INTERMEDIATE EXAMINATION

GROUP I
(SYLLABUS 2008)

SUGGESTED ANSWERS TO QUESTIONS

DECEMBER 2012

Paper- 5 : FINANCIAL ACCOUNTING

Time Allowed : 3 Hours The figures in the margin on the right side indicate full marks. Answer Question No. 1, which are compulsory and any five questions from the rest. Q. 1. (a) From the four alternative answers given against each of the following cases, indicate the correct answer : [110=10] (i) The situation when the number of shares applied for is less than the number of shares offered is termed as (A) Minimum subscription (B) Under subscription (C) Over subscription (D) None of the above (ii) Realisation account is opened at the time of (A) Admission of a new partner (B) Retirement of a partner (C) Dissolution of the Firm (D) In all the above situations (iii) In the hire purchase system interest charged by vendor is calculated on the basis of (A) Outstanding Cash Price (B) Hire Purchase Price (C) Instalment amount (D) None of the above Full Marks : 100

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(iv) Bad debts are apportioned among departments in the proportion of (A) Sales of each department (B) Number of units sold by each department (C) Cost of sales of each department (D) None of the above (v) The following account has a credit balance (A) Plant and Equipment A/c (B) Purchase Returns A/c (C) Purchase A/c (D) None of the above (vi) Actuarial valuation relates to (A) Banking Company (B) Electric Supply Company (C) Insurance Company (D) None of the above (vii) The amortisation of amount of software commences from the date when it is (A) Available for use (B) Put to use (C) Developed upto 75% (D) None of the above (viii) A non-performing asset is (A) Money at call and short notices (B) An asset that ceases to generate income (C) Cash balance with Bank (D) None of the above (ix) When prior period expenditure is paid subsequently and for which no provision was made earlier, the accounting entry would be (A) Debit expenditure (B) Debit prior period expenditure (C) Debit deferred reveneu expenditure (D) None of the above (x) In the case of non-profit organisation donations received by the organisation are reflected in (A) Income and Expenditure Account (B) Capital Account (C) Receipts and Payments Account (D) None of the above

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(b) State whether the following statements are TRUE (T) or FALSE (F) : [15=5] (i) When the shareholder cannot pay call moneys for the shares allotted he can return the shares which is called as surrender of shares. (ii) Reserve for unexpired risk is applicable for Banking companies. (iii) Rebate on bills discounted is disclosed in the balance sheet of a Banking company in the assets side as representing the rebate not yet matured. (iv) Double account system is applicable for electricity companies. (v) Liquid assets plus stock in trade is called current assets. (c) Fill in the blanks in the following sentences using appropriate word from the alternatives indicated : [15=5] (i) Net worth ratio means share holders funds divided by total assets excluding (fictitious assets/prepaid expenses). (ii) When the cost of byproduct cannot be ascertained separately it should be valued (sale price/net realisable value). at (iii) Errors in principle affect tallying Balance Sheet (does/does not). (sale/payment of last (iv) In case of instalment sale ownership passes at the time of instalment). (v) Solvency ratio means total liabilities divided by (total assets/shareholders funds). (d) Match the following : (i) (ii) (iii) (iv) (v) Answer 1. (a) (i) (B) The numbers of shares applied by the public is less than the number of shares offered. This is a case of under subscription. In majority of such cases full allotment is made in case of under subscription. (ii) (C) Realisation Account is opened when the firm is fully dissloved, to ascertain the profit or loss from Realisation of assets & payment of liabilities. Books of accounts can be closed only if all the Assets are realised and all the liabilities are paid off except cash. Whereas Revaluation means modifying the value, when the partnership ratio changes, or admission of new partner or retirement of existing partner or death of partners, or any other change in the constitution of the firm. (iii) (A) Total payment under Hire-Purchase System is more than cash price. In fact this excess payment over the cash price is interest. It is very essential to calculate interest because the AS-3 AS-6 AS-9 AS-16 AS-22 (A) (B) (C) (D) (E) (F) Depreciation Accounting Cash flow statement Borrowing cost Revenue recognition Accounting for tax on income No matching statement found [15=5]

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amount paid for interest is charged to revenue and the asset is capitalized at cash price. Thus, normally all instalments will include a part of cash price and a part of interest on the outstanding balance. (iv) (A) Bad debts is considered to be a part of Selling and Distribution expenses where, they are arise in the normal course of trading. So, it is apportioned on the sales value. (v) (B) When we return goods the stock will decrease, as well as the liability towards suppliers decreases. The journal entry is Suppliers A/c Dr. To Purchase Returns A/c (vi) (C) It is ascertained the fair market value of the product in future. (vii) (A) AS-26 refers that amortisation of intangible assets should commence when the asset is available for use. (viii) (B) An asset becomes non performing when it ceases to generate income for the bank. Here assets include, Leased Assets, Loans and Advances. Banks should classify an account as NPA only if the interest due and changed during any querter is not serviced fully within 90 days from the end of the quarter. (ix) (B) Say, salary paid in April 2013 ` 2,00,000 including ` 70,000 for the month of March 2013. The accounting entry would be :Slary A/c Prior Period Expenses (Salary) A/c To Bank A/c Dr. Dr. 1,30,000 70,000 2,00,000

