repossessed2,000
Instalments due but not received 3,000

Valuation of repossessed goods (70% of ` 2,000) 1,400
Loss on repossession 1,600

Q.5.5 2007 - May [3] (a) Practical S Ltd. has a Hire-purchase department. Goods are sold on hire-purchase at cost
plus 60%.
From the following particulars draft Hire-purchase trading account and compute profit or loss for the year ended
31st March, 2007:
` Goods with customers on 1.4.2006 (instalments are not due) 3,20,000

Instalments due on 1.4.2006 (customers are paying) 20,000
Goods sold on hire-purchase during the year 16,00,000
(i.e., from 1.4.2006 to 31.3.2007)
Goods re-possessed from customers valued at 40% 16,000
Unpaid instalments in respect of re-possessed goods 40,000
Goods with customers as on 31.3.2007 7,20,000
(at hire-purchase price) (8 marks)
Answer :
Working Notes: ` 1. Opening H.P. Stock reserve, 3,20,000 × 1,20,000
2. Loading on goods sold on H.P 16,00,000 × 6,00,000
3. Closing H.P. Stock reserve 7,20,000 × 2,70,000
4. Commutation of Instalments due at the end of the year

Opening H.P. Stock + Opening Instalments due + H.P. Sales during the year (i.e., 3,20,000 +20,000 + 16,00,000)
19,40,000 Less: Cash received from customers 11,20,000
Instalments unpaid for repossessed goods 40,000 Closing balance of H.P. Stock 7,20,000 18,80,000
Closing Instalments Due 60,000 In the books of Ltd.

Dr. (For the year ended on 31st March, 2007) Cr.
Particulars
To Hire Purchase
Stock
To Instalment due
` Particulars `
3,20,000 By Hire Purchase Stock 1,20,000

Reserve (W.N.1)
20,000 By B a n k A / c ( C a s h 11,20,000
received)
To Goods sold on Hire
Purchase
16,00,000 By Goods Repossessed 16,000
A/c
To Hire Purchase Stock Reserve (W.N.3) To Profit and Loss A/c
(balancing figure)
2,70,000 By Goods sold on hire 6,00,000

purchase (loading)
4,26,000 (W.N.2)
By Hire purchase stock 7,20,000 By Instalments due 60,000 (W.N.4)

Q.5.6 2008 - Nov [3] (b) Practical Wye sells goods on Hire-purchase. The term of purchase at cost plus 50%
prepare Hire-purchase Trading A/c from the information given below :
` Stock with customers on hire-purchase price (Opening) 1,62,000

Stock in hand at shop (Opening) 3,24,000
Installments overdue (Opening) 1,35,000
Purchases during the year 10,80,000
Goods re-possessed (instalments not due ` 36,000) 9,000
Stock at shop excluding re-possessed goods (Closing) 3,60,000
Cash received during the year 10,35,000
Installments overdue (Closing) 1,62,000
The vendor spent ` 2,000 on goods re-possessed and then sold it for ` 15,000.
(8 marks) Answer :
Particulars
To Opening balance
Hire Purchase Debtors Hire Purchase Stock (Instalments overdue)
` Particulars `
By Cash received 10,35,000

1,35,000 (on Instalments)
1,62,000 By Stock reserve (Opening) 54,000
(W.N.2)
To Goods sold on hire purchase (W.N.I)
To Cash (Expenses)
To Stock reserve (closing) (W.N.5)
To Profit and loss account
Working Notes : 1. Memorandum Stock at Shop Account
15,66,000 By Goods sold on hire 5,22,000

purchase (loading) (W.N.I)
2,000 By Cash received (on sale of 15,000
2,10,000 re-possessed goods)
By Closing balance
3,43,000 Hire Purchase Stock (Inst.
Overdue) (W.N.4) 6,30,000
Hire Purchase Debtors 1,62,000
24,18,000 24,18,000
Particulars
To Balance b/d
To Purchase (at cost)
` Particulars ` 3,24,000 By Goods sold on hire 10,44,000 10,80,000 purchase account (at
cost)

14,04,000 14,04,000
Goods sold on hire purchase account

at invoice price (10,44,000 ×150%) ` 15,66,000
Loading ` 15,66,000☐` 10,44,000 ` 5,22,000
2. Opening Stock reserve
3. Hire Purchase Debtors Account Particulars

To Balance b/d
To Goods sold on hire
purchase
` Particulars ` 1,35,000 By Cash received 10,35,000
15,66,000 By Hire purchase stock 5,04,000

account (Bal. Fig)
17,01,000 17,01,000
4. Hire Purchase Stock Account Particulars

To Balance b/d
To Hire Purchase Debtors
A/c (W.N.3)
` Particulars ` 1,62,000 By Goods repossessed
(instalments not due) 36,000

5,04,000 By Balance c/d (Bal. fig.) 6,30,000
6,66,000 6,66,000
5. Closing stock reserve Space to write important points for revision

On 1stApril, 2012, M/s. Power Motors sold on hire purchase basis a truck whose cash price was ` 9,00,000 to M/s.
Singh & Singh, a firm of transporters. The terms of the contract were that the transporters were to pay` 3,00,000
down and six four-monthly instalments of` 1,00,000 plus interest on outstanding amount of cash price for the
intervening four months. The instalments were payable on 31st July, 30th November and 31st March in each one of
the two accounting years. Interest was calculated @ 12% per annum.
M/s. Singh & Singh duly paid the instalment on 31st July, 2012 but failed to pay the instalment on 30th November,
2012. M/s. Power Motors, after legal formalities, repossessed the truck valuing it at ` 7,00,000. M/s. Power Motors
spent` 80,000 on repairs and repainting of the truck and on 7th January, 2013 sold it for ` 7,50,000 cash.
You are required to prepare the account of M/s. Singh & Singh and Goods Repossessed Account in the books of
M/s. Power Motors.
(6 marks)
Answer: In the books of M/s. Power Motors
M/s. Singh & Singh’s Account
2012 2012
1.04. To Hire Purchase Sales 9,00,000 1.04. By Bank 3,00,000 A/c (Cash Price) (Down payment) 31.07. To Interest A/c 24,000 31.07. By Bank 1,24,000
(6,00,000 × 12 × ) (1,00,000+24,000)
30.11. To Interest A/c 20,000 30.11. By Goods 7,00,000 (5,00,000 × 12 × ) Repossessed A/c
30.11. To Profit & Loss Account 1,80,000 (Bal. fig.)
11,24,000 11,24,000 Goods Repossessed Account
30.11.2012 To Singh & Singh’s A/c 7,00,000 7.1.2013 By Bank A/c 7,50,000 7.1.2013 To Bank A/c (Repairs) 80,000 7.1.2013 By Profit & Loss A/c
30,000
Lucky bought 2 tractors from Happy on 1-10-2011 on the following terms:
` Down payment 5,00,000

1st installment at the end of first year 2,65,000
2nd installment at the end of 2nd year 2,45,000
3rd installment at the end of 3rd year 2,75,000
Interest is charged at 10% p.a.
Lucky provides depreciation @ 20% on the diminishing balances. On 30-9-2014 Lucky failed to pay the 3rd
installment upon which Happy repossessed 1 tractor. Happy agreed to leave one tractor with Lucky and adjusted the
value of the tractor against the amount due. The tractor taken over was valued on the basis of 30% depreciation
annually on written down basis. The balance amount remaining in the vendor’s account after the above adjustment
was paid by Lucky after 3 months with interest @ 18% p.a.
(1) Calculate the cash price of the tractors and the interest paid with each installment.
(2) Prepare Tractor Account and Happy Account in the books of Lucky assuming that books are closed on
September 30 every year. Figures may be rounded off to the nearest rupee. (8 marks) Answer :
1. Calculation for cash price of Tractors & Interest paid statement of cash price of asset acquired on H.P.
End of Balance due 8 InstallmentCumulative Install after installment Amt. (`) Amt.(`)
3 Nil 2,75,000 2,75,000

2 2,50,000 2,45,000 4,95,000
1 4,50,000 2,65,000 7,15,000
(2,50,000+2,00,000)
0 6,50,000
(2,00,000+ 4,50,000) 5,00,000 11,50,000
12,85,000 Cash price of the Asset is ` 11,50,000

Interest Paid for at 10% principal
P.a.
25,000 2,50,000
45,000 2,00,000
65,000 2,00,000
Down
Payment 5,00,000 Nil
1,35,000 11,50,000
Interest paid with each installment (`)

= 1st installment = 65,000
= 2nd installment = 45,000
= 3rd installment = 25,000
Total = 1,35,000
In the books of Lucky
Tractors Account
Date Particulars
1.10.2011 To Happy A/c
(`) Date Particulars (`) 11,50,000 30.9.2012 By Depreciation A/c 2,30,000 By Balance c/d 9,20,000 11,50,000
11,50,000 1.10.2012 To Balance b/d 9,20,000 30.9.2013 By Depreciation A/c 1,84,000 By Balance c/d 7,36,000
9,20,000 9,20,000
1.10.2013 To Balance b/d 7,36,000 30.9.2014 By Depreciation A/c 1,47,200
By Happy a/c (Value
of 1 Tractor taken o v e r a f t e r depreciation for 3 years @ 30% p.a.) 1,97,225 { 5 , 7 5 , 0 0 0 – (1,72,500 +

1,20,750 + 84,525)}
By Loss transferred to P & L A/c on surrender (Bal. fig.) 97,175 o r ( 2 9 4 , 4 0 0 – 1,97,225)

By Balance c/d 2,94,400 ½ ( 7 , 3 6 , 0 0 0 - 1,47,200 = 5,88,800)
Happy Account
Date Particulars (`) Date Particulars (`)
1.10.11 To Bank (down 5,00,000 1.10.11 By Tractor A/c 11,50,000 payment) 30.9.12 By Interest A/c 65,000
30.9.12 To Bank1st 2,65,000
Installment
12,15,000 12,15,000 30.9.13 To Bank 2nd 2,45,000 1.10.12 By Balance b/d 4,50,000 Installment 30.9.14 By Interest
A/c 45,000 To Balance c/d 2,50,000
4,95,000 4,95,000 30.9.14 To Tractor a/c 1,97,225 1.10.13 By Balance b/d 2,50,000 To Balance c/d 77,775 30.9.14
By Interest A/c 25,000 2,75,000 2,75,000
31.12.14 To Bank 81,275 1.10.14 By Balance b/d 77,775

(Amount settled 31.12.14 By Interest A/c 3,500
after 3 months (@ 18% on bal.) (77,775×3/12×18/100)
81,275 81,275 Space to write important points for revision

Girish Transport Ltd., purchased from NCR Motors 3 electric rickshaws costing`60,000 each on the hire purchase
system on 1.1.2013. Payment was to be made`30,000 down and the remainder in 3 equal installments payable on
31.12.2013, 31.12.2014 and 31.12.2015 together with interest @ 10% p.a. Girish Transport Ltd. writes off
depreciation @ 20% p.a. on the reducing balance. It paid the installment due at the end of 1st year i.e. 31.12.2013 but
could not pay next on 31.12.2014. NCR Motors agreed to leave one e-rickshaw with the purchaser on 31.12.2014
adjusting the value of the other two e-rickshaws against the amount due on 31.12.2014. The e-rickshaws were
valued on the basis of 30% depreciation annually on WDV basis.
Show the necessary Ledger accounts in the books of Girish Transport Ltd. for the year 2013, 2014 and 2015. (8
marks)
Answer :
Ledgers A/c Books of Girish Transport
Date Particulars 1/1/1 To NCR Motors A/c
1/1/14 To Balance b/d
1/1/15 By Balance b/d
Date Particulars 1/1/13 To Bank (D.P.)
Auto Rickshaws A/c

Amount Date Particulars Amount 1,80,000 31/12/13 By Depreciation A/c 36,000
31/12/13 By Balance c/d 1,44,000

1,80,000 1,80,000
1,44,000 31/12/14 By Depreciation A/c 28,800
31/12/14 By P&L Class on 18,000

default (Note -1)
31/12/14 By NCR Motors 58,800

31/12/14 By Balance c/d 38,400
1,44,000 1,44,000
38,400 31/12/15 By Depreciation A/c 7,680
38,400 38,400
NCR Motors A/c
Amount Date Particulars Amount 30,000 1/1/13 By Auto Rickshaw A/c 1,80,000
31/12/13 To Bank (installments) 65,000 By Interest A/c 15,000
To Balance c/d 1,00,000
31/12/14 To Auto rickshaw A/c 58,800 1/4/14 By Balance b/d 1,00,000 31/12/14 To Balance c/d 51,200 By Interest A/c 10,000 1,10,000 1,10,000
31/12/15 To Bank A/c (Cost installment paid)
Note: Calculation of loss on non payment of installment

Book value of Auto rickshaw as on 31/12/14 as per Girish Transport Book
1/1/13 60,000
☐ depreciation (20%) 12,000
31/12/13 48,000
31/12/14 38,400
Book value adopted by NCR Motors
1/1/13 60,000
31/12/13 42,000
31/12/14 29,400
Loss per Auto rickshaw = 38,400 ☐ 29,400
= 9,000
Total loss = 9,000 × 2 = 18,000
56,320 1/1/15 By Balance b/d 51,200
By Interest A/c 5,120 56,320 56,320
Q.5.10 2016 - Nov [5] (a) Practical Srikumar bought 2 cars from ‘Fair Value Motors Pvt Ltd. on 1-4-2012 on the
following terms:
Down payment 6,00,000

1st Installment at the end of first year 4,20,000
2nd Installment at the end of 2nd year 4,90,000
3rd Installment at the end of 3rd year 5,50,000
Interest is charged at 10% p.a.
Srikumar provides depreciation @ 25% on the diminishing balances. On 31-3-15 Srikumar failed to pay the
3rdinstallment upon which ‘Fair Value Motors Pvt Ltd.’ repossessed 1 car. Srikumar agreed to leave one car with
Fair Value Motors Pvt Ltd. and adjusted the value of the car against the amount due. The car taken over was valued
on the basis of 40% depreciation annually on written down basis. The balance amount remaining in the vendor’s
account after the above adjustment was paid by Srikumar after 3 months with interest @ 20% p.a.
(i) Calculate the cash price of the cars and the interest paid with each installment.
(ii) Prepare Car Account and Fair Value Motors Pvt Ltd. Account in the books of Srikumar assuming books are
closed on March 31, every year. Figures may be rounded off to the nearest rupee. (8 marks)
Answer :
(i) Calculation of Interest and Cash Price
E n d o f Outstanding A m o u n t Outstanding Interest Outstanding Installment Balance at d u e a t Balance

at the end after the time the end the Paymentof Installbefore the of ment payment of Installment Installment
Balance at the
beginning
[1] [2] [3] [4] = 2 + 3 [5] = 4 × 10/110

3rd — 5,50,000 5,50,000 50,000 2nd 5,00,000 4,90,000 9,90,000 90,000
1st 9,00,000 4,20,000 13,20,000 1,20,000
[6] = 4 - 5
5,00,000 9,00,000
12,00,000 Total cash price = ` 12,00,000 + 6,00,000 (down payment) =` 18,00,000
(ii) In the books of Srikumar
Cars Account
Date Particulars ` Date Particulars ` 1.4.12 To Fair Value
A/c
Motors 18,00,000 31.3.13 By Depreciation A/c 4,50,000
18,00,000 18,00,000
13,50,000 13,50,000
By Fair Value Motors A/c (Value of 1 Car taken over after depreciation for 3 y e a r s @ 4 0 % p . a . ) [9,00,000 - (3,60,000 + 2,16,000 + 1,29,600)]
1,94,400
By Loss transferred to Profit and Loss A/c on surrender (Bal. fig.) 1,85,288*
By Balance c/d
1/2(10,12,500 - 2,53,125) 3,79,687* 10,12,500 10,12,500
* May be rounded off as 1,85,287. In that case, the balance in Cars account will be 3,79,688.
Fair Value Motor Pvt. Ltd.
Date Particulars 1.4.12 To Bank (down payment)
31.3.13 To Bank (1st Instalment)

To Balance c/d
31.3.14 To Bank (2nd Installment)

To Balance c/d
31.3.15 To Car A/c To Balance c/d
30.6.15 To Bank A/c (Amount settled after 3 months) `
6,00,000
Date Particulars ` 1.4.12 By Car A/c 18,00,000
4,20,000 31.3.13 By Interest A/c 1,20,000
9,00,000
19,20,000 19,20,000
4,90,000 1.4.13 By Balance b/d 9,00,000
5,00,000 31.3.14 By Interest A/c 90,000

9,90,000 9,90,000
1,94,400 1.4.14 By Balance b/d 5,00,000
3,55,600 31.3.15 By Interest A/c 50,000
5,50,000 5,50,000
3,73,380 1.4.15 By Balance b/d 3,55,600
30.6.15 By Interest A/c (@ 20% on 17,780 bal.)

M/s Amar bought six Scooters from M/s Bhanu on 1st April, 2015 on the following terms:
Down payment ` 3,00,000 1st instalment payable at the end of 1st year ` 1,59,000 2nd instalment payable at the end of
2nd year ` 1,47,000 3rd instalment payable at the end of 3rd year ` 1,65,000 Interest is charged at the rate of 10% per
annum.
M/s Amar provides depreciation @ 20% per annum on the diminishing balance method.
On 31st March, 2018 M/s Amar failed to pay the 3rd instalment upon which M/s Bhanu repossessed two Scooters.
M/s Bhanu agreed to leave the other four Scooters with M/s Amar and adjusted the value of the repossessed
Scooters against the amount due. The Scooters taken over were valued on the basis of 30% depreciation per annum
on written down value. The balance amount remaining in the vendor’s account after the above adjustment was paid
by M/s Amar after 5 months with interest @ 15% per annum.
M/s Bhanu incurred repairing expenses of ` 15,000 on repossessed scooters and sold scooters for ` 1,05,000 on 25th
April, 2018. You are required to:
1. Calculate the cash price of the Scooters and the interest paid with each
instalment.
2. Prepare Scooters Account and M/s Bhanu Account in the books of
M/s Amar.
3. Prepare Goods Repossessed Account in the books of M/s Bhanu. (10 marks)
Answer:
1. Calculation of Interest and Cash Price
No. of Outstanding Amount Installment Balance at due at the the end after time of the payment installment
of
installment
123
Outstanding balance at the end before the payment of installment
4 = 2+3
Interest Outstanding
balance at the
beginning
6 = 4 -5
3rd - 1,65,000
2nd 1,50,000 1,47,000
1st 2,70,000 1,59,000
1,65,000 2,97,000 4,29,000 15,000 27,000 39,000
Date Particulars 1/4/2015 To M/s Bhanu A/c
1/4/16 To Bal b/d
1/4/17 To Bal b/d
Total Cash Price =` 3,90,000 +` 3,00,000 (down Payment) ` 6,90,000
2. In the books of M/s Amar Scooters A/c
` Date Particulars
1,50,000
2,70,000
3,90,000
` 31/3/18 By loss transferred to 38,870 Profit and Loss A/c on
6,90,000 31/3/2016 By Depreciation A/c 1,38,000 31/3/2016 By Bal. c/d 5,52,000
6,90,000 6,90,000
5,52,000 31/3/17 By Depreciation 1,10,400
31/3/17 By Bal. c/d 4,41,600
5,52,000 5,52,000
4,41,600 31/3/18 By Depreciation 88,320
31/3/18 By Bhanu A/c 78,890

(Value of 2 scooter t a k e n o v e r a f t e r
depreciation for 3 years @ 30% P.A.) [2,30,000 - 69,000 + 48,300 + 33,810)]
48,300 + 33,810)]
78,890)
31/3/18 31/3/18 2,35,520 88,320) × 1/6 × 4 4,41,600 4,41,600 3. M/S Bhanu A/c
Date Particulars
1/4/15 To Bank (D.P.)

31/3/16 To Bank (1st Installment) 31/3/16 To Bal c/d
31/3/17 To Bank (2nd Installment) 31/3/17 To Bal. c/d

31/3/18 To Scooters A/c 31/3/18 To Bal. c/d
31/8/18 To Bank (amount settled after 5 months)
3,00,000 1/4/15 By Scooters A/c 6,90,000
1,59,000 31/3/16 By Interest A/c 39,000
2,70,000
7,29,000 7,29,000
1,47,000 1/4/16 By Bal. b/d 2,70,000
1,50,000 31/3/17 By Interest A/c 27,000
2,97,000 2,97,000
78,890 1/4/17 By Bal. b/d 1,50,000
86,110 31/3/18 By Interest A/c 15,000
1,65,000 1,65,000
91,492 1/4/18 By Bal. b/d 86,110

31/8/18 By Interest A/c 5,382
(@ 15% on
bal.)
91,492 91,492
4. In the books of M/S Bhanu Ltd.
Goods Repossessed A/c Date Particulars 1/4/18 To Amar A/c
25/4/18 To Bank A/c

(Repairing exp.)
25/4/18 To P&L A/c

(Profit on Sale of 2 Scooters)
` Date Particulars ` 78,890 25/4/18 By Bank (Sale of 2 1,05,000 Scooters)

15,000
11,110
A Machinery is sold on Hire Purchase. The terms of purchase is 4 Annual Instalments of` 6,000 at the end of each
year commencing from the date of agreement. Interest is charged @ 20% and is included in the annual payment of `
6,000.
Show Machinery A/c and Hire Vendor A/c in the books of the Hire Purchaser who defaulted in the payment of the
3rd yearly payment whereupon the Vendor repossessed the Machinery. The Hire Purchaser provides Depreciation on
Machine at 10% p.a.
Answer :
Working Note:
Computation of Cash Price and Interest for the Hire Purchaser Instalment Balance due
No. after Instalment
(A) (B)
Instalment Cumulative Amount Amount Interest at Paid for 20% p.a. Principal
(C) (D)= (B)+(C) (E)=(D) × (F)=(C)–(E)
1 Nil 2 0 + 5,000 = 5,000 6,000 6,000 1,000 5,000 6,000 11,000 1,833 4,167 3 5,000 + 4,167 6,000 15,167 2,528
3,472
= 9,167
4 9,167+3,472 = 6,000 18,639 3,107 2,893 12,639
8,468 15,532 1. Machinery Account

Year Particulars ` Year Particulars `
1st To Hire Vendor (M/c 15,532 1st By Depreciation at 10% 1,553 Yr. Price) Yr. By Balance c/d 13,979 Total
15,532 Total 15,532 2nd To Balance b/d 13,979 2nd By Depreciation at 10% 1,398 Yr. Yr. By Balance c/d 12,581
3rd To Balance b/d 12,581 3rd By Depreciation at 10% 1,258

Yr. Yr. By Hire Vendor (Tfr of Balance in Vendor A/c) 11,000
By P&L A/c (bal.fig.) 323
2. Hire Vendor Account
Year Particulars
1st To Bank
Yr. To Balance c/d Total
2nd To Bank
Yr. To Balance c/d Total
3rd To Machinery A/c Yr. -transfer
Total
` Year Particulars ` 6,000 1st By Machinery ( WN) 15,532
12,639 Yr. By Interest (WN) 3,107
18,639 Total 18,639
6,000 2nd By Balance b/d 12,639
9,167 Yr. By Interest 2,528
15,167 Total 15,167
11,000 3rd By Balance b/d 9,167
Yr. By Interest 1,833
11,000 Total 11,000
Assumption: It is assumed that the Asset is taken over at the amount due to Hire Vendor.
ABC Transporters Ltd. purchased from Hans Motors 3 Trucks costing ` 50,000 each on the Hire Purchase System
on 01.01.2016. Payment was to be made`30,000 down and the remainder in 3 equal annual instalments payable on
31.12.2009, 31.12.2017 and 31.12.2018 together with interest at 9% p.a. ABC Transporters Ltd. writes off
depreciation at 20% on the diminishing balance. It paid the instalment due at the end of the first year i.e. 31.12.2016
but could not pay the next on 31.12.2017. Hans Motors agreed to leave one Trucks with the purchaser on 01.01.2018
adjusting the value of other 2 Trucks against the amount due on 01.01.2018. The Trucks were valued on the basis of
30% depreciation annually.
Prepare the necessary accounts in the books of ABC Transporters Ltd. for the years 2016, 2017 and 2018.
Answer :
Books of ABC Transporters Ltd.
Date Particulars 01.01.16 To H a n s Motors A/c
Total 01.01.17 To Balance b/d
Total 01.01.18 To Balance b/d
Total
Trucks A/c
1,50,000 31.12.16 By Depreciation 30,000

(1,50,000 × 20%)
31.12.16 By Balance c/d 1,20,000
1,50,000 Total 1,50,000
1,20,000 31.12.17 By Depreciation 24,000

(1,20,000 × 20%)
31.12.17 By Balance c/d 96,000
1,20,000 Total 1,20,000
96,000 01.01.18 By Hans Motors (taken 49,000

back by Vendor)(WN2) By Loss on takeover 15,000
01.01.18 By Depreciation (96,000 31.12.18 – 6,400) × 20% 6,400
31.12.18 By Balance c/d 25,600

96,000 Total 96,000
Date Particulars
01.01.16 To Bank A/c

31.12.16 To Bank (40,000
Hans Motors A/c ` Date Particulars ` 30,000 01.01.16 By Tempos A/c 1,50,000 + 50,800 31.12.16 By I n t e r e s t
10,800) ( 1 , 5 0 , 0 0 0 – To B a l a n c e c / d 80,000 30,000) × 9% 10,800 (bal.fig.)
Total 1,60,800 Total 1,60,800

31.12.17 To Balance c/d 87,200 01.01.17 By Balance c/d 80,000
31.12.17 By Interest
(80,000×9%) 7,200
01.11.18 To Trucks A/c 49,000 01.01.18 By Balance b/d 87,200
(take over) 31.12.18 By Interest
31.12.18 To Bank A/c (Assumed 41,638 (87,200 – 3,438
to be paid) (bal.fig) 49,000) × 9% Total 90,638 Total 90,638
Working Notes:
1. Valuation of Trucks
Particulars
Depreciation Rate
Value of Trucks on 01.01.2016 (50,000×3)
Less: Depreciation for 2016
Value as per Purchaser Value as per Vendor 20% p.a. on Cash Price 20% p.a. on Cash Price
1,50,000 1,50,000 (30,000) (45,000)
Y Ltd. sold 3 Machinery for a total cash sale price of ` 6,00,000 on hire purchase basis to X on 1.1.2018 . The terms
of agreement provided for 30% as cash down and the balance of the cash price in three equal instalments together
with interest at 10% per annum compounded annually. The instalments were payable as per the following schedule:
1st instalment on 31.12.2019; 2nd instalment on 31.12.2020 and 3rd instalment on 31.12.2021. X paid the 1st
instalment on time but failed to pay thereafter. On his failure to pay the second instalment, Y Ltd. repossessed two
machineries and valued them at 50% of the cash price. X charges 10% p.a. depreciation on straight line method.
Prepare necessary ledger accounts in the books of X for 2018-2020.
Answer :
Dr. Machinery Account Cr. Date Particulars
1.1.2018 To Y Ltd.’s Account
` Date Particulars ` 6,00,000 31.12.2018 By Depreciation A/c 60,000 By Balance c/d 5,40,000 6,00,000 6,00,000
1.1.2019 To Balance b/d 5,40,000 31.12.2019 By Depreciation A/c 60,000 By Balance c/d 4,80,000 5,40,000
5,40,000
1.1.2020 To Balance b/d 4,80,000 31.12.2020 By Depreciation A/c 60,000

By Y Ltd.’s Account 2,00,000
By Profit and Loss A/c (Balancing figure) 80,000
4,80,000 4,80,000
Dr. Y Ltd.’s Account Cr. Date Particulars
1.7.2018 To Bank A/c

31.12.2018 To Balance c/d
1,80,000 31.12.2018 By Machinery A/c 6,00,000 4,62,000 By Interest A/c 42,000 10% on (` 6,00,000
– ` 1,80,000)
6,42,000 6,42,000
31.12.2019 To Bank A/c

(1,40,000 +
42,000 +
46,200)
To Balance c/d
2,28,200 1.1.2019 By Balance c/d 4,62,000
31.12.2019 By Interest A/c 46,200
( 1 0 % o n ` 4,62,000) 2,80,000
5,08,200 5,08,200 31.12.2020 To Machinery A/c
To Balance c/d
2,00,000 1.1.2020 By Balance b/d 2,80,000 1,08,000 31.12.2020 By Interest A/c 28,000
3,08,000 3,08,000 Working Notes: (i) Book Value of Machine left and Repossessed
1 left 2 repossessed A. Costs 2,00,000 4,00,000 B. Less: Depreciation for 3 years @ 10% (60,000) (1,20,000)
1,40,000 2,80,000 (ii) Agreed Value of 2 Machinery Repossessed
(iii) Loss on Default = Cash Price – 50% of cash price =` 4,00,000 – 2,00,000 = ` 2,00,000 = Agreed Value – Book
Value =` 2,00,000 – ` 2,80,000 =` 80,000
ABC and Co. purchased seven trucks on hire purchase on 1st July, 2018. The cash purchase price of each truck was`
50,000. The company has to pay 20% of the cash purchase price at the time of delivery and the balance in five half
yearly instalment starting from 31st December, 2018 with interest at 5% per annum at half yearly rest. On the
Company’s failure to pay the instalment due on 30th June 2019 it was agreed that the Company would return 3
trucks to the vendor and the remaining four would be retained. The vendor agreed to allow him a credit for the
amount paid against these 3 trucks less 25%. Vendor after spending` 1,000 on repairs sold away all the three trucks
for ` 40,000.
Prepare the relevant Accounts in the books of the purchaser and vendor assuming the books are closed in June every
year and depreciation @ 20% p.a. is charged on Trucks.
Answer :
In Books of Hire-Purchaser (ABC and Co.)
Dr.
Date Particulars
1.7.2018 To Hire Vendor’s A/c (Cost of 7 Trucks @ ` 50,000 each)
Trucks Account Cr. ` Date Particulars `
3,50,000 30.06.2019 By Depreciation A/c 70,000

By Hire Vendor’s A/c 40,500
(Value of 3 Trucks
returned to Vendor)
By P&L A/c (Loss on 79,500
default )
3,50,000 3,50,000 Dr. Hire Vendor’s Account Cr. Date Particulars

01.07.2018 To Bank A/c
(` 3,50,000
× 20/100)
` Date Particulars ` 01.07.2018 By Trucks A/c 3,50,000 31.12.2018 By Interest A/c 7,000 70,000 (` 2 , 8 0 , 0 0 0
×5/100× 6/12)
31.12.2018 To Bank A/c 30.06.2019 By Interest A/c 5,600 [(20% of` ( ` 2,24,000 × 2,80,000)+ 5/100 × 6/12) `
7,000] 63,000
30.06.2019 To Trucks A/c

(Va lue of
T r u c k s 40,500
returned)
30.06.2019 To Balance c/d 1,89,100

3,62,600 3,62,600
Working Notes:
(i) Credit allowed Vendor against 3 trucks `
(a) Total amount of principal paid against 7 trucks

(` 70,000 + ` 56,000) 1,26,000
(b) Total amount of principal paid against 3 trucks
(` 1,26,000 × 3/7) 54,000
(c) Credit allowed by Vendor
(` 54,000 – 25% of ` 54,000) 40,500 (ii) Loss on return of 3 trucks
(a) Book value of 3 trucks returned
[(` 50,000 × 3) Less: 20% of ` 1,50,000] 1,20,000
(b) Less: Credit allowed by Vendor against these 3 Trucks (40,500)
(c) Loss on return of 3 Trucks (A – B) 79,500 Dr. In the books of Hire Vendor ABC and Co’s Account Cr.
Date Particulars
1.7.2018 To Hire Sales A/c

31.12.2018 To Interest A/c
30.06.2019 To Interest A/c
3,50,000 01.07.2018 By Bank A/c 70,000

7,000 31.12.2018 By Bank A/c 63,000
5,600 30.06.2019 By Goods
Repossessed A/c 40,500
30.06.2019 By Balance c/d 1,89,100
3,62,600 3,62,600
Dr. Goods Repossessed Company Cr. Date Particulars
30.06.2019 To Banerjee & Co.

30.06.2019 To Cash A/c
(expenses)
40,500 30.06.2019 By Bank A/c (Sales) 40,000

1,000 30.06.2019 By Profit and Loss A/c (Loss on Sale) 1,500

On 1.1.2018 X, a television dealer, bought 5 television sets from LG Television Co. on hire-purchase. The cash
price of each set was`20,000. It was agreed that` 25,000 should be paid immediately and the balance in three
instalments of ` 30,000 each at the end of each year. The LG Television Co. charges interest @ 10% p.a. The buyer
depreciates television sets at 20% p.a. on the diminishing balance method. X paid cash down and two instalments
but failed to pay the last instalment. Consequently, the LG Television Co. repossessed three sets, leaving two sets
with the buyer and adjusting the value of 3 sets against the amount due. The sets repossessed were valued on the
basis of 30% depreciation p.a. on the written down value. The sets repossessed were sold by the LG Television Co.
for` 30,000 after necessary repairs amounting to` 5,000 on 30th June 2021.
Open the necessary ledger account in the books of both the parties.
Answer :
Dr.
Date Particulars 1.1.2018 To Dolphin
Television Co.
01.01.2019 To Balance b/d
In the Books of X
Television Account Cr.
` Date Particulars ` 31.12.2018 By Depreciation A/c 20,000

1,00,000 By Balance c/d 80,000
1,00,000 1,00,000
80,000 31.12.2018 By Depreciation A/c 16,000
80,000 80,000
31.12.2020 To Balance b/d 64,000 31.12.2019 By Depreciation A/c 12,800
B y D o l p h i n Television
Co-(Goods reposse20,580
ssed)
By P&L A/c 10,140
(Loss on default) 20,480
By Balance c/d 64,000 64,000
Dr. Dolphin Television Company Cr. Date Particulars
1.1.2018 To Cash A/c
31.12.2018 To Cash A/c
To Balance c/d
25,000 1.1.2018 By T.V. A/c 1,00,000

30,000 31.12.2018 By Interest A/c
52,500 [ (` 1 , 0 0 , 0 0 0 - 7,500
` 25,000) × 10/100] 1,07,500 1,07,500
31.12.2019 To Cash A/c
To Balance c/d
30,000 01.01.2019 By Balance b/d 52,500 27,750 31.12.2020 By Interest A/c 5,250
[52,500 × 10/100] 57,750 57,750 31.12.2020 To T.V. A/c

(Goods seized)
To Balance c/d
20,580 01.01.2020 By Balance b/d 27,750
31.12.2020 By Interest A/c 2,250
9,420
30,000 30,000 Working Notes:
(i) Total Interest = Hire Purchase Price – Cash Price

= [` 25,000 + (` 30,000 × 3)] – (` 20,000 × 5) =` 1,15,000 – ` 1,00,000 =` 15,000
(ii) Interest for 3rd year = ` 15,000 –` 7,500 – ` 5,250 =` 2,250
(iii) Agreed Value of 3 TV Repossessed on the basis of

depreciation @ 30% p.a. ` (a) Cost (Cash Price) of 3 TV Sets 60,000 (b) Less: Depreciation @ 30% p.a. for 3 years
[ ` 18,000 + ` 12,600 + ` 8,820] 39,420

20,580
(iv) Book Value of 3 TV Repossessed on the
basis of depreciation @ 20% p.a.
(a) Cost (Cash Price) of 3 TV Sets 60,000
(b) Less: Depreciation @ 20% WDV for 3 years
[` 12,000 + ` 9,600 +` 7,680] 29,280
30,720
(v) Loss on default = Book value — Agreed Value =` 30,720 –` 20,580 = ` 10,140
In the Books of LG Television Co.
Dr.
Date Particulars 01.01.2018 To HP Sales A/c 31.12.2018 To Interest A/c
01.01.2019 To Balance b/d 31.12.2019 To Interest A/c

01.01.2020 To Balance b/d 31.12.2020 To Interest A/c
X’s Account Cr. ` Date Particulars `

1,00,000 01.01.2018 By Cash A/c 25,000
7,500 31.12.2018 By Cash A/c 30,000
1,07,500 1,07,500 52,500 31.12.2018 By Cash A/c 30,000 5,250 31.12.2019 By Balance c/d 27,750 57,750 57,750
27,750 31.12.2020 By Goods

2,250 Repossessed A/c 20,580
30,000 30,000 Dr. Goods Repossessed Account Cr.
Particulars
To X
To Cash A/c (Repairs)
To Profits and Loss A/c (Profit)
` Particulars ` 20,580 By Cash A/c 30,000 5,000

4,420

Q.5.17 RTP Practical The following particulars relate to hire purchase transactions:
(a) X purchased three cars from Y on hire purchase basis, the cash price of each car being ` 2,00,000.
(b) The hire purchaser charged depreciation @ 20% on diminishing balance method.
(c) Two cars were seized by on hire vendor when second installment was not paid at the end of the second year. The
hire vendor valued the two cars at cash price less 30% depreciation charged under it diminishing balance method.
(d) The hire vendor spent` 10,000 on repairs of the cars and then sold them for a total amount of ` 1,70,000.
You are required to compute:
(i) Agreed value of two cars taken back by the hire vendor. (ii) Book value of car left with the hire purchaser.
(iii) Profit or loss to hire purchaser on two cars taken back by their hire vendor.
(iv) Profit or loss of cars repossessed, when sold by the hire vendor.
Answer:
` (i) Price of two cars =` 2,00,000 x 2 4,00,000 Less: Depreciation for the first year @ 30% 1,20,000
2,80,000
Less: Depreciation for the second year =` 2,80,000 × 84,000
Agreed value of two cars taken back by the hire vendor 1,96,000
(ii) Cash purchase price of one car 2,00,000
Less: Depreciation on ` 2,00,000 @20% for the first year 40,000
Written drown value at the end of first year 1,60,000
Less: Depreciation on`1,60,000 @ 20% for the second year 32,000
Book value of car left with the hire purchaser 1,28,000
(iii) Book value of one car as calculated in working note (ii) above 1,28,000
Book value of Two cars =` 1,28,000 x 2 2,56,000
Value at which the two cars were taken back, calculated in 1,96,000
working note (i) above
Hence, loss on cars taken back =`2,56,000 –`1,96,000 = ` 60,000
(iv) Sale proceeds of cars repossessed 1,70,000

Less: Value at which Cars were taken back ` 1,96,000 Repair ` 10,000 2,06,000
Loss on resale 36,000

6
Difference Between Hire Purchase Agreement and Instalment Payment Agreement
Q.6.1 2014 - Nov [7] (c), 2017 - May [7] (b), Distinguish Between RTP
Distinguish between Hire Purchase system and Installment system. (4 marks each)
Answer :
Differences between Hire Purchase and Installment System Basis of Distinction 1. Governing Act
2. N a t u r e o f Contract
3. Passing of Title (ownership)
4. Right to Return goods
5. Seller’s right to repossess
Hire Purchase Agreement
It is governed by Hire Purchase Act, 1972. It is an agreement of hiring.
The title to goods passes on last payment.
The hirer may goods without payment except f or accrued installments.
The seller may take possession of the goods if hirer is in default.

return
further
7. Responsibility for Risk of Loss
6. Right of Disposal Hirer cannot hire out, sell, pledge or assign entitling t ransferee to retai n possession as against
the hire vendor.
T h e h i r e r i s n o t responsible for risk of loss of goods if he has taken reasonable precaution because the
ownership h a s n o t y e t b e e n transferred.
Installment Purchase Agreement

It is governed by the Sale of Goods Act, 1930. It is an agreement of sale.
The title to goods passes immediately as in the case of usual sale.
Unless seller defaults, goods are not returnable.
The seller can sue for price if the buyer is in default. He cannot take possession of the goods.
The buyer may dispose off the goods and give good title to the bona fide purchaser.
The buyer is responsible for risk of loss of goods because the ownership has transferred.
8. Name of Parties involved

9. Component other than cash price.
The parties involved are called Hirer and vendor.
Component other Cash Price included in installment is called Hire charges.

Hire The parties involved are called buyer and seller.
than Component other than
Cash Price included in Installment is called Interest.
Space to write important points for revision CHAPTER
12 Departmental Accounts
Chapter Comprises: ☹Advantages of Departmental Accounting ☹Methods of Departmental Accounting ☹Basis of
Allocation of Common
Expenditure ☹Types of Departments ☹Inter-Departmental Transfers
☹Memorandum Stock and Memorandum Mark Up Account Method

Legend
book.
1.642
TIME MANAGER
First Indepth
learning
i.e.....Time
............ Day 1
1. Budgeted 9
2. Actual
3. Variance
(1-2)
Instant
Revision (in hours)

i.e.... i.e. on
......... ...........
Day 2 Day 8
2.15 1.5
Plan and Manage your Time Periodic Revision
(in hours)

i.e. on i.e. on i.e. on need. ........... ............. ...........
1.2 0.5 0.5

2.3, 2.6, 3.3, 3.8, 3.10, 4.1, 4.5
1
Basis of Allocation of Common Expenditure Among Different Departments
Q.1.1 1998 - Nov [6] (b) (iii) Descriptive Basis of allocation of common expenditure among different departments.
(4 marks)
Answer :
Basis of allocation of common expenditure among different departments: At the time of preparing department
accounts, expenses should be distributed among the different departments on the basis of the following principles:
1. Expenses incurred specially for each department are charged directly to
it. For example, insurance charges of stock held by a department. 2. The expenses which are not capable of correct
measurement are dealt
in the following ways:
(i) Expenses incurred on selling are charged on the basis of sales for e.g. discount, bad debts, selling, commission
etc.
(ii) Administrative and other expenses such as salaries of managers, directors, common advertisement expenses,
depreciation on assets etc. are allocated equally among all the departments that have benefitted thereby.
Alternatively, no allocation may be made and such expenses may be charged to the combined profit and loss
account.
3. Common expenses, the advantages of which is shared by all the
departments and which are competent enough of precise allocation (e.g.
rent, lighting expenses etc.) are distributed among the departments
related on some particular basis which are considered suitable for the
circumstances. Rent are charged to different departments as per the
floor area occupied by each department. Lighting and heating expenses
are distributed on the basis of consumption of energy by every
department and so on.
Q.1.2 2013 - Nov [7] (c) Descriptive
State the basis on which the following common expenses, the benefit of which is shared by all the departments is
distributed among the departments :
(i) Rent, rates and taxes, insurance of building;
(ii) Selling expenses such as discount, bad debts, selling commission and other such selling expenses;
(iii) Carriage Inward;
(iv) Depreciation;
(v) Interest on loan;

(vi) Profit or loss on sale of investment; (vii) Wages;
(viii) Lighting and Heating Expenses
Answer:
S.No. Expenses
(i) Rent, rates & taxes, insurance Floor (4 marks) [IPCC Gr- II]
Basis
area occupied by each of building
(ii) Selling expenses such discount, bad-debts etc. (iii) Carriage Inward
(iv) Depreciation
(v) Interest on loan
(vi) Profit or loss on sale investment
(vii) Wages
as department (if given) otherwise on time basis.
Sales of each department.
of
(viii) Lighting & Heating expenses Purchase of each department.
V a l u e o f a s s e t s o f e a c h department or time basis.
Utilisation of loan amount in each department (if identifiable) otherwise in combined P&L A/c.
Equal or shown in general P&L A/c.

Time devoted to each department. Consumption of energy by each department.
Q.1.3 2016 - May [7] (d) Descriptive Give the basis of allocation of the following common expenditure among
different departments:
(i) Insurance of Building
(ii) Discount and bad debts
(iii) Discount received
(iv) Repairs and maintenance of capital assets
(v) Advertisement expenses (vi) Labour welfare expenses (vii) PF/ESI contributions (viii) Carriage inward
Answer:
(4 marks) [IPCC Gr- II]
Item
(i) Insurance of Building
Basis
Floor area of each department
(ii) Discount and bad debts (iii) Discount received

(iv) Repairs and maintenance of
capital assets
(v) Advertisement expenses (vi) Labour welfare expenses
(vii) PF/ESI contributions
(viii) Carriage inward Sales of each department

Purchases of each department Assets value of each department
Sales of each department

No. of employees in each dept. Wages and Salaries of each department
Purchases of each department

2 Inter Departmental Transfers
Department X sells goods to Department Y at a profit of 25% on cost and to Department Z at 10% profit on cost.
Department Y sells goods to X and Z at a profit of 15% and 20% on sales, respectively. Department Z charges 20%
and 25% profit on cost to Department X and Y, respectively. Department Managers are entitled to 10% commission
on net profit subject to unrealised profit on departmental sales being eliminated. Departmental profits after charging
Managers' commission, but before adjustment of unrealised profit are as under:
` Department X 36,000
Department Y 27,000
Department Z 18,000
Stock lying at different departments at the end of the year are as under: Dept. X Dept. Y Dept. Z ` ` ` Transfer from
Department X — 15,000 11,000 Transfer from Department Y 14,000 — 12,000 Transfer from Department Z 6,000
5,000 — Find out the correct departmental Profits after charging Managers' commission.
Answer:
Profit after commission Add back: Manager's commission (1/9) 4,000 3,000 2,000
40,000 30,000 20,000

Less: Unrealised profit on stock 4,000 4,500 2,000
(Working Note)
Profit before manager's commission 36,000 25,500 18,000

Less: Commission for Deptt. manager
@ 10% 3,600 2,550 1,800
(8 marks)
Calculation of Profits
Particulars Deptt. X Deptt. Y Deptt. Z ` ` ` charging manager's 36,000 27,000 18,000
Working Note: Stock lying with
Particulars Deptt. X` Deptt. Y` Deptt. Z` Total ` Unrealised profit of:
Department X — 1/5 of 15,000 1/11 of 11,000 4,000 = 3,000 = 1,000 Department Y 15% of 14,000 — 20% of
12,000 4,500 = 2,100 = 2,400 Department Z 1/6 of 6,000 1/5 of 5,000 — 2,000 = 1,000 = 1,000
Q.2.2 2009 - Nov [1] (viii) Practical
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. (2 marks) [IPCC Gr- II]
Answer :
Calculation of Stock Reserve
Particulars ` Closing stock of Department Q 27,000 Goods sent by Department P to Department Q at a price 50%
above cost
Hence, profit of Department P included in the stock will be
9,000
Amount of stock reserve will be ` 9,000 Space to write important points for revision
Department R sells goods to Department S at a profit of 25% on cost and Department T at 10% profit on cost.
Department S sells goods to R and T at a profit of 15% and 20% on sales respectively. Department T charges 20%
and 25% profit on cost to Department R and S respectively. Department Managers are entitled to 10% commission
on net profit subject to unrealised profit on departmental sales being eliminated. Departmental profits after charging
Manager’s commission, but before adjustment of unrealised profit are as under:
`
Department R 54,000
Department S 40,500
Department T 27,000
Stock lying at different departments at the end of the year are as under : Deptt. R Deptt. S Deptt. T ` ` ` Transfer
from Department R ☐ 22,500 16,500 Transfer from Department S 21,000 ☐ 18,000 Transfer from Department T
9,000 7,500 ☐ Find out the correct departmental profits after charging Manager’s commission.
Answer :
Particulars
Profit
Add : Managerial commission (1/9)
Less: Unrealised profit on stock (Refer W.N.)

