3246accounting - CA IPCC

November 14, 2014
22:4
Accounting
CA Final: Group 1
Advanced Accounts
Module - 1
PARVEEN JINDAL
B.Com (H), F.C.A,
M.B.A. (FINANCE)
DIPLOMA IN IFRS FROM ACCA LONDON
(FORMER MEMBER OF RECOMMENDATION BOARD ON AS)
(FORMER MEMBER OF ACCOUNTING STANDARD BOARD 2012-13)
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Dedicated to
BABA VISHAN PURI JI MAHARAJ
BABA LAKSHMAN PURI JI MAHARAJ
ii
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Contents
Internal Reconstruction
Average Due Date
Insurance Claim
Profit Prior to Incorporation
Investment Accounts
1
37
47
83
95
iii
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iv
UNIT
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Internal Reconstruction
QUESTION NO 1 (MAY 2002)

The following is the Balance Sheet of Rocky Limited as at 31st March 2002:
Liabilities:-
Fully paid equity shares of ` 10 each
500
Capital reserve
12% debentures
400
Debenture interest outstanding
48
Trade creditors
165
Directors Remuneration outstanding
10
Other outstanding expenses
11
Provisions
33
1,173
Assets:-
Goodwill
15
Land and building
184
Plant and machinery
286
Furniture and fixtures
41
Stock
142
Debtors
80
Cash and bank
27
Discount on issue of debentures
Profit and loss account
390
1,173
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ACCOUNTING CA IPCC
The following scheme of internal reconstruction was framed, approved by the court, all the concerned
parties and implemented:
(a) All the equity shares converted into the same number of fully paid shares of ` 2.50 each.
(b) Directors agree to forego their outstanding remuneration.
(c) The debenture holders also agree to forego outstanding interest in return of their 12% debentures
being converted into 13% debentures.
(d) The existing shareholders agree to subscribe for cash, fully paid equity shares of ` 2.50 each for
` 125 lacs.
(e) Trade creditors are given the option of either to accept fully paid equity shares of ` 2.50 each for
the amount due to them or to accept 80% of the amount due in cash. Creditors for ` 65lacs accept
equity shares whereas those for ` 100lacs accept ` 80lacs in cash in full settlement.
(f ) The assets are revalued as under: (In Lacs)
Land and building
230
Plant and machinery
220
Stock
120
Debtors
76
Pass the journal entries for all the above-mentioned transactions and draft the companys Balance
Sheet immediately after the reconstruction.
ANSWER:
Balance Sheet of Rocky Ltd. (& reduced) as on 31st March, 2002
Liabilities
Amounts
1,26,000 fully paid equity
Assets
Amounts
Land and building (184+46)
230
220
shares of ` 2.50 each
315
Plant and machinery (286-66)
13% debentures
400
41
Outstanding expenses
11
Stock
Provisions
33
Debtors (80-4)
76
Cash and bank
72
759
120
759
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UNIT 1. INTERNAL RECONSTRUCTION
QUESTION NO 2 (NOV. 2000)

Green Limited had decided to reconstruct the Balance Sheet since it had accumulated huge losses.
The following is the Balance Sheet of the company on 31.3.2000 before reconstruction:
Balance Sheet of Green Limited as at 31.3.2000
Liabilities
Amounts
Assets
Amounts
Goodwill
20,00,000
Building
10,00,000
Plant
10,00,000
40,00,000
Computers
25,00,000
5,00,000
Investment
nil
Current assets
nil
50,000 equity shares of
` 50 each
25,00,000
1,00,000 equity shares of
` 50 each., ` 40 paid up
12% first Debentures
12% second Debentures
Sundry creditors
10,00,000
5,00,000
Profit and Loss account
85,00,000
20,00,000
85,00,000
The following is the interest of Mr. X and Mr. Y in Green Limited:

Mr. X (`)
Mr. Y (`)
12% first Debentures
3,00,000
2,00,000
12% second Debentures
7,00,000
3,00,000
Sundry creditors
2,00,000
1,00,000
12,00,000
6,00,000
3,00,000
5,00,000
2,00,000
5,00,000
Fully paid up ` 50 shares Partly paid up shares
The following scheme of reconstruction is approved by all parties interested and also by the court :
(a) Uncalled capital is to be called up in full and such shares and the other fully paid up shares be
converted into equity shares of ` 20 each.
(b) Mr. X is to cancel ` 7,00,000 of his total debt (other than share amount) and to pay ` 2 lakh to the
company and to receive new 14% first debentures for the balance amount.
(c) Mr. Y is to cancel ` 3,00,000 of his total debt (other than equity shares) and to accept new 14% first
debentures for the balance.
(d) The amount thus rendered available by the scheme shall be utilized in writing off of goodwill,
Profit and Loss account and the balance to write off the value of computers.
You are required to draw the journal entries to record the same and also show the Balance Sheet of the
reconstructed company.
November 14, 2014
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ACCOUNTING CA IPCC
ANSWER:
Balance Sheet of Green Ltd. (& reduced) as on 31st March, 2000
Liabilities
1,50,000 equity shares of ` 20 each
14% First debentures
Sundry creditors
Amounts
Assets
Amounts
30,00,000
10,00,000
2,00,000
Building
Plant
Computers
Cash and bank balance
10,00,000
10,00,000
10,00,000
12,00,000
42,00,000
42,00,000

The Balance Sheet of Revise Limited as at 31st March, 1992 was as follows:
Liabilities
Amounts
Assets
Authorized and subscribed
Fixed assets:
capital:
Machinery
Current assets:
` 100 each fully paid
10,00,000
Unsecured loan:
12% debentures
2,00,000
Accrued interest
24,000
Amounts
1,00,000
Stock
3,20,000
Debtors
2,70,000
Bank
30,000
6,00,000
Current liabilities:
Creditors
72,000
Provision for income tax
24,000
13,20,000
13,20,000
It was decided to reconstruct the company for which necessary resolution was passed and sanctions
were obtained from appropriate authorities. Accordingly, it was decided that:
(a) Each share be sub-divided into ten fully paid equity shares of ` 10 each.
(b) After sub-division, each shareholder shall surrender to the company 50 per cent of his holding, for
the purpose of re-issue to debenture-holders and creditors as necessary.
(c) Out of shares surrendered, 10,000 shares of ` 10 each shall be converted into 12% preference shares
of ` 10 each fully paid up.
(d) The claims of the debenture holders shall be reduced by 75 per cent. In consideration of the reduction, the debenture holders shall receive preference shares of ` 1,00,000 which are converted
out of shares surrendered.
(e) Creditors claim shall be reduced to 50 per cent, to be settled by the issue of equity shares of ` 10
each out of shares surrendered.
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(f ) Balance of preference shares account to be written off.

(g) The shares surrendered and not re-issued shall be cancelled.
You are required to show the journal entries giving effect to the above and the resultant Balance Sheet.

XY Limited Balance Sheet as at 31st March 1993
Liabilities
Amounts
2,00,000 equity shares of
` 10 each, ` 5 paid
10,00,000
6,000 8% preference
Assets
Amounts
Fixed assets
11,40,000
Patents and copyrights
80,000
Investment at cost
65,000
shares of ` 100 each
6,00,000
(Market value ` 55,000)
9% Debentures
6,00,000
Stock
4,00,000
Debtors
4,39,000
Interest accrued on
Debentures
1,08,000
Bank
Bank overdraft
1,50,000
10,000
4,08,000
Interest accrued on bank

overdraft
15,000
Creditors
69,000
25,42,000
25,42,000
(a) Preference dividend is in arrear for one year.

(b) Preference shares holders to give up their claims, inclusive of dividends, to the extent of 30% and
desire to be paid off.
(c) Debenture- holders agree to give up their claims to interest in consideration of their interest being
enhanced to 12%.
(d) Bank agrees to give up 50% of its interest outstanding in consideration of its being paid off at once.
(e) Creditors would like to grant a discount of 5% if they are paid immediately.
(f ) Balance of Profit and Loss account. Patents and copyrights and debtors of ` 30,000 to be written
off.
(g) Fixed assets to be written down by ` 34,000.
(h) Investments are to reflect their market value.
(i) To the extent not specifically stated, equity shareholders suffer on reduction of their rights. Cost of
reconstruction is ` .3,350.
Draft journal entries in the books of the company assuming that the scheme has been put through fully
with the equity shareholders bringing in necessary cash to pay off the parties and to leave a working
capital of ` 30,000, and prepare the Balance Sheet after reconstruction.
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ACCOUNTING CA IPCC
ANSWER:
Balance Sheet of XY Ltd. (& reduced) as on 31st March, 1993
Liabilities
Amounts
Assets
Amounts
2,00,000 equity shares of ` 10 each,

7 paid up 12% debentures
14,00,000
6,00,000
Fixed assets
Investments
Stock
Debtors
Bank
11,06,000
55,000
4,00,000
4,09,000
30,000
20,00,000
20,00,000

The paid up capital of Toy Limited amounted to ` 2,50,000 consisting of 25,000 equity shares of ` 10
each.
Due to losses incurred by the company continuously, the directors of the company prepared a scheme
for reconstruction, which was duly approved by the court. The terms of reconstruction were as under:
(a) In lieu of their present holdings; the shareholders are to receive:
(i)
Fully paid equity shares equal to 2/5th of their holding.
(ii) 5% preference shares fully paid up to the extent of 20% of the above new equity shares.
(iii) 3,000 6% second debentures of ` 10 each.
(b) An issue of 2,500 5% first debentures of ` 10 each was made and fully subscribed in cash.
(c) The assets were reduced as follows:
(i)
Goodwill from ` 1,50,000 to ` 75,000
(ii) Machinery from ` 50,000 to ` 37,500

(iii) Leasehold premises from ` 75,000 to ` 62,500.
Show the journal entries to give effect to the above scheme of reconstruction.
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The following is the Balance Sheet as at 31st December 1990 of Blackened Prospectus Limited:
Liabilities
Amounts
Assets
3000 cumulative
Fixed assets (including
preference shares of ` 100
goodwill of ` 1,00,000)
each fully paid up
3,00,000
7500 equity shares of `
Amounts
10,80,000
Investments
20,000
Stock in trade
2,00,000
7,50,000
Trade Debtors
1,54,500
Share premium
12,000
Bank balances
62,500
General reserve
80,000
Trade creditors
3,75,000
100 each fully paid up
15,17,000
15,17,000
Contingent liability:
Preference dividends in arrears ` 66,000
The board of directors of the company decided upon the following scheme of reconstruction:
(a) The preference shares are to be converted into 13% unsecured Debentures of ` 100 each in regard
to 80% of the dues (including arrears of dividends) and for the balance equity shares of ` 50 paid up
would be issued. The authorized capital of the company permitted the issue of additional shares.
(b) Equity shares would be reduced to shares of ` 50 each paid up.
(c) All equity holders agree to pay the balance in cash.
(d) Goodwill has lost its value and is to be written off fully. Investment are to reflect their market value
of ` 30,000. Obsolete items in stock of ` 50,000 are to be written off. Bad debts to the extent of 5%
of the total Debtors would be provided for. Fixed assets to be written down by ` 1,50,000.
The scheme was duly approved and put into effect.
The company carried on trading for six months and after writing off depreciation at 20% p.a. on the revised value of fixed assets, made a net profit of ` 80,000. The half yearly working resulted in an increase
of sundry debtors by ` 60,000. Stock by ` 80,000 and cash by ` 40,000.
Show the journal entries (without narration) necessary in the companys books to give effect to the
scheme and draw the Balance Sheet as at 30th June, 1991.
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ACCOUNTING CA IPCC

The Balance Sheet of BCR Limited as on 31st October 1984 appears as below:
Liabilities
Share capital:
1,50,000 equity shares of ` 10 each fully paid 5,000 11% preference shares of ` 100 each
fully paid Secured loans: 11% Debentures Interest accrued and due on Debentures
Bank overdrafts Unsecured loans Interest accrued and due Current liabilities
15,00,000
5,00,000
5,00,000
1,10,000
6,30,000
5,00,000
1,50,000
5,00,000
43,90,000
Assets
Assets:
Fixed assets at cost Less depreciation reserves
Stocks and stores Receivables Other current assets
Miscellaneous expenditure: Profit and Loss account
20,00,000
15,00,000
5,00,000
6,00,000
14,50,000
2,00,000
16,40,000
Total
43,90,000
A scheme of reconstruction has been agreed amongst the shareholders and the creditors with the
following salient features:
(a) Interest due on unsecured loans is waived.
(b) 50% of the interest due on the Debentures is waived.
(c) The 11% preference shares holders rights are to be reduced to 50% and converted into 15% Debentures of ` 100 each.
(d) Current liabilities would be reduced by ` 50,000 on account of provisions no longer required.
(e) The banks agree to the arrangement and to increase the case credit/over draft limits by ` 1,00,000
upon the shareholders agreeing to bring in a like amount by way of new equity.
(f ) Besides additional subscription as above, the equity shareholders agree to convert the existing
equity share into new 10-rupee shares of total value ` 5,00,000.
(g) The debit balance in the Profit and Loss account is to be wiped out. ` 2,60,000 provided for doubtful debts and the value of the fixed assets increased by ` 4,00,000.
Redraft the Balance Sheet of the company based on the above scheme of reconstruction.
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ANSWER:
Balance Sheet of BCR Ltd. (& reduced) as on 31st OCT. 1984
Liabilities
Amounts
60,000 Equity shares of
` 10 each
Capital reserve
11% debentures
Interest on debentures
6,00,000
5,000
5,00,000
Assets
Amounts
Fixed assets
9,00,000
Stocks
6,00,000
Receivables
11,90,000
Other current assets
2,00,000
55,000
15% debentures
2,50,000
Bank overdraft
5,30,000
Unsecured loans
5,00,000
Current liabilities
4,50,000
28,90,000
28,90,000

Paradise Limited which had experienced trading difficulties, decided to reorganize its finances. On
March 31,1982 a final Trial balance extracted from the books of the company showed the following
position:
Dr
Cr
Share capital, Authorised and issued:

1,500 6% Cumulative preference shares of ` 100 each
1,50,000
2,000 equity shares of ` 100 each
2,00,000
Capital reserve
Preliminary expenses
Goodwill at cost
36,000
1,10,375
7,250
50,000
Trade creditors
Debtors
42,500
32,200
Bank overdraft
Leasehold property at cost
51,000
80,000
Leasehold property, Provision for depreciation

Plant and machinery at cost
30,000
2,10,000
Plant and machinery, Provision for depreciation

Stock in trade
57,500
79,175
5,67,000
5,67,000
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21:39
ACCOUNTING CA IPCC
The approval of the court was obtained for the following scheme for reduction of capital:
(a) The preference shares to be reduced to ` 75 per share.
(b) The equity shares to be reduced to ` 12.50 per share.
(c) One ` 12.50 equity shares to be issued for each ` 100 of gross preference dividend arrears, the
preference dividend had not been paid for three years.
(d) The balance of capital reserve account to be utilized.
(e) Plant and machinery to be written down to ` 75,000.
(f ) The Profit and Loss account balance and all intangible assets to be written off.
At the same time as the resolution to reduce capital was passed, another resolution was approved
restoring the total authorized capital to ` 3,50,000 consisting of 1,500 6% Cumulative preference shares
of ` 75 each and the balance in equity shares of ` 12.50 each. As soon as the above resolutions had
been passed 5,000 equity shares were issued at par, for cash, payable in full upon application. The
same were fully subscribed and paid. You are required:
(i)
To show the journal entries necessary to record the above transactions in the companys books
and
(ii) To prepare the Balance Sheet of the company after completion of the scheme.
ANSWER:
Balance Sheet of Paradise Ltd. (& reduced) as on 31st March, 1982
Liabilities
12.50 each
1,500 6% cum. Preference
shares of 75 each
Sundry creditors
Amounts
90,875
1,12,500
42,500
2,45,875
Assets
Goodwill
Plant and machinery
Leasehold property
Sundry Debtors
Stock
Cash and bank
Amounts
Nil
75,000
50,000
30,200
79,175
11,500
2,45,875
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The directors of Hardluck Limited decided to recommend to the shareholders certain steps to put the
affairs of the company back on the rails. On 30th June 1987 the Balance Sheet of the company was as
under:
Liabilities
Share capital:
Fixed assets:
Authorized: 1,00,000
Goodwill at cost
equity shares of ` 1 each
Freehold property at
Issued and paid up:
1,00,000
` 1 each fully paid

Reserves and surplus:
Share premium
cost
Less depreciation
85,000
22,600
50,000
8,500
41,500
Plant and machinery at

cost
1,500
Assets
Less depreciation
1,19,000
59,000
60,000
Investments:
Trade creditors
64,500
Sharesat cost in
Bank overdraft
56,500
associated companies
Loan from bank
60,000
Other quoted
investments at cost
30,000
16,000
46,000
Current assets:
Stock
23,000
Debtors
19,600

2,81,000
42,600
68,300
2,81,000
The scheme of reconstruction as approved by the competent authorities was as under:

(a) The issued ordinary shares were reduced to 5 paise each paid up; the unpaid value of the share
was subsequently called by the company and paid by all the shareholders.
(b) The balance of un-issued capital was allotted to the bank in part discharge of the loan; the balance
due was paid in cash.
(c) The authorized capital of the company is to be increased by another 50,000 shares and these are to
be issued to the existing shareholders as rights issue. The amount due from the shareholders was
realized.
(d) Trade creditors to give up 25% of their claims and the balance due to them to be converted into
12% secured Debentures of ` 100 each.
(e) Interest of ` 6,500 on overdraft to be waived by the bank and the balance overdraft to be paid off.
(f ) All amounts available including share premium to be utilized to write off losses, goodwill and the
value of shares in associated companies.
11
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21:39
ACCOUNTING CA IPCC
Show the journal entries to record the above and also draw the Balance Sheet of the company after the
scheme is fully implemented. All workings should form part of your answer.
QUESTION NO 10
The Balance Sheet of A & Company Limited as on 31.12.1999 is as follows:
Assets
Fixed assets:
Freehold property
4,25,000
Plant
50,000
Patent
37,500
Goodwill
1,30,000
Traded investments (at cost)
6,42,500
55,000
Current assets:
Debtors
4,85,000
Stock
4,25,000
Deferred advertising
1,00,000
10,10,000
4,35,000
Total
21,42,500
Liablities
Share capital:
4000 6% cumulative preference shares of ` 100 each
4,00,000
75,000 Equity shares of ` 10 each
7,50,000
6% Debentures (secured on freehold property)
3,75,000
Accrued interest
22,500
11,50,000
3,97,500
Bank overdraft
1,95,000
Creditors
3,00,000
Directors loans
1,00,000
Total
5,95,000
21,42,500
The court approved a scheme of re-organisation to take effect on 1.1.2000 whereby:

(i)
The preference shares to be written down to ` 75 each and equity shares to ` 2 each.
(ii)
Of the preference share dividends which are in arrears for four years, three fourths to be waived
and equity shares of ` 2 each to be allotted for the remaining quarter.
(iii) Accrued interest on Debentures to be paid in cash.