(x) (C) Donation received is a capital nature transaction. So, it is shown in the Receipt & Payments Account only, if any other not mention of the problems. Answer 1. (b) (i) True Surender of shares is a voluntary return of shares for the purposes of cancellation by shareholder. Surrender of shares is at the instances of shareholders. (ii) False Reserve for unexpired risk is applicable to Insurance Company. (iii) False It is shown in the liabilities side included in Other Liabilities & Provisions in Schedule-5 appeneded to the Balance Sheet. (iv) True It is applicable to the Electricity Company. There are following reasons: (a) It has different components for presenting the final accounts. (b) A Revenue Account is prepared in lieu of the Profit & Loss A/c. A net Revenue Account is prepared in place of the Profit & Loss Appropriation A/c. (c) The conventional system of preparing a Balance Sheet is not followed. Balance Sheet split up into (1) Receipt and Expenditure on Capital Account (2) General Balance Sheet

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(d) Interest on Loan or Debenture is treated as an appropriation of Profit and charged to Net Revenue Account. (e) Depreciation is charged to Revenue Account. (v) True Liquid assets means which is converted cash quickly. The component of liquid assets are Cash, Debtors, B/R etc. and added Stock with the Liquid assets the value which is derived is called Current Assets. Answer 1. (c) (i) (ii) (iii) (iv) (v) Fictitious assets Net realizable value Does not Sale Total assets

Answer 1. (d) (i) (ii) (iii) (iv) (v) AS-3 AS-6 AS-9 AS-16 AS-22 (B) (A) (D) (C) (E) Cash Flow statement Depreciation Accounting Revenue recognition Borrowing cost Accounting for tax on income

Q. 2. (a) Priya Sales Corporation of Jaipur has a Branch at Kota to which goods are sent @ 33 1 3 % above cost. 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 Kota. Following further details are given for the year ended 31st March, 2012: (` ) Goods sent to Branch (at invoice price) 18,00,000 Goods returned by Branch (at invoice price) 20,000 Stock at Branch on 1.4.2011 (at invoice price) 2,40,000 aranch Debtors on 1.4.2011 2,15,000 Sales during the year: Cash 5,80,000 Credit 11,40,000 Cash received from Branch debtors 10,45,000 Discount allowed to by Branch to debtors 14,800 Bad debts 9,200 Sales return at Kota Branch 25,000 Salaries and wages at Branch 1,80,000 Rent, Rates and Taxes at Branch 42,000 Sundry expenses at Branch 15,000 Stock at Branch on 31.3.2012 (at invoice price) 3,60,000

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You are required to show Branch Stock Account, Branch Adjustment Account, Branch Expenses Account, Branch Debtors Account, Branch Goods sent to Branch Account and Branch Profit & Loss Account in the books of the Head Office. [8] (b) State the criteria which should be fulfilled by a depreciable asset as per AS-6. [3] (c) Toly Enterprise ordered 10,000 units of material X at ` 135 per unit. The purchase price includes excise duty @ ` 8 per unit, in respect of which full CENVAT Credit is admissible. Freight incurred amounted to ` 88,500. Normal transit loss is 5%. The enterprise actually received 9,400 units and consumed 8,500 units. You are required to ascertain the value of inventory as per AS-2. [4] Answer 2. (a) Dr. Particuars To To To To Books of Priya Sales Corporation Branch Stock Account Amount ` Particuars Cr. Amount ` 20,000 5,80,000 11,40,000 3,60,000 21,00,000 Cr.

Balance b/d 2,40,000 By Goods sent to Branch A/c (Return) Goods sent to Branch A/c 1,80,000 By Bank A/c (Cash Sales) Branch Debtors A/c (Returns) 25,000 By Branch Debtors A/c (Credit Sales) Branch Adjustment A/c 35,000 By Balance c/d (Excess of sales over invoice price) 21,00,000 Branch Adjustment Account Particuars

Dr.

To Stock Reserve A/c (Closing stock - 25% on 3,60,000) To Branch P/L A/c

Amount Particuars Amount ` ` 90,000 By Stock Reserve A/c (Opening stock) 60,000 (25% on 2,40,000) 4,50,000 By Goods sent to Branch A/c 4,45,000 (18,00,000-20,000=17,80,00025%) By Branch Stock A/c 35,000 5,40,000 5,40,000 Branch Expenses Account Amount Particuars ` 1,80,000 By Branch Profit & Loss A/c (transfer) 42,000 15,000 2,37,000 Cr. Amount ` 2,37,000

Dr. Particuars To Bank A/c (Salaries & Wages) To Bank A/c (Rent, rates & taxes) To Bank A/c (Sundry exp.)