Less: Managers’ commission @ 10%
Departments
R S T (`) (`) (`)
54,000 40,500 27,000

6,000 4,500 3,000
60,000 45,000 30,000
6,000 6,750 3,000
54,000 38,250 27,000 5,400 3,825 2,700

Working Notes:
Value of unrealised profit
Transfer by department R to
S department (22,500 ×25/125) = 4,500 T department (16,500 ×10/110) = 1,500 6,000
Transfer by department S to
R department (21,000 × 15/100) = 3,150 T department (18,000 × 20/100) = 3,600 6,750
Transfer by department T to
R department (9,000 × 20/120) = 1,500
S department (7,500 × 25/125) = 1,500 3,000

Department A sells goods to Department B at a profit of 20% on cost and Department C at 15% profit on cost.
Department B sells goods to A and C at a profit of 10% and 20% on sales respectively. Department C sells goods to
A and B at 15% 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 profit are as under:
` Department A 36,000
Department B 27,000
Department C 18,000
Stock lying at different departments at the end of the year are as below: Department A Department B Department C
` ` ` Transfer from Department A ☐ 7,200 5,750 Transfer from Department B 19,000 ☐ 15,000 Transfer from
Department C 4,600 3,300 ☐ Find out correct departmental profits after charging manager’s commission. (8 marks)
[IPCC Gr- II]
Answer: Calculation of correct Departmental Profit Particulars Department Department Department A B C

```
Profit after charging managers’ 36,000 27,000 18,000 c o m m i s s i o n b u t b e f o r e

adjustment for unrealized profit
Addback:Managers’
commission (1/9) 4,000 3,000 2,000 Less: Unrealised profit on stock 40,000 30,000 20,000 (Working Note)
P r o f i t b e f o r e M a n a g e r ’ s (1,950) (4,900) (900) commission
Less: Commission for Department 38,050 25,100 19,100
Manager @ 10%
Correct profit after charging (3,805) (2,510) (1,910) manager’s commission ______ ______ ______
34,245 22,590 17,190 Working Note:

Unrealised
Profit on
transfer to:
Department A Department B 19,000 × 10% = 1,900 – 15,000 × 20% = 3,000 4,900 Department C 4,600 × 15/115 = 600 3,300 × 10/110 = 300 900
Department A Department B Department C Total

````
– 7,200 × 20/120 = 1,200 5,750 × 15/115 = 750 1,950
Q.2.5 2013 - May [7] (c) Practical Department A sells goods to Department B at a profit of 50% on cost and
to Department C at 20% on cost. Department B sells goods to A and C at a profit of 25% and 15% respectively on
sales. Department C charges 30% and 40% profit on cost to Department A and B respectively. Stock lying at
different departments at the end of the year are as under:
Department A Department B Department C ` ` ` Transfer from Department A — 45,000 42,000 Transfer from
Department B 40,000 — 72,000 Transfer from Department C 39,000 42,000 —
Calculate the unrealized profit of each department and also total unrealized profit. (4 marks) [IPCC Gr- II] Answer:
Computation of unrealized profit of each department and total unrealized profit
Particulars Dept. A Dept. B Dept. C Total
` ` ` ` Unrealized Profit
of:
Department A 45,000 × 42,000×20/ 22,000
50/150 120 = 15,000 = 7,000
Department B 40,000 × 0.25 72,000 × 0.15 20,800

= 10,000 = 10,800 Department C 39,000 × 42,000 × 21,000
30/130 40/140
= 9,000 = 12,000 63,800
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:
Figures in `
DEPARTMENTS P S Q
Transfer from P – 18,000 14,000

Transfer from S 48,000 – 38,000
Transfer from Q 12,000 8,000 –
Find out correct Departmental Profits after charging Managers’ Commission. (8 marks) [IPCC Gr- II]
Answer : Calculation of correct Departmental Profits Departments P (`) S (`) Q (`) P r o f i t s a f t e r c h a r g i
n g M a n a g e r ’ s 90,000 60,000 45,000 Commission
Add : Manager’s Commission (1/9) 10,000 6,667 5,000 Profit before adjustment of unrealised profit 1,00,000
66,667 50,000 on stock
Less : Unrealised profit on stock (w.n. 1) 5,426 21,000 2,727 Profit after adjustment of the unrealised 94,574 45,667
47,273 profit on stock
Less : Departmental Manager’s Commission 9,457 4,567 4,727 @ 10%
Correct Departmental profit after Manager’s 85,117 41,100 42,546 commission
Working Note:
Calculation of unrealised profit on stock
Particulars Departments Total (`)
P (`) S (`) Q (`)

Unrealised
profit of :
Dep. P – 3,600 1,826 5,426 (1/5 ×` 18,000) (13,047 × ` 14,000) Dep. S 9,600 – 11,400 21,000 (` 48,000 × 20%) (`
38,000 × 30%) Dep. Q 2,000 727 – 2,727 (` 1/6 ×` 12,000) (`1/11× ` 8,000)
Q.2.7 2016 - May [6] (a), RTP Practical There is transfer/sale among the three departments as below:
Department X sells goods to Department Y at a profit of 25% on cost and to Department Z at 20% profit on cost.
Department Y sells goods to X and Z at a profit of 15% and 20% on sales respectively.
Department Z charges 20% and 25% profit on cost to Departments X and Y respectively.
Department Managers are entitled to 10% commission on net profit subject to unrealised profit on departmental
sales being eliminated. Departmental profits after charging Managers’ commission, but before adjustment of
unrealised profit are as under:
`
Department X 1,80,000
Department Y 1,35,000
Department Z 90,000
Stocks lying at different Departments at the end of the year are as under:
Dept. X Dept. Y Dept. Z Transfer from Department X — 75,000 57,000

Transfer from Department Y 70,000 — 60,000
Transfer from Department Z 30,000 25,000 —
Find out the correct departmental profits after charging Managers’ commission. (8 marks) [IPCC Gr- II] Answer :
Calculation of correct departmental profits after charging Manager’s commission:
Particulars Department Department Department
X Y Z Profit after charging Managers’

Commission 1,80,000 1,35,000 90,000
(+) Manager’s commission (1/9) 20,000 15,000 10,000

Profit before commission & 2,00,000 1,50,000 1,00,000
unrealised profit
(-) Unrealised profit on stock (24,500) (22,500) (10,000) P r o f i t b e f o r e M a n a g e r s ’ 1,75,500 1,27,500

90,000 commission
(-) Commission of Managers’ (17,550) (12,750) (9,000) @ 10%
Correct Departmental Profit 1,57,950 1,14,750 81,000 * Working Note:
1. Calculation for unrealised profit on stock.
Particulars
Unrealised profit of Department - X
Unrealised profit of Department - Y
Unrealised profit of Department - Z
Department Department Department Total X (`) Y (`) Z (`)
— 1/5 of 75,000 1/6 of 57,000 24,500 = 15,000 = 9,500
15% of — 20% of 22,500

70,000 = 60,000 =
10,500 12,000
1/6 of 30,000 1/5 of 25,000 — 10,000 = 5,000 = 5,000

Department X sells goods to Department Y at a profit of 50% on cost and to Department Z at 20% on cost.
Department Y sells goods to Department X and Z at a profit of 25% and 15% respectively on sales. Department Z
charges 30% profit on cost to Department X and 40% profit on sale to Y. Stocks lying at different departments at the
end of the year are as under:
Dept. X Dept. Y Dept. Z ` ` `
Transfer from Department X 75,000 48,000 Transfer from Department Y 50,000 82,000 Transfer from Department
Z 52,000 56,000
Calculate the unrealized profit of each department and also total unrealized profit. (4 marks) [IPCC Gr- II] Answer:
Computation of Unrealized Profits (in `)
Particulars of X Y Z Total transfer
From dept. X to – 75,000 × 48,000 × 33,000 Y & Z at 50% 50/150 = 20/120 = on cost and 25,000 8,000 20% on
cost
From dept. Y to 50,000 × 25/ – 82,000 24,800 X & Z at 25% 100 = ×15/100 = on sales and 12,500 12,300 15% on
sales
From dept. Z to 52,000 × 30/ 56,000 × – 34,400 X & Y at 30% 130 = 40/100 =
on costs and 12,000 22,400
40% on sales
Total 24,500 47,400 20,300 92,200 unrealised

profit

Axe Limited has four departments, A, B, C and D. Department A sells goods to other departments at a profit of 25%
on cost. Department B sells goods to other department at a profit of 30% on sales. Department C sells goods to other
departments at a profit of 10% on cost. Department D sells goods to other departments at a profit of 15% on sales.
Stock lying at different departments at the year-end was as follows:
Department Department Department Department A B C D Transfer from Department A — 45,000 50,000 60,000
Transfer from Department B 50,000 — — 75,000 Transfer from Department C 33,000 22,000 — —
Transfer from Department D 40,000 10,000 65,000 —
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 profit are as under:
` Department A 2,25,000
Department B 3,37,500
Department C 1,80,000
Department D 4,50,000
Calculate the correct departmental profits after charging Manager’s commission. (5 marks)
Answer:
Calculation of Correct Departmental Profits Particulars
Profit after charging managers’ commission
A d d b a c k : M a n a g e r s ’ commission (1/9)
Department Department A B
``
2,25,000 3,37,500
Department Department C D
``
1,80,000 4,50,000
25,000 37,500 20,000 50,000
Less : Unrealised Profit on stock (Working Note)
P r o f i t b e f o r e M a n a g e r s ’ commission
L e s s : C o m m i s s i o n f o r Department Manager @ 10% Correct Departmental Profits after Manager’s Commission * Working Note :
2,50,000 3,75,000 (31,000) (37,500) 2,00,000 5,00,000 (5,000) (17,250)
2,19,000 3,37,500 1,95,000 4,82,750
(21,900) (33,750) (19,500) (48,275)
1,97,100 3,03,750 1,75,500 4,34,475
Stock lying with Particulars Department Department Department A B C ` ` `
Department Total D
``
Unrealised Profit of : Dept. A
Dept. B
Dept. C
Dept. D 1/5 × 45,000 1/5 × 50,000

= 9,000 = 10,000
0.30 × 50,000
= 15,000
1/11 × 33,000 1/11 × 22,000
= 3,000 = 2,000
0.15 × 40,000 0.15 × 10,000 0.15 × 65,000 = 6,000 = 1,500 = 9,750 1/5 × 60,000 31,000 = 12,000
0.30 × 75,000 37,500 = 22,500
5,000
17,250
3 Departmental Trading Account
FGH Ltd has three departments I. J. K. The following information is provided for the year ended 31.3.2004
IJK
` ` ` Opening Stock 5,000 8,000 19,000 Opening Reserve for unrealised profit — 2,000 3,000 Materials consumed
16,000 20,000 — Direct labour 9,000 10,000 — Closing Stock 5,000 20,000 5,000 Sales — — 80,000 Area
occupied (sq. mtr.) 2,500 1,500 1,000 No of employees 30 20 10 Stocks of each department are valued at costs to
the department concerned. Stocks of I are transferred to J at cost plus 20% and stocks of J are transferred to K at a
Gross Profit of 20% on sales. Other common expenses are Salaries and Staff Welfare ` 18,000, Rent ` 6,000. Prepare
Departmental Trading, Profit and Loss Account for the year ending 31.3.2004. (10 marks)
Answer:
The Table is given in the Next Page
Departmental Trading and Profit & Loss A/c of FGH Ltd. (For the year ended 31.3.2004)
Dr. Cr.
Particulars Departmental Total Particulars Departmental Total
IJKIJK
To Opening Stock 5,000 8,00019,000 32,000By Sales — — 80,000 80,000

To Material consumed 16,000 20,000 — 36,000By Inter-dept.
To Direct labour 9,000 10,000 — 19,000 transfer 30,000 60,000 — 90,000
To Inter-dept. transfer — 30,000 60,000 90,000By Closing Stock 5,000 20,000 5,000 30,000
To Gross Profit c/d 5,000 12,000 6,000 23,000
35,000 80,000 85,000 2,00,000 35,000 80,000 85,000 2,00,000
To Salaries & Staff By Gross Profit 5,000 12,000 6,000 23,000 welfare 9,000
To Rent 3,000
To Stock Reserve
(unrealised profit)
(W. N. - 1) —
To Net Profit c/d —
6,000 3,000 18,000 b/d
1,800 1,200 6,000By S t o c k
Reserve
(unrealised
1,667 1,333 3,000 profit given) — 2,000 3,000 5,000 4,533 3,467 8,000By Net Loss c/d 7,000 7,000
12,000 14,000 9,000 35,000 12,000 14,000 9,000 35,000

To Net Loss b/d 7,000By Net Profit b/d 8,000 To Balance Transfer to
General P&L A/c 1,000
8,000 8,000
Working Note :
1. Computation of unrealised profit on closing stock :
(a) Amount of stock reserve for dept. ‘J’.

Cost of production of dept. ‘J’ ` 30,000
Transfer from dept. ‘I’ ` 30,000
Total cost 60,000
Closing stock of dept. ‘I’ = ` 20,000
* Proportion of closing stock of dept. ‘I’ = ` 20,000 =

=` 10,000
Therefore the stock reserve of dept. ‘J’ =` 10,000 ×
= ` 1,667
(b) Amount of stock reserve for dept. ‘K’.
Stock reserve of dept. ‘k’ ` 5,000 Loss: Unrealised profit 5,000 × ` 1,000
Cost of production of dept. ‘J’ 4,000 Proportion of stock transfer from dept.
‘I’ =` 4,000 × = ` 2,000
* Therefore the stock reserve =` 2,000 × = ` 333. ☐ Total stock reserve of dept. ‘k’ =` 1,000 +` 333 = ` 1,333. Space
to write important points for revision
Q.3.2 2011 - May [1] {C} (c) Practical Brahma Limited has three departments and submits the following
information for the year ending on 31st March, 2011.
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.
(5 marks) [IPCC Gr- II] Answer :

Departmental Trading Account for the year ended 31st March, 2011 Particulars
To Opening
Stock
(W.N. 4)
To Purchases
(W.N. 2)
To Gross profit
A (`) B (`) C (`) Particulars A (`) B (`) C (`)
By Sales 2,08,000 4,41,000 7,65,000

14,400 10,800 30,000 By Closing 9,600 16,200 21,000
stock
1,20,000 2,70,000 4,50,000 (W.N.4)
83,200 1,76,400 3,06,000

2,17,600 4,57,200 7,86,000 2,17,600 4,57,200 7,86,000 Working Notes:
(1) Profit Margin Ratio
Selling price of units purchased: `
Department A (5,000 units ×` 40) 2,00,000

Department B (10,000 units × ` 45) 4,50,000
Department C (15,000 units × ` 50) 7,50,000
Total selling price of purchased units 14,00,000
Less : Purchases (8,40,000) Gross profit 5,60,000
Profit Margin ratio = × 100 = × 100 = 40%

(2) Statement showing department-wise per unit cost and purchase cost
Particulars A B C Selling price per unit (`) 40 45 50 Less: Profit margin @ 40% (`) (16) (18) (20) Purchase price
per unit (`) 24 27 30 No. of units purchased 5,000 10,000 15,000 Purchases (purchase cost per 1,20,000 2,70,000
4,50,000 unit x units purchased)
(3) Statement showing calculation of department-wise Opening Stock (in units)

Particulars A B C Sales (Units) 5,200 9,800 15,300 Add: Closing Stock (Units) 400 600 700
5,600 10,400 16,000

Less: Purchases (Units) (5,000) (10,000) (15,000) Opening Stock (Units)600 400 1000
(4) Statement showing department-wise cost of Opening and Closing Stock

Particulars A B C
Cost of Opening Stock (`) 600 × 24 400 × 27 1,000 × 30 14,400 10,800 30,000
Cost of Closing Stock (`) 400 × 24 600 × 27 700 × 30 9,600 16,200 21,000 Space to write important points for
revision
M/s. AM Enterprise had two departments, Cloth and Readymade Clothes. The Readymade clothes were made by the
firm itself out of the cloth supplied by the Cloth Department at its usual selling price. From the following figures,
prepare Departmental Trading and Profit & Loss Account for the year ended 31st March, 2011:
Cloth
Department `
Opening Stock on 1st April, 2010 31,50,000 Purchases 2,10,00,000
Readymade Clothes
Department ` 5,32,000 1,68,000 Sales 2,31,00,000 47,25,000 Transfer to Readymade
Clothes Department 31,50,000 --Manufacturing Expenses --6,30,000 Selling Expenses 2,10,000 73,500 Rent &
Warehousing 8,40,000 5,60,000 Stock on 31st March, 2011 21,00,000 6,72,000 In addition to the above, the
following information is made available for necessary consideration :
The stock in the Readymade Clothes Department may be considered as consisting of 75% cloth and 25% other
expenses. The Cloth Department earned a gross profit at the rate of 15% in 2009-10. General Expenses of the
business as a whole amount to` 10,85,000.
Answer :
Working Note:
Calculation of Stock Reserve:
Rate of Gross Profit of Cloth Department, for the year 2010-11
= × 100
= × 100 = 16%
Closing Stock of cloth in Readymade Clothes Department = 75% i.e. ` 6,72,000 × 75% =` 5,04,000
` 5,04,000 × 16% =` 80,640
Stock Reserve for unrealized profit included in opening stock of readymade clothes @ 15% i.e.
( ` 5,32,000 × 75% × 15%) = ` 59,850

Additional Stock Reserve required during the year =` 80,640 –` 59,850 =` 20,790.
Departmental Trading and Profit and Loss Account for the year ended 31st March, 2011
Particulars Cloth ReadyTotal Particulars Cloth ReadyTotal (`) made (`) (`) made (`) Clothes Clothes (`) (`)
To Opening stock 31,50,000 5,32,000 36,82,000 By Sales 2,31,00,000 47,25,000 2,78,25,000 To Purchases 2,10,00,000 1,68,000 2,11,68,000 By Transfer
to
To Transfer from Readymade
Cloth Department – 31,50,000 31,50,000 Clothes

To Manufacturing Deptt. 31,50,000 – 31,50,000
expenses – 6,30,000 6,30,000 By Closing 21,00,000 6,72,000 27,72,000
To Gross profit c/d 42,00,000 9,17,000 51,17,000 stock
2,83,50,000 53,97,000 3,37,47,000 2,83,50,000 53,97,000 3,37,47,000

To Selling expenses 2,10,000 73,500 2,83,500 By Gross
To Rent & wareprofit b/d 42,00,000 9,17,000 51,17,000 housing 8,40,000 5,60,000 14,00,000
To Net profit 31,50,000 2,83,500 34,33,500
42,00,000 9,17,000 51,17,000 42,00,000 9,17,000 51,17,000

General Profit and Loss Account Particulars
To General expenses
To Unrealized profit (Refer W.N.)
To General net profit (Bal. fig.)

10,85,000 By Net profit 34,33,500
20,790
23,27,710
34,33,500 34,33,500
Q.3.4 2014 - Nov [6] (b) Practical Mega Ltd. has two departments, A and B. From the following particulars,
prepare departmental Trading A/c and General Profit & Loss Account for the year ended 31st March, 2014.
Particulars
Opening stock as on 01.04.2013 (at cost) Purchases

Carriage Inward
Wages
Sales
Purchased Goods Transferred: By Department B to A
By Department A to B
Finished Goods Transferred:
By Department B to A
By Department A to B
Amount (`)
Department Department A B
70,000 54,000
3,92,000 2,98,000
6,000 9,000
54,000 36,000
5,72,000 4,60,000
50,000 36,000
1,50,000 1,75,000
Particulars
To Opening Stock
To Purchase
To Carriage Inward
To Wages
To Transfers: Purchased Goods
Finished** Goods
To Gross
Profit c/d
Return of Finished Goods:

By Department B to A 45,000
By Department A to B 32,000 Closing Stock:
Purchased Goods 24,000 30,000 Finished Goods 1,02,000 62,000
Purchased goods have been transferred mutually at their respective departmental purchase cost and finished goods at
departmental market price and that 30% of the closing finished stock with each department represents finished
goods received from the other department.
Answer:
Department Trading Account in the books of Mega Ltd. for the year ended 31st March, 2014
Dept. A Dept. B Particulars Dept. A Dept. B (`) (`) (`) (`) By Sales 5,72,000 4,60,000 70,000 54,000 By Transfer:
3,92,000 2,98,000 Purchased

Goods 36,000 50,000 6,000 9,000 Finished
54,000 36,000 Goods 1,30,000 1,18,000 By Closing
Stock: 24,000 50,000 36,000 Purchased
Goods 1,02,000 30,000
1,18,000 1,30,000 Finished*

Goods 8,64,000 62,000
1,74,000 1,57,000
8,64,000 7,20,000 7,20,000
* Finished goods from other department included in closing stock

Particulars
Stock of Finished Goods

Stock related to other department (30% of Finished Goods)
** Net transfer of Finished Goods by Department Department
A ( `) B (`) 1,02,000 62,000

30,600 18,600
Department A to B = ` (1,75,000 - 45,000) =` 1,30,000

Department B to A = ` (1,50,000 - 32,000) =` 1,18,000
Profit and Loss A/c
Particulars Amount (`) Particulars Amount (`)
Gross Profit b/d:

Department A 1,74,000 Department B 1,57,000
To Provision for unrealised By profit included in closing

stock:
(Department A) (W.N.2) 8,311 (Department B) (W.N.2) 4,611

3,31,000
Working Notes
1. Calculation of ratio of gross profit margin on sales
3,31,000
Particulars
Sales
Add: Transfer of
Finished Goods
Department A (`) Department B (`) 5,72,000 4,60,000
1,75,000 1,50,000
7,47,000 6,10,000
Less: Return of
Finished Goods Gross Profit
Gross Profit margin = (45,000) (32,000)
7,02,000 5,78,000
1,74,000 1,57,000
2. Unrealised profit included in the closing stock

Department A = 27.16% of` 30,600 (30% of Stock of Finished Goods ` 1,02,000) = ` 8311.00
Department B = 24.79% of` 18,600 (30% of Stock of Finished Goods ` 62,000) =` 4611.00
M/s. Suman Enterprises has two Departments, Finished Leather and Shoes. Shoes are made by the Firm itself out of
leather supplied by Leather Department at its usual selling price. From the following figures, prepare Departmental
Trading and Profit & Loss Account for the year ended 31st March, 2014:
Opening Stock (As on 01.04.2013) Purchases

Sales
Transfer to Shoes Department Manufacturing Expenses
Selling Expenses
Rent and Warehousing
Stock on 31.03.2014
Finished Shoes Leather Department Department

(`) (`)
30,20,000 4,30,000
1,50,00,000 2,60,000
1,80,00,000 45,20,000
30,00,000 -
- 5,00,000
1,50,000 60,000
5,00,000 3,00,000
12,20,000 5,00,000
The following further information are available for necessary consideration: (i) The stock in Shoes Department may
be considered as consisting of
75% of Leather and 25% of other expenses.

(ii) The Finished Leather Department earned a Gross Profit @ 15% in
2012-13.
(iii) General expenses of the business as a whole amount to`8,50,000. (8 marks) [IPCC Gr. II]
Answer: Departmental Trading A/c

Particulars Finished L Shoes Total Particulars Finished L Shoes Total
To Opening 30,20,000 4,30,000 34,50,000 By Sales 1,80,00,000 45,20,000 2,25,20,000
To Purchases 1,50,00,000 2,60,000 1,52,60,000 By Transfer 30,00,000 – 30,00,000
To Tra. from – finished
30,00,000 30,00,000 By Closing
Stock 12,20,000 5,00,000 17,20,000
To Mfg. Exp. – 5,00,000 5,00,000
To GP. 42,00,000 8,30,000 50,30,000
2,22,20,000 50,20,000 2,72,40,000 2,22,20,000 50,20,000 2,72,40,000
Departmental P&L A/c
Particulars Finished L Shoes Total Particulars Finished L Shoes Total
To Selling Exp. 1,50,000 60,000 2,10,000 By GP 42,00,000 8,30,000 50,30,000
To Rent &
Warehouse 5,00,000 3,00,000 8,00,000
To NP 35,50,000 4,70,000 40,20,000
42,00,000 8,30,000 50,30,000 42,00,000 8,30,000 50,30,000
Particulars
To General Exp.
To Stock Reserve (WN) To NP
Working Note: Calculation for stock Reserve: General P&L A/c

8,50,000 By Profit b/d 40,20,000 26,625

31,43,375
40,20,000 40,20,000
Particulars Rate of GP
Last Year This Year 15% × 100 = 20%
Element of finished leather stock in Ready made shoes

Stock Reserve required to be maintained
75% of 4,30,000 75% of 5,00,000
= 3,22,500 = 3,75,000
3,22,500 ×15% 3,75,000 × 20% = 48,375 = 75,000 Stock Reserve for this year = 75,000 - 48,375 = ` 26,625 Space
Q.3.6 2017 - May [6] (a), RTP Practical The following balances were extracted from the books of Beta. You are
required to prepare Departmental Trading Account and General Profit & Loss Account for the year ended 31st
December, 2016:
Particulars Deptt. A Deptt. B ` `
Opening Stock 3,00,000 2,40,000

Purchases 39,00,000 54,60,000
Sales 60,00,000 90,00,000
General expenses incurred for both the Departments were`7,50,000 and you are also supplied with the following
information:
(i) Closing stock of Department A ` 6,00,000 including goods from Department B for ` 1,20,000 at cost to
Department A. (ii) Closing stock of Department B ` 12,00,000 including goods for
Department A for ` 1,80,000 at cost to Department B. (iii) Opening stock of Department A and Department B
include goods of
the value of` 60,000 and` 90,000 taken from Department B and
Department A respectively at cost to transferee departments. (iv) The gross profit is uniform from year to year. (8
marks) [IPCC Gr- II] Answer: Trading A/c Dr. Particulars To Opening stock To Purchases
To Gross Profit
Cr. Dept A Dept B Particulars Dept A Dept B

3,00,000 2,40,000 By Sales 60,00,000 90,00,000 39,00,000 54,60,000 By Closing stock 6,00,000 12,00,000 24,00,000 45,00,000
66,00,000 1,02,00,000 66,00,000 1,02,00,000
General Profit and Loss Account of Beta for the year ended on 31stDecember, 2016
Particulars Amount Particulars Amount
To General expenses
To Stock reserve (Closing stock) Dept. A

Dept. B
To Net Profit
``
7,50,000 By Stock reserve

(Opening stock)
Dept. A 30,000 Dept. B 36,000
60,000 By Gross Profit

72,000 Dept. A 24,00,000
60,84,000 Dept. B 45,00,000
69,66,000 69,66,000
Working Notes: Dept. A Dept. B 1 Percentage of 24,00,000/60,00,000 × 45,00,000/90,00,000 × 100 Profit 100 =
40% = 50%
2 Opening 60,000 × 50% = 30,000 90,000 × 40% = 36,000 Stock reserve
3 Closing Stock 1,20,000 × 50% = 60,000 1,80,000 × 40% = 72,000 reserve
M/s Delta is a Departmental Store having three departments X, Y and Z. The information regarding three
departments for the year ended 31stMarch, 2018 are given below:
Particulars Dept. X Dept. Y Dept. Z ` ` `
Opening Stock 18,000 12,000 10,000

Purchases 66,000 44,000 22,000
Debtors at end 7,500 5,000 5,000
Sales 90,000 67,500 45,000
Closing Stock 22,500 8,750 10,500
Value of furniture in each Department 10,000 10,000 5,000
Floor space occupied by each Dept. (in sq. ft) 1,500 1,250 1,000
Number of employees in each Department 25 20 15
Electricity consumed by each Department

(in units) 300 200 100
Amount (`) Carriage inwards 1,500
Carriage outwards 2,700

Salaries 24,000
Advertisement 2,700
Discount allowed 2,250
Discount received 1,800
Rent, Rates and Taxes 7,500
Depreciation on furniture 1,000
Electricity Expenses 3,000
Labour welfare expenses 2,400
Prepare Departmental Trading and Profit & Loss Account for the year ended 31st March, 2018 after providing
provision for Bad Debts at 5%. (10 marks)
Answer: In the books of M/s. Delta
Departmental Trading and Profit and Loss Account for the year ended 31st March, 2018
Particulars Dep. X` Det. Y` Dept. Z Total` Particulars Dep. X` Det. Y Dept. Total` ` ` Z` To Stock (Opening) 18,000 12,000 10,000 40,000 By Sales
90,000 67,500 45,000 2,02,500 To Purchases 66,000 44,000 22,000 1,32,000 By Stock 22,500 8,750 10,500 41,750
(closing)
To Carriage Inwards 750 500 250 1,500
(b.f.)
1,12,500 76,250 55,500 2,44,250 1,12,500 76,250 55,500 2,44,250 To Carriage outwards 1,200 900 600 2,700 By Gross 27,750 19,750 23,250 70,750
Profit b/d
To Electricity 1,500 1,000 500 3,000 By D i s c o unt 900 600 300 1,800 Received
24,000
2,700
2,250
7,500
To Salaries 10,000 8,000 6,000 To Advertisement 1,200 900 600 To Discount Allowed 1,000 750 500 To Rent, Rates and 3,000 2,500 2,000 taxes
To Depreciation 400 400 200 To Provision for Bad 375 250 250 debts @ 5% of debtors
To Labour Welfare 1,000 800 600 Expenses
To Net Profit (b.f) 8,975 4,850 12,300 28,650 20,350 23,550 1,000
875
2,400
26,125
72,550 28,650 20,350 23,550 72,550
Working Note: Basis of allocation of expenses Carriage inwards

Carriage outwards
Salaries
Advertisement
Discount allowed
Discount received
Rent, Rates and Taxes Depreciation on furniture Labour welfare expenses Electricity expenses
Provision for bad debts Purchases (3 : 2 : 1)
Turnover (4 : 3 : 2)
No. of Employees (5 : 4 : 3) Turnover (4 : 3 : 2)
Turnover (4 : 3 : 2)
Purchases (3 : 2 : 1)
Floor Space Occupied (6 : 5 : 4) Value of furniture (2 : 2 : 1) No. of Employees (5 : 4 : 3) Units consumed (3 : 2 : 1)
Debtors balances (3 : 2 : 2)

Q.3.8 RTP Practical The following details are available in respect of a business for a year. Department Opening
Stock
A 120 units B 80 units C 152 units
Purchase Sales
1,000 units 1,020 units at ` 20.00 each

The Total Value of Purchases is `1,00,000. It is observed that the rate of Gross Profit is the same in each department.
Prepare Departmental Trading Account for the above year.
Answer: 1. Computation of Closing Stock (in units) Particulars A B C
Opening Stock 120 80 152

Add: Purchases 1,000 2,000 2,400
Less: Units Sold (1,020) (1,920) (2,496)
Closing Stock 100 160 56 2. Computation of Gross Profit Ratio
We are informed that the GP Ratio is the same for all Departments. Selling Price is given for each Department’s
products but the Sale Quantity is different from that of Purchase Quantity. To find the Uniform GP Rate, the Sale
Value of Purchase Quantity should be compared with the Total Cost of Purchase, as under:
Assuming all Purchases are sold, the Sale Proceeds would be: Particulars
Department A
Department B
Department C
Total Sale Value of
Purchase Quantity
Less: Cost of Purchase
Gross Profit Amount Gross Profit Ratio
Computation Amount
1,000 units at ` 20.00 20,000

2,000 units at ` 22.50 45,000
2,400 units at ` 25.00 60,000
1,25,000
(1,00,000) 25,000
25,000 ÷ 1,25,000 20% of Selling Price
3. Computation of Profit and Cost for each Department
Department A B C (a) Selling Price p.u. ` 20.00 ` 22.50 ` 25.00
(b) GP p.u. at 1/5th of ` 4.00 ` 4.50 ` 5.00

Selling Price
(c) Cost p.u. (a) – (b) ` 16.00 ` 18.00 ` 20.00
(d) Cost of Purchase = 1,000 × 16 = 2,000 × 18 = 2,400 × 20 = Qty. × Cost p.u. ` 16,000 ` 36,000 ` 48,000 (e) Cost
of Op. Stock = 120 × 16 =` 1,920 80 × 18 =` 1,440 152 × 20 =` 3,040 Qty × Cost p.u.
(f) Cost of Cl. Stock = 100 × 16 =` 1,600 160 × 18 =` 56 × 20 =` 1,120 Qty. × Cost p.u. 2,880
4. Department Trading Account for the year ended 31st March (in`) B C Particulars A B C By Sales (Qty.
1,440 3,040 × SP p.u.) 20,400 43,200 62,400
Particulars A
To Opening Stock
(WN 3e) 1,920
To Purchases
(WN 3d) 16,000
To GP (20% of
Sales) 4,080
Total 22,000
36,000 48,000 By C l o s i n g 1,600 2,880 1,120 Stock (WN
8,640 12,480 3f)
46,080 63,520 Total 22,000 46,080 63,520 Space to write important points for revision
Q.3.9 RTP Practical The following balances were extracted from the books of ABC Sons. You are required to
prepare Departmental Trading Account and Profit and Loss
Account for the year ended 31st March after adjusting the unrealized Department Profits if any.
Particulars Deptt. A Deptt. B
Opening Stock ` 50,000 ` 40,000

Purchases ` 6,50,000 ` 9,10,000
Sales ` 10,00,000 ` 15,00,000
General Expenses incurred for both the Departments were `1,25,000 and you are also supplied with the following
information:
(a) Closing Stock of Department A ` 1,00,000 including goods from
Department B for ` 20,000 at cost of Department A.

(b) Closing Stock of Department B ` 2,00,000 including goods from
Department A for ` 30,000 at cost to Department B.

(c) Opening Stock of Department A and Department B include goods of
the value of` 10,000 and ` 15,000 taken from Department B and
Department A respectively at cost to Transferee Departments. (d) The rate of Gross Profit is uniform from year to
year.
Answer:
1. Departmental Trading and Profit and Loss Account for the year ended 31st March Particulars Deptt. A
To Opening 50,000 Stock

To Purchase 6,50,000 To Gross Profit 4,00,000
Deptt. B Particulars Deptt. A Deptt. B 40,000 By Sales 10,00,000 15,00,000
9,10,000 By Closing 1,00,000 2,00,000 7,50,000 Stock
Total 11,00,000 17,00,000 Total 11,00,000 17,00,000
To General By Gross
Expenses Profit 4,00,000 7,50,000 (in ratio of 50,000 75,000
Sales)
To Profit tfr to
General
Profit and 3,50,000 6,75,000
Loss A/c
Total 4,00,000 7,50,000 Total 4,00,000 7,50,000 2. General Profit and Loss Account
To Stock Reserve, (Additional) By Profit from: Stock in Deptt, A: Deptt. A 3,50,000

(` 20,000 – ` 10,000)× 50% Deptt. B 6,75,000
GP of ‘B’ 5,000
Stock in Deptt, B :
(` 30,000 – ` 15,000) × 40%
GP of ‘A’ 6,000
Total 10,25,000 Total 10,25,000 Note: GP Rates: Dept A. = 40%

Dept B. = 50% Space to write important points for revision
XY and Z carried on a business of Drapers and Tailors in Delhi; X was in charge of Department “A” dealing in
cloth, Y of Department “B” for selling garments and Z of Department “C” the tailoring section. It had been agreed
that each of the three partners would receive 75% of the profits disclosed by accounts of the department of which he
was in charge and the balance of the profits would be shared in the proportion. X ½, Y 1/4, and Z 1/4. The following
is the Trading and Profit and Loss Account of the firm for the six months ended 31st March, 2012.
Trading and Profit and Loss Account

Dr. Cr. Particulars
To Opening Stock:
Cloth (A)
Ready-made
Garments (B)
Tailoring Jobs (C)
To Purchases:
Cloth (A)
Ready-made
Garments (B)
Tailoring Goods (C)
To Salaries and Wages

To Advertising
To Rent
To Discount Allowed
To Sundry Expenses
To Depreciation on
Furniture and Fittings
To Net Profit
` Particulars ` By Sales:
37,890 Cloth (A) 1,80,000
Ready-made
24,000 Garments (B) 1,30,000
20,000 Tailoring Jobs (C) 90,000
By Discount received 800
1,40,700 By Closing Stock:
Cloth (A) 45,100
80,600 Ready-made
44,400 Garments (B) 22,300
48,000 Tailoring Jobs (c) 2,400 [including ` 5,700
10,800 for goods
1,200 transferred from
12,000 department (A)] 21,600
750
67,060
4,89,800 4,89,800 After consideration of the following, prepare Departmental Accounts and Profit and Loss
Appropriation Account.
(i) Cloth of the value of ` 10,700 and other goods of the value of ` 600 were transferred at selling price by
Departments A and B respectively to Department C.
(ii) Cloth and garments are sold in the show-room. Tailoring work is carried out in the workshop.
(iii) The details of salaries and wages were as follows:
(a) General Office 50%, show-room 25% and 25% for workshop 75% of which is for tailoring alone.
(b) Allocate General Office Expenses, in the proportion of 3:2:1

among the Departments A, B, C.
(c) Distribute show-room expenses in the proportion of 1:2
between Departments A and B.
(iv) The workshop rent is ` 1,000 per month. The rent of the General Office and Show-room is to be divided equally
between Departments A and B.
(v) Depreciation charges are to be allocated equally amongst the three Departments.
(vi) All other expenses are to be allocated on the basis of turnover (excluding Internal Transfers).
(vii) Discounts received are to be credited to the three Departments as follows: A ` 400; B` 250; C ` 150.
(viii) The opening stock of Department C does not include any goods transferred from Department A.
Answer: Departmental Trading and Profit and Loss Account For the six months ending on 31st March,
2012Dr. Cr.
Particulars A` B` C` Total `Particulars A` B ` C` Total`
To Opening Stock 37,890 24,000 20,000 81,890By Sales 1,80,000 1,30,000 90,000 4,00,000
To Purchases 1,40,700 80,600 44,400 2,65,700 By Transfer 10,700 600 — 11,300
To Transfer — — 11,300 11,300By Closing
To Wages — — 9,000 9,000 Stock 45,100 22,300 21,600 89,000
To Gross Profit c/d 57,210 48,300 26,900 1,32,410
2,35,800 1,52,900 1,11,600 5,00,300 2,35,800 1,52,900 1,11,600 5,00,300
To Salaries and By Gross

Wages: Profit b/d 57,210 48,300 26,900 1,32,410 General Office 12,000 8,000 4,000 24,000By Discount
Showroom 4,000 8,000 — 12,000Received 4,00 250 150 800 Workshop — — 3,000 3,000
To Advertising 1,080 780 540 2,400
To Rent 2,400 2,400 6,000 10,800
To Discount Allowed 540 390 270 1,200
To Sundry Expenses 5,400 3,900 2,700 12,000
To Depreciation 250 250 250 750
To Net Profit t/f
To P&L 31,940 24,830 10,290 67,060
Approp-
riation A/c
57,610 48,550 27,050 1,33,210 57,610 48,550 27,050 1,33,210
Note: Gross profit of Department A is 30% in Sales (including transfer to Dept C). There is some unrealised profit
only on inter departmental stock. 30% of`5,700 is required as stock reserve. This will be debited to Profit and Loss
Appropriation account.
Profit and Loss Appropriation Account

Dr. Cr. Particulars ` Particulars ` To Stock Reserve (` 5,700 × 30/100) 1,710 By Net Profit To X: 75% of Profit of
Dept. A 23,955 from Profit and
50% of Common pool 7,527 31,482 Loss A/c 67,060 To Y:75% of Profit of Dept. B 18,623
25% of Common pool 3,763 22,386
To Z:75% of profit of Dept. C 7,718
25% of Common Pool 3,764 11,482
ABC Ltd., has 3 departments, A, B, C. The following information is provided: A B C

Opening Stock 3,000 4,000 6,000
Consumption of direct materials 8,000 12,000 –
Wages 5,000 10,000 –
Closing Stock 4,000 14,000 8,000
Sales – – 34,000
Stock of each department is valued at cost to the department concerned.
Stocks of A department are transferred to B at a margin of 50% above
departmental cost. Stocks of B department are transferred to C department at
a margin of 10% above departmental cost. Other expenses were: Salaries`
2,000, Printing & Stationery ` 1,000. Rent ` 6,000, Interest paid ` 4,000,
Depreciation` 3,000, Allocate expenses in the ratio of departmental gross
profit. Opening figures of reserves for unrealised profits on departmental stocks
were; Department B` 1,000; Department C` 2,000.
Prepare Departmental Trading and Profit and Loss Account for the year
ending on March 31, 2012.
Answer: Departmental Trading and Profit and Loss Account for the year ending on 31st March, 2012
Dr. Cr.
Particulars A` B` C` Total `Particulars A` B ` C` Total`
To Opening Stock 3,000 4,000 6,000 13,000By Internal t/f 18,000 33,000 – 51,000
To Direct Material By Sales – – 34,000 34,000
Consumed 8,000 12,000 – 20,000By Closing 4,000 14,000 8,000 26,000
To Wages 5,000 10,000 – 15,000 Stock
To Internal
Transfer – 18,000 33,000 51,000
22,000 47,000 42,000 1,11,000 22,000 47,000 42,000 1,11,000
To Salaries 1,000 500 500

To P r i n t i n g &
Stationery 500 250 250
To Rent 3,000 1,500 1,500
To Depreciation 1,500 750 750
To Interest paid 2,000 1,000 1,000
2,000 By Gross
Profit b/d 6,000 3,000 3,000 12,000 1,000 By Net Loss 2,000 1,000 1,000 4,000 6,000 c/d
3,000
4,000
8,000 4,000 4,000 16,000 8,000 4,000 4,000 16,000
To Net Loss b/d To Provision for unrealised profit on Closing

Stock
4,000 By Provision
for
unrealise
3,918 d profit on
Opening
Stock 3,000
By Balance
transferre
d to Profit
& Loss
A/c 4,918
7,918 7,918
Working Notes:
(i) FIFO method for stock issue has been assumed. Alternatively this question could have been solved by assuming
other methods for stock issue like LIFO Basis, Weighted Average basis, etc.
(ii) Calculation of unrealised profit on Closing Stock of Deptt B ` A. Current cost incurred by Dept. B
( ` 12,000 + ` 10,000 + ` 18,000) 40,000 B. Profit included in Above (` 18,000 × 50/150) 6,000 C. Profit included in
Closing Stock of ` 14,000
( ` 6,000× ` 14,000/` 40,000) 2,100

(iii) Calculation of unrealised profit on Closing Stock of Dept C ` A. Current Cost incurred by Dept. C 33,000
B. Profit of Dept. B included in above (` 33,000 × 10/110) 3,000
C. Cost element of Dept. B included in current cost
(` 33,000 – 3,000) 30,000
D. Profit of Dept. A included in above cost
(` 6,000 ×` 30,000/ ` 40,000) 4,500
E. Total Profit included in current cost of Dept. C
(` 3,000 +` 4,500) 7,500
F. Unrealised profit included in closing stock of ` 8,000 (` 7,500 ×` 8,000/` 33,000) 1,818
(iv) Total unrealised profit (` 2,100 +` 1,818) 3,918
4 Memorandum Stock Account

Q.4.1 2013 - Nov [6] (a), RTP Practical Martis Ltd. has several departments. Goods supplied to each department
are debited to a Memorandum Departmental Stock Account at cost, plus a fixed percentage (mark-up) to give the
normal selling price. The mark-up is credited to a memorandum departmental ‘Mark-up account’, any reduction in
selling prices (mark-down) will require adjustment in the stock account and in mark-up account. The mark up for
Department A for the last three years has been 25%. Figures relevant to Department A for the year ended 31st
March, 2013 were as follows :
Opening stock as on 1st April, 2012, at cost ` 65,000

Purchase at cost ` 2,00,000
Sales ` 3,00,000
It is further ascertained that :
(1) Shortage of stock found in the year ending 31.03.2013, costing to ` 1,000 were written off.
(2) Opening stock on 01.04.12 including goods costing`6,000 had been sold during the year and had been marked
down in the selling price by ` 600. The remaining stock had been sold during the year. (3) Goods purchased during
the year were marked down by`1,200 from a cost of ` 15,000. Marked-down stock costing ` 5,000 remained unsold
on 31.03.13.
(4) The departmental closing stock is to be valued at cost subject to adjustment for mark-up and mark-down.
You are required to prepare :
(i) A Departmental Trading Account for Department A for the year ended 31st March, 2013 in the books of Head
Office. (ii) A Memorandum Stock Account for the year.
(iii) A Memorandum Mark-up Account for the year.
(12 marks) [IPCC Gr- II] Answer:
(i) Department Trading Account
In the books of Head Office
For the year ending on 31.03.2013
Particulars

To Gross Profit c/d
` Particulars ` 65,000 By Sales 3,00,000

2,00,000 By Shortage 1,000
(ii) Memorandum stock account (for Department A) (at selling price)

Particulars
To Balance b/d
(` 65,000 + 25% of ` 65,000)
To Purchases (`2,00,000 + 25% of ` 2,00,000)
` Particulars ` 81,250 By Profit & Loss A/c 1,000 (Cost of Shortage)
By Memorandum 250
2,50,000 Departmental Mark up

A/c (Load on Shortage)
(` 1,000 × 25%)
By Memorandum 1,200 Departmental
Mark-up A/c (Mark

down on Current
Purchases)
By Debtors A/c (Sales) 3,00,000 By Memorandum 600 Departmental

Mark-up A/c
(Mark Down on Opening
Stock)
(iii) Memorandum Departmental Mark-up Account Particulars
To Memorandum Departmental Stock A/c
(` 1,000 × 25/100)

To Gross Profit transferred to Profit & Loss A/c
To Balance c/d [(` 28,200 + 400*) × 25/125 - 400]
` Particulars ` By Balance b/d 16,250 250 (` 81,250 × 25/125)

By Memorandum 50,000 Departmental Stock
1,200
A/c(2,50,000×
25/125)
600
58,880
5,320
66,250 66,250 * [` 1,200 × 5,000/15,000] = 400 Working Notes:
(i) Calculation of Cost of Sales
` A Sales as per Books 3,00,000

B Add: Mark-down in opening stock (given) 600
C Add: Mark-down in sales out of current purchases
(` 1,200 x 10,000/15,000) 800
D Value of sales if there was no mark-down (A+B+C) 3,01,400
E Less: Gross Profit (25/125 of ` 3,01,400) subject to Mark Down (` 600 + ` 800) (60,280) F Cost of sales (D-E)
2,41,120
(ii) Calculation of Closing Stock ` A Opening Stock 65,000 B Add: Purchases 2,00,000 C Less: Cost of Sales
(2,41,120) D Less: Shortage (1,000) E Closing Stock (A+B-C-D) 22,880
Q.4.2 2016 - Nov [6] (a) Practical M/s Shyam Udyog, a retail store, has two departments, Department X and
Department Y for each of which stock account and memorandum ‘mark-up’ account are kept. All the goods
supplied to each department are debited to the stock account at cost plus a ‘mark-up’, which together make up the
selling price of the goods and in the account the sale proceeds of the goods are credited. The amount of ‘mark-up’ is
credited to the Departmental Markup Account. If the selling price of any goods is reduced below its normal selling
price, the reduction ‘marked down’ is adjusted both in the Stock Account and the Departmental Mark-up Account.
The rate of ‘Mark up’ for X Department is 33-1/3% of the cost and for Y Department it is 50% of the cost.
The following figures have been taken from the books for the year ended March 2016:
X Y Department Department Amount (`) Amount (`)
Stock as on April 1st at cost Purchases

Sales
3,15,000 5,58,000
22,77,000 28,02,000
28,68,000 37,50,000
(1) The stock of Department X on April 1, 2015 included goods the selling price of which had been marked down
by` 37,800. These goods were sold during the year at the reduced prices.
(2) Certain stock of the value of `2,07,000 purchased from the Department X was later in the year transferred to the
Department Y and sold for ` 3,10,500. As a result though cost of the goods is included in the Department X the sale
proceeds have been credited to the Department Y.
(3) During the year 2015-16 to promote the goods, they were marked down as follows:
Cost (`) Marked down (`)
Department X 1,68,000 10,800

Department Y 3,00,000 60,000
All the goods marked down, were sold except of Department Y of the value of ` 1,50,000 marked down by ` 30,000.
(4) At the time of stock taking on 31st March, 2016, it was discovered that cloth of Department X of the cost of `
11,700 was missing and it was decided that the amount be written-off.
You are required to prepare for both the departments for the year ended 31st March, 2016:
(a) The Memorandum Stock Account; and
(b) The Memorandum Mark-up Account. (8 marks) [IPCC Gr- II]
Answer :
1. Department X Memorandum Stock A/c
Dr. Cr.
Particulars
To Bal. b/d
(3,15,000 + 67,200)
Amt. (`) Particulars Amt. (`) By Sales 28,68,000

3,82,200 Deptt.- X 2,07,000
To Purchase 22,77,000 Mark-up 69,000 31,44,000 + Mark-up 7,59,000 30,36,000 By Loss of Stock A/c 11,700
Mark-up 3,900 15,600 By Mark-up A/c 10,800 By Bal. c/d 2,47,800 34,18,200 34,18,200
2. Department X Memorandum Mark-up A/c

Dr. Cr. Particulars
To Stock A/c (transfer)
Amt. (`) Particulars Amt. (`) 69,000 By Bal. b/d

To Stock A/c (Resale)
To Stock A/c
3,900 (1,05,000 - 37,800) 67,200
10,800 By Stock A/c 7,59,000 (Mark down) To P & L A/c To Balance 6,80,550
61,950
8,26,200 8,26,200 3. Department Y Memorandum Stock A/c
Particulars
To Bal. b/d
To Cost 5,58,000
Mark-up 2,79,000
To Purchase 28,02,000
Mark-up 14,01,000
To X Deptt. A/c 2,07,000
Mark-up 1,03,500
Amt. (`) Particulars Amt. (`) By Sales A/c 37,50,000
By Mark-up A/c 60,000

8,37,000 By Bal. c/d 15,40,500
42,03,000
3,10,500
53,50,500 53,50,500
4. Department Y Memorandum Mark-up A/c Particulars

To Stock A/c
To P & L A/c
To Bal. c/d
Working Notes:
1. Verification of Profit Sales as per books Add: Mark-down (37,800 + 10,800) 48,600 29,16,600 Gross Profit on
fixed selling price @ 25% on ` 29,16,600 7,29,150 Less: Mark down (48,600) 6,80,550
2. Verification of Profit ` Sales 37,50,000 Add: Mark down in goods sold 30,000 37,80,000 Gross Profit 1/3
12,60,000 Less: Mark down (30,000) Gross profit as per books 12,30,000 Space to write important points for
revision
Amt. (`) Particulars Amt. (`) 60,000 By Bal. b/d 2,79,000