(iv)
Debenture-holders agreed to take over freehold property, book value ` 1,00,000 at a valuation of
` 1,20,000 in part repayment of their holdings
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and to provide additional cash of ` 1,30,000 secured by a floating charge

on companys assets at an interest rate of 8% per annum.
(v)
Patents, Goodwill and Deferred advertising to be written off.
(vi)
Stock to be written off by ` 65,000.
(vii) Amount of ` 68,500 to be provided for bad debts.

(viii) Remaining freehold property to be re-valued at ` 3,87,500.
(ix)
Trade investments be sold for ` 1,40,000.
(x)
Directors to accept settlement of their loans as to 90% thereof by allotment of equity shares of
` 2 each and as to 5% in cash and balance 5% being waived.
(xi)
There were capital commitments totaling ` 2,50,000. These contracts are to be cancelled on payment of 5% of the contract price as a penalty.
(xii) Ignore taxation and cost of the scheme.

You are requested to show journal entries reflecting the above transactions (including cash transactions) and prepare the Balance Sheet of the company after completion of the scheme.
QUESTION NO 11
S.P. Construction Company finds itself in financial difficulty. The following is the Balance Sheet on 31st
December 1999
Liabilities
Assets
Share capital
Land
20,000 Equity shares of ` 10
Building (net)
27,246
Equipment
10,754
Goodwill
60,000
each fully paid
2,00,000
5% Cum. Preference shares
1,56,000
of ` 10 each fully paid
70,000
Investments (Quoted) in
8% Debentures
80,000
shares
Loan from directors
16,000
Stock
Trade creditors
96,247
Sundry debtors
70,692
Bank overdrafts
36,713
39,821
Interest payable on Debentures
12,800
5,11,760
27,000
1,20,247
5,11,760
The authorize capital of the company is ` 20,000 equity shares of ` 10 each and 10,000 5% Cum. Preference shares of ` 10 each.
13
November 14, 2014
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21:39
ACCOUNTING CA IPCC
During a meeting of shareholders and directors, it was decided to carry out a scheme of internal reconstruction. The following scheme has been agreed:
(a) The equity shareholders are to accept reduction of ` 7.50 per share, and each equity share is to be
re-designated as a share of ` 2.50 each.
(b) The equity shareholders are to subscribe for a new share on the basis of 1 for 1 at a price of ` 3 per
share.
(c) The existing 7,000 preference shares are to be exchanged for a new issue of 3,500 8% Cum. Preference shares of ` 10 each and 14,000 equity shares of ` 2.50 each.
(d) The Debenture holders are to accept 2,000 equity shares of ` 2.50 each in lieu of interest payable.
The interest rate is to be increased to 9.5%. Further ` 9,000 of this 9.5% Debentures are to be issued
and taken up by the existing holders at ` 90 for ` 100.
(e) ` 6,000 of directors loan is to be credited. The balance is to be settled by issue of 1,000 equity
shares of ` 2.50 each.
(f ) Goodwill and the Profit and Loss account balance are to be written off.
(g) The investment in shares is to be sold at current market value of ` 60,000.
(h) The bank overdraft is to be repaid.
(i) ` 46,000 is to be paid to trade creditors now and balance at quarterly intervals.
(j) 10% of the debtors are to be written off.
(k) The remaining assets were professionally valued and should be included in the books of account
as follows:
Land
Building
Equipment
Stock
90,000
80,000
10,000
50,000
(l) It is expected that due to changed condition and new management operating profit will be earned
at the rate of ` 50,000 p.a. after depreciation but before interest and tax.
Due to losses brought forward it is unlikely that any tax liability will arise until 2002.
You are required to show the necessary journal entries to effect the reconstruction scheme; prepare
the Balance Sheet of the company immediately after the reconstruction.
November 14, 2014
21:39
QUESTION NO 12
Liabilities
Assets
Amount
Equity shares of ` 10 each
Goodwill
3,00,000
10% preference shares of
Land
4,00,000
Building at cost
3,75,000
` 10 each
Amount
10,00,000
12% debentures
4,00,000
Machinery at cost
2,20,000
Interest payable on deb.
3,00,000
Investment
2,25,000
Stock
3,60,000
Debtors
2,00,000
Loan from directors

Provision for depreciation:
36,000
1,00,000
Building
Cash
Machinery
75,000
Advertisement suspense
Bank overdraft
80,000
account
Sundry creditors
1,50,000
5,000
25,000
2,90,000
2,59,000
24,00,000
24,00,000
The authorized share capital of the company is 2,50,000 equity shares of ` 10 each and 50,000 10%
preference shares of ` 10 each.
It was decided during a meeting of the shareholders and directors of the company to carry out a
scheme of internal reconstruction as follows:
(i)
Each equity share is to be re designated as a share of ` 2.50. The equity shareholders are to accept
a reduction in the nominal value of their share from ` 10 to ` 2.50 and subscribe for a new issue
on the basis of 1for 2 at a price of ` 4 per share.
(ii)
The existing preference shares are to be exchanged for a new issue of 30,000 15% preference
shares of ` 10 each and 40,000 equity shares of ` 2.50 each.
(iii) The debenture holders are to accept 10,000 equity shares of ` 2.50 each in lieu of interest payable.
The interest rate is to be increased to 14%. A further ` 1,00,000 of 14% debentures of ` 100 each
is to be issued and taken up by the existing holders at ` 90.
(iv)
` 40,000 of directors loan is to be cancelled. The balance amount is to be settled by issue of

10,000 equity shares of ` 2.50 each.
(v)
The investments are to be sold at current market price of ` 3,00,000.
(vi)
The bank overdraft is to be repaid.
(vii) A sum of ` 1,59,000 is to be paid to the creditors immediately and the balance is to be paid at
quarterly intervals.
(viii) All intangible and fictitious assets are to be eliminated.
(ix)
The following assets are to be adjusted to fair values: debtors ` 1,80,000, stock ` 3,20,000, machinery ` 1,00,000: building ` 2,50,000 and land ` 3,20,000.
15
November 14, 2014
16
21:39
ACCOUNTING CA IPCC
(x)
It is estimated that under new arrangements net profit before interest and tax will be ` 2,50,000
per annum. There will be no tax liability of the company for the next five years.
You are required to:

(a) Show the journal entries to effect the reconstruction scheme.
(b) Prepare the Balance Sheet of the company immediately after reconstruction and
(c) Show how the anticipated profits will be distributed under new arrangements.
QUESTION NO 13
Liabilities
Amount

8% debentures
Land, Building and Machinery

8,00,000
14,00,000
Sundry creditors
Income tax liability
Stock
Amount
14,00,000
1,00,000
Sundry debtors
40,000
Investments
15,000
70,000
Cash at bank
1,03,000
4,50,000
Cash in hand
2,000
Accrued interest on
Debentures
Assets
10,000
27,30,000
10,70,000
27,30,000
The fixed assets are heavily overvalued. A scheme of reorganization was prepared and passed. The
salient points of the scheme are the following:
(a) Each share shall be sub divided into ten fully paid equity shares of ` 10 each.
(b) After such sub division, each shareholder shall surrender to the company 90% of his holding, for
the purpose of reissue to debenture holders and creditors so far as required and otherwise for
cancellation.
(c) Of those surrendered 50,000 equity shares of ` 10 each, shall be converted into 8% preference
shares of ` 10 each fully paid for debenture holders.
(d) The debenture holders total claim shall be reduced to ` 5,00,000. This will be satisfied by the issue
of 50,000 preference shares of ` 10 each fully paid.
(e) The claim of sundry creditors shall be reduced by 80% and the balance shall be satisfied by allotting
them equity shares of ` 10 each fully paid from the shares surrendered.
(f ) Shares surrendered and not reissued shall be cancelled.
Assuming that the scheme is duly approved by all parties interested and by the court, draft necessary journal entries and Balance Sheet of the company after the scheme has been carried into
effect.
November 14, 2014
21:39
QUESTION NO 14
Liabilities
Amount
Assets
Amount
10,000, 10% cumulative
Goodwill
25,000
preference shares of ` 10
Freehold property at cost
90,000
each fully paid up
1,00,000
20,000 equity shares of `

10 each fully paid up
Plant and machinery at cost

less depreciation
2,00,000
85,000
Investments
Creditors
75,000
(market value 86,000)
80,500
Bank overdraft
15,000
Stock
35,000
General reserve
70,000
Debtors
40,000
Cash at bank
4,60,000
500
1,04,000
4,60,000
Prepare a capital reduction scheme and redraft the Balance Sheet after incorporating your proposals
for submission to board to directors. The cumulative preference dividend are in arrears for two years.

The balance sheet of Y Ltd. as on 31 March 2003 was as follows:
Liabilities
5,00,000 Equity shares of ` 10
Amount
50,00,000
Assets
Goodwill
Amount
10,00,000
each fully paid
Patent
5,00,000
9% 20,000 Preference shares of
Land and building
30,00,000
20,00,000
Plant and machinery
10,00,000
10% First debentures
6,00,000
2,00,000
Computers
3,00,000
10% Second debentures
10,00,000
Debentures interest outstanding
1,60,000
Trade investment
5,00,000
Trade creditors
5,00,000
Debtors
5,00,000
Directors loan
1,00,000
Stock
Bank O/D
1,00,000
Discount on issue of
Outstanding liabilities
Provision for tax
40,000
1,00,000
debentures
10,00,000
1,00,000
Profit and loss account

(loss)
96,00,000
Note: Preference dividend is in arrears for last three years.
15,00,000
96,00,000
17
November 14, 2014
18
21:39
ACCOUNTING CA IPCC
A hold 10% first debentures for ` 4,00,000 and 10% second debentures for ` 6,00,000. He is also
creditors for ` 1,00,000. B holds 10% first debentures for ` 2,00,000 and 10% second debentures for
` 4,00,000 and is also creditors for
` 50,000.
The following scheme of reconstruction has been agreed upon and duly approved by the court.
(a) All the Equity shares be converted into fully paid Equity shares of ` 5 each.
(b) The Preference shares be reduced to ` 50 each and the Preference shareholders agree to forego
their arrears of Preference dividends in consideration of which 9% Preference shares are to be
converted into 10% Preference shares.
(c) Mr. A is to cancel ` 6,00,000 of his total debt including interest on debentures and to pay ` 1 lakh
to the company and to receive new 12% debentures for the balance amount.
(d) Mr. B is to cancel ` 3,00,000 of his total debt including interest on debentures and to accept new
12% debentures for the balance amount.
(e) Trade creditors (other than A and B) agreed to forego 50% of their claim.
(f ) Directors to accept settlement of their loans as to 60% thereof by allotment of Equity shares and
balance being waived.
(g) There were capital commitments totaling ` 3,00,000. These contracts are to be cancelled on payment of 5% of the contract price as a penalty.
(h) The directors refund ` 1,10,000 of the fees previously received by them.
(i) Reconstruction expenses paid ` 10,000
(j) The taxation liability of the company is settled at ` 80,000 and the same is paid immediately.
(k) The assets are revalued as under:
`
Land and building
Plant and machinery
Stock
Debtors
Computers
Trade investment
28,00,000
4,00,000
7,00,000
3,00,000
1,80,000
1,00,000
4,00,000
Pass journal entries for all the above mentioned transactions including amounts to be written off of
goodwill, patents, loss in profit and loss account and discount on issue of debentures. Prepare bank
account and working of allocation of interest on debentures between A and B.
November 14, 2014
21:39

The following is the Balance Sheet of ABC Ltd. as at 31st March, 2007:
Liabilities
Share Capital :
2,00,000 Equity Shares of
` 10 each fully paid up
6,000 8% preference
9% Debentures
Bank overdraft
Sundry Creditors
20,00,000
6,00,000
12,00,000
1,50,000
5,92,000
Assets
Plant and Machinery
Furniture and Fixtures
Patents and Copyrights
investment (at cost)
(Market value ` 55,000)
Stock
Sundry Debtors
Cash and Bank Balance
Profit and loss
45,42,000
`
9,00,000
2,50,000
70,000
68,000
14,00,000
14,39,000
10,000
4,05,000
45,42,000
The following scheme of reconstruction was finalized:

r Preference shareholders would give up 30% of their Capital in exchange for allotment of 11% Debentures to them.
r Debenture holders having charge on Plant and machinery would accept Plant and machinery in full
settlement of their dues.

r Stock equal to ` 5,00,000 in book value will be taken over by Sundry Creditors in full settlement of
their dues.
r Investment value to be reduced to market price.
r The Company would issue 11% Debentures for ` 3,00,000 and augment its working capital requirement after settlement of bank overdraft.
Pass necessary Journal Entries in the books of the company. Prepare Capital reduction account and
Balance Sheet of the company after internal reconstruction.
19
November 14, 2014
20
21:39
ACCOUNTING CA IPCC

The Balance Sheet of R. Ltd. at 31 march, 2008 was as follows:
`
Share capital Authorized
Issued : 64,000 8% cumulative
preference shares of
` 10 each, fully paid
64,000 Equity share of
` 10 each, ` 7.5 paid
Loans from directors
Sundry creditors
Bank overdraft
14,00,000
6,40,000
4,80,000
60,000
4,40,000
2,08,000
`
Intangibles
Freehold premises at cost
Plant and equipment at cost
less depreciation
Q Ltd. at cost
Stocks
Debtors
Deferred Revenue expenditure
18,28,000
68,000
1,40,000
2,40,000
3,24,000
2,48,000
3,20,000
48,000
4,40,000
18,28,000
Note : the arrear of Preference dividends amount to ` 51,200.

A scheme of reconstruction was duly approved with effect from 1 April, 2008 under the conditions
state below:
(a) The unpaid amount on the Equity shares would be called up.
(b) The preference shareholders would forego their arrear dividends. In addition, they would accept a
reduction of ` 2.5 per share. The dividend rate would be enhanced to 10%.
(c) The Equity shareholders would accept a reduction of ` 7.5 per share.
(d) R Ltd. holds 21,600 shares in Q Ltd. This represents 15% of the share capital of that company. Q
Ltd. Is not a quoted company, The average net profit (after tax) of the company is ` 2,50,000. The
shares would be valued based on 12% capitalization rate.
(e) A bad debt provision at 2% would be created.
(f ) The -other assets would be valued as under:
`
Intangibles
Plant
Freehold premises
Stock
48,000
1,40,000
3,80,000
2,50,000
(g) The Profit and Loss account debit balance and the balance standing to the debit of the deferred
revenue Expenditure account would be eliminated.
(h) The directors would have to take equity shares at the new face value of ` 2.5 per share in settlement
of their loan.
(i) The Equity shareholders, including the directors, who would receive equity shares in settlement of
their loans, would take up two new equity shares for every one held.
(j) The Preference shareholders would take up one new preference share for every four held.
November 14, 2014
21:39
(k) The authorized Share capital would be restated to RS. 14,00,000.

(l) The new face values of the shares-preference and equity will be maintained at their reduced levels.
You are required to prepare:
(a) Necessary ledger accounts to effect the above ; and
(b) The Balance Sheet of the company after reconstruction.

Following is the Balance Sheet of Weak Ltd. as on 31.03.2006:
Liabilities
Equity shares of 100 each
Amount
1,00,00,000
12% Preference shares of
Assets
Amount
Fixed assets
1,25,00,000
Investments
10,00,000
` 100 each
50,00,000
(market value ` 9,50,000)
10% Debentures of 100 each
40,00,000
Current assets
Creditors
50,00,000
Profit and Loss Account
4,00,000
2,00,000
Taxation provision
1,00,000
2,41,00,000
1,00,00,000
2,41,00,000
The following scheme of reorganization is sanctioned:

(i)
All the existing equity shares are reduced to ` 40 each.
(ii)
All Preference shares are reduced to ` 60 each
(iii) The rate of interest on debentures is increased to 12%.The debenture holders surrender their
existing debentures of ` 100 each and exchange the same for fresh debentures of ` 70 each for
every debentures held by them.
(iv)
One of the creditors of the company to whom the company owes ` 20,00,000 decides to forego
40% of his claim. He is allotted 30,000 equity shares of ` 40 each in full satisfaction of his claim.
(v)
The taxation liability of the company is settled at ` 1,50,000.
(vi)
Fixed assets are to be written down by 30%.
(vii) Current assets are to be revalued at ` 45,00,000.

(viii) Investments are to be brought at market value.
(ix)
It is decided to write off the fictitious assets.
Pass journal entries and show Balance Sheet of the company after giving effect to the above.
21
November 14, 2014
22
21:39
ACCOUNTING CA IPCC
ANSWER:
Journal entries
Debit (`)
Equity share capital

Dr.
Preference share capital
Dr.
To Capital reduction a/c
(being equity capital is reduced to ` 40 per share and Preference
share capital to ` 60 per share)
60,00,000
20,00,000
10% debentures account

Dr.
To 12% debentures
To Capital reduction account
(being interest rate of debentures is changed and 30% amount is
reduced by converting the debentures into 70 each)
40,00,000
Creditors account
Dr.
To capital reduction account
To equity share capital
(40% amt. of creditors is reduced and for remaining 60% equity
shares are issued)
20,00,000
Provision for taxation

Capital reduction a/c
To Bank account
(being tax liability is settled at ` 150000)
Dr.
Dr.
Capital reduction account Dr.