2,37,000

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Dr. Particuars To Balance b/d To Branch Stock A/c

Branch Debtors Account Amount Particuars ` 2,15,000 By Bank A/c 11,40,000 By Branch Stock A/c (Sales return) By Branch P/L A/c (Discount ` 14,800 & Bad debts ` 9,200) By Balance c/d 13,55,000 Goods sent to Branch Account Amount Particuars ` 20,000 By Branch Stock A/c 4,45,000 13,35,000 18,00,000

Cr. Amount ` 10,45,000 25,000 24,000

2,61,000 13,55,000 Cr. Amount ` 18,00,000

Dr. Particuars To Branch Stock A/c (Return) To Branch Adjustment A/c To Purchases A/c (Trading A/c) Dr. Particuars To Branch Exp. A/c To Branch Debtors A/c (Discount & Bad debts) To Profit & Loss A/c (Branch Net profit)

18,00,000 Cr. Amount ` 4,50,000

Branch Profit & Loss Account Amount Particuars ` 2,37,000 By Branch Adjustment A/c 24,000 1,89,000 4,50,000

4,50,000

Answer 2. (b) As per As-6, a depreciable asset must fulfill the following criteria : (i) Expected to be used for more than one accounting period. (ii) Have a Limited useful life. (iii) Are held for use in the production or supply of goods and services, for rental, for administrative purpose, and not for sale in the ordinary course of business.

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Answer 2. (c) (i) Calculation of normal cost per unit : Purchase price- 10000 units@ ` 135 Less : CENVAT credit - 10,000 units @ ` 8 Add : Freight Total Material Cost

` 13,50,000 80,000 12,70,000 88,500 13,58,500

No. of units normally received : 100 5 = 95% of 10,000 = 9,500 units Normal Cost per unit = ` 13,58,500 9,500 = ` 143 (ii) Valuation of lnventory: units = 9400 8500 = 900 units Value of inventory = 900 units@ ` 143 = ` 1,28,700 Q. 3. (a) Income and Expenditure Account and the Balance Sheet of Nav Bharat Club are as under : Income and Expenditure Account for the year ending 31st March, 2012 Dr. Expenditure To To To To Upkeep of Ground Printing & Stationery Salaries Depreciation: Ground & Building Furniture To Repairs To Surplus Amount ` 21,000 2,800 28,000 9,000 1,000 Income By By By By By Subscription Sale of old newspapers Lectures Entrance Fee Misc. Incomes

Cr.

Amount ` 56,640 530 8,000 2,900 1,200

10,000 3,500 3,970 69,270

69,270

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Liabilities Capital Fund: Opening Balance Add: Entrance Fee Add: Surplus Sports Prize Fund: Opening Balance Add: Interest Less: Prizes Outstanding Salary Subscription in Advance

Balance Sheet as at 31st March, 2012 Amount Amount Assets (`) (`) Ground & Building 1,56,430 Furniture 2,900 Sports Prize Fund: 3,970 1,63,300 Investment Subscription 51,000 Cash and Bank 4,500 55,500 6,500 49,000 4,200 700 2,17,200

Amount (`)

Amount (` ) 1,43,200 9,000

43,000 2,600 19,400

65,000

2,17,200

The following adjustments have been made in the above accounts: (i) Upkeep of ground ` 1,500 and printing and stationery ` 510 relating to 2010-2011 were paid in 2011-12. (ii) One-half of entrance fee has been capitalised. (iii) Subscription outstanding in 2010-11 was ` 3,100 and for 2011-12 ` 2,600. (iv) Subscription received in advance in 2010-11 was ` 1,100 and in 2011-12 for 2012-13 ` 700. (v) Outstanding salary on 31.3.2011 was ` 3,600. Prepare Receipts and Payments Account for the year ended on 31st March, 2012. [8] (b) Chiou and Co. sells goods on hire purchase at cost plus 60 percent. Prepare Hire Purchase Trading Account from the following information for the year ending 31st March, 2012: [4] ` 1.4.2011 Stock with customers at hire purchase price 96,000 31.3.2012 Sale of hire purchase goods during the year at hire purchase price 5,68,000 31.3.2012 Cash received from hire purchase customers 2,65,000 31.3.2012 Stock with customers at hire purchase price 3,64,000 [3] (c) Cochin Coals Ltd. holds a lease of coal mine for 20 years. It sub-leased a part of the coal mine to Dhanbad Coals Ltd. The details of output in tons are given below : [3] Year 2009-10 2010-11 2011-12 Cochin Coals. (Tons) 10,000 12,000 14,000 Dhanbad Coals (Tons) 4,000 7,000 8,000