12,30,000 By Stock A/c 14,01,000
4,93,500 By Stock A/c 1,03,500
17,83,500 17,83,500
` 28,68,000
ABC Ltd. has several departments. Goods supplied to each department are debited to a Memorandum Departmental
Stock Account at cost plus a fixed percentage (marks-up) to give the normal selling price. The amount of mark-up is
credited to a Memorandum Departmental Markup account. If the selling price of goods is reduced below its normal
selling prices, the reduction ( mark-down) will require adjustment both in the stock account and the mark-up
account. The mark-up for department X for the last three years has been 20%. Figures relevant to department X for
the year ended 31st March , 2019 were as follows:
Stock as on 1st April, 2018 at cost ` 1,50,000

Purchases at cost ` 4,30,000
Sales ` 6,50,000
It is further ascertained that:
1. Shortage of stock found in the year ending 31.3.2019, costing ` 4,000
were written off.
2. Opening stock on 1.4.2018 including goods costing` 12,000 had been sold during the year and had been marked-
down in the selling price by ` 1,600. The remaining stock had been sold during the year. 3. Goods purchased during
the year were marked down by`3,600 from a cost of`30,000. Marked-down stock costing`10,000 remained unsold on
31.3.2019.
4. The departmental closing stock is to be valued at cost subject to adjustment for mark-up and mark-down.
You are required to prepare for the year ended 31st March, 2019: (i) Departmental Trading Account for department
X for the year ended 31st March, 2019 in the books of head office.
(ii) Memorandum Stock Account for the year ended 31st March, 2019. (iii) Memorandum Mark-Up account for the
year ended 31st March, 2019. (10 marks) Space to write important points for revision
Q.4.4 RTP Practical
A B & C is a Retail Store having 2 Departments A and B. The Company maintains Memorandum Stock Account &
Memorandum Mark-Up Account for each of the Departments. Supplies issued to the Departments are debited to the
Memorandum Stock Account of the Department at Cost plus Mark-Up, and Departmental Sales are credited to this
Account. The MarkUp on supplies issued to the Departments is credited to the Mark-Up Account for the
Department. When it is necessary to reduce the Selling Price below the Normal Selling Price, i.e. Cost plus Mark-
Up, the reduction (Mark-Down) is entered in the Memorandum Stock Account and Mark-up Account. Department P
has a mark-up of 1/3rdon Cost, and Department Q has a mark-up of 50% on Cost.
The following information has been extracted from the records of the Company for a year ending 31st December.
Particulars A B
Opening Stock (at Cost) 24,000 36,000

Purchases 1,62,000 1,90,000
Sales 2,10,000 2,85,000
Opening Stock of Department A includes goods on which the Selling Price has been marked down by`510. These
goods were sold in January at the reduced Selling Price.
Certain goods purchased during the year for`2,700 for Department A, were transferred during the year to
Department B and sold for`4,500. Purchases and Sales are recorded in the Purchases of Department A and the Sales
of Department B respectively, but no entries have been made in respect of the transfer.
Goods purchased during the year were marked down as follows:
A B Cost 8,000 21,000

Mark down 800 4,100
At the end of the year there were some items in the stock of Department B, which had been marked down to` 2,300.
With this exception, all goods marked down during the year were sold during the year at reduced prices. During
stock-taking at the end of the year, goods which had cost`240 were found to be missing in Department A. It was
determined that loss should be regarded as irrecoverable. Closing Stock in both Departments are to be valued at Cost
for the purpose of the annual accounts.
Prepare for the year ended 31st December - (1) Trading A/c, (2) Memorandum Stock A/c, and (3) Memorandum
Mark Up A/c.
Answer:
Particulars
To Balanced b/d
(Given Cost + 1/3rd & 50% Mark-up)
To Purchases (given) To Memorandum Mark Up (1/3rd and 50% on Purchase)
To Internal Transfer (as per contra)

To Memorandum Mark Up (50% on Internal Transfer)
To Memorandum Mark Up (on Marked Down Goods still in Stock - Note 1)
1. Memorandum Stock Account (in `)

A B Particulars A B
32,000 54,000By Balance b/d 510 (Mark Down b/fd as

given)
1,62,00 1,90,000 By Sales (given) 2,10,000 2,85,000 54,000 95,000By Int. transfer t/f (as per
contra) 2,700 –
– 2,700By Memorandum Mark Up 900 – (Mark-up on Transfer)

– 1,350By Memorandum Mark Up 800 4,100 (Mark Down = given)
– 344 By Abnormal Loss 240 – Cost transferred to P&L
A/c
By Memorandum Mark Up 80 – (Mark-up on Stock
Lost)
By Balance c/d (Closing 32,770 54,294 Stock - balancing
figure)
Note 1: Mark Down in Unsold Stock of Department Q

= = ` 344
Value of Mark Down Goods = Cost (+) Normal Mark Up 50% (–) Amount Marked Down
=` 21,000 (+) ` 10,500 (–) ` 4,100 (given) =` 27,400
Note 2 : Valuation of Closing Stock at cost:

Department A B Closing Stock at Invoice 32,770 54,294 Price as per Memorandum
Stock A/c
Closing Stock at Cost after 32,770 – 1/4 thereon 54,294 – 1/3 thereon reducing 1/3rdand ½ on cost = 24,578 =
36,196
= 1/4th and 1/3rd on

InvoicePrice
respectively
2. Trading Account for the year ended 31st December (in`) Particulars
To Opening
Stock
To Purchases
To Internal
Transfer
To Gross Profit
(bal. fig.)
A B Particulars A B 24,000 36,000 By Sales 2,10,000 2,85,000 By Internal 2,700 – 1,62,000 1,90,000 Transfer
– 2,700 By Abnormal 240 –
Loss
51,518 92,496 By Closing 24,578 36,196
Stock
(Note 2)
Particulars A
To balance b/d (Mark 510 Down - given - per

contra)
To Memorandum Stock 900 A/c

(Mark-upon
Transfer)

(Mark-down given)

(Mark-up on Goods
Lost)

(as above)
To balance c/d 8,192
3. Memorandum Mark Up Account (in`)

B Particulars A B
– By balance b/d 8,000 18,000 (1/3rd and 50% on cost

given)
– By Memorandum Stock 54,000 95,000 A/c
(Mark Up on Purchase)
By Memorandum Stock – 1,350 4,100 A/c (2700 × 50%)
(Mark Up on Int. t/f)
By Memorandum Stock – 344

– A/c
(Marked Down goods
still in Stock)
(bal. fig.)
4. Confirmation/Verification of Gross Profit (in`) Department A B Sales
Total 62,000 1,14,694 Total 62,000 1,14,694
(given) 2,10,000 2,85,000 Add back: Reduction/Mark down 510+800 = 1,310 4,100-344 = 3,756 Total 2,11,310
2,88,756
Normal Gross Profit at 1/4 (1/4) = 52,828 (1/3) = 96,252
and 1/3 of above
Less: Reduction / Mark down 1,310 3,756
Gross Profit (as per Memo Mark 51,518 92,496 up A/c)

92,496
18,098
Q.4.5 Practice Practical ABC Limited is a retail organisation with several departments. Goods supplied to each
department are debited to a Memorandum Departmental Stock Account at cost, plus fixed percentage (mark-up) to
give the normal selling price. The mark up is credited to a Memorandum Departmental “Mark-up Account”. Any
reduction in selling prices (mark-down) will require adjustment in the stock account and in mark-up account. The
mark up for Department A for the last three years has been 40%. Figures relevant to Department A for the ended
31st Dec. 2018 were as follows: Stock 1stJan., 2018 at cost,`80,000, Purchases at cost`1,80,000, Sales ` 3,20,000.
(a) Goods purchased in the period were marked down by ` 1,400 from a
cost of`16,000. Marked-down stock costing`4,000 remained unsold on 31st Dec 2018.
(b) Stock shortages at the year end, which had cost ` 1,200 were to be written off.
(c) Stock at 1st Jan. 2018 including goods costing` 8,200 had been sold during the year and has been mark down in
the selling price by` 740. The remaining stock had been sold during the year.
(d) The departmental closing stock is to be valued at cost subject to adjustments for mark-up and mark-down.
Prepare (i) A Departmental Trading Account (ii) A Memorandum Stock
Account (iii) A Memorandum Mark-up Account for the year 2018.
Answer:
(i) Departmental Trading Account
for the year ending on 31st Dec. 2018
Dr. Cr.
Particulars
To Opening Stock
To Purchase
To Gross Profit c/d

1,80,000 By Shortage 1,200
90,150 By Closing stock 28,950
(` 40,180 –` 11,230)
3,50,150 3,50,150
(ii) Memorandum Departmental Stock Account (At Selling Price) Dr. Particulars
To Balance b/d
(` 80,000+` 32,000) To Purchases
(` 1,80,000 +
` 72,000)
Cr. ` Particulars ` 1,12,000 By Profit & Loss A/c 1,200 (Cost of Shortage)
2,52,000 By Memorandum 480 Departmental Mark-up

A/c
(Load on Shortage)
By Mark-up A/c 1,400 (Mark Down in Current

Purchases)
By Debtors A/c (Sales) 3,20,000

By M e m o r a n d u m
Departmental Mark-up A/c 740
(Mark Down on Opening
Stock)
3,64,000 3,64,000
(iii) Memorandum Departmental Mark up Account Dr. Cr. ` Particulars ` 480 By Balance b/d 32,000
(` 1,12,000 × 40/140) By M e m o r a n d u m 72,000
1,400 Departmental Stock A/c (` 2,52,000 × 40/140) 740
Particulars
To Memorandum
Departmental Stock A/c (` 1,200 × 40/100)
To Memorandum
Departmental Stock A/c
To Memorandum
Departmental Stock A/c
To Gross Profit transferred to Profit & Loss A/c
To Balance c/d
[(` 40,180 + ` 350)* × 40/140 – (` 350)]
*[` 1,400 × 4,000/16,000]

90,150
11,230
1,04,000 1,04,000
Working Notes:
(i) Calculation of Cost of Sales ` A. Sales as per Books 3,20,000 B. Add: Mark-down in opening stock (given) 740
C. Add: Mark-down in sales out of current Purchases
( ` 1,400 × 12,000/16,000) 1,050

D. Value of sales if there was no mark-down (A+B+C) 3,21,790
E. Less: Gross Profit (40/140 of ` 3,21,790) subject to Mark Down (` 740 + ` 1,050) (91,940) F. Cost of sales (D –
E) 2,29,850
(ii) Calculation of Closing Stock ` A. Opening Stock 80,000
B. Add: Purchases 1,80,000
C. Less: Cost of Sales 2,29,850
D. Less: Shortage 1,200
E. Closing Stock (A+B – C – D) 28,950
Fbb Store Ltd. is a retail store operating two departments. The company maintains Memorandum Stock account and
memorandum mark-up account for each of the departments. Supplies issued to the department are debited to the
Memorandum Stock account of the department at cost plus the Markup, and departmental sales are credited to this
account. The mark-up on supplies issued to the departments is credited to the Mark-up account for the department.
When it is necessary to reduce the selling price below the normal selling price, i.e. cost plus Mark-up, the reduction
(mark down) is entered in the Memorandum Stock account and in the mark-up account. Department A has a Mark-
up of 33-1/3% on cost, and Department B 50% on cost. The following information has been extracted from the
records of Southern Store Ltd. for the year ended 31st December, 2018.
Department A ` Department B `
Stock, 1st January, 2012 at cost Purchases

Sales
24,000 36,000
1,62,000 1,90,000 2,10,000 2,85,000
(a) The stock of Department A on 1st January, 2018 included goods on which the selling price has been marked
down by` 510. These goods were sold in January, 2018 at the reduced price.
(b) Certain goods purchased in 2012 for ` 2,700 for Department A were transferred during the year to Department B
and sold for ` 4,050. Purchase and sale are recorded in the purchases of Department A and the sales of Department B
respectively, but no entries in respect of the transfer have been made.
(c) Goods purchased in 2018 were marked down as follows:

Department A` Department B` Cost 8,000 21,000 Mark down 800 4,100
At the end of the year there were some items in the stock of Department B which had been marked down to` 2,300.
With this exception all goods marked down in 2018, were sold during the year at the reduced prices. (d) During
stock taking on 31st December 2018, goods which had cost
` 240 were found to be missing in department A, It was determined that the loss should be regarded as irrecoverable.
(e) The closing stock in both departments are to be valued at cost for the purpose of the annual accounts.
Prepare for each department for the year ended 31st December, 2018
(i) a Trading Account, (ii) a Memorandum Stock Account, and (iii) a
Memorandum Mark-up Account.
Answer: Fbb Stores Ltd.

Trading Account for the year ending on 31st December, 2018 Dr. Cr.
Particulars Dept. A Dept. B Particulars Dept. A Dept. B ` ` ` ` To Opening Stock

To Purchases
To Transfer from
A Dept.
To Gross Profit c/d
24,000 36,000 By Sales 2,10,000 2,85,000 1,62,000 1,90,000 By Transfer to
Dept. B 2,700 –
– 2,700 By Goods Lost 240 – 51,518 92,496 By Closing Stock 24,578 36,196 (at cost)
2,37,518 3,21,196 2,37,518 3,21,196 Memorandum Stock Account (At Selling Price) Dr. Cr.
Particulars Dept. A Dept. B Particulars Dept. A Dept. B ` ` ` `
To Balance b/d
(Cost + Mark
up)
To Purchases
(Cost)
To Memorandum
Mark-up A/c
(on purchases)
To Transfer
To Memorandum
Mark-up A/c
(on t/f)
To Memorandum
Mark-up A/c
(on Marked
down goods
still in Stock)
32,000 54,000 By Balance b/d 510 By Sales 2,10,000 2,85,000 By Transfer 2,700 1,62,000 1,90,000 By
Memorandum
Mark-up A/c
54,000 95,000 (on transfer) 900 –
By Memorandum
Mark-up A/c
2,700 (Marked down
1,350 on current
purchasers) 800 4,100
By P & L A/c
344 ( C o s t o f
Shortage) 240
By M e m o r a n d u m
Mark-up A/c
(on lost Stock) 80
By Balance c/d
(Closing Stock) 32,770 54,294 2,48,000 3,43,394 2,48,000 3,43,394
Memorandum Mark-up Account Dr. Particulars
To Balance b/d To Memorandum Stock A/c
(Mark-up on Transfer)
To Memorandum Stock A/c

(Mark down on Current
Purchase)
To Memorandum Stock A/c

(Mark down on goods lost)
To Gross Profit (Balancing

Figure)
To Balance c/d
Cr. Dept. A Dept. B Particulars Dept. A Dept. B ` ` ` `
510 By Balance b/d 8,000 18,000 By Memorandum

Stock A/c
(purchases) 54,000 95,000 900 By Memorandum

Stock A/c
(Mark-up on
transfer) 1,350 By Memorandum
800 4,100 Stock A/c
(Marked down
on goods still in
Stock) 344 80
51,518 92,496
8,192 18,098
62,000 1,14,694 62,000 1,14,694 Working Notes: (i) Calculation of Closing Stock at Cost A Dept. (`) B Dept. (`)
A. Calculation of Closing Stock at
Invoice Price 32,770 54,294 B. Calculation of Closing Stock at Cost 32,770×3/4 54,294× 2/3 =` 24,578 = 36,196 (ii)
Calculation of Mark Down in unsold Stock of B Debt.
= = ` 344 (iii) Verification of Gross Profit
A Dept. B Debt. ` ` A. Sales 2,10,000 2,85,000 B. Add: Reduction 510 — C. Add: Mark down 800 3,756 2,11,310
2,88,756
D. Gross Profit (1/4) 52,828 (1/3) 96,252

E. Less: Mark down (1,310) (3,756) F. Gross Profit as per Memorandum Mark up 51,518 92,496
Account
CHAPTER
13
Accounting for Branches Including Foreign Branches
Chapter Comprises: ☹Distinction Between Branch Accounts and Departmental Accounts ☹Dependent Branches
☹Methods of Charging Goods to Branches ☹Accounting for Dependent Branches ☹Accounting for Independent
Branches ☹Adjustment and Reconciliation of Branch & Head Office Accounts ☹Incomplete Information in Branch
Books ☹ Foreign Branches ☹Accounting for Foreign Branches ☹Change in Classification ☹Techniques for Foreign
Currency Translation

Legend
book. 1.707
TIME MANAGER
i.e.....
............ Day 1
Instant
Revision (in hours)

i.e.... i.e. on ........... ...........
Day 2 Day 8
. . . . . . . . . Plan and Manage your Time Periodic Revision

(in hours)
i.e. on i.e. on i.e. on need............ .............. ............
1. Budgeted
2. Actual
3. Variance (1-2)
2.2, 3.4, 5.5, 6.3
1 Dependent Branch: Debtor Method
Q.1.1 2011 - May [7] (e) Descriptive Why goods are marked on invoice price by the head office while sending
goods to the branch? (4 marks) [IPCC Gr- II]
Answer:
Goods are marked on invoice price to achieve the following objectives: 1. To keep secret from the branch
manager, the cost price of the goods
and profit made, so that the branch manager may not start a rival and competitive business with the concern; and
2. To have effective control on stock i.e. stock at any time must be equal to opening stock plus goods received from
head office minus sales made at branch.
3. To dictate pricing policy to its branches, as well as save work at branch because prices have already been decided.
Ram Limited of Chennai has a branch at Nagpur to which office, goods are invoiced at cost plus 25%. The branch
makes sales both for cash and on credit. Branch expenses are paid direct from Head Office and the branch has to
remit all cash received into the Head Office Bank Account at Nagpur.
From the following details, relating to the year 2009, prepare the accounts in Head Office Ledger and ascertain
Branch Profit. Branch does not maintain any books of accounts, but sends weekly returns to Head Office:
` Goods received from Head Office at invoice price 1,20,000

Returns of Head Office at invoice price 2,400
Stock at Nagpur Branch on 1.1.2009 12,000
Sales during the year— Cash 40,000
Credit 72,000
Debtors at Nagpur Branch 14,400
Cash received from Debtors 64,000
Discounts allowed to Debtors 1,200
Bad Debts during the year 800
Sales Returns at Nagpur Branch 1,600
Salaries and Wages at Branch 12,000
Rent, Rates and Taxes at Branch 3,600
Office, expenses at Nagpur Branch 1,200
Stock at Branch on 31.12.2009 at invoice price 24,000
Answer: Nagpur Branch Stock Account Particulars
To Balance b/d
To Goods sent to branch A/c To Branch Debtors A/c
(Returns)
To Branch Adjustment A/c (Surplus over invoice price)
12,000 By Goods sent to branch

1,20,000 A/c (Returns) 2,400
1,600 By Bank A/c (Cash sales) 40,000
By Branch Debtors A/c 72,000
4,800 (credit sales)
1,38,400 1,38,400 Nagpur Branch Adjustment Account Particulars
To Stock reserve- 20% of `24,000 (closing stock)

To Branch Profit & Loss A/c (Gross profit)
Amount Particulars Amount (`) (`) By Stock reserve- 20%

4,800 of` 12,000 (Opening
stock) 2,400
25,920 By Goods sent to branch

A/c☐20% of`1,17,600 23,520
By Branch Stock A/c 4,800
30,720 30,720 Branch Profit & Loss Account Particulars

To Branch expenses A/c To Branch debtors A/c (Discount)
To Branch debtors A/c (Bad Debts)

To Net profit (transferred to Profit & Loss A/c)
Amount Particulars Amount (`) (`) 16,800 By Branch Adjustment

1,200 A/c (Gross Profit) 25,920
800
7,120
25,920 25,920
Branch Expenses Account
To Bank A/c (Rent, rates & taxes) 3,600 By Branch profit and To Bank A/c (Salaries & wages) 12,000 loss A/c
(Transfer) 16,800 To Bank A/c (Office expenses) 1,200
16,800 16,800 Branch Debtors Account
Particulars Amount Particulars Amount (`) (`) To Balance b/d

To Branch stock A/c
14,400 By Bank A/c 64,000 72,000 By Branch Profit and Loss A/c
(Bad debts and discount) 2,000

By Branch stock A/c
(Sales returns) 1,600
By Balance c/d (bal. fig.) 18,800
86,400 86,400
Goods sent to Branch Account
To Branch Stock A/c 2,400 By Branch Stock A/c 1,20,000 To Branch Adjustment A/c 23,520
To Purchases A/c 94,080

Following is the information of the Jammu branch of Best Ltd., New Delhi for the year ending 31st March 2010
from the following :
(1) Goods are invoiced to the branch at cost plus 20%.
(2) The sale price is cost plus 50%.
(3) Other informations :
` Stock as on 01-04-2009 2,20,000
Goods sent during the year 11,00,000
Sales during the year 12,00,000
Expenses incurred at the branch 45,000
Ascertain (i) the profit earned by the branch during the year (ii) branch stock reserve in respect of unrealized profit.
Answer:
(i) Calculation of profit earned by the branch In the books of Jammu Branch
Trading Account
Particulars Amount
To Opening stock 2,20,000

To Goods received
from Head office 11,00,000
To Expenses 45,000
To Gross profit 1,95,000
15,60,000
Particulars Amount
By Sales 12,00,000
By Closing stock 3,60,000
(Refer W.N.)
15,60,000 (ii) Stock reserve in respect of unrealised profit

=` 3,60,000 x (20/120) =` 60,000
Working Note:
Cost Price 100
Invoice Price 120
Sale Price 150
Calculation of closing stock at invoice price
Opening stock at invoice price 2,20,000
Goods received during the year at invoice
price 11,00,000
13,20,000
Less : Cost of goods sold at invoice price (9,60,000) [12,00,000 × Closing stock 3,60,000 (120/150)] Note : It is
assumed that all figures is at invoice price.
XYZ Company is having it's Branch at Kolkata. Goods are invoiced to the branch at 20% profit on sale. Branch has
been instructed to send all cash daily to head office. All expenses are paid by head office except petty expenses
which are met by the Branch Manager. From the following particulars prepare branch account in the books of Head
Office.
` Stock on 1st April 2010 (invoice price) 30,000

Sundry Debtors on 1st April, 2010 18,000
Cash in hand as on 1st April, 2010 800
Office furniture on 1st April, 2010 3,000
Goods invoiced from the
head office (invoice price) 1,60,000
Goods return to Head office 2,000
Goods return by debtors 960
Cash received from debtors 60,000
Cash Sales 1,00,000
Credit sales 60,000
` Discount allowed to debtors 160 Expenses paid by head office : Rent 1,800 Salary 3,200 Stationery & Printing 800
Petty exp. Paid by the branch 600 Depreciation to be
provided on branch
furniture at 10% p.a.
Stock on 31st March,
2011 (at invoice price) 28,000
(8 marks) [IPCC Gr- II] Answer: In the books of Head Office - XYZ Company Kolkata Branch Account (at
invoice) Particulars Amt. (` )
To Balance b/d
Stock 30,000
Debtors 18,000
Cash in hand 800
Furniture 3,000
To Goods sent to branch 1,60,000
To Goods returned by
branch (loading) 400
To Bank (expenses
paid by H.O.)
Rent 1,800
Particulars Amt. (`)
By Stock reserve (opening) 6,000 By Remittances:

Cash Sales 1,00,000
Cash from Debtors 60,000 1,60,000
By Goods sent to branch (loading) 32,000
By Goods returned by
branch (Return to H.O.) 2,000
By Balance c/d
Stock 28,000 Debtors 16,880 Cash (800 - 600) 200
Particulars
To Balance b/d
To Sales account (credit)
Salary 3,200 Furniture (3,000 - 300) 2,700 Stationary &

Printing 800 5,800
To S t o c k r e s e r v e 5,600
(closing)
To Profit transferred to
General Profit &
Loss A/c 24,180
2,47,780 2,47,780 Working Note :
Debtors Account
` Particulars ` 18,000 By Cash account 60,000
60,000 By Sales return account 960

By Discount allowed account 160
78,000 78,000 Note : It is assumed that goods returned by branch are at invoice price. Space to write important
points for revision
LMN is having branch at Mumbai. Goods are invoiced to the branch at 25% profit on sale. Branch has been
instructed to send all cash daily to head office. All expenses are paid by head office except petty expenses, which are
met by the Branch. From the following particulars, prepare branch account in the books of head office:
Particulars
Stock as on 1st April, 2013 (Invoice Price)
Discount allowed to
40,000 debtors 300 Sundry Debtors as on 1st April, 2013
Expenses paid by head 25,000 office:

Cash in hand as on 1st April, 2013
Salary 4,000 1,000 Staff Welfare 750
Office furniture as on 1st April, 2013

Goods invoiced from the head office (invoice price) Goods return to head office
Goods return by debtors
Telephone Expenses 1,200

4,000 Other Misc. Expenses paid
by branch 700
1,80,000 Stock as on 31st March,
2014 (at invoice price) 35,000
6,000 Depreciation to be provi
1,250 ded on branch furniture 10% p.a.
Cash received from Debtors

Cash sales
65,000
1,20,000 Credit sales 70,000 (8 marks) [IPCC Gr- II] Answer:

Particulars
To Balance b/d: Stock

Debtors Cash in hand Furniture
To Goods sent to branch To Goods returned by branch (loading)

In the books of Head Office - LMN
Mumbai Branch Account (At invoice price)
By Stock Reserve (opening) 10,000

40,000 By Remittances
25,000 Cash Sales 1,20,000 1,000 Cash from Debtors 65,000 1,85,000
4,000 By Goods sent to Branch 45,000
1,80,000 (loading)
1,500 By Goods returned by
branch (Returns to HO) 6,000
To Bank (Expenses paid by By Balance c/d:
Head Office) Stock 35,000
Salary 4,000 Debtors 28,450
Staff Welfare 750 Cash (` 1,000 ` 700) 300
Telephone 1,200 5,950 Furniture (` 4,000 - ` 400) 3,600
To Stock Reserve (closing) 8,750
To Profit Transferred to 47,150
General Profit & Loss A/c
3,13,350 3,13,350
Working Note:

To Sales A/c (Credit)
Debtors Account
Amount (`) Particulars Amount (`) 25,000 By Cash A/c 65,000 70,000 By Sales Return 1,250
By Discount allowed 300

95,000 95,000
Note: It is assumed that goods returned by branch are at invoice price. Space to write important points for revision
Raju Industries, Kolkata has a branch in Delhi to which office goods are invoiced at cost plus 25%. The branch sells
both for cash and on credit. Branch expenses are paid direct from head office, and branch has to remit all cash
received to the Head office Bank Account.
From the following details, relating to calendar year 2014, prepare the accounts in the Head Office Ledger and
ascertain the Branch Profit. Branch does not maintain any books of account, but sends weekly returns to the Head
Office.
Particulars Amount in ` Goods received from Head Office at Invoice Price 6,00,000
Returns to Head Office at Invoice Price 12,000
Stock at Delhi as on 1st Jan., 2014 60,000
Sales during the year - Cash 1,80,000
- Credit 3,80,000
Sundry Debtors at Delhi as on 1st Jan., 2014 72,000
Discount allowed to debtors 8,000
Bad Debts in the year 6,000
Sales returns at Delhi Branch 6,000
Rent, Rates, Taxes at Branch 16,000
Salaries, Wages, Bonus at Branch 62,000
Office Expenses 6,000
Stock at Branch on 31st December, 2014 1,20,000
(12 marks) Answer:
Particulars
To Bal b/d
To GSTB
To Branch debtors
To Branch stock adj. A/c
Branch Stock A/c

Amount Particulars Amount ` `
60,000 By GSTB (Returns) 12,000

6,00,000 By Bank A/c (Cash Sales) 1,80,000
6,000 By Branch Debtors (Credit) 3,80,000
26,000 By Balance c/d 1,20,000
6,92,000 6,92,000
Particulars
To Stock Reserve To Branch P& L A/c (Gross Profit)
Branch stock adjustment A/c

24,000 By Balance b/d (Stock Reserve) 12,000 1,05,600 By GSTB A/c 1,17,600
1,29,600 1,29,600
Branch P& L A/c Particulars
To Branch Debtors discount Bad Debts

To Branch Expenses A/c
To Net Profit (transfer to P&L
8,000 By Branch Stock adj. A/c 1,05,600 6,000 By Branch Stock A/c 26,000 84,000
33,600
A/c.) 1,31,600 1,31,600
Particulars
To Bank A/c:
Rent, Rates, Tax, Salaries, Wages Office Expenses
Branch Expenses A/c

Amount Particulars Amount ` ` By Branch P&L A/c 84,000
16,000
62,000
6,000
84,000 84,000
Particulars
To Balance b/d To Branch stock
Particulars
To Branch stock
Branch Debtors A/c
72,000 By Branch P & L discount 8,000

3,80,000 By Bad Debt 6,000
By Branch stock (sales return) 6,000
By Bank A/c 4,32,000
4,52,000 4,52,000
Goods sent to Branch A/c

12,000 By Branch stock 6,00,000 To Branch stock adjustment 1,17,600

To Purchases 4,70,400
6,00,000 6,00,000 Note: It is assumed that there is no closing balance of debtors. So all the cash received are
adjusted in debtors A/c.
Mr. Chena Swami of Chennai trades in Refined Oil and Ghee. It has a branch at Salem. He despatches 30 tins of
Refined Oil @` 1,500 per tin and 20 tins of Ghee @ ` 5,000 per tin on 1st of every month. The Branch has incurred
expenditure of` 45,890 which is met out of its collections; this is in addition to expenditure directly paid by Head
Office. Following are the other details:
Chennai H.O. Salem B.O. Amount (`) Amount (`)
Purchases:
Refined Oil 27,50,000
Ghee 48,28,000
Direct Expenses 6,35,800
Expenses paid by H.O. 76,800 Sales:
Refined Oil 24,10,000 5,95,000 Ghee 38,40,500 14,50,000
Collection during the year (including Cash 20,15,000 Sales)
Remittance by Branch to Head Office 19,50,000 Chennai H.O.

Balance as on 01-04-2015 31-03-2016
Amount (`) Amount (`) Stock:

Refined Oil 44,000 8,90,000 Ghee 10,65,000 15,70,000 Building 5,10,800 7,14,780 Furniture & Fixtures 88,600
79,740
Salem Branch Office

Balance as on 01-04-2015 31-03-2016
Amount (`) Amount (`) Stock:

Refined Oil 22,500 19,500 Ghee 40,000 90,000
Sundry Debtors 1,80,000 ? Cash in Hand 25,690 ? Furniture & Fixtures 23,800 21,420 Additional information:
(i) Addition to Building on 01-04-2015` 2,41,600 by H.O. (ii) Rate of depreciation: Furniture & Fixtures @ 10% and
Building @
5% (already adjusted in the above figure)

(iii) The Branch Manager is entitled to 10% commission on overall
organisational profits after charging such commission. (iv) The General Manager is entitled to a salary of ` 20,000
per month. (v) General expenses incurred by Head Office is ` 1,86,000. You are requested to prepare Branch
Account in the Head Office books and also prepare Chena Swami’s Trading and Profit & Loss Account (excluding
branch transactions) for the year ended 31st March, 2016. (8 marks) [IPCC Gr- II] Answer:
In the books of Chena Swami Salem Branch Account Dr. Particulars To Bal. b/d
Op. Stock
Ghee
Oil
Cr. Amt. (`) Particulars Amt. (`)
By Bank A/c
(Remittance to
40,000 H.O.) 19,50,000 22,500 62,500 By Bal. c/d
Debtors
Cash on hand
Furniture & Fittings
To GSTB A/c
Ghee 12,00,000 Oil 5,40,000 To Bank
(Exp. paid by H.O.)
To Net Profit transferred to General P&L A/c
1,80,000 Closing Stock:
25,690 Ghee 90,000
23,800 Oil 19,500 1,09,500
Debtors 2,10,000 (W.N.1)

Cash (W.N. 2) 44,800 17,40,000 F u r n i t u r e & 21,420 76,800 Fittings
2,26,930
23,35,720 23,35,720
Mr. Chena Swami

Trading and Profit and Loss A/c for the year ended 31st March, 2016 (Excluding Branch Transaction)
Dr. Cr.
Particulars Amt. (`) Particulars Amt. (`)
To Opening Stock By Sales

Ghee 10,65,000 Ghee 38,40,500 Oil 44,000 11,09,000 Oil 24,10,000 62,50,500
To Purchases By Closing Stock

Ghee 48,28,000 Ghee 15,70,000
- GSTB (12,00,000) 36,28,000 Oil 8,90,000 24,60,000
Oil 27,50,000
- GSTB (5,40,000) 22,10,000
To Direct Exp. 6,35,800
87,10,500 87,10,500
To Manager’s Salary 2,40,000 By Gross Profit b/d 11,27,700 To Gen. Exp. 1,86,000 By Branch Profit 2,26,930 To
Depreciation transferred
Furniture
@ 10% 8,860
Building
@ 15% 37,620 46,480
To Manager’s Commission 80,195

13,54,630 13,54,630 Working Notes:
Debtors A/c
Dr. Cr.
Particulars Amt. (`) By Cash A/c 20,15,000

By Bal. c/d 2,10,000
Particulars Amt. (`) To Bal. b/d 1,80,000 To Sales
Ghee 14,50,000
Oil 5,95,000 20,45,000 22,25,000 22,25,000 Branch Cash A/c
Dr. Cr.
Particulars Amt. (`) Particulars Amt. (`) To Bal. b/d 25,690 By Remittance 19,50,000
To Collection 20,15,000 By Exp. 45,890
By Bal. c/d (Bal. fig.) 44,800
20,40,690 20,40,690
2
Accounting for Dependent Branch: Stock and Debtor Method
Ayan Ltd. invoices goods to its branch at cost plus 33%. From the following particulars prepare Branch Stock
Account, Branch Stock Adjustment Account and Branch Profit and Loss Account as they would appear in the books
of head office.
Stock at commencement at Branch at invoice Price 3,60,000

Stock at close at Branch at Invoice Price 2,88,000
Goods sent to Branch during the year at invoice price 24,00,000
(including goods invoiced at`48,000 to Branch on 31.03.2018 but not received by Branch before close of the year).
Return of goods to head office (Invoice Price) 1,20,000

Credit Sales at Branch 1,20,000
Invoice value of goods pilfered 24,000
Normal loss at Branch due to wastage and deterioration of stock (at invoice price) 36,000
Cash Sales at Branch 21,60,000
Ayan closes its books on 31st March, 2018. (10 marks) Answer:

In the books of Ayan Ltd.
Branch Stock Account
` Particulars ` 3,60,000 By Goods Sent to Branch A/c 1,20,000

To Goods Sent to Branch A/c 24,00,000 By Branch Debtors A/c 1,20,000
To Branch Adjustment A/c 36,000 By Normal loss A/c 27,000

(Excess of Sale over invoice By Branch Adjustment A/c 9,000
price) By Pilfered Loss A/c 18,000
By Branch Adjustment A/c 6,000

By Cash/Bank A/c 21,60,000
By Balance c/d
Goods in Transit 48,000
Stock at Branch 2,88,000
27,96,000 27,96,000 Branch Stock Adjustment A/c

Particulars ` Particulars ` To Branch Stock A/c By Stock Reserve A/c
(Loading on Abnormal Loss) 6,000 (` 3,36,000 × 25/100) 90,000 To Branch Stock A/c (Normal Loss) 36,000 By Goods Sent to Branch A/c (` 24,00,000 - `
1,20,000) × 25/100 5,70,000 To Stock Reserve A/c By Branch Stock A/c (Surplus) 36,000 (` 3,36,000 × 25/100) 84,000
To Gross Profit t/f to P & L A/c 5,70,000
6,96,000 6,96,000
Branch Profit and Loss Account
Particulars ` Particulars ` To Branch Stock A/c By Branch Adjustment A/c (Cost of Abnormal Loss) 18,000
(Gross Profit) 5,70,000 To Net Profit t/f to General P 5,52,000
& L A/c
5,70,000 5,70,000
Q.2.2 RTP Practical ABC Ltd. is a Company in the Retail Trade. Business had been concentrated in the past on the
Shopping Premises in the Uttam Nagar area, but it has now been decided to open a Branch at RG Towers. The
Branch was opened on 1st January, Goods were charged out to the Branch at Selling Price of 10% above Cost. The
Branch sells to its Customers at such Invoice Price.
The following information were extracted from the Head Office records relating to the branch at the end of the year,
i.e. 31st December. All the Amounts shown are at Invoice Price.
Particulars
Goods Sent to Branch (including goods invoiced at ` 1,100 to Branch, but not received by Branch till 31st
December)
Credit Sales
Cash Sales
Goods returned to Branch by Customers
Goods returned to Head Office by Branch
Goods returned to Head Office by Customers
Bad Debts
` Particulars ` reduction in 394 24,200 Authorized
Selling Price D i s c o u n t Customers Cash remitted by Branch to 18,230
12,960 HO
9,240 Stock at Branch at 31st 770 1,100 December
Cash at Branch at 31st 500

484 December
Branch Expenses paid by 50
440 Branch
Branch Expenses paid by 780
160 HO
a l l o w e d t o 80
Certain Stocks were lost by fire, the value of which was not yet known. Prepare the necessary Ledger Accounts in
the books of the Head Office. Answer: 1.
Particulars
To Goods sent to Branch A/c
Branch Stock Account
` Particulars `
24,200 By Branch Debtors A/c 12,960

- Credit Sales
To Branch Debtors A/c
- Goods returned by Customers to Branch
Total
1,100 By Branch Cash A/c - Cash 9,240

Sales
By Goods Sent to Branch A/c 484
Goods returned to HO
By Branch Stock Adjustment A/c 394
- Reduction in Sale Price
By Abnormal Loss A/c (bal.fig.) 352
By Goods in Transit 1,100

By balance c/d 770
25,300 Total 25,300
2. Branch Debtors Account
To Branch Stock A/c 12,960 By Branch Stock A/c 1,100

By Goods sent to Branch A/c 440
By Branch Profit & Loss A/c
- Bad Debts 160
- Discount Allowed 80
By Branch Cash A/c (Cash received) 9,540
By balance c/d (bal.fig.) 1,640
Total 12,960 Total 12,960 3. Goods sent to Branch Account

Particulars ` Particulars ` To Branch Stock A/c 484 By Branch Stock A/c 24,200 Goods returned to (HO) – Goods
sent
To Branch Debtors (Goods 440
returned directly to HO
To Branch Stock Adjustment A/c 2,116

(W.N.)
To Purchases A/c - tfr (bal.fig.) 21,160
Working Notes:
Loading reversed on Goods sent to Branch (Net) = [(Sent 24,200 – Returns 484 – Returns 440) × ] = 2,116
4. Branch Cash Account
Particulars
To Branch Stock A/c
To Branch Debtors A/c
(Cash received) (bal. fig.) Total
` Particulars `
9,240 By Cash A/c (Returns to HO) 18,230
9,540 By Branch Expenses 50
By balance c/d 500
18,780 Total 18,780
5. Abnormal Loss Account
To Branch Stock A/c 352 By Branch Stock Adjustment A/c 32

(Loading)
By Branch Profit and Loss A/c 320 Total 352 Total 352 6. Branch Adjustment Account
Particulars ` Particulars ` To Branch Stock - Selling 394 By Goods sent to Branch A/c 2,116 Price Reduction
To Abnormal Loss A/c 32

To Branch P&L A/c - Gross 1,520
Profit trfd (bal. fig.)
To Stock Reserve-Loading 170

on Stock in Hand and
Goods in Transit (W.N.)
Working Notes:
Loading on Stock in Hand and Goods in Transit = (1,100 + 770) × =`170 Space to write important points for
revision
Q.2.3 RTP Practical
ABC Ltd, Delhi started a Branch in Jaipur on 1stApril, to which goods were sent at 20% above Cost. The Branch
makes both Credit and Cash Sales. Branch expenses are met from Branch Cash and balance money remitted to HO.
The Branch does not maintain double entry books of account and necessary accounts relating to Branch are
maintained in H.O. Following further details are given for the year ended on 31st March:
Particulars `
Cost of Goods Sent to Branch 50,000
Goods received by Branch till 31st March at Invoice Price 54,000
Credit Sales for the year 58,000
Debtors as on 31st March 20,800
Bad Debts and Discount written off 200
Cash remitted to HO 43,000
Cash in Hand at Branch on 31st March 2,000
Cash remitted by HO to Branch during the year 3,000
Closing Stock at Branch at Invoice Price 6,000
Expenses incurred at Branch 12,000
Prepare the necessary Ledger Accounts according to Stock and Debtors System, in the books of the Head Office and
determine the Profit or Loss of the Branch for the year ended on 31st March.
1. Branch Stock Account
Particulars
To Goods sent to Branch A/c To Branch Adjustment A/c
` Particulars `
60,000 By Branch Debtors A/c 58,000

27,000 By Branch Bank A/c 17,000* (Ref.Br. Bank A/c)
By balance c/d
- Stock in Transit
[(50,000 × 120%) - 54,000] 6,000
- Stock at Branch 6,000
Total 87,000 Total 87,000 2. Branch Debtors Account

To Branch Stock A/c 58,000 By Branch Bank A/c - Colln from 37,000
Debtors (b/f)
By Branch P&L A/c (Bad Debts) 200
Total 58,000 Total 58,000 3. Goods sent to Branch Account

Particulars To Branch Adjustment A/c (Loading on Goods Sent = 60,000 × )
To Purchases
Total
` Particulars ` 10,000 By Balance Stock 60,000 Account
50,000
60,000 Total 60,000 4. Branch Bank Account
Receipts
To Bank A/c-Receipt from HO To Branch Debtors A/c -
Collection (Ref. Br. Debtors A/c To Branch Stock A/c - Branch

Cash Sales (bal.fig.)
` Payments ` 3,000 By Branch Expenses A/c 12,000

37,000* By Bank A/c- Remittance 43,000
to HO
17,000* By Balance c/d 2,000
5. Branch Adjustment Account Particulars

To Branch P&L A/c-Gross Profit
(bal.fig)
To Stock Reserve on Clg Stk (12,000 × )
Total
` Particulars ` 35,000 By Goods Sent to 10,000 Branch - Loading
By Branch Sales A/c 27,000 2,000

37,000 Total 37,000 6. Branch Profit and Loss Account
To Branch Debtors A/c (Bad 200 By Branch Adjustment A/c 35,000 Debts
To Branch Expenses A/c 12,000
To Net Profit (bal.fig.) 22,800
Total 35,000 Total 35,000 Space to write important points for revision
Q.2.4 RTP Practical
ABC Ltd. sends Goods to its Jaipur Branch at Cost plus 25%. The following particulars are available in respect of
the Branch for the yearended 31st March:
Particulars `
Opening Stock 80,000

Goods Sent to Branch (Invoice Price) 12,00,000
Loss in Transit (Invoice Price) 15,000
Pilferage (Invoice Price) 6,000
Sales 12,19,000
Expenses 60,000
Closing Stock 40,000
Recovered from Insurance Company against Loss in Transit 10,000
Prepare Ledger Accounts in the HO Books for -(1) Branch Stock Account, (2) Goods Sent to Branch Account, (3)
Branch Adjustment Account, and (4) Branch Profit and Loss Account.
Answer:
1. Branch Stock Account
Particulars
To Balance b/d
To Goods Sent to Branch
Total ` Particulars `
80,000 By Branch Cash/Debtors 12,19,000

12,00,000 By Loss in Transit 15,000
By Pilferage 6,000
12,80,000 Total 12,80,000
2. Goods sent to Branch Account
Particulars ` Particulars ` To Balance Adjustment A/c 22,40,000 By Branch Stock A/c 12,00,000
(Loading)(12,00,000 × )
To Trading A/c - transfer 9,60,000

Total 12,00,000 Total 12,00,000 3. Branch Adjustment Account
Particulars ` Particulars ` To Loss in Transit - Loading 3,000 By Stock Reserve on 16,000 (15,000 × ) Opg Stk
(80,000 × ) To Pilferage - Loading 1,200 By Goods Sent to Branch 2,40,000 (6,000 × )A/c
To Branch P&L A/c (bal.fig) 2,43,800
To Stock Reserve on Clg Stk 8,000
(40,000 × )
Total 2,56,000 Total 2,56,000 4. Branch Profit and Loss Account
Particulars ` Particulars ` To Expenses 60,000 By Branch Adjustment 2,43,800 To Loss in transit 12,000 A/c
(Gross Profit) Less: Insurance Cover(10,000) 2,000
To Pilferage (Cost) 4,800

To General P&L A/c (Profit 1,77,000
transferred)
Total 2,43,800 Total 2,43,800 Working Notes:
Computation of Loss on Pilfered Goods and Goods lost in Transit Particulars
Value of Goods Lost

Less: Loading adjusted in Branch Adjustment A/c at 20% of Value of Goods
Cost of Loss in Transit

Less: Amount of Insurance Claim
Net Loss
Loss in Pilfered Transit Goods 15,000 6,000 (3,000) (1,200)
12,000 4,800 (10,000) – 2,000 4,800
3 Accounting for Independent Branch
On 31st March, 2000 Kanpur Branch submits the following Trial Balance to its Head Office at Lucknow :
Debit Balances ` in lacs Furniture and Equipment 18 Depreciation on Furniture 2 Salaries 25 Rent 10 Advertising 6
Telephone, Postage and Stationery 3 Sundry Office Expenses 1 Stock on 1st April, 1999 60 Goods Received from
Head Office 288 Debtors 20 Cash at bank and in hand 8 Carriage Inwards 7
448
Credit Balances 3
Outstanding Expenses 5
Goods Returned to Head Office 360
Sales 80
Head Office 448
Stock on 31st March, 2000 was valued at ` 62 lacs on 29th March, 2000 the Head Office despatched goods costing `
10 lacs to its branch. Branch did not receive these goods before 1st April, 2000. Hence the figure of goods received
from Head Office does not include these goods. Also the head office has charged the branch ` 1 lac for centralised
services for which the branch has not passed the entry.
(i) Pass Journal Entries in the books of the Branch to make the necessary adjustments.
(ii) Prepare Final Accounts of the Branch including Balance Sheet, and (iii) Pass Journal Entries in the books of the
Head Office to incorporate the whole of the Branch Trial Balance. (16 marks)
Answer:
(i) Journal Entries
in the Books of KANPUR BRANCH (ìn lacs.) Particulars Dr. Cr. Goods in transit A/c Dr. 10
To Head Office A/c 10 (Goods dispatched by head office but not received by
branch before 1st April 2000)
Expenses A/c Dr. 1
To Head Office A/c 1 (Amount charged by head office for centralised services)
(ii) Trading and Profit & Loss Account of the Branch for the year ended 31st March, 2000 Particulars
To Opening Stock
To Goods received from
Head Office 288

Less: Returns 5
To Carriage Inwards
To Gross Profit c/d
To Salaries
To Depreciation on Furniture To Rent
To Advertising
To Telephone, Postage &
Stationery
To Sundry Office Expenses To Head Office Expenses To Net profit Transferred to
H.O. A/c
` in Particulars ` in lacs lacs 60 By Sales 360 By Closing stock 62
283
7
72
422 422 25 By Gross Profit b/d 72 2
10
6
3
1
1
24
72 72
Liabilities
Head Office 80
Add: Goods in transit 10
Head Office expenses 1
Net Profit 24
Outstanding expenses

` In Assets ` In Lacs Lacs Furniture & equipment 20
Less: Dep. 2 18
Stock in Hand 62
115 Goods in Transit 10
3 Debtors 20
Cash at Bank and in Hand 8
118 118 (iii) Books of Head Office Journal Entries (` in Lacs) Particulars ` `
Branch Trading Account Dr. 355 To Branch Account 355
(Being incorporation of the following debit items of branch

trial balance:☐opening stock 60, goods received from Head
Office 288, Carriage Inwards 7)
Branch Account Dr. 427 To Branch Trading Account 427
(Being incorporation of the following credit items of branch

trial balance: Sales 360, closing stock 62, goods returns to
H. 0.5)
Branch Trading Account Dr. 72 To Branch Profit & Loss Account 72
(Being Gross profit earned by branch credited to Branch

Profit & Loss Account)
Branch Profit & Loss Account Dr. 48 To Branch Account 48
(Being incorporation of the following debit items of branch

trial balance: Salaries☐25, Rent☐10, Advertising☐6,
Telephone, Postage & Stationery☐3, Sundry office
expenses☐1, Depreciation on furniture & equipment☐2)
Branch Profit & loss Account Dr. 24 To Profit & Loss Account 24
(Being Net Profit at branch credited to (general) profit & loss

A/c
Branch A/c Dr. 3 To Branch Outstanding Expenses A/c 3
(Being incorporation of Branch Outstanding Expenses in H.