To fixed assets
To current assets
To investments
(being assets are revalued as per given information)
Credit (`)
80,00,000
28,00,000
12,00,000
8,00,000
12,00,000
1,00,000
50,000
1,50,000
93,00,000
37,50,000
55,00,000
50,000
Capital reduction account

To Profit and Loss Account
To preliminary expenses
(being fictitious assets are written off0
Dr.
Capital reduction account

To Capital Reserve
(unutilized amount in reduction account is transferred)
Dr.
6,00,000
4,00,000
2,00,000
50,000
50,000
November 14, 2014
21:39
Capital Reduction Account

Particulars
To cash (additional tax)
To fixed assets
To current assets
To investments
To Profit and loss Account
To capital reserve (bal.fig)
Amount
50,000
37,50,000
55,00,000
50,000
4,00,000
2,00,000
50,000
Particulars
By equity share capital
By Preference capital
By debentures
By creditors
1,00,00,000
Amount
60,00,000
20,00,000
12,00,000
8,00,000
1,00,00,000

Balance Sheet of Weak Limited
Liabilities
Amount
52,00,000
Assets
Fixed assets
(100L-60L+12L)
Investments (market value)
12% Preference shares of
Current assets
` 100 each (50L-20L)

Capital reserve
30,00,000
(100L-55L-1.5L)
Amount
87,50,000
9,50,000
43,50,000
50,000
10% Debentures of 100

each (40L*70%)
28,00,000
Creditors (50L-20L)
30,00,000
Pass journal entries for the following transactions :

(i)
Conversion of 2 Lakh fully paid equity shares of ` 10 each into stock of ` 1,00,000 and balance
has 12% fully convertible Debenture.
(ii)
Consolidation of 40 Lakh fully paid equity shares of ` 2.50 each into 10 lakh fully paid equity
share of 10 each.
(iii) Sub-division of 10 lakh fully paid 11% preference shares of ` 50 each into 50 lakh fully paid 11%
preference shares of ` 10 each.
(iv)
Conversion of 12% preference shares of ` 5,00,000 into 14% preference shares ` 3,00,000 and
remaining balance as 12% Non-cumulative preference shares.
23
November 14, 2014
24
21:39
ACCOUNTING CA IPCC
ANSWER:
No.
Journal Entries
Amount
1.
Equity share capital Dr.(10)

To Equity share capital
To 12% Debentures
(being equity share capital is converted in to shares and
debentures)
2,00,000
Equity share capital Dr.(2.5)

To Equity share capital (10)
(being 40 lacs equity shares of 2.5 each are converted into
10lacs of 10 each)
1,00,00,000
11% P.S.C Dr. (50)

To 11% P.S.C (10)
(being 10lac preference shares of 50 are sub divided into 50
lac shares of 10 each)
5,00,00,000
2.
3.
4.
Amount
1,00,000
1,00,000
1,00,00,000
12% P.S.C Dr.

To 14% P.S.C
To 12% P.S.C
(being preference shares are converted)
5,00,00,000
5,00,000
3,00,000
2,00,000
QUESTION NO 20 (MAY 2013) (16 MARKS)

The Balance Sheet of M/s Cube Limited as on 31-03-2013 is given below :
Note No.
Amount (` in
laksh)
Share Capital
700
Reserves & Purples
(261)
350
Trade Payables
51
Other Liabilities
12
Particular
Equity & Liabilities Shareholders Funds
Non- Current Liabilities

Long term Borrowing
Current Liabilities
Total
852
Assets
Non-Current Assets
Fixed Assets
Tangible Assets
Current Assets
375
November 14, 2014
21:39
Current Investments
100
Inventories
150
Trade Receivables
225
10
Cash & Cash Equivalents

Total
852
Note
Amount
(` in lakh)
1.
Share Capital Authorised

100 lakh Equity Shares of ` 10 each
4 laksh, 8% Preference Share of ` 100 each
1,000
400
1,400
Issued, Subscribed and paid-up

50 laksh Equity Share of ` 10 each, fully paid up
500
2 lakh 8% Preference Share of ` 100 each, fully paid up
200
700
2.
Reserves & Surplus

Debit balance of profit & Loss A/c
3.
(261)
Lona Term Borrowina

6% Debentures (Secured by Freehold Property
200
Directors Loan
150
350
Trade Payable
Sundry Creditors for Goods
5.
Other Current Liabilities

Interest Accrued and Due on 6% Debentures
6.
51
12
Tangible Assets
Freehold Property
275
Plant & Machinery
100
375
7.
Current Investment
Investment in Equity Instruments
8.
Inventories
Finished Goods
9.
100
150
Trade Receivable
Sundry Debtors for Goods
225
25
November 14, 2014
26
21:39
ACCOUNTING CA IPCC
10.
Cash and cash Equivalents

Balance with Bank
The Board of Directors of the company decided upon the following scheme of reconstruction with the
consent of respective shareholders:
(1) Preference Shares are to be written down to ` 80 each and Equity Shares to ` 2 each.
(2) Preference Shares Dividend in arrears for 3 years to be waived by 2/3rd and for balance 1/3 rd,
Equity Shares of ` 2 each to be alloted.
(3) Debenture Holder agreed to take one Freehold Property at its book value of ` 150 lakh in part
payment of their holding. Balance Debentures to remain as liability of the company.
(4) Interest accrued and due on Debentures to be paid in cash.
(5) Remaining Freehold Property to be valued at ` 200 lakh.
(6) All investments sold out for ` 125 lakh.
(7) 70% of Directors loan to be waived and for the balance, Equity Share of ` 2 each to be allowed.
(8) 40% of Sundry Debtors and 80% of Inventories to be written off.
(9) Companys contractual commitments amounting to ` 300 lakh have been settled by paying 5%
penalty of contract value.
You are required to:
(a) Pass Journal Entries for all the transactions related to internal reconstruction.
(b) Prepare Reconstruction Account and
(c) Prepare notes on Share Capital and Tangible Assets to Balance Sheet immediately after the implementation of scheme of internal reconstruction.
Journal entries
Debit
Credit
Director loan account

Dr.
To Reconstruction account (70%)
To Equity share capital (30%) (being outstanding balance in
director loan account is settled)
150
Reconstruction account
To Debtors (225*40%)
To stock (150*80%)
(being assets are revalued at market price)
Dr.
210
To bank
(being penalty on cancellation on contracts is paid)
Dr.
105
45
90
120
15
15
November 14, 2014
21:39
To profit and loss account
(being debit balance in profit and loss account is written off)
Dr.
261
261
Dr.
To capital reserve
(being excess surplus in reconstruction account is transferred to
capital reserve account)
143
143
RECONSTRUCTION ACCOUNT
Journal entries
Debit
8% Preference share capital 100)

Dr.
To 8% Preference share capital 80)
To Reconstruction account
(being preference share capital is converted from ` 100 each in to
` 80 each)
200
Equity Share Capital a/c 10)

Dr.
To Equity Share Capital 2)
(being equity shares capital is converted from ` 10 each into ` 2
each)
500
Dr.
(being payment of preference dividend in equity shares is considered as an additional liability)
16
6% Debentures account
To freehold property account
(being payment of debentures is made)
Dr.
Outstanding interest account

To bank
(being interest is paid)
Dr.
Freehold property account

(being balancefreehold property is revalued)
Dr.
Bank account
To investment account
To profit on sale of investment
(being investments are sold at profit)
Dr.
Credit
160
40
100
400
16
150
150
12
12
75
75
Profit on sale of investment account

Dr.
(being profit on sale of investment is transferred to reconstruction
account)
125
100
25
25
25
27
November 14, 2014
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21:39
ACCOUNTING CA IPCC
ANSWER 20 (16 -MARKS)

Particulars
Amount
16
(dividends)
To debtors
To stock
To bank(penalty)
90
120
15
To profit and loss a/c
261
To capital reserve (bal.fig)
143
Particulars
Amount
400
40
By freehold property
75
By profit on sale of invest.
25
By director loan
645 645
NOTES TO BALANCE SHEET:
SHARE CAPITAL:
Authorized capital:
100 Lakh equity shares of 2 each 200 lakhs
4 Lakh preference shares of 80 each 320 lakhs
Issued.subscribed and paid up capital:
Equity share capital (2each)161 lakhs (500 - 400 + 16 + 45)
Preference share capital (80 each) 160 lakhs (200 lakhs - 40 lakhs)
TANGIBLE ASSETS:
Freehold property (275 lakhs - 150 lakhs + 75 lakhs) 200 lakhs Plant and machinery 100 lakhs
105
November 14, 2014
21:39

M/s Platinum Limited has decided to reconstruct the Balance Sheet since it has accumulated huge
losses. The following is the Balance Sheet of the Company as on 31st March, 2012 before reconstructions.
Liabilities
Amount (`)
Share Capital
50,000 Share of ` 50 each fully
25,00,000
paid up
1,00,000 shares of ` 50 each
40,00,000
` 40 paid up
Assets
Amount ()
Good will
22,00,000
Land & Building
42,70,000
Machinery
8,50,000
Computer
5,20,000
Stock
3,20,000
Capital Reserve
5,00,000
Trade Debtors
10,90,000
8% Debentures of ` 100 each
4,00,000
Cash at Bank
2,68,000
12% Debentures of ` 100 each
6,00,000
Profit & Loss Account
7,82,000
Trade Creditors
12,40,000
Outstanding Expenses
10,60,000
Total
1,03,00,000
Total
1,03,00,000
Following the interest of Mr. Shiv and Mr. Ganesh in M/s Platinum Limited.
8% Debentures
12% Debentures
Total
Mr. Shiv
Mr. Ganesh
3,00,000
4,00,000
7,00,000
1,00,000
2,00,000
3,00,000
The following scheme of internal reconstruction was framed and implemented, as approved by the
Court and concerned parties.
(1) Uncalled capital is to be called up in full and then all the shares to be converted into Equity Shares
of ` 40 each.
(2) The existing shares holders agree to subscribe in cash, fully paid up equity shares of ` 40 each for
` 12,00,000.
(3) Trade Creditors are given option of either to accept fully paid equity shares of ` 40 each for the
amount due to them or to accept 70% of the amount due to them in cash in full settlement of
their claim. Trade creditors for ` 7,50,000 accept equity shares and rest of them opted for cash
towards full and final settlement of their claim.
(4) Mr. Shiv agrees to cancel debenture amounting to ` 2,00,000 out of total debentures due to him
and agree to accept 15% debentures for the balance amount due. He also agree to subscribe
further 15% Debenture in cash amounting to ` 1,00,000.
(5) Mr. Ganesh agrees to cancel debentures amounting to ` 50,000 out of total debentures due to
him and agree to accept 15% Debentures for the balance amount due.
29
November 14, 2014
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21:39
ACCOUNTING CA IPCC
(6) Land & Building to be revalued at ` 51,84,000, Machinery at ` 7,20,000, Computers at ` 4,00,000,
Stock at ` 3,50,000 and Trade Debtors at 10% less to as they are appearing in Balance Sheet as
above.
(7) Outstanding Expenses are fully paid in cash.
(8) Goodwill and Profit & Loss A/c will be written off and balance, if any of Capital Reduction A/c
will be adjusted against capital Reserve.
You are required to pass necessary Journal Entries for all the above transactions and draft the companys Balance Sheet immediately after the reconstructions.
ANSWER:
Journal Entries
Debit
Equity share final call
(being final call is made on 1,00,000 shares @10)
Dr.
Credit
10,00,000
10,00,000
Bank account
Dr.
To Equity share final call
(being amount of share final call is received from shareholders)
10,00,000
Equity Share capital account

Dr. (50)
To Reconstruction account (10)
To equity share capital (40)
(being equity shares of ` 50 are converted into ` 40 per share)
75,00,000
Bank account
To Equity Share capital
(being new equity shares are issued to existing shareholders)
Dr.
12,50,000
Creditors account
To Cash(70%)
To Reconstruction account(30%)
(being creditors are settled in cash and shares)
Dr.
To Mr. Shiv
(being amount due to shiv)
Dr.
Dr.
Mr. Shiv account

Bank account
To 15% Debentures
To Reconstruction
(being amount is settled which was payable to Mr.shiv)
Dr.
Dr.
10,00,000
15,00,000
60,00,000
12,50,000
12,40,000
7,50,000
3,43,000
1,47,000
3,00,000
4,00,000
7,00,000
7,00,000
1,00,000
6,00,000
2,00,000
November 14, 2014
21:39
To Mr. Ganesh
(being amount due to Ganesh)
Dr.
Dr.
Mr. Ganesh account

To 15% Debentures
To Reconstruction
(being amount is settled which was payable to Mr. Ganesh)
Dr.
1,00,000
2,00,000
3,00,000
3,00,000
2,50,000
50,000
Land & Building account

Dr.
Stock account
Dr.
(being assets are revalued upward as per given market values)
9,14,000
30,000
To Machinery
To computers
To debtors
(being assets revalued downward as per given market values)
Dr.
3,59,000
Outstanding expenses account

To bank
(being expenses are paid in cash)
Dr.
To profit & loss account
To Goodwill
(being losses are written off as per requirement)
Dr.
Capital reserve account

(being capital reserve is adjusted against reconstruction)
(REFER RECONSTRUCTION ACCOUNT)
Dr.
9,44,000
1,30,000
1,20,000
1,09,000
10,60,000
10,60,000
29,82,000
7,82,000
22,00,000
5,00,000
5,00,000
Reconstruction Account
Particulars
To machinery
To computers
To debtors
To profit and loss
To goodwill
Amount
1,30,000
1,20,000
1,09,000
7,82,000
22,00,000
33,41,000
Particulars
By Equity share capital
By creditors
By shiv
By Ganesh
By land and building
By stock
By capital reserve (balancing figure)
Amount
15,00,000
1,47,000
2,00,000
50,000
9,14,000
30,000
5,00,000
33,41,000
31
November 14, 2014
32
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ACCOUNTING CA IPCC
Balance Sheet of Platinum Limited

Liabilities
Amount

25L+40L+10L15L+12.5L+7.5L)
15% Debentures (600000+250000)
80,00,000
8,50,000
Assets
Land & Building
Machinery
Computers
Stock
Debtors
Cash and bank
(2,68,000+10,00,000+
12,50,0003,43,000+
1,00,00010,60,000)
88,50,000
Amount
51,84,000
7,20,000
4,00,000
3,50,000
9,81,000
12,15,000
88,50,000
QUESTION NO 22 (NOV. 2011) (16 MARKS)

The Balance Sheet of M/s Ice Ltd. As on 31.03.2011 is given below:
Liabilities
Assets
1,00,000 equity shares

of ` 10 each fully paid up
4,000, 8% preference
fully paid
6% Debenture
(secured by freehold property)
Arrear interest
Sundry Creditors
Directors Loan
Freehold Property
Plant and Machinery
Trade investment (at cost)
Sundry Debtors
Stock-in-Trade
Deferred Advertisement
Expenses
Profit and Loss Account
10,00,000
4,00,000
4,00,000
24,000
5,50,000
2,00,000
2,00,000
4,50,000
3,00,000
50,000
4,75,000
4,24,000
1,01,000
3,00,000
22,25,000
22,25,000
The Board of Directors of the Company decided upon the following scheme of reconstruction with the
consent of respective stakeholders.
(i)
Preference shares are to be written down to ` 80 each and equity shares to ` 2 each.
(ii)
Preference dividend in arrear for 3 years to be waived by 2/3rd and for balance 1/3rd, equity
shares of ` 2 each to be allotted.
(iii) Debenture holders agreed to take one freehold property at its book value of ` 3,00,000 in part
payment of their holding. Balance debentures to remain as liability of the company.
(iv)
Arrear debenture interest to be paid in cash.
(v)
Remaining freehold property to be valued at ` 4,00,000
(vi)
Investment sold out for ` 2,50,000.
November 14, 2014
21:39
(vii) 75% of Directors loan to be waived and for the balance, equity share of ` 2 each to be allotted.
(viii) 40% of sundry debtors, 80% of stock and 100% of deferred advertisement expenses to be written
off.
(ix)
Companys contractual commitments amounting to ` 6,00,000 have been settled by paying 5%

penalty of contract value.
Show the Journal Entries for giving effect to the internal re-construction and draw the Balance Sheet
of the company after effecting the scheme.
ANSWER 22 (16 Marks):

Journal Entries
Debit (`)
8% Preference share capital (` 100)
Dr.
To 8% Preference share capital (` 80)
(being preference share capital is converted from ` 100 each in to
` 80 each)
4,00,000
Equity Share Capital a/c (` 10)

Dr.
To Equity Share Capital (` 2)
(being equity shares capital is converted from ` 10 each into ` 2
each)
10,00,000
Dr.
(being payment of preference dividend in equity shares is considered as an additional liability)
32,000
To freehold property account
(being payment of debentures is made)
Dr.
Outstanding interest account

To bank
(being interest is paid)
Dr.
Freehold property account

(being balance freehold property is revalued)
Dr.
Bank account
To investment account
To profit on sale of investment
(being investments are sold at profit)
Dr.
Credit (`)
3,20,000
80,000
2,00,000
8,00,000
32,000
3,00,000
3,00,000
24,000
24,000
1,50,000
1,50,000
Profit on sale of investment account

Dr.
(being profit on sale of investment is transferred to reconstruction
account)
2,50,000
2,00,000
50,000
50,000
50,000
33
November 14, 2014
34
21:39
ACCOUNTING CA IPCC
Director loan account

Dr.
To Reconstruction account (75%)
To Equity share capital (25%)
(being outstanding balance in director loan account is settled)
3,00,000
To Debtors (450000*40%)
To stock (300000*80%)
To deferred advertising (50000*100%)
(being assets are revalued at market price)
Dr.
4,70,000
To bank
(being penalty on cancellation on contracts is paid)
Dr.
To profit and loss account
(being debit balance in profit and loss account is written off)
Dr.
2,25,000
75,000
1,80,000
2,40,000
50,000
30,000
30,000
Dr.
To capital reserve
(being excess surplus in reconstruction account is transferred to
capital reserve account)
4,75,000
4,75,000
2,98,000
2,98,000
RECONSTRUCTION ACCOUNT
Particulars
Amount
Particulars
Amount

(dividends) To debtors
To stock
To deferred advertising
To bank(penalty) To profit and loss
a/c To capital reserve (bal.fig)
32,000
1,80,000
2,40,000
50,000
30,000
4,75,000
2,98,000

By freehold property
By profit on sale of invest.
By director loan
8,00,000
80,000
1,50,000
50,000
2,25,000
13,05,000
13,05,000
BALANCE SHEET OF ICE LIMITED AS ON 31ST MARCH 2011