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As per lease, Cochin Coals has to pay100 per ton and a minimum rent being15,00,000. Dhanbad Coals had to pay120 per ton to Cochin Coals by way of royalty. Show Royalty Account in the books of Cochin Coals Ltd. for the said 3 years reflecting both Royalty receivable from Dhanbad Coals and Royalty payable to the Landlord. Answer 3. (a) Dr. Receipts To Balance b/d (Balance figure) To Subscription (*) To Entrance fee (2,900+29,000) To Lectures (fee) To Interest of prize fund investment To Sale of Newspapers To Misc. incomes Receipts and Payments Account for the year ended 31st March 2012 Amount ` 5,840 56,740 5,800 8,000 4,500 530 1,200 82,610 Payments By By By By By By Upkeep of Ground Printing & Stationery Salaries Sports Prizes Repairs Balance c/d Cr. Amount ` 22,500 3,310 27,400 6,500 3,500 19,400

82,610

Working Notes : (i) Amount of subscription received during the year 2011 -12: ` Subscription debited in Income & Exp. A/c 56,640 Add : outstanding in 2010-11 3,100 Add : Advance received in 2011-12 for 2012-13 700 60,440 ` Less : Received in advance in 2010-11 1100 Less: Outstanding in 2011-12 2600 3700 Amounts received during 2011-12 (*) 56,740 (ii) (iii) (iv) Upkeep of ground: ` 21,000+outstanding in 2010-11 ` 1,500 = ` 22,500 Printing & stationery : ` 2800 + outstanding in 2010-11 ` 510 = ` 3310 Salaries : ` 28,000+outstanding on 31.3.11 ` 3,600-outstanding on 31.3.2012 ` 4,200 = ` 27,400.

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Answer 3. (b) Hire Purchase Trading Account for the year ending 31st March, 2012. Dr. Date 1.4.11 Particulars ` Date 31.3.12 Particulars By Cash Received ` 2,65,500 To Stock with customer at 60,000 100 cost (96,000 ) 160 To Goods sold on hire 3,55,000 purchase at cost 100 (5,68,000 ) 160 To Profit & Loss A/c (profit) 1,12,500 Cr.

31.3.12

31.3.12

By Installments Overdue

35,000

31.3.12

31.3.12

By Stock with customer 100 at cost (3,64,000 ) 160

2,27,500

5,27,500 Working Notes : Dr. Memorandum Hire Purchase Customers Account Particulars Amount Particulars ` To Stock with customers 96,000 By Cash Received To Goods sold at H. P. price 5,68,000 By Installment Overdue (Balancing figure) By Stock with Customers 6,64,000 Answer 3. (c) Dr. Date 31.3.2010 To Landlord A/c 31.3.2011 To Landlord A/c 31.3.2012 To Landlord A/c In the books of Cochin Coals Ltd. Royalty Payable Account Amount Date Particulars ` By Royalty Receivable A/c 15,00,000 By Profit & Loss A/c 15,00,000 By Royalty Receivable A/c 19,00,000 By Profit & Loss A/c 19,00,000 By Royalty Receivable A/c 22,00,000 By Profit & Loss A/c 22,00,000

5,27,500 Cr. Amount ` 2,65,000 35,000 3,64,000 6,64,000

Particulars

Cr. Amount ` 4,80,000 10,20,000 15,00,000 8,40,000 10,60,000 19,00,000 9,60,000 12,40,000 22,00,000

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Q. 4. (a) Ashok & BaJa who where in partnership sharing 7/12 and 5/12 respectively admitted Chand as a partner giving him 1/5th share from 01.04.2011. The new profit sharing ratio is 7 : 5: 3. Chand brought ` 96,000 towards goodwill to be shared by Ashok & BaJa in their sacrificing ratio. The amount so brought was however credited to Chands capital account by mistake. The Trial Balance of the firm as on 31st March, 2012 is given below: Dr. (`) Ashoks capital Balas capital Chands capital Sundry Creditors Current year profit Other Assets 7,70,000 Ashoks drawing 1,45,600 Balas drawing 1,04,000 Chands drawing 20,400 Cash in hand 28,000 Total: 10,68,000 10,68,000 Interest on drawings is to be ignored but interest on capital is to be charged at 5% per annum which was not made so far. Prepare new Balance Sheet as at 31.03.2012 giving effect to above adjustments/omissions. [8] (b) Sachin & Ganguly are partners of a firm SG & Co. From the following information calculate the value of goodwill by super profit method and capitalization method: [5] (i) Average capital employed in the business ` 5,00,000. (ii) Net trading profit of the firm for the last three years ` 1,50,000; ` 1,70,000 and ` 1,90,000. (iii) Rate of return expected from capital having regard to risk involved @ 15% per annum. (iv) Goodwill to be valued at 2 years purchase. [10] (c) Mr. X is owner of a Cinema Hall. He spent a heavy amount for complete renovation of the hall, for installation of air-condition machines and for sitting arrangement with cushion seats. As a result the revenue has been doubled. He also spent for few more doors for emergency exit. State your opinion about the treatment of the entire expenditure. [10] Answer 4. (a) Computation of Correct Capital of Partners Capital as per Trial Balance Adjustment for goodwill in sacrificing ratio 7:5* Interest on capital @ 5% Ashok (`) 3,36,000 56,000 3,92,000 4,11,600 Bala (`) 2,40,000 40,000 2,80,000 2,94,000 Chand (`) 2,24,000 (96,000) 1,28,000 1,34,400 Cr. (`) 3,36,000 2,40,000 2,24,000 48,000 2,20,000