O. books)
Branch Furniture & Equipment A/c Dr. 18

Branch Stock A/c Dr. 62
Branch Debtors A/c Dr. 20
Branch Cash at Bank and in Hand A/c Dr. 8
Goods in Transit A/c Dr. 10
To Branch A/c 118
(Incorporation of different assets at the branch in H.O.

books)
Beta Ltd. having head office at Mumbai has a branch at Nagpur. The Head Office does wholesale trade only at cost
plus 80%. The goods are sent to branch at the wholesale price viz., Cost plus 80%. The branch at Nagpur is wholly
engaged in retail trade and the goods are sold at cost to H.O. plus 100%.
Following details are furnished for the year ended 31st March, 2007:
Head Office Branch ` ` Opening Stock (as on 1.4.2006) 2,25,000 — Purchases 25,50,000 — Goods sent to Branch
9,54,000 — (Cost to H.O. plus 80%)
Sales 27,81,000 9,50,000

Office expenses 90,000 8,500
Selling expenses 72,000 6,300
Staff Salary 65,000 12,000
You are required to prepare Trading and Profit and Loss Account of the Head Office and Branch for the year ended
31st March, 2007. (8 marks) [IPCC Gr- II] Answer:
Trading & P&L A/c of the Branch Particulars
To Op Stock
To Goods received from H.O. To Gross Profit c/d
To Office exp. To Selling exp. To Staff salary To Net profit
` Particulars `
— By Sales 9,50,000
9,54,000 By Closing stock 99,000
95,000 (W.N.-1)
10,49,000 10,49,000 8,500 By Gross Profit b/d 95,000 6,300
12,000
68,200
95,000 95,000
Trading P&L A/c of the H.O. Particulars ` To Opening Stock 2,25,000 To Purchase 25,50,000 To G.P. c/d
16,60,000
44,35,000
To Office expense . 90,000
To Selling expense. 72,000
To Staff salary 65,000
To Branch Stock
Revenue (WN-1) 44,000
To Net profit 13,89,000
16,60,000
Working Notes:
1. Calculation of closing stock of branch : ` Goods received from head office [At invoice value] 9,54,000 Less:
Invoice value of goods sold [9,50,000 × 180/200] 8,55,000 99,000 2. Calculation of closing stock of head office :
` Opening stock of head office 2,25,000 Goods purchased by head office 25,50,000 27,75,000 Less: Cost of goods
sold
[(27,81,000 ☐ 9,54,000) × 100/180] 20,75,000 7,00,000 3. Calculation of unrealised profit in branch stock :
` Branch stock 99,000 Profit included 80% of cost Therefore, unrealised profit would be = ` 99,000 × 80/180 `
44,000
Particulars ` By Sales 27,81,000

By Goods sold to Branch 9,54,000
By Closing stock (W.N. -2) 7,00,000
44,35,000
By G.P. b/d 16,60,000
16,60,000
M/s. Sandeep, having Head Office at Delhi has a Branch at Kolkata. The Head Office does wholesale trade only at
cost plus 80%. The Goods are sent to Branch at the wholesale price viz. cost plus 80%. The Branch at Kolkata
wholly engaged in retail trade and the goods are sold at cost to Head Office plus 100%.
Following details are furnished for the year ended 31st March, 2014:
Particulars Head Kolkata Office Branch (`) (`) Opening Stock (As on 01.04.2013) 1,25,000 - Purchases
21,50,000 - Goods sent to Branch (cost to H.O. plus 80%) 7,38,000 - Sales 23,79,600 7,30,000 Office Expenses
50,000 4,500 Selling Expenses 32,000 3,300 Staff Salary 45,000 8,000 You are required to prepare Trading and
Profit & Loss Account of the Head Office and Branch for the Year ended 31st March, 2014.
(8 marks) [IPCC Gr- II] Answer:

Trading and Profit and Loss A/c
Particulars Head Branch Particulars Head Branch office office ` ` ` `
To Opening stock 12,500 ☐ By Sales 23,79,600 7,30,000 To Purchases ☐ By Goods sent to

To Goods received branch 7,38,000 ☐
from head office 7,38,000 By Closing stock 5,43,000 81,000

To Gross profit c/d 13,85,600 73,000 (W.N. 1 & 2)
36,60,600 8,11,000 36,60,600 8,11,000
To Office expenses 50,000 4,500 By Gross profit b/d 13,85,600 73,000
To Selling expenses 32,000 3,300

To Staff salaries 45,000 8,000
To Branch stock
(Reserve (W.N.3) 36,000 ☐
To Net Profit 12,22,600 57,200
13,85,600 73,000 13,85,600 73,000 Working Notes:
(1) Calculation of closing stock of head office: (`) Opening Stock of head office 1,25,000 Goods purchased by
head office 21,50,000
22,75,000 Less: Cost of goods sold [31,17,600 (23,79,600 + 7,38,000) × 100/180] (17,32,000)
5,43,000
(2) Calculation of closing stock of branch: ` Goods received from head office [At invoice value] 7,38,000
Less: invoice value of goods sold [7,30,000 × 180/200] (6,57,000) 81,000
(3) Calculation of unrealized profit in branch stock:
Branch stock ` 81,000

Profit included 80% of cost
Hence, unrealized profit would be = ` 81,000 × 80/180 ` 36,000
Q.3.4 RTP Practical
A and Co, with its Head Office in Mumbai invoiced goods to its Branch at Pune, at 20% less than the Catalogue
Price, which is Cost plus 50%, with instructions that Cash Sales were to be made at invoice Price and Credit Sales at
Catalogue Price. Discount on Credit Sale at 15% on prompt payment will be allowed.
From the following particulars available from the Branch, prepare the Branch Trading and Profit and Loss Account
of the Branch for the financial year:
Particulars
Opening Stock (Invoice Price)

Goods received from Head Office (Invoice Price) Debtors on 1st April (year beginning)
Cash Sales
Credit Sales
C a s h r e a l i s e d f r o m Debtors
` Particulars `
12,000 Discount allowed on 13,365

Debtors
1,32,000 Expenses at the Branch 6,000
10,000 Remittance to Head Office 1,20,000
46,000 Debtors on 31s t March 11,000

(year-end)
1,00,000 Cash in Hand on 31st 5,635
March (year-end)
85,635 Closing Stock on 31st 15,000
March (year-end)
It was reported that a part of Stock at the Branch was lost by fire during the year, whose value is to be ascertained,
and Provision should be made for Discount to be allowed to Debtors as on 31stMarch (year-end) on the basis of the
year’s occurrence of prompt payment.
Answer:
Branch Trading and Profit and Loss A/c for the year ended 31st March Particulars
To Opening Stock
To Goods from HO
To Gross Profit c/d
(balancing figure)
Total
To Discount
To Expenses
To Provision for Dis
count on Debtors
(W.N. 3)
To Abnormal Loss
Total
` Particulars ` 12,000 By Sales – Cash 46,000

1,32,000 – Credit 1,00,000
19,500 By Abnormal Loss (W.N. 2) 2,500
By Closing Stock 15,000
1,63,500 Total 1,63,500
13,365 By Gross Profit b/d 19,500
6,000 By Net Loss c/d 3,702
(balancing figure)
1,337
2,500
23,202 Total 23,202 Note: Stock Reserve will be shown in General Profit and Loss Account. (Refer W.N. 4)
Working Notes:
1. Computation of Catalogue Price and Invoice Price
Particulars ` Cost to HO 100

Add: Profit Margin for Catalogue Price (Cost Price ` 100 × 50% 50
Catalogue Price 150
Less: 20% Discount for Invoice Price (Catalogue Price`150 × 20%) 30
Invoice Price (i.e. for Branch) 120
So, Loading by HO = (120 – 100) = 20% on Cost to HO = 1/5th on Cost =

1/6th on Invoice Price to Branch.
2. Computation of Abnormal Loss
Particulars ` Opening Stock at Invoice Price 12,000 Add: Goods Received from HO (at Invoice Price) 1,32,000
Q.3.5 RTP Practical
ABC and Bros. is a Partnership Firm. The Firm has a Branch at Delhi. As on the year ended 31st December, the
Delhi Branch Manager sent the following Branch Trial Balance for incorporation in the Head Office Books:
Particulars Dr. Cr. 18% Team Loan — 2,50,000 Goods from Head Office (at Invoice Price) 12,00,000 — Opening
Stock (at invoice Price) 4,80,000 — Salaries and Wages 1,50,000 — Branch Expenses 48,000 — Fixed Assets
2,50,000 — Sales — 16,32,000 Head Office Account — 2,46,000
Total 21,28,000 21,28,000
1. Branch Manager is entitled to get 10% Commission on Net profit before Commission.
2. Branch Current Account in the HO books ` 3,80,000.
3. Branch Manager sent`87,500 which was not received at the HO as on 31stDecember. A Consignment valued
at`46,500 despatched from HO did not reach the Branch till the year-end.
4. Depreciation on Branch Fixed Assets was chargeable at 10% p.a.
5. Goods were sent to branch at Cost Plus 20% and Sales were made making 20% Profit on invoice Price.
6. Branch did not maintain any HO Account. In the Trial Balance, H.O. Account balance is just a Balancing Figure.
Prepare – (1) Branch Account in the Head Office, and (2) Branch Profit and Loss Account.
Answer:
☐ Since the question has given a separate Trial Balance for the Branch, it is treated as an Independent Branch.
☐ It is assumed that the Firm follows “Transfer of Profit/Loss Method” to record only the Net Profits in HO Books.
Hence, Branch Assets and Liabilities are not transferred to HO.
A. Branch Trading and Profit and Loss A/c (in the books of Delhi Branch Particulars
To Opening Stock
To Goods from Head Office
(12,00,000 + 46,500) To Gross Profit c/d

(balancing figure)
Total
To Salaries and Wages To Expenses

To Provision for Depreciation To Interest on Term Loan
(2,50,000 × 18%)
To Manager’s Commission (Note)

To Net Profit (tfrd to HO A/c) (balancing figure)
Total
` Particulars `
4,80,000 By Sales 16,32,000

(W.N. 2)
2,72,000
19,98,500 Total 19,98,500
1,50,000 By Gross Profit b/d 2,72,000 48,000

25,000
45,000
400
3,600
2,72,000 Total 2,72,000 Note: Manager’s Commission = 10% of [GP 2,72,000 – Other exps in P&L (1,50,000 +
48,000 + 25,000 + 45,000)] = 400
B. Branch Account (in the books of Head Office) Particulars

To Balance b/d
To General Profit and Loss A/c
Total ` Particulars `
3,80,000 By Cash in Transit 87,500

3,600 By Balance c/d 2,96,100
(balancing figure)
3,83,600 Total 3,83,600 C. Reconciliation of HO – Branch Balances

In HO Books ` In Mumbai Branch Books `
Balance in Branch A/c 3,80,000 Dr.

Less: Cash-in-Transit (87,500) Cr.
Add: Profits transferred 3,600 Dr.
from Branch
Revised Balance 2,96,100 Dr.
Balance in Head Office A/c 2,46,000 Cr. Add: Goods-in-Transit 46,500 Cr. Add:Profit transferred to HO 3,600 Cr.
Revised Balance 2,96,100 Dr. Adjusting Dr. Cr. Adjusting Entries Dr. Cr. Entries
Cash-in Transit Goods from HO A/c

A/c Dr. 87,500 Dr. 46,500 To Branch A/c 87,500 To HO A/c 46,500
Branch A/c Dr. 3,600 P&L A/c Dr. 3,600 To General 3,600 To HO A/c 3,600 P&L A/c (Being Profits trfd
(Being Profits to HO)

tfd from Branch)
Working Notes:
1. Determination of Profit Margin
(a) From H e ad = 20% on Cost = 1/5th on Cost =1/6th on Invoice
O f f i c e t o Price Branch
(b) From Branch = 20% on Invoice = 1/5th on Invoice = 1/6th on Sales to Outsiders Price Price Price
2. Value of Closing Stock (at Invoice Price, i.e. Cost to Branch) Particulars `
Opening Stock 4,80,000

Add: Goods from HO (including Goods in Transit) 12,46,500
Total Goods Available for Sale 17,26,500
Less: Invoice Price of Goods sold [Sales - Branch Profits = (13,60,000) 16,32,000 – (16,32,000 × 1/6th )]
Closing Stock (including Goods in Transit) 3,66,500
3. General Profit and Loss Account (Extract)
[Note: This A/c is not required as per the question. It is prepared for understanding purposes only.]
Particulars
To Stock Reserve on Closing Stock

(3,66,500 × 1/6)
` Particulars `
61,083 By Branch A/c (Net Profits 3,600 from Branch)

By Stock Reserve on Opg
Stock (4,80,000 × 1/6 80,000
Note: Since this is only an Extract of P&L A/c, Totals and Balancing Figure are not drawn in the above account.
Q.3.6 RTP Practical
ABC Co. commenced business on 1st January with Head Office at Delhi and a Branch at Pune . All Goods were
purchased by Head Office and normally packed immediately but on 31st December, Goods Costing `5,000 remained
unpacked. Only Packed Goods were sent to the Branch, which were charged at Selling Price less 10%.
Following information is furnished to you on 31stDecember from the Head Office and Branch Office books:
(`)
Particulars H O Branch Capital Account 40,000
Drawing by Proprietor 10,000
Purchases 4,00,000
Packing Materials bought 6,000
Sales 3,20,000 1,00,000 Despatch of Goods to Branch 1,13,400
Selling Expenses 16,000 800 Clerks Salaries, Wages etc. 20,000 3,000 Sundry Debtors 28,000 4,200 Sundry
Creditors 26,600 5,000 Current Accounts –
– Head Office (Cr. Balance) – 12,000
– Branch Office (Dr. Balance) 19,000 – Bank Balance 1,000 1,000 Goods received from Head Office – 1,08,000
1. Sales by HO were at a uniform Gross Profit (after charging Packing
Materials) at 20% on the fixed Selling Price.

2. Sales at Branch were at Fixed Selling Price.
3. Goods invoiced and despatched by Head Office to Branch in December for` 5,400, were received in the Branch
Office only on 5th January of next year.
4. Stock of Packing Materials on Hand as on 31stDecember was valued at ` 1,000.
5. Remittance of`1,600 from the Branch to the Head Office was in Transit on 31st December.
6. ` 2,000 worth of Stock at Selling Price was damaged at the Branch. For valuing Stock, this was reduced by`1,090
below the Invoice Cost to the Branch. It was decided that the Head Office and the Branch would share Equally the
loss occasioned by this, and also the deficit in stock, ascertained on Actual Stock Taking at the Branch of goods at
Selling Price of` 500.
Prepare a Columnar Trading and Profit and Loss A/c of the Delhi and Pune Offices, and also a Balance Sheet an on
31st December of the business. Answer:
A. Trading and Profit and Loss A/c of ABC and Co. for the year ended 31st December (in `)
Particulars HO To Purchases 4,00,000
To Packing 6,000
Material
Branch Particulars HO Branch

– By Sales 3,20,000 1,00,000
– By Goods sent to 1,13,400 – Branch

To Goods – 1,08,000 By Abnormal Loss – 1,540 (W.N. 4)
received from
HO
To Gross Profit c/d 76,600 (W.N. 2 for HO)

(1,00,000 ×
12.5/125) for
Branch
10,000 By Closing Stock;
- Packed Goods
(bal. fig.) 43,200 16,460
- Unpacked Goods 5,000 –
- Packing Material 1,000 –
Total 4,82,600 1,18,000 Total 4,82,600 1,18,000 To Salaries, 20,000 3,000 By Gross Profit 76,600 10,000 Wages,
etc. b/d
To S e l l i n g 16,000 800
Expenses
To Loss of Stock 770 770
(W.N.4)
To Net Profit - tfrd 39,830 5,430
to General P&L
(balancing
figure)
Total 76,600 10,000 Total 76,600 10,000 B. General Profit and Loss Account
To Stock Reserve on Closing Stock of Branch (W.N.3)

To Net Profit c/d (balance figure)
By HO Profits 39,830 2,350 By Branch Profits 5,430

42,910
C. Balance Sheet of Chandru and Co. as on 31st December Capital and Liabilities ` Properties and Assets `
Capital Account:
Opening Balance 40,000
Add: Net Profit (from B)42,910
82,910
Less: Drawing (given) (10,000)
Stock in Trade
(a) Packed Goods
- Head Office 43,200
- Branch 16,460 72,910 - Packed Goods
in Transit (given) 5,400
65,060
Less: Stock Reserve (2,350) 62,710

(b) Unpacked Goods 5,000
Sundry Creditors: (c) Packing Materials 1,000
- Head Office (given) 26,600

- Branch (given) 5,000
Sundry Debtors:
31,600 - Head Office 28,000
- Branch 4,200 32,200
Remittance in Transit 1,600 Bank Balance:

- Head Office 1,000
- Branch 1,000 2,000
Total 1,04,510 Total 1,04,510 Working Notes:

1. Computation of Invoice Price and Profit to Branch
Particulars ` (or) %
Cost to HO 100 Add: Profit Margin 25
Sales Price (by HO to Outside Customers) (and also by Branch 125 to Outside Customers
Invoice Price (i.e. for Branch) = 125 – 10% 112.5
Hence, Profit Element for HO on Sales to Outside Customers = = 1/5th on Sales Price.
Profit Element for HO on Goods sent to Branch = = 1/9th on Invoice Price.
Profit to Branch on Sales to Outsiders = 125 – 112.5 = 12.5, i.e. = 10% on Sale Price.
2. Computation of Gross Profit for Head Office
Particulars `
Profit on Sale of Goods to Outside Customers ( `3,20,000 × 1/5th 64,000 Profit on Sales) (W.N.1)
Add: Loading on Goods Sent to Branch (` 1,13,400 × 1/9th on Invoice Price) (W.N.1) 12,600
Gross Profit of Head Office 76,600

3. Computation of Stock Reserve
Particulars `
Closing Stock of Goods (Packed Goods) (as per Trading A/c 16,460 Branch Col.)
Less: Net Value of Damaged Goods includes above
Sale Price ` 2,000 Less 10% Discount = Net Invoice Loss to Branch) 1,800 Less: Reduction in Value Accounted
(1,090) (710)
Value of Closing Stock excluding Goods-in-Transit 15,750

Add: Goods in Transit (Sent by HO ` 1,13,400 – Received by Branch ` 1,08,000) 5,400
Value of Stock on which Stock Reserve is to be eliminated 21,150 (at Invoice Price to Branch)
Stock Reserve Required = Value of Stock ×
2,350 =` 21,150 ×
4. Computation of Abnormal Loss
Particulars ` Abnormal Loss on Damaged Goods (given) 1,090 Add: Stock Deficit (Value ` 500 Less 10% Profit
Margin) 450 Total Loss on Stock 1,540 Share of Loss Borne by HO and Branch (each at 50%) (equally 770 shared)
Q.3.7 RTP Practical
ABC Ltd., Delhi started on 1st January, has 2 branches at Mumbai and Pune. All goods sold at the Branches are
received from the HO invoiced at Cost plus 25%. All expenses relating to branches are paid by the HO. Each Branch
has its own Sales Ledger and sends weekly statements. All cash collections are remitted daily to HO by the
Branches. The following particulars relating to the year-ended 31stDecember are extracted from the weekly
statements sent by the Branches:
Particulars Mumbai Pune Credit Sales 1,25,200 1,10,000

Cash Sales 78,600 85,200
Sales Returns 2,300 1,200
Sundry Debtors 34,500 23,600
Rent and Taxes 3,200 4,500
Bad Debts 6,000 — Salaries 16,000 18,000
General Expenses 2,600 1,500
Goods Received from Head Office 1,50,000 1,25,000
Particulars To Goods
Received from HO (at Invoice Price) To Gross Profit c/d (bal. fig.)
Total
Advertisement 7,500 5,200

Stock as on 31st December 45,000 35,000
Prepare the Branch Account, as they would appear in the Books of the Head Office, showing the Profit or Loss
Account for the period, and the Trading and Profit and Loss Account separately for each Branch.
Answer:
Note: Goods are invoiced to Branch at Cost + 25% = Cost + 1/4th. So, Loading = 1\4th on Cost to HO = 1/5th on
Invoice Price.
A. Branch Accounts in the books of Head Office (in `)
Particulars Mumbai Pune Particulars Mumbai Pune To Goods sent to By Cash Account
Branch A/c 1,50,000 1,25,000
To B r a n c h - Cash Sales 78,600 85,200
Expenses - Coll. from Debtors 82,400 85,200
- Rent and Rates 3,200
- Salaries 16,000
- General Expenses 2,600
- Advertisement 7,500
To Stock Res. 9,000
(20% of Clg. Stk)
To Profit and Loss 82,200
4,500 By Goods sent to 30,000 25,000 18,000 B r a n c h ( S t k
1,500 Res.)
5,200 By balance c/d 34,500 23,600 7,000 - Branch Debtor A/c
- Stock-in-Trade 45,000 35,000 92,800
Account
Total 2,70,500 2,54,000 Total 2,70,500 2,54,000 B. Branch Trading and Profit and Loss Account for year
ended 31st December (in `)
Mumbai Pune Particulars Mumbai Pune 1,50,000 1,25,000 By Credit Sales 1,25,200 1,10,000 Less: Sales
Returns (2,300) (1,200) Net Sales 1,22,900 1,08,800 96,500 1,04,000 By Cash Sales 78,600 85,200 By Closing
Stock 45,000 35,000 (at Invoice Price)
2,46,500 2,29,000 Total 2,46,500 2,29,000
To Salaries 16,000 18,000 By Gross Profit b/d 96,500 1,04,000 T o G e n e r a l 2,600 1,500
Expenses
To Bad Debts 6,000 –

To Rent & Taxes 3,200 4,500
To Advertisement 7,500 5,200
To Net Profit (bal.fig) 61,200 74,800
Total 96,500 1,04,000 Total 96,500 1,04,000
7,000 By Net Profit b/d 61,200 74,800 To Stock Reserve on 9,000 Closing Stock
(1/5th on Closing Stock)
By Loading on Goods 30,000 25,000 sent by HO
To Net Profit (Note) 82,200 92,800 (1/5th on Invoice Price)
Total 91,200 99,800 Total 91,200 99,800 Note: Net Profit of` 82,200 and` 92,800 reflect the true profits earned at
Branch (from HO viewpoint).
Working Notes:
Particulars To Sales
Total
Memorandum Branch Debtors Account (in `)

Mumbai Pune Particulars Mumbai Pune 1,25,200 1,10,000 By Sales Returns 2,300 1,200
By Bad Debts 6,000 – By Cash (bal.fig.) 82,400 85,200

By balance c/d (given) 34,500 23,600
1,25,200 1,10,000 Total 1,25,200 1,10,000
Q.3.8 RTP Practical
Pass necessary Journal entries in the books of an independent Branch of M/s TPL Sons, wherever required, to rectify
or adjust the following transactions:
(i) Branch paid ` 5,000 as salary to a Head Office Manager, but the amount paid has been debited by the Branch to
Salaries Account. (ii) A remittance of` 1,50,000 sent by the Branch has not received by Head Office on the date of
reconciliation of Accounts.
(iii) Branch assets accounts retained at head office, depreciation charged for the year ` 15,000 not recorded by
Branch.
(iv) Head Office expenses`75,000 allocated to the Branch, but not yet been recorded by the Branch.
(v) Head Office collected` 60,000 directly from a Branch Customer. The intimation of the fact has not been received
by the branch.
(vi) Goods dispatched by the Head office amounting to ` 50,000, but not received by the Branch till date of
reconciliation. (vii) Branch incurred advertisement expenses of` 10,000 on behalf of other branches, but not
recorded in the books of Branch. (viii) Head office made payment of` 16,000 for purchase of goods by branch, but
not recorded in branch books.
Answer:
Books of Branch Journal Entries Amount`
Dr. Cr. (i) Head Office Account Dr. 5,000
To Salaries Account 5,000 (Being rectification of salary paid on behalf of

Head Office)
(ii) No entry in Branch Books is required.

(iii) Depreciation A/c Dr. 15,000 To Head Office Account 15,000 (Being depreciation of assets accounted for)
(iv) Expenses Account Dr. 75,000
To Head Office Account 75,000 (Being allocated expenses of Head Office

recorded)
(v) Head Office Account Dr. 60,000
To Debtors Account 60,000 (Being adjustment entry for collection from

Branch Debtors directly by Head Office)
(vi) Goods in-transit Account Dr. 50,000 To Head Office Account 50,000 (Being goods sent by Head Office still in-
transit)
(vii) Head Office Account Dr. 10,000
To Expenses Account 10,000 (Being expenditure incurred, wrongly recorded in

books)
(viii) Purchases Account A/c 16,000 To Head Office Account 16,000 (Being purchases booked)
4
Adjustment and Reconciliation of Branch and Head Office Accounts
Q.4.1 2004 - Nov [5] (b) Practical Give Journal Entries in the books of Branch A to rectify or adjust the following.:
(i) Head Office expenses ` 3,500 allocated to the Branch, but not recorded in the Branch Books.
(ii) Depreciation of branch assets, whose accounts are kept by the Head
Office not provided for ` 1,500.

(iii) Branch paid` 2,000 as salary to a H.O. Inspector, but the amount
paid has been debited by the Branch to Salaries account. (iv) H.O. collected ` 10,000 directly from a customer on
behalf of the
Branch, but no intimation to this effect has been received by the
Branch.
(v) A remittance of ` 15,000 sent by the Branch has not yet been
received by the Head Office.
(vi) Branch A incurred advertisement expenses of` 3,000 on behalf of
Branch B. (6 marks) Answer:
In the Books of Branch A
Journal Entries
Date Particulars Dr. (`) Cr. (`) (i) Expenses A/c Dr. 3,500 To Head Office A/c 3,500
(being H. O. expenses allocated to branch)
(ii) Depreciation A/c Dr. 1,500 To Head Office A/c 1,500
(Being the depreciation charged)
(iii) Head Office A/c Dr. 2,000 To Salaries A/c 2,000
(Being the rectification of salary A/c which is paid
on behalf of H. O.)
(iv) Head Office A/c Dr. 10,000 To Debtors A/c 10,000
(Being adjustment of amount, collected from
branch debtors)
(v) No entry is passed for the said transaction in the — —
books of branch
(vi) Head Office A/c Dr. 3,000 To Cash A/c 3,000
(Being the advertisement expenditure incurred by
Branch A of Branch B.)
Alphs & Co., having head office in Mumbai has a branch in Nagpur. The branch at Nagpur is an independent branch
maintaining separate books of account. On 31.3.2007, it was found that the goods dispatched by head office for `
2,00,000 was received by the branch only to the extent of `1,50,000. The balance goods are in transit. What is the
accounting entry to be passed by the branch for recording the goods in transit, in its books?
(2 marks)
Answer:
Nagpur branch must include the inventory in its books as goods in transit. The following journal entry must be
passed by the branch:
Goods in Transit A/c Dr. 50,000

To Head Office A/c 50,000 [Being Goods sent by Head Office is still in transit on the closing date]. Space to write
Q.4.3 2008 - Nov [5] (xii) Practical
Goods worth `50,000 sent by head office but the branch has received till the closing date goods worth`40,000. Give
journal entry in the books of H.O. and branch for goods in transit. (2 marks) [IPCC Gr- II]
Answer:
Journal entry in the books of Head Office No entry
Journal entry in the books of Branch
Particulars L.F. Amt. (`) Amt. (`)
Goods-in-transit account Dr. 10,000 To Head Office account 10,000

(Being goods sent by head office is still in
transit)
Global Limited has a branch which closes its books of account every year on 31st March. This is an independent
branch which maintains comprehensive books of account for recording their transactions. You are required to show
journal entries in the books of branch on 31st March, 2011 to rectify or adjust the following :
(i) Head Office allocates ` 1,35,000 to the branch as head office expenses, which have not yet been recorded by
branch.
(ii) Depreciation of branch fixed assets, whose accounts are kept by head office in its books, not yet recorded in the
branch books, ` 1,15,000.
(iii) Branch paid ` 1,40,000 as salary to an official from head office on visit to branch and debited the amount to its
Salaries Account.
(iv) Head Office collected`1,30,000 directly from a branch customer on behalf of the branch, but no intimation was
received earlier by the branch.
Now the branch learns about it.
(v) It is learnt that a remittance of` 1,50,000 sent by the branch has not been received by head office till date. (5
marks) [IPCC Gr- II] Answer:
In the books of Branch
Journal Entries
S. Particulars Dr. (`) Cr. (`)
No.
(i) Head Office Expenses A/c Dr. 1,35,000
To Global Limited (H.O.) A/c 1,35,000 (Being expenses allocated to branch by head
office)
(ii) Depreciation A/c Dr. 1,15,000
To Global Limited (H.O.) A/c 1,15,000 (Being depreciation on fixed assets of branch,
whose account are maintained by head office)
(iii) Global Limited (H.O.) A/c Dr. 1,40,000
To Salaries A/c 1,40,000 (Being the rectification of salary paid, on

behalf of the head office)
(iv) Global Limited (H.O.) A/c Dr. 1,30,000
To Debtors A/c 1,30,000 (Being adjustment of direct collection from

branch debtors, by head office)
(v) No. entry shall be passed in the books of Branch but will be shown in the books of Head Office as cash-in-
transit.
Q.4.5 2012 - Nov [1] {C} (d) Practical Give Journal Entries in the books of Head Office to rectify or adjust the
following:
(i) Goods sent to Branch ` 12,000 stolen during transit. Branch manager refused to accept any liability.
(ii) Branch paid` 15,000 as salary to the officer of Head Office on his visit to the branch.
(iii) On 28th March, 2012, the H.O. dispatched goods to the Branch invoiced at ` 25,000 which was not received by
Branch till 31st March, 2012.
(iv) A remittance of ` 10,000 sent by the branch on 30th March, 2012, received by the Head Office on 1st April,
2012.
(v) Head Office made payment of ` 25,000 for purchase of goods by Branch and wrongly debited its own purchase
account. (5 marks) [IPCC Gr- II]
Answer: In the books of Head Office

Journal Entries
Particulars L.F. Dr. Cr. Amount Amount ` ` (i) Loss of goods due to theft during transit Dr. 12,000
To Purchases account 12,000 (Being goods lost on account of theft during

transit)*
(ii) Salaries account Dr. 15,000
To Branch account 15,000 (Being salary paid by the branch for H.O.
employee)
(iii) No entry in the books of head office for

goods sent to branch not received by branch
till 31st March 2012
(iv) Cash in transit account Dr. 10,000
To Branch account 10,000 (Being remittance by branch not received by

31st March, 2012)
(v) Branch account Dr. 25,000
To Purchases account 25,000 (Being rectification of entry for payment for

goods purchased by branch wrongly debited
to purchase account)
* Assumption: It is assumed that refusal of branch manager (to accept liability of stolen goods) is accepted by the
Head Office. Alternatively, Branch account will be credited on the basis of assumption that refusal of branch
manager is not accepted by the Head Office.
Note: In entry (iii) the goods in transit entry will be passed in the Books of the Branch.

Q.4.6 2014 - May [6] (a) Practical Pass necessary Journal entries in the books of an independent Branch of a
Company, wherever required, to rectify or adjust the following:
(i) Income of` 2,800 allocated to the Branch by Head Office but not recorded in the Branch books.
(ii) Provision for doubtful debts, whose accounts are kept by the Head Office, not provided earlier for ` 1,000.
(iii) Branch paid ` 3,000 as salary to a Head Office Manager, but the amount paid has been debited by the Branch to
Salaries Account. (iv) Branch incurred travelling expenses of` 5,000 on behalf of other Branches, but not recorded in
the books of Branch.
(v) A remittance of`1,50,000 sent by the Branch has not received by Head Office on the date of reconciliation of
Accounts. (vi) Head Office allocates ` 75,000 to the Branch as Head Office expenses, which has not yet been
recorded by the Branch. (vii) Head Office collected` 30,000 directly from a Branch Customer. The intimation of the
fact has been received by the Branch only now.
(viii) Goods dispatched by the Head Office amounting to` 10,000, but not received by the Branch till date of
reconciliation. The Goods have been received subsequently. (8 marks) [IPCC Gr- II] Answer:
Journal Entries
in the books of an Independent Branch
Particulars L.F. ` ` (i) Head office Account Dr. 2,800 To Income Account 2,800 (Being allocated income by Head
office
recorded in branch account)
(ii) Provision for doubtful debt A/c Dr. 1,000 To Head office A/c 1,000 (Being provision for doubtful debt provided)
(iii) Head office A/c Dr. 3,000 To Salaries A/c 3,000 (Being rectification of salary paid on behalf
of Head Office)
(iv) Head office A/c Dr. 5,000 To Cash A/c 5,000 (Being the expenses on account of branch
recorded in books)
(v) No entry in the branch books required
(vi) Expenses A/c Dr. 75,000 To Head Office A/c 75,000 (Being the allocated expenditure by Head
Office recorded in branch books)
(vii) Head Office Account Dr. 30,000 To Debtors Account 30,000
(Being the adjustment of collection from

branch debtors)
(viii) Goods in transit Account Dr. 10,000
To Head Office A/c 10,000 (Being goods dispatched by head office yet
not received)

Q.4.7 2015 - Nov [7] (e) Practical Pass necessary Journal Entries (with narration) in the books of branch to rectify
or adjust the following:
(i) Branch Paid` 24,000 as salary to HO Supervisor and the amount was debited to Salaries Account by the branch.
(ii) Head Office Expenses allocated to branch were ` 22,500, but these expenditure were not recorded by the branch.
(iii) HO collected`50,000 directly from the customer on branch’s behalf. (iv) Branch has sent remittance of `
1,20,000 but the same has not yet
been received by HO. Answer:

Journal Entries Particulars
(i) HO A/c Dr. To Salary A/c

(i.e. salary paid to HO supervisor Corrected because of previous debit to salary a/c)
(ii) Expenses A/c Dr. To HO A/c

(i.e. HO Exp. allocated to the Branch)
(iii) H.O. A/c Dr. To Debtors A/c

(i.e. HO collected the amount receivable on Branch’s behalf)
(iv) No entry in Branch Books

L.F. Dr. ` Cr.` 24,000
24,000
22,500 22,500
50,000 50,000
5 Foreign Branch
Q.5.1 2014 - Nov [7] (b) Descriptive What are the indicators of Non-Integral Foreign Operation(NFO)? (4 marks)
[IPCC Gr- II]
Answer:
Indicators of Non Integral Foreign Operations: 1 Autonomy
2 Transaction Pattern
3 Financing
4 Expenditure in local
currency
5 Sales Pattern
6 E f f e c t o f Cash Flows
7 Prices of Products
8 Local Market
While the reporting enterprise may control the foreign operation, the activities of the foreign operation are carried
out with a significant degree of autonomy from those of the reporting enterprise.
Transactions with the reporting enterprise are not a high proportion of the foreign operation’s activities.
The activities of the foreign operation are financed mainly from its own operations or local borrowings rather than
from reporting enterprise.
Costs of labour, material and other components of the foreign operations products or services are primarily paid or
settled in the local currency rather than in the reporting currency.
The foreign operation’s sales are mainly in currencies other than the reporting currency.
Cash Flows of the reporting enterprise are insulated from day to day activities of the foreign operation rather than
being directly affected by the activities of the foreign operation.
Sales prices for the foreign operation’s products are not primarily responsive on a short-term basis to changes in
exchange rates but are determined more by local competition or Local Government Regulations.
There is an active local sales market for the foreign operations products, although there might be significant amounts
of exports.

DM Ltd., Delhi has a branch in London. London branch is an integral foreign operation of DM Ltd. At the end of
the year 31st March, 2009, the branch furnishes the following trial balance in U.K. Pound : Particulars £ £
Dr. Cr. Fixed assets (Acquired on 1st April, 2005) 24,000

Stock as on 1st April, 2008 11,200
Goods from Head Office 64,000
Expenses 4,800
Debtors 4,800
Creditors 3,200 Cash at bank 1,200
Head Office Account 22,800 Purchases 12,000
Sales _______ 96,000 1,22,000 1,22,000 In head office books, the branch account stood as shown below :
Particulars
To Balance B/d
To Goods sent to branch London Branch A/c
Dr Cr.
Amount Particulars Amount ` ` 20,10,000 By Bank A/c 52,16,000 49,26,000 By Balance C/d 17,20,000 69,36,000
69,36,000 The following further information are given :
(a) Fixed assets are to be depreciated @ 10% p.a. on straight line basis. (b) On 31st March, 2008 :
Expenses outstanding — £ 400
Prepaid expenses — £ 200
Closing stock — £ 8,000
(c) Rate of Exchange :
1st April, 2005 — ` 70 to £ 1
1st April, 2008 — ` 76 to £ 1
31st March, 2009 — ` 77 to £ 1
Average — ` 75 to £ 1
(1) Trial balance, incorporating adjustments of outstanding and prepaid expenses, converting U.K. pound into Indian
rupees.
(2) Trading and profit and loss A/c for the year ended 31st March, 2009 and the Balance Sheet as on that date of
London branch as would appear in the books of Delhi head office of DM Ltd.
Answer:
(i) Trial Balance of London Branch as on 31st March, 2009 Particulars U.K. Rate Dr.(`) Cr.(`) Pound per U.K.
Pound
Fixed assets 24,000 70 16,80,000
Stock (as on 1st April, 2008) 11,200 76 8,51,200
Goods from head office 64,000 – 49,26,000 Sales 96,000 75 72,00,000 Purchases 12,000 75 9,00,000 Expenses
(4,800 + 400 – 200) 5,000 75 3,75,000 Debtors 4,800 77 3,69,600 2,46,400 Creditors 3,200 77 30,800 Outstanding
expenses 400 77
Prepaid expenses 200 77
Cash at bank 1,200 77 15,400 Head office account – 92,400 17,20,000 Difference in foreign exchange
translation 12,400
92,09,600 92,09,600 Closing Stock will be (£ 8,000 × ` 77) = ` 6,16,000

(ii) Trading and Profit & Loss Account
Particulars Amount (`) Particulars Amount (`) To Opening stock 8,51,200 By Sales 72,00,000
To Purchases 9,00,000 By Closing stock 6,16,000
To Goods from head office 49,26,000
To Gross profit 11,38,800
78,16,000 78,16,000
To Expenses 3,75,000 By Gross profit 11,38,800
To Depreciation 1,68,000 By Profit due to foreign To Net Profit 6,08,200 exchange difference 12,400
11,51,200 11,51,200
(iii) Balance Sheet as on 31st March, 2008
Liabilities ` Assets ` ` Head office Fixed Assets 16,80,000 Less: Depreciation
Balance
Add: Net profit
17,20,000 1,68,000 15,12,000
6,08,200 23,28,200 Debtors 3,69,600
Outstanding expenses 30,800 Prepaid expenses 15,400
Creditors 2,46,400 Closing stock 6,16,000
Cash at bank 92,400
26,05,400 26,05,400
On 31st March, 2010, the following Ledger balances have been extracted from the books of Washington branch
office :
Ledger A/c $
Building 180
Stock as on 1.4.2009 26
Cash and Bank Balances 57
Purchases 96
Sales 110
Commission receipts 28
Debtors 46
Creditors 65
You are required to convert above Ledger balances into Indian Rupees. Use the following rates of exchange :
Opening Rate $ = 46
Closing Rate $ = 50
Average Rate $ = 48
For Fixed Assets $ = 42 (2 marks) [IPCC Gr- II]
Answer:
Conversion of ledger balances (in Dollars) into Rupees Particulars $ Rate per $ Amount in `
Building 180 42 7,560

Stock as on 01.04.2009 26 46 1,196
Cash and bank balances 57 50 2,850
Purchases 96 48 4,608
Sales 110 48 5,280
Commission receipts 28 48 1,344
Debtors 46 50 2,300
Creditors 65 50 3,250
* Note:
1. All P & L items will be valued at Average Exchange Rate as these transactions are settled at various applicable
exchange rate during the year.
2. All Balance sheet items will be valued at specific opening or closing rates as applicable.
An Indian Company Moon Star Limited has a branch at Verginia (USA). The Branch is a non-integral foreign
operation of the Indian Company. The trial balance of the Branch as at 31st March, 2012 is as follows:
US $Particulars
Dr. Cr.
Office equipments 48,000

Furniture and Fixtures 3,200
Stock (April 1,2011) 22,400
Purchases 96,000
Sales - 1,66,400 Goods sent from H.O. 32,000
Salaries 3,200
Carriage inward 400
Rent, Rates & Taxes 800
Insurance 400
Trade Expenses 400
Head Office Account - Sundry Debtors 9,600 45,600 Sundry Creditors - Cash at Bank 2,000 6,800 Cash in Hand
400
2,18,800 2,18,800
The following further informations are given :

1. Salaries outstanding $ 400.
2. Depreciate office equipment and Furniture & Fixtures @ 10% p.a. at written down value.
3. The Head Office sent goods to Branch for ` 15,80,000.
4. The Head Office shown an amount of ` 20,50,000 due from Branch.
5. Stock on 31st March, 2012- $ 21,500.
6. There were no transit items either at the start or at the end of the year.
7. On April 1, 2010 when the fixed assets were purchased the rate of exchange was`43 to one $. On April 1, 2011,
the rate was`47 per $. On March 31, 2012, the rate was` 50 per $. Average Rate during the year was ` 45 to one $.
Prepare :
(a) Trial balance incorporating adjustments given converting dollars into rupees.
(b) Trading, Profit and Loss Account for the year ended 31st March, 2012 and Balance Sheet as on date depicting the
profitability and net position of the Branch as would appear in the books of Indian Company for the purpose of
incorporating in the main Balance Sheet. (16 marks) [IPCC Gr- II]
Answer:
In the books of Moon Star Ltd. - an Indian Company Trial Balance (in Rupees) of Verginia (USA) Branch

(a)
Particulars Dr. Cr. Conver Dr. Cr.
US $ US $sion ` `rate
Office Equipment 43,200 50 21,60,000
Depreciation on Office 4,800 50 2,40,000
Equipment
Furniture and fixtures 2,880 50 1,44,000
D e p r e c i a t i o n o n 320 50 16,000
furniture and fixtures
Stock (1st April, 2011) 22,400 47 10,52,800
Purchases 96,000 45 43,20,000
Sales 1,66,400 45 74,88,000 Goods sent from H.O. 32,000 15,80,000
Carriage inward 400 18,000
Salaries (3,200 + 400) 3,600 45 1,62,000
Outstanding salaries 400 45
Rent, rates and taxes 800 50 36,000 20,000 Insurance 400 45 18,000
Trade expenses 400 45 18,000
Head Office A/c 45,600 45
Trade debtors 9,600 4,80,000 20,50,000 Trade Creditors 6,800 50
Cash at bank 2,000 50 1,00,000 3,40,000 Cash in hand 400 50 20,000
Exchange gain (bal. fig.) 50 4,66,800 2,19,200 2,19,200 1,03,64,800 1,03,64,800 (b) Trading and Profit and Loss
Account of Verginia Branch for the year ended 31st March, 2012
Particulars ` Particulars ` To Opening stock 10,52,800 By Sales 74,88,000 To Purchases 43,20,000 By Closing
stock 10,75,000 To Goods from Head 15,80,000 (21,500 US $ x 50) Office 18,000
To Carriage inward 15,92,200
To Gross profit c/d
85,63,000 85,63,000 To Salaries 1,62,000 By Gross profit b/d 15,92,200 To Rent, rates and taxes 36,000
To Insurance 18,000
To Trade expenses 18,000
To Depreciation of office
equipment 2,40,000
To Depreciation on furni
ture and fixtures 16,000
To Net Profit c/d 11,02,200
15,92,200 15,92,200
Balance Sheet of Verginia Branch as on 31st March, 2012

Liabilities ` ` Assets ` `
Head Office A/c 20,50,000 Office Equipment 24,00,000

Add : Net profit 11,02,200 31,52,200 Less : Depreciation 2,40,000 21,60,000 Foreign Currency Furniture and fixtures 1,60,000
Transaction Reserve 4,66,800 Less : Depreciation 16,000 1,44,000 Trade Creditors 3,40,000 Closing stock 10,75,000 Outstanding Salaries 20,000 Trade
debtors 4,80,000 Cash in hand 20,000 Cash at bank 1,00,000

39,79,000 39,79,000
ABCD Ltd., Delhi has a branch in New York, USA, which is an integral foreign operation of the company. At the
end of 31st March, 2013, the following ledger balances have been extracted from the books of the Delhi office and
the New York Branch:
Particulars
Share Capital
Reserves and Surplus
Land
Building (cost)
Buildings Depreciation Reserve Plant & Machinery (cost)
Plant & Machinery Depreciation Reserve 500 20 Trade receivables/payables 500 270 60 20 Stock (01-04-2012) 250
25 Branch Stock Reserve 65
Delhi New York (` thousands) ($ thousands) Debit Credit Debit Credit
1,250
940
475
1,000
200
2,000 100 Cash & Bank Balances 125 4 Purchases/Sales 275 600 25 125 Goods sent to Branch 1,500 30 Managing
Director's salary 50
Wages & Salaries 100 18 Rent 6
Office Expenses 25 12 Commission receipts 275 100 Branch/H.O. Current A/c 800 15
Total 5,600 5,600 280 280 The following information is also available:
(1) Stock as at 31-03-2013
Delhi ` 2,00,000
New York - $ 10 (all stock received from Delhi)
(2) Head Office always sent goods to the Branch at cost plus 25%. (3) Provision is to be made for doubtful debts at
5%.
(4) Depreciation is to be provided on Buildings at 10% and on Plant and
Machinery at 20% on written down values.
You are required:
(a) To convert the Branch Trial Balance into rupees, using the following
rates of exchange:
Opening rate 1$ =` 50
Closing rate 1$ =` 55
Average rate 1$ =` 52
For fixed assets 1$ =` 45
(b) To prepare the Trading and Profit & Loss Account for the year ended
31st March, 2013, showing to the extent possible, Head Office results
and Branch results separately.
Answer:
(a) ABCD Ltd.
New York Branch Trial Balance
(As on 31st March 2013)
($ ‘000) (` ‘000)
Particulars Dr. Cr. Conversion Dr. Cr. rate per $

Plant & Machinery (cost)
Plant & Machinery Dep.
Reserve
Trade receivable/payable
Stock (1.4.2012)
Cash & Bank Balances
Purchase/Sales
Goods received from H.O.
Wages & Salaries
Rent
Office expenses
Commission Receipts
H.O. Current A/c
Exchange loss (bal. fig.)
100 ` 45 4,500
20 ` 45 900 60 20 ` 55 3,300 1,100 25 ` 50 1,250
4 ` 55 220
25 125 ` 52 1,300 6,500 30 Actual 1,500
18 ` 52 936
6 ` 52 312
12 ` 52 624
100 ` 52 5,200 15 Actual 800 13,942 14,500 558
280 280 14,500 14,500 0.010 ` 55 0.55 Closing stock (b)

To Goods received
from Head
Office
To Wages & Salaries To Gross profit c/d
Trading and Profit & Loss Account

for the year ended 31st March, 2013 (ìn ‘000)
H.O. Branch Total H.O. Branch Total
250 1,250.00 1,500.00 By Sales 600 6,500.00 7,100.00

275 1,300.00 1,575.00 By Goods sent to 1,500 – 1,500.00
Branch
By Closing Stock 200 0.55 200.55
– 1,500.00 1,500.00
100 936.00 1,036.00
1,675 1,514.55 3,189.55
2,300 6,500.55 8,800.55 2,300 6,500.55 8,800.55 To Rent

To Office expenses To Provision for
doubtful debts @ 5%
To Depreciation (W.N.1)
To Balance c/d
To Exchange loss To Managing

Director’s Salary To Balance c/d
Working Notes: (1) Calculation of Depreciation (ìn ‘000)
Particulars H.O. (`) Branch (`) Building-Cost 1,000

Less: Dep. Reserve (200)
800
Depreciation @ 10% (A) 80
Plant & Machinery Cost 2,000 4,500 Less: Dep. Reserve (500) (900)
1,500 3,600
Depreciation @ 20% (B) 300 720
Total Depreciation (A + B) 380 720
(2) Calculation of Additional Branch Stock Reserve (ìn ‘000) Particulars (`) Closing stock of Branch 0.55
Reserve on closing stock (0.55 × 1/5) 0.11 Less: Branch Stock Reserve (as on 1.4.2012) (65) Reversal of Stock
Reserve (64.89) Space to write important points for revision
– 312.00 312.00 By Gross profit b/d 1,675 1,514.55 3,189.55
25 624.00 649.00 By Commission 275 5,200.00 5,475.00
receipts
25 165.00 190.00
380 720.00 1,100.00

1,520 4,893.55 6,413.55
1,950 6,714.55 8,664.55 1,950 6,714.55 8,664.55
558.00 By Balance b/d 6,413.55

50.00 By Branch Stock 64.89
Reserve (W.N.2)
5,870.44
6,478.44 6,478.44
M/s ABC & Co. has head office at New York (U.S.A.) and branch in Bangalore (India). Bangalore branch is an
integral foreign operation of M/s ABC & Co.
Bangalore branch furnishes you with its trial balance as on 31st March, 2015 and the additional information given
thereafter:
Dr. Cr. (Rupees in thousands) Stock on 1st April, 2014 300 — Purchases and Sales 800 1,200 Sundry Debtors &
Creditors 400 300 Bills of Exchange 120 240 Wages & Salaries 560 – Rent, Rates & Taxes 360 – Sundry Charges
160 – Computers 240 – Bank Balance 420 – New York Office A/c – 1,620
3,360 3,360
(a) Computers were acquired from a remittance of US $ 6,000 received from New York head office and paid to the
suppliers. Depreciate computers at 60% for the year.
(b) Unsold stock of Bangalore branch was worth ` 4,20,000 on 31st March, 2015.
(c) The rates of exchange may be taken as follows:
– On 01.04.2014 @ ` 55 per US $
– On 31.03.2015 @ ` 60 pe US $
– Average exchange rate for the year @ ` 58 per US $
– Conversion in $ shall be made up to two decimal accuracy.
You are asked to prepare in US dollars the revenue statement for the year
ended 31st March, 2015 and the balance sheet as on that date of
Bangalore branch as would appear in the books of New York head office
of ABC & Co. You are informed that Bangalore branch account showed a
debit balance of US $ 29845.35 on 31.3.2015 in New York books and
there were no items pending reconciliation. (8 marks) [IPCC Gr- II] Answer:
M/s ABC & Co.
Bangalore Branch Trial Balance in (US $) as on 31st March, 2015
Conversion rate Dr. US $ Cr. US $ per US $ (`)
Stock on 1.4.14 55 5,454.55 – Purchases and sales 58 13,793.10 20,689.66

Sundry debtors and creditors 60 6,666.67 5,000.00
Bills of exchange 60 2,000.00 4,000.00
Wages and salaries 58 9,655.17 – Rent, rates and taxes 58 6,206.90 – Sundry charges 58 2,758.62 – Computers -
6,000.00 – Bank Balance 60 7,000.00 – New York office A/c - - 29,845.35
59,535.01 59,535.01
To Wages and Salaries
To Gross Loss b/d To Rent, rates and taxes To Sundry charges
To Depreciation on computers (US $ 6,000 x 0.6)

Trading and Profit & Loss Account
US $ US $ 5,454.55 By Sales 20,689.66

13,793.10 By Closing Stock 7,000.00
9,655.17 (` 4,20,000/60)
By Gross Loss c/d 1,213.16
28,902.82 28,902.82
1,213.16 By Net Loss 13,778.68
6,206.90
2,758.62
3,600.00
13,778.68 13,778.68
Balance Sheet of Bangalore Branch as on 31st March, 2015
Liabilities US $ New York Office A/c 29,845.35 Less: Net Loss (13,778.68) Sundry creditors
Bills payable
US $ Assets US $ US $ Computers 6,000.00

16,066.67 Less: Depreciation (3,600.00) 2,400.00 5,000.00 Closing Stock 7,000.00 4,000.00 Sundry debtors 6,666.67
Bills receivable 2,000.00

Bank balance 7,000.00
25,066.67 25,066.67
M & S Co. of Lucknow has a branch in Canberra, Australia. At the end of 31stMarch 2017, the following ledger
balances have been extracted from the books of the Lucknow office and the Canberra.
(` in thousands) (Aust. Dollars in thousands)

Dr. Cr. Dr. Cr. Capital
- 2,000
--
Reserves & Surplus
- 1,000
- - Land 500 -
- - Buildings (Cost) 1,000 -
--
Buildings Dep. Reserves
- 200
- - Plant and Machinery (Cost) 2,500 - 200 -
Plant and Machinery Dep. Reserves
- 600
- 130
Debtors/Creditors 280 200 60 30 Stock as on 1-4-2016 100 - 20 -
Branch Stock Reserve
-4
- - Cash & Bank Balances 10 - 10 - Purchases/Sales 240 520 20 123
Goods sent to Branch
- 100 5 - Managing Partner’s Salary 30 - - -
Wages and Salary 75 - 45 - Rent - - 12 - Office Expenses 25 - 18 -
Commission Receipts - 256 - 100 Branch/HO Current Account 120 - - 7

4,880 4,880 390 390
The following information is also available:

(i) Stock as at 31st March, 2017
Lucknow ` 1,50,000
Canberra A$ 3125 (all stock are out of purchases made at Abroad)
(ii) Head Office always sent goods to the Branch at cost plus 25% (iii) Provision is to be made for doubtful debts at
5%
(iv) Depreciation is to be provided on Buildings at 10% and on Plant and
Machinery at 20% on written down value.