Liabilities
Amount
Assets
Equity shares
(10L - 8L + .32L + .75L)
8% Preference shares
(4L - .8L)
Capital reserve
6% Debentures
Creditors
3,07,000
3,20,000
2,98,000
1,00,000
1,01,000
Freehold property
(5,50,000 - 3,00,000 +
1,50,000)
Plant and machinery
Sundry debtors (-180000)
Stock in trade (-240000)
Cash and bank balance
(250000 - 24000 - 30000)
11,26,000
Amount
4,00,000
2,00,000
2,70,000
60,000
1,96,000
11,26,000
November 14, 2014
21:39
IMPORTANT NOTES
35
November 14, 2014
36
21:39
ACCOUNTING CA IPCC
UNIT
November 14, 2014
22:6
Average Due Date
QUESTION NO 1
The following are the amounts due on different dates in between the same parties:
Amounts (`)
Due dates
500
800
1,000
3rd July
2nd August
11 September
Suggest a date on which all the bills may be paid out without any loss of interest to either party.
QUESTION NO 2
Two traders X and Y buy goods from one another, each allowing the other one months credit. At the
end of 3 months the accounts rendered are as follows:
Goods sold by X to Y
Goods sold by Y to X
April 18
May 15
June 16
April 23 52.00
May 24 50.00
60.00
70.00
80.00
QUESTION NO 3
A and B two partners of a firm, have drawn the following amounts from the firm in the year ending
31st March, 19 . . .
Date
Date
1.7
500
12.5
1000
30.9
800
11.8
500
1000
9.2
400
400
7.3
900
1.11
28.2
37
November 14, 2014
38
22:6
ACCOUNTING CA IPCC
Interest at 6% per annum is charged on all drawings. Calculate interest chargeable (assume February
of 28 days).
QUESTION NO 4
The following amounts are due to X by Y. Y wants to pay off (a) on 18.3 . . . . . . (b) on 14.7 . . . . . . Interest
are of 8% per annum is taken into consideration.
Amounts (`)
Due dates
500
10.1
1,000
26.1 (Republic day)
3,000
23.3
4,000
18.8 (Sunday)
Determine the amount to be paid in (a) and in (b).
QUESTION NO 5
` 10,000 lent by Dass bros. to Kumar and Sons on 1st January, 2004 is repayable in 5 equal annual
installments commencing on 1st January, 2005. find the average due date and calculate interest at 5%
per annum, which Dass Bros. will recover from Kumar and Sons.
QUESTION NO 6
` 10,000 lent by A to B on 1st January 2005, is repayable in five six monthly equal installments commencing on and from 1st January, 2006.
Calculate average due date and interest at 5% per annum.
QUESTION NO 7
A trader having accepted the following several bills falling due on different dates, now desires to have
these bills cancelled and to accept a new bills for the whole amount payable on the average due date:
Serial no.
Date of bill
Amount
Usage of the bill
1.3.2005
400
2 months
10.3.2005
300
3 months
5.4.2005
200
2 months
20.4.2005
375
1 month
10.5.2005
500
2 months
You are required to find the said average due date.
November 14, 2014
22:6
UNIT 2. AVERAGE DUE DATE
QUESTION NO 8
A owes B ` 890 on 1st January, 2005. From January to March, the following further transactions took
place between A and B:
January 16
A buys goods
910.00
February 2
A receives Cash loan
750.00
March 5
A buys goods
810.00
A pays the whole amount on 31st March 2005 together with interest at 5% per annum. Calculate the
interest by the average due date method.
QUESTION NO 9
A purchased goods from B, the due dates for payment is cash, being as follows:
15 March
400 due on 18.4
21 April
300 due on 24.5
27 April
200 due on 30.6
15 May
250 due on 18.7
B agreed to draw a bill for the total amount due on the average due date. Ascertain that date.
QUESTION NO 10 (NOV 1998)

Mr. Green and Mr. Red had the following mutual dealings and desire to settle their account on the
average due date:
Purchases by Green from Red:
`
6th
January, 1998
6,000
2nd February, 1998
2,800
31st March, 1998
2,000
Sales by Green to Red:
`
6th January, 1998
6,600
9th January, 1998
2,400
20th
500
march, 1998
You are asked to ascertain the average due date.
39
November 14, 2014
40
22:6
ACCOUNTING CA IPCC

E owes to F the following amounts:
(i)
` 5,000 due on 10th March, 1999
(ii) ` 18,000 due on 2nd April, 1999

(iii) ` 60,000 due on 30th April, 1999
(iv) ` 2,000 due on 10th June, 1999.
He desired to make full payment on 30th June, 1999 with interest at 10% per annum from the average
due date. Find out the average due date and the amount of interest.

A lent ` 25,000 to B on 1st January, 2000. The amount is repayable in 5 half yearly installment commencing from 1st January, 2001. Calculate the Average due date and interest @ 10% per annum.

Calculate average due date from the following informations:
Date of Bill
Term
Amount
16 August, 2003
3 months
3,000
20 October, 2003
60 days.
2,500
14 December, 2003
2 Months
2,000
24 January, 2004
60 days
1,000
06 March, 2004
2 Months
1,500

Mr. A advanced ` 30,000 to Mr. B on 1.4.2008. The amount is repayable in 6 equal monthly installments
commencing from 1.5.2008. Compute the average due date for the loan.
November 14, 2014
22:6

R had the following bills receivable and bills payable against S. Calculate average due date when the
payment can be made or received without any loss or gain of interest to either party.
Bills receivable
Date of the
Bills payable
Amount
Date of in
Tenure (`)
Months
1.6.08
9,000
29.5.08
6,000
5.6.08
7,500
3.6.08
9,000
9.6.08
10,000
10.6.08
10,000
12.6.08
8,000
13.6.08
7,000
20.6.08
12,000
27.6.08
11,000
Bill
Amount Bill
Tenure
In months
( `)
Holiday intervening in the period 15st August, 2008 and 6th September, 2008.

A trader allows his customers credit for one week only beyond which he charges interest @ 12% per
annum. Anil, a customer buys goods as follows:
Amount (`)
Date of sale/Purchase
Janaury 2, 2009
January 28, 2009
February 17, 2009
March 3, 2009
6,000
5,500
7,000
4,700
Anil settles his account on 31st March, 2009, Calculate the amount of interest payable by Anil using
average due date method.

Swami nation owed to subramanium the following sums:
` 5,000 on 20th January, 2009

` 8,000 on 3rd March, 2009
` 6,000 on 5th April, 2009
` 11,000 on 30th April, 2009
Ascertain the average due date.
41
November 14, 2014
42
22:6
ACCOUNTING CA IPCC

The following transactions took place between Thick and Thin. They desire to settle their account on
average due date.
Purchases by Thick from Thin

9th July 2013
7,200
14th August, 2013
12,200
Sales by Thick from Thin

15th July 2013
18,000
31th August, 2013
16,500
Calculate Average Due Date and the amount to be paid or received by Thick.
ANSWER:
Due date
Amount
No. of days From base date
9.7.2013
(7200)
15.7.2013
18000
108000
14.8.2013
(12200)
36
(439200)
31.8.2013
16500
53
874500
15100
Product
0
543300
Average Due Date = Base date +

= 9.7.2013 +
Total product
Total Amount
543300
days
15100
= 9.7.2013 + 36days
= 14.8.2013
November 14, 2014
22:6

T Owes to K the following amounts:
` 7,000 due to 15th March, 2012

` 12,000 due on 5thApril, 2012
` 30,000 due on 25th April, 2012
` 20,000 due on 11th June, 2012
He desires to make the full payment on 30th June, 2012 along with interest @ 10% per annum from the
average due date. Find out the average due date and the amount of interest. Amount of interest may
be rounded off to the nearest rupee.
ANSWER: Calculation of Average Due Date

Due Date
Amount
No. of Days From Base Date
15/03/2012
7,000
05/04/2012
12,000
21
2,52,000
25/04/2012
30,000
41
12,30,000
11/06/2012
20,000
88
17,60,000
69,000
(i)
Products
0
32,42,000
Average Due date = Base date (Product/ amount)

= 15/03/2012 + (32, 42, 000/69, 000)
= 15/03/2012 + 46.98or say47 = 01/05/2012.
(ii) Calculation of interest = 69, 000 10% 60/365

= ` 1, 134.24

M/s Stairs & Co. draw upon M/s Marble & Co. several bills of exchange due for payment on different
dates as under :
Amount (`)
Tenure of Bill
12th May
44,000
3 months
10th June
45,000
4 months
1st July
14,000
1 Months
19th July
17,000
2 months
Date of Bill
43
November 14, 2014
44
22:6
ACCOUNTING CA IPCC
Find out the average due date on which payment may be made in one single amount by M/s Marble &
Co. to M/s Stairs & Co. 15th Aug, Independence Day, is national holiday and 22nd September declared
emergency holiday. Due to death of a national leader.
ANSWER:
CALCULATION OF AVERAGE DUE DATE
DUE DATES
NO. OF DAYS FROM BASE

DATE
AMOUNTS
PRODUCT
4th AUGUST
0 (Base date)
14,000
14th
AUGUST
10
44,000
4,40,000
23rd
SEPTEMBER
50
17,000
8,50,000
70
45,000
31,50,000
1,20,000
44,40,000
13th OCTOBER
44, 40, 000

1, 20, 000
= 4th August + 37days
Average Due date = 4th August +

= 10th October
(NOTE: In case of a public holiday or a Sunday we have to consider the preceding date as due date
but in case of an emergency, we should consider the next date.)

Mr. Black accepted the following bills drawn by Mr. White:
Date of Bill
Period
Amount (`)
09.03.2010
4 Months
4,000
16.03.2010
3 Months
5,000
07.04.2010
5 Months
6,000
18.05.2010
3 Months
5,000
He wants to pay all the bills on a single date. Interest chargeable is @ 18% p.a. and Mr. Black wants to
save ` 150 on account of interest payment. Find out the date on which he has to effect the payment to
save interest of ` 150. Base date to be taken shall be the earliest due date.
November 14, 2014
22:6
ANSWER 21 (8 marks)
Due Dates
No. Of Days From Base Date
Amounts
Product
19.6.2010
0 (Base date)
5000
12.7.2010
23
4000
92,000
21.8.2010
63
5000
3,15,000
10.9.2010
83
6000
4,98,000
20,000
9,05,000
9, 05, 000
20, 000
= 19.6.2010 + 45days
Average Due date = 19.6.2010 +

= 3.8.2010
COMMENTS:
As per questions requirement, we have to calculate payment date so that interest of ` 150 could be
saved by Mr. Black. For the specified purpose, Mr. Black should make payment on an earlier date
than average due date. The following equation can be preferred:
150 = 20, 000
x = 15days
18
x
100 365
ACTUAL PAYMENT DATE: 3.8.2010 - 15 DAYS = 19.7.2010

A and B are partners in a firm and share profits and losses equally. A has withdrawn the following sum
during the half year ending 30th June, 2010.
Date
Amount (`)
January 15
5,000
February 10
4,000
April 5
8,000
May 20
10,000
June 18
9,000
Interested on drawings is charged @ 10% per annum. Find out the average due date and calculate the
interest on drawings to be charged on 30th June 2010.
45
November 14, 2014
46
22:6
ACCOUNTING CA IPCC
ANSWER:
Due Dates
No. of Days From Base Date
Amounts
January 15
0 (Base date)
5000
February 10
26
4000
104000
April 5
80
8000
640000
May 20
125
10000
1250000
June 18
154
9000
1386000
36000
3380000
33, 80, 000

36, 000
= 15.1.10 + 94days
Average Due date = 15.1.2010 +
= 19April
10
72
Interest = 36, 000
= 710
100 365
Note:- 19 April to June 30 = 72 days
Product
UNIT
November 14, 2014
22:7
Insurance Claim
QUESTION NO 1
On 12th June 2006, fire occurred in the premises of Patel, a paper merchant. Most of the stocks were
destroyed, cost of stock salvaged being ` 11,200. In addition, some stock was salvaged in a damaged
condition and its value in that condition was agreed at ` 10,500. From the books of account, the following particulars were available:
(a) His stock at the close of account on December 31, 2005 was valued at ` 83,500.
(b) His purchases from 1.1.2006 to 12.6.2006 amounted to ` 1,12,000 and his sales during that period
amounted to ` 1,54,000.
On the basis of his accounts for the past three years it appears that he earns on an average a gross
profit of 30% on sales.
Patel has insured his stock for ` 60,000. Compute the amount of claim.
QUESTION NO 2
On 1st April, 2006 the stock of Shri Ramesh was destroyed by fire but sufficient records were saved from
which following particulars were ascertained:
`
Stock at cost 1st January 2005
73,500
Stock at cost 31st December 2005
79,600
Purchases- year ended 31st December 2005
3,98,000
Sales- year ended 31st December 2005
4,87,000
Purchases 1.1.2006-31.3.2006
1,62,000
Sales 1.1.2006-31.3.2006
2,31,200
47
November 14, 2014
48
22:7
ACCOUNTING CA IPCC
In valuing the stock for the balance sheet at 31st December, 2005 ` 2,300 had been written off on
certain stock which was a poor selling line having the cost ` 6900. A portion of these goods were sold
in March,2006 at loss of ` 250 on original cost of ` 3450. The remainder of this stock was now estimated
to be worth its original cost. Subject to the above exception, gross profit had remained at a uniform
rate throughout year.
The value of stock salvaged was ` 5,800. The policy was for ` 50,000 and was subject to the average
clause. Work out the amount of the claim of loss by fire.
QUESTION NO 3
A fire occurred on 1st February, 2006, in the premises of Pioneer Ltd., a retail store and business
was partially disorganized upto 30th June, 2006. The company was insured under a loss of profits for
` 1,25,000 with a six months period indemnity. From the following information, compute the amount
of claim under the loss of profit policy.
`
Actual Turnover from 1st February to 30th June 2006
80,000
Turnover from 1st February to 30th June 2005
2,00,000
Turnover from 1st February 2005 to 31st January 2006
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 ` 6700 which reduced the loss in turnover.
There was also a saving during the indemnity period of ` 2450 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.
QUESTION NO 4
The premises of XY Ltd. were partially destroyed by fire on 1st March 2006 and as a result, the business
was practically disorganized upto 31st August 2006. The company is insured under a loss of profit
policy for ` 1,65,000 having an indemnity period of 6 months.
From the following information, prepare a claim under the policy:
(i)
Actual turnover during period of dislocation (1.3.2006 - 31.8.2006) ` 80,000
(ii)
Turnover for the corresponding period (dislocation) in the 12 months immediately before the
fire (1.3.2005 to 31.8.2005) ` 240000
November 14, 2014
22:7
UNIT 3. INSURANCE CLAIM
(iii) Turnover for the 12 months immediately preceding the fire (1.3.2005 to 28.2.2006) ` 6,00,000
(iv)
Net profit for the last financial year ` 90,000
(v)
Insured standing charges for the last financial year ` 60,000
(vi)
Uninsured standing charges ` 5,000
(vii) 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 amounting to ` 9300 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 ` 2700 in insured standing charges as a result of the fire.
QUESTION NO 5
From the following data, compute a consequential loss claim:
(1) Financial year end on 31st December, Turnover ` 2,00,000.
(2) Indemnity period 6 months, Period of interruption 1st July to 31st October.,
(3) Net profit ` 18,000.
(4) Standing charges ` 42,000 out of which ` 10,000 have not been insured.
(5) Sum assured ` 50,000. Standard turnover 65,000
(6) Turnover in the period of interruption ` 25,000 out of which ` 6,000 was from a rented place at
` 600 per month.
(7) Annual turnover ` 2,40,000. Saving in standing charges ` 4,725 per annum.
Date of fire night of 30th June. It was agreed to between the insured that the business trends would lead
to an increase of 10% in the turnover.
[Ans. ` 8750]
QUESTION NO 6
The premises of a company was partly destroyed by fire on 1st March 1992, as a result of which the
business was disorganized from 1st March to 31st July, 1992 A/cs are closed on 31st December every
year. The company is insured under a loss of profit policy for ` 7,50,000. The period of indemnity
specified in the policy is 6 months. From the following information, you are required to compute the
amount of claim under the loss of profit policy. (all figures in ` )
49
November 14, 2014
50
22:7
ACCOUNTING CA IPCC
Turnover for the year 1991
40,00,000
Standard turnover for the corresponding period i.e., from 1.3.91 to 31.7.91
20,00,000
Net profit fro preceding year
4,80,000
Insured standing charges
2,40,000
Annual turnover for the year immediately preceding i.e., 1.3.91 to 29.2.92
Uninsured standing charges
44,00,000
80,000
Turnover during the period of disorganisation i.e., from 1.3.92 to 31.7.92
8,00,000
Increased cost of working
1,50,000
Saving in insured standing charges
30,000
Reduction in turnover avoided through increase in working cost
4,00,000
Owing to reasons acceptable to the insurer, the Special circumstances clause" stipulates for: (a) Increases of turnover (standard and annual) by 10% and (b) Increase of rate gross profit by 2%.
QUESTION NO 7
Sony Ltd.s Trading and P & L Account for the year ended 31st Dec. 93 is as follows:
Trading and Front and Loss Account for
the year ended 31st December 1993
`
To Opening Stock
20,000
To Purchases
6,50,000
To Manufacturing Exp.
1,70,000
To Gross Profit
2,50,000
`
By Sales
By Closing Stock
10,90,000
To Administrative Exp.
80,000
To Selling Expenses
20,000
To Finance Charges
1,00,000
To Net Profit
10,00,000
90,000
10,90,000
By Gross Profit
2,50,000
50,000
2,50,000
2,50,000
The company had taken out a fire policy for ` 3,00,000 and a loss of profit policy for ` 1,00,000 having
an indemnity period of 6 months. A fire occurred on 1.4.1994 at the premises and the entire stock were
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gutted with nil salvage value. The net quarter sale i.e., 1.4.1994 to 30.6.1994 was severely affected. The
following are the other information:
`
Sales during the period 1.1.94 to
31.3.94
Manufacturing. Expenses 1.1.94 to
31.3.94
Standing charges insured
2,50,000
Purchase during the period

1.1.94 to 31.3.94
Sales during the period 1.4.94
to 30.6.94
Actual expenses incurred after
fire
70,000
50,000
3,00,000
87,500
60,000
The general trend of the industry shows an increase in sales by 75% and decrease in G. P. by 5% due to
increased costs.
Ascertain the claims for loss of stock and loss of profits.
[CA. (Inter), Nov. 1994]
Answer
A. Loss of Stock
Dr. In the books of Sony Ltd. Trading Account (from 1.1.1994 to 31.3.1994)
`
To Opening Stock
90,000
To Purchases
3,00,000
To Manufacturing Expenses
70,000
To Gross Profit
50,000
Cr.
`
By Sales
2,50,000
By Closing Stock (bal. fig.)
2,60,000
(25% 5% = 20% on Sales)

5,10,000
5,10,000
Amount of claim for stock lost by fire is ` 2,60,000.