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Share of profit ` 2,20,000 minus interest on capital of ` 40,000 = ` 1 ,80,000 in 7:5:3 ratio Less : Drawings Closing capital Sacrificing ratio * Old ratio New ratio Sacrificing ratio = Old ratio minus new ratio i.e.

84,000 4,95,600 1,45,600 3,50,000 7/12 7/15 7/60

60,000 3,54,000 1,04,000 2,50,000 5/12 5/15 5/60 7:5 ratio

36,000 1,70,400 20,400 1,50,000

3/15

Balance Sheet as at 31.03.2012 (after adjustments) Liabilities Capital Accounts Ashok Bala Chand Creditors ` 3,50,000 2,50,000 1,50,000 48,000 7,98,000 Assets Cash on hand Assets ` 7,70,000 28,000

7,98,000

Answer 4. (b) Calculation of Goodwill under Super Profit Method ` First year 1 ,50,000 Second year 1 ,70,000 Third year Total 1,90,000 5,10,000 Average profit ` 5,10,000 I 3 Less: Normal return 15% of capital employed i.e. ` 5,00,000 15% Super profit Two years purchase of super profit = ` 95,000 2 Calculation of Goodwill under Capitalization Method Average profit = ` 1,70,000
` 1,70,000 100 = 15 Less Average capital employed Value of goodwill

= ` 1 ,70,000 = ` 75,000 = ` 95,000 = 1,90,000

Capitalization of business =

` 11,33,333 ` 5,00,000 ` 6,33,333

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Suggested Answers to Question FAC

Answer 4. (c) The size of the expenditure is not the criteria to decide whether subsequent expenditure should be capitalized. The important question is whether the expenditure increases the future benefits from the asset beyond its pre-assessed standard of performance as per AS-10. Only then it should capitalized. In the instant case, the first part of expenditure i.e., Renovation etc. should be capitalized because it has enhanced the revenue earning capacity of the hall. The second part of expenditure for making more emergency exit doest not enhance the revenue of the asset. So it should be charged to revenue.

Q. 5. (a) Khelaram commenced a contract on 01.07.2011. The price agreed for the contract was ` 8,00,000. At the end of the year on 30.06.2012, the contract was in advance stage of completion and it was decided to arrive at the notional profit on the basis of the total contract. The contract is expected to be completed by the end of December, 2012. Actual expenditure for the years 2011-12 and 2012-13 till December, 12 are as under: Actual till Estimated for 30.06.2012 2012-13 (upto Dec., 2012) (`) (`) Materials 2,00,000 70,000 Labour 90,000 25,000 Plant purchased (at original cost) 60,000 Miscellaneous expenses 30,000 6,000 Plant returned to store on 30.06.2012 (original cost) 12,000 Plant returned to store on 31.12.2012 (original cost) 24,000 Materials at site 8,000 Nil Work certified 6,00,000 8,00,000 Work uncertified 20,000 Nil Cash received 5,80,000 8,00,000 Charge depreciation at 20% p.a. on plant on straight line basis. You are asked to prepare the Contract Account for the year ended 30.06.2012. [10] Expenditure

(b) The Revenue Account of a Life Insurance Company shows the Life Assurance Fund on 31.03.2012 at ` 75,00,000 before taking into account the following items: A. Claims covered Under Re-insurance ` 3,15,000 B. Income Tax on the above ` 35,000 C. Bonus in reduction of Premium ` 4,25,000 D. Dividend from Investment ` 3,20,000 E. Claims intimated but not yet admitted ` 8,15,000 F. Outstanding Premium ` 25,000 Compute the Life Insurance Fund on 31.03.2012 after taking into account the above omission. [5]

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15

Answer 5. (a) In the books of Khelaram Dr. Particulars To To To To To Materials Labour Plant Misc. Expenses Notional Profit c/d Contract Account for the year ended 30.06.2012 ` 2,00,000 90,000 60,000 30,000 2,96,000 By By By By Particulars Plant Returned to stores Plant at site Material at site W-I-P - Certified 6,00,000 - Uncertified 20,000 ` 9,600 38,400 8,000 Cr.