You are required to :
(1) Convert the Branch Trial Balance into rupees by using the following
exchange rates:
Opening rate 1A $ = ` 50
Closing rate 1A $ = ` 53
Average rate 1A $ = ` 51.00
For Fixed Assets 1A $ = ` 46.00
(2) Prepare Trading and Profit and Loss Account for the year ended 31st March 2017 showing to the extent possible
H.O. results and Branch results separately. (12 marks) [IPCC Gr- II]
Answer:
Conversion of Canberra Branch Trial Balance in Rupees (` in 000s)
Particulars Dr.$ Cr.$ 1A$ =` Dr. Cr. Plant & Machinery (Cost) 200 – 46 9,200 – Plant & Machinery Depreciation
Reserve – 130 46 – 5,980 Debtors / Creditors 60 30 53 3,180 1,590 Stock (1st April) 20 – 50 1,000 – Cash/ Bank
Balance 10 – 53 530 – Purchases / Sales 20 123 51 1,020 6,273 Goods received from H.O 5 – – 100 – Wages &
Salaries 45 – 51 2,295 – Rent 12 – 51 612 – Office Expenses 18 – 51 918 – Commission Receipts – 100 51 – 5,100
HO Current A/c – 7 – – 120 Exchange loss (bal. fig.) – – – 208 –
Net Total 390 390 19,063 19,063
Closing Stock = A$ 3.125

= 3.125 ×` 53
=` 165.625 (000’s)
=` 166 (000’s)
Trading and Profit and Loss Account for the year ended 31st March, 2017
Particulars H.O. Branch Total Particulars H.O. Branch Total
To Opening Stock 100 1,000.000 1,100.000 By Sales 520 6,273.000 6,793.000
To Purchases 240 1,020.000 1,260.000 By Goods sent to Branch 100 – 100.000
To Goods received
from Head office – 100.000 100.000 By Closing Stock 150 165.625 315.625
To Wages & Salaries 75 2,295.000 2,370.000
To Gross profit c/d 355 2,023.625 2,378.625
770 6,438.625 7,208.625 770 6,438.625 7,208.625
To Rent – 612.000 612.000 By Gross profit b/d 355 2,023.625 2,378.625
To Office expenses 25 918.000 943.000 By Commission receipts 256 5,100.000 5,356.000
To Provision for
doubtful debts @5% 14 159.000 173.000
To Depreciation (W. N.) 460 644.000 1,104.000
To Balance c/d 112 4,790.625 4,902.625
611 7,123.625 7,734.625 611 7,123.625 7,734.625
To Managing Partner’s 30.000 By Balance b/d 4,902.625 Salary
To Exchange Loss 208.000 By Branch stock reserve 4.000
To Balance c/d 4,668.625
4,906.625 4,906.625
Working Note:
Calculation of Depreciation H. O .` Branch ` ‘000 ‘000
Building - Cost 1,000

Less: Dep. Reserve (200) 800
Depreciation @ 10% (A) 80
Plant & Machinery Cost 2,500 9,200 Less: Dep. Reserve (600) (5,980) 1,900 3,220 Depreciation @ 20% (B) 380
644 Total Depreciation (A + B) 460 644
Note:
1. In the above solution, it has been assumed that the Australia branch is an integral foreign operation of M & S Co.
Alternative solution considering branch as non-integral foreign operation is also possible.
2. As the closing stock of Branch does not consist any stock transferred from M & S Co., there is no need to create
closing stock reserve. But the opening branch stock reserve has to be reversed in the P&L A/c. Space to write
M/s Rani & Co. has head office at Singapore and branch at Delhi (India). Delhi branch is an integral foreign
operation of M/s Rani & Co., Delhi branch furnishes you with its Trial Balance as on 31stMarch, 2019 and the
additional information thereafter:
Dr. Cr. Rupees in thousands Stock on 1st April, 2018 600 — Purchases and Sales 1,600 2,400 Sundry Debtors and
Creditors 800 600 Bills of Exchange 240 480 Wages 1,120 — Rent, rates and taxes 720 — Sundry Expenses 320 —
Computers 600 — Bank Balance 520 — Singapore Office a/c — 3,040 Total 6,520 6,520
(a) Computers were acquired from a remittance of Singapore dollar 12,000 received from Singapore Head Office
and paid to the suppliers. Depreciate Computers at the rate of 40% for the year.
(b) Closing Stock of Delhi branch was ` 15,60,000 on 31st March, 2019.
(c) The Rates of Exchange may be taken as follows:
(i) on 1.4.2018 @ ` 50 per Singapore Dollar
(ii) on 31.3.2019 @ ` 52 per Singapore Dollar
(iii) average Exchange Rate for the year @`51 per Singapore Dollar (iv) conversion in Singapore Dollar shall be
made upto two decimal accuracy.
(d) Delhi Branch Account showed a debit balance of Singapore Dollar 59,897.43 on 31.3.2019 in the Head office
books and there were no items pending for reconciliation.
In the books of Head office, you are required to prepare:
1. Revenue statement for the year ended 31st March, 2019. (in Singapore Dollar)
2. Balance Sheet as on that date. (in Singapore Dollar) (8 marks)
Answer: M/s. Rani and Co.

Delhi Branch Trial Balance in (SG $)
Conversion rate Dr. SG $ Cr. SG $ per SG $ (`)
Stock on 1/4/2018 50 12,000.00 – Purchases and Sales 51 31,372.55 47,058.82

Sundry Debtors and Creditors 52 15,384.61 11,538.46
Bills of Exchange 52 4,615.38 9,230.77
Wages 51 21,960.78 – Rent, Rates and Taxes 51 14,117.65 – Sundry Expenses 51 6,274.51 – Computer – 12,000.00
– Bank Balance 52 10,000.00 – Singapore Office A/c – – 59,897.43
1,27,725.48 1,27,725.48
Revenue Statement
SG $ SG $ To Opening Stock 12,000.00 By Sales 47,058.82

To Purchases 31,372.54 By Closing Stock 30,000.00
(` 15,60,000/` 52) To Wages 21,960.78
To Gross Profit c/d 11,725.50
77,058.82 77,058.82
To Rent, Rates and Tax
To Sundry Expenses
To Depreciation on Computers (SG $ 12000.00 ×40%)
14,117.65 By Gross Profit 11,725.50
6,274.51 By Net Loss 13,466.66
4,800.00
25,192.16 25,192.16
Balance Sheet of Delhi Branch
Liabilities SG $ Assets SG $ Singapore A/c 59897.43 Computers 12,000 Less: Net Loss (13,466.66) 46,430.76
Less: Depreciation (4,800) 7,200.00 Sundry Creditors
Bills Payables
11,538.46 Closing Stock 30,000.00
9,230.77 Sundry Debtors 15,384.61

Bank Balance 10,000.00
Bills Receivables 4,615.38
67,199.00 67,199.00
Q.5.9 RTP Practical
ABC Ltd. is a Company with an Authorized Share Capital of ` 10,00,000 in Shares of`10 each of which 35,000
Shares have been issued and fully paid. On 1st April 2017, it opened a Branch in a Foreign Country with a
Fluctuating Currency Yen-having purchased (in the earlier year) Freehold Premises there for Yen 1,20,000 which
were paid for by a Rupee Draft for ` 58,000. Fixtures and Fittings, costing Yen 60,000 were paid for on 1st April
2017, out of a Rupee Remittance of` 50,000 from the Head Office on that date.
All Goods were purchased by Head Office and those for Sale by the Branch were involved to it at Cost Plus 25%.
The Cost of Forwarding and Import Duty were paid by the Branch on arrival of the Goods and averaged 5% of the
Invoice Price. After making all the necessary Closing Entries, with the exception of the Branch Profit and the
appropriation of the balance on P&L Account, the following were the Trial Balance as on 31st March 2018.
Brand (Yen) H.O. (`) DEBITS: Freehold Buildings at Cost 1,20,000 1,80,000
Fixtures and Fittings at Cost 60,000 84,000
Stock in Trade 84,000 1,48,640
Debtors 57,000 22,280
Short Term Loans – 50,000
Balance at Bank 16,400 29,380
Cash in Hand 2,800 1,240
Branch Office Current Account – 1,15,060
Total 3,40,200 6,30,600
CREDITS: Share Capital – 3,50,000
12% Debentures redeemable 30% – 80,000

September 2021
Creditors 46,000 29,200
Provision for Taxation 15,000 25,400
Provision for Depreciation-Buildings (3%) 3,600 26,000
-Fixtures (5%) 3,000 38,000 Head Office Current Account 2,35,800 – Profit and Loss Account as on 1stApril, –
27,800 2017
Profit and Loss for the year 36,800 54,200

Total 3,40,200 6,30,600
Rate of Exchange of Yen to the Rupee was as under -(a) 1st April, 2017 2.00, (b) 31st March, 2018 - 2.50, and (c)
Average for the year - 2.30. Stock in Trade at HO was valued at Cost at the Branch at the Invoice Price Plus
Forwarding Charges and Import Duty. Entries in the Current Account between the Head Office and the Branch had
all been agreed except the following: (a) Goods despatched and invoiced to the Branch on 29thMarch, 2018 ` 4,000,
and Remittance by the Branch to the Head Office on 30th March, 2018 - Bcs. 5,000. Both were received in April
2018, the remittance realizing ` 2,000. In view of the need to maintain Cash Reserves for redemption of the 12%
Debentures, the Directors decided to pay no Dividend.
Prepare: (1) Set out the Branch Trial Balance after Conversion, and (2) Prepare the Company’s Balance Sheet as on
31st March, 2018.
Answer:
1. Branch Trial Balance as on 31st March, 2018
` Credit Balances Rate Yen ` 58,000 Creditors 2.50 46,000 18,400
Debit Balances Rate Yen Freehold Bldgs. Actual 1,20,000 at Cost
F i x t u r e s a n d 2 60,000 Fittings at Cost
Stock in Trade 2.50 84,000
Debtors 2.50 57,000

Balance at Bank 2.50 16,400
Cash in hand 2.50 2,800
Goods in Transit 2.50 10,000 (` given)

Exchange Loss – – (bal. fig.)
Total 3,50,200 1,56,700 Total 3,50,200 1,56,700
30,000 P r o v i s i o n f o r 2.50 15,000 6,000 Taxation
33,600 P r o v i s i o n f o r
Deprn:
22,800 – Building (3%) – 3,600 1,740

6,560 – Fixtures (5%) 2.00 3,000 1,500
1,120 H O Current A / c 2,45,800 1,13,060

(Note)
4,000 Profit for the year 2.30 36,800 16,000
620
Note: Provision for Depreciation of Building =` 58,000 =` 1,740 HO Current A/c Revised (as per Branch Books) =
2,35,800 (given) + Goods in Transit 10,000 = Yen 2,45,800
Branch Current A/c Revised (as per HO Books) = 1,15,060 (given) (-) Cash in Transit 2,000 = ` 1,13,060
2. Computation of Branch Stock Reserve

Particulars ` Branch Stock as on 31.03.2012 (as given) 33,600
Less: Forwarding Charges and Import Duty =` 33,600 × (1,600)
Branch Stock (at Invoiced Valued) 32,000
Stock Reserve required on ` 32,000 = ` 32,000 × 6,400
Stock Reserve required on Goods in Transit = ` 4,000 × 800
Total Stock Reserve Required 7,200
3. Profit and Loss Account for the year ended 31st March, 2018 Particulars
To Exchange Loss (W.N. 1)
` Particulars ` 620 By Profit from HO Trial 54,200 Balance
To Stock Reserve (W.N. 2) 7,200 By Profit from Branch 16,000 Trial Balance (W.N. 1) 62,380
To Net Profit for the year (bal. fig.)
Total 70,200 Total 70,200 4. Balance Sheet of Rishikesh Ltd. as on 31st March 2018 Particulars Note This
Prev. Year Year
I. Equity and Liabilities:

1. Shareholder’s Funds:
2. Non-Current Liabilities:
Long Term Borrowings - 12% Debentures 80,000 (redeemable on 30.09.2015)
(a) Trade Payables - Creditors 47,600
(HO 29,200 + Branch 18,400)

(b) Short Term Provisions - Provision for 31,400
Taxation (HO 25,400 + Branch 6,000)
Total 5,99,180 II. Assets

1. Non-Current Assets Fixed Assets: 3 2,84,760 Tangible Assets
2. Current Assets:
(a) Inventories (HO 1,48,640 + Branch 1,79,040 33,600 + In Transit 4,000 - Stock
Reserve 7,200)
(b) Trade Receivables (HO 22,280 + 45,080
Branch 22,800)
(c) Cash and Cash Equivalents 4 40,300
(d) Short Term Loans and Advances 50,000
Total 5,99,180 Note 1: Share Capital

Authorised:
Issued, Subscribed and Paid up:
Particulars This Prev. Year Year 1,00,000 Equity Shares of` 10 each
35,000 Equity Shares of ` 10 each 3,50,000 Note 2: Reserves and Surplus Particulars
Surplus (P&L A/c)
Opening Additions Deductions Balance
27,800 (W.N. 3) 62,380 – Closing Balance
90,180 Note 3: Tangible Fixed Assets Item Gross Block/Cost

HO Branch Total
Column (1) (2) (3) = 1+2 Freehold 1,80,000 58,000 2,38,000 Building
Furniture 84,000 30,000 1,14,000 and

Fittings
Total 3,52,000
Depreciation Net Block/WDV HO Branch Total Opening Balance (4) (5) (6) = 4+5 (7) 26,000 1,740 27,740
Closing Balance (8) = 3-6 2,10,260
38,000 1,500 39,500 74,500
67,240 2,84,760 Note: 4 Cash and Cash Equivalents
Particulars This Previous
Year Year Balances with Banks (HO 29,380 + Branch 6,560) 35,940
Cash on Hand (HO 1,240 + Branch 1,120 + In 4,360

Transit 2,000)
Total 40,300
6 Miscellaneous
Show Adjustment Journal Entry alongwith working notes in the books of head office at the end of April, 2017 for
incorporation of inter branch transactions assuming that only head office maintains different branch account in its
books:
(A) Delhi Branch:
(i) Received goods from Mumbai ` 1,40,000 and ` 60,000 from
Kolkata.
(ii) Sent goods to Chennai ` 1,00,000, Kolkata` 80,000 (iii) Bill receivable received ` 80,000 from Chennai
(iv) Acceptances sent to Mumbai ` 1,00,000, Kolkata` 40,000
(B) Mumbai Branch (Apart from the above):

(i) Received goods from Kolkata` 60,000, Delhi ` 80,000 (ii) Cash sent to Delhi ` 60,000, Kolkata ` 28,000
(C) Chennai Branch (Apart from the above):

(i) Received goods from Kolkata` 1,20,000
(ii) Acceptances and cash sent to Kolkata` 80,000 and` 40,000
respectively.
(D) Kolkata Branch (Apart from the above)
(i) Sent goods to Chennai ` 1,40,000
(ii) Paid cash to Chennai ` 60,000
(iii) Acceptances sent to Chennai ` 60,000 (8 marks) [IPCC Gr- II] Answer:
Journal Entries in the books of H.O.
Date Particulars Dr. (`) Cr.(`) 30th April, 2017 Mumbai Branch A/c 12,000
Chennai Branch A/c 2,80,000
To Delhi Branch A/c 60,000 To Kolkata Branch A/c 2,32,000 (Being Adjustment entry passed by H.O. in respect of
inter-branch
transactions for the month of April, 2017)

Working Note:
Inter Branch Transactions
Delhi ( `) Mumbai (`) Chennai (`) Kolkata (`) A. Delhi Branch:

1. Received Goods 2,00,000 (Dr.) 1,40,000 (Cr.) - 60,000 (Cr.) 2. Sent Goods 1,80,000 (Cr.) - 1,00,000 (Dr.) 80,000
(Dr.) 3. Received B/R 80,000 (Dr.) - 80,000 (Cr.) - 4. Sent Acceptance 1,40,000 (Cr.) 1,00,000 (Dr.) - 40,000 (Dr.)
B. Mumbai Branch:
5. Received Goods 80,000 (Cr.) 1,40,000 (Dr.) - 60,000 (Cr.)
6. Sent Cash 60,000 (Dr.) 88,000 (Cr.) - 28,000 (Dr.) C. Chennai Branch:
7. Received Goods 1,20,000 (Dr.) 1,20,000 (Cr.)
8. Sent Cash & 1,20,000 (Cr.) 1,20,000 (Dr.) acceptance
D. Kolkata Branch:
9. Sent Goods 1,40,000 (Dr.) 1,40,000 (Cr.)
10. Sent Cash 60,000 (Dr.) 60,000 (Cr.)
11. Sent Acceptance 60,000 (Dr.) 60,000 (Cr.) 60,000 (Cr.) 12,000 (Dr.) 2,80,000 (Dr.) 2,32,000 (Cr.)
Q.6.2 RTP Practical
ABC Ltd. has four Branches in Mumbai, Kolkata and Mohali at each of which it manufactures Plastic Bottles. Each
of the Branches has been controlled by a Manager with full responsibility for all aspects of the Branch affairs
including the purchase locally of Fixed Assets.
During 2017, there have been problem in that, although in total the Company has had cash funds, because the
Branches operate separate Bank Accounts, there have been simultaneous debit and credit Bank Balances.
The Directors of Partha Ltd. have therefore decided to centralize the purchase of Fixed Assets, the raising of Loans
and the payments of Tax and Dividends.
Balance Sheet of Partha Ltd. as on 31.12.2017 Particulars ` `
Sources of Funds:
Share Capital:
- Equity Shares of ` 50 each fully paid up 50,00,000
- 5% Preference Shares of`10 each fully paid up 5,00,000 55,00,000 Reserves and Surplus 37,12,500
Total Sources of Funds 92,12,500 Application of Funds:

(a) Fixed Assets at Cost 75,00,000 Less: Depreciation (12,50,000) 62,50,000
(b) Current Assets, Loans and Advances:

Stock of Materials 10,00,000
Work in Progress 1,08,750
Stock of Finished Products 17,81,250
Debtors 5,72,500
Cash at Bank 1,25,000 35,87,500 Less: Current Liabilities and Provisions:
- Creditors 1,87,500
- Taxation 2,37,500
- Proposed Dividends 2,00,000 (6,25,000)
Net Current Assets 29,62,500

Total Application of Funds 92,12,500
Forecast Profit and Loss Account for the year ended 31.12.2018 (Amt. In `) Particulars Mumbai Kolkata
Pune Mohali (a) Sales 27,50,000 15,00,000 5,00,000 2,50,000
(b) Cost of Goods Sold 22,00,000 7,50,000 3,50,000 1,87,500
(c) Gross Profit (A – B) 5,50,000 7,50,000 1,50,000 62,500
(d) Operating Expense 4,12,500 3,00,000 75,000 37,500
(e) Operating Profit after charging 1,37,500 4,50,000 75,000 25,000

Depreciation (C – D)
(f) Depreciation considered above 5,00,000 1,75,000 62,500 12,500
Other Information:
1. The Proposed Capital Expenditure for 2018 is: (a) Mumbai ` 10,00,000, (b) Kolkata - ` 62,500, (c) Pune `
1,25,000, and (d) Mohali` 2,50,000. There was no proposed sale of Fixed Assets.
2. Branch Working Capital at 31.12.2017 was: (Amount in `)
Branches
Mumbai
Kolkata
Pune
Mohali
Materials WIP Fin. Good Debtors Creditors

6,25,000 62,500 12,50,000 3,00,000 1,22,500
2,50,000 21,250 4,37,500 1,62,500 50,000
87,500 16,250 62,500 75,000 10,000
37,500 8,750 31,250 35,000 5,000
3. Branch Working Capital at 31.12.2018 is estimated to be:
Branches Mumbai
Kolkata
Pune
Mohali
(Amount in `) Materials WIP Fin. Good Debtors Creditors 7,12,500 72,500 13,12,500 4,00,000 1,60,000
2,73,750 26,350 4,62,500 2,25,000 62,500 1,00,000 18,750 71,250 78,750 17,500 38,750 7,500 28,750 46,250
10,000
4. ABC Ltd. proposes to raise ` 6,25,000 by the issue of 12% Debentures on 01.01.2018. Interest on Overdraft is
estimated to be ` 12,500.
5. The Opening Balances at Bank on 01.01.2018 were - (a) Mumbai ` 60,000, (b) Kolkata` 25,000 (c) Pune ` 30,000,
and (d) Mohali ` 10,000.
6. The Fixed Assets at 31.12.2017 were:
Branches Mumbai
Kolkata
Pune
Mohali
Cost Depreciation Net Block

50,00,000 8,00,000 42,00,000
17,50,000 1,75,000 15,75,000
6,25,000 1,87,500 4,37,500
1,25,000 87,500 37,500
7. The Company pays the Preference Dividend for the year on 30th December every year. It is proposed to pay a
Dividend for 2018 of 5% on the Equity Shares.
8. The Corporate Tax charge for 2018 has been estimated at`3,12,500. Prepare: (1) Prepare a statement to show
how much cash each Branch will be able to transfer to Head Office and still maintain a Bank Balance of ` 30,000 at
each Branch as at 31.12.2018, and (2) Prepare a Forecast Balance Sheet for ABC Ltd. as at 31.12.2018.
Answer:
1. Statement of Estimated Remittance to Head Office (Amount in `) Particulars Mumbai Kolkata Pune
Mohali Total Bank Balance as on 60,000 25,000 30,000 10,000 1,25,000 01.01.2018
Operating Profit 1,37,500 4,50,000 75,000 25,000 6,87,500

Depreciation 5,00,000 1,75,000 62,500 12,500 7,50,000
Adjust: (Increase)/
Decrease in–
- Stock of Materials (87,500) (23,750) (12,500) (1,250) (1,25,000)

- Work in Progress (10,000) (5,100) (2,500) 1,250 (16,350)
- Finished Goods (62,500) (25,000) (8,750) 2,500 (93,750)
- Debtors (1,00,000) (62,500) (3,750) (11,250) (1,77,500)
Adjust: (Increase)/
Decrease in–
- Creditors 37,500 12,500 7,500 5,000 62,500 B a l a n c e a s o n 4,75,000 5,46,150 1,47,500 43,750 12,12,400
31.12.2018
Less: Bank Balance to (30,000) (30,000) (30,000) (30,000) (1,20,000) be retained
Balance to be transferred 4,45,000 5,16,150 1,17,500 13,750 10,92,400 to HO
2. Head Office Bank Account

To Receipts from Branches: 10,92,400 By Capital Expense 14,37,500 (10,00 + 62.5 + 1,25 + 2,50)
To Proceeds from Issue of
12% Debentures
To balance c/d
6,25,000 By Debenture Interest 75,000 (12% of ` 6,25,000) 2,70,100 By Bank Interest 12,500 By Corporate Tax
2,37,500 By Pref. Dividend 25,000 (15% of ` 5,00,000) By Equity Dividend 2,00,000 Total 19,87,500 Total
19,87,500
3. Computation of Reserves and Surplus

Particulars ` ` Balance as on 01.01.2018 37,12,500
Operating Profit for 2018 6,87,500 Less: Bank Interest (12,500)
Interest on Debentures (75,000) Corporate Tax (3,12,500) Preference Dividend (paid) (25,000)
Dividend on Equity Shares (proposed) (2,50,000) 12,500

Balance on 31.12.2018 37,25,000 4. Forecast Balance Sheet of Partha Ltd. as at 31.12.2018 Particulars Note
This Year Prev. Year I. Equity and Liabilities:
1. Shareholder’s Funds:
(a) Share Capital

Equity Shares of`50 each fully
paid up 50,00,000 5% Pref. Shares of ` 10 each
fully paid up 5,00,000 (b) Reserves and Surplus (as per W.N. 3) 37,25,000
2. Non-Current Liabilities:
- Long Term Borrowing - 12%
Debentures 6,25,000 3. Current Liabilities:
(a) Short Term Borrowings
- Bank Overdraft (W.N. 2) 2,70,100 (b) Trade Payable

- Sundry Creditors 2,50,000 (c) Short Term Provisions
- Proposed Dividend 2,50,000
- Provision for Taxation 3,12,500 5,62,500
Total 1,09,32,600
II. ASSETS
- Fixed Assets Cost 89,37,500
- Less: Depreciation 20,00,000 69,37,500
(2) Current Assets:
(a) Inventories (Raw Material 11,25,000+
WIP 1,25,100 + Finished Goods
18,75,000) 31,25,100 (b) Trade Receivables - Debtors 7,50,000 (c) Cash and Cash Equivalents
- Balance at
Branches 1,20,000
Total 1,09,32,600
Note: This is only a Forecast Balance Sheet, therefore all disclosure requirements of Schedule III are not given.
Alternatively. The forecast Balance Sheet can be prepared in T form as under:
Equity and Liabilities Shareholders’ Funds:
Share Capital
Equity Shares of `50 each fully paid up

5% Pref. Shares of ` 10 each fully paid up
Reserves and Surplus (W.N.3) Non-Current Liabilities: 12% Debentures

Current Liabilities:
(a) Creditors
(b) Bank Overdraft (W.N. 2) (c) Provision for Taxation (d) Proposed Dividend
Total
` Assets ` Fixed Assets: Cost 89,37,500
Less: Depreciation (20,00,000) 69,37,500
50,00,000
5,00,000 Current Assets:
37,25,000 (a) 6,25,000 (b) (c) (d) 2,50,000 (e) 2,70,100
3,12,500
2,50,000
1,09,32,600
Stock of Materials 11,25,000

Work in Progress 1,25,100
Stock of Finished Goods 18,75,000
Debtors 7,50,000
Bank Balances (Branch) 1,20,000

Total 1,09,32,600
Q.6.3 RTP Practical
ABC Ltd. operates a number of Retail Outlets to which goods are invoiced at Wholesale Price, which is Cost Plus
25%. These sell the goods at the Retail Price, which is Wholesale Price plus 20%.
Following is the information regarding one of the Outlets for the year ended 31st March
Particulars ` Opening Stock at the Outlet 30,000
Goods invoiced to the Outlet during the year 3,24,000
Gross Profit made by the Outlet 60,000
Goods Lost by Fire ? Expenses of the Outlet for the year 20,000
Closing Stock at the Outlet 36,000
Prepare the following accounts in the books of ABC Ltd. for the year-ended 31st March
1. O u t l e t S t o c k 2. Outlet Profit and 3. S t o c k R e s e r v e Account, Loss Account, and Account

Answer:
1.
Outlet Stock Account
` Particulars ` 30,000 By Sales (See W.N.) 3,60,000
Particulars To balance b/d To Goods Sent to Outlet 3,24,000 By Goods Lost by fire (bal. fig.) 18,000 To Gross
Profit 60,000 By balance c/d 36,000
Total 4,14,000 Total 4,14,000
2. Outlet Profit and Loss Account

To Expenses 20,000 By Gross Profit b/d 60,000
To Goods Lost by Fire 18,000
To Profit tfrd to B/S (bal.fig.) 22,000
3. Stock Reserve Account
Particulars
To General P&L A/c (transfer) To balance c/d (36,000 × 20%)
Total ` Particulars ` 6,000 By balance b/d (30,000 × 20% 6,000
7,200 By General P&L A/c (reserve 7,200 required)

13,200 Total 13,200
Working Notes: Computation of Retail Sales
Particulars ` Wholesale Price 125

Add: Profit Margin for Retail Sale (20% of Wholesale Price`125) 25
Retail Price 150
Gross Profit 60,000
Retail Sales = (Gross Profit × )= 60,000 × 3,60,000

CHAPTER
Accounts from 14 Incomplete Records

Chapter Comprises: ☹Introduction ☹Types of Single Entry System ☹Ascertainment of Profit by Capital
Comparison ☹Techniques of
Obtaining Complete Accounting Information

Legend
book. 1.805
TIME MANAGER . . . . . . . . . Plan and Manage your Time
i.e.....
1. Budgeted
2. Actual
3. Variance (1-2)
............ Day 1 16
Instant
Revision (in hours)

i.e.... i.e. on ........... ...........
Day 2 Day 8
4 3.12

2.2 1.35 1.35

1.2, 2.8, 2.11, 2.16, 3.3
1 Ascertainment of Profit by Capital Comparison
Q.1.1 2007 - Nov [5] (vi) Practical

The closing capital of Mr. A on 31.3.2007 was`1,50,000. On 1.4.2006 his capital was`60,000. During the year he
had, drawn`40,000 for domestic expenses. He introduced`25,000 as additional Capital in February, 2007. Find out
his Net Profit for the year. (2 marks)
Answer:
Computation of Profit for the year ended 31.3.2007.
` Closing Capital 1,50,000

Less: Capital Contributed 25,000
1,25,000
Add: Drawing 40,000
1,65,000
Less: Opening Capital 60,000
Profit for the year 1,05,000
Q.1.2 2009 - Nov [1] (i), RTP Practical
On 1st April, 2008, Chhotu started business with an initial Capital of ` 70,000. On 1st October, 2008, he introduced
additional capital of ` 40,000. On 7th of every month, he withdraw ` 5,000 for household expenses. On 31stMarch,
2009 his Assets and Liabilities were`2,00,000 and` 70,000 respectively.
Ascertain the Profit earned by Chhotu during the year ended 31st March, 2009. (2 marks) Answer:
Calculation of Profit Earned
Particulars Amount(`)
Capital as on 31.3.2009 ( ` 2,00,000- ` 70,000) 1,30,000

Add: Drawings (` 5,000 × 12 months) 60,000
1,90,000
Less: Additional capital introduced as on 1.10.2008 (40,000) 1,50,000
Less: Capital on 01.04. 2008 (70,000)
Profit for the year ended as on 31.3.2009 80,000 Space to write important points for revision
Practical
2013 are as follows:
31-3-2012 31-3-2013 ` `
Assets:
Furniture 50,000
Building 1,00,000
Stock 1,00,000 2,50,000 Sundry Debtors 60,000 1,10,000 Cash in hand 11,200 13,200 Cash at Bank 60,000 75,000
Liabilities:
Loans 90,000 70,000 Sundry Creditors 50,000 80,000
Mr. ‘A’ decided to provide depreciation on building by 2.5% and furniture by 10% for the period ended on 31-3-
2013. Mr. ‘A’ purchased jewellery for `24,000 for his daughter in December 2012. He sold his car on 30-3-2013 and
the amount of ` 40,000 is retained in the business.
You are required to :
(i) Prepare statement of affairs as on 31-3-2012 & 31-3-2013. (ii) Calculate the profit received by ‘A’ during the
year ended 31-3-2013. (8 marks) Answer: 1.
Statement of Affairs (`)
Capital & Liabilities 31.3.12 31.3.13 Assets 31.3.12 31.3.13
Capital (Bal. Fig.) Non- current liabilities loan

2,41,200 4,40,700 Fixed assets:
90,000 70,000 Furniture 50,000 45,000

50,000 80,000 Building 1,00,000 97,500
Current liabilities creditors
Total Current
Assets:
Stock 1,00,000 2,50,000

Debtors 60,000 1,10,000
Cash 11,200 13,200
Bank 60,000 75,000
3,81,200 5,90,700 Total 3,81,200 5,90,700 2. Computation of Profit:

Particulars
To Drawing (Jewellery) To Balance C/d
Capital A/c
` Particulars `
24,000 By Balance b/d 2,41,200

4,40,700 By Additional Capital
(Sale of Car.) 40,000
By Profits for the year
(Bal. Fig.) 1,83,500

2
Techniques of Obtaining Complete Accounting Information
Shri Rashid furnishes you with the following information relating to his business:
(a) Assets and liabilities as on
1.1.1997 31.12.1997
` ` Furniture (W.D.V.) 6,000 6,350
Stock at cost 8,000 7,000
Sundry debtors 16,000 ? Sundry creditors 11,000 15,000
Prepaid expenses 600 700
Unpaid expenses 2,000 1,800
Cash in hand and at bank 1,200 625
(b) Receipts and payments during 1997:
Collections from debtors, after allowing discount of`1,500 amounted to ` 58,500.
Collections on discounting of bills of exchange, after deduction of discount of ` 125 by the bank, totaled to ` 6,125.
Creditors of ` 40,000 were paid ` 39,200 in full settlement of their dues.
Payment for freight inwards ` 3,000. Amounts withdrawn for personal use ` 7,000. Payment for office furniture `
1,000. Investment carrying annual interest of 4% were purchased at`96 on 1st July, 1997 and payment made therefor.
Expenses including salaries paid ` 14,500. Miscellaneous receipts ` 500. (c) Bills of exchange drawn on and
accepted by customers during the year amounted to ` 10,000. Of these, bills of exchange of` 2,000 were endorsed in
favour of creditors. An endorsed bill of exchange of ` 400 was dishonoured.
(d) Goods costing ` 900 were used as advertising materials. (e) Goods are invariably sold to show a gross profit of
33 and 1/3% on sales.
(f) Difference in cash book, if any, is to be treated as further drawing or introduction by Shri Rashid.
(g) Provide at 2.5% for doubtful debts on closing debtors. Rashid asks you to prepare Trading and Profit and Loss
A/c for the year ended 31st December, 1997 and the Balance Sheet as on that date. (20 marks)
Answer:
Working Notes :
(1) Capital on Ist January, 1997
Balance Sheet as on Ist January, 1997 Liabilities

Capital (Balancing figure) Creditors
` Assets `
18,800 Furniture (w.d.v.) 6,000

11,000 Stock at cost 8,000
2,000 Sundry debtors 16,000
Cash in hand and at bank 1,200
Prepaid expenses 600
31,800 31,800 (2) Purchases made during the year

Sundry Creditors Account
Particulars To Cash and bank A/c
To Discount received A/c To Bills receivable A/c To Balance c/d

`
39,200
800
2,000
15,000
57,000
Particulars ` By Balance b/d 11,000
By Sundry debtors A/c 400

By Purchases A/c 45,600
(Balancing figure)
57,000 (3) Sales made during the year
Particulars Opening Stock
Purchases
Less: For advertising
Freight inwards
Less: Closing stock

Cost of goods sold
Add: Gross profit @ 50% on cost `
8,000
45,600
900 44,700
3,000
55,700
7,000
48,700
24,350
73,050
(4) Debtors on 31.12.1997
Sundry Debtors Account Particulars `
To Balance b/d 16,000 By To Sales A/c 73,050 By To Sundry creditors A/c By
(bill dishonoured) 400 By 89,450

Particulars `
Cash and bank A/c 58,500

Discount allowed A/c 1,500
Bills receivable A/c 10,000
Balance c/d (Balancing figure) 19,450
89,450 (5) Additional drawings by Mr. Rashid

Cash and Bank Account Particulars
Balance b/d
Sundry debtors A/c
Bills receivable A/c
Miscellaneous income A/c
` Particulars `
1,200 By Freight inwards A/c 3,000

58,500 By Furniture A/c 1,000
6,125 By Investment A/c 96
500 By Expenses A/c 14,500
By Creditors A/c 39,200
By Drawings A/c 7,904
[` 7,000+` 904
(Additional drawings)]
By Balance c/d 625
66,325 66,325 (6) Amount of expenses debited to Profit and Loss A/c Expenses Account
Particulars ` Particulars ` Prepaid expenses A/c By Outstanding expenses 2,000 (on 1.1.1997) 600 A/c (on
1.1.1997)
Bank A/c 14,500 By Profit and Loss A/c

Outstanding expenses (Balancing figure) 14,200 A/c (on 31.12.1997) 1,800 By Prepaid expenses A/c
(on 31.12.1997) 700 (7) Bills receivable on 31.12.1997

Particulars
To Debtors A/c
Bills Receivable Account
` Particulars `
10,000 By Creditors A/c 2,000

By Bank A/c 6,125
By Discount on bills receivable A/c 125
By Balance c/d (Balancing figure) 1,750
10,000 10,000 Note : It has been assumed that investment purchased for`96 has the face value ` 100.
Trading and Profit and Loss Account of Shri Rashid for the year ended 31st December, 1997
Particulars
To Opening stock
To Purchases
Less: For advertising
To Freight inwards
To Gross profit c/d
` Particulars ` 8,000 By Sales 73,050 45,600 By Closing stock 7,000
900 44,700
3,000
24,350
80,050 80,050 To Sundry expenses

To Advertisement
14,200 By Gross profit b/d 24,350

900 By Interest on investment 2
To Discount allowed-Debtors
1,500
Bills receivable 125 1,625 By Discount received 800
To Depreciation on furniture 650 By Miscellaneous income 500
To Provision for doubtful debts 486
To Net profit 7,791
Liabilities
Capital as on Ist January, 1997 18,800
Less: Drawings 7,904
10,896
Add: Net Profit 7,791
Sundry creditors Outstanding expenses
Balance Sheet as on 31st December, 1997

Amount Assets Amount (`) (`)
Furniture (w.d.v.) 6,000

Additions during the year 1,000
7,000
Less: Depreciation 650 6,350 18,687 Investment 96 15,000 Interest accrued 2 1,800 Closing stock 7,000 Sundry
debtors 19,450
Less: Provision for
doubtful debts 486 18,964 Bills receivable 1,750 Cash in hand and at bank 625 Prepaid expenses 700 35,487 35,487
Shri Kisan, a farmer, maintains a cash book, through which he records all receipts and payments and a diary in
which he records other relevant information. On 31st March, 1999 he had cash in hand ` 1,000 and balance of` 500
with local Grameen Bank. He also owed ` 600 to Beej Bhandar for seeds purchased by that date.
During the year ended 31st March, 2000, he realised:
` Sale proceeds of crops 59,100

Sale proceeds of cattle and cattle products 12,500
Sale proceeds of wood and grass 3,000
Sale of cowdung 5,000
Receipt on account from Babu (a credit customer) 12,000
Grant from Zila Parishad for installing tubewell—cheque 10,000
During the year ended 31st March, 2000 he paid: ` Wages 65,000
Beej Bhandar 600
Seeds, feeds and fertilizer 3,000
Power 5,000
Land revenue 2,000
Tools purchased 2,500
Household expenses 10,000
During the year ended 31st March, 2000 his other transactions were: ` (i) Sale of crop to Babu on credit 20,000
(ii) Purchase on 25th March, 2000 from Beej Bhandar on credit of one month seeds of 2,000
(iii) Efforts put in by self and family members on the farm were conservatively valued at 60,000
(iv) Value of crop used for consumption by:
Self and family 30,000
Agricultural labourers 40,000
On 31st March, 2000, his cash in hand was only ` 2,500. The rest was banked. He did not have any stock of seeds.
The tubewell for which the grant cheque was realised in the last week of March, 2000 is to be installed in April,
2000.
Shri Kisan asks you to prepare his cash and income summaries for the year ended 31stMarch, 2000 and his statement
of financial position as on that date. (12 marks)
Answer: In the Books of Shri Kisan

Cash summary for the year ended on 31st March, 2000
Particulars ` `
Opening balance (on 1st April, 1999)

Cash in hand 1,000 Grameen Bank balance 500 1,500
Receipts:
Sale proceeds Crops 59,100
Cattle and cattle products 12,500
Wood and grass 3,000
Cowdung 5,000
Collection from Babu 12,000
Grant from Zila Parishad 10,000 1,01,600 Payments 1,03,100 Farm expenses - 65,000
Wages 3,000
Seeds, feeds and fertilizers 5,000
Power Land revenue 2,000
Payment to Beej Bhandar 600
Tools purchased 2,500
Household expenses 10,000 88,100 Closing balances (on 31st March, 2000) :
Cash in hand 2,500
Grameen Bank balance (Balancing figure) 12,500 15,000
1,03,100
Income summary for the year ended on 31st March, 2000
` ` Revenues:
Sales-Crops (Cash sales: 59,100 + Credit sales: 20,000) 79,100
Cattle and cattle products 12,500

Wood and grass 3,000
Cowdung 5,000
Crop used for consumption:
Self and family 30,000
Agricultural Labourers 40,000
Less: Expenses1,69,600 Wages 65,000
Consumption of crop by Labours: 40,000
Seeds, feeds and fertiliser (Cash purchase 3,000 5,000

+ Credit purchases 2,000)
Power 5,000 Land revenue 2,000 Efforts of self and family members 60,000 1,77,000
Loss 7,400
Statement of financial position as on 31st March, 2000. Liabilities

Farm household capital
Balance on 1.4.99 900
Add: Notional wages of self
and family member 60,000
60,900
` Assets ` Tools (Note) 2,500

Debtors (Babu) 8,000
Cash in hand 2,500

Grameen bank balance 12,500
Less: Drawings
Cash 10,000
Crop 30,000
Loss as per
Income 7,400
summary 47,400 13,500
Grant (for tubewell) 10,000
Creditors (Beej Bhandar) 2,000
25,500 25,500
Note: Alternatively, tools may be treated as revenue expenditure. Working Note:

Computation of Farm household capital on 1.4.99
Statement of financial position on 31.3.99 Particulars
Liability to Beej Bhandar Farm household capital (Balancing figure)
` Particulars `
600 Cash in hand 1,000 Grameen bank balance 500

900

A trader keeps his books of account under single entry system. On 31st March, 2000 his statement of affairs stood as
follows:
Liabilities
Trade Creditors
Bills Payable
Outstanding Expenses Capital Account
The following was the summary of Cash-book for the year ended 31st March, 2001: Receipts
Cash in Hand and at
` Assets `
5,80,000 Furniture, Fixtures and Fittings 1,00,000
1,25,000 Stock 6,10,000
45,000 Trade Debtors 1,48,000
2,50,000 Bills Receivable 60,000
Unexpired Insurance 2,000
Cash in Hand and at Bank 80,000
Bank on 1st April, 2000

Cash Sales
Receipts from Trade
Debtors
Receipts for Bills
Receivable
` Payments `
Payments to Trade Creditors 75,07,000

80,000 Payments for Bills Payable 8,15,000
73,80,000 Sundry Expenses paid 6,20,700
15,10,000 Drawings 2,40,000
Cash in Hand and at Bank on 3,40,000 31st March, 2001 1,27,300
93,10,000 93,10,000
Discount allowed to trade debtors and received from trade creditors amounted to`36,000 and`28,000 respectively.
Bills endorsed amounted to` 15,000. Annual Fire Insurance premium of` 6,000 was paid every year on 1st August for
the renewal of the policy. Furniture, fixtures and fittings were subject to depreciation @ 15% per annum on
diminishing balances method.
You are also informed about the following balances as on 31stMarch, 2001:
` Stock 6,50,000
Trade Debtors 1,52,000
Bills Receivable 75,000
Bills Payable 1,40,000
Outstanding Expenses 5,000
The trader maintains a steady gross profit ratio of 10% on sales. Prepare Trading and Profit and Loss Account for
the year ended 31st March, 2001 and Balance Sheet as at that date. (16 marks)
Answer:
Particulars To Opening Stock To Purchases (W.N. 3)

` Particulars ` 6,10,000 By Sales
81,10,000 Cash Sales 73,80,000 To Gross profit c/d 9,30,000 Credit, Sale 19,20,000 93,00,000
(i.e. 10% of 93,00,000) (W.N. 3)

By Closing stock 6,50,000
99,50,000 99,50,000
To Sundry expenses (W.N. 6) 5,80,700 By Gross profit b/d 9,30,000
To Discount allowed 36,000 By Discount received 28,000
(15%` 1,00,000)
9,58,000 9,58,000 Balances Sheet as at 31st March, 2001
Liabilities Amount Assets Amount ` ` Capital

Opening balance
Less: Drawing
Furniture & fittings 1,00,000

2,50,000 Less: Depreciation 15,000 85,000
2,40,000 Stock 6,50,000 10,000 Trade debtors 1,52,000 Add: Net profit for
the year
Bills payable
Trade creditors
Unexpired insurance 2,000
3,26,300 3,36,300 Cash in hand & at bank 1,27,300 1,40,000
6,10,000
Outstanding expenses 5,000
10,91,300 10,91,300
Working Notes : (1)

To Trade debtors

` Particulars `
60,000 By Cash 3,40,000

3,70,000 By Trade creditors
(Bills endorsed) 15,000
(2) Particulars To Cash/Bank
To Balance c/d
(3)

To Credit sales
(balancing figure)
(4)
Particulars
To Cash/Bank
To Discount received To Bills receivable To Bills payable
To Balance c/d
(balancing figure)
Bills Payable Account

` Particulars ` 8,15,000 By Balance b/d 1,25,000 1,40,000 By Creditors (balancing 8,30,000
figure)
9,55,000 9,55,000 Trade Debtors Account
` Particulars `
1,48,000 By Cash/Bank 15,10,000

19,20,000 By Discount allowed 36,000
By Bills receivable 3,70,000
20,68,000 20,68,000
Trade Creditors Account