B. Loss of Profit
Statement Showing Loss of Profit
(a) Adjusted Standard Sales
3,00,000
(b) Actual Sales of the indemnity period, 87,500
2,12,500
Short Sales (a-b)

Loss of Gross Profit =
Short Sales Gross Profit ratio = ` 2,12,500 5% = 10,625
Ad d : Admissible increased working cost
Le s s : Saving in insured standing Charges
Gross Claim
4,375
Nil
15,000
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Workings:
(1) Standard Sales
Sales (1.1.1994To31.3.94)` 2,50,000x 100/115 = 2,17,391
Sales (remaining 3 quarters of 1993) = (` 10,00,000 2,17,391)
= 7,82,609
Per quarter average sales (1.4.94 to 30.6.94) (i.e., 7,82,609 1/3)
= 2,60,870
Ad d : 15% increase (2,60,7808 15 /100)
39,130
= 30,00,000
(2) G. P. Rate = N. P. + Insured Standing Charges / Sales 100
= 50,000 + 50,000/10,00,000 100 = 10%
Le s s : Decrease in trend
= 5%
Adjusted G. P. Rate
= 5%
QUESTION NO 8
S & M Ltd. give the following Trading and Profit and Loss Account for year ended 31st December, 2005:
Trading and Profit and Loss Account for the year ended 31st December, 2005
`
To Opening Stock
50,000
To Purchases
3,00,000
To Wages (` 20,000 for
1,60,000
`
By Sales
By Closing Stock
8,00,000
70,000
skilled labour)
1,20,000
To Gross Profit
2,40,000
8,70,000
To Office Administrative
60,000
8,70,000
By Gross Profit
2,40,000
Expenses
To Advertising
20,000
To Selling Expenses (Fixed)
40,000
To Commission on Sales
48,000
To Carriage Outward
16,000
To Net Profit
56,000
2,40,000
2,40,000
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The company had taken out policies both against loss to stock and against loss of profit, the amounts
being ` 80,000 and ` 1,72,000. A fire occurred on 1st May, 2006 and as a result of which sales were
seriously affected for a period of 4 months. You are given the following further information:
(a) Purchases, wages and other manufacturing expenses for the first 4 months of 2006 were ` 1,00,000,
` 50,000 and ` 36,000 respectively.
(b) Sales for the same period were ` 2,40,000.
(c) Other sales figures were as follows:
`
1st
30th
From
January 2005 to
April, 2005
From 1st May 2005 to 31st August, 2005
From 1st May, 2006 to 31st August, 2006
3,00,000
3,60,000
60,000
(d) Due to rise in wages, gross profit during 2006 was expected to decline by 2% on sales.
(e) Additional expenses incurred during the period after fire amounted to ` 1,40,000. The amount
of the policy included ` 1,20,000 for expenses leaving ` 20,000 uncovered. Ascertain the claim for
stock and for loss profit.
All workings should form part of your answers.
QUESTION NO 9
Sony Ltd.s. Trading and profit and loss account for the year ended 31st December, 2005 were as follows:
Trading and profit and Loss Account for the year ended 31.12.2005
`
Opening Stock
Purchases
Manufacturing Expenses
To Gross Profit
20,000
6,50,000
1,70,000
2,50,000
`
Sales
Closing Stock
10,90,000
Administrative Expenses
Selling Expenses
Finance Charges
To Net Profit
80,000
20,000
1,00,000
50,000
2,50,000
10,00,000
90,000
10,90,000
Gross Profit
2,50,000
2,60,000
The company had taken out a fire policy for ` 3,00,000 and a loss of profits policy for ` 1,00,000 having
an indemnity period of 6 months. A fire occurred on 1.4.2006 at the premises and entire stock were
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ACCOUNTING CA IPCC
gutted with nil salvage value. The net quarter sales i.e. 1.4.2006 to 30.6.2006 was severely affected. The
following are the other information:
Sales during the period
1.1.06 to 31.3.06
2,50,000
Purchases during the period
1.1.06 to 31.3.06
3,00,000
Manufacturing expenses
1.1.06 to 31.3.06
70,000
Sales during the period
1.4.06 to 30.6.06
87,500
Standing charges insured
50,000
Actual expense incurred after fire
60,000
The general trend of the industry shows an increase of sales by 15% and decrease in GP by 5% due to
increased cost.
Ascertain the claim for stock and loss of profits.
QUESTION NO 10
Out of goods costing ` 2,00,000, 3/4 are destroyed by fire. Find out the amount under following conditions:
(1) Sum insured - ` 2,00,000
(2) Sum insured without average clause 1,00,000
(3) Sum insured with average clause 1,00,000***
Solution
Turnover Lost = 2,00,000

(i)
3
= ` 1,50,000
4
Policy taken = 2,00,000

Claim
= 1,50,000
(ii) Policy taken = 1,00,000

Claim
= 1,00,000
(iii) Policy taken = 1,00,000

Loss suffered Sum Insured
Actual Insurable Value
1,00,000
= 1,50,000
2,00,000
= 75,000
Claim =
Note Average clause applies only where the insured value is Less than the total cost.
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QUESTION NO 11
Calculation the Gross profit Ratio for the for Calender year 2006.
` 3,20,000
Opening Stock
` 17,76,000
Purchases
Wages
` 2,00,000
Sales
` 23,20,000
` 4,40,000
Closing Stock
Solution
Trading A/c for the year ending on 31.12.06
Particular
Opening Stock
Purchases
Wages
G.P (Balance figure)
3,20,000
17,76,000
2,00,000
4,64,000
Sales
Closing Stock
27,60,000
G.P. Ratio =
=
Particular
23,20,000
4,40,000
27,60,000
Gross Profit
Net Sales
4,64,000
100 = 20%
23,20,000
QUESTION NO 12
Due to fire on July 2004 the entire Stock was bunt except. Some costing ` 35,000. The information
available from the books of accounts saved were as follows:
(i)
The average G.P was 25% on Sales
(ii) The wages for the period is 72,000

(iii) The Stock on 31st December 2003 valued as per practice at 10% above Cost was ` 1,10,000
(iv) The Purchase & Sales from 1.1.2003 upto date of fire were ` 1,50,000 & 3,40,000 respectively,
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(v) The Company insured Stock for ` 60,000

(vi) The policy had an average clause.
Prepare a Statement showing the amount of stock Lost by fire and the amount of claim to be collaged
with the insurance company.
Solution
Memorandum Trading Account
For the period 1.1.2003 to 1.7.04
Particular
Opening Stock
1,10,000 100
110
Purchases
Wages
G.P (25% of 3,40,000)
1,00,000
1,50,000
72,000
85,000
Particular
Sales
Closing Stock
(Balancing figure)
4,07,000
`
3,40,000
67,000
4,07,000
Loss suffered = 67,000 35,000 = 32,000

Claim = Loss suffered
= 32,000
Sum insured
Actual insurable value
60,000
= 28,656
67,000
QUESTION NO 13
A fire occurred in the premises of Agni On 25th August 2003 when a large pant of the Stock was destroyed. Salvage was ` 15,000. Agni gives you the following information for the period of January 1,
2003 to August 25, 2003
(a) Purchases
(b) Sales
` 85,000
` 90,000
(c) Goods costing ` 5,000 were taken by Agni for personal use.
(d) Cost price of Stock On January 1 was ` 40,000
Over the past few years, Agni has been selling goods at a consistent gross profit margin of 33 1/3%.
The insurance policy was ` 50,000. It included an average clause Agni asks you to prepare a statement
of claim to be made on the insurance company.
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Solution
Statement of Claim
Closing stock
60,000
Less salvage
15.000
Loss
45,000
Application of average clause
Value of stock on hand

Amount of policy
50000
Admissible claim 45,000
60,000
60,000
50,000
37,500
Memorandum Trading A/c for the period ending 25.8.03

Particulars
To Opening Stock
To Purchases
85,000
Less: Drawinq
5000
To G.P (Balance figure) (33 - 1/3
of 90,000)
`
40,000
80,000
30,000
Particulars
By Sales
By Closing Stock
(Balance Figure)
1,50,000
90,000
60,000
1,50,000
QUESTION NO 14
Mr. A prepares accounts on 30th September each year but on 31.12.2001 fire destroyed the great in part
of his Stock. Following information was collected form his book:
Stock as On 1.10.1
29,700
Purchase from 1.10to31.12.01
75,000
Wages from 1.10.to 31.12.01
33,000
Sales from 1.10 to 31.12.01
1,40,000
The rate of gross profit 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.
Additional informations:
(a) Stock in the beginning was calculated at 10% less than cost.
(b) A plant was installed by firms own worker. He was paid ` 500. Which was included in wages?
(c) Purchases include the purchase of the plant for ` 5,000
You are required to calculate claim for the Loss of stock the Loss of Stock.
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Solution
Compulation of claim for Loss of stock
Stock on the date of fire
30,500
Less: salvage stock
3,000
Loss of stock
27,500
Amount of claim =
=
Insured values
Loss of Stock
Total cost of stock on the date a fire
25,000
27,500 = 22,541
30,500
Memorandum Trading Account for period from 1.10 to 31.12.01
Particulars
To

Opening Stock
100
29,700
9
To Purchases
( ) Cost of Plant
To Wages
( ) Wages paid
To G.P (25% on sales)
33,000
75,000
5,000
33,000
500
Particulars
By Sales
By Closing Stock
(Balance Figure)
`
1,40,000
30,500
70,000
32,500
35,000
1,70,500
1,70,500
Not e : G.P 33.33% On Cost or 25% on Sales = 35,000
QUESTION NO 15
Find out the amount of net claim for loss of profit by applying clauses from the following in formation:
(i)
Adjusted annual turnover preceding the date of fire
50,000
(ii) Policy amount
7,500
(iii) Loss suffered
2,500
(iv) Adjusted Insured G.P rate
20%
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Solution
G.P rate = 20%
Loss suffered = 2,500
Amount of Claim =
Policy amount
Loss suffered
Insured profit
7,500
2,500
20% of 50,000
7,500
2,500 = 1,875
10,000
QUESTION NO 16
From the following information, compute the amount of claim under the loss of profit policy.
` 1.95 lack
Sum insured
Indemnity Period
6 months
Reason for Damage (Due to fire accident On 1.3.2002)

Period of interruption
1.3.2002 to 31.7.2002 Accounting year

Calender year
` 60 lack
Net profit
Increase in Cost of working
` 0.15 lack
Turnover for the year ended 31st December 01. ` 5,250 lac
Turnover for the period from 1.3.2001 to 28.2.2002 ` 5.850 lac
Turnover for the period from 1.3.2001 to 31.7.2001 ` 1.275 lac
Turnover for the period from 1.3.2002 to 31.7.2002 ` 0.600
Sales were evenly thought out the period standing Changes ` 1.50 lac
No clause for up ward / down ward trend.
Solution
(i)
Claim period being the least of the indemnity Period - 6 months & Dislocation Period - 5months
(ii)
Gross profit Ratio =

=
Net Profit + Insured Standing Charges

100
Turnover of last accounting year
60,000 + 1,50,000
100 = 40%
5,25,000
(iii) Turnover Lost = Standard turnover Actual turnover

= 1,27,500 60,000 = 67,500
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(iv)
Gross Profit Lost = Turnover lost during the claim period
Agreed G. P ratio
40
= 67,500 100
= 27,000
(v)
Calculation of Net Claim for the increased Cost of working

(A)
(B) Gross claim for increased Cost of Working = 15,000
(a) Proportionate increased Cost of Working
= Increased cost of working
Net profit + Insured standing charges

Net profit + All insurable standing charges
= 15,000
60,000 + 1,50,000
60,000 + 1,50,000
= 15, 000
(b) Maximum Saving of liability of the insurer
= Reduction in turnover avoided through increased
Cost of Working ` Agreed G P Ratio
= 60,000 40% = 24,000
Net Claim for the increased Cost of Working = 15,000
(vi)
Total Claim = 27,000 + 15,000 = 42,000
(vii) Sum insurable = Adjusted Turnover Agreed G.P

= 5,85,000 40% = 2,34,000
(viii) Net Claim = Total Claim
= 42,000
Sum insured
Sum insurable
1,95,000
= 35,000
2,34,000
QUESTION NO 17
On account of fire on 15th June 2002 in the business house of a company the working remained disturbed upto 15 December, 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 cons Consequential losses for
` 1,40,000 and a period of 7 months has been agreed upon as indemnity period. An increased of 25%
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was marked in the current years sales as compared to the 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 changes.
Actual sales from 15 June, 2002 to 15 December, 2002
Sales from 15. June, 2001 to 15 December, 2001
70,000
2,40,000
Net profit for last financial year
80,000
Insured standing changes for the last financial year
70,000
Total standing changes for the last financial year
1,20,000
Turnover for the last financial year
6,00,000
Turnover for the year: 16 June, 2001 to 15 June, 2002
5,60,000
Solution
(1) Period of Claim = 6 months (15 June to 15 December)
....
Net profit + Insured Standing Changes
(2) Gross profit ratio =
100
Turnover
80,000 + 70,000
100 = 25%
=
6,00,000
(3) Turnover Lost = Standard - Actual
= 2,40,000 + (25% of 2,40,000) 70,000
= 2,30,000
Loss of profit = 25% of 2,30,000 = 57,500
(4) Calculation of Claim for increased (Cost of Working)
(i)
Actual expense = 12,000
(ii) Gross profit or Sale generated by additional expenditure

= 25% of 70,000 = 17,500
(iii) Additional expense
=
Gross profit on adjusted turnover

G.P. as above + Uninsured Standing Charges
12,000 25% 7,00,000
25% 7,00,000 + (1,20,000 + 70,000)
= 9,333 (approx)
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Adjusted annual turnover = 5,60,000 + 25% = 7,00,000 ` 9,333 being the Least Shall be increased cost of working
(5) Total Claim = 57,500 + 9,333 2,000 = 64,833
Insured Amount
Total Claim
Insurable Amount
1,40,000
=
64,833
25% 7,00,000
(6) Net Claim =
= 51,866.40

Mr. A prepares accounts on 31st September each year, but on 1st December, 2001 fire destroyed the
greater part of this stock. Following information was collected from his books;
`
Stock as on 1.10.2001
29,700
Purchase from 1.10.2001 to 31.12.2001
75,000
Wages from 1.10..2001 to 31.12.2001
33,000
Sales form 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 firms worker. He was paid ` 500, which was included in wages
(iii) Purchase included the purchase of the plant for ` 5,000.
You are required to calculate the claim for the loss of Stock.

On account of a fire on 15 June, 2002 in the business house of a company, the working remained
disturbed upto 15 Dec., 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 years 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.
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Ascertain the claim under the consequential loss policy keeping the following additional information
in view.
`
Actual sales form 15 June, 2002 to 15 Dec., 2002
Sales from 15 June, 2001 to 15 Dec., 2001
70,000
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 : 16 June, 2001 to 15 June, 2002
5,60,000

A fire occurred in the workshop of Mr. on 31st March, 2006 where a large part of stock was destroyed.
Scarp realized ` 7,500. Mr. A gives youre the following information for the period of 1st January to 31st
March, 2006:
`
(i)
Purchase
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, Mrs. 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.

On 2.6.2007 the stock of Mr. Black was destroyed by fire. However, following particulars were furnished
form the recorders 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.Purchase upto 2.6.2007 includes a machinery acquired for ` 15, 000. Purchases
upto 2.6.2007 does not included goods worth ` 30,000 received from suppliers, as invoice not received
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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 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.

On 11.11.2007 the premises of Rocky Ltd. Was destroyed by fire. The following information is made
available:
`
3,75,000
Purchase from 1.4.2006 to 31.3.2007
5,20,000
Sales from 1.4.2006 top 31.3.2007
8,55,000
2,00,000
Purchase from 1.4.2004 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 relies 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

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, 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) Unisnured standing charges ` 6,000:
(9) Turnover during the destitution period ` 67, 500:
(10) Annual turnover for 12 months immediately preceding the date of fire ` 6,60,000;
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(11) Standard turnover i.e. for corresponding month (1st September 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 ` 3,000;
(14) Special clause stipulated:
(a) Increase in rate of G.P. 2%
(b) Increase in turnover (Standard and Annual) 10%

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.
QUESTION NO 25
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 good costing ` 44 lakhs.
Stock in the godown was estimated at ` 80 lakhs. Computer the amount of insurance claim.
QUESTION NO 26
On 20th July, 1991, the godown and business premises of a merchant were affected by fire and from
accounting records salvaged, the following information is made available to you.
`
Stock of goods at cost on 1st April, 1990
1,00,000
Stock of goods at 10% lower than cost as on

Purchase of goods for the year from
1st
31st
March, 1991
1,08,000
31st
4,20,000
April, 1990 to
march, 1991
Sale for the same period
6,00,000
Purchase less return for the period from 1st April to 20th July, 1991
1,40,000
Sales less returns for the above period
3,10,000
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Sale upto 20th July 1991 included ` 40,000 for which goods had not been dispatched. Purchases upto
20th July, 1991 did not include ` 20,000 for which purchase invoices had not been received from suppliers, thought goods have been received at the godown.
Goods salvaged from the accident were worth ` 12,000 and these were handed over to the insured.
Ascertain the value of the claim for loss of goods/ stock which could be preferred on the insurer.
Solution
Trading A/c 1.4.90 to 31.3.90)
Particulars
Amount
Particulars
Amount
To Opening stock
To purchases
To Gross profit
1,00,000
4,20,000
2,00,000
By sales
By closing stock (100%)
6,00,000
1,20,000
7,20,000
GP ratio =
7,20,000
2,00,000
100 = 33.33%
6,00,000
Memorandum Trading A/c ( 1.4..01 to 20.7.01)

Particulars
Amount
Particulars
Amount
To Opening stock
To purchases
(1,40,000 + 20,000)
To gross profit
1,20,000
1,60,000
By sales
(3,10,000 40, 000)
By closing stock
(balace figure)
2,70,000
90,000
3,70,000
1,00,000
3,70,000
Stock on the date of fire = 1,00,000

(-) stock salvage = 12,000
Therefore claim to be lodged to Insurance company = 88,000
QUESTION NO 27
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
Purchase 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
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Sale upto 2.6.2007 includes ` 75,000 being the goods not dispatched to the customers. The sales invoice price is ` 75,000.
` 15,000
` 30,000
Purchase upto 2.6.2007 includes a machinery acquired for

Purchase upto 2.6.2007 does not includes goods worth
Received from suppliers, but 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.
(PCC May 2007; Marks 8)
Solution
In the books of Mr. Black
Trading Account for the year ended 31.3.2007
Particulars
To opening stock
To purchases
To gross profit
1,35,000
6,45,000
3,00,000
Particulars
By sales
By closing stock at cost
9,00,000
1,80,000
10,80,000
10,80,000
Memorandum Trading A/c

For the period from 1.4.2007 to 02.06.2007
Particulars
Amount
Particulars
To opening stock at cost

To purchases
Add: Goods received
but
invoice not received
Less: Machinery
To Gross Profit
(Refer working note)
1,80,000
By sales
Less: Goods not
Dispatched
By Closing Stock
(Balancing Figure)
2,25,000
30,000
2,55,00
15,000
Amount
4,80,000
75,000
4,05,000
1,50,000
2,40,000
1,35,000
5,55,000
5,55,000
Calculation of Insurance Claim

Claim subject to average clause = Actual loss of stock Amount of policy/
Value of stock on the date of fire
= 1,50,000 (1,20,000 1,50,000)
= ` 1,20,000
67
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ACCOUNTING CA IPCC
Working Note :
G.P. ratio = (3,00,000 9,00,000) 100