To P & L A/c To Work-in-progress A/c (Profit-in-Reserve) Working Note : (1) Dr. Particulars To Materials (2,00,000+70,000) To Labour (90,000+25,000) To Plant To Misc. Expenses To Estimated Profit

6,76,000 2,62,595 By Notional Profit b/d 33,405 2,96,000

6,20,000 6,76,000 2,96,000

2,96,000

Contract Account for the year ended 31.12.2012 (for determining the Estimated Profit) Cr. ` Particulars ` 26,400 16,800 8,00,000 2,70,000 By Plant Returned to store (9,600+16,800) 1,15,000 By Plant at site By Contractee A/c 60,000 36,000 3,62,200 8,43,200

8,43,200

(2) Profit on contract to be taken to P & L A/c for the year ended 30.6.12 Contract likely to be completed on December, 2012
Work Certified Cash Re ceived So, Estimated Profit Total Contract Pr ice Work Certified

3,62,200 5,80,000 6,00,000 6,00,000 8,00,000 = ` 2,62,595.

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(3) Plant returned to store on 30.6.12 Less : Depreciation 20% for one year (4) Plant at site on 30.6.12 Less retruned to store Balance at site at original costLess : Depreciation on 48,000 @ 20% (5) Plant returned to store on 31.12.12 at original cost Less : Depreciation for 18 months (6) Plant at site 31.12.2012 Less : Depreciation for 18 months

` 12,000 2,400 9,600 60,000 12,000 48,000 9,600 38,400 24,000 7,200 16,800 24,000 7,200 16,800

Answer 5. (b) Statement showing Life Insurance Fund as on 31.03.2012 Particulars Balance of Fund on 31.032012 Add : Bonus Utilised in reduction on Premium Dividend from Investment Premium Outstanding Less : Claims Intimated but not admitted Claims covered under Re-insurance Income Gax Bonus Utilised in reduction on Premium Balance of Life Insurance Fund Amount (`) 4,25,000 3,20,000 25,000 8,15,000 3,15,000 5,00,000 35,000 4,25,000 Amount (`) 75,00,000

7,70,000 82,70,000

9,60,000 73,10,000

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Q. 6. (a) The following was the Balance Sheet of Wonder World Ltd. as at 31.03.2012 : (` in lakhs) Liabilities 1 lakh Equity Shares of ` 10 each fully paid 10.00 Securities Premium 3.50 General Reserves 3.10 Profit & Loss Account 1.10 14% Debentures 7.50 Sundry creditors 5.00 30.20 Assets Plant & Machinery Furniture Investments Stock Sundry debtors Bank 13.50 2.40 1.80 7.20 2.30 3.00 30.20

On 01.04.2012, the company decided to buy-back 20% of its equity shares at a premium of ` 10 per share. For this purpose, the company sold its entire investments for ` 2.30 akhs and issued 1500, 12% Preference shares of ` 100 each at par. The amount payable was ` 60 on application and ` 40 on allotment. The issue was fully subscribed. Thereafter the company issued bonus shares of ` 10 at the rate of one bonus share for every five equity shares held by the equity shareholders. Show Journal entries and Balance Sheet after the above transactions were completed. [10] (b) The total of debit side of the Trial Balance of Lotus Stores as at 31.03.2012 is ` 3,65,000 and that of the credit side is ` 2,26,000. After checking, the following mistakes were discovered: Items of account Correct figures (as it should be) (`) 15,000 36,000 81,000 1,04,000 Figures as it appears in the Trial Balance (`) 10,000 63,000 18,000 1,58,000 [5] (` in lakh) 2.00 1.50 0.50

Opening stock Rent and rates Sundry creditors Sundry debtors Ascertain the correct total of the Trial Balance. Answer 6. (a) Funds Required for buy-back For buy-back of equity shares (1020%) Less : Proceeds from Issue of 12% Pref. shares (1500 ` 100)

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In the books of Wonder World Journals Sl. No. 1 Particulars Bank A/c To Investment A/c To Profit & Loss A/c (Being the investment sold at a profit) Bank A/c To 12% Pref. Share Application A/c (Being the application money of 1500 shares, 12% Pref. share of ` 60 each received) 12% Pref. Share Application A/c To 12% Pref. Share Capital A/c (Being the application money of 1500 shares, 12% Pref. shares of ` 60 each due, as per Boards Resolution No.... dated...) 12% Preference Share Allotment A/c To 12% Preference Share Capital A/c (Being the allotement money of 1500 shares 12% Pref. Shares of ` 40 each due as per Boards Resolution No.... dated....) Bank A/c To 12% Preference Share Allotment A/c (Being the allotment money of 1500 shares, 12% Pref. share of ` 40 each received) Equity Share Capital A/c [20% of 1,00,000 shares ` 10 per share] Securities Premium A/c [20,000 shares ` 10 per share] To Equity Shareholders A/c (Being the 20% of shares were bought back at a premium of ` 20 each per Boards Resolution No..... dated....) Equity Shareholders A/c To Bank A/c (Being the amount paid to equity shareholders against buy-back) General Reserve A/c To Capital Redemption Reserve A/c (Being a sum equal to the nominal value of buy-back of shares transferred to C.R.R. out of General Reserve) Dr. ` in lakhs Dr. Cr. (`) (` ) 2.30 1.80 0.50 Dr. 0.90 0.90

2.