` Particulars `
75,07,000 By Balance b/d 5,80,000 28,000 By Purchases (as calculated
15,000 in W.N. 3) 84,10,000 8,30,000
6,10,000
89,90,000 89,90,000 (5) Memorandum Trading Account
Particulars
To Opening stock
To Purchases
(Balancing figure)
To Gross Profit (10% on sales)

9,30,000
(6) Computation of Sundry expenses to be charged to Profit & Loss A/c
` Sundry expenses (as per cash book) 6,20,700

Add: Prepaid expenses as on 31☐3☐2000 2,000
6,22,700
Less: Outstanding expenses as on 31☐3☐2000 45,000
5,77,700
Add: Outstanding expenses as on 31☐3☐2001 5,000
5,82,700
Less:Prepaid expenses as on 31☐3☐2001 (Insurance paid till July, 2001) 2,000
5,80,700
The following is the Balance Sheet of a concern on 31st March, 2000: ` `

Capital
Creditors (Trade)
Profit & Loss A/c
10,00,000 Fixed Assets 4,00,000 1,40,000 Stock 3,00,000 60,000 Debtors 1,50,000 Cash & Bank 3,50,000
12,00,000 12,00,000 The management estimates the purchases and sales for the year ended 31st March, 2001 as
under:
upto March 28.2.2001 2001 Purchases ` 14,10,000 1,10,000 Sales 19,20,000 2,00,000 It was decided to
invest`1,00,000 in purchases of fixed assets, which are depreciated @ 10% on cost.
The time lag for payment to Trade Creditors for purchase and receipt from Sales is one month. The business earns a
gross profit of 30% on turnover. The expenses against gross profit amount to 10% of the turnover. The amount of
depreciation is not included in these expenses. Draft a Balance Sheet as at 31stMarch, 2001 assuming that creditors
are all Trade Creditors for purchases and debtors for sales and there is no other item of current assets and liabilities
apart from stock and cash and bank balances. (8 marks) Answer:
Projected Balance sheet of ............
Liabilities Capital
Profit & Loss Account (as on 1st April, 2000)

` Assets `
10,00,000 Fixed Assets 4,00,000

Additions 1,00,000
60,000 5,00,000
Add: Profit for the year 3,74,000 4,34,000 Less: Depreciation 50,000 4,50,000 Creditors (Trade) 1,10,000 Stock in trade 3,36,000

Cash & Bank Balances 5,58,000
15,44,000 15,44,000
Working Notes:
1. Projected Trading and Profit and Loss Account for the year ended 31st March, 2001
Particulars
To Opening Stock
To Purchases
To Gross Profit c/d (30% on sales)
To Sundry Expenses (10% on sales)

6,36,000 (balancing figure)
24,56,000 24,56,000
2,12,000 By Gross Profit b/d 6,36,000
To Depreciation To Net Profit
2.
50,000
3,74,000
6,36,000 6,36,000
Cash and Bank Account for the period
Particulars
To Balance b/d
To Sundry Debtors
(`1,50,000 +`19,20,000)
` Particulars ` 3,50,000 By Sundry Creditors 15,50,000
20,70,000 (` 1,40,000 + ` 14,10,000)

By Expenses 2,12,000
By Fixed Assets 1,00,000
24,20,000 24,20,000
Note: In this question, all sales and purchase are considered on the basis of credit.
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, 2003 and a Balance Sheet as on that date : (a)
Building
Furniture
Motorcar
Stocks
Bills payable 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 —
Balance as on Balance as on 31st March, 2002 31st March, 2003
` ` 3,20,000 3,60,000
60,000 68,000
80,000 80,000
— 40,000
28,000 16,000
(b) Cash transactions during the year included the following besides certain other items :
Sale of old papers and
miscellaneous income
Miscellaneous Trade
expenses (including salaries etc.)
Collection from debtors
(c) Other information :
` ` Cash purchases 48,000
20,000 Payment to creditors 1,84,000
Cash Sales 80,000
80,000
2,00,000
(i) Bills receivable drawn during the year amount to` 20,000 and Bills payable accepted ` 16,000.
(ii) Some items of old furniture, whose written down value on 31st March, 2002 was`20,000 was sold on
30thSeptember, 2002 for `8,000. Depreciation is to be provided on Building and Furniture @ 10% p.a. and on
Motorcar @ 20% p.a. Depreciation on sale of furniture to be provided for 6 months and for additions to Building for
whole year.
(iii) Of the Debtors, a sum of ` 8,000 should be written off as Bad

Debt and a reserve for doubtful debts is to be provided @ 2%. (iv) Mr. Shivkumar has been maintaining a steady
gross profit rate of
30% on turnover.
(v) Outstanding salary on 31st March, 2002 was` 8,000 and on 31st
March, 2003 was` 10,000 on 31st March, 2002. Profit & Loss
Account had a credit balance of ` 40,000.
(vi) 20% of total Sales and total purchases are to be treated as for
cash.
(vii) Additions in Furniture Account took place in the beginning of the
year and there was no opening provision for doubtful debts. (20 marks)
Answer:
Particulars To Opening stock (balancing figure) To Purchases
To Gross profit c/d [i.e. 30%]
To Misc. expenses (`80,000☐`8,000 +` 10,000) To Depreciation: Building
Furniture
Motor Car
To Loss on sale of furniture To Bad debts

(For the year ended 31st March, 2003)
1,20,000
4,40,000 4,40,000
By Gross profit b/d 1,20,000
82,000 By Misc. receipts 20,000
By Net loss transferred to 25,840

Capital A/c
` 36,000 ` 7,800 ` 16,000
To Provision for doubtful debts

59,800
11,000
8,000
5,040
1,65,840 1,65,840
Capital as on 1
Liabilities ` st April 2002 Profit and Loss A/c Opening balance 40,000
Less: Loss during the year 25,840 Sundry creditors

Bills payable
Outstanding salary
Balance Sheet of Mr. Shiv Kumar
` Assets ` ` 7,16,000 Building 3,20,000 Add: Addition
during the year 40,000
14,160 Less: Provision for 3,60,000 1,12,000 depreciation

16,000 36,000 3,24,000
10,000 Furniture 60,000
Less: Sold during 20,000

the year40,000
A d d : A d d i t i o n 28,000
during the year68,000
Less: Depreciation 6,800 61,200

Motor car 80,000 Less: Depreciation 16,000 64,000
Stock in trade 40,000
Sundry debtors 2,52,000
Less: Provision for

D/D @ 2% 5,040 2,46,960
Bills receivable 28,000

Cash in hand and at bank 1,04,000
8,68,160 8,68,160
Working Notes:
1. Sundry Debtors Account
Particulars ` To Balance b/d 1,60,000 To Sales A/c 3,20,000
4,80,000
Particulars `
By Cash/Bank A/c 2,00,000

By Bills receivable A/c 20,000
By Bad debts A/c 8,000
By Balance c/d (bal. fig.) 2,52,000
4,80,000
2. Sundry Creditors Account
Particulars
To Cash/Bank A/c
To Bills payable A/c
To Balance c/d (balancing
figure)
` Particulars ` 1,84,000 By Balance b/d 1,20,000

16,000 By Purchases A/c 1,92,000
1,12,000
3,12,000 3,12,000
3. Bills Receivable Account

To Sundry debtors A/c
4. Particulars
To Cash/Bank A/c (balancing figure)

To Balance c/d
` Particulars `
32,000 By Cash/Bank A/c (bal. fig.) 24,000
20,000 By Balance c/d 28,000
52,000 52,000

` Particulars ` 28,000 By Balance b/d 28,000 16,000 By Sundry creditors A/c 16,000
5.

To Miscellaneous
receipts A/c
To Sundry debtors A/c To Sales A/c
To Furniture A/c (sale) To Bills receivable A/c
6.
To Bank A/c
44,000 44,000
Cash/Bank Account
` Particulars `
1,80,000 By Misc. trade expenses A/c 80,000 By Purchases A/c 48,000 20,000 By Furniture A/c (bal. fig.) 28,000
2,00,000 By Sundry creditors A/c 1,84,000 80,000 By Bills payable A/c 28,000 8,000 By Building A/c 40,000
24,000 By Balance c/d 1,04,000
5,12,000 5,12,000
Furniture Account
` Particulars ` 60,000 By Bank/Cash A/c 8,000 28,000 By Depreciation A/c 1,000
By Profit and loss A/c 11,000

(loss on sale)
By Depreciation A/c 6,800
88,000 88,000
7. Opening Balance Sheet

(As on 31st March, 2002)
Liabilities ` Assets `
Capital (balancing figure) 7,16,000 Building 3,20,000

Profit and loss A/c 40,000 Furniture 60,000
Sundry creditors 1,20,000 Motor car 80,000
Bills payable 28,000 Stock in trade 80,000
Outstanding salary 8,000 Sundry debtors 1,60,000
Cash in hand and at bank 1,80,000

Lucky does not maintain proper books of accounts. However he maintains a record of his bank transactions and also
is able to give the following information from which you are requested to prepare his final accounts for the year
2003:
1.1.2003 31.12.2003 ` ` Debtors 1,02,500 — Creditors — 46,000 Stock 50,000 62,500 Bank Balance — 50,000
Fixed Assets 7,500 9,000 Details of his bank transactions were as follows:
` Received from Debtors 3,40,000

Additional Capital brought in 5,000
Sale of Fixed Assets (book value` 2,500) 1,750
Paid to Creditors 2,80,000
Expenses paid 49,250
Personal Drawings 25,000
Purchase of Fixed Assets 5,000
No cash transactions took place during the year. Goods are sold at cost plus 25%. Cost of goods sold was ` 2,60,000.
(16 marks)
Answer:
Trading and P & L A/c
(for the year ended 31st Dec. 2003)
Dr. Cr.
Particular Amt. (`) Particular Amt (`) By sales
To Opening stock 50,000 3,25,000
To Purchase (Bal. fig.) To Gross Profit c/d (` 2,60,000×25/100)
To Loss on sale of fixed asset To Expenses

To Dep. on fixed asset
(W. Note ☐2)
To Net Profit transfer to capital A/c 2,72,500 By Closing Stock 62,500
65,000
3,87,500 3,87,500 750 By Gross Profit b/d 65,000 49,250
1,000
14,000
65,000 65,000
Balance Sheet
(As on 31st December 2003)
Dr. Cr.
Liabilities Amount
Capital 1,69,000
Add: Additional Capital 5,000
Assets Amount Fixed Assets 9,000

Debtors 87,500
Stock 62,500
Bank balance 50,000
Add: Net profit 14,000
1,88,000
Less: Drawing 25,000 1,63,000
Creditors 46,000
2,09,000 2,09,000
Working Notes:
1. Bank Account
Particulars Amt. (`) Particulars Amt (`)
To Bal b/d (bal. fig.) 62,500 By Expenses 49,250

To Capital 5,000 By Creditors 2,80,000
To Debtors 3,40,000 By Drawings 25,000
To Fixed Assets (sale) 1,750 By Fixed Assets 5,000
(Purchases) 50,000
By Bal. c/d (given)
4,09,250 4,09,250
2. Fixed Assets A/c
Particulars Amt. (`) Particulars Amt (`) To bal. b/d 7,500 By Bank (sale) 1,750 To Bank (Purchase) 5,000 By P&
L A/c (loss on sale) 750
By Depreciation (bal. fig.) 1,000

By Bal. c/d 9,000
12,500 12,500
3. Debtors
Particulars Amt. (`) Particulars Amt (`) To Bal. b/d 1,02,500 By Bank 3,40,000 To Sales 3,25,000 By Bal. c/d
(bal. fig.) 87,500 4.
Particulars To Bank
To Bal. c/d
Liabilities Capital (Bal. fig.)

Creditors A/c
Amt. (`) Particulars Amt (`)
2,80,000 By Bal. b/d (bal. fig.) 53,500

46,000 By Purchase (Refer Trading A/c) 2,72,500
3,26,000 3,26,000
Balance Sheet (opening)

(As on 1st Jan. 2003)
Amt. (`) Assets Amt. (`)
1,69,000 Fixed Assets 7,500

Creditors (W. Note☐4) 53,500 Debtors 1,02,500
Stock 50,000
Bank (W. Note ☐ 1) 62,500

From the following furnished by Shri Ramji, prepare Trading and Profit and Loss account for the year ended
31.3.2005. Also draft his Balance Sheet as at 31.3.2005:
1.4.2004 31.3.2005
` ` Creditors 3,15,400 2,48,000
Expenses outstanding 12,000 6,600
Fixed assets (includes Machinery) 2,32,200 2,40,800
Stock in hand 1,60,800 2,22,400
Cash in hand 59,200 24,000
Cash at Bank 80,000 1,37,600
Sundry Debtors 3,30,600 ? Details of the year's transactions are as follows:
Cash and discount credited to debtors 12,80,000 Returns from Debtors 29,000 Bad Debts 8,400 Sales (Both Cash
and Credit) 14,36,200 Discount allowed by creditors 14,000 Returns to creditors 8,000 Capital introduced by
Cheque 1,70,000 Collection from debtors (Deposited into Bank after receiving cash) 12,50,000 Cash purchases
20,600 Expenses paid by cash 1,91,400 Drawings by Cheque 8,600 Machinery acquired by Cheque 63,600 Cash
deposited into Bank 1,00,000 Cash withdrawn from Bank 1,84,800 Cash Sales 92,000 Payment to creditors by
Cheque 12,05,400 Note : Ramji has not sold any Fixed Asset during the year. (16 marks)
Answer:
Particulars To Opening Stock To Purchase

– Cash
In the books of Shri Ramji

Trading Profit & Loss A/c
(For the year ended 31.3.05)
` Particulars ` 1,60,800 By Sales
– Cash 92,000
20,600 – Credit 13,44,200
– Credit 11,60,000 14,36,200
(☐) Return (8,000) 11,72,600 (☐) Return (29,000) 14,07,200 To Gross Profit c/d 2,96,200 By Closing stock
2,22,400 16,29,600 16,29,600 To Bad Debts 8,400 By Gross profit b/d 2,96,200 To Discount 30,000 By Discount
received 14,000 To Expense (Note - 7) 1,86,000
To Depreciation (Note - 4) 55,000
To N. P. transfer to capital A/c 30,800
Liabilities
Capital
Opening Balance (+) Fresh brought (☐) Drawings
Balance Sheet
(As on 31.3.05)
` Assets `
Fixed Assets
5,35,400 Opening Balance 2,32,200
1,70,000 (+) Purchase 63,600
(8,600) (☐) Depreciation (55,000) 2,40,800
(+) N.P.
Creditors
Expenses Outstanding 30,800 7,27,600 Stock 2,22,400
2,48,000 Cash-in-Hand 24,000

6,600 Cash-at-Bank 1,37,600
Debtors 3,57,400
9,82,200 9,82,200 Working Notes: 1.
Particulars To Discount
To Returns
To Bank
To Bal. c/d
2.
Creditor’s Account
` Particulars ` 14,000 By Balance b/d 3,15,400 8,000 By Purchase 11,60,000
12,05,400
2,48,000
14,75,400 14,75,400
Debtor’s Account
3,30,600 By Cash 12,50,000

13,44,200 By Discount 30,000
By Return 29,000
By Bad Debts 8,400
3. Particulars
To Balance b/d To Capital
To Debtor’s A/c To Cash
To Cash
To Bank
To Sales
Cash & Bank Account

Cash Bank Particulars Cash Bank 59,200 80,000 By Bank 12,50,000 — 1,70,000 By Purchase 20,600 —
12,50,000 By Expenses 1,91,400 — 12,50,000 By Drawings 8,600 — 1,00,000 By Fixed Assets — 63,600
1,84,800 — By Bank 1,00,000 — 92,000 — By Cash — 1,84,800

By Creditors — 12,05,400
By Balance c/d 24,000 1,37,600
15,86,000 16,00,000 15,86,000 16,00,000 4.

To Bank
Fixed Assets Account

` Particulars ` 2,32,200 By Depreciation 55,000 63,600 By Balance c/d 2,40,800 2,95,800 2,95,800 5. Expenses
Outstanding Account
Particulars To Expenses A/c To Balance c/d
` Particulars ` 12,000 By Balance b/d 12,000 6,600 By Expenses A/c 6,600 18,600 18,600 6. Balance Sheet (as on
1.4.04)
Liabilities Capital
Creditors
Expense Outstanding
` Assets `
5,35,400 Fixed Assets 2,32,200

3,15,400 Stock 1,60,800
12,000 Cash-in-hand 59,200
Cash-at-Bank 80,000
Debtors 3,30,600
7. Calculation of Expenses :
Expenses paid 1,91,400 (☐) Outstanding as on 1.4.04 (12,000) (+) Outstanding as on 31.3.05 6,600

Mr. X runs a retail business. Suddenly he finds on 31.3.2006 that his Cash and Bank balances have reduced
considerably. He provides you the following information :
(i) Balances 31.3.2005 31.3.2006

` ` Sundry Debtors 35,400 58,800
Sundry Creditors 84,400 22,400
Cash at Bank 1,08,400 2,500
Cash in hand 10,400 500
Rent (Outstanding for one month) 2,400 3,000
Stock 11,400 20,000
Electricity and Telephone bills — outstanding — 6,400
(ii) Bank Pass-book reveals the following :
` Total Deposits 10,34,000
Withdrawals :
Creditors 8,90,000
Professional charges 34,000
Furniture & Fixtures (acquired on 1.10.05) 54,000
Proprietor’s drawings 1,61,900
(iii) Rent has been increased from January, 2006.
(iv) Mr. X deposited all cash sales and collections from debtors after meeting wages, shop expenses, rent, electricity
and telephone charges. (v) Mr. X made all purchases on credit.
(vi) His credit sales during the year amounts to ` 9,00,000. (vii) He incurred ` 6,500 per month towards wages.
(viii) He incurred following expenses :
(a) Electricity and telephone charges ` 24,000 (paid) (b) Shop expenses ` 18,000 (paid).
(ix) Charge depreciation on furniture and fixtures @10% p.a. Finalise the accounts of Mr. X and compute his profit
for the year ended 31.3.2006, Prepare his statement of affairs and reconcile the profit and capital balance. (20 marks)
Answer:
Dr. Total Debtor A/c Cr. Particulars Amount
To Opening balance 35,400
To Credit sales 9,00,000
9,35,400
Particulars Amount By Cash (Bal. fig.) 8,76,600

By Balance c/fd 58,800
9,35,400
Total Creditors A/c
Particulars Amount Particulars Amount To Bank 8,90,000 By Opening balance 84,400
To Closing balance 22,400 By Purchase A/c (credit) (Balancing figure) 8,28,000
9,12,400 9,12,400
Cash Book
Particulars Cash
To Balance b/d 10,400

To Sundry debtors 8,76,600
To Cash sales
(bal. fig.) 2,97,500
To Cash (as per contra)
Bank Particulars Cash Bank
1,08,400 By Bank (as per contra) 10,34,000 — — By Wages 78,000 — By Rent 30,000 — — By Electricity &
10,34,000 telephone 24,000 —
By Shop expenses 18,000 — By Professional charges — 34,000

By Sundry creditors — 8,90,000
By Furniture — 54,000
By Drawings — 1,61,900
By Balance C/f 500 2,500
11,84,500 11,42,400 11,84,500 11,42,400

Trading and Profit & Loss A/c of Mr. X
Dr. for the period ending March 31,2006 Cr.
Particulars Amount Particulars Amount
To Opening Stock
To Purchase
To Gross Profit c/d
11,400 By Sales :
8,28,000 ☐ Cash 2,97,500 3,78,100 ☐ Credit 9,00,000 11,97,500

12,17,500 12,17,500
To Wages
To Rent (30,000 + 3,000 - 2,400)
To Electricity & Telephone
(24,000 + 6,400)
To Professional Charges
To Shop Expenses
To Depreciation [10% of 54,000 ×
]
To Net profit
78,000 By Gross b/d 3,78,100 30,600
30,400
34,000
18,000
2,700
1,84,400
3,78,100 3,78,100
Statement of Affairs of Mr. X as on 31-3-2005 Liabilities ` Assets `
Capital (Bal. fig.) 78,800 Furniture — Sundry Creditors 84,400 Stock 11,400
Outstanding exp. 2,400 Sundry Debtors 35,400
Rent Bank 1,08,400
Cash 10,400
1,65,600 1,65,600
Statement of Affairs of Mr. X as on 31-03-2006
Liabilities ` Assets ` Opening Capital 78,800 Furniture 54,000 + Profit for the year 1,84,400 (☐) Depreciation
2,700 51,300 2,63,200 Stock 20,000 (☐) Drawings (☐) 1,61,900 1,01,300 Sundry Debtors 58,800
Creditors Exps. :– 22,400 Bank 2,500 ☐ Rent 3,000 Cash 500 ☐ Electricity 6,400 9,400
1,33,100 1,33,100
Reconciliation of profit:–
` Capital as on 31-3-2006 1,01,300 Add: Drawings 1,61,900
2,63,200
Less: Opening Capital ☐ 78,800
Profit for the year ending 31-3-2006 1,84,400
Mr. Ashok keeps his books in Single Entry system. From the following information, prepare Trading and Profit &
Loss Account for the year ended 31st March, 2006 and the Balance Sheet as on that date :
Assets and Liabilities 31.3.2005 31.3.2006

(`) (`) Sundry Creditors 30,000 25,000
Outstanding expenses 1,000 500
Fixed Assets 23,000 22,000
Stock 16,000 22,500
Cash in Hand and at Bank 14,000 16,000
Sundry Debtors ? 36,000
Following further details are available for the Current year :
Cash receivable from debtors Returns inward
Bad Debts
Total Sales
Discount received
Return outwards
Capital introduced
(paid into Bank)
` ` 1,30,000 Cash purchases 2,000 3,000 Fixed Assets purchased

1,000 and paid by cheque 1,000
1,50,000 Drawings by cheques 6,500

1,500 Deposited into the bank 10,000
1,000 Withdrawn from bank 18,500
Cash in hand at the end 2,500
15,000 Paid to creditors by cheques 1,20,000
Cheques received from Debtors 1,25,000 Expenses paid 20,000
(16 marks)
Answer:
In the books of Mr. Ashok
Trading and Profit and Loss A/c for the year ended 31.03.06
Particulars Amt. (`) Particulars Amt. (`)
To Opening Stock 16,000 By Sales

To Purchases (Note-3) Cash 11,500
(1,17,500 + 2,000) Credit 1,38,500
1,19,500 1,50,000
Less: Return Outward 1,000 1,18,500 Less: Return Inward 3,000 1,47,000
To Gross profit b/d 35,000 By Closing Stock 22,500
1,69,500 1,69,500
To Expenses By Gross Profit b/d 35,000 (20,000+500☐1,000) 19,500 By Discount Received 1,500
To Bad debts 1,000
To Discount 1,000
To Depreciation on Fixed
Assets (Note-5) 2,000
To Net Profit (transferred to capital) 13,000
36,500 36,500
Balance Sheet as on 31-03-06

Liabilities Amt.(`) Assets Amt. (`) Capital : Fixed Assets 22,000 Opening balance 49,500 Stock 22,500 Add:
Introduced 15,000 Sundry Debtors 36,000 Add: Net Profit 13,000 Cash in Hand and at Bank 16,000
77,500
Less: Drawings 6,500 71,000
Sundry Creditors 25,000
Outstanding expenses 500
96,500 96,500 Working Notes:

1. Combined Cash and Bank A/c
Particulars
To Bal. b/d
To Capital
To Sundry debtors To Sundries (contra) To Sundries (contra) To Sales
(Cash sales
Balancing fig.)
2.
Particulars To Bal. b/d

To Sales
(1,50,000☐11,500)
Amt. ( `) Particulars Amt. (`) 14,000 By Purchases 2,000 15,000 By Fixed Assets 1,000
1,25,000 By Drawings 6,500

10,000 By Sundries (contra) 10,000
18,500 By Sundries (contra) 18,500
11,500 By Sundry Creditors 1,20,000
By Expenses 20,000
By Bal. b/d 16,000
1,94,000 1,94,000
Total Debtors A/c
Amt. (`) Particulars Amt. (`) 27,500 By Bank 1,25,000
1,38,500 By Bad debts 1,000
By Sales Return 3,000
By Discount (Note-6) 1,000
By Bal. c/d 36,000
1,66,000 1,66,000
3. Particulars
To Bank
To Returns Outward To Discount Received To Bal. c/d
Total Creditors A/c

` Particulars ` 1,20,000 By Bal. b/d 30,000
1,000 By Purchases (Bal. figure) 1,17,500 1,500

25,000
1,47,500 1,47,500 4. Balance Sheet as on 31-03-05 Liabilities
Opening Capital (Bal.Fig.) Sundry Creditors

5. Particulars
To Bal. b/d
To Bank A/c (Purchase)
Amt. Assets Amt. (`) (`)
49,500 Fixed Assets 23,000

30,000 Stock 16,000
1,000 Debtors 27,500
Cash in Hand & at Bank
(` 4,500 +` 9,500) 14,000
80,500 80,500 Fixed Assets A/c

Amt. (`) Particulars Amt. (`) 23,000 By Depreciation 2,000 1,000 By Bal. c/d 22,000 24,000 24,000 6. Cash
Receivable from Debtors : 1,30,000
Less: Cheque Received 1,25,000

Bad debts 1,000
Return Inward 3,000 1,29,000 Discount allowed 1,000

Mr. Y keeps his books under single entry system. On 31stMarch, 2006 his Balance Sheet was as follows :
Liabilities
Capital of Mr. Y
Creditors
Bills payable
Expenses outstanding
` Assets `
4,50,000 Fixed assets 2,25,000
8,70,000 Stock 9,15,000
1,87,500 Debtors 2,22,000
67,500 Bills receivable 90,000
Prepaid insurance 3,000
Cash/Bank balance 1,20,000
15,75,000 15,75,000
(i) Following are the summary of cash and bank transactions for the year ended 31st March, 2007 :
` Cash sales 1,10,70,000
Collection from debtors 22,65,000
Payments to creditors 1,12,60,500
Paid for bills payable 12,22,500
Sundry expenses paid 9,31,050
Drawings for domestic expenses by Mr. Y 3,60,000
Cash and bank balance as on 31.3.2007 1,90,950
(ii) Following further details are furnished :

Gross profit on sales @ 10%
Bills receivable from debtors during the year 6,52,500 Discount allowed to debtors 54,000 Discount received from
creditors 42,000 Bills receivable endorsed to creditors 22,500 Annual fire insurance premium paid 63,800 (This is
paid on 1st August every year 9,000 Depreciate fixed assets @ 10%
(iii) Balances as on 31.3.2007 are given below :
` Stock in hand 9,75,000

Debtors 2,28,000
Bills receivable 2,10,000
Bills payable 2,10,000
Outstanding expenses 7,500
Prepare Trading, Profit and Loss Account for the year ended 31st March, 2007 and Balance Sheet on that date. (16
marks) Answer:
Working Note: 1.
To Balance b/f To Debtors

2.
To Balance b/f
To Credit Sales
(Balancing figure)
3. Bills Receivable Account
``
90,000 By Cash (Balancing figure) 5,10,000

6,52,500 By Creditors (Bills endorsed) 22,500
By Balance c/f 2,10,000
7,42,500 7,42,500 Debtors Account

` ` 2,22,000 By Cash/Bank 22,65,000 29,77,500 By Discount allowed 54,000 By Bills receivable 6,52,500
By Balance c/f 2,28,000

31,99,500 31,99,500

` ` To Bank 12,22,500 By Balance b/f 1,87,500 To Balance c/f 2,10,000 By Creditor (Balance figure) 12,45,000
14,32,500 14,32,500
4. Creditors Account
To Cash/Bank
To Discount
To B/R endorsed
To B/P
To Balance c/f (Balancing figure) `
1,12,60,500 By 42,000 By 22,500
12,45,000
10,02,750
1,35,72,750
Stock Account `
` Balance b/f 8,70,000

Purchases 1,27,02,750
1,35,72,750 5. ` To Balance b/f

To Purchases
(Balancing figure)
9,15,000 By Cash of good sold 1,26,42,750 (` 1,40,47,500 ×

90%)
1,27,02,750 By Balance c/d 9,75,000

1,36,17,750 1,36,17,750 6. Expenses for the year ended 31st March, 2007
Particular ` Expenses paid during the year 9,31,050

Add: Outstanding expenses as on 31.32007 7,500
9,38,550
Less: Outstanding expenses as on 1.4.2006 67, 500
8,71,050
Add: Prepaid Insurance as on 1.4.2006 3,000
8,74,050
Less: Prepaid Insurance as on 31.3.2007 (9,000 × 4/12) 3,000
Expenses shown in the profit and loss account for the year 8,71,050
ended 31.3.2007
Trading and Profit and Loss Account of Mr. Y for the year 31.3.2007 Dr.
Particulars
To Opening stock To Purchase (W.N.5) To Gross profit
To Expenses
(W.N.6)
To Discount allowed To Depreciation To Net profit
Liabilities
Capital 4,50,000
Add: 4,99,200
9,49,200
Less: Drawing 3,60,000
Bills payable
Creditors
Cr. ` Particulars ` 9,15,000 By Sales: Cash 1,10,70,000

1,27,02,750 Credit (W.N.2) 29,77,500 1,40,47,500

1,50,22,500 1,50,22,500
By Gross Profit 14,04,750

8,71,050By Discount received 42,000
54,000
22,500
4,99,200
14,67,750 14,46,750 Balance Sheet of Mr. Y
(as on 31st March, 2007)
` Assets `
Fixed assets 2,25,000

Less: Depreciation 22,500 2,02,500 Stock 9,75,000
5,89,200 Debtors 2,28,000

2,10,000 Bills receivable 2,10,000
10,02,750 Prepaid insurance 3,000
7,500 Cash on hand/bank 1,90,950
18,09,450 18,09,450
Q.2.11 2008 - May [5] (ii), RTP Practical

A company sold 25% of the goods on cash basis and the balance on credit basis. Debtors are allowed 2 months
credit and their balance as on 31.3.2008 is` 1,40,000. Assume that the sale is uniform through out the year. Calculate
the total sales of the company for the year ended 31.3.2008.
(2 marks)
Answer:
Calculation of total sales ` Total sales always equal to cash sales and credit sales
First we calculate credit sale
Debtor balance is 2 month outstanding
and sale is uniform throughout the year 1,40,000 Total credit Sale is
12 (A) (it is 75% if total sales) 8,40,000 Cash Sales is 25% of total sale
2,80,000 Total sales (A+ B) 11,20,000 Space to write important points for revision
Q.2.12 2008 - Nov [2] (a), RTP Practical The books of Mr. Z showed the following information :
1.1.2007 31.12.2007
` ` Bank balance ) 50,000

Debtors ) 87,500
Creditors ) 46,000
Stock 50,000 62,500
Fixed Assets 7,500 9,000
The following are the details of the bank transactions :
`
Receipt from customers 3,40,000
Payment to creditors 2,80,000
Capital brought in 5,000
Sale of Fixed assets 1,750
Expenses paid 49,250
Drawings 25,000
Purchase of Fixed assets 5,000
Other informations :
(i) Cost of goods sold 2,60,000
(ii) Gross profit 25% on cost of goods sold ) (iii) Book value of Assets sold 2,500
Prepare Trading, Profit & Loss account for the year ended 31.12.2007 and Balance Sheet as at 31.12.2007. (8
marks) Answer:
In the Books of Mr. Z
Liabilities ` Assets ` Capital 1,69,000 Fixed Assets 9,000 Add : Net Profit 14,000 Stock 62,500 Add : Capital
brought in 5,000 Debtors 87,500 1,88,000 Bank Balance 50,000 Less: Drawings
Creditors
25,000 1,63,000
46,000
2,09,000 2,09,000 Trading and Profit & Loss Account
for the year ended 31.12.2007
Dr. Cr. Particulars
To Opening Stock
To Purchases (W.N.1)
To Gross Profit c/d
` Particulars ` 50,000 By Sales (W.N.2) 3,25,000

65,000
3,87,500 3,87,500
To Expenses 49,250 By Gross Profit b/d 65,000
To Depreciation on fixed assets 1,000
To Loss on sale of
Fixed assets 750
65,000 65,000
Working Notes :
1. Opening stock + Purchases☐ Closing stock = Cost of goods sold 50,000 + Purchases☐ 62,500 = 2,60,000
Purchases = ` 2,72,500/
It has been assumed that all purchases are on credit.
2. Sales = Cost of goods sold + Gross profit
= 2,60,000 + (25% of 2,60,000)
= 3,25,000
It has been assumed that all sales are on credit.
3.
Liabilities Balance Sheet as on 1.1.2007

` Assets ` Capital (Bal fig) Creditors
Total 4 (a)
Dr.
Particulars
To bal b/d (Bal fig) To sales
Total 1,69,000 Fixed Assets 7,500

53,500 Stock 50,000
Debtors 1,02,500
Bank 62,500
2,22,500 2,22,500
Debtors Account Cr. ` Particulars `
1,02,500 By Bank 3,40,000 3,25,000 By bal c/d 87,500
4,27,500 4,27,500
(b) Dr. Particulars To Bank
To bal c/d
Creditors Account Cr. ` Particulars `

2,80,000 By bal b/d 53,500 46,000 (bal fig)
By Purchases 2,72,500
3,26,000 3,26,000
(c) Dr. Particulars
To Balance b/d
To Bank (purchase)
Fixed Assets Account Cr. ` Particulars ` 7,500 By Bank (sale) 1,750 5,000 By P/L (loss) 750
By Dep. (bal fig) 1,000 By Bal c/d 9,000 12,500 12,500 (d) Dr.
Particulars To balance b/d (bal fig)

To Debtors
To Capital
To Fixed asset
Bank Account Cr. ` Particulars `

62,500 By Creditors 2,80,000 By Expenses 49,250 3,40,000 By Drawings 25,000 5,000 By Fixed assets 5,000 1,750
By bal c/d 50,000 4,09,250 4,09,250 Space to write important points for revision
Following is the Balance Sheet of Mr. Ram, a small trader, as on 31st March, 2008:
Liabilities ` Assets ` Creditors 1,00,000 Cash 10,000 Capital 4,00,000 Bank 20,000 Stock 80,000 Debtors 1,00,000
Fixed Assets 2,90,000 5,00,000 5,00,000 A fire occurred on the night of 31st March, 2009, destroying the
accounting records as well as the closing cash of the trader. However, the
following information was available :
(i) Debtors and creditors as on 31st March, 2009 showed an increase of 20% as compared to 31st March, 2008.
(ii) Credit period :
Debtors : 1 month
Creditors : 2 months
(iii) Stock was maintained at the same level throughout the year. (iv) Cash sales constituted at 20% of the total sales.
(v) All purchases were on credit basis only.
(vi) Current ratio on 31st March, 2009 was exactly 2.
(vii) Total expenses excluding depreciation for the year amounted to ` 5,00,000.
(viii) Depreciation was provided @ 10% on the closing book value of fixed assets.
(ix) Bank and cash transactions for the financial year 2008-09 were as under :
(a) Payment to creditors included` 1,00,000 by cash. (b) Received from debtors included`11,80,000 by way of
cheques. (c) Cash deposited into the Bank ` 2,40,000.
(d) Personal drawings from Bank ` 1,00,000.
(e) Fixed assets purchased and paid by cheques ` 4,50,000.
(f) Assume that cash destroyed by fire is written off in the Profit and Loss account.
(i) Trading and Profit and Loss account of Shri Ram for the year ended 31st March, 2009.
(ii) A Balance Sheet as at that date. (8 marks)
Answer:
Trading and Profit and Loss Account for the year ended 31.3.2009
Particulars To Opening stock To Purchases (W.N.1) To Gross profit
To Expenses
To Loss of cash by fire To Depreciation
To Net profit transferred
to Capital A/c
` Particulars ` 80,000 By Sales (W.N.2)
7,20,000 Cash 3,60,000
10,80,000 Credit 14,40,000 18,00,000
18,80,000 18,80,000
5,00,000 By Gross Profit 10,80,000
20,000
74,000
4,86,000
10,80,000 10,80,000 Balance Sheet as on 31.3.2009

Liabilities ` Assets ` ` Creditors 1,20,000 Cash at bank (W.N.3) 40,000 Capital 4,00,000 Debtors 1,20,000 Add: Net
profit Stock 80,000
during the year 4,86,000 Fixed assets 2,90,000

8,86,000 During the year 4,50,000
Less: Drawings 1,00,000 7,86,000 7,40,000
Less: Depreciation 74,000 6,66,000
Working Notes:
(1) Calculation of creditors as on 31.3.2009 and credit purchase for 2008-2009
Creditors = Previous year creditors + 20% increase
= 1,00,000 + 20,000
= ` 1,20,000
Credit purchases = Creditors at the end ×

= 1,20,000 × = ` 7,20,000
(2) Calculation of Debtors as 31.3.2009 and Cash and Credit Sales for 2008-2009
Debtors on 31.3.2009 = Debtors on 31.3.2008 + 20% Increase
= 1,00,000 + 20,000
=` 1,20,000
Credit sales for 2008-2009 = Debtors at the end (i.e. one month credit) × 12
= ` 1,20,000 × 12 = ` 14,40,000 Total sales = ` 14,40,000 × = ` 18,00,000
Cash sales = Total sales – Credit sales

= ` 18,00,000 –` 14,40,000
= ` 3,60,000
(3) Cash and Bank Balance as on 31.3.2009

Current ratio = 2
Current ratio = =
Current assets = Current liabilities × 2

Current assets = 1,20,000 × 2 = 2,40,000
Cash and bank balance = Current assets – (Debtors + Stock) Cash and bank balance = 2,40,000 – (1,20,000 +
80,000) Cash and bank balance = 2,40,000 – 2,00,000 =` 40,000
(4) Cash Account
Particulars
To Balance b/d
To Sales A/c
To Debtors A/c (W.N.6) `
10,000 By 3,60,000 By 2,40,000 By
By 6,10,000
Particulars ` Creditors A/c 1,00,000
Bank A/c 2,40,000

Expenses A/c 2,50,000
(5,00,000 –2,50,000)
Loss by fire (Bal.fig.) 20,000
6,10,000 (5) Particulars
To Balance b/d To Debtors A/c To Cash A/c
(6) Particulars

(7) Particulars
To Cash A/c
To Bank (Bal. fig.) To Balance c/d
Bank Account
` Particulars `
20,000 By Creditors A/c (W.N.7) 6,00,000
11,80,000 By Fixed Assets A/c 4,50,000

2,40,000 By Drawings 1,00,000
By Expenses (Bal. fig.) 2,50,000
14,40,000 14,40,000
Debtors Account
` Particulars `
1,00,000 By Bank 11,80,000

14,40,000 By Cash (Bal. Fig.) 2,40,000
15,40,000 15,40,000
Creditors Account
` Particulars ` 1,00,000 By Balance b/d 1,00,000 6,00,000 By Purchases A/c 7,20,000 1,20,0002
1. Debtors on 31.3.2009 = Debtors on 31.3.2008 × 120% i.e. 1,00,000 x
120% = ` 1,20,000
2. Creditors on 31.3.2009 = Creditors on 31.3.2008 x 120% i.e. 1,00,000
x 120% =` 1,20,000.
Q.2.14 2010 - May [2] Practical The books of account of Ruk Ruk Maan of Mumbai showed the following figures
:
31.3.2008 31.3.2009
` ` Furniture & Fixtures 2,60,000 2,34,000
Stock 2,45,000 3,20,000
Debtors 1,25,000 ? Cash in hand & Bank 1,10,000 ? Creditors 1,35,000 1,90,000
Bills Payable 70,000 80,000
Outstanding Salaries 19,000 20,000
An analysis of the cash book revealed the following :
` Cash sales 16,20,000
Collection from debtors 10,58,000
Discount allowed to debtors 20,000
Cash purchases 6,15,000
Payment to Creditors 9,73,000
Discount received from creditors 32,000
Payment for bills payable 4,30,000
Drawings for domestic expenses 1,20,000
Salaries paid 2,36,000
Rent paid 1,32,000
Sundry trade expenses 81,000
Depreciation is provided on furniture & fixtures @ 10% p.a. on diminishing balance method. Ruk Ruk Maan
maintains a steady gross profit rate of 25% on sales.
You are required to prepare trading and profit and loss account for the year ended 31st March, 2009 and Balance
Sheet as on that date. (16 marks)
Answer:
Particulars
To Opening stock To Purchases : Cash

Credit (W.N.i)
To Gross profit c/d
To Salaries (W.N.vi) To Rent

To Sundry trade expenses To Discount allowed To Depreciation on
furniture & fixtures To Net profit
In the books of Ruk Ruk Maan

Trading & Profit & Loss Account
(For the year ended 31st March, 2009)
2,45,000 By Sales :
Cash 16,20,000
6,15,000 Credit (W.N.iii) 11,00,000
6,80,000
30,40,000 30,40,000
2,37,000 By Gross profit b/d 6,80,000
1,32,000 By Discount 32,000
81,000 received
20,000
26,000 2,16,000
Liabilities
Capital
Opening balance (W.N.7) 5,16,000
Add : Net profit 2,16,000
7,32,000
Less : Drawings 1,20,000
Current liabilities & provisions : Creditors
Bills payable
Outstanding salaries
Balance Sheet
as at 31st March, 2009
Amount Assets Amount ` `
Fixed assets
Furniture & fixtures 2,34,000 Current assets :
Stock 3,20,000
6,12,000 Debtors (W.N.4) 1,47,000 Cash & bank (W.N.6) 2,01,000

1,90,000
80,000
20,000
Working Notes :
9,02,000 9,02,000
(i) Bills Payable Account
Particulars ` Particulars ` To Cash/Bank 4,30,000 By Balance b/d 70,000 To Balance c/d 80,000 By Trade
creditors (Bal. fig.) 4,40,000 5,10,000 5,10,000 (ii)
Particulars
To Cash/Bank
To Bills payable A/c (W.N.1)
To Discount received To Balance c/d
Creditors Account
` Particulars `
9,73,000 By Balance b/d 1,35,000
4,40,000 By Credit purchases 15,00,000 (Bal. fig.)

32,000
1,90,000
(iii)
Opening stock Add : Purchases Cash purchases 6,15,000

Credit purchases 15,00,000 21,15,000 23,60,000
Less : Closing Stock 3,20,000
Gross profit ratio on sales 25%
Calculation of credit sales

Particulars ` 2,45,000
Total sales Less : Cash sales Credit sales
27,20,000 16,20,000
11,00,000
(iv)
Particulars
To Balance b/d
To Credit sales (W.N.3)
(v) Debtors Account
` Particulars ` 1,25,000 By Cash/Bank 10,58,000

11,00,000 By Discount allowed 20,000
By Balance c/d (Bal. fig) 1,47,000
12,25,000 12,25,000
Salaries
Particulars `
Salaries paid during the year 2,36,000

Add : Outstanding salaries as on 31.03.2009 20,000
2,56,000
Less : Outstanding salaries as on 31.03.2008 19,000
2,37,000
(vi) Cash/Bank Account
Particulars ` Particulars ` To Balance b/d 1,10,000 By Cash purchases 6,15,000 To Cash sales 16,20,000 By
Creditors 9,73,000 To Debtors 10,58,000 By Bills payable 4,30,000
By Drawings 1,20,000
By Salaries 2,36,000
By Rent 1,32,000
By Sundry trade expenses 81,000
27,88,000 27,88,000
(vii) Balance Sheet
Liabilities
Creditors
Bills payable
Outstanding salaries
Capital (Bal. fig.)
` Asset ` 1,35,000 Furniture & fixtures 2,60,000
70,000 Stock 2,45,000

19,000 Debtors 1,25,000
5,16,000 Cash & bank 1,10,000

M/s. Ice Limited gives you the following information to find out Total Sales and Total Purchases :
Debtors as on 01.04.2011 70,000
Creditors as on 01.04.2011 81,000
Bills Receivables received during the year 47,000
Bills Payable issued during the year 53,000
Cash paid to suppliers 1,72,000
Bad Debts recovered 16,000 Bills Receivables endorsed to creditors 27,000 Bills Receivables dishonoured by
customers 5,000 Discount allowed by suppliers 7,000 Discount allowed to customers 9,000 Endorsed Bills
Receivables dishonoured 3,000 Sales Return 11,000 Bills Receivable discounted 8,000 Discounted Bills Receivable
dishonoured 2,000 Cash Sales 1,68,500 Cash Purchases 1,97,800 Debtors as on 31.03.2012 82,000 Creditors as on
31.03.2012 95,000 (8 marks) Answer :
(a) 1. Total Sales
2. Purchases
= Cash sales + Credit sales

=` 1,68,500 +` 2,25,000 (Refer W.N.1) =` 3,93,500
= Cash Purchases + Credit Purchases =` 1,97,800 +` 2,70,000 (Refer W.N.2) =` 4,67,800
Working Notes: 1.
Particulars
To Balance b/d
To Bills receivable dishonoured To Bills receivable dishonoured
(endorsed)
To Bills receivable dishonoured (discounted)

To Credit sales (bal. fig.)
Debtors Account ` Particulars `
70,000 By Bills receivable 47,000

5,000 By Cash 1,56,000
3,000 By Discount allowed 9,000
By Sales return 11,000
2,000 By Balance c/d 82,000
2,25,000
3,05,000 3,05,000
2. Creditors Account Particulars ` To Bills payable 53,000 By To Cash 1,72,000 By
To Discount received 7,000

To Bills receivable endorsed 27,000 By To Balance c/d 95,000
3,54,000
Particulars ` Balance b/d 81,000

dishonoured (endorsed)
Credit purchases (bal. fig.) 2,70,000
3,54,000 Note: It is assumed that sales return is out of credit sales only. Space to write important points for revision
A sole trader requests you to prepare his Trading and Profit & Loss Account for the year ended 31stMarch, 2013 and
Balance Sheet as at that date. He provides you the following information:
Statement of Affairs as at 31st March, 2012 Liabilities ` Assets `
Bank Overdraft 4,270 Furniture 96,000 Outstanding Expenses Computer 24,300 Salaries 8,000 Mobile Phone 8,000
Rent 6,000 14,000 Stock 89,500 Bills Payable 22,500 Trade Debtors 55,000 Trade Creditors 52,500 Bills
Receivable 15,000 Capital (balancing figure) 1,97,430 Unexpired Insurance 2,400 Stock of Stationery 200 Cash in
Hand 300 Total 2,90,700 Total 2,90,700 He informs you that there has been no addition to or sale of Furniture,
Computer and Mobile Phone during the accounting year 2012-13. The other assets and liabilities on 31st March,
2013 are as follows:
` Stock 95,400
Trade Debtors 65,000
Bills Receivable 20,000
Stock of Stationery 250
Cash at Bank 18,000
Cash at Hand 7,230
Salaries Outstanding 8,300
Rent Outstanding 6,000
Bills Payable 26,500
Trade Creditors 76,000
He also provides to you the following summary of his cash transactions:
Receipts ` Payments ` Cash Sales 5,09,800 Trade Creditors 3,06,000
Trade Debtors 1,51,900 Bills Payable 80,000
Bills Receivable 65,000 Salaries 99,000
Rent 72,000
Insurance Premium 10,000
Stationery 1,500
Mobile Phone Expenses 9,000
Drawings 1,20,000
It is found prudent to depreciate Furniture @ 5%, Computer @ 10% and Mobile Phone @ 25%. A provision for bad
debts @ 5% on Trade Debtors is also considered desirable. (16 marks)
Answer: Trading and Profit and Loss Account (For the year ended 31st March, 2013)
Particulars Amt. ` To Opening Stock 89,500 By To Purchase (W.N. 3) 4,13,500 To Gross profit c/d (Bal. Fig.)
3,34,100
By 8,37,100 To Insurance (W.N. 5) 9,900 By To Salaries (W.N. 6) 99,300 To Rent (W.N. 7) 72,000 To Stationery
(W.N.8) 1,450 To Mobile Phone expenses 9,000
To Provision for doubtful 3,250 debts (5% of 65,000)
To Depreciation: Furniture
Computer
Mobile Phone
To Net Profit
Liabilities
Capital A/c:
2,430
2,000 9,230
1,29,970 3,34,100
Particulars Amt.` Sales:

Credit (W.N.1)2,31,900
Cash 5,09,800 7,41,700 Closing stock 95,400
8,37,100 Gross profit b/d 3,34,100
3,34,100 Balance Sheet

Amt. ` Assets Amt. `
Furniture 96,000
1,97,430 Less: Depreciation (4,800) 91,200 Less: Drawings (1,20,000) Computer 24,300
77,430 Less: Depreciation (2,430) 21,870 Add: Net Profit 1,29,970 2,07,400 Mobile Phone 8,000
Bills Payable 26,500 Less: Depreciation (2,000) 6,000 Trade Creditors (W.N.3) Outstanding expenses: Salaries
Rent
Working Notes: 1.
Particulars
To Balance b/d To Credit Sales (bal. fig.) 2,31,900 By Bills Receivable A/c 70,000 (W.N.2)
By Balance c/d (given) 65,000 2,86,900 2,86,900 2. Bills Receivable Account
76,000 Trade Debtors (W.N.1) 65,000
Less: Provision for
8,300 doubtful debts (3,250) 61,750 6,000 Bills Receivable (W.N.2) 20,000

Stock of Stationery 250
Cash at bank 18,000
Cash in hand 7,230
3,24,200 3,24,200
Trade Debtors Account
Amt. (`) Particulars Amt. (`) 55,000 By Cash/ Bank 1,51,900
Particulars
To Balance b/d
To Sundry Debtors (bal. fig.)