= 33.33%
Amount of Gross profit = ` 4,05,000 33.33%
= ` 1,35,0000
Salvaged stock amounting ` 22,500 handed over to the insurance company is also a loss to Mr. Black.
QUESTION NO 28
X Ltd. has insured itself under a loss of profit policy for ` 3,63,000.
The indemnity period under the policy is six month. On 1st September, 1998 a fire occurred in the
factory of X Ltd. and the normal business was affected upto 1st March, 1999.
The following information is complied for the year ended on 31st March, 1998:
`
Sales
Insured standing charges
20,00,000
2,40,000
Uninsured standing charges

Net profit
20,000
1,20,000
Following further details of turnover are furnished:

(a) Turnover during the period of 12 months ending on the date of fire was ` 22,00,000.
(b) Turnover during the period of interruption was ` 2,25,000;
(c) Actual turnover during the period from 1.9.1997 to 1-3-1998 during the preceding year corresponding to the indemnity period was ` 7,50,000;
X Ltd spent an amount of ` 40,000 as additional cost of working. During the indemnity period. On
account of this additional expenditure :
(a) There was a saving of ` 15,000 in insured standing charges during the period of indemnity;
(b) Reduced turnover avoided was ` 1,00,000 i.e., but for this expenditure, the turnover after the date
of fire would have been only ` 1,25,000.
A special clause in the policy stipulates that owing to the reasons acceptable to the insurer under the
special circumstances the following increases are to be made :
(a) Increase of turnover standard and actual-by 10%.
(b) Increase in rate of gross profit by 2% from previous years level.
X Ltd asks you to compute the claim for loss of profit. All calculations should be made to the nearest
rupee.
Answer : Claim for loss ` 93,750.
November 14, 2014
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69
QUESTION NO 29
On 30th June, 1996, accidental fire destroyed a major part of, the stocks in the godown of Jay Associates.
Stocks costing ` 30,000 could be salvaged but not their stores ledgers. A fire insurance policy was in
force under which the sum insured was ` 3,50,000. From available records, the following information
was retrieved:
(i)
Total of sales invoices during the period April-June amounted to ` 30,20,000. An analysis showed
that goods of the value of ` 3,00,000 had been returned by the customers before the date of the
fire.
(ii) Opening stock on 1-4-96 was ` 2,20,000 including stocks of value of ` 20,000 being lower of cost
and net value subsequently realized.
(iii) Purchases between 1-4-96 and 30.6.96 were ` 21,00,000.
(iv) Normal gross profit rate was 331/3% on sales.
(v) A sum of ` 30,000 was incurred by way of fire fighting expenses on the day of the fire.
Prepare a statement showing the insurance claim recoverable.
(1996 - November [4])
Solution
Memorandum Trading A/c
Particulars
To opening stock
To purchas
To Gross Profit (1/3)
Amount
2,20,000
21,00,000
9,00,000
Particulars
By sales
(3,20,000 - 3,00,000)
By closing stock (by. Flg.)
32,20,000
Amount
27,20,000
5,00,000
32,20,000
`
Value of stock on date of fire
() Salvage value of stock
5,00,000
30,000
4,70,000
(+) Fire fighting expenses

Therefore loss
Since insurance was only for ` 3,50,000 so, admissible claim =
30,000
5,00,000
` 3,50,000
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ACCOUNTING CA IPCC

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?
ANSWER:
S1 = STANDARD SALES (15.9.2011-15.12.2011)
S2 = ACTUAL SALES (15.9.2012-15.12.2012)
S3 = SALES DURING PREVIOUS FINANCIAL YEAR (1.1.2011-31.12.2011)
(I)
CALCULATION OF ACTUAL SALES DURING DOP

Sales during last quarter (1.10.2012-31.12.2012)
Less: sales for last 15 days(4th quarter) (16.12.2012-31.12.2012)
Add: sales for first last 15 days (3rd quarter)(16.9.2012-30.9.2012)
148000
20000
Nil
128000
(II)
CALCULATION OF STANDARD SALES

Sales during last quarter (1.10.2011-31.12.2011)
Less: sales for last 15 days(4th quarter) (16.12.2011-31.12.2011)
Add: sales for first last 15 days (3rd quarter)(16.9.2011-30.9.2011)
190000
60000
34000
164000
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(III)
CALCULATION OF ANNUAL SALES (16.9.2011-15.9.2012)

Sales during (1.7.2012-30.9.2012) (4months)
175000
Sales (1.4.2012-30.6.2012) (4months)
221000
Sales (1.1.2012-31.3.2012) (4months)
162000
Sales(1.10.2011-31.12.2011) (4months)
190000
Adjustment for 15 days (16.9.2012-31.12.2012)
(Nil)
Adjustment for 15 days (16.9.2011-31.12.2011)
34000
782000
(IV)
CALCULATION OF TREND IN SALES

2009
620000
2010
2011
713000
819950
INCREASE IN SALES = 93000

(713000620000)
TREND IN SALES =
(V)
106950
15%
15%
Shortage in sales = standard sales actual sales

= (164000 + 15%) 128000
= 60600
(VI)
GP Ratio = [NP + SC (Insured)/S3]*100

= [(120000 + 43990)/819950] 100
= 20%
(VII) Loss = Shortage In Sales * Gp Ratio

= 60600 20%
= 12120
(VIII) GP on S4 = {[(190000+34000)+15%] + (175000+221000+162000)} X 20%
= 163120
(GP on S4 is higher than insured profits due to which average clause should be applied)
Insurance claims = (insured profits/GP on S4) loss
= (100000/163120) 12120
= 7430
71
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ACCOUNTING CA IPCC

On 15th December, 2012, a fire occurred in the premises of M/s OM Export Most of the stock 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.
ANSWER 31 (5 MARKS) :
In the books of OM Exports
Memorandum Trading A/c for the period 1.4.2012-15.12.2012
Particulars
Amount
To Opening stock
To Purchases
To Gross profit @20%
9,40,000
13,20,000
4,05,000
Particulars
Amount
By Sales
By Closing stock
(bal.fig)
26,65,000
26,65,000
CALCULATION OF DAMAGED GOODS

Closing stock as on the date of fire (refer above account)
Salvaged goods (given in question)
DAMAGED GOODS
6,40,000
(1,40,000)
5,00,000
CALCULATION OF INSURANCE CLAIM

Claim subject to average clause
= insured value / Value of stock on the date of fire Damaged goods
= (4,00,000 6,40,000) 5,00,000
= 3,12,500
20,25,000
6,40,000
November 14, 2014
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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

Purchase during the year ended
31st
7,90,100
March 2012
56,79,600
Purchase 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.
ANSWER
Calculation of Gross Profit Ratio
Trading and Profit & Loss Account for the Year Ended 31-3-2012
Particular
To Opening stock
To Purchase
To Gross Profit c/d
Amount
7,10,500
56,79,600
24,00,000
Particular
By Sales
By Closing Stock
87,90,100
Gross Profit Ratio 100 = 100 = 30%. Calculation of Closing Stock
Amount
80,00,000
7,90,100
87,90,100
73
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ACCOUNTING CA IPCC
Memorandum Trading and Profit & Loss Account From 1-4-12- to 29-8-12
Particular
To Opening Stock
To Purchase
() Sample Advertising
() Personal Use
To gross profit
(4536000 30%)
33,10,700
(41,000)
(2000)
Amount
Particular
7,90,100
By Sales
By Closing Stock
(bal.fig.)
Amount
45,36,000
8,82,600
32,67,700
13,60,800
54,18,600
54,18,600
Calculation of Total Loss of Stock
`
Closing stock on the date of fire
Fire fighting expenses
8,82,600
4,700
Total loss of stocks
8,87,300
Calculation of Final Claim

IN THE GIVEN QUESTION. THE AMOUNT OF FINAL CLAIM WILL BE EQUAL TO TOTAL
LOSS OF STOCK WITHOUT APPLICATION OF AVERAGE CLAUSE BECAUSE INSURED
VALUE IS HIGHER THAN LOSS OF STOCK.
INSURED VALUE IS 9.00.000
LOSS OF STOCK 8.87.300
(Note: An application of average clause is required only if value of closing stock exceeds insured
value of stock.)

From the following information ascertain the value of stock as on 31th March, 2012.
`
Stock as on 01-04-2011
Purchases
28,500
1,52,500
Manufacturing Expenses
30,000
Selling Expenses
12,100
Administration Expenses
6,000
Financial Expenses
4,300
Sales
2,49,000
November 14, 2014
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At the time of valuing stock as on 31th 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:
Calculation of Closing Stock as on 31.3.2012
Memorandum Trading Account for the year ended 31/03/2012
Particulars
Amount
Particulars
Amount
To opening stock (28500-6500)

To purchase
To manufacture expenses
To Gross profit c/d ( 24,0* 20%)
22,000
1,52,500
30,000
48,000
By Sales (2,49,000-9000)
By Closing stock
(balancing fig.)
2,40,000
12,500
2,52,500
2,52,500
NOTES:
(i)
Obsolete stock included in opening stock ` 10000 3500 = ` 6500
(ii) We should not consider administration, selling and other financial expenses while preparing trading account.
QUESTION NO 34 (May 2012)
Ramada & 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 Ist 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:
Particulars
To Opening Stock
Amount (`)
96,000
To Purchase
7,56,000
To Wages
1,58,000
To Gross Profit C/d
Total
By Sales
By Closing Stock
Amount (`)
12,00,000
1,85,000
75,000
3,00,000
13,85,000
To Administration 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
Particulars
3,00,000
Total
13,85,000
By Gross Profit B/d
3,00,000
Total
3,00,000
75
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ACCOUNTING CA IPCC
Further details 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:
` 3,00,000
` 3,20,000
` 48,000
From 01.04.2010 to 30.06.2010

From 01.07.2010 to 30.09.2010
From 01.07.2011 to 30.09.2011
(c) Due to decrease in the material cost, Gross Profit during 2011-12 was expected to increase by 5%
on sales.
(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.
ANSWER:
Calculation of Claim for Loss of Stock
In the books of Ramda & Sons
Memorandum Trading A/c for the period
1.4.2011-30.6.2011
Particulars
Amount
Particulars
Amount
To Opening stock
To Purchases
To Wages
To manufacturing expenses
To Gross profit @30%****
1,85,000
2,14,000
51,000
12,000
1,00,800
By Sales
By Closing stock
(bal.fig)
3,36,000
2,26,800
5,62,800
5,62,800
**** G P RATIO (PREVIOUS YEAR) = Gross profit/sales*100

= 3,00,000/12,00,000 100
= 25%
ADJUSTED G P RATIO DUE TO INCREASE IN GP RATIO = 25% + 5% = 30%
Insurance Claim = 2,10,000
(NOTE: THE AMOUNT OF CLAIM WILL BE INSURED VALUE OR DAMAGED GOODS WHICH EVER
IS LOWER BECAUSE POLICY IS WITHOUT AVERAGE CLAUSE. SO THE AMOUNT OF CLAIM WILL
BE 2,10,000 WHICH IS INSURED VALUE OF STOCK BUT LESS THAN DAMAGED GOODS OF
2,26,800.)
November 14, 2014
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Calculation of Claim for Loss of Profit

Step 1: CALCULATION OF TREND IN SALES
Sales during first 3 months (1.4.2011 - 30.6.2011)
Sales during first 3 months(1.4.2010 - 30.6.2010)
Increase in sales
% increase in sales on the basis of sales in last year
(36,000/3,00,000*100)
3,36,000
3,00,000
36,000
12%
Step2: CALCULATION OF SALES DURING 12 MONTHS PRECEDING THE DATE OF FIRE

Sales during last financial year (1.4.2010-31.3.2011)
Less: sales during first 3 months (1.4.2010-30.6.2010)
Sales during 9 months in previous year (1.7.2010-31.3.2011)
Increasing trend in sales @12%
12,00,000
3,00,000
9,00,000
1,08,000
Adjusted sales during 9 months in previous year

Add: Sales during first 3 months (1.4.2011-30.6.2011)
10,08,000
3,36,000
Sales during 12 months preceding the date of fire
13,44,000
Step 3: CALCULATION OF SHORTAGE IN SALES

Sales during disorganized period in previous year(1.7.10-30.9.10)
Add : expected increase in sales @ 12%
3,20,000
38,400
Expected sales in disorganized period

Less: Actual sales during Disorganized period (1.7.2011-30.9.2011)
3,58,400
48,000
Shortage in Sales
3,10,400
Step 4: CALCULATION OF G P RATIO
G P RATIO =
Net profit + S tan ding ch arg es (insured)

100
Sales during previous financial year
60,000 + 1,56,000
100
12,00,000
= 18%
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ACCOUNTING CA IPCC
ADJUSTED G P RATIO DUE TO INCREASE IN GP RATIO = 18% + 5% = 23%

Step 5: CALCULATION OF LOSS OF NET PROFIT & STANDING CHARGES
LOSS = Shortage in sales * G P ratio
= 3,10,400 23%
= 71,392
Step 6: CALCULATION OF ADDITIONAL EXPENSES
Actual additional expenses incurred
1,98,000
OR
Increase in sales due to additional expenses* G P ratio (48,000*23%)
11,040
OR
Gross profit
Additional expenses
Gross profit + uninsured charges
Gross profit = sales during preceding 12 months * GP ratio
= 13,44,000 23%
= 3,09,120
3,09,120
1,98,000
3,09,120 + 42,000
Whichever is lower
1,74,316
11,040
Step 7: CALCULATION OF TOTAL LOSS

Loss of net profit and standing charges (step 5)
Loss of additional expenses (step 6)
71,392
11,040
Total Loss
82,432
Step 8: CALCULATION OF INSURANCE CLAIM

TOTAL LOSS = 82,432
INSURANCE CLAIM = 82,432
(NOTE: There will be no application of average clause because policy is without average clause. In
addition, insured profits are higher than gross profit during 12 months preceding the date of fire.
So the amount of claim will be equal to total loss.)
QUESTION NO 35 (Nov. 2011) (10 marks)
A fire occurred in the premises of M/s. Fireproof Co. on 31st August, 2010. From the following particulars relating to the period from 1st April, 2010 to 31st August, 2010 your are requested ascertain the
November 14, 2014
22:7
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
(ii)
Purchases
99,000
1,70,000
(iii) Wages (including wages for the installation of a machine
` 3,000)
50,000
(iv)
Sales
(v)
Sale value of goods drawn by partners
(vi)
2,42,000
Cost of goods sent to consignees on
15,000
16th
August, 2010,
lying unsold with them
16,500
(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.
ANSWER 35 (10marks)
TRADING ACCOUNT OF FIREPROOF COMPANY
(1.4.2010-31.8.2010)
Particulars
To opening stock
To purchases
To wages
Normal
Abnormal
95,000
5,000
1,70,000
By drawings at cost
47,000
(15000 - 20%)
(50000 - 3000)
To gross profit
Particulars
Normal
Abnormal
By sales
2,42,000
2,000
12,000
16,500
1,500
500
88,400
2,500
3,60,400
5,000
By goods sent to
48,400
(242000*20%)
consignee
By advertisement
By gross loss
By closing stock
(balancing figure)
3,60,400
5,000
CALCULATION OF DAMAGED GOODS

Closing stock as per trading account:
Normal goods Abnormal goods
88,400
2,500
Less: salvaged goods
90,900
20,000
Damaged goods
70,900
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ACCOUNTING CA IPCC
CALCULATION OF CLAIM FOR DAMAGED GOODS

Claim subject to average clause = Actual loss of stock Amount of policy /
= 70,900 (60,000 90,900)
= ` 46,798