3.

Dr.

0.90 0.90

4.

Dr.

0.60 0.60

5.

Dr.

0.60 0.60

6.

Dr. Dr.

2.00 2.00 4.00

7.

Dr.

4.00 4.00

8.

Dr.

0.50 0.50

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19

9.

10.

Capital Redemption Reserve A/c Securities Premium A/c To Bonus to Shareholders A/c (Being the Fund transferred for bonus shares issued in the ratio of 1:5) Bonus to Shareholders A/c To Equity Share Capital A/c (Being the shares issued in the ratio of 1:5 as per Boards Resolution No..... dated.....)

Dr. Dr.

0.50 1.10 1.60

Dr.

1.60 1.60

Workings : No. of Bonus Shares issued after buy-back: 1 80,000 = 16,000 5 Fund Required = 16,000 ` 10 = ` 1,60,000. Balance Sheet of Wonder World Ltd. as at ..... (after buy-back & Bonus Share) Liabilities 96,000 Equity Shares @ ` 10 each (including 16,000 fully paid Equity Shares issued as Bonus issued otherwise than for cash) 1,500 12% Pref. Shares @ ` 100 each Securities Premium (3.50 2.00 1.10) General Reserve (3.10 0.50) Profit & Loss (1.10 + 0.50) 14% Debentures Sundry Creditors Amount ` 9.60 Assets Plant & Machinery Furniture Stock Sundry Debtors Bank (3.00+2.30+1.54) Amount ` 13.50 2.40 7.20 2.30 2.80

1.50 0.40 2.60 1.60 7.50 5.00 28.20

28.20

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Suggested Answers to Question FAC

This may be represented in Revised Schedule VI

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21

ANNEXURE

Answer 6. (b) In the books of Lotus Assertainment of correct trial Balance as at 31.3.2012 Dr. ` 3,65,000 5,000 3,70,000 (27,000) (54,000) 2,89,000 Cr. ` 2,26,000 2,26,000 63,000 2,89,000

Total as per Trial Balance Add : Opening stock understated Less/Add : Adjustments Rent and rates overstated Sundry Creditors - understated Sundry Debtors - Overstated Correct Total

Q. 7. (a) You are provided with the following information for a company for the year ending on a certain date : Annual Sales (all credit) ` 36,00,000 Sales to Net worth 2.5 times Total Debts to Net worth 80% Current liabilities to Net worth 25% Current Ratio 3:1 Inventory Turnover Ratio (based on sales) 6 times Average collection period 40 days in a year of 360 days Fixed Assets to Net worth 1.05 : 1 Share Capital to Reserves and Surplus 1 : 0.8 Preare the Balance Sheet as on that date based on above information. [10]

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Suggested Answers to Question FAC

(b) Due to inadequacy of profit during the year 2011-12, Jatin Limited proposes to declare dividend out of general reserve. Following particulars are given to you: (` in lakhs) 9%, Preference Shares of ` 100 each fully paid 1,100 Equity Shares of. ` 10 each fully paid 5,000 General Reserve 1,605 Capital Reserve on revaluation of assets 185 Securities Premium 210 Profit and Loss Account (out of which current year net profit is ` 255 lakhs) 280 Average rate of dividend during the last five years is 16%. You are required to ascertain the amount that can be drawn for dividend applying the Companies (Declaration of Dividend out of Reserves) Rules, 1975. [5] Answer 7. (a) Working Notes :
Sales ` 36,00,000 = ` 6,00,000 (i) Inventory = Inventory Turnover = 6

(ii) Debtors = =

Sales Average collection period 360

36,00,000 = ` 4,00,000 360

Sales 36,00,000 = ` 14,40,000 (iii) Net worth = Sales to net worth = 2.5

(iv) Total Debts = 80% of Net worth = 14,40,000 80% = ` 11,52,000 (v) Current Liabilities = 25% of Net worth = 14,44,000 25% = ` 3,60,000. (vi) Current Asset = Current Liabilities Current Ratio = ` 3,60,000 3 = ` 10,80,000 (vii) Long term loans = Total Debts Current Liabilities = ` 11,52,000 3,60,000 = ` 7,92,000 (viii) Share Capital to Reserves and surplus = 1 : 0.8 Share Capital =
Networth 14 ,40,000 = = ` 8,00,000 1: 8 1: 8

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Reserve and surplus = 14,40,000 8,00,000 = ` 6,40,000 (ix) Fixed Assets = Net worth 1.05 = 14,40,000 1.05 = ` 15,12,000 (x) Cash and Bank = Current Assets Inventory Debtors = 10,80,000 6,00,000 4,00,000 = ` 80,000 Balance Sheet as on ........ Amount Assets ` 8,00,000 Fixed Assets 6,40,000 Current Assets 7,92,000 Inventory 3,60,000 Debtors Cash and Bank 25,92,000