15,000 By Cash/Bank 65,000
70,000 By Bal. c/d (given) 20,000
85,000 85,000
3. Trade Creditors Account Particulars

To Bank/ Cash
To Bills payable A/c (W.N.4) To Bal. C/d (given)

3,06,000 By Bal. b/d 52,500

84,000 By Credit Purchases 4,13,500
76,000 (bal. fig.)
4,66,000 4,66,000
4.
Particulars
To Cash/Bank A/c To Bal. c/d (given)
80,000 By Bal. b/d 22,500 26,500 By Sundry Creditors (bal. fig.) 84,000 1,06,500 1,06,500
5. Insurance expenses for the year 2012-2013 Particulars Amt. (`)
Insurance paid during the year 10,000

Add: Unexpired Insurance as on 1.4.2012 2,400
Less: Unexpired Insurance as on 31.3.2013 (2,500)
9,900
6. Salaries for the year 2012-2013

Salaries paid during the year 99,000

Add: Salaries outstanding as on 31.03.2013 8,300
1,07,300
Less: Salaries outstanding as on 1.4.2012 (8,000)
99,300
7. Rent expenses for the year 2012-2013
Rent paid during the year 72,000

Add: Rent outstanding as on 31.03.2013 6,000
78,000
Less: Rent outstanding as on 1.04.2012 (6,000)
72,000
8. Stationary expenses for the year 2012-2013 Particulars Amt. (`) Stock of stationery as on 1.4.2012 200 Add:
Stationary purchased during the year 1,500
1,700
Less: Stock of stationery as on 31.3.2013 (250)
1,450
Q.2.17 2014 - June [1] {C} (viii) Practical Answer the following questions (give workings):
(viii) Calculate the average collection period from the following details by adopting 360 days an year.
Average Inventory –` 10,80,000 Gross Profit Ratio – 10% Debtors – ` 6,90,000 Credit sales to total sales – 20%
Inventory Turnover ratio – 6 Times 1 year – 360
days (2 marks) [CSExe. - II] Answer:

Inventory turnover ratio =
6=
GP = 64,80,000
GP ratio = 10%
Hence, Sates = COGS ×
= 64,80,000 × = 72,00,000 Credit sales = 72,00,000 × 20% = 14,40,000 Average collection Period =
= = 172.5 days
Q.2.18 2014 - May [3] Practical Following are the incomplete information of Moonlight Traders: The following
balances are available as on 31.03.2013 and 31.03.2014.
(Fig. in `) Balances 31.03.2013 31.03.2014

Land and Building 5,00,000 5,00,000
Office equipment 1,05,000 85,000
Debtors ? 2,25,000
Creditors for purchases 95,000 ? Creditors for office expenses 20,000 15,000
Stock ? 65,000
Long term loan from SBI @ 12%. 1,25,000 1,00,000
Bank 25,000 ? Provision for tax (rate 30%) 35,000 30,000
Other Information in` Collection from debtors 9,25,000
Payment to creditors for purchases 5,25,000
Payment of office expenses 42,000
Salary paid 32,000
Selling expenses 15,000
Cash sales 2,50,000
Credit sales (80% of total sales)
Credit purchases 5,40,000
Cash purchases (40% of total purchases)
GP Margin at cost plus 25%
Discount Allowed 5,500
Discount Received 4,500
Bad debts (2% of closing debtors)
Depreciation to be provided as follows
Land and Building 5% Plant and Machinery 10% Office Equipment 15% Other adjustments :
(i) On 01.10.13 they sold machine having Book Value`40,000 (as on

31.03.2013) at a loss of`15,000. New machine was purchased on
01.01.2014.
(ii) Office equipment was sold at its book value on 01.04.2013. (iii) Loan was partly repaid on 31.03.14 together
with interest for the year.
Prepare Trading P & L A/c. and Balance Sheet as on 31.03.2014. (16 marks) Answer: Trading A/c of Moonlight
Traders for the year ended 31.3.2014 Particulars
To Opening Stock To Purchase

To Gross Profit (Note)
Amount (`) Particulars Amount (`)

1,65,000 By Sales 12,50,000
9,00,000 By Cl. Stock 65,000
2,50,000
13,15,000 13,15,000
P/L A/c of Moonlight Traders for the year ended 31.3.2014 Particulars
To Discount
To Salaries Expenses
To Office Expenses (W.N.3) To Selling expenses
Amount Particulars Amount (`) (`) 5,500 By Gross Profit 2,50,000
32,000 By Discount 4,500

37,000
15,000
To Interest on loan 15,000

(12% on` 1,25,000)
To Bad Debts (2% of ` 2,25,000) 4,500

To Loss on sale of Machinery 15,000
To Depreciation:
Land & Building 25,000
Plant & Machinery

(W.N.4b) 23,750
Office Equipment (W.N.5) 12,750 61,500

To Tax Provision (69,000 x 30%) 20,700
To Net profit after tax 48,300
2,54,500 2,54,500 Note:
GP = on cost = on sale = on 12,50,000 = 2,50,000
Balance Sheet
as on 31.3.2014
Liabilities `
Capital (W.N. 6) 8,95,500

Creditors for
Purchases (W.N. 8)
Loan from SBI
Tax Provision
` Assets `
Land and Building

9,43,800 (5,00,000 - 25,000) 4,75,000
Plant and Machinery
1,05,500 (W.N. 4a) (3,30,000 3,08,250 15,000 21,750)
1,00,000 Office Equipment 72,250 30,000 (85,000-12,750)
Debtors less Bad debts 2,20,500
(W.N. 7)
Stock 65,000
Bank Balance (W.N. 9) 53,300
Working Notes: 1.
Cash Sales
Calculation of Total Sales
Particulars `
2,50,000 Credit Sales (80% of total sales)

Cash Sales (20% of total sales)
Thus total Sales (2,50,000*100/20) 12,50,000 Credit Sales (12,50,000*80/100) 10,00,000
2. Calculation of Total Purchases

3.
Particulars `
Credit Purchases 5,40,000 Cash Purchases (40% of total purchases

Credit Purchases (60% of total purchases)
Thus total Purchases (5,40,000 x 100/60) 9,00,000 Cash Purchases (9,00,000 x 40/100) 3,60,000
Office Expenses Account
Particulars
To Bank A/c
To Balance c/d
Amt . (`) Particulars Amt. (`)

42,000 By Balance b/d 20,000
15,000 By Profit & Loss A/c 37,000
57,000 57,000
4. (a) Plant and Machinery Account
Particulars
To Opening Balance
To Bank (Purchases)
Amt. ` Particulars Amt.`

2,20,000 By Bank (Sale) 40,000
1,50,000 By Closing Balance 3,30,000
(b) Calculation of Depreciation on Plant & Machinery Particulars Amt. `

Depreciation on 1,80,000 x 10% (for full year) 18,000 1,50,000* x 10% x 3/12 (for 3 months) 3,750 40,000 x 10% x
6/12 (for 6 months) 2,000 23,750 * [3,30,000 - (2,20,000 - 40,000)]
(c) Sale of Machinery Account
Particulars Amt.` Particulars Amt.`
To Plant & Machinery 40,000 By Depreciation 2,000 By Profit and Loss A/c 15,000 By Bank (bal. fig.) (Sale)
23,000 40,000 40,000
5. Calculation of Depreciation on Office Equipments Particulars `
Opening Balance 1,05,000

Less: Closing Balance 85,000
Sale of Office Equipments 20,000
Balance of Office Equipments after sale on 01.04.2013 85,000
Depreciation @ 15%
6.
12,750 Opening Balance Sheet

as on 31.03.2013
Particulars
Creditors
Creditor for Exp.
Loan
Provision for Tax
Capital (Bal. fig.)
Amt. ` Particulars Amt.`

95,000 Land & Building 5,00,000
20,000 Plant & Machinery 2,20,000
1,25,000 Office Equipment 1,05,000
35,000 Debtors (W.N. 7) 1,55,500
8,95,500 Stock (from Trading A/c) 1,65,000
Bank 25,000
7.
Particulars
To Balance b/d (bal. fig.) To Sales
8.
Particulars
To Bank
To Discount
To Balance c/d (bal. fig.)
9.
Particulars
To Balance b/d To Debtors
To Cash Sales
Sundry Debtors A/c

Amt.` Particulars Amt.`
1,55,500 By Bank 9,25,000

10,00,000 By Discount 5,500
By Bad Debts 4,500
By Bal. c/d 2,20,500
11,55,500 11,55,500
Sundry Creditors A/c

Amt.` Particulars Amt.`
5,25,000 By Balance b/d 95,000
4,500 By Purchases 5,40,000
1,05,500
6,35,000 6,35,000
Bank Account
Amt.` Particulars Amt.` 25,000 By Creditors 5,25,000
9,25,000 By Office Expenses 42,000

2,50,000 By Salary Expense 32,000
To Sale of Machinery (W.N. 4c) 23,000 By Selling Expenses 15,000
To Sale of equipment 20,000 By Purchase (cash) 3,60,000
By Purchase of Machinery 1,50,000
By Bank Loan & Interest (W.N. 11) 40,000 By Tax (W.N.10) 25,700 By Balance c/d (bal. fig.) 53,300
10. Provision for Tax Account

Particulars Amt.` Particulars Amt.` To Bank (bal. fig.) 25,700 By Balance b/d 35,000 To Balance c/d 30,000 By
55,700 55,700 11. Repayment of Bank Loan and interest
Particulars ` Interest 1,25,000 x 12% 15,000

Loan (1,25,000 - 1,00,000) 25,000
40,000
Note:
The aforesaid solution has been worked out on the basis of the following assumptions:
(i) Tax profits are the same as accounting profits.

(ii) The figure of ` 2,25,000, being the closing balance of Sundry Debtors as given in the question is before
providing for bad debts. Accordingly, the closing balance has been reduced by the amount of bad debts.
Q.2.19 2014 - Dec [4] (b) Practical Answer the question:

(b) Prepare Total Creditors Account for the year ended on 31.03.2013 from the data given below:
` Creditors Balance on 01.04.2012 38,000

Credit Purchases during the year 2,67,000
Bills payable accepted 62,000
Cash paid to Creditors 1,37,000
B/R endorsed to creditors 16,000
Endorsed B/R dishonoured 3,000
B/P dishonoured 2,000
Purchase returns 11,000
Discount received 6,000
Transfer from Debtors ledger 7,000
(4 marks) [CSEP - II] Answer:
Particulars
To B/P
To Cash
To B/R (endorsed) To Purchase return
To Discount
To Total debtors A/c To Balance c/d
Total Creditors A/c
62,000 By Balance b/d 38,000

1,37,000 By Purchases 2,67,000
16,000 By Total debtors A/c 3,000

11,000 (endorsed B/R dishonoured) 6,000 By B/P 2,000 7,000
71,000
Q.2.20 2015 - May [4] Practical The following is the Balance Sheet of M/s. Care Traders as on 1-4-2014:
` Sources of Funds
Share Capital 10,00,000 Profit and Loss 1,47,800 Unsecured loan @ 10% 1,75,000 Trade Payables 45,800
13,68,600
Application of Funds
Machinery 8,25,500
Furniture 1,28,700
Inventory 1,72,000
Trade Receivables 2,29,600
Bank Balance 12,800
13,68,600
A fire broke out in the premises on 31-3-2015 and destroyed the books of account. The accountant could however
provide the following information: (1) Sales for the year ended 31-3-2014 was ` 18,60,000. Sales for the
current year was 20% higher than the last year.

(2) 25% sales were made in cash and the balance was on credit. (3) Gross profit on sales is 30%.
(4) Terms of Credit
Debtors : 2 months
Creditors : 1 month
All creditors are paid by cheque and all credit sales are collected in cheque.
(5) The Bank Pass Book has the following details (other than payment to creditors and collection from debtors)
` Machinery purchased 1,14,000

Rent paid 1,32,000
Advertisement expenses 80,000
Travelling expenses 78,400
Repairs 36,500
Sales of furniture 9,500
Cash withdrawn for petty expenses 28,300
Interest paid on unsecured loan 8,750
(6) Machinery was purchased on 1-10-2014.
(7) Rent was paid for 11 months only and 25% of the advertisement expenses relates to the next year.
(8) Travelling expenses of` 7,800 for which cheques were issued but not presented in bank.
(9) Furniture was sold on 1-4-2014 at a loss of` 2,900 on book value. (10) Physical verification as on 31-3-2015
ascertained the stock position at ` 1,81,000 and petty cash balance at nil.
(11) There was no change in unsecured loan during the year. (12) Depreciation is to be provided at 10% on
machinery and 20% on furniture.
Prepare Bank Account, Trading and Profit and Loss Account for the year ended 31-3-2015 in the books of M/s. Care
Traders and a Balance Sheet as on that date. Make necessary assumptions wherever necessary. (16 marks) Answer:
In the books of M/s Care Traders Bank Account as on 31.3.2015 Particulars Amount (`) To Opening Balance 12,800 By To
Cash sales (WN 1) 5,58,000 To Debtors (collection made) 16,24,600 By (WN 4) By To Furniture (sold) 9,500 By
By
By By By By
22,04,900
Particulars Amount (`) Creditors (Payment made) 14,86,250 (WN 6)
Machinery Purchased 1,14,000 Advertisement expenses 80,000 Rent 1,32,000
Travelling expenses 86,200 (78,400 + 7,800)
Repairs 36,500
Petty Cash 28,300
Interest on unsecured loan 8,750
Balance c/d (bal. fig.) 2,32,900
22,04,900
Particulars
To Opening Stock To Purchases (WN 2) To Gross Profit b/d (WN 1)
To Rent (1,32,000 ×12/11) To Advertisement expenses To Travelling expenses To Repairs

To Petty Cash expenses To Interest on unsecured loan To Loss on sale of Furniture
To Depreciation Machinery (WN 8) Furniture
To Net Profit
1,72,000 By Sales (WN 1) 22,32,000

6,69,600
24,13,000 24,13,000
1,44,000 By Gross Profit c/d 6,69,600
60,000
86,200
36,500
28,300
17,500
2,900
88,250
23,260
1,82,690
6,69,600 6,69,600
Balance Sheet of M/s. Care Traders
as on 01.04.2015
Liabilities (`)
Share Capital 10,00,000 Profit and Loss

Add: Profit for the year 1,82,690 3,30,490 Unsecured loan @10% 1,75,000 Interest on unsecured loan 8,750 Trade
Payable (WN 5) 1,30,950 Outstanding expenses Rent 12,000 16,57,190 Assets
Machinery
Gross block value (WN 7) 9,39,500
Less: depreciation (88,250)
8,51,250
Furniture
Gross block value (WN 9) 1,16,300
Less: depreciation (23,260) 93,040
Inventory 1,81,000
Trade Receivables (WN 3) 2,79,000
Prepaid expenses (Advertisement) 20,000
Bank balance 2,32,900
16,57,190 Working Notes :

1. Sale for the year ended 31.03.2015 ` Last year Sales 18,60,000 Add growth @20% 3,72,000 Sale for 2014-15
(A) 22,32,000 Cash Sales (25% of ` 22,32,000) 5,58,000 Credit sales (22,32,000 – 5,58,000) 16,74,000 Gross profit
30% on sales (B) 6,69,600 2. Purchases for the year ended 31.03.2015 ` Cost of Sales (A-B) (22,32,000 -6,69,600)
15,62,400 Add Closing stock 1,81,000
17,43,400 Less: Opening stock (1,72,000) Purchases during the year 15,71,400
3. Debtors as on 31.03.2015 ` Total credit sales 16,74,000 Debtors 2 months credit

(16,74,000 x 2/12) 2,79,000 4. Collections from Debtors account
To Opening Balance To Credit sales
Dr. Cr. Amount Amount

(`) (`)
2,29,600 By Bank (collection) Bal. fig. 16,24,600 16,74,000 By Closing balance 2,79,000
19,03,600 19,03,600
5. Creditors as on 31.03.2015 `
Total Credit purchases (all creditors paid by cheque hence there 15,71,400
are no cash purchases)
Creditors 1 month credit
(15,71,400 x 1/12) 1,30,950
6. Payment to Creditors account

Dr. Cr. Amount Amount (`) (`)
To Bank (Payment) Bal. fig. 14,86,250 By Opening Balance 45,800 To Closing Balance 1,30,950 By Credit
Purchases 15,71,400 16,17,200 16,17,200 7. Machinery Account
Dr. Cr. Amount Amount

(`) (`) To Opening Balance 8,25,500 By Closing Balance (Bal. 9,39,500 To Machinery Purchased 1,14,000 fig.)
9,39,500 9,39,500
8. Depreciation on Machinery ` Existing Machinery for 1 Year (` 8,25,500 x 10%) 82,550 New Machinery
(Purchased on 1.10.2014)
For 6 months (` 1,14,000 x ½ x 10%) 5,700
88,250 9. Furniture Account

Dr. Amount Cr. Amount (`) (`)
To Opening Balance 1,28,700 By Bank (Sale ) 9,500

By Loss on Sale 2,900
By Closing balance 1,16,300
1,28,700 1,28,700
Q.2.21 2015 - Nov [1] {C} (c) Practical Balance Sheet of Anurag Trading Co. on 31stMarch, 2014 is given below:
Liabilities Amount Assets Amount (`) (`)
Capital 50,000 Fixed Assets 69,000

Profit and Loss A/c 22,000 Stock in Trade 36,000
10% Loan 43,000 Trade Receivables 10,000
Trade Creditors 18,000 Deferred Expenditure 15,000
Bank 3,000
1,33,000 1,33,000
(i) Remaining life of fixed assets is 5 years with even use. The net r e a l i z a b l e v a l u e o f f i x e d a s s e t s a s o
n 3 1st Ma r c h , 2 0 1 5 w a s ` 64,000.
(ii) Firm’s sales and purchases for the year 2014-15 amounted to ` 5
lacs and` 4.50 lacs respectively.
(iii) The cost and net realizable value of the stock were` 34,000 and ` 38,000 respectively.
(iv) General Expenses for the year 2014-15 were ` 16,500. (v) Deferred Expenditure is normally amortized equally
over 4 years starting from F.Y. 2013-14 i.e. ` 5,000 per year.
(vi) Out of debtors worth ` 10,000, collection of` 4,000 depends on successful re-design of certain product already
supplied to the customer.
(vii) Closing trade payable is ` 10,000, which is likely to be settled at 95%.
(viii) There is pre-payment penalty of`2,000 for Bank loan outstanding. Prepare Profit & Loss Account for the year
ended 31st March, 2015
by assuming it is not a Going Concern. (5 marks) [IPCC Gr. II] Answer:
Profit and Loss Account of Anurag Trading Co. for the year ended 31st March, 2015 (Assuming business is
not a going concern) Particulars
To Opening Stock
To Purchases
To Expenses
To Depreciation (69,000-64,000) To Provision for doubtful debts To Deferred cost
To Loan penalty
To Net Profit

4,50,000 By Trade payables 500
5,000
4,000
15,000
2,000
10,000
5,38,500 5,38,500
Q.2.22 2015 - Nov [7] (d), RTP Practical
Attempt the following:

A company sold 20% of the goods on cash basis and the balance on credit basis. Debtors are allowed 1½ month’s
credit and their balance as on 31.03.2015 is`1,25,000. Assume that the sale is uniform through out the year.
Calculate the credit sales and total sales of the company for the year ended 31.03.2015. (4 marks)
Answer :
Calculation of Credit sales:
Debtor × = 1,25,000 x = 10,00,000
Calculation of Total sales:

Credit sale x = 10,00,000 x
= 12,50,000.
Q.2.23 2016 - May [3] (a), RTP Practical The following is the Balance Sheet of Manish and Suresh as on 1st April,
2015: Liabilities
Capital:
Manish
Suresh
Creditors for goods Creditors for expenses

` Assets `
Building 1,00,000
1,50,000 Machinery 65,000
75,000 Stock 40,000
30,000 Debtors 50,000
25,000 Bank 25,000
2,80,000 2,80,000
They give you the following additional information:
(i) Creditors’ Velocity 1.5 month & Debtors’ Velocity 2 months. (ii) Stock level is maintained uniformly in value
throughout all over the year.
(iii) Depreciation on machinery is charged @10%, Depreciation on building @ 5% in the current year.
(iv) Cost price will go up 15% as compared to last year and also sales in the current year will increase by 25% in
volume. (v) Rate of gross profit remains the same.
(vi) Business Expenditures are`50,000 for the year. All expenditures are paid off in cash.
(vii) Closing stock is to be valued on LIFO Basis.
Prepare Trading, Profit and Loss Account, Trade Debtors A/c and Trade Creditors A/c for the year ending
31.03.2016. (8 marks) Answer:
Particulars Opening Stock Purchase

Gross profit
Particulars Business expense Depreciation

Net profit
Particulars Opening balance Sales
Trading A/c
40,000 Sales 4,31,250 3,45,000 Closing stock 40,000

86,250
4,71,250 4,71,250

Amount Particulars Amount 50,000 Gross profit 86,250 11,500
24,750
86,250 86,250
Trade Debtors A/c

50,000 Cash receipt 4,09,375

4,31,250 Closing 71,875
4,81,250 4,81,250
Particulars Cash paid
Closing
Particulars Capital:
Manish
Suresh
Profit & Loss A/c Creditor for goods
Trade Creditors A/c
3,31,875 Opening balance 30,000

43,125 Purchase 3,45,000
3,75,000 3,75,000
Balance Sheet
Amount Particulars Amount Fixed asset:
1,50,000 Building 95,000
75,000 Machinery 58,500
24,750 Current asset:
43,125 Stock 40,000
Debtors 71,875
Bank 27,500
2,92,875 2,92,875
Working Note: 1 Old purchase Creditor velocity = × 12
1.5 = × 12
Old purchase = 2,40,000 Working Note: 2

Old sales
Debtor velocity = × 12
2 = × 12
Sales = 3,00,000
= Sales - Purchase = 3,00,000 - 2,40,000 = 60,000
Gross profit ratio = × 100 = 20%
Purchase New
= Old purchase × 115% × 125%
= 2,40,000 × 115% × 125%
= 3,45,000
New Sales & Gross Profit

Gross Profit = 4,31,250 × 20% = 86,250
Gross Profit = Sales - Purchase
0.205 = 5 - 3,45,000
0.805 = 3,45,000
Sales = 4,31,250
Cash Balance
Opening cash 25,000
Add: Cash receipt (from debtor) 4,09,375
Less: Cash paid (to creditors) 3,31,875
Less: Business expenditure 50,000
Less: Cash paid (to creditor for expense) 25,000
Closing Balance 27,500
Q.2.24 2017 - May [4], RTP Practical The following information relates to the business of ABC Enterprises, who
requests you to prepare a Trading and Profit & Loss A/C for the year ended 31st March, 2017 and a Balance Sheet as
on that date. (a) Assets and Liabilities as on in `
1.4.2016 31.3.2017
Furniture 60,000 63,500
Stock 80,000 70,000
Sundry Debtors 1,60,000 – Sundry Creditors 1,10,000 1,50,000
Cash in Hand & Bank Balance 12,000 26,250

(b) Cash transaction during the year:
(i) Collection from Debtors, after allowing discount of ` 15,000
amounted to ` 5,85,000.
(ii) Collection on discounting of Bills of Exchange, after deduction of discount of ` 1,250 by bank, totalled to `
61,250. (iii) Creditors of`4,00,000 were paid`3,92,000 in full settlement of their dues.
(iv) Payment of Freight inward of` 30,000.
(v) Amount withdrawn for personal use ` 70,000.
(vi) Payment for office furniture ` 10,000.
(vii) Investment carrying annual interest of 6% were purchased at ` 95 (200 shares, face value` 100 each) on 1st
October, 2016
and payment made thereof.
(viii) Expenses including salaries paid ` 95,000.
(ix) Miscellaneous receipt of ` 5,000.
(c) Bills of exchange drawn on and accepted by customers during the year amounted to ` 1,00,000. Of these, bills of
exchange of` 20,000 were endorsed in favour of creditors. An endorsed bill of exchange of`4,000
was dishonoured.
(d) Goods costing ` 9,000 were used as advertising material. (e) Goods are invariably sold to show a gross profit of
20% on sales. (f) Difference in cash book, if any, is to be treated as further drawing or introduction of capital by
proprietor of ABC enterprises. (g) Provide at 2% for doubtful debts on closing debtors. (16 marks)
Answer:
Trading and Profit and Loss Account of
ABC enterprise for the year ended 31st March, 2017
` ` To Opening Inventory 80,000 By Sales 6,08,750

To Purchases 4,56,000 By Closing Inventory 70,000
Less: For advertising (9,000) 4,47,000
To Freight inwards 30,000
To Gross profit c/d 1,21,750
To Sundry expenses
To Advertisement To Discount allowedDebtors
Bills Receivable
To Depreciation on furniture
To P r o v i s i o n f o r doubtful debts
To Net profit
92,000 By Gross profit b/d 1,21,750 9,000 By I n t e r e s t o n 600 investment
15,000 (20,000×6/100 ×½)
1,250 16,250 By Discount received 8,000 6,500 By Miscellaneous 5,000 income
1,455
10,145
1,35,350 1,35,350
Liabilities
Capital as on 1.4.2016 Less: Drawings
Add: Net Profit

Sundry creditors

Amount Assets Amount ` ` ` `
1,88,000 F u r n i t u r e ( w . d . v . ) 60,000 (91,000) Additions during the year 10,000 97,000

10,145 1,07,145 Less: Depreciation (6,500) 63,500
1,50,00 Investment 19,000

18,000 Interest accrued 600
Closing Inventory 70,000

Sundry debtors 72,750 Less: Provision for
doubtful debts 1,455 71,295 Bills receivable 17,500 Cash in hand and at 26,250 bank
Prepaid expenses 7,000
Working Notes:
1. Capital on 1st April, 2016
Balance Sheet as on 1st April, 2016

Liabilities
Capital (Bal. fig.)
Creditors
` Assets ` 1,88,000 Furniture (w.d.v.) 60,000
1,10,000 Closing Inventory 80,000

20,000 Sundry debtors 1,60,000
Cash in hand and at bank 12,000
Prepaid expenses 6,000
3,18,000 3,18,000
2. Purchases made during the year
Sundry Creditors Account
To Cash and bank A/c
To Discount received A/c To Bills Receivable A/c To Balance c/d

``
3,92,000 By Balance b/d 1,10,000
8,000
20,000
1,50,000
By Sundry debtors A/c 4,000 By Purchases A/c 4,56,000 (Balancing figure)
5,70,000 5,70,000 3. Sales made during the year

Opening inventory
Purchases
Less: For advertising Freight inwards
Less: Closing inventory

Cost of goods sold
Add: Gross profit (25% on cost) `
80,000 4,56,000
(9,000) 4,47,000
30,000
5,57,000
(70,000) 4,87,000
1,21,750
6,08,750
4. Debtors on 31st March, 2017

Sundry Debtors Account
To Balance b/d
To Sales A/c
To Sundry creditors A/c (bill dishonoured) ` `
1,60,000 By Cash and bank A/c 5,85,000
6,08,750 By Discount allowed A/c 15,000

By Bills receivable A/c 1,00,000
4,000 By Balance c/d (Bal. fig.) 72,750
7,72,750 7,72,750
5. Additional drawings by Proprietors of ABC Enterprises Cash and Bank Account
` ` To Balance b/d 12,000 By Freight inwards A/c 30,000

To Sundry debtors A/c 5,85,000 By Furniture A/c 10,000
To Bills Receivable A/c 61,250 By Investment A/c 19,000
To Miscellaneous Income A/c 5,000 By Expenses A/c 95,000
By Creditors A/c 3,92,000
By Drawings A/c
[(` 70,000 + ` 21,000) Additional drawings)] 91,000
6,63,250 6,63,250
6. Amount of Expenses debited to Profit and Loss A/c
Sundry Expenses Account
To Prepaid Expenses A/c (on 1.4.2016)
To Bank A/c
To Outstanding Expenses A/c (on 31.32017)
` ` By Outstanding Expenses A/c 20,000 6,000 (on 1.4.2016)
95,000 By Profit and Loss A/c 92,000 (Balancing figure)
18,000 By Prepaid Expenses A/c 7,000 (on 31.3.17)
7. Bills Receivable on 31st March, 2017
` ` To Debtors A/c 1,00,000 By Creditors A/c 20,000

By Bank A/c 61,250
By Discount on bills
receivable A/c 1,250 By Balance c/d
(Balancing figure) 17,500 1,00,000 1,00,000 Note: All sales and purchases are assumed to be on credit basis. Space
Q.2.25 2019 - May [3] (a) Practical The following balances appeared in the books of M/s Sunshine Traders:
As on As on 31-03-2018 31-03-2019 (`) (`)

Office Equipment 52,500 42,500
Sundry Debtors 77,750 1,10,250
Creditors for Purchases 47,500 ? Provision for office expenses 10,000 7,500
Stock ? 32,500
Long Term loan from ABC Bank @ 10%

per annum 62,500 50,000
Bank 12,500 ? Capital 4,65,250 ? Other information was as follows:
in ( `) — Collection from Sundry Debtors 4,62,500

— Payments to Creditors for Purchases 2,62,500
— Payment of office Expenses 21,000
— Salary paid 16,000
— Selling Expenses paid 7,500
— Total sales 6,25,000
Credit sales (80% of Total sales)
— Credit Purchases 2,70,000
Cash Purchases (40% of Total Purchases)
— Gross Profit Margin was 25% on cost
— Discount Allowed 2,750
— Discount Received 2,250
— Bad debts 2,250
— Depreciation to be provided as follows:

Land and Machinery Plant and Machinery Office Equipment 5% per annum 10% per annum 15% per annum
— On 01.10.2018 the firm sold machine having Book Value`20,000 (as on 31.03.2018) at a loss of ` 7,500. New
machine was purchased on 01.01.2019.
— Office equipment was sold at its book value on 01.04.2018. — Loan was partly repaid on 31.03.2019 together
with interest for the year.
(i) Trading and Profit & Loss account for the year ended 31st March, 2019.
(ii) Balance Sheet as on 31st March, 2019.
(12 marks) Answer:
Particulars ` To Opening Stock (Balancing figure)
To Purchases-Cash 1,80,000
Credit (W.N.1) 2,70,000
To Gross Profit c/d
Trading and Profit and Loss A/c

for the year ended on 31st March, 2019
` Particulars ` ` 82,500 By Sales (W.N.1)
Cash 1,25,000
Credit 5,00,000 6,25,000

4,50,000 By Closing Stock 32,500
1,25,000
6,57,500 6,57,500
7,500 By Gross Profit b/d 1,25,000 To Loss on Sale of

Machine
To Depreciation
Land & Building 12,500
Plant & Machinery 11,875

Office Equipment 6,375
To Expenses paid
Salary 16,000
Selling Expenses 7,500
Office Expenses 18,500
To Bed debt
To Discount allowed
To Interest on loan
To Net Profit
By Discount received 2,250
30,750
42,000
2,250
2,750
6,250
35,750
(ii) Balance Sheet

Liabilities ` ` Assets ` ` Capital (Balancing Figure) 4,65,250 Land & Building 2,50,000 Add: Net Profit 35,750 5,01,000 Less: Depreciation (12,500)
2,37,500 Sundry creditors (W.N.3) 52,750 Plant & Machinery 1,65,000 Bank loan 50,000 Less: Depreciation (10,875) 1,54,125 Provision for expenses
7,500 Office Equipment 42,500
Less: Depreciation (6,375) 36,125

Debtors 1,10,250
Stock 32,500
Bank balance (W.N.4) 40,750
6,11,250 6,11,250
Working Notes: 1. Calculation of Sales and Purchases: Total Sales Cash Sales Credit Sales = ` 6,25,000
= 20% of total sales = (6,25,000) = ` 1,25,000 = 80% of total sales = (6,25,000) = ` 5,00,000 Gross Profit 25% on
cost = 6,25,000 × = ` 1,25,000
Credit Purchases =` 2,70,000

Credit Purchases = 60% of total purchases
Credit Purchases = 40% of total purchases
Total Purchases = =` 4,50,000 Cash Purchases =` 4,50,000 – 2,70,000 = ` 1,80,000
2. Plant & Machinery

` ` To Balance b/d 1,10,000 By Sale of Machinery A/c 20,000 To Cash-Purchase (Bal. Fig.) 75,000 By Balance c/d
1,65,000
1,85,000 1,85,000
Depreciation on Plant & Machinery

@ 10% p.a. on ` 20,000 for 6 months = ` 1,000
@ 10% p.a. on ` 90,000 (i.e. ` 1,10,000 – ` 20,000) = ` 9,000
@ 10% p.a. on` 75,000 for 3 months (i.e. during the year) = ` 1,875
= ` 11,875
Sale of Machinery Account

To Plant and Machinery 20,000 By Depreciation (20,000 × 10% 1,000
×½
By Profit and Loss A/c 7,500
By Bank (Balancing figure) 11,500
20,000 20,000
3. Creditors Account
``
To Cash 2,62,500 By Balance b/d 47,500 To Discount received 2,250 By Credit purchases (W.N.2) 2,70,000 To
Balance c/d (Bal. Fig) 52,750
To Balance b/d (Given) To Sales (Credit)
Debtors Account
``
77,750 By Cash 4,62,500 5,00,000 By Discount allowed 2,750 By Bad debts 2,250 By Balance c/d 1,10,250
5,77,750 5,77,750 Provision for Office Expenses Account
To Bank
To balance c/d
4.
To Balance b/d
To Debtors
To Office Equipment
(sales)
``
21,000 By Balance b/d 10,000

7,500 By Expenses (Bal. fig.) 18,500
28,500 28,500
Bank Account
` ` 12,500 By Creditors 2,62,500
4,62,500 By Purchases 1,80,000
10,000 By Expenses 44,500

`(16,000 +7,500 + 21,000)
To Cash sales (W.N.1) 1,25,000 By Bank loan paid 18,750
To Machine sold 11,500 B y M a c h i n e p u r c h a s e d 75,000
(W.N.4)
By Balance c/d (Bal. Fig.) 40,750

6,21,500 6,21,500
5.
To balance b/d
Office Equipment Account

52,500 By Sales 10,000
By balance c/d 42,500
52,500 52,500
Q.2.26 2019 - Nov [4] (b) Practical Archana Enterprises maintain their books of accounts under single entry
system. The Balance Sheet as on 31st March, 2018 was as follows: Liabilities Amount Assets Amount (`) (`)
Capital A/c
Trade creditors
Outstanding exp.
6,75,000 Furniture & fixtures 1,50,000 7,57,500 Stock 9,15,000
67,500 Trade debtors 3,12,000

Prepaid insurance 3,000
Cash in hand & at bank 1,20,000
15,00,000 15,00,000
The following was the summary of cash and bank book for the year ended 31st March, 2019: Receipts
Cash in hand & at

Bank on 1st April, 2018 Cash sales
Receipts from trade debtors
Amount Payment Amount (`) (`)
Payment to trade
1,20,000 creditors 1,24,83,000
1,10,70,000 Sundry expenses paid 9,31,050
Drawings 3,60,000
27,75,000 Cash in hand & at

Bank on 31st March,
2019 1,90,950
1,39,65,000 1,39,65,000
(i) Discount allowed to trade debtors and received from trade creditors amounted to ` 54,000 and ` 42,500
respectively, (for the year ended 31st March, 2019)
(ii) Annual fire insurance premium of`9,000 was paid every year on 1st
August for the renewal of the policy.

(iii) Furniture & fixtures were subject to depreciation @ 15% p.a. on
diminishing balance method.
(iv) The following are the balances as on 31st March, 2019: Stock ` 9,75,000
Trade debtors ` 3,43,000
Outstanding expenses ` 55,200
(v) Gross profit ratio of 10% on sales in maintained throughout the year. You are required to prepare Trading and
Profit & Loss account for the year ended 31st March, 2019, and Balance Sheet as on that date. (10 marks) Space to
3 Miscellaneous: Cash Lost or Defalcation of Cash

Q.3.1 1999 - May [4] Practical The following is the Balance Sheet of the retail business of Sri Srinivas as at 31st
December, 1998:
Liabilities
Sri Srinivas's capital Liabilities for goods Rent
` Assets `
1,00,000 Furniture 10,000

20,500 Stock 70,000
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.
Analysis of the Bank Pass-book for the 13 weeks period ending 31st March, 1999 disclosed the following:
` Payments to creditors 75,000 Payments of rent upto 31.3.99 4,000 Amounts deposited into the bank 1,25,000
(include` 30,000 received from debtors by cheques) The following are the balances on 31st March, 1999:
` Stock 40,000 Debtors 30,000 Creditors for goods 36,500 On the evening of 31st March, 1999 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, 1999 and a Balance Sheet as on that date. (12 marks) Answer :
Statement showing the amount of cash defalcated by the Cashier Particulars ` ` Cash balance as on 1.1.99
2,000 Add: Cash sales 1,16,250 Less: Salary to clerk (` 300 ×13) 3,900 1,18,250 Sundry expenses (` 50 × 13) 650
Drawing of Sri Srinivas (` 100 × 13) 1,300 Deposit into bank (` 1,25,000 ☐` 30,000) 95,000 1,00,850 Cash balance
as on 31.3.99 (i.e. defalcated by cashier) 17,400
Trading and Profit and Loss Account of Sri Srinivas (for the 13 week period ended 31st March, 1999)
Particulars ` Particulars ` ` To Opening stock 70,000 By Sales:

To Purchases 91,000 Cash 1,16,250 To Gross Profit c/d 30,250 Credit 35,000 1,51,250
1,91,250 1,91,250
To Salaries 3,900 By Gross Profits b/d 30,250
To Rent ( ` 4,000☐` 1,000) 3,000

To Sundry expenses 650
To Loss of cash by theft 17,400
To Net Profit 5,300
Creditors 30,250 30,250 Balance Sheet of Sri Srinivas

Liabilities
Capital as on 1.1.99 1,00,000
Add: Profit 5,300
1,05,300
` Assets ` Furniture 10,000

Stock 40,000
Debtors 30,000
Particulars To Bank A/c

To Balance c/d
Less: Drawings 1,300 1,04,000 Cash at bank 60,500
Creditors 36,500
1,40,500 1,40,500 Working Notes:
(1) Determination of Purchases
Creditors Account
` Particulars ` 75,000 By Balance b/d 20,500 36,500 By Purchases A/c 91,000
(Balancing figure)
(2) Determination of Cash Sales
Particulars ` Total sales 1,51,250 Less: Credit sales 35,000 Cash sales 1,16,250
(3) Determination of Credit sales

Debtors Account
Particulars
To Balance b/d
To Sales A/c (Balancing figure)
` Particulars `
25,000 By Bank A/c 30,000
35,000 By Balance c/d 30,000
60,000 60,000
(4) Determination of Total sales
Particulars ` Opening stock 70,000

Add: Purchases 91,000
1,61,000
Less: Closing Stock 40,000
Add: Gross profits (@ 25% on cost) 30,250
Total sales 1,51,250
(5) Determination of Bank balance
(As on 31.3.99)
Bank A/c
` ` 14,500 By Creditors A/c 75,000
30,000 By Rent A/c 4,000
95,000 By Balance c/d 60,500
Notes :
1. All purchases are taken as credit purchase.
2. In the absence of information about the depreciation rate, no depreciation has been charged on furniture.
3. The amount defalcated by the cashier may be treated as recoverable from him. In that situation,`17,400 may be
treated as sundry advances and shown on assets side in the Balance Sheet and net profit for 13
week period ending 31st March, 1999 would amount ` 22,700. Space to write important points for revision
The following is the Balance Sheet of Sri Agni Dev as on 31stMarch, 2001: Liabilities ` Assets ` Capital account
2,52,500 Machinery 1,20,000 Sundry Creditors for purchases 45,000 Furniture 20,000
Stock 33,000
Debtors 1,00,000
Cash in hand 8,000
Cash at Bank 16,500
2,97,500 2,97,500
Riots occurred and fire broke out on the evening of 31st March, 2002, destroying the books of account and
Furniture. The cashier was grievously hurt and the cash available in the cash box was stolen.
The trader gives you the following information :
(i) Sales are effected as 25% for cash and the balance on credit. His total sales for the year ended 31st March, 2002
were 20% higher than the previous year. All the sales and purchases of goods were evenly spread throughout the
year (as also in the last year). (ii) Terms of credit
Debtors 2 Months
Creditors 1 Month
(iii) Stock level was maintained at ` 33,000 all throughout the year. (iv) A steady Gross Profit rate of 25% on the
turnover was maintained throughout. Creditors are paid by cheque only, except for cash purchase of ` 50,000.
(v) His private records and the Bank Pass-book disclosed the following transaction for the year:
(i) Miscellaneous Business expenses ` 1 , 5 7 , 5 0 0 ( i n c l u d i n g ` 5,000 paid by cheque a n d ` 7 , 5 0 0 w a s
outstanding as on 31st March, 2002) (ii) Repairs
(iii) Addition to Machinery
(iv) Private drawings
(v) Travelling expenses
(vi) Introduction of Additional
` 3,500 (paid by cash) ` 60,000 (paid by cheque) ` 30,000 (paid by cash) ` 18,000 (paid by cash)
Capital by depositing in to the Bank. ` 5,000

(vi) Collection from debtors were all through cheques.
(vii) Depreciation on Machinery is to be provided @ 15% on the Closing Book Value.
(viii) The cash stolen is to be charged to the Profit and Loss Account. (ix) Loss of furniture is to be adjusted from
the Capital Account.
Prepare Trading, Profit and Loss Account for the year ended 31st March, 2002 and a Balance Sheet as on that date.
Make appropriate assumptions wherever necessary. All workings should form part of your answer. (20 marks)
Answer :
Particulars To Opening Stock To Purchases To Gross Profit c/d


7,20,000 By Closing Stock 33,000
2,40,000
To Business Expenses 1,57,500 By Gross profit b/d 2,40,000
To Repairs 3,500
To Travelling Expenses 18,000
To Loss by theft
To Net Profit
1,500
32,500
2,40,000 2,40,000
Balance Sheet
(as at 31st March, 2002)
Liabilities
Capital
Add: Additional Capital
Net Profit
` ` Assets ` ` 2,52,500 Machinery 1,80,000

5,000 Less: Depreciation 27,000 1,53,000 32,500 Stock in Trade 33,000 2,90,000 Sundry Debtors 1,20,000 Less: Loss of Furniture
Drawings
Bank overdraft
Sundry Creditors
Outstanding Expenses
20,000
30,000 2,40,000
2,667
55,833
7,500
3,06,000 3,06,000 Working Notes: 1. Sales during 2001☐2002 `
Debtors as on 31st March, 2001 (2 months') 1,00,000

Total credit sales in 2000☐2001, ` 1,00,000 × 6 6,00,000
Cash Sales, being equal to 1/3rd of credit sales or 1/4th of total. 2,00,000
Sales in 2000 ☐2001 8,00,000

Increase, 20% as stated in the problem 1,60,000
Total sales during 2001☐2002 9,60,000
Cash sales: ¼ th 2,40,000

Credit sales: ¾ th 7,20,000
2. Debtors equal to two months credit sales 1,20,000
3. Purchases
Sales in 2001☐2002 9,60,000
Gross Profit @ 25% 2,40,000
Cost of goods sold being purchases 7,20,000
4. Sundry Creditors for goods

(` 7,20,000☐` 50,000/12 = ` 6,70,000/12 55,833
5. Collections from Debtors
Add: Credit Sales 7,20,000
8,20,000
Less: Closing Balance 1,20,000
7,00,000
6. Payment to Creditors
Add: Credit Purchases (` 7,20,000☐` 50,000) 6,70,000
7,15,000
Less: Closing Balance 55,833
Payments by cheque 6,59,167
7. Cash and Bank Account
Particulars
To Balance b/d
To Collection
from Debtors
To Sales
To Additional
Capital
To Balance c/d
(i.e. Bank
overdraft)
Cash Bank Particulars Cash Bank 8,000 16,500 By Payment to Creditors 50,000 6,59,167
By Misc. Expenses 1,45,000 5,000
— 7,00,000 By Repairs 3,500 — 2,40,000 — By Machinery
(Addition) — 60,000
— 5,000 By Travelling Expenses 18,000 — 2,667 By Drawings 30,000 — By Balance c/d
(lost by theft) 1,500 — 2,48,000 7,24,167 2,48,000 7,24,167
Mr. A. runs a business of readymade garments. He closes the books of accounts on 31stMarch, 2010. The Balance
Sheet as on 31stMarch, 2010 was as follows : Liabilities
A's capital a/c Creditors
` Assets ` 4,04,000 Furniture 40,000

82,000 Stock 2,80,000
Debtors 1,00,000
Cash in hand 28,000
Cash at bank 38,000
4,86,000 4,86,000
You are furnished with the following information :
1. His sales, for the year ended 31st March, 2011 were 20% higher than the sales of previous year, out of which 20%
sales was cash sales. Total sales during the year 2009-10 were ` 5,00,000.
2. Payments for all the purchases were made by cheques only. 3 Goods were sold for cash and credit both. Credit
customers pay by cheques only.
4. Depreciation on furniture is to be charged 10% p.a.
5. Mr. A sent to the bank the collection of the month at the last date of 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 31stMarch, 2011 disclosed the following:
` Payment to creditors 3,00,000 Payment of rent up to 31st March, 2011 16,000 Cash deposited into the bank during
the year 80,000 The following are the balances on 31st March, 2011
` Stock 1,60,000 Debtors 1,20,000 Creditors for goods 1,46,000 On the evening of 31st March, 2011 the cashier
absconded with the available cash in the cash book.
You are required to prepare Trading and Profit and Loss A/c for the ended 31st March, 2011 and Balance Sheet as
on that date. All the workings should form part of the answer. (16 marks) Answer :
Trading and Profit and Loss Account for the year ending 31st March, 2011
Particulars
To Opening stock
To Purchases (W.N.1) To Gross Profit
To Salary
To Rent
To Office expenses
To Loss of Cash (W.N.6) To Depreciation of furniture To Net Profit
(`) Particulars (`)
2,80,000 By Sales (W.N.3)

3,64,000 Credit 4,80,000
1,16,000 Cash 1,20,000 6,00,000 By Closing stock 1,60,000
7,60,000 7,60,000 By Gross Profit 1,16,000 24,000
16,000
14,400
23,600
4,000
34,000
1,16,000 1,16,000
Liabilities A’s Capital 4,04,000

Less: Drawings (6,000) Creditors

(`) Assets (`) Furniture 40,000 Less: Depreciation (4,000) 36,000
4,32,000 Stock 1,60,000

1,46,000 Debtors 1,20,000
Working Notes:
(1) Calculation of Purchases
Creditors Account Particulars

To Bank A/c To Balance c/d
(`) 3,00,000 1,46,000 4,46,000

Particulars (`) By Balance b/d 82,000 By Purchases (Bal. fig) 3,64,000 4,46,000 (2) Calculation of total sales
Sales for the year 2009-10 Add: 20% increase

Total sales for the year 2010-11
(3) Calculation of credit sales Total sales
`
5,00,000
1,00,000
6,00,000
` 6,00,000 Less: Cash sales (20% of total sales) (1,20,000) 4,80,000
(4) Calculation of cash collected from debtors

Particulars To Balance b/d To Sales A/c
Debtors Account
(`) Particulars (`) 1,00,000 By Bank A/c (Bal. fig) 4,60,000 4,80,000 By Balance c/d 1,20,000 5,80,000 5,80,000
(5) Calculation of closing balance of cash at bank

Particulars
Bank Account
(`) Particulars (`)
38,000 By Creditors A/c 3,00,000

4,60,000 By Rent A/c 16,000
80,000 By Balance c/d 2,62,000
(6) Calculation of the amount of cash defalcated by the cashier
Particulars Amount (`) Cash balance as on 1st April 2010 28,000 Add: Cash sales during the year 1,20,000
1,48,000 Less: Salary (` 2,000 × 12) 24,000
Office expenses ( ` 1,200 × 12) 14,400 Drawings of A (` 500 × 12) 6,000 Cash deposited into bank during the year
80,000 1,24,400
Cash balance as on 31st March 2011

(defalcated by the cashier) 23,600 Space to write important points for revision
Aman, a readymade garment trader, keeps his books of account under single entry system. On the closing on 31st
March, 2017 his statement of affairs stood as follows:
Liabilities Aman’s capital Loan

Creditors
Amount ` Assets Amount`

4,80,000 Building 3,25,000
1,50,000 Furniture 50,000
3,10,000 Motor car 90,000
Stock 2,00,000
Debtors 1,70,000
Cash in hand 20,000
Cash at bank 85,000
Riots occurred and a fire broke out on the evening of 31st March, 2018, destroying the books of accounts. On that
day, the cashier had absconded with the available cash. You are furnished with the following information: 1. Sales
for the year ended 31st March, 2018 were 20% higher than the
previous year’s sales, out of which, 20% sales were for cash. He always sells his goods at cost plus 25%. There were
no cash purchases. 2. Collection from debtors amounted to ` 14,00,000, out of which ` 3,50,000 was received in
cash.
3. Business expenses amounted to` 2,00,000, of which` 50,000 were outstanding on 31st March, 2018 and ` 60,000
paid by cheques.
4. Gross profit as per last year’s audited accounts was ` 3,00,000.
5. Provide depreciation on building and furniture at 5% each and motor car at 20%.
6. His private records and the Bank Pass Book disclosed the following transactions for the year 2017-18:
` Payment to creditors (paid by cheques) 13,75,000

Personal drawings (paid by cheques) 75,000
Repairs (paid by cash) 10,000
Travelling expenses (paid by cash) 15,000
Cash deposited in bank 7,15,000
Cash withdrawn from bank 1,20,000
7. Stock level was maintained at ` 3,00,000 all throughout the year.
8. The amount defalcated by the cashier is to be written off to the Profit and Loss Account.
You are required to prepare Trading and Profit and Loss A/c for the year
ended 31st March, 2018 and Balance Sheet as on that date of Aman. All
the workings should form part of the answer. (15 marks)
Answer: Trading and Profit and Loss Account of Aman for the year ended on 31st March, 2018.
Particulars ` Particulars ` To Opening Stock 2,00,000 By Sales 18,00,000

To Purchases 15,40,000 By Closing Stock 3,00,000
To Gross Profit c/d 3,60,000
21,00,000 21,00,000
To Business Expenses 2,00,000 By Gross Profit b/d 3,60,000
To Repairs 10,000
To Depreciation
Building 16,250
Furniture 2,500
Motor Car 18,000 36,750
To Traveling Expenses 15,000
To Loss by theft 20,000
3,60,000 3,60,000
Balances Sheet of Aman

as at 31st March, 2018
Liabilities `
Capital 4,80,000
Add : Net Profit 78,250
5,58,250
Less : Drawings (75,000)
` Assets ` ` Building 3,25,000 Less : Depre. (16,250) 3,08,750
Loan 4,83,250 Furniture 50,000
Less : Depre. (2,500) 47,500

1,50,000 Motor Car 90,000
Creditors 4,75,000 Less : Depre. (18,000) 72,000
Outstanding 50,000 Stock 3,00,000

Expenses
Debtors 2,10,000
11,58,250 11,58,250
* Working Notes :
1. Sales for the year ended on 31st March, 2018
Particulars ` Gross Profit as per last year’s accounts 3,00,000 GP Ratio is cost plus 25%
So, Sales for last year 15,00,000
Increase of 20% as stated in question 3,00,000

Total Sales during 2017 - 18 18,00,000
Cash Sales - 20% 3,60,000
Credit Sales - 80% 14,40,000

2. Calculation for Creditors for Purchases
Particulars ` Creditors as on 31st March, 2017 3,10,000

Purchases during 2017 - 18 (All credit) 15,40,000
(-) Payment to creditors (by cheques) (13,75,000) Creditors as on 31st March, 2018 4,75,000
3. Calculation for Debtors for Sales
Particulars ` Debtors as on 31st March, 2017 1,70,000 Credit Sales during 2017 - 18 14,40,000 (-) Collection from
debtors (14,00,000) Debtors as on 31st March, 2018 2,10,000
4. Cash and Bank Account

Particulars
To Bal. b/d.
To Collection From
Debtors
To Sales
To Cash
To Bank
Cash Bank Particulars Cash Bank 20,000 85,000 By Payment to Creditors – 13,75,000
3,50,000 10,50,000 By Business Expenses 90,000 60,000

By Repairs 10,000 –
3,60,000 By Traveling Expenses 15,000 –

– 7,15,000 By Personal Drawings – 75,000
1,20,000 By Bank 7,15,000 – By Cash – 1,20,000 By Balance C/d. – 2,20,000
By Balance. C/d 20,000 – (lost by theft)

8,50,000 18,50,000 18,50,000
May - 2019
CA Inter Gr. I
Paper - 1 (New Syllabus) Accounting
Question No. 1 is compulsory.