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 subjected 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.
ANSWER:
In the books of Suraj Brothers
Memorandum Trading A/c for the period
1.1.2011-30.3.2011
Particulars
To Opening stock
To Purchases*
Amount
95,600
1,40,000
To Wages*
47,000
To Gross profit @20%
48,400
3,31,000
Particulars
Amount
By Sales*
2,42,000
By Closing stock
89,000
(bal.fig)
3,31,000
November 14, 2014
22:7
*PURCHASES LESS PURCHASE OF MACHINERY: 1,70,000 30,000 = 1,40,000 WAGES LESS INSTALLATION OF MACHINERY: 50,000 3,000 = 47,000
SALES LESS GOODS ON APPROVAL BASIS FOR WHICH APPROVAL IS PENDING: 2,75,000-2/3RD OF
49,500 = 2,42,000
Calculation of Insurance Claim
Claim subject to average clause = Actual loss of stock Amount of policy /
= 76,700 (60,000 89,000) = ` 51,708
Working Note:
Actual loss of stock = Closing stock on the date of fire - Salvaged goods
= 89,000 12,300 = 76,700.
81
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ACCOUNTING CA IPCC
IMPORTANT NOTES
UNIT
November 14, 2014
22:10
Profit Prior to Incorporation
QUESTION NO 1
VK Ltd. was incorporated on the 1st March 2003 and received its certificate for commencement of
business on 1st April 2003. The company bought the business of M/s Shared singh brothers with effect
from 1st November 2002 from the following figures relating to the year ending October 31, 2003, find
out the profits available for dividends:
(a) Sales for the year ` 6,00,000 out of which sales up to 1st March were ` 2,50,000 and upto 1st April
` 3,00,000.
(b) Gross profit for the year was 1,80,000
(c) The expenses debited to the profit and loss account were:
(i) Rent
(ii) Salaries
9,000
15,000
(iii) Directors fees
4,800
(iv) Interest on debentures
5,000
(v) Audit fees
1,500
(vi) Discount on sales
3,600
(vii) Depreciation
24,000
(viii) General expenses
4,800
(ix) Advertising
18,000
(x) Stationary and printing
3,600
(xi) Commission on sales
6,000
(xii) Bad debts 1500 (` 500 relate to debts to created prior to incorporation)
(xiii) Interest to vendor on purchase consideration up to 1st May 2003 ` 3000
83
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ACCOUNTING CA IPCC
QUESTION NO 2
A company was incorporated on 1st May 2004 to take over the business a going concern from 1st January of the same year. The total turnover for the year ended 31st December was ` 2,00000 namely
` 60,000 for the first period upto 1st May and ` 1,40,000 for the following period. The gross profit is
` 70,000 and the profit and loss account is given below. Ascertain profits prior to incorporation:
Profit and Loss Account for the year ended 31st December 2004
Particulars
Particulars
Rent and rates
3,240
Gross profit b/d
70,000
Insurance
720
Lighting and heating
2,040
Salaries
7,800
Directors fees
2,000
Sales commission
10,000
Sales discounts
5,000
General office expenses
2,400
Carriage outwards
3,000
Bank charges
420
Repairs
1,380
Bad debts
600
Loan interest
1,200
Net profit
30,200
70,000
70,000
QUESTION NO 3
Neeraj Ltd. was incorporated as a private Ltd. company on 1st August 2003 to take over a business as a
going concern as from 1st February 2003. The purchase price of the business for such acquisition was
fixed on the basis of the Balance Sheet of the firm as at 31st January 2003 but the agreement provided
that the vendors would get 80% of the profit prior to 1st August 2003 as compensation. Companys
accounts were made up to 31st January each year and the summarized trading and profit and loss
account for the year ended 31.1.2004 disclosed the following results:
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UNIT 4. PROFIT PRIOR TO INCORPORATION
Particulars
Particulars
To material consumed
1,86,000
By net sales
2,60,000
To manufacturing wages
48,500
By finished goods
49,000
To misc. expenses
18,600
By incomplete goods
6,000
To carriage inwards
6,300
To gross profits
55,600
3,15,000
To salaries and charges
18,300
To office expenses
2,750
To director fees
1,800
To bad debts
2,300
To debentures interest
1,250
To commission and discounts
7,800
To carriage outwards
1,600
To depreciation
10,300
To net profit
9,500
3,15,000
By gross profit
55,600
55,600
55,600
Further information available was that sales made by the company amounted to ` 1,16,000 and bad
debts amounting to ` 1,100 were written off prior to 1st August 2003.
Prepare a statement showing the profits earned prior and after incorporation, state also the amount
of profit prior to 1st August 2003 payable to the vendors.
How should the company deal with its share of profits in the year ending 31.1.2004.
QUESTION NO 4
X Ltd. was incorporated on 1.5.2004 to acquire a business as on 1st Jan 2004. The first accounts were
closed on 30.9.2004.
The gross profit for the period was ` 42,000. Details of the other expense:
General expenses
7200
Directors remuneration
12000
2000
Rent upto 30th June was ` 6000 per annum after which it was increased by 40%
Salary of the manager, who on information of the company had become a whole time director and
whose remuneration has been given above, was ` 5100 per annum.
The company earned uniform gross profits. The sales upto 30th September 2004 were ` 98000. The
monthly average of sales for the first four months of the year was one half of the remaining period.
Show the profit and loss account and indicate how you would deal with the pre incorporation reserve.
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QUESTION NO 5
The partners of Maitri agencies decided to convert the partnership in to private Ltd. company called
MA (P) company Ltd. with effect from 1.1.2003. The consideration was agreed at ` 1,17,00,000 based
on the firms Balance Sheet at 31.12.2002. however, due to some procedural difficulties, the company
could be incorporated only on 1.4.2003. Meanwhile the business continued on behalf of the company
and the consideration was settled on that date with interest at 12% per annum. The same books of
account were continued the company which closed its accounts for the first time on 31.3.2004. Prepare
the following summarized the profit and loss account:
Sales
2,34,00,000
Cost of goods sold
(1,63,80,000)
Salaries
(11,70,000)
Depreciation
(1,80,000)
Advertisements
(7,02,000)
Discounts
(11,70,000)
Managing directors remuneration
(90,000)
Misc. office expenses
(1,20,000)
Office cum show room rent
(7,20,000)
Interest
(9,51,000)
Profit
19,17,000
The companys only borrowed was a loan of ` 50,00,000 at 12% per annum to pay the purchase consideration due to the firm and for working capital requirement.
The company was able to double the average monthly sales of the firm, from 1.4.2003 but the salaries
trebled from that date. It had to occupy additional space from 1.7.2003 for which rent was ` 30,000 per
month.
Prepare a profit and loss account in columnar form apportioning cost and revenue between pre incorporation and post incorporation periods. Also suggest how the pre incorporation profits are to be
dealt with.
QUESTION NO 6
Ashish Ltd. was incorporated on 1.72003 to take over the running business Mr.sham with effect from
1.4.2003. The following profit and loss account for the year 31.3.2004 was drawn up:
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Particulars
Particulars
To commission
2,625
By gross profit
98,000
To advertisement
5,250
By bad debts realized
500
To managing director remun.
9,000
To depreciation
2,800
To salaries
18,000
To insurance
600
700
To rent and taxes
3,000
To discounts
350
To bad debts
1,250
To net profits
54,925
98,500
98,500
The following details are available:

(a) The average monthly turnover from july 2003 onwards was double then that of the previous
months.
(b) Rent for the first three months was paid at ` 200 per month and thereafter at the rate increased by
` 50 per month.
(c) Bad debts ` 350 related to sales effect after 1st September 2003 and the realization of the bad debts
was in respect of debts written off during 200203.
(d) Advertisement expenses were directly proportionate to the sales.
You are required to find out the profit prior to incorporation and to state the treatment thereof in the
books of the company.
QUESTION NO 7
MR X formed a private Ltd. company under the name and style of EXE private Ltd. to take over his
existing business as from 1 st April 2000 but the company was not incorporated until 1st july 2000. No
entries related to transfer of the business were entered in the books, which were carried on without a
break until 31.3.2001. The following balances were extracted from the books as on 31.3.2001:
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Debit
Opening stock
43,000
Purchases
1,89,000
Carriage outwards
3,300
Traveling commission
7,500
Office salaries
21,000
Administration expenses
19,900
Rent and rates
12,000
Directors fees
18,000
Fixed assets
1,00,000
Current assets (excluding stock)
34,000
5,200
Credit
Sales
2,78,000
Mr. X capital account (1.4.2000)
2,30,000
Current liabilities
37,000
You are also given that

(a) Stock on 31.3.2001 ` 44,000
(b) The gross profit ratio is constant and monthly sales in April 2000, February 2001 and March 2001
are doubled the average monthly sales for the remaining months of the year
(c) The purchase consideration was agreed to be satisfied by issue of 3000 equity shares of ` 100 each
(d) The preliminary expenses are to be written off.
(e) You are to assume that carriage outward and travelers commission vary in direct proportion to
sales.
You are required to prepare profit and loss account for the year ended on 31.3.2001 apportioning the
profit or loss of the periods before and after incorporation. Depreciation shall be provided at 25% per
annum on fixed assets.
QUESTION NO 8
C private Ltd. was incorporated on 1.2.2003. It took over the properitory business of C with effect from
1.1.2003. The Balance Sheet of C as at 31.12.2002 is as follows:
Liabilities
Amount
Assets
Amount
Capital
4,31,500
Debtors
25,700
Creditors
17,000
Buildings
1,10,000
Loans
8,500
Machinery
3,00,000
Expenses outstanding
2,500
Loss
23,800
4,59,500
4,59,500
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It was agreed to pay ` 4,50,000 in equity shares to C. The company decided to close its first years
accounts as at 31.12.2003. The following are the further details, furnished to you:
Sales
3,00,000
Purchases
1,40,000
Salaries and wages
40,000
General expenses
32,000
Freight
4,700
Interest paid
8,000
Stock in trade
22,000
Additions to buildings
38,000
Depreciation may be provided 10% on assets including additions
The company request to prepare first general entries for the take over, C account and Profit and
loss account showing separately pre incorporation and post incorporation profits for the year ending 31.12.003.
QUESTION NO 9
Bidyut Ltd. was incorporated on 1st July 1998 to acquire from Bijli as and from 1st January, the individual business carried on by him. The purchase price of the fixed assets and goodwill was agreed to be
the sum equal to 80% of the profits made each year on ascertainment of the sum due.
The following trail balances as on 31.12.98 is presented to you to enable you to prepare a Balance
Sheet as at that date. Also prepare a statement of appropriation of profit writing off one third of the
preliminary expenses.
Debit
Share capital 1500 equity shares of ` 100 each 80 paid
Credit
1,20,000
Debtors
82,000
Stock on 31.12.98
67,000
Cash at bank and in hand
24,000
Directors fees
3,000
24,000
Creditors
32,000
Net profit for the year providing for all expenses under
48,000
agreement entered into with Bijli
QUESTION NO 10
Inder and Vishnu, working in partnership registered a joint stock company under the name of Fellow Travelers Ltd. on May 31,2000 to take over their existing business. It was agreed that they would
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ACCOUNTING CA IPCC
take over the assets of the partnership for a sum of ` 3,00,000 as from January 1st , 2000 and that until the amount was discharged they would pay interest on the amount at the rate of 6% per annum.
The amount was paid on June 30,2000. To discharge the purchase consideration, the company issued
20,000 equity shares of ` 10 each at a premium of Re.1 each and allotted 7% debentures of the face
value of ` 1,50,000 to the vendors at par.
The profit and loss account of the Fellow Travellers Ltd. for the year ended 31.12.2000 was as follows:
Particulars
Particulars
Purchase, including stock
1,40,000
Sales:
Freight and carriage
5,000
1.1.2000-31.5.2000
60,000
Gross profit c/d
60,000
1.06.2000-31.12.2000
1,20,000
Stock in hand
25,000
2,05,000
Salaries and wages
10,000
Debentures interest
5,250
Depreciation
1,000
Interest on PC (up to 30.6.)
9,000
Selling commission
9,000
Directors fees
600
900
Provision for taxes
6,000
Dividend on equity shares (5%)
5,000
Balance c/d
13,250
60,000
2,05,000
Gross profit b/d
60,000
60,000
Prepare statement apportioning the balance between the post and pre incorporation periods and also
show how these figures would appear in the Balance Sheet of the company.

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 account
were made upto 31st March,2013 which revealed that the sales for the whole year totaled ` 1,600 lakh
out of which sales till 31th,2012 were for ` 400 lakh. Gross profit ratio was 25%.
The expenses from 1st Aril 2012, till 31ST March,2013 were as follows.
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` In lakhs
Salaries
69
Rent, Rates and insurance
24
Sundry Office Expenses
66
Travelers Commission
16
Discounts Allowed
12
Bad Debts
Directors Fee
25
Audit Fee
Depreciation on Tangible Assets
12
Debenture interest
11
Prepare a statement showing the calculation of profits for the pre-incorporation and postincorporation periods.
ANSWER 11
Statement showing apportionment of profit during the period under the heading of pre incorporation
& post incorporation periods
Pre Incorporation
Post Incorporation
Period
Period
Gross Profit @25% on sales (400:1200)
100
300
Total (a)
100
300
Salaries (Time Ratio)(4:8)
23
46
Rent (Time Ratio)(4:8)
16
Office expenses (Time Ratio)(4:8)
22
44
Audit fees (Time Ratio)(4:8)
Depreciation (Time Ratio)(4:8)
Travellers commission (sales ratio)(4:12)
12
Discount allowed (sales ratio)(4:12)
Bad debts (sales ratio)(4:12)
Director fees (post)
25
Debenture interest (post)
11
Total (b)
68
180
Net profit or loss (a-b)
32
120
Note 1: The amount of earned profit in pre incorporation period should be transferred to capital reserve assuming capital profit but profit during post incorporation period should be transferred to
profit and loss statement.
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Note 2: However allocation of Audit fees may also be considered in post incorporation period assuming audit has been done for company.

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 firs accounts are drawn upto March 31, 2011. The gross profit for
the period is ` 56,000. The general expenses are 14,220; Directors 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. The net sales are ` 8,20,000, the
monthly average of which for the first four months in one-half of the of the remaining period. The
company earned a uniform profit. Interest and tax may be ignored.
ANSWER 12 (6 MARKS)
PROFIT & LOSS ACCOUNT FOR THE PERIOD ENDING ON 31ST MARCH 2011
PARTICULARS
PRE
POST
INCOR.
INCOR.
6,320
7,900
To Director fees
5,000
To Preliminary exp.
1,500
To Rent (w.n#1)
400
950
To Manager salary
2,000
To Capital Reserve
7,280
24,650
16,000
40,000
To General expenses
To Net Profits
PARTICULARS
By Gross profits
PRE
POST
INCOR.
INCOR.
16,000
40,000
16,000
40,000
Applications:
(a) General expenses:
TIME RATIO
(b) Director fess:
POST PERIOD ONLY
(c) Preliminary expenses: POST PERIOD ONLY

(d) Rent:
TIME RATIO SUBJECT TO INCREASE IN RENT
(e) Manager salary:
PRE PERIOD
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W.N#1
CALCULATION OF RENT
Pre Incorporation
Post Incorporation
(July-Oct) (4M)
(Nov-March)(5M)
Rent up to 31st December (1200/12m=100per month)
400
200
Rent after 31st December (3000/12m=250)
750
400
950
Particulars
W.N#2
CALCULATION OF SALES RATIO
Pre Incorporation
Post Incorporation
Particulars
(July-Oct) (4M)
(Nov-March)(5M)
Time Ratio
4 months
5 months
Weights
Sales ratio(time ratio*weights)
10
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IMPORTANT NOTES
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95
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96
UNIT
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Investment Accounts

Bonanzaa Limited held on 1st April 1993 ` 2,00,000 of 9% Government loan (2003) at ` 1,90,000. (Face
value of loan ` 100 each). Three months interest accrued on the above date. On 31st May 1993 the
company purchased the same government loan of the face value of ` 80,000 at ` 95 (net) cum-interest.
On 1st June 1993 ` 60,000 face value of the loan was sold at ` 94 (net) ex-interest. Interest on the loan
was paid each year on 30th June and 31st December and was credited by the bank on the same date.
On 30th November 1993 ` 40,000 face value of the loan was sold at ` 97 (net) cum-interest. On 1st
December 1993 the company purchased the same loan ` 10,000 at per ex-interest. On 1st March 1994
the company sold ` 10,000 face value of the loan at ` 95 ex-interest. The market price of the loan
on 31st March 1994 was ` 96. Draw up the 9% government loan (2003) account in the books of the
company. First in first out 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.

On 1.4.96 Sunder had 25,000 equity shares of X Ltd. at a book value of ` 15 per share (face value ` 10).
On 20.6.96 he purchased another 5000 shares of the company at ` 16 per share. The directors of X Ltd.
announced a bonus and right issue. No dividend was payable on these issues. The terms of the issue
are as follows:
Bonus basis 1: 6 (Date 16.8.96)
Rights basis 3: 7(Date 31.8.96) price ` 15 per share.
Due date for payment 30.9.96
Shareholders can transfer their rights in full or in part. Accordingly Sunder sold 33 1/3 % of his entitlement to Sekhar for a consideration of ` 2 per share.
Dividends: Dividends for the year ended 31.3.96 at the rate of 20% were declared by X Ltd. and received
by Sunder on 31.10.96. Dividends for shares acquired by him on 20.6.96 are to be adjusted against the
cost of purchase.
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IPCC
On 15.11.96 Sunder sold 25000 equity shares at a premium of ` 5 per share.

You are required to prepare in the books of Sunder:
(1) Investment account
(2) Profit and loss account
For your exercise assume that the books are closed on 31.12.96 and shares are valued at average cost.
QUESTION NO 3
A purchased on 1st March, ` 24,000 5% Bharat Debenture stock at 90 cum-interest interest being
payable on 31st March and 30th September each year, stamp and expenses on purchase amounted
to ` 20 and brokerage at 2% was charged on cost; interest for the half-year was received on the due
date. On 1st September ` 10,000 of the stock was sold at 92 ex-interest less brokerage at 2%. On 30th
September ` 8,000 stock was purchased at 91 ex-interest plus brokerage at 2% and charges ` 10. On 1st
December ` 6,000 stock was sold at 94 cum-interest less brokerage at 2%. The market price of stock on
31st December was 91%. Show the investment account for the year ended 31st December, marking all
calculations in months.
QUESTION NO 4
Rao purchased 500 ordinary shares of ` 100 each in the ABC Company Limited for ` 62,500 inclusive of
brokerage and stamp duty. Some years later the company resolved to capitalize its profit and to issue
to the holders of ordinary shares, one ordinary share as bonus for every share held by them. Prior
to the capitalization the shares of ABC Company Limited were quoted at ` 175 per share. After the
capitalization, the shares were quoted at ` 92-1/2 per share. Rao sold the bonus shares and received
at ` 90 per share. Show the investment account in Raos book on average cost basis.
QUESTION NO 5
On 1st January 1997, Singh had 20,000 equity shares in X Limited. Face value of the shares was ` 10
each but their book value was ` 16 per share. On 1st June 1997, Singh purchased 5,000 more equity
shares in the company at a premium of ` 4 per share.
On 30th June 1997, the directors of X Limited announced a bonus and rights issue. Bonus was declared
at the rate of one equity share for every five shares held and these shares were received on 2nd August
1997.
The terms of the right issue were:
(a) Rights shares to be issued to the existing holders on 10th August 1997.
(b) Rights issue would entitle the holders to subscribe to additional equity shares in the company at
the rate of one share per every three held at ` 15 per share the whole sum being payable by 30th
September 1997.
(c) Existing shareholders may to the extent of their entitlement, either wholly in part, transfer their
rights to outsiders.
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UNIT 5. INVESTMENT ACCOUNTS
(d) Singh exercised his option under the issue for 50% of his entitlements and the balance of rights he
sold to Ananth for a consideration of ` 1.50 per share.
(e) Dividends for the year ended 31st March 1997 at the rate of 15% were declared by the company and
received by Singh on 20th October 1997.
(f ) On 1st November 1997 Singh sold 20,000 equity shares at a premium of ` 3 per share.
The market price of share on 31-12-1997 was ` 13. Show the investment account as it would appear in
Singhs books on 31-12-1997 and the value of the share held on that date.
QUESTION NO 6
Tee Limited purchased on 1st May 1997 13.5% Convertible Debentures in Dee Limited of face value of
` 5,00,000 @ 105; Interest on the debentures is payable each year on 31st March and 30th September.
The accounting year adopted by Tee Limited is the calendar year. The following other transactions
were entered into in 1997 by Tee Limited in regard to these debentures:
August 1
Purchased ` 2,50,000 debentures @ 107 cum interest.
October 1
Sale of ` 2,00,000 debentures @ 103
December 31
Receipt of 10,000 equity shares in Dee Limited of ` 10 each in

conversion of 20% of the debentures held.
The market value of the debentures and equity shares in Dee Limited at the end of 1997 was 106 and
` 15 respectively.
Prepare the debenture investment account in the books of Tee Limited on average cost basis.