Liabilites Share Capital Reserves & Surplus Long term loans Current Liabilities

Amount ` 15,12,000 6,00,000 4,00,000 80,000 25,92,000

Answer 7. (b) Calculation of amount to be drawn from reserves for dividend: (i) First condition: Rate of dividend must be 10% or average rate of dividend for last 5 years, i.e. 16%, whichever is less. So, 10% is declared. Requirement of transfer from reserves for 10% dividend (` In lakhs) 10% of ` 5,000 lakhs Less : Profit available Less: Preference Dividend Balance to be drawn from Reserve 280 99 181 319 500

(ii) Second Condition: Maximum amount that can be drawn should not exceed 10% of paid up capital plus free reserves = ` (1,100 + 5,000 + 1,605) = ` 7,705 lakhs. So, 10% of ` 7,705 lakhs = ` 770.05 lakhs (iii) Third Condition : After drawing from reserves, the residual amount of reserve should not fall below 15% of paid up capital : Let Dividend d, Free Reserves r and paid up capital c

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Suggested Answers to Question FAC

As per this condition, r d = 15% of c or, d = r 15% of c or, d = 1,605 15% of 6,100 = 1,605 915 = 690. As per third condition, maximum amount of dividend is ` 690 lakhs. Since ` 319 lakhs is less than the amount available as per condition 2 and 3. Hence, the 10% dividend can be paid. Q. 8. Write short notes on any three : (a) Sources for payment of Dividend; (b) Shortworkings and recoupment of shortworkings; (c) Accounting convention of consistency; (d) Contingent liability; (e) Classification of Branches for Branch accounting purpose. Answer 8. (a) Sec.205 deals with sources for payment of dividend and other conditions. The sources for payment of dividend are: (i) Out of current years profit (ii) Out of previous year (iii) Out of the aggregate of profit mentioned in (i) and (ii) above, in all the above cases proper provision for depreciation has to be made (iv) Out of state subsidies Apart from above sources, dividends can be paid out of profits made on sale of assets subject to the fulfillment of certain conditions. Answer 8. (b) Short working and recoupment of short working: Short working is the amount by which the minimum rent exceeds the actual royalty. It is the difference between actual rent and minimum rent. Generally the royalty agreement contains a provision for carrying forward of short workings with a view to adjust it in the future. In the subsequent years, such short working is adjusted against the surplus royalty. This process of adjustment is called recoupment of short Workings. [35=15]

Suggested Answers to Question FAC

25

The right of recoupment of short workings enables the lessee to recover the excess payment, made in the earlier years to meet the condition of payment of minimum rent. A time is usually agreed upon the number ofyears for which such short workings can be recouped . This time limit for recoupment of short workings may be fixed or fluctuating. If the short workings cannot be recouped within the specified time, they lapse and are charged to Profit and Loss Account in the year when that specified time limit for recoupment ends. Answer 8. (c) In order to enable the management to draw important conclusions regarding the working of a company over a number it is essential that accounting practices and methods remain unchanged from one accounting period to another. According to AS-1 consistency is a fundamental assumption and it is assumed that accounting policies are consistent from one period to another. Where this assumption is not followed, the fact should be disclosed with proper reasons. Kohler has talked about three types of consistencies : (i) Vertical consistency- consistency maintained within the interrelated financial statements ofthe same date. (ii) Horizontal consistency- this enables the comparison of performance of the organization in one year with its performance of previous/ next year. (iii) Third dimensional consistency- Performance of one organization can be compared with that of another organization in the same industry. Answer 8. (d) Contingent liability can be termed as an obligation relating to an exi sting condition or situation which may arise in future depending on the occurance or non- occurrence of one or more uncertain future events- For example, a company may have certain pending litigation, assessments made by tax authorities which are being contested etc, Which might result in company incurring financial liability in future and in all such cases, the amounts involved are shown as contingent liability. Contingent liabilities are classified under the following head:(i) Claims against the company not acknowledged as debts (ii) Uncalled liability on shares partly paid (iii) Areas of fixed cumulative dividend (iv) Estimated amount of contracts remaining unexecuted On capital account not provided for, and (v) Other money for which the company is liable contingently

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Suggested Answers to Question FAC

Answer 8. (e) Branches are classified as two way, (i) Inland Branch, (ii) Foreign Branch (i) Inland Branches : (a) Dependent Branches: Branches in respect of which the whole ofthe accounting records are kept at head office. (b) Independent Branches: As the name indicates such branches maintain independent accounting records. (ii) Foreign Branches: Branches which are located in a foreign country other then in which the company is incorporated they maintain independent and complete record of business. Methods of accounting are : (i) Final Accounts method (a) At wholesale price (b) At Cost Price/At Invoice Price (ii) Debtors method; (iii) Stock and Debtors method; and (iv) Cash Basis System.