Candidates are required to answer any four questions from the remaining five questions.
1. (a) M/s First Ltd. began construction of a new factory building on 1st April, 2017. It obtained` 2,00,000 as a
special loan to finance the construction of the factory building on 1st April, 2017 at an interest rate of 8% per annum.
Further, expenditure on construction of the factory building was financed through other non- specific loans. Details
of other outstanding non- specific loans were:
Amount ( `) Rate of Interest per annum

4,00,000 9%
5,00,000 12%
3,00,000 14%
The expenditures that were made on the factory building construction were as follows:
Date Amount (`)

1st April, 2017 3,00,000
31st May, 2017 2,40,000
1st August, 2017 4,00,000
31st December, 2017 3,60,000
1.913
The construction of factory building was completed by 31st March,

2018. As per the provisions of AS- 16, you are required to:
1. Calculate the amount of interest to be capitalized.
2. Pass Journal entry for capitalizing the cost and borrowing cost in respect of the factory building.
(b) On 15th June, 2018, Y limited wants to re-classify its investments in accordance with AS13 (revised). Decide and
state the amount of transfer, based on the following information:
1. A portion of long term investments purchased on 1st March, 2017 are to be re-classified as current investments.
The original cost of these investments was` 14 lakhs but had been written down by ` 2 lakhs (to recognise ‘other
than temporary’ decline in value). The market value of these investments on 15thJune, 2018 was ` 11 lakhs.
2. Another portion of long term investments purchased on 15th January, 2017 are to be re-classified as current
investments. The original cost of these investments was ` 7 lakhs but had been written down to ` 5 lakhs (to
recognise ‘other than temporary’ decline in value). The fair value of these investments on 15th June, 2018 was ` 4.5
lakhs.
3. A portion of current investments purchased on 15thMarch, 2018 for`7 lakhs are to be re-classified as long term
investments, as the company has decided to retain them. The market value of these investments on 31st March, 2018
was` 6 lakhs and fair value on 15th June, 2018 was ` 8.5 lakhs.
4. Another portion of current investments purchased on 7th December, 2017 for ` 4 lakhs are to be re-classified as
long term investments. The market value of these investments was: on 31st March, 2018 ` 3.5 lakhs
on 15th June, 2018 ` 3.8 lakhs

(c) State whether the following statements are ‘True’ or False’. Also give reason for your answer.
2. As per the provisions of AS-12, government grants in the nature
of promoters’ contribution which become refundable should be reduced from the capital reserve.
3. As per the provisions of AS-2, inventories should be valued at the lower of cost and selling price.
4. As per the provisions of AS-13, a current investments is an investment that is by its nature is readily realisable
and is intended to be held for not more than six months from the date on which such investment is made.
(d) The financial statements of PQ Ltd. for the year 2017-18 approved by the Board of Directors on 15th July, 2018.
The following information was provided :
(i) A suit against the company’s advertisement was filed by a party
on 20th April, 2018, claiming damges of ` 25 lakhs. (ii) The terms and conditions for acquisition of business of
another
company have been decided by March, 2018. But the financial
resources were arranged in April, 2018 and amount invested
was ` 50 lakhs.
(iii) Theft of cash of`5 lakhs by the cashier on 31stMarch, 2018 but
was detected on 16th July, 2018.
(iv) Company sends a proposal to sell an immovable property for
`40 lakhs in March, 2018. The book value of the property is`30
lakhs on 31stMarch, 2018. However, the deed was registered on
15th April, 2018.
(v) A major fire has damaged the assets in a factory on 5th April,
2018. However, the assets are fully insured.
With reference to AS-4 “Contingencies and events occurring after the balance sheet date”, state whether the above
mentioned events will be treated as contingencies, adjusting events or non- adjusting events occurring after the
balance sheet date.
(4 × 5 = 20 marks) 2. (a) M/s Amar bought six Scooters from M/s Bhanu on 1stApril, 2015 on the following terms:
Down payment ` 3,00,000 1st instalment payable at the end of 1st year ` 1,59,000 2nd instalment payable at the end of
2nd year ` 1,47,000 3rd instalment payable at the end of 3rd year ` 1,65,000 Interest is charged at the rate of 10% per
annum.
M/s Amar provides depreciation @ 20% per annum on the diminishing balance method.
On 31st March, 2018 M/s Amar failed to pay the 3rdinstalment upon which M/s Bhanu repossessed two Scooters.
M/s Bhanu agreed to leave the other four Scooters with M/s Amar and adjusted the value of the repossessed
Scooters against the amount due. The Scooters taken over were valued on the basis of 30% depreciation per annum
on written down value. The balance amount remaining in the vendor’s account after the above adjustment was paid
by M/s Amar after 5 months with interest @ 15% per annum.
M/s Bhanu incurred repairing expenses of`15,000 on repossessed scooters and sold scooters for ` 1,05,000 on 25th
April, 2018. You are required to:
1. Calculate the cash price of the Scooters and the interest paid
with each instalment.
2. Prepare Scooters Account and M/s Bhanu Account in the books
of M/s Amar.
3. Prepare Goods Repossessed Account in the books of M/s
Bhanu. (10 marks) (b) A fire occurred in the premises of M/s Bright on 25th May, 2017. As a result of fire, sales
adversely affected up to 30thSeptember, 2017. The firm had taken Loss of profit policy (with an average clause) for `
3,50,000 having indemnity period of 5 months.
There is an upward trend of 10% in sales.
The firm incurred an additional expenditure of` 30,000 to maintain the sales.
There was a saving of` 5,000 in the insured standing charges.
Actual turnover from 25thMay, 2017 to 30thSeptember, 2017 ` 1,75,000
Turn over from 25thMay, 2016 to 30thSeptember, 2016 ` 6,00,000

Net profit for last financial year ` 2,00,000
Insured standing charges for the last financial year ` 1,75,000
Total standing charges for the last financial year ` 3,00,000
Turnover for the last financial year ` 15,00,000
Turnover for one year from 25thMay, 2016 to 24thMay, 2017 ` 14,00,000
You are required to calculate the loss of profit claim amount, assuming that entire sales during the interrupted period
was due to additional expenses. (10 marks)
3. (a) The following balances appeared in the books of M/s Sunshine Traders:
As on As on 31-03-2018 31-03-2019 (`) (`)

Office Equipment 52,500 42,500
Sundry Debtors 77,750 1,10,250
Creditors for Purchases 47,500 ? Provision for office expenses 10,000 7,500
Stock ? 32,500
Long Term loan from ABC Bank

@ 10% per annum 62,500 50,000 Bank 12,500 ?
Capital 4,65,250 ?
Other information was as follows: in (`) — Collection from Sundry Debtors 4,62,500 — Payments to Creditors for
Purchases 2,62,500 — Payment of office Expenses 21,000 — Salary paid 16,000 — Selling Expenses paid 7,500 —
Total sales 6,25,000
Credit sales (80% of Total sales)

— Credit Purchases 2,70,000
Cash Purchases (40% of Total Purchases)
— Gross Profit Margin was 25% on cost
— Discount Allowed 2,750 — Discount Received 2,250 — Bad debts 2,250
— Depreciation to be provided as follows:

Land and Machinery Plant and Machinery Office Equipment 5% per annum 10% per annum 15% per annum — On
01.10.2018 the firm sold machine having Book Value
` 20,000 (as on 31.03.2018) at a loss of`7,500. New machine was purchased on 01.01.2019.
— Office equipment was sold at its book value on 01.04.2018.
— Loan was partly repaid on 31.03.2019 together with interest for the year.
(i) Trading and Profit & Loss account for the year ended 31stMarch, 2019.
(ii) Balance Sheet as on 31st March, 2019. (12 marks) (b) M/s Rani & Co. has head office at Singapore and branch at
Delhi
(India). Delhi branch is an integral foreign operation of M/s Rani &
Co., Delhi branch furnishes you with its Trial Balance as on 31st
March, 2019 and the additional information thereafter:
Dr. Cr.
Rupees in thousands
Stock on 1st April, 2018 600 — Purchases and Sales 1,600 2,400
Sundry Debtors and Creditors 800 600

Bills of Exchange 240 480
Wages 1,120 —
Rent, rates and taxes 720 — Sundry Expenses 320 — Computers 600 —
Bank Balance 520 — Singapore Office a/c — 3,040
Total 6,520 6,520
(a) Computers were acquired from a remittance of Singapore dollar 12,000 received from Singapore Head Office
and paid to the suppliers. Depreciate Computers at the rate of 40% for the year.
(b) Closing Stock of Delhi branch was` 15,60,000 on 31st March, 2019.
(c) The Rates of Exchange may be taken as follows: (i) on 1.4.2018 @ ` 50 per Singapore Dollar
(ii) on 31.3.2019 @ ` 52 per Singapore Dollar
(iii) average Exchange Rate for the year @`51 per Singapore Dollar
(iv) conversion in Singapore Dollar shall be made upto two decimal accuracy.
(d) Delhi Branch Account showed a debit balance of Singapore Dollar 59,897.43 on 31.3.2019 in the Head office
books and there were no items pending for reconciliation.
In the books of Head office, you are required to prepare:
1. Revenue statement for the year ended 31st March, 2019. (in Singapore Dollar)
2. Balance Sheet as on that date. (in Singapore Dollar) (8 marks) 5. (a) The Summarized Balance Sheet of Clean Ltd.
as on 31st March, 2019 is as follows:
Particulars (`) EQUITY AND LIABILITIES:

1. Shareholder’s funds:
(a) Share Capital 5,80,000

(b) Reserves and Surplus 96,000
Total 7,89,000
ASSETS:
1. Non-Current Assets
(b) Non-current investments 37,000
2. Current Assets
Cash and cash equivalents (Bank) 62,000
Total 7,89,000
The Share Capital of the company consists of` 50 each Equity shares of` 4,50,000 and` 100 each 8% Redeemable
Preference Shares of ` 1,30,000 (issued on 1.4.2017)
Reserves and Surplus comprises statement of profit and loss only. In order to facilitate the redemption of preference
shares at a premium of 10%, the Company decided :
(a) to sell all the investments for ` 30,000.
(b) to finance part of redemption from company funds, subject to,
leaving a Bank balance of ` 24,000.

(c) to issue minimum equity share of ` 50 each at a premium of
` 10 per share to raise the balance of funds required. You are required to
1. Pass Journal Entries to record the above transactions. 2. Prepare Balance Sheet as on completion of the above
transactions. (10 marks) (b) The following information was provided by M/s PQR Ltd. for the year ended 31st
March, 2019 :
1. Gross Profit Ratio was 25% for the year, it amounts to
` 3,75,000.
2. Company sold goods for cash only.
3. Opening inventory was lesser than closing inventory by
` 25,000.
4. Wages paid during the year ` 5,55,000.
5. Office expenses paid during the year ` 35,000.
6. Selling expenses paid during the year ` 15,000.
7. Dividend paid during the year ` 40,000 (including dividend
distribution tax).
8. Bank Loan repaid during the year` 2,05,000 (included interest
` 5,000)
9. Trade Payables on 31st March, 2018 were` 50,000 and on 31st
March, 2019 were ` 35,000.
10. Amount paid to Trade payables during the year ` 6,10,000. 11. Income Tax paid during the year amounts to `
55,000.
(Provision for taxation as on 31st March, 2019` 30,000.) 12. Investments of` 8,20,000 sold during the year at a profit
of
` 20,000.
13. Depreciation on furniture amounts to ` 40,000.
14. Depreciation on other tangible assets amounts to ` 20,000. 15. Plant and Machinery purchased on 15th
November, 2018 for ` 3,50,000.
16. On 31st March, 2019` 2,00,000, 7% Debentures issued at face value in an exchange for a plant.
17. Cash and Cash equivalents on 31st March, 2018` 2,25,000. (A) Prepare cash flow statement for the year ended
31st March, 2019, using direct method.
(B) Calculate cash flow from operating activities, using indirect method. (10 marks) 6. Answer any four of the
following :
(b) Summarised Balance Sheet of Cloth Trader as on 31.03.2017 is given below :
Liabilities
Proprietor’s Capital
P r o f i t & L o s s Account
10% Loan Account
Sundry Creditors
Amount (`) Assets Amount (`) 3,00,000 Fixed Assets 3,60,000
1,25,000 Closing Stock 1,50,000
2,10,000 Sundry Debtors 1,00,000
50,000 Deferred Expenses 50,000

Cash & Bank 25,000
6,85,000 6,85,000
Additional Information is as follows :

1. The remaining life of fixed assets is 8 years. The pattern of use of the asset is even. The net realisable value of
fixed assets on 31.03.2018 was ` 3,25,000.
2. Purchases and Sales in 2017-18 amounted to` 22,50,000 and ` 27,50,000 respectively.
3. The cost and net realizable value of stock on 31.03.2018 were ` 2,00,000 and` 2,50,000 respectively.
4. Expenses for the year amounted to ` 78,000.
5. Deferred Expenses are amortized equally over 5 years.
6. Sundry Debtors on 31.03.2018 are` 1,50,000 of which`5,000 is doubtful. Collection of another ` 25,000 depends
on successful re-installation of certain product supplied to the customer.
7. Closing Sundry Creditors are ` 75,000, likely to be settled at 10% discount.
8. Cash balance as on 31.03.2018 is ` 4,22,000.
9. There is an early repayment penalty for the loan of ` 25,000.
(Not assuming going concern)
1. Profit & Loss Account for the year 2017-18.
2. Balance Sheet as on 31st March, 2018. (5 marks) (c) Tarun Ltd. was incorporated on 1st July, 2018 to acquire a
running
business of Vinay Sons with effect from 1st April, 2018. During the
year 2018-19, the total sales were` 12,00,000 of which` 2,40,000
were for the first six months. The Gross Profit for the year is `
4,15,000. The expenses debited to the Profit and Loss account
included :
(ii) Bad Debts ` 6,500
(iii) Advertising ` 18,000
(under a contract amounting to` 1,500 per month) (iv) Company Audit Fees ` 15,000
(v) Tax Audit Fees ` 10,000
1. Prepare a statement showing pre-incorporation and post-incorporation profit for the year ended 31stMarch, 2019.
2. Explain how profits are to be treated. (5 marks)
(d) State the circumstances when Garner V/s Murray rule is not applicable. (5 marks)
(e) Wooden Plywood Limited has a normal wastage of 5% in the production process. During the year 2017-18, the
Company used `16,000 MT of Raw material costing`190 per MT. At the end of the year, 950 MT of wastage was in
stock. The accountant wants to know how this wastage is to be treated in the books.
1. Calculate the amount of abnormal loss.
2. Explain the treatment of normal loss and abnormal loss. [In the context of AS-2 (Revised)] (5 marks)
November - 2019
CA Inter Gr. I
Paper - 1 (New Syllabus)
Accounting

Candidates are required to answer any four questions from the remaining five questions.
1. Answer the following questions:

(a) Prepare cash flow from investing activities as per AS 3 of M/s Subham Creative Limited for year ended
31.3.2019. Particulars Amount (`)
Machinery acquired by issue of shares at face value 2,00,000

Claim received for loss of machinery in earthquake 55,000
Unsecured loans given to associates 5,00,000
Interest on loan received form associate company 70,000

Pre-acquisition dividend received on investment made 52,600
Debenture interest paid 1,45,200
Term loan repaid 4,50,000

Interest received on investment (TDS of` 8,200 was deducted on the above interest) 73,800 Purchased debentures of
X Ltd., on 1st December, 2018 which are redeemable within 3 months 3,00,000
Book value of plant & machinery sold (loss incurred ` 9,600) 90,000
(5 marks) (b) Karan Enterprises having its Head Office in Mangalore, Karnataka has a branch in Greenville, USA.
Following is the trial balance of Branch as at 31-3-2019:
Particulars Amount ($) Amount ($) Dr. Cr. Fixed assets 8,000
Opening inventory 800 Cash 700
Goods received form Head Office 2,800
Sales 24,050
Purchases 11,800 Expenses 1,800
Remittance to head office 2,450 Head office account 4,300
28,350 28,350
(i) Fixed assets were purchased on 1st April, 2015.
(ii) Depreciation at 10% p.a. is to be charged on fixed assets on straight line method.
(iii) Closing inventory at branch is $ 700 as on 31-3-2019.
(iv) Goods received form Head Office (HO) were recorded at ` 1,85,500 in HO books.
(v) Remittances to HO were recorded at ` 1,62,000 in HO books.
(vi) HO account is recorded in HO books at ` 2,84,500. (vii) Exchange rates of US Dollar at different dates can be
taken as: 1-4-2015 ` 63;
1-4-2018 ` 65 and
31-3-2019 ` 67.
Prepare the trial balance after been converted into Indian rupees in
accordance with AS-11. (5 marks)
(c) Mr. Rakshit gives the following information relating to items forming part of inventory as on 31st March, 2019.
His factory produces product X using raw material A.
(i) 800 units of raw material A (purchased @ ` 140 per unit). Replacement cost of raw material A as on 31st March,
2019 is ` 190 per unit.
(ii) 650 units of partly finished goods in the process of producing X and cost incurred till date ` 310 per unit. These
(iii) 1,800 units of finished product X and total cost incurred ` 360 per unit.
Expected selling price of product X is ` 350 per unit.
In the context of AS-2, determine how each item of inventory will be valued as on 31st March, 2019. Also, calculate
the value of total inventory as on 31st March, 2019. (5 marks)
3. (a) Mr. Harsh provides the following details relating to his holding in 10% debentures (face value of ` 100 each)
of Exe Ltd., held as current assets:
1.4.2018 opening balance – 12,500 debentures, cost`12,25,000 1.6.2018 purchased 9,000 debentures @` 98 each ex-
interest 1.11.2018 purchased 12,000 debentures @ ` 115 each cuminterest
31.1.2019 sold 13,500 debentures @ ` 110 each cum-interest

31.3.2019 Market value of debentures @ ` 115 each Due dates of interest are 30th June and 31st December.
Brokerage at 1% is to be paid for each transaction. Mr. Harsh closes his books on 31.3.2019. Show investment
account as it would appear in his books assuming FIFO method is followed. (10 marks) (b) A fire occurred in the
premises of M/s Kirti & Co. on 15thDecember,
2018. The working remained disturbed upto 15th March, 2019 as a result of which sales adversely affected. The firm
had taken out an insurance policy with an average clause against consequential losses for ` 2,50,000.
Following details are available form the quarterly sales tax return filed / GST return filed:
Sales 2015-16 2016-17 2017-18 2018-19 (`) (`) (`) (`)
From 1st April to 30th 3,80,000 3,15,000 4,11,900 3,24,000 June

From 1st July to 30th
September 1,86,000 3,92,000 3,86,000 4,42,000 From 1st October to
31st December 3,86,000 4,00,000 4,62,000 3,50,000 From 1st January to
31st March 2,88,000 3,19,000 3,80,000 2,96,000
Total 12,40,000 14,26,000 16,39,900 14,12,000 A period of 3 months (i.e from 16-12-2018 to 15-3-2019) has been
agreed upon as indemnity period.
Sales from 16-12-2017 to 31-12-2017 68,000
Sales from 16-12-2018 to 31-12-2018 Nil Sales from 16-03-2018 to 31-03-2018 1,20,000
Sales from 16-03-2019 to 31-03-2019 40,000
Net profit was ` 2,50,000 and standing charges (all insured) amounted to ` 77,980 for the year ending 31st March,
2018. You are required to calculate the loss of profit claim amount.
(10 marks) 4. (a) ABC Ltd. has several departments. Goods supplied to each department are debited to a
Memorandum Departmental Stock Account at cost plus a fixed percentage (marks-up) to give the normal selling
price. The amount of mark-up is credited to a Memorandum Departmental Markup account. If the selling price of
goods is reduced below its normal selling prices, the reduction (mark-down) will require adjustment both in the
stock account and the mark-up account. The mark-up for department X for the last three years has been 20%.
Figures relevant to department X for the year ended 31st March , 2019 were as follows:
Stock as on 1st April, 2018 at cost ` 1,50,000

Purchases at cost ` 4,30,000
Sales ` 6,50,000
1. Shortage of stock found in the year ending 31.3.2019, costing ` 4,000 were written off.
2. Opening stock on 1.4.2018 including goods costing` 12,000 had been sold during the year and had been marked-
down in the selling price by`1,600. The remaining stock had been sold during the year.
3. Goods purchased during the year were marked down by`3,600 from a cost of` 30,000. Marked-down stock costing
` 10,000 remained unsold on 31.3.2019.
4. The departmental closing stock is to be valued at cost subject to adjustment for mark-up and mark-down.
You are required to prepare for the year ended 31st March, 2019: (i) Departmental Trading Account for department
X for the year ended 31st March, 2019 in the books of head office. (ii) Memorandum Stock Account for the year
ended 31st March, 2019.
(iii) Memorandum Mark-Up account for the year ended 31stMarch, 2019. (10 marks) (b) Archana Enterprises
maintain their books of accounts under single entry system. The Balance Sheet as on 31st March, 2018 was as
follows:
Liabilities Amount Assets Amount (`) (`) Capital A/c 6,75,000 Furniture & fixtures 1,50,000 Trade creditors
7,57,500 Stock 9,15,000 Outstanding exp. 67,500 Trade debtors 3,12,000 Prepaid insurance 3,000 Cash in hand & at
bank 1,20,000 15,00,000 15,00,000 The following was the summary of cash and bank book for the year ended 31st
March, 2019: Receipts
Cash in hand & at
Bank on 1st April, 2018 Cash sales
Receipts from trade debtors
Additional Information: (i) Discount allowed to trade debtors and received from trade creditors amounted to`
54,000 and` 42,500 respectively, (for the year ended 31st March, 2019)
(ii) Annual fire insurance premium of` 9,000 was paid every year on 1st
August for the renewal of the policy.

(iii) Furniture & fixtures were subject to depreciation @ 15% p.a. on
diminishing balance method.
(iv) The following are the balances as on 31st March, 2019: Stock ` 9,75,000
Trade debtors ` 3,43,000
Outstanding expenses ` 55,200
(v) Gross profit ratio of 10% on sales in maintained throughout the year. You are required to prepare Trading and
Profit & Loss account for the year ended 31st March, 2019, and Balance Sheet as on that date. (10 marks)
Amount (`)
1,20,000
Payment Amount (`)
Payment to trade
creditors 1,24,83,000
1,10,70,000 Sundry expenses paid 9,31,050
Drawings 3,60,000
27,75,000 Cash in hand & at

Bank on 31st March,
2019 1,90,950
1,39,65,000 1,39,65,000
5. (a) From the following particulars furnished by the Prashant Ltd., prepare the Balance Sheet as at 31st March,
2019 as required by Schedule III of the Companies Act, 2013:
Particulars Debit (`) Credit (`) Equity share capital (face value of` 10 15,00,000 each)
Calls-in-arrears 5,000
Land 5,50,000
Building 4,85,000
Plant & machinery 5,60,000
General reserve 2,70,000 Loan from State Financial Corporation 2,10,000 Inventories 3,15,000
Provision for taxation 72,000 Trade receivables 2,95,000
Short-term loans & advances 58,500
Profit & loss account 1,06,800 Cash in hand 37,300
Unsecured loans 1,65,000 Trade payables 2,67,000 Total 25,90,800 25,90,800
1. 10,000 equity shares were issued for consideration other than cash.
2. Trade receivables of`55,000 are due for more than six months.
3. The cost of building and plant & machinery is` 5,50,000 and ` 6,25,000 respectively.
4. The loan from State Financial Corporation is secured by hypothecation of plant & machinery. The balance of`
2,10,000 in this account is inclusive of` 10,000 for interest accrued but not due.
5. Balance at Bank included ` 15,000 with Aakash Bank Ltd., which is not a scheduled bank. (10 marks) (b) The
partners of C&G decided to convert their existing partnership business into a private limited called CG trading Pvt.
Ltd. with effect from 1.7.2018.
The same books of accounts were continued by the company which closed its accounts for the first term on
31.3.2019.
The summarized profit & loss account for the year ended 31.3.2019 is below: Particulars
Turnover
Advertisement
Sales Commission
Salaries
Managing Director’s Remuneration Interest on Debenture
Rent
Bad debt
Underwriting Commission
Audit fees
Loss on sale of Investments Depreciation
` in lakhs ` in lakhs 245.00
6.00 251.00 124.32

3.50
7.00
18.00
6.00
2.00
5.50
1.15
1.00
3.00
1.00
4.00 176.47 74.53
The following additional information was provided:
(i) The average monthly sales doubled from 1.7.2018, GP ratio was constant.
(ii) All investments were sold on 31.5.2018.
(iii) Average monthly salaries doubled from 1.10.2018. (iv) The company occupied additional space from 1.7.2018
for which rent of ` 20,000 per month was incurred.
(v) Bad debts recovered amounting to`60,000 for a sale made in 2016-17 has been deducted from bad debts
mentioned above. (vi) Audit fees pertains to the company.
Prepare a statement apportioning the expenses between pre and post incorporation periods and calculate the profit/
loss for such periods. (10 marks)
6. Answer any four of the following:

(a) The following extract of Balance Sheet of Prabhat Ltd. (Noninvestment Company) was obtained:
Balance Sheet (Extract) as on 31st March, 2019
Liabilities ` Issued and subscribed capital:
30,000, 12% preference shares of ` 100 each 30,00,000 (fully paid)
24,00,000 equity shares of ` 10 each, ` 8 paid up 1,92,00,000

Share suspense account 40,00,000
Capital reserves (` 3,00,000 is revaluation 3,90,000
reserve)
Secured loans:
12% debentures 1,30,00,000
Unsecured loans:
Public deposits 7,40,000 Current liabilities:
Trade payables 6,90,000 Cash credit from SBI (short term) 9,30,000 Assets
Investments in shares, debentures etc. 1,50,00,000 Profit & loss account (Dr. balance) 30,50,000
Prabhat Ltd. is an investment company? (5 marks)
(b) Following is the extract of Balance Sheet of Prem Ltd. as at 31st March, 2018:
Authorized capital `
3,00,000 equity shares of ` 10 each 30,00,000
25,000, 10% preference shares of ` 10 each 2,50,000
32,50,000

2,70,000 equity shares of ` 10 each fully paid up 27,00,000
24,000, 10% preference shares of ` 10 each fully 2,40,000

paid up
29,40,000
Capital redemption reserve 1,20,000
Securities premium (in cash) 75,000
11,55,000
On 1stApril, 2018, the company decided to capitalize its reserves by way of bonus at the rate of two shares for every
five shares held. Show necessary journal entries in the books of the company and prepare the extract of the balance
sheet after bonus issue.
(5 marks) (e) A company had issued 40,000, 12% debentures of`100 each on 1st April, 2015. The debentures are due
for redemption on 1st March, 2019. The terms of issue of debentures provided that they were redeemable at a
premium of 5% and also conferred option to the debenture holders to convert 20% of their holding into equity shares
(nominal value`10) at a predetermined price of`15 per share and the payment in cash, 50 debentures holders holding
totally 5,000 debentures did not exercise the option. Calculate the number of equity shares to be allotted to the
debenture holders and the amount to be paid in cash on redemption. (5 marks)
Test Series
CA Inter Gr.I Paper-1 (New Syllabus)
Accounting

Candidates are also required to answer any four questions from the remaining five questions.
1. (a) HIL Ltd. was making provision for non-moving stocks based on no issues having occurred for the last 12
months upto 31.03.2017. The company now wants to make provision based on technical evaluation during the year
ending 31.03.2018.
Total value of stock ` 120 lakhs
Provision required based on technical evaluation ` 3.00 lakhs Provision required based on 12 months no issues ` 4.00
lakhs You are requested to discuss the following points in the light of Accounting Standard (AS) – 1:
(i) Does this amount to change in accounting policy? (ii) Can the company change the method of accounting?
(5 marks)
(b) Best Ltd. deals in five products, P, Q, R, S, and T which are neither similar nor interchangeable. At the time of
closing of its accounts for the year ending 31st March 2011, the historical cost and net realisable value of the items
of the closing stock are determined as follows:
Items Historical Cost Net realizable value ` `

P 5,70,000 4,75,000
Q 9,80,000 10,32,000
R 3,16,000 2,89,000
S 4,25,000 4,25,000
T 1,60,000 2,15,000 What will be the value of closing stock for the year ending 31st March, 2011 as per AS-2
"Valuation of inventories"? (5 marks)
1.937
(c) Tiger Motor Car Limited signed an agreement with its employees union for revision of wages on 01.07.2011.
The revision of wages is with retrospective effect from 01.04.2008. The arrear wages up to 31.03.2011 amounts to `
40,00,000 and that for the period from 01.04.2011 to 01.07.2011 amount to ` 3,50,000. In view of the provisions of
AS 5 “Net Profit or Loss for the period, Prior Period Items and Changes in Accounting Policies”, decide whether a
separate disclosure of arrear wages is required while preparing financial statements for the year ending 31.03.2012.
(5 marks)
(d) Preet Ltd. is installing a new plant at its production facility. It has incurred these costs:
1. Cost of the plant (cost per supplier’s invoice plus
taxes) ` 50,00,000 2. Initial delivery and handling costs ` 4,00,000
3. Cost of site preparation ` 12,00,000 4. Consultants used for advice on the acquisition of
the plant ` 14,00,000
5. Interest charges paid to supplier of plant for
deferred credit ` 4,00,000
6. Estimated dismantling costs to be incurred after
7 years ` 6,00,000 7. Operating losses before commercial production ` 8,00,000
Please advise Preet Ltd. on the costs that can be capitalised in accordance with AS 10 (Revised).
(5 marks) 2. (a) From the following, prepare the Balance Sheet of ABC Ltd. as at 31st March as required by
Companies Act. Give Notes at the foot of the Balance Sheet as may be necessary:
(Amount in `) Particulars Dr. (`) Cr. (`) Equity Capital (Face value of ` 100) 15,00,000 Calls in Arrears 5,000 Land
3,50,000 Building 9,50,000 Plant and Machinery 9,00,000 Furniture 50,000 General Reserve 2,50,000 Loan from
State Financial Corporation 3,00,000 Term Loans from Banks 5,00,000 Stock of - Finished Goods 8,00,000

Provision for Taxation 80,000 Sundry Debtors 5,50,000
Advances 45,000
Profit and Loss A/c 6,10,000 Cash Balance 35,000
Loans (Unsecured) 2,00,000 Sundry Creditors (For Goods) 6,10,000 Total 40,50,000 40,50,000
The following additional information is provided
1. 5,000 Equity Shares were issued for consideration other than cash.
2. Debtors of ` 1,02,000 are due for more than six months.
3. Cost of Assets are as follows: (a) Building - ` 13,00,000 (b) Plant and Machinery `20,00,000, and (c) Furniture
`65,000.
4. The Balance of ` 3,00,000 in the Loan Account with State Financial Corporation is inclusive of ` 20,000 for
interest accrued but not due. The Loan is secured by hypothecation of building.
5. The Balance of`5,00,000 in the Term Loan Account with Bank is Inclusive of` 10,000 towards interest accrued
and due. The Loan is secured by hypothecation of Plant and Machinery.
6. Bills receivable for`2,00,000 maturing on 15thMay, have been discounted.
7. The Company had a contract for the Erection of Machinery at ` 2,50,000 which is incomplete on 31st March.
8. Proposed Dividend ` 2,10,000. (10 marks) (b) ABC Ltd. is in the midst of finalising its accounts for the year-
ended
31st March. A Profit and Loss Account has been prepared in draft, the account balances as rounded of to the nearest
thousands, are listed below:
Particulars
Share Capital
General Reserve
Development Rebate Reserve Land
Buildings
Plant and Machinery
Furniture, Fixtures and Office Equipment
Vehicles
` 000's Particulars ` 000's
25,000 Finished Goods 1,414

6,031 Stores and Spares 2,771
6,271 Tools Jigs and Dies 9,187
2,225 Cash Credit from Banks 30,672
9,316 Acceptances 2,645
64,282 Sundry Creditors 6,162
Other Current Liabilities 10,317
1,594 Interest Accrued but not
454 due on Loans 589
Loan from State Government Other Secured Loans
575 Provisions for Gratuity 241
32,460 and Pension
Interest Accrued on 2
Deposits
Particulars
Fixed Deposits from Public Unsecured Loans

Depreciation Reserve
- Building
- Plant and Machinery
- Furniture
- Vehicles
Raw Materials and

Components
Work-in-progress
` 000's Particulars ` 000's
2,400 Sundry debtors 24,231

1,114 Cash in Hand 37
Bank balances
2,193 - 30,328 - 568 Loans and Advances 4,518
245 Preliminary Expenses 8
Advance Income
42,014 - Tax Paid 3,489
6,116 Capital Work-in Progress 596
(Profit for the year)
On Current Accounts 39
On Deposit Accounts 27
In arriving at the Profit for the year, the following have been charged: Particulars ` 000's
Depreciation 12,424
Salary and Perquisite to Managing Director 72
Director’s Fee 4
The Authorized Capital is 3,50,000 Equity Shares of ` 100 each.
The Loan from the State Government is secured by a charge on the
Land. Cash Credits by hypothecation of Stocks and Book Debts and
the Other Secured Loans on the Buildings and Plant and Machinery.
The following adjustments are yet to be made:
1. Investment Allowance Reserve to be created ` 5,400 (000's)
2. Provision to be made for Income-Tax in ` 4,400 (000's) 3. Provision to be made for Managing Director’s
Commission at 1% of the Net Profits.
4. Proposed Dividend at 10%.
Depreciation as per Companies Act, is ` 10,424 (000's) Prepare:
(a) Show the computation of Commission Payable to the Managing Director, and
(b) Prepare the Balance sheet of the Company, based on all the above. (10 marks) 3. (a) With the help of the
following statement of Profit and Loss for the year ended 31-3-2016 and Balance sheets as on 31.3.2015 and
31.3.2014 of ABC Ltd. calculate Cash flows from operating activities.
Statement of Profit and Loss

for the year ended 2016
Particulars Amount `
Revenue from Operation 5,00,000 Less Expenses

Depreciation 17,000 Salary 35,000
Other Expenses
Rent 72,000 Commission 23,000 Other Expenses 43,000 1,90,000
Net Profit for the Period 3,10,000
Less Appropriations proposed dividend 1,50,000
Net Profit 1,60,000
Balance Sheet of ABC Ltd.

as at 31.3.2015 and 31.3.16
Particulars 31.3.15 31.3.2016 ` `

Shareholder’s Funds
Equity Share capital 3,50,000 2,00,000 Reserve and surplus 2,20,000 60,000 Non-current Liabilities
Loan 30,000 20,000 Current Liabilities
Trade Payable 50,000 3,50,000 Proposed dividend 1,50,000 20,000
Total 8,00,000 6,50,000 II. Assets
Non-current Assets:
Plant 5,40,000 4,75,000 Patents 50,000 -
Current assets
Inventories 1,20,000 1,05,000
Total 8,00,000 6,50,000
Note: Depreciation was to be allowed ` 20,000 but it is charged ` 17,000.
(12 marks) (b) The partners Kamal and Vimal decided to convert their existing partnership business into a Private
Limited Company called M/s. KV Trading Private Ltd. with effect from 1-7-2014.
The same books of accounts were continued by the company which closed its account for first term on 31-3-2015.
closed its account for first term on 31-3-2015.
2015 is below:
Turnover

Advertisement
Sales Commission
Salary
Managing directors remuneration Interest on Debentures Rent

Bad Debts
Underwriting Commission Audit fees
Loss on sale of investment Depreciation
(`) in lakhs (`) in lakhs
240.00
6.00
246.00
102.00
3.00
6.00
18.00
6.00
2.00
5.50
1.00
2.00
2.00
1.00
4.00 152.50
93.50
The following additional information was provided
(i) The average monthly sales doubled from 1-7-2014. GP ratio was constant.
(ii) All investments were sold on 31-5-2014.
(iii) Average monthly salary doubled from 1-10-2014. (iv) The company occupied additional space from 1-7-2014
for
which rent of ` 20,000 per month was incurred. (v) Bad debts recovered amounting to ` 50,000 for a sale
made in 2012, has been deducted from bad debts
mentioned above.
(vi) Audit fees pertains to the company.
Prepare a statement apportioning the expenses between pre and post incorporation periods and calculate the
Profit/Loss for such periods.
Also suggest how the pre-incorporation profits are to be dealt with. (8 marks)
4. The Balance Sheet of Dee Limited on 31st March, 2009 was as follows:
Balance Sheet as at 31st March, 2009
Liabilities Amount
` Share capital :
Authorised capital 50,000 equity
shares of ` 10 each 5,00,000 Issued and subscribed capital 25,000
equity shares of ` 10 fully paid up 2,50,000
Assets Amount `
PPE (at cost less depreciation) 8,00,000
Debenture redemption fund
investments 2,00,000
Cash balance 2,50,000
Other current assets 10,00,000
Reserves and surplus :

Profit and Loss A/c 1,00,000
Debenture redemption reserve 2,50,000
Secured loans :
12% convertible debentures
(5,000 Deb. of ` 100 each) 5,00,000
Other secured loans 2,50,000
Current liabilities and provisions 6,00,000
Proposed dividend 25,000
22,50,000
22,50,000
At the General meeting it was resolved to :

1. Pay proposed dividend of 10% in cash.
2. Give existing shareholders the option to purchase one share of`10 each at`15 for every five shares held. This
option was taken up by all the shareholder.
3. Redeem the debentures at a premium of 5% and also confer option to the debentureholders to convert 50% of
their holding into equity shares at a predetermined price of ` 15 per share and balance payment to be made in cash.
Holders of 3,000 debentures opted to get their debentures redeemed in cash only while the rest opted for getting the
same converted into equity shares as per the terms of issue. Debenture redemption fund investments realised `
1,80,000 on sales.
You are required to redraft the Balance Sheet after giving effects of the right issue and redemption of debentures.
Also show the calculations in respect of number of equity shares issued and cash payment. (20 marks) 5. (a) A Ltd.
purchased on 1st April, 2015 8% convertible debenture in C Ltd. of face value of ` 2,00,000 @` 108. On 1st July,
2015 A Ltd. purchased another ` 1,00,000 debenture @ ` 112 cum interest. On 1st October, 2015` 80,000 debenture
was sold @` 105. On 1st December, 2015, C Ltd. give option for conversion of 8% convertible debentures into
equity share of` 10 each. A Ltd. receive 5000 equity share in C Ltd. in conversion of 25% debenture held on that
date. The market price of debenture and equity share in C Ltd. at the end of year 2015 is ` 110 and ` 15 respectively.
Interest on debenture is payable each year on 31st March, and 30th September.
The accounting year of A Ltd. is calendar year.
Prepare investment account in the books of A Ltd. on average cost basis. (12 marks) (b) Following transactions of
Nisha took place during the financial year 2017-18:
1st April, 2017 Purchased ` 9,000 8% bonds of ` 100 each at` 80.50 cum-interest. Interest is payable on 1st
November and 1st May. 1st May, 2017 Received half year’s interest on 8% bonds.
10th July, 2017
1st October, 2017 1st November, 2017
15th January, 2018
15thMarch, 2018 Purchased 12,000 equity shares of` 10 each in Moon Limited for ` 44 each through a broker, who
Sold 2,250 8% bonds at`81 Ex-interest. Received half year’s interest on 8% bonds.
Moon Limited made a rights issue of one equity share for every four Equity shares held at`5 per share. Nisha
exercised the option for 40% of her entitlements and sold the balance rights in the market at` 2.25 per share.
Received 18% interim dividend on equity shares of Moon Limited.
Prepare separate investment account for 8% bonds and equity shares of Moon Limited in the books of Nisha for the
year ended on 31st March, 2018. Assume that the average cost method is followed. (8 marks) 6. (a) Happy Valley
Florists Ltd. acquired a delivery van on hire purchase
on 01.04.2010 from Ganesh Enterprises. The terms were as follows: Particulars Amount (`) Hire Purchase Price
1,80,000 Down Payment 30,000 1st installment payable after 1 year 50,000 2nd installment after 2 years 50,000 3rd
installment after 3 years 30,000 4th installment after 4 years 20,000
Cash price of van ` 1,50,000 and depreciation is charged at 10% WDV.

You are required to
(i) Calculate Total Interest and Interest included in each
installment.
(ii) Prepare Van A/c., Ganesh Enterprises A/c. in the books of
Happy Valley Florists Ltd. up to 31.03.2014. (5 marks) (b) There is transfer/sale among the three departments as
below: Department X sells goods to Department Y at a profit of 25% on cost and to Department Z at 20% profit on
cost.
Department Y sells goods to X and Z at a profit of 15% and 20% on sales respectively.
Department Z charges 20% and 25% profit on cost to Departments X and Y respectively.
Department Managers are entitled to 10% commission on net profit subject to unrealised profit on departmental
sales being eliminated. Departmental profits after charging Managers’ commission, but before adjustment of
unrealised profit are as under:
`
Department X 1,80,000
Department Y 1,35,000
Department Z 90,000
Stocks lying at different Departments at the end of the year are as under:
Dept. X Dept. Y Dept. Z Transfer from Department X — 75,000 57,000

Transfer from Department Y 70,000 — 60,000
Transfer from Department Z 30,000 25,000 —
Find out the correct departmental profits after charging Managers’ commission. (5 marks)
(c) ABC Ltd. sends Goods to its Jaipur Branch at Cost plus 25%. The following particulars are available in respect
of the Branch for the year- ended 31st March:
Particulars `
Opening Stock 80,000

Goods Sent to Branch (Invoice Price) 12,00,000
Loss in Transit (Invoice Price) 15,000
Pilferage (Invoice Price) 6,000
Sales 12,19,000
Expenses 60,000
Recovered from Insurance Company against Loss in Transit 10,000
Prepare Ledger Accounts in the HO Books for -(1) Branch Stock Account, (2) Goods Sent to Branch Account, (3)
Branch Adjustment Account, and (4) Branch Profit and Loss Account.
(5 marks) (d) Write short notes on Designated Partner in a Limited Liability Partnership and what are their
liabilities. (5 marks)
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First edition : January 2008

All disputes are subject to ALLAHABAD jurisdiction only. iii

We applaud our son Bhaskar

Dr. Arpita Ghose Gourab Ghose

November - 2019 on companion.sauda.com

(New Syllabus) Paper 1 - Accounting

Editors : Prof. Arun Kumar CA Mohit Bahal CS (Dr.) Himanshu Srivastava

Shuchita Prakashan (P) Ltd.

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: Shuchita Prakashan (P) Ltd.

Laser Typeset at : Shuchita Prakashan (P) Ltd. ISBN : 978-93-89613-04-9

4B Cash flow Statement

7 Redemption of preference shares

10 Insurance Claims for Loss of Stock and Loss of Profit

CA IPCC Paper- 1, Chapter- 1 CA IPCC Paper- 5, Chapter- 2 CA Final Paper- 1, Chapter- 1

CA Final Paper- 1, Chapter- 1 CA IPCC Paper- 1, Chapter- 2

CA IPCC Paper- 1, Chapter- 3

CA IPCC Paper- 1, Chapter- 5

CA IPCC Paper- 1, Chapter- 12

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Paper - 1 ________________________________ Accounting

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3. (Chapter 3 Unit 1,2)

11. (Chapter 11)

Introduction to Accounting Standards 1.11

Financial Statements of Companies: Preparation of Financial Statements 1.132

Redemption of Preference Shares 1.371

14. (Chapter 14) ☹

Departmental Accounts 1.642

Paper 1 Accounting (100 marks) (One Paper - Three Hours)

5. Accounting for Special Transactions:

(iii) Hire- purchase and Instalment sale transactions.

6. Special Type of Accounting

(iii) Accounts from Incomplete Records.

Examination Trend Analysis

Paper 1 Accounting Question Paper Based Contents of Last Five Examinations

(b) 6 Accounting for Bonus Issue and

Table Showing Importance of Chapter on the Basis of Marks

☹Carve OUTS/INS in IND AS ☹List of IND AS

Time First Indepth learning

Next After day 7 days

After After After Fix as 30 days 60 days 90 days per your

0.45 0.10 0.10

1. Recognition of events and transactions in the financial statements,

Q.1.2 2017 - Nov [1] {C} (d) Descriptive

2 Standard Setting Process

Space to write important points for revision

(3 marks) [CS Exe - II] Answer:

4 International Accounting Standard Board

Space to write important points for revision

State the objectives of the Accounting Standards Board.

CHAPTER Framework for Preparation

This Chapter Covers: Study’s Chapter: 2

THE GRAPH . . . . . . . . . . . . . . . . . Trend Analysis