On 1.4.2002, Mr. Krishna Murty purchased 1000 equity share of ` 100 each in TELCO Ltd. @120 each
from a broker, who charged 2% brokerage. He incurred 50 paise per ` 100 as cost of shares transfer
stamps. On 31.1.2003 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 31.3.2003 Mr.
Krishna murthy sold bonus shares to a broker, who charged 2% brokerage.
Show the investment account in the books of Mr. Krishna Murthy, who held the shares as current
assets and closing value of investments shall be made at cost or market value whichever is lower.
QUESTION NO 8
Y Limited purchases 25,000 shares of ` 10 each of X Limited on 15.4.1999 @ 120 per share(cum-right
cum dividend). The company paid brokerage 1.5% and stamp duties 1%. It acquires another 30,000
shares of X Limited on 25.5.1999 @ ` 140 pr share( cum right cum dividend). And paid for brokerage and stamp duties. The company offered 1:1 right @ 80 per share on 30.5.99. Y Limited acquired
35,000 shares exercising the right and sold the right for 20,000 shares @ ` 30 per right. The company
received dividend @ 40% on paid up value of shares for 19992000. It sold 15,000 shares @ ` 110 less
brokerage 1.5% on 15.11.1999. Please calculate the cost of investment sold, carrying amount of unsold
investments and profit on sale of investments.
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QUESTION NO 9
A Limited purchases 10000 shares of X Limited @ ` 80 and paid brokerage @ 1.5% and stamp duties
` 8000 on 15.12.1999. The company purchases another 15000 shares of X Limited @ 96 and paid brokerage @ 1.5% and stamp duties ` 14400 on 25.12.1999. It sold 12000 shares @ 105 and brokerage @
1.5% on 15.2.2000.
Show the cost of investment balance In account in the balance sheet and amount of profit or loss on
the sale?
QUESTION NO 10
Continuing with the example above if X Limited issues one bonus share for every two shares held on
2.1.2000 and X Limited sold 12000 shares on 15.2.2000.
Calculate the carrying amount of investments
QUESTION NO 11
Mr. Lal purchased 500 equity shares of ` 100 each in omega co Ltd. for ` 62500 inclusive of brokerage
and stamp duty on cum right basis. Later the company announced right issue @ one equity share for
every share held by them. X accepted 50% of right shares and sold 50% right. The shares of Omega co
Ltd. were quoted at ` 110 per share pre right and the shares were quoted at ` 92.50 per share after right
issue. Mr. X sold the right @10 per right share and paid at ` 80 per share as subscription charges for his
50% shares.
Prepare investment account on average cost basis valuation.
QUESTION NO 12
Sharma purchased 1000 equity shares of X Ltd. as ` 35 each on 1st April 2003. He further purchased
300 equity shares @32 each on 1 july 2003. On 30 Sep, he received dividend @ ` 2 per share for the year
2002-03. He sold 500 shares @38 per share on 1 Nov 2003. Market value of share on 31st March 2004
was ` 33, prepare investment account(assume permanent investment).

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 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.
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Answer the following:
Mr. T purchased 1,000 nos. 10% debentures of ` 100 each on 1st April, 2009 at ` 96 com interest, the
previous interest date being 31st December, 2008. Computer cost of investment.

MY Ltd. Had acquired 200 equity shares of YZ Ltd. At ` 105 per share on 1.1.2009 and paid ` 200 towards
brokerage, stamp duty and STT. On 31st March, 2009 Share 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.

Answer the Following:
Rose Ltd. Had made an investment of ` 500 lakhs in the equity shares of Nose Ltd on 10.01.2009. The
realizable value of such investment on 31.03.2009 became ` 200 laksh as Nose Ltd. Lost a case of patent
rights. Rose Ltd. Follows financial years as accounting year. How will you recognize this reduction in
Financial Statements for the year 200809.

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 ex-interest at ` 38,400. On December
31, 2009 400 debentures are sold cum-interest for ` 55,000.
Prepare the investment account showing value of holdings on March 31, 2010 at cost, using FIFO
method.
QUESTION NO 18 (AS-13)
Define investment as per Accounting Standard-13. How investments are classified by AS-13? What are
the items not dealt with by AS-13?
ANSWER:
Meaning of Investments: AS-13 defines investments as assets held by an enterprise for:
r Earning income by way of dividends, interest, and rentals, e.g., investment in building let out
r Capital appreciation, e.g., increase in the value of land,
r Other benefits to the investing enterprise, e.g., to control the investee,
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r Not held as stock-in-trade, e.g., held by investment company not investment
AS-13 does not deal with:

r Bases for recognition of interest, dividends and rentals earned covered by AS-9;
r Operating or finance leases;
r Investments of retirement benefit plans and life insurance enterprises; and
r Mutual funds, banks and public financial institutions
Classification of investments: An enterprise should disclose current investments and long-term investments distinctly in its financial statements.
(i)
Current investment: A current investment is an investment that isb By its nature readily realizable, e.g., land & building are not readily realizable, and
b Intended to be held for not more than one year from the date of making such investment (Evi-
dence that held for not more than one year could be management representation)
Therefore, ready marketability is not the only criteria for classifying the investment in to current
or long term. To be classified as current investment, an investment must be made for a period not
more than one year.
(ii) Long-term investment: A long-term investment is an investment other than a current investment, e.g., investment in property such as land and building should be accounted for as long
term investment.
Further classification of current and long-term investments should be as specified in the statute
governing the enterprise. In the absence of a statutory requirement, such further classification
should disclose, where applicable, investments in:
b Government or Trust securities
b Shares, debentures or bonds
b Investment properties
b Othersspecifying nature
Briefly indicate, how would you determine the cost of investment?
ANSWER:
Cost of Investments: AS-13 lays down following with regard to determination of cost:
(i)
Acquisition against monetary consideration: The cost of an investment should include purchase
price and acquisition charges such as brokerage, fees and duties.
It is also possible that an investment has been purchased on cum-interest or cum-dividend basis, the subsequent receipt of interest/dividend is allocated between pre-acquisition and postacquisition periods; the pre-acquisition portion is deducted from cost as it represents recovery of
cost.
November 14, 2014
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(ii) Acquisition of right shares: When right shares are acquired, the cost of the right shares is added
to the carrying amount of the original holding. If rights are not acquired but sold in the market,
the sale proceeds are taken to the profit and loss account. However, where the investments are acquired on cum-right basis and the market value of investments immediately after their becoming
ex-right is lower than the cost for which they were acquired, it may be appropriate to apply the
sale proceeds of rights to reduce the carrying amount of such investments to the market value.
Summarize the provision contained in the Accounting Standard-13 in respect of valuation of investments in the financial statements.
ANSWER:
Valuation of Investments: Valuation depends upon classification of investments:
Current investments:
r Present in the financial statements at the lower of cost and fair value.
r Cost or fair value should be determined either on an individual investment basis (i.e., cost and fair
value of each investment should be compared separately) or by category of investment (all types
preference shares constitute a category), but not on an overall/global basis.
Long-term investments:
r Present at cost
r Provision for diminution (reduction) in the value of the investments, shall be made to recognise a
decline, other than temporary,

r Such reduction being determined on individual investment basis
Changes in Carrying Amounts of Investments:

Any reduction in the carrying amount and any reversals of such reductions should be charged or credited to the profit and loss account.
Disposal of Investments: On disposal of an investment, the difference between the carrying amount
and net disposal proceeds should be charged or credited to the profit and loss account.
When disposing of a part of the holding of an individual investment, the carrying amount to be allocated to that part is to be determined on the basis of the average carrying amount of the total holding
of the investment.
Briefly summarize the discloser requirements of Accounting Standard-13.
ANSWER:
Disclosure: The following information should be disclosed in the financial statements:
Accounting policies for valuation of investments;
103
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Classification of investments;
Amounts included in profit and loss account for interest, dividends from subsidiary companies, other
dividends and rentals separately from long term and current investments.
Gross income should be stated, the TDS being included under Advance Taxes Paid;
Profits and losses on disposal of current and long term investments and changes in the earning
amount of such investments;
Significant restrictions on the right of ownership, realisability of investments or the remittance of income and proceeds of disposal;
Aggregate amount of quoted and unquoted investments along with market value;
Other disclosures as specifically required by the relevant statute.

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 31-102012, bonus was declared in the ratio 1:4 The shares were quoted at ` 110 and ` 60 per share before and
after the record date of bonus shares respectively. On 30-11-2012, Mr. Mishra sold the bonus shares to
a broker who charged 5%. You are required to prepare Investment Account in the books of Mr. Mishra
for the year ending 31-12-2012 and closing value of Investment shall be made at cost or market value
whichever is lower.
ANSWER:
In the books of Mr. MISHRA Investment Account for the year ended 31.12.2012
Date
Particular
1.5.2012
To bank A/c
31.10.2012
To Bonus
Shares
No. of shars Amount

(` )
(` )
800
42,080
200
31.12.2012 To profit on sale
Date
Particular
(` )
(` )
30.11.2012 By bank A/c
200
11,400
31.12.2012
800
33,664
1,000
45,064
By Bal. c/d
2,984
1,000
45,064
W.N#1
CALCULATION OF COST OF INVESTMENTS PURCHASED ON 1.5.2012
Particulars
Purchase price (800*50)
Brokerage @ 5%
Stamp duty (40000*.20/100)
Total acquisition cost
No. of shares Amount
Amount
40,000
2,000
80
42,080
November 14, 2014
22:10
W.N#2
CALCULATION OF PROFIT OR LOSS
ON SALE OF INVESTMENTS ON 30.11.2012
Particulars
Amount
Selling price (200*60)
12,000
Brokerage @ 5%
(600)
Net selling price
11,400
Cost for sold portion on weighted average cost basis
8,416
(42080/1000shares 200shares)
Profit on sale
2,984
W.N#3
VALUATION OF INVESTMENTS
Particulars
Amount
Cost Of Investments (42080/1000 800) Or
33664
Market Value On Balance Sheet Date (800*60)
48000
Whichever Is Lower
33664
(Note: In the given case, cost of investment is lower than market value due to which there is no valuation loss)

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 cuminterest amount.
Prepare Investment Account in the books of M/s Bull & Bear for the period 1st December, 2012 to 1st
March, 2013.
105
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ANSWER 23 5 MARKS
CALCULATION OF COST OF INVESTMENTS MADE ON 1.12.2012
Purchase price (10000 101)
1010000
Brokerage @ 1% on cum interest price
(10100)
999900
Interest for 2 months (10000 100 12% 2/12)
(20000)
Cost of investments
979900
CALCULATION OF PROFIT OR LOSS ON SALE OF INVESTMENTS

Selling price (10000 106)
1060000
Brokerage @1% on cum interest price
(10600)
1049400
Interest for 5 months (10000 100 12% 5/12)
(50000)
Net selling price
999400
Cost of investment made on 1.12.2012
(979900)
Profit on sale of investment
19500
Investment in 12% Debentures Account

Nominal
Particulars
Value
Nominal
Amount
Income
1.12.2011
To bank
Particulars
value
Amount
Income
10,00,000
9,99,400
50,000
31.3.2012
10,00,000
9,79,900
20,000
By cash
(2 month)
(5 months)
1.3.2013
To profit
19,500
on sale
31.3.2012
30,000
To profit & loss

10,00,000
9,99,400
50,000
10,00,000
9,99,400
50,000

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 31-032012
Mr. T. Shekharan sold bonus shares to a broker, who charged 2% brokerage.
November 14, 2014
22:10
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.
ANSWER
In the books of Mr. T. Shekharan Investment Account for the year ended 31st March, 2012
NO.of
Amount
shars (` )
(` )
Date
Date
Particular
1.4.2011
To bank A/c
5,000
6,15.000
31.1.2012
To Bonus Shares
2,500
31.3.2012
To profit on sale
15,500
7,500
No. of
Amount
Particular
shares (` )
(` )
31.3.2012
By bank A/c
2,500
2,20,500
31.3.2012
By Balance c/d
5,000
4,10,000
7,500
6,30,500
6,30,500
W.N#1
Calculation of Cost of Investments Purchased on 1.4.2011
Particulars
Amount
Purchase price (5,000 120)
6,00,000
Brokerage @ 2%
12,000
Stamp duty (6,00,000*.50/100)

Total acquisition cost
3,000
6,15,000
W.N#2
Calculation of Profit or Loss on Sale of Investments on 31.3.2012
Particulars
Amount
Selling price (2500 90)
2,25,000
Brokerage @ 2%
4,500
Net selling price
2,20,500
Cost for sold portion on weighted average cost basis
2,05,000
(6,15,000/7500shares 2500shares)
Profit on sale
15,500
W.N#3
VALUATION OF INVESTMENTS
Particulars
Amount
Cost of investments (615000/7500 5000) Or
4,10,000
Market value on balance sheet date (5000 90)
4,50,000
Whichever is lower
4,10,000
(Note: In the given case, cost of investment is lower than market value due to which there is no
valuation loss.)
107
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Mr. Brown has made following transactions during the financial year 201112.
Date
Particulars
01.05.2011
Purchased 24,000 12% Bonds of ` 100 each at ` 84 Cum-Interest. 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 charged brokerage @ 2%.
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.
ANSWER:
Investment in 12% Bonds Account
Nominal
Particulars
Value
Nominal
Cost
Income
1.5.2011
To bank
24,00,000
19,92,000
24,000
By cash
(1 month)
(24L 12%
Cost
Income
1,44,000
(6months)
6/12)
1,05,000
75,000
on sale
1.3.2012
(w.n#1)
By cash (sale)
31.3.2012
value
30.9.2011
1.3.2012
To profit
Particulars
2,49,000
To profit &
15,00,000
13,50,000
31.3.2012
(5months)
54,000
By cash
(6months)
By balance c/d
9,00,000
7,47,000
24,00,000
20,97,000
2,73,000
loss
24,00,000
20,97,000
2,73,000
November 14, 2014
22:10
W.N#1
Calculation of Profit or Loss on Sale of Investments
Selling price ex interest (15,000 90)
13,50,000
Cost for sold portion (19,92,000/24,000) 15,000
(12,45,000)
Profit on sale of investment
1,05,000
Investment In Shares Of Alpha Limited Account

No. of
Particulars
shares
No. of
Amount
15.06.2011
To bank
1,50,000
38,25,000
Amount
By bank
80,000
17,60,000
1,70,000
26,01,000
2,50,000
43,61,000
(sales)
1,00,000
31.10.2011
To profit on sale
shares
31.10.2011
14.10.2011
To bonus shares
Particulars
31.03.2012
5,36,000
By balance c/d
(w.n#2)
(bal. fig.)
2,50,000
43,61,000
(NOTE: THE AMOUNT OF INTERIM DIVIDEND (1,70,000 10 15% = 2,55,000) SHOULD BE

TRANSFERRED TO PROFIT AND LOSS ACCOUNT AS POST ACQUISITION DIVIDEND BECAUSE
SUCH TYPE OF DIVIDEND IS PROPOSED FOR CURRENT YEAR AS WELL AS PAID IN SAME YEAR
ALSO. SO THERE WILL BE NO ACCOUNTING IN INVESTMENT ACCOUNT IN RELATION TO SUCH
TYPE OF DIVIDEND.)
W.N#2
Calculation of Profit or Loss on Sale of Investments
Selling price of shares (80,000 22)
17,60,000
Cost for sold portion

(38,25,000/2,50,000) 80,000
(12,24,000)
Profit on sale
5,36,000
Investment in Shares of Beeta Limited Account

No. of
Particulars
shares
No. of
Amount
10.07.2011
To bank
Particulars
shares
Amount
20,250
66,000
27,02,550
66,000
27,22,800
15.01.2012
60,000
26,92,800
By sale of right
6,000
30,000
31.03.2012
15.01.2012
To bank
(15000 40% 5)
By balance c/d
66,000
27,22,800
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(NOTE: THE AMOUNT OF INTERIM DIVIDEND (66000 10 18% = 118800)) SHOULD BE TRANSFERRED TO PROFIT AND LOSS ACCOUNT AS POST ACQUISITION DIVIDEND BECAUSE SUCH
TYPE OF DIVIDEND IS PROPOSED FOR CURRENT YEAR AS WELL AS PAID IN SAME YEAR ALSO.
SO THERE WILL BE NO ACCOUNTING IN INVESTMENT ACCOUNT IN RELATION TO SUCH TYPE
OF DIVIDEND.)

On 1st April, 2010 Rajat has 50,000 equity shares of P. Ltd. at a book value of ` 15 per share (face value
R. 10 each). He provides you the further information.
(a) On 20th June, 2010 he purchased another 10,000 shares of P. Ltd. at ` 16 per share.
(b) On 1st August, 2010, P. Ltd. issue one equity bonus share for every six shares held by the shareholders.
(c) 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.
ANSWER:
In the books of Mr.Rajat Investment Account in shares of P Ltd.
No. of
Particulars
shares
No. of
Amount
1.4.2010
To balance b/d
50,000
7,50,000
20.6.2010
10,000
1,60,000
To Bank
Particulars
shares
Amount
5.11.2010
20,000
90,000
11,90,000
90,000
12,10,000
By sale of rights (10,000*2)

31.3.2011
By Bal. c/d
1.8.2010
10,000
20,000
3,00,000
90,000
12,10,000
To Bonus shares
(60,000*1/6)
5.11.2010
To Bank
(70,000*3/7 - 1/3rd )
Assumption: It has been assumed that market price after right issue becomes lower than the market
price before right issue due to which the amount of sale of right has been adjusted in investment account
against cost of investment. An alternative assumption can also be taken and the amount of sale of right
can also be transferred to profit and loss account in the absence of required information.
November 14, 2014
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IMPORTANT NOTES
111
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22:10

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November 14, 2014

November 14, 2014

November 14, 2014

Average Due Date

Profit Prior to Incorporation

November 14, 2014

November 14, 2014

QUESTION NO 1 (MAY 2002)

Fully paid equity shares of ` 10 each

Debenture interest outstanding

Directors Remuneration outstanding

Other outstanding expenses

Land and building

Plant and machinery

Furniture and fixtures

Cash and bank

Discount on issue of debentures

Profit and loss account

November 14, 2014

1,26,000 fully paid equity

Land and building (184+46)

shares of ` 2.50 each

Plant and machinery (286-66)

Furniture and fixtures

Cash and bank

November 14, 2014

UNIT 1. INTERNAL RECONSTRUCTION

QUESTION NO 2 (NOV. 2000)

50,000 equity shares of

1,00,000 equity shares of

Profit and Loss account

The following is the interest of Mr. X and Mr. Y in Green Limited:

12% first Debentures

12% second Debentures

Fully paid up ` 50 shares Partly paid up shares

November 14, 2014

QUESTION NO 3 (NOV. 1992)

Authorized and subscribed

10,000 equity shares of

` 100 each fully paid

Provision for income tax

November 14, 2014

UNIT 1. INTERNAL RECONSTRUCTION

(f ) Balance of preference shares account to be written off.

QUESTION NO 4 (NOV. 1993)

2,00,000 equity shares of

Patents and copyrights

shares of ` 100 each

(Market value ` 55,000)

Profit and Loss account

Interest accrued on bank

(a) Preference dividend is in arrear for one year.

November 14, 2014

2,00,000 equity shares of ` 10 each,

QUESTION NO 5 (NOV. 1995)

Fully paid equity shares equal to 2/5th of their holding.

Goodwill from ` 1,50,000 to ` 75